Capital Flow and Forex Market MCQs
1. What is capital flow in the context of the Forex market?
A) The movement of physical goods between countries
B) The movement of money for investment, trade, or business production across borders
C) The movement of people across borders
D) The flow of natural resources between nations
Answer: B) The movement of money for investment, trade, or business production across borders
2. How do capital flows affect the Forex market?
A) They have no impact on currency prices
B) They directly affect the supply and demand of a country’s currency
C) They cause inflation
D) They only impact domestic trade
Answer: B) They directly affect the supply and demand of a country’s currency
3. When foreign investors invest in a country’s assets, how does it typically affect that country’s currency?
A) The currency depreciates
B) The currency appreciates
C) The currency remains stable
D) The currency becomes worthless
Answer: B) The currency appreciates
4. Which type of capital flow is primarily involved in long-term investments like buildings and factories?
A) Portfolio investment
B) Foreign Direct Investment (FDI)
C) Remittances
D) Currency speculation
Answer: B) Foreign Direct Investment (FDI)
5. What is the impact of large capital outflows on a country’s currency?
A) It causes the currency to strengthen
B) It has no impact
C) It causes the currency to weaken
D) It causes inflation to decrease
Answer: C) It causes the currency to weaken
6. Which of the following is an example of a portfolio investment in the context of capital flow?
A) Building a factory in a foreign country
B) Buying government bonds from another country
C) Exporting goods to another country
D) Sending remittances to a relative abroad
Answer: B) Buying government bonds from another country
7. Capital inflows into a country generally result in which of the following?
A) Currency depreciation
B) Increased demand for the local currency
C) Decreased demand for the local currency
D) No impact on the currency
Answer: B) Increased demand for the local currency
8. Which type of capital flow is associated with short-term investments like stocks and bonds?
A) Foreign Direct Investment (FDI)
B) Portfolio investment
C) Remittances
D) Trade surplus
Answer: B) Portfolio investment
9. What is a key risk of large capital inflows for a country?
A) Currency depreciation
B) Economic instability if the flows reverse suddenly
C) Increased foreign exchange reserves
D) Decreased interest rates
Answer: B) Economic instability if the flows reverse suddenly
10. How does capital flight affect the Forex market?
A) It strengthens the country’s currency
B) It has no impact on the currency
C) It weakens the country’s currency as investors move money out of the country
D) It causes inflation to rise
Answer: C) It weakens the country’s currency as investors move money out of the country
11. What happens when a country experiences large capital outflows due to political instability?
A) The country’s currency appreciates
B) The country’s currency depreciates
C) The currency remains stable
D) The central bank increases its currency reserves
Answer: B) The country’s currency depreciates
12. How can a country attract more capital inflows?
A) By raising interest rates
B) By decreasing taxes
C) By increasing inflation
D) By increasing foreign trade barriers
Answer: A) By raising interest rates
13. Which of the following can lead to capital outflows?
A) Higher interest rates in the domestic country
B) Political instability or economic uncertainty
C) Decreased inflation rates
D) Trade agreements with other countries
Answer: B) Political instability or economic uncertainty
14. What is the balance of payments?
A) A statement that records all transactions made between one country and others
B) A measure of a country’s total exports
C) A measure of a country’s inflation rate
D) A measure of how much money is printed by a country
Answer: A) A statement that records all transactions made between one country and others
15. Capital inflows are more likely to occur in which economic environment?
A) A country with low interest rates and low investment opportunities
B) A country with high political risks
C) A country with high interest rates and strong investment opportunities
D) A country that imposes capital controls
Answer: C) A country with high interest rates and strong investment opportunities
16. What is capital flight?
A) The rapid outflow of capital from a country due to fears of economic instability
B) The movement of physical goods across borders
C) The inflow of foreign investment into a country
D) The act of a central bank printing more money
Answer: A) The rapid outflow of capital from a country due to fears of economic instability
17. What is one way a country can prevent capital flight?
A) By decreasing interest rates
B) By maintaining political and economic stability
C) By encouraging high inflation
D) By cutting off trade with foreign countries
Answer: B) By maintaining political and economic stability
18. Which of the following is an example of capital inflow?
A) A local company buys assets abroad
B) Foreign investors purchase government bonds in a country
C) A citizen sends money to relatives abroad
D) A country loses foreign investments due to instability
Answer: B) Foreign investors purchase government bonds in a country
19. What is a consequence of capital outflows on a country’s economy?
A) Strengthened currency value
B) Weakened currency value and potential economic instability
C) Increased capital reserves
D) Higher foreign investment inflows
Answer: B) Weakened currency value and potential economic instability
20. How do capital flows affect a country’s foreign exchange reserves?
A) Capital inflows increase foreign exchange reserves
B) Capital outflows increase foreign exchange reserves
C) Capital flows have no effect on reserves
D) Capital inflows decrease foreign exchange reserves
Answer: A) Capital inflows increase foreign exchange reserves
