UPSC Prelims Practice Questions — Protracted Iran conflict narrows Bank of Japan’s rate-hike options

Q1. With reference to the littoral states and users of the Strait of Hormuz, consider the following statements. Which of the above is/are correctly identified?

1. Iran controls the waters to the north of the strait's shipping lanes.
2. Bahrain controls the waters to the south of the strait's shipping lanes.
3. Qatar routes its LNG exports through the strait.
4. Kuwait exports most of its oil through the strait.

• A. 1, 3 and 4
• B. 1 and 2
• C. 2, 3 and 4
• D. 1, 2 and 4

Q2. Which one of the following countries controls the waters lying to the south of the shipping lanes of the Strait of Hormuz?

• A. Iran
• B. Oman
• C. United Arab Emirates
• D. Saudi Arabia

Q3. With reference to the negative interest rate policy (NIRP) adopted by the Bank of Japan in January 2016, which one of the following best describes its mechanism?

• A. The Bank of Japan applied a rate of -0.1% to a portion of the reserves that commercial banks held with it.
• B. The Bank of Japan fixed the yield on newly issued 10-year government bonds at -0.1%.
• C. Commercial banks were required to charge -0.1% on all household savings deposits.
• D. The Bank of Japan lent directly to the government at -0.1%.

Q4. Consider the following statements about the sequence of the Bank of Japan's unconventional monetary policy tools. Which of the statements given above is/are correct?

1. The Bank of Japan first lowered its policy rate to the effective lower bound (zero interest rate policy) in 1999, before introducing quantitative easing in 2001.
2. Under its quantitative easing programme begun in 2001, the Bank of Japan used purchases of Japanese government bonds as the main instrument.
3. The Bank of Japan adopted its negative interest rate policy in 2001, ahead of introducing quantitative easing.

• A. 1 and 2 only
• B. 2 and 3 only
• C. 1 and 3 only
• D. 1, 2 and 3

Q5. In the context of the Bank of Japan's 2026 rate increases, the 'neutral level' of around 1% toward which the Bank sought to raise its policy rate refers to which one of the following?

• A. The policy rate at which monetary policy neither stimulates nor restrains economic activity.
• B. The policy rate that guarantees zero inflation in the economy.
• C. The exchange rate at which the yen is neither overvalued nor undervalued.
• D. The overnight rate at which commercial banks lend to one another independently of the central bank.

Q6. By raising its benchmark rate to 1% in June 2026, the Bank of Japan reached its highest policy rate in approximately how many years?

• A. About 21 years
• B. About 26 years
• C. About 31 years
• D. About 41 years

Q7. In the IMF's World Economic Outlook of April 2026, the 'reference forecast' assumed which one of the following about the Iran conflict and energy prices?

• A. A short-lived conflict accompanied by a moderate 19% rise in energy prices in 2026.
• B. A prolonged conflict with a doubling of energy prices in 2026.
• C. An immediate and durable ceasefire with no change in energy prices.
• D. A short-lived conflict accompanied by a 40% fall in energy prices in 2026.

Q8. Consider the following statements about the projections in the IMF's World Economic Outlook of April 2026. Which of the statements given above is/are correct?

1. The IMF projected global growth to slow to 3.1% in 2026.
2. The IMF projected global growth to recover slightly to 3.2% in 2027.
3. The IMF's reference forecast projected headline inflation to fall to 4.4% in 2026.

• A. 1 and 2 only
• B. 1 and 3 only
• C. 2 and 3 only
• D. 1, 2 and 3

Q9. With reference to the mandates and policy instruments of major central banks, consider the following statements. Which of the above is/are correctly identified?

1. The US Federal Reserve operates under a statutory 'dual mandate' of maximum employment and price stability.
2. The European Central Bank operates under an explicit dual mandate identical to that of the US Federal Reserve.
3. The Reserve Bank of India's Monetary Policy Committee is a six-member body that sets the repo rate.
4. The repo rate is the rate at which the RBI provides liquidity under its Liquidity Adjustment Facility against government or approved securities.

• A. 1, 3 and 4
• B. 1, 2 and 3
• C. 2, 3 and 4
• D. 1 and 2 only

Q10. Which one of the following correctly describes the status of the Strait of Hormuz following the US–Iran ceasefire of early 2026?

• A. The United States imposed a naval blockade in the Strait of Hormuz in April 2026.
• B. The strait was permanently demilitarised under United Nations supervision.
• C. Iran alone kept the strait fully open to all shipping without any exception.
• D. The strait was placed entirely under Omani naval control after the ceasefire.

Q11. With reference to the transmission of oil price shocks to oil-importing economies, consider the following statements. Which of the above is/are correctly identified?

1. A rise in oil prices raises domestic import prices, generating inflationary pressure.
2. Oil price shocks transmit through the exchange-rate channel, affecting import prices and external competitiveness.
3. Higher oil prices can raise inflation expectations, prompting authorities to raise policy rates.
4. In the IMF's assessment, oil-importing emerging economies with pre-existing vulnerabilities are relatively insulated from energy price shocks.

• A. 1, 2 and 3
• B. 1, 2 and 4
• C. 2, 3 and 4
• D. 1 and 4 only

Q12. Consider the following statements about the depreciation of the Japanese yen in 2025–2026. Which of the statements given above is/are correct?

1. The yen continued to depreciate even though the Japan–US 10-year yield differential had narrowed by over 100 basis points.
2. According to the IMF, a large part of the yen's movements since mid-2025 could be fully explained by yield differentials and the oil price.
3. In 2026 the yen fell to its weakest level against the US dollar since 1986.

• A. 1 and 2 only
• B. 1 and 3 only
• C. 2 and 3 only
• D. 1, 2 and 3