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Introductory Macroeconomics

Class 12 · Economy

Ch 6 · Open Economy Macroeconomics

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.

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

Select the correct answer using the code given below.

(a)1 only
(b)1 and 3 only
(c)2 only
(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?

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

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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?

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

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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.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

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 ↗

Prelims 2022 · Q3

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

1.If the inflation 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

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 ↗

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