UPSC CSE Prelims 2022 Previous Year Question Answer with Explanation Part-1

Question 1. “Rapid Financing Instrument” and “Rapid Credit Facility” are related to the  provisions of lending by which one of the following? 

(a) Asian Development Bank 

(b) International Monetary Fund 

(c) United Nations Environment Programme Finance Initiative 

(d) World Bank 

Correct Option: (b) 

Explanation: 

Rapid Financing Instrument (RFI) 

The Rapid Financing Instrument (RFI) provides rapid fi nancial assistance, which is available to all  member countries facing an urgent balance of payments need. The RFI was created as part of a broader  reform to make the IMF’s fi nancial support more fl exible to address the diverse needs of member  countries. The RFI replaced the IMF’s previous emergency assistance policy and can be used in a wide  range of circumstances. 

Rapid Credit Facility (RCF) 

The Rapid Credit Facility (RCF) provides rapid concessional fi nancial assistance to low-income countries  (LICs) facing an urgent balance of payments (BoP) need with no ex post conditionality where a full fl edged economic program is neither necessary nor feasible. The RCF was created under the Poverty  Reduction and Growth Trust (PRGT) as part of a broader reform to make the Fund’s fi nancial support  more fl exible and better tailored to the diverse needs of LICs, including in times of crisis. There are  three windows under RCF: 

(i) a “regular window” for urgent BoP needs caused by wide range of sources  including domestic instability, emergencies and fragility; 

(ii) an “exogenous shock window” for urgent  BoP needs caused by a sudden, exogenous shock; and 

(iii) a “large natural disaster window” for urgent  BoP needs arising from natural disasters where damage is assessed to be equivalent to or exceed 20  percent of the member’s GDP. Access under the RCF is subject to annual and cumulative limits, with  higher access limits applying for the large natural disaster window. For higher income countries that  are non-PRGT eligible, a similar Rapid Financing Instrument (RFI) is available. 

 

Question 2. With reference to the Indian economy, consider the following statements: 

1. An increase in Nominal Effective Exchange Rate (NEER) indicates the appreciation of rupee. 

2. An increase in the Real Effective Exchange Rate (REER) indicates an improvement in trade  competitiveness. 

3. An increasing trend in domestic infl ation relative to infl ation in other countries is likely to cause an  increasing divergence between NEER and REER. 

Which of the above statements are correct? 

(a) 1 and 2 only 

(b) 2 and 3 only

UPSC Prelims 2022 www.iasscore.in 1 

(c) 1 and 3 only 

(d) 1, 2 and 3 

Correct Option: (c) 

Explanation: 

Statement 1 is correct: NEER is a measure of value of a currency against a weighted average of  several foreign currencies. An increase in NEER indicates appreciation of rupee. 

Statement 2 is incorrect: An increase in REER implies that exports become more expensive and imports become cheaper; therefore, an increase indicates a loss in trade competitiveness. 

Statement 3 is correct: NEER is the weighted geometric average of the bilateral nominal exchange  rates of the home currency in terms of foreign currencies. The REER is the weighted average of NEER  adjusted by the ratio of domestic price to foreign prices. Increasing trend in domestic infl ation relative  to infl ation in other countries creates a divergence in NEER and REER. 

 

Question 3. With reference to the Indian economy, consider the following statements: 

1. If the infl ation is too high, Reserve Bank of India (RBI) is likely to buy government securities. 

2. If the rupee is rapidly depreciating, RBI is likely to sell dollars in the market. 

3. If interest rates in the USA or European Union were to fall, that is likely to induce RBI to buy  dollars. 

Which of the statements given above are correct? 

(a) 1 and 2 only 

(b) 2 and 3 only 

(c) 1 and 3 only 

(d) 1, 2 and 3 

Correct Option: (b) 

Explanation: 

Statement 1 is incorrect: If the infl ation is high RBI tries to reduce the liquidity from the market, by  selling Government securities to the public via open market operation. 

Statement 2 is correct: Rupee depreciation means, fall in value of rupee with respect to dollar. In free  fl oating exchange rate regime, depreciation takes place when the demand for dollar is more than the  supply.thus, RBI is likely to sell dollars in the economy to increase the supply of the dollar. 

Statement 3 is correct: If the interest rate in US and EU falls, there will be an infl ow of dollars in the  Indian market, leading to appreciation of the rupee. To reduce the supply of dollar in the economy, RBI  will like to buy the dollars from the market. 

Question 4. With reference to the “G20 Common Framework”, consider the following  statements: 

1. It is an initiative endorsed by the G20 together with the Paris Club. 

2. It is an initiative to support Low Income Countries with unsustainable debt. 

Which of the statements given above is/are correct? 

(a) 1 only 

(b) 2 only 

(c) Both 1 and 2 

(d) Neither 1 nor 2 

Correct Option: (c) 

Explanation: 

Statement 1 is correct: Initiative endorsed by G20 together with Paris Club. 

Statement 2 is correct: It is an initiative to support low income countries with unsustainable debt.

Question 5. With reference to the India economy, what are the advantages of “Infl ation-Indexed  Bonds (IIBs)”? 

1. Government can reduce the coupon rates on its borrowing by way of IIBs. 

2. IIGs provide protection to the investors from uncertainty regarding infl ation. 

3. The interests received as well as capital gains on IIBs are not taxable. 

Which of the statements given above are correct? 

(a) 1 and 2 only 

(b) 2 and 3 only 

(c) 1 and 3 only 

(d) 1, 2 and 3 

Correct Option: (a) 

Explanation: 

Statement 1 is correct: Since these bonds provide no risk of capital loss, it can offer a lesser rate of  interest (coupon) as interest is directly proportional to risk. 

Statement 2 is correct: Infl ation indexed bonds provide protection to investors from uncertainty  regarding infl ation. 

Statement 3 is incorrect: Interest or infl ation compensation both are taxable. There is no special  treatment for these bonds. 

Question 6. With reference to foreign-owned e-commerce fi rms operating in India, which of the  following statements is/are correct? 

1. They can sell their own goods in addition to offering their platforms as market-places. 

2. The degree to which they can own big sellers on their platforms is limited. 

Select the correct answer using the code given below: 

(a) 1 only 

(b) 2 only 

(c) Both 1 and 2 

(d) Neither 1 nor 2 

Correct Option: (c) 

Explanation: 

Statement 1 is correct: E- commerce fi rms can sell their own products in addition to offering their  platforms as market place. 

Statement 2 is correct: Big sellers have the limit of 25% for sale on e-commerce platform. 

Question 7. Which of the following activities constitute real sector in the economy? 

1. Farmers harvesting their crops 

2. Textile mills converting raw cotton into fabrics 

3. A commercial bank lending money to a trading company 

4. A corporate body issuing Rupee Denominated Bonds overseas 

Select the correct answer using the code given below: 

(a) 1 and 2 only 

(b) 2, 3 and 4 only 

(c) 1, 3 and 4 only 

(d) 1, 2, 3 and 4

Correct Option: (a) 

Explanation: 

The real sector of the economy deals with the production side, while the nominal economy deals with  the fi nancial side. A fi nancial activity majorly support real (production) activity, but does not contribute  itself too much except the factor income it generates. 

Question 8. Which one of the following situations best refl ects “Indirect Transfers” often talked  about in media recently with reference to India? 

(a) An Indian company investing in a foreign enterprise and paying taxes to the foreign country on the  profi ts arising out of its investment. 

(b) A foreign company investing in India and paying taxes to the country of its base on the profi ts arising  out of its investment. 

(c) An Indian company purchases tangible assets in a foreign country and sells such assets after their  value increases and transfers the proceeds to India. 

(d) A foreign company transfers shares and such shares derive their substantial value from assets  located in India. 

Correct Option: (d) 

Explanation: 

Indirect transfers refer to situations where when foreign entities own shares or assets in India, the  shares of such foreign entities are transferred instead of a direct transfer of the underlying assets in  India. 

Question 9. With reference to the expenditure made by an organization or a company, which of  the following statements is/are correct? 

1. Acquiring new technology is capital expenditure. 

2. Debt fi nancing is considered capital expenditure, while equity fi nancing is considered revenue  expenditure. 

Select the correct answer using the code given below: 

(a) 1 only 

(b) 2 only 

(c) Both 1 and 2 

(d) Neither 1 nor 2 

Correct Option: (a) 

Explanation: 

Statement 1 is correct: Acquiring new technology is considered as capital expenditure as it will  generate profi t in the future and helps in creation of new assets. 

Statement 2 is incorrect: Debt Financing and equity fi nancing are considered under capital  expenditure. 

Question 10. With reference to the Indian economy, consider the following statements: 

1. A share of the household fi nancial savings goes towards government borrowings. 

2. Dated securities issued at market-related rates in auctions form a large component of internal  debt. 

Which of the above statements is/are correct? 

(a) 1 only 

(b) 2 only 

(c) Both 1 and 2 

(d) Neither 1 nor 2

Correct Option: (c) 

Explanation: 

Statement 1 is correct: A share of household fi nancial savings goes to the government borrowings, as  part of public accounts of India. It mainly consists of provident funds. 

Statement 2 is correct: Dated securities means regular government bonds, whereas T-bills are  considered separately. Dated securities issued at market related rates comprise a large share of internal  debt.