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#TickleYourGreyCells - GS Economics Concepts

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


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@AzadHindFauz brilliant answer


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#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..



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@ingenuity_max excellent answer ingenuity! Though your answer was complete by the first sentence of the second para. There was no need for the rest. Well done!


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@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 


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@Deviant13 good attempt deviant.. just that points 3 and 4 are not clean... 


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Solution to#tickleyourgreycells  #3

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


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#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.



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@ingenuity_max brilliant answer


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@Deviant13 try more on supply side reasoning…


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@Mariposa27 V good 


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@Pandit96 V good explanation. Though in GS our answers should be very non technical and simple. 


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@ZeroInfinity excellent!


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@TheNotorious good attempt. though actually wage price spiral is complete on the supply side itself. 


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@Saint_1 good answer


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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? 


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#tickleyourgreycells - 5


Actions of the US #Fed impact Indian government’s bond #yields. True or False? Answer in comments with your logic…


Yields mean returns of bonds.


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@Ri2raj v good. 


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@vianengg7270 good answer


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@Mariposa27 very good


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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.



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#tickleyourgreycells - 6


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


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Solution to#tickleyourgreycells - 6

The question was: Do you think#RBI can do anything about supply side inflation?

(Since answer involves multiple images, so sharing the instagram post link here as it gives the best user experience)

https://www.instagram.com/p/CqEu_8LByfT/?utm_source=ig_web_button_share_sheet
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#tickleyourgreycells - 7


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


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@ingenuity_max good attempt, but try and keep the answer focused.


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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

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#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


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Solution to #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


Insta link (because of multiple photos):




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#tickleyourgreycells - 9


Why are banks getting into trouble these days?

#economics #banking #yieldcurve



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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. 



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This is the pdf containing the solution


9 solution banking-compressed.pdf

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@crikeymate good answer!


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