Class 12 Open Economy Macroeconomics Mock Test (CBSE)

Topics in Open Economy Macroeconomics

• The balance of payments
• Current account
• Capital account
• Balance of payments surplus and deficit
• The foreign exchange market
• Determination of the exchange rate
• Flexible exchange rates
• Fixed exchange rates
• Managed floating

Open Economy Macroeconomics practice questions with answers

1. Q1Multiple choice·1 mark
   Under a flexible exchange rate system, the exchange rate is determined by:

   1. (a)Government intervention through central bank reserves
   2. (b)Fixed international trade agreements between countries
   3. (c)The international monetary fund guidelines
   4. (d)The interaction of the demand for and supply of foreign exchange in the market
   Show answer and step marks

   1. Correct option: (d)+1

   Answer: (d)
2. Q2Multiple choice·1 mark
   In a fixed exchange rate system, the official value of the domestic currency is determined and maintained by:

   1. (a)Commercial banks through foreign trade
   2. (b)The monetary authority or government
   3. (c)Free market forces of demand and supply
   4. (d)International financial markets
   Show answer and step marks

   1. Correct option: (b)+1

   Answer: (b)
3. Q3Short answer·3 marks
   State the components of the Current Account of the Balance of Payments. Explain any one of them briefly.
   Show answer and step marks

   1. Trade in goods (visible items): exports and imports of goods.+0.5
   2. Trade in services (invisible items): exports and imports of services such as transport, banking, insurance and tourism.+0.5
   3. Income (factor income) such as interest, profits, dividends and wages received from or paid abroad; NCERT counts this under trade in services, so naming it there earns this mark.+0.5
   4. Transfer payments (unilateral transfers): gifts, remittances and grants.+0.5
   5. Brief, accurate explanation of any one component, e.g. transfer payments are receipts and payments made without any goods or services in return, such as remittances from workers abroad.+1

   Answer: Trade in goods (visibles), trade in services (invisibles), income (factor income) and transfer payments; e.g. transfer payments are receipts and payments without anything in return, such as gifts, remittances and grants.

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