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#TickleYourGreyCells - GS Economics Concepts

If interest #rates in the USA or European Union were to fall, that is likely to induce #RBI to buy dollars.

True or false? Answer in comments with logic...

#ImpossibleTrinity





DM,GaneshGaitondeand27 otherslike this
19.7k views

60 comments

True.

Reduction in the US interest rates leads to flight of capital to more attractive destinations like India. Inflow of dollar would lead to appreciation of rupee. To arrest this supply of dollars in the market, RBI buys dollars since ours is a managed-floating type economy.

ssver2,Microand15 otherslike this
7.9k views

Solution to #tickleyourgreycells - 4


The question was: Inflation indexation of wages (meaning if inflation goes up, wages go up and if inflation goes down, wages go down too by a predefined formula) will lead to demand side inflation or supply side inflation? 


Saint_1,AzadHindFauzand13 otherslike this
3.2k views

Solution to #tickleyourgreycells - 7


The question was: Equity markets generally rise with good economic numbers as it means firms’ profits will go up. Why do you think in the news clippings below, markets are falling here after good employment numbers?


solution 7 employment and stock markets-compressed.pdf

mightyraju,DMand9 otherslike this
3.5k views

Great to see the "Gaurav" of ForumIAS back after nearly 10 years ! How have you been Gaurav!

*goosebumps*


I am no knight. Do not call me Sir

ssver2,thejokerand8 otherslike this
8.1k views

@gaurav1agrawal Thank you for Coming back (Superman Returns AGAIN 😁) . Your charisma and popularity is still unmatched. You were the only one who taught us how being an IAS was deeply meaningful as it gave you the ability to deliver JUSTICE. That talk on Forum community meet never fails to inspire me. 


Now that you've spent a greater time in the service, I hope we all will get to learn a lot more from you. 

Joeyisthebest,thejokerand8 otherslike this
7.7k views

#tickleyourgreycells- 3

If the rupee is rapidly depreciating, RBI is likely to sell dollars in the market. True or false? Answer in comments with logic..




True.

Depreciation of currency for a country may lead to imported inflation

So, RBI will have to sell dollars in market to arrest the depreciation of rupee. So as to strike a balance between the supply of rupee and dollar in the market and stabilise the currency. (via selling forex reserves or boosting NRI deposits)


Neyawn,Joeyisthebestand7 otherslike this
7.4k views

#tickleyourgreycells - 4

Inflation indexation of wages (meaning if #inflation goes up, wages go up and if inflation goes down, wages go down too at a predefined formula) will lead to demand side inflation or supply side inflation? Answer in comments with logic.



Ans - Supply side inflation

Inflation indexed wages nullify the impact of inflation on wages and thus effectively keep the wages "same". Therefore keeping the demand in check, whereas simultaneouly they may result in increase of cost, leading to "supply side inflation"

AzadHindFauz,Rashmirathiand6 otherslike this
6.8k views

Here is the solution to yesterday's #tickleyourgreycells - 2 ...@AzadHindFauz  got it spot on!


AzadHindFauz,Vin01and6 otherslike this
7.8k views

Solution to #tickleyourgreycells - 5


The question was: Actions of the US #Fed impact Indian government’s bond #yields. True or False?

If you have answered all #tickleyourgreycells correctly including this one, congratulations! You have answered 3 #upsc prelims economics questions correctly.



Saint_1,crikeymateand4 otherslike this
2.5k views

#tickleyourgreycells - 8


Look at the news clipping below. Why did Liz Truss’ tax cut plan spook the markets so much that she had to resign?


#economics


mightyraju,CuriYashand3 otherslike this
3.2k views

Solution to #tickleyourgreycells - 9


The question was: Why are banks getting into trouble these days?

#economics #banking #yieldcurve


Instagram link (multiple photos):https://www.instagram.com/p/CqUKY4nPpls/?utm_source=ig_web_copy_link


Banks typically engage in carry trade on the yield curve. Normally longer duration rates are higher than short term rates. This means that the yield curve is upward sloping. 


So banks lend for longer duration at higher rates. and finance it by borrowing for a short term at lower rates and earn profits. When the short term borrowing comes up for repayment, they just borrow again for a short term.


The party continued happily until the recent times when due to Fed printing too much money post covid and the Russo-Ukraine war, inflation hit the world with a vengeance. This forced the Fed (and other central banks) to raise the interest rates at breakneck speed. 


Now central banks only control short term rates (generally overnight rates) directly. So their actions impact short term rates more than the long term rates. Long term rates are influenced more by inflation expectations. So because of Fed action, the short term rates rose rapidly but the long term rates remained anchored because the inflation expectations remained in control. 


And thus the yield curve inverted! This spelled doom for the carry trade. The mother of all trades turned loss making now and banks started bleeding. Naturally the weaker ones are facing the music first.


Inverted yield curve always signals an upcoming recession. The US 2 year-10 year yield curve turned negative to the tune of -1% in March this year! This is why we say there is an inflation - growth tradeoff. This is the pain central banks have to engineer to control #inflation. 



DM,crikeymateand3 otherslike this
2.6k views

True.

Reduction in the US interest rates leads to flight of capital to more attractive destinations like India. Inflow of dollar would lead to appreciation of rupee. To arrest this supply of dollars in the market, RBI buys dollars since ours is a managed-floating type economy.

Thanks a ton, Azad! You rescued us.

Gaurav has more responses on LinkedIn than here, ironically. Or maybe not so ironically!


I am no knight. Do not call me Sir

AzadHindFauz,BurtMacklin_FBIand3 otherslike this
7.2k views


#tickleyourgreycells4:-

No demand side inflation:-

Suppose a basket of goods which used to cost ₹100,now costs ₹105.And the wages of a person also increases from ₹100 to ₹105.So his net purchasing capacity is same.Hence no increase in demand.

Can lead to supply side inflation:-

As wages are inceeasing,cost of production increases.

Rashmirathi,sstarrrand2 otherslike this
6.6k views

#tickleyourgreycells - 6


Checkout the news headlines. Do you think #RBI can do anything about supply side inflation?


RBI largely controls demand side inflation through quantitative measures like rate-cuts. However, in case of supply side inflation, RBI can use its qualitative tools like moral suasion and credit rationing to divert major credit flow to certain stressed sectors like agriculture, infrastructure etc. to boost supply and maintain confidence of investors & public in general.

mightyraju,Microand2 otherslike this
3.5k views
@Pandit96 I am sure when you say a country with limited forex, you are not talking about India. India has fifth highest reserves globally and they are more than sufficient to cover any crisis in the foreseeable future. 

But academically, yes, if forex reserves run out, you can’t support the currency any more. That is where you get a balance of payments crisis. Of course this will be covered in a later #tickleyourgreycells 


AzadHindFauz,sstarrrand2 otherslike this
7.6k views

Solution to#tickleyourgreycells  #3

The question was: If the rupee is rapidly depreciating, RBI is likely to buy or sell dollars in the market.


DM,ryzenauster
7.2k views

#tickleyourgreycells - 4

Inflation indexation of wages (meaning if #inflation goes up, wages go up and if inflation goes down, wages go down too at a predefined formula) will lead to demand side inflation or supply side inflation? Answer in comments with logic.



ryzenauster,dotttt27
7.1k views

#tickleyourgreycells - 4

Inflation indexation of wages (meaning if #inflation goes up, wages go up and if inflation goes down, wages go down too at a predefined formula) will lead to demand side inflation or supply side inflation? Answer in comments with logic.



1. In case of Inflation: Supply Side Inflation

2. In case of deflation: Supply Side deflation

Pandit96,gaurav1agrawal
3.3k views

When the wages are indexed to inflation ; in (p,y) space

AD will remain constant while with the rising wages the AS CURVE WILL SHIFT UPWARD.

THUS NOW THE EQB OCCUR AT HIGHER P AND LESSER Y.

so; it is a cost pushed inflation

Sir; one policy implication will be : cost push inflation decreases the output ; so is it safe to call it is more critical a condition than it would have been in case of demand pull.

Correct me if I thought wrong

ZeroInfinity,gaurav1agrawal
3.2k views

Yes.

As US interest rate decreases, foreigners bring capital to India's growing economy ->Invest in markets ->Demand for bond rises ->Yields fall

SwetSagar,gaurav1agrawal
2.3k views
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