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Question
"Under the flexible exchange rate system, the Central Bank does not intervene in the foreign exchange market."
Justify the statement, giving valid arguments.
Solution
Yes, the Central Bank does not intervene in the currency market under the flexible exchange rate regime.
- The exchange rate is determined by market forces, such as demand and supply of foreign money, in a flexible exchange rate system.
- The rise in the foreign exchange rate is caused by an increase in demand and a decrease in supply of foreign currency.
- The reduction in the foreign exchange rate is caused by a decrease in demand and an increase in supply of foreign exchange.
- Imports, direct purchases overseas, investment in the rest of the globe, repayment of international debts, and other factors influence forex demand.
- The supply of currency is determined by factors such as exports, direct purchases by the rest of the world, loans from the rest of the world, and so on.
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Identify the correctly matched pair from Column A to that of Column B:
| Column A | Column B |
| (1) Private Consumption Expenditure | (a) Market Rate of Interest |
| (2) Private Investment Expenditure | (b) Total Expenditure |
| (3) Autonomous Investment | (c) Construction of Roads |
| (4) Aggregate Demand | (d) Level of personal disposable income |
Point out the merit of the flexible exchange rate.
Exchange rate is the price of a currency expressed in terms of:
Explain the impact of home currency depreciation on the exports of a nation.
Suppose, the price of one UK Pound (£) has increased from ₹ 70 to ₹ 80, owing to market forces.
This means that value of Indian Currency (₹) has ______.
Giving valid reason, state whether the following statement is true or false:
Depreciation of the Indian Currency will lead to promotion of Indian exports.
