# Free The Open Economy 01 Practice Test - 12th Grade - Commerce

What is the relationship between supply of foreign exchange and exchange rate?

A.

No relationship

B.

One to one

C.

Direct

D.

Inverse

#### SOLUTION

Solution : C

The supply of foreign exchange varies positively and directly with the exchange rate.

Which of the following transactions are recorded in the current account of the balance of payments?

A.

Import and export of goods and services

B.

Transfers from one country to the other

C.

Both (a) and (b)

D.

None of these

#### SOLUTION

Solution : C

The current account records imports and exports, as well as transfer payments.

Balance of payment is in disequilibrium when:

A.

Current account balance + capital account balance is some negative number

B.

Current account balance + capital account balance is not equal to zero

C.

Current account balance + capital account balance is some positive number

D.

All of the above

#### SOLUTION

Solution : A

The balance of payments shows disequilibrium if the sum of current and capital account balance is not equal to zero, or is equal to a positive or a negative value.

Disequilibrium in the balance of payments leads to:

A.

none of these

B.

both (a) and (b)

C.

decrease in official reserves with RBI

D.

increase in official reserves with RBI

#### SOLUTION

Solution : B

Disequilibrium in the BoP can cause an increase or a decrease in the official reserves, depending on whether there is a deficit or a surplus.

Cause of BoP imbalance relates to:

A.

neither (a) nor (b)

B.

autonomous items

C.

accomodating items

D.

both (a) and (b)

#### SOLUTION

Solution : B

Autonomous items cause an imbalance in the BoP, and accommodating items correct these imbalances.

The balance of trade shows a deficit of Rs 4,000 crore and the value of imports are Rs 10,000 crore. What is the value of exports?

A.

2,000

B.

4,000

C.

6,000

D.

8,000

#### SOLUTION

Solution : C

Exports = Balance of Trade + Imports = -4,000 + 10,000 = 6,000

The balance of payments of a country includes:

A.

Official transfers of foreign currency

B.

Smuggling transactions

C.

Loans and aid

D.

Both a and c

#### SOLUTION

Solution : D

The BOP includes both official transfers of currency and loans and aid.

Final balance of payments of an economy is:

A.

Always in a deficit

B.

Always in a surplus

C.

Always balanced

D.

Subject to wide fluctuation

#### SOLUTION

Solution : C

The balance of payments is always balanced.

A debit item is:

A.

A positive item

B.

A negative item

C.

Inflow item

D.

Outflow item

#### SOLUTION

Solution : B and D

A debit item is a negative item.

Which of the following are features of foreign portfolio investments?

A.

Long-term

B.

Short-term

C.

High risk

D.

Low risk

#### SOLUTION

Solution : B and C

FPI is generally short-term investment and is riskier than FDI.