UPSC General Studies Sample Paper General Studies Sample Paper-5

  • question_answer
    Consider the following statements about 'hot money'.                              
    1. This is the fund which is dumped into a country to get the advantage of a favourable interest rate hence brings higher returns.                                                             
    2. This is the fund which is provided by a bank in US at very short notice and at a very high rate interest and for a longer period of repayment.                                          
    3. This is the fund which is pushed into market through Hawala or some other such illegal methods sometimes referred also as black money.                                              
    Which of the statement(s) given above is /are correct?                                  

    A)  Only 1             

    B)  1 and 2            

    C)  Only 3 

    D)  1 and 3     

    Correct Answer: A

    Solution :

    [a] Hot money is a term that is most commonly used in financial markets to refer to the flow of funds (or capital) from one country to another in order to earn a short-term profit on interest rate difference and/or anticipated exchange rate shifts. These speculative capital flows are called 'hot money' because they can move very quickly in and out of markets, potentially leading to market instability.

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