Balance of Payments and Exchange Rates MCQs 2026

The balance of payments (BoP) is a systematic record of

1. Aonly domestic retail sales✓
2. Ba country's economic transactions with the rest of the world over a period✓
3. Conly provincial tax receipts✓
4. Donly stock-market tickers✓

The current account of the BoP mainly includes

1. Aonly long-term FDI flows✓
2. Bonly central-bank gold vault counts✓
3. Conly domestic wage bills✓
4. Dtrade in goods and services, primary income and secondary income (transfers)✓

Merchandise trade balance equals

1. AFDI inflows minus remittances✓
2. Bbudget deficit minus surplus✓
3. CM2 minus currency✓
4. Dexports of goods minus imports of goods✓

Invisible trade in BoP terminology typically refers to

1. Aonly smuggled gold✓
2. Bonly domestic barter✓
3. Ctrade in services (and related invisibles)✓
4. Donly provincial octroi✓

Workers' remittances are usually recorded in the

1. Acapital account as equity FDI only✓
2. Bcurrent account (secondary income / transfers)✓
3. Cofficial reserve liabilities only✓
4. Ddomestic CPI basket only✓

Primary income in the current account includes

1. Aonly customs duties✓
2. Bonly sales tax refunds✓
3. Ccompensation of employees and investment income (interest, dividends, profits)✓
4. Donly municipal fees✓

The capital account in modern BPM6 mainly covers

1. Acapital transfers and acquisition/disposal of non-produced non-financial assets✓
2. Ball merchandise exports✓
3. Call domestic bank deposits✓
4. Dall provincial budgets✓

The financial account records

1. Aonly crop yields✓
2. Btransactions in financial assets and liabilities (FDI, portfolio, other investment, reserves)✓
3. Conly school enrollment✓
4. Donly weather indices✓

Foreign direct investment (FDI) is typically classified under the

1. Acurrent account merchandise only✓
2. Bdomestic fiscal deficit only✓
3. Cfinancial account✓
4. DHDI calculation only✓

Portfolio investment differs from FDI mainly because it

1. Aalways builds factories with majority control✓
2. Bnever involves equities✓
3. Cis identical to remittances✓
4. Dinvolves financial securities without lasting control of the enterprise✓

Official reserve assets include items such as

1. Aforeign exchange, SDRs and monetary gold held by the monetary authority✓
2. Bonly private household cash✓
3. Conly municipal land✓
4. Donly corporate goodwill✓

A current account deficit means

1. Aexports always exceed imports of goods only✓
2. BBoP must be unbalanced forever✓
3. Cexchange rate cannot change✓
4. Ddebits on current account exceed credits (net borrowing from abroad on current transactions)✓

Overall BoP accounting identity implies that

1. Aonly exports equal GDP✓
2. Bonly taxes equal spending✓
3. Conly M1 equals M2✓
4. Dthe sum of current, capital and financial accounts (with errors) balances with reserve changes✓

Errors and omissions in BoP arise mainly from

1. Aperfect data collection always✓
2. Bincomplete or inconsistent statistical recording of transactions✓
3. Conly weather forecasting✓
4. Donly census age errors✓

Autonomous transactions in BoP are those

1. Adone only to balance the books by the central bank✓
2. Bidentical to reserve sales always✓
3. Cnever involving trade✓
4. Dundertaken for their own economic motives, independent of financing the imbalance✓

Accommodating (compensatory) transactions typically include

1. Aordinary tourist spending only✓
2. Bofficial financing / reserve changes used to settle BoP imbalances✓
3. Chousehold grocery purchases✓
4. Dprovincial school fees✓

A BoP surplus (overall) tends to be associated with

1. Aautomatic elimination of all trade✓
2. Bzero FDI forever✓
3. Caccumulation of official reserves (other things equal)✓
4. Dfixed domestic prices always✓

A BoP deficit (overall) may require

1. Adrawing down reserves or official borrowing to finance the gap✓
2. Bprinting only provincial coupons✓
3. Cbanning all exports✓
4. Dabolishing the central bank✓

The exchange rate is

1. Athe domestic inflation rate only✓
2. Bthe fiscal deficit ratio only✓
3. Cthe unemployment rate only✓
4. Dthe price of one currency in terms of another✓

Under a fixed (pegged) exchange-rate regime, the authorities

1. Anever hold foreign reserves✓
2. Bcommit to maintain the currency's value against an anchor by intervening✓
3. Clet the rate float freely without intervention✓
4. Dabolish all trade✓

Under a floating exchange-rate regime, the rate is

1. Aset once forever by parliament only✓
2. Blargely determined by market supply and demand for foreign exchange✓
3. Cidentical to the tax rate✓
4. Dfixed by IMF quotas alone✓

A managed float (dirty float) means

1. Athe rate is permanently immutable✓
2. Bthere is no foreign-exchange market✓
3. Cthe rate is market-based but authorities intervene occasionally✓
4. Donly gold coins circulate✓

Currency appreciation means

1. Athe currency always loses value✓
2. Bimports become always dearer in domestic terms✓
3. Cthe domestic currency buys more units of foreign currency✓
4. Dreserves must fall✓

Currency depreciation means

1. Athe domestic currency buys fewer units of foreign currency✓
2. Bexports always become dearer in foreign currency✓
3. Cthe fiscal deficit disappears✓
4. Dinterest rates must be zero✓

Devaluation refers to

1. Aa market-driven float rise only✓
2. Ban official reduction in the pegged value of a currency under a fixed regime✓
3. Can increase in tariff rates only✓
4. Da cut in income tax only✓

Revaluation is

1. Aan official increase in the pegged value of a currency✓
2. Bidentical to depreciation in a float✓
3. Ca rise in unemployment only✓
4. Da cut in reserve requirements only✓

Other things equal, depreciation tends to

1. Amake exports dearer abroad always✓
2. Bmake exports cheaper abroad and imports dearer at home✓
3. Celiminate all capital flows✓
4. Dfix the money supply overnight✓

The Marshall-Lerner condition states that depreciation improves the trade balance if

1. Aelasticities are both zero✓
2. Bthe sum of export and import demand elasticities exceeds one✓
3. Ctariffs are infinite✓
4. Dmoney demand is infinite✓

The J-curve effect suggests that after depreciation, the trade balance may

1. Aimprove instantly forever without lag✓
2. Bnever change✓
3. Cdepend only on rainfall✓
4. Dworsen first and improve later as quantities adjust✓

Purchasing power parity (PPP) links exchange rates to

1. Aonly unemployment gaps✓
2. Bonly fiscal deficits✓
3. Crelative price levels across countries✓
4. Donly literacy rates✓

Interest rate parity relates

1. Aonly wage differentials to HDI✓
2. Bonly tariffs to quotas✓
3. Cinterest differentials to expected exchange-rate changes✓
4. Donly remittances to FDI✓

A currency board is a hard peg arrangement in which

1. Adomestic base money is backed by foreign reserves at a fixed rate✓
2. Bthe central bank freely floats without rules✓
3. Cthere is no convertibility✓
4. Donly barter is allowed✓

Dollarization means

1. Afloating the rupee freely✓
2. Braising only income tax✓
3. Cadopting a foreign currency (e.g., USD) as legal tender✓
4. Dbanning remittances✓

Foreign-exchange reserves are held mainly to

1. Apay only domestic salaries in rupees✓
2. Bsupport external payments, intervene in FX markets and provide confidence✓
3. Creplace all tax revenue✓
4. Dmeasure HDI directly✓

A sudden stop in capital inflows can cause

1. ABoP pressure, reserve loss and exchange-rate stress✓
2. Bautomatic trade surplus forever✓
3. Czero inflation always✓
4. Dhigher HDI overnight✓

Hot money typically refers to

1. Along-term FDI in factories only✓
2. Bshort-term speculative capital that can reverse quickly✓
3. Cworkers' remittances only✓
4. Dofficial gold mining✓

The IMF's primary role includes

1. Asetting all domestic tax rates✓
2. Bpromoting international monetary cooperation and providing temporary BoP financing✓
3. Crunning commercial banks for profit✓
4. Dfixing world oil prices✓

Special Drawing Rights (SDRs) are

1. Aa domestic sales tax✓
2. Ba provincial bond only✓
3. Can international reserve asset created by the IMF✓
4. Da private crypto token✓

An IMF Stand-By Arrangement typically provides

1. Apermanent grants with no conditions✓
2. Bonly agricultural seeds✓
3. Cshort- to medium-term financial support for BoP needs with policy conditions✓
4. Donly military aid✓

Conditionality in IMF programs refers to

1. Apolicy commitments a country agrees to in return for financing✓
2. Bunconditional free money forever✓
3. Conly weather insurance✓
4. Donly tariff elimination by the IMF itself✓

Twin deficits hypothesis links

1. Aonly inflation and literacy✓
2. Bonly wages and rents✓
3. Conly M0 and gold✓
4. Dfiscal deficit and current account deficit✓

Terms of trade measure

1. Athe ratio of export prices to import prices✓
2. Bonly unemployment to vacancies✓
3. Conly tax to GDP✓
4. Donly M2 to GDP✓

An improvement in terms of trade means

1. Aexport prices rise relative to import prices✓
2. Bimport prices always rise more✓
3. Cexports volume must fall✓
4. Dreserves must be zero✓

External debt servicing appears in BoP mainly through

1. Ainterest (current account) and principal (financial account) flows✓
2. Bonly domestic GST✓
3. Conly school fees✓
4. Donly CPI weights✓

A crawling peg is

1. Aa pure free float with no intervention✓
2. Ba permanent gold standard only✓
3. Ca peg adjusted gradually according to a rule or announced path✓
4. Da ban on FX trading✓

Real effective exchange rate (REER) adjusts the nominal rate for

1. Arelative prices (and often trade weights across partners)✓
2. Bonly nominal GDP✓
3. Conly population✓
4. Donly rainfall✓

Capital controls are measures that

1. Arestrict or regulate cross-border capital flows✓
2. Bset only agricultural support prices✓
3. Cfix only school curricula✓
4. Dabolish the customs department✓

Convertibility of a currency means

1. Ait cannot be used in trade✓
2. Bit has no exchange rate✓
3. Cit is only paper without value✓
4. Dit can be freely exchanged for foreign currency for permitted purposes✓

Pakistan's external vulnerability is often discussed in terms of

1. Aonly domestic cricket scores✓
2. Bonly municipal parking fees✓
3. Conly forest cover alone✓
4. Dcurrent account gaps, reserves adequacy and external debt✓