INSIGHTS STATIC QUIZ 2019
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Question 1 of 5
1. Question
Exchange rate is the price of one currency in terms of another currency. The exchange rate depends upon
- Inflation
- Interest rates in the country and global majors like USA
- International commodity prices
- Political stability
- Forex reserves with RBI
Select the correct answer code:
Correct
Solution: d)
The exchange rate depends upon many factors. They are:
- Inflation
- Interest rates in the country and global majors like USA
- International commodity prices
- Political stability
- Forex reserves with RBI
- Growth rate of the economy
- Future potential
- Foreign trade profile which includes import dependency
- Monetary policy of countries like USA
- External debt levels, particularly the short-term commercial debt level
- The extent of convertibility of the currency
- Fiscal and Current account deficits
Incorrect
Solution: d)
The exchange rate depends upon many factors. They are:
- Inflation
- Interest rates in the country and global majors like USA
- International commodity prices
- Political stability
- Forex reserves with RBI
- Growth rate of the economy
- Future potential
- Foreign trade profile which includes import dependency
- Monetary policy of countries like USA
- External debt levels, particularly the short-term commercial debt level
- The extent of convertibility of the currency
- Fiscal and Current account deficits
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Question 2 of 5
2. Question
Consider the following statements regarding Current Account Deficit (CAD).
- A current account deficit indicates that a country is importing more than it is exporting.
- Both government and private payments are included in the calculation of CAD.
- CAD is always bad for the country and its economy as it drains the country’s forex reserves.
Which of the above statements is/are correct?
Correct
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.
Incorrect
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.
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Question 3 of 5
3. Question
Which of the following steps can be taken by the RBI and the government to stabilise the currency markets.
- Increasing the limit for outbound investment and remittances from India.
- Using local currency for trade with major trading partners.
- Liberalisation of FDI norms
Select the correct answer code:
Correct
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.
Incorrect
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.
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Question 4 of 5
4. Question
Which of the following developments may not likely reduce the fiscal deficit?
- Increasing Foreign Direct Investment (FDI)
- Providing budgetary support to public sector enterprises
- Waiving off farm loans.
- Austerity measures should be adopted.
Select the correct answer code:
Correct
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.
Incorrect
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.
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Question 5 of 5
5. Question
If a country is consistently running a negative trade balance, which of the following is necessarily implied?
- The nation is economically a developing country.
- The nation’s currency is weak as compared to Dollar, which is the international reserve currency.
- There is little or no demand for the country’s exports in international market.
- The nation is grappling with high inflation and low growth.
Select the correct answer code:
Correct
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.
Incorrect
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.