CUET UG Categorised PYQ Economics Unit 11

(Detailed) → Under a fixed exchange rate system, the value of currency is officially fixed by the monetary authority. → When the government officially raises the value of its currency, it is called revaluation. → Therefore, raising the value of a country's currency under a fixed exchange rate system is revaluation. → Hence, Option C is the correct answer.

(Detailed) → When the Indian rupee loses value against the US dollar, more rupees are needed to buy one US dollar. → As a result, imports from the USA become costlier for Indian buyers. → This can lead to a fall in imports from the USA. → At the same time, Indian goods become cheaper for American buyers. → This can lead to a rise in exports from India to the USA. → Therefore, Statements (B) and (C) are correct. → Hence, Option D is the correct answer.

(Detailed) → Accommodating items are called below-the-line items in Balance of Payments. Therefore, (A) matches with (III). → Capital account records international purchases and sales of assets. Therefore, (B) matches with (I). → Balance of trade refers to exports and imports of visible goods. Therefore, (C) matches with (IV). → Dirty floating involves intervention in exchange rate management and is linked with above-line autonomous transactions in this matching pattern. Therefore, (D) matches with (II). → Hence, A-III, B-I, C-IV, D-II is correct. → Hence, Option A is the correct answer.

(Detailed) → Under a flexible exchange rate system, the exchange rate is determined by demand and supply in the foreign exchange market. → If demand for foreign currency rises, its price rises. → If supply of foreign currency rises, its price falls. → Therefore, flexible exchange rate is determined by market forces. → Hence, Option C is the correct answer.

(Detailed) → Exchange rate is the rate at which one currency can be exchanged for another currency. → For example, if 1 US dollar = ₹83, then ₹83 is the exchange rate of dollar in terms of rupees. → Thus, exchange rate is the price of a currency expressed in terms of another currency. → Hence, Option B is the correct answer.

(Detailed) → When the exchange rate changes from $1 = ₹80 to $1 = ₹75, the Indian rupee appreciates against the dollar. → Appreciation makes foreign goods cheaper for Indian buyers. → Therefore, imports are likely to rise. → At the same time, Indian goods become relatively costlier for foreign buyers, so exports may fall. → A fall in net exports can reduce aggregate demand and national income. → Hence, Statements (B) and (E) are correct. → Hence, Option B is the correct answer.

(Detailed) → The capital account of the Balance of Payments records transactions that change foreign assets and liabilities. → External commercial borrowings are loans taken from foreign sources. → Since they create external liability, they are recorded in the capital account. → Hence, Option D is the correct answer.

(Detailed) → Purchasing Power Parity states that exchange rates adjust so that similar goods cost the same in different countries. → It is based on the law of one price. → Therefore, the theory described in the question is Purchasing Power Parity. → Hence, Option C is the correct answer.

(Detailed) → The current account of Balance of Payments records trade in goods and services, income flows, and transfers. → When an Indian buys a French-made car from France, it is an import of goods. → Import of goods is recorded in the current account. → Hence, Option B is the correct answer.

(Detailed) → A floating exchange rate is determined by the forces of demand and supply in the foreign exchange market. → The government does not fix the rate under a pure floating system. → Therefore, an exchange rate determined by market forces is called a floating exchange rate. → Hence, Option D is the correct answer.

(Detailed) → Under a flexible exchange rate system, exchange rate is determined by demand and supply of foreign exchange. → It gives more flexibility to the government and central bank in conducting domestic economic policies. → It also automatically corrects surplus and deficit in Balance of Payments through changes in exchange rate. → Therefore, Statements (A) and (D) are correct. → Hence, Option B is the correct answer.

(Detailed) → Export of goods and services brings foreign exchange, so it is recorded on the credit side of the current account of BOP. Therefore, (A) matches with (III). → Trade surplus means exports of goods are greater than imports of goods. Therefore, (B) matches with (I). → Current transfers are part of invisible items in the current account. Therefore, (C) matches with (II). → Portfolio investment includes foreign institutional investment in financial assets. Therefore, (D) matches with (IV). → Therefore, A-III, B-I, C-II, D-IV is correct. → Hence, Option D is the correct answer.

(Detailed) → If a nation is a lender to other countries, it means it has surplus savings available for lending abroad. → This is usually reflected in a surplus current account. → A current account surplus means foreign exchange receipts from goods, services and transfers exceed payments. → Therefore, Option A is the correct answer.

(Detailed) → Capital account of BOP records international transactions relating to assets and liabilities. → Loans, banking capital and capital flows are included in the capital account. → Gifts and donations are transfer payments and are recorded in the current account as current transfers. → Therefore, gifts and donations are not included in capital account balance. → Hence, Option A is the correct answer.

(Detailed) → Balance of Trade refers to export and import of goods. Therefore, (A) matches with (IV). → Balance of Payments records all international transactions including goods, services and transactions in assets. Therefore, (B) matches with (III). → Net invisibles include services, transfers and income items. Therefore, (C) matches with (II). → Balance on capital account deals with international transactions related to financial assets. Therefore, (D) matches with (I). → Therefore, A-IV, B-III, C-II, D-I is correct. → Hence, Option B is the correct answer.

(Detailed) → Currency depreciation means the value of domestic currency falls in terms of foreign currency. → As a result, domestic goods become cheaper for foreign buyers. → This increases the demand for exports. → Therefore, depreciation leads to an increase in exports. → Hence, Option A is the correct answer.

(Detailed) → The current account of Balance of Payments records exports and imports of goods, services and unilateral transfers. → Visible items, invisible items and transfer payments are included in current account. → Portfolio investment is a capital transaction, so it is included in capital account, not current account. → Hence, Option A is the correct answer.

(Detailed) → In a fixed exchange rate system, revaluation means the government officially increases the value of domestic currency. → This means the domestic currency can buy more foreign currency than before. → Therefore, the price of domestic currency in terms of foreign currency increases. → Hence, Option D is the correct answer.

(Detailed) → Demand for foreign exchange arises when residents need to make payments to foreign countries. → Purchase of financial assets abroad requires foreign exchange. Therefore, Statement (B) is correct. → Studying abroad requires payment in foreign currency. Therefore, Statement (C) is correct. → Import of goods also requires foreign exchange. Therefore, Statement (E) is correct. → Demand for domestic goods by foreigners and transfers made by foreigners to residents create supply of foreign exchange, not demand. → Therefore, B, C and E represent demand for foreign exchange. → Hence, Option B is the correct answer.

(Detailed) → Current account includes transactions related to goods, services and transfers. → A surplus current account occurs when total receipts from current account transactions exceed total payments. → Therefore, Receipts > Payments is the correct meaning of surplus current account. → Hence, Option C is the correct answer.

(Detailed) → The European Monetary Union was created in 1999. → It marked an important step in European monetary integration. → The euro was introduced in 1999 for electronic or accounting purposes and later as notes and coins in 2002. → Therefore, European Monetary Union was created in 1999. → Hence, Option C is the correct answer.

(Detailed) → The Gold Standard was used before the Bretton Woods system. → The Bretton Woods Conference was held in 1944 and led to the creation of IMF and World Bank. → The Smithsonian Agreement came later in 1971 after the Bretton Woods system came under pressure. → The World Trade Organization was established in 1995. → Therefore, the correct chronological order is Gold Standard → Bretton Woods Conference → Smithsonian Agreement → Establishment of WTO. → Hence, Option B is the correct answer.

(Detailed) → Under a flexible exchange rate system, currency value changes due to demand and supply in the foreign exchange market. → When the price or value of domestic currency in terms of foreign currency increases, the domestic currency becomes stronger. → This increase in value under flexible exchange rate is called appreciation. → Hence, Option B is the correct answer.

(Detailed) → Pegged exchange rate means the currency value is fixed or pegged to another currency or basket. Therefore, (A) matches with (II). → Managed floating is known as dirty floating because the central bank intervenes when needed. Therefore, (B) matches with (III). → Bretton Woods Conference resulted in the creation of IMF and World Bank. Therefore, (C) matches with (I). → The Balance of Payments includes current account, capital account, and errors and omissions. Therefore, (D) matches with (IV). → Hence, Option B is the correct answer.