[Mission 2023] STATIC QUIZ, 17 April 2023 – Economy

Solution: c)

Opportunity costs represent the potential benefits that an individual, investor, or business misses out on when choosing one alternative over another. 

To properly evaluate opportunity costs, the costs and benefits of every option available must be considered and weighed against the others.

Considering the value of opportunity costs can guide individuals and organizations to more profitable decision-making.

Opportunity cost is a strictly internal cost used for strategic contemplation; it is not included in accounting profit and is excluded from external financial reporting.

For example, a company decides to buy a new piece of manufacturing equipment rather than lease it. The opportunity cost would be the difference between the cost of the cash outlay for the equipment and the improved productivity vs. how much money could have been saved in interest expense had the money been used to pay down debt.

Solution: a)

The GDP deflator, also called implicit price deflator, is a measure of inflation. It is the ratio of the value of goods and services an economy produces in a particular year at current prices to that of prices that prevailed during the base year.

This ratio helps show the extent to which the increase in gross domestic product has happened on account of higher prices rather than increase in output.

Since the deflator covers the entire range of goods and services produced in the economy — as against the limited commodity baskets for the wholesale or consumer price indices — it is seen as a more comprehensive measure of inflation.

The formula to find the GDP price deflator:

GDP price deflator = (nominal GDP ÷ real GDP) x 100

Solution: c)

The First Five-year Plan was launched in 1951 which mainly focused in the development of the primary sector. The motto of first five years plan was ‘ Development of agriculture’ and the aim was to solve different problems that formed due to the partition of the nation, second world war. Rebuilding the country after independence was the vision of this plan.

Solution: b)

Effects of inflation:

Inflation redistributes wealth from creditors to debtors, i.e., lenders suffer and borrowers benefit out of inflation.

With every inflation the currency of the economy depreciates (loses its exchange value in front of a foreign currency) provided it follows the flexible currency regime.

With inflation, exportable items of an economy gain competitive prices in the world market. Due to this, the volume of export increases and thus export income increases in the economy. It means the export segment of the economy benefits due to inflation.

Inflation increases the nominal value of wages, while their real value falls. That is why there is a negative impact of inflation on the purchasing power and living standard of wage employees.

Solution: b)

Exchange rates – They link national currencies for purposes of international trade. There are broadly two kinds of exchange rates: fixed exchange rate and floating exchange rate

Fixed exchange rates – When exchange rates are fixed and governments intervene to prevent movements in them

Flexible or floating exchange rates – These rates fluctuate depending on demand and supply of currencies in foreign exchange markets, in principle without interference by governments.

Statement 1: IMF does not peg a currency’s level. Pegging of currencies by a central authority was done earlier in the Gold system where currencies were fixed in value.

Statement 2: In this system, currencies freely float apart from some occasional interventions. The more a nation’s currency is in demand, the higher will be its value in forex market.

If a nation follows managed floating system, all its external transactions are based on this system. It cannot fix its currency level in opposition to the market.