UPSC 2022 Prelims Questions with Answers

Explanation

Rapid Financing Instrument (RFI) and Rapid Credit Facility (RCF) are instruments of the International Monetary Fund (IMF) which provides financial assistance to the countries in need. Rapid Financing Instrument (RFI): The Rapid Financing Instrument (RFI) provides rapid financial assistance, which is available to any IMF member countries facing an urgent balance of payment needs. The RFI was created as part of a broader reform to make the IMF’s financial support more flexible to address the diverse needs of member countries. It is one of the facilities under the General Resources Account (GRA) that provide financial support to countries, including in times of crisis. Rapid Credit Facility (RCF): The Rapid Credit Facility (RCF) provides rapid concessional financial assistance to low-income countries (LICs) facing an urgent Balance of Payments (BoP) need with no ex post conditionality where a full-fledged economic program is neither necessary nor feasible. The RCF was created under the Poverty Reduction and Growth Trust (PRGT) as part of a broader reform to make the Fund’s financial support more flexible and better tailored to the diverse needs of LICs, including in times of crisis.

Explanation

Statement 1 is correct: The Nominal Effective Ex-change Rate (NEER) is an unadjusted weighted average rate at which a country’s currency exchanges for a basket of multiple foreign currencies. An increase in NEER signifies that the domestic currency has strengthened or appreciated relative to the selected basket of foreign currencies. An increase in NEER means that, on average, the rupee has become more valuable relative to those other currencies. It takes more of the foreign currencies to buy one unit of the rupee.

Statement 2 is incorrect: Real Effective Exchange Rate (REER) is a measure of a country’s currency value relative to a basket of other currencies adjusted for inflation differentials. An increase in REER implies that the domestic currency has appreciated in real terms, making exports more expensive and im-ports cheaper. Consequently, a higher REER indicates a loss in trade competitiveness, not an improvement.

Statement 3 is correct: If domestic inflation is higher than inflation in other countries, the REER will appreciate (be-come more expensive) even if the NEER remains constant or depreciates. This divergence occurs because the REER calculation accounts for inflation differentials. The higher domestic inflation makes a country’s goods less competitive, even if nominal exchange rates don’t reflect that.

Explanation

Statement 1 is correct: A tight monetary policy by the US Federal Reserve typically involves increasing interest rates to control inflation. Higher US interest rates can attract investors seeking better returns which can lead to capital outflows from emerging markets as investors move their funds to the US. This phenomenon is known as capital flight.

Statement 2 is correct: Capital flight can lead to the depreciation of the domestic currency as investors sell off local assets. For firms with ECBs(loans in foreign currency) denominated in foreign currencies, a weaker domestic currency means that more local currency is required to service the same amount of foreign debt, effectively increasing the interest cost and principal repayments in domestic currency terms.

Statement 3 is incorrect: Devaluation increases(not decreases) the currency risk associated with ECBs. If a firm has borrowed in a foreign currency and the domestic currency is devalued, the firm will have to pay more in domestic currency terms to repay the loan. This increases the burden of the debt and the currency risk for the borrower.

Explanation

Statement 1 is incorrect: A nominated member of a House becomes disqualified for being a member of the House if he joins any political party after the expiry of six months from the date on which he takes his seat in the House. This means that he may join any political party within six months of taking his seat in the House.

Statement 2 is correct: The law does not specify any time period for the Presiding Officer to decide on a disqualification plea under the Tenth Schedule.

Explanation

Statement 1 is incorrect: Attorney General has the right to speak and to take part in the proceedings of Parliament or their joint sitting and any committee of the Parliament of which he is a member, but without a right to vote. He enjoys all the privileges and immunities that are available to a Member of Parliament. While Solicitor General of India and Additional Solicitor General of India have no such rights or privilege.

Statement 2 is incorrect: The term of office of the AG is not fixed by the Constitution and also, the Constitution does not contain the procedure and grounds for his removal. He holds office during the pleasure of the president and conventionally, he resigns when CoM resigns or is replaced, as he is appointed on its advice.

Explanation

Statements 1 and 2 are correct: Inflation-Indexed Bonds is a debt market securities offered by the government to protect the savings from inflation and offer positive real rates of returns. Since Inflation-Indexed Bonds (IIBs) provide inflation protection to investors, the government can offer these bonds with lower coupon rates compared to traditional bonds. The inflation adjustment compensates for the lower fixed interest.

Statement 3 is incorrect: The existing tax provisions will be applicable on interest payment and capital gains on IIBs. There will be no special tax treatment for these bonds.

Explanation

The real sector refers to the segment of the economy that is involved in the production and consumption of tangible goods and services. It includes industries such as agriculture, manufacturing, construction, mining, and services like health-care, education, and transportation. Statements 1 and 2 are correct:

Farmers harvesting their crops: This is a primary sector activity directly contributing to the production of goods (agricultural produce). Textile mills converting raw cotton into fabrics: This is a manufacturing activity, part of the secondary sector, which also belongs to the real sector. Statements 3 and 4 are incorrect:

A commercial bank lending money to a trading company:

This is a financial sector activity, involving monetary transactions rather than the production of tangible goods or services. A corporate body issuing Rupee Denominated Bonds overseas: This relates to the financial sector and capital markets, as it involves raising funds rather than producing goods or services.

Explanation

Statement 1 is correct: A convertible bond is a fixed-in-come corporate debt security that yields interest payments, but can be converted into a predetermined number of common stock or equity shares. Convertible bonds generally offer a lower coupon rate or rate of return in exchange for the value of the option to convert the bond into common stock. Investors will generally accept a lower coupon rate on a convertible bond, compared with the coupon rate on an otherwise identical regular bond, because of its conversion feature.

Statement 2 is correct: Equity (stock) prices tend to rise with inflation. Companies’ earnings and assets often appreciate during inflationary periods. Therefore, the option to convert a bond into equity provides a hedge against inflation. If inflation rises and the company performs well, its stock price is likely to increase. The bondholder can then convert the bond into equity at a more favorable price, thus benefiting from the rising prices and protecting their investment’s real value (purchasing power). This acts as a form of indexation (linking to a price index) against inflation.

Explanation

Some species of ants such as leafcutter ants (of genus Atta and Acromyrmex) are well-known for cultivating fungi. These ants cut leaves and use them to grow fungi in specialized underground gardens. The fungi serve as the primary food source for the ant colony. This relationship between ants and fungi is a classic example of mutualism where both species benefit. The ants provide the fungi with a controlled environment and a constant supply of plant material while the fungi provide the ants with a nutritious food source. Leafcutter ants are primarily found in Central and South America,

Explanation

Option (a) is incorrect: Lake Victoria, located in East Africa (Kenya, Uganda, Tanzania), is the largest lake in Africa. It remains full and functional, supporting millions of people and diverse ecosystems.

Option (b) is correct: Lake Faguibine in Mali, West Africa, has mostly dried up due to climate change, low rainfall, and human activities. It was once one of the largest lakes in West Africa, covering 590 km², but has shrunk since the 1970s due to severe droughts. The lake depends on seasonal flooding from the Niger River, but with less water, the area has turned into dry land. This has badly affected farming, fishing, and the livelihoods of people who relied on the lake.

Option (c) is incorrect: Lake Oguta, located in Nigeria, is a permanent freshwater lake. It has not dried up and continues to serve as an important water source for local communities.

Option (d) is incorrect: Lake Volta, located in Ghana, is one of the largest artificial reservoirs in the world. It was created by the construction of the Akosombo Dam on the Volta River. The lake remains full and continues to be a vital source of hydroelectric power, irrigation, and fishing.