6.4.1 Definition of exchange rate
Definition: The exchange rate is the price of one currency expressed in terms of another currency (e.g. $1 = ₹83). It is set in the foreign exchange (forex) market, where currencies are bought and sold.
Example: If $1 = ₹83 changes to $1 = ₹86, the rupee has depreciated against the dollar (more rupees are needed to buy one dollar).
Analysis chain (AO2): Exchange rate determines the price of exports and imports → changes in the rate change international competitiveness → affects net exports, AD, growth and inflation.
Evaluation (AO3):
- India's rupee is a managed float in practice: the RBI intervenes to reduce volatility, although at AS the focus is on the floating exchange rate.
🔒 Also in the full notes
- 6.4.2 Determination of a floating exchange rate
- 6.4.3 Depreciation and appreciation of a floating exchange rate
- 6.4.4 Causes of changes in a floating exchange rate: demand and supply of the currency
- 6.4.5 AD/AS analysis of exchange rate changes
- Exam practice: 6 practice questions
- 3 exemplar answers with full model answers and mark breakdowns
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