Eonomics Sample Paper

CLASS – XII ECONOMICS SOLVED SAMPLE PAPER

Que. State the three central problems of an economy. Ans. Central problems of an economy are: (A)

What to produce? : - The problem of choice related to the production of different goods.

(B)

How to produce? : - The problem of choice related to the technique of production.

(C)

For whom to produce? : - The problem of choice related to the distribution of output.

Que. Explain the Law of Demand with the help of demand schedule. Ans. The law of demand states that, other things remaining constant, the amount demanded of a commodity decreases with rises in its price and increases with fall in its price. So, there is an inverse relationship between price and quantity demanded of a commodity. The given table and the diagram show the inverse relationship between price and quantity demanded.

DEMAND SCHEDULE Price per Unit (Rs.)

Quantity Demanded

10 8 6

50 60 70

4 2

Y 10

D

80 90

DEMAND CURVE

8 PRICE

6 4 2 O

D1 50

60

70

80

90

X

QUANTITY DEMANDED

Que. Draw the supply curves showing:

Ans.

(A)

Elasticity of supply equal to 1

(B)

Elasticity of supply greater than 1

(C)

Elasticity of supply less than 1

Y

(A)

Unitary Elastic E=1 PRICE

S

P1 P O

S

X Q Q1 QUANTITY SUPPLIED

Y

(B)

More Elastic E>1 PRICE

S2

P1 P S2 O

X Q Q1 QUANTITY SUPPLIED

Y

(C)

Less Elastic E<1 PRICE

S1

P1 P O

S1

X Q Q1 QUANTITY SUPPLIED

Que. State any three factors affecting supply of a commodity. Ans. (a)

Technological changes : When

there

is

improvement, output is produced at lower cost. production increases the supply of

technological Lower cost of

the commodity. The supply

curve shifts to the right. (b)

Prices of other goods: When price of a substitute good increases, the quantity supplied of the concerned good decreases and there is backward shift of

the supply curve. Supply curve shifts forward in

case price of the substitute good decreases.

(c)

Prices of factors of

production: If factors price decreases, cost of

production also decreases. Accordingly supply increases and the supply curve shift to the right. If factor price increases, supply tends to decline and there is a backward shift in supply curve. Que. The quantity demanded of a commodity at a at the price of Rs.10 per unit is 40 units. Its price elasticity of demand is 2. its price falls by Rs. 2 per unit. Calculate its quantity demanded at the new price. Ans. Given that,

Q1 − Q P . =–2 P1 − P Q Q1 − 40 10 . =–2 8 − 10 40 Q1 − 40 1 . =–2 4 −2 Q1 − 40 =–2 −8 Q1 – 40 = 16 Q1 = 16 + 40 = 56 Quantity demanded at new price = 56 units Que. Complete the following table: Output (in units)

Total Cost (Rs.)

Marginal Cost

Average Variable

0 1 2 3 4

60 140 190 240 300

(Rs.) -

Cost (Rs.) -

Ans. Output(in units) T.C (Rs.) TFC (Rs.) TVC (RS.) AVC (Rs.) MC (Rs.) 0 60 60 0 0 1 140 60 80 80 80 2 190 60 130 65 50 3 240 60 180 60 50 4 300 60 240 60 60 Que. Distinguish between increases in quantity supplied (expansion of supply) And increase in supply. Use diagrams. Ans. Expansion Increase in Supply : - When a rise in the price of a commodity leads to increase in quantity supplied, it

is called expansion/extension of

supply. If the quantity others

than price

supplied increases in

the market due to factors

of the concerned commodity.

It is a situation of

increase in supply. Tables (A) and (B) show, respectively, the situations of ‘expansion’ and ‘increase’. Likewise, Figure (A) shows

expansion, while

Figure (B) shows increase.

Y

(A)

Expansion of Supply PriceQuantity 10 20 100 200

S PRICE

20

B

10

A S

O

X

100 200 QUANTITY

Y

(B)

S PRICE

E

10 S O

S1 E1

S1

100 200 QUANTITY

X

Increase of Supply PriceQuantity 10 10 100 200

Que. Explain any two main features of monopolistic competition of monopolistic competition. Or Explain any two main features of monopoly. Ans. Following are the important features of monopolistic competition. (a)

Large number of buyers and sellers:- The number of buyers and

sellers of a commodity is very large. (b)

Product Differentiation :- Each producer tries to differentiate his

product with a view to attracting the buyers. Or Ans. Main features of monopoly market are as under:(i)

Single seller and large number of buyers of a product.

(i)

Entry of new firms not possible.

Que. Explain the law of variable

proportion in terms

of behaviour of Total

Physical Product, with the help of a diagram. Ans. Law of variable proportions states that as more and more of the variable factor is used with the

fixed factors, a stage must come when marginal

product(MP) of the variable factor starts diminishing. Diminishing MP may become zero or negative. Of course, initially, MP may rise owing to better coordination between the factors and better utilization of the fixed factor. But, continuous increase of the variable factor must cause mismatch between the variable and the fixed factor, and must ultimately decline. Following table shows how the law operates in terms of the behaviour of TP and MP. Variable Factor

MP

TP

Units 1 2 3

(Variable Factor) 10 15 20

10 25 45

4 5 6 7 8

20 20 10 0 -10

65 85 95 95 85

Observations: (i)

Initially, when MP is rising,(10 → 15 → 20), TP tends to rise at the increasing rate. This is also described as a situation of increasing returns.

(ii)

Subsequently, when MP is constant (20→20→20), TP increases at the constant rate. This is also described as a constant returns.

(iii)

Further, when MP is declining (20→10→0), TP increases at the diminishing rate. This is also described as a situation of diminishing returns.

(iv)

Ultimately, when MP becomes negative, TP starts declining. This is described as a situation of negative returns.

Que. Define equilibrium price. Explain with the help of a diagram the effect of an increase in demand of a commodity on its

equilibrium

price and

equilibrium quantity. Or “If the demand and supply of a commodity both increase, the equilibrium price may not change, may increase, may decrease.” Explain using diagrams. Ans.

The price which equates market demand of a commodity with its market supply is the equilibrium price.

Increase in Demand

Y D1

S

D E1

P1 PRICE P

E S

O

D1 D

Q Q1 QUANTITY

X

Equilibrium Price:- Market Demand = Market Supply When the demand equilibrium

increases while supply remains

price increases. Figure shows

constant the

that while supply remains

unchanged and demand curve shifts upwards (rightwards) from DD to D1D1, the equilibrium price will increase from OP to OP1 and equilibrium quantity increases from OQ to OQ1. Or

Ans. If the demand and supply of a commodity change equally, there will be no effect on its price. On the other hand, an unequal change in demand and supply will affect equilibrium price. When demand increases more than supply, price will rise. On the other hand, when than demand, price will fall.

supply

increases more

(a)

Y D1

S

D PRICE

P S S1 O

(b)

S1

D1 D

X

Q Q1 QUANTITY

Y D

D1

S S1

PRICE P P1 S S1 O

D

Q Q1 QUANTITY

D1 X

In Figure increase in demand and supply happen to be equi – proportionate. Accordingly, price

decreases

from

OP

to

OP1.

Que. Explain ant three factors other than the price of a commodity that affect its demand. Ans. Demand for a commodity is affected by the following factors: (i)

Prices of related goods: - In case of substitute goods, demand for a

commodity falls with fall in price of the substitute commodity. In case of complementary goods, demand for the commodity rises with a fall in the price of complementary commodity. (ii)

Taste and preferences: - If

income distribution is even, market

demand of the commodity will also change. (iii)

Income distribution : - If income distribution is even, market demand For commodities will be at a higher level, than otherwise.

Que. Calculate value added by firm X from the following data. Rs. (in lakh) (a) Sales

600

(b) Purchase of raw material

200

(c) Import of raw material

100

(d) Import of machines

200

(e) Closing stock

40

(f) Opening stock

10

Ans. Value Added = (Sales + Change in stock) – Purchase of new material = 600 + (40 – 10) – 200 = 600 + 30 – 200 = 630 – 200 = Rs. 430 lakh Que. Explain any three components of aggregate demand. Ans. Components of aggregate demand are explained as follows: (i)

Household consumption expenditure (C) is the amount of the money spent by the people on the purchase of goods and services in order to satisfy their wants directly.

(ii)

Government consumption expenditure (G) is the expenditure made by the government on the purchase of goods and services.

(iii)

Investment expenditure (I) is the expenditure that increases the stock of capital goods like machines, factories, houses, etc.

Que. Distinguish between revenue expenditure and capital expenditure. Give an example of each. Ans. Any expenditure that creates an asset or reduces a liability is categorized as capital expenditure. Example, investment in shares. Any expenditure that neither creates an asset nor reduces a liability is categorized as revenue expenditure. Example, expenditure on law and order. Que. In an economy, the level of income is Rs. 2000 crore and marginal propensity to consume is 0.75. Calculate the total increase in income if investment increases by Rs. 200 crore. Ans. ∆Y = K. ∆I ……………….

(i)

∆Y: Increase in Income K: Multiplier ∆I = Increase in investment K=

1 ……………… 1 − MPC

K=

1 1 = =4 1 − 0.75 .25

(ii)

Accordingly ∆Y = 4. ∆1 ∆Y = 4 × 200 = Rs. 800 crore Que. State the main objectives of budgetary policy. Ans. Budget is a comprehensive statement of the expected receipts and the expenditure of the government during the financial year (1st April to 31st March). Following are the principal objectives that the government pursues through the budget.

(i)

Re-allocation of Resources: The government seeks to re-allocate resources with a view to maximizing social welfare.

(ii)

Re-distribution of Income: Distribution of income is sought to be improved through subsidies and taxation.

(iii)

Economic Stability: Using its revenue and expenditure policy, the government ensures economics stability in the economy.

(iv)

Direct Participation and Economic Growth: The government seeks to accelerate the pace of growth by establishing public sector enterprises.

Que. State the main functions of money. Ans. The function of money can be classified into the following three categories: (i)

Primary Functions are those functions which are common to all countries during all time period. These include the following: (a) Medium of exchange, (b) Measure of value.

(ii)

Secondary

Functions

are

those

functions

which

are

supplementary to the primary functions. These include the following: (a) Standard of deferred payments, (b) Store of value, (c) Transfer of value. (iii)

Contingent Functions are those functions which help in the economic development of the country. These include the following: (a) Basis

of credit

creation, (b) Distribution of national income,

(c) Bearer of option, (d) Guarantee of solvency, (e) Increase in the liquidity of capital. Que. Describe any one method of quantitative credit control. Or Describe two main functions of Commercial Bank.

Ans. Bank rate policy is an important method of credit control used by Central Bank. The bank rate is the rate at which the central bank lends to the commercial banks against approved securities. An increase in the bank rate increases the cost of securing funds from the central bank. This reduces the ability of the commercial banks to create credit. Therefore, when bank rate rises, it will cause the commercial banks to increase their lending rates, thus reducing the volume of credit. Similarly, lowering of bank rate will reduce the cost of borrowing from central bank. The commercial banks will reduce their lending rates and thus the volume of credit will increase. Or Ans. Two main functions of Commercial Banks: (i)

Acceptance of Deposits: Commercial banks accept deposits from the general public. Broadly base deposits are classified as (i) demand deposits and (ii) term deposits. Demand deposits are chequable deposits and can be withdrawn by the depositor by issuing a cheque. Term deposits are not chequable deposits. These are like fixed deposits with the bank for the specified period of time.

(ii)

Advancing Loans and Creation of Credit: Commercial banks advance loans to the general households and the producers. In the process, they tend to create credit and add to the supply of money in the economy.

Que. Name the main component of the current account of Balance of Payments accounts. What does the deficit in current account indicate? Ans. Principal Items of current account balance of payments are as under: (a)

Merchandise: It refers to all such items of exports and imports which are visible, and is therefore also called “visible trade” relating to “exports and imports”. Current account showing export and import visibles is often referred to the Balance of Trade Account.

(b)

Invisibles: It refers to all such items which are rendered to rest of the world or received from rest of the world in the form of services. Invisibles in India’s balance of payments include the following principal services: Travel, Transportation, Insurance and Banking. Services rendered to the rest of the world are treated like exports, and services received from the rest of the world are treated like imports.

(c) Transfers: It refers to unilateral transfers such as gifts or donations. These are broadly divided as: (i) official transfers, and (ii) private transfers. Donations and gifts received from rest of the world are shown as “receipts” while those given to rest of the world are shown as “payments”. (d) Investment Income: It refers to income by way of rent, interest and profit. Income earned

by our country from our country is shown as

“payment” in the current account balance of payment. (e)

Compensation of Employees: It refers to income earned or paid to rest of the world by way of wages or salaries. Deficit in current account indicates that the imports of goods and services into the country are more than the exports of goods and services from the country.

Que. Explain the concept of inflationary gap with the help of a diagram. Give any two measures of reducing it. Or Explain the concept of equilibrium level of income with the help of C + I curve. Can there be unemployment at equilibrium level of income? Explain. Ans. Inflationary gap is the excess of aggregate demand over and above its level required to maintain full employment equilibrium in the economy. In the figure AS is the aggregate supply curve and AD is the demand curve.

Equilibrium between AD and AS is struck at point E corresponding to which to which all the OM number of workers are employed and there is full employment. If the level of demand increases to AD 1 it is in excess of what is required to maintain full employment. The difference between AD 1 and AD i.e. FE point to inflationary gap. Over Full Employment

Y

AS

Equilibrium Inflationary Gap F

AD AD

E

EXPENDITURE

Full Employment Equilibrium Full Employment O

M INCOME / EMPLOYMENT

X

Inflationary gap can be reduced through increased bank rate of taxation to reduce excess demand for goods and services, and through increased bank rate which makes credit dear. Or Ans. According

to

the

Modern

Theory

of

Income

and

Employment

determination, in any economy at any given time , income and employment are determined at that level where aggregate demand is equal to aggregate supply. in the figure AD represents aggregate supply curve. From figure it is clear that equilibrium level of income (Y) is determined at point E, where AD curve and AS curve intersect each other (AD = AS). Hence ‘E’ indicates equilibrium point and OY is equilibrium level of income. Any point to the left of E (like E 1 ) would mean that AD > AS. Accordingly, level of output would be raised till it reaches E. likewise, any point to the right of E (like E

2

) would mean that AD < AS. Accordingly, level of output be decreased. It

is only at point E that the equilibrium could be struck where AD = AS. Y AS

E AD

E

AD
AD rel="nofollow">AS 45°

O

AD

Y INCOME / EMPLOYMENT

X

Yes, there can be unemployment at equilibrium level of income. In fact, equilibrium can be struck: (i) at full employment, (ii) at less than full employment, or (iii) at more than full employment. Que. Will the following be included in Gross National Product? Give reasons for your answer: A.

Profits earned by a foreign company in India.

B.

Money received from sale of shares.

C.

Salary paid to Americans working in Indian embassy in America.

D.

Money received from sale of old house.

E.

Scholarship received by a student.

F.

Remittances from abroad.

Ans. (i)

Profits earned by a foreign company in India ia a part of domestic income, not of national income.

(iii)

Money received from the sale of shares is not be included in GNP as there is no value added corresponding to the sales and the purchase of shares.

(iv)

Salary paid to Americans working in Indian embassy in America is a part of the net factor income from abroad.

(v)

Money received from the sale of old house is not to be included in GNP, because it is an old house of which value added has already been accounted for in the earlier year when the house was constructed.

(vi)

Scholarship received by the student is not included in the GNP because it is a transfer payment corresponding to which there is no value addition.

(vii)

Remittances from abroad are transfer payment in case these are by the non-residents, but are the part of net factor income in case these are by the normal residents of a country. Transfer payments are not to be included in GNP but anything that is a part of net factor income from abroad is to be included in GNP.

Que. Calculate GNP by income method and expenditure method from the following data: (Rs. in crore) a.

Rent

40

b.

Private final consumption expenditure

800

c.

Net Exports

20

d.

Interest

60

e.

Profit

120

f.

Government final consumption expenditure

200

g.

Net domestic capital formation

100

h.

Compensation of employees

800

i.

Consumption of fixed capital

20

j.

Net indirect taxes

100

k.

Net factor income from abroad

(-)20

Ans. GNP (i) Income Method: GNP = Rent + Interest + Profit + Compensation of employees + Consumption of fixed capital + Net Indirect Taxes + Net factor income from abroad

(ii)

(Rs. in crore) 40 60 120 800 20 100 -20 = 1.120

Expenditure Method:

GNP = Private final consumption expenditure + Net Exports + Government final consumption expenditure + Net domestic capital formation + Consumption of fixed capital + Net factor income from abroad

(Rs. in crore) 800 20 200 100 20 (-)20 = 1.120