The graph shows the rate fixed at ₹70 per dollar, below the market rate. If the central bank runs short of reserves, it is likely to Demand (D$) and supply (S$) of dollars cross at ₹80 per dollar, but the rate is fixed at ₹70 per dollar. At ₹70, $30 billion is supplied (A) and $50 billion is demanded (B).

The graph shows the rate fixed at ₹70 per…

The graph shows the rate fixed at ₹70 per dollar, below the market rate.

Question 34

MediumOriginal question

The graph shows the rate fixed at ₹70 per dollar, below the market rate. If the central bank runs short of reserves, it is likely to

Demand (D$) and supply (S$) of dollars cross at ₹80 per dollar, but the rate is fixed at ₹70 per dollar. At ₹70, $30 billion is supplied (A) and $50 billion is demanded (B).

revalue the rupee to ₹60 per dollarCorrect answerYour answerdevalue the rupee towards ₹80 per dollarCorrect answerYour answerbuy more dollarsCorrect answerYour answerleave everything as it is for everCorrect answerYour answer

Show the answer and explanation

CorrectNot quiteAnswer B

Correct answer: B

The rupee is overvalued at ₹70, so there is a lasting shortage of dollars.
Devaluing towards the market rate of ₹80 removes the shortage.

Concept: When reserves run out
Typical timeTypical: 70 s
Your timeYours: —

The rule this testsThe fixed rate: devaluation and revaluation

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 rate fixed at ₹70 per dollar, below the market rate.

Question 34

Explanation