1.

During the festival season, the people Select the correct answer using the code
usually withdraw large amount of money given below:
from the banks, leading to an increase in (a) 1 only
the Currency Deposit Ratio (CDR). What is
(b) 1 and 2 only
the impact the Money Multiplier?
(c) 2 only
(a) Increase in the Money Multiplier.
(b) Decrease in the Money Multiplier. (d) 1, 2 and 3

(c) The Money Multiplier remains

unaffected. 5. Consider the following statements related
(d) None of the above. to the Scheduled Banks in India:
1. They are listed under the Second
2. Which of the following statements correctly Schedule to the RBI Act, 1934.
describes the meaning of Fiduciary 2. They need to have a minimum paid-up
Money? capital of Rs. 1,000 crore.
(a) Money deposited by the public with the
3. All the Cooperative Banks and the
banks.
Regional Rural Banks (RRBs) are
(b) Money which is accepted for payment categorized under the Scheduled Banks.
because of its backing by the
Which of the statements given above is/are
government.
correct?
(c) Money which is accepted for payment
because of the trust between the (a) 1 only
parties. (b) 2 and 3 only
(d) Money whose value is not derived from (c) 3 only
any intrinsic value. (d) 1, 2 and 3

3. Which of the following is/are considered as

6. With reference to the Payments Banks in
the legal tender in India?
India, consider the following statements:
1. Currency notes
1. The Payments Banks cannot accept
2. Coins
deposits of more than Rs. 1 lakh from a
3. Cheques and demand drafts.
single customer.
Select the correct answer using the code
2. The Payments Banks can issue both
given below:
debit and credit cards.
(a) 1 only
3. The Payments Banks are required to
(b) 1 and 2 only
invest minimum 75% of their deposits
(c) 1 and 3 only
in the Government Securities (G-Secs).
(d) 1, 2 and 3
Which of the statements given above is/are
correct?
4. Which of the following can lead to an
(a) 1 only
increase in the Money Multiplier within the
Indian economy? (b) 1 and 2 only
1. Decrease in the CRR (c) 1 and 3 only
2. Decrease in the SLR (d) 2 and 3 only
3. Decrease in the rate of interest on loans

RAUSIAS-TS21E1028 1
https://t.me/upsc_pt_mains
7. With reference to the printing of the 10. With reference to the Cash Reserve Ratio
currency notes by the RBI, consider the (CRR), consider the following statements:
following statements: 1. The CRR refers to the percentage of the
1. The RBI needs to maintain certain depositors' money which the banks are
minimum reserves of foreign currency required to maintain with the RBI in the
and gold to print the currency notes in form of cash.
India.
2. The banks are required to maintain
2. The RBI Act, 1934 imposes statutory 100% of the CRR requirement on all the
limit on the printing of the currency days.
notes by the RBI.
Which of the statements given above is/are
Which of the statements given above is/are
correct?
correct?
(a) 1 only
(a) 1 only
(b) 2 only
(b) 2 only
(c) Both 1 and 2
(c) Both 1 and 2
(d) Neither 1 nor 2
(d) Neither 1 nor 2

8. Which of the following steps is/are not
likely to be taken by the RBI to promote
economic growth and development?
1. Adopt Calibrated Tightening Monetary
Policy stance
2. Decrease Repo Rates and MSF
3. Decrease Reverse Repo
Select the correct answer using the code
given below:
(a) 1 only
(b) 1 and 2 only
(c) 2 and 3 only
(d) 1, 2 and 3
9. Which of the following are the eligible
instruments that can be maintained by the
banks to fulfil their Statutory Liquidity
Ratio (SLR) requirements?
1. Treasury Bills
2. Dated Securities of the Government
3. State Development Loans
4. Recapitalization Bonds
Select the correct answer using the code
given below:
(a) 1 and 2 only
(b) 1, 2 and 3 only
(c) 1, 2 and 4 only
(d) 1, 2, 3 and 4
11. Consider the following statements related
to the Standing Deposit Facility (SDF):
1. The SDF enables the RBI to inject
liquidity into the economy, without
accepting the G-Secs as collateral from
the banks.
2. This tool has been introduced through
an amendment to the RBI Act, 1934.
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
12. Which of the following categories of banks
can use the Liquidity Adjustment Facility
(LAF) of the RBI to manage their liquidity?
1. The Scheduled Commercial Banks
2. The Scheduled Cooperative Banks
3. The Regional Rural Banks
Select the correct answer using the code
given below:
(a) 1 only
(b) 1 and 2 only
(c) 1 and 3 only
(d) 1, 2 and 3

RAUSIAS-TS21E1028 2
13. With reference to the White Label ATMs in Select the correct answer using the code
India, consider the following statements: given below:
1. These ATMs are set up, owned and (a) 1 and 2 only
operated by the non-banking entities. (b) 1 and 3 only
2. The customers are not charged at all for (c) 2 and 3 only
withdrawing money from such ATM
(d) 1, 2 and 3
machines.
Which of the statements given above is/are
correct? 17. Which of the following was the main
(a) 1 only objective of Operation Twist carried out by
the RBI?
(b) 2 only
(a) To check exchange rate volatility.
(c) Both 1 and 2
(d) Neither 1 nor 2 (b) To provide finances to the government
at lower interest rates.
(c) To reduce rate of interest on long term
14. A drastic increase in the velocity of money
is necessarily associated with which of the loans.
following? (d) To provide loans to the Commercial
1. Increase in the Nominal GDP growth Banks at lower interest rates.
rate.
2. Increase in the absolute amount of 18. Which of the following is/are associated
money in circulation. with the Inverted Yield Curve in the field of
3. Increase in the rate of inflation. finance?
Select the correct answer using the code 1. Higher yields on short term maturity
given below: bonds
(a) 1 only 2. Economic slowdown
(b) 1 and 2 only 3. Outflow of Foreign Portfolio Investment
(c) 2 and 3 only (FPI)
(d) 1 and 3 only Select the correct answer using the code
given below:
15. Which of the following can be associated (a) 1 only
with the Liquidity Trap in an economy? (b) 1 and 2 only
1. Higher rate of inflation (c) 2 and 3 only
2. Higher domestic savings (d) 1, 2 and 3
3. Decrease in GDP growth rate
Select the correct answer using the code 19. Which of the following financial
given below:
instruments are used by the government to
(a) 1 and 2 only borrow money in order to address its
(b) 2 and 3 only temporary mismatches in its cash
(c) 1 and 3 only balances?
(d) 1, 2 and 3 1. Ways and Means Advances (WMA)
2. Cash Management Bills (CMB)
16. Which of the following are the likely 3. Treasury Bills
impacts of Foreign Exchange Buy/Sell
Select the correct answer using the code
Swap carried out by the RBI?
given below:
1. Rupee appreciation
(a) 1 only
2. Decrease in rate of interest on loans
(b) 1 and 2 only
3. Increase in the forex reserves with the
RBI (c) 2 and 3 only
(d) 1, 2 and 3

RAUSIAS-TS21E1028 3
20. Which of the following can be chosen by the Which of the statements given above is/are
banks to fix the interest rate on loans correct?
under the External Benchmarking Regime? (a) 1 only
1. Repo Rate (b) 2 only
2. Marginal Cost of Fund based Lending (c) Both 1 and 2
Rate (MCLR) (d) Neither 1 nor 2
3. Yield rates on the Treasury Bills, such
as T-91 and T-182 24. Consider the following statements related
Select the correct answer using the code to the Structured Financial Messaging
given below: System (SFMS):
1. It is a secure interbank communication
(a) 1 only
platform for the Indian Banking and
(b) 1 and 2 only Financial Sector.
(c) 1 and 3 only 2. It is presently being used for sending
(d) 1, 2 and 3 messages pertaining to the National
Electronic Funds Transfer (NEFT) and
21. Which of the following best describes the the Real Time Gross Settlement (RTGS).
concept of Non-Performing Asset (NPA) of a Which of the statements given above is/are
bank? correct?
(a) 1 only
(a) Loan whose principal/interest is due for
a period of more than 30 days. (b) 2 only
(c) Both 1 and 2
(b) Loan whose principal/interest is due for
a period of more than 90 days. (d) Neither 1 nor 2

(c) Loan which has been identified as

unrecoverable by the internal auditors. 25. Which of the following categories of
deposits with the banks is/are insured by
(d) Loan which has written off from the
the Deposit Insurance and Credit
Balance Sheet of the bank.
Guarantee Corporation (DICGC)?
1. Public deposits in the form of both
22. Which of the following best describes the savings and current accounts.
concept of "Special Mention Account (SMA)" 2. Inter-bank deposits.
introduced by the RBI? 3. Deposits of the central/state
(a) NPA of more than Rs. 500 crore. governments.
(b) Loans that have defaulted for a period Select the correct answer using the code
of less than 90 days. given below:
(c) NPA of more than Rs. 1,000 crore. (a) 1 only
(d) NPA that has undergone restructuring. (b) 1 and 2 only
(c) 2 and 3 only
(d) 1, 2 and 3
23. Consider the following statements related
to the Liquidity Coverage Ratio (LCR):
1. The LCR has been introduced as a part 26. The Economic Survey 2019-20 has
highlighted about the Cobweb Phenomenon
of the BASEL III reforms.
in pulses. What does it deal with?
2. Under the LCR, the banks are required
(a) Decrease in the production of pulses
to hold sufficient reserve of high-quality
(b) Decrease in the area under pulses
liquid assets (HQLAs) to allow them to
(c) Volatility in the prices of pulses
survive a period of significant liquidity
stress lasting 30 calendar days. (d) Demand-supply mismatch in pulses

RAUSIAS-TS21E1028 4
27. The "Base Effect" in the measurement of
the rate of inflation in an economy refers to
which of the following?
(a) Change in the basket of commodities for
the measurement of inflation.
(b) The rate of inflation in the present year
depends upon the rate of inflation in
the previous year.
(c) Change in the base year for the
measurement of inflation.
(d) Change in the rate of inflation due to
increase in the monetary base.
28. Which of the following best describes the
concept of "Inflation Tax"?
(a) Increase in tax burden due to higher
rate of inflation.
(b) Increase in inflation due to decrease in
tax rates.
(c) Increase in the tax revenue of the
government due to higher rate of
inflation.
(d) Decrease in purchasing power of the
currency.
29. A Negative Real Rate of Interest is
associated with which of the following?
(a) Higher savings and lower inflation
(b) Lower savings and higher inflation
(c) Lower savings and lower investment
(d) Higher savings and higher investment
30. Which of the following are considered to be
the ‘Money Market Instruments’ in India?
1. Treasury Bills
2. Dated Securities of the Government
3. Commercial Paper
4. Certificate of Deposit
5. Call/Notice Money
Select the correct answer using the code
given below:
(a) 1 and 2 only
(b) 3, 4 and 5 only
(c) 1, 2, 3 and 4 only
(d) 1, 3, 4 and 5 only
RAUSIAS-TS21E1028
31. The Panda Bonds, sometimes seen in the
news, refer to which of the following?
(a) Yuan-denominated bonds issued in
Chinese mainland by an overseas
entity.
(b) Yuan-denominated bonds issued in
Chinese mainland by the Chinese
companies.
(c) Rupee denominated bonds issued in
Chinese mainland.
(d) Yuan denominated bonds issued in
India.
32. Which of the following can be considered as
"Strategic Disinvestment" of the Public
Sector Undertaking (PSU)?
(a) Sale of more than 51% of government's
ownership to the strategic private sector
company along with management
control.
(b) Sale of more than 51% of government's
ownership to the strategic public sector
company along with management
control.
(c) Sale of more than 51% of government's
ownership to foreign company.
(d) Both (a) and (b)
33. Which of the following factors has/have led
to increased preference of the government
towards the Exchange Traded Fund (ETF)
route for undertaking disinvestment in the
PSUs?
1. Ability to undertake disinvestment in
multiple PSUs at a single time.
2. Enables the government to reduce its
ownership in the PSUs to below 51%
and yet retain management control.
3. Enables the government to sell its entire
stake to a single private sector entity.
Select the correct answer using the code
given below:
(a) 1 only
(b) 1 and 2 only
(c) 2 and 3 only
(d) 1, 2 and 3
5
47. Consider the following statements about 49. Which of the following was/were considered
the Second Five-Year Plan: during the Fourth Five-Year Plan?
1. This Plan is also called the Mahalanobis 1. Growth with stability
Plan. 2. Progressive achievement of self-reliance
2. The Plan focussed on agriculture, price 3. Implementation of the Family Planning
stability, power and transport. Programmes
3. The Industrial Policy, 1956, was based Select the correct answer using the code
on the establishment of a socialistic given below:
pattern of society as the goal of the (a) 3 only
economic policy.
(b) 1 and 3 only
Which of the statements given above is/are
(c) 1 and 2 only
correct?
(d) 1, 2 and 3
(a) 3 only
(b) 1 and 3 only
50. Under which of the following Five-Year
(c) 1 and 2 only
Plans, the objective of Garibi Hatao
(d) 1, 2 and 3 (Removal of poverty) was proposed?
(a) Fourth Five-Year Plan
48. Which of the following factors led to the (b) Fifth Five-Year Plan
failure of the Third Five-Year Plan?
(c) Sixth Five-Year Plan
1. Chinese aggression
(d) Seventh Five-Year Plan
2. Severe drought
3. Indo-Pakistan War
4. Political instability
Select the correct answer using the code
given below:
(a) 1, 2 and 3 only
(b) 1, 2 and 4 only
(c) 2 and 4 only
(d) 1, 2, 3 and 4

RAUSIAS-TS21E1028 8
Answers &
Explanations
of

TEST CODE: TS21E1028

GENERAL STUDIES (PAPER – I)

ECONOMY–3
 ANSWERS & EXPLANATIONS OF
ECONOMY-3
GS Paper-I (TS21E1028)
1. Answer: (b)
Explanation:
The Currency Deposit Ratio (CDR) is the
ratio of money held by the public in
currency to that they hold in the bank
deposits. It reflects the people’s preference
for liquidity. For example, the CDR
increases during the festive season, as the
people convert the deposits to cash balance
for meeting extra expenditure during such
periods.
If the CDR increases, that means that the
public is holding more of its money out of
the banks, rather than depositing it. Hence,
the Money Multiplier will go down.
2. Answer: (c)
Explanation:
Fiduciary Money is the money which is
accepted on the basis of the trust it
commands. Unlike Fiat Money, it is not
declared as a legal tender by the
government. It means that the people are
not required by law to accept it as a means
of payment. Examples of Fiduciary Money
include cheques, bank notes or drafts.
3. Answer: (b)
Explanation:
'Legal tender' is the money that is
recognised by the law of the land as valid
for payment of the debt. It must be
accepted for discharge of the debt. Both
currency notes and coins are considered to
be the legal tender. However, cheques and
demand drafts are not considered to be
the legal tender.
Legal tender can be limited or unlimited in
character. In India, coins function as
limited legal tender. Therefore, 50 paise
coins can be offered as the legal tender for
dues up to Rs. 10. Coins of Re. 1 and above
RAUSIAS-TS21E1028
can be offered as the legal tender for dues
up to Rs. 1,000. Currency notes are
unlimited legal tender and can be offered as
payment for dues of any size.
4. Answer: (d)
Explanation:
The Money Multiplier refers to how an
initial deposit can lead to a bigger final
increase in the total money supply. For
example, if the commercial banks gain
deposits of Re. 1, this may lead to a final
money supply of Rs. 6. The Money
Multiplier is 6.
It is calculated as (1/R), where R denotes
the Reserve Ratio. As the CRR (Cash
Reserve Ratio) and the SLR (Statutory
Liquidity Ratio) reduce, the Money
Multiplier increases. Similarly, an increase
in the financial inclusion also leads to an
increase in the Money Multiplier.
Decrease in the rate of interest on loans
can lead to an increase in the Money
Multiplier within the Indian economy.
5. Answer: (a)
Explanation:
The Scheduled Banks in India constitute
those banks which have been included in
the Second Schedule to Reserve Bank of
India (RBI) Act, 1934. These banks should
fulfil two conditions:
 The paid capital and collected funds
of the bank should not be less than
Rs. 5 lac.
 Any activity of the bank will not
adversely affect the interests of the
depositors.
Note: All the categories of the Cooperative
Banks are not categorized as the Scheduled
Banks. For example, some of the Urban
1
 Cooperative Banks are categorized as the 7. Answer: (a)
Non-Scheduled Banks. Explanation:
Scheduled Banks: The list includes the As per the RBI Act, 1934, the RBI needs to
State Bank of India and its subsidiaries maintain minimum reserves of Rs. 200
(like State Bank of Travancore), all crore (Rs. 115 Crore – Gold and Rs. 85
nationalized banks (Bank of Baroda, Bank crore - Foreign Currency Assets) in order to
print the currency notes. Based upon the
of India etc.), regional rural banks (RRBs),
maintenance of the minimum reserves, the
foreign banks (HSBC Holdings Plc, Citibank
RBI can print unlimited currency notes. As
NA) and some co-operative banks.
such, there is no statutory limit on the
printing of the currency notes by the
6. Answer: (c) RBI.
Explanation:
The Payments Bank will be registered as a 8. Answer: (a)
public limited company under the Explanation:
Companies Act, 2013. It is governed by the The Calibrated Tightening Monetary
provisions of the Banking Regulation Act, Policy stance is adopted to control
1949; the RBI Act, 1934; the Foreign higher rates of inflation. The RBI reduces
Exchange Management Act, 1999; the various policy rates, such as Repo, Reverse
Repo, Marginal standing facility (MSF) etc.,
Payment and Settlement Systems Act,
to inject more liquidity into the economy,
2007; other relevant statutes and
and promote economic growth and
directives.
development.
The Payments Banks can accept demand
deposits. The deposits mobilized by the
9. Answer: (b)
Payments Bank would be covered under
Explanation:
the deposit insurance scheme of the
Under the Statutory Liquidity Ratio (SLR),
Deposit Insurance and Credit Guarantee
the banks are required to maintain certain
Corporation India (DICGC). The Payments
percentage of Net Demand and Time
Banks cannot accept deposits of more than Liabilities (NDTL) in the form of cash, gold
Rs. 1 lakh from a single customer. These and eligible G-Secs. These financial
banks can issue debit cards, but not instruments include Treasury Bills, Dated
credit cards. Securities of the Government, State
The Payments Banks cannot undertake Development Loans and any other
lending activities. They are required to instrument as may be notified by the
invest minimum 75% of their "demand Reserve Bank of India. However,
Recapitalization Bonds are not eligible
deposit balances" in the Government
instruments to fulfil the SLR
Securities/Treasury Bills, with maturity up
requirements.
to one year, that are recognized by the RBI
as eligible securities for the maintenance of
10. Answer: (a)
the Statutory Liquidity Ratio (SLR) and
Explanation:
hold maximum 25% in current and
The Cash Reserve Ratio (CRR) is the
time/fixed deposits with other Scheduled
percentage of the depositors' money which
Commercial Banks for operational
the banks are required to maintain with the
purposes and liquidity management. RBI in the form of cash. However, it may be

RAUSIAS-TS21E1028 2
 noted that the RBI does not pay any keep their surplus funds with the RBI
interest to the banks on the CRR deposits. at their own discretion.
During Inflation : Increase in the CRR  The Finance Act (2018), introduced as a
The banks are required to keep higher part of the Budget, amended the RBI Act,
percentage of depositors' money with the 1934, to enable the RBI to use the new tool
RBI Less money available with the banks of the SDF. Subsequently, the liquidity
for giving loans  Decrease in the money management framework adopted by the
supply. RBI in February, 2020, has decided to use
During Slowdown : Decrease in the CRR  the SDF in India. However, the RBI has so
The banks are required to keep less far not notified the operational details.
percentage of depositors' money with the
RBI  More money available for giving 12. Answer: (d)
loans  Increase in the money supply. Explanation:
All the banks are required to maintain Earlier, the Liquidity Adjustment Facility
100% of the CRR requirement on an (LAF) was applicable only to the Scheduled
average basis during the fortnight. This Commercial Banks and the Scheduled
means that it is not necessary for the Cooperative Banks. Recently, the RBI has
banks to maintain 100% of the CRR decided to extend the LAF and the Marginal
requirement on all the days during the Standing Facility (MSF) to the Regional
fortnight. However, the average CRR with Rural Banks (RRBs). It has also been
the RBI for the entire fortnight has to be decided to permit the RRBs to participate
100% of the CRR requirement. Further, the in the Call/Notice money market, both as
RBI stipulates the daily minimum CRR the borrowers and the lenders.
balances for the banks. Earlier, it was 90% Liquidity Adjustment for the Regional Rural
of the CRR requirement on a daily basis. In Banks (RRBs)
2019, the RBI decided to reduce the MSF Repo Reverse
requirement of minimum daily CRR Repo
balance maintenance from 90% to 80%. What is it? Interest Interest Interest paid
paid by paid by by RBI for
Banks for Banks short term
11. Answer: (b)
overnight for short loans from
Explanation: borrowing term banks
The Standing Deposit Facility (SDF) works Loan
similar to the Reverse Repo. However, the Purpose Inject Inject Such out
SDF is different from the Reverse Repo in Liquidity Liquidity Liquidity
the following ways: Collateral? G-Secs part G-Secs G-Secs with
1. Under the SDF route, the RBI would not of SLR outside RBI
be required to provide the G-Secs as SLR

collateral to the banks. Hence, it would Relation- Higher than Higher Lower than
enable the RBI to absorb huge ship Repo than Repo
Reverse
amount of liquidity from the
Repo
economy, without the G-Secs acting
as collateral.
2. The SDF would be lower than the 13. Answer: (a)
Reverse Repo. Explanation:
3. Reverse Repo exercise is carried out as The ATMs which are set up, owned and
per the discretion of the RBI, depending operated by non-banks are called the White
upon the market conditions. However, Label ATMs (WLAs). The non-bank ATM
the SDF would enable the banks to operators are authorized under the
Payment and Settlement Systems Act,

RAUSIAS-TS21E1028 3
 2007, by the Reserve Bank of India (RBI).
The rationale to allow the non-bank entities
to set up the WLAs has been to increase
the geographical spread of the ATMs for
increased/enhanced customer service,
especially in the semi-urban/rural areas.
In addition to dispensing cash, the
ATMs/WLAs may offer many other
services/facilities to the customers. Some
of such services include - Account
Information; Cash Deposit; Regular Bill
Payment; PIN Change; Request for Cheque
Book etc.
The customers can be charged for
transactions at the ATMs over and above
the mandated number of free
transactions.
14. Answer: (d)
Explanation:
The ‘velocity of circulation’ refers to the
average number of times a single unit of
money changes hands in an economy
during a given period of time. It is the
frequency with which the total money
supply in the economy turns over in a given
period of time. If the velocity of money is
increasing, then the velocity of circulation
is an indicator that the transactions
between the individuals are occurring more
frequently. A higher velocity is a sign that
the same amount of money is being used
for a number of transactions. A high
velocity indicates a high degree of inflation.
The velocity of money is calculated as
(Nominal GDP/Money Supply). Hence, an
increase in the velocity of money would
lead to an increase in the Nominal GDP
(Gross Domestic Product). However, there
is an inverse relationship between the
‘velocity of money’ and the ‘total money
supply’. As the total money supply
increases, usually, the velocity of money
reduces.
15. Answer: (b)
Explanation:
Liquidity Trap refers to a situation where
the interest rates in an economy are at
RAUSIAS-TS21E1028
extremely low levels and the individuals
prefer to hold their money in cash, as they
are uncertain about the performance of the
nation’s economy.
Liquidity Traps occur when a country is
trying to recover from a recession
(lower/negative rate of inflation) and the
government aims to boost the investment
in the nation by reducing interest rates to
facilitate borrowing.
In a standard economy, such a reduction in
the interest rates encourages both
borrowing and spending levels on part of
both the producers and the consumers.
However, in case of a Liquidity Trap, an
expansionary monetary policy through
lowering borrowing rates is ineffective. Due
to the prevailing depressed demand and
production levels, the individuals prefer
storing their money in the advent of
weakening economic conditions.
16. Answer: (c)
Explanation:
The Foreign Exchange Buy/Sell Swap is in
the nature of a simple buy/sell foreign
exchange swap from the RBI side. Under
the swap, the RBI would buy US dollars
from the banks and simultaneously agree
to sell the same number of US dollars at
the end of the swap period. This particular
mechanism shall involve mainly 2 steps:
 The RBI would be buying dollars from
the financial institutions, such as the
banks, in order to inject rupees into the
economy.
 At a later date, the RBI would be selling
the same amount of dollars to the
financial institutions, in order to suck
out the rupee which was earlier
injected.
Impact:
 Increase in the rupee liquidity in the
economy.
 Decrease in the rate of interest and
consequently higher credit creation.
4
  Increase in the forex reserves with the
RBI.
 Decrease in the dollar supply and
consequent increase in the rupee
supply may lead to rupee
depreciation.
17. Answer: (c)
Explanation:
Operation Twist is the special Open Market
Operation (OMO) carried out by the RBI. It
is called as special OMO because the RBI
simultaneously buys and sells the
Government Securities (G-Secs). The RBI
sells short term G-Secs to the banks and
financial institutions, and collects money.
The same money is then used by the RBI to
buy long term G-Secs.
Impact of Operation Twist: When the RBI
buys long term G-Secs, there would be
decreased supply and increased demand
for the long term G-Secs in the market. The
higher demand would then lead to an
increase in the Bond prices and decrease in
their yields. On the other hand, as the RBI
sells short term G-Secs, there would be
increased supply and lower demand for
short term G-Secs in the market. This
decreased demand would then lead to a
decrease in the Bond prices and an
increase in their yields.
Hence, Operation Twist would bring
down the rates of interest on long term
loans and increase the rate of interest
on short term loans.
18. Answer: (d)
Explanation:
A Yield Curve is a graph that depicts yields
on the bonds ranging from short term debt,
such as one month to longer term debt,
such as 30 years. Usually, in order to track
the Yield Curve, the yields of the
Government bonds are taken into
consideration.
RAUSIAS-TS21E1028
Normal Yield Curve: The yield on the
bonds depends upon the risk involved.
Higher the risks, higher would be the
yields. Normally, the yield on short term
maturity bonds is lower than that of long
term maturity bonds. The higher yields on
the long term maturity bonds can be
attributed to increased risk in the longer
term (say 30 years).
Hence, under normal conditions, the Yield
Curve is upwards sloping.
Inverted Yield Curve: When there are
signs of slowdown in an economy, it would
mean that the economy faces risk in the
short term. However, in the long term, the
economy may come back to normalcy.
Hence, due to this, the yield on the short
term bonds becomes higher than the yields
of the long term bonds. Hence, an Inverted
Yield Curve points towards a probable
economic recession. Similarly, it could lead
to capital outflows, which may, in turn,
adversely affect the stock market.
19. Answer: (d)
Explanation:
The Ways and Means Advances (WMA) act
as a loan facility to the central and the
state governments to meet their cash
requirements. This facility is availed by the
government due to the temporary
mismatches in their receipts and
expenditure. The loan taken by the
government through the WMA needs to be
paid back in 90 days. The interest rate of
the WMA currently is the repo rate.
The Treasury Bills or the T-Bills are short
term debt instruments issued by the
Government of India and are presently
issued in three tenors, viz., 91-day, 182
day and 364 day. The Treasury Bills are
zero coupon securities and pay no interest.
Instead, they are issued at a discount and
redeemed at the face value at maturity.
The Cash Management Bills were
introduced in 2010 to meet the temporary
mismatches in the cash flow of the
Government of India. The CMBs have the
5
 generic character of the T-Bills, but are that have the potential to become an
issued for maturities less than 91 days. NPA/Stressed Asset.

20. Answer: (c) 23. Answer: (c)

Explanation: Explanation:
The RBI has introduced the external A failure to adequately monitor and control
benchmarking of loans mandating the liquidity risk led to the Great Financial
banks to link all new floating rate retail and Crisis in 2008. To improve the banks'
MSE loans to any of the 4 external short-term resilience to liquidity shocks,
benchmarks. These external benchmarks
the Basel Committee on Banking
could be Repo Rate, Yield Rate of Treasury
Supervision (BCBS) introduced the
Bill (T-91), Yield Rate of T-182 or any
Liquidity Coverage Ratio (LCR), as a part of
reference market rate of interest published
the Basel III post-crisis reforms. The LCR is
by the Financial Benchmarks India Private
designed to ensure that the banks hold a
Ltd., (FBIL). The banks are free to decide
sufficient reserve of high-quality liquid
the spread over the external benchmark.
assets (HQLAs) to allow them to survive a
The interest rate under the regime shall be
reset at least once in 3 months. period of significant liquidity stress lasting
30 calendar days. HQLAs are cash or
Marginal Cost of Fund based Lending Rate
assets that can be converted into cash
(MCLR) cannot be chosen by the banks to
fix the interest rate on loans under the quickly through sales (or by being pledged
External Benchmarking Regime as collateral) with no significant loss of
value. The LCR requires the banks to hold
a stock of HQLAs at least as large as
21. Answer: (b)
expected total net cash outflows over the
Explanation:
stress period of 30 days.
According to the RBI, if the principal or
interest is due for more than 90 days, then
the loan has to be categorized as Non-
Total net cash outflows are defined as the
Performing Asset (NPA).
total expected cash outflows minus the
Categories of NPAs –
total expected cash inflows arising in the
 Sub-standard Assets: More than 90
stress scenario.
days and less than 1 year.
 Doubtful Assets: More than 1 year.
24. Answer: (c)
 Loss Assets: A loss asset is one where
Explanation:
loss has been identified by the bank or
The Structured Financial Messaging
internal or external auditors, but the
System (SFMS) is a secure messaging
amount has not been written off.
standard developed to serve as a platform
for intra-bank and inter-bank applications.
22. Answer: (b) It is an Indian standard similar to SWIFT
Explanation: (Society for Worldwide Interbank Financial
Special Mention Accounts are those Telecommunication). The inter-bank
assets/accounts that show symptoms of messaging is useful for applications, like
bad asset quality in the first 90 days itself. the National Electronic Funds Transfer
The classification of the Special Mention (NEFT) and the Real Time Gross Settlement
Accounts (SMA) was introduced by the RBI (RTGS) systems.
in 2014, in order to identify those accounts

RAUSIAS-TS21E1028 6
 The SFMS was launched by the Institute
for Development and Research in Banking
Technology (IDRBT).
25. Answer: (a)
Explanation:
Currently, the Deposit Insurance and
Credit Guarantee Corporation (DICGC)
provides for an insurance cover of Rs. 5
lakh per depositor for deposits in the
commercial banks, the regional rural
banks, the local area banks (LABs) and the
cooperative banks. The premium for
insurance is paid by the banks and hence,
the cost is not directly borne by the deposit
holder. In case of bank failure, the
depositors can get back a maximum of Rs.
5 lakh per account, even if their deposits
may far exceed Rs. 5 lakh. The DICGC
insures all deposits, such as savings, fixed,
current, recurring, etc., deposits, except
the following types of deposits:
 Deposits of the foreign governments.
 Deposits of the central/state
governments.
 Inter-bank deposits.
 Deposits of the State Land Development
Banks with the State Co-operative
Bank.
26. Answer: (c)
Explanation:
The Cobweb Phenomenon seeks to explain
large scale fluctuations in the prices of
pulses in the Indian market. The farmers
usually decide whether to grow a particular
crop or not, depending upon the prices
which they received in the previous year. If
the prices were higher in the previous year,
number of farmers would sow such a crop
in the current year, leading to its over-
production and subsequent decline in the
prices.
The lower prices, in turn, disincentivise the
farmers from growing crop in the next
season. This leads to lower-production and
subsequent increase in the prices in the
RAUSIAS-TS21E1028
next year. So, the cycle keeps repeating,
leading to fluctuations in the prices.
27. Answer: (b)
Explanation:
The “Base Effect” refers to the impact of the
rise in the price level (i.e., last year’s
inflation) in the previous year over the
corresponding rise in the price levels in the
current year (i.e., current inflation). If the
previous year rate of inflation is higher,
then the current year rate of inflation
would be lower. On the other hand, if the
inflation rate was too low in the
corresponding period of the previous year,
even a relatively smaller rise in the Price
Index will arithmetically give a high rate of
inflation in the current year.
28. Answer: (d)
Explanation:
Inflation tax is not a tax paid to the
government. Instead "inflation tax" refers to
the penalty for holding cash at a time of
high inflation. When the government prints
more money or reduces interest rates, it
floods the market with cash, which raises
inflation in the long run. If an investor is
holding securities, real estate or other
assets, the effect of inflation may be
negligible. But, if a person is holding
cash, the purchasing power of this cash
reduces during higher rate of inflation.
29. Answer: (b)
Explanation:
The Nominal Rate of Interest is the rate of
interest which a person is expected to get
as a saver or pay as a borrower from the
bank. However, if this rate of interest is
adjusted for inflation, then it is known as
the Real Rate of Interest, i.e., the Real Rate
of Interest = Nominal Rate of Interest -
Inflation.
For example, let us say that a person
deposits Rs. 100 in the bank for a period of
1 year, for which the bank is expected to
7
 pay him 5% Nominal Rate of Interest.
However, let us say, after 1 year, the rate of
inflation is expected to be around 6%. In
this case, the Real Rate of Interest would be
negative (Nominal Rate of Interest of 5% -
Inflation Rate of 6%). Hence, the person
would be discouraged from depositing his
money in the bank due to negative returns.
30. Answer: (d)
Explanation:
Money Market refers to the Financial
Market that fills the demand-supply gap in
short term funds with maturity period less
than 1 year.
Instruments –
Treasury Bills: Instruments that the
government uses to raise short-term money
from the financial market. (For long term:
Dated Securities).
Certificate of Deposit: Issued by the
banks and the FIs to the individuals,
companies, corporations, funds etc.
Commercial Paper: Debt instruments
issued by the companies to raise short term
funds.
Call/Notice Money: Used for inter-bank
lending. Call money is usually availed for 1
day. Notice money is availed for 2-14 days.
31. Answer: (a)
Explanation:
The Panda Bonds are the Yuan-
denominated bonds issued in the Chinese
mainland market by an overseas entity.
They are usually issued by the foreign
companies and the Chinese companies
operating overseas to raise capital. The
International Finance Corporation and the
Asian Development Bank have issued the
Panda Bonds in 2005. Besides, countries
like the Philippines and most recently,
Pakistan have issued the Panda Bonds.
32. Answer: (d)
Explanation:
According to the Department of
Disinvestment, in the strategic sale of a
company, the transaction has two
elements:
RAUSIAS-TS21E1028
 Transfer of a block of shares to a
Strategic Partner; and
 Transfer of management control to the
Strategic Partner.
Strategic Disinvestment takes place when
the government ownership in the Public
Sector Undertakings (PSUs) get reduced to
below 51%. Further, this is accompanied
by the transfer of management control to
the Strategic Partner (which could either be
public or private sector).
33. Answer: (a)
Explanation:
The Exchange Traded Fund (ETF) is a fund
that is created by pooling together the
assets and then dividing this cumulated
asset into individual units that are traded
on the stock exchange. The value of the
ETF comes from the value of the underlying
assets (shares of stock, bonds, foreign
currency, etc.). These ETFs, listed in the
stock exchanges, are similar to shares and
can be traded like ordinary shares. In
nature, the ETFs are Index Funds, because
they comprise shares of different
companies.
The share-based ETFs, issued by the
government, include CPSE ETF and
Bharat-22 ETF. These share-based ETFs
enable the government to undertake the
disinvestment in multiple PSUs at a single
time and hence, reduces the time for
undertaking disinvestment. This is the
main reason for the higher preference of
the government towards the ETF route for
undertaking disinvestment.
34. Answer: (b)
Explanation:
The Net Tax Revenue of the centre is
calculated as Gross Tax Revenue - (States'
share of taxes + Transfer to the National
Disaster Response Fund).
35. Answer: (a)
Explanation:
Money held by the government in trust is
kept in the Public Account. The Public
Account draws its existence from Article
8
 266 of the Constitution of India. Provident
Funds, small savings collections, income of
the government set apart for expenditure
on specific objects, such as road
development, primary education, other
Reserve/Special Funds etc., are the
examples of moneys kept in the Public
Account.
The Public Account funds that do not
belong to the government and have to be
finally paid back to the persons and
authorities, who deposited them, do not
require Parliamentary authorization for
withdrawals. However, the approval of
the Parliament is obtained when
amounts are withdrawn from the
Consolidated Fund and kept in the
Public Account for expenditure on
specific objects.
36. Answer: (b)
Explanation:
Tax Expenditure does not relate to the
expenditure incurred by the government in
the collection of taxes. Rather, it indicates
the revenue forgone by the government due
to tax exemptions.
39. Answer: (b)
37. Answer: (b)
Explanation:
The Fiscal Deficit (borrowings) can be used
for financing both the Revenue and the
Capital Expenditure. In case of India, a
higher share of Fiscal Deficit (around 70%)
is used for financing the Revenue
Expenditure.
40. Answer: (d)
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38. Answer: (b)
Explanation:
The Interim Budget is essentially a budget
which is announced in an election year by
the incumbent government. The Interim
Budget would be applicable until the new
government takes over after the General
Elections. Hence, unlike the Union
Budget, the Interim Budget would be
applicable for a part of the financial
year.
Even though the words ‘Interim Budget’
and ‘Vote-on-Account’ are used
interchangeably, they are not same.
The government needs approval from the
Parliament to withdraw money from the
Consolidated Fund of India to meet its day-
to-day expenses. Hence, the incumbent
government presents the Vote-on-Account
in order to seek approval from the
Parliament for withdrawing money to meet
its expenditure needs until the new
government takes over.
However, the Interim Budget is an estimate
of both the receipts and the expenditure of
the government. Thus, while the Vote-on-
Account deals only with the expenditure of
the government, the Interim Budget deals
with both the revenue and the expenditure.
Explanation:
The Medium Term Fiscal Policy Statement;
the Fiscal Policy Strategy Statement; and
the Macro-Economic Framework Statement
are presented along with the Budget
documents as per the FRBM (Fiscal
Responsibility and Budget Management)
Act, 2003. However, under the FRBM Act,
the Medium Term Expenditure
Framework Statement is required to be
presented in the session, immediately
after the Budget session.
Explanation:
Targets under the FRBM Act, 2003 –
 Reduce the Fiscal Deficit to 3% of the
GDP by the end of 2021.
9
  Reduce the General Government Debt
to below 60% by the end of 2024-25.
(Central Government: Below 40%; State
Governments: Below 20%).
Restrictions on Direct Monetization of
Government's deficit under the FRBM
Act, 2003:
1. The government can borrow money
from the RBI for meeting its immediate
and temporary cash requirements
through the Ways and Means Advances
(WMA).
2. The government cannot borrow money
from the RBI for meeting its deficit. It
can do so only under exceptional
circumstances.
3. Exceptional circumstances under which
the government can borrow money from
the RBI for meeting its deficit include-
National security; Act of war; National
calamity; Collapse of agriculture;
Structural reforms; and Decline in real
output growth of a quarter by at least
3% points below its average of the
previous four quarters.
41. Answer: (c)
Explanation:
As part of the Fiscal Stimulus Policy, the
government tries to revive the economy by
injecting more money. In order to do so, the
government reduces the tax rates, provides
higher tax exemptions and enhances its
expenditure.
42. Answer: (a)
Explanation:
Surcharge/Cess imposed and collected by
the Centre does not form part of the
Central Divisible Pool of taxes.
distribution of the Integrated GST between
the Centre and States is decided by the
GST Council and not by the Finance
Commission.
RAUSIAS-TS21E1028
43. Answer: (b)
Explanation:
The Internal Debt of the government
comprises Treasury Bills, Dated Securities,
Cash Management Bills (CMBs), Ways and
Means Advances, Special G-Secs,
Recapitalization Bonds, Sovereign Gold
Bonds, Securities against the NSSF
(National Small Savings Fund) etc. The
Dated Securities account for the highest
share of Internal Debt of the
government.
44. Answer: (a)
Explanation:
The Patent Box Regime provides for a
special tax regime for Intellectual Property
(IP) revenues. In a Patent Box Regime, a
lower rate of tax is applicable for the
income generated from licensing or transfer
of the Intellectual Property Rights, like the
Patents.
Such a regime has been adopted by
countries, such as UK, France, Spain etc.,
to incentivise R&D. The Patent Box Regime
in India has been introduced through the
Finance Act, 2016. It provides for a
concessional rate of tax at the rate of 10%
on the gross amount of royalty earned
through the Patents. However, to be eligible
for this benefit, the Patent must be
developed and registered in India.
45. Answer: (d)
Explanation:
The Medium-Term Fiscal Policy Statement
cum Fiscal Policy Strategy Statement is
presented to the Parliament, under Section
3 of the Fiscal Responsibility and Budget
Management Act (The FRBM Act), 2003. It
sets out the three-year rolling targets for
six specific fiscal indicators in relation to
the GDP at market prices, viz., (i) Fiscal
The
Deficit; (ii) Revenue Deficit; (iii) Primary
Deficit; (iv) Tax Revenue; (v) Non-tax
Revenue; and (vi) Central Government
Debt.
10
46. Answer: (a) The Industrial Policy 1956
Explanation: was based on establishment
It was based on Harrod- of a Socialist pattern of
Domer Model. society as the goal of
economic policy.
First Pan Influx of refugees, severe
food shortage & mounting Acute shortage of forex led
(1951-56)
inflation confronted the to pruning of development
country at the onset of the targets, price rise was also
first five year Ran seen (about 30%) vis a vis
decline in the earlier Plan &
Target The Plan Focussed on
the 2nd FYP was only
Growth agriculture, price stability,
moderately successful.
: 2.1% power and transport

It was a successful plan

48. Answer: (a)
primarily because of good
Explanation:
harvests in the Last two
Actual years of the plan. The Third Plan (1961 - 66) – (Target
Growth 3.6% Objectives of Growth: 5.6%; Actual Growth: 2.8%) – At
rehabilitation of refugees, its conception, it was felt that the Indian
food self-sufficiency & economy has entered a “take-off stage”.
control of prices were Therefore, its aim was to make India a 'self-
more or less achieved. reliant' and 'self-generating' economy.
Based on the experience of the first two
Plans (Agricultural production was seen as
47. Answer: (b)
the limiting factor in India’s economic
Explanation: development), agriculture was given top
Simple aggregative Harrod priority to support exports and industry.
Domar Growth Model was The Plan was a thorough failure in reaching
again used for overall the targets due to unforeseen events -
projections and the strategy Chinese aggression (1962), Indo-Pak War
of resource allocation to (1965) and severe drought (1965-66). Due
broad sectors as agriculture to conflicts, the approach during the later
& Industry was based on phase was shifted from development to
Second Plan two & four sector Model defence and development.
(1956–61) prepared by Prof. P C
Target Mahalanobis. (Plan is also 49. Answer: (d)
Growth: called Mahalanobis Plan).
Explanation:
4.5% Actual Second plan was conceived The Fourth Plan (1969 - 74) – (Target
Growth: in an atmosphere of Growth: 5.7%; Actual Growth: 3.3%) –
4.3% economic stability. It was Refusal of supply of the essential
felt agriculture could be equipment and raw materials from the
accorded lower priority. allies during the Indo-Pak War resulted in
The Plan Focussed on rapid twin objectives of “growth with stability
industrialization – heavy & “and “progressive achievement of self-
basic industries. Advocated reliance” for the Fourth Plan.
huge imports through The main emphasis was on the growth rate
foreign loans. of agriculture to enable other sectors to
move forward.

RAUSIAS-TS21E1028 11
 The first two years of the Plan saw record
production. The last three years did not
measure up due to poor monsoon. The
implementation of the Family Planning
Programmes was amongst the major
targets of the Plan.
Influx of Bangladeshi refugees before and
after the 1971 Indo-Pak War was an
important issue, along with the price
situation deteriorating to crisis proportions
and the Plan is considered as a big failure.
50. Answer: (b)
Explanation:
The Fifth Plan (1974-79) proposed to
achieve two main objectives: 'removal of
poverty' (Garibi Hatao) and 'attainment
of self-reliance'.
RAUSIAS-TS21E1028
The final Draft of the Fifth Plan was
prepared and launched by D.P. Dhar in the
backdrop of the economic crisis arising out
of run-away inflation fuelled by hike in oil
prices and the failure of the government
takeover of the wholesale trade in wheat.
Due to high inflation, cost calculations for
the Plan proved to be completely wrong and
the original public sector outlay had to be
revised upwards. After promulgation of
Emergency in 1975, the emphasis shifted
to the implementation of the Prime
Minister’s 20 Point Programme. The Five-
Year Plan was relegated to the background
and when Janta Party came to power in
1978, the Plan was terminated.
12