UPSC Prelims 2021— Question 85

The lender-of-last-resort function refers to a central bank providing emergency liquidity to solvent banks or financial institutions facing temporary liquidity stress when normal market funding is unavailable. It is not ordinary lending to trade and industry nor routine financing of government budget deficits. Hence only statement 2 is correct. The final answer-key position for Set C identifies option B as the correct option. Option A — 1 and 2 — is not correct because it does not satisfy the specific condition tested in the question; it represents an alternative that is contradicted, incomplete, or less precise than the accepted answer. Option B — 2 only — is correct because it is the alternative that matches the constitutional, historical, geographical, scientific or economic principle established above. Option C — 2 and 3 — is not correct because it does not satisfy the specific condition tested in the question; it represents an alternative that is contradicted, incomplete, or less precise than the accepted answer. Option D — 3 only — is not correct because it does not satisfy the specific condition tested in the question; it represents an alternative that is contradicted, incomplete, or less precise than the accepted answer. For PYQ interpretation, the distinction between the correct alternative and merely related facts is important. UPSC often places plausible distractors beside the precise statement that matches the underlying rule, chronology, definition or empirical relationship. The answer should therefore be read against the exact wording of the question rather than against a broadly related fact.