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UPSC Essentials | Daily subject-wise quiz : Economy MCQs on deflationary phase of Indian tea market, Effective Exchange Rate and more (Week 173)
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(b) Both Statement 1 and Statement 2 are correct and Statement 2 is not the correct explanation for Statement 1.
The Nominal Effective Exchange Rate (NEER) and Real Effective Exchange rate (REER) indices of the weighted average of the rupee’s exchange rates vis-à-vis the currencies of the country’s key trade partners.
Explanation— Effective exchange rates, the most widely used gauges to measure whether a currency is over or undervalued is its so-called Nominal Effective Exchange Rate (NEER) and Real Effective Exchange rate (REER) indices.
If a currency’s nominal exchange rate falls less than the domestic inflation rate during a particular period, it is actually appreciated in “real” terms.
— Higher crude oil prices increase India’s oil import bill, leading to a widening of the Current Account Deficit (CAD).