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Foreign Exchange MCQs

Free 44+ Foreign Exchange MCQs for PPSC, FPSC, NTS, and Pakistan government job tests. Practise below with answers and explanations.

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44 questions in this list. Select an option to practice, or open a question for the full page with explanation.

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Foreign Exchange

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1.What does the J-curve effect describe in the context of currency depreciation?

Gross Domestic Product tends to fall before rising following a currency depreciation.The trade balance often deteriorates initially before improving after a currency depreciation.The trade balance typically improves first and then worsens after a currency appreciation.Gross Domestic Product usually declines before increasing after a currency appreciation.None of the above.

2.What is the likely effect on a country's currency value if its interest rates are lower than those of other nations, assuming a floating exchange rate system?

Decline in value under a fixed exchange rate regimeDecline in value under a floating exchange rate regimeIncrease in value under a floating exchange rate regimeIncrease in value under a hybrid floating-fixed exchange rate system

3.Which international exchange rate theory suggests that exchange rates change to compensate for differences in inflation rates between countries?

theory of price feedbacktheory of trade feedbackJ-curve effect theorypurchasing power parity theory

4.What term describes the decrease in value of one currency compared to another?

a currency depreciationa currency appreciationa currency floata currency strengtheninga currency stabilization

5.What is the typical impact of an expansionary monetary policy on a country's currency value?

It generally causes the country's currency to strengthen.It generally causes the country's currency to weaken.It usually does not influence the currency's exchange rate.It usually results in the weakening of other countries' currencies.

6.Why does a floating exchange rate help the Bank of England combat inflation when it reduces the money supply?

When the money supply decreases, interest rates rise, causing UK export prices to increase and import prices to decrease.Reducing the money supply leads to higher interest rates, which lowers UK export prices and raises import prices.A reduction in the money supply raises interest rates, resulting in a decline in the prices of both UK exports and imports.Decreasing the money supply causes interest rates to increase, pushing up the prices of UK exports and imports alike.

7.What major change did most countries make regarding exchange rates in 1971?

Implemented a new fixed exchange rate systemAbandoned formal exchange rate pegs and allowed rates to float based on market forcesIntroduced a single global currency used only for international tradeReinstated the gold standard for currency valuation

8.What term is used to describe all currencies except the local currency of a particular nation?

stable currencyforeign exchangeofficial reservesquasi-moneydomestic currency

9.Which of the following activities is NOT performed by speculators in the foreign exchange market?

Try to gain from trading based on predictions of future currency valuesTake on risk while trying to outperform the marketPurchase currency at a lower rate and sell it later at a higher rateExecute simultaneous buying and selling of currency to earn a guaranteed, risk-free profit

10.What does the real effective exchange rate of the U.S. dollar represent?

It considers solely the impact of goods trade on the dollar's exchange value.It accounts only for activities in the currency futures market.It is a weighted average of the dollar's exchange rate against major U.S. trading partners' currencies, adjusted for inflation.It is a weighted average of the dollar's exchange rate against major U.S. trading partners' currencies without inflation adjustment.

11.What term describes the practice where investors transfer money into foreign currencies to benefit from higher interest rates overseas compared to their home country?

foreign exchange arbitrageinterest arbitragetaking short positionstaking long positionscurrency speculation

12.Which of the following is not a valid reason for Joe Smith, an American, to act as a buyer in the foreign exchange market?

He wants to establish a bank account in Japan.He intends to buy a car made within the United States.He plans to visit countries in Europe.He wishes to acquire British government Treasury bills.He aims to invest in foreign real estate.

13.What happens when Sweden’s currency loses value compared to Norway’s currency?

Norwegian exports become costlier for people living in NorwayNorwegian export products become less expensive for Swedish consumersSwedish exports become more affordable for Norwegian buyersSwedish export items become cheaper for Swedish residents

14.If the current spot price of the franc is $0.48 and the nine-month forward rate is $0.42, how is the franc trading in the forward market?

at a forward discountat a forward premiumwith a forward spreadnone of the abovenot applicable

15.What term describes risk-free trades that exploit price or yield differences exceeding transaction expenses to generate profit?

price variation tradesspot market dealsarbitragefutures contractshedging strategies

19.In a graph depicting the supply and demand for Japanese yen, where the exchange rate (dollars per yen) is on the vertical axis, how does the demand curve for yen slope?

rising upwardsstraight up and downfalling downwardsflat and horizontal

20.Which country hosts the highest volume of foreign exchange trading?

ChinaGermanyUnited KingdomUnited StatesJapan

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