Foreign Exchange and Exchange Rate

Q.

Differentiate between appreciation and depreciation of domestic currency.

Q.

What do you understand by devaluation of rupee?

Q. Price of one currency in relation to other currencies in the international exchange market is known as rate.

1. flexible exchange
2. fixed exchange
3. exchange
4. equilibrium

Q.

Price of one currency in relation to other countries in the international exchange market is known as:

1. flexible exchange rate

2. fixed exchange rate

3. exchange rate

4. equilibrium rate

Q.

Explain why the supply of a foreign currency rises in response to a rise in its exchange rate.

Q.

Calculate real exchange rate if the domestic price level is 100, the price level in the US is 500, and the nominal exchange rate is 70 dollars per rupee.

1. $\frac{1}{14}$

2. $14$

3. $350$

4. $470$

Q.

Distinguish between the nominal exchange rate and the real exchange rate. If you were to decide whether to buy domestic goods or foreign goods, which rate would be more relevant? Explain.

Q.

The rate which is determined by the government is known as:

1. none of these

2. floating exchange rate

3. fixed exchange rate

4. flexible exchange rate

Q. Explain the "medium of exchange" function of money.

Q.

Suppose it takes 1.25 yen to buy a rupee, and the price level in Japan is 3 and the price level in India is 1.2. Calculate the real exchange rate between India and Japan.

Q.

Spot market is the market where:

1. forward rate of exchange is determined

2. instant rate of exchange is determined

3. both (a) and (c)

4. only current transactions are handled

Q.

Would the central bank need to intervene in a managed floating system? Explain why.

Q. ______________ refers to the minimum percentage of total demand and time deposits to be kept by commercial banks with the central bank.

[0.80 marks]

1. Cash Reserve Ratio
2. Statutory Liquidity Ratio
3. Repo Rate
4. Reverse Repo Rate

Q.

Forward market is that market which:

1. none of these

2. handles current as well as future transactions

3. handles current transactions

4. handles transactions of foreign exchange meant for future delivery

Q.

Differentiate between the following:
(a) BOT and BOP
(b) Fixed and Flexible exchange rates

Q.

Discuss the important reforms introduced in the foreign exchange market?

Q.

Is hedging possible in the managed floating system?

Q. Match List - I (Type of Inflation) with List - II (Characteristic) and select the correct answer using the codes given below the lists.

List - I (Type of Inflation)	List - II (Characteristic)
A. Demand-pull Inflation	1. Initially price rises
B. Cost-push Inflation	2. Price-rise controlled by rationing and other means
C. Suppressed Inflation	3. Inflation in which prices increase as a result of increased production costs, as labour and raw materials, even when demand remains the same
D. Creeping Inflation	4. Inflation in which rising demand results in a rise in prices. 5. Fall in price of raw materials

1. $4,1,2,5$
2. $4,3,2,1$
3. $2,1,4,5$
4. $2,3,4,1$

Q. What is floating exchange rate?

Q. Long Answer Type Questions :
Distinguish between the fixed exchange rate and the floating exchange rate. If exchange rate falls, explain its effects on exports and imports.

Q. The purpose of devaluation of Indian rupee is to _______.

1. reduce imports and to increase exports
2. reduce differences between value of goods and value of services imported
3. maintain favourable balance of payments
4. increase imports and to reduce exports

Q. In spot market, sale and purchase of foreign currency is settled on a specified future date.

1. True
2. False

Q. The rate at which the currency of one country is converted into another currency is called __________.

1. currency Swap
2. exchange rate
3. transfer rate
4. conversion rate

Q. Fill in the blanks with appropriate alternatives given in the brackets:
The currency notes issued by Central Bank are ___ legal tender.
(Limited, unlimited, restricted, nil)

Q. Two economics teachers Shekhar and Nitin were discussing the exchange rate systems. Under this system, the central bank buys or sells foreign currencies so that changes of exchange rate remain within the targeted range. The above-mentioned statement was given by Nitin. Identify the type of exchange rate system that he was talking about.

[0.80 marks]

1. Floating exchange rate
2. Managed floating exchange rate
3. Managed fixed exchange rate
4. Fixed exchange rate

Q.

If real exchange rate has fallen, which of the following might be true?

1. Domestic prices have risen

2. Foreign prices have fallen

3. Domestic prices have fallen

4. Foreign prices have risen

Q. Short Answer Type Questions:
How is exchange rate determined in the foreign exchange market? Explain.

Q. Devaluation of Indian Rupee first time took place in____.

1. 1940
2. 1947
3. 1970
4. 1966

Q. Explain what is meant by 'Open market operation'.

Q.

A system in which the government intervenes only if the exchange rate slips out of a target zone is called:

1. Managed Floating System

2. Flexible Exchange Rate System

3. Fixed Exchange Rate System

4. None of these