[Mission 2023] INSIGHTS STATIC QUIZ, 1 July 2022 – Economy – INSIGHTSIAS

Solution: b)

Every currency note bears on its face a promise from the Governor of RBI that if someone produces the note to RBI, or any other commercial bank, RBI will be responsible for giving the person purchasing power equal to the value printed on the note. Currency notes and coins are therefore called fiat money. They do not have intrinsic value like a gold or silver coin. They are also called legal tenders as they cannot be refused by any citizen of the country for settlement of any kind of transaction.

Cheques drawn on savings or current accounts, however, can be refused by anyone as a mode of payment. Hence, demand deposits are not legal tenders.

Solution: d)

Calculating GDP includes adding together private consumption or consumer spending, government spending, capital spending by businesses, and net exports—exports minus imports. Here’s a brief overview of each component:

• Consumption: The value of the consumption of goods and services acquired and consumed by the country’s households. This accounts for the largest part of GDP
• Government Spending: All consumption, investment, and payments made by the government for current use
• Capital Spending by Businesses: Spending on purchases of fixed assets and unsold stock by private businesses
• Net Exports: Represents the country’s balance of trade (BOT), where a positive number bumps up the GDP as country exports more than it imports, and vice versa

Solution: c)

Gross domestic product (GDP) is the value of a nation’s finished domestic goods and services during a specific time period. A related but different metric, the gross national product (GNP), is the value of all finished goods and services owned by a country’s residents over a period of time. 

While GDP limits its interpretation of the economy to the geographical borders of the country, GNP extends it to include the net overseas economic activities performed by its nationals. 

Solution: a)

Imports become expensive because now the same value of local currency and can buy less of foreign currency.

Exports become more competitive (beneficial to domestic exporters) because now foreign buyers will find it easy to buy domestic goods.

Foreign borrowers who owe the debt from a domestic bank in domestic currency will benefit because now they need to pay less in terms of their original borrowing which was in foreign currency.

Solution: a)

The Bretton Woods System: The Bretton Woods Conference held in 1944 set up the International Monetary Fund (IMF) and the World Bank and re-established a system of fixed exchange rates.