UPSC IAS Prelims :Indian Economy : Open Economy and Exchange rate MCQs

1.Consider the following statements:

     1 Trade in services denoted as invisible trade because they are not seen to cross national borders.
     2 Total foreign trade (exports +imports) as a proportion of GDP is a common measure of the degree of openness of an economy.

Select the correct answer using the code given below.

(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer .c

2. Choose the false statement among the following statements:

(a) If the real exchange rate is equal to zero, currencies are at purchasing power parity
(b) The real exchange rate is often taken as a measure of a country’s international competitiveness.
(c) The price of one currency in terms of the other is known as the exchange rate.
(d) Real exchange rate – the ratio of foreign to domestic prices, measured in the same currency.

 Answer . a

3. Choose the false statement among the following statements:

(a) The Bretton Woods Conference was held in 1944 in Canada.
(b) Silver supplemented gold introducing ‘bimetallism’.
(c) Gold standard was the epitome of the fixed exchange rate system

(d) The Gold Standard: 1870 to the outbreak of the First World War in 1914

Answer . a

4. What does pegged exchange rate system mean?

(a) The exchange rate is pegged at a particular level
(b) The exchange rate is determined by the forces of market demand and supply

(c) The exchange rate is fixed by bank consortium
(d) The exchange rate is fixed by Govt together with private players.

Answer . a

5. A devaluation is said to occur when the exchange rate is ______?

(a) Decreased    
(b) Increased
(c) Kept constant
(d)None of these

Answer . b

6. With reference to Exchange rate, consider the following statements:

1.    Managed floating exchange rate system is a mixture of a flexible exchange rate system and a fixed rate system.
2.    In dirty floating, central banks intervene to buy and sell foreign currencies in an attempt to moderate exchange rate movements whenever they feel that such actions are appropriate.

Select the correct answer using the code given below.

(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer .c

7. Which of these Institutions are “The Bretton Woods System”?

(a)IMF and WTO
(b)IMF and World Bank
(c)WTO and World Bank
(d)IBRD and IDA

Answer .b

8.The Smithsonian Agreement of 1971 is related to?

(a)      Widening the permissible band of the exchange rates to 2.5 per cent above or below the new ‘central rates’.
(b)    Tackle shortage of liquidity during the Great Depression
(c)    Moving from fixed to floating exchange rate
(d)    Bop crisis faced  by countries after fall of the Bretton Woods System

Answer .a

9.With reference to SDR, consider the following statement:

1. ‘Reserve asset’ created under the control of the IMF
2. At present, it is calculated daily as the weighted sum of the values in dollars of four currencies (euro, dollar, Japanese yen, and pound sterling)
3. Special Drawing Rights (SDRs) also known as ‘paper gold’

Which of the statements given above is/are correct?

  (a) 1 and 2 only
  (b) 2 only
  (c) 1, 2 and 3
  (d) 2 and 3 only

Answer .c

10.With mines not producing enough gold, __________ helped to economise on gold.

(a) Fractional reserve banking( Paper currency was not entirely backed by gold)
(b) Gold Standard
(c) fixed exchange rate system
(d) Silver standard

Answer .a

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