TEST NO-6: PRELIMS-CUM-

MAINS 2025

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Question-1: Which of the following scenarios best describe inflation in general sense:
1. Price rise of your favourite food item i.e. Maggi
2. Abrupt price rise across agricultural sector
3. Persistent price rise across wide variety of goods & services in the economy over time.
Choose the correct answer:
a. 1 Only
b. 2 Only
c. 3 Only
d. 1,2&3

Question-2: A rapid increase in the rate of inflation is sometimes attributed to the 'Base Effect'. What
is the 'Base Effect'?
a. It is the impact of drastic deficiency in supply due to failure of crops.
b. It is the impact of the surge in demand due to rapid economic growth.
c. It is the impact of price levels of the previous year on the calculation of inflation rate.
d. None of the above

Question-3: Which of the following is a typical cause of inflation in developing countries like India in
general?
1. Demand Pull Inflation
2. Cost-Push Inflation
3. Structural Inflation
How many of the above options are correct?
a. Only One
b. Only two
c. All three
d. None of the above

Question-4: Which of the following can be a potential demand side factor for inflation in an
economy:
1. A reduction in direct income tax rates in economy.
2. An increase in subsidy in the economy.
3. Government’s decision to increase export of onions to friendly countries.
How many of the above options are correct?
a. Only one
b. Only two
c. All three
d. None of these

Question-5: A rise in general level of prices may be caused by:

1. an increase in the money supply
2. a decrease in the aggregate level of output
3. an increase in the effective demand
Select the correct answer using the codes given below
a. 1 only
b. 1 and 2 only
c. 2 and 3 only
d. 1, 2 and 3

Question-6: Economic growth is usually coupled with ________.

a. Deflation
b. Inflation

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c. Stagflation
d. Hyper inflation

Question-7: RBI often uses qualitative control measures to tame inflation in India. Which of the
following steps can be called as qualitative measure:
1. Suppose you go to a bank for vehicle loan and the margin requirement increases from 10% of the
vehicle cost to 20%.
2. You want to buy your favourite phone using credit card and the maximum maturity period on such
a loan goes down.
Choose the correct option:
a. Only1
b. Only2
c. Both1&2
d. None of these

Quesiton-8 [2021]: With reference to 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

Question-9 [2022]:With reference to the Indian economy, consider the following statements:
1. If the inflation is too high, Reserve Bank of India (RBI) is likely to buy government securities.
2. If the rupee is rapidly depreciating, RBI is likely to sell dollars in the market.
3. If interest rates in the USA or European Union were to fall, that is likely to induce RBI to buy dollars.
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

Question-10: Which one of the following is likely to be the “most inflationary” in its effect?
a. repayment of public debt
b. borrowing from the public to finance a budget deficit
c. borrowing from banks to finance a budget deficit
d. creating new money to finance a budget deficit

Question-11:Which of the following measures should be taken when an economy is going through
inflationary pressures?
1. The direct taxes should be increased.
2. The interest rate should be reduced.
3. The public spending should be increased
Select the correct answer using the code given below:
a. 1 only
b. 2 only

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c. 2 and 3
d. 1 and 2

Question-12: Consider the following statements about WPI in India:

1. Total weight of food products in WPI is 24.4%
2. Very limited services are covered under WPI in India.
3. WPI is calculated on a base year 2011-12.
How many of the above options are correct?
a. Only One
b. Only two
c. All three
d. None of the above

Question-13: Consider the following statements about WPI in India:

1. WPI is released monthly in India.
2. WPI is published with a 2 weeks lag.
3. The Office of the Economic Adviser, Department for Promotion of Industry and Internal Trade
(DPIIT), Ministry of Commerce and Industry releases the index numbers of wholesale price in India.
4. Total weight of primary food products is around 15% in WPI.
Choose the correct option:
a. Only1
b. Both 1&2
c. 1,2&3
d. 1,2,3&4

Question-14: Which of the following is most inclusive and least inclusive as per its coverage of items:
1. WPI Headline
2. WPI Core
3. WPI Refined Core
Choose the correct answer:
a. 1= Max, 3= Min
b. 2=Max, 3=Min
c. 1=Max, 2=Min
d. None of these

Question-15: Which of the following statements regarding CPI in India is/are correct:
1. CPI includes services like education, medical care, recreation.
2. CPI for housing is not compiled.
Choose the correct option:
a. Only1
b. Only2
c. Both1&2
d. None of these

Question-16: Which of the following can be described as the differentiating factor between Core &
Headline Inflation in general?
1. Food Prices
2. Fuel Prices
3. Energy Prices
How many of the above options are correct?
a. Only one
b. Only two

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c. All three
d. None of these

Question-17: Which of the following is most inclusive and least inclusive as per its coverage of
items:
1. CPI Headline
2. CPI Core
3. CPI Refined Core
Choose the correct answer:
a. 1= Max, 3= Min
b. 2=Max, 3=Min
c. 1=Max, 2=Min
d. 1=Max, 3=Min

Question-18:Consider the following statements regarding Inflation in India:

1. CPI Industrial Worker is primarily used to regulate the dearness allowance of government
employees and the workers in organised sector.
2. CPI Agricultural Labour is used for revising minimum wages for agricultural labour in different
States.
Choose the correct option:
a. Only1
b. Only2
c. Both1&2
d. None of these

Question-19: Consider the following statements regarding deflation:

1. It runs “parallel” to inflation.
2. There is decline in general price levels.
3. There is a fall output and employment levels.
4. Real value of money goes up.
Choose the correct options that describe the features of deflation:
a. Both1&2
b. Both1&3
c. 2,3&4
d. 1,2,3&4

Question-20: Choose the potential factors which can lead to deflation in the economy:
1. Supply of money or credit falls in the economy.
2. Direct contractions in spending, either due to decrease in government expenditure, consumption
or investment in the economy.
Choose the correct option:
a. Only1
b. Only2
c. Both1&2
d. None of these

Question-21: Which of the following can be seen during skewflation in the economy?
1. Some sectors experience deflation.
2. Some sectors don’t experience inflation.
3. Some sectors experience inflation.
How many of the above options are correct?

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a. Only one
b. Only two
c. All three
d. None of these

Question-22 [2020]: Consider the following statements :

1. The weightage of food in Consumer Price Index (CPI) is higher than that in Wholesale Price Index
(WPI).
2. The WPI does not capture changes in the prices of services, which CPI does.
3. The Reserve Bank of India has now adopted WPI as its key measure of inflation and to decide on
changing the key policy rates.
Which of the statements given above is/are correct?
a. 1 and 2 only
b. 2 only
c. 3 only
d. 1, 2 and 3

Question-23-Complete the following table by selecting the correct option from the bracket:
INFLATION DEFLATION
General Price Level (High/Low)
Availability of Money (High/Low)
Real value of currency (High/Low)
Output & Employment (High/Low)
Nominal Interest Rate (Ni) compared to
Real Interest Rate (Ri)
Cause related to MP (EMP/CMP)
Cause related to FP (EFP/CFP)
Remedy related to MP (EMP/CMP)
Remedy related to FP (EFP/CFP)

Question-24: Complete the following table

CAUSE EFFECT SEEN ON:
Increase in GST Rates Demand-Pull or Cost-Push Inflation

Poor Roads Demand-Pull or Structural Inflation

Poor Monsoon leading to crop damage Demand Side or Supply Side Inflation

Increase in Income Tax Rates Demand-Pull or Cost-Push Inflation

Question-25: Consider the following statements:

1. OMO can be used to control inflation.
2. OMO can be used to control deflation.

Chose the correct option:

a. 1 only
b. 2 only
c. Both 1&2
d. None of these

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Question-26: Complete the following table:
INDICES BASE YEAR COMPILED BY
WPI
CPI-IW
CPI-AL
CPI-RL
CPI-R
CPI-U
CPI-Combined

Question-27: Consider the following attributes related to a measure of Inflation: “This measure of
inflation directly impacts consumers on everyday basis. It impacts their standard of living directly. It
doesn’t include volatile and seasonal items generally impacting the level of Inflation in India on short-
term basis.” Which measure of inflation are we talking about?
1. CPI
2. CPI-Core
3. WPI-Core
4. CPI-Refined Core
Select the correct option:
a. 1 only
b. 2 only
c. 3 only
d. 4 only

Question-28: Which of the following is a typical cause of inflation in developing countries like India
in general?
1. Demand Pull Inflation
2. Cost-Push Inflation
3. Structural Inflation
How many of the above options are correct?
a. Only One
b. Only two
c. All three
d. None of the above

Question-29: Suppose that there is food inflation in the economy along with inflation in services.
Which of the following diagrams aptly depict such a scenario:

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Question-30: Suppose that the USA reduces the rate of interest and it is significantly lower compared
to India. Which of the following is/are the likely impact of the above action by USA:
1. India would receive dollars
2. Dollar would be exchanged with Rupee in India
3. Circulation of rupee increases in the economy
4. There is a high chance of inflation
5. RBI might indulge OMO.
Select the correct option:
a. Both 1&2
b. 1,2 & 3
c. 1,4 & 5
d. 1,2,3,4 & 5

Question-31: From the following, which statement best describes the term import cover sometimes
seen in the news:
a. It is the ratio value of imports to gross domestic product of a country
b. It is the total value of imports of a country in a year
c. It is the ratio between value of exports and date of imports between 2 countries
d. It is the number of months of imports that could be paid for by a country's international reserves

Question-32: An international currency is used and held beyond the borders of the issuing country for
transaction purposes. Only a few countries can enjoy such privileges at any given point of time in
history. Which of the following pre- conditions do you think should be fulfilled by a country to
internationalise a currency?
1. A dominant share of global GDP
2. High demand of the currency in international foreign currency market
3. Extraordinary military capabilities
How many of the above options are correct?
a. Only one
b. Only two
c. All three
d. None of these

Question-33: Consider the following statements regarding “Exchange Rates”:

1. Foreign Exchange Rate is the price of one currency in terms of another.
2. It links the currencies of different countries and enables comparison of international costs and
prices.
Which one of the following is correct in respect of the above statements?
a. Both Statement-I and Statement-II are correct and Statement-II is the correct explanation for
Statement-I

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b. Both Statement-I and Statement-II are correct and Statement-I is the correct explanation for
Statement-II
c. Statement-I is correct but Statement-II is incorrect
d. Statement-I is correct and Statement-II is correct

Question-34: The classic Gold Standard exchange system prevailed around WWI. Which of the
following is true about that regime?
1. Countries fixed the value of their currencies in terms of a specified amount of gold.
2. Domestic currencies were freely convertible into gold at the fixed price and there was no
restriction on the import or export of gold.
3. Gold coins circulated as domestic currency alongside coins of other metals and notes.
4. A country’s money supply was linked to gold.
How many of the above statements are correct?
a. Only one
b. Only two
c. Only three
d. All Four

Question-35: Which of the following is/are true about Brettonwoods System?

1. The Bretton Woods regime dominated the world till 1991.
2. The US dollar became at the central currency of the system.
3. The Bretton Woods system was essentially a fixed exchange rate system.
How many of the above statements are correct?
a. Only one
b. Only two
c. All three
d. None of the above

Question-36: Regarding fixed exchange rate system (FERS), consider the following statements:
1. The fixed exchange rate system is market driven
2. It assures the stability of the exchange rate
3. FERs put a heavy burden on the government to maintain the exchange rate
Which of the statements given above is/are correct?
a. 2&3 only
b. 1&3 only
c. 3 only
d. 1&2 only

Question-37: Under the flexible exchange rate system, exchange rate is determined:
a. Predominantly by market mechanism
b. By the central bank
c. As a weighted index of a group of currencies
d. By the World Trade Organization

Question-38: Under Dirty Float Exchange Rate System, which of the following is generally correct:
1. Under it the exchange rate is market-determined.
2. The exchange rate is not perfectly flexible or perfect floating.
3. The central bank intervenes in the foreign exchange market to prevent large fluctuations in
exchange rate.
4. The currencies under this system, do not face large fluctuations.
Select the correct answer:
a. Both1&3

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b. 1,2&3
c. 2,3&4
d. 1,2,3&4

Question-39: Consider the following statements regarding India’s exchange rate system
at the time of independence:
1. India followed Brettonwoods Exchange rate System.
2. India followed pegged exchange rate system.
3. India followed the par value system of exchange rates.
How many of the above options are correct?
a. Only one
b. Only two
c. All three
d. None of these

Question-40: With reference to the Nominal Exchange Rate (NER) & Real Exchange Rate (RER) of
Rupee vis-a-vis Dollar, consider the following statements:
1. NER reflects relative price level of goods and services between India & USA.
2. RER reflects the amount of Rupee required to purchase 1$.
3. RER>1 shows that relative prices are higher in USA and USA would tend to import items from India.
How many of the above statements are correct?
a. Only one
b. Only two
c. All three
d. None of these

Question-41: Consider the following statements:

1. India is under liberalised exchange rate mechanism system (LERMS)
2. India's exchange rate is dual in nature
3. Dr. C. Rangarajan committee recommended to adopt market determined exchange rate regime in
the 1990s.
4. Recommendations of the Sodhani committee helped in the implementation of LERMS
Which of the statements given above are correct?
a. 1&2
b. 1,2&3
c. 2,3&4
d. None of the above

Question-42: Post-1990, India followed new exchange rate regime:

1. Liberalised Exchange Rate Management System (LERMS)
2. Unified Exchange Rate System
3. Dirty Float
How many of the above options are correct?
a. Only one
b. Only two
c. All three
d. None of these

Question-43 (UPSC): Which of the following best describes the term depreciation in the foreign
exchange market?
a. Domestic currency losing its value against foreign currency
b. An acid losing its value due to use or wear and tear

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c. A share losing value in foreign exchange
d. Real income going down due to fiscal drag

Question-44: Consider the following statements regarding depreciation:

1. It is experienced by countries with floating exchange rate regime.
2. A currency depreciation with respect to foreign currency occurs when the supply of that currency
in the market increases while its demand falls.
3. A depreciation is the outcome of active intervention of Central Banks to depreciate their respective
currencies.
Select the correct option:
a. Only1
b. Both 1&2
c. Both2&3
d. 1,2&3

Question-45: Consider the following statements regarding devaluation:

1. Devaluation of a currency is associated with countries having a fixed exchange rate regime.
2. Under it, the value of the domestic currency is deliberately reduced in terms of other foreign
currencies by the Central Banks.
Select the correct option:
a. Only1
b. Only 2
c. Both1&2
d. None of these

Question-46: Which of the following is/are possible impacts of devaluation of Rupee:

1. Devaluation makes the India’s exports relatively less expensive for foreigners.
2. Devaluation makes foreign products relatively more expensive for domestic consumers, thus
discouraging imports.
3. It may therefore help to reduce the current account deficit.

Which one of the following is correct in respect of the above statements?

a. Both Statement-I and Statement-II are correct and Statement-II is the correct explanation for
Statement-I
b. Both Statement-II and Statement-III are correct and Statement-II is the correct explanation for
Statement-III
c. Statement-III is correct and Statement-I and Statement-II are correct explanation for Statement-III
d. Statement-I, Statement-II and Statement-III are correct.

Question-47: Suppose that RBI devalues INR. Which of the following can be an unintended impact
of such a move:
1. It might lead to domestic inflation
2. It might lead to worsening of trade deficit.
3. RBI might increase the interest rates post-devaluation
How many of the above options are correct?
a. Only one
b. Only two
c. All three
d. None of these

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Question-48: Consider the following regarding currency appreciation:
1. It is observed in fixed exchange rate system.
2. It results in an increase in the external value of one currency in relation to another currency.
3. It occurs due to market forces of demand and supply.
How many of the above options are correct?
a. Only one
b. Only two
c. All three
d. None of these

Question-49: Identify the statements which best describe the situation when Rupee is revalued
against Dollars:
1. The same amount of rupee can buy more dollars.
2. Less rupee would be required to buy same amount of dollars.
Select the correct option:
a. 1 only
b. 2 only
c. Both1&2
d. None of these

Question-50: Which are reference to the exports of services in India which of the following
statements are correct?
1. Most of the Indian exports of services goes to countries with which we have signed FTAs.
2. Depreciation of rupees against the dollar helps in India’s export of services
Select the answer using the code given below
a. 1 only
b. 2 only
c. Both 1&2
d. Neither 1 nor 2

Question-51: Other things remaining unchanged, when in a country the price of foreign currency
rises, national income is:
a. Likely to rise
b. Likely to fall
c. Likely to rise and fall both
d. Not affected

Question-52: The balance of payments of a country is a systematic record of:

a. All important export-import transactions of a country during a given period of time normally a year
b. Goods exported from a country during a year
c. Economic transactions between the government of one country to another
d. Capital movements from one country to another

Question-53: With reference to the balance of payments which of the following constitutes the
current account?
1. Balance of trade
2. Foreign assets
3. Balance of invisibles
4. Special drawing rights
Select the answer using the code given below
a. 1 only
b. 2&3 only

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c. 1&3 only
d. 1,2&4 only

Question-54: In terms of economy, the visit by foreign nationals to witness the IPL matches in India
amounts to:
a. Export
b. Import
c. Production
d. Consumption

Question-55: Consider the following statements regarding Current Account Deficit (CAD) of BoP:
1. The current account deficit is essentially the difference between investment and savings in the
economy.
2. A current account deficit in itself is neither good nor bad.
3. A CAD might lead to imported inflation.
Select the correct option:
a. 1 only
b. 3 only
c. Both1&3
d. 1,2&3

Question-56:Consider the following actions which the government can take:

1. Devaluing the domestic currency
2. Reduction in export subsidy
3. Adopting suitable policies which attract greater FDI and more funds from FIIs
Which of the above actions can help in reducing the current account deficit?
a. 1&2 only
b. 2&3 only
c. 3 only
d. 1&3 only

Question-57: Which of the following is a component of Capital Account in BoP?

1. Depository Receipts (DRs)
2. Loans by IMF to India
3. NRI deposits
4. Net balance of foreign Commercial Banks with RBI
Choose the correct option:
a. 1 only
b. Both1&2
c. Both2&3
d. 1,2,3&4

Question-58: Which of the following statements are correct?

1. A positive outcome in the balance of payments at the end of the year increases forex
2. During the balance of payment crisis, the International Monetary Fund acts as the lender of last
resort
3. A negative balance of payment is unfavourable for an economy and it cannot be settled.
Select the answer using the code given below
a. 1&2
b. 2&3
c. 2 only
d. 3 only

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Question-59: Consider the following statements:
1. Current Account is maintained by central bank on behalf of government
2. Qualified foreign investors (a type of foreign investors) come under capital account transactions
3. Balance of Payment is the net outcome of current accounts and capital accounts of an economy
Which of the statements given above are correct?
a. 1&2 only
b. 3 only
c. 2&3 only
d. All of the above

Question-60: Which one of the following groups of items is included in India’s foreign-exchange
reserves?
a. Foreign-currency assets, Special Drawing Rights (SDRs) and loans from foreign countries
b. Foreign-currency assets, gold holdings of the RBI and SDRs
c. Foreign-currency assets, loans from the World Bank and SDRs
d. Foreign-currency assets, gold holdings of the RBI and loans from the World Bank

QUESTION FOR MAINS

Question-1: Discuss the scope and significance of Food Processing Industry in India. What steps have
been taken by government to promote FPI recently. [15 marks, 250 words]

Question-2: Explain “Supply Side Inflation”. Discuss the factors behind it and the suggest remedies to
handle it in India. [10 marks, 150 words]

Question-3: Explain the various components of BOP Account of India. What do you mean by “BOP
Crisis”? Mention the steps undertaken by government to handle BoP Crisis of 1990. [15 marks, 250
words]

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