Indian Economy- PYQs 2021
- ✅ — Statement is definitely true
- 🟢 — Statement is likely true
- 🔴 — Statement is likely false
- ❌ — Statement is definitely false
- 💡 — View hint for guidance
- ⚪ / ⚫ — Mark statement(s) for conflict comparison
Q. With reference to India, consider the following statements:
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1)
Retail investors through Demat account can invest in Treasury Bills and Government of India Debt Bonds in the primary market.
Hint: The RBI’s Retail Direct Scheme allows individuals to open gilt accounts and invest directly in government securities, including T-bills and bonds.
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2)
The “Negotiated Dealing System–Order Matching” is a government securities trading platform of the Reserve Bank of India.
Hint: NDS-OM is an RBI-operated electronic platform mainly for institutional trading in G-Secs—used by banks, PDs, and eligible entities.
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3)
The “Central Depository Services Ltd” is jointly promoted by the Reserve Bank of India and the Bombay Stock Exchange.
Hint: CDSL deals with dematerialized shares and securities; such depositories fall under SEBI’s domain and are not promoted by RBI.
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Selected: 0/2
✅ Correct answer: (b) 1 and 2
Retail investors can invest in T-bills and G-Secs via RBI’s Retail Direct platform, and NDS-OM is RBI’s electronic trading system for government securities. Statement 3 is incorrect as CDSL is promoted by BSE and other financial institutions—not by RBI.
Q. In India, the central bank’s function as the “lender of last resort” usually refers to which of the following?
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1)
Lending to trade and industry bodies when they fail to borrow from other sources
Hint: The RBI’s “lender of last resort” role applies primarily to the banking system.
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2)
Providing liquidity to the banks having a temporary crisis
Hint: When banks face short-term liquidity crunch or loss of confidence, the RBI steps in to prevent systemic collapse.
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3)
Lending to governments to finance budgetary deficits
Hint: Budgetary deficits are handled via market borrowing; direct lending by RBI is restricted under the FRBM framework.
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Selected: 0/2
✅ Correct answer: (b) 2 only
Why? The “lender of last resort” function means RBI provides emergency liquidity to banks facing temporary crises to maintain financial stability.
Q. The money multiplier in an economy increases with which one of the following?
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1)
Increase in the Cash Reserve Ratio in the banks
Hint: Higher CRR means banks must keep more reserves and can lend less.
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2)
Increase in the Statutory Liquidity Ratio in the banks
Hint: Like CRR, a higher SLR locks more funds in government securities, shrinking lendable resources.
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3)
Increase in the banking habit of the people
Hint: When people prefer deposits over cash, currency leakage declines; banks can re-lend more.
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4)
Increase in the population of the country
Hint: Population growth doesn’t directly change the deposits.
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Selected: 0/2
✅ Correct answer: (b) Increase in the banking habit of the people
Why? A rise in banking habit raises the deposit–currency ratio, allowing banks to create more credit per unit of base money—thereby increasing the money multiplier.
Q. With reference to the Indian economy, demand-pull inflation can be caused/increased by which of the following?
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1)
Expansionary policies
Hint: Expansionary monetary or fiscal policies inject more money or credit into the economy.
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2)
Fiscal stimulus
Hint: Government spending or tax cuts raise disposable income.
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3)
Inflation-indexing wages
Hint: It maintains real wages, preventing a fall in purchasing power, but does not raise purchasing power.
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4)
Higher purchasing power
Hint: More disposable income leads to greater consumption, increasing demand for goods and services.
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5)
Rising interest rates
Hint: Higher rates make borrowing costlier, reducing consumption and investment.
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Selected: 0/2
✅ Correct answer: (a) 1, 2 and 4 only
Why? Expansionary policies, fiscal stimulus, and higher purchasing power directly boost aggregate demand, leading to demand-pull inflation. Other factors either neutralize or reduce demand.
Q. Consider the following statements:
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1)
The Governor of the Reserve Bank of India (RBI) is appointed by the Central Government.
Hint: The RBI, though autonomous, functions under the Ministry of Finance, Govt of India.
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2)
Certain provisions in the Constitution of India give the Central Government the right to issue directions to the RBI in the public interest.
Hint: The RBI’s powers and relationship with the government are defined by the RBI Act, 1934.
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3)
The Governor of the RBI draws his power from the RBI Act.
Hint: The RBI’s powers and relationship with the government are defined by the RBI Act, 1934.
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Selected: 0/2
✅ Correct answer: (c) 1 and 3 only
Why? The RBI Governor is appointed by the Central Government and derives authority from the RBI Act, 1934. The Constitution has no direct provision empowering the government over RBI.
Q. With reference to the casual workers employed in India, consider the following statements:
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1)
All casual workers are entitled to Employees’ Provident Fund (EPF) coverage
Hint: Only employees in establishments covered under the EPF Act and earning above the threshold are eligible.
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2)
All casual workers are entitled to regular working hours and overtime payment
Hint: Labour laws require overtime payment if working beyond prescribed hours.
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3)
The government can by notification specify that an establishment or industry shall pay wages only through its bank account
Hint: The Payment of Wages Act allows the government to mandate electronic payment of wages to ensure traceability and prevent underreporting.
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Selected: 0/2
✅ Correct answer: (b) 2 and 3 only
Why? Casual workers do not automatically get EPF coverage, but they are entitled to overtime if they work extra, and the government can mandate wage payments through bank accounts for transparency.
Q. Which among the following steps is most likely to be taken at the time of an economic recession?
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1)
Cut in tax rates accompanied by increase in interest rate
Hint: A recession means declining output and demand. Policy must stimulate spending and investment. Lower taxes increase disposable income, while higher interest rates discourage borrowing and investment.
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2)
Increase in expenditure on public projects
Hint: Direct government spending can create jobs and raise incomes.
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3)
Increase in tax rates accompanied by reduction of interest rate
Hint: Higher tax rates decrease disposable income, while lower interest rates encourage borrowing and investment.
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4)
Reduction of expenditure on public projects
Hint: Cutting public spending will reduce jobs and worsen the downturn.
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Selected: 0/2
✅ Correct answer: (b) Increase in expenditure on public projects
Why? Expansionary fiscal policy—such as higher government spending—directly boosts aggregate demand and employment during a recession, making option (b) the most appropriate.
Q. Other things remaining unchanged, market demand for a good might increase if:
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1)
Price of its substitute increases
Hint: If a good becomes costlier, consumers tend to shift towards its substitute.
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2)
Price of its complement increases
Hint: Complements are used together (like car and petrol). Higher price of a complement reduces demand.
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3)
The good is an inferior good and income of the consumers increases
Hint: As income rises, people switch from inferior goods to normal goods, reducing demand for the inferior good.
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4)
Its price falls
Hint: Lower price makes the good more affordable, increasing demand.
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Selected: 0/2
✅ Correct answer: (a) 1 and 4 only
Why? Demand increases when the price of a substitute rises or when the good’s own price falls. Higher prices of complements or rising income for inferior goods reduce demand.
Q. With reference to Urban Cooperative Banks in India, consider the following statements:
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1)
They are supervised and regulated by local boards set up by the State Governments.
Hint: Cooperative banks operate in a dual regulatory framework—both RBI and the Registrar of Cooperative Societies have roles.
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2)
They can issue equity shares and preference shares.
Hint: Recent RBI amendments (post-2020) allow Urban Cooperative Banks to raise capital through equity and preference shares under specified conditions.
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3)
They were brought under the purview of the Banking Regulation Act, 1949 through an Amendment in 1966.
Hint: The 1966 amendment extended the Banking Regulation Act to UCBs, giving RBI regulatory powers over their banking functions.
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Selected: 0/2
✅ Correct answer: (b) 2 and 3 only
Why? Urban Cooperative Banks are regulated by RBI under the Banking Regulation Act (1966 amendment) and can issue equity and preference shares to raise capital; sole state board supervision is incorrect.
Q. Indian Government Bond yields are influenced by which of the following?
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1)
Actions of the United States Federal Reserve
Hint: Global capital flows respond to US interest rate changes; higher US rates can attract funds away from India, affecting bond prices.
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2)
Actions of the Reserve Bank of India
Hint: RBI’s policy rates and open market operations influence domestic bond prices.
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3)
Inflation and short-term interest rates
Hint: Higher inflation erodes real returns; short-term rates set the benchmark for longer-term yields.
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Selected: 0/2
✅ Correct answer: (d) 1, 2 and 3
Why? Indian government bond yields respond to domestic RBI policies, inflation trends, and global factors like US Fed actions that affect capital flows.
Q. Which of the following can be included in Foreign Direct Investments (FDI)?
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1)
Foreign currency convertible bonds (FCCBs)
Hint: Bonds issued in foreign currency that can be converted into equity shares of the issuing company count as FDI.
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2)
Foreign institutional investment (FII) with certain conditions
Hint: Investments by foreign institutional investors; if they acquire significant equity (e.g., more than 10% of a company), it can be treated as FDI.
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3)
Global depository receipts (GDRs)
Hint: Certificates issued abroad representing shares of an Indian company; they count as FDI.
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4)
Non-resident external (NRE) deposits
Hint: Bank deposits in India made by non-residents are purely debt and do not count as FDI.
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Selected: 0/2
✅ Correct answer: (a) 1, 2 and 3
Why? FDI includes instruments that result in equity participation in Indian companies, such as FCCBs, GDRs, and significant FII holdings. NRE deposits are purely debt and do not qualify as FDI.
Q. Consider the following statements: The effect of the devaluation of a currency is that it necessarily:
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1)
Improves the competitiveness of the domestic exports in the foreign markets
Hint: A weaker domestic currency makes exports cheaper abroad.
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2)
Increase the foreign value of the domestic currency
Hint: Devaluation reduces the value of the currency.
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3)
Improves the trade balance
Hint: Devaluation will make exports cheaper. This may lead to more volume of exports but that may take some time. Recall J-curve effect.
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Selected: 0/2
✅ Correct answer: (a) 1 only
Why? Devaluation lowers the domestic currency value, making exports cheaper and more competitive. The trade balance may worsen initially before improving over time due to the J-curve effect.
Q. Which one of the following effects of creation of black money in India has been the main cause of worry to the Government of India?
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1)
Diversion of resources to the purchase of real estate and investment in luxury housing
Hint: Very concerning but is it the main cause of worry?
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2)
Investment in unproductive activities and purchase of precious stones, jewellery, gold etc.
Hint: Very concerning but is it the main cause of worry?
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3)
Large donations to political parties and growth of regionalism
Hint: An indirect effect of black money.
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4)
Loss of revenue to the State Exchequer due to tax evasion
Hint: Directly reduces government funds for public spending and development.
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Selected: 0/2
✅ Correct answer: (d) Loss of revenue to the State Exchequer due to tax evasion
Why? The primary concern of black money is the loss of tax revenue, which reduces the government’s capacity for public expenditure and economic development.
Q. Which one of the following is likely to be one of the most inflationary in its effects?
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1)
Repayment of public debt
Hint: Government repays money to bondholders; money flows from government to the public.
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2)
Borrowing from the public to finance a budget deficit
Hint: Government borrows from citizens; money moves from public to government.
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3)
Borrowing from the banks to finance a budget deficit
Hint: Government borrows from banks; money moves from banks’ reserves to the government.
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4)
Creation of new money to finance a budget deficit
Hint: New money is created by the central bank and injected into the economy via government spending. Directly increases the money supply without a corresponding rise in goods/services.
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Selected: 0/2
✅ Correct answer: (d) Creation of new money to finance a budget deficit
Why? Injecting newly created money into the economy increases purchasing power without increasing output, making it the most inflationary option.