#TickleYourGreyCells - GS Economics Concepts

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.

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? 

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

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

*goosebumps*

@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. 

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)

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"

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

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.

#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

Thanks a ton, Azad! You rescued us.

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

#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.

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.

#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

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

Yes.

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

#tickleyourgreycells - 6

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