Posted by Anjali Kaur on Nov 20, 2021
Balance of Payment-test

Practice Test on Balance of Payment

Practice Test on Balance of Payment.

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1. ‘Devaluation and Depreciation of currency is one and the same thing’. Do you agree? How do they affect the exports of a country?

Answer. Both imply a fall in the external value of a currency; however, the term depreciation is used under the floating exchange rate system when the exchange rate is determined by the market forces of demand and supply.

The term devaluation is used in a system of fixed exchange rates. Under this, the exchange value of a currency is decided by the government.

Devaluation is done deliberately by the government. But both encourage exports from a country, as exports become cheaper and foreign currency can buy more domestic goods.

2. What is meant by ‘Official reserve transactions’? Discuss their importance in Balance of Payments.

Answer. These transactions are made by the Central Bank which causes a change in its official reserves of foreign exchange. These involve the purchase or sale of its own currency in the foreign exchange market.

In Balance of Payment:

  1. Purchase of a country’s own currency is a credit item in Balance of Payment, whereas, sale of the currency is a debit item.
  2. It helps to adjust the deficit and surplus in Balance of Payment.

3. Explain the concept of ‘deficit’ in balance of payments.

Answer. The deficit in BoP refers to a situation when receipts of the country arising out of autonomous transactions are less than the corresponding payments to the rest of the world during the period of an accounting year. It highlights our net liabilities towards the rest of the world.
Significance of deficit in BoP:
There is a positive as well as a negative sign of the deficit in BoP. The positive sign is that the BoP deficit may be occurring on account of such capital imports which are essential to speed up the process of growth and development in the economy. The negative sign is that it highlights our liabilities to the rest of the world. The greater the liability, the greater is the strain on our GDP by the way of payments to the rest of the world.

4. Indian investors lend abroad. Answer the following questions:

(a) In which sub account and on which side of BOP account such lending is recorded? Give reasons
(b) Explain the impact of this lending on market exchange rate.


  1. Indians lending abroad is recorded in Capital Account of BOP Account because it leads to creation of foreign exchange assets. It is recorded on the debit side because it outflow of foreign exchange.
  2. Lending abroad increases demand for foreign exchange. Supply of foreign exchange remains unchanged, exchange rate may rise.
  3. In Capital Account, and on debit side of BOP, the lending of Indian investors to abroad will be recorded. Indian investors lending abroad cause an outflow of foreign exchange from the country. Thus, it is recorded as negative item in the Capital Account of BOP.
  4. Lending to abroad by Indian investors will decrease the supply of foreign currency. This would shift the supply curve from $5 to ‘S’. With the shift in supply curve, the new equilibrium is established at point E’, where the exchange rate rises from OR to OR1.

You can try more tests:

  1. Formula list on macroeconomics
  2. Practice test on macroeconomics
  3. Indian Economy Test
  4. Real and nominal GDP
  5. National income
  6. National income formula list
  7. Value-added method
  8. Income method
  9. Expenditure method

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Great post! Loved it 🙂

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