Important Economic Terms and Concepts in News for UPSC Prelims

Reading Time: 21 mins

Why this topic is important for Prelims?

Which one of the following statements appropriately describes the “fiscal stimulus”?(2011)

(a.) It is a massive investment by the Government in manufacturing sector to ensure the supply of goods to meet the demand surge caused by rapid economic growth

(b.) It is an intense affirmative action of the Government to boost economic activity in the country

(c.) It is Government’s intensive action on financial institutions to ensure disbursement of loans to agriculture and allied sectors to promote greater food production and contain food inflation

(d.) It is an extreme affirmative action by the Government to pursue its policy of financial inclusion

Solution (b)

Consider the following actions which the Government can take:

  1. Devaluing the domestic currency.
  2. Reduction in the export subsidy.
  3. Adopting suitable policies which attract greater FDI and more funds from FIIs.

Which of the above action/actions can help in reducing the current account deficit?

(a.) 1 and 2

(b.) 2 and 3

(c.) 3 only

(d.) 1 and 3

Solution (a)

A rapid increase in the rate of inflation is sometimes attributed to the “base effect”. What is “base effect”?(2011)

(a.) It is the impact of drastic deficiency in supply due to failure of crops

(b.) It is the impact of the surge in demand due to rapid economic growth

(c.) It is the impact of the price levels of previous year on the calculation of inflation rate

(d.)None of the statements (a), (b) and (c) ‘given above is correct in this context

Solution (c)

Why is the offering of “teaser loans” by commercial banks a cause of economic concern?(2011)

  1. The teaser loans are considered to be an aspect of sub-prime lending and banks may be exposed to the risk of defaulters in future.
  2. In India, the teaser loans are mostly given to inexperienced entrepreneurs to set up manufacturing or export units.

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

Solution (c)

The lowering of Bank Rate by the Reserve Bank of India leads to (2011)

(a.) More liquidity in the market

(b.) Less liquidity in the market

(c.) No change in the liquidity in the market

(d.) Mobilization of more deposits by commercial banks

Solution (a)

Which one of the following is not a feature of “Value Added Tax”? (2011)

(a.) It is a multi-point destination-based system of taxation

(b.) It is a tax levied on value addition at each stage of transaction in the production-distribution chain

(c.) It is a tax on the final consumption of goods or services and must ultimately be borne by the consumer

(d.) It is basically a subject of the Central Government and the State Governments are only a facilitator for its successful implementation

Solution (c)

A “closed economy” is an economy in which (2011)

(a.) the money supply is fully controlled

(b.) deficit financing takes place

(c.) only exports take place

(d.) neither exports nor imports take place

Solution (d)

Microfinance is the provision of financial services to people of low-income groups. This includes both the consumers and the self-employed. The service/services rendered under micro-finance is/are: (2011)

  1. Credit facilities
  2. Savings facilities
  3. Insurance facilities
  4. Fund Transfer facilities

Select the correct answer using the codes given below the lists:

(a.) 1 only

(b.) 1 and 4 only

(c.) 2 and 3 only

(d.) 1, 2, 3 and 4

Solution (d)

Why is the Government of India disinvesting its equity in the Central Public Sector Enterprises (CPSEs)? (2011)

  1. The Government intends to use the revenue earned-from the disinvestment mainly to pay back the external debt.
  2. The Government no longer intends to retain the management control of the CPSEs.

Which of the statements given above is/are correct?

 (a.) I only

(b.) 2 only

(c.) Both 1 and 2

(d.) Neither 1 nor 2

Solution (d)

Under which of the following circumstances may ‘capital gains’ arise? (2012)

  1. When there is an increase in the sales of a product
  2. When there is a. natural increase in the value of the property owned
  3. When you purchase a painting and there is a growth in its value due to increase in its popularity

Select the correct answer using the codes given below :

(a) 1 only

(b) 2 and 3 only

(c) 2 only

(d) 1, 2 and 3

Solution (b)

The basic aim of Lead Bank Scheme is that: (2012)

(a) big banks should try to open offices in each district

(b) there should be stiff competition among the various nationalized banks

(c) individual banks should adopt particular districts for intensive development

(d) all the banks should make intensive efforts to mobilize deposits

Solution (c)

In India, in the overall Index of Industrial Production, the Indices of Eight Core Industries have a combined weight of 37-90%. Which of the following are among those Eight Core Industries? (2012)

  1. Cement
  2. Fertilizers
  3. Natural gas
  4. Refinery products
  5. Textiles

Select the correct answer using the codes given below :

(a) 1 and 5 only

(b) 2, 3 and 4 only

(c) 1, 2, 3 and 4 only

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

Solution (c)

The balance of payments of a country is a systematic record of (2012)

 (a) all import and transactions of a during a given period normally a year

(b) goods exported from a country during a year

(c) economic transaction between the government of one country to another

(d) capital movements from one country to another

Solution (a)

An increase in the Bank Rate generally indicates that the: (2013)

(a) market rate of interest is likely to fall

(b) Central Bank is no longer making loans to commercial banks

(c) Central Bank is following an easy money policy

(d) Central Bank is following a tight money policy

Solution (d)

In India, deficit financing is used for raising resources for (2013)

(a) economic development

(b) redemption of public debt

(c) adjusting the balance of  payments

(d) reducing the foreign debt

Solution (a)

Which of the following constitute Capital Account? (2013)

  1. Foreign Loans
  2. Foreign Direct Investment
  3. Private Remittances
  4. Portfolio Investment

Select the correct answer using the codes given below.

(a) 1, 2 and 3

(b) 1, 2 and 4

(c) 2, 3 and 4

(d) 1, 3 and 4

Solution (b)

In the context of Indian economy,Open Market Operations’ refers to: (2013)

(a) borrowing by scheduled banks from the RBI

(b) lending by commercial banks to industry and trade

(c) purchase and sale of government securities by the RBI

(d) None of the above

Solution (c)

Priority Sector Lending by banks in India constitutes the lending to: (2013)

(a) agriculture

(b) micro and small enterprises

(c) weaker sections

(d) All of the above

Solution (d)

 The terms ‘Marginal Standing Facility Rate’ and ‘Net Demand and Time Liabilities’, sometimes appearing in news, are used in relation to (2014)

  1. banking operations
  2. communication networking
  3. military strategies
  4. supply and demand of agricultural products

Solution (a)

What is/are the facility/facilities the beneficiaries can get from the services of Business Correspondent (Bank Saathi) in branchless areas?(2014)

  1. It enables the beneficiaries to draw their subsidies and social security benefits in their villages.
  2. It enables the beneficiaries in the rural areas to make deposits and withdrawals.

Select the correct answer using the code given below.

  1. 1 only
  2. 2 only
  3. Both 1 and 2
  4. Neither 1 nor 2

Solution (c)

In the context of Indian economy which of the following is/are the purpose/purposes of ‘Statutory Reserve Requirements’?

  1. To enable the Central Bank to control the amount of advances the banks can create
  2. To make the people’s deposits with banks safe and liquid
  3. To prevent the commercial banks from making excessive profits
  4. To force the banks to have sufficient vault cash to meet their day-to-day requirements

Select the correct answer using the code given below.

  1. 1 only
  2. 1 and 2 only
  3. 2 and 3 only
  4. 1, 2, 3 and 4

Solution (b)

 What does venture capital mean?

  1. A short-term capital provided to industries
  2. A long-term start-up capital provided to new entrepreneurs
  3. Funds provided to industries at times of incurring losses
  4. Funds provided for replacement and renovation of industries

Solution (b)

With reference to Balance of Payments, which of the following constitutes/constitute the Current Account?

  1. Balance of trade
  2. Foreign assets
  3. Balance of invisibles
  4. Special Drawing Right

Select the correct answer using the code given below.

  1. 1 only
  2. 2 and 3
  3. 1 and 3
  4. 1, 2 and 4

Solution (c)

India is regarded as a country with “Demographic Dividend”. This is due to: (2011)

(a.) Its high population in the age group below 15 years

(b.) Its high population in the age group of 15-64 years

(c.) Its high population in the age group above 65 years

(d.) Its high total population

Solution (b)

Which one of the following best describes the term “Merchant Discount Rate” sometimes seen in news? (2018)

(a) The incentive given by a bank to a merchant for accepting payments through debit cards pertaining to that bank.

(b) The amount paid back by banks to their customers when they use debit cards for financial transactions for purchasing goods or services.

(c) The charge to a merchant by a bank for accepting payments from his customers through the bank’s debit cards.

(d) The incentive given by the Government to merchants for promoting digital payments by their customers through Point of Sale (PoS) machines and debit cards.

Answer – c

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Note:

  • Economic terms you see below are seen in news between June 2019-June 2020. So there is a more possibility that some of these terms might be asked in the UPSC prelims 2020 exam. Remaining economic terms can be covered in Economy Static Mindmaps >> Chapters (Inflation, Business cycle, Financial market, banking, security market, external sector, taxation, public finance and investment models).
  • These terms are made in the format of one-liners for quick digestion of info. Hyphen or dash symbols are used to separate different points.
  • Source of these terms are – Prelims CA Mindmaps and Mains CA Articles
  • Other compilation of important topic areas such as indexes/reports, schemes, etc. can be covered in  Prelims CA mindmaps itself.

RBI’s income sources:

  • Open Market Operations (OMOs): the RBI may buy government bonds from the public and earn interests on it from the issuer i.e. government.
  • Interest on loans.
  • Interests on overseas deposits.
  • Forex market operations: the RBI buys and sells foreign currency like the dollar by speculation.
  • Sovereign Seigniorage: this is the income that the central bank earns by printing currency.

Types of RBI’s reserve:

  • Currency and Gold Revaluation Account (CGRA): Value of gold and forex assets owned by RBI on behalf of Indian govt – major portion of RBI’s reserve – it is the revaluation eserve.
  • Continengency Fund (CF): reserve held as a safety measure against any unforeseen risk/crisis – it is the realized equity or contingency risk buffer (CRB).

Economic Capital Framework (ECF):  Realized equity + Revaluation reserve. capital that must be held in reserve by the RBI to sustain its stability in times of an unforeseen crisis or risks.

Liquidity Adjustment Facility (LAF): It is a monetary policy instrument used by the RBI for managing the liquidity needs of the commercial banking system. The LAF works through various instruments devised by the RBI to inject liquidity into the banking system when the system/institutions need cash as well as to absorb liquidity when the banking system has excess money. The components of LAF are:

  • Repo (overnight fixed repo or the ‘popular’ repo)
  • Reverse Repo (Overnight fixed reverse repo or the ‘popular reverse repo’)
  • Term repo (auction)
  • Overnight variable rate repo (auction)
  • Overnight variable rate reverse repo (auction)

Repo Rate: Also known as repurchase rate – it is the key monetary policy instrument of the RBI – It is the rate of interest at which the RBI lends short-term money to banks to control credit availability, inflation and economic growth.

Reverse Repo Rate: It is the rate at which the RBI borrows money from the commercial banks within India – It is a monetary policy instrument used to control the money supply in the country.

Cash Reserve Ratio (CRR): It is the ratio of total deposit that banks need to keep as a reserve with the RBI in the form of cash instead of keeping the amount with them – to control the flow of money in the market.

Statutory Liquidity Ratio (SLR): It is the ratio of the deposit that the commercial bank has to maintain in the form of liquid cash, gold, other securities prescribed by the RBI – It is a percentage of net time and demand liability (NTDL) kept by the bank – The SLR is maintained so that the bank will have an amount in the form of liquid assets, which can be used to handle a sudden increase in demand for the amount from the depositor – RBI uses this to limit credit facilities offered by banks to borrowers to ensure the stability of banks.

Marginal Standing Facility (MSF): It is overnight liquidity support provided by the RBI to commercial banks – The interest rate for MSF borrowing is decided by the RBI from time to time and it was originally set at 1% higher than the repo rate – Subsequently, with the gradual reduction of…

[Mindmap] Economic Survey 2019-20: Read/Revise Faster

Reading Time: 2 mins Economic Survey is an annual exercise of the finance ministry and prepared by the chief economic adviser. It comes one day prior to the general budget announcement in the parliament. As this document is prepared by the government and its different agents =  It has paramount importance for any government examination and particularly civil services.