2022 GS Paper I, all questions

UPSC Prelims 2022 · GS Paper I

Question 2: Economy and Social Development

With reference to the Indian economy, consider the following statements :

  1. 1.An increase in Nominal Effective Exchange Rate (NEER) indicates the appreciation of rupee.
  2. 2.An increase in the Real Effective Exchange Rate (REER) indicates an improvement in trade competitiveness.
  3. 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 ?

a1 and 2 only
b2 and 3 only
c1 and 3 only
d1, 2 and 3

AnswerUPSC’s answer is (c).

NEER is a trade-weighted index of the rupee against a basket of currencies, and a rise means the rupee has appreciated. REER adjusts NEER for relative inflation: REER = NEER x (domestic prices / partner prices). A rising REER means the rupee has become dearer in real terms, so exports lose competitiveness rather than gain it. When India's inflation runs above its partners', the price ratio grows and REER pulls away from NEER.

  • 1. A higher NEER index means the rupee has strengthened against the basket.
  • 2. A higher REER means the rupee is stronger in real terms, which hurts trade competitiveness.
  • 3. Higher relative inflation widens the gap, since REER corrects NEER for price differences.

How you could have got this

  1. If you were sure statement 2 is not correct, (a), (b) and (d) go: each of them includes 2.

    What you needed to know: A higher REER means the rupee is stronger in real terms, which hurts trade competitiveness.

Only (c) is left. You didn’t need statements 1 or 3.

Which options go is worked out from UPSC’s key and the options, not by a model.

Why each option is right or wrong
  • (a) Wrong. Statement 2 is false: a rising REER signals lost, not improved, competitiveness.
  • (b) Wrong. Statement 2 is false, so this combination fails.
  • (c) Correct. Statements 1 and 3 hold; statement 2 does not.
  • (d) Wrong. It includes statement 2, which is false.

Answer: UPSC’s key. Explanation: written by UPSC Grade, not by UPSC.

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Source: UPSC, Civil Services (Preliminary) Examination 2022, General Studies Paper I, Series A. The paper on upsc.gov.in.