2012 GS Paper I, all questions

UPSC Prelims 2012 · GS Paper I

Question 79: Economy and Social Development

Consider the following statements : The price of any currency in international market is decided by the

  1. 1.World Bank
  2. 2.demand for goods/services provided by the country concerned
  3. 3.stability of the government of the concerned country
  4. 4.economic potential of the country in question

Which of the statements given above are correct?

a1, 2, 3 and 4
b2 and 3 only
c3 and 4 only
d1 and 4 only

AnswerUPSC’s answer is (b).

A currency's price in the foreign-exchange market is set by demand and supply. These reflect the demand for the country's goods and services (traders need its currency to buy them) and confidence in the government's stability. The World Bank does not fix exchange rates. UPSC's key treats a country's economic potential as not directly deciding the price.

  • 1. The World Bank does not decide exchange rates.
  • 2. Demand for a country's goods and services creates demand for its currency.
  • 3. Government stability builds confidence in a currency.
  • 4. UPSC's key does not count economic potential as a direct determinant.

How you could have got this

  1. If you were sure statement 4 is not correct, (a), (c) and (d) go: each of them includes 4.

    What you needed to know: UPSC's key does not count economic potential as a direct determinant.

Only (b) is left. You didn’t need statements 1, 2 or 3.

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) Wrong: the World Bank does not set currency prices.
  • (b) Correct: demand for the country's goods and services, and government stability.
  • (c) Wrong: it leaves out demand for goods and services and adds economic potential, which UPSC excludes.
  • (d) Wrong: the World Bank does not decide currency prices.

Worth knowing: Economic potential also influences a currency's value, so excluding statement 4 is debatable, but UPSC's key is (b).

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.