1.

An increase in the money supply, without a corresponding increase in output, will

most likely lead to:

(a) Deflation

(b) Inflation

(c) Stagflation

(d) Disinflation

Answer: (b) Inflation

Explanation: When the money supply in an economy increases but the production of
goods and services remains the same, it creates higher demand relative to supply, leading
to price increases or inflation. This concept is related to the Quantity Theory of Money.

2. Which one of the following is not a function of the Reserve Bank of India?

(a) Custodian of the foreign exchange

(b) Regulator of banks

(c) Management of public debt

(d) Accepting deposits from the public

Answer: (d) Accepting deposits from the public

Explanation: The Reserve Bank of India (RBI) regulates monetary policy, manages public
debt, acts as a custodian of foreign exchange, and regulates the banking sector. It does not
accept deposits from the general public—that function belongs to commercial banks.

3. Fiscal deficit in the Union Budget means:

(a) The difference between current expenditure and current revenue

(b) Net increase in Union Government’s borrowings from the Reserve Bank of India
(c) The excess of total expenditure over total receipts (excluding borrowings) during a fiscal
year

(d) The difference between the total expenditure and total receipts of the Government

Answer: (c) The excess of total expenditure over total receipts (excluding borrowings)
during a fiscal year

Explanation: Fiscal deficit represents the total expenditure of the government minus its
total receipts, excluding borrowings. It reflects the amount that needs to be borrowed to
finance the expenditure.

4. Which of the following statements correctly describes the term 'narrow banking' in
the context of banking system in India?

(a) Banks that accept only demand deposits

(b) Banks that have a restricted area of operation

(c) Banks that lend to only a few sectors

(d) Banks that provide safe avenues for savings but hardly lend to risky ventures

Answer: (d) Banks that provide safe avenues for savings but hardly lend to risky ventures

Explanation: Narrow banking refers to a system where banks accept deposits and invest in
risk-free assets like government securities but do not engage in risky lending practices.
This limits the exposure to default risks.

5. Which of the following items are included in 'revenue expenditure' in a government

budget?
1. Interest payments on the national debt
2. Subsidies
3. Defense capital expenditure
4. Grants to state governments

Select the correct answer using the codes given below:

(a) 1, 2, and 4 only

(b) 1 and 3 only

(c) 2 and 3 only

(d) 1, 2, 3, and 4

Answer: (a) 1, 2, and 4 only

Explanation: Revenue expenditure consists of expenditure that does not create assets or
reduce liabilities. It includes interest payments, subsidies, and grants, but not capital
expenditure, such as defense capital expenditure which is considered part of capital
outlay.

6. Open Market Operations (OMO) refers to:

(a) Borrowing by the central bank from the public

(b) Lending by commercial banks to industry and trade

(c) Purchase and sale of government securities by the central bank

(d) None of the above

Answer: (c) Purchase and sale of government securities by the central bank

Explanation: Open Market Operations (OMO) are the activities by which a central bank
(like the RBI) buys or sells government bonds in the open market to control liquidity in the
economy. If the central bank wants to increase liquidity, it buys securities, and if it wants to
reduce liquidity, it sells them.

7. A liquidity trap is a situation in which:

(a) People want to hold only cash because interest rates are high

(b) People want to hold only cash because inflation rates are high

(c) People want to hold only cash because interest rates are low

(d) The central bank absorbs excess liquidity from the market

Answer: (c) People want to hold only cash because interest rates are low

Explanation: A liquidity trap occurs when interest rates are very low, and savings rates are
high, making monetary policy ineffective. In this situation, people prefer to hold onto cash
rather than invest it, because they expect no significant returns from holding financial
assets like bonds.

8. Which one of the following is likely to cause an increase in demand-pull inflation?

(a) An increase in the interest rate

(b) A reduction in the subsidy on LPG

(c) An increase in government spending

(d) An increase in income tax rates

Answer: (c) An increase in government spending

Explanation: Demand-pull inflation occurs when there is an increase in aggregate demand

due to factors like increased government spending, lower taxes, or higher consumer
confidence, leading to higher prices.

9. The 'repo rate' refers to the rate at which:

(a) The RBI lends to commercial banks

(b) Commercial banks lend to the RBI

(c) The government borrows from the RBI

(d) Commercial banks borrow from individuals

Answer: (a) The RBI lends to commercial banks

Explanation: Repo rate is the rate at which the Reserve Bank of India (RBI) lends money to
commercial banks against government securities. It is an important monetary policy tool
used to control inflation and liquidity.

10. In the context of the Indian economy, which of the following is included in the capital
budget?

1. Expenditure on acquisition of assets like roads, buildings, machinery, etc.

2. Loans received from foreign governments
3. Loans and advances granted to the states and union territories

Select the correct answer using the codes given below:

(a) 1 only

(b) 2 and 3 only

(c) 1 and 3 only

(d) 1, 2, and 3

Answer: (d) 1, 2, and 3

Explanation: Capital budget includes expenditures on assets and investments, as well as

loans received from foreign governments and loans given to states or union territories for
development purposes.

11. Core inflation excludes changes in:

(a) Fuel and food prices

(b) Price of all inputs

(c) Wages

(d) Interest rates

Answer: (a) Fuel and food prices

Explanation: Core inflation measures the long-term inflation trend in the economy and
excludes volatile items like food and fuel, which are subject to price fluctuations due to
external factors.

12. The 'money multiplier' in an economy increases with which one of the following?

(a) Increase in the cash reserve ratio

(b) Increase in the banking habit of the population

(c) Increase in the statutory liquidity ratio

(d) Increase in the population of the country

Answer: (b) Increase in the banking habit of the population

Explanation: The money multiplier increases when more people deposit money in banks,
leading to higher lending by banks. This increases the total money supply in the economy
through a process called credit creation.

13. Fiscal consolidation refers to:

(a) Reduction in government deficits and debt accumulation

(b) Increase in the government’s capital expenditure

(c) Increase in the tax-to-GDP ratio

(d) Decrease in government borrowings from the market

Answer: (a) Reduction in government deficits and debt accumulation

Explanation: Fiscal consolidation involves reducing government deficits and debt

accumulation by controlling public expenditure and improving revenue collection.

14. Statutory Liquidity Ratio (SLR) is the percentage of:

(a) Net demand and time liabilities that commercial banks must maintain in the form of
cash reserves with the central bank

(b) Net demand and time liabilities that commercial banks must maintain in the form of
gold or approved securities

(c) Net demand and time liabilities that the central bank must maintain in the form of cash
reserves

(d) None of the above

Answer: (b) Net demand and time liabilities that commercial banks must maintain in the
form of gold or approved securities

Explanation: SLR is the minimum percentage of net demand and time liabilities that
commercial banks are required to maintain in the form of gold, cash, or approved
government securities.

15. In which of the following types of unemployment, more people are employed than what
is actually required?
(a) Seasonal unemployment

(b) Cyclical unemployment

(c) Disguised unemployment

(d) Frictional unemployment

Answer: (c) Disguised unemployment

Explanation: Disguised unemployment occurs when more people are employed in a job
than are necessary, typically in agricultural sectors, leading to inefficiencies.

16. Which one of the following best defines 'Non-Performing Assets' in the banking sector?

(a) The part of the money invested in bonds that does not yield interest

(b) The loans or advances that are in default or arrears for more than 90 days

(c) The part of the capital invested in real estate that does not provide returns

(d) The loans given to government undertakings

Answer: (b) The loans or advances that are in default or arrears for more than 90 days

Explanation: NPAs refer to loans or advances where the borrower has stopped making
interest or principal repayments for a period of more than 90 days.

17. In the context of the Indian economy, inflation targeting is primarily implemented by:

(a) Ministry of Finance

(b) NITI Aayog

(c) Reserve Bank of India

(d) Comptroller and Auditor General of India

Answer: (c) Reserve Bank of India

Explanation: Inflation targeting is a monetary policy strategy used by the Reserve Bank of
India (RBI) to control inflation by adjusting interest rates and other financial policies to
maintain a specific inflation rate target.
18. Which of the following will not be included in the calculation of GDP?

(a) Salaries paid to government employees

(b) Value of exports

(c) Payment of interest on loans taken by firms

(d) Purchase of used machinery

Answer: (d) Purchase of used machinery

Explanation: GDP measures the value of newly produced goods and services within a
country. The purchase of used machinery is a resale and does not contribute to the current
period's production, so it is not included in GDP.

19. Which of the following transactions is recorded in the capital account of the balance of
payments?

(a) Foreign direct investment

(b) Export of goods

(c) Import of services

(d) Remittances by Indians working abroad

Answer: (a) Foreign direct investment

Explanation: The capital account records financial transactions like foreign direct
investments (FDI), portfolio investments, and loans, whereas the current account records
trade in goods and services, including remittances.

20. Which of the following components is excluded while calculating the primary deficit?

(a) Revenue deficit

(b) Capital expenditure

(c) Interest payments

(d) Fiscal deficit

Answer: (c) Interest payments

Explanation: Primary deficit is calculated as fiscal deficit minus interest payments. It

shows the government’s borrowing requirement excluding the interest liabilities.

21. The Marginal Standing Facility (MSF) introduced by the RBI allows banks to:

(a) Borrow overnight funds from the RBI at a rate higher than the repo rate

(b) Borrow funds for a longer term than under the Liquidity Adjustment Facility (LAF)

(c) Lend funds to the government directly

(d) Borrow funds from the public

Answer: (a) Borrow overnight funds from the RBI at a rate higher than the repo rate

Explanation: MSF allows banks to borrow overnight from the RBI when they have
exhausted all other borrowing options, and it is charged at a rate higher than the repo rate.

22. A counter-cyclical fiscal policy refers to:

(a) Increasing government spending during a boom

(b) Cutting taxes during a boom

(c) Reducing government spending and increasing taxes during a recession

(d) Increasing government spending and cutting taxes during a recession

Answer: (d) Increasing government spending and cutting taxes during a recession

Explanation: A counter-cyclical fiscal policy is one where the government increases

spending and cuts taxes during a recession to boost demand and does the opposite during
a boom to control inflation.

23. Which of the following instruments is not traded in the money market?

(a) Treasury bills

(b) Commercial papers

(c) Certificates of deposit

(d) Corporate bonds

Answer: (d) Corporate bonds

Explanation: Corporate bonds are traded in the capital market, not the money market. The
money market deals with short-term financial instruments like treasury bills, commercial
papers, and certificates of deposit, which typically have maturities of less than one year.

24. Which of the following is most likely to occur during a period of deflation?

(a) Increase in consumer spending

(b) Decrease in interest rates

(c) Increase in investment

(d) Decrease in the purchasing power of money

Answer: (b) Decrease in interest rates

Explanation: During deflation, prices fall, and central banks tend to reduce interest rates
to encourage borrowing and investment, aiming to boost economic activity. Consumer
spending generally falls as people expect prices to drop further.

25. Treasury Bills are issued by the government to meet:

(a) Short-term borrowing requirements

(b) Long-term capital needs

(c) Fiscal deficit of the state governments

(d) Financing of exports

Answer: (a) Short-term borrowing requirements

Explanation: Treasury Bills are short-term instruments issued by the government for
borrowing funds to meet short-term needs. They typically have maturities of 91 days, 182
days, or 364 days.

26. Which of the following is a key principle of supply-side economics?

(a) Reducing government intervention in the economy

(b) Increasing welfare spending

(c) Focusing on demand stimulation through tax cuts

(d) Increasing public sector enterprises

Answer: (a) Reducing government intervention in the economy

Explanation: Supply-side economics emphasizes policies that reduce government

intervention, deregulate markets, and lower taxes to increase production, leading to
overall economic growth.

27. Which of the following are examples of capital receipts for the government?

1. Borrowings from foreign governments

2. Sale of public sector undertakings
3. Interest received on loans given to state governments
4. Disinvestment proceeds

Select the correct answer using the codes given below:

(a) 1 and 2 only

(b) 1, 2, and 4 only

(c) 3 and 4 only

(d) 1, 2, 3, and 4

Answer: (b) 1, 2, and 4 only

Explanation: Capital receipts include borrowing, disinvestment proceeds, and sale of

assets like public sector undertakings. Interest received is part of revenue receipts, not
capital receipts.

28. Public debt refers to:

(a) Borrowing by the government from individuals and institutions

(b) Borrowing by individuals from commercial banks

(c) Government’s borrowing from foreign countries only

(d) Private sector’s borrowing from international markets

Answer: (a) Borrowing by the government from individuals and institutions

Explanation: Public debt refers to the total borrowings of a government, which can include
domestic borrowing from individuals and institutions as well as borrowing from foreign
governments and international organizations.

29. The crowding-out effect is likely to occur when:

(a) The government increases its spending and finances it by borrowing, leading to a rise in
interest rates

(b) The central bank reduces the money supply

(c) The government cuts taxes to stimulate consumption

(d) Private investment increases due to government subsidies

Answer: (a) The government increases its spending and finances it by borrowing, leading to
a rise in interest rates

Explanation: The crowding-out effect occurs when increased government borrowing leads
to higher interest rates, which in turn reduces private investment in the economy.

30. Quantitative Easing (QE) refers to:

(a) Central bank printing more currency

(b) Central bank purchasing government and private sector securities from the market to
inject liquidity

(c) Government reducing taxes

(d) Commercial banks increasing lending to the private sector

Answer: (b) Central bank purchasing government and private sector securities from the
market to inject liquidity

Explanation: QE is a monetary policy used by central banks to inject liquidity into the
economy by purchasing long-term government bonds and other financial assets to lower
interest rates and stimulate economic activity.
31. A fiscal stimulus refers to:

(a) A reduction in government spending

(b) An increase in government spending or tax cuts to stimulate the economy

(c) An increase in government borrowing

(d) A reduction in government’s fiscal deficit

Answer: (b) An increase in government spending or tax cuts to stimulate the economy

Explanation: Fiscal stimulus involves increasing government spending or reducing taxes

to boost aggregate demand and support economic growth, particularly during a recession.

32. Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) are used by the RBI to:

(a) Control inflation

(b) Increase foreign exchange reserves

(c) Maintain liquidity in the market

(d) Improve the balance of trade

Answer: (a) Control inflation

Explanation: CRR and SLR are tools of monetary policy used by the RBI to control inflation
by regulating the amount of funds that commercial banks must hold in reserve, thereby
influencing the lending capacity of banks.

33. Revenue deficit refers to:

(a) Excess of total expenditure over total receipts

(b) Excess of revenue expenditure over revenue receipts

(c) Excess of capital expenditure over capital receipts

(d) Excess of fiscal deficit over revenue deficit

Answer: (b) Excess of revenue expenditure over revenue receipts

Explanation: Revenue deficit occurs when the government's revenue expenditure exceeds
its revenue receipts. It shows the shortfall in the government’s day-to-day operational
income.

34. The real exchange rate is:

(a) The nominal exchange rate adjusted for inflation

(b) The exchange rate set by the central bank

(c) The rate at which foreign currency is converted into domestic currency

(d) The rate determined by market forces

Answer: (a) The nominal exchange rate adjusted for inflation

Explanation: The real exchange rate takes into account the inflation differentials between
two countries and reflects the purchasing power of one currency relative to another.

35. Disinvestment refers to:

(a) The sale of government’s equity in public sector enterprises

(b) The decrease in the government's capital investment

(c) The withdrawal of foreign investment from a country

(d) The reduction in foreign direct investment (FDI)

Answer: (a) The sale of government’s equity in public sector enterprises

Explanation: Disinvestment involves the government selling its shares in public sector
enterprises to the private sector or the general public to raise resources or promote greater
efficiency.

36. Capital Adequacy Ratio (CAR) is a measure of:

(a) The ratio of a bank's capital to its risk-weighted assets

(b) The ratio of a bank’s deposits to its loans

(c) The ratio of government revenue to GDP

(d) The ratio of government’s borrowing to fiscal deficit

Answer: (a) The ratio of a bank's capital to its risk-weighted assets

Explanation: CAR is a measure used to ensure that banks have enough capital to absorb
potential losses and continue to operate. It is expressed as a percentage of a bank's risk-
weighted credit exposures.

37. Which of the following items is not included in the calculation of a country’s Gross
National Product (GNP)?

(a) Wages and salaries of residents

(b) Profits earned by a foreign company within the country

(c) Income earned by a resident from foreign investments

(d) Government expenditure on infrastructure

Answer: (b) Profits earned by a foreign company within the country

Explanation: GNP includes the total value of all goods and services produced by residents
of a country, including income from abroad, but excludes the income earned by foreign
companies within the country.

38. Inflation Indexed Bonds (IIBs) are:

(a) Bonds where the principal and interest payments are indexed to inflation

(b) Bonds that can be converted into shares

(c) Bonds issued by the central bank to control inflation

(d) Bonds whose interest payments increase when inflation decreases

Answer: (a) Bonds where the principal and interest payments are indexed to inflation

Explanation: Inflation Indexed Bonds are designed to provide protection against inflation.
The principal or interest payments on these bonds are adjusted in accordance with
inflation rates.

39. The main objective of the FRBM Act is:

(a) To control the fiscal deficit of the central government

(b) To reduce the level of inflation in the economy

(c) To increase the foreign exchange reserves

(d) To maintain a balanced current account

Answer: (a) To control the fiscal deficit of the central government

Explanation: The FRBM Act aims to ensure fiscal discipline by setting targets for the
reduction of the fiscal deficit and public debt, thereby ensuring long-term fiscal stability.

40. Tax buoyancy refers to:

(a) The responsiveness of tax revenue growth to changes in GDP

(b) The increase in tax rates due to inflation

(c) The ability of a government to raise taxes during a recession

(d) The growth in tax revenue due to an increase in foreign trade

Answer: (a) The responsiveness of tax revenue growth to changes in GDP

Explanation: Tax buoyancy measures how well tax revenue increases in response to a rise
in GDP. A higher tax buoyancy indicates that tax revenues grow faster than the growth in
national income.

41. The “base effect” is often mentioned in the context of inflation. What does it refer to?

(a) The impact of base money on the inflation rate

(b) The effect of the previous year’s inflation rate on the current inflation rate

(c) The role of base interest rates in determining inflation

(d) The effect of inflation on the cost of production

Answer: (b) The effect of the previous year’s inflation rate on the current inflation rate
Explanation: The base effect refers to the impact of comparing current price levels to
those of a previous period, which may have experienced unusually high or low inflation. A
low base year can exaggerate inflation in the current year.

42. The Twin Deficit Hypothesis states that:

(a) Current account deficit and capital account deficit coexist

(b) Fiscal deficit and current account deficit are interrelated

(c) Trade deficit and budget deficit always occur together

(d) Revenue deficit and fiscal deficit rise simultaneously during inflation

Answer: (b) Fiscal deficit and current account deficit are interrelated

Explanation: The twin deficit hypothesis suggests that a large fiscal deficit may lead to a
higher current account deficit as government borrowing can increase demand for imports
and decrease national savings, worsening the current account balance.

43. Stagflation refers to a situation where:

(a) The economy experiences high inflation and high unemployment simultaneously

(b) There is deflation along with economic growth

(c) Both inflation and employment grow simultaneously

(d) Interest rates rise while inflation remains low

Answer: (a) The economy experiences high inflation and high unemployment
simultaneously

Explanation: Stagflation is a rare economic situation characterized by stagnant economic

growth, high unemployment, and persistent inflation, making it challenging for
policymakers to address both issues simultaneously.

44. In a liquidity trap, monetary policy becomes ineffective because:

(a) Interest rates are too high to stimulate demand

(b) People prefer to hold cash rather than invest in bonds

(c) Central banks lose control over money supply

(d) Banks refuse to lend despite low interest rates

Answer: (b) People prefer to hold cash rather than invest in bonds

Explanation: A liquidity trap occurs when interest rates are very low and savings rates
remain high, rendering monetary policy ineffective because people expect no gain from
investing in bonds or other securities and hold on to cash instead.

45. According to the Ricardian Equivalence theorem, government borrowing does not
affect total demand in the economy because:

(a) Private sector anticipates future tax increases and adjusts its savings accordingly

(b) The central bank neutralizes the impact of government borrowing

(c) Higher interest rates lead to more investment

(d) Public spending automatically adjusts to cover deficits

Answer: (a) Private sector anticipates future tax increases and adjusts its savings
accordingly

Explanation: Ricardian Equivalence suggests that when the government borrows,

individuals expect higher future taxes to repay the debt and thus increase their savings,
leaving total demand unchanged.

46. The money multiplier depends on:

(a) The cash reserve ratio (CRR) and the statutory liquidity ratio (SLR)

(b) The reserve requirement and people’s preference for holding cash

(c) The interest rate and government bonds

(d) The total capital of commercial banks

Answer: (b) The reserve requirement and people’s preference for holding cash

Explanation: The money multiplier is influenced by the reserve requirement that banks
must hold and the public’s tendency to hold cash rather than deposit it in banks, affecting
how much new money is created from deposits.
47. An inverted yield curve is often seen as a predictor of:

(a) Rising inflation

(b) Economic recession

(c) Expansionary monetary policy

(d) Currency devaluation

Answer: (b) Economic recession

Explanation: An inverted yield curve, where short-term interest rates are higher than long-
term rates, is often viewed as a signal that investors expect an economic downturn or
recession in the future.

48. According to the "Impossible Trinity" (or Trilemma) in international economics, it is

impossible for a country to achieve all of the following simultaneously, except:

(a) Free capital mobility

(b) Fixed exchange rate

(c) Independent monetary policy

(d) Full employment

Answer: (d) Full employment

Explanation: The Impossible Trinity states that a country cannot have free capital mobility,
a fixed exchange rate, and an independent monetary policy at the same time. However, full
employment is not part of this trilemma and can be pursued with appropriate policies.

49. Fiscal drag occurs when:

(a) Inflation pushes taxpayers into higher income tax brackets, increasing tax revenue
without an actual change in policy

(b) Government borrowing reduces private sector investment

(c) Increased government spending slows down economic growth

(d) Higher taxation leads to reduced consumer spending

Answer: (a) Inflation pushes taxpayers into higher income tax brackets, increasing tax
revenue without an actual change in policy

Explanation: Fiscal drag happens when inflation or income growth pushes individuals into
higher tax brackets, increasing the government’s tax revenue, even though there has been
no change in tax rates.

50. The Phillips Curve shows the relationship between:

(a) Inflation and unemployment

(b) Inflation and interest rates

(c) Economic growth and inflation

(d) Employment and trade balance

Answer: (a) Inflation and unemployment

Explanation: The Phillips Curve illustrates the inverse relationship between inflation and
unemployment, suggesting that lower unemployment rates can lead to higher inflation,
and vice versa, in the short term.