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UPSC Prelims Previous Year Questions 2022: Indian Economy | Indian Economy for UPSC CSE PDF Download

Q1: Consider the following statements:

  1. Gujarat has the largest solar park in India.
  2. Kerala has a fully solar powered International Airport.
  3. Goa has the largest floating solar photovoltaic project in India.

Which of the statements given above is/are correct?
(a) 
1 and 2
(b) 2 only
(c) 1 and 3
(d) 3 only 

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Ans: (b)

  • India's Bhadla Solar Park is the largest solar power park in the world. Bhadla Solar Park is located in Bhadla, a dry and sandy region in Rajasthan, and spans 14,000 acres. There are over 10 million solar panels at the park, which contribute to an operational capacity of 2245MW. Hence, statement 1 is not correct.
  • Kerala's Cochin International Airport Ltd (CIAL) is the first airport in the world that would be running fully on solar power. The airport officially commissioned a 12 MW solar project in 2015. Hence, statement 2 is correct.
  • India’s biggest floating solar power plant by generation capacity (100MW) is being developed by the National Thermal Power Corporation Limited (NTPC) at Ramagundam in Peddapalli district of Telangana. Hence, statement 3 is not correct.

Q2: Consider the following statements:

  1. Tight monetary policy of US Federal Reserve could lead to capital flight.
  2. Capital flight may increase the interest cost of firms with existing External Commercial Borrowings (ECBs).
  3. Devaluation of domestic currency decreases the currency risk associated with ECBS. 

Which of the statements given above are correct?
(a)
1 and 2 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3 

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Ans: (d)

  • Tight Monetary Policy implies raising of short term interest rate by the Federal/Reserve Bank of a country. A tight monetary policy by the US Federal Reserve leads investors to pull money out of emerging markets, including India. Hence, statement 1 is correct.
  • Depreciation of the domestic currency leads to an increase in the value of foreign currency debts in domestic currency terms. Thus, devaluation increases the currency risk associated with ECBs. Hence, statement 3 is not correct.

Q3: Consider the following statements:

  1. In India, credit rating agencies are regulated by Reserve Bank of India.
  2. The rating agency popularly known as ICRA is a public limited company.
  3. Brickwork Ratings is an Indian credit rating agency.

Which of the statements given above are correct?
(a) 
1 and 2 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3

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Ans: (b)

  • All the credit rating agencies in India are regulated by SEBI (Credit Rating Agencies) Regulations, 1999 of the Securities and Exchange Board of India Act, 1992. Hence, Statement (1) is not correct.
  • ICRA Limited (formerly Investment Information and Credit Rating Agency of India Limited) was set up in 1991 by leading financial/investment institutions, commercial banks and financial services companies as an independent and professional investment Information and Credit Rating Agency.
  • Today, ICRA and its subsidiaries together form the ICRA Group of Companies (Group ICRA). ICRA is a Public Limited Company, with its shares listed on the Bombay Stock Exchange and the National Stock Exchange. Hence, Statement (2) is correct Brickwork Ratings, a SEBI registered Credit Rating Agency, has also been accredited by RBI. Hence, Statement (3) correct.

Hence, Option (b) is correct.


Q4: With reference to the 'Banks Board Bureau (BBB)', which of the following statements are correct?

  1. The Governor of RBI is the Chairman of BBB.
  2. BBB recommends for the selection of heads for Public Sector Banks.
  3. BBB helps the Public Sector Banks in developing strategies and capital raising plans.

Select the correct answer using the code given below:
(a) 
1 and 2 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3 

► View Answer

Ans: (b)

  • The Banks Board Bureau (BBB) has its genesis in the recommendations of ‘The Committee to Review Governance of Boards of Banks in India, May 2014 (Chairman - P. J. Nayak)’.
  • Formation: The government, in 2016, approved the constitution of the BBB as a body of eminent professionals and officials to make recommendations for appointment of whole-time directors as well as non-executive chairpersons of Public Sector Banks (PSBs) and state-owned financial institutions.
    • It is an autonomous recommendatory body.
    • Banks Board Bureau comprises the Chairman, three ex-officio members i.e Secretary, Department of Public Enterprises, Secretary of the Department of Financial Services and Deputy Governor of the Reserve Bank of India, and five expert members, two of which are from the private sector.
    • The chairman of Banks Board Bureau is appointed by The Appointments Committee of the Cabinet
  • Banks Board Bureau helps the Public Sector Banks in developing strategies and Capital raising

Hence, Option (b) is correct.


Q5: With reference to Convertible Bonds, consider the following statements:

  1. As there is an option to exchange the bond for equity, Convertible Bonds pay a lower rate of interest.
  2. The option to convert to equity affords the bondholder a degree of indexation to rising consumer prices.

Which of the statements given above is/are correct?
(a) 
1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2 

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Ans: (c)

  • A convertible bond is a fixed-income corporate debt security that yields interest payments, but can be converted into a predetermined number of common stock or equity shares.
  • Companies issue convertible bonds to lower the coupon rate(lower interest rate) on debt and to delay dilution. Hence, statement 1 is correct
  • They may be more attractive to investors since convertible bonds provide growth potential through future capital appreciation of the stock price. So investors will be benefited due to rising consumer prices. Hence, statement 2 is correct.
  • Convertible bonds typically carry lower interest rates payments than straight corporate bonds—the savings in interest expense can be significant.
  • Investors accept the lower interest payments because the conversion option offers the opportunity to benefit from increases in the stock price.

Q6: In India, which one of the following is responsible for maintaining price stability by controlling inflation?
(a) 
Department of Consumer Affairs
(b) Expenditure Management Commission
(c) Financial Stability and Development Council
(d) Reserve Bank of India

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Ans: (d)

  • The primary objective of monetary policy is to maintain price stability while keeping in mind the objective of growth. Price stability is a necessary precondition to sustainable growth.
  • The Reserve Bank of India (RBI) is vested with the responsibility of conducting monetary policy. This responsibility is explicitly mandated under the Reserve Bank of India Act, 1934.
  • In May 2016, the Reserve Bank of India (RBI) Act, 1934 was amended to provide a statutory basis for the implementation of the flexible inflation targeting framework.

Hence, option (d) is correct.


Q7: With reference to Non-Fungible Token (NFTs), consider the following statements:

  1. They enable the digital representation of physical assets.
  2. They are unique cryptographic tokens that exist on a blockchain.
  3. They can be traded or exchanged at equivalency and therefore can be used as a medium of commercial transactions.

Which of the statements given above are correct?
(a)
1 and 2 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3 

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Ans: (a)

  • Anything that can be converted into a digital form can be an NFT.
  • Everything from drawings, photos, videos, GIFs, music, in-game items, selfies, and even a tweet can be turned into an NFT, which can then be traded online using cryptocurrency.
  • If anyone converts its digital asset to an NFT, he/she will get proof of ownership, powered by Blockchain.

Hence, statement 1 and 2 are correct.

  • NFTs are non-fungible, which means the value of one NFT is not equal to another. 
  • Nonfungible means NFTs aren't mutually interchangeable. Every art is different from others, making it non-fungible, and unique.

Hence, statement 3 is not correct.


Q8: With reference to the Indian economy, consider the following statements:

  1. An increase in Nominal Effective Exchange Rate (NEER) indicates the appreciation of rupee.
  2. An increase in the Real Effective Exchange Rate (REER) indicates an improvement in trade competitiveness.
  3. An increasing trend in domestic inflation relative to inflation in other countries is likely to cause an increasing divergence between NEER and REER.

Which of the above statements are correct?
(a) 
1 and 2 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3

► View Answer

Ans: (c)

  • The Reserve Bank of India (RBI) tabulates the 'Nominal Effective Exchange Rate- NEER' of the rupee with respect to the currencies of 36 trading partner countries. It is a type of weighted index, that is, in this, more importance is given to those countries with which India does more business. A decrease in this index reflects a depreciation in the value of the rupee, while an increase in the index reflects an appreciation in the value of the rupee.
  • Apart from NEER, 'Real Effective Exchange Rate (REER) is also an important parameter to measure the changes taking place in the Indian economy. Under REER, apart from other factors included in NEER, domestic inflation in various economies is also taken into account, due to which its importance increases.
  • NEER is the weighted average of the bilateral exchange rates of the domestic currency with respect to foreign currencies. Whereas REER is the weighted average of the domestic currency relative to other major currencies, adjusted for the effects of inflation.
  • NEER is an indicator of a country's international competitiveness in the foreign exchange market. REER is calculated after adjusting the price change in NEER. Thus, economists give more importance to REER than NEER.
  • NEER = Domestic Exchange Rate in terms of Special Drawing Rights (SDR) / Foreign Exchange Rate in terms of Special Drawing Rights (SDR)
  • REER = NEER × (Domestic Price Index/Foreign Price Index). Hence statements 1 and 3 are correct.

Q9: With reference to the Indian economy, consider the following statements:

  1. If the inflation is too high, Reserve Bank of India (RBI) is likely to buy government securities.
  2. If the rupee is rapidly depreciating, RBI is likely to sell dollars in the market.
  3. If interest rates in the USA or European Union were to fall, that is likely to induce RBI to buy dollars.

Which of the statements given above are correct?
(a)
1 and 2 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3 

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Ans: (b)

  • To control inflation, RBI sells securities in the money market which absorbs the excess liquidity from the market. Hence, statement 1 is not correct.
  • When the rupee depreciates sharply, the Reserve Bank increases the supply of dollars. If interest rates fall in international markets such as in the US or the European Union, it has an effect on the purchase of dollars in the markets of other countries such as India.

Q10: With reference to the Indian economy, what are the advantages of "Inflation- Indexed Bonds (IIBs)"?

  • Government can reduce the coupon rates on its borrowing by way of IIBs.
  • IIBS provide protection to the investors from uncertainty regarding inflation.
  • The interest received as well as capital gains on IIBs are not taxable.

Which of the statements given above are correct?
(a) 
1 and 2 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3 

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Ans: (a)
According to the Reserve Bank of India,

  • CIB released in 1997 provided inflation protection only for principal and not for interest payment. While new products of IIB would provide inflation protection for both principal and interest payment.
  • The interest rate will be protected from inflation by paying a fixed coupon rate on the principal adjusted against inflation. And the government can reduce the coupon rates on its borrowings in the form of IIBs. Hence statements 1 and 2 are correct.
  • Inflation Indexed Bonds (IIBs) were issued during 1997 in the name of Capital Indexed Bonds (CIBs). And IIBs can also be traded in the secondary market (through BSE, NSE, and other stock exchanges), However, if they are sold in the secondary market and profit is made, capital gains tax has to be paid. Hence statement 3 is not correct.

Q11: With reference to foreign-owned e-commerce firms operating in India, which of the following statements is/are correct?

  1. They can sell their own goods in addition to offering their platforms as market-places.
  2. The degree to which they can own big sellers on their platforms is limited.

Select the correct answer using the code given below:
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2 

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Ans: (d)
Based on the rules of e-commerce:

  • E-commerce entities providing a market place shall not exercise ownership over the inventory. Such ownership of inventory would render the business in an inventory based model. Hence statement 1 is not correct.
  • An entity having equity participation by e-commerce marketplace entity or its group companies, or having control on its inventory by e-commerce marketplace entity or its group companies, will not be permitted (if not permitted, the question of limit does not arise) to sell its products on the platform run by such marketplace entity.

Q12: Which of the following activities constitute real sector in the economy?

  1. Farmers harvesting their crops
  2. Textile mills converting raw cotton into fabrics
  3. A commercial bank lending money to a trading company.
  4. A corporate body issuing Rupee Denominated Bonds overseas.

Select the correct answer using the code given below:
(a) 
1 and 2 only
(b) 2, 3 and 4 only
(c) 1, 3 and 4 only
(d) 1, 2, 3 and 4 

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Ans: (a)
Real sectors of the economy include enterprises (non-financial corporations), households and nonprofits that serve families. Therefore only statements 1 and 2 are correct.


Q13: Which one of the following situations best reflects "Indirect Transfers" often talked about in media recently with referece to India?
(a) 
An Indian company investing in a foreign enterprise and paying taxes to the foreign country on the profits arising out of its investment.
(b) A foreign company investing in Indian and paying taxes to the country of its base on the profits arising out of its investment.
(c) An Indian company purchases tangible assests in a foreign country and sells such assets after their value increases and transfers the proceeds to India.
(d) A foreign compnay transfers shares and such shares derive their substantial value from assest located in India.

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Ans: (d)
The term 'indirect transfer', often discussed in the mass media, refers to situations where foreign entities holding shares or assets in India, the shares of such foreign entities are transferred instead of a direct transfer of the underlying assets in India. Hence option (d) is the most appropriate.


Q14: With reference to the expenditure made by an organization or a company, which of the following statements is/are correct?

  1. Acquiring new technology is capital expenditure.
  2. Debt financing is considered capital expenditure, while equity financing is considered revenue expenditure.

Select the correct answer using the code given below:
(a) 
1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2 

► View Answer

Ans: (a)

  • Capital expenditure (Cap ex.) is the amount of money used by a company to acquire, upgrade, and maintain physical assets such as property, plants, buildings, technology, or equipment. CapEx is often used by a company to fund new projects or investments. Hence statement 1 is correct.
  • Statement 2 is not correct, as equity financing is a method of raising funds to meet the liquidity needs of an organisation by selling the stock of a company in exchange for cash, hence it is treated as capital expenditure.

Q15: With reference to the Indian economy, consider the following statements:

  1. A share of the household financial savings goes towards government borrowings.
  2. Dated securities issued at marked-related rates in auctions form a large component of internal debt.

Which of the above statements is/are correct?
(a) 
1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2 

► View Answer

Ans: (c)

  • By Government Debt Status Letter, the following section provides details of the components of internal debt.
  • Market Debt: Dated securities are the major instrument used for financing the fiscal deficit. They are issued through auction according to two half yearly issue calendars covering April-September and October-March respectively in each financial year. Hence Statement 2 is correct.

The document UPSC Prelims Previous Year Questions 2022: Indian Economy | Indian Economy for UPSC CSE is a part of the UPSC Course Indian Economy for UPSC CSE.
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