Tag: balance of payments and exchange rate

Questions Related to balance of payments and exchange rate

Select the correct one/ones in case of a volatility in the exchange rate of the rupee-using the code given below:
1. With depreciation in it, India's export earning increase.
2. Oil marketing companies of India benefit out of appreciation in it.

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

  1. Only 1

  2. Only 2

  3. 1 and 2 both

  4. Neither 1 nor 2

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Correct Option: D
Explanation:

Depreciation makes a country's exports become cheaper in the international market (the reason exports increase and get benefit). On the other hand with an appreciation in it the oil marketing companies of India are able to import cheaper crude oil.

Select the correct outcomes up depreciation in a country's currency-using the code given below:
1. Export of the country goes up as value of the export falls in the international market.
2. At times, countries use it as a means to promote their exports.
3.Promoting exports through depreciation in ones currency is like selling national assets at throwaway prices to the world.

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

  1. Only 1

  2. Only 3

  3. 2 and 3

  4. 1,2 and 3

Show answer
Correct Option: D
Explanation:

Depreciation makes a country's exports become cheaper in the international market (i.e. the value of export items fall for the importers)this makes the country export more (increase in 'volume' of the export). Countries use depreciation as a tool to promote their exports (in present times, China has been doing the same)but such a policy is not healthy in long-term. 

 Select the correct one/ones related to the provision of rupee convertibility in India, using the code given below: 

1. India allows partial convertibility to rupee in the capital account in the case of outflow of capital by Indians.
2. To the extent capital outflow by a foreign company is concerned, India allows full convertibility to rupee in the capital account up to the level of $ \,$500$ million. 

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

  1. Only 1

  2. Only 2

  3. I and 2

  4. Neither 1 nor 2

Show answer
Correct Option: C
Explanation:

Though India allows only partial convertibility to rupee in the capital account, it has the provision for its full convertibility up to $500million.

The exchange rate of currency is maintained at the same level in all the foreign exchange markets through _____________.

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

  1. exchange arbitrage

  2. interest arbitage

  3. hedging

  4. speculation

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Correct Option: A
Explanation:

Arbitrage refers to the simultaneous buying or selling of foreign currencies with the intention of making profits from the differences between the exchange rates prevailing in different markets at the same time. The one who conducts arbitrage trade is known as an arbitrageur. Exchange arbitrage leads to change in demand and supply of currencies, so as to bring in a balance in exchange rates in all the markets.

For example, if $1 = Rs.10 in India and $1 = Rs.12 in Nepal. The arbitrageur in this case will buy dollars in India at Rs. 10 and sell it for Rs. 12 in Nepal. Thus, the demand rise in India will lead to rise in exchange rate in India, while, increased supply in Nepal will lead to fall in exchange rate in that market, leading to elimination of difference in exchange rates between both the markets.

Devaluation works best when __________________.

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

  1. it is accompanied by a decline in short-term interest rates

  2. foreign demand for the devaluing country's exports is elastic

  3. the devaluing country's demand for imports is inelastic

  4. devaluation brings about price rises in the export industries of the devaluing country

Show answer
Correct Option: B
Explanation:

Devaluation : The loss of value of currency of a country relative to other foreign currency is known as devaluation. Devaluation is a process in which the government deliberately cheapens the exchange value of its own currency by giving it lower exchange value. Devaluation is used for improving , the balance of payment situation in the country. 
The exports of a country become cheaper for other countries when the currency is devalued, thus, if the export demand is elastic, it will lead to higher demand, similarly, the demand for imports will be lowered in the domestic country, which will help solve the balance of payment problem.

A change from USD 3 = GBP 1 to USD 2 = GBP 1 represents ___________.

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

  1. a depreciation of the dollar

  2. an appreciation of the dollar

  3. an appreciation of the pound

  4. None of the above

Show answer
Correct Option: B
Explanation:

As now less dollars have to be exchanged to buy one pound, the value of the dollar against the pound has increased and its cheaper to buy pounds, this is know as an appreciation of the currency (in this case dollar). 

By devaluation we mean ___________________.

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

  1. a fall in the external value of a currency caused by central bank action

  2. a fall in the external value of a currency caused by the market forces

  3. a fall in the external value of a currency caused by Government action

  4. none of the above

Show answer
Correct Option: A
Explanation:
When the country follows a fixed exchange rate regime the government constantly has to revalue and devalue the currency in order to maintain the pegged exchange rate. When there is upwards market pressure on the currency to appreciate, the central bank will artificially devalue the currency by buying up foreign reserves. 

A surge in foreign capital inflows in India would lead to the ______________________.

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

  1. Sale of foreign exchange by the central bank in order to prevent depreciation of rupee

  2. Purchase of foreign exchange by the central bank in order to prevent depreciation of the rupee

  3. Sale of foreign exchange by the central bank to prevent the appreciation of the rupee

  4. Purchase of foreign exchange by the central bank in order to prevent appreciation of the rupee

Show answer
Correct Option: D

Purchasing Power Parity theory is related with ________.

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

  1. interest rate

  2. bank rate

  3. wage rate

  4. exhange rate

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Correct Option: D
Explanation:
The acronym PPP stands for, "Purchasing Power Parity". It is a method of currency valuation that tells us that the exchange rate between two countries must be equal to the ratio of the currencies' respective purchasing power, i.e., two identical goods should eventually cost the same in different countries once adjusted for purchasing power parity.

What is the meaning of devaluation of money?

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

  1. Decrease in the internal value of money

  2. Decrease in the external value of money

  3. Decrease in both internal and external values of money

  4. The government takes back currency notes of any denomination

Show answer
Correct Option: B
Explanation:

When the country follows a fixed exchange rate regime the government constantly has to revalue and devalue the currency in order to maintain the pegged exchange rate. When there is upwards market pressure on the currency to appreciate, the central bank will artificially devalue the currency by buying up foreign reserves.