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Foreign Exchange Rate |
👉 Foreign Exchange
It refers to all currencies other than the domestic currency of a given country.
👉 Foreign Exchange Rate
It refers to the rate at which one currency is exchanged for the other.
👉 Currency Depreciation
It refers to decrease in the value of domestic currency in terms of foreign currency.
👉 Currency Appreciation
It refers to increase in the value of domestic currency in terms of foreign currency.
👉 Fixed Exchange Rate System
It refers to the system in which the rate of exchange for a currency is fixed by the government.
👉 Devaluation
It refers to reduction in price of domestic currency in terms of all foreign currencies under fixed exchange rate regime.
👉 Revaluation
It refers to rise in price of domestic currency in terms of all foreign currencies under fixed exchange rate regime.
👉 Flexible Exchange Rate System
It refers to a system in which the rate of exchange is determined by the forces of demand and supply of different currencies in the foreign exchange market.
👉 Managed Floating Rate System
It refers to a system in which foreign exchange rate is determined by market forces and central bank is a key participant to stabilize the value of currency in case of extreme appreciation or depreciation.
👉 Reasons for Demand of Foreign Exchange
1. Imports of Goods and Services
2. Tourism
3. Unilateral Transfers sent abroad
4. Purchase of Assets in Foreign Countries
5. Speculation
👉 Reasons for Supply of Foreign Exchange
1. Exports of Goods and Services
2. Foreign Investment
3. Remittances (Unilateral transfers) from abroad
4. Speculation
👉 Equilibrium Exchange Rate
It is determined at a level where demand for foreign exchange is equal to the supply of foreign exchange.
👉 Foreign Exchange Market
It is the market in which foreign currencies are bought and sold.
Functions :
1. Transfer Function
2. Credit Function
3. Hedging Function
Types :
1. Spot Market = It refers to the market in which the receipts and payments are made immediately.
2. Forward Market = It refers to the market in which sale and purchase of foreign currency is settled on a specified future date at a rate agreed upon today.
👉 Multiple Choice Questions (MCQs)
Que 1. Which of the following items raises the supply of foreign exchange ?
(a) Import of goods from China
(b) Indian students going to USA for MBA
(c) Donation of 50 million $ received from Microsoft
(d) Purchase of land in England
Ans. (c) Donation of 50 million $ received from Microsoft
Que 2. Supply curve of foreign exchange :
(a) Horizontal straight line parallel to X-axis
(b) Vertical straight line parallel to Y-axis
(c) Slope downwards
(d) Slope upwards
Ans. (d) Slope upwards
Que 3. Depreciation of domestic currency leads to rise in :
(a) Exports (b) Imports
(c) Both (a) and (b) (d) Neither (a) nor (b)
Ans. (a) Both (a) and (b)
Que 4. Imports of goods and services raises the ____ of foreign exchange.
(a) Supply (b) Demand
(c) Both (a) and (b) (d) neither (a) nor (b)
Ans. (b) Both (a) and (b)
Que 5. Flexible Exchange Rate System is also known as :
(a) Pegged Exchange Rate System
(b) Dirty Floating
(c) Floating Exchange Rate
(d) Both (a) and (c)
Ans. (b) Dirty Floating
Que 6. Devaluation of Currency means :
(a) Reduction in the value of domestic currency by the market forces
(b) Reduction in the value of domestic currency by the government
(c) Both (a) and (b)
(d) Neither (a) and (b)
Ans. (b) Reduction in the value of domestic currency by the government
Que 7. Other things remaining the same, when in a country the market price of foreign currency falls, national income is likely :
(a) to rise (b) to fall
(c) to rise or to fall (d) to remain unaffected
Ans. (b) to fall
Que 8. Other things remaining unchanged, when in a country the market price of foreign currency rises, national income is likely :
(a) Likely to rise (b) Likely to fall
(c) Likely to rise or to fall both
(d) Not affected
Ans. (a) Likely to rise
Que 9. Other things remaining the same, when foreign currency becomes cheaper, the effect on national income is likely to be :
(a) Positive (b) Negative
(c) Positive and Negative both
(d) No effect
Ans. (b) Negative
Que 10. The value of US Dollar $1 has gone down from Rs. 67 to Rs. 65. It means that :
(a) Indian rupee has appreciated
(b) US Dollar has depreciated
(c) Both (a) and (b)
(d) None of these
Ans. (c) Both (a) and (b)
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