UPSC Prelims 2020 · GS Paper I
Question 57: Economy and Social Development
If the RBI decides to adopt an expansionist monetary policy, which of the following would it not do ?
- 1.Cut and optimize the Statutory Liquidity Ratio
- 2.Increase the Marginal Standing Facility Rate
- 3.Cut the Bank Rate and Repo Rate
Select the correct answer using the code given below :
AnswerUPSC’s answer is (b).
An expansionary monetary policy aims to raise liquidity and lower the cost of credit, so the RBI would cut the SLR, the Bank Rate and the Repo Rate. Raising the Marginal Standing Facility rate makes emergency borrowing from the RBI costlier and tightens credit, so it is the one thing it would not do. The question asks what it would not do, so the answer is item 2 only.
- 1. Not selected: cutting the SLR is expansionary, so the RBI would do it.
- 2. Selected: raising the MSF rate tightens policy, so it would not do this.
- 3. Not selected: cutting the Bank Rate and Repo Rate is expansionary.
How you could have got this
- If you were sure statement 1 is not correct, (a), (c) and (d) go: each of them includes 1.
What you needed to know: Not selected: cutting the SLR is expansionary, so the RBI would do it.
Only (b) is left. You didn’t need statements 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: cutting the SLR is expansionary, so the RBI would do it.
- (b) Right: raising the MSF rate is contractionary, so the RBI would not do it.
- (c) Wrong: both are expansionary, so the RBI would do them.
- (d) Wrong: items 1 and 3 are things the RBI would do.
Answer: UPSC’s key. Explanation: written by UPSC Grade, not by UPSC.
Source: UPSC, Civil Services (Preliminary) Examination 2020, General Studies Paper I, Series A. The paper on upsc.gov.in.