UPSC Prelims Practice Questions — The cost of bringing down inflation in India, U.S. and U.K.

Q1. The 'sacrifice ratio' invoked to assess the output cost of India's 2022–23 disinflation measures the cost of contractionary policy conducted by which one of the following institutions?

  • A. The Reserve Bank of India, acting solely through its Monetary Policy Committee
  • B. The Ministry of Finance, through the Department of Economic Affairs
  • C. NITI Aayog, through its macroeconomic advisory wing
  • D. The Securities and Exchange Board of India

Q2. With reference to the sacrifice ratio as a measure of the cost of disinflation, consider the following statements: 1. It expresses the cumulative loss of output as a proportion of the reduction in inflation actually achieved. 2. A higher sacrifice ratio always implies that disinflation was achieved at a lower output cost. 3. Empirical estimates for the Indian economy typically place the sacrifice ratio above unity, indicating a non-negligible output cost. Which of the statements given above is/are correct?

  1. It expresses the cumulative loss of output as a proportion of the reduction in inflation actually achieved.
  2. A higher sacrifice ratio always implies that disinflation was achieved at a lower output cost.
  3. Empirical estimates for the Indian economy typically place the sacrifice ratio above unity, indicating a non-negligible output cost.
  • A. 1 and 2 only
  • B. 1 and 3 only
  • C. 2 and 3 only
  • D. 1, 2 and 3

Q3. By how many percentage points did the US CPI inflation peak (June 2022) exceed India's CPI inflation peak (April 2022) during the 2022 surge?

  • A. 1.3 percentage points
  • B. 1.1 percentage points
  • C. 1.5 percentage points
  • D. 2.3 percentage points

Q4. In which month and year did India's retail (CPI) inflation first breach the upper bound of the RBI's 2–6% tolerance band during the 2022 surge, touching 7.8%?

  • A. April 2022
  • B. June 2022
  • C. October 2022
  • D. February 2023

Q5. The Monetary Policy Committee that carried out the cumulative 250-basis-point repo-rate hike of 2022–23 derives its mandate to determine the policy rate from which one of the following provisions?

  • A. Section 45ZB of the Reserve Bank of India Act, 1934
  • B. Section 24 of the Banking Regulation Act, 1949
  • C. Section 3 of the Fiscal Responsibility and Budget Management Act, 2003
  • D. Article 112 of the Constitution of India

Q6. In the context of the RBI's 2022–23 tightening cycle, the term 'repo rate' is best defined as:

  • A. The rate at which the RBI lends short-term funds to commercial banks against government securities
  • B. The rate at which the RBI absorbs surplus liquidity by borrowing from commercial banks
  • C. The proportion of deposits that banks must maintain with the RBI in cash
  • D. The medium-term CPI inflation figure that the RBI is mandated to achieve

Q7. With reference to the 2022–23 disinflation experience of the US Federal Reserve and the Bank of England, consider the following statements: 1. The Federal Reserve delivered a 0.75-percentage-point rate hike in June 2022, its largest single increase since 1994. 2. The Bank of England's August 2022 hike of 50 basis points was its biggest single increase in about 27 years. 3. The Bank of England projected that the UK would enter a recession lasting roughly five quarters. 4. The US economy entered a recession as a direct result of the Fed's 2022–23 tightening. Which of the statements given above is/are NOT correct?

  1. The Federal Reserve delivered a 0.75-percentage-point rate hike in June 2022, its largest single increase since 1994.
  2. The Bank of England's August 2022 hike of 50 basis points was its biggest single increase in about 27 years.
  3. The Bank of England projected that the UK would enter a recession lasting roughly five quarters.
  4. The US economy entered a recession as a direct result of the Fed's 2022–23 tightening.
  • A. 1 and 2 only
  • B. 3 only
  • C. 4 only
  • D. 2 and 4

Q8. The US Federal Reserve's June 2022 rate hike of 0.75 percentage point was widely noted as its largest single increase since which year?

  • A. 1994
  • B. 1981
  • C. 2008
  • D. 2000

Q9. Under India's flexible inflation targeting framework, the figure '4% (±2%)' is best understood as:

  • A. The CPI inflation target with a tolerance band of 2–6%, set by the Government in consultation with the RBI
  • B. The ceiling on the repo rate that the Monetary Policy Committee may impose
  • C. The real GDP growth target that the RBI is mandated to support
  • D. The Wholesale Price Index target maintained by the Ministry of Commerce

Q10. Who among the following appoints the four external members of the Bank of England's Monetary Policy Committee?

  • A. The Chancellor of the Exchequer
  • B. The Governor of the Bank of England
  • C. The Permanent Secretary of HM Treasury
  • D. The Prime Minister of the United Kingdom

Q11. With reference to the 2026 crude-oil shock linked to the West Asia conflict and its impact on India, consider the following statements: 1. Brent crude surged past $120 per barrel in 2026 following the closure of the Strait of Hormuz. 2. SBI Research estimates that every $10 per barrel rise in crude adds roughly 35–40 basis points to India's inflation. 3. India's retail inflation rose to 3.93% in May 2026, up from 3.48% in April 2026. 4. A $10 per barrel rise in crude is estimated to narrow India's current account deficit by about 36 basis points. Which of the statements given above is/are NOT correct?

  1. Brent crude surged past $120 per barrel in 2026 following the closure of the Strait of Hormuz.
  2. SBI Research estimates that every $10 per barrel rise in crude adds roughly 35–40 basis points to India's inflation.
  3. India's retail inflation rose to 3.93% in May 2026, up from 3.48% in April 2026.
  4. A $10 per barrel rise in crude is estimated to narrow India's current account deficit by about 36 basis points.
  • A. 1 and 2 only
  • B. 4 only
  • C. 3 and 4
  • D. 2 only

Q12. In analyses of the rupee's vulnerability to the 2026 oil shock, the term 'current account deficit' is best defined as:

  • A. The excess of a country's imports of goods, services and transfers over its corresponding exports
  • B. The gap between the government's total expenditure and its total revenue in a year
  • C. The shortfall of the RBI's foreign-exchange reserves relative to its import cover norm
  • D. The difference between the repo rate and the reverse repo rate