UPSC TEST - 5 (SOLUTION)

Q 1. Ans: (b)
Fiscal Deficit = Total Expenditure – Total Receipts
Explanation: (except borrowings).
Statement 1 is correct: The period of the first five-year Q 4. Ans: (b)
plan was 1951-56. The plan was based on the Harrod-
Domar Model and was presented to the Parliament of Explanation:
India by the first Indian Prime Minister. The Harrod– Non-tax revenue of the central government mainly
Domar model is a Keynesian model of economic consists of interest receipts on account of loans by
growth. This growth model stresses the importance of the central government, dividends and profits on
savings and investment as key determinants of growth. investments made by the government, fees and other
Statement 2 is incorrect: During the second five-year receipts for services rendered by the government.
plan, five major Hydroelectric power projects and Cash grants-in-aid from foreign countries and
steel plants at Bhilai, Durgapur and Rourkela were international organizations are also included in non-
set up during the period. In cooperation with Britain, tax revenue receipt. The estimates of revenue receipts
Durgapur Steel plant was built; Rourkela Steel plant was take into account the effects of tax proposals made in
established in cooperation with Germany and Bhilai the Finance Bill.
steel plant was started in cooperation with Russia. Receipt from sale of shares of a public sector undertaking
Statement 3 is correct: The duration of the second is a capital receipt. .
five-year plan was from 1956 to 61. The primary focus So, option (b) is correct.
of the plan was on speedy industrialization. Q 5. Ans: (a)
Statement 4 is incorrect: During the second five-year
plan, The target growth rate during period was 4.5% Explanation:
and the actual growth rate was 4.27%. Primary deficit is the difference between the fiscal
Q 2. Ans: (d) deficit and the interest payment of the previous year.
The goal of measuring primary deficit is to focus on
Explanation: present fiscal imbalances.
The Fiscal Policy Strategy Statement is presented It is simply the fiscal deficit minus the interest
to Parliament under Section 3(4) of the Fiscal payments. Gross primary deficit = Gross fiscal deficit
Responsibility and Budget Management Act, 2003. – Net interest liabilities. Net interest liabilities consist
It outlines for the existing financial year, the strategic of interest pay.
priorities of the Government relating to taxation, So, option (a) is correct.
expenditure, lending and investments, administered Q 6. Ans: (c)
pricing, borrowings and guarantees.
The Medium-term Fiscal Policy Statement, presented to Explanation:
Parliament under Section 3(2) of the Fiscal Responsibility Plan expenditures are spent on the current development
and Budget Management (FRBM) Act, 2003, sets out three- and investment outlays. Plan expenditures arise only
year rolling targets for four specific fiscal indicators in when the plans say so about such expenditures.
relation to gross domestic product (GDP) at market prices. Non-Plan expenditure covers all expenditure of
Every year, a macroeconomic framework statement Government not included in the Plan. It may either
is presented before Parliament at the time of the Union be revenue expenditure or capital expenditure. Part
Budget presentation. This is under Section 3(5) of the Fiscal of the expenditure is obligatory in nature e.g. interest
Responsibility and Budget Management (FRBM) Act, 2003. payments, pensionary charges and statutory transfers
So, option (d) is correct. to State and Union Territory Governments.
Q 3. Ans: (a) Examples of the Plan expenditures are expenditures
on energy, irrigation, communication, transport, and
Explanation: agriculture.
Statement 1 is correct: Fiscal Deficit is the excess of Non-plan expenditures are spent on the routine
total expenditure over total receipts/income, excluding functioning of the government. Expenditure on
borrowings in a fiscal year. defense services, payment of interest, expenditure on
Statement 2 is incorrect: Fiscal Deficit indicates the administrative services, Sale of decontrolled fertilizers
government’s total borrowing requirements, including with the concession to farmers.
interest payments. Primary deficit deals with the So, option (c) is correct.
government’s borrowings excluding the interest payments.

UPSC Test - 5 Economy (Solution) Paper Code: 25005 1

Q 7. Ans: (a) (GFWC) chaired by the Chief Economic Adviser of
Explanation: the Government of India. The GFWC will meet at least
twice a year to assist the Ministry of Finance in the
Statement 1 is correct: “Fiscal Health Index 2025” is selection and evaluation of projects and other relevant
published by NITI Ayog. The Hon’ble Chairman of work related to the framework. The initial evaluation
the 16th Finance Commission, Dr. Arvind Panagariya, of projects will be the responsibility of the concerned
launched the inaugural issue of NITI Aayog’s report Ministry or Department, in consultation with experts.
titled “Fiscal Health Index (FHI) 2025” on 24th January Q 10. Ans: (b)
2025 in New Delhi.
Statement 2 is incorrect: With a cumulative score of Explanation:
67.8, Odisha tops the ranking in fiscal health among 18 1 and 3 are correct: Gross Investment is defined as
major States, followed by Chhattisgarh and Goa with the total expenditure or investment that is made by
scores of 55.2 and 53.6, respectively. Improvements are a company to acquire capital goods. Gross Capital
seen in states like Jharkhand, which has strengthened Formation/Gross Investment = Gross Fixed Capital
fiscal prudence and debt sustainability, while Formation (machinery + equipment + building +
Karnataka faces a decline due to weaker performance cultivated biological resources + intellectual property)
in expenditure quality and debt management. + Valuable Metals + Change in stock/inventory
Q 8. Ans: (c) Cultivated biological resources is defined as animal
resources yielding repeat products and tree, crop
Explanation: and plant resources yielding repeat products whose
National Income (NI) and Net National Income (NNI) natural growth and regeneration are under the direct
are same terms and used interchangeably. Net national control, responsibility and management of institutional
product (NNP) refers to gross national product (GNP) units. The term ‘Gross fixed capital formation’ is
minus depreciation. National Income = Net National interchangeably used as “gross investment” as valuable
Income (NNI) = Net National Product (NNP) (NNP = metals and change in stock/inventory is less than 1%.
GNP – Depreciation) Statement 2 is incorrect: Any payment of interest on
Earlier (before January 2015) NSO was using factor loan, salary or taxes by the firm are not part of capital
cost to calculate NNP but now it uses Market Prices to formation as they are not contributing in generation of
calculate NNP. profit or capital of that firm.
Q 9. Ans: (c) Q 11. Ans: (d)
Explanation: Explanation:
Statement I is correct: In line with the goal of If any country’s currency is appreciating with respect to
significantly reducing the carbon intensity of the other then it means that its value is increasing and it will
economy, the Union Budget for 2022-23 announced the be costlier to purchase that currency and hence its costlier
issuance of Sovereign Green Bonds. These bonds will to purchase the goods from that country (by purchasing
be issued to mobilize resources for green infrastructure, that country’s currency) and then we say that that
with the proceeds allocated to public sector projects country’s export is becoming less competitive. When the
that help reduce the economy’s carbon intensity. domestic currency appreciates, import increases, import
Statement II is incorrect: The following projects are cover decreases, and balance of trade goes deficit.
excluded from financing through Sovereign Green Bonds: Q 12. Answer- d
3 Projects involving the extraction, production, and
distribution of fossil fuels, including improvements Explanation:
and upgrades, where the core energy source is 1 is incorrect: When inflation in the economy is low,
fossil-fuel based. people expenses decreases and they are able to save
3 Nuclear power generation. more. When inflation rate is high then, the necessary
3 Direct waste incineration. household expenditure increases thereby decreasing
3 Industries related to alcohol, weapons, tobacco, the household savings.
gaming, or palm oil. 2 and 3 are correct: When per capital income increases,
3 Renewable energy projects generating energy from while considering that expenditure remains same then
biomass sourced from protected areas. it leads to higher savings in the economy. Because of
3 Landfill projects. high interest rates increase the cost of borrowing,
3 Hydropower plants larger than 25 MW. making goods more costly, individuals spend less, and
Statement III is correct: The Ministry of Finance has thereby, save more. Source: Indian economy by Vivek
established a “Green Finance Working Committee” Singh Chapter

2 UPSC Test - 5 Economy (Solution) Paper Code: 25005

Q 13. Ans: (a) Q 16. Ans: (a)
Explanation: Explanation:

1 is incorrect: Liquidity crisis may also be caused if Statement 1 is correct: Tax buoyancy shows the
foreign portfolio investors are running out and selling relationship between tax revenue and GDP. It is the
their bond holdings in the Indian bond markets. response of gross tax revenue to a change in the GDP. It
2 is incorrect: When demand for credit is low or supply measures how responsive a taxation policy is to growth
of credit is high, interest rates tend to fall. In other in economic activities.
words, low interest rate, leads to inflow of liquidity in Statement 2 is incorrect: A tax is called buoyant when it
the market. grows with the growth in GDP. Lower the tax buoyancy
When there is a default in the debt market, everyone poorer the tax collection in response to economic
wants to sell the debt paper and hold cash which results growth. It depends on the tax base, tax compliance,
in shortage of liquidity and increase/hardening of simplicity and rationality of the tax system, etc.
interest rates. Q 17. Ans: (a)
3 is correct: To resolve the liquidity crisis, RBI may
buy government bonds i.e., open market operations Explanation:
and pump liquidity in the economy. However, with sale Statement 1 is correct: A Tax inversion is also known as
of government securities, liquidity will reduce in the corporate inversion. It is a process by which companies
market. relocate their legal location overseas to reduce their
Q 14. Ans: (d) income tax burden. Companies undertaking a corporate
inversion usually select a country which has a lower tax
Explanation: rate than their home country.
Statement 1 is incorrect: Tax incidence is the point where Statement 2 is incorrect: Tax inversion is a legal
a tax leaves its final burden felt whereas Tax impact is the practice in India and it is a method of tax avoidance.
point where a tax leaves its initial burden felt. Tax evasion is an illegal act, while tax avoidance is not
Statement 2 is incorrect: When the GST is imposed illegal. The countries in the world that have very low tax
on biscuits the producer bears its initial burden. The regimes for corporations have emerged as very attractive
tax is actually paid by the consumer who bears the final locations for the headquarters of big corporations.
burden. The tax impact is on the producer while the Q 18. Ans: (a)
incidence of the tax is on the consumer.
Explanation:
Q 15. Ans: (a)
The Goods and Service Tax Act was passed in the Indian
Explanation: Parliament on March 29th, 2017, which subsequently
Pair 1 is incorrectly matched: A Pigouvian tax is a came into effect on July 1st, 2017. It was hailed as a
type of tax on market transactions that create negative significant tax reform for the country, replacing the
externalities. In taxing the producer or consumer of the pre-existing array of indirect taxes.
goods or services, this type of taxation aims to recoup Taxes replaced with GST:
some of the cost of the externality by adding it to the 3 VAT
price of the product. 3 Octroi
Pair 2 is incorrectly matched: The Tobin tax is a duty 3 Entertainment Tax
proposed on spot currency trades to penalize short- 3 Tax on Lottery
term currency trading in order to stabilize markets and 3 Luxury Tax
disincentive speculation. The Tobin tax can be used to 3 Purchase Tax
generate revenue streams for countries that see a great 3 Service Tax
deal of short-term currency movement. 3 Additional Excise Duty
Pair 3 is correctly matched: The Angel tax was 3 Central Excise Duty
introduced by the Government of India is March Like all other taxes, the GST exempts certain goods and
2019. The new direct tax was to be paid by the unlisted services from ensuing liability. Exemptions under GST
companies on the capital they raised by selling their contain an extensive list of goods, which include the
shares at a value above their fair market value. This following –
receipt from share sale is seen as income for the Food: Fruits and vegetables, cereals, meat, and fish, etc.
companies, the reason they attract this tax which Raw materials: Tax on Cotton for khadi yarn, handloom
operates like an income tax. fabrics, unprocessed wool, raw silk, raw jute fiber, etc.
The Angel Tax was believed to hamper the expansion of Instruments/Tools: Taxes on Agricultural tools, tools
smaller companies of India. The Government withdrew for differently-abled individuals.
the tax. Miscellaneous: Taxes on Vaccines, journals,

UPSC Test - 5 Economy (Solution) Paper Code: 25005 3

 newspapers, maps, books, non-judicial stamps, articles Q 22. Ans: (a)
of paper pulp, etc. Explanation:
So, option (a) is correct.
Q 19. Ans: (b) The expansionary fiscal policy seeks to stimulate an
economy by boosting demand through fiscal stimulus.
Explanation: Expansionary policy is intended to prevent or moderate
The Securities Transaction Tax (STT) is a type of economic downturns and recessions.
financial transaction tax levied in India on transactions An expansionary fiscal policy involves increasing
carried out on the domestic stock exchanges. spending or cutting taxes to prevent or end a recession
Statement 1 is correct: The rates of STT are prescribed or depression.
by the central government through its budget from Expansionary fiscal policy includes transfer payments,
time to time. The tax came into effect in 2004. rebates and increased government spending on projects
Statement 2 is incorrect: In Tax Parlance, this is such as infrastructure improvements. Transfer payments
categorized as a direct tax. are monetary transactions in which one party transfers
Statement 3 is correct: As on date, STT is not applicable funds to another without receiving goods or services.
in this case of preference, shares, government securities, Increasing the short-term interest rate is part of
bonds, debentures, currency derivatives, units of contractionary monetary policy.
mutual fund other than equity mutual fund and gold So, option (a) is correct.
exchanges traded funds. Q 23. Ans: (c)
Q 20. Ans: (b) Explanation:
Explanation: The major highlights of the Fiscal Responsibility and
American economist Arthur Laffer developed a bell- Budget Management Act of 2003:
curve analysis in 1974 known as the Laffer curve. Statement 1 is correct: The Government of India is not
Statement 1 is correct: The Laffer curve shows the to borrow from the RBI except by the ways and means
relationship between tax rates and total tax revenue. advances. Ways and Means Advances (WMAs) is a
The curve is often used to illustrate the argument facility that allows different arms of the government
that cutting tax rates can result in increased total tax and centres to borrow from the Reserve Bank of India.
revenue. Statement 2 is correct: The RBI is not to subscribe to
Statement 2 is incorrect: The Laffer curve states that the primary issues of the Government of India securities
total tax revenue is most likely not maximized when tax from 2006-07.
rates are at 100% because this disincentivizes workers Steps to be taken to ensure greater transparency in
from earning wages. fiscal operations.
Statement 3 is correct: The Laffer Curve represents an Rules to be made under the Act to specify annual targets
inverted U-shape, illustrating the relationship between for the reduction of fiscal deficit and revenue deficit,
tax rates and government revenue. If tax rates are too contingent liabilities and total liabilities.
high, they discourage activities like investment and The fiscal deficit and revenue deficit may exceed the
consumption; governments won’t generate enough targets only on grounds such as national security,
revenue if they’re too low. calamity or exceptional cases.
Q 21. Ans: (a) Q 24. Ans: (a)
Explanation: Explanation:
Ricardian equivalence is an economic theory that says 1 is correct: High inflation means prices increase, reducing
that financing government spending out of current what people can buy with the same amount of money.
taxes or future taxes will have equivalent effects on the 2 is correct: As purchasing power decreases, consumers
overall economy. may reduce their spending, which can lower overall
It maintains that government deficit spending is demand.
equivalent to spending out of current taxes. 3 is not correct: It harms savers and helps borrowers. High
Because taxpayers will save to pay the expected future inflation eats away the real interest earned from keeping
taxes, this will tend to offset the macroeconomic effects one’s money in the bank or similar savings instruments.
of increased government spending. Borrowers are better off when inflation rises because they
This theory has been widely interpreted as undermining end up paying a lower “real” interest rate.
the Keynesian notion that deficit spending can boost 4 is not correct: While high inflation can affect the real value
economic performance, even in the short run. of debt, it can also make it easier for the government to pay
So, option (a) is correct. off debts with inflated currency. Higher inflation reduces
the real value of the government’s outstanding debt.

4 UPSC Test - 5 Economy (Solution) Paper Code: 25005

Q 25. Ans: (a) lead investors to seek higher returns in emerging
Explanation: markets. This can result in increased capital inflows
into emerging market like India..
Statement 1 is not correct: Household Consumption Q 27. Ans: (d)
Expenditure Survey 2023-24 was released by the Ministry
of Statistics and Programme Implementation (MoSPI). Explanation:
Statement 2 is not correct: The difference in average The Government of India finances its fiscal deficit
monthly consumption expenditure between rural and through various instruments, including dated securities,
urban households narrowed further to 69.7 per cent the National Small Savings Fund (NSSF), provident
in 2023-24 from 71.2 per cent in 2022-23, and 83.9 per funds, and Sovereign Gold Bonds (SGBs).
cent 11 years ago in 2011-12. Statement I is correct: It is a modern investment
Statement 3 is correct: Spending on food items: For vehicle offering a unique investment opportunity by
Rural – 47.04% and for Urban 39.68%. combining the value of gold with the benefits of fixed-
income securities.
Statement II is not correct: SGBs are debt securities
issued by the Reserve Bank of India (RBI) on behalf
of the government, with each unit denoting a gram
of gold. These bonds offer the flexibility of trading in
the secondary market and the interest in SGBs is fixed
at 2.5 per cent per annum on the amount of initial
investment.
Statement III is not correct: While the tenor of bonds
is eight years, it can be redeemed even after five years.
Q 28. Ans: (d)
Explanation:
Palm oil is nature’s cheapest vegetable oil. At 20-25
tonnes of fresh fruit bunches and a 20% extraction rate,
4-5 tonnes of crude palm oil (CPO) can be produced
from every hectare.
Statement 1 is not correct: Palm oil is the world’s
most produced vegetable oil, at 76.26 mt in 2023-24,
ahead of soyabean (62.74 mt), rapeseed (34.47 mt) and
sunflower (22.13 mt), according to the US department
of agriculture (USDA).
Statement 2 is not correct: The world’s top Oil Palm
Statement 4 is not correct: Among the states, the producer is Indonesia with43 mt; followed by Malaysia
highest monthly per capita expenditure in 2023-24 was (19.71 mt) and Thailand (3.60 mt).
recorded in Sikkim. Q 29. Ans: (c)
Q 26. Ans: (c) Explanation:
Explanation: Statement 1 is correct: According to data from India’s
1 is correct: A cut in US interest rates can make US Ministry of Petroleum and Natural Gas, in the fiscal
assets less attractive compared toother countries like year 2021–22, India’s net import of LPG was 16.607
India providing higher rate of interest. This will lead million tons, while domestic consumption was 25.502
to an inflow of US dollars in the Indian market, leading million tons. This indicates that more than 55% of
to an appreciation of the rupee. . This could lead to India’s LPG consumption was met through imports
an increase in currency carry trade, where investors during that period.
borrow in low-interest currencies and invest in higher- Statement 2 is correct: LPG Contract Price (CP),
yield currencies, potentially resulting in currency commonly called the “Saudi CP” is widely recognized
appreciation for emerging markets. as the benchmark for international LPG pricing. It is
2 is correct: A lower interest rate from the Fed often the international price benchmark set at the beginning
signals an effort to stimulate economic growth in India of each month by Saudi Arabia’s state - owned oil
as US Dollars will flow into India. This money can be company Saudi Aramco.
used for boosting economic growth in India.
3 is correct: Lower returns in US debt markets might

UPSC Test - 5 Economy (Solution) Paper Code: 25005 5

Q 30. Ans: (b) percent Universal Service Levy imposed on all telecom
Explanation: service operators based on their Adjusted Gross
Revenue (AGR).
Row 1 is correctly matched. Statement 2 is not correct: Funds collected under
Giffen Goods: These are rare types of inferior goods that the Digital Bharat Nidhi will be used to support
lack readily available substitutes, such as bread, rice, and universal service by promoting access to and delivery
potatoes. The key distinction between Giffen goods and of telecommunications services in underserved rural,
traditional inferior goods is that the demand for Giffen remote, and urban areas. These funds will also be allocated
goods increases even when their prices rise, regardless for research and development of telecommunications
of a consumer’s income. For example, rice has been services, technologies, and products; support pilot
observed to exhibit Giffen behavior; in certain situations, projects; provide consultancy assistance and advisory
when its price increases, people who heavily rely on rice support to improve connectivity; and facilitate the
may purchase more of it despite the price rise. introduction of new telecommunications services,
Row 2 is not correctly matched. technologies, and products.
Veblen Goods: These are luxury items for which Q 33. Ans: (a)
demand increases as their prices rise, as their high cost
is perceived as a status symbol. Luxury cars, which are Explanation:
expensive and associated with prestige, are considered The Reserve Bank of India (RBI) has joined Project
Veblen goods. Nexus, a multilateral international initiative to enable
Row 3 is correctly matched. instant cross-border retail payments by interlinking
Public Goods: These are commodities or services that domestic Fast Payments Systems (FPSs). India’s Unified
benefit all members of society and are often provided Payments Interface (UPI) and FPSs of Malaysia, the
for free through public taxation. Public goods are Philippines, Singapore, and Thailand will be interlinked
characterized by being both non-excludable and non- through Nexus. Going ahead, the platform can be
rivalrous. Examples include town roads, parks, schools, extended to more countries.
and national defense. Additionally, basic needs such Q 34. Ans: (d)
as access to clean air and drinking water can also be
classified as public goods. Explanation:

Q 31. Ans: (a) Statements 1 and 2 are incorrect: Money supply =

(Money Multiplier) X (Monetary Base) from the above
Explanation: formula, money supply can be increased by increasing
Pair 1 is not correctly matched: the money multiplier or monetary base or both.
The Phillips Curve is an economic theory suggesting So, in any case where either money multiplier or
that there is a stable and inverse relationship between monetary base is decreased it will directly lead to
inflation and unemployment. It posits that as economic decrease in money supply.
growth occurs, inflation rises, which should lead to Q 35. Ans: (a)
increased job creation and reduced unemployment.
Pair 2 is correctly matched: Explanation:
The Kuznets Curve explains the relationship between Statements 1 and 2 are incorrect: Services are not
income inequality and economic growth. It predicts traded/transacted in the wholesale markets. So, WPI
that as a nation transition from an agricultural to data does not include the inflation due to services but
an industrial economy, income inequality typically CPI includes services and goods both.
increases in the early stages of development. However, Statement 3 is correct: When goods are imported in India,
as the economy continues to grow and prosper, income first they move to the wholesale mandis and then they
inequality begins to decline. come in the retail markets. So, wholesale prices and retail
Pair 3 is not correctly matched: prices both get impacted because of the imported goods.
The Laffer Curve illustrates the relationship between statement 4 is correct: The goods purchased by
tax rates and the amount of tax revenue collected by consumers in the retail market do not represent
governments. It is often used to argue that lowering tax all the goods produced in the country (like inputs,
rates can lead to an increase in total tax revenue. intermediates and capital goods are purchased by the
Q 32. Ans: (a) companies), So CPI does not include these items but
WPI takes into account of all such goods.
Explanation:
Q 36. Ans: (b)
Statement 1 is correct: The Digital Bharat Nidhi will
replace the previous Universal Service Obligation Fund Explanation:
(USOF), which is a pool of funds generated by a 5 Statement 1 is correct: Demand and supply in foreign

6 UPSC Test - 5 Economy (Solution) Paper Code: 25005

 exchange markets decide that rate of Rupee against Dollar. State Development Loans are part of Capital Market.
When importers buy dollars in the foreign exchange Q 39. Ans: (c)
market, rupee depreciates as the demand of dollars
increases in the forex market. But if they directly deal with Explanation:
RBI (and take dollars from RBI) and don’t go in the forex Statement 1 is correct: Gender Budgeting, or Gender-
market then it may not impact the rupee-dollar rate. Responsive Budgeting, is a tool for implementing
Statement 2 is correct: When RBI increases the repo policies and programs that address the specific needs of
rate, the interest rate in the market increases which women, working towards a more gender-equal society.
decreases rupee supply in market and also may attract It is not a separate budget for women, but a part of
foreign investors in debt instruments resulting in rupee the Union Budget designed to highlight government
appreciation. fiscal allocations aimed at improving the well-being
Statement 3 and 4 are incorrect: When RBI sells of women. The Gender Budget Statement (GBS) was
dollars in forex market, the supply of dollar increases, introduced in the Union Budget for the first time in
and dollar depreciates and rupee appreciates. 2005-06. It is divided into two parts:
Q 37. Ans: (b) Part A: Reflects schemes with 100% allocation
exclusively for women.
Explanation: Part B: Includes schemes where at least 30% of the
The velocity of money measures the number of times allocation is directed toward women.
that one unit of currency is used to purchase goods and Statement 2 is correct: The share of Gender Budget
services within a given time period. In other words, it’s allocation in the total Union Budget has increased to
how many times money is changing hands. 8.86% in FY 2025-26 from 6.8% in FY 2024-25. An
Income Velocity of money refers to the number of allocation of Rs. 4.49 lakh crore has been reported
times the available money stock may roll over or change for welfare of women and girls in the gender budget
hands to finance transactions equivalent of nominal statement of FY 2025-26. This is an increase of Rs.
GDP. 37.25% over the GBS allocation of Rs. 3.27 lakh crore
Statements 1 and 2 are correct: During economic in FY 2024-25.
crisis like Covid and Global Financial Crisis, due to Q 40. Ans: (c)
liquidity hoarding and the fear of restrained access to
liquidity, income velocity of money may fall. In order Explanation:
to restore monetary (M3) balance in the economy and If RBI is pumping more money/cash into the economy
to ensure that risk averse behaviour due to uncertainty that means this money is going both to banks and
does not freeze financial markets, central banks public. This can happen in several ways:
commit to and provide ample liquidity to the system, 1. RBI purchase physical gold from the market and
i.e., they compensate for the fall in velocity of money by print extra cash and pay for it. RBI’s assets (physical
increasing the reserve (base) money. gold) will increase and Liabilities (cash/currency)
Statement 3 is incorrect: The money multiplier is the will also increase that means “monetary base” also
link between “broad money” and “reserve money”, increases.
whereas velocity is the link between “broad money” 2. RBI purchases “Govt bonds” from the market and
and “nominal GDP”. prints extra cash to pay for the bonds. RBI’s assets
Q 38. Ans: (c) (Govt bonds) will increase and Liabilities (cash/
currency) will also increase that means “monetary
FINANCIAL / SECURITIES MARKET base” also increases.
Money Market with a maturity tenure less than 1 year 3. RBI is purchasing extra dollars (from foreign
and Capital Market with a maturity tenure greater than investors coming to India or from exporters) and
1 year. printing cash/currency (rupee) and paying for it.
RBI’s assets (dollars) will increase and liabilities
(cash/currency) will also increase that means
“monetary base” also increases. Hence statement
1 is incorrect.
Money Supply = Money Multiplier X Monetary Base.
Since in the above 3 examples, “Monetary Base” is
increasing hence “Money Supply” will (also) increase..
Money Multiplier will change only when if there is
change in behaviour of people or RBI changing CRR/
SLR. If CRR reduces, then money multiplier increases.
Hence statement 2 is correct and 3 is incorrect.

UPSC Test - 5 Economy (Solution) Paper Code: 25005 7

 The balance sheet of the Reserve Bank of India (RBI) shares are included which does not have fully/
reflects its role in the functioning of India’s economy mandatorily convertibility condition. Actually,
largely in terms of the activities carried out in pursuance preference shares features are like bonds for
of its currency issue function as well as monetary example preferential rights over dividend (a kind
policy. While performing currency management of fixed income) and priority over repayment of
functions, when new currency is injected, the balance capital in case of bankruptcy. These characteristics
sheet expands, and when soiled currency notes are make them a part of ECB but they should not have
received back for destruction, the balance sheet condition of fully/mandatorily conversion into
contracts. As the banker to banks, the RBI maintains the normal/common equity shares. Hence only option
accounts of banks. Hence Statement 4 is also correct. 1 and 4 are correct.
Q 41. Ans: (b) Q 43. Ans: (a)

Explanation: Explanation:

The total stock of money in circulation among the Statement 1 is correct: India is making significant
public at a particular point in time is called money inroads into the global coffee export market with
supply or supply of [Link] is to be noted the term total exports during the current financial year up to
‘public’ refers to households, firms, local authorities, November crossing the $1-billion mark for the first
companies, etc, and does not include the government time, according to data from Centre for Monitoring
and banks. Thus, public money does not include money Indian Economy (CMIE).
held by the government the RBI (in the form of CRR), Statement 2 is incorrect: Brazil is the world’s largest
and the commercial banks (in the form of SLR) coffee producer, contributing about 40 per cent of
So, money lying with government, RBI and interbank global production whereas, Vietnam is the second-
deposits are not considered as money supply. Hence largest coffee producer.
statement 2 and 3 are in incorrect. But money held by Statement 3 is incorrect: Coffee Board data showed
public at large and deposit of public held by commercial that Chikkamagaluru, Kodagu and Hassan in Karnataka
bank are part of money supply. Hence statement 1 and with 2,48,020 MTs during 2022-23 is the largest
4 are correct. producer of Arabica and Robusta coffee. Kerala comes
Q 42. Ans: (b) a distinct second at 72,425 MTs followed by Tamil
Nadu at 18,700 MTs.
Explanation:
Q 44. Ans: (d)
External Commercial Borrowings (ECBs) are
commercial loans/debt raised by resident entities from Explanation:
recognised non-resident entities. So, it is basically debt Statement 1 is incorrect: Countervailing duties or
denominated in foreign currency or Indian rupee and CVDs are tariffs on imported goods that are imposed
includes: to offset subsidies given by the exporting country’s
1. Bank Loan government. Anti-dumping duties are imposed by the
2. Trade Credits: It refers to the credits/loan extended importing nation in case the exporting country is found
by the overseas supplier, bank, financial institution to export at below fair market price.
and other permitted recognised lenders for Statement 2 is incorrect: The WTO permits
imports (into India) of capital/non-capital goods countervailing duties to be charged only after
permissible under the Foreign Trade Policy of the the importing nation has conducted an in-depth
Government of India. investigation into the subsidized exports.
3. Bonds, Debentures which should not have Q 45. Ans: (d)
condition of fully/compulsorily convertibility.
Bonds/debentures are basically debt but some have Explanation:
option to convert into shares/equity. So, only those Okun’s law is an observed relationship between a
debentures/bonds which does not have a condition country’s GDP (or GNP) and employment levels.
of fully/compulsorily convertibility are treated as Okun’s law was coined by Arthur Okun, a Yale
ECB. economist who served on President Kennedy’s council
4. Preference Shares which should not have condition of economic advisors.
of fully/compulsorily convertibility: Preference Okun’s law predicts that a 1% drop in employment
shares have basically preferential rights over tends to be accompanied by a drop in GDP of around
dividend and to repayment of the capital in the case 2%. Likewise, a 1% increase in employment is associated
of winding-up of the company. Some preference with a 2% GDP increase.
shares have option of conversion into equity shares So, option (d) is correct.
after some time. So, in ECB only those preference

8 UPSC Test - 5 Economy (Solution) Paper Code: 25005

Q 46. Ans: (b) exchange, Government transactions, banking
Explanation: operations and currency management.
The Alagh Committee (1979) was constituted by the
Statement 1 is incorrect: The Pradhan Mantri Matru Planning Commission for poverty estimation, chaired
Vandana Yojana (PMMVY) is a Centrally Sponsored by YK Alagh, and constructed a poverty line for rural
flagship scheme by the Ministry of Women and Child and urban areas on the basis of nutritional requirements.
Development, Government of India, designed to The Lakdawala Committee was an Expert Group on the
support pregnant women and lactating mothers. Estimation of Proportion and Number of Poor. It was
Statement 2 is correct: The PMMVY Scheme is being constituted in 1989 to `look into the methodology for
implemented as per provisions under Section 4 of estimation of poverty and to re-define the poverty line.
the National Food Security Act (NFSA), 2013 which The Rangarajan committee was constituted to Review
provides financial support for pregnant and lactating the Methodology for the Measurement of Poverty in
mothers to improve the health and nutrition of mothers the country constituted by the Planning Commission
and children as well as compensation for wage loss. in 2012.
Statement 3 is correct: One of the objectives of the G K Pillai committee was constituted to recommend
scheme is to promote positive behavioral change toward changes in the Remission of Duties or Taxes on
a girl child by providing additional cash incentive for Export Product (RoDTEP), formulate the modalities
the second child if that is a girl child. to calculate taxes at the central, state and local levels
Other objectives of the schemes are: imposed on the exported products including embedded
3 To provide cash incentive for partial compensation taxes, such as local levies, coal cess, mandi tax.
for the wage loss so that the woman can take So, option (b) is correct.
adequate rest before and after delivery of the first Q 49. Ans: (b)
child;
3 To improve health-seeking behavioural amongst Explanation:
Pregnant Women & Lactating Mothers (PW&LM). Statement 1 is incorrect: Effective Revenue deficit is
Q 47. Ans: (b) a new term introduced in the Union Budget 2011-12.
The Effective Revenue Deficit does not include revenue
Explanation: expenditures made in the form of grants for capital
Statement 1 is correct: Treasury bills are money asset creation.
market instruments issued by the Government of India Statement 2 is correct: The monetized deficit is the
as a promissory note with guaranteed repayment at a monetary support the Reserve Bank of India (RBI)
later date. The Reserve Bank of India also issues treasury extends to the Centre as part of the government’s
bills under its open market operations (OMO) strategy borrowing program. In other words, the term refers to
to regulate the inflation level and spending/borrowing the purchase of government bonds by the central bank
habits of individuals. to finance the spending needs of the government.
Statement 2 is incorrect: Treasury bills are primarily Q 50. Ans: (b)
short-term borrowing tools, having a maximum tenure
of 364 days, available at zero coupons (interest) rate. Explanation:
These bills have tenure of 91 days, 182 days, and 364 Equalisation Levy was introduced in India in 2016, with
days. the intention of taxing digital transactions i.e. the income
Statement 3 is correct: G-Sec treasury bills don’t yield accruing to foreign e-commerce companies from India.
any interest on total deposits. Instead, investors stand It is aimed at taxing business-to-business transactions. It
to realize capital gains from such investments, as such is also often referred to as the “Google Tax”.
securities are sold at a discounted rate in the market. Statement 1 is incorrect: Equalisation Levy is a direct
Upon redemption, the entire par value of this bond tax, which is withheld at the time of payment by the
is paid to investors, thereby allowing them to realize service recipient.
substantial profits on total investment. The two conditions to be met to be liable to equalization
Q 48. Ans: (b) levy:
3 The payment should be made to a non-resident
Explanation: service provider.
The S.S. Tarapore Committee (1997) was primarily 3 The annual payment made to one service provider
focused on providing recommendations for achieving exceeds Rs.1,00,000 in one financial year.
capital account convertibility in India. The Tarapore Statement 2 is correct: Equalisation Levy resolves
Committee examined the Reserve Bank’s procedures the issue of base erosion and profit shifting by the
and performance under four different areas affecting multinational companies operating in the digital
individual customer transactions. These were foreign economy, to some extent.

UPSC Test - 5 Economy (Solution) Paper Code: 25005 9

 Statement 3 is correct: Equalisation Levy applies to decisions on fiscal and monetary policies. Whether
online marketing, digital platforms selling goods/ responding to inflation or recessions, real GDP offers
services, cloud computing, web designing, hosting and insights critical for achieving sustainable growth.
maintenance, and online download of software. Q 54. Ans: (b)
Q 51. Ans: (a) Explanation:
Explanation: To be considered for selection, a stock must satisfy
Fiscal drag is an economic term whereby inflation or certain requirements. The Sensex is reconstituted
income growth moves taxpayers into higher tax biannually, in June and December of every year.
brackets. Statement 1 is correct: A stock must have a listing
Statement 1 is correct: Fiscal drag is a result of history of at least six months and must have traded on
decreased consumer spending as a result of increased every trading day during this period to be considered
taxation that eventually reduces aggregate demand, for the Sensex.
which leads to deflationary pressures. Statement 2 is incorrect: The company must be
Statement 2 is incorrect: Fiscal drag mainly happens among the top 75 companies based on their average
in the case progressive taxation system. In Progressive three-month float or total market cap. It should have a
taxation, individuals are moved into higher tax brackets minimum free-float market cap of 0.50% after market
because of inflation or increased income. cap and liquidity criteria are met.
Statement 3 is incorrect: Taxpayers pay more taxes Statement 3 is correct: To be eligible, the stock should
and their disposable income declines which increases have a derivative contract, that is, an agreement
the government’s tax revenue. Fiscal drag can be seen between two parties to buy or sell any form of security
as an automatic fiscal stabilizer as it controls a rapidly at a certain price in the future.
expanding economy from overheating. Statement 4 is incorrect: In terms of liquidity, the
Q 52. Ans: (d) cumulative weight of the three-month average daily
value traded (ADVT) is calculated for companies that
Explanation: meet the eligibility requirements. Any prospective
Statement I is incorrect: A higher Gini index indicates constituents with a total weight of ADVT greater than
greater inequality, with high-income individuals 98% are excluded from the index.
receiving much larger percentages of the population’s Q 55. Ans: (d)
total income.
Statement II is correct: The Gini index determines a Explanation:
nation’s level of income inequality by measuring the Statement 1 is incorrect: India VIX is a volatility index
income distribution or wealth distribution across its computed by the National Stock Exchange (NSE) based
population. The Gini index was developed in 1912 by on the order book of NIFTY Options.
Italian statistician Corrado Gini. Statement 2 is also incorrect: India VIX reflects
Global inequality, as measured by the Gini index, investors’ perceptions of market volatility in the near
has steadily increased over the past few centuries and term, specifically indicating the expected volatility over
spiked during the COVID-19 pandemic. the next 30 calendar days. According to the NSE, higher
So, Statement I is incorrect, but statement II is correct. India VIX values signify greater expected volatility,
Q 53. Ans: (c) while lower values suggest the opposite.

Explanation: Q 56. Ans: (a)

Statement 1 is correct: Nominal GDP reflects the Explanation:

total value of goods and services produced within a The Directorate General of Foreign Trade (DGFT) has
country during a given period at current market prices. announced the pilot launch of the upgraded electronic
This figure does not account for inflation or deflation, Bank Realisation Certificate (eBRC) system for self-
capturing the economic output at prevailing prices. certification by exporters. The eBRC is a document that
Statements 2 and 4 are correct: Nominal GDP is valuable certifies the receipt of foreign exchange by an exporter
for comparing economic output across countries at and is used for various purposes such as claiming
a specific time. However, since it does not adjust for benefits under the Foreign Trade Policy, filing income
inflation, changes in nominal GDP may simply reflect tax returns, etc.
price hikes rather than actual growth in production. This The upgraded eBRC system is based on electronic
limitation makes nominal GDP less reliable for assessing Inward Remittance Messages (IRMs), which are to be
an economy’s long-term growth trends. transmitted directly by banks to DGFT. Based on the
Statement 3 is not correct: Real GDP helps in evaluating IRMs received, the exporters shall self-certify their
long-term economic trends and making informed eBRCs by matching them with relevant shipping bills,

10 UPSC Test - 5 Economy (Solution) Paper Code: 25005

 SOFTEX, or invoice details. The enhanced eBRC system Q 60. Ans: (d)
shall enable exporters to reduce transaction time and Explanation:
costs, ease the burden on bankers, and promote ease of
doing business in general. Individuals 75 and older are excluded from submitting
Q 57. Ans: (a) income-tax (I-T) returns if their income consists only
of pension and interest income, with interest income
Explanation: generated from the same specified bank to which the
India has signed a protocol amending its tax treaty pension is credited.
with Mauritius with an aim to plug treaty abuse for tax In such circumstances, the selected bank deducts the
evasion and avoidance. applicable tax, removing the need to file a return. The
The amended pact includes the Principal Purpose Test age limit for this provision could be reduced to 70 years,
(PPT), which is in line with the global efforts against treaty extending the benefit to more senior individuals.
abuse, particularly under the BEPS (Base Erosion and The current basic exemption ceiling for older citizens is
Profit Shifting) framework. The PPT essentially implies Rs 3 lakh under both the old and new tax regimes. The
that the tax benefits under the treaty will not be applicable baseline exemption ceiling for super senior citizens (aged
if it is established that obtaining that duty benefit was the 80 and above) was Rs 5 lakh under the previous regime,
principal purpose of any transaction or arrangement. but it remains Rs 3 lakh under the current regime.
Q 58. Ans: (a) Q 61. Ans: (a)
Explanation: Explanation:
Statement 1 is not correct: Under the provisions of the The situations that could lead to a negative WPI are:
WTO’s Agreement on Agriculture (AoA), the aggregate 3 Fall in global crude oil price
value of the product-specific support should not exceed 3 Global lockdown
5% of the total value of production of the agricultural Fall in global crude oil price: A significant drop in
product in question. crude oil prices can lead to a decrease in the prices of
In the case of developing countries such as India, the de various goods and services, potentially contributing
minimis ceiling is 10%. to a negative WPI. This is because oil prices affect
Statement 2 is not correct: The WTO Agreement on transportation and production costs.
Fisheries Subsidies, which was adopted at the 12th Global lockdown: During a global lockdown, demand
Ministerial Conference (MC12) on 17 June 2022, for many goods and services plummets, which can
marks a major step forward for ocean sustainability lead to lower prices and possibly a negative WPI, as
by prohibiting harmful fisheries subsidies, which are a businesses may reduce prices to stimulate demand.
key factor in the widespread depletion of the world’s Whereas in the case of,
fish stocks. The Agreement represents a historic Global inflation in volatile commodities: If there is
achievement for the membership as the first Sustainable inflation in volatile commodities, it typically leads to
Development Goal (SDG) target to be fully met, the first higher prices rather than a negative WPI. Therefore,
SDG target met through a multilateral agreement, the this situation would not contribute to a negative WPI.
first WTO agreement to focus on the environment, the Rising freight cost across the globe: Rising freight costs
first broad, binding, multilateral agreement on ocean generally lead to higher prices for goods, which would
sustainability, and only the second agreement reached not contribute to a negative WPI.
at the WTO since its inception. Q 62. Ans: (a)
Statement 3 is correct: The interim peace clause was
put in place in 2013 under the Bali Agreement to Explanation:
protect developing countries from being challenged for Statement 1 is correct: The first urban cooperative
breach of subsidy levels. credit society was registered in Canjeevaram
Q 59. Ans: (a) (Kanjivaram) in the erstwhile Madras province in
October 1904. The most prominent among the early
Explanation: credit societies was the Bombay Urban Co-operative
The Cairns Group is a coalition of 20 agricultural fair- Credit Society, sponsored by Vithaldas Thackersey and
trading countries (members) which together account Lallubhai Samaldas established on January 23, 1906.
for almost 30 percent of the world’s agricultural Statement 2 is incorrect: The Government of India
exports (WTO Stats, total value of agricultural Act in 1919 transferred the subject of “Cooperation”
products exported, average 2018–2022). Since the from the Government of India to the Provincial
Group’s establishment in Cairns, Australia, on 25-27 Governments. The Government of Bombay passed the
August 1986, its members have continued to push for first State Cooperative Societies Act in 1925 “which not
liberalisation of global trade in agricultural goods. only gave the movement its size and shape but was a

UPSC Test - 5 Economy (Solution) Paper Code: 25005 11

 pacesetter of cooperative activities and stressed the Q 66. Ans: (c)
basic concept of thrift, self-help and mutual aid.” Explanation:
Statement 3 is incorrect: Cooperative banks have
long been under dual regulation by the state Registrar Statement 1 is incorrect: A Sovereign Wealth Fund
of Societies and the RBI. As a result, these banks have (SWF) is a State/Government owned investment fund
escaped scrutiny despite failures and frauds. that is commonly established from export surpluses,
The changes to The Banking Regulation Act approved fiscal surpluses, proceeds from privatization etc.
by Parliament in September 2020, brought cooperative Statements 2 and 3 are correct: Countries generally
banks under the direct supervision of the RBI. create SWFs to diversify their revenue streams to
Q 63. Ans: (d) protect and stabilize the budget and economy from
excess volatility. For ex., UAE relies on oil exports for
Explanation: its wealth. Hence, it devotes a portion of its reserves to
Statements 1 and 2 are incorrect: At the time of an SWF that invests in diversified assets that can act as
inflation, the government increases taxes for dropping a shield against oil-related risks (when oil prices plunge,
private spending. If direct taxes on profits increase, govt’s budgetary resources/taxes decline, and SWFs act
the total disposable income would reduce. As a result, as buffer). SWFs typically invest in multiple asset classes
the total spending of individuals decreases, which, in including publicly listed shares, fixed income, private
turn, reduces the money supply in the market. Along equity, private debt, real estate, infrastructure etc.
with taxation policy, the government must reduce Q 67. Ans: (d)
public expenditure and public borrowing to control
excess demand. Reduction in public expenditure and Explanation:
public borrowing reduces the supply of money thereby Statements 1 and 2 are incorrect: Interest rate
reducing inflation. differential is important in determining exchange rate
Statement 3 is correct: Increasing interest rates in the movements. If we assume that government bonds in
economy to control inflation is a monetary policy tool country A pay 8 percent rate of interest whereas equally
and it is done by the Monetary Policy Committee of safe bonds in country B yield 10 percent, the interest
RBI. rate differential is 2 percent. Investors from country A
Q 64. Ans: (a) will be attracted by the high-interest rates in country
B and will buy the currency of country B selling their
Explanation: own currency. At the same time, investors in country
Statement 1 is correct: In the case of direct taxes, both B will also find investing in their own country more
the incidence and impact often fall on the same person. attractive and will, therefore, demand less of country A’s
Direct taxes are levied directly on an individual’s or currency. Therefore, country A’s currency depreciates
entity’s income or wealth, such as income tax, property whereas that of country B’s currency appreciates. If a
tax, or corporation tax. country’s imports grow faster than exports, the capital
Statements 2 and 3 are incorrect: Direct taxes are inflows from exports will not be sufficient to pay for
progressive in nature- higher taxes are levied on the imports. This will lead to an increase in demand
persons earning higher income. In India, indirect tax for foreign currency. Therefore, the domestic currency
is levied on services which are currently covered under depreciates.
Goods and Service tax. Q 68. Ans: (a)
Q 65. Ans: (b) Explanation:
Explanation: Statement 1 is correct: Current account convertibility
Option 1 and 4 are correct: Capital account is a record allows for unrestricted payments related to the
of the inflows and outflows of capital that directly international exchange of goods, services, and
affect a country’s foreign assets and liabilities. Capital incomes. In contrast, capital account convertibility
account transactions are those transactions which involves liberalizing capital transactions like loans and
alter Indian residents’ assets or liabilities, including investments.
contingent liabilities, outside India and foreign Capital account convertibility (CAC) means that
resident’s assets or liabilities inside India. It comprises individuals can convert rupees to any foreign currency
of foreign investments like FDI and FPI, Loans by (like euros, dollars, yen, or renminbi) and vice versa for
companies which includes External Commercial capital transactions. This enables Indians to invest in
Borrowings and governments and banking capital foreign assets at market rates. Currently, India allows
such as NRI deposits. individuals to invest up to $250,000 per financial year
under the Liberalized Remittance Scheme, totalling up
to $500,000 in a calendar year.

12 UPSC Test - 5 Economy (Solution) Paper Code: 25005

 Statement 2 is incorrect: India has full current Q 71. Ans: (d)
account convertibility but not full capital account Explanation:
convertibility.
The current account is fully convertible, meaning Statement 1 is correct: If the fiscal deficit is large
individuals can access the foreign exchange they need at enough, it can negatively affect the sovereign ratings
the official rate. However, capital account transactions of an economy. It means expenditure in the form of
still face restrictions. domestic currency is higher and so its value decreases..
India is partially convertible in the capital account Statement 2 is incorrect: Higher fiscal deficit
(40:60). Following the 1997 recommendations of the of government leads to crowding out of private
S.S. Tarapore Committee, India is gradually moving investment in a number of ways. Firstly, when the
toward greater capital account convertibility, with government decides to borrow from private citizens
some reforms already in place. by issuing bonds to finance its fiscal deficits, these
Q 69. Ans: (d) bonds will compete with corporate bonds and other
financial instruments for the available supply of funds.
Explanation: Thus, some private borrowers will get ‘crowded out’
Statement 1 and 2 are incorrect: The Government of of the financial markets as the government claims an
India has the sole right to mint coins. The responsibility increasing share of the economy’s total savings.
for coinage vests with the Government of India in Statement 3 is correct: A fiscal deficit leads to an
terms of the Coinage Act, 1906. The designing and increase in the interest rate as the demand for loans
minting of coins in various denominations is also the is higher than its supply. This increase in demand
responsibility of the Government of India. Coins are for borrowings puts pressure on the available capital
minted at the India Government Mints at Mumbai, resources leading to an increase in the interest rates and
Alipore (Kolkata), Saifabad (Hyderabad), Cherlapally the cost of borrowings.
(Hyderabad) and NOIDA (UP). Statement 4 is incorrect: Fiscal deficits are generally
Statement 3 is incorrect: The coins are issued for inflationary in nature. This is because when the
circulation only through the Reserve Bank in terms of government increases spending or cuts taxes, aggregate
the RBI Act. Coins can be issued up to the denomination demand increases. Firms may not be able to produce
of Rs.1000 as per the Coinage Act, 1906. The RBI shall higher quantities that are being demanded at the
issue rupee coins on demand and the Govt. of India ongoing prices. Prices will, therefore, have to rise.
shall supply/mint such coins to the RBI on demand. Q 72. Ans: (a)
Q 70. Ans: (d) Explanation:
Explanation: Statement 1 is correct: The Liquidity Adjustment
Statement 1 is incorrect: Commercial Paper (CP) is an Facility (LAF) is a monetary policy tool of the RBI that
unsecured money market instrument issued in the form enables banks to manage their short-term liquidity
of a promissory note (promise to pay in future). The needs. Banks can borrow money through repurchase
original tenor (time period) of a CP shall be between agreements (repos) or deposit funds with the RBI using
seven days to one year. reverse repo contracts to earn interest. LAF influences
Statement 2 is incorrect: Certificate of Deposits key monetary variables, including interest rates.
are negotiable/tradable, unsecured money market Statement 2 is incorrect: The. Marginal Standing
instruments issued by Scheduled Commercial Banks Facility (MSF) rate is the penal rate at which banks can
(and some All-India Financial Institutions like NHB, borrow on an overnight basis from the central bank by
SIDBI etc. but mostly by banks) for a maturity period using their Statutory Liquidity Ratio (SLR) portfolio as
up to one year against funds deposited at the bank. collateral. Introduced in 2011, this mechanism helps
Statement 3 is incorrect: The call/notice money banks manage unexpected financial needs and maintain
market forms an important segment of the Indian liquidity. A higher MSF rate means that banks must
money market. Under call money market, funds are borrow at a higher cost, which can lead to increased rates
transacted on overnight basis and under notice money for retail loans, such as home and car loans. Conversely,
market, funds are transacted for the period between 2 lowering MSF rates has the opposite effect.
days and 14 days. These are unsecured instruments. Statement 3 is incorrect: The Standing Deposit Facility
Participants in call/notice money market currently (SDF) is a liquidity window that allows banks to park
include Commercial and Cooperative Banks, Primary their excess liquidity with the RBI. The SDF operates as
Dealers (PDs), development finance institutions, an overnight facility, enabling banks to deposit excess
insurance companies and select mutual funds. funds for one day and retrieve them the next day. Unlike
the reverse repo facility, the SDF does not require banks
to provide collateral when parking their funds.

UPSC Test - 5 Economy (Solution) Paper Code: 25005 13

Q 73. Ans: (b) 3 Assets: The household does not own more than
Explanation: one of these assets: radio, television, telephone,
computer, animal cart, bicycle, motorbike or
Stock Variables: refrigerator, and does not own a car or truck.
A stock is a quantity that is measurable at a particular Q 75. Ans: (a)
point in time. Capital is a stock variable. On a particular
date (say, 1st April 2022), a company owns and Explanation:
commands a stock of machines, buildings, accessories, Statement 1 is incorrect: The SDR is an international
raw materials, etc. It is a stock of capital. Like a balance reserve asset and not a currency. Its value is based on
sheet, a stock has a reference to a particular date on a basket of five currencies: the US dollar, the euro, the
which it shows the stock position. Clearly, a stock has Chinese renminbi, the Japanese yen, and the British
no time dimension (length of time) as against a flow pound sterling.
that has a time dimension. Statement 2 is incorrect: Individuals and private
Stock indicates the quantity of a variable at a point of entities cannot hold SDRs. Only IMF member countries
time. Thus, wealth is a stock since it can be measured and the IMF itself hold SDRs, although the IMF can
at a point in time, but income is a flow because it can authorize other holders, such as central banks and
be measured over a period of time. Examples of stocks multilateral development banks.
are wealth, Government debt, loans, inventories (not Statement 3 is correct: A currency included in the SDR
change in inventories), opening stock, money supply basket must meet two criteria:
(amount of money), population, etc. The export criterion: A currency qualifies if the issuing
Investment in the economy and National Income are country is an IMF member (or part of a monetary union
flow variables. that includes IMF members) and ranks among the top
Q 74. Ans: (d) five world exporters.
The freely usable criterion: A currency qualifies if it is
Explanation: widely used in international payments and is actively
Following Indicator are used for measurement of traded in principal exchange markets.
Multidimensional poverty Index Statement 4 is incorrect: The value of the SDR in
Health: terms of the US dollar is determined daily based on spot
3 Nutrition: Any adult under 70 years of age or any exchange rates observed around noon London time,
child for whom there is nutritional information is and this information is posted on the IMF’s website.
undernourished. However, the IMF reviews the SDR basket every five
3 Child mortality: Any child under the age of 18 years or sooner if necessary to ensure it reflects the
years has died in the family in the five-year period relative importance of currencies in the global trading
preceding the survey. and financial systems.
Education: Q 76. Ans: (d)
3 Years of schooling: No household member aged
‘school entrance age + six years or older has Explanation:
completed at least six years of schooling. Frictional Unemployment: This kind of unemployment
3 School attendance: Any school-aged child is not arises due to people moving between jobs, career or
attending school up to the age at which he/she location or people entering and exiting the labour
would complete class eight. force or workers and employers having inconsistent or
Standard of living: incomplete information. Many people first leave job and
3 Cooking Fuel: The household cooks with dung, then they try to find a new job according to their choice
wood, charcoal or coal. and this process takes some time to apply for new jobs
3 Sanitation: The household’s sanitation facility is and for employers to make a selection and hence they
not improved (according to SDG guidelines) or it remain unemployed for this transition period. That is
is improved but shared with other households. why frictional unemployment is also called as transitional
3 Drinking-Water: The household does not have unemployment and it is always present in the economy.
access to improved drinking water (according to Q 77. Ans: (d)
SDG guidelines) or improved drinking water is at
least a 30-minute walk from home, round trip. Explanation:
3 Electricity: The household has no electricity. o Statement 1 is incorrect: The short-term co-operative
Housing: At least one of the three housing materials credit institutions have a three-tier structure comprising
for roof, walls and floor are inadequate: the floor is State Co-operative Banks (StCBs), Central Co-operative
of natural materials and/or the roof and/or walls Banks (CCBs), and Primary Agricultural Credit Societies
are of natural or rudimentary materials. (PACSs) which are not banks but only societies.

14 UPSC Test - 5 Economy (Solution) Paper Code: 25005

 Statement 2 is incorrect: PACS are village-level increases. It imposes a lower tax rate on low-income
cooperative credit societies that serve as the last link earners and a higher rate on those with higher incomes.
in a three-tier cooperative credit structure headed by Progressive taxes are designed to reduce income
the State Cooperative Banks (SCB) at the state level. inequality by imposing higher tax rates on those with
Credit from the SCBs is transferred to the district higher incomes.
central cooperative banks, or DCCBs, that operate at Statement 2 is correct: A regressive tax is one in which
the district level. The DCCBs work with PACS, which low-income owners pay a larger percentage of income
deals directly with farmers. than middle- and high-income earners. The tax burden
Statement 3 is incorrect: Since these are cooperative decreases with regressive taxes as income rises.
bodies, individual farmers are members of the PACS, Statement 3 is incorrect: GST is generally considered
and office-bearers are elected from within them. A to be a regressive tax, meaning that it takes a relatively
village can have multiple PACS. larger percentage of income from lower-income
Statement 4 is incorrect: PACS are involved in short households compared to higher-income households.
term lending — or what is known as crop loan. At Statement 4 is incorrect: Examples of progressive
the start of the cropping cycle, farmers avail credit to tax include investment income taxes, tax on interest
finance their requirement of seeds, fertilisers etc. Banks earned, rental earnings, estate tax, and tax credits.
extend this credit at 7 per cent interest, of which 3 per Q 80. Ans: (b)
cent is subsidised by the Centre, and 2 per cent by the
state government. Effectively, farmers avail the crop Explanation:
loans at 2 per cent interest only. Industrial licensing was a major instrument of control
Q 78. Ans: (c) under which central government permission was
needed for both investment in new units and also for
Explanation: substantial expansion of capacity in existing units.
The following heads of the constitution of India are Statement 1 is incorrect: In a series of steps, licensing
covered under Union taxation on which Parliament was abolished for all except 7 industries viz. alcoholic
enacts the taxation law: beverages, sugar, cigars and cigarettes, electronics,
3 Corporation tax. aerospace and defense products, hazardous chemicals
3 Taxes on the sale or purchase of newspapers and 7 and pharmaceuticals.
advertisements published therein. Statement 2 is correct: In 1991, Foreign investment
3 Taxes on sale of goods other than newspapers, up to 50 percent in the Mining sector was allowed. In
where such sales or purchases take place in the 2020, 100% FDI is allowed under the ‘Automatic’ route
course of inter-state trade or commerce. for mining and exploration of metal and non-metal
3 Duties of customs including export duties. ores including diamond, gold, silver and precious ores.
The following heads of the constitution of India are Q 81. Ans: (a)
covered under State taxation on which State Legislative
enacts the taxation law: Explanation:
3 Land revenue, including the assessment and Statement 1 is correct: In 1969, government
collection of revenue, the maintenance of land nationalised 14 banks, each with reserves of more than
records, survey for revenue purposes and records Rs.50 crore. An authorized history of the Reserve Bank
of rights, and alienation of revenues. of India calls the action “the single most important
3 Taxes on agricultural income. economic decision taken by any government since
3 Taxes on lands and buildings. 1947.”
3 Taxes on mineral rights. Statement 2 is incorrect: Before 1969, the State Bank
3 Taxes on the consumption or sale of electricity. of India (SBI) was the only public sector bank in India.
3 Taxes on goods and passengers carried by roads or SBI was nationalized in 1955 under the SBI Act of
on inland waterways. 1955.
3 Taxes on vehicles suitable for use on roads. Q 82. Ans: (c)
3 Taxes on animals and boats.
3 Taxes on luxuries, including taxes on entertainment, Explanation:
amusements, betting and gambling. Statement 1 is correct: India is one of the major
So, option (c) is correct. players in the agriculture sector worldwide and it is
Q 79. Ans: (b) the primary source of livelihood for ~55% of India’s
population. India has the world’s largest cattle herd
Explanation: (buffaloes), the largest area planted for wheat, rice, and
Statement 1 is correct: A progressive tax involves a cotton, and is the largest producer of milk, pulses, and
tax rate that increases or progresses as taxable income spices in the world.

UPSC Test - 5 Economy (Solution) Paper Code: 25005 15

 Statement 2 is correct: The Indian food processing as unemployed who had no gainful work for a major
industry accounts for 32% of the country’s total food time during the 365 days preceding the date of the
market, one of the largest industries in India and is survey.
ranked fifth in terms of production, consumption, Pair 2 is incorrectly matched: Current Weekly Status:
export and expected growth. A person is considered working or employed if the
Q 83. Ans: (b) person was engaged for at least one hour on any one
day on any work-related (economic) activity during
Explanation: the reference period of seven days preceding the date
Statement 1 is correct: Minimum Alternate Tax is a of survey. The activity status determined on the basis of
provision in Direct tax laws to limit tax exemptions a reference period of the last 7 days preceding the date
availed by companies so that they pay at least a of survey is known as the current weekly status (CWS)
minimum amount of corporate tax to the government. of the person.
MAT is calculated under Section 115JB of the Income- Pair 3 is correctly matched: Current Daily Status:
tax Act. A person is considered working for the entire day
Statement 2 is incorrect: The provisions of MAT are if he had worked four hours or more on any day of
applicable for all companies except Life insurance the reference week preceding the date of the survey.
companies and shipping companies, who have Under this approach, the unemployment status of
exercised their option to pay tax on the tonnage income a person is measured for each day in a reference
as per the tonnage taxation scheme, foreign companies week. A person having no gainful work even for 1
with which India has Double Taxation Avoidance hour in a day is described as unemployed for that
Agreement, etc. day.
Statement 3 is correct: MAT has been lowered from Q 86. Ans: (d)
FY 2019-20 to 15% from 18.5% for businesses that
continue to get exemptions and incentives. Explanation:

Q 84. Ans: (a) The government constituted T R Rastogi, former

joint secretary in the finance ministry, to bring out a
Explanation: comprehensive circular on service tax.
Pradhan Mantri Jan-Dhan Yojana (PMJDY) is the The Arvind Subramanian Committee was constituted
National Mission for Financial Inclusion to ensure to recommend tax rates, including a structure of rates,
access to financial services, namely, basic savings & under the proposed GST regime.
deposit accounts, remittance, credit, insurance, and The Chelliah committee was constituted to make
pension in an affordable manner. recommendations for a comprehensive reform of the
Under the scheme, a basic savings bank deposit system of central taxes.
account can be opened in any bank branch or Business So, option (d) is correct.
Correspondent outlet, by persons not having any other Q 87. Ans: (a)
account.
Statement 1 is incorrect: There is no requirement to Explanation:
maintain any minimum balance in PMJDY accounts. Recently, UNESCO launched the 2024 State of the
Statement 2 is incorrect: An overdraft (OD) facility up Education Report for India on Culture and Arts
to Rs. 10,000 to eligible account holders is available. Education. UNESCO Regional Office for South
Statement 3 is correct: Rupay Debit card is provided Asia has launched the sixth edition of its annual
to PMJDY account holder. Accident Insurance Cover flagship report, “Rhythms of Learning”, the 2024 State
of Rs.1 lakh which was enhanced to Rs. 2 lakhs for new of the Education Report for India, focusing on Culture
PMJDY accounts opened after 28.8.2018 is available and Arts Education.
with a RuPay card issued to the PMJDY account This year’s report explores the significant role that
holders. culture and arts education plays in fostering creativity,
Q 85. Ans: (b) promoting inclusive and equitable education,
strengthening social cohesion, and advancing
Explanation: sustainable development.
Pair 1 is correctly matched: Usual Status: A person In a country like India, where culture and arts are deeply
is considered working or employed if the person was embedded in its heritage, integrating these elements
engaged for a relatively longer period in any one or into the education system is crucial for holistic and
more work-related (economic) activities during the inclusive learning.
reference period of 365 days preceding the date of the So, option (a) is correct.
survey. This approach estimates only those persons

16 UPSC Test - 5 Economy (Solution) Paper Code: 25005

Q 88. Ans: (a) countries that collectively account for about 88% of
Explanation: India’s annual trade flows.
The REER, or Real Effective Exchange Rate, is essentially
The Code on Social Security, 2020 provides for framing the NEER adjusted for inflation differentials between
of suitable social security measures for gig workers India and its trading partners.
and platform workers on matters relating to life Statement I is correct: It accurately describes the
and disability cover, accident insurance, health and REER’s role in providing a more nuanced understanding
maternity benefits, old age protection, etc. of currency strength by incorporating inflation factors.
Statement 1 is incorrect: Section 113 of the Code Statement II is incorrect: An increase in the REER
on Social Security, 2020 provides for the registration indicates that the costs of Indian exports are rising
of unorganized workers, gig workers and platform faster than import prices, which typically leads to a
workers. The provisions of the Code are yet to come decrease in trade competitiveness, not an increase.
into effect. Statement III is incorrect: If a country’s nominal
Statement 2 is incorrect: In a gig economy, employers exchange rate falls less than its domestic inflation rate,
save money when they do not have to provide benefits the currency has actually appreciated in “real” terms
such as health coverage and paid vacation time. rather than depreciated.
Statement 3 is correct: The gig economy offers workers Q 92. Ans: (d)
the flexibility to choose their working hours and
projects, providing autonomy over their professional Explanation:
lives. India considers purchasing and storing crude oil for
Q 89. Ans: (a) strategic and buffer stock purposes to ensure availability
during wartime and other emergencies.
Explanation: The underground Strategic Petroleum Reserves (SPR)
Statement 1 is correct: When a budget proposes higher storages have a total capacity of 5.33 Million Metric
expenditures than the receipts, it is known as a deficit Tonnes (MMT) of crude oil and are located in 2 States
budget. If a budget proposes a lesser expenditure than namely (i) Vishakhapatnam in Andhra Pradesh (1.33
the receipts, then it is called a surplus budget. MMT), (ii) Mangaluru (1.5MMT) and Padur (2.5
Statement 2 is incorrect: The Union Budget in India has MMT) in Karnataka. Taking advantage of low crude
never been presented as a surplus budget. The finance oil prices in April/May 2020, the Strategic Petroleum
minister informed that for the year 2024-25 the fiscal Reserves were filled to full capacity, leading to notional
deficit is estimated at 4.9 percent of GDP. savings of approximately INR 5000 crore.
Q 90. Ans: (c) In July 2021, the Government had approved the
establishment of two additional commercial-cum-
Explanation: strategic facilities with total storage capacity of 6.5
Statement 1 is correct: Inheritance tax is the income MMT at Chandikhol (4 MMT) in Odisha and Padur (2.5
tax liability in the hands of the recipient if he has MMT) in Karnataka, on a Public Private Partnership
received any assets through inheritance/will. However, (PPP) mode.
in India, as per section 56(2)(x), any money or property These facilities utilize underground rock caverns,
received under a will or by way of inheritance is not which offer greater security during airstrikes and are
taxable. more economical and environmentally friendly than
Statement 2 is correct: Capital gains taxes apply only conventional above-ground storage tanks, which often
to capital assets, which include stocks, bonds, digital require additional cooling or air conditioning.
assets like cryptocurrencies and NFTs, jewelry, coin The India’s Strategic Petroleum Reserve Limited
collections, and real estate. (ISPRL) is an Indian company responsible for
Q 91. Ans: (d) maintaining the country’s strategic petroleum reserves.
It is a wholly owned subsidiary of the Oil Industry
Explanation: Development Board (OIDB), which functions under
The Reserve Bank of India has developed NEER indices the administrative control of the Ministry of Petroleum
for the rupee, measuring its value against a basket of and Natural Gas.
six currencies as well as against 40 currencies. The first Q 93. Ans: (d)
index represents a trade-weighted average exchange
rate of the rupee against a core basket that includes Explanation:
the US dollar, euro, Chinese yuan, British pound, The Foreign Trade Policy 2023 replaces the old Foreign
Japanese yen, and Hong Kong dollar. The second index Trade Policy 2015-20 and would run for 5 years. The
encompasses a broader range of 40 currencies from aim of the new trade policy is fourfold — to shift from an

UPSC Test - 5 Economy (Solution) Paper Code: 25005 17

 Q 96. Ans: (c)
incentive to a tax remission-based regime, to improve
the ease of doing business, to promote exports through Explanation:
collaborations, and to focus on emerging areas.
Statement 1 is not correct: The government has Statement 1 is incorrect: India permits 100% foreign
articulated a goal of achieving $2 trillion in export of goods direct investment (FDI) in the marketplace model of
and services by 2030, up from the $900 billion target that e-commerce, which is defined as a technology platform
the previous policy had hoped to achieve by 2020. that connects buyers and sellers.
Statement 2 is not correct: The policy proposes to create Statement 2 is also incorrect: The inventory model,
E-Commerce Export Hubs (ECEHs), which would used by companies like Walmart and Amazon in
act as a center for favourable business infrastructure the United States, involves an e-commerce firm
and facilities for cross-border e-commerce activities. owning the goods and services it sells directly to
These hubs are likely to come up near airports and retail customers. Since India does not allow FDI in
ports. The hubs would be set up by the industry and inventory-driven models of e-commerce, companies
would not involve any financial commitment from the like Amazon and Flipkart are restricted to operating
government. as marketplaces.
Q 94. Ans: (a) Statement 3 is correct: Companies such as Amazon and
Flipkart are only permitted to function as marketplaces.
Explanation: They can provide platforms for other sellers, merchants,
The Foreign Trade Policy 2023 announced four new or businesses to list and sell their products, but they
Towns of Export Excellence (TEE) – Faridabad for cannot list their own products on the platform. This
apparel, Moradabad for handicrafts, Mirzapur for restriction is primarily aimed at protecting India’s vast
handmade carpets, and Varanasi for handloom and unorganized retail sector, which lacks the scale and
handicrafts – which are in addition to the already purchasing power to offer significant discounts.
existing 39 towns of export excellence. The facility helps Q 97. Ans: (a)
in global recognition, provides financial assistance
for marketing, and offers a common service provider Explanation:
(CSP) facility that helps increase the competitiveness E-commerce operatives like Amazon and Walmart-
of the entire cluster by enabling the common use of acquired Flipkart have been pricing goods below the
capital goods for exports. cost of production as a strategy to kill competition.
Q 95. Ans: (d) While they incur a loss in the short term, once
competitors have shut shop, the big retailers acquire a
Explanation: monopoly and fix prices to the detriment of millions of
Lab-grown diamonds (LGDs) are diamonds that are consumers.
produced using specific technology that mimics the Q 98. Ans: (a)
geological processes that grow natural diamonds. They
are not the same as “diamond simulants” – LGDs are Explanation:
chemically, physically, and optically diamond and thus Foreign funds can issue P notes to investors.
are difficult to identify as “lab-grown.” Statement 1 is not correct: P-Notes or Offshore
There are multiple ways in which LGDs can be derivative instruments (ODIs), short for
produced. The most common (and cheapest) is the Participatory Notes, are financial instruments that
“High pressure, high temperature” (HPHT) method. let foreign investors indirectly invest in the Indian
As the name suggests, this method requires extremely stock market without registering with the market
heavy presses that can produce up to 730,000 psi of regulator, Sebi.
pressure under extremely high temperatures (at least Statement 2 is correct: P-Notes act like a substitute
1500 Celsius). for underlying Indian company shares. When we buy a
Other processes include “Chemical Vapor Deposition” P-Note, we are essentially investing in the performance
(CVD) and explosive formation that creates what is of those Indian shares.
known as “detonation nanodiamonds”. Statement 3 is not correct: Previously, only banks
Any of these methods can be carried out using registered with GIFT City could issue P-Notes. Now,
renewables or cleaner energy sources, making LGDs foreign funds registered with Sebi and operating in
more eco-friendly than traditional diamond mining. GIFT City can also issue them. Foreign funds issuing the
Furthermore, mined diamonds, the production of LGDs notes would need to meet the compliance requirements
skips the most socially exploitative aspects of diamond of IFSCA and the Securities and Exchange Board of
manufacturing, namely the highly exploitative mining India.
process which often employs impoverished Africans in
terrible conditions.

18 UPSC Test - 5 Economy (Solution) Paper Code: 25005

Q 99. Ans: (b) in India and non-residents. The internationalisation
Explanation: of the currency, which is closely interlinked with
the nation’s economic progress, requires further
Foreign investment in Indian securities has also opening up of the currency settlement and a strong
been made possible through the purchase of Global swap and forex market.
Depository Receipts, Foreign Currency Convertible Internationalizing the rupee would facilitate its use
Bonds, and Foreign Currency Bonds issued by Indian in capital account transactions, making it easier for
issuers which are listed, traded, and settled overseas. businesses and investors to operate internationally.
Foreign investors, whether registered as FII or not, may Statement 2 is incorrect: While there may be concerns
also invest in Indian securities outside the FII route. about sanctions, internationalization typically aims to
Such investment requires case-by-case approval from enhance global trade and investment, which may not
the Foreign Investment Promotion Board (FIPB) and necessarily increase sanction risks.
the RBI, or only by the RBI depending on the size of the Statement 3 is correct: An internationally accepted
investment and the industry in which this investment currency can provide more stability and reduce
is to be made. exposure to currency volatility, as it may encourage
Investment in government securities is typically more consistent trade practices.
associated with Foreign Institutional Investors (FIIs) or Statement 4 is correct: With the rupee being used
Foreign Portfolio Investment (FPI), not FDI. more widely, there could be less reliance on foreign
A Non-Resident External (NRE) account is a rupee- currencies, potentially reducing the need for large
dominated account opened by an NRI to facilitate the foreign exchange reserves.
deposit of foreign currency earnings. It is not an FDI.
Q 100. Ans: (d)
Explanation:
Statement 1 is correct: Use in capital account
transactions. These are all transactions between residents

UPSC Test - 5 Economy (Solution) Paper Code: 25005 19