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Deciphering the Economics

Top 50 MCQs on Balance of Payments and Foreign Exchange Rate

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

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