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Balance of Payments, Exchange Rate and Foreign Investment
Practice foreign-trade-bop-foreign-investment with 20 free MCQ questions covering economics. Detailed explanations in English and Hindi, perfect for UPSC, SSC, and competitive exam preparation.
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Balance of Payments, Exchange Rate and Foreign Investment20:00
foreign-trade-bop-foreign-investment — Answer Key & Explanations (20 Questions)
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Attempt the quiz above first, then review every question with its correct answer and a short explanation below.
Q1.The balance of trade is the difference between a country's:
- A.savings and investment
- B.exports and imports of goods✓ Correct Answer
- C.income and expenditure of the government
- D.imports and tourism receipts
Explanation: Balance of trade = value of exports of goods minus value of imports of goods.
Q2.A trade deficit occurs when:
- A.exports exceed imports
- B.imports of goods exceed exports of goods✓ Correct Answer
- C.imports equal exports
- D.the budget is balanced
Explanation: India usually runs a trade deficit because imports of oil and gold are large.
Q3.The two main accounts of the balance of payments are:
- A.the current account and the capital account✓ Correct Answer
- B.the savings account and the loan account
- C.the revenue account and the expenditure account
- D.the tax account and the subsidy account
Explanation: The current account records trade and income flows; the capital account records investment and borrowing.
Q4.FDI stands for:
- A.Foreign Deposit Insurance
- B.Foreign Direct Investment✓ Correct Answer
- C.Fixed Deposit Interest
- D.Federal Debt Index
Explanation: FDI is an investment in a business with a lasting interest and control.
Q5.Foreign Portfolio Investment (FPI) means foreign investment in:
- A.factories built by the investor
- B.agricultural land
- C.government buildings
- D.financial assets such as shares and bonds without control of the company✓ Correct Answer
Explanation: FPI is more volatile than FDI because it can be withdrawn quickly.
Q6.The exchange rate is:
- A.the interest rate on loans
- B.the price of gold in rupees
- C.the tax on imports
- D.the price of one currency in terms of another currency✓ Correct Answer
Explanation: For example, how many rupees are needed to buy one US dollar.
Q7.India devalued the rupee sharply in July 1991 during:
- A.the Green Revolution
- B.the Emergency
- C.the balance of payments crisis✓ Correct Answer
- D.the first Five-Year Plan
Explanation: The 1991 crisis, with very low foreign exchange reserves, led to devaluation and economic reforms.
Q8.FEMA, which replaced FERA, was enacted in:
- A.1999✓ Correct Answer
- B.1973
- C.1991
- D.2005
Explanation: The Foreign Exchange Management Act, 1999 shifted focus from control to management of foreign exchange.
Q9.The Special Economic Zones (SEZ) Act was passed in India in:
- A.1991
- B.1999
- C.2005✓ Correct Answer
- D.2014
Explanation: The SEZ Act, 2005 came into force in February 2006.
Q10.India accepted current account convertibility of the rupee (IMF Article VIII) in:
- A.1994✓ Correct Answer
- B.1947
- C.1966
- D.2005
Explanation: In August 1994 India made the rupee convertible for current account transactions.
Q11.If the rupee appreciates against the dollar, imports from the US become:
- A.costlier in rupee terms
- B.impossible
- C.cheaper in rupee terms✓ Correct Answer
- D.unchanged in price
Explanation: A stronger rupee buys more dollars, so imports cost fewer rupees but exports become less competitive.
Q12.Short-term, speculative capital that moves quickly between countries is called:
- A.foreign aid
- B.direct investment
- C.hot money✓ Correct Answer
- D.remittance
Explanation: Hot money can leave suddenly and destabilise the exchange rate.
Q13.Selling goods abroad at a price lower than in the home market is called:
- A.dumping✓ Correct Answer
- B.hoarding
- C.smuggling
- D.rationing
Explanation: Dumping can hurt domestic producers in the importing country, so anti-dumping duties are imposed.
Q14.Which of the following is a non-tariff barrier to trade?
- A.customs duty
- B.excise duty
- C.sales tax
- D.an import quota✓ Correct Answer
Explanation: Quotas restrict the quantity of imports directly, rather than taxing them.
Q15.India's foreign exchange reserves are managed and held by the:
- A.Reserve Bank of India✓ Correct Answer
- B.Ministry of Commerce
- C.SEBI
- D.NITI Aayog
Explanation: The RBI is the custodian of the country's foreign exchange reserves.
Q16.Which of the following is recorded in the current account of the balance of payments?
- A.foreign direct investment
- B.external commercial borrowing
- C.portfolio investment
- D.exports and imports of goods and services, and remittances✓ Correct Answer
Explanation: FDI, borrowing and portfolio flows belong to the capital account.
Q17.The Tarapore Committee (1997) examined the question of:
- A.direct tax reforms
- B.agricultural pricing
- C.capital account convertibility of the rupee✓ Correct Answer
- D.public sector disinvestment
Explanation: The committee laid down a roadmap for moving to capital account convertibility.
Q18.India moved to a market-determined exchange rate system in:
- A.1947
- B.1993✓ Correct Answer
- C.1966
- D.2001
Explanation: Following the Liberalised Exchange Rate Management System of 1992, the rate became market-determined in March 1993.
Q19.The dual exchange rate system introduced in India in 1992 was known as:
- A.SEZ
- B.LERMS✓ Correct Answer
- C.FEMA
- D.ECB
Explanation: LERMS (Liberalised Exchange Rate Management System) partly allowed market rates for exports and imports.
Q20.The Foreign Exchange Regulation Act (FERA), later replaced by FEMA, was enacted in:
- A.1947
- B.1991
- C.2005
- D.1973✓ Correct Answer
Explanation: FERA, 1973 imposed strict controls on foreign exchange dealings.