UPSC Prelims Practice Questions — Adequate response

Q1. With reference to India's statutory flexible inflation targeting framework, consider the following statements: Which of the statements given above is/are correct?

  1. The framework is 'flexible' because it has a tolerance band and requires growth to be kept in mind, while price stability remains the primary objective.
  2. Because the target is defined on the CPI, movements in food and fuel prices are left out when deciding whether the target has been breached.
  3. Inflation above the upper tolerance level in any single quarter is enough to trigger the RBI's statutory obligation to report to the Central Government.
  • A. 1 only
  • B. 1 and 2 only
  • C. 1, 2 and 3
  • D. 2 and 3 only

Q2. With reference to how the policy repo rate is decided under the Monetary Policy Committee (MPC) of the RBI, consider the following statements: Which of the statements given above is/are correct?

  1. The Governor's vote counts for more than any other member's vote only when the votes are equally divided.
  2. When all members are present, the Governor cannot set the policy rate alone if a majority of members votes the other way.
  3. A rate decision taken by the MPC takes effect only after the RBI's Central Board approves it.
  • A. 2 and 3 only
  • B. 1 only
  • C. 1 and 2 only
  • D. 1, 2 and 3

Q3. Consider the following statements: Which of the following is correct in respect of the above statements?

  1. An increase in the policy repo rate is a relatively weak instrument for containing a rise in food prices caused by a deficient monsoon.
  2. A higher policy rate restrains inflation mainly by curbing aggregate demand, and it does nothing to increase the supply of the commodity that has become scarce.
  • 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

Q4. Consider the following statements: Which of the following is correct in respect of the above statements?

  1. India's inflation target is defined in terms of headline CPI inflation, which includes food and fuel prices, rather than core inflation.
  2. Monetary policy can disregard the initial, first-round price impact of an adverse supply shock, as that impact lies outside its remit.
  • 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

Q5. An RBI study finds the following. After a transitory supply shock, inflation returns to equilibrium without any monetary policy action. Repeated supply shocks, however, trigger second-round effects that spread through the cost-push, expectations, exchange rate and demand channels. Which of the following inferences can be drawn from the above?

  1. The case for a monetary policy response to a supply shock becomes stronger the more persistent the shock is.
  2. Because supply shocks originate outside the monetary sphere, a policy rate response to them is never warranted.
  3. A price rise that begins on the supply side can, over time, pick up demand-driven and expectations-driven components.
  • A. 1, 2 and 3
  • B. 2 and 3 only
  • C. 1 only
  • D. 1 and 3 only

Q6. Global crude oil prices rise sharply and stay high, and other things remain unchanged. Consider the following likely consequences for India: Which of the statements given above is/are correct?

  1. The current account deficit tends to widen.
  2. The rupee comes under depreciation pressure, which further raises the domestic cost of imports.
  3. If oil marketing companies are made to hold retail fuel prices unchanged, the price pressure is deferred and shifted to their balance sheets or the exchequer, not eliminated.
  4. Since crude oil enters the wholesale price index and not the consumer price index, retail inflation targeted by the RBI remains unaffected.
  • A. 1, 2, 3 and 4
  • B. 1, 2 and 3 only
  • C. 1 and 2 only
  • D. 3 and 4 only

Q7. Which one of the following situations is best described as demand-pull inflation?

  • A. Wage contracts indexed to past inflation push up the cost of services
  • B. Easy credit lifts household spending faster than the economy can raise output
  • C. A rise in global crude prices raises freight costs across the economy
  • D. A deficient monsoon cuts the harvest of pulses, raising their market prices

Q8. Consider the following measures: Which of the measures given above act on a price rise by easing supply or lowering costs at the source, rather than by restraining aggregate demand?

  1. A cut in excise duty on petrol and diesel
  2. Sale of foodgrains from government buffer stocks in the open market
  3. An increase in the Cash Reserve Ratio
  4. A restriction on exports of a commodity facing a domestic shortage
  • A. 1 and 2 only
  • B. 1, 2, 3 and 4
  • C. 1, 2 and 4 only
  • D. 2, 3 and 4 only