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Indian Economy Quiz: Foreign Exchange and the Exchange Rate

  • 10 questions
  • 10 minutes
  • Difficulty: Medium
Useful for:SSCSSC CGLBankingIBPSSBIRBINABARDUPSC Civil ServicesRRB NTPCState Exams
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About this quiz

This Indian Economy quiz on Foreign Exchange and the Exchange Rate puts 10 multiple-choice questions to you, the verified MCQs published with GK24's note on the topic, 3 of them asked in real previous-year papers. Every question carries a full explanation of why the correct option is right and why the other options are wrong, so you learn the fact behind the answer rather than the letter. Attempt it right after reading the note, keep to the timer, and use the explanations at the end to mark what needs another look. Sit it again before the exam as a quick revision of the topic.

Questions in this quiz

10 questions with answers and explanations

Q1.Indian EconomyAsked in: UPSC Civil Services · UPSC Civil Services Prelims 2022Hard

With reference to the Indian economy, consider the following statements: 1. An increase in the Nominal Effective Exchange Rate (NEER) indicates the appreciation of rupee. 2. An increase in the Real Effective Exchange Rate (REER) indicates an improvement in trade competitiveness. 3. An increasing trend in domestic inflation relative to inflation in other countries is likely to cause an increasing divergence between NEER and REER. Which of the above statements are correct?

  1. A.1 and 2 only
  2. B.2 and 3 only
  3. C.1 and 3 only
  4. D.1, 2 and 3
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Correct answer: C. 1 and 3 only

Statement 1 is right because the NEER is a trade weighted index of the rupee against a basket of partner currencies, so a rise in the index means the rupee has appreciated in nominal terms.

Q2.Indian EconomyAsked in: UPSC Civil Services · UPSC Civil Services Prelims 2022Hard

Consider the following statements: 1. Tight monetary policy of US Federal Reserve could lead to capital flight. 2. Capital flight may increase the interest cost of firms with existing External Commercial Borrowings (ECBs). 3. Devaluation of domestic currency decreases the currency risk associated with ECBs. Which of the statements given above are correct?

  1. A.1 and 2 only
  2. B.2 and 3 only
  3. C.1 and 3 only
  4. D.1, 2 and 3
Show answer
Correct answer: A. 1 and 2 only

Statement 1 is right because when the United States Federal Reserve tightens, returns there become attractive and portfolio money flows out of emerging markets, which is capital flight.

Q3.Indian EconomyAsked in: SSC CGL · 09 Sept, 2024, Shift 1Easy

What challenge does foreign investment often face in India?

  1. A.Excessive foreign competition
  2. B.Inconsistent regulatory environment
  3. C.Lack of skilled labour
  4. D.Lack of consumer base
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Correct answer: B. Inconsistent regulatory environment

Foreign investors bring in foreign exchange and look for predictable rules, and the difficulty most often listed for India is regulatory uncertainty: changing rules, clearances spread across departments and states, and disputes that take long to settle.

Q5.Indian EconomyMedium

In which year did India accept the obligations of Article VIII of the IMF, making the rupee fully convertible on the current account?

  1. A.1991
  2. B.1993
  3. C.1994
  4. D.1999
Show answer
Correct answer: C. 1994

India accepted the obligations of Article VIII of the Articles of Agreement of the International Monetary Fund in August 1994, which means the rupee can be exchanged freely for trade in goods and services, travel, education, remittances and interest payments.

Q7.Indian EconomyMedium

The exchange rate system followed by India at present is best described as

  1. A.A fixed peg to the US dollar
  2. B.A managed float
  3. C.A currency board arrangement
  4. D.A gold standard
Show answer
Correct answer: B. A managed float

Since the unification of the exchange rate in March 1993 the value of the rupee has been determined by demand and supply in the foreign exchange market, while the Reserve Bank intervenes by buying or selling dollars to curb sharp volatility rather than to defend any particular level.

Q8.Indian EconomyEasy

A depreciation of the Indian rupee against the US dollar is likely to

  1. A.Make Indian exports cheaper for foreign buyers and imports costlier
  2. B.Make Indian exports costlier for foreign buyers and imports cheaper
  3. C.Reduce the rupee cost of repaying dollar loans
  4. D.Have no effect on the price of imported crude oil
Show answer
Correct answer: A. Make Indian exports cheaper for foreign buyers and imports costlier

When the rupee depreciates, each dollar buys more rupees, so an Indian good priced in rupees costs a foreign buyer fewer dollars and exports become more competitive, while every imported item costs more rupees than before.

Q9.Indian EconomyMedium

The Tarapore Committee is associated with which of the following?

  1. A.Reform of agricultural credit
  2. B.Capital account convertibility
  3. C.Goods and services tax design
  4. D.Restructuring of public sector banks
Show answer
Correct answer: B. Capital account convertibility

The committee headed by S. S. Tarapore reported in 1997 and again in 2006 and set out a phased road map for making the rupee convertible on the capital account, together with the preconditions to be met first, such as fiscal discipline, low and stable inflation and a strong banking…

Q10.Indian EconomyMedium

Special Drawing Rights, which form part of a country's foreign exchange reserves, are issued by

  1. A.The World Bank
  2. B.The International Monetary Fund
  3. C.The World Trade Organization
  4. D.The Bank for International Settlements
Show answer
Correct answer: B. The International Monetary Fund

Special drawing rights are an international reserve asset created by the IMF and allotted to member countries in proportion to their quotas; a member can exchange them with other members for usable currencies.

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