[Mission 2023] STATIC QUIZ, 8 September 2022 – Economy

Solution: c)

Phantom FDI — “investments that pass through empty corporate shells” with no real business activity.

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.

Solution: b)

It is the international currency in which the highest faith is shown and is needed by every economy. The strongest currency of the world is one which has a high level of liquidity, i.e. people are easily willing to sell or buy it due to the high confidence shown in it.

Solution: b)

Fiat money is currency that a government has declared to be legal tender, but it is not backed by a physical commodity. The value of fiat money is derived from the relationship between supply and demand rather than the value of the material from which the money is made. Because fiat money is not linked to physical reserves, it risks becoming worthless due to hyperinflation.