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 to cause an increasing divergence between NEER and REER. Which of the above statements are correct?
A
1 and 2 only
B
2 and 3 only
C
1 and 3 only
Correct Answer
D
1, 2 and 3
Explanation
Statements 1 and 3 are correct because an increase in NEER reflects the appreciation of the Rupee against a basket of currencies, and a higher domestic inflation rate relative to trading partners creates a mathematical divergence
Exchange RateNominal Effective Exchange Rate (NEER) and Real Effective Exchange Rate (REER)Indian economyNominal Effective Exchange Rate (NEER)appreciation of rupeeReal Effective Exchange Rate (REER)trade competitivenessdomestic inflationinflation in other countriesdivergence