Macro CH 12 PDF

CHAPTER -18.
FOREIGN EXCHANGE RATE

MULTIPLE CHOICE QUESTIONS
1 Rate of exchange as determined by the government is called:

(a) Floating exchange rate.
(b) Fixed exchange rate
(c) Flexible exchange rate
(d) None of these
2 The exchange rate at which demand for foreign exchange is equal to its supply is
called:
(a) Par exchange rate
(b) Floating exchange rate
(c) Fixed exchange rate
(d) Equilibrium exchange rate
3 Demand curve for foreign exchange is :-
(a) Positively related to rate of exchange
(b) Not related to rate of exchange
(c) Proportionately related to rate of exchange
(d) negatively related to rate of exchange
4 When US dollar exchanges for Rs. 40 instead of Rs. 50 earlier, the domestic
currency shows:
(a) Currency depreciation.
(b) Currency appreciation.
(c) Currency devaluation.
(d) None of these
5 Which of the following causes loss of foreign exchange?

(a) Grants from the rest of the world
(b) Exports
(c) Imports
(d) All of the above
6 Other things remaining unchanged, when in a country the price of foreign currency
rises, national income is:
1|Page 8 October 2021,ZIET BHUBANESWAR

(a) Likely to rise
(b) Likely to fall
(c) Both (a) and (b)
(d) Not affected
7 What is the relationship between supply of foreign exchange and exchange rate?
(a) Direct
(b) Indirect
(c) Both (a) & (b)
(d) None of the above
8 Gold standard system of exchange rate is an old variant of _____.

(a) Flexible exchange rate
(b) Dirty floating exchange rate
(c) Managed floating exchange rate
(d) Fixed exchange rate
9 Identify which of the following statements is true.
(a) Reserve bank of India is the custodian of official reserves.
(b) Less developed countries often devalue their currencies.
(d) None of these
10 Which of the following is a function of foreign exchange market?

(a) Credit function
(b) Transfer function
(c) Hedging function
(d) All of these
11 Which of the following statements is incorrect about flexible exchange rate system?
(a) High degree of speculation
(b) Does not require any large stock of foreign exchange
(c) Determined by demand for and supply of foreign exchange.
(d) None of these
12 Spot market deals in:

(a) Future transactions

(b) Current transactions
(c) Both current and future transactions
13 Which of the following is a demand for foreign exchange?

(a) Investments by foreigners in domestic country
(b) Imports
(c) Income receipts
(d) All of these
14 The price of one currency in terms of another currency is known as ____

(a) The foreign exchange
(b) The foreign exchange rate
(c) The balance of payments
(d) The foreign exchange market
15 Export is a source of ________ of foreign exchange.

(a) Supply
(b) Demand
(c) Both demand and supply
(d) None of these
16 The exchange rate at which demand for foreign currency is equal to its supply is
called:
(a) Equilibrium exchange rate
(c) Par exchange rate
(d) Both a and c
17 Underflexibleexchangeratesystem,exchangerateisdetermined
(A)bythegovernment
(B) bymarket forcesof demand and supply
(C)byCentral Bank ofacountry
(D)noneofthese
18 Thepriceof onecurrencyin termsof another isknown as

(A)Foreignexchangerate (B)Trade rate
(C)Interestrate (D)BalanceofPayment
19
Themarketwhere thenationalcurrenciesare tradedforoneanotherisknownas
(A)Domesticexchangemarket (B)Foreignexchangemarket
(C)Bazaar (D)Shop
20
Whichone isa meritofthefixedexchange rate?
(a)Promotes ForeignTrade (b)InducesForeignCapital
(c)IncreasesCapitalFormation (d)Alltheabove
21 Whichoneisademeritoftheflexibleexchangerate?
(a)BadResultsofLowRate (b)Uncertainty
(c)Instabilityin ForeignExchange (d)All of theabove
22 Whichamongthe followingisa source of supplyofforeignexchange?

a.Donationsgiven b.Imports
c. Exports d.Gifts
23 Foreignexchangeisdeterminedby:
(a) Demandforforeigncurrency
(b) Supplyofforeigncurrency
(c) Demandand supplyin the foreign exchange market
(d) Noneofthe above
24 Due to a fall in the value of Indian currency in the international market, the RBI
decides to buyback Indian currency .This is a case of :
(a) Flexible exchange rate (b) fixed exchange rate

(c) managed floating (d) manipulated floating
25
Theoperationoffuture deliveryinthe foreignexchangemarketisknownas
(A)Spotmarket (B)Currentmarket
(C)Forwardmarket (D)Domesticmarket
26 What isthe causeofthedevaluationofanycountry’scurrency?

(A) Increaseinthedomesticinflationrate
(B) Domesticrealinterestratesare lessthanforeigninterestrates
(C) Muchincreaseintheincome
(D) Allofthese
27 Hybridinmanagementoffixedandflexibleexchangerateisknownas
(A)Managedtofloat (B)CrawlingPeg
(C)WiderBands (D)None ofthese
28 Whichamongthe followingisasource ofdemandforforeign exchange?

a.Brokerage ofgoodsandservices
b.Smuggleofgoodsandservices
c.Export of goodsand services
d.Importofgoodsandservices
29 Other things remaining the same, when foreign currency becomes cheaper ,the effect
on national income is likely to be :
(a) positive (b) negative
(c) positive and negative both (d) no effect
30 Whichone isa meritofthe flexible exchangerate?

(a)SimpleSystem (b)ContinuousAdjustments
(c)Improves BalanceofPayments (d)Alltheabove
31 Increase in the value of foreign commodities is known as :

(A)Revaluation
(B)Devaluation
(C)Inflation
(D) None of these
32 Which one is the king of the exchange rate?
(a) Fixed Exchange Rate
(b) Flexible Exchange Rate
33 Which one is a merit of the fixed exchange rate?
(a) Promotes Foreign Trade
(b) Induces Foreign Capital
(c) Increases Capital Formation
(d) All the above
34 Which one is a source of the demand for foreign exchange?
(a) Imports of Goods and Services from Abroad
(b) Investment in Foreign Nations
(c) Gift Scheme to Foreign Nations
(d) All the above
35 Foreign exchange is determined by:
(a) Demand for foreign currency
(b) Supply of foreign currency
(c) Demand and supply in the foreign exchange market
36 The fixed exchange rate is determined by:
(a) Government
(b) Bargaining
(c) World Bank
(d) Demand and Supply forces
37 By exchange rate we mean:
(a) How much local currency we have to pay for a foreign currency
(b) How much of a foreign currency we have to pay for another foreign currency
(c) The rate at which foreign currency is bought and sold
(d) All of these
38 Which function of foreign exchange market protects against the foreign exchange
risk?
(a) Credit function
(b) Hedging function
(c) Transfer function
(d) All of them
39 Reduction in the value of domestic currency by the government is called
(a) depreciation
(b) devaluation
(c) revaluation
(d) appreciation
40 What will be the effect on exports if foreign exchange rate increases?
(a) Increases
(b) Decreases
(c) Remains constant
(d) None of them
41 The supply of foreign exchange comes from
(a) the foreigners purchasing home country’s goods and services through exports
(b) the foreigners who invest in home country through joint ventures or through
financial market operations
(c) currency dealers and speculators.
(d) all of them
42 Which exchange rate measures the average relative strength of a given currency with
respect to other currencies without eliminating the effect of change in price?
(a) Nominal exchange rate
(b) Nominal effective exchange rate
(c) Real exchange rate
(d) Real effective exchange rate
43 Other things remaining the unchanged, when in a country the price of foreign
currency rises, national income is:
(a) Likely to rise
(b) Likely to fall
(c) Likely to rise or to fall
(d) Not affected
44 What is the impact of India-Iran contract of payment of oil in rupees?
A. Forex reserve increase in India
B. Forex reserve decrease in India
C. Depreciation of rupee
D. Both A and C
45 Types of Foreign Exchange Market are:
(a) Spot market
(b) Forward market
(d) None of these.
46 Identify which of the following statement is true?
a. The flexible exchange rate system gives the government more flexibility
to maintain large stocks of foreign exchange reserves.
b. In the managed floating exchange rate system, the government intervenes
to buy and sell foreign currencies.
c. In the managed floating exchange rate system, the central bank intervenes
to moderate exchange rate fluctuations.
d. In the fixed exchange rate system, market forces fixed exchange rate.
47 Consider the following statements

1. Devaluation of the currency may promote exports.
2. Prices of a country’s products in the international market may fall due to
devaluation.
Which of the statements given above is/ are correct?
a. Only 1
b. Only 2
c. Both 1 & 2
d. Neither 1 nor 2
48 Decrease in the value of domestic currency in terms of foreign currency is.

a. Appreciation of domestic currency
b. Revaluation of domestic currency
c. Depreciation of domestic currency
d. None of these
49 Identify which of the following statement is true:

a. Under Flexible Exchange Rate system exports or imports are not affected
b. Reserve of foreign exchange is the part of current account of BOP.
c. A receipt of unilateral transfer from foreign nation is recorded on the
debit side of BOP.
d. Fixed exchange rates are declared by the government
50 Appreciation of domestic currency encourages

a. Imports
b. Exports
c. Foreign trade
d. All of these
51 The demand curve for foreign exchange is:

a. Vertical
b. Upward sloping
c. Horizontal
d. Downward sloping
52 Managed floating exchange rate is a system in which the:

a. The Government allow the exchange rate to determine by market forces
b. The central bank allows the exchange rate to determine by market forces
c. The central bank or Government allow the exchange rate to determine by
market forces
d. None of the above
53 The downward sloping demand curve for the foreign exchange reflects:
a. Direct relationship
b. Exponential relationship
c. Inverse relationship
d. Indirect relationship
54 Flexible exchange rate system has the advantage:
a. Automatic adjustment of BOP
b. Easy to borrow from World Bank
c. Encourages export
d. None of the above
55 Foreign exchange rate of a country is:

a. Price of a foreign goods in terms of the domestic good
b. Price of a foreign factor in terms of the domestic factor
c. Price of foreign currency in terms of the domestic currency
d. Price of foreign trade in terms of the domestic trade
56 ………………..rate of exchange is it that rate which is determined by the supply

demand forces in the foreign exchange market. It is also known as
……………exchange rate.
a. Flexible, free
b. Fixed, floating
c. Fixed, flexible
d. Free, floating
57 Foreign exchange rate is determined by………
a. Demand for foreign exchange
b. Supply of foreign exchange
c. Both A and B
d. None of these
58 Other things remaining the same, when in the country the market price of foreign
currency falls, national income is likely:
a. Positive
b. Negative
c. Positive and negative both
d. No effect
59 Under managed floating exchange rate system, if rupee is getting depreciated fast
then RBI:
a. Sell dollars in the foreign exchange market
b. Purchase dollars in the foreign exchange market
c. Print more currency notes
d. None of these
60 If ₹ 75 are required to buy 1 US$, Instead of 65, it will lead to rise in:
a. Imports from USA
b. Exports to USA
c. Both A and B
d. Either A or B
61 Under fixed exchange rate policy, central bank:
(a) A central bank loses its power on monetary policy

(b) Demand for domestic currency increases.
(c) A central bank cannot control interest rates.
(d) Currency is undervalued
62 In the foreign exchange market,
(a) Exports and imports are exchanged.

(b) Domestic currency is traded for foreign currencies.
(c) Exports and imports are purchased and sold.
(d) Domestic bonds are traded for foreign bonds.
63 Dirty floating is related to:
(a) fixed system of exchange rate
(b) flexible system of exchange rate
(c) both of these
(d) none of these
64 The rate which is determined by the government is known as:
(a) Flexible exchange rate
(c) Managed floating
65 The price of one currency in terms of other currency is called:
(a) Foreign exchange rate
(b) Flexible exchange rate
(c) Current rate of exchange
66 Flexible exchange rate system is also known as:
(a) Pegging exchange rate
(c) Dirty floating
(d) Both (b) and (c)
67 Which of the systems are covered under fixed exchange rate system:
(a) Gold standard system
(b) Adjustable peg system
(c) Managed system
(d) Both (a) and (b)
68 Which of the following are the buyers and sellers of a foreign exchange:
(a) Individual and firms
(b) Foreign exchange brokers
(c) Commercial and central bank
69 Who maintains the foreign exchange reserve in India:
(a) RBI
(b) SBI
(c) Ministry of finance, GoI
(d) Export Import Bank
70 Which one is a demerit of fixed exchange rate:
(a) Ignores National Interests
(b) Restricted movement of capital
(c) Sudden fluctuations in Exchange rates
71 Which one is the demerit of the flexible exchange rate:
(a) Bad results of low rate
(b) Uncertainty
(c) Instability in foreign market
72 Which one is a source of the demand for foreign exchange:
(a) Imports of goods and services
(b) Investment in foreign nations
(c) Gift scheme to foreign nations
73 Which of the following is true:
(a) Fixed exchange rate is determined by the government
(b) Flexible exchange rate is determined by market forces
(c) Both a and b
74 Which one is a merit of the flexible exchange rate:
(a) Simple system
(b) Continuous adjustments
(c) Improves balance of payments
75 Exchange rate is price of a currency expressed in terms of:
(a) Gold
(b) Silver
(c) Another currency
(d) None of these
ANSWERS
Sl.No. ANSWERS OF MULTIPLE CHOICE QUESTIONS
1 B
2 D
3 D
4 B
10 | P a g e 8 October 2021,ZIET BHUBANESWAR

5 C
6 A
7 A
8 D
9 C
10 D
11 D
12 B
13 B
14 B
15 A
16 (d)
17 (b)
18 (a)
19 (b)
20 (d)
21 (d)
22 (c)
23 (c)
24 (c)
25 (c)
26 (d)
27 (a)
28 (d)
29 (b)
30 (d)
31 B
32 C
33 D
34 D
35 C
36 A
37 D
38 B
39 B
40 A
41 D
42 B

43 A
44 A
45 C
46 c. In the managed floating exchange rate system, the central bank
intervenes to moderate exchange rate fluctuations.
47 c. Both 1 & 2
48 c. Depreciation of domestic currency
49 d. Fixed exchange rates are declared by the government

50 a. Imports
51 e. Downward sloping
52 d. None of the above
53 c. Inverse relationship
54 a. Automatic adjustment of BOP
55 c. Price of foreign currency in terms of the domestic currency
56 a. Flexible, free
57 c. Both A and B
58 a. Positive
59 a. Sell dollars in the foreign exchange market
60 b. Exports to USA
61 A
62 B
63 D
64 B
65 A
66 B
67 D
68 D
69 A
70 D
71 D
72 D
73 C
74 D
75 C
PREPIRED BY : PGT ECONOMICS OF BHUBANESWAR, GUWAHATI,

KOLKATA, RANCHI, SILCHAR AND TINSIKIA REGION .
VETTED BY :TINSUKIA REGION

CHAPTER -18. FOREIGN EXCHANGE RATE
CASE STUDY BASED QUESTIONS
CBQ Question Content

NO
1. MUMBAI: The Indian rupee opened on a flat note and slipped 5 paise to 73.05
against the US dollar NSE 1.38 % in opening trade on Wednesday. However, strong
macroeconomic data and a rally in the domestic equity market restricted the rupee's fall, forex
dealers said. At the interbank foreign exchange, the rupee opened at 73.05 against the dollar,
registering a fall of 5 paise from the last close.In the previous session, the rupee had settled at
73.00 against the US dollar.Meanwhile, India's economic growth surged by a record 20.1 per
cent in the April-June quarter of this fiscal, helped by a low base of the year-ago period,
despite a devastating second wave of COVID-19.Foreign institutional investors were net
buyers in the capital market on Tuesday as they purchased shares worth Rs 3,881.16 crore, as
per exchange data. On the domestic equity market front, the 30-share index was trading
234.34 points or 0.41 per cent up at a record high of 57,786.73. Similarly, the broader NSE
Nifty which had surged to its lifetime high of 7,194.35, was later trading 31.55 points or 0.18
per cent up at 17,163.75.Meanwhile, the dollar index, which gauges the greenback's strength
against a basket of six currencies, rose 0.12 per cent at 92.73.
--------- The Economic Times, September 01, 2021----
1.Indian rupee opened on a flat note and slipped 5 paise to 73.05 against the US dollar ,
implies that
(a) Rupee dollar exchange rate has slipped
(b) Rupee dollar exchange rate has increased
(c) Dollar rupee exchange rate has increased
2. Why the foreign Institutional investors purchase more shares of Indian companies?
(a) Because rupee cost of Indian shares became cheaper
(b) Because rupee cost of Indian shares became dearer
(c) Because dollar cost of Indian shares became cheaper
(d) Because dollar cost of Indian shares became dearer

3. The above situation indicates that ____
(a) There is devaluation of Indian Rupee
(b) There is revaluation of Indian Rupee
(c) There is depreciation of Indian Rupee
(d) There is appreciation of Indian Rupee
4. As the Foreign exchange rate has been rose from $1 = Rs.73.00 to $1:Rs.73.05 , it will
(a) Boost India’s import
(b) Boost India’s export
(c) No effect on India’s import and export
2
“India needs foreign exchange buffer reserves to insulate itself from exchange rate volatility
as we have "no friends" for swap lines and Japan was the only country that helped during the
taper tantrum in 2013, former RBI Governor RaghuramRajan on Tuesday. Participating in a
virtual event organised by economic think tank NCAER, Rajan said during the taper tantrum
in 2013, India asked for swap lines, and only country who helped us was Japan.
"We need this (foreign exchange) reserve buffer to insulate ourselves because we have no
friends. Even the European Union (EU) went to get swap lines from the Federal Reserve.
"We asked for swap lines that are on public record, we did not get them. Only country who
helped us during the taper tantrum was Japan," he said.
Taper tantrum refers to emerging markets facing inflation woes and other issues after the US
Federal Reserve decided to put brakes on its quantitative easing programme in 2013. The
programme was started to deal with the fallout of the 2008 global financial crisis.
"So when you have no external support, you have to build your own support, which is why we
started building the reserve buffer," Rajan said, adding that what happened during the taper
tantrum was a traumatic experience for me.
--------- The Economic Times, July 14, 2021--------

1. According to former RBI Governor RaghuramRajan, India needs this (foreign exchange)
reserve buffer to insulate ourselves because we have no external support.
(a) True
(b) False
2. Assertion (A) Taper tantrum refers to emerging markets facing inflation woes and other
issues after the US Federal Reserve decided to put brakes on its quantitative easing
programme in 2013.
Reason (R) :Theprogramme was started to deal with the fallout of the 2008 global financial
crisis.

(a) Both Assertion (A) and Reason (R) are true and (R) is the correct explanation
of (A)
(b) Both Assertion (A) and Reason (R) are true but (R) is not the correct
explanation of (A)
(c) Only Assertion (A) is true and Reason (R) is false
(d) Assertion (A) is false but Reason (R) is true
3. Which country helped India during the taper tantrum in 2013?
(a) USA
(b) Japan
(c) Both USA and Japan
(d) None of these
4. Building the reserve buffer will help India to become less dependent on foreign countries.
(a) True
(b) False
3 Foreign Exchange Rate is the price of one currency in terms of another. It links the
currencies of
differentcountriesandenablescomparisonofinternationalcostsandprices.Peopledemandfo
reignexchangebecause:
i) Theywanttopurchasegoodsandservices,
(ii) Theywant to sendgiftsabroad
(iii) Theywanttopurchasefinancialassets
Rise in price of foreign exchange will increase the cost (in terms of rupees) of
purchasing a foreign good.This reduces demand for imports and hence demand for
foreign exchange also decreases, other thingsremainingconstant.
1. 1.Whichofthefollowingisnotasourceofdemandofforeignexchange?
(a) Export ofgoodsandservices(b)Import ofgoodsandservices
(c) Foreigntravel (d)Higherstudiesabroad
2. . Increase inexchangerateimpliesthatthe price of

foreigncurrencyintermsofdomesticcurrencyhasincreased.Thisiscalled……….
of domesticcurrency.
(a) Depreciation (b)Appreciation
(c)Devaluation (d)PeggedExchangeRate

3. . Exchange rate isdeterminedbythe market forcesofdemandandsupply.
(a) Flexibleexchange rate (b)Fixedexchangerate
(c)Export of goodsand services (d)PeggedExchange Rate
4.FlexibleExchangeRateSystemisalsoknownas:
(a) PeggedExchangeRateSystem (b)Export ofgoodsandservices
(c)DirtyFloating (d)FloatingExchangeRate
4 Each nation has its own currency when monetary transactions are conducted within
thenational borders, payments are made in the currency of that country for example
Indiancurrency is called rupee. To be more exact it is called Indian rupee payments
within thenational borders Of India are made in Indian rupees. Similarly, each other
nation has itsown currency for example Pakistan currency is called Pakistani rupee USA
currency USdollar Kuwait currency Kuwaiti Dinar UAE currency dirham and so on
payments within thenationbordersofPakistanaremadeinPakistanirupees
paymentwithinthenationalborderofUSAisUSAdollars,etc.Whentransactionsareconducted
acrossNationalbordersonecurrencymustbeconvertedintoanother.Conversionratebetweent
wocurrencies is decided by two ways first fixed exchange rate second floating or
flexibleexchangerate.
1. .Exchangeraterefertotherateatwhichthefollowingis exchanged:
(a) Goods (c)Services
(b) Currencies (d)Alltheabove
2.Whofixedtheflexibleexchangerate:
a. Marketforce (b)Government
(c) Bothaandb (d) Noneof these
3. .------ refers to a system in which exchange rate for a currency is fixed by the
government
(a) Fixed exchange rate
(b) flexible exchanged rate
(c ) floating exchange rate
(d ) none of the above
4. When the value of domestic currency is deliberately reduced by the government ,it is called
(a) depreciation (b) appreciation
(c) revaluation (d) devaluation
5 The rupee declined 18 paise to close at Rs. 74.36 against the US dollar on Wednesday, tracking
strengthening American currency in the overseas market and higher crude prices. However, a strong
rally in domestic equities and unabated foreign fund inflows restricted the slide of the domestic unit,
forex traders said. At the interbank foreign exchange market, the local currency opened on a weak note

at Rs. 74.24 and swung between the day’s high of Rs.74.18 and low of Rs. 74.50 to the US dollar. The
rupee finally settled at Rs. 74.36 against the greenback, down 18 paise over its last close. “Indian rupee
depreciated amid strong dollar and surge in crude oil prices. Further, rupee slipped on worries over a
slowdown in global economic recovery due to resurgence in COVID-19 cases. “India CPI data is
likely to show that inflation remained above the Reserve Bank of India medium- term target range of
2-6 per cent. India’s Industrial Production data forecasted
1. The rupee declined 18 paise means ___________ of rupee.
A. Depreciation
B. Appreciation
C. Devaluation
D. Revaluation
2. What is the full form of CPI?
A. Current Price Index
B. Crude Price Index
C. Consumer Price Index
D. None of the above
3. The rupee finally settled at Rs. 74.36 against the greenback, down …………….. over its
last close.
A. 18 paise
B. 18 rupees
C. Rs. 74.36 paise
D. none of these
4. At the interbank foreign exchange market, the local currency opened on a weak note at Rs.
74.24 and swung between the day’s high of 74.18 and low of ……………….. to the US
dollar.
A. Rs. 74.50 US dollar
B. Rs. 74.24 US dollar
C. Rs. 74.18 US dollar
D. none of these
6 ‘Rupees drops 20 paise, Rs.75.42 on forex outflows, equity losses.’ The rupee on Tuesday
tumbled 23 Paise to settle at Rs.75.42 against the US dollar as risk appetite remained weak
amid heavy selling in domestic equities and a strengthening US dollar. The rupee opened
lower at Rs. 75.33 and the lost ground to touch a low of Rs. 75.49 against the US dollar. The
local unit settled at Rs.75.42 against US dollar, down 23 paise from its last close of Rs. 75.19.
1. ‘Rupees drops 23Paise to Rs. 75.42 on forex outflows, equity losses.’ It is an example
of………….. (appreciation /depreciation) of domestic currency.
2. Such a change in the value of rupee is it likely to have…………..( positive/ negative)
effect on exports to USA
7 A dirty float is a floating exchange rate where a country's central bank occasionally intervenes
to change the direction or the pace of change of a country's currency value. In most instances,
the central bank in a dirty float system acts as a buffer against an external economic shock
before its effects become disruptive to the domestic economy. A dirty float is also known as a
"managed float."
This can be contrasted with a clean float, where the central bank does not intervene.From
1946 until 1971, many of the world's major industrialized nations participated in a fixed
exchange rate system known as the Bretton Woods Agreement. This ended when President
Richard Nixon took the United States off the gold standard on August 15, 1971. Since then,

most major industrialized economies have adopted floating exchange rates.Many developing
nations seek to protect their domestic industries and trade by using a managed float where the
central bank intervenes to guide the currency. The frequency of such intervention varies. For
example, the Reserve Bank of India closely manages the rupee within a very narrow currency
band while the Monetary Authority of Singapore allows the local dollar to fluctuate more
freely in an undisclosed band.
(i) Clean float is :
(a) Floating exchange rate
(c) Managed floating exchange rate
(d) All of the above.
(ii) Central bank intervene in Exchange rate market:
(a) To avoid external economic shock
(b) To change the pace of currency's value
(c) Both a and b
(iii). Fixed exchange rate is also known as:
(a) Gold standard system
(b) Bretton woods agreement
(c) Both a and b
8 An exchange rate mechanism (ERM) is a set of procedures used to manage a country's

currency exchange rate relative to other currencies. It is part of an economy's monetary policy
and is put to use by central banks. Such a mechanism can be employed if a country utilizes
either a fixed exchange rate or one with a constrained floating exchange rate that is bounded
around its peg (known as an adjustable peg)
An exchange rate mechanism (ERM) is a set of procedures used to manage a
country's currency exchange rate relative to other currencies. It is part of an
economy's monetary policy and is put to use by central banks.
Such a mechanism can be employed if a country utilizes either a fixed exchange rate or one
with a constrained floating exchange rate that is bounded around its peg (known as
an adjustable peg or crawling peg).
An exchange rate mechanism (ERM) is a way that governments can influence the relative
price of their national currency in forexmarkets.The ERM allows the central bank to tweak a
currency peg in order to normalize trade and/or the influence of inflation.More broadly, ERM
is used to keep exchange rates stable and minimize currency rate volatility in the market.
Monetary policy is the process of drafting, announcing, and implementing the plan of actions
taken by the central bank, currency board, or other competent monetary authority of a country
that controls the quantity of money in an economy and the channels by which new money is
supplied. Under a currency board, the management of the exchange rate and money supply is
given to a monetary authority that makes decisions about the valuation of a nation’s currency.
Often, this monetary authority has direct instructions to back all units of domestic currency in
circulation with foreign currency.
An exchange rate mechanism is not a new concept. Historically, most new currencies started

as a fixed exchange mechanism that tracked gold or a widely traded commodity. It is loosely
based on fixed exchange rate margins, whereby exchange rates fluctuate within certain
margins.
An upper and lower bound interval allows a currency to experience some variability without
sacrificing liquidity or drawing additional economic risks. The concept of currency exchange
rate mechanisms is also referred to as a semi-pegged currency system.
(i) what is exchange rate mechanism
(a) An exchange rate mechanism (ERM) is a way that governments can influence the
relative price of their national currency in forex markets.
(b) The ERM allows the central bank to tweak a currency peg in order to normalize trade
and/or the influence of inflation.
(c) (c) ERM is used to keep exchange rates stable and minimize currency rate volatility in
the market.
(d) (d) All of the above
(ii) What is fixed exchange margin:

(a) Value of Currency fluctuate within certain margin
(b) Currency varies between lower and upper band
(c) Both a and b

ANSWERS:
CBQ NO. ANSWER

1 1. b) Rupee dollar exchange rate has increased
2. c) Because dollar cost of Indian shares became cheaper
3. c) There is depreciation of Indian Rupee
4. b) Boost India’s export
2 1.a)True
2.a) Both Assertion (A) and Reason (R) are true and (R) is the correct explanation
of (A)
3.b) Japan
4.a)True
3
1.a
2.a
3.a
4.d
4 1.d
2.a
3.a
4.d
5 1(A)
2 (C)
3.(A)
4 (A)
6 1.depreciation
2. positive
7 (i)- a,
(ii)- c,
(iii)- b,
8 (i)- d,
(ii)- c

KOLKATA, RANCHI, SILCHAR AND TINSIKIA REGION.

TRUE AND FALSE QUESTIONS
Question Question Content
No
Q1 According to former RBI Governor Raghu ramRajan, India needs this (foreign
exchange) reserve buffer to insulate ourselves because we have no external support.
a) True
b) False
Q2 Building the reserve buffer will help India to become less dependent on foreign
countries.
a) True
b) False
Q3 If there is revaluation of Indian Rupee, Indian import will decrease and export will
decrease.
a) True
b) False
Q4 The exchange rate which is determined by the market forces of demand and supply of
foreign exchange is called flexible exchange rate,
a) True
b) False
Q5 Export is an important source of supply of foreign exchange.
a) True
b) False
Q6 Managed floating is also called dirty floating.

a) True
b) False
Q7 People of a country demand foreign exchange because the assets of home country are
bought by the foreigners.
a) True
b) False
Q8
Hedgingfunctionhelpstoreducethe riskoffluctuationduetochange inforeignexchange
rate.

a) True
b) False
Q9 Fixedexchangerateisfixedbythegovernmentintermsofgoldreserves
a) True
b) False
Q10 The relative price of the foreign goods in term of domestic goods is known as Real
Exchange Rate.
a) True
b) False
Q 11 Devaluation and depreciation of a currency are one and the same thing
a) True
b) False
Q 12 Demand for American goods will rise in India due to appreciation of Indian currency.
a) True
b) False
Q13 When price of foreign currency raises the demand for foreign exchange falls.
a) True
b) False
Q 14 There is direct relation between foreign exchange rate and the supply of foreign
exchange.
a) True
b) False
Q 15 The value of currency of one country with that of the currency of another country is
called Exchange rate.
a) True
b) False
Q 16 Which of the following is true?

(a) Fixed exchange rate is determined by the government
(b) Flexible exchange rate is determined by market forces (demand and supply of
foreign exchange)
Q 17 Decrease in demand for foreign goods means decrease in demand for foreign currency.
a) True
b) False
Q18 “Devaluation of currency is said to occur when the exchange rate is increased under
the fixed exchange rate system.”

a) True
b) False
Q19 Appreciation of Indian rupees will occur when ₹70 have to be paid to exchange one
US $ instead of present rate of ₹ 65/$.
a) True
b) False
Q 20 In spot market, sale and purchase of foreign currency is settled on a specified future
date.
a) True
b) False
Q 21 Managed Floating Exchange Rate is decided by market forces but remains within a
specific range as decided by central bank.
a) True
b) False
Q 22 Exchange rate is the price of a currency expressed in terms of gold.

a) True
b) False
Q 23 Buyers and sellers in foreign exchange rate market wish to buy or sell foreign
exchange.
a) True
b) False
Q 24 Mint value of a currency implied paper value of that currency.

a) True
b) False
Q 25 Managed floating comprises only the element of fixed exchange rate system.
a) True
b) False
Q 26 Bretton woods system of exchange rate was replaced by a dirty floating system of
exchange rate.
a) True
b) False

ANSWER
Question No Answer
Q1 a)True
Q2 a)True
Q3 b)False
Q4 a)True
Q5 a)True
Q6 b)True
Q7 b)False
Q8 a)True
Q9 a)True
Q10 b) True
Q 11 b)False
Q 12 a)True
Q13 a)True
Q 14 a)True
Q 15 a)True
Q 16 c)Both (a) and (b)
Q 17 a)True
Q18 a)True
Q19 b)False
Q 20 b)False
Q 21 a)True
Q 22 b)False
Q 23 a)True
Q 24 b)False
Q 25 b)False
Q 26 b)False


ASSERTION- REASON QUESTIONS
Sl.No. Question
1 Assertion (A) : Equilibrium exchange rate is determined by the demand for and supply of
foreign exchange in the market.
Reason (R) : At equilibrium, demand for foreign exchange is equal to supply of foreign
exchange.
A. Both Assertion (A) and Reason (R) are true and (R) is the correct explanation of (A)
B. Both Assertion (A) and Reason (R) are true but (R) is not the correct explanation of (A)
C. Only Assertion (A) is true and Reason (R) is false
D. Assertion (A) is false but Reason (R) is true
2 Assertion (A) : Rise in the value of domestic currency in terms of foreign currency in the
market is called appreciation of domestic currency.
Reason (R) : When there is appreciation of domestic currency, export of domestic country
increases.
3 Assertion (A) : If US dollar exchanges for Rs 70, instead of Rs 64 earlier in foreign exchange
market, it is called depreciation of rupee.
Reason (R) : If US dollar exchanges for Rs 45, instead of Rs 60 earlier in foreign exchange
market, it is called appreciation of rupee.
4 Assertion (A) : Gold standard system is an example of fixed exchange rate system.
Reason (R) : In fixed exchange rate system the exchange rate is officially fixed by the

Government.
5 Assertion (A) Spot market is of daily nature.

Reason (R) : In spot market future transactions are carried out.
6 Assertion(A):Buyingforeigngoodsisexpenditurefromourcountryanditbecomestheincomeofthatforeign
country.
Reason(R):The purchaseofforeigngoodsorimportsdecreasesthedomestic
demandforgoodsandservicesin our country.
A. Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of
Assertion (A)
B. Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation of
Assertion (A)
C. Assertion (A) is true but Reason (R) is false.
D. Assertion (A) is false but Reason (R) is true.
7
Assertion (A): Managed Floating exchange rate system is also called as 'Dirty Floating'
Reason(R): Clean Floating rate is influenced by the intervention of the Central Bank in the
Foreign ExchangeMarket.
Assertion (A)
B. Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation of
Assertion (A)
8 Assertion(A):FixedExchangeratesysteminvolvesactiveinvolvementofcentralbank/governmentof
therespectivecountries.
Reason (R): In fixed exchange rate system, once the exchange rate is decided it is
usuallykeptas fixedin ordertomaintain thestabilityin economictransactions
.
Assertion (A)

B. Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct
explanation of Assertion (A)

9 Assertion(A):Purchaseofsecond-handmachineryfromabroadisnotrecordedinbalanceof payment.
Reason(R):Saleandpurchaseofsecond-handgoodsfromabroadarenotincludedintheestimationof
nationalincome
Assertion (A)
10 Assertion(A):IfanIndianbuysaUKCarCompany,itrenters’capitalaccounttransactionsas
adebititem.
Reason(R):SaleofassetslikesaleofshareofanIndiancompanytoaChinesecustomerisacredititem
Assertion (A)
11 Assertion (A): Appreciation of domestic currency means a rise in the price of domestic
currency
Reason (R): Appreciation leads to increase in exports.
A. Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation
of Assertion (A).
B. Both Assertion (A) and Reason(R) are true, and Reason (R) is not the correct
explanation of Assertion (A).
C. Assertion (A) is true, but Reason (R) is false.
D. Assertion (A) is false, but Reason (R) is true
12 Assertion (A): Depreciation of domestic currency leads to rise in exports.

Reason (R): Depreciation of domestic currency makes domestic currency relatively cheaper,
which leads to increase in exports.
Assertion (A).
13 Assertion (A): Managed Floating Exchange rate system is a combination of fixed and flexible
exchange rate systems.

Reason (R): In managed floating exchange rate system, central bank decides the limit of Both
A. Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of
Assertion (A).
14 Assertion (A): Appreciation of domestic currency means a rise in the price of domestic
currency.
Reason (R): Appreciation leads to increase in Exports.
Assertion (A).
15 Assertion (A): Managed floating exchange rate system is also called as ‘Dirty floating’.
Reason (R): Clean floating rate is influenced by the intervention of the central bank in the
foreign exchange market.
Assertion (A).
B. Both Assertion (A) and Reason (R)are true and Reason (R) is not the correct
16 Assertion A: An increase in demand for imported goods raises the foreign exchange rate.
Reason R: Demand for foreign exchange will increase in order to make the payment for
imported goods. Supply of foreign exchange may change; increase in demand will cause the
exchange rate to rise.
A. Both Assertion and reason are true and reason is correct explanation of assertion.
B. Assertion and reason both are true but reason is not the correct explanation of assertion.
C. Assertion is true, reason is false.
D. Assertion is false, reason is true.
17 Assertion A: Under managed floating exchange rate system, the Government directly controls
the exchange rate.
Reason R: Managed floating exchange rate is decided by market forces (the float part) but
remains within a specific range as decided by central bank (the managed part).
18 Assertion A: Flexible exchange rate is determined by the market forces of demand and supply.

Reason R: It is also known as floating exchange rate.
D. Assertion is false, reason is true
19 Assertion A : Both devolution and depreciation of currency encourages the export of a

country.
Reason R: Depreciation of currency takes place due to Government, while devaluation takes
place due to market forces of demand and supply.
D. Assertion is false, reason is true
20 Assertion A: Depreciation of domestic currency leads to rise in exports to foreign countries.

Reason R: Due to depreciation of domestic currency, more goods can be purchased from India
with the same amount of foreign currency.
21 . Assertion(A): Foreign exchange management and control is undertaken by commercial banks.

Reason (B): RBI has to maintain the official rate of exchange of rupee to ensure its stability.
Assertion (A).
22 Assertion (A): Exchange control means the state intervention.
Reason (R): Exchange control means the forex market.
Assertion (A).
23 Assertion (A) countries combat currency weakness caused by instability in emerging markets
worldwide
Reasoning(R): Central banks with a dirty float sometimes intervene to steady the market at
times of widespread economic uncertainty.
Assertion (A).

24 Assertion (A): The central bank can purchase a large amount of its own currency to limit the
amount of devaluation caused by the hedge fund.
Reasoning (R): Central banks sometimes intervene to support a currency that is under attack by
a hedge fund or other speculator.
Assertion (A).
25 Assertion (A): An economic shock refers to any change to
fundamental macroeconomic variables or relationships that has a substantial effect on
macroeconomic outcomes and measures of economic performance, such as unemployment,
consumption, and inflation.
Reason(R): A supply shock is an event that makes production across the economy more
difficult, more costly, or impossible for at least some industries.
Assertion (A).

ANSWER
Q.No. Answer
1 A
2 C
3 B
4 A
5 C
6 A
7 A
8 B
9 D
10 A
11 C
12 A
13 A
14 C
15 A
16 A
17 D
18 B
19 C
20 A
21 B
22 A
23 D
24 D
25 D


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CHAPTER -18.

FOREIGN EXCHANGE RATE

1 Rate of exchange as determined by the government is called:

5 Which of the following causes loss of foreign exchange?

1|Page 8 October 2021,ZIET BHUBANESWAR

8 Gold standard system of exchange rate is an old variant of _____.

10 Which of the following is a function of foreign exchange market?

12 Spot market deals in:

2|Page 8 October 2021,ZIET BHUBANESWAR

13 Which of the following is a demand for foreign exchange?

14 The price of one currency in terms of another currency is known as ____

15 Export is a source of ________ of foreign exchange.

18 Thepriceof onecurrencyin termsof another isknown as

22 Whichamongthe followingisa source of supplyofforeignexchange?

(a) Flexible exchange rate (b) fixed exchange rate

26 What isthe causeofthedevaluationofanycountry’scurrency?

28 Whichamongthe followingisasource ofdemandforforeign exchange?

30 Whichone isa meritofthe flexible exchangerate?

31 Increase in the value of foreign commodities is known as :

47 Consider the following statements

48 Decrease in the value of domestic currency in terms of foreign currency is.

49 Identify which of the following statement is true:

50 Appreciation of domestic currency encourages

51 The demand curve for foreign exchange is:

52 Managed floating exchange rate is a system in which the:

55 Foreign exchange rate of a country is:

56 ………………..rate of exchange is it that rate which is determined by the supply

61 Under fixed exchange rate policy, central bank:

(a) A central bank loses its power on monetary policy

(a) Exports and imports are exchanged.

10 | P a g e 8 October 2021,ZIET BHUBANESWAR

11 | P a g e 8 October 2021,ZIET BHUBANESWAR

49 d. Fixed exchange rates are declared by the government

PREPIRED BY : PGT ECONOMICS OF BHUBANESWAR, GUWAHATI,

12 | P a g e 8 October 2021,ZIET BHUBANESWAR

CBQ Question Content

1|Page 8 October 2021,ZIET BHUBANESWAR

--------- The Economic Times, July 14, 2021--------

2|Page 8 October 2021,ZIET BHUBANESWAR

2. . Increase inexchangerateimpliesthatthe price of

3|Page 8 October 2021,ZIET BHUBANESWAR

4|Page 8 October 2021,ZIET BHUBANESWAR

5|Page 8 October 2021,ZIET BHUBANESWAR

8 An exchange rate mechanism (ERM) is a set of procedures used to manage a country's

6|Page 8 October 2021,ZIET BHUBANESWAR

(ii) What is fixed exchange margin:

7|Page 8 October 2021,ZIET BHUBANESWAR

CBQ NO. ANSWER

PREPIRED BY : PGT ECONOMICS OF BHUBANESWAR, GUWAHATI,

8|Page 8 October 2021,ZIET BHUBANESWAR

Q6 Managed floating is also called dirty floating.

1|Page 8 October 2021,ZIET BHUBANESWAR

Q 16 Which of the following is true?

2|Page 8 October 2021,ZIET BHUBANESWAR

Q 22 Exchange rate is the price of a currency expressed in terms of gold.

Q 24 Mint value of a currency implied paper value of that currency.

3|Page 8 October 2021,ZIET BHUBANESWAR

PREPIRED BY : PGT ECONOMICS OF BHUBANESWAR, GUWAHATI,

4|Page 8 October 2021,ZIET BHUBANESWAR

1|Page 8 October 2021,ZIET BHUBANESWAR

5 Assertion (A) Spot market is of daily nature.

2|Page 8 October 2021,ZIET BHUBANESWAR