UPSC Previous Year Questions (Prelims): Price & Inflation | Indian Economy for UPSC CSE PDF Download

Correct Answer is Option (d)

• Statement-I:This statement is correct. The Digital Rupee (e₹) is indeed a sovereign digital currency issued by the Reserve Bank of India (RBI), and it is aligned with the country's monetary policy, just like physical currency.
• Statement-II:This statement is correct. The Digital Rupee is a liability on the balance sheet of the RBI, similar to physical currency, because it represents a claim of the public on the central bank.
• Statement-III:This statement is incorrect. While the Digital Rupee's value is managed by the central bank, it is not specifically "insured" against inflation. Its value would generally be tied to the overall monetary policy and economic conditions, including inflation, but not in the way traditional financial instruments might be "insured" against inflation.
• Statement-IV:This statement is correct. The Digital Rupee is designed to be freely convertible into commercial bank money (like deposits) and physical cash, maintaining its liquidity and usability as a form of money in the economy.

Correct Answer is Option (a)

• Statement-I:This statement is correct. According to India's CSR regulations, expenditures that are directly beneficial to the company or its employees, such as those that primarily serve the interests of the company or are part of the benefits to employees, do not qualify as CSR activities. CSR activities are meant to benefit the community and environment outside the immediate interests of the company and its employees.
• Statement-II:This statement is incorrect. The CSR regulations in India specifically require eligible companies to spend at least 2% of their average net profits made during the three immediately preceding financial years on CSR activities. This minimum spending requirement is a fundamental part of the CSR policy framework in India.

Correct Answer is Option (d)

• Statement-I: Interest income from the deposits in Infrastructure Investment Trusts (InvITs) is exempted from tax, but the dividend is taxable. This statement is incorrect because both interest income and dividends from InvITs are taxable. The tax treatment is that interest income is subject to tax, while dividends are also taxed as per the applicable tax laws.
• Statement-II: InvITs are recognized as borrowers under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). This statement is correct. InvITs are indeed recognized under this Act, which allows them to securitize assets and use this framework for enforcing security interest.

Correct Answer is Option (a)

• Statement 1 is accurate: Recently, after the pandemic, many central banks around the world have raised interest rates. Central banks use interest rate changes as a tool in their monetary policy to manage the economy. When the economy shows signs of recovery and inflation starts to rise, central banks may decide to increase interest rates. This is done to control inflation and maintain price stability. By raising interest rates, central banks aim to reduce borrowing and spending, which can help slow down an economy that is growing too quickly and prevent inflation from becoming too high. 
• Statement 2 is also accurate:Monetary policy includes the actions taken by central banks to influence the amount of money and credit available in the economy. Central banks believe that by changing interest rates, they can affect borrowing costs, spending habits, and overall economic activity. When inflation goes up, central banks might raise interest rates to make loans more expensive. This discourages people from spending too much and slows down economic growth. By doing this, they aim to reduce inflation pressures and keep prices stable. 
• Therefore, Statement 2 correctly explains Statement 1. Central banks think that by using tools like interest rate increases, they can effectively fight against rising consumer prices and manage inflation pressures in the economy. 

Correct Answer is Option (a)

• Sterilization is a process used by a central bank to manage the effects of its foreign exchange actions on the local money supply. 
• When a central bank, like the Reserve Bank of India (RBI), steps into the foreign exchange market by buying or selling foreign currencies, it changes the amount of money available in the economy. 
• One of the main methods that central banks use to carry out their monetary policy is called Open Market Operations (OMO). 
• In OMO, the central bank buys or sells government bonds in the open market to affect the money flow in the economy. 
• When the RBI purchases government bonds, it puts more money into the financial system, which raises the overall money supply. 
• To avoid this increase in money from leading to inflation, the RBI performs sterilization. 
• Sterilization means that the RBI will simultaneously sell or buy different types of securities, usually treasury bills, to balance out the effects of its original open market actions. 

Correct Answer is Option (b)

• Statement 1 is incorrect: If inflation is too high, the Reserve Bank of India (RBI) will likely reduce the money supply in the economy to control it. To do this, the RBI sells government securities, which helps to take excess money out of the economy and manage inflation.
• Statement 2 is correct: The RBI steps in to help support the rupee when it is weak. A weak domestic currency can lead to higher import costs for the country. The RBI has several ways to intervene in the currency market. It can buy or sell dollars directly. If the RBI wants to strengthen the rupee, it sells dollars; if it needs to lower the rupee's value, it buys dollars.
• Statement 3 is correct: When the US raises its interest rates, it can make investing in India less attractive. This may cause some investments to leave India and go back to the US, which could decrease the value of the rupee compared to the US dollar. Therefore, if interest rates in the US or the European Union decrease, the value of the rupee against the dollar may increase, which could lead the RBI to buy dollars. 

Correct Answer is Option (a) 

• Statement 1: This statement is accurate. Since IIBs are government securities (G-Sec), they can be traded in the secondary market just like other government securities. G-Secs assist the government in lowering the interest rates on its loans. Similar to other G-Secs, the interest on IIBs is paid every six months. The fixed interest rate will be calculated based on the adjusted principal amount. 
• Statement 2: This statement is also correct. These instruments offer protection for savings against inflation. The RBI has decided to use the Wholesale Price Index (WPI) for determining inflation protection in IIBs. 
• Statement 3: This statement is incorrect. The current tax rules will apply to the interest payments and capital gains from IIBs. There will not be any special tax benefits for these bonds. 

Correct Answer is Option (a)

• Tight monetary policy is a measure taken by central banks, like the Federal Reserve, to reduce fast economic growth. Central banks apply this policy when the economy is growing too quickly or when inflation—the rise in overall prices—is increasing too rapidly.
• Statement 1 is correct: Central banks implement monetary policy to maintain stability in inflation, unemployment, and economic growth. When the economy gets too hot, central banks raise interest rates and use other methods to slow it down. This can make investments less attractive and lower the prices of assets. Therefore, the tight monetary policy of the US Federal Reserve might cause capital flight, where investors move their money out of the country.
• Statement 2 is correct:Capital flight can increase interest costs because it reduces the amount of money available in the system. This situation leads to higher interest expenses for companies that have taken out loans in foreign currencies.
• Statement 3 is incorrect: A drop in the value of the domestic currency does not impact External Commercial Borrowings because these loans are in foreign currency, not in the local currency.

Correct Answer is Option (d)
Reserve Bank of Indiais India’s central bank has key function to keep check on the inflationby use of monetary policy in forms of qualitative and quantitative measures.

Correct Answer is Option (d)
Black money eats up a part of the tax and, thus, the government’s deficit increases.

Correct Answer is Option (a)
Rising interest rates will deter people to borrow money and hence it will not aid in demand pull inflation

Correct Answer is Option (a)
Under the new monetary policy Framework effective since 2016, RBI tries to control inflation at 2-6% of CPI (All India). So, #3 is wrong. Option c and d eliminated. In both (a & b) the options, statement#2 is common so we have to accept #2 as correct, Even without checking. Everything boils down to whether statement#1 is correct or not?
Both WPI and CPI are based on Laspeyres formula wherein weightage is assigned to multiple commodities and their prices are tracked. The weight of an individual commodity depends on how frequently it is bought by the consumer. So obviously consumer price index would be giving more weightage to the food products compared to WPI which is aimed at the manufacturers. So, #1 should be correct.

Correct Answer is Option (a)
Those who benefit from higher inflation are debtors and those who suffer from it are creditors. If one has substantial debt, each rupee one has to repay would be worth less than when it was borrowed. In this way, one pays back less in real terms.

Correct Answer is Option (c)
Deflation is a decrease in the prices of goods and services. It occurs when the annual inflation rate falls below 0% which is a negative inflation rate. This is different from Disinflation which is a slow-down in the inflation rate. This is a situation when inflation declines to lower levels but prices continue to rise.

Correct Answer is Option (b)
Alter the Abhijit Sen committee’s proposals in 2004- 05, the government had approved the proposal to release or wholesale price based inflation data on a monthly basis, instead of every week. The base year was changed to 2004- 05 from 1993-94. However data on primary and fuel items was continued to release on a weekly basis. Consumer Price Index food group has a weight of 39.1 percent as compared to the combined weight of 24.4 percent (food articles and Manufactured food products) in wholesale Price Index food basket.

Correct Answer is Option (a)
Wholesale Price Index (WPI) is an index used by the Reserve Bank of India till 2014 to measure inflation. WPI is the price of a representative basket of wholesale goods. It takes a basket of 697 items into account and shows the combined prices. The RBI, ex-governor Raghuram Rajan, Shifted to consumer Price Index (CPI) is because WPI neglects services and the bottlenecks between a wholesaler and a retailer. CPI, based on 260 commodities including certain services, measures the change in Prices at the retail level. The base year of CPI is 2012.