Skip to content

IAI Actuarial Core Principles · Business Economics · Importance of international trade

Under a floating exchange rate system, a sustained rise in foreign demand for Indian software services, with all else unchanged, would most likely lead to which of the following?

The rupee would appreciate. Greater foreign demand for Indian services raises the demand for rupees, pushing up its price under a float. The appreciation makes Indian exports more expensive in foreign currency and reduces their price competitiveness, partly offsetting the original rise in demand.

  1. ADepreciation of the rupee, making Indian exports cheaper abroad
  2. BNo change in the rupee, because the central bank sets the rate by law
  3. CAppreciation of the rupee, reducing the foreign price competitiveness of Indian exportsCorrect
  4. DAppreciation of the rupee, and a fall in the demand for rupees
  5. Depreciation of the rupee, because the current account surplus falls

Explanation

Higher export demand increases demand for rupees from foreign buyers. The rupee appreciates, which makes Indian exports dearer in foreign currency and partly offsets the initial rise in demand. Options 0 and 4 have the wrong direction. Option 3 contradicts itself, since the demand for rupees rises.

Did you get it right without looking?

One question tells you little. A timed set on Importance of international trade shows your real accuracy, how long you take and where you lose marks.

Practise Importance of international tradeFree diagnostic mock

More Importance of international trade questions