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In economics, which of the following best describes the term “base effect”?
Ans) C
Exp)
• The base effect refers to the impact of the rise in the price level (i.e. last year's inflation) in the previous year over the corresponding rise in price levels in the current year (i.e., current inflation): if the price index had risen at a high rate in the corresponding period of the previous year leading to a high inflation rate, some of the potential rise is already factored in, therefore a similar absolute increase in the Price index in the current year will lead to relatively lower inflation rates.
• On the other hand, if the inflation rate was too low in the corresponding period of the previous year, even a relatively smaller rise in the Price Index will arithmetically give a high rate of current inflation.
Ans) C
Exp)
• The base effect refers to the impact of the rise in the price level (i.e. last year's inflation) in the previous year over the corresponding rise in price levels in the current year (i.e., current inflation): if the price index had risen at a high rate in the corresponding period of the previous year leading to a high inflation rate, some of the potential rise is already factored in, therefore a similar absolute increase in the Price index in the current year will lead to relatively lower inflation rates.
• On the other hand, if the inflation rate was too low in the corresponding period of the previous year, even a relatively smaller rise in the Price Index will arithmetically give a high rate of current inflation.
The difference between a nation's current account surplus and its primary account surplus is its
Ans) A
Exp)
• The current account records a country's imports and exports of goods and services over a defined period of time, in addition to earnings from cross-border investments, and transfer payments. Exports, earnings on investments abroad, and incoming transfer payments (aid and remittances) are recorded as credits; imports, foreign investors' earnings on investments in the country, and outgoing transfer payments are recorded as debits.
• When credits exceed debits, the country enjoys a current account surplus, meaning that the rest of the world is in effect borrowing from it. A current account surplus increases a nation's net assets by the amount of the surplus.
• A country with a current account surplus will have a deficit on the financial/capital account. i.e. a country with a current account surplus will have surplus foreign exchange it can use to invest in other countries.
• A country's primary account surplus (deficit) refers to the component of the fiscal surplus (deficit) that is comprised of current government spending less current income from taxes, and excludes interest paid on government debt.
Ans) A
Exp)
• The current account records a country's imports and exports of goods and services over a defined period of time, in addition to earnings from cross-border investments, and transfer payments. Exports, earnings on investments abroad, and incoming transfer payments (aid and remittances) are recorded as credits; imports, foreign investors' earnings on investments in the country, and outgoing transfer payments are recorded as debits.
• When credits exceed debits, the country enjoys a current account surplus, meaning that the rest of the world is in effect borrowing from it. A current account surplus increases a nation's net assets by the amount of the surplus.
• A country with a current account surplus will have a deficit on the financial/capital account. i.e. a country with a current account surplus will have surplus foreign exchange it can use to invest in other countries.
• A country's primary account surplus (deficit) refers to the component of the fiscal surplus (deficit) that is comprised of current government spending less current income from taxes, and excludes interest paid on government debt.
Which of the following is/are ‘Foreign Liabilities’ of a commercial bank in India?
1. Foreign currency holdings
2. Non-resident deposit
3. Rupee overdrafts to non-residents banks
Select the correct answer using the code given below:
Ans) A
Exp)
• Foreign assets of commercial banks consist of (i) foreign currency holdings, and (ii) rupee overdrafts to non-resident banks.
• Foreign liabilities of commercial banks consists of (i) non-resident deposits and (ii) liabilities other than non-resident deposits, which comprise rupee and foreign currency liabilities to non-resident banks and official and semi-official institutions.
Ans) A
Exp)
• Foreign assets of commercial banks consist of (i) foreign currency holdings, and (ii) rupee overdrafts to non-resident banks.
• Foreign liabilities of commercial banks consists of (i) non-resident deposits and (ii) liabilities other than non-resident deposits, which comprise rupee and foreign currency liabilities to non-resident banks and official and semi-official institutions.
The term ‘impossible trinity’ implies
Ans) B
Exp)
• The impossible trinity, also called the Mundell-Fleming trilemma or simply the trilemma, expresses the limited options available to countries in setting monetary policy.
• According to this theory, a country cannot achieve the free flow of capital, a fixed exchange rate and independent monetary policy simultaneously. By pursuing any two of these options, it necessarily closes off the third. Thus, option (b) is correct.
Ans) B
Exp)
• The impossible trinity, also called the Mundell-Fleming trilemma or simply the trilemma, expresses the limited options available to countries in setting monetary policy.
• According to this theory, a country cannot achieve the free flow of capital, a fixed exchange rate and independent monetary policy simultaneously. By pursuing any two of these options, it necessarily closes off the third. Thus, option (b) is correct.
Which one of the following Currency Regime/Exchange Rate System provides the most suitable conditions for investments?
Ans) D
Exp)
• A fixedexchange rate is a regime applied by a country whereby the government orcentral bank ties the official exchange rate to another country's currency or the price of gold. The purpose of a fixed exchange rate system is to keep a currency's value within a narrow band.
• Fixed rates provide greater certainty for exporters and importers. Fixed rates also helps the government maintain lowinflation, which, in thelong run, keeps interest rates down and stimulates trade and investment. Most major industrialized nations have had floating exchange rate systems since the early 1970s, while developing economies continue with fixed-rate systems.
Ans) D
Exp)
• A fixedexchange rate is a regime applied by a country whereby the government orcentral bank ties the official exchange rate to another country's currency or the price of gold. The purpose of a fixed exchange rate system is to keep a currency's value within a narrow band.
• Fixed rates provide greater certainty for exporters and importers. Fixed rates also helps the government maintain lowinflation, which, in thelong run, keeps interest rates down and stimulates trade and investment. Most major industrialized nations have had floating exchange rate systems since the early 1970s, while developing economies continue with fixed-rate systems.