Tag: balance of payments and exchange rate

Quizzes (1) Questions (59)

Questions Related to balance of payments and exchange rate

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

An increase in demand for imported goods raises the demand for foreign exchange. 

  1. True

  2. False
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

Importing goods requires paying in foreign currency. Therefore, an increase in demand for imports directly increases the demand for foreign exchange to settle those payments.

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

Under managed floating rate system, central bank maintains reserves of foreign exchange. 

  1. True

  2. False
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

In a managed floating system, the central bank intervenes in the foreign exchange market to stabilize the currency by buying or selling foreign exchange 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

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

  1. True

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

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

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

  1. True

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

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

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

  1. True

  2. False
Reveal answer Fill a bubble to check yourself
A Correct answer
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.

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

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

  1. Current Account Transactions

  2. Capital Account Transactions

  3. Autonomous Transactions

  4. Accommodating Transaction
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

Accommodating transactions are those undertaken to cover the deficit or surplus in the balance of payments, making them dependent on the autonomous transactions that created the imbalance.

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

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

  1. True

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

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

  1. True

  2. False
Reveal answer Fill a bubble to check yourself
A Correct answer
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.

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

Flexible exchange rate is determined by the government. 

  1. True

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

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.