UPSC Static Quiz – Economy : 26 June 2025

Solution: D

Statement 1 is incorrect: A Current Account Deficit (CAD) means that the country’s payments on the current account exceed its receipts. While a CAD puts pressure on foreign exchange reserves, it does not invariably lead to a decrease if it is financed by adequate capital inflows (like FDI or FPI) in the capital account. If capital inflows are greater than the CAD, forex reserves can actually increase.

Statement 2 is incorrect: Foreign Portfolio Investment (FPI), which includes investments in shares and bonds, is recorded in the capital account of the BoP, not the current account. The current account primarily includes trade in goods and services, income, and current transfers.

Statement 3 is incorrect: An overall surplus in the BoP (leading to an increase in foreign exchange reserves) occurs if the sum of the current account balance and the capital account balance (excluding reserve changes) is positive. A surplus in the capital account does not always ensure an overall BoP surplus if there is a larger deficit in the current account. For instance, if CAD is $100 billion and capital account surplus is $80 billion, there will be an overall BoP deficit.

Solution: C

• Statement 1 is correct: Fiscal deficit is indeed the difference between the government’s total expenditure and its total receipts, excluding borrowings. It indicates the total borrowing requirement of the government.
• Statement 2 is correct: Revenue deficit arises when the government’s revenue expenditure is greater than its revenue receipts. This signifies that the government’s own current earnings are insufficient to meet its current operational expenses.
• Statement 3 is correct: Primary deficit is defined as the fiscal deficit of the current year minus interest payments on previous borrowings. It shows the borrowing requirement of the government, exclusive of interest payments, indicating the amount of borrowing needed for expenses other than servicing past debt.

Statement 4 is incorrect: Disinvestment proceeds, which arise from the sale of government equity in public sector undertakings, are treated as non-debt capital receipts, not revenue receipts. Capital receipts either create a liability or reduce assets.

Solution: C

• Statement 1 is correct: The RBI acts as a banker to commercial banks by holding a part of their reserves, providing clearing and remittance facilities, and offering lender-of-last-resort facilities.
• Statement 2 is correct: The RBI manages the public debt of both the Central and State Governments. This involves issuing government securities (bonds, Treasury bills) on their behalf and managing their repayment.
• Statement 3 is correct: The RBI is responsible for regulating and supervising Non-Banking Financial Companies (NBFCs) to ensure financial stability and protect depositors’ interests, although the extent and nature of regulation can vary based on the NBFC type.

Statement 4 is incorrect: The formulation and implementation of the nation’s fiscal policy is the responsibility of the Government of India (Ministry of Finance), not the RBI. Fiscal policy deals with government taxation, expenditure, and borrowing. The RBI is responsible for monetary policy.

Solution: D

• Statement 1 is correct: Frictional unemployment is temporary unemployment that occurs when individuals are transitioning between jobs, searching for new ones, or entering the labor force for the first time. It is a natural part of a dynamic labor market.
• Statement 2 is correct: Structural unemployment results from a fundamental mismatch between the skills that workers possess and the skills that employers require, often due to technological changes, shifts in industry structure, or geographical immobility.
• Statement 3 is correct: Cyclical unemployment is caused by fluctuations in the overall level of economic activity, specifically during economic downturns or recessions when aggregate demand falls, leading to layoffs.

Statement 4 is correct: Disguised unemployment (or hidden unemployment) exists when more people are employed in an activity than are actually required to perform the work efficiently. This often means that the marginal productivity of some workers is very low or even zero. It is commonly observed in agricultural sectors of developing economies.

Solution: D

India’s Foreign Exchange Reserves, managed by the Reserve Bank of India (RBI), comprise four main components:

1. Foreign Currency Assets (FCAs): These are assets held by the RBI in foreign currencies, such as US dollars, euros, pounds sterling, and Japanese yen. FCAs form the largest component of India’s forex reserves and include foreign government securities and deposits with foreign central banks and commercial banks.
2. Gold: The RBI holds a significant amount of gold as part of its reserves. The value of these gold holdings is revalued periodically based on international market prices.
3. Special Drawing Rights (SDRs): SDRs are international reserve assets created by the International Monetary Fund (IMF) and allocated to its member countries. They represent a potential claim on the freely usable currencies of IMF members.
4. Reserve Tranche Position (RTP) with the IMF: This represents the portion of a member country’s quota of currency with the IMF that can be drawn upon unconditionally, if needed. It is essentially a reserve asset that can be accessed without conditions. Therefore, all four components listed are correct.