UPSC Static Quiz – Economy : 14 January 2026

UPSC Static Quiz – Economy : 14 January 2026 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 the revision of the base year for calculating India’s Gross Domestic Product (GDP): A base year revision is undertaken primarily to account for structural changes in the economy. Shifting to a newer base year typically results in a lower estimation of the nominal GDP for that year. The revision process involves updating the basket of goods and services and their corresponding weights in the calculation. How many of the above statements are correct? (a) Only one (b) Only two (c) All three (d) None Correct Solution: B Statement 1 is correct.The primary objective of revising the base year for GDP calculation is to capture and reflect the structural changes that have occurred in the economy. Over time, new sectors gain prominence (e.g., the digital economy), some sectors decline, and the relative importance of various goods and services changes. A new base year ensures that the GDP figures provide a more accurate and contemporary picture of the economy’s structure. Statement 2 is incorrect.Shifting to a newer base year usually results in a higher, not lower, estimation of the nominal GDP. This is because the new series incorporates more comprehensive data and better captures new economic activities and sectors that were previously under-represented or non-existent. For instance, the revision from base year 2004-05 to 2011-12 led to an upward revision of GDP figures. Statement 3 is correct.The revision is a comprehensive exercise that involves updating the item basket in the indices used for deflation (like WPI and CPI) and re-evaluating the weights assigned to different sectors and sub-sectors based on their current contribution to the economy. This is done using data from the latest large-scale surveys and censuses, such as those conducted by the National Sample Survey Office (NSSO). Incorrect Solution: B Statement 1 is correct.The primary objective of revising the base year for GDP calculation is to capture and reflect the structural changes that have occurred in the economy. Over time, new sectors gain prominence (e.g., the digital economy), some sectors decline, and the relative importance of various goods and services changes. A new base year ensures that the GDP figures provide a more accurate and contemporary picture of the economy’s structure. Statement 2 is incorrect.Shifting to a newer base year usually results in a higher, not lower, estimation of the nominal GDP. This is because the new series incorporates more comprehensive data and better captures new economic activities and sectors that were previously under-represented or non-existent. For instance, the revision from base year 2004-05 to 2011-12 led to an upward revision of GDP figures. Statement 3 is correct.The revision is a comprehensive exercise that involves updating the item basket in the indices used for deflation (like WPI and CPI) and re-evaluating the weights assigned to different sectors and sub-sectors based on their current contribution to the economy. This is done using data from the latest large-scale surveys and censuses, such as those conducted by the National Sample Survey Office (NSSO).

#### 1. Question

Consider the following statements regarding the revision of the base year for calculating India’s Gross Domestic Product (GDP):

• A base year revision is undertaken primarily to account for structural changes in the economy.

• Shifting to a newer base year typically results in a lower estimation of the nominal GDP for that year.

• The revision process involves updating the basket of goods and services and their corresponding weights in the calculation.

How many of the above statements are correct?

• (a) Only one

• (b) Only two

• (c) All three

Solution: B

• Statement 1 is correct.The primary objective of revising the base year for GDP calculation is to capture and reflect the structural changes that have occurred in the economy. Over time, new sectors gain prominence (e.g., the digital economy), some sectors decline, and the relative importance of various goods and services changes. A new base year ensures that the GDP figures provide a more accurate and contemporary picture of the economy’s structure.

• Statement 2 is incorrect.Shifting to a newer base year usually results in a higher, not lower, estimation of the nominal GDP. This is because the new series incorporates more comprehensive data and better captures new economic activities and sectors that were previously under-represented or non-existent. For instance, the revision from base year 2004-05 to 2011-12 led to an upward revision of GDP figures.

• Statement 3 is correct.The revision is a comprehensive exercise that involves updating the item basket in the indices used for deflation (like WPI and CPI) and re-evaluating the weights assigned to different sectors and sub-sectors based on their current contribution to the economy. This is done using data from the latest large-scale surveys and censuses, such as those conducted by the National Sample Survey Office (NSSO).

Solution: B

• Question 2 of 5 2. Question In the context of the Reserve Bank of India’s monetary policy framework, what is the most immediate and direct consequence of an increase in the fixed Reverse Repo Rate? (a) It leads to a decrease in the lending rates offered by commercial banks to corporations. (b) It incentivizes commercial banks to park more of their surplus funds with the RBI. (c) It directly reduces the Statutory Liquidity Ratio for scheduled commercial banks. (d) It increases the amount of money available for the public to borrow. Correct Solution: B The Reverse Repo Rateis the interest rate at which the RBI absorbs liquidity from commercial banks, against the collateral of eligible government securities. It is the rate at which commercial banks can park their short-term excess funds with the central bank. When the RBI increases the Reverse Repo Rate, it makes it more attractive for commercial banks to lend their surplus funds to the RBI, as they earn a higher, risk-free return. This is the most immediate and direct effect. This action absorbs liquidityfrom the banking system. With less surplus cash, the capacity of banks to lend to the public and corporations is reduced, not increased. This would likely put upward pressure on their lending rates, not decrease them. Therefore, options (a) and (d) are incorrect. The Reverse Repo Rate is a monetary policy tool related to liquidity management and has no direct bearing on the Statutory Liquidity Ratio (SLR), which is a prudential norm requiring banks to hold a certain percentage of their deposits in the form of liquid assets like government securities. Therefore, option (c) is incorrect. Incorrect Solution: B The Reverse Repo Rateis the interest rate at which the RBI absorbs liquidity from commercial banks, against the collateral of eligible government securities. It is the rate at which commercial banks can park their short-term excess funds with the central bank. When the RBI increases the Reverse Repo Rate, it makes it more attractive for commercial banks to lend their surplus funds to the RBI, as they earn a higher, risk-free return. This is the most immediate and direct effect. This action absorbs liquidityfrom the banking system. With less surplus cash, the capacity of banks to lend to the public and corporations is reduced, not increased. This would likely put upward pressure on their lending rates, not decrease them. Therefore, options (a) and (d) are incorrect. The Reverse Repo Rate is a monetary policy tool related to liquidity management and has no direct bearing on the Statutory Liquidity Ratio (SLR), which is a prudential norm requiring banks to hold a certain percentage of their deposits in the form of liquid assets like government securities. Therefore, option (c) is incorrect.

#### 2. Question

In the context of the Reserve Bank of India’s monetary policy framework, what is the most immediate and direct consequence of an increase in the fixed Reverse Repo Rate?

• (a) It leads to a decrease in the lending rates offered by commercial banks to corporations.

• (b) It incentivizes commercial banks to park more of their surplus funds with the RBI.

• (c) It directly reduces the Statutory Liquidity Ratio for scheduled commercial banks.

• (d) It increases the amount of money available for the public to borrow.

Solution: B

• The Reverse Repo Rateis the interest rate at which the RBI absorbs liquidity from commercial banks, against the collateral of eligible government securities. It is the rate at which commercial banks can park their short-term excess funds with the central bank.

• When the RBI increases the Reverse Repo Rate, it makes it more attractive for commercial banks to lend their surplus funds to the RBI, as they earn a higher, risk-free return. This is the most immediate and direct effect.

• This action absorbs liquidityfrom the banking system. With less surplus cash, the capacity of banks to lend to the public and corporations is reduced, not increased. This would likely put upward pressure on their lending rates, not decrease them. Therefore, options (a) and (d) are incorrect.

• The Reverse Repo Rate is a monetary policy tool related to liquidity management and has no direct bearing on the Statutory Liquidity Ratio (SLR), which is a prudential norm requiring banks to hold a certain percentage of their deposits in the form of liquid assets like government securities. Therefore, option (c) is incorrect.

Solution: B

• Question 3 of 5 3. Question Which one of the following scenarios best illustrates the macroeconomic condition of ‘Stagflation’? (a) A rapid increase in the general price level accompanied by high economic growth and falling unemployment. (b) A persistent fall in the general price level accompanied by contracting economic output. (c) A high rate of inflation coexisting with a high rate of unemployment and stagnant economic growth. (d) A situation where a sharp rise in the prices of a few essential commodities skews the overall inflation rate. Correct Solution: C Stagflationis a portmanteau of “stagnation” and “inflation.” It describes a situation in an economy where economic growth is slow or stagnant, unemployment is persistently high, and inflation is also high. This combination is particularly problematic because the policy tools used to combat inflation (e.g., raising interest rates) tend to worsen unemployment and stagnation, while policies to boost growth and employment (e.g., cutting interest rates) can exacerbate inflation. Option (a) describes an economic boom, the opposite of stagflation. Option (b) describes deflationary depression or a severe recession. Option (d) describes ‘skewflation,’ where inflation is driven by a price rise in a specific group of commodities, not an across-the-board phenomenon coexisting with unemployment. Option (c) accurately captures the three defining characteristics of stagflation: high inflation, high unemployment, and stagnant growth. This was famously observed in many Western economies during the 1970s oil crisis. Incorrect Solution: C Stagflationis a portmanteau of “stagnation” and “inflation.” It describes a situation in an economy where economic growth is slow or stagnant, unemployment is persistently high, and inflation is also high. This combination is particularly problematic because the policy tools used to combat inflation (e.g., raising interest rates) tend to worsen unemployment and stagnation, while policies to boost growth and employment (e.g., cutting interest rates) can exacerbate inflation. Option (a) describes an economic boom, the opposite of stagflation. Option (b) describes deflationary depression or a severe recession. Option (d) describes ‘skewflation,’ where inflation is driven by a price rise in a specific group of commodities, not an across-the-board phenomenon coexisting with unemployment. Option (c) accurately captures the three defining characteristics of stagflation: high inflation, high unemployment, and stagnant growth. This was famously observed in many Western economies during the 1970s oil crisis.

#### 3. Question

Which one of the following scenarios best illustrates the macroeconomic condition of ‘Stagflation’?

• (a) A rapid increase in the general price level accompanied by high economic growth and falling unemployment.

• (b) A persistent fall in the general price level accompanied by contracting economic output.

• (c) A high rate of inflation coexisting with a high rate of unemployment and stagnant economic growth.

• (d) A situation where a sharp rise in the prices of a few essential commodities skews the overall inflation rate.

Solution: C

• Stagflationis a portmanteau of “stagnation” and “inflation.” It describes a situation in an economy where economic growth is slow or stagnant, unemployment is persistently high, and inflation is also high. This combination is particularly problematic because the policy tools used to combat inflation (e.g., raising interest rates) tend to worsen unemployment and stagnation, while policies to boost growth and employment (e.g., cutting interest rates) can exacerbate inflation.

• Option (a) describes an economic boom, the opposite of stagflation.

• Option (b) describes deflationary depression or a severe recession.

• Option (d) describes ‘skewflation,’ where inflation is driven by a price rise in a specific group of commodities, not an across-the-board phenomenon coexisting with unemployment.

• Option (c) accurately captures the three defining characteristics of stagflation: high inflation, high unemployment, and stagnant growth. This was famously observed in many Western economies during the 1970s oil crisis.

Solution: C

• Option (a) describes an economic boom, the opposite of stagflation.

• Option (b) describes deflationary depression or a severe recession.

• Option (d) describes ‘skewflation,’ where inflation is driven by a price rise in a specific group of commodities, not an across-the-board phenomenon coexisting with unemployment.

• Question 4 of 5 4. Question With reference to foreign investment in India, consider the following statements: Foreign Direct Investment (FDI) is generally considered more stable than Foreign Portfolio Investment (FPI) as it involves a long-term interest in the host economy. An investment is classified as FDI if the foreign investor acquires a stake of 10 percent or more in a listed company; otherwise, it is treated as FPI. Unlike FPI, FDI is permitted only in the primary market and not in the secondary market. Which of the statements given above are correct? (a) 1 and 2 only (b) 2 and 3 only (c) 1 and 3 only (d) 1, 2 and 3 Correct Solution: A Statement 1 is correct. FDI represents a long-term investment where a foreign entity establishes a lasting interest in a domestic enterprise, often involving the transfer of technology, management skills, and organizational expertise. This type of investment in physical assets and operations is difficult to withdraw quickly, making it a stable source of capital. FPI, on the other hand, consists of investments in financial assets like stocks and bonds. These are typically driven by short-term considerations of interest rates and exchange rate movements and can be sold off quickly, leading to volatility. For this reason, FPI is often referred to as ‘hot money’, and FDI is considered a more stable and desirable form of foreign capital inflow. Statement 2 is correct. This statement reflects the standard international definition, as recommended by committees like the Arvind Mayaram panel in India, used to differentiate between FDI and FPI. If a foreign investor acquires 10 percent or more of the equity shares in a listed company, it is deemed to represent a long-term, strategic interest, and the investment is categorized as FDI. If the stake is less than 10 percent, it is treated as FPI, assuming the investor is primarily interested in financial returns rather than exercising significant influence or control over the company’s management. Statement 3 is incorrect. FDI is not restricted to the primary market (issuance of new shares). It can also be made through the secondary market via mergers and acquisitions, where a foreign company buys a controlling stake in an existing Indian company by purchasing its shares from existing shareholders. FPI, by its nature, operates in both the primary market (e.g., subscribing to Initial Public Offerings – IPOs) and the secondary market (buying and selling already listed securities on stock exchanges). The key distinction is not the market of operation but the level of stake and the intent of the investor (control vs. financial return). Incorrect Solution: A Statement 1 is correct. FDI represents a long-term investment where a foreign entity establishes a lasting interest in a domestic enterprise, often involving the transfer of technology, management skills, and organizational expertise. This type of investment in physical assets and operations is difficult to withdraw quickly, making it a stable source of capital. FPI, on the other hand, consists of investments in financial assets like stocks and bonds. These are typically driven by short-term considerations of interest rates and exchange rate movements and can be sold off quickly, leading to volatility. For this reason, FPI is often referred to as ‘hot money’, and FDI is considered a more stable and desirable form of foreign capital inflow. Statement 2 is correct. This statement reflects the standard international definition, as recommended by committees like the Arvind Mayaram panel in India, used to differentiate between FDI and FPI. If a foreign investor acquires 10 percent or more of the equity shares in a listed company, it is deemed to represent a long-term, strategic interest, and the investment is categorized as FDI. If the stake is less than 10 percent, it is treated as FPI, assuming the investor is primarily interested in financial returns rather than exercising significant influence or control over the company’s management. Statement 3 is incorrect. FDI is not restricted to the primary market (issuance of new shares). It can also be made through the secondary market via mergers and acquisitions, where a foreign company buys a controlling stake in an existing Indian company by purchasing its shares from existing shareholders. FPI, by its nature, operates in both the primary market (e.g., subscribing to Initial Public Offerings – IPOs) and the secondary market (buying and selling already listed securities on stock exchanges). The key distinction is not the market of operation but the level of stake and the intent of the investor (control vs. financial return).

#### 4. Question

With reference to foreign investment in India, consider the following statements:

• Foreign Direct Investment (FDI) is generally considered more stable than Foreign Portfolio Investment (FPI) as it involves a long-term interest in the host economy.

• An investment is classified as FDI if the foreign investor acquires a stake of 10 percent or more in a listed company; otherwise, it is treated as FPI.

• Unlike FPI, FDI is permitted only in the primary market and not in the secondary market.

Which of the statements given above are correct?

• (a) 1 and 2 only

• (b) 2 and 3 only

• (c) 1 and 3 only

• (d) 1, 2 and 3

Solution: A

• Statement 1 is correct. FDI represents a long-term investment where a foreign entity establishes a lasting interest in a domestic enterprise, often involving the transfer of technology, management skills, and organizational expertise. This type of investment in physical assets and operations is difficult to withdraw quickly, making it a stable source of capital. FPI, on the other hand, consists of investments in financial assets like stocks and bonds. These are typically driven by short-term considerations of interest rates and exchange rate movements and can be sold off quickly, leading to volatility. For this reason, FPI is often referred to as ‘hot money’, and FDI is considered a more stable and desirable form of foreign capital inflow.

• Statement 2 is correct. This statement reflects the standard international definition, as recommended by committees like the Arvind Mayaram panel in India, used to differentiate between FDI and FPI. If a foreign investor acquires 10 percent or more of the equity shares in a listed company, it is deemed to represent a long-term, strategic interest, and the investment is categorized as FDI. If the stake is less than 10 percent, it is treated as FPI, assuming the investor is primarily interested in financial returns rather than exercising significant influence or control over the company’s management.

• Statement 3 is incorrect. FDI is not restricted to the primary market (issuance of new shares). It can also be made through the secondary market via mergers and acquisitions, where a foreign company buys a controlling stake in an existing Indian company by purchasing its shares from existing shareholders. FPI, by its nature, operates in both the primary market (e.g., subscribing to Initial Public Offerings – IPOs) and the secondary market (buying and selling already listed securities on stock exchanges). The key distinction is not the market of operation but the level of stake and the intent of the investor (control vs. financial return).

Solution: A

• Question 5 of 5 5. Question Consider the following transactions in the context of India’s Balance of Payments: An Indian firm takes a loan from a commercial bank in the United States. This is recorded as a credit item on the current account. An Indian IT company provides software services to a client in Germany. This is recorded as a credit item on the capital account. Which of the above statements are correct? (a) 1 only (b) 2 only (c) Both 1 and 2 (d) Neither 1 nor 2 Correct Solution: D Statement 1 is incorrect. A loan taken by an Indian firm from a foreign bank is a form of borrowing. This represents an inflow of capital into the country. All capital inflows are recorded as credit items. However, since this transaction creates a liability for the Indian firm, it is recorded on the capital account, not the current account. The current account deals with trade in goods, services, and unilateral transfers. Statement 2 is incorrect. The provision of software services by an Indian company to a foreign client constitutes an export of services. Exports of services result in an inflow of foreign currency. Such inflows are recorded as credit items. However, trade in services (both exports and imports) is a component of the current account under the ‘invisibles’ category, not the capital account. The capital account is for transactions involving assets and liabilities. Incorrect Solution: D Statement 1 is incorrect. A loan taken by an Indian firm from a foreign bank is a form of borrowing. This represents an inflow of capital into the country. All capital inflows are recorded as credit items. However, since this transaction creates a liability for the Indian firm, it is recorded on the capital account, not the current account. The current account deals with trade in goods, services, and unilateral transfers. Statement 2 is incorrect. The provision of software services by an Indian company to a foreign client constitutes an export of services. Exports of services result in an inflow of foreign currency. Such inflows are recorded as credit items. However, trade in services (both exports and imports) is a component of the current account under the ‘invisibles’ category, not the capital account. The capital account is for transactions involving assets and liabilities.

#### 5. Question

Consider the following transactions in the context of India’s Balance of Payments:

• An Indian firm takes a loan from a commercial bank in the United States. This is recorded as a credit item on the current account.

• An Indian IT company provides software services to a client in Germany. This is recorded as a credit item on the capital account.

Which of the above statements are correct?

• (a) 1 only

• (b) 2 only

• (c) Both 1 and 2

• (d) Neither 1 nor 2

Solution: D

• Statement 1 is incorrect. A loan taken by an Indian firm from a foreign bank is a form of borrowing. This represents an inflow of capital into the country. All capital inflows are recorded as credit items. However, since this transaction creates a liability for the Indian firm, it is recorded on the capital account, not the current account. The current account deals with trade in goods, services, and unilateral transfers.

• Statement 2 is incorrect. The provision of software services by an Indian company to a foreign client constitutes an export of services. Exports of services result in an inflow of foreign currency. Such inflows are recorded as credit items. However, trade in services (both exports and imports) is a component of the current account under the ‘invisibles’ category, not the capital account. The capital account is for transactions involving assets and liabilities.

Solution: D

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