UPSC Static Quiz – Economy : 22 May 2025

UPSC Static Quiz – Economy : 22 May 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 Match List-I (Economic Concept/Term) with List-II (Primary Implication/Characteristic) and select the correct answer using the code given below the lists: List-I (Economic Concept/Term) List-II (Primary Implication/Characteristic) A. Seigniorage 1. Protection for investors from uncertainty regarding inflation. B. Stagflation 2. Profit made by a government by issuing currency. C. Inflation-Indexed Bonds 3. A persistent high inflation combined with high unemployment and stagnant demand. D. Liquidity Trap 4. Monetary policy becomes ineffective as interest rates are near zero. Select the correct answer Code: (a) A-2, B-1, C-3, D-4 (b) A-3, B-2, C-4, D-1 (c) A-2, B-3, C-1, D-4 (d) A-4, B-3, C-1, D-2 Correct Solution: c) Seigniorage is the profit made by a government by being able to issue currency. It is the difference between the face value of coins/notes and their production costs. So, A matches with 2. Stagflation is a condition of slow economic growth (stagnation) and relatively high unemployment—or economic stagnation—accompanied by rising prices, or inflation. So, B matches with 3. Inflation-Indexed Bonds (IIBs are bonds where the principal and/or interest payments are indexed to inflation. They provide protection to investors from uncertainty regarding inflation. So, C matches with 1. D. Liquidity Trap is a situation, described in Keynesian economics, in which injections of cash into the private banking system by a central bank fail to decrease interest rates and hence make monetary policy ineffective. This typically occurs when interest rates are already very low (near zero) and savings rates are high, making consumers and investors unwilling to take on more debt or invest. So, D matches with 4. Incorrect Solution: c) Seigniorage is the profit made by a government by being able to issue currency. It is the difference between the face value of coins/notes and their production costs. So, A matches with 2. Stagflation is a condition of slow economic growth (stagnation) and relatively high unemployment—or economic stagnation—accompanied by rising prices, or inflation. So, B matches with 3. Inflation-Indexed Bonds (IIBs are bonds where the principal and/or interest payments are indexed to inflation. They provide protection to investors from uncertainty regarding inflation. So, C matches with 1. D. Liquidity Trap is a situation, described in Keynesian economics, in which injections of cash into the private banking system by a central bank fail to decrease interest rates and hence make monetary policy ineffective. This typically occurs when interest rates are already very low (near zero) and savings rates are high, making consumers and investors unwilling to take on more debt or invest. So, D matches with 4.

#### 1. Question

Match List-I (Economic Concept/Term) with List-II (Primary Implication/Characteristic) and select the correct answer using the code given below the lists:

List-I (Economic Concept/Term) | List-II (Primary Implication/Characteristic)

A. Seigniorage | 1. Protection for investors from uncertainty regarding inflation.

B. Stagflation | 2. Profit made by a government by issuing currency.

C. Inflation-Indexed Bonds | 3. A persistent high inflation combined with high unemployment and stagnant demand.

D. Liquidity Trap | 4. Monetary policy becomes ineffective as interest rates are near zero.

Select the correct answer Code:

• (a) A-2, B-1, C-3, D-4

• (b) A-3, B-2, C-4, D-1

• (c) A-2, B-3, C-1, D-4

• (d) A-4, B-3, C-1, D-2

Solution: c)

• Seigniorage is the profit made by a government by being able to issue currency. It is the difference between the face value of coins/notes and their production costs. So, A matches with 2.

• Stagflation is a condition of slow economic growth (stagnation) and relatively high unemployment—or economic stagnation—accompanied by rising prices, or inflation. So, B matches with 3.

• Inflation-Indexed Bonds (IIBs are bonds where the principal and/or interest payments are indexed to inflation. They provide protection to investors from uncertainty regarding inflation. So, C matches with 1.

D. Liquidity Trap is a situation, described in Keynesian economics, in which injections of cash into the private banking system by a central bank fail to decrease interest rates and hence make monetary policy ineffective. This typically occurs when interest rates are already very low (near zero) and savings rates are high, making consumers and investors unwilling to take on more debt or invest. So, D matches with 4.

Solution: c)

• Seigniorage is the profit made by a government by being able to issue currency. It is the difference between the face value of coins/notes and their production costs. So, A matches with 2.

• Stagflation is a condition of slow economic growth (stagnation) and relatively high unemployment—or economic stagnation—accompanied by rising prices, or inflation. So, B matches with 3.

• Question 2 of 5 2. Question Consider the following statements regarding Production Linked Incentive (PLI) scheme. Statement-I: The implementation of Production Linked Incentive (PLI) schemes, aimed at boosting domestic manufacturing, may lead to a short-term increase in the import bill for certain sectors. Statement-II: Many PLI schemes incentivize incremental production, which, in the initial phases, might necessitate increased imports of capital goods, critical raw materials, and specialized components not yet available domestically at the required scale or quality. 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. While PLI schemes aim to reduce import dependence in the long run, the initial phase of setting up or scaling up manufacturing facilities can lead to an increase in imports of machinery, technology, and critical inputs that are not yet part of the domestic supply chain. Statement-II is correct. PLI schemes are designed to boost domestic manufacturing and attract investments. To achieve the targeted incremental production, firms often need to invest in new capital goods and source high-quality raw materials and components. If these are not readily available domestically, they will be imported, especially in high-tech sectors. This directly explains why the import bill might rise in the short term as firms gear up for increased production under PLI. Incorrect Solution: a) Statement-I is correct. While PLI schemes aim to reduce import dependence in the long run, the initial phase of setting up or scaling up manufacturing facilities can lead to an increase in imports of machinery, technology, and critical inputs that are not yet part of the domestic supply chain. Statement-II is correct. PLI schemes are designed to boost domestic manufacturing and attract investments. To achieve the targeted incremental production, firms often need to invest in new capital goods and source high-quality raw materials and components. If these are not readily available domestically, they will be imported, especially in high-tech sectors. This directly explains why the import bill might rise in the short term as firms gear up for increased production under PLI.

#### 2. Question

Consider the following statements regarding Production Linked Incentive (PLI) scheme.

Statement-I: The implementation of Production Linked Incentive (PLI) schemes, aimed at boosting domestic manufacturing, may lead to a short-term increase in the import bill for certain sectors.

Statement-II: Many PLI schemes incentivize incremental production, which, in the initial phases, might necessitate increased imports of capital goods, critical raw materials, and specialized components not yet available domestically at the required scale or quality.

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. While PLI schemes aim to reduce import dependence in the long run, the initial phase of setting up or scaling up manufacturing facilities can lead to an increase in imports of machinery, technology, and critical inputs that are not yet part of the domestic supply chain.

Statement-II is correct. PLI schemes are designed to boost domestic manufacturing and attract investments. To achieve the targeted incremental production, firms often need to invest in new capital goods and source high-quality raw materials and components. If these are not readily available domestically, they will be imported, especially in high-tech sectors. This directly explains why the import bill might rise in the short term as firms gear up for increased production under PLI.

Solution: a)

• Question 3 of 5 3. Question Consider the following statements regarding Cash Reserve Ratio (CRR). Statement-I: An increase in the Cash Reserve Ratio (CRR) by the central bank typically leads to an expansion of credit creation capacity in the banking system. Statement-II: CRR is the portion of Net Demand and Time Liabilities (NDTL) that banks must maintain as cash balances with the central bank, and a higher CRR reduces the funds available with banks for lending. 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: d) Statement-I is incorrect. An increase in the CRR reduces the credit creation capacity of the banking system. When CRR is increased, banks have to keep a larger portion of their deposits with the central bank, leaving them with less money to lend out. Statement-II is correct. CRR is indeed the share of a bank’s NDTL that it must maintain with the central bank in the form of cash reserves. A higher CRR directly curtails the lendable resources of banks. This statement correctly explains the mechanism of CRR and its impact on banks’ liquidity. Incorrect Solution: d) Statement-I is incorrect. An increase in the CRR reduces the credit creation capacity of the banking system. When CRR is increased, banks have to keep a larger portion of their deposits with the central bank, leaving them with less money to lend out. Statement-II is correct. CRR is indeed the share of a bank’s NDTL that it must maintain with the central bank in the form of cash reserves. A higher CRR directly curtails the lendable resources of banks. This statement correctly explains the mechanism of CRR and its impact on banks’ liquidity.

#### 3. Question

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

Statement-I: An increase in the Cash Reserve Ratio (CRR) by the central bank typically leads to an expansion of credit creation capacity in the banking system.

Statement-II: CRR is the portion of Net Demand and Time Liabilities (NDTL) that banks must maintain as cash balances with the central bank, and a higher CRR reduces the funds available with banks for lending.

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: d)

Statement-I is incorrect. An increase in the CRR reduces the credit creation capacity of the banking system. When CRR is increased, banks have to keep a larger portion of their deposits with the central bank, leaving them with less money to lend out.

Statement-II is correct. CRR is indeed the share of a bank’s NDTL that it must maintain with the central bank in the form of cash reserves. A higher CRR directly curtails the lendable resources of banks. This statement correctly explains the mechanism of CRR and its impact on banks’ liquidity.

Solution: d)

• Question 4 of 5 4. Question Match List-I (Type of Unemployment) with List-II (Primary Cause/Characteristic) and select the correct answer using the code given below the lists: List-I (Type of Unemployment) List-II (Primary Cause/Characteristic) A. Frictional Unemployment 1. Caused by a mismatch between the skills that workers in the economy can offer, and the skills demanded by employers. B. Structural Unemployment 2. Occurs when individuals are voluntarily transitioning between jobs or are new entrants to the labor market. C. Cyclical Unemployment 3. Arises due to seasonal variations in demand for labor in certain industries. D. Disguised Unemployment 4. Caused by a downturn in the business cycle leading to insufficient aggregate demand for labor. 5. Exists when more people are employed than actually needed, with marginal productivity being near zero. Select the correct answer Code: (a) A-1, B-2, C-3, D-4 (b) A-2, B-1, C-4, D-5 (c) A-2, B-4, C-1, D-5 (d) A-3, B-1, C-4, D-2 Correct Solution: b) Frictional Unemployment occurs when people are temporarily unemployed, either transitioning between jobs, or after finishing education and looking for their first job. It is a natural part of a dynamic labor market. So, A matches with 2. Structural Unemployment arises from a mismatch between the skills possessed by the workforce and the skills demanded by employers, often due to technological changes, shifts in industry structure, or geographical immobility. So, B matches with 1. Cyclical Unemployment is associated with the fluctuations in the business cycle. During economic downturns or recessions, aggregate demand falls, leading to firms laying off workers. So, C matches with 4. Disguised Unemployment (often found in agriculture in developing countries) exists when more people are employed in an activity than are actually needed, such that their marginal productivity is very low or zero. Removing some workers would not reduce total output. So, D matches with 5. Incorrect Solution: b) Frictional Unemployment occurs when people are temporarily unemployed, either transitioning between jobs, or after finishing education and looking for their first job. It is a natural part of a dynamic labor market. So, A matches with 2. Structural Unemployment arises from a mismatch between the skills possessed by the workforce and the skills demanded by employers, often due to technological changes, shifts in industry structure, or geographical immobility. So, B matches with 1. Cyclical Unemployment is associated with the fluctuations in the business cycle. During economic downturns or recessions, aggregate demand falls, leading to firms laying off workers. So, C matches with 4. Disguised Unemployment (often found in agriculture in developing countries) exists when more people are employed in an activity than are actually needed, such that their marginal productivity is very low or zero. Removing some workers would not reduce total output. So, D matches with 5.

#### 4. Question

Match List-I (Type of Unemployment) with List-II (Primary Cause/Characteristic) and select the correct answer using the code given below the lists:

List-I (Type of Unemployment) | List-II (Primary Cause/Characteristic)

A. Frictional Unemployment | 1. Caused by a mismatch between the skills that workers in the economy can offer, and the skills demanded by employers.

B. Structural Unemployment | 2. Occurs when individuals are voluntarily transitioning between jobs or are new entrants to the labor market.

C. Cyclical Unemployment | 3. Arises due to seasonal variations in demand for labor in certain industries.

D. Disguised Unemployment | 4. Caused by a downturn in the business cycle leading to insufficient aggregate demand for labor.

| 5. Exists when more people are employed than actually needed, with marginal productivity being near zero.

Select the correct answer Code:

• (a) A-1, B-2, C-3, D-4

• (b) A-2, B-1, C-4, D-5

• (c) A-2, B-4, C-1, D-5

• (d) A-3, B-1, C-4, D-2

Solution: b)

• Frictional Unemployment occurs when people are temporarily unemployed, either transitioning between jobs, or after finishing education and looking for their first job. It is a natural part of a dynamic labor market. So, A matches with 2.

• Structural Unemployment arises from a mismatch between the skills possessed by the workforce and the skills demanded by employers, often due to technological changes, shifts in industry structure, or geographical immobility. So, B matches with 1.

• Cyclical Unemployment is associated with the fluctuations in the business cycle. During economic downturns or recessions, aggregate demand falls, leading to firms laying off workers. So, C matches with 4.

• Disguised Unemployment (often found in agriculture in developing countries) exists when more people are employed in an activity than are actually needed, such that their marginal productivity is very low or zero. Removing some workers would not reduce total output. So, D matches with 5.

Solution: b)

• Question 5 of 5 5. Question Consider the following statements regarding Current Account Deficit (CAD). Statement-I: A persistent and significant rise in the global price of crude oil tends to worsen India’s Current Account Deficit (CAD). Statement-II: India is a net importer of crude oil, and oil imports constitute a substantial portion of the country’s total import bill, making the CAD sensitive to global oil price fluctuations. 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. India relies heavily on crude oil imports to meet its energy demands. A significant rise in global crude oil prices directly increases the value of India’s imports, which, other things being equal, tends to widen the Current Account Deficit. Statement-II is correct. India imports more than 80% of its crude oil requirements. These imports form a very large component of the total import bill. Consequently, any sharp increase in global oil prices leads to a higher outflow of foreign exchange, directly impacting and typically worsening the CAD. This statement accurately explains why Statement-I occurs. Incorrect Solution: a) Statement-I is correct. India relies heavily on crude oil imports to meet its energy demands. A significant rise in global crude oil prices directly increases the value of India’s imports, which, other things being equal, tends to widen the Current Account Deficit. Statement-II is correct. India imports more than 80% of its crude oil requirements. These imports form a very large component of the total import bill. Consequently, any sharp increase in global oil prices leads to a higher outflow of foreign exchange, directly impacting and typically worsening the CAD. This statement accurately explains why Statement-I occurs.

#### 5. Question

Consider the following statements regarding Current Account Deficit (CAD).

Statement-I: A persistent and significant rise in the global price of crude oil tends to worsen India’s Current Account Deficit (CAD).

Statement-II: India is a net importer of crude oil, and oil imports constitute a substantial portion of the country’s total import bill, making the CAD sensitive to global oil price fluctuations.

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. India relies heavily on crude oil imports to meet its energy demands. A significant rise in global crude oil prices directly increases the value of India’s imports, which, other things being equal, tends to widen the Current Account Deficit.

Statement-II is correct. India imports more than 80% of its crude oil requirements. These imports form a very large component of the total import bill. Consequently, any sharp increase in global oil prices leads to a higher outflow of foreign exchange, directly impacting and typically worsening the CAD. This statement accurately explains why Statement-I occurs.

Solution: a)

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