Question

State the difference between: (2.5 mark per question)
 -uncertainty and risk.
 -between the interest rate and the exchange rate
 between a supply side shock and a demand side shock
 between a trade deficit and net foreign debt

Answer 1

Interest is the extra cost paid for of borrowing money. Interest rate is charged on loans given or deposits kept in bank.Interest rates impact exchange rate. Exchange rate is value of one currency in terms of another. It is determined by demand and supply of goods and services from a country.

A supply side shock is sudden shift in supply of a particular good or goods. It can be positive or negative. Example-recent fire in Saudi Arabian oil wells shifted supply of crude oil to left and this comes as negative supply shock. Improvement in technology shifts supply right and comes as positive supply shock.

Demand side shocks affect the demand. It can also be positive or negative. A move like demonetisation may create demand side shock and demand can shift to right with increase in income of people.

Trade deficit is caused due to more imports and less exports. Bills for imports exceed receipt from imports. Foreign debt is borrowing from abroad. It is generally taken for some capital building or to run a scheme or for development purpose.

Risk can predicit future outcomes which uncertainty do not. Risks can be measured but uncertainty cannot. Risk can be positive also. Uncertainty is generally related to outcome. risk is to process.