With reference to the Indian economy, consider the following statements: 1. An increase in Nominal Effective…
With reference to the Indian economy, consider the following statements: 1. An increase in Nominal Effective Exchange Rate (NEER) indicates the appreciation of rupee. 2. An increase in the Real Effective Exchange Rate (REER) indicates an improvement in trade competitiveness. 3. An increasing trend in domestic inflation relative to inflation in other countries is likely to cause an increasing divergence between NEER and REER. Which of the above statements are correct?
1 and 2 only
2 and 3 only
1 and 3 only
1, 2 and 3
Solution
Statement 1 is correct: NEER increase = rupee appreciation. Statement 2 is incorrect: REER increase indicates loss of trade competitiveness (exports become costlier). Statement 3 is correct: relative inflation differentials drive divergence between NEER and REER.