Chapter 6
Foreign Exchange Rate
Questions
Ṁultiple Choice Question
1. Foreign exchange is concerned with
(a) Domestic currency
(b) Foreign currency
(c) Neither of them
Answer: (b) Foreign currency
2. The excess demand for foreign currency causes the home currency to
(a) Appreciate
(b) Depreciate
(c) Neither of the two
Answer: (b) Depreciate
3. Forward exchange rate is concerned with
(a) Immediate transactions
(b) Future transactions
(c) Neither of them
Answer: (b) Future transactions
4. The PPP theory of exchange rate was developed by
(a) Kindelberger
(b) Keynes
(c) Cassel
Answer: (c) Cassel
5. The monetary approach to rate of exchange involves
(a) price levels
(b) Money balances
(c) Real national incomes
(d) All the Above
Answer: (d) All the Above
6. The assets approach ignores
(a) Real income
(b) Trade flows
(c) Both of them
Answer: (c) Both of them
7. The monetary approach to the BOP takes money demand functions as
(a) Stable
(b) Unstable
(c) Neither of the two
Answer: (a) Stable
Very Short Answer Type Questions
1. What is the meaning of foreign exchange?
Answer:
2. What is rate of exchange ?
Answer:
3. Explain the determination of rates of exchange.
Answer:
4. Give the meaning of spot and forward rates of exchange.
Answer:
5. Briefly explain the concepts of interest arbitrage, hedging and swap operations.
Answer:
6. Outline briefly the PPP theory of rate of exchange.
Answer:
7. Give the essence of balance of payments theory of exchange rate.
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8. What is the monetary approach for determining rate of exchange ?
Answer:
9. What is the essence of the portfolio balance approach to determine rate of exchange ?
Answer:
10. What is over-shooting of exchange rate ?
Answer:
Short Answer Type Questions
1. Give the meaning of foreign exchange.
Answer:
2. What is meant by rate of exchange ?
Answer:
3. In what way is the equilibrium rate of exchange determined?
Answer:
4. Distinguish between spot and forward exchange rates.
Answer:
5. Explain the concept of interest arbitrage.
Answer:
6. What is meant by hedging ?
Answer:
7. Explain the purchasing power parity theory of exchange rate.
Answer:
8. On what grounds is the PPP theory criticised ?
Answer:
9. Discuss empirical tests on PPP hypothesis.
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10. Explain clearly the BOP theory of rate of exchange.
Answer:
11. Explain the monetary approach to the rate of exchange.
Answer:
12. Explain the assets approach to the rate of exchange.
Answer:
13. Explain briefly the monetary approach to BOP adjustment.
Answer:
14. Write a note on over-shooting of exchange rate.
Answer:
15. What are the factors that cause variations in exchange rates ?
Answer:
Long Answer Type Questions
1. Define the rate of exchange. How is the equilibrium rate of exchange determined ?
Answer:
2. Make a clear distinction between spot and forward exchange rates.
Answer:
3. Critically examine the purchasing power parity theory of exchange rates.
Answer:
4. Explain clearly the balance of payments theory of rate of exchange. On what grounds is it criticised?
Answer:
5. Discuss the monetary approach to exchange rates.
Answer:
6. Explain the portfolio balance approach to rate of exchange. Point out its shortcomings.
Answer:
7. Explain Dornbusch's model of over-shooting of exchange rate.
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8. Examine the factors that cause fluctuations in the exchange rates.
Answer:
Very Long Answer Type Questions
1. Explain clearly the determination of equilibrium rate of exchange.
Answer:
2. Distinguish between spot and forward rates of exchange.
Answer:
3. Write notes on the following:
(i) Interest arbitrage
Answer:
(ii) Hedging
Answer:
(iii) Swap operation.
Answer:
4. Explain and criticise the PPP theory of exchange rate.
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5. Discuss the BOP theory of exchange rate.
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6. Critically examine the monetary approach to rate of exchange.
Answer:
7. Explain monetary approach to BOP. What are its weaknesses?
Answer:
Type- Bhabesh Bora
Post ID : DABP005191
