Economics · Banking Financial Awareness

Macroeconomics and Policy

2,878 Questions

Macroeconomics and policy questions assess the understanding of broad economic indicators, government fiscal strategies, and banking regulations. Topics include inflation causes, currency exchange rates, monetary policy tools, and historical economic systems. These are highly tested in banking and civil services examinations.

Inflation FactorsMonetary PolicyExchange RatesFiscal PolicyEconomic IndicatorsBretton Woods System

Macroeconomics and Policy Questions

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

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

  1. Flexible exchange rate system

  2. Managed floating rate system

  3. Floating exchange rate

  4. Fixed exchange rate system
Reveal answer Fill a bubble to check yourself
B Correct answer
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.

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

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

  1. Positive

  2. Negative

  3. Positive and negative both

  4. No effect
Reveal answer Fill a bubble to check yourself
B Correct answer
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.

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

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. 

  1. 1 and 2

  2. 2 and 3

  3. 1 and 3

  4. 1, 2 and 3
Reveal answer Fill a bubble to check yourself
D Correct answer
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.

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

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

  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.
Reveal answer Fill a bubble to check yourself
B Correct answer
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.

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

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.

  1. Only 1

  2. Only 3

  3. 2 and 3

  4. 1,2 and 3
Reveal answer Fill a bubble to check yourself
D Correct answer
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. 

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

Devaluation works best when __________________.

  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
Reveal answer Fill a bubble to check yourself
B Correct answer
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.

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

By devaluation we mean ___________________.

  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
Reveal answer Fill a bubble to check yourself
A Correct answer
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. 
Multiple choice business economics and quantitative methods balance of payments exchange rate balance of payments and exchange rate balance of trade and balance of payments

Purchasing Power Parity theory is related with ________.

  1. interest rate

  2. bank rate

  3. wage rate

  4. exhange rate
Reveal answer Fill a bubble to check yourself
D Correct answer
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.
Multiple choice business economics and quantitative methods balance of payments exchange rate balance of payments and exchange rate balance of trade and balance of payments

What is the meaning of devaluation of money?

  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
Reveal answer Fill a bubble to check yourself
B Correct answer
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. 

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

What is the main feature of a fixed exchange rate?

  1. It is pegged at a certain level by the market

  2. It is pegged at a certain level by the government

  3. It is pegged at a certain level by individuals

  4. It is pegged at a certain level by the central bank
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

In a fixed rate system, the price of the domestic currency in international markets is purely determined by the central bank of the country. It is pegged bilaterally and is artificially maintained at that level by the central bank. It is not allowed to appreciate and depreciate as per the market conditions, the central bank will intervene using forex reserves and hold the exchange rate at the pegged amount.

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

What is the main feature of a flexible exchange rate system?

  1. Determined by forces of market supply

  2. Determined by forces of market demand

  3. Both A and B

  4. None of the above
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

In a flexible rate system, the price of the domestic currency in international markets is purely determined by the market forces of supply and demand. It is allowed to appreciate and depreciate as per the market conditions, without intervention by the central bank. The Federal Reserve does not intervene in the forex market for the US dollar and it is classified as a freely floating currency.  

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

Devaluation of currency means a ________.

  1. fall in exchange value of a country by market forces

  2. reduction in external value /exchange value of currency by the Government

  3. reduction in currency value due to wear and tear

  4. all the three
Reveal answer Fill a bubble to check yourself
B Correct answer
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. 

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

In what way devaluation helps a country?

  1. Improvement in Balance of Payment situation

  2. Encourages exports

  3. Discourages imports

  4. All the three
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

A devaluation of the currency may help improve the balance of payments situation when it is in a deficit, as a devaluation makes it attractive to purchase domestic goods as it becomes relatively cheaper to do so thus the value of imports is likely to decrease and the value of exports is likely to increase. 

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

Which of these measures is / are essential to make devaluation successful?

  1. Export performance of exporting units should be strengthened

  2. Export quality should be improved

  3. Domestic prices should be checked

  4. All the three
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

For devaluation to be successful, the country must be able to export more (improved performance and quality) and keep domestic inflation in check so that the price advantage is not lost.