2nd PUC Economics Question Bank Chapter 12 Open Economy

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Karnataka 2nd PUC Economics Question Bank Chapter 12 Open Economy

2nd PUC Economics Open Economy One Mark Questions and Answers

I. Choose the correct answer.

Question 1.
The consumers and producers can choose between domestic and foreign goods, this market linkage is called
(a) Financial Market linkage
(b) Output Market linkage
(c) Labour Market linkage
(d) None of the above
Answer:
(b) Output Market linkage

Question 2.
The exchange rate is determined by the market forces of demand and supply is called
(a) Fixed exchange rate
(b) Dirty floating exchange rate
(c) Flexible exchange rate
(d) None of the above
Answer:
(c) Flexible exchange rate

Question 3.
The balance of payments (BOP) record these transactions between residents and with the rest of the world
(a) Goods
(b) Services
(c) Assets
(d) All of the above
Answer:
(d) All of the above

Question 4.
The rate at which the price of one currency in terms of Foreign Currency is called
(a) Exchange Control
(b) Interest Rate
(c) Foreign Exchange Rate
(d) None of the above
Answer:
(c) Foreign Exchange Rate

Question 5.
In this standard, all currencies were defined in terms of gold
(a) Metal standard
(b) Silver standard
(c) Gold standard
(d) None of the above
Answer:
(c) Gold standard

Question 6.
When one country manipulates exchange rate against the interest of other countries, is known as
(a) Managed Floating
(b) Crawling peg
(c) Dirty floating
(d) Wide Band
Answer:
(c) Dirty floating

Question 7.
Name the economic transactions which are undertaken to make equilibrium in the balance of payment,
(a) Autonomous items
(b) Invisible items
(c) Accommodating items
(d) Visible items
Answer:
(c) Accommodating items

Question 8.
If India exports goods worth ₹ 20 core and imports goods with ₹ 30 crores, it will have a ______
(a) Surplus of ₹ 10 Crore in the balance of trade
(b) The deficit of ₹ 10 Crore in the balance of trade
(c) The deficit of ₹ 7.50 Crore in the balance of trade
(d) Can’t say
Answer:
(b) The deficit of ₹ 10 Crore in the balance of trade

Question 9.
Which one of the following items is an intangible item in the balance of payments statements?
(a) Export of food grains
(b) Import of crude oil
(c) Banking services provided in other countries
(d) Import of steel by the steel industry.
Answer:
(c) Banking services provided in other countries

Question 10.
Which one of the following statements deals with debts and claims of a country?
(a) Balance of capital account
(b) Balance of trade account
(c) Balance of current account
(d) Balance of services
Answer:
(a) Balance of capital account

Question 11.
Current account of BOP records transactions relating to ________
(a) Exchange of goods
(b) Exchange of services
(c) unilateral transfers
(d) All of them
Answer:
(d) All of them

Question 12.
Current transactions are of _________ nature
(a) Flow
(b) Stock
(c) Both flow and stock
(d) None of the above
Answer:
(a) Flow

Question 13.
Balance of trade is equal to
(a) X – M
(b) X + M
(c) Both (a) and (b)
(d) None of the above.
Answer:
(a) X – M

Question 14.
Balance of payment deficit is based on
(a) Capital account transaction
(b) Autonomous transactions
(c) Current account transactions
(d) Accommodating transactions
Answer:
(b) Autonomous transactions

Question 15.
A change from ₹ 140 = 2$ to ₹ 60 = 1$ indicate that ₹ is:
(a) appreciating
(b) depredating
(c) Both (a) and (b)
(d) devalued
Answer:
(a) appreciating

Question 16.
Accommodating transactions take place in the
(a) Capital account
(b) Current account
(c) Both (a) and (b)
(d) None of these
Answer:
(a) Capital account

Question 17.
A deliberate raising of the price of foreign currency in terms of domestic currency by the government is:
(a) Appreciation
(b) Devaluation
(c) Depreciation
(d) either (b) or (d)
Answer:
(b) Devaluation

Question 18.
A country’s BOT is ₹ 500 crores. Value of exports of goods in ₹ 650 crores, then the value of imports will be
(a) 1150 crores
(b) 500 Crores
(c) 150 Crores
(d) None of these
Answer:
(c) 150 Crores

Question 19.
Which of the following is not true for the balance of payment
(a) Accounts relating to the specified period
(b) Double-entry system
(c) It excludes capital transfers
(d) It is self-balanced.
Answer:
(c) It excludes capital transfers

Question 20.
The inflow of foreign exchange is recorded on
(a) Debit side
(b) Credit note
(c) Either (a) or (b)
(d) None of the above
Answer:
(b) Credit note

Question 21.
“Purchase of machinery” affects ________ of BOP a/c
(a) Current A/c
(b) Capital A/c
(c) Both (a) and (b)
(d) Either (a) or (b)
Answer:
(b) Capital A/c

Question 22.
The flexible exchange rate is also known as
(a) pegged exchange rate
(b) Floating exchange rates
(c) Both (a) and (b)
(d) None of these
Answer:
(b) Floating exchange rates

Question 23.
_______ is a situation when “managed floating’ is exercised by the Central Bank
(a) Crawling peg
(b) Spot market
(c) Dirty floating
(d) None of these
Answer:
(c) Dirty floating

Question 24.
In case of currency appreciation, the domestic currency becomes ________
(a) less valuable
(b) more valuable
(c) rise
(d) fall
Answer:
(b) more valuable

Question 25.
Balance of payments deficit is calculated by taking into account the _______ only.
(a) accommodating transactions
(b) autonomous transactions
(c) Unilateral transactions
(d) None of the above
Answer:
(a) accommodating transactions

Question 26.
Which items are excluded in BoT, but included in BoP?
(a) Visible items
(b) Invisible items
(c) Private Capital
(d) Both (b) and (c)
(d) Both (b) and (c)

II. Fill in the blanks.

Question 1.
________ is the record of trade in goods and services and transfer payments.
Answer:
Current Account

Question 2.
_______ account records all international transactions of assets.
Answer:
Capital Account

Question 3.
The price of foreign currency in terms of Domestic currency has increased and this is called ______ of the domestic currency.
Answer:
Appreciation

Question 4.
______ is a mixture of a flexible and fixed exchange rate system.
Answer:
Managed Floating

Question 5.
The Bretton Woods conference held in the year ______
Answer:
1994

Question 6.
Reduction in the value of the domestic currency by the government is called ______
Answer:
Devaluation

Question 7.
Reduction in the value of domestic currency through market forces is called ________
Answer:
Depreciation

Question 8.
_________ is the systematic record of all economic transactions between one country and rest of the world.
Answer:
Balance of Payments

Question 9.
An _______ is an economy which has economics relations with other countries of the world with regard to goods and services, financial assets, etc.
Answer:
Open economy

Question 10.
When the goods and services are exchanged between the nations, it is called as ______ or _______
Answer:
Foreign trade or external trade.

Question 11.
______ refers to the difference between the value of visible items of exports and imports during a year.
Answer:
Balance of trade

Question 12.
The _______ means the difference between exports and imports of visible material goods.
Answer:
Balance of Trade (BOT)

Question 13.
______ refers to the rate at which one country’s currency is exchanged with another country’s currency.
Answer:
Exchange rate

Question 14.
______ is a system in which exchange rate keeps on changing of floating.
Answer:
Flexible exchange rate

Question 15.
A trade policy which does not impose any barrier on the exchange of goods and services between different countries is known as the _______
Answer:
Free trade policy.

Question 16.
_______ means the system of trading exclusively between two countries or two groups of countries, for their mutual advantage.
Answer:
Bilateral trade

Question 17.
_______ refers to the deliberate reduction of the value of domestic currency against foreign currencies.
Answer:
Devaluation

Question 18.
______ refers to the involvement of three or more groups of countries in trade.
Answer:
Multilateral Trade

III. Match the following.

Question 1.

A	B
1. SDR	a. Dirty floating
2. Balance of payment	b. Flexible exchange rate
3. Balance of trade	c. Paper gold
4. Floating exchange rate	d. Trade-in goods
5. Managed floating	e. Trade in goods and service

Answer:
1. (c) Paper gold
2. (e) Trade in goods and service
3. (d) Trade in goods
4. (b) Flexible exchange rate
5. (a) Dirty floating

Question 2.

A	B
1. BOP	a. Purchasing Power Parity
2. Autonomous	b. ‘below the line’ items
3. Accommodating	c. Floating Exchange Rate
4. Errors and Omissions	d. Dirty Floating
5. Real Exchange Rate	e. Balancing items
6. Flexible Exchange Rate	f. International Economic Transactions.
7. Fixed Exchange Rate	g. Systematic Record of International transactions of Goods and Services
8. Managed Floating System	h. Pegged Exchange Rate

Answer:
1. (g) Systematic Record of International transactions of Goods and Services
2. (f) International Economic Transactions.
3. (b) ‘below the line’ items
4. (a) Purchasing Power Parity
5. (c) Floating Exchange Rate
6. (h) Pegged Exchange Rate
7. (d) Dirty Floating
8. (e) Balancing items

IV. Answer the following Questions in a Sentence/Word.

Question 1.
What do you mean by an open economy
Answer:
An open economy is one which interacts with other countries through various channels.

Question 2.
What is Balance of payment?
Answer:
Balance Of Payments record the transactions in goods, services and transfer payments.

Question 3.
What is balance of trade?
Answer:
It is the difference between the value of exports and value of imports of goods of a country in a given period of time

Question 4.
What do you mean by fixed exchange rate?
Answer:
In this exchange rate system, the government fixes the exchange rate at a particular level.

Question 5.
Give the meaning of official reserve sale.
Answer:
The reserve bank sells foreign exchange when there is a deficit. This is called official reserve sale.

Question 6.
Give the meaning of managed floating.
Answer:
Managed floating system is a mixture of flexible and fixed exchange rate systems. Under this system, 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.

2nd PUC Economics Open Economy Two Mark Questions and Answers

V. Answer the following Questions in 4 Sentences.

Question 1.
Mention the three linkages of the open economy.
Answer:
The three linkages of the open economy are,
(a) Output Market
(b) Financial Market
(c) Labour Market

Question 2.
What is the difference between current account and capital account?
Answer:

Basis	Current Account	Capital Account
Influence	1. Current account transactions affect the current income level of the economy.	1. Capital account transaction affects the capital stock of the company.
Components	2. It records export/import of goods and services, unilateral transfers and investment income received or paid.	2. It records transaction relating to sale/purchase of assets and borrowings/lending.
Concept	3. It is a flow concept.	3. It is a stock concept.

Question 3.
When do surplus and deficit arises in Capital Account?
Answer:
The surplus in capital account arises when capital inflows are greater than capital outflows. Whereas, deficit capital account arises when capital inflows are lesser than capital outflows.

Question 4.
Write the meaning of balanced, surplus and deficit BOT.
Answer:
1. BOT is said to be in balance when exports of goods are equal to the imports of goods.
2. Surplus BOT will arise if the country exports more goods than it imports.
3. Deficit BOT will arise if a country imports more goods than it exports.

Question 5.
Why do people demand foreign exchange?
Answer:
People demand foreign exchange because: they want to purchase goods and services from other countries: they want to send gifts abroad: and they want to purchase financial assets of a certain country.

Question 6.
What is the foreign exchange rate?
Answer:
Foreign Exchange Rate is the price of one currency in terms of another. It links the currencies of different countries and enables comparison of international costs and prices.

Question 7.
Differentiate between depreciation and devaluation.
Answer:

Devaluation	Depreciation
1. It refers to a deliberate reduction of value of one country’s currency with other country’s currency.	1. It occurs when the value of domestic currency decreases in relation to the value of other currencies in the foreign exchange market.
2. It takes place due to the action taken by the government.	2. It takes place due to changes in the market forces.
3. It takes place under the Fixed exchange rate system.	3. It takes place under a flexible exchange rate system.

2nd PUC Economics Open Economy Four Mark Questions and Answers

VI. Answer the following Questions in 12 Sentences.

Question 1.
Write a note on the balance of trade.
Answer:
Balance of Trade: It is the difference between the value of exports and the value of imports of goods in a country in a given period of time. Export of goods is entered as a credit item in BOT, whereas import of goods is entered as a debit item in BOT. It is also known as Trade Balance. BOT is said to be in balance when exports of goods are equal to the imports of goods.

• Surplus BOT will arise if the country exports more goods than it imports.
• Deficit BOT will arise if a country imports more goods than it exports.

Question 2.
Write the chart of components of Current account.
Answer:

Question 3.
Write the chart of components of the capital account.
Answer:

Question 4.
Briefly explain the effect of an increase in demand for imports in the foreign exchange market with the help of a diagram.
Answer:
Suppose the demand for foreign goods and services increases, then the demand curve shifts upward and right to the original demand curve, which is shown in the below diagram.

The increase in demand for foreign goods and services results in a change in the exchange rate. The initial exchange rate e0 = 50, which means that we need to exchange ₹50 for one dollar. At the new equilibrium, the exchange rate becomes e1 = 70, which means that we need to pay more rupees for a dollar now (i.e., ₹ 70).
It indicates that the value of rupees in terms of dollars has fallen and the value of the dollar in terms of rupees has risen.

Question 5
Explain the merits and demerits of Flexible and fixed exchange rate system.
Answer:
The main feature of the fixed exchange rate system the government will be able to maintain the exchange rate at the specific level. If there is a deficit in the BoP, governments will have to intervene to take care of the gap by use of its official reserves. This gives rise to speculation of devaluation. It leads to various speculative attacks on a currency.

The Flexible exchange rate system gives the government more flexibility and they do not need to maintain large stocks of foreign exchange reserves. The major advantage is that movements in the exchange rate automatically take care of the surpluses and deficits in the BoP. Also, countries gain independence in implementing their monetary policies, since they do not have to intervene to maintain the exchange rate which is automatically taken care of by the market.