The market rate is Rs 80 per dollar and the government fixes the rate at Rs 90 per dollar. Which of the following statements are correct?
(A) Indian goods become cheaper for foreigners.
(B) At this rate, the supply of dollars exceeds the demand for dollars.
(C) The RBI sells dollars from its reserves to hold the rate.
(D) Foreign goods cost more in terms of rupees.
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → (A), (B) and (D) only
At Rs 90, the dollar costs more rupees than the market rate of Rs 80. So the rupee is cheaper and the dollar dearer.
(A) Indian goods become cheaper for foreigners. — Correct. A dollar now buys more rupees, so our goods cost foreigners less.
(B) At this rate, the supply of dollars exceeds the demand for dollars. — Correct. Above the market rate, exports rise and imports fall, so supply exceeds demand.
(C) The RBI sells dollars from its reserves to hold the rate. — Incorrect. With extra dollars in the market, the RBI must buy dollars, not sell them.
(D) Foreign goods cost more in terms of rupees. — Correct. Each dollar of foreign goods now costs Rs 90.
NCERT (2026-27): “Fixed Exchange Rates … However, let us suppose that for some reason the Indian Government wants to encourage exports for which it needs to make rupee cheaper for foreigners it would do so by fixing a higher exchange rate, say Rs 70 per dollar from the current exchange rate of Rs 50 per dollar. Thus, the new exchange rate set by the Government is e1, where e1 > e. At this exchange rate, the supply of dollars exceeds the demand for dollars. The RBI intervenes to purchase the dollars for rupees in the foreign exchange market in order to absorb this excess supply which has been marked as AB in the figure. …” “Demand for Foreign Exchange … A rise in price of foreign exchange will increase the cost (in terms of rupees) of purchasing a foreign good. …” |