Foreign Exchange Rate MCQ | Class 12 | Economics | Chapter-7

Foreign Exchange Rate MCQ

Below are some of the very important NCERT MCQ Questions of Foreign Exchange Rate Class 12 Economics Chapter 7 with Answers. These Foreign Exchange Rate MCQ have been prepared by expert teachers and subject experts based on the latest syllabus and pattern of term 1 and term 2. We have given these Foreign Exchange Rate MCQ Class 12 Economics Questions with Answers to help students understand the concept.

MCQ Questions for Class 12 Economics Chapter 7 are very important for the latest CBSE term 1 and term 2 pattern. These MCQs are very important for students who want to score high in CBSE Board.

We have put together these NCERT Questions of Foreign Exchange Rate MCQ for Class 12 Economics Chapter 7 with Answers for practice on a regular basis to score high in exams. Refer to these MCQs Questions with Answers here along with a detailed explanation.


Foreign Exchange Rate mcq

MCQ 1- 7

1. Identify which of the following statements is true?

(a) The flexible exchange rate system gives the government more flexibility to maintain large stocks of foreign exchange reserves.
(b) In the managed floating exchange rate system, the government intervenes to buy and sell foreign currencies.  
(c) In the managed floating exchange rate system, the central bank intervenes to moderate exchange rate fluctuations.
(d) In the fixed exchange rate system, market forces fix the exchange rate.

2. Foreign exchange refers to

(a) the price of one currency in terms of gold in the domestic market
(b) the price of one currency determined by the government of other country
(c) the price of one currency in relation to other currencies in the international money market.
(d) none of the above.

3. Match the following.

Column AColumn B
1. Flexible Exchange Rate(a) Foreign Exchange Rate is determined by the Central Bank.
2. Fixed Exchange Rate(b) The foreign exchange rate is determined by the demand and supply.
3. Managed Flexible Rate(c) The Central Bank interferes with the market demand and supply of foreign currency.
4. Managed Fixed Rate(d) The Central Bank controls the foreign rate regime.

(a) 1 – (a)
(b) 2 – (b)
(c) 3 – (c)
(d) 4 – (d)

4. Which of the following statements is false?

(a) Depreciation of the foreign currency leads to the fall in exports
(b) Devaluation of the domestic currency leads to a rise in imports
(c) Appreciation of domestic currency leads to rise in exports
(d) Appreciation of foreign currency leads to a fall in imports   

5. Main domestic currency loses its value in relation to a foreign currency in the international money market, it is a situation of

(a) Currency appreciation
(b) Currency depreciation
(c) Currency devaluation 
(d) None of the above

6. Exchange rate is the price of a currency expressed in terms of

(a) gold
(b) metal
(c) another currency
(d) none of the above

7. Match and identify the correct pair.

COLUMN 1COLUMN 2
(i) reduction in the value of domestic currency by the government(a) devaluation
(ii) reduction in the value of domestic currency through market forces(b) appreciation
(iii) increase in the value of domestic currency by the government(c) depreciation
(iv) increase in the value of domestic currency through market forces(d) revaluation

(a) 1 – (a)
(b) 2 – (b)
(c) 3 – (c)
(d) 4 – (d)

MCQ Answers

1. (c)

Managed floating exchange rate system is the amalgamation of the flexible exchange rate system and the fixed exchange rate system. Under this system, central banks intervene to buy and sell foreign currencies in an attempt to moderate exchange rate movements.

2. (c)

3. (c) 

Managed floating exchange rate system is the amalgamaüon of the exchange rate system and the fixed exchange rate system. Under this system, central bank intervene to buy and sell currencies in an attempt to moderate exchange rate movements.

4. (a)

Depreciation of home currency implies a fall in the price of domestic goods for the foreign buyers.

5. (b)

Depreciation of domestic currency refers to fall in the value of domestic currency in terms of foreign currency caused by rise in foreign exchange rate in the foreign exchange market.

6. (c)

It is the rate at which one currency can be converted into another currency.

7. (a)

Devaluation refers to fall in the value of domestic currency due to deliberate increase in foreign exchange rate by the government which follows fixed exchange rate system.


Assertion-Reason Based MCQ 

Code

  1. Both assertion and reason are true and reason is the correct explanation of assertion.
  2. Both assertion and reason are true but reason is not the correct explanation of assertion.  
  3. Assertion is true but reason is false.
  4. Assertion is false but reason is true. 

1. Assertion When in order to buy 1 US dollar  80 are needed instead of 75, domestic currency shows depreciation.

Reason Depreciation of domestic currency refers to fall in the value of domestic currency in terms of foreign currency caused by rise in foreign exchange rate in the foreign exchange market. 

2. Assertion Export of goods and services from India to the US would mean outflow of foreign exchange from India.

Reason Foreign exchange in terms of receipts for exports flows from the US to India. 

3. Assertion In case of currency appreciation, less rupees are to be paid to buy one US dollar.

Reason Currency appreciation leads to increase in value of domestic currency in reference to foreign currency. So, less is needed to pay for the same amount.

4. Assertion In order to restore the value of depreciating domestic currency, the Central Bank sells the US dollars in the international money market. 

Reason By selling US dollars, supply of dollars will increase which will reduce the price of dollar,

Assertion-Reason Based Answers 

1. (1)

Here, domestic currency shows  depreciation because more rupees are to be paid to buy one US dollar.

2. (4)

Export of goods and services from India to US would mean inflow of foreign exchange to India.

3. (1)

Export of goods and services from India to US would mean foreign exchange of India

4. (1)


Case-Study Based MCQ

1. Read the following passage and answer accordingly.

The rupee depreciated by 6 paise to close at 73.02 (provisional) against the US dollar on Monday, tracking a rebound in the American currency overseas.

At the interbank Forex market, the domestic unit opened at ₹72.89 against the US dollar and witnessed an intra-day high of ₹72.84 and a low of ₹73.15.

The local unit finally settled at ₹73.02, registering a fall of 6 paise over its previous close, even as the  domestic equity market settled with significant gains on budget day.

On Friday, the rupee had closed at ₹72.96 against the American currency.

Meanwhile, the dollar index, which gauges the greenback’s strength against a basket of six  currencies, rose 0.21% to 90.78.

On the domestic equity market front, the BSE Sensex ended 2,314.84 points or 5% higher at 48,600.61, while the broader NSE Nifty advanced 646.60 points or 4.74% to 14,281.20.

Foreign institutional investors were net sellers in the capital market as they offloaded shares worth 5,930.66 crore on Friday, according to exchange data.

Brent Crude Futures, the global oil benchmark, advanced 0.84% to USD 55.50 per barrel.

(i) How will the devaluation of Indian Rupee affect imports? 

(a) Imports will fall
(b) Imports will rise
(c) Imports will have no effect
(d) None of the above 

(ii) How will the devaluation of the Indian Rupee affect exports?

(a) Exports will fall
(b) Exports will rise
(c) Exports will remain same.
(d) Exports will fall first and then rise.

(iii) Read the following statements.

Assertion: Forex reserve of the country will fall.
Reason: Due to devaluation of domestic currency.

Code

(a) Both assertion and reason are true and reason is the correct explanation of assertion.
(b) Both assertion and reason are true but reason is not the correct explanation of assertion.  
(c) Assertion is true but reason is false.
(d) Assertion is false but reason is true. 

(iv) How is the exchange rate determined in India?

(a) By the government.
(b) By the demand and supply of Foreign Currency
(c) Both (a) and (b)
(d) Neither (a) nor (b) 

2. Read the following passage and answer the following accordingly.

The rupee rose by 3 paise to settle at 72.94 (provisional) against the US dollar on Monday, extending its gains for the fifth straight session despite heavy selling in the domestic equity market.

At the interbank Forex market, the rupee opened at 72.95 against the American currency, and hit an intra-day high of 72.89 and a low of 72.96 in day trade.

It finally finished at ₹ 72.94, higher by 3 paise over its last close. On Friday, the rupee had settled at ₹ 72.97 against the American currency.

Meanwhile, the dollar index, which gauges the greenback’s strength against a basket of six currencies, advanced 0.10% to ₹ 90.32.

“The rupee has managed to hold its fort around the ₹ 72.90 to 73 levels, but given the sell-off in equities and the likelihood of a rebound in the dollar index, we see the trend tilting slightly towards depreciation going forward,” said Sugandha Sachdeva VP-Metals, Energy & Currency Research, Religare NSE 0.52% broking.

(i) What is the benefit for the appreciation of the Indian Rupees?

(a) The Forex Reserve of the country will increase
(b) The imports of the country will decline
(c) There will be an increase in the Foreign Direct Investment
(d) None of the above

(ii) Which of the following is not the reason for the increase in the price of rupees in the Forex Market?

(a) Increase in investment through FDI and FPI
(b) Increase in the share and security market
(c) Better government policies
(d Heavy selling in the domestic equity market

(iii) India follows ________ system of Foreign Exchange, as per the given report.

(a) Fixed Exchange Rate
(b) Flexible Exchange Rate
(c) Managed Floating Exchange Rate
(d) None of the above

(iv) Rupee rose by ________ paise against USD

(a) 2 
(b) 3 
(c) 4
(d) 5

3. Read the following passage and answer the following accordingly.

NEW DELHl: India’s Foreign Direct Investment saw a significant jump in November 2020. FDI data released by the Commerce Ministry shows that total in the month of November 2020 grew by a whopping 81% to $ 10.15 billion against $ 5.6 billion in November 2019. 

FDI equity has also jumped to $ 8.5 billion as against $ 28 billion in November 2019, registering a growth of 70%. 

India has attracted a total FDI inflow of $ 58.37 billion during April to November 2020. It is the highest ever for the first eight months of a financial year (F.Y.) and 22 % higher as compared to the first eight months of 2019-20 ($ 47.67 billion).

FDI equity inflow received during F.Y. 2020-21 (April to November 2020) is $ 43.85 billion. It is also the highest ever for the first eight months of a financial year and 37% more compared to the first eight months of 2019-20 ($ 32.11 billion), the data revealed.

FDI is a major driver of economic growth and an important source of non-debt finance for the economic development of India. It has been the endeavour of the government to put in place an enabling and investor-friendly FDI policy, the Commerce Ministry said.

The intent all this while has been to make the FDI policy more investor-friendly and remove the policy bottlenecks that have been hindering the investment inflows into the country. 

The steps taken in this direction have borne fruit, as is evident from the ever-increasing volumes of FDI inflows being received into the country, it said. Measures taken by the Government on the FDI policy reforms, investment facilitation and ease of doing business have resulted in increased FDI inflows into the country. The following trends in India’s Foreign Direct Investment are an endorsement of its status as a preferred investment destination amongst global investors.

(i) What effect will the increase in foreign direct investment will have on the economy?

(a) Increase in the Forex Reserve
(b) Increase in the supply of Foreign Currency
(c) Decrease in the Exchange Rate
(d) All of the above

(ii) Why does the country foster a higher Foreign Direct investment?

(a) FDI is a major driver of Economic Growth
(b) FDI helps in getting better foreign exchange returns
(c) FDI helps the government to control foreign exchange rate
(d) All of the above

(iii) There has been an increase in the FDI. How has the government helped it?  

(a) FDI policy reforms
(b) Ease of doing business
(c) Both (a) and (b)
(d) Neither (a) nor (b) 

(iv) When the FDI increases, the of foreign currency increases.

(a) Demand
(b) Supply
(c) Either (a) or (b)
(d) Neither (a) nor (b) 

Case-Study Based MCQ Answers

1.

(i) (a) 

Imports become more expensive

(ii) (b) 

Exports become cheaper

(iii) (a)

Imports becomes more expensive, i.e., the domestic buyers will now have to pay more for imports

(iv) (c)

India practices managed floating exchange rate system in which the Central Bank has a major role to play.

2.

(i) (c)

(ii) (d)

(iii) (c)

India practices managed floating exchange rate system in which the Central Bank has major role to play.

(iv) (d)

The rupee rose by 3 paise to settle at 72.95 against the US dollar on Monday. 

3.

(i) (d)

(ii) (a)

(iii) (c) 

Measures taken by the Government on the FDI policy reforms, investment facilitation and ease of doing business have resulted in increased FDI inflows into the country.

(iv) (b)

It leads to inflow of foreign currency. 


Final Words

From the above article, you have practiced Foreign Exchange Rates MCQ of Class 12 Economics Chapter 7. We hope that the above-mentioned MCQs for term 1 of chapter 7 Foreign Exchange Rate MCQ would will surely help you in your exam. 

If you have any doubts or queries regarding Foreign Exchange Rate MCQ (Multiple Choice Questions) with answers, feel free to reach us and we will get back to you as early as possible.

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