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The following Test is based on the syllabus of 60 Days Plan-2023 for UPSC IAS Prelims 2022.
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Consider the following statements regarding deficit financing
How many of the above statements are correct?
Solution (c)
Statement 1 | Statement 2 | Statement 3 |
Correct | Correct | Correct |
External Grants are the best mode to finance the deficit as they do not create any obligation- neither interest payments nor any repayment. They are essentially free. | External borrowings are preferred over internal borrowings due to the ‘crowding out effect’. If the government goes on borrowing from the banks within the country, the liquidity with banks reduces. | Less liquidity with banks leaves private entities with limited money. This further leads to depression in the level of investment. |
Solution (c)
Statement 1 | Statement 2 | Statement 3 |
Correct | Correct | Correct |
External Grants are the best mode to finance the deficit as they do not create any obligation- neither interest payments nor any repayment. They are essentially free. | External borrowings are preferred over internal borrowings due to the ‘crowding out effect’. If the government goes on borrowing from the banks within the country, the liquidity with banks reduces. | Less liquidity with banks leaves private entities with limited money. This further leads to depression in the level of investment. |
Consider the following statements regarding the Balance of Payment:
Select the correct answer using the code given below.
Solution (c)
Statement 1 | Statement 2 |
Correct | Correct |
The outcome of the total transactions of an economy with the outside world in one year is known as the balance of payment (BoP) of the economy. Basically, it is the net outcome of the current and capital accounts of an economy. | Before the 19th century, international transactions were denominated in gold, providing little flexibility for countries experiencing trade deficits. Growth was low, so stimulating a trade surplus was the primary method of strengthening a nation’s financial position. National economies were not well integrated, however, so steep trade imbalances rarely provoked crises. The industrial revolution increased international economic integration, and balance-of-payment crises began to occur more frequently. |
Solution (c)
Statement 1 | Statement 2 |
Correct | Correct |
The outcome of the total transactions of an economy with the outside world in one year is known as the balance of payment (BoP) of the economy. Basically, it is the net outcome of the current and capital accounts of an economy. | Before the 19th century, international transactions were denominated in gold, providing little flexibility for countries experiencing trade deficits. Growth was low, so stimulating a trade surplus was the primary method of strengthening a nation’s financial position. National economies were not well integrated, however, so steep trade imbalances rarely provoked crises. The industrial revolution increased international economic integration, and balance-of-payment crises began to occur more frequently. |
Consider the following statements concerning Capital Account Convertibility:
Select the correct answer using the code given below.
Solution (c)
Statement 1 | Statement 2 |
Correct | Correct |
Capital Account
Convertibility refers to the removal of restraints on international flows on a country’s capital account, enabling full currency convertibility and opening the financial system. Presently, India has current account convertibility. This means one can import and export goods or receive or make payments for services rendered. However, investments and borrowings are restricted. The term Capital Account Convertibility was coined by RBI and this term is almost synonymous with the RBI committee headed by SS Tarapore. |
The SS Tarapore Committee on Capital Account Convertibility was an experts’ committee to study the feasibility of capital account convertibility in India. It submitted its report in 1997. |
Solution (c)
Statement 1 | Statement 2 |
Correct | Correct |
Capital Account
Convertibility refers to the removal of restraints on international flows on a country’s capital account, enabling full currency convertibility and opening the financial system. Presently, India has current account convertibility. This means one can import and export goods or receive or make payments for services rendered. However, investments and borrowings are restricted. The term Capital Account Convertibility was coined by RBI and this term is almost synonymous with the RBI committee headed by SS Tarapore. |
The SS Tarapore Committee on Capital Account Convertibility was an experts’ committee to study the feasibility of capital account convertibility in India. It submitted its report in 1997. |
Consider the following statements regarding Nominal Effective Exchange Rates (NEER)
How many of the above statements are correct?
Solution (b)
Statement 1 | Statement 2 | Statement 3 |
Correct | Correct | Incorrect |
The Nominal Effective Exchange Rate (NEER) of the rupee is an unadjusted weighted average of exchange rates before the currencies of India’s major trading partners. | An increase in NEER indicates an appreciation of the local currency against the weighted basket of currencies of its trading partners. The basket of foreign currencies basket is chosen based on the domestic country’s most important trading partners as well as other major currencies. | There is no international standard for selecting a basket of currencies. Rather it depends upon weighted average of currencies of India’s major trading partners However, many different institutions rely on International Financial Statistics (IFS) published by the IMF |
Solution (b)
Statement 1 | Statement 2 | Statement 3 |
Correct | Correct | Incorrect |
The Nominal Effective Exchange Rate (NEER) of the rupee is an unadjusted weighted average of exchange rates before the currencies of India’s major trading partners. | An increase in NEER indicates an appreciation of the local currency against the weighted basket of currencies of its trading partners. The basket of foreign currencies basket is chosen based on the domestic country’s most important trading partners as well as other major currencies. | There is no international standard for selecting a basket of currencies. Rather it depends upon weighted average of currencies of India’s major trading partners However, many different institutions rely on International Financial Statistics (IFS) published by the IMF |
Consider the following statements regarding Foreign Direct Investment (FDI) in India
How many of the above statements are correct?
Solution (b)
Statement 1 | Statement 2 | Statement 3 |
Correct | Incorrect | Correct |
FDI was introduced in India in 1991 after the LPG reforms which opened the economy to the world.
India passed Foreign Exchange Management Act (FEMA), 1999 to consolidate and amend the law relating to foreign exchange with the objective of facilitating external trade and payments and promoting the orderly development and maintenance of the foreign exchange market in India. |
FDI inflows are reported under the capital account of the Balance of payments (BoP) | The prohibited sectors include Betting, Gambling, Lottery; Chit funds; Nidhi Company; Real Estate, etc.
FDI for most cases can be brought through Automatic Route and for the remaining case through Government approval. |
Solution (b)
Statement 1 | Statement 2 | Statement 3 |
Correct | Incorrect | Correct |
FDI was introduced in India in 1991 after the LPG reforms which opened the economy to the world.
India passed Foreign Exchange Management Act (FEMA), 1999 to consolidate and amend the law relating to foreign exchange with the objective of facilitating external trade and payments and promoting the orderly development and maintenance of the foreign exchange market in India. |
FDI inflows are reported under the capital account of the Balance of payments (BoP) | The prohibited sectors include Betting, Gambling, Lottery; Chit funds; Nidhi Company; Real Estate, etc.
FDI for most cases can be brought through Automatic Route and for the remaining case through Government approval. |
Concerning FDI and FII, consider the following statements:
How many of the above statements are correct?
Solution (c)
Statement 1 | Statement 2 | Statement 3 |
Correct | Correct | Correct |
Both are types of foreign investments, there is, however, a stark difference in the way they are operated, whom they target, and the returns that can be derived from both. | FDI being a direct form of investment into a foreign company, the investors are more interested and even get to enjoy a higher control on the management of the company, even if it is in a foreign country. | FII just allows for funds to be invested into the financial market of the host country and therefore doesn’t have much hold onto the managerial decisions, or rather are referred to as just passive investors |
Solution (c)
Statement 1 | Statement 2 | Statement 3 |
Correct | Correct | Correct |
Both are types of foreign investments, there is, however, a stark difference in the way they are operated, whom they target, and the returns that can be derived from both. | FDI being a direct form of investment into a foreign company, the investors are more interested and even get to enjoy a higher control on the management of the company, even if it is in a foreign country. | FII just allows for funds to be invested into the financial market of the host country and therefore doesn’t have much hold onto the managerial decisions, or rather are referred to as just passive investors |
Consider the following statements regarding Forex Reserve:
How many of the above statements are correct?
Solution (a)
Statement 1 | Statement 2 | Statement 3 |
Incorrect | Correct | Incorrect |
Forex Reserves comprise foreign currency assets added with its gold reserves, SDRs (Special Drawing Rights), and Reserve Tranche in the IMF. | The adequacy of Forex Reserves is measured by Import Cover.
|
A reserve tranche is a portion of the required quota of currency each member country must provide to the International Monetary Fund (IMF) that can be utilized for its purposes—without a service fee or economic reform conditions.
Reserve Tranche in IMF also comprises the forex reserves. |
Solution (a)
Statement 1 | Statement 2 | Statement 3 |
Incorrect | Correct | Incorrect |
Forex Reserves comprise foreign currency assets added with its gold reserves, SDRs (Special Drawing Rights), and Reserve Tranche in the IMF. | The adequacy of Forex Reserves is measured by Import Cover.
|
A reserve tranche is a portion of the required quota of currency each member country must provide to the International Monetary Fund (IMF) that can be utilized for its purposes—without a service fee or economic reform conditions.
Reserve Tranche in IMF also comprises the forex reserves. |
Consider the following statements about types of exchange rates and interventions.
Exchange rate – Interventions
How many of the above pairs are correctly matched?
Solution (a)
Statement 1 | Statement 2 | Statement 3 |
Incorrect | Incorrect | Correct |
Floating/Flexible Exchange Rates are also called market-driven or based exchange rates, which are regulated by factors such as the demand and supply of the domestic and foreign currencies in the concerned economy.
In the floating exchange rate system, a domestic currency is left free to float against a number of foreign currencies in its foreign exchange market and determine its value. Failure of the gold standard and the Bretton Woods Agreement led to the increased popularity of this system. |
Managed Exchange Rate: A managed-exchange-rate system is a hybrid or mixture of the fixed and flexible exchange rate systems in which the government of the economy attempts to affect the exchange rate directly by buying or selling foreign currencies or indirectly, through monetary policy (by lowering/raising interest rates on foreign currency bank accounts, etc. | Fixed Exchange Rate: In this system, the government or central bank ties the country’s currency official exchange rate to another country’s currency (currency peg) or the price of gold (gold standard).
Fixed rates provide greater certainty for exporters and importers and also help the government maintain low inflation. The purpose of a fixed exchange rate system is to keep a currency’s value within a narrow band. |
Solution (a)
Statement 1 | Statement 2 | Statement 3 |
Incorrect | Incorrect | Correct |
Floating/Flexible Exchange Rates are also called market-driven or based exchange rates, which are regulated by factors such as the demand and supply of the domestic and foreign currencies in the concerned economy.
In the floating exchange rate system, a domestic currency is left free to float against a number of foreign currencies in its foreign exchange market and determine its value. Failure of the gold standard and the Bretton Woods Agreement led to the increased popularity of this system. |
Managed Exchange Rate: A managed-exchange-rate system is a hybrid or mixture of the fixed and flexible exchange rate systems in which the government of the economy attempts to affect the exchange rate directly by buying or selling foreign currencies or indirectly, through monetary policy (by lowering/raising interest rates on foreign currency bank accounts, etc. | Fixed Exchange Rate: In this system, the government or central bank ties the country’s currency official exchange rate to another country’s currency (currency peg) or the price of gold (gold standard).
Fixed rates provide greater certainty for exporters and importers and also help the government maintain low inflation. The purpose of a fixed exchange rate system is to keep a currency’s value within a narrow band. |
Which of the following are the possible risk of rising external debt on the Indian economy?
How many of the above statements are correct?
Solution (c)
Statement 1 | Statement 2 | Statement 3 |
Correct | Correct | Correct |
There are certain major risks involved in foreign borrowings. One is that, like in the case of domestic borrowings, there could be unexpected changes in the interest rates charged on these loans. This can, for instance, cause widespread default when rates rise as borrowers may not be able to make higher interest payments, thus raising the risks of a systemic crisis. | A major risk is unexpected changes in the exchange rates of currencies. An unexpected fall in the value of the rupee (depreciation of the rupee) can cause severe difficulties for Indian companies that need to pay back dollar-denominated loans as they will now have to shell out more rupees than they had previously estimated to buy the necessary dollars. This eventually results in higher debt on the balance sheet which may affect many financial ratios adversely. | The government loses the flexibility to manipulate currency to lower levels to boost exports as it will further worsen the debt payment requirements. High levels of government borrowing from international sources can also hamper the domestic industry by crowding out their sources of funds. |
Solution (c)
Statement 1 | Statement 2 | Statement 3 |
Correct | Correct | Correct |
There are certain major risks involved in foreign borrowings. One is that, like in the case of domestic borrowings, there could be unexpected changes in the interest rates charged on these loans. This can, for instance, cause widespread default when rates rise as borrowers may not be able to make higher interest payments, thus raising the risks of a systemic crisis. | A major risk is unexpected changes in the exchange rates of currencies. An unexpected fall in the value of the rupee (depreciation of the rupee) can cause severe difficulties for Indian companies that need to pay back dollar-denominated loans as they will now have to shell out more rupees than they had previously estimated to buy the necessary dollars. This eventually results in higher debt on the balance sheet which may affect many financial ratios adversely. | The government loses the flexibility to manipulate currency to lower levels to boost exports as it will further worsen the debt payment requirements. High levels of government borrowing from international sources can also hamper the domestic industry by crowding out their sources of funds. |
Consider the following statements concerning External Commercial Borrowings (ECBs):
How many of the above statements are correct?
Solution (b)
Statement 1 | Statement 2 | Statement 3 |
Correct | Incorrect | Correct |
External Commercial Borrowings (ECBs) are basically loans availed by an Indian entity from a non-resident lender. Most of these loans are provided by foreign commercial banks and other institutions in foreign currency. It is a loan availed from non-resident lenders with a minimum average maturity of 3 years. It includes commercial bank loans, buyers’ credit, suppliers’ credit, securitized instruments such as Floating Rate Notes and Fixed Rate Bonds, etc., credit from official export credit agencies, and commercial borrowings from Multilateral Financial Institutions. | The External Commercial Borrowing (ECB) policy is regularly reviewed by the Ministry of Finance in consultation with the Reserve Bank of India (RBI) to keep it in tune with the evolving macroeconomic situation, changing market conditions, sectoral requirements, etc. The RBI has decided to keep the minimum average maturity period at 3 years (earlier 5 years) for all ECBs, irrespective of the amount of borrowing, except for borrowers specifically permitted to borrow for a shorter period, like manufacturing companies. | The ECB proceeds cannot be utilized for real estate activities, investment in the capital market, equity investment, working capital purposes (except foreign equity holder), and repayment of Rupee loans (except foreign equity holder). |
Solution (b)
Statement 1 | Statement 2 | Statement 3 |
Correct | Incorrect | Correct |
External Commercial Borrowings (ECBs) are basically loans availed by an Indian entity from a non-resident lender. Most of these loans are provided by foreign commercial banks and other institutions in foreign currency. It is a loan availed from non-resident lenders with a minimum average maturity of 3 years. It includes commercial bank loans, buyers’ credit, suppliers’ credit, securitized instruments such as Floating Rate Notes and Fixed Rate Bonds, etc., credit from official export credit agencies, and commercial borrowings from Multilateral Financial Institutions. | The External Commercial Borrowing (ECB) policy is regularly reviewed by the Ministry of Finance in consultation with the Reserve Bank of India (RBI) to keep it in tune with the evolving macroeconomic situation, changing market conditions, sectoral requirements, etc. The RBI has decided to keep the minimum average maturity period at 3 years (earlier 5 years) for all ECBs, irrespective of the amount of borrowing, except for borrowers specifically permitted to borrow for a shorter period, like manufacturing companies. | The ECB proceeds cannot be utilized for real estate activities, investment in the capital market, equity investment, working capital purposes (except foreign equity holder), and repayment of Rupee loans (except foreign equity holder). |
Which of the following statements is/are correct about Foreign Exchange Management Act (FEMA)?
How many of the above statements are correct?
Solution (d)
Statement 1 | Statement 2 | Statement 3 |
Incorrect | Incorrect | Incorrect |
For External trade and remittances, there is no need for prior approval from the Reserve Bank of India (RBI) | FERA was repealed in 1998 by the government of Atal Bihari Vajpayee and replaced by the Foreign Exchange Management Act, which liberalised foreign exchange controls and restrictions on foreign investment. | Section 17 of the FEMA Act provides for the appointment of Special Director (Appeals). Section 17(1) provides that the Central Government shall, by notification, appoint one or more Special Directors (Appeals) to hear appeals against the orders of the Adjudicating Authorities. Hence there is a provision |
Solution (d)
Statement 1 | Statement 2 | Statement 3 |
Incorrect | Incorrect | Incorrect |
For External trade and remittances, there is no need for prior approval from the Reserve Bank of India (RBI) | FERA was repealed in 1998 by the government of Atal Bihari Vajpayee and replaced by the Foreign Exchange Management Act, which liberalised foreign exchange controls and restrictions on foreign investment. | Section 17 of the FEMA Act provides for the appointment of Special Director (Appeals). Section 17(1) provides that the Central Government shall, by notification, appoint one or more Special Directors (Appeals) to hear appeals against the orders of the Adjudicating Authorities. Hence there is a provision |
If external debt vis-s-vis internal debt in the government’s total debt increases, what would be its likely impact on the Indian economy?
How many of the above statements are correct?
Solution (c)
Sovereign borrowing means raising money from foreign markets by issuing government bonds by the government/central bank of a country.
Statement 1 | Statement 2 | Statement 3 | Statement 4 |
Correct | Incorrect | Correct | Correct |
Global interest rates are at historic lows, so the government should tap the potential and allocate needed money for the country’s growth and development. Borrowing in dollars is expected to be cheaper, and hence, bring down the interest that the government pays on its debt. | It may lead to the rupee appreciating against the dollar, at least in the short run. When the bonds are sold and the dollars (or any other foreign currency for that matter) are brought back to India, they will have to be converted into rupees. This will push up the demand for rupees and eventually lead to the rupee appreciating in value against the dollar. | In the short term, an appreciating rupee will hurt India’s exports, which are struggling already. It will make imports cheaper and hurt domestic producers competing against them. The government of India launched the “Make in India” scheme to promote manufacturing in India. But with the appreciation of the rupee, imports will be cheaper and it may impact the Make-in-India initiative. | Excessive levels of foreign debt can hamper countries’ ability to invest in their economic future—whether it be via infrastructure, education, or health care—as their limited revenue goes to servicing their loans. This thwarts long-term economic growth.
The United Nations has also linked high levels of foreign debt and a government’s dependency on foreign assistance to human rights abuses. Economic distress causes governments to cut social spending and reduces the resources it has to enforce labour standards and human rights. |
Solution (c)
Sovereign borrowing means raising money from foreign markets by issuing government bonds by the government/central bank of a country.
Statement 1 | Statement 2 | Statement 3 | Statement 4 |
Correct | Incorrect | Correct | Correct |
Global interest rates are at historic lows, so the government should tap the potential and allocate needed money for the country’s growth and development. Borrowing in dollars is expected to be cheaper, and hence, bring down the interest that the government pays on its debt. | It may lead to the rupee appreciating against the dollar, at least in the short run. When the bonds are sold and the dollars (or any other foreign currency for that matter) are brought back to India, they will have to be converted into rupees. This will push up the demand for rupees and eventually lead to the rupee appreciating in value against the dollar. | In the short term, an appreciating rupee will hurt India’s exports, which are struggling already. It will make imports cheaper and hurt domestic producers competing against them. The government of India launched the “Make in India” scheme to promote manufacturing in India. But with the appreciation of the rupee, imports will be cheaper and it may impact the Make-in-India initiative. | Excessive levels of foreign debt can hamper countries’ ability to invest in their economic future—whether it be via infrastructure, education, or health care—as their limited revenue goes to servicing their loans. This thwarts long-term economic growth.
The United Nations has also linked high levels of foreign debt and a government’s dependency on foreign assistance to human rights abuses. Economic distress causes governments to cut social spending and reduces the resources it has to enforce labour standards and human rights. |
Consider the following pairs:
Types of Currency – Characteristics
How many of the above pairs are correctly matched?
Solution (b)
Statement 1 | Statement 2 | Statement 3 |
Correct | Correct | Incorrect |
Hard currency is the international currency in which the highest faith is shown and is needed by every economy. The strongest currency in the world is one that has a high level of liquidity.
The economy with the highest as well as highly diversified exports that are compulsive imports for other countries (as of high-level technology, defense products, lifesaving medicines, and petroleum products) will also create high demand for its currency in the end become the hard currency. It is always scarce. |
Heated currency is a term used in the forex market to denote the domestic currency which is under enough pressure (heat) of depreciation due to a hard currency’s high tendency of exiting the economy (since it has become hot). It is also known as currency under heat or hammering. | A soft currency is one with a value that fluctuates because there is less demand for that currency in the forex markets. This lack of demand may be driven by a variety of factors, but is most often a result of the country’s political or economic uncertainty. Soft currencies are unlikely to be held by central banks as foreign reserves. |
Solution (b)
Statement 1 | Statement 2 | Statement 3 |
Correct | Correct | Incorrect |
Hard currency is the international currency in which the highest faith is shown and is needed by every economy. The strongest currency in the world is one that has a high level of liquidity.
The economy with the highest as well as highly diversified exports that are compulsive imports for other countries (as of high-level technology, defense products, lifesaving medicines, and petroleum products) will also create high demand for its currency in the end become the hard currency. It is always scarce. |
Heated currency is a term used in the forex market to denote the domestic currency which is under enough pressure (heat) of depreciation due to a hard currency’s high tendency of exiting the economy (since it has become hot). It is also known as currency under heat or hammering. | A soft currency is one with a value that fluctuates because there is less demand for that currency in the forex markets. This lack of demand may be driven by a variety of factors, but is most often a result of the country’s political or economic uncertainty. Soft currencies are unlikely to be held by central banks as foreign reserves. |
Consider the following statements with reference to the foreign exchange market
How many of the above statements are correct?
Solution (c)
Statement 1 | Statement 2 | Statement 3 | Statement 4 |
Correct | Correct | Incorrect | Correct |
In the foreign exchange market, it is a situation when a domestic currency loses its value in front of a foreign currency if it is market-driven. It means depreciation in a currency can only take place if the economy follows the floating exchange rate system. | If a free-floating domestic currency increases its value against the value of a foreign currency, it is appreciated. In the domestic economy, if a fixed asset has seen an increase in its value, it is also known as appreciation. Appreciation rates for different assets are not fixed by any government as they depend upon market mechanisms. | When the exchange rate of a domestic currency is cut down by its government (and not driven by market forces) against any foreign currency, it is called devaluation. It means official depreciation is devaluation. | Revaluation is when a government increases the exchange rate of its currency against any foreign currency. It is official appreciation. |
Solution (c)
Statement 1 | Statement 2 | Statement 3 | Statement 4 |
Correct | Correct | Incorrect | Correct |
In the foreign exchange market, it is a situation when a domestic currency loses its value in front of a foreign currency if it is market-driven. It means depreciation in a currency can only take place if the economy follows the floating exchange rate system. | If a free-floating domestic currency increases its value against the value of a foreign currency, it is appreciated. In the domestic economy, if a fixed asset has seen an increase in its value, it is also known as appreciation. Appreciation rates for different assets are not fixed by any government as they depend upon market mechanisms. | When the exchange rate of a domestic currency is cut down by its government (and not driven by market forces) against any foreign currency, it is called devaluation. It means official depreciation is devaluation. | Revaluation is when a government increases the exchange rate of its currency against any foreign currency. It is official appreciation. |
Current account of the country includes:
Which of the above statements is/are correct?
Solution (c)
Foreign currency deposits of banks are included in the capital accounts.
In the external sector, it refers to the account maintained by every government of the world in which every kind of current transaction is shown—basically this account is maintained by the central banking body of the economy on behalf of the government. Current transactions of an economy in foreign currency all over the world are—export, import, interest payments, private remittances, and transfers. All transactions are shown as either inflow or outflow (credit or debit). At the end of the year, the current account might be positive or negative. The positive one is known as a surplus current account, and the negative one is known as a deficit current account.
Solution (c)
Foreign currency deposits of banks are included in the capital accounts.
In the external sector, it refers to the account maintained by every government of the world in which every kind of current transaction is shown—basically this account is maintained by the central banking body of the economy on behalf of the government. Current transactions of an economy in foreign currency all over the world are—export, import, interest payments, private remittances, and transfers. All transactions are shown as either inflow or outflow (credit or debit). At the end of the year, the current account might be positive or negative. The positive one is known as a surplus current account, and the negative one is known as a deficit current account.
Which of the following transactions would be related to the BoP account of the economy?
How many of the above statements are correct?
Solution (c)
Statement 1 | Statement 2 | Statement 3 |
Correct | Correct | Correct |
A joint production of helicopters by India and Japan would involve sharing and transferring of money and other resources across nations. | Transfer of technology would also involve money and the transfer of other resources. It is essentially a BoP account transaction of the economy. | Investment in treasury bills or government bonds of a country is a kind of Foreign Institutional Investment. So it will come under external sector transactions. |
Solution (c)
Statement 1 | Statement 2 | Statement 3 |
Correct | Correct | Correct |
A joint production of helicopters by India and Japan would involve sharing and transferring of money and other resources across nations. | Transfer of technology would also involve money and the transfer of other resources. It is essentially a BoP account transaction of the economy. | Investment in treasury bills or government bonds of a country is a kind of Foreign Institutional Investment. So it will come under external sector transactions. |
Which of the following would lead to a depreciation of the Indian rupee?
Select the correct answer using the codes given below:
Solution (c)
Statement 1 | Statement 2 | Statement 3 |
Correct | Correct | Correct |
Currency depreciation is a fall in the value of a currency in a floating exchange rate system.
The higher import bill could lead to the outflow of the dollar in the economy and increase the value of the dollar as compared to the Indian rupee in the market economy which could lead to the depreciation of the Indian rupee. |
A higher fiscal deficit would lead to a depreciation of the Indian rupee. A country running a large fiscal deficit is always at risk of seeing the value of the currency fall. If there are insufficient capital flows to finance the deficit, the exchange rate will fall to reflect the imbalance of foreign flows of funds. | An increase in interest rates by US federal reserve leads to a depreciation of the Indian rupee. When the Federal Reserve increases the federal funds rate, it increases interest rates throughout the economy. The higher yields attract investment capital from investors abroad seeking higher returns on bonds and interest-rate products. This results in a stronger exchange rate in favor of the U.S. dollar and a weaker exchange rate in the favor of Indian rupee, which could lead to the depreciation of the Indian rupee. |
Solution (c)
Statement 1 | Statement 2 | Statement 3 |
Correct | Correct | Correct |
Currency depreciation is a fall in the value of a currency in a floating exchange rate system.
The higher import bill could lead to the outflow of the dollar in the economy and increase the value of the dollar as compared to the Indian rupee in the market economy which could lead to the depreciation of the Indian rupee. |
A higher fiscal deficit would lead to a depreciation of the Indian rupee. A country running a large fiscal deficit is always at risk of seeing the value of the currency fall. If there are insufficient capital flows to finance the deficit, the exchange rate will fall to reflect the imbalance of foreign flows of funds. | An increase in interest rates by US federal reserve leads to a depreciation of the Indian rupee. When the Federal Reserve increases the federal funds rate, it increases interest rates throughout the economy. The higher yields attract investment capital from investors abroad seeking higher returns on bonds and interest-rate products. This results in a stronger exchange rate in favor of the U.S. dollar and a weaker exchange rate in the favor of Indian rupee, which could lead to the depreciation of the Indian rupee. |
Consider the following statements with reference to External commercial borrowings in India:
How many of the above statements are correct?
Solution (b)
Statement 1 | Statement 2 | Statement 3 | Statement 4 |
Incorrect | Correct | Correct | Incorrect |
ECB can be raised in any freely convertible foreign currency as well as in Indian Rupees or any other currency as specified by the Reserve Bank of India in consultation with the Government of India. | It includes trade credits beyond three years, floating/ fixed-rate notes/ bonds/ debentures (other than fully and compulsorily convertible instruments), loans including bank loans, financial leases, and plain vanilla Rupee denominated bonds issued overseas. | ECBs include commercial bank loans, buyers’ credit, suppliers’ credit, securitized instruments such as floating rate notes and fixed rate bonds, etc., credit from official export credit agencies, and commercial borrowings from the private sector window of multilateral financial Institutions such as International Finance Corporation (Washington), ADB, AFIC, CDC, etc. | ECBs cannot be used for investment in the stock market or speculation in real estate. The DEA (Department of Economic Affairs), Ministry of Finance, Government of India along with the Reserve Bank of India, monitors and regulates ECB guidelines and policies. |
Solution (b)
Statement 1 | Statement 2 | Statement 3 | Statement 4 |
Incorrect | Correct | Correct | Incorrect |
ECB can be raised in any freely convertible foreign currency as well as in Indian Rupees or any other currency as specified by the Reserve Bank of India in consultation with the Government of India. | It includes trade credits beyond three years, floating/ fixed-rate notes/ bonds/ debentures (other than fully and compulsorily convertible instruments), loans including bank loans, financial leases, and plain vanilla Rupee denominated bonds issued overseas. | ECBs include commercial bank loans, buyers’ credit, suppliers’ credit, securitized instruments such as floating rate notes and fixed rate bonds, etc., credit from official export credit agencies, and commercial borrowings from the private sector window of multilateral financial Institutions such as International Finance Corporation (Washington), ADB, AFIC, CDC, etc. | ECBs cannot be used for investment in the stock market or speculation in real estate. The DEA (Department of Economic Affairs), Ministry of Finance, Government of India along with the Reserve Bank of India, monitors and regulates ECB guidelines and policies. |
Which of the following is correct about the ‘impossible trinity?
Solution (b)
The impossible trinity also called the Mundell-Fleming trilemma or simply the trilemma expresses the limited options available to countries in setting monetary policy.
The impossible trinity (also known as the impossible trilemma or the Unholy Trinity) is a concept in international economics that states that it is impossible to have all three of the following at the same time:
According to the impossible trinity, a central bank can only pursue two of the above-mentioned three policies simultaneously
Solution (b)
The impossible trinity also called the Mundell-Fleming trilemma or simply the trilemma expresses the limited options available to countries in setting monetary policy.
The impossible trinity (also known as the impossible trilemma or the Unholy Trinity) is a concept in international economics that states that it is impossible to have all three of the following at the same time:
According to the impossible trinity, a central bank can only pursue two of the above-mentioned three policies simultaneously
Which one of the following groups of items is included in India’s foreign-exchange reserves?
Solution (b)
The Foreign Exchange Reserves of India consists of below four categories:
Solution (b)
The Foreign Exchange Reserves of India consists of below four categories:
It is located in the Mandla and Balaghat districts of Madhya Pradesh. It is nestled in the Maikal range of Satpuras, the heart of India, that forms the central Indian highlands. It is characterized mainly by forested shallow undulations, and hills with varying degrees of slopes, plateaus, and valleys. It is the first tiger reserve in India to officially introduce a mascot, “Bhoorsingh the Barasingha”. It is the largest national park in Madhya Pradesh.
The above paragraph describes which of the following?
Solution (d)
Kanha National Park is located in the Mandla and Balaghat districts of Madhya Pradesh. It is nestled in the Maikal range of Satpuras, the heart of India, that forms the central Indian highlands. It is characterized mainly by forested shallow undulations, and hills with varying degrees of slopes, plateaus, and valleys. It is the first tiger reserve in India to officially introduce a mascot, “Bhoorsingh the Barasingha”. It is the largest national park in Madhya Pradesh. Hence option d is correct.
Solution (d)
Kanha National Park is located in the Mandla and Balaghat districts of Madhya Pradesh. It is nestled in the Maikal range of Satpuras, the heart of India, that forms the central Indian highlands. It is characterized mainly by forested shallow undulations, and hills with varying degrees of slopes, plateaus, and valleys. It is the first tiger reserve in India to officially introduce a mascot, “Bhoorsingh the Barasingha”. It is the largest national park in Madhya Pradesh. Hence option d is correct.
Consider the following statements regarding the Kosi River:
How many of the above statements are correct?
Solution (c)
Solution (c)
Consider the following statements regarding the SOFIA (Stratospheric Observatory for Infrared Astronomy):
How many of the above statements are correct?
Solution (a)
Solution (a)
Consider the following statements about the Sangam: Digital Twin Initiative:
How many of the above statements are correct?
Solution (c)
Solution (c)
Consider the following statements about the Gulf Stream:
How many of the above statements are correct?
Solution (b)
Solution (b)
Consider the following statements regarding the Young Scientist Programme (YUVIKA):
How many of the above statements are correct?
Solution (a)
Solution (a)
Consider the following statements regarding the European Free Trade Association:
How many of the above statements are correct?
Solution (c)
Solution (c)
Consider the following statements regarding the Cash Reserve Ratio (CRR):
How many of the above statements are correct?
Solution (b)
Solution (b)
Consider the following statements regarding Diphtheria:
How many of the above statements are correct?
Solution (b)
Solution (b)
Mutualism is an association between organisms of two different species in which each benefit. Which of the following exhibit mutualism?
Solution (c)
Solution (c)
What is the missing number ‘X’ of the series 7, 11, 19, 35, X?
Solution (b)
Second number of series = [(2 × first number)− 3]
11 = (2 × 7)− 3
19 = (2 × 11) − 3
35 = (2 × 19) − 3
X = (2 × 35)− 3
= 70 − 3 = 67
Solution (b)
Second number of series = [(2 × first number)− 3]
11 = (2 × 7)− 3
19 = (2 × 11) − 3
35 = (2 × 19) − 3
X = (2 × 35)− 3
= 70 − 3 = 67
A man purchased 50 pens for Rs. 3000, and sold 15 of them at a gain of 5%. He wants to sell the remaining so as to gain 15% on the whole. What should the approximate selling price of each pen be?
Solution (b)
(x – 15) : 10 = 15 : 35
7x – 105 = 30
X = 20
Required selling price = 60 * (120/100 ) = 72
Solution (b)
(x – 15) : 10 = 15 : 35
7x – 105 = 30
X = 20
Required selling price = 60 * (120/100 ) = 72
The monthly average salary paid to all the employees of a company was Rs. 12000. The monthly average salary paid to male and female employees was Rs. 14000 and Rs. 10000 respectively. Then the percentage of males employed in the company is:
Solution (c)
Let total no of the male employee be x
Total no of the female be y
Then total salary of all male = 14000 × x
The total salary of all female =10000 × y
But as per question total salary of all the employee = 12000(x + y)
So [(14000 × x)+ (10000 × y)] = 12000(x + y)
By equating we will find x/y = 1/1
So the percentage of female employee= 1 2 × 100 = 50%
Solution (c)
Let total no of the male employee be x
Total no of the female be y
Then total salary of all male = 14000 × x
The total salary of all female =10000 × y
But as per question total salary of all the employee = 12000(x + y)
So [(14000 × x)+ (10000 × y)] = 12000(x + y)
By equating we will find x/y = 1/1
So the percentage of female employee= 1 2 × 100 = 50%
If CAT = 60, AS = 19, then BED will be equal to
Solution (c)
Taking A = 1, B = 2, C = 3…., T = 20,….., Z = 26,
We have: CAT = C × A x T = 3 × 1 x 20 = 20.
AS = A x S = 1 x 19 = 19.
Similarly, BED = B x E x D = 2 x 5 x 4 = 40.
Solution (c)
Taking A = 1, B = 2, C = 3…., T = 20,….., Z = 26,
We have: CAT = C × A x T = 3 × 1 x 20 = 20.
AS = A x S = 1 x 19 = 19.
Similarly, BED = B x E x D = 2 x 5 x 4 = 40.
All the Best
IASbaba