Open Economy Macroeconomics quiz

Which is recorded in the current account?

Balance of trade records:

If the rupee price of a dollar rises from Rs 80 to Rs 85, the rupee has:

Foreign direct investment is recorded in the:

Devaluation is done under a:

Remittances sent home by Indians working abroad are:

Depreciation of the domestic currency tends to:

India follows which exchange rate system?

Accommodating transactions are undertaken to:

The demand curve for foreign exchange slopes:

Distinguish between visible and invisible items in the balance of payments. (2 marks)

Give two sources of supply of foreign exchange. (2 marks)

What is meant by a deficit in the balance of payments? (2 marks)

Why does a rise in the exchange rate increase the supply of foreign exchange? (2 marks)

What is meant by managed floating? (2 marks)

Explain the effect of appreciation of the rupee on imports. (2 marks)

What are errors and omissions in the balance of payments? (2 marks)

Distinguish between FDI and portfolio investment. (2 marks)

Why does the balance of payments always balance in the accounting sense? (2 marks)

State two merits of a flexible exchange rate system. (2 marks)

A country's exports of goods are Rs 4,50,000 crore and imports of goods are Rs 6,75,000 crore. Calculate the balance of trade and state whether it is a surplus or deficit. (3 marks)

The exchange rate rises from Rs 75 to Rs 82.50 per dollar. Calculate the percentage depreciation of the rupee. (3 marks)

The demand for foreign exchange is Qd = 500 - 4e and the supply is Qs = 100 + 4e. Find the equilibrium exchange rate and quantity. (3 marks)

A country has a trade deficit of Rs 150 crore, net invisibles of Rs 100 crore and a capital account surplus of Rs 80 crore. Calculate the current account balance and the change in foreign exchange reserves. (3 marks)

A laptop costs 800 US dollars. Calculate its rupee price at Rs 83 per dollar and at Rs 85 per dollar, and the increase in rupee cost. (3 marks)

Read the passage and answer the questions. In 2022, the rupee weakened from about Rs 74 to Rs 82 per dollar as foreign investors pulled money out of India and oil prices rose. The RBI sold dollars from its reserves to slow the fall. (i) Did the rupee appreciate or depreciate? (ii) Why did foreign investors' exit weaken the rupee? (iii) Why did the RBI sell dollars? (5 marks)

Read the passage and answer the questions. India receives over 100 billion dollars a year in remittances from Indians working abroad, mainly in the Gulf countries and the USA. (i) In which account are remittances recorded? (ii) Do they increase demand or supply of foreign exchange? (iii) How do they affect the exchange rate? (5 marks)

Read the passage and answer the questions. In 1991, India faced a severe BoP crisis with foreign exchange reserves enough for only a few weeks of imports. The rupee was devalued and economic reforms began. (i) What is devaluation? (ii) Why was it done? (iii) Name the exchange rate system India later adopted. (5 marks)

Read the passage and answer the questions. A foreign company set up a car manufacturing plant in Tamil Nadu, while a foreign fund bought shares of Indian companies in the stock market. (i) Classify each investment. (ii) In which account are they recorded? (iii) Which is more stable and why? (5 marks)

Read the passage and answer the questions. An Indian textile exporter sells shirts for Rs 2,000 each. The rupee appreciates from Rs 80 to Rs 75 per dollar. (i) Calculate the dollar price before and after. (ii) How will foreign demand change? (iii) Who gains from rupee appreciation? (5 marks)

Explain the components of the balance of payments with a chart. Distinguish between current account and capital account. (6 marks)

Explain the determination of the exchange rate under a flexible system with a diagram. Explain the effect of an increase in supply of foreign exchange. (6 marks)

Explain the fixed, flexible and managed floating exchange rate systems, with merits and demerits. (6 marks)

Explain surplus and deficit in the balance of payments using autonomous and accommodating transactions, and how a deficit is financed. (6 marks)

Explain the sources of demand and supply of foreign exchange with diagrams of both curves. (6 marks)