Question

If \(₹150\) is required to buy 2 dollars instead of \(₹100\) earlier, then: \[ (A)\ \text{Domestic currency has depreciated} \] \[ (B)\ \text{Domestic currency has appreciated} \] \[ (C)\ \text{The rupee value of the import bill will increase} \] \[ (D)\ \text{Selling foreign exchange from its reserves by the Reserve Bank of India} \]

• A. (A), (B) and (D) only
• B. (A), (C) and (D) only
• C. (A), (B), (C) and (D)
• D. (B), (C) and (D) only

Hint:

If more rupees are required to buy one dollar, the rupee has depreciated. Depreciation makes imports costlier in domestic currency.

Answer 1

The Correct Option is B

Concept:
Exchange rate shows how much domestic currency is required to buy foreign currency. If more domestic currency is required to buy the same foreign currency, then domestic currency has depreciated. If less domestic currency is required to buy the same foreign currency, then domestic currency has appreciated.

Step 1: Calculate the earlier exchange rate.
Earlier, \(₹100\) was required to buy \(2\) dollars. So, \[ ₹100 = 2\$ \] To find the value of \(1\) dollar: \[ 1\$ = \frac{₹100}{2} \] \[ 1\$ = ₹50 \] Therefore, the earlier exchange rate was: \[ 1\$ = ₹50 \]

Step 2: Calculate the new exchange rate.
Now, \(₹150\) is required to buy \(2\) dollars. So, \[ ₹150 = 2\$ \] To find the value of \(1\) dollar: \[ 1\$ = \frac{₹150}{2} \] \[ 1\$ = ₹75 \] Therefore, the new exchange rate is: \[ 1\$ = ₹75 \]

Step 3: Compare the exchange rates.
Earlier: \[ 1\$ = ₹50 \] Now: \[ 1\$ = ₹75 \] Now more rupees are required to buy one dollar. This means the rupee has become weaker. Therefore, the domestic currency has depreciated. So, statement (A) is correct.

Step 4: Check whether domestic currency has appreciated.
Appreciation means the domestic currency becomes stronger. If the rupee appreciated, fewer rupees would be needed to buy one dollar. But here, more rupees are needed to buy one dollar. So, domestic currency has not appreciated. Therefore, statement (B) is incorrect.

Step 5: Effect on import bill.
Imports are generally paid for in foreign currency. When the rupee depreciates, more rupees are required to buy the same amount of foreign currency. Therefore, the rupee value of imports increases. So, the rupee value of the import bill will increase. Hence, statement (C) is correct.

Step 6: Role of Reserve Bank of India.
When domestic currency depreciates sharply, the Reserve Bank of India may sell foreign exchange from its reserves. By selling foreign exchange, the supply of foreign currency in the market increases. This helps control excessive depreciation of domestic currency. Therefore, statement (D) is correct.

Step 7: Final conclusion.
The correct statements are: \[ (A),\ (C),\ (D) \] Hence, the correct answer is: \[ \boxed{\text{(B) (A), (C) and (D) only}} \]