Chapter 6 Part 1 - Foreign Exchange Rates

Economics Class 12
Macroeconomics

## For Exports

It is good for economy

Export Increase because it is cheaper for foreigners to purchase our product

This will generate us income from abroad and increase our income

Example

Suppose a foreigner wants to Purchase goods for Rs 70,000

Exchange Rate is Rs70 per \$

So Foreigner has to spend = Rs 70,000/70 = \$1000

Now, suppose

Exchange rate of dollar becomes 80 Rupees

Suppose a foreigner wants to Purchase goods for Rs 70,000

So Foreigner has to spend = 70,000/80 = \$875

Hence, it is cheaper for foreigner to purchase our products, hence exports will increase

## For Imports

As Imported goods become costlier

It increases our expenses and decreases our income

Example

Suppose we want to import goods worth \$1000

Exchange Rate is Rs 70 per \$

So we have to pay 70*1000 = 70,000

Suppose exchange rate increases to Rs 80 per \$

Now we have to pay 80*1000 =80,000

Since ,we have to pay more expenses ,it is bad for economy

Balance of Trade = Export - Import

If balance of trade is Positive,

it is good for economy

as exports are more than imports

If balance of trade is Negative,

as imports are more than exports

### NCERT Questions

No questions in this part

### Other Books

#### Question 1

In the following questions, select the correct answers:

When is the Balance of Trade positive?

1. Exports > Imports
2. Exports < Imports
3. Exports = Imports
4. Exports - Imports = 1

#### Question 2

If price of foreign exchange rises, which of the following is true?

1. Exports will increase
2. Imports will go down
3. Domestic goods become cheaper for foreign country
4. All of the above

### Oswaal Questions

#### Question 1

Read the news report given below and answer the questions that follow with respect to the same:

The rupee rose by 3 paise to settle at Rs 72.94 (provisional) against the US dollar on Monday, extending its gains for the fifth straight session despite heavy selling in the domestic equity market.

At the interbank Forex market, the rupee opened at Rs 72.95 against the American currency, and hit an intra-day high of Rs 72.89 and a low of Rs 72.96 in day trade.

It finally finished at Rs 72.94, higher by 3 paise over its last close.

On Friday, the rupee had settled at Rs 72.97 against the American currency.

Meanwhile, the dollar index, which gauges the greenback's strength against a basket of six currencies, advanced 0.10 per cent to Rs 90.32.

The rupee has managed to hold its fort around the Rs 72.90 to 73 levels, but given the sell-off in equities and the likelihood of a rebound in the dollar index, we see the trend tilting slightly towards depreciation going forward, said Sugandha Sachdeva VP-Metals, Energy & Currency Research, Religare NSE 0.52% Broking.

- "Rupee rises for 5th straight session, settles 3 paise higher at Rs 72.94" - The Economic Times - January 25, 2021

#### Question 1

What is the benefit for the appreciation of the Indian Rupees?

1. The Forex Reserve of the country will increase.
2. The imports of the country will decline.
3. There will be an increase in the Foreign Direct Investment.
4. None of the above.

#### Question 2

Which of the following is not the reason for increase in the price of rupees in the Forex Market?

1. Increase in investment through FDI and FPI.
2. Increase in the share and security market.
3. Better government policies.
4. Heavy selling in the domestic equity market.

#### Question 3

India follows ___________________ system of Foreign Exchange, as per the given report.

1. Fixed Exchange Rate
2. Flexible Exchange Rate
3. Managed Floating Exchange Rate
4. None of the above

#### Question 4

Rupee rose by _________ paise against USD.

1. 2
2. 3
3. 4
4. 5

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