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Distinguish between the nominal exchange rate and the real exchange ra...

Distinguish between the nominal exchange | Class 12 Macro Economics Chapter Open Economy Macroeconomics, Open Economy Macroeconomics NCERT Solutions

Welcome to the NCERT Solutions for Class 12 Macro Economics - Chapter Open Economy Macroeconomics. This page offers a step-by-step solution to the specific question from Exercise 1, Question 3: . With detailed answers and explanations for each chapter, students can strengthen their understanding and prepare confidently for exams. Ideal for CBSE and other board students, this resource will simplify your study experience.

Question 3:

Distinguish between the nominal exchange rate and the real exchange rate. If you were to decide whether to buy domestic goods or foreign goods, which rate would be more relevant? Explain.

Answer:

Nominal exchange rate is the price of one currency in terms of another. It is the amount of domestic currency required to buy one unit of foreign currency. For example a rupee- dollar exchange rate of Rs 45 means that it costs 45 rupees to buy 1 dollar. Real exchange rate is the ratio of foreign prices to domestic prices. In other words, it measures foreign prices relative to domestic prices.

Real exchange rate

Where Pf - price level of foreign currency

P - Price level of domestic currency
e - Nominal exchange rate

For example, if a watch costs $40 in US and the nominal exchange rate is 50 per US dollar, then, with a real exchange rate of 1, it should cost Rs 2,000 (ePf = 50 × 40 = Rs2000) in India.

If, I were to decide whether to buy domestic goods or foreign goods, then real exchange rate will be more relevant, because real exchange rate takes the inflation differential among the countries into account and is also used as an indicator of a country's competitiveness in the foreign trade.

Other Questions of Chapter Open Economy Macroeconomics

Differentiate between balance of trade and current account balance.

Explain the automatic mechanism by which BoP equilibrium was achieved under the gold standard.

Are the concepts of demand for domestic goods and domestic demand for goods the same?

In the above example, if exports change to X = 100, find the change in equilibrium income and the net export balance.

Discuss some of the exchange rate arrangements that countries have entered into to bring about stability in their external accounts.

Should a current account deficit be a cause for alarm? Explain.

If inflation is higher in country A than in Country B, and the exchange rate between the two countries is fixed, what is likely to happen to the trade balance between the two countries?

Suppose the exchange rate between the Rupee and the dollar was Rs. 30=1$ in the year 2010. Suppose the prices have doubled in India over 20 years while they have remained fixed in USA. What, according to the purchasing power parity theory will be the exchange rate between dollar and rupee in the year 2030.

Calculate the open economy multiplier with proportional taxes, T = tY, instead of lump-sum taxes as assumed in the text.

Why is the open economy autonomous expenditure multiplier smaller than the closed economy one?

Popular questions of class 12 Macro Economics

What is a barter system? What are its drawbacks?

Write down some of the limitations of using GDP as an index of welfare of a country.

Explain the relation between government deficit and government debt.

From the following data, calculate Personal Income and Personal Disposable Income.
Rs (crore)
(a) Net Domestic Product at factor cost 8,000
(b) Net Factor Income from abroad 200
(c) Undisbursed Profit 1,000
(d) Corporate Tax 500
(e) Interest Received by Households 1,500
(f) Interest Paid by Households 1,200
(g) Transfer Income 300
(h) Personal Tax 500

Why should the aggregate final expenditure of an economy be equal to the aggregate factor payments? Explain.

Give the relationship between the revenue deficit and the fiscal deficit.

Explain ‘Paradox of Thrift’.

Discuss the issue of deficit reduction.

What is the difference between ex ante investment and ex post investment?

Are fiscal deficits inflationary?

Recently Viewed Questions of Class 12 Macro Economics

What is High Powered Money?

What is the difference between ex ante investment and ex post investment?

Suppose that for a particular economy, investment is equal to 200, government purchases are 150, net taxes (that is lump-sum taxes minus transfers) is 100 and consumption is given by C = 100 + 0.75Y (a) What is the level of equilibrium income? (b) Calculate the value of the government expenditure multiplier and the tax multiplier. (c) If government expenditure increases by 200, find the change in equilibrium income.

Describe the four major sectors in an economy according to the macroeconomic point of view.

What are the important features of a capitalist economy?

What are the instruments of monetary policy of RBI?

What is the difference between microeconomics and macroeconomics?

The value of the nominal GNP of an economy was Rs 2,500 crores in a particular year. The value of GNP of that country during the same year, evaluated at the prices of same base year, was Rs 3,000 crores. Calculate the value of the GNP deflator of the year in percentage terms. Has the price level risen between the base year and the year under consideration?

Explain why the tax multiplier is smaller in absolute value than the government expenditure multiplier.

Suppose marginal propensity to consume is 0.75 and there is a 20 per cent proportional income tax. Find the change in equilibrium income for the following (a) Government purchases increase by 20 (b) Transfers decrease by 20.

Study Tips for Answering NCERT Questions:

NCERT questions are designed to test your understanding of the concepts and theories discussed in the chapter. Here are some tips to help you answer NCERT questions effectively:

Read the question carefully and focus on the core concept being asked.
Reference examples and data from the chapter when answering questions about Open Economy Macroeconomics.
Review previous year question papers to get an idea of how such questions may be framed in exams.
Practice answering questions within the time limit to improve your speed and accuracy.
Discuss your answers with your teachers or peers to get feedback and improve your understanding.

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