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Solved PYQs
Money and Banking

[Link] are the components of high powered money ? (2 Marks) (2022,24)

Ans: It is comprised of two main components:
(i) Currency in circulation: This includes all physical banknotes and coins held by the general public
(individuals and businesses) for day-to-day transactions.
(ii) Commercial bank reserves: These are the funds that commercial banks hold as reserves. This is further
broken down into two parts:
(a)Vault cash: The physical cash that commercial banks keep in their own vaults and branches.
(b)Deposits with the central bank: The electronic deposits that commercial banks maintain in their accounts
at the central bank (e.g., the Federal Reserve in the US or the RBI in India), which often include both
required reserves and any excess reserves.
The formula for high-powered money (H) is commonly expressed as: H = C + R
Where: H = High-Powered Money; C = Currency held by the public; R = Total reserves of commercial
banks (vault cash + deposits with the central bank)
[Link] any three limitations of Barter System. (3 Marks) (2024)
Ans: Following are the limitations of Barter System:
(i)Lack of Double Coincidence of Wants:Under the barter system, it is necessary that the wants of two
persons who wish to exchange goods must coincide. Suppose Mr.A has wheat and he wants sugar. Then
Mr.A must find a person who has sugar and who is ready to exchange sugar for wheat.
(ii) Lack of Common measures of Value: The barter system suffers from the fact that there is no common
measure of value. The exchange of goods cannot take place unless and until the two persons agree to
exchange some given quantity of goods with each other.
(iii)Difficulty in Transporting: Under the barter system, one has to transport goods and services from one
place to another. Suppose a shepherd wishes to exchange his sheep for other commodities.
(iv)Difficulty in storing:Under barter system it is very difficult to store wealth as it requires more space and
[Link] some goods may get perished if stored for long time.
3. Expalin the process of credit creation by Commercial [Link] is Money
multiplier? (5+1=6 Marks) (2025)
Ans:Credit creation is the process by which commercial banks multiply a new deposit into a larger amount
of credit in the economy by lending out a portion of their deposits. This happens through a cycle where a
bank keeps a fraction of a deposit as reserves and lends out the rest, and the borrowed money is then
redeposited into another bank, creating new funds that can be lent again.
The extent of credit creation is determined by the initial deposit and the Legal Reserve Ratio (LRR) set by
the central bank, which dictates how much must be held in reserve.
The process of credit creation:
(i)Initial deposit: A customer makes an initial deposit, such as Rs 10,000.
(ii)Reserve requirement: The bank is required to keep a percentage of this deposit as a reserve, based on the
Legal Reserve Ratio (LRR). For example, if the LRR is 10%, the bank must hold Rs 1,000 in reserve.
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(iii)Lending: The bank can then lend out the remaining amount, which is Rs 9,000 in this example. This
amount is not given as physical cash but is credited to the borrower's account, creating a derivative deposit.
(iv)Redeposit: The borrower spends the money, and the recipient of the payment deposits it into another
bank.
(v)Repeat the cycle: The second bank now has a new deposit of Rs 9,000, keeps its 10% reserve (Rs 900),
and can lend out the remaining Rs 8,100 and the cycle continues.
The total amount of credit created can be calculated using the following formula:
Total Credit Creation = Initial Deposit x (1 / LRR)
Money multiplier is the number of times the total deposits would be of the initial deposits. It is equal to
1/LRR.
[Link] two points of superiority of Selective Credit Control Measure over Quantitative Credit
Control Measures. (2 Marks) (2020)
Ans: Selective credit control is meant to control the credit creation by means of qualitative control methods.
So as to control the inflationary pressure in a country by checking the bank credit to non-essential uses.
(i) These controls can correct the sectoral imbalances arising out of economic progress. They can also
stabilize the relative prices.
(ii) It has got flexibility which makes the Selective Credit Controls (SCCs) very popular to control the
stresses and strains of a growing economy.
(iii) The SCCs can Control the demand for loans and supply of loans. They have significantly widened the
scope of monetary policy.
(iv) Undesirable activities like speculation hoarding and unwanted development of some sectors can be
restricted by the adoption of SCCs.
[Link] does the Central Bank use its Quantitative Credit Control Measures to control inflationary
situation in the economy? (5 Marks) (2020)
Ans: The central bank uses its Quantitative Credit Control measures to control inflationary situations in the
economy by regulating the overall volume of credit available. The key quantitative measures include:
[Link] Rate Policy: The bank rate is the Official interest rate at which RBI rediscounts the approved bills
held by commercial banks. For controlling the credit, inflation and money supply, RBI will increase the
Bank Rate.
[Link] Market Operations: Open Market Operations refer to direct sales and purchase of securities and bills
in the open market by Reserve bank of India. The aim is to control volume of credit.
[Link] Reserve Ratio: Cash reserve ratio refers to that portion of total deposits in commercial Bank which
it has to keep with RBI as cash reserves.
[Link] Liquidity Ratio: SLR refers to that portion of deposits with the banks which it has to keep with
itself as liquid assets (Gold, approved govt. securities etc.) If RBI wishes to control credit and discourage
credit it would increase CRR & SLR.
These measures collectively reduce the money supply and restrict the availability of credit, discouraging
excessive borrowing and spending that drive inflation, thereby stabilizing the economy.
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Economic Reforms Since 1991

[Link] out four failures of economic reforms in India. OR (2015,18)

Explain the various weakness of economic reforms in India. OR (2017)
Mention some negative (Disadvantages/Demerits/Limitations) impacts of LPG.
Ans: Four major failures of economic reforms in India can be summarized as follows:
(i) Income Inequality and Poverty:The reforms led to a concentration of wealth among the skilled and
wealthy, widening the gap between the rich and the poor and hindering poverty alleviation.
(ii)Agricultural Distress: Farmers struggled to compete with cheaper imports, leading to income instability
and increased rural poverty.
(iii)Environmental Degradation: Increased industrialization from globalization resulted in pollution from
manufacturing plants and the destruction of vegetation, affecting human health.
(iv)Reduced Government Spending: Government spending on crucial social sectors like health and
education was reduced, impacting overall development.
(v)Displacement of Traditional Industries:Liberalisation led to increased competition, causing many
traditional, labor-intensive industries to decline or close, affecting low-skilled workers.
[Link] four arguments for (advantage/merit/positive impact) New Economic Reforms. OR (2016)
Mention some positive (Advantages/Merits) impacts of LPG?
Ans: Following are four arguments for New Economic Reforms in India:
(i) Higher GDP Growth:The reforms led to India's GDP growth accelerating, making it one of the
fastest-growing economies globally, with GDP increasing significantly since 1991.
(ii)Increased FDI and Reserves:Foreign Direct Investment (FDI) inflows saw a substantial rise,
boosting foreign exchange reserves.
(iii)Controlled Inflation:Steps were taken to control inflation, contributing to overall economic
stability.
(iv)Increased Competition:Reduced restrictions and privatization fostered domestic and international
competition, leading to innovation and better-quality products for consumers.
(v)Job Creation:The rise of new industries and the private sector, particularly in IT and services,
created numerous job opportunities.
(vi)Higher Per Capita Income:Increased economic growth and job opportunities contributed to a rise in
per capita income, improving the standard of living for many.
[Link] four arguments against (Demerits/Disadvantages/Negative Impacts) Privatization in Indian
context. (2016,17,24)
Ans: Following are four arguments against Privatization in Indian context:
(i)Private sector focuses more on profit maximization and less on social objectives unlike public sector that
initiates socially viable adjustments in case of emergencies and criticalities.
(ii) There is lack of transparency in private sector and stakeholders do not get the complete information
about the functionality of the enterprise.
(iii) Privatization has provided the unnecessary support to the corruption and illegitimate ways of
accomplishments of licenses and business deals amongst the government and private bidders.
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(iv) Privatization escalates price inflation in general as privatized enterprises do not enjoy government
subsidies after the deal and the burden of this inflation affects the common man.
[Link] five merits of Globalization. OR (2018)
Mention three merits and three demerits of Globalization. (2017)
Ans: Following are the merits of globalisation:
(i)Access to Global Markets: Globalization has opened India's economy to international trade and
investment, allowing Indian companies to access and compete in global markets.
(ii)More FDI: Globalization in India made provision for increased flow of foreign direct investment which
would help the country to modernize its technology and also for increasing its productivity.
(iii)Employment Opportunities: The entry of multinational corporations and the expansion of export-
oriented sectors have created millions of jobs, lifting many out of poverty. Special economic zones (SEZs)
and export processing zones (EPZs) have played a key role in increasing employment especially in
manufacturing and services.
(iv)Technological Advancement: Globalization has facilitated the transfer of advanced technologies, modern
business practices, and innovation into India. This has helped modernize Indian industries including
pharmaceuticals, chemicals, and information technology, enhancing productivity and competitiveness.
(v)Higher Standard of Living: Economic growth fuelled by globalization has increased national income and
wages, raising the standard of living for many Indians. Access to a broader variety of goods and services and
improved infrastructure have contributed to better quality of life.
[Link] do you mean by Modernization? (2019)
Ans: Modernization is a process by which modern scientific knowledge is introduced in the society with the
ultimate purpose of achieving a better and a more satisfactory life in the broadest sense of the term as
accepted by the society concerned.
[Link] two Navaratna Industries. (2023)
Ans:
Some of the Navaratna Companies in India: Some of the Maharatna Companies in India:
i. Mahanagar Telephone Nigam Limited i. Bharat Heavy Electricals Limited (BHEL)
(MTNL) ii. Bharat Petroleum Corporation Limited
ii. IRCTC (BPCL)
iii. ONGC Videsh Limited. iii. Coal India Limited (CIL)
iv. Bharat Electronics Limited (BEL) iv. GAIL
v. National Aluminium Company Limited v. Hindustan Petroleum Corporation Limited
(NACL) (HPCL)
vi. Oil India Limited (OIL)

Some of the Miniratna Companies in India:

i. Airports Authority of India (AAI)
ii. Balmer Lawrie & Co. Limited
iii. Bharat Dynamics Limited
iv. BEML Limited
v. Bharat Sanchar Nigam Limited (BSNL)

[Link] two objectives of Disinvestment. (2024)

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Ans: Following are the objectives of Disinvestment

(i) To reduce the financial burden on the Government.
(ii) To improve public finances.
(iii) To encourage wider share of ownership.
(iv) To introduce, competition and market discipline.
(v) To depoliticise essential services.
(vi) To help public enterprises upgrade their technology to become competitive.
(vii) To rationalise and retrain their workforce.
[Link] Indian company bought the English Tea Company ‘Tetly’ in 2000? (2025)
Ans: The Tetley Group was bought by India's Tata Group in February 2000.
[Link] do you understand by outsourcing? Write with an example. (2025)
Ans: Outsourcing is a business practice where a company hires a third-party individual or organization to
perform services or create goods that were previously handled by its own employees. Companies use
outsourcing to reduce costs, access specialized expertise, improve efficiency, and focus on their core
business activities.
Facebook, now Meta, is a large multinational corporation that operates social-media platforms like
WhatsApp, Snapchat, and Facebook itself. The company outsources the monitoring and removal of harmful
content on its platforms to third-party firms, such as Accenture. This outsourcing allows Meta to manage
vast amounts of content more efficiently and focus on its core business operations.
[Link] two major industrial sector reforms in the Indian economy under the policy of
Liberalization. OR (2022)
Briefly write about: (a)Industrial Sector Reforms (b) Financial Sector Reforms (c)Tax Reform
measures undertaken as a part of Liberalization policy of Economic Reforms,1991. (2025)
Ans: Following are some of the reforms undertaken in different sectors as a part of the Liberalization policy
of Economic Reforms,1991:
(a) Industrial Sector Reforms:
(i)Industrial Licensing abolished: The complex system of industrial licensing was largely eliminated, freeing
businesses from government approval for most industries and ending the restrictive "License Raj".
(ii)Reduced role for the Public Sector: The number of industries reserved for the public sector was
significantly reduced, with many core and basic industries opened to private players.
(iii)MRTP Act repealed: The Monopolies and Restrictive Trade Practices (MRTP) Act was abolished,
removing the need for large companies to seek prior approval for capacity expansion, diversification, or
mergers.
(b) Financial Sector Reforms:
(i)Shift from Regulation to Facilitation: The Reserve Bank of India's (RBI) role shifted from a direct
regulator to a facilitator, allowing the financial sector more autonomy in decision-making.
(ii)Reduced Reserve Requirements: Lowering the cash reserve ratio (CRR) and statutory liquidity ratio
(SLR) freed up more funds for banks to lend to businesses and other sectors, increasing their operational
independence and resources.
(iii)Establishment of Private Sector Banks: Reforms permitted the entry of private and foreign banks,
fostering competition and improving the quality and efficiency of banking services offered to the public.
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(c) Fiscal Reforms/Tax Reforms:

(i)Tax Rate Rationalization: A key recommendation was a shift from high tax rates to a system of low tax
rates with a broader base.
(ii) Reforms in Indirect Tax: To simplify and unify India's indirect tax system, the Goods and Services Tax
(GST) was implemented on July 1, 2017, subsuming all previous indirect taxes except for customs duty.
Consequently, India's indirect tax structure now primarily consists of only GST and customs duty.
[Link] briefly the factors responsible for introduction of economic reforms in India. OR (2015)
What was the need for Economic Reforms in India?
Ans: Following are the factors responsible for introduction of economic reforms in India:
(i) Depletion of Foreign Exchange Reserves: Foreign exchange reserves of India were at its lowest level
(2400 crore) in June 1991 which led to foreign exchange crisis in the country. We did not have enough
foreign exchange reserves to pay for two weeks of imports.
(ii) Unnecessary Controls: During 1951-90 economic growth did not take place as desired. The adoption of
the policy of mixed economy resulted in the establishment of a variety of rules and laws to control and
regulate the economy. These controls hampered the growth process of our economy.
(iii)Balance of Payments Crisis: In 1991, India faced a severe balance of payments crisis, with dwindling
foreign exchange reserves. This necessitated reforms to boost exports and attract foreign investment.
(iv)Failure of the Public Sector: The public sector's underperformance in key sectors like infrastructure and
manufacturing highlighted the need for reforms to enhance efficiency and productivity.
(v)Fiscal Deficit: A large fiscal deficit, where government expenditure exceeded revenue, also contributed to
the need for reforms. This led to increased borrowing and debt.
(vi)Regional Disparities: Economic growth has been unevenly distributed across different states, with some
lagging behind in terms of attracting investment and development.
[Link] two advantages and two disadvantages of liberalisation. (2016,18)
Ans:Advantages:
(i) Higher GDP Growth:The reforms led to India's GDP growth accelerating, making it one of the fastest-
growing economies globally, with GDP increasing significantly since 1991.
(ii)Increased FDI and Reserves: Foreign Direct Investment (FDI) inflows saw a substantial rise, boosting
foreign exchange reserves.
(iii)Job Creation: The rise of new industries and the private sector, particularly in IT and services,
created numerous job opportunities.
(iv)Higher Per Capita Income: Increased economic growth and job opportunities contributed to a rise
in per capita income, improving the standard of living for many.
Disadvantages:
(i) Income Inequality and Poverty: The reforms led to a concentration of wealth among the skilled and
wealthy, widening the gap between the rich and the poor and hindering poverty alleviation.
(ii)Displacement of Traditional Industries: Liberalisation led to increased competition, causing many
traditional, labour-intensive industries to decline or close, affecting low-skilled workers.
(iii) Unbalanced development: Trade liberalisation may be damaging for developing economies which
cannot compete against free trade. The trade liberalisation often benefits developed countries rather than
developing economies.
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13. What is Bank Rate and Cash Reserve Ratio ? (2013,22)

Ans:Bank Rate:Bank rate is the rate at which the central bank lends money to commercial banks.
Cash Reserve Ratio: A certain fixed percentage of the total deposits (time and demand) of a bank needs to be kept as
cash with the central bank. This fixed percentage of cash is termed as the cash reserve ratio.
[Link] is Statutory Liquidity Ratio (SLR)?
Ans:It is the minimum percentage of deposits that commercial banks must maintain in liquid assets, such as cash, gold
or government securities, before they can offer credit.