Question

If \(₹150\) is required to buy 2 dollars instead of \(₹100\) earlier, then: \[ (A)\ \text{Domestic currency has depreciated} \] \[ (B)\ \text{Domestic currency has appreciated} \] \[ (C)\ \text{The rupee value of the import bill will increase} \] \[ (D)\ \text{Selling foreign exchange from its reserves by the Reserve Bank of India} \]

• A. (A), (B) and (D) only
• B. (A), (C) and (D) only
• C. (A), (B), (C) and (D)
• D. (B), (C) and (D) only

Hint:

If more rupees are required to buy one dollar, the rupee has depreciated. Depreciation makes imports costlier in domestic currency.

Answer 1

The Correct Option is B

Step 1: Understanding the Concept:
A change in the exchange rate affects the purchasing power of the domestic currency and the balance of payments.
Step 2: Detailed Explanation:
1. Analyzing the Rate:
Earlier: 100 INR for 2 USD $\rightarrow$ \$1 = 50 INR.
Now: 150 INR for 2 USD $\rightarrow$ \$1 = 75 INR.
2. Domestic Currency Status (A and B): Since you now need more INR (75 instead of 50) to buy \$1, the Rupee has lost value. Thus, the Domestic currency has depreciated. (A) is correct; (B) is incorrect.
3. Impact on Imports (C): When the Rupee depreciates, foreign goods become more expensive. For example, a \$1 item now costs 75 INR instead of 50 INR. Therefore, the import bill will increase. (C) is correct.
4. RBI Intervention (D): To stabilize a depreciating currency, the Central Bank (RBI) often intervenes by selling foreign exchange from its reserves to increase the supply of USD in the market and slow down the Rupee's fall. (D) is correct.
Step 3: Final Answer:
Statements (A), (C), and (D) are correct.