Foreign Exchange Rate Quiz

Which of the following statements best describes the foreign exchange rate?

• The rate at which currencies are exchanged for goods.

• The price of one currency in terms of another currency.

• The value of a domestic currency only.

• The rate set exclusively by the government.

If the Indian Rupee depreciates from Rs 77 to Rs 79 for $1, what effect will this likely have on Indian exports?

• Exports will decrease because Indian goods are more expensive.

• Exports will increase as Indian goods become cheaper for foreign buyers.

• Exports will remain unchanged.

• Exports will only increase if the domestic currency appreciates.

Analyze the consequences of a devaluation of the domestic currency. What is the most significant impact on the economy?

• Devaluation leads to decreased demand for exports.

• Devaluation makes imported goods cheaper.

• Devaluation increases the cost of imports and may improve export competitiveness.

• Devaluation has no impact on the economy.

Compare and contrast fixed and flexible exchange rate systems. Which statement is true?

• In both systems, the government has the same level of control.

• A fixed exchange rate is determined by market forces, while a flexible rate is set by the government.

• A flexible exchange rate fluctuates based on supply and demand, while a fixed exchange rate is maintained by government intervention.

• Fixed exchange rates are more stable than flexible exchange rates in all situations.

How does an increase in demand for foreign exchange affect the exchange rate, assuming supply remains constant?

• The exchange rate will decrease, making foreign currency cheaper.

• The exchange rate will remain unchanged.

• The exchange rate will increase, making foreign currency more expensive.

• The demand will cause depreciation of the domestic currency without affecting the exchange rate.

Consider a situation where the exchange rate for $1 increases from Rs 78 to Rs 80. What could be a potential cause of this change?

• A decrease in the demand for Indian exports.

• An increase in the value of the Indian Rupee.

• A rise in the price of US goods in India.

• An increase in foreign currency supply.

Evaluate the statement: "Managed floating exchange rates provide more stability than flexible rates." What is a valid conclusion based on this statement?

• Managed floating exchange rates are always more beneficial for trade.

• Flexible rates are more stable than managed floating rates.

• Managed floating exchange rates aim to reduce volatility while allowing market forces to influence the rate.

• Both systems provide the same level of market stability.

In the context of foreign exchange, what role does speculation play?

• It has no impact on the supply of foreign exchange.

• It decreases the demand for foreign currency.

• It can lead to increased volatility in exchange rates.

• It ensures that exchange rates remain stable.

When the supply of foreign exchange increases, which of the following is likely to occur?

• The exchange rate will rise.

• The domestic currency will appreciate.

• There will be excess demand for foreign currency.

• The supply curve will shift to the left.

What is the primary reason for the demand for foreign currency in a foreign exchange market?

• To increase speculation on currency values.

• To meet payments for imports of goods and services.

• To stabilize the domestic currency.

• To maintain fixed exchange rates.