money supply, banking & financial institutions section 5 Practice Questions Answers Test with Solutions & More Shortcuts

Answer: (d)

Devaluation in modern monetary policy is a reduction in the value of a currency with respect to those goods, services or other monetary units with which that currency can be exchanged.

‘Devaluation’ means official lowering of the value of a country’s currency within a fixed exchange rate system, by which the monetary authority formally sets a new fixed rate with respect to a foreign reference currency.

There are two implications for a currency devaluation. First, devaluation makes a country’s exports relatively less expensive for foreigners and second, it makes foreign products relatively more expensive for domestic consumers, discouraging imports.

As a result, this may help to reduce a country’s trade deficit.

Answer: (b)

Deflation is a decrease in the prices of goods and services. It occurs when the annual inflation rate falls below 0%, which is a negative inflation rate.

This is different from Disinflation which is a slowdown in the inflation rate. This is a situation when inflation declines to lower levels but prices continue to rise.

Answer: (d)

Demand-pull inflation is asserted to arise when aggregate demand in an economy outpaces aggregate supply.

It involves inflation rising as real gross domestic product rises and unemployment falls, as the economy moves along the Phillips curve. This is commonly described as “too much money chasing too few goods”.

More accurately, it should be described as involving “too much money spent chasing too few goods”, since only money that is spent on goods and services can cause inflation.

Answer: (a)

Answer: (b)

If the Current Account is negative that means we are spending more and earning less (imports are more than exports), then we require foreign exchange to fund the Current Account Deficit.

This foreign exchange can come if we are surplus in Capital Account i.e. there is a net inflow in Capital Account. Or we can also use the foreign exchange reserves of our country. So, both statements are true.