15 Questions were asked in Economy 2021.
- All the questions were conceptual and analytical.
- Overall the level of questions was moderate.
Previous Year UPSC Economy Questions (PYQs) With Explanation 2021
1. Consider the following statements:
1) The Governor of the Reserve Bank of India (RBI) is appointed by the Central Government.
2) Certain provisions in the Constitution of India give the Central Government the right to issue directions to the RBI in public interest.
3) The Governor of the RBI draws his power from the RBI Act.
Which of the above statements are correct?
(a) 1 and 2 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3
Answer: c
Explanation:
According to Section 8 of the Reserve Bank of India Act 1934 – the Governor and not more than four Deputy Governors of RBI are to be appointed by the Central Government;
The Governor and a Deputy Governor shall hold office for such term not exceeding five years as the Central Government may fix when appointing them, and shall be eligible for re-appointment.
Hence, statement 1 is correct.
According to Section 7 (1) in the Reserve Bank of India Act, 1934 – The Central Government may from time to time give such directions to the Bank as it may, after consultation with the Governor of the Bank, consider necessary in the public interest.
The RBI Governor and deputy governor are appointed through the Prime Minister’s Office on the recommendation of Finance Ministry.
Hence, statement 2 is incorrect.
Section 7 (3) in The Reserve Bank of India Act, 1934
The Governor and, in his absence, the Deputy Governor nominated by him in his behalf shall also have powers of general superintendence and direction of the affairs and the business of the Bank, and may exercise all powers and do all acts and things which may be exercised or done by the Bank.
Hence, statement 3 is correct.
2. With reference to casual workers employed in India, consider the following statements:
1. All casual workers are entitled to Employees Provident Fund coverage.
2. All casual workers are entitled to regular working hours and overtime payment.
3. The government can by a notification specify that an establishment or industry shall pay wages only through its bank account.
Which of the above statements is correct?
a) 1 and 2 only
b) 2 and 3 only
c) 1 and 3 only
d) 1, 2 and 3
Answer: b
Explanation:
After rendering three years’ continuous service after conferment of temporary status casual workers, the casual labourers would be treated on par with temporary Group ‘D’ employees for the purpose of contribution to the General Provident Fund.
Hence, statement 1 is incorrect.
Where the nature of work entrusted to the casual workers and regular employees is the same, the casual workers may be paid at the rate of 1/30th of the pay at the minimum of the relevant pay scale plus dearness allowance for work of 8 hours a day.
Hence, statement 2 is correct.
The Payment of Wages (Amendment) Act 2017 enables the employers to pay the wages to their employees in cash or by Cheque or by crediting the wages in the bank account.
Hence, statement 3 is correct.
3. Which among the following steps is most likely to be taken at the time of an economic recession?
(a) Cut in tax rates accompanied by an increase in interest rate
(b) Increase in expenditure on public projects
(c) Increase in tax rates accompanied by reduction of interest rate
(d) Reduction of expenditure on public projects
Answer: b
Explanation:
Recession or involuntary unemployment comes into existence because of deficiency of aggregate demand brought about by fall in investment.
Equilibrium in national income and increase in employment can be achieved through:
- The government reducing income tax, which leads to an increase in consumption functions.
- Raising the rate of private investment by decreasing interest rates by the Central Bank and thus improving credit availability.
- Increasing Government expenditure (on public works as suggested by Keynes).
- Expansion of positive Net exports, i.e., expansion of exports by tax concessions.
Hence, option b is correct.
4. Consider the following statements:
Other things remaining unchanged, market demand for a good might increase if
1. The price of its substitute increases
2. The price of its complement increases
3. The good is an inferior good and the income of the consumers increases
4. Its price falls
Which of the above statements is correct?
(a) 1 and 4 only
(b) 2, 3 and 4
(c) 1, 3 and 4
(d) 1, 2 and 3
Answer: a
Explanation:
Demand represents the whole demand schedule and shows how price of a good is relatable to quantity which the consumers are willing or able to buy, other factors which determine demand held constant.
Change in demand for a commodity occurs when there is a change in the factors other than prices namely:
- Income of consumer increases
- Preferences of the people for a commodity increase.
- Expectations about future prices that a commodity price may increase in future.
- The price of related commodities, such as substitutes and complements, also changes the demand for a commodity.
Example: If the price of coffee rises, other factors remaining constant, this will cause the demand for tea.
Hence, option a is correct.
5. With reference to urban cooperative banks in India consider the following statements:
1. They are supervised and regulated by local boards set up by the state governments
2. They can issue equity shares and preference shares.
3. They were brought under the purview of the Banking Regulation Act, of 1949 through an Amendment in 1966.
Which of the statements given above is/are correct?
(a) 1 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3
Answer: b
Explanation:
The term Urban Co-operative Banks (UCBs), though not formally defined, refers to primary cooperative banks located in urban and semi-urban areas. These banks, till 1996, were allowed to lend money only for non-agricultural purposes. This distinction does not hold today.
Large cooperative banks with paid-up share capital and reserves of Rs.1 lakh were brought under the purview of the Banking Regulation Act 1949 with effect from 1st March, 1966 and within the ambit of the Reserve Bank’s supervision.
This marked the beginning of an era of duality of control over these banks. Banking related functions (viz. licensing, area of operations, interest rates, etc.) were to be governed by RBI and registration, management, audit and liquidation, etc. governed by State Governments as per the provisions of respective State Acts.
In 1968, UCBS extended the benefits of Deposit Insurance.
Hence, option b is correct.
6. Indian Government Bond Yields are influenced by which of the following?
1. Actions of the United States Federal Reserve
2. Actions of the Reserve Bank of India
3. Inflation and short-term interest rates
Select the correct answer using the code given below.
(a) 1 and 2 only
(b) 2 only
(c) 3 only
(d) 1, 2 and 3
Answer : d
Explanation:
Actions of the United States Federal Reserve:
If the federal government cuts interest rates, then borrowing costs will be lowered, and spending and investment will be encouraged in the US; such action has impact worldwide.
Actions of the Reserve Bank of India:
RBI controls short-term interest rates and uses monetary policy to manage inflation and liquidity. When RBI raises interest rates, Bond Yields automatically rises.
Inflation and short-term interest rates:
Inflation- It can reduce the real returns on bonds, causing investors to demand higher yields.
Short-term interest rates- Interest rates are a key part of a nation’s monetary policy. With short-term bonds, this risk is not as significant because interest rates are less likely to change substantially in the short term. Short-term bonds are also easier to hold until maturity, thereby alleviating an investor’s concern about the effect of interest rate-driven changes in the price of bonds.
Hence, option d is correct.
7. Consider the following:
1. Foreign currency convertible bonds.
2. Foreign institutional investment with certain conditions
3. Global depository receipts
4. Non-resident external deposits
Which of the above can be included in Foreign Direct Investments?
(a) 1, 2, and 3
(b) 3 only
(c) 2 and 4
(d) 1 and 4
Answer: a
Explanation:
FDI is the investment made by an entity of an economy other than its national economy, into an entity of a foreign nation where it wants to have substantial influence and control over the entity.
FPI are the foreign institutional or individual investors who invest in the security market other than the domestic security market, in different class of assets like bonds, debenture, equity etc.
Global Depository Receipts is a financial instrument in the form of depository created by the overseas depository banks/financial institutions issued in more than one country. GDR is just like ADR but traded in non-US market like Japan, London, Singapore, Hong Kong or any other stock exchanges.
Foreign Currency Convertible Bonds. (FCCB) are bonds issued by the Indian company expressed in foreign currency, to the nonresident investors.
The principal and interest in respect of the instrument are paid in the specified foreign currency. The bonds are convertible into shares of the issuing company in any manner like, wholly or partly or on the basis of any equity-related warrant attached to the debt security.
Hence, option a is correct.
8. Consider the following statements:
The effect of devaluation of a currency is that it necessarily
1. Improves the competitiveness of the domestic exports in the foreign markets
2. Increases the foreign value of domestic currency
3. Improves the trade balance
Which of the above statements is/are correct?
(a) 1 only
(b) 1 and 2
(c) 3 only
(d) 2 and 3
Answer: a
Explanation:
Appreciation of a currency is the increase in its value in terms of another foreign currency where as Depreciation of a currency is the decrease in its value in terms of another foreign currency.
In case of devaluation by the government, the prices of Indian exports in terms of foreign currency (say dollar) will fall and will Improve the competitiveness of the domestic exports. This will cause the increase in quantity demanded of Indian exports. As a result Indian exports will increase.
Devaluation or depreciation makes the imports from abroad expensive in terms of domestic currency (rupees in case of India), and therefore, the imports tend to fall. With exports increasing and imports declining it is expected that devaluation (depreciation) will reduce a country’s trade deficit.
However, it may be noted that the effect of devaluation or depreciation on balance of trade is ambiguous and quite uncertain because a good deal depends on the price elasticity of exports and imports of a country and necessarily need not improve trade balance.
Hence, statement 1 is correct & statements 2, 3 are incorrect.
9. Which one of the following effects of the creation of black money in India has been the main cause of worry to the Government of India?
(a) Diversion of resources to the purchase of real estate and investment in luxury housing
(b) Investment in unproductive activities and purchase of precious stones, jewellery, gold, etc.
(c) Large donations to political parties and the growth of regionalism
(d) Loss of revenue to the state exchequer due to tax evasion
Answer: d
Explanation:
Black money is a term used in common parlance to refer to money that is not fully legitimate in the hands of the owner. This could be for two possible reasons
- money may have been generated through illegitimate activities not permissible under the law, like crime, drug trade, terrorism, and corruption
- wealth may have been generated and accumulated by failing to pay the dues to the public exchequer in one form or other.
Impacts of ‘Black Money’
Its major impact is the loss in revenue collection as it loses the tax which would have come to the Exchequer if such transactions had been done in the open and duly accounted for.
Black money situation results in an under-estimation of resources available in the country which can distort major investment targets and objectives of the government’s planning.
In order to avoid detection, these ill-gotten gains are kept either outside the country as deposits in foreign bank accounts which deprive the country of a part of its wealth that could have been used for growth or is hoarded within the country and results in immobilisation of investible funds, which could have helped in the economic growth of the country.
Black money provides an alternative source of credit at a ‘free market’ rate which defeats the Government’s economic policies, particularly related to credit and investment, and makes them ineffective.
Lead to economic inequality and concentration of wealth in the hands of the unscrupulous few in the country.
Black money encourages over-financing of business which adds further to the inflationary pressures in the country.
Hence, option d is correct.
10. Which one of the following is likely to be the most inflationary in its effects?
(a) Repayment of public debt
(b) Borrowing from the public to finance a budget deficit
(c) Borrowing from the banks to finance a budget deficit
(d) Creation of new money to finance a budget deficit
Answer : d
Explanation:
Money financing was earlier called Deficit financing, refers to created Money. The Government borrows from the Central Bank, which is a note-issuing authority. The Central Bank simply issues more notes and gives them to the Government against Government securities i.e., the creation of additional purchasing power in the form of currency notes.
This is referred to as monetisation of fiscal deficit.
Since Deficit financing involves expansion of the money supply with the Public, it has inflationary potential.
Hence, option d is correct.
11. The money multiplier in an economy increases with which one of the following?
(a) Increase in the cash reserve ratio in the banks
(b) Increase in the Statutory Liquidity Ratio in the banks
(c) Increase in the banking habits of the people
(d) Increase in the population of the country
Answer: c
Explanation:
High powered money: Refers to notes and coins issued by the government and RBI.
Money supply: Is total stock of monetary media.
As a standard concept money supply is composed of two elements:
- Currency with public
- Demand deposit with public
The relationship between High powered money and Money supply is determined by the money multiplier, i.e.,
Money multiplier (m) = Money supply (M)/ High powered money (H)
Size of money multiplier is determined by- (i) Cash Reserve Ratio of Banks; (ii) Currency-Deposit Ratio of public; together determine money multiplier.
Hence, option c is correct.
12. With reference to the Indian economy, demand-pull inflation can be
caused/increased by which of the following?
1. Expansionary policies
2. Fiscal stimulus
3. Inflation-indexing wages
4. Higher purchasing power
5. Rising interest rates
Select the correct answer using the code given below.
(a) 1, 2, and 4 only
(b) 3, 4 and 5 only
(c) 1, 2, 3 and 5 only
(d) 1, 2, 3, 4 and 5
Answer: a
Explanation:
Demand-pull inflation /monetary theory of inflation:
The reason for demand-pull inflation is increase in aggregate demand,i.e., aggregate demand cannot be met by current supply.
Aggregate demand is the sum of:
Consumer spending on goods & services + Government spending on goods and services + Net investment made by entrepreneurs.
According to the monetary theory of inflation, inflation is always, and everywhere, a phenomenon,i.e., an increase in money supply is the cause of inflation.
So, the factors determining demand-side inflation are:
- Increase in money supply (by decrease in interest rate)
- Increase in disposable income.
- Fiscal stimulus-i.e., government spending more and reducing taxes.
- Increase in business outlay, i.e., capital expansion.
Hence, option a is correct.
13. With reference to India, consider the following statements:
1. Retail investors through demat accounts can invest in ‘Treasury Bills’ and ‘Government of India Debt Bonds’ in the primary market.
2. The ‘Negotiated Dealing System-Order Matching’ is a government securities trading platform of the Reserve Bank of India.
3. The ‘Central Depository Services Ltd’ is jointly promoted by the Reserve Bank of India and the Bombay Stock Exchange.
Which of the statements given above is/are correct?
(a) 1 only
(b) 1 and 2
(c) 3 only
(d) 2 and 3
Answer: b
Explanation:
Retail investors are allowed participation on a “non-competitive” basis in select auctions of dated Government of India (GoI) securities and Treasury Bills; stock exchanges have launched debt trading (G-Secs as also corporate bonds) segment to cater to the needs of retail investors in Demat form.
Hence, statement 1 is correct.
The securities can be bought/sold in the secondary market through Negotiated Dealing System-Order Matching (NDS-OM)
In August 2005, RBI introduced an anonymous screen-based order-matching module called NDS-OM. This is an order-driven electronic system, where the participants can trade anonymously by placing their orders on the system or accepting the orders already placed by other participants.
Hence, statement 2 is correct.
NDS-OM is operated by the Clearing Corporation of India Limited (CCIL) on behalf of the RBI.
What is a Depository?
A depository is an organisation which holds securities (like shares, debentures, bonds, government securities, mutual fund units etc.) of investors in electronic form at the request of the investors through a registered Depository Participant. It also provides services related to transactions in securities.
It can be compared with a bank, which holds the funds for depositors. A Bank – Depository analogy is given in the following table:
BANK-DEPOSITORY – AN ANALOGY
| BANK | DEPOSITORY |
| Holds funds in an account | Holds securities in an account |
| Transfers funds between accounts on the instruction of the account holder | Transfers securities between accounts on the instruction of the BO account holder |
| Facilitates transfer without having to handle money | Facilitates transfer of ownership without having to handle securities |
| Facilitates safekeeping of money | Facilitates safekeeping of securities |
At present, two Depositories viz. National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL) are registered with SEBI.
RBI has no role in Central Depository Services (India) Limited (CDSL).
Hence, statement 3 is incorrect.
14. With reference to ‘Water Credit’, consider the following statements:
1. It puts microfinance tools to work in the water and sanitation sector.
2. It is a global initiative launched under the aegis of the World Health Organization and the World Bank.
3. It aims to enable poor people to meet their water needs without depending on subsidies.
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
Answer: c
Explanation:
The Water Credit Initiative represents the creation of a new space at the intersection of water and sanitation and microfinance.
Hence, statement 1 is correct.
By catalysing small loans to individuals and communities in developing countries who do not have access to traditional credit markets, WaterCredit empowers people to immediately address their own water needs. As loans are repaid, they can be redeployed to additional people in need of safe water.
Hence, statement 3 is correct.
Water Credit is an initiative of Water.org, a global non-profit organisation working to bring water and sanitation to the world.
Hence, statement 2 is incorrect.
15. In India, the central bank’s function as the ‘lender of last resort’ usually refers to which of the following?
1. Lending to trade and industry bodies when they fail to borrow from other sources
2. Providing liquidity to the banks having a temporary crisis
3. Lending to governments to finance budgetary deficits
Select the correct answer using the code given below.
(a) 1 and 2
(b) 2 only
(c) 2 and 3 only
(d) 3 only
Answer: b
Explanation:
As a Banker to Banks, the Reserve Bank also acts as the ‘lender of the last resort’. It can come to the rescue of a bank that is solvent but faces temporary liquidity problems by supplying it with much needed liquidity when no one else is willing to extend credit to that bank.
The Reserve Bank extends this facility to protect the interest of the depositors of the bank and to prevent possible failure of the bank, which in turn may also affect other banks and institutions and can have an adverse impact on financial stability and on the economy.
Hence, option b is correct.