Economy MCQs for Prelims – 28th June 2025

Welcome to today’s curated set of MCQs from the Economy segments, specially aligned with the evolving trend of the UPSC Civil Services Preliminary Examination. These questions are not just a quiz, but a resource designed to familiarize you with the exact nature of questions asked in Prelims — where static concepts are tested through a current affairs lens.

Each question below is framed using recent developments in the news and backed by clear, concise explanations to help you link dynamic events with foundational knowledge. Topics covered today include: bypolls, removal of a judge, and more...

Use this as a daily revision tool to refine your understanding, build context, and learn how UPSC frames conceptual questions from contemporary issues.

 Click Here to read the Current Affairs Total (CAT) Magazine for January 2025- April 2025.

 

Q1. Which of the following is a key trend in the digital economy?

1. Decrease in online transactions due to security concerns
2. Growth in the use of blockchain technology for secure transactions
3. Reduction in the use of digital wallets and online payment systems
4. Decrease in e-commerce sales as consumers return to traditional retail shopping

Answer: b

Explanation

Blockchain technology is increasingly being adopted for its ability to provide secure, transparent, and efficient transactions, which is a key trend in the digital economy.

 

Q2. Consider the following statements about different types of money:

1. Commodity money is a type of money whose value comes from a commodity of which it is made.
2. Fiat money has intrinsic value and is backed by physical commodities.
3. Representative money means each unit of money is backed by a physical quantity of a commodity.
4. Cryptocurrency is considered a form of fiat money that operates on blockchain technology.

Which of the statements given above are correct?

1. 1 and 3 only
2. 2 and 4 only
3. 1, 3 and 4 only
4. 1 and 4 only

Answer: a

Explanation

Statement 1 is correct: Commodity money's value comes from the commodity out of which it is made, such as gold or silver coins.

Statement 2 is incorrect: Fiat money, on the other hand, does not have intrinsic value and is not backed by physical commodities; its value comes from the trust and faith that people have in the issuing government.

Statement 3 is correct: Representative money is backed by a physical commodity, and each unit can be exchanged for a commodity.

Statement 4 is incorrect: Cryptocurrency operates on blockchain technology and is not considered fiat money because it is not issued by a central authority and does not have the legal tender status.

 

Q3. The velocity of money in an economy increases with which one of the following?

1. Increase in the use of cash for transactions
2. Increase in digital payment adoption
3. Increase in the savings rate of households
4. Increase in the currency-to-deposit ratio

Answer: b

Explanation

Option a is incorrect: Increase in the use of cash for transactions: While cash transactions contribute to the economy, they tend to slow down the velocity of money compared to digital payments, which are instantaneous and efficient.

Option b is correct: Increase in digital payment adoption: When more people use digital payment systems, transactions happen faster, leading to an increase in the velocity of money. The same amount of money circulates more quickly within the economy, facilitating more transactions.

Option c is incorrect: Increase in the savings rate of households: When households save more, less money is available for spending, reducing the velocity of money.

Option d is incorrect: Increase in the currency-to-deposit ratio: A higher currency-to-deposit ratio implies that people are holding more cash relative to deposits, which slows down money circulation.

 

Q4. Consider the following statements regarding the money multiplier:

Statement-I: An increase in the Cash Reserve Ratio (CRR) leads to a higher money multiplier, increasing the money supply in the economy.

Statement-II: A decrease in the Statutory Liquidity Ratio (SLR) can potentially increase the money supply, as banks have more funds available to lend.

Which one of the following is correct in respect of the above statements?

1. Both Statement-I and Statement-II are correct and Statement-II is the correct explanation for Statement-I
2. Both Statement-I and Statement-II are correct and Statement-II is not the correct explanation for Statement-I
3. Statement-I is correct but Statement-II is incorrect
4. Statement-I is incorrect but Statement-II is correct

Answer: d

Explanation

Statement I is incorrect: An increase in the CRR reduces the money multiplier. CRR is the portion of deposits that banks are required to keep with the central bank. A higher CRR means banks have less money to lend out, reducing the multiplier effect.

Statement II is correct: A decrease in the SLR can increase the money supply. SLR is the portion of deposits that banks must invest in approved securities. A lower SLR means banks have more funds available to lend, thus potentially increasing the money supply.

 

Q5. In a fractional reserve banking system, which of the following actions by the central bank would most directly decrease the money multiplier, assuming no change in public holding of currency?

1. Lowering the discount rate and providing additional short-term liquidity to banks.
2. Conducting open market purchases of government securities, injecting liquidity into the system.
3. Raising the reserve requirement ratio, mandating banks to hold a larger proportion of deposits as reserves.
4. Reducing the statutory liquidity ratio, allowing banks to hold a smaller proportion of their demand and time liabilities in liquid assets.

Answer: c

Explanation

Option a is incorrect: Lowering the discount rate encourages banks to borrow more from the central bank, increasing their reserves and potentially leading to more lending. This would tend to increase, not decrease, the money multiplier.

Option b is incorrect: Open market purchases of government securities inject liquidity into the banking system, increasing banks' reserves and their capacity to lend. This action would also tend to increase the money multiplier.

Option c is correct: Raising the reserve requirement ratio directly reduces the money multiplier. When banks are required to hold a larger proportion of their deposits as reserves, they have less to lend out, reducing the multiplier effect of each deposit on the overall money supply.

Option d is incorrect: Reducing the statutory liquidity ratio allows banks to maintain a smaller proportion of their liabilities in liquid assets like government securities and cash. This frees up funds for lending and would tend to increase the money multiplier.