UPSC Prelims 2013— Question 85

Concept and answer: Option B is correct. With the money supply fixed, a rise in the demand for money increases the demand for liquidity. In a standard monetary framework, this tends to push the equilibrium rate of interest upward as people are willing to hold more money at higher interest rates or reduce bond holdings. Therefore an increase in the interest rate is the expected effect. The question tests the precise definition, fact or causal relationship identified above. The alternatives must therefore be checked against that exact point rather than against a loosely related fact. Option A: Incorrect. This alternative does not match the verified principle tested by the question. It either reverses the relationship, assigns the feature to the wrong institution, place, process or category, or includes an additional proposition that is not correct. The fact that an option may contain a term related to the subject does not make the entire option correct. Option B: Correct. This option is the combination or proposition that matches the verified principle described above. It does not introduce a contradiction or an unsupported qualification. Option C: Incorrect. This alternative does not match the verified principle tested by the question. It either reverses the relationship, assigns the feature to the wrong institution, place, process or category, or includes an additional proposition that is not correct. The fact that an option may contain a term related to the subject does not make the entire option correct. Option D: Incorrect. This alternative does not match the verified principle tested by the question. It either reverses the relationship, assigns the feature to the wrong institution, place, process or category, or includes an additional proposition that is not correct. The fact that an option may contain a term related to the subject does not make the entire option correct. Exam takeaway: the decisive point is the distinction stated in the core explanation, and Option B is the only choice fully consistent with it. For Prelims, avoid selecting an option merely because one part sounds familiar. Read the entire alternative, identify the controlling constitutional provision, historical fact, scientific mechanism, geographical location or economic definition, and then eliminate choices that overstate, omit or misclassify that point.