MCQ BOP and Foreign Exchange

1..Read the following statements carefully:

Statement 1: Borrowings by a nation from the World Bank to finance Balance of Payment (BOP) deficit will be recorded in the capital account.

Statement 2: Autonomous transactions are independent of the condition of Balance of Payment (BOP) account.

In light of the given statements, choose the correct alternative from the following:

(a) Statement 1 is true and Statement 2 is false.

(b) Statement 1 is false and Statement 2 is true.

(d) Both Statements 1 and 2 are false.

2. Suppose that, the Balance of Trade of a nation exhibits a deficit of ₹ 50,000 crore. The import of visible items are

five times of the exports of visible items. The value of exports of visible items would be ₹_______ crore.

(Choose the correct alternative to fill up the blank)

(a) 20,000

(b) 10,000

(d) 20,300

3. Gifts and remittances sent abroad are recorded on the _______ side of the _________ account in Balance of

Payment. (Choose the correct alternative to fill up the blanks)

(a) credit, capital

(b) debit, capital

(d) debit, current

4. “As per the National Stock Exchange (NSE) data, dated 9th June, 2023, there was a net selling off worth ₹ 309

crore by Foreign Institutional Investors (FIIs) over the period of one month i.e., 9th May, 2023 - 9th June, 2023.”

The above-mentioned transactions will be recorded on __________ side of ___________ account of Balance of

Payments of India. (Choose the correct alternative to fill in the blanks)

(A) Debit, Current

(B) Credit, Capital

(D) Debit, Capital

5. Surplus in Balance of Payments (BOP) refers to the excess of ___________. (Choose the correct alternative to

fill in the blank)

(A) Autonomous payments over Autonomous receipts

(B) Current Account payments over Autonomous receipts

(D) Autonomous receipts over Autonomous payments

6. Suppose, the Balance of Trade of an imaginary economy shows a favourable balance of ₹ 500 crore. The values

of merchandise exports are ₹ 1200 crore and transfer payments are ₹400 crore. The value of merchandise imports

would be ₹ __________ crore. (Choose the correct alternative to fill in the blank)

(A) 1700

(B) 750

(D) 900

7. Read the following statements - Assertion (A) and Reason (R). Choose one of the correct alternatives given below:

Assertion (A): The Balance of Payments is in surplus, if autonomous receipts are greater than autonomous payments.

Reason (R): Autonomous transactions are determined by the difference in the Balance of Payments.

Alternatives:

(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).

(d) Assertion (A) is false, but Reason (R) is true.

8. As per the Reserve Bank of India (RBI) press report, dated

22nd June, 2022: "Net Foreign Portfolio Investment (FPI) recorded an outflow of US$15.2 billion mainly from the

equity market." The above transaction will be recorded in the _______ account on ______ side of Balance of

payments account of India. (Choose the correct alternative)

(a) current, credit (b) current, debit

(d) capital, debit (c) capital, credit

9. Assuming that, the following data is given for an imaginary economy:

The balance of trade from 2020 to 2021_______ by ₹_______ crore. (Choose the correct alternative)

(a) increased, 200 (b) decreased, 200

10.Identify which of the following is not one of the merits of fixed exchange rate system.

(A) Ensures stability in exchange rate

(B) Possibility of under or over valuation of foreign currency

(D) Coordination of macroeconomic policies becomes convenient

11. Identify which of the following will appear on the debit side in the Capital Account of India's Balance of Payments.

(A) An Indian sending remittances from England

(B) Investing in assets abroad by Indians

(D) Export of spices from India

12. Study the following figure carefully and choose the correct alternative to fill in the blank:

Alternatives:

(A) Investments

(B) Trade of Services

(D)External Assistance

13. Keeping other factors constant, if the price of crude oil falls in the international market, it may lead to_____________. (Choose the correct alternative to fill up the blank)

(a) increase in trade deficit

(b) decrease in trade deficit

(d) no change in the foreign exchange reserves

14. Read the following statements carefully:

Statement 1: Import of gold from Dubai will be recorded on the debit side of the current account in Balance of Payments of India.

Statement 2: Outflow of Foreign Institutional Investment (FII) from Indian stock markets will be recorded on the credit side of the capital account.

In light of the given statements, choose the correct alternative from the following:

(a) Statement 1 is true and Statement 2 is false.

(b) Statement 1 is false and Statement 2 is true.

(d) Both Statements 1 and 2 are false.

15. Identify, which of the following is not a source of supply of foreign exchange for India. (Choose the correct alternative)

(a) Exports of goods and services abroad

(b) Remittances by Indian workers working abroad

(d) Foreign Direct Investment (FDI) by a German automobile manufacturer

16. According to the Reserve Bank of India’s (RBI’s) Statistical Supplement released on 19th May, 2023: “India’s

foreign exchange reserves grew for the third straight week and reached near an approximate level of $ 600 billion.”

The above situation will _________ the __________ side of Balance of Payments account of India.

(Choose the correct alternative to fill in the blanks)

(A) Increase, Credit

(B) Decrease, Credit

(D) Increase, Debit

17. Identify the correct pair of statements given in Column I with the related terms in Column II

Alternatives: (A)1 → (i) (B) 2 → (ii) (C) 3 → (iii) (D) 4 → (iv)

18. An Indian company receives a loan from a company located abroad. This transaction would be recorded on the_____________ side of _________ account in India's Balance of Payment.

(a) Credit, Current (b) Debit, Current

19. Read the following statements carefully:

Statement 1: Balance of Payment account is always balanced in accounting sense.

Statement 2: Autonomous transactions, restore balance in Balance of Payment account.

In light of the given statements, choose the correct alternative from the following:

(a) Statement 1 is true and Statement 2 is false.

(b) Statement 1 is false and Statement 2 is true.

(d)Both Statements 1 and 2 are false.

20. Read the following statements carefully:

Statement 1: Depreciation of domestic currency may lead to a rise in exports.

Statement 2: Due to the depreciation of Indian National Rupee (₹), purchasing power of US Dollar ($) may increase.

In light of the given statements, choose the correct alternative from the following:

(a) Statement 1 is true and Statement 2 is false.

(b) Statement 1 is false and Statement 2 is true.

(d) Both Statements 1 and 2 are false.

21. Identify, which one of the following is an intangible item in Balance of Payment (BoP).

(a) Export of food grains

(b) Imports of crude oil

(d) Import of coal by steel company in India

22. Read the following statements - Assertion (A) and Reason (R). Choose one of the correct alternatives given below:

Assertion (A): Ceteris Paribus, Devaluation of domestic currency leads to an increase in National Income of anation.

Reason (R): Devaluation of domestic currency refers to reduction in the value of domestic currency with respect to

foreign currency, under the fixed exchange rate system.

Alternatives:

(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).

(D) Assertion (A) is false, but Reason (R) is true.

23. Identify, which of the following is not a source of demand for foreign exchange for Indian economy?

(Choose the correct alternative.)

(A) Import of goods and services

(B) Remittances by foreigners living in India to their families abroad

(D) Loans from Rest of the World (ROW)

24. Under the ______________Exchange Rate System, the Central Bank can control the rise / fall of foreign exchange rate in a range bound manners. (Fill up the blank with correct alternative.)

(A) fixed (B) flexible

25. “Considering the depreciation of Indian Currency (₹) in the international market, the Reserve Bank of India

(RBI) has decided to purchase Indian currency (₹) in the open market.” This represents ____________ exchange rate

system. (Fill up the blanks with correct alternative)

(a) fixed (b) flexible

26. ‘Deficit’ in Balance of Payment (BOP) refers to the excess of ____. (Choose the correct alternative)

(a) Current account payments over Current account receipts

(b) Capital account payments over Capital account receipts

(d) Accommodating payments over Accommodating receipts

27. Suppose, the price of one UK Pound (£) has increased from ₹70 to ₹80, owing to market forces. This means that value of Indian Currency (₹) has __________. (Choose the correct alternative)

(a) appreciated (b) depreciated

28. If in an economy the Balance of Trade is showing a deficit of ₹ 200 crore and the value of import is ₹ 900 crore,then the value of exports would be ₹ _________crore. (Fill up the blank with correct alternative.)

(A) 200 (B) 1100 (C) 700 (D) 900

29. From the following, identify the correct reasons that may affect the supply of foreign exchange in an economy:

I. Purchase of land in England by an Indian

II. Foreign tourists visiting Taj Mahal

III. Donation of $ 500 million from Microsoft

IV. Indian students going to Australia for studies

Alternatives:

(A) I and II (B) II and IV

30. The measurement of Balance of Payments deficit is based on ______ transactions.

(Fill up the blank with correct alternative.)

(A) Autonomous (B) Accommodating

31. Keeping all other factors constant, trade surplus may arise in the Balance of Payments of a nation because of

________. (Choose the correct alternative to fill in the blank)

(A) rise in export of coffee to Japan

(B) fall in import of banking services

(D) rise in remittances to abroad

32. Under _______ exchange rate system, the Central Bank and Government of the country do not have any

authority to interfere in the exchange rate determination. (Choose the correct alternative to fill in the blank)

(A) fixed (B) floating

33. The ___________ account of Balance of Payments reflects the net changes in financial claims on the Rest of the

World (ROW). (Choose the correct alternative to fill in the blank)

(A) Trade (B) Capital

34. ‘Owing to the Russia-Ukraine crisis, the world is experiencing rising crude prices due to supply-side issues.’

Identify the most likely impact on the Balance of Payment situation of the Indian economy from the following:

a) Production of cars in India will rise. b) Production and sale of cycles in India will rise.

c) Inflow of US Dollars in India will rise. d) Outflow of US Dollars from India will rise.

35. As per the Reserve Bank of India (RBI) press report, dated 29th December, 2022: "Net external commercial

borrowings to India recorded an outflow of US$ 0.4 billion in the second quarter (2022-23)" The above transaction will be recorded in the _______ account on ______ side of Balance of payments account of India. (Choose the

correct alternative to fill up the blanks)

a) current, credit b) current, debit

c) capital, credit d) capital, debit

36. Identify the correct reason(s) that may affect the demand for foreign exchange in an economy.

I. Imports of visibles

II. Exports of invisibles

III. Remittances by residents working abroad

IV. Purchase of assets abroad

Alternatives:

a) I and II

b) II and III

c) III and IV

d) I and IV

37. Read the following chart carefully and choose the correct alternative:

Alternatives:

a) Interest received on loans c) Portfolio Investment

b) Multilateral Loans d) Government Aid

38. Under the _______ exchange rate system, market forces automatically adjust the surplus and deficit in the Balance of Payments account. (Choose the correct option to fill up the blank)

A. fixed B. flexible

C. managed floating D. dirty floating

39. Read the following statements carefully:

Statement 1: Foreign grants-in-aid receipts do not lead to any claim on the government.

Statement 2: Disposal of equity by the Public Sector Undertakings in the market may lead to a decrease in the assets of the government.

In light of the given statements, choose the correct option from the following:

A. Statement 1 is true and Statement 2 is false.

B. Statement 1 is false and Statement 2 is true.

C. Both Statements 1 and 2 are true.

D. Both Statements 1 and 2 are false.

40. “There exists a positive relation between foreign exchange rate and supply of foreign exchange.” Do you agree with the given statement? Justify your answer with valid arguments. (use diagram)

Ans. Yes. When foreign exchange rate rises, the goods in domestic market become relatively cheaper for the buyers of the rest of the world. Thereby increasing the international competitiveness of Indian exports. This raises demand for exports, which in turn may lead to increase in supply of foreign exchange and vice-versa.

41. Distinguish between fixed exchange rate system and flexible exchange rate system.

Ans. Under the Fixed Exchange Rate System, the foreign exchange rate is fixed by the government. This exchangerate system helps in maintaining stability in the value of the domestic currency vis-à-vis foreign currencies.

Whereas; Under the Flexible Exchange Rate System, the foreign exchange rate is determined by the interaction of market forces of demand and supply. Flexible exchange rate keeps fluctuating according to the demand and supply.

42. "Under the flexible exchange rate system, the Central Bank does not intervene in the foreign exchangemarket." Justify the statement, giving valid arguments.

Ans. Under the flexible exchange rate system, the foreign exchange rate is determined through free market forces ofdemand and supply. Equilibrium rate of exchange is established at a point where the quantity demanded and quantity supplied of foreign exchange are equal. In case of any disequilibrium, market forces of demand and supply will automatically bring the exchange rate back to the equilibrium level. Hence, the Central Bank does not have any active role to play in the determination of exchange rate under the flexible exchange rate system.

43. Explain the impact of home currency depreciation on the exports of a nation.

Ans. Depreciation of home currency is referred to as a situation of fall in the price of home currency in terms of a foreign currency. Depreciation of home currency may lead to promotion of exports from the nation as the goods become relatively cheaper. This will increase the international competitiveness of the exports from the home country to the rest of the world.

44. “Accommodating transactions are undertaken to maintain stability in the Balance of Payments Account.” Justify the given statement with valid explanation.

Ans. Accommodating transactions are commonly undertaken to maintain stability in Balance of Payments (BOP)account. Accommodating transactions are independent of any economic motive. These transactions are determinedby the net result of autonomous items such as surplus or deficit in BOP. Hence, accommodating transactions play a crucial role in maintaining stability in Balance of Payments account by providing a mechanism to address imbalances in international transactions.

45. “Depreciation of currency may promote exports of a nation.” Defend or refute the given statement with valid arguments.

Ans. The given statement is defended. When the domestic currency of an economy depreciates, domestic goods become relatively cheaper in the international markets. Thereby, increasing the demand of domestic goods globally.

Hence, depreciation of currency may promote exports of a nation.

46. Discuss briefly the determination of exchange rate under the flexible exchange rate system.

Ans. Equilibrium rate of exchange is established at a point where the quantity demanded and quantity supplied of

foreign exchange are equal. In the foreign exchange market, if disequilibrium occurs, it may lead to a situation of excess demand or excess supply. The market mechanism will drive the exchange rate back to the equilibrium level.

This implies that the free market forces of demand and supply will operate in such a manner that the equilibrium rate of exchange is automatically restored.

47. Discuss any two factors which directly affect the demand for foreign exchange of a nation.

Ans. Two factors which directly affect the demand of foreign exchange of a nation are:

• Imports: When a country imports goods and services, it needs to pay for these imports in the foreign currency.

Therefore, higher imports result in higher demand for foreign exchange.

• Investments abroad: When domestic investors make investments abroad, the payment is to be made in the foreign

currency. This increases the demand for foreign exchange.

48. "The central bank needs to intervene under the managed floating system." Do you agree with the given statement? Support your answer with valid reasons.

Ans. Yes. Under the managed floating system, the central bank allows the exchange rate to be determined by market forces of demand and supply. It may buy and sell foreign exchange to moderate exchange rate fluctuations. This intervention is undertaken to keep the exchange rate within the desired range. (To be marked as a whole)

49. Differentiate between Surplus in Balance of Trade and Current Account Surplus.

Ans. Surplus in the Balance of trade arises when the value of exports of visibles is more than the value of imports ofvisibles. Whereas, The current account surplus arises when receipts from exports of visibles, invisibles and unilateral transfers are more than payments for imports of visible, invisibles and unilateral transfers.

50. State the meaning of ‘Balance of Payments Deficit’

Ans. Balance of Payments deficit occurs when autonomous receipts fall short of autonomous payments during agiven fiscal year in an economy.

51. State the meaning of autonomous and accommodating items, under Balance of Payments of India, with the help of an example.

Ans. Autonomous transactions are those international economic transactions which are independent of the state of Balance of Payments (BOP). These transactions generally take place with some economic motive. For example, exports of goods. Accommodating transactions are those international economic transactions which are undertaken (by competent authorities) to cover the surplus/deficit in Balance of Payments (BOP). These transactions are independent of economic motive. For example, loan taken from the World Bank to cover the deficit in the BOP Account.

52. Giving valid reasons, state whether the following statements are true or false:

(i) Dividend received from investment abroad is recorded on the credit side of the capital account.

Ans. (i) False. Dividend received from investment abroad is recorded on the credit side of current account, as neither assets nor liabilities of the country get affected.

(ii) Depreciation of the Indian Currency will lead to promotion of Indian exports.

Ans. True. Depreciation of the Indian currency will lead to promotion of Indian exports. As Indian exports become relatively cheaper for the rest of the world, thereby increasing the international competitiveness of Indian exports.

53. “Trade Deficit must exist, if a country is facing situation of Current Account Deficit (CAD).” Defend or refute the above-mentioned statement with valid arguments.

Ans. The given statement is refuted. The Current Account Deficit (CAD) is a broader concept. CAD occurs when the foreign exchange payments on account of visible, invisibles and unilateral transfers are in excess over the foreign exchange receipts of visible, invisibles and unilateral transfers. A country may face a situation of CAD, even if the country has trade surplus, with negative balances on account of services and unilateral transfers.

54. “Devaluation of currency and depreciation of currency have the same implications, but they originate from divergent sources.” Do you agree with the given statement? Give valid reason in support of your answer.

Ans. Yes, devaluation and depreciation of currency may lead to fall in the value of domestic currency in relation to foreign currency. This may result in promotion/reduction of exports/imports, as the domestic/foreign goods become relatively cheaper/costlier. Hence, both devaluation and depreciation of currency have the same implications. However, devaluation of currency originates due to the actions taken by the government while depreciation of currency is caused by the market forces of demand and supply.

55. Outline the meaning and reasons behind narrowing down of Current Account Deficit.

Ans. Current Account Deficit (CAD) arises when receipts from exports of goods & services and unilateral transfers are less than the payments for imports of goods & services and unilateral transfers. CAD may narrow down when either receipts from exports of goods and services and unilateral transfers increase or payments for imports of goods and services and unilateral transfers decrease.

56. ‘Current account deficit in an economy must be financed by a corresponding capital account surplus’.Do you agree with the given statement? Give valid reason(s) in support of your answer.

Ans. Yes, the statement can be agreed upon. Since, in accounting sense; Current Account + Capital Account ≡ 0 If an economy is facing the situation of current account deficit (CAD), the same must be financed through surplus in capital account. CAD may be setoff through net capital inflows. Transactions like selling off assets or borrowing from abroad, may be instrumental in balancing CAD in Balance of Payments account.

57. (I) ‘Foreign Portfolio Investment (FPI) witnessed a sharp turnaround during 2023-24 with net FPI inflows of US$ 32.4 billion.’ In which sub-account and on which side of the Balance of Payments account the above transaction will be recorded? Give reasons in support of your answer.

Ans. Foreign Portfolio Investments in India in the fiscal year 2023-24 will be recorded on the credit side of the capital account of the Balance of Payments (BOP) account. It is recorded on the credit side, as it results in the inflow of foreign exchange. Furthermore, such transactions are documented in the capital account as they reflect the change in the ownership of financial assets between the residents of a country and rest of the world.

Answer Keys

1. Ans. (c) Both Statements 1 and 2 are true.

2. Ans. (c) 12,500

3. Ans. (d) debit, current

4. Ans. (D) Debit, Capital

5. Ans. (D) Autonomous receipts over Autonomous payments

6. Ans. (C) 700

7. Ans. (c) Assertion (A) is true, but Reason (R) is false.

8. Ans. (d) capital, debit

9. Ans. (c) increased, 50

10. Ans. (B) Possibility of under or over valuation of foreign currency

11. Ans. (B) Investing in assets abroad by Indians

12. Ans. (B) Trade of Services

13. Ans. (b) decrease in trade deficit

14. Ans. (a) Statement 1 is true and Statement 2 is false.

15. Ans. (c) Imports of goods and services from abroad

16. Ans. (D) Increase, Debit

17. Ans. (B) 2 → (ii)

18. Ans. (c) Credit, Capital

19. Ans. (a) Statement 1 is true and Statement 2 is false.

20. Ans. (c) Both statements 1 and 2 are true.

21. Ans. (c) Exports of Information Technology to U.S.A.

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

23. Ans. (D) Loans from Rest of the World (ROW)

24. Ans. (C) managed floating

25. Ans. (C) managed floating

26. Ans. (c) Autonomous payments over Autonomous receipts

27. Ans. (b) depreciated

28. Ans. (C) 700

29. Ans. (C) (II) and (III)

30. Ans. (A) Autonomous

31. Ans. (A) rise in export of coffee to Japan

32. Ans. (B) floating

33. Ans. (B) Capital

34. Ans. d) Outflow of US Dollars from India will rise.

35. Ans. d) capital, debit

36. Ans. d) I and IV

37. Ans. c) Portfolio Investment

38. Ans. B. flexible

39. Ans. C. Both Statements 1 and 2 are true.

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MCQ BOP and Foreign Exchange

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