Economics upsc pyq 2021
15.
In India, the central bank's function as the ‘lender of last resort’ usually refers to which of the following?
1.Lending to trade and industry bodies when they fail to borrow from other sources
2.Providing liquidity to the banks having a temporary crisis
3.Lending to governments to finance budgetary deficits
Select the correct answer using the code given below.
(a) 1 and 2
(b) 2 only
(c) 2 and 3
(d) 3 only
Correct Answer:
(b) 2 only
Explanation:
Statement 1: Incorrect
The lender of last resort (LOLR) function is meant for banks and financial institutions, not for trade and industry bodies.
Firms and industries borrow from markets, not directly from the central bank under LOLR.
Statement 2: Correct
As lender of last resort, the Reserve Bank of India (RBI) provides emergency liquidity to banks facing temporary liquidity shortages.
The objective is to prevent bank failure and maintain financial stability.
Statement 3: Incorrect
Lending to government to finance budget deficits is related to deficit financing/monetisation, not the LOLR function.
LOLR is a financial stability function, not a fiscal support role.
Memory Trick:
“LOLR = RBI rescues banks, not businesses or budgets.”
14.
With reference to ‘Water Credit’, consider the following statements:
1.It puts microfinance tools to work in the water and sanitation sector.
2.It is a global initiative launched under the aegis of the World Health Organization and the World Bank.
3.It aims to enable the poor people to meet their water need without depending on subsidies.
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 Answer:
(c) 1 and 3 only
Explanation:
Statement 1: Correct
WaterCredit uses microfinance (small loans) to help households finance water and sanitation facilities like toilets and water connections.
Hence, it applies microfinance tools in the water and sanitation sector.
Statement 2: Incorrect
WaterCredit is not launched by the World Health Organization (WHO) or the World Bank.
It is an initiative of Water.org, a non-profit organisation.
Therefore, this statement is factually incorrect.
Statement 3: Correct
WaterCredit aims to help poor households access water and sanitation through affordable loans,reducing dependence on government subsidies or grants.
Memory Trick:
“WaterCredit = Microloans for water, by water.org”
13.
With reference to India, consider the following statements:
1.Retail investors through demat account can invest in ‘Treasury Bills’ and ‘Government of India Debt Bonds’ in primary market.
2.The ‘Negotiated Dealing System–Order Matching’ is a government securities trading platform of the Reserve Bank of India.
3.The ‘Central Depository Services Ltd’ is jointly promoted by the Reserve Bank of India and the Bombay Stock Exchange.
Which of the statements given above is/are correct?
(a) 1 only
(b) 1 and 2
(c) 3 only
(d) 2 and 3
Correct Answer:
(b) 1 and 2
Explanation:
Statement 1: Correct
Retail investors can invest in Treasury Bills (T-Bills) and Government of India dated securities in the primary market.
This is done through demat accounts, especially after the introduction of RBI Retail Direct Scheme.
Hence, statement 1 is correct.
Statement 2: Correct
Negotiated Dealing System–Order Matching (NDS-OM) is an electronic trading platform for government securities.
It is owned and operated by the Reserve Bank of India (RBI).
It facilitates trading in government securities among eligible participants.
“Eligible participants” are entities authorised by the Reserve Bank of India (RBI).
Hence, statement 2 is correct.
Statement 3: Incorrect
Central Depository Services Ltd (CDSL) is promoted by the Bombay Stock Exchange (BSE) along with banks and financial institutions.
The Reserve Bank of India is NOT a promoter of CDSL.
RBI promotes Clearing Corporation of India Ltd (CCIL), not CDSL.
Hence, statement 3 is incorrect.
Memory Trick:
“Retail buys G-Secs through demat account, RBI runs NDS-OM .”
12.
With reference to Indian economy, demand-pull inflation can be caused/increased by which of the following?
1.Expansionary policies
2.Fiscal stimulus
3.Inflation-indexing wages
4.Higher purchasing power
5.Rising interest rates
Select the correct answer using the code given below.
(a) 1, 2 and 4 only
(b) 3, 4 and 5 only
(c) 1, 2, 3 and 5 only
(d) 1, 2, 3, 4 and 5
Correct Answer:
(a) 1, 2 and 4 only
Explanation:
Statement 1: Expansionary policies — Correct
Expansionary monetary or fiscal policies increase money supply or government spending.
This raises aggregate demand in the economy.
If supply does not increase proportionately, prices rise → demand-pull inflation.
Example: RBI cuts repo rate → loans become cheaper → people spend more → demand exceeds supply.
Statement 2: Fiscal stimulus — Correct
Fiscal stimulus means higher government spending or tax cuts.
This directly increases household and corporate demand.
Excess demand over supply leads to demand-pull inflation.
Example: Government increases infrastructure spending and subsidies → incomes rise → consumption rises → prices rise.
Statement 3: Inflation-indexing wages — Incorrect
Inflation-indexed wages rise after inflation, not before it.
This is a response to inflation, not a cause of demand-pull inflation.
It may contribute to cost-push inflation later, but not demand-pull initially.
Example: DA (Dearness Allowance) revision follows past inflation.
Statement 4: Higher purchasing power — Correct
Higher purchasing power means people can buy more goods and services.
This increases aggregate demand.
If supply is unchanged, prices rise → demand-pull inflation.
Example: Increase in salaries due to economic growth → higher consumption of goods → price rise.
Statement 5: Rising interest rates — Incorrect
Rising interest rates reduce borrowing and spending.
They cool down demand, not increase it.
Hence, they are anti-inflationary, not inflationary.
Example: RBI raises repo rate → EMIs rise → people reduce spending → demand falls.
Memory Trick:
“Demand-pull = More spending power, not higher interest or wage adjustment.”
11.
The money multiplier in an economy increases with which one of the following?
(a) Increase in the Cash Reserve Ratio in the banks
(b) Increase in the Statutory Liquidity Ratio in the banks
(c) Increase in the banking habit of the people
(d) Increase in the population of the country
Correct Answer:
(c) Increase in the banking habit of the people
Explanation:
Money multiplier shows how much the money supply expands due to credit creation by banks.
It depends on how much money is deposited in banks versus held as cash.
Option (a): Incorrect
Higher Cash Reserve Ratio (CRR) means banks must keep more money with the central bank.
Less money available for lending → money multiplier falls.
Option (b): Incorrect
Higher Statutory Liquidity Ratio (SLR) means banks must hold more funds in safe assets.
Lending capacity reduces → money multiplier falls.
Option (c): Correct
When people develop banking habits (deposit more, hold less cash):
More deposits enter the banking system
Banks can lend more
Credit creation increases
Hence, money multiplier rises.
Option (d): Incorrect
Increase in population by itself does not ensure more deposits or lending.
Without banking habits, money multiplier does not rise.
Memory Trick:
“More deposits, less cash → Bigger money multiplier.”
Expected Questions
1. What is money multiplier?
Money multiplier = number of times the money supply expands due to the banking system.
It explains how ₹1 of base money can create ₹many of total money.
2. Simple step-by-step example
Assumptions
Cash Reserve Ratio (CRR) = 10%
Initial deposit = ₹1,000
Step 1: First deposit
Person deposits ₹1,000 in Bank A.
Bank keeps ₹100 (10%) as reserve.
Bank lends ₹900.
Money supply now:
Deposits = ₹1,000
Step 2: Second deposit
₹900 is spent and deposited in Bank B.
Bank B keeps ₹90 as reserve.
Bank B lends ₹810.
Money supply now:
Deposits = ₹1,000 + ₹900 = ₹1,900
Step 3: Third round
₹810 deposited in Bank C.
Bank keeps ₹81 as reserve.
Lends ₹729.
Money supply now:
Deposits = ₹1,000 + ₹900 + ₹810 = ₹2,710
Step 4: Process continues
Each round creates new deposits.
Finally, total deposits reach ₹10,000.
3. Formula (UPSC-ready)
Multiplier = 1÷ CRR
CRR = 10% → Multiplier = 10
Initial ₹1,000 → Total money = ₹10,000
4. Why money multiplier increases
More deposits in banks
Lower CRR and SLR
Higher banking habit (less cash holding)
5. Key limitation (important for exams)
Assumes:
Banks lend all excess reserves
People redeposit all money
In reality, multiplier is lower.
Memory Trick:
“One deposit → many loans → multiplied money.”
10.
Which one of the following is likely to be the most inflationary in its effects?
(a) Repayment of public debt
(b) Borrowing from the public to finance a budget deficit
(c) Borrowing from the banks to finance a budget deficit
(d) Creation of new money to finance a budget deficit
Correct Answer:
(d) Creation of new money to finance a budget deficit
Explanation:
Why government not print more money and end poverty? - Because printing more money can increases inflation.
Creation of new money to finance a budget deficit means the government spends by printing new money (monetisation of deficit).
This directly increases money supply in the economy without a corresponding increase in goods and services.
Excess money chasing the same quantity of goods leads to demand-pull inflation.
Hence, it is the most inflationary option.
Example:
Government asks the central bank to print ₹10,000 crore.
This money is spent on salaries, subsidies, or welfare schemes.
No increase in production immediately.
👉 Effect: Highly inflationary
👉 Reason: New money directly enters circulation, increasing demand without increasing supply.
Why others are less inflationary (only to justify correctness):
(a) Repayment of public debt:
Withdraws money from circulation → deflationary, not inflationary.
Famous doubt:
In statement 1 money supply is increasing, how can you say net money supply reduces or remain same
Correct Answer:
Because repayment of public debt does NOT create new money; it only returns existing money, and is usually financed by taxes or fresh borrowing, which neutralises or reduces net money supply.
Explanation:
Let us break this very carefully, step by step.
First, the confusion point
You are right that money is paid to the public when the government repays debt.
But the key UPSC concept is NET money supply, not gross flow.
Case 1: Repayment financed by TAXES (most common)
Example:
Government collects ₹1,000 crore as tax from people.
It uses the same ₹1,000 crore to repay bondholders.
Flow:
Tax collection → ₹1,000 crore taken out of people’s hands
Debt repayment → ₹1,000 crore given back to bondholders
Net effect:
Money taken out = Money given back
Net money supply = SAME
👉 No new money is created.
Case 2: Repayment financed by BORROWING from public
Example:
Government issues new bonds worth ₹1,000 crore.
Uses this to repay old bonds.
Flow:
Public gives ₹1,000 crore to government
Government gives ₹1,000 crore to old bondholders
Net effect:
Again, money only changes hands
Net money supply = SAME
Case 3: Repayment leads to SAVINGS (often ignored)
Example:
Bondholder receives ₹1,000 crore repayment.
Instead of spending, he deposits it in a bank or reinvests in bonds.
Effect:
Immediate circulation of money reduces
Inflationary pressure falls
👉 This is why repayment is often called deflationary in impact.
Why repayment is NOT inflationary (core UPSC logic)
✔ No fresh money is created
✔ Government demand does not increase
✔ Often reduces fiscal pressure
✔ May reduce spending in economy
So even though someone receives money,
👉 the economy as a whole does not get extra money.
Contrast with money creation (to lock the concept)
Debt repayment: uses EXISTING money
Money creation: creates NEW money
Only new money creation increases net money supply.
Final UPSC-ready line
“Repayment of public debt redistributes existing money and is therefore non-inflationary or even deflationary in net effect.”
Memory Trick:
“Repayment returns money, printing creates money.”
(b) Borrowing from the public:
Transfers existing money from public to government → no net increase in money supply.
(c) Borrowing from banks:
Can be inflationary, but less than direct money creation, as it is constrained by banking regulations and monetary policy.
Example:
Government borrows ₹10,000 crore from commercial banks.
Banks create credit to lend this amount.
Money supply increases indirectly.
👉 Effect: Moderately inflationary
👉 Reason: Credit creation increases money supply, but it is regulated by RBI.
How credit creation increases
money supply ?
Correct Answer:
Credit creation increases money supply because banks create new deposit money when they give loans, even though no new physical cash is printed.
Explanation:
This is a very important UPSC concept. Let us explain it slowly and step-by-step.
1. What is credit creation?
Credit creation means banks create deposits when they give loans.
Deposits are counted as money supply (specifically, demand deposits).
👉 Money supply = Cash + Bank deposits
2. Step-by-step simple example
Step 1: Initial deposit
Person A deposits ₹1,000 in Bank X.
Bank keeps ₹100 as reserve (10% CRR).
Bank can lend ₹900.
Money supply now:
Cash: ₹0
Deposit: ₹1,000
👉 Money supply = ₹1,000
Step 2: Loan is given
Bank lends ₹900 to Person B.
Person B spends ₹900.
Receiver deposits ₹900 in Bank Y.
Money supply now:
Original deposit: ₹1,000
New deposit: ₹900
👉 Money supply = ₹1,900
⚠️ No new cash printed, yet money increased.
Step 3: Second round of lending
Bank Y keeps 10% = ₹90
Lends ₹810
₹810 is deposited again in another bank.
Money supply now:
₹1,000 + ₹900 + ₹810 = ₹2,710
Step 4: Process continues
Each round creates new deposits.
Total deposits expand multiple times.
3. Final result (Money Multiplier effect)
Formula:
Money multiplier = 1 / CRR
If CRR = 10%
Money multiplier = 10
Initial cash ₹1,000 → Total deposits up to ₹10,000
👉 This is credit creation.
4. Why money supply increases (core logic)
Loan given by bank = New purchasing power
Borrower spends it
That spending becomes someone else’s deposit
Deposits are counted as money
👉 Therefore, credit = money creation
5. Why this matters for inflation
More money → more demand
If supply of goods does not increase → inflation
That is why:
Borrowing from banks is inflationary
Printing money is even more inflationary
6. UPSC-ready distinction
Cash printing: Physical money increases
Credit creation: Deposit money increases
Both increase money supply
Memory Trick:
“Banks don’t print notes, they print deposits.”
Memory Trick:
“Printing money directly → Maximum inflation.”
9.
Which one of the following effects of creation of black money in India has been the main cause of worry to the Government of India?
(a) Diversion of resources to the purchase of real estate and investment in luxury housing
(b) Investment in unproductive activities and purchase of precious stones, jewellery, gold, etc.
(c) Large donations to political parties and growth of regionalism
(d) Loss of revenue to the State Exchequer due to tax evasion
Correct Answer:
(d) Loss of revenue to the State Exchequer due to tax evasion
Explanation:
Black money is income or wealth that is earned legally or illegally but is not reported to the government for taxation.
Explanation:
Black money refers to money that:
Is hidden from tax authorities, or
Is generated through illegal activities, and
No tax is paid on it.
Key features:
Not recorded in official accounts
Used outside the formal economy
Leads to tax evasion and revenue loss to the government
Simple examples
Example 1: Legal activity, illegal concealment
A shopkeeper earns ₹10 lakh in a year.
He reports only ₹6 lakh to the tax department.
Remaining ₹4 lakh is kept in cash and not declared.
👉 That ₹4 lakh is black money.
Example 2: Illegal activity
Money earned through bribery, smuggling, corruption, or illegal mining.
Since the source itself is illegal, the entire amount is black money.
Important clarification (UPSC-relevant)
Black money can arise from:
White income turned black (by hiding it), or
Illegal income from the start.
Why it worries the government ?
Reduces tax revenue
Distorts the economy
Promotes corruption and inequality
Memory Trick:
“Black money = Earned or stolen, but hidden from tax.”
The primary concern of the Government regarding black money is tax evasion, which leads to:
Direct loss of public revenue,
Reduced capacity of the State to spend on development, welfare, and public services,
Increased fiscal deficit and borrowing needs.
Other effects listed are serious consequences, but they are secondary.
From a policy and governance perspective, loss of revenue to the exchequer is the main and most immediate worry for the Government of India.
Memory Trick:
“Black money hurts most where it hits revenue — the State’s tax base.”
8.
Consider the following statements:
The effect of devaluation of a currency is that it necessarily
1.improves the competitiveness of the domestic exports in the foreign markets.
2.increases the foreign value of domestic currency.
3.improves the trade balance.
Which of the above statements is/are correct?
(a) 1 only
(b) 1 and 2
(c) 3 only
(d) 2 and 3
Correct Answer:
(a) 1 only
Explanation:
Statement 1: Correct
Devaluation means a deliberate reduction in the value of domestic currency.
This makes exports cheaper in foreign markets.
Hence, export competitiveness necessarily improves.
What is devaluation? (Base example)
Suppose earlier:
₹50 = 1 US dollar
Government officially devalues currency to:
₹60 = 1 US dollar
This is devaluation → domestic currency loses value officially.
Statement 1
“Improves the competitiveness of domestic exports in foreign markets.” ✅
Example:
Before devaluation:
Indian shirt price = ₹600 = $12
After devaluation (₹60 = $1):
Same shirt = ₹600 = $10
👉 For foreign buyers, Indian goods become cheaper.
👉 Hence, export competitiveness improves.
✔ This effect is necessary and immediate.
Statement 2: Incorrect
Devaluation reduces, not increases, the foreign value of domestic currency.
One unit of domestic currency buys less foreign currency after devaluation.
“Increases the foreign value of domestic currency.” ❌
Example:
Before devaluation:
₹1 = $0.02
After devaluation:
₹1 = $0.016
👉 One rupee now buys less foreign currency, not more.
👉 Foreign value of domestic currency falls.
❌ Statement is incorrect.
Statement 3: Incorrect
Improvement in trade balance is not necessary.
Example
where trade balance does NOT improve:
India imports crude oil.
After devaluation:
Oil becomes more expensive in rupees.
Oil demand is inelastic (cannot reduce imports easily).
Result:
Import bill increases sharply.
Export increase may be slow.
Trade deficit may worsen initially.
👉 Trade balance improves only if export and import demand are sufficiently elastic.
👉 Hence, improvement is not guaranteed.
Memory Trick:
“Devaluation surely boosts export competitiveness, not currency value or trade balance.”
7.
Consider the following:
1.Foreign currency convertible bonds
2.Foreign institutional investment with certain conditions
3.Global depository receipts
4.Non-resident external deposits
Which of the above can be included in Foreign Direct Investments?
(a) 1, 2 and 3
(b) 3 only
(c) 2 and 4
(d) 1 and 4
Correct Answer:
(a) 1, 2 and 3
Explanation:
Statement 1: Correct
Foreign Currency Convertible Bonds (FCCBs) are bonds issued to foreign investors that can be converted into equity shares.
Once converted, they result in ownership and control, hence are treated as Foreign Direct Investment (FDI).
Statement 2: Correct
Foreign Institutional Investment (FII) is normally portfolio investment.
However, if it crosses the prescribed ownership threshold (as per FDI policy), it is reclassified as FDI.
Hence, FII with certain conditions can be included in FDI.
Statement 3: Correct
Global Depository Receipts (GDRs) represent equity shares of an Indian company issued abroad.
They provide ownership interest and are included under FDI.
Statement 4: Incorrect
Non-Resident External (NRE) deposits are bank deposits, not equity investment.
They do not give ownership or control.
Hence, they are not FDI.
Memory Trick:
“FDI means ownership: Bonds-to-equity, big FII, and GDRs count — deposits don’t.”
6.
Indian Government Bond Yields are influenced by which of the following?
1.Actions of the United States Federal Reserve.
2.Actions of the Reserve Bank of India.
3.Inflation and short-term interest rates.
Select the correct answer using the code given below.
(a) 1 and 2 only
(b) 2 only
(c) 3 only
(d) 1, 2 and 3
Correct Answer:
(d) 1, 2 and 3
Explanation:
Statement 1: Correct
Actions of the United States Federal Reserve (US Fed) affect global capital flows.
U.S. Federal Reserve (Fed) is the central bank of the United States of America.
Functions similar to RBI.
Example:
The US Federal Reserve increases its policy interest rate.
US government bonds now give higher returns.
Foreign investors move money from India to the US.
Demand for Indian government bonds falls.
Bond prices fall → Indian bond yields rise.
Logic:
Global investors compare returns. Higher US rates pull capital out of India, pushing Indian yields up.
Bond price and Bond yield inverse relationship.
Statement 2: Correct
The Reserve Bank of India (RBI) directly influences bond yields through:
Repo rate and reverse repo rate
Open Market Operations (OMOs)
Liquidity management
RBI tightening → bond yields rise; RBI easing → bond yields fall.
Example:
RBI raises the repo rate to control inflation.
Borrowing becomes costlier in the economy.
New government bonds must offer higher interest to attract buyers.
Existing bonds become less attractive.
Bond prices fall → yields rise.
Opposite case:
RBI cuts repo rate → liquidity increases → bond prices rise → yields fall.
Logic:
RBI controls domestic liquidity and interest rates, which directly affect bond yields.
Statement 3: Correct
Inflation erodes real returns, so higher inflation leads to higher bond yields.
Short-term interest rates guide expectations about future rates and influence yields across maturities.
Example (Inflation):
Expected inflation = 7%
Existing bond yield = 6%
Real return = negative (6 − 7 = −1%)
Investors demand higher yield, say 8–9%.
Bond prices fall → yields rise.
Example (Short-term rates):
RBI signals future rate hikes.
Investors expect higher returns later.
They sell long-term bonds now.
Prices fall → yields increase.
Logic:
Higher inflation or rising short-term rates reduce real returns, so investors demand higher yields as compensation.
One-line UPSC summary
Fed actions affect global flows
RBI actions affect domestic liquidity
Inflation and short-term rates affect real returns
Memory Trick:
“Fed moves money, RBI moves rates, inflation eats returns — yields react.
5.
With reference to 'Urban Cooperative banks' in India consider the following statements:
1.They are supervised and regulated by local boards set up by the State Governments.
2.They can issue equity shares and preference shares.
3.They were brought under the purview of the Banking Regulation Act, 1949 through an Amendment in 1966.
Which of the statements given above is/are correct?
(a) 1 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3
Correct Answer:
(b) 2 and 3 only
Explanation:
Statement 1: Incorrect
Urban Cooperative Banks (UCBs) are not supervised by local boards set up by State Governments.
They follow dual regulation:
Reserve Bank of India (RBI) → banking functions
State Government / Central Government → incorporation, management, and audit under Cooperative Societies laws.
No “local boards” regulate them.
Dual regulation means cooperative banks are regulated by two different authorities for two different aspects: banking functions by RBI and management-related aspects by State/Central Governments under Cooperative Laws.
Explanation:
Why “dual regulation” exists
Cooperative banks are banks and also cooperative societies.
Therefore, they are governed by:
Banking law (like other banks), and
Cooperative law (because they are member-owned societies).
Who regulates what?
(A) Reserve Bank of India (RBI) – Banking side
RBI regulates cooperative banks for banking operations, such as:
Accepting deposits
Lending and credit policy
Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR)
Prudential norms (capital adequacy, NPAs)
Licensing and cancellation of banking licence
👉 In short: How the bank does banking = RBI
(B) State Government / Central Government – Management side
This regulation is under Cooperative Societies Acts:
State Cooperative Societies Act (for most cooperative banks)
Multi-State Cooperative Societies Act, 2002 (if operating in more than one state)
They control:
Registration of cooperative society
Election of board of directors
Management structure
Audit (earlier, now increasingly professionalised)
Supersession of board (subject to constitutional limits)
👉 In short: Who manages the bank = State/Central Government
3. Simple real-life analogy
Think of a school:
Education board decides syllabus and exams
Management committee decides staff appointments and administration
Similarly:
RBI decides banking rules
State/Central Government decides cooperative management rules
Why UPSC often asks this
Dual control earlier caused:
Weak governance
Political interference
Hence reforms like:
Greater RBI powers (post-2020 amendments)
Banking regulation strengthened for cooperative banks
Memory Trick:
“RBI runs the bank; Government runs the cooperative.”
Statement 2: Correct
Urban Cooperative Banks can raise capital by issuing equity shares and preference shares to their members, subject to regulatory norms.
Equity Share
Represents ownership in the company/bank.
Equity shareholders are the real owners.
Dividend:
Not fixed
Depends on profits
Voting rights:
Yes (usually one share = one vote)
Risk:
Higher risk
Paid last if the company is liquidated
Simple example:
You buy equity shares of a bank.
If profits are high → dividend is high.
If losses → no dividend.
Preference Share
Represents priority, not full ownership control.
Preference shareholders get preference over equity shareholders.
Dividend:
Fixed rate
Voting rights:
Generally no voting rights (except in special cases)
Risk:
Lower risk than equity
Paid before equity during liquidation
Simple example:
You buy preference shares of a bank.
You receive a fixed dividend, whether profits are high or moderate.
Key Difference in One Line
Equity share: Risk + ownership + variable return
Preference share: Safety + fixed return + priority payment
Memory Trick:
“Equity = Owner & Uncertain; Preference = Priority & Fixed.”
What does “safety” mean here?
In finance, safety = assurance of return + priority of payment.
Higher safety → more certainty of getting money back
Lower safety → higher chance of loss or non-payment
Why are equity shares risky?
Dividend is not fixed
Paid only if profits exist
Last in payment order
During liquidation, equity holders are paid after all others
Market value fluctuates heavily
Share price can fall sharply
Meaning of risk in equity:
You may get high returns, or
You may get no dividend and capital loss
Simple example:
Company makes loss → equity holder gets ₹0 dividend
Company closes → equity holder may get nothing
👉 Hence, equity = high risk, high potential return
Why are preference shares considered safer than equity?
Safety of preference shares comes from priority, not guarantee.
Fixed dividend rate
Paid before equity shareholders
Higher claim during liquidation than equity
But:
Dividend is paid only if company has profits
Company is not legally bound to pay dividend every year
Simple example:
Profit earned → preference shareholders get fixed dividend first
Remaining profit → equity shareholders get dividend
👉 Hence, preference = moderate safety
4. How are preference shares different from debt or bonds?
(A) Preference Shares
Not a loan
Dividend is not legally compulsory
No fixed maturity (usually perpetual)
Part of share capital
(B) Debt / Bonds
Loan to the company
Interest payment is legally compulsory
Fixed maturity period
Creditor, not owner
Key safety difference:
Bondholders must be paid interest even if company is in loss.
Preference shareholders get dividend only if profits exist.
Payment priority (highest to lowest):
Bondholders / Debenture holders
Preference shareholders
Equity shareholders
5. UPSC-ready hierarchy (very important)
Debt/Bonds → Highest safety, lowest risk
Preference Shares → Medium safety, medium risk
Equity Shares → Lowest safety, highest risk
Memory Trick:
“Debt must be paid, Preference paid first, Equity paid last.”
Statement 3: Correct
Urban Cooperative Banks were brought under the Banking Regulation Act, 1949 through the Banking Laws (Application to Co-operative Societies) Act, 1965, which came into effect in 1966.
Memory Trick:
“UCBs: Shares allowed, BR Act applies—but no local board control.”
4.
Consider the following statements:
Other things remaining unchanged, market demand for a good might increase if
1.price of its substitute increases.
2.price of its complement increases.
3.the good is an inferior good and income of the consumers increases.
4.its price falls.
Which of the above statements are correct?
(a) 1 and 4 only
(b) 2, 3 and 4
(c) 1, 3 and 4
(d) 1, 2 and 3
Correct Answer:
(a) 1 and 4 only
Explanation:
Statement 1: Correct
If the price of a substitute increases, consumers shift towards this good.
Hence, demand increases.
Example: If tea becomes expensive, demand for coffee rises.
Statement 2: Incorrect
If the price of a complement increases, the combined consumption becomes costlier.
Demand for the good falls, not rises.
Example: Increase in petrol price reduces demand for cars.
Statement 3: Incorrect
For an inferior good, demand falls when income increases.
Hence, market demand will not increase.
Statement 4: Correct
Fall in the price of the good itself leads to increase in quantity demanded (Law of Demand).
Memory Trick:
“Substitute costly or own price low → Demand grows.”
3.
With reference to casual workers employed in India, consider the following statements:
1.All casual workers are entitled for Employees Provident Fund coverage.
2.All casual workers are entitled for regular working hours and overtime payment.
3.The government can by a notification specify that an establishment or industry shall pay wages only through its bank account.
Which of the above statements are correct?
(a) 1 and 2 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3
Correct Answer:
(b) 2 and 3 only
Explanation:
Statement 1: Incorrect
Employees’ Provident Fund (EPF) coverage applies only to workers in establishments covered under the EPF Act, 1952, subject to wage and employment conditions.
All casual workers are not automatically entitled to EPF coverage.
Statement 2: Correct
Casual workers are treated as “workers” under labour laws such as the Factories Act, 1948.
They are entitled to regulated working hours and overtime payment where the law applies.
“Regular working hours” means legally prescribed and limited working hours, beyond which overtime must be paid.
The word casual does not exclude them from these protections.
Statement 3: Correct
Under the Payment of Wages Act, 1936 (as amended),
The government may, by notification, mandate payment of wages only through bank accounts or electronic modes for specified establishments or industries.
Memory Trick:
“Casual workers gets limited hours & overtime, wages via bank—but PF is not for all.”
Expected Question
Under India's new Labour Codes, the standard is still 48 hours/week, but offers flexibility, allowing up to 12-hour shifts for 4 days a week (with 3 paid holidays) or up to 9 hours daily, with any work over 48 hours/week requiring double overtime pay, while daily overtime usually means double pay and requires consent, plus daily breaks are mandatory.
Here's a breakdown of the rules:
Weekly Limit: 48 hours.
Daily Limit (Standard): 9 hours (with 30 min break after 5 hours).
Flexible 4-Day Week: You can schedule 12-hour days for 4 days, then provide 3 paid days off.
Overtime (Consent & Pay): Work beyond the daily/weekly limit needs employee consent and must be paid at double the normal wage rate.
No Excessive Days: No one should work more than 12 hours in a day, including rest/meal breaks.
State Variations: Some states (like Haryana) might adjust daily limits, but the 48-hour week and overtime rules generally hold.
In essence: You can structure work flexibly within 48 hours, but exceeding those hours requires double pay and breaks are essential for work-life balance, aligning with the new Codes
2.
Which among the following steps is most likely to be taken at the time of an economic recession?
(a) Cut in tax rates accompanied by increase in interest rate
(b) Increase in expenditure on public projects
(c) Increase in tax rates accompanied by reduction of interest rate
(d) Reduction of expenditure on public projects
Correct Answer:
(b) Increase in expenditure on public projects
Explanation:
Economic recession means:
Low demand
Falling output
Rising unemployment
During recession, the government adopts expansionary fiscal policy to revive demand.
Increasing expenditure on public projects:
Creates employment
Increases income
Boosts aggregate demand
Other options are incorrect because:
Increasing interest rates or taxes reduces demand.
Reducing public expenditure worsens recession.
Memory Trick:
“Recession = Government spends more to restart demand.”
1.
Consider the following statements:
The Governor of the Reserve Bank of India (RBI) is appointed by the Central Government.
Certain provisions in the Constitution of India give the Central Government the right to issue directions to the RBI in public interest.
The Governor of the RBI draws his power from the RBI Act.
Which of the above statements are correct?
(a) 1 and 2 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3
Correct Answer:
(c) 1 and 3 only
Explanation:
Statement 1: Correct
The Governor of the Reserve Bank of India is appointed by the Central Government.
This is provided under the Reserve Bank of India Act, 1934.
Statement 2: Incorrect
The Constitution of India does NOT contain any provision giving the Central Government the power to issue directions to the RBI.
Such power, where applicable, comes from Section 7 of the RBI Act, 1934, not from the Constitution.
Statement 3: Correct
The powers, functions, and authority of the RBI Governor are derived from the RBI Act, 1934.
Memory Trick:
“RBI Governor: Appointed by Centre, Powered by RBI Act—not by Constitution.”
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