UPSC Prelims Mock Test – ECONOMY 8

Here are 25 Questions, a part of our series on UPSC Prelims Mock Test.

Q1. With reference to the ‘Monetised Deficit’ in India, consider the following statements:

1. The part of the Fiscal Deficit which was provided by the Reserve Bank of India to The government in a particular year is the Monetised Deficit.
2. It leads to a decrease in the total money supply in the Economy.

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

Answer – A

• Statement 1 is correct: The Monetised Deficit is the part of the Fiscal Deficit which was provided by the Reserve Bank of India to the Government in a particular year. It is a newer term that was adopted in 1997-98 in India. It is an innovation in fiscal management and more transparency is brought with this in the behavior of Government expenditure and also in its capabilities concerning its dependence on market borrowings by the Reserve Bank of India. Essentially, every year both Central and State Governments in India have been depending massively on market borrowings (internal) for their long-term capital requirements. The Reserve Bank of India does and manages the Market borrowings of the Government. Apart from this, the primary customer for Government securities is the Reserve Bank of India. This is another way of raising long-term capital for the Government.
• Statement 2 is not correct: Monetised Deficit is termed as Debt monetization. The total money supply in the economy is increased by the Monetised Deficit which leads to inflation because the fresh money to purchase the bonds is created by the Reserve Bank of India. Later on, the same bonds are sold in the open market and are used to bring down inflation which helps the Reserve Bank of India to suck excess money out of the market and rein in rising prices.

Q2. Which of the following statements is/are correct about the Expenditure Management Commission (EMC) in India?

1. It is a statutory body created by an act of Parliament.
2. The ‘Terms of Reference’ of the Commission includes a review of the major areas of Central Government 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

Answer – B

• Statement 1 is not correct: Through a Resolution dated 4th September 2014, an Expenditure Management Commission (EMC) was constituted by the Government. The EMC is to look into various expenditure reform aspects which the Government has to undertake and other issues that concern Public Expenditure management. The EMC has one full time, one part-time and one ex-officio Member other than Chairman of (Cabinet Rank).
• Statement 2 is correct: The Commission’s ‘Terms of Reference’ are:
• Review the major areas of Central Government Expenditure, and to suggest ways of creating fiscal space required to meet developmental expenditure needs, without compromising the commitment to fiscal discipline.
• Review the institutional arrangement, including the budgeting process and FRBM rules, for enforcing aggregate fiscal discipline and suggest improvements therein.
• Suggest measures to improve allocative efficiencies in the existing expenditure classification system, including focus on capital expenditure.
• Design a framework to improve the operational efficiency of expenditures through a focus on utilization, targets, and outcomes. Suggest an effective strategy for meeting a reasonable proportion of expenditure on services through user charges.

Q3. Which of the following is/are the key recommendations of the N. K. Singh Committee set-up to review the Fiscal Reforms and Budget Management (FRBM) Act, 2003?

1. To bring down the Central Government’s Debt-to-GDP ratio to 60 percent.
2. It has also provided for Escape Clauses, for deviations up to 0.5 percent of GDP, from the stipulated Fiscal Deficit target.

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

Answer – B

• In 2016, a Committee was constituted by the Government of India under the Chairmanship of N. K. Singh to review the implementation of the FRBM Act. By late January 2017, a report was submitted by this Committee. Some important recommendations of the Committee that have been outlined by the Union Budget 2017-18 are:
• A detailed exercise was done by this committee and it has recommended that a sustainable debt path must be the principal macroeconomic anchor of our fiscal policy. It has suggested bringing down Debt to GDP of 60 percent for the General Government by It including 40 percent for the Central
• Government and 20 percent for State Governments. (Statement 1 is not correct)
• It has derived and suggested a 3 percent fiscal deficit for the next three years within the framework of debt to GDP ratio.
• It has also provided for Escape Clauses, for deviations up to 0.5 per cent of GDP, from the stipulated Fiscal Deficit target. These Escape Clauses has many triggers for come into play which include “far-reaching structural reforms in the economy with unanticipated fiscal implications”. (Statement 2 is correct)

Q4. Consider the following statements about the Marginal Standing Facility (MSF) in the Indian Banking system:

1. Under MSF, the Banks can borrow overnight up to 1 percent of their total assets from the Reserve Bank of India (RBI).
2. The MSF rate is a penal rate and is always fixed above the Repo rate.

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

Answer – B

• Statement 1 is not correct: Marginal Standing Facility (MSF): – It was a new scheme announced by the Reserve Bank of India (RBI) in its Monetary Policy, 2011-12 which came into effect from May 2011. Its main aim is to reduce volatility in the overnight lending rates in the interbank market and to enable smooth monetary transmission in the financial system. Marginal Standing Facility, the banks can borrow overnight up to 1 percent of their Net Demand and Time Liabilities (NDTL) from the Reserve Bank of India.
• Statement 2 is correct: Marginal Standing Facility (MSF), being a penal rate, is always fixed above the Repo rate. The Marginal Standing The facility would be the last resort for banks once they exhaust all borrowing options including the liquidity adjustment facility by pledging Government securities, where the rates are lower in comparison with the Marginal Standing Facility. Under the MSF, the banks can borrow within the limits of the Statutory Liquidity Ratio (SLR).

Q5. With reference to Long Term Repo Operations (LTROs), consider the following statements:

1. LTRO allows Banks to borrow one-tothree-year funds from the Central Bank at the Repo Rate.
2. In Targeted LTRO, the Central Bank wants Banks opting for funds under this option to be specifically invested in investment-grade corporate debt.

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

Answer – C

• Statement 1 is correct: Long-term repo Operations (LTROs) allow All Banks to borrow cash from the Central Bank for one to three years at the Repo Rate in exchange for higher or similar-tenure Government Securities. Long-term repo Operations allow banks to borrow money from the Reserve Bank of India at a lower cost (RBI). As a result, they are more likely to boost economic activity and lend more money. They can also boost profitability by investing this long-term capital in assets that provide higher returns.
• Statement 2 is correct: Banks can use Targeted Long-Term Repo Operations (TLTRO) to invest in specific sectors using debt instruments (corporate bonds, commercial papers, and Non-Convertible Debentures (NCDs) to increase credit flow. It’s named Targeted LTRO because the Reserve Bank of India (RBI) wants banks that take advantage of the Targeted LTRO option to invest funds in investment-grade corporate debt. The Reserve Bank of India’s Marginal Standing Facility (MSF) and Liquidity Adjustment Facility (LAF) both give funds to other banks for a longer period of time than short-term (up to 28 days) liquidity.

Q6. The terms ‘Agreement on Agriculture’, Agreement on the Application of Sanitary and Phytosanitary Measure’ and ‘Peace Clause’ appear in the news frequently in the context of the affairs of the

(a) Food and Agriculture Organization
(b) United Nations Framework Conference on Climate Change
(c) World Trade Organization
(d) United Nations Environment Programme

Answer – C

• The global trade body WTO regulates various dimensions of the agricultural trade by the member countries. Under the ‘Peace Clause’, India has bargained a relaxation for 4 years in disbursal of the agricultural subsidies foe public stockholding of food grains at the 9th Ministerial Conference of the WTO (Bali, 2013), In the 10th Conference (Nairobi, 2015), the member countries have agreed to decide a permanent solution to this issue.

Q7. Regarding the International Monetary Fund, which one of the following statements is correct?

(a) It can grant loans to any country
(b) It can grant loans to only developed countries
(c) It grants loans to only member countries
(d) It can grant loans to the central bank of a country

Answer – C

• MF grants loans only to members’ country

Q8. Consider the following countries:

1. Brazil
2. Mexico
3. South Africa According to UNCTAD,

Which of the above is/are categorized as “Emerging Economies”?

(a) 1 only

(b) 1 and 3 only

(c) 2 and 3 only

(d) 1, 2 and 3

Answer – D

• The 10 Big Emerging Markets (BEM) economies are (alphabetically ordered): Argentina, Brazil, China, India, Indonesia, Mexico, Poland, South Africa, South Korea and Turkey. Egypt, Iran, Nigeria, Pakistan, Russia, Saudi Arabia, Taiwan, and Thailand are other major emerging markets.

Q9. As regards the use of international food safety standards as reference point for the dispute settlements, which one of the following does WTO collaborate with?

(a) Codex Alimentarius Commission
(b) International Federation of Standards Users
(c) International Organization for Standardization
(d) World Standards Cooperation

Answer – A

• The Codex Alimentarius (Latin for “food book”) is a collection of internationally recognized standards, codes of practice, guidelines and other recommendations relating to foods, food production and food safety. Its name derives from the Codex Alimentarius Austriacus. Its texts are developed and maintained by the Codex Alimentarius Commission, a body that was established in 1963 by FAO and WHO.

Q10. In the context of the affairs of which of the following is the phrase “Special Safeguard Mechanisms” mentioned in the news frequently?

(a) United Nations Environment Programme
(b) World Trade Organization
(c) ASEAN – India Free Trade Agreement
(d) G – 20 Summits

Answer – B

• “Special Safeguard Mechanisms” is related to World Trade Organization.

Q11. Consider the following statements:

1. Poverty Reduction and Growth Facility (PRGF) has been established by the International Development Association (IDA) to provide further assistance to low-income countries facing high level of indebtedness.
2. Singapore Regional Training Institute (STI) is one of the institutes that provides
   training in macroeconomic analysis and policy and related subjects as a part of program of the IMF institute.

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

Answer – B

• In 1999, the IMF established the Poverty Reduction and Growth Facility (PRGF) to make the objectives of poverty reduction and growth more central to lending operations in its poorest member countries.

Q12. Consider the following statements: The price of any currency in international the market is decided by the:

1. World Bank
2. Demand for goods/services provided by the country concerned
3. Stability of the government of the concerned country
4. The economic potential of the country in question of these statements:

Codes:

(a) 1, 2, 3 and 4

(b) 2 and 3 Only

(c) 3 and 4 only

(d) 1 and 4 only

Answer – B

• The price of any currency is the international market is determined by the forces of demand and supply. Demand for a currency increases if the demand for the goods and services provided by that country increases. Moreover, a stable Govt gives confidence to investors and raises the demand for currency of that country.

Q13. Which one of the following types of borrowings from the IMF has the softest servicing conditions?

(a) Second tranche loan
(b) SAF
(c) ESAF
(d) Oil Facility

Answer – A

• A tranche is a common financial structure for securitized debt products, such as collateralized debt obligation (CDO), which pools together a collection of cash flow-generating assets-such as mortgages, bonds, and loans-or a mortgage-backed security (MBS)

Q14. “With reference to Pradhan Mantri Kaushal Vikas Yojana, consider the following statements:

1. It is the flagship scheme of the Ministry of Labor and Employment.
2. It, among other things, will also impart training in soft skills, entrepreneurship, financial and digital literacy.
3. It aims to align the competencies of the unregulated workforce of the country to the National Skill Qualification Framework.

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

Answer – C

• PMKVY is the flagship outcome-based skill training scheme of the Ministry of Skill Development and Entrepreneurship (MSDE). So, The Ministry of Skill Development is created with core focus on converging all skill development initiatives in the country under one National Skills Qualification Framework (NSQF). So, #3 ought to be right. Thus by elimination, we get the answer C: 2 and 3 only.

Q15. With reference to organic farming in India, consider the following statements:

1. ‘The National Programme for Organic Production’ (NPOP) is operated under the guidelines and directions of the Union Ministry of Rural Development.
2. ‘The Agricultural and Processed Food Products Export Development Authority’ (APEDA) functions as the Secretatiat for the implementation of NPOP.
3. Sikkim has become India’s first fully organic State.

Which of the statements given above is/are correct?

(a) 1 and 2 only

(b) 2 and 3 only

(c) 3 only

(d) 1, 2 and 3

Answer – B

• This National Programme for Organic Production (NPOP) is under the Commerce ministry, but Secretariat assistance by the Agricultural and Processed Food Products Export Development Authority (APEDA).

Q16. Consider the following statements:

1. The Commission for Agricultural Costs and Prices recommends the Minimum Support Prices for 32 crops.
2. The Union Ministry of Consumer Affairs, Food and Public Distribution has launched the National Food Security Mission.

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

Answer – D

• The National Development Council (NDC) in its 53rd meeting held on 29th May, 2007 adopted a resolution to launch a Food Security Mission consisting of rice, wheat, and pulses and to increase the production of rice by 10 million tons, wheat by 8 million tons and pulses by 2 million tons by the end of the Eleventh Plan (2011-12). The project is under the Ministry of Agriculture. The project identifies districts and varieties which would be concentrated on.

Q17. Consider the following statements:

1. Regarding the procurement of food grains, Government of India follows a procurement target rather than an open-ended procurement policy.
2. The government of India announces minimum support prices only for cereals.
3. For distribution under Targeted Public Distribution System (TPDS), wheat and rice are issued by the Government of India at uniform central issue prices to the States/Union Territories.

Which of the statements given above is/are correct?

(a) 1 and 2

(b) 2 only

(c) 1 and 3

(d) 3 only

Answer – C

• The policy involves the procurement of various food grains, stock and price levels

Q18. Consider the following statement: India continues to be dependent on imports to meet the requirement of oilseeds in the country because:

1. farmers prefer to grow food grains with highly remunerative support prices.
2. most of the cultivation of oilseed crops continues to be dependent on rainfall.
3. oils from the seeds of free origin and rice bran have remained unexploited.
4. it is far cheaper to import oilseeds than to cultivate the oilseed crops.

Which of the statements given above are correct?
(a) 1 and 2
(b) 1, 2 and 3
(b) 2 and 3
(d) 1, 2, 3 and 4

Answer – B

• The reduction of rainfall and the leak of seed preservation technology are the main causes.

Q19. If another global financial crisis happens in the near future, which of the following actions/ policies are most likely to give some immunity to India ?

1. Not depending on short-term foreign borrowings
2. Opening up to more foreign banks
3. Maintaining full capital account convertibility

Select the correct answer using the code given below :

(a) 1 only

(b) 1 and 2 only

(c) 3 only

(d) 1, 2 and 3

Answer – A

• Keeping full capital account convertibility will make India vulnerable to global crisis, just like the 1997 crisis among the East Asian countries. So number 3 is wrong. C and D were eliminated. If Indian Government /RBI allows opening of more foreign banks in India, there could be a dangerous scenario where foreign problems may percolate into Indian economy. So, #2 is wrong. So we are left with Answer (A) only 1.

Q20. Consider the following statements:

1. Purchasing Power Parity (PPP) exchange rates are calculated by comparing the prices of the same basket of goods and services in different countries.
2. In terms of PPP dollars, India is the sixth the largest economy in the world.

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

Answer – A

• PPP: Hypothetical concept that tries to compare two currencies’ exchange rate through their purchasing power in respective countries. India displaces Japan to become third-largest world the economy in terms of PPP.

Q21. In the context of India, which of the following factors is/are contributor/contributors to reducing the risk of a currency crisis?

1. The foreign currency earnings of India’s IT sector
2. Increasing the government expenditure
3. Remittances from Indians abroad

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

Answer – B

• The currency crisis usually denotes that Indian Rupee is weakening and the dollar is strengthening at a rapid level. In ordinary circumstances, the rupee-dollar exchange rate is determined by the market forces of supply and demand. Therefore we have to encourage the inflow of dollars to reduce the risk of currency crisis. 1 and 3 can help in this regard, 2 is irrelevant. Infact 2 can backfire if raising Government Expenditure results in excessive printing of Rupee currency. – Thus, by elimination answer is B: 1 and 3.

Q22. Which one of the following is not the most likely measure the Government/ RBI takes to stop the slide of the Indian rupee?

(a) Curbing imports of non-essential goodsand promoting exports
(b) Encouraging Indian borrowers to issue rupee-denominated Masala Bonds
(c) Easing conditions relating to external commercial borrowing
(d) Following an expansionary monetary policy

Answer – D

• To control the rupee weakening, – A: will help by reducing the Current account deficit. – B: will help by reducing the demand of dollars in loan repayment. – C: will help by increasing the inflow of dollars and other currencies. – D: will backfire, because the rupee currency supply will increase without a corresponding increase in the supply of dollars and as a result: the dollar will strengthen, Indian The rupee will weaken further.

Q23. Consider the following statements:

1. The quantity of imported edible oils is more than the domestic production of edible oils in the last five years.
2. The Government does not impose any customs duty on all imported edible oils as a special case.

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

Answer – A

• The first statement is right as per the ICAR report. If we look at the budget documents of last three year, The government does impose customs duties on imported edible oils, so, 2 is a hyperbole wrong statement.

Q24. Which of the following best describes the term ‘import cover’, sometimes seen in the news?

(a) It is the ratio of the value of imports to the Gross Domestic Product of a country
(b) It is the total value of imports of a country in a year
(c) It is the ratio between the value of exports and that of imports between two countries
(d) It is the number of months of imports that could be paid for by a country’s international reserves

Answer – D

• t is the number of months of imports that could be paid for by a country’s international reserves

Q25. The balance of payments of a country is a systematic record of

(a) all import and export transactions of a country during a given period of time, normally a year
(b) goods exported from a country during a year
(c) economic transaction between the government of one country to another
(d) capital movements from one country to another

Answer – A

• Balance of Payments (BoP) statistics systematically summarize the economic reactions of an economy with the rest of the World (i.e. transactions between resident & nonresident entities) during a given period. It comprises of current and capital & financial accounts.

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