#TickleYourGreyCells - GS Economics Concepts
If interest #rates in the USA or European Union were to fall, that is likely to induce #RBI to buy dollars.
True or false? Answer in comments with logic...
#ImpossibleTrinity
#tickleyourgreycells - 6
Checkout the news headlines. Do you think #RBI can do anything about supply side inflation?
RBI's MPC could do little in tackling supply side inflation. Interest rate hikes could arrest the demand only. Need government intervention (fiscal policy) to address issues now-
1. Food inflation is high. Open market operations could be done by the FCI but again, it needs to be balanced with the procurement cycle which has not begun yet. Offloading grains now might lead to crash in prices before the procurement. So, expedite procurement and then, offload.
2. Duty cuts in imports that go on to add to CPI basket would help in the short run.
What RBI, SEBI can do is to come out to boost the confidence; assuring investors and businesses amid the SVB and Credit Suisse saga.
mightyraju,DwightSchrute08
mightyraju,prowess
#tickleyourgreycells - 6
Checkout the news headlines. Do you think #RBI can do anything about supply side inflation?
RBI largely controls demand side inflation through quantitative measures like rate-cuts. However, in case of supply side inflation, RBI can use its qualitative tools like moral suasion and credit rationing to divert major credit flow to certain stressed sectors like agriculture, infrastructure etc. to boost supply and maintain confidence of investors & public in general.
The question was: Do you think#RBI can do anything about supply side inflation?
(Since answer involves multiple images, so sharing the instagram post link here as it gives the best user experience)
https://www.instagram.com/p/CqEu_8LByfT/?utm_source=ig_web_button_share_sheet
mightyraju,
#tickleyourgreycells - 7
Look at the news clippings below. Equity markets generally rise with good economic numbers as it means firms’ profits will go up. Why do you think markets are falling here after good employment numbers?
Market are influenced by various factors :-
1) Worry of continued Fed rate hikes - prolonged inflation may push the bank to push rates further higher
2) Higher rates, make yields attractive, so shift of traders to debt market
3) Domino effect on share markets world over (herd mentality of selling)
4) Recent SVB, Credit Suisse crisis ->lack of investor faith due to bank run
mightyraju,gaurav1agrawalmightyraju,Solution to #tickleyourgreycells - 7
The question was: Equity markets generally rise with good economic numbers as it means firms’ profits will go up. Why do you think in the news clippings below, markets are falling here after good employment numbers?
solution 7 employment and stock markets-compressed.pdf
The possible reasoning-
1.Europe is marred by high inflationary pressures due to supply side shocks as a consquence of Ukraine war.
2.Such tax cuts will exacerbate those pressures, thereby leading to further inflation-leading to devalution of the currency-leading to sluggish growth rates and general market scanerio(bond markets, investment scanerio)
Mauraisles,DancingMasterSolution to #tickleyourgreycells - 8
Look at the news clipping below. Why did Liz Truss’ tax cut plan spook the markets so much that she had to resign?
#economics
CuriYash,
During COVID, banks invested in G-Secs as to buttress their reserve capital.
Also, during COVID, the Fed and Central Bank in Europe followed an expansionary monetary policy to keep borrowing costs low and to prevent a recession.
This led to unprecedented levels of inflation, as markets flushed with cheap money.
The central banks now, to curb inflationary pressures began to follow monetary tightening. As interest rates rose, this spooked investors to invest in govt securities.
The rising demand of g-secs, led to increase in their prices and a reduction in their yields. For many banks, holding large investments in G-Secs, this could mark beginning of a financial contagion.
gaurav1agrawal,Solution to #tickleyourgreycells - 9
The question was: Why are banks getting into trouble these days?
#economics #banking #yieldcurve
Instagram link (multiple photos):https://www.instagram.com/p/CqUKY4nPpls/?utm_source=ig_web_copy_link
Banks typically engage in carry trade on the yield curve. Normally longer duration rates are higher than short term rates. This means that the yield curve is upward sloping.
So banks lend for longer duration at higher rates. and finance it by borrowing for a short term at lower rates and earn profits. When the short term borrowing comes up for repayment, they just borrow again for a short term.
The party continued happily until the recent times when due to Fed printing too much money post covid and the Russo-Ukraine war, inflation hit the world with a vengeance. This forced the Fed (and other central banks) to raise the interest rates at breakneck speed.
Now central banks only control short term rates (generally overnight rates) directly. So their actions impact short term rates more than the long term rates. Long term rates are influenced more by inflation expectations. So because of Fed action, the short term rates rose rapidly but the long term rates remained anchored because the inflation expectations remained in control.
And thus the yield curve inverted! This spelled doom for the carry trade. The mother of all trades turned loss making now and banks started bleeding. Naturally the weaker ones are facing the music first.
Inverted yield curve always signals an upcoming recession. The US 2 year-10 year yield curve turned negative to the tune of -1% in March this year! This is why we say there is an inflation - growth tradeoff. This is the pain central banks have to engineer to control #inflation.
CuriYash,Tyrion LannisterTyrion Lannister,Solution to #tickleyourgreycells - 9
The question was: Why are banks getting into trouble these days?
#economics #banking #yieldcurve
Instagram link (multiple photos):https://www.instagram.com/p/CqUKY4nPpls/?utm_source=ig_web_copy_link
Banks typically engage in carry trade on the yield curve. Normally longer duration rates are higher than short term rates. This means that the yield curve is upward sloping.
So banks lend for longer duration at higher rates. and finance it by borrowing for a short term at lower rates and earn profits. When the short term borrowing comes up for repayment, they just borrow again for a short term.
The party continued happily until the recent times when due to Fed printing too much money post covid and the Russo-Ukraine war, inflation hit the world with a vengeance. This forced the Fed (and other central banks) to raise the interest rates at breakneck speed.
Now central banks only control short term rates (generally overnight rates) directly. So their actions impact short term rates more than the long term rates. Long term rates are influenced more by inflation expectations. So because of Fed action, the short term rates rose rapidly but the long term rates remained anchored because the inflation expectations remained in control.
And thus the yield curve inverted! This spelled doom for the carry trade. The mother of all trades turned loss making now and banks started bleeding. Naturally the weaker ones are facing the music first.
Inverted yield curve always signals an upcoming recession. The US 2 year-10 year yield curve turned negative to the tune of -1% in March this year! This is why we say there is an inflation - growth tradeoff. This is the pain central banks have to engineer to control #inflation.
Thank you for the explanation sir
Solution to #tickleyourgreycells - 4
The question was: Inflation indexation of wages (meaning if inflation goes up, wages go up and if inflation goes down, wages go down too by a predefined formula) will lead to demand side inflation or supply side inflation?
was going through pyq and found this ->
2. With reference to the Indian economy, demand-pull inflation can be caused/increased by which of the following?
1. Expansionary policies
2. Fiscal stimulus
3.Inflation-indexing wages
4. Higher purchasing power
5. Rising interest rates
Select the correct answer using the code given below.
a) 1, 2 and 4 only
b) 3, 4 and 5 only
c) 1, 2, 3 and 5 only
d) 1, 2, 3, 4 and 5
There is no need to know about inflation indexing of wages in order to solve this question. But thanks to you, we are well equipped to solve questions related to inflation indexing of wages/push,pull inflation. Grateful.
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