Daily Static Quiz (Economy) January 9, 2026
Daily Static Quiz (Economy) January 9, 2026
Q1. Consider the following statements regarding the Central Government’s budget deficit:
An increase in fiscal deficit during a period of economic recession can be a deliberate policy tool to stimulate aggregate demand.
Reducing fiscal deficit during inflationary periods helps to curb the inflationary pressure primarily through decreased demand for money.
The monetisation of fiscal deficit occurs when the Reserve Bank of India purchases government securities directly from the open market on behalf of the government.
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
Q2. With reference to the Reserve Bank of India’s Liquidity Adjustment Facility (LAF), consider the following:
Under the reverse repo operation, the RBI lends money to banks at the reverse repo rate.
When the RBI reduces the repo rate, it intends to inject more liquidity into the banking system.
The Standing Deposit Facility has now replaced the fixed-rate reverse repo as a collateral-free borrowing facility.
Which of the above statements is/are correct?
(a) 1 and 2 only
(b) 2 and 3 only
(c) 1 only
(d) 3 only
Q3. Consider the following statements about India’s merchandise trade deficit:
Statement I: If India’s merchandise exports remain stagnant while global crude oil prices increase significantly, India’s current account deficit would likely widen.
Statement II: The merchandise trade deficit widens because high global commodity prices increase the import bill, which is fundamentally a supply-side constraint that monetary policy alone cannot address.
(a) Both Statement I and II are correct, and Statement II is the correct explanation for Statement I.
(b) Both statements are correct, but Statement II is not the correct explanation for Statement I.
(c) Statement I is correct, but Statement II is incorrect.
(d) Statement II is correct, but Statement I is incorrect.
Q4. Consider the following statements regarding the Production-Linked Incentive (PLI) scheme:
The PLI scheme provides financial incentives to both domestic and foreign companies based on a percentage of their incremental sales from products manufactured in India.
To be eligible under PLI, companies must meet minimum investment thresholds and incremental sales targets above a defined base year.
Unlike traditional subsidies, the PLI scheme is time-bound (typically 5 years) and performance-driven, making it fundamentally different from permanent subsidy structures.
Which of the statements given above is/are correct?
(a) 1 and 2 only
(b) 2 and 3 only
(c) 1, 2, and 3
(d) 1 and 3 only
Q5. With reference to macroeconomic instruments, consider the following:
When there is high inflation in the economy, which of the following combined policy actions by the government and central bank would be most effective in controlling inflation without severely restricting economic growth?
(a) Decrease Cash Reserve Ratio and increase government spending on public projects
(b) Increase repo rate and reduce non-essential government expenditure
(c) Increase Open Market Operations (selling securities) and increase statutory liquidity requirements
(d) Decrease Statutory Liquidity Ratio and reduce corporate tax rates
Q6. Consider the following statements about foreign exchange management:
An increase in Foreign Direct Investment (FDI) inflows generally leads to an appreciation of domestic currency.
Exchange rate depreciation makes a country’s exports more competitive in international markets but increases the cost of essential imports like crude oil and electronics.
A persistent current account deficit, if not matched by sufficient capital account surplus, can lead to a depletion of foreign exchange reserves.
Which of the statements given above is/are correct?
(a) 1 and 2 only
(b) 2 and 3 only
(c) 1, 2, and 3
(d) 1 and 3 only
Q7. Consider the following about the relationship between monetary policy and inflation:
Statement I: The Reserve Bank of India can always control inflation through monetary policy instruments, regardless of whether inflation is driven by demand-side or supply-side factors.
Statement II: Cost-push inflation caused by rising global commodity prices cannot be effectively addressed by RBI’s contractionary monetary policy, as the root cause lies outside the control of monetary policy.
(a) Both statements are correct, and Statement II is the correct explanation for Statement I.
(b) Both statements are correct, but Statement II is not the correct explanation for Statement I.
(c) Statement I is incorrect, but Statement II is correct.
(d) Both statements are incorrect.
Q8. With reference to the Balance of Payments components, consider the following:
The balance of payments deficit of a country could arise from:
A merchandise trade deficit where import of goods exceeds exports
A reduction in remittances received from Indians working abroad
An increase in outflows for investment returns (like dividends) to foreign investors
A surplus in the capital account not being sufficient to offset the current account deficit
Which of the above can contribute to a balance of payments deficit?
(a) 1, 2, and 3 only
(b) 2, 3, and 4 only
(c) 1, 2, 3, and 4
(d) 1 and 4 only
Q9. Consider the following statements about employment and demographic dividend:
India’s demographic dividend refers to a situation where the working-age population exceeds the dependent population, providing an economic advantage.
To effectively harness the demographic dividend, the government must invest in skill development and education to enhance the productive capacity of the workforce.
After 2050, India will experience a demographic crisis as the proportion of working-age population to dependent population reverses irreversibly.
Which of the statements given above is/are correct?
(a) 1 and 2 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2, and 3
Q10. Consider the following statements regarding the Statutory Liquidity Ratio (SLR):
An increase in SLR reduces the lending capacity of banks and thereby reduces the money supply in the economy.
SLR is a more rigid instrument than the Cash Reserve Ratio because banks must maintain SLR in government securities, which can be sold only at market prices.
During periods of excess liquidity, the RBI increases SLR to absorb money from the banking system.
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 & EXPLANATIONS
Q1 – Answer: (a) 1 and 2 only
Explanation:
Statement 1: CORRECT – During an economic recession, fiscal deficit is often used as a countercyclical tool. The government deliberately increases spending (or reduces taxes), creating a fiscal deficit to stimulate aggregate demand, boost investment, and create employment. This is a well-established Keynesian economic principle.
Statement 2: CORRECT – During inflationary periods, reducing the fiscal deficit decreases government spending and/or increases taxation, which reduces the quantity of money available in the economy. Lower demand-side pressure helps curb inflation through reduced aggregate demand, thereby reducing demand for money.
Statement 3: INCORRECT – This statement misdefines “monetisation of fiscal deficit.” Monetisation occurs when the RBI purchases government securities directly from the government (as a primary issuance) to provide financing. This is different from purchasing government securities from the secondary market (open market operations). When the RBI purchases directly from the government, it’s creating new money specifically to finance the deficit—this is monetisation. The statement incorrectly suggests open market purchases constitute monetisation, which is inaccurate.
Q2 – Answer: (b) 2 and 3 only
Explanation:
Statement 1: INCORRECT – Under reverse repo, the RBI borrows from banks (not the other way around). Banks sell government securities to the RBI at the reverse repo rate and agree to buy them back later at a slightly higher rate. This allows banks to park excess liquidity with the RBI and earn interest. The RBI thus absorbs liquidity through reverse repo operations.
Statement 2: CORRECT – When the RBI reduces the repo rate, it makes borrowing from the RBI cheaper for banks. Banks are more incentivized to borrow, which increases liquidity in the banking system. This is an expansionary monetary policy move designed to inject more money into the economy.
Statement 3: CORRECT – The RBI has indeed introduced the Standing Deposit Facility (SDF) as a collateral-free overnight lending facility at a fixed rate, intended to eventually replace the fixed-rate reverse repo structure. This is part of the RBI’s modernization of its liquidity management framework. The SDF offers a floor rate for overnight borrowing and complements the existing LAF structure.
Q3 – Answer: (a) Both Statement I and II are correct, and Statement II is the correct explanation for Statement I.
Explanation:
Statement I: CORRECT – If merchandise exports are stagnant while global crude oil prices rise, India’s import bill increases significantly (as crude oil is a major import component). With exports unchanged but imports rising, the merchandise trade deficit widens. Since the trade deficit is a major component of the current account, the overall current account deficit widens.
Statement II: CORRECT AND EXPLAINS STATEMENT I – The statement correctly identifies that higher global commodity prices increase India’s import bill, which is indeed a supply-side constraint. Monetary policy cannot directly address supply-side issues (like global crude prices); it only affects demand-side factors through liquidity and interest rates. This is the precise reason why the current account deficit widens: it’s due to an external supply shock that monetary policy cannot counteract.
The causal relationship is: Higher global commodity prices (supply-side shock) → Increased import bill → Wider current account deficit. Monetary policy, being a demand-management tool, cannot prevent this mechanical widening of the CAD when exports are stagnant and import costs rise due to global factors.
Q4 – Answer: (c) 1, 2, and 3
Explanation:
Statement 1: CORRECT – The PLI scheme explicitly incentivizes both foreign multinational companies and domestic companies. The incentives are performance-based, calculated as a percentage of incremental sales (typically 4-6% of sales above a base year). This performance-linked approach is central to the scheme’s design.
Statement 2: CORRECT – All PLI beneficiaries must meet two critical criteria:
Minimum investment thresholds: Companies must commit significant capital to expand or establish manufacturing facilities in India.
Incremental sales targets: They must achieve defined sales growth beyond a base year. The performance metrics are audited annually, and incentives are released only upon verification of compliance.
Statement 3: CORRECT – The PLI is fundamentally structured as a time-bound, performance-driven initiative (typically 5 years from a base year in each sector), not a permanent subsidy. Each company’s PLI period is defined upfront. This differentiates it from traditional subsidies, which are:
Often permanent in nature
Not performance-linked
Not subject to strict investment or output benchmarks
The PLI’s end-date design incentivizes companies to achieve scale and competitiveness before incentives cease, forcing them to become globally competitive.
Q5 – Answer: (b) Increase repo rate and reduce non-essential government expenditure
Explanation:
To control inflation while balancing growth, the ideal combination involves both monetary and fiscal measures:
Why (b) is correct:
Increasing repo rate: Makes borrowing expensive, reducing credit expansion and dampening demand-pull inflation without directly restricting productive economic activity.
Reducing non-essential government expenditure: Decreases aggregate demand for non-critical sectors, curbing inflationary pressures while preserving government spending on productive sectors like infrastructure and healthcare (which support long-term growth).
Why other options fail:
(a) Decrease CRR + Increase spending: This is contradictory. Decreasing CRR injects liquidity (expansionary), while the question asks to control inflation. Both measures together would exacerbate inflation.
(c) Increase OMO (selling) + Increase SLR: While selling securities reduces liquidity, increasing SLR is overly contractionary and could choke credit availability excessively, severely restricting growth.
(d) Decrease SLR + Reduce taxes: Both are expansionary measures that would worsen inflation rather than control it.
The correct approach balances monetary tightening (higher repo rate reduces new credit) with selective fiscal discipline (reducing non-essential spending while maintaining productive investment), thereby controlling inflation without stalling growth.
Q6 – Answer: (c) 1, 2, and 3
Explanation:
Statement 1: CORRECT – When foreign investors bring in more FDI, they exchange foreign currency for Indian rupees to invest. This increased demand for rupees relative to foreign currency leads to rupee appreciation. This follows basic supply-demand principles in the forex market.
Statement 2: CORRECT – Exchange rate depreciation operates as a dual-edged sword:
Positive: Depreciation makes Indian exports cheaper and more competitive globally, potentially boosting export volumes.
Negative: However, depreciation increases the rupee cost of imports, especially essential imports like crude oil (priced in dollars) and electronic components. For India, which is heavily dependent on crude oil imports, depreciation significantly increases the import bill despite higher export competitiveness.
Statement 3: CORRECT – This is a fundamental balance of payments accounting relationship:
Current Account Deficit = Capital Account Surplus + Change in Foreign Exchange Reserves
If the current account is in deficit (more outflows than inflows), and the capital account surplus (FDI, loans, etc.) is insufficient to offset it, the gap must be financed by drawing down forex reserves. Persistent deficits with inadequate capital inflows lead to depletion of foreign exchange reserves, weakening the country’s external position.
Q7 – Answer: (c) Statement I is incorrect, but Statement II is correct.
Explanation:
Statement I: INCORRECT – This statement overstates the power of monetary policy. Monetary policy is effective against demand-pull inflation but has limited effectiveness against supply-side (cost-push) inflation. Examples:
If inflation is caused by a crude oil price shock (supply-side), contractionary monetary policy may not reduce inflation; instead, it may just reduce growth (stagflation).
If inflation is caused by supply chain disruptions, monetary tightening alone cannot restore supply.
Therefore, the blanket claim that RBI “can always control inflation” is incorrect.
Statement II: CORRECT – This statement correctly identifies the limitation of monetary policy against cost-push inflation. When inflation is driven by factors like:
Rising global commodity prices (oil, metals)
Supply chain disruptions
Poor harvests (food inflation)
…these are structural/supply-side issues beyond the RBI’s direct control. Monetary policy cannot increase crude oil supplies or fix supply chains. Attempting to control cost-push inflation purely through monetary contraction often leads to stagflation (low growth + high inflation), which is undesirable.
Therefore, Statement I is incorrect, but Statement II accurately explains why monetary policy has limitations.
Q8 – Answer: (c) 1, 2, 3, and 4
Explanation:
A Balance of Payments deficit occurs when total payments abroad exceed total receipts from abroad. It is the overall deficit in the combined current and capital accounts. Let’s examine each factor:
Component 1: Merchandise trade deficit (CORRECT) – When imports of goods exceed exports, it creates a trade deficit. This is a major component of the current account. A trade deficit directly contributes to a BoP deficit if not offset by other current account items or capital inflows.
Component 2: Reduction in remittances (CORRECT) – Remittances are income received from Indians working abroad and are part of the current account (under “Net Income from Abroad”). Lower remittances mean fewer rupees flowing in, worsening the current account and contributing to a BoP deficit.
Component 3: Increase in outflows for investment returns (CORRECT) – When foreign investors repatriate dividends and profits from their investments in India, this constitutes a payment outflow on the current account. Higher repatriation means more rupees flowing out, worsening the current account.
Component 4: Capital account surplus insufficient to offset current account deficit (CORRECT) – This is the accounting identity of BoP. If the current account is in deficit and the capital account surplus (inflows from FDI, foreign loans, portfolio investment) is less than the current account deficit, the combined position results in a BoP deficit. The gap is financed by forex reserve depletion.
BoP = Current Account + Capital Account. If both are negative or if one is very negative, BoP deficit emerges.
Q9 – Answer: (a) 1 and 2 only
Explanation:
Statement 1: CORRECT – The demographic dividend is precisely defined as the period when a country has a high proportion of working-age population (15-65 years) relative to dependents (children and elderly). This creates economic opportunities because:
More people are economically productive
Fewer dependents to support
Higher savings and investment potential
Larger workforce for economic growth
India currently enjoys a demographic dividend with its youth bulge.
Statement 2: CORRECT – Merely having a demographic dividend doesn’t guarantee economic benefits. To realize and leverage the dividend, the government must:
Invest in skill development to make the workforce employable
Expand education to enhance human capital
Create job opportunities in productive sectors
Invest in healthcare to maintain workforce productivity
Without these investments, the demographic dividend can paradoxically become a burden (demographic liability) if the young population remains unskilled and unemployed.
Statement 3: INCORRECT – This statement makes an overly deterministic claim. While demographic forecasts suggest India’s demographic dividend will narrow after 2045-2050, the statement uses the word “irreversibly,” which is problematic:
Demographic trends can be influenced by policy (e.g., immigration, increased female workforce participation, raising retirement age).
Population dynamics are not completely rigid; fertility rates can change.
More importantly, even if the demographic dividend ends, it doesn’t automatically mean a “demographic crisis.” Countries like Japan and Germany manage aging populations effectively through productivity improvements and policy reforms.
The phrasing “demographic crisis” is alarmist and not necessarily accurate.
Q10 – Answer: (d) 1, 2, and 3
Explanation:
Statement 1: CORRECT – The Statutory Liquidity Ratio (SLR) is the percentage of deposits that banks must maintain as liquid assets (primarily government securities). When SLR increases:
Banks must park a larger portion of deposits in government securities (earning lower returns than loans).
The lending capacity available for loans to the public is reduced.
This reduces credit creation and money supply in the economy.
It’s a contractionary monetary policy tool.
For example, if SLR is increased from 18% to 20%, banks have 2% less deposits available to lend as credit.
Statement 2: CORRECT – SLR is indeed more rigid and restrictive than CRR because:
CRR requirement: Funds are held with the RBI and earn no interest; they’re essentially sterile.
SLR requirement: Funds are invested in government securities, which can theoretically be sold, but:
Government securities can only be sold at market prices, which fluctuate with interest rates.
If interest rates have risen since purchase, securities lose value (inverse relationship between bond prices and yields).
Banks cannot always realize the full book value.
This market price risk makes SLR less flexible than CRR.
SLR is therefore a more rigid instrument with liquidity constraints, making it a stronger brake on credit expansion.
Statement 3: CORRECT – This is standard RBI practice. During periods of excess liquidity (too much money in the system, inflationary pressure):
The RBI increases SLR requirements.
Banks must park more deposits in government securities.
This reduces the money available for lending.
Credit contracts, and liquidity is absorbed from the system.
This contractionary effect helps cool down inflation.
Conversely, during liquidity shortages, the RBI decreases SLR to release money into the system.
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