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.
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Q1. Which of the following is a key trend in the digital economy?
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:
Which of the statements given above are correct?
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?
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?
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?
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.
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