GPSC Prelims Paper 2 Mock Test - 8 Free Online Test 2026

• Monetized deficit, also known as the ‘net reserve bank credit to the government’, is that part of the government deficit which is financed solely by borrowing from the RBI. Hence statement 1 is correct

• Since borrowings from the RBI can be both short-term and long-term, therefore, monetized deficit is the sum of the net issuance of short-term treasury bills, dated securities (that is, long-term borrowing from the RBI) and rupee coins held exclusively by the RBI, net of Government’s deposits with the RBI. Hence statement 2 is not correct.

• This is different from the Traditional Budget deficit in two ways:

  • Traditional Budget deficit includes 91-day treasury bills held by both, the RBI and non-RBI entities whereas Monetized deficit includes 91-day Treasury Bills held only by the RBI.

  • Traditional Budget deficit includes only short-term sources of finance whereas Monetized deficit includes long-term securities also.

NTPC Kanti was awarded the Silver Medal for CSR innovation by the Indo-Continental Trade and Entrepreneurship Promotion Council at the Tusker Awards. This recognition highlights the organization's impactful contributions in various areas like skill development and women empowerment.

The Anubhav Awards 2024 were conferred by V. Srinivas, who serves as the Secretary of the Department of Pension and Pensioners' Welfare. The awards honor retiring government officials for their services.

Garden Reach Shipbuilders & Engineers Limited (GRSE) won two CSR Times Awards for their outstanding contributions to healthcare and skill development, showcasing their commitment to community welfare.

The 24th International Mother Teresa Awards Ceremony celebrated her 114th birth anniversary, recognizing individuals for their contributions in various fields, including education and social work.

Mohammed Zeeshan Ayyub received the award for best Asian actor at the Septimius Awards 2024 for his performance in the crime drama series "Scoop," reflecting his talent and recognition in the film industry.

The film "Maidaan," starring Ajay Devgn, was recognized as the best Asian film at the Septimius Awards 2024, highlighting its excellence in storytelling and production.

A total of 5 Anubhav Awards were presented in 2024, awarded to distinguished retiring government officials for their contributions to public service.

G. Nancharamma held the position of Technical Officer-D at DRDO and was one of the recipients of the Anubhav Awards, reflecting her significant contributions to the department.

NTPC Kanti was recognized for its impactful Corporate Social Responsibility (CSR) initiatives that include skill development, youth employment, health, and education, showcasing its commitment to social welfare.

The ceremony took place in Dubai, celebrating Mother Teresa's legacy and honoring those who have made significant contributions to society.

The category "Vigyan Guru" was not mentioned among the award categories for the Rashtriya Vigyan Puraskar - 2024, which included Vigyan Ratna, Vigyan Shri, Vigyan Yuva, and Vigyan Team.

• NIPUN Bharat Mission has been launched to ensure that every child in the country necessarily attains foundational literacy and numeracy by the end of Grade 3, by 2026-27. NIPUN stands for National Initiative for Proficiency in Reading with Understanding and Numeracy.

  • NIPUN Bharat comes under the aegis of the centrally sponsored scheme of Samagra Shiksha.

  • It is being launched as a part of NEP (National Education Policy) 2020.

  • Department of School Education and Literacy is the nodal agency for implementing this scheme. Hence, statement 2 is not correct.

• It focuses on:

  • Providing access and retaining children in foundational years of schooling

  • Teacher capacity building

  • Development of high quality and diversified Student and Teacher Resources/Learning Materials

  • Tracking the progress of each child in achieving learning outcomes.

• NIPUN Bharat aims to cover the learning needs of children in the age group of 3 to 9 years. Hence, statement 1 is not correct.

• Goals of the Mission are set in the form of Lakshya Soochi or Targets for Foundational Literacy and Numeracy. The Laskhyas are based on the learning outcomes developed by the NCERT and international research and ORF studies.

• Outcomes that have been envisaged from the implementation of the goals and objectives of NIPUN Bharat Mission are:

  • Foundational skills enable to keep children in class thereby reducing the dropouts and improve transition rate from primary to upper primary and secondary stages

  • Activity-based learning and conducive learning environment will improve quality of education.

  • Innovative pedagogies such as toy-based and experiential learning will be used in classroom transaction thereby making learning a joyful and engaging activity.

  • Intensive capacity building of teachers will make them empowered and provide greater autonomy for choosing the pedagogy.

  • Holistic development of the child by focusing on different domains of development like physical and motor development, socio-emotional development, literacy and numeracy development, cognitive development, life skills etc. which are interrelated and interdependent, which will be reflected in a Holistic Progress Card.

  • Since almost every child attends early grades, therefore, focus at that stage will also benefit the socio-economic disadvantageous group thus ensuring access to equitable and inclusive quality education.

• A five-tier implementation mechanism will be set up at the National- State- District- Block- School level in all States and Union Territories under the aegis of the centrally sponsored scheme of Samagra Shiksha.

• A special package for foundational literacy and Numeracy (FLN) under NISHTHA (National Initiative for School Heads and Teachers Holistic Advancement) is being developed by NCERT.

• The Livestock Census started in the country in the year 1919. It is being conducted once in 5 years. So far, 20 livestock censuses have been conducted. Hence statement 1 is correct.

• Livestock Census is a complete count of the livestock and poultry at a pre-defined reference point of time. Similar to population census, primary workers are engaged to undertake house to house enumeration and ascertain the number, age, sex, etc., of livestock/poultry possessed by every household/household enterprise / non-household / non-household enterprises and institutions in rural & urban areas of the country.

• The census usually covers all domesticated animals and headcounts of these animals are taken. Hence statement 2 is correct.

• It is conducted by the Ministry of Fisheries, Animal Husbandry & Dairying in participation with all State Governments and UT Administrations. Hence statement 3 is not correct.

• The 20th Livestock Census was launched during the month of October 2018. The enumeration was done in both rural and urban areas. Various types of animals (cattle, buffalo, mithun, yak, sheep, goat, pig, horse, pony, mule, donkey, camel, dog, rabbit, and elephant)/poultry birds (fowl, duck, and other poultry birds) possessed by the households, household enterprises/non-household enterprises were counted at that site. Another important feature of the 20th Livestock Census is it has been designed to capture a Breed-wise number of animals and poultry birds.

• At independence, about 75 per cent of the country’s population was dependent on agriculture. Productivity in the agricultural sector was very low because of the use of old technology and the absence of required infrastructure for the vast majority of farmers.

• The stagnation in agriculture induced as a result of colonial rule was permanently broken by the green revolution. This refers to the large increase in production of food grains resulting from the use of high-yielding variety (HYV) seeds especially for wheat and rice.

• The nation had immensely benefited from the green revolution. Thus, by the late 1960s, Indian agricultural productivity had increased sufficiently to enable the country to be self-sufficient in food grains. Hence, statement 1 is correct.

• Economists have found that as a nation becomes more prosperous, the proportion of GDP contributed by agriculture as well as the proportion of the population working in the sector declines considerably. In India, between 1950 and 1990, the proportion of GDP contributed by agriculture declined significantly from more than 50 percent in 1950 to 34 percent in 1990. Hence, statement 2 is not correct.

• On the negative side, some 65 per cent of the country’s population continued to be employed in agriculture even as late as 1990. The population depending on agriculture declined slightly from 67.5 per cent in 1950 to 64.9 per cent by 1990. Hence, statement 3 is not correct.

• When the country’s reserve bank is using its reserves of foreign exchange in order to balance any deficit in its balance of payments (BoP), it is called official reserve sale.

• International economic transactions are called autonomous when transactions are made due to some reason other than to bridge the gap in the balance of payments, that is, when they are independent of the state of BoP. One reason could be to earn profit. These items are called ‘above the line’ items in the BoP. Hence, statement 1 is correct.

• Accommodating transactions (termed ‘below the line’ items) refer to transactions that take place to cover deficit (or surplus) arising from autonomous transactions. They are determined by the gap in the balance of payments, that is, whether there is a deficit or surplus in the balance of payments. Since the official reserve transactions are made to bridge the gap in the BoP, they are seen as the accommodating item in the BoP (all others being autonomous). Hence, statement 2 is correct.

• The Small Finance Bank (SFB) is a private financial institution intended to further the objective of financial inclusion by primarily undertake basic banking activities of acceptance of deposits and lending to un-served and underserved sections including small business units, small and marginal farmers, micro and small industries and unorganized sector entities, but without any restriction in the area of operations, unlike Regional Rural Banks or Local Area Banks.

• Small Finance Banks were created pursuant to the announcement in Union Budget 2014-2015.

• Eligibility to Setup SFB:

  • Resident individuals/professionals with 10 years of experience in banking and finance and companies and societies owned and controlled by residents will be eligible to set up small finance banks.

  • Existing Non-Banking Finance Companies (NBFCs), Micro Finance Institutions (MFIs), and Local Area Banks (LABs) that are owned and controlled by residents can also opt for conversion into small finance banks.

• Conditions:

  • The minimum capital for SFBs is prescribed at Rs. 100 crore with an initial contribution of 40% coming from the promoters, which over a period of 12 years, have to be reduced to 26%.

  • Foreign Investment is permitted as in the case of other private sector commercial banks.

  • After the small finance bank reaches the net worth of Rs.500 crore, listing its shares on a stock exchange will be mandatory within three years of reaching that net worth.

• Regulations:

  • They are subject to all prudential norms and regulations of RBI as applicable to existing commercial banks like maintenance of Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR). Hence, statement 1 is correct.

  • They are required to extend 75 percent of its Adjusted Net Bank Credit (ANBC) to the sectors eligible for classification as priority sector lending (PSL) by the Reserve Bank. Hence, statement 3 is correct.

  • At least 50 percent of its loan portfolio should constitute loans and advances of up to Rs. 25 lakh.

  • It cannot set up subsidiaries to undertake non-banking financial services activities.

  • It is stipulated that at least 25 percent of its branches shall be in unbanked rural centers. Hence, statement 2 is correct.

• Other function which can be performed by SFB:

  • Distribution of mutual fund units, insurance products, pension products, etc.

  • They can also become a Category II Authorized Dealer in foreign exchange business for its clients’ requirements.

• We can subdivide the National Income into smaller categories. The part of NI which is received by households is called Personal Income (PI). It is calculated as follows.

• First, out of NI, which is earned by the firms and government enterprises, a part of the profit is not distributed among the factors of production. This is called Undistributed Profits (UP). We have to deduct UP from NI to arrive at PI since UP does not accrue to the households.

• Similarly, Corporate Tax, which is imposed on the earnings made by the firms, will also have to be deducted from the NI, since it does not accrue to the households.

• On the other hand, the households do receive interest payments from private firms or the government on past loans advanced by them. And households may have to pay interests to the firms and the government as well, in case they had borrowed money from either. So we have to deduct the net interests paid by the households to the firms and government.

• The households receive transfer payments from the government and firms (pensions, scholarships, prizes, for example) which have to be added to calculate the Personal Income of the households.

• Thus, Personal Income (PI) ≡ NI – Undistributed profits – Net interest payments made by households – Corporate tax + Transfer payments to the households from the government and firms.

• However, even PI is not the income over which the households have complete say as they have to pay taxes from PI. If we deduct the Personal Tax Payments (income tax, for example) and Non-tax Payments (such as fines) from PI, we obtain what is known as the Personal Disposable Income. So Personal Income includes tax payments.

Hence option (a) is the correct answer.

• Headline inflation is the total inflation in an economy. The headline inflation figure includes inflation in a basket of goods that includes commodities like food and energy. Hence statement 1 is correct.

• Core inflation excludes food and fuel items from headline inflation. Since the prices of fuel and food items tend to fluctuate and create ‘noise’ in inflation computation, core inflation is less volatile than headline inflation. Hence statement 2 is not correct.

• Small Scale Industries in India have a large share of contribution to the socio-economic and balanced regional development of the country. These industries in India account for 95% of the industrial units in the country.

• Statement 1 is not correct: Micro Small and Medium Enterprises (MSMEs) have the second-largest share in terms of human resource employability after the Agriculture sector. It supplies an enormous variety of mass consumption products which includes readymade garments, hosiery goods, stationery items, soaps and detergents, plastic and rubber goods, processed foods and vegetables, etc.

• Statement 2 is correct: MSMEs sector generates more employment opportunities per unit of capital invested compared to large-scale industries. That is why they are considered to be less capital intensive and more labour intensive. This is a boon for a labour surplus country like India.

• Gross National Product is the total measure of the flow of goods and services at market value resulting from current production during a year in a country, including net income from abroad. Hence,

  • GNP ≡ GDP + Net factor income from abroad.

• A part of the capital gets consumed during the year due to wear and tear. This wear and tear is called depreciation. Naturally, depreciation does not become part of anybody’s income. If we deduct depreciation from GNP the measure of aggregate income that we obtain is called Net National Product (NNP).

  • NNP ≡ GNP – Depreciation

• It is to be noted that the above variables are evaluated at market prices. But market price includes indirect taxes. When indirect taxes are imposed on goods and services, their prices go up. Indirect taxes accrue to the government. We have to deduct them from NNP evaluated at market prices in order to calculate that part of NNP which actually accrues to the factors of production. Similarly, there may be subsidies granted by the government on the prices of some commodities (in India petrol is heavily taxed by the government, whereas cooking gas is subsidised). So we need to add subsidies to the NNP evaluated at market prices. The measure that we obtain by doing so is called Net National Product at factor cost which is also called as National Income.

• Thus, NNP at factor cost ≡ National Income (NI ) ≡ NNP at market prices – (Indirect taxes – Subsidies) ≡ NNP at market prices – Net indirect taxes (Net indirect taxes ≡ Indirect taxes – Subsidies)

Hence option (b) is the correct answer.

• A liquidity trap is a contradictory economic situation in which interest rates are very low and savings rates are high, rendering monetary policy ineffective. Hence options 2 and 3 are correct.

• It was first described by economist John Maynard Keynes.

• During a liquidity trap, consumers choose to avoid bonds and keep their funds in cash savings because of the prevailing belief that interest rates could soon rise (which would push bond prices down and yields up). Because bonds have an inverse relationship to interest rates, many consumers do not want to hold an asset with a price that is expected to decline. Hence option 1 is correct.

• At the same time, central bank efforts to spur economic activity are hampered as they are unable to lower interest rates further to incentivize investors and consumers.

• While a liquidity trap is a function of economic conditions, it is also psychological since consumers are making a choice to hoard cash instead of choosing higher-paying investments because of a negative economic view.

• A liquidity trap is not limited to bonds. It also affects other areas of the economy, as consumers are spending less on products which means businesses are less likely to hire.

• Some ways to get out of a liquidity trap include raising interest rates, hoping the situation will regulate itself as prices fall to attractive levels, or increased government spending.

• The Association of Southeast Asian Nations, or ASEAN, was established on 8 August 1967 in Bangkok, Thailand, with the signing of the ASEAN Declaration (Bangkok Declaration) by the Founding Fathers of ASEAN, namely Indonesia, Malaysia, Philippines, Singapore and Thailand. Hence, statement 1 is not correct.

• Brunei Darussalam then joined on 7 January 1984, Viet Nam on 28 July 1995, Lao PDR and Myanmar on 23 July 1997, and Cambodia on 30 April 1999, making up what is today the ten Member States of ASEAN.

• The ASEAN Charter entered into force on 15 December 2008. With the entry into force of the ASEAN Charter, ASEAN will henceforth operate under a new legal framework and establish a number of new organs to boost its community-building process. In effect, the ASEAN Charter has become a legally binding agreement among the 10 ASEAN Member States. Hence, statement 2 is correct.

• The ASEAN-India Trade in Goods Agreement was signed in 2009 and on ASEAN-India Trade-in-Services and Investments in 2015. With the signing of these Agreements, the ASEAN-India FTA is complete.

• The World Bank is like a cooperative, made up of 189 member countries. These member countries, or shareholders, are represented by a Board of Governors, who are the ultimate policymakers at the World Bank.

• International Finance Corporation (IFC), a member of the World Bank Group, advances economic development and improves the lives of people by encouraging the growth of the private sector in developing countries.

• The Multilateral Investment Guarantee Agency (MIGA) is a member of the World Bank Group. MIGA provides political risk insurance (guarantees) for projects in a broad range of sectors in developing member countries, covering all regions of the world.

• International Centre for Settlement of Investment Disputes (ICSID) is the world’s leading institution specializing in international investment dispute settlement. States have agreed on ICSID as a forum for Investor-State dispute settlement in most international investment treaties and in numerous investment laws and contracts. ICSID is an independent, depoliticized and effective dispute-settlement institution. ICSID provides for settlement of disputes by conciliation, arbitration or fact-finding.

Hence option (c) is the correct answer.

• The SDR was created as a supplementary international reserve asset in the context of the Bretton Woods fixed exchange rate system. The collapse of Bretton Woods system in 1973 and the shift of major currencies to floating exchange rate regimes lessened the reliance on the SDR as a global reserve asset. Nonetheless, SDR allocations can play a role in providing liquidity and supplementing member countries’ official reserves, as was the case amid the global financial crisis.

• The SDR serves as the unit of account of the IMF and some other international organizations.

• The SDR is neither a currency nor a claim on the IMF. Hence, statement 1 is not correct. Rather, it is a potential claim on the freely usable currencies of IMF members. SDRs can be exchanged for these currencies.

• Currencies included in the SDR basket have to meet two criteria: the export criterion and the freely usable criterion. Hence, statement 2 is correct.

• A currency meets the export criterion if its issuer is an IMF member or a monetary union that includes IMF members, and is also one of the top five world exporters. For a currency to be determined “freely usable” by the IMF, it has to be widely used to make payments for international transactions and widely traded in the principal exchange markets.

• The IMF has the authority to prescribe other holders of SDRs, non-members, member countries that are not SDR Department Participants, institutions that perform the functions of a central bank for more than one member, and other official entities. SDRs cannot be held by private entities or individuals. Hence, statement 3 is correct.

• The term shell company is used for illegal companies whose basis of purpose of creation is derived from a 'shell' which has an outer covering but nothing inside that is a Shell company does no substantial tangible business. Such companies are generally only in papers and are mostly established in tax havens.

• Statement 1 is correct: Shell companies are corporate entities that do not have any significant assets in their possession or any active business operations.

• These companies are generally involved in money laundering and tax avoidance activities. The main purpose is to divert money for tax evasion and route money generated from illegal activities to formal financial institutions.

• Statement 2 is not correct: Shell companies are not defined under any specific law. The Companies Act, 2013 does not define shell companies and what activities constitute shell companies.

• However to curb illegal activities shell companies can be targeted under laws such as:

  • Benami Transaction (Prohibition) Amendment Act 2016

  • The Prevention of Money Laundering Act 2002

  • The Companies Act, 2013

• In economics, we often distinguish between quantities that are stocks and those that are flows. These differ in their units of measurement. A stock is measured at one specific time and represents a quantity existing at that point in time, which may have accumulated in the past. A flow variable is measured over an interval of time. Therefore, a flow would be measured per unit of time (say a year). Flow is roughly analogous to rate or speed in this sense.

• For example, Indian nominal gross domestic product refers to the total number of dollars spent over a time period, such as a year. Therefore, it is a flow variable and has units of dollars/year. In contrast, India's nominal capital stock is the total value, in dollars, of equipment, buildings, and other real productive assets in the U.S. economy, and has units of dollars. Hence flows are defined over a period of time and stocks are defined at a particular point of time. Hence statement 1 is correct.

• An item that is meant for final use and will not pass through any more stages of production or transformations is called a final good. Of the final goods, we can distinguish between consumption goods and capital goods. Goods like food and clothing and services like recreation that are consumed when purchased by their ultimate consumers are called consumption goods.

• There are other goods that are of a durable character that is used in the production process. These are tools, implements, and machines. While they make the production of other commodities feasible, they themselves don’t get transformed in the production process. These goods form a part of capital, which continue to enable the production process to go on for continuous cycles of production. These are called Capital goods. That part of our final output that comprises of capital goods constitutes gross investment of an economy. These may be machines, tools and implements; buildings, office spaces, storehouses or infrastructure like roads, bridges, airports or jetties. Hence statements 2 and 3 are correct.

• A Participatory Note (PN or P-Note) in the Indian context, in essence, is a derivative instrument issued in foreign jurisdictions, by a SEBI registered Foreign Institutional Investor (FII) or its sub-accounts or one of its associates, against underlying Indian securities. Hence, statement 1 is correct.

• The off-shore derivative market allows investors to gain exposure to the local shares without incurring the time and costs involved in investing directly.

• The underlying Indian security instrument may be equity, debt, derivatives, or may even be an index.

• PNs are also known as Overseas Derivative Instruments, Equity Linked Notes, Capped Return Notes, and Participating Return Notes etc.

• Regulation excludes a certain category of Foreign portfolio investors, like individuals, from issuing the PNs) against securities held by it that are listed or proposed to be listed on any recognized stock exchange in India.

• The investor in PN does not own the underlying Indian security, which is held by the FII who issues the PN. Thus the investors in PNs derive the economic benefits of investing in the security without actually holding it. They benefit from fluctuations in the price of the underlying security since the value of the PN is linked with the value of the underlying Indian security. The PN holder also does not enjoy any voting rights in relation to security/shares referenced by the PN. Hence, statement 2 is correct.

• Being derivative instruments and freely tradable, PNs can be easily transferred, creating multiple layers, thereby obfuscating the real beneficial owner. It is in this respect that concerns about the identity of the ultimate beneficial owner and the source of funds arise.

• For the reason that such instruments are issued outside India, these transactions are outside the purview of SEBI surveillance and it is the FIIs which acts as mini-exchange overseas. Hence, statement 3 is correct.

• The actual transactions in the underlying are executed by the FIIs only at its discretion, as and when necessary and there is no one-to-one correspondence between transactions in the underlying instruments and issuance of PNs.

• The ex-post reporting requirement enjoined upon the FII in respect of PNs on a monthly basis effectively keeps the transactions in PNs out of the real-time market surveillance mechanism and beyond the enforceability jurisdiction of SEBI.

• Unemployment is said to have occurred when a person who is actively searching for employment is unable to find work. The measure of unemployment can be used to perceive the health of an economy.

• The types of unemployment that can occur depending upon their nature are cyclical, structural, frictional, and seasonal. The three official sources of data on unemployment in India are:

  • data of National Statistical Organisation (NSO) under Ministry of Statistics and Programme Implementation. Hence option 1 is correct.

  • data by Director General of Employment and Training. Hence option 2 is correct.

  • The report of Census of India. Hence option 3 is correct.

• In India census is conducted as a decennial exercise. Census provides information on the distribution of labor force by various categories at the national, state, and district levels. The distribution of the unemployed is given by age, sex, education, and rural and urban residence at the three levels. The census also provides data on the unemployed defined as; persons who had not worked at all in the reference year and were seeking work throughout the year. The Census also defines the "worker" as a person who has worked any time at all in the 365 days in the market and non-market economic activities.

• RBI decides a certain percentage of deposits that every bank must keep as reserves. This is done to ensure that no bank is ‘over lending’. This is a legal requirement and is binding on the banks.

• This is called the ‘Required Reserve Ratio’ or the ‘Reserve Ratio’ or ‘Cash ReserveRatio’ (CRR).

• Cash Reserve Ratio (CRR) = Percentage of deposits which a bank must keep as cash reserves with RBI. Hence, statement 1 is correct.

  • Let's Assume, CRR = 20 percent

  • Then with deposits of Rs100, the bank will need to keep Rs 20 (20 percent of 100) as cash reserves. Only the remaining amount of deposits, i.e., Rs 80 (100 – 20 = 80) can be used to give loans. However, apart from the CRR, banks are also required to keep some reserves in liquid form in the short term. This ratio is called Statutory Liquidity Ratio or SLR.

  • The statutory requirement of the reserve ratio acts as a limit to the amount of credit that banks can create.

• In theory, if a Central Bank demands a higher reserve ratio – it has the effect of acting like a deflationary monetary policy. A higher reserve ratio should reduce bank lending and therefore reduce the money supply. Hence, statement 2 is correct.

• However, in the real world, there are many reasons why the actual money created is significantly smaller than the theoretically possible money supplied:

  • Import spending: If consumers buy imports the money leaves the economy

  • Taxes: A percentage of income will be taken in taxes.

  • Savings: Not all money is spent and circulated, a significant percentage will be saved

  • Currency Drain Ratio: This is the % of banknotes that individual consumers keep in cash, rather than depositing in banks. If consumers deposited all their cash in banks, there would be a bigger money multiplier. But, if people keep funds in cash then the banks cannot lend more.

  • Bad loans: A bank may lend out $90 but the company goes bankrupt and so this is never deposited bank into the banking system.

  • Safety reserve ratio: This is the % of deposits a bank may like to keep above the statutory reserve ratio. i.e. the required reserve ratio maybe 5%, but banks may like to keep 5.2%.

  • Banks may not want to lend also, at various times, the banks may not want to lend, e.g. during a recession they feel firms and individuals more likely to default. Therefore, the banks end up with a higher reserve ratio.