UPSC Prelims Previous Year Questions 2021: Indian Economy | Indian Economy for UPSC CSE PDF Download

Ans: (c)

• The money multiplier effect can be seen in a country’s banking system. An increase in bank lending should translate to an expansion of a country’s money supply. Thus, the money multiplier in an economy increases with an increase in the banking habits of the people.

Therefore, option (c) is the correct answer.

Ans: (a)

There are multiple causes of increase in demand-pull inflation in an economy including: 

• Expansionary Policies: Expansionary policies leads to an expansion of the money supply with too few goods to buy, which leads to increase in price. Hence, 1 is correct. Higher Purchasing Power: If in an economy, employment rises, more people go to work, they make more money and spend more money. However, if at a point of time, people are willing to spend more money while goods are limited, then competition among consumers drives the prices up. Hence, 4 is correct.
• Fiscal Stimulus: Policy tools often used to implement fiscal stimulus include lowering interest rates, increasing government spending, and quantitative easing. Often these fiscal stimulus lead to the increase of money supply in the economy. Hence, 2 is correct.
• Inflation indexing ensures lowest-paid workers a wage that keeps pace with the rising costs of goods and services, it does not lead to demand pull inflation. Hence, 3 is not correct.
• There is an inverse relationship between the interest rates and rate of inflation. So, when interest rates are high, the economy slows and inflation decreases. Hence, 5 is not correct.

Therefore, option (a) is the correct answer.

Ans: (b)

• Gilt account is opened by the bank for individuals who wish to invest in government securities and treasury bills. Banks in effect maintain a Demat account for these instruments in the name of the individuals. Hence, statement 1 is correct.
• Negotiated Dealing System-Order Matching (NDS-OM) is RBI’s screen-based, anonymous electronic order matching system for trading in government securities in the secondary market. Hence, statement 2 is correct.
• Central Depository Services Ltd (CDSL), is the first listed Indian central securities depository based in Mumbai. CDSL is promoted by BSE Ltd. jointly with leading banks such as State Bank of India, Bank of India, Bank of Baroda, HDFC Bank, and Standard Chartered Bank. Hence, statement 3 is not correct.

Therefore, option (b) is the correct answer.

Ans: (b)

• The Reserve Bank of India, a Banker to Banks also acts as the ‘lender of the last resort’. It can come to the rescue of a bank that is solvent but faces temporary liquidity problems by supplying it with much needed liquidity when no one else is willing to extend credit to that bank. Hence, 2 is correct and 1 and 3 are not correct.

Therefore, option (b) is the correct answer.

Ans: (c)

• The RBI’s affairs are governed by a central board of directors. The board is appointed by the Government of India in line with the Reserve Bank of India Act. Hence, statement 1 is correct.
• The Central Government may from time to time give such directions to the Bank as it may, after consultation with the Governor of the Bank, consider it necessary in the public interest. Hence, statement 2 is not correct.
• The Governor of RBI draws his powers from Section 7(3) of the RBI Act. He can exercise all powers and do all things that may be exercised and done by the RBI. Hence, statement 3 is correct.

Therefore, option (c) is the correct answer.

Ans: (d)
Applicability of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952

• The employees become eligible to participate in the fund on his/her joining the establishment covered under this Act. All casual/temporary workmen are to be covered. Hence, statement 1 is correct.
• Where an employee whose minimum rate of wages has been fixed under this Code by the hour, by the day or by such a longer wage-period as may be prescribed, works on any day in excess of the number of hours constituting a normal working day, the employer shall pay him for every hour or for part of an hour so worked in excess, at the overtime rate which shall not be less than twice the normal rate of wages. Hence, statement 2 is correct.
• The Code on Wages, 2019 provided that the appropriate Government may specify the industry or other establishment, the employer of which shall pay to every person employed in such industry or other establishment, the wages only by cheque or by crediting the wages in his bank account. Hence, statement 3 is correct.

Therefore, option (d) is the correct answer.

Ans: (b)

• In order to tackle the economic recession, the money supply in the economy must be increased. There are various ways to boost money supply into the economy:
• Expansionary Monetary Policy: It will increase the supply of money in the market. Banks and Financial Institutions will have more money to lend with leveraged interest rates. This will attract the borrowers to borrow money, thereby increasing the economic activities and expenditure such as investment, production, consumption etc.
• High Expenditure on Public Projects: Increase in expenditure on public projects will lead to increase in money supply and will be helpful in bringing the country out of economic recession.

Therefore, option (b) is the correct answer.

Ans: (a)

• Law of Demand states that other things being equal, there is a negative relation between demand for a commodity and its price. In other words, when price of the commodity increases, demand for it falls and when price of the commodity decreases, demand for it rises, other factors remaining the same. Hence, statement 4 is correct. The demand for a good usually increases if the price of its substitutes increases. Hence, statement 1 is correct.
• Goods which are consumed together are called complementary goods. In general, the demand for a good move in the opposite direction of the price of its complementary goods. Hence, statement 2 is not correct.
• There are some goods the demands for which move in the opposite direction of the income of the consumer. Such goods are called inferior goods. As the income of the consumer increases, the demand for an inferior good falls, and as the income decreases, the demand for an inferior good rises. Examples of inferior goods include food items like coarse cereals. Hence, statement 3 is not correct.

Therefore, option (a) is the correct answer.

Ans: (b)

• Urban Co-operative Banks (UCB) are regulated and supervised by State Registrars of Co-operative Societies (RCS) in case of single-state co-operative banks and Central Registrar of Co-operative Societies (CRCS) in case of multi-state co-operative banks and by the RBI. Hence, statement 1 is not correct.
• The banking related functions such as issue of license to start new banks/branches, matters relating to interest rates, loan policies, investments and prudential exposure norms are regulated and supervised by the Reserve Bank under the provisions of the Banking Regulation Act, 1949 after an amendment in 1966. Hence, statement 3 is correct.
• The UCBs could raise share capital by issue of equity to persons within their area of operation enrolled as members and also through additional equity shares to the existing members. Hence, statement 2 is correct.

Therefore, option (b) is the correct answer.

Ans: (d)

• Fed tapering is the gradual reduction in the bond buying program of the US Federal Reserve. So, any actions of the United States Federal Reserve impact the bond yield in India. Hence, 1 is correct.
• The actions of the RBI plays a crucial role in determining the yield of government bonds. The sovereign yield curve has a special significance for monetary policy in influencing a wide array of interest rates in the economy. Hence, 2 is correct.
• Inflation and short-term interest rates also influence the yield of government bonds. Hence, 3 is correct.

Therefore, option (d) is the correct answer.

Ans: (a)

• Foreign Currency Convertible Bonds (FCCBs) are foreign currency convertible Bonds invested in Indian company. Since these bonds are convertible into equity shares over a period of time as provided in the instrument, therefore they are covered under FDI policy and inward remittances received by the Indian company vide issuance of FCCBs are treated as FDI and counted towards FDI. Hence, 1 is correct.
• Foreign Institutional Investor (FII) is not FDI in general as FIIs can invest up to a maximum of 10 percent of the total paid-up capital, however, if FII invest in convertible debenture then it is counted as FDI subject to certain limitations. Hence, 2 is correct. Indian companies can raise foreign currency resources abroad through the issue of American Depository Receipt (ADR)/Global Depository Receipts (GDRs) in accordance with the Scheme for issue of Foreign Currency Convertible Bonds and Ordinary Shares (through Depository Receipt Mechanism) Scheme, 1993 and guidelines issued by the Government of India thereunder from time to time. Therefore, bonds cannot be FDI but Convertible Bond/Debenture could be converted to Equity and included under FDI. Hence, 3 is correct.
• Non-resident external deposits are not treated as FDI as banks can route these deposits for loans. NRIs can invest in shares on recognized stock exchanges under portfolio investment route. The investment can be repatriable or non-repatriable, but the maximum limit of investment is 10% of paid-up capital of the relevant company. Hence, 4 is not correct.

Therefore, option (a) is the correct answer.

Ans: (a)

• Currency devaluation is the deliberate reduction in the value of a country’s currency against another currency. A country pursues a policy of devaluation to boost its exports as its products and services become cheaper to buy. In other words, the competitiveness of domestic exports improves in the foreign markets. Devaluation will not increase the foreign value of domestic currency. Hence, 1 is correct and 2 is not correct.
• Devaluation of currency is often done by the monetary authorities when they need to improve the country’s trade balance. However, it is not necessary that it will improve the trade balance as import can be expensive. Hence, 3 is not correct.

Therefore, option (a) is the correct answer.

Ans: (d)

• Taxation is the primary source of income for the government. Tax revenue can be regarded as one measure of the degree to which the government controls the economy’s resources. Therefore, loss of revenue to the State Exchequer due to tax evasion is the main cause of worry to the Government of India.

Therefore, option (d) is the correct answer.

Ans: (d)

• Printing new currency notes increases the flow of money in the economy. As the flow of money raises aggregate expenditure, the aggregate demand also increases and the danger of inflation becomes large.
• With the creation of new money, the amount of goods does not change. Therefore, if the money supply is increased, but the goods remain the same, everything will become more expensive.
• If the government keeps printing more, the economy will start experiencing hyperinflation. Moreover, the currency will also devalue against other currencies. So, among all the deficit financing methods creating more money will have the most inflationary effect.

Therefore, option (d) is the correct answer.