NIOS Economics (318) Notes/Answer| Chapter-34| Foreign exchange rate

NIOS Economics (318) Notes/Answer| Chapter-34| Foreign exchange rate. Important questions for NIOS Economics (318) Questions Answers brings you latest queries and solutions with accordance to the most recent pointers SOS . Students will clear all their doubts with regard to every chapter by active these necessary chapter queries and elaborate explanations that area unit provided by our specialists so as to assist you higher. These queries can facilitate students prepare well for the exams thanks to time constraint . NIOS Economics (318) Notes/Answer| Chapter-34| Foreign exchange rate

HS 2nd years Solutions (English Medium)

NIOS Economics (318) Notes/Answer| Chapter-34| Foreign exchange rate

 Intext Question 

1. State whether the following statements are true or false. 

(a) Each foreign currency has an exchange rate with the currency of a given country. 

Ans. True 

(b) It is not possible to do foreign trade without exchange rate

 Ans. True 

(c) Currency of every country is medium of exchange in other countries.

 Ans. False 

2. Fill in the blanks with appropriate words given in the bracket 

(a) Fixed exchange in the fixed exchange system is determined by ________ (Central Bank, government) 

Ans. Central Bank 

(b) The foreign exchange rate determined by Central Bank can ________ (be charged, not be charged) 

Ans. be changed 

(c) Reserve Bank of India has made changes in exchange rate to ________ net inflow of foreign exchange. (increase, reduce) 

Ans. increase 

(d) Devaluation means________ the value of the country’s currency in terms of foreign currencies. (lowering, raising) 

Ans. lowering 

3. State whether the following statement are true or false:

(a) The market situation in foreign countries is called the foreign exchange market. 

Ans. False 

(b) In the foreign exchange market goods are traded with foreign countries. 

Ans. False 

(c) The rate at which imports and exports are equal is the equilibrium exchange rate. 

Ans. False

(d) The demand and supply of foreign exchange determines the equilibrium exchange rate.

 Ans. True 

4. State whether the following statement are true or false:

(a) The equilibrium rate of foreign exchange does not change.

 Ans. False 

(b) Big fluctuations in the equilibrium foreign exchange rates are harmful for the economy. 

Ans. True 

(c) The Reserve Bank of India enters the foreign exchange market to reduce fluctuations in the foreign exchange market. 

Ans. True 

 Terminal Exercise

1. Explain the meaning of foreign exchange rate

Ans. Foreign exchange rate is the rate at which one currency is exchanged with other currency. This rate depends on the local demand for foreign currencies and their local supply, country’s trade balance, strength of its economy, and other such factors. 

2. Distinguish between fixed exchange rate and market determined foreign exchange rate.

Ans. When the exchange rate between a country’s currency and foreign currency is fixed by the monetary authority (Central Bank) of that country, it is called fixed foreign exchange rate. On the other hand, when foreign currencies, it is generally called flexible exchange rate or market determined foreign exchange rate. 

3. Explain how foreign exchange rate is determined in foreign exchange market. 

Ans. Foreign exchange market is a market in which foreign currencies are bought and sold. Those who deal in foreign currencies are authorised dealers. They are authorised by the monetary authority i.e. the central bank of a country. The price of foreign currencies in such a market is determined by the demand and supply of foreign currencies. 

4. What are the causes of changes in foreign exchange rate?

Ans. Following are the causes of changes in foreign exchange rate 

Inflation Rates 

Changes in inflation cause changes in currency exchange rates. Generally speaking, a country with a comparatively lower rate of inflation will see an appreciation in the value of its 

currency. The price of goods and services increases at a slower rate when inflation is low. Countries with a continually low inflation rate exhibit an increasing currency value, whereas a country with higher inflation typically experiences depreciation of its currency and this is usually accompanied by higher interest rates. 

Capital Movements: 

International capital movements from one country for short periods to avail of the high rate of interest prevailing abroad or for long periods for the purpose of making long-term investment abroad. Any export or import of capital from one country to another will bring about a change in the rate of exchange.

Interest Rates 

Interest rates, inflation and exchange rates are all correlated. Central banks can influence both inflation and exchange rates by manipulating interest rates. Higher interest rates offer lenders a higher return compared to other countries. Any increase in a country’s interest rate causes its currency to increase in value as higher interest rates mean higher rates to lenders, thus attracting more foreign capital, which in turn, creates an increase in exchange rates. 


In the event a country’s economy falls into a recession, its interest rates will be dropped, hindering its chances of acquiring foreign capital. The consequence of this is that its currency weakens in comparison to that of other countries, thereby lowering the exchange rate. 

Terms of Trade 

Terms of trade relate to a ratio which compares export prices to import prices. If the price of a country’s exports increases by a higher rate than its imports, its terms of trade will have improved. Increasing terms of trade indicate a greater demand for a country’s exports. This, in turn, results in an increase in revenue from exports which has the effect of raising the demand for the country’s currency and an increase in its value. In the event the price of exports rises by a lower rate than its imports, the currency’s value will decline in comparison to that of its trading partners. 

Government Debt 

Government debt is public debt or national debt owned by the central government. Countries with large public deficits and debts are less attractive to foreign investors and are thus less likely to acquire foreign capital which leads to inflation. Foreign investors will forecast a rise in government debt within a particular country. As a result, a decrease in the value of this country’s exchange rate will follow. 

5.What are the effects of changes in foreign exchange rate.

Ans. Change in foreign exchange rate will take place when demand for foreign currency or its supply or both may increase or decrease at a given equilibrium price.

As we know that imports create demand for foreign currency and exports create the supply of foreign currency, Therefore any change in imports, in their quantity or price or both, changes demand for foreign currency, and any change in exports, changes supply of foreign currency. Such changes will shift the demand curve or supply curve or both as the case may be. These shifts in the demand curve or supply curve are similar to the shifts in the demand and supply curves of commodities. The effect of these changes on the equilibrium price of foreign currency is also similar to the effects of such changes in case of a commodity. 

The demand and supply of foreign exchange keeps on changing because of changes in exports, imports, foreign investments, foreign tourism etc. As a result of this the equilibrium rate of foreign exchange also keeps on changing. We can see in the daily newspaper the exchange rate of various currencies and notice the changes. The fluctuation in exchange rate may be very wide. Wide fluctuation may adversely affect those engaged in foreign trade and also the economy as a whole. In India the Reserve Bank of India keeps watch on these fluctuations. If the foreign exchange rate rises sharply, the Reserve Bank of India intervenes in the foreign exchange market. It enter the market as a supplier of foreign exchange and thus checks the rise in foreign exchange rate. The Reserve Bank of India has a stock of foreign exchange, so it sells foreign exchange in the market and thus increases the supply. Similarly if the foreign exchange rate falls sharply, it indicates the supply of foreign exchange is greater than the demand. In such a situation the Reserve Bank of India increases the demand for foreign exchange by entering the market as a buyer. It will increase its stock of foreign exchange.

A rise in the equilibrium rate of foreign exchange i.e. a rise in the price of, say dollar in terms of rupee is called depreciation of Indian currency. In a regime of fixed foreign exchange rate such a situation was called depreciation. The effect of depreciation of domestic currency would be the same as the effects of devaluation of a currency. 

NIOS Class 12th Economics (318) Notes/Question Answer

Chapter Chapters NameLink
Chapter 1Economy and Its ProcessClick Here
Chapter 2Basic Problems of an EconomyClick Here
Chapter 3Economic Development and Indian EconomyClick Here
Chapter 4Statistics: Meaning and ScopeClick Here
Chapter 5Making Statistical Data MeaningfulClick Here
Chapter 6Presentation of Statistical DataClick Here
Chapter 7Statistical MethodsClick Here
Chapter 8Index Numbers (Meanings and Its Construction)Click Here
Chapter 9Index Numbers (Problem and Uses)Click Here
Chapter 10Income FlowsClick Here
Chapter 11National Income: ConceptsClick Here
Chapter 12National Income: MeasurementClick Here
Chapter 13Uses of National Income EstimatesClick Here
Chapter 14What micro EconomicsClick Here
Chapter 15What affects demandClick Here
Chapter 16What affects supplyClick Here
Chapter 17Price determinationClick Here
Chapter 18CostClick Here
Chapter 19RevenueClick Here
Chapter 20Profit maximizationClick Here
Chapter 21Government budgetingClick Here
Chapter 22Money supply and its regulationClick Here
Chapter 23Need for planning in IndiaClick Here
Chapter 24Achievements of planning in IndiaClick Here
Chapter 25Recent economic reforms and the role of planningClick Here

Optical Module – I

Chapter 26AgricultureClick Here
Chapter 27IndustryClick Here
Chapter 28Independence of Agriculture and IndustryClick Here
Chapter 29Transport and CommunicationClick Here
Chapter 30EnergyClick Here
Chapter 31Financial InstitutionsClick Here
Chapter 32Social Infrastructure (Housing, Health and Education)Click Here

Optical Module – II

Chapter 33Direction and composition of India’s Foreign tradeClick Here
Chapter 34Foreign exchange rateClick Here
Chapter 35Balance of trade and balance of paymentsClick Here
Chapter 36Inflow of capital (Foreign Capital and Foreign Aid)Click Here
Chapter 37New trade policy and its implicationsClick Here
Chapter 38Population and economic developmentClick Here
Chapter 39Population of IndiaClick Here

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