Fiscal Deficit, Revenue Deficit, Primary Deficit
Question
Consider the following statements: Which of the statements given above are correct?
- 1.
Tight monetary policy of US Federal Reserve could lead to capital flight.
- 2.
Capital flight may increase the interest cost of firms with existing External Commercial Borrowings (ECBs).
- 3.
Devaluation of domestic currency decreases the currency risk associated with ECBs.
Options
1 and 2 only
2 and 3 only
1 and 3 only
1, 2 and 3
Explanation
Statements 1 and 2 are correct. Statement 3 is incorrect.
A tight US Fed policy raises dollar interest rates, causing investors to pull funds from emerging markets (capital flight). This capital flight depreciates the local currency. Currency depreciation increases the currency risk and repayment burden (interest costs) for firms holding dollar-denominated ECBs, it does not decrease it.
Answer: (a).
Question details
Year
2025
Paper
GS Paper 1
Question
Q61
Subject
Economy
Sub-topic
Fiscal Policy, Taxation & Budget
Type
Statement-based
Difficulty
Medium
Nature
Static
Source hint
NCERT Economy Cl.12 Ch.6
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