ECONOMICS-2015 (Annual) CLASS-XII Q.1. Define indifference curve. 1 Ans. An indifferent curve is the locus of point particularly by consumption of goods which yield the same utility to the consumer, so that he is indifferent as to the particular combination he consumes. Q.2. If due to fall in the price of good X, demand for good Irises, the two goods are: (choose the correct alternative) 1 (a) Substitutes (b) Complements. (c) Not related (d) Competitive Ans. (b) Complements Q.3. If Marginal Rate of Substitution is increasing throughout, the Indifference Curve will be: (Choose the correct alternative)? 1 (a) Downward sloping convex (b) Downward sloping concave (c) Downward sloping straight line (d) Upward sloping convex Ans. (c) Downward sloping straight line. Q.4. Giving reason comment on the shape of Production Possibilities Curve based on the following schedule? 3 Good X (units) Good Y (units) 0 1 2 3 4 30 27 21 12 0 Ans. We can draw production possibilities curve as- 1
We can see, as the production of Good X is increasing, the production in units of Good Y is decreasing. It is because the economy forgoes the production of units of Good Y. This makes PPC downward sloping. Q.5. What is likely to be the impact of Make in India appeal to the foreign investors by the Prime Minister of India, on the production possibilities frontier of India? Explain. 3 Ans. The Prime Minister of India has appealed to increase foreign investors in India. This is 'Make in India' programmed. It will increase investments in India. This will also increase production of various types of commodities which will allow optimum use of resources available. This would change PPC curve's shape and would move upwards. OR What is likely to be the impact of efforts towards reducing unemployment on the production potential of the economy? Explain. Ans. When the government makes efforts to reduce unemployment, it means it is increasing employment opportunities. This also means new projects will begin. Such efforts will increase production potential of the country because of increase in manpower. Total production capacity of the economy will increase and resources will be used optimally. Q.6. Explain the significance of 'minus sign' attached to the measure of price elasticity of demand in case of a normal good, as compared to the 'plus sign' attached to the measure of price elasticity of supply. 3 Ans. If minus sign is attached to the measure of price elasticity of demand it means E d is less than zero. This shows percentage change in demand is less than percentage change in price. The plus sign attached with elasticity of supply means quantity supplied changes by a larger percentage than price. 2
Q.7. In a perfectly competitive market the buyers treat products of all the firms as homogeneous. Explain the significance of this feature. 3 Ans. The concept of perfect competition was first introduced by Adam Smith in his book "Wealth of Nations". Later on, it was improved by Edge worth. However, it received its complete formation in Frank Knight s book "Risk, Uncertainty and Profit" (1921). Left which has defined market' competition in the following words: "Prefect competition is a market in which there are many firms selling identical products with no firm large enough, relative to the entire market, to be able to influence market price". According to Bllas: "The perfect competition is characterized by the presence of many firms. They sell identically the same product. The seller is a price-taker". The main conditions or features of perfect competition are as under: Features or Conditions for Perfect Competition (1) Large number of firms. The basic condition of perfect competition is that there are large numbers of firms in an industry. Each firm in the industry is so small and its output so negligible that it exercises little influence over price of the commodity in the market. A single firm cannot influence the price of the product either by reducing or increasing its output. An individual firm takes the market price as given and adjusts its output accordingly. In a competitive market, supply and demand determine market price. The firm is price taker and output adjuster. (2) Large number of buyers. In a perfect competitive market; there are very large numbers of buyers of the product. If any consumer purchases more or purchases less, he is not in a position to affect the market price of the commodity. His purchase in the total output is just like a drop in the' ocean. He, therefore, too like the firm, is a price-taker. Q.8. What are the effects of 'price-floor' (minimum price ceiling) on the market of a good? Use Diagram. 3 Ans. Price-Floor (Minimum Price Ceiling) Price-floor is a price support measure. There are several effects shown by diagram (i) Surpluses Because of price floor, the quantity actually bought and supplied will shrink. There will be huge surpluses as show AB with the producer. 3
(ii) Buffer Stocks The government would design program as to enable producer to dispose of their surplus stocks. The buffer stocks operations benefit producer. But the consumers would have to pay higher price at OP 1. Q.9. A consumer spends Rs. 1,000 on a good priced at Rs. 10 per unit. When its price falls by 20 percent, the consumer spends Rs. 800 on the good. Calculate the price elasticity of demand by the Percentage method. 4 Ans. We have been given- P = Rs. 10 per unit q = Price full s by 20% i.e., Rs. 2 per unit. = 10-2 = 8 Change in quantity demanded = Ed will remain 00 (infinity) Ed = = 100 units = 100 units % change in quantity = = 0% Q.10. What is the behavior: of Average Fixed Cost? 4 Ans. Average Fixed Cost Average fixed cost curve looks like a rectangular hyperbola. It is defined as the ratio of TFC to the output. We know that TFC remains constant throughout all the output levels and as output increases, with TFC being constant, AFC decreases. When output level is closed to zero (0), AFC is AFC (Rs) infinitely large and by contrast when output level is very large. AFC tends to zero, but never becomes zero. AFC can never be zero, because it is a rectangular hyperbola and it never intersects the x-axis and thereby can never be equal to zero. With increase in total output, we can show affect on AVC as- Total Output ('000) 1 2 3 4 5 6 TVC 2000 2700 3000 3100 4000 5000 AVC 2 1.35 1. 0.77 0.80 1.70 4
OR Define Average Revenue. Show that Average Revenue and Price are same. Ans. Average Revenue Average revenue is the total revenue divided by number of units sold so as to give revenue per unit sold. AR = We can say that average of a firm is the price of a commodity or Average revenue and price are same. We know that- TR = and TR = Q.P AR = or AR = P Q.11. A Consumer consumes only two goods X and Y, both priced at Rs. 2 per unit. If the consumer chooses a combination of the two goods with Marginal Rate of Substitution equal to 2, is the consumer in equilibrium? Why or why not?' What will a rational consumer do in this situation? Explain. 6 Ans. Here consumer consumes only two goods Le. X and Y with price Rs. 2 per unit MRS xy = Rs. 2 MRS xy = = 1 The combination of those goods will not make consumer in equilibrium on situation because IC will cut each other. For optimum condition a rational consumer will forgo one unit of another commodity. OR A consumer consumes only two goods X and Y whose prices are Rs. 5 and Rs. 4 respectively. If the consumer chooses a combination of the two goods with marginal utility of X equal to 4 and that of Y equal to 5, is the consumer in equilibrium? Why or why not? What will a rational consumer do in this situation? Use utility analysis. Ans. Here, P = Rs. 5; P y = Rs. 4 MU x = 4; MU y = Rs. 5 = 1.25 = 0.80 A consumer' is not in equilibrium condition. Q.12. What are the deferent phases in the Law of Variable Proportions in terms of marginal product? Give reason behind each phase. Use diagram? 6 Ans. Relationship between marginal products (MP) and the total product (TP) can be represented graphically as (i) TP increases at an increasing rate till point K, when more and more units of labour are employed. The point K is known as the point of inflexion. At this point MP (second part of the 5
figure) attains its maximum value at point U. (ii) After point K, TP increases, but at a decreasing rate. Simultaneously, MP starts falling after reaching its maximum level at point U. (iii) When TP curve reaches its maximum and becomes constant at point B, MP becomes zero. (iv) When TP starts falling after B, MP becomes negative. (v) MP is derived from TP by MP = Or, MP = TP n TP n-1 Explain with the help of a numerical example different phases in the Law of Variable Proportions? 6 Ans. Law of Variable Proportions: According to the law of variable proportions, if more and more units of the variable factor/labour are combined with the same quantity of the fixed factor i. e., capital, and then initially the total production will increase, but gradually after a point, the total production will start diminishing. Q.13. Explain why will a producer not be in equilibrium if the conditions of equilibrium are not met? 6 Ans. A firm is said to be in equilibrium condition when it earns maximum profits. We can always use approaches as (a) Marginal Revenue Marginal cost approach (b) total revenue total cost approach. In case of marginal revenue and Marginal cost approach, the equilibrium situation occurs where MR = MC. If this situation doesn't occur, the firm would not earn maximum profits and it would not be its equilibrium conditions. 6
Q.14. Market for a good is in equilibrium. The supply of good "decreases", Explain the chain of effects of this change? 6 Ans. We can show that changes using following diagram When the supply decreases from SS to S 1 S 1, the quantity supplied will decrease from OQ to OQ, and price will increase from OP to OP 1. This will increase equilibrium condition from A to B. Q.15. What is 'aggregate demand' in macroeconomics? 1 Ans. Aggregate demand is the sum of demand for consumption products (C) and investment products. AD=C+I Q.16. If MI'C = I, the value of multiplier is: (Choose the correct alternative) 1 (a) 0 (b) 1 (c) Between 0 and 1 (d) Infinity Ans. (d) infinity. Q.17. Primary deficit in a government budget is: (Choose the correct alternative) 1 (a) Revenue expenditure- Revenue receipts (b) Total expenditure- Total receipts (b) Revenue deficit - Interest payments. (d) Fiscal deficit - Interest payments Ans. (d) Fiscal deficit - Interest Payments. Q.18. Direct tax is called direct because it is collected directly from: (Choose the correct alternative) 1 (a) The producers on goods produced (b) The sellers on goods sold (c) The buyers of goods (d) The income earners Ans. (d) The income earners. 7
Q.19. Other things remaining the same, when in a country the market price of foreign currency falls, national income is likely: (Choose the correct alternative) 1 (a) to rise (b) to fall (b) to rise or to fall (d) to remain unaffected Ans. (a) to rise. Q.20. If the Real GDP is Rs. 400 and Nominal GDP is Rs. 450, calculate the Price index (base= 100)? 3 Ans. We have been given- Real COP = Rs. 400 Nominal COP = Rs. 450 Price index =? Base price index = 100 Nominal CDP = Real CDP 450 = 400 Price index = 112.50 Q.21. What are fixed and flexible exchange rates? 3 Ans. Fixed foreign exchange rate: Fixed rate refers to rate of exchange as fixed by the government. Historically, it has two important variants: (a) Gold standard system of exchange rate (b) Britton words system-of exchange rate Fixed exchange rate system was abandoned in 1977. It was replaced by a flexible system of exchange rate. Fixed exchange rate keeps the government under pressure to combat inflation. Because if prices in the domestic market are high, demand for our exports reduces. Our foreign exchange earnings start reducing, and our reserves of foreign. Exchange starts shrinking. Flexible foreign exchange rate: The rate which is determined by the demand for and supply of different currencies in the foreign exchange market. In other words, it is determined by the market forces, like the price of any other commodity. The market where foreign currencies are demanded and supplied is called foreign exchange market. It can be said that: R = ƒ (D,S) (Here, R = Exchange rate, D = Demand for the different currencies in the international market, 5 =Supply of different currencies in the international market.) OR Explain the meaning of Managed Floating Exchange Rate. Ans. Managed Floating Exchange Rate-It is a floating exchange rate in which a government intervenes at some frequency to change the direction of the float by buying or selling currencies. It is also called dirty float. In other words, a managed currency is an exchange rate that is floating in the foreign exchange market but often is subject to intervention from time to time by central monetary authorities as RBI etc. 8
Q.22. Where is 'borrowings from abroad' recorded in the Balance of Payments Accounts? Give reasons. 3 Ans. Borrowing from abroad are liabilities for a country. They are recorded in Balance of payment in its Capital Account. Q.23. Explain the Bankers Bank function of the central bank? 4 Ans. There are usually hundreds of banks in a country. There should be some agency to regulate and supervise their proper functioning. This duty is discharged by the central bank. Central bank acts as banker's bank in three capacities: (i) it is custodian of their cash reserves. Banks of the country are required to keep a certain percentage of their deposits with the central bank; and in this way the central bank is the ultimate holder of the cash reserves of commercial banks. (ii) Central bank is lender of last resort. Whenever banks are short of funds, they can take loans from the central bank and get their trade bills discounted. Thus Central Bank is a source of great strength to the banking system. (iii) It acts as a bank of central clearance, settlements and transfers. Its moral persuasion is usually very effective so far as commercial banks are concerned. OR Explain the Bank of Issue function of the central bank? Ans. Bank of Issue: - The central bank is given the sole monopoly of issuing currency in order to secure control over volume of currency and credit. These notes circulate throughout the country as legal tender money. Note-issuing is governed by Minimum Reserve System: i.e., while issuing currency notes, a minimum fixed amount of gold and foreign currency is kept by Central Bank. It has to keep a reserve in the form of gold and foreign securities as per statutory rules against the notes issued by it. It may be noted that RBI that one rupee notes and small coins are issued by government mints. Remember, central government of a country is usually authorized to borrow money from the central bank. When central government expenditure exceeds government revenue and Govt. is unable to reduce its expenditure, then' it borrows from RBI. This is called monetization of budget deficit or deficit financing. The government spends new currency and puts it into circulation to meet its expenditure. Q.24. Currency is issued by the central bank, yet we say that commercial banks create money. Explain. How is this money creation by commercial banks likely to affect the national income? Explain. 4 Ans. Credit Creation by the Commercial Banks: Commercial banks are an important source of money supply in the economy. They contribute to money supply by creating credit. They create credit in the form of demand deposits. Demand deposits of the commercial banks are many times more than their cash reserves. If cash reserves are (say) Rs. 1,000, the commercial banks are creating credit ten times of their cash reserves. Accordingly, on the basis of cash reserves of Rs. 1,000, the commercial banks are contributing Rs. 10,000 to the supply of money. Here, comes the basic question: how cash reserves of Rs. 1,000, with the banks are converted into demand deposits of Rs. 10,000? Following is a brief description of how it happens. (i) The commercial banks know by way of their historical experience that, all the depositors would not show up in the banks to withdraw all their deposits at a point of time. (ii) If experience shows that withdrawals are generally around 10 percent of the deposits, the banks need to keep only 10 per cent of deposits as cash reserves. This is known as CRR (Cash Reserve Ration). 9
(iii) If CRR = 10%, total cash reserves of Rs. 1,000 in accordance with following formula: Demand Deposits = Cash Reserves = Rs. 1,000 = 10 Rs. 1,000 = Rs. 10,000 Here, it is important to note that loans are never offered in cash. These are always reflected as demand deposits in favors of the borrowers. Accordingly, when loans are offered worth Rs. 10,000, demand deposits of the banks are raised by Rs. 10,000. So that, in the above equation, demand deposits are in fact pointing to loans. (iv) We can thus conclude that if cash reserves of the commercial banks are increased by (say) t 1,000, then credit supply (or money supply) in the economy will increase by t 10,000 (= t 1, 000 x 10) on the assumption that banks are not a part of money supply (simply because cash held by the suppliers of money cannot be a part of money supply). Demand deposits are a part of money supply (simply because these are chequeable deposits and holders of these deposits can use them as money by issuing cheques). Q.25. An economy is in equilibrium. Calculate the Investment Expenditure from the following? 4 National Income = 800 Marginal Propensity to Save = 0.3 Autonomous Consumption = 100 Ans. We have been gives Y = 800 MPS = 0.3 = 100 MPC= 1-0.3 (1-MPS) = 0.7 Equilibrium condition is Y = + I By putting values we get 800 = 100 + 0.7 (800) + I 900 = 560 + I 1= 340 (Investment Expenditure) Q.26. Giving reason explain how the following should be treated in estimation of national income: 6 (i) Payment of interest by a firm to a bank (ii) Payment of interest by a bank to an individual (iii) Payment of interest by an individual to a bank Ans. (i) It will be included in national income because it is paid only after the production activity s conducted by the firm. (ii) Interest when paid by a bank to an individual will be included in national income because banks are to have use individual's savings for production purposes. (iii) Interest paid by an individual to a bank could be a capital expenditure that will not be included in the national income estimation. 10
Q.27. What is 'deficient demand? Explain the role of 'Bank Rate' in removing it. 6 Ans. Deficient Demand-Deficient demand situation occurs when aggregate demand is less then aggregate supply at full employment level. It is shown as- The diagram shows QB as deficient demand. Equilibrium should be at point A where AD = AS Bank rates can be useful in removing deficient demand, Central Bank reduces bank rates expand credit. It leads to fall in the market rate of interest which induces people to borrow and AD increase. OR What is 'excess demand' Explain the role of 'Reverse Repo Rate' in removing it. Ans. Excess Demand-A Situation when AD increases aggregate supply, is called excess demand at a full employment output. It gives rise to inflationary gap, It is shown as- AD 1 is showing excess demand in figure. 11
Revenue Repo rate is used to control excess demand in which such policy can reduce or ease vitality in periods of excess demand. In this, an increase in the revenue repo rate, the money supply will decreases. This method is used to control money supply within the country. Q.28. Explain how the government can use the budgetary policy in reducing inequalities in incomes. 6 Ans. (i) Government can influence allocation of resources through budget in many ways. It can encourage or discourage production of selected goods through.taxes and subsidies. For discouraging it car* impose taxes. For encouraging it can give subsidies. Government can also directly participate in production of goods and services. (ii) Government can influence inequalities of income through taxes and public expenditure. It can impose taxes on the rich reducing their disposable income. The amount so collected san be spent on poor for raising their standard of living. (iii) To reallocate resources in line With social and economic objectives, governni.ent has to allocate resources into areas where private sector is not corning, e.g., sanitation, water supply, rural development, education, health etc. Moreover, government provides more funds to productive sectors and draws away resources from some other sectors to promote balanced economic growth of different regions. Impact of the budget: A budget impacts the society at three levels: 1. It promotes aggregate fiscal discipline through controlled expenditure, given the quantum of revenues. 2. Resources of the country are allocated on the basis of social priorities. 3. It contains effective and efficient! programmers for delivery of goods and services to achieve targets and goals, Q.29. Calculate the National Income and Private Income? (i) Rent (ii) Net factor income to abroad (iii) National debt interest (iv) Wages and salaries (v) Current transfers from government (vi) Undistributed profits (vii) Corporation tax (viii) Interest (ix) Social security contributions by employers 100 (x) Net domestic product accruing to government 250 (xi) Net current transfers to rest of the world (xii) Dividends (Rs. crores) 200 10 15 700 10 20 30 150 100 250 5 50 12
Ans. National Income - This will be calculated using income method. NDP Fe = (i) + (iv) + (vi) + (vii) + (viii) + (ix) + (xii) = 200 + 700 + 20 + 30 + 150 + 100 + 50 = Rs. 1250 crores Private Income Private Income = NOP FC (x) + (iii) + (v) + (ii) = 1250-250 + 15 + 10 + 10 = Rs. 1035 crores 13