UPSC Static Quiz – Economy : 5 June 2025

UPSC Static Quiz – Economy : 5 June 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 Central Bank Digital Currency (CBDC). Statement-I: The adoption of a Central Bank Digital Currency (CBDC) by a country is likely to completely eliminate the risks associated with private cryptocurrencies. Statement-II: CBDCs, being sovereign-backed digital currencies, offer a safer and more regulated alternative to volatile private cryptocurrencies, thereby potentially reducing their attractiveness for legitimate transactions. 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. While a CBDC might offer a regulated alternative, it is unlikely to completely eliminate all risks or the existence of private cryptocurrencies. Private cryptocurrencies often appeal to users for reasons beyond just being a medium of exchange, such as speculative investment, perceived anonymity (though often pseudo-anonymous), or ideological opposition to centralized financial systems. A CBDC will not automatically remove these motivations or the technologies underpinning private cryptocurrencies. Statement-II is correct. CBDCs are digital forms of a country’s fiat currency, issued and backed by the central bank. This provides them with legal tender status, stability, and regulatory oversight that private cryptocurrencies lack. This can make CBDCs a more attractive option for legitimate transactions and may reduce the appeal of volatile private cryptocurrencies for mainstream use, though not eliminate them entirely or their associated risks (like speculative trading or illicit use). Incorrect Solution: d) Statement-I is incorrect. While a CBDC might offer a regulated alternative, it is unlikely to completely eliminate all risks or the existence of private cryptocurrencies. Private cryptocurrencies often appeal to users for reasons beyond just being a medium of exchange, such as speculative investment, perceived anonymity (though often pseudo-anonymous), or ideological opposition to centralized financial systems. A CBDC will not automatically remove these motivations or the technologies underpinning private cryptocurrencies. Statement-II is correct. CBDCs are digital forms of a country’s fiat currency, issued and backed by the central bank. This provides them with legal tender status, stability, and regulatory oversight that private cryptocurrencies lack. This can make CBDCs a more attractive option for legitimate transactions and may reduce the appeal of volatile private cryptocurrencies for mainstream use, though not eliminate them entirely or their associated risks (like speculative trading or illicit use).

#### 1. Question

Consider the following statements regarding Central Bank Digital Currency (CBDC).

Statement-I: The adoption of a Central Bank Digital Currency (CBDC) by a country is likely to completely eliminate the risks associated with private cryptocurrencies.

Statement-II: CBDCs, being sovereign-backed digital currencies, offer a safer and more regulated alternative to volatile private cryptocurrencies, thereby potentially reducing their attractiveness for legitimate transactions.

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. While a CBDC might offer a regulated alternative, it is unlikely to completely eliminate all risks or the existence of private cryptocurrencies. Private cryptocurrencies often appeal to users for reasons beyond just being a medium of exchange, such as speculative investment, perceived anonymity (though often pseudo-anonymous), or ideological opposition to centralized financial systems. A CBDC will not automatically remove these motivations or the technologies underpinning private cryptocurrencies.

• Statement-II is correct. CBDCs are digital forms of a country’s fiat currency, issued and backed by the central bank. This provides them with legal tender status, stability, and regulatory oversight that private cryptocurrencies lack. This can make CBDCs a more attractive option for legitimate transactions and may reduce the appeal of volatile private cryptocurrencies for mainstream use, though not eliminate them entirely or their associated risks (like speculative trading or illicit use).

Solution: d)

• Question 2 of 5 2. Question Consider the following statements regarding Fiscal Responsibility and Budget Management (FRBM) Act, 2003 Statement-I: The Fiscal Responsibility and Budget Management (FRBM) Act, 2003, primarily focuses on mandating specific levels of government expenditure on social sector schemes. Statement-II: The FRBM Act aims to ensure inter-generational equity in fiscal management and long-term macroeconomic stability by setting targets for the reduction of fiscal deficits and government debt. 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. The FRBM Act does not mandate specific expenditure levels for social sector schemes. Its primary focus is on fiscal consolidation by setting targets for deficits (fiscal and revenue) and debt levels of the government. While government expenditure patterns are influenced by fiscal targets, the Act itself doesn’t prescribe sectoral allocations. Statement-II is correct. A core objective of the FRBM Act is to instill fiscal discipline, ensure that current generations do not unduly burden future generations with debt (inter-generational equity), and promote macroeconomic stability by controlling government deficits and debt. Incorrect Solution: d) Statement-I is incorrect. The FRBM Act does not mandate specific expenditure levels for social sector schemes. Its primary focus is on fiscal consolidation by setting targets for deficits (fiscal and revenue) and debt levels of the government. While government expenditure patterns are influenced by fiscal targets, the Act itself doesn’t prescribe sectoral allocations. Statement-II is correct. A core objective of the FRBM Act is to instill fiscal discipline, ensure that current generations do not unduly burden future generations with debt (inter-generational equity), and promote macroeconomic stability by controlling government deficits and debt.

#### 2. Question

Consider the following statements regarding Fiscal Responsibility and Budget Management (FRBM) Act, 2003

Statement-I: The Fiscal Responsibility and Budget Management (FRBM) Act, 2003, primarily focuses on mandating specific levels of government expenditure on social sector schemes.

Statement-II: The FRBM Act aims to ensure inter-generational equity in fiscal management and long-term macroeconomic stability by setting targets for the reduction of fiscal deficits and government debt.

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. The FRBM Act does not mandate specific expenditure levels for social sector schemes. Its primary focus is on fiscal consolidation by setting targets for deficits (fiscal and revenue) and debt levels of the government. While government expenditure patterns are influenced by fiscal targets, the Act itself doesn’t prescribe sectoral allocations.

Statement-II is correct. A core objective of the FRBM Act is to instill fiscal discipline, ensure that current generations do not unduly burden future generations with debt (inter-generational equity), and promote macroeconomic stability by controlling government deficits and debt.

Solution: d)

• Question 3 of 5 3. Question In the context of the Indian economy, the term ‘Twin Deficit’ most accurately refers to: (a) Fiscal Deficit and Revenue Deficit. (b) Fiscal Deficit and Current Account Deficit. (c) Trade Deficit and Primary Deficit. (d) Budget Deficit and Monetized Deficit. Correct Solution: b) The ‘Twin Deficit’ problem in an economy refers to the simultaneous occurrence of a Fiscal Deficit and a Current Account Deficit (CAD). A fiscal deficit arises when government expenditure exceeds its revenue, indicating government borrowing. A current account deficit signifies that a country’s total imports of goods, services, and transfers are greater than its total exports of goods, services, and transfers. These two deficits are often interlinked; high fiscal deficits can lead to higher aggregate demand, potentially spilling over into higher imports and thus a wider CAD, or it could lead to higher domestic interest rates attracting capital inflows that appreciate the currency, making exports less competitive and imports cheaper. Incorrect Solution: b) The ‘Twin Deficit’ problem in an economy refers to the simultaneous occurrence of a Fiscal Deficit and a Current Account Deficit (CAD). A fiscal deficit arises when government expenditure exceeds its revenue, indicating government borrowing. A current account deficit signifies that a country’s total imports of goods, services, and transfers are greater than its total exports of goods, services, and transfers. These two deficits are often interlinked; high fiscal deficits can lead to higher aggregate demand, potentially spilling over into higher imports and thus a wider CAD, or it could lead to higher domestic interest rates attracting capital inflows that appreciate the currency, making exports less competitive and imports cheaper.

#### 3. Question

In the context of the Indian economy, the term ‘Twin Deficit’ most accurately refers to:

• (a) Fiscal Deficit and Revenue Deficit.

• (b) Fiscal Deficit and Current Account Deficit.

• (c) Trade Deficit and Primary Deficit.

• (d) Budget Deficit and Monetized Deficit.

Solution: b)

• The ‘Twin Deficit’ problem in an economy refers to the simultaneous occurrence of a Fiscal Deficit and a Current Account Deficit (CAD).

• A fiscal deficit arises when government expenditure exceeds its revenue, indicating government borrowing.

• A current account deficit signifies that a country’s total imports of goods, services, and transfers are greater than its total exports of goods, services, and transfers.

• These two deficits are often interlinked; high fiscal deficits can lead to higher aggregate demand, potentially spilling over into higher imports and thus a wider CAD, or it could lead to higher domestic interest rates attracting capital inflows that appreciate the currency, making exports less competitive and imports cheaper.

Solution: b)

• The ‘Twin Deficit’ problem in an economy refers to the simultaneous occurrence of a Fiscal Deficit and a Current Account Deficit (CAD).

• A fiscal deficit arises when government expenditure exceeds its revenue, indicating government borrowing.

• A current account deficit signifies that a country’s total imports of goods, services, and transfers are greater than its total exports of goods, services, and transfers.

• Question 4 of 5 4. Question If the Reserve Bank of India (RBI) conducts an Open Market Operation (OMO) by selling government securities, what is its most likely immediate impact on the banking system? (a) Decrease in liquidity and increase in interest rates. (b) Increase in liquidity and decrease in interest rates. (c) Increase in liquidity and increase in interest rates. (d) Decrease in liquidity and decrease in interest rates. Correct Solution: a) When the RBI sells government securities through Open Market Operations (OMOs), commercial banks and other financial institutions purchase these securities. To do so, they pay the RBI, which leads to a reduction in the cash reserves held by these banks. This withdrawal of money from the banking system results in a decrease in overall liquidity. With less money available for lending, the cost of borrowing (interest rates) tends to rise as banks compete for scarce funds or pass on the higher cost. This is a contractionary monetary policy tool used by the RBI to curb inflationary pressures or manage excess liquidity in the economy. Conversely, buying securities injects liquidity and tends to lower interest rates. Incorrect Solution: a) When the RBI sells government securities through Open Market Operations (OMOs), commercial banks and other financial institutions purchase these securities. To do so, they pay the RBI, which leads to a reduction in the cash reserves held by these banks. This withdrawal of money from the banking system results in a decrease in overall liquidity. With less money available for lending, the cost of borrowing (interest rates) tends to rise as banks compete for scarce funds or pass on the higher cost. This is a contractionary monetary policy tool used by the RBI to curb inflationary pressures or manage excess liquidity in the economy. Conversely, buying securities injects liquidity and tends to lower interest rates.

#### 4. Question

If the Reserve Bank of India (RBI) conducts an Open Market Operation (OMO) by selling government securities, what is its most likely immediate impact on the banking system?

• (a) Decrease in liquidity and increase in interest rates.

• (b) Increase in liquidity and decrease in interest rates.

• (c) Increase in liquidity and increase in interest rates.

• (d) Decrease in liquidity and decrease in interest rates.

Solution: a)

When the RBI sells government securities through Open Market Operations (OMOs), commercial banks and other financial institutions purchase these securities. To do so, they pay the RBI, which leads to a reduction in the cash reserves held by these banks. This withdrawal of money from the banking system results in a decrease in overall liquidity.

With less money available for lending, the cost of borrowing (interest rates) tends to rise as banks compete for scarce funds or pass on the higher cost. This is a contractionary monetary policy tool used by the RBI to curb inflationary pressures or manage excess liquidity in the economy. Conversely, buying securities injects liquidity and tends to lower interest rates.

Solution: a)

• Question 5 of 5 5. Question Consider the following statements regarding the Monetary Policy Committee (MPC) in India: The Governor of the Reserve Bank of India is the ex-officio Chairperson of the MPC. The MPC is mandated to meet at least six times in a financial year. All decisions of the MPC are taken by a majority vote, with the Chairperson having a second or casting vote in case of a tie. How many of the above statements is/are correct? (a) Only one (b) Only two (c) All three (d) None Correct Solution: b) Statement 1 is correct: The Governor of the Reserve Bank of India (RBI) is the ex-officio Chairperson of the Monetary Policy Committee (MPC). The MPC is a six-member committee. Statement 2 is incorrect: The MPC is required by the RBI Act to meet at least four times in a financial year, not six. While it can meet more frequently if needed, the statutory minimum is four. Statement 3 is correct: Decisions of the MPC are made by majority vote of the members present and voting. In the event of an equality of votes, the Chairperson (the RBI Governor) has a second or casting vote. Incorrect Solution: b) Statement 1 is correct: The Governor of the Reserve Bank of India (RBI) is the ex-officio Chairperson of the Monetary Policy Committee (MPC). The MPC is a six-member committee. Statement 2 is incorrect: The MPC is required by the RBI Act to meet at least four times in a financial year, not six. While it can meet more frequently if needed, the statutory minimum is four. Statement 3 is correct: Decisions of the MPC are made by majority vote of the members present and voting. In the event of an equality of votes, the Chairperson (the RBI Governor) has a second or casting vote.

#### 5. Question

Consider the following statements regarding the Monetary Policy Committee (MPC) in India:

• The Governor of the Reserve Bank of India is the ex-officio Chairperson of the MPC.

• The MPC is mandated to meet at least six times in a financial year.

• All decisions of the MPC are taken by a majority vote, with the Chairperson having a second or casting vote in case of a tie.

How many of the above statements is/are correct?

• (a) Only one

• (b) Only two

• (c) All three

Solution: b)

• Statement 1 is correct: The Governor of the Reserve Bank of India (RBI) is the ex-officio Chairperson of the Monetary Policy Committee (MPC). The MPC is a six-member committee.

• Statement 2 is incorrect: The MPC is required by the RBI Act to meet at least four times in a financial year, not six. While it can meet more frequently if needed, the statutory minimum is four.

• Statement 3 is correct: Decisions of the MPC are made by majority vote of the members present and voting. In the event of an equality of votes, the Chairperson (the RBI Governor) has a second or casting vote.

Solution: b)

• Statement 1 is correct: The Governor of the Reserve Bank of India (RBI) is the ex-officio Chairperson of the Monetary Policy Committee (MPC). The MPC is a six-member committee.

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