Question

Define exchange rate in terms of rupee and dollar.

Hint:

The exchange rate plays a crucial role in international trade and finance, as it affects the price of imports and exports, investment decisions, and economic stability.

Answer 1

The exchange rate is the price of one country's currency in terms of another country's currency. It determines how much of one currency (e.g., the Indian Rupee) is needed to purchase a unit of another currency (e.g., the U.S. Dollar). In terms of the rupee and dollar, the exchange rate specifies how many Indian Rupees are needed to buy one U.S. Dollar or vice versa.

Step 1: Direct Exchange Rate.
In a direct exchange rate system, the value of the foreign currency (e.g., dollar) is quoted in terms of the domestic currency (e.g., rupee). For example, if the exchange rate is \( 1 \text{ USD} = 75 \text{ INR} \), it means that one U.S. Dollar is equal to 75 Indian Rupees.

Step 2: Indirect Exchange Rate.
In an indirect exchange rate system, the value of the domestic currency (e.g., rupee) is quoted in terms of the foreign currency (e.g., dollar). For example, if the exchange rate is \( 1 \text{ INR} = 0.013 \text{ USD} \), it means that one Indian Rupee is equal to 0.013 U.S. Dollars.

Step 3: Exchange Rate Determinants.
The exchange rate is influenced by various factors, including:
- Supply and demand for currencies in the foreign exchange market.
- Inflation rates and interest rates in the respective countries.
- Government policies related to monetary supply, foreign trade, and capital flows.