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 a loan to.
(2) It helps in evaluating the emerging risk of a firm that
a bank is going to give a 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
Ans. (a)
Explanation:
One of the significant and most crucial liquidity ratios is
the Interest Coverage Ratio, which indicates the level of a
company’s ability to afford the interest that is to be paid
by the company for raising debt. It does not measure the
ability to make principal payments on the debt; instead it
depicts how much the company can afford to pay the
interests on the debt promptly.
• The interest coverage ratio is used to see how well a
firm can pay the interest on outstanding debt. So,
statement 1 is correct.
• Also called the times-interest-earned ratio, this ratio is
used by creditors and prospective lenders to assess the
risk of lending capital to a firm. So, statement 2 is
correct.
• A higher coverage ratio is better, although the ideal
ratio may vary by industry. So, statement 3 is not
correct. Therefore, the correct answer is (b).
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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
Ans. (d)
Explanation:
By the following ways the price of rice in India gets
affected:
• MSP increases the overall price of rice in market as the
traders have to buy near MSP value otherwise farmers
have the option to sell to government appointed agency
at MSP.
• Government also carries out auction of the excess
stockpile or intervenes when market prices soar to
stabilize them.
• Similarly stockpiling is done to offload the stock when
market prices soar providing cheap rice to consumers
and stocking when prices fall ensuring remunerative
prices to farmers.
• Government also provides subsidised food to poor at
Fair price Shops. This reduces the overall demand in the
open market and prices are affected. Therefore, the
correct answer is (d).
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
Ans. (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.
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
Ans. (a)
Explanation:
WPI is the price of representative basket of wholesale
goods. While the CPI is a comprehensive measure, used
for estimation of price changes in a basket of goods and
services representative of consumption expenditure in an
economy. Food weight in WPI is 18.8% which part of
primary products, While CPI has 50% weight for food.
So statement 1 is correct.
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
(6) 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
Ans. (c)
Explanation:
Public investment in Agriculture constitutes investments
made by government to create capital or social assets to
improve agricultural productivity. Fixing MSP gives
farmers the remunerative price without creating any
durable infrastructure. So, (1) is not correct.
• Computerization Agri credit societies improves their
productivity by digitising their functioning. Social capital
development like agri education improves the knowledge
base of farmers paving the way for improved
productivity. So, (2) and (3) are correct.
• While free electricity and waiver of agri loans creates
government liabilities without creating any durable
assets on ground. So, (4) and (5) are not correct. • Cold
chain infra also helps reduce post-harvest losses creating
durable assets. So, (6) is correct. Therefore, the correct
answer is (c)
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 Instrument
issued by RBI to a corporation.
(3) ‘Call Money’ is 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
(d) 2, 3 and 4 only
Ans. (c)
Explanation:
Commercial paper is a commonly used type of
unsecured, short-term debt instrument issued by
corporations, typically used for the financing of payroll,
accounts payable and inventories, and meeting other
short-term liabilities. Maturities on commercial paper
typically last several days, and rarely range longer than
270 days. So statement 1 is correct. The Certificate of
Deposit (CD) is an agreement between the depositor and
the bank where a predetermined amount of money is
fixed for a specific time period. It is issued by the Federal
Deposit Insurance Corporation (FDIC) and regulated by
the Reserve Bank of India, the CD is a promissory note,
the interest on which is paid by the bank. CDs are
short-term debt instruments issued by Banks. So
statement 2 is not correct. Call Money is short term
finance used for inter-bank transactions. It has a
maturity period of one day to fifteen days. Call money is
a facility under which banks borrow money from each
other to adjust short-term liquidity imbalances at rate of
interest known as Call Rate. This rate keeps on changing
from day to day and sometimes from hour to hour. So
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. These bonds
have been traditionally issued by government, but banks
are also allowed to issue them since last few years. But
ZCBs are generally Long-Term Bonds. So statement 4 is
not correct. Therefore, the correct answer is (c)
7. 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
Ans. (d)
Explanation:
Self-Explanatory
8. 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
Ans. (d)
Explanation:
Non-financial debt consists of credit instruments issued
by governmental entities, households and businesses that
are not included in the financial sector. It shares most of
the same characteristics with financial debt, except the
issuers are non-financial. It includes industrial or
commercial loans, Treasury bills and credit card
balances. Therefore, the correct answer is (d).
9. 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
Ans. (c)
Explanation:
The Agreement on Trade-Related Investment Measures
(TRIMS) recognizes that certain investment measures
can restrict and distort trade. It states that WTO
members may not apply any measure that discriminates
against foreign products or that leads to quantitative
restrictions, both of which violate basic WTO principles.
A list of prohibited TRIMS, such as local content
requirements, is part of the Agreement. The TRIMS
Committee monitors the operation and implementation
of the Agreement and allows members the opportunity to
consult on any relevant matters. Therefore, statement 1 is
correct.
The objectives of the Agreement, as defined in its
preamble, include “the expansion and progressive
liberalization of world trade and to facilitate investment
across international frontiers so as to increase the
economic growth of all trading partners, particularly
developing country members, while ensuring free
competition”. The coverage of the Agreement is defined
in Article 1, which states that the Agreement applies to
investment measures related to trade in goods only. Thus,
the TRIMs Agreement does not apply to services.
Therefore, statement 2 is not correct.
As an agreement that is based on existing GATT
disciplines on trade in goods, the Agreement is not
concerned with the regulation of foreign investment. The
disciplines of the TRIMs Agreement focus on investment
measures that discriminate between imported and
exported products and/or create import or export
restrictions. Therefore, statement 3 is correct.
Therefore, the correct answer is (c)
10. 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
Ans. (b)
Explanation:
Expansionary monetary policy involves cutting interest
rates or increasing the money supply to boost economic
activity. An increase in the SLR constricts the ability of
the bank to inject money into the economy which affects
growth. Thus, statement (1) is not correct. The MSF or
Marginal Standing Facility (MSF) Rate is the rate at
which RBI lends funds overnight to scheduled banks,
against government securities. RBI has introduced this
borrowing scheme to regulate short-term asset liability
mismatch in a more effective manner. MSF basically
provides a greater liquidity cushion. Higher the MSF
rate, more expensive is borrowing for banks, as well as
corporate borrowers and individuals. It is used by RBI to
control the money supply in the country’s financial
system. Thus, statement (2) is correct.
The repo rate is the rate at which the Reserve Bank of
India lends money to commercial banks in order to help
these lenders meet their short-term liquidity needs. If the
repo rate is low, banks are required to pay lower interest
amount towards loans. This impacts the loans taken by
customers, who can also avail loans at lower interest
rates. This boosts economic activity. The rate of interest
charged by the central bank on the loans they have
extended to commercial banks and other financial
institutions is called “Bank Rate”. When Bank Rate is
increased by RBI, bank’s borrowing costs increases
which in return, reduces the supply of money in the
market. Thus, statement (3) is not correct. Therefore, the
correct answer is (b).
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11. 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
Ans. (b)
Explanation:
Traditionally, agriculture is the prime sector of rural
economy and rural employment. The transition in
composition of output and occupation from agriculture
to more productive nonfarm sectors is considered as an
important source of economic growth and
transformation in rural and total economy. Higher rural
workers’ productivity is mainly visible though higher
agricultural wages in the 1990s as compared to the 1980s.
However, the increase in wages and agricultural incomes
had significant diversity across states. So, statement 1 is
not correct. And 2 is also incorrect
12. 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
Ans. (b)
Explanation:
In institutional sources, for the agricultural credit, it
includes commercial banks, cooperative credit
institutions, regional rural banks. Under institutional
sources, commercial bank entered this field very recently.
The cooperative institutions play an important role in
providing credit to agricultural sector The district
central co-operative bank occupies a key position in the
co-operative credit structure. But the District Central
Cooperative Banks (DCCBs) does not provide
quantitatively more credit in comparison to Scheduled
Commercial Banks and Regional Rural Banks. So,
statement 1 is not correct. Although statement 1 is not
correct, the above pie-chart demonstrates share of total
agricultural credit and not short-term credit. In
short-term credit, share of SCBs is around 60% and that
of Cooperative Banks is around 30%. The most
significant functions of the district central co-operative
bank is to provide financial support to the primary
co-operative societies that are affiliated to it in the
district . These societies belong to highly diverse
categories like the primary agricultural credit societies,
the producers’ cooperative societies, handloom and
handicrafts co-operative societies, salary earners
co-operative societies consumers co-operative societies,
primary urban co-operative banks etc. However, one of
the most significant roles of the district central
co-operatives bank is to support and develop the primary
agricultural credit societies. So, statement 2 is correct.
Therefore, the correct answer is (b)
13. 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
Ans. (a)
Explanation:
(1). The Short-term debts have to be returned at a
shorter interval. This renders an economy vulnerable if
the economy is already facing economic crisis as it has an
obligation to return the debt as well as interest payments
(debt service). Example: Many economies like Mexico,
Argentina etc who faced crisis were seen to have
borrowed large amounts of short-maturity debt. So, the
ideal scenarios is not to depend upon short-term debt
during crisis.
(2). Opening up to the foreign banks and depending upon
them is not a good idea during crisis. It has been
empirically observed in World Bank Research that in
many cases (like during Global Financial Crisis 2007-08)
that foreign banks reduced their lending during crisis.
Many of them choose to retreat from cross-border
banking in general, including through cutting back on
new entry.
(3) Capital account convertibility would mean that there
is no restriction on conversion of the domestic currency
into a foreign currency. It is recognised that capital flows
are sensitive to macroeconomic conditions. Any
deterioration in fiscal conditions, inflation management,
balance of payments, or any other economic crisis may
cause a cessation or reversal of capital flows. This might
make the economy vulnerable if it already suffering from
economic crisis. Therefore, the correct answer is (a).
14. 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
(c) to increase it by more than 1,00,000
(d) to leave it unchanged
Ans. (d)
Explanation:
At a very basic level, aggregate money supply (say M)
refers to the “total stock of money available for use” in
the economy. So, two absolute basic components of
money supply are: 1. Currency with public (C): This
consists of currency notes in circulation issued by RBI,
rupee notes & coins in circulations, as well as small coins
in circulation. 2. Demand Deposits of public with Banks
(also called as deposit money) (D): These deposits can be
withdrawn by public at any point depending upon need.
Without getting into the technicalities of M1, M2 etc, at a
very basic level, we can express money supply as: M =
C+D Now, taking out Rs 1 lakh from “D” would increase
“C” with public. This simply means that “the
immediate” effect would be “a no change in the
aggregate money supply” in the economy. If we carry out
the same analysis technically also using measures of
money supply like M1, M2, M3 and M4, the result would
be same. Therefore, the correct answer is (d).
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