Question

If Rs. 150 is required to buy \(2\) dollars instead of Rs. 100 earlier, then:

• [(A)] Domestic currency has depreciated
• [(B)] Domestic currency has appreciated
• [(C)] The rupee value of the import bill will increase
• [(D)] 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:

Remember:

• More rupees needed per dollar $\rightarrow$ Rupee depreciates
• Depreciation $\rightarrow$ Imports become costly
• RBI may sell foreign exchange reserves to stabilize currency

Answer 1

The Correct Option is B

Concept: When more domestic currency is needed to buy the same amount of foreign currency, the domestic currency is said to depreciate. Currency depreciation also increases the cost of imports.

Step 1: Compare the exchange rates. Earlier: \[ 2 \text{ dollars} = Rs.100 \] Thus: \[ 1 \text{ dollar} = Rs.50 \] Now: \[ 2 \text{ dollars} = Rs.150 \] Thus: \[ 1 \text{ dollar} = Rs.75 \]

Step 2: Identify the effect on domestic currency. Previously: \[ Rs.50 \] was needed for one dollar. Now: \[ Rs.75 \] is needed for one dollar. Hence, the rupee has lost value. Therefore: \[ \text{Domestic currency has depreciated} \] So: \[ (A) \text{ is correct} \]

Step 3: Examine the import bill effect. When the domestic currency depreciates: \[ \text{Imports become more expensive} \] Thus: \[ (C) \text{ is correct} \]

Step 4: Examine RBI intervention. To control excessive depreciation, the: \[ \text{Reserve Bank of India} \] may sell foreign exchange reserves in the market. Thus: \[ (D) \text{ is correct} \]

Step 5: Examine Statement (B). Appreciation means: \[ \text{Domestic currency gains value} \] But here rupee lost value. Thus: \[ (B) \text{ is incorrect} \] Hence, the correct statements are: \[ (A),\ (C)\ \text{and}\ (D) \] Therefore, \[ \boxed{(A),\ (C)\ \text{and}\ (D)\ \text{only}} \]