Balance of Payments and Exchange Rates MCQs 2026

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

1. A only domestic retail sales ✓
2. B a country's economic transactions with the rest of the world over a period ✓
3. C only provincial tax receipts ✓
4. D only stock-market tickers ✓

The current account of the BoP mainly includes

1. A only long-term FDI flows ✓
2. B only central-bank gold vault counts ✓
3. C only domestic wage bills ✓
4. D trade in goods and services, primary income and secondary income (transfers) ✓

Merchandise trade balance equals

1. A FDI inflows minus remittances ✓
2. B budget deficit minus surplus ✓
3. C M2 minus currency ✓
4. D exports of goods minus imports of goods ✓

Invisible trade in BoP terminology typically refers to

1. A only smuggled gold ✓
2. B only domestic barter ✓
3. C trade in services (and related invisibles) ✓
4. D only provincial octroi ✓

Workers' remittances are usually recorded in the

1. A capital account as equity FDI only ✓
2. B current account (secondary income / transfers) ✓
3. C official reserve liabilities only ✓
4. D domestic CPI basket only ✓

Primary income in the current account includes

1. A only customs duties ✓
2. B only sales tax refunds ✓
3. C compensation of employees and investment income (interest, dividends, profits) ✓
4. D only municipal fees ✓

The capital account in modern BPM6 mainly covers

1. A capital transfers and acquisition/disposal of non-produced non-financial assets ✓
2. B all merchandise exports ✓
3. C all domestic bank deposits ✓
4. D all provincial budgets ✓

The financial account records

1. A only crop yields ✓
2. B transactions in financial assets and liabilities (FDI, portfolio, other investment, reserves) ✓
3. C only school enrollment ✓
4. D only weather indices ✓

Foreign direct investment (FDI) is typically classified under the

1. A current account merchandise only ✓
2. B domestic fiscal deficit only ✓
3. C financial account ✓
4. D HDI calculation only ✓

Portfolio investment differs from FDI mainly because it

1. A always builds factories with majority control ✓
2. B never involves equities ✓
3. C is identical to remittances ✓
4. D involves financial securities without lasting control of the enterprise ✓

Official reserve assets include items such as

1. A foreign exchange, SDRs and monetary gold held by the monetary authority ✓
2. B only private household cash ✓
3. C only municipal land ✓
4. D only corporate goodwill ✓

A current account deficit means

1. A exports always exceed imports of goods only ✓
2. B BoP must be unbalanced forever ✓
3. C exchange rate cannot change ✓
4. D debits on current account exceed credits (net borrowing from abroad on current transactions) ✓

Overall BoP accounting identity implies that

1. A only exports equal GDP ✓
2. B only taxes equal spending ✓
3. C only M1 equals M2 ✓
4. D the sum of current, capital and financial accounts (with errors) balances with reserve changes ✓

Errors and omissions in BoP arise mainly from

1. A perfect data collection always ✓
2. B incomplete or inconsistent statistical recording of transactions ✓
3. C only weather forecasting ✓
4. D only census age errors ✓

Autonomous transactions in BoP are those

1. A done only to balance the books by the central bank ✓
2. B identical to reserve sales always ✓
3. C never involving trade ✓
4. D undertaken for their own economic motives, independent of financing the imbalance ✓

Accommodating (compensatory) transactions typically include

1. A ordinary tourist spending only ✓
2. B official financing / reserve changes used to settle BoP imbalances ✓
3. C household grocery purchases ✓
4. D provincial school fees ✓

A BoP surplus (overall) tends to be associated with

1. A automatic elimination of all trade ✓
2. B zero FDI forever ✓
3. C accumulation of official reserves (other things equal) ✓
4. D fixed domestic prices always ✓

A BoP deficit (overall) may require

1. A drawing down reserves or official borrowing to finance the gap ✓
2. B printing only provincial coupons ✓
3. C banning all exports ✓
4. D abolishing the central bank ✓

The exchange rate is

1. A the domestic inflation rate only ✓
2. B the fiscal deficit ratio only ✓
3. C the unemployment rate only ✓
4. D the price of one currency in terms of another ✓

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

1. A never hold foreign reserves ✓
2. B commit to maintain the currency's value against an anchor by intervening ✓
3. C let the rate float freely without intervention ✓
4. D abolish all trade ✓

Under a floating exchange-rate regime, the rate is

1. A set once forever by parliament only ✓
2. B largely determined by market supply and demand for foreign exchange ✓
3. C identical to the tax rate ✓
4. D fixed by IMF quotas alone ✓

A managed float (dirty float) means

1. A the rate is permanently immutable ✓
2. B there is no foreign-exchange market ✓
3. C the rate is market-based but authorities intervene occasionally ✓
4. D only gold coins circulate ✓

Currency appreciation means

1. A the currency always loses value ✓
2. B imports become always dearer in domestic terms ✓
3. C the domestic currency buys more units of foreign currency ✓
4. D reserves must fall ✓

Currency depreciation means

1. A the domestic currency buys fewer units of foreign currency ✓
2. B exports always become dearer in foreign currency ✓
3. C the fiscal deficit disappears ✓
4. D interest rates must be zero ✓

Devaluation refers to

1. A a market-driven float rise only ✓
2. B an official reduction in the pegged value of a currency under a fixed regime ✓
3. C an increase in tariff rates only ✓
4. D a cut in income tax only ✓

Revaluation is

1. A an official increase in the pegged value of a currency ✓
2. B identical to depreciation in a float ✓
3. C a rise in unemployment only ✓
4. D a cut in reserve requirements only ✓

Other things equal, depreciation tends to

1. A make exports dearer abroad always ✓
2. B make exports cheaper abroad and imports dearer at home ✓
3. C eliminate all capital flows ✓
4. D fix the money supply overnight ✓

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

1. A elasticities are both zero ✓
2. B the sum of export and import demand elasticities exceeds one ✓
3. C tariffs are infinite ✓
4. D money demand is infinite ✓

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

1. A improve instantly forever without lag ✓
2. B never change ✓
3. C depend only on rainfall ✓
4. D worsen first and improve later as quantities adjust ✓

Purchasing power parity (PPP) links exchange rates to

1. A only unemployment gaps ✓
2. B only fiscal deficits ✓
3. C relative price levels across countries ✓
4. D only literacy rates ✓

Interest rate parity relates

1. A only wage differentials to HDI ✓
2. B only tariffs to quotas ✓
3. C interest differentials to expected exchange-rate changes ✓
4. D only remittances to FDI ✓

A currency board is a hard peg arrangement in which

1. A domestic base money is backed by foreign reserves at a fixed rate ✓
2. B the central bank freely floats without rules ✓
3. C there is no convertibility ✓
4. D only barter is allowed ✓

Dollarization means

1. A floating the rupee freely ✓
2. B raising only income tax ✓
3. C adopting a foreign currency (e.g., USD) as legal tender ✓
4. D banning remittances ✓

Foreign-exchange reserves are held mainly to

1. A pay only domestic salaries in rupees ✓
2. B support external payments, intervene in FX markets and provide confidence ✓
3. C replace all tax revenue ✓
4. D measure HDI directly ✓

A sudden stop in capital inflows can cause

1. A BoP pressure, reserve loss and exchange-rate stress ✓
2. B automatic trade surplus forever ✓
3. C zero inflation always ✓
4. D higher HDI overnight ✓

Hot money typically refers to

1. A long-term FDI in factories only ✓
2. B short-term speculative capital that can reverse quickly ✓
3. C workers' remittances only ✓
4. D official gold mining ✓

The IMF's primary role includes

1. A setting all domestic tax rates ✓
2. B promoting international monetary cooperation and providing temporary BoP financing ✓
3. C running commercial banks for profit ✓
4. D fixing world oil prices ✓

Special Drawing Rights (SDRs) are

1. A a domestic sales tax ✓
2. B a provincial bond only ✓
3. C an international reserve asset created by the IMF ✓
4. D a private crypto token ✓

An IMF Stand-By Arrangement typically provides

1. A permanent grants with no conditions ✓
2. B only agricultural seeds ✓
3. C short- to medium-term financial support for BoP needs with policy conditions ✓
4. D only military aid ✓

Conditionality in IMF programs refers to

1. A policy commitments a country agrees to in return for financing ✓
2. B unconditional free money forever ✓
3. C only weather insurance ✓
4. D only tariff elimination by the IMF itself ✓

Twin deficits hypothesis links

1. A only inflation and literacy ✓
2. B only wages and rents ✓
3. C only M0 and gold ✓
4. D fiscal deficit and current account deficit ✓

Terms of trade measure

1. A the ratio of export prices to import prices ✓
2. B only unemployment to vacancies ✓
3. C only tax to GDP ✓
4. D only M2 to GDP ✓

An improvement in terms of trade means

1. A export prices rise relative to import prices ✓
2. B import prices always rise more ✓
3. C exports volume must fall ✓
4. D reserves must be zero ✓

External debt servicing appears in BoP mainly through

1. A interest (current account) and principal (financial account) flows ✓
2. B only domestic GST ✓
3. C only school fees ✓
4. D only CPI weights ✓

A crawling peg is

1. A a pure free float with no intervention ✓
2. B a permanent gold standard only ✓
3. C a peg adjusted gradually according to a rule or announced path ✓
4. D a ban on FX trading ✓

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

1. A relative prices (and often trade weights across partners) ✓
2. B only nominal GDP ✓
3. C only population ✓
4. D only rainfall ✓

Capital controls are measures that

1. A restrict or regulate cross-border capital flows ✓
2. B set only agricultural support prices ✓
3. C fix only school curricula ✓
4. D abolish the customs department ✓

Convertibility of a currency means

1. A it cannot be used in trade ✓
2. B it has no exchange rate ✓
3. C it is only paper without value ✓
4. D it can be freely exchanged for foreign currency for permitted purposes ✓

Pakistan's external vulnerability is often discussed in terms of

1. A only domestic cricket scores ✓
2. B only municipal parking fees ✓
3. C only forest cover alone ✓
4. D current account gaps, reserves adequacy and external debt ✓