BALANCE OF PAYMENTS

QUESTION BANK

Multiple Choice Questions ( 1 mark each)

1. Under flexible exchange rate system, exchange rate is determined by the :-

(a) Demand for foreign exchange (b) supply of foreign exchange

(c) Supply – demand forces (d) government
2. Demand curve for foreign exchange is :-
(a) Negatively related to the rate of exchange
(b) Positively related to the rate of exchange
(c) Proportionately related to the rate of exchange
(d) Not related to the rate of exchange.

3. The supply curve of foreign exchange is :-

(a) Negatively sloped from the left to right (b) positively sloped from left to right
(c) A straight line from left to right (d) a rectangular hyperbola curve
4. When domestic currency loses its value in relation to a foreign currency in the
international money market, it is a situation of :

(a) Currency appreciation

(b) Currency depreciation
(c) Currency devaluation
(d) None of these.
5. Currency appreciation takes place when:
(a) domestic currency loses its value in relation to a foreign currency.
(b) there is an increase in the price of a foreign currency in terms of the domestic
currency
(c) there is a decrease in the price of a foreign currency in terms of the domestic
currency
(d) none of these
6. When US dollar exchanges for Rs 50, instead of Rs 55 earlier, the domestic currency
shows:
(a) currency appreciation (b) currency deprecuation

(c) currency devaluation (d) none of these.

7. Which of the following is the source of demand for foreign exchange?

(a) Imports (b) Foreign investment

(c) Income receipts (d) both (a) and (b)

8. Spot market deals in :

(a) Current transactions (b) future transactions
(c) current as well as future transactions (d) transactions meant for future delivery.

9. Accommodating items in BOP are

(a) determined by profit (b) above the line items
(c) undertaken to maintain BOP identity (d) none of these.
10. Transactions which take place on both current and capital account are :
(a) Autonomous (b) accommodating (c) both (a) and (b)
(d) neither (a) nor (b)
11. Gifts and remittances to abroad are recorded in the
(a) credit side of capital account (b) debit side of capital account
(c) credit side of current account (d) debit side of current account
12. Loans taken from world bank are recorded in the :
(a) credit side of capital account (b) debit side of capital account
(c) credit side of current account (d) debit side of current account
Objective Type Questions ( 1 mark each)
13. Define foreign exchange.
14. What is foreign exchange rate?
15. What is meant by flexible exchange rate?
16. What is meant by fixed rate/
17. What is ‘float’ rate of exchange?
18. What is meant by managed floating exchange rate?
19. What is equilibrium rate of exchange?
20. Why is flexible rate of exchange called free rate of exchange?
21. Give two sources of demand for foreign exchange.
22. Give two sources of supply of foreign exchange.
23. What is meant by currency appreciation?
24. What is meant by currency depreciation?
25. what is meant by visible items of balance of payments?
26. What is meant by invisible items o balance of payments?
27. Give two example of invisible items
28. Name three such items which are not included in balance of trade.
29. What does deficit in balance of trade indicate?
30. Define current account of balance of payments
31. Define capital account of balance of payments
32. Define ‘current account deficit’ in the balance of payments.
33, Define autonomous items.
34. Define accommodating items.
Short Answer Questions ( 3/ 4 Marks)
35. Balance of payments always balances. Does it means a situation of zero net financial
obligation for a country?

36. How is the rising demand for the Indian goods in the US market likely to impact the
exchange rate between the Indian rupee and US dollar?

37. Where will sale of machinery to abroad be recorded in the balance of payments accounts.
give reasons.

38. Name the broad categories of transactions recorded in the current account of the balance
of payments accounts.

39. Name the broad categories of transactions recorded in the ‘capital account’ of the
balance of payments accounts.

40. Explain the meaning of managed floating exchange rate.

41. Where is ‘borrowings from abroad’ recorded in the balance of payments accounts? Give
reasons.

42. Giving reasons explain where charity to foreign countries is reco0rded in the balance of
payments accounts.
43. Give the meanings of balance of trade and balance on current account of balance of
payments accounts.

44. Distinguish between current account and capital account.

45. Explain the distinction between the flexible exchange rate and the managed floating
Exchange rate.

46. Explain by giving examples, the distinction between depreciation and devaluation
domestic currency.

47. In recent times the Indian Rupee depreciated to an all time low against the US dollar.
Discuss its impact on Indian’s imports.

48. “A country with trade deficit cannot have current account surplus in its Balance of
Payments.”

49. State on which side of capital account/current account will the following transactions be
recorded and why:

(i) Interest on loan received from Nepal

(ii) Import of mobile phones from china.

50. How is the exchange rate determined under a flexible exchange rate regime/

51. What are the sources of supply of foreign exchange.

52. How does giving the incentives for exports influence foreign exchange rate?

53. when price of a foreign currency falls, the supply of that foreign currency also falls
why?

Long Answer Questions ( 6 marks each)

54. Distinguish of ‘autonomous’ transactions and ‘accommodating’ transactions in the

balance of payments accounts.

55. (i) In which sub-account and on which side of balance of payments account will foreign
investments in India be recorded? Give reasons

(ii) What will be the effect of foreign investments in India on exchange rate? Explain.

56. Indian investors lend abroad. Answer the following questions:

(a) In which sub-account and on which side of the balance of payments account such
lending is recorded? Give reasons;
(b) Explain the impact of this lending on market exchange rate.
57. Indian investors borrows from abroad. Answer the following:

(a) In which sub-account and on which side of the Balance of Payments Accounts will
this borrowing be recorded? Give reasons.

(b) Explain what is the impact of this borrowing on exchange rate.

58. Why does the demand for foreign currency fall and supply rises when its price rises?.
Explain.

59. (a) Define “Trade Surplus”. How is it different from “current Account Surplus?

(b) “Indian Rupee plunged to all time low of Rs 74.48 against the US Dollar.”

In the light of the above report, discuss the impact of the situation on Indian imports.

60. (a) Distinguish between appreciation of home currency and depreciation of home
currency.

(b) What is meant by “current account surplus”

(c) State any one source of supply of foreign currency for a country.

61. (a) Distinguish between ‘Trade Deficit’ and “Current Account Deficit.

(b) Discuss briefly the concept of flexible exchange rate system of foreign exchange rate
determination.

62. Explain the reason for inverse relationship between price of a foreign currency and its
demand.

63. Explain the components of capital account of balance payments

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