QUIZ – 2020: INSIGHTS STATIC QUIZ, 11 May 2020 – Economy

Solution: a)

Exchange rate of a currency may be fixed by a central bank or left to the market forces of demand and supply. When the value is changed by the central bank it is changed devaluation if it is made cheaper and revaluation if it is made stronger. Cheaper means more of rupees for a dollar and stronger means less of rupees for a dollar. If market forces bring down the value due to demand falling behind supply of the currency, it leads to depreciation.

In the Balance of Payments, the movements of money without exchange for goods or services called ‘remittances’ and charities are part of Current account.

Solution: b)

There is a strong connection between the government’s tax revenue earnings and economic growth. The simple fact is that as the economy achieves faster growth, the tax revenue of the government also goes up.

Tax buoyancy explains this relationship between the changes in government’s tax revenue growth and the changes in GDP. It refers to the responsiveness of tax revenue growth to changes in GDP. When a tax is buoyant, its revenue increases without increasing the tax rate.

Solution: d)

Statement 2:  The real exchange rate is often taken as a measure of a country’s international competitiveness as it takes into account purchasing power at both nations.

The real exchange rates are nothing but the nominal exchange rates multiplied by the price indices of the two countries.

This means the market price level of goods and services, given by indices of inflation. So if the price level in the US is higher than the price level in India, then the real exchange rate of the rupee versus the dollar will be greater than the nominal exchange rate.

Suppose the nominal exchange rate is Rs 50 and US prices are greater than Indian prices, a dollar will buy more in India than what Rs 50 will buy in the US.

Statement 1: Just like NER, RER too is subject to devaluations and depreciation. RER is only a mathematical adjustment of NER. If NER is volatile, RER too will be volatile. So, 1 is incorrect.

Solution: d)

A managed-exchange-rate system is a hybrid or mixture of the fixed and flexible exchange rate systems in which the government of the economy attempts to affect the exchange rate directly by buying or selling foreign currencies or indirectly, through monetary policy (i.e., by lowering or raising interest rates on foreign currency bank accounts, affecting foreign investment, etc.).Today, most of the economies have shifted to this system of exchange rate determination. Almost all countries tend to intervene when the markets become disorderly or the fundamentals of economics are challenged by the exchange rate of the time.

Solution: b)

Corporate bonds are debt securities issued by private and public corporations. Companies issue corporate bonds to raise money for a variety of purposes, such as building a new plant, purchasing equipment, or growing the business. When one buys a corporate bond, one lends money to the “issuer,” the company that issued the bond. In exchange, the company promises to return the money, also known as “principal,” on a specified maturity date. Until that date, the company usually pays you a stated rate of interest, generally semi-annually. Corporate bond does not have an ownership interest in the issuing company, unlike when one purchases the company’s equity stock.

In India, given the absence of a well-functioning corporate bond market, the burden of financing infrastructure projects such as roads, ports, and airports is more on banks and the general government. This, in turn, puts lenders such as the banks under pressure as reflected in the ballooning of bad loans.

Source