Here are 50 more multiple-choice questions (MCQs) on the topics of balance of payments and foreign exchange rates for CUET, Class 12, and various exam preparations.
1. What does the Balance of Payments (BoP) measure?
a) Government spending
b) Trade balance
c) Financial transactions with foreign entities
d) Inflation rate
Answer: c) Financial transactions with foreign entities
2. In the Balance of Payments, the current account includes which of the following?
a) Imports and exports of goods and services
b) Financial investments abroad
c) Government grants and subsidies
d) All of the above
Answer: a) Imports and exports of goods and services
3. Which component of the Balance of Payments represents income earned from foreign investments?
a) Current account
b) Capital account
c) Financial account
d) Trade account
Answer: a) Current account
4. The Balance of Payments is always expected to be in:
a) Surplus
b) Deficit
c) Equilibrium
d) None of the above
Answer: c) Equilibrium
5. What is the primary determinant of exchange rates in the foreign exchange market?
a) Central bank policies
b) Inflation rate
c) Supply and demand for currencies
d) Government fiscal policies
Answer: c) Supply and demand for currencies
6. In a fixed exchange rate system, the exchange rate is determined by:
a) Market forces
b) Government intervention
c) International organizations
d) None of the above
Answer: b) Government intervention
7. What is the term for the rate at which the central bank lends money to commercial banks in a country?
a) Inflation rate
b) Exchange rate
c) Discount rate
d) Prime rate
Answer: c) Discount rate
8. A country with a trade surplus will likely experience:
a) Appreciation of its currency
b) Depreciation of its currency
c) No change in its currency value
d) Exchange rate stability
Answer: a) Appreciation of its currency
9. In the context of foreign exchange rates, what does the term “pegging” refer to?
a) Tying a currency’s value to another currency or asset
b) Rapid fluctuation of currency values
c) A currency’s conversion rate
d) A currency’s appreciation
Answer: a) Tying a currency’s value to another currency or asset
10. The system where a country’s currency is fully convertible into gold is known as:
a) Fixed exchange rate system
b) Gold standard
c) Flexible exchange rate system
d) Managed exchange rate system
Answer: b) Gold standard
11. Which organization is responsible for maintaining exchange rate stability among its member countries?
a) World Bank
b) International Monetary Fund (IMF)
c) World Trade Organization (WTO)
d) United Nations (UN)
Answer: b) International Monetary Fund (IMF)
12. In a floating exchange rate system, the exchange rate is primarily determined by:
a) Government intervention
b) Market forces of supply and demand
c) International treaties
d) Central bank policies
Answer: b) Market forces of supply and demand
13. A country with a trade deficit is likely to experience:
a) Appreciation of its currency
b) Depreciation of its currency
c) No change in its currency value
d) An increase in foreign reserves
Answer: b) Depreciation of its currency
14. What is the primary purpose of the International Monetary Fund (IMF)?
a) Promoting international trade
b) Providing loans to developing countries
c) Regulating global financial markets
d) Stabilizing exchange rates and international monetary cooperation
Answer: d) Stabilizing exchange rates and international monetary cooperation
15. Which exchange rate system allows for a mix of fixed and floating exchange rates?
a) Managed float
b) Gold standard
c) Currency board system
d) Fixed exchange rate
Answer: a) Managed float
16. Which of the following can lead to a trade surplus?
a) An increase in imports
b) A decrease in exports
c) A depreciation of the currency
d) An increase in exports
Answer: d) An increase in exports
17. What is the term for the value of a country’s currency decreasing in relation to another currency over time?
a) Appreciation
b) Depreciation
c) Revaluation
d) Devaluation
Answer: b) Depreciation
18. Which exchange rate system allows a country to fix its exchange rate to that of another country but with occasional adjustments?
a) Fixed exchange rate system
b) Crawling peg system
c) Currency board system
d) Managed float system
Answer: b) Crawling peg system
19. Under a managed exchange rate system, what does the central bank do to influence the exchange rate?
a) Buys and sells its own currency in the foreign exchange market
b) Sets a fixed exchange rate
c) Abandons any intervention in the market
d) Uses only interest rate policies
Answer: a) Buys and sells its own currency in the foreign exchange market
20. What is the primary goal of a currency board system?
a) To control inflation
b) To maintain a fixed exchange rate
c) To encourage trade deficits
d) To eliminate the central bank
Answer: b) To maintain a fixed exchange rate
21. Which organization sets international trade rules and resolves trade disputes?
a) World Bank
b) International Monetary Fund (IMF)
c) World Trade Organization (WTO)
d) United Nations (UN)
Answer: c) World Trade Organization (WTO)
22. A country with a trade deficit may lead to a decrease in its:
a) Imports
b) Exports
c) Foreign debt
d) Currency value
Answer: d) Currency value
23. Which factor can lead to a country experiencing a capital account surplus?
a) Increased foreign direct investment (FDI)
b) Decreased imports
c) Decreased exports
d) Increased government spending
Answer: a) Increased foreign direct investment (FDI)
24. In a floating exchange rate system, exchange rates are determined primarily by:
a) Government intervention
b) Market forces
c) International treaties
d) Central bank policies
Answer: b) Market forces
25. Which of the following is not a component of the Balance of Payments?
a) Capital account
b) Financial account
c) Current account
d) Fiscal account
Answer: d) Fiscal account
26. What is a trade surplus?
a) When a country exports more goods than it imports
b) When a country imports more goods than it exports
c) When a country has no international trade
d) When a country’s currency depreciates
Answer: a) When a country exports more goods than it imports
27. In a fixed exchange rate system, if a country’s currency is overvalued, what action is likely taken by the central bank?
a) Buy its own currency in the foreign exchange market
b) Sell its own currency in the foreign exchange market
c) Decrease interest rates
d) Do nothing
Answer: b) Sell its own currency in the foreign exchange market
28. What is a currency devaluation?
a) An increase in the value of a currency
b) A decrease in the value of a currency
c) A fixed exchange rate
d) A floating exchange rate
Answer: b) A decrease in the value of a currency
29. Which exchange rate system allows a country to completely control its domestic money supply?
a) Fixed exchange rate system
b) Managed float system
c) Floating exchange rate system
d) Gold standard
Answer: a) Fixed exchange rate system
30. In a currency crisis, what is the most likely outcome for a country’s exchange rate?
a) Stable exchange rate
b) Appreciation of the currency
c) Depreciation of the currency
d) No change in the exchange rate
Answer: c) Depreciation of the currency
31. What does the term “balance of trade” refer to?
a) The overall balance of a country’s imports and exports
b) The balance between government spending and revenue
c) The balance between capital inflows and outflows
d) The balance of payments
Answer: a) The overall balance of a country’s imports and exports
32. Which of the following is an example of a capital account transaction?
a) Exporting goods to another country
b) Importing goods from another country
c) A foreign investor buying stocks in a domestic company
d) A government grant to a foreign nation
Answer: c) A foreign investor buying stocks in a domestic company
33. What is the primary purpose of a central bank in relation to foreign exchange rates?
a) To regulate international trade
b) To maintain exchange rate stability
c) To set interest rates for foreign loans
d) To issue international currency
Answer: b) To maintain exchange rate stability
34. In a currency board system, what is the source of the country’s foreign reserves?
a) Foreign loans
b) Gold reserves
c) Central bank assets
d) Export earnings
Answer: d) Export earnings
35. Under a fixed exchange rate system, what is the central bank’s role in maintaining the exchange rate?
a) It allows the exchange rate to fluctuate freely
b) It buys and sells its own currency to maintain the fixed rate
c) It adjusts the rate daily based on market demand
d) It has no role in exchange rate maintenance
Answer: b) It buys and sells its own currency to maintain the fixed rate
36. What is a trade deficit?
a) When a country exports more goods than it imports
b) When a country imports more goods than it exports
c) When a country has no international trade
d) When a country’s currency appreciates
Answer: b) When a country imports more goods than it exports
37. In a managed float exchange rate system, who typically intervenes in the foreign exchange market to stabilize the currency?
a) Private individuals and businesses
b) Central banks
c) International organizations
d) Foreign governments
Answer: b) Central banks
38. What is the main purpose of exchange rate pegging?
a) To allow free exchange rate fluctuations
b) To stabilize a country’s currency
c) To eliminate the need for foreign exchange markets
d) To encourage trade imbalances
Answer: b) To stabilize a country’s currency
39. In a flexible exchange rate system, exchange rates are primarily determined by:
a) Government intervention
b) Market forces of supply and demand
c) International treaties
d) Central bank policies
Answer: b) Market forces of supply and demand
40. Which organization provides financial assistance to countries facing balance of payments problems?
a) World Bank
b) International Monetary Fund (IMF)
c) World Trade Organization (WTO)
d) United Nations (UN)
Answer: b) International Monetary Fund (IMF)
41. In the context of foreign exchange rates, what is “currency appreciation”?
a) An increase in the value of a currency relative to other currencies
b) A decrease in the value of a currency relative to other currencies
c) A fixed exchange rate
d) A floating exchange rate
Answer: a) An increase in the value of a currency relative to other currencies
42. Which of the following is not a tool used by central banks to influence exchange rates?
a) Interest rate adjustments
b) Open market operations
c) Fiscal policy changes
d) Foreign exchange market interventions
Answer: c) Fiscal policy changes
43. What is the main purpose of the capital account in the Balance of Payments?
a) To track international trade in goods and services
b) To record financial investments and transfers with other countries
c) To measure a country’s income and expenditure
d) To calculate the government’s budget surplus or deficit
Answer: b) To record financial investments and transfers with other countries
44. What is the term for a sudden and significant decline in a currency’s value?
a) Currency appreciation
b) Currency depreciation
c) Currency revaluation
d) Currency devaluation
Answer: d) Currency devaluation
45. Which exchange rate system allows a country to set a target exchange rate and adjust it periodically?
a) Fixed exchange rate system
b) Managed float system
c) Currency board system
d) Gold standard
Answer: b) Managed float system
46. What is a currency revaluation?
a) An increase in the value of a currency
b) A decrease in the value of a currency
c) A fixed exchange rate
d) A floating exchange rate
Answer: a) An increase in the value of a currency
47. In a floating exchange rate system, which factor is likely to influence exchange rates the most?
a) Central bank policies
b) Government intervention
c) Market supply and demand
d) International treaties
**Answer
: c) Market supply and demand**
48. Which organization is responsible for regulating the global financial system and providing monetary stability?
a) World Bank
b) International Monetary Fund (IMF)
c) World Trade Organization (WTO)
d) United Nations (UN)
Answer: b) International Monetary Fund (IMF)
49. What is the primary purpose of the current account in the Balance of Payments?
a) To record financial investments and transfers with other countries
b) To measure a country’s income and expenditure on goods and services
c) To calculate the government’s budget surplus or deficit
d) To track changes in exchange rates
Answer: b) To measure a country’s income and expenditure on goods and services
50. Which exchange rate system allows a country’s currency to fluctuate freely based on market forces?
a) Fixed exchange rate system
b) Managed float system
c) Currency board system
d) Floating exchange rate system
Answer: d) Floating exchange rate system