Class 12 Macroeconomics Chapter 6 MCQ and Important Question answers prepared for academic session 2022-2023. All the extra case based question answers and multiple choice questions of 12th Economics lesson 6 Open Economy Macroeconomics are given here with answers and explanation.

Class 12 Macroeconomics Chapter 6 MCQ


When the import and export of visible item are equal, the situation is known as

[A]. Balance of trade
[B]. Balance of payments
[C]. Trade surplus
[D]. Trade deficit

Which one is the item of capital account?

[A]. Private transaction
[B]. Government transaction
[C]. Foreign direct investment
[D]. All of the above

BoP is measured as

[A]. Difference between visible items of exports and imports
[B]. Difference between invisible items of exports and imports
[C]. Difference between external and internal flow of gold
[D]. Different between all receipts of foreign exchange and payments of foreign exchange

In which of the following categories are economic transaction of balance of trade is recorded?

[A]. Visible items
[B]. Invisible items
[C]. Capital transfers
[D]. All of the above

The Foreign Exchange Market

We have already thought about the accounting of international transactions on the whole, we are now going to take up a single transaction. Allow us to assume that one Indian resident needs to go to London on a vacation. He will ought to pay in pounds for his stay there. He will need to know where to obtain pounds and at what price, as the price is known as the exchange rate.

The market during which the national currencies are exchanged for one another is termed as foreign exchange market. The key participants in the foreign exchange rate are commercial banks, exchange brokers and alternative authorised dealers and financial authorities. It’s necessary to notice that though participants themselves could have their own commerce centres, the market itself is world-wide. There’s a detailed and continuous contact between the commerce centres and also the participants deal in additional than one market.

Class 12 Macroeconomics Chapter 6 Multiple Choice Questions


The relationship between supply of foreign exchange and exchange rate is

[A]. Inverse
[B]. Direct
[C]. One-to-one
[D]. No relation

Spot market is that market where in

[A]. Only spot or current transactions are handled
[B]. Only future transactions are handled
[C]. Only past transactions are handled
[D]. None of the above

Which one is a demerit of the fixed exchange rate?

[A]. Induces foreign capital
[B]. Increases capital formations
[C]. Promotes foreign trades
[D]. Instability in foreign exchange

Which of the following is a source of supply of foreign exchange.

[A]. Gifts
[B]. Donations only
[C]. Imports
[D]. Exports and Donation

Foreign exchange rate

Foreign exchange rate (also referred to as Forex Rate) is that the value of one currency in terms of another. It links the currencies of various countries and permits comparisons of international prices costs and prices. As an example, if we have to pay Rs 50 for 1 dollar, then the exchange rate is Rs 50 per dollar. To make it straight, let us consider that India and USA are the sole countries within the world, then there’s only one exchange rate that must be determined. People demand foreign exchange because they want to buy foreign products, need to send gifts abroad, etc.

An increase in value of foreign exchange can increase the price of buying foreign products. This reduces demand for import and therefore demand for foreign exchange conjointly decreases, alternative things stay constant. Foreign currency flows into the home country due to the subsequent reasons: exports by a country leads to the purchase of its domestic goods and services by the foreigners; foreigners send gifts or make transfers; and, the assets of a home country are bought by the foreigners.

Class 12 Macroeconomics Chapter 6 Important Question answers

What is the real exchange rate?

The real exchange rate is the relative price of foreign goods in terms of domestic goods. It is equal to the nominal exchange rate times the foreign price level divided by the domestic price level. It measures the international competitiveness of a country in international trade. When the real exchange rate is equal to one, the two countries are said to be in purchasing power partly.

What is the current account balance and capital account balance?

Current account balance is the sum of the balance of merchandise trade, services and net transfers received from the rest of the world. The capital account balance is equal to capital flows from the rest of the world, minus capital flows to the rest of the world.

What do you understand by fixed exchange rate.

The epitome of the fixed exchange rate system was the gold standard in which each participant country committed itself to convert freely its currency into gold at fixed price. The pegged exchange rate is a policy variable and can be changed by official action.

What is ‘Clean floating’ and ‘Managed floating’?

Under clean floating, the exchange rate is market-determined without any central bank intervention. Whereas, in case of managed floating, central banks intervene to reduce fluctuations in the exchange rate.

How the open economy multiplier is different from closed economy multiplier?

The open economy multiplier is smaller than that in a closed economy, because a part of domestic demand falls on foreign goods. An increase in autonomous demand thus leads to a smaller increase in output compared to a closed economy. It also results in deterioration of the trade balance.

Merits – Demerits of Flexible and Fixed Exchange Rate Systems

The most feature of the fixed exchange rate system is that there should be credibleness that the govt is ready to maintain the exchange rate at the amount specified. Often, if there’s a deficit within the balance of payments, in a fixed exchange rate system, governments can have to be compelled to take care of the gap by use of its official reserves. If folks grasp that the amount of reserves is insufficient, they’d begin to doubt the flexibility of the govt to take care of the fixed rate. This could bring about to speculation of devaluation. Once this belief interprets into aggressive shopping of one currency thereby forcing the govt to devalue, it’s aforesaid to represent a speculative attack on a currency.

Fixed exchange rates are liable to these sorts of attacks, as has been witnessed within the period before the collapse of the Bretton Woods System. The flexible exchange rate system provides the govt additional flexibility and that they don’t go to maintain giant stocks of foreign exchange reserves. The main advantage of versatile rate is that movements within the exchange rate mechanically beware of the surpluses and deficits within the balance of payments. Also, countries gain independence in conducting their financial policies, since they not have to be compelled to intervene to take care of the exchange rate which are mechanically taken care of by the market.

Managed Floating

With none formal international agreement, the planet has affected on to what may be best delineate as a managed floating exchange rate system. It is a mix of a versatile rate system and a hard and fast rate system. Underneath this method, conjointly known as dirty floating, central banks intervene to shop for and sell foreign currencies in a trial to moderate exchange rate movements whenever they feel that such actions are applicable. Official reserve transactions are, therefore, not equal to zero.