Daily Static MCQs Quiz for UPSC, IAS, UPPSC/UPPCS, MPPSC. BPSC, RPSC & All State PSC Exams
Subject : Economy (30 november 2023)
1. Which of the following are merits of flexible exchange rate system?
1. The main feature of the flexible exchange rate system is that there must be credibility that the government will be able to maintain the exchange rate at the level specified.
2. Under flexible exchange rate system, the government need not maintain large stocks of foreign exchange reserves.
3. Movements in the exchange rate automatically take care of the surpluses and deficits in the BoP.
How many of the above statements is/are correct?
(a) Only one
(b) Only two
(c) All three
(d) None
Answer: (B)
Explanation: The main feature of the fixed exchange rate system is that there must be credibility that the government will be able to maintain the exchange rate at the level specified. Often, if there is a deficit in the BoP, in a fixed exchange rate system, governments will have to intervene to take care of the gap by use of its official reserves.
The flexible exchange rate system gives the government more flexibility and they do not need to maintain large stocks of foreign exchange reserves. The major advantage of flexible exchange rates is that movements in the exchange rate automatically take care of the surpluses and deficits in the BoP. Also, countries gain independence in conducting their monetary policies, since they do not have to intervene to maintain exchange rate which are automatically taken care of by the market. Hence, statement 1 is not correct.
2. In WTO terminology, subsidies in general are identified by “boxes” which are given different colours. Consider the following pairs regarding them:
1. Amber Box: Domestic support measures considered to distort production and trade
2. Green box: Subsidies are allowed even if they distort trade.
3. Blue Box: No limits on subsidies or spending
How many of the above pairs is/are correctly matched?
(a) Only one
(b) Only two
(c) All three
(d) None
Answer: (B)
Explanation: All domestic support measures considered to distort production and trade (with some exceptions) fall into the amber box, which is defined as all domestic supports except those in the blue and green boxes. These include measures to support prices, or subsidies directly related to production quantities. These supports are subject to limits: “de minimis” minimal supports are allowed. This threshold is generally 5% of the value of agricultural production for developed countries, 10% for most developing countries. In order to qualify, green box subsidies must not distort trade, or at most cause minimal distortion. They have to be government-funded (not by charging consumers higher prices) and must not involve price support. Blue Box is the “amber box with conditions” — conditions designed to reduce distortion. Any support that would normally be in the amber box, is placed in the blue box if the support also requires farmers to limit production. Hence, pair 2 is not correctly matched.
3. Which of the following can lead to Demand-Pull Inflation?
1. A growing economy
2. Increase in Forex reserves
3. Deficit financing by the government
4. Depreciation of rupee
Select the correct answer using the code given below:
(a) 1, 2 and 3
(b) 1, 3 and 4
(c) 2 and 3
(d) 1, 2, 3 and 4
Answer: (D)
Explanation: Demand-Pull Inflation: This type of inflation is caused due to an increase in aggregate demand in the economy.
Causes of Demand-Pull Inflation:
• A growing economy or increase in the supply of money – When consumers feel confident, they spend more and take on more debt. This leads to a steady increase in demand, which means higher prices.
• Asset inflation or Increase in Forex reserves.
• Government spending or Deficit financing by the government – When the government spends more freely, prices go up.
• Due to fiscal stimulus.
• Increased borrowing.
• Depreciation of rupee.
• Low unemployment rate.
Effects of Demand-Pull Inflation:
• Shortage in supply
• Increase in the prices of the goods (inflation).
• The overall increase in the cost of living.
4. Which of the following institutions were established under Bretton Woods Conference?
1. International Monetary Fund (IMF)
2. World Trade Organization
3. World Bank
4. European Bank for Reconstruction and Development
Select the correct answer using the code given below:
(a) 1, 2 and 3
(b) 1, 3 and 4
(c) 1 and 2
(d) 1, 2, 3 and 4
Answer: (B)
Explanation: The Bretton Woods System: The Bretton Woods Conference held in 1944 set up the International Monetary Fund (IMF) and the World Bank. The Bretton Woods Agreement was a monetary and exchange rate management system that attempted to encourage international financial cooperation through the introduction of a system of convertible currencies at fixed exchange rates.
5. Consider the following statements regarding Reserve Tranche:
1. It is a portion of the required quota of currency each member country must provide to the International Monetary Fund (IMF) that can be utilized by the members for its own purposes.
2. It is an emergency account that IMF members can access at any time, but agreeing to conditions or by paying a service fee.
3. IMF Members cannot borrow beyond 100% of their reserve tranche position.
How many of the above statements is/are correct?
(a) Only one
(b) Only two
(c) All three
(d) None
Answer: (A)
Explanation: A reserve tranche is a portion of the required quota of currency each member country must provide to the International Monetary Fund (IMF) that can be utilized for its own purposes—without a service fee or economic reform conditions. Hence, statement 1 is correct.
The IMF is funded through its members and their quota contributions. The reserve tranche is basically an emergency account that IMF members can access at any time without agreeing to conditions or paying a service fee. Hence, statement 2 is not correct.
In theory, members can borrow over 100% of their quota. However, if the amount being sought by the member nation exceeds its reserve tranche position (RTP), then it becomes a credit tranche that must be repaid in three years with interest. Hence, statement 3 is not correct.
