BALANCE OF PAYMENTS

TOTAL WEIGHTAGE- 6 MARKS

QNS.1 Foreign exchange rate refers to -

A)The price of one currency in terms of gold in the domestic market.
B) The price of one currency in relation to another currencies in the international money market.
C) The price of domestic currency in relation to foreign currency in the international money market.
D) Both B and C

QNS.2 Foreign exchange rate is also called as

A) Fixed exchange rate
B) Equilibrium rate
C) External value of currency
D) None of these

QNS.3 ___________ rate of exchange is declared by the government.

A) Flexible
B) Managed
C) Dirty
D) Fixed

QNS.4 Under flexible exchange rate system, exchange rate is determined by the
A) Demand for foreign exchange
B) Supply of foreign exchange
C) Both A and B
D) Government

QNS.5 There is _______ relation between Foreign ExchangeRate and demand for foreign exchange
A) Inverse
B) Direct
C) Indirect
D) None of these

QNS.6 When supply of foreign currency increase, the equilibrium exchange rate will –
A) Rise
B) Fall
C) Remains same
D) None of these

QNS.7 If rate of dollar increase from Rs 40 to Rs 50 (due to market forces) then it is called as:
A) Depreciation of domestic currency
B) Appreciation of foreign currency
C) Appreciation of domestic currency
D) Both A and B

QNS.8 When the government wants to strengthen the rupee it _________ Foreign reserves
and ________ domestic rupee.
A) Buys, Sells
B) Sells, Sells
C) Sells, buys
D) Buys, buys

QNS.9 The Expert said that India should focus on cutting inflation by allowing a more flexible
exchange rupee rate. What must be currently be happening regarding exchange rate?

A) There is a balance of payments surplus and the exchange rate is trying to rise
B) There is a balance of payments surplus and the exchange rate is trying to fall
C) There is a balance of payments deficit and the exchange rate is trying to rise
D) There is a balance of payments deficit and the exchange rate is trying to fall

Consider the following statements:

1) Devaluation of a currency may promote exports.
2) Prices of a country‟s products in the international market may fall due to devaluation.

QNS.10Which of the statements given above is/are correct?

A) 1 only
B) 2 only
C) Both 1 and 2
D) Neither 1 nor 2

After reading following case study give answers from question no. 11 to 13.

India, which uses 80% of imported crude oil for its requirements, imports around 10% of its crude oil
requirement from Iran, the third largest supplier after Saudi Arabia and Iraq.
An agreement had been signed by the Indian and Iranian government on 2 November 2018 for oil
payment in rupees and 50% of those funds had been earmarked for exports," according to an Indian
government document reviewed by Reuters.
Oil payments are being made in rupees only as against earlier arrangements where there was a
ratio of 45% rupees and 55% euros, the document said.

QNS.11 ________ is the second largest traded currency on the forex market.
A) US dollar
B) Indian Rupees
C) Euro
D) Yen

QNS.12What 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

QNS.13 Which of the following is / are benefits of India-Iran agreementto India?

A) Strengthening rupee in international market
B) Help to boost trade with Iran
C) Both A and B
D) None of these

QNS. 14 The forward exchange rate is -

A) The rate today for exchanging one currency for another for immediate delivery.
B) The rate today for exchanging one currency for another at a specific future date.
C) The rate today for exchanging one currency for another at a specific location on a specific
future date.
D) The rate today for exchanging one currency for another at a specific location for immediate
delivery.

QNS. 15 Other things remaining the same, when foreign currency becomes cheaper, the effect
on National Income is likely to be:
A) Positive
B) Negative
C) Both A and B
D) None of These

QNS. 16 Identify the correct matched pair from Column A to Column B.

COLUMN A COLUMN B
(a) Fixed Exchange rate (1) Demand – Supply forces
(b) Flexible exchange rate (2) Manipulation
(c) Managed Floating (3) Occasional Intervention by central bank
(d) Dirty Floating (4) Fixed by government

QNS. 17 Financial conference held at Bretton woods in ________________which led to the

establishment of IMF.
A) 1944
B) 1945
C) 1950
D) 1955

QNS. 18 Assertion (A): Appreciation of domestic currency means a rise in the price of domestic
currency.
Reason (R): Appreciation leads to increase in Exports.

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

QNS. 19 Assertion (A): Any current account deficit must be financed by a capital account
surplus, that is, a net capital inflow.
Reason (R): The current account deficit is financed entirely by international lending without
any reserve movements.

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.

QNS. 20 Assertion (A): Balance of payment may improve better.

Reason (R): „Make in India‟ will increase inflow of foreign exchange.

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.

QNS. 21 Assertion (A): Due to rise in demand for foreign exchange rupee is depreciating.
Reason (R): Government devalues its own currency sometimes.

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.

After reading following Report/Case study give answers from question no. 22 to 24.

The rupee declined 18 paise to close at 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 74.24
and swung between the day‟s high of 74.18 and low of 74.50 to the US dollar.
The rupee finally settled at 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 to show
factory output contracted for 7 consecutive month,” Mukadam said.
Source: www.economictimes.com
QNS. 22 The rupee declined 18 paise means ___________ of rupee.
A) Depreciation
B) Appreciation
C) Devaluation
D) Revaluation

QNS.23 ____________ is the system of floating exchange rate with the occasional intervention
by the RBI to influence the float or manage the float.
A) Managed Floating
B) Dirty Floating
C) Both (a) & (b)
D) None of the above

QNS. 24 What is the full form of CPI?

A) Current Price Index
B) Crude Price Index
C) Consumer Price Index
D) None of the above

Read the following News Report and answer Q. 25 -28 on the basis of the same:

India‟s trade deficit with China dips to $48.66 billion in 2019-20. In 2018-19, Exports to China
in the last financial year stood at $18.9 billion, and the trade deficit stood at $53.56 billion.
Chinese FDI has dipped to $163.78 million in 2019-20 from $229 million in the previous fiscal.

QNS. 25 What does “Trade Deficit” mean?

A)The value of exports of goods and services is less than the value of imports of goods and
services.
B) The value of imports of merchandise is more than the value of exports of merchandise.
C) Negative balance on account of trade in goods, services and transfers.
D) Foreign exchange payments on account of invisible items are in excess over the receipts of
invisible items.

QNS. 26 “India‟s trade deficit with China dips to $48.66 billion in 2019-20.” ___________ in
imports from China has caused this.
A) Increase
B) Decrease
C) No change
D) None of the above

QNS. 27 How much was the Imports of goods from China in 2018-19?
A)$53.56 billion
B) $34.66 billion
C) $48.66 billion
D) $72.46 billion
QNS.28 “Chinese FDI has dipped to $163.78 million in 2019-20 from $229 million in the
previous fiscal.” What will be its impact on BOP position of India?
A) Favourable BOP position
B) Adverse BOP position
C) BOP equilibrium
D) None of the above

QNS. 29 In international trade if the domestic price of goods is more than the world price:
A) The country will become an exporter of the goods.
B) Country will become an importer of the goods.
C) The country will neither import not export.
D) Additional information is required.

QNS. 30 An Indian real estate company receives rent from Google in New York. This
transaction would be recorded on ________ side of ________ account.
A) Credit, current
B) Credit, capital
C) Debit, capital
D) Debit, current

QNS. 31 Balance of payment is a set of accounts showing –

A) All monetary transactions of a country with rest of the world

B) All economic transactions between residents of domestic country and residents of foreign
countries
C) All autonomous transactions of a country with rest of the world.
D) Both A and B

QNS. 32 If balance of trade is (-) Rs.600 crore and value of exports Rs. 500 crores, then the
value of imports will be
A) Rs. 1300 crore
B) Rs. 300 Crore
C) Rs. 1100 Crore
D) Rs. 1200 Crore

QNS. 33 Capital account of BoP records all such transactions which cause –

A) Change in ownership of assets between one country and rest of the world
B) Movement of goods between one country and rest of the world
C) Movement of services between one country and rest of the world
D) All of these

QNS. 34 Investment by Walmart stores in India is a part of -

A) Current account of BOP
B) Capital account of BOP
C) Both A and B
D) None of these
QNS. 35 Export and Import of Machinery comes under
A) Current account of BOP
B) Capital account of BOP
C) Both A and B
D) None of these

QNS. 36 Which of the following transaction is/are a part of capital account of BOP?

A) Money sent by NRIs to their family members

B) Deposit held by NRIs in the domestic economy
C) Both A and B
D) None of these

QNS. 37 Which of the following transaction determine balance of trade?

A) Export of goods
B) Import of goods
C) Both A and B
D) All of these

QNS. 38 Assertion (A): If an Indian buys a UK Car Company, it enters capital account
transactions as a debit item.
Reason (R): Sale of assets like sale of share of an Indian company to a Chinese customer is a
credit item on the capital account.

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.

QNS. 39 Assertion (A): Balance of Payments may be adversely affected.

Reason (R): Import of pulses is leading to outflow of foreign exchange.

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.

QNS. 40 Assertion (A): A country tries to balance the BOP ie balance in current account equals
to balance in capital account.
Reason (R): Balance BOP indicates stable economic relation with rest of the world.

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.

QNS. 41Suppose a US Toyota dealer imports 100 cars worth $10,000 each and the Japanese
manufacturer buys a US bond with the $1 million proceeds. Then the US current account moves
A) Towards deficit and balance of payments moves toward surplus
B) Towards surplus and balance of payment moves towards surplus
C) Towards deficit and balance of payment moves towards deficit
D) Towards deficit and the balance of payment is unaffected

QNS. 42 Identify the correct sequence of alternatives given in Column B by matching them
with Column A

COLUMN A COLUMN B
(i) Borrowing from IMF (1) Invisible Items
(ii) Import of Shipping Services (2) Unilateral Transfer
(iii) Export of Machinery (3) Accommodating Items
(iv) Foreign Aid (4) Visible Items

A) (4), (1), (2), (3)

B) (3), (1), (4), (2)
C) (1), (2), (4), (3)
D) (4), (1), (2), (3)

QNS. 43 Identify the correct matched pair from Column A to Column B.

COLUMN A COLUMN B
(a) Export of Software to France (1) Debit side of current account
(b) Import of machinery from China (2) Capital Account of BOP
(c) Remittances to relatives staying abroad (3) Debit side of Current Account of BOP
(d) Investment by Apple phones firm in India (4) Credit side of Current Account of BOP

QNS. 44 Identify the correct matched pair from Column A to Column B.

COLUMN A COLUMN B
(a) Import of Petroleum from Iran (1) Debit Side of Current Account
(b) BPO Service provided by India toUSA (2) Credit Side of Capital Account
(c) Investment by Saudi Arabia in RIL (3) Debit side of Capital Account
(d) Export of Spices to Greece (4) Debit side of Current Account

QNS. 45Economic transactions include:

A) Visible items
B) Invisible items
C) Unilateral transfers
D) All of the above

QNS. 46Credit side of capital account constitute

A) Capital receipts
B) Capital Payments
C) Capital balance
D) None of the above

QNS. 47 Current account in ________ concept.

A) Stock
B) Flow
C) Real
D) None of the above

QNS. 48 The Price of one currency in terms of another is known as ___________.

A) Foreign exchange rate
B) Trade rate
C) Interest rate
D) Balance of Payments

QNS. 49 When there is a favourable balance of trade:

A) X > M
B) X < M
C) X = M
D) None of these

QNS. 50 Other things remaining the same, when in a country the market price of foreign
currency falls, national income is likely:
A) To rise
B) To fall
C) To rise or to fall
D) To remain unaffected