ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -The Fixed Exchange Rate Mechanism Link to the Domestic Money Supply. Under a fixed exchange rate, the NRCC has to insure that its exchange rate is fixed to the reserve currency country (RCC) at all times. The NRRC stands ready to buy or sell any amount of the foreign exchange at the exchange rate price.

Detailed explanation-2: -A fixed exchange rate is a regime applied by a government or central bank that ties the country’s official currency exchange rate to another country’s currency or the price of gold. The purpose of a fixed exchange rate system is to keep a currency’s value within a narrow band.

Detailed explanation-3: -The real exchange rate (RER) between two currencies is the product of the nominal exchange rate (the dollar cost of a euro, for example) and the ratio of prices between the two countries.

Detailed explanation-4: -India has been operating on a managed floating exchange rate regime since March 1993, marking the start of an era of a market-determined exchange rate regime of the rupee with provision for timely intervention by the central bank.

Detailed explanation-5: -Devaluation, the deliberate downward adjustment in the official exchange rate, reduces the currency’s value; in contrast, a revaluation is an upward change in the currency’s value. A key effect of devaluation is that it makes the domestic currency cheaper relative to other currencies.