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In a hypothetical… (Class 12 Economics SQP 2026-27, Q14)

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EconomicsCBSE Class 12 · Sample paper, session 2026-27 · 4 marks · Short answer

CBSE Class 12 Economics sample paper 2026-27: question 14

From the official CBSE sample question paper for 2026-27, section A, question 14, for 4 marks. Try it first; the hints and our step-by-step solution are below.

Q14 · 4 marks · Short answerCompetency-basedOpen Economy Macroeconomics

In a hypothetical economy called BoPia, the equilibrium exchange rate is 72 Bopas per US dollar determined through market forces. Over time, BoPia has made substantial investments in human capital formation. As a result, the country now has an abundant supply of skilled labour, which has made it an attractive destination for Foreign Direct Investments (FDI). Hence, multinational companies across the world are investing huge amounts of capital in BoPia.

  1. (I)

    Assuming all other factors constant, explain the effect of increased FDI inflows on BoPia’s Balance of Payments Account.

    2 marks
  2. (II)

    Suppose the competent authority does not intervene in the process of determination of exchange rate in BoPia. Identify the foreign exchange rate system prevailing in BoPia and mention one of its merits.

    2 marks

Source: official sample paper from cbseacademic.nic.in (PDF). See it in the full Sample paper 2026-27.

Hints

Open one hint at a time and try again before the next.

Hint 1

Is FDI an inflow or outflow of foreign exchange?

Hint 2

Who sets the exchange rate when no one intervenes?

Step-by-step solution

Each step shows the marks it earns, as an examiner would award them. Checked by an independent re-solve from the question paper.

  1. (I) Higher FDI inflows increase the supply of foreign exchange (US dollars) in BoPia. These are credit entries in the capital account, so the BoP position strengthens and may move into surplus (and the Bopa tends to appreciate).

    2 marks

  2. (II) As the authority does not intervene and the rate is set by market forces, BoPia has a flexible (floating) exchange rate system.

    1 mark

  3. (II) Merit: the central bank or government need not hold large foreign exchange reserves (the rate adjusts on its own to correct BoP imbalances).

    1 mark

Answer: (I) More FDI increases foreign exchange supply and strengthens the BoP, possibly into surplus. (II) Flexible exchange rate; merit: no need to keep large forex reserves.

Where the marks are

  • Effect of FDI on BoP (2)
  • Flexible system identified (1)
  • One merit (1)

Revise the chapter

Practise this chapterBoard-style questions from Open Economy Macroeconomics, one at a time, marked against the answer key and marking points.Back to the full paperSample paper 2026-27: every question, by section.

The question is transcribed from the official paper; figures are described in words. The solution, hints and chapter tag are ours. Spotted an error? Write tosupport@questionbuddy.in.