MCQs with answers on “Foreign Exchange Reserves: Importance for India’s Economic Stability”

What are foreign exchange reserves?
- A) Gold reserves held by the government
- B) Foreign currency deposits held by a country’s central bank
- C) Bonds issued by foreign governments
- D) None of the above
  Answer: B) Foreign currency deposits held by a country’s central bank
Why are foreign exchange reserves important for a country?
- A) To stabilize the national currency
- B) To finance trade deficits
- C) To maintain investor confidence
- D) All of the above
  Answer: D) All of the above
Which of the following is a major component of India’s foreign exchange reserves?
- A) SDRs (Special Drawing Rights)
- B) Gold
- C) Foreign currency assets
- D) All of the above
  Answer: D) All of the above
As of 2023, what is the primary purpose of maintaining foreign exchange reserves?
- A) To pay foreign debts
- B) To ensure economic stability and liquidity
- C) To support the stock market
- D) To invest in foreign lands
  Answer: B) To ensure economic stability and liquidity
Which institution is responsible for managing India’s foreign exchange reserves?
- A) Ministry of Finance
- B) Reserve Bank of India (RBI)
- C) Securities and Exchange Board of India (SEBI)
- D) Planning Commission
  Answer: B) Reserve Bank of India (RBI)
What is the effect of high foreign exchange reserves on a country’s currency?
- A) Depreciation
- B) Appreciation
- C) No effect
- D) Volatility
  Answer: B) Appreciation
How do foreign exchange reserves contribute to a country’s credit rating?
- A) By increasing inflation
- B) By reducing debt
- C) By enhancing payment capabilities
- D) By lowering interest rates
  Answer: C) By enhancing payment capabilities
Which of the following can be a consequence of low foreign exchange reserves?
- A) Increased investment
- B) Currency devaluation
- C) Trade surplus
- D) Economic growth
  Answer: B) Currency devaluation
What is one of the risks associated with holding large foreign exchange reserves?
- A) Increased inflation
- B) Currency risk
- C) Opportunity cost
- D) Both B and C
  Answer: D) Both B and C
What role do foreign exchange reserves play during economic crises?
- A) They are used to fund government projects
- B) They act as a buffer to stabilize the economy
- C) They increase domestic prices
- D) They are not relevant during crises
  Answer: B) They act as a buffer to stabilize the economy
Which of the following is NOT a source of foreign exchange reserves?
- A) Foreign investments
- B) Export revenues
- C) Domestic loans
- D) Remittances
  Answer: C) Domestic loans
In which scenario would a country likely need to dip into its foreign exchange reserves?
- A) During an economic boom
- B) To pay for imports when trade deficits arise
- C) When the stock market is performing well
- D) None of the above
  Answer: B) To pay for imports when trade deficits arise
What is the impact of foreign exchange reserves on a country’s monetary policy?
- A) They restrict monetary policy options
- B) They have no impact
- C) They support the implementation of monetary policy
- D) They lead to hyperinflation
  Answer: C) They support the implementation of monetary policy
Which of the following can lead to an increase in a country’s foreign exchange reserves?
- A) Declining exports
- B) Increased foreign direct investment (FDI)
- C) Trade deficits
- D) Economic recession
  Answer: B) Increased foreign direct investment (FDI)
How can foreign exchange reserves affect a country’s inflation rate?
- A) Higher reserves can lead to higher inflation
- B) Lower reserves can lead to higher inflation
- C) Reserves have no effect on inflation
- D) Reserves only affect employment
  Answer: B) Lower reserves can lead to higher inflation
What is the relationship between foreign exchange reserves and international trade?
- A) Reserves decrease trade volume
- B) Reserves ensure trade stability and confidence
- C) There is no relationship
- D) Reserves only affect export activities
  Answer: B) Reserves ensure trade stability and confidence
What happens to a country’s foreign exchange reserves when it exports goods?
- A) They decrease
- B) They increase
- C) They remain unchanged
- D) They become irrelevant
  Answer: B) They increase
Which currency is most commonly held in foreign exchange reserves globally?
- A) Euro
- B) Japanese Yen
- C) British Pound
- D) US Dollar
  Answer: D) US Dollar
What can be a direct benefit of higher foreign exchange reserves for a country?
- A) Lower taxes
- B) Improved infrastructure
- C) Greater ability to manage currency volatility
- D) Increased interest rates
  Answer: C) Greater ability to manage currency volatility
In the context of India, what is one of the challenges related to foreign exchange reserves?
- A) They can lead to trade deficits
- B) They might be insufficient during crises
- C) Maintaining them can be costly
- D) All of the above
  Answer: D) All of the above
How can remittances from abroad impact India’s foreign exchange reserves?
- A) By decreasing them
- B) By increasing them
- C) By having no impact
- D) By leading to currency speculation
  Answer: B) By increasing them
What is the primary function of the Foreign Exchange Management Act (FEMA) in India?
- A) To regulate foreign investments
- B) To promote exports
- C) To manage foreign exchange reserves
- D) To control currency value
  Answer: A) To regulate foreign investments
Which of the following is a potential use of foreign exchange reserves?
- A) Paying foreign debts
- B) Funding infrastructure projects
- C) Paying subsidies
- D) Only for emergencies
  Answer: A) Paying foreign debts
What is the impact of global economic downturns on India’s foreign exchange reserves?
- A) They typically increase
- B) They typically decrease
- C) They remain stable
- D) They are irrelevant
  Answer: B) They typically decrease
How do geopolitical tensions affect a country’s foreign exchange reserves?
- A) They have no effect
- B) They can lead to capital flight and decreased reserves
- C) They can strengthen reserves
- D) They solely affect domestic markets
  Answer: B) They can lead to capital flight and decreased reserves
Which of the following factors can contribute to a country building up its foreign exchange reserves?
- A) High inflation
- B) Trade surpluses
- C) Economic recessions
- D) Increased import tariffs
  Answer: B) Trade surpluses
What is the potential risk of excessive foreign exchange reserves?
- A) Low interest rates
- B) Economic overheating
- C) Increased inflation
- D) Currency speculation
  Answer: C) Increased inflation
Which of the following describes “currency convertibility”?
- A) Ability to convert currency into gold
- B) Ability to exchange currency freely on the market
- C) Government control over currency exchange
- D) Limited access to foreign currency
  Answer: B) Ability to exchange currency freely on the market
What role do foreign exchange reserves play in ensuring investor confidence?
- A) They are not related to investor confidence
- B) They reassure investors about currency stability
- C) They only affect domestic investments
- D) They discourage foreign investments
  Answer: B) They reassure investors about currency stability
How do fluctuations in global oil prices affect India’s foreign exchange reserves?
- A) They have no effect
- B) They can deplete reserves due to higher import bills
- C) They can increase reserves by boosting exports
- D) They only affect the agricultural sector
  Answer: B) They can deplete reserves due to higher import bills

These MCQs can help assess understanding and knowledge about foreign exchange reserves and their significance for India’s economic stability.

Share This

Home Tuition in Guwahati

Related Posts