Economics: CUET Mock Test - 3

Foreign exchange refers to the stock of foreign currencies required to trade between countries.

Gold standard start to loose its importance during 1920s, post the world war and rising prices of gold around the globe.

There are very few countries in the world which still follows fixed exchange rate system including Fiji, Kuwait, Morocco, and Libya,

Foreign exchange rate is the rate at which one unit of foreign currency is exchanged for some units of domestic currency.

Devaluation refers to the decrease in the value of domestic currency as planned by the government under fixed exchange rate.

ise in exchange rate leads to depreciation of domestic currency. Depreciation of currency encourages exports and inflow of foreign exchange. This process is likely to have a positive impact on the national income of the country.

Before the Bretton Woods standard, gold standard was followed. Under that system of exchange, rates were fixed or tied against US Dollar.

This is a deliberate step taken by the government to rise the value of domestic currency. This is known a revaluation of domestic currency against foreign currency.

The fixed exchange rate is determined by the government of the country.

When the value of domestic commodity increases, it indicates increase in the value of domestic currency. This situation could either be appreciation or revaluation depending upon the type of exchange rate.

Demand for foreign exchange and foreign exchange rate is indirect or inverse i.e., when foreign exchange rate increase, its demand falls.

A downward movement along demand curve is caused by fall in exchange rate, which represents appreciation of domestic currency.

Price of US Dollar rose from ₹ 63 per unit to ₹ 75 per unit, this shows that the value of domestic currency has fallen over the time period due to market forces. This is known as depreciation of domestic currency.

Rising in the value of domestic currency in the foreign exchange market is known as currency appreciation,

Under managed floating exchange rate system, market forces determine the exchange rate and excessive fluctuation is checked by the central bank.

As less units of domestic currency are required to exchange one unit of foreign currency, this situation refers to appreciation of domestic currency.

Floating exchange rate is determined by the market forces of demand and supply. Like a general price determination, exchange rate is determined at a point where demand and supply are equal.

There are many reasons that can be accounted for depreciation of Indian currency against UD Dollar, few of such reasons are listed in options.

Demand for foreign exchange and exchange rate are inversely proportional, i.e., with increase in one other fall and vice-versa.

Under managed floating exchange rate, price is determined by the market forces however, excessive fluctuation is checked by the central bank. Thus, this system has components of both fixed and floating exchange rate system and known as dirty floating exchange rate.

Accommodating transactions are undertaken for balancing the BoP, thus these are only recorded in capital account of BoP.

Invisible items are the services. Balance on invisible items is calculated as the difference between exports and imports of services.

Balance of trade only includes export and import of goods while balance of payments includes all international concepts. So, BoT is a narrower concept as compared to BoP.

Trade deficit and balance of trade deficit are one or the same thing, it is the situation where import of goods exceeds the export of goods during a given period of time.

Uni lateral transfers are one way transactions which have no impact on the assets or liabilities of the country, thus recorded in the current account of BoP.

The given are the examples of export of services, thus considered as invisible trade and recorded in current account of BoP.

Export of goods leads to inflow of foreign exchange while import leads to outflow. In the given situation, as the inflows are greater than outflow, it leads to surplus in BoT.

Foreign exchange reserves are considered as an asset for the economy and increase in assets are always debited as per accounting rule. So, increase in foreign exchange reserve will be recorded on debit side of capital account.

As the rent is received, so, it is an inflow of currency and considered as a credit item. Also, rent does not impact the assets or liabilities of the country thus, it is recorded in current account of BoP.

Surplus is the situation of excess of receipts over expenditures. In BoP, it happens when the balance of credit side exceeds the balance of debit side.

Accommodating transactions are only undertaken when there is a deficit in BoP. Thus, these are known as below the line items.

State of BoP need not always balances as different account of BoP (Current account and Capital account) might have different balance.

Accommodating transactions are balancing transactions, so, when these are included, BoP always balances.

Surplus in BoP is a state where receipts on account of autonomous items exceeds over autonomous payment as these are independent of BoP.

A tariff is a tax on import, which makes imports expensive in the domestic market.
The rise in tariff keeping exports unchanged, will likely to have a positive impact on BoT.

In order to attain equilibrium in BoP, there will be deficit in one account and surplus in the other of equivalent amount.

The given is an example of uni lateral transfers received. So, it will be recorded on the credit side of current account of BoP.

The given programme attracts foreign investment in India, this will lead to inflow of foreign currency, hence improving the state of BoP for the country.

Accommodating transactions are balancing transactions of BoP, so these are called as below the line items.

Purchase of machinery will be recorded in current account of BoP as it is considered as an import of goods. Whereas transaction that has an impact on the assets or liabilities of the country is recorded in capital account of BoP.