Match List-I with List-II:
| List-I | List-II | ||
|---|---|---|---|
| (A) | Purchasing power parity theory | (I) | Quantitative limits on imports |
| (B) | Tariffs | (II) | A factor in exchange rate movements in the short run |
| (C) | Quotas | (III) | Long-run predictions about exchange rates under a flexible system |
| (D) | Interest rate differential | (IV) | Taxes on trade |
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → (A) - (III), (B) - (IV), (C) - (I), (D) - (II)
Exchange rates move with interest rates in the short run and with price levels in the long run. Tariffs and quotas are barriers to trade.
| List-I | List-II | Reason |
|---|---|---|
| (A) Purchasing power parity theory | (III) Long-run predictions about exchange rates under a flexible system | Rates adjust so the same product costs the same in every country. |
| (B) Tariffs | (IV) Taxes on trade | A tariff is a tax on goods crossing the border. |
| (C) Quotas | (I) Quantitative limits on imports | A quota limits the quantity that can be imported. |
| (D) Interest rate differential | (II) A factor in exchange rate movements in the short run | Funds move to where interest rates are highest. |
NCERT (2026-27): “Interest Rates and the Exchange Rate … In the short run, another factor that is important in determining exchange rate movements is the interest rate differential i.e. the difference between interest rates between countries. …” “Exchange Rates in the Long Run … The purchasing Power (PPP) theory is used to make long-run predictions about exchange rates in a flexible exchange rate system. According to the theory, as long as there are no barriers to trade like tariffs (taxes on trade) and quotas (quantitative limits on imports), exchange rates should eventually adjust so that the same product costs the same whether measured in rupees in India, or dollars in the US, yen in Japan and so on, except for differences in transportation. …” |