External Sector and Currency Exchange rate MCQ Quiz - Objective Question with Answer for External Sector and Currency Exchange rate - Download Free PDF

The correct answer is option 3, i.e. Foreign investment.

Worldwide investment in multinational companies is called foreign investment.

• It is an investment made by a company or individual from one country to the business of another country. It is also called as foreign direct investment.
• It is an important factor in economic growth in the country.
• In Foreign direct investment, foreign entity acquires shares or ownership in the company and can influence day-to-day businesses and operations.
• It is not an only inflow of money but also technology, skills and expertise.
• It is one of the major ways of capital transfer internationally and how well it is working will depend upon the host country’s system and infrastructure.
• FDI in India improved after the LPG reforms of 1991. The government opened the economy for investment and improved FDI norms.

The correct answer is The difference between a country’s imports and exports over a given time period.

Key Points

• The Balance of trade (BoT) is the difference between the monetary value of a country’s imports and exports over a given time period. ​Hence, statement 1 is correct.
• It helps in determining a country’s current account.
• Formula:
  • Balance of Trade = Value of Export - Value of Imports
• Trade Surplus:- It is a positive balance of trade that occurs when exports are greater than imports.
• Trade Deficit:- It is a negative trade balance that occurs when exports are less than imports.
• Actually, trade surplus or deficit does not necessarily indicate a healthy or weak economy.
  • It depends on the countries involved, their trade policy, the duration of the positive or negative BOT, and the size of the trade imbalance.

Additional Information

• Balance Of Payment (BOP):
  • It is the record of all the monetary transactions made between residents of a country and the rest of the world i.e: international transactions, during any given period. 
  • It indicates whether the country has a surplus or a deficit of funds.

The correct answer is 1969.

Key Points

• MRTP Act was passed in 1969 and became effective from 1970.
• MRTP stands for Monopolies and Restrictive Trade Practices.
• This Act was enacted to prevent the concentration of economic power to common detriment, control monopolies, and prohibit monopolistic and restrictive trade practices (MRTP) and matters connected therewith.

Additional Information Monopolistic and Restrictive Trade Practice under MRTP Act, 1969

• The Monopolistic and Restrictive Trade Practices Act, 1969, was enacted.
  • To ensure that the operation of the economic system does not result in the concentration of economic power in hands of few,
  • To provide for the control of monopolies, and
  • To prohibit monopolistic and restrictive trade practices.
  • The MRTP Act extends to the whole of India except Jammu and Kashmir.

The correct answer is Token currency

Key Points

• Token currency:-
  • It is a form of money that has a lesser intrinsic value compared to its face value.
  • It is accepted as money because of custom or legal enactment, not because of its intrinsic value.
  • Token money costs less to produce than its face value.
  • Examples of token money include:-
    • Paper currency
    • Coins
    • Credit cards
    • Debit cards
    • Digital currencies, such as Bitcoin
  • Token money is the most common form of money in use today. It is convenient and easy to use, and it is widely accepted by merchants and consumers.
  • Some of the advantages of token money:
    • It is convenient and easy to use.
    • It is widely accepted by merchants and consumers.
    • It is relatively inexpensive to produce.
    • It can be used to make large transactions.
    • It is relatively durable and can be used many times.
  • Token money also has some disadvantages:-
    • It is not backed by any physical commodity, such as gold or silver.
    • It is susceptible to inflation, which means that its value can decrease over time.
    • It can be counterfeited.
    • It can be lost or stolen.

Additional Information

• Hot currency:-
  • It is money that is moved quickly between countries or financial markets to take advantage of short-term interest rate differentials or anticipated exchange rate shifts.
• Fiat currency:-
  • It is a government-issued currency that is not backed by a physical commodity, such as gold or silver.
  • Instead, its value is derived from the public's trust in the issuing government and its ability to repay its debts.
• Standard currency:-
  • It is a currency that is widely accepted and used as a medium of exchange in a particular country or region.
  • It is usually the official currency of a government, but it can also be a foreign currency that is widely used in a country.

The correct answer is Option 1.

Key Points

• Currency depreciation makes exports cheaper for foreign buyers, increasing demand for exported goods and services.
• Lower export costs improve competitiveness in international markets, driving up net exports.
• Depreciation increases the price of imports for domestic consumers, reducing import demand and further boosting net exports.
• Net exports (exports minus imports) tend to rise as a result of the combined effect of higher export volumes and reduced import volumes.
• This phenomenon is often referred to as the "exchange rate effect" on trade balances.

Additional Information

• Currency Depreciation: Refers to a decline in the value of a country's currency relative to foreign currencies, often influenced by market demand and supply dynamics.
• Impact on Trade Balance: Depreciation improves the trade balance by increasing exports and decreasing imports, provided that demand for goods is elastic.
• Elasticity of Demand: For currency depreciation to effectively impact net exports, the price elasticity of demand for exports and imports must be high (responsive to price changes).
• Marshall-Lerner Condition: States that currency depreciation will improve the trade balance if the sum of the absolute price elasticity of exports and imports is greater than one.
• Risk Factors: Excessive depreciation can lead to inflationary pressures and increased costs for imported raw materials, potentially offsetting export gains.

The correct answer is Department for Promotion of Industry and Internal Trade.

Key Points

• Department for Promotion of Industry and Internal Trade is the nodal department for the formulation of the policy on Foreign Direct Investment (FDI).
  • It is a central government department under the Ministry of Commerce and Industry.
  • It controls the maintenance and management of data on inward FDI into India.
  • The Department for Promotion of Industry and Internal Trade plays a vital role in the liberalization and rationalization of the FDI policy.

 Additional Information

The correct answer is Both (1) and (2).

Key Points

The balance of payments (BoP)

• It records the transactions in goods, services, and assets between residents of a country with the rest of the world for a specified time period typically a year.

There are two main accounts in the BoP

The current account

• The current account records exports and imports in goods and services and transfer payments.

The capital account

• The capital account records all international purchases and sales of assets such as money, stocks, bonds, etc.

The Correct Answer is Option 3.

Key Points

• A complete ban on imports from a certain country is called Embargo.
• Tariff Barriers are taxes on certain imports.
• Subsidies: It is a form of financial grant or aid given by the state to help an industry or business keep the price of a commodity or service at an affordable price.
• Export Security: It is a measure used by the government for the protection of producers or consumers of a particular. It is not a trade barrier.

The correct answer is Martha Washington.

Important Points

US Dollar:

• The U.S. dollar was first designated as the world's currency in the 1944 Bretton Woods Agreement, and it is the most powerful currency in the world.
• It's backed by the world's third-largest economy, the United States of America.
• The strength of the U.S. economy supports the dollar's use as a global currency.
• The term "U.S. dollar" refers to a specific denomination and the U.S. currency in general.
• It was initially traded as a coin worth its weight in silver or gold and then exchanged as a paper note redeemable in gold.
• Today, although its value fluctuates, it's in strong demand.

The correct answer is Token currency

Key Points

• Token currency:-
  • It is a form of money that has a lesser intrinsic value compared to its face value.
  • It is accepted as money because of custom or legal enactment, not because of its intrinsic value.
  • Token money costs less to produce than its face value.
  • Examples of token money include:-
    • Paper currency
    • Coins
    • Credit cards
    • Debit cards
    • Digital currencies, such as Bitcoin
  • Token money is the most common form of money in use today. It is convenient and easy to use, and it is widely accepted by merchants and consumers.
  • Some of the advantages of token money:
    • It is convenient and easy to use.
    • It is widely accepted by merchants and consumers.
    • It is relatively inexpensive to produce.
    • It can be used to make large transactions.
    • It is relatively durable and can be used many times.
  • Token money also has some disadvantages:-
    • It is not backed by any physical commodity, such as gold or silver.
    • It is susceptible to inflation, which means that its value can decrease over time.
    • It can be counterfeited.
    • It can be lost or stolen.

Additional Information

• Hot currency:-
  • It is money that is moved quickly between countries or financial markets to take advantage of short-term interest rate differentials or anticipated exchange rate shifts.
• Fiat currency:-
  • It is a government-issued currency that is not backed by a physical commodity, such as gold or silver.
  • Instead, its value is derived from the public's trust in the issuing government and its ability to repay its debts.
• Standard currency:-
  • It is a currency that is widely accepted and used as a medium of exchange in a particular country or region.
  • It is usually the official currency of a government, but it can also be a foreign currency that is widely used in a country.

Test your knowledge of NEER and REER in the Indian economy. Understand how exchange rates and inflation impact trade competitiveness. Choose the correct options.

The correct answer is 1 and 3 only.

Key Points

Nominal Effective Exchange Rate (NEER):

• It is an unadjusted weighted average rate at which one country's currency exchanges for a basket of multiple foreign currencies.
• The nominal exchange rate is the amount of domestic currency needed to purchase foreign currency.
• It is a measure of the value of a currency against a weighted average of several foreign currencies. An increase in NEER indicates an appreciation of the rupee. Hence, Statement 1 is correct.

Real effective exchange rate (REER):

• It is the weighted average of a country's currency in relation to an index or basket of other major currencies.
• The weights are determined by comparing the relative trade balance of a country's currency against that of each country in the index.
• An increase in REER implies that exports become more expensive and imports become cheaper; therefore, an increase indicates a loss in trade competitiveness. Hence, Statement 2 is not correct.
• The NEER is the weighted geometric average of the bilateral nominal exchange rates of  home currency in terms of foreign currencies.
• The REER is the weighted average of NEER adjusted by the ratio of domestic prices to foreign prices.
• An increasing trend in domestic inflation relative to inflation in other countries creates a divergence in NEER and REER. Hence, Statement 3 is correct.

• NEER is like a report card for a country's currency. It shows how strong or weak a currency is compared to a bunch of other currencies. Imagine you're comparing how well your favorite sports team is doing against all the other teams in the league - that's kind of what NEER does for currencies!

  Here's what makes NEER special:

• It looks at multiple currencies, not just one

• It uses a weighted average, giving more importance to countries that trade more with each other

• It doesn't account for inflation (that's why it's called "nominal")

The correct answer is the Balance of Trade of Invisible Items

Key Points

• Balance Of Payment (BOP) is a statement that records all the monetary transactions made between residents of a country and the rest of the world during any given period. This statement includes all the transactions made by/to individuals, corporates and the government and helps in monitoring the flow of funds to develop the economy.

• The current account monitors the inflow and outflow of goods and services between countries. This account covers all the receipts and payments made with respect to raw materials and manufactured goods.

• There are various categories of trade and transfers which happen across countries.

• It could be visible or invisible trading, unilateral transfers or other payments/receipts. Trading in goods between countries is referred to as visible items, and import/export of services (banking, information technology etc.) are referred to as invisible items.

Important Points

• Piyush Goyal announced on a social platform on 15th July 2020 that India had recorded a trade surplus in June for the first time in last 18 years.

The correct answer is Foreign Direct Investment.

Key Points

• FDI Stands for Foreign Direct Investment.
• It is an investment made by a firm or individual in one country into business interests located in another country.
• However, FID's are distinguished from portfolio investments in which an investor merely purchases equities of foreign-based companies.
• It plays an important role in the economic development of a country. 
• There are 3 types of FDI:
  • Horizontal FDI
  • Vertical FDI
  • Conglomerate FDI
• Horizontal FDI: 
  • It is where funds are invested abroad in the same industry.
  • In other words, a business invests in a foreign firm that produces similar goods.
  • For example, a US-based firm may purchase Puma, a Germany-based firm.
  • They are both in the industry of sportswear and therefore would be classified as a form of horizontal FDI.
• Vertical FDI:-
  • Vertical FDI is where an investment is made within the supply chain, but not directly in the same industry.
  • In other words, a business invests in a foreign firm that it may supply or sell too. For example, Hershey's, a US Manufacturer may look to invest in cocoa products in Brazil.
  • This is known as backward vertical integration because the firm is purchasing a supplier, or potential supplier, in the supply chain.
• Conglomerate FDI:
  • It is where an investment is made in a completely different industry. In other words, it is not linked in any direct way to the investor's business.
  • For Example, Walmart, a US retailer, may invest in BMW, a German automobile manufacturer.

Important Points

• Advantages of FDI:
  • Boost to International Trade.
  • Reduced Regional and Global Tensions
  • Sharing of Technology, Knowledge, and Culture.
  • Diversification
  • Lower Costs and increased efficiencies
  • Tax Incentives
  • Employment and Economic Boost
• Disadvantages of FDI:
  • Foreign Control
  • Loss of Domestic Jobs
  • Risk of Political or Economic Change

The correct answer is Option 1.

THIS QUESTION HAS BEEN DELETED BY THE UPSC.

Key PointsTight monetary Policy

• Tight monetary policy refers to the actions that a central bank takes to limit inflation and an overheating economy. Tight monetary policy is commonly called contractionary monetary policy.
• Tight monetary policy, or contractionary monetary policy, typically occurs when a central bank wants to keep inflation under control.
• If there has been too much spending and borrowing by consumers and businesses, the economy can become overheated and that could considerably raise the price level of goods and services.
• Inflation is the rise in the price level of items, such as groceries or clothes, over time.
• To minimize or slow down inflation, a central bank could make it more expensive for consumers to spend money and businesses to borrow money by raising interest rates. This is a form of contractionary monetary policy—it restricts, or contracts, spending.

The correct answer is INTUC(Indian National Trade Union Congress).

• INTUC(Indian National Trade Union Congress) is the Indian National Congress trade union wing.
• Formed on 3 May 1947, it is affiliated with the International Confederation of Trade Unions.
• The founding conference of INTUC was inaugurated by Acharya JB Kripalani who was then president of the Indian National Congress.
• Trade Unions in India are registered under the Trade Union Act (1926) and file annual reports accordingly.
• Trade Union movement in India is divided mainly along political lines and follows a pattern of contradictory relations between pre-independence political parties and unions.
• Bharatiya Mazdoor Sangh is India's largest trade union.