UPSC Static Quiz – Economy : 16 January 2025

UPSC Static Quiz – Economy : 16 January 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 What is the primary objective of contractionary monetary policy? a) To increase credit availability in the economy b) To control inflation and reduce economic overheating c) To boost aggregate demand and economic growth d) To enhance employment opportunities Correct Solution: b) Contractionary monetary policy aims to control inflation and reduce overheating by curbing excessive demand through measures like higher interest rates and reduced money supply. Impact of Monetary Policy on Growth and Demand: Type Tools Impact on Growth Impact on Demand Expansionary Monetary Policy – Lower interest rates – Encourages borrowing and investment – Increases consumer spending – Reduce CRR – Stimulates economic activity – Boosts aggregate demand – Quantitative Easing (QE) Contractionary Monetary Policy – Higher interest rates – Reduces overheating in the economy – Decreases consumer and business spending – Increase CRR – Slows down GDP growth – Controls inflation by reducing aggregate demand – Open Market Sales Incorrect Solution: b) Contractionary monetary policy aims to control inflation and reduce overheating by curbing excessive demand through measures like higher interest rates and reduced money supply. Impact of Monetary Policy on Growth and Demand: Type Tools Impact on Growth Impact on Demand Expansionary Monetary Policy – Lower interest rates – Encourages borrowing and investment – Increases consumer spending – Reduce CRR – Stimulates economic activity – Boosts aggregate demand – Quantitative Easing (QE) Contractionary Monetary Policy – Higher interest rates – Reduces overheating in the economy – Decreases consumer and business spending – Increase CRR – Slows down GDP growth – Controls inflation by reducing aggregate demand – Open Market Sales

#### 1. Question

What is the primary objective of contractionary monetary policy?

• a) To increase credit availability in the economy

• b) To control inflation and reduce economic overheating

• c) To boost aggregate demand and economic growth

• d) To enhance employment opportunities

Solution: b)

Contractionary monetary policy aims to control inflation and reduce overheating by curbing excessive demand through measures like higher interest rates and reduced money supply.

Impact of Monetary Policy on Growth and Demand:

Type | Tools | Impact on Growth | Impact on Demand

Expansionary Monetary Policy | – Lower interest rates | – Encourages borrowing and investment | – Increases consumer spending

– Reduce CRR | – Stimulates economic activity | – Boosts aggregate demand

– Quantitative Easing (QE) | |

Contractionary Monetary Policy | – Higher interest rates | – Reduces overheating in the economy | – Decreases consumer and business spending

– Increase CRR | – Slows down GDP growth | – Controls inflation by reducing aggregate demand

– Open Market Sales | |

Solution: b)

Contractionary monetary policy aims to control inflation and reduce overheating by curbing excessive demand through measures like higher interest rates and reduced money supply.

Impact of Monetary Policy on Growth and Demand:

Type | Tools | Impact on Growth | Impact on Demand

Expansionary Monetary Policy | – Lower interest rates | – Encourages borrowing and investment | – Increases consumer spending

– Reduce CRR | – Stimulates economic activity | – Boosts aggregate demand

– Quantitative Easing (QE) | |

Contractionary Monetary Policy | – Higher interest rates | – Reduces overheating in the economy | – Decreases consumer and business spending

– Increase CRR | – Slows down GDP growth | – Controls inflation by reducing aggregate demand

– Open Market Sales | |

• Question 2 of 5 2. Question Which of the following is an example of an expansionary fiscal policy measure? a) Increasing interest rates b) Reducing government spending on infrastructure c) Introducing subsidies for renewable energy d) Increasing income tax rates Correct Solution: c) Subsidies for renewable energy represent an example of expansionary fiscal policy because they aim to boost economic activity by increasing sectoral demand. Expansionary fiscal policies are designed to stimulate economic growth, especially during periods of slow economic activity or recession. By reducing the cost of renewable energy projects through subsidies, the government encourages investment in this sector, leading to job creation, increased production, and a multiplier effect across the economy. In contrast, other options like increasing income tax rates or reducing government spending on infrastructure are contractionary measures as they lower disposable income and decrease public expenditure, thereby dampening demand. Increasing interest rates is a tool of monetary policy, not fiscal policy, and it is used to control inflation rather than stimulate demand. Incorrect Solution: c) Subsidies for renewable energy represent an example of expansionary fiscal policy because they aim to boost economic activity by increasing sectoral demand. Expansionary fiscal policies are designed to stimulate economic growth, especially during periods of slow economic activity or recession. By reducing the cost of renewable energy projects through subsidies, the government encourages investment in this sector, leading to job creation, increased production, and a multiplier effect across the economy. In contrast, other options like increasing income tax rates or reducing government spending on infrastructure are contractionary measures as they lower disposable income and decrease public expenditure, thereby dampening demand. Increasing interest rates is a tool of monetary policy, not fiscal policy, and it is used to control inflation rather than stimulate demand.

#### 2. Question

Which of the following is an example of an expansionary fiscal policy measure?

• a) Increasing interest rates

• b) Reducing government spending on infrastructure

• c) Introducing subsidies for renewable energy

• d) Increasing income tax rates

Solution: c)

Subsidies for renewable energy represent an example of expansionary fiscal policy because they aim to boost economic activity by increasing sectoral demand. Expansionary fiscal policies are designed to stimulate economic growth, especially during periods of slow economic activity or recession. By reducing the cost of renewable energy projects through subsidies, the government encourages investment in this sector, leading to job creation, increased production, and a multiplier effect across the economy.

In contrast, other options like increasing income tax rates or reducing government spending on infrastructure are contractionary measures as they lower disposable income and decrease public expenditure, thereby dampening demand. Increasing interest rates is a tool of monetary policy, not fiscal policy, and it is used to control inflation rather than stimulate demand.

Solution: c)

• Question 3 of 5 3. Question Consider the following statements about the employment indicators tracked by the Periodic Labour Force Survey (PLFS): The work participation rate reflects the proportion of the working-age population currently employed. The unemployment rate in PLFS includes individuals engaged in informal work. The underemployment rate is a key metric used in PLFS to measure those working less than desired hours. PLFS focuses exclusively on formal sector employment. How many of the above statements is/are correct? a) Only one b) Only two c) Only three d) All four Correct Solution: b) Statement 1 is correct because the work participation rate measures the proportion of the working-age population that is employed. Statement 2 is incorrect because the unemployment rate in PLFS typically does not include those engaged in informal work, as it focuses on those seeking employment. Statement 3 is correct as PLFS tracks the underemployment rate to measure workers employed for fewer hours than they desire. Statement 4 is incorrect because PLFS covers both formal and informal sector employment. Incorrect Solution: b) Statement 1 is correct because the work participation rate measures the proportion of the working-age population that is employed. Statement 2 is incorrect because the unemployment rate in PLFS typically does not include those engaged in informal work, as it focuses on those seeking employment. Statement 3 is correct as PLFS tracks the underemployment rate to measure workers employed for fewer hours than they desire. Statement 4 is incorrect because PLFS covers both formal and informal sector employment.

#### 3. Question

Consider the following statements about the employment indicators tracked by the Periodic Labour Force Survey (PLFS):

• The work participation rate reflects the proportion of the working-age population currently employed.

• The unemployment rate in PLFS includes individuals engaged in informal work.

• The underemployment rate is a key metric used in PLFS to measure those working less than desired hours.

• PLFS focuses exclusively on formal sector employment.

How many of the above statements is/are correct?

• a) Only one

• b) Only two

• c) Only three

• d) All four

Solution: b)

Statement 1 is correct because the work participation rate measures the proportion of the working-age population that is employed.

Statement 2 is incorrect because the unemployment rate in PLFS typically does not include those engaged in informal work, as it focuses on those seeking employment.

Statement 3 is correct as PLFS tracks the underemployment rate to measure workers employed for fewer hours than they desire.

Statement 4 is incorrect because PLFS covers both formal and informal sector employment.

Solution: b)

Statement 1 is correct because the work participation rate measures the proportion of the working-age population that is employed.

Statement 2 is incorrect because the unemployment rate in PLFS typically does not include those engaged in informal work, as it focuses on those seeking employment.

Statement 3 is correct as PLFS tracks the underemployment rate to measure workers employed for fewer hours than they desire.

Statement 4 is incorrect because PLFS covers both formal and informal sector employment.

• Question 4 of 5 4. Question Consider the following statements. When the value of the currency is made cheaper by the central bank it is called devaluation of the currency, and when the market forces bring down the value of the currency due to falling demand it is called depreciation of the currency. In the Balance of Payments, the movements of money without exchange for goods or services and charities are part of Capital account. Which of the above statements is/are correct? a) 1 only b) 2 only c) Both 1 and 2 d) Neither 1 nor 2 Correct Solution: a) Exchange rate of a currency may be fixed by a central bank or left to the market forces of demand and supply. When the value is changed by the central bank it is called devaluation. If market forces bring down the value due to demand falling behind supply of the currency, it leads to depreciation. In the Balance of Payments, the movements of money without exchange for goods or services called ‘remittances’ and charities are part of Current account. Incorrect Solution: a) Exchange rate of a currency may be fixed by a central bank or left to the market forces of demand and supply. When the value is changed by the central bank it is called devaluation. If market forces bring down the value due to demand falling behind supply of the currency, it leads to depreciation. In the Balance of Payments, the movements of money without exchange for goods or services called ‘remittances’ and charities are part of Current account.

#### 4. Question

Consider the following statements.

• When the value of the currency is made cheaper by the central bank it is called devaluation of the currency, and when the market forces bring down the value of the currency due to falling demand it is called depreciation of the currency.

• In the Balance of Payments, the movements of money without exchange for goods or services and charities are part of Capital account.

Which of the above statements is/are correct?

• c) Both 1 and 2

• d) Neither 1 nor 2

Solution: a)

Exchange rate of a currency may be fixed by a central bank or left to the market forces of demand and supply. When the value is changed by the central bank it is called devaluation. If market forces bring down the value due to demand falling behind supply of the currency, it leads to depreciation.

In the Balance of Payments, the movements of money without exchange for goods or services called ‘remittances’ and charities are part of Current account.

Solution: a)

In the Balance of Payments, the movements of money without exchange for goods or services called ‘remittances’ and charities are part of Current account.

• Question 5 of 5 5. Question Consider the following statements regarding Money Market. The money market provides investment avenues of short-term tenor. The tenor of the transactions for Term money market is from 2 days to 14 days. Call money market is a market for uncollateralized lending and borrowing of funds. Which of the above statements is/are correct? a) 1 only b) 1 and 3 only c) 2 and 3 only d) 1, 2 and 3 Correct Solution: b) What is Money Market? While the G-Secs market generally caters to the investors with a long-term investment horizon, the money market provides investment avenues of short-term tenor. Money market transactions are generally used for funding the transactions in other markets including G-Secs market and meeting short term liquidity mismatches. By definition, money market is for a maximum tenor of one year. Within the one year, depending upon the tenors, money market is classified into: Overnight market – The tenor of transactions is one working day. Notice money market – The tenor of the transactions is from 2 days to 14 days. Term money market – The tenor of the transactions is from 15 days to one year. What are the different money market instruments? Money market instruments include call money, repos, T- Bills, Cash Management Bills, Commercial Paper, Certificate of Deposit and Collateralized Borrowing and Lending Obligations (CBLO). Call money market: Call money market is a market for uncollateralized lending and borrowing of funds. This market is predominantly overnight and is open for participation to scheduled commercial banks and the primary dealers. Incorrect Solution: b) What is Money Market? While the G-Secs market generally caters to the investors with a long-term investment horizon, the money market provides investment avenues of short-term tenor. Money market transactions are generally used for funding the transactions in other markets including G-Secs market and meeting short term liquidity mismatches. By definition, money market is for a maximum tenor of one year. Within the one year, depending upon the tenors, money market is classified into: Overnight market – The tenor of transactions is one working day. Notice money market – The tenor of the transactions is from 2 days to 14 days. Term money market – The tenor of the transactions is from 15 days to one year. What are the different money market instruments? Money market instruments include call money, repos, T- Bills, Cash Management Bills, Commercial Paper, Certificate of Deposit and Collateralized Borrowing and Lending Obligations (CBLO). Call money market: Call money market is a market for uncollateralized lending and borrowing of funds. This market is predominantly overnight and is open for participation to scheduled commercial banks and the primary dealers.

#### 5. Question

Consider the following statements regarding Money Market.

• The money market provides investment avenues of short-term tenor.

• The tenor of the transactions for Term money market is from 2 days to 14 days.

• Call money market is a market for uncollateralized lending and borrowing of funds.

Which of the above statements is/are correct?

• b) 1 and 3 only

• c) 2 and 3 only

• d) 1, 2 and 3

Solution: b)

What is Money Market?

While the G-Secs market generally caters to the investors with a long-term investment horizon, the money market provides investment avenues of short-term tenor. Money market transactions are generally used for funding the transactions in other markets including G-Secs market and meeting short term liquidity mismatches. By definition, money market is for a maximum tenor of one year. Within the one year, depending upon the tenors, money market is classified into:

• Overnight market – The tenor of transactions is one working day.

• Notice money market – The tenor of the transactions is from 2 days to 14 days.

• Term money market – The tenor of the transactions is from 15 days to one year.

What are the different money market instruments?

Money market instruments include call money, repos, T- Bills, Cash Management Bills, Commercial Paper, Certificate of Deposit and Collateralized Borrowing and Lending Obligations (CBLO).

Call money market:

Call money market is a market for uncollateralized lending and borrowing of funds. This market is predominantly overnight and is open for participation to scheduled commercial banks and the primary dealers.

Solution: b)

What is Money Market?

• Overnight market – The tenor of transactions is one working day.

• Notice money market – The tenor of the transactions is from 2 days to 14 days.

• Term money market – The tenor of the transactions is from 15 days to one year.

What are the different money market instruments?

Money market instruments include call money, repos, T- Bills, Cash Management Bills, Commercial Paper, Certificate of Deposit and Collateralized Borrowing and Lending Obligations (CBLO).

Call money market:

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