[Mission 2023] STATIC QUIZ, 18 March 2023 – Economy

Solution: c)

Inflation is closely related to interest rates, which can influence exchange rates. Countries attempt to balance interest rates and inflation, but the interrelationship between the two is complex and often difficult to manage. Low interest rates spur consumer spending and economic growth, and generally positive influences on currency value. If consumer spending increases to the point where demand exceeds supply, inflation may ensue, which is not necessarily a bad outcome. But low interest rates do not commonly attract foreign investment. Higher interest rates tend to attract foreign investment, which is likely to increase the demand for a country’s currency.

Solution: b)

CPI may differ from GDP deflator because:

1. The goods purchased by consumers do not represent all the goods which are produced in a country. GDP deflator takes into account all such goods and services.
2. CPI includes prices of goods consumed by the representative consumer; hence it includes prices of imported goods. GDP deflator does not include prices of imported goods.
3. The weights are constant in CPI – but they differ according to production level of each good in GDP deflator.

Ministry of Statistics and Programme Implementation (MOSPI) comes out with GDP deflator in National Accounts Statistics as price indices.

Solution: d)

What are the advantages of having a bullion exchange in India?

India International Bullion Exchange (IIBX) is India’s first International Bullion Exchange set up at the GIFT City, Gandhinagar.

The IIBX will be a gateway for bullion imports into India, where all bullion imports for domestic consumption shall be channelized through the exchange. In addition to providing a trading avenue to various participants, a bullion exchange will also offer the advantages of price discovery, transparency in disclosures, guaranteed centralised clearing and assurance of quality. A bullion exchange, apart from providing standardisation and transparent mechanism, will also be an important step towards financialization of bullion-based products.

Solution: a)

A rise in the general level of prices is inflation. If the price of one good has gone up, it is not inflation; it is inflation only if the prices of most goods have gone up.

A mis-match between demand and supply pulls up prices. Either the demand increases over the same level of supply, or the supply decreases with the same level of demand and thus the situation of demand-pull inflation arise.

An increase in factor input costs (i.e., wages and raw materials) pushes up prices. The price rise which is the result of increase in the production cost is cost-push inflation.

Solution: c)

GDP is the total market value of all goods and services produced in the economy during a particular year, inclusive of all taxes and subsidies on products. The market value taken at current prices is the nominal GDP. The value taken at constant prices — that is prices for all products taken at an unchanged base year — is the real GDP.

In simple terms, real GDP is nominal GDP stripped of inflation. Real GDP growth thus measures how much the production of goods and services in the economy has increased in actual physical terms during a year. Nominal GDP growth, on the other hand, is a measure of the increase in incomes resulting from rise in both production and prices.