Day-419 | Daily MCQs | UPSC Prelims | ECONOMICS

Answer: C
Explanation:
● Option 1 is correct: Devaluation of currency leads to reduction in imports and goods becoming expensive leads to inflation.
● Option 2 is correct: Reduction in import leads to goods becoming expensive and leads to inflation.
● Option 3 is incorrect: Increasing deposit in the banking system does not lead to inflation as there is limited money supply in the economy.
● Option 4 is correct: Deficit financing led to increase in expenditure and increased demand that leads to inflation.
● Option 5 is correct: Lowering of bank rate led to increase in money supply that leads to inflation.
Additional information: Inflation is a rise in prices, which can be translated as the decline of purchasing power over time. The rate at which purchasing power drops can be reflected in the average price increase of a basket of selected goods and services over some period of time. The rise in prices, which is often expressed as a percentage, means that a unit of currency effectively buys less than it did in prior periods. Inflation can be contrasted with deflation, which occurs when prices decline and purchasing power increases. Inflation is the rate at which prices for goods and services rise. Inflation is sometimes classified into three types: demand-pull inflation, cost-push inflation, and built-in inflation. The most commonly used inflation indexes are the Consumer Price Index and the Wholesale Price Index. Inflation can be viewed positively or negatively depending on the individual viewpoint and rate of change. Those with tangible assets, like property or stocked commodities, may like to see some inflation as that raises the value of their assets.

Answer: D
Explanation:
● Statement 1 is incorrect: Real GDP reflects the value of all goods and services produced within a country by taking inflation in account unlike nominal GDP which does not take inflation into account while calculating GDP.
● Statement 2 is correct: Real GDP takes into account changes in price level unlike nominal GDP.
● Statement 3 is correct: If inflation is positive, real GDP will be lower than nominal GDP.
Additional Information: Real gross domestic product is a more accurate reflection of the output of an economy than nominal GDP. By eliminating the distortion caused by inflation or deflation or by fluctuations in currency rates, real GDP gives economists a clearer idea of how the total national output of a country is growing or contracting from year to year.
Nominal GDP is also called “current dollar” GDP. It is the total in dollars or any other currency of goods and services consumed, plus government expenditures, investments, and exports, minus total imports. Nominal GDP has its uses. It is always used when GDP is being compared to any other factor that is not inflation-adjusted. For example, a comparison of a nation’s debt to its GDP will use nominal GDP, because debt is always measured in current dollars.

Answer: C
Explanation:
● Increase in capital expenditure leads to creation of long-term assets in the economy and increase in money. Hence, it leads to decrease in liabilities of the government and decrease in deficit of government and decrease in borrowing of government.
Additional information: A capital expenditure is money invested by a company to acquire or upgrade fixed, physical or non-consumable assets. Capex is primarily a one-time investment in non-consumable assets used to maintain existing levels of operation within a company and to foster its future growth. Capital expenditure is the money spent by the government on the development of machinery, equipment, building, health facilities, education, etc. It also includes the expenditure incurred on acquiring fixed assets like land and investment by the government that gives profits or dividends in future.

Answer: C
Explanation:
● Option 1 is incorrect: Increase in bank rate will decrease money supply.
● Option 2 is correct: Increase in FDI leads to increase in per capital income and money supply in the economy.
● Option 3 is correct: Increasing exports leads to increase in money supply.
● Option 4 is correct: Lowering interest rates leads to increase in money supply.
Additional information: The money supply is the total amount of money cash, coins, and balances in bank accounts in circulation. The money supply is commonly defined to be a group of safe assets that households and businesses can use to make payments or to hold as short-term investments. Money supply is the sum total of all of the currency and other liquid assets in a country’s economy on the date measured. The money supply includes all cash in circulation and all bank deposits that the account holder can easily convert to cash. Governments issue paper currency and coins through their central banks or treasuries, or a combination of both. In order to keep the economy stable, banking regulators increase or reduce the available money supply through policy changes and regulatory decisions.

Answer: D
Explanation:
● Statement 1 is incorrect: It makes Country’s currency less attractive and therefore less opportunity for investors.
● Statement 2 is correct: It can weaken currency and decrease demand for currency.
● Statement 3 is correct: It can lead to increase in imports and decrease in exports.
Additional information: The current account deficit is a measurement of a country’s trade where the value of the goods and services it imports exceeds the value of the products it exports. The current account includes net income, such as interest and dividends, and transfers, such as foreign aid, although these components make up only a small percentage of the total current account. The current account represents a country’s foreign transactions and, like the capital account, is a component of a country’s balance of payments.