.

objective oudstions .,
The ...... .. ... . expresses the ra~io of
Multiple Choice Questions 1, · between the currencies of
excha~ge t~~
1. rhe ten11 foreign exchange means countries.
. . currency (b) Price of goods
, ) I., r nanq('>: f QOOrt', Ol. one n·a,··,,..1 for goods (a) Foreign t
1 v• · (cl Foreign exchange ra e
1 ~her nJt ·,"·
, b) t >ct,:ingP ol qoot1s ol one nation (d) None of the abo ve
for
q~r vices of other nation
(.- l : xc h;i1qC' of quoos of one nation for 8· Ge nera11y, the value of
.
currency of a
f
. expressed m terms o
curr en,y of ntt1rr n;'ition country 1s
(l1) Stock ot torc,qn currency witI,
domestic ......... ..
rnu ntr-✓ (b) Pou nd Ste rli ng
(al us Doll ar (d ) J apanese Yen
2. Choose the correc t statement(s) from (cl Euro
given below? 9. Devaluation of currency is a
(al Fixed exchange rate is determined
by the component Of .. .... .. . exchange rate
government
(bl Flexible exchange rate ,s determin system .
ed by
market forces (demand and supp ly of (al fixed (b) f lexible
foreign exchange) (c) managed float ing (dl Both (bl and (c)
(c ) Both (a) and (bl
(d) None of the abo ve 10. Increase in the value of foreign.
commodities in term of domestic
3. The gol d standard system of exchan currency as planned by the governme
ge nt
rate lost its importance during
refers to
(a) 1900s (b ) 1910s
(c) 1920s (a) Revaluation
(d) None of these
(b) Devaluation
4. Which of the following is/are (cl Eith er(a ) or (b)
advantages of fixed exchange rate? (dl Can 't predict the impact of the abo
ve
(a) Promotes Foreign Tra de situation
(b) Induces Fore ign Capital 11. What will be the most likely impact on
(c) Incr eases Capital Formation
the national income when in a countr
(d) All of the abo ve y
the pric e of foreign currency rises,
5. Which of the following countries still kee ping oth er things unchanged?
follows fixed exchange rate system? (a) Likely to ri se
(a) China (b) India (b) Likely to fall
(c) USA (d) None of these (c) Likely to ri se and fal l both
(dl Not affected
6. Price of one currency in terms of other
fore ign currencies is determined by forc
es
12. Which of the following can be
of demand and supply is known as considered as disadvantages of the
(a) Equilibrium Rate of Income flexible exchange rate system ?
(b) Fixed exchange Rat e (a) Excessive flu ctuation
(c) Exc hange Rate (b) Instability of Foreign Exc hange
(d) Flex ible exchange Rate (c) Both(a)and(b)
(d) None of th e above
 13. Before the Bretton Woods standard -- - -- -- ----- Column ll
Column I -----
sys~em, exchange rates were pegged --- -
against , . •-••••• - B. Decrease in supply
(ii) Apprecia~on
of domestic
(a) gold (b} si lver
of foreign currency,
currency.
demand remaining
(c) any precious metal (d) Either (a) or (b)
unchanged -------·
14• The.curve depicti?g the supply of C. Increase in supply of (iii)
Devaluation
of domestic
c1 re1gn
10
exchange
•
1s . . .
•• • • • • • • • sloped . foreign currency,
demand remaining currency
{a ) negative ly (b) positively
(c) consta ntly (d) Both (a) and (b) unchanged

15. Suppose the government plans to Codes

reduce the prices of US Dollar from (a) A-(i)
t 50 to i 45. This step is known as (b) B -(ii)
...... ••• of domestic currency. (c) C -(iii)
(a ) revaluation (d) 0-(iv)
(b) devaluation
(c ) depreciation
20. The market where foreign currencies
(d) appreciation
are traded is known as
(a) General market
16. Demand for foreign exchange is (b) Financial market
directly related to the price of foreign (c) Money market
exchange. (d) Foreign exchange market
(a) True 21. Increase in the value of domestic
(b) False commodities in terms of foreign
(c) Partially true
currency is known as
(d) Incomp lete statement
(a) Revaluation
17. The fIXed exchange rate is determined (b) Devaluation
by the Reserve Bank of India. (c) Appreciat ion
(a) True (d) Either(a)or(c)
(b) False 22. Which of the following can be
(c) Partially true accounted for the cause of devaluation
(d) Incomplete statement
of currency in a country?
18. Devaluation and depreciation of (a) Increase in the domestic infla t ion rate
currency are one or the same thing. (b) Domestic real interest rates are less than
(b) False foreign interest rate s
(a) Tru e
(c) Much increase in the income
(c) Partia lly tru e increase in demand for
(d) Incomplete stat ement foreign currency means (d) All of t he above
Domestic currency has
19. \Yrite the correct pair. Depreciated. 23. Relationship between demand for
foreign exchange and foreign exchange
Column I Column II rate is
A. Increase in demand (i) Depreciation (a) Inverse
for foreign currency, of domestic (b) Direct
supply remaining currency. (c) No rela t ionsh ip be tween th e two variab le s
unchanged (d) Either (a) and (b)
 - (

. cu.rt-encv app:C'Ciation depk~s a Situ ,

29 when domestic cu~enty ga.ms it! "a&r~
11, fll,h,)11 ~,,\iJTiill"''t ,mu;.t""d man,. in relation to a foreign currency. ijll,
~. hl'Ul""' fo .1U1a, t fnfl'l.)[P fll\{'-!tnlf'Ot.
(b) False
\.. . htrh •1f th,, followmg ;,t.au"m~nt 1~ (a' Tn.. o
,·,,n"'f"• t f1nm b(alov. (d Partially true
h C • C • (dl incomplete statement
- 1, ,,d· tD ~t(J i tVi<i' ·' : " ' 1 "' '-t,Nh u\ "

, a1· , , 111 :wl! 'u ' ~ t•, : n ·,: ·.e 30. Appreciation of foreign currency leacti
• 1 ·\J' ,., .hariQ!
toincrease in exports from the
1 ' , ,,-r's 10 •1ot·v.a'd t.!v'~ ,, d~rnaf1d cur,·P domestic country.
1/ fr , c iqn r- ,r l'lan,4,, (b) False
(a) True
(11 ll 11,,,ci( to ts,f1ward, Mt r, ctr.rnand curve of
' (I r{ IQrJ (•Ych;inqr:
(cl Partially true
(d) tncomplete statement
25. A downward movement along the 31. Under managed floating exchange rate
demand curvP for foreign exchange
inrl1<"ales
system, central bank dete~nes the
exchange rate and excessive fluctuation
t,1 ) /..porc,cwt1on of currency
0 1f lrnr('c,auon of currency
is checked by the market forces.
(( ) f)pvaluat ion of currency (a) True (b) False
!rl) f<<•vnlurltinn of currency (c) Partially true
(d) Incomplete statement
26• Dur to appreda.Oon of domestic
currency, supply curve of foreign 32. Write the correct
rxrhange will - pair.
- - ----- -- - - -
Column I Column II
(,) R15p
/h) ra11 A. Nominal (i) It is the price of one
(c) Remain cons tan t exchange unit of foreign
(d) r1iher (a) or(b) rate currency in terms of
domestic currency
27. The US$ exchange rate for rupee is ~ 75 -- - ~-
now. as compared to i 63 previously B. Real (ii) It is the exchange rate
exchange which does not
This shows that the value of rupee h~s
rate account 1or
" changes in
price level
(a) deprecia ted
(b) apprecia ted
C. Nominal ( iii) I~isilie ~ati_o_o_f_fo-rei;-
le) devalued effective to domestic prices,
( d) revalu ed
exchange measured in same
rate curre~cy _ _
28. Flexible exchange rate is determined by D. Flexible (iv) It is the rate
tJie supply_and demand of foreign exchange determined by the
exchange 111 the international market. rate government of the
(a) True country
(b) Falso
(c) Partially true Codes
(d) Incomplete statement (a) A-(i) (b) 8-(ii)
(c) C-(iii) (d) □-(iv)
 i"'li t H.'~e · .
tlH' itH orrc ct iJ•t ir
33,'!wl,n\.. r , 1iom iven
g 38. In the diagram below. at exc hange ratr
OP 1, there is
Column l
-. Column ll y
facess supply (deioond) rrioons·1
\
1
Export of (i) Dern and for.fore-· tafl (rise) ,n exchange rate · -
excI_1ange rate ign
n.
(;oods
fmport of (ii) Supply of f~re i~
l D\
a b
/s1

c.
Services
Fixed and
. exchange
Fio~;in~---- -
t P1 ········r ···· ············
~

(iii) Dirty ······· ··r···············:

floating ~ p
i
exchange rate ~ P2 ···············- C -···-r ···d
(l)

.c ;
~ :
Codes w s
:

(a) (A) - (i) (b) (B)-(ii) ;-- --- -Y X

'-- --- ,!-M
(d) Both (a)a nd(b) 0
(c ) (C )-(iii) Foregn Exchange (Dollar)
(a) Exce ss demand (b) Excess supp ly
34, O~casional int~rvention by central bank (d) Either(a)o r (b)
(c) Equilibrium
influence pnc e of fore ign exch ange 1s.
to
kno wn as .. ....... . th
39. It has been observed in recent times st at
(a) Dirty floating (b) Hedging Indian currency is depreciating again
(c) Appre ciation (d) Depreciation US Dollar. Which of the following
reason can be accounted for the same?
35, If <75 are required to buy I$, instead (a) Rising inflation in the county
of < 78 per US Dollar, this situation is (b) Fall in stock prices
indicating that (c) Rise in globa l prices (d) All of the above
(a) Dom esti c cu rren cy has appreciated
(b) Domestic currency has deprecia ted 40. The form of exchange market in which
(c) Rupee value of import bill will in crease delivery of currency happens on the
(d) Rupee value of export bill will decr ease same day is known as
(a) Spot market (b) Forward market
36. Cho ose the correct statement from (c) Foreign exchange market
given below (d) None of the above
to
(a) Appreciation of domestic cu rrency lead s
ris e in exports
to
Assertion-Reasoning MCOs
(b) Deprecia tion of dom estic curren cy leads
ri se in exports 41. Assertion (A) Demand for foreign
(c) Devaluati on of dom estic curr ency lead s to exchange and exchange rate moves in
rise in expo rts the same direction.
(d) Both(b) and(c) Reason (R) When exchange rate rises
domestic goods becomes cheaper in
37. Clean floating exchange rate is international market.
determined at a point where
of Alternatives
(a) Demand fo r foreign exchange and Supply
fore ign exchange are equal (a) Asse rtion (A) is true and Reason (R) is a
correct reaso n of Assertion (A).
(b) Demand for foreign exchange is less than a
Supply of fore ign exchange (b) Asse rtion (A) is true and Reason (R) is not
(cl Demand for foreign exchange is less than correc t reason of Asse rti on (A)
e
Supply off oreign exchange (c) Assertion (A ) is false, but Reason (R) is tru
(d) Determin ed by the central ban k (d) Both are false

42. Assertion (A) Make jn India campaign
initiated by the government leads to
rise in forcig11 exchange rate.
Resason (R) Inflow of foreign exchange
improves the trade deficit of the country.
Alternatives
(a) Assertion (A) is true and Resason (R ) is a
correc t reason of Assertion (A ).
(Li) Assertion (A) is tru g and Resaso n (R) is not a
correct reason of Assertion (A).
( c) Assertion (A ) is false, but Resason (R) is true
(d) Both are fa lse
43. Assertion (A) Fixed exchange rate
system is more stable as compared to
floating exchange rate.
Reason (R) Free play of demand and
supply of foreign exchange brings
ambiguity in the system.
Alternatives
(a) Assertion (A) is true and Resason (R) is a
correct reason of Assertion (A).
(b ) As sertion (A) is true and Resason (R) is not a
correct reason of Assertion (A).
(c) Assertio n (A) is false, but Resason (R) is tru e
(d) Both are fa lse
44• Assertion (A) Manage floating
exchange rate system is a hybrid system
of exchange rate used by the most of
the countries in recent time.
Reason (R) Excessive fluctuation in
exchange rate system is checked by the
central authority under dirty fl oating
exchange rate.
Alternatives
(a) Assertion (A) is true and Resason (R) is a
correct reason of Assertion (A)
(b) Assertion (A) is true and Resason (R) is not a
correct reason of Assertion (A)
(de)) Assertion (A) is false, but Resason (R) is true
( Both are false
45. Assertion. (A) rorwar
v d market refers to
a market m which transactions are
settled on a future date at a rate agreed
upon today.
h transactions are
Reason _(R) Sue in by the changes .
. tered mto to ga lJ
en rate,
foreign exchange
AIternatives. A) and Reason (R) are
(a) Both Assertion ( n (R) is th e correct
correct ~n d R: ! !~ert ion (A)
explana t1on_o A)a nd Reason(R)are
(b) Both Assert,~n (son (R ) is not the correct
correct, ~utofe:ssertion (A)
(A ). corre ct, bu t Reason (R) is
explana. t1on
(c) Asserti on is
incorrect t· n(A)and Reason(R)a re Corre
(d) Both Ass er ,o t
case eased MC05
. . s Read the following case
D1rect1odn wer the questions 46 to 50.
study an ans
. , h ge rate policy has evolved in
Indian s exc an .
. 'th i·nternational and domestic
1me w1 d
n st-indepen ence, m . view
. of
ts 0
deve1opmen • I'
. . g Bretton Woods system, the
the prevat1m
Indian rupee was pegged to the Pound
• Wi'tb the breakdown of the Bretton
ster1mg. . .
Woods system, and also the declmmg share of
UK in India's trade, the rupee was delinked
from the Pound sterling in September, 1975.
During the period between 1975 to 1992, the
exchange rate was officially determined by
the RBI within nominal band of plus or
minus 5 percent of the weighted basket of
currencies of India's major trading partners.
This exchange rate was referred to as
'adjustable nominal peg with a band '.
46. Post-independence, the exchange rate
was determined under
(a) fixed exchange rate system
(b) flexible exchan ge rat e system
(c) manage floa ting syste m
(d) None of the above
47. Assertion (A) Under fi xed exchange
rate system, country's government is
responsible for changing the price of
foreign exchange as per the
developmental needs.