Purchasing Power Parity theory states that exchange rates between currencies adjust to equalize: MCQ with Answer and Explanation

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Purchasing Power Parity theory states that exchange rates between currencies adjust to equalize:

A. government budget deficits

B. interest rates

C. inflation rates only

D. the purchasing power of currencies in terms of goods

Answer: Option D

Solution (By JKSSB Mock Tests)

Purchasing Power Parity says exchange rates adjust so that identical goods cost the same in different currencies.

This question belongs to: Economy GK Economy Set 1

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Question #1

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The 'Fiscal Deficit' in the Union Budget is expressed as a percentage of:

A. Gross Domestic Product

B. revenue receipts

C. total debt

D. total expenditure

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Correct Answer: Option A

Explanation:
Fiscal deficit is conventionally expressed as a percentage of GDP.

This question belongs to: Economy GK Economy Set 1

Question #2

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Which of the following is a feature of the 'Permanent Income' versus 'Current Income' debate in consumption theory?

A. Consumption is completely independent of current income

B. Empirical evidence shows that consumption is more sensitive to current income than pure permanent-income theory predicts

C. The debate has been fully resolved in favour of pure permanent-income theory

D. Only permanent income matters and liquidity constraints are irrelevant

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Correct Answer: Option B

Explanation:
Empirical studies often find 'excess sensitivity' of consumption to current income, suggesting that liquidity constraints, myopia or other factors cause departures from pure permanent-income behaviour.

This question belongs to: Economy GK Economy Set 1

Question #3

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In the context of Indian economy, the term 'Twin Balance Sheet Problem' referred to:

A. Only fiscal and current account deficits

B. Stressed balance sheets of banks and corporates

C. Problems of government and household balance sheets

D. Only external and internal debt

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Correct Answer: Option B

Explanation:
The twin balance sheet problem referred to the simultaneous stress on the balance sheets of banks (rising NPAs) and over-leveraged corporates in India during a particular period.

This question belongs to: Economy GK Economy Set 1

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