[Mission 2022] QUIZ – 2022: INSIGHTS STATIC QUIZ, 23 March 2022 – Economy

Solution: c)

Merits and Demerits of Flexible and Fixed Exchange Rate Systems

The main feature of the fixed exchange rate system is that there must be credibility that the government will be able to maintain the exchange rate at the level specified. Often, if there is a deficit in the BoP, in a fixed exchange rate system, governments will have to intervene to take care of the gap by use of its official reserves. 

The flexible exchange rate system gives the government more flexibility and they do not need to maintain large stocks of foreign exchange reserves. The major advantage of flexible exchange rates is that movements in the exchange rate automatically take care of the surpluses and deficits in the BoP. Also, countries gain independence in conducting their monetary policies, since they do not have to intervene to maintain exchange rate which are automatically taken care of by the market.

Solution: d)

The RBI appointed in 1997 the Committee on Capital Account Convertibility with Mr. S. S. Tarapore as its Chairperson. The Tarapore Committee defined CAC as “the freedom to convert local financial assets into foreign financial assets and vice versa at market-determined rates of exchange.” CAC would permit anyone to move freely from local currency into foreign currency and back. 

The potential benefits from the scheme are: 

1. Availability of large funds to supplement domestic resources and thereby promote faster economic growth. 
2. Improved access to international financial markets and reduction of the cost of capital. 
3. Incentive for Indians to acquire and hold international securities and assets. 
4. Improvement (strengthening) of the financial system in the context of global competition.

Solution: b)

External debt can be mainly classified into Long term and Short-term debts. 

Long-Term debt is further classified into (a) Multilateral Debt (b) Bilateral Debt (c) ‘IMF’ signifying SDR allocations to India by the IMF (c) Export Credit (d) (External) Commercial Borrowings (e) NRI Deposits and (d) Rupee Debt. 

Short Term Debt is classified into (a) Trade Credits (of up to 6 months and above 6 months and up to 1 year) (b) Foreign Institutional Investors’ (FII) Investment in Government Treasury-Bills and Corporate Securities (c) Investment in Treasury-bills by foreign Central Banks and International Institutions etc. 

FDI does not lead to any debt on the country.

Solution: d) 

Non-tariff measure (NTMs) are defined as policy measures, other than ordinary customs tariffs, that can potentially have an economic effect on international trade in goods, changing quantities traded, or prices or both.

As a result, NTMs cover a broad range of policies including traditional trade policy instruments, such as quotas or price controls.

However, they also comprise technical regulatory measures that pursue important non-trade objectives that relate to health and environmental protection, such as Sanitary and Phytosanitary (SPS) measures and Technical Barriers to Trade (TBT).

Solution: a)

Bound rate is the maximum rate of duty (tariff) that can be imposed by the importing country on an imported commodity. Here, each country commits itself to a ceiling on customs duties (tariff) on a certain number of products.

These rates vary from country to country and commodity to commodity. But no country can raise duties above the bound rate it has committed, and the rate of customs duty actually applied may be lower than the bound rate.