Tag: exchange rate

Questions Related to exchange rate

An increase in demand for imported goods raises the demand for 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. True

  2. False

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Correct Option: A

Under managed floating rate system, central bank maintains reserves 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. True

  2. False

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Correct Option: A

Devaluation and depreciation of currency are one and the same thing. 

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: B
Explanation:

Devaluation is reduction in value of domestic currency by the government under fixed exchange rate system.It is a deliberate effort. On the other hand,
Depreciation is decrease in value of domestic currency due to market forces of demand and supply under flexible exchange rate system. 

Under flexible exchange rate system, each country fixes its value of currency in terms of some external standard. 

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: B
Explanation:

This happens in case of fixed exchange rate system.
 Under Flexible exchange rate system, value of currency is determined by the market forces of demand and supply. 

Demand for American goods will rise in India due to appreciation of Indian currency.

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
Explanation:

Demand for American goods will rise in India due to appreciation of Indian currency. Appreciation of domestic currency is a situation of a fall in exchange rate, i.e, less rupees are needed to buy one dollar. Thus, making American goods cheaper and leading to an increase in their demand.

Foreign exchange transactions dependent on other foreign exchange transactions are called ________________.

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

  1. Current Account Transactions

  2. Capital Account Transactions

  3. Autonomous Transactions

  4. Accommodating Transaction

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Correct Option: D

Huge international reserves are required to be maintained by the government in fixed and flexible exchange rate system. 

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: B
Explanation:
Fixed exchange rate system is always supported with huge reserves of gold because foreign currencies are convertible to gold.
But flexible rate of exchange is the rate which is determined by the supply-demand forces in the foreign exchange market. It is also called 'free exchange rate' as it is determined by the free play of supply and demand forces in the international money market.

Increase in foreign exchange rate leads to rise in supply 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. True

  2. False

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Correct Option: A
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.

Flexible exchange rate is determined by the government. 

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: B
Explanation:

Flexible rate of  exchange is the rate which is determined by the supply-demand forces in the foreign exchange market. It is also called 'free exchange rate' as it is determined by the free play of supply and demand forces in the international money market.

_________ refers to a system in which foreign exchange rate is determined by market forces and central bank influences the exchange rate through intervention.

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

  1. Flexible exchange rate system

  2. Managed floating rate system

  3. Floating exchange rate

  4. Fixed exchange rate system

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Correct Option: B
Explanation:

Managed floating is a tool employed by the Central bank to restore the value of the country's currency in relation to other countries within the desired limits, even when the exchange rate is determined by the market forces of demand and supply.