Table of Contents
Class 12 Macroeconomics Chapter 6 – Open Economy Important Questions
Open Economy Macroeconomics is one of the most important chapters in NCERT Class 12 Macroeconomics as it explains how an economy interacts with the rest of the world through international trade, foreign investment and foreign exchange markets. The chapter introduces Balance of Payments (BoP), Current Account, Capital Account, Foreign Exchange Rate, Purchasing Power Parity (PPP), Flexible and Fixed Exchange Rate Systems, and Open Economy Multiplier. These important questions include MCQs, one-word questions, assertion and reason questions, numerical-based questions and descriptive questions for complete NCERT revision.
This question bank is highly useful for CBSE Board Exams, CUET, UPSC, SSC, Banking, Railways, State PSC and other competitive examinations. The questions comprehensively cover exchange rate determination, foreign exchange market, balance of trade, depreciation, appreciation, devaluation, revaluation, managed floating system and equilibrium income in an open economy exactly as discussed in the latest NCERT.
MULTIPLE CHOICE QUESTIONS (1–30)
These MCQs are prepared strictly from the latest NCERT and cover every important concept, definition and application from the first half of the chapter.
1. An open economy is one that:
A. Does not trade with other countries
B. Trades only in goods
C. Interacts with other countries through trade and financial markets
D. Depends only on domestic production
Answer: C | Page Reference: 85
2. Which of the following is NOT a linkage of an open economy discussed in NCERT?
A. Output Market
B. Financial Market
C. Labour Market
D. Commodity Exchange Market
Answer: D | Page Reference: 85
3. Trade in goods and services with other countries mainly takes place through the:
A. Labour Market
B. Output Market
C. Capital Market
D. Bond Market
Answer: B | Page Reference: 85
4. When Indians purchase foreign goods, it acts as:
A. Injection into circular flow
B. Leakage from circular flow
C. Capital inflow
D. Government expenditure
Answer: B | Page Reference: 85
5. Exports of goods increase:
A. Imports
B. Aggregate demand
C. Government borrowing
D. Inflation automatically
Answer: B | Page Reference: 85
6. The price of one currency in terms of another currency is called:
A. Purchasing Power
B. Exchange Rate
C. Inflation Rate
D. Interest Rate
Answer: B | Page Reference: 86
7. Balance of Payments (BoP) records transactions between:
A. States of a country
B. Residents of a country and the rest of the world
C. Government and firms
D. Households and firms
Answer: B | Page Reference: 86
8. The two main accounts of BoP discussed in NCERT are:
A. Revenue and Capital Accounts
B. Current and Capital Accounts
C. Fiscal and Monetary Accounts
D. Domestic and Foreign Accounts
Answer: B | Page Reference: 86
9. The Current Account records:
A. Purchase of shares
B. Trade in goods, services and transfer payments
C. Sale of land
D. Foreign investments only
Answer: B | Page Reference: 86
10. Transfer payments include:
A. GST collections
B. Gifts and remittances
C. Sale of machinery
D. Purchase of bonds
Answer: B | Page Reference: 86
11. Factor income includes income from:
A. Tourism only
B. Banking only
C. Factors of production
D. Gifts received
Answer: C | Page Reference: 88
12. Which of the following is an example of non-factor income?
A. Wages
B. Interest
C. Banking services
D. Rent
Answer: C | Page Reference: 88
13. Balance of Trade (BOT) is the difference between:
A. Imports and exports of services
B. Exports and imports of goods
C. Capital inflows and outflows
D. Revenue and expenditure
Answer: B | Page Reference: 87
14. A Trade Surplus occurs when:
A. Imports exceed exports
B. Exports exceed imports
C. Exports equal imports
D. Services exceed goods
Answer: B | Page Reference: 87
15. Trade Deficit means:
A. Exports are greater than imports
B. Imports are greater than exports
C. Imports equal exports
D. Capital inflow exceeds capital outflow
Answer: B | Page Reference: 87
16. Capital Account records:
A. Trade in goods
B. International transactions in assets
C. Government taxes
D. Household consumption
Answer: B | Page Reference: 88
17. Purchase of foreign assets by Indians is recorded as:
A. Credit item
B. Debit item
C. Transfer payment
D. Invisible export
Answer: B | Page Reference: 88
18. Foreign Direct Investment (FDI) is included under:
A. Current Account
B. Capital Account
C. Revenue Account
D. Fiscal Account
Answer: B | Page Reference: 88
19. Which of the following forms part of the Capital Account?
A. Gifts
B. Grants
C. External Commercial Borrowings
D. Tourism
Answer: C | Page Reference: 88
20. Current Account Deficit must generally be financed by:
A. Current Account Surplus
B. Capital Account Surplus
C. Higher taxes
D. Lower exports
Answer: B | Page Reference: 89
21. Official reserve transactions are carried out by:
A. Commercial Banks
B. RBI / Central Bank
C. Private Investors
D. Exporters
Answer: B | Page Reference: 89
22. International transactions made independently of BoP conditions are called:
A. Accommodating Transactions
B. Autonomous Transactions
C. Official Transactions
D. Reserve Transactions
Answer: B | Page Reference: 89
23. Transactions undertaken to bridge BoP deficit are known as:
A. Autonomous Transactions
B. Accommodating Transactions
C. Invisible Transactions
D. Domestic Transactions
Answer: B | Page Reference: 89
24. Errors and Omissions in BoP exist because:
A. Trade is illegal
B. It is difficult to record every international transaction accurately
C. Exchange rates fluctuate
D. Imports exceed exports
Answer: B | Page Reference: 89
25. The market where national currencies are exchanged is called:
A. Money Market
B. Foreign Exchange Market
C. Capital Market
D. Commodity Market
Answer: B | Page Reference: 91
26. Which of the following is a participant in the foreign exchange market?
A. RBI
B. Commercial Banks
C. Foreign Exchange Brokers
D. All of the above
Answer: D | Page Reference: 91
27. People demand foreign exchange mainly to:
A. Purchase foreign goods and services
B. Buy foreign financial assets
C. Send gifts abroad
D. All of the above
Answer: D | Page Reference: 91
28. An increase in the price of foreign exchange generally leads to:
A. Increase in imports
B. Decrease in imports
C. Increase in domestic currency value
D. Lower export prices
Answer: B | Page Reference: 91
29. Supply of foreign exchange increases due to:
A. Higher imports
B. Higher exports
C. Increase in domestic taxes
D. Reduction in tourism
Answer: B | Page Reference: 91
30. Foreign exchange rate is also known as:
A. Inflation Rate
B. Forex Rate
C. Repo Rate
D. Bank Rate
Answer: B | Page Reference: 91
31. Under a flexible exchange rate system, the exchange rate is determined by:
A. Government
B. Central Bank
C. Demand and supply of foreign exchange
D. IMF
Answer: C | Page Reference: 92
32. A flexible exchange rate is also known as:
A. Pegged Exchange Rate
B. Floating Exchange Rate
C. Controlled Exchange Rate
D. Fixed Exchange Rate
Answer: B | Page Reference: 92
33. Under a fixed exchange rate system, the exchange rate is mainly determined by:
A. Market forces
B. Government or Central Bank
C. Exporters
D. Commercial Banks
Answer: B | Page Reference: 93
34. Which institution generally maintains a fixed exchange rate?
A. Commercial Banks
B. RBI/Central Bank
C. Stock Exchange
D. IMF only
Answer: B | Page Reference: 93
35. Managed floating exchange rate is a combination of:
A. Fixed and Flexible Exchange Rate Systems
B. Gold Standard and Silver Standard
C. Inflation and Deflation
D. Export and Import Controls
Answer: A | Page Reference: 93
36. In India, the exchange rate system currently followed is:
A. Completely Fixed
B. Gold Standard
C. Managed Floating
D. Dual Exchange Rate
Answer: C | Page Reference: 93
37. An increase in the value of domestic currency under a flexible exchange rate system is called:
A. Depreciation
B. Appreciation
C. Devaluation
D. Deflation
Answer: B | Page Reference: 94
38. A decrease in the value of domestic currency due to market forces is called:
A. Revaluation
B. Depreciation
C. Devaluation
D. Inflation
Answer: B | Page Reference: 94
39. Which of the following occurs under a fixed exchange rate system?
A. Appreciation
B. Depreciation
C. Devaluation
D. Market Equilibrium Only
Answer: C | Page Reference: 94
40. Devaluation means:
A. Increase in value of domestic currency by market forces
B. Reduction in value of domestic currency by government
C. Increase in exports only
D. Increase in imports
Answer: B | Page Reference: 94
41. Revaluation refers to:
A. Increase in value of domestic currency under a fixed exchange rate system
B. Increase in imports
C. Decrease in exports
D. Depreciation by market forces
Answer: A | Page Reference: 94
42. Depreciation generally makes exports:
A. More expensive
B. Cheaper for foreigners
C. Impossible
D. Illegal
Answer: B | Page Reference: 94
43. Currency appreciation generally makes imports:
A. More expensive
B. Cheaper
C. Impossible
D. Constant
Answer: B | Page Reference: 94
44. If the rupee depreciates against the US dollar, Indian exports are expected to:
A. Fall
B. Rise
C. Remain unchanged
D. Become illegal
Answer: B | Page Reference: 94
45. If the rupee appreciates, imports into India generally become:
A. Costlier
B. Cheaper
C. Impossible
D. Unchanged
Answer: B | Page Reference: 94
46. Purchasing Power Parity (PPP) theory was developed by:
A. Alfred Marshall
B. Gustav Cassel
C. Adam Smith
D. Keynes
Answer: B | Page Reference: 95
47. According to PPP theory, exchange rates are determined by:
A. Interest Rates
B. Purchasing Power of currencies
C. Government expenditure
D. Taxation
Answer: B | Page Reference: 95
48. PPP mainly compares:
A. Inflation rates
B. Purchasing power of two currencies
C. Imports only
D. Exports only
Answer: B | Page Reference: 95
49. The demand curve for foreign exchange generally slopes:
A. Upward
B. Downward
C. Vertically
D. Horizontally
Answer: B | Page Reference: 91–92
50. The supply curve of foreign exchange generally slopes:
A. Downward
B. Upward
C. Horizontal
D. Vertical
Answer: B | Page Reference: 91–92
51. Foreign tourists visiting India increase:
A. Demand for foreign exchange
B. Supply of foreign exchange
C. Inflation
D. Imports
Answer: B | Page Reference: 91
52. Indians travelling abroad increase:
A. Supply of foreign exchange
B. Demand for foreign exchange
C. Exports
D. Capital inflow
Answer: B | Page Reference: 91
53. Which of the following increases the supply of US dollars in India?
A. Indian imports from USA
B. Foreign investment into India
C. Indian tourists travelling abroad
D. Purchase of foreign bonds by Indians
Answer: B | Page Reference: 91
54. Foreign Institutional Investment (FII) is recorded under:
A. Current Account
B. Capital Account
C. Transfer Payments
D. Invisible Trade
Answer: B | Page Reference: 88
55. External Commercial Borrowings are part of:
A. Balance of Trade
B. Current Account
C. Capital Account
D. Government Budget
Answer: C | Page Reference: 88
56. Which item belongs to Invisible Trade?
A. Wheat exports
B. Automobile exports
C. Banking Services
D. Petroleum imports
Answer: C | Page Reference: 87–88
57. Balance on Invisibles includes:
A. Services, Income and Transfers
B. Goods only
C. Merchandise only
D. Capital inflows only
Answer: A | Page Reference: 87
58. The Open Economy Multiplier is generally:
A. Smaller than the Closed Economy Multiplier
B. Equal to Closed Economy Multiplier
C. Larger than Closed Economy Multiplier
D. Always zero
Answer: A | Page Reference: Appendix
59. Imports in an open economy act as:
A. Injection
B. Leakage
C. Government Revenue
D. Investment
Answer: B | Page Reference: 85
60. Exports are considered:
A. Leakages
B. Autonomous Consumption
C. Injections into Aggregate Demand
D. Taxes
Answer: C | Page Reference: 85
61. The Foreign Exchange Market is also known as:
A. Commodity Market
B. Forex Market
C. Money Supply Market
D. Equity Market
Answer: B | Page Reference: 91
62. Exchange rate equilibrium is determined where:
A. Demand exceeds Supply
B. Supply exceeds Demand
C. Demand equals Supply
D. Imports equal Exports
Answer: C | Page Reference: 92
63. When foreign exchange demand rises while supply remains unchanged, the domestic currency generally:
A. Appreciates
B. Depreciates
C. Remains fixed
D. Becomes convertible automatically
Answer: B | Page Reference: 92
64. Which of the following is NOT a component of the Current Account?
A. Merchandise Trade
B. Services
C. Transfer Payments
D. Foreign Direct Investment
Answer: D | Page Reference: 86–88
65. The primary objective of the Balance of Payments account is to:
A. Measure domestic inflation
B. Record all economic transactions between residents and the rest of the world
C. Measure government expenditure
D. Calculate GDP only
Answer: B | Page Reference: 86
ONE-WORD / VERY SHORT ANSWER QUESTIONS
These one-word and very short answer questions from Open Economy Macroeconomics are designed for quick revision and competitive exam preparation. They cover every important NCERT definition, concept, account, exchange rate terminology and numerical term from the chapter.
1. What type of economy interacts with the rest of the world through trade and financial transactions?
Answer: Open Economy | Page Reference: 85
2. What is the record of all economic transactions between residents of a country and the rest of the world called?
Answer: Balance of Payments (BoP) | Page Reference: 86
3. Which account records exports and imports of goods and services?
Answer: Current Account | Page Reference: 86
4. Which account records foreign investments and loans?
Answer: Capital Account | Page Reference: 88
5. What is the difference between exports and imports of goods called?
Answer: Balance of Trade (BOT) | Page Reference: 87
6. What is the price of one currency in terms of another currency called?
Answer: Exchange Rate | Page Reference: 86
7. What is another name for the Foreign Exchange Market?
Answer: Forex Market | Page Reference: 91
8. What is the abbreviation for Foreign Direct Investment?
Answer: FDI | Page Reference: 88
9. What is the abbreviation for Foreign Institutional Investment?
Answer: FII | Page Reference: 88
10. Which account includes gifts and remittances?
Answer: Current Account | Page Reference: 86
11. What is income earned from factors of production called?
Answer: Factor Income | Page Reference: 88
12. Which account records banking, insurance and tourism services?
Answer: Current Account | Page Reference: 87
13. What do imports represent in the circular flow of income?
Answer: Leakage | Page Reference: 85
14. What do exports represent in the circular flow of income?
Answer: Injection | Page Reference: 85
15. Which institution maintains official foreign exchange reserves in India?
Answer: Reserve Bank of India (RBI) | Page Reference: 89
16. What are transactions undertaken to remove BoP imbalance called?
Answer: Accommodating Transactions | Page Reference: 89
17. Transactions undertaken independently of BoP conditions are called?
Answer: Autonomous Transactions | Page Reference: 89
18. Which exchange rate system is determined by demand and supply?
Answer: Flexible Exchange Rate | Page Reference: 92
19. Which exchange rate system is maintained by the government or central bank?
Answer: Fixed Exchange Rate | Page Reference: 93
20. Which exchange rate system is followed in India?
Answer: Managed Floating Exchange Rate System | Page Reference: 93
21. What is an increase in the value of domestic currency due to market forces called?
Answer: Appreciation | Page Reference: 94
22. What is a decrease in the value of domestic currency due to market forces called?
Answer: Depreciation | Page Reference: 94
23. What is a decrease in currency value by government decision called?
Answer: Devaluation | Page Reference: 94
24. What is an increase in currency value by government decision called?
Answer: Revaluation | Page Reference: 94
25. Who developed the Purchasing Power Parity Theory?
Answer: Gustav Cassel | Page Reference: 95
26. PPP stands for?
Answer: Purchasing Power Parity | Page Reference: 95
27. According to PPP theory, exchange rates depend upon the purchasing power of what?
Answer: Currency | Page Reference: 95
28. Which account records External Commercial Borrowings (ECB)?
Answer: Capital Account | Page Reference: 88
29. Banking services belong to which account?
Answer: Current Account | Page Reference: 87
30. Tourism receipts are included under?
Answer: Invisible Exports | Page Reference: 87
31. Which market deals in buying and selling foreign currencies?
Answer: Foreign Exchange Market | Page Reference: 91
32. What happens when exports exceed imports?
Answer: Trade Surplus | Page Reference: 87
33. What happens when imports exceed exports?
Answer: Trade Deficit | Page Reference: 87
34. Open Economy Multiplier is generally compared with which multiplier?
Answer: Closed Economy Multiplier | Page Reference: Appendix
35. Which account includes remittances from Indians working abroad?
Answer: Current Account | Page Reference: 86
ASSERTION & REASON QUESTIONS
These Assertion and Reason questions are prepared strictly from the NCERT chapter and focus on conceptual understanding, cause-and-effect relationships and Board exam patterns.
Standard Rules for Options (Unless Specified Otherwise):
A. Both A and R are true and R is the correct explanation of A.
B. Both A and R are true but R is not the correct explanation of A.
C. A is true but R is false.
D. A is false but R is true.
Question 1
Assertion (A): An open economy interacts with the rest of the world through trade and financial transactions.
Reason (R): It allows the movement of goods, services and capital across national borders.
Correct Option: A | Page Reference: 85
Question 2
Assertion (A): Imports are leakages from the circular flow of income.
Reason (R): Payments for imports flow out of the domestic economy.
Correct Option: A | Page Reference: 85
Question 3
Assertion (A): Exports increase aggregate demand.
Reason (R): Export earnings represent injections into the economy.
Correct Option: A | Page Reference: 85
Question 4
Assertion (A): Balance of Payments records only merchandise trade.
Reason (R): It includes services, income transfers and capital transactions.
Correct Option: D | Page Reference: 86
Question 5
Assertion (A): Current Account includes exports and imports of goods and services.
Reason (R): It records all current international transactions.
Correct Option: A | Page Reference: 86
Question 6
Assertion (A): Capital Account records foreign investments.
Reason (R): FDI and FII are capital transactions.
Correct Option: A | Page Reference: 88
Question 7
Assertion (A): Balance of Trade includes services.
Reason (R): Balance of Trade measures only merchandise exports and imports.
Correct Option: D | Page Reference: 87
Question 8
Assertion (A): Trade Surplus occurs when exports exceed imports.
Reason (R): Export earnings become greater than import payments.
Correct Option: A | Page Reference: 87
Question 9
Assertion (A): Trade Deficit occurs when imports exceed exports.
Reason (R): Import payments become larger than export receipts.
Correct Option: A | Page Reference: 87
Question 10
Assertion (A): Gifts received from abroad are included in the Current Account.
Reason (R): They are unilateral transfer payments.
Correct Option: A | Page Reference: 86
Question 11
Assertion (A): RBI undertakes official reserve transactions.
Reason (R): RBI maintains India’s foreign exchange reserves.
Correct Option: A | Page Reference: 89
Question 12
Assertion (A): Autonomous transactions depend upon BoP deficit.
Reason (R): Autonomous transactions are undertaken for profit motives and are independent of BoP conditions.
Correct Option: D | Page Reference: 89
Question 13
Assertion (A): Flexible exchange rate is determined by market forces.
Reason (R): Demand and supply determine equilibrium exchange rate.
Correct Option: A | Page Reference: 92
Question 14
Assertion (A): Under fixed exchange rate system, market demand alone determines exchange rate.
Reason (R): Government or central bank fixes the exchange rate.
Correct Option: D | Page Reference: 93
Question 15
Assertion (A): India follows a managed floating exchange rate system.
Reason (R): RBI intervenes whenever necessary while allowing market forces to operate.
Correct Option: A | Page Reference: 93
Question 16
Assertion (A): Appreciation increases the value of domestic currency.
Reason (R): Appreciation occurs due to market forces.
Correct Option: A | Page Reference: 94
Question 17
Assertion (A): Depreciation makes exports cheaper for foreigners.
Reason (R): Domestic currency loses value relative to foreign currencies.
Correct Option: A | Page Reference: 94
Question 18
Assertion (A): Devaluation is carried out by the government.
Reason (R): It occurs under a fixed exchange rate system.
Correct Option: A | Page Reference: 94
Question 19
Assertion (A): Purchasing Power Parity Theory was proposed by Gustav Cassel.
Reason (R): Exchange rates depend upon the purchasing power of currencies.
Correct Option: A | Page Reference: 95
Question 20
Assertion (A): Demand for foreign exchange increases when imports increase.
Reason (R): Importers need foreign currency to make international payments.
Correct Option: A | Page Reference: 91
Question 21
Assertion (A): Foreign tourists visiting India increase the supply of foreign exchange.
Reason (R): They bring foreign currency into India.
Correct Option: A | Page Reference: 91
Question 22
Assertion (A): Indians travelling abroad increase the supply of foreign exchange.
Reason (R): They require foreign currency to meet expenses abroad.
Correct Option: D | Page Reference: 91
Question 23
Assertion (A): Open Economy Multiplier is smaller than Closed Economy Multiplier.
Reason (R): Imports act as additional leakages from income.
Correct Option: A | Page Reference: Appendix
Question 24
Assertion (A): Appreciation generally encourages exports.
Reason (R): Domestic goods become costlier for foreign buyers.
Correct Option: D | Page Reference: 94
Question 25
Assertion (A): Capital Account Surplus can finance Current Account Deficit.
Reason (R): Capital inflows provide foreign exchange needed to meet excess import payments.
Correct Option: A | Page Reference: 89
MOST IMPORTANT BOARD EXAM CONCEPTUAL A&R
Question 26
Assertion (A): Every transaction in the Current Account affects the country’s current income.
Reason (R): It involves current receipts and current payments.
Correct Option: A | Page Reference: 86
Question 27
Assertion (A): Exchange rate equilibrium occurs where demand equals supply of foreign exchange.
Reason (R): At equilibrium there is neither excess demand nor excess supply.
Correct Option: A | Page Reference: 92
Question 28
Assertion (A): Managed Floating Exchange Rate combines features of fixed and flexible exchange rate systems.
Reason (R): The central bank intervenes only when necessary.
Correct Option: A | Page Reference: 93
Question 29
Assertion (A): FDI forms part of the Current Account.
Reason (R): FDI represents international capital movement.
Correct Option: D | Page Reference: 88
Question 30
Assertion (A): Exchange rate movements influence exports and imports.
Reason (R): Changes in currency value alter international competitiveness.
Correct Option: A | Page Reference: 94