Economics UPSC PYQ 2018
17.
Consider the following countries:
1.Australia
2.Canada
3.China
4.India
5.Japan
6.USA
Which of the above are among the 'free-trade partners' of ASEAN?
(a) 1, 2, 4 and 5
(b) 3, 4, 5 and 6
(c) 1, 3, 4 and 5
(d) 2, 3, 4 and 6
Correct Answer:
(c) 1, 3, 4 and 5
Explanation:
ASEAN (Association of Southeast Asian Nations) has Free Trade Agreements (FTAs) with several dialogue partners.
ASEAN has concluded FTAs with:
• China
• Japan
• India
• South Korea
• Australia and New Zealand (as a combined FTA)
Now evaluate the countries:
Australia – Correct
ASEAN has an FTA with Australia (under ASEAN–Australia–New Zealand FTA).
Canada – Incorrect
ASEAN does not have a concluded FTA with Canada.
China – Correct
ASEAN–China Free Trade Area (ACFTA) exists.
India – Correct
ASEAN–India Free Trade Agreement (AIFTA) exists.
Japan – Correct
ASEAN–Japan Comprehensive Economic Partnership exists.
USA – Incorrect
The USA is a dialogue partner but does not have an ASEAN-wide FTA.
Thus, the correct combination is 1, 3, 4 and 5.
Memory Trick:
ASEAN FTA Core = China + Japan + India + Australia.
If USA or Canada appears → usually incorrect in ASEAN FTA context.
16.
Which one of the following best describes the term "Merchant Discount Rate" sometimes seen in news?
(a) The incentive given by a bank to a merchant for accepting payments through debit cards pertaining to that bank.
(b) The amount paid back by banks to their customers when they use debit cards for financial transactions for purchasing goods or services.
(c) The charge to a merchant by a bank for accepting payments from his customers through the bank's debit cards.
(d) The incentive given by the Government to merchants for promoting digital payments by their customers through Point of Sale (PoS) machines and debit cards.
Correct Answer:
(c) The charge to a merchant by a bank for accepting payments from his customers through the bank's debit cards.
Explanation:
Merchant Discount Rate (MDR) is the fee charged to a merchant by a bank or payment service provider for processing digital payments made through debit cards, credit cards, or other electronic payment modes.
When a customer pays ₹1,000 using a card, the merchant does not receive the full ₹1,000. A small percentage (for example, 0.5% or 1%) is deducted as MDR.
This fee is shared among: • The acquiring bank
• The issuing bank
• The payment network (such as Visa, Mastercard, RuPay)
Option (a) is incorrect because MDR is not an incentive to the merchant; it is a charge.
Option (b) describes cashback to customers, which is unrelated to MDR.
Option (d) is incorrect because MDR is not a government incentive. In fact, at times the Government has reduced or subsidised MDR to promote digital payments.
Memory Trick:
MDR = Merchant Deducted
If money is deducted from merchant’s payment → it is MDR.
15.
With reference to digital payments, consider the following statements:
1.BHIM app allows the user to transfer money to anyone with a UPI-enabled bank account.
2.While a chip-pin debit card has four-factor authentication, BHIM app has only two factors of authentication.
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 Answer:
(a) 1 only
Explanation:
Statement 1 – Correct
BHIM (Bharat Interface for Money) is a Unified Payments Interface (UPI)-based application developed by the National Payments Corporation of India (NPCI).
It allows users to transfer money to any individual who has a UPI-enabled bank account using:
• UPI ID
• Account number and IFSC
• QR code
• Mobile number (linked to UPI)
Thus, Statement 1 is correct.
Statement 2 – Incorrect
A chip-and-PIN debit card transaction generally involves two-factor authentication:
Possession of the card
Knowledge of the PIN
Similarly, BHIM/UPI transactions also use two-factor authentication:
Possession of the registered mobile device/SIM
UPI PIN
Therefore, it is incorrect to say a chip-pin card has four-factor authentication while BHIM has only two.
Both operate under RBI’s two-factor authentication norms.
Memory Trick:
Card = Card + PIN (2 factors)
UPI = Mobile + UPI PIN (2 factors)
If any option says “four-factor authentication” for normal debit card → incorrect.
14.
Which of the following links all the ATMs in India?
(a) Indian Banks Association
(b) National Securities Depository Limited
(c) National Payments Corporation of India
(d) Reserve Bank of India
Correct Answer:
(c) National Payments Corporation of India
Explanation:
All ATMs in India are interconnected through the National Financial Switch (NFS).
The National Financial Switch is operated by the National Payments Corporation of India (NPCI).
NPCI is an umbrella organisation for retail payment systems in India.
It operates:
• National Financial Switch (ATM network)
• Unified Payments Interface (UPI)
• RuPay
• Immediate Payment Service (IMPS)
Therefore, NPCI links all ATMs across banks in India.
Why others are incorrect:
(a) Indian Banks Association – It is an industry body representing banks. It does not operate ATM switching networks.
(b) National Securities Depository Limited (NSDL) – It deals with dematerialised securities (shares, bonds), not ATM networks.
(d) Reserve Bank of India – RBI regulates and supervises payment systems but does not directly operate the inter-bank ATM switching network.
Memory Trick:
ATM network = NFS - run by NPCI.
If the question says “ATM linking” → think NPCI immediately.
13.
With reference to India's decision to levy an equalization tax of 6% on online advertisement services offered by non-resident entities, which of the following statements is/are correct?
1.It is introduced as a part of the Income Tax Act.
2.Non-resident entities that offer advertisement services in India can claim a tax credit in their home country under the "Double Taxation Avoidance Agreements".
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 Answer:
(d) Neither 1 nor 2
Explanation:
Statement 1 – Incorrect
The 6% Equalisation Levy on online advertisement services (introduced in 2016) was not inserted into the Income Tax Act, 1961.
It was introduced through the Finance Act, 2016 as a separate levy.
Although administered by the income tax department, it is legally distinct from income tax.
Statement 2 – Incorrect
The Equalisation Levy is not treated as income tax under Double Taxation Avoidance Agreements (DTAAs).
Since it is a separate levy outside the Income Tax Act, non-resident entities generally cannot claim DTAA relief or foreign tax credit under tax treaties in the same way as income tax.
Therefore, the levy was structured precisely to avoid treaty limitations.
Memory Trick:
Equalisation Levy = “Outside Income Tax.”
If it were inside Income Tax → DTAA benefit possible.
Since it is outside → DTAA protection does not apply.
Note
6% Equalisation Levy on online advertisement services no longer exists.
12.
Consider the following items:
1.Cereal grains hulled
2.Chicken eggs cooked
3.Fish processed and canned
4.Newspapers containing advertising material
Which of the above items is/are exempted under GST (Goods and Services Tax)?
(a) 1 only
(b) 2 and 3 only
(c) 1, 2 and 4 only
(d) 1, 2, 3 and 4
Correct Answer:
(c) 1, 2 and 4 only
Explanation:
Statement 1 – Correct
Cereal grains (even when hulled, i.e., outer husk removed) remain basic agricultural produce.
Unprocessed food grains are exempt from GST when not branded and not supplied as pre-packaged and labelled (subject to amendments).
Thus, Item 1 is exempt.
Statement 2 – Correct
Eggs, including cooked eggs, fall under food items that are exempt when not supplied as restaurant services.
GST exemption notifications classify eggs (whether fresh, preserved or cooked) under exempted goods category when sold as goods.
The confusion arises because restaurant services are taxable, but cooked eggs sold as goods are exempt.
Thus, Item 2 is exempt.
Statement 3 – Incorrect
Processed and canned fish is a value-added, preserved product.
Such products attract GST.
Only fresh fish is exempt.
Thus, Item 3 is not exempt.
Statement 4 – Correct
Newspapers are fully exempt from GST, even if they contain advertisements.
However, advertisement services are taxable separately.
The physical newspaper as a product remains exempt.
Thus, Item 4 is exempt.
Final Answer:
(c) 1, 2 and 4 only
Memory Trick:
Basic food + eggs + newspapers = exempt.
Canned or processed fish = taxed.
If value addition + preservation → usually taxable.
11.
With reference to the governance of public sector banking in India, consider the following statements:
1.Capital infusion into public sector banks by the Government of India has steadily increased in the last decade.
2.To put the public sector banks in order, the merger of associate banks with the parent State Bank of India has been affected.
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 Answer:
(b) 2 only
Explanation:
Statement 1 – Incorrect
Capital infusion into Public Sector Banks (PSBs) has not steadily increased over the last decade.
There was a sharp rise in capital infusion particularly during the period of high Non-Performing Assets (NPAs) around 2015–2018 under the Indradhanush plan and recapitalisation packages.
However, in recent years, capital infusion has declined significantly as banks improved profitability and capital positions.
Therefore, the term “steadily increased” is incorrect.
Statement 2 – Correct
In 2017, the associate banks of State Bank of India (SBI) and Bharatiya Mahila Bank were merged with SBI.
This consolidation was aimed at improving efficiency, governance, capital strength, and operational synergy in the public sector banking system.
Thus, the statement correctly reflects a governance reform measure.
Memory Trick:
“Steadily” is a trap word.
If a statement says capital infusion steadily increased — suspect it.
SBI merger for reform — correct.
10.
Consider the following statements:
1.The Reserve Bank of India manages and services Government of India Securities but not any State Government Securities.
2.Treasury bills are issued by the Government of India and there are no treasury bills issued by the State Governments.
3.Treasury bills are issued at a discount from the par value.
Which of the statements given above is/are correct?
(a) 1 and 2 only
(b) 3 only
(c) 2 and 3 only
(d) 1, 2 and 3
Correct Answer:
(c) 2 and 3 only
Explanation:
Statement 1 – Incorrect
The Reserve Bank of India (RBI) acts as banker and debt manager for both the Central Government and the State Governments.
RBI manages and services Government of India securities as well as State Development Loans (SDLs) issued by State Governments.
Therefore, it is incorrect to say that RBI does not manage State Government securities.
Statement 2 – Correct
Treasury Bills (T-Bills) are short-term debt instruments issued only by the Government of India.
State Governments do not issue treasury bills.
States raise short-term funds through Ways and Means Advances (WMA) from RBI and by issuing State Development Loans (SDLs), which are longer-term securities.
Statement 3 – Correct
Treasury Bills are zero-coupon instruments.
They are issued at a discount and redeemed at face (par) value.
The difference between issue price and face value is the investor’s return.
Example:
Issued at ₹95, redeemed at ₹100 → ₹5 is the return.
Memory Trick:
T-Bills = “Central Only, Discount Only.”
If State T-Bill is mentioned → incorrect.
If issued at discount → correct.
9.
Despite being a high saving economy, capital formation may not result in significant increase in output due to
(a) weak administrative machinery
(b) illiteracy
(c) high population density
(d) high capital-output ratio
Correct Answer:
(d) high capital-output ratio
Explanation:
Capital formation means increasing investment in physical assets like machinery, infrastructure, factories, etc.
But investment does not automatically guarantee high output.
The key concept here is the Capital-Output Ratio (COR).
Capital-Output Ratio tells us:
How much capital is required to produce one unit of output.
If the Capital-Output Ratio is high, it means:
A large amount of capital is needed to produce a small amount of output.
So even if savings and investment are high, output may not increase significantly because production is inefficient.
For example:
If ₹10 produces ₹5 output → low COR (efficient)
If ₹10 produces ₹1 output → high COR (inefficient)
Thus, when COR is high, capital formation does not translate into proportionate growth.
Other options:
(a) Weak administration affects governance but is not the core economic reason in this context.
(b) Illiteracy affects productivity but does not directly explain failure of capital-output relationship.
(c) High population density does not directly determine output response to capital formation.
The question is directly testing growth theory logic.
Memory Trick:
High COR = More capital, less output.
If investment rises but output doesn’t rise much → suspect high capital-output ratio.
8.
Consider the following statements:
Human capital formation as a concept is better explained in terms of a process which enables
1.individuals of a country to accumulate more capital.
2.increasing the knowledge, skill levels and capacities of the people of the country.
3.accumulation of tangible wealth.
4.accumulation of intangible wealth.
Which of the statements given above is/are correct?
(a) 1 and 2
(b) 2 only
(c) 2 and 4
(d) 1, 3 and 4
Correct Answer:
(c) 2 and 4
Explanation:
Statement 1 – Incorrect
Human capital formation does not mean individuals accumulate physical or financial capital.
It refers to improvement in human abilities, not accumulation of money or machines.
Statement 2 – Correct
Human capital formation means improving education, skills, health, training, and productivity of people.
It increases knowledge, skill levels and capacities.
Statement 3 – Incorrect
Tangible wealth refers to physical assets like buildings, machines, roads, etc.
Human capital formation is not about physical asset accumulation.
Statement 4 – Correct
Human capital is an example of intangible wealth.
It is not visible like machines, but it increases productivity and economic growth.
Education, health, training — these are intangible but valuable.
Memory Trick:
Human capital = “Brain power, not building power.”
If the option talks about skills and knowledge → correct.
If it talks about physical assets → incorrect.
7.
Increase in absolute and per capita real GNP do not connote a higher level of economic development, if
(a) industrial output fails to keep pace with agricultural output.
(b) agricultural output fails to keep pace with industrial output.
(c) poverty and unemployment increase.
(d) imports grow faster than exports.
Correct Answer:
(c) poverty and unemployment increase.
Explanation:
Real Gross National Product (GNP) measures the total income of a country adjusted for inflation.
Per capita real GNP measures average income per person.
However, economic development is broader than income growth. It includes:
• Reduction in poverty
• Reduction in unemployment
• Improvement in living standards
• Better health and education
If real GNP and per capita income increase, but poverty and unemployment also increase, then the benefits of growth are not reaching people.
This situation reflects “jobless growth” or “unequal growth.”
Therefore, mere income growth does not guarantee development.
Option (a) and (b) relate to sectoral imbalance, not necessarily lack of development.
Option (d) relates to trade imbalance, not directly to development level.
Economic development requires improvement in human welfare, not just increase in income numbers.
Memory Trick:
Growth = income increase.
Development = income + jobs + poverty reduction.
If poverty rises, development is doubtful.
Basics
6.
If a commodity is provided free to the public by the Government, then
(a) the opportunity cost is zero.
(b) the opportunity cost is ignored.
(c) the opportunity cost is transferred from the consumers of the product to the tax-paying public.
(d) the opportunity cost is transferred from the consumers of the product to the Government.
Correct Answer:
(c) the opportunity cost is transferred from the consumers of the product to the tax-paying public.
Explanation:
Opportunity cost means the value of the next best alternative that is forgone.
Example
A family has ₹5,000 this month extra.
They have two choices:
1️⃣ Buy a new school bag for their child 🎒
2️⃣ Go for a family picnic 🍱
But ₹5,000 is not enough for both.
Suppose they choose:
👉 Buy the school bag.
The picnic does not happen.
So what is the opportunity cost?
👉 The picnic.
Now reverse it.
If they go for picnic,
then the school bag is not bought.
Now what is the opportunity cost?
👉 The school bag.
Now Link This to Government “Free” Scheme
Government also has limited money (like the family).
If Government gives:
👉 Free electricity
Then maybe it cannot:
👉 Build a hospital
So the hospital becomes the opportunity cost.
And who gave that money?
👉 Taxpayers.
So free for users
= paid by taxpayers
= something else sacrificed
Final Ultra-Simple Line
Whenever money is limited,
Choosing A
means
Losing B.
Losing B = Opportunity Cost.
Even if the Government provides a commodity free of cost to consumers, resources (money, labour, land, capital) are still used to produce it. Therefore, opportunity cost never becomes zero.
Statement (a) is incorrect because scarcity still exists. Resources used for free distribution could have been used elsewhere.
Statement (b) is incorrect because opportunity cost cannot be ignored in economics.
It always exists whenever scarce resources are used.
Statement (c) is correct because when the Government provides something free, the cost is financed through taxation or public borrowing. Thus, the burden shifts from direct consumers to taxpayers collectively.
Statement (d) is incorrect because the Government itself does not ultimately bear the cost; it collects revenue from taxpayers. The real burden lies on the tax-paying public.
Memory Trick:
Free for user ≠ Free for economy.
If Government gives free goods, taxpayers pay the price.
5.
Which one of the following statements correctly describes the meaning of legal tender money?
(a) The money which is tendered in courts of law to defray the fee of legal cases
(b) The money which a creditor is under compulsion to accept in settlement of his claims
(c) The bank money in the form of cheques, drafts, bills of exchange etc.
(d) The metallic money in circulation in a country
Correct Answer:
(b) The money which a creditor is under compulsion to accept in settlement of his claims
Explanation:
Legal tender money refers to money that must be legally accepted if offered in payment of a debt.
Under the legal framework in India (as per the Reserve Bank of India Act, 1934 and the Coinage Act, 2011):
• Currency notes issued by the Reserve Bank of India are legal tender.
• Coins issued by the Government of India are also legal tender (subject to denomination limits).
This means that if a debtor offers payment in legal tender, the creditor cannot legally refuse it.
Option (a) is incorrect because legal tender has nothing to do with court fees.
Option (c) is incorrect because cheques, drafts, and bills of exchange are not legal tender. They are credit instruments. A person can refuse payment via cheque.
Option (d) is incorrect because legal tender includes paper currency as well, not just metallic money.
Memory Trick:
Legal Tender = “Legally Compulsory to Accept.”
If refusal is legally allowed (like cheque) → not legal tender.
4.
India enacted the Geographical Indications of Goods (Registration and Protection) Act, 1999 in order to comply with the obligations to
(a) ILO
(b) IMF
(c) UNCTAD
(d) WTO
Correct Answer:
(d) WTO
Explanation:
The Geographical Indications of Goods (Registration and Protection) Act, 1999 was enacted to fulfil India’s obligations under the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS).
The TRIPS Agreement is administered by the World Trade Organization (WTO). It mandates member countries to provide legal protection for Geographical Indications (GIs), along with other intellectual property rights such as patents, trademarks, and copyrights.
Since India became a member of the WTO in 1995, it was required to align its domestic intellectual property laws with TRIPS provisions. The GI Act, 1999 was enacted to implement these obligations.
The International Labour Organization (ILO) deals with labour standards.
The International Monetary Fund (IMF) deals with monetary stability and balance of payments.
The United Nations Conference on Trade and Development (UNCTAD) focuses on trade and development policy discussions but does not impose binding intellectual property obligations.
Therefore, the correct answer is WTO.
Memory Trick:
GI protection comes from TRIPS.
TRIPS belongs to WTO.
If the question mentions intellectual property compliance → think WTO immediately.
3.
Consider the following statements:
1.Capital Adequacy Ratio (CAR) is the amount that banks have to maintain in the form of their own funds to offset any loss that banks incur if the account-holders fail to repay dues.
2.CAR is decided by each individual bank.
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 Answer:
(a) 1 only
Explanation:
Statement 1 – Correct
Capital Adequacy Ratio (CAR), also known as Capital to Risk-Weighted Assets Ratio (CRAR), is the ratio of a bank’s capital to its risk-weighted assets.
Instead of treating all assets equally based on their nominal value, the RWA framework assigns a "risk weight" (percentage) to each asset based on the likelihood of borrower default or loss.
Example - Government bonds have less risk than corporate bonds.
It ensures that banks maintain a minimum level of their own capital to absorb losses arising from risky assets such as loans that may turn into Non-Performing Assets (NPAs).
Thus,
CAR acts as a cushion to protect depositors and maintain financial stability.
Hence, Statement 1 is correct.
Statement 2 – Incorrect
CAR is not decided by individual banks.
It is prescribed by the banking regulator in line with Basel norms.
In India, the Reserve Bank of India (RBI) mandates the minimum CAR requirement.
Therefore, individual banks cannot independently decide their CAR requirement below the regulatory minimum.
Hence, Statement 2 is incorrect.
Memory Trick:
CAR = “Capital Against Risk.”
Regulator sets the rule, not the bank.
2.
Consider the following statements:
1.The quantity of imported edible oils is more than the domestic production of edible oils in the last five years.
2.The Government does not impose any customs duty on all the imported edible oils as a special case.
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 Answer:
(a) 1 only
Explanation:
Statement 1 – Correct
India has been heavily dependent on edible oil imports, particularly palm oil, soybean oil and sunflower oil.
In recent years, domestic edible oil production has been around 10–12 million tonnes annually, whereas imports have generally been in the range of 13–15 million tonnes.
Thus, imports have exceeded domestic production in the last several years.
Hence, Statement 1 is correct.
Statement 2 – Incorrect
The Government of India has reduced customs duties at various times to control inflation, but it has not permanently exempted all imported edible oils from customs duty.
Basic Customs Duty (BCD) and Agriculture Infrastructure and Development Cess (AIDC) have been modified periodically, but duty has not been universally zero on all edible oils.
Hence, Statement 2 is incorrect.
Memory Trick:
India = “Import Heavy in Oil.”
1.
Consider the following statements:
1.The Fiscal Responsibility and Budget Management (FRBM) Review Committee Report has recommended a debt to GDP ratio of 60% for the general (combined) government by 2023, comprising 40% for the Central Government and 20% for the State Government.
2.The Central Government has domestic liabilities of 21% of GDP as compared to that of 49% of GDP of the State Governments.
3.As per the Constitution of India, it is mandatory for a State to take the Central Government's consent for raising any loan if the former owes any outstanding liabilities to the latter.
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:
(c) 1 and 3 only
Explanation:
Statement 1 – Correct
The Fiscal Responsibility and Budget Management (FRBM) Review Committee (N.K. Singh Committee, 2017) recommended that the combined (general government) debt should be reduced to 60% of GDP by 2023.
The recommended split was:
40% of GDP for the Central Government
20% of GDP for the State Governments
Hence, Statement 1 is correct.
Statement 2 – Incorrect
The statement reverses the liability burden.
In reality, the Central Government’s debt as a percentage of GDP is significantly higher than that of the States. Historically, the Centre’s liabilities have been around 45–50% of GDP, while States’ combined liabilities have been roughly 20–25% of GDP.
The statement incorrectly claims 21% for Centre and 49% for States.
Hence, Statement 2 is incorrect.
Statement 3 – Correct
Article 293(3) of the Constitution of India provides that if a State is indebted to the Government of India, it shall not raise any loan without the consent of the Government of India.
Thus, obtaining Central Government consent is constitutionally mandatory when outstanding liabilities exist.
Hence, Statement 3 is correct.
Memory Trick:
FRBM Rule: “Centre Carries More debt.”
If any option shows States having more debt than Centre → eliminate it.
Article 293(3): “If you owe, you ask before you borrow.”
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