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Introductory Macroeconomics

Class 12 · Economy

Real UPSC Prelims questions from 2016–2026, linked to this book. Try each one first, then open the answer. 2026 answers follow UPSC's provisional answer key.

A question can draw on more than one chapter, so the chapter counts add up to more than 25.

Ch 3 · Money and Banking

Prelims 2018 · Q46

Which one of the following statements correctly describes the meaning of legal tender money?

  1. (a)The money which is tendered in courts of law to defray the fee of legal cases
  2. (b)The money which a creditor is under compulsion to accept in settlement of his claims
  3. (c)The bank money in the form of cheques, drafts, bills of exchange, etc.
  4. (d)The metallic money in circulation in a country
Show answer

UPSC's answer: (b)

NCERT answers it: Class 12 Introductory Macroeconomics, Ch 3 (Money and Banking).

Macroeconomics (ch 3): currency notes and coins are called legal tender because no citizen can refuse them in settling any transaction. So (b).

Hindi version: UPSC's official question paper (2018), question 46 ↗

Prelims 2019 · Q64

Which of the following is not included in the assets of a commercial bank in India?

  1. (a)Advances
  2. (b)Deposits
  3. (c)Investments
  4. (d)Money at call and short notice
Show answer

UPSC's answer: (b)

NCERT answers it: Class 12 Introductory Macroeconomics, Ch 3 (Money and Banking).

Macroeconomics (ch 3): a bank's assets are the loans it gives and its reserves. The deposits it takes are its liabilities. So (b).

Hindi version: UPSC's official question paper (2019), question 64 ↗

Prelims 2019 · Q90

The money multiplier in an economy increases with which one of the following?

  1. (a)Increase in the cash reserve ratio
  2. (b)Increase in the banking habit of the population
  3. (c)Increase in the statutory liquidity ratio
  4. (d)Increase in the population of the country
Show answer

UPSC's answer: (b)

NCERT answers it: Class 12 Introductory Macroeconomics, Ch 3 (Money and Banking).

The one fact NCERT doesn't give: When people keep more of their money in banks instead of as cash (a better banking habit), banks have more deposits to lend, so the money multiplier rises.

Class 12 Macroeconomics, ch 3, shows how deposits and reserve ratios create money and why a higher CRR cuts the multiplier. Answer (b).

Hindi version: UPSC's official question paper (2019), question 90 ↗

Prelims 2020 · Q50

If you withdraw ₹ 1,00,000 in cash from your Demand Deposit Account at your bank, the immediate effect on aggregate money supply in the economy will be

  1. (a)to reduce it by ₹ 1,00,000
  2. (b)to increase it by ₹ 1,00,000
  3. (c)to increase it by more than ₹ 1,00,000
  4. (d)to leave it unchanged
Show answer

UPSC's answer: (d)

NCERT answers it: Class 12 Introductory Macroeconomics, Ch 3 (Money and Banking).

How to solve it with NCERT: Class 12 Macroeconomics, ch 3: money supply M1 = currency with the public + demand deposits. Withdrawing ₹1 lakh cuts your deposit by ₹1 lakh and raises your cash by ₹1 lakh, so M1 doesn't change. Answer (d).

Hindi version: UPSC's official question paper (2020), question 50 ↗

Prelims 2020 · Q57

If the RBI decides to adopt an expansionist monetary policy, which of the following would it not do?

  1. 1.Cut and optimize the Statutory Liquidity Ratio
  2. 2.Increase the Marginal Standing Facility Rate
  3. 3.Cut the Bank Rate and Repo Rate

Select the correct answer using the code given below:

  1. (a)1 and 2 only
  2. (b)2 only
  3. (c)1 and 3 only
  4. (d)1, 2 and 3
Show answer

UPSC's answer: (b)

NCERT answers it: Class 12 Introductory Macroeconomics, Ch 3 (Money and Banking).

How to solve it with NCERT: Class 12 Macroeconomics, ch 3: raising the bank rate shrinks money supply and lowering it expands supply. Reserve ratios limit how much banks can lend. An expansionary RBI would therefore cut the SLR and cut rates (1 and 3), but would not raise the MSF rate. Answer (b).

Hindi version: UPSC's official question paper (2020), question 57 ↗

Prelims 2021 · Q9

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?

  1. (a)Diversion of resources to the purchase of real estate and investment in luxury housing
  2. (b)Investment in unproductive activities and purchase of precious stones, jewellery, gold, etc.
  3. (c)Large donations to political parties and growth of regionalism
  4. (d)Loss of revenue to the State Exchequer due to tax evasion
Show answer

UPSC's answer: (d)

NCERT answers it: Class 12 Introductory Macroeconomics, Ch 3 (Money and Banking).

How to solve it with NCERT: Class 12 Macroeconomics, ch 3 (the demonetisation passage), ties curbing black money to ending tax evasion. The revenue lost to tax evasion is the government's main worry. Answer (d).

Hindi version: UPSC's official question paper (2021), question 9 ↗

Prelims 2021 · Q11

The money multiplier in an economy increases with which one of the following?

  1. (a)Increase in the Cash Reserve Ratio in the banks
  2. (b)Increase in the Statutory Liquidity Ratio in the banks
  3. (c)Increase in the banking habit of the people
  4. (d)Increase in the population of the country
Show answer

UPSC's answer: (c)

NCERT answers it: Class 12 Introductory Macroeconomics, Ch 3 (Money and Banking).

The one fact NCERT doesn't give: When people keep more of their money in banks instead of as cash (a better banking habit), banks have more deposits to lend, so the money multiplier rises.

Class 12 Macroeconomics, ch 3, shows how deposits and reserve ratios create money and why higher reserve requirements cut the multiplier. Answer (c).

Hindi version: UPSC's official question paper (2021), question 11 ↗

Prelims 2021 · Q12

With reference to Indian economy, demand-pull inflation can be caused/increased by which of the following?

  1. 1.Expansionary policies
  2. 2.Fiscal stimulus
  3. 3.Inflation-indexing wages
  4. 4.Higher purchasing power
  5. 5.Rising interest rates

Select the correct answer using the code given below.

  1. (a)1, 2 and 4 only
  2. (b)3, 4 and 5 only
  3. (c)1, 2, 3 and 5 only
  4. (d)1, 2, 3, 4 and 5
Show answer

UPSC's answer: (a)

NCERT answers it: Class 12 Introductory Macroeconomics, Ch 5 (Government Budget and the Economy); Class 12 Introductory Macroeconomics, Ch 3 (Money and Banking).

How to solve it with NCERT: Class 12 Macroeconomics, ch 5: when the government spends more or cuts taxes, aggregate demand rises. That is demand-pull inflation (statements 1, 2 and 4). Ch 3 shows higher interest rates shrink money supply, so rising rates (5) cannot pull demand up. Every option except (a) includes 5.

Hindi version: UPSC's official question paper (2021), question 12 ↗

Prelims 2021 · Q15

In India, the central bank's function as the 'lender of last resort' usually refers to which of the following?

  1. 1.Lending to trade and industry bodies when they fail to borrow from other sources
  2. 2.Providing liquidity to the banks having a temporary crisis
  3. 3.Lending to governments to finance budgetary deficits

Select the correct answer using the code given below.

  1. (a)1 and 2
  2. (b)2 only
  3. (c)2 and 3
  4. (d)3 only
Show answer

UPSC's answer: (b)

NCERT answers it: Class 12 Introductory Macroeconomics, Ch 3 (Money and Banking).

Macroeconomics (ch 3): the RBI stands ready to lend to banks at all times — that is why it is called the lender of last resort. So (b).

Hindi version: UPSC's official question paper (2021), question 15 ↗

Prelims 2022 · Q3

With reference to the Indian economy, consider the following statements:

  1. 1.If the inflation is too high, Reserve Bank of India (RBI) is likely to buy government securities.
  2. 2.If the rupee is rapidly depreciating, RBI is likely to sell dollars in the market.
  3. 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?

  1. (a)1 and 2 only
  2. (b)2 and 3 only
  3. (c)1 and 3 only
  4. (d)1, 2 and 3
Show answer

UPSC's answer: (b)

NCERT answers it: Class 12 Introductory Macroeconomics, Ch 3 (Money and Banking); Class 12 Introductory Macroeconomics, Ch 6 (Open Economy Macroeconomics).

How to solve it with NCERT: Class 12 Macroeconomics, ch 3: when the RBI buys securities it pumps money in, which feeds inflation, so statement 1 is false. Ch 6: the RBI buys or sells dollars to steady the rupee, so it sells dollars when the rupee falls (statement 2). Funds flow to where interest rates are higher, so lower US or EU rates bring dollars into India, which the RBI absorbs by buying them (statement 3). Answer (b).

Hindi version: UPSC's official question paper (2022), question 3 ↗

Prelims 2022 · Q68

In India, which one of the following is responsible for maintaining price stability by controlling inflation?

  1. (a)Department of Consumer Affairs
  2. (b)Expenditure Management Commission
  3. (c)Financial Stability and Development Council
  4. (d)Reserve Bank of India
Show answer

UPSC's answer: (d)

NCERT answers it: Class 12 Introductory Macroeconomics, Ch 3 (Money and Banking).

How to solve it with NCERT: Class 12 Macroeconomics, ch 3, describes the RBI as controlling the country's money supply through the bank rate, open market operations and reserve ratios. Those are the tools that control inflation, and none of the other bodies has them. Answer (d).

Hindi version: UPSC's official question paper (2022), question 68 ↗

Ch 4 · Determination of Income and Employment

Prelims 2021 · Q3

Which among the following steps is most likely to be taken at the time of an economic recession?

  1. (a)Cut in tax rates accompanied by increase in interest rate
  2. (b)Increase in expenditure on public projects
  3. (c)Increase in tax rates accompanied by reduction of interest rate
  4. (d)Reduction of expenditure on public projects
Show answer

UPSC's answer: (b)

NCERT answers it: Class 12 Introductory Macroeconomics, Ch 4 (Determination of Income and Employment).

How to solve it with NCERT: Class 12 Macroeconomics, ch 4: government spending is part of aggregate demand, and extra spending raises output by more than itself (the multiplier). In a recession you want more demand, so you raise public spending. Higher taxes or interest rates, or fewer projects, would deepen the slump. Answer (b).

Hindi version: UPSC's official question paper (2021), question 3 ↗

Ch 5 · Government Budget and the Economy

Prelims 2016 · Q12

Which of the following is/are included in the capital budget of the Government of India?

  1. 1.Expenditure on acquisition of assets like roads, buildings, machinery, etc.
  2. 2.Loans received from foreign governments
  3. 3.Loans and advances granted to the States and Union Territories

Select the correct answer using the code given below.

  1. (a)1 only
  2. (b)2 and 3 only
  3. (c)1 and 3 only
  4. (d)1, 2 and 3
Show answer

UPSC's answer: (d)

NCERT answers it: Class 12 Introductory Macroeconomics, Ch 5 (Government Budget and the Economy).

Macroeconomics (ch 5): capital expenditure covers assets like buildings and machinery and loans to states and UTs, and loans the government receives are capital receipts. All three are in the capital budget. So (d).

Hindi version: UPSC's official question paper (2016), question 12 ↗

Prelims 2017 · Q81

What is/are the most likely advantages of implementing 'Goods and Services Tax (GST)'?

  1. 1.It will replace multiple taxes collected by multiple authorities and will thus create a single market in India.
  2. 2.It will drastically reduce the 'Current Account Deficit' of India and will enable it to increase its foreign exchange reserves.
  3. 3.It will enormously increase the growth and size of economy of India and will enable it to overtake China in the near future.

Select the correct answer using the code given below:

  1. (a)1 only
  2. (b)2 and 3 only
  3. (c)1 and 3 only
  4. (d)1, 2 and 3
Show answer

UPSC's answer: (a)

NCERT answers it: Class 12 Introductory Macroeconomics, Ch 5 (Government Budget and the Economy).

How to solve it with NCERT: Class 12 Macroeconomics, ch 5 (box 'One Nation, One Tax, One Market'): GST subsumed many central and state taxes into one, which is statement 1. Nothing in NCERT supports GST wiping out the current account deficit or India overtaking China. Claims that big need evidence you don't have. Answer (a).

Hindi version: UPSC's official question paper (2017), question 81 ↗

Prelims 2020 · Q6

Along with the Budget, the Finance Minister also places other documents before the Parliament which include 'The Macro Economic Framework Statement'. The aforesaid document is presented because this is mandated by

  1. (a)Long standing parliamentary convention
  2. (b)Article 112 and Article 110(1) of the Constitution of India
  3. (c)Article 113 of the Constitution of India
  4. (d)Provisions of the Fiscal Responsibility and Budget Management Act, 2003
Show answer

UPSC's answer: (d)

NCERT answers it: Class 12 Introductory Macroeconomics, Ch 5 (Government Budget and the Economy).

Macroeconomics (ch 5): the Fiscal Responsibility and Budget Management Act, 2003 mandates three policy statements with the Budget, including the Macroeconomic Framework Statement. So (d).

Hindi version: UPSC's official question paper (2020), question 6 ↗

Prelims 2021 · Q10

Which one of the following is likely to be the most inflationary in its effects?

  1. (a)Repayment of public debt
  2. (b)Borrowing from the public to finance a budget deficit
  3. (c)Borrowing from the banks to finance a budget deficit
  4. (d)Creation of new money to finance a budget deficit
Show answer

UPSC's answer: (d)

NCERT answers it: Class 12 Introductory Macroeconomics, Ch 5 (Government Budget and the Economy).

The one fact NCERT doesn't give: Printing new money adds directly to money supply, so it is the most inflationary way to fund a deficit. Borrowing only moves money that already exists.

Class 12 Macroeconomics, ch 5, lists the three ways to finance a deficit (taxes, borrowing, printing money) and explains why deficits can be inflationary. Answer (d).

Hindi version: UPSC's official question paper (2021), question 10 ↗

Prelims 2022 · Q9

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

  1. 1.Acquiring new technology is capital expenditure.
  2. 2.Debt financing is considered capital expenditure, while equity financing is considered revenue expenditure.

Select the correct answer using the code given below:

  1. (a)1 only
  2. (b)2 only
  3. (c)Both 1 and 2
  4. (d)Neither 1 nor 2
Show answer

UPSC's answer: (a)

NCERT answers it: Class 12 Introductory Macroeconomics, Ch 5 (Government Budget and the Economy).

The one fact NCERT doesn't give: Debt and equity are ways of raising money (financing), not kinds of spending, so they are neither capital nor revenue expenditure.

Class 12 Macroeconomics, ch 5: spending that creates assets, such as new technology or machinery, is capital expenditure (statement 1). Answer (a).

Hindi version: UPSC's official question paper (2022), question 9 ↗

Prelims 2022 · Q10

With reference to the Indian economy, consider the following statements:

  1. 1.A share of the household financial savings goes towards government borrowings.
  2. 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?

  1. (a)1 only
  2. (b)2 only
  3. (c)Both 1 and 2
  4. (d)Neither 1 nor 2
Show answer

UPSC's answer: (c)

NCERT answers it: Class 12 Introductory Macroeconomics, Ch 5 (Government Budget and the Economy).

The one fact NCERT doesn't give: Dated government securities (long-term bonds auctioned at market rates) make up the largest part of the Centre's internal debt.

Class 12 Macroeconomics, ch 5: government borrowing draws on the savings of the public (statement 1). Answer (c).

Hindi version: UPSC's official question paper (2022), question 10 ↗

Prelims 2025 · Q10

Consider the following statements:

  1. I.Capital receipts create a liability or cause a reduction in the assets of the Government.
  2. II.Borrowings and disinvestment are capital receipts.
  3. III.Interest received on loans creates a liability of the Government.

Which of the statements given above are correct?

  1. (a)I and II only
  2. (b)II and III only
  3. (c)I and III only
  4. (d)I, II and III
Show answer

UPSC's answer: (a)

NCERT answers it: Class 12 Introductory Macroeconomics, Ch 5 (Government Budget and the Economy).

Macroeconomics (ch 5): capital receipts are those that create a liability or reduce financial assets, and they include borrowings and disinvestment. Interest received is non-tax revenue, which creates no liability. So I and II: (a).

Hindi version: UPSC's official question paper (2025), question 10 ↗

Prelims 2025 · Q61

Suppose the revenue expenditure is ₹ 80,000 crores and the revenue receipts of the Government are ₹ 60,000 crores. The Government budget also shows borrowings of ₹ 10,000 crores and interest payments of ₹ 6,000 crores. Which of the following statements are correct?

  1. I.Revenue deficit is ₹ 20,000 crores.
  2. II.Fiscal deficit is ₹ 10,000 crores.
  3. III.Primary deficit is ₹ 4,000 crores.

Select the correct answer using the code given below.

  1. (a)I and II only
  2. (b)II and III only
  3. (c)I and III only
  4. (d)I, II and III
Show answer

UPSC's answer: (d)

NCERT answers it: Class 12 Introductory Macroeconomics, Ch 5 (Government Budget and the Economy).

Macroeconomics (ch 5): revenue deficit = revenue expenditure − revenue receipts = ₹20,000 crore. Fiscal deficit is the gap not covered by receipts other than borrowing, i.e. the ₹10,000 crore borrowed. Primary deficit = fiscal deficit − interest = ₹4,000 crore. All three statements are correct. So (d).

Hindi version: UPSC's official question paper (2025), question 61 ↗

Prelims 2025 · Q65

A country's fiscal deficit stands at ₹ 50,000 crores. It is receiving ₹ 10,000 crores through non-debt creating capital receipts. The country's interest liabilities are ₹ 1,500 crores. What is the gross primary deficit?

  1. (a)₹ 48,500 crores
  2. (b)₹ 51,500 crores
  3. (c)₹ 58,500 crores
  4. (d)None of the above
Show answer

UPSC's answer: (a)

NCERT answers it: Class 12 Introductory Macroeconomics, Ch 5 (Government Budget and the Economy).

Macroeconomics (ch 5): gross primary deficit = gross fiscal deficit − net interest liabilities = ₹50,000 − ₹1,500 = ₹48,500 crore. So (a).

Hindi version: UPSC's official question paper (2025), question 65 ↗

Ch 6 · Open Economy Macroeconomics

Prelims 2019 · Q65

In the context of India, which of the following factors is/are contributor/contributors to reducing the risk of a currency crisis?

  1. 1.The foreign currency earnings of India's IT sector
  2. 2.Increasing the government expenditure
  3. 3.Remittances from Indians abroad

Select the correct answer using the code given below.

  1. (a)1 only
  2. (b)1 and 3 only
  3. (c)2 only
  4. (d)1, 2 and 3
Show answer

UPSC's answer: (b)

NCERT answers it: Class 10 Contemporary India – II, Ch 7 (Lifelines of National Economy); Class 12 Introductory Macroeconomics, Ch 6 (Open Economy Macroeconomics).

How to solve it with NCERT: Class 10 Contemporary India II, ch 7: India earns large foreign exchange from IT exports. Class 12 Macroeconomics, ch 6: remittances ('transfers') are inflows in the balance of payments. Both bring in dollars, which protects the rupee. More government spending does not. Answer (b).

Hindi version: UPSC's official question paper (2019), question 65 ↗

Prelims 2019 · Q86

Which one of the following is not the most likely measure the Government/RBI takes to stop the slide of Indian rupee?

  1. (a)Curbing imports of non-essential goods and promoting exports
  2. (b)Encouraging Indian borrowers to issue rupee denominated Masala Bonds
  3. (c)Easing conditions relating to external commercial borrowing
  4. (d)Following an expansionary monetary policy
Show answer

UPSC's answer: (d)

NCERT answers it: Class 12 Introductory Macroeconomics, Ch 6 (Open Economy Macroeconomics).

How to solve it with NCERT: Class 12 Macroeconomics, ch 6: higher interest rates at home tend to strengthen the currency. An expansionary monetary policy lowers rates, so it would weaken the rupee further. That is the step the RBI would not take. The other three options bring dollars in. Answer (d).

Hindi version: UPSC's official question paper (2019), question 86 ↗

Prelims 2020 · Q51

With reference to Foreign Direct Investment in India, which one of the following is considered its major characteristic?

  1. (a)It is the investment through capital instruments essentially in a listed company.
  2. (b)It is a largely non-debt creating capital flow.
  3. (c)It is the investment which involves debt-servicing.
  4. (d)It is the investment made by foreign institutional investors in the Government securities.
Show answer

UPSC's answer: (b)

NCERT answers it: Class 12 Introductory Macroeconomics, Ch 6 (Open Economy Macroeconomics).

The one fact NCERT doesn't give: FDI brings in ownership capital (equity), not loans, so India owes no repayment or interest on it. It is a non-debt-creating flow.

Class 12 Macroeconomics, ch 6, lists FDI as a capital-account item separate from external borrowings. Answer (b).

Hindi version: UPSC's official question paper (2020), question 51 ↗

Prelims 2021 · Q8

Consider the following statements:

The effect of devaluation of a currency is that it necessarily

  1. 1.improves the competitiveness of the domestic exports in the foreign markets
  2. 2.increases the foreign value of domestic currency
  3. 3.improves the trade balance

Which of the above statements is/are correct?

  1. (a)1 only
  2. (b)1 and 2
  3. (c)3 only
  4. (d)2 and 3
Show answer

UPSC's answer: (a)

NCERT answers it: Class 12 Introductory Macroeconomics, Ch 6 (Open Economy Macroeconomics).

The one fact NCERT doesn't give: Devaluation does not necessarily improve the trade balance. If imports such as crude oil can't be cut, the import bill can rise instead.

Class 12 Macroeconomics, ch 6: devaluation makes the domestic currency cheaper (so 2 is false), which makes exports cheaper abroad (1 is true). Answer (a).

Hindi version: UPSC's official question paper (2021), question 8 ↗

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