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4 of 7 questions answered correctly
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Hiii Kirti
Wht about question 2,4,6
Question 2’s 2nd option????
Question 4’s floated Vs flexible
Q5- other liabilities?????l
there is ambiguity on Q4, and 5.
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Sir please explain how crowding out is related to interest rates.
https://economictimes.indiatimes.com/definition/crowding-out-effect
Actually my doubt was how the interest rate increases.In this article it only mentions that public spending increases the interest rate. I wanted to know how.
When interest rate increases, borrowing becomes costlier. So, this will discourage private investors from taking loans for investing in new projects -> will lead to crowding out effect. Hope this helps! 🙂
Greater public spending by gov leads to greater money flow in market there by inducing inflationary tendencies in economy. Due to this, Central bank resorts to conservative approach there by increasing interest rates and absorbing money from market which in turns hurt private sector as they don’t have credit to invest
See it from this angle
> Govt borrows more = Incurs FD
> High FD => High Inflation Rate (to counter hyperinflation, Central Bank must go for High IR when FD is high)
> High Inflation Rate= Demand falls => Crowding out effect i.e. the original intent of borrowing to push demand is defeated.
Hence strong Fiscal Management is a key pre-requisite to using borrowings to push demand. This is why India went for FRBM and this is why India had poor progress on aggregate demand before in the 90s despite huge borrowings.
It is a situation when increased interest rates lead to a reduction in private investment spending such that it dampens the initial increase of total investment spending is called crowding out effect.
Sometimes, government adopts an expansionary fiscal policy stance and increases its spending to boost the economic activity. This leads to an increase in interest rates. Increased interest rates affect private investment decisions. A high magnitude of the crowding out effect may even lead to lesser income in the economy.
With higher interest rates, the cost for funds to be invested increases and affects their accessibility to debt financing mechanisms. This leads to lesser investment ultimately and crowds out the impact of the initial rise in the total investment spending. Usually the initial increase in government spending is funded using higher taxes or borrowing on part of the government.
For public debt questions I would say 1st option mentions public debt and not central govt borrowings,hence correct!
Q4 is incorrect given
But Q6 is correct
Increase in NRI deposits leads to currency appreciation. can u tell how?
NRI deposits are generally in Foreign Currencies. When Foreign Currencies increase in the domestic system => the Supply Side of Foreign Currencies increase vis-a-vis Indian Currency. In this case, the price of Foreign Currencies against Indian currency falls => Indian currency gains in value i.e. appreciates.
4/7
GOOD QUESTIONS……..
Kya Singh Sahab , kuchh doubts clear Karo yaar
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Sir kindly address my enquiries
Think from an investors point of view. You ‘ll get your answer.
However the issue is still not clear but thnxx for Ur concern
Yeah I complicated, that’s why I left NOTE??
Increase risk factor creates uncertainty in the mind of investor. They become reluctant to invest in the long capital instrument. Above example of oil price was seen during 2014, when oil price decrease sharply. IMF predicted high inflation but as the price decreases, demand also decrease. Investors start spending more in GOLD.
(Note: just remember oil price and gold price are inversely proportional whereas oil price and interest rate are directly proportional.) Gold is sort of black money/ hidden money, govt never wish people to invest in such commodities.
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Issue with q 2 option 2. When oil prices fall, households with have surplus money and so it may likely to raise inflation. Hence govt. Will intend to absorb this extra money or be reluctant to release any money further into market and thus interest rates ( both saving and lending ) will increase.
SOMEONE PLZZ CLARIFY
Same issue here!!
When there is price down in d economy, then there is great spending n consumption by d consumer thus less spending…….. Bank does not have money does it have to increase rate for attraction
Or it will b inflation due to less supply, does govt will rase interest rate rate!!
Yeah, even I thought the same. But, when oil prices fall, it also reduces the inflation to some extent… so, it may not always lead to increase in interest rate. Read this to know about the relation between oil prices and inflation – https://www.economicshelp.org/blog/11738/oil/impact-of-falling-oil-prices/ And out of the explanation given in the solution, I could understand.. household demand decreases -> so basically inflation reduces as people will not demand more money -> might lead to decrease in interest rates -> lowers the cost of borrowing, which encourages businesses to increase investment spending.
Thnxx
Q.4 option 3 it happens in fixed rate exchange system. We blame China of currency devaluation to increase exports how can we do so
Consider you are an owner of a car company. Each car gives profit of ₹50,000 = $1000 in your home country USA (1$= ₹50)
2.Devaluation (1$=₹60), now when to try to convert it you get approx $833.
Now ask yourself still you want to export?? Incurring loss of $167
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Need to revise economy! 🙁
Q1 statement 2 ..oil spill will not only have environmental effect but also economic effect .
Yaa but that will not affect GDP bcoz GDP accounts for only production and not with what happened later
Okay thanks bro
Q4 in flexible exchange rate regime RBI can intervene. Answer is wrong
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Other reason is expansionary fiscal policy reduces investment spending by the private sector. Ye kaise hua
In expansionary fiscal deficit policy, when govt borrow from the bank then less money is left to bank for lending to private company, thus!!
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Forum ias question no.4 and 6 has wrong answers mentioned however the explanation is correct. Please take into account as these queries have been raised several times on this platform.
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Effect of rising prices:
Higher oil imports → higher current account deficit.
Rising oil prices → fiscal deficit due to subsides (Explained above).
Higher oil price → higher input costs → higher overall inflation.
Higher input costs → Lower profitability for several industries.
All above factors → Depreciating INR.
Depreciating INR → Fall in stock markets.
Fall in stock markets → Loss of wealth.
Loss of wealth → Slow investment cycle.
Slow investment cycle → Slow productivity growth.
Slow productivity growth → Slowing GDP.
??Effect of lower prices: Vice versa!
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Q7, option 1
The difference between total revenue and total expenditure of the government is termed as fiscal deficit. It is an indication of the total borrowings needed by the government. While calculating the total revenue, “borrowings are not included. ”
Fiscal deficit = Total expenditure – Total receipts excluding borrowings
https://economictimes.indiatimes.com/definition/fiscal-deficit
5/7 great quiz…pura concept check kar liya
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1oo days prelim free plan and ncert revision plan with test at
https://namdevpasme.wordpress.com/100days-prelim-plan/
In Q2 statement 3 explanation… shouldn’t it be ‘domestic currency’ depreciates instead of ‘dollar’…? Because when domestic currency depreciates, net exports increase.
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