La Excellence UPSC Prelims 2021 Test Series
Revision Test - 03_Explanations (23-09-2021)
1. Answer: B
Explanation: The bond is a debt
security, under which the issuer owes
the holders a debt and (depending on
the terms of the bond) is obliged to pay
them interest (the coupon) or to repay
the principal at a later date, termed the
maturity date. Interest is usually
payable at fixed intervals.
A bondholder will not be impacted by
the future increase in interest rate
because the interest rate on his bond
will remain the same. It can be an
indirect loss as buying the bond
sometime later might have given him
more interest. Higher inflation is bad for
bondholder as it will lower down his real
return from the bond investment.
Educational Objective: To know about
bonds.
2. Answer: C
Explanation: Statements (1), (2) and (4)
are correct: A government security is a
bond issued by a government authority
with a promise of repayment upon
maturity. These securities are
considered low-risk, since they are
backed by the taxing power of the
government. In India, RBI regulates the
government securities market by
arranging their primary auctions. The
commercial banks are statutorily
required to buy a minimum worth of
these securities.
Statement (3) is incorrect. Interest rates
on government securities are market
determined and not fixed by either RBI
or government
Educational Objective: To know about
government securities.
3. Answer: D
Explanation: All the given instruments
are instruments of fiscal policy. Fiscal
policy is the means by which a
government adjusts its spending levels
and tax rates to monitor and influence a
nation's economy. It is the sister
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strategy to monetary policy through
which a central bank influences a
nation's money supply. These two
policies are used in various
combinations to direct a country's
economic goals. Any expenditure or
revenue collected by the government is a
part of fiscal policy. PDS is a subsidy
borne by government and thus also part
of fiscal policy.
Educational Objective: To know about
instruments of fiscal policy
4. Answer: B
Explanation: Statement (1) is incorrect:
The Balance of Payments (BoP) records
all economic transactions between
residents of a country and the rest of
the world. The BoP account consists of
Current account, Capital account, and
Financial Account. Thus, BOP is a
concept reflecting international
transactions only, either by the
government or other sectors and does
not include any domestic transaction.
Statement (2) is correct: A country gets
foreign exchange not only from
exporting goods and services, but also,
from capital flows, whether by way of
foreign investment, commercial
borrowings or external assistance. The
bigger chart shows that for most years,
net capital flows into India have been
more than CADs. Therefore, BOP
surplus in India can be accounted for
through the surplus in the capital
accounts.
Educational Objective: To know about
Balance of Payments
5. Answer: B
Explanation: Tax is a mandatory fee
imposed upon individuals or
corporations by the Central and the
State Government to help build the
economy of a country by meeting
various public expenses. Taxes are
broadly divided into two categories-
Direct and Indirect taxes. Direct Tax: It
 is a tax levied directly on a taxpayer who
pays it to the Government and cannot
pass it on to someone else.
Examples: Income Tax, Corporate Tax,
Wealth Tax, Estate Duty etc Indirect
Tax: It is a tax levied by the Government
on goods and services and not on the
income, profit or revenue of an
individual and it can be shifted from one
taxpayer to another.
Examples: Customs Duty, Central
Excise Duty, Service Tax, Sales Tax,
Value Added Tax (VAT) etc Now these
indirect taxes are replaced by the Goods
and Services Tax (GST).
Educational Objective: To know about
taxation of India.
6. Answer: A
Explanation: Statements (1) and (3)
correct: A fiscal deficit occurs when a
government's total expenditures exceed
the revenue that it generates, excluding
borrowings. Higher industrial growth
and FDI tend to bring more tax revenue
to the government reducing FD. Waiving
off loans and providing food security
increase government expenditure thus,
increasing Fiscal deficit.
Educational Objective: To know about
fiscal policy
7. Answer: D
Explanation: All the given statements
are correct.
Repo rate is the rate at which the
central bank of a country lends money
to commercial banks in the event of any
shortfall of funds. Repo rate issued by
monetary authorities to control inflation.
Banks can take loans from RBI under
Repo Rate by repurchasing the
government securities at a higher price
i.e. Banks sell their securities to RBI
with an agreement to repurchase these
in future at higher prices.
Reverse repo rate is the rate at which
the central bank of a country borrows
money from commercial banks within
the country. It is a monetary policy
instrument which can be used to control
the money supply in the country. Banks
can earn interest by parking their
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surplus with RBI under Reverse Repo
Rate.
Key differences between Repo Rate and
Reverse Repo Rate
 Repo rate is charged by RBI when
commercial banks sell their
securities. Whereas, reverse repo
rate is the rate at which RBI borrows
money from banks within the
country.
 While high repo rate drains excess
liquidity from the market as the
banks have to pay high interest to
obtain loan from RBI, high reverse
repo rate injects liquidity into the
economic system by offering high
profits to banks.
 The repo rate is always higher than
the reverse repo rate.
 While repo rate is used to control
inflation, reverse repo rate is used to
control money supply in the market.
 The main objective of repo rate is to
deal with deficiency of funds.
Whereas, reverse repo rate deals
with liquidity in the economy. Repo
Rate involves selling securities to
RBI with a motive to repurchase it in
the future at a fixed rate of interest
but reverse repo rate is mere
transferring of funds from one bank
account to RBI account.
Educational Objective: To know about
monetary policy.
8. Answer: C
Explanation: In order to deal with the
NPA and bad loans, the government has
announced its EASE reform agenda
along with a Rs 2.1 lakh crore capital
infusion plan of which Rs 80,000 crore
have already been disbursed.
EASE Programme
 Six pillars: The reform plan of the
banks sets a goal of EASE and the
six pillars to achieve this include
Customer Responsiveness,
Responsible Banking, Credit Off
Take, PSBs As Udyami Mitra,
Deepening Financial Inclusion &
Digitalization, And Developing
Personnel.
  Evaluation of Performance: Whole
Time Directors of PSBs would be
assigned theme wise reforms for
implementation. And the Bank Board
in this regard would evaluate their
performance.
 Specialized Monitoring Agency:
Under EASE, banks are to set up
specialized monitoring agencies for
loans above Rs 250 crore and a
separate vertical for nonperforming
assets apart from rationalizing
overseas businesses.
 Need To Have Minimum 10%
Exposure In Consortium Loans:
Banks also need to have a minimum
10% exposure in consortium loans to
prevent a situation in which too
many lenders are involved when it
comes to debt resolution. Other
Agenda: The recapitalization and
reform agenda include a commitment
to banking services within five km of
every village, a refund within 10 days
of any unauthorized debit in
electronic transactions, a mobile app
designed to locate banking outlets,
and a mobile ATM in every
underserved district.
 Independent Survey: The govt also
said that it would hire an
independent agency to conduct a
survey of the PSBs on the aspects of
EASE to measure public perception
about improvements in access and
service quality. The results of the
survey would be made public each
year.
 Overall Goal: Taken together the
recap & reform agenda is sharply
focused on strengthening PSBs,
increasing lending to MSMEs and
making it easier for MSMEs and
retail customers to transact as well
as significantly increasing access to
banking services.
Educational Objective: To know about
EASE Agenda.
9. Answer: C
Explanation: Statement (1) is incorrect:
Currency appreciation is an increase in
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the value of one currency regarding
another currency. Currencies appreciate
against each other for a variety of
reasons, including government policy,
interest rates, trade balances and
business cycles. Currency depreciation
is a fall in the value of a currency in a
floating exchange rate system. Currency
depreciation can occur due to any
number of reasons – economic
fundamentals, interest rate differentials,
political instability, risk aversion among
investors and so on.
Statement (2) is correct: Devaluation is a
deliberate downward adjustment of the
value of a country's currency relative to
another currency, group of currencies or
standard. Countries that have a fixed
exchange rate or semi-fixed exchange
rate use this monetary policy tool. It is
often confused with depreciation and is
the opposite of revaluation.
Dirty float:
 A dirty float is a floating exchange
rate where a country's central bank
occasionally intervenes to change
the direction or the pace of change
of a country's currency value.
 In most instances, the central bank
in a dirty float system acts as a
buffer against an external economic
shock before its effects become
disruptive to the domestic economy.
A dirty float is also known as a
"managed float."
Educational Objective: To know about
exchange rates
10. Answer: A
Explanation: Statement (1) is correct:
The minimum paid-up equity capital for
small finance banks shall be Rs. 100
crores.
Statement (2) is incorrect: The
guidelines for small finance banks
provide that such banks shall primarily
undertake basic banking activities of
acceptance of deposits and lending to
unserved and underserved sections.
Payment banks cannot offer loans.
Statement (3) is incorrect: All prudential
norms and regulations of RBI as
 applicable to existing commercial banks
including requirement of maintenance of
Cash Reserve Ratio (CRR) and Statutory
Liquidity Ratio (SLR) are applicable to
Small Finance Banks.
Educational Objective: To know about
small finance banks
11. Answer: A
Explanation: Statement 1 is correct:
Real exchange rate is the ratio of foreign
to domestic prices, measured in the
same currency. If the real exchange rate
is equal to one, currencies are at
purchasing power parity.
Statement 2 is incorrect: The real
exchange rate (not Purchasing Power
Parity) is often taken as a measure of a
country’s international competitiveness.
Educational Objective: To know about
foreign exchange
12. Answer: C
Explanation: Statement (1) is correct:
Angel tax is a term used to refer to the
income tax payable on capital raised by
unlisted companies via issue of shares
where the share price is seen in excess
of the fair market value of the shares
sold. The excess realisation is treated as
income and taxed accordingly. The tax
was introduced in the 2012 Union
Budget by then finance minister Pranab
Mukherjee to arrest laundering of funds.
It has come to be called angel tax since
it largely impacts angel investments in
start-ups.
Statement 2 is correct: The government
has put in place a mechanism for start-
ups to secure exemption from the ‘Angel
Tax’ with retrospective effect. Start-ups
with total investment including funding
from angel investors up to Rs. 10 crores
can seek approval from an eight-
member government board for
exemption from tax. The investor must
have paid tax above Rs. 50 lakhs and
should have net worth of more than Rs.
2 crores
Educational Objective: To know about
angel tax
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13. Answer: D
Explanation: Statement 1 is incorrect:
Financial Stability and Development
Council (FSDC) is not a statutory body.
It was first mooted by the Raghuram
Rajan Committee in 2008.
Statement 2 is correct: FSDC is an apex-
level body constituted by the
government of India to strengthen and
institutionalise the mechanism of
maintaining financial stability, financial
sector development, inter-regulatory
coordination along with monitoring
macro-prudential regulation of economy.
Statement 3 is incorrect: The Council is
headed by the Finance Minister. Other
members of the FSDC are
 The Minister of State responsible for
the Department of Economic Affairs
(DEA)
 The Secretary of Department of
Electronics and Information
Technology
 The Chairperson of the Insolvency
and Bankruptcy Board of India
(IBBI) and
 The Revenue Secretary
Educational Objective: To know about
Financial Stability and Development
Council (FSDC)
14. Answer: B
Explanation: Usually security exchanges
and commodity trading are regulated by
separate entities. By creating universal
exchange, SEBI has allowed the same
exchange to offer products in the equity,
commodity derivatives, and debt and
currency segments. This comes after
merging of Forward Markets
Commission with SEBI. It will promote
competition in the market for these
products and greater volume can result
in streamlining of such transactions,
translating into lower transaction cost.
If an exchange like BSE starts dealing in
wide spectrum of products, traders and
stock brokers need to hold just a single
account with such exchange to deal in
both equity and commodities, which was
done through 2 separate accounts
 earlier, one with BSE and one with MCX
(just an example).
Educational Objective: To know about
universal exchange
15. Answer: C
Explanation: The Union Government
launched the Pradhan Mantri Annadata
Aay Sanrakshan Abhiyan (PM-AASHA)
to ensure that poor farmers growing
pulses and oilseeds benefit from higher
minimum support prices (MSPs)
announced by the government. The new
scheme will be a mix of sub-schemes,
which will involve direct procurement
from farmers (price support scheme or
PSS), paying them for losses incurred
when wholesale market prices are lower
than announced MSPs (price deficiency
payment scheme or PDPS), and
procurement by private traders at MSP
as a pilot.
The decision to launch a new
mechanism for ensuring that farmers
benefit from MSPs comes against the
backdrop of a promise made in the
budget this year and the government
fixing higher MSPs for rain-fed kharif
crops in July to ensure that the farmers
receive 50% returns over their costs of
production, which is in line with
government’s commitment to ‘Double
farmer’s income by 2022’ - an
affirmative action in direction of
inclusive and sustainable development
of country.
India’s public procurement of food
grains is market distortionary, as MSP
comes under Amber box subsidy
(defined under Agreement on
Agriculture), and there have been many
disputes in WTO over the same. Hence,
such measures will shift the government
support from Amber box (direct cash
payment) to Blue box (income support
measures). Hence, Option (c) is the
correct answer.
Educational Objective: To know about
Pradhan Mantri Annadata Aay
Suraksha Abhiyaan (PM-AASHA)
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16. Answer: D
Explanation: Statement (1) is incorrect:
The Society for Worldwide Interbank
Financial Telecommunication (SWIFT) is
an industry-owned limited liability
cooperative society set up under Belgian
law and controlled by its member banks
(including central banks) and other
financial institutions. SWIFT’s business
is to supply secure messaging services
and interface software, to contribute to
greater automation of financial
transaction processes and to provide a
forum for financial institutions to
address issues of common concern in
the area of financial communication
services. Messaging services are
provided to banks, broker/dealers and
investment managers, as well as to
market infrastructures in payments,
treasury, securities and trade. SWIFT is
headquartered in Belgium.
Statement (2) is incorrect: SWIFT does
not facilitate funds transfer; rather, it
sends payment orders, which must be
settled by correspondent accounts that
the institutions have with each other.
There are four key areas that SWIFT
services fall under in the financial
marketplace-
 Securities
 Treasury & Derivatives
 Trade Services and Payments
 Cash Management
Hence, Option (d) is the correct answer.
Educational Objective: To know about
SWIFT
17. Answer: C
Explanation: As per RBI notifications,
Priority Sector includes the following
categories:
 Agriculture
 Micro, Small and Medium
Enterprises
 Export Credit
 Education
 Housing
 Social Infrastructure
 Renewable Energy
 Others
 Statement (1) is correct and Statement
(2) is incorrect: The Priority Sector
Lending (PSL) norms are applicable to
domestic Scheduled Commercial Banks
(excluding Regional Rural Banks and
Small Finance Banks) and Foreign
banks with 20 branches and above.
Total Priority Sector target of 40 percent
for foreign banks with less than 20
branches has to be achieved in a phased
manner, and sub-classification in
Agriculture, SMEs and Advances to
Weaker Sections is not applicable.
Statement (3) is correct: Priority Sector
Lending Certificates (PSLCs) are a
mechanism to enable banks to achieve
the priority sector lending target and
sub-targets by purchase of these
instruments in the event of shortfall.
This also incentivizes surplus banks as
it allows them to sell their excess
achievement over targets thereby
enhancing lending to the categories
under priority sector. Under the PSLC
mechanism, the seller sells fulfilment of
priority sector obligation and the buyer
buys the obligation with no transfer of
risk or loan assets, or banks can count
investments made in the RIDF and other
funds with NABARD, NHB, SIDBI and
MUDRA Ltd as part of their priority
sector lending target.
Educational Objective: To know about
Priority Sector Lending
18. Answer: C
Explanation: Statement 1 is incorrect.
The World Economic Forum is an
independent international organization
committed to improving the state of the
world by engaging business, political,
academic and other leaders of society to
shape global, regional and industry
agendas. It is not the aegis of United
Nations.
Statement 2 is correct. It was
established in 1971 as a not-for-profit
foundation and is headquartered in
Geneva, Switzerland.
Statement 3 is correct. It releases
Inclusive Development Index. Inclusive
Development Index (IDI) measures
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progress of 103 economies on three
individual pillars – growth and
development; inclusion; and inter-
generational equity. It has been divided
into two parts. The first part covers 29
advanced economies and second 74
emerging economies. India ranks 62nd
among the emerging economies in year
2018.
Educational Objective: To know about
World Economic Forum
19. Answer: C
Explanation: HEDGE FUND: It is an
offshore investment fund, typically
formed as a private limited partnership
that engages in speculation using credit
or borrowed capital. Hence, option A is
incorrect.
TAX INCIDENCE: It means the ultimate
distribution of the burden i.e. who bears
the ultimate burden of the tax. Hence,
option (b) is incorrect.
TOBIN TAX: It is a tax on foreign
exchange transaction mainly in the
nature of portfolio investment as such
as investment by way of volatile
financial flows moves from one country
to another in search of quick profits and
often brings about volatility. It is
estimated that close to 5 trillion US
dollars per day globally may be the size
of such investment. The tax has the
potential to be applicable not only to
currency markets but another market as
well, particularly after the experience
with regard to global financial crisis.
Such a tax is considered necessary to
recover the bailout cost incurred by the
government to avoid collapse of the
financial sector. Hence, option (c) is
correct.
FISCAL DRAG: Fiscal drag is a concept
where inflation and earnings growth
may push more taxpayers into higher
tax brackets. Therefore, fiscal drag has
the effect of raising government tax
revenue without explicitly raising tax
rates. Hence, option (d) is incorrect
Educational Objective: To know about
Tobin Tax.
20. Answer: A
Explanation: Statement (1) is correct:
The indirect taxes promote inequality in
the distribution of income as poor bear
more burden of indirect taxes.
Statement (2) is incorrect: Tax
expenditure, as the word indicate, does
not relate to the expenditures incurred
by the Government in the collection of
taxes. Rather it refers to the opportunity
cost of taxing at concessional rates or
the opportunity cost of giving
exemptions, deductions, rebates etc. to
the tax payers. Tax expenditure is also
known as revenue foregone. It is the
revenue losses attributable to tax
provisions that often result from the use
of the tax system to promote social goals
without incurring direct expenditures. A
statement of the Revenue Foregone is
presented to the Parliament at the time
of Union Budget by way of a separate
budget document.
Educational Objective: To know about
Public finance
21. Answer: D
Explanation: Statement 1 is incorrect:
Bonds are used for raising both the
Long and the Short-term capital.
Statement 2 is incorrect: Bonds are
tradable in the financial market after
their initial sale.
Statement 3 is incorrect: Bond yield is
the difference between Cost Price and
Selling price. Bond yield is a good
indicator of profitability. Bonds come
with a fixed maturity value, so, if bond
yield is increasing, it means a decrease
in selling price of bond, which means
the bond is not attracting demand & it’s
price in market is falling.
Educational Objective: To know about
Bonds
22. Answer: D
Explanation: Statement 1 is incorrect:
Capital Account consists of receipt of
loans from abroad, sale of assets or
shares in foreign companies as well as
repayment of loans, purchase of assets
or shares in foreign countries.
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Statement 2 is incorrect: External
Commercial Borrowing, short term debt,
Intergovernmental, bilateral and
multilateral loans and governmental
aids are part of capital account whereas
Grants, remittances and gifts form part
of Transfer payment under the Current
Account.
Educational Objective: To know about
External Commercial Borrowings.
23. Answer: C
Explanation: Deficit financing is the
budgetary situation where expenditure
is higher than the revenue. It is a
practice adopted for financing the excess
expenditure with outside resources. The
expenditure-revenue gap is financed by
either printing of currency or through
borrowing. Nowadays most
governments, both in the developed and
developing world, are having deficit
budgets and these deficits are often
financed through borrowing. Hence the
fiscal deficit is the ideal indicator of
deficit financing.
Educational Objective: To know about
Deficit Financing
24. Answer: A
Explanation: Statement 1 is correct: A
rise in price of foreign exchange will
reduce the foreigner’s cost (in terms of
USD) while purchasing products from a
country. This increases the export of
country.
Statement 2 is correct: A Trade surplus
means that the export of a country is
greater than its imports. The export of a
country helps in bringing foreign
currency. So surplus trade of balance
trade surplus will bring more foreign
currency. As a result of which the
domestic currency will appreciate.
Statement 3 is incorrect: The rise in the
interest rates at home often leads to
shortage of money/currency supply in
an economy due to more demand of the
domestic currency (both from the
domestic and foreign players) in
expectation of higher returns in private
market, thereby leads to an appreciation
of the domestic currency.
 Educational Objective: To know about • Our planners also feared the
foreign exchange possibility of foreign exchange
25. Answer: C being spent on import of luxury
Explanation: Gross National Product goods if no restrictions were placed
(GNP) is Gross Domestic Product (GDP) on imports. Nor was any serious
plus net factor income from abroad. thought given to promote exports
GNP measures the monetary value of all until the mid- 1980s.
the finished goods and services Educational objective: To know about
produced by the country’s factors of evolution of India’s industrial trade
production irrespective of their location. policy
When depreciation is deducted from the 27. Answer: B
GNP, we get Net National Product (NNP). Explanation: Statement 1 is
Hence, Pairs 1 and 3 are correctly incorrect: The Green Revolution
matched. exacerbated the disparities
National Income is NNP at factor cost, regionally and between large and
not market price. Hence, Pair 2 is not small farmers.
correctly matched. Green Revolution
Educational Objective: To know about • The Green Revolution
National Income Accounting. exacerbated the disparities
26. Answer: C regionally and between large and
Explanation: Trade policy adopted small farmers. There was
by India after Independence unwillingness and inability to
• The industrial policy that we redistribute land. Economists
adopted was closely related to the state that the benefits of
trade policy. In the first seven economic growth have not
plans, trade was characterised by trickled down to the poor.
what is commonly called an • As pointed out by the famous
inward-looking trade strategy. economist C.H. Hanumantha Rao,
• Technically, this strategy is a good proportion of the rice
called import substitution. This and wheat produced during the
policy aimed at replacing or green revolution period (available
substituting imports with as marketed surplus) was sold by
domestic production. For the farmers in the market. As a
example, instead of importing result, the price of food grains
vehicles made in a foreign declined relative to other items of
country, industries would be consumption. The low-income
encouraged to produce them in groups, who spend a large
India itself. In this policy, the percentage of their income on food,
government protected the domestic benefited from this decline in
industries from foreign relative prices. The green
competition. revolution enabled the government
Hence, option C is correct to procure sufficient amount of
• The policy of protection is based on food grains to build a stock which
the notion that industries of could be used in times of food
developing countries are not in a shortage.
position to compete against the • The farmers who could benefit
goods produced by more developed from HYV seeds required reliable
economies. It is assumed that if the irrigation facilities as well as the
domestic industries are protected, financial resources to purchase
they will learn to compete in the fertiliser and pesticide. As a
course of time. result, in the first phase of the

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 green revolution (approximately
mid 1960s upto mid 1970s), the
use of HYV seeds was restricted to
the more affluent states such as
Punjab, Andhra Pradesh and
Tamil Nadu. Further, the use of
HYV seeds primarily benefited the
wheat growing regions only. In the
second phase of the green
revolution (mid-1970s to mid-
1980s), the HYV technology spread
to a larger number of states and
benefited more variety of crops.
Hence, Option 2 and 3 are correct
Educational objective: To know about
green revolution
28. Answer: C
Explanation: Suppose due to future
growth prospects in India investors
from across the world increase their
investments in Indian bonds which
under such circumstances, are likely
to yield a high rate of return. They
will buy these bonds with foreign
currency. Since one cannot purchase
goods in the domestic market with
foreign currency, a person who sells
these bonds to foreign investors will
exchange her foreign currency
holding into rupee at a commercial
bank.
This increased money supply may
not altogether be good for the
economy’s health. If the volume of
goods and services produced in the
economy remains unchanged, the
extra money will lead to increase in
prices of all commodities. People have
more money in their hands with which
they compete each other in the
commodities market for buying the
same old stock of goods. As too much
money is now chasing the same old
quantities of output, the process ends
up in bidding up prices of every
commodity -- an increase in the
general price level, which is also
known as inflation. RBI often
intervenes with its instruments to
prevent such an outcome. In the
above example, RBI will undertake
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an open market sale of government
securities of an amount equal to the
amount of foreign exchange inflow in
the economy, thereby keeping the
stock of high- powered money and
total money supply unchanged.
Thus, it sterilises the economy
against adverse external shocks.
This operation of RBI is known as
sterilisation. Money supply is,
therefore, an important
macroeconomic variable. Its overall
influence on the values of the
equilibrium rate of interest, price
level and output of an economy is of
great significance
Hence, option C is correct
Educational objective: To know about
measures RBI can take to manage
money supply
29. Answer: B
Explanation: Oligopoly
If the market of a particular
commodity consists of more than one
seller but the number of sellers is few,
the market structure is termed
oligopoly.
The special case of oligopoly where
there are exactly two sellers is termed
duopoly.
In analysing this market structure, we
assume that the product sold by the
two firms is homogeneous and there is
no substitute for the product,
produced by any other firm.
Given that there are a few firms, the
output decisions of any one firm
would necessarily affect the market
price and therefore the amount sold
by the other firms as also their total
revenues.
It is, therefore, only to be expected
that other firms would react to protect
their profits.
This reaction would be through taking
fresh decisions about the quantity and
price of their own output. There are
various ways in which this can be
theorised.
Educational objective: To know about
different kinds of market competitions
30. Answer: B
Explanation
Statement 1 is incorrect: A public
sector company/unit can also
participate in disinvestment. Ex: LIC
has lost more than Rs. 20,000 crore
in just 5 PSU stocks which the govt.
made it buy in 2 yrs.
Disinvestment
Privatisation of the public
sector undertakings by selling off
part of the equity of PSUs to the
public is known as disinvestment.
The purpose of the sale, according to
the government, was mainly to
improve financial discipline and
facilitate modernisation.
It was also envisaged that private
capital and managerial capabilities
could be effectively utilised to
improve the performance of the
PSUs.
The government envisaged that
privatisation could provide strong
impetus to the inflow of FDI.
The government has also made
attempts to improve the efficiency of
PSUs by giving them autonomy in
taking managerial decisions. For
instance, some PSUs have been
granted special status as navaratnas
and miniratnas.
Hence, statement 2 is correct
Educational objective: To know about
divestment
31. Answer: D
Explanation: All of the above are the
sources of human capital. Hence,
all statements are correct
Sources of Human Capital
Investment in education is considered
as one of the main sources of human
capital. There are several other
sources as well. Investments in health,
on- the job training, migration and
information are the other sources of
human capital formation.
Like education, health is also
considered as an important input for
the development of a nation as much
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as it is important for the development
of an individual.
Who can work better—a sick person or
a person with sound health? A sick
labourer without access to medical
facilities is compelled to abstain from
work and there is loss of productivity.
Hence, expenditure on health is an
important source of human capital
formation.
People spend to acquire information
relating to the labour market and other
markets like education and health.
For example, people want to know the
level of salaries associated with
various types of jobs, whether the
educational institutions provide the
right type of employable skills and at
what cost.
This information is necessary to
make decisions regarding
investments in human capital as well
as for efficient utilisation of the
acquired human capital stock.
Expenditure incurred for acquiring
information relating to the labour
market and other markets is also a
source of human capital formation.
Educational objective: To know about
factors affecting human capital
creation.
32. Answer: D
Explanation: Diversification into
Productive Activities
Diversification includes two aspects:
one relates to diversification of crop
production and the other relates to a
shift of workforce from agriculture to
other allied activities (livestock,
poultry, fisheries etc.) and non-
agriculture sector. The need for
diversification arises from the fact that
there is greater risk in depending
exclusively on farming for livelihood.
Diversification towards new areas is
necessary not only to reduce the risk
from agriculture sector but also to
provide productive sustainable
livelihood options to rural people
Hence, statement 1 and 2 are correct
 As agriculture is already overcrowded, 34. Answer: A
a major proportion of the increasing Explanation
labour force needs to find alternate Statement 3 is incorrect: Trade
employment opportunities in other Policy Reforms were also aimed at
non-farm sectors. Non-farm economy removal of licensing procedures for
has several segments in it; some imports
possess dynamic linkages that permit Economic Reforms of 1991
healthy growth while others are in Financial sector includes
subsistence, low productivity financial institutions such as
propositions. The dynamic sub-sectors commercial banks, investment
include agro- processing industries, banks, stock exchange operations
food processing industries, leather and foreign exchange market
industry, tourism, etc. The Reserve bank of India (RBI)
Hence, statement 3 is correct decides the amount of money that
Educational objective: To understand the banks can keep with themselves,
features of agricultural diversification fixes interest rates, nature of lending
33. Answer: C to various sectors etc. One of the
Explanation: Price Floor major aims of financial sector
For certain goods and services, fall reforms is to reduce the role of RBI
in price below a particular level is from regulator to facilitator of
not desirable and hence the financial sector. This means that the
government sets floors or minimum financial sector may be allowed to
prices for these goods and services take decisions on many matters
The government imposed lower limit without consulting the RBI
on the price that may be charged for a The trade policy reforms aimed at (i)
particular good or service is called price dismantling of quantitative
floor. Most well- known examples of restrictions on imports and exports (ii)
imposition of price floor are reduction of tariff rates and (iii)
agricultural price support programmes removal of licensing procedures for
and the minimum wage legislation imports. Import licensing was
Through an agricultural price abolished except in case of hazardous
support programme, the government and environmentally sensitive
imposes a lower limit on the industries
purchase price for some of the The reform policies introduced in
agricultural goods and the floor is and after 1991 removed many of
normally set at a level higher than the these restrictions. Industrial
market-determined price for these licensing was abolished for almost all
goods. but product categories — alcohol,
Similarly, through the minimum wage cigarettes, hazardous chemicals
legislation, the government ensures industrial explosives, electronics,
that the wage rate of the labourers aerospace and drugs and
does not fall below a particular level pharmaceuticals. The only
and here again the minimum wage industries which are now reserved
rate is set above the equilibrium wage for the public sector are defence
rate equipment’s, atomic energy
Educational objective: To know about generation and railway transport.
important terms related with Many goods produced by small scale
agriculture. industries have now been dereserved
Hence, statement 2 and 1 are correct
Educational objective: To know about
economic reforms 1991

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35. Answer: D To assist in the establishment of a
Explanation: GDP deflator multilateral system of payments in
• GDP deflator is a measure of respect of current transactions
inflation that tracks the price between members.
changes in the entire economy Hence, statement 2 and 3 are correct
and not a specific limited basket Educational objective: To know about
of goods and services as the price functions of IMF
indices. Hence, statement 1 is 37. Answer: C
correct Explanation:
• It is available only annually. Both statements are correct
Hence, statement 3 is correct Second Five Year Plan
• GDP deflator = GDP at current • Planning, in the real sense of the
prices/ GDP at constant prices. term, began with the Second
• When nominal GDP is less than Five Year Plan. The Second Plan,
real GDP that means the GDP a landmark contribution to
deflator is negative and it means development planning in general,
there is deflation in the country. laid down the basic ideas
Hence, statement 2 is correct regarding goals of Indian planning;
Educational objective: To know about this plan was based on the ideas
GDP deflator. of Mahalanobis. In that sense, he
36. Answer: B can be regarded as the architect
Explanation: Statement 1 is of Indian planning.
incorrect: Providing loans for • Mahalanobis established the
reconstruction to war devastated Indian Statistical Institute (ISI)
countries is a function of World Bank in Calcutta and started a
Functions of IMF: journal, Sankhya, which still
The major objectives and serves as a respected forum for
functions of International Monetary statisticians to discuss their
fund (IMF) are: ideas. Both, the ISI and
Acting as a short-term credit institution.
Sankhya, are highly regarded by
Providing machinery for the orderly statisticians and economists all
adjustment of exchange rates; over the world to this day.
Acting as a reservoir of the • This Model suggested that there
currencies of all the member should be an emphasis on the
countries, from which a borrower heavy industries, which can lead
nation can borrow the currency of the Indian Economy to a long
other nations. IV. Acting as a lending term higher growth path.
institution of foreign currency and Educational objective: To know
current transaction. about 5 year plans.
To promote international monetary 38. Answer: B
cooperation through a permanent Explanation: Statement 2 is
institution, incorrect: Free-rider problem do not
To facilitate expansion of balanced arise in case of public Goods
growth of international trade and to Statement 3 is incorrect: These
contribute thereby to the promotion goods may be produced directly under
and maintenance of high levels of government management or by the
employment and real income, private sector
To promote exchange stability Public Goods
with a view to maintain orderly The consumption of public goods is
exchange arrangements among not ‘rival’ in the sense that a person
member countries, and can enjoy the benefits without

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 reducing their availability to others. Educational objective: To know
In case of private goods anyone who about important economic terms
does not pay for the good can be 40. Answer: D
excluded from enjoying its benefits. Explanation: All statements are
However, in case of public goods, there correct
is no feasible way of excluding anyone Helicopter Drop (Helicopter Money)
from enjoying the benefits of the good Helicopter drop refers to a last resort
(they are non-excludable). type of monetary stimulus strategy to
Since non-paying users usually spur inflation and economic output.
cannot be excluded, it becomes It is an expansionary monetary
difficult or impossible to collect fees for policy that is financed by an increase
the public good. This is what is called in an economy’s money supply.
the ‘freerider’ problem. Consumers will Though it would appear to be
not voluntarily pay for what they can theoretically feasible, from a
get for free and for which there is no practical standpoint, it is considered
exclusive title to the property being to be a hypothetical, unconventional
enjoyed. monetary policy tool whose
The link between the producer and the implementation is highly improbable.
consumer is broken and the Helicopter drop is a monetary
government must step in to provide for stimulus act of last resort that could
such goods. Public provision, however, be undertaken when other, more
is not the same as public production. frequently used stimulus attempts
Public provision means that they are have failed to sufficiently revive a
financed through the budget and struggling economy.
made available free of any direct A helicopter drop refers to spiking a
payment. These goods may be nation’s money supply, such as with
produced directly under government increased spending or a tax cut, as a
management or by the private sector. means of jump- starting a weak
Hence, statement 1 is correct economy.
Educational objective: To know The idea of a helicopter drop is mostly
about public goods. metaphorical and can refer to a
39. Answer: B number of unconventional approaches
Explanation: to monetary policy that jolt a
Option (b) is correct struggling economy.
There are many ways to categorise Deflation is a side effect of a
poverty. In one such way people who collapse in aggregate demand, or
are always poor and those who are such a severe curtailment in
usually poor but who may sometimes consumer spending that producers
have a little more money (example: would have to cut prices on an
casual workers) are grouped together ongoing basis to find buyers.
as the chronic poor. Helicopter money is an anti-deflation
Another group are the churning policy.
poor who regularly move in and out Educational objective: To know
of poverty (example: small farmers and about helicopter money.
seasonal workers) and the 41. Answer: C
occasionally poor who are rich most of Explanation: Both statements are
the time but may sometimes have a correct
patch of bad luck. They are called Recapitalization of Regional and
the transient poor. And then there are Rural Banks
those who are never poor and they are • The Cabinet Committee on
the non- poor. Economic Affairs has given its

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 approval for continuation of the
process of recapitalization of
Regional Rural Banks (RRBs) by
providing minimum regulatory
capital to RRBs for 2020-21.
• Recapitalization will be taken up
for those RRBs which have been
unable to maintain minimum
Capital to Risk weighted Assets
Ratio (CRAR) of 9%, as per the
regulatory norms prescribed by
the Reserve Bank of India.
• A financially stronger and robust
Regional Rural Banks with
improved CRAR will enable them
to meet the credit requirement in
the rural areas.
• With the recapitalization support
to augment CRAR, RRBs would
be able to continue their lending
to these categories of borrowers
under their PSL target, and thus,
continue to support rural
livelihoods.
• The recapitalisation process of
RRBs was approved by the
cabinet in 2011 based on the
recommendations of a committee
set up under the Chairmanship
of K C Chakrabarty.
• The National Bank for
Agriculture and Rural
Development (NABARD) identifies
those RRBs, which require
recapitalisation assistance to
maintain the mandatory CRAR of
9% based on the CRAR position
of RRBs.
Educational objective: To know
about recent developments related
with RRBs.
42. Answer: B
Explanation: Statement 1 is incorrect:
Basel III norms were developed by
Basel Committee on Banking
Supervision after the financial crisis
of 2008.
In the wake of the Lehman Brothers
collapse of 2008 and the ensuing
financial crisis, the BCBS decided to
update and strengthen the Accords.
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The BCBS considered poor governance
and risk management, inappropriate
incentive structures, and an
overleveraged banking industry as
reasons for the collapse.
In November 2010, an agreement was
reached regarding the overall design of
the capital and liquidity reform
package. This agreement is now
known as Basel III.
Basel III is a continuation of the
three pillars along with additional
requirements and safeguards. For
example, Basel III requires banks to
have a minimum amount of common
equity and a minimum liquidity ratio.
Basel III also includes additional
requirements for what the Accord
calls “systemically important banks”
or those financial institutions that
are considered “too big to fail.”
Educational objective: To know
about Basel III norms
43. Answer: C
Explanation: Both statements are
correct
Leverage Ratio
A leverage ratio is any one of several
financial measurements that look at
how much capital comes in the form
of debt (loans) or assesses the ability
of a company to meet its financial
obligations. Banks have regulatory
oversight on the level of leverage they
are can hold.
The BCBS introduced a leverage ratio
in Basel III to reduce the risk of such
periods of deleveraging in the future
and the damage they inflict on the
broader financial system and
economy.
The leverage ratio is also intended to
reinforce the risk-based capital
requirements with a simple, non-risk-
based “backstop”.
The capital adequacy ratio measures
a bank’s capital in relation to its risk-
weighted assets. The capital-to-risk-
weighted-assets ratio promotes
financial stability and efficiency in
 economic systems throughout the
world.
Educational objective: To know
about important economic ratios.
44. Answer: A
Explanation: Option (a) is correct
The RBI transfer the surplus i.e. the
excess of income over expenditure, to
the government in accordance with
Section 47 (Allocation of Surplus
Profits) of the Reserve Bank of India,
1934.
Earlier, the RBI used to keep major
portion of the profits but this changed
after the Malegam Committee
recommendations.
Recently with the ongoing tussle
between RBI and the government of
India a committee was formed on this
regard to deal with provisions of
Economic capital framework which
was headed by Bimal Jalan.
Educational objective: To know
about important committees related
with economic developments.
45. Answer: C
Explanation: Statement 1 is incorrect:
it is freely convertible money that is
the intrinsic value is equal to its
face value.
Convertible Paper Money
It refers to the currency notes which
are freely convertible into full-bodied
money (gold or silver) at any time at
the option of the holder. The
individuals can get their paper money
converted into cash.
However, 100% backing of gold or
silver is not desired as all the notes
in circulation are not simultaneously
presented for conversion.
The paper money is backed by gold
and silver reserves. But, on the
assumption that all the currency
notes are not simultaneously
presented by the public for
encashment and the value of metallic
reserves is less than the value of the
notes issued.
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The reserves comprise of (i) metallic
portion containing gold, silver and
standard coins, and (ii) fiduciary
portion containing approved
securities.
Generally, the public gets gold and
silver in exchange for paper money for
making foreign payments.
Educational objective: To know
about convertible paper money
46. Answer: D
Explanation: Option (d) is correct
Stressed Assets
Stressed Assets is a broader term and
comprises of NPAs, restructured loans
and written off assets.
Stressed assets = NPAs +
Restructured loans + Written off
assets
A non-performing asset (NPA) is a loan
or advance for which the principal or
interest payment remained overdue for
a period of 90 days.
Restructured Loan is a new loan
that replaces the outstanding balance
on an older loan, and is paid over a
longer period, usually with a lower
installment amount. Loans are
commonly rescheduled to
accommodate a borrower in financial
difficulty and, thus, to avoid a
default. They are also called as
rescheduled loan.
A write-off is an accounting action
that reduces the value of an asset
while simultaneously debiting a
liabilities account. It is primarily used
in its most literal sense by businesses
seeking to account for unpaid loan
obligations, unpaid receivables, or
losses on stored inventory. Written off
assets are those on which the bank or
lender doesn’t count the money
borrower owes to it.
Educational objective: To know
about stressed assets.
47. Answer: C
Explanation: Phillips Curve
The Phillips curve is an economic
concept showing that inflation and
unemployment have a stable and
 inverse relationship. The theory states However, the investor does not lose in
that with economic growth comes terms of the units of gold which he
inflation, which in turn should lead to has paid for.
more jobs and less unemployment. Persons resident in India as defined
The inverse relationship between under Foreign Exchange
unemployment and inflation is Management Act, 1999 are eligible
depicted as a downward sloping and to invest in SGB.
concave curve. Eligible investors include
The implications of Phillips curve have individuals, HUFs, trusts,
been found to be true only in the short universities and charitable
term. Phillips curve fails to justify the institutions.
situations of stagflation, when both Individual investors with subsequent
inflation and unemployment are change in residential status from
alarmingly high. resident to non-resident may continue
Educational objective: To know to hold SGB till early
about different economic curves redemption/maturity.
48. Answer: A Educational objective: To know
Explanation: Statement 3 is about sovereign gold bonds.
incorrect: The investor does not lose 49. Answer: B
in terms of the units of gold which he Explanation: Statement 2 is
has paid for incorrect: A regressive tax imposes
Sovereign Gold Bond Scheme the same rate on all taxpayers,
SGBs are government securities regardless of ability to pay. A sales
denominated in grams of gold. They tax is an example.
are substitutes for holding physical Progressive taxes
gold. A progressive tax imposes
Investors have to pay the issue price higher percentage rate on taxpayers
in cash and the bonds will be who have higher incomes. The U.S.
redeemed in cash on maturity. income tax system is an example.
The Bond is issued by Reserve A flat tax is an income tax that is the
Bank on behalf of Government of same percentage of income for all.
India. The quantity of gold for which The U.S. Social Security payroll tax
the investor pays is protected, since he would be a flat tax except that it has
receives the ongoing market price at an upper cap.
the time of redemption/ premature A progressive tax system reduces
redemption. the tax burden on the people who can
The SGB offers a superior alternative least afford to pay. That leaves more
to holding gold in physical form. The money in the pockets of low-wage
risks and costs of storage are earners, who are likely to spend all of
eliminated. that money on essential goods and
Investors are assured of the market stimulate the economy in the
value of gold at the time of maturity process.
and periodical interest. SGB is free A progressive tax system also tends to
from issues like making charges and collect more taxes than flat taxes or
purity in the case of gold in jewellery regressive taxes, as the highest
form. percentage of taxes is collected from
The bonds are held in the books of the highest amounts of money.
the RBI or in demat form eliminating A progressive tax also requires those
risk of loss of scrip etc. with the greatest amount of
There may be a risk of capital loss resources to fund a greater portion
if the market price of gold declines. of the services that all citizens and

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 businesses rely on, such as road
maintenance and public safety.
Educational objective: To know
about taxation system.
50. Answer: B
Explanation: Statement 3 is
incorrect: India is at 3rd position in
the world in terms of PPP.
Purchasing Power Parity (PPP)
It is a popular metric used by
macroeconomic analysts that
compares different countries’
currencies through a “basket of goods”
approach.
It allows for economists to compare
economic productivity and standards
of living between countries.
It is a measurement of prices in
different countries that uses the prices
of specific goods to compare the
absolute purchasing power of the
countries’ currencies.
In many cases, PPP produces an
inflation rate that is equal to the price
of the basket of goods at one location
divided by the price of the basket of
goods at a different location.
The PPP inflation and exchange
rate may differ from the market
exchange rate because of poverty,
tariffs, and other transaction costs.
Some countries adjust their gross
domestic product (GDP) figures to
reflect PPP.
Educational objective: TO know
about purchasing power parity.

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