Foreign Exchange Rate
1. Exchange Rate refers to the rate at which the following is exchanged.
a) Goods
b) Services
c) Currencies
d) All the above
Answer :- (c) Currencies
2. Floating Exchange Rates is determined by:
a) Mutual consultations between coutries
b) Banking systems
c) Market Forces
d) None of the above
Answer :- (c) Market Forces
3. Managed floating exchange rate is called ‘managed’ because it is influenced by the steps taken by:-
a) Government
b) Central Bank
c) World Bank
d) IMF
Answer :- (b) Central Bank
4. When exchange rate in terms of domestic currency rises:-
a) Exports become cheaper
b) Imports become cheaper
c) Exports become costiler
d) NO effect on imports
Answer :- (a) Exports become cheaper
5. When exchange rate falls in terms of domestic currency:-
a) Domestic currency depreciates
b) Foreign currency appreciates
c) Domestic currency appreciates
d) NO effect on the domestic currency
Answer :- (c) Domestic currency appreciates
6. In the foreign exchange market that market price of US Dollar rises from ₹ 60 to ₹ 61. This means that:-
a) Rupee has depreciated
b) US Dollar has appreciated
c) Both a) and b)
d) None of the above
Answer :- (c) Both (a) and (b)
7. Price of one currency is relation to other currencies in the internatinoal exchange market is known as:-
a) Equilibrium rate
b) fixed exchange rate
c) exchange rate
d) flexible exchange rate
Answer :- (c) exchange rate
8. The rate which is determined by the government is known as:-
a) flexible exchange rate
b) Fixed Exchange Rate
c) floating exchange rate
d) None of these
Answer :- (b) Fixed Exchange Rate
9. The exchange rate at which demand for foreign currency becomes equal to its supply, is called
a) Equal rate of exchange
b) Mint Parity
c) Equilibrium exchange rate
d) all of these
Answer :- (c) Equilibrium exchange rate
10. What is the relationship between ‘demand for foreign exchange’ and ‘exchange rate’:-
a) Inverse
b) Direct
c) One to one
d) No Relationship
Answer :- (a) Inverse
11. When supply of foreign exchange increases, the equilibrium exchange rate will:-
a) Rise
b) fall
c) not change
d) either rise or fall
Answer :- (b) fall
12. Demand for foreign currency depends upon:-
a) repayment of international loans
b) investment in rest of the world
c) direct foreign investment in the domestic economy
d) both a) and b)
Answer :- (d) investment in rest of the world
13. Due to depreciation of foreign currency, the supply of foreign currency in domestic economy will:-
a) increase
b) not change
c) either increase or decrease
d) decrease
Answer :- (d) decrease
14. Direct foreign investment is a source of:-
a) demand for foreign exchange
b) supply of foreign exchange
c) both a) and b)
d) none of these
Answer :- (b) supply of foreign exchange
15. When the exchange rate rises due to managed floating, it is called:
a) devaluation
b) appreciation
c) depreciation
d) revalutaion
Answer :- (c) depreciation
16. If ₹ 120 are required to buy $ 1, instead of ₹ 100 earlier:-
a) Domestic currency has appreciated
b) Domestic currency has depreciated
c) rupee value of import bill will increase
d) both b) and c)
Answer :- (d) both (b) and (c)
17. Equilibrium exchange rate occurs when:-
a) supply of foreign exchange > demand for foreign exchange
b) supply of foreign exchange = demand for foreign exchange
c) supply of foreign exchange < demand for foreign exchange
d) both (a) and (b)
Answer :- (b) supply of foreign exchange = demand for foreign exchange
18. Dirty floating is related to:
a) fixed system of exchange rate
b) flexible system of exchange rate
c) both of these
d) none of these
Answer :- (b) none of these
19. Which of the following items raises the supply of foreign exchange?
a) Export of goods from China
b) Indian students going to USA for MBA
c) Donation of 50 million $ received from Microsoft
d) Purchase of land in England
Answer :- (a), (c)
20. A Change from ₹ 140 = 2 $ to ₹ 60 = 1$ indicates that ₹ is:-
(a) Appreciating
(b) Depreiating
(c) Neither (a) nor (b)
(d) Either (a) or (b)
Answer :- (a) Appreciating
21. Depreciation of domestic currency leads to rise in:
a) Exports
b) Imports
c) Both (a) and (b)
d) Neither (a) nor (b)
Answer :- (a) Exports
22. Flexible Exchange Rate System is also known as:
a) Pegged Exchange Rate System
b) Dirty Floating
c) Floating Exchange Rate
d) Both (b) and (c)
Answer :- (c) Floating Exchange Rate
23. Devaluation of Currency means:-
a) Reduction in the value of domestic currency by the market forces
b) Reduction in the value of domestic currency by the government
c) Both (a) and (b)
d) Neither (a) nor (b)
Answer :- (b) Reduction in the value of domestic currency by the government
24. Other things remaining unchanged, when in a country the price of foreign currency rises, national income is:
a) Likely to rise
b) Likely to fall
c) Likely to rise and fall both
d) Not affected
Answer :- (a) Likely to rise
25. Other things remaining the same, when in a country the market price of foreign currency falls, national income is likely:
a) to rise
b) to fall
c) to rise or to fall
d) to remain unaffected
Answer :- (b) to fall
26. Other things remaining the same, when foreign currency becomes cheaper, the
effect on national income is likely to be:
a) Positive
b) Negative
c) Positive and negative both
d) No effect
Answer :- (b) Negative
27. The value of US Dollar $1 has gone down from ₹73 to ₹70. It means that:
a) Indian rupee has appreciated
b) US Dollar has depreciated
c) Both a) and b)
d) No effect
Answer :- (c) Both (a) and (b)
28. If ₹70 are required to buy 1 US dollar, instead of ₹ 68, it will lead to rise in:-
a) Exports to USA
b) Imports from USA
c) Both a) and b)
d) Either a) or b)
Answer :- (a) Exports to USA
29. When there is appreciation of currency:-
a) Imports become costlier
b) Exports become Cheaper
c) Imports become cheaper
d) No effect on Exports
Answer :- (c) Imports become cheaper
30. Due to the depreciation of the foreign currency, the supply of foreign currency in the domestic economy will:
a) Increase
b) Decrease
c) Either a) or b)
d) Not Change
Answer :- (b) Decrease
31. Under Floating Exchange rate system, Exchange rate is determined by:-
a) Central Bank
b) Government
c) Market forces of demand and supply
d) None of these
Answer :- (c) Market forces of demand and supply
32. Under Managed Floating Exchange Rate System, if rupee is getting deprecated fast, then RBI:
a) Sell dollars in the foreign exchange market
b) Purchase dollars in the foreign exchange market
c) Print more Currency Notes
d) None of these
Answer :- (a) Sell dollars in the foreign exchange market
33. If ₹ 74 are required to buy $ 1, instead of ₹ 70 earlier, it means:
a) Domestic currency has depreciated
b) Foreign Currency has appreciated
c) Domestic Currency has appreciated
d) Both a) and b)
Answer :- (d) Both (a) and (b)
34. By Exchange Rate we mean:-
a) Quantum of domestic currency needed to pay for foreign currency
b) Quantum of foreign currency needed to pay for another foreign currency
c) Rate at which foreign currency is bought and sold
d) All of these
Answer :- (d) All of these
35. Identify which of the following statements is true?
a) The flexible exchange rate system gives the government more flexibility to maintain a large stock of foreign exchange reserves
b) In the managed floating exchange rate system, the government intervenes to buy and sell foreign currencies.
c) in the Managed floating exchange rate system, the central bank intervenes to moderate exchange rate fluctuations
d) In the Fixed exchange rate system, market forces fix the exchange rate.
Answer :- (c) in the Managed floating exchange rate system, the central bank intervenes to moderate exchange rate fluctuations
36. Other things remaining unchanged, when in a country, the price of foreign currency rises, national income is:
a) Likely to rise
b) Likely to fall
c) Likely to rise and fall both
d) Not Affected
Answer :- (a) Likely to rise
37. Foreign exchange refers to:
a) the price of one currency in terms of gold in the domestic market.
b) the price of one currency determined by the government of other countries
c) the price of one currency in relation to other currencies in the international
money market
d) none of these.
Answer :- (c) the price of one currency in relation to other currencies in the international money market
38. The exchange rate is the price of a currency expressed in terms of:
a) gold
b) metal
c) another currency
d) None of these
Answer :- (c) another currency
39. Which of the following statements is not true:-
a) Depreciation of the foreign currency leads to the fall in exports
b) Devaluation of the domestic currency leads to a rise in imports
c) Appreciation of domestic currency leads to rise in exports
d) Appreciation of foreign currency leads to fall in exports
Answer :- (a) Depreciation of the foreign currency leads to the fall in exports
40. What is the cause of the devaluation of any country’s currency?
(A) Increase in the domestic inflation rate
(B) Domestic real interest rates are less than foreign interest rates
(C) Much increase in the income
(D) All of these
Answer :- (D) All of these
41. When was the gold standard abandoned?
(A) 1930’s
(B) 1920’s
(C) 1940’s
(D) 1950’s
Answer :- (B) 1920’s
42. When there is a favourable balance of trade?
(A) X > M
(B) X = M
(C) X < M
(D) None of these
Answer :- (A) X > M
43. When there is unfavourable balance of trade?
(A) X > M
(B) X = M
(C) X < M
(D) None of these
Answer :- (C) X < M
44. Other things remaining unchanged, when in a country the price of foreign currency rises, national income is:
(A) Likely to rise
(B) Likely to fall
(C) Likely to rise and fall both
(D) Not affected
Answer :- (A) Likely to rise
45. Which one is the king of the exchange rate?
(a) Fixed Exchange Rate
(b) Flexible Exchange Rate
(c) Both (a) and (b)
(d) None of the above
Answer :- (c) Both (a) and (b)
46. Which of the following is true?
(a) Fixed exchange rate is determined by the government
(b) Flexible exchange rate is determined by market forces (demand and supply of foreign exchange)
(c) Both (a) and (b)
(d) None of the above
Answer :- (c) Both (a) and (b)
47. Which one is a kind of fixed exchange rate?
(a) Gold Standard System of Exchange Rate
(b) Bretton Woods System of Exchange Rate
(c) Both (a) and (b)
(d) None of the above
Answer :- (c) Both (a) and (b)
48. Which one is a merit of the fixed exchange rate?
(a) Promotes Foreign Trade
(b) Induces Foreign Capital
(c) Increases Capital Formation
(d) All the above
Answer :- (d) All the above
49. Which one is a demerit of the fixed exchange rate?
(a) Ignores National Interests
(b) Restricted Movement of Capital
(c) Sudden Fluctuations in Exchange Rates
(d) All the above
Answer :- (d) All the above
50. Which one is a merit of the flexible exchange rate?
(a) Simple System
(b) Continuous Adjustments
(c) Improves Balance of Payments
(d) All the above
Answer :- (d) All the above
51. Which one is a demerit of the flexible exchange rate?
(a) Bad Results of Low Rate
(b) Uncertainty
(c) Instability in Foreign Exchange
(d) All the above
Answer :- (d) All the above
52. Which one is a source of the demand for foreign exchange?
(a) Imports of Goods and Services from Abroad
(b) Investment in Foreign Nations
(c) Gift Scheme to Foreign Nations
(d) All the above
Answer :- (d) All the above
53. Foreign exchange is determined by:
(a) Demand for foreign currency
(b) Supply of foreign currency
(c) Demand and supply in the foreign exchange market
(d) None of the above
Answer :- (c) Demand and supply in a foreign exchange market
54. The forms of foreign exchange market is/are:
(a) Spot market
(b) Forward market
(c) Both (a) and (b)
(d) None of these
Answer :- (c) Both (a) and (b)
55. The foreign exchange rate is determined by:
(a) Government
(b) Bargaining
(c) World Bank
(d) Demand and Supply forces
Answer :- (d) Demand and Supply forces
56. By exchange rate we mean:
(a) How much local currency we have to pay for a foreign currency
(b) How much of a foreign currency we have to pay for another foreign currency
(c) The rate at which foreign currency is bought and sold
(d) All of these
Answer :- (d) All of these
57. Balance of Trade =?
(a) Export of Visible Items – Imports of Visible Items
(b) Export of both Visible and Invisible Items – Import of both Visible and Invisible Items
(c) Import of Visible Items – Export of Visible Items
(d) None of the above
Answer :- (a) Export of Visible Items – Imports of Visible Items
58. Which items are included in the Balance of Payments?
(a) Visible Items
(b) Invisible Items
(c) Capital Transfers
(d) All the above
Answer :- (d) All the above
59. Which one is the visible item of Balance of Payments?
(a) Machine
(b) Cloth
(c) Cement
(d) All of these
Answer :- (d) All of these
60. Which one is the invisible item of Balance of Payment?
(a) Banking
(b) Shipping
(c) Communication
(d) All of these
Answer :- (d) All of these
61. Which one is the feature of Balance of Payment?
(a) Systematic Accounts
(b) Fixed Time Period
(c) Comprehensiveness
(d) All the above
Answer :- (d) All the above
62. Which account is included in the composition of the Balance of Payments?
(a) Current Account
(b) Capital Account
(c) Both (a) and (b)
(d) None of the above
Answer :- (c) Both (a) and (b)
63. Which one is the item of the Current Account?
(a) Import of Visible Items
(b) Expenses of Tourists
(c) Exports of Visible Items
(d) All the above
Answer :- (d) All the above
64. Which one is the item of Capital Account?
(a) Government Transaction
(b) Priva Transactions
(c) Foreign Direct Investment
(d) All the above
Answer :- (d) All the above
65. The component(s) of Balance of Payment is/are:
(a) Current Account
(b) Capital Account
(c) Both (a) and (b)
(d) None of these
Answer :- (c) Both (a) and (b)
66. Which items are included in the balance of trade?
(a) Invisible Item
(b) Capital Transfer
(c) Visible Item
(d) All of these
Answer :- (c) Visible Item
67. Balance of Trade means:
(a) Capital Transaction
(b) Import and export of goods
(c) Total debit and credit
(d) All the above
Answer :- (b) Import and export of goods
68. The reason for the imbalance in the balance of payment is:
(a) Natural Reasons
(b) Economic Reasons
(c) Political Reasons
(d) All of these
Answer :- (d) All of these
69. Structure of balance of payment includes which account:
(a) Current account
(b) Capital account
(c) Both (a) and (b)
(d) None of these.
Answer :- (c) Both (a) and (b)
70. Balance of trade means:
(a) Capital transactions
(b)Import and export of goods,
(c) Total credit and debit
(d) All of the above
Answer :- (b)Import and export of goods
71. Measures to improve the adverse balance of payment includes:
(a) Currency devaluation
(b) Import substitution
(c) Exchange control
(d) All of the above
Answer :- (d) All of the above.
72. Foreign Exchange Rate is determined by:
(a) Demand for foreign currency
(b) Supply of foreign currency
(c) Demand and supply in the foreign exchange market
(d) None of these
Answer :- (c) Demand and supply in the foreign exchange market
.
73. Types of Foreign Exchange Market are:
(a) Spot market
(b) Forward market
(c) Both (a) and (b)
(d) None of these
Answer :- (c) Both (a) and (b)
74. Exchange rate is the price of a currency expressed in terms of
(a) gold
(b) metal
(c) another currency
(d) none of the above
Answer :- (c)
It is the rate at which one currency can be converted into another currency.
75. Which of the following statements is false?
(a) Depreciation of the foreign currency leads to the fall in exports
(b) Devaluation of the domestic currency leads to a rise in imports
(c) Appreciation of domestic currency leads to rise in exports
(d) Appreciation of foreign currency leads to a fall in imports
Answer :- (a)
Depreciation of home currency implies a fall in the price of domestic goods for the foreign buyers.
FILL IN THE BLANKS
1. The price of one currency in terms of another is known as _________ .
(A) Foreign exchange rate
(B) Trade rate
(C) Interest rate
(D) Balance of Payment
Answer :- (A) Foreign exchange rate
2. When the Government wants to strengthen the rupee, it_____foreign currency and ______domestic currency.
a) Buys, Sells
b) Sells, Sells
c) Sells, Buys
d) Buys, Buys
Answer :- (c) Sells, Buys
3. Imports of goods and services raises the_______of foreign exchange:
a) Supply
b) Demand
c) Both (a) and (b)
d) Neither (a) nor (b)
Answer :- (b) Demand
4. The market where the national currencies are traded for one another is known as ________
(A) Domestic exchange market
(B) Foreign exchange market
(C) Bazaar
(D) Shop
Answer :- (B) Foreign exchange market
5. Increase in the value of foreign commodities is known as _________
(A) Revaluation
(B) Devaluation
(C) Inflation
(D) None of these
Answer :- (B) Devaluation
6. Decrease in the value the foreign commodities is known as _________
(A) Revaluation
(B) Devaluation
(C) Deflation
(D) All of these
Answer :- (A) Revaluation
7. ______ refers to a system in which foreign exchange rate is determined by market forces and central bank influences the exchange rate through intervention
a) Flexible Exchange Rate System
b) Managed Floating Rate System
c) Dirty Floating
d) Fixed Exchange Rate System
Answer :- (b) Managed Floating Rate System
8. The operation of daily nature in the foreign exchange market is known as ________
(A) Spot market
(B) Forward market
(C) Domestic market
(D) International market
Answer :- (A) Spot market
9. The operation of future delivery in the foreign exchange market is known as ________
(A) Spot market
(B) Current market
(C) Forward market
(D) Domestic market
Answer :- (C) Forward market
10. Hybrid in management of fixed and flexible exchange rate is known as ________
(A) Managed to float
(B) Crawling Peg
(C) Wider Bands
(D) None of these
Answer :- (A) Managed floating
11. Trade of visible items between the countries is known as ________
(A) Balance of Payment
(B) Balance of Trade
(C) Deficit Balance
(D) All of these
Answer :- (B) Balance of Trade
12. When the import and export of visible items are equal, the situation is known as _______
(A) Balance of Trade
(B) Balance of Payment
(C) Trade Surplus
(D) Trade Deficit
Answer :- (A) Balance of Trade
13. The trade of visible and invisible items is known as _________
(A) Balance of Payments
(B) Balance of Trade
(C) Deficit of interest
(D) Profit
Answer :- (A) Balance of Payments
14. ________ refers to the rate at which one currency is exchanged for the other.
Answer :- Foreign exchange rate
15. _______ rate of exchange refers to the rate of exchange as determined by the government.
Answer :- Fixed
16. _______ market deals with current sales and purchases of foreign exchange.
Answer :- Foreign Exchange
17. _______ market deals with such sale and purchase of foreign exchange, which are contracted today but are implemented sometimes in the future.
Answer :- Forward
18. Balance of ________ is a summary statement of all economic transactions between a country and the rest of the world.
Answer :- Payment
19. The balance of _______ is the difference between visible exports and visible imports.
Answer :- Trade
20. Balance of Payment is always _________
Answer :- Positive
21. Balance of Payment is a ______ concept as compared to the balance of trade.
Answer :- broader
22. If exports exceed imports, then BoP is _________
Answer :- favourable
23. Balance of trade includes only ________ items.
Answer :- visible
24. Bretton woods system is also known as ________ border system.
Answer :- Adaptable
25. There is ________ relation between foreign exchange rate and the supply of foreign exchange.
Answer :- Direct
26. By devaluation, the value of currency ________
Answer :- Reduces
27. ________ items are included in the balance of trade.
Answer :- Visible
28. Balance of payment always remains ________
Answer :- Balanced
29. The value of the currency of one country with that of the currency of another country is called ________
Answer :- Exchange rate
True and False
1. Balance of Payments includes only visible items.
Answer :- False
2. Balance of trade is a part of the Balance of Payments.
Answer :- True
3. The balance of trade is always positive.
Answer :- False
4. The balance of Payments may be positive or negative.
Answer :- False
5. The current account records visible items, invisible items, and unilateral transfers.
Answer :- True
6. Capital account records are such transactions, which cause a change in the asset and liability status of the residents of a country or of its government.
Answer :- True
7. Exports of tea is an example of visible items.
Answer :- True
8. Banking and insurance are examples of visible items.
Answer :- False
9. Forward market deals with current sales and purchases of foreign exchange.
Answer :- False
10. Demand for foreign exchange also depends upon payments of international loans
Answer :- True
11. Balance of trade includes both visible and invisible items.
Answer :- False
12. Balance of trade is a part of the Balance of payments.
Answer :- True
13. Devaluation is declared by the government.
Answer :- True
14. The balance of payment is always balanced.
Answer :- True
15. For export promotion, the help of devaluation is taken.
Answer :- True
16. The increasing population in developing countries has a direct impact on economic growth.
Answer :- False
18. Export promotion is one of the ways of correcting the Balance of payments.
Answer :- False
Match the following:
1.
| A | B |
| 1. Balance of payments | (a) Always favourable |
| 2. Balance of Trade includes | (b) Both visible and invisible items |
| 3. India’s Balance of payments | (c) Includes only visible items |
| 4. Determination of flexible exchange rate | (d) Foreign banks issue letter of credit in large demand over banks of the country |
| 5. In favour of foreign exchange rate | (e) Forces of demand and supply in foreign exchange markets. |
Answer :-
| A | B |
| 1. Balance of payments | (b) Both visible and invisible items |
| 2. Balance of Trade includes | (c) Includes only visible items |
| 3. India’s Balance of payments | (a) Always favourable |
| 4. Determination of flexible exchange rate | (e) Forces of demand and supply in foreign exchange markets. |
| 5. In favour of foreign exchange rate | (d) Foreign banks issue letter of credit in large demand over banks of the country |
2.
| Column-I | Column-II |
| 1. Spot market | (A) Risk management |
| 2. Forward market | (B) Accommodating items |
| 3. Hedging | (C) Deals with current transactions |
| 4. Above the line items | (D) Autonomous items |
| 5. Below the line items | (E) Deals with future transactions |
Answer :-
| Column-I | Column-II |
| 1. Spot market | (C) Deals with current transactions |
| 2. Forward market | (E) Deals with future transactions |
| 3. Hedging | (A) Risk management |
| 4. Above the line items | (D) Autonomous items |
| 5. Below the line items | (B) Accommodating items |
3. Identify the correctly matched pair from column A to that of Colum B:
| Column – A | Column – B |
| (1) Invest in bonds in a foreign country | (a) Factor affecting demand of Foreign Currency |
| (2) Purchase by foreigners in the domestic market | (b) Factor effecting the Fixed Exchange Rate |
| (3) Change in Trade | (c) Factor affecting Foreign Trade |
| (4) Monetary and Fiscal Policy | (d) Factor affecting the calculation of National Income |
Option:-
a) 1 – (a)
b) 2 – (b)
c) 3 – (c)
d) 4 – (d)
Answer :- (a)
4. Identify the correct pair of given in Column B by matching them with respective concepts
in Column A:
| Column – A | Column – B |
| (1) Reduction in the value of the domestic currency by the government | (a) Devaluation |
| (2) Reduction in the value of the domestic currency through market forces | (b) Appreciation |
| (3) Increase in the value of the domestic currency by the government | (c) Depreciation |
| (4) Increase in the value of the domestic currency through market forces | (d) Revaluation |
Option
a) 1 – (a)
b) 2 – (b)
c) 3 – (c)
d) 4 – (d)
Answer :- (a)
5. Match the following.
| Column A | Column B |
| 1. Flexible Exchange Rate | (a) Foreign Exchange Rate is determined by the Central Bank. |
| 2. Fixed Exchange Rate | (b) The foreign exchange rate is determined by the demand and supply. |
| 3. Managed Flexible Rate | (c) The Central Bank interferes with the market demand and supply of foreign currency. |
| 4. Managed Fixed Rate | (d) The Central Bank controls the foreign rate regime. |
Answer :-
(a) 1 – (a)
(b) 2 – (b)
(c) 3 – (c)
(d) 4 – (d)
Assertion-Reason Based MCQ
A. Both assertion and reason are true and reason is the correct explanation of assertion.
B. Both assertion and reason are true but reason is not the correct explanation of assertion.
C. Assertion is true but reason is false.
D. Assertion is false but reason is true.
1.Assertion :- When in order to buy 1 US dollar 80 are needed instead of ₹75, domestic currency shows depreciation.
Reason :- Depreciation of domestic currency refers to fall in the value of domestic currency in terms of foreign currency caused by rise in foreign exchange rate in the foreign exchange market.
Answers :- (A)
Here, domestic currency shows depreciation because more rupees are to be paid to buy one US dollar.
2. Assertion :- Export of goods and services from India to the US would mean outflow of foreign exchange from India.
Reason :- Foreign exchange in terms of receipts for exports flows from the US to India.
Answers :- (D)
Export of goods and services from India to US would mean inflow of foreign exchange to India.
3.Assertion :- In case of currency appreciation, less rupees are to be paid to buy one US dollar.
Reason :- Currency appreciation leads to increase in value of domestic currency in reference to foreign currency. So, less is needed to pay for the same amount.
Answers :- (A)
Export of goods and services from India to US would mean foreign exchange of India
4.Assertion :- In order to restore the value of depreciating domestic currency, the Central Bank sells the US dollars in the international money market.
Reason :- By selling US dollars, supply of dollars will increase which will reduce the price of dollar,
Answers :- (A)
Case-Study Based MCQ
1. Read the following passage and answer accordingly.
The rupee depreciated by 6 paise to close at 73.02 (provisional) against the US dollar on Monday, tracking a rebound in the American currency overseas.
At the interbank Forex market, the domestic unit opened at ₹72.89 against the US dollar and witnessed an intra-day high of ₹72.84 and a low of ₹73.15.
The local unit finally settled at ₹73.02, registering a fall of 6 paise over its previous close, even as the domestic equity market settled with significant gains on budget day.
On Friday, the rupee had closed at ₹72.96 against the American currency.
Meanwhile, the dollar index, which gauges the greenback’s strength against a basket of six currencies, rose 0.21% to 90.78.
On the domestic equity market front, the BSE Sensex ended 2,314.84 points or 5% higher at 48,600.61, while the broader NSE Nifty advanced 646.60 points or 4.74% to 14,281.20.
Foreign institutional investors were net sellers in the capital market as they offloaded shares worth ₹5,930.66 crore on Friday, according to exchange data.
Brent Crude Futures, the global oil benchmark, advanced 0.84% to USD 55.50 per barrel.
(i) How will the devaluation of Indian Rupee affect imports?
(a) Imports will fall
(b) Imports will rise
(c) Imports will have no effect
(d) None of the above
Answer :- (i) (a)
because, Imports become more expensive
(ii) How will the devaluation of the Indian Rupee affect exports?
(a) Exports will fall
(b) Exports will rise
(c) Exports will remain same.
(d) Exports will fall first and then rise.
Answer :- (ii) (b)
because, Exports become cheaper
(iii) Read the following statements.
Assertion :-Forex reserve of the country will fall.
Reason :- Due to devaluation of domestic currency.
Code :-
(a) Both assertion and reason are true and reason is the correct explanation of assertion.
(b) Both assertion and reason are true but reason is not the correct explanation of assertion.
(c) Assertion is true but reason is false.
(d) Assertion is false but reason is true.
Answer :- (iii) (a)
Imports becomes more expensive, i.e., the domestic buyers will now have to pay more for imports
(iv) How is the exchange rate determined in India?
(a) By the government.
(b) By the demand and supply of Foreign Currency
(c) Both (a) and (b)
(d) Neither (a) nor (b)
Answer :- (iv) (c)
India practices managed floating exchange rate system in which the Central Bank has a major role to play.
2. Read the following passage and answer the following accordingly.
The rupee rose by 3 paise to settle at 72.94 (provisional) against the US dollar on Monday, extending its gains for the fifth straight session despite heavy selling in the domestic equity market.
At the interbank Forex market, the rupee opened at 72.95 against the American currency, and hit an intra-day high of 72.89 and a low of 72.96 in day trade.
It finally finished at ₹ 72.94, higher by 3 paise over its last close. On Friday, the rupee had settled at ₹ 72.97 against the American currency.
Meanwhile, the dollar index, which gauges the greenback’s strength against a basket of six currencies, advanced 0.10% to ₹ 90.32.
“The rupee has managed to hold its fort around the ₹ 72.90 to 73 levels, but given the sell-off in equities and the likelihood of a rebound in the dollar index, we see the trend tilting slightly towards depreciation going forward,” said Sugandha Sachdeva VP-Metals, Energy & Currency Research, Religare NSE 0.52% broking.
(i) What is the benefit for the appreciation of the Indian Rupees?
(a) The Forex Reserve of the country will increase
(b) The imports of the country will decline
(c) There will be an increase in the Foreign Direct Investment
(d) None of the above
Answer :- (i) (c)
(ii) Which of the following is not the reason for the increase in the price of rupees in the Forex Market?
(a) Increase in investment through FDI and FPI
(b) Increase in the share and security market
(c) Better government policies
(d Heavy selling in the domestic equity market
Answer :- (ii) (d)
(iii) India follows ________ system of Foreign Exchange, as per the given report.
(a) Fixed Exchange Rate
(b) Flexible Exchange Rate
(c) Managed Floating Exchange Rate
(d) None of the above
Answer :- (iii) (c)
India practices managed floating exchange rate system in which the Central Bank has major role to play.
(iv) Rupee rose by ________ paise against USD
(a) 2
(b) 3
(c) 4
(d) 5
Answer :- (iv) (d)
The rupee rose by 3 paise to settle at 72.95 against the US dollar on Monday.
3. Read the following passage and answer the following accordingly.
NEW DELHl: India’s Foreign Direct Investment saw a significant jump in November 2020. FDI data released by the Commerce Ministry shows that total in the month of November 2020 grew by a whopping 81% to $ 10.15 billion against $ 5.6 billion in November 2019.
FDI equity has also jumped to $ 8.5 billion as against $ 28 billion in November 2019, registering a growth of 70%.
India has attracted a total FDI inflow of $ 58.37 billion during April to November 2020. It is the highest ever for the first eight months of a financial year (F.Y.) and 22 % higher as compared to the first eight months of 2019-20 ($ 47.67 billion).
FDI equity inflow received during F.Y. 2020-21 (April to November 2020) is $ 43.85 billion. It is also the highest ever for the first eight months of a financial year and 37% more compared to the first eight months of 2019-20 ($ 32.11 billion), the data revealed.
FDI is a major driver of economic growth and an important source of non-debt finance for the economic development of India. It has been the endeavour of the government to put in place an enabling and investor-friendly FDI policy, the Commerce Ministry said.
The intent all this while has been to make the FDI policy more investor-friendly and remove the policy bottlenecks that have been hindering the investment inflows into the country.
The steps taken in this direction have borne fruit, as is evident from the ever-increasing volumes of FDI inflows being received into the country, it said. Measures taken by the Government on the FDI policy reforms, investment facilitation and ease of doing business have resulted in increased FDI inflows into the country. The following trends in India’s Foreign Direct Investment are an endorsement of its status as a preferred investment destination amongst global investors.
(i) What effect will the increase in foreign direct investment will have on the economy?
(a) Increase in the Forex Reserve
(b) Increase in the supply of Foreign Currency
(c) Decrease in the Exchange Rate
(d) All of the above
Answer :- (i) (d)
(ii) Why does the country foster a higher Foreign Direct investment?
(a) FDI is a major driver of Economic Growth
(b) FDI helps in getting better foreign exchange returns
(c) FDI helps the government to control foreign exchange rate
(d) All of the above
Answer :- (ii) (a)
(iii) There has been an increase in the FDI. How has the government helped it?
(a) FDI policy reforms
(b) Ease of doing business
(c) Both (a) and (b)
(d) Neither (a) nor (b)
Answer :- (iii) (c)
Measures taken by the Government on the FDI policy reforms, investment facilitation and ease of doing business have resulted in increased FDI inflows into the country.
(iv) When the FDI increases, the of foreign currency increases.
(a) Demand
(b) Supply
(c) Either (a) or (b)
(d) Neither (a) nor (b)
Answer :- (iv) (b)
because , It leads to inflow of foreign currency.