{"id":92010,"date":"2025-06-01T11:12:04","date_gmt":"2025-06-01T11:12:04","guid":{"rendered":"https:\/\/exam.pscnotes.com\/mcq\/?p=92010"},"modified":"2025-06-01T11:12:04","modified_gmt":"2025-06-01T11:12:04","slug":"with-reference-to-the-indian-economy-consider-the-following-statement-2","status":"publish","type":"post","link":"https:\/\/exam.pscnotes.com\/mcq\/with-reference-to-the-indian-economy-consider-the-following-statement-2\/","title":{"rendered":"With reference to the Indian economy, consider the following statement"},"content":{"rendered":"<p>With reference to the Indian economy, consider the following statements:<\/p>\n<ul>\n<li>1. An increase in Nominal Effective Exchange Rate (NEER) indicates the appreciation of rupee.<\/li>\n<li>2. An increase in the Real Effective Exchange Rate (REER) indicates an improvement in trade competitiveness.<\/li>\n<li>3. An increasing trend in domestic inflation relative to inflation in other countries is likely to cause an increasing divergence between NEER and REER.<\/li>\n<\/ul>\n<p>Which of the above statements are correct ?<\/p>\n<p>[amp_mcq option1=&#8221;1 and 2 only&#8221; option2=&#8221;2 and 3 only&#8221; option3=&#8221;1 and 3 only&#8221; option4=&#8221;1, 2 and 3&#8243; correct=&#8221;option3&#8243;]<\/p>\n<div class=\"psc-box-pyq-exam-year-detail\">\n<div class=\"pyq-exam\">\n<div class=\"psc-heading\">This question was previously asked in<\/div>\n<div class=\"psc-title line-ellipsis\">UPSC IAS &#8211; 2022<\/div>\n<\/div>\n<div class=\"pyq-exam-psc-buttons\"><a href=\"\/pyq\/pyq-upsc-ias-2022.pdf\" target=\"_blank\" class=\"psc-pdf-button\" rel=\"noopener\">Download PDF<\/a><a href=\"\/pyq-upsc-ias-2022\" target=\"_blank\" class=\"psc-attempt-button\" rel=\"noopener\">Attempt Online<\/a><\/div>\n<\/div>\n<section id=\"pyq-correct-answer\">\nStatement 1 is correct. Nominal Effective Exchange Rate (NEER) is a weighted average of bilateral nominal exchange rates of the domestic currency against the currencies of its trading partners. An increase in NEER means that, on average, the domestic currency is appreciating against the currencies of its trading partners.<br \/>\nStatement 2 is incorrect. Real Effective Exchange Rate (REER) is NEER adjusted for the inflation differential between the domestic economy and its trading partners. REER = NEER * (Domestic Price Index \/ Foreign Price Index). An increase in REER means that the domestic country&#8217;s goods and services are becoming relatively more expensive compared to those of its trading partners. This makes exports less competitive and imports more attractive, thus indicating a *decrease* (or worsening) in trade competitiveness.<br \/>\nStatement 3 is correct. The formula for REER shows its relationship with NEER and inflation differentials. REER = NEER * (Domestic Price Index \/ Foreign Price Index). If domestic inflation increases significantly relative to foreign inflation, the term (Domestic Price Index \/ Foreign Price Index) increases. This will cause the REER to rise relative to the NEER. For instance, if NEER remains constant, an increase in domestic inflation relative to foreign inflation will cause REER to increase, creating a divergence. Similarly, if NEER depreciates, but domestic inflation is much higher, REER might depreciate less or even appreciate, again creating divergence.<br \/>\n<\/section>\n<section id=\"pyq-key-points\">\nNEER reflects the nominal value of a currency against a basket, while REER reflects the real value (purchasing power) against a basket, adjusted for relative inflation. REER is a key indicator of a country&#8217;s external competitiveness.<br \/>\n<\/section>\n<section id=\"pyq-additional_information\">\nPolicymakers monitor both NEER and REER to understand the impact of exchange rate movements on trade and the economy. A higher REER often signals a potential challenge for export growth due to reduced competitiveness.<br \/>\n<\/section>\n","protected":false},"excerpt":{"rendered":"<p>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 &#8230; <\/p>\n<p class=\"read-more-container\"><a title=\"With reference to the Indian economy, consider the following statement\" class=\"read-more button\" href=\"https:\/\/exam.pscnotes.com\/mcq\/with-reference-to-the-indian-economy-consider-the-following-statement-2\/#more-92010\">Detailed Solution<span class=\"screen-reader-text\">With reference to the Indian economy, consider the following statement<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1092],"tags":[1108,1226],"class_list":["post-92010","post","type-post","status-publish","format-standard","hentry","category-upsc-ias","tag-1108","tag-external-sector-of-economy","no-featured-image-padding"],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v22.2 (Yoast SEO v23.3) - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>With reference to the Indian economy, consider the following statement<\/title>\n<meta name=\"description\" content=\"Statement 1 is correct. Nominal Effective Exchange Rate (NEER) is a weighted average of bilateral nominal exchange rates of the domestic currency against the currencies of its trading partners. An increase in NEER means that, on average, the domestic currency is appreciating against the currencies of its trading partners. Statement 2 is incorrect. Real Effective Exchange Rate (REER) is NEER adjusted for the inflation differential between the domestic economy and its trading partners. REER = NEER * (Domestic Price Index \/ Foreign Price Index). An increase in REER means that the domestic country&#039;s goods and services are becoming relatively more expensive compared to those of its trading partners. This makes exports less competitive and imports more attractive, thus indicating a *decrease* (or worsening) in trade competitiveness. Statement 3 is correct. The formula for REER shows its relationship with NEER and inflation differentials. REER = NEER * (Domestic Price Index \/ Foreign Price Index). If domestic inflation increases significantly relative to foreign inflation, the term (Domestic Price Index \/ Foreign Price Index) increases. This will cause the REER to rise relative to the NEER. For instance, if NEER remains constant, an increase in domestic inflation relative to foreign inflation will cause REER to increase, creating a divergence. Similarly, if NEER depreciates, but domestic inflation is much higher, REER might depreciate less or even appreciate, again creating divergence. NEER reflects the nominal value of a currency against a basket, while REER reflects the real value (purchasing power) against a basket, adjusted for relative inflation. REER is a key indicator of a country&#039;s external competitiveness.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/exam.pscnotes.com\/mcq\/with-reference-to-the-indian-economy-consider-the-following-statement-2\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"With reference to the Indian economy, consider the following statement\" \/>\n<meta property=\"og:description\" content=\"Statement 1 is correct. Nominal Effective Exchange Rate (NEER) is a weighted average of bilateral nominal exchange rates of the domestic currency against the currencies of its trading partners. An increase in NEER means that, on average, the domestic currency is appreciating against the currencies of its trading partners. Statement 2 is incorrect. Real Effective Exchange Rate (REER) is NEER adjusted for the inflation differential between the domestic economy and its trading partners. REER = NEER * (Domestic Price Index \/ Foreign Price Index). An increase in REER means that the domestic country&#039;s goods and services are becoming relatively more expensive compared to those of its trading partners. This makes exports less competitive and imports more attractive, thus indicating a *decrease* (or worsening) in trade competitiveness. Statement 3 is correct. The formula for REER shows its relationship with NEER and inflation differentials. REER = NEER * (Domestic Price Index \/ Foreign Price Index). If domestic inflation increases significantly relative to foreign inflation, the term (Domestic Price Index \/ Foreign Price Index) increases. This will cause the REER to rise relative to the NEER. For instance, if NEER remains constant, an increase in domestic inflation relative to foreign inflation will cause REER to increase, creating a divergence. Similarly, if NEER depreciates, but domestic inflation is much higher, REER might depreciate less or even appreciate, again creating divergence. NEER reflects the nominal value of a currency against a basket, while REER reflects the real value (purchasing power) against a basket, adjusted for relative inflation. REER is a key indicator of a country&#039;s external competitiveness.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/exam.pscnotes.com\/mcq\/with-reference-to-the-indian-economy-consider-the-following-statement-2\/\" \/>\n<meta property=\"og:site_name\" content=\"MCQ and Quiz for Exams\" \/>\n<meta property=\"article:published_time\" content=\"2025-06-01T11:12:04+00:00\" \/>\n<meta name=\"author\" content=\"rawan239\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"rawan239\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"2 minutes\" \/>\n<!-- \/ Yoast SEO Premium plugin. -->","yoast_head_json":{"title":"With reference to the Indian economy, consider the following statement","description":"Statement 1 is correct. Nominal Effective Exchange Rate (NEER) is a weighted average of bilateral nominal exchange rates of the domestic currency against the currencies of its trading partners. An increase in NEER means that, on average, the domestic currency is appreciating against the currencies of its trading partners. Statement 2 is incorrect. Real Effective Exchange Rate (REER) is NEER adjusted for the inflation differential between the domestic economy and its trading partners. REER = NEER * (Domestic Price Index \/ Foreign Price Index). An increase in REER means that the domestic country's goods and services are becoming relatively more expensive compared to those of its trading partners. This makes exports less competitive and imports more attractive, thus indicating a *decrease* (or worsening) in trade competitiveness. Statement 3 is correct. The formula for REER shows its relationship with NEER and inflation differentials. REER = NEER * (Domestic Price Index \/ Foreign Price Index). If domestic inflation increases significantly relative to foreign inflation, the term (Domestic Price Index \/ Foreign Price Index) increases. This will cause the REER to rise relative to the NEER. For instance, if NEER remains constant, an increase in domestic inflation relative to foreign inflation will cause REER to increase, creating a divergence. Similarly, if NEER depreciates, but domestic inflation is much higher, REER might depreciate less or even appreciate, again creating divergence. NEER reflects the nominal value of a currency against a basket, while REER reflects the real value (purchasing power) against a basket, adjusted for relative inflation. REER is a key indicator of a country's external competitiveness.","robots":{"index":"index","follow":"follow","max-snippet":"max-snippet:-1","max-image-preview":"max-image-preview:large","max-video-preview":"max-video-preview:-1"},"canonical":"https:\/\/exam.pscnotes.com\/mcq\/with-reference-to-the-indian-economy-consider-the-following-statement-2\/","og_locale":"en_US","og_type":"article","og_title":"With reference to the Indian economy, consider the following statement","og_description":"Statement 1 is correct. Nominal Effective Exchange Rate (NEER) is a weighted average of bilateral nominal exchange rates of the domestic currency against the currencies of its trading partners. An increase in NEER means that, on average, the domestic currency is appreciating against the currencies of its trading partners. Statement 2 is incorrect. Real Effective Exchange Rate (REER) is NEER adjusted for the inflation differential between the domestic economy and its trading partners. REER = NEER * (Domestic Price Index \/ Foreign Price Index). An increase in REER means that the domestic country's goods and services are becoming relatively more expensive compared to those of its trading partners. This makes exports less competitive and imports more attractive, thus indicating a *decrease* (or worsening) in trade competitiveness. Statement 3 is correct. The formula for REER shows its relationship with NEER and inflation differentials. REER = NEER * (Domestic Price Index \/ Foreign Price Index). If domestic inflation increases significantly relative to foreign inflation, the term (Domestic Price Index \/ Foreign Price Index) increases. This will cause the REER to rise relative to the NEER. For instance, if NEER remains constant, an increase in domestic inflation relative to foreign inflation will cause REER to increase, creating a divergence. Similarly, if NEER depreciates, but domestic inflation is much higher, REER might depreciate less or even appreciate, again creating divergence. NEER reflects the nominal value of a currency against a basket, while REER reflects the real value (purchasing power) against a basket, adjusted for relative inflation. REER is a key indicator of a country's external competitiveness.","og_url":"https:\/\/exam.pscnotes.com\/mcq\/with-reference-to-the-indian-economy-consider-the-following-statement-2\/","og_site_name":"MCQ and Quiz for Exams","article_published_time":"2025-06-01T11:12:04+00:00","author":"rawan239","twitter_card":"summary_large_image","twitter_misc":{"Written by":"rawan239","Est. reading time":"2 minutes"},"schema":{"@context":"https:\/\/schema.org","@graph":[{"@type":"WebPage","@id":"https:\/\/exam.pscnotes.com\/mcq\/with-reference-to-the-indian-economy-consider-the-following-statement-2\/","url":"https:\/\/exam.pscnotes.com\/mcq\/with-reference-to-the-indian-economy-consider-the-following-statement-2\/","name":"With reference to the Indian economy, consider the following statement","isPartOf":{"@id":"https:\/\/exam.pscnotes.com\/mcq\/#website"},"datePublished":"2025-06-01T11:12:04+00:00","dateModified":"2025-06-01T11:12:04+00:00","author":{"@id":"https:\/\/exam.pscnotes.com\/mcq\/#\/schema\/person\/5807dafeb27d2ec82344d6cbd6c3d209"},"description":"Statement 1 is correct. Nominal Effective Exchange Rate (NEER) is a weighted average of bilateral nominal exchange rates of the domestic currency against the currencies of its trading partners. An increase in NEER means that, on average, the domestic currency is appreciating against the currencies of its trading partners. Statement 2 is incorrect. Real Effective Exchange Rate (REER) is NEER adjusted for the inflation differential between the domestic economy and its trading partners. REER = NEER * (Domestic Price Index \/ Foreign Price Index). An increase in REER means that the domestic country's goods and services are becoming relatively more expensive compared to those of its trading partners. This makes exports less competitive and imports more attractive, thus indicating a *decrease* (or worsening) in trade competitiveness. Statement 3 is correct. The formula for REER shows its relationship with NEER and inflation differentials. REER = NEER * (Domestic Price Index \/ Foreign Price Index). If domestic inflation increases significantly relative to foreign inflation, the term (Domestic Price Index \/ Foreign Price Index) increases. This will cause the REER to rise relative to the NEER. For instance, if NEER remains constant, an increase in domestic inflation relative to foreign inflation will cause REER to increase, creating a divergence. Similarly, if NEER depreciates, but domestic inflation is much higher, REER might depreciate less or even appreciate, again creating divergence. NEER reflects the nominal value of a currency against a basket, while REER reflects the real value (purchasing power) against a basket, adjusted for relative inflation. REER is a key indicator of a country's external competitiveness.","breadcrumb":{"@id":"https:\/\/exam.pscnotes.com\/mcq\/with-reference-to-the-indian-economy-consider-the-following-statement-2\/#breadcrumb"},"inLanguage":"en-US","potentialAction":[{"@type":"ReadAction","target":["https:\/\/exam.pscnotes.com\/mcq\/with-reference-to-the-indian-economy-consider-the-following-statement-2\/"]}]},{"@type":"BreadcrumbList","@id":"https:\/\/exam.pscnotes.com\/mcq\/with-reference-to-the-indian-economy-consider-the-following-statement-2\/#breadcrumb","itemListElement":[{"@type":"ListItem","position":1,"name":"Home","item":"https:\/\/exam.pscnotes.com\/mcq\/"},{"@type":"ListItem","position":2,"name":"UPSC IAS","item":"https:\/\/exam.pscnotes.com\/mcq\/category\/upsc-ias\/"},{"@type":"ListItem","position":3,"name":"With reference to the Indian economy, consider the following statement"}]},{"@type":"WebSite","@id":"https:\/\/exam.pscnotes.com\/mcq\/#website","url":"https:\/\/exam.pscnotes.com\/mcq\/","name":"MCQ and Quiz for Exams","description":"","potentialAction":[{"@type":"SearchAction","target":{"@type":"EntryPoint","urlTemplate":"https:\/\/exam.pscnotes.com\/mcq\/?s={search_term_string}"},"query-input":"required name=search_term_string"}],"inLanguage":"en-US"},{"@type":"Person","@id":"https:\/\/exam.pscnotes.com\/mcq\/#\/schema\/person\/5807dafeb27d2ec82344d6cbd6c3d209","name":"rawan239","image":{"@type":"ImageObject","inLanguage":"en-US","@id":"https:\/\/exam.pscnotes.com\/mcq\/#\/schema\/person\/image\/","url":"https:\/\/secure.gravatar.com\/avatar\/761a7274f9cce048fa5b921221e7934820d74514df93ef195a9d22af0c1c9001?s=96&d=mm&r=g","contentUrl":"https:\/\/secure.gravatar.com\/avatar\/761a7274f9cce048fa5b921221e7934820d74514df93ef195a9d22af0c1c9001?s=96&d=mm&r=g","caption":"rawan239"},"sameAs":["https:\/\/exam.pscnotes.com"],"url":"https:\/\/exam.pscnotes.com\/mcq\/author\/rawan239\/"}]}},"amp_enabled":true,"_links":{"self":[{"href":"https:\/\/exam.pscnotes.com\/mcq\/wp-json\/wp\/v2\/posts\/92010","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/exam.pscnotes.com\/mcq\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/exam.pscnotes.com\/mcq\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/exam.pscnotes.com\/mcq\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/exam.pscnotes.com\/mcq\/wp-json\/wp\/v2\/comments?post=92010"}],"version-history":[{"count":0,"href":"https:\/\/exam.pscnotes.com\/mcq\/wp-json\/wp\/v2\/posts\/92010\/revisions"}],"wp:attachment":[{"href":"https:\/\/exam.pscnotes.com\/mcq\/wp-json\/wp\/v2\/media?parent=92010"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/exam.pscnotes.com\/mcq\/wp-json\/wp\/v2\/categories?post=92010"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/exam.pscnotes.com\/mcq\/wp-json\/wp\/v2\/tags?post=92010"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}