Chapter MCQ Test 2 — Open Economy Macroeconomics
10 Questions • 12 min • Chapter MCQ
12:00
Question 1 of 10
Money sent home by Indians working in the Gulf (remittances) appears in India's BoP as:
A supply of foreign exchange (current-account invisible)
A demand for foreign exchange
Capital-account borrowing
An import of goods
Explanation: Remittances bring foreign currency in, supplying forex and entering the current account as an invisible.
Question 2 of 10
If the demand for dollars rises (more imports) while supply is unchanged, the rupee will:
Depreciate (₹/$ rises)
Appreciate
Stay fixed
Disappear
Explanation: Greater demand for dollars raises their rupee price, so the rupee weakens (depreciates).
Question 3 of 10
A weaker rupee helps Indian exporters because their goods become:
Cheaper for foreign buyers
More expensive abroad
Banned
Tax-free
Explanation: Foreigners need fewer of their own dollars to buy rupee-priced goods, boosting export competitiveness.
Question 4 of 10
Under a managed float, the RBI sells dollars when the rupee falls too fast in order to:
Increase the supply of dollars and support the rupee
Reduce dollar supply
Devalue officially
Fix the rate forever
Explanation: Selling reserves adds to dollar supply, easing the rupee's slide — intervention within a float.
Question 5 of 10
Devaluation differs from depreciation mainly in that devaluation is:
A deliberate official act under a fixed-rate system
A market outcome
Always automatic
An appreciation
Explanation: Devaluation is a policy decision to lower a fixed rate, whereas depreciation is a market-driven fall.
Question 6 of 10
A persistent current-account deficit means a country's payments for imports and other current items exceed its:
Receipts from exports and other current inflows
Capital inflows only
Tax revenue
Money supply
Explanation: A current-account deficit arises when current outflows exceed current inflows (often financed by the capital account).
Question 7 of 10
A fixed exchange rate gives stability but requires the central bank to hold large:
Foreign exchange reserves to defend the rate
Tax files
Gold coins for citizens
Domestic loans
Explanation: To keep the rate fixed the central bank must buy/sell forex, which needs ample reserves.
Question 8 of 10
Foreign investment buying Indian company shares is recorded in the ____ and supplies foreign exchange.
Capital account
Current account
Revenue budget
Balance of trade
Explanation: Inward investment is a capital-account flow that also brings in (supplies) foreign currency.
Question 9 of 10
A rising rupee (appreciation) tends to make a foreign holiday for an Indian tourist:
Cheaper
Costlier
Free
Impossible
Explanation: A stronger rupee buys more foreign currency, so spending abroad becomes cheaper.
Question 10 of 10
Exchange rates are important in macroeconomics because they link the domestic economy to the:
Rest of the world (trade and capital flows)
Local market only
Government budget alone
Stock exchange only
Explanation: The exchange rate channels how foreign trade and capital flows affect domestic output and prices.