1. Prologue
  2. Banking Related
  3. Foreign Trade Related
  4. Inflation
  5. GDP and allied topics

Prologue

  • Out of 100 GS questions in UPSC CSAT 2013, there were 18 questions from Economy.
  • All questions from Static portion, Not even one Economy related question from current affairs.
  • But don’t think that your majoori (labour) has gone in vain. Whatever you prepared for Economy current affairs –that will definitely help you directly/indirectly in Mains, Essay and interview (or atleast let’s hope so again hahaha.)
  • Thankfully no question on trivial dates and numbers of Economy (bad news for the next year sales of those special issues/editions on Economy).

Almost all of these questions can be solved by reading following:

  1. NCERT Textbooks on Economics
  2. NIOS PDF set on Economics
  3. Indian Economy by Ramesh Singh (McGraw Hill Education)
  4. Finance Chapter from India 2013 (Yearbook).
  5. And of course the Main Villain: Mrunal.org/economy

Within Economy topic, the internal breakup looks like this:

Banking 7
Foreign trade 3
Inflation 3
GDP, Development and allied topics 5
Total 18

chart-csat2013-economy

Banking Related

bank rate

1. An increase in the Bank Rate generally indicates that the

  1. market rate of interest is likely to fall
  2. Central Bank is no longer making loans to commercial banks
  3. Central Bank is following an easy money policy
  4. Central Bank is following a tight money policy

Bank Rate=RBI lends money to its clients for long term loans @this interest rate.

Tight monetary policy= when RBI raises the rates to decrease liquidity.

Answer choice Comment
  1. market rate of interest is likely to fall
 Not possible. because if RBI lends money to its clients @higher rate, they won’t reduce their loan interest rates, because it’ll reduce their profit margin.
  1. Central Bank is no longer making loans to commercial banks
 Ridiculous.
  1. Central Bank is following an easy money policy
 Reverse is happening.
  1. Central Bank is following a tight money policy
 This is the answer.

RBI’s regulatory powers

2. The Reserve Bank of India regulates the commercial banks in matters of

  1. liquidity of assets
  2. branch expansion
  3. merger of banks
  4. winding-up of banks

Select the correct answer using the codes given below.

  1. 1 and 4 only
  2. 2, 3 and 4 only
  3. 1, 2 and 3 only
  4. 1, 2, 3 and 4

RBI regulates Liquidity of Assets via SLR hence B is false, because it doesn’t have (1)

If existing bank requires RBI permission. Hence (A) is false because it doesn’t have (2).

Amalgamation /Merger of two bank require RBI’s approval. Thus final answer is D.

credit to villagers

3. Which of the following grants/ grant direct credit assistance to rural households?

  1. Regional Rural Banks
  2. National Bank for Agriculture and Rural Development
  3. Land Development Banks

Select the correct answer using the codes given below:

  1. 1 and 2 only
  2. 2 only
  3. 1 and 3 only
  4. 1, 2 and 3

NABARD doesn’t give “direct” credit assistance. It provides credit via intermediaries such as Microfinance companies, cooperative society, RRB. Therefore, 2 is false. Any answer choice that contains 2 is false. And thus we’re left with C only 1 and 3.

liquid assets

4. Consider the following liquid assets:

  1. Demand deposits with the banks
  2. Time deposits with the banks
  3. Savings deposits with the banks
  4. Currency

The correct sequence of these decreasing order of Liquidity is

  1. 1-4-3-2
  2. 4-3-2-1
  3. 2-3-1-4
  4. 4-1-3-2
  • Currency (#4) is most liquid, because you can use it as and when you want.
  • Time deposit with bank (#1) (e.g. fixed deposit), are least liquid compared to savings/demand deposit with banks and currency(#4).
  • That means decreasing order of liquidity will be 4-*-*-1.
  • and Demand deposit with bank >more liquid> savings deposit
  • final order is 4-1-3-2 Answer choice D

OMO

  1. In the context of Indian economy, Open Market Operations refers to
  1. borrowing by scheduled banks from the RBI
  2. lending by commercial banks to industry and trade
  3. purchase and sale of government securities by the RBI
  4. None of the above

Recall the Liquidity adjustment facility article: Click me

Open market operation= when RBI buys/sells securities in open market…. in case of OMO, first party permanently sells the Government security to second party. Second party is free to do whatever it wants with that security.

Hence Answer C

Another source: NCERT Macroeconomics class 12, page 44

Open market operations: RBI purchases or sells government securities to general public…

PSL

6. Priority Sector Lending by banks in India constitutes the lending to

  1. agriculture
  2. micro and small enterprises
  3. weaker sections
  4. All of the above

Answer is (D) all of above. For more, refer

money supply

7. Supply of money remaining the same when there is an increase in demand for money, there will be

  1. a fall in the level of prices
  2. an increase in the rate of interest
  3. a decrease in the rate of interest
  4. an increase in the level of income and employment

If supply of onion is same, but junta demands more onion, what will vegetable-seller do? Increase price to get more profit. When same thing happens with money, the banks/lenders will do the same by increasing interest rates.

Answer is (B).

Foreign Trade Related

BoP

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

  1. all import and export transactions of a country during a given period of time, normally a year
  2. goods exported from a country during a year
  3. economic transaction between the government of one country to another
  4. capital movements from one country to another

Question contains problematic wording. Consider this:

Balance of Payment (BoP) As per definition in ch.6, NCERT Macroeconomics, class 12.

  • Balance of payment records the transaction in goods, service and assets between ‘residents’ (and not governments) of one country with the rest of world.

This makes option C is wrong.
Balance of trade (BoT) It is the balance of exports and imports. So option (A) is actually talking about BoT and not BoP.BoP is a more than just import and export transactions because it includes Current account (inside that balance of trade, gifts, remittance, dividend etc.) + Capital account (FDI, FII, ECB etc.)

economy-Bot-vs-Bop

  • B and D are irrelevant.
  • anyways in the given the mess, I pick A as the answer.

Update Jun-26-2014: UPSC uploaded official answerkey. Correct answer is: A.

Components of Capital Account

2. Which of the following constitute Capital Account?

  1. Foreign Loans
  2. Foreign Direct Investment
  3. Private Remittances
  4. Portfolio Investment

Select the correct answer using the codes given below.

  1. 1, 2 and 3
  2. 1, 2 and 4
  3. 2, 3 and 4
  4. 1, 3 and 4

Recall article on 6th Chapter of Economic Survey Click me

or just observe the chart given under previous question.

Remittances (item#3) fall under Current Account. Therefore any answer choice that includes #3, is wrong. Eliminate them.

  1. 1, 2 and 3
  2. 1, 2 and 4
  3. 2, 3 and 4
  4. 1, 3 and 4

Thus we’re left with answer (B)

Components of Forex Reserve

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

  1. Foreign-currency assets, Special Drawing Rights (SDRs) and loans from foreign countries
  2. Foreign-currency assets, gold holdings of the RBI and SDRs
  3. Foreign-currency assets, loans from the World Bank and SDRs
  4. Foreign-currency assets, gold holdings of the RBI and loans from the World Bank

Recall article on ch6 of Economic survey

Click me

India’s foreign exchange reserves is made up of

  1. Foreign currency assets (FCA) (US dollar, euro, pound sterling, Canadian dollar, Australian dollar and Japanese yen etc.)
  2. gold
  3. special drawing rights (SDRs) of IMF
  4. Reserve tranche position (RTP) in the International Monetary Fund (IMF)

Hence the closest answer choice is (B): Foreign-currency assets, gold holdings of the RBI and SDRs

Other answer choices talk about loans from foreign countries/World bank: while those have some relevance in current/capital account classification type MCQs, but in case of forex reserve they’re irrelevant.

Another reference for this answer: India 2013 (Yearbook) Page 334, last two lines.

Inflation

benefit to debtors

1. Consider the following statements:

  1. Inflation benefits the debtors.
  2. Inflation benefits the bond-holders.

Which of the statements given above is/are correct?

  1. 1 only
  2. 2 only
  3. Both 1 and 2
  4. Neither 1 nor 2

Refer page 7.8 in Indian Economy by Ramesh Singh, topic title “Effects of Inflation”–> I. On Creditors and Debtors.

  • Inflation redistributes wealth from creditors to debtors i.e. lenders suffer and borrowers benefit out of inflation.
  • Bond holders= this person has lend money (to debtor) and received bond in return. So he is lender, he suffers.
  • Therefore Answer choice is (A) 1 only (Debtor benefits from inflation).

by the way, they haven’t specifically used the word “inflation indexed bonds”, hence we cannot say Inflation benefits the bond-holders.

inflation cause

2. A rise in general level of prices may be caused by

  1. an increase in the money supply
  2. a decrease in the aggregate level of output
  3. an increase in the effective demand

Select the correct answer using the codes given below.

  1. 1 only
  2. 1 and 2 only
  3. 2 and 3 only
  4. 1, 2 and 3

All three lead to inflation. Answer (D)

inflation cause

3. Which one of the following is likely to be the most inflationary in its effect?

  1. Repayment of public debt
  2. Borrowing from the public to finance a budget deficit
  3. Borrowing from banks to finance a budget deficit
  4. Creating new money to finance a budget deficit

Printing/creating new money to finance a budget deficit will be the most inflationary effect. Because it increases money supply without any increase in production of goods and services. Recall the Israel Palestine article (click me): How Germany suffered Hyperinflation when government started printing money just to pay war reparation costs under Treaty of Versailles. Check this photo: A German woman burns currency, because its paper was cheaper fuel than coal!

hyperinflation

and @Public Administration players, recall the great Laxmikanth and his chapter on Financial administration:

Currency expansion: Under this method, government prints more currency to repay debts. This results in inflation and destroys the fixed value of money claims. This method was used by Germany after First World War.

GDP and allied topics

National income, meaning of

1. The national income of a country for a given period is equal to the

  1. total value of goods and services produced by the nationals
  2. sum of total consumption and investment expenditure
  3. sum of personal income of all individuals
  4. money value of final goods and services produced

Observe the glossary given on page 100 and 101 in NCERT Macroeconomics class 12.
National income= NNP @Market price MINUS indirect tax PLUS subsidies.
then what is NNP @Market price? (NNP_MP)

NNP_MP=GNP-Depreciation.

then what is GNP?

GNP=GDP + Net factor income from abroad. In other words, GNP includes the aggregate income made by all citizens of the country, whereas GDP includes incomes by foreigners within the domestic economy and excludes the incomes earned by the citizens in foreign economy.

Thus answer is (A).

Another source: As per NIOS Economy Chapter 12, topic #12.3

National income of a country is defined as the sum of total factor incomes accruing to the residents of that country from the production activity performed by them both within and outside the economic territory in a year.

Hence the closest answer among the given = (A).
Update Jun-26-2014: UPSC uploaded official answerkey. Correct answer is: D. money value of final goods and services produced.

disguised unemployment, meaning of

2. Disguised unemployment generally means

  1. large number of people remain unemployed
  2. alternative employment is not available
  3. marginal productivity of labour is zero
  4. productivity of workers is low

Suppose three people work in farm, produce 200kg wheat. If one of them is removed, still farm produces 200kg wheat. That is disguised unemployment. Marginal productivity is zero. Hence Answer C.
Another example of disguised unemployment is ministers in Mohan’s cabinet. Whether you keep or remove Pawan and Ashwini, the efficiency of government doesn’t change.
economy disguised unemployment in UPA

Economic growth, factors responsible

3. Economic growth in country X will necessarily have to occur if

  1. there is technical progress in the world economy
  2. there is population growth in X
  3. there is capital formation in X
  4. the volume of trade grows in the world economy

NIOS Economy, Ch 36, bullet point 29.3:

Internally capital formation takes place when a country does not spend all its current income and consumption, but saves a part of it and uses it for investment for increasing further production. This act of saving and investment is described as capital accumulation or capital formation.
Therefore, answer is (C)

B is wrong because
NIOS Economy, Ch 38 population and economic development,

  • The high growth rate of population adversely affects capital formation in the developing economies. More resources are used for meeting the fast increasing consumption needs. This leaves less resources for increasing productivity capacity of the economy. This adversely affects the future growth rate of these economies.
  • The developing countries already have a large labour force, which remains underutilised due to lack of capital. The fast increasing population makes the task of absorbing the labour force in productivity activities all the more difficult. So the large increasing population is more of a liability than an asset in these economies.

A and D are wrong because
The positive developments happening in World economy (choice A and D) won’t help economic growth in the given country, if it is a closed economy.
Final answer (C)

Deficit Financing purpose

4. In India, deficit financing is used for raising resources for

  1. economic development
  2. redemption of public debt
  3. adjusting the balance of payments
  4. reducing the foreign debt

as per page 273, Development and Environmental Economics by Ne Thi Somashekar

Deficit financing is a pragmatic tool of economic development and has been used by Indian government to obtain necessary resources to finance the five year plans.

Answer (A)

Demographic Dividend

5. To obtain full benefits of demographic dividend, what should India do?

  1. Promoting skill development
  2. Introducing more social security schemes
  3. Reducing infant mortality rate
  4. Privatization of higher education

To rip maximum demographic dividend, India has to promote skill development. This is what Economic Survey and 12th FYP have been advocating. Ans (A)

Answerkeys for remaining topics, coming soon. + thanks Mr. Palas Nuwal and Mr.Shiva Ram for providing inputs.