[Mission 2024] STATIC QUIZ, 11 December 2023 – Economy

Solution: d)

Countries use bilateral/regional trade agreements to increase market access and expand trade in foreign markets. These agreements are called reciprocal trade agreements (RTAs) because members grant special advantages to each other.

RTAs include many types of agreements, such as preferential arrangements, free trade agreements, customs unions, and common markets, in which members agree to open their markets to each other’s exports by lowering trade barriers.

Solution: b)

Statement 2 is incorrect.

What are open market operations?

• They are conducted by the RBI by way of sale or purchase of government securities (g-secs)to adjust money supply conditions.
• The central bank sells g-secs to suck out liquidity from the system and buys back g-secs to infuse liquidity into the system.
• These operations are often conducted on a day-to-day basis in a manner that balances inflation while helping banks continue to lend.
• The RBI uses OMO along with other monetary policy tools such as repo rate, cash reserve ratio and statutory liquidity ratio to adjust the quantum and price of money in the system.
• When the RBI wants to increase the money supply in the economy, it purchases the government securities from the market and it sells government securities to suck out liquidity from the system.

RBI carries out the OMO through commercial banks and does not directly deal with the public. 

Solution: c)

“Crowding out” effect refers to how increased government spending, for which it must borrow more money, tends to reduce private spending. This happens because when the government takes up the lion’s share of funds available in the banking system, less of it is left for private borrowers. This also impacts interest rates in the economy.

Sometimes, government adopts an expansionary fiscal policy stance and increases its spending to boost the economic activity. This leads to an increase in interest rates. Increased interest rates affect private investment decisions. A high magnitude of the crowding out effect may even lead to lesser income in the economy.

Solution: a)

Under the WTO rules, any country can “self-designate” itself as a developing country. In fact, the WTO does not lay down any specific criteria for making a distinction between a developed and a developing country member, unlike in the World Bank where per capita incomes are used to classify countries.

Solution: c)

A trade deficit means broadly can mean two things.

One, that the demand in the domestic economy is not being met by the domestic producers. For instance, India may be producing a lot of milk but still not enough for the total milk demand in the country. As such, India may choose to import milk.

Two, many a time a deficit signifies the lack of competitiveness of the domestic industry. For instance, Indian car manufacturers could import steel from China instead of procuring it from the domestic producers if the Chinese steel was decidedly cheaper, for the same quality.

More often than not, the trade deficit of a country is due to a combination of both these main factors.