Global Capital Markets and Investment Banking

GLOBAL CAPITAL MARKETS AND INVESTMENT BANKING- Mid Term Exam
Name: Karanupdesh Singh

e-mail: [email protected]
Contact No.: 9569940071
MCQ section
1–c
2-a
3-b
4–b
5–d
6–a
7 –b
8 -a
9 -b
10 –c
11- a
12-c
13-a
14- c
15- d
16-b
17-a
18-a
19-b
20-a
21- b
22-a
23-b
24-
25-b
Part -A:
Ans- A: -
Inflation refers to the rise in price of commodities which are of regular use (say food,
clothing, transport, etc).
It is generally regulated by the central bank. The main element used in regulating the
inflation is monetary policy. Government can exercise wage and price controls to tackle
inflation. It can also implement a contractionary monetary policy to deal with inflation by
reducing the money supply in an economy.
Another tool is to higher the reserve requirement on the money banks are supposed to
keep in hand to cover withdrawals
Reducing money supply is another method to deal with inflation. The method is to reduce
money supply by enacting policies that leads to lowered supply of money.
Ans- B: -
Different ways to tackle inflation are
Theoretically there are some more tools present to do so.
1.Monetary Policy- Interest rates are increased to reduce demand which leads to lower
inflation.
2. Fiscal Policy- Higher rate of taxes could reduce spending, demand and inflationary
pressures.
3. Wage control- controlling wages can aid in reducing inflationary pressures.
Ans C: - Inflation is likely to have a negative effect, on a currency’s value and forex.
Ans D: - It impacts
Borrowings- Rising inflation leads to hiked rate of interest, gradually it declines
Savings- rise in prices and living cost occurred due to inflation leaves reduced savings
Investment-Investments also tends to decline.
Ans E: Impact of inflation on stock market such as equity, bond: Inflation is considered as a
negative trigger for equity markets. The reasons are not far to seek. Higher inflation means
higher cost of living and therefore lower purchasing power. When inflation goes up, people
earn less in real terms and that result in lower returns net of inflation. Secondly, higher
inflation means higher rates of interest and that also impacts the cost of equity
So therefore, people tend to invest less in shares and securities
Impact on gold:
Since there is inflation in a country, due to increase in the prices of gold people will not tend
to buy it due to excessive prices.
Ans F: With rising prices from food to vegetables to petrol, common man like you and me
always remain at the receiving end during high inflation environment. As discussed earlier in
high inflationary environment on one end RBI keeps raising interest rates in an attempt to
control inflation & on other end rising prices pinch common man’s household budget. CPI
(Consumer Price Inflation), the inflation number that impacts common man more than WPI
as it is the measure of price rise at end user level has remained at around 9 to 10% level in
last few months.
Higher inflation, rising interest rates, higher input cost & lowering demand affects corporate
profitability and results in lower production, eventually affecting the economic growth of
the country. If inflation remains at the elevated levels for longer period of time it affects
investors as investment in fixed income instruments end up generating negative real return.
With CPI hovering around 9 to 10% and your investment in Bank F.D., PPF or any other
Postal instruments generate 8 to 9% return, as an investor you end up generating negative
return.
The logical alternative for investor is to explore investment avenue with possible inflation
beating returns like equity & gold. Investing systematically & in a staggered manner help
investors in yielding inflation beating returns.
Ans G:
a. Metals- Overweight
b. Auto- Overweight
c. Banking-Underweight
d. Real estate- Overweight
e. Utilities- Underweight
f. Pharma- Underweight
g. IT Services- Overweight
Ans 2:
A. Jobless Claim rise-When unemployment rates are high and steady, there are

negative impacts on the long-run economic growth. Unemployment wastes
resources, generates redistributive pressures and distortions, increases poverty,
limits labour mobility, and promotes social unrest and conflict.
B. The Consumer Price Index (CPI) is a measure that examines the weighted average of
prices of a basket of consumer goods and services, such as transportation, food, and
medical care. It is calculated by taking price changes for each item in the
predetermined basket of goods and averaging them. Changes in the CPI are used to
assess price changes associated with the cost of living. The CPI is one of the most
frequently used statistics for identifying periods of inflation or deflation. If it
increases inflation tends to rises and vice-versa.
C. If prices of raw material drop, the industrial output and GDP will rise as production
cost will get low and more of goods will be produced.
D. Deflation is a general decline in prices for goods and services, typically associated
with a contraction in the supply of money and credit in the economy. During
deflation, the purchasing power of currency rises over time. Deflation leads to
increase in unemployment, increase in real value of debt, and most crucial it traps
economy in deflationary trap.
E. The gap between income and spending is subsequently closed by government
borrowing, increasing the national debt. An increase in the fiscal deficit, in theory,
can boost a sluggish economy by giving more money to people who can then buy
and invest more.
F. Contractionary monetary policy decreases the money supply in an economy. The
decrease in the money supply is mirrored by an equal decrease in the nominal
output, otherwise known as Gross Domestic Product (GDP). In addition, the decrease
in the money supply will lead to a decrease in consumer spending.
Ans 3:
The economic cycle is the fluctuating state of an economy from periods of economic
expansion and contraction. It is usually measured with the Gross Domestic Product (GDP) of
a country or region. Other economic factors, such as employment rates, consumer
spending, and interest rates, can also be used to determine the stage of the economic cycle.
The economic cycle is also known as the business cycle, and it is the fluctuating state of a
market-based economy. An economy is a term that describes a set of production and
consumption activities that determine how resources ought to be allocated.
In today’s world, virtually every economy is a market-based economy in which the laws of
supply and demand determine prices.
Supply and demand pressures influence the economy through different variables, such as
global economic conditions, trade balances, productivity, inflation rates, interest rates, and
exchange rates. The variables, in aggregate, shape the economy and the state of the
economic cycle.
The economic cycle is a trend of upward and downward movements of GDP that ultimately
determines the overall long-term growth of an economy.
GDP measures the aggregate value of goods and services and is used to depict the overall
wealth of an economy. Higher GDP usually correlates with more well-off citizens.
Stages of the Economic Cycle-
The economic cycle goes through four stages:
1. Expansion
2. Peak
3. Contraction
4. Trough
Once the cycle is complete, it continues from the start again. No definite rule exists in
determining how long each phase lasts; in fact, expansion phases can last many years before
hitting a peak. However, a healthy economy will always go through a contraction phase once
in a while.
During the expansion phase, an economy will experience strong growth, and interest rates
will generally be lower but will begin to increase as the expansion matures. The overall
production level increases, and inflation rates begin to rise as the expansion matures.
The peak is reached when the growth of an economy reaches a plateau or maximum rate. It
is usually characterized by higher inflation that needs to be corrected.
The correction occurs through the contraction phase, wherein the growth of the economy
slows, unemployment rates rise, and inflation tapers off. It continues until the cycle reaches
a trough.
The trough is characterized as a low point in the economy from which it can re-enter an
expansionary phase.
Importance of the Economic Cycle

Every person is a participant in the market-based economy. The defining factor of the
success of a market-based economy is that it essentially makes everyone better off by
producing and consuming more goods and services over time. The GDP of an economy
captures the increased production and consumption levels, and a growing GDP is an
important aspect of a successful economy.
Given that everyone is a participant in the overall economy, it makes sense that everyone is
impacted by the state of the economic cycle. It is usually in everyone’s best interest for the
economy to be in an expansion phase to accumulate more wealth.
Impact of Economic Phases

When the economy is in expansion, businesses generate profits, which leads to hiring more
employees, and more disposable income and spending. It, in turn, leads to more profits for
businesses, and it continues in a virtuous cycle.
When the economy is in contraction, businesses lose profits, which leads to downsizing and
laying off of employees. When employees lose their jobsoff, there is less disposable income
and less consumer spending, which leads to even lower business profits. It continues in a
vicious cycle.
An economy should be in continuous expansion; however, contractions are needed to keep
inflation in check and to make sure the economy does not overheat.
An overheated economy is an economy that has experienced a long period of strong
economic growth but also has begun to reach high levels of inflation. Inflation that is too
high leads to inefficiency within a market-based economy.

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GLOBAL CAPITAL MARKETS AND INVESTMENT BANKING- Mid Term Exam

Name: Karanupdesh Singh

A. Jobless Claim rise-When unemployment rates are high and steady, there are

Importance of the Economic Cycle

Impact of Economic Phases

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