Indian Economy Previous Year Questions (PYQ) with Answers – Page 4

The correct answer is B, inflationary gap. When demand pushes the economy to produce more than it can at full employment, the extra demand only drives prices up. Full-employment GDP, also called potential GDP, is the output an economy can produce when all its resources are in use. If aggregate demand is so high that equilibrium real GDP sits above this level, the difference is the inflationary gap. Real output cannot keep rising beyond capacity, so the excess shows up as rising prices. The idea comes from J.M. Keynes, who used it in his 1940 pamphlet "How to Pay for the War", and the cure is to cut demand through higher taxes, lower government spending or tighter money. Option A is wrong because a recessionary gap is the opposite case, when equilibrium GDP falls short of full employment. Option C is wrong because the income multiplier measures how much income rises for each rupee of new spending. Option D is wrong because automatic stabilisers are tools, such as progressive taxes, that help narrow these gaps. Exam tip: output above potential is an inflationary gap; output below potential is a recessionary gap.

The correct answer is A, Personal income tax. A progressive income tax takes a bigger share when incomes rise and a smaller one when they fall, without any new decision by the government. Such tools are called automatic or built-in stabilisers, because they soften booms and slumps on their own. In a boom, rising incomes push people into higher tax slabs, so tax collections grow faster than income and cool down spending. In a recession, collections fall faster than income, which leaves more money in people's hands. Unemployment benefits work the same way on the spending side of the budget. Option B is wrong because the reverse repo rate is changed by the Reserve Bank of India through a deliberate policy decision, which makes it discretionary monetary policy. Option C is wrong because open market operations, the buying and selling of government securities by the RBI, are also a deliberate policy step. Option D is wrong because a bond price is a market outcome, not a policy tool. Exam tip: automatic stabilisers need no decision; progressive taxes and unemployment benefits are the classic pair.

The correct answer is B, 30. Sensex, short for ‘Sensitive Index’, tracks 30 large, well-established and actively traded companies listed on the BSE, chosen from different sectors of the economy. It was launched in 1986 with 1978–79 as its base year, when its value was set at 100, and it is calculated by the free-float market capitalisation method, which counts only the shares available for trading. When people say ‘the market rose today’, they usually mean the Sensex or the Nifty went up. The BSE, founded in 1875 and located on Dalal Street in Mumbai, is Asia’s oldest stock exchange. Option A is wrong because the Sensex has never been a 20-stock index. Option C is wrong because 25 is not its size either; the count has stayed at 30 since 1986. Option D is wrong because ten companies would be too few to represent the whole market. Exam tip: Sensex has 30 companies on the BSE, base 1978–79 = 100; Nifty has 50 companies on the NSE.

The correct answer is B, Shri K. C. Neogy. Article 280 of the Constitution requires the President to set up a Finance Commission every five years, or earlier if needed, to recommend how the taxes collected by the Union should be shared with the states and how grants-in-aid should be given. The first Finance Commission was set up in 1951 with Kshitish Chandra Neogy, a former member of Nehru’s first cabinet, as chairman, and its recommendations covered the five years from 1952 to 1957. Commissions are numbered in order, which is how setters frame questions on their chairmen. Option A is wrong because K. Santhanam chaired the second Finance Commission, appointed in 1956; he is also known for the Santhanam Committee on corruption. Option C is wrong because P. V. Rajamannar chaired the fourth Finance Commission, appointed in 1964. Option D is wrong because A. K. Chanda chaired the third Finance Commission, appointed in 1960. Exam tip: the first four chairmen in order are Neogy, Santhanam, Chanda and Rajamannar.

The correct answer is C, Increase in the banking habit of the people. When people keep more of their money in banks instead of as cash, banks can lend more, so each rupee of reserve money creates more money in the economy. The money multiplier is the ratio of broad money (M3) to reserve money (M0). It depends on two leakages: the cash people hold, measured by the currency–deposit ratio, and the reserves banks must keep, measured by the reserve ratios. The smaller the leakage, the bigger the multiplier. A stronger banking habit lowers the currency–deposit ratio, so more of each rupee returns to banks and is lent again. Option A is wrong because a higher Cash Reserve Ratio makes banks park more money with the RBI, which lowers the multiplier. Option B is wrong because a higher Statutory Liquidity Ratio also locks up more of banks' funds and cuts lending. Option D is wrong because population by itself does not change how much of each deposit banks can lend. Exam tip: more money in banks means a bigger multiplier; a higher CRR or SLR means a smaller one.

The correct answer is C, Economy budget. By the balance between estimated receipts and expenditure, a budget is of only three types. A balanced budget has receipts equal to expenditure. A surplus budget has receipts higher than expenditure, and a government may use it to cool an overheated, inflationary economy. A deficit budget has expenditure higher than receipts; it is the normal case in India and is used to push demand and growth, the gap being met by borrowing. 'Economy budget' is not a recognised type at all; it is a distractor. In India the budget is called the Annual Financial Statement under Article 112, is presented on 1 February since 2017, and the first budget of independent India was presented by R. K. Shanmukham Chetty on 26 November 1947. Option A is wrong because a deficit budget is a real type. Option B is wrong because a balanced budget is a real type. Option D is wrong because a surplus budget is a real type. Exam tip: three types by balance, balanced, surplus and deficit; India normally runs a deficit budget.

The correct answer is B, April 1935. The Reserve Bank of India started working on 1 April 1935 under the Reserve Bank of India Act, 1934, following the recommendation of the Hilton Young Commission of 1926. It began as a privately owned shareholders' bank with its central office in Calcutta, which moved permanently to Bombay (Mumbai) in 1937. Its first Governor was Sir Osborne Smith, and C. D. Deshmukh became the first Indian Governor in 1943. The bank was nationalised on 1 January 1949, after which it has been fully owned by the Government of India. A is wrong because nothing about the RBI's founding happened in April 1948; 1949 is the nationalisation year. C is wrong because April 1945 was still wartime and the bank had already existed for ten years. D is wrong because April 1936 is a year too late; the bank had already completed its first year. Exam tip: RBI Act 1934, RBI born 1 April 1935, nationalised 1 January 1949.

The correct answer is C, 2.1. The Total Fertility Rate is the average number of children a woman would have in her lifetime if she followed the current birth rates at each age from 15 to 49. Replacement level is the TFR at which each generation exactly replaces itself, so that over time, leaving migration aside, the population stops growing or shrinking. Two children are needed to replace the two parents, and the extra 0.1 covers children who die before reaching adulthood and the fact that slightly more boys than girls are born. India’s National Population Policy, 2000 set the goal of bringing TFR down to replacement level. Option A is wrong because a TFR of 1.0 would halve the population in each generation. Option B is wrong because 1.6 is below replacement, a level seen in ageing societies. Option D is wrong because 2.3 is above replacement, so the population would keep rising. Exam tip: replacement level fertility means a TFR of about 2.1 children per woman.

The correct answer is D, Reserve Bank of India. Monetary policy, the control of money supply and interest rates to keep prices stable, is the job of the central bank, the RBI, set up on 1 April 1935 under the RBI Act 1934 and nationalised on 1 January 1949. Since 2016 the policy repo rate is decided by the six-member Monetary Policy Committee, three from the RBI including the Governor, who chairs it, and three appointed by the Union Government, working to an inflation target set in 2016 at 4 per cent with a band of 2 per cent on either side. Option A is wrong because the Ministry of Statistics and Programme Implementation compiles data such as GDP and the CPI, it does not set policy. Option B is wrong because the Finance Commission, under Article 280, recommends how taxes are shared between the Centre and the States. Option C is wrong because NITI Aayog, formed on 1 January 2015, is a policy think tank that replaced the Planning Commission. Exam tip: monetary policy = RBI and its MPC, fiscal policy = Finance Ministry through the Budget.

The correct answer is D, price stability. The Reserve Bank Of India Act, as amended in 2016, states that the primary objective of monetary policy is to maintain price stability while keeping in mind the objective of growth. Under the inflation targeting framework the government, in consultation with the RBI, sets the target for consumer price inflation at four per cent with a band of two per cent on either side. A six member Monetary Policy Committee, three from the RBI including the Governor, who has the casting vote, and three appointed by the government, decides the policy repo rate, usually every two months. Option A is wrong because creating wealth is not a task of monetary policy. Option B is wrong because the RBI manages the exchange rate under FEMA, but only to curb sharp volatility, not as its main aim. Option C is wrong because growth is an objective the RBI must keep in mind, yet it comes after price stability in the law. Exam tip: price stability first, growth kept in mind, four per cent inflation target with a two per cent band.

The correct answer is A, Russia. India took the idea of five-year plans from the erstwhile Soviet Union, which began its first plan in 1928 under Stalin. Along with it India borrowed Fundamental Duties and the ideal of justice, social, economic and political, in the Preamble, all from the Soviet constitution. India's own First Five Year Plan ran from 1951 to 1956 and focused on agriculture and irrigation; the Planning Commission set up in 1950 prepared the plans, and the Prime Minister was its chairman. The Twelfth Plan, which ended in 2017, was the last, and NITI Aayog replaced the Planning Commission in 2015. Option B is wrong because England gave the parliamentary system, rule of law and single citizenship. Option C is wrong because the United States gave Fundamental Rights and judicial review. Option D is wrong because Germany, that is the Weimar constitution, gave the suspension of Fundamental Rights during an emergency. Exam tip: from the Soviet Union came Fundamental Duties, five-year plans and the ideal of justice in the Preamble.

The correct answer is A, 15. The language panel on the reverse of an Indian banknote carries the value of the note in 15 languages. Hindi and English are not part of that panel: they appear on the front of the note, so the total number of languages printed on a note comes to 17. The 15 in the panel are Assamese, Bengali, Gujarati, Kannada, Kashmiri, Konkani, Malayalam, Marathi, Nepali, Odia, Punjabi, Sanskrit, Tamil, Telugu and Urdu. Notes are issued by the Reserve Bank of India under the Reserve Bank of India Act, 1934, except the one rupee note, which is issued by the Government of India. Option B is wrong because 17 is the count of all languages on the note, including Hindi and English on the front. Option C is wrong because 10 is far fewer than the panel holds. Option D is wrong because 12 is also short of the actual number. Exam tip: remember 15 in the panel on the back and 17 on the whole note.

The correct answer is B, 2011-2012. The all-India Index of Industrial Production is compiled with 2011-12 as its base year, a revision announced in 2017 that replaced the older 2004-05 base. The IIP is a monthly volume index put out by the National Statistical Office and it measures the change in output of three sectors — mining, manufacturing and electricity. In the 2011-12 series manufacturing carries by far the largest weight, about 77.6 per cent, with mining near 14.4 per cent and electricity near 8 per cent, and the index is released about six weeks after the month it reports on. Option A is wrong because 2004-05 was the base of the series that the present one replaced. Option C is wrong because 2005-06 has never been an IIP base year. Option D is wrong because 2010-11 is not the IIP base either. Exam tip: 2011-12 is the base year of the IIP, the Wholesale Price Index and India's national accounts alike, while the Consumer Price Index uses 2012.

The correct answer is A, whatever the change in price, there is absolutely no change in demand. Elasticity measures how strongly the quantity demanded reacts to price, and zero means no reaction at all. Price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price. When it is zero, demand is perfectly inelastic and the demand curve is a vertical straight line. Life-saving medicines such as insulin come closest to this, since a patient buys the same dose whatever the price. At the other extreme, perfectly elastic demand, with infinite elasticity, gives a horizontal demand curve. Option B is wrong because any change in demand, however small, means the elasticity is above zero. Option C is wrong because a large response to a small price change means elastic demand, with elasticity greater than one. Option D is wrong because a small response to a large price change is relatively inelastic demand, between zero and one, but still not zero. Exam tip: elasticity zero gives a vertical curve; elasticity infinite gives a horizontal one.

The correct answer is A, Morris D. Morris. The American economic historian Morris David Morris built the Physical Quality of Life Index in the 1970s for the Overseas Development Council, and set it out in his 1979 book on measuring the condition of the world’s poor. He wanted a simple measure of well-being that did not depend on income alone. The PQLI uses three indicators, each scored from 0 to 100 and given equal weight: basic literacy, infant mortality and life expectancy at age one. Their average gives a country a score out of 100. Kerala was often cited as a place where a high PQLI came with a low income. Option B is wrong because the UNDP publishes the Human Development Index, which came later, in 1990. Option C is wrong because Mahbub-ul-Haq designed the HDI, not the PQLI. Option D is wrong because the index has a known author, Morris D. Morris. Exam tip: PQLI, Morris D. Morris, 1979, three indicators; HDI, Mahbub-ul-Haq and the UNDP, 1990.

The correct answer is A, M. Visvesvaraya. Sir M. Visvesvaraya, the engineer and former Diwan of Mysore, wrote ‘Planned Economy for India’ in 1934, the first book to set out a plan for India’s development. He proposed doubling the national income in ten years by shifting people from farming to industry, which is why he is seen as a pioneer of economic planning in India. His birthday, 15 September, is observed as Engineers’ Day, and he received the Bharat Ratna in 1955. Other plans followed: the Congress set up the National Planning Committee under Jawaharlal Nehru in 1938, and a group of industrialists released the Bombay Plan in 1944. Option B is wrong because J. R. D. Tata was one of the industrialists who signed the Bombay Plan, not the author of this book. Option C is wrong because G. D. Birla was also a signatory of the Bombay Plan. Option D is wrong because Pattabhi Sitaramayya is known for writing a history of the Indian National Congress. Exam tip: Visvesvaraya’s book 1934, National Planning Committee 1938, Bombay Plan and Gandhian Plan 1944, People’s Plan 1945.

The correct answer is B, France. France was the first country to introduce GST, in 1954. The idea came from Maurice Lauré, a French tax official, who designed a tax charged at every stage of production and sale but only on the value added at that stage. This avoids "tax on tax", the cascading effect of older sales taxes. This value added tax (VAT) model later spread across Europe and the world. India adopted GST on 1 July 2017 through the 101st Constitutional Amendment, with a dual model: CGST and SGST on sales within a state and IGST on sales between states. A is wrong because Canada brought in its GST only in 1991. C is wrong because Australia introduced GST in 2000. D is wrong because Germany adopted its VAT system in 1968, long after France. Exam tip: First GST = France, 1954 (Maurice Lauré); India's GST from 1 July 2017 under the 101st Amendment; 1 July is observed as GST Day.

The correct answer is A, Assam. Assam became the first state to ratify the GST Constitution Amendment Bill, on 12 August 2016, soon after Parliament passed it. Because GST changes the taxing powers of both the Centre and the states, the bill needed approval from at least half of the state legislatures under Article 368. Bihar was the second state and Jharkhand the third. After enough states ratified it, the President gave assent on 8 September 2016 and it became the Constitution (101st Amendment) Act, 2016. It added Article 246A and created the GST Council under Article 279A, and GST came into force on 1 July 2017. B is wrong because West Bengal ratified the bill only after Assam. C is wrong because Meghalaya was not the first state to ratify it. D is wrong because Arunachal Pradesh was not the first state either. Exam tip: GST = 101st Amendment, 2016; first state to ratify = Assam; GST Council = Article 279A, chaired by the Union Finance Minister; GST in force from 1 July 2017.

The correct answer is A, 2nd Oct 2014. Prime Minister Narendra Modi launched the Swachh Bharat Mission on 2 October 2014, Mahatma Gandhi's 145th birth anniversary, at Rajpath in New Delhi. Its target was a clean and open defecation free (ODF) India by 2 October 2019, Gandhiji's 150th birth anniversary, mainly by building household and community toilets and improving waste management. The mission has two parts, Swachh Bharat Mission (Gramin) for villages and Swachh Bharat Mission (Urban) for towns and cities. Its logo is Gandhiji's round spectacles with the words "Swachh Bharat". B is wrong because 14 November is Children's Day, Jawaharlal Nehru's birthday, and 2015 is also the wrong year. C is wrong because 14 November 2014 was Children's Day, not the launch date. D is wrong because by 2 October 2015 the mission had already completed its first year. Exam tip: Swachh Bharat = 2 October 2014, target ODF India by 2 October 2019, logo = Gandhiji's spectacles; the Swachh Survekshan ranks cities on cleanliness.

The correct answer is C, Public Account of India. Money from National Savings Certificates belongs to the savers, not the government, so under Article 266(2) it is credited to the Public Account. The Public Account holds money that the government keeps as a banker or trustee, such as small savings, provident funds, deposits and remittances. Since the money has to be returned to its owners, it can be paid out by executive action without a vote of Parliament. Option A is wrong because the Consolidated Fund, under Article 266(1), receives the government's own revenues, the loans it raises and loan repayments, and nothing can be spent from it without Parliament's approval. Option B is wrong because the Prime Minister's National Relief Fund is a separate fund built from public donations, set up in 1948 to help people displaced by Partition. Option D is wrong because the Contingency Fund, under Article 267, is kept at the disposal of the President for urgent, unforeseen spending. Exam tip: Article 266(1) is the Consolidated Fund, 266(2) the Public Account, 267 the Contingency Fund.