Macro

Balance of Payments

Medium

Arrange the given statement in terms of determining the ehange rate through a floating /flexible exchange rate.

(A) Depreciation of domestic currency in terms of foreign currency.

(B) The demand curve shifts upward and right to the original demand curve.

(C) The demand for foreign goods and services increases.

(D) The increase in demand for foreign goods and services result in a change in the exchange rate.

Choose the correct answer from the options given below:

(B), (A), (C), (D)

(A), (B), (C), (D)

(B), (A), (D), (C)

(C), (B), (D), (A)

✅ Correct Option: 4

Option 1 -> Starts with demand curve shift before the initial increase in demand, which is illogical.

Option 2 -> Begins with depreciation, which is the outcome, not the starting point.

Option 3 -> Places depreciation before the change in exchange rate, disrupting the cause-effect sequence.

Option 4 -> Follows the correct logical sequence: initial increase in demand → graphical shift → exchange rate change → currency depreciation.

Hence, Option 4: (C), (B), (D), (A) -> The correct sequence in a floating exchange rate system starts with (C) increased demand for foreign goods/services, which causes (B) the demand curve to shift upward and rightward, leading to (D) a change in the exchange rate, ultimately resulting in (A) depreciation of the domestic currency as more domestic currency is needed to buy foreign currency for purchasing foreign goods. This chain of events demonstrates how market forces determine exchange rates in a flexible exchange rate regime. -> correct

2023: 1 June Shift 1

Decrease in value of domestic currency to foreign currency in fixed exchange rate system is called :

2025: 28 May Shift 1

Arrange the following in correct sequence with respect to exchnage rate :-

(A) The central bank purchases dollars to absorb the excess supply.

(B) The exchange rate is fixed by the government higher than the market rate of exchange.

(D) Supply of the dollars exceeds the demand for the dollar.

Choose the correct answer from the options given below:

(B), (A), (D), (C).
(D), (A), (C), (B).
(C), (A), (D), (B).
(C), (B), (D), (A).

2025: 2 June Shift 1

Identify the correct reasons that may affect the demand for foreign exchange in an economy.

(A) Import of visibles.

(B) Export of invisibles.

(D) Purchase of assets abroad.

Choose the correct answer from the options given below:

2025: 29 May Shift 1

Which of the following transactions will be recorded in the current account of Balance of Payment?

2025: 29 May Shift 2

Central banks intervene to buy and sell foreign currencies in an attempt to moderate exchange rate movements whenever they feel that such actions are appropriate. What is this move called?

2025: 13 May Shift 2

An increase in exchange rate implies that the price of foreign currency in terms of domestic currency has increased; this is called ........

Solution

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