UPSC Static Quiz – Economy : 27 November 2025

Solution: B

Option (a) is incorrect since it refers to demand elasticity, not Jevons Paradox.

Option (b) is correct as the paradox highlights that when a resource is used more efficiently, total consumption often increases due to greater demand.

Option (c) is incorrect because the paradox does not directly relate resource depletion to economic growth.

Option (d) is incorrect because Jevons Paradox states that increased efficiency leads to higher, not lower, consumption.

• What is Jevons Paradox?
  • It states that when a resource becomes more efficientand cheaper to use, overall consumption increases instead of decreasing.
• Theory & Origin:
  • Proposed by William Stanley Jevonsin 1865, observing that improved coal efficiency led to higher coal consumption instead of savings.
• Factors Influencing Jevons Paradox:
  • Cost Reduction:Lower usage costs drive higher demand.
  • Increased Accessibility:Efficiency makes resources more widespread.
  • Economic Growth:Higher productivity spurs industrial expansion.
  • Elastic Demand:When demand is highly responsive to price changes, consumption rises sharply.

Solution: C

What is Beggar-Thy-Neighbour Policy?

Economic policies aimed at benefiting a country’s economy at the expense of others, often through protectionist measures like tariffs, quotas, or currency devaluation.

Statement 1 (Tariffs) is correct because imposing high import tariffs protects domestic industries but hurts exporting nations.

Statement 2 (Currency Devaluation) is correct since devaluing a country’s currency makes its exports cheaper but harms competitors.

Statement 3 (FDI Increase) is incorrect as attracting foreign direct investment benefits both the investor and the recipient country.

Statement 4 (Export Subsidies) is correct because subsidizing exports makes domestic goods artificially cheaper, disadvantaging foreign competitors.

Solution: A

Statement 1 is correct as the MPC was introduced through amendments to the RBI Act, 1934, under the Finance Act, 2016.

Statement 2 is correct since the MPC comprises six members—three from the RBI (including the Governor) and three external members nominated by the Government of India.

Statement 3 is incorrect as the MPC’s decisions are binding on the RBI, not just recommendatory.

• What is MPC?
  • The MPC is a statutory body established under the Reserve Bank of India Act, 1934, as amended by the Finance Act, 2016. It is responsible for setting the benchmark policy rate (repo rate) to control inflation within a specified target range.
• Members:
  • RBIGovernor (Chairperson)
  • RBI Deputy Governor in charge of monetary policy
  • One official nominated by the RBI Board
  • Three external members representing the Government of India
• Tenure:
  • External members serve a four-year term.
  • RBI Governor and Deputy Governor serve ex-officio.
• Meetings:
  • The MPC meets at least four times a year.
  • Additional meetings can be convened if necessary.
• Quorum for Decision:
  • A minimum of four members is required for a quorum.
  • The Governor (or Deputy Governor in their absence) must be present.
  • Decisions are made by majority vote; in case of a tie, the Governor has the casting vote.
• Function and Role:
  • Primary role: To determine the repo rate to maintain inflation within the target range (currently 4% +/- 2%).
  • Replaced the earlier Technical Advisory Committee.
  • Decisions are binding on the RBI.
  • The RBI’s Monetary Policy Department (MPD) assists the MPC in policy formulation.

Solution: D

Option (a) is incorrect because redistributive policies are associated more with Trickle-Up economics.

Option (b) is incorrect as government subsidies to lower-income groups align more with the Trickle-Up model.

Option (c) is incorrect because this describes the Trickle-Up approach, which focuses on empowering lower-income groups.

Option (d) is correct as the Trickle-Down theory suggests that benefits given to businesses and wealthy individuals eventually “trickle down” to the poor.

Trickle-Down Economics:

• Focuses on wealth accumulation at the top, assuming benefits will gradually reach lower income groups.
• Prioritizes corporate tax cuts, subsidies for big businesses, and deregulation.

E.g. India’s corporate tax cuts (2019) reduced revenue for social programs.

Solution: D

Statement-I is incorrect: A repo rate reduction usually increases inflation by boosting borrowing and spending.

Statement-II is correct: Lower repo rates reduce borrowing costs, leading to higher demand, which can increase inflation.

• What is Repo Rate?
  • The repo rate is the interest rate at which the RBI lends money to commercial banks for short-term needs. It is a key monetary policy tool used to control inflation, manage liquidity, and influence economic growth.
• How Does It Work?
  • When the RBIlowers the repo rate, borrowing costs for banks decrease, enabling them to offer loans at lower interest rates to consumers and businesses.
  • Conversely, an increase in the repo rate makes borrowing expensive, curbing excessive spending and controlling inflation.
• Impact of Repo Rate Reductionon the Economy:
  • Cheaper Loans:A lower repo rate reduces interest rates on loans, making home, vehicle, and personal loans more affordable.
  • Boost to Spending and Investment:Lower borrowing costs encourage individuals and businesses to spend and invest, stimulating economic activity.
  • Job Creation:Increased investment and spending can lead to higher employment opportunities.
  • Inflation Management:While a rate cut can spur growth, it may also risk higher inflation if not managed carefully.
  • Global Alignment:The rate cut aligns India with global trends, where many central banks have adopted accommodative monetary policies to support growth.