QUIZ – 2020: INSIGHTS STATIC QUIZ, 3 June 2020 – Economy

Solution: d)

India’s foreign exchange (Forex) reserves stand at around $480 billion. It is acquired by the RBI for the following reasons:

1. To defend the rupee when needed
2. To gain external account security
3. To enable country to globalise further
4. To import essentials for economic and social security
5. To deter speculations
6. To enjoy favourable rating by sovereign credit rating agencies.

Solution: c)

About $15 trillion, or 38 per cent, of the world’s foreign direct investment (FDI) in 2017 was “phantom capital” that was tailor-made to trim tax bills of multinational corporations, and tax havens were being used to funnel these investments, according a study put out by the International Monetary Fund.

Roughly a half of the phantom FDI — “investments that pass through empty corporate shells” with no real business activity — passes through just Luxembourg and the Netherlands.

Source

Solution: a)

T-bills are short term securities issued on behalf of the government by the RBI and are used in managing short term liquidity needs of the government.

• T-Bills are issued on discount to face value, while the holder gets the face value on maturity. The return on T-Bills is the difference between the issue price and face value.
• Thus, return on T-Bills depends upon auctions. When the liquidity position in the economy is tight, returns are higher and vice versa.
• Individuals, Firms, Trusts, Institutions and banks can purchase T-Bills. The commercial and cooperative banks use T-Bills for fulfilling their SLR requirements.
• Treasury Bills are issued only by the central government in India. The State governments do not issue any treasury bills.

The secondary market of T-Bills is very active so they have a higher degree of tradability.

Solution: a)

Total balance of payments consists of current account (includes trade, invisibles, remittances etc) as well as capital account.

Capital inflows like FDI, FII help bridge the trade deficit and neutralize BoP.

High consumption expenditure will further inflate the import bill and cause trade deficit. And, so will monetary expansion – pushes up demand and thus imports in the short-term aggravating the BoP.

Solution: d)

A closed economy is self-sufficient, meaning that no imports are brought in and no exports are sent out. The goal is to provide consumers with everything that they need from within the economy’s borders. A closed economy is the opposite of an open economy, in which a country will conduct trade with outside regions.

So, if no capital or goods/services are imported, exported, the BoP will be zero.

In this case, the fiscal deficit need not be zero since a developing country may adopt expansionary fiscal policy to tackle poverty and unemployment.