The graph shows the supply of dollars rising from S₁ to S₂. What happens to the rupee? The supply of dollars shifts right from S₁ to S₂ while demand D stays put. Equilibrium moves from E₁ (₹80 per dollar, $40 billion) to E₂ (₹70 per dollar, $50 billion).

The graph shows the supply of dollars…

The graph shows the supply of dollars rising from S₁ to S₂.

Question 24

MediumOriginal question

The graph shows the supply of dollars rising from S₁ to S₂. What happens to the rupee?

The supply of dollars shifts right from S₁ to S₂ while demand D stays put. Equilibrium moves from E₁ (₹80 per dollar, $40 billion) to E₂ (₹70 per dollar, $50 billion).

It appreciates from ₹80 to ₹70 per dollarCorrect answerYour answerIt depreciates from ₹80 to ₹90 per dollarCorrect answerYour answerIt stays at ₹80 per dollarCorrect answerYour answerIt is devalued by the RBICorrect answerYour answer

Show the answer and explanation

CorrectNot quiteAnswer A

Correct answer: A

Equilibrium moves from E₁ (₹80) to E₂ (₹70).
Fewer rupees per dollar: the rupee has appreciated.

Worth noting

Devaluation is a decision under a fixed rate; here the market moved the rate.

Concept: Rise in supply of dollars
Typical timeTypical: 70 s
Your timeYours: —

The rule this testsThe flexible rate: depreciation and appreciation

Practise this chapter →

Ten questions from Foreign Exchange Rate, at your own pace.

Practise this chapter →

Ten questions from Foreign Exchange Rate, at your own pace.

The graph shows the supply of dollars rising from S₁ to S₂.

Question 24

Explanation