Here are 50 case study-based multiple-choice questions (MCQs) on balance of payments and foreign exchange rates. These questions include practical scenarios and may cover topics from various sources, including CBSE, CUET, UPSC, IB, and IGCSE:
1. Suppose a country experiences a surge in foreign investment due to favorable economic conditions. What is the likely impact on its exchange rate?
a) Exchange rate depreciation
b) Exchange rate appreciation
c) No impact on the exchange rate
d) The exchange rate will become fixed
Answer: b) Exchange rate appreciation
2. A domestic company imports machinery to expand its production capacity. Which account of the Balance of Payments does this transaction belong to?
a) Current account, debit side
b) Current account, credit side
c) Capital account, debit side
d) Capital account, credit side
Answer: a) Current account, debit side
3. If a country experiences a trade deficit, how can it use accommodating items to maintain its Balance of Payments?
a) By reducing government spending
b) By attracting foreign investments
c) By decreasing interest rates
d) By increasing import tariffs
Answer: b) By attracting foreign investments
4. A country’s central bank decides to increase interest rates to attract foreign capital. What effect is this likely to have on the country’s exchange rate?
a) Exchange rate appreciation
b) Exchange rate depreciation
c) No impact on the exchange rate
d) Fixed exchange rate
Answer: a) Exchange rate appreciation
5. Imagine a country experiencing a significant increase in tourism, leading to a higher inflow of foreign currency. Which account of the Balance of Payments is directly affected?
a) Financial account
b) Capital account
c) Current account
d) Official reserve account
Answer: c) Current account
6. In the context of Balance of Payments, how does a country record the purchase of foreign bonds by its citizens?
a) As a debit in the capital account
b) As a credit in the financial account
c) As a debit in the current account
d) As a credit in the capital account
Answer: b) As a credit in the financial account
7. A country decides to impose strict import quotas to reduce its trade deficit. What is the likely impact on its Balance of Payments?
a) Improvement in the current account
b) Deterioration in the current account
c) No impact on the current account
d) Improvement in the capital account
Answer: a) Improvement in the current account
8. A nation experiences a significant decline in its foreign exchange reserves. What action might its central bank take to address this situation?
a) Reduce interest rates
b) Sell foreign currency reserves
c) Increase government spending
d) Attract foreign investments
Answer: b) Sell foreign currency reserves
9. Consider a scenario where a country consistently exports more services than it imports. Which account of the Balance of Payments is directly affected?
a) Capital account
b) Current account
c) Financial account
d) Official reserve account
Answer: b) Current account
10. A country’s government decides to offer tax incentives to attract foreign direct investment (FDI). What impact might this have on its Balance of Payments?
a) Deterioration in the capital account
b) Improvement in the capital account
c) Deterioration in the current account
d) No impact on the Balance of Payments
Answer: b) Improvement in the capital account
11. Suppose a country’s citizens start buying more foreign luxury goods due to an increase in disposable income. How will this affect the Balance of Payments?
a) Improvement in the current account
b) Deterioration in the current account
c) Improvement in the capital account
d) Deterioration in the financial account
Answer: b) Deterioration in the current account
12. A nation decides to implement capital controls, restricting the flow of capital in and out of the country. How might this impact its Balance of Payments?
a) Improvement in the financial account
b) Deterioration in the financial account
c) Improvement in the current account
d) Deterioration in the capital account
Answer: b) Deterioration in the financial account
13. In response to a Balance of Payments deficit, a country decides to increase its exports by offering subsidies to local exporters. What impact might this have on its Balance of Payments?
a) Improvement in the current account
b) Deterioration in the current account
c) Improvement in the financial account
d) Deterioration in the capital account
Answer: a) Improvement in the current account
14. A country experiences a sudden surge in imports of crude oil due to a sharp increase in global oil prices. How will this affect the Balance of Payments?
a) Improvement in the current account
b) Deterioration in the current account
c) Improvement in the financial account
d) Deterioration in the capital account
Answer: b) Deterioration in the current account
15. If a country’s citizens invest in foreign stocks and earn dividends, how is this income recorded in the Balance of Payments?
a) As a debit in the capital account
b) As a credit in the financial account
c) As a debit in the current account
d) As a credit in the capital account
Answer: b) As a credit in the financial account
16. Imagine a country signs a bilateral trade agreement with another nation, leading to increased trade. What impact is this likely to have on the Balance of Payments?
a) Improvement in the current account
b) Deterioration in the current account
c) Improvement in the capital account
d) Deterioration in the financial account
Answer: a) Improvement in the current account
17. A country experiences a significant depreciation of its currency. How might this impact its Balance of Payments?
a) Improvement in the current account
b) Deterioration in the current account
c) Improvement in the financial account
d) Deterioration in the capital account
Answer: a) Improvement in the current account
18. Suppose a country imposes strict capital controls, making it difficult for its citizens to invest abroad. How will this affect the Balance of Payments?
a) Improvement in the financial account
b) Deterioration in the financial account
c) Improvement in the current account
d) Deterioration in the capital account
Answer: a) Improvement in the financial account
19. In response to a Balance of Payments surplus, a country decides to reduce its imports by implementing trade restrictions. What impact might this have on the Balance of Payments?
a) Improvement in the current account
b) Deterioration in the current
account
c) Improvement in the financial account
d) Deterioration in the capital account
Answer: a) Improvement in the current account
20. A country’s central bank decides to lower interest rates to stimulate domestic spending. How might this impact the Balance of Payments?
a) Improvement in the financial account
b) Deterioration in the financial account
c) Improvement in the current account
d) Deterioration in the capital account
Answer: b) Deterioration in the financial account
21. A nation experiences a significant increase in remittances from its citizens working abroad. How will this affect the Balance of Payments?
a) Improvement in the current account
b) Deterioration in the current account
c) Improvement in the capital account
d) Deterioration in the financial account
Answer: a) Improvement in the current account
22. Imagine a country imposes tariffs on a wide range of imported goods to protect domestic industries. What impact is this likely to have on the Balance of Payments?
a) Improvement in the current account
b) Deterioration in the current account
c) Improvement in the capital account
d) Deterioration in the financial account
Answer: b) Deterioration in the current account
23. A country decides to reduce its government budget deficit by cutting public spending. How might this impact the Balance of Payments?
a) Improvement in the financial account
b) Deterioration in the financial account
c) Improvement in the current account
d) Deterioration in the capital account
Answer: c) Improvement in the current account
24. Suppose a country experiences a significant increase in foreign aid and grants. How will this affect the Balance of Payments?
a) Improvement in the current account
b) Deterioration in the current account
c) Improvement in the capital account
d) Deterioration in the financial account
Answer: a) Improvement in the current account
25. A nation’s government decides to increase tariffs on imported luxury cars. What impact might this have on the Balance of Payments?
a) Improvement in the current account
b) Deterioration in the current account
c) Improvement in the capital account
d) Deterioration in the financial account
Answer: a) Improvement in the current account
26. Imagine a country experiencing a sudden surge in foreign direct investment (FDI) in its technology sector. What impact is this likely to have on the Balance of Payments?
a) Improvement in the current account
b) Deterioration in the current account
c) Improvement in the capital account
d) Deterioration in the financial account
Answer: c) Improvement in the capital account
27. A nation’s government decides to reduce income tax rates to encourage domestic consumption. How might this impact the Balance of Payments?
a) Improvement in the financial account
b) Deterioration in the financial account
c) Improvement in the current account
d) Deterioration in the capital account
Answer: b) Deterioration in the financial account
28. Suppose a country experiences a sudden surge in foreign tourists due to a major international event. What impact is this likely to have on the Balance of Payments?
a) Improvement in the current account
b) Deterioration in the current account
c) Improvement in the capital account
d) Deterioration in the financial account
Answer: a) Improvement in the current account
29. A country’s central bank decides to intervene in the foreign exchange market to stabilize its currency’s value. What impact might this have on the Balance of Payments?
a) Improvement in the financial account
b) Deterioration in the financial account
c) Improvement in the current account
d) Deterioration in the capital account
Answer: a) Improvement in the financial account
30. Imagine a country experiencing a significant increase in foreign direct investment (FDI) in its real estate market. What impact is this likely to have on the Balance of Payments?
a) Improvement in the current account
b) Deterioration in the current account
c) Improvement in the capital account
d) Deterioration in the financial account
Answer: c) Improvement in the capital account
31. A nation’s government decides to reduce corporate taxes to attract foreign businesses. How might this impact the Balance of Payments?
a) Improvement in the financial account
b) Deterioration in the financial account
c) Improvement in the current account
d) Deterioration in the capital account
Answer: a) Improvement in the financial account
32. Suppose a country experiences a sudden increase in demand for its agricultural exports due to favorable weather conditions. What impact is this likely to have on the Balance of Payments?
a) Improvement in the current account
b) Deterioration in the current account
c) Improvement in the capital account
d) Deterioration in the financial account
Answer: a) Improvement in the current account
33. A country’s central bank decides to sell its foreign currency reserves to stabilize its currency. What impact might this have on the Balance of Payments?
a) Improvement in the financial account
b) Deterioration in the financial account
c) Improvement in the current account
d) Deterioration in the capital account
Answer: a) Improvement in the financial account
34. Imagine a country experiences a significant increase in foreign portfolio investment in its stock market. What impact is this likely to have on the Balance of Payments?
a) Improvement in the current account
b) Deterioration in the current account
c) Improvement in the capital account
d) Deterioration in the financial account
Answer: c) Improvement in the capital account
35. A nation’s government decides to increase public infrastructure spending to boost economic growth. How might this impact the Balance of Payments?
a) Improvement in the financial account
b) Deterioration in the financial account
c) Improvement in the current account
d) Deterioration in the capital account
Answer: d) Deterioration in the capital account
36. Suppose a country experiences a sudden increase in foreign aid and grants. What impact is this likely to have on the Balance of Payments?
a) Improvement in the current account
b) Deterioration in the current account
c) Improvement in the capital account
d) Deterioration in the financial account
Answer: a) Improvement in the current account
37. A country’s central bank decides to increase interest rates to combat inflation. How might this impact the Balance of Payments?
a) Improvement in the financial account
b) Deterioration in the financial account
c) Improvement in the current account
d
) Deterioration in the capital account
Answer: a) Improvement in the financial account
38. Imagine a country experiences a significant increase in foreign direct investment (FDI) in its energy sector. What impact is this likely to have on the Balance of Payments?
a) Improvement in the current account
b) Deterioration in the current account
c) Improvement in the capital account
d) Deterioration in the financial account
Answer: c) Improvement in the capital account
39. A nation’s government decides to implement strict import controls to protect domestic industries. How might this impact the Balance of Payments?
a) Improvement in the current account
b) Deterioration in the current account
c) Improvement in the capital account
d) Deterioration in the financial account
Answer: c) Improvement in the capital account
40. Suppose a country experiences a significant increase in foreign aid targeted at infrastructure development. What impact is this likely to have on the Balance of Payments?
a) Improvement in the current account
b) Deterioration in the current account
c) Improvement in the capital account
d) Deterioration in the financial account
Answer: c) Improvement in the capital account
41. A country’s central bank decides to decrease interest rates to stimulate domestic investment. How might this impact the Balance of Payments?
a) Improvement in the financial account
b) Deterioration in the financial account
c) Improvement in the current account
d) Deterioration in the capital account
Answer: d) Deterioration in the capital account
42. Imagine a country experiencing a significant increase in foreign portfolio investment in its government bonds. What impact is this likely to have on the Balance of Payments?
a) Improvement in the current account
b) Deterioration in the current account
c) Improvement in the capital account
d) Deterioration in the financial account
Answer: d) Deterioration in the financial account
43. A nation’s government decides to implement strict capital controls, making it difficult for its citizens to invest abroad. How might this impact the Balance of Payments?
a) Improvement in the financial account
b) Deterioration in the financial account
c) Improvement in the current account
d) Deterioration in the capital account
Answer: b) Deterioration in the financial account
44. Suppose a country experiences a sudden increase in foreign direct investment (FDI) in its healthcare sector. What impact is this likely to have on the Balance of Payments?
a) Improvement in the current account
b) Deterioration in the current account
c) Improvement in the capital account
d) Deterioration in the financial account
Answer: c) Improvement in the capital account
45. A country’s central bank decides to sell foreign currency reserves to stabilize its currency. What impact might this have on the Balance of Payments?
a) Improvement in the financial account
b) Deterioration in the financial account
c) Improvement in the current account
d) Deterioration in the capital account
Answer: b) Deterioration in the financial account
46. Imagine a country experiencing a significant increase in foreign tourists due to a major sporting event. What impact is this likely to have on the Balance of Payments?
a) Improvement in the current account
b) Deterioration in the current account
c) Improvement in the capital account
d) Deterioration in the financial account
Answer: a) Improvement in the current account
47. A nation’s government decides to reduce corporate taxes to attract foreign businesses. How might this impact the Balance of Payments?
a) Improvement in the financial account
b) Deterioration in the financial account
c) Improvement in the current account
d) Deterioration in the capital account
Answer: a) Improvement in the financial account
48. Suppose a country experiences a sudden increase in demand for its agricultural exports due to favorable weather conditions. What impact is this likely to have on the Balance of Payments?
a) Improvement in the current account
b) Deterioration in the current account
c) Improvement in the capital account
d) Deterioration in the financial account
Answer: a) Improvement in the current account
49. A country’s central bank decides to intervene in the foreign exchange market to stabilize its currency’s value. What impact might this have on the Balance of Payments?
a) Improvement in the financial account
b) Deterioration in the financial account
c) Improvement in the current account
d) Deterioration in the capital account
Answer: a) Improvement in the financial account
50. Imagine a country experiencing a significant increase in foreign portfolio investment in its technology sector. What impact is this likely to have on the Balance of Payments?
a) Improvement in the current account
b) Deterioration in the current account
c) Improvement in the capital account
d) Deterioration in the financial account
Answer: c) Improvement in the capital account