Economics Questions Analysis – IAS Prelims 2020

UPSC: Check the detailed analysis of 15 questions based on Economics asked in the UPSC Civil Services Prelims Exam 2020. The answers have been explained for a better understanding of aspirants. The GS Paper I this year fetched more questions on Economics as compared to the previous years. The questions covered basic concept understanding, as well as questions related to current affairs, were asked in the paper. Most of the questions were analytical in nature

Question 1: What is the importance of the term “Interest Coverage Ratio” of a firm in India? 

1. It helps in understanding the present risk of a firm that a bank is going to give loan to.
2. It helps in evaluating the emerging risk of a firm that a bank is going to give loan to.
3. The higher a borrowing firm’s level of Interest Coverage Ratio, the worse is its ability to service its debt. Select the correct answer using the code given below: 

(a) 1 and 2 only 

(b) 2 only 

(c) 1 and 3 only 

(d) 1, 2 and 3

Answer: c

Explanation: The interest coverage ratio is used to determine how easily a company can pay its interest expenses on outstanding debt. Hence Statement 1 is correct.

The interest coverage ratio measures how many times a company can cover its current interest payment with its available earnings. Statement 2 is incorrect

The lower the ratio, the more the company is burdened by debt expense. Statement 3 is correct.

Question 2: Which of the following factors/policies were affecting the price of rice in India in the recent past? 

1. Minimum Support Price 
2. Government’s trading
3. Government’s stockpiling
4. Consumer subsidies

Select the correct answer using the code given below:

(a) 1, 2 and 4 only

(b) 1, 3 and 4 only

(c) 2 and 3 only 

(d) 1, 2, 3 and 4

Answer d

Explanation:  Domestic factors which may affect the Indian rice pricing are:

• Overall Production of Rice in India which further depends on seasonal Monsoon across Indian states.
• Price of Rice Paddy and ratio of full and broken kernels in milling the paddy.
• Domestic demands from Indian consumers.
• Rice Tenders floated by Food Corporation of India and other government organizations.
• Any state and central government policies concerning domestic rice trade or rice export.

Question 3: Under the Kisan Credit Card scheme, short-term credit support is given to farmers for which of the following purposes ?

1. Working capital for maintenance of farm assets harvesters, 
2. Purchase of combine tractors and mini trucks requirements of farm
3. Consumption households 
4. Post-harvest expenses
5. Construction of family house and setting up of village cold storage facility

Select the correct answer using the code given below:

(a) 1, 2 and 5 only

(b) 1, 3 and 4 only

(c) 2,3,4 and 5 only

(d) 1, 2, 3, 4 and 5

Answer b

Explanation: The scheme aims at providing adequate and timely credit for the comprehensive credit requirements of farmers under single window for their cultivation and other needs as indicated below:

• To meet the short term credit requirements for cultivation of crops

• Post harvest expenses
  • Produce Marketing loan
• Consumption requirements of farmer household
• Working capital for maintenance of farm assets, activities allied to agriculture, like dairy animals, inland fishery and also working capital required for floriculture, horticulture etc.
• Investment credit requirement for agriculture and allied activities like pump sets, sprayers, dairy animals, floriculture, horticulture etc
• Short term credit requirements of rearing of animals, birds, fish, shrimp, other aquatic organisms, capture of fish.

Question 4: 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

Answer a

Explanation: While WPI keeps track of the wholesale price of goods, the CPI measures the average price that households pay for a basket of different goods and services. WPI carries more weightage than CPI. Statement 1 is correct. 

The WPI basket includes 697 now commodities in total- all of these are only goods and whose prices are captured at the wholesale/producer level. The CPI considers inflation at the retail end, while also including services. Statement 2 is correct.

In India, RBI uses CPI (combined) released by CSO for inflation purposes with base year as 2012. Hence Statement 3 is incorrect.

Question 5: In India, which of the following can be considered as public investment in agriculture ? 

1. Fixing Minimum Support Price for agricultural produce of all crops 
2. Computerization of Primary Agricultural Credit Societies 
3. Social Capital development
4. Free electricity supply to farmers 
5. Waiver of agricultural loans by the banking system Setting up of cold storage facilities by the governments.

Select the correct answer using the code given below: 

(a) 1, 2 and 5 only

(b) 1, 3, 4 and 5 only 

(c) 2, 3 and 6 only 

(d) 1, 2, 3, 4, 5 and 6

Answer: c

Explanation: Subsidies and Waivers are not part of public investment. Hence, Statement 4 and 5 are incorrect.

Question 6: With reference to the Indian economy, consider the following statements :

1. Commercial Paper is a short-term unsecured promissory note. 
2. Certificate of Deposit is a long-term of Instrument issued by RBI to a corporation. 
3. ‘Call Money’ is a short-term finance used for interbank transactions. 
4. “Zero-Coupon Bonds’ are the interest bearing short-term bonds issued by the Scheduled Commercial Banks to corporations.

 Which of the statements given above is/are correct? 

(a) 1 and 2 only 

(b) 4 only 

(c) 1 and 3 only 

(a) 2, 3 and 4 only

Answer: c

Explanation: Commercial paper is a money-market security issued (sold) by large corporations to obtain funds to meet short-term debt obligations (for example, payroll) and is backed only by an issuing bank or company promise to pay the face amount on the maturity date specified on the note. Statement 1 is correct.

A certificate of deposit (CD) is a product offered by banks and credit unions that provides an interest rate premium in exchange for the customer agreeing to leave a lump-sum deposit untouched for a predetermined period of time. Statement 2 is incorrect.

Call money is a short-term, interest-paying loan from one to 14 days made by a financial institution to another financial institution. Statement 3 is correct.

A zero-coupon bond is a debt security that does not pay interest but instead trades at a deep discount, rendering a profit at maturity, when the bond is redeemed for its full face value. Statement 4 is incorrect.

Question 7: With reference to Foreign Direct Investment in India, which one of the following is considered its major characteristic? 

(a) It is the investment through capital instruments essentially in a listed company. 

(b) It is largely non-debt creating capital flow. 

(c) It is the investment which involves debt-servicing 

(d) It is the investment made by foreign institutional investors in the Government securities.

Answer: b

Explanation: Equity flows under foreign direct investment (FDI) and foreign portfolio investments constitute the major forms of non-debt-creating capital flows to India.

Question 8: With reference to the international trade of India at present, which of the following statements is/are correct? 

1. India’s merchandise exports are less than its merchandise imports. 
2. India’s imports of iron and steel, chemicals, fertilisers and machinery have decreased in recent years. 
3. India’s exports of services are more than its imports of services. 
4. India suffers from an overall trade/current account deficit. 

Select the correct answer using the code given below: 

(a) 1 and 2 only 

(b) 2 and 4 only 

(c). 3 only 

(d) 1, 3 and 4 only

Answer d

Explanation: With the global trade coming to a near halt due to the COVID-19 pandemic, India’s merchandise exports nosedived over 60% in the last month to $10.36 billion from $26.07 billion On closer analysis of India’s merchandise trade, we find that India faces trade deficit as imports have always grown faster than exports for this period. Statement 1 and 4 are correct

Except for iron ore and drugs and pharmaceuticals, all other commodities saw a negative growth. Statement 2 is incorrect

India’s services imports are relatively small, at around 4¼ per cent of GDP, with business services, travel and transportation services accounting for more than 70 per cent of total services imports. Statement 3 is correct.

Question 9: In the context of the Indian economy, non-financial debt includes which of the following? 

1. Housing loans owed by households 
2. Amounts outstanding on credit cards 
3. Treasury bills 

Select the correct answer using the code given below : 

(a) 1 only 

(b) 1 and 2 only 

(c) 3 only 

(d) 1, 2 and 3

Answer: d

Explanation: Non-financial debt includes industrial or commercial loans, Treasury bills and credit card balances.

Question 10: With reference to Trade-Related Investment Measures (TRIMS), which of the following statements is/are correct? 

1. Quantitative restrictions on imports by foreign investors are prohibited. 
2. They apply to investment measures related to trade in both goods and services. 
3. They are not concerned with the regulation of foreign investment. 

Select the correct answer using the code given below: 

(a) 1 and 2 only 

(b) 2 only 

(c) 1 and 3 only 

(d) 1, 2 and 3

Answer: c

Explanation: The TRIMs Agreement does not cover services.Statement 2 is incorrect.

Question 11:  If the RBI decides to adopt an expansionist monetary policy, which of the following would it not do? 

1. Cut and optimize the Statutory Liquidity Ratio 
2. Increase the Marginal Standing Facility Rate 
3. Cut the Bank Rate and Repo Rate 

Select the correct answer using the code given below: 

(a) 1 and 2 only 

(b) 2 only 

(c) 1 and 3 only 

(d) 1, 2 and 3

Answer: b

Explanation: The key steps used by a central bank to expand the economy include:

• Decreasing the discount rate.
• Purchasing government securities.
• Reducing the reserve ratio.

Marginal Standing Facility (MSF) rate refers to the rate at which the scheduled banks can borrow funds overnight from RBI against government securities. MSF is a very short term borrowing scheme for scheduled commercial banks. An increase in MSF rate will shrink the money supply. Hence RBI will not  Increase the Marginal Standing Facility Rate.

Question 12 : With reference to the Indian economy after the 1991 economic liberalization, consider the following statements : 

1. Worker productivity (Rs per worker at 2004-05 prices) increased in urban areas while it decreased in rural areas.
2. The percentage share of rural areas in the workforce steadily increased. 
3. In rural areas, the growth in the non-farm economy increased. 
4. The growth rate in rural employment decreased. 

Which of the statements given above is/are correct? 

(a) 1 and 2 only 

(b) 3 and 4 only 

(c) 3 only 

(d) 1, 2 and 4 only

Answer b

Explanation: 

Question 13: Consider the following statements: 

1. In terms of short-term credit delivery to the agriculture sector, District Central Cooperative Banks (DCCBs) deliver more credit in comparison to Scheduled Commercial Banks and Regional Rural Banks. 
2. One of the most important functions of DCCBs is to provide funds to the Primary Agricultural Credit Societies. Which of the statements given above is/are correct? 

(a) 1 only 

(b) 2 only 

(c) Both 1 and 2 

(d) Neither 1 nor 2

Answer b

Explanation: 

DCCBs act as a balancing center for Primary Agricultural Credit Societies (PACS). This is done by diverting the surplus funds of some societies to those who face shortages of funds. Hence Statement 2 is correct

Question 14: If another global financial crisis happens in the near future, which of the following actions/policies are most likely to give some immunity to India ? 

1. Not depending on short-term foreign borrowings 
2. Opening up to more foreign banks 
3. Maintaining full capital account convertibility 

Select the correct answer using the code given below : 

(a) 1 only

(b) 1 and 2 only 

(c) 3 only 

(d) 1, 2 and 3

Answer a

Explanation: 

Financial crises can induce significant hardships on both international creditors and the debtor nations which are forced into default. Both economic and political considerations leave it difficult to resist coming to the aid of a distressed nation or region. So Not depending on short-term foreign borrowings will provide immunity to India. Statement 1 is correct.

At the time of the Global Financial Crisis, there is a high risk of banks becoming inefficient in NPA recovery and declaring themselves insolvent in near future. Hence, allowing more foreign banks to India would be a huge risk. Hence Statement 2 is incorrect.

Capital account convertibility is a feature of a nation’s financial regime that centers on the ability to conduct transactions of local financial assets into foreign financial assets freely or at market determined exchange rates. With the Global Financial crisis, this step will prove to be a huge fail. Hence Statement 3 is incorrect.

Question 15: If you withdraw 1,00,000 in cash from your Demand Deposit Account at your bank, the immediate effect on aggregate money supply in the economy will be 

(a) to reduce it by 1,00,000 

(b) to increase it by 1,00,000 

(e) to increase it by more than 1,00,000 

(d) to leave it unchanged

Answer c

Explanation: When you withdraw cash from your bank, you reduce the bank’s reserves. Just as a deposit at Acme Bank increases the money supply by a multiple of the original deposit, your withdrawal reduces the money supply by a multiple of the amount you withdraw