Balance of Payments (Test Questions)

Read this article to learn about the top thirty three frequently asked questions on Balance of Payments.

Q.1. What is foreign exchange?

Ans. Any currency other than the domestic currency.

Q.2. State two sources of supply of foreign exchange.

Ans. Exports, Foreign tourism etc.

Q.3. State two sources of demand for foreign exchange.

Ans. Imports, tourist going abroad etc.

Q.4. Define foreign exchange rate?

Ans. Foreign Exchange is a price of a foreign currency in terms of domestic currency.

OR

The price of one unit of one currency in terms of some other currency is called foreign exchange rate.

Q.5. Define foreign exchange market.

Ans. Foreign exchange market is that market in which foreign currencies are bought and sold.

Q.6.What is meant by ‘balance of trade’?

Ans. Balance of trade is the difference between exports and imports of goods.

Q.7. What is forward rate?

Ans. It is the rate at which future contract for exchange of foreign currency is made.

Q.8. What is spot rate?

Ans. Spot rate is the rate of exchange used for current transactions.

Q.9.When is balance of trade unfavorable?

Ans. When imports of goods are more than the export of goods for a country, its balance of trade will be unfavorable.

Q.10. Is balance of payment always balanced?

Ans. Balance of trade can be favourable or unfavorable but balance of payment always remains balanced.

Q.11. Name two invisible items of current account of balance of payments.

Ans. Services like shipping. Insurance.

Q.12. What is meant by visible trade?

Ans. Visible trade means exports and imports of goods.

Q.13. Give two examples of unilateral transfers.

Ans. Gifts and donations.

Q.14. What is balance of payment?

Ans. Balance of payment of a country is a systematic record of all economic transactions between residents of that country and rest of the world.

Q.15. What is meant by depreciation of currency?

Ans. A rise in the exchange rate of a foreign currency in terms of home currency leads to depreciation of home currency.

Q.16. When will there be depreciation of Indian rupee?

Ans. An increase in the exchange rate of a foreign currency in relation to Indian rupee leads to depreciation of latter.

Q.17. What will be the effect on the exchange rate if supply of a foreign currency increases?

Ans. The exchange rate of a foreign currency will fall with the increase in its supply

Q.18. What will be the effect on foreign exchange rate if demand for a foreign currency increases?

Ans. An increase in demand of a foreign currency will increase the exchange rate of that currency.

Q.19. How is rate of exchange of a foreign currency determined?

Ans. The exchange rate of a foreign currency is determined by the supply and demand of that currency.

Q.20. What is the relation between foreign exchange rate and supply of foreign currency?

Ans. Supply of foreign currency is directly related to foreign exchange rate i.e. supply is more at a higher exchange rate and it is less at a lower exchange rate.

Q.21. How is demand for foreign exchange related to the exchange rate?

Ans. The demand for foreign exchange is inversely related to the exchange rate i.e., higher the exchange rate lower will be the demand and demand will rise if exchange rate is lower.

Q.22. Give two examples of investment income.

Ans. Interest and dividend.

Q,23. What is a fixed exchange rate?

Ans. Fixed exchange rate is the rate of exchange that is officially fixed by the government.

Q.24. How can increase in foreign direct investment affect the price of foreign exchange?

Ans. Foreign direct investment raises the supply of foreign exchange leading to downward influence on the price of foreign exchange.

Q.25. What is flexible exchange rate?

Ans. Flexible exchange rate is the rate at which demand for a foreign currency is equal to its supply.

Q.26. Give meaning of managed floating exchange rate.

Ans. Exchange rate influenced by the intervention of the central bank in the foreign exchange market.

Q.27. What is hedging?

Ans. Hedging means covering a foreign exchange risk.

Q.28. How are exchange risks covered?

Ans. Exchange risks can be covered by entering into forward contracts for sale / purchase of foreign currency.

Q.29. When is balance of trade favourable?

Ans. There will be a favourable balance of trade when exports of goods are more than the imports of goods of a country.

Q.30. Which transactions are recorded in Current Account of Balance of Payment?

Ans. Imports and exports of goods, services and unilateral transfers are recorded in Current Account of Balance of Payment.

Q.31. Which transactions are recorded in Capital Account of Balance of Payment?

Ans. Capital transfers which change the assets or liability status of the residents or the government of a country are recorded in Capital Account of Balance of Payment.

Q.32. Give two examples of the transactions that will be recorded in Capital Account of Balance of Payment?

Ans. Investment by an individual in another country and loan taken by the government from an International institution.

Q.33. Which account shows the overall balance of payment position?

Ans. The overall position of Balance of Payment is shown by the net balance of capital account.