UPSC Static Quiz – Economy : 30 March 2026

Solution: C

In behavioural economics, the concept of a “nudge” was popularised by Richard Thaler and Cass Sunstein in their book Nudge. A nudge refers to a small design change in the way choices are presented (known as choice architecture) that influences behaviour in a predictable way, without forbidding any options or significantly changing economic incentives.

For example, automatically enrolling employees into pension schemes (while allowing them to opt out) increases savings rates. Similarly, placing healthier food at eye level in cafeterias encourages better dietary choices. In both cases, individuals retain full freedom to choose otherwise.

The key features of a nudge are:

• No coercion
• No significant financial penalty
• No elimination of alternatives
• Preservation of individual freedom

Options (d) and (b) involve coercion or penalties, which are regulatory tools, not nudges. Option (a) involves financial incentives, which change economic payoffs rather than subtly altering the decision environment.

Solution: C

A perfectly competitive market is characterized by four main features: a large number of buyers and sellers, homogenous (identical) products, free entry and exit, and perfect information. Perfect information ensures that all participants have full knowledge of prices and quality, preventing any single firm from charging more than the market rate.

Solution: A

• Structural Unemployment (A) arises from a mismatch between the jobs available and the skills of the workers, often caused by changes in technology or economic structure.
• Frictional Unemployment (B) is temporary and occurs when workers are “between jobs” or searching for new ones.
• Cyclical Unemployment (C) is a result of the business cycle, where layoffs occur during economic downturns or recessions.
• Disguised Unemployment (D) is common in agriculture, where excess labour is employed such that removing some workers does not reduce total output (marginal productivity is zero).

Solution: B

• Statement 1 is correct. Quantitative Easing (QE) is a policy where the central bank buys assets (like G-Secs or corporate bonds) from the private sector to expand the monetary base and lower long-term interest rates, especially when the Zero Lower Bound (ZLB) is hit.
• Statement 3 is also correct. A Liquidity Trap is a state where the public’s demand for money becomes perfectly elastic. Because interest rates are so low, people expect them to rise in the future (causing bond prices to fall), and thus they hoard cash instead of investing, rendering monetary policy ineffective.
• Statement 2 is incorrect. Helicopter Money involves the central bank printing money and distributing it directly to the public or government, but without any obligation of repayment. This is the fundamental difference between QE and Helicopter Money: in QE, the central bank’s balance sheet expands with “assets” that can eventually be sold back; in Helicopter Money, it is a permanent expansion of the money supply.
• While QE aims to stimulate the economy through the “wealth effect” and lower yields, Helicopter Money aims to stimulate “aggregate demand” directly by putting cash in the hands of spenders. Both are considered “last resort” measures for deflationary environments.

Solution: B

• Statement 1 is incorrect: The whole purpose of EBLR is to move away from internal benchmarks. Banks are prohibited from using internal rates like their own deposit rates. They must use external benchmarks like the RBI Repo Rate or Treasury Bill yields published by FBIL.
• Statement 2 is correct: To ensure rapid transmission of monetary policy, the RBI mandates that the interest rate on an EBLR-linked loan must be reset at least once every three months based on the movement of the external benchmark. This ensures that if the RBI cuts the Repo Rate today, the borrower sees the benefit within a maximum of 90 days.
• Statement 3 is incorrect: The EBLR mandate currently applies only to new floating-rate loans for retail (housing, auto) and MSME It is not mandatory for fixed-rate loans or for large corporate loans, where banks can still use MCLR.