QUIZ – 2020: INSIGHTS STATIC , 24 June 2021 – Economy – INSIGHTSIAS

Solution: c)

Overheating of an economy occurs when its productive capacity is unable to keep pace with growing aggregate demand.

• It is generally characterised by a below-average rate of economic growth, where growth is occurring at an unsustainable rate.

Effects:

• Overheating is generally preceded by lower than average economic growth.
• Demand pull inflation occurs as suppliers try to capitalize on the excess demand which cannot be met via existing production constraints.
• These higher prices tend to reduce aggregate demand and exports (since goods and services become more expensive abroad) leading to reduced consumption.
• Central banks often simultaneously tighten monetary policy in response to increased inflationary pressures, reducing investment expenditure, which in tandem with decreased consumption, can lead to economic recession.

Solution: a)

The idea of setting up a bad bank is to resolve the growing problem of non-performing assets (NPAs), or loans on which borrowers have defaulted.

• Technically, a bad bank is an asset reconstruction company (ARC) or an asset management company that takes over the bad loans of commercial banks, manages them and finally recovers the money over a period of time.
• The bad bank is not involved in lending and taking deposits, but helps commercial banks clean up their balance sheets and resolve bad loans.
• The takeover of bad loans is normally below the book value of the loan and the bad bank tries to recover as much as possible subsequently.

Solution: a)

Provisioning means to set aside or provide some funds to cover up losses if things go wrong and some of their loans turn into bad assets. Provisioning Coverage Ratio (PCR) refers to the prescribed percentage of funds to be set aside by the banks for covering the prospective losses due to bad loans. 

A high PCR ratio (ideally above 70%) means most asset quality issues have been taken care of and the bank is not vulnerable. Higher the PCR, lower is the unexposed part of the bad debts.
Source

Solution: c)

There are multi-dimensional effects of inflation on an economy both at the micro and macro levels. Inflation redistributes wealth from creditors to debtors i.e. lenders suffer and borrowers benefit out of inflation. The opposite effect takes place when inflation falls (i.e. deflation).

Holding money does not remain an intelligent economic decision (because money loses value with every increase in inflation).

With every inflation the currency of the economy depreciates (loses its exchange value in front of a foreign currency) provided it follows the flexible currency regime rate is compared.

Solution: d)

Eight core industries viz. Coal, Crude Oil, Natural Gas, Refinery Products, Fertilizers, Steel, Cement and Electricity.