2021 GS Paper I, all questions

UPSC Prelims 2021 · GS Paper I

Question 15: Economy and Social Development

In India, the central bank’s function as the ‘lender of last resort’ usually refers to which of the following?

  1. 1.Lending to trade and industry bodies when they fail to borrow from other sources
  2. 2.Providing liquidity to the banks having a temporary crisis
  3. 3.Lending to governments to finance budgetary deficits

Select the correct answer using the code given below.

a1 and 2
b2 only
c2 and 3
d3 only

AnswerUPSC’s answer is (b).

Lender of last resort means the central bank gives emergency liquidity to banks that cannot raise funds elsewhere, so that a temporary shortage does not turn into a bank run or a wider crisis. In India the RBI does this through facilities such as the marginal standing facility. It does not lend to trade and industry bodies directly, and financing the government's deficit is a different matter, tied to its role as the government's banker.

  • 1. Last-resort lending is to banks, not to trade and industry bodies.
  • 2. This is the core meaning: liquidity support for banks facing a temporary crisis.
  • 3. Financing government deficits is not what lender of last resort refers to.

How you could have got this

  1. If you were sure statement 1 is not correct, (a) goes: it includes 1.

    What you needed to know: Last-resort lending is to banks, not to trade and industry bodies.

  2. Then, if you were sure statement 3 is not correct, (c) and (d) go: each of them includes 3.

    What you needed to know: Financing government deficits is not what lender of last resort refers to.

Only (b) is left. You didn’t need statement 2.

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 RBI does not act as last-resort lender to trade and industry bodies.
  • (b) Right: last-resort lending means emergency liquidity for banks in temporary trouble.
  • (c) Wrong: deficit financing for the government is not last-resort lending.
  • (d) Wrong: lending to governments is a different function and not what the term refers to.

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

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Source: UPSC, Civil Services (Preliminary) Examination 2021, General Studies Paper I, Series A. The paper on upsc.gov.in.