Skip to content

IAI Actuarial Core Principles · Business Economics · Balance of payments and exchange rates

An Indian firm exports goods and is paid in US dollars. Under a managed float, the rupee is allowed to depreciate gradually against the dollar. Other things equal, what is the most direct effect on the firm's rupee revenue from existing dollar-priced sales?

Rupee revenue from dollar-priced sales rises when the rupee depreciates, because each dollar received converts into more rupees. The dollar price is unchanged, but the rupee value of those receipts increases, benefiting the exporter.

  1. AIt falls, because each dollar buys fewer rupees
  2. BIt rises, because each dollar converts into more rupeesCorrect
  3. CIt is unchanged, because prices are fixed in dollars
  4. DIt falls, because the central bank imposes a tax on exporters
  5. It is unaffected only if the dollar also depreciates

Explanation

If the rupee depreciates, one dollar exchanges for more rupees, so dollar-priced sales convert into higher rupee revenue. Fixed dollar prices do not fix rupee receipts. No tax is implied, and the dollar's own movement is irrelevant to this bilateral rate.

Did you get it right without looking?

One question tells you little. A timed set on Balance of payments and exchange rates shows your real accuracy, how long you take and where you lose marks.

Practise Balance of payments and exchange ratesFree diagnostic mock

More Balance of payments and exchange rates questions