UPSC Prelims Economy Trend Analysis: Part 3

Pre 2012

1. Consider the following specific stages of demographic transition associated with economic development

  1. Low birthrate with low death rate
  2. High birthrate with high death rate
  3. High birthrate with low death rate

Select the correct order of the above stages using the codes given below :

(a) 1, 2, 3

(b) 2, 1, 3

(c) 2, 3, 1

(d) 3, 2, 1

Theory of demographic transition. Anybody can solve with common sense. Low death rate and low birth rate is population stabilization as in developed world  would be later stage and high death rate would obviously be first

Learning – TFR needed to achieve population stabilization, delimitation of constituencies and population stabilization , North India v/s South India difference in TFR

2. To obtain full benefits of demographic dividend, what should India do?

(a) Promoting skill development

(b) Introducing more social security schemes

(c) Reducing infant mortality rate

(d) Privatization of higher education

Question on demographic dividend also asked in 2011. hot topic. Common sense topic

Learning – Demographic dividend, dependency ratio, total factor productivity, CENSUS 2011, sex ratio, child sex ratio etc

3. 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

Functions of RBI asked several times

4. Under which of the following circumstances may ‘capital gains’ arise?

  1. When there is an increase in the sales of a product
  2. When there is a. natural increase in the value of the property owned
  3. When you purchase a painting and there is a growth in its value due to increase in its popularity

Select the correct answer using the codes given below :

(a) 1 only

(b) 2 and 3 only

(c) 2 only

(d) 1, 2 and 3

  • Capital means asset, capital gains means rise in the value of asset.
  • Sale increase is not asset price rise, property value rise is asset value rise, similar is the case with painting

Learning – Capital gains tax and FII, Security transaction tax

5. Which of the following measures would result in an increase in the money supply in the economy?

  1. Purchase of government securities from the public by the Central Bank
  2. Deposit of currency in commercial banks by the public
  3. Borrowing by the government from the Central Bank
  4. Sale of government securities to the public by the Central Bank

Select the correct answer using the codes given below :

(a) 1 only

(b) 2 and 4 only

(c) 1 and 3

(d) 2, 3 and 4

  • From the holy bundle
  • 1 and 3 options are similar, only Public and govt are interchanged so net effect would be the same. Both have to be correct or incorrect simultaneously. RBI by securities # give money to people or govt # more money in the market # money supply increased

6. Which of the following would include Foreign Direct Investment in India?

  1. Subsidiaries of companies in India
  2. Majority foreign equity holding in Indian companies
  3. Companies exclusively financed by foreign companies
  4. Portfolio investment

Select the correct answer using the codes given below :

(a) 1, 2, 3 and 4

(b) 2 and 4 only

(c) 1 and 3 only

(d) 1, 2 and 3 only

  • Obviously portfolio investment is FII or FPI not FDI, eliminate 4
  • Now check 4, majority foreign equity holding means ownership, management in foreign hands, clearly FDI

Learning – FDI v/s FII, Arvind Mayaram committee recommendations, sectors attracting maximum FDI

7. The price of any currency in international market is decided by the

  1. World Bank
  2. demand for goods/services provided by the country concerned
  3. stability of the government of the concerned country
  4. economic potential of the country in question

Which of the statements given above are correct?

(a) 1, 2, 3 and 4

(b) 2 and 3 only

(c) 3 and 4 only

(d) 1 and 4 only

  • From the holy bundle
  • 1 is definitely wrong as prices are market determined
  • 2 is definitely correct as prices depend on demand supply
  • Eliminate 1, include 2, you reach the correct answer

8. The basic aim of Lead Bank Scheme is that:

(a) big banks should try to open offices in each district

(b) there should be stiff competition among the various nationalized banks

(c) individual banks should adopt particular districts for intensive development

(d) all the banks should make intensive efforts to mobilize deposits

Lead means leading a district, 1 bank adopting 1 district

Learning – Local area bank, RRB, NABARD, SIDBI, Cooperative bank

9. In India, in the overall Index of Industrial Production, the Indices of Eight Core Industries have a combined weight of 37-90%. Which of the following are among those Eight Core Industries?

  1. Cement
  2. Fertilizers
  3. Natural gas
  4. Refinery products
  5. Textiles

Select the correct answer using the codes given below :

(a) 1 and 5 only

(b) 2, 3 and 4 only

(c) 1, 2, 3 and 4 only

(d) 1, 2, 3, 4 and 5

  • Question on core sector asked again in 2015
  • Core is huge likely impact on general economic activity as well as other industrial activity
  • Obviously textile can’t be core, it’s finished thing, not used in other activities
  • Remove textile, look at cement, indicates construction, real estate etc.

Learning – IIP, Core sector <both with weightage>, organization publishing IIP and Core sector data <different organizations>, volatility and Reforms in IIP

10. The balance of payments of a country is a systematic record of

(a) all import and transactions of a during a given period normally a year

(b) goods exported from a country during a year

(c) economic transaction between the government of one country to another

(d) capital movements from one country to another

From the holy bundle

Pre 2011

1. India has experienced persistent and high food inflation in the recent past. What could be the reasons?

  1. Due to a gradual switchover to the cultivation of commercial crops, the area under the cultivation of food grains has steadily decreased in the last five years by about 30%.
  2. As a consequence of increasing incomes, the consumption patterns of the people have undergone a significant change.
  3. The food supply chain has structural constraints.

Which of the statements given above are correct?

(a.) 1 and 2 only

(b.) 2 and 3 only

(c.) 1 and 3 only

(d.) 1, 2 and 3

1st is obviously wrong. 2 and 3 are correct

Learning – inflation in food products v/s food articles, Core v/s headline inflation, PDS reform, Shantakumar recommendations

2. In terms of economy, the visit by foreign nationals to witness the XIX Common Wealth Games in India amounted to

(a.) Export

(b.) Import

(c.) Production


Simple, service consumption abroad, India gains forex, tourism is services export <mode 2 as per GATS>

Learning – all 4 modes of GATS

3. Which one of the following statements appropriately describes the “fiscal stimulus”?

(a.) It is a massive investment by the Government in manufacturing sector to ensure the supply of goods to meet the demand surge caused by rapid economic growth

(b.) It is an intense affirmative action of the Government to boost economic activity in the country

(c.) It is Government’s intensive action on financial institutions to ensure disbursement of loans to agriculture and allied sectors to promote greater food production and contain food inflation

(d.) It is an extreme affirmative action by the Government to pursue its policy of financial inclusion

  • From the holy bundle
  • Fiscal stimulus is pump priming the economy to boost growth by increasing the expenditure and slashing the taxes

4. Consider the following actions which the Government can take:

  1. Devaluing the domestic currency
  2. Reduction in the export subsidy
  3. Adopting suitable policies which attract greater FDI and more funds from FIIs.

Which of the above action/actions can help in reducing the current account deficit?

(a.) 1 and 2

(b.) 2 and 3

(c.) 3 only

(d.) 1 and 3

  • From the holy bundle
  • Devaluation makes domestic products cheaper in terms of foreign currency thsu exports increase
  • Reduce export subsidy, exports would obviously decline
  • Eliminate 3

5. A rapid increase in the rate of inflation is sometimes attributed to the “base effect”. What is “base effect”?

(a.) It is the impact of drastic deficiency in supply due to failure of crops

(b.) It is the impact of the surge in demand due to rapid economic growth

(c.) It is the impact of the price levels of previous year on the calculation of inflation rate

(d.)None of the statements (a), (b) and (c) ‘given above is correct in this context

  • From the holy bundle
  • Note that base effect and base year are different

Learning – Base years of CPI, WPI, GDP, IIP

6. Why is the offering of “teaser loans” by commercial banks a cause of economic concern?

  1. The teaser loans are considered to be an aspect of sub-prime lending and banks may be exposed to the risk of defaulters in future.
  2. In India, the teaser loans are mostly given to inexperienced entrepreneurs to set up manufacturing or export units.

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

  • Teaser loan is loan which teases i.e at low rates initially with interest rate rising with time.
  • It was one of the main causes of subprime crisis, given to gullible customers

Learning – Don’t lose too much sleep over this question, This issue was very much in news at that time

7. In the context of Indian economy, consider the following statements :

  1. The growth rate of GDP has steadily increased in the last five years.
  2. The growth rate in per capita income has steadily increased in the last five years.

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

  • Asked in 2015 as well
  • Growth rate is never steady. There was financial crisis in 2008 and growth rate had come down
  • If GDP growth rate is not steady, per capita income growth rate would also not be steady

8. In India, which of the following have the highest share in the disbursement of credit to agriculture and allied activities?

(a.) Commercial Banks

(b.) Cooperative Banks

(c.) Regional Rural Banks

(d.) Microfinance Institutions

Commercial banks dominate credit off take in all the sector and even in them Public sector banks

Learning – RRB, Rural cooperative credit structure, Kisan credit cards

9. Economic growth is usually coupled with

(a.) Deflation

(b.) Inflation

(c.) Stagflation

(d.) Hyperinflation

From the holy bundle

10. The lowering of Bank Rate by the Reserve Bank of India leads to

(a.) More liquidity in the market

(b.) Less liquidity in the market

(c.) No change in the liquidity in the market

(d.) Mobilization of more deposits by commercial banks

From the holy bundle

11. Which one of the following is not a feature of “Value Added Tax”?

(a.) It is a multi-point destination-based system of taxation

(b.) It is a tax levied on value addition at each stage of transaction in the production-distribution chain

(c.) It is a tax on the final consumption of goods or services and must ultimately be borne by the consumer

(d.) It is basically a subject of the Central Government and the State Governments are only a facilitator for its successful implementation

  • VAT is your sales tax, imposed and collected by state govt
  • That tax on buying toothapste wala question was an indirect repeat in 2014

Learning – Concept of GST which is a VAT, Amendment bill, roadblocks

12. A “closed economy” is an economy in which

(a.) the money supply is fully controlled

(b.) deficit financing takes place

(c.) only exports take place

(d.) neither exports nor imports take place

Closed to the world, no trade. India was relatively closed economy before reforms of 1991

Learning – India’s export, import share in world market, major trading partners, top imports and exports, Foreign trade policy

13. Both Foreign Direct Investment (FDI) and Foreign Institutional Investor (FII) are related to investment in a country. Which one of the following statements best represents an important difference between the two?

(a.) FII helps bring better management skills and technology, while FDI only brings in capital

(b.) FII helps in increasing capital availability in general, while FDI only targets specific sectors

(c.) FDI flows only into the secondary market, while FII targets primary market

(d.) FII is considered to be more stable than FDI

  • FDI is invested in specific sector say build a nuclear power plant while FII buy shares in stock market and increse liquidity and capital availability in general
  • 1st statement, FDI brings tech and know how, FDI target primary market, FDI is stable, FII is hot money

14. Microfinance is the provision of financial services to people of low-income groups. This includes both the consumers and the self-employed. The service/services rendered under micro-finance is/are:

  1. Credit facilities
  2. Savings facilities
  3. Insurance facilities
  4. Fund Transfer facilities

Select the correct answer using the codes given below the lists:

(a.) 1 only

(b.) 1 and 4 only

(c.) 2 and 3 only

(d.) 1, 2, 3 and 4

Obviously all

Learning – MFI, small banks payment banks

15. Which of the following can aid in furthering the Government’s objective of inclusive growth?

  1. Promoting Self-Help Groups
  2. Promoting Micro, Small and Medium Enterprises
  3. Implementing the Right to Education Act

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

Obviously all

16. Why is the Government of India disinvesting its equity in the Central Public Sector Enterprises (CPSEs)?

  1. The Government intends to use the revenue earned-from the disinvestment mainly to pay back the external debt.
  2. The Government no longer intends to retain the management control of the CPSEs.

Which of the statements given above is/are correct?

(a.) I only

(b.) 2 only

(c.) Both 1 and 2

(d.) Neither 1 nor 2

  • Divestment money comes in rupees, won’t pay back dollar debt
  • Management control is given up by privatization or strategic sale not divestment

Learning – Divestment v/s privatization, strategic sale, NIF, sectors reserved for public sector, sectors requiring licenses, sectors reserve for MSEs

17. India is regarded as a country with “Demographic Dividend”. This is due to:

(a.) Its high population in the age group below 15 years

(b.) Its high population in the age group of 15-64 years

(c.) Its high population in the age group above 65 years

(d.) Its high total population

Youth bulge, more population in 15 – 64

By Dr V

Doctor by Training | AIIMSONIAN | Factually correct, Politically not so much | Opinionated? Yes!

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