SSC
The price of one unit of a foreign currency in terms of the domestic currency is called the:
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Answer: Option C — Nominal exchange rate
Detailed Solution
The exchange rate is the price of one currency in terms of another. The nominal exchange rate is the number of units of domestic currency needed to buy one unit of foreign currency. For example, if 1 US dollar can be bought for 85 Indian rupees, the nominal exchange rate is ₹85 per dollar. This is the rate quoted every day in newspapers and by banks.
When the number of rupees needed to buy a dollar rises (say, from ₹80 to ₹85), the rupee is said to have depreciated (lost value) against the dollar. When fewer rupees are needed, the rupee has appreciated. Under a fixed exchange rate system, an official reduction in the value of the currency is called devaluation, and an official increase is called revaluation. India devalued the rupee in 1949, 1966 and in July 1991.
Other types of exchange rates:
Real exchange rate: the nominal exchange rate adjusted for differences in price levels (inflation) between the two countries. It shows the actual purchasing power and the competitiveness of a country's goods.
Nominal Effective Exchange Rate (NEER): a weighted average of the exchange rates of the domestic currency against a basket of currencies of its main trading partners.
Real Effective Exchange Rate (REER): the NEER adjusted for inflation differences. The RBI publishes NEER and REER indices for the rupee.
India follows a managed floating exchange rate system since 1993. The rupee's value is mainly decided by the market forces of demand and supply, but the RBI intervenes by buying or selling foreign currency to prevent excessive fluctuations. A depreciating rupee makes exports cheaper and imports costlier.
Why not the other options?
- ✗The real exchange rate adjusts the nominal rate for price levels.
- ✗The effective exchange rate measures the currency against a basket of currencies.
- ✗The repo rate is the rate at which the RBI lends to commercial banks.
Quick tip
Remember: Nominal exchange rate = rupees per unit of foreign currency; real = adjusted for inflation; NEER and REER = against a basket. India = managed float since 1993.
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This question tests your understanding of Economic Reforms & Foreign Trade, a key topic in the General Knowledge section. The detailed solution above uses a step-by-step approach to show the reasoning, and where available, a shortcut that helps you solve similar questions in under 90 seconds during the actual exam.
This topic covers the 1991 economic reforms (liberalisation, privatisation and globalisation), industrial policies, foreign trade and India's main trading partners, balance of payments, current and capital accounts, exchange rates, FDI and FPI, and foreign trade policy. Common questions ask what LPG stands for, what the current account includes, the difference between FDI and FPI, and what devaluation of the rupee means. The 1991 reforms were introduced by the government of P. V. Narasimha Rao, with Manmohan Singh as Finance Minister. Practise the economic reforms and foreign trade questions below, written in the style of the general awareness sections of exams such as SSC, banking, railways, CUET GAT, MAH CET and CLAT. Each question comes with a detailed explanation that adds related facts, so every question helps you revise more than one point.