UPSC Static Quiz – Economy : 10 July 2025

UPSC Static Quiz – Economy : 10 July 2025 We will post 5 questions daily on static topics mentioned in the UPSC civil services preliminary examination syllabus. Each week will focus on a specific topic from the syllabus, such as History of India and Indian National Movement, Indian and World Geography, and more.We are excited to bring you our daily UPSC Static Quiz, designed to help you prepare for the UPSC Civil Services Preliminary Examination. Each day, we will post 5 questions on static topics mentioned in the UPSC syllabus. This week, we are focusing on Indian and World Geography.

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• Question 1 of 5 1. Question Consider the following statements regarding Cash Reserve Ratio (CRR). Statement-I: An increase in the Cash Reserve Ratio (CRR) by the central bank tends to reduce the credit creation capacity of commercial banks. Statement-II: CRR is the fraction of total deposits that commercial banks are required to keep with themselves in the form of liquid assets. Which one of the following is correct in respect of the above statements? (a) Both Statement-I and Statement-II are correct and Statement-II is the correct explanation for Statement-I (b) Both Statement-I and Statement-II are correct and Statement-II is not the correct explanation for Statement-I (c) Statement-I is correct but Statement-II is incorrect (d) Statement-I is incorrect but Statement-II is correct Correct Solution: C Statement-I is correct. An increase in the Cash Reserve Ratio (CRR) means that commercial banks have to hold a larger portion of their Net Demand and Time Liabilities (NDTL) as cash reserves with the central bank. This reduces the amount of funds available with them for lending, thereby contracting their credit creation capacity. Statement-II is incorrect. CRR is the fraction of their Net Demand and Time Liabilities (NDTL) that commercial banks are required to keep with the central bank (RBI in India), not with themselves. The portion of liquid assets that banks are required to maintain with themselves is known as the Statutory Liquidity Ratio (SLR), which includes cash, gold, or approved securities. Incorrect Solution: C Statement-I is correct. An increase in the Cash Reserve Ratio (CRR) means that commercial banks have to hold a larger portion of their Net Demand and Time Liabilities (NDTL) as cash reserves with the central bank. This reduces the amount of funds available with them for lending, thereby contracting their credit creation capacity. Statement-II is incorrect. CRR is the fraction of their Net Demand and Time Liabilities (NDTL) that commercial banks are required to keep with the central bank (RBI in India), not with themselves. The portion of liquid assets that banks are required to maintain with themselves is known as the Statutory Liquidity Ratio (SLR), which includes cash, gold, or approved securities.

#### 1. Question

Consider the following statements regarding Cash Reserve Ratio (CRR).

Statement-I: An increase in the Cash Reserve Ratio (CRR) by the central bank tends to reduce the credit creation capacity of commercial banks.

Statement-II: CRR is the fraction of total deposits that commercial banks are required to keep with themselves in the form of liquid assets.

Which one of the following is correct in respect of the above statements?

• (a) Both Statement-I and Statement-II are correct and Statement-II is the correct explanation for Statement-I

• (b) Both Statement-I and Statement-II are correct and Statement-II is not the correct explanation for Statement-I

• (c) Statement-I is correct but Statement-II is incorrect

• (d) Statement-I is incorrect but Statement-II is correct

Solution: C

• Statement-I is correct. An increase in the Cash Reserve Ratio (CRR) means that commercial banks have to hold a larger portion of their Net Demand and Time Liabilities (NDTL) as cash reserves with the central bank. This reduces the amount of funds available with them for lending, thereby contracting their credit creation capacity.

• Statement-II is incorrect. CRR is the fraction of their Net Demand and Time Liabilities (NDTL) that commercial banks are required to keep with the central bank (RBI in India), not with themselves. The portion of liquid assets that banks are required to maintain with themselves is known as the Statutory Liquidity Ratio (SLR), which includes cash, gold, or approved securities.

Solution: C

• Question 2 of 5 2. Question Consider the following statements. Statement-I: Persistent high inflation can erode the real value of savings and fixed incomes. Statement-II: Inflation represents a sustained increase in the general price level of goods and services in an economy. Which one of the following is correct in respect of the above statements? (a) Both Statement-I and Statement-II are correct and Statement-II is the correct explanation for Statement-I (b) Both Statement-I and Statement-II are correct and Statement-II is not the correct explanation for Statement-I (c) Statement-I is correct but Statement-II is incorrect (d) Statement-I is incorrect but Statement-II is correct Correct Solution: A Statement-II is correct. Inflation is defined as a sustained increase in the general level of prices of goods and services in an economy over a period of time. This means that each unit of currency buys fewer goods and services; consequently, inflation reflects a reduction in the purchasing power per unit of money. Statement-I is correct. Persistent high inflation reduces the purchasing power of money. For savers, if the nominal interest rate on their savings does not keep pace with inflation, the real return on savings becomes negative, eroding their real value. Similarly, individuals with fixed incomes (like pensioners or salaried employees whose wages don’t rise with inflation) find that their income can buy fewer goods and services, thus eroding the real value of their income. Statement-II provides the definition of inflation, which is the underlying reason why Statement-I occurs. Incorrect Solution: A Statement-II is correct. Inflation is defined as a sustained increase in the general level of prices of goods and services in an economy over a period of time. This means that each unit of currency buys fewer goods and services; consequently, inflation reflects a reduction in the purchasing power per unit of money. Statement-I is correct. Persistent high inflation reduces the purchasing power of money. For savers, if the nominal interest rate on their savings does not keep pace with inflation, the real return on savings becomes negative, eroding their real value. Similarly, individuals with fixed incomes (like pensioners or salaried employees whose wages don’t rise with inflation) find that their income can buy fewer goods and services, thus eroding the real value of their income. Statement-II provides the definition of inflation, which is the underlying reason why Statement-I occurs.

#### 2. Question

Consider the following statements.

Statement-I: Persistent high inflation can erode the real value of savings and fixed incomes. Statement-II: Inflation represents a sustained increase in the general price level of goods and services in an economy.

Which one of the following is correct in respect of the above statements?

• (a) Both Statement-I and Statement-II are correct and Statement-II is the correct explanation for Statement-I

• (b) Both Statement-I and Statement-II are correct and Statement-II is not the correct explanation for Statement-I

• (c) Statement-I is correct but Statement-II is incorrect

• (d) Statement-I is incorrect but Statement-II is correct

Solution: A

• Statement-II is correct. Inflation is defined as a sustained increase in the general level of prices of goods and services in an economy over a period of time. This means that each unit of currency buys fewer goods and services; consequently, inflation reflects a reduction in the purchasing power per unit of money.

• Statement-I is correct. Persistent high inflation reduces the purchasing power of money. For savers, if the nominal interest rate on their savings does not keep pace with inflation, the real return on savings becomes negative, eroding their real value. Similarly, individuals with fixed incomes (like pensioners or salaried employees whose wages don’t rise with inflation) find that their income can buy fewer goods and services, thus eroding the real value of their income.

• Statement-II provides the definition of inflation, which is the underlying reason why Statement-I occurs.

Solution: A

• Statement-II provides the definition of inflation, which is the underlying reason why Statement-I occurs.

• Question 3 of 5 3. Question Consider the following statements. Statement-I: Expansionary fiscal policy, such as increased government spending or tax cuts, typically aims to stimulate economic activity during a recession. Statement-II: Increased government spending directly adds to aggregate demand, while tax cuts increase disposable income, potentially leading to higher consumption. Which one of the following is correct in respect of the above statements? (a) Both Statement-I and Statement-II are correct and Statement-II is the correct explanation for Statement-I (b) Both Statement-I and Statement-II are correct and Statement-II is not the correct explanation for Statement-I (c) Statement-I is correct but Statement-II is incorrect (d) Statement-I is incorrect but Statement-II is correct Correct Solution: A Statement-I is correct. Expansionary fiscal policy involves measures like increasing government expenditure or reducing taxes. These actions are typically undertaken during periods of economic slowdown or recession to boost aggregate demand and stimulate economic growth and employment. Statement-II is correct. The mechanisms through which expansionary fiscal policy works are described here. Increased government spending (e.g., on infrastructure, public services) directly contributes to aggregate demand in the economy. Tax cuts (e.g., on personal income or corporate profits) increase the disposable income of households and post-tax profits of firms, which can lead to higher consumption and investment, thereby boosting aggregate demand. Statement-II clearly explains how the measures mentioned in Statement-I achieve their aim of stimulating economic activity. Incorrect Solution: A Statement-I is correct. Expansionary fiscal policy involves measures like increasing government expenditure or reducing taxes. These actions are typically undertaken during periods of economic slowdown or recession to boost aggregate demand and stimulate economic growth and employment. Statement-II is correct. The mechanisms through which expansionary fiscal policy works are described here. Increased government spending (e.g., on infrastructure, public services) directly contributes to aggregate demand in the economy. Tax cuts (e.g., on personal income or corporate profits) increase the disposable income of households and post-tax profits of firms, which can lead to higher consumption and investment, thereby boosting aggregate demand. Statement-II clearly explains how the measures mentioned in Statement-I achieve their aim of stimulating economic activity.

#### 3. Question

Consider the following statements.

Statement-I: Expansionary fiscal policy, such as increased government spending or tax cuts, typically aims to stimulate economic activity during a recession.

Statement-II: Increased government spending directly adds to aggregate demand, while tax cuts increase disposable income, potentially leading to higher consumption.

Which one of the following is correct in respect of the above statements?

• (a) Both Statement-I and Statement-II are correct and Statement-II is the correct explanation for Statement-I

• (b) Both Statement-I and Statement-II are correct and Statement-II is not the correct explanation for Statement-I

• (c) Statement-I is correct but Statement-II is incorrect

• (d) Statement-I is incorrect but Statement-II is correct

Solution: A

• Statement-I is correct. Expansionary fiscal policy involves measures like increasing government expenditure or reducing taxes. These actions are typically undertaken during periods of economic slowdown or recession to boost aggregate demand and stimulate economic growth and employment.

• Statement-II is correct. The mechanisms through which expansionary fiscal policy works are described here. Increased government spending (e.g., on infrastructure, public services) directly contributes to aggregate demand in the economy. Tax cuts (e.g., on personal income or corporate profits) increase the disposable income of households and post-tax profits of firms, which can lead to higher consumption and investment, thereby boosting aggregate demand.

• Statement-II clearly explains how the measures mentioned in Statement-I achieve their aim of stimulating economic activity.

Solution: A

• Statement-II clearly explains how the measures mentioned in Statement-I achieve their aim of stimulating economic activity.

• Question 4 of 5 4. Question With reference to ‘Quantitative Easing (QE)’, consider the following statements: It is a conventional monetary policy tool used by central banks to increase interest rates. QE involves the central bank injecting liquidity into money markets by purchasing assets without the goal of lowering interest rates. The primary aim of QE is to directly finance government budget deficits. How many of the above statements is/are correct? (a) Only one (b) Only two (c) All three (d) None Correct Solution: D Statement 1 is incorrect: Quantitative Easing (QE) is an unconventional monetary policy tool, typically employed when conventional tools (like interest rate cuts) have become ineffective (e.g., when interest rates are already near zero). Its aim is generally to lower longer-term interest rates and increase money supply, not to increase interest rates. Statement 2 is incorrect: QE involves the central bank injecting liquidity into the economy by purchasing assets (usually government bonds or other securities) from commercial banks or other financial institutions. A key goal of this is often to lower longer-term interest rates, ease financial conditions, and encourage lending and investment, not just to inject liquidity without affecting interest rates. Statement 3 is incorrect: While QE involves the central bank purchasing government bonds, its primary stated aim is typically to influence monetary conditions and stimulate the economy, not to directly finance government budget deficits. Incorrect Solution: D Statement 1 is incorrect: Quantitative Easing (QE) is an unconventional monetary policy tool, typically employed when conventional tools (like interest rate cuts) have become ineffective (e.g., when interest rates are already near zero). Its aim is generally to lower longer-term interest rates and increase money supply, not to increase interest rates. Statement 2 is incorrect: QE involves the central bank injecting liquidity into the economy by purchasing assets (usually government bonds or other securities) from commercial banks or other financial institutions. A key goal of this is often to lower longer-term interest rates, ease financial conditions, and encourage lending and investment, not just to inject liquidity without affecting interest rates. Statement 3 is incorrect: While QE involves the central bank purchasing government bonds, its primary stated aim is typically to influence monetary conditions and stimulate the economy, not to directly finance government budget deficits.

#### 4. Question

With reference to ‘Quantitative Easing (QE)’, consider the following statements:

• It is a conventional monetary policy tool used by central banks to increase interest rates.

• QE involves the central bank injecting liquidity into money markets by purchasing assets without the goal of lowering interest rates.

• The primary aim of QE is to directly finance government budget deficits.

How many of the above statements is/are correct?

• (a) Only one

• (b) Only two

• (c) All three

Solution: D

• Statement 1 is incorrect: Quantitative Easing (QE) is an unconventional monetary policy tool, typically employed when conventional tools (like interest rate cuts) have become ineffective (e.g., when interest rates are already near zero). Its aim is generally to lower longer-term interest rates and increase money supply, not to increase interest rates.

• Statement 2 is incorrect: QE involves the central bank injecting liquidity into the economy by purchasing assets (usually government bonds or other securities) from commercial banks or other financial institutions. A key goal of this is often to lower longer-term interest rates, ease financial conditions, and encourage lending and investment, not just to inject liquidity without affecting interest rates.

• Statement 3 is incorrect: While QE involves the central bank purchasing government bonds, its primary stated aim is typically to influence monetary conditions and stimulate the economy, not to directly finance government budget deficits.

Solution: D

• Question 5 of 5 5. Question Consider the following statements regarding the ‘Fiscal Multiplier’: A fiscal multiplier greater than one implies that an initial increase in government spending leads to a smaller increase in overall national income. The value of the fiscal multiplier is always positive and constant across all economic conditions. Tax cuts always have a larger fiscal multiplier effect than direct government spending. How many of the above statements is/are correct? (a) Only one (b) Only two (c) All three (d) None Correct Solution: D Statement 1 is incorrect: A fiscal multiplier greater than one implies that an initial increase in government spending (or a tax cut) leads to a larger, magnified increase in overall national income. For example, a multiplier of 1.5 means a $100 billion increase in government spending leads to a $150 billion increase in national income. Statement 2 is incorrect: The value of the fiscal multiplier can vary significantly depending on economic conditions (e.g., whether the economy is in a recession or at full employment), how the fiscal stimulus is financed, the openness of the economy, and the marginal propensity to consume. It is not always positive (though typically expected to be) and certainly not constant. For example, if increased government spending completely crowds out private investment, the net effect could be small or even negative in some theoretical scenarios. Statement 3 is incorrect: Economic theory suggests that direct government spending generally has a larger multiplier effect than tax cuts. This is because the entire amount of government spending directly enters the flow of income, whereas a portion of a tax cut might be saved by individuals rather than spent, thus having a smaller initial impact on aggregate demand. Incorrect Solution: D Statement 1 is incorrect: A fiscal multiplier greater than one implies that an initial increase in government spending (or a tax cut) leads to a larger, magnified increase in overall national income. For example, a multiplier of 1.5 means a $100 billion increase in government spending leads to a $150 billion increase in national income. Statement 2 is incorrect: The value of the fiscal multiplier can vary significantly depending on economic conditions (e.g., whether the economy is in a recession or at full employment), how the fiscal stimulus is financed, the openness of the economy, and the marginal propensity to consume. It is not always positive (though typically expected to be) and certainly not constant. For example, if increased government spending completely crowds out private investment, the net effect could be small or even negative in some theoretical scenarios. Statement 3 is incorrect: Economic theory suggests that direct government spending generally has a larger multiplier effect than tax cuts. This is because the entire amount of government spending directly enters the flow of income, whereas a portion of a tax cut might be saved by individuals rather than spent, thus having a smaller initial impact on aggregate demand.

#### 5. Question

Consider the following statements regarding the ‘Fiscal Multiplier’:

• A fiscal multiplier greater than one implies that an initial increase in government spending leads to a smaller increase in overall national income.

• The value of the fiscal multiplier is always positive and constant across all economic conditions.

• Tax cuts always have a larger fiscal multiplier effect than direct government spending.

How many of the above statements is/are correct?

• (a) Only one

• (b) Only two

• (c) All three

Solution: D

• Statement 1 is incorrect: A fiscal multiplier greater than one implies that an initial increase in government spending (or a tax cut) leads to a larger, magnified increase in overall national income. For example, a multiplier of 1.5 means a $100 billion increase in government spending leads to a $150 billion increase in national income.

• Statement 2 is incorrect: The value of the fiscal multiplier can vary significantly depending on economic conditions (e.g., whether the economy is in a recession or at full employment), how the fiscal stimulus is financed, the openness of the economy, and the marginal propensity to consume. It is not always positive (though typically expected to be) and certainly not constant. For example, if increased government spending completely crowds out private investment, the net effect could be small or even negative in some theoretical scenarios.

• Statement 3 is incorrect: Economic theory suggests that direct government spending generally has a larger multiplier effect than tax cuts. This is because the entire amount of government spending directly enters the flow of income, whereas a portion of a tax cut might be saved by individuals rather than spent, thus having a smaller initial impact on aggregate demand.

Solution: D

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