UPSC Prelims Practice Questions — The backdrop in which the U.S. Fed raised interest rate

Q1. Consider the following statements comparing the U.S. Federal Reserve's federal funds rate with the Reserve Bank of India's policy repo rate: Which of the statements given above is/are correct?

1. The federal funds rate is announced by the Federal Open Market Committee as a target range, whereas the Reserve Bank of India announces the policy repo rate as a single rate.
2. In the Reserve Bank of India's liquidity adjustment facility corridor, the standing deposit facility rate is placed 25 basis points below the policy repo rate and forms the floor, while the marginal standing facility rate forms the ceiling.
3. Both central banks conduct all of their overnight liquidity operations exclusively against the collateral of government securities.

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

Q2. Which one of the following correctly gives the number of voting members of the U.S. Federal Open Market Committee and the number of members of India's Monetary Policy Committee, respectively?

• A. Nineteen and six
• B. Seven and six
• C. Twelve and six
• D. Twelve and four

Q3. Consider the following statements about the U.S. Federal Reserve's interest rate decision of 16 September 2026 as compared with the position that prevailed immediately before it: Which of the statements given above is/are correct?

1. The decision moved the target range for the federal funds rate from 3.5–3.75% to 3.75–4%.
2. It was the first increase in the federal funds rate in three years, the preceding phase having been one in which the rate was cut on a few occasions since 2023.
3. The decision was announced by Fed Chair Jerome Powell, who had been handpicked for the post by President Trump.

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

Q4. The increase in the federal funds target range announced on 16 September 2026 was the first increase in that rate after a gap of how many years?

• A. Two years
• B. Four years
• C. Three years
• D. Five years

Q5. The U.S. Federal Reserve's longer-run inflation objective of 2 per cent, which U.S. inflation remained well above through 2026, is defined in terms of the annual change in which one of the following?

• A. The consumer price index for all urban consumers, compiled monthly
• B. The personal consumption expenditures price index, compiled monthly
• C. The producer price index for final demand, compiled monthly
• D. The implicit price deflator for gross domestic product, compiled quarterly

Q6. The Fed's 2 per cent inflation objective is a numerical goal adopted by the FOMC itself; by contrast, India's inflation target is fixed under which one of the following arrangements?

• A. By the Monetary Policy Committee, in consultation with the Central Government, in terms of the Consumer Price Index, once in every five years
• B. By the Reserve Bank of India, in consultation with the Central Government, in terms of the Wholesale Price Index, once in every three years
• C. By the Central Government, on the recommendation of the Finance Commission, in terms of the Consumer Price Index, in every financial year
• D. By the Central Government, in consultation with the Reserve Bank of India, in terms of the Consumer Price Index, once in every five years

Q7. With reference to the behaviour of long-term government bond yields in the period leading up to the U.S. rate action of September 2026, consider the following as factors placing upward pressure on long-term yields: Which of the above is/are correctly identified?

1. Heavy government borrowing, which increases the supply of long-dated bonds that markets must absorb.
2. Quantitative tightening by central banks, which adds to the stock of bonds that markets must absorb.
3. A decline in structural demand for long-term bonds, combined with higher risk perceptions among investors.
4. A continuing decline in long-term yields since 2025, the observed steepening of the yield curve being driven entirely by movements at the short end.

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

Q8. The Global Debt Report 2026, which attributed the steepening of advanced-economy yield curves to greater supply of long-dated bonds and weaker structural demand for them, is brought out by which one of the following?

• A. The International Monetary Fund, as a chapter of its Fiscal Monitor
• B. The Organisation for Economic Co-operation and Development
• C. The World Bank, as part of its International Debt Statistics series
• D. The Bank for International Settlements, in its Quarterly Review

Q9. Which one of the following correctly describes the appointment and tenure of the members of the Federal Reserve's Board of Governors, the body that gave institutional cover to Chair Kevin Warsh's rate decision despite presidential opposition?

• A. Twelve members, elected by the boards of the twelve regional Federal Reserve Banks, each serving a 14-year term
• B. Seven members, nominated by the President of the United States and confirmed by the Senate, each serving a 14-year term
• C. Seven members, nominated by the President of the United States and confirmed by the Senate, each serving a four-year term running concurrently with the President's
• D. Seven members, appointed by the Secretary of the Treasury from among the regional Reserve Bank presidents, serving staggered 14-year terms

Q10. Consider the following as channels through which a tightening of U.S. monetary policy is transmitted to emerging market and developing economies, as assessed by multilateral institutions: Which of the above is/are correctly identified?

1. An unwinding of carry trades and portfolio capital outflows that amplify pressure on emerging market currencies.
2. Higher foreign lending rates and government bond yields, along with wider emerging market bond index spreads.
3. A contraction in private capital inflows to emerging market and developing economies.
4. A necessarily uniform and immediate tightening by all emerging market central banks, since no emerging market possesses the credibility to tighten gradually.

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

Q11. Approximately what share of global crude oil trade moved through the Strait of Hormuz in calendar year 2025, the chokepoint whose disruption drove the price pressures behind the 2026 tightening?

• A. About 19 per cent
• B. About 25 per cent
• C. About 34 per cent
• D. About 45 per cent

Q12. Consider the following descriptions of monetary policy instruments: Which of the above is/are NOT correctly described?

1. Standing Deposit Facility — a facility under which the Reserve Bank of India accepts uncollateralised overnight deposits from liquidity adjustment facility participants.
2. Statutory Liquidity Ratio — a requirement under which a bank in India maintains assets in unencumbered government securities, cash and gold as a specified percentage of its demand and time liabilities.
3. Marginal Standing Facility — the rate that forms the lower bound, or floor, of the Reserve Bank of India's liquidity adjustment facility corridor.
4. Quantitative tightening — a reduction in the central bank's bond holdings that adds to the stock of bonds the market must absorb, putting upward pressure on longer-term yields.

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