The supply of foreign exchange and the exchange rate has
A. Direct relationship
B. Inverse relationship
C. Indirect relationship
D. Exponential relationship
Answer : Option A
Q.3
If domestic autonomous demand increases by 100, in a open economy output will increase by
A. 400
B. 500
C. 300
D. 200.0
Answer : Option D
Explaination / Solution:
No Explaination.
Q.4
When currency becomes less valuable for the Rest of the world, it is called
A. Appreciation
B. Depreciation
C. Devaluation
D. Revaluation
Answer : Option B
Explaination / Solution:
Currency's value goes up (or down) if the demand for it goes up more (or less) than the supply does. In
the short run this can happen unpredictably for a variety of reasons, having to do with trade
flows,speculation, or other factors in the international capital market.
Q.5
A component of capital account of balance of payment is
A. Borrowing from abroad.
B. Borrowing and lending from the govt.
C. Lending to abroad.
D. Borrowing and lending to and from abroad
Answer : Option D
Explaination / Solution:
All transactions relating to borrowings from abroad by private sector, government, etc. Receipts of such
loans and repayment of loans by foreigners are recorded on the positive (credit) side.
All transactions of lending to abroad by private sector and government. Lending abroad and repayment
of loans to abroad is recorded as negative or debit item.
Capital account of BOP records all those transactions, between the residents of a country and the rest of
the world, which cause a change in the assets or liabilities of the residents of the country or its
government. It is related to claims and liabilities of financial nature.
Q.6
Depreciation is a
A. Reduction in the price of domestic currency in terms of all foreign currencies by the govt
B. Reduction in the price of foreign currency in terms of domestic currencies in the market
C. Reduction in the price of domestic currency in the foreign exchange market by the govt
D. Reduction in the price of foreign currency in terms of domestic currencies in the market
Answer : Option D
Explaination / Solution:
No Explaination.
Q.7
A source of supply of foreign exchange is
A. Gifts
B. Donations given
C. Exports
D. Imports
Answer : Option C
Explaination / Solution:
When price of a foreign currency rises, domestic goods become relatively cheaper. It induces the foreign
country to increase their imports from the domestic country
Q.8
Fixed exchange rate is
A. is fixed by the foreign exchange market
B. is fixed by the businesses in an economy
C. is fixed by the anybody in an economy
D. is fixed by the Government in an economy
Answer : Option D
Explaination / Solution:
A fixed exchange rate is a country's exchange rate regime under which the government or Central bank
ties the official exchange rate to another country's currency or to the price of gold. The purpose of a
fixed exchange rate system is to maintain a country's currency value within a very narrow band.
Q.9
Point out a demerit of fixed exchange rate
A. None
B. Contradicts the objectives of free markets
C. Ensures supply of the fixed exchange rate
D. Promotes the objectives of free markets
Answer : Option B
Explaination / Solution:
yes it contradicts with the objectives of free markets .It can be explained as
suppose,
· If a currency is falling below its band the government will have to intervene. It can do this by buying
sterling but this is only a short term measure.
· The most effective way to increase the value of a currency is to raise interest rates. This will increase
hot money flows and also reduce inflationary pressures.
· However higher interest rates will cause lower AD and economic growth, if the economy is growing
slowly this may cause a recession and rising unemployment
Q.10
Balance of capital account includes
A. lending to abroad only
B. Borrowings from and lending to abroad
C. Borrowings from abroad Only
D. None of the above
Answer : Option B
Explaination / Solution:
No Explaination.
Q.1
The supply curve of foreign exchange is
A. Horizontal
B. Vertical
C. Upward sloping
D. Downward sloping
Answer : Option C
Explaination / Solution:
No Explaination.
Q.2
If the Supply of foreign exchange rises, demand schedule remaining the same, the exchange rate will
rise. It is
A. Always
B. Sometimes
C. Never
D. Can’t say
Answer : Option C
Explaination / Solution:
No Explaination.
Q.3
The balance of payment is a more comprehensive than balance of trade concept. It is
A. Sometimes
B. Can’t say
C. Always
D. Never
Answer : Option C
Explaination / Solution:
No Explaination.
Q.4
Nominal exchange rate is the price of
A. domestic currency in terms of the Foreign currency
B. Foreign currency in terms of the domestic currency
C. None
D. Both
Answer : Option B
Explaination / Solution:
The nominal exchange rate is defined as the number of units of the domestic currency that can purchase
a unit of a given foreign currency. A decrease in this variable is termed nominal appreciation of the
currency.
Q.5
Which transactions determine the balance of trade?
A. Exports of goods and imports of goods
B. Investment to and from abroad
C. Borrowing and lending to and from abroad
D. Change in Borrowing and lending by the govt.
Answer : Option A
Explaination / Solution:
The difference between the value of goods and services exported out of a country and the value of
goods and services imported into the country. The balance of trade is the official term for net exports
that makes up the balance of payments. The balance of trade can be a "favorable" surplus (exports
exceed imports) or an "unfavorable" deficit (imports exceed exports). The official balance of trade is
separated into the balance of merchandise trade for tangible goods and the balance of services.
Q.6
When price of a foreign currency rises its supply also rises.
A. Sometimes
B. Never
C. Always
D. Can’t say
Answer : Option C
Explaination / Solution:
No Explaination.
Q.7
Foreign exchange means
A. Any currency
B. US Dollars
C. Any currency other than the domestic currency
D. Domestic currency
Answer : Option C
Explaination / Solution:
No Explaination.
Q.8
Flexible exchange rate is
A. Ordered
B. Fixed
C. Determined
D. Can’t say
Answer : Option C
Explaination / Solution:
flexible exchange-rate system is a monetary system that allows the exchange rate to be determined by
supply and [Link] it variates according to market forces.
Q.9
Point out a demerit of flexible exchange rate
A. Creates stability
B. Creates instability
C. None
D. Has no effect on stability
Answer : Option B
Explaination / Solution:
flexible exchange rates creates instablity because there is too frequent fluctuations in exchange rate
under it create uncertainty about the exact amount of receipts and payments in foreign exchange
[Link] this instability hampers foreign trade and capital movements between the countries.
Q.10
Identify one of the types of balances in BOP account
A. All Invisible items
B. All visible items
C. None of the above
D. Autonomous Items
Answer : Option D
Explaination / Solution:
No Explaination.
Topic: Balance of Payments
Q.1
The equilibrium exchange rate is determined at the point where the
A. Demand for and Supply of foreign exchange has maximum gap
B. Demand for and Supply of foreign exchange has maximum gap
C. None of the above
D. Demand for and Supply of foreign exchange is equal
Answer : Option D
Explaination / Solution:
No Explaination.
Q.2
If c = 0.8 and m = 0.3, the open economy multiplier will be
A. 5.0
B. 7
C. 6
D. 8
Answer : Option A
Explaination / Solution:
No Explaination.
Q.3
Balance of invisibles is the
A. Value of invisibles exported less value of visibles imported
B. None of the above
C. Value of invisibles exported less value of invisibles imported
D. Value of visibles exported less value of invisibles imported
Answer : Option C
Explaination / Solution:
No Explaination.
Q.4
Real exchange rate is the price of
A. Only B
B. Price of goods abroad relative to domestic goods
C. Price of goods abroad relative to domestic goods
D. None
Answer : Option B
Explaination / Solution:
Real exchange rate tells how much the goods and services in the domestic country can be exchanged for
the goods and services in a foreign country.
Q.5
Balance of trade is in surplus when
A. the value of exports of goods is greater than the value of imports of goods
B. the value of exports of goods is equal to the value of imports of goods
C. None of these
D. the value of imports of goods is greater than the value of exports of goods
Answer : Option A
Explaination / Solution:
A trade surplus is an economic measure of a positive balance of trade, where a country's exports exceed
its imports. A trade surplus represents a net inflow of domestic currency from foreign markets. trade
surplus helps to strengthen a country’s currency; however, this is dependent on the proportion of goods
and services of a country in comparison to other countries as well as other market factors. Countries can
also highly control their currency through foreign investment efforts.
Q.6
If exchange rate increases, this will make
A. Domestic country's goods becomes cheaper to foreigners
B. Domestic country's goods becomes dearer to foreigners
C. Domestic country's goods becomes dearer to residents
D. Domestic country's goods becomes cheaper to residents
Answer : Option A
Explaination / Solution:
No Explaination.
Q.7
Balance of payment Accounts is a
A. Systematic record of all economic transactions between the residents of a country
B. Systematic record of all receipts between the residents of a country and abroad
C. Systematic record of economic transactions between the residents of a country & abroad
D. Systematic record of all expenditures between the residents of a country and abroad
Answer : Option C
Explaination / Solution:
Balance of payment account is a systematic record of all economic transactions between residents of
home country and residents of foreign countries during a given point of time.
Q.8
Flexible exchange rate is determined by
A. Market forces of demand and supply
B. Demand for foreign exchange
C. Government
D. Supply of foreign exchange
Answer : Option A
Explaination / Solution:
It is determined by market forces because every currency area must decide what type of exchange rate
arrangement to maintain. Between permanently fixed and completely flexible however, are
heterogeneous approaches. They have different implications for the extent to which national authorities
participate in foreign exchange markets.
Q.9
A component of current account of the BOP account is
A. Exports and imports of goods
B. Change in Borrowing and lending by the govt.
C. Investment by the govt.
D. Investment to and from abroad
Answer : Option A
Explaination / Solution:
Current account of balance of payment is trade balance & trade balance includes exports and imports of
goods and services.
Q.10
Autonomous Items are also called
A. Above the line items
B. On the line items
C. None of the above
D. Below the line items
Answer : Option A
Explaination / Solution:
No Explaination.
Topic: Balance of Payments
Q.1
The upward sloping supply curve for the foreign exchange reflects
A. Indirect relationship
B. Exponential relationship
C. Direct relationship
D. Inverse relationship
Answer : Option C
Explaination / Solution:
No Explaination.
Q.2
If c = 0.8 and m = 0.3, the closed economy multiplier will be
A. 2.0
B. 5
C. 3
D. 4
Answer : Option A
Explaination / Solution:
No Explaination.
Q.3
Balance of visibles is the
A. Value of visibles exported less value of invisibles imported
B. Value of invisibles exported less value of visibles imported
C. None of the above
D. Value of visibles exported less value of visibles imported
Answer : Option D
Explaination / Solution:
No Explaination.
Q.4
To buy domestic or foreign goods, the more relevant is
A. Only B
B. None
C. Nominal exchange rate
D. Real exchange rate
Answer : Option D
Explaination / Solution:
No Explaination.
Q.5
A deficit in BOP occurs
A. When autonomous foreign exchange payments equals autonomous foreign exchange receipts
B. When autonomous foreign exchange payments exceeds autonomous foreign exchange receipts
C. When autonomous foreign exchange payments is less than autonomous foreign exchange receipts
D. When autonomous foreign exchange payments is in negative deficit
Answer : Option B
Explaination / Solution:
Balance of payments includes all external visible and non-visible transactions of a country. If a country is
importing more than it exports, its trade balance will be in deficit, but the shortfall will have to be
counterbalanced in other ways – such as by funds earned from its foreign investments, by running down
currency reserves or by receiving loans from other countries.
Q.6
The demand for foreign exchange and the exchange rate has
A. Indirect relationship
B. Exponential relationship
C. Inverse relationship
D. Direct relationship
Answer : Option C
Explaination / Solution:
No Explaination.
Q.7
A source of demand for foreign exchange is
A. Import of goods & services
B. Export of goods & services
C. Smuggle of goods & services
D. Brokerage of goods & services
Answer : Option A
Explaination / Solution:
No Explaination.
Q.8
Point out a merit of fixed exchange rate
A. Ensures demand for the fixed exchange rate
B. Ensures stability of the fixed exchange rate
C. Ensures supply of the fixed exchange rate
D. None
Answer : Option B
Explaination / Solution:
Exchange rate stability, it is said, is necessary for orderly development of the international economy and
rapid growth of world trade. If the exchange rate is unstable or variable, the exporters will not be
certain about the price they would receive for the goods to be expedited by them; the importers will not
be certain about the price and the payments they have to make for their imports.2
Q.9
Currency depreciation occurs when
A. Increase in the price of the domestic currency
B. decrease in the domestic currency price of the foreign currency
C. Increase in the domestic currency price of the foreign currency
D. decrease in the price of the domestic currency
Answer : Option C
Explaination / Solution:
No Explaination.
Q.10
Accommodating Items are also called
A. On the line items
B. Below the line items
C. None of the above
D. Above the line items
Answer : Option B
Explaination / Solution:
No Explaination.
A disequilibrium in Balance of payment can be corrected by
A. Promoting entrepot trade
B. Promoting exports
C. None of the above
D. Promoting imports
Answer : Option B
Explaination / Solution:
No Explaination.
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