Daily Static Quiz (Economy) January 2, 2026

Q1. Consider the following statements regarding the Statutory Liquidity Ratio (SLR) in India’s banking system:

Statement I: An increase in SLR compels commercial banks to hold a higher proportion of their deposits in government securities, thereby reducing their capacity to extend credit to the private sector.

Statement II: When RBI intends to control inflationary pressures in the economy, it is likely to increase the SLR as a qualitative instrument of monetary policy.

Which one of the following is correct in respect of the above statements?

(a) Both Statement-I and Statement-II are correct and Statement-II explains Statement-I
(b) Both Statement-I and Statement-II are correct, but Statement-II does not explain Statement-I
(c) Statement-I is correct, but Statement-II is incorrect
(d) Statement-I is incorrect, but Statement-II is correct

Q2. With reference to India’s Balance of Payments, consider the following pairs:

How many of the above pairs are correctly matched?

(a) Only one
(b) Only two
(c) Only three
(d) All four

Q3. Consider the following statements regarding Open Market Operations (OMOs) conducted by the Reserve Bank of India:

Statement I: OMOs involve the RBI buying and selling of government securities in the secondary market to influence money supply.

Statement II: OMOs are considered a sterilization technique that allows RBI to absorb liquidity without changing foreign exchange reserves.

Statement III: OMOs can simultaneously achieve both monetary policy objectives and exchange rate management.

Which of the statements given above are correct?

(a) 1 and 2 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3

Q4. With reference to Revenue Deficit and Fiscal Deficit in government budgeting, consider the following:

If a government’s revenue expenditure is ₹5,00,000 crores, revenue receipts are ₹3,50,000 crores, borrowings are ₹1,00,000 crores, and capital receipts from disinvestment are ₹50,000 crores, then:

(a) Revenue deficit is ₹1,50,000 crores and Fiscal deficit is ₹50,000 crores
(b) Revenue deficit is ₹1,50,000 crores and Fiscal deficit is ₹1,00,000 crores
(c) Revenue deficit is ₹1,50,000 crores and Fiscal deficit is ₹1,50,000 crores
(d) Revenue deficit is ₹2,00,000 crores and Fiscal deficit is ₹1,50,000 crores

Q5. Consider the following statements regarding Foreign Portfolio Investment (FPI) and Foreign Direct Investment (FDI) in India:

Statement I: FPI flows are considered more volatile and can exit quickly during market downturns, while FDI typically represents long-term commitments.

Statement II: FPI in equities can be made through recognized channels like stock exchanges, whereas FDI in manufacturing requires approval from the Foreign Investment Promotion Board (FIPB) regardless of the sector.

Statement III: Both FPI and FDI are non-debt creating capital flows that enhance India’s foreign exchange reserves.

Which of the statements given above is/are correct?

(a) 1 only
(b) 1 and 2 only
(c) 2 and 3 only
(d) 1 and 3 only

Q6. With reference to the concept of ‘Inflation-Indexed Bonds’ (IIBs) in India, consider the following statements:

1. The principal amount of IIBs is adjusted periodically based on changes in Wholesale Price Index (WPI).

2. Interest earned and capital gains on IIBs are subject to the same tax treatment as other government securities.

3. IIBs provide investors with real returns that exceed the inflation rate.

How many of the above statements are correct?

(a) Only one
(b) Only two
(c) All three
(d) None

Q7. Consider the following regarding the sectors of Indian economy and classification of economic activities:

How many of the pairs given above are correctly matched?

(a) Only one
(b) Only two
(c) Only three
(d) All four

Q8. With reference to the implementation of Goods and Services Tax (GST) in India, consider the following statements:

Statement I: GST subsumed multiple indirect taxes including Central Excise, Service Tax, and State VAT under a unified framework, resulting in a reduction of cascading tax effects.

Statement II: The GST regime has completely eliminated the concept of input tax credit for intra-state transactions, leading to higher compliance costs for small businesses.

Statement III: The GST Compensation Cess was introduced to compensate states for revenue loss during the transition from the previous tax regime.

Which of the statements given above is/are correct?

(a) 1 and 2 only
(b) 1 and 3 only
(c) 2 and 3 only
(d) 1, 2 and 3

Q9. With reference to capital and revenue expenditure in government accounts, consider the following:

Which of the following would be classified as Capital Expenditure of the government?

1. Spending on construction of highways and bridge infrastructure

2. Salary payments to government employees

3. Expenditure on acquisition of equipment and machinery for government offices

4. Interest payments on government loans

5. Investment in setting up of public sector enterprises

Select the correct answer using the code given below:

(a) 1, 2 and 3 only
(b) 1, 3 and 5 only
(c) 2, 3 and 4 only
(d) 1, 2, 3, 4 and 5

Q10. With reference to the Money Multiplier concept in monetary economics, consider the following statements:

Statement I: The money multiplier increases when the banking habit of people improves and the reserve ratio of banks decreases.

Statement II: A lower Cash Reserve Ratio (CRR) mandated by the RBI would enable commercial banks to keep more reserves and restrict their lending capacity.

Statement III: The relationship between the monetary base and the total money supply is determined by the money multiplier, which is inversely related to reserve requirements.

Which of the statements given above is/are correct?

(a) 1 only
(b) 1 and 3 only
(c) 2 and 3 only
(d) 1, 2 and 3

ANSWER KEY WITH DETAILED EXPLANATIONS

ANSWER Q1: (a)

Explanation:

Statement I is CORRECT:
The Statutory Liquidity Ratio (SLR) requires commercial banks to maintain a certain percentage of their deposits in government securities. When the RBI increases SLR, banks are compelled to allocate a larger proportion of customer deposits into G-secs rather than extending credit. For instance, if SLR increases from 18% to 20%, banks have 2 percentage points less liquidity available for lending to the private sector, directly reducing their credit expansion capacity. This mechanism contracts the money supply and reduces aggregate demand in the economy.

Statement II is CORRECT:
The RBI employs SLR as a qualitative (or selective) monetary policy instrument to absorb or inject liquidity into the system. When inflationary pressures emerge, the RBI increases SLR, forcing banks to lock in more funds into government securities. This reduces the money supply in active circulation because those funds are essentially immobilized. By contracting the money supply, inflation driven by excess demand can be controlled—a standard counter-inflationary measure.

Does Statement II explain Statement I?
Yes, the mechanism of reducing lending capacity (Statement I) occurs precisely because the RBI uses SLR to control inflation (Statement II). The causal chain is:
Higher SLR (inflation control tool) → Less funds for lending → Reduced credit growth → Lower money supply → Inflation moderation

This is a direct explanatory relationship.

Correct Answer: (a)

ANSWER Q2: (c)

Explanation:

Pair 1 – Remittances from NRIs | Current Account – CORRECT ✓
Remittances from Non-Resident Indians are unilateral transfers of income and are explicitly recorded under the “Secondary Income” (or “Transfers”) sub-component of the Current Account in India’s Balance of Payments. These are not payments for goods or services but represent income transfers and are part of the current flow of income.

Pair 2 – FDI in manufacturing | Capital Account – INCORRECT ✗
This is a common misconception. FDI (Foreign Direct Investment) is recorded in the Financial Account (not the Capital Account per the BPM6 standard adopted by India). The Capital Account is limited to capital transfers and non-financial assets. FDI, by contrast, involves the acquisition of financial assets (equity stakes, ownership of subsidiaries), making it a Financial Account item. The Financial Account includes investments in equities, bonds, and other financial instruments.

Pair 3 – Short-term trade credits | Financial Account – CORRECT ✓
Trade credits, including supplier financing, letters of credit, and short-term loans used to finance trade, are classified as short-term financial instruments. They appear in the Financial Account’s “Other Investment” category, reflecting money owed for trade transactions.

Pair 4 – Import of gold for private consumption | Current Account – CORRECT ✓
When gold is imported for industrial use or private consumption (e.g., jewelry), it is treated as a merchandise import—a tangible good. Merchandise trade (both goods and services) is recorded in the Current Account under the “Goods” sub-section. The import of gold, whether for official reserves or private use, contributes to the merchandise deficit.

Result: Pairs 1, 3, and 4 are correctly matched = 3 pairs

Correct Answer: (c)

ANSWER Q3: (a)

Explanation:

Statement I is CORRECT:
Open Market Operations (OMOs) are the most direct and frequently used monetary policy tools of the RBI. They involve buying and selling government securities (Treasury Bills and Government Bonds) in the secondary market:

• When RBI buys G-secs: It credits cash to banks’ accounts → Increases liquidity in the system → Expansionary monetary policy

• When RBI sells G-secs: It receives cash from banks → Absorbs liquidity → Contractionary monetary policy

OMOs directly influence the money supply and are the primary transmission mechanism of monetary policy in developed economies.

Statement II is CORRECT:
Sterilization is the process of neutralizing the monetary impact of foreign exchange interventions. Here’s the context:

• Suppose the RBI intervenes in forex markets by selling dollars to support the rupee (a capital account inflow scenario). This injection of rupees into the banking system increases base money.

• Simultaneously, to prevent this from expanding the money supply, the RBI conducts reverse OMOs (selling G-secs), absorbing an equivalent amount of rupees from the banking system.

• Result: The exchange rate is managed without altering the monetary base or inflation—sterilized intervention.

This is a critical technique for emerging market central banks managing volatile capital flows while maintaining monetary policy independence.

Statement III is INCORRECT:
This statement oversimplifies and is economically flawed. OMOs cannot simultaneously achieve both monetary policy and exchange rate objectives optimally due to the Impossible Trinity (or Trilemma):

• Independent monetary policy

• Fixed/managed exchange rate

• Free capital flows

A central bank can achieve only TWO of these three. For example:

• If the RBI uses OMOs to tighten monetary policy (raise rates) to fight inflation, the higher rates attract foreign investment, appreciating the rupee—conflicting with exchange rate stability.

• Conversely, using OMOs to keep rates low (exchange rate management) risks inflation, compromising monetary policy independence.

The RBI typically prioritizes monetary policy and accepts exchange rate flexibility, or uses direct forex interventions separately for exchange rate management.

Correct Answer: (a) [Statements 1 and 2 only]

ANSWER Q4: (a)

Explanation:

This is a calculation-based question testing understanding of government fiscal accounting definitions.

Given Data:

• Revenue Expenditure (RevExp) = ₹5,00,000 crores

• Revenue Receipts (RevRec) = ₹3,50,000 crores

• Borrowings = ₹1,00,000 crores (capital receipts/financing source)

• Disinvestment = ₹50,000 crores (non-debt capital receipts)

• Capital Expenditure = Not mentioned (assume ₹0)

Step 1: Calculate Revenue Deficit

Revenue Deficit = Revenue Expenditure – Revenue Receipts

= ₹5,00,000 – ₹3,50,000 = ₹1,50,000 crores

Interpretation: The government’s revenue operations (daily expenditures) exceed revenue earnings (taxes, fees, etc.) by ₹1.5 lakh crores, indicating structural fiscal stress.

Step 2: Calculate Fiscal Deficit

Fiscal Deficit = Total Expenditure – Total Non-Debt Receipts

Or equivalently:
Fiscal Deficit = (Revenue Exp + Capital Exp) – (Revenue Rec + Non-Debt Capital Rec)

= (₹5,00,000 + ₹0) – (₹3,50,000 + ₹50,000)
= ₹5,00,000 – ₹4,00,000 = ₹1,00,000 crores

Critical Note: Borrowings (₹1,00,000 crores) are not deducted from total expenditure; they are the source of financing the deficit. Only non-debt capital receipts (disinvestment, recovery of loans) are counted as income.

Verification:

• Fiscal deficit = Revenue deficit – Non-debt capital receipts

• = ₹1,50,000 – ₹50,000 = ₹1,00,000 ✓

Correct Answer: (a)

ANSWER Q5: (a)

Explanation:

Statement I is CORRECT:
FPI and FDI differ fundamentally in their nature and stability:

Real Example: During the 2008 financial crisis and March 2020 COVID crash, FPI from emerging markets reversed rapidly, while FDI remained intact.

Statement II is INCORRECT:
This statement has multiple flaws:

1. FPI approval process oversimplified: Direct FPI in listed equities through the Liberalized Remittance Scheme (LRS) does NOT require FIPB/SEBI approval. A foreign national can open a demat account and invest freely. However, FPI in debt instruments, government securities, or sensitive sectors may require approval from SEBI or the RBI.

2. FIPB is now absorbed into DPIIT: The Foreign Investment Promotion Board (FIPB) was dissolved in 2017. Most FDI approvals now come from sector regulators (RBI for banking, TRAI for telecom, etc.) through automatic approval routes rather than blanket FIPB clearance.

3. “Regardless of sector” is misleading: Many sectors (e.g., retail, defense) have sector-specific restrictions or require conditions (e.g., local sourcing requirements for retail). Not all FDI requires the same level of approval.

The statement oversimplifies the actual procedural complexity.

Statement III is INCORRECT:
This statement contains two errors:

1. FPI is NOT always non-debt creating: FPI includes both equity investment (non-debt) and bonds/debt securities (debt-creating). A foreign investor purchasing Indian corporate bonds or government securities through FPI channels is creating debt FPI, not non-debt FPI. The distinction is crucial but often blurred in classifications.

2. Foreign exchange reserve enhancement is not guaranteed for FPI: While inflows improve reserves, FPI is highly volatile and subject to reversal. FDI is more stable. In 2022, India saw significant FPI outflows as global rates rose, offsetting FDI inflows. Relying on FPI for reserve stability is risky.

Correct Answer: (a) [Statement 1 only]

ANSWER Q6: (b)

Explanation:

Statement 1 is CORRECT:
Inflation-Indexed Bonds (IIBs) issued by the Government of India (since June 2013) are adjusted for inflation:

• Principal is adjusted semi-annually based on the Wholesale Price Index (WPI)

• If face value is ₹1,000 and WPI increases by 3%, the principal becomes ₹1,030

• Interest is paid on the adjusted principal amount

• At maturity, the investor receives the higher of face value or inflation-adjusted value

This ensures investors’ capital is protected from erosion due to inflation.

Statement 2 is CORRECT:
As per the Income Tax Act, interest income and capital gains on IIBs are taxable:

• Interest is taxable under “Income from Other Sources”

• Capital gains (difference between sale price and purchase price) are taxable at applicable rates

• IIBs do NOT receive special tax exemption (unlike some government bonds)

• Individuals in the highest tax slab (30%) must pay 30% tax on interest earned

This is explicitly stated in RBI’s IIB issuance guidelines and confirmed in budget documents.

Statement 3 is INCORRECT:
This statement is misleading. While IIBs provide protection against inflation, they do NOT guarantee returns exceeding the inflation rate:

• Coupon rate for WPI-linked IIBs is typically 0.25% to 1.25% (historically among the lowest)

• Real return = Coupon rate + Principal appreciation due to inflation – 1 (approximately)

• If coupon = 0.5% and inflation = 4%, real return = 0.5% – 4% = -3.5% (NEGATIVE real return)

• Inflation protection keeps nominal purchasing power constant, not positive real returns

Historical Example: IIBs issued in 2013 with 0.25% coupon saw real returns turn negative when inflation exceeded 2-3%, as the low coupon didn’t compensate for price increases.

The statement incorrectly conflates “inflation protection” with “returns exceeding inflation.”

Correct Answer: (b) [Statements 1 and 2 only]

ANSWER Q7: (b)

Explanation:

Classification of Economic Sectors:

• Primary Sector: Extraction of natural resources (agriculture, mining, fishing)

• Secondary Sector: Transformation/processing of raw materials into finished goods (manufacturing)

• Tertiary Sector: Provision of services (trade, transport, finance, healthcare)

Analysis of Each Pair:

Pair 1 – Processing agricultural raw materials into oils | Secondary Sector – CORRECT ✓
Converting raw seeds (cotton, soybean) into finished edible oil through crushing and refining involves value addition and transformation—the definition of secondary sector. Oil mills are classified as secondary sector units.

Pair 2 – Installing and maintaining telecom tower infrastructure | Tertiary Sector – INCORRECT ✗
This pair contains ambiguity:

• Installation of infrastructure (constructing towers, laying cables) is typically a secondary sector activity (capital asset creation, similar to construction)

• Operation and maintenance (providing connectivity services) is a tertiary sector activity (service delivery)

The statement’s phrasing “installing and maintenance” conflates both. The statement’s intent is unclear, but strict classification places installation as secondary, not tertiary. This pair is incorrectly matched.

Pair 3 – Fishing in marine fisheries | Primary Sector – CORRECT ✓
Fishing is the extraction of a natural resource (fish) directly from the environment without processing or transformation—the classic primary sector activity. Both marine and inland fishing are primary sector.

Pair 4 – Wholesale trading of manufactured goods | Secondary Sector – INCORRECT ✗
Wholesale trading is a tertiary sector (services) activity. It involves distribution and trading of finished goods, not manufacturing or value addition. Wholesale traders, retailers, and distributors are classified as service providers in the tertiary sector. Trading is distinct from the production (primary/secondary) sectors.

Result:

Correctly matched pairs: 1 and 3 = 2 pairs

Correct Answer: (b) [Only two]

ANSWER Q8: (b)

Explanation:

Statement I is CORRECT:
The Goods and Services Tax (implemented July 1, 2017) unified multiple indirect taxes:

• Central taxes: Central Excise, Service Tax, Additional Excise

• State taxes: State VAT, Sales Tax, Octroi

• Objective: Eliminate cascading tax effect (tax on tax at multiple stages)

Cascading effect under the old regime:

1. Manufacturer pays ₹100 excise on ₹1,000 goods → cost = ₹1,100

2. Wholesaler adds VAT on ₹1,100 (say 5%) = ₹55 → cost = ₹1,155

3. Retailer adds sales tax → multiple layers of taxation

GST solution – Input Tax Credit (ITC):

• Business A pays 5% GST on ₹1,000 = ₹50 tax input

• Business B purchases from A at ₹1,050 and pays 5% GST = ₹52.50

• Business B credits ₹50 paid by A, pays only ₹2.50 net GST

• End user pays cumulative ₹52.50 (only once), not compounded

Result: WPI deflation of 8-12% observed post-GST as cascading was eliminated. Statement I is accurate.

Statement II is INCORRECT:
This statement is false and contradicts GST’s design. Input Tax Credit (ITC) still exists for intra-state transactions:

• A manufacturer in Maharashtra paying GST on raw materials can claim ITC on intra-state purchases

• GST’s core feature is seamless ITC across states (inter-state GST through Integrated GST/IGST)

Where ITC is restricted (not eliminated):

• Luxury goods (passenger cars, private aircraft)

• Personal consumption (food, clothing bought for personal use)

• Services without proper GSTR-1 filing (invoicing requirement)

• Partially eligible supplies (real estate, finance)

The statement’s claim of “complete elimination” is factually incorrect.

Statement III is CORRECT:
The GST Compensation Cess is explicitly documented:

• Act: Constitution (122nd Amendment) Act, 2017 & GST (Compensation to States) Act, 2017

• Purpose: Compensate states for revenue loss during transition from 14.5% average VAT rates to single GST rate

• Structure: Guaranteed 14% annual revenue growth (base year 2015-16) for 5 years. Shortfalls compensated from Cess collected on luxury/sin goods (cars, alcohol, etc.)

• Rationale: States like Kerala, Tamil Nadu, which exported goods, lost VAT on exports but gained only IGST (central tax). Cess bridge this gap.

This was critical for fiscal federalism during transition.

Correct Answer: (b) [Statements 1 and 3 only]

ANSWER Q9: (b)

Explanation:

Definition:

• Capital Expenditure (CapEx): Spending that creates or acquires assets with benefits extending over multiple years

• Revenue Expenditure (RevExp): Current/day-to-day operational spending with benefits in the immediate year

Analysis of Each Item:

Item 1 – Construction of highways and bridges – CAPITAL EXPENDITURE ✓
Infrastructure projects create long-term assets generating benefits (reduced transport costs, economic growth) over 20-50 years. Recorded as capital expenditure in government accounts.

Item 2 – Salary payments to government employees – REVENUE EXPENDITURE ✗
Salaries are operational expenses. Though essential, they provide no asset. Classified as revenue expenditure (non-interest revenue expenditure, specifically).

Item 3 – Equipment/machinery for government offices – CAPITAL EXPENDITURE ✓
Acquisition of capital assets (computers, furniture, vehicles) with useful life of 3-10+ years. Creates a balance sheet asset. Capital expenditure.

Item 4 – Interest payments on government loans – REVENUE EXPENDITURE ✗
Interest is a transfer payment (borrowing cost), not asset-creating. Classified as revenue expenditure (interest revenue expenditure specifically).

Item 5 – Investment in setting up public sector enterprises – CAPITAL EXPENDITURE ✓
Equity investment in PSUs (NTPC, BSNL, Air India) creates assets and ownership stakes generating future returns. Recorded as capital expenditure / investment.

Correct items: 1, 3, 5

Correct Answer: (b) [1, 3 and 5 only]

ANSWER Q10: (b)

Explanation:

The Money Multiplier (m) is defined as: m = 1 / (CRR + currency-to-deposits ratio)

Or simplified: m = 1 / reserve ratio

Statement I is CORRECT:

The money multiplier increases when:

1. Banking habit improves: If people hold more deposits in banks rather than physical cash, the “currency-to-deposits ratio” decreases → denominator shrinks → multiplier increases

   • Example: If 10% of deposits are withdrawn as cash and 90% stay in banks (high banking habit), the multiplier is larger than if 50% are withdrawn.

   • India’s increasing digital payments (UPI, RTGS) have improved banking habits, raising the multiplier.

2. Reserve ratio decreases: A lower CRR mandated by RBI → banks keep fewer reserves → more funds available for lending → larger multiplier

   • Formula: If CRR decreases from 4% to 2%, m increases from 1/0.04 = 25 to 1/0.02 = 50

Both factors increase the multiplier.

Statement I is CORRECT.

Statement II is INCORRECT:

This statement contradicts monetary policy logic and is factually backwards:

• A LOWER CRR mandated by RBI means banks are required to maintain LESS in reserves (e.g., reduce reserves from 4% to 2%)

• With lower reserve requirements, banks have MORE funds available for lending (higher lending capacity)

• The statement claims “lower CRR → keep more reserves → restrict lending,” which is the opposite of reality

Correct logic:

• Lower CRR → Lower reserve requirement → More funds free for lending → Higher lending capacity

• Higher CRR → Higher reserve requirement → Fewer funds for lending → Lower lending capacity

Statement II is INCORRECT (factually and logically flawed).

Statement III is CORRECT:

The Money Multiplier is the direct link between the monetary base and total money supply:

Mathematical relationship:
M2 (Total Money Supply) = Monetary Base (MB) × Money Multiplier (m)

Or: m = M2 / MB

Inverse relationship with reserve ratios:
Since m = 1 / reserve ratio:

• Higher reserve ratios (CRR increases) → Smaller multiplier → Less money creation from a given base

• Lower reserve ratios (CRR decreases) → Larger multiplier → More money creation from a given base

Real-world example:

• MB = ₹100 crores, m = 10 (CRR = 10%) → M2 = ₹1,000 crores

• If CRR increases to 20%, m decreases to 5 → M2 = ₹500 crores (for same MB)

This inverse relationship is fundamental to monetary transmission.

Statement III is CORRECT.

Daily Static Quiz