NEER reflects the nominal value of a currency against a basket, while REER reflects the real value (purchasing power) against a basket, adjusted for relative inflation. REER is a key indicator of a country's external competitiveness.
With reference to the Indian economy, consider the following statements: 1. An increase in Nominal Effective Exchange Rate (NEER) indicates the appreciation of rupee. 2. An increase in the Real Effective Exchange Rate (REER) indicates an improvement in trade competitiveness. 3. An increasing trend in domestic inflation relative to inflation in other countries is likely to cause an increasing divergence between NEER and REER. Which of the above statements are correct ?
Asked in UPSC IAS 2022 · Topic: Foreign Exchange Market and Exchange Rate Determination (Definition and Types of Exchange Rates (Nominal, Real, Bilateral, Effective))
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Answer: C. 1 and 3 only
Read the notes: Foreign Exchange Market and Exchange Rate Determination →
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