MCQ Questions.

SET-1

Economics (Hons) Sem-IV

Intermediate Macro-II

1. What does the Mundell-Fleming model analyze?

a) Consumer behavior
b) Business cycle fluctuations
c) Exchange rate determination
d) Monetary policy effectiveness

Answer: c) Exchange rate determination

2. Suppose that the exchange rate of the Indian rupee appreciates by 10% and,
over the same period, inflation in India be 8% and inflation in india’s trading
parameters is 3%. What is the change in india’s real exchange rate ?
a) 5% appreciation
b) 10% appreciation
c) 15% appreciation
d) 5% depreciation

Answer : a) 5% appreciation
3. In the Mundell-Fleming model, under a fixed exchange rate regime, a decrease in
government spending would lead to:
a) Appreciation of the domestic currency
b) Depreciation of the domestic currency
c) No change in the exchange rate
d) Uncertain effects on the exchange rate

Answer: a) Appreciation of the domestic currency

4. According to the Mundell-Fleming model, what effect does an increase in foreign

income have on the domestic economy under a floating exchange rate regime?
a) Increases domestic output
b) Decreases domestic output
c) No effect on domestic output
d) Uncertain effect on domestic output

Answer: a) Increases domestic output

5. How does the Mundell-Fleming model suggest a country can simultaneously

pursue independent monetary policy and fixed exchange rates?
a) By controlling capital flows
b) By implementing flexible exchange rate regimes
c) By adopting a currency peg
d) By adjusting fiscal policy

Answer: a) By controlling capital flows

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6. In the Mundell-Fleming model, what happens to the current account balance

when there is an increase in government spending under a fixed exchange rate
regime?
a) Current account surplus increases
b) Current account surplus decreases
c) Current account deficit increases
d) Current account deficit decreases

Answer: c) Current account deficit increases

7. Which of the following is a potential criticism of the Mundell-Fleming model in

explaining exchange rate dynamics?
a) It ignores the role of expectations and forward-looking behavior
b) It assumes perfect capital mobility, which may not hold in reality
c) It relies too heavily on fiscal policy as the primary stabilization tool
d) It overlooks the impact of speculative attacks on currency markets

Answer: a) It ignores the role of expectations and forward-looking behavior

8. In the Mundell-Fleming model, how do changes in investor sentiment and risk

perception affect the effectiveness of exchange rate policies?
a) They strengthen the effectiveness of exchange rate policies
b) They weaken the effectiveness of exchange rate policies
c) They have no effect on the effectiveness of exchange rate policies
d) They make exchange rate policies more predictable

Answer: b) They weaken the effectiveness of exchange rate policies

9. How do contractionary monetary policies affect a country's BOP position?
a) They improve the BOP deficit by reducing domestic demand for imports
b) They worsen the BOP surplus by decreasing exports
c) They have no effect on the BOP position
d) They lead to an appreciation of the domestic currency relative to other
currencies

Answer: d) They lead to an appreciation of the domestic currency relative to other

currencies

10. What is the primary objective of imposing import tariffs and quotas as a BOP
adjustment policy?
a) To increase government revenue
b) To promote domestic consumption of imported goods
c) To reduce the trade deficit by limiting imports
d) To encourage international
Answer: c) To reduce the trade deficit by limiting imports

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11. According to the Asset Market Model, what is the effect of an increase in
government spending on the exchange rate?
a) Appreciation of the domestic currency
b) Depreciation of the domestic currency
c) No change in the exchange rate
d) Uncertain effects on the exchange rate

Answer: b) Depreciation of the domestic currency

12. How does the Asset Market Model explain the phenomenon of overshooting in
exchange rate movements?
a) Exchange rates tend to stabilize quickly after shocks
b) Exchange rates initially move more than required to restore equilibrium
c) Exchange rates move gradually in response to changes in fundamentals
d) Exchange rates are determined solely by government interventions

Answer: b) Exchange rates initially move more than required to restore equilibrium

13. What is the primary assumption of the Asset Market Model regarding capital
mobility?
a) Perfect capital mobility
b) Imperfect capital mobility
c) No capital mobility
d) Capital controls

Answer: a) Perfect capital mobility

14. In the Asset Market Model, what role does the exchange rate play in achieving
asset market equilibrium?
a) The exchange rate is determined independently of asset markets
b) The exchange rate adjusts to equilibrate the demand and supply of assets
c) The exchange rate is set by government authorities
d) The exchange rate is fixed relative to a specific currency

Answer: b) The exchange rate adjusts to equilibrate the demand and supply of
assets
15. How does a currency devaluation affect a country's BOP position?
a) It worsens the BOP deficit by increasing the cost of imports
b) It improves the BOP surplus by making exports cheaper and imports more
expensive
c) It has no effect on the BOP position
d) It leads to a depreciation of the domestic currency relative to other currencies

Answer: b) It improves the BOP surplus by making exports cheaper and imports
more expensive

16. In the context of BOP adjustment, what is the primary objective of fiscal

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austerity measures?
a) To stimulate domestic consumption and investment
b) To reduce government spending and borrowing
c) To increase money supply and lower interest rates
d) To target specific industries for export promotion

Answer: b) To reduce government spending and borrowing

17. Which of the following is a potential drawback of relying solely on import tariffs
and quotas for BOP adjustment?
a) It may lead to retaliation by trading partners
b) It is ineffective in reducing imports
c) It worsens income distribution within the country
d) It encourages domestic production inefficiency

Answer: a) It may lead to retaliation by trading partners

18. According to Interest Parity Approach, what should hold true between domestic
and foreign interest rates?
a) They should be equal
b) Domestic interest rates should be higher than foreign interest rates
c) Foreign interest rates should be higher than domestic interest rates
d) They are unrelated to each other

Answer: a) They should be equal

19. In Interest Parity Approach, if domestic interest rates are higher than foreign
interest rates, what is the expected movement of the domestic currency relative to
the foreign currency?
a) Appreciation
b) Depreciation
c) No change
d) It depends on other factors besides interest rates

Answer: b) Depreciation

20. Which of the following factors is NOT considered in the Interest Parity
Approach to exchange rate determination?
a) Inflation differentials
b) Capital mobility
c) Interest rate differentials
d) Government fiscal policy

Answer: d) Government fiscal policy

21. According to Interest Parity Approach, what is the relationship between

expected exchange rate changes and interest rate differentials?
a) Positive correlation

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b) Negative correlation
c) No correlation
d) Inverse correlation

Answer: a) Positive correlation

22. How does Interest Parity Approach explain the impact of capital flows on
exchange rate movements?
a) Capital flows have no impact on exchange rates
b) Capital flows are solely determined by interest rate differentials
c) Capital flows influence exchange rates by equalizing expected returns on assets
d) Capital flows are influenced by government policies, not interest rates

Answer: c) Capital flows influence exchange rates by equalizing

23. Which form of PPP considers that the prices of goods are equalized when
expressed in terms of a common currency?
a) Absolute PPP
b) Relative PPP
c) Purchasing power parity
d) International PPP

Answer: a) Absolute PPP

24. What does the relative version of PPP focus on?

a) It focuses on the absolute level of prices in different countries
b) It focuses on the relative changes in prices in different countries over time
c) It focuses on the absolute level of exchange rates between countries
d) It focuses on the relative changes in exchange rates between countries over
time

Answer: b) It focuses on the relative changes in prices in different countries over

time

25. What is one of the main criticisms of PPP theory in explaining exchange rate
movements?
a) It assumes perfect capital mobility
b) It relies too heavily on interest rate differentials
c) It overlooks the impact of government policies on exchange rates
d) It does not account for non-tradable goods and services

Answer: d) It does not account for non-tradable goods and services

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