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 21–30 of 86 questions
RAS PrelimsIndian Economy · Monetary and Fiscal Policy, Union Budget and Resource Mobilisation
Q21. Consider the following statements regarding an Expansionary Fiscal Policy: I. It is typically used during an economic recession or slowdown. II. It involves increasing government spending. III. It involves reducing tax rates to leave more disposable income with consumers. IV. It generally leads to a reduction in the government’s fiscal deficit. V. It aims to stimulate aggregate demand in the economy. Which of the above statements are correct?
Explanation
This policy approach aims to boost economic activity during downturns by increasing government spending and lowering tax rates. These actions put more money into the hands of consumers and businesses, thereby stimulating aggregate demand. While effective for growth, such measures typically lead to an increase in the budget deficit because expenditures often rise faster than the revenues collected by government.
RAS PrelimsIndian Economy · Monetary and Fiscal Policy, Union Budget and Resource Mobilisation
Q22. In India, the responsibility of formulating the Fiscal Policy rests with which of the following entities?
Explanation
The formulation and execution of fiscal strategy are handled by the central government’s financial department. This entity manages the national budget, oversees revenue collection through various taxes, and determines the allocation of public funds across different sectors. This responsibility is separate from the central bank, which manages monetary policy. It focuses on using budgetary tools to achieve growth and stability.
RAS PrelimsIndian Economy · Monetary and Fiscal Policy, Union Budget and Resource Mobilisation
Q23. Which of the following measures represents a contractionary fiscal policy?
Explanation
A contractionary stance involves reducing the government’s budget deficit to cool down an overheating economy or control inflation. This is achieved by cutting public spending, such as subsidies, and raising tax rates to reduce disposable income. These actions lower the overall demand in the economy. Unlike monetary policy changes, these measures directly impact the government’s own balance sheet and revenue.
RAS PrelimsIndian Economy · Monetary and Fiscal Policy, Union Budget and Resource Mobilisation
Q24. Match the following policy instruments in List I with their respective policy types in List II.
Instrument
Policy Type
A. Cash Reserve Ratio
i. Monetary Policy Instrument
B. Goods and Services Tax
ii. Fiscal Policy Instrument
C. Open Market Operations
iii. Monetary Policy Instrument
D. Public Debt Management
iv. Fiscal Policy Instrument
Explanation
Monetary policy utilizes tools like the cash reserve ratio and open market operations to regulate liquidity and interest rates. Fiscal policy involves instruments such as the goods and services tax for revenue collection and public debt management for financing expenditures. Both sets of tools are used in coordination to achieve macroeconomic stability, though they are managed by completely different national authorities.
RAS PrelimsIndian Economy · Monetary and Fiscal Policy, Union Budget and Resource Mobilisation
Q25. What is the most likely long-term effect of a persistently high fiscal deficit financed by continuous government borrowing from the domestic market?
Explanation
When the government borrows excessively from the domestic market, it competes with the private sector for available savings. This increased demand for funds leads to higher interest rates, making it more expensive for businesses to borrow and invest. This phenomenon reduces the overall capital available for private enterprise, potentially slowing down long-term economic growth and diminishing the nation’s total productive capacity.
RAS PrelimsIndian Economy · Monetary and Fiscal Policy, Union Budget and Resource Mobilisation
Q26. An economy is facing a severe recession with high unemployment. Which combination of policies is most appropriate to combat this situation?
Explanation
To combat a recession, a dual approach of increasing the money supply and boosting government spending is most effective. Lowering interest rates encourages private borrowing and investment, while increased public expenditure and tax cuts stimulate aggregate demand directly. Together, these policies work to increase production, create employment opportunities, and restore economic growth during periods of significant slowdown and high unemployment.
RAS PrelimsIndian Economy · Monetary and Fiscal Policy, Union Budget and Resource Mobilisation
Q27. Given below are two statements, one is labelled as Assertion (A) and the other as Reason (R). Assertion (A): Expansionary fiscal policy can sometimes lead to demand-pull inflation. Reason (R): Increased government spending and tax cuts boost aggregate demand, which can outpace aggregate supply.
Explanation
Increasing government expenditure and reducing taxes significantly boosts the purchasing power of consumers. When this rise in aggregate demand occurs faster than the economy’s ability to produce goods and services, it leads to upward pressure on prices. This specific type of inflation occurs because the total spending in the economy exceeds the available supply, illustrating a common economic trade-off.
RAS PrelimsIndian Economy · Monetary and Fiscal Policy, Union Budget and Resource Mobilisation
Q28. Identify the odd one out among the following items in the context of Capital Receipts of the Union Government.
Explanation
Capital receipts either create a liability for the government or reduce its existing assets. Examples include loan recoveries, disinvestment proceeds, and fresh borrowings. In contrast, dividends represent regular income earned from government investments in enterprises. These are classified as revenue receipts because they provide income without affecting the government’s asset or liability position, unlike the other mentioned capital-related financial transactions.
RAS PrelimsIndian Economy · Monetary and Fiscal Policy, Union Budget and Resource Mobilisation
Q29. Arrange the following stages of the Union Budget passage in the Parliament in the correct chronological order: I. Voting on Demands for Grants II. Presentation of the Budget III. Passing of Finance Bill IV. General Discussion V. Passing of Appropriation Bill
Explanation
The legislative process begins with the presentation of the budget, followed by a general discussion among members of parliament. Subsequently, specific demands for grants are voted upon by the assembly. Once approved, the appropriation bill is passed to authorize spending, and finally, the finance bill is enacted to give legal effect to the government’s various taxation and revenue collection proposals.
RAS PrelimsIndian Economy · Monetary and Fiscal Policy, Union Budget and Resource Mobilisation
Q30. A government receipt is classified as a ‘Revenue Receipt’ if it meets which of the following criteria?
Explanation
Receipts are categorized as revenue if they represent recurring income that does not result in a future repayment obligation or a decrease in the government’s wealth. Common examples include tax collections, interest income, and dividends. These funds are used for the day-to-day functioning of the administration and do not change the fundamental financial position or net worth of the state.
Answer key for these questions
Q
Correct answer
21
(c) I, II, III and V only
22
(d) The Ministry of Finance
23
(a) Reducing subsidies and increasing direct taxes
24
(a) A-i, B-ii, C-iii, D-iv
25
(a) Private investment crowding out due to higher interest rates
26
(d) Expansionary monetary policy and expansionary fiscal policy
27
(a) Both A and R are true and R is the correct explanation of A.
28
(c) Dividends received from Public Sector Undertakings
29
(a) II - IV - I - V - III
30
(a) It neither creates a liability nor reduces an asset
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.
