Insights Static Quiz -288, 2019–Economy

Solution: d)

Devaluation is the deliberate downward adjustment of the value of a country’s money relative to another currency, group of currencies, or currency standard.

Currency devaluations can be used by countries to achieve economic policy. Having a weaker currency relative to the rest of the world can help boost exports, shrink trade deficits and reduce the cost of interest payments on its outstanding government debts.

Boost Exports: exporters become more competitive in a global market. Exports are encouraged while imports are discouraged.

Shrink Trade Deficits: Exports will increase and imports will decrease due to exports becoming cheaper and imports more expensive. This favors an improved balance of payments as exports increase and imports decrease, shrinking trade deficits.

Reduce Sovereign Debt Burdens: A government may be incentivized to encourage a weak currency policy if it has a lot of government-issued sovereign debt to service on a regular basis. If debt payments are fixed, a weaker currency makes these payments effectively less expensive over time.

Solution: c)

The balance of payments (BOP), also known as balance of international payments, summarizes all transactions that a country’s individuals, companies and government bodies complete with individuals, companies and government bodies outside the country. These transactions consist of imports and exports of goods, services and capital, as well as transfer payments, such as foreign aid and remittances.

The balance of payments divides transactions in two accounts: the current account and the capital account.

The current account includes transactions in goods, services, investment income and current transfers (remittances, gifts, grants etc.).

The capital account, includes transactions in financial instruments (FDI, FPI etc.) and central bank reserves.

Solution: c)

Gross Domestic Product (GDP) Aggregate value of goods and services produced within the domestic territory of a country. It includes the replacement investment of the depreciation of capital stock. (Glossary of class 12 – Macroeconomics)

Solution: d)

Primary Deficit: We must note that the borrowing requirement of the government includes interest obligations on accumulated debt. To obtain an estimate of borrowing on account of current expenditures exceeding revenues, we need to calculate what has been called the primary deficit. It is simply the fiscal deficit minus the interest payments

Gross primary deficit = Gross fiscal deficit – net interest liabilities

Net interest liabilities consist of interest payments minus interest receipts by the government on net domestic lending.

Solution: c)

Statement 1: Unnecessary revenue expenditure bloats the fiscal deficit, and since it forms the majority of government spending, its reduction has a very large effect on the fiscal deficit.

Statement 2: It will further increase the fiscal deficit.

Statement 3: Subsidies are a major component of government spending, and its reduction will cut down fiscal deficit.

Statement 4: It reduces tax revenue and thus increases fiscal deficit.