Sample Paper 2014-15 & 15-16 & 16-17
(Q1) Name of the market exchange rate system in which the Central Bank can actively intervene. (1 mark)
Ans: Managed floating exchange rate.
(Q2) In India, exchange rate of Rs. in terms of US doller has fallen considerably. What is the likely impact on Indian export and why ? (3 marks)
Ans: Increase Export
(Q3) What is the role of central bank in the following exchange rate
(a) Fixed exchage rate
(b) Floating exchange
(c) Managed floating
Ans: The role of the Central Bank in maintaining the foreign exchange rates under different regimes is:
(a) Fixed exchange rate system : A Central Bank actively uses its foreign currency reserves to maintain the officially determined exchange rate.
(b)Floating exchange rate system: A Central Bank does not maintain any reserves of foreign currency as the market automatically adjusts to determine the market driven exchange rate.
(c) Managed Floating: A Central Bank enters the foreign exchange market to buy/sell foreign currency in order to control fluctuations and volatility in the market.
(Q4) ‘Devaluation and Depreciation of currency are one and the same thing’. Do you agree ?How do they affect the exports of a country ? (3M)
Ans: Devaluation is the fall in the value of domestic currency in relation to foreign currency as planned by the government in a situation when exchange rate is not determined by the forces of demand & supply but is fixed by the government of different countries whereas Depreciation is the fall in the value of domestic currency in relation to foreign currency in a situation when exchange rate is determined by the forces of demand & supply in the international money market. As a general phenomena, any depreciation/devaluation of currency may result into increase in exports of the goods and services from the country since it would increase the global competiveness of the goods. (1m)
(Q5) If an economy is to control recession like most of the Euro-Zone nations, which of the following can be appropriate: (1M)
(i) Reducing Repo Rate
(iii) Both (i) and (ii)
(ii) Reducing CRR
(iv) None of (i) and (ii)
CBSE paper 2013
(Q1) How can Reserve Bank of India help in bringing down the foreign exchange rate which is very high ? (1 M)
Ans: It can increase the supply of foreign exchange by selling foreign exchange from its reserves.
(Q2) Explain the effect of depreciation of domestic currency on exports. (3 M)
Ans: Depreciation of domestic currency means higher price of foreign currency in terms of domestic currency. This reduces the price of domestic goods for foreign buyers. This means exports become cheaper. As a result the demand for exports may rise.
(Q3) Explain the effect of appreciation of domestic currency on imports. (3 M)
Ans: Appreciation of domestic currency means fall in exchange rate, i.e. price of foreign currency. It means that the importers have now to pay less domestic currency to buy one unit worth of foreign currency goods from abroad. Imports become cheaper. This raises demand for imports.
(Q4) How is exchange rate determined in the foreign exchange market ? (3 M)
Ans: It is determined by the forces of demand and supply of foreign exchange. The price and demand for foreign exchange are inversely related and supply and price of foreign exchange are directly related. The price at which demand and supply are equal is the price determined by the market. (Diagram not necessary)
(Q5) How can increase in foreign direct investment affect the price of foreign exchange ?
Ans: Foreign direct investment raises the supply of foreign exchange leading to downward influence on the price of foreign exchange.
(Q6) The country needs a huge amount on imports for development programme .Name one step which the central bank can take tomake import cheaper ?
Ans: Sells Foreign exchange , resulting in fall in FER and hence currency appreciation . This will make imports cheaper
CBSE paper 2014
(Q1) Define foreign exchange rate. (1 mark )
Ans: The price of one currency in terms of the other is called foreign exchange rate.
(Q2) What is ‘floating exchange rate’. (1 Mark)
Ans: Floating exchange rate is the exchange rate determined by the market forces of supply and demand of foreign exchange.
(Q3) Foreign exchange rate in India is on the rise recently. What impact is it likely to have on exports and how ? (3 marks)
(Q4) Foreign exchange rate in India is on the rise recently. What impact is it likely to have on imports and how ? (3 marks)
Ans: When foreign exchange rate rises, it makes the country’s imports costly .The importers have to pay a higher price in terms of domestic currency for the goods and services imported. This may reduce demand for imports.
(Q5) Explain the effect of appreciation of domestic currency on exports. (3 marks)
(Q6) Recently GOI has doubled the import duty on Gold . What impact is it likely to have on foreign exchange rate and how ?
Ans: This will make gold costly and hence demand for import of gold will decrease and thus demand for foreign exchange will also decrease . Since supply of foreign exchange remaining uncanged , price / rate of foreign exchange is likely to fall
(Q7) Government takes measure to restrict autionomous imports of gold . Explain the economic values desired to be achieved from this .
Ans: Reduces foreign exchange demand and hence foreign exchange payment . BOP deficit will decline
(Q8) The Central Bank takes steps to control rise in the price of foreign exchange . Explain the economic value it involves as far as the common man is concerned
Ans: This will make import cheaper . The economic value is that common man now has to pay less for goods and services imported.
(Q9) How does giving incentives for export influence foreign exchange rate ? Explain
Ans: Incentives for exports are aimed at increasing exports. Increase in exports will bring more foreign exchange into the country .Demand for foreign exchange remaining unchanged,Exchange rate is likely to fall.
(Q1) Other things remaining the same, when in a country the market price of foreign currency falls, national income is likely : (1 M)
(a) to rise
(b) to fall
(c) to rise or to fall
(d) to remain unaffected
(Q2) Other things remaining the same, when in a country the market price of foreign currency rises , national income is likely : (1 M)
(a) to rise
(b) to fall
(c) to rise or to fall
(d) to remain unaffected
Ans: 1 (b) , 2(b)
(Q3) What are fixed and flexible exchange rates ? (3 M)
Ans: Fixed Exchange Rate is the exchange rate fixed by the government / central bank and is not influenced by the demand and supply of foreign exchange. (11/2M)
Flexible exchange rate is the exchange rate determined by the forces of demand and supply of foreign exchange in the market and is influenced by the market forces. (11/2M)
(Q4) Explain the meaning of Managed Floating Exchange Rate.
Ans: It is the flexible exchange rate with intervention by the central bank through the market for foreign exchange to reduce fluctuations in the rate. When foreign exchange rate is too high, the central bank starts selling the foreign currency from its reserves. When it is too low central bank starts buying foreign currency in the market.
(Q5) Describe any three sources of demand for foreign exchange. or (3)
(a) For imports
(b) For investment in other countries.
(c) For Foreign travel etc . (any other relevant source)
(Q1) What is meant by depreciation of domestic currency ? (1M)
Ans: When in the foreign exchange market the price of foreign currency rises in terms of domestic currency, it is depreciation of domestic currency.
(Q2) Why does the demand for foreign currency fall and supply rises when its price rises ?
(Q3) Explain the distinction between the flexible exchange rate and the managed floating exchange rate.
(Q4) Explain three sources of demand for foreign exchange and three sources of supply of foreign exchange.
Ans: Sources of demand for foreign exchange
(2) Interest payments on loans from abroad
(3) Investment abroad
Explanation : These are sources of demand because these lead to outflow of foreign exchange.
Sources of supply of foreign exchange
(2) Interest received on loans to abroad
(3) Investments from abroad
(4) Any other (Any three)
Explanation : These are sources of supply because these lead to inflow of foreign exchange.
(Q1) Discuss briefly the meanings of : (6M)
(i) Fixed Exchange Rate
(ii) Flexible Exchange Rate
(iii) Managed Floating Exchange Rate
Fixed Exchange Rate: is the exchange rate determined by the government for conversion of domestic currency into foreign currency. (2)
Flexible Exchange Rate:is the rate of exchange which is determined by the market forces of demand and supply in the foreign exchange market. (2)
Managed Floating Exchange Rate: Floating rate influenced by buying and selling foreign exchange by the central bank in the foreign exchange market. (2)
(Q2) Explain the impact of rise in exchange rate on national income. (3M)
Previous C.B.S.E & N.C.E.R.T QUESTION ’S
(Q1) Define rate of exchange ? How is the foreign exchange rate determined ? Use diagram ?
(Q2) Name two ways of expressing the foreign exchange rate.
(Q3) (a) If $ 9 are needed to buy Rs 2, what is the exchange rate for USA dollar ?
(b) Ten US dollars are exchanged for five hundred rupees. What is the exchange rate for Indian currency .
(Q4) Give three reason why people desire to hold foreign exchange.
(Q5) What is meant by foreign exchange rate ? Why does a rise in foreign exchange rate causes a rise in its supply ?
(Q6) What is meant by foreign exchange rate ? Why does demand for foreign exchange rise when its price falls.
(Q7) Explain relationship between foreign exchange rate and demand for foreign exchange ?
(Q8) The price of 1 US Dollar has fallen from Rs 50 to Rs 48. Has the Indian currency appreciated or depreciated? (1M)
(Q9) Giving two examples, explain why there is a rise in demand for a foreign currency when its price falls.
(Q10) What is foreign exchange ? (1 mark)
(Q11) When price of a foreign currency falls, the demand for that foreign currency rises. Explain, why. (3 marks)
(Q12) When price of a foreign currency falls, the supply of that foreign currency also falls. Explain, why. (3 marks)
(Q13) What is a fixed exchange rate ? (1 mark)
(Q14) Give the meaning of ‘foreign exchange’ and ‘foreign exchange rate’. Giving reason, explain the relation between foreign exchange rate and demand for foreign exchange.(6M)
(Q15) State any two factors that explain contraction of supply of a foreign currency when its price in terms of the domestic currency falls.
(i) When foreign currency (say US $) becomes cheaper (that is currency appreciation) , less domestic currency is to be paid for one unit of dollar . Accordingly, exports become expensive . This decreases export & hence supply of foreign currency.
(ii) Accordingly, foreigners are less inclined to make FDI (Foreign Direct Investment). This reduces the supply of foreign currency.