Monetary and Fiscal Policy, Union Budget and Resource Mobilisation: RAS Prelims MCQs
86 RAS Prelims MCQs on monetary and fiscal policy, the Union Budget and resource mobilisation test the tools of the RBI, the Monetary Policy Committee and inflation targeting, along with the deficits, taxes and budget terms. Each question asks for the effect of a policy change on liquidity or credit, so the explanations trace the transmission step by step.
Practice questions based on the RPSC RAS Prelims syllabus. They follow the exam pattern but are not past-paper questions.
Showing 11–20 of 86 questions
RAS PrelimsIndian Economy · Monetary and Fiscal Policy, Union Budget and Resource Mobilisation
Q11. Consider the following statements regarding the Monetary Policy Committee (MPC): I. It is a six-member committee constituted by the Central Government. II. The Union Finance Minister is the ex-officio Chairperson of the MPC. III. Decisions are taken by a majority vote, with the Governor having a casting vote in case of a tie. Which of the above statements are correct?
Explanation
The monetary policy committee consists of six members appointed by the government and the central bank. It is chaired by the governor, not the finance minister, to ensure institutional independence. Decisions are reached through a democratic voting process where each member has one vote. In the event of a tie, the governor possesses a second or casting vote during meetings.
RAS PrelimsIndian Economy · Monetary and Fiscal Policy, Union Budget and Resource Mobilisation
Q12. Which of the following defines the concept of ‘Inflation Targeting’ adopted by the RBI?
Explanation
This framework involves setting a specific target for the consumer price index to ensure macroeconomic stability. The goal is to keep price increases within a flexible range, typically around four percent with a two percent margin. By focusing on this metric, the central bank provides clarity to the market, anchors expectations, and aligns its monetary instruments to achieve sustainable growth.
RAS PrelimsIndian Economy · Monetary and Fiscal Policy, Union Budget and Resource Mobilisation
Q13. The statutory framework for the Monetary Policy Committee (MPC) was introduced by amending which of the following legislations?
Explanation
The institutional framework for determining interest rates was formalized through a significant amendment to the primary legislation governing central bank operations. This legal change mandated the creation of a committee to ensure a transparent and consultative approach to monetary policy. By codifying these responsibilities, the law strengthened the accountability and effectiveness of the nation’s inflation management strategies and policy processes.
RAS PrelimsIndian Economy · Monetary and Fiscal Policy, Union Budget and Resource Mobilisation
Q14. Match the following terms in List I with their accurate descriptions in List II.
Monetary Stance
Description
A. Accommodative Stance
i. The central bank prioritizes controlling inflation, often by raising interest rates
B. Neutral Stance
ii. The central bank is willing to either cut or raise rates based on data
C. Hawkish Stance
iii. Rates will either be kept on hold or raised, but not cut
D. Calibrated Tightening
iv. The central bank is prepared to expand money supply to boost growth
Explanation
An accommodative stance focuses on expanding the money supply to foster growth, while a hawkish stance prioritizes inflation control through higher rates. A neutral position allows for flexibility in either direction based on emerging data. Calibrated tightening indicates a bias toward maintaining or increasing rates. These stances provide critical signals to financial markets regarding future policy directions and economic priorities today.
RAS PrelimsIndian Economy · Monetary and Fiscal Policy, Union Budget and Resource Mobilisation
Q15. In response to a sharp rise in core inflation, the Monetary Policy Committee decides to hike the repo rate by 50 basis points. Which of the following is an intended consequence of this action?
Explanation
Raising the benchmark interest rate increases the cost at which commercial banks borrow from the central bank. These banks subsequently pass on the higher costs to consumers and businesses through increased lending rates. This process discourages spending and investment, which helps in cooling down an overheating economy and curbing inflationary pressures by reducing the overall demand for various services.
RAS PrelimsIndian Economy · Monetary and Fiscal Policy, Union Budget and Resource Mobilisation
Q16. Which of the following is NOT a direct objective of the Reserve Bank of India’s Monetary Policy?
Explanation
The central bank focuses on maintaining price stability, ensuring a smooth flow of credit to productive sectors, and protecting the overall health of the financial system. These goals support sustainable economic development. However, the management of tax collections and revenue targets is a purely fiscal function handled by the government, specifically the finance ministry, rather than a central monetary goal.
RAS PrelimsIndian Economy · Monetary and Fiscal Policy, Union Budget and Resource Mobilisation
Q17. Consider the following statements regarding reserve ratios: I. CRR is maintained in cash, whereas SLR can be maintained in liquid assets like gold and G-secs. II. Banks earn interest on CRR balances kept with the RBI but earn nothing on SLR. III. Both CRR and SLR are calculated as a percentage of Net Demand and Time Liabilities (NDTL). IV. Reducing CRR and SLR releases liquidity into the banking system. Which of the above statements are correct?
Explanation
Mandatory reserves are calculated based on the total liabilities of a bank. While cash reserves must be kept with the central bank without interest, liquidity reserves can be held in gold or government securities. Reducing these requirements provides banks with more funds to lend. However, the central bank does not pay interest on the cash portion of these mandatory reserves.
RAS PrelimsIndian Economy · Monetary and Fiscal Policy, Union Budget and Resource Mobilisation
Q18. Which of the following is the most appropriate description of the transmission of monetary policy?
Explanation
This concept describes how modifications in the central bank’s benchmark rates eventually influence the interest rates charged by commercial banks. Efficient transmission ensures that the intended policy stance reached by the central bank actually reaches the end consumers and businesses. It is a critical link in the effectiveness of monetary policy in managing economic growth and controlling price levels.
RAS PrelimsIndian Economy · Monetary and Fiscal Policy, Union Budget and Resource Mobilisation
Q19. Identify the incorrect pair regarding the roles of the Reserve Bank of India from the options provided below.
Explanation
The central bank performs various vital functions, including managing public debt, providing emergency liquidity to banks, and safeguarding foreign exchange reserves. These roles ensure financial stability and support government operations. However, the formulation of fiscal policy and the preparation of the annual budget are the exclusive responsibilities of the central government, specifically the finance ministry, rather than the central bank.
RAS PrelimsIndian Economy · Monetary and Fiscal Policy, Union Budget and Resource Mobilisation
Q20. Fiscal policy is primarily concerned with which of the following?
Explanation
Fiscal policy involves the strategic use of government spending and taxation to influence macroeconomic conditions. By adjusting these levels, the government can manage aggregate demand, promote economic growth, and ensure social welfare. It serves as a tool for stabilization during economic fluctuations and for achieving long-term developmental goals. This policy is distinct from the central bank’s management of money.
Answer key for these questions
Q
Correct answer
11
(c) I and III only
12
(c) Maintaining retail inflation within a statutory target range
13
(d) Reserve Bank of India Act, 1934
14
(a) A-iv, B-ii, C-i, D-iii
15
(b) Increasing the cost of borrowing to dampen aggregate demand in the economy
16
(b) Managing government’s tax revenue targets
17
(b) I, III and IV only
18
(c) Process where policy rate changes impact bank lending rates
19
(d) Fiscal Policy Formulator - Designs and implements the Union Budget
20
(c) Managing government revenue and expenditure to affect the economy
Key facts from Monetary and Fiscal Policy, Union Budget and Resource Mobilisation
The objective of monetary policy under the RBI Act, 1934 is to maintain price stability while supporting growth.
If the RBI increases the CRR, the lendable resources of commercial banks decrease.
A higher reverse repo rate encourages banks to park funds with the RBI, reducing liquidity.
The statutory framework for the Monetary Policy Committee was introduced by amending the Reserve Bank of India Act, 1934.
Inflation targeting means keeping retail inflation within a statutory target range.
When the RBI buys government securities from the market, the total money supply increases.
Frequently asked questions
How many RAS Prelims practice MCQs are there on Monetary and Fiscal Policy, Union Budget and Resource Mobilisation?
This page has 86 practice MCQs on Monetary and Fiscal Policy, Union Budget and Resource Mobilisation (Indian Economy). Each has the correct answer, and most have an explanation.
What happens when the RBI raises the CRR?
Banks must keep a larger share of their deposits with the RBI, so their lendable resources decrease. Credit becomes tighter, and the policy is used to control inflation.
What is inflation targeting?
A monetary policy framework in which the central bank aims to keep inflation within a stated range. In India the RBI works to a statutory target for retail (CPI) inflation, and the Monetary Policy Committee decides the policy rate.
What is the effect of the RBI buying government securities?
It pays the sellers with new money, so the total money supply in the economy increases. This is an open market operation, used to add liquidity, and selling securities does the opposite and absorbs liquidity from the banks.
