Class 12 Macroeconomics Sandeep Garg Solutions Chapter 11 - Foreign Exchange Rates
FAQs on Sandeep Garg Macroeconomics Chapter 11 Solutions
1. What are the main types of exchange rate systems explained in the Sandeep Garg Class 12 Macroeconomics solutions for Chapter 11?
The solutions for Chapter 11 detail three primary types of exchange rate systems as per the CBSE syllabus. These are:
- Fixed Exchange Rate System: Where the exchange rate is officially fixed or pegged by the government or central bank.
- Flexible (or Floating) Exchange Rate System: Where the exchange rate is determined by the market forces of demand for and supply of foreign currency.
- Managed Floating Exchange Rate System: A hybrid system where the exchange rate is primarily determined by market forces, but the central bank intervenes occasionally to manage excessive fluctuations.
2. How do the Sandeep Garg solutions explain the determination of the exchange rate in a flexible exchange rate system?
The solutions explain that under a flexible exchange rate system, the value of a currency is determined at a point where the demand for foreign exchange equals its supply. This point is known as the equilibrium rate of exchange. An increase in demand for foreign currency leads to a depreciation of the domestic currency, while an increase in its supply leads to an appreciation.
3. What is the correct method to differentiate between currency depreciation and currency appreciation as per the Chapter 11 solutions?
As per the solutions, the key difference lies in the change in the domestic currency's value relative to a foreign currency in a flexible exchange rate system. Currency depreciation is the decrease in the value of the domestic currency (e.g., if the exchange rate changes from $1 = ₹80 to $1 = ₹85). Conversely, currency appreciation is the increase in the value of the domestic currency (e.g., if the rate changes from $1 = ₹80 to $1 = ₹75).
4. Why is the demand curve for foreign exchange negatively sloped, according to the explanation in these solutions?
The demand curve for foreign exchange is negatively sloped due to the inverse relationship between the price of foreign exchange and its quantity demanded. The solutions clarify that when the price of a foreign currency (the exchange rate) falls, foreign goods become cheaper for domestic residents. This increases the demand for imports, and consequently, the demand for foreign currency to pay for them rises.
5. How does a 'managed floating' exchange rate system work, as detailed in the Sandeep Garg solutions?
The solutions describe the managed floating system as a blend of fixed and flexible systems. While the exchange rate is largely set by market forces (demand and supply), the central bank (like the RBI in India) intervenes to influence the rate. It does this by buying or selling foreign currency in the open market to prevent extreme volatility and maintain stability, a process often referred to as 'dirty floating'.
6. How do the solutions for Chapter 11 differentiate between the Real Exchange Rate (RER) and the Nominal Exchange Rate (NER)?
The solutions distinguish between the two based on the effect of prices. The Nominal Exchange Rate (NER) is simply the rate at which one currency can be exchanged for another, without accounting for inflation. The Real Exchange Rate (RER) is the NER adjusted for the relative price levels between countries. It reflects the purchasing power of a currency and is a better measure of a country's international competitiveness.
7. According to the solutions, what is the impact on a country's exports if its domestic currency depreciates?
A depreciation of the domestic currency makes its goods and services cheaper for foreign countries. As explained in the solutions, this leads to an increase in the demand for the country's exports. For example, if the rupee depreciates against the dollar, American buyers can purchase more Indian goods with the same amount of dollars, thus boosting India's exports.
8. What are the primary functions of a foreign exchange market as explained in the Sandeep Garg Chapter 11 solutions?
The solutions outline three key functions of the foreign exchange market:
- Transfer Function: It facilitates the transfer of purchasing power between countries, enabling international trade and investment.
- Credit Function: It provides short-term credit to finance international trade, typically through bills of exchange.
- Hedging Function: It offers mechanisms to protect against risks arising from fluctuations in the exchange rate, using instruments like forward contracts.
9. Where can I find accurate, step-by-step solutions for all questions in Sandeep Garg's Macroeconomics Chapter 11 for the 2025-26 session?
For the 2025-26 academic session, you can find comprehensive and reliable step-by-step solutions for Sandeep Garg's Macroeconomics Class 12 Chapter 11 on Foreign Exchange Rates at Vedantu. These solutions are prepared by subject-matter experts and are fully aligned with the latest CBSE guidelines, ensuring clarity on all concepts and problem-solving methods.
