Chapter Wise Indian Economy MCQ’s With Explanation

Today’s Topic:Indian Financial System

These are most-important and most-expected Questions for IAS Prelims General Studies paper-1 (ECONOMY) of UPSC Civil Service exam.

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Today’s Topic:Indian Financial System

Q1. In context with Banking in India, what is the difference between liquidity adjustment facility – repo-rate and Marginal standing facility rate?

  1. Under repo, banks can borrow up to 5% of net demand and time liabilities under MST, they can borrow up to no limit.
  2. Under repo rate banks can borrow above SLR requirements, under MSF, banks can borrow within SLR requirements.

Select the above correct statements.

a) Only 1           b) Only 2            c) 1 and 2         d) Neither 1 nor 2

Ans:     A

Explanation:     The Reserve Bank of India (RBI) is the Indian central bank. The RBI’s most important goal is to maintain and stable inflation in India. When reference is made to the Indian interest rate this often refers to the repo-rate. If banks are short of funds they can borrow rupees from RBI at the repo rate, the interest rate with a one day maturity. If the central bank of India wants to put more money into circulation, then the RBI will lower Repo rate.

Q2. Which among the following in India can use ‘Repo Bonds’ to raise short term money from markets?

  1. Commercial Bank              2. Regional Bank               3. Corporate                4. Governments

Select the above correct statements.

a) Only 3               b) Only 1            c) 1 and 3                     d) 2 and 4

Ans:     C

Explanation:     When reference is made to the Indian interest rate this often refers to the repo rate, also called the key short term lending rate. Please note that government doesn’t raise money for short term using Repo Bonds. The banks, corporate bonds with each other to raise pledging government securities with RBI to raise short term money.

Q3. A Company making a public of securities has to file a Draft Red Herring Prospects with SEBI through an eligible merchant banker prior to filling a prospects with the registrar of Companies. What information does this Draft Red Herring Prospects provide?

  1. Financial details about the company                2.Price and size of offerings           3.Products details          4.Objects of raising money

Select the above correct statements.

a) 1 and 2           b) 2 and 3            c) 3 and 4                d) 1 and 4

Ans:     D

Explanation:     Draft Red Herring prospects provide all the necessary information an investor ought to know about the company in order to make an informed decision. It contains details about the company, its promoter the projects, financial details, object of raising the money, term of the issue, use of proceeds from the offering among others. However the document does not provide information about the price or size of the offering.

Q4. Consider the following statements:

  1. Government of India has set up a Price Monitoring Cell (PMC) in the department of Agriculture to monitor and analyze price data and trends of availability of essential commodities.
  2. Price Monitoring Cell (PMC) monitors 21 essential commodities.

Select the above correct statements.

a) Only 2            b) Only 1                c) 1 and 2                d) Neither 1 nor 2

Ans:     A

Explanation:     Price monitoring Cell is in the Department of Consumer Affairs. The twenty one commodities are Rice, Wheat, Atta, Gram, Dal, Tur (Arhar) , Dal, Urad Dal, Moong Dal, Masur Dal, Sugar, Gur, Groundnut oil, Mustard oil, onion, salt etc. . Information on retail and wholesale prices is received on daily basis from 50 centers of the country.

Q5. One of the economic laws says that as income increases, the proportion of starchy staples in the food basket decline relative to the share of more expensive sources of calories. Recent NSSO data showing a significant increase in the share of protein rich items in total food expenditure, both in rural and urban areas of India to confirm this hypothesis.

What this hypothesis is known as?

a) Gresham’s Law         b) Vijay Tendulkar’s Law

c) Bennet’s Law            d) None of these.

Ans:     C

Explanation:     We need to turn to the lesser known Bennet’s law for an explanations of food inflation. Bennet’s law suggests that as income increase, the proposition of starchy staples in the food basket declines relating to the share of more expensive source of calories. Recent NSSO data showing a significant increase in the share of protein rich items in total find expenditure, both in rural and urban areas confirm this hypothesis.

Q6. Consider the following statements about Infrastructure Debt Fund (IDF) in India:

  1. Infrastructure debt fund are regulated by Planning commission
  2. Infrastructure debt fund can be established as a trust in India, but not in company.

Select the above correct statements.

a) Only 1              b) Only 2           c) 1 and 2          d) Neither 1 nor 2

Ans:     D

Explanation:     Infrastructure Debt Fund is a debt instrument being set up by the finance ministry in order to channelize long – term funds into infrastructure project which require long term stable capital investment According to the structure laid out by the finance ministry, after consultations with stakeholders, infrastructure NBFCs, market regulates and banks, an IDF could either be set as a trust or as a company.

Q7. In one of the Seminar’s the Governor of RBI said that the schemes like ‘Mahatma Gandhi National Rural Employment Guarantee Scheme’ (MNREGA) have played role in increasing inflation. How MNREGA could have stirred up inflationary pressure?

  1. By Increasing demand
  2. By increasing rural wage
  3. By increasing production

Select the above correct statements.

a) Only 1         b)  Only 2       c) 2 and 3           d) 1 and 2

Ans:     D

Explanation:     The ‘MNREGA’ guaranteeing hundred days of wage employment to rural labor, in implementation since February 2006, has pushed up rural wages, in line with expected outcomes of the schemes. The MNREGA has evidently set the floor for the rural wage level, making wage push inflation more visible and prominent. Admittedly, increase in wages need not be inflationary provided it reflects higher productivity, but it has been the case of MNREGA at least in food productivity.

Q8. In context with India’s oil and gas fields consider the following.

  1. Only gas Fields
  2. Only Oil fields
  3. Oil and gas fields.

Which among the following option gives the correct order of numbers of fields classified as above?

a) 1, 2, 3             b) 2, 3, 1               c) 3, 2, 1                d) 3, 1, 2

Ans:     C

Explanation:     Indian oil is not only the largest commercial enterprise in the country. It is the flagship corporate of the Indian Nation. Indian oil’s world class R and D center, established in 1972, has state of the art facilities and has delivered pioneering results in lubricants technology, refining process, pipeline transportation, bio fuels and fuel efficient appliances.

As on 1st April 2009, India had 402 total oil and gas fields, out of which 16 are only oil fields, 125 are only gas fields and 261 are both.

Q9. It has been generally viewed that when an economy grows beyond its potential growth rate, it causes inflation. How does growing faster than the potential rate cause inflation?

a) Fast growth causes more productivity which leads to higher supply and cost put inflation.

b) Fast growth causes quick resources utilization to fulfill the higher demand

c) Fast growth cause more employment opportunities which leads to rise in prices.

d) None of these.

Ans:     B

Explanation:     There are two major determinants of the potential rate at which an economy can grow in the long run. Infrastructure investments and skills of labor can raise India potential growth rate because the country has ample labor supply. The overall demand in the economy rises up due to fast growth and more resources are used to meet higher demand.

Q10. Consider the following statement context with India’s planning commission:

  1. A Planning in the sense of formal projects on the basis of the certain sets of assumption started only in the second five year plan in India.
  2. The Mahalanobis model of growing corporate possibilities opened up the foreign trade.

Select the above correct statements.

a) Only 1            b) Only 2                c) 1 and 2              d) Neither 1 nor 2

Ans:     A

Explanation:     Mahalanobis Model of growth incorporates the possibilities opened up the foreign trade is incorrect. In simple words this model was based upon a four sector plan frame, which represents an alternative approach to planning that focuses on the bottleneck created by shortage the capital goods rather than on the shortage of the aggregate savings as a previous model given by Harrod – Dobor model.


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