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GS Economy Economic Concepts
Q.

Which of the following conditions can increase the acceptability of a national currency to be used as an international medium of exchange?

1. The amount of goods that can be bought with a certain amount of that currency does not change frequently. 

2. The national currency is freely convertible at a fixed price into another asset like gold.

3. The issuing authority has full control over the value of that asset into which the currency can be converted.

Select the correct answer using the code given below.
Explanation:

 ANSWER: (A) 

  • Statement 1 is correct.

Foreign economic agents will accept a national currency only if they are convinced that the amount of goods they can buy with a certain amount of that currency will not change frequently. In other words, the currency will maintain a stable purchasing power. 

Without this confidence, a currency will not be used as an international medium of exchange and unit of account since there is no international authority with the power to force the use of a particular currency in international transactions.

  • Statement 2 is correct.

In the past, governments have tried to gain confidence of potential users by announcing that the national currency will be freely convertible at a fixed price into another asset. 

  • Statement 3 is not correct.

Also, the issuing authority will have no control over the value of that asset into which the currency can be converted. This other asset most often has been gold, or other national currencies. 

Q.

Read the following statements carefully in the context of ‘Gross Domestic Product at Market Prices’:

1. It is the market value of all final goods and services produced within a domestic territory of a country measured in a year.

2. It includes all production done by national residents or the non-residents in a country.

3. It excludes all production done by residents in a country if the production is owned by a foreign company.

Which of the statements given above is/are correct?
Explanation:

ANSWER: (B)

  • Statement 1 is correct.

Gross Domestic Product at Market Prices is the market value of all final goods and services produced within a domestic territory of a country measured in a year.

  • Statement 2 is correct but Statement 3 is not correct.

All production done by the national residents or the non-residents in a country gets included, regardless of whether that production is owned by a local company or a foreign entity.

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