UPSC Prelims Economy Trend Analysis: Part 2

1. The terms ‘Marginal Standing Facility Rate’ and ‘Net Demand and Time Liabilities’, sometimes appearing in news, are used in relation to

  1. banking operations
  2. communication networking
  3. military strategies
  4. supply and demand of agricultural product

Simple, from that holy bundle – Economy concepts simplified

2. What is/are the facility/facilities the beneficiaries can get from the services of Business Correspondent (Bank Saathi) in branchless areas?

  1. It enables the beneficiaries to draw their subsidies and social security benefits in their villages.
  2. It enables the beneficiaries in the rural areas to make deposits and withdrawals.

Select the correct answer using the code given below.

  1. 1 only
  2. 2 only
  3. Both 1 and 2
  4. Neither 1 nor 2

Financial inclusion programme, common sense, both the statements talk about the same thing, deposits and withdrawl

Learning – Financial inclusion – Swabhimaan, Swavlamban, Jan Dhan Yojana, Atal Pension, Jivan Jyoti Bima, NPS v/s EPF, small bank, payment bank

3. If the interest rate is decreased in an economy, it will 

  1. decrease the consumption expenditure in the economy
  2. increase the tax collection of the Government
  3. increase the investment expenditure in the economy
  4. increase the total savings in the economy
  • From that holy bundle again
  • Decreased interest rate # low cost of borrowing # more borrowing # more investment # more consumption
  • Decreased rate # less interest # less incentive to deposit your money # less savings

4. In the context of Indian economy which of the following is/are the purpose/purposes of ‘Statutory Reserve Requirements’?

  1. To enable the Central Bank to control the amount of advances the banks can create
  2. To make the people’s deposits with banks safe and liquid
  3. To prevent the commercial banks from making excessive profits
  4. To force the banks to have sufficient vault cash to meet their day-to-day requirements

Select the correct answer using the code given below.

  1. 1 only
  2. 1 and 2 only
  3. 2 and 3 only
  4. 1, 2, 3 and 4
  • From that holy bundle
  • 3 is definitely wrong as to control excess profit, margins would have to be reduced, not CRR, SLR
  • 1 is definitely correct as CRR. SLR is used to control money supply and credit off take
  • 2 may or may not be correct, To make people’s deposit safe, capital adequacy ratio is the norm.
  • UPSC says only 1

6. With reference to Union Budget, which of the following is/are covered under Non-Plan Expenditure?

  1. Defense -expenditure
  2. Interest payments
  3. Salaries and pensions
  4. Subsidies

Select the correct answer using the code given below.

  1. 1 only
  2. 2 and 3 only
  3. 1, 2, 3 and 4
  4. None
  • Covered in titbits, covered in holy bundle
  • Plan expenditure is expenditure according to five year plans i.e development expenditure which is mainly capital expenditure except defense capital as defense capital is not for the developmental expenditure
  • Maintenance expenditure such as wages, pension, interest, military is non plan

Learning – 14th FC on plan- non plan classification, zero based budgeting, gender budget etc

7. The sales tax you pay while purchasing a toothpaste is a

  1. tax imposed by the Central Government.
  2. tax imposed by the Central Government but collected by the State Government
  3. tax imposed by the State Government but collected by the Central Government
  4. tax imposed and collected by the State Government
  • Many such questions have been asked.
  • Sales tax is your state VAT. Centre levies tax on production stage i,e central excise while state levies on consumption i.e sales tax
  • On interstate movement, central sales tax is levied and collected by centre but goes to originating state’s kitty
  • Remember there is no tax which is levied by state but collected by centre or which accrue to centre

Learning – Direct v/s indirect tax, Concept of VAT, octroi,salient provisions of GST and opposition concerns, distribution of tax proceeds, Cess v/s surcharge

8. The main objective of the 12th Five-Year Plan is

  1. inclusive growth and poverty reductions
  2. inclusive and sustainable growth
  3. sustainable and inclusive growth to reduce unemployment
  4. Faster, sustainable and more inclusive growth

Learning – Remember theme of all 5 year plans, shift to heavy industry in 2nd , indicative planning in 8th, emergency during which plan?, emphasis on infrastructure during which plan?, garibi Hatao during which plan? Plan holidays. Just 3 points about every plan

9. What does venture capital mean?

  1. A short-term capital provided to industries
  2. A long-term start-up capital provided to new entrepreneurs
  3. Funds provided to industries at times of incurring losses
  4. Funds provided for replacement and renovation of industries

Venture capital is for startups.

Learning – Venture capital v/s Angel investors, Private Equity, Mutual Fund, alternative investment funds under SEBI, chit funds – regulation <just basic understanding>

10. With reference to Balance of Payments, which of the following constitutes/constitute the Current Account?

  1. Balance of trade
  2. Foreign assets
  3. Balance of invisibles
  4. Special Drawing Right

Select the correct answer using the code given below.

  1. 1 only
  2. 2 and 3
  3. 1 and 3
  4. 1, 2 and 4
  • Asset is capital, eliminate statement 2, you reach the conclusion
  • Again from the holy bundle

11. Which of the following organizations brings out the publication known as ‘World Economic Outlook’?

  1. The International Monetary Fund
  2. The United Nations Development Programme
  3. The World Economic Forum
  4. The World Bank

Reports are very important

Prelims 2013

1. The Reserve Bank of India regulates the commercial banks in matters of 

  1. liquidity of assets
  2. branch expansion
  3. merger of banks
  4. winding-up of banks

Select the correct answer using the codes given below.

(a) 1 and 4 only

(b) 2, 3 and 4 only

(c) 1, 2 and 3 only

(d) 1, 2, 3 and 4

  • Common sense. RBI doe it all.
  • Please remember that in other companies, mergers and acquisitions are regulated by competition commission of India

Learning – Role of RBI and Role of CCI

2. An increase in the Bank Rate generally indicates that the:

(a) market rate of interest is likely to fall

(b) Central Bank is no longer making loans to commercial banks

(c) Central Bank is following an easy money policy

(d) Central Bank is following a tight money policy

  • From the holy bundle
  • Increase CRR # less money to lend # liquidity tightened # raised interest rate # tight money policy
  • c and d are contradictory, one has to be true

3. In India, deficit financing is used for raising resources for 

(a) economic development

(b) redemption of public debt

(c) adjusting the balance of  payments

(d) reducing the foreign debt

  • c and d are useless options, BoP and foreign debt can not be repaid by domestic borrowings
  • Redemption of public debt is by monetizing deficits i.e RBI printing money for he govt # as it’s very inflationary # not followed in India after reforms
  • Govt borrow for economic development

Learning – Deficit financing, monetizing deficit, Treasury Bill v/s bond, State development bond, Commercial paper v/s certificate of deposit

4. Which of the following constitute Capital Account?

  1. Foreign Loans
  2. Foreign Direct Investment
  3. Private Remittances
  4. Portfolio Investment

Select the correct answer using the codes given below.

(a) 1, 2 and 3

(b) 1, 2 and 4

(c) 2, 3 and 4

(d) 1, 3 and 4

  • From the holy bundle
  • Remittances do not create any asset or liability, hence included in current account, eliminate that, we get to the right answer

Learning – Top remittance country order <India, China, Philippines, Mexico, arrange in correct order>, MAx remittance from where, Maximum FDI and FII from which countries and maximum FDI in which sectors

5. Consider the following statements :

  1. Inflation benefits the debtors.
  2. Inflation benefits the bond-holders.

Which of the statements given above is/are correct?

(a) 1 only

(b) 2 only

(c) Both 1 and 2

(d) Neither 1 nor 2

  • From that holy bundle again
  • Debtor is borrower, bond holder is creditor. Obviously both can’t benefit at the same time or be in loss at the same time so c and d are eliminated.
  • As real interest rate is nominal – inflation, inflation means debtor would have t pay less real interest, thus it benefits debtor
  • That’s the reason, savings decline during inflation as Creditors are harmed

6. Disguised unemployment generally means 

(a) large number of people remain unemployed

(b) alternative employment is not available

(c) marginal productivity of labour is zero

(d) productivity of workers is low

  • Disguised means hidden i.e unemployment is hidden i.e people are employed but not actually adding any value i.e marginal productivity is zero
  • For instance, son starts working on the field with father but production remains the same. He is employed but is not adding any extra value

Learning – Employment and Labour force participation of males and females, Frictional unemployment, structural unemployment, Misery index

7. Consider the following liquid assets:

1.Demand deposits with the banks

2.Time deposits with the banks

3.Savings deposits with the banks

4.Currency

The correct sequence of these decreasing order of Liquidity is

(a) 1-4-3-2

(b) 4-3-2-1

(c) 2-3-1-4

(d) 4-1-3-2

  • Liquidity is ease of conversion into cash so obviously currency would be most liquid
  • Time deposit i,e your FD – can not withdraw money without paying penalty so least liquid
  • Only option with 4 at 1st place and 2 at last place

Learning – fiat money, high powered money, broad money, narrow money (M0, M1, M2, M3)

8. In the context of Indian economy,Open Market Operations’ refers to:

(a) borrowing by scheduled banks from the RBI

(b) lending by commercial banks to industry and trade

(c) purchase and sale of government securities by the RBI

(d) None of the above

From the holy bundle

Learning – Market stabilization scheme, sterilization , automatic sterilization Quantitative easing

9. Priority Sector Lending by banks in India constitutes the lending to: 

(a) agriculture

(b) micro and small enterprises

(c) weaker sections

(d) All of the above

  • Simple, can be solved with common sense
  • topic covered in that bundle

Learning – New PSL norms, Urjit, Nachiket Mor recommendations <not important for prelims but name of committee and terms of reference imp.>

10. A rise in general level of prices may be caused by:

  1. an increase in the money supply
  2. a decrease in the aggregate level of output
  3. an increase in the effective demand

Select the correct answer using the codes given below.

(a) 1 only

(b) 1 and 2 only

(c) 2 and 3 only

(d) 1, 2 and 3

  • Again from the bundle
  • Increased demand, decreased supply # apply demand supply principle # price rise
  • Increase money supply # more money chasing same goods # price rise

11. Which one of the following groups of items is included in India’s foreign-exchange reserves?

(a) Foreign-currency assets, Special Drawing Rights (SDRs) and loans from foreign countries

(b) Foreign-currency assets, gold holdings of the RBI and SDRs

(c) Foreign-currency assets, loans from the World Bank and SDRs

(d) Foreign-currency assets, gold holdings of the RBI and loans from the World Bank

Obviously loan can not be counted in reserves. Eliminate that, answer reached

Learning – World bank’s concessional lending, IDA v/s IBRD, Forex reserve of RBI, SDR, IMF quota and governance reform

12. Which one of the following is likely to be the most inflationary in its effect?

(a) Repayment of public debt

(b) Borrowing from the public to finance a budget deficit

(c) Borrowing from banks to finance a budget deficit

(d) Creating new money to finance a budget deficit

  • From that bundle
  • Obviously printing new money or creating new money out of nowhere would be most inflationary as money is increased without any increase in supply

13. Supply of money remaining the same when there is an increase in demand for money, there will be

(a) a fall in the level of prices

(b) an increase in the rate of interest

(c) a decrease in the rate of interest

(d) an increase in the level of income and employment

  • From that holy bundle
  • Increased demand for money # increase price of money # price of money is interest rate
  • b and c are contradictory, one has to be true

14. Economic growth in country X will necessarily have to occur if

(a) there is technical progress in the world economy

(b) there is population growth in X

(c) there is capital formation in X

(d) the volume of trade grows in the world economy

  • c and d are happening in world economy so no necessary effect on country X
  • Population growth may be due to children who would not produce anything so no growth
  • Capital formation is investment, investment leads to growth

15. The national income of a country for a given period is equal to the:

(a) total value of goods and services produced by the nationals

(b) sum of total consumption and investment expenditure

(c) sum of personal income of all individuals

(d) money value of final goods and services produced

  • GDP, GNP covered in the bundle
  • national income is production by nationals , domestic income production inside the country

16. Which of the following grants/ grant direct credit assistance to rural households?

  1. Regional Rural Banks
  2. National Bank for Agriculture and Rural Development
  3. Land Development Banks

Select the correct answer using the codes given below:

(a) 1 and 2 only

(b) 2 only

(c) 1 and 3 only

(d) 1, 2 and 3

NABARD is regulator, financier to Regional rural banks , Obviously no direct credit offtake

Learning – NABARD v/s SIDBI, RRB, Cooperative banks

17. The Reserve Bank of India (RBI) acts as a bankers’ bank. This would imply which of the following?

  1. Other banks retain their deposits with the RBI.
  2. The RBI lends funds to the commercial banks in times of need.
  3. The RBI advises the commercial banks on monetary matters.

Select the correct answer using the codes given below :

(a) 2 and 3 only

(b) 1 and 2 only

(c) 1 and 3 only

(d) 1, 2 and 3

  • RBI does all these things. Similar question on RBI functions asked before
  • Learning – Autonomy of RBI, Monetary Policy Committee, Debt management office, FERA v/s FEMA and Panama papers
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