UPSC Static Quiz – Economy : 5 June 2025

Solution: d)

• Statement-I is incorrect. While a CBDC might offer a regulated alternative, it is unlikely to completely eliminate all risks or the existence of private cryptocurrencies. Private cryptocurrencies often appeal to users for reasons beyond just being a medium of exchange, such as speculative investment, perceived anonymity (though often pseudo-anonymous), or ideological opposition to centralized financial systems. A CBDC will not automatically remove these motivations or the technologies underpinning private cryptocurrencies.
• Statement-II is correct. CBDCs are digital forms of a country’s fiat currency, issued and backed by the central bank. This provides them with legal tender status, stability, and regulatory oversight that private cryptocurrencies lack. This can make CBDCs a more attractive option for legitimate transactions and may reduce the appeal of volatile private cryptocurrencies for mainstream use, though not eliminate them entirely or their associated risks (like speculative trading or illicit use).

Solution: d)

• Statement-I is incorrect. The FRBM Act does not mandate specific expenditure levels for social sector schemes. Its primary focus is on fiscal consolidation by setting targets for deficits (fiscal and revenue) and debt levels of the government. While government expenditure patterns are influenced by fiscal targets, the Act itself doesn’t prescribe sectoral allocations.

Statement-II is correct. A core objective of the FRBM Act is to instill fiscal discipline, ensure that current generations do not unduly burden future generations with debt (inter-generational equity), and promote macroeconomic stability by controlling government deficits and debt.

Solution: b)

• The ‘Twin Deficit’ problem in an economy refers to the simultaneous occurrence of a Fiscal Deficit and a Current Account Deficit (CAD).
• A fiscal deficit arises when government expenditure exceeds its revenue, indicating government borrowing.
• A current account deficit signifies that a country’s total imports of goods, services, and transfers are greater than its total exports of goods, services, and transfers.
• These two deficits are often interlinked; high fiscal deficits can lead to higher aggregate demand, potentially spilling over into higher imports and thus a wider CAD, or it could lead to higher domestic interest rates attracting capital inflows that appreciate the currency, making exports less competitive and imports cheaper.

Solution: a)

When the RBI sells government securities through Open Market Operations (OMOs), commercial banks and other financial institutions purchase these securities. To do so, they pay the RBI, which leads to a reduction in the cash reserves held by these banks. This withdrawal of money from the banking system results in a decrease in overall liquidity.

With less money available for lending, the cost of borrowing (interest rates) tends to rise as banks compete for scarce funds or pass on the higher cost. This is a contractionary monetary policy tool used by the RBI to curb inflationary pressures or manage excess liquidity in the economy. Conversely, buying securities injects liquidity and tends to lower interest rates.

Solution: b)

• Statement 1 is correct: The Governor of the Reserve Bank of India (RBI) is the ex-officio Chairperson of the Monetary Policy Committee (MPC). The MPC is a six-member committee.
• Statement 2 is incorrect: The MPC is required by the RBI Act to meet at least four times in a financial year, not six. While it can meet more frequently if needed, the statutory minimum is four.
• Statement 3 is correct: Decisions of the MPC are made by majority vote of the members present and voting. In the event of an equality of votes, the Chairperson (the RBI Governor) has a second or casting vote.