Scanner Chapter 13 - Foreign Exchange Rate (Macro Economics) | Economics Class 12 - Commerce PDF Download

C.B.S.E QUESTIONS

(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) List three sources each of demand and supply of foreign exchange

(3M) (S.P)

(Q9) Give two reasons for a rise in demand for a foreign currency when its price falls.

(4M)

(Q10) State any two merits and demerits of flexible exchange rate system.

(4M) (S.P)

(Q11) What is fixed exchange rate system?

(1M) (‘08)

(Q12) When exchange rate of foreign currency falls, its demand rises? Explain how.

(3M) ( ‘08)

(Q13) Explain two merits each of flexible foreign exchange rate and fixed foreign exchange
rate.

(4M)

(Q14) How is foreign exchange rate determined in the market.

(4M)( ‘09)

SAMPLE PAPER + C.B.S.E 2010

(Q1) State two sources of demand for foreign exchange

(1M)

(Q2) What is meant by foreign exchange rate?

(1M)

(Q3) State two sources of supply of foreign currency.

(1M)

(Q4) The price of 1 US Dollar has fallen from Rs 50 to Rs 48. Has the Indian currency appreciated or depreciated?

(1M)

(Q5)Giving two examples, explain why there is a rise in demand for a foreign currency when its price falls.

(3M)

(Q6) Distinguish between fixed and flexible foreign exchange rate.

(3M)

(Q7) Explain the effect of depreciation of domestic currency on exports.

(3 M)

(Q8) Explain the effect of appreciation of domestic currency on imports.

(3 M)

C.B.S.E PAPER 2011 & 2012

(Q1) What is foreign exchange ?

(1 mark)

(Q2) When price of a foreign currency falls, the demand for that foreign currency rises. Explain,
why.

(3 marks)

OR

When price of a foreign currency falls, the supply of that foreign currency also falls. Explain, why.

(3 marks)

(Q3) What is a fixed exchange rate ?

(1 mark)

(Q4) Give the meaning of ‘foreign exchange’ and ‘foreign exchange rate’. Giving reason,
explain the relation between foreign exchange rate and demand for foreign exchange.

(6 marks)

C.B.S.E PAPER 2013

(Q1) How can Reserve Bank of India help in bringing down the foreign exchange rate which is very high ?

(1 M)

(Q2) Explain the effect of depreciation of domestic currency on exports.

(3 M)

(Q3) How is exchange rate determined in the foreign exchange market ?

(3 M)

(Q4) 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

C. B. S. E PAPER 2014

(Q1) Define foreign exchange rate. 

(1 mark )

(Q2) What is ‘managed floating exchange rate’.

(1 Mark)

(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)

(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 : Exchange rate is likely to fall

SAMPLE PAPER

(Q1) Name of the market exchange rate system in which the Central Bank can actively
intervene.

(1 mark)

Ans. Managed floating exchange rate.

(Q2) Explain the effect of appreciation of domestic currency on exports.

(3 marks)

OR

Explain the effects of appreciation of domestic currency on imports.

(Q3) 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

(Q4) 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.

CBSE 2015

(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

(Q3) What are fixed and flexible exchange rates ? ‘

or

Explain the meaning of Managed Floating Exchange Rate.

(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.

(1^1/2M)

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.

(1^1/2M)

Managed floating exchange rate 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.

(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 :: 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.

EXTRA QUESTIONS

(Q1) If the demand of US dollars in India increases but supply of US dollars remains constant,
what will be the effect on exchange rate for USA dollars ?

(Q2) Would the central need to intervene in a managed floating system ? Explain

(Q3) Is improvement in exchange rate always beneficial ?

(Q4) We are importing too much from China. Is it good for our economy ? Explain.
Ans. No

(Q5) If India’s currency is appreciated, then what will be its impact on exports of the country ?
Ans. exports will fall.

(Q6) The market price of US Dollar has increased considerably leading to rise in prices of the imports of essential goods. What can Central Bank do to ease the situation ?

Ans. The Central Bank can start selling US Dollars from its ‘reserves’.

(Q7) During the economic reforms of 1991, India devalued its currency. Why does a country devalue its own currency ?
Ans. In 1991, foreign exchange reserves fell to the lowest level and it led to the foreign exchange crisis in the country. Therefore, India devalued its currency in 1991 to increase the inflow of foreign exchange reserve.

(Q8) Do you think that a rise in outsourcing services to India is a good source of supply of foreign currency and employment generation ?

Ans. Yes, led to huge inflow of foreign exchange into the country. Moreover, outsourcing work has also created large number of employment opportunities.

(Q9) Suppose the foreign exchange rate changed from 1$ = Rs. 50 to 1$ = Rs. 60. Do you think
it is necessary that central bank should intervene to control the foreign exchange rate ?

Ans. Yes, to safeguard the interest of the importers. The Central Bank can start selling dollars from its ‘reserves’ to control the foreign exchange rate.

(Q10) An American company has ordered readymade garments from an Indian company. What
will be the impact on their total import expenditure if there is an increase in the FER?

(Q11) Why does demand for foreign exchange arise for speculative activities ?
Ans. Demand for foreign exchange arises when people want to speculate on the value of foreign currency. Speculators demand foreign currency in the present period with the aim of selling it in future at higher prices. For example, Manish purchases 1,000 US$ at Rs. 50 per dollar with the expectation of selling the dollars at higher prices.

(Q12) If inflation is higher in country A than in Country B, and the exchange rate between the two
countries is fixed, what is likely to happen to the trade balance between the two countries ?

Ans. In this situation, the exports from country B to country A will rise and it will lead to surplus trade balance for country B. However, due to higher prices in country A, its imports will increase from country B and it will lead to deficit in trade balance for country A.

(Q13) If US dollar becomes costlier in terms of the Indian rupee, it is good as well as bad for the
domestic growth. How ?

Ans. (i) It is good because purchasing power of US dollar in the Indian market increases. A rise in exports is a key factor in domestic growth.
(ii) It is bad because imports of essential capital goods (critical for growth) become expensive.

(Q14) How does decrease in FDI in india act as a supply shock of forign exchange ?
Ans ::Supply decreases , Exchange rate rises , currency depreciation

(Q15) Will you always appreciate a rise in exchange rate as a means to boost our exports ?
Ans. No , not always. A rise in exchange rate is beneficial only when elasticity of demand for our exports is greater than unity. Because, it is only then the total expenditure on our exports will rise in response to a rise in exchange rate.

(Q16) How would you comment on the statement that increase in interest rate leads to an appreciation of domestic currency ?
Ans. True , interest rate rises -- foreigners will be induced to shift their funds to the domestic economy with a view to making higher interest earnings. leading to its appreciation in relation to the foreign currency.

(Q17) Equilibrium exchange rate in the foreign exchange market is often unfavourable to less developed countries. Why ?
Ans. This is because a less developed country like India depends on developed countries like USA for the import of plant and machinery (and related technology) for its development programmes. This causes a situation of adverse or negative balance of payments for the less developed countries. Accordingly, their forex reserves are low while the need for such reserves (to cope with rising imports) continues to be high. Paying more and more for a dollar in the international market) is Leads to high exchange rate.

(Q18) M/S Reliance Petroleum advises its banker HBSC Bank to remit $ 2 billion dollars to Gulf
Oil Co. Dubai, towards settlement of their bill. How will it affect the exchange value of Indian rupee

(Q19) M/S. Mohan Chand and Sons Pvt. Ltd. receive a bank advice intimating that a sum of $
1 billion has been received from UAE Brothers, Muscat, against imports of books by them. How
will it affect India’s rupee ?

Ans. Supply of dollars will increase. Price of dollars will fall. Rupee will appreciate.