External Sector and Currency Exchange rate MCQ Quiz - Objective Question with Answer for External Sector and Currency Exchange rate - Download Free PDF

The correct answer is Token currency

Key Points

• Token currency:-
  • It is a form of money that has a lesser intrinsic value compared to its face value.
  • It is accepted as money because of custom or legal enactment, not because of its intrinsic value.
  • Token money costs less to produce than its face value.
  • Examples of token money include:-
    • Paper currency
    • Coins
    • Credit cards
    • Debit cards
    • Digital currencies, such as Bitcoin
  • Token money is the most common form of money in use today. It is convenient and easy to use, and it is widely accepted by merchants and consumers.
  • Some of the advantages of token money:
    • It is convenient and easy to use.
    • It is widely accepted by merchants and consumers.
    • It is relatively inexpensive to produce.
    • It can be used to make large transactions.
    • It is relatively durable and can be used many times.
  • Token money also has some disadvantages:-
    • It is not backed by any physical commodity, such as gold or silver.
    • It is susceptible to inflation, which means that its value can decrease over time.
    • It can be counterfeited.
    • It can be lost or stolen.

Additional Information

• Hot currency:-
  • It is money that is moved quickly between countries or financial markets to take advantage of short-term interest rate differentials or anticipated exchange rate shifts.
• Fiat currency:-
  • It is a government-issued currency that is not backed by a physical commodity, such as gold or silver.
  • Instead, its value is derived from the public's trust in the issuing government and its ability to repay its debts.
• Standard currency:-
  • It is a currency that is widely accepted and used as a medium of exchange in a particular country or region.
  • It is usually the official currency of a government, but it can also be a foreign currency that is widely used in a country.

The correct answer is Option 1 (Statement 1 only).

Key Points

• Foreign Investment comprises both Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI).
• Foreign Direct Investment (FDI) refers to investments made by a foreign entity directly into the business operations or physical assets of another country.
• Foreign Portfolio Investment (FPI) involves investment in financial assets such as stocks, bonds, or other securities in a foreign country, without taking control of the business.
• Statement 1 is correct because it acknowledges that foreign investment includes both FDI and FPI.
• Statement 2 is incorrect as it excludes FPI, which is an integral part of foreign investment.

Additional Information

• Foreign Direct Investment (FDI):
  • FDI typically provides long-term capital and technical expertise to the host country.
  • It often involves establishing businesses, acquiring stakes in enterprises, or building infrastructure.
  • FDI is regulated by the government of the host country and is subject to specific laws and policies.
• Foreign Portfolio Investment (FPI):
  • FPI consists of passive holdings of financial securities, like stocks and bonds, in a foreign country.
  • Unlike FDI, FPI does not provide the investor with direct control over business operations.
  • It is considered more volatile as it is influenced by changes in market conditions.
• Key Differences between FDI and FPI:
  • FDI involves direct control or significant influence over the business, whereas FPI is purely financial investment without control.
  • FDI is generally more stable and long-term, while FPI can be speculative and short-term.
• Importance of Foreign Investment:
  • It helps in economic growth, job creation, and technology transfer in the host country.
  • It contributes to the development of infrastructure and industrialization.
  • It also plays a role in stabilizing foreign exchange reserves.

The correct answer is Crude oil.

Important Points

• An import is a good or service bought in one country that was produced in another.
• Imports and exports are components of international trade.
• If the value of a country's imports exceeds the value of its exports, the country has a negative balance of trade (BOT), also known as a trade deficit.

Key Points

• India produces just 20% crude oil of its demand and rests 80% is imported from abroad.
• Crude oil and other related products account for around 22% total import of India.
• The second spot is obtained by the capital goods (machinery, base metal, transport equipment) which accounts for 19.2% of the total Indian imports.
• The third spot is obtained by the import of gems and jewellery (16.8 per cent of the total imports), the fourth and fifth spot is secured by the chemical & related products (12.7%), and electronic goods (11.4%) respectively.

The correct answer is 0.74.

Key Points

• 74% Foreign Direct Investment (FDI) is allowed in the defence sector under the automatic route in India.
• FDI beyond 74% is permitted but requires government approval, subject to access to modern technology or for other reasons.
• The decision to increase FDI in the defence sector was made to attract investment and boost the Make in India initiative in defence manufacturing.
• The relaxation in FDI norms aims to facilitate the establishment of joint ventures, encourage technology transfer, and strengthen India's defence capabilities.
• This policy helps enhance self-reliance and reduces dependency on defence imports, promoting India as a global defence manufacturing hub.

Additional Information

• Automatic Route:
  • Under the automatic route, foreign investors do not need prior approval from the government or the Reserve Bank of India (RBI) to invest in specified sectors.
  • This is intended to simplify the investment process and attract more foreign capital to India.
• Defence Production Policy:
  • The Defence Production and Export Promotion Policy (DPEPP) 2020 aims to achieve a turnover of ₹1.75 lakh crore (US$25 billion) in defence manufacturing by 2025.
  • It focuses on achieving self-reliance through indigenization and promoting export-oriented defence production.
• Make in India Initiative:
  • Launched in 2014, this initiative seeks to transform India into a global manufacturing hub.
  • It emphasizes reducing imports and promoting indigenous production in key sectors, including defence, electronics, and automobiles.
• FDI in Critical Sectors:
  • In addition to defence, FDI is permitted in sectors like telecommunications, pharmaceuticals, and aviation to boost investment and growth.
  • Each sector has specific caps and conditions for FDI, depending on its strategic importance.

The correct answer is option 2.

• Row 1 is incorrect: Foreign Portfolio Investment (FPI) refers to investments in financial assets like stocks, bonds, or mutual funds. However, negotiable financial instruments representing shares of a foreign company traded on a local exchange are called Depository Receipts (DRs), not FPIs.
• Row 2 is correct: Foreign Direct Investment (FDI) involves investment by a foreign entity in a domestic company, where the investor gains ownership and operational control. FDI is typically long-term and involves direct participation in business activities.
• Row 3 is correct: Participatory Notes (P-Notes) are instruments that allow foreign investors to invest in Indian securities without directly registering with SEBI. They are issued by SEBI-registered Foreign Institutional Investors (FIIs) to overseas investors.

Key Features of FPI and FDI:

Additional Information

• Foreign Portfolio Investment (FPI):
  • Short-term investment focused on financial assets.
  • FPIs do not grant control over businesses and are often subject to market fluctuations.
  • Example: Mutual funds investing in Indian stocks.
• Foreign Direct Investment (FDI):
  • Involves direct ownership and long-term participation.
  • For listed companies: FDI occurs when investment is 10% or more of paid-up capital.
  • For unlisted companies: Any investment is considered FDI.
  • Example: A foreign company setting up a manufacturing unit in India.
• Participatory Notes (P-Notes):
  • Issued by SEBI-registered Foreign Institutional Investors (FIIs).
  • Used by overseas investors who do not want to register with SEBI.
  • High risk due to anonymity, which raises concerns about money laundering.

Since Row 1 is incorrect and Rows 2 & 3 are correct, the correct answer is option 2 (Only two rows are correct).

The correct answer is Department for Promotion of Industry and Internal Trade.

Key Points

• Department for Promotion of Industry and Internal Trade is the nodal department for the formulation of the policy on Foreign Direct Investment (FDI).
  • It is a central government department under the Ministry of Commerce and Industry.
  • It controls the maintenance and management of data on inward FDI into India.
  • The Department for Promotion of Industry and Internal Trade plays a vital role in the liberalization and rationalization of the FDI policy.

 Additional Information

The correct answer is Both (1) and (2).

Key Points

The balance of payments (BoP)

• It records the transactions in goods, services, and assets between residents of a country with the rest of the world for a specified time period typically a year.

There are two main accounts in the BoP

The current account

• The current account records exports and imports in goods and services and transfer payments.

The capital account

• The capital account records all international purchases and sales of assets such as money, stocks, bonds, etc.

The Correct Answer is Option 3.

Key Points

• A complete ban on imports from a certain country is called Embargo.
• Tariff Barriers are taxes on certain imports.
• Subsidies: It is a form of financial grant or aid given by the state to help an industry or business keep the price of a commodity or service at an affordable price.
• Export Security: It is a measure used by the government for the protection of producers or consumers of a particular. It is not a trade barrier.

The correct answer is Martha Washington.

Important Points

US Dollar:

• The U.S. dollar was first designated as the world's currency in the 1944 Bretton Woods Agreement, and it is the most powerful currency in the world.
• It's backed by the world's third-largest economy, the United States of America.
• The strength of the U.S. economy supports the dollar's use as a global currency.
• The term "U.S. dollar" refers to a specific denomination and the U.S. currency in general.
• It was initially traded as a coin worth its weight in silver or gold and then exchanged as a paper note redeemable in gold.
• Today, although its value fluctuates, it's in strong demand.

The correct answer is Token currency

Key Points

• Token currency:-
  • It is a form of money that has a lesser intrinsic value compared to its face value.
  • It is accepted as money because of custom or legal enactment, not because of its intrinsic value.
  • Token money costs less to produce than its face value.
  • Examples of token money include:-
    • Paper currency
    • Coins
    • Credit cards
    • Debit cards
    • Digital currencies, such as Bitcoin
  • Token money is the most common form of money in use today. It is convenient and easy to use, and it is widely accepted by merchants and consumers.
  • Some of the advantages of token money:
    • It is convenient and easy to use.
    • It is widely accepted by merchants and consumers.
    • It is relatively inexpensive to produce.
    • It can be used to make large transactions.
    • It is relatively durable and can be used many times.
  • Token money also has some disadvantages:-
    • It is not backed by any physical commodity, such as gold or silver.
    • It is susceptible to inflation, which means that its value can decrease over time.
    • It can be counterfeited.
    • It can be lost or stolen.

Additional Information

• Hot currency:-
  • It is money that is moved quickly between countries or financial markets to take advantage of short-term interest rate differentials or anticipated exchange rate shifts.
• Fiat currency:-
  • It is a government-issued currency that is not backed by a physical commodity, such as gold or silver.
  • Instead, its value is derived from the public's trust in the issuing government and its ability to repay its debts.
• Standard currency:-
  • It is a currency that is widely accepted and used as a medium of exchange in a particular country or region.
  • It is usually the official currency of a government, but it can also be a foreign currency that is widely used in a country.

Test your knowledge of NEER and REER in the Indian economy. Understand how exchange rates and inflation impact trade competitiveness. Choose the correct options.

The correct answer is 1 and 3 only.

Key Points

Nominal Effective Exchange Rate (NEER):

• It is an unadjusted weighted average rate at which one country's currency exchanges for a basket of multiple foreign currencies.
• The nominal exchange rate is the amount of domestic currency needed to purchase foreign currency.
• It is a measure of the value of a currency against a weighted average of several foreign currencies. An increase in NEER indicates an appreciation of the rupee. Hence, Statement 1 is correct.

Real effective exchange rate (REER):

• It is the weighted average of a country's currency in relation to an index or basket of other major currencies.
• The weights are determined by comparing the relative trade balance of a country's currency against that of each country in the index.
• An increase in REER implies that exports become more expensive and imports become cheaper; therefore, an increase indicates a loss in trade competitiveness. Hence, Statement 2 is not correct.
• The NEER is the weighted geometric average of the bilateral nominal exchange rates of  home currency in terms of foreign currencies.
• The REER is the weighted average of NEER adjusted by the ratio of domestic prices to foreign prices.
• An increasing trend in domestic inflation relative to inflation in other countries creates a divergence in NEER and REER. Hence, Statement 3 is correct.

• NEER is like a report card for a country's currency. It shows how strong or weak a currency is compared to a bunch of other currencies. Imagine you're comparing how well your favorite sports team is doing against all the other teams in the league - that's kind of what NEER does for currencies!

  Here's what makes NEER special:

• It looks at multiple currencies, not just one

• It uses a weighted average, giving more importance to countries that trade more with each other

• It doesn't account for inflation (that's why it's called "nominal")

The correct answer is the Balance of Trade of Invisible Items

Key Points

• Balance Of Payment (BOP) is a statement that records all the monetary transactions made between residents of a country and the rest of the world during any given period. This statement includes all the transactions made by/to individuals, corporates and the government and helps in monitoring the flow of funds to develop the economy.

• The current account monitors the inflow and outflow of goods and services between countries. This account covers all the receipts and payments made with respect to raw materials and manufactured goods.

• There are various categories of trade and transfers which happen across countries.

• It could be visible or invisible trading, unilateral transfers or other payments/receipts. Trading in goods between countries is referred to as visible items, and import/export of services (banking, information technology etc.) are referred to as invisible items.

Important Points

• Piyush Goyal announced on a social platform on 15th July 2020 that India had recorded a trade surplus in June for the first time in last 18 years.

The correct answer is Foreign Direct Investment.

Key Points

• FDI Stands for Foreign Direct Investment.
• It is an investment made by a firm or individual in one country into business interests located in another country.
• However, FID's are distinguished from portfolio investments in which an investor merely purchases equities of foreign-based companies.
• It plays an important role in the economic development of a country. 
• There are 3 types of FDI:
  • Horizontal FDI
  • Vertical FDI
  • Conglomerate FDI
• Horizontal FDI: 
  • It is where funds are invested abroad in the same industry.
  • In other words, a business invests in a foreign firm that produces similar goods.
  • For example, a US-based firm may purchase Puma, a Germany-based firm.
  • They are both in the industry of sportswear and therefore would be classified as a form of horizontal FDI.
• Vertical FDI:-
  • Vertical FDI is where an investment is made within the supply chain, but not directly in the same industry.
  • In other words, a business invests in a foreign firm that it may supply or sell too. For example, Hershey's, a US Manufacturer may look to invest in cocoa products in Brazil.
  • This is known as backward vertical integration because the firm is purchasing a supplier, or potential supplier, in the supply chain.
• Conglomerate FDI:
  • It is where an investment is made in a completely different industry. In other words, it is not linked in any direct way to the investor's business.
  • For Example, Walmart, a US retailer, may invest in BMW, a German automobile manufacturer.

Important Points

• Advantages of FDI:
  • Boost to International Trade.
  • Reduced Regional and Global Tensions
  • Sharing of Technology, Knowledge, and Culture.
  • Diversification
  • Lower Costs and increased efficiencies
  • Tax Incentives
  • Employment and Economic Boost
• Disadvantages of FDI:
  • Foreign Control
  • Loss of Domestic Jobs
  • Risk of Political or Economic Change

The correct answer is Option 1.

THIS QUESTION HAS BEEN DELETED BY THE UPSC.

Key PointsTight monetary Policy

• Tight monetary policy refers to the actions that a central bank takes to limit inflation and an overheating economy. Tight monetary policy is commonly called contractionary monetary policy.
• Tight monetary policy, or contractionary monetary policy, typically occurs when a central bank wants to keep inflation under control.
• If there has been too much spending and borrowing by consumers and businesses, the economy can become overheated and that could considerably raise the price level of goods and services.
• Inflation is the rise in the price level of items, such as groceries or clothes, over time.
• To minimize or slow down inflation, a central bank could make it more expensive for consumers to spend money and businesses to borrow money by raising interest rates. This is a form of contractionary monetary policy—it restricts, or contracts, spending.

The correct answer is INTUC(Indian National Trade Union Congress).

• INTUC(Indian National Trade Union Congress) is the Indian National Congress trade union wing.
• Formed on 3 May 1947, it is affiliated with the International Confederation of Trade Unions.
• The founding conference of INTUC was inaugurated by Acharya JB Kripalani who was then president of the Indian National Congress.
• Trade Unions in India are registered under the Trade Union Act (1926) and file annual reports accordingly.
• Trade Union movement in India is divided mainly along political lines and follows a pattern of contradictory relations between pre-independence political parties and unions.
• Bharatiya Mazdoor Sangh is India's largest trade union.