2012 GS Paper I, all questions

UPSC Prelims 2012 · GS Paper I

Question 77: Economy and Social Development

Which of the following measures would result in an increase in the money supply in the economy?

  1. 1.Purchase of government securities from the public by the Central Bank
  2. 2.Deposit of currency in commercial banks by the public
  3. 3.Borrowing by the government from the Central Bank
  4. 4.Sale of government securities to the public by the Central Bank

Select the correct answer using the codes given below :

a1 only
b2 and 4 only
c1 and 3
d2, 3 and 4

AnswerUPSC’s answer is (c).

Money supply rises when the central bank puts money into the economy. Buying government securities from the public pays out money, and government borrowing from the central bank (which creates the money it lends) adds to the money supply. Depositing currency in banks only converts currency into deposits, leaving the total unchanged, and selling securities to the public withdraws money.

  • 1. Central bank purchase of securities pays money to the public.
  • 2. Depositing currency only converts currency into deposits; the total is unchanged.
  • 3. Government borrowing from the central bank creates new money.
  • 4. Selling securities to the public withdraws money and reduces supply.

How you could have got this

  1. If you were sure statement 1 is correct, (b) and (d) go: each of them leaves 1 out.

    What you needed to know: Central bank purchase of securities pays money to the public.

  2. Then, if you were sure statement 3 is correct, (a) goes: it leaves 3 out.

    What you needed to know: Government borrowing from the central bank creates new money.

Only (c) is left. You didn’t need statements 2 or 4.

Which options go is worked out from UPSC’s key and the options, not by a model.

Why each option is right or wrong
  • (a) Incomplete: government borrowing from the central bank also raises money supply.
  • (b) Wrong: depositing currency does not raise it, and selling securities reduces it.
  • (c) Correct: central bank purchases and government borrowing from it.
  • (d) Wrong: it includes depositing currency and the sale of securities, which do not raise money supply.

Answer: UPSC’s key. Explanation: written by UPSC Grade, not by UPSC.

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Source: UPSC, Civil Services (Preliminary) Examination 2012, General Studies Paper I, Series A. The paper on upsc.gov.in.