QUIZ – 2020: INSIGHTS STATIC QUIZ, 18 May 2020 – Economy

Solution: d)

The exchange rate depends upon many factors. They are:

1. Inflation
2. Interest rates in the country and global majors like USA
3. International commodity prices
4. Political stability
5. Forex reserves with RBI
6. Growth rate of the economy
7. Future potential
8. Foreign trade profile which includes import dependency
9. Monetary policy of countries like USA
10. External debt levels, particularly the short-term commercial debt level
11. The extent of convertibility of the currency
12.  Fiscal and Current account deficits

Solution: a)

The current account deficit is a measurement of a country’s trade where the value of the goods and services it imports exceeds the value of the products it exports. A current account deficit indicates that a country is importing more than it is exporting. A current account deficit is not always detrimental to a nation’s economy—external debt may be used to finance lucrative investments. Both government and private payments are included in the calculation of CAD.

Solution: c)

Statement 1: To reduce capital outflow, RBI can reduce the limit for outbound investment and remittances from India.

Statement 2: The government can explore the possibility of using local currency for trade with major trading partners to reduce the trade deficit.

Statement 3: The government can liberalise the FDI limits to encourage capital inflows.

Solution: b)

Fiscal deficit (FD) is the difference between revenue receipts plus non-debt capital receipts on the one side and total expenditure including loans, net of repayments, on the other. It measures the gap between the government consumption expenditure including loan repayments and the anticipated income from tax and non-tax revenues.

It also indicates the borrowing requirements of the government from all sources. The bigger the gap the more the government will have to borrow or resort to printing money to make both ends meet. Indiscriminate borrowings will push the economy into debt trap, while too much deficit financing may be inflationary.

Increasing Foreign Direct Investment (FDI) tend to bring more revenue to the government there by reducing FD.

Austerity measures are reductions in government spending, increases in tax revenues, or both which can reduce FD.

Providing budgetary support to public sector enterprises and Waiving off farm loans increase government expenditure thus increasing FD.

Solution: d)

Statements 1, 2 and 3: United States of America continuously runs a trade deficit, but it is not a developing country, neither is its currency weak, nor is the demand for its exports weak.

A negative trade balance simply implies that the demand of the resident for foreign goods outstrips what foreign residents demand from that nation.

Moreover, you should see other factors like capital flows in the nation, remittances etc and the overall BoP situation. If it is favourable (positive), statement 2 would be incorrect.

Statement 4: It again depends on the overall BoP situation. If the BoP as well as trade balance is negative, the nation may suffer from currency devaluation. However, still we cannot conclusively say anything about

the growth and inflation in the country. It depends on the economy’s structure and its export-import composition. For e.g. if rupee devaluates, we pay a higher price of essential commodities like oil, which inflate domestic prices.