1. What is GDP? How GDP is measured in Nepal?
GDP
is defined as the market value of final goods and services that are
produced within the geographical boundary of an economy within a
specified period of time.
Thus,
GDP is always measured at market prices.
Only final goods and services are included.
All output produced within an economy are included whatever the nationality of the producer.
It is measure in a specific time period such as a year.
GDP
can be measured by using production, expenditure as well as income
approaches. However, in underdeveloped countries such as Nepal, reliable
data on expenditures as well as income is very difficult to be
collected. Thus, Nepal uses Gross Value Added Approach (production
approach) to measure GDP. However, after finding the value of GDP,
estimates regarding expenditure as well as income components are also
produced.
Nepal currently uses SNA 2008 methodology to estimate the value of GDP.
2. What is GDP deflator? How is it different from CPI?
GDP
deflator a price index that measures the increases in prices level of
goods and services produced within the economy. It is used to find real
GDP from nominal GDP. When we divide nominal GDP by GDP deflator, we
get real GDP.
The main differences between GDP deflator and CPI are :
CPI
measures the prices of consumer goods and services whereas GDP deflator
keeps tracks of the prices of all goods and services produced within
the economy.
In
CPI, the basket of goods and services whose prices are to be collected
remains fixed whereas there is no basket in case of GDP deflator.
CPI included the prices of imported goods whereas GDP deflator included domestically produced goods and services only.
3. What is used to measure the size of the economy? Why real GDP is not appropriate for this purpose.
The
size of the economy means the sum total of output/income generated
within a specific time period. Since nominal GDP measures the size of
income generated within a period, it is used as the size of the economy.
The size of Nepali economy is Rs.3943 billion.
The
size of the economy included total income or expenditure. Since
increase in prices raises nominal income and expenditure, it is the
nominal GDP that is appropriate for this purpose. Real GDP is free from
the changes in prices and differ according to the choice of base year.
Thus, Real GDP does not work as the correct measure for measuring the
size of the economy.
4.
What is economic growth rate ? How the growth rate measured at basic
prices differs from the growth rate measured at market prices?
Economic
growth rate is the rate of change in real output of the economy. Thus,
it is measured by the rate of change in real GDP not the nominal GDP. It
is because nominal GDP can increase due to increase in prices even if
there is no change in output.
Next
if we value real GDP without including the taxes and subsidies on goods
and services, such growth rate is called growth rate at basic prices.
On the other hand, if we include taxes and subsidies, we call it growth
at market/purchaser's prices. In general, growth rate at market prices
is generally greater than the growth rate measured at basic prices.
5. What is the current structure of GDP in Nepal?
The
structure of the economy can be measured by using the output,
expenditure as well as income shares. Looking from the output
perspective, the share of the agriculture is declining whereas the share
of services sector is gradually increasing. As of 2019/20, the share of
agriculture sector in GVA is 26 percent, the share of industry is 14
percent and the share of services sector is 60 percent.
From
the expenditure perspective, consumption/GDP is 91.1 percent, gross
fixed capital formation/GDP is 31.3 percent and net exports/GDP is -26.9
percent. Whereas from the income approach, the share of compensation to
employees is 39.5 percent, the share of operating surplus is 48.6
percent and the share of share of net taxes on production and imports is
11.9 percent.
6. How are GNI and GNDI calculated?
GNI
or gross national income measures the total income received by the
residents of an economy. It is calculated as GDP + income received by
Nepali factors of production from abroad -income paid to foreign factors
of production by Nepal.
On
the other hand, GNDI or gross national disposable income is the sum
total of income received by Nepal from all sources, it includes the
income produced in the economy plus income as well as all transfers
received from abroad minus income and transfers paid abroad.
GNDI=GDP+Net Factor income from abroad + Net current transfers from abroad.
Thus,
GNDI includes remittances, pensions and grants received from abroad.
As of 2020, the GDP of Nepal is Rs. 3943 billion, GNI is Rs. 3989
billion and GNDI is Rs. 4972 billion.
7. Why remittances are not included in GDP?
Since
GDP includes the value of production carried out within a boundary of
the economy and remittances are received from abroad, they are obviously
not included in GDP. Many people say that remittances contributes
directly to GDP which is misleading. Remittances may help increase
production but not included in GDP directly.
8. What is gross domestic savings ?
Gross
domestic savings is simply the value of GDP minus consumption
expenditure. It compares the value of consumption to what we produce
within our economy. The gross domestic saving as percent of GDP is
around 10 percent in Nepal.
9. What is gross national savings?
Gross
national savings is the difference between gross national disposable
income (GNDI) and consumption expenditure. GNDI includes the sum of all
incomes received by the residents of the economy. It includes the value
GDP plus the sum of income, remittances and other current transfers
received from abroad minus the sum of income, remittances and other
current transfers received by the foreign residents from Nepal. Since
Nepal receives huge amount of remittances, gross national saving is high
around 40 percent even though gross domestic savings is low.
10. What is resource gap?
Resource
gap is the gap between saving and investment. If a country saves less
but needs more resources for investment, resource gap is negative.
Thus, it can be defined to be the difference between gross national
saving ratio and gross capital formation ratio. As of 2020, the gross
national saving ratio of Nepal is 34.9 percent whereas gross capital
formation ratio is 31.3 percent. Thus, resource gap is : 34.9-31.3=3.6
percent. It implies that Nepal has sufficient resources for financing
investment requirements.
11. Why resource gap is equal to the current account?
Resource
gap and current account balance of the BoP essentially measure the same
concept: how much resources does a country need to borrow? It can be
shown by suing the following macroeconomic identity:
GNDI=GDP+Net Factor Income from Abroad +Net current Transfers
GNDI=C+ I+ X-M+ Net Factor Income from Abroad +Net current Transfers
GNDI-C= I+ X-M+ Net Factor Income from Abroad +Net current Transfers
Gross National Savings= I+ X-M+ Net Factor Income from Abroad +Net current Transfers
Gross National Savings-I= X-M+ Net Factor Income from Abroad +Net current Transfers
Gross National Savings-Gross investment = Trade balance + Net Factor Income from Abroad +Net current Transfers
Resource Gap= Current account balance.
12. How inflation is calculated in Nepal?
Official inflation
in Nepal is calculated by using Consumer Price Index. To construct the
index, 496 goods and services have been chosen by the Fifth Household
Budget Survey conducted in 2104/15. Such goods and services carry almost
97 percent of the consumption expenditure done by Nepalese households.
Prices are taken from 60 market centers across the country on a weekly,
fortnightly, monthly and quarterly basis. And Geometric Laspeyres Index
has been used to aggregate the price indices to National CPI.
13. Is inflation always bad for the economy?
No.
Inflation has positive as well as negative impacts. Low and stable
inflation encourages investment and promotes growth whereas high
inflation reduces purchasing power and brings uncertainty. Thus,
inflation up to a certain level has positive impacts and beyond that it
is detrimental to growth. In case of Nepal. studies show that inflation
up to 6 percent has favorable effects on growth and employment in the
economy.
14. What are the main driers of inflation in Nepal?
The
main drivers of inflation in Nepal are demand side factors, imported
inflation from India and supply side issues. Since Nepal has fixed
exchange rate with India and two third trade is with India, any increase
in prices in India is directly imported by Nepal. On the other hand,
Nepal has problems in supply side such as market imperfections (black
marketing, artificial shortages, syndicates), supply disturbances (such
as load shedding, strikes, lockouts, industrial disputes) and
structural issues such as lack of transport, lack of skilled workforce
and lack of advanced technology. Such factors raise the cost of
production and/or the rate of profit resulting into inflation. NRB can
manage the inflationary pressure arising from demand side by managing
liquidity and interest rate but has less control in managing the
imported inflation and inflation originating from the supply side
factors.
15. What is Phillips curve?
Phillips
curve shows the inverse relationship between inflation and
unemployment. It argues that if central bank creates inflation by
increasing money supply in the economy, unemployment rate goes down and
vice versa. This implies that there is a tradeoff between the rate of
inflation and unemployment in the economy.
The
inverse relationship proposed by the Phillips curve has been questioned
by the economists such as Friedman and Lucas. According to Friedman,
the inverse relationship of the Phillips curve exists in the short run
only and in the long run the Phillips becomes vertical implying that
unemployment in the long run cannot be reduced by creating inflation.
16. What is real interest rate?
Real
interest rate is the interest rate adjusted for inflation. It is
defined to as the difference between nominal interest rate and expected
inflation. Real interest rate = nominal interest rate-expected inflation.
17. What is core inflation?
Core
inflation is the inflation that excludes the movements of extremely
volatile prices such as prices of food items, prices of energy drinks
etc. Such inflation is calculated from the CPI by excluding the
commodities with very high volatility. It is thus the true measure of
inflation in the economy.
18. What is money supply?
Money
supply is the total stock of financial assets in an economy that can be
used to carry out the function of money. It includes the currency and
coins at the hands of public and deposits of the public maintained at
the banking system. Deposits include the balances held at current
account, at saving accounts, call accounts, fixed deposit accounts and
margin accounts. Thus,
Money Supply=Currency help by Public(CP)+ Public Deposits maintained at banks (D)
19. What is narrow money supply?Narrow
money supply is the sum of currency held by the public and demand
deposits held at the banking system. In case of Nepal, demand deposits
includes the balances kept at current accounts in the banking system.
Thus, Narrow Money Supply = Currency with Public (CP)+Demand Deposits(DD)
20. What is broad money supply?
Broad
money supply is the sum of currency held by the public and demand
as well as time deposits held at the banking system. In case of Nepal,
demand deposits
includes the balances kept at current accounts in the banking system
and time deposits include the balances maintained at saving, call,
margin as well as fixed deposit accounts.
21. What is intermediate money supply?
Intermediate
money supply is a measure between narrow money supply and broad money
supply in Nepal. It includes the currency held by the public plus
current account deposits plus saving and call deposits. If we add margin
and fixed deposits in this measure, we get broad money supply. It is
denoted by M1+.
22. What is reserve money/high powered money?
Reserve money is
the amount of currency outside the monetary authority that is held by
the public and banking system in the economy. It can be expressed as the
sum of currency with public and reserves kept by the BFIs.
Thus,
Reserve Money = Currency with Public+Reserves Kept by the BFIs.
Reserves include required reserves as well as excess reserves. Thus,
High Powered Money = CP+RR+ER
High
powered money is important for monetary management because the central
banks can control the money supply by controlling the high powered
money.
23. What is money multiplier ?
Money
multiplier is a a number that shows the amount of money supply that can
be created by increasing the amount of base money by one unit. For
instance, the money multiplier in Nepal is around 5. This shows that if
NRB increases the base money /high powered money by Rs. 1 billion, money
supply increases by Rs. 5 billion.
The
value of money multiplier depends on the banking habits of the people,
confidence in the banking system, the required reserve ratio determined
by the central bank as well as the excess ratio to be kept by the BFIs.
If
people like to hols more cash, there will be less deposits and less
credit creation in the banking system and the value of multiplier will
be low.
If required reserve ratio is lowered, banks can lend more as such the multiplier will be higher.
If banks keep more excess reserves, they will lend less as such the value of multiplier will be lower.
24. What
is demand for money? Why is it important for central banks?
Demand
for money is the desire of the public to hold liquid assets such as currency
and bank balances. If people like to hold more in the form of money, demand for
money rises. In such a case, the central bank needs to increase the supply of
money, otherwise interest rate will rise in the market. Thus, to stabilize the interest
by keeping the monetary sector equilibrium, the central bank needs to know the
demand for money.
25. What
arguments are given by different theories of demand for money?
The
classical theory of demand for money argues that demand for money is basically a
medium of exchange and demand for money is determined by the volume of
transactions in the economy. Demand for money is a constant proportion of the
volume of transactions in the economy.
The
neo-classical theory argue that money works as a medium of exchange as well as
a store of value and demand for money is a constant fraction of nominal income
in the economy.
Keynesian
theory argues for three motives for holding money balances: for carrying out
daily transactions (Transaction Motive), for meeting unexpected expenses such
as illness (Precautionary Motive) and for getting benefit by investing in the
stock market (Speculative motive). Transaction as well as precautionary demand
for money positively depends on income level and speculative demand for money inversely
depends on interest rate.
The
Baumol and Tobin approach argues that the transaction demand for money not only
depends on income level but also on the interest rate. It is affected by the
cost in and return from investing in bonds.
The
Tobin's portfolio approach to demand for money argues that people want to
maximize their utility considering the risk and return from bonds. There exists
inverse relationship between demand for money and interest rate.
Freidman's
demand for money argues that demand for money depends on:
i) return from money,
ii) return from alternative forms of
wealth such as bond, equity, physical asset and
iii) human asset and tastes and
preference of the money holders.
The demand for money by McKinnon and
Shaw argues that in underdeveloped market, money and capital are not substitutes
but complements. That is why increase in the demand for money does not reduce
the demand for capital. It argues that demand for money positively demands on
income level, investment rate and the return from holding money.
26. What
determines the growth of money supply by central banks?
Generally,
the supply of money is determined by the growth of demand for money in the
economy. Demand for money, on the other hand, depends on the growth of income
as well as the level of interest rate. For instance, in case of nominal GDP
targeting monetary policy framework, supply of money is basically kept
consistent with the increase in nominal GDP.
27. Is
money supply an exogenous variable?
Though
money supply is arguing to be an exogenous variable within the complete control
of the central bank, it is, in reality, influenced by the behavior of public as
well as the behaviors of BFIs in the economy. That is why it is said to be
jointly determined by central banks, commercial banks as well as public. Thus,
it is both exogenous as well as endogenous variable.
28. How
money supply is managed by the central banks?
The
central banks use tools such as cash reserve ratio, bank rate and open market
operations to manage the level of liquidity as well as money supply in the
market. The open market operations are the most frequently used instruments for
such purpose. For instance, if the central bank feels that there is excess
liquidity in the market, it increases cash reserve ratio and sells government
bonds to the BFIs. There actions reduce the level of liquidity with the banks
and controls their capacity to lend. This action ultimately reduces the supply
of money in the economy.
29. How
money supply statistics are compiled by the central banks?
The
central banks compile the money supply statistics by consolidating the balance
sheets of the central banks as well as other banks and financial institutions
in the economy. There are two sides: In the sources side: the assets of the
banking systems such as foreign assets and loans provided by the banking system
to various sectors are added together to arrive at the money supply statistics.
On the uses side the monetary liability of the central bank and the deposit
liabilities of the banks and financial institutions are added together to
arrive at the money supply statistics.
Thus,
Money
supply= Net foreign Assets (NFA)+ Net Domestic Assets (NDA)..(sources side)
Money
supply = Currency with Public(CP)+ Demand Deposits (DD) + Time Deposits(TD) ……………..(Uses
side)
30. What
is meant by neutrality of money supply in the economy?
Neutrality
of money supply means no role of money supply in determining the real sector
variables such as output and employment. It is an argument that says that money
supply only affects monetary variables such as nominal wage arte and price
level but has no effect on output and employment.
31. What
is meant by IS curve?
IS
curve shows the combinations of income level and interest rate in the
economy that can maintain goods market equilibrium. In other words, it
is the locus of income level and interest rate that can maintain the
equality of aggregate demand and aggregate supply.
32. What
is meant by LM curve?
LM curve shows the combinations of income level and interest rate in the
economy that can maintain money market equilibrium. In other words,
it is the locus of income levels and interest rates that can maintain the
equality of demand for money and supply of money. 33. What is meant by liquidity trap?
Liquidity
trap is a situation during economic crisis when interest rate falls to
the minimum and interest rate cannot be reduced further by increasing
the supply of money by the central bank. In this situation, any attempt
by the central bank to boost the economy by reducing interest rate
through increase in money supply. That is why monetary policy is argued
to be less effective during an economic crisis. 34. What
are the advantages and disadvantages of fixed exchange rate regime?
Advantages:
There
is certainty in trade transactions.
Higher
Indian capital inflows in the form of FDI.
Nepal
has been benefitted from lower inflation in India.
No
arbitraging.
Helps
maintain price stability as RBI follows inflation targeting.
Disadvantages
Nepal
has to tolerate shocks to Indian economy.
Monetary
policy is dependent on India.
The
exchange rate has overvalued due to positive inflation differentials leading to
decline in exports.
We
have to manage the supply of IC by selling USD.
35. What
is real effective exchange rate?
Real
effective exchange rate is the exchange rate between two currencies adjusted
for inflation differentials. It can be measured as: RER=NER*Pf/Pd.
Where,
NER is the nominal exchange rate, pf is the price of foreign country and pd is
the price in domestic country. For example, if USD/NPR is 120 it is called nominal
exchange rate. Suppose CPI indices are 120 for Nepal and 110 for US, then real effective
exchange rate will be: 120*110/120=110. This implies that due to higher
inflation in Nepal, the purchasing power of USD has fallen in real sense.
36. Why
Nepal should continue the pegged exchange rate with India?
Because,
India
is the largest trading partner of Nepal.
Long,
open and porous border with India.
Nepal
has ever increasing trade deficit with India.
India
is rapidly growing economy that provides indirect dividends to Nepal via fixed
exchange rate.
Nepal's
export as well as import market are inelastic.
37. What
is impossible trinity?
Impossible
trinity is a situation where fixed exchange rate, free capital flows and independent
monetary policy cannot be chosen simultaneously. We can choose any two options
from them. The three policy options are:
Fixed
exchange rate and Free capital flow.
Fixed
exchange rate and independent monetary policy.
Free
capital flows and independent monetary policy.
38. What
does the Mundell Fleming Model say for a fixed exchange rate economy like Nepal?
The Mundell
Fleming model argues that if there are free capital flows a country under fixed
exchange rate cannot pursue an independent monetary policy. Suppose that
central bank decided to raise interest rate in domestic economy. This will
invite capital flows and the market will have excess supply of USD. This will
create pressure on the exchange rate and the domestic currency is likely to
appreciate. But the central bank had commitments to keep the exchange rate
fixed. Thus the central bank is compelled to buy USD from market that increases
the supply of domestic currency in the market and reduces the interest rate.
39. What
is pegged exchange rate regime?
A
pegged exchange rate regime is the one in which the exchange rate is managed
within a very narrow band of the preannounced exchange rate with the currency.
The central bank of the country continuously works by influencing the demand
and supply of the currencies to maintain the peg.
40. What
is flexible exchange rate regime?
A flexible
exchange rate regime is the one in which the exchange rate between the currencies
is allowed to float freely in the market. In other words, in such a regime, the
exchange rate is determined freely by the market forces of demand for and
supply of the currencies. The float may be a managed float or an independent
float.
41. How
does the policy effectiveness differ according to the choice of exchange rate
regime?
In a
fixed exchange rate regime monetary policy is least effective whereas fiscal
policy is highly effective. And in flexible
exchange rate both policies are effective but the monetary policy is more
effective than the fiscal policy.
42. What is balance of trade ?
Balance of trade is the difference between exports of goods and services and import of goods and services. If exports is greater than imports, balance of trade is positive.
If exports is smaller than imports, balance of trade is negative.
If exports is equal to imports, there is trade balance.
Merchandise
trade balance shows the difference between the exports and imports of
goods only whereas trade balance includes both goods and services.
43. What is current account balance ?
Current
account balance is the summary of transactions in goods, services,
factors of production and transfers of one country with the rest of the
world. It includes exports and imports of goods and services, factors
income received and paid, tourism income, current transfers such as
remittances, grants and pensions. Thus it shows the total amount
received from abroad minus total amount paid. If
current account is negative, the deficit is to be met by borrowing from
abroad, Thus, deficit in current account indirectly shows the resource
gap in your country.
44. What is BoP ?
Balance
of Payments is the summary of the transaction done between the
residents of a economy with the rest of the world. It covers the
transaction in goods, transactions in services, factor income received
from abroad and paid abroad, remittances
received and paid, foreign grants received, pensions received and paid,
capital transfers as well as investment transactions such as foreign
direct investment, portfolio investment and loan transactions.
45. What
argument does the elasticity approach give for correcting deficit in Balance of
Payments?
The elasticity
approach to BoP argues that devaluation of a currency can improve the deficit
in BoP provided that the import as well as export market are sensitive to the
changes in exchange rate. Specifically, if the sum of export and import market
elasticities is greater than one, devaluation can improve the BoP position.
46. What
argument does the absorption approach give for correcting deficit in Balance of
Payments?
The absorption
approach argues that devaluation of a currency can discourage internal
consumption of goods and can encourage exports thus leading to an improvement
in BoP. Devaluation can create income effect, absorption effect, money illusion
effect and redistribution effect that can work for the improvement of BoP.
47. What
argument does the monetary approach give for correcting deficit in Balance of
Payments?
The monetary
approach argues that BoP is purely a monetary phenomenon and can be corrected
only by using monetary instruments. It argues that deficit in BoP can be
improved by controlling domestic credit creation. Controlling credit reduces
money supply and increases interest rate which invites capital flows, On the
other hand controlling credit controls imports. These work together to improve
the BoP deficit.
48. What is CCD ratio? CCD
stands for credit to capital and deposit ratio. Currently, CCD ratio is
fixed at 85 percent in Nepal. This implies that a bank can lend 85
percent of its deposit and capital to its customers as loans.
49. What is SLR?
SLR
stands for statutory liquidity ratio. It is the percent of deposit that
the bank has to keep in liquid form. It consists of the cash kept as
cash reserve ratio, cash kept at the vault of the banks and amount
invested in government securities. Currently, SLR ratio is 10 percent
for commercial banks, 8 percent for development banks and 7 percent for
finance companies.
50. What is inter-bank rate?
Inter-bank
rate is the interest rate that a bank charges on a loan given to
another bank in the inter-bank market. Such loans are provided by the
banks to other banks for a very short time period.
51. What is SLF ?
SLF
stands for standing liquidity facility. It is the credit facility
provided by the Nepal Rastra Bank to the banks and financial
institutions. Such loans are taken by the banks if they face shortage of
liquidity. In Nepal, the interest rate charged by the NRB on such loans
is 5 percent.
52. What is bank rate?
Bank
rate is the interest rate charged by the Nepal Rastra Bank on the SLF
provided to the banks and financial institutions. When banks are in need
of liquidity, they borrow from the NRB. NRB provides loan to then by
charging bank rate.
53. What is cash reserve ratio?
Cash
Reserve Ratio is the minimum amount of reserve that the banks and
financial institutions should keep at their accounts maintained at Nepal
Rastra Bank.
54. What are open market operations?
Open
market operations refers to the sale and purchase of government
securities by the central bank with the banks and financial
institutions. The main objective of such transactions is to manage
liquidity in the banking system. For instance, if banks have excess
liquidity, the central bank sells government securities to the banks as
such cash of the banks is transferred to the central banks and liquidity
level of the banks comes down. On the opposite case, if there is
shortage of liquidity, central bank buys government securities from the
market as such liquidity is transferred from the central bank to the
banks and financial institutions.
55. What are the main tools of liquidity management?
The main tools used by central banks to manage liquidity are:
Repo and reverse repo operations
Outright purchase and outright sale operations
Standing liquidity facility
Deposit Auctions
56. What is repo facility?
Repo
is a short term credit facility provided by the central bank to banks
and financial institutions. In this facility, when banks are in need of
liquidity for a short time period, they pledge the government securities
with the central bank and avail credit for a short period e.g. one
week. This instrument is used by the Central Bank for short term
liquidity management. The opposite of the repo facility is the reverse
repo facility that is used to mop up liquidity from the banks for a
short time period.
57. What is LTV ratio?
LTV
ratio stands for loan to value ratio. It sets the limit of the bank
loan for buying a fixed asset such as land, house and vehicles or taking
loans. For instance if LTV is 80 percent and you asking the bank to
give loan to buy a car having price Rs. 100 million, the bank can give
you a loan of Rs. 80 million only. This, reducing the LTV ratio reduces
the capacity of the bank to provide loans.
58. What is monetary policy ?
Monetary
policy is a policy at the hands of the central bank that aims at
achieving broad macroeconomic objectives such as price and external
sector stability, financial stability and economic growth. It controls
money supply, credit and interest rate so as to achieve the objectives.
59. What are the major monetary policy instruments?
The main instruments of monetary policy are :
Cash reserve ratio
Bank rate
Open market operations
Credit rationing
Sectoral credit requirements
Direct control of credit
Moral suasion
60. What is fiscal policy?
Fiscal
policy is a policy at the hands of the government that is used to
achieve broad macroeconomic objectives such as economic growth,
employment creation and maintaining stability. It manages government
revenue and government expenditure so as to achieve those objectives.
61. What are the main instruments of fiscal policy?
The main instrument of fiscal policy are:
Government revenue
Government expenditure
Government debt
62.What is money laundering?
Money
laundering is a process of converting illegal money from various
sources appear to have originated from legal sources. Illegal money
mainly comes from tax evasion, smuggling, corruption and others.
63. What is Core Banking Solution(CBS)?
Core
Banking Solution (CBS) is the networking of bank branches, which
enables
customers to operate their accounts, and get banking services from
any
branch of the bank on the banking system network. In this case,
the customer can maintain account in any branch but get same services
from any of the bank branches as his details are maintained in the
centralized system rather than a specific branch.
64. What is Bancassurance?
Bancassurance
is the concept of selling insurance products of insurance companies by
banks. In this case, banks act like agents of insurance companies and
sell their insurance policies. It is practiced in Nepal also.
65. What is Nostro Account?
A
Nostro Account is an account maintained by a Nepali Bank in a bank
abroad. The meaning of 'Nostro' means ours. So, Nostro account refers to
our money deposited in your bank from the perspective of Nepali Bank.
Such accounts are generally maintained in foreign currencies to settle
trade and financial transactions. For example, Nabil Bank may open an
Nostro account in Bank of America in New York.
66. What is Vostro Account?
A
vostro account is an account opened in Nepali banks by foreign banks.
The meaning of Vostro is 'Yours'. Thus, a Vostro Account simple means
'Your money deposited in my our bank'. Such accounts are generally
opened in Nepal by foreign banks but in Nepali currencies. For instance
the Standard Chartered London may open a Vostro account in Nabil Bank
Nepal.
67. What is off-balance sheet exposure of the banks?
Off-balance
sheet exposure items of the banks are the liabilities and assets that
are not included in the balance sheet. Such liabilities are contingent
liabilities such as letter of credit, unused commitments and
derivatives.
68. What is performing loan?
The loan whose repayments are due by three months are called performing loans in Nepal. It consists of pass loans that with no due payments and payments due by maximum one month and watch list loans with payments due from one to three months.
69. What is non-performing loan?
The loans whose repayments are due by more than three months are called non-performing loans in Nepal. It consists of :
Substandard Loans : Due by three to six months
Doubtful Loans : Due by six to twelve months
Bad Loans : Due by more than 12 months
70. What is Multiplier?
Multiplier
shows the increase in income from one unit increase in investment. For
instance if the value of the multiplier is 5, it shows that if we invest
Rs. 100 in the economy, income level would increase by Rs. 500.The
value of the multiplier depends on the propensity to consume ratio.
Higher the propensity to consume, higher the multiplier.
71. What is accelerator?
Accelerator
shows the increase in investment from one unit increase in income. For
instance if the value of accelerator is 0.8, it implies that if income
increase by Rs.100 , investment will increase by Rs. 80.
72. What is Capital Output Ratio?
Capital
output ratio shows the required amount of capital to be invested in
order to increase the level of income/output by one unit. For instance,
if we want to increase GDP by Rs. 1000 and the capital output ratio is
5, it shows that we need an additional investment of Rs. 5000.
73. What is accomodative monetary policy?
It
is a stance of monetary policy which focuses on boosting economic
activities by expanding money supply and reducing interest rate. It is
also called loose stance or dovesh stance of monetary policy.
74. What is ad valeorem tax?
Ad
valorem tax is imposed on the total amount of the commodity. It is
different from the special tax which is levied on per unit of the
commodity. For example if Rs. 1 is imposed on pee litre petrol, it is
special tax whereas if 13 percent VAT is applied on petrol, it is called
ad valorem tax.
75. What is adverse selection problem?
Adverse
selection in economics is a problem where most problematic agents are
attracted. For instance if an insurance company offers health insurance
without any medical examination, people with poor health are likely to
accept it and people with good health are likely to reject it. Such
problem occurs due to asymmetric information: the information about
health is not publicly available to both parties in this case. 76. What are agglomeration economies?
Agglomeration
economies are the economies of scale available to individual firms in
large concentrations of economic activities. When the concentration of
activities increase, the long run average cost falls.
77. What is announcement effect ?
It
is the effect brought by the announcement of the policy even before the
policy is implemented. For example the announcement effect of a spread
rate tightening of the banking sector.
78. What is arbitrage ?
Arbitrage is a process of buying goods at a market where price is lower ad selling at a market where price is higher.
79. What is anti dumping duty?
It
is a tariff imposed on imported commodities to protect the domestic
industries. Such duty raises the prices of imported commodities and
does not let the demand for domestic commodities fall much.
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