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Practice Test: Indian Economy - 1 - UPSC MCQ


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50 Questions MCQ Test Mock Test for UPSC Prelims 2025 - Practice Test: Indian Economy - 1

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Practice Test: Indian Economy - 1 - Question 1

Which of the following are examples of Economic activities?

  1. Buying and selling something
  2. Doing business
  3. Visiting religious places for prayer
  4. Giving alms to beggars at places of worship

 Select the correct answer using the code given below: 

Detailed Solution for Practice Test: Indian Economy - 1 - Question 1

Economics is the study of how societies use scarce resources to produce valuable commodities and distribute them among different people. Economic activities, in a very simple way, are all activities where money is involved. And wherever money comes into question, there comes the economic motive or gain. 
Several examples can be taken of it like  

  • getting a job, giving a job,
  • buying and selling something,
  • doing a business, and so on and so forth.

 Visiting religious places for prayer is clearly not an economic activity, but giving alms to  beggars there or putting some money in the places of worship are economic activities. 

Practice Test: Indian Economy - 1 - Question 2

Consider the following pairs with reference to different kinds of poor


Which of the pairs given above are incorrect? 

Detailed Solution for Practice Test: Indian Economy - 1 - Question 2

Pair 1 is correct: There are many ways to categorize poverty. In one such way, people who are always poor and those who are usually poor but who may sometimes have a little more money are grouped together as the chronic poor.  
Pair 2 is incorrect: Another group are the churning poor who regularly move in and out  of poverty. 
Pair 3 is incorrect:  Occasionally poor who are rich most of the time but may sometimes  have a patch of bad luck. Churning poor and Occasionally poor together are called the  transient poor. And then there are those who are never poor, and they are the non-poor.

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Practice Test: Indian Economy - 1 - Question 3

Consider the following statements about the Global Multidimensional Poverty Index (MPI):

  1. It has been developed by the Oxford Poverty and Human Development Initiative and the United Nations Development Programme.
  2. Health, Education and monthly Income are the three main dimensions covered under MPI.
  3. A person is multi-dimensionally poor if he is deprived in one-sixth of the weighted indicators

How many of the statements given above are correct?

Detailed Solution for Practice Test: Indian Economy - 1 - Question 3

Global Multidimensional Poverty Index: The index is a key international resource that  measures acute multidimensional poverty across more than 100 developing countries. 

  • Statement 1 is correct:  MPI was first launched in 2010 by the Oxford Poverty and Human Development Initiative and the United Nations Development Programme. It uses different factors beyond income-based lists to determine poverty.  
  • Statement 2 is incorrect: The index uses the same three dimensions as the Human Development Index. Those are Health, Education and standard of living and are measured using ten Indicators. (Refer to the figure given below). 
  • Statement 3 is incorrect: A person is multi dimensionally poor if he is deprived in one third or more of the weighted indicators out of The 10 indicators.
Practice Test: Indian Economy - 1 - Question 4

Consider the following statements regarding the Human Development Index (HDI):

  1. The HDI encapsulates various dimensions, such as health, education, and standard of living.
  2. The HDI uses a simple arithmetic mean to aggregate the scores for the three HDI dimension indices.
  3. The HDI includes the inequalities, poverty, and human security and provides a complete assessment of human development.
  4. The HDI gives increasing importance to income with rising Gross National Income (GNI).

 How many of the statements given above are correct? 

Detailed Solution for Practice Test: Indian Economy - 1 - Question 4

Statement 1 is correct: The HDI offers a comprehensive measure of human development by considering key dimensions, namely health (life expectancy at birth), education (mean years of schooling and expected years of schooling), and standard of living (Gross National Income per capita). 

Statement 2 is incorrect: The HDI employs a geometric mean to aggregate the normalized indices for its three dimensions, not a simple arithmetic mean. This geometric mean reflects the idea that a balanced development across these dimensions is more desirable than skewed development. 

Statement 3 is incorrect: The HDI, while valuable in assessing human development, does not directly account for factors like inequality, poverty, or human security. It focuses primarily on the three core dimensions of human development (health, education, and standard of living).  

Statement 4 is incorrect: The HDI uses the logarithm of income as an adjustment to reflect the diminishing importance of income with increasing GNI. This adjustment is in line with the concept that as a country's income increases, additional income contributes less to overall well-being, and thus the logarithmic function is used to incorporate this into the HDI calculation.

Practice Test: Indian Economy - 1 - Question 5

Consider the following pairs:


How many of the above pairs are correctly matched? 

Detailed Solution for Practice Test: Indian Economy - 1 - Question 5
  • Pair 1 is correct: Ad-valorem tax is levied as a percentage of the value of the item it is imposed on, and not on the item's quantity, size, weight or other such factor. 
  • Pair 2 is correct: Specific tax is the tax which is fixed as per each unit of good or service rather than based on its value. 
  • Pair 3 is incorrect: Regressive Taxes are the taxes where the Tax percentage decreases with an increase in income. 
  • Pair 4 is incorrect: Progressive Taxes are the taxes where the Tax percentage increases with an increase in income.
Practice Test: Indian Economy - 1 - Question 6

The concept of a Poverty line in the form of “Jail cost of living” in pre-independent India was first discussed by who among the following?  

Detailed Solution for Practice Test: Indian Economy - 1 - Question 6

In pre-independent India, Dadabhai Naoroji was the first to discuss the concept of a Poverty Line.  

  • He used the menu for a prisoner and used appropriate prevailing prices to arrive at what may be called ‘jail cost of living’.
  • However, only adults stay in jail whereas, in an actual society, there are children too. He,
  •  appropriately adjusted this cost of living to arrive at the poverty line. 
  • For this adjustment, he assumed that one-third population consisted of children and half of them consumed very little while the other half consumed half of the adult diet.
  • The weighted average of consumption of the three segments gives the average poverty line, which comes out to be three-fourth of the adult jail cost of living
Practice Test: Indian Economy - 1 - Question 7

Consider the following statements:  

  • Statement-I : In the given year in India, official poverty lines are higher in some states than in others. 
  • Statement-II : Price levels of commodities vary from states to states in India.

Which one of the following is correct in respect of the above statements?

Detailed Solution for Practice Test: Indian Economy - 1 - Question 7

Poverty is a state or situation in which a person or a group of people don't have enough money or the basic things they need to live.  
Poverty Line: It is the required level of income to fulfil the basic necessities of life.  lt can be represented in terms of either per capita calorie intake or per capita consumption expenditure required to attain a minimum living condition. 
It may vary from one country to another. It may also vary from one state to another in India due to different price levels prevailing in the country. This difference could be due to factors such as the cost of living, economic conditions, and other regional variations.  According to the United Nations, India has witnessed a remarkable achievement in poverty reduction, with a staggering 415 million individuals transitioning out of poverty within  a relatively short span of 15 years, from 2005/2006 to 2019/2021. 
Hence, Both Statement-I and Statement-II are correct and Statement-II is the correct  explanation for Statement-I.

Practice Test: Indian Economy - 1 - Question 8

 Consider the following: 

  1. Lower Inflation in goods and services 
  2. More focus on capital-intensive ways of production 
  3. Urban bias in private investment 

How many of the above are causes of income inequality? 

Detailed Solution for Practice Test: Indian Economy - 1 - Question 8

The gap in income between the rich and the poor is referred to as inequality. In other words, it indicates the disparity in the distribution of economic assets and income.

  • Option 1 is incorrect: Inflation can disproportionately affect lower-income individuals and households, as they often spend a larger portion of their income on basic necessities like food, housing, and healthcare. When the prices of these essential goods and services rise significantly, it can lead to a reduction in the real income of lower-income groups, thereby exacerbating income inequality.
  • Option 2 is correct: Capital-intensive production methods often require significant investments in machinery and technology, which can lead to a concentration of wealth and income among those who own and control these capital assets. This can result in a wider income gap between capital owners and labourers, contributing to income inequality.
  • Option 3 is correct: Urban bias in private investment: An urban bias in private investment means that more investment is directed towards urban areas and industries, neglecting rural or less-developed regions. This can lead to unequal economic development, with urban areas benefiting more from economic growth and job opportunities while rural areas experience slower growth and fewer employment prospects. This regional disparity can contribute to income inequality.
Practice Test: Indian Economy - 1 - Question 9

Consider the following statements concerning the Indian economy:

  1. Non-tax Revenue Receipts include profits, interest receipts on loans given, and dividends from entities like PSEs.
  2. Revenue expenditure, if done by states, directly creates assets.
  3. Capital Receipts involve recoveries of loans, receipts from asset sales and fresh borrowings.

Which of the statements given above are correct?

Detailed Solution for Practice Test: Indian Economy - 1 - Question 9

Statement 1 is correct:  
Non-tax Revenue Receipts:  This includes all money earned by the government from sources other than taxes. In India, they are:

  • Profits and dividends which the government gets from its public sector undertakings (PSUs).  
  • Interests received by the government out of all loans forwarded by it, be it inside the country (i.e., internal lending) or outside the country (i.e., external lending). It means this income might be in both domestic and foreign currencies.  
  • Fiscal services also generate incomes for the government, i.e., currency printing, stamp printing, coinage and medals minting, etc. 
  • General Services also earn money for the government as the power distribution, irrigation, banking, insurance, community services, etc.  
  • Fees, Penalties and Fines received by the government.  
  • Grants which the governments receives—  it is always external in the case of the Central Government and internal in the case of state  governments 

Statement 2 is incorrect: Revenue Account Expenditure includes but is not limited to, interest payments, defence, subsidies, public administration, and financial grants to states. In conventional terms, it includes maintenance  and consumption expenditure, as well as welfare expenditure. It does not create assets  directly. 
Statement 3 is correct: All non-revenue receipts of a government are known as capital  receipts. Such receipts are for investment purposes and supposed to be spent on plan development by the government. Capital Account Receipts involve recoveries of loans,  receipts from asset sales, and fresh borrowings from inside and outside the country, both debt and non-debt.

Practice Test: Indian Economy - 1 - Question 10

Consider the following products:

  1. Alcohol
  2. Petrol
  3. Aviation Turbine Fuel
  4. Natural Gas

 How many of the above products are outside the domain of the GST framework? 

Detailed Solution for Practice Test: Indian Economy - 1 - Question 10

Goods and Services Tax (GST) subsumed various central indirect taxes including the central excise duty, additional excise duties, service tax, additional customs duty and special additional duty of customs, etc. It also subsumed State Value Added Tax (VAT )/sales tax, central sales tax, entertainment tax, octroi and entry tax, purchase tax and luxury tax, etc.  However, Alcohol, Petrol, Diesel, Aviation Turbine Fuel and Natural Gas do not come under GST.

Practice Test: Indian Economy - 1 - Question 11

Which one of the following curves plots the relation between inequality and per capita income? 

Detailed Solution for Practice Test: Indian Economy - 1 - Question 11

The Kuznets curve is a hypothetical curve that graphs economic inequality against per capita income over the course of economic development. Simon Kuznets hypothesized that as an economy develops, market forces first increase then decrease the overall economic inequality of society, which is illustrated by the inverted U-shape of the Kuznets curve.

  • Laffer curve- A curve devised by the economist Arthur Laffer in 1974 which links average tax rates to total tax revenue. It suggests that higher tax rates initially increase revenue but after a point further increases in tax rates cause revenue to fall. Phillips curve - It is a graphic curve which advocates a relationship between inflation and unemployment in an economy. The curve suggests that lower the inflation, higher the unemployment and higher the inflation, lower the unemployment.
  • Lorenz curve- A graph showing the degree of inequality in income and wealth in a given population or an economy. It is a rigorous way to measure income inequality. In this method (for example), personal incomes in an economy are arranged in increasing order; the cumulative share of total income is then plotted against the cumulative share of the population.
Practice Test: Indian Economy - 1 - Question 12

Consider the following statements regarding the Revenue Deficit in the economy:  

  1. Social sector expenditures, such as expenditure on education, health, and labor welfare, are not considered part of revenue expenditure in India. 
  2. The goal of the Fiscal Responsibility and Budget Management (FRBM) Act 2003  was to increase the  Revenue Deficit in a sustainable manner. 

Which of the statements given above are correct? 

Detailed Solution for Practice Test: Indian Economy - 1 - Question 12

Statement 1 is incorrect: In India, social sector expenditures, including education, labor welfare, health, contributions to agriculture, and social security under government flagship schemes, are considered part of revenue expenditure. Excess of these expenditures contribute to the Revenue Deficit.

Statement 2 is incorrect: The Fiscal Responsibility and Budget Management (FRBM) Act is to provide for the responsibility of the Central Government to ensure intergenerational equity in fiscal management and long-term macro-economic stability by removing fiscal impediments in the effective conduct of monetary policy and prudential debt management consistent with fiscal sustainability through limits on the Central Government borrowings, debt and deficits, greater operations of the Central Government and conducting fiscal policy. The Main highlight of the FRBMA, 2003 was that the Gol was to take measures to reduce fiscal and revenue deficit so as to eliminate revenue deficit by March 31, 2008 and thereafter build up adequate revenue surplus.

Practice Test: Indian Economy - 1 - Question 13

In India, which one of the following compiles information on the Periodic Labour Force Survey?  

Detailed Solution for Practice Test: Indian Economy - 1 - Question 13

National Sample Survey Office (NSSO): It became National Statistical Office (NSO) in 2019 after merging with Central Statistical Office (CSO). It was done to streamline the efforts of both of these organisations. NSO is headed by the Ministry of Statistics and Programme Implementation (MOSPI). 
Considering the importance of the availability of labour force data at more frequent time intervals, National Sample Survey Office (NSSO) launched Periodic Labour Force Survey (PLFS) in April 2017. 
The objective of PLFS is primarily twofold: 

  • to estimate the key employment and unemployment indicators (viz. Worker Population Ratio, Labour Force Participation Rate, Unemployment Rate) in the short time interval of three months for the urban areas only in the ‘Current Weekly Status’ (CWS).
  • To estimate employment and unemployment indicators in both ‘Usual Status’ (ps+ss) and CWS in both rural and urban areas annually. The National Sample Survey Office (NSSO)  headed by a Director General is responsible for conduct of large scale sample surveys in diverse fields on All India basis

Primarily data are collected through nation-wide household surveys on various socio-economic subjects, Annual Survey of Industries (ASI), etc. Besides these surveys, NSSO collects data on rural and urban prices and plays a significant role in the improvement of crop statistics through supervision of the area enumeration and crop estimation surveys of the State agencies. It also maintains a frame of urban area units for use in sample surveys in urban areas.

Practice Test: Indian Economy - 1 - Question 14

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

  1. Labor force refers to the number of persons actually working or willing to work. 
  2. Workforce refers to the number of persons who are actually working and it does not include those who are willing to work but not working. 

Which of the statements given above are correct?

Detailed Solution for Practice Test: Indian Economy - 1 - Question 14

Statement 1 is correct: Labour force is the total number of people employed or seeking employment in a country or region. One is classified as ‘not in labor force’, if he or she was engaged in a relatively longer period in any one of the non-gainful activities. It refers to the number of persons actually working or willing to work. It is not related to the wage rate. It is measured in terms of number of persons (not in terms of man-days or persondays). 
Statement 2 is correct: Workforce refers to only those persons who are actually working. It does not take into account those who are willing to work (but not working). The Worker participation rate is defined as the percentage of total workers (main and 
marginal) to the total population. 
Work participation rate = (Total Workers / Total Population) X 100
 

Practice Test: Indian Economy - 1 - Question 15

Consider the following statements:

  1. Angel Tax is levied when the Initial Public Offer by a listed company is oversubscribed.
  2. Windfall Tax is a virtual tax as a result of the withdrawal of subsidies by the government.

Which of the statements given above are correct?

Detailed Solution for Practice Test: Indian Economy - 1 - Question 15

Statement 1 is incorrect: Angel tax is levied when an unlisted company issues shares to an investor at a price higher than its fair market value. Earlier, it was imposed only on investments made by a resident investor. However, the Finance Act 2023 proposed to extend angel tax even to non-resident investors. It was first introduced in 2012 to deter the generation and use of unaccounted money through the subscription of shares of a closely held company at a value that is higher than the fair market value of the firm’s shares. 
Statement 2 is incorrect: A windfall tax is a tax levied by governments against certain industries when economic conditions allow those industries to experience significantly above-average profits. Windfall taxes are primarily levied on companies in the targeted industry that have benefited the most from the economic windfall, most often commodity based businesses.

Practice Test: Indian Economy - 1 - Question 16

Which of the following organisations came up with the ‘State of Inequality in India report’? 

Detailed Solution for Practice Test: Indian Economy - 1 - Question 16

The State of Inequality in India Report has been written by the Institute for Competitiveness and presents a holistic analysis of the depth and nature of inequality in India. The report compiles information on inequities across sectors of health, education, household characteristics and the labour market. As the report presents, inequities in these sectors make the population more vulnerable and trigger a descent into multidimensional poverty.

Practice Test: Indian Economy - 1 - Question 17

Consider the following statements:

  1. Fiscal Deficit is the difference between the government’s total receipts and total expenditures.
  2. The concept of Budget Deficit rather than Fiscal deficit is widely used in the Economy in recent times.
  3. Monetized Deficit refers to the purchase of government bonds by the central bank to finance the spending needs of the government.

Which of the statements given above are correct?

Detailed Solution for Practice Test: Indian Economy - 1 - Question 17

Statement 1 is correct: When the balance of the government’s total receipts (i.e., revenue + capital receipts) and total expenditures (i.e., revenue + capital expenditures) turns out to be negative, it shows the situation of fiscal deficit. The situation of fiscal deficit indicates that the government is spending beyond its means. Fiscal deficit may be shown in the quantitative form (i.e., the total currency value of the deficit) or in the percentage form of the GDP for that particular year (percentage of GDP).

Statement 2 is incorrect: Budget Deficit is the difference between total budgeted expenditure and receipts that include the money borrowed from the market by the RBI by floating government securities. The concept was discarded in 1997 as it led to accounting distortions.

Statement 3 is correct: Monetized deficit is the monetary support the Reserve Bank of India (RBI) extends to the Centre as part of the government's borrowing programme. In other words, the term refers to the purchase of government bonds by the central bank to finance the government. spending needs of the Also known as debt monetisation, the exercise leads to an increase in total money supply in the system, and hence inflation, as RBI creates fresh money to purchase the bonds. The same bonds are later used to bring down inflation as they are sold in the open market. This helps RBI suck excess money out of the market and rein in rising prices.

Practice Test: Indian Economy - 1 - Question 18

Consider the following statements regarding Gross Domestic Product (GDP) and Gross National Product (GNP) in the context of the globalised economy: 

  1. GDP primarily focuses on where the output is produced, while GNP  emphasises who produced it. 
  2. China's GNP was historically higher than its GDP, but now it is catching up with it’s GDP due to the Belt and Road Initiative. 

Which of the statements given above are correct? 

Detailed Solution for Practice Test: Indian Economy - 1 - Question 18

Statement 1 is correct: While GDP includes the production within a country by all producers-citizens as well as foreign multinational corporations, GNP captures all that is produced by the citizens of a country, whether within the geography of the country or abroad. In other words, GDP is a geography-related concept, while GNP is citizen-related. 
GDP focuses on where the output is produced, while GNP shows who produced it. 

Statement 2 is incorrect: China's GDP was much more than its GNP until the last decade, as many foreign MNCs were operating  in China. However, with China's Belt and Road Initiative gaining ground, the nation's GNP is catching up with its GDP. If MNCs relocate out of China due to trade tensions with the US, its GDP will diminish even more relative to its GNP. 

Practice Test: Indian Economy - 1 - Question 19

With reference to the Indian economy, which of the following denotes the difference between the fiscal deficit and the interest payment?  

Detailed Solution for Practice Test: Indian Economy - 1 - Question 19

Gross Primary Deficit is Gross Fiscal Deficit less interest payments. Net Primary Deficit is Net Fiscal Deficit minus net interest payments. The concept of primary deficit plays a pivotal role in evaluating the government's fiscal prowess by dissecting the fiscal deficit from interest payments. It signifies the current fiscal control efforts, excluding the burden of historical interest payments. As a new government is scrutinized for its fiscal performance, the primary deficit serves as a key metric, allowing a focused assessment of its ability to rationalize the fiscal deficit. The aspiration of achieving a primary surplus underscores the government's potential to borrow less than interest payments, paving the way for future fiscal prudence. In this trajectory, a distant yet transformative future sees interest payments funded exclusively from budgetary revenues, marking the zenith of fiscal responsibility.

Practice Test: Indian Economy - 1 - Question 20

Many a times we read about “Circuit Breakers” in share markets. They are temporary measures which halt the trading on which of the following occasion?

Detailed Solution for Practice Test: Indian Economy - 1 - Question 20

Correct Answer: B [When the prices of particular stock’s) rises or falls by a specified amount in specified time]

Notes:
Circuit breakers are pre-defined values in percentage terms, which trigger an automatic check when there is a runaway move in any security or index. It may involve Halting of trade in a security or index for a certain period or Halting of trade in a security or index for the entire trading day.

Practice Test: Indian Economy - 1 - Question 21

With reference to the ‘T+0 Settlement Cycle’ that was recently introduced in Indian Stock Market, 
consider the following statements: 
1.  The shares are transferred to the buyer’s account and funds are deposited in the seller’s account on 
the same day of the trade. 
2.  It is applicable only for trades executed before 05:00 p.m. 
Which of the statements given above is/are correct? 

Detailed Solution for Practice Test: Indian Economy - 1 - Question 21

(c) 
In News : The Indian Stock Market recently introduced the T+0 settlement cycle, marking a significant 
shift from the existing T+1 settlement cycle. 
Statement 1 is correct: 
● T+0 Settlement Cycle: The trades involving shares are settled on the same day they occur in the T+0 
system. It means shares are transferred to the buyer’s account and funds are deposited in the 
seller’s account on the same day of the trade.  It is a departure from the current T+1 cycle, where trades are settled by the next day. 

Statement 2 is not correct: 
● The T+0 settlement cycle will be executed in two phases. 
First Phase: Trades executed up to 1:30 pm will be considered for settlement, which must be 
completed by 4:30 pm.
Second Phase: It extends trading time till 3:30 pm, discontinuing the first phase.

● The T+0 settlement will be optional for 25 stocks and will be applicable only for trades executed between 9:15 a.m. and 1:30 p.m.

Practice Test: Indian Economy - 1 - Question 22

Consider the following statements regarding deficit financing in the economy:  

  1. Deficit financing means generating funds to finance the deficit which results from excess expenditure over revenue. 
  2. The Reserve Bank of India can print money and supply credit in deficit financing. 

Which of the statements given above are correct? 

Detailed Solution for Practice Test: Indian Economy - 1 - Question 22

Statement 1 is correct: Deficit financing means generating funds to finance the deficit, which results from excess expenditure over revenue. The gap is being covered by borrowing from the public by the sale of bonds or by printing new money. The need for deficit financing: 

  • For developing countries like India, higher economic growth is a priority. A higher economic growth requires finances. With the private sector being shy of making huge expenditures, the responsibility of drawing financial resources rests on the government. 
  • Often both the tax and non-tax revenues fail to mobilise enough resources. The deficit is often funded through borrowings or printing new currency notes. 

Statement 2 is correct: In deficit financing, the Reserve Bank of India prints money and  supplies credit, resulting in an increase in highpowered money or reserve money.

Practice Test: Indian Economy - 1 - Question 23

Consider the following events from the first to the last:  

  1. Introduction of the Regional Rural Banks 
  2. Introduction of the Lead Bank Scheme 
  3. Establishment of the State Bank of India  
  4. Nationalisation of 14 major banks in India 

Select the correct chronological order(past to present) using the code given below: 

Detailed Solution for Practice Test: Indian Economy - 1 - Question 23

On 1st July 1955, the State Bank of India was constituted under the provisions of the State Bank of India Act 1955, for the purpose of taking over the undertaking and business of the Imperial Bank of India. The Imperial Bank of India was founded in 1921.  The Bank transacts general banking description  business of every including, foreign exchange, merchant banking and mutual funds. After successful experimentation in the partial nationalizations the government decided to go for complete nationalization. With the help of the Banking Nationalization Act of 1969, the government nationalized a total number of 20 private banks.

  • 14 banks with deposits were more than Rs. 50 crore of nationalized in July 1969, and
  • 6 banks with deposits were more than Rs. 200 crore nationalized in April 1980.

On the basis of the recommendations of both the Gadgil Study Group and Banker's Committee (Nariman Committee) Reserve Bank of India introduced the "Lead Bank Scheme" in December of 1969. The Regional Rural Banks (RRBs) were— first set up on October 2, 1975 (only 5 in number) with the aim to take banking services to the doorsteps of the rural masses, especially in remote areas with no access to banking services.

Practice Test: Indian Economy - 1 - Question 24

Consider the following statements:

1. Credit bureaus are organizations that collect, analyze, and maintain credit data on borrowers, businesses, and organizations.
2.They are licensed by the Securities and Exchange Board of India.
3. Only one Credit reports can only be provided to borrowers and government agencies.

How many statements given above is/are correct?

Detailed Solution for Practice Test: Indian Economy - 1 - Question 24

(D)
Statement 1 is correct: Credit Information Companies, also called credit bureaus, are organizations that 
collect, analyze, and maintain credit data on borrowers, businesses, and organizations. 

  • CIBIL is the oldest and most well-known credit information company in India. The top four credit  information companies in India are: 
    • Credit Information Bureau (India) Limited (CIBIL) 
    • Equifax 
    • Experian 
    • CRIF Highmark 

Statement 2 and 3 are not correct: They are licensed by the Reserve Bank of India. 

  • Credit reports can only be provided to the following people or authorities upon request: 
    • Borrower’s employer 
    • Borrower’s landlords 
    • Utility service providers 
    • Government of India 
    • Lenders, banks, financial institutions 
    • Any third party (only after the written request from the borrower). 
Practice Test: Indian Economy - 1 - Question 25

With reference to the ‘Coffee Board’ in India, consider the following statements:

1. It is a statutory body functioning under the Ministry of Commerce and Industry.
2. Its head office is situated in Bengaluru.

Which of the statements given above is/are correct?

Detailed Solution for Practice Test: Indian Economy - 1 - Question 25

(b)
In News : Recently, it was found that the Price of Robusta coffee has spiked due to drastic fall in traditional growing regions like Vietnam and Indonesia. Statement 1 is correct:

● Coffee Board of India: It was established through Coffee Act VII of 1942.
Thus It is a statutory body.
● Administrative Control: The Ministry of Commerce and Industry.

Statement 2 is correct:
● Its head office is situated in Bengaluru in Karnataka
● The Board has a Market Intelligence Unit (MIU) functioning from its head office at Bangalore. ○ It undertakes various activities related to market information & intelligence, market research studies, crop forecasting and coffee economics aspects.

Practice Test: Indian Economy - 1 - Question 26

Gini index or Gini Coefficient is used to measure which of the following?

Detailed Solution for Practice Test: Indian Economy - 1 - Question 26

(c)

The Gini index is a measure of the distribution of income across a population.
● A higher Gini index indicates greater inequality, with high-income individuals receiving much larger percentages of the population’s total income.
● Global inequality, as measured by the Gini index, has steadily increased over the past few centuries and spiked during the COVID-19 pandemic.

Practice Test: Indian Economy - 1 - Question 27

Which of the following activities are undertaken by the Bureau of Indian Standards (BIS)?  

  1. Product Certification Scheme 
  2. Hall Marking Scheme 
  3. Laboratory Recognition Scheme 
  4. Sale of Indian Standards 

Select the correct answer using the code given below: 

Detailed Solution for Practice Test: Indian Economy - 1 - Question 27

The Bureau of Indian Standards (BIS) is the National Standard Body of India established under the BIS Act 2016 for the harmonious development standardisation, marking and quality certification of goods. To protect the interest of 
consumers as well as the industry, BIS is involved in various activities as follows: 

  • Standards Formulation
  • Product Certification Scheme
  • Compulsory Registration Scheme
  • Foreign Manufacturers Certification Scheme
  • Hall Marking Scheme
  • Laboratory Services
  • Laboratory Recognition Scheme
  • Sale of Indian Standards
  • Consumer Affairs Activities
  • Promotional Activities
  • Training Services at National & International level
  • Information Services
Practice Test: Indian Economy - 1 - Question 28

Which of the following is the primary objective of the Financial Services Institutions Bureau? 

Detailed Solution for Practice Test: Indian Economy - 1 - Question 28

The BBB was declared an incompetent authority by the Delhi High Court when a general manager at state-owned National Insurance Company challenged the appointment of a person junior to him for Director’s position by the BBB.  
The Banks Board Bureau (BBB) had to be struck down, and a new body, namely, FSIB had to be put in place via approval from the Appointments Committee of the Cabinet, headed by the prime minister. The Financial Services Institutions Bureau (FSIB) is a government body set up under the Department of Financial Services. The board will be entrusted with making recommendations for the appointment of full-time directors and non-executive chairman of state-run financial services institutions. FSIB would be headed by a chairman, a central government nominee. The board would comprise the Secretaries of the DFS, the chairman of IRDAI, and a deputy governor of the RBI. Additionally, it will have three part-time members who are experts in banking and three more from the insurance sector.

Practice Test: Indian Economy - 1 - Question 29

Consider the following statements regarding structural inflation:  

  1. It is a short term inflation due to temporary mismatch in the demand and supply. 
  2. Inefficient distribution and storage facilities is a major cause of such type of inflation. 

Which of the statements given above are correct? 
 

Detailed Solution for Practice Test: Indian Economy - 1 - Question 29

Statement 1 is incorrect: Structural Inflation persists for a longer period due to deficiencies existing in the economy, such as 
Backward agricultural sector (poor productivity). Inefficient distribution and storage facilities, and many more. Hence, statement 2 is correct.

  • Backward technology
  • Infrastructural bottlenecks
  • Supply chain breakdowns
  • Greenflation is due to carbon tax.

These deficiencies in the economy lead to shortages, which in turn cause inflation. It is also termed as Bottleneck Inflation, and the government faces a tough time tackling this particular type of inflation. It can be handled through major structural reforms.

Practice Test: Indian Economy - 1 - Question 30

With reference to the ‘Regional Rural Banks (RRBs)’, consider the following statements:

  1. They were established under the Kelkar committee recommendations.
  2. They were established with the goal of providing credit and financial services to rural areas.
  3. They are jointly owned by the Central Government, State Government, and a sponsor bank.

Which of the statements given above are correct?  

Detailed Solution for Practice Test: Indian Economy - 1 - Question 30

Statement 1 is incorrect: The Regional Rural Banks (RRBs) were established under the provisions of an ordinance passed in 1975 and the RRB Act 1976. Kelkar Committee was formed to study the extant Public Private Partnership Model in India.  
Statement 2 is correct: The main goal of establishing RRBs was to provide credit and other banking facilities to small and marginal farmers, agricultural labourers, and small artisans, which are a significant part of the rural economy. 
Statement 3 is correct: The RRBs are jointly owned by the Central Government, the State Government, and a sponsor bank. The equity is held by the Central Government, the concerned State Government, and the Sponsor Bank in the proportion of 50:15:35, respectively

Practice Test: Indian Economy - 1 - Question 31

 With reference to Sanchar Saathi, consider the following statements:

  1. It allows citizens to block the mobile phones which are stolen/lost.
  2. It uses artificial intelligence for subscriber verification.
  3. It cannot prevent mobile devices with forged IMEIs from being used in Indian networks.

 How many of the above statements are correct?

Detailed Solution for Practice Test: Indian Economy - 1 - Question 31

Sanchar Saathi portal is a citizen-centric initiative of  Department of Telecommunications to empower mobile subscribers, strengthen their security and increase awareness about citizen-centric initiatives of the Government.  
Statement 1 is correct: Sanchar Saathi empowers citizens by allowing them to know the mobile connections issued in their name, get disconnected from the connections not required by them, block/trace lost mobile phones and check the genuineness of devices while buying a new/old mobile phone.  
Statement 2 is correct: The entire system has been designed in-house by Dept. of Telecom. It has following modules.  

  • Centralised Equipment Identity Register (CEIR)
  • Know Your Mobile
  • Telecom Analytics for Fraud Management and Consumer Protection (TAFCOP)
  • ASTR (Artificial Intelligence and Facial Recognition powered Solution for Telecom SIM Subscriber Verification) The ASTR, is an AI powered tool for Telecom SIM Subscriber Verification. It uses various techniques of facial recognition and data analytics. It will help to identify SIMs issued using fraudulent/forged documents. 

Statement 3 is incorrect: The Centralised Equipment Identity Register (CEIR) prevents mobile devices with inaccurate or forged International Mobile Equipment Identity (IMEIs)  being used in Indian networks. 

The CEIR also prevents the use of stolen/lost mobiles. In case any mobile device is stolen or lost, a user can submit the IMEI numbers on the portal. Information submitted by the user, along with a copy of the police complaint, is then verified. The system is integrated with the Telecom Service Providers and Law Enforcement Agencies. Once the information is verified, the system blocks the stolen mobile phones from being used in Indian networks. In case anyone tries to use the stolen device, the system allows Law Enforcement Agencies to trace the device. When the stolen device is recovered, the user can unlock the device on the portal.

Practice Test: Indian Economy - 1 - Question 32

Which of the following statements best describes the term Gig economy?

Detailed Solution for Practice Test: Indian Economy - 1 - Question 32

(b) Labor market characterized by short-term, flexible work arrangements.
Gig Economy ● The Gig economy, also known as the freelance economy or on-demand economy, refers to a labor market characterized by short-term, flexible work arrangements.
● The gig economy is about individual workers carrying out tasks for clients through the intermediation of a platform on a task-by-task basis.
● Gig workers: NITI Aayog defines 'gig workers' as those engaged in work outside of the traditional employer-employee arrangement. NITI Aayog’s report titled ‘India’s Booming Gig and Platform Economy’ defines a gig worker as
(a) “someone who engages in income-earning activities outside of a traditional employer employee relationship, as well as in the informal sector”.
(b) Additionally, it defines those working with platforms such as Ola, Uber, Dunzo, Swiggy, Zomato and Urban Company as platform workers.

Practice Test: Indian Economy - 1 - Question 33

With respect to the Global Financial Innovation Network (GFIN), consider the following statements:  

  1. GFIN was launched by the World Bank. 
  2. The Reserve Bank of India (RBI) is a member of the GFIN. 

Which of the statements given above are incorrect?

Detailed Solution for Practice Test: Indian Economy - 1 - Question 33

Statement 1 is incorrect: The Global Financial Innovation Network (GFIN) was formally launched in January 2019 by an international group of financial regulators and related organisations. The GFIN is a network of over 70 organisations committed to supporting financial innovation in the interests of consumers. It seeks to provide a more efficient way for innovative firms to interact with regulators, helping them navigate between countries as they look to scale new ideas. This includes the ability to apply to join a pilot for firms wishing to test innovative products, services or business models across more than one jurisdiction.

Statement 2 is correct: The GFIN is overseen by the Coordination Group. The Coordination Group is made up of GFIN Members and sets the overall direction, strategy and annual work programme of the GFIN. The Coordination Group is currently being chaired by the FCA. Membership in the Coordination Group lasts for two years, and members meet twice a year to provide ongoing input and engagement into the work-streams. The Reserve Bank of India (RBI) is a member of the  Global Financial Innovation Network (GFIN). Recently, RBI has also joined Global Financial  Innovation Network (GFIN)’s Greenwashing  TechSprint.

Practice Test: Indian Economy - 1 - Question 34

With reference to the Minimum Support Price (MSP), consider the following statements:
1. The Commission for Agricultural Costs & Prices recommends the MSP.
2. The MSPs of toria and de-husked coconut are fixed on the basis of the MSPs of rapeseed/mustard 
and copra, respectively. 

Which of the statements given above is/are correct?

Detailed Solution for Practice Test: Indian Economy - 1 - Question 34

(c)
The Commission for Agricultural Costs & Prices (CACP) makes recommendations for the MSPs. The Cabinet Committee on Economic Affairs (CCEA) takes these decisions. MSP is announced for 22 mandated crops and fair and remunerative price (FRP) for sugarcane. The mandated crops are 14 crops of the kharif season, 6 rabi crops and two other commercial crops. In addition, the MSPs of toria and de husked coconut are fixed on the basis of the MSPs of rapeseed/mustard and copra, respectively. The list of crops are as follows:
• Cereals (7) - paddy, wheat, barley, jowar, bajra, maize and ragi
• Pulses (5) - gram, arhar/tur, moong, urad and lentil
• Oilseeds (8) - groundnut, rapeseed/mustard, toria, soyabean, sunflower seed, sesamum, safflower seed and niger seed
• Raw cotton
• Raw jute
• Copra
• De-husked coconut
• Sugarcane (Fair and remunerative price)
• Virginia flue cured (VFC) tobacco

Practice Test: Indian Economy - 1 - Question 35

Consider the following statements regarding transfer payments: 

  1. Transfer payments are the money exchanged for some goods or services. 
  2. The Pradhan Mantri Ujjwala Yojana is considered a transfer payment program. 
  3. The Pradhan Mantri Matru Vandana Yojana is an example of a transfer payment program. 
  4. Transfer payments are included in the calculation of the national income under GDP. 

How many of the statements given above are correct?

Detailed Solution for Practice Test: Indian Economy - 1 - Question 35

Statement 1 is incorrect: Transfer payments are one-way payments of money for which no goods or services are received in exchange. They are typically used for income redistribution or welfare programs and do not involve the exchange of money for goods or services.

Statement 2 is incorrect: The Pradhan Mantri Ujjwala Yojana is considered a subsidy program, not a transfer payment. It provides select beneficiaries with access to stoves and LPG cylinders at a subsidised price, which is linked to a commodity transaction.

Statement 3 is correct: Under the Pradhan Mantri Matru Vandana Yojana (PMMVY), GOI provides financial aid to pregnant women who undergo institutional delivery in hospitals. The aid is also meant to help with the child's vaccination as well as nutritional food. The money is directly transferred to the bank accounts of pregnant women. The scheme is aimed at encouraging institutional deliveries in order to reduce maternal as well as infant mortality. PMMVY is a transfer payment, and it is a conditional cash transfer.

Statement 4 is incorrect: Transfer payments are typically excluded from GDP calculations because they do not represent the production of goods or services. It is a one-way transfer and is not a payment involving purchase.

Practice Test: Indian Economy - 1 - Question 36

Consider the following:

  1. Deliberate non-payment of the dues despite good net worth
  2. Misrepresentation of records
  3. Fraudulent transactions by the borrower

How many of the above are considered wilful defaulters?
 

Detailed Solution for Practice Test: Indian Economy - 1 - Question 36

The Reserve Bank of India (RBI) issued draft guidelines on the classification of wilful defaulters, expanding the definition of the term and mandating lenders to complete the process of identifying and tagging borrowers as wilful defaulters within six months of loans turning bad. 
According to the RBI, a wilful defaulter is one who: 

  1. Deliberate non-payment of the dues despite adequate cash flow and good net worth;
  2. Syphoning off of funds to the detriment of the defaulting unit;
  3. Assets financed either have not been purchased or been sold, and proceeds have misutilised;
  4. Misrepresentation / falsification of records;
  5. Disposal / removal of securities without the bank's knowledge;
  6.  Fraudulent transactions by the borrower
     
Practice Test: Indian Economy - 1 - Question 37

The Balance of Payments of a country is a systematic record of :

Detailed Solution for Practice Test: Indian Economy - 1 - Question 37

(a)
The balance of payments (BOP) is a statement of all transactions made between entities in one country and the rest of the world over a defined period of time, such as a quarter or a year. The balance of payments includes both the current account and capital account. The current account includes a nation's net trade in goods and services, its net earnings on cross-border investments, and its net transfer payments. The capital account consists of a nation's imports and exports of capital and foreign aid.

Practice Test: Indian Economy - 1 - Question 38

With reference to the Reserve Bank of India, consider the following statements:

  1. It was set up on the basis of the recommendations Commission on Indian Currency and Finance.
  2. It was established in accordance with the provisions of the Reserve Bank of India Act, 1934.
  3. The Central Office of the Reserve Bank was initially established in Mumbai.

 How many of the statements given above are correct? 

Detailed Solution for Practice Test: Indian Economy - 1 - Question 38

Statement 1 is correct: The Reserve Bank of India was set up on the basis of the recommendations of the Royal Commission on Indian Currency and Finance also known as the Hilton-Young Commission.

Statement 2 is correct: The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934. Though originally privately owned, since nationalisation in 1949, the Reserve Bank is fully owned by the Government of India.

Statement 3 is incorrect: The Central Office of the Reserve Bank was initially established in Kolkata but was permanently moved to Mumbai in 1937. The Central Office is where the Governor sits and where policies are formulated.

Practice Test: Indian Economy - 1 - Question 39

Consider the following statements regarding economic cycles and their impact on an economy:  

  1. Economic growth follows a linear pattern, with consistent expansion over time. 
  2. Governments typically respond to recessions by tightening the money supply and raising taxes. 
  3. A depression occurs when inflation is high, and unemployment is very low. 
  4. The 2008 Lehman crisis triggered a prolonged global recession. 

How many of the statements given above are correct? 

Detailed Solution for Practice Test: Indian Economy - 1 - Question 39

Statement 1 is incorrect: Economic growth is cyclical, characterized by alternating periods of expansion and stagnation or decline, known as business cycles. It is not a linear process and frequently experiences periods of decline or slowdown.

Statement 2 is incorrect: Governments usually respond to recessions by adopting expansionary macroeconomic policies, such as increasing money supply, increasing government spending, and decreasing taxation, to stimulate economic growth, not by reducing money supply and increasing taxation.

Statement 3 is incorrect: Major traits of depression could be as given below: (i) An extremely low aggregate demand in the economy causes activities to decelerate; (ii) the inflation being comparatively lower; (iii) the employment avenues start shrinking, forcing the unemployment rate to grow fast; (iv) To keep the business going, production houses go for forced labour cuts or retrenchment (to cut down production costs and be competitive in the market) etc.

Statement 4 is correct: At the time of the collapse of Lehman Brothers, it was the fourth largest investment bank in the United States. The bank became a symbol of the excesses of the 2007-08 Financial Crisis, engulfed by the subprime meltdown that swept through financial markets and cost an estimated $10 trillion in lost economic output. The great recession that followed the Lehman crisis of 2008 had a significant global impact and lasted for several years, illustrating the severe consequences of a prolonged economic downturn.

Practice Test: Indian Economy - 1 - Question 40

With reference to the functions of the Reserve Bank of India, consider the following:  

  1. It formulates, implements and monitors the monetary and fiscal policies for the Government of India. 
  2. It acts as a regulator and supervisor of the financial system in India. 
  3. It facilitates external trade and payment and promotes orderly development and maintenance of the foreign exchange market in India. 

How many of the statements given above are correct? 

Detailed Solution for Practice Test: Indian Economy - 1 - Question 40

The Reserve Bank of India (RBI) was established on April 1, 1935, in accordance with the provisions of the Reserve Bank of India Act, 1934. The Preamble of the RBI describes the basic functions of the Reserve Bank as: ‘to regulate the issue of Bank notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage; to have a modern monetary policy framework to meet the challenge of an increasingly complex economy, to maintain price stability while keeping in mind the objective of growth’.

  • Statement 1 is incorrect: Monetary Policy of India is a set of actions available to a Central Bank i.e. RBI to achieve sustainable economic growth by adjusting the money supply, while the Fiscal policy (use of Government’ spending and taxation to influence the economy) comes under the Union Ministry of Finance. RBI formulates, implements and monitors the monetary policy to maintain price stability while keeping in mind the objective of growth.
  • Statement 2 is correct: RBI acts as regulator and supervisor of the Indian financial system by prescribing broad parameters of banking operations within which the country's banking and financial system functions. It is to maintain public confidence in the system, protect depositors' interest and provide cost-effective banking services to the public.
  • Statement 3 is correct: RBI is the manager of foreign exchange in India and derives its power from the Foreign Exchange Management Act, 1999. It facilitates external trade and payment and promotes orderly development and maintenance of the foreign exchange market in India.

Other functions include:

  • Issuer of currency: RBI issues, exchanges, and destroys currency notes as well as puts into circulation coins minted by the Government of India to give the public adequate quantity of supplies of currency notes and coins and in good quality.
  • Developmental role: RBI performs a wide range of promotional functions to support national objectives.
  • Regulator and supervisor of payment and settlement systems to maintain public confidence in payment and settlement systems.
  • Banker to the Government: RBI performs merchant banking function for the central and the state governments; and also acts as their banker.
  • Banker to Banks: RBI maintains banking accounts of all scheduled banks.
Practice Test: Indian Economy - 1 - Question 41

Consider the following statements:

  1. The Reserve Bank of India has the powers to declare any series of bank notes of any denomination to be not a legal tender.
  2. The Reserve Bank of India is solely responsible for the designing and minting
  3.  of coins in various denominations.
  4. The Reserve Bank of India determines the inflation target in terms of the Consumer Price Index, once every two years.

 How many of the statements given above are correct?  

Detailed Solution for Practice Test: Indian Economy - 1 - Question 41

Statement 1 is incorrect: The design, form and material of bank notes shall be approved by the Central Government on the recommendations of the Central Board of the RBI. Every bank note shall be a legal tender at any place in India, however, on recommendation of the Central Board, the Central Government may declare any series of bank notes of any denomination to be not a legal tender.

Statement 2 is incorrect: In terms of Section 22 of the Act, the Reserve Bank has the sole right to issue banknotes in India. Section 25 states that the design, form and material of bank notes shall be such as may be approved by the Central Government after consideration of the recommendations made by the Central Board of RBI. The Government of India is responsible for the designing and minting of coins in various denominations as per the Coinage Act, 2011.

Statement 3 is incorrect:  The RBI Act provides for a statutory basis for the Monetary

Practice Test: Indian Economy - 1 - Question 42

Which of the following financial instruments involves a simultaneous sale and purchase agreement and is commonly used by banks in India to address fund shortages? 

Detailed Solution for Practice Test: Indian Economy - 1 - Question 42

Ready Forward Contracts (Repos) are financial agreements that involve a simultaneous sale and purchase, typically used by banks in India to address fund shortages. These contracts are based on government securities and are often referred to as Repos. This instrument plays a significant role in the banking sector's liquidity management. 
These are purchase and repurchase agreements. It is often used by money market participants to finance their loans. Such transaction when viewed from the supplier of funds, is Reverse Repo. Likewise, to the party acquiring the funds, it is Repo.

Practice Test: Indian Economy - 1 - Question 43

Consider the following:

  1. Repo rate and reverse repo rate
  2. Cash Reserve Ratio and Statutory Liquidity Ratio
  3. Purchase of government securities

How many of the above are included in Open market operations (OMOs) by the Reserve Bank of India?  

Detailed Solution for Practice Test: Indian Economy - 1 - Question 43

The RBI uses Open market operations (OMOs) in order to adjust the rupee liquidity conditions in the market on a durable basis. Open Market Operations (OMOs) include both repurchase (repo or reverse repo) operations and outright purchase and sale of government securities, for injection and absorption of liquidity, respectively. Hence, Options 1 and 3 are correct.

  • Repo Rate: The (fixed) interest rate at which the Reserve Bank provides overnight liquidity to banks against the collateral of government and other approved securities under the Liquidity Adjustment Facility (LAF).
  • Reverse Repo Rate: The (fixed) interest rate at which the Reserve Bank absorbs liquidity, on an overnight basis, from banks against the collateral of eligible government securities under the LAF.

RBI carries out the OMO through commercial banks and does not directly deal with the public. OMO is one of the tools that RBI uses to smoothen the liquidity conditions throughout the year and minimize its impact on the interest rate and inflation rate levels.

Practice Test: Indian Economy - 1 - Question 44

Which one of the following scenarios increases the GDP without accurately representing real economic well-being? 

Detailed Solution for Practice Test: Indian Economy - 1 - Question 44

GDP measurements may not always reflect genuine economic well-being and progress. A decrease in unemployment rates due to the creation of jobs in the formal sector leads to an increase in GDP and reflects genuine economic well-being and progress. The creation of low wage, part-time jobs may not provide stable income or job security for individuals, which can adversely affect their overall well-being.  A rise in government spending on healthcare and education is generally considered a positive development for a country's well-being and progress. An increase in clean energy production, reducing greenhouse gas emissions, is a positive development for both economic wellbeing and the environment.

MONEY ILLUSION: A phrase coined by J. M. Keynes to denote the misleading thinking among people that they are getting richer as a result of inflation when in reality, the value of money decreases.

Practice Test: Indian Economy - 1 - Question 45

Which index measures a nation's well-being by incorporating factors like water and sanitation, health and wellness, access to basic knowledge, and personal safety?  

Detailed Solution for Practice Test: Indian Economy - 1 - Question 45

Social Progress Index- 
The 2021 Social Progress Index ranks 168 countries on social progress. It combines 53 
social and environmental outcome indicators to calculate an overall score for these countries, based on tiered levels of scoring that include measures in health, safety, education, technology, rights, and more. 

Practice Test: Indian Economy - 1 - Question 46

When the Reserve Bank of India observes an excess of liquidity in the market, it is likely to resort to which one of the following actions?  

Detailed Solution for Practice Test: Indian Economy - 1 - Question 46

The RBI uses Open market operations (OMOs) in order to adjust the rupee liquidity conditions in the market on a durable basis. When the Reserve Bank feels that there is excess liquidity in the market, it resorts to the sale of government securities, thereby sucking out the rupee liquidity. Similarly, when the liquidity conditions are tight, the central bank buys securities from the market, thereby releasing liquidity into the market. It’s used as a tool to rein in inflation and money supply in the system. However, when liquidity is sucked out, it can lead to a spike in bond yields as the RBI will release more government securities into the market and bond buyers demand more interest rates on these securities.

  • Decreasing the Cash Reserve Ratio (CRR): The CRR is the minimum fraction of the total deposits of customers, which commercial banks have to hold as reserves with the central bank.

If the RBI decreases the CRR, banks would have to keep a smaller portion of their deposits with the RBI, thereby increasing the amount of money available for lending, which can add to the liquidity in the market. This action is typically taken when there is a liquidity shortage, not when there is an excess of liquidity. The introduction of new currency notes into the system increases the money supply and hence the liquidity in the market.

Practice Test: Indian Economy - 1 - Question 47

At which of the following rates the Reserve Bank is ready to buy or rediscount bills of exchange or other commercial papers? 

Detailed Solution for Practice Test: Indian Economy - 1 - Question 47

Bank Rate: It is the standard rate at which the Reserve Bank is ready to buy or rediscount bills of exchange or other commercial papers. The Bank Rate is published under Section 49 of the Reserve Bank of India Act, 1934. In general terms, the Bank rate is the rate charged by the central bank for lending funds to commercial banks. Bank rates influence the lending rates of commercial banks. Higher bank rates will translate to higher lending rates by the banks. In order to curb liquidity, the central bank can resort to raising the bank rate and vice versa.

Repo Rate: The (fixed) interest rate at which the Reserve Bank provides overnight liquidity to banks against the collateral of government and other approved securities under the Liquidity Adjustment Facility (LAF).

Base Rate: This is the lowest rate established by the Reserve Bank of India (RBI) at which banks can lend to their customers. The base rate is set by the RBI to ensure that banks pass on the lower cost of funds to their customers when the RBI cuts policy rates.

Prime Lending Rate (PLR): This is the interest rate that banks charge to their most creditworthy (prime) customers. The PLR is often guided by the cost of funds, administrative costs, and the bank’s internal profit margin. It’s important to note that the PLR can vary from one bank to another.

Practice Test: Indian Economy - 1 - Question 48

Consider the following statements:

  1. Statutory Liquidity Ratio is a maximum percentage of deposits that a commercial bank has to maintain in the form of cash, gold or other securities.
  2. If the RBI increases the Cash Reserve Ratio (CRR), it can create a liquidity deficit in the banking system.

 Which of the statements given above are correct?  

Detailed Solution for Practice Test: Indian Economy - 1 - Question 48

CRR (Cash Reserve Ratio) and SLR have been the traditional tools of the central bank's monetary policy to control credit growth, flow of liquidity and inflation in the economy. 
Statement 1 is correct: Statutory Liquidity Ratio or SLR is a minimum percentage of deposits that a commercial bank has to maintain in the form of liquid cash, gold or other securities. It is basically the reserve requirement that banks are expected to keep before offering credit to customers. These are not reserved with the Reserve Bank of India (RBI), but with banks themselves. The SLR is fixed by the RBI.  
Statement 2 is correct: The CRR is a direct instrument which immediately impacts the system liquidity. If CRR is increased, banks must maintain higher balances in their current account with RBI, thereby creating a liquidity deficit in the banking system. 
Similarly, decrease in CRR has the immediate impact of creating a liquidity surplus in the banking system. 

Practice Test: Indian Economy - 1 - Question 49

Consider the following statements:

  1. An increase in the repo rate can reduce the money supply in the economy.
  2. An increase in the reverse repo rate implies that banks will receive higher interest rates from the RBI.

 Which of the statements given above are correct?

Detailed Solution for Practice Test: Indian Economy - 1 - Question 49

Statement 1 is correct: Repo rate, also known as the benchmark interest rate, is the rate at which the RBI lends money to the banks for a short term. When the repo rate increases, borrowing from RBI becomes more expensive. This, in turn, raises the interest rate in the economy and therefore reduces the total money supply. 

Statement 2 is correct: Reverse Repo rate is the short-term borrowing rate at which RBI borrows money from banks. The central bank uses this tool to change the money supply in the economy. An increase in the reverse repo rate means that the banks will get a higher rate of interest from RBI. As a result, banks prefer to lend their money to RBI, which is 
always safe, instead of lending it to others (people, companies etc), which is considered risky.

Practice Test: Indian Economy - 1 - Question 50

Consider the following statements regarding the Gross Domestic Product (GDP) and its limitations:

  1. GDP is a comprehensive and accurate measure of a country's economic well being.
  2. Rising crime rates in a society can increase GDP.
  3. Some environmental disasters can boost GDP.
  4. The sale of more guns due to broken law and order is not reflected in GDP calculations.
  5. Commercial agricultural production boosts GDP even when it is unsustainable.

Which of the statements given above are correct? 

Detailed Solution for Practice Test: Indian Economy - 1 - Question 50

Statement 1 is incorrect: GDP is not a comprehensive measure of a country's economic well-being. It primarily focuses on the monetary value of goods and services produced within a country's borders and does not account for many important factors such as income distribution, life, environmental sustainability, or non-monetary contributions to well-being, like volunteer work and leisure time. 
Statement 2 is correct: Rising crime rates can increase GDP due to higher expenditures on security personnel and technology. These increased government expenditures contribute positively to GDP. However, this does not reflect a genuine improvement in the well being of a society; it merely represents a response to a negative situation. 

Statement 3 is correct: Despite the destruction wrought by environmental disasters like oil spills, it boosts GDP as cleaning up adds to hiring and purchasing services and equipment. The costs associated with cleaning up and addressing the environmental damage caused by such disasters are counted as part of GDP. Therefore, GDP can increase due to the economic activity generated by responding to the disaster, but this does not indicate overall economic well-being.

Statement 4 is incorrect: When more guns are sold due to increased insecurity among people, it can magnify GDP. The sale of firearms and related services and equipment contributes positively to GDP. However, this does not reflect an improvement in societal well-being but rather the economic response to a perception of increased insecurity.

Statement 5 is correct: Commercial agricultural production often boosts GDP, even  when it is unsustainable. This is because the monetary value of agricultural goods and services produced is included in GDP calculations. Unsustainable agricultural practices that may have long-term negative consequences on the environment and society are not adequately captured by GDP, making it a limited measure in assessing the overall well being and sustainability of an economy.

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