Short Answer Questions (with Solutions) - Open Economy Macroeconomics | Economics Class 12 - Commerce PDF Download

VERY SHORT ANSWER QUESTIONS.

1. Define foreign exchange rate.
   
   Ans:  Foreign exchange rate is the rate at which currency of one country can be exchanged for currency of another country.
    
2. What do you mean by Foreign Exchange Market?
   
   Ans:  The foreign exchange market is the market where international currencies are traded for one another.
    
3. What is meant by Fixed Exchange Rate?
   
    Ans:  Fixed Rate of exchange is a rate that is fixed and determined by the government of a country and only the government can change it.
    
4. What is equilibrium rate of exchange?
   
    Ans:  Equilibrium exchange rate occurs when supply of and demand for foreign exchange are equal to each other.
    
5. Define flexible exchange rate.
   
   Ans: Flexible rate of exchange is that rate which is determined by the demand and supply of different currencies in the foreign exchange market.
    
6. What is meant by appreciation of currencies?
   
    Ans:  Appreciation of a currency occurs when its exchange value in relation to currencies of other country increases.
    
7. What is meant by balance of payments?
   
    Ans:  Balance of payments refers to the statement of accounts recording all economic transactions of a given country with the rest of the world.
   
    
8. What do you mean by balance of trade?
   
    Ans:  Balance of trade is the difference between the value of imports and exports of only physical goods.
    
9. The balance of trade shows a deficit of Rs. 600 crores, the value of exports is Rs.1000 crores.  What is value of Imports?
   
    Ans:  Balance of Trade = Exports of goods – import of goods
   Import of good = Export of goods – (B.O.T)
   = 1000- (-600)
   = Rs. 1600.
    
10. What is the balance of visible items in the balance of payments account called?
    
     Ans:- Balance of trade
     
11. What do you mean by disequilibrium in BOP?
    
     Ans:- Disequilibrium in BOP is means either there is a surplus or deficit in balance of payment account.
    
     
12. List two items of the capital account of BOP account.
    
    Ans:- i) external assistance           
    ii) commercial borrowing       
    iii) foreign investment
     
13. Which transactions bring balance in the BOP account?
    
     Ans:- Accommodating transactions bring balance in the BOP account.
     
14. Define autonomous items in BOP.
    
     Ans:- Autonomous items in BOP refers to international economic transaction that take place due to some economic motive such as profit maximization. These items are independent of the state of the country balance of payments.
     
15. What is the other name of autonomous items in the BOP?
    
     Ans:- The other name of autonomous items in BOP is above the line item.
    
     
16. When does a situation of deficit in BOP arises?
    
     Ans:- A situation of deficit in BOP arise when autonomous receipts are less than autonomous payments.
    
     
17. What is meant by managed floating?
    
     Ans:- It is a system that allows adjustments in exchange rate according to a set of rules and regulations which are officially declared in the foreign exchange market.

ANSWER QUESTIONS (3 / 4 MARKS)

1. Why is foreign exchange demanded?
   
    Ans:- Foreign exchange is demanded for the following purposes.
   a) Payment of International loans
   b) Gifts and grants to rest of the world
   c) Investment in rest of the world.
   d) Direct purchases abroad for goods and services as well as imports from rest of the world.
   
    
2. What determines the flow of foreign exchange in to the country?
   
    Ans: - Following factors contribute to the flow of foreign exchange in to the country.
   a) Purchases of domestic goods by the foreigners
   b) Direct foreign investment and portfolio investment in the home country.
   c) Speculative purchase of foreign exchange.
   d) When foreign tourists come to India.
   
    
3. Why does the demand for foreign exchange rise, when it price falls?
   
    Ans:- With a fall in price of foreign exchange, the exchange value of domestic currency increases and that of foreign currency falls. This implies that foreign goods become cheaper and their domestic demand increases. The rising domestic demand for foreign goods implies higher demand for foreign exchange. So there is inverse relationship between price and demand for foreign exchange.
   
    
4. When price of a foreign currency falls, the supply of that foreign currency also fall why?
   
    Ans:  When price of a foreign currency falls it makes exports, investment by foreign residents costlier as a result supply of foreign currency falls.
   
    
5. Distinguish between autonomous and accommodating transaction of balance of payment account.
   
    Ans:  Autonomous transactions are done for some economic consideration such as profit, such transactions are independent of the state of B.O.P. Accommodating transactions are under taken to cover the deficit/surplus in balance of payments.
   
    
6. Give two examples explain why there is a rise in demand for a foreign currency when its price falls.
   
   Ans: When price of foreign currency falls, imports are cheaper.  So, more demand for foreign exchange by importers.
   Tourism abroad is promoted as it becomes cheaper.  So demand for foreign currency rises.
    
7. Distinguish between fixed and flexible foreign exchange rate.
   
    Ans:  When foreign exchange rate is fixed by Central Bank/government, it is called fixed exchange rate. When foreign exchange rate is determined by market forces/mechanism, it is flexible exchange rate.