Economics: CUET Mock Test - 4
40 Questions MCQ Test CUET Mock Test Series | Economics: CUET Mock Test - 4
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There are majorly two types of exchange rate systems. Fixed exchange rate system is governed by the central bank while flexible exchange rate system by the market forces.
Generally, the value of currency of a country is expressed in terms of ________
Under fixed exchange rate, the most used currency for pegging was US Dollar.
Increase in the value of foreign commodities in term of domestic currency as planned by the government refers to
When the value of foreign goods increases, this indicates decrease in the value of domestic currency. As this situation is planned by the government so, it will be referred to as devaluation.
The curve depicting the supply of foreign exchange i s ________ sloped.
Foreign exchange rate and supply of foreign exchange are directly related; thus, the supply curve slopes upward.
Demand for foreign exchange is directly related to the price of foreign exchange.
Demand for foreign exchange is inversely related to the price of foreign exchange.
Devaluation and depreciation of currency are one or the same thing.
Both devaluation and depreciation means decrease in the value of domestic currency however, devaluation is a component of fixed exchange rate system while depreciation is component of floating exchange rate system.
The market where foreign currencies are traded is known as
Foreign exchange market is the place where foreign currencies are traded for each other based upon the demand and supply.
Indian government initiated many schemes to attract foreign investment, which of the following statement is correct from below
Due to increase in investment from foreign country, supply of foreign exchange will increase. So, supply curve will shift to the right,
Due to appreciation of domestic currency, supply curve of foreign exchange will
Appreciation of domestic currency will have no impact on the supply curve of foreign exchange. Though it will lead to increase in imports.
Flexible exchange rate is determined by the supply and demand of foreign exchange in the international market.
Flexible or floating exchange rate system is a market-based system where, price of foreign currency is determined at the foreign exchange market.
Appreciation of foreign currency leads to increase in exports from the domestic country.
Appreciation of foreign currency is tied with depreciation of domestic currency. Depreciation makes domestic goods cheaper in international market leading to rise in exports from domestic market.
Occasional intervention by central bank to influence price of foreign exchange is known as .............
Intervention of central bank to keep the exchange rate in a band is known as managed floating or dirty floating exchange rate.
Both devaluation and depreciation of domestic currency makes domestic goods cheaper in international market, leading to increase in exports from domestic country.
The form of exchange market in which delivery of currency happens on the same day is known as
In spot market, exchange of currency happens on the spot i.e., buying of currency and delivery happens on the same day.
Assertion (A): Make in India campaign initiated by the government leads to rise in foreign exchange rate.
Resason (R): Inflow of foreign exchange improves the trade deficit of the country.
Alternatives
Make in India Campaign leads to inflow of foreign currency. With inflow of foreign currency, supply of foreign exchange increases which further leads to fall in exchange rate.
Assertion (A): Manage floating exchange rate system is a hybrid system of exchange rate used by the most of the countries in recent time.
Reason (R): Excessive fluctuation in exchange rate system is checked by the central authority under dirty floating exchange rate.
Alternatives
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.
Directions: Read the following case study and answer the questions.
Indian’s exchange rate policy has evolved in line with international and domestic developments. Post-independence, in view of the prevailing Bretton Woods system, the Indian rupee was pegged to the Pound sterling. With the breakdown of the Bretton Woods system, and also the declining share of UK in India’s trade, the rupee was delinked from the Pound sterling in September, 1975. During the period between 1975 to 1992, the exchange rate was officially determined by the RBI within nominal band of plus or minus 5 percent of the weighted basket of currencies of India’s major trading partners. This exchange rate was referred to as ‘adjustable nominal peg with a band’.
Q. Post-independence, the exchange rate was determined under
Fixed exchange rate system is the one in which, price of foreign exchange or currency is fixed by the government authority, RBI in India.
Directions: Read the following case study and answer the questions.
Indian’s exchange rate policy has evolved in line with international and domestic developments. Post-independence, in view of the prevailing Bretton Woods system, the Indian rupee was pegged to the Pound sterling. With the breakdown of the Bretton Woods system, and also the declining share of UK in India’s trade, the rupee was delinked from the Pound sterling in September, 1975. During the period between 1975 to 1992, the exchange rate was officially determined by the RBI within nominal band of plus or minus 5 percent of the weighted basket of currencies of India’s major trading partners. This exchange rate was referred to as ‘adjustable nominal peg with a band’.
Q. Immediately after independence, Indian rupee was pegged to the ______
Balance of trade is the difference between value of export of goods and import of goods only. As it is not clear from given case study that whether export of goods is increasing or decreasing, thus, the actual impact can’t be predicted.
Directions: Read the following case study and answer the questions.
Indian’s exchange rate policy has evolved in line with international and domestic developments. Post-independence, in view of the prevailing Bretton Woods system, the Indian rupee was pegged to the Pound sterling. With the breakdown of the Bretton Woods system, and also the declining share of UK in India’s trade, the rupee was delinked from the Pound sterling in September, 1975. During the period between 1975 to 1992, the exchange rate was officially determined by the RBI within nominal band of plus or minus 5 percent of the weighted basket of currencies of India’s major trading partners. This exchange rate was referred to as ‘adjustable nominal peg with a band’.
Q. The rupee was delinked from Pound sterling in 1975 because
It was due to the collapse of Bretton woods system and decline in the trade with Britain, India opted out of Pound sterling to fix its currency.
Directions: Read the following case study and answer the questions.
Indian’s exchange rate policy has evolved in line with international and domestic developments. Post-independence, in view of the prevailing Bretton Woods system, the Indian rupee was pegged to the Pound sterling. With the breakdown of the Bretton Woods system, and also the declining share of UK in India’s trade, the rupee was delinked from the Pound sterling in September, 1975. During the period between 1975 to 1992, the exchange rate was officially determined by the RBI within nominal band of plus or minus 5 percent of the weighted basket of currencies of India’s major trading partners. This exchange rate was referred to as ‘adjustable nominal peg with a band’.
Q. Indian currency was delinked from pound sterling on
Till 1975, India continued pegging its currency against pound sterling, post that Indian currency was pegged against US dollar.
Directions: Read the following case study and answer the questions 51 to 55.
In the Indian context, the RBI Act and the Foreign Exchange Management Act, 1999 set the legal provisions for governing the foreign exchange reserves. RBI acts as the chief monetary authority and the custodian of foreign exchange assets. RBI accumulates foreign currency reserves by purchasing from authorised dealers in the open market operations. The type of instruments in which RBI can invest is stipulated in the RBI Act. The aid received by the government also becomes a part of the reserves.
The Asian crisis tells us how countries suffer due to ill management of the foreign exchange reserves. Many countries foresaw
the vulnerability to the external shocks and accumulated heavy foreign exchange reserves. Countries want to keep their exports competitive. Hence, they prefer to depreciate their currencies against dollars. In recent days, there has been a continuous appreciation of rupee vis-a-vis dollar. To avoid the appreciation of rupee, RBI has been continuously interfering in the money market. RBI is buying dollars from the market. The dollars that are being bought add to the foreign exchange kitty.
Unlike, in the past, the NRI community is more dispersed now, not just confining to the Gulf. Due to software boom, Indians are heading towards new destinations. NRIs are doing well there and ploughing back their savings to India. Moreover, foreign institutional investors are also making huge investments into Indian stocks.
The emergence of India as an offshore outsourcing hub has created new opportunities. There are huge dollar earnings for India. Further, India is also proving to be a worthy manufacturing hub for many companies. All these factors played a positive role in building up of huge foreign exchange reserves.
Q. During the economic crisis of 1990s, India opted for which of the following foreign exchange measure?
As a part of new economic reform, India opted for above mentioned policies in the foreign exchange market to improve its condition.
When supply of foreign exchange increase it leads to inflow of foreign currency and recorded on credit side of BoP. Further, it leads to fall in exchange rate and improvement in BoT.
Current account records all payments to rest of the world as ______ and all receipts from rest of the world as _____
Any outflow of foreign currency is recorded on the debit side of current account while any inflow of foreign currency is recorded on the credit side of current account.
If value of visible exports is greater than the value of invisible imports, the balance relates to
In this case, we cannot determine the value of surplus or deficit as the export of visibles and import of invisibles cannot be compared.
If trade deficit is ₹ 1,500 crores and import of goods are ₹ 3,500 crores, value of export of goods will be ₹ 2,000 crores.
Trade deficit = Value of import of goods - Value of export of goods
1,500 = 3,500 - Value of export of goods
∴ Value of export of goods = 3,500 -1,500
= ₹ 2,000
If value of exports is ₹ 5,000 crores and import of ₹ 3,050 crores, balance of trade shows
Balance of trade is the difference between value of exports minus value of imports. In the given case, as exports exceeds imports there is a surplus amounting to ₹ 1,950 crores (5,000-3,050).
Which of the following is not a component of current account of BoP?
Current account of BoP records all such transactions which have no impact on either assets or liabilities of the county. All of the items are such which do not impact the assets or liabilities.
If trade deficit shows a balance of ₹ (-) 1,500 crores and export of goods is ₹ 5,500 crores, value of import of goods will be
Trade Balance = Export of Goods - Import of Goods
(-) ₹ 1,500 crores = ₹ 5,500 crores - Import of Goods
Import of Goods = ₹ 7,000 crores
A deficit in _______ can be covered by a surplus in _______ , while the reverse cannot be done.
As BoT is only a component of BoP, thus a deficit in BoT can be covered by a surplus in BoP but the reverse cannot be done.
Increase in domestic interest rate on investment leads to surplus in capital account.
When domestic interest rate increase, foreign investors invest in the domestic country leading to inflow of foreign exchange and surplus in current account of BoP.
Which of the following is/are component (s) of capital account of BoP?
Capital account of BoP records all such transactions which impact either assets or liabilities of the country. All of the given components have either an impact on assets or liabilities of the country.
For equilibrium in balance of payments, sum total of _______ account and ________ account should be zero.
BoP is said to be in equilibrium when the balance on current account becomes equal to balance on capital account.
Autonomous items are known as “below the line items.”
Autonomous transactions are known as above the line items as they are undertaken with the motive of profit earning.
How is the state of balance of payments affects, when government is directly involved in foreign trade?
Direct involvement of government doesn’t ensure improvement or deterioration in BoP.
It depends upon the type of transaction government is doing, i.e., exports or imports.
Currency depreciation leads to improvement on balance of trade.
Depreciation of domestic currency leads to increase in exports. This has a positive impact on the BoT account.
At the state of equilibrium in balance of payments, there will be deficit in either of the accounts. Deficit in which account will be considered as better?
A deficit in capital account of BoP is considered as better as it might lead to formation of assets or reduction of liabilities.
Which of the following types of deficit is/are common in case of India?
Current account deficit is very common in India as India’s imports exceeds its exports of goods and services.
Autonomous transactions/items of balance of payments are recorded in
Autonomous transactions are done with the profit motive regardless of the state of BoP. Thus recorded in both current and capital accounts of BoP.
Favourable dis-equilibrium means surplus in BoP. In this situation, amount equal to the amount of surplus is invested abroad to bring BoP in equilibrium, leading to fall in foreign exchange reserves with RBI.
Assertion (A): Balance of Payments is the accounting record of economic transactions only.
Reason (R): Surplus balance of payments is an indicator of excess of outflows over inflows of foreign trade.
Alternatives
Balance of payments includes all transactions between home country and rest of the world while more of outflow in BoP indicates deficit in BoP.
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