Open Economy Macroeconomics Test 1

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Open Economy Macroeconomics Test 1

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Weekly Quiz Competition

Question 1
1 / -0

'Invisible' exports include __________________.

A
Payment of services obtained from foreign insurance agents

B
foreign tourists in the country

C
PL 480 loan

D
Payment for services rendered by Indian Banks abroad

Solution

Foreign tourists purchase the "experience of a vacation" from the country and since this is not a tangible good, it is classified as an invisible export.
Question 2
1 / -0

Devaluation works best when __________________.

A
it is accompanied by a decline in short-term interest rates

B
foreign demand for the devaluing country's exports is elastic

C
the devaluing country's demand for imports is inelastic

D
devaluation brings about price rises in the export industries of the devaluing country

Solution

Devaluation : The loss of value of currency of a country relative to other foreign currency is known as devaluation. Devaluation is a process in which the government deliberately cheapens the exchange value of its own currency by giving it lower exchange value. Devaluation is used for improving , the balance of payment situation in the country.
The exports of a country become cheaper for other countries when the currency is devalued, thus, if the export demand is elastic, it will lead to higher demand, similarly, the demand for imports will be lowered in the domestic country, which will help solve the balance of payment problem.
Question 3
1 / -0

According to the IMF, SDR stands for _________________.

A
Standard Depreciation Rate

B
Special Drawing Rights

C
State Bank's Deposit Rate

D
Special Deposit Rate

Solution

Officially SDR is defined as "The SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves. The SDR was created as a supplementary international reserve asset in the context of the Bretton Woods fixed exchange rate system. The collapse of Bretton Woods system in 1973 and the shift of major currencies to floating exchange rate regimes lessened the reliance on the SDR as a global reserve asset."
Question 4
1 / -0

The most important of the non-tariff trade barriers are __________.

A
quotas

B
health regulations

C
pollution standards

D
labelling and packaging regulations

Solution

Quotas are a protectionist measure that aim to discourage the citizens from spending on imports and "buy local" instead. By imposing a quota the government limits the quantity of a commodity entering the economy, thus the price of it is likely to increase this gives the domestic producers of that commodity an advantage as now more people are likely to purchase domestic produce.
Question 5
1 / -0

To keep the balance of payments deficit from becoming excessive, an under-developed country should ____________.

A
Reduce imports

B
Increase the price of articles exported

C
Increase the quantum of exports

D
Stabilize the price level

Solution

Balance of payments abbreviated as B.O.P. refers to the record of all the economic transactions which take place between the country and the remaining world. This record is for a particular period of time.
Under-developed countries import more and more from foreign markets. To accomplish imports, they have to pay huge amount of money. However, the decline in demand for the country’s product in foreign markets affect B.O.P. Thus, the quantum of exports must be increased to combat excessive B.O.P.
The correct option is C.
Question 6
1 / -0

The balance of trade is also known as _____________.

A
capital transfers

B
gain from trade

C
the visible balance

D
all of the above

Solution

Balance of Trade : It refers to the total value of country's export commodities and total value of imports commodities. Thus, balance of trade includes only visible trade, i.e., movement of goods (exports and imports of goods). Balance of trade is a part of Balance of Payment Statement.
Question 7
1 / -0

Trade Balance of a country is equal to ____________________.

A
balance of export and import of goods

B
balance of payments + net Invisibilities

C
balance of payments minus net invisibilities

D
export minus import

Solution

The trade balance of a country is a part of the balance of payments account of a country. Its is the part of the current account and it keeps track of only the visible imports and exports of the country.
Question 8
1 / -0

A change from USD 3 = GBP 1 to USD 2 = GBP 1 represents ___________.

A
a depreciation of the dollar

B
an appreciation of the dollar

C
an appreciation of the pound

D
None of the above

Solution

As now less dollars have to be exchanged to buy one pound, the value of the dollar against the pound has increased and its cheaper to buy pounds, this is know as an appreciation of the currency (in this case dollar).
Question 9
1 / -0

A closed economy is one having _______.

A
imports only

B
exports only

C
no export or imports

D
both imports and exports

Solution

A closed economy is one that only operates a domestic sector and is self sufficient. It is closed to international trade. The economy will usually only consist of 3 sectors, firms, households and government when the economy is closed and there is no exports and imports.
Question 10
1 / -0

A surge in foreign capital inflows in India would lead to the ______________________.

A
Sale of foreign exchange by the central bank in order to prevent depreciation of rupee.

B
Purchase of foreign exchange by the central bank in order to prevent depreciation of the rupee.

C
Sale of foreign exchange by the central bank to prevent the appreciation of the rupee.

D
Purchase of foreign exchange by the central bank in order to prevent appreciation of the rupee.

Solution

A managed floating exchange rate is an exchange rate system that allows a nation’s central bank to intervene regularly in foreign exchange markets to change the direction of the currency’s float and/or reduce the amount of currency volatility. This exchange rate system is also known as a “dirty float”.

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Open Economy Macroeconomics Test 1

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Open Economy Macroeconomics Test 1

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SHARING IS CARING

Question 1

Payment of services obtained from foreign insurance agents

foreign tourists in the country

PL 480 loan

Payment for services rendered by Indian Banks abroad

Solution

Question 2

it is accompanied by a decline in short-term interest rates

foreign demand for the devaluing country's exports is elastic

the devaluing country's demand for imports is inelastic

devaluation brings about price rises in the export industries of the devaluing country

Solution

Question 3

Standard Depreciation Rate

Special Drawing Rights

State Bank's Deposit Rate

Special Deposit Rate

Solution

Question 4

quotas

health regulations

pollution standards

labelling and packaging regulations

Solution

Question 5

Reduce imports

Increase the price of articles exported

Increase the quantum of exports

Stabilize the price level

Solution

Question 6

capital transfers

gain from trade

the visible balance

all of the above

Solution

Question 7

balance of export and import of goods

balance of payments + net Invisibilities

balance of payments minus net invisibilities

export minus import

Solution

Question 8

a depreciation of the dollar

an appreciation of the dollar

an appreciation of the pound

None of the above

Solution

Question 9

imports only

exports only

no export or imports

both imports and exports

Solution

Question 10

Sale of foreign exchange by the central bank in order to prevent depreciation of rupee.

Purchase of foreign exchange by the central bank in order to prevent depreciation of the rupee.

Sale of foreign exchange by the central bank to prevent the appreciation of the rupee.

Purchase of foreign exchange by the central bank in order to prevent appreciation of the rupee.

Solution

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