2013 GS Paper I, all questions
UPSC Prelims 2013 · GS Paper I
Question 85: Economy and Social Development
Supply of money remaining the same when there is an increase in demand for money, there will be
aa fall in the level of prices
ban increase in the rate of interest
ca decrease in the rate of interest
dan increase in the level of income and employment
AnswerUPSC’s answer is (b).
With a fixed money supply, an increase in the demand for money means people want to hold more cash, so they sell bonds or lend less, which pushes interest rates up. The interest rate is the price of holding money; when demand for money rises against a fixed supply, that price rises. Prices do not fall, the rate does not decrease, and income and employment do not rise as a result.
Why each option is right or wrong
- (a) Wrong. Demand pressure on a fixed money supply does not lower prices.
- (b) Correct. The interest rate rises.
- (c) Wrong. It would fall only if money demand fell or supply rose.
- (d) Wrong. Higher interest rates do not raise income and employment.
Answer: UPSC’s key. Explanation: written by UPSC Grade, not by UPSC.
Source: UPSC, Civil Services (Preliminary) Examination 2013, General Studies Paper I, Series A. The paper on upsc.gov.in.