This set covers the balance of payments, exchange rates and the main international economic institutions. UPSC Prelims frequently asks which items belong to the current or capital account and about the IMF, World Bank and WTO.
How to practise: read each question and tap the option you think is correct. You will see right away whether you got it, along with a short explanation, and your score is tracked at the bottom of the screen. This set has 15 questions.
Topics covered in this set
- Current and capital account of the BoP
- Exchange rate and convertibility
- FDI and FPI
- IMF and Special Drawing Rights
- World Bank Group
- WTO and agricultural subsidy boxes
UPSC Economy MCQs with answers and explanations
Q1. Which of the following is recorded in the current account of India's balance of payments?
a) Foreign direct investment
b) External commercial borrowings
c) Remittances from Indian workers abroad
d) Foreign portfolio investment
Q2. Which of the following is a capital account transaction?
a) Export of software services
b) Purchase of shares of an Indian company by a foreign investor
c) Interest paid on foreign loans
d) Import of crude oil
Q3. In the balance of payments, the term invisibles refers to:
a) Trade in goods only
b) Changes in foreign exchange reserves
c) Foreign direct investment flows
d) Trade in services, income flows and transfers
Q4. Depreciation of the Indian rupee against the US dollar is most likely to:
a) Make Indian exports cheaper and imports costlier
b) Make Indian exports costlier and imports cheaper
c) Reduce the rupee cost of foreign debt servicing
d) Have no effect on trade
Q5. In India, an investment by a foreign investor in a listed company is generally treated as FDI rather than FPI when the stake is:
a) Less than 1 percent of equity
b) 10 percent or more of equity
c) Exactly 5 percent of equity
d) Any amount made through the stock exchange
Q6. India adopted full convertibility of the rupee on the current account in:
a) 1991
b) 1993
c) 1994
d) 2000
Q7. Which committee is associated with recommendations on capital account convertibility in India?
a) Narasimham committee
b) Tarapore committee
c) Rangarajan committee
d) Kelkar committee
Q8. Which of the following currencies is NOT part of the IMF's Special Drawing Rights (SDR) basket?
a) US dollar
b) Chinese renminbi
c) Indian rupee
d) Japanese yen
Q9. The International Monetary Fund and the International Bank for Reconstruction and Development were created at the conference held at:
a) Bretton Woods
b) Geneva
c) Marrakesh
d) Doha
Q10. Which of the following statements about the World Trade Organization is correct?
a) It was established in 1947
b) It is headquartered in Washington DC
c) It came into existence in 1995 and replaced GATT as the global trade body
d) It provides loans to developing countries
Q11. Under the WTO Agreement on Agriculture, subsidies that cause minimal or no trade distortion are placed in the:
a) Amber box
b) Blue box
c) Red box
d) Green box
Q12. Which member of the World Bank Group provides concessional loans and grants to the poorest countries?
a) International Development Association
b) International Finance Corporation
c) Multilateral Investment Guarantee Agency
d) International Bank for Reconstruction and Development
Q13. Masala bonds are:
a) Dollar-denominated bonds issued by Indian firms in India
b) Rupee-denominated bonds issued outside India by Indian entities
c) Bonds issued by the RBI to absorb liquidity
d) Gold-linked bonds issued by the government
Q14. Why is foreign portfolio investment often called hot money?
a) It is invested only in energy companies
b) It is subject to higher taxes
c) It flows only into government bonds
d) It can enter and leave the country quickly, making it volatile
Q15. India's exchange rate system is best described as:
a) A fixed peg to the US dollar
b) A managed float, with the RBI intervening to curb excessive volatility
c) A currency board
d) A free float with no central bank intervention
Quick revision notes
- The current account covers trade in goods, services, income and transfers; the capital account covers FDI, FPI, loans and banking capital.
- A foreign stake of 10 percent or more in a listed company is treated as FDI in India.
- The rupee became fully convertible on the current account in 1994; capital account convertibility is partial.
- The SDR basket has five currencies: US dollar, euro, renminbi, yen and pound sterling.
- The IMF and IBRD came from the 1944 Bretton Woods conference; the WTO began in 1995 in Geneva.
- IDA is the World Bank Group's concessional lending arm for the poorest countries.
Frequently asked questions
What is the difference between the current account and capital account?
The current account records trade in goods and services, income and transfers, which do not create claims on future assets or liabilities. The capital account records flows such as investment and loans that change a country's assets or liabilities.
Is a current account deficit always bad?
Not always, since a deficit financed by stable flows such as FDI can support investment and growth. It becomes a concern when it is large and financed by volatile short-term flows.
What is an SDR?
The Special Drawing Right is an international reserve asset created by the IMF in 1969. Its value is based on a basket of five major currencies, and it is allocated to member countries in proportion to their quotas.
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