Question
How is the exchange rate determined under a flexible exchange rate regime?
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Answer
Flexible exchange rate is determined by the forces of supply and demand in the international market. And the equilibrium exchange rate is determined at a level where demand for foreign exchange is equal to the supply of foreign exchange.Sources of demand for foreign exchange:
In the figure, the equilibrium exchange rate i.e., E.
- Payment of international loans.
- Gifts and grants to rest of the world.
- Export to the rest of the world.
- Direct foreign investment.
- Direct purchase of goods and services by the non-residents in the domestic market.
In the figure, the equilibrium exchange rate i.e., E.Need a full question paper?
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(₹ crores)
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(i)
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Net current transfers to abroad
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$10$
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(ii)
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Private final consumption expenditure
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$500$
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|
(iii)
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Current tansfers from government
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$30$
|
|
(iv)
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Net factor income to abroad
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$20$
|
|
(v)
|
Net exports
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$(-) 20$
|
|
(vi)
|
Net indirect tax
|
$120$
|
|
(vii)
|
National debt interest
|
$70$
|
|
(viii)
|
Net domestic capital formation
|
$80$
|
|
(ix)
|
Income accruing to government
|
$60$
|
|
(x)
|
Government final consumption expenditure
|
$100$
|
(i) On the basis of the following hypothetical data: (all figures in ₹ crore)
| Year | Nominal | Nominal GDP adjusted to base year |
| 2020 | 3,000 | 4,000 |
| 2023 | 4,000 | 4,500 |
Calculate the percentage change in Real Gross Domestic Product in the year 2023 using 2020 as the base year.
(ii) “The public investment on the construction of a multi-lane flyover may reduce traffic congestion.” On the basis of the above statement, discuss its likely impact on Gross Domestic Product (GDP) and welfare in an economy.
Draw a hypothetical propensity to save curve and from it draw the propensity to consume curve.
OR
Explain the steps taken in derivation of the CC from the saving curve.
OR
Explain the steps taken in derivation of the CC from the saving curve.