1. Consider the following statements:
(1) A high foreign exchange rate may increase the export of a country.
(2) A Trade surplus in an economy may help to appreciate its currency.
(3) A rise in interest rates in a country is often accompanied with depreciation of domestic currency.
Which of the statements given above are correct?
(a) 1 and 2 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3
Answer: (a) Explanation: Statement 1 is correct. A rise in price of foreign exchange will reduce the foreigner’s cost (in terms of USD) while purchasing products from a country. This increases the export of country. Statement 2 is correct. A Trade surplus means that the export of a country is greater than its imports. The export of a country helps in bringing foreign currency. So surplus trade of balance trade surplus will bring more foreign currency. As a result of which the domestic currency will appreciate. Statement 3 is incorrect.
The rise in the interest rates at home often leads to shortage of money/currency supply in an economy due to more demand of the domestic currency (both from the domestic and foreign players) in expectation of higher returns in private market, thereby leads to an appreciation of the domestic currency.
Source: NCERT XII, Macroeconomics, PG- 91, 92, 93
2. Which of the following is the best description of the term 'deficit financing', which was in the news recently?
(a) It is the excess of government's current expenditure over its current revenue.
(b) It is the difference of borrowing from external and internal resources.
(c) It is an excess of government's total expenditure over its total revenue.
(d) It is the capital expenditure on items of public contractions and public borrowings.
Answer: (c) Explanation: Deficit financing is the budgetary situation where expenditure is higher than the revenue. It is a practice adopted for financing the excess expenditure with outside resources. The expenditure-revenue gap is financed by either printing of currency or through borrowing. Nowadays most governments, both in the developed and developing world, are having deficit budgets and these deficits are often financed through borrowing. Hence the fiscal deficit is the ideal indicator of deficit financing.
Source: https://www.indianeconomy.net/splclassroom/what-is-deficit-financing- what-are-the-different-types-of-deficits-in-the-budget/
3. Consider the following statements regarding options:
(1) Under call options, the option writer has the obligation to buy the underlying asset at the specified price
(2) Under call options, the option holder has the right to buy the underlying asset at the specified price.
(3) Under the put options, option seller has the obligation to sell the underlying asset at the specified price
Which of the statements given above is/are correct?
(a) 1 and 2 only
(b) 2 only
(c) 1 and 3 only
(d) 1, 2 and 3
Answer: (b) Explanation: Under Call options, the option writer/option seller has the obligation to sell the underlying asset (to the option holder) at the specified price. Thus statement 1 is incorrect. Under call options, the option holder/option buyer has the right to buy the underlying asset at the specified price. Thus statement 2 is correct.
Under the Put options, option seller/option writer has the obligation to buy the underlying asset (from the option holder) at the specified price. Thus statement 3 is also incorrect.
Source: https://www.investopedia.com/terms/c/calloption.asp
4. Consider the following statements:
(1) The Indian Strategic Petroleum Reserve (ISPR) is an emergency fuel store of total 5 MMT (million metric tons) of strategic crude oil enough to provide 10 days of consumption.
(2) India’s strategic crude oil storages are located at Vishakhapatnam, Mangalore and Padur, and two more will be set up in Odisha and Rajasthan as part of the second phase.
Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
Answer: (c) Explanation: Statement 1 is correct. The Indian Strategic Petroleum Reserve (ISPR) is an emergency fuel store of total 5 MMT (million metric tons) of strategic crude oil enough to provide 10 days of consumption. The historic first cargo of crude oil from the Abu Dhabi National Oil Company (ADNOC), destined for the Indian Strategic Petroleum Reserves Ltd (ISPRL) has been loaded and is En-route to India. Statement 2 is correct. India’s strategic crude oil storages are located at Vizag (1.33 million tonnes), Mangalore (1.5 million tonnes) and Padur (2.5 million tonnes). The reserves are maintained by the Indian Strategic Petroleum Reserves Limited. In the 2017-18 budget, it was announced that two more such caverns will be set up Chandikhole in Jajpur district of Odisha and Bikaner in Rajasthan as part of the second phase.
Source: Economic Growth and Development; page-79.
5. Which of the following does not include liberalization of foreign trade for any country?
(1) Domestic content requirements
(2) Removal of custom duties
(3) Removal of excise duties
(4) Easing up of trade sanctions
Select the correct answer using the code given below:
(a) 1 and 3 only
(b) 2 and 4 only
(c) 2 and 3 only
(d) 1, 2 and 3 only
Answer: (a) Explanation: Removing barriers or restrictions set by the government is known as liberalization. Statement 1 is correct. Domestic content requirement means that some firm has to mandatorily source some percentage of its input from local sources. This will increase restrictions on import and hence does not include liberalization. Statement 2 is incorrect. Customs duties are a type of tax charged on goods from outside the country. Removal of custom duties will remove restrictions and hence is included in liberalization. Statement 3 is correct. An excise duty is a type of tax charged on goods produced within the country. Their removal will not cause liberalization as these are not related to foreign trade. Statement 4 is incorrect. Sanctions are a type of Non-tariff barrier to trade. Easing up of sanctions will lead to liberalization.
Source: X NCERT: Understanding Economic Development: Chapter 4: Globalization and Indian Economy Page 64 + general economics concepts.