UPSC Static Quiz – Economy : 3 December 2024

Solution: a)

The Extended Credit Facility (ECF) provides financial assistance to countries with protracted balance of payments problems. The ECF was created under the Poverty Reduction and Growth Trust (PRGT) as part of a broader reform to make the Fund’s financial support more flexible and better tailored to the diverse needs of low-income countries (LICs), including in times of crisis. The ECF is the Fund’s main tool for providing medium-term support to LICs.

Solution: d)

Structural adjustment programs (SAPs) consist of loans (structural adjustment loans; SALs) provided by the International Monetary Fund (IMF) and the World Bank (WB) to countries that experience economic crises. Their purpose is to adjust the country’s economic structure, improve international competitiveness, and restore its balance of payments. SAPs are created with the stated goal of reducing the borrowing country’s fiscal imbalances in the short and medium term or in order to adjust the economy to long-term growth.

Solution: a)

The policy stance tells everyone what the MPC is trying to achieve by its actions. A policy stance tells us whether the MPC is trying to contain inflation or boost growth while containing inflation or simply being neutral.

There are two more things that observers watch out for in MPC statements: the outlooks on GDP growth and inflation.

A Goldilocks scenario for an economy refers to a point where it is running just perfectly — neither too hot (implying high inflation) nor too cold (referring to faltering GDP growth).

Solution: a)

The World Bank defines the middle-income trap as a situation where a middle-income country struggles to become a high-income economy due to rising costs and declining competitiveness. There are concerns that India may fall into this trap, potentially stalling at a per capita income of USD 5,000-6,000 on its path to becoming a developed economy.

Key Highlights of the Report:

• Wealthy countries often hit a growth slowdown at around $8,000 per capita (10% of U.S. GDP per person).
• Since 1990, only 34 middle-income countries (MICs) have transitioned to high-income status.
• As of end-2023, 108 MICs host 75% of the global population and generate over 40% of global GDP.
• Challenges for MICs include ageing populations, rising protectionism, and the need for faster energy transitions.

Why Countries Fall into the Middle-Income Trap

1. Struggles of Developing Countries: Middle-income nations often lag due to competition with low-wage producers and lack of innovation, stalling growth.
2. Structural Shift: Transitioning sectors or growth drivers risk stagnation in per capita income, especially if innovation capabilities are lacking.
3. Rising Income Inequality: High-income inequality, exemplified by large wealth gaps, restricts consumer spending and economic progress.

Solution: c)

Statement 1 is incorrect.

German professor Klaus Schwab founded the WEF.

The WEF has become a forum for various stakeholders to meet and discuss global and regional socio-economic issues.

The WEF is largely funded by its partnering corporations. These are generally global enterprises with annual turnover greater than $5 billion.

The WEF also went on to regularly publish global rankings and indices, such as the Global Competitiveness Report and the Global Gender Gap Report.