CBSE Sample Papers for Class 12 Economics Compartment Outside Delhi -2015

CBSE Sample Papers for Class 12 Economics Compartment Outside Delhi -2015

Time allowed : 3  hours                                                                                         Maximum marks 100

GENERAL INSTRUCTIONS

1.  All questions in both the sections are compulsory.
2. Marks for questions are indicated against each.
3. Questions No. 1-5 and 17-21 are very short-answer questions carrying 1 nick each. They are required to be answered in one sentence each.
4.  Questions No. 6-10 and 22-26 are? short-answer questions carrying 3 marks each. Answers to them should normally not exceed 60 words each.
5.  Questions No. 11-13 and 27-29 are also short-answer questions carrying 4 marks each. Answers to them should normally not exceed 70 words each.
6.  Questions No. 14-16 and 30-32 are long-answers questions carrying 6 marks each. Answers to them should normally not exceed 100 words each.
7.  Answers should be brief and to the point and the above word limit should be adhered to as far as possible.

SET I

SECTION A
Question.1. DD’ is a demand curve, A and B are two points on it.
Price elasticity of demand at point A is: (Choose the correct alternative)
(a) less than elasticity of demand at B.
(b) equal to elasticity of demand at B.
(c) greater than elasticity of demand at B.
(d) less than 1.

Answer. (c) Greater than elasticity of demand at B.

Question.2. What economic measure can the Government take to reduce demand for a commodity which is harmful for health?
Answer. The government can reduce the demand for commodity X, which is harmful for health, by imposing taxes on it and thereby making it more expensive.

Question.3. The average fixed cost at 4 units of output is Rs 20. Average variable cost at 5 units of output is Rs 40. Average cost of producing 5 units is: (Choose the correct alternative) (a) Rs 20 (b) Rs 40 (r) Rs 56 (d) Rs 60
Answer. (c) Rs 56

Question.4. Describe the problem of ‘what to produce’.
Answer. This is a problem of allocation of resources among different goods. It involves the selection of goods and services to be produced and the quantity to be produced of each selected commodity. Every economy has limited resources and thus cannot produce all the goods. More of one good or service usually means less of others e g., production of , more war goods is possible only by reducing the production of civil goods. Therefore, on the basis of the importance of various goods, an economy has to decide, what to produce and in what quantities. The guiding principle being used here is to allocate the resources  in such a manner which gives maximum aggregate satisfaction.

Question.5. Explain the meaning and need for ‘maximum price-ceiling’.
Answer. When government imposes an upper limit on the price of a good, it is called price-ceiling. It Is generally imposed on essential items and is fixed below the market determined price. The reason being the equilibrium price is too high for the common people to afford.

Question.6. The Government establishes a large number of Institutes of science and technology.How will it affect the production possibility, frontier? Explain.
Answer. Production Possibility Frontier refers to a graphical representation of possible combination of two goods that can be produced with given resources and technology. A change in the productive capacity of the economy due to change in technology or resources will shift the PPF either towards left or right.
By establishing institutes of science and technology, the government is trying to improve productivity of the economy through promotion of skills and professional qualifications. A skilled and professionally qualified workforce combined with technological up gradation will ultimately lead to a rightward shift in the Production Possibility Frontier. Establishment of these institutes also signifies improvement in educational infrastructure which will further enhance the productive capacity of the economy.

Question.7. Explain the changes that take place in total product and marginal product under diminishing returns to a factor.
Answer. Diminishing returns to a factor signifies the second phase of the Law of Variable Proportions; In this phase, every additional variable factor employed adds lesser and lesser amount of output.
This means that:
TP increases at a diminishing rate and MP falls with increase in variable factor.
This phase ends when TP is maximum and MP is zero.
This happens because beyond the optimum combination of fixed and variable factors, every additional unit of a variable factor will bring in less than proportionate return. Also beyond a limit, it is not possible to substitute factors for each other. It is at this stage the law of diminishing returns sets in.

Question.8. Explain the significance of ‘barriers to entry’ feature of monopoly.
Answer. There exist strong barriers to entry of new firms in a monopoly market These barriers may be due to legal restrictions like licensing or patent rights or due to restrictions created by firms in the form of cartel. Since the monopolist is the only producer, he can always exercise significant influence over market price by changing the supply. It makes the monopolist a price maker. As a result, a monopoly firm can earn abnormal profits and losses in the long run.
Or
Explain the significance of ‘product differentiation’ feature of monopolistic competition.
Answer. Product differentiation refers to differentiating the products on the basis of brand, size, colour, shape, etc. making the products of different firms close but not perfect substitutes of each other. This differentiation helps the buyers to differentiate between the same product produced by different firms. Therefore, they are willing to pay different prices for such differentiated products. This gives monopoly power to an individual firm to fix and charge a price higher than its competitor.

Question.9. Explain with the help of a numerical example, the meaning of diminishing marginal , rate of substitution.
Answer. See Q. 14(Or), 2014 (I Outside Delhi).
Or
Explain the Law of Diminishing Marginal Utility with the help of an example.
Answer. See Q. 7, 2013 (Comptt. I Outside Delhi).

Question.10. Explain the difference between ‘change in demand’ and ‘change in quantity demanded’.
Answer.

Question.11. Explain the effect of the following on market supply of good:
(i) Increase in input prices (ii) Reduction in per unit tax.
Answer. (i) Increase in input prices. Change in price of raw material and remuneration of factors , (rent, wages, interest and profit) influence the cost of production of a commodity and thereby its Supply. An increase in price of inputs, will increase the cost of production leading to a reduction in profit. This will make the producer reduce the supply of the commodity, shifting the supply curve to the left.
(ii) Reduction in per unit tax. Government levies various taxes on production of goods, e.g., excise duty, etc. Such taxes influence supply because it adds to the cost of production. Reduction in per unit tax levied by the government will decrease the cost of production and increase supply by the firms due to higher profit margins. In this case the supply curve will shift towards the right.
Or
State the relationship between:
(i) Marginal cost and average variable cost (ii) Total cost and marginal cost.
Answer. (i) Relationship between MC and AVC. See Q. 10, 2015 (I Delhi).
(ii) Relationship between TC and MC. See Q. 8(Or), 2014 (I Delhi).

Question.12. Explain the effect of the following on the demand for a good:
(i) Increase in income of its consumer.
(ii) Rise in price of its substitute good.
Answer. (i) Increase in income of its consumer:
(a) In case of normal good. If the commodity is normal, an increase in the income of its buyer will increase the demand for that good at the same price and shift the demand curve to the right. Example, if the income of the consumer increases and he reduces consumption of toned milk and increases consumption of full cream milk. Then in this case, full cream milk is a normal good which is showing positive income effect.
(b) In case of inferior good. With increase in the income of the consumer, price remaining the same, the demand for an inferior good will decrease shifting the demand curve towards left. In the. above mentioned example, toned milk is an inferior good whose demand decreases due to increase in consumer income, its price remaining unchanged.
(ii) Rise in price of its substitute good. Substitute goods are those goods which can be used in place of one another for satisfaction of a particular want like tea and coffee. An increase in the price of a substitute leads to an increase in the demand of the given commodity and vice versa, e.g., if price of a substitute (coffee) increases, then demand for the given commodity (tea) will rise as it will become relatively cheaper in comparison to coffee. This will lead to a rightward shift in the demand curve of tea.

Question.13. Giving reasons, state whether Hie following statements are true or false:
(i) The supply curve of a good shifts to the right when prices of other goods rise.
(ii) The difference between average cost and average variable cost is always constant.
Answer. (i) The statement is false. Increase in prices of other goods makes their production more profitable for the producer. As a result the firm shifts its resources from production of the given commodity to the production of other goods. A decline in the supply of the given commodity will shift its supply curve toward left and not towards right.
(ii) The statement is false. The difference between average cost and average variable cost is equaLto average fixed cost. Average fixed cost is calculated by dividing total fixed cost by total output.
\(AFC=\frac { TFC }{ Q } \)
As TFC remain same at all levels of output. Therefore, AFC will fall with increase in output and not remain constant.

Question.14. Explain with the help of a diagram the chain of effects of a rightward shift in demand curve of a good on its equilibrium price, quantity demanded and supplied.
Answer. As shown in the diagram, market demand curve DD and marked supply curve SS intersect each other at point E, which is the market equilibrium where OP is the equilibrium price and OQ the equilibrium quantity.
An increase in demand (assuming no change in supply) leads to a rightward shift in demand curve from DD to D1D1.
When demand increases, it creates an excess demand (equal to EA) at the old equilibrium price of OP. This leads to competition between buyers which increases the price. Increase in price leads to rise in supply (expansion in supply) and fall in demand (contraction in demand). These change continue till new equilibrium is established at point E1 where the equilibrium price rises from OP to OPj and equilibrium quantity rises from OQ to OQ1.

Note: The following question is for BLIND CANDIDATES only in lieu of Q. No. 14 .
Explain the meaning of excess demand of a good. Explain its chain of effects on equilibrium price.
Answer. Excess demand means market demand exceeds market supply at a price which is less than the equilibrium price. In other words, excess demand refers to a situation where quantity demanded is more than quantity supplied at the prevailing market price.
Chain of effects. Same as Q. 14 (above).

SECTION B 
Question.15. Who regulates money supply? (Choose the correct alternative)
(a) Government of India
(b) Reserve Bank of India
(c) Commercial Banks
(d) Planning Commission 1
Answer. (b) Reserve Bank of India.

Question.16. What are demand deposits?
Answer. Demand deposits’ are the deposits which can be withdrawn from banks on demand by writing cheques.

Question.17. Which of the following is not a revenue receipt? (Choose the correct alternative)
(a) Recovery of loans
(b) Foreign grants
(c) Profits of public enterprises
(d) Wealth tax
Answer. (a) Recovery of loans

Question.18. Which of the following is a correct measure of primary deficit? (Choose the correct. alternative)
(a) Fiscal deficit minus revenue deficit
(b) Revenue deficit minus interest payments
(c) Fiscal deficit minus interest payments
(d) Capital expenditure minus revenue expenditure
Answer. (c) Fiscal deficit minus interest payments

Question.19. Which of the following is a stock? (Choose the correct alternative)
(a) Wealth (b) Saving (c) Exports (d) Profit
Answer. (a) Wealth

Question.20. Describe any three sources of demand for foreign exchange.
Answer. Sources of demand for foreign exchange. See Q. 21, 2015 (Comptt. I Delhi).
Or
Give the meanings of ‘devaluation and depreciation’ of domestic currency.
Answer. Devaluation. It refers to reduction in price of domestic currency in terms of foreign currency under fixed exchange rate regime. This is done by the government, e.g., if the rupee-dollar exchange rate changes from 1$ = Rs 55 to 1$ = Rs 60, it denotes devaluation of rupee.
Depreciation. It refers to fall in value of domestic currency in terms of foreign currency under flexible exchange rate regime (market determined rate of exchange).
The effect of depreciation is the same as devaluation except that it taken place due to market forces of demand and supply.

Question.21. In an economy investment increases from 300 to 500. As a result of this equilibrium level of income increases by 2000. Calculate the marginal propensity to consume.
Answer.

Question.22. Explain the meaning of deflationary gap with the help of a diagram.
Answer. See Q. 24, 2012 (Comptt. I Delhi).
Note: The following question is for BLIND CANDIDATES only in lieu of Q. No. 22.
Distinguish between inflationary gap and deflationary gap.
Answer.

Question.23. In the context of balance of payments account, state whether the following statements are true or false. Give reasons for your answer.
(i) Profits received from investments abroad is recorded in capital account.
(ii) Import of machines is recorded in current account.
Answer. (i) The statement is false. Profits received from investments abroad is a part of factor income which is included in exports and imports of services. It is recorded in current account as it neither affects foreign exchange assets nor foreign exchange liabilities. Therefore, the given statement is false.
(ii) The statement is true. Export and Import of goods, i.e., visible trade includes import of machines also which is a part of current account. Therefore, the given statement
is true.

Question.24. Describe the expenditure method of calculating Gross Domestic Product at market price.
Answer. In the final expenditure method of calculating national income, we take the sum of final expenditure on consumption and investment. This sum equals \(GD{ P }_{ MP }\). These final expenditures are on the output produced within the domestic territory of the country. Its main components are :
(i) Private final consumption expenditure.
(ii) Government final consumption expenditure.
(iii) Gross domestic capital formation.
(a) Gross domestic fixed capital formation
(b) Change in stock (Closing stock – Opening stock)
(iv) Net exports (Exports – Imports)
The following steps are involved in calculating National Income by Expenditure method:
1. Identify and classify the economic units incurring final expenditure into:
(a) household sector, (b) Government sector, (c) firms, (d) rest of the world.
2. Final expenditure incurred by these economic units is estimated and classified under the following heads, the sum of which gives us \(GD{ P }_{ MP }\).
\(GD{ P }_{ MP }\)= Private final consumption expenditure + Government final consumption expenditure + Gross domestic capital formation + Net exports.
Or
What precautions (any four) should be taken while estimating national Income by expenditure method.
Answer. Precautions of expenditure method:
(i) Avoid intermediate expenditure. Expenditure on intermediate goods is already included in final expenditure. If included again, it will lead to double counting.
(ii) Purchase of second hand goods will not be included as such expenditure has already been included when they were originally purchased.
However, Payment made for commission or brokerage on such goods is included as it is payment made for productive service.
(iii) Transfer payments are not included. Payments such as charities, donations etc. are – not connected with any productive activity and do not lead to any value addition. Therefore, they are excluded from national income.
(iv) Expenditure on own account production like production for self consumption, imputed value of owner occupied houses etc. will be included in national income, since, these are productive services.

Question.25. Calculate gross value added at factor cost.

Answer.

Question.26. The Government decides to give budgetary incentives to investors for making investments , in backward regions. Explain these possible incentives and the reasons for the same.
Answer. Government prepares the budget for fulfilling certain economic and social objectives. In order to achieve its various objectives, the government tries to adjust its resource allocation by providing more resources into socially productive sectors where private sector initiative is not forthcoming, e.g., public sanitation, rural electrification, etc. and drawn away resources from some other areas to promote balanced economic growth of regions.
In order to encourage investor for making investments in backward regions, the government can give the following budgetary incentives:
(i) Tax concessions and subsidies. There are many economy activities which are not undertaken by the private sector due to lack of profits, inadequate infrastructure, huge investment expenditure, etc. The government, through tax concessions and subsidies, can encourage the private sector to undertake production in public interest.
(ii) Liberal licensing rules. In India, establishment of SEZs (Special Economic Zones) is an important step towards the development of backward regions. Tax laws are more liberal in SEZs compared to other parts of the domestic economy. Liberal taxation laws and licensing rules along with infrastructural development makes SEZs an attractive investment destination. This contributes positively to balanced regional growth. Therefore, the government in its budget should provide for more SEZs.

Question.27. Explain any two functions of money.
Answer. Money performs following functions:
1. Unit of account. Unit of account refers to a common unit as a measure of value.
Money acts as a unit of account.
— It is used for quoting prices of goods and services and comparing the value.
— It is treated as the standard unit for borrowing and lending activities.
— It has made possible keeping of business accounts and thus facilitated trade.
— It has also led to the emergence of the banking system.
This function of money removes the problem of “absence of a common measure of value”, where value of each and every commodity had to be expressed in terms of all the other commodities in the market.
2. Store of value. Store of value function means storing assets for use in future. Money as a store of value means that an individual can hold his earnings until the time he wants to spend the same. The main advantages of holding money are:
— It can be easily exchanged for goods and services.
— It is easily portable.
— It comes in convenient denominations.
— It is not perishable and its storage costs are considerably lower.
This function of money removes the problem of “lack of store of value” as it is readily acceptable for exchange with other goods along with other advantages.
Or
Explain any two main functions of Central Bank.
Answer. The Central Bank is the apex institution of a country’s monetary system. Following are the two main functions performed by it:
(i) Bank of Issue. See Q. 23, 2015 (I Delhi).
(ii) Bankers’ Bank and Supervisor. See Q. 23, 2015 (I Outside Delhi).

Question.28. In an economy planned spending is greater than planned output. Explain all the changes that will take place in the economy.
Answer. Planned spending refers to people planning to purchase final goods and services during the year. Planned output means the production units planning to produce final goods and services during the year. An economy is in equilibrium when planned expenditure or spendings is equal to planned output, i.e.,
AD = AS or C +1 = Y
Consumption Expenditure + Investment Expenditure = Income Equilibrium condition implies that whatever is produced by firms is either consumed by households or invested by the firms. There is neither surplus nor shortage in the economy.
But if in an economy, planned spending is greater than planned output, i.e., AD > AS, the producers find the stock falling below the desired level then this means that consumer and firms together would be buying more goods than firms were producing. This would lead to an unplanned decrease in inventories. Firms would then expand production and . increase employment. As a result, output and income would increase. This process of increase in income will continue until the economy is in equilibrium where AD = AS.

Question.29. From the following data calculate (i) Gross national product at market price and (ii) Net national disposable income:

Answer.

SET II

Question.4. Describe the problem of ‘how to produce’.
Answer. See Q. 6, 2014 (Comptt. I Outside Delhi).

Question.7. Explain the changes that take place in total product and marginal product under increasing returns to a factor.
Answer. Increasing returns to a factor refers to the first phase of the law of variable proportions. In this phase, Total Product (TP) increases at an increasing rate and Marginal Product (MP) increases. The reason for this being that when units of the variable factor increases, efficient utilization of the fixed factors takes place due to specialization and division of labour. This increases the efficiency of the variable factor leading to increase in MP and thus TP also increases at an increasing rate.

Question.8. Explain the ‘inter-dependence of firms’ feature of oligopoly.
Answer. In an oligopoly market, a few firms dominate the market. Therefore, 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 reaction from the rival firms. Therefore, an individual firm must .

Question.6. Hie Government establishes a large number of Institutes of science and technology.How will it affect the production possibility frontier? Explain.
Answer. Production Possibility Frontier refers to a graphical representation of possible combination of two goods that can be produced with given resources and technology. A change in the productive capacity of the economy due to change in technology or resources will shift the PPF either towards left or right.
By establishing institutes of science and technology, the government is trying to improve productivity of the economy through promotion of skills and professional qualifications. A skilled and professionally qualified workforce combined with technological up gradation will ultimately lead to a rightward shift in the Production Possibility Frontier. Establishment of these institutes also signifies improvement in educational infrastructure which will further enhance the productive capacity of the economy.

Question.7. Explain the changes that take place in total product and marginal product under diminishing returns to a factor.
Answer. Diminishing returns to a factor signifies the second phase of the Law of Variable Proportions. In this phase, every additional variable factor employed adds lesser and lesser amount of output.
This means that:
TP increases at a diminishing rate and MP falls with increase in variable factor.
This phase ends when TP is maximum and MP is zero.
This happens because beyond the optimum combination of fixed and variable factors, every additional unit of a variable factor will bring in less than proportionate return. Also beyond a limit, it is not possible to substitute factors for each other. It is at this stage the law of diminishing returns sets in.

Question.8. Explain the significance of ‘barriers to entry’ feature of monopoly.
Answer. There exist strong barriers to entry of new firms in a monopoly market. These barriers may be due to legal restrictions like licensing or patent rights or due to restrictions created by firms in the form of cartel. Since the monopolist is the only producer, he can always exercise significant influence over market price by changing the supply. It makes the monopolist a price maker. As a result, a monopoly firm can earn abnormal profits and losses in the long run.
Or
Explain the significance of ‘product differentiation’ feature of monopolistic competition.
Answer. Product differentiation refers to differentiating the products on the basis of brand, size, colour, shape, etc. making the products of different firms close but not perfect substitutes of each other. This differentiation helps the buyers to differentiate between the same product produced by different firms. Therefore, they are willing to pay different prices for such differentiated products. This gives monopoly power to an individual firm to fix and charge a price higher than its competitor. –

Question.9. Explain with the help of a numerical example, the meaning of diminishing marginal rate of substitution.
Answer. See Q. 14(Or), 2014 (I Outside Delhi). [Page 281
Or
Explain the Law of Diminishing Marginal Utility with the help of an example.
Answer. See Q. 7, 2013 (Comptt. I Outside Delhi). [Page 254

Question.10. Explain the difference between ‘change in demand’ and ‘change in quantity demanded’.
Answer.

Question.11. Explain the effect of the following on market supply of good:
(i) Increase in input prices (ii) Reduction in per unit tax.
Answer. (i) Increase in input prices. Change in price of raw material and remuneration of factors ; (rent, wages, interest and profit) influence the cost of production of a commodity and thereby its Supply. An increase in price of inputs will increase the cost of production leading to a reduction in profit. This will make the producer reduce the supply of the commodity, shifting the supply curve to the left.
(ii) Reduction in per unit tax. Government levies various taxes on production of goods, .g., excise duty, etc. Such taxes influence supply because it adds to the cost of production. Reduction in per unit tax levied by the government will decrease the cost of production and increase supply by the firms due to higher profit-margins. In this case the supply curve will shift towards the right.
Or
State the relationship between:
(i) Marginal cost and average variable cost (ii) Total cost and marginal cost
Answer. (i) Relationship between MC and AVC. See Q. 10, 2015 (I Delhi).
(ii) Relationship between TC and MC. See Q. 8(Or), 2014 (I Delhi).

Question.12. Explain the effect of the following on the demand for a good:
(i) Increase in income of its consumer.
(ii) Rise in price of its substitute good.
Answer. (i) Increase in income of its consumer:
(a) In case of normal good. If the commodity is normal, an increase in the income of its buyer will increase the demand for that good at the same price and shift the demand curve to the right. Example, if the income of the consumer increases and he reduces consumption of toned milk and increases consumption of full cream milk. Then in this case, full cream milk is a normal good which is showing positive income effect.
(b) In case of inferior good. With increase in the income of the consumer, price remaining the same, the demand for an inferior good will decrease shifting the demand curve towards left. In the above mentioned example, toned milk is an inferior good whose demand decreases due to increase in consumer income, its price remaining unchanged.
(ii) Rise in price of its substitute good: Substitute goods are those goods which can be used in place of one another for satisfaction of a particular want like tea and coffee. An increase in the price of a substitute leads to an increase in the demand of the given commodity and vice versa, e.g., if price of a substitute (coffee) increases, then demand for the given commodity (tea) will rise as it will become relatively cheaper in comparison to coffee. This will lead to a rightward shift in the demand curve of tea.

Question.13. Giving reasons, state whether the following statements are true or false:
(i) The supply curve of a good shifts to the right when prices of other goods rise.
(ii) The difference between average cost and average variable cost is always constant.
Answer. (i) The statement is false. Increase in prices of other goods makes their production
more profitable for the producer. As a result the firm shifts its resources .from production of the given commodity to the production of other goods. A decline in the supply of the given commodity will shift its supply curve toward left and not towards right.
(ii) The statement is false. The difference between average cost and average variable cost is equal to average fixed cost.
Average fixed cost is calculated by dividing total fixed cost by total output.
\(AFC=\frac { TFC }{ Q } \)
As TFC remain same at all levels of output. Therefore, AFC will fall with increase in output and not remain constant.

Question.14. Explain with the help of a diagram the chain of effects of a rightward shift in demand curve of a good on its equilibrium price, quantity demanded and supplied.
Answer. As shown in the diagram, market demand curve DD and marked supply curve SS intersect each other at point E, which is the market equilibrium where OP is the equilibrium price and OQ the equilibrium quantity.
An increase in demand (assuming no change in supply) leads to a rightward shift in demand curve from DD to D1D1.
When demand increases, it creates an excess demand (equal to EA) at the old equilibrium price of OP. This leads to- competition between buyers which increases the price. Increase in price leads to rise in supply (expansion in supply) and fall in demand (contraction in demand). These changes continue till new equilibrium is established at point Ea where the equilibrium price rises from OP to OP1 and equilibrium quantity rises from OQ to OQ1

Note: The following question is for BLIND CANDIDATES only in lieu of Q. No. 14 .
Explain the meaning of excess demand of a good. Explain its chain of effects on equilibrium price.
Answer. Excess demand means market demand exceeds market supply at a price which is less than the equilibrium price. In other words, excess demand refers to a situation where quantity demanded is more than quantity supplied at the prevailing market price.Chain of effects. Same as Q. 14 (above).

SECTION B
Question.15. Who regulates money supply? (Choose the correct alternative)
(a) Government of India
(b) Reserve Bank of India
(c) Commercial Banks
(d) Planning Commission
Answer. (b) Reserve Bank of India.

Question.16. What are demand deposits?
Ans. Demand deposits are the deposits which can be withdrawn from banks on demand by writing cheques.

Question.17. Which of the following is not a revenue receipt? (Choose the correct alternative)
(a) Recovery of loans
(b) Foreign grants
(c) Profits of public enterprises
(d) Wealth tax
Answer. (a) Recovery of loans

Question.18. Which of the following is a correct measure of primary deficit? (Choose the correct alternative)
(a) Fiscal deficit minus revenue deficit
(b) Revenue deficit minus interest payments
(c) Fiscal deficit minus interest payments
(d) Capital expenditure minus revenue expenditure
Answer. (c) Fiscal deficit minus interest payments

Question.19. Which of the following is a stock? (Choose the correct alternative)
(a) Wealth (b) Saving (c) Exports (d) Profit
Answer. (a) Wealth

Question.20. Describe any three sources of demand for foreign exchange.
Answer. Sources of demand for foreign exchange. See Q. 21, 2015 (Comptt. I Delhi).
Or
Give the meanings of ‘devaluation and depreciation’ of domestic currency.
Answer. Devaluation. It refers to reduction in price of domestic currency in terms of foreign currency under fixed exchange rate regime. This is done by the government, e.g., if the rupee-dollar exchange rate changes from 1$ = Rs 55 to 1$ = Rs 60, it denotes devaluation of rupee.
Depreciation. It refers to fall in value of domestic currency in terms of foreign currency under flexible exchange rate regime (market determined rate of exchange).
The effect of depreciation is the same as devaluation except that it taken place due to market forces of demand and supply.

Question.21. In an economy investment increases from 300 to 500. As a result of this equilibrium level of income increases by 2000. Calculate the marginal propensity to consume.
Answer.

Question.22. Explain the meaning of deflationary gap with the help of a diagram.
Answer. See Q. 24, 2012 (Comptt. I Delhi).
Note: The following question is for BLIND CANDIDATES only in lieu of Q. No. 22.
Distinguish between inflationary gap and deflationary gap.
Answer.

Question.23. In the context of balance of payments account, state whether the following statements are true or false. Give reasons for your answer.
(i) Profits received from investments abroad is recorded in capital account.
(ii) Import of machines is recorded in current account.
Answer. (i) The statement is false. Profits received from investments abroad is a part of factor income which is included in exports and imports of services. It is recorded in current account as it neither affects foreign exchange assets nor foreign exchange liabilities! Therefore, the given statement is false.
(ii) The statement is true. Export and Import of goods, i.e., visible trade includes import of machines also which is a part of current account. Therefore, the given statement is true.

Question.24. Describe the expenditure method of calculating Gross Domestic Product at market price.
Answer. In the final expenditure method of calculating national income, we take the sum of final expenditure on consumption and investment. This sum equals \(GD{ P }_{ MP }\). These final expenditures are on the output produced within the domestic territory of the country. Its main components are
(i) Private final consumption expenditure
(ii) Government final consumption expenditure.
(iii) Gross domestic capital formation
(a) Gross domestic fixed capital formation
(b) Change in stock (Closing stock – Opening stock)
(iv) Net exports (Exports – Imports)
The following steps are involved in calculating National Income by Expenditure method:
1. Identify and classify the economic units incurring final expenditure into:
(a) household sector, (b) Government sector, (c) firms, (d) rest of the world.
2. Final expenditure incurred by these economic units is estimated and classified under the following heads, the sum of which gives us \(GD{ P }_{ MP }\).
\(GD{ P }_{ MP }\) = Private final consumption expenditure + Government final consumption expenditure + Gross domestic capital formation + Net exports.
Or
What precautions (any four) should be taken while estimating national income by expenditure method.
Answer. Precautions of expenditure method:
(i) Avoid intermediate expenditure. Expenditure on intermediate goods is already included in final expenditure. If included again, it will lead to double counting.
(ii) Purchase of second hand goods will not be, included as such expenditure has already been included when they were originally purchased.
However, Payment made for commission or brokerage on such goods is included as it is payment made for productive service.
(iii) Transfer payments are not included. Payments such as charities, donations etc. are not connected with any productive activity and do not lead to any value addition. Therefore, they are excluded from national income.
(iv) Expenditure on own account production like production for self consumption, imputed value of owner occupied houses etc. will be included in national income, since, these are productive services.

Question.25. Calculate gross value added at factor cost.

Answer.

Question.26. The Government decides to give budgetary incentives to investors for making investments in backward regions. Explain these possible incentives and the reasons for the same.
Answer. Government prepares the budget for fulfilling certain economic and social objectives. In order to achieve its various objectives, the government tries to adjust its resource allocation by providing more resources into socially productive sectors where private sector initiative is not forthcoming, e.g., public sanitation, rural electrification, etc. and drawn away resources from some other areas to promote balanced economic growth of regions.
In order to encourage investor for making investments in backward regions, the government can give the following budgetary incentives:
(i) Tax concessions and subsidies. There are many economy activities which are not undertaken by the private sector due to lack of profits, inadequate infrastructure, huge investment expenditure, etc. The government, through tax concessions and subsidies, can encourage the private sector to undertake production in public interest.
(ii) Liberal licensing rules. In India, establishment of SEZs (Special Economic Zones) is an important step towards the development of backward regions. Tax laws are more liberal in SEZs compared to other parts of the domestic economy. Liberal taxation laws and licensing rules along with infrastructural development makes SEZs an attractive investment destination. This contributes positively to balanced regional growth. Therefore, the government in its budget should provide for more SEZs.

Question.27. Explain any two functions of money.
Answer. Money performs following functions:
1. Unit of account. Unit of account refers to a common unit as a measure of value. Money acts as-a unit of account.
— It is used for quoting prices of goods and services and comparing the value.
— It is treated as the standard unit for borrowing and lending activities.
— It has made possible keeping of business accounts and thus facilitated trade.
— It has also led to the emergence of the banking system.
This function of money removes the problem of “absence of a common measure of value”, where value of each and every commodity had to be expressed in terms of all the other commodities in the market.
2. Store of value. Store of value function means storing assets for use in future. Money as a store of value means that an individual can hold his earnings until the time he wants to spend the same. The main advantages of holding money are:
— It can be easily exchanged for goods and services.
— It is easily portable.
— It comes in convenient denominations.
— It is not perishable and its storage costs are considerably lower.
This function of money removes the problem of “lack of store of value” as it is readily acceptable for exchange with other goods along with other advantages.
Or
Explain any two main functions of Central Bank.
Answer. The Central Bank is the apex institution of a country’s monetary system. Following are the two main functions performed by it:
(i) Bank of Issue. See Q. 23, 2015 (I Delhi). [Page 326
(ii) Bankers’ Bank and Supervisor. See Q. 23, 2015 (I Outside Delhi).

Question.28. In an economy planned spending is greater than planned output. Explain all the changes that will take place in the economy.
Answer. Planned spending refers to people planning to purchase final goods and services during the year. Planned output means the production units planning to produce final goods : and services during the year. An economy is in equilibrium when planned expenditure or spendings is equal to planned output, i.e., AD = AS or C +1 = Y
Consumption Expenditure + Investment Expenditure = Income Equilibrium condition implies that whatever is produced by firms is either consumed by households or invested by the firms. There is neither surplus nor shortage in the economy.
But if in an economy, planned spending is greater than planned output, i.e., AD > AS, the producers find the stock falling below the desired level then this means that consumer and firms together would be buying more goods than firms were producing. This would lead to an unplanned decrease in inventories. Firms would then expand production and increase employment. As a result, output and income would increase. This process of increase in income will continue until the economy is in equilibrium where AD = AS.

Question.29. From the following data calculate (i) Gross national product at market price and (ii) Net national disposable income:

Answer.

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