Q1540992933jeconomics-12_self Assessment Paper-8.pdf

ECONOMICS

Time : 3 Hours Maximum Marks : 80

CBSE Solutions

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Self Assessment Paper 1. Example of Microeconomics : Wages of labour in a particular factory. Example of Macroeconomics : Aggregate demand. 2. (ii) The utility from the last unit consumed. 

½+½=1

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OR Marginal utility curve shapes downwards from left to right. 1 3. (ii) Downward sloping concave. 4. Normal Goods are those goods which are directly related to consumers income. When income of a consumer increases, demand for normal goods also increases and vice versa. For example, Full cream milk. 1 OR Rise in the price of substitute goods. Any other relevant reason. 5. Production Possibility Curve is a curve showing different possible combinations of two goods that can be produced with given resources and technology. Properties of PPC : (i) PPC slopes downward, (ii) PPC is concave shaped 3 6. (i) MPP initially rises to its maximum. (ii) MPP then decreases (stays positive) to become zero. (iii) MPP becomes negative.

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OR False, when price of other goods rise, it becomes more profitable to produce them in place of the given good, so supply curve will shift to left.  [CBSE Marking Scheme, 2015] 3 7. As the consumer substitutes one good for a unit of other the rate at which this substitution takes place is called marginal rate of substitution. As the substitution goes on, this rate diminishes. For example :



Combinations of Goods-X and Goods-Y

Units of X

Units of Y

Marginal Rate of Substitution

A B C D

1 2 3 4

8 4 2 1

— 4Y : 1X 2Y : 1X 1Y : 1X [CBSE Marking Scheme, 2017] 1 + 3

OSWAAL CBSE Sample Question Papers, ECONOMICS, Class-XII

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Detailed Answer : The rate of substitution of one commodity for another is known as Marginal Rate of Substitution

Commonly made error

Change in 'Y' Goods DY MRS = = DX Change in 'X' Goods Explanation with the help of numerical example. Combinations

Goods-X

Goods-Y

MRS

A B C D E

1 2 3 4 5

15 11  8  6  5

— 4:1 3:1 2:1 1:1

 Generally candidates assumes diminishing marginal rate of substitution as law of diminishing return.

MRS has always a declining trend, because law of diminishing marginal utility applies on consumers, while making different combinations. It’s clear from the given schedule as the consumer is moving from A to C the consumer wants to give up less and less amount of Y goods. 8. Output (Units)

AR (in `)

TC (in `)

TR (in `)

Profit in ` (TR – TC)

1

12

14

12

(–) 2

2

12

26

24

(–) 2

3

12

35

36

+1

4

12

52

48

(–) 4

5

12

64

60

(–) 4

6

12

70

72

+2

Producer is in equilibrium at 6th unit of output. Reasons : The producer is in equilibrium when the difference between the total revenue and total cost (i.e., profit) is maximum. At the sixth unit of output, producer gets maximum profit which is equal to 2 in this case. 4 OR The relationship between AP and MP can be explained with the help of the following diagram :

M E Z

In the diagram : (i) The AP increases when MP is greater than AP. (ii) The AP is at its maximum when both MP and AP are equal. This is shown at point E. (iii) The AP decreases when MP is less than AP. (iv) MP can be positive, zero or negative, but AP is always positive.

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Solutions

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9. Firms are mutually interdependent because only a few firms dominate the market. A change in price and output by any individual firm is likely to influence the profits and output of the rival firms. This may invite reactions from the rival firms. Therefore, an individual firm must take into account the probable reactions of its rivals before setting his price and output. This makes the firms mutually dependent on each other for taking price and output decisions. [CBSE Marking Scheme, 2017] 4 OR Each firm is in a position to exercise some degree of monopoly, in spite of large number of sellers, through product differentiation. Product differentiation refers to differentiating the products on the basis of brand, size, colour, shape, design, features, etc. The product of a firm is close, but not perfect substitute of other firm. Implication of ‘Product differentiation’ is that buyers of a product differentiate between the same products produced by different firms. Therefore, they are also willing to pay different prices for the same product produced by different firms. This gives some monopoly power to an individual firm to influence market price of its product. 4 10. (i) P × Q = TE 5 × 20 = 100 7 × 16 = 112 Since, the price and total expenditure carry positive relation Ed < 1, relatively. Change in Quantity Demanded (ii) Ed = Change in Price ×

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Original Price (Absolute values taken) Original Quantity

 4  5  =   ×    2   20  = 0.5 (Ed < 1, relatively inelastic demand.)

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Commonly made errors  A number of candidates are not aware about the expenditure method of calculating elasticity of demand. So, they generally, skip this question or use incorrect formula.  Candidates only calculate degree of elasticity and skip the explanation or comment part of the question.  Candidates generally commit calculation errors also.

11. Geometrically, elasticity of supply depends on the origin of the supply curve. Assuming the supply curve to be a straight line and positively sloped, we can have three possible situations of elasticity of supply as in the following diagrams : (i) es = 1, when a straight line, positively sloped supply curve starts from the point of origin. Y

eS = 1

Price (`)

S

P

Q



O

Quantity (Units)

X

OSWAAL CBSE Sample Question Papers, ECONOMICS, Class-XII

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(ii) eS > 1, when a straight line, positively sloped supply curve starts from Y-axis. Y

S

Price (`)

P

S Q Quantity (Units)

O

X

(iii) eS < 1, when a straight line, positively sloped supply curve starts from X-axis. Y

eS < 1

Price (`)

S

P

Q O



S

X

Quantity (Units)

OR Output Units

TC (`)

AVC (`)

MC (`)

AFC (`)

0 1 2 3 4 5

30 55 78 99 122 150

— 25 24 23 23 24

— 25 23 21 23 28

— 30 15 10 7.5 6



[CBSE Marking Scheme, 2017] ½×12

Commonly made errors  Candidates just draw the curves but do not give any explanation to justify the position of supply curves.  Sometime candidates do not draw perpendicular on the x-axis from the point on the curve.  The ratio to calculate elasticity is not shown by candidates correctly.

ANSWERING TIP... Draw well labelled diagrams to show elasticity of supply.

12. Price (in `) 10 8 6 4 2

Market Supply (in Units) 100  80  60  40  20

Market Demand (in Units)  20  40  60  80 100

S>D S>D S=D D>S D>S

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Solutions

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Excess Supply : Excess Supply occurs when the market price is greater than the equilibrium price. This leads to competition among sellers as a result of which : (i) Price starts falling. (ii) Demand starts rising. (iii) Supply starts falling. Till the equilibrium price ` 6 is reached. 4

13. (ii) Reserve Bank of India

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14. (ii) Margin Requirements.

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15. BOP is a record of inflows and outflows of foreign exchange.

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16. The price of one currency in terms of the other is called Foreign Exchange Rate. OR (iv) Accommodating transactions.

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17.  Less money supply, i.e., stock of money with people leaves less purchasing power in their hands. Therefore, people demand less goods and services. AD falls. [CBSE Marking Scheme, 2016] 3 18. Aggregate Demand refers to the value of final goods and services which all sectors of an economy are planning to buy during a year 1 Components : (i) Private final consumption expenditure (ii) Government final consumption expenditure (iii) Investment expenditure (iv) Net exports.  ½×4=2  [CBSE Marking Scheme, 2016] Detailed Answer : Aggregate Demand implies the total demand of final goods and services by all the people in an economy. It expresses the total demand in terms of money. In this manner, it can be defined as the actual aggregate expenditure incurred by all the people in an economy on different goods and services. The components of aggregate demand are enlisted below : (i) Private Consumption Expenditure (C) : Private consumption expenditure refers to the total expenditure incurred by all the households in an economy on different types of final goods and services in order to satisfy their wants. Consumption depends on the level of the disposable income. There are two types of consumption expenditure : Autonomous Consumption Expenditure and Induced Consumption Expenditure. (ii) Private Investment Expenditure (I) : Private investment expenditure refers to the planned (exante) total expenditure incurred by all the private investors on creation of capital goods such as, expenditure incurred on new machinery, tools, buildings, raw materials, etc. Broadly, investment can be categorised in two types : Autonomous Investment Expenditure and Induced Investment Expenditure. (iii) Government Expenditure (G) : Government expenditure refers to the total planned expenditure incurred by the government on consumption and investment purposes to enhance the welfare of the society and to achieve higher economic growth rates. (iv) Net Exports (X – M) : Net exports refers to the difference between the demand for domestically produced goods and services by the rest of the world (exports) and the demand for goods and services produced abroad by the residents of a country. In other words, it is the difference between the exports and imports.  3

OSWAAL CBSE Sample Question Papers, ECONOMICS, Class-XII

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OR Since the sum of MPC and MPS is 1, any increase in Marginal Propensity to Save (MPS) would directly lead to decrease in Marginal Propensity to Consume (MPC). This means that it may lead to lesser proportion of the additional income going for consumption which is a vital factor of Aggregate Demand Expenditure. This may further lead to fall in equilibrium level of income in the economy.  [CBSE Marking Scheme, 2016] 3 19. Components of Expenditure Method : (i) Private Final Consumption Expenditure (ii) Government Final Consumption Expenditure (iii) Investment Expenditure (iv) Net Exports (X – M). (i) Private Final Consumption Expenditure (C) : It refers to expenditure on final goods and services by the individuals, households and Non-profit Institution Serving Society. (ii) Government Final Consumption Expenditure (G) : It refers to expenditure on final goods and services by the government, like expenditure on the purchase of goods for consumption by the defence personnel. (iii) Investment Expenditure (I) : It refers to expenditure on the purchase of final goods by the producers. (iv) Net Exports (X – M) : It is the difference between exports and imports during an accounting year.  [CBSE Marking Scheme, 2016] 1 × 4 = 4

Commonly made error  Sometimes, candidate explain the expenditure method but do not give the components of expenditure method.  A large number of candidates do not write correct components like they write exports instead of net export, expenditure instead of investment expenditure, etc.

OR If government raises its expenditure on producing public goods, it reflects that government is serving the objective of social welfare. Public goods are those goods which satisfy collective consumption needs, i.e., health, education, fresh air, civic amenities, etc. When government raises its expenditure on public goods, residents of a country are benefitted by being provided with these basic amenities. Healthy and educated people are more efficient which can lead to increase in GDP in future too. Thus, it will improve the overall quality of life of the people in the country. 4 20. Legal Reserve Ratio (LRR) refers to that legal minimum fraction of deposits which the banks are mandate to keep as cash with themselves. Legal Reserve Ratio has two variants : (i) Cash Reserve Ratio, and (ii) Statutory Liquidity Ratio. Cash Reserve Ratio (CRR) : It refers to cash reserves of Commercial Banks with the Central Bank as a percentage of their deposits. Statutory Liquidity Ratio (SLR) : It refers to reserves in the form of liquid assets (including (i) cash, (ii) gold, and (iii) approved securities) with the Commercial Banks themselves, as a percentage of their total deposits. Both CRR and SLR are fixed by the Central Bank, and both are a legal binding for the Commercial Banks. In this sense, both CRR and SLR are legal reserve ratios.  4 21. (i) ‘Make in India’ will increase supply (inflow) of foreign exchange in India causing improvement in the balance of payments position. (ii) Import of pulses will lead to outflow of foreign exchange from the country causing adverse effect on balance of payment position. [CBSE Marking Scheme, 2016] 4 etailed Answer : D (i) “Make in India” programme will have favourable effect on balance of payment because : (a)  It will reduce the imports of commodities which will be made in India. Ultimately, we will be in the position to export. This will make BOP favourable. (b) It will help in import substitution. (ii) Imports of pulses : It will make balance of payments adverse. Because of imports we will have to make payments. 4

Solutions

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22. Domestic Income = xi + ii + iv – vi + vii – x – viii = ` 2,200 + ` 2,500 + ` 1,190 – ` 100 + ` (–420) – ` 145 – ` 470 = ` 4,755 (in ` crores) Net National Disposable Income = National Income – Net factor Income to abroad + Net Indirect Taxes + Net Current Transfers from Abroad = ` 4,755 – ` 125 + ` 470 + ` 350 = ` 5,450 (in ` crore) [CBSE Marking Scheme, 2016] 6 OR The counting of the value of commodity more than once is called Double Counting. This leads to overestimation of the value of goods and services produced. Thus, the importance of avoiding double counting lies in avoiding overestimating the value of domestic product. For example, a farmer produces one ton of wheat and sells it for ` 400 in the market to a flour mill. The flour mill sells it for ` 600 to the baker. The baker sells to the bread shopkeeper for ` 800. The shopkeeper sells the entire bread to the final consumers for ` 900. Thus, Value of Output = ` 400 + ` 600 + ` 800 + ` 900 = ` 2,700 In fact, the value of wheat is counted four times, the value of services of the miller thrice, and the value of services by the baker twice. In other words, the value of wheat and value of services of the miller and of the baker have been counted more than once. The counting of the value of commodity more than once is called Double Counting. To avoid the problem of double counting two methods used are : (i) Final Output Method, and (ii) Value Added Method. (i) Final Output Method : According to this method, the value of intermediate goods is not considered. Only the value of final goods and services is considered. In the above example, the value of final good, i.e., Bread is ` 900. (ii) Value Added Method : Another method to avoid the problem of double counting is to estimate the total value added at each stage of production. In the above example, the value added at each stage of production is ` 400 + ` 200 + ` 200 + ` 100 = ` 900. 6 23. A situation in an economy, when the Aggregate Demand is less than the Aggregate Supply, corresponding to full employment level, is termed as deficient demand. Y

Y = AS ADFE

AD/AS

E

O

G

}

nt Deficie d Deman

ADIU

F

P1 P Output / Income

X

In the above figure, E is the equilibrium point of the economy where AD = AS. But at the present Aggregate Demand ADIU, gives AB equal to FP which is less than the Aggregate supply of EP. Hence, EF represents the deficient demand in the economy. Deficient Demand gives rise to a deflationary gap and leads the economy to an equilibrium level of income/output that is less than the full employment level of income. This leads to deflationary pressures on economy and increases the inventory of producers as sales falls. The producers are discouraged to produce more as price level falls. The economy therefore will attain a new equilibrium at point C with National Income of OP.

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OSWAAL CBSE Sample Question Papers, ECONOMICS, Class-XII

Role of Bank Rate in Correcting the Problem of Deficient Demand The rate at which the Central Bank lends money to commercial banks is termed as bank rate. In case of deficient demand, the Central Bank reduces the bank rate to increase the money supply in the economy. Reduction in bank rate increases the credit/money creation capacity of Commercial Bank and also reduces the market rate of interest which encourages people to borrow more. In this way, the AD increases to the level of AS and the economy attains equilibrium. 6 24. Revenue Expenditure is an expenditure that neither creates any assets nor reduces any liability while Capital Expenditure either creates assets or reduces liabilities. 2 Taxes and Expenditure can be used to alter distribution of income. Government can impose higher taxes on income of the rich on the goods and services consumed by them. The money so collected can be spent on providing free goods and services to the poorer sections of the society. This will reduce disposable income of the rich and raise that of the poor. This can alter distribution of income. 4 [CBSE Marking Scheme, 2016] etailed Answer : D Revenue Expenditure refers to the expenditure which neither creates any asset nor causes reduction in any liability of the government. For example, payment of salaries. On the other hand, capital expenditure, refers to the expenditure which either creates an asset or causes a reduction in the liabilities of the government. For example, construction of Metro, etc. The government through its budgetary policy attempts to promote fair and right distribution of income in a society. This is done through taxation and expenditure policy. On one hand, through its taxation policy, the government taxes the higher income group and on the other hand, through the expenditure policy (subsidies, transfer payments, etc.), it transfers the purchasing power in the hands of the poor sections of society. With the help of these policies, the government aims at fair distribution of income in the society. 6

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