UPSC CSE Practice Quiz

Question 1

Which one of the following best captures the immediate macroeconomic implication when a government finances a high fiscal deficit primarily by borrowing from the domestic market, while private credit demand is also strong?

Accepted Answer

It can raise interest rates and crowd out private investment.

Question 2

If a fiscal deficit is financed by monetization through central bank creation of money, which implication is most likely in the short run, assuming output is near capacity?

Accepted Answer

Inflationary pressure due to excess aggregate demand.

Question 3

A rise in fiscal deficit caused by tax cuts during a downturn may have a weaker stimulus effect than the same-sized rise caused by direct public works spending mainly because:

Accepted Answer

Part of the tax-cut gain may be saved rather than spent, reducing the multiplier.

Question 4

Which one of the following is the most appropriate implication if a government persistently finances fiscal deficits through short-term borrowing rather than long-term borrowing?

Accepted Answer

It increases rollover risk and vulnerability to interest rate shocks.

Question 5

Which one of the following situations best indicates that a high fiscal deficit may be less inflationary than usual?

Accepted Answer

The economy has substantial unused capacity and weak private demand.

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