UPSC Prelims Mock Test – ECONOMY 5

Q1 Which one of the following groups of items is included in India’s foreign exchange reserves?

(a) Foreign-currency assets, Special Drawing Rights (SDRs), and loans from foreign countries
(b) Foreign-currency assets, gold holdings of the RBI and SDRs
(c) Foreign-currency assets, loans from the World Bank, and SDRs
(d) Foreign-currency assets, gold holdings of the RBI, and loans from the World Bank

Answer- B

• India’s foreign exchange reserves is made up of foreign currency assets (FCA) (US dollar, euro, pound sterling, Canadian dollar, Australian dollar, and Japanese yen, etc.) 2. gold 3. special drawing rights (SDRs) of IMF 4. Reserve tranche position (RTP) in the International Monetary Fund (IMF) Hence the closest answer choice is (B): Foreign currency assets, gold holdings of the RBI, and SDRs

Q2. Consider the following statements: Full convertibility of the rupee may mean:

1. Its free floats with international currencies
2. It is a direct exchange with any other international currency at any prescribed place inside and outside the country
3. It acts just like any other international currency

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

Answer – D

• Capital account convertibility means free conversion of cross-border capital flows, implying that anybody can convert domestic currency into hard currency at the market rate and take the hard currency out of the country

Q3. Consider the following statements: The Indian rupee is fully convertible:

1. in respect of the Current Account of Balance of payment
2. in respect of the Capital Account of the Balance of payment
3. into gold

Which of these statements is/are correct?

(a) 1 alone

(b) 3 alone

(c) 1 and 2

(d) 1, 2 and 3

Answer – A

• In respect of the current account of the balance of payment, the Indian rupee is partially convertible after 1991. The convertibility of a currency such as Rupee has different meanings in different times. In existing standards, it means that the country’s currency becomes convertible in foreign exchange and vice versa in the market.

Q4. Convertibility of the rupee implies

(a) being able to convert rupee notes into gold

(b) allowing the value of the rupee to be fixed by market forces

(c) freely permitting the conversion of the rupee to other major currencies and vice versa

(d) developing an international market for currencies in India

Answer – C

• Convertibility of the rupee implies freely permitting the conversion of the rupee to other currencies and vice-versa. India permits full current account convertibility of the rupee but only partial capital account convertibility.

Q5 When partial convertibility is obtained the exchange rate is

(a) a weighted average
(b) a simple average
(c) fully floating
(d) fully administered

Answer – C

• When partial convertibility obtains the exchange rate is fully floating.

Q6. With reference to Trade-Related Investment Measures (TRIMS), which of the following statements is/are correct?

1. Quantitative restrictions on imports by foreign investors are prohibited.
2. They apply to investment measures related to trade in both goods and services.
3. They are not concerned with the regulation of foreign investment.

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

Answer -C

• The Agreement is not concerned with the regulation of foreign investment. So, #3 is right. The coverage of the Agreement is defined in Article 1, which states that the Agreement applies to investment measures related to trade in goods only. Meaning, that the TRIMs Agreement does not apply to services. So, #2 is wrong. So, the Answer should be C.

Q7. In which one of the following groups are all four countries members of G20?

(a) Argentina, Mexico, South Africa and Turkey
(b) Australia, Canada, Malaysia and New Zealand
(c) Brazil, Saudi Arabia and Vietnam
(d) Indonesia, Japan, Singapore, and South Korea

Answer – A

• G20 consists of Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, the Republic of Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, UK, the USA, and EU Therefore the answer should be A.

Q8. With reference to the Asian Infrastructure Investment Bank (AIIB), consider the following statements:

1. AIIB has more than 80 member nations.
2. India is the largest shareholder in AIIB.
3. AIIB does not have any members from outside Asia.

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

Answer – A

• AIIB: China, India, the UK, and Switzerland are among the members. And, based on the share capital provided. China ~27%, India ~7%. Asian countries control about 75% of voting. So, 2 and 3 are wrong. We are left with answer A.

Q9. Which one of the following is not a sub-index of the World Bank’s ‘Ease of Doing Business Index’?

(a) Maintenance of law and order
(b) Paying taxes
(c) Registering property
(d) Dealing with construction permits

Answer -A

• Sub Index of Ease of Doing Business Index comprises starting a business, Getting a location(labour market regulation, construction permits, getting electricity, registering property), Accessing finance (Getting credit, Protecting Minority investors), Dealing with day-to-day operations (Paying taxes, enforcing contracts).

Q10. The Global Competitiveness Report is published by the

(a) International Monetary Fund
(b) United Nations Conference on Trade and Development
(c) World Economic Forum
(d) World Bank

Answer – C

• The Global Competitiveness Report (GCR) is a yearly report published by the World Economic Forum

Q11. Which of the following is/are the part of Gross National Product (GNP)?

1. Private Remittances
2. Interest on External Loans
3. External Grants

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

Answer – D

• Option (d) is correct: Gross National Product (GNP) is the GDP of a country added to its ‘income from abroad’. Here, the transboundary economic activities of an economy is also taken into account. The items which are counted in the segment ‘Income from Abroad’ are:
• Private Remittances: This is the net outcome of the money which inflows and outflows on account of the ‘private transfers’ by Indian nationals working outside of India (to India) and the foreign nationals working in India (to their home countries).
• Interest on External Loans: The net outcome on the front of the interest payments, i.e., the balance of inflow (on the money lent out by the economy) and outflow (on the money borrowed by the economy) of external interests. In India’s case it has always been negative as the economy has been a ‘net borrower’ from the world economies.
• External Grants: The net outcome of the external grants i.e., the balance of such grants which flow to and from India. Today, India offers more such grants than it receives. India receives grants (grants or loan-grant mix) from few countries as well as UN bodies (like the UNDP) and offers several developmental and humanitarian grants to foreign nations. Ultimately, the balance of all the three components of the ‘Income from Abroad’ segment may turn out to be positive or negative. In India’s case, it has always been negative (due to heavy outflows on account of trade deficits and interest payments on foreign loans). It means, the ‘Income from Abroad’ is subtracted from India’s GDP to calculate its GNP.
• The normal formula is GNP = GDP + Income from Abroad. But it becomes GNP = GDP + (- Income from Abroad), i.e., GDP – Income from Abroad, in the case of India. This means that India’s GNP is always lower than its GDP.

Q 12. With reference to the National Rural Health Mission, which of the following are the jobs of ‘ASHA’, a trained community health worker?

1. Accompanying women to the health facility for antenatal care checkup.
2. Using pregnancy test kits for early detection of pregnancy.
3. Providing information on nutrition and immunization.
4. Conducting the delivery of the baby.

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

Answer – A

• Accompanying women to the health facility for antenatal care checkup. Using pregnancy test kits for early detection of pregnancy. Providing information on nutrition and immunization.

Q13. With what purpose is the Government of India promoting the concept of “Mega Food Parks”?

1. To provide good infrastructure facilities for the food processing industry.
2. To increase the processing of perishable items and reduce wastage.
3. To provide emerging and eco-friendly food processing technologies to entrepreneurs.

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

Answer – D

• The purpose of mega food parks was to provide good infrastructure facilities for food processing industry to increase the processing of perishable items and reduce wastage. Mega food parks established to provide emerging and eco friendly food processing technologies to entrepreneurs.

Q14. Who among the following can join the National Pension System (NPS)?

(a) Resident Indian citizens only
(b) Persons of age from 21 to 55 only
(c) All State Government employees joining the services after the state of notification by the respective State Governments
(d) All Central Government employees including those of Armed Forces joining the services on or after 1st April, 2004

Answer – C

• All State Government employees joining the services after the date of notification by the respective State Governments

Q15. In the context of independent India’s economy, which one of the following was the earliest event to take place?

(a) Nationalization of Insurance companies
(b) Nationalization of State Bank of India
(c) Enactment of Banking Regulation Act
(d) Introduction of First Five-Year Plan

Answer -C

• The Banking Regulation act was passed in 1949 while all others are after 1950s.

Q16. Consider the following statements: The Reserve Bank of India’s recent directives relating to ‘Storage of Payment System Data’, popularly known as data diktat, command the payment system providers that

1. They shall ensure that entire data relating to payment systems operated by them are store in a system only in India.
2. They shall ensure that the systems are owned and operated by public sector
   enterprises.
3. They shall submit the consolidated system audit report to the Comptroller and Auditor General of India by the end of the calendar year

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

Answer – A

• As per RBI’s directive, payment system providers are required to store the data in India only. Other features are not required by RBI.

Q17. Consider the following statements: As per the Industrial Employment (Standing Orders) Central (Amendment) Rules, 2018

1. If rules for fixed-term employment are implemented, it becomes easier for the firms/companies to lay off workers
2. No notice of termination of employment shall be necessary in the case of
   temporary workman

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

• The government has notified fixed-term employment for all sectors through an amendment to the Industrial Employment (Standing Orders) Central Rules, 1946. Fixed-term employment for all sectors will make it easier for companies to hire-and-fire workers along with reducing the role of middlemen. Hence, statement 1 is correct. No notice of termination of employment shall be necessary in the case of temporary workman whether monthly rated, weekly rated or piece rated and probationers or badli workmen. Hence, statement 2 is correct.

Q18. Which of the following factors cause Inflation in a country?

1. Expansion of the Private Sector
2. Black Money
3. Repayment of Public debt

Which of the following factors cause Inflation in a country?

1. Expansion of the Private Sector
2. Black Money
3. Repayment of Public debt

Answer – B

• Option (b) is correct: The following factors cause inflation in a country:
• Increase in Money Supply: Inflation is caused by an increase in the supply of money which leads to an increase in aggregate demand. The higher the growth rate of the nominal money supply, the higher is the rate of inflation.
• Increase in Disposable Income: When the disposable income of the people increases, it raises their demand for goods and services. Disposable income may increase with the rise in national income reduction in taxes or reduction in the saving of the people.
• Increase in Consumer Spending: The demand for goods and services increases when consumer expenditure increases. Consumers may spend more due to conspicuous consumption or the demonstration effect. They may also spend more when they are given credit facilities to buy goods on a hire-purchase and installment basis.
• Cheap Monetary Policy: Cheap monetary policy or the policy of credit expansion also leads to an increase in the money supply which raises the demand for goods and services in the economy.
• Deficit Financing: In order to meet its mounting expenses, the government resorts to deficit financing by borrowing from the public and even by printing more notes. This raises aggregate demand in relation to aggregate supply, thereby leading to an inflationary rise in prices.
• Expansion of the Private Sector: The expansion of the private sector also tends to raise the aggregate demand. Huge investments increase employment and income, hereby creating more demand for goods and services. But it takes time for the output to enter the market. This leads to rise in prices.
• Black Money: The existence of black money in all countries due to corruption, tax evasion etc. increases the aggregate demand. People spend such unearned money extravagantly, thereby creating unnecessary demand for commodities. This tends to raise the price level further.
• Repayment of Public Debt: Whenever the government repays its past internal debt to the public, it leads to an increase in the money supply to the public. This tends to raise the aggregate demand for goods and services and to rise in prices.
• Increase in Exports: When the demand for domestically produced goods increases in foreign countries, this raises the earnings of industries producing export commodities. These, in turn, create more demand for goods and services within the economy, thereby leading to a rise in the price level.

Q19. How do District Rural Development Agencies (DRDAs) help in the reduction of rural poverty in India?

1. DRDAs act as Panchayati Raj Institutions in certain specified backward regions of the country.
2. DRDAs undertake an area-specific scientific study of the causes of poverty and malnutrition and prepare detailed remedial measures.
3. DRDAs secure inter-sectoral and inter-departmental coordination and cooperation for effective implementation of anti-poverty programs.
4. DRDAs watch over and ensure the effective utilization of the funds intended for anti-poverty programs.

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

Answer – B

• DRDAs secure inter-sectoral and inter-departmental coordination and cooperation for the effective implementation of anti-poverty programs.
• DRDAs watch over and ensure effective utilization of the funds intended for anti-poverty programs.

Q20. Which one of the following is not a feature of a Limited Liability Partnership firm?

(a) Partners should be less than 20
(b) Partnership and management need not be separate
(c) Internal governance may be decided by mutual agreement among partners
(d) It is a corporate body with perpetual succession

Answer – A

• A limited liability partnership LLP is a partnership in which some or all partners depending on the jurisdiction has limited liability. LLP shall be a body corporate and a legal entity separate from its partners. It will have perpetual succession. Indian Partnership Act 1932 shall not be applicable to LLPs and there shall not be any upper limit on number of partners in an LLP unlike an ordinary partnership firm where the maximum number of partners can not exceed 20 LLP Act makes a mandatory statement where one of the partner to the LLP should be an Indian.

Q21. Which among the following Indian bodies established the Central Repository of Information on Large Credits (CRILC)?

(a) Reserve Bank of India
(b) Ministry of Finance
(c) Securities and Exchange Board of India
(d) NITI Aayog

Answer – A

• Option (a) is correct: To collect, preserve, and communicate credit data to lenders, the Reserve Bank of India (RBI) has established a Central Repository of Information on Large Credits (CRILC). As a result, banks would be required to provide credit information to CRILC on all borrowers with total fund-based and non-fund-based exposure of Rs. 5 crores or more. The Reserve Bank of India, certain Non-Banking Financial Companies with multiple objectives, and All India Financial Institutions collaborated to create the Central Repository of Information on Large Credit (CRILC) of Scheduled Commercial Banks, which aims to strengthen offsite supervision and early detection of financial distress, among other things.

Q22. Consider the following statements regarding the types of Security Markets in an Economy:

1. In the Primary Market, instruments of the security market are traded directly between the capital raiser and the instrument purchaser.
2. In the Secondary Market, instruments of the security market are traded among the
   primary instrument holders.

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

• Every security market has two complementary primary and Secondary.
• Statement 1 is correct: Instruments of the security market are traded directly between the capital raiser and the instrument purchaser in the Primary Market. For example, a share purchased directly from the issuer, which could be the firm itself. The person in question is referred to as the primary shareholder.
• Statement 2 is correct: Instruments of the security market are traded among holders of primary instruments in the secondary market. Such transactions require an organized trading floor, which is provided by stock exchanges.

Q23. With reference to the Call Money Market (CMM) in India, consider the following statements:

1. It is an interbank money market where funds are borrowed and lent.
2. The funds in the call money market are borrowed/raised for a minimum period up
   to 14 days.

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: Call Money Market (CMM), is an inter-bank money market where funds are borrowed and lent, generally, for one day-that is why this is also known as an overnight borrowing market (also called Money at call). Call money market allows large financial institutions, such as Corporations, banks, and mutual funds, to borrow and lend money at inter-bank rates, the rate of interest that banks charge when they borrow funds from each other.
• Statement 2 is not correct: The Call Money Market: – It funds are raised/borrowed for 14 days (it is also called – Short notice) maximum period. Borrowing in this market may take place against securities or without securities both. The rate of interest in the Call Money Market glides with the repo rate of the time. The principle remains very simple – the longer the period, the higher the interest rate.

Q24. Consider the following statements about the ‘Buyouts’ activity in an economic system:

1. It refers to an investment transaction where one party acquires control of a company, either through an outright purchase or by obtaining a controlling equity interest.
2. In leveraged Buyouts, the Private Equity investor usually helps the existing management of the company to buy out the promoters of the company.

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: A Buyout refers to an investment transaction where the control of a company is acquired by one party, either through an outright purchase or by obtaining a controlling equity interest (at least 51% of the company’s voting shares). Generally, a Buyout is inclusive of the purchase of the target’s outstanding debt, which is also known as assumed debt by the acquirer.
• Statement 2 is not correct: Private Equity (PE) investors participate in two types of buyouts of firms (a PE-backed buyout simply means that the PE investor takes a controlling stake i.e., between 50-100 percent in a company):
• Management Buyout (MBO): Here, the PE investor usually helps the existing management of the company to buy out the promoters of the company. The PE investor takes a majority stake in return.
• Leveraged Buyout (LBO): Here a large portion of funds in acquiring the company is financed by the normal ratio being 70 percent debt and 30 percent equity.

Q25. Consider the following statements regarding the Indian Depository Receipts (IDRs):

1. It is a mechanism that allows investors in India to invest in listed foreign companies.
2. They are denominated in foreign currencies and issued by a Domestic Depository in India.

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

• Indian Depository Receipts (IDRs) are an instrument in the form of a depository receipt established by an Indian depository in India against the underlying equity shares of the issuing firm, according to the Companies (Issue of Indian Depository Receipts) Rules. 2004. Foreign firms would issue shares to an Indian depository, National Security Depository Limited, which would then issue Depository Receipts to Indian investors in an Indian Depository Receipts (IDRs).
• Statement 1 is correct: IDRs (Indian Depository Receipts) are a method that allows Indian investors to invest in listed foreign companies, especially multinational corporations, in Indian rupees. Indian Depository Receipts allow the holder to participate in the ownership of equity shares of a foreign company.
• Statement 2 is not correct: Indian Depository Receipts (IDRs) are issued by a Domestic Depository in India and are denominated in Indian Rupees. IDRs can be traded on any stock exchange in India. Indian Depository Receipts are available to anybody who can invest in an Initial Public Offering.

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