Tag: balance of payments and exchange rate

Questions Related to balance of payments and exchange rate

Supply curve of foreign exchange ____________________.

business economics and quantitative methods balance of payments exchange rate balance of payments and exchange rate balance of trade and balance of payments

  1. Horizontal straight line parallel to X-axis

  2. Vertical straight line parallel to Y-axis

  3. Slope downwards

  4. Slope upwards

Show answer
Correct Option: D
Explanation:

The foreign exchange rate and supply of foreign exchange is positively related and it is upward sloping curve as because the components of supply of foreign exchange rise as foreign exchange rate rises. For example exports rise as the foreign exchange rate rises.

Other things remaining the same, when foreign currency becomes cheaper, the effect on national income is likely to be: 

business economics and quantitative methods balance of payments exchange rate balance of payments and exchange rate balance of trade and balance of payments

  1. Positive

  2. Negative

  3. Positive and negative both

  4. No effect

Show answer
Correct Option: B
Explanation:

Price of foreign exchange and growth of national income is directly related. When foreign currency becomes cheaper, it indicates that demand of foreign exchange is higher than the supply of foreign exchange. Hence, other things remaining the same, when foreign currency becomes cheaper, the effect on national income is likely to be negative.

The value of US Dollar $ $1$ has gone down from $Rs. 67$ to $Rs. 65$. It means that ________________.

business economics and quantitative methods balance of payments exchange rate balance of payments and exchange rate balance of trade and balance of payments

  1. Indian rupee has appreciated

  2. US Dollar has depreciated

  3. Both (a) and (b)

  4. None of the above

Show answer
Correct Option: C
Explanation:

Depreciation of US dollar will occur when Rs 65 have to be paid to exchange one US Dollar instead of Rs 67 per dollar as less rupees are needed to buy one dollar. Whereas, Indian rupee has appreciated as it is a situation of rise of foreign exchange rate.

Value of the Indian currency to a currency of another country shows the concept of the exchange rate.

business economics and quantitative methods balance of payments exchange rate balance of payments and exchange rate balance of trade and balance of payments

  1. True

  2. False

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Correct Option: A

Many a time we read in financial newspapers a term/name NMCEX. What is the full form of the same?

business economics and quantitative methods balance of payments exchange rate balance of payments and exchange rate balance of trade and balance of payments

  1. New Multi Capital Exchange

  2. National Medium Commodity Exchange

  3. National Multi-Commodity Exchange

  4. Net Marketable Commodity Exchange

Show answer
Correct Option: C
Explanation:

The acronym NMCEX stands for National Multi-Commodity Exchange. The NMCEX merged with the Indian Commodity Exchange, (ICEX) in 2017. The combined exchange is India's third-largest commodities market.

Which of the following policies of the financial sector is basically designed to transfer local financial assets into foreign financial assets freely and at market determined exchange rates?
Policy of

business economics and quantitative methods balance of payments exchange rate balance of payments and exchange rate balance of trade and balance of payments

  1. Capital Account Convertibility

  2. Financial Deficit Management

  3. Minimum Support Price

  4. Restrictive Trade practices

Show answer
Correct Option: A

Select the correct statement/statements for the situation when a currency goes for 'devaluation' using the code given below:
1. Fall in the value of currency vis-a-vis international currencies.
2. Exports become more competitive.
3. Trading partners see fall in their exports. 

business economics and quantitative methods balance of payments exchange rate balance of payments and exchange rate balance of trade and balance of payments

  1. 1 and 2

  2. 2 and 3

  3. 1 and 3

  4. 1, 2 and 3

Show answer
Correct Option: D
Explanation:

Though devaluation in currencies are discouraged and negated with excessive pressure coming from the trading partners of the country, it ultimately makes goods of the country cheaper in the world market and the economy earns profit from the exports. The increase in profit of export takes place due to increase in 'volume' of the exports. In practice, exporters forego more goods to earn the same amount of foreign currency.

For which of the following purposes Indian currency is fully convertible? Select correct code :
1. Repatriation of remittances
2. Interest payments of foreign loans
3. Direct foreign investment
4. Indirect foreign investment
5. Trade 

business economics and quantitative methods balance of payments exchange rate balance of payments and exchange rate balance of trade and balance of payments

  1. 1,3 and 5

  2. 1,2,4 and 5

  3. 3,4 and 5

  4. 2,4 and 5

Show answer
Correct Option: B
Explanation:

Rupee is fully convertible in the cases interest payment, remittances, grants and indirect foreign investment (though, it belongs to the capital account).

Which one is not correct about  country when its currency goes for depreciation?

business economics and quantitative methods balance of payments exchange rate balance of payments and exchange rate balance of trade and balance of payments

  1. Its exports increases due to increase in the volume of its exports.

  2. The country faces deflationary pressure.

  3. Import bill of the country increases.

  4. In case of India this makes trade deficit increase.

Show answer
Correct Option: B
Explanation:

The country faces inflationary pressure. India's composition of trade is heavily biased in favour of imports which makes its trade balance become more negative.

For which of the following purpose Indian currency is fully convertible- select your answer, using the code given below :
1. For repatriation of remittances and trade purposes
2. Servicing of the foreign loans
3. Direct foreign investment
4. Indirect foreign investment

business economics and quantitative methods balance of payments exchange rate balance of payments and exchange rate balance of trade and balance of payments

  1. 1 and 2

  2. 1,2 and 4

  3. 2,3 and 4

  4. 1,3 and 4

Show answer
Correct Option: B
Explanation:

Rupees is fully convertible in the cases of interest payment, remittances, grants, trade and indirect foreign investment (though, it belongs to the capital account).