Re-Defining UPSC Preparation UPSC PYQs

Theme wise Previous Year Questions

(13 years IAS, NDA-CDS, CAPF)

Total PYQs - 267

ECONOMY
CSE, NDA ETC. (2011-23)

1
 UPSC Repeats Itself!
Re-Defining UPSC Preparation
20+ PYQs in Prelims 2024

KFG KALAM F O CUS GROUP

An integrated “GS cum CSAT” PYQs Mentorship Program for Notes Making, and to build
Prelims clearing competence for UPSC (CSE) Exam 2025 through 10 Years PYQs.

2400 PYQs (GS+CSAT)

10 Years CSE, CDS, NDA, IES Etc.

UPSC Prelims 2025

Shadow of the Past - PYQ (IAS Prelims)

Shadow of the Past - PYQ (IAS Prelims)
Study With
Ayush Krishna (IFS)
UPSC: (IFS) AIR-06, (CSE) AIR-720
66 BPSC Rank-09, IIT Guwahati
th
 Index Exercise - III – PYQs
No. of Que. on Exp. on
Head/Theme Question Page No. Page No.
Basics
1. Human and social development 21 3-5 5-7
2. Other basic concept in economy 30 7-10 11-14
Fiscal policy & Government & Inflation
3. National income 12 15-16 16-18
4. Budget 13 18-20 20-22
5. Taxation 12 22-24 24-25
6. Five-year plans 6 26 26-27
Monetary policy & Inflation
7. Inflations 17 28-29 30-31
8. RBI & Money policy 29 32-35 35-39
Baking
9. Banking operations 14 40-41 42-43
10. Banking regulations 13 43-45 45-47
11. Digital Economy 11 48-49 49-51
12. Financial inclusion 10 51-53 53-54
Finance & Investment
13. FDI, FII, Bonds, disinvestment 22 55-57 58-63
14. Tools (Money and Capital market) 32 63-66 66-72
External sector
15. Balance of Payment 12 73-74 74-76
16. Currency and Foreign Exchange 13 76-78 78-80
Total - 267

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 1 Basics
Human and social (d) Privatization of higher education
development 4. Consider the following statements: [CSE-2018]
Human capital formation as a concept is better
1. Which of the following can aid in furthering the
explained in terms of a process which enables
Government’s objective of inclusive growth?
1. Individuals of a country to accumulate more
[CSE-2011]
capital.
1. Promoting Self-Help Groups
2. Increasing the knowledge, skill levels and
2. Promoting Micro, Small and Medium
capacities of the people of the country.
Enterprises.
3. Accumulation of tangible wealth.
3. Implementing the Right to Education Act.
4. Accumulation of intangible wealth.
Select the correct answer using the codes given
below: Which of the statements given above is/are correct?

(a) 1 only (b) 1 and 2 only (a) 1 and 2 only (b) 2 only

(c) 2 and 3 only (d) 1, 2 and 3 (c) 2 and 4 only (d) 1, 3 and 4 only

2. Which of the following can be said to be essentially 5. In a given year in India, official poverty lines are
the parts of ‘Inclusive Governance’? [CSE-2012] higher in some states than in others because:
1. Permitting the Non-Banking Financial [CSE-2019]
Companies to do banking. (a) Poverty rates vary from State to State
2. Establishing effective District Planning (b) Price levels vary from State to State
Committees in all the districts. (c) Gross State Product varies from State to State
3. Increasing the government spending on public (d) Quality of public distribution varies from State
health. to State
4. Strengthening the Mid-day Meal Scheme. 6. In the context of any country, which one of the
Select the correct answer using the codes given following would be considered as part of its social
below: capital? [CSE-2019]
(a) 1 and 2 only (b) 3 and 4 only (a) The proportion of literates in the population.
(c) 2, 3 and 4 only (d) 1, 2, 3 and 4 (b) The stock of its buildings, other infrastructure
3. To obtain full benefits of demographic dividend, what and machines.
should India do? [CSE-2013] (c) The size of the population in the working age
(a) Promoting skill development group
(b) Introducing more social security schemes (d) The level of mutual trust and harmony in the
(c) Reducing infant mortality rate society

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7. With reference to the Indian economy after the 1991 (c) A rise in the standard of living of the people due
economic liberalization, consider the a following to the growth of alternative livelihood practices
statements: [CSE-2020] (d) A rise in the gross employment ratio of a country
1. worker productivity (¹ per worker at 2004-05 due to government policies
prices) increased in urban areas while it 12. Which one of the following is an example of a price
decreased in rural areas. floor? [CDS-II-2019]
2. The percentage share of rural areas in the
(a) Minimum Support Price (MSP) for Jowar in
workforce steadily increased.
India
3. In rural areas, the growth in non-farm economy
(b) Subsidy given to farmers to buy fertilizer
increased.
4. The growth rate in rural employment decreased. (c) Price paid by people to buy goods from ration
shops
Which of the statements given above is/are correct?
(d) Maximum Retail Price (MRP) Printed on the
(a) 1 and 2 only (b) 3 and 4 only
covers/packet of goods sold in India
(c) 3 only (d) 1, 2 and 4 only
13. Which one of the following factors is not considered
8. The mismatch in the regional or occupational pattern
in determining the Minimum Support Price (MSP)
of job vacancies and the pattern of worker
in India? [CDS-II-2019]
availability results in: [CDS-I-2021]
(a) Structure unemployment (a) Coast of production
(b) Disguised unemployment (b) Price trends in international and domestic
markets
(c) Altered unemployment
(c) Cost of living index
(d) Cyclical unemployment
9. The natural rate of unemployment hypothesis was (d) Inter-crop price parity
advocated by: [CDS-II-2018] 14. Which one of the following is not a dimension of the
(a) Milton Friedman (b) A. W. Phillips Human Development Index? [CDS-II-2019]
(c) J. M. Keynes (d) R. G. Lipsey (a) A long and healthy life
10. With regard to the cabinet decision in July 2018, the (b) Knowledge
percentage increase in Minimum Support Price (c) Access to banking and other financial provisions
(MSP) is maximum in which one of the following (d) A decent standard of living
crops? [CDS-II-2018]
15. Which one of the following statements with regard
(a) Jowar (Hybrid) (b) Bajra
to the National Food Security Act is not correct?
(c) Maize (d) Soya bean
[CDS-II-2020]
11. What do you mean by ‘Demographic Dividend’?
(a) The Act was enacted in the year 2013.
[CDS-II-2019]
(b) The Act was rolled out in the year 2014.
(a) A rise in the rate of economic growth due to a
higher share of working age people in a (c) The Act legally entitles 67 percent of the
population population to receive highly subsidised food
(b) A rise in the rate of literacy due to development grains.
of educational institutions in different parts of the (d) The Act is not being implemented in all the States/
country Union Territories.

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16. According to UNDP’s Human Development Report 19. Fixation of price levels for wheat and rice by the
– 2020, in which of the HDI components has India Commission for Agriculture Costs and Prices
improved in recent years? [CDS-II-2021] (CACP) is an example of? [CAPF-2020]
1. Life expectancy at birth (a) Administered Price (b) Market Price
2. Expected years of schooling (c) Control Price (d) Support Price
3. GNI per capita
20. Which one of the following statements about
4. Mean years of schooling
production possibility frontier is not correct?
Select the correct answer using the code given be:
[CAPF-2021]
(a) 1 and 2 only (b) 2 and 3 only
(a) The production possibility frontier slopes
(c) 1 and 3 only (d) 1, 2, 3 and 4
downwards to the right as the resources are
17. If you were to browse a table of a recent period
limited.
showing life expectancy at birth for all categories of
rural-urban and male-female divisions for all States (b) The different combinations of various goods and
of India, you are not likely to observe that: services given the available resources and
[CDS-II-2022] technology are denoted by the production
1. Urban life expectancy is higher than the rural possibility frontier.
one. (c) Any point on or inside the production frontier is
2. Male life expectancy is higher than the female attainable under the existing technology and
one. resources.
Select the correct answer using the code given below: (d) On the production possibility frontier, the output
(a) 1 only (b) 2 only of one commodity can be increased without
(c) Both 1 and 2 (d) Neither 1 nor 2 changing the output of another commodity.
18. Which one of the following educational development 21. The price declared by the Government every year
indictors is currently used by United Nations
before the sowing season to provide incentives to
Development Programme (UNDP) to construct
Human Development Index? [CAPF-2020] the farmers is called: [CAPF-2021]
(a) Level of Literacy (a) Buffer price
(b) Gross Enrolment Ratio (b) Issue price
(c) Mean Years of Schooling (c) Minimum support price
(d) Dropout rate (d) Fair sustenance price

Explanation
Q.1 D Q.2 C
 Inclusive growth can be furthered by promoting  Permitting Non-Banking Financial Companies
self-help groups, promoting micro, small and to do banking is not directly linked to inclusive
medium enterprises and implementing the right governance as they do not give loans directly to
to education. the people. However, Establishing effective
District Planning Committees in all the districts,

5
 Increasing the government spending on public Q.8 A
health, and Strengthening the Mid-day Meal  A longer-lasting form of unemployment caused
Scheme affect the masses directly and leads to by fundamental shifts in an economy is called
inclusive growth Structural Unemployment
Q.3 A Q.9 A
 Promoting Skill Development will help India reap  The ‘natural rate of unemployment hypothesis’
its benefits because a skilled younger population was advocated by Milton Friedman.
will help create employment and help increase Q.10 A
the GDP  The registered increase in the MSP has been
the highest in Bajra since 2009-10 (37%)
Q.4 C
Q.11 A
 Human capital formation is explained in terms
 A demographic dividend means the economic
of a process, which enables increasing the
growth potential that can result from shifts in a
knowledge, skill levels and capacities of the
population’s age structure, mainly when the share
people of the country. Also, the accumulation of of the working-age population (15 to 64) is larger
intangible wealth would mean an increase in the than the non-working-age share of the population
skill sets only. (14 and younger, and 65 and older). Hence,
Q.5 B Option 1 is correct.
 The Methodology for estimating poverty at Q.12 A
national and state level vary from State to State  A price floor is the lowest legal price a
because of interstate price differentials for commodity can be sold at. Price floors are used
different commodities. The poverty line is a by the government to prevent prices from being
function of the cost of consumption basket which too low. The minimum Support Price (MSP) for
Jowar in India is the correct option
varies from state to state.
Q.13 C
Q.6 D
 The following factors included in determining
 Social capital refers to connections among MSP are:
individuals – social networks and the norms of 1) Demand and supply
reciprocity and trustworthiness that arise from
2) Cost of production
them i.e. the level of mutual trust and harmony in
the society. 3) Price trends in the market, both domestic
and international
Q.7 B
4) Inter-crop price parity
 Statement 1 is incorrect: Worker productivity 5) Terms of trade between agriculture and non-
has increased in both rural and urban areas (NITI agriculture;
Ayog report). 6) A minimum of 50 per cent as the margin over
 Statement 2 is incorrect: A steady transition the cost of production
to urbanization over the years has led to a decline 7) Implications of MSP on consumers of that
in the rural share of the workforce. product.
 Statement 3 and 4 are correct: The rural share  The Cost of Living Index is not considered when
in the total workforce declined steadily from determining the Minimum Support Price.
76.1 per cent in 1999-00 to 70.9 per cent in Q.14 C
2011-12. Also, the growth rate of rural  The dimensions considered in the Human
employment decreased. Development Index include:

6
 1) A long and healthy life – measured by life Q.19 D
expectancy.  The fixation of price levels for wheat and rice by
2) Access to education – measured by the Commission for Agriculture Costs and Prices
expected years of schooling of children at (CACP) is an example of Support Price
school-entry age and mean years of popularly known as Minimum Support Price
schooling of the adult population. (MSP).
3) A decent standard of living Q.20 D
 The production Possibility Frontier is a curve
 Access to banking and other financial is NOT a
that shows the relation between the productions
factor considered for the Human Development of two commodities in an economy with limited
Index resources.
Q.15 D  As one moves along the curve, it can be
 The National Food Security Act, (NFSA) 2013 observed that when the production of other
is being implemented in all the States/UTs, on products comes into play, that of the first product
an all-India basis. Hence option D is incorrect starts decreasing. (Option 4 is incorrect)
Q.16 C Q.21 C
 Between 1990 and 2019, India’s life expectancy  The minimum support price is the price declared
at birth increased by 11.8 years by the government to insure agricultural
producers against any sharp fall in farm prices.
 India’s GNI per capita increased by about
273.9% between 1990 and 2019
Other basic concept
 Between 1990 and 2019, mean years of
in economy
schooling increased by 3.5 years, and expected
years of schooling increased by 4.5 years.
1. A “closed economy” is an economy in which:
 Hence all options are correct
[CSE-2011]
Q.17 B
(a) The money supply is fully controlled
 Women are expected to live for 70.4 years and
(b) Deficit financing takes place
men for 67.8 years. Hence statement 2 is not
correct. (c) Only exports take place
 Life expectancy at birth increased by 0.3 years (d) Neither exports nor imports take place
for rural India to 68.3 years in 2015-19. 2. Under which of the following circumstances may
 Urban Indians were expected to live up to 73 ‘capital gains’ arise? [CSE-2012]
years. 1. When there is an increase in the sales of the
Q.18 C product.
 United Nations Development Programme 2. When there is a natural increase in the value of
(UNDP) Measured using 3 parameters the property owned.
1) Health – Life expectancy at birth. 3. When you purchase a painting and there is a
2) Education – expected years of schooling growth in its value due to increase in its popularity.
for school-age children and mean years of Select the correct answer using the codes given
schooling in the adult population. below:
3) Income – Gross National Income (GNI) (a) 1 only (b) 2 and 3 only
per capita (PPP)
(c) 2 only (d) 1, 2 and 3

7
3. Economic growth in country X will necessarily have 8. Which one of the following effects of creation of
to occur if: [CSE-2013] black money in India has been the main cause of
(a) There is technical progress in the world economy worry to the Government of India? [CSE-2021]
(b) There is population growth in X (a) Diversion of resources to the purchase of real
estate and investment in luxury housing
(c) There is capital formation in X
(b) Investment in activities and purchase of precious
(d) The volume of trade grows in the world economy
stones, jewellery, gold, etc.
4. Disguised unemployment generally means:
(c) Large donations to political parties and growth
[CSE-2013] of regionalism to the State
(a) Large number ofpeople remain unemployed (d) Loss of revenue Exchequer due to tax evasion
(b) Alternative employment is not available 9. In India, which one of the following compiles
(c) Marginal productivity of labour is zero information on industrial disputes, closures,
(d) Productivity of workers is low. entrenchments and lay-offs in factories employing
5. Despite being a high saving economy, capital worker? [CSE-2022]
formation may not result in significant increase in (a) Central Statistics Office
output due to: [CSE-2018] (b) Department for Promotion of Industry and
(a) Weak administrative machinery Internal Trade
(b) Illiteracy (c) Labour Bureau
(c) High population density (d) National Technical Manpower Information
(d) High capital-output ratio System
6. If you withdraw Rs.1,00,000 in cash from your 10. Which of the following activities constitute real sector
Demand Deposit Account at your bank, the in the economy? [CSE-2022]
immediate effect on aggregate money supply in the 1. Farmers harvesting their crops
economy will be: [CSE-2020] 2. Textile mills converting raw cotton into fabrics
(a) To reduce it by Rs. 1,00,000 3. A commercial bank lending money to a trading
(b) To increase it by Rs. 1,00,000 company
(c) To increase it by more than Rs. 1,00,000 4. A corporate body issuing Rupee Denominated
(d) To leave it unchanged Bonds overseas
7. Consider the following statements: [CSE-2021] Select the correct answer using the code given below:
Other things remaining unchanged, market demand (a) 1 and 2 only (b) 2, 3 and 4 only
for a good might increase if: (c) 1, 3 and 4 only (d) 1, 2, 3 and 4
1. Price of its substitute increases 11. Consider the investments in the following assets:
2. Price of its complement increases [CSE-2023]
3. The good is an inferior good and income of the 1. Brand recognition 2. Inventory
consumers increases 3. Intellectual property 4. Mailing list of clients.
4. Its price falls How many of the above are considered intangible
Which of the above statements are correct? investments?
(a) 1 and 4 only (b) 2, 3 and 4 only (a) Only one (b) Only two
(c) 1, 3 and 4 only (d) 1, 2 and 3 only (c) Only three (d) All four

8
12. In which one of the following groups of zone (a) Horizontal
management (ICZM) Project being implemented as (b) Downward sloping to the right
a pilot investment? [CDS-I-2018] (c) Vertical
(a) Gujarat, Kerala and Goa (d) Upward sloping to the right
(b) Kerala, Karnataka and Andhra Pradesh 17. According to John Maynard Keynes, employment
(c) Gujarat, Odisha and West Bengal depends upon: [CDS-I-2019]
(d) Maharashtra, Andhra Pradesh and Tamil Nadu (a) Aggregate demand (b) Aggregate supply
13. Which one of the following is not an assumption in (c) Effective demand (d) Rate of interest
the law of demand? [CDS-I-2019] 18. Which of the following are considered to be the four
(a) There are no changes in the taste and preferences pillars o human development: [CDS-I-2020]
of consumers.
(a) Equity, inclusion, productivity and empowerment
(b) Income of consumers remains constant.
(b) Equity, productivity, empowerment and
(c) Consumers are affected by demonstration sustainability
effects.
(c) Productivity, gender, inclusion and equity
(d) There are no changes in the price of substitute
(d) Labour, productivity, inclusion and equity
goods.
19. Who among the following formulated the concept
14. Which one of the following statements is not correct?
of poverty as a measurable development indicator
[CDS-I-2019] in the Indian subcontinent? [CDS-I-2022]
(a) When total utility is maximum, marginal utility is (a) Dadabhai Naoroji
zero.
(b) Romesh Chandra Dutt
(b) When total utility is decreasing, marginal utility
(c) V.K.R.V. Rao
is negative
(d) M. Ranade
(c) When total utility is increasing, marginal utility is
positive. 20. Infant mortality ratio of which one of the following
countries is comparable to that of India?
(d) When total utility is maximum, marginal and
average utility are equal to each other. [CDS-I-2022]
15. Consider the following statements about indifference (a) China
corves: [CDS-I-2019] (b) United States of America
1. Indifference curves are convex to the origin (c) Shri Lanka
2. Higher indifference curve represents higher level (d) None of the above
of satisfaction. 21. Which one of the following statements with regard
3. Two indifference curves cut each other. to economic models is not correct?[CDS-II-2019]
Which of the statements given above is/are correct? (a) They involve simplification of complex
(a) 1 only (b) 1 and 2 only processes.
(c) 2 and 3 only (d) 3 only (b) They represent the whole or a part of a theory
16. When some goods or productive factors are (c) They can be expressed only through equations.
completely fixed in amount, regardless of price, the (d) They help in gaining an insight into cause and
supply curve is: [CDS-I-2019] effects.

9
22. The value of the slope of a normal demand curve is: 26. The principal component(s) of Nehru-Mahala nobis
[CDS-II-2019] strategy of economic development was/were:
(a) Positive (b) Negative [NDA & NA-II-2019]
(c) Zero (d) Infinity 1. Restructuring economic dependency on
23. Which one of the following is the opportunity cost metropolitan capitalism into independent
of a chosen activity? [CDS-II-2021] economic development.
(a) Out of pocket cost 2. Transition from semi-feudal agriculture to
capitalist farming.
(b) Out of pocket cost plus cost incurred by the
Government Select the correct answer using the code given below:
(c) Value of all opportunities forgone (a) 1 only (b) 2 only
(d) Value of next best alternative that is given up (c) Both 1 and 2 (d) Neither 1 nor 2
24. Match List I with List II and select the correct answer 27. The activities or services focused on creation,
using the code given below the Lists: [CDS-II-2021] rearrangement and interpretation of new existing
ideas are referred to as: [NDA & NA-II -2022]
List I List II
(Curve) (Indication) (a) Quaternary activities

(a) Lorenz curve 1. Inflation and employment (b) Quinary activities

(b) Phillips curve 2. Tax rates and tax revenue (c) Tertiary activities

(c) Engel curve 3. Inequality in distribution of (d) Secondary activities

income or wealth 28. According to simple Keynesian theory the slope of
(d) Laffer curve 4. Income and proportion of the aggregate consumption curve against income is:
expenditure on food [CAPF-2019]
Code: (a) Positive (b) Negative
A B C D A B C D (c) Zero (d) Infinity
(a) 3 4 1 2 (b) 2 1 4 3 29. Who coined the concept of “Paradox of Thrift”?
(c) 3 1 4 2 (d) 2 4 1 3 [CAPF-2019]
25. Which one of the following statements about a (a) Adam Smith
borrower from a Microfinance Company is not (b) Alfred Marshall
correct? [CDS-II-2022] (c) John Maynard Keynes
(a) The borrower should not have annual income (d) Paul A. Samuelson
beyond a limit.
30. Which one of the following was recognized as
(b) The borrower should not seek loan amount ‘invisible hand’ by Adam Smith? [CAPF-2020]
beyond a limit.
(a) Government
(c) The borrower should not refuse to offer a
(b) Market/Price Mechanism
collateral.
(c) Judiciary
(d) The borrower should not refuse to pay any rate
of interest offered. (d) Legislature

10
 Explanation
Q.1 D capital formation may not result in a significant
 A closed economy is one that has no trading increase in the output.
activity with outside economies. The closed Q.6 D
economy is therefore entirely self-sufficient,  When you draw cash from the bank, it goes to
which means no imports come into the country the currency in hand but it does not change the
and no exports leave the country. value of the money supply. Hence, there will be
Q.2 B no change in the aggregate money supply.
 Any profit or gain that arises from the sale of a Q.7 A
‘capital asset’ is a capital gain.  Demand for a given commodity varies directly
 ‘Capital Gains’ arise when there is a natural with the price of a substitute good.
increase in the value of the property. When you  As consumers’ incomes increase, they tend to
purchase a painting there is a growth in its value decrease their purchases of inferior goods, opting
due to an increase in its popularity. Hence for normal goods or luxury goods instead.
statements 2 and 3 are correct. Hence 3 is incorrect.
Q.3 C  The quantity demanded of a good increases
 The capital formation in any country boosts its when its price falls is that the: lower price
development as investment activities increase increases the real incomes of buyers, enabling
resulting in high production, increase in per- them to buy more.
capita income, employment generation, the  If the price of the complement falls, the quantity
standard of living, poverty reduction, etc. Hence demanded of the other goods will increase.
option 3 is correct. Q.8 D
Q.4 C  The generation of black income has been
 The correct answer is the marginal productivity resulting in a huge loss of revenue to the state
of labour is zero. exchequer due to continuous evasion of taxes
 Disguised Unemployment: It is a phenomenon both from direct and indirect taxes.
wherein more people are employed than actually Q.9 C
needed. It is primarily traced to the agricultural  Statement C is correct: The Labour Bureau
and the unorganised sectors of India. is a government agency responsible for collecting
Q.5 D and analyzing data on various aspects of labor
 Capital Output Ratio (COR) is a measure of the and employment in India. It specifically compiles
percentage increase in capital formation required information on industrial disputes, closures,
to obtain a percentage increase in GDP. The retrenchments, and layoffs in factories employing
capital-output ratio is the relationship between workers. This information is published in the form
investment and resulting output over a period of of the Industrial Disputes, Factories, and
time. If the capital to output ratio is high then Employment Surveys.

11
Q.10 A 3) There are no changes in the price of
 The real sector of the economy deals with the substitute goods.
production side, while the nominal economy 4) There are no changes in the taste and
deals with the financial side. Therefore, Farmers preferences of consumers.
harvesting their crops and Textile mills converting 5) No expectation of a price change in future.
raw cotton into fabrics are parts of the Real 6) There are no changes in the price of
Sector of the Economy. Hence, statements 1 substitute goods.
and 2 are correct.
Q.14 D
 A commercial bank lending money to a trading
company and A corporate body issuing Rupee  Total utility is the overall content a customer
Denominated Bonds overseas are part of the obtains from the consumption of particular goods
financial sector and services. Total utility is the total marginal
utility of all such individual items. Marginal Utility
Q.11 C
is derived from the consumption of an extra unit
 Brand recognition: This is an intangible asset. It of an item. When total utility is maximum,
represents the value associated with a brand, marginal utility is zero. When total utility is
including its reputation and customer perception. decreasing, marginal utility is negative. When total
 Inventory: Inventory is typically considered a utility is increasing, marginal utility is positive.
tangible asset. It includes the goods a company Q.15 B
holds for production, processing, or sale.
 Four features of the Indifference Curve are given
 Intellectual property: This is an intangible asset. below:
Intellectual property includes patents, copyrights,
trademarks, and other intangible creations of the 1) Indifference curves slope downward to the
human intellect. right.
 Mailing list of clients: This is generally considered 2) Indifference curves are convex to the origin.
an intangible asset. A mailing list of clients 3) Indifference curves cannot intersect each
represents a valuable database of customer other.
information and relationships, contributing to the 4) A higher indifference curve represents a
company’s customer base and potential future higher level of satisfaction than a lower
revenue. indifference curve.
Q.12 C Q.16 C
 The Integrated Coastal Zone Management  In the supply curve, X-axis has the quantity of
Program is supported by the World Bank which goods and Y axis has the price. The slope is
aims to build national capacity for the positive. When the quantity is fixed, a point in
implementation of a comprehensive coastal the X-axis is fixed and the Y coordinate varies.
management approach in the country. ICZM Hence the curve would be vertical. Since the
approach in 3 states namely Gujarat, Odisha and quantity does not necessarily start from zero,
West Bengal. there is no curving of the slope.
Q.13 C Q.17 C
 These assumptions maintain the relationship  According to him, the volume of employment in
constant: a country depends on the level of effective
1) The income of consumers remains constant. demand of people for goods and services. Thus,
2) No change in the size and composition of unemployment is attributed to the deficiency of
the population. effective demand.

12
Q.18 B Q.22 B
 Four pillars of development in the process of  The demand curve illustrates the relationship
Human Development are equality, sustainability, between the price and quantity demanded of a
productivity, and empowerment. particular good or service. For the normal curve,
Q.19 A it’s a Negative slope.
 Dadabhai Naoroji in his book, “Poverty and Q.23 D
unBritish Rule in India” made the earliest  Opportunity cost it is defined as the cost of the
estimation of the poverty line. Hence, Option next best alternative foregone. It represents the
1 is correct. sacrifices that people must make due to the
Q.20 D scarcity of resources.
 Globally, the infant mortality rate has decreased Q.24 C
from an estimated rate of 65 deaths per 1000  A Lorenz curve is a graphical representation of
live births in 1990 to 29 deaths per 1000 live the distribution of income or wealth within a
births in 2018. population.
1) The mortality rate in the United States is 5.8  The Phillips curve is an economic theory that
2) The infant mortality rate for China was 5.5 inflation and unemployment have a stable and
deaths per 1,000 live births inverse relationship.
3) Infant mortality rate for Sri Lanka was 5.9  The Engel curve describes how household
deaths per 1,000 live births. expenditure on a particular good or service
4) In India (RGI), the Infant Mortality Rate varies with household income.
(IMR) has reduced from 37 per 1,000 live  The Laffer curve shows the relationship between
births in 2015 to 30 per 1,000 live births in tax rates and total tax revenue.
2019 at National Level. Q.25 C
Q.21 C  Microfinance is a form of financial service that
 An economic model is a simplified description provides small loans and other financial services
of reality, designed to yield hypotheses about to poor and low-income households, hence it is
economic behaviour that can be tested an economic tool designed to promote financial
 There are two broad classes of economic inclusion
models—theoretical and empirical.  Microfinance loans do not require any collateral.
 Theoretical models seek to derive verifiable Hence statement 3 is not correct.
implications about economic behaviour under the Q.26 C
assumption that agents maximize specific  Nehru-Mahalanobis strategy of economic
objectives subject to constraints that are well- development
defined in the model  One important aim was to make India
 In contrast, empirical models aim to verify the independent as quickly as possible of growth of
qualitative predictions of theoretical models and producer goods so that the accumulation of
convert these predictions into precise, numerical capital would not be hampered by difficulties in
outcomes securing supplies of essential producer goods

13
 from other countries. Hence Statement 1 is
correct.
 Emphasis on the transition from semi-feudal
agriculture to capitalist farming. Hence
Statement 2 is correct.
Q.27 B
 Quinary activities are services that focus on the
creation, re-arrangement and interpretation of
new and existing ideas; data interpretation and
the use and evaluation of new technologies.
Q.28. A
 According to simple Keynesian theory, the slope
of the aggregate consumption curve against
income is positive.
 This is because when people have money in their
hands then only they will spend on buying goods
and services.
Q.29 C
 The concept of ‘Paradox of Thrift’ was given
by John Maynard Keynes.
 Paradox of Thrift: This concept talks about the
ill effects of the personal savings of an individual
on the economy.
Q.30 B
 Adam Smith recognized the ‘invisible hand’ of
the Market mechanism. He assumed that an
economy can work well in a free market scenario
where everyone will work for his/her own
interest.

14
 Fiscal policy &
2 Government budgeting
Which of the statements given above is/are correct?
National Income (a) 1 only (b) 2 only
(c) Both 1 and 2 (d) Neither 1 nor 2
1. In the context of Indian economy, consider the
5. Increase in absolute and per capita real GNP do not
following statements: [CSE-2011]
connote a higher level of economic development, if:
1. The growth rate of GDP has steadily increased
[CSE-2018]
in the last five years.
(a) Industrial output fails to keep pace with
2. The growth rate in per capita income has steadily
agricultural output.
increased in the last five years.
(b) Agricultural output fails to keep pace with
Which of the statements given above is/are correct?
industrial output.
(a) 1 only (b) 2 only
(c) Poverty and unemployment increase.
(c) Both 1 and 2 (d) Neither 1 nor 2
(d) Imports grow faster than exports
2. The national income of a country for a given period
6. Which one of the following statements is not correct?
is equal to the: [CSE-2013]
[CDS I-2021]
(a) Total value of goods and services produced by
the nationals (a) Real GDP is calculated by valuing outputs of
different years at common prices.
(b) Sum of total consumption and investment
expenditure (b) Potential GDP is the real GDP that the economy
would produce if its resources were fully
(c) Sum of personal income of all individuals
employed.
(d) Money value of final goods and services
(c) Nominal GPD is calculated by valuing outputs
produced.
of different years at constant prices.
3. With reference to Indian economy, consider the
(d) Real GDP per capita is the ratio of real GDP
following statements: [CSE-2015]
divided by population.
1. The rate of growth of Real Gross Domestic
7. The increase in private investment spending induced
Product has steadily increased in the last decade.
by he increases in Government spending is known
2. The Gross Domestic Product at market prices as: [CDS-I-2021]
(in rupees) has steadily increased in the last
(a) Crowding in (b) Deficit financing
decade.
(c) Crowding out (d) Pumping out
Which of the statements given above is/are correct?
8. The situation where the equilibrium level of real GDP
(a) 1 only (b) 2 only
falls short of potential GDP is known as:
(c) Both 1 and 2 (d) Neither I nor 2
[CDS-I-2021]
4. Consider the following statements: [CSE-2017]
(a) Recessionary gap
1. Tax revenue as a percent of GDP of India has
(b) Inflationary gap
steadily increased in the last decade.
(c) Demand-side inflation
2. Fiscal deficit as a percent of GDP of India has
steadily increased in the last decade. (d) Supply-side inflation

15
9. Which one of the following does not influence (a) NI – Undistributed profits – net interest
quantity demanded for a good? [CDS-I-2022] payments made by households – corporate tax
+ transfer payment to the households from the
(a) Good’s own price
government and firms
(b) Price of a complementary good (b) NI – undistributed profits – corporate tax +
(c) Price of a substitute good transfer payments to the households from the
governments and firns
(d) Prices of inputs into production of the good
(c) Undistributed profits – net interest payment made
10. Which one of the following statements in the context by households + transfer payments to the
of social spending India during 2014-19 (both States households from the government and firms
and the Union Government together) is true? (d) Undistributed profits – net interest payments
made by households – corporate tax
[CDS-II-2021]
12. Which one of the following is NOT correct?
(a) Expenditure on education was 5% of GDP.
[CAPF-2019]
(b) Expenditure on health was 4% of the social (a) The Average Revenue and Marginal Revenue
services as percent of GDP. curves of a perfectly competitive firm are
(c) There was stagnation in the spending on perfectly elastic
education as a percent of GDP. (b) The Marginal Revenue curve of the monopoly
firm is above its Average Revenue curve
(d) Health sector spending amounted to 10% of the
(c) In the long-run, a competitive firm earns only
total expenditure. normal profits
11. In National Income (NI) accounts, Personal Income (d) In equilibrium, the Marginal Cost Curve of the
(PI) is defined as: [CAPF -2018] monopoly firm may be rising, falling or constant

Explanation
Q.1 D  2017- 7.04%
The growth rate of  2018- 6.12%
 GDP- 2016- 8.26%  2019- 4.18%
 2017- 7.04%  2020- -10.29%
 2018- 6.12%  As we can see, it has not been increasing for
 2019- 4.18% five years. Hence, statement 1 is not correct.

 2020- -10.29% Q.2 D

 As we can see, it has not been increasing for  Option A is incorrect: National income includes
five years. Hence, statement 1 is not correct. the value of goods and services produced by all
residents of the country, not just nationals. This
The growth rate of
means it also accounts for the economic activity
 GDP- 2016- 8.26% of foreign nationals residing within the country.

16
  Option B is incorrect: Consumption and Q.5 C
investment expenditures are components of  Economic development also includes human
national income, but they don’t represent the development. There are situations where the
entire picture. National income also includes numbers related to growth like GNP increase
other factors like government spending and net but the employment data and Poverty data might
exports. not change or can decline. This situation is called
 Option C is incorrect: Personal income only jobless growth. This can also happen when
reflects the income earned by individuals, not technology replaces human labour. Such a
the total value of production within the country. situation leads to concentration of wealth in the
National income takes into account the hands of a few increasing inequality in the society
contributions of all factors of production, not just and economy.
labor income.
Q.6 C
 Option D is correct: National income is the
 Option A is correct: Real GDP compares the
money value of final goods and services
total value of goods and services produced in
produced within a country’s borders during a
an economy across different years by eliminating
given period. This includes both domestically
the effect of inflation. This means valuing outputs
produced goods and services as well as those
of different years at constant prices, typically a
produced by foreign residents within the country.
base year price. So, Real GDP indeed uses
Q.3 B common prices (constant prices) to compare
 The rate of growth of Real Gross Domestic outputs across different years.
Product had declined due to the recession in
 Option B is correct: Potential GDP refers to
2008 and other reasons for the next few years
the maximum output an economy could achieve
from 8-9% to 5-6%. Hence statement 1 is
with full employment and efficient resource
incorrect.
allocation, measured in real terms.
 GDP at market prices has always increased year
 Option C is incorrect: Nominal GDP measures
on year since last decade. Though the growth
the total value of goods and services produced
rate declined, it has never become negative.
in an economy at current market prices.
Hence statement 2 is correct.
Therefore, it doesn’t adjust for inflation and
Q.4 D reflects the combined effect of both changes in
 Statement 1 is incorrect: While tax revenue production and price fluctuations.
as a percentage of GDP in India has shown some
 Option D is correct: Real GDP per capita
upward trend in the last decade, it’s not
simply divides real GDP by the population to
necessarily “steadily” increasing. There have
reflect the average productivity or income per
been fluctuations and periods of slower growth
person.
or even decline, depending on economic
conditions and government policies. Q.7 A
 Statement 2 is incorrect: Fiscal deficit as a  Crowding occurs when higher government
percentage of GDP in India hasn’t shown a spending leads to an increase in private sector
consistent rising trend over the past decade. investment. The crowding in effects occurs
There have been periods of both reduction and because higher government spending leads to
increase, influenced by factors like government an increase in economic growth and therefore
spending, economic growth, and revenue encourages firms to invest because there are now
fluctuations. more profitable investment opportunities

17
Q.8 A curves, meaning a small change in price would
 A recessionary gap, or contractionary gap, is a lead to an infinite change in quantity demanded.
macroeconomic term used when a country’s real Consequently, Average Revenue (AR) and
gross domestic product (GDP) is lower than its Marginal Revenue (MR) coincide and are
GDP at full employment. constant at the market price.
Q.9 D  Option B is incorrect: In a monopoly market,
 There is an inverse (negative) relationship the firm faces a downward-sloping demand curve
between the price of a product and the amount and has significant control over price. The MR
of that product consumers are willing and able curve lies below the AR curve because each
to buy. additional unit sold reduces the price charged
 The prices of complementary or substitute goods for all previous units (due to the downward-
also shift the demand curve. sloping demand).
 The other things that change demand include  Option C is correct: Competitive firms in the
tastes and preferences, the composition or size long run earn only normal profits (enough to cover
of the population, the prices of related goods, all costs), due to constant entry and exit from
and even expectations. the market.
 The prices of inputs into production do not affect  Option D is correct: A monopoly firm’s MC
the quantity of a product demanded by the curve in equilibrium can be rising, falling, or
consumer. Hence, Option 4 is correct.
constant, depending on its production costs and
Q.10 C market conditions.
 Overall, India’s public health expenditure (sum
of central and state spending) has remained
between 1.2% to 1.6% of GDP between 2008- Budget
09 and 2019-20. Hence, Statement 4 is not
correct. 1. Which one of the following statements appropriately
 Even as the government promises an increase in describes the “fiscal stimulus”? [CSE-2011]
spending on education, the share of the union
(a) It is a massive investment by the Government in
budget allocated to education fell from 4.14%
in 2014-15 to 3.4% in 2019-20. In the 2019- manufacturing sector to ensure the supply of
20 budget, the share of the union budget goods to meet the demand surge caused by rapid
allocated to education remains at 3.4%. Hence, economic growth.
Statement 1 is not correct and statement 3 (b) It is an intense affirmative action of the
is correct Government to boost economic activity in the
Q.11 A country.
 Personal Income (P.I) = NI – undistributed (c) It is Government’s intensive action on financial
profits – net interest payments made by
institutions to ensure disbursement of loans to
households – corporate tax + transfer payments
agriculture and allied sectors to promote greater
to the households from the government and
firms. food production and contain food inflation.
Q.12 B (d) It is an extreme affirmative action by the
 Option A is correct: In a perfectly competitive Government to pursue its policy of financial
market, firms face perfectly elastic demand inclusion.

18
2. In the Union Budget 2011-12, a full exemption from 3. All the disbursements made from Public Account
the basic customs duty was extended to the bio- also need the authorization from the Parliament
based asphalt (bioashphalt). What is the importance of India.
of this material? [CSE-2011] Which of the statements given above is/are correct?
1. Unlike traditional asphalt, bio-asphalt is not (a) 1 and 2 only (b) 2 and 3 only
based on fossil fuels. (c) 2 only (d) 1, 2 and 3
2. Bioasphalt can be made from nonrenewable 6. There has been a persistent deficit budget year after
resources. year. Which of the following actions can be taken
3. Bioasphalt can be made from organic waste by the government to reduce the deficit?
materials.
[CSE-2015]
4. It is eco-friendly to use bioasphalt for surfacing
1. Reducing revenue expenditure.
of the roads.
2. Introducing new welfare schemes.
Which of the statements given above are correct?
3. Rationalizing subsidies.
(a) 1, 2 and 3 only (b) 1, 3 and 4 only
4. Expanding industries.
(c) 2 and 4 only (d) 1, 2, 3 and 4
Select the correct answer using the code given below:
3. In India, deficit financing is used for raising resources
for: [CSE-2013] (a) 1 and 3 only (b) 2 and 3 only
(a) Economic development (c) 1 only (d) 1, 2, 3 and 4
(b) Redemption of public debt 7. Which of the following is/are included in the capital
budget of the Government of India? [CSE-2016]
(c) Adjusting the balance of payments
1. Expenditure on acquisition of assets like roads,
(d) Reducing the foreign debt
buildings, machinery, etc.
4. With reference to Union Budget, which of the
2. Loans received from foreign governments
following is/are covered under Non-Plan
Expenditure? [CSE-2014] 3. Loans and advances granted to the States and
Union Territories.
1. Defence expenditure
Select the correct answer using the code given below:
2. Interest payments
(a) 1 only (b) 2 and 3 only
3. Salaries and pensions
(c) 1 and 3 only (d) 1, 2 and 3
4. Subsidies
8. There has been a persistent deficit budget year after
Select the correct answer using the code given below:
year. Which action/actions of the following can be
(a) 1 only (b) 2 and 3 only taken by the Government to reduce the deficit?
(c) 1, 2, 3 and 4 (d) None [CSE-2016]
5. With reference to the Union Government, consider 1. Reducing revenue expenditure
the following statements: [CSE-2015]
2. Introducing new welfare schemes
1. The Department of Revenue is responsible for
3. Rationalizing subsidies
the preparation of Union Budget that is presented
to the Parliament. 4. Reducing import duty.
2. No amount can be withdrawn from the Select the correct answer using the code given below:
Consolidated Fund of India without the (a) 1 only (b) 2 and 3 only
authorization from the Parliament of India. (c) 1 and 3 only (d) 1, 2, 3 and 4

19
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9. Along with the Budget, the Finance Minister also 11. The excess of total expenditure of Government over
places other documents before the Parliament which its total receipts, excluding borrowings, is known
include “The Macro Economic Framework as: [CDS-I-2021]
Statement”. The aforesaid document is presented (a) Primary deficit (b) Fiscal deficit
because this is mandated by: [CSE-2020] (c) Current deficit (d) Capital deficit
(a) Long standing parliamentary convention 12. As per the Budget Estimates of 2019-20, the
(b) Article 112 and Article 110(1) of the Constitution following are some of the important source of tax
of India receipts for the Union Government:[CDS-II-2020]
1. Corporation Tax
(c) Article 113 of the Constitution of India
2. Taxes on income other than Corporation Tax
(d) Provisions of the Fiscal Responsibility and
Budget Management Act, 2003 3. Goods and Services Tax
4. Union Excise Duties
10. With reference to the expenditure made by an
organization or a company, which of the following Which one of the following is the correct descending
statements is/are correct? [CSE-2022] order of the foresaid tax receipts as a percentage of
GDP?
1. Acquiring new technology is capital expenditure.
(a) 1, 2, 3 and 4 (b) 1, 3, 2 and 4
2. Debt financing is considered capital expenditure,
(c) 3, 2, 1 and 4 (d) 2, 4, 3 and 1
while equity financing is considered revenue
13. As per the Budget Estimates of expenditure on
expenditure.
major subsidies during 2019-20, the maximum
Select the correct answer using the code given below: expenditure was likely to be on: [CDS-II-2020]
(a) 1 only (b) 2 only (a) Urea subsidy (b) Petroleum subsidy
(c) Both 1 and 2 (d) Neither 1 nor 2 (c) Food subsidy (d) Fertilizer subsidy

Explanation
Q.1 B  Option C is incorrect: While government
 Option A is incorrect: While the government intervention in agriculture and financial institutions
can invest in the manufacturing sector, this can be part of a fiscal stimulus package, it’s not
doesn’t necessarily represent the core purpose the sole definition. The broader aim is to stimulate
of fiscal stimulus. It’s more focused on the overall economy, not just specific sectors.
addressing economic downturns or stimulating  Option D is incorrect: Financial inclusion is a
specific sectors, not just keeping up with long-term policy objective, not a short-term
increased demand. measure like fiscal stimulus. While stimulus can
 Option B is correct: It can involve various indirectly contribute to financial inclusion through
measures like increasing government spending, economic growth, it’s not the primary goal.
reducing taxes, or providing subsidies, but the Q.2 B
overall objective is to stimulate economic growth  Statement 1 is correct: As you mentioned, bio-
and counteract economic slowdowns. asphalt is derived from non-petroleum-based

20
 renewable resources, such as plant oils, lignin,  Statement 3 is incorrect: The Public Account
and cellulose. This makes it a more sustainable is operated by the executive action i.e. payment
alternative to traditional asphalt, which is from this account can be made without
primarily made from fossil fuels. Parliamentary appropriation.
 Statement 2 is incorrect: Bio-asphalt is Q.6 A
actually classified as a renewable resource, so it  Reducing revenue expenditure and Rationalizing
cannot be made from non-renewable resources. subsidies will reduce the deficit. Hence
 Statement 3 is correct: Bio-asphalt can indeed statement 1 and 3 are correct
be made from organic waste materials like  Introducing new welfare schemes will further
agricultural residues, food waste, and even enhance the budget deficit. Hence statement
wastewater sludge. This reduces waste 2 is wrong
generation and promotes resource recovery.  Expanding industries will also increase the budget
 Statement 4 is correct: Using bio-asphalt for deficit as in the short run, it will not add anything
road surfacing contributes to eco-friendliness due to the tax revenues of the government, and thus
to its reduced reliance on fossil fuels and lower will increase the budget deficit. Hence
emissions during production and use. statement 4 is wrong
Additionally, its biodegradability can offer Q.7 D
environmental benefits compared to traditional  Statement 1 is correct: Capital expenditure
asphalt. refers to the funds used by the government to
Q.3 A acquire or upgrade physical assets such as
 Deficit financing is a necessary evil in a welfare infrastructure, buildings, machinery, etc. These
state as the states often fail to generate tax are long-term investments that contribute to the
revenue that is sufficient enough to take care of creation of assets.
the expenditure of the state. The basic intention  Statement 2 is correct: Capital receipts include
behind deficit financing is to provide the loans that the government takes to meet its
necessary impetus to economic growth by expenditure requirements. These loans can be
artificial means. obtained from various sources, including foreign
 Hence option 1 is correct. governments and international financial
Q.4 C institutions.
 Statement 3 is correct: The central government
 All expenditures which are done in the name of
provides loans and advances to the States and
planning were called plan expenditures while the
Union Territories to support their development
rest are placed under non-plan expenditures. The
projects and meet their financial requirements.
government of India has now scrapped the plan
These transactions are part of the capital budget.
and non-plan expenditures in budget exercise
and is replaced by capital and revenue spending Q.8 C
classifications.  Statement 1 is correct: This directly addresses
Q5 C a key driver of the deficit by cutting down on
non-essential government spending.
 Statement 1 is incorrect: The budget is
prepared by the Department of Economic  Statement 2 is incorrect: This would likely
Affairs. increase government expenditure, potentially
worsening the deficit.
 Statement 2 is correct: No money out of this
fund can be appropriated (issued or drawn)  Statement 3 is correct: This involves eliminating
except in accordance with parliamentary law. inefficient subsidies and targeting them more

21
 effectively, which can free up resources and  Statement 4 is incorrect: Capital deficit occurs
reduce the deficit. when the government’s total liabilities exceed the
 Statement 4 is incorrect: This might lead to a total assets.
decrease in government revenue from import Q.12 B
taxes, potentially worsening the deficit.  For every rupee with the government – offer,
Q.9. D 68 paise came from the direct & indirect taxes
while the states’ share of taxes & duties is the
 The Macro-Economic Framework Statement is single-largest expen’e head accounting for 23%
a statement presented to the Parliament at the of the total spending as per the 1019-20 budget.
time of Union Budget under Section 3(5) of the  GST collections contributed 19 paise in every
Fiscal Responsibility and Budget Management rupee revenue collection.
Act, 2003.  The Corporation tax is the single largest source
Q.10 A of the income, contributing 21 paise to each
 Statement 1 is correct: Acquiring new rupee earned.
technology is considered as capital expenditure  The collection from borrowings & other liabilities
as it will generate profit in the future and helps in will be 20 paise whereas income tax will yield
creation of new assets. 16 paise to every rupee collection.
 Statement 2 is incorrect: Debt Financing is  The govt. intends to earn 9 paise from the non-
when a firm raises money for capital by selling tax revenue like disinvestment, 8 paise from the
debt instruments to investors, it is known as debt Union excise duty, 4 paise from the customs and
3 paise from the non-debt capital receipts in
financing. Repayment of loan is an example of
every rupee collection.
capital expenditure.
Q.13 C
 Equity financing is the process of raising capital
 As per the Budget Estimates of the expenditure
through the sale of shares in a company. With
on major subsidies during 2019-20, the
equity financing comes an ownership interest for maximum expenditure was likely to be on food
shareholders. It is an example of non-debt capital subsidies.
receipts.
Q.11 B
 Statement 1 is incorrect: Primary Deficit is Taxation
the difference between the current year’s fiscal
deficit and the interest paid on the borrowings 1. Which one of the following is not a feature of “Value
of the previous year. It indicates the borrowing Added Tax”? [CSE-2011]
requirements of the government, excluding
(a) It is a multi-point destination-based system of
interest.
taxation
 Statement 2 is correct: Fiscal Deficit is the
(b) It is a tax levied on value addition at each stage
difference between the total income of the
government (total taxes and non-debt capital of transaction in the production distribution chain
receipts) and its total expenditure. Hence, (c) It is a tax on the final consumption of goods or
option B is correct. services and must ultimately be borne by the
 Statement 3 is incorrect: Current deficit refers consumer.
to the difference between income from exports (d) It is basically subject of the Central Government
of goods and services and the expenditure on and the State Governments are only a facilitator
imports of goods and services. for its successful implementation.

22
2. A decrease in tax to GDP ratio of a country indicates 2. Non-resident entities that offer advertisement
which of the following? [CSE-2015] services in India can claim a tax credit in their
1. Slowing economic growth rate home country under the “Double Taxation
2. Less equitable distribution of national income. Avoidance Agreements”.
Select the correct answer using the codes given Select the correct answer using the code given below:
below: (a) 1 only (b) 2 only
(a) 1 only (b) 2 only (c) Both 1 and 2 (d) Neither 1 nor 2
(c) Both land 2 (d) Neither 1 nor 2 6. Consider the following items: [CSE-2018]
3. The term ‘Base Erosion and Profit Shifting’ is 1. Cereals grains hulled.
sometimes seen in the news in the context of:
2. Chicken eggs cooked
[CSE-2016]
3. Fish processed and canned
(a) Mining operation by multinational companies in
4. Newspapers containing advertising material.
resource-rich but backward areas.
(b) Curbing of the tax evasion by multinational Which of the above items is/are exempted under
companies. GST (Goods and Services Tax)?
(c) Exploitation of genetic resources of a country (a) 1 only (b) 2 and 3 only
by multinational companies. (c) 1, 2 and 4 only (d) 1, 2, 3 and 4
(d) Lack of consideration of environmental costs in 7. Which among the following steps is most likely to
the planning and implementation of be taken at the time of an economic recession?
developmental projects. [CSE-2021]
4. What is/are the most likely advantages of
(a) Cut in tax rates accompanied by increase in
implementing ‘Goods and Services Tax (GST)’?
interest rate
[CSE-2017]
(b) Increase in expenditure on public projects
1. It will replace multiple taxes collected by multiple
authorities and will thus create a single market in (c) Increase in tax rates accompanied by reduction
India. of interest rate
2. It will drastically reduce the ‘Current Account (d) Reduction of expenditure on public projects
Deficit’ of India and will enable it to increase its 8. Which one of the following canons of taxation was
foreign exchange reserves. not advocated by Adam Smith? [CDS-I-2019]
3. It will enormously increase the growth and size (a) Canon of equality
of economy of India and will enable it to overtake (b) Canon of certainty
China in the near future.
(c) Canon of convenience
Select the correct answer using the code given below:
(d) Canon of fiscal adequacy
(a) 1 only (b) 2 and 3 only
9. Which one of the following items is not covered
(c) 1 and 3 only (d) 1, 2 and 3
under GST? [CDS-I-2022]
5. With reference to India’s decision to levy an
equalization tax of 6% on online advertisement (a) Cosmetics
services offered by non- resident entities, which of (b) Medical grade oxygen
the following statements is/are correct? [CSE-2018] (c) Jewellery
1. It is introduced as a part of the Income Tax Act. (d) Petrol

23
10. The Fourteenth Finance Commission assigned (a) Personal Income – Direct taxes paid by
different weights to the following parameters for households and miscellaneous fees, fines, etc.
distribution of tax proceeds to the States:
(b) Private Income – Saving of Private Corporate
[CDS-II-2018]
Sectors – Corporation Tax
1. Income distance
2. Population (c) Private Income Taxes
3. Demographic changes (d) Total Expenditure of Households – Income Tax
4. Area – Gifts received
Arrange the aforesaid parameters in descending 12. GST is a/an: [CAPF-2022]
order in terms of their weights. (a) Destination-based consumption tax
(a) 1-2-3-4 (b) 1-2-4-3
(b) Origin-based sales tax on transaction
(c) 1-3-2-4 (d) 4-3-2-1
(c) Destination-based sales tax on transaction
11. Which one of the following equals Personal
Disposable Income? [CDS-II-2019] (d) Origin-based tax on sales transaction

Explanation
Q.1 D inequality, it’s not a direct indicator. There could
 VAT, being a ‘tax on sale or purchase of goods be other factors at play, like changes in tax policy
within a State’ is a State Subject by virtue of or tax evasion that contribute to both a lower
Entry 54 of State List of the Seventh Schedule ratio and inequality.
of the Constitution of India. Since VAT/Sales Q.3 B
tax is a State subject, the Central Government  Base erosion and profit shifting (BEPS) is related
has been playing the role of a facilitator for the
to tax avoidance strategies adopted by
successful implementation of VAT. Hence,
companies that exploit gaps and mismatches in
option 4 is not correct.
tax rules to artificially move profits to low or no-
Q.2 A tax locations.
 A tax-to-GDP ratio is a gauge of a nation’s tax
Q.4 A
revenue relative to the size of its economy as
measured by gross domestic product (GDP).  Statement 1 is correct: GST unifies a wide
The tax-to-GDP ratio is a measure of a nation’s range of indirect taxes levied by different central
tax revenue relative to the size of its economy. and state governments into a single tax system.
 Statement 1 is correct: A decrease in the tax- This eliminates cascading effects (taxes on taxes)
to-GDP ratio can indeed indicate a slowing and simplifies tax compliance for businesses.
economic growth rate. This is because when  Statement 2 is incorrect: While GST can
economic activity slows down, tax revenue from potentially boost exports and improve tax
sources like income and consumption taxes also compliance, its direct impact on the Current
declines. As a result, the ratio of tax revenue to Account Deficit (CAD) is difficult to predict.
GDP falls. CAD depends on various factors beyond GST,
 Statement 2 is incorrect: While a decrease in such as global trade patterns, exchange rates,
the tax-to-GDP ratio could be associated with and oil prices.

24
  Statement 3 is incorrect: GST is expected to  Option C is incorrect: Raising taxes during a
contribute to economic growth by reducing recession can further dampen economic activity,
inefficiencies and boosting productivity. while lowering interest rates might not be
However, its impact on overall growth rates effective if businesses and individuals lack
depends on multiple factors. IMF has predicted confidence to invest or borrow.
that ~1-1.5% addition in growth rate.  Option D is incorrect: This can worsen the
Q.5 D recession by reducing government spending,
 Equalisation Levy, as a direct tax, was introduced leading to job losses and decreased aggregate
in India in 2016, with the intention of taxing the demand.
digital transactions. Q.8 D
 Neither 1 nor 2 statements are correct:  In order to guide the taxing authority, Adam
Equalisation Levy was introduced as a separate Smith laid down four principles which are also
legislation under the Finance Bill, not as part of known as the Canons’s of taxation:
the Income Tax Act. Also, since it is not covered 1) Canon of Equality
under the Income Tax Act, non-resident entities
2) Canon of Certainty
cannot claim a tax credit in their home country
under double taxation avoidance agreements. 3) Canon of Convenience
Q.6 C 4) Canon of Economy
 Cooked eggs is exempted from paying GST, Q.9 D
the rate of GST payable on cooked eggs is nil  The Goods and Services Tax (GST) applies to
rate. most goods and services in India, but there are
 Fish, crustaceans, molluscs & other aquatic a few exceptions, including petroleum products
invertebrates in processed, cured or frozen state like petrol, high-speed diesel, aviation turbine
are taxable at 5% rate under GST. fuel, and crude oil.
 Newspapers with or without advertisements are Q.10 B
exempted from GST.  Weightage given to each of the parameters
Q.7 B includes Income Distance (50%), Population
Census 1971 (17.5%), Area (15%),
 Opti7on A is incorrect: This combination
Demographic Change (10%), and Forest Cover
contradicts itself. While cutting taxes might
(7.5%)
stimulate spending, raising interest rates
discourages borrowing and investment, Q.11 A
potentially negating the positive effects of the tax  Personal Disposable Income equals the amount
cut. of money available with the household for saving
 Option B is correct: Increasing expenditure and spending after deduction of all forms of taxes
on public projects is the most suitable option to like the direct tax (Income Tax), and fees, fines,
stimulate economic activity, create jobs, and etc.
inject money into the economy during a Q.12 A
recession. This can involve investments in  GST is a comprehensive, multistage, destination-
infrastructure, social programs, or other areas based tax comprehensive because it has
that generate multiplier effects and benefit the subsumed almost all the indirect taxes except a
overall economy. few state taxes. Hence option 1 is correct.

25
 4. The call for Garibi Hatao was incorporated in:
Five-year plans [NDA&NA-I,II-2020]
(a) Fourth Five Year Plan
1. The main objective of the 12th Five-Year Plan is: (b) Fifth Five Year Plan
[CSE-2014] (c) Sixth Five Year Plan
(a) Inclusive growth and poverty reduction. (d) Seventh Five Year Plan
(b) Inclusive and sustainable growth 5. Match List I with List II and select the correct answer
(c) Sustainable and inclusive growth to reduce using the code given below the Lists:[NDA&NA-
I,II-2020]
unemployment
List I List II
(d) Faster, sustainable and more inclusive growth.
(Major objective) (Five Year Plan)
2. With reference to India’s Five-Year Plans, which of (a) Faster and more 1. First
the following statements is/are correct? inclusive growth
[CSE-2019] (b) Faster, more inclusive 2. Fifth
1. From the Second Five-Year Plan, there was a and sustainable growth
determined thrust towards substitution of basic (c) Correction of 3. Eleventh
and capital good industries. disequilibrium caused
2. The Fourth Five-Year Plan adopted the objective by second World war
of correcting the earlier trend of increased (d) Attaining self-reliance 4. Twelfth
concentration of wealth and economic power. Code:
3. In the Fifth Five-Year Plan, for the first time, the A B C D A B C D
financial sector was included as an integral part (a) 3 1 4 2 (b) 3 4 1 2
of the Plan. (c) 2 4 1 3 (d) 2 1 4 3
Select the correct answer using the code given below: 6. The National Green Tribunal, set up to deal with the
(a) 1 and 2 only (b) 2 only expeditious disposal of cases relating to
environmental protection, was set up under the:
(c) 3 only (d) 1, 2 and 3
[CAPF -2018]
3. The Five-Year Plan was first launched in: (a) 12th Five-Year Plan
[NDA&NA-I,II-2020] (b) 11th Five-Year Plan
(a) China (b) USSR (c) 10th Five-Year Plan
(c) India (d) Bhutan (d) 9th Five-Year Plan

Explanation
Q.1 D Q.2 A
 The Twelfth Five Year Plan lasted from 2012-  The stated objective of the Second five-year plan
2017. It was launched with the objective of was rapid industrialisation with particular
faster, sustainable, and more inclusive growth. emphasis on the development of basic and heavy

26
 industries - aimed at establishing the Socialistic
Pattern of Society. Hence Statement 1 is
Correct.
 The fourth five-year plan emphasised the
reduction of the concentration of incomes, wealth
and economic power to achieve social equality
and justice. Hence Statement 2 is Correct.
Q3 B
 The Five-year plan was obtained from the USSR
(The Union of Soviet Socialist Republics).
Q4 B
 ‘Garibi Hatao’ was the slogan given by Indira
Gandhi at the time of the fifth five-year plan
Q5 B
 The Aim of the 12th five-year plan was- Faster,
Sustainable and More Inclusive Growth
 Main Objectives of the fifth five-year plan are:
The removal of poverty Economic Independence
 Eleventh Five-Year Plan (2007-2012) - The
basic theme of this plan period is “Inclusive
Growth”
 First Five year Plan (1951-56) - Objectives of
rehabilitation of refugees, food self-sufficiency
& control of prices were more or less achieved
Q6 B
 The NGT was created by the National Green
Tribunal Act, 2010, which came into effect on
October 18, 2010.
 The 11th Five-Year Plan period for India spanned
from 2007 to 2012, coinciding with the
establishment of the NGT.

27
 3 Monetary policy & Inflation
2. Deposit of currency in commercial banks by the
Inflation public.
3. Borrowing by the government from the Central
1. Economic growth is usually coupled with: Bank.
[CSE-2011] 4. Sale of government securities to the public by
(a) Deflation (b) Inflation the Central Bank.
(c) Stagflation (d) Hyperinflation Select the correct answer using the codes given
2. India has experienced persistent and high food below:
inflation in the recent past. What could be the (a) 1 only (b) 2 and 4 only
reasons? [CSE-2011] (c) 1 and 3 (d) 2, 3 and 4
1. Due to a gradual switchover to the cultivation of
5. Consider the following statements: [CSE-2013]
commercial crops, the area under the cultivation
of food grains has steadily decreased in the last 1. Inflation benefits the debtors.
five years by about 30%. 2. Inflation benefits the bond-holders.
2. As a consequence of increasing incomes, the Which of the statements given above is/are correct?
consumption patterns of the people have (a) 1 only (b) 2 only
undergone a significant change. (c) Both 1 and 2 (d) Neither 1 nor 2
3. The food supply chain has structural constraints. 6. A rise in general level of prices may be caused by:
Which of the statements given above are correct?
[CSE-2013]
(a) 1 and 2 only (b) 2 and 3 only
1. An increase in the money supply.
(c) 1 and 3 only (d) 1, 2 and 3
2. A decrease in the aggregate level of output.
3. A rapid increase in the rate of inflation is sometimes
3. An increase in the effective demand.
attributed to the “base effect”. What is “base effect”?
Select the correct answer using the codes given
[CSE-2011]
below
(a) It is the impact of drastic deficiency in supply
due to failure of crops. (a) 1 only (b) 1 and 2 only
(b) It is the impact of the surge in demand due to (c) 2 and 3 only (d) 1, 2 and 3
rapid economic growth. 7. With reference to inflation in India, which of the
(c) It is the impact of the price levels of previous following statements is correct? [CSE-2015]
year on the calculation of inflation rate. (a) Controlling the inflation in India is the
(d) None of the statements (a), (b) and (c) given responsibility of the Government of India only.
above is correct in this context . (b) The Reserve Bank of India has no role in
4. Which of the following measures would result in an controlling the inflation.
increase in the money supply in the economy? (c) Decreased money circulation helps in controlling
[CSE-2012] the inflation.
1. Purchase of government securities from the (d) Increased money circulation helps in controlling
public by the Central Bank. the inflation.

28
8. With reference to Indian economy, demand-pull 12. In economics, if a diagram has a line passing through
inflation can be caused/ increased by which of the the origin and has 45° angle that along the line X=Y,
following? [CSE-2021] what is tacitly assumed? [CDS-I-2020]
1. Expansionary policies (a) Both variables are pure numbers.
2. Fiscal stimulus (b) Both variables are in the same unit.
3. Inflation-indexing wages (c) Both variables are in different units.
4. Higher purchasing power (d) At least one variable is a pure number.
5. Rising interest rates 13. The situation in an economy which is growing slowly
Select the correct answer using the code given below: along with rapid inflation (rising price level) is called:
(a) 1, 2 and 4 only (b) 3, 4 and 5 only [CDS-I-2021]
(c) 1, 2, 3 and 5 only (d) 1, 2, 3, 4 and 5 (a) Stagnation (b) Deflation
9. Which one of the following is likely to be the most (c) Stagflation (d) Recession
inflationary in its effect? [CSE-2013 & 2021] 14. Gini Coefficient of Gini Ratio can be associated with
(a) Repayment of public debt. which one of the following measurements in an
(b) Borrowing from the public to finance a budget economy? [CDS-II-2019]
deficit. (a) Rate of inflation (b) Poverty index
(c) Borrowings from banks to finance a budget (c) Income inequality (d) Personal income
deficit. 15. What is the real interest rate on a Credit Card loan
(d) Creating new money to finance a budget deficit. bearing 24% interest per year, if the rate of inflation
10. ‘Sub-prime crisis’ is a term associated with which is 10%? [CAPF-2019]
one of the following events? [CDS-I-2019] (a) 2.4 (b) 0.34
(a) Economic recession (c) 0.14 (d) 0.04
(b) Political recession 16. Which of the following goods are included to estimate
(c) Structural adjustment programmes food inflation in India? [CAPF-2020]

(d) Growing social inequality 1. Wheat 2. Paddy

11. Consider the following statements: [CDS-I-2019] 3. Tobacco 4. Sugar

1. Inflation in India continued to be moderate during Select the correct answer using the code given below:
2017-18 (a) 1, 2 and 3 only (b) 2, 3 and 4 only
2. There was significant reduction in food inflation, (c) 1, 3 and 4 only (d) 1, 2 and 4 only
particularly pulses and vegetables during the 17. The amount by which the equilibrium level of real
period. GDP exceeds the full employment level of GDP is
Which of the statements given above is/are correct? called: [CAPF-2021]
(a) 1 only (b) 2 only (a) Recessionary gap (b) Inflationary gap
(c) Both 1 and 2 (d) Neither 1 nor 2 (c) Income multiplier (d) Automatic stabilizer

29
 Explanation
Q.1 B of more money in the market. Hence statement
 Economic growth results in higher disposable 1 is correct.
income available with the consumer which  Deposit of currency in commercial banks by the
increases the overall demand along with the public does not increase instead decreases the
supply available for the consumers. This increase supply of money in the market. Hence
in demand spurs inflation, which eventually statement 2 is not correct.
becomes a necessary evil for a growing  Borrowing by the government from the Central
economy. Bank led to the release of money to the Central
Q.2 B Bank which eventually releases money in the
market via loans etc. Hence statement 3 is
 Statement 1 is incorrect: While there has been correct.
some shift towards commercial crops like
sugarcane and vegetables, it isn’t significant  The sale of government securities to the public
by the Central Bank leads to reduce the money
enough to cause a 30% decrease in food grain
supply in the market. Hence statement 4 is
cultivation. This is an extreme statement.
not correct.
 Statement 2 is correct: Rising income and
Q5 A
diversification of diets raising the demand for
high-value food products, and thereby adding  Statement 1 is correct: When inflation occurs,
to inflationary pressures. Demand is found to the value of money decreases over time. This
persistently outstrip supply in the case of pulses, means that the real value of debt (the amount of
goods and services it can buy) also decreases.
meat and fish, and in recent years in the case of
As a result, debtors benefit because they can
milk and vegetables. Overall, an additional gap
repay their loans with money that is worth less
of 1 million tonnes in demand relative to supply
than when they borrowed it.
would result in food prices increasing by 0.3%
to 1.1% annually.  Statement 2 is incorrect: Bond-holders
typically receive a fixed interest rate on their
 Statement 3 is correct: Supply-side and investments. When inflation occurs, the
external factors affecting food inflation. Fuel and purchasing power of this fixed interest rate
agricultural wage inflation and international food decreases. This means that bond-holders actually
price surge. lose out because their income can buy fewer
Q.3 C goods and services over time.
 The base effect relates to inflation in the Q6 D
corresponding period of the previous year, if the  The increase in the general level of prices may
inflation rate was too low in the corresponding be caused by many factors like an increase in
period of the previous year, even a smaller rise the money supply, a decrease in the aggregate
in the Price Index will arithmetically give a high level of output, an increase in the effective
rate of inflation now demand, an increase in income, the rapid growth
Q4 C of population, etc.
 When the RBI wants to increase the money Q7 C
supply in the economy, it purchases government  Inflation refers to the general increase in the prices
securities from the market which led to the flow of goods and services in an economy over a

30
 period of time. If the money supply increases Q11 C
than the economy’s ability to produce goods and  According to the Survey, inflation in the country
services, then inflation will also increase. During continued to moderate during 2017-18 with the
the high inflation period, the government can CPI based headline inflation averaging 3.3 per
reduce the spending to decrease the money
cent during the period — the lowest in the last
circulation in the country. Therefore, decreased
six financial years Retail inflation fell to a record
money circulation helps in controlling inflation.
low of 2.18% in May as prices of kitchen staples
Q8 A like vegetables and pulses declined sharply
 Statement 1 is correct: Expansionary policies although there was a marginal spike in fruit rates.
lead to more economic activity via low-interest
Q12 B
rates, more money with the public etc.
 If a diagram has a line passing through the origin
 Statement 2 is correct: Increased government
spending or tax cuts injects more money into and has a 45° angle with either axis and it is
the economy, similar to expansionary policies, asserted that along the line X = Y, then both
raising demand and potentially exceeding supply variables are in the same unit.
 Statement 4 is correct: Higher purchasing Q13 C
Power - When consumers feel confident, they  Stagflation is characterized by slow economic
spend more and take on more debt. This leads growth and relatively high unemployment or
to a steady increase in demand, which means economic stagnation which is at the same time
higher prices. accompanied by rising prices (i.e. inflation).
 Statement 3 is incorrect: Inflation-indexing Q14 C
wages: While this aligns wages with inflation, it
 Gini Coefficient is a measure of the income
doesn’t necessarily increase overall demand and
inequality in a country or between countries.
is more of a response to existing inflation
Q15 C
 Statement 5 is incorrect: The rising interest
rate - It decreases the money supply in the  Real interest rate is calculated using the formula:
economy. This may result in a credit crunch in Real interest rate = Nominal interest rate –
the economy. It is costlier to borrow money in Inflation (Given: Nominal interest rate = 24%;
the economy and it leads to a decreased money Inflation = 10%) = 24% – 10% = 14%.
supply. So, it cannot cause demand-pull inflation Q16 D
in the economy.
 Food items are included to indicate inflation in
Q9 D the economy. Food accounts for about 46% of
 When a government or central bank creates new India’s CPI, making it the highest among
money to finance a budget deficit, it increases inflation-targeting countries.
the money supply in the economy. If the supply
 Most food items, namely, cereals, pulses, milk,
of money grows more rapidly than the supply of
fruits and vegetables, meat-fish eggs (MFE) and
goods and services, it can lead to an increase in
sugar etc. are included in it
overall prices, causing inflation.
Q10 A Q17 B
 The sub-prime crisis was an economic situation  An inflationary gap measures the difference
started in 2008 that had severely affected the between the current real GDP and the potential
mortgage industry after the borrowers could not GDP where an economy operates at full
able to afford the repayment of loan they had employment. The current real GDP is higher than
been approved. the potential GDP for the gap to be inflationary.

31
 5. An increase in the Bank Rate generally indicates that
RBI & Monetary policy the: [CSE-2013]
(a) Market rate of interest is likely to fall.
1. The lowering of Bank Rate by the Reserve Bank of (b) Central Bank is no longer making loans to
India leads to: [CSE-2011] commercial banks.
(a) More liquidity in the market (c) Central Bank is following an easy money policy.
(b) Less liquidity in the market (d) Central Bank is following a tight money policy.
(c) No change in the liquidity in the market 6. The terms ‘Marginal Standing Facility Rate’ and Net
(d) Mobilization of more deposits by commercial Demand and Time Liabilities’, sometimes appearing
banks. in news, are used in relation to: [CSE-2014]
2. The Reserve Bank of India (RBI) acts as a bankers’ (a) Banking operations
bank. This would imply which of the following? (b) Communications networking
[CSE-2012] (c) Military strategies
1. Other banks retain their deposits with the RBI. (d) Supply and demand of agricultural products.
2. The RBI lends funds to the commercial banks in 7. In the context of Indian economy which of the
times of need. following is/are the purpose/purposes of ‘Statutory
3. The RBI advises the commercial banks on Reserve Requirements’? [CSE-2014]
monetary matters. 1. To enable the Central Bank to control the amount
Select the correct answer using the codes given of advances the banks can create.
below: 2. To make the people’s deposits with banks safe
(a) 2 and 3 only (b) 1 and 2 only and liquid.
(c) 1 and 3 only (d) 1, 2 and 3 3. To prevent the commercial banks from making
3. In the context of Indian economy, ‘Open Market excessive profits.
Operations’ refers to : [CSE-2013] 4. To force the banks to have sufficient vault cash
(a) Borrowing by scheduled banks from the RBI. to meet their day-to-day requirements.
(b) Lending by commercial banks to industry and Select the correct answer using the code given below.
trade. (a) 1 only (b) 1 and 2 only
(c) Purchase and sale of government securities by (c) 2 and 3 only (d) 1, 2, 3 and 4
the RBI. 8. With reference to Indian economy, consider the
(d) None of the above. following: [CSE-2015]
4. The Reserve Bank of India regulates the commercial 1. Bank rate
banks in matters of: [CSE-2013] 2. Open market operations
1. liquidity of assets 2. branch expansion 3. Public debt
3. merger of banks 4. winding-up of banks. 4. Public Revenue
Select the correct answer using the codes given Which of the above is/are component/components
below: of Monetary Policy?
(a) 1 and 4 only (b) 2, 3 and 4 only (a) 1 only (b) 2, 3 and 4 only
(c) 1, 2 and 3 only (d) 1, 2, 3 and 4 (c) 1 and 2 only (d) 1, 3 and 4 only

32
9. When the Reserve Bank of India reduces the (b) Encouraging Indian borrowers to issue rupee
Statutory Liquidity Ratio by 50 basis points, which denominated Masala Bonds
of the following is likely to happen? [CSE-2015] (c) Easing conditions relating to external commercial
(a) India’s GDP growth rate increases drastically. borrowing
(b) Foreign Institutional Investors may bring more (d) Following an expansionary monetary policy.
capital into our country. 13. If the RBI decides to adopt an expansionist monetary
(c) Scheduled Commercial Banks may cut their policy, which of the following would it not do?
lending rates. [CSE-2020]
(d) It may drastically reduce the liquidity to the 1. Cut and optimise the Statutory Liquidity Ratio.
banking system
2. Increase the Marginal Standing Facility Rate.
10. What is/are the purpose/purposes of the ‘Marginal
Cost of Funds based Lending Rate (MCLR)’ 3. Cut the Bank Rate and Repo Rate.
announced by RBI? Select the correct answer using the code given below:
1. These guidelines help improve the transparency (a) 1 and 2 only (b) 2 only
in the methodology followed by banks for (c) 1 and 3 only (d) 1, 2 and 3
determining the interest rates on advances. 14. In India, the central bank’s function as the lender of
2. These guidelines help ensure availability of bank last resort’ usually refers to which of the following?
credit at interest rates which are fair to the [CSE-2021]
borrowers as well as the banks.
1. Lending to trade and industry bodies when they
Select the correct answer using the code given below: fail to borrow from other sources
[CSE-2016]
2. Providing liquidity to the banks having a
(a) 1 only (b) 2 only
temporary crisis
(c) Both 1 and 2 (d) Neither 1 nor 2
3. Lending to governments to finance budgetary
11. Which of the following statements is/are correct deficits
regarding the ‘Monetary Policy Committee (MPC)?
Select the correct answer using the code given below:
[CSE-2017]
(a) 1 and 2 only (b) 2 only
1. It decides the RBI’s benchmark interest rates.
(c) 2 and 3 only (d) 3 only
2. It is a 12-member body including the Governor
of RBI and is reconstituted every year. 15. Consider the following statements: [CSE-2021]
3. It functions under the chairmanship of the Union 1. The Governor of the Reserve Bank of India
Finance Minister. (RBI) is appointed by the Central Government.
Select the correct answer using the code given below: 2. Certain provisions in the Constitution of India
give the Central Government the right to issue
(a) 1 only (b) 1 and 2 only
directions to the RBI in public interest.
(c) 3 only (d) 2 and 3 only
3. The Governor of the RBI draws his power from
12. Which one of the following is not the most likely
the RBI Act.
measure the Government/ RBI takes to stop the slide
of Indian rupee? [CSE-2019] Which of the above statements are correct?
(a) Curbing imports of non - essential goods and (a) 1 and 2 only (b) 2 and 3 only
promoting exports (c) 1 and 3 only (d) 1, 2 and 3

33
16. With reference to the Indian economy, consider the (a) Conducting ‘Open Market Operations’
following statements: [CSE-2022] (b) Oversight of settlement payment systems
1. If the inflation is too high, Reserve Bank of India (c) Debt and cash management for the Central and
(RBI) is likely to buy government securities. State Governments
2. If the rupee is rapidly depreciating, RBI is likely
(d) Regulating the functions of Non-banking
to sell dollars in the market.
Financial Institutions
3. If interest rates in the USA or European Union
20. The Cash Reserve Ratio refers to: [CDS-I-2020]
were to fall, that is likely to induce RBI to buy
dollars. (a) The share of Net Demand and Time liabilities
Which of the statements given above are correct? that banks have to hold as liquid assets.
(a) 1 and 2 only (b) 2 and 3 only (b) The share of Net Demand and Time Liabilities
(c) 1 and 3 only (d) 1, 2 and 3 that banks have to hold as balances with the
RBI
17. In India, which one of the following is responsible
for maintaining price stability by controlling inflation? (c) The share of Net Demand and Time Liabilities
that banks have to hold as part of their cash
[CSE-2022]
reserves.
(a) Department of Consumer Affairs
(d) The ratio of cash holding to reserves of banks
(b) Expenditure Management Commission
21. Recently the Reserve Bank of India has imposed
(c) Financial Stability and Development Council
limitation, initially for a period of six months, on the
(d) Reserve Bank of India
withdrawal of amount by account holders of which
18. Consider the following statements : one of the following banks? [CDS-I-2020]
Statement-I : In the post-pandemic recent past, many
(a) Induslnd bank
Central Banks worldwide had carried out interest
rate hikes (b) Dhanlaxmi Bank
Statement-II : Central Banks generally assume that (c) Punjab and Maharashtra Cooperative Bank
they have the ability to counteract the rising consumer (d) South Indian Bank
prices via monetary policy means. 22. Normally, there will not be a shift in the demand
Which one of the following is correct in respect of curve when: [CDS-II-2020]
the above statements? [CSE-2023] (a) Price of a commodity falls
(a) both Statement-I and Statement-II are correct
(b) Consumers want to buy more at any given price
and Statement-II is the correct explanation for
Statement-I (c) Average income rises
(b) Both Statement-I and Statement-II are correct (d) Population grows
and Statement-II is not the correct explanation 23. Which one of the following may lead to movement
for Statement-I along the demand curve of a commodity?
(c) Statement-I is correct but Statement-II is [CDS-II-2021]
incorrectt (a) Change in its price
(d) Statement-I is incorrect Statement-II is correct
(b) Change in price of the other commodities
19. Which one of the following activities of the Reserve
(c) Change in income of the consumer
Bank of India is considered to be partn of
‘sterilization? [CSE-2023] (d) Change in tastes and preferences of consumer

34
24. Which one of the following statements about Non- 27. In a closed economy with no taxes, if the marginal
Banking Financial Company (NBFCs) is not propensity to consume is always 0-9, then the value
correct? [CDS-II-2022] of the multiplier will be: [CAPF-2019]
(a) NBFCs cannot accept demand deposits. (a) 10-00 (b) 1-00
(b) NBFCs cannot give loans. (c) 0-90 (d) 0-10
28. Which one of the following functions as an automatic
(c) NBFCs cannot issue cheques drawn on
stabilizer in the context of fiscal and monetary policies
themselves.
of an economy? [CAPF-2021]
(d) NBFCs cannot offer deposit insurance facility (a) Personal income tax
of Deposit Insurance and Credit Guarantee
(b) Reverse repo rate of bank
Corporation.
(c) Open market operation
25. Which one of the following forms of money supply
(d) Bond price
of considered as the most widely used in the Indian
29. Which one among the following statements is not
monetary system? [CDS-II-2022]
correct? [CAPF-2021]
(a) M1 (b) M2 (a) When the economy grows slowly than its
(c) M3 (d) M4 potential, the unemployment rate rises.
26. Multipliers will be lower with which one of the (b) Structural employment occurs when jobs are
following? [CAPF -2018] eliminated by changes in demand for particular
goods or due to automation.
(a) High marginal propensity to consume
(c) Recession in the economy leads to cyclical
(b) Low marginal propensity to consume
unemployment.
(c) High marginal propensity to invest (d) At full employment, the measured unemployment
(d) Low marginal propensity to save rate is negative.

Explanation
Q.1 A Q.3 C
 A decrease in bank rate will make borrowing  Open Market Operations (OMOs) are market
from RBI cheap which will eventually lead to an operations conducted by RBI by way of sale/
increase in the money supply in the market i.e. purchase of government securities to/from the
higher liquidity. market with an objective to adjust the rupee
Q.2 D liquidity conditions in the market on a durable
basis
 The Reserve Bank of India acts as a lender of
last resort and a bankers’ bank. It provides Q.4 D
credit to banks in times of need and other banks  Liquidity of Assets: RBI mandates banks to
retain their deposits with the RBI. The RBI also maintain a certain percentage of their assets in
advises the commercial banks on monetary liquid forms (cash, gold, or government
matters. securities). This ensures banks have sufficient

35
 funds to meet immediate withdrawal demands Q.8 C
and maintain financial stability.  The monetary policy tool is implemented by the
 Branch Expansion: RBI regulates the opening RBI through open market operations, bank rate,
of new branches by commercial banks, CRR, SLR, the repo rate, reverse repo rate.
considering factors like geographical reach,  The bank rate is the rate of interest at which
financial inclusion, and equitable distribution of RBI charges while lending loans to a commercial
banking services. bank.
 Merger of Banks: RBI approves or  The Open market operations are conducted by
disapproves mergers and acquisitions between the RBI by the way of sale and purchase of
commercial banks, assessing their impact on Government Securities (G-Secs) to adjust
competition, financial stability, and customer liquidity in the market.
interests. Q.9 C
 Winding-up of Banks: RBI has the authority  Statutory liquidity ratio (SLR) is the reserve
to order the closure of a commercial bank if it requirement that commercial banks are required
becomes insolvent or faces severe financial to maintain in the form of cash, gold reserves,
distress. This protects depositors’ funds and PSU Bonds, and RBI approved securities before
maintains public confidence in the banking providing credit to the customers. When SLR is
system. reduced, the commercial banks can use more
 All of the above options are correct. RBI is money to lend its customers.
known as the banker’s bank which regulates the Q.10 C
banking sector in India.
 Statement 1 is correct: MCLR mandates
Q.5 D banks to link their lending rates to their marginal
 An increase in the bank rate means that the cost of funds, which includes factors like deposit
Central bank is following a tight monetary policy rates, repo rates, and operating costs. This
as increase in rates will lead to decrease in money ensures a clear connection between the interest
supply thereby leading to decrease in inflation rates banks pay to acquire funds and the rates
and reduction in investment. they charge borrowers, making the process more
Q6 A transparent and understandable.
 The correct answer is banking operations:  Statement 2 is correct: MCLR encourages
Marginal Standing Facility (MSF): It is the rate faster transmission of monetary policy changes
at which banks borrow funds overnight from the to borrowers. When the RBI cuts repo rates,
RBI against approved government securities. banks are expected to reduce their MCLR
Under MSF, banks can borrow funds up to one accordingly, leading to lower lending rates for
percentage of their net demand and time liabilities consumers and businesses. This promotes a fairer
(NDTL). interest rate regime for both borrowers and
Q.7 A banks.
 Statutory Liquidity Ratio (SLR) are maintained Q.11 A
by the banks in ‘non-cash’ form which are used  Statement 1 is correct: Monetary Policy
by then to raise cash against it (from the money Committee (MPC) - It decides the RBI’s
market) in times of cash mismatch (and ‘vault benchmark interest rates. These interest rates
cash’ means liquid cash). Profit management is include MSF, Repo Rate, Reverse Repo Rate,
not the aim behind SLR. and LiquidityAdjustment Facility.

36
  Statement 2 is incorrect: The committee will Repo Rate is the rate at which banks borrow
have six members. from the RBI for short-term needs. Cutting these
 Statement 3 is incorrect: The Governor of the rates makes borrowing cheaper for banks,
RBI is the ex-officio Chairperson of MPC. encouraging them to lend more. This increases
the money supply.
Q.12 D
Q.14 B
 Option A is incorrect: Curbing imports of non-
essential goods and promoting exports helps  Lender of last resort is a crucial role played by
reduce the demand for foreign currency like central banks, including the Reserve Bank of
dollars and euros, and increases the supply of India (RBI). It involves providing emergency
rupees, supporting the rupee. liquidity to solvent banks facing temporary
financial difficulties, preventing potential bank
 Option B is incorrect: Encouraging issuance
failures and systemic crises.
of Masala Bonds (rupee denominated bonds
issued overseas) - This helps raise rupee funds Q.15 C
from overseas investors without creating dollar Statement 1 is correct.
outflows.  Section 8(1)(a) of the Reserve Bank of India
 Option C is incorrect: Easing conditions for Act, 1934, provides that there shall be one
external commercial borrowings - This makes it Governor and not more than four Deputy
easier for Indian companies to raise low-cost Governors to be appointed by the central
loans in foreign currency. This may put pressure government on the central board of RBI.
on the rupee. But it also brings in capital. Statement 2 is incorrect.
 Option D is correct: Following an expansionary  Section 7 of the RBI Act provides that Central
monetary policy would mean cutting interest rates Government may from time to time give such
and expanding money supply to boost growth. directions to the Bank as it may, after consultation
This may weaken the rupee further by allowing with the Governor of the Bank, consider
easy outflows of dollars. necessary in the public interest. Constitution of
Q.13 B India does not provide any provision for Central
 An expansionist monetary policy aims to increase Government the right to issue directions to the
the money supply in the economy to boost RBI in Public interest.
economic growth. Statement 3 is correct.
 Statement 1 is incorrect: SLR is the  According to RBI Act, the Governor shall have
percentage of deposits that banks must hold in powers of general superintendence and direction
cash or specified assets. Cutting SLR releases of the affairs and the business of the RBI. He/
more funds for lending, increasing the money she may exercise all powers and do all acts and
supply. things which may be exercised or done by the
RBI.
 Statement 2 is correct: MSFR is the rate at
which banks can borrow from the RBI overnight Q.16 B
in emergency situations. Increasing MSFR  Statement 1 is incorrect: When inflation is high,
makes borrowing more expensive, discouraging the RBI actually aims to reduce liquidity in the
banks from lending. This would contract the market to curb inflation. It does this by selling
money supply. government securities through Open Market
 Statement 3 is incorrect: Bank Rate is the rate Operations (OMOs). Selling securities absorbs
at which the RBI lends to commercial banks. money from the market, making it less readily

37
 available for spending and potentially lowering reduce demand, and ultimately manage
inflationary pressures. Therefore, the RBI is more inflationary pressures to maintain price stability.
likely to sell government securities, not buy them,  Thus, Central banks, through their monetary
in response to high inflation. policy measures, including interest rate hikes,
 Statement 2 is correct: If the rupee is rapidly believe they can effectively counteract the impact
depreciating (losing value against other of rising consumer prices and control inflation in
currencies), the RBI may intervene to stabilize the economy.
the exchange rate. One way to do this is by Q.19 A
selling dollars in the market. By increasing the  Sterilization, in the context of the Reserve Bank
supply of dollars, the RBI can potentially put of India (RBI), refers to the actions taken by the
upward pressure on the rupee’s value. central bank to offset the impact of its foreign
 Statement 3 is correct: Falling interest rates in exchange interventions on the money supply.
the USA or EU can make investments there less When the RBI conducts open market operations
attractive. This could lead to investors pulling to buy or sell government securities, it can
their money out of India and into those markets, absorb or inject liquidity into the financial system,
leading to potential rupee depreciation. To helping to stabilize the money supply. This
counter this, the RBI might try to increase the process is considered part of sterilization.
attractiveness of rupee-denominated assets by
buying dollars in the market. This would inject
Q.20 B
rupees into the system and potentially make
rupee investments more appealing.  The Cash Reserve Ratio (CRR) refers to the
share of Net Demand and Time Liabilities that
Q.17 D
banks have to hold as balances with the RBI.
 Reserve Bank of India is India’s central bank The objective of CRR is to keep inflation under
has key function to keep check on the inflation control.
by use of monetary policy in forms of qualitative
Q.21 C
and quantitative measures.
 Punjab & Maharashtra Co-operative Bank is a
Q.18 A
Multi-State Scheduled Urban Co-operative
 Statement I is correct: In response to Bank with its area of operation in the States of
economic conditions, several central banks Maharashtra, Delhi, Karnataka Goa, Gujarat,
globally have opted for interest rate hikes in the Andhra Pradesh, and Madhya Pradesh. The
post-pandemic period. Central banks utilize bank was conferred with scheduled status by
interest rate adjustments as a monetary policy the Reserve Bank of India (RBI) in 2000.
tool to manage economic variables such as
Q.22 A
inflation, growth, and employment.
 The demand curve is a curve that is used in
 Statement II is correct: Central banks, through
microeconomics to determine the quantity of any
monetary policy tools, particularly interest rate
particular commodity that people are willing to
adjustments, aim to influence the overall supply
purchase with corresponding changes in its price.
of money and credit in the economy. When faced
with the challenge of rising consumer prices or Q.23 A
inflation, central banks may employ interest rate  Demand curve shows the relationship between
hikes to make borrowing more expensive. By the price of a specific commodity and the quantity
doing so, they intend to curb excessive spending, demanded at that price, assuming all other factors
influencing demand remain constant. A change

38
 in price leads to a movement along the demand marginal propensity to consume is always 0.90,
curve and it referred to as a change in quantity then the value of the multiplier will be
demanded. Hence option A is the correct Q.28 A
answer.  A common example of automatic stabilizers is
Q.24 B corporate and personal income taxes that are
 NBFCs lend and invest; therefore their progressively graduated, which means that they
operations are similar to those of banks. Hence are fixed in proportion to the income levels of
statement 2 is not correct. the taxpayer. Hence Option 1 is correct.
 Nevertheless, there are a few differences, as Q.29 D
listed below: NBFCs are unable to accept  Option A is correct: Slow economic growth
demand deposits. often leads to job losses and higher
Q.25 C unemployment.
 M1 and M2 are known as narrow money while  Option B is correct: Structural unemployment
M3 and M4 are known as broad money. These arises when the qualification of a person is not
measures are in decreasing order of liquidity. M1 sufficient to meet his job responsibilities. It arises
is most liquid and easiest for transactions due to long term change in the pattern of demand
whereas M4 is least liquid of all. M3 is the most that changes the basic structure of the economy.
commonly used measure of money supply.  Option C is correct: Recessions involve a
Q.26 B decline in economic activity, often resulting in
 The multiplier effect refers to the phenomenon higher cyclical unemployment.
where an initial increase in spending in an  Option D is incorrect: At full employment,
economy (e.g., government spending, everyone who wants to work has a job. But this
investment) leads to a larger, multiplied increase doesn’t mean there are zero unemployed
in final income. The key driver of the multiplier individuals. A certain level of frictional
effect is the marginal propensity to consume unemployment is always present and inevitable.
(MPC), which is the proportion of additional
income that people spend on consumption rather
than saving.
 A lower MPC implies that a smaller proportion
is spent, resulting in a smaller multiplier.
Q.27 A
 The percentage of additional income that is spent
on consumption is known as the marginal
propensity to consume (MPC). Depending on
income, MPC fluctuates. MPC tends to be lower
at higher income levels. The Keynesian multiplier,
which describes the impact of additional
investment or government spending as an
economic stimulus, is mostly determined by
MPC. In a closed economy with no taxes, if the

39
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 4 Banking
3. It is a detailed procedure by which a bank with
Banking operations huge non-performing assets is taken over by
another bank.
1. Why is the offering of “teaser loans” by commercial
Select the correct answer using the code given below:
banks a cause of economic concern? [CSE-2011]
(a) 1 only (b) 2 and 3 only
1. The teaser loans are considered to be an aspect
(c) 1 and 3 only (d) 1, 2 and 3
of sub-prime lending and banks may be exposed
4. Which one of the following best describes the term
to the risk of defaulters in future.
“Merchant Discount Rate” sometimes seen in news?
2. In India, the teaser loans are mostly given to
[CSE-2018]
inexperienced entrepreneurs to set up
(a) The incentive given by a bank to a merchant for
manufacturing or export units.
accepting payments through debit cards
Which of the statements given above is/are correct? pertaining to that bank.
(a) 1 only (b) 2 only (b) The amount paid back by banks to their
(c) Both 1 and 2 (d) Neither 1 nor 2 customers when they use debit cards for financial
2. Consider the following liquid assets: [CSE-2013] transactions for purchasing goods or services.

1. Demand deposits with the banks (c) The charge to a merchant by a bank for accepting
payments from his customers through the bank’s
2. Time deposits with the banks
debit cards.
3. Savings deposits with the banks
(d) The incentive given by the Government to
4. Currency merchants for promoting digital payments by their
The correct sequence of these assets in the decreasing customers through Point of Sale (PoS) machines
order of liquidity is: and debit cards.
(a) 1-4-3-2 (b) 4-3-2-1 5. Which one of the following links all the ATMs in
India: [CSE-2018]
(c) 2-3-1-4 (d) 4-1-3-2
(a) Indian Banks’Association
3. The term ‘Core Banking Solution’ is sometimes seen
(b) National Securities Depository Limited.
in the news. Which of the following statements best
describes/describe this term? [CSE-2016] (c) National Payments Corporation of India.

1. It is a networking of a bank’s branches which (d) Reserve Bank of India.

enables customers to operate their accounts from 6. Which of the following is not included in the assets
any branch of the bank on its network regardless of a commercial bank in India? [CSE-2019]
of where they open their accounts. (a) Advances (b) Deposits
2. It is an effort to increase RBI’s control over (c) Investments
commercial banks through computerization. (d) Money at call and short notice.

40
7. The Chairman of public sector banks are selected 10. The asset or assets that a borrower pledges in order
by the: [CSE-2019] to guarantee repayment of a loan is called as:
(a) Banks Board Bureau [CDS-I-2021]
(b) Reserve Bank of India (a) Cheque (b) Collateral
(c) Union Ministry of Finance (c) Guarantee card (d) Bond
(d) Management of concerned bank 11. According to the latest Reserve Bank of India study
8. Consider the following statements: on State finances, capital spending is maximum on:
Statement-I: Interest income from the deposits in [CDS-II-2018]
Infrastructure Investment Trusts (InvITs) distributed (a) Rural development
to their investors is exempted from tax, but the (b) Water supply and sanitation
dividend is taxable. (c) Urban development
Statement-II: InvITs are recognized as borrowers (d) Education
under the Securitization and Recon-struction of
12. As per the World Bank’s Ease of Doing business
Financial Assets and Enforcement of Security Interest
Ranking, India’s rank has improved from 142 in 2014
Act, 2002'
to 63 in 2019. During this period, in which of the
Which one of the following is correct in respect of following parameters has India’s rank deteriorated?
the above statements? [CSE-2023]
[CDS-II-2020]
(a) Both Statement-I and Statement-II are correct
(a) Ease of starting a business
and Statement-II is the correct explanation for
Statement-I (b) Getting electricity
(b) Both Statement-I and Statement-II are correct (c) Registering property
and Statement-II is not the correct explanation (d) Paying taxes
for Statement-I 13. Which one of the following is considered as an
(c) Statement-I is correct but Statement-II is agency function of commercial banks in India?
incorrect is [CDS-II-2022]
(d) Statement-I is incorrect but Statement-II is (a) Acceptance of deposits
correct (b) Investment of surplus funds
9. Which one of the following is not correct about Repo (c) Acceptance of income tax payments
rate? [CDS-I-2020]
(d) Providing overdraft facilities
(a) It is the interest rate charged by the Central Bank
14. With reference to Indian economy, the term ‘bad
on overnight loan.
bank’, frequently mentioned in news, refers to:
(b) It is the interest rate paid by the commercial
[CAPF-2022]
banks on overnight borrowing.
(a) An asset reconstruction company
(c) It is the interest rate agreed upon in the loan
contract between a commercial bank and the (b) An asset management company
Central Bank. (c) A bank with huge ‘nonperforming assets’
(d) It is the cost of Collateral security. (d) A bank that has become insolvent

41
 Explanation
Q.1 A branch or channel (like ATMs, online banking,
 Statement 1 is correct: Teaser loans refer to mobile banking) regardless of where they
loans offered at extremely low interest rates opened their account.
initially, but the rates are later increased Q.4 C
substantially. They are considered a type of  Option C is correct: MDR (Merchant Discount
subprime lending, as they often target less Rate) is basically a fee that a merchant is charged
creditworthy borrowers. Offering such loans by their issuing bank for accepting payments from
does expose banks to higher default risk in the their customers via credit and debit cards.
future when interest rates escalate. Q.5 C
 Statement 2 is incorrect: In India, teaser loans  National Payments Corporation of India (NPCI)
have mostly been offered for homes, cars and is an umbrella organization for retail payments in
consumer durables. It has nothing to do with the India. They operate the National Financial
experience of the entrepreneurs as the teaser Switch (NFS), the largest network of shared
loans are given to entrepreneurs as well as home ATMs in India, connecting various bank ATMs
loans. across the country.
Q.2 D Q.6 B
 The sequence 4-1-3-2 represents the decreasing  In terms of the banks, the deposits represent
order of liquidity for the given financial the “liabilities” of the banks while loans advanced
instruments. and investments made by banks represent their
 Currency is the most liquid asset because it can “assets”. The deposit itself is a liability owed by
be readily used for transactions without any the bank to the depositor.
restrictions or delays. Q.7 A
 Demand deposits with banks come next as they  Bank Board Bureau is responsible for the
can be easily accessed and withdrawn anytime selection and appointment of the Board of
through checks, debit cards, or online transfers. Directors in Public Sector Banks and Financial
 Savings deposits with banks have slightly lower Institutions.
liquidity compared to demand deposits due to  [Note: In 2022, the government has
potential withdrawal limitations or penalties, transformed Banks Board Bureau (BBB) into
depending on the specific account type. Financial Services Institutions Bureau (FSIB).
 Time deposits with banks are the least liquid as For more details about FSIB, you can refer to
they have fixed maturity periods and early this link (https://www.thehindubusinessline.com/
withdrawals usually incur penalties or interest blexplainer/from-banks-board-bureauto-
losses. financial-services-institutions-bureau-all-that-
Q.3 A you-need-to-know/article65653269.ece)]
 Core Banking Solution (CBS) is a centralized Q.8 D
banking software system that integrates a bank’s  Statement I is incorrect: Under the latest
various branches and operations into a unified budget 2023-24, there has been a significant
platform. It enables customers to access their change in the tax treatment of income from
accounts and conduct transactions from any InvITs. Previously, only dividend income from

42
 InvITs was taxable, but now, all income released in July 2018, rural development has the
distributed by InvITs, including interest income, highest capital spending.
dividend income, and rental income, will be Q.12 C
taxable in the hands of the unitholders. This  India has recorded an increase of 14 positions
change is aimed at broadening the tax base and at 63rd rank against its rank of 77 last year.
ensuring that all forms of income from InvITs
Although, the country still lags in areas like
are subject to taxation. The exemption for interest
enforcing contracts and registering property
income no longer applies.
Q.13 C
 Statement II correct: InvITs are indeed
classified as borrowers under the SARFAESI  “Acceptance of income tax payments” is
Act. This classification is significant as it allows considered an agency function of commercial
for the securitization of financial assets and banks in India. Commercial banks often act as
empowers the enforcement of security interests agents for the government in collecting income
in the event of default. This recognition enhances tax payments from individuals and businesses.
the financial mechanisms available to InvITs and They facilitate the collection process by accepting
strengthens the legal framework governing their tax payments on behalf of the government,
operations. contributing to the efficiency of tax collection and
Q.9 C administration.
 Option A is correct: In a repurchase agreement Q.14 A
(repo), the central bank lends securities to  A ‘Bad Bank’ is an asset reconstruction
commercial banks for a short-term period companies (ARCs) specialize in purchasing and
(usually overnight) and charges them an interest resolving NPAs from banks. The aim of setting
rate, which is the repo rate. up a bad bank is to help ease the burden on
 Option B is correct: From the commercial banks by taking bad loans off their balance sheets
bank’s perspective, the repo rate is the cost of and get them to lend again to customers without
borrowing funds from the central bank overnight. constraints.
 Option C is incorrect: It is not the loan contract
between a commercial bank and the central Banking regulations
bank. The central bank has the power to change
it to regulate it according to the situation.
 Option D is correct: While collateral is involved 1. Basel III Accord’ or simply ‘Basel often seen in the
in repo transactions, the repo rate itself doesn’t new, seeks to: [CSE-2015]
represent the cost of this collateral. The value of (a) develop national strategies for the conservation
the collateral and the associated costs are and sustainable use of biological diversity.
determined separately.
(b) improve banking sector’s ability to deal with
Q.10 B
financial and economic stress and improve risk
 Option B is correct: Collateral is an asset or
management.
property that an individual or entity offers to a
lender as security for a loan. It encompasses (c) reduce the greenhouse gas emissions but places
various types of assets like property, vehicles, a heavier burden on developed countries.
investments, or even cash. (d) transfer technology from developed countries to
Q.11 A poor countries to enable them to replace the use
 According to the RBI Report analyzing the State of chlorofluorocarbons in refrigeration with
Finances - A Study of Budgets, which was harmless chemicals.

43
2. Consider the following statements: [CSE-2018] 3. The higher a borrowing firm’s level of Interest
1. Capital Adequacy Ratio (CAR) is the amount Coverage Ratio, the worse is its ability to service
that banks have to maintain in the form of their its debt.
own funds to offset any loss that banks incur if Select the correct answer using the code given below:
the account-holders fail to repay dues. (a) 1 and 2 only (b) 2 only
2. CAR is decided by each individual bank. (c) 1 and 3 only (d) 1, 2 and 3
Which of the statements given above is/are correct? 6. With reference to Urban Cooperative Banks’ in
India, consider the following statements:
(a) 1 only (b) 2 only
[CSE-2021]
(c) Both 1 and 2 (d) Neither 1 nor 2
1. They are supervised and regulated by local
3. With reference to the governance of public sector
boards set up by the State Governments.
banking in India, consider the following statements:
2. They can issue equity shares and preference
[CSE-2018] shares.
1. Capital infusion into public sector banks by the 3. They were brought under the purview of the
Government of India has steadily increased in Banking Regulation Act, 1949 through an
the last decade. Amendment in 1966.
2. To put the public sector banks in order, the Which of the statements given above is/are correct?
merger of associate banks with the parent State (a) 1 only (b) 2 and 3 only
Bank of India has been affected. (c) 1 and 3 only (d) 1, 2 and 3
Which of the statements given above is/are correct? 7. Consider the following statements: [CSE-2022]
(a) 1 only (b) 2 only 1. In India, credit rating agencies are regulated by
(c) Both 1 and 2 (d) Neither I nor 2 Reserve Bank of India.
4. What was the purpose of Inter-Creditor Agreement 2. The rating agency popularly known as ICRA is
signed by Indian banks and financial institutions a public limited company.
recently? [CSE-2019] 3. Brickwork Ratings is an Indian credit rating
(a) To lessen the Government of India’s perennial agency.
burden of fiscal deficit and current account deficit. Which of the statements given above are correct?
(b) To support the infrastructure projects of Central (a) 1 and 2 only (b) 2 and 3 only
and State Governments (c) 1 and 3 only (d) 1, 2 and 3
(c) To act as independent regulator in case of 8. With reference to the ‘Banks Board Bureau (BBB),
application for loans of Rs. 50 core or more which of the following statements are correct?
(d) To aim at faster resolution of stressed assets of [CSE-2022]
Rs.50 crore or more which are under consortium 1. The Governor of RBI is the Chairman of BBB.
lending. 2. BBB recommends for the selection of heads for
5. What is the importance of the term “Interest Public Sector Banks.
Coverage Ratio” of a firm in India? [CSE-2020] 3. BBB helps the Public Sector Banks in developing
1. It helps in understanding the present risk of a strategies and capital raising plans.
firm that a bank is going to give loan to. Select the correct answer using the code given below:
2. It helps in evaluating the emerging risk of a firm (a) 1 and 2 only (b) 2 and 3 only
that a bank is going to give loan to. (c) 1 and 3 only (d) 1, 2 and 3

44
9. Consider the following statements with reference to 11. Which of the following statements about the India
India : [CSE-2023] Post Payments Bank (IPPB) is/are correct?
1. According to the Micro, Small and Medium [CDS-I-2018]
Enterprises Development (MSMED) Act, 2006', 1. It has been incorporated as a Public Limited
the ‘medium enterprises’ are investments those Company.
with in plant machinery between R15 crore and 2. It started its operation by establishing two pilot
and 25 crore. branches at Hyderabad and Varanasi.
2. All bank loans to the Micro, Small and Medium Select the correct answer using the code given below.
Enterprises qualify under the priority sector.
(a) 1 only (b) 2 only
Which of the statements given above is/are correct?
(c) Both 1 and 2 (d) Neither 1 nor 2
(a) 1 only (b) 2 only
12. The idea of Planning in Independent India was drawn
(c) Both 1 and 2 (d) Neither 1 nor 2 from: [NDA & NA-I -2022]
10. Consider the following statements: [CSE-2023] (a) The Bombay Plan
1. The Self-Help Group (SHG) programme was (b) The demand made by peasants
originally initiated by the State Bank of India by
(c) The demand made by worker’s unions
providing microcredit to the financially deprived.
(d) The Gandhian vision of India’s future
2. In an SHG, all members of a group take
responsibility for a loan that an individual member 13. A non-banking financial company cannot:
takes. [CAPF-2022]
3. The Regional Rural Banks and Scheduled (a) Give loans
Commercial Banks support SHGs. (b) Make investments
How many of the above statements are correct? (c) Borrow from bank
(a) Only one (b) Only two (d) Seek demand deposits from public and cannot
(c) All three (d) None issue cheques

Explanation
Q.1 B Q.2 A
 Option B is correct: The Basel III Accord is a  Statement 1 is correct: Capital Adequacy
set of international regulations developed by the Ratio (CAR) is indeed the ratio of a bank’s
Basel Committee on Banking Supervision. It capital (own funds) to its risk-weighted assets.
aims to strengthen the banking system by It serves as a buffer to absorb potential losses
increasing capital requirements, improving from loan defaults or other financial setbacks.
liquidity standards, and enhancing risk  Statement 2 is incorrect: CAR is not
management practices. This, in turn, should make determined by individual banks. It is set by
banks more resilient to financial shocks and help regulatory authorities like the Reserve Bank of
prevent future crises. India (RBI) in India, based on international
standards like Basel Accords.

45
Q.3 B the Reserve Bank of India (RBI) under the
 Statement 1 is incorrect: While it’s true that Banking Regulation Act, 1949. They do not have
the government has provided capital infusions local boards controlled by state governments.
to Public Sector Banks (PSBs) in recent years,  Statement 2 is correct: Unlike traditional
the rate of increase has not been steady. cooperative societies, UCBs are allowed to
 Statement 2 is correct: The merger of five issue equity shares and preference shares to raise
associate banks with the State Bank of India capital. This provides them with more flexibility
(SBI) in 2017 was indeed a major reform in their financial structure.
initiative aimed at consolidating and strengthening  Statement 3 is correct: Co-operative banks
the public sector banking sector. Merging of are regulated by the Reserve Bank of India under
banks would help in strengthening the bargaining the Banking Regulation Act, 1949 and Banking
power of the banks, reduce operational Laws (Application to Cooperative Societies)
expenditure, enhance capital efficiency, Act, 1965.
streamline banking operations and reduce their Q.7 B
NPA burden.
 Statement 1 is incorrect: Credit rating
Q.4 D
agencies in India are regulated by the Securities
 Option D is correct: It aim at faster resolution and Exchange Board of India (SEBI) under the
of stressed assets of Rs 50 crore or more which SEBI (Credit Rating Agencies) Regulations,
are under consortium lending. The inter-creditor 1999, not the Reserve Bank of India (RBI).
agreement is aimed at the resolution of loan
 Statement 2 is correct: ICRA Limited It is a
accounts with a size of ¹ 50 crores and above
public limited company that was set up in 1991
that are under the control of a group of lenders.
in Gurugram.
Q.5 A
 Statement 3 is correct: Brickwork Ratings, a
 Statement 1 is correct: The Interest Coverage SEBI registered Credit Rating Agency, has also
Ratio (ICR) assess the current risk associated been accredited by RBI , offers Rating Services
with lending to a firm. It indicates the firm’s ability
On Bank Loans, NCDS, Fixed Deposits,
to meet its existing interest obligations on
Securitized Products ,Security Receipts etc.
outstanding debt. A higher ICR suggests a lower
risk of the firm defaulting on its loan payments. Q.8 B
 Statement 2 is correct: ICR can be used to  Statement 1 is incorrect: The Banks Board
gauge the emerging risk of a firm by analyzing Bureau (BBB) is chaired by an eminent
trends over time. A declining ICR might suggest professional appointed by the Central
potential future difficulties in servicing debt, Government.
raising concerns for future loan repayments.  Statement 2 is correct: One of the key
 Statement 3 is incorrect: In reality, a higher functions of the BBB is to recommend
ICR indicates a stronger ability to service debt. candidates for top-level positions, including the
It means the firm’s earnings before interest and heads of Public Sector Banks (PSBs).
taxes (EBIT) are enough to cover its interest  Statement 3 is correct: The BBB plays an
expenses by a larger margin. A lower ICR raises advisory role in assisting PSBs with strategic
concerns about the firm’s ability to handle its planning, capital raising, and other financial
existing debt burden. matters.
Q.6 B  [Note: In 2022, the government has transformed
 Statement 1 is incorrect: Urban Cooperative Banks Board Bureau (BBB) into Financial
Banks (UCBs) are supervised and regulated by Services Institutions Bureau (FSIB). For more

46
 details about FSIB, you can refer to this link scheme, which aids SCBs and RRBs in
(https://www.thehindubusinessline.com/ implementing Dual Authentication options in
blexplainer/from-banks-board-bureauto- micro ATMs, facilitating SHG transactions.
financial-services-institutions-bureau-all-that- Q.11 A
you-need-to-know/article65653269.ece)]
 Statement 1 is correct and 2 is incorrect:
Q.9 D Indian Post Payments Bank has been
 Statement 1 is not correct: According to the incorporated as a Public Limited company under
revised MSME definition announced in the department of posts. It is governed by Reserve
Atmanirbhar Bharat package on 13th May 2020, Bank of India and will be operational by April
the definition of Micro, Small, and Medium 2018 in all 650 districts. With its Headquarters
Enterprises was indeed revised. The current in New Delhi. It started its operation by opening
limits are Rs. 1 Crore of investment and Rs. 5 first two branches in Ranchi and Raipur.
Crore of turnover for Micro, Rs. 10 Crore of
investment and Rs. 50 Crore of turnover for Q.12 A
Small, and Rs. 20 Crore of investment and Rs.  A section of the big industrialists got together in
100 Crore of turnover for Medium Enterprises. 1944 and drafted a joint proposal for setting up
The government further revised the definition on a planned economy in the country. It was called
01.06.2020, setting the limit for medium the Bombay Plan. The Bombay Plan wanted the
enterprises at Rs. 50 Crore of investment and state to take major initiatives in industrial and
Rs. 250 Crore of turnover. other economic investments.
 Statement 2 is not correct: Bank loans to Q.13 D
Micro, Small, and Medium Enterprises, both in  NBFCs do not form part of the payment and
manufacturing and service sectors, are eligible settlement system and cannot issue cheques
to be classified under the priority sector as per drawn on themselves; the deposit insurance
the specified norms. The priority sector lending
facility of Deposit Insurance and Credit
guidelines include provisions for lending to
Guarantee Corporation is not available to
MSMEs, and loans to them contribute towards
depositors of NBFCs, unlike in the case of
fulfilling the priority sector lending targets.
banks. Hence option 4 is correct.
Q.10 B
 Option A is correct: NBFCs can extend loans,
 Statement 1 is incorrect: The SHG movement although their regulations and permissible loans
was initiated by NABARD (National Bank for
differ slightly from banks.
Agriculture and Rural Development) in 1991–
1992, not the State Bank of India. The Reserve  Option B is correct: NBFCs can invest their
Bank of India later permitted SHGs to open funds in various avenues like securities, real
savings bank accounts in 1993. estate, or financial instruments.
 Statement 2 is correct: Banks provide loans  Option C is correct: NBFCs can borrow funds
to the SHG as a whole, and it is the collective from banks and other financial institutions to
responsibility of the SHG members to repay the conduct their business.
loan. This fosters a sense of joint responsibility  Option D is incorrect: One key distinction
among the group members. between NBFCs and banks is the ability to
 Statement 3 is correct: Financial institutions, accept demand deposits and issue cheques.
including Regional Rural Banks (RRBs) and NBFCs are not allowed to handle these due to
Scheduled Commercial Banks (SCBs), support stricter regulations for banks concerning liquidity
SHGs.An example is the Financial Inclusion Fund and stability.

47
 2. While a chip-pin debit card has four factors
Digital Economy authentication, BHIM app has only two factors
of authentication.
1. With reference to ‘Bitcoins’, sometimes seen in the Which of the statements given above is/are correct?
news, which of the following statements is/ are (a) 1 only (b) 2 only
correct? [CSE-2016]
(c) Both I and 2 (d) Neither 1 nor 2
1. Bitcoins are tracked by the Central Banks of
5. With reference to Non-Fungible Tokens (NFTs),
the countries.
consider the following statements: [CSE-2022]
2. Anyone with a Bitcoin address can send and
1. They enable the digital representation of physical
receive Bitcoins from anyone else with a Bitcoin assets.
address.
2. They are unique cryptographic tokens that exist
3. Online payments can be sent without either side on a blockchain.
knowing the identity of the other.
3. They can be traded or exchanged at equivalency
Select the correct answer using the code given below: and therefore can be used as a medium of
(a) 1 and 2 only (b) 2 and 3 only commercial transactions.
(c) 3 only (d) 1, 2 and 3 Which of the statements given above are correct?
2. Which of the following is a most likely consequence (a) 1 and 2 only (b) 2 and 3 only
of implementing the ‘Unified Payments Interface (c) 1 and 3 only (d) 1, 2 and 3
(UPI)? [CSE-2017]
6. With reference to Central Bank digital currencies,
(a) Mobile wallets will not be necessary for online consider the following statements: [CSE-2023]
payments.
1. It is possible to make payments in a digital
(b) Digital currency will totally replace the physical currency without using US dollar or SWIFT
currency in about two decades. system.
(c) FDI inflows will drastically increase. 2. A digital currency can be distributed with a
(d) Direct transfer of subsidies to poor people will condition programmed into it such as a time-
become very effective. frame for spending it.
3. Consider the following statements: [CSE-2017] Which of the statements given above is/are correct?
1. National Payment Corporation of India (NPCI) (a) 1 only (b) 2 only
helps in promoting the financial inclusion in the (c) Both 1 and 2 (d) Neither 1 nor 2
country. 7. In the context of finance, the term ‘beta’ refers to:
2. NPCI has launched RuPay, a card payment [CSE-2023]
scheme.
(a) The process of simultaneous buying and selling
Which of the statements given above is/are correct? of an asset from different platforms
(a) 1 only (b) 2 only (b) An investment strategy of a portfolio manager
(c) Both 1 and 2 (d) Neither 1 nor 2 to balance risk versus reward
4. With reference to digital payments, consider the (c) A type of systemic risk that arises where perfect
following statements: [CSE-2018] hedging is not possible
1. BHIM app allows the user to transfer money to (d) A numeric value that measures the fluctuations
anyone with a UPI-enabled bank account. of a stock to changes in the overall stock market

48
8. The percentage by which the money the borrower 3. By the rate of income growth in the economy
pays back exceeds the money that was borrowed is 4. By the relative importance of the good in the
called as: [CDS-I-2021] consumer’s budget
(a) Bank rate Select the correct answer using the code given below:
(b) Nominal interest rate (a) 1, 2 and 3 only (b) 1 and 4 only
(c) Real interest rate
(c) 1, 2 and 4 only (d) 3 and 4 only
(d) Terms of credit
11. For anything to be recognized as money, it needs to
9. What is meant by MSME? [CAPF-2020] have which of the following characteristics?
(a) Medium, Small and Marginalized enterprises [CAPF-2021]
(b) Micro, Small and Marginalized 1. Act as an intermediate in the exchange process
(c) Medium, Strategic and Micro Enterprises
2. Standard unit for quoting prices
(d) Micro, Small and Medium Enterprises
3. Must be easily divisible
10. How is the magnitude of price elasticity for an
4. Have higher value in alternative uses
individual determined? [CAPF-2021]
Select the correct answer using the code given below.
1. By the degree to which the good is a necessity
of luxury (a) 1, 2 and 4 only (b) 2 and 3 only
2. By the extent to which substitutes are available (c) 1, 2 and 3 only (d) 1, 3 and 4 only

Explanation
Q.1 B Q.2 A
 Statement 1 is incorrect: Central banks do  Option A is correct: The most likely
not directly monitor individual Bitcoin consequence of implementing the ‘Unified
transactions because the decentralized nature of Payments Interface (UPI)’ is Mobile wallets will
the Bitcoin network prevents such tracking. not be necessary for online payments. UPI
 Statement 2 is correct: Bitcoin operates on a allows you to pay directly from your bank
peer-to-peer network, allowing anyone with a account to different merchants without the hassle
Bitcoin address to send and receive bitcoins of typing your card details, or net banking/wallet
globally without the need for intermediaries such password.
as banks. This decentralized feature enables  Option B is incorrect: While UPI promotes
direct transactions between users, irrespective digital transactions; it doesn’t necessarily imply
of their locations. complete replacement of physical currency within
 Statement 3 is correct: Bitcoin payments offer a short timeframe.
a degree of privacy, known as pseudonymity,  Option C is incorrect: UPI primarily focuses
as the identities of the sender and receiver can on domestic transactions and payments
remain undisclosed. While Bitcoin addresses are infrastructure. While it might indirectly influence
visible on the blockchain, they do not inherently foreign investments, a drastic increase is not a
connect to real-world identities. direct consequence.

49
  Option D is incorrect: While UPI can facilitate artwork, real estate, or collectibles in a digital
efficient subsidy transfers; it’s just one aspect of format on the blockchain. This allows for secure
a complex system with various factors influencing verification and transfer of ownership. The
effectiveness. distinct construction of each NFT has the
Q.3 C potential for several use cases. For example, they
are an ideal vehicle to digitally represent physical
 Statement 1 is correct: NPCI plays a significant
assets like real estate and artwork. Because they
role in promoting financial inclusion by
are based on blockchains, NFTs can also work
developing and managing retail payment systems
to remove intermediaries and connect artists with
like RuPay, Unified Payments Interface (UPI),
audiences or for identity management. NFTs can
Immediate Payment Service (IMPS), and
remove intermediaries, simplify transactions, and
Aadhaar Enabled Payment System (AEPS).
create new markets.
These systems make financial services accessible
to a wider population, particularly those in rural  Statement 2 is correct: Each NFT is unique
areas and unbanked segments. and cannot be replicated or replaced. They exist
on a blockchain, which is a distributed ledger
 Statement 2 is correct: NPCI launched RuPay
that ensures transparency and security.
in 2012 as an alternative domestic card payment
scheme to international networks like Visa and  Statement 3 is incorrect: While NFTs can be
Mastercard. RuPay cards are widely accepted traded or exchanged; their value is not fixed and
in India and offer benefits like lower transaction can vary greatly depending on the specific token
fees for merchants and consumers. They also and market demand. This makes them unsuitable
contribute to reducing dependence on foreign for most commercial transactions where
payment systems. fungibility (exchangeability for equal value) is
crucial.
Q.4 A
Q.6 C
 Statement 1 is correct: The BHIM app, built
on the Unified Payments Interface (UPI), allows  Statement 1 is correct: Central Bank Digital
users to transfer money to anyone with a UPI- Currencies (CBDCs) operate on decentralized
enabled bank account, regardless of the bank or distributed ledger technology, and transactions
they use. can occur directly between parties without the
need for traditional intermediaries like the US
 Statement 2 is incorrect: While chip-and-pin dollar or the SWIFT (Society for Worldwide
debit cards involve four factors of authentication Interbank Financial Telecommunication) system.
(card, PIN, chip, and terminal), BHIM app
typically involves three factors:  Statement 2 is correct: Smart contracts, which
are self-executing contracts with the terms of
1) Mobile device and SIM card: The app the agreement directly written into code, can be
binds itself to the specific device and SIM integrated into digital currencies like CBDCs.
card used for registration. These smart contracts can include conditions,
2) UPI PIN: This is a secret PIN created by such as time limits for spending the digital
the user for authorizing UPI transactions. currency, adding programmable features to the
3) Bank account: Linking a bank account with currency.
the UPI PIN enables fund transfers. Q.7 D
Q.5 A  In finance, beta is a measure of a stock’s volatility
 Statement 1 is correct: NFTs can be used to in relation to the overall market. It helps investors
represent ownership of real-world assets like assess the risk associated with a particular stock

50
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 in comparison to the market as a whole. A beta Q.11 C
value of 1 indicates that the stock tends to move  Statement 1 is correct: Money serves as a
with the market, while a beta greater than 1 medium of exchange, meaning it facilitates
indicates higher volatility, and a beta less than 1 transactions between buyers and sellers. It
indicates lower volatility compared to the market. allows people to exchange goods and services
Q.8 B without having to directly barter for specific
 The nominal interest rate refers to the percentage items.
by which the money the borrower pays back  Statement 2 is correct: Money acts as a unit
exceeds the money that was borrowed. In other of account, meaning it provides a common way
words, it is the rate charged by the lender to the to measure and compare the value of different
borrower as a fee for borrowing money. This goods and services. It simplifies pricing and
fee is calculated as a percentage of the total allows for clear accounting of transactions.
amount borrowed.  Statement 3 is correct: Money needs to be
Q.9 D divisible into smaller units to accommodate
 The correct answer is Micro, Small and Medium various transaction sizes. This makes it practical
Enterprises (MSME) for both small and large purchases.
Q.10 C  Statement 4 is incorrect: Having higher value
in alternative uses, is not a necessary
 Statement 1 is correct: Necessity or Luxury
characteristic of money. In fact, money often has
1) Necessities have inelastic demand (people little intrinsic value outside its role as a medium
buy them even if prices rise). of exchange and unit of account. Its value
2) Luxuries have elastic demand (people are primarily stems from its widespread acceptance
more sensitive to price changes). and use in society.
 Statement 2 is correct: Availability of
Substitutes: Financial inclustion
1) Goods with substitutes have elastic demand
(consumers can switch if prices rise).
1. Microfinance is the provision of financial services to
2) Goods with few substitutes have inelastic people of low-income groups. This includes both
demand (consumers have limited choices). the consumers and the self-employed. The service/
 Statement 3 is incorrect: Rate of income services rendered under micro-finance is/ are:
growth is not directly relevant to individual price [CSE-2011]
elasticity.
1. Credit facilities
 Statement 4 is correct: Importance in the
2. Savings facilities
Budget -
3. Insurance facilities
1) Goods that represent a large portion of the
budget have elastic demand (price changes 4. Fund Transfer facilities.
have a significant impact). Select the correct answer using the codes given
2) Goods that represent a small portion have below the lists:
inelastic demand (price changes have less (a) 1 only (b) 1 and 4 only
impact). (c) 2 and 3 only (d) 1, 2, 3 and 4

51
2. In India, which of the following have the highest share 1. It enables the beneficiaries to draw their
in the disbursement of credit to agriculture and allied subsidies and social security benefits in their
activities? [CSE-2011] villages.
(a) Commercial Banks 2. It enables the beneficiaries in the rural areas to
make deposits and withdrawals.
(b) Cooperative Banks
Select the correct answer using the code given below:
(c) Regional Rural Banks
(a) 1 only (b) 2 only
(d) Microfinance Institutions
(c) Both 1 and 2 (d) Neither 1 nor 2
3. The basic aim of Lead Bank Scheme is that:
7. The establishment of ‘Payment Banks’ is being
[CSE-2012] allowed in India to promote financial inclusion. Which
(a) Big banks should try to open offices in each of the following statements is/are correct in this
district. context? [CSE-2016]
(b) There should be stiff competition among the 1. Mobile telephone companies and supermarket
various nationalized banks. chains that are owned and controlled by residents
(c) Individual banks should adopt particular districts are eligible to be promoters of Payment Banks.
for intensive development. 2. Payment Banks can issue both credit cards and
debit cards.
(d) All the banks should make intensive efforts to
mobilize deposits. 3. Payment Banks cannot undertake lending
activities.
4. Priority Sector Lending by banks in India constitutes
Select the correct answer using the code given below:
the lending to: [CSE-2013]
(a) 1 and 2 only (b) 1 and 3 only
(a) Agriculture
(c) 2 only (d) 1, 2 and 3
(b) Micro and small enterprises
8. What is the purpose of setting up of Small Finance
(c) Weaker sections Banks (SFBs) in India? [CSE-2017]
(d) All of the above 1. To supply credit to small business units
5. Which of the following grants/grant direct credit 2. To supply credit to small and marginal farmers.
assistance to rural households? [CSE-2013] 3. To encourage young entrepreneurs to set up
1. Regional Rural Banks business particularly in rural areas.
2. National Bank for Agriculture and Rural Select the correct answer using the code given below:
Development (a) 1 and 2 only (b) 2 and 3 only
3. Land Development Banks. (c) 1 and 3 only (d) 1, 2 and 3
Select the correct answer using the codes given 9. The Service Area Approach was implemented under
below: the purview of: [CSE-2019]
(a) 1 and 2 only (b) 2 only (a) Integrated Rural Development Programme.
(c) 1 and 3 only (d) 1, 2 and 3 (b) Lead Bank Scheme
6. What is/are the facility/facilities the beneficiaries can (c) Mahatma Gandhi National Rural Employment
get from the services of Business Correspondent Guarantee Scheme.
(Bank Saathi) in branchless areas? [CSE-2014] (d) National Skill Development Mission

52
10. Consider the following statements: [CSE-2020] 2. One of the most important functions of DCCBs
1. In terms of short-term credit delivery to the is to provide funds to the Primary Agriculture
agriculture sector, District Central Cooperative Credit Societies.
Banks (DCCBs) deliver more credit in Which of the statements given above is/are correct?
comparison to Scheduled Commercial Banks (a) 1 only (b) 2 only
and Regional Rural Banks. (c) Both 1 and 2 (d) Neither I nor 2

Explanation
Q.1 D of lead roles to individual banks for the districts
 Microfinance encompasses a range of financial allotted to them. The lead bank acts as a leader
services aimed at empowering individuals and for coordinating the efforts of all credit institutions
small businesses. These services include: in the allotted districts to increase the flow of
1) Credit facilities: Microloans are provided credit to agriculture, MSE and other economic
to individuals and groups for various activities with the district being the basic unit in
purposes, like starting or expanding terms of geographical area.
businesses, purchasing assets, or managing Q4 D
emergencies.  Broadly, the priority sector includes Agriculture
2) Savings facilities: Microfinance institutions Finance, Small Enterprises, weaker sections,
offer safe and accessible savings accounts Retail Trade, Micro Credit, Education Loans and
to help clients build financial security and housing loans.
accumulate funds for future needs. Q.5 C
3) Insurance facilities: Microinsurance  Statement 1 is correct: Established in 1975,
products protect individuals and families Regional Rural Banks (RRBs) specifically aim
from financial risks associated with health, to provide credit and banking facilities to small
accidents, and property loss. and marginal farmers, artisans, labourers, and
4) Fund Transfer facilities: Microfinance small entrepreneurs in rural areas to contribute
platforms enable convenient and secure to the development of the rural economy.
money transfers, facilitating domestic and  Statement 2 is incorrect: NABARD doesn’t
international remittances. directly provide credit assistance to rural
Q.2 A households. It acts as an apex institution,
 Commercial banks have the highest share in the refinancing regional rural banks, cooperative
disbursement of credit to agriculture and allied banks, and other financial institutions that lend
activities. The commercial banks disburse to the rural sector.
around 60% credit followed by cooperative  Statement 3 is correct: Land Development
banks around 30% and RRB and others. Banks (LDBs), 1912, primarily offer long-term
Q.3 C loans to farmers for land development purposes
 Option C is correct: The Lead Bank Scheme, like irrigation, soil conservation, and farm
introduced in year 1969, envisages assignment mechanization.

53
Q.6 C providing affordable credit to farmers, especially
 Business Correspondents (BCs) aka Bank those engaged in small-scale agriculture and
Saathis, helps in extending basic banking services lacking access to conventional banking channels.
to unbanked and underbanked areas,  Statement 3 is incorrect: To encourage young
particularly in rural regions. They act as entrepreneurs to set up business particularly in
intermediaries between banks and customers. rural areas: While SFBs might indirectly
 Statement 1 is correct: BCs enable contribute to entrepreneurship and rural
beneficiaries to withdraw government subsidies development by empowering microbusinesses
and social security benefits directly in their and farmers, their primary mandate is not directly
villages, eliminating the need to travel long focused on these aspects. They are not
distances to bank branches. This includes funds specifically tied to promoting young
for pensions, scholarships, employment schemes, entrepreneurs or rural locations.
and other welfare programs. Q.9 B
 Statement 2 is correct: BCs provide basic  The Service Area Approach (SAA) was
banking services like accepting deposits and introduced in 1989 as an extension of the Lead
facilitating cash withdrawals, promoting financial Bank Scheme. It aimed to bring planned and
inclusion in rural areas. orderly development to rural and semi-urban
Q.7 B areas by assigning each commercial bank branch
a specific geographic area of 15-25 villages.
 Statement 1 is correct: The RBI allows entities
These branches were then responsible for
like mobile phone companies and supermarket
meeting the credit needs of their designated
chains to be promoters of Payment Banks, with
service area through various loan products and
the condition that they are owned and controlled
financial services.
by Indian residents.
Q.10 B
 Statement 2 is incorrect: Payment Banks are
only allowed to issue debit cards, not credit  Statement 1 is incorrect: SCBs hold a
cards. Credit card issuance requires a different significant portion, estimated to be around 70-
license and regulations. 80%, of the total agricultural and allied credit
 Statement 3 is correct: One of the key market in India. While cooperative institutions
limitations of Payment Banks is that they cannot like DCCBs and PACS are crucial for reaching
lend money. Their primary focus is on facilitating smaller farmers and marginalized communities,
payments and providing basic banking services their overall contribution usually falls in the range
like deposit accounts and money transfers. of 15-20%.
 Statement 2 is correct: Providing funds to
Q.8 A
Primary Agricultural Credit Societies (PACS) is
 Statement 1 is correct: SFBs are specifically indeed a major function of DCCBs within the
designed to address the financial needs of small cooperative banking structure. They act as
and micro businesses that often struggle to access intermediaries between State Cooperative
formal banking services from traditional banks. Banks and PACS, ensuring financial resources
They offer tailored loan products and flexible reach the village level for farmer needs.
repayment options to these underserved
segments.
 Statement 2 is correct: This is also a key
objective of SFBs. They play a crucial role in

54
 5 Finance & Investment
(a) 1, 2, 3 and 4 (b) 2 and 4 only
FDI, FII, Bonds, disinvestment (c) 1 and 3 only (d) 1, 2 and 3 only
4.If the interest rate is decreased in an economy, it
1. Both Foreign Direct Investment (FDI) and Foreign will: [CSE-2014]
Institutional Investor (FII) are related to investment
(a) Decrease the consumption expenditure in the
in a country. Which one of the following statements
economy.
best represents an important difference between the
two? [CSE-2011] (b) Increase the tax collection of the Government.
(a) Cut in tax rates accompanied by increase in (c) Increase the investment expenditure in the
interest rate economy.
(b) FIT helps in increasing capital availability in (d) Increase the total savings in the economy.
general, while FDI only targets specific sectors. 5.What does venture capital mean? [CSE-2014]
(c) FDI flows only into the secondary market. while (a) A short-term capital provided to industries.
FIT targets primary market (b) A long-term start-up capital provided to new
(d) FII is considered to be more stable than FDI. entrepreneurs.
2. Why is the Government of India disinvesting its equity (c) Funds provided to industries at times of incurring
in the Central Public Sector Enterprises (CPSEs)? losses.
[CSE-2011] (d) Funds provided for replacement and renovation
1. The Government intends to use the revenue of industries.
earned from the disinvestment mainly to pay back 6. The substitution of steel for wooden ploughs in
the external debt. agricultural production is an example of: [CSE-2015]
2. The Government no longer intends to retain the (a) Labour-augmenting technological progress.
management control of the CPSEs. (b) Capital-augmenting technological progress.
Which of the statements given above is/are correct? (c) Capital-reducing technological progress.
(a) 1 only (b) 2 only (d) None of the above.
(c) Both 1 and 2 (d) Neither 1 nor 2 7.With reference to ‘IFC Masala Bonds’, sometimes
3. Which of the following would include Foreign Direct seen in the news, which of the statements given below
Investment in India? [CSE-2012] is/are correct? [CSE-2016]
1. Subsidiaries of foreign companies in India. 1. The International Finance Corporation, which
2. Majority foreign equity holding in Indian offers these bonds, is an arm of the World Bank.
companies. 2. They are the rupee denominated bonds and are
3. Companies exclusively financed by foreign a source of debt financing for the public and
companies. private sector.
4. Portfolio investment. Select the correct answer using the code given below:
Select the correct answer using the codes given (a) 1 only (b) 2 only
below: (c) Both 1 and 2 (d) Neither 1 nor 2

55
8. Which of the following is issued by registered foreign 4. Non-resident external deposits
portfolio investors to overseas investors who want Which of the above can be included in Foreign Direct
to be part of Indian stock market without registering Investments?
themselves directly? [CSE-2019]
(a) 1, 2 and 3 only (b) 3 only
(a) Certificate of Deposits
(c) 2 and 4 only (d) 1 and 4 only
(b) Commercial Paper
12. Indian Government Bond Yields are influenced by
(c) Promissory Note which of the following?
(d) Participatory Note 1. Actions of the United States Federal Reserve
9. With reference to the Indian economy, consider the 2. Actions of the Reserve Bank of India
following statements: [CSE-2020]
3. Inflation and short-term interest rates
1. ‘Commercial Paper’ is a short-term unsecured
Select the correct answer using the code given below:
promissory note.
[CSE-2021]
2. ‘Certificate of Deposit’ is a long-term instrument
issued by the Reserve Bank of India to a (a) 1 and 2 only (b) 2 only
corporation. (c) 3 only (d) 1, 2 and 3
3. ‘Call Money’ is a short-term finance used for 13. With reference to the India economy, what are the
interbank transactions. advantages of “Inflation-Indexed Bonds (IIBs)”?
4. ‘Zero-Coupon Bonds’ are the interest bearing [CSE-2022]
short-term bond issued by the Scheduled 1. Government can reduce the coupon rates on its
Commercial Banks to corporations. borrowing by way of IIBs.
Which of the statements given above is/are correct? 2. IIGs provide protection to the investors from
(a) 1 and 2 only (b) 4 only uncertainty regarding inflation.
(c) 1 and 3 only (d) 2, 3 and 4 only 3. The interest received as well as capital gains on
10. With reference to Foreign Direct Investment in India, IIBs are not taxable.
which one of the following is considered its major Which of the statements given above are correct?
characteristic? [CSE-2020] (a) 1 and 2 only (b) 2 and 3 only
(a) It is the investment through capital instruments (c) 1 and 3 only (d) 1, 2 and 3
essentially in a listed company. 14. With reference to foreign-owned e-commerce firms
(b) It is a largely non-debt creating capital flow. operating in India, which of the following statements
(c) It is the investment which involves debtservicing. is/are correct? [CSE-2022]
(d) It is the investment made by foreign institutional 1. They can sell their own goods in addition to
investors in the Government Securities. offering their platforms as market-places.
11. Consider the following: [CSE-2021] 2. The degree to which they can own big sellers on
1. Foreign currency convertible bonds their platforms is limited.
2. Foreign institutional investment with certain Select the correct answer using the code given below:
conditions (a) 1 only (b) 2 only
3. Global depository receipts (c) Both 1 and 2 (d) Neither 1 nor 2

56
15. With reference to Convertible Bonds, consider the (c) John Maynard Keynes
following statements: [CSE-2022] (d) Milton Friedman
1. As there is an option to exchange the bond for 19. Which one of the following would be consider as
equity, Convertible Bonds pay a lower rate of Foreign Direct Investment? [CDS-I-2022]
interest.
(a) A foreign company buying shares in stock
2. The option to convert to equity affords the exchanges in India
bondholder a degree of indexation to rising
(b) A foreign country pension fund investing in India
consumer prices.
stock markets
Which of the statements given above is/are correct?
(c) A foreign merchant banker buying shares from
(a) 1 only (b) 2 only Indian stocks markets
(c) Both 1 and 2 (d) Neither 1 nor 2 (d) A foreign entity setting up an educational
16. Consider the following markets: [CSE-2023] institution in India.
1. Government Bond Market 20. Which one of the following statements about Indian
2. Call Money Market economy during 2019-20 is not correct?
3. Treasury Bill Market [CDS-II-2020]
4. Stock Market (a) There has been deceleration in growth rate.
How many of the above are included in capital (b) There has been sluggish growth in tax revenue
markets? relative to the Budget Estimates.
(a) Only one (b) Only two (c) Fiscal deficit as percentage of GDP has been as
(c) Only three (d) All four per the Budget Estimates.

17. Consider the following statements about a joint-stock (d) The non-tax revenue registered a considerably
company: [CDS-I-2019] higher growth.

1. It has a legal existence. 21. As per the use-based classification of the Index of
Industrial Production (IIP), the maximum weight has
2. There is limited liability of share-holders.
been assigned to: [CDS-II-2020]
3. It has a democratic management.
(a) Primary goods
4. It has a collective ownership.
(b) Intermediate goods
Which of the statements given above is/are correct?
(c) Consumer durables
(a) 1 and 2 only (b) 1, 2 and 3 only
(d) Consumer non-durables
(c) 3 and 4 only (d) 1, 2, 3 and 4
22. The proceeds from disinvestment are included as:
18. Who among the following first mooted the idea of
[CAPF-2022]
deficit financing? [CDS-I-2022]
(a) Non-tax revenue (b) Revenue receipts
(a) Adam Smith
(c) Capital receipts (d) Tax revenue
(b) Alfred Marshall

57
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UPSC: (IFS) AIR-06, (CSE) AIR-720
66 BPSC Rank-09, IIT Guwahati
th
 Explanation
Q.1 B Q.3 D
 Foreign Direct Investment (FDI) involves a  Statement 1 is correct: Subsidiaries of foreign
foreign company making an investment in companies in India involve the direct ownership
another country’s economy, often by acquiring and control of a company by a foreign entity.
a controlling stake in a local company or  Statement 2 is correct: Majority foreign equity
establishing a new business. This investment is holding in Indian companies involves direct
usually sector-specific, targeting areas like investment of foreign capital in Indian companies.
manufacturing or infrastructure, with the intention  Statement 3 is correct: Companies exclusively
of contributing to the host country’s long-term financed by foreign companies are directly
economic development. owned and controlled by foreign entities.
 In contrast, a Foreign Institutional Investor (FII)  Statement 4 is incorrect: Portfolio investment,
refers to an investor or investment fund from refers to indirect investment through the purchase
outside the country that participates in the host of stocks or bonds, and does not involve direct
country’s financial markets. FII investments ownership or control of a company, so it does
typically take the form of portfolio investments, not include Foreign Direct Investment (FDI).
such as stocks and bonds, and are oriented Q.4 C
toward generating short-term gains rather than  When the interest rates decrease, citizens do not
fostering long-term economic development. want to keep their currency in banks since they
 In summary, FDI is geared towards specific would not get a high return. A lower interest rate
sectors and aims to support the host country’s tends to make borrowing cheaper, encouraging
lasting economic growth, while FII is more businesses to invest more in projects and expand
focused on increasing capital availability and is operations. This, in turn, contributes to an
increase in investment expenditure in the
often driven by short-term profit objectives.
economy.
Q.2 D
Q.5 B
 Both statements 1 and 2 are incorrect.
 Option A is incorrect: A short-term capital
 Statement 1 is incorrect: Disinvestment serves provided to industries is often referred to as
broader purposes such as enhancing operational “working capital.” Working capital represents
efficiency, fostering public participation, and the funds that a business or industry needs for
ensuring transparency and accountability. It is its day-to-day operations.
not primarily driven by the sole goal of debt  Option B is correct: A long-term start-up capital
repayment. provided to new entrepreneurs. Venture capital
 Statement 2 is incorrect: While disinvestment is a form of private equity and a type of financing
can result in a shift in management control, it that investors provide to startup companies and
doesn’t necessarily indicate a complete small businesses that are believed to have long-
relinquishment of control. The government often term growth potential.
retains a substantial stake, allowing it to maintain  Option C is incorrect: Funds provided to
influence over decision-making processes even industries at times of incurring losses are often
after the disinvestment. referred to as “bailouts” or “financial assistance.”

58
  Option D is incorrect: Funds provided for the a lump sum of money for a fixed period of time.
replacement and renovation of industries are CDs differ from savings accounts because the
commonly referred to as “modernization funds” money must remain untouched for the entirety
or “capital expenditure funds.” of their term or you risk paying a penalty. CDs
Q.6 B usually have higher interest rates than savings
 This type of progress occurs when new or accounts as an incentive for lost liquidity.
improved capital goods are introduced into the  Statement B is incorrect: Commercial paper
production process, leading to increased output is an unsecured form of promissory note that
with the same amount of labor. In this case, pays a fixed rate of interest. It is typically issued
replacing wooden ploughs with steel ones by large banks or corporations to cover short-
represents an investment in a more advanced term receivables and meet short-term financial
capital good. obligations, such as funding for a new project.
Q.7 C  Statement C is incorrect: Promissory note is
 Statement 1 is correct: The first Masala bond a financial instrument that contains a written
was issued by IFC in 2014 for the infrastructure promise by one party (the note’s issuer or
projects in India. International Finance maker) to pay another party (the note’s payee)
Corporation is an arm of World Bank that a definite sum of money, either on demand or at
provides investment, advice, and asset a specified future date.
management to companies and governments.
 Statement D is correct: Participatory Notes
 Other arms of World Bank: (P-Notes) are instruments issued by registered
1) International Bank for Reconstruction and foreign institutional investors to overseas
Development (IBRD) provides loans, investors, who wish to invest in Indian markets
credits, and grants. without registering themselves directly in India
2) International Development Association to save on time.
(IDA) provides low- or no-interest loans to Q.9 C
low-income countries.
 Statement 1 is correct: Commercial paper is
3) The Multilateral Guarantee Agency (MIGA)
an unsecured form of promissory note that pays
insures lenders and investors against political
a fixed rate of interest. It is typically issued by
risk such as war.
large banks or corporations to cover short-term
4) The International Centre for the Settlement receivables and meet short-term financial
of Investment Disputes (ICSID) settles
obligations, such as funding for a new project.
investment-disputes between investors and
countries.  Statement 2 is incorrect: Certificate Of
Deposit is a short term instrument issued by
 Statement 2 is correct: Masala Bonds are
rupee-denominated bonds. It is a debt scheduled commercial banks and select financial
instrument issued by an Indian entity in foreign institutions in India as allowed by RBI within a
markets to raise money, in Indian currency, limit.
instead of dollars or local denomination. The  Statement 3 is correct: Call money is a short-
major objectives of Masala Bonds are to fund term financial loan that is payable immediately,
infrastructure projects, ignite internal growth (via and in full, when the lender demands it. Unlike a
borrowings) and internationalise the Indian rupee term loan, which has a set maturity and payment
Q.8 D schedule, call money does not have to follow a
 Statement A is incorrect: Certificate of deposit fixed schedule, nor does the lender have to
(CD) is a savings product that earns interest on provide any advance notice of repayment.

59
  Statement 4 is incorrect: Zero-Coupon  Statement 3 is correct: A global depositary
Bonds, which are short-term government receipt (GDR) is a negotiable financial instrument
securities or instruments issued by Reserve Bank issued by a depositary bank. It represents shares
of India (RBI) on behalf of the Government of in a foreign company and trades on the local
India that pays no interest. stock exchanges in investors’ countries. GDRs
Q.10 B make it possible for a company (the issuer) to
access investors in capital markets beyond the
 Option A is incorrect: FDI is a capital
borders of its own country.
investment in a listed as well as non-listed
company.  Statement 4 is incorrect: A Non-Resident
External (NRE) account is a rupee dominated
 Option B is correct: Foreign Direct Investment
account opened by an NRI to facilitate deposit
(FDI) is a type of investment made by a foreign
of foreign currency earnings. It is not an FDI.
entity, such as an individual or a company, in a
domestic company or enterprise. It involves the Q.12 D
transfer of capital, technology, and other  Statement 1 is correct: Hike in interest rate in
resources, and is considered an important source the US by United States Federal Reserve leads
of non-debt creating capital flow in the recipient not only to an outflow of funds from equities
country. into US treasury bonds, but also to an outflow
of funds from emerging economies to the US.
 Option C is incorrect: FDI is an instrument to
Thus, it impacts Indian Government Bond Yields
boost the potential growth of a company. It does
in negative manner as there is a net outflow of
not involve debt servicing.
foreign currency making it difficult for the
 Option D is incorrect: Additionally, FDI Government to raise money.
involves a long-term commitment by the foreign
 Statement 2 is correct: The actions of the
investor, as opposed to short-term investments
Reserve Bank of India can also influence bond
such as foreign institutional investments in
yields. RBI influences the bond yields through
government securities. FDI also typically
various instruments under the Monetary Policy
involves a direct equity stake in the domestic
Framework. For example, if the RBI increases
company, rather than investment through capital the policy interest rate, it can lead to an increase
instruments like stocks and bonds. in bond yields as investors may demand higher
Q.11 A returns on their investments.
 Foreign direct investment (FDI) is an ownership  Statement 3 is correct: Inflation and short-
stake in a foreign company or project made by term interest rates can also impact bond yields.
an investor, company, or government from If inflation expectations rise, investors may
another country. demand higher yields to compensate for the loss
 Statement 1 is correct: A foreign currency of purchasing power over time. Similarly, if short-
convertible bond (FCCB) is a type of convertible term interest rates increase, bond yields may also
bond issued in a currency different than the increase.
issuer’s domestic currency. Q.13 A
 Statement 2 is correct: In India, as per SEBI  Statement 1 is correct: Since a growing
(FPI regulations), 2019, a particular FPI is economy is always inflationary, these bonds
allowed to invest upto 10% of the paid-up provide no risk of capital loss. Hence, it can
capital of an economy, which implies that any offer a lesser rate of interest (coupon) as interest
investment above 10% will be constituted as FDI. is directly proportional to risk.

60
  Statement 2 is correct: Since Inflation indexed Q.16 B
bonds are linked to WPI (Wholesale Price  Government Bond Market: Government
Index), they provide protection to investors from bonds are long-term debt securities issued by
uncertainty regarding inflation. governments to finance various activities. The
 Statement 3 is incorrect: Tax provisions are market for these bonds is considered a part of
applicable on interest payments and capital gains the capital market. Investors in government
made when sold in the secondary market bonds typically lend money to the government
(through the BSE, NSE, and other stock for an extended period, and the trading of these
exchanges). There will be no special tax bonds occurs in the capital market.
treatment for these bonds.  Call Money Market: The call money market
Q.14 D operates in the short-term lending and borrowing
of funds, usually on an overnight basis.
 Statement 1 is incorrect: Foreign-owned e-
Transactions in this market are focused on short
commerce firms operating in India are not
durations and are not classified within the capital
allowed to sell their own products. They are only
market. It falls under the broader category of
allowed to function as a marketplace, providing the money market, which deals with short-term
a platform for other sellers to sell their products. financial instruments.
 Statement 2 is incorrect: As per India‘s FDI  Treasury Bill Market: Similar to the call
policy, 100% FDI is permitted in the money market, the treasury bill market involves
marketplace model of e-commerce, but e- short-term debt instruments issued by
commerce entities providing a marketplace will governments. Treasury bills are typically short-
not directly or indirectly influence the sale price term, with maturities ranging from a few days to
of goods or services and shall maintain a level a year. This market is considered part of the
playing field. So, they cannot own sellers on their money market due to its focus on short-term
platforms. instruments and short investment horizons.
Q.15 C  Stock Market: The stock market, also known
 Statement 1 is correct: Convertible Bonds as the equity market, is where shares or stocks
provide bondholders with the opportunity to of publicly listed companies are bought and sold.
convert the bond into equity at a predetermined It involves the trading of ownership interests
price. This feature allows investors to potentially (equity securities) in companies. The stock
benefit from any increase in the company’s share market is a key component of the capital market
price. The inclusion of the conversion option as it deals with long-term securities, providing a
enhances the attractiveness of these bonds to platform for companies to raise capital by issuing
investors, enabling issuers to offer a lower interest stocks to investors.
rate. Q.17 D
 Statement 2 is correct: Since bondholders have  Statement 1 is correct: A joint-stock company
the flexibility to convert the bond into equity, the is a legally registered entity under the Companies
bond’s value tends to mirror the underlying Act 2013 with independent status from its
equity’s price movements. Consequently, in a shareholders. This grants it the ability to engage
scenario of increasing inflation, the value of the in contracts, possess assets, and participate in
equity may also experience growth. This dynamic legal actions under its own identity.
offers bondholders a form of indexation to rising  Statement 2 is correct: Within a joint-stock
consumer prices, providing a potential hedge in company, shareholders bear limited liability,
inflationary environments. restricted to the extent of their invested capital.

61
 This safeguard shields their personal assets from  Statement 2 is incorrect: A foreign country
the company’s financial obligations and debts. pension fund investing in Indian stock markets
 Statement 3 is correct: Typically, joint-stock is considered portfolio investment and does not
companies feature a board of directors chosen represent FDI due to the absence of a direct
by the shareholders. These directors assume stake in the Indian economy.
responsibility for pivotal decisions on behalf of  Statement 3 is incorrect: A foreign merchant
the company, with shareholders enjoying the right banker acquiring shares from Indian stock
to vote on significant corporate matters. markets is also not categorized as FDI. Like
statement 1, this constitutes portfolio investment
 Statement 4 is correct: A joint-stock company
rather than a direct investment in the Indian
is collectively owned by its shareholders, each
economy.
holding shares representing their ownership
stake. Shareholders participate in the company’s  Statement 4 is correct: A foreign entity setting
profits and losses, fostering a sense of collective up an educational institution in India aligns with
ownership. FDI principles as it entails a lasting commitment
and the establishment of a business within the
Q.18 C Indian economy.
 Deficit financing refers to the practice of a Q.20 C
government spending more money than it
 The Fiscal Deficit for 2019-20 Provisional
receives in revenue, resulting in a budget deficit.
Actuals stood at 4.6 percent of GDP, which was
This concept was first proposed and advocated
0.8 percentage points higher than the Fiscal
by John Maynard Keynes, a prominent
Deficit. Hence option 3 is not correct.
economist during the early 20th century.
Q.21 A
 Keynes suggests that during economic
 Primary goods refer to raw materials or
downturns or recessions, governments should
agricultural products that are directly extracted
augment spending to stimulate economic activity
from nature and used in the production of other
and employment. To implement this approach,
goods. Examples of primary goods are crude
the government incurs budget deficits that are
oil, coal, minerals, timber, etc.
funded through borrowing or the creation of
additional currency. Keynes asserted that deficit  Intermediate goods are products that are used
financing could effectively elevate aggregate in the production process to make other goods,
which are ultimately sold to consumers. The
demand, consequently fostering increased output
intermediate goods are sold industry-to-industry
and employment levels.
for resale or to produce other products. E.g.
Q.19 D Tyres used in cars.
 Foreign Direct Investment (FDI) refers to the  Consumer durables, also known as durable
investment made by a foreign entity in a country‘s goods, are consumer goods that do not wear
economy. It involves a long-term commitment out quickly and therefore do not have to be
and is typically associated with the establishment purchased frequently. E.g. TV, washing machine,
of a business or the acquisition of a substantial etc.
amount of ownership in an existing enterprise.  Consumer nondurable goods are purchased for
 Statement 1 is incorrect: A foreign company immediate or almost immediate consumption and
purchasing shares on Indian stock exchanges have a life span ranging from minutes to three
does not qualify as FDI as it does not constitute years. Common examples of these are food,
a direct investment in the Indian economy. beverages, clothing, shoes, and gasoline.

62
Q.22 C 1. The Reserve Bank of India manages and services
 The proceeds from such disinvestment are Government of India Securities but not any State
considered as capital receipts for the government, Government Securities.
as they result in a reduction in the assets owned 2. Treasury bills are issued by the Government of
by the government. Capital receipts are those India and there are no treasury bills issued by
receipts which either create a liability for the the state Governments.
government or result in a reduction in its assets. 3. Treasury bills offer are issued at a discount from
the par value.
Tools (Money Which of the statements given above is/are correct?
and Capital Market)
(a) 1 and 2 only (b) 3 only
1. Supply of money remaining the same when there is (c) 2 and 3 only (d) 1, 2 and 3
an increase in demand for money, there will be: 5. The money multiplier in an economy increases with
which one of the following? [CSE-2019&2020]
[CSE-2013]
(a) Increase in the cash reserve ratio.
(a) A fall in the level of prices
(b) Increase in the banking habit of the population.
(b) An increase in the rate of interest
(c) Increase in the statutory liquidity ratio.
(c) A decrease in the rate of interest
(d) Increase in the population of the country.
(d) An increase in the level of income and
6. In the context of the Indian economy, nonfinancial
employment
debt includes which of the following? [CSE-2020]
2. If a commodity is provided free to the public by the
1. Housing loans owed by households.
Government, then: [CSE-2018]
2. Amounts outstanding on credit cards.
(a) The opportunity cost is zero.
3. Treasury bills.
(b) The opportunity cost is ignored.
Select the correct answer using the code given below:
(c) The opportunity costs is transferred from the
(a) 1 only (b) 1 and 2 only
consumers of the product to the taxpaying
public. (c) 3 only (d) 1, 2 and 3
(d) The opportunity cost is transferred from the 7. With reference to India, consider the following
consumers of the product to the Government. statements: [CSE-2022]
1. Retail investors through demat account can invest
3. Which one of the following statements correctly
in Treasury Bills’ and ‘Government of India Debt
describes the meaning of legal tender money?
Bonds’ in primary market.
[CSE-2018]
2. The Negotiated Dealing System- Order
(a) The money which is tendered in courts of law to Matching’ is a government securities trading
defray the fee of legal cases. platform of the Reserve Bank of Indía.
(b) The money which a creditor is under compulsion 3. The Central Depository Services Ltd.’ is jointly
to accept in settlement of his claims. promoted by the Reserve Bank of India and the
(c) The bank money in the form of cheques, drafts, Bombay Stock Exchange.
bills of exchange etc. Which of the statements given above is/are correct?
(d) The metallic money in circulation in a country (a) 1 only (b) 1 and 2 only
4. Consider the following statements: [CSE-2018] (c) 3 only (d) 2 and 3 only

63
8. With reference to the Indian economy, consider the List I List II
following statements: [CSE-2022] (Market structure) (Characteristic)
1. A share of the household financial savings goes (a) Perfect competition 1. Only one producer
towards government borrowings. selling one commodity
2. Dated securities issued at market-related rates (b) Monopoly 2. Few producers selling
in auctions form a large component of internal similar or almost
debt. similar products
Which of the above statements is/are correct? (c) Monopolistic 3. Many producers
(a) 1 only (b) 2 only competition selling differentiated
(c) Both 1 and 2 (d) Neither 1 nor 2 products
9. Which one of the following is not an exclusive right (d) Oligopoly 4. Many producers
of the concerned coastal nations over Exclusive selling similar products
Economic Zone (EEZ)? [CDS-I-2018] Code:
(a) Survey and exploitation of mineral resources of A B C D A B C D
ocean deposits.
(a) 4 3 1 2 (b) 4 1 3 2
(b) Exploitation of marine water energy and marine
(c) 2 1 3 4 (d) 2 3 1 4
organisms including dishing
13. Which one of the following is not a function of
(c) Conservation and management of marine
money? [CDS I-2021]
resources
(a) Acts as an intermediate in the exchange process
(d) Navigation of ship and laying down submarine
cables (b) Acts as a store of value
10. A market situation when many firms sell similar but (c) Used as the unit of account
not identical products is termed as: [CDS-I-2019] (d) Used for regulating consumption
(a) Perfect competition 14. Which one of the following terms denotes the inputs
(b) Imperfect competition in terms of tools, Machines, buildings, raw materials
(c) Monopolistic competition and money in hand required at any stage of
production? [CDS-I-2022]
(d) Oligopoly
(a) Fixed capital (b) Working capital
11. Which one of the following hypotheses postulates
that individual’s consumption in any time period (c) Physical capital (d) Human capital
depends upon resources available to the individual, 15. Which of the following factors signify monopolistic
rate of return on his capital and age of the individual? competition? [CDS-I-2022]
[CDS-I-2019] 1. Differentiated products
(a) Absolute Income Hypothesis 2. Larges number of buyers and sellers
(b) Relative Income Hypothesis 3. Barriers to entry
(c) Life Cycle Hypothesis 4. Homogeneous products
(d) Permanent Income Hypothesis Select the correct using the code given below:
12. Match List I with List II and select the correct answer (a) 1 and 2 only (b) 1, 2 and 3 only
using the code given below the Lists: [CDS-I-2020] (c) 3 and 4 only (d) 2 and 4 only

64
16. According to the World Bank’s Doing Business (d) Both can lose
Report, 2018, India’s ranking has improved in 2018 21. Which one of the following is a typical example of
as compared to 2017 in which of the following areas? monopolistic competition? [CDS-II-2021]
[CDS-II-2018] (a) Retail vegetable markets
1. Paying taxes 2. Resolving insolvency (b) Market for soaps
3. Starting a business 4. Getting electricity (c) Indian Railways
Select the correct answer using the code given below: (d) Labour market for software engineers
(a) 1 only (b) 1 and 2 only 22. The department for Promotion of Industry and
(c) 1, 2 and 3 only (d) 2, 3 and 4 only Internal Trade (DOIIT) has revised the base year
17. The working of the price mechanism in a free-market index of Eight Core Industries having a combined
economy refers to which one of the following? weight of about 40-27 percent in the index of
industrial Production. Which one of the following is
[CDS II-2019]
not one of the Eight Core Industries? [CDS-II-2022]
(a) The interplay of the forces of demand and supply
(a) Coal (b) Refinery products
(b) Determination of the inflation rate in the economy
(c) Rubber products (d) Cement
(c) Determination of the economy’s propensity to
23. Consider the following statements about the Micro,
consume
Small and Medium Enterprises (MSMEs):
(d) Determination of the economy’s full employment
[CDS-II-2022]
output
1. The MSMEs comprise a dynamic sector of the
18. Indexation is a method whose use can be associated
Indian economy providing large employment
with which one of the following? [CDS-II-2019]
opportunities.
(a) Controlling inflation
2. MSMEs require low capital coast and help
(b) Nominal GDP estimation industrialization of backward regions.
(c) Measurement of saving rate 3. MSMEs contribute enormously to socio-
(d) Fixing of wage compensation economic development.
19. A market, in which there are a large number of firms, How many of the above statements is/are correct?
homogeneous product, infinite electricity of demand (a) None (b) 1 only
for an individual firm and no control over price by
(c) 2 only (d) 3 only
firms, is termed as: [CDS-II-2020]
24. Which one of the following central features is not
(a) Oligopoly
associated with Capitalist Economy?[CDS-II-2022]
(b) Imperfect competition
(a) There is generalised commodity production – it
(c) Monopolistic competition has market value.
(d) Perfect competition (b) Productive wealth is held predominantly in
20. Which one of the following is true of a pure voluntary private hands.
exchange between two parties A and B?
(c) Economic life is organised according to market
[CDS-II-2021] principles.
(a) A can exploit B or vice versa (d) Economic organisation is based on planning, a
(b) Both gain; it is a win-win situation supposedly rational process of resource
(c) If a makes profit, it must be at the cost of B allocation.

65
25. Zero price elasticity of demand means:[CAPF- 29. Mobile phone operators’ market in India is an
2019] example of: [CAPF-2020]
(a) Whatever the change in price, there is absolutely (a) Monopoly
no change in demand (b) Monopolistic Competition
(b) For a small change in price, there is a small (c) Oligopoly
change in demand (d) Perfect Competition
(c) For a small change in price, there is a large change 30. Which of the following sectors contribute in recent
in demand year to the deterioration of asset quality of
(d) For a large change in price, there is a small change commercial banks by way of non-Performing Assets?
in demand [CAPF-2020]
26. Which one of the following is an example of a price 1. Agriculture and allied sector
ceiling? [CAPF-2019]
2. Industrial sector
(a) Fares charged by Airlines in India
3. Infrastructure sector
(b) Price printed on biscuit packets
4. Information technology sector
(c) Minimum support price for cane growers
Select the correct answer using the code given below:
(d) Minimum wages fixed by state Governments
(a) 1 and 2 only (b) 2 and 3 only
27. Which one of the following statements is true with
regard to an economy which is one its production (c) 1 and 4 only (d) 1, 2, 3 and 4
possibility frontier? [CAPF-2019] 31. The sectoral shares of Gross Value Added (GVA)
(a) The economy has to sacrifice some production for the year 2009-10 to 2018-19 show that the share
of one commodity in order to increase the of service sector in GVA in India has increased over
production of another commodity the years. Which among the following have driven
the maximum increase? [CAPF-2021]
(b) There is no limit or constraint of the economy in
the production of goods and services (a) Electricity, gas, water supply and other utility
services
(c) The economy can produce more of one
commodity up to a point without reducing the (b) Trade, hotel, transport, communication and
production of any other commodity services related to broadcasting
(d) Its production possibility frontier is a sloping curve (c) Public administration, defense and other services
28. Which one of the following Central Public Sector (d) Financial, real estate and professional services
Undertakings (CPSUs) is recognized as Miniratnas? 32. On the basis of employment conditions, the economy
[CAPF-2020] is divided into: [CAPF-2021]
(a) Airport Authority of India (a) Organized and unorganized sectors
(b) Indian Oil Corporation Limited (b) Private and public sectors
(c) Hindustan Aeronautics Limited (c) Seasonal and disguised sectors
(d) Steel Authority of India Limited (d) Primary, secondary and tertiary sectors

Explanation
Q.1 B when there is an increase in demand for money,
there will be an increase in the rate of interest.
 The correct answer is an increase in the rate of This occurs in order to attract customers and
interest: The supply of money remaining the same
initiate deposits among them by the banks.

66
Q.2 C currency in circulation and reserves held by
 Opportunity cost represents the benefits an commercial banks) leads to a change in the
individual, investor, or business misses out on money supply. So, a higher money multiplier
when choosing one alternative over another. If a implies a greater expansion of the money supply
commodity is provided free to the public by the for any given increase in the monetary base.
Government, then the opportunity cost is  As more people deposit their money into banks,
transferred from the consumers of the product the amount of depositable funds available for
to the tax-paying public. lending increases. This allows banks to expand
Q.3 B their loanable funds and contribute to a higher
 Legal tenders are those currencies which cannot money supply, boosting the money multiplier.
be refused by any citizen of the country for Q.7 B
settlement of any kind of transaction. Cheques  Statement 1 is correct: Retail investors in India
drawn on savings or current accounts, however, can invest in Treasury Bills and Government of
can be refused by anyone as a mode of payment. India Debt Bonds in the primary market through
Hence, demand deposits are not legal tenders. demat accounts. This option allows them to
Q.4 C participate directly in the initial issuance of these
 Statement 1 is incorrect: The Reserve Bank securities at the issue price.
of India manages and services Government of  Statement 2 is correct: The Negotiated Dealing
India as well as State Government Securities. System - Order Matching (NDS-OM) is indeed
 Statement 2 is correct: In India, the Central a screen-based electronic platform established
Government issues both, treasury bills and bonds by the Reserve Bank of India for trading
or dated securities while the State Governments government securities in the secondary market.
issue only bonds or dated securities, which are It facilitates anonymous order matching between
called the State Development Loans (SDLs). participants like banks, primary dealers, and
 Statement 3 is correct: T-bills are issued other institutional investors.
through a competitive bidding process at a  Statement 3 is incorrect: Central Depository
discount from par, which means that rather than Services Ltd. (CDSL) plays a crucial role in the
paying fixed interest payments like conventional Indian securities market, it is a public limited
bonds, the appreciation of the bond provides company jointly promoted by the Stock
the return to the holder. Exchanges of India and sponsored by the
Q.5 D Government of India.
 It consists of credit instruments issued by Q.8 C
government entities, households, and business  Statement 1 is correct: Gross financial savings
which are not covered in the financial sector. of households include money saved in banks,
Housing loans owed by households, Amounts provident funds, pension schemes, shares,
outstanding on credit cards, Treasury bills, Credit insurance and in the form of currency, among
Card balance etc. are types of nonfinancial other categories. These savings form the pool
debts. of domestic finance for investments which are
Q.6 B used by the government in job creation, and are
 The money multiplier refers to the factor by which currently critical as they will be crucial in deciding
a change in the monetary base (the sum of the pace of economic revival.

67
  Statement 2 is correct: Internal debt comprises  Option C is correct: Monopolistic competition
of loans raised in the open market, dated is a type of market structure where many
securities issued by the Reserve Bank of India, companies are present in an industry, and they
compensation and other bonds, etc. The share produce similar but differentiated products.
of marketable securities in internal debt stood at  Option D is incorrect: An oligopoly is a market
84.4 per cent at end-March 2019. in which control over an industry lies in the hands
Q.9 D of a few large sellers who own a dominant share
of the market.
 Statement 1 is incorrect: “Survey and
exploitation of mineral resources of ocean Q.11 C
deposits,” qualifies as an exclusive right because  Statement 1 is incorrect: Absolute income
coastal nations possess sovereignty over hypothesis concerns how a consumer divides
resources within their Exclusive Economic Zone their disposable income between consumption
(EEZ), granting them the authority to explore and saving.
and exploit these resources.  Statement 2 is incorrect: The relative income
 Statement 2 is incorrect: “Exploitation of hypothesis was developed by James
marine water energy and marine organisms, Duesenberry and states that an individual’s
including fishing,” is considered an exclusive right. attitude to consumption and saving is dictated
more by his income in relation to others than by
Coastal nations are empowered to manage and
abstract standard of living. The percentage of
regulate the utilization of marine energy and
income consumed by an individual depends on
resources within their EEZ.
his percentile position within the income
 Statement 3 is incorrect: “Conservation and distribution.
management of marine resources,” represents  Statement 3 is correct: The life cycle
another exclusive right. Coastal nations bear the hypothesis argues that people seek to maintain
responsibility of safeguarding and sustainably roughly the same level of consumption
managing marine resources within their EEZ. throughout their lifetimes by taking on debt or
 Statement 4 is correct: “Navigation of ships liquidating assets early and late in life (when their
and laying down submarine cables,” is the correct income is low) and saving during their prime
response as it does not constitute an exclusive earning years when their income is high.
right for coastal nations over the Exclusive  Statement 4 is incorrect: The permanent
Economic Zone (EEZ). income hypothesis is a theory of consumer
Q.10 C spending stating that people will spend money
 Option A is incorrect: Perfect competition is a at a level consistent with their expected long-
unique form of the marketplace that allows term average income. The level of expected
long-term income then becomes thought of as
multiple companies to sell the same product or
the level of “permanent” income that can be safely
service. Under perfect competition, there are
spent.
many buyers and sellers, and prices reflect supply
and demand. Q.12 B
 Option B is incorrect: Imperfect competition  Perfect - Many producers selling similar
is an economic concept used to describe products
marketplace conditions that render a market less  Monopoly - Only one producer selling one
than perfectly competitive, creating market commodity
inefficiencies that result in losses of economic  Monopolistic - Many producers selling
value. differentiated products

68
  Oligopoly - Few producers selling similar or  Statement 2 is correct: While perfectly
almost similar products competitive markets typically feature a multitude
Q.13 D of buyers and sellers, monopolistic competition
can also involve a substantial number of firms
 The correct answer is used for regulating
participating in the market. However, the mere
consumption: Money serves as a medium of
presence of numerous participants does not
exchange, and as a unit of account. The medium
inherently indicate monopolistic competition.
of exchange: Money’s most important function
is as a medium of exchange to facilitate  Statement 3 is incorrect: Entry Barriers
transactions. suggests that it characterize monopolistic
competition. In reality, monopolistic competition
Q.14 C is distinguished by relatively low entry barriers,
 Statement 1 is incorrect: Fixed capital refers facilitating easy market entry for new firms.
to the long-term assets of a production process,  Statement 4 is incorrect: Option 4 incorrectly
such as land, buildings, and machinery. While asserts that identical products are indicative of
fixed capital is part of physical capital, it does monopolistic competition. In monopolistic
not encompass all the inputs listed in the question. competition, products are differentiated,
 Statement 2 is incorrect: Working capital possessing distinctive features that set them apart
denotes the financial resources utilized for from one another.
meeting the everyday operational costs of a Q.16 B
business, including salary disbursements and  Of the 10 indicators assessed, India improved
procurement of inventory. It does not specifically its rankings in 6. India’s rankings improved in
encompass the tangible inputs essential for the Paying Taxes (172 to 119), Resolving
production process. Insolvency (136 to 103), Getting Credit (44 to
 Statement 3 is correct: Physical capital 29), Enforcing Contracts (172 to 164),
encompasses the inputs or assets utilized in the Protecting Minority Investors (13 to 4), and
production process, such as tools, machinery, Construction Permits (185 to 181).
buildings, raw materials, and available funds. Q.17 A
These tangible resources serve as assets
 The price mechanism is a system where the
employed in the creation of goods or services.
forces of supply and demand determine the
 Statement 4 is incorrect: Human capital prices of the commodities. The buyers and sellers
pertains to the capabilities, expertise, and life determine the price of a commodity. The free
experiences of individuals, influencing their play of market forces with respect to demand
productivity and capacity to generate goods and and supply influences the Price Mechanism.
services. While crucial for production, it does Sometimes, though, the government intervenes
not encompass the physical inputs mentioned in to control the price mechanism of certain
the question. commodities which may be necessary but not
Q.15 A affordable for the poor. Examples include Public
 Statement 1 is correct: In monopolistic Distribution System, and Essential Commodities
competition, companies manufacture products Act.
that exhibit slight variations, whether in terms of Q.18 D
branding, quality, or features. This enables firms  Indexation involves the modification of a price,
to exert some influence on pricing and establishes wage, or any other value in response to
a perception of product distinctiveness in the fluctuations in another price or a composite
market. indicator of prices. This adjustment is carried

69
 out to account for the impacts of inflation,  Statement 2 is correct: This option correctly
changes in the cost of living, or variations in input states that in a pure voluntary exchange, both
prices over a period. Additionally, indexation parties gain and it is a win-win situation. This
serves the purpose of accommodating different means that each party involved in the exchange
prices and costs across various geographical perceives that what they are receiving is of greater
areas. Particularly in environments marked by value than what they are giving up. There is
inflation, indexation is commonly employed to mutual benefit and both parties are satisfied with
raise wages, preventing a scenario where the the outcome.
absence of regular wage negotiations would  Statement 3 is incorrect: This option implies
result in continual reductions in real wages for that if party A profits, it must be at the expense
workers. Hence, Option D is the correct of party B. However, in a true voluntary
answer. exchange, both parties benefit, eliminating the
need for one party to incur losses for the other
Q.19 D
to gain.
 Statement 1 is incorrect: An oligopoly is a
 Statement 4 is incorrect: In a genuine voluntary
market in which control over an industry lies in
exchange, it is inherently designed for mutual
the hands of a few large sellers who own a
benefit, and both parties are expected to gain.
dominant share of the market. The concept of both parties losing in a voluntary
 Statement 2 is incorrect: Imperfect exchange contradicts the fundamental nature of
competition is an economic concept used to voluntary transactions.
describe marketplace conditions that render a Q.21 B
market less than perfectly competitive, creating
 The correct answer is Market for soaps. It
market inefficiencies that result in losses of
occurs when an industry has many firms offering
economic value. products that are similar but not identical.
 Statement 3 is incorrect: Monopolistic Therefore, the market for soaps in India is an
competition is a type of market structure where example of a typical example of monopolistic
many companies are present in an industry, and competition. Hence, Option 2 is correct.
they produce similar but differentiated products. Q.22 C
Buyers are many but the seller is one.
 Index of Eight Core Industries (ICI) is a
 Statement 4 is correct: Perfect competition is production volume index that measures the
a unique form of the marketplace that allows collective and individual production
multiple companies to sell the same product or performances of selected eight core industries.
service. Under perfect competition, there are  ICI measures combined and individual
many buyers and sellers, and prices reflect supply performance of production in selected eight core
and demand. industries –Coal, Crude Oil, Natural Gas,
Q.20 B Refinery Products, Fertilizers, Steel Cement and
 Statement 1 is incorrect: This option suggests Electricity.
that either party, A or B, can exploit the other.  Rubber products are not among the eight core
However, in a pure voluntary exchange, industries. Hence C is incorrect.
exploitation should not occur. Both parties in the Q.23 D
exchange are entering into the transaction  Statement 1 and 2 are correct: [As per https:/
willingly and based on their own free will and /msme.gov.in/about-us/about-us-ministry.] The
self-interest, with the intention of benefiting from MSME sector has emerged as a highly vibrant
the exchange. and dynamic sector of the Indian economy over

70
 the last five decades. MSMEs not only play do not affect the quantity demanded. The
crucial role in providing large employment demand remains constant regardless of price
opportunities at comparatively lower capital cost fluctuations.
than large industries but also help in  Option B is incorrect: This describes a
industrialization of rural & backward areas, situation where the price elasticity of demand is
thereby, reducing regional imbalances, assuring elastic (greater than 1) but not necessarily zero.
more equitable distribution of national income In elastic demand, a small change in price leads
and wealth. to a proportionately larger change in quantity
 MSMEs are indeed a significant contributor to demanded.
employment in India, employing over 12 crore  Option C is incorrect: This describes a
people (120 million) - making them the second- situation of elastic demand, not zero elasticity.
largest source of jobs after agriculture.
In elastic demand, a small change in price leads
 Statement 3 is correct: MSMEs are to a relatively larger change in quantity
complementary to large industries as ancillary demanded.
units and this sector contributes enormously to
 Option D is incorrect: This describes a
the socio-economic development of the country.
situation of inelastic demand, where a large
 [Note: As per the MSME site mentioned above, change in price results in a proportionately smaller
all three statements are correct. But UPSC gave change in quantity demanded.
only 3 as correct. Kindly visit the MSMEs site
Q.26 B
for more information]
Q.24 D  Price ceiling refers to the maximum price which
a seller can charge for a commodity. The price
 Option A is correct: This is a core characteristic
ceilings are decided by the government or related
of capitalism, where goods and services are
authorities to control the prices and ensure the
produced specifically for market exchange and
availability of goods/ services to the consumers
assigned value based on supply and demand.
at reasonable prices. Hence, option B is
 Option B is correct: Ownership of factories, correct.
businesses, and resources is largely private in a
 Fare charged by airlines is not fixed by
capitalist system, driving competition and
government. Hence, option A is incorrect.
individual profit motives.
 Minimum support price is the price at which
 Option C is correct: Market forces like supply
and demand, competition, and price fluctuations government buys farm products from farmers.
play a crucial role in allocating resources and Hence, option C is incorrect.
directing economic activity under capitalism.  Minimum wages refers to the minimum wage rate
 Option D is incorrect: This principle at which a labor can be hired from the market.
contradicts the decentralized nature of a capitalist Hence, option D is incorrect.
economy. While individual businesses within a Q.27 A
market may engage in planning, there’s usually  Production possibility frontier is the graph that
no central governmental body dictating resource indicates the various production possibilities of
allocation based on a predetermined plan. two commodities when resources are fixed.
Q.25 A  The production of one commodity can only be
 Option A is correct: If the price elasticity of increased by sacrificing the production of the
demand is zero, it means that changes in price other commodity.

71
Q.28 A interdependent on each other’s actions. Pricing
 The Union Government started the scheme of strategies, network expansions, and service
categorizing CPSE as ‘Miniratnas’ in 1997. offerings are often influenced by moves made
Criteria for grant of Miniratna status to CPSEs: by competitors.
1) Miniratna Category-I status: - The Q.30 B
CPSEs which have made profit in the  A non-performing asset (NPA) is a loan or
last three years continuously, pre-tax advance for which the principal or interest
profit is Rs.30 crores or more in at least payment remained overdue for a period of 90
one of the three years and have a days.
positive net worth are eligible to be  As per the recent RBI reports, five sectors alone
considered for grant of Miniratna-I account for 60% of the total stressed assets on
status. the books of the banks in the country:
2) Miniratna Category-II status: - The 1) Infrastructure.
CPSEs which have made profit for the 2) Industrial.
last three years continuously and have
a positive net worth are eligible to be 3) Steel.
considered for grant of Miniratna-II 4) Power.
status. 5) Telecom.
 The list of 14 Category I mini Ratna companies  Hence, statements 2 and 3 are correct.
are as follows- Airports Authority of India (AAI), Q.31 D
Antrix Corporation, Bharat Dynamics Limited
 The gross value added from finance, real estate
(BDL), Bharat Earth Movers Limited (BEML),
and professional services had the highest share
Bharat Sanchar Nigam Limited (BSNL), Central
in India in the fiscal year 2019. Hence Option 4
Warehousing Corporation, Cochin Shipyard
is correct. With more than 54% overall, the
(CSL), Dredging Corporation of India (DCI),
service sectors made up a large chunk of GVA
Garden Reach Shipbuilders & Engineers
for the country that year.
(GRSE), Goa Shipyard (GSL), India Tourism
Development Corporation (ITDC), Indian Q.32 A
Railway Catering and Tourism Corporation  Based on the conditions of work as well as rules
(IRCTC), IRCON International and Mazagaon and regulations, economic activities are classified
Dock Shipbuilders Limited. Hence, option A into organised and unorganised sectors. The
is correct. organised sector comprises enterprises or places
 While IOCL and SAIL are accorded the of work that are registered with the government.
MAHARATNA status, HAL is accorded a These have to follow the rules and regulations
NAVRATNA status. Hence, Option B, C, D laid out by the government.
are incorrect.
Q.29 C
 Oligopoly markets are markets dominated by a
small number of suppliers. India’s mobile market
is dominated by a small number of major players
like Reliance Jio, Bharti Airtel, Vodafone Idea,
and BSNL. These few operators control a
significant share of the market and influence its
overall dynamics. These operators are highly

72
 6 External sector
Select the correct answer using the codes given
Balance of Payment below:
(a) 1, 2 and 3 only (b) 1, 2 and 4 only
1. In terms of economy, the visit by foreign nationals to
(c) 2, 3 and 4 only (d) 1, 3 and 4 only
witness the XIX Common Wealth Games in India
5. With reference to Balance of Payments, which of
amounted to: [CSE-2011]
the following constitutes/constitute the Current
(a) Export (b) Import Account? [CSE-2014]
(c) Production (d) Consumption 1. Balance of trade
2. Consider the following actions which the government 2. Foreign assets
can take: [CSE-2011] 3. Balance of invisibles
1. Devaluing the domestic currency. 4. Special Drawing Rights.
2. Reduction in the export subsidy. Select the correct answer using the code given below:
3. Adopting suitable policies which attract greater (a) 1 only (b) 2 and 3 only
FDI and more funds from FIIs. (c) 1 and 3 only (d) 1, 2 and 4 only
Which of the above action/actions can help in 6. Which of the following best describes the term
reducing the current account deficit? ‘import cover’, sometimes seen in the news?
(a) 1 and 2 only (b) 2 and 3 only [CSE-2016]
(c) 3 only (d) 1 and 3 only (a) It is the ratio of value of imports to the Gross
3. The balance of payments of a country is a systematic Domestic Product of a country
record of: [CSE-2013] (b) It is the total value of imports of a country in a
(a) All import and export transactions of a country year
during a given period of time, normally a year (c) It is the ratio between the value of exports and
that of imports between two countries
(b) Goods exported from a country during a year.
(d) It is the number of months of imports that could
(c) Economic transaction between the governments
be paid for by a country’s international reserves.
of one country to another.
7. Consider the following statements: [CSE-2019]
(d) Capital movements from one country to another
1. Most of India’s external debt is owed by
4. Which of the following constitute Capital Account? governmental entities.
[CSE-2013] 2. All of India’s external debt is denominated in
1. Foreign Loans US dollars.
2. Foreign Direct Investment Which of the statements given above is/are correct?
3. Private Remittances (a) 1 only (b) 2 only
4. Portfolio Investment (c) Both 1 and 2 (d) Neither 1 nor 2

73
8. If another global financial crisis happens in the near (c) United Nations Environment Programme
future, which of the following actions/ policies are Finance Initiative
most likely to give some immunity to India? (d) World Bank
[CSE-2020] 11. Consider the following statements: [CSE-2023]
1. Not depending on short-term foreign Statement-I: India accounts for 3.2% of global
borrowings. export of goods.
2. Opening up to more foreign banks. Statement-II: Many local companies and some
3. Maintaining full capital account convertibility. foreign companies operating in India have taken
Select the correct answer using the code given below: advantage of India’s Production-linked Incentive’
(a) 1 only (b) 1 and 2 only scheme.
(c) 3 only (d) 1, 2 and 3 Which one of the following is correct in respect of
9. Consider the following statements: [CSE-2020] the above statements?
1. The value of Indo-Sri Lanka trade has (a) Both Statement-I and Statement-II are correct
consistently increased in the last decade. and Statement-II is the correct explanation for
2. “Textile and textile articles” constitute an Statement-l
important item of trade between India and (b) Both Statement-I and Statement-II are correct
Bangladesh. and Statement-II is not the correct explanation
3. In the last five years, Nepal has been the largest for Statement-I
trading partner of India in South Asia. (c) Statement-I is correct but Statement-II is
Which of the statements given above is/are correct? incorrect is incorrect
(a) 1 and 2 only (b) 2 only (d) Statement-I Statement-II is not correct but
(c) 3 only (d) 1, 2 and 3 Statement-II is correct
10. “Rapid Financing Instrument” and “Rapid Credit 12. Since 2014-15, India has consistently run trade
Facility” are related to the provisions of lending by surplus with which one among the following
which one of the following? [CSE-2022] countries? [CDS-II-2020]
(a) Asian Development Bank (a) China (b) Saudi Arabia
(b) International Monetary Fund (c) USA (d) Germany

Explanation
Q.1 A Q.2 D
 In terms of economy, the visit by foreign nationals  Devaluing the domestic currency makes the
to witness the XIX Common Wealth Games in export of a country competitive in the
India amounted to export. Here the visitors international market, which eventually helps to
brought dollars into India and they utilized increase export and to earn foreign currency.
services in India (consumption). This is classified This can help to reduce CAD. Hence,
under Mode 2 type of service under WTO statement 1 is correct.
norms

74
  Reduction in the export subsidy will discourage of a country is known as the “import-to-GDP
export and export from India will become ratio”.
expensive at the international market vis-a-vis  Option B is incorrect: The total value of
other countries. Thus, CAD will increase. imports of a country in a year is referred to as
Hence, statement 2 is not correct. the “import bill” or “import expenditure.”
Q.3 A  Option C is incorrect: Foreign trade coverage
 If the exports of a country exceed its imports, ratio is the ratio between the value of exports
the country is said to have a favourable balance and that of imports between two countries.
of trade, or a trade surplus. Conversely, if the  Option D is correct: Import cover is the
imports exceed exports, an unfavourable balance number of months of imports that could be paid
of trade, or a trade deficit, exists. for by a country’s international reserves.
Q.4 B Q.7 D
 The capital account shows the net change in the  Statement 1 is incorrect: Commercial
physical or financial asset ownership for a borrowings continued to be the largest
country. It includes Foreign Direct Investment, component of external debt with a share of
Portfolio Investment, foreign loans, changes in 37.4%, followed by NRI deposits (24.1%) and
the reserve account, etc. short term trade credit (19.9%).
Q.5 C  Statement 2 is incorrect: US dollar-
denominated debt continued to be the largest
 Statements 1 and 3 are correct: The current
component of India’s external debt with a share
account balance (CAB) is part of a country’s of 45.9% at end December 2018, followed by
financial inflow and outflow record. It is part of the Indian rupee (24.8%), SDR (5.1%), yen
the balance of payments, the statement of all (4.9%) and euro (3.1%).
transactions made between one country and
Q.8 A
another. The current account measures: Balance
of Trade (Imports and exports of goods) and  Statement 1 is correct: If another global
Balance of invisibles (Imports and exports of financial crisis were to happen, depending on
services, Payments to foreign holders of a short-term foreign borrowings would make India
country’s investments, Payments received from more vulnerable to external shocks as the India
would have to spend money on repayment of
investments abroad, Transfers such as foreign
short-term loans and would not be capable of
aid and remittances).
handling the financial crisis.
 Statement 2 is incorrect: Foreign assets are a
 Statement 2 and 3 are incorrect: Opening up
part of the Capital Accounts on the Balance of
to more foreign banks and maintaining full capital
Payments. account convertibility may increase capital
 Statement 4 is incorrect: Special Drawing inflows, but it would also increase the risk of
Rights are supplementary foreign exchange capital outflows during times of crisis.
reserve assets defined and maintained by the Q.9 B
International Monetary Fund. SDRs are units of
 Statement 1 is incorrect: The Indo-Sri Lanka
account for the IMF, and not a currency per se.
trade reached its peak in 2013-14 in the last
Q.6 D decade. It has seen a net rise in trade in the past
 Option A is incorrect: The ratio of the value of decade but have also witnessed fluctuations on
imports to the Gross Domestic Product (GDP) a year-on-year basis.

75
  Statement 2 is correct: Cotton is the largest prevention and crisis-mitigation lending
export item to Bangladesh from India, accounting for countries with very strong policy
for a fifth of India’s supplies to Bangladesh, frameworks and track records in
followed by mineral fuels, automobiles and economic performance.
capital goods. Q.11 D
 Statement 3 is incorrect: Bangladesh ($14.2  Statement I is incorrect: As per the latest data
billion in 2022-23) is India’s largest trading from the Economic Survey 2022-23, India’s
partner in South Asia, followed by Nepal ($8.8 share in global merchandise exports is
billion in 2022-23), Sri Lanka, Pakistan, Bhutan, approximately 1.8%, not 3.2%. The correct
Afghanistan, and the Maldives. figure for India’s contribution to global exports
Q.10 B of goods should be considered as 1.8%.
 Option B is the correct answer: The Rapid  Statement II is correct: The Production-
Financing Instrument (RFI) provides rapid Linked Incentive (PLI) scheme is designed to
financial assistance, which is available to all promote manufacturing in India. Both local and
member countries of IMF facing an urgent foreign companies operating in the country can
balance of payments need. The Rapid Credit benefit from the scheme by receiving incentives
Facility is a concessional policy under which the based on their incremental sales from
International Monetary Fund (IMF) provides domestically manufactured products. It aims to
financial assistance to low-income countries boost the manufacturing sector and reduce
(LICs) facing an urgent balance of payments India’s dependence on imports.
need.
Q.12 C
 Some other provisions of IMF:
 Since 2014-2015 India has consistently run a
1) The Stand-by Arrangement (SBA)
trade surplus with the USA and UAE.
provides short-term financial assistance
to countries facing balance of payments
Currency and Foreign
problems.
exchange
2) The Extended Fund Facility (EFF)
provides financial assistance to 1. Consider the following statements: [CSE-2012]
countries facing serious medium-term
The price of any currency in international market is
balance of payments problems because
decided by the
of structural weaknesses that require
time to address. 1. World Bank
3) The Short-term Liquidity Line (SLL) 2. Demand for good/services provided by the
is a liquidity backstop for members with country concerned
very strong policy frameworks and 3. Stability of the government of the concerned
fundamentals, who face potential, country
moderate, short-term liquidity needs 4. Economic potential of the country in question.
because of external shocks that
Which of the statements given above are correct?
generate balance of payment difficulties.
4) The Flexible Credit Line (FCL) is (a) 1, 2, 3, and 4 (b) 2 and 3 only
designed to meet the demand for crisis- (c) 3 and 4 only (d) 1 and 4 only

76
2. Which one of the following groups of items is 6. In the context of India, which of the following factors
included in India’s foreign-exchange reserves? is/are contributor/ contributors to reducing the risk
[CSE-2013] of a currency crisis? [CSE-2019]
(a) Foreign-currency assets, Special Drawing Rights 1. The foreign currency earnings of India’s IT
(SDRs) and loans from foreign countries. sector.
(b) Foreign-currency assets, gold holdings of the 2. Increasing the government expenditure.
RBI and SDRs. 3. Remittances from Indians abroad.
(c) Foreign-currency assets, loans from the World Select the correct answer using the code given below:
Bank and SDRs.
(a) 1 only (b) 1 and 3 only
(d) Foreign-currency assets, gold holdings of the
(c) 2 only (d) 1, 2 and 3
RBI, and loans from the World Bank.
7. Consider the following statements: [CSE-2019]
3. The problem of international liquidity is related to
the non- availability of: [CSE-2015] 1. Purchasing Power Parity (PPP) exchange rates
(a) Goods and services are calculated by comparing the prices of the
same basket of goods and services in different
(b) Gold and silver
countries.
(c) Dollars and other hard currencies
2. In terms of PPP dollars, India is the sixth largest
(d) Exportable surplus
economy in the world.
4. Convertibility of rupee implies: [CSE-2015]
Which of the statement given above is/are correct?
(a) Being able to convert rupee notes into gold.
(a) 1 only (b) 2 only
(b) Allowing the value of rupee to be fixed by market
(c) Both 1 and 2 (d) Neither 1 nor 2
forces.
(c) Freely permitting the conversion of rupee to other 8. “Gold Tranche” (Reserve Tranche) refers to:
currencies and vice versa. [CSE-2020]
(d) Developing an international market for currencies (a) A loan system of the World Bank
in India. (b) One of the operations of a Central Bank
5. Which of the following has/have occurred in India (c) A credit system granted by WTO to its members
after its liberalization of economic policies in 1991? (d) A credit system granted by IMF to its members
[CSE-2017]
9. Consider the following statements: [CSE-2021]
1. Share of agriculture in GDP increased
enormously. The effect of devaluation of a currency is that it
necessarily
2. Share of India’s exports in world trade increased.
1. Improves the competitiveness of the domestic
3. FDI inflows increased.
exports in the foreign markets
4. India’s foreign exchange reserves increased
enormously. 2. Increases the foreign value of domestic currency

Select the correct answer using the codes given 3. Improves the trade balance
below: Which of the above statements is/are correct?
(a) 1 and 4 only (b) 2, 3 and 4 only (a) 1 only (b) 1 and 2 only
(c) 2 and 3 only (d) 1, 2, 3 and 4 (c) 3 only (d) 2 and 3 only

77
10. Which one of the following situations best reflects Which of the above statements are correct?
“Indirect Transfers” often talked about in media (a) 1 and 2 only (b) 2 and 3 only
recently with reference to India? [CSE-2022] (c) 1 and 3 only (d) 1, 2 and 3
(a) An Indian company investing in a foreign 12. Which one of the following statements about
enterprise and paying taxes to the foreign country Exchange-Trade fund (ETF) is not correct?
on the profits arising out of its investment
[CDS-I-2018]
(b) A foreign company investing in India and paying
(a) It is marketable security
taxes to the country of its base on the profits
arising out of its investment (b) It experiences price changes throughout the day
(c) An Indian company purchases tangible assets in (c) It typically has lower daily liquidity and higher
a foreign country and sells such assets after their fees than mutual fund shares.
value increases and transfers the proceeds to (d) An ETF does not have its net asset value
India calculated once at the end of every day.
(d) A foreign company transfers shares and such 13. Exchange rate states the value of one currency in
shares derive their substantial value from assets terms of other currencies. Which one of the following
located in India statements with respect to the exchange rate of
11. With reference to the Indian economy, consider the currency is correct? [CDS-I-2021]
following statements: [CSE-2022] (a) Floating exchange rates are rates in which the
1. An increase in Nominal Effective Exchange Rate Governments interfere by buying or selling their
(NEER) indicates the appreciation of rupee. currencies.
2. An increase in the Real Effective Exchange Rate (b) Fixed exchange rate are rates set by Government
(REER) indicates an improvement in trade decisions an maintained by Government actions.
competitiveness. (c) Under the Bretton Woods System, the exchange
3. An increasing trend in domestic inflation relative rate are floated in terms of rise of fall in price of
to inflation in other countries is likely to cause an gold
increasing divergence between NEER and (d) Under the classical gold standard, the exchange
REER. rates are fixed in terms of price of dollar.

Explanation
Q.1 B exports are in high demand, there is a greater
 Statement 1 is incorrect: World Bank is demand for its currency, leading to an increase
important to the source of financial and technical in its value.
assistance to developing countries around the  Statement 3 is correct: The stability of the
world. It has no relation to the price of the government of the concerned country also plays
currency in the International Market. a role in determining the price of its currency.
 Statement 2 is correct: The price of a currency Political stability is an important factor for
in the international market is primarily determined investors and affects their confidence in the
by the demand for goods and services provided country‘s economy. A stable government is
by the country concerned. When a country‘s generally perceived as favorable, which can
positively impact the value of the currency.

78
  Statement 4 is incorrect: The economic positive perception of the country’s
potential of a country is indirectly reflected in creditworthiness, supporting the strength of the
the demand for its goods and services, which, rupee.
as mentioned earlier, influences the price of its  Statement 2 is Not Correct: Increasing
currency. government Expenditure will have no effect on
Q.2 B the value of the currency. Furthermore, if the
 India’s foreign-exchange reserves include expenditure is done through heavy internal
Foreign-currency assets (FCA), Gold reserves, borrowings, it may lead to weakening of the
Special Drawing Rights (SDRs) and reserve currency which will fuel the currency crisis.
position with the IMF. Loans from other countries  Statement 3 is correct: Remittances from
and/or financial institutions do not form a part of Indian expatriates working abroad contribute to
the foreign exchange reserves. Hence, Option the country’s foreign exchange reserves. As
B is the correct answer. individuals send money back home in INR, the
Q.3 C central bank accumulates foreign currency,
 The correct answer is dollars and other hard strengthening its ability to stabilize the currency.
currencies. The concept of international liquidity Q7 A
is associated with international payments that  Statement 1 is correct: Purchasing power
arise out of international trade in goods and parity (PPP) is a popular metric used by
services. macroeconomic analysts. It compares different
Q.4 C countries’ currencies through a “basket of
 The convertibility of Rupee refers to the ease goods” approach. Purchasing power parity
with which it can be exchanged or converted (PPP) allows for economists to compare
into another currency or assets without economic productivity and standards of living
restrictions. Convertibility can be either full or between countries.
partial, and it has implications for international  Statement 2 is incorrect: In terms of PPP
trade, investment, and the overall economic dollars, India is the third-largest economy in the
environment. world followed by China and USA.
 A fully convertible rupee allows for unrestricted Q8 D
transactions related to international trade in  Statement D is correct: The reserve tranche
goods and services. is a segment of an International Monetary Fund
 In a partially convertible system, there may be (IMF) member country’s quota that is accessible
some restrictions on certain types of current without fees or economic reform conditions.
account transactions, such as limits on the amount Initially, member nations’ reserve tranches are
of currency that can be exchanged or specific 25% of their quota, but this position can change
documentation requirements. according to any lending that the IMF does with
Q5 B its holdings of the member’s currency. The
 Voluntary acquisition of citizenship of a foreign reserve tranches that countries hold with the IMF
country, holding the office of the Chairperson of are considered their facilities of first resort,
the National Commission for Women, and meaning they will tap into them before seeking a
holding the office of the Chairman of the Board formal credit tranche that charges interest.
of Directors of the National Coal Development Q9. A
Corporation Ltd are al  Statement 1 is correct: When a country
Q6 B devalues its currency, it becomes cheaper for
 Statement 1 is correct: Using foreign currency foreign buyers to purchase the country’s exports.
earnings to pay off external debts denominated This can make the exports more competitive in
in foreign currencies helps reduce the external the international market, potentially leading to
debt burden. This, in turn, contributes to a increased demand and exports.

79
  Statement 2 is incorrect: Devaluation actually effective exchange rate (REER). Higher the
decreases the foreign value of the domestic relative domestic inflation, higher will be
currency. One unit of the domestic currency buys divergence (difference between) NEER and
less in foreign currency terms after devaluation. REER.
 Statement 3 is incorrect: While devaluation Q12 C
can sometimes lead to an improvement in the
 Statement 1 is correct: ETFs are considered
trade balance (the difference between exports
and imports) in the short term, it’s not a marketable securities because they can be bought
guaranteed outcome. Several factors, such as and sold on an exchange like stocks.
the price elasticity of demand for exports and  Statement 2 is correct: Unlike mutual funds,
imports, can affect its long-term impact on the which have their net asset value (NAV)
trade balance. calculated at the end of each trading day, ETFs
Q10 D can be traded throughout the day like stocks,
 Statement D is the correct answer: A foreign which means their prices can fluctuate throughout
company transfers shares and such shares derive the trading day.
their substantial value from assets located in India.  Statement 3 is incorrect: ETFs are known for
 Direct transfers involve the transfer of resources their high liquidity, meaning they are easily bought
from one economic agent to another without any and sold, often with tight bid-ask spreads.
intermediary or third party. These are Additionally, ETFs tend to have lower fees
straightforward, involving a direct flow of compared to many mutual fund shares.
resources from one entity to another. This  Statement 4 is correct: Unlike mutual funds,
approach is often used when there is a specific ETFs do not have their NAV calculated at the
intention to target certain individuals or groups end of every trading day. Instead, the price of
in need. an ETF is determined by supply and demand in
 Indirect transfers refer to situations where when the market.
foreign entities own shares or assets in India, Q13 B
the shares of such foreign entities are transferred
instead of a direct transfer of the underlying  Statement 1 is incorrect: A floating exchange
assets in India. rate is an exchange rate system where a
country’s currency price is determined by the
Q11 C
foreign exchange market, depending on the
relative supply and demand of other currencies.
 Statement 1 is correct: NEER is the weighted  Statement 2 is correct: Fixed exchange rates
average of bilateral nominal exchange rates of are rates set by Government decisions and
the home currency in terms of foreign currencies.
Maintained by Government actions. An exchange
An increase in Nominal Effective Exchange Rate
(NEER) indicates the appreciation of rupee. rate is the value of one nation’s currency versus
the currency of another nation or economic zone.
 Statement 2 is incorrect: The real effective
exchange rate (REER) is the weighted average  Statement 3 is incorrect: Bretton Woods
of a country’s currency in relation to an index or established a system of payments based on the
basket of other major currencies. An increase in dollar, which defined all currencies in relation to
a nation’s REER is an indication that its exports the dollar, itself convertible into gold, and above
are becoming more expensive and its imports all, “as good as gold” for trade.
are becoming cheaper. Means, it is losing its trade  Statement 4 is incorrect: The Gold Standard
competitiveness. was a system under which nearly all countries
 Statement 3 is correct: A nation’s nominal fixed the value of their currencies in terms of a
effective exchange rate (NEER) when adjusted specified amount of gold, or linked their currency
for inflation in the home country, equals its real to that of a country which did so.

80
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