Xam Idea Economics

ECONOMICS
Examination
Papers
2008–2014
CONTENT
n CBSE Examination Paper–2008 (Delhi) 3
n CBSE Examination Paper–2009 (All India) 41
n CBSE Examination Paper–2009 (Foreign) 61
CBSE EXAMINATION PAPERS–2008
DELHI
Time allowed: 3 hours Maximum marks: 100
General Instructions:
(i) All questions in both the sections are compulsory.
(ii) Marks for questions are indicated against each.
(iii) Question Nos. 1-5 and 17-21 are very short answer questions carrying one mark each. They
are required to be answered in one sentence each.
(iv) Question Nos. 6-10 and 22-26 are short answer questions carrying three marks each. Answer
to them should not normally exceed 60 words each.
(v) Question Nos. 11-13 and 27-29 are also short answer questions carrying four marks each.
Answer to them should not normally exceed 70 words each.
(vi) Question Nos. 14-16 and 30-32 are long answer questions carrying six marks each. Answer to
them should not normally exceed 100 words each.
(vii) Answer should be brief and to the point and the above word limit be adhered to as far as
possible.
SET–I
SECTION – A
1. Give meaning of ‘opportunity cost.’ 1
Ans. Opportunity cost is value of a factor in its next best alternative use.
2. Define market demand. 1
Ans. Market demand refers to total demand by all buyers of a commodity in the market.
3. What does cost mean in economics? 1
Ans. Cost is the expenditure incurred by the producer on purchases of factor inputs such as
land, labour, capital, etc., and non-factor inputs such as raw material, fuel, etc.
4. Define revenue. 1
Ans. Revenue refers to the money receipts of a firm from the sale of its output.
5. Define market for a good. 1
Ans. Market refers to the mechanism of sale and purchase of goods and services.
6. Explain the central problem “what to produce”. 3
Ans. What do produce is the problem relating to choice of goods and services to be produced.
Because resources are scarce, we cannot produce everything in whatever quantity we wish
to. We are bound to be faced with the problem of what to produce.
Let us assume that resources are available worth Rs 5 crore. Assuming technology to be
constant, we can utilise these resources entirely for the production of (say) guns and
4 | Economics–XII
produce 500 guns, or utilise these resources entirely for the production of bread and
produce (say) 500 tons of bread. Every society has to decide what to produce, consumer
goods like refrigerator, shirts etc. or producer goods like machine, tools etc. We need guns
for the defence and bread for the masses. Now, can we produce both of them, even when we
need both of them? No, because resources do not permit it. Hence the obvious problem of
choice relating to what to produce and how much to produce.
Every economy faces this problem because in every economy, resources are scarce in
relation to unlimited wants.
7. When price of a good rises from Rs 5 per unit to Rs 6 per unit, its demand falls from 20
units to 10 units. Compare expenditures on the good to determine whether demand is
elastic or inelastic. 3
Ans.
Price Demand Total Expenditure
(Rs) (in units) (Rs)
5 20 100
6 10 60
Here, total expenditure decreases with rise in price, hence elasticity of demand is more
than unity. It is a situation of elastic demand.
8. What is the relation between good X and good Y in each case, if with fall in the price of X
demand for good Y (i) rises and (ii) falls? Give reason. 3
Ans. (i) With fall in the price of X, demand for good Y rises: It is a situation of complementary
goods. These are the goods which complete the demand for each other. So that when
price of X falls and more of X is purchased, more of Y is also purchased. (Example: If
more of bread is purchased owing to a fall in its price, more of butter is also purchased.)
(ii) With fall in the price of X, demand for good Y falls: It is a situation of substitute goods.
These are the goods which can be substituted for each other. So that when price of X
falls, consumers switch over from Y to X, and therefore demand for Y falls. (Example:
If price of tea falls, consumers tend to shift from coffee to tea; accordingly demand for
coffee falls.)
9. Explain the effect of technical progress on the supply of good. 3
Or
Explain the effect of rise in input prices on the supply of a good.
Ans. A cost saving technological progress will reduce the marginal cost of production. So the
marginal cost curve shifts downward. Since MC curve is the same as supply curve of the
firm, downward shift in MC curve implies a downward shift in supply curve. It means
supply curve shifts forward, signifying increase in supply. Thus, a cost saving technological
progress leads to increase in supply. This situation is illustrated in Fig. 1.
Examination Papers–2008 |5
Fig. 1 Y
Supply curve
prior to technological S1
improvement S2
PRICE
Supply curve after
K T technological improvement
P
S1
S2
O X
QUANTITY
Or
Increase in input price shifts the marginal cost curve upward. Accordingly, supply curve
shifts upward or to the left implying less supply at the same price (i.e., same supply at higher
price). Fig. 2 illustrates this situation. S1S1 is the initial supply curve. When input price
increases, supply curve will shift backward from S1S1 to S2S2.
Fig. 2 Y
S2
S1
R K
PRICE
Supply curve shifts backward in case of

increase in the input price and the
consequent increase in production cost.
S2
S1
O X
QUANTITY
10. State three features of monopoly. 3

Ans. The three main features of monopoly market are as under:
(i) Single seller and large number of buyers of a product.
(ii) Entry of new firms not possible.
(iii) No close substitutes of the monopoly product.
11. Explain the conditions leading to maximization of profits by a producer. Use total cost
and total revenue approach. 4
Ans. A producer is said to be in equilibrium when:
(i) Marginal revenue = Marginal cost.
(ii) Marginal cost is rising.
It is here only that profit is maximised or losses are minimised. Fig. 3 shows maximisation of
profit (which occurs when the difference between TR and TC is maximum) corresponding
to which MR = MC.
6 | Economics–XII
Fig. 3 Y
TC
Cost, Revenue and Profit

A b
a TR
d
c B (Maximum
P
Profit)
O X
Q1 Q Q2
TP
In the diagram, maximum profit is AB which is the maximum difference between TR and
TC. It is equal to QP on the line showing total profit (TP). The corresponding level of
output is OQ.
Q.12. Complete the following table: 4
Output Average Revenue Marginal Revenue Total Revenue
(Units) (Rs) (Rs) (Rs)
1 — 15 —
2 — — 26
3 11 — —
4 — 3 —
Ans.
Output Average Revenue Marginal Revenue Total Revenue
1 15 15 15
2 13 11 26
3 11 7 33
4 9 3 36
13. Complete the following table: 4
Output Total Variable Cost Average Variable Cost Marginal Cost (Rs)
(Units) (Rs) (Rs)
1 10 — —
— — 8 6
3 27 — —
— — 10 13
Or
Complete the following table:
Output Total Variable Cost Average Variable Cost Marginal Cost
1 — 12 —
2 20 — —
— — 10 10
4 40 — —
Ans.
1 10 10 10
2 16 8 6
3 27 9 11
4 40 10 13
Or
1 12 12 12
2 20 10 8
3 30 10 10
4 40 10 10
14. A consumer consumes only two goods. Explain his equilibrium with the help of utility
approach. 6
Ans. A consumer is in a state of equilibrium when he maximises his satisfaction by spending his
given income on different goods and services.
Buying only two goods, the consumer strikes his equilibrium when:
MUX MUY
= = MUM
PX PY
It implies that in a state of equilibrium, rupee worth of satisfaction actually derived from
each of the commodity should be equal and be further equal to rupee worth of satisfaction
expected by the consumer (MUM).
15. Explain the Law of Variable Proportions through the behaviour of both Total Product and
Marginal Product. Give reasons. 6
Or
*Explain Returns to Scale using numerical examples. Give reasons.
8 | Economics–XII
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
utilisation of the fixed factor. But, continuous increase of the variable factor must cause
mismatch between the variable and the fixed factor, and MP must ultimately decline.
Fig. 4 explains the behaviour of TP and MP.
Y
Fig. 4 T
TOTAL PRODUCT
TP
L S
OY X
Increasing Diminishing
Returns Returns
MARGINAL PRODUCT
O X
L S – ve
MP
UNITS OF THE VARIABLE FACTOR
Diagram shows that:

(i) MP tends to rise till OL units of the variable factor are used with the constant
application of the fixed factor. This corresponds to point E on the MP curve. This is a
situation of increasing returns to a factor.
(ii) When MP is rising, TP tends to rise at an increasing rate. This occurs till point K on the
TP curve. This corresponds to the situation of increasing returns to a factor.
(iii) Beyond OL units of the variable factor, MP tends to decline, and TP increases only at
diminishing rate. This occurs between E and S on MP curve, and between K and T on
TP curve. This corresponds to a situation of diminishing returns to a factor.
(iv) Beyond OS units of the variable factor, MP becomes negative. Now TP starts declining.
Economists sometimes refer to this situation as a situation of negative returns.
Or
When a producer changes all the factors of production in the same proportion, the
proportional relationship between output and factor inputs is known as returns to scale.
When all inputs are increased in the same proportion, there are three possibilities:
(i) Constant returns to scale (CRS), (ii) Increasing returns to scale (IRS), and (iii) Decreasing
returns to scale (DRS).
Let us consider a production function of the following type where x1 and x2 are the amounts
of factor-1 and factor- 2 respectively, and y is the level of output:
y = f (x1 , x 2 )
(i) In a situation of CRS, output increases in the same proportion as the increase in inputs.
That is, if inputs of factor-1 and factor-2 are increased t times (and t > 1) then output
should also increase by a factor of t. This is how it is expressed:
f ( tx 1 , tx 2 ) = t . f ( x 1 , x 2 )
New output level when t times old

both x1 and x2 are output level
increased by a factor of t.
(ii) In a situation of IRS, output increases proportionately higher than the increase in
inputs. Or, that the new output level is greater than t times old output level. This is how
it is expressed:
f ( tx 1 , tx 2 ) > t . f ( x 1 , x 2 )
(iii) Likewise, in a situation of DRS, output level increases proportionately lower than the
increase in inputs. Or, that new output level is lesser than t times old output level. This
is how it is expressed:
f ( tx 1 , tx 2 ) < t . f ( x 1 , x 2 )
Note: *Deleted from the syllabus, 2010.
16. Market for a good is in equilibrium. What is the effect on equilibrium price and quantity
if both market demand and market supply of the good increase in the same proportion?
Use diagram. 6
Ans. If the demand and supply of a commodity change equally and in the same direction, there
will be no effect on equilibrium price, but equilibrium quantity increases. This is shown in
Fig. 5.
Y
Fig. 5 S1
D2
S2
D1
PRICE
P1
S1
D2
S2 D1
O X
Q1 Q2
QUANTITY
In Fig. 5, D1D1 is the initial demand curve and S1S1 is the initial supply curve. OP1 is equilibrium
price and OQ1 equilibrium quantity. Due to increase in demand, new demand curve takes the
shape of D2D2 and due to increase in supply, new supply curve takes the shape of S2S2.
10 | Economics–XII
In Fig. 5, it is clear that increase in demand and supply is equal. Hence, price remains
unchanged, i.e., OP1 but the equilibrium quantity increases from OQ1 to OQ2. Thus, when
demand and supply increase equally, no change in equilibrium price takes place but equilibrium
quantity changes (increases).
SECTION – B
17. Give meaning of involuntary unemployment. 1
Ans. Involuntary unemployment is a situation in which a worker is willing to work at current
rate of wages but does not get work.
18. Define inflationary gap. 1
Ans. Inflationary gap is the excess of aggregate demand over and above its level required to
maintain full employment equilibrium in the economy.
19. What is a central bank? 1
Ans. A Central Bank is an apex institution of a country that controls and regulates the monetary
and financial system of the country.
20. State any one objective of government budget. 1
Ans. The government budget focuses on achieving growth with stability.
21. Define flexible exchange rate system. 1
Ans. Flexible rate of exchange is that rate which is determined by the demand for and supply of
different currencies in the foreign exchange market.
22. Calculate ‘value of output’ from the following data: 3
(Rs lakhs)
(i) Net value added at factor cost 100
(ii) Intermediate consumption 75
(iii) Excise duty 20
(iv) Subsidy 5
(v) Depreciation 10
Ans. Value of Output = Net value added at factor cost + Intermediate consumption + Excise duty
– Subsidy + Depreciation
= Rs 100 lakh + Rs 75 lakh + Rs 20 lakh – Rs 5 lakh + Rs 10 lakh
= Rs 200 lakh.
23. When exchange rate of foreign currency rises, its supply rises. How? Explain. 3
Ans. Exchange rate is the rate at which one currency can be exchanged for the other currency in
the international foreign exchange market.
An increase in foreign exchange rate (from OR1 to OR2) means relative fall in exchange
value of domestic currency, which attracts more exports from the country and implies a
greater supply of foreign exchange, i.e., from OS1 to OS2 , as shown in Fig. 6.
Examination Papers–2008 | 11
Y
Fig. 6
S
RATE OF EXCHANGE
R2
R1
O X
S1 S2
QUANTITY SUPPLIED
(FOREIGN CURRENCY)
24. State components of the current account of balance of payments account. 3

Ans. Principal items of current account of balance of payments are as under:
(i) Merchandise: It refers to all such items of exports and imports which are visible.
(ii) 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. Examples: Travel, Transportation,
Insurance and Banking.
(iii) Transfers: It refers to unilateral transfers such as gifts or donations.
(iv) Investment Income: It refers to income by way of rent, interest and profit.
(v) Compensation of Employees: It refers to income earned or paid to rest of the world by
way of wages or salaries.
25. What is bank rate policy? How does it work as a method of credit control? 3
Or
What are open market operations? How do these work as a method of credit control?
Ans. Bank rate is the rate at which the Central Bank offers loans to the commercial banks as ‘a
lender of last resort’. During inflation when supply of money/credit is to be reduced, bank
rate is increased. This reduces borrowing by the commercial banks, implying a reduction in
their cash reserves and therefore a reduction in their capacity to create credit. Following
increase in bank rate, market rate of interest is also raised, implying a check on borrowings
from the commercial banks. Thus, overall supply of money/credit is reduced in the
economy. Exactly opposite is done to combat deflation: bank rate is lowered to increase the
supply of money/credit.
Or
Open market operations refers to sale and purchase of securities by the Central Bank in the
open market. To increase money supply (as during deflation) securities are purchased by
the Central Bank. On the other hand, to decrease money supply (as during inflation)
securities are sold off. Buying the securities, the commercial banks reduce their cash
deposits, and hence their capacity to create credit. Selling the securities, the commercial
banks add to their cash reserves and enhance their capacity to create credit.
26. Give meanings of capital receipts and revenue receipts with an example of each. 3
Ans. Capital receipts are those receipts which either create a liability or lead to reduction in
assets. Recovery of loans from state governments, market loans, and disinvestment are
examples.
Revenue receipts are those receipts which do not create a liability or cause a reduction in
assets. Receipts from tax revenue like income tax and sales tax and receipts from non-tax
revenue like interest and dividends are examples.
27. As a result of increase in investment by Rs 125 crores, national income increases by Rs 500
crores. Calculate marginal propensity to consume. 4
Ans. We know,
DY 1 1
= K (Multiplier), and K = =
DI 1 – MPC MPS
Given, DY = 500, DI = 125, we get,
500
K= =4
125
1 1
Þ =4 Þ MPS = = 0.25
MPS 4
MPC = 1 – MPS
= 1 – 0.25 = 0.75
Q.28. Give four agency functions of commercial banks. 4
Or
Explain the acceptance of deposits function of commercial banks.
Ans. The four agency functions of commercial banks are as follows:
(i) Collection and Payment of Various Items: Banks collect cheques, rent, interest, etc.,
on behalf of their customers and also make payment of taxes, insurance premium, etc.,
on their behalf.
(ii) Purchase and Sale of Securities: Banks normally are more knowledgeable with
regard to stock and share business. As such they buy, sell and keep in safe custody the
securities on behalf of their customers.
(iii) Trustee and Executor: Banks also act as trustees and executors of the property of their
customers on their advice.
(iv) Remitting Money: Banks remit money at distant places through bank drafts.
Or
A bank accepts deposits from the public. People can deposit their money in either of the
following accounts:
(i) Fixed or Time Deposit Account: Cash is deposited in this account for a fixed time
period. This is not payable on demand or there is no chequing facility on Time Deposit
Account.
(ii) Current or Demand Deposit Account: A depositor can deposit his funds any number
of times he likes and can also withdraw the same any number of times he likes. The
depositor enjoys the chequing facility.
(iii) Savings Deposit Account: These deposits are payable on demand and also
withdrawable by cheque, but with certain restrictions.
(iv) Recurring Deposit Account: Under this account, a specified amount is deposited
every month for specified period, say, 12, 24, 36 or 60 months. It does not carry any
chequing facility.
29. What is fiscal deficit? What are its implications? 4
Ans. Fiscal deficit refers to the excess of total expenditure over the sum of revenue receipts and
capital receipts excluding borrowing.
Fiscal deficit occurs when:
Total Expenditure >(Revenue Receipts + Capital Receipts - Borrowing).
The significance of the fiscal deficit is that it reflects total borrowing requirement of the
government.
30. Calculate ‘Net Domestic Product at Factor Cost‘ and ‘Gross National Disposable Income’
from the following data: 3,3
(Rs crores)
(i) Net current transfers from abroad (–) 5
(ii) Private final consumption expenditure 250
(iii) Net factor income from abroad 15
(iv) Government final consumption expenditure 50
(v) Consumption of fixed capital 25
(vi) Net exports (–) 10
(vii) Subsidies 10
(viii) Net domestic capital formation 30
(ix) Indirect tax 20
Ans. Net Domestic Product at Factor Cost
= Private final consumption expenditure+ Government final consumption expenditure
+ Net domestic capital formation+ Net exports – Indirect taxes + Subsidies
= Rs 250 crore + Rs 50 crore + Rs 30 crore + (–) Rs 10 crore – Rs 20 crore + Rs 10 crore
= Rs 310 crore.
Gross National Disposable Income
= Net domestic product at factor cost + Net current transfers from abroad + Net
indirect taxes + Consumption of fixed capital + Net factor income from abroad
= Rs 310 crore + (–) Rs 5 crore + (Rs 20 crore – Rs 10 crore) + Rs 25 crore + Rs 15 crore
= Rs 310 crore – Rs 5 crore + Rs 10 crore + Rs 25 crore + Rs 15 crore
= Rs 360 crore – Rs 5 crore = Rs 355 crore.
31. Explain determination of equilibrium level of income using ‘consumption plus
investment’ approach. Use diagram. 6
Or
Explain determination of equilibrium level of income using ‘saving-investment’
approach. Use diagram.
Ans. Equilibrium income is determined at the level where aggregate demand is equal to
aggregate supply (AD = AS).
AD has two components: Consumption and Investment
AD = C + I
I is autonomous. It is independent of income. Accordingly, it is shown as a horizontal
straight line. C is related to income. It increases as income increases. However, there is some
minimum level of C even when income is zero.
AS responds to AD at its different levels. 45o line shows the equality between AS and AD.
Accordingly, equilibrium is struck at that level of AD where it cuts the 45o line. Fig. 7
illustrates this equilibrium. It is struck at point E where AD = AS, and OY is the equilibrium
level of income.
In the Fig. 7, AD represents aggregate demand curve and 45° line is the line of reference
where AS = AD. Prior to point E, aggregate demand will exceed aggregate supply leading
to an increase in level of income upto point E. Beyond point E, aggregate supply will exceed
aggregate demand leading to a fall in AS back to point E.
Y
Fig. 7 AS=AD
CONSUMPTION/INVESTMENT
C+I
E C
O X
Y
INCOME/OUTPUT
Or
Fig. 8 illustrates the equilibrium level of output/ income with reference to the equality
between S and I. E is the point of equilibrium corresponding to which OL is the level of
equilibrium income/output.
Y
Fig. 8
S, I
S
E
K I
O X
L T
(–)
S
INCOME/OUTPUT
(i) At E, S = I.
(ii) If S > I, it implies that
C+S>C+I
Or AS > AD
It refers to deficiency of AD in relation to AS.
Stocks of the producers would be in excess of the desired limit. Unsold stock may cause
reduction in profits. Consequently the producers would plan lower level of output ,
implying lower level of employment and income.
Briefly, if planned S > planned I,
(i) Stocks would be in excess of the desired limit.
(ii) Profits may shrink.
(iii) Planned level of output for the subsequent year may fall.
(iv) Levels of income and employment will tend to shrink to the point where S = I.
32. Giving reasons explain how the following are treated while estimating national income:
2,2,2
(i) Payment of fees to a lawyer engaged by a firm.
(ii) Rent free house to an employee by an employer.
(iii) Purchases by foreign tourists.
Ans. (i) Payment of Fees to a Layer Engaged by a Firm: Services purchased by one firm from
another, like consultancy services of an advocate, are treated as a part of intermediate
consumption Accordingly, payment of fees to a lawyer engaged by a firm is not to be
included in the estimation of national income.
(ii) Rent Free House to an Employee by an Employer: Rent free house to an employee by
an employer is a component of compensation of employees. Therefore it is included in
national income.
(iii) Purchases by Foreign Tourists: Purchases by foreign tourists are like export of goods
and services to the non-residents. It is a part of expenditure on domestic product, and
therefore a part of national income, as estimated using expenditure method.
SET–II
(UNCOMMON QUESTIONS)
SECTION–A
6. When price of a good falls from Rs 10 per unit to Rs 9 per unit, its demand rises from 9
units to 10 units. Compare expenditures on the good to find price elasticity of demand. 3
Ans.
(Rs) (in units) (Rs)
10 9 90
9 10 90
Since, total expenditure remains constant, elasticity of demand is equal to unity.
9. State three features of monopolistic competition. 3

Ans. The main features of monopolistic competition are as under:
(i) Large Number of Buyers and Sellers: The number of buyers and sellers of a
commodity is very large.
(ii) Product Differentiation: Each producer tries to differentiate his product with a view
to attracting the buyers.
(iii) Freedom of Entry and Exit: Firms are free to enter the industry or quit it.
10. Explain the central problem ‘how to produce’. 3
Ans. The problem of how to produce is a problem relating to choice of technology. Broadly, it is
the problem of deciding input ratio of different factor inputs and efficient use of resources.
There are two techniques of production: (i) Labour intensive technique in which labour is
used more than capital, and (ii) Capital intensive technique in which capital is used more
than labour. An economy must decide as to which technique is to be used so that efficient
production is obtained.
if the proportionate increase in market demand is greater than increase in market
supply? Use diagram. 6
Ans. When proportionate increase in market demand is greater than increase in market supply,
the equilibrium price and quantity will rise. This is shown in the Fig. 9:
Y
Fig. 9
D2 S1
D1 S2
PRICE
P2
P1
S1 D2
S2
D1
O X
Q1 Q2
QUANTITY
Fig. 9
In Fig. 9, D1D1 is the initial demand curve and S1S1 is the initial supply curve. OP1 is
equilibrium price and OQ1 equilibrium quantity. Due to increase in demand, new demand
curve takes the shape of D2D2 and due to increase in supply, new supply curve takes the
shape of S2S2. In this situation, demand has increased more than supply. Hence price
increases to OP2 and quantity to OQ2. Consequently, when demand increases more than
supply, price and quantity will rise.
SECTION–B
17. Define deflationary gap. 1
Ans. Deflationary gap is a situation when AD < AS corresponding to its full employment level in
the economy.
21. Give meaning of full employment. 1

Ans. Full employment is a situation in which all those who are able to work and willing to work at
the existing rate of wage get work.
26. Calculate ‘intermediate consumption’ from the following data: 3
(Rs lakhs)
(i) Value of output 200
(ii) Net value added at factor cost 80
(iii) Sales tax 15
(iv) Subsidy 5
(v) Depreciation 20
Ans. Intermediate Consumption
= Value of output – Net value added at factor cost – Net indirect taxes – Depreciation
= Rs 200 lakh – Rs 80 lakh – (Rs 15 lakh – Rs 5 lakh) – Rs 20 lakh
= Rs 200 lakh – Rs 80 lakh – Rs 10 lakh – Rs 20 lakh
= Rs 200 lakh – Rs 110 lakh = Rs 90 lakh.
28. As a result of increase in investment national income rises by Rs 600 crores. If marginal
propensity to consume is 0.75, calculate the increase in investment. 4
Ans. Increase in National Income ( DY)= Rs 600 crore
MPC = 0.75
1 1 1
Multiplier (K) = = = =4
1 – MPC 1 – 0.75 0.25
DY
We know, K =
DI
DY 600
Þ DI = = = 150
K 4
Increase in investment = Rs 150 crore.
31. Calculate Gross National Product at Market Price and Net National Disposable Income
from the following data: 3,3
(Rs crores)
(i) Net current transfers to abroad (–) 5
(ii) Profits 70
(iii) Consumption of fixed capital 30
(iv) Rent 40
(v) Indirect tax 20
(vi) Interest 100
(vii) Royalty 10
(viii) Compensation of employees 600
(ix) Subsidy 5
(x) Net factor income from abroad (–) 25
Ans. GNPMP = Compensation of employees + Rent + Interest + Royalty + Profit

+ Net factor income from abroad + Consumption of fixed capital
+ Indirect taxes – Subsidy
= Rs 600 crore + Rs 40 crore + Rs 100 crore + Rs 10 crore + Rs 70 crore +
(–) Rs 25crore + Rs 30 crore + Rs 20 crore – Rs 5 crore
= Rs 840 crore.
Net National Disposable Income
= GNPMP – Consumption of fixed capital – Net current transfers to abroad
= Rs 840 crore – Rs 30 crore – (–) Rs 5 crore
= Rs 840 crore – Rs 30 crore + Rs 5 crore = Rs 815 crore.
SET–III
SECTION–A
8. State three features of perfect competition. 3
Ans. The three features of perfect competition are as follows:
(i) Large Numbers of Buyers and Sellers: The number of buyers and sellers of a
commodity is so large that no seller or buyer can influence the price.
(ii) Homogeneous Product: All sellers sell identical units of a given product.
(iii) Perfect Knowledge: Buyers and sellers have full knowledge regarding the prevailing
market price.
9. Explain the central problem of “for whom to produce.” 3
Ans. It is a problem relating to choice of users of the goods and services. Should we produce for
those who can pay high price? If yes is the answer, we shall end up producing goods and
services for a relatively richer section of the society or even for a richer section of the world
community. Their quality of life would improve, but that of the poor would stagnate or
deteriorate further. As such, the gulf between rich and the poor would keep on widening
which no welfare state can afford to accept. On the other hand, if goods are produced for
the poor only, they may not afford to buy, reducing profits of the producers. When
producers do not earn profits, where will investment come from? Accordingly, the level of
production would shrink and quality of life of the entire population would suffer. Hence,
the problem of choice related to the final users of goods and services.
10. When price of a good falls from Rs 8 per unit to Rs 7 per unit, its demand rises from
12 units to 16 units. Compare expenditures on the good to determine whether demand is
elastic or inelastic. 3
Ans.
Price (Rs) Demand (in units) Total Expenditure (Rs)
8 12 96
7 16 112
Since, total expenditure increases with fall in price, elasticity of demand is greater than
unity. It is a situation of elastic demand.
if increase in market demand is less than increase in market supply? Use diagram. 6
Ans. If market demand increases less than increases in market supply the equilibrium price falls,
but the equilibrium quantity increases, as in Fig. 10.
Fig. 10 Y
S1
D2
D1 S2
PRICE
P1
P2
S1 D2
S2 D1
O X
Q1 Q2
QUANTITY
In the Fig. 10, D1D1 is the initial demand curve and S1S1 is the initial supply curve. OP1 is
equilibrium price and OQ1 equilibrium quantity. Due to increase in demand, new demand
curve takes the shape of D2D2 and due to increase in supply, new supply curve takes the
shape of S2S2.
Increase in supply is more than increase in demand. Hence, price falls from OP1 to OP2 but
the quantity increases from OQ1 to OQ2. Thus, when supply increases more than demand,
price tends to fall but quantity increases.
SECTION – B
20. What is under employment equilibrium? 1
Ans. Underemployment equilibrium is a situation where some resources continue to be
unemployed even when AD = AS.
21. What is consumption function? 1
Ans. Consumption function is a schedule showing the relationship between consumption and
income.
25. Calculate ‘Sales’ from the following data: 3
(Rs lakhs)
(ii) Intermediate consumption 200
(iii) Indirect tax 20
(iv) Depreciation 30
(v) Change in stocks (–) 50
Ans. Sales = Net value added at factor cost – Change in stock + Intermediate Consumption
+ Depreciation + Net indirect taxes
= Rs 300 lakh – (–) Rs 50 lakh + Rs 200 lakh + Rs 30 lakh + (Rs 20 lakh – Rs 0 lakh)
= Rs 600 lakh.
29. If marginal propensity to consume in 0.9, what is the value of multiplier? How much
investment is needed to increase national income by Rs 5,000 crores? Calculate. 4
Ans. Desired increase in National Income (DY) = Rs 5000 crore.
MPC = 0.9
1 1 1
Multiplier (K) = = = = 10
1 – MPC 1 – 0. 9 0 .1
DY DY 5000
We know, K = Þ DI = = = 500
DI K 10
Desired increase in investment = Rs 500 crore.
32. Calculate National Income and Net National Disposable Income from the following data:
3,3
(Rs crores)
(i) Net current transfers to abroad 15
(ii) Net exports (–) 20
(iii) Private final consumption expenditure 400
(iv) Net factor income to abroad 10
(v) Government final consumption expenditure 100
(vi) Indirect Tax 30
(vii) Net domestic capital formation 50
(viii) Change in stocks 7
(ix) Subsidy 5
Ans. National Income (or NNPFC)
= Private final consumption expenditure + Government final consumption expenditure
+ Net domestic capital formation + Net exports – Net factor income to abroad
– Net indirect tax (indirect tax – subsidy)
= Rs 400 crore + Rs 100 crore + Rs 50 crore + (–) Rs 20 crore – Rs 10 crore
– (Rs 30 crore – Rs 5 crore)
= Rs 495 crore
= NNPFC + Net indirect taxes – Net current transfers to abroad
= Rs 495 crore + (Rs 30 crore – Rs 5 crore) – Rs 15 crore
= Rs 495 crore + Rs 25 crore – Rs 15 crore
= Rs 505 crore.
DELHI
(iii) Questions Nos. 1 - 5 and 17 - 21 are very short-answer questions carrying 1 mark each. They are required
to be answered in one sentence each.
(iv) Questions Nos. 6 - 10 and 22 - 26 are short-answer questions carrying 3 marks each.
Answers to them should normally not exceed 60 words each.
(v) Questions Nos. 11 - 13 and 27 - 29 are also short-answer questions carrying 4 marks each. Answers to them
should normally not exceed 70 words each.
(vi) Questions Nos. 14 - 16 and 30 - 32 are also long-answer questions carrying 6 marks each. Answers to them
(vii) Answers should be brief and to the point and the above word limits should be adhered to as far
as possible.
SET–I
SECTION–A
1. Give two examples of microeconomic studies. 1
Ans. Two examples of microeconomic studies are:
(i) Study of price determination in the commodity market.
(ii) Study of consumer equilibrium.
2. When is the demand for a commodity said to be inelastic? 1
Ans. When the percentage change in quantity demanded is less than the percentage change in
price, the demand for a commodity is said to be inelastic (i.e., Ed < 1).
3. Define fixed cost. 1
Ans. Fixed costs are the sum total of expenditure incurred by the producer on the purchase or
hiring of fixed factors of production.
4. What causes a downward movement along a supply curve? 1
Ans. Fall in price of the concerned commodity causes downward movement along a supply curve.
5. Define monopoly. 1
Ans. Monopoly is a form of market in which there is a single seller of a commodity with no close
substitutes.
6. Why does an economic problem arise? Explain. 3

Or
Explain the problem of ‘What to produce’.
Ans. Economic problem is a problem related to the allocation of resources (or problem of
choice). An economic problem arise due to the following reasons:
(i) Scarcity: Resources are scarce in relation to their wants.
(ii) Alternative uses: Resources have alternative uses like, for example, land may be used
to produce wheat or may be used for the construction of buildings.
Or
What to produce is the problem relating to choice of goods and services to be produced.
to. We are bound to face the problem of choice.
produce (say) 400 tons of bread. We need guns for the defence and bread for the masses.
Can we produce 400 guns as well as 400 tons of bread, even when we need both of them?
No, because resources do not permit it. Hence, the obvious problem of choice relating to
what to produce and how much to produce.
7. Distinguish between a normal good and an inferior good. Give example in each case. 3
Ans. A normal good is that good the consumption of which increases with increase in income of
the consumer, so that there is a positive relationship between consumer income and
demand for the good. Example: milk.
An inferior good is that good the consumption of which decreases with increase in income
of the consumer, so that there is a negative relationship between consumer income and
demand for the good. Example: coarse grain.
8. How is the price elasticity of demand for a commodity affected by the number of its
substitutes? Explain. 3
Ans. Larger the number of substitutes of a commodity, greater is the elasticity of demand, as in a
situation of monopolistic competition. This is because the consumer gets a choice of shifting
from one commodity to the other when price of one commodity changes in relation to price
of the other. On the other hand, if a commodity has no close substitute as under monopoly,
elasticity of demand will be low. Because, in such a situation the consumer has little choice of
shifting from one commodity to the other when price changes.
9. Explain the meaning of ‘increase in supply’ and ‘increase in quantity supplied’ with the
help of a schedule. 3
Ans. Increase in supply occurs when quantity supplied increases at the existing price of the
commodity. It can be explained with the help of the following table.
Increase in Supply
Price Quantity Supplied
(Rs) (Units)
10 20
10 30
The above table illustrates the situation of increase in supply. This table shows that initially
20 units of the commodity are supplied at the price of Rs 10 per unit. Owing to some causes
(generally related to reduction in the cost of production or technological improvement),
firms are now willing to supply 30 units even when price of that commodity remains to be
Rs 10 per unit. This is known as the situation of increase in supply.
Increase in quantity supplied occurs when quantity supplied of a commodity increases due
to rise in its own price. It can be explained by the following table.
Increase in Quantity Supplied
Price Quantity Supplied Description
(Rs) (Units)
1 1 Rise in price
5 5 Extension of supply
In the above table, when price of the commodity is Re 1, quantity supplied is 1 unit. When
price rises to Rs 5, supply extends to 5 units. Thus, movement from 1 unit of quantity
supplied to 5 units of quantity supplied is called increase in quantity supply or extension
of supply.
10. Why is a firm under perfect competition a price-taker? Explain. 3
Ans. A firm under perfect competition is a price taker owing to the following reasons:
(i) A firm under perfect competition is contributing such a small fragment to the market
supply, that total supply schedule (or industry’s supply curve) virtually remains unaffected
by any change in the firm’s supply.
(ii) All firms in the market are selling homogeneous product. Accordingly, even partial
control over price is not possible (through product differentiation).
(iii) If at all any firm tries to fix its own price it won’t succeed: higher price (than the market
price) would drive the buyers to a large number of other sellers; lower price would
bring so many buyers to the firm that it can’t cope with the demand because a single
firm under perfect competition is a small producing unit. Also, when any amount of
the commodity can be sold by a firm at the existing price, there is no wisdom in
lowering the price.
Output Average Total Marginal
(Units) Variable Cost Cost Cost
(Rs) (Rs) (Rs)
1 — 60 20
2 18 — —
3 — — 18
4 20 120 —
5 22 — —
Or
Complete the following table:
Output Price Total Revenue Marginal Revenue (Rs)
(Units) (Rs) (Rs)
4 9 36 —
5 — — 4
6 — 42 —
7 6 — —
8 — 40 —
Ans.
Output AVC TC MC TVC TFC
(Units) (Rs) (Rs) (Rs) (Rs) (Rs)
1 20 60 20 20 40
2 18 76 16 36 40
3 18 94 18 54 40
4 20 120 26 80 40
5 22 150 30 110 40
Or
Output Price Total Revenue Marginal Revenue
4 9 36 —
5 8 40 4
6 7 42 2
7 6 42 0
8 5 40 –2
12. Commodities X and Y have equal price elasticity of supply. The supply of X rises from
400 units to 500 units due to a 20 per cent rise in its price. Calculate the percentage fall in
supply of Y if its price falls by 8 per cent. 4
500 - 400
Ans. Percentage change in quantity supplied of commodity X = ´ 100 = 25%
400
Percentage change in price of commodity X = 20%
Percentage change in price of commodity Y = (–) 8%
Percentage change in quantity supplied of commodity Y = ?
Given,
Price elasticity of supply of commodity Y = Price elasticity of supply of commodity X
That is,
Percentage change in quantity supplied of commodity Y
Percentage change in price of commodity Y
Percentage change in quantity supplied of commodity X
=
Percentage change in price of commodity X
Percentage change in quantity supplied of commodity Y 25
Þ =
(–) 8 20
25 ´ ( -) 8
Þ Percentage change in quantity supplied of commodity Y = = ( -) 10%
20
\ Percentage fall in supply of commodity Y = 10%.
13. From the following schedule find out the level of output at which the producer is in
equilibrium. Give reasons for your answer. 4
Output (Units) Price (Rs) Total Cost (Rs)
1 24 26
2 24 50
3 24 72
4 24 92
5 24 115
6 24 139
7 24 165
Ans.
Output Price Total Cost Total Profit Marginal Marginal
(Q) (P) (TC) Revenue (TR) (p = TR – TC) Revenue (MR) Cost (MC)
(Units) (Rs) (Rs) (Rs) (Rs) (Rs) (Rs)
1 24 26 24 –2 24 26
2 24 50 48 –2 24 24
3 24 72 72 0 24 22
4 24 92 96 4 24 20
5 24 115 120 5 24 23
6 24 139 144 5 24 24
7 24 165 168 3 24 26
th
Producer is in equilibrium at 6 unit of output.
Reason: At output levels 5th and 6th unit, the difference between TR and TC, i.e., profit is
maximum, which is equal to 5 in both the cases. But the producer is in equilibrium at 6th
unit only where MR = MC (= 24).
14. Explain the causes of a rightward shift in demand curve of a commodity of an individual
consumer. 6
Or
Explain the conditions of consumer’s equilibrium in case of (i) single commodity and (ii) two
commodities. Use utility approach.
Ans. Main causes of increase in demand or rightward shift in demand curve of a commodity are
as under:
(i) Income of the Consumer: With increase in income of the consumer, the demand curve
for normal good, shifts to the right.
(ii) Price of Related Goods: In case of substitute goods, demand for a commodity rises (or
demand curve shifts to the right) with rise in price of the substitute commodity. In case
of complementary goods, demand for the commodity rises with a fall in the price of the
complementary commodity.
(iii) Tastes and Preferences: If consumer’s tastes and preferences change in favour of the
commodity, the quantity demanded of the commodity rises (and demand curve shifts
to the right).
(iv) Expectations: If the consumer expects that price in the near future will rise, he will buy
more quantity at the prevailing price and hence demand curve shifts to the right.
Or
A consumer is in a state of equilibrium when he maximises his satisfaction by spending his
given income on different goods and services at given price.
(i) In case of single commodity, consumer attains equilibrium when:
MU X
= MU M
PX
Here, MU X = Marginal utility of X
PX = Price of X
MU M = Marginal utility of money.
The equilibrium equation implies that the consumer is equating his rupee worth of utility
æ MU X ö
that he actually receives çç ÷÷ with the rupee worth of satisfaction that he wishes to
è PX ø
achieve (MUM).
(ii) In case of two commodities, consumer attains equilibrium when:
MU X MU Y
= = MU M
PX PY
Here, MU X and MU Y = Marginal utilities of X and Y respectively.
PX and PY = Price of X and Y respectively.
The equilibrium equation implies that in case of each commodity rupee worth of
æ MU X MU Y ö
satisfaction actually received çç or ÷ is equal to rupee worth of satisfaction that
è XP PY ÷ø
the consumer wishes to achieve (MUM).
15. Give reasons, state whether the following statements are true or false: 6
(i) When there are diminishing returns to a factor, total product always decreases.
(ii) Total product will increase only when marginal product increases.
(iii) When marginal revenue is zero, average revenue will be constant.
Ans. (i) False. This is because in a situation of diminishing returns to a factor marginal product
tends to fall. Falling marginal product implies that total product should be increasing,
though at a diminishing rate. It simply implies diminishing slope of TP (total product)
curve, NOT diminishing TP.
(ii) False. Total product will also increase when marginal product decreases. In that case,
total product increases at diminishing rate.
(iii) False. When marginal revenue is zero, average revenue should be diminishing, as in
Fig.1.
Fig. 1 Y
AR, MR
AR
O X
MR
OUTPUT
16. With the help of a diagram explain the effect of “decrease” in demand for a commodity
on its equilibrium price and quantity. 6
Ans. Effect of decrease in demand for a commodity on equilibrium price and quantity is
explained with reference to Fig. 2.
Fig. 2
Y
Decrease in Demand
S
D
D2
E
P
PRICE
E2
P2
D
S D2
O X
Q2 Q
QUANTITY
Due to decrease in demand for a commodity, the demand curve shifts to the left. In the
diagram, DD is the initial demand curve and SS is the initial supply curve. E is the
equilibrium point. OP is the equilibrium price and OQ is the equilibrium quantity. When
demand for a commodity decreases, the demand curve shifts to become D2D2. The new
demand curve D2D2 intersects supply curve SS at point E2 which is now the point of new
equilibrium. At E2, the equilibrium price is OP2 and equilibrium quantity is OQ2. Thus,
both equilibrium price as well as equilibrium quantity tend to fall, when demand curve
shifts to the left.
SECTION-B
17. Why is repayment of loan a capital expenditure? 1
Ans. Repayment of loan reduces liability of the government. Therefore, it is a capital
expenditure.
18. What is meant by excess demand in macroeconomics?` 1
Ans. Excess demand refers to the situation when aggregate demand (AD) is in excess of
aggregate supply (AS) corresponding to full employment in the economy.
19. What can be the minimum value of investment multiplier? 1
Ans. The minimum value of investment multiplier can be one (1).
20. Define bank rate. 1
Ans. Bank rate is the rate at which the central bank gives credit to the commercial banks.
21. Define involuntary unemployment. 1
Ans. Involuntary unemployment is a situation in which people are able to work and willing to
work at existing rate of wages but do not get work.
Income Saving Marginal Propensity Average Propensity
to Consume to Save
0 –12
20 –6 — —
40 0 — —
60 6 — —
Ans.
Income Saving Consumption Marginal Propensity Average Propensity
(Y) (S) (C) = Y – S to Consume to Save
DC S
(MPC) = (APS) =
DY Y
0 –12 12 — —
20 –6 26 14 -6
= 07
. = – 0.3
20 20
40 0 40 14 0
= 07
. =0
20 40
60 6 54 14 6
= 07
. = 0.1
20 60
23. State any three points of distinction between Central Bank and commercial banks. 3
Ans. The principal differences between Central Bank and commercial banks are as follows:
Central Bank Commercial Banks
(i) Central Bank functions as the apex bank of (i) Commercial banks function according to
the country. the rules and regulations stipulated by the
central bank.
(ii) The Central Bank designs and controls all (ii) Commercial banks only executes the
instruments of monetary policy of the monetary policy as directed by the central
country. bank.
(iii) Central Bank is the sole authority of note (iii) Commercial banks contribute to the flow of
issuing. money only by way of credit creation.
24. How can a government budget help in reducing inequalities of income? Explain. 3
Ans. A government budget can help in reducing inequalities of income through redistribute the
income and wealth in the economy. To achieve this objective, government uses fiscal
instruments of taxation and subsidies. By imposing taxes on rich and giving subsidies to the
poor, government redistribute income in the society. Equitable distribution of income and
wealth is a sign of social justice which is achieved through government budget.
25. Explain the circular flow of income. 3
Or
Distinguish between intermediate products and final products. Give examples.
Ans. The unending flow of production, income generation and expenditure involving different
sectors of the economy, is known as circular flow of income. Production gives rise to
income, income gives rise to demand for goods and services, and demand in turn gives rise
to expenditure. Expenditure leads to further production. Thus, the flow of production,
income and expenditure becomes circular with no beginning or no end. This flow is shown
in the Fig 3.
Fig. 3 Production
Expenditure
Income
Circular Flow
of Income
Or
The difference between intermediate products and final products are as under:
Intermediate Products Final Products
1. These are those goods which are within the 1. These are those goods which have crossed
boundary line of production. the boundary line of production.
2. Value is yet to be added to these goods by 2. Value is not to be added to these goods by
way of further processing or resale. way of further processing or resale.
3. These goods are not included in the 3. These goods are included in the estimation
estimation of national income. of national income.
Example: When a carpenter buy wood worth Rs 5000 and converts it into chairs worth Rs
10000, then the value of chairs includes the value of wood. Here, chair indicates the final
products while wood intermediate products.
26. List the items of the current account of balance of payments account. Also define ‘balance
of trade’. 3
Ans. Current account is that account which records imports and exports of goods and services
and unilateral transfers. Items of the current account of the balance of payments are as
follows:
(i) Export and import of goods (visible items).
(ii) Export and import of services (invisible items).
(iii) Unilateral transfers from one country to the other.
Balance of trade is the difference between export of visible items (physical goods) and
import of visible items.
Balance of trade = Export of visible items – Import of visible items.
27. Explain the meaning and two merits of fixed foreign exchange rate. 4
Or
Explain two sources each of demand and supply of foreign exchange.
Ans. Fixed foreign exchange rate refers to the rate of exchange as fixed by the government of a
country.
Fixed exchange rate has the following two merits:
(i) Market Stability and Mobility of Capital: It ensures stability in the international
money market/exchange market. Traders and investors are not exposed to
uncertainties of the market. It promotes international mobility of capital.
(ii) Encourages International Trade: Stable market under the fixed exchange rate system
encourages international trade.
Or
Two sources of demand for foreign exchange are as follows:
(i) Direct purchases abroad as well as imports from the rest of the world.
(ii) Speculative trading in foreign exchange by our residents.
Two sources of supply of foreign exchange are as follows:

(i) Direct purchases of goods and services by the non-residents in the domestic market.
(ii) Speculative trading in domestic currency (implying purchase of domestic currency
through foreign exchange) by the non-residents in the domestic market.
28. State the four functions of money. Explain any one of them. 4
Ans. Four functions of money are as follows:
(i) Money serves as medium of exchange
(ii) Money is a measure of value or unit of value
(iii) Money serves as store of value
(iv) Money is a standard for deferred payments.
Medium of Exchange: It means that money acts as a medium for the sale and purchase of
goods and services. In the absence of money, goods were exchanged for goods. This required
double coincidence of wants. Accordingly, exchange was difficult, and therefore limited.
Introduction of money has separated the acts of sale and purchase: double coincidence of
wants is no longer required. Exchange is now much simpler, and is therefore unlimited.
29. Distinguish between: 4
(i) Direct tax and indirect tax.
(ii) Revenue deficit and fiscal deficit.
Ans. (i) The main differences between direct tax and indirect tax are as follows:
(a) Final Burden: Direct taxes are those taxes the final burden of which falls on that
very person who makes the payment to the government. On the other hand,
indirect taxes are those which are paid to the government by one person but their
final burden is borne by another person.
(b) Shifting of Tax: Direct taxes cannot be shifted to other persons whereas the
indirect taxes can be shifted to other persons.
(ii) Revenue deficit is the excess of revenue expenditure of the government over its
revenue receipts. While fiscal deficit is the excess of total budget expenditure over total
budget receipts excluding borrowing. Fiscal deficit thus underscores a borrowing by
the government.
30. How will you treat the following while estimating domestic factor income of India? Give
reasons for your answer. 6
(i) Remittances from non-resident Indians to their families in India.
(ii) Rent paid by the embassy of Japan in India to a resident Indian.
(iii) Profits earned by branches of foreign bank in India.
Ans. (i) Remittances from non-resident Indians to their families in India are to be treated as
transfer payments. Accordingly, these are not to be included in the estimation of
domestic factor income of India.
(ii) It is not included in the domestic factor income of India because Japan embassy in
India is not a part of domestic territory of India.
(iii) It is a part of domestic factor income of India because the branch of foreign bank is
within the domestic territory of India.
31. Given consumption function C = 100 + 0.75 Y (where C = consumption expenditure and
Y = national income) and investment expenditure Rs 1000, calculate: 6
(i) Equilibrium level of national income.
(ii) Consumption expenditure at equilibrium level of national income.
Or
What changes will take place to bring an economy in equilibrium if
(i) planned savings are greater than planned investment and
(ii) planned savings are less than planned investment.
Ans. (i) Given, C = 100 + 0.75Y and I = 1000
At the equilibrium level,
Y=C+I
Y = 100 + 0.75Y + 1000
Y = 1100 + 0.75Y
Y - 0.75Y = 1100
0.25Y = 1100
1100
Y= = 4400
0 . 25
\ Equilibrium level of national income, Y = Rs 4400.
(ii) Consumption, C = 100 + 0.75 × 4400
= 100 + 3300 = 3400
\ Consumption expenditure at equilibrium level of national income, C = Rs 3400.
Or
These situations in the economy can well explained with the help of the following diagram.
Y
Fig. 4
S
Saving/Investment
E
I
O X
Y Y* Y1 Income/Output
Y=0 2
Y'
In the diagram, curve S indicates the planned savings and curve I indicates planned investment.
When planned saving equates planned investment at point E, the economy is in equilibrium.
At this point, aggregate demand and aggregate supply of the economy are also equal.
(i) At OY1 income level, planned savings are greater than planned investment. It is a
situation in the economy when aggregate demand is less than aggregate supply, i.e.,
economy is in a situation of deficient demand. This can be eliminated by increasing

aggregate demand up to equilibrium level through increase in planned investment
and other components of aggregate demand.
(ii) Planned savings are less than planned investment at OY2 income level in the diagram.
At this level of income, aggregate demand is more than aggregate supply, i.e., the
economy in a situation of excess demand. For achieving the equilibrium level in the
economy, aggregate demand should be reduced upto the equilibrium level through
increase in saving and other components of aggregate supply.
32. Calculate “gross national product at factor cost” from the following data by (i) income
method, and (ii) expenditure method: 6
(Rs in crores)
(i) Private final consumption expenditure 1000
(ii) Net domestic capital formation 200
(iii) Profits 400
(iv) Compensation of employees 800
(v) Rent 250
(vi) Government final consumption expenditure 500
(vii) Consumption of fixed capital 60
(viii) Interest 150
(ix) Net current transfers from rest of the world (–) 80
(xi) Net exports (–) 20
(xii) Net indirect taxes 80
Ans. (i) Income Method:
GNPFC = Compensation of employees + Operating surplus (Profits + Rent + Interest)
+ Net factor income from abroad + Consumption of fixed capital
= Rs 800 crore + (Rs 400 crore +Rs 250 crore + Rs 150 crore) + (–)Rs 10 crore
+Rs 60 crore
= Rs 800 crore + Rs 800 crore + Rs 50 crore
= Rs 1650 crore.
(ii) Expenditure Method:
GNPFC = Private final consumption expenditure + Government final consumption
expenditure + Gross domestic capital formation + Net exports + Net factor
income from abroad – Net indirect taxes
= Rs 1000 crore + Rs 500 crore + (Rs 200 crore + Rs 60 crore) + (–) Rs 20 crore
+ (–) Rs 10 crore – Rs 80 crore
= Rs 1000 crore + Rs 500 crore + Rs 260 crore – Rs 110 crore
= Rs 1760 crore – Rs 110 crore
= Rs 1650 crore.
SET–II
SECTION–A
1. Give the meaning of opportunity cost. 1
Ans. Opportunity cost refers to value of a factor in the next best (or second best) alternative use.
11. The price elasticity of supply of commodity X and Y are equal. The price of X falls from
Rs 10 to Rs 8 per unit and its quantity supplied falls by 16 per cent. The price of Y rises by
10 per cent. Calculate the percentage increase in its supply. 4
Ans. 8 - 10
Percentage change in price of commodity X = ´ 100 = ( -) 20%
10
Percentage change in quantity supplied of commodity X = (–)16%
Percentage change in price of commodity Y = 10%
Percentage change in quantity supplied of commodity Y = ?
Given,
Price elasticity of supply of commodity X = Price elasticity of supply of commodity Y
That is,
Percentage change in quantity supplied of commodity X
Percentage change in price of commodity X
Percentage change in quantity supplied of commodity Y
=
Percentage change in price of commodity Y
( -)16 Percentage change in quantity supplied of commodity Y
Þ =
( -)20 10
16 ´ 10
Þ Percentage change in quantity supplied of commodity Y =
20
Þ Percentage change in quantity supplied of commodity Y = 8%
\ Percentage increase in supply of commodity Y = 8%.
13. From the following table find out the level of output at which the producer is in
Output Average Revenue Total Cost
(Units) (Rs) (Rs)
1 12 14
2 12 26
3 12 35
4 12 52
5 12 64
6 12 70
Ans.
Output Average Revenue Total Cost Total Revenue Profit
(Q) = Price (TC) (TR) (p = TR – TC)
(Units) (Rs) (Rs) (Rs) (Rs)
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.
Reason: The producer is in equilibrium when the difference between total revenue and
total cost (i.e., profit) is maximum. At the 6th unit of output producer gets maximum profit
which is equal to 2 in this case.
15. Giving reasons, state whether the following statements are true or false: 6
(i) Increase in total product always indicates that there are increasing returns to a factor.
(ii) Marginal revenue is always the price at which the last unit of a commodity is sold.
(iii) When there are diminishing returns to a factor marginal and total product both
always fall.
Ans. (i) It is a false statement. It is not necessary that increase in total product always indicates
that there are increasing returns to a factor because in the stage of diminishing returns
to a factor, total product also increases but at a diminishing rate.
(ii) It is a false statement. Marginal revenue is never the price at which the last unit of a
commodity is sold. Marginal revenue simply refers to additional revenue when an
additional unit of output is sold. It may in fact work out to be zero or nagative, while
price (= AR) is never zero or negative.
(iii) It is a false statement because, in the case of diminishing returns to a factor only
marginal product tends to falls. Total product tends to increase at diminishing rate.
SECTION–B
17. Why are borrowings a capital receipt? 1
Ans. Borrowings of the government are capital receipts because they create a liability for the
government.
19. If investment multiplier is 1, what will be the value of marginal propensity to consume? 1
Ans. Given, investment multiplier (K) = 1
We know that,
1
K=
1 - MPC
1
Þ 1=
1 - MPC
Þ 1 – MPC = 1 Þ MPC = 1 – 1 = 0
\ Marginal propensity to consume (MPC) = 0.

Income Saving Marginal Propensity Average Propensity
to Consume to Save
0 –6 — —
20 –3 — —
40 0 — —
60 3 — —
Ans.
Income Saving Consumption Marginal Propensity Average Propensity
(Y) (S) (C) = Y – S to Consume to Save
DC S
(MPC) = (APS) =
DY Y
0 –6 6 — —
20 –3 23 17 -3
= 0.85 = – 0.15
20 20
40 0 40 17 0
= 0.85 =0
20 40
60 3 57 17 3
= 0.85 = 0.05
20 60
28. Explain any two functions of money. 4
Ans. (i) Medium of Exchange: It means that money acts as an intermediary for the exchange
of goods and services.
(ii) Measure of Value: Money serves as a measure of value in terms of unit of account, i.e.,
in monetary unit.
30. How will you treat the following while estimating national income? Give reasons for your
answer. 6
(i) Salaries received by Indian residents working in Russian Embassy in India.
(ii) Profits earned by an Indian bank from its branches abroad.
(iii) Entertainment tax received by the government.
Ans. (i) It is included in the estimation of national income because salaries received by the Indian
residents working in Russian Embassy in India is a part of factor income from abroad.
(ii) It is included in the estimation of national income because it is a part of factor income
from abroad.
(iii) Entertainment tax is a transfer payment from one sector to the other. It is not to be
included in the estimation of national income. National income is estimated as NNPFC
(net national product at factor cost).
SET–III
SECTION–A
3. Give the meaning of microeconomics. 1
Ans. Study of economic problems or economic issues at the level of individuals, house holds,
pirms or individual industries is called microeconomics.
15. Explain the causes of a leftward shift in demand curve of a commodity. 6

Or
Explain consumer’s equilibrium in case of a single commodity with the help of a utility
schedule.
Ans. Main causes of decrease in demand or leftward shift in demand curve of a commodity are as
under:
(i) Income of the Consumer: With decrease in income of the consumer, the demand
curve for normal good shifts to the left.
(ii) Price of Related Goods: In case of substitute goods, demand for a commodity falls
(and demand curve shifts to the right) with fall in price of the substitute commodity. In
case of complementary goods, demand for the commodity falls with a rise in the price of
the complementary commodity.
(iii) Tastes and Preferences: If consumer’s tastes and preferences change against the
commodity, the quantity demanded of the commodity falls (implying a shift in demand
curve to the left).
(iv) Expectations: If the consumer expects that price in the near future will fall, he will buy
less quantity at the prevailing price and hence demand curve shifts to the left.
(v) Number of Consumers: Decrease in the number of the consumers will shift the
demand curve of the commodity to the left.
Or
Consumer is in equilibrium when, given his income and market prices, he plans his
expenditure (on different goods and services) in such a manner that he miximises his total
satisfaction.
Consumer’s Equilibrium in Case of Single Commodity:
Let marginal utility of money = 4 utils (referring to consumer satisfaction from his standard
set of goods available for a rupee) and price of good X = Rs 4.
Marginal utility schedule of good X is given as:
Marginal Utility Schedule of X
Units of X MUX MU X
PX
1 20 20
=5
4
2 18 18
= 4.5
4
3 16 16
=4
4
4 10 10
= 2. 5
4
5 0 0
6 –5 -5
= -125
.
4
Consumer strikes his equilibrium when:

MU X
= MUM
PX
MU X
Where, = Rupee worth of additional satisfaction actually received.
PX
MUM = Marginal utility of money (rupee worth of satisfaction that the
consumer wishes to receive).
In the above schedule, at the 3rd unit of X, consumer attains equilibrium as:
MU X 16
= = 4 = Marginal utility of money (MUM).
PX 4
Thus, consumer attains equilibrium when 3 units of commodity X are consumed.
16. How is equilibrium price of a commodity determined? Explain with the help of a demand
and supply schedule. 6
Ans. Equilibrium price is determined by the forces of market demand and market supply.
Market demand refers to the sum total of demand for a commodity by all the buyers in the
market. Whereas market supply refers to the sum total of supply of a commodity by all the
firms in the market. Equilibrium price is a price where market demand = market supply. It
is illustrated with the help of the following schedule:
With the help of the following demand and supply schedule of ice cream, we show the
equilibrium price.
Determination of Equilibrium Price
Price Supply of Ice cream Demand for Ice cream
(Rs) (Dozens) (Dozens)
5 50 10
4 40 20
3 30 30
2 20 40
1 10 50
The above table shows that at price Rs 3, market supply = 30 dozens and market demand
= 30 dozens. Accordingly, Rs 3 is the equilibrium price, because at price (Rs 3, quantity
demanded is equal to quantity supplied = 30 dozens.
Diagrammatic Illustration:
Y
Fig. 5 S
D
E Point of Equilibrium
P
PRICE
Equilibrium Price = OP
Here,
D
Market Demand = Market Supply = OQ.
S
O X
Q
QUANTITY
SECTION–B
17. Define a government budget. 1
Ans. Government budget is a statement of the estimates of the government receipts and
government expenditure during the period of the financial year.
19. Give the meaning of autonomous consumption. 1
Ans. Consumption at the zero level of income is called autonomous consumption.
Income Consumption Marginal Propensity Average Propensity to
to Save Save
0 40 — —
50 70 — —
100 100 — —
150 120 — —
Ans.
Income Consumption Saving Marginal Propensity Average Propensity
(Y) (C) (S) = Y – C to Save to Save
DS S
(MPS) = (APS) =
DY Y
0 40 – 40 — —
50 70 – 20 20 -20
= 0.4 = – 0.4
50 50
100 100 0 20 0
= 0.4 =0
50 100
150 120 30 30 30
= 0.6 = 0.2
50 150
30. How will you treat the following while estimating national income of India? Give reasons
for your answer. 6
(i) Salaries paid to Russians working in Indian Embassy in Russia.
(ii) Profits earned by an Indian company from its branch in Singapore.
(iii) Capital gains to Indian residents from sale of shares of a foreign company.
Ans. (i) It is reflected in national income of India as a negative component of net factor income
from abroad. Because it is a part of factor income to rest of the world.
(ii) It is included in the national income of India because it is a part of net factor income
from aborad.
(iii) It is not included in the national income of India because it is a part of financial
transactions corresponding to which there is no flow of goods and services in the
economy.
31. From the following data calculate gross national product at factor cost by (i) income
method and (ii) expenditure method. 6
(Rs in crores)
(i) Net domestic capital formation 500
(ii) Compensation of employees 1850
(v) Private final consumption expenditure 2600
(vi) Rent 400
(vii) Dividend 200
(viii) Interest 500
(ix) Net exports (–) 100
(x) Profits 1100
(xi) Net factor income from abroad (–) 50
(xii) Net indirect taxes 250
GNPFC = Compensation of employees + Operating surplus (Rent + Interest + Profits)
+ Net factor income from abroad + Depreciation
= Rs 1850 crore + (Rs 400 crore + Rs 500 crore + Rs 1100 crore) + (–) 50 crore
+ Rs 100 crore
= Rs 1850 crore + Rs 2000 crore + Rs 50 crore
= Rs 3900 crore.
GNP FC = Government final consumption expenditure + Private final
consumption expenditure + Gross domestic capital formation + Net
exports + Net factor income from abroad – Net indirect taxes
= Rs 1100 crore + Rs 2600 crore + (Rs 500 crore + Rs 100 crore) + (–) Rs 100 crore
+ (–) Rs 50 crore) – Rs 250 crore
= Rs 2600 crore + Rs 600 crore + Rs 1100 crore – Rs 400 crore
= Rs 3900 crore.
ALL INDIA
(iii) Questions No. 1-5 and 17-21 are very short-answer questions carrying 1 mark each. They are
required to be answered in one sentence each.
(iv) 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.
(v) Questions No. 11-13 and 27-29 are also short-answer questions carrying 4 marks each.
(vi) Questions No. 14-16 and 30-32 are also long-answer questions carrying 6 marks each. Answers
to them should normally not exceed 100 words each.
as possible.
SET–I
SECTION-A
1. Give the meaning of opportunity cost. 1
Ans. Opportunity cost refers to the value of a factor in its next best alternative use.
2. What is meant by inferior good in economics? 1
Ans. Inferior good is that good the demand for which decreases as income of buyers increases.
3. Define marginal cost. 1
Ans. Marginal cost is the change in total cost when an additional unit of output is produced.
4. Give one reason for a rightward shift in supply curve. 1
Ans. Due to technological improvement supply curve shifts to the right.
5. Why is average total cost greater than average variable cost? 1
Ans. Average total cost is greater than average variable cost because average total cost (ATC) is
the sum of average variable cost (AVC) and average fixed cost (AFC).
6. State the law of demand and show it with the help of a schedule. 3
Ans. The law of demand states that other things remaining constant, quantity demanded of a
commodity increases with a fall in price and diminishes with a rise in price.
Law of demand may be explained with the help of the following demand schedule:
Price Quantity
(Rs) (Units)
10 100
9 150
8 200
Above schedule shows extension of demand in response to decrease in price of the commodity.
Thus, demand stretches from 100 to 150 units when price reduces from Rs 10 to Rs 9 per
unit.
7. Explain the geometric method of measuring price elasticity of demand. 3
Ans. Geometric method measures elasticity of demand at different points on the demand curve.
It is also called ‘point method’ of measuring price elasticity of demand. This method is
explained with the help of Fig. 1.
Fig. 1 Y
M
Upper segment
PRICE
Mid-point
}
P
Lower segment
}
N
O X
QUANTITY
In this figure, MN is a straight line demand curve. P is a specific point on the demand curve.
The point P divides the demand curve into two segments, viz. lower segment PN and upper
segment PM. Elasticity of demand at point P is the ratio between lower segment (PN) and
upper segment (PM).
PN (lower segment)
Elasticity of Demand (at P)=
PM (upper segment)
8. Why do problems related to allocation of resources in an economy arise? Explain. 3
Or
Explain the problem of ‘for whom to produce’.
Ans. Problems relating to allocation of resources in an economy arise because of two basic
characterstics of resources:
(ii) Alternative Uses: Resources have alternative uses. For example, land may be used to
grow wheat or rice or may be used for the construction of buildings.
Or
The problem of ‘for whom to produce’ is a problem relating to choice of users of the goods
and services. Should we produce for those who can pay high price? If yes is the answer, we
shall end up producing goods and services for a relatively richer section of the society or
even for a richer section of the world community. Their quality of life would improve, but
that of the poor would stagnate or deteriorate further. As such, the gulf between rich and
the poor would keep on widening which no welfare state can afford to accept. On the other
hand, if goods are produced for the poor only, they may not afford to buy, reducing profits
of the producers. When producers do not earn profits, where will investment come from?
Accordingly, the level of production would shrink and quality of life of the entire
population would suffer.
Output Total Revenue Marginal Revenue Average Revenue
1 — — 8
2 — 4 —
3 12 — 4
4 8 — 2
Ans.
Output Total Revenue Marginal Revenue Average Revenue
1 8 8 8
2 12 4 6
3 12 0 4
4 8 –4 2
10. Explain the effect of fall in prices of other goods on the supply of a given good. 3
Ans. The supply of a good depends upon the prices of other goods, besides its own price and
other determinants. In case the price of other goods (say substitute goods) falls, the buyers
would shift to those goods. Accordingly, for the given good, the supply curve would shift
forward: the producer would like to sell more of the given good at its existing price. Thus SS
in Fig. 2 would shift to S1S1.
Y
Fig. 2
S S1 SS : Initial supply curve
S1S1: New supply curve when
price of other goods decreases.
PRICE
S1
S
O X
QUANTITY
11. Explain two points of distinction between monopoly and monopolistic competition. 4
Or
Explain any two main features of perfect competition.
Ans.
Reference Monopoly Monopolistic Competition
(i) Number of sellers and One seller, but large number Large number of buyers and
buyers of buyers. sellers.
(ii) Products The product has no close Differentiated products but

substitutes. with a large number of close
substitutes.
Or
Two main features of perfect competition are as under:
(i) Large number of buyers and sellers: The number of sellers selling a particular
commodity is so large that any increase or decrease in supply by an individual seller
hardly impacts the total market supply. Also, there are large number of buyers present
in the market to purchase that particular commodity.
(ii) Homogeneous product: All sellers sell identical units of a product. Accordingly, buyers
have no reason to prefer the product of one seller compared to that of the other.
12. The price elasticity of supply of commodity Y is half the price elasticity of supply of
commodity X. 16 per cent rise in the price X results in a 40 per cent rise in its supply. If
the price of Y falls by 8 per cent, calculate the percentage fall in its supply. 4
Ans. Given, Rise in price of X = 16 per cent
Rise in supply of X= 40 per cent
Fall in price of Y = 8 per cent
Fall in supply of Y = ?
Given,
1
Price elasticity of supply of commodity Y = (Price elasticity of supply of commodity X)
2
Percentage fall in supply of Y 1 æ Percentage rise in supply of X ö
Þ = ç ÷
Percentage fall in price of Y 2 çè Percentage rise in price of X ÷ø
Percentage fall in supply of Y 1 40
Þ ´ =
8 2 16
40 ´ 8
Þ Percentage fall in supply of Y = = 10 %
2 ´ 16
\ Percentage fall in supply of commodity Y = 10%.
13. Given below is a cost and revenue schedule of a producer. At what level of output is the
producer in equilibrium? Give reasons for your answer. 4
Output (Units) Price (Rs) Total Cost (Rs)
1 10 13
2 10 22
3 10 30
4 10 38
5 10 47
6 10 57
7 10 71
Ans.
Output Price Total Cost Total Revenue Profit Marginal Marginal
(Units) (Rs) (TC) (TR) (p = TR – TC) Revenue Cost
(Rs) (Rs) (Rs) (MR) (MC)
1 10 13 10 –3 10 13
2 10 22 20 –2 10 9
3 10 30 30 0 10 8
4 10 38 40 2 10 8
5 10 47 50 3 10 9
6 10 57 60 3 10 10
7 10 71 70 –1 10 14
th
Producer is in equilibrium at 6 unit of output.
Reason: At output levels 5th and 6th unit, the difference between total revenue and total cost
(i.e., profit) is maximum which is equal to 3 in both the cases. But, producer is in equilibrium
at 6th unit only where MR = MC (=10).
14. With the help of a demand and supply schedule, explain the meaning of excess demand
and its effect on price of a commodity. 6
Or
Define equilibrium price of a commodity. How is it determined? Explain with the help of
a schedule.
Ans.
Price Supply Demand
1 10 50
2 20 40
3 30 30 ¬ Equilibrium
4 40 20
5 50 10
Equilibrium price and quantity of a product is determined at the point where market
demand = market supply. In the above schedule, equilibrium price is 3 and equilibrium
output is 30 where demand is equal to the supply (= 30). At price levels 1 and 2, demand
for output is greater than its supply. It is a situation of excess demand. In other words,
excess demand is a situation when market demand exceeds market supply of a commodity
at a given price.
In the situation of excess demand, price increases up to the equilibrium level (= 3)
through expansion of supply and contraction of demand.
Or
Equilibrium price is the price which equates market demand of a commodity with its
market supply.
Equilibrium price is determined at a point where market demand is equal to market supply.
This is explained with the help of the following table:
Price of the Commodity Quantity Supplied Quantity Demanded
(Rs) (Units) (Units)
5 50 10
4 40 20
3 30 30
2 20 40
1 10 50
The above table shows that at price Rs 3, market supply = 30 units and market demand =
30 units. At this price (Rs 3), quantity demanded is equal to quantity supplied = 30 units.
Accordingly, Rs 3 is the equilibrium price.
15. Giving reasons, state whether the following statements are true or false:
(i) Average cost falls only when marginal cost falls.
(ii) The difference between average total cost and average variable cost is constant.
(iii) When total revenue is maximum, marginal revenue is also maximum. 6
Ans. (i) The statement is false. Average cost can fall even when marginal cost is rising. See AC
and MC corresponding to output range LQ in Fig. 3.
Fig. 3 Y
MC
AC
COST
O X
L Q
QUANTITY
(ii) This is false statement. The difference between average total cost (ATC) and average
variable cost (AVC) is average fixed cost (AFC) and average fixed cost can never be
constant. Since AFC tends to decline with increase in output, the difference between
ATC and AVC must reduce as output increases.
(iii) The statement is false because, when total revenue is maximum, marginal revenue is zero.
16. Explain the effect of the following on the market demand for a commodity: 6
(i) Change in price of related goods
(ii) Change in the number of its buyers.
Ans. (i) Change in price of related goods: Market demand of a commodity is influenced by
change in price of related goods. Related goods are of two types:
(a) Substitute Goods: Substitute goods are those goods which can be substituted for
each other like tea and coffee. When price of Good-X (tea) increases, demand for
Good-Y (coffee) tends to rise. Demand curve for coffee will shift to the right. More
coffee is demanded at its existing price. Fig. 4 illustrates this situation.
Fig. 4 Y D1
D
Initial demand
curve for coffee
PRICE
P K S Demand curve for

coffee shifts to the right
when price of the substitute
good (tea) increases
D1
D
O X
QUANTITY
(b) Complementary Goods: Complementary goods are those goods which complete
the demand for each other like pen and ink. When price of Good-Y (pen) increases,
demand for Good-X (ink) tends to fall. Demand curve for ink will shift to the left.
Less ink is demanded at its existing price. Fig. 5 illustrates this situation.
Y D
Fig. 5 D1
Initial demand
curve for ink
PRICE

ink shifts to the left when
price of pen increases
D
D1
O X
QUANTITY
(ii) Change in the number of its buyers: Demand increases with increase in the number of
buyers and decreases with decrease in the number of buyers. More buyers would
simply mean more demand, and less buyers would mean less demand for a commodity,
other things remaining constant.
SECTION–B
17. Give meaning of aggregate supply. 1
Ans. Aggregate supply refers to the flow of all goods and services in the economy during an
accounting year.
18. Why are taxes received by the government not capital receipts? 1
Ans. Taxes received by the government are not capital receipts because tax receipts do not
create a liability or lead to reduction in asset of the government.
19. Give the meaning of excess demand in an economy. 1
Ans. Excess demand refers to the situation when aggregate demand (AD) is in excess of
aggregate supply (AS) corresponding to full employment in the economy.
20. What is meant by cash reserve ratio? 1
Ans. Cash reserve ratio refers to the percentage of demand deposits of the commercial banks
which they are required to keep as reserves with the Central Bank.
21. Define involuntary unemployment. 1
wage rate but does not get work.
Income Marginal Propensity Saving Average Propensity
to Consume to Save
0 — – 90
100 0.6 — —
200 0.6 — —
300 0.6 — —
Ans.
Income Marginal Propensity Saving Average Propensity Consumption
(Y) to Consume (S) = Y – C to Save (C)
(MPC) S
(APS) =
Y
0 — – 90 — 90
100 0.6 – 50 – 0.5 90 + 60 = 150
200 0.6 – 10 – 0.05 90 + 120 = 210
300 0.6 30 0.1 90 + 180 = 270
(Hint: C = C+ cY; where, C = 90 at Y = 0 and c = 0.6)

23. Give the meaning of factor income to abroad and factor income from abroad. Also give an
example of each. 3
Or
Distinguish between domestic product and national product. When can domestic
product be more than national product?
Ans. Factor income to abroad is the factor income earned by non-residents who are temporarily
residing in our country. Example: Salaries of American working in Indian embassy in
America.
Factor income from abroad is the factor income earned by our residents who are temporarily
residing abroad. Example: Salaries of Indians working in Russian embassy in India.
Or
Domestic Product National Product
(i) It is the sum total of factor incomes (i) It is the sum total of factor incomes generated
generated within the domestic territory of by normal residents of a country, no matter
a country, no matter who generates this where this income is generated within the
income–residents or non-residents. domestic territory or in rest of the world.
(ii) It does not include net factor income from (ii) It includes net factor income from abroad.
abroad.
When net factor income from abroad is negative, domestic product would be more than the
national product.
24. Distinguish between balance on trade account and balance on current account. 3
Ans. Balance on trade account includes only visible items of trade. It is defined as the difference
between export of goods and import of goods.
Balance on trade account = Export of visible items – Imports of visible items
On the other hand, balance on current account includes transactions of visible items,
invisible items and unilateral transfers.
25. State three main functions of a commercial bank. Explain any one of them. 3
Ans. The three main functions of a commercial bank are:
(i) Accepting deposits
(ii) Advancing loans
(iii) Providing general utility services like locker facilities, traveller’s cheque, etc.
Accepting Deposits: A bank accepts deposits from the public. People can deposit their cash
balances as: chequeable deposits or non-chequeable deposits. Chequeable deposits are
those deposits against which cheques can be issued (and therefore money can be
withdrawn) any time. Non-chequeable deposits are those deposits against which cheques
cannot be issued (and therefore money cannot be withdrawn) any time. Instead, money in
these deposits is kept as reserve with the bank for some fixed period of time. Accordingly,
these deposits are also called fixed deposits.
26. Give the meaning of revenue deficit, fiscal deficit and primary deficit. 3
Ans. Revenue deficit is the excess of revenue expenditure over revenue receipts. It is estimated
as under:
RD = RE – RR, when RE > RR
Here, RD = Revenue Deficit,
RE = Revenue Expenditure,
RR = Revenue Receipts.
Fiscal deficit is the excess of total expenditure (revenue expenditure + capital
expenditure) over total receipts other than borrowing (revenue receipts + capital receipts
other than borrowing). It is estimated as under:
FD = BE – BR other than borrowing, when BE > BR
Here, FD = Fiscal Deficit
BE = Budgetary Expenditure or Total Expenditure
BR = Budgetary Receipts or Total Receipts.
It highlights total borrowing of the government during a fiscal year.
Primary deficit is the difference between fiscal deficit and interest payment. It is estimated
as under:
PD = FD – IP
Here, PD = Primary Deficit,
FD = Fiscal Deficit,
IP = Interest Payment.
It highlights net borrowing (borrowing other than for the payment of interest) of the
government.
27. Describe the evolution of money. 4
Or
Explain any two functions of money.
Ans. To overcome the difficulties of barter system (a system of direct exchange of goods against
goods, that prevailed prior to the invention of money), man invented money – a thing that
was commonly accepted as a medium of exchange. Initially, metal coins of gold and silver
were introduced. Subsequently, alloy metal came to be used for coinage, besides the
introduction of paper money. And, now is the age of plastic money in the form of debit cards
and credit cards. Thus, money finds its origin in the need to facilitate exchange; hence, it
came to be defined as “a thing that is commonly accepted as a medium of exchange”.
Or
Two functions of money are as follows :
(i) Medium of Exchange: It means that money acts as a medium for the sale and purchase
of goods and services. Exchange was difficult under the barter system. Introduction of
money has separated the acts of sale and purchase. Exchange is now much simpler, and is
therefore unlimited. This has raised the overall level of economic activity in an economy.
(ii) Store of Value: Store of value implies store of wealth. Storing wealth has become
considerably easy with the introduction of money. It was not convenient to store value
in the barter system of exchange, because goods tend to wear-out or perish. On the
other hand, it is convenient to store value in terms of money because (a) money has the
merit of general acceptability, (b) value of money remains relatively stable compared to
other commodities, (c) storage of money does not need much space. Store of value is
also called asset function of money.
28. Explain any two objectives of a government budget. 4
Ans. Two objectives of a government budget are as under :
(i) Economic Stability: Free play of market forces (or the forces of supply and demand)
are bound to generate trade cycles, also called business cycles. These refer to the
phases of recession, depression, recovery and boom in the economy. The government
of a country is always committed to save the economy from instability. Budget is used as
an important policy instrument to combat the situations of deflation and inflation. By
doing it, the government tries to achieve the state of economic stability. Economic stability
stimulates the inducement to invest and increases the rate of growth and development.
(ii) Redistribution of Income and Wealth: Budget of the government shows its
comprehensive exercise on the taxation and subsidies. The government uses fiscal
instruments of taxation and subsidies with a view to improving the distribution of
income and wealth in the economy. Equitable distribution of income and wealth is a
sign of social justice which is the principal objective of any welfare state as in India.
29. Explain two merits each of flexible foreign exchange rate and fixed foreign exchange
rate. 4
Ans. Two merits of flexible exchange rate are:
(i) No Need for International Reserves : Flexible exchange rate system is not to be
supported with international reserves. Because member countries (in the flexible
exhange rate system) are no longer floating ‘convertible currencies’.
(ii) Optimum Resource Allocation : Flexible exchange rate system enhances efficiency in
resource allocation. Accordingly, allocation of resources in the area of international
trade, tends to become optimum
Two merits of fixed exchange rate are:
(i) Promotes International Trade : Fixed exchange rate implies a stable exchange rate.
Stability prevents uncertainty and therefore promotes international trade.
(ii) Prevents Outflow of Capital Assets : Stable exchange rate prevents the outflow of gold
or other capital assets to rest of the world, occcuring due to uncertainties of exchange rate.
30. While estimating national income, how will you treat the following? Give reasons for your
answer.
(i) Imputed rent of self occupied houses.
(ii) Interest received on debentures.
(iii) Financial help received by flood victims. 6
Ans. (i) Imputed rent of self occupied houses is included in the estimation of national income.
This is because all houses have rental value, no matter whether these are rented out or
self occupied.
(ii) Interest received by debentures is included in the estimation of national income. This
is because income from debentures (in the form of fixed interest) is a factor income.
(iii) Financial help received by flood victims is not included in the estimation of national
income. This is because financial help is a transfer receipt.
31. In an economy S = – 50 + 0.5Y is the saving function (where S = saving and Y = national
income) and investment expenditure is 7000. Calculate:
(ii) Consumption expenditure at equilibrium level of national income. 6
Or
From the following information about an economy, calculate (i) its equilibrium level of
national income, and (ii) savings at equilibrium level of national income.
Consumption function: C = 200 + 0.9Y
(where C = consumption expenditure and Y = national income)
Investment expenditure: I = 3000.
Ans. (i) Given, S = – 50 + 0.5Y
and I = 7000
Saving = Investment
Þ – 50 + 0.5Y = 7000
0.5Y = 7000 + 50
0.5Y = 7050
7050
Y=
0.5
Þ Y = 14100
\ Equilibrium level of national income, Y = 14100.
(ii) At Y = 14100
Saving, S = – 50 + 0.5Y
= – 50 + 0.5 × 14100 = – 50 + 7050
\ S = 7000
Consumption expenditure, C = Y – S
Þ C = 14100 – 7000 = 7100
\ Consumption expenditure at the equilibrium level of national income, C = 7100.
Alternative Method
At equilibrium level,
Saving = Investment
\ Saving = 7000
Consumption expenditure, C = Y – S
= 14100 – 7000 = 7100.
Or
(i) Given, C = 200 + 0.9Y
and I = 3000
Y= C + I
Y = 200 + 0.9Y + 3000
Y = 3200 + 0.9Y
Y – 0.9Y = 3200
0.1Y = 3200
3200
\ Y= = 32000
0 .1
(ii) At Y = 32000
Consumption, C = 200 + 0.9Y
= 200 + 0.9 × 32000
= 200 + 28800 = 29000
\ Consumption, C = 29000
Thus, Savings, S= Y – C
= 32000 – 29000 = 3000
\ Savings at equilibrium level of national income, S = 3000.
32. From the following data, calculate “national income” by (a) income method and
(b) expenditure method: 6
(Rs in crores)
(i) Interest 150
(ii) Rent 250
(iii) Government final consumption expenditure 600
(iv) Private final consumption expenditure 1200
(v) Profits 640
(vi) Compensation of employees 1000
(vii) Net factor income to abroad 30
(viii) Net indirect taxes 60
(ix) Net exports (–) 40
(x) Consumption of fixed capital 50
(xi) Net domestic capital formation 340
Ans. (a) Income Method:

National Income = Compensation of employees + Operating surplus (Interest
+ Rent + Profits) – Net factor income to abroad
= Rs 1000 crore + (Rs 150 crore + Rs 250 crore + Rs 640crore)
– Rs 30 crore
= Rs 2040 crore – 30 crore
= Rs 2010 crore.
(b) Expenditure Method:
National Income = Private final consumption expenditure + Government final
consumption expenditure + Net domestic capital formation
+ Net exports – Net indirect taxes – Net factor income to abroad
= Rs 1200 crore + Rs 600 crore + Rs 340 crore + (–)Rs 40 crore
– Rs 60 crore – Rs 30 crore
= Rs 2010 crore.
SET - II
SECTION - A
3. Define fixed costs. 1
Ans. Fixed costs are the sum total of expenditure incurred by the producer on the purchase or
hiring of fixed factors of production.
6. Distinguish between demand by an individual and market demand with the help of a
schedule. 3
Ans. Individual demand shows demand for a commodity by an individual buyer in the market at
different prices, whereas market demand shows demand for a commodity by all the buyers
in the market at different prices. Market demand is the horizontal summation of individual
demands as under:
Market Demand Schedule
Price of A’s Demand B’s Demand Market Demand
Ice cream (Rs) (1) (2) (3) (1+2)
1 4 5 4+5=9 Assumption:
There are only
2 3 4 3+4=7 2 buyers of a
commodity in the
3 2 3 2+3=5 market.
4 1 2 1+2=3
Above schedule shows the individual A’s and B’s demand and market demand at different
prices.
Column (3) illustrates the market demand which is the horizontal summation of individual
demand of column (1) and (2).

Output Total Cost Average Variable Marginal Cost
(Units) (Rs) Cost (Rs) (Rs)
1 90 — 30
2 — 27 —
3 — — 27
4 180 30 —
Ans.
Output Total Cost Average Variable Marginal Total Variable Total Fixed
(Units) (Rs) Cost (Rs) Cost (Rs) Cost (Rs) Cost (Rs)
1 90 30 30 30 60
2 114 27 24 54 60
3 141 27 27 81 60
4 180 30 39 120 60
13. The price of commodity X is Rs 20 per unit and it remains constant. Given below is the
cost schedule of one of its producers. Find out the level of output at which this producer
is in equilibrium. Give reasons for your answer. 4
Output (Units) Total Cost (Rs)
1 26
2 45
3 60
4 76
5 94
6 114
7 142
Ans.
Output Total Price Total Profit Marginal Marginal
(Units) Cost (Rs) Revenue (p = TR – TC) Revenue Cost
(TC) (Rs) (TR) (Rs) (Rs) (MR) (Rs) (MC) (Rs)
1 26 20 20 –6 20 26
2 45 20 40 –5 20 19
3 60 20 60 0 20 15
4 76 20 80 4 20 16
5 94 20 100 6 20 18
6 114 20 120 6 20 20
7 142 20 140 –2 20 28

Reason: At output levels 5th and 6th unit, the difference between total revenue and total cost
(i.e., profit) is maximum which is equal to 6 in both the cases. But, producer is in equilibrium
at 6th unit only where MR = MC (=20).
(i) When there are diminishing returns to a factor, marginal product and total product
both always diminish.
(ii) When marginal revenue is positive and constant, average and total revenue will both
increase at constant rate.
(iii) As output is increased, the difference between average total cost and average variable
cost falls and ultimately becomes zero. 6
Ans. (i) It is a false statement because when there are diminishing returns to a factor, marginal
product diminishes but total product increases at the diminishing rate.
(ii) This is a false statement because when marginal revenue is positive and constant, total
revenue increases at constant rate, not the average revenue.
(iii) It is a wrong statement because as output increases, the difference between average
total cost and average variable cost falls but can never be zero. The difference is equal
to AFC (Average fixed cost) which must remain positive.
SECTION–B
Income Consumption Marginal Average
Propensity to Save Propensity to
Consume
0 15 — —
50 50 — —
100 85 — —
150 120 — —
Ans.
Income Consumption Saving Change Marginal Average Propensity
in Saving Propensity to Save to Consume
(Y) (C) (S) = Y – C DS C
(DS) (MPS) = (APC) =
DY Y
0 15 – 15 — — —
50 50 0 15 0.3 1
100 85 15 15 0.3 0.85
150 120 30 15 0.3 0.80
29. How is foreign exchange rate determined in the market? 4

Ans. Equilibrium exchange rate is determined at a point where supply of and demand for
foreign currency are equal to each other. Following diagram illustrates this situation.
Fig. 6 Y
D S
RATE OF EXCHANGE
R1
R E
R2
S
D
O X
M Q N
SUPPLY AND DEMAND
(Foreign currency)
In Fig. 6, supply and demand are measured on the X-axis, and exchange rate on the Y-axis.
DD is the demand and SS is the supply curve of foreign exchange. Both these curves
intersect at point E. It is an equilibrium point and OR is the equilibrium rate of exchange.
If the rate of exchange rises to OR1 then supply of foreign currency (ON) will exceed its
demand (OM) by an amount equivalent to MN. Supply being more than demand, rate of
exchange will come down to OR. On the contrary, if the rate of exchange falls to OR2 then
demand for foreign currency (ON) will be more than its supply (OM) by MN. Demand
being more than supply, rate of exchange will again rise to OR. Rate of exchange will,
therefore, be determined at a point where demand for and supply of foreign currency are
equal.
30. How will you treat the following while estimating national income? Give reasons for your
answer.
(i) Capital gain on sale of a house
(ii) Prize won in a lottery
(iii) Interest on public debt 6
Ans. (i) Capital gain on sale of a house is not included in the national income estimation
because it does not add to the flow of goods and services in the economy.
(ii) Prize won in a lottery is not included in national income estimation because it is a part
of transfer payments.
(iii) Interest on public debt is deemed as transfer payment. Hence, not included in the
estimation of national income.
SET–III
SECTION - A
7. Explain any two factors that affect the price elasticity of demand of a commodity. 3
Ans. Two factors that affect the price elasticity of demand of a commodity are as under:
(i) Nature of Commodity: Goods may be : necessaries , luxuries and comforts. Demand
for necessaries (like salt) is highly inelastic, demand for luxuries (like ACs) is highly
elastic and demand for comforts (like air coolers) is moderately elastic.
(ii) Price Level: Higher the level of price, higher is the elasticity of demand for a commodity.
Output Price Marginal Revenue Total Revenue
1 — 16 —
2 12 — 24
3 — 6 —
4 7 — 28
Ans.
Output Price Marginal Revenue Total Revenue
1 16 16 16
2 12 8 24
3 10 6 30
4 7 –2 28
13. Explain the conditions of producer’s equilibrium with the help of a total cost and total
revenue schedule. 4
Ans. According to total cost and total revenue approach, a producer strikes his equilibrium when
he maximises the difference between TR and TC (i.e., profit). Let us take a schedule of TR
and TC and see how equilibrium is worked out.
TR, TC Schedule and Producer’s Equilibrium
Output TR TC Profit (= TR – TC)
0 0 3 –3
1 4 5 –1
2 7 6 1
3 9 7 2
4 10 9 1
5 10 12 –2
6 9 18 –9
The above table shows that the difference between TR and TC is maximum (= 2) when
3 units of output are produced. Accordingly, it is only when 3 units of output are produced
that the producer strikes his equilibrium.
14. State the causes of an ‘increase’ in demand. Explain any two of them. 6
Ans. Main causes of increase in demand or right ward shift in demand curve of a commodity are
as under:
(i) Increase in income of the consumer.
(ii) Increase in price of substitute good and decrease in price of complementary good.
(iii) Change in consumer’s tastes and preferences in favour of the commodity.
(iv) Expectation of rise in price in the near future.
(v) Increase in the number of the consumers.
(vi) Expectation of increase in income in the near future.
Income of the Consumer: With increase in income of the consumer, the demand curve for
normal good shifts to the right but with fall in income of the consumer, the demand curve
for inferior good shifts to the right.
Price of Related Goods: In case of substitute goods, demand for a commodity rises with rise
in price of the substitute commodity. In case of complementary goods, demand for the
commodity rises with a fall in price of the complementary commodity.
SECTION–B
Income Marginal Saving Average
Propensity to Propensity
Consume to Consume
0 — – 30
100 0.75 — —
200 0.75 — —
300 0.75 — —
Ans.
Income Marginal Saving Consumption Average
(Y) Propensity to (S) = Y – C (C) Propensity
Consume to Consume
(MPC) C
(APC) =
Y
0 — – 30 30 —
100 0.75 –5 105 1.05
200 0.75 20 180 0.90
300 0.75 45 255 0.85
(Hint: C = C + cY; where C = 30 at Y = 0 and c = 0.75.)

25. Explain any two functions of a Central Bank. 3

Ans. Two functions of a Central Bank are as follows :
(i) Controller of Credit: The most important function of the Central Bank is to control
the flow of credit in the economy. It implies increase or decrease in the volume of credit
money in accordance with the monetary requirement of the country. Central Bank
seeks to regulate the flow of credit by pursing various quantitative and qualitative
instruments of credit.
Quantitative instruments include:
(a) Bank rate policy,
(b) CRR (Cash Reserve Ratio) policy,
(c) SLR (Statutory Liquidity Ratio) policy, and
(d) Policy of open market operations.
Qualitative instruments include:
(a) Policy of moral suasion
(b) Changes in margin requirements for different categories of loans.
(ii) Banker to the Government: Central Bank is a banker, agent and financial advisor to
the government. As a banker to the government, it manages accounts of the
government banks across all in the country. As an agent to the government, it buys and
sells securities, treasury bills on behalf of the government. As an advisor to the
government, it helps the government in framing policies to regulate the money market.
27. What are the implications of revenue deficit? State two measures to reduce this deficit. 4
Ans. Revenue deficit is related to revenue expenditure and revenue receipts of the government.
Since revenue receipts and revenue expenditures are related largely to recurring expenses
of the government (as on administration and maintenance), high revenue deficit gives a
warning to the government either to cut its expenditure or increase its tax/non-tax receipts.
In less developed countries like India, often the situation arises when the government is to
incur huge expenditure on administration and maintenance (particularly on law and order
and defence) and it is difficult to force the poor people to pay high taxation. In such
situations, the government is compelled to cope with high revenue deficit through borrowings
or disinvestment. While borrowing increases liability of the government, disinvestment
reduces her assets. A well planned strategy is needed to strike a balance between assets and
liabilities. Otherwise the whole financial system in the economy may get destabilised.
28. Explain two sources each of demand and supply of a foreign currency. 4
Ans. Two sources of demand for foreign currency are as follows:
Two sources of supply of foreign currency are as follows:
(i) Direct purchase of goods and services by the non-residents in the domestic market.
(ii) Speculative purchases of domestic currency (using foreign exchange) by the
non-residents in the domestic market.
FOREIGN
Time allowed: 3 Hours Maximum marks: 100
(iii) Questions No. 1-5 and 17-21 are very short-answer questions carrying 1 mark each. They are
required to be answered in one sentence each.
(iv) 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.
(v) Questions No. 11-13 and 27-29 are also short-answer questions carrying 4 marks each. Answers
(vi) Questions No. 14-16 and 30-32 are also long-answer questions carrying 6 marks each. Answers
as possible.
SET–I
SECTION-A
1. Why does an economic problem arise ? 1
Ans. An economic problem arises because:
(i) resources are limited in relation to our wants, and
(ii) resources have alternative uses.
2. When is the demand for a commodity said to be elastic ? 1
Ans. When percentage change in quantity demanded is greater than percentage change in
price, the demand is called elastic.
3. Define variable costs. 1
Ans. Variable costs are those costs which change as the level of output changes.
4. What causes an upward movement along a supply curve ? 1
Ans. A rise in the price of a commodity leads to increase in quantity supplied and thus causes an
upward movement along a supply curve.
5. Define marginal revenue. 1
Ans. Marginal revenue is the change in total revenue as a result of selling an additional unit of
output
MRn = TRn – TRn – 1
DTR
Also, MR =
DQ
6. Explain the problem of ‘ how to produce’. 3

than labour. An economy must decide as to which technique is to be used so that
productivity is maximised or cost is minimised.
7. Explain the law of supply with the help of a supply schedule. 3
Ans. The law of supply states that, other things being equal, quantity supplied extends with
increase in price and contracts with decrease in price of a commodity.
Supply Schedule
Price Quantity
(Rs) (Units)
10 100
20 200
30 300
The above schedule shows a positive relationship between price and quantity supplied.
Thus, supply increases from 100 to 200 units when price increases from Rs 10 to Rs 20. This
is in accordance with the law of supply.
8. Draw a straight line demand curve and show on it a point at which 3
(i) price elasticity of demand > 1
(ii) price elasticity of demand < 1
(iii) price elasticity of demand = 1.
Ans.
Y
Fig. 1
B: Mid point on the demand curve
D
Ed>1
A
PRICE
Ed=1
B
Ed<1
C
O X
D1
QUANTITY DEMANDED
AD1
(i) Price elasticity of demand at point A = > 1.
DA
BD1
(ii) Price elasticity of demand at point B = = 1.
DB
CD1
(iii) Price elasticity of demand at point C = < 1.
DC
9. Explain consumer’s equilibrium in case of a single commodity, through the utility approach. 3
Or
Explain the law of diminishing marginal utility with the help of a utility schedule.
Ans. Consumer’s equilibrium refers to a situation when a consumer maximises his satisfaction,
spending his given income across different goods and services at given price.
In case of a single commodity, consumer attains equilibrium when:
MU X
= MUof Money
PX
Where, MUX is marginal utility of commodity X, and PX is price of commodity X.
It implies that in a state of equilibrium, rupee worth of satisfaction actually derived from the
commodity should be equal to rupee worth of satisfaction expected by the consumer (=MUM).
Or
The law states that the marginal utility derived from the consumption of a commodity must
diminish as more units of that commodity are consumed at a point of time. Two basic
assumptions of the law are: (i) only standard units of the commodity are consumed, like a
cup of tea (not a spoon of tea) or a glass of water (not a drop of water), and (ii) consumption
is continuous.
Utility Schedule
Units of Commodity X MUX
1 50
2 40
3 30
4 20
5 10
6 0
7 –10
The above table reveals that as the consumer consumes more of commodity X, the marginal
utility diminishes. Accordingly, marginal utility curve (MU) slopes downward from left to right.
10. How is the supply of a commodity affected by changes in the prices of other commodities?
Explain. 3
Ans. The supply of a good depends upon the price of related goods besides its own price and
other determinants. 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.
11. Explain with the help of a total product curve the meaning of increasing returns to a
factor. 4
Ans. Increasing returns to a factor refers to the situation in which total product (TP) increases at
the increasing rate. Increasing returns to a factor can be shown with the help of total
product curve as follows:
Y
Fig. 2
TOTAL PRODUCT
T
TP
L S
O X
UNITS OF VARIABLE FACTOR
The above diagram shows that total product (TP) increases at increasing rate upto point K.
(i.e., upto OL units of the variable factor). This corresponds to the situation of increasing
returns to a factor.
12. The ratio of elasticity of supply of commodities A and B is 1 : 1.5. 20 per cent fall in price
of A results in a 40 per cent fall in its supply. Calculate the percentage increase in supply
of B if its price rises from Rs 10 per unit to Rs 11 per unit. 4
Ans. Percentage change in price of commodity A = 20 per cent
Percentage change in supply of commodity A = 40 per cent
Thus, price elasticity of supply of commodity A is
Percentage change in quantity supplied 40
Elasticity of supply of commodity A = = = 2
Percentage change in price 20
Given,
Elasticity of supply of commodity A 1
=
Elasticity of supply of commodity B 1.5
2 1
Þ =
Elasticity of supply of commodity B 1.5
Þ Elasticity of supply of commodity B = 2 × 1.5 =3
Now,
Percentage change in quantity supplied
Elasticity of supply of commodity B =
Percentage change in price
Elasticity of supply of commodity B = 3
11 -10
Percentage change in price = ´ 100 = 10%
10
Percentage change inquantity supplied
Thus, =3
10%
Percentage change in quantity supplied = 3 ×10% = 30%
\ Percentage increase in supply of commodity B = 30%.
13. Explain “large number of buyers and sellers” feature of perfect competition. 4
Or
Explain “freedom of entry and exit to firms” feature of perfect competition.
Ans. The number of buyers and sellers of a commodity is very large under perfect competition.
The number of firms selling a particular commodity is so large that an individual seller
contributes only a small fragment to the market supply. Thus, any increase or decrease in
supply by an individual firm hardly impacts the total market supply and consequently, an
individual firm cannot impact price of the commodity.
Not only is the number of sellers very large, but the number of buyers is also very large
under perfect competition. Accordingly, like an individual firm, an individual buyer is also
not able to influence price of the commodity. Consequently, under perfect competition,
only normal profits prevail in the long run.
Or
Under perfect competition, there is no legal restriction on the entry or exit of the firms. A
firm can enter and leave any industry, any time. Thus, whenever there are extra-normal
profits some new firms will enter the industry and whenever there are extra-normal losses,
some existing firms will leave the industry. Consequently, under perfect competition only
normal profits prevail in the long run.
(i) A producer is in equilibrium when total cost and total revenue are equal.
(ii) The difference between average total cost and average variable cost decreases with
decrease in the level of output.
(iii) When marginal cost rises, average cost will also rise.
Ans. (i) The statement is false. A producer is in equilibrium when it produces that amount of
output at which the difference between total revenue and total cost is maximum.
(ii) This is a false statement. The difference between average total cost and average
variable cost is equal to average fixed cost which must decrease as output increases (Or
must increase as output decreases).
(iii) The statement is false. Average cost can fall even when marginal cost is rising. See AC
and MC corresponding to output range LQ in Fig. 3.
Y
Fig. 3
MC
AC
COST
O L X
Q
QUANTITY
15. Explain three causes of a shift in demand curve of a commodity. 6

Or
Explain the difference between ‘decrease in demand’, and ‘decrease in quantity
demanded’ with the help of a demand schedule. Give two cause of a decrease in demand.
Ans Three causes of a shift in demand curve of a commodity are:
(i) Income of the Consumer: Demand for a commodity is directly related to income of the
consumer. Increase in income causes a rightward shift of the demand curve, and
vice-versa.
(ii) Price of Related Goods: In case of substitute goods, demand for a commodity falls with
fall in price of the substitute good. Accordingly, demand curve shifts to the left. In case
of complementary goods, demand for a commodity rises with a fall in the price of
complementary good. Accordingly, demand curve shifts to the right.
(iii) Tastes and Preferences: If consumer’s tastes and preferences change in favour of the
commodity, demand curve shifts to the right. If tastes and preferences shift against the
commodity, demand curve shifts to the left.
Or
When quantity demanded decreases as a result of change in others factors, other than price
of the commodity, it is called decrease in demand. The following table illustrates this situation.
Decrease in Demand
Price (Rs) Quantity (Units)
5 100
5 75
Price remaining constant at Rs 5, quantity demanded decreases from 100 to 75 units.

Two possible causes of decrease in demand are:
(i) Decrease in income of the consumer.
(ii) Decrease in price of a substitute good.
When quantity demanded decreases as a result of increase in the price of the concerned
commodity, other factors remaining constant, it is called decrease in quantity demanded.
The following table illustrates this situation.
Decrease in Quantity Demanded
Price (Rs) Quantity (Units)
5 100
10 50
16. Define equilibrium price. How is it determined? Explain with the help of a schedule. 6
Ans. The price which equates market demand of a commodity with its market supply is the
equilibrium price. Equilibrium price is determined at a point where market demand is
equal to market supply.
Let us consider the following demand and supply schedules:
Price Quantity Demanded Quantity Supplied
(Rs) (Units) (Units)
5 10 50
4 20 40
3 30 30
2 40 20
1 50 10
The above table shows that when price of the commodity is Rs 3, market demand = 30 units
and market supply = 30 units. At this price (Rs 3), quantity demanded is equal to quantity
supplied. Accordingly, Rs 3 is the equilibrium price.
Fig. 4
Y
PRICE D S
S D
O X
Q
QUANTITY
In the diagram, equilibrium price = OP, corresponding to which market demand = market
supply = OQ.
SECTION–B
17. Can the value of average propensity to save be negative? If yes, when? 1
Ans. Yes, the value of average propensity to save (APS) can be negative. It happens when:
Consumption > Income.
Or, when: APC >1.
18. Why is income tax a direct tax? 1
Ans. The final burden of income tax cannot be shifted on to others and thus, it is a direct tax.
19. What is the relationship between marginal propensity to save and multiplier ? 1
Ans. There is an inverse relation between multiplier and marginal propensity to save (MPS).
Higher is the value of MPS, lower is the value of multiplier and vice versa [Multiplier =
1
].
MPS
20. Give the meaning of deflationary gap. 1
Ans. Deflationary gap refers to a situation of deficiency of demand when aggregate demand is
short of aggregate supply corresponding to full employment level.
21. Give the meaning of demand deposits of commercial banks. 1
Ans. Demand deposits of commercial banks are those deposits which can be withdrawn from the
bank on demand or by writing a cheque any time.
22. Calculate net value added at factor cost from the following data: 3
(Rs in crores)
(i) Purchase of machinery to be used in the production unit 100
(ii) Sales 200
(iii) Intermediate costs 90
(iv) Indirect taxes 12
(v) Change in stock 10
(vi) Excise duty 6
(vii) Stock of raw material 5
Ans. Net Value Added at factor cost
= Sales + Change in stock – Intermediate costs – Indirect taxes
= Rs 200 crore + Rs 10 crore – Rs 90 crore – Rs 12 crore
= Rs 108 crore.
23. Explain any two functions of a commercial bank. 3
Or
Explain any two functions of a Central Bank.
Ans. Two important functions of a commercial bank are as follows:
(i) Accepting Deposits: A commercial bank accepts deposits from the public. People can
deposit their cash balances as chequeable deposits or non-chequeable deposits.
(ii) Advancing Loans: A bank advances loans both for productive purposes as well as
consumption purposes. By advancing loans through credit creation it contributes to
money supply in the economy.
Or
Two important functions of a Central Bank are as follows:
(i) Issuing of Notes or Currency Authority: The Central Bank is the sole authority of
issuing notes in the country. Most of the Central Banks in the world have divided their
functions into two parts– banking department and issuing department. It is the issuing
department that is responsible for note issuing.
(ii) Control of Credit: The most important function of the Central Bank is to control the
credit activities of the commercial banks. Credit control refers to increase or decrease
in the volume of credit money in accordance with the monetary requirement of the
country. Central Bank seeks to contain credit money within reasonable limits.
Income Consumption Marginal Average
Propensity Propensity to
to Save Consume
0 12
20 26 — —
40 40 — —
60 54 — —
Ans.
Income Consumption Saving Marginal Average Propensity
Propensity to to Consume
(Y) (C) (S) = Y – C DS C
Save (MPS) = (APC) =
DY Y
0 12 – 12 — —
20 26 –6 6 26
= 0.3 =1.3
20 20
40 40 0 6 40
= 0.3 = 1.0
20 40
60 54 6 6 54
= 0.3 = 0.9
20 60
25. List the types of transactions that are recorded in the current account of balance of
payments account. 3
Ans. Current account of balance of payments records the following types of transactions:
(iii) Unilateral transfers from one country to other.
26. How can a government budget help in reallocation of resources in an economy ? Explain. 3
Ans. Through its budgetary policy, the government of a country directs the allocation of
resources in a manner such that there is a balance between the goals of profit maximisation
and social welfare. Production of goods which are injurious to health is discouraged
through heavy taxation. On the other hand, production of ‘socially useful goods’ is
encouraged through subsidy.
27. Explain two merits and two demerits of fixed foreign exchange rate. 4
Ans. Two merits of fixed foreign exchange rate are as under:
(i) Promotes International Trade: Fixed exchange rate implies a stable exchange rate.
Stability prevents uncertainty and therefore promotes international trade.
(ii) Prevents Speculation: Stable exchange rate prevents speculation in foreign exchange
market. Accordingly, hedging is not required.
Two demerits of fixed foreign exchange rate are as under:
(i) Huge International Reserves: Fixed exchange rate system is often supported with
huge international reserves of gold. This is because different currencies are directly or
indirectly convertible into gold.
(ii) Restricted Movement of Capital: Owing to huge back-up of international reserves,
fixed exchange rate restricts the movement of capital across different parts of the world.
28. Explain the basis of classifying government receipts into revenue receipts and capital
receipts. Give two examples of each. 4
Or
Explain the meaning and implications of fiscal deficit.
Ans. Revenue receipts are those receipts which do not create either a liability or lead to
reduction in assets. Example: (i) receipts from tax revenue (like income tax and sales tax),
and (ii) receipts from non-tax revenue (like interest and dividends).
Capital receipts are those receipts which either create a liability or lead to reduction in
assets. Examples: (i) recoveries of loans, and (ii) receipts through disinvestment.
Or
Fiscal deficit is the excess of budgetary expenditure over the budgetary receipts of the
government, excluding borrowing. It highlights the extent to which the government is
resort to borrowing to cope with its expenditures of the year. Higher borrowing implies
higher burden of repayment of loans and of interest on the future generations. As this
burden mounts up, year after year, resource-base of the future generations is curtailed.
This will definitely hinder the process of growth, particularly when borrowings by the
government are used for non-productive purposes. Inflation is yet another serious
implication of fiscal deficit. Rising fiscal deficit to finance rising expenditure (on
non-productive activities) generally causes a greater stress of demand on the existing flow
of goods and services. Inflation is the obvious consequence in such a situation.
29. State any two problems of barter system of exchange. How does money solve them? 4
Ans. Following are the two problems of barter system of exchange:
(i) Both sale and purchase should occur simultaneously implying double coincidence of wants.
(ii) There is no common unit of exchange in a barter system, accordingly, exchange
remains limited.
Use of money overcomes the above mentioned drawbacks of barter system of exchange in
the following manner:
(i) With the introduction of money, double coincidence of wants is no longer needed.
(ii) Money serves as a medium of exchange. Accordingly, scope of exchange has greatly
widened.
30. While calculating national income of India from its domestic factor income, how will you
treat the following ? Give reasons for your answer. 6
(i) Salaries received by Indians working in branches of foreign banks in India.
(ii) Profits earned by an Indian bank from its branches abroad.
(iii) Rent paid by embassy of Japan in India to an Indian resident.
Ans. (i) Salaries received by Indians working in branches of foreign banks in India is a part of
net factor income from abroad. Because these employees are normal residents of India
working in foreign establishments. Accordingly, this is added to domestic factor
income to get national income.
(ii) Profits earned by an Indian bank from its branches abroad is a part of net factor income
from abroad, and accordingly added to domestic factor income while calculating
national income.
(iii) Rent paid by embassy of Japan in India to an Indian resident is a part of net factor
income from abroad. Accordingly, it is added to domestic factor income while
calculating national income.
31. C = 100 + 0.75Y is a consumption function (where C = consumption expenditure and
Y= national income) and investment expenditure is 800. On the basis of this information
calculate:6
(i) equilibrium level of national income
(ii) saving at equilibrium level of national income. 6
Or
In an economy, aggregate demand is less than aggregate supply. Is the economy in
equilibrium ? If not, explain the changes that will bring the economy in equilibrium.
Ans. (i) Given, C = 100 + 0.75Y
At the equilibrium level, Y = C + I
Y = 100 + 0.75Y + 800
Y = 900 + 0.75Y
Y – 0.75Y = 900
0.25Y = 900
900
Y= = 3600
0.25
(ii) Consumption, C = 100 + 0.75Y
= 100 + 0.75 × 3600= 2800
We know that,
Y =C+S
Þ S = Y – C = 3600 – 2800 = 800
\ Saving at equilibrium level of national income = 800.
Or
If aggregate demand (AD) is less than aggregate supply (AS), then economy is not in equilibrium
because an economy is in equilibrium when AS = AD. When AD< AS, flow of goods and
services in the economy tends to exceed their demand. As a result, some of the goods would
remain unsold. To clear unwanted stocks the producers would plan a cut in production.
Consequently, AS would reduce to become equal to AD. This is how AS adapts itself to AD.
In Fig. 5, AD represents aggregate demand curve and AS is the line of reference or 45° line
showing equality between AS and AD. Accordingly, equilibrium is struck at that level of AD
where it cuts the 45° line. It is struck at point E where AD = AS. Beyond point E, aggregate
supply exceeds aggregate demand. Unwanted stocks with the producers would compell
the producers to slash the level of planned output till it is equal to AD at point E. It is only at
E, that the equilibrium is struck where AD = AS.
Y
AD=AS
Fig. 5
AD
E
AD
45º
O X
Y Y1
INCOME/OUTPUT
32. From the following data, calculate “national income” by (i) income method and
(ii) expenditure method: 6
(Rs in crores)
(i) Net domestic capital formation 360
(ii) Interest 200
(iii) Rent 300
(vi) Net exports (–) 20
(vii) Net indirect taxes 70
(viii) Net current transfers from rest of the world 80
(ix) Consumption of fixed capital 60
(xi) Profits 600
(xii) Compensation of employees 1200
National Income = Interest + Rent + Net factor income from abroad + Profits
+ Compensation of employees
= Rs 200 crore + Rs 300 crore + (–) Rs 50 crore + Rs 600 crore +
Rs 1200 crore
= Rs 2250 crore.
National Income = Net domestic capital formation + Private final consumption
expenditure + Government final consumption expenditure + Net
exports – Net indirect taxes + Net factor income from abroad
= Rs 360 crore + Rs 1300 crore + Rs 730 crore + (–) Rs 20 crore
– Rs 70 crore + (–) Rs 50 crore
= Rs 2250 crore.
SET–II
SECTION - A
10. Explain any two causes of a rightward shift in supply curve. 3
Ans. Two causes of a rightward shift in supply curve are as follow:
(i) Technological Improvement: When there is technological improvement, output is
produced at lower cost. Lower cost of production increases the supply of the
commodity. Consequently, the supply curve shifts to the right.
(ii) Decrease in Prices of Factors of Production: If factor price decreases, cost of production
also decreases. Accordingly, supply increases and the supply curve shifts to the right.
11. Explain the law of variable proportions. 4
Ans. The law of variable proportions states that increasing application of the variable factor (fixed
factor remaining constant) must ultimately cause a situation when marginal product (MP)
and then average product (AP) of the variable factor start declining. The reason is that there
is some ideal ratio of factors of production. Once the ideal ratio is reached, any increase in
variable factor would mean lesser and lesser availability of the fixed factor per unit of the
variable factor. Accordingly, marginal productivity of the variable factor starts declining.
16. Explain how the equilibrium price and quantity of a commodity are affected by a fall in
the prices of its substitutes? 6
Ans. Demand for a commodity will decrease when there is a fall in the price of substitute goods.
Implying that demand curve would shift backward. Less will be purchased at the same price.
When demand curve shifts backward, the equilibrium price and quantity will be affected as
shown in the following figure.
Fig. 6 Y
D
D1 S
P E
PRICE
P1 E1
D
S
D1
Q1 Q X
O
QUANTITY
In the diagram, the initial demand curve is DD. E is the equilibrium point. OP is the
equilibrium price and OQ is the equilibrium quantity. When the price of a substitute good
falls, demand curve shifts backward as D1D1. Equilibrium price falls from OP to OP1 and
equilibrium quantity falls from OQ to OQ1.
SECTION–B
Income Saving Average Propensity Marginal Propensity
to Consume to Consume
0 –30
50 –15 — —
100 0 — —
150 15 — —
Ans.
Income Saving Consumption Average Propensity Marginal Propensity
to Consume to Consume
(Y) (S) (C) = Y – S C DC
(APC) = (MPC) =
Y DY
0 –30 30 – –
50 –15 65 65 35
= 1.3 = 0.7
50 50
100 0 100 100 35
=1.0 = 0.7
100 50
150 15 135 135 35
=0.9 = 0.7
150 50
25. Distinguish between current account and capital account of balance of payments account. 3
Ans. Current account balance of payments is that part of balance of payments which records
items of:
(i) Export and imports of goods (visibles).
(ii) Export and import of services (invisibles).
Capital account balance of payments is that part of balance of payments which records items of:
( i) Official transaction affecting assets and liabilities of the Government.
(ii) Private transactions, affecting asset or liability status of the individuals households and
private business enterprises.
26. Define revenue deficit. State two measures to reduce it. 3
Ans. Revenue deficit is equal to the excess of total revenue expenditure over the total revenue
receipts. Revenue deficit occurs when:
Revenue Receipts < Revenue Expenditure
Two measures to reduce revenue deficit are as under:
(i) Lowering revenue expenditure.
(ii) Raising revenue receipts, including tax receipts and non-tax receipts.
27. Give the meaning of foreign exchange rate. Explain any two sources of supply of it. 4
Ans. Foreign exchange rate is the rate at which domestic currency can be exchanged for the
foreign currency in the foreign exchange market.
Two sources of supply of foreign exchange are:
(i) Purchase of domestic goods by the foreigners.
(ii) Foreign investments in the domestic economy.
29. State the four functions of money. Explain any one of them. 4
Ans. Four functions of money are as follows:
(i) Money acts as medium of exchange
(ii) Money serves as a measure of value or unit of value
(iv) Money acts as a standard of deferred payments.
Medium of Exchange: It means that money acts as a medium for the sale and purchase of
goods and services. In the absence of money, goods were exchanged for goods. This required
double coincidence of wants. Accordingly, exchange was difficult, and therefore limited.
Introduction of money has separated the acts of sale and purchase: double coincidence of
wants is no longer required. Exchange is now much simpler, and is therefore unlimited.
SET–III
SECTION - A
10. Explain any two causes of a leftward shift in supply curve. 3
Ans. Two causes of leftward shift in supply curve are as under:
(i) Increase in Price of Substitute Goods: When price of a substitute good increases, the
quantity supplied of the concerned good decreases and there is a leftward shift in
supply curve.
(ii) Increase in Factor Prices: If factor price increases supply tends to decline and there is a
leftward shift in supply curve.
11. Explain the meaning of diminishing returns to a factor and diminishing returns to scale.
Give one reason for diminishing returns to a factor. 4
Ans. Diminishing Returns to a Factor: Diminishing returns to a factor refer to a situation in
which total output increases at the diminishing rate when more of the variable factor is
combined with the fixed factor (s) of production.
Diminishing Returns to Scale: When percentage change in output is less than percentage
change in all inputs, it is known as diminishing returns to scale.
An important reason for Diminishing Returns to a Factor:
Diminishing returns to a factor operate due to the fixity of the factor. As more and more
units of a variable factor are combined with the fixed factor, the latter gets over utilised.
Hence, the diminishing returns.
16. Explain the chain of effects leading to change in equilibrium price and quantity of a
normal good due to increase in income of its consumers. 6
Ans. For a normal commodity, an increase in the income of its buyers means increase in its
demand. Accordingly, demand curve DD as shown in Fig. 7, shifts rightwards to D1 D1 .
Refer Fig. 7. Initially equilibrium is struck at point E with OP and OQ level of equilibrium
price and equilibrium quantity respectively. With an increase in income of the buyers (in
case of normal commodity), the new equilibrium is attained at point E1 . The equilibrium
price increases from OP to OP1 and equilibrium quantity increases from OQ to OQ1 , other
things remaining unchanged. (Assumption: Supply and other factors affecting demand
remain unchanged.)
Y
Fig. 7 D1
S
D
P1 E1
PRICE
P E
D1
S
D
X
O Q Q1
QUANTITY
SECTION-B
Income Consumption Marginal Propensity Average Propensity
to Consume to Save
0 40
— 120 0.8 —
— 200 0.8 —
— 280 0.8 —
Ans.
Income Consumption Saving Marginal Propensity Average Propensity
to Consume to Save
(Y) (C) (S) = Y – C S
(MPC) (APS) =
Y
0 40 – 40 — —
100 120 – 20 0.8 -20
= – 0.2
100
200 200 0 0.8 0
=0
200
300 280 20 0.8 20
= 0.06
300
25. What types of transactions are recorded in current account of balance of payments
account? Name them . 3
26. Explain the meaning of revenue expenditure and capital expenditure. 3
Ans. Revenue Expenditure: Revenue expenditure refers to estimated expenditure of the
government which does not create assets or causes a reduction in liabilities of the government.
Capital Expenditure: It refers to that expenditure which either creates assets or causes a
reduction in liabilities of the government.
27. Distinguish between fixed and flexible exchange rate. 4
Ans. Fixed rate of exchange is a rate determined by the government of a country, and the
government alone can change it.
Flexible rate of exchange is that rate which is determined by the demand for and supply of
28. Describe the evolution of money. 4
Ans. To overcome the difficulties of barter system (a system of direct exchange of goods against
goods), man invented money – a thing that is commonly accepted as a medium of exchange.
Initially, metal coins of gold and silver were introduced. Subsequently, alloy metal came to
be used for coinage, besides the introduction of paper money. And, now is the age of plastic
money in the form of debit cards and credit cards. Thus, money finds its origin in the need
to facilitate exchange; hence, it came to be defined as “a thing that is commonly accepted as
a medium of exchange”.
DELHI
(ii) Marks for questions are indicated against each question.
(iii) Question Nos. 1 - 5 and 17 - 21 are very short-answer questions carrying 1 mark each. They are required to
be answered in one sentence each.
(iv) Question Nos. 6 - 10 and 22 - 26 are short-answer questions carrying 3 marks each.
(v) Question Nos. 11 - 13 and 27 - 29 are also short-answer questions carrying 4 marks each. Answers to them
(vi) Question Nos. 14 - 16 and 30 - 32 are long-answer questions carrying 6 marks each. Answers to them
(vii) Answers should be brief and to the point and the above word limits should be adhered to as far as possible.
SET–I
SECTION–A
1. Define an indifference curve. 1
Ans. Indifference curve is a curve showing different combinations of a set of 2-Goods, each
combination offering the same level of satisfaction to the consumer.
2. Name the characteristic which makes monopolistic competition different from perfect
competition. 1
Ans. Product differentiation makes monopolistic competition different from perfect
competition.
3. Why is demand for water inelastic? 1
Ans. Demand for water is inelastic because water is the essential of life.
4. State one feature of oligopoly. 1
Ans. There are only a few big sellers of a commodity and a large number of buyers in the
oligopoly market.
5. In which market form demand curve of a firm is perfectly elastic? 1
Ans. In perfect competition, demand curve of a firm is perfectly elastic.
6. Distinguish between ‘increase in demand’ and ‘increase in quantity demanded’ of a

commodity. 3
Ans.
Increase in Demand Increase in Quantity Demanded
1. Increase in demand refers to increase in 1. Increase in quantity demanded refers
purchase of a commodity at its existing to increase in purchase of a commodity
price. due to a fall in its price.
2. Increase in demand occurs due to 2. Increase in quantity demanded occurs
change in factors other than price of the due to change in price of the
commodity. commodity.
3. Diagrammatically, this is shown by a 3. Diagrammatically, this is shown by a
forward shift in demand curve. downward movement on the same
demand curve.
7. Explain the law of diminishing marginal utility with the help of a utility schedule.
Or
Goods X and Y are substitutes. Explain the effect of fall in price of Y on demand for X. 3
Ans. The law of diminishing marginal utility states that the marginal utility derived from the
consumption of a commodity must decline as more and more units of that commodity are
consumed at a point of time. Two basic assumptions of the law are: (i) only standard units of
the commodity are consumed, like a cup of tea (not a spoon of tea) or a glass of water (not a
drop of water), and (ii) consumption of the commodity is continuous. This law can be
explained with the help of the following table.
Utility Schedule
Units of Commodity-X MUX
1 25
2 20
3 15
4 10
5 5
6 0
7 –5
The above table reveals that as the consumer consumes more of commodity-X, the marginal
utility diminishes. Accordingly, marginal utility curve (MU) slopes downward from left to right.
Or
Substitute goods are those goods which can be substituted for each other. If price of a
commodity increases, demand for its substitute will increase and vice versa. Therefore,
when price of Y falls, consumers switch over from X to Y and hence demand for X falls.
Pepsi and Coca Cola, tea and coffee are the examples of substitute goods. For example, if
price of Pepsi falls, consumers will shift from the consumption of Coca Cola to Pepsi,
accordingly demand for Coca Cola falls.
Fig. 1 Y
Initially, the consumer

purchases Q1 quantity of X
when its price is OP. Now, PY
PX
falls, PX remaining constant,.
P
As a result, demand curve for
X shifts to the left. The
consumer now purchases Q2
S D1 of X even when PX remains
D2 constant.
O X
Q2 Q1
QX
8. At a price of Rs 5 per unit of commodity A, total revenue is Rs 800. When its price rises by
20 per cent, total revenue increases by Rs 400. Calculate its price elasticity of supply. 3
Ans. Given, initial price (P) = Rs 5
Rise in price (DP) = 20% of Rs 5
20
= × Rs 5
100
= Re 1
New Price (P1) = P + DP
= Rs 5 + Re 1
= Rs 6
Initial total revenue (P × Q) = Rs 800
New total revenue (P1 × Q1) = Rs 800 + Rs 400
= Rs 1200
800
When P = 5, Q = = 160
5
1200
When P1 = 6, Q1 = = 200
6
P = Rs 5, P1 = Rs 6, DP = P1 – P
= Rs 6 – Rs 5
= Re 1
Q = 160, Q1= 200, DQ = Q1 – Q = 200 – 160 = 40
P DQ
Price Elasticity of Supply (Es ) = ´
Q DP
5 40
= ´ = 1.25
160 1
\ Price elasticity of supply =1.25.
9. Explain the implications of freedom of entry and exit of firms under perfect competition.
3
Ans. (i) In case of perfect competition, a firm can enter or leave the industry in the long run. By
definition, short period is too short for the new firms to enter the industry and the
existing firms to leave the industry.
(ii) Because of free entry and exit, firms in the long run earn only normal profits (TR = TC
or AR = AC). In case extra-normal profits are earned, new firms will join the industry.
Market supply will increase. Market price will fall. Extra-normal profits will be wiped
out. In case of extra-normal losses, some of the existing firms will leave the industry.
Market supply will decrease. Market price will increase. Extra-normal losses will be
wiped out.
10. Given below is the cost schedule of a firm. Its average fixed cost is Rs 20 when it produces
3 units.
Output (Units) 1 2 3
Average Variable Cost (Rs) 30 28 32
Calculate its marginal cost and average total cost at each given level of output. 3
Ans.
Output Average Total Fixed Average Total Marginal Average
(Units) Variable Cost Fixed Cost Variable Cost Total Cost
Cost (Rs) (Rs) (Rs) Cost (Rs) (Rs) (Rs) (AFC
+ AVC)
1 30 60 60 30 30 90
2 28 60 30 56 26 58
3 32 60 20 96 40 52
When Output = 3 units, AFC = Rs 20

\ TFC = AFC × Q
= Rs 20 × 3
= Rs 60
11. Explain the problem of ‘what to produce’.
Or
Explain any two main features of a centrally planned economy. 4
Ans. What to produce is the problem relating to choice of goods and services to be produced.
to. We are bound to face the problem of choice.
produce (say) 400 tonnes of bread. We need guns for the defence and bread for the masses.
Can we produce 400 guns as well as 400 tonnes of bread, even when we need both of them?
No, because resources do not permit it. Hence, the obvious problem of choice relating to
what to produce and how much to produce.
Or
Two main features of a centrally planned economy are as follows:
(i) In centrally planned economy, decisions relating to what, how and for whom to
produce are taken by some central authority appointed by the government.
(ii) Market forces are regulated or controlled by the government.
12. When the price of a commodity falls by Rs 2 per unit, its quantity demanded increases by
10 units. Its price elasticity of demand is (–)1. Calculate its quantity demanded at the
price before change which was Rs 10 per unit. 4
Ans. Suppose the initial quantity demanded = X units.
P = Rs 10, P1 = Rs 10 – Rs 2 = Rs 8, DP = P1 – P
= Rs 8 – Rs 10
= – Rs 2
Q = X units, Q1 = (X + 10) units, DQ = Q 1 – Q
= X + 10 - X
= 10 units
Ed = (–) 1
P DQ
Elasticity of Demand (E d) = ´
Q DP
10 10
–1 = ´
X -2
100
–1 =
-2X
2X = 100
X = 50
\ Quantity demanded before change in price = 50 units.
13. Explain the effect of increase in income of buyers of a ‘normal’ commodity on its
equilibrium price. 4
Ans. For a normal commodity, an increase in the income of its buyers means increase in its demand.
Accordingly, demand curve DD as shown in Fig. 2, shifts rightward to D1D1 . Refer Fig. 2.
Initially equilibrium struck at point E with OP and OQ level of equilibrium price and
equilibrium quantity respectively. With an increase in income of the buyers of the normal
commodity, the new equilibrium is attained at point E1. The equilibrium price increases from
OP to OP1 , and equilibrium quantity increases from OQ to OQ1 other things remaining
unchanged. (Assumption: Supply and other factors affecting demand remained unchanged.)
Y
Fig. 2
D1
S
D
P1 E1
PRICE
P E
S D1
D
O X
Q Q1
QUANTITY
14. Using indifference curves approach, explain the conditions of consumer’s equilibrium. 6
Ans. Consumer’s equilibrium refers to a situation when a consumer maximises his satisfaction
spending his given income across different goods and services.
In terms of IC analysis, a consumer attains equilibrium when:
(i) IC and price line are tangent to each other.
or
When: slope of IC and slope of price line are equal to each other.
(ii) When IC is convex to the origin, at the point of equilibrium.
In Fig. 3 AB is the budget or price line. IC1, IC2 and IC3 are indifference curves. A
consumer can buy any of the combinations, A, B, C, D and E of good-X and good-Y shown
on the price line AB. He cannot get any combination on IC3 as it is away from price line AB.
He can buy those combinations which are not only on price line AB but also coincide with
the highest indifference curve which is IC2 in this case. Out of A, B, C, D and E combinations,
the consumer will be in equilibrium at combination ‘E’, because at this point price line (AB)
is tangent to the highest indifference curve IC2. Also, at E, IC is convex to the origin. No
doubt, the consumer can buy ‘C’ or ‘D’ combinations as well but these will not give him
maximum satisfaction being situated on lower indifference curve IC1. It means consumer’s
equilibrium point is the point of tangency of price line and indifference curve. At
equilibrium,
P
Slope of Indifference Curve = Slope of Budget or Price Line or MRSXY = X
PY
In a state of equilibrium, the consumer is buying OL amount of Good-Y and OM amount of
Good-X. It is here that he is maximising his satisfaction. Any departure from this point
would only mean lesser satisfaction.
Y
Fig. 3
A
C Consumer’s Equilibrium
GOOD-Y
E
L
IC3
IC2
D IC1
O X
M B
GOOD-X
15. State whether the following statements are true or false. Give reasons for your answer. 6
(a) When total revenue is constant average revenue will also be constant.
(b) Average variable cost can fall even when marginal cost is rising.
(c) When marginal product falls, average product will also fall.
Ans. (a) False. When total revenue is constant, average revenue should be diminishing as
shown in Fig. 4
Y (a)
Fig. 4 Constant
TR
TR
TR
O X
Q
Y OUTPUT
(b)
AR AND MR
AR
MR=0
O X
Q MR
OUTPUT
(b) The statement is true. Average variable cost can fall even when marginal cost is rising.
See AVC and MC corresponding to output range MQ in Fig. 5.
MC
Y
Fig. 5 AVC
COST
O X
M Q
OUTPUT
(c) The statement is false. Average product can rise even when marginal product falls. See
AP and MP corresponding to output range MQ in Fig. 6.
Fig. 6 Y
AP, MP
AP
O X
M Q
UNITS OF LABOUR MP
16. Explain the law of variable proportions with the help of total product and marginal
product curves.
Or
Explain producer’s equilibrium with the help of a marginal cost and marginal revenue
schedule. 6
utilisation of the fixed factor. But, continuous increase of the variable factor must cause
mismatch between the variable and the fixed factor, and MP must ultimately decline.
Fig. 7 explains the behaviour of TP and MP.
Y
Fig. 7 T
TOTAL PRODUCT
TP
L S
O X
Y Increasing Diminishing
Returns Returns
MARGINAL PRODUCT
O X
L S – ve
MP
Diagram shows that:

Or
According to marginal cost and marginal revenue approach, a producer strikes his
equilibrium when:
(i) MR = MC and (ii) MC is rising or MC curve cuts MR curve from below.
Consider the following schedule and see how equilibrium is worked out:
Output (Units) MR (Rs) MC (Rs)
1 16 20
2 16 18
3 16 16
4 16 15
5 16 16
6 16 17
The above table shows that MR and MC is equal to 16 at output levels 3rd and 5th. But the
producer attains equilibrium at 5th unit only because here both the conditions of
equilibrium, viz. (i) MR = MC and (ii) MC is rising, are satisfied. Thus, a producer is in
equilibrium when he produces 5 units of the output.
SECTION-B
17. State the components of money supply. 1
Ans. The components of money supply are: (i) Currency held by the public, (ii) Demand deposits
of the people with the commercial banks, and (iii) Other deposits (demand deposits with
RBI of domestic and foreign institutions other than of the government of the country and
commercial banks with the country).
18. Give the meaning of ex-ante savings. 1
Ans. Ex-ante savings refer to the planned savings at different levels of income in the economy.
19. How is primary deficit calculated? 1
Ans. Primary deficit is calculated by deducting interest payments from the fiscal deficit.
20. Give the meaning of deflationary gap. 1
Ans. Deflationary gap refers to a situation of deficiency of demand when aggregate demand is
short of aggregate supply corresponding to full employment level.
21. State two sources of supply of foreign exchange. 1
Ans. Two sources of supply of foreign exchange are as follows:
(i) Direct purchase of goods and services by the non-residents in the domestic market.
(ii) Speculative purchases of domestic currency (using foreign exchange) by the
non-residents in the domestic market.
22. Explain how distribution of gross domestic product is its limitation as a measure of
economic welfare.
Or
Explain the basis of classifying goods into intermediate and final goods. Give suitable
examples. 3
Ans. Increase in gross domestic product (GDP) is often taken as a measure of economic welfare.
This is because increase in GDP implies increased flow of goods and services in the
economy. However, distribution of GDP acts as a limitation in this context. If with every
increase in the level of GDP, distribution of GDP is getting more unequal, welfare level of
the society may not rise. Only fewer people tend to benefit from a larger share of the cake.
The gulf between haves and have-nots may increase. The bulk of the population may have
even lesser goods than before even when the overall level of GDP has tended to rise.
Or
Goods which are used by the producers in the process of production as raw material or are
purchased for resale are known as intermediate goods. Example: Shirt purchased by a firm
for resale is an intermediate good.
Goods which are used by their final users are known as final goods. These are not resold.
Example: Shirt purchased by the household is a final good.
‘End-use’ of the goods is the basis of classifying goods as ‘final’ and ‘intermediaries’. Goods
are final if they have crossed the boundary line of production and are ready for use by their
final users (consumers or producers). Goods are intermediate if they are within the
boundary line of production and are not ready for use by their users. Value is yet to be
added to intermediate goods.
23. Explain the ‘lender of last resort’ function of the Central Bank. 3
Ans. The central bank acts as lender of last resort for the commercial banks of the country. It
means that if a commercial bank fails to get financial accommodation from anywhere it can
approach the central bank as a last resort. Central bank advances loan to such a bank
against approved securities. It helps commercial banks to manage their financial crises.
24. How can government budget be helpful in altering distribution of income in an
economy? Explain. 3
Ans. A government budget can help in altering distribution of income in the economy by using
its fiscal instruments. Taxation and subsidies are the two principal instruments, often used
by the government to combat inequality in the distribution of income. By imposing taxes on
rich and giving subsidies to the poor, government redistributes income in favour of the
poorer sections of the society. Equitable distribution of income is a sign of social justice
which is often achieved through taxation and subsidies.
25. Explain the meaning of deficit in balance of payments. 3
Ans. When the payments (debit) of the country are more than its receipts (credit), then it is called
deficit in balance of payments.
BU = R < P
(Here, BU = Unfavourable balance of payments; R = Receipts; P = Payments.)
When the country’s imports are more than its exports, (including both visible and invisible
items of trade) it is called deficit on current account BoP. In countries like India, often this
deficit is met through borrowings from abroad. It is important to note that borrowings
from abroad are reflected as receipts in capital account BoP. On account of such receipts,
capital account BoP may show a surplus. But if this surplus corresponds to deficit in current
account BoP then the real situation is of deficit BoP, even when BoP is shown to be in a state
of balance.
26. Distinguish between devaluation and depreciation of domestic currency. 3

Ans. Depreciation is the fall in the value of domestic currency in relation to foreign currency in a
situation when exchange rate is determined by the forces of supply and demand in the
international money market. Devaluation, on the other hand, is the fall in the value of
domestic currency in relation to foreign currency as planned by the government in a
situation when exchange rate is not determined by the forces of supply and demand but is
fixed by the government of different countries. Both depreciation and devaluation result in
fall in the value of domestic currency in terms of foreign currency. Consequently, domestic
goods become cheaper in terms of foreign currency. Accordingly, exports tend to rise while
imports are discouraged.
27. Explain the process of money creation by Commercial Banks. 4
Or
How do changes in bank rate affect money creation by Commercial Banks? Explain.
Ans. Money/credit creation is an important function of the commercial banks. By creating
credit, commercial banks contribute to money supply in the economy. 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 and if demand deposits
are (say) Rs 10,000, then 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 are
cash reserves of Rs 1,000 with the banks 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 per cent of the deposits, the
banks need to keep only 10 per cent of deposits as cash reserves. This is known as CRR
(cash reserve ratio).
(iii) If CRR = 10%, total cash reserves of Rs 1,000 allows the bank to offer loans up to Rs 10,000
in accordance with following formula:
1
Demand Deposits = ´ Cash Reserves
CRR
1
= × Rs 1,000
10%
= 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 favour 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.
Or
The bank rate is the rate at which the central bank of the country offers loans or gives credit
to the commercial banks ‘as a lender of last resort’ . The increase or decrease in bank rate
also increases or decreases the market rate of interest. Accordingly, the cost of credit (or cost
of capital) changes in the market. During inflation when supply of money/credit is to be
reduced, bank rate is increased. This reduces borrowing by the commercial banks,
implying a reduction in their cash reserves and therefore a reduction in their capacity to
create credit. Following this increase in bank rate, market rate of interest is also raised,
implying a check on borrowings from the commercial banks. Thus, the overall supply of
money/credit is reduced in the economy. Exactly opposite is done to combat deflation: bank
rate is lowered to increase the supply of money/credit.
(a) When marginal propensity to consume is greater than marginal propensity to save,
the value of investment multiplier will be greater than 5.
(b) The value of marginal propensity to save can never be negative.
Ans. (a) No, the statement is not fully correct. We know, MPC + MPS = 1, When MPC >MPS,
the value of MPC can be anything greater than 0.5 and less than 1. Let us assume MPC
= 0.6. The value of investment multiplier (K) in this case will be,
1 1 1
K= = = = 2.5
1 - MPC 1 - 0.6 0.4
Which is less than 5.
Similarly, when the value of MPC = 0.7, the value of K will be 3.33 which is less than 5
and when MPC= 0.8, K will be 5 which is also not greater than 5 but equal to 5.
Hence, only when the value of MPC is greater than 0.8 that the value of investment
multiplier will be greater than 5.
(b) Yes, the statement is true. Marginal propensity to save is the ratio between additional
saving and additional income which is always positive because of positive relationship
between saving and income.
(a) Capital receipts and revenue receipts.
(b) Direct tax and indirect tax.
Ans. (a) Capital receipts are those receipts which either create a liability or lead to reduction
in assets. For example, recoveries of loans from state governments, market loans,
and disinvestment.
On the other hand, revenue receipts are those receipts which do not create either a
liability or lead to reduction in assets. For example, receipts from tax revenue like
income tax and sales tax and receipts from non-tax revenue like interest and
dividends.
On the other hand,
(b) The main differences between direct tax and indirect tax are as follows:
(i) Final Burden: Direct taxes are those taxes the final burden of which falls on that
person who makes the payment to the government. On the other hand, indirect
taxes are those taxes which are paid to the government by one person but their final
burden is borne by another person.
(ii) Shifting of Tax: Direct taxes cannot be shifted to other persons whereas the
indirect taxes can be shifted to other persons.
30. How will you treat the following while estimating national income of India? 6
(a) Dividend received by an Indian from his investment in shares of a foreign company.
(b) Money received by a family in India from relatives working abroad.
(c) Interest received on loans given to a friend for purchasing a car.
Ans. (a) Dividend received by an Indian from his investment in shares of a foreign company is
included in national income of India because it is a part of net factor income from
abroad.
(b) Money received by a family in India from relatives working abroad is not included in
national income of India because it is a kind of transfer income.
(c) Interest received on loans given to a friend for purchasing a car is not included in
national income because loans are used not for production purpose.
31. From the following data, calculate (a) Gross Domestic Product at Factor Cost and
(b) Factor Income to Abroad:
(Rs in 000 crore)
(i) Compensation of employees 800
(ii) Profits 200
(iii) Dividends 50
(iv) Gross national product at market price 1,400
(v) Rent 150
(vi) Interest 100
(vii) Gross domestic capital formation 300
(viii) Net fixed capital formation 200
(ix) Change in stock 50
(x) Factor income from abroad 60
(xi) Net indirect taxes 120
Or
Calculate Net National Product at Factor Cost and Gross National Disposable Income
from the following: 6
(Rs in crore)
(i) Saving of non-departmental enterprises 50
(ii) Income from property and entrepreneurship accruing to the 70
government administrative departments
(iii) Personal tax 90
(iv) National debt interest 20
(v) Retained earnings of private corporate sector 10
(vi) Current transfer payments by government 40
(viii) Corporation tax 30
(ix) Net indirect tax 80
Examination Papers | 91
(x) Net current transfers from rest of the world (–) 10

(xi) Personal disposable income 1,000
Ans. Gross Domestic Product at Factor Cost
= Compensation of employees + Profits + Rent + Interest + Mixed income + Consumption
of fixed capital [Gross domestic capital formation – (Net fixed capital formation +
Change in stock)]
= Rs 800 thousand crore + Rs 200 thousand crore + Rs 150 thousand crore + Rs 100
thousand crore + Rs 0 thousand crore + [Rs 300 thousand crore – (Rs 200 thousand
crore + Rs 50 thousand crore)]
= Rs 1,250 thousand crore + Rs 50 thousand crore
= Rs 1,300 thousand crore
Gross National Product at Factor Cost
= Gross national product at market price – Net indirect taxes
= Rs 1,400 thousand crore – Rs 120 thousand crore
= Rs 1,280 thousand crore
Net Factor Income from Abroad
= Gross national product at factor cost – Gross domestic product at factor cost
= Rs 1,280 thousand crore – Rs 1,300 thousand crore
= – Rs 20 thousand crore
= Factor income from abroad – Factor income to abroad
Or, Factor Income to Abroad
= Factor income from abroad – Net factor income from abroad
= Rs 60 thousand crore – (– Rs 20 thousand crore) = Rs 80 thousand crore
(a) Gross domestic product at factor cost = Rs 1,300 thousand crore
(b) Factor income to abroad = Rs 80 thousand crore.
Or
Private Income
= Personal disposable income + Personal tax + Corporation tax + Retained earnings of
private corporate sector
= Rs 1,000 crore + Rs 90 crore + Rs 30 crore + Rs 10 crore
= Rs 1,130 crore
Net National Product at Factor Cost
= Private income + Saving of non-departmental enterprises + Income from property
and entrepreneurship accruing to the government administrative departments
– National debt interest – Current transfer payments by government – Net current
transfers from rest of the world
= Rs 1,130 crore + Rs 50 crore + Rs 70 crore – Rs 20 crore – Rs 40 crore – (–)Rs 10 crore

= Rs 1,250 – Rs 60 crore + Rs 10 crore
= Rs 1,200 crore
= Net national product at factor cost + Net indirect tax + Net current transfers from rest
of the world + Consumption of fixed capital
= Rs 1,200 crore + Rs 80 crore + (–) Rs 10 crore + Rs 60 crore
= Rs 1,200 crore + Rs 80 crore – Rs 10 crore + Rs 60 crore
= Rs 1,330 crore
(a) Net national product at factor cost = Rs 1,200 crore
(b) Gross national disposable income = Rs 1,330 crore.
32. In an economy, 75 per cent of the increase in income is spent on consumption. Investment
is increased by Rs 1, 000 crore. Calculate: 6
(a) total increase in income.
(b) total increase in consumption expenditure.
Ans 75 per cent of the increase in income is spent on consumption.
DC 75
\ MPC = = = 075
.
DY 100
1
Multiplier (K) =
1 - MPC
1
=
1 - 075
.
1
=
0.25
=4
DY
We are know, K =
DI
Þ DY = K × DI
DY = 4 × 1,000
= 4,000
Increase in Consumption Expenditure ( DC) = MPC × DY
DC
= 0.75 × 4,000 (Q MPC = ,
DY
75
= × 4,000 so that DC = MPC × DY)
100
= 3,000
(a) Total increase in income = Rs 4,000 crore
(b) Total increase in consumption expenditure = Rs 3,000 crore.
SET–II
SECTION–A
1. Define an indifference map. 1
Ans. A set of indifference curve is known as indifference map.
6. Distinguish between ‘decrease in demand’ and ‘decrease in quantity demanded’. 3
Ans.
Decrease in Demand Decrease in Quantity Demanded
1. Decrease in demand refers to decrease 1. Decrease in quantity demanded refers to
in purchase of a commodity at its decrease in purchase of a commodity
existing price. due to rise in its price.
2. Decrease in demand occurs due to 2. Decrease in quantity demanded occurs
3. Diagrammatically, it is shown by a 3. Diagrammatically, it is shown by a
backward shift in demand curve. upward movement along the same
demand curve.
8. Price of commodity A is Rs 10 per unit and total revenue at this price is Rs 1,600. When its
price rises by 20 per cent, total revenue increases by Rs 800. Calculate its price elasticity
of supply. 3
20
= × Rs 10
100
= Rs 2
New price (P1) = P + DP
= Rs 10 + Rs 2
= Rs 12
Initial total revenue (P ×Q) = Rs 1,600
New total revenue (P1× Q1) = Rs 1,600 + Rs 800
= Rs 2,400
1,600
When, P = Rs 10, Q = = 160
10
2,400
When, P1 = Rs 12, Q1 = = 200
12
P = Rs 10, P1 = Rs 12, DP = P1 – P
= Rs 12 – Rs 10
= Rs 2
Q = 160, Q1 = 200, DQ = Q1 – Q = 200 – 160 = 40

P DQ
Price Elasticity of Supply (ES) = ´
Q DP
10 40
= ´
160 2
= 1.25
\ Price elasticity of supply =1.25.
(i) When there are diminishing returns to a factor, total product first increases and then
starts falling.
(ii) When marginal revenue falls to zero, average revenue becomes maximum.
(iii) The difference between total cost and total variable cost falls with increase in output.
Ans. (i) False. This is because in a situation of diminishing returns to a factor marginal product
tends to fall. Falling marginal product implies that total product should be increasing,
though at a diminishing rate. It simply implies diminishing slope of TP (total product)
curve, NOT diminishing TP.
(ii) False. When marginal revenue is zero, average revenue should be diminishing, as in
Fig. 8.
Fig. 8 Y
AR, MR
AR
Zero MR
O X
MR
OUTPUT
(iii) False. Because the difference between total cost and total variable cost is equal to total
fixed cost which remains constant at each level of output.
SECTION–B
17. Give the meaning of ex-ante investment. 1
Ans. Ex-ante investment refers to the investment which the investors plan to invest at different
levels of income in the economy.
22. Distinguish between real and nominal gross domestic product.
Or
Distinguish between consumer goods and capital goods. Which of these are final goods? 3
Ans. The principal differences between real gross domestic product (GDP) and nominal gross
domestic product (GDP) are as follows:
(i) Real GDP or GDP at constant prices is the value measured at constant prices of the final
goods and services produced within the domestic territory of a country during an
accounting year. Nominal GDP or GDP at current prices is the value measured at
current prices of final goods and services produced within the domestic territory of a
country during an accounting year. Constant prices refer to prices during the base year
(which is defined as the year of comparison). Current prices refer to prices prevailing
during the year of estimation.
(ii) Real GDP can increase only when there is an increase in the production of goods and
services while nominal GDP can increase even when there is no increase in the
production of goods and services but only prices happen to increase.
Or
Consumer goods are those goods which satisfy the consumer’s wants directly. Consumer
goods are used as final goods by their final users. Example: Pen, bread, butter, vegetables,
etc.
Capital goods, on the other hand, are those goods which are used as fixed assets by the
producers in the production of other goods and services. These goods are repeatedly used
in the production of other goods and services. Example: Building, machinery, tractors, etc.
Capital goods, as fixed assets, are to be treated as final goods whereas in case of consumer
goods, it depends on their ‘end-use’. Example: Kerosene oil used by households is a final
good but when used by the firms to clean their machinery is to be treated as intermediate
good.
23. Explain the ‘banker to the government’ function of the Central Bank. 3
Ans. Central bank acts as a banker, agent and financial advisor to the government. As a banker to
the government, it keeps the accounts of all government banks and manages government
treasuries. The loans are given to the government without any interest for short-term. It
also transfers government funds. It also buys and sells securities, treasury bills on behalf of
the government. Being the apex bank of the country, it advises the government from time
to time on economic, financial and monetary matters.
29. Giving reasons, classify the following into direct and indirect tax: 4
(i) Wealth tax
(ii) Value added tax
Ans. (i) Wealth tax is a direct tax, because the burden of this tax is borne by the person on
whom it is imposed and he cannot shift the burden of this tax onto others.
(ii) Value added tax is an indirect tax, because the initial burden of this tax is on one person
but its final burden may be on another person. So the burden of value added tax can be
shifted to other persons.
31. From the following data, calculate (a) Gross Domestic Product at Factor Cost and (b) Factor
Income to Abroad:
(Rs in crore)
(i) Gross domestic capital formation 600
(ii) Interest 200
(iii) Gross national product at market price 2,800
(iv) Rent 300

(v) Compensation of employees 1,600
(vi) Profits 400
(vii) Dividends 150
(viii) Factor income from abroad 50
(x) Net indirect taxes 240
(xi) Net fixed capital formation 400
(xii) Net exports (–) 30
Or
Calculate Net National Product at Factor Cost and Gross National Disposable income
(Rs in crore)
(i) Net current transfers to the rest of the world 10
(ii) Saving of non-departmental enterprises 60
(iii) Net indirect tax 90
(iv) Income from property and entrepreneurship accruing to the 80
government administrative departments
(vi) Personal tax 100
(vii) Corporation tax 40
(viii) National debt interest 30
(ix) Current transfer payments by government 50
(x) Retained earnings of private corporate sector 10
(xi) Personal disposable income 1,100
= Compensation of employees + Interest + Rent + Profits + Mixed income +
Consumption of fixed capital [Gross domestic capital formation – (Net fixed capital
formation + Change in stock)]
= Rs 1,600 crore + Rs 200 crore + Rs 300 crore + Rs 400 crore +Rs 0 crore + [Rs 600
crore – (Rs 400 crore + Rs 100 crore)]
= Rs 2,500 crore + Rs 100 crore
= Rs 2,600 crore
Gross National Product at Factor Cost
= Gross national product at market price – Net indirect taxes
= Rs 2,800 crore – Rs 240 crore
= Rs 2,560 crore

= Rs 2,560 crore – Rs 2,600 crore
= – Rs 40 crore
= Rs 50 crore – (– Rs 40 crore)
= Rs 90 crore
(a) Gross domestic product at factor cost = Rs 2,600 crore
(b) Factor income to abroad = Rs 90 crore.
Or
Private Income
= Personal disposable income + Personal tax + Corporation tax + Retained earnings of
private corporate sector
= Rs 1,100 crore + Rs 100 crore + Rs 40 crore + Rs 10 crore
= Rs 1,250 crore
Net National Product at Factor Cost
= Private income + Saving of non-departmental enterprises + Income from property
and entrepreneurship accruing to the government administrative departments
– National debt interest – Current transfer payments by government + Net current
transfers to rest of the world
= Rs 1,250 crore + Rs 60 crore + Rs 80 crore – Rs 30 crore – Rs 50 + Rs 10 crore
= Rs 1,320 crore
= Net national product at factor cost + Net indirect tax – Net current transfers to rest of
the world + Consumption of fixed capital
= Rs 1,320 crore + Rs 90 crore – Rs 10 crore + Rs 70 crore
= Rs 1,470 crore
(a) Net national product at factor cost = Rs 1,320 crore
(b) Gross national disposable income = Rs 1,470 crore.
SET–III
SECTION–A
1. What is law of demand? 1
Ans. Law of demand states that, other things remaining constant, more of a commodity is
purchased in response to decrease in its price and vice-versa.
6. Explain any two factors that affect price elasticity of demand 3
Ans. The elasticity of demand is affected by the following two factors:
(i) Nature of Commodity: Goods may be: necessaries, luxuries and comforts. Demand for
necessaries (like salt) is highly inelastic; demand for luxuries (like ACs) is highly elastic;
and demand for comforts (like air coolers) is moderately elastic.
(ii) Availability of Substitutes: Commodities which have substitutes, have elastic demand,
like tea and coffee. Commodities having no substitutes like liquor and cigarettes, etc.
have inelastic demand.
8. Total revenue at a price of Rs 4 per unit of a commodity is Rs 480. Total revenue increases
by Rs 240 when its price rises by 25 per cent. Calculate its price elasticity of supply. 3
25
= × Rs 4
100
= Re 1
New Price (P1) = P + DP
= Rs 4 + Re 1
= Rs 5
Initial total revenue (P × Q) = Rs 480
New total revenue(P1 × Q1) = Rs 480 + Rs 240
= Rs 720
480
When, P = Rs 4, Q = = 120
4
720
When P1 = Rs 5, Q1 = = 144
5
P = Rs 4, P1 = Rs 5, DP = P1 – P
= Rs 5 – Rs 4
= Re 1
Q = 120, Q1 = 144, DQ = 144 – 120
= 24
P DQ
Price Elasticity of Supply (ES) = ´
Q DP
4 24
= ´
120 1
= 0.8
\ Price elasticity of supply = 0.8.
9. Explain the implication of ‘homogeneous products’ feature of perfect competition. 3
Ans. A product being perfectly homogeneous implies that all units of a commodity are identical
in size, quality, shape, colour, weight, etc. In a state of perfect competition, a perfectly
homogeneous product is sold in the market at a uniform price. If ever an individual firm
tries to charge higher price, it would lose all its buyers to a large number of other sellers in
the market. In a perfectly competitive environment, homogeneous product does not allow
a firm any control over its price. Accordingly, firm’s demand curve (under perfect
competition) becomes a horizontal straight line.
14. State and explain the characteristics of indifference curves. 6
Ans. The principle characteristics of indifference curves are as follows:
1. Indifference curves are negatively slopped or they slope downward: An indifference
curve slopes downwards from left to right. It shows that more of one commodity
implies less of the other, so that total satisfaction (at any point on IC) remains the same.
2. Indifference curves are convex to the point of origin: An indifference curve will
ordinarily be convex to the point of origin. This is because of diminishing marginal
rate of substitution.
3. Indifference curves never touch or intersect each other: Each indifference curve
represents different levels of satisfaction. So their intersection is ruled out or in other
words, indifference curves never cut each other.
4. Higher indifference curve represents higher level of satisfaction: In indifference
map, a higher indifference curve represents those combinations which yield higher
level of satisfaction than the combinations on the lower indifference curve.
5. Indifference curve touches neither X-axis nor Y-axis: It is often assumed that a
consumer buys a combination of different quantities of two goods. Hence, an
indifference curve touches neither X-axis nor Y-axis.
SECTION–B
18. Give the meaning of aggregate demand. 1
Ans. Aggregate demand is the total demand for goods and services measured in terms of total
expenditure in the economy during the period of one year.
23. Explain Central Bank’s function as currency authority. 3
Ans. The central bank is the sole note-issuing authority in the country. Often, the central banks
divides its functions into two departments–banking department and issue department. It is
the issue department that is responsible for note-issuing. It issues currency to cope with the
demand for it, which depends upon the level of economic activity in the economy.
25. Distinguish between autonomous and accommodating transactions of balance of

payments account. 3
Ans. (i) The basic difference between autonomous and accommodating items is that while
deficit or surplus in BoP occurs due to autonomous items (as determined by economic
motive), the accommodating items are meant to restore the BoP identity. BoP always
balances because of the accommodating items.
(ii) Autonomous items are also known as above the line items. Whereas accommodating
items are also known as below the line items.
26. Giving two examples explain the relation between the rise in price of a foreign currency
ans its demand. 3
Ans. The relation between the rise in price of a foreign currency and its demand is as follows:
(i) As a result of rise in price of foreign currency, our demand for goods in the
international market tends to fall. Because, now we have to pay more foreign currency
in relation to domestic currency. Accordingly, demand for foreign currency will fall.
(ii) When foreign currency becomes dearer, our investment in rest of the world will fall.
Accordingly, demand for foreign currency tends to shrink.
(i) Average propensity to save is always greater than zero.
(ii) Value of investment multiplier varies between zero and infinity.
Ans. (i) No, the statement is false. Average propensity to save is not always greater than zero. It
can be negative in situations when saving is negative or when consumption is greater
than income.
(ii) No, the statement is false. Value of investment multiplier varies between one and
infinity. The minimum value of investment multiplier is 1. It can never be less than one
because MPC is never negative. Atleast it is = 0, and most it is = ¥. In case MPC = 0,
1 1
K= = =1
1 - MPC 1 - 0
In case MPC = 1,
1 1 1
K= = = =¥
1 - MPC 1 -1 0
So that value of K (multiplier) always varies between 1 and ¥.
ALL INDIA
(iv) Question Nos. 6 - 10 and 22 - 26 are short-answer questions carrying 3 marks each. Answers to them
SET–I
SECTION–A
1. Define a budget line. 1
Ans. Budget line is a line showing different combinations of a set of 2-Goods that the consumer
can buy, given his income and prices of the goods.
2. What is meant by inferior good in economics? 1
Ans. Inferior good is that good the demand for which decreases as income of the buyers
increases.
3. In which market form can a firm not influence the price of the product? 1
Ans. Under perfect competition, a firm cannot influence the price of the product.
Ans. Monopoly is a market form with a single seller and many buyers of a commodity.
5. What can you say about the number of buyers and sellers under monopolistic competition? 1
Ans. The number of buyers and sellers of a commodity is very large under monopolistic
competition.
6. Explain the effect of the following on the price elasticity of demand of a commodity: 3
(i) Number of substitutes
(ii) Nature of the commodity.
Ans. (i) Larger the number of substitutes of a commodity, greater is the elasticity of demand.
This is because the consumer gets a choice of shifting from one commodity to the other
when price of one commodity changes in relation to price of the other. On the other
hand, if a commodity has no close substitute, elasticity of demand will be low. Because,
in such a situation the consumer has little choice of shifting from one commodity to the
other when price changes.
(ii) Goods may be necessaries, luxuries or comforts. Demand for necessaries (like salt,
vegetables) is highly inelastic. Demand for luxuries (like ACs) is highly elastic. Demand
for comforts (like TV, coolers) is moderately elastic.
7. Explain any two causes of ‘increase’ in demand of a commodity.
Or
Explain the inverse relationship between price and quantity demanded of a commodity. 3
Ans. Two causes of increase in demand of a commodity are:
consumer. Increase in income causes a rise in demand of the good and hence a
rightward shift of the demand curve.
(ii) Price of Related Goods: In case of substitute goods, demand for a commodity rises
with rise in price of the substitute good. Accordingly, demand curve shifts to the right.
In case of complementary goods, demand for a commodity rises with a fall in the price
of complementary good. Accordingly, demand curve shifts to the right.
Or
The quantity demanded of a commodity decreases with rise in its price and increases with a
fall in its price. So, there is an inverse relationship between price and quantity demanded of
a commodity. This is explained in terms of the law of diminishing marginal utility.
According to this law, utility derived from every successive unit of consumption of a
commodity tends to diminish. Accordingly, for every additional unit that the consumer
intends to buy, he should be willing to pay less and less price.
8. A firm’s average fixed cost, when it produces 2 units, is Rs 30. Its average total cost
schedule is given below. Calculate its marginal cost and average variable cost at each level
of output. 3
Average Total Cost (Rs) 80 48 40
Ans.
Output Average Total Fixed Average Average Total Marginal
(Units) Total Cost Cost (Rs) Fixed Cost Variable Variable Cost (Rs)
(Rs) (Rs) Cost (Rs) Cost (Rs)
1 80 60 60 20 20 20
2 48 60 30 18 36 16
3 40 60 20 20 60 24
AFC = Rs 30, when output = 2

\ TFC = AFC × 2
= Rs 30 × 2 = Rs 60
We know, TFC remains constant at all levels of output.
9. Total revenue is Rs 400 when the price of the commodity is Rs 2 per unit. When price rises
to Rs 3 per unit, the quantity supplied is 300 units. Calculate the price elasticity of
supply. 3
Ans. When price (P) = 2, total revenue (P × Q) = 400
400
\ Quantity Supplied (Q) = = 200 units
2
P = Rs 2, P1 = Rs 3, DP = P1 – P
= Rs 3 – Rs 2 = Re 1
Q = 200 units, Q1 = 300 units, DQ = Q1 – Q
= (300 – 200) units
= 100 units
P DQ
Price Elasticity of Supply (Es) = ´
Q DP
2 100
= ´ =1
200 1
\ Price elasticity of supply = 1.
10. Why is the number of firms small in an oligopoly market? Explain. 3
Ans. By definition, oligopoly is a form of the market in which there is a small number of big firms.
Each firm is so big that it controls a significant segment of the market. It is so significant that
the price and output policy of one firm has a direct bearing on the price and output of the
rival firms in the market. Which is why, it is not possible to draw any unique demand curve
(AR curve) for an oligopoly firm. Often the oligopoly firms tend to form trusts and cartels
with a view to avoiding price competition. By forming trusts and cartels (like OPEC) they
tend to make monopoly profits.
11. Explain the problem of ‘how to produce’.
Or
Distinguish between microeconomics and macroeconomics. Give examples. 4
than labour. An economy must decide as to which technique is to be used so that
productivity is maximised or cost is minimised.
Or
Microeconomics Macroeconomics
1. Microeconomics studies economic 1. Macroeconomics studies economic
relationships or economic problems at the relationships or economic problems or
level of an individual– an individual firm, economic issues at the level of the economy
an individual household or an individual as a whole.
consumer.
2. Microeconomics is concerned with 2. Macroeconomics is concerned with
determination of output and price for an determination of aggregate output and a
individual firm or industry. general price level in the economy as a
whole.
3. Study of microeconomics assumes that 3. Study of macroeconomics assumes that
macro variables (like aggregate output and micro variables (like distribution of income
general price level) remain constant. and wealth) remain constant.
4. Examples: Saving and consumption 4. Examples: Total output, aggregate
pattern of an individual household, price demand and general price level.
level of a firm or industry.
12. When price of a commodity falls by Re 1 per unit, its quantity demanded rises by 3 units.
Its price elasticity of demand is (–) 2. Calculate its quantity demanded if the price before
the change was Rs 10 per unit. 4
Ans. Let the initial quantity be X units.
Given, P = Rs 10, DP = ( -)Re1
Q = X units, DQ = 3 units
Ed = (–) 2
P DQ
Price Elasticity of Demand (Ed) = ´
Q DP
10 3
(–) 2 = ´
X –1
30
(–) 2 =
–X
2X = 30 Þ X = 15
13. How does the equilibrium price of a ‘normal’ commodity change when income of its
buyers falls? Explain the chain of effects. 4
Ans. For a normal commodity, a fall in the income of its buyers means decrease in its demand.
Accordingly, demand curve DD as shown in Fig. 1, shifts leftwards to D1D1 . Refer Fig. 1.
Initially equilibrium is struck at point E with OP and OQ level of equilibrium price and
equilibrium quantity respectively. With a fall in income of the buyers (in case of normal
commodity), the new equilibrium is attained at point E1 . The equilibrium price decreases
from OP to OP1 and equilibrium quantity decreases from OQ to OQ1 other things
remaining unchanged. (Assumption: Supply and other factors affecting demand remain
unchanged.)
Y
Fig. 1 D
D1 S
P E
PRICE
P1 E1
D
S
D1
X
O Q1 Q
QUANTITY
14. State whether the following statements are true or false. Give reasons for your answer: 6
(i) When marginal revenue is constant and not equal to zero, then total revenue
will also be constant.
(ii) As soon as marginal cost starts rising, average variable cost also starts rising.
(iii) Total product always increases whether there is increasing returns or diminishing
returns to a factor.
Ans. (i) False. Because when marginal revenue is constant, total revenue is increasing at a
constant rate.
(ii) No, the statement is false. Average variable cost can fall even when marginal cost starts
rising. See AVC and MC corresponding to output range MQ in Fig. 2.
MC
Y
Fig. 2 AVC
COST
O X
M Q
OUTPUT
(iii) Yes, the statement is true. This is because in a situation of increasing returns to a factor,
marginal product tends to rise. Accordingly, total product should be increasing at an
increasing rate. Similarly, under diminishing returns to a factor, marginal product
tends to fall. Falling marginal product implies that total product should be increasing
though at a decreasing rate.
15. What are the conditions of consumer’s equilibrium under the indifference curve
approach? What changes will take place if the conditions are not fulfilled to reach
equilibrium? 6
or
and (ii) IC is convex to the origin, at the point of equilibrium.
the highest indifference curve which is IC2 in this case. Out of A, B, C, D and E combinations,
the consumer will be in equilibrium at combination ‘E’, because at this point price line (AB)
is tangent to the highest indifference curve IC2. No doubt, the consumer can buy ‘C’ or ‘D’
combinations as well but these will not give him maximum satisfaction being situated on
lower indifference curve IC1. It means consumer’s equilibrium point is the point of
tangency of price line and indifference curve. At equilibrium,
P
PY
Also, at point E, the IC2 is convex to the origin. Accordingly, equilibrium is stable. If IC2 was
not convex at the point of equilibrium, we shall never have stable equilibrium.
Y
Fig. 3
A
GOOD-Y
E
L
IC3
IC2
D IC1
O X
M B
GOOD-X
equilibrium, using marginal cost and marginal revenue approach. Give reasons for your
answer.
Price per unit (Rs) Output (Units) Total Cost (Rs)
8 1 6
7 2 11
6 3 15
5 4 18
4 5 23
Or
Explain the law of returns to a factor with the help of total product and marginal product
schedule. 6
Ans.
Price per Output Total Total Marginal Marginal
unit (Rs) (Units) Cost (Rs) Revenue (Rs) Revenue (Rs) Cost (Rs)
8 1 6 8 8 6
7 2 11 14 6 5
6 3 15 18 4 4
5 4 18 20 2 3
4 5 23 20 0 5
The producer is in equilibrium at 3rd unit of output according to MR and MC approach.

Reason: At output level 3, both MR and MC are equal which is 4 in this case.
Or
Law of variable proportions states that as more and more of the variable factor is combined
with the fixed factor, marginal product (MP) of the variable factor may initially increase and
subsequently stabilise, but must finally decrease. Accordingly, the law exhibits three phases
of production.
The law of variable proportions is explained with the help of following table 1 and Fig. 4.
Table 1. Law of Variable Proportions

Units of Units of Total Marginal
Land Labour Product Product
1 1 2 2 Increasing MP implying
1 2 5 3 increasing returns to a factor.
1 3 9 4
1 4 12 3
1 5 14 2
1 6 15 1 Diminishing MP implying
1 7 15 0 diminishing returns to a factor
1 8 14 -1
Note: Where MP stops increasing, from that very point it starts diminishing. Thus overlapping is
indicated in the above table when MP = 4.
The table shows that as more and more units of labour are combined with fixed amount of
land, MP (marginal product) tends to rise till 3 units of labour are employed. In this situation,
TP (total product) increases at the increasing rate. This is a situation of increasing returns to
the factor. But, with the application of 4th unit of labour, situation of diminishing returns
sets in: MP starts decreasing and TP increases only at the decreasing rate. Diminishing MP
reduces to zero when 7th unit of labour is added, and MP becomes negative (-1) when 8th
unit of labour is also employed. Total output is maximum (= 15), when marginal output is
zero and it starts declining (from 15 to 14) when marginal output = – 1 (negative).
Y
Fig. 4 T
TOTAL PRODUCT
TP
K
L S X
O
MARGINAL PRODUCT
Returns Returns
O X
L S – ve
MP
In the diagram, increasing returns to a factor occurs between O and K on the TP curve and
diminishing returns to a factor occurs between K and T on the TP curve.
SECTION-B
17. Give the meaning of money. 1
Ans. Money is something that is generally accepted as a means of exchange and acts as a measure
as well as a store of value.
18. What is meant by revenue deficit? 1
Ans. Revenue deficit is the excess of total revenue expenditure above the total revenue receipts
of the government.
19. What is ex-ante aggregate demand? 1
Ans. Ex-ante aggregate demand refers to desired or planned expenditure of the people in the
economy during the year.
20. Give the meaning of inflationary gap. 1
21. State two sources of demand for foreign exchange. 1
Ans. Two sources of demand for foreign exchange are as follows:
22. Distinguish between real and nominal gross domestic product.
Or
Giving reasons, classify the following into intermediate and final goods: 3
(i) Machines purchased by a dealer of machines.
(ii) A car purchased by a household.
Or
(i) Machines purchased by a dealer of machines is an intermediate good because
machines are resold by the firms to make profits or value is yet to be added to these
goods by way of further processing.
(ii) A car purchased by a household is a final good because the household is the final user of
the car and no value is to be added to the car.
23. Explain the ‘banker to the government’ function of the central bank. 3
24. Explain the allocation function of a government budget. 3
encouraged through subsidy.
25. Distinguish between autonomous and accommodating transactions of balance of
payments account. 3
items are also known as below the line items.
26. Giving two examples, explain why there is a rise in demand for a foreign currency when
its price falls. 3
Ans. (i) With a fall in price of foreign exchange, the exchange value of domestic currency
increases and that of foreign currency falls, implying that foreign goods become
cheaper in relation to domestic goods. The rising domestic demand for foreign goods
implies higher demand for foreign exchange.
(ii) When price of the foreign currency reduces, tourists from the home country find it
cheaper to visit abroad. Accordingly, demand for foreign currency rises
27. How does a commercial bank create money?
Or
Explain how do ‘open market operations’ by the central bank affect money creation by
commercial banks. 4
more than their cash reserves. If cash reserves are (say) Rs 1,000 and if demand deposits
are (say) Rs 10,000, then 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 are
cash reserves of Rs 1,000 with the banks converted into demand deposits of Rs 10,000?
banks need to keep only 10 per cent of the deposits as cash reserves. This is known as
CRR (cash reserve ratio).
(iii) If CRR = 10%, total cash reserves of Rs 1,000 allows the bank to offer loans up to Rs 10,000
in accordance with following formula:
1
CRR
1
= × Rs 1,000
10%
= 10 × Rs 1,000 = Rs 10,000.
Rs 10,000, demand deposits of the banks are raised by Rs 10,000. So, in the above equation,
demand deposits are in fact pointing to loans.
Or
Open market operations is the sale and purchase of government securities in the open
market by the central bank of the country. By selling the securities, the central bank
withdraws cash balances from the country and by buying the securities, the central bank
injects cash balances into the country.
During deflation, to increase money supply, securities are purchased by the central bank.
On the other hand, during inflation, to decrease money supply, securities are sold off.
Buying the securities, the commercial banks reduce their cash deposits, and hence their
capacity to create credit. Selling the securities, the commercial banks add to their cash
reserves and enhance their capacity to create credit.
(i) When marginal propensity to consume is zero, the value of investment multiplier
will also be zero.
(ii) Value of average propensity to save can never be less than zero.
Ans. 1
(i) False. Because K =
1 - MPC
When: MPC = 0
1 1
K= = =1
1- 0 1
Therefore, when marginal propensity to consume is zero, the value of investment
multiplier will be one.
(ii) False. The value of average propensity to save (APS) can be less be than zero. It
happens when consumption is greater than income or when APC > 1.
Illustration:
Let us assume Y = 100
C = 120
S = Y – C = 100 – 120 = – 20
-20 120
In such a situation, APS = = -0.2; APC = = 12
.
100 100
(i) Capital expenditure and Revenue expenditure
(ii) Fiscal deficit and Primary deficit.
Ans. (i) Capital expenditure is that expenditure of the government which either creates assets
for the government or causes a reduction in government liability. Example:
Expenditure on purchase of shares.
Revenue expenditure is that expenditure of the government which does not either
create assets for the government or causes a reduction in liabilities of the government.
Example: Expenditure on interest payments.
(ii) Fiscal deficit is the excess of total budget expenditure over total budget receipts excluding
borrowing. Primary deficit is equal to fiscal deficit reduced by interest payments.
30. How will you treat the following while estimating national income of India? Give reasons
for your answer.
(i) Dividend received by a foreigner from investment in shares of an Indian company.
(ii) Profits earned by a branch of an Indian bank in Canada.
(iii) Scholarship given to Indian students studying in India by a foreign company.
Or
Explain the problem of double counting in estimating national income, with the help of
an example. Also explain two alternative ways of avoiding the problem. 6
Ans. (i) Dividend received by a foreigner from investment in shares of an Indian company is
included in national income of India as a negative component. Because it is a part of
net factor income to rest of the world.
(ii) Profits earned by a branch of an Indian bank in Canada is included in national income
of India since it is a part of net factor income from rest of the world.
(iii) Scholarship given to Indian students studying in India by a foreign company is not
included in national income of India, because it is a kind of transfer income.
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 rice and sells it for Rs 500 in the market to a
flour mill. The flour mill sells it for Rs 700 to the baker. The baker sells the bread to the
shopkeeper for Rs 900. The shopkeeper sells the entire bread to the final consumers for
Rs 1,000. Thus,
Value of Output = Rs 500 + Rs 700 + Rs 900 + Rs 1,000 = Rs 3,100

In fact, the value of the rice 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 are used: (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 goods, i.e., bread is Rs 1000.
(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 Rs 500 + Rs 200 + Rs 200 + Rs 100 =Rs 1,000.
31. In an economy the equilibrium level of income is Rs 12,000 crore. The ratio of marginal
propensity to consume and marginal propensity to save is 3 : 1. Calculate the additional
investment needed to reach a new equilibrium level of income of Rs 20,000 crore. 6
Ans. Initial equilibrium level of income = Rs 12,000 crore
Desired equilibrium level of income = Rs 20,000 crore
Desired increase in equilibrium level of income (DY) = Rs 20,000 crore – Rs 12,000 crore
= Rs 8,000 crore
Let us suppose that MPC = 3x and MPS = 1x
We know,
MPC + MPS = 1
3x + 1x = 1
4x = 1
1
Þ x = = 0.25
4
\ MPC = 3x
= 3(0.25) = 0.75
and MPS = 1x
=1 (0.25) = 0.25
When MPC = 0.75, multiplier (K) will be
1
K=
1 - MPC
1 1
= = =4
1 - 0.75 0.25
DY
We also know, K =
DI
8,000
4=
DI
8,000
Þ DI= = 2,000
4
Hence, Rs 2,000 crore will be needed to reach a new equilibrium level of income of
Rs 20,000 crore.
32. Calculate (a) Gross domestic product at market price, and (b) Factor income from abroad
from the following data: 3 + 3 =6
(Rs in crore)
(i) Profits 500
(ii) Exports 40
(iii) Compensation of employees 1,500
(iv) Gross national product at factor cost 2,800
(v) Net current transfers from rest of the world 90
(vi) Rent 300
(vii) Interest 400
(viii) Factor income to abroad 120
(ix) Net indirect taxes 250
(x) Net domestic capital formation 650
(xi) Gross fixed capital formation 700
(xii) Change in stock 50
Ans. Gross Domestic Product at Market Price
= Compensation of employees + Profits + Rent + Interest + Mixed income + Net
Indirect taxes + Consumption of fixed capital (Gross fixed capital formation
+ Change in stock – Net domestic capital formation)
= Rs 1,500 crore + Rs 500 crore +Rs 300 crore + Rs 400 crore + Rs 0 crore + Rs 250
crore + (Rs 700 crore + Rs 50 crore –Rs 650 crore)
= Rs 1,500 crore + Rs 500 crore + Rs 300 crore + Rs 400 crore + Rs 0 crore + Rs 250
crore + Rs 100 crore
= Rs 3,050 crore
Gross National Product at Market Price
= Gross national product at factor cost + Net indirect taxes
= Rs 2,800 crore + Rs 250 crore = Rs 3,050 crore
= Gross national product at market price – Gross domestic product at market price
= Rs 0 crore
Or, Factor Income from Abroad
= Net factor income from abroad + Factor income to abroad
= Rs 0 crore + Rs 120 crore
= Rs 120 crore
\ (a) Gross domestic product at market price = Rs 3,050 crore
(b) Factor income from abroad = Rs 120 crore.
SET–II
SECTION–A
1. Define an indifference curve. 1
Ans. Indifference curve is a curve showing different combinations of a set of 2-Goods, each
combination offering the same level of satisfaction to the consumer.
2. What is meant by normal good in economics? 1
Ans. Normal good is a good whose demand increases with rise in income and decreases with fall
in income of the consumer.
8. Given below is the cost schedule of a firm. Its total fixed cost is Rs 120. Calculate the
marginal cost and average variable cost at each level of output. 3
Average Total Cost (Rs) 160 96 80
Ans.
Output Average Total Fixed Total Cost Total Average Marginal
(Units) Total Cost Cost (Rs) Variable Variable Cost Cost
(Rs) (Rs) Cost (Rs) (Rs) (Rs)
1 160 120 160 40 40 40
2 96 120 192 72 36 32
3 80 120 240 120 40 48
10. Giving reason, distinguish between the behaviour of demand curves of firms under
perfect competition and monopolistic competition. 3
Ans. The demand curve of firms under perfect competition is perfectly elastic or a horizontal
straight line parallel to X-axis. A firm cannot influence or alter the price because due to
homogeneous product, uniform price prevails in the market. Implying that a firm can sell
any quantity at the given price. Therefore, the demand curve will be perfectly elastic,
showing Ed = ¥.
The demand curve of firms under monopolistic competition is less than perfectly elastic.
Under monopolistic competition, the seller sells a differentiated product, so he exercises
partial control over price. But he can sell more only by lowering the price; certainly not at
the existing price. This is what makes the demand curve less than perfectly elastic.
12. The price elasticity of demand of a commodity is (–) 1.5. When its price falls by Re 1 per
unit its quantity demanded rises by 3 units. If the quantity demanded before the price
change was 30 units, what was the price at this demand? Calculate. 4
Ans. Suppose the initial price be Rs X.
P = Rs X, DP = (–) Re 1
Q = 30 units, DQ = 3units
Ed = (–) 1.5
P DQ
Elasticity of Demand(Ed) = ´
Q DP
X 3
(–) 1.5 = ´
30 –1
3X
(–) 1.5 =
-30
3X = 45
45
X= = 15
3
\ Price before change = Rs15.
SECTION–B
18. Define tax. 1
Ans. A tax is a compulsory payment imposed by the government on the people of the country.
19. Give the meaning of marginal propensity to save. 1
DS
Ans. Marginal propensity to save is the ratio of change in saving to change in income. MPS = .
DY
23. Explain the ‘lender of the last resort’ function of the central bank. 3
Ans. The central bank also acts as lender of last resort for the other banks of the country. It means
that if a commercial bank fails to get financial accommodation from anywhere it can
against approved securities.
26. Distinguish between fixed and flexible foreign exchange rate. 3
Ans. Fixed rate of exchange is a rate fixed and determined by the government of a country, and
the government alone changes it.
different currencies in the foreign exchange market. Government of a country cannot
change the flexible rate of interest.
(i) There is an inverse relationship between the value of marginal propensity to save
and investment multiplier.
(ii) When the value of average propensity to save is negative, the value of marginal
propensity to save will also be negative.
Ans. (i) Yes, the statement is true. Marginal propensity to save (MPS) and multiplier are
negatively related. Higher the MPS, lower the multiplier and lower the MPS, higher
1
the multiplier, as K = . Saving (S) is a leakage in the circular flow of money. Greater
MPS
the S, greater the leakage. Accordingly, lesser the value of investment multiplier.
(ii) No, it is not true. The value of average propensity to save is negative when consumption
is greater than income but this does not mean that marginal propensity to save (MPS)
will also be negative. In fact MPS is never negative. Because it is the ratio between DS and
DY and DS can never be negative, as a component of DY.
32. From the following data calculate, (a) Gross domestic product at market price, and
(b) Factor income to abroad: 3 + 3 =6
(Rs in crore)
(i) Compensation of employees 1,000
(ii) Net exports (–)50
(iii) Profits 400
(iv) Interest 250
(v) Rent 150
(vi) Gross national product at factor cost 1,850
(vii) Gross domestic capital formation 220
(viii) Net fixed capital formation 150
(xi) Net indirect taxes 100
Ans. Gross Domestic Product at Market Price = Compensation of employees + Profits
+ Interest + Rent + Mixed income + Net indirect taxes + Consumption of fixed capital
[Gross domestic capital formation – (Net fixed capital formation + Change in stock)]
crore + [Rs 220 crore – (Rs 150 crore + Rs 20 crore)]
crore + Rs 50 crore
= Rs 1,950 crore
= Rs 1,950 crore
= Rs 0 crore
= Rs 30 crore
(a) Gross domestic product at market price = Rs 1,950 crore
SET–III
SECTION–A
1. Define an indifference map. 1
Ans. A set of indifference curves is known as indifference map.
2. When is the demand for a good said to be perfectly inelastic? 1
Ans. Demand for a good is perfectly inelastic when there is no change in quantity demanded in
response to any change in price of the good.
8. From the following cost schedule of a firm, calculate marginal cost and average variable
cost at each level of output. 3
Total Cost (Rs) 80 96 120
Average Fixed Cost (Rs) 60 30 20
Ans.
Output Total Average Total Fixed Total Average Marginal
(Units) Cost Fixed Cost Cost Variable Variable Cost
(Rs) (Rs) (Rs) Cost (Rs) Cost (Rs) (Rs)
1 80 60 60 20 20 20
2 96 30 60 36 18 16
3 120 20 60 60 20 24
10. Why is the demand curve more elastic under monopolistic competition than under
monopoly? Explain. 3
Ans. The demand curve under both the market structures, i.e., in monopoly and in monopolistic
competition, is downward sloping. However, the demand curve for a monopolistic
competitive firm is flatter, i.e., more elastic than the demand curve for a monopoly firm.
This is so because a product under monopolistic competition has a large number of close
substitutes while there are no close substitutes of a monopoly product.
12. Quantity demanded of a commodity rises by 6 units when its price falls by Re 1 per unit.
Its price elasticity of demand is (–) 1. If the price before the change was Rs 20 per unit,
calculate quantity demanded at this price. 4
Ans. Suppose the initial quantity demanded be X units.
P = Rs 20, DP = (–) Re 1, Q = X units, DQ = 6 units
Ed = (–) 1
P DQ
Q DP
20 6
(–) 1 = ´
X –1
120
(–) 1 =
-X
X = 120
SECTION–B
18. Give two examples of direct tax. 1
Ans. (i) Income tax (ii) wealth tax.
19. When is there the equilibrium level of national income? 1
Ans. When AS = AD, of when S = I there is equilibrium level of national income.
23. Explain the meaning of cash reserve ratio and statutory liquidity ratio. 3
Ans. Cash reserve ratio is the minimum percentage of a bank’s total demand deposits which the
banks are required to keep as reserves with the central bank.
Every bank is required to maintain a fixed percentage of its assets in the form of cash or
other liquid assets. It is called statutory liquidity ratio.
26. Explain the meaning of the managed flexible foreign exchange rate. 3
Ans. Managed floating is a system that allows adjustments in exchange rate according to a set of
rules and regulations which are officially declared in the foreign exchange market. There is
no pre-defined range of adjustment. Also, there is no pre-defined time of adjustment.
Adjustment is allowed entirely on the merits of a case. It is for the managing authority to
allow or reject an appeal for adjustment.
(i) If the ratio of marginal propensity to consume and marginal propensity to save is
4 : 1, the value of investment multiplier will be 4.
(ii) Sum of average propensity to consume and marginal propensity to consume is
always equal to 1.
Ans. (i) False. Because, if the ratio of marginal propensity to consume and marginal propensity
to save is 4:1, MPC will be 0.8 and investment multiplier (K) will be
1 1 1
K= = = =5
1 - MPC 1 - 0.8 0.2
Given, MPC : MPS = 4 : 1
(Let us assume that MPC = 4x and MPS = 1x
We know, MPC + MPS = 1
Þ 4x + 1x = 1
Þ 5x = 1
1
Þ x = = 0.2
5
\ MPC = 4 × 0.2
= 0.8)
(ii) False. Sum of average propensity to consume and average propensity to save as well as
sum of marginal propensity to consume and marginal propensity to save is always
equal to one (1). There is no fixed relationship between APC and MPC.
32. From the following data calculate (a) Gross domestic product at market price, and
(b) Factor income from abroad: 3+3=6
(Rs in crore)
(i) Gross national product at factor cost 6,150
(ii) Net exports (–) 50
(iii) Compensation of employees 3,000
(iv) Rent 800
(v) Interest 900
(vi) Profit 1,300
(vii) Net indirect taxes 300
(viii) Net domestic capital formation 800
(ix) Gross fixed capital formation 850
(x) Change in stock 50
(xi) Dividend 300
(xii) Factor income to abroad 80
Ans. Gross Domestic Product at Market Price
= Compensation of employees + Rent + Interest + Profit + Mixed income + Net
indirect taxes + Consumption of fixed capital (Gross fixed capital formation + Change
in stock – Net domestic capital formation)
= Rs 3,000 crore + Rs 800 crore + Rs 900 crore + Rs 1,300 crore + Rs 0 crore + Rs 300
crore + (Rs 850 crore + Rs 50 crore – Rs 800 crore)
= Rs 3,000 crore + Rs 800 crore + Rs 900 crore + Rs 1,300 crore + Rs 0 crore + Rs 300
crore + Rs 100 crore
= Rs 6,400 crore
= Rs 6,450 crore
= Rs 50 crore

Or, Factor Income from Abroad
= Net factor income from abroad + Factor income to abroad
= Rs 50 crore + Rs 80 crore
= Rs 130 crore
(a) Gross domestic product at market price = Rs 6,400 crore
(b) Factor income from abroad = Rs 130 crore.
Foreign
(iv) Question Nos. 6 - 10 and 22 - 26 are short-answer questions carrying 3 marks each. Answers to them
SET–I
SECTION–A
1. Give the meaning of marginal utility. 1
Ans. Marginal utility is the utility derived from an additional unit of a commodity.
MUn = TUn – TUn–1
2. What is meant by demand in economics? 1
Ans. Demand refers to the desire to buy a commodity backed by willingness and ability to
purchase that commodity, at a given point of time and at a given price.
3. Under which market form is the product homogeneous? 1
Ans. The product is homogeneous in perfectly competitive market.
Ans. Monopoly is a market form with a single seller and many buyers of a commodity.
5. In which market form is a firm a price taker? 1
Ans. A firm is a price taker under perfectly competitive market.
6. Explain two causes of ‘decrease’ in demand of a commodity.
Or
Explain the conditions of consumer’s equilibrium using utility approach (in case of two
commodities). 3
Ans. Two causes of decrease in demand of a commodity are:
consumer. Decrease in income causes a fall in demand of the good and hence a leftward
shift of the demand curve.
(ii) Price of Related Goods: In case of substitute goods, demand for a commodity falls with
fall in price of the substitute good. Accordingly, demand curve shifts to the left. In case
of complementary goods, demand for a commodity falls with a rise in the price of
complementary good. Accordingly, demand curve shifts to the left.
Or
In case of two commodities, consumer attains equilibrium when:
MU X MU Y
= = MU M
PX PY
æ MU X MU Y ö
è PX PY ÷ø
7. Distinguish between ‘increase in demand’ and ‘increase in quantity demanded’. 3
Ans.
Increase in Demand Increase in Quantity Demanded

1. Increase in demand refers to increase in 1. Increase in quantity demanded refers
purchase of a commodity at its existing to increase in purchase of a commodity
price. due to a fall in its price.
2. Increase in demand occurs due to 2. Increase in quantity demanded occurs
forward shift in demand curve. downward movement on the same
demand curve.
8. When the price of a commodity rises from Rs 4 per unit to Rs 5 per unit, total revenue
increases from Rs 600 to Rs 750. Calculate its price elasticity of supply. 3
Ans. Given, P = Rs 4, P1 = Rs 5, DP = P1 - P
= Rs 5 – Rs – 4
= Re 1
When P = Rs 4, total revenue (P × Q) = Rs 600
600
\ Quantity Supplied (Q) = = 150
4
When P1 = Rs 5, total revenue (P1 ´ Q1 ) = Rs 750

750
\ New Quantity Supplied (Q1 ) = = 150
5
Q = 150 units, Q1 = 150 units, DQ = Q1 - Q
= 150 – 150
=0
P DQ
Price Elasticity of Supply (Es) = ´
Q DP
4 0
= ´ =0
150 1
\ Price elasticity of supply = 0 (Zero).
9. Total fixed cost of a firm is Rs 60. Given below is its average variable cost schedule.
Calculate its marginal cost and average total cost at each level of output. 3
Ans.
Output Average Total Average Total Marginal Average
(Units) Variable Fixed Cost Fixed Cost Variable Cost Total Cost
Cost (Rs) (Rs) (Rs) Cost (Rs) (Rs) (Rs)
1 20 60 60 20 20 80
2 16 60 30 32 12 46
3 18 60 20 54 22 38
10. Explain how firms are interdependent in an oligopoly market. 3

Ans. Under oligopoly there is a high degree of interdependence between the firms. Price and
output policy of one firm has a significant impact on the price and output policy of the rival
firms in the market. When one firm lowers its price, the rival firms may also lower the price.
And, when one firm raises the price, the rival firms may not do so. Accordingly, it becomes
very difficult to estimate change in firm’s sales caused by a change in price. Implying that a
precise relationship between price and sales cannot be established. Or, that the firm’s
demand curve cannot be drawn.
11. Explain the problem of for whom to produce.
Or
Giving suitable examples, explain the meaning of microeconomics and macroeconomics. 4
Ans. The problem of ‘for whom to produce’ is a problem relating to choice of users of the goods
and services. Should we produce for those who can pay high price? If yes is the answer, we
shall end up producing goods and services for a relatively richer section of the society or
that of the poor would stagnate or deteriorate further. As such, the gulf between rich and
the poor would keep on widening which no welfare state can afford to accept. On the other
hand, if goods are produced for the poor only, they may not afford to buy, reducing profits
of the producers. When producers do not earn profits, where will investment come from?
Accordingly, the level of production would shrink and quality of life of the entire
population would suffer.
Or
Microeconomics studies economic relationships or economic problems at the level of an
individual– an individual firm, an individual household or an individual consumer.
Microeconomics is concerned with determination of output and price for an individual
firm or industry. Examples: Consumption and saving pattern of the households,
distribution of income and wealth.
Macroeconomics studies economic relationships or economic problems or economic
issues at the level of the economy as a whole. Macroeconomics is concerned with
determination of aggregate output and a general price level in the economy as a whole.
Examples: Aggregate saving, aggregate investment, general price level.
12. The quantity demanded of a commodity falls by 5 units when its price rises by Re 1 per
unit. Its price elasticity of demand is (–) 1.5. Calculate the price before change if at this
price quantity demanded was 60 units. 4
Ans. Let the price before change = Rs X.
Given, P = Rs X, DP = Re 1
Q = 60 units, DQ = (–) 5 units
Ed = (–) 1.5
P DQ
Q DP
X –5
(–) 1.5 = ´
60 1
-5X
(–) 1.5 =
60
5X = 90
90
X=
5
= 18
\ Price before change = Rs 18.
13. How is the equilibrium price of a commodity affected by a rise in the prices of its
substitutes? Explain the chain of effects. 4
Ans. An increase in the prices of substitutes of a commodity means increase in its demand.
Accordingly, demand curve DD as shown in Fig. 1, shifts rightwards to D1D1 . Refer Fig. 1.
Initially equilibrium is struck at point E with OP and OQ level of equilibrium price and
equilibrium quantity respectively. With an increase in the prices of substitutes of a
commodity, new equilibrium is attained at point E1 . The equilibrium price increases from
OP to OP1 and equilibrium quantity increases from OQ to OQ1 , other things remaining
unchanged. (Assumption: Supply and other factors affecting demand remain unchanged.)
Y
Fig. 1 D1
S
D
P1 E1
PRICE
P E
D1
S
D
X
O Q Q1
QUANTITY
14. Explain consumer’s equilibrium with the help of indifference curves approach. Use
diagram. 6
given income on different goods and services at given price.
P
MRS (Marginal rate of substitution) = X (Slope of the price line).
PY
Fig. 2 illustrates this situation.
Fig. 2 Y
P
GOOD-Y
L Q
IC
O X
M P
GOOD-X
Q is the point of equilibrium. Here, IC and price line (PP) are tangent to each other. Or, it is
here that the slope of IC = slope of price line. Or, it is here that:
P
MRS (indicated by the slope of IC) = X (indicated by the slope of price line).
PY
equilibrium. Give reasons for your answer. (Use total revenue and total cost approach.)
Output (Units) Marginal Revenue (Rs) Total Cost (Rs)

1 8 6
2 6 11
3 4 15
4 2 18
5 0 23
Or
What type of changes take place in total product and marginal product when there are
(a) increasing returns to a factor?
(b) diminishing returns to a factor?
Why do these changes take place? 6
Ans.
Output Marginal Total Cost Total Revenue Profit
(Units) Revenue (Rs) (TC) (Rs) (TR) (Rs) ( p = TR - TC)
(Rs)
1 8 6 8 2
2 6 11 14 3
3 4 15 18 3
4 2 18 20 2
5 0 23 20 –3
Producer is in equilibrium at 3rd unit of output.

Reason: Profit is maximum at output level of 3rd unit. At this level, the difference between
TR and TC is maximum, i.e., 3 and thereafter starts falling. Therefore, producer’s
equilibrium is at 3rd unit of output.
Or
(a) When there are increasing returns to a factor, total product increases at an increasing
rate and marginal product also rises in this case. This change occurs owing to the
following reasons:
(i) Greater application of the variable factor ensures better utilisation of the fixed
factor.
(ii) Greater application of the variable factor facilitates better division of labour, and
(iii) Greater application of the variable factor improves co-ordination between the
factors.
(b) When there are diminishing returns to a factor, total product increases at a decreasing
rate and marginal product starts declining in this case. Reasons for this kind of change
are as follows:
(i) Fixity of the Factor: As more and more units of a variable factor are combined with
the fixed factor, the latter gets over-utilised. Hence, the diminishing returns.
(ii) Factors of production are imperfect substitutes of each other.
(iii) The coordination between factors gets distorted so that marginal product of the
variable factor declines.
16. Explain the relationship between:
(a) Marginal revenue and Total revenue.
(b) Marginal revenue and Average revenue. 6
Ans. (a) Relationship between Marginal Revenue (MR) and Total Revenue (TR):
(i) When MR is positive and constant, TR should increase at a constant rate.
(ii) When MR is falling, TR should increase at a decreasing rate.
(iii) When MR is zero, TR should be maximum.
(iv) When MR is negative, TR starts declining.
(b) Relationship between Marginal Revenue (MR) and Average Revenue (AR):
(i) When average revenue is constant, it is equal to marginal revenue, as under perfect
competition.
(ii) When average revenue is diminishing, it is greater than marginal revenue. It is true
in situations of monopoly and monopolistic competition.
(iii) Marginal revenue can be zero or negative but not the average revenue.
SECTION-B
17. Give the meaning of autonomous consumption. 1
Ans. Consumption at zero income level is known as autonomous consumption.
18. What is meant by ex-ante investment? 1
Ans. Ex-ante investment refers to desired (or planned) investment corresponding to different
income levels in the economy.
19. Give two examples of non-tax revenue? 1
Ans. Interest and Dividends are the two examples of non-tax revenue.
20. Give the meaning of foreign exchange rate. 1
Ans. The rate at which one currency exchanges for the other currency in the international
foreign exchange market is known as exchange rate.
22. Distinguish between stocks and flows. Give an example of each.
Or
Explain the circular flow of income. 3
Ans.
Stocks Flows
1. Stock is that quantity of an economic variable 1. Flow is that quantity of an economic variable
which is measured at a particular point of which is measured during the period of
time. time.
2. Stock has no time dimension. 2. Flow has time dimension as per hour, per
day, per month.
3. Stock is a static concept. 3. Flow is a dynamic concept.
4. Examples: Quantity of money, wealth. 4. Examples: Consumption, investment.
Or
The unending flow of production, income generation and expenditure involving different
sectors of the economy, is known as circular flow of income. Production gives rise to income,
income gives rise to demand for goods and services, and demand in turn gives rise to
expenditure. Expenditure leads to further production. Thus, the flow of production,
income and expenditure becomes circular with no beginning or no end. This flow is shown in
Fig 3.
Fig. 3 Production
Expenditure
In c o m e
Circular Flow
of Income
23. Distinguish between cash reserve ratio and statutory liquidity ratio. 3
Every bank is required to maintain a fixed percentage of its assets in the form of cash or
other liquid assets, called statutory liquidity ratio.
24 Explain the two components of the government budget. 3

Ans. Two components of the government budget are:
(i) Revenue Budget: Revenue budget is the statement of estimated revenue receipts and
estimated revenue expenditure during a fiscal year.
(ii) Capital Budget: Capital budget is the statement of estimated capital receipts and
estimated capital expenditure during a fiscal year.
25. Distinguish between fixed and flexible foreign exchange rate. 3
Ans. Fixed rate of exchange is a rate determined by the government of a country, and the
government alone can change it.
26. Distinguish between balance of trade and balance on current account. 3
Ans. Balance of trade account includes only visible items of trade. It is defined as the difference
Balance of trade account = Export of visible items – Imports of visible items
27. Explain any two functions of money. 4
Ans. Two functions of money are as follows:
(i) Medium of Exchange: It means that money acts as a medium for the sale and purchase
of goods and services. Exchange was difficult under the barter system. Introduction of
money has separated the acts of sale and purchase. Exchange is now much simpler, and is
therefore unlimited. This has raised the overall level of economic activity in an economy.
(ii) Standard of Deferred Payments: Deferred payments refer to those payments which
are made in future. Money is accepted as a standard of deferred payments because,
(a) its price remains stable, (b) it has general acceptability, (c) it is more durable
compared to other commodities.
28. Explain with the help of suitable examples the basis of classifying taxes into direct and
indirect taxes.
Or
Explain the objective of stability of prices of government budget. 4
Ans. A direct tax is a tax the final burden of which falls on those on whom it is legally imposed and
the impact of which cannot be shifted. For example, income tax is imposed on the income of
a person and he himself bears its burden.
On the other hand, indirect taxes are those taxes which are paid to the government by one
person but their burden is borne by another person. For example, VAT is paid by the
shopkeeper to the government but usually recovers it from the customers as a part of price
of the commodity sold. So, impact of VAT is ultimately shifted to the consumers.
Or
Free play of market forces (or the forces of supply and demand) are bound to generate
trade cycles, also called business cycles. These refer to the phases of recession, depression,
recovery and boom in the economy. The government of a country is always committed to
save the economy from instability. Budget is used as an important policy instrument to
combat the situations of deflation and inflation. By doing it, the government tries to achieve
the state of economic stability. Economic stability stimulates the inducement to invest and
increases the rate of growth and development.
(a) When investment multiplier is 1, the value of marginal propensity to consume is
zero.
(b) The value of average propensity to save can never be greater than 1.
Ans. (a) Yes, the statement is true. When investment multiplier is 1, marginal propensity to
consume is zero.
We know that,
1
Multiplier (K) =
1 - MPC
1
1=
1 - MPC
1 – MPC = 1
MPC = 1 – 1
=0
(b) True. The value of average propensity to save can never be greater than 1 because even
when all the income is saved and nothing is spent on consumption, saving will be equal
to income. In this case, average propensity to save (APS) will be equal to 1 and not
greater than 1.
30. Distinguish between real gross domestic product and nominal gross domestic product.
Can gross domestic product be used as an index of welfare of the people? Give two
reasons.
Or
How will you treat the following in estimating national income of India? Give reasons for
your answer. 6
(i) Value of bonus shares received by shareholders of a company.
(ii) Fees received from students.
(iii) Interest received on loan given to a foreign company in India.
Often gross domestic product (GDP) is considered as an index of welfare of the people, but
there are strong exceptions to this generalisation. Following are the reasons:
(i) If with every increase in the level of GDP, distribution of GDP is getting more unequal,
welfare level of the society may not rise. Only fewer people tend to benefit from an
unequal distribution. Hence, the gulf between haves and have-nots may increase
which results in lesser welfare of the society.
(ii) Composition of GDP may not be welfare oriented even when the level of GDP tends to
rise. There is no direct increase in the welfare of the masses if GDP has risen owing
largely to the increase in the production of defence goods.
Or
(i) Value of bonus shares received by shareholders of a company is not included in the
estimation of national income of India because no goods and services are added by
these shares.
(ii) Fees received from students is not included in the estimation of national income of
India because fees are paid out of the income of the parents which is already included
in the national income of India and hence not to be included separately in national
income of India.
(iii) Interest received on loan given to a foreign company in India is included in estimating
national income of India as a part of net factor income from abroad.
31. Calculate (a) Gross domestic product at factor cost, and (b) factor income to abroad, from
the following data: 3+3=6
(Rs in crore)
(i) Gross national product at factor cost 3,750
(ii) Compensation of employees 2,000
(iii) Net exports (–) 50
(iv) Profit 700
(v) Net domestic capital formation 1,000
(vi) Opening stock 150
(vii) Closing stock 200
(viii) Gross fixed capital formation 1,050
(ix) Interest 600
(x) Rent 400
(xi) Factor income from abroad 20

= Compensation of employees + Profit + Interest + Rent + Mixed income +
Consumption of fixed capital (Gross fixed capital formation + Change in stock – Net
domestic capital formation)
= Rs 2,000 crore + Rs 700 crore + Rs 600 crore + Rs 400 crore + Rs 0 crore + [Rs 1,050
crore + (Rs 200 crore – Rs 150 crore) – Rs 1,000 crore]
= Rs 2,000 crore + Rs 700 crore + Rs 600 crore + Rs 400 crore + Rs 0 crore + Rs 100 crore
= Rs 3,800 crore
= – Rs 50 crore
= Rs 20 crore – (– Rs 50 crore)
= Rs 70 crore
(a) Gross domestic product at factor cost = Rs 3,800 crore
32. In an economy the consumption function is C = 500 + 0.75Y where C is consumption
expenditure and Y is income. Calculate the equilibrium level of income and
consumption expenditure when investment expenditure is 5,000. 6
Ans. Given, C = 500 + 0.75Y
I = 5,000
At equilibrium, Y = C + I
Y = 500 + 0.75Y + 5,000
Y = 5,500 + 0.75Y
Y – 0.75Y = 5,500
0.25Y = 5,500
5,500
Y=
0.25
Y = 22,000
When Y = 22,000, C = 500 + 0.75 (22,000)
= 500 + 16,500 = 17,000
Equilibrium level of income = 22,000
Equilibrium level of consumption expenditure = 17,000.
SET–II
SECTION–A
7. Explain the chain of effects of rise in price of related goods on the demand of a
commodity. 3
Ans. Related goods are of two types: Substitute goods and complementary goods. In case of
substitute goods, demand for a commodity rises with rise in price of the substitute
commodity. Accordingly, demand curve DD as shown in Fig. 4 shifts rightward to D1D1, the
equilibrium price increases from OP to OP1 and equilibrium quantity increases from OQ to
OQ1. In case of complementary goods, demand for a commodity falls with rise in price of
the complementary commodity. Accordingly, demand curve DD as shown in Fig. shifts
leftward to D2D2, the equilibrium price decreases from OP to OP2 and equilibrium quantity
decreases from OQ to OQ2. (Assumption: Supply and other factors affecting demand
remained unchanged.)
Y
Fig. 4
S
D
D2
P1 E1
PRICE
P E
P2 E2
S D1
D
D2
O X
Q2 Q Q1
QUANTITY
8. From the following schedule, calculate the price elasticity of supply: 3

Price per unit (Rs) Total Revenue (Rs)
4 800
5 1,200
Ans. Given, P = Rs 4, P1 = Rs 5, DP = P1 - P
= Rs 5 – Rs 4
= Re 1
When P = 4, total revenue (P × Q) = 800
800
4
When, P = 5, total revenue (P1 ´ Q1 ) = 1,200

1,200
\ New Quantity Supplied (Q1 ) =
5
= 240
Q = 200 units, Q1 = 240 units, DQ = Q1 - Q
= (240 – 200) units
= 40 units
P DQ
Q DP
4 40
= ´
200 1
= 0.8
9. From the following cost schedule of a firm, calculate marginal cost and average total cost
at each level of output. Fixed cost is Rs 120. 3
Ans.
Output Average Total Average Total Marginal Average
(Units) Variable Fixed Cost Fixed Cost Variable Cost Total Cost
Cost (Rs) (Rs) (Rs) Cost (Rs) (Rs) (Rs)
1 40 120 120 40 40 160
2 32 120 60 64 24 92
3 36 120 40 108 44 76
12. Price elasticity of demand of a commodity is – 0.5. Its quantity demanded falls by 5 units
when its price rises by Re 1 per unit. Calculate the quantity demanded if the price before
the change is Rs 5 per unit. 4
Ans. Let the initial quantity demanded be X units.
Given, P = Rs 5, DP = Re 1
Q = X units, DQ = (–)5 units
Ed = – 0.5
P DQ
Price Elasticity of Demand = ´
Q DP
5 –5
–0.5 = ´
X 1
-25
–0.5 =
X
X = 50
\ Quantity demanded before the change in price = 50 units.
13. Explain the chain of effects of an ‘increase’ in supply of a commodity on its equilibrium
price.
Ans. Effect of increase in supply of a commodity on its equilibrium price is discussed with
reference to the following figure:
In Fig. 5, E is the initial equilibrium where supply and demand curves intersect each other.
OQ is the equilibrium quantity and OP is the equilibrium price.
Y
Fig. 5
D S
S1
P E
PRICE
P1 E1
S
D
S1
O X
Q Q1
QUANTITY
Increase in supply implies a shift in supply curve to the right. It is indicated by S1S1. Now
new equilibrium is determined at E1. Corresponding to it, equilibrium price decreases from
OP to OP1.
Hence the conclusion that when supply for a commodity increases, equilibrium price tends
to decrease, other things remaining constant.
SECTION–B
26. Distinguish between current account and capital account of balance of payments
account. 3
Ans. Current account of balance of payments is that part of BoP accounts which records items of:
(i) export and imports of goods (visibles).
(ii) export and import of services (invisibles).
(iii) unilateral transfers.
Capital account of balance of payments is that part of BoP accounts which records items of:
(i) official transaction affecting assets and liabilities of the government.
(ii) private transactions affecting asset liability status of the individual households and
private business enterprises.
27. State the functions of money. Explain any one of them. 4

Ans. The functions of money are as follows:
(i) Money serves as a medium of exchange
(ii) Money is a measure of value or unit of value
(iv) Money is a standard for deferred payments.
Store of Value: Store of value implies store of wealth. Storing wealth has become considerably
easy with the introduction of money. It was not convenient to store value in the barter
system of exchange, because goods tend to wear-out or perish. On the other hand, it is
convenient to store value in terms of money because (a) money has the merit of general
acceptability, (b) value of money remains relatively stable compared to other commodities,
(c) storage of money does not need much space. Store of value is also called asset function
of money.
consumption expenditure when investment expenditure is 500. 6
Ans. Given, C = 600 + 0.9Y
I = 500
Y = 600 + 0.9Y + 500
Y = 1,100 + 0.9Y
Y– 0.9Y = 1,100
0.1Y = 1,100
1100
,
Y=
01
.
= 11,000
When Y = 11,000, C = 600 + 0.9 (11,000)
= 600 + 9,900
= 10,500
SET–III
SECTION–A
7. Explain the chain of effects of increase in income of buyers of a commodity on its
demand. 3
Ans. For a normal commodity, an increase in the income of its buyers means increase in its
demand. Accordingly, demand curve DD as shown in Fig. 6, shifts rightward to D1D1 . Refer
Fig. 6. Initially equilibrium struck at point E with OP and OQ level of equilibrium price and
equilibrium quantity respectively. With an increase in income of the buyers of the normal
commodity, the new equilibrium is attained at point E1. The equilibrium price increases
from OP to OP1 , and equilibrium quantity increases from OQ to OQ1 other things
remaining unchanged. (Assumption: Supply and other factors affecting demand
remained unchanged.)
Y
Fig. 6
D1
S
D
P1 E1
PRICE
P E
S D1
D
O X
Q Q1
QUANTITY
8. From the following schedule, calculate the price elasticity of supply: 3
Price per unit (Rs) Total Revenue (Rs)

5 800
6 1,200
Ans. Given, P = Rs 5, P1 = Rs 6, DP = Rs 6 – Rs 5
= Re 1
When P = 5, total revenue (P × Q) = 800
800
5
When, P = 6, total revenue (P1 ´ Q1 ) = 1,200
1,200
\ New Quantity Supplied (Q1 ) = = 200
6
Q = 160, Q1 = 200, DQ = Q1 - Q
= 200 – 160
= 40
P DQ
Q DP
5 40
= ´
160 1
= 1.25
9. Given below is the cost schedule of a firm. Its total fixed costs are Rs 90. Calculate
marginal cost and total cost at each level of output. 3
Ans.
Output Average Total Fixed Total Marginal Total
(Units) Variable Cost Variable Cost Cost
Cost (Rs) (Rs) Cost (Rs) (Rs) (Rs)
1 30 90 30 30 120
2 24 90 48 18 138
3 27 90 81 33 171
12. Price elasticity of demand of a commodity is (–) 0.75. When its price falls by Re 1 per unit
its quantity demanded rises by 4 units. Calculate its quantity demanded if the price
before the change was Rs 12 per unit. 4
Ans. Suppose the initial quantity demanded is X units.
Given, P = Rs 12, DP = (–) Re 1
Q = X units, DQ = 4 units
Ed = (–) 0.75
P DQ
Price Elasticity of Demand = ´
Q DP
12 4
(–) 0.75 = ´
X –1
48
(–) 0.75 =
–X
X = 64
\ Quantity demanded before the change in price = 64 units.
13. Explain the chain of effects of ‘decrease’ in supply of a commodity on its equilibrium
price and quantity. 4
Ans. Effect of decrease in supply of a commodity on its equilibrium price and equilibrium
quantity is discussed with reference to Fig. 7.
Y
Fig. 7
D S1
S
P1 E1
PRICE
P E
S1
D
S
O X
Q1 Q
QUANTITY
In Fig. 7, E is the initial equilibrium where supply and demand curves intersect each other.
OQ is the equilibrium quantity and OP is the equilibrium price.
Decrease in supply implies a shift in supply curve to the left. It is indicated by S1S1. Now new
equilibrium is determined at E1. Corresponding to it, equilibrium quantity decreases from
OQ to OQ1. Equilibrium price increases from OP to OP1.
Hence, the conclusion that when supply for a commodity decreases, equilibrium price
tends to increase but equilibrium quantity tends to decrease, other things remaining
constant.
SECTION–B
26. Explain two sources each of demand and supply of foreign exchange. 3
Ans. Two sources of demand for foreign exchange are as follows:
Two sources of supply of foreign exchange are as follows:
(i) Direct purchases of goods and services by the non-residents in the domestic market.
(ii) Speculative trading in domestic currency (implying purchase of domestic currency
through foreign exchange) by the non-residents in the domestic market.
27. How does money overcome the main problem of exchange in the barter system? Explain.
4
Ans. Medium of exchange is an important function of money. It means that money acts as an
intermediary for the goods and services in exchange transactions. Use of money as a
medium of exchange has removed the major difficulty of double coincidence of wants in the
barter system. In the monetary system, act of sale and purchase of the goods and services is
separated from each other. If one wants to buy goods, he can do so with money, and if one
wants to sell goods, he can sell these for money.

consumption expenditure when investment expenditure is 500. 6
Ans. Given, C = 500 + 0.8Y
I = 500
Y = 500 + 0.8Y + 500
Y = 1,000 + 0.8Y
Y – 0.8Y = 1,000
0.2Y = 1,000
1,000
Y=
0.2
= 5,000
When Y = 5,000, C = 500 + 0.8 (5,000)
= 500 + 4,000
= 4,500
DELHI
(iii) Question No. 1 - 5 and 17 - 21 are very short-answer questions carrying 1 mark each. They are required to
(iv) Question No. 6 - 10 and 22 - 26 are short-answer questions carrying 3 marks each.
(v) Question No. 11 - 13 and 27 - 29 are also short-answer questions carrying 4 marks each. Answers to them
(vi) Question No. 14 - 16 and 30 - 32 are long-answer questions carrying 6 marks each. Answers to them
SET–I
SECTION–A
1. What is a market economy? 1
Ans. A market economy is the one in which decisions regarding ‘what, how and for whom to
produce’ are governed by the market forces of supply and demand.
2. When is a firm called ‘price-taker’? 1
Ans. A firm is called ‘price-taker’ when it sells its output at the given price as determined by the
market forces of supply and demand.
3. Define budget set. 1
Ans. Budget set is the attainable combinations of a set of two goods, given the prices of goods and
income of the consumer.
4. What is meant by‘increase’ in supply? 1
Ans. Increase in supply refers to increase in quantity supplied of a commodity at its existing
price. It implies a shift in supply curve to the right.
5. Define supply. 1
Ans. Supply refers to various quantities of a commodity that a seller is willing to sell
corresponding to different possible prices at a given point of time.
6. Why is a production possibilities curve concave? Explain. 3

Ans. Production possibility curve is concave to its origin because marginal opportunity cost
æ D loss of Y ö
ç ÷
ç D gain of X ÷ of shifting resources from commodity Y to commodity X tends to rise. And,
è ø
marginal opportunity cost tends to rise because of the law of diminishing returns. When
more and more resources are applied to X, additional gain of output (per unit of input)
tends to decrease; and as more and more resources are withdrawn from Y, additional loss of
output tends to rise.
7. 8 units of a good are demanded at a price of ` 7 per unit. Price elasticity of demand is (–)1.
How many units will be demanded if the price rises to ` 8 per unit? Use expenditure
approach of price elasticity of demand to answer this question. 3
Ans.
(`) (Units) (`)
7 8 56
8 7 56
Given, Ed = (–) 1.
When price rises to ` 8 per unit, quantity demanded will be 7 units. In this case, when
elasticity of demand is (–) 1, total expenditure will remain constant, i.e., ` 56. In other words,
rise or fall in price of a commodity make no change in its total expenditure.
8. Giving examples, explain the meaning of cost in economics. 3
Ans. Cost is the expenditure incurred by the producer on account of the production of a
commodity. Often, costs are split as fixed costs and variable costs. Fixed costs remain fixed
irrespective of the level of output. Example: Cost incurred on the installation of plant and
machinery. Variable costs rise when the level of output rises, and fall when the level of
output falls. Example: Cost incurred on the purchase of raw material. Costs are also
classified as explicit costs and implicit costs. Explicit costs refer to expenditure incurred on
the purchase of inputs from the market. Example: Purchase of cloth by the Garment
factory. Implicit costs are incurred on account of the use of self-owned inputs. Example:
Use of family labour.
9. Draw average revenue and marginal revenue curves in a single diagram of a firm which
can sell more units of a good only by lowering the price of that good. Explain. 3
Ans. Fig. 1 represent average and marginal revenue curves of a firm which are downward
sloping. It means that if the seller intends selling more units of the commodity, he will
have to lower the price. Hence, a downward sloping AR curve of a firm. In case, AR slopes
downward, MR slopes downward faster than AR. In case of a straight line AR curve
(sloping downward, as in Fig. 1), slope of MR curve will be twice the slope of AR curve.
Such situations are found when there is monopoly and monopolistic competition in the
market.
Fig. 1 Y
REVENUE
A B C
Note: AB = BC, implying

AR that the slope of MR is
twice the slope of AR.
MR
O X
OUTPUT
10. Explain the implication of ‘freedom of entry and exit to the firms’ under perfect competition.
Or
Explain the implication of ‘perfect knowledge about market’ under perfect competition.
3
Ans. (i) In case of perfect competition, a firm can enter or leave the industry in the long run. By
definition, short period is too short for the new firms to enter the industry or for the
existing firms to leave the industry.
(ii) Because of free entry and exit, firms in the long run earn only normal profits (TR = TC or
AR = AC). In case extra-normal profits are earned, new firms will join the industry.
Market supply will increase. Market price will fall. Extra-normal profits will be wiped out.
In case of extra-normal losses, some of the existing firms will leave the industry. Market
supply will decrease. Market price will increase. Extra-normal losses will be wiped out.
Or
Under perfect competition, buyers and sellers are fully aware of the price prevailing in the
market. They are also aware of the fact that homogeneous product is being sold by all the
firms. The buyers would not pay a price higher than the price dictated by the market. The
sellers would not sell at a price below than that dictated by the market. Accordingly, uniform
price prevails in the market. Price discrimination and exploitation of the consumers are
ruled out.
11. A consumer consumes only two goods X and Y. State and explain the conditions of
consumer’s equilibrium with the help of utility analysis. 4
In case of two commodities, consumer attains equilibrium when:
MU X MU Y
= = MU M
PX PY
æ MU X MU Y ö
è PX PY ÷ø
12. Explain how the demand for a good is affected by the prices of its related goods. Give
examples. 4
Ans. Related goods are of two types:
(i) Substitute goods, and (ii) Complementary goods.
(i) Substitute Goods: When price of the substitute goods increases, demand curve for
Good-X shifts to the right, implying quantity demanded increases from PK to PS even
when price of Good-X continues to be OP and vice versa.
(ii) Complementary Goods: When price of the complementary goods increases, demand
curve for Good-X shifts to the left, implying quantity demanded decreases from PK to
PL even when price of Good-X continues to be OP and vice versa.
Fig. 2 illustrates the effect of change in price of the related goods.
Y
D1
Fig. 2 D2
D
Initial demand curve
PX
L K S
P
Demand curve shifts to the right
Demand curve
(from DD to D1D1) when price of the
shifts to the left
substitute good increases
(from DD to D2D2)
when price of the
complementary good D1
D2 D
increases
O X
QX
13. Define ‘Market-supply’. What is the effect on the supply of a good when Government
imposes a tax on the production of that good? Explain.
Or
What is a supply schedule? What is the effect on the supply of a good when Government
gives a subsidy on the production of that good? Explain. 4
Ans. Market supply refers to supply of a good by all the firms in the market.
When government imposes a tax on the production of the good, marginal and average costs of
the production tend to rise. Accordingly, producers will supply less of the good at the existing
price, or they will sell the same quantity only at a higher price. This implies a backward shift in
supply curve or decrease in supply as shown in Fig. 3. S1S1 is the initial supply curve. When
government imposes tax, supply curve will shift backward from S1S1 to S2S2.
Fig. 3 Y
Supply curve S2
after tax S1
Supply curve
PRICE
before tax
K
P T
S2
S1
O X
QUANTITY
Or
Supply schedule is a table showing different quantities of a commodity offered for sale
corresponding to different possible prices of that commodity.
When government gives a subsidy on the production of a good, marginal and average costs
of the production tend to fall. Accordingly, supply curve shift forward or to the right
implying more supply at the same price or same supply at the lower price. Fig. 4 illustrates
this situation. S1S1 is the initial supply curve. When government gives subsidy, supply curve
will shift forward from S1S1 to S2S2.
Y
Fig. 4
Supply curve S1
before subsidy S2
Supply curve
after subsidy
PRICE
P
T K
S1
S2
O X
QUANTITY
14. What is meant by producer’s equilibrium? Explain the conditions of producer’s

equilibrium through the ‘total revenue and total cost’ approach. Use diagram. 6
Ans. Producer is said to be in equilibrium when he maximises his profits. It happens when the
difference between TR and TC is maximised.
Fig. 5 illustrates this situation:
Fig. 5 Y TC
(a)
A b
COST, REVENUE
a TR
AND PROFIT
d Note: The difference between TR and TC
c B is maximum only when MR = MC
P
X
O Q1 Q Q2
TP
OUTPTUT
In the figure, AB is the maximum possible distance. Here, both the conditions of producer’s
equilibrium are satisfied: (i) MR = MC (because slope of TC = slope of TR, ab being parallel
to cd) and (ii) MC is rising (because TC is increasing at the increasing rate). Thus, QP
indicates the highest possible profit corresponding to the point of equilibrium. OQ is the
equilibrium level of output.
15. Explain the three properties of indifference curves. 6
Ans. The three principal properties of indifference curves are as follows:
(i) Indifference curves are negatively sloped or they slope downward: An indifference
(ii) Indifference curves are convex to the point of origin: An indifference curve will
(iii) Indifference curves never touch or intersect each other: Each indifference curve
represents a different level of satisfaction. So their intersection is ruled out.
16. Market for a good is in equilibrium. There is an ‘increase’ in demand for this good.
Explain the chain of effects of this change. Use diagram.
Or
Distinguish between collusive and non-collusive oligopoly. Explain how the oligopoly
firms are interdependent in taking price and output decisions. 6
Ans. Effect of increase in demand for a commodity on equilibrium price and equilibrium
D1
Fig. 6 Y
S
P2 D
P1 E1
PRICE
P
E
D1
D
S
O X
Q Q1 Q2
QUANTITY
In Fig. 6, DD and SS are the initial demand curve and supply curve respectively. E is the
initial equilibrium where supply and demand curves intersect each other. OQ is the
equilibrium quantity and OP is the equilibrium price.
Increase in demand implies a shift in demand curve to the right. It is indicated by D1D1.
This sets in motion the following Chain of Effects:
Increase in demand implies that more is demanded at the existing price. Given the supply,
price of the commodity will tend to increase, from OP to OP2: same quantity (OQ) will now
be demanded at the price OP2. Or, at the price of OP, only OQ2 quantity will now be offered
for demand. Rise in price will cause contraction of demand and extension of supply. This
process of extension and contraction will continue till quantity demanded is equal to
quantity supplied (OQ1). The equilibrium price is struck at OP1.
Or
Collusive oligopoly is a form of the market in which there are few firms in the market and all
decide to avoid competition through a formal agreement. They collude to form a cartel,
and fix for themselves output quota and market price. Sometimes a leading firm in the
market is accepted by the cartel as a price leader. Members of the cartel accept the price as
fixed by the price leader.
Non-collusive oligopoly is a form of the market in which there are few firms in the market
and each firm pursues its price and output policy independent of the rival firms. Each firm
tries to increase its market share through competition. Competition is preferred to
collusion as a means of profit maximisation. Because there are only a few big firms in the
market, there is a cut-throat competition.
Price and output policy of one firm has a significant impact on the price and output policy of
the rival firms in the market. When one firm lowers its price, the rival firms may also lower
the price. And, when one firm raises the price, the rival firms may not do it. Accordingly, it
becomes very difficult to estimate change in firm’s sales caused by a change in price.
Implying that a precise relationship between price and sales cannot be established. Or, that
the firm’s demand curve cannot be drawn.
SECTION-B
17. What is nominal gross domestic product? 1
Ans. Nominal gross domestic product refers to GDP estimated at current prices during the year
of estimation.
18. Define flow variables. 1
Ans. A flow variable is a quantity measured per unit of time period. Example: Consumption in
the economy during the period of one year.
19. Define cash reserve ratio. 1
20. Define money supply. 1
Ans. Money supply refers to the total quantity or stock of money available in the economy at a
point of time.
21. Define foreign exchange rate. 1
money market is known as foreign exchange rate.
22. State the components of capital account of balance of payments. 3
Ans. Main components of capital account of balance of payments are as follows:
(i) Foreign Investment: It includes FDI (Foreign Direct Investment) and portfolio
investment. Investment by our residents in rest of the world is recorded under ‘debit
items’, while investment by non-residents in our country is recorded under ‘credit
items’ in current account BoP.
(ii) Loans: These include external assistance and commercial borrowings. Assistance and
loans offered to rest of the world are recorded under ‘debit items’ while assistance and
loans received are recorded under ‘credit items’ in capital account BoP.
(iii) Changes in Reserve of Gold and Foreign Exchange: Foreign currency assets of the
government, gold reserves of the Central Bank, and similar capital receipts, are
included under ‘credit items’ and the corresponding payments under ‘debit items’.
23. Explain how ‘distribution of gross domestic product’ is a limitation in taking gross
domestic product as an index of welfare. 3
Ans. Increase in gross domestic product (GDP) is often taken as a measure of economic welfare.
This is because increase in GDP implies increased flow of goods and services in the
economy. However, distribution of GDP acts as a limitation in this context. If with every
increase in the level of GDP, distribution of GDP is getting more unequal, welfare level of
the society may not rise. Only fewer people tend to benefit from a larger share of the cake.
The gulf between haves and have-nots may increase. The bulk of the population may have
even lesser goods than before even when the overall level of GDP has tended to rise.
24. Given that national income is ` 80 crore and consumption expenditure ` 64 crore, find
out average propensity to save. When income rises to ` 100 crore and consumption
expenditure to ` 78 crore, what will be the average propensity to consume and the
marginal propensity to consume? 3
Ans. Given, national income (Y) = ` 80 crore

Consumption expenditure (C) = ` 64 crore
Saving (S) = Y – C
= ` 80 crore – ` 64 crore
= ` 16 crore
S
Average Propensity to Save (APS) =
Y
16
= = 0.2
80
Increased income (Y1) = ` 100 crore
Increased consumption expenditure (C1) = ` 78 crore
Change in income (DY) = ` 100 crore – ` 80 crore
= ` 20 crore
Change in consumption expenditure (DC) = ` 78 crore – ` 64 crore
= ` 14 crore
C 78
Average Propensity to Consume (APC) = 1 = = 0.78
Y1 100
DC 14
Marginal Propensity to Consume (MPC) = = = 0.7
DY 20
APS = 0.2.
APC = 0.78.
MPC = 0.7.
25. Explain the relationship between investment multiplier and marginal propensity to
consume. 3
Ans. There is direct relationship between investment multiplier and marginal propensity to
consume. Higher the marginal propensity to consume, greater is the size of multiplier. On
the contrary, lower the marginal propensity to consume, smaller is the size of multiplier. In
fact, the value of multiplier is determined by the value of marginal propensity to consume.
i.e.,
1
K=
1 - MPC
Where, K = Multiplier and MPC = Marginal propensity to consume.
26. When price of a foreign currency rises, its demand falls. Explain why.
Or
When price of a foreign currency rises, its supply also rises. Explain why. 3
Ans. When price of a foreign currency rises, its demand falls, owing to the following reasons:
(i) Indian players in the international market will now buy less of foreign currency,
because now it is available at a higher price. Thus, the demand falls.
(ii) Now, imports become dearer than before. Accordingly, imports tend to fall, implying a
fall in the demand for foreign currency.
(iii) Travelling abroad now becomes dearer. Accordingly, demand for the foreign currency
falls.
Or
Rise in the price of a foreign currency causes a rise in its supply, owing to the following reasons:
(i) Now domestic currency becomes cheaper in relation to the foreign currency.
Accordingly, foreign investors will make larger investment in the domestic economy.
Implying, a rise in the supply of foreign currency.
(ii) Now domestic exporters will get an opportunity to increase their exports, because
domestic goods become cheaper in relation to foreign goods (Example: if US $
becomes expensive, it can buy more goods in the Indian market). Accordingly, supply
of foreign currency (or flow of foreign currency into our economy) will tend to rise.
(iii) Rise in the price of a foreign currency (say US $) would mean more Indian rupees per
US dollar. Accordingly, NRIs would make greater transfers to their home country.
Implying, a rise in the flow of foreign currency into the domestic economy.
27. Explain the ‘allocation of resources’ objective of Government budget.
Or
Explain the ‘redistribution of income’ objective of Government budget. 4
encouraged through subsidy. Larger budgetary allocations to the production of ‘merit
goods’ in the public sector also impacts the allocation of resources.
Or
Equitable distribution of income and wealth is a sign of social justice which is the principal
objective of any welfare state as in India. The government uses budgetary instruments of
taxation and subsidies with a view to improving the distribution of income and wealth in the
economy. Distribution of income is impacted largely by way of ‘progressive taxation policy’.
It implies greater tax burden on the rich than the poor. In fact, those with very low incomes
are exempted from the payment of tax. Those who are absolutely poor are offered goods
through PDS (Public Distribution System) at the subsidised rate.
28. From the following data about a Government budget, find out (a) Revenue deficit, (b) Fiscal
deficit and (c) Primary deficit: 4
Items (` in arab)
(i) Capital receipts net of borrowings 95
(ii) Revenue expenditure 100
(iii) Interest payments 10
(iv) Revenue receipts 80
(v) Capital expenditure 110
Ans. (a) Revenue Deficit = Revenue expenditure – Revenue receipts

= ` 100 arab – ` 80 arab
= ` 20 arab
(b) Fiscal Deficit = Revenue expenditure + Capital expenditure – Revenue
receipts – Capital receipts net of borrowings
= ` 100 arab + ` 110 arab – ` 80 arab – ` 95 arab
= ` 210 arab – ` 175 arab
= ` 35 arab
(c) Primary Deficit = Fiscal deficit – Interest payments
= ` 35 arab – ` 10 arab
= ` 25 arab
29. Giving reasons classify the following into intermediate products and final products:
(i) Furniture purchased by a school.
(ii) Chalks, dusters, etc. purchased by a school. 4
Ans. (i) Furniture purchased by a school is a final product because school is the final user of the
furniture and no value is to be added to the furniture. This will be deemed as
investment expenditure because furniture is used by the school for several years and is
of high value.
(ii) Chalks, dusters, etc. purchased by a school are intermediate goods as these are used up
in the process of value-addition during the year.
30. Explain the role of the following in correcting ‘deficient demand’ in an economy:
(i) Open market operations.
(ii) Bank rate.
Or
Explain the role of the following in correcting ‘excess demand’ in an economy:
(i) Bank rate.
(ii) Open market operations. 6
Ans. (i) Open market operations is the policy that focuses on increasing and decreasing the
stock of liquidity (or cash balances) with the people, through sale and purchase of
securities by the central bank. During the situations of deficient demand, when cash
balances need to be increased, the central bank starts buying securities. Purchase of
securities injects purchasing power into the money market. Consequently, aggregate
demand is increased, as required to correct deficient demand.
(ii) Bank rate is the rate at which the central bank lends money to the commercial banks.
To correct the situation of deficient demand, bank rate is decreased. As a follow-up
action, the commercial banks lower the market rate of interest (the rate at which the
commercial banks lend money to the consumers and the investors). This increases
demand for credit. Consequently, consumption expenditure and investment
expenditure are increased. Implying a expansion in aggregate demand, as required to

correct deficient demand.
Or
(i) Bank rate is the rate at which the central bank lends money to the commercial banks.
To correct the situation of excess demand, bank rate is increased. As a follow-up action,
the commercial banks raise the market rate of interest (the rate at which the
commercial banks lend money to the consumers and the investors). This reduces
expenditure are reduced. Implying a reduction in aggregate demand, as required to
correct excess demand.
(ii) Open market operations is the policy that focuses on increasing and decreasing the
securities by the central bank. When cash balances need to be reduced as during
situations of excess demand, the central bank starts selling securities. Sale of securities
sucks purchasing power from the money market. Consequently, aggregate demand is
reduced and excess demand is corrected.
31. Explain the process of money creation by the commercial banks with the help of a
numerical example. 6
more than their cash reserves. If cash reserves are (say) ` 1,000 and if demand deposits
are (say) ` 10,000, then the commercial banks are creating credit ten times of their cash
reserves. Accordingly, on the basis of cash reserves of ` 1,000, the commercial banks are
contributing ` 10,000 to the supply of money. Here, comes the basic question: how are
cash reserves of ` 1,000 with the banks converted into demand deposits of ` 10,000?
(iii) If CRR = 10%, total cash reserves of ` 1,000 allows the bank to offer loans up to ` 10,000 in
accordance with following formula:
1
CRR
1
= × ` 1,000
10%
= 10 × ` 1,000 = ` 10,000.
` 10,000, demand deposits of the banks are raised by ` 10,000. So that, in the above
32. Calculate National Income and Gross National Disposable Income from the following:
6
Items (` in crore)
(i) Net current transfers to the rest of the world (–)5
(iv) Net factor income to abroad (–)10
(vi) Net indirect tax 100
(vii) Net domestic fixed capital formation 120
(viii) Net imports 30
(ix) Change in stocks (–)20
Ans. Gross Domestic Product at Market Price (GDPMP)
= Private final consumption expenditure + Government final consumption
expenditure + Net domestic fixed capital formation + Consumption of fixed capital
+ Change in stocks – Net imports
= ` 500 crore + ` 200 crore + ` 120 crore + ` 20 crore + (–) ` 20 crore – ` 30 crore
= ` 840 crore – ` 50 crore = ` 790 crore
National Income
= GDPMP – Consumption of fixed capital – Net indirect tax – Net factor income to abroad
= ` 790 crore – ` 20 crore – ` 100 crore – (–) ` 10 crore
= ` 680 crore
= GDPMP – Net factor income to abroad – Net current transfer to the rest of the world
= ` 790 crore – (–) ` 10 crore – (–) ` 5 crore
= ` 790 crore + ` 15 crore = ` 805 crore
National income = ` 680 crore.
Gross national disposable income = ` 805 crore.
SET–II
SECTION–A
1. What is positive economics? 1
Ans. Positive economics refers to such issues in economics which are subject to verification or
which can be verified against the facts. Example: Population of India is more than 100
crores.
7. A consumer buys 10 units of a good at a price of ` 6 per unit. Price elasticity of demand is
(–) 1. At what price will he buy 12 units? Use expenditure approach of price elasticity of
demand to answer this question. 3
Ans.
Price (`) Demand (Units) Total Expenditure (`)
6 10 60
5 12 60
Given, Ed = (–) 1.
At ` 5, the consumer will buy 12 units. Because in this case, elasticity of demand is (–) 1,
therefore, total expenditure will remain constant, i.e., ` 60. In other words, rise or fall in
price of a commodity makes no change in its total expenditure.
11. Explain the conditions determining how many units of a good the consumer will buy at a
given price. 4
Ans. In case of one commodity, equilibrium is struck when
MU X
= MUM
PX
In case of two commodities, equilibrium is struck when
MU X MU Y
= = MUM
PX PY
MU X MU Y
Where, = = Rupee worth of additional satisfaction.
PX PY
MUM= Marginal utility of money.
In both the situations, the conditions determining consumer’s equilibrium are:
æ MU X ö
(i) rupee worth of additional satisfaction çç ÷ from the consumption of a unit of a
÷
è PX ø
good is equal to marginal utility of money (MU M ).
(ii) marginal utility of money is constant.
(iii) law of diminishing marginal utility holds good.
15. Explain the concept of Marginal Rate of Substitution (MRS) by giving an example. What
happens to MRS when consumer moves downwards along the indifference curve? Give
reasons for your answer. 6
Ans. Marginal rate of substitution of X for Y (MRSXY) is defined as the amount of Y, the
consumer is willing to forego for a unit more of X
DY
MRSXY =
DX
AE BF
In Fig. 7 at point A, MRS XY = . At point B, MRS XY = , and so on. When the
EB FC
consumer moves from point A to point B he gives up 3 units of Good-Y to obtain one unit of
Good-X. In this situation, consumer’s marginal rate of substitution is 3 : 1. When he moves
from B to C, he gives up only 2 units of Good-Y to get one additional unit of Good-X. The
marginal rate of substitution now drops to 2 : 1. Implying that MRSXY tends to diminish as
the consumer moves downwards along the IC. Why should MRSXY diminish? It is because,
as the consumers gives up more and more of good Y, his intensity of desire for Y tends to
rise. On the other hand, as the consumer gets more and more of good X, his intensity of
desire for X tends to fall.
Y
Fig. 7
Diminishing
10 A
MRSXY
8 MRSXY
E B3:1
GODO-Y
7
MRSXY
6 2:1
F C MRSXY
5
D 1:1
4 IC
O X
1 2 3 4
GOOD-X
SECTION–B
22. State the components of current account of balance of payments. 3
Ans. Principal components of current account of balance of payments are as under:
(i) Merchandise (referring to export and import of goods).
(ii) Invisibles, including:
(a) Services (such as of shipping and tourism).
(b) Transfers (unilateral payments such as gifts and donations).
(c) Investment income (such as interest and dividend income).
(d) Compensation of employees (wages and salaries).
24. If national income is ` 50 crore and saving ` 5 crore, find out average propensity to
consume. When income rises to ` 60 crore and saving to ` 9 crore, what will be the average
propensity to consume and the marginal propensity to save? 3
Ans. Given, national income (Y) = ` 50 crore.
Saving (S) = ` 5 crore.
Consumption (C) = Y – S
= ` 45 crore
C 45
Average Propensity to Consume (APC) = = = 0.9
Y 50
Increased saving (S1) = ` 9 crore
New consumption (C1) = ` 60 crore – ` 9 crore
= ` 51 crore
C 51
Average Propensity to Consume (APC) = 1 = = 0.85
Y1 60
= ` 10 crore
Change in saving (DS) = ` 9 crore – ` 5 crore
= ` 4 crore
DS 4
Marginal Propensity to Save (MPS) = = = 0.4
DY 10
APC = 0.9.
New APC = 0.85.
MPS = 0.4.
29. Giving reasons classify the following into intermediate products and final products:
(i) Computers installed in an office.
(ii) Mobile sets purchased by a mobile dealer. 4
Ans. (i) Computers installed in an office is a final product because computers are finally and
repeatedly used by the office for several years and these are of high value.
(ii) Mobile sets purchased by a mobile dealer is an intermediate product because these are
purchased for resale.
32. Find out Gross National Product at Market price and Net National Disposable Income
Items (` in arab)
(i) Opening stock 50
(ii) Private final consumption expenditure 1,000
(iii) Net current transfers to abroad 5
(iv) Closing Stock 40
(v) Net factor income to abroad (–)10
(ix) Net domestic fixed capital formation 150
Ans. Gross National Product at Market Price (GNPMP)

expenditure + Net domestic fixed capital formation + Change in stock +
Consumption of fixed capital – Net imports – Net factor income to abroad
= ` 1,000 arab + ` 300 arab + ` 150 arab + (` 40 arab – ` 50 arab) + ` 30 crore
– ` 20 arab – (–) ` 10 arab
= ` 1,000 arab + ` 300 arab + ` 150 arab – ` 10 arab +` 30 arab – ` 20 arab + ` 10 arab
= ` 1,460 arab
= GNPMP – Consumption of fixed capital – Net current transfer to abroad
= ` 1,460 arab – ` 30 arab – ` 5 arab
= ` 1,425 arab
Gross national product at market price (GNPMP) = ` 1,460 arab.
Net national disposable income = ` 1,425 arab.
SET–III
SECTION–A
1. What is normative economics? 1
Ans. Normative economics refers to such issues in economics which are suggestive in nature and
are not verifiable. Example: Growth process should be conducive to employment
generation and equitable distribution of income.
7. When the price of a good changes to ` 11 per unit, the consumer’s demand falls from 11
units to 7 units. The price elasticity of demand is (–)1. What was the price before change?
Use expenditure approach of price elasticity of demand to answer this question. 3
Ans.
7 11 77
11 7 77
Given, Ed = (–) 1.
Price before change was ` 7. Because in this case, elasticity of demand is (–) 1 and therefore,
total expenditure remain constant even after the change in price, i.e., ` 77.
11. Derive the law of demand from the single commodity equilibrium condition “marginal
utility = price”. 4
Ans. Fig. 8 shows consumer equilibrium in case of a single commodity, when
Marginal Utility (MU) = Price (P).
Y Y
Fig. 8
MARGINAL UTILITY (MU)

30
30
PRICE (`)
20 20
10 10 DD Curve
X X
O 1 2 3 4 O 1 2 3 4
QUANTITY (Units) MUX QUANTITY (Units)
When MU = P = 10; quantity purchased by the consumers is 3 units. When price (= marginal
utility) rises to 20, quantity purchased by the consumers is 2 units and further when price
rises to 30, the quantity purchased by the consumers falls to 1 unit. Thus, demand curve is
derived by joining all the points corresponding to price and quantity purchased.
15. What are monotonic preferences? Explain why is an indifference curve (i) downward
sloping from left to right and (ii) convex. 6
Ans. Monotonic preferences mean that a rational consumer always prefers more of a commodity
as it offers him a higher level of satisfaction.
(i) An indifference curve slopes downwards from left to right, or that, its slope is negative.
Because if a consumer uses more quantity of one good he will use less quantity of the
other, then only he will have equal satisfaction from their different combinations. This
is true in the context of the assumption that the consumer has monotonic preferences.
(ii) An indifference curve will ordinarily be convex to the point of origin. Convexity of the
curve means that it bows inward to the origin. This implies that the slope of an
indifference curve tends to fall as the consumer moves downward along the curve. The
slope of the indifference curve is called the marginal rate of substitution because it
indicates the rate at which the consumer is willing to substitute one good for the other.
The falling slope of IC thus implies that MRSXY tends to fall as the consumer moves
downward along the curve. In other words, it is because of the diminishing MRSXY
that the IC is convex to the origin.
SECTION – B
22. What does balance of payments account show? Name the two parts of the balance of
payments account. 3
Ans. Balance of payments refers to the statement of accounts recording all economic
transactions of a country with rest of the world. Each country enters into economic
transactions with other countries of the world. As a result of such transactions, it receives
payments from and makes payments to other countries. The balance of payments is a
statement of accounts of these receipts and payments.
Two parts of the balance of payments account are:

(i) Current account of balance of payments.
(ii) Capital account of balance of payments.
24. If national income is ` 90 crore and consumption expenditure ` 81 crore, find out
average propensity to save. When income rises to ` 100 crore and consumption
expenditure to ` 88 crore, what will be the marginal propensity to consume and marginal
propensity to save? 3
Ans. Given, national income (Y) = ` 90 crore.
Consumption expenditure (C) = ` 81 crore.
Saving (S) = Y – C
= ` 9 crore
S
Average Propensity of Save (APS) =
Y
9
= = 0.1
90
Increased consumption expenditure (C1) = ` 88 crore
Increased saving (S1) = ` 100 crore – ` 88 crore
= ` 12 crore
= ` 10 crore
Change in consumption expenditure (DC) = ` 88 crore – ` 81 crore
= ` 7 crore
Change in saving (DS) = ` 12 crore – ` 9 crore
= ` 3 crore
DC 7
Marginal Propensity to Consume (MPC) = = = 0.7
DY 10
DS 3
Marginal Propensity to Save (MPS) = = = 0.3
DY 10
APS = 0.1.
MPC = 0.7.
MPS = 0.3.
29. Giving reason identify whether the following are final expenditure or intermediate
expenditure:
(i) Expenditure on maintenance of an office building.
(ii) Expenditure on improvement of a machine in a factory. 4
Ans. (i) Expenditure on maintenance of an office building is an intermediate expenditure as

the things purchased for repair and maintenance are used up during the period of one
year.
(ii) Expenditure on improvement of a machine in a factory is a final expenditure as the
machine is repeatedly used for several years as a fixed asset. Improvement of a
machine implies improvement of asset value (through investment expenditure).
32. Calculate Net National Product at Market Price and Gross National Disposable Income:
6
Items (` in arab)
(i) Consumption of fixed capital 40
(ii) Change in stocks (–)10
(iii) Net imports 20
(iv) Gross domestic fixed capital formation 100
(vi) Net current transfers to rest of the world 5
(vii) Government final consumption expenditure 250
(viii) Net factor income to abroad 40
Ans. Gross Domestic Product at Market Price (GDPMP)
expenditure + Gross domestic fixed capital formation + Change in stocks
– Net imports
= ` 800 arab + ` 250 arab + ` 100 arab + (–) ` 10 arab – ` 20 arab
= ` 1,120 arab
Net National Product at Market Price (NNPMP)
= GDPMP – Consumption of fixed capital – Net factor income to abroad
= ` 1,120 arab – ` 40 arab – ` 40 arab
= ` 1,040 arab
= GDPMP – Net factor income to abroad – Net current transfers to rest of the world
= ` 1,120 arab – ` 40 arab – ` 5 arab
= ` 1,075 arab
Net national product at market price (NNPMP) = ` 1,040 arab.
Gross national disposable income = ` 1,075 arab.
All India
(iv) Question No. 6 - 10 and 22 - 26 are short-answer questions carrying 3 marks each. Answers to them should
normally not exceed 60 words each.
SET–I
SECTION–A
1. What is a planned economy? 1
Ans. A planned economy is the one in which decisions regarding ‘what, how and for whom to
produce’ are taken by some central authority appointed by the government.
2. When is a firm called price maker? 1
Ans. A firm is called a price maker when it can fix whatever price it wishes to fix for its product.
Example: Monopoly firm.
3. Define a budget line. 1
Ans. Budget line is a line showing different combinations of a set of 2-Goods that the consumer
can buy, given his income and prices of the goods.
4. What is ‘decrease’ in supply? 1
Ans. Decrease in supply occurs when quantity supplied decreases at the existing price of the
commodity. Supply curve shifts to the left.
5. Define production function. 1
Ans. Production function studies the functional relationship between physical inputs and
physical output of a commodity.
6. How is production possibility curve affected by unemployment in the economy?
Explain. 3
Ans. PPC is drawn on the assumption that the given resources are fully as well as efficiently utilised.
Unemployment is a situation when resources are not fully utilised. Or, it is a situation of
under-utilisation of resources. It would mean that the economy is not operating on the PPC but
somewhere inside the PPC. PPC showing only technical possibilities of production, would not
shift. Fig. 1 illustrates the situation:
Fig 1. Y
P
Unemployment or under-
GOOD-Y utilisation of resources
A PPC showing fuller and efficient

utilisation of resources with the
given technology
O X
P
GOOD-X
7. When price of a good is ` 13 per unit, the consumer buys 11 units of that good. When
price rises to ` 15 per unit, the consumer continues to buy 11 units. Calculate price
elasticity of demand. 3
Ans. Given, P = ` 13; P1 = ` 15; DP = P1 – P = ` 15 – ` 13 = ` 2
Q = 11 units; Q1 = 11 units; DQ = Q1 – Q = (11 – 11) units = 0
DQ P
Ed = (–) ´
DP Q
0 13
= (–) ´ =0
2 11
Here, price elasticity of demand is zero. In other words, we can say that increase in price has
no effect on quantity demanded. Hence, demand is perfectly inelastic or Ed = 0.
8. Distinguish between explicit cost and implicit cost and give examples. 3
Ans. Explicit costs are those costs which a firm incurs on account of the purchase of inputs from
the market. Example: Expenditure incurred on the purchase of raw material. Implicit
costs are those costs which a firm incurs on account of the use of self-owned inputs.
Example: Use of family labour.
9. Draw in a single diagram the average revenue and marginal revenue curves of a firm
which can sell any quantity of the good at a given price. Explain. 3
Ans. Average revenue and marginal revenue curves of a firm which can sell any quantity of the
good at a given price are shown as a horizontal straight line, as in Fig. 2. It refers to a
situation of perfect competition in which price (AR) is constant for a firm. Constant AR
implies constant MR, and also AR = MR.
Fig. 2 Y
PRICE/AR/MR
P AR=MR
O X
OUTPUT
10. Explain the implications of the feature ‘large number of buyers’ in a perfectly
competitive market.
Or
Explain the implications of the feature ‘homogeneous products’ in a perfectly competitive
market. 3
Ans. The number of buyers of a commodity is very large under perfect competition. It is so large
that by varying its demand, an individual buyer cannot affect total market demand for a
commodity. Accordingly, an individual buyer cannot affect market price. He can buy any
quantity at the existing price of the commodity. An individual buyer is a price taker.
Or
A product being perfectly homogeneous implies that all units of a commodity are identical
homogeneous product is sold in the market at a uniform price. If ever an individual firm
tries to charge higher price, it would lose all its buyers to a large number of other sellers in
the market. In a perfectly competitive environment, homogeneous product does not allow
a firm any control over its price. A firm is a price taker.
11. A consumer consumes only two goods X and Y. At a consumption level of these two goods,
he finds that the ratio of marginal utility to price in case of X is higher than in case of Y.
Explain the reaction of the consumer. 4
Ans. Equilibrium of the consumer occurs when:
MU X MU Y
= = MUM
PX PY
MU X MU Y
Given, >
PX PY
The consumer will increase the consumption of Good-X in place of Good-Y. Accordingly,
MUX would start declining while MUY would start rising. The process of substituting X for
MU X MU Y
Y would continue till (rupee worth of MUX) and (rupee worth of MUY) are
PX PY
equal and the equilibrium is achieved.
12. Explain how rise in income of a consumer affects the demand of a good. Give examples. 4
Ans. Effect of rise in income of a consumer on demand is different in case of normal goods and
inferior goods, as under:
Normal Goods: When income rises, demand curve for the normal goods shifts to the right.
For example, milk is a normal good. Demand curve for milk shifts (forward) from D1D1 to
D2D2 when consumer’s income increases.
Inferior Goods: When income rises, demand curve for inferior goods shifts to the left. For
example, coarse grain is an inferior good. Demand curve for coarse grain shifts (backward)
from D1D1 to D2D2 when consumer’s income increases.
Fig. 3 illustrates these situations.
(a) (b)
Fig. 3
Y Y
PRICE OF COARSE GRAIN
D2 D1
D2
PRICE OF MILK
D1
P P
D2
D1 D1
D2
O X O X
Q1 Q2 Q2 Q1
DEMAND FOR MILK DEMAND FOR COARSE GRAIN
13. Define marginal cost. Explain its relation with average cost.
Or
Define variable cost. Explain the behaviour of total variable cost as output increases. 4
Ans. Marginal cost is the change in total cost when a unit more of a commodity is produced.
MCn = TCn – TCn–1
DTC
Or, MC =
DQ
Relation between AC and MC is explained with reference to Fig. 4.

Y
Fig. 4
MC
AC
AC, MC
C
AC M
> <
MC AC
AC=MC
O X
OUTPUT
Observations:
(i) When AC is falling, AC > MC.
(ii) When AC is constant, AC = MC.
(iii) When AC is rising, AC < MC.
(iv) MC curve cuts AC curve at its lowest point.
(v) Both AC and MC curves are U shaped.
Or
Variable costs are the expenditure incurred on the use of variable factors. When output
changes, these costs also change. As the output increases, these costs also increase and as the
output decreases, these costs also decrease. When output is zero, these costs are also zero.
The following table and Fig. 5 explain the behaviour of variable costs.
Units of Total Variable Cost

Output (`)
0 0
1 10
2 18
3 24
4 28
5 32
6 38
Y Total Variable Cost

Fig. 5
TOTAL VARIABLE COST (`)

TVC
40
30
A
20
10
O X
1 2 3 4 5 6
OUTPUT (Units)
14. What is producer’s equilibrium? Explain the conditions of producer’s equilibrium

through the ‘marginal cost and marginal revenue’ approach. Use diagram. 6
Ans. Producer is said to be in equilibrium when he maximises his profits or minimises his losses.
According to marginal cost and marginal revenue approach, producer strikes his
equilibrium when two conditions are satisfied:
(i) MR = MC, and
(ii) MC is rising (or MC curve cuts MR curve from below).
The following table and Fig. 6 illustrate producer’s equilibrium, according to the
marginal cost and marginal revenue approach.
MR, MC Schedule and Producer’s Equilibrium
Output MR MC
(Units) (`) (`)
1 20 16
2 20 14
3 20 12
4 20 16
5 20 20
6 20 26
Note: The table is drawn on the assumption that Price (AR) is constant, so that MR is constant (= ` 20).
We are assuming a situation of perfect competition.
The table shows that the two conditions of equilibrium are satisfied only when 5 units of
output are produced. It is here that (i) MR = MC = ` 20, and (ii) MC is rising.
Likewise Fig. 6 shows that the producer strikes his equilibrium at point Q when 5 units of
output are produced. Note carefully that it is only when 5 units of output are produced that
MC = MR = ` 20, and that MC curve is rising.
Fig. 6 Y Firm’s equilibrium (Perfect competition)

MC
28
24
P Q
MR/MC (`)
20 AR=MR (= ` 20)
16
12
8
4
O X
1 2 3 4 5 6
OUTPUT (Units)
(Note: The diagram is not exactly according to table.)

15. Explain the conditions of consumer’s equilibrium with the help of the indifference curve
analysis. 6
or
Slope of IC and slope of price line are equal to each other.
(ii) IC is convex to the origin, at the point of equilibrium.
consumer can buy any of the combinations, A, B, C, D and E of Good-X and Good-Y shown
the highest indifference curve which is IC2 in this case. Out of A, B, C, D and E
combinations, the consumer will be in equilibrium at combination ‘E’, because at this point
price line (AB) is tangent to the highest indifference curve IC2. Also, at E, IC is convex to the
origin. No doubt, the consumer can buy ‘C’ or ‘D’ combinations as well but these will not
give him maximum satisfaction being located on lower indifference curve IC1. It means
consumer’s equilibrium point is the point of tangency of price line and indifference curve.
Y
Fig. 7
A
Slope of Indifference Curve
GOOD-Y
E = Slope of Budget or Price
L P
Line or MRSXY = X ,
IC3 PY
IC2 and at the point of equilibrium,
IC is convex to the origin.
D IC1
O X
M B
GOOD-X
16. Market for a good is in equilibrium. There is ‘increase’ in supply of the good. Explain the
chain of effects of this changes. Use diagram.
Or
Distinguish between ‘non-collusive’ and ‘collusive’ oligopoly. Explain the following
features of oligopoly:
(i) Few firms
(ii) Non-price competition. 6
Ans. Market equilibrium is a situation where market demand is equal to market supply.
Effect of increase in supply of a good on equilibrium price and equilibrium quantity is
discussed with reference to Fig. 8.
Fig. 8 Y S
D
S1
E
P
PRICE
P1 E1
P2 S
D
S1
O X
Q Q1 Q2
QUANTITY
Increase in supply implies a shift in supply curve to the right. It is indicated by S1S1. This
sets in motion the following Chain of Effects:
Increase in supply implies that more is supplied at the existing price. Given the demand,
price of the commodity will tend to decrease, from OP to OP2: same quantity (OQ) will now
be supplied at the price OP2. Or, at the price of OP, only OQ2 quantity will now be offered
for sale. Fall in price will cause extension of demand and contraction of supply. This process
of extension and contraction will continue till quantity demanded is equal to quantity
supplied (OQ1). The equilibrium price is struck at OP1.
Or
and fix for themselves output quotas and market price. Whereas, non-collusive oligopoly is
a form of the market in which there are few firms in the market, and each firm pursues its
price and output policy independent of the rival firms. Each firm tries to increase its market
share through competition.
(i) Few Firms: A few firms, but large in size, dominate the market for a commodity. Each
firm commands a significant share of the market: it can impact market price of the
product through its independent price-output policy. Since the number of firms is
small, they try to avoid price competition by forming cartels.
(ii) Non-price Competition: Under oligopoly, firms tend to avoid price competition.
Example: In India both Coke and Pepsi drinks sell at the same price. However, in
order to enhance its share of the market, each firm tries to resort to non-price
competition. Example: Coke and Pepsi sponsor different games and sports; they also
offer lucrative schemes (like of maintenance of school garden) when bulk purchases
are made on regular basis.
SECTION-B
17. What are stock variables? 1
Ans. Stock variables are those variables which are measured at a point of time. Example: Savings
in the bank accounts.
18. Define ‘depreciation’. 1
Ans. Depreciation is the loss of the value of fixed assets (in use) on account of their normal wear
and tear.
19. Define ‘Statutory Liquidity Ratio’. 1
Ans. Every bank is required to maintain a fixed percentage of its assets in the form of cash or
other liquid assets, called statutory liquidity ratio.
20. Define money. 1
Ans. Money refers to a thing (like notes and coins) which is generally accepted as a medium of
exchange.
21. What is foreign exchange? 1
Ans. Foreign exchange refers to demand and supply of the currencies of other countries in the
domestic economy.
22. Which transactions determine the balance of trade? When is balance of trade in surplus? 3
Ans. Export and import of goods or visible items determine the balance of trade. Visible items
include all commodities of export and import.
Balance of trade is the difference between the value of exports and value of imports of only
the visible items. Surplus in balance of trade occurs when
Exports of goods > Imports of goods.
23. Explain how ‘non-monetary exchanges’ are a limitation in taking gross domestic product
as an index of welfare. 3
Ans. In economies like of India, barter system of exchange is not totally non-existent.
Non-monetary transactions are quite evident in rural areas where payments for
farm-labour are often made in kind rather than cash. But such transactions are not
recorded, because they are outside the monetary system of exchange. To this extent GDP
remains underestimated, and is, therefore, not a proper index of welfare.
24. In an economy the marginal propensity to consume is 0.75. Investment expenditure in
the economy increases by ` 75 crore. Calculate the total increase in national income. 3
Ans. Given, marginal propensity to consume (MPC) = 0.75.
Change in investment expenditure (DI) = ` 75 crore.
We know that,
1 1 1
Multiplier (K) = = = =4
1 - MPC 1 - 075
. 0.25
DY
We also know that, K=
DI
Or, DY = K . DI
= 4 × 75= 300
Increase in national income = ` 300 crore.
25. Explain the distinction between voluntary and involuntary unemployment. 3
Ans. (i) Voluntary unemployment is a situation in which a worker is not willing to work at the
current rate of wages. On the other hand, involuntary unemployment is a situation in
which a worker is willing to work at current rate of wages but does not get work.
(ii) Voluntary unemployment is not considered in the estimation of total unemployment
in a country. While, involuntary unemployment is considered in the estimation of total
unemployment in the economy.
26. When price of a foreign currency falls, the demand for that foreign currency rises.
Explain, why.
Or
When price of a foreign currency falls, the supply of that foreign currency also falls.
Explain, why. 3
Ans. When price of a foreign currency falls, its demand rises, owing to the following reasons:
(i) Indian players in the international market will now buy more of foreign currency,
because now it is available at a lower price. Thus, the demand rises.
(ii) Now, imports become cheaper than before. Accordingly, imports tend to rise, implying
a rise in the demand for foreign currency.
(iii) Travelling abroad now becomes cheaper. Accordingly, demand for the foreign
currency rises.
Or
Fall in the price of a foreign currency causes a fall in its supply, owing to the following
reasons:
(i) Now domestic currency becomes dearer in relation to the foreign currency.
Accordingly, foreign investors will make smaller investment in the domestic economy.
Implying, a fall in the supply of foreign currency.
(ii) Now domestic exports will fall because 1 US $ buys less goods in the domestic market.
Accordingly, supply of foreign currency (or flow of foreign currency into our economy)
will fall.
(iii) Fall in the price of a foreign currency (say US $) would mean less Indian rupees per US
dollar. Accordingly, NRIs would make less transfers to their home country. Implying, a
fall in the flow of foreign currency into the domestic economy.
27. Explain the ‘redistribution of income’ objective of a government budget.
Or
Explain the ‘economic stability’ objective of a government budget. 4
Ans. Equitable distribution of income and wealth is a sign of social justice which is the principal
objective of any welfare state as in India. The government uses budgetary instruments of
taxation and subsidies with a view to improving the distribution of income and wealth in the
economy. Distribution of income is impacted largely by way of ‘progressive taxation policy’.
It implies greater tax burden on the rich than the poor. In fact, those with very low incomes
are exempted from the payment of tax. Those who are absolutely poor are offered goods
through PDS (Public Distribution System) at the subsidised rate.
Or
Free play of market forces (or the forces of supply and demand) tend to generate trade
cycles, also called business cycles. These cycles bring a situation of inflation or deflation in
the economy. Such situations are not conducive to the process of growth. Pace of growth
enhances only in situations of economic stability. Budget is used as an important policy
instrument to correct the situations of deflation and inflation. Policy of deficit budget is
pursued to combat deflationary gap. Policy of surplus budget is pursued to combat (or
correct) inflationary gap.
28. From the following data about a government budget, find out (a) revenue deficit, (b) fiscal
deficit and (c) primary deficit: 4
Items (` in arab)
(i) Tax revenue 47
(ii) Capital receipts 34
(iii) Non-tax revenue 10
(iv) Borrowings 32
(v) Revenue expenditure 80
(vi) Interest payments 20
Ans. (a) Revenue Deficit = Revenue expenditure – Revenue receipts (Tax revenue
+ Non-tax revenue)
= ` 80 arab – (` 47 arab + ` 10 arab)
= ` 80 arab – ` 57 arab
= ` 23 arab
(b) Fiscal Deficit = Borrowings
= ` 32 arab
= ` 32 arab – ` 20 arab
= ` 12 arab
29. Giving reasons, explain the treatment assigned to the following while estimating national
income:
(i) Family members working free on the farm owned by the family.
(ii) Payment of interest on borrowings by general government. 4
Ans. (i) Family members working free on the farm owned by the family are engaged in the
value addition process. Imputed value of their farm output is included in national
product. Accordingly, income generated by the farming family would be treated as
mixed income of self-employed, which includes compensation of labour.
(ii) Payment of interest on borrowings by general government is not included in the
estimation of national income because it is assumed that the government uses the
borrowing for consumption purpose only.
30. Explain the role of the following in correcting ‘the inflationary gap’ in an economy:
(i) Legal reserves.
(ii) Bank rate
Or
Explain the role of the following in correcting the deflationary gap in an economy:
(i) Open market operations.
(ii) Margin requirements. 6
Ans. (i) Legal reserve refers to the legally determined ratio between liquid assets and total
assets of the commercial banks. The commercial banks are required to maintain
minimum SLR, also known as legal reserves as fixed by the central bank from time to
time.
Legal reserve ratio is raised to correct inflationary gap. This reduces credit creation
capacity of the commercial banks. Accordingly, availability of credit decreases in the
capital market. As a result, aggregate demand reduces as required to correct
inflationary gap in the economy.
(ii) Bank rate is the rate at which the central bank lends money to the commercial banks.
To correct the situation of inflationary gap, bank rate is increased. As a follow-up
action, the commercial banks raise the market rate of interest (the rate at which the
commercial banks lend money to the consumers and the investors). This reduces
expenditure are reduced. Implying a reduction in aggregate demand, as required to
correct inflationary gap.
Or
(i) Open market operations is the policy that focuses on increasing and decreasing the
stock of liquidity (or cash balances) in the economy, through sale and purchase of
securities by the central bank. When cash balances need to be increased (as during
situations of deficient demand or deflationary gap), the central bank starts buying
securities. Purchase of securities injects purchasing power into the money market.
Consequently, aggregate demand is increased and deflationary gap is corrected.
(ii) Margin requirements refer to minimum down payment that the borrowers are to
make as a percentage of their total borrowing from the commercial banks. Margin
requirement is reduced to correct situations of deflationary gap. Lower margin
requirement acts as a incentive to borrow. This induces borrowers to raise more credit.
Implying a rise in aggregate demand, as desired to correct deficient demand or
deflationary gap.
31. Explain the following functions of the central bank:
(i) Bank of issue.
(ii) Bankers’ bank. 6
Ans. (i) The central bank is the sole note-issuing authority in the country. Often, the central
banks divides its functions into two departments–banking department and issue
department. It is the issue department that is responsible for note-issuing. It issues
currency to cope with the demand for it, which depends upon the level of economic
activity in the economy.
(ii) Central bank is an apex bank of all banks in the country. The central bank has almost
the same relation with other banks in the country as a commercial bank has with its
customers. As a banker’s bank, the central bank offers loans to the commercial bank,
and also accepts deposits from them. The central bank keeps some cash balances of the
commercial banks as a compulsory deposit. This is to help them during financial crises.
CRR, Repo rate and Reverse repo rate (as applicable to the commercial banks from
time to time) are fixed by the Central Bank.
32. Calculate (a) ‘Net Domestic Product at Factor Cost’ and (b) ‘Private Income’ from the
following: 6
Items (` in crore)
(i) Domestic product accruing to government 300
(ii) Wages and salaries 1,000
(iii) Net current transfers to abroad (–)20
(iv) Rent 100
(v) Interest paid by the production units 130
(vi) National debt interest 30
(viii) Current transfers by government 40
(ix) Contribution to social security schemes by employers 200
(x) Dividends 100
(xi) Undistributed profits 20
(xii) Net factor income to abroad 0
Ans. (a) Net Domestic Product at Factor Cost (NDPFC)
= Wages and salaries + Contribution to social security schemes by employers
+ Rent + Interest + Corporation tax + Dividends + Undistributed profits
= ` 1,000 crore + ` 200 crore + ` 100 crore + ` 130 crore + ` 50 crore + ` 100 crore
+ ` 20 crore
= ` 1,600 crore
(b) Factor Income from Net Domestic Product accruing to Private Sector
= NDPFC – Domestic product accruing to government
= ` 1,600 crore – ` 300 crore
= ` 1,300 crore
Private Income
= Factor Income from net domestic product accruing to private sector – Net factor
income to abroad + National debt interest + Current transfers by government
– Net current transfer to abroad
= ` 1,300 crore – ` 0 crore + ` 30 crore + ` 40 crore – (–) ` 20 crore
= ` 1,300 crore – ` 0 crore + ` 30 crore + ` 40 crore + ` 20 crore
= ` 1,390 crore
(a) Net domestic product at factor cost (NDPFC) = ` 1,600 crore.
(b) Private income = ` 1,390 crore.
SET–II
SECTION–A
1. Define an economy. 1
Ans. Economy is a system comprising all economic activities directed towards the satisfaction of
unlimited wants using the scarce means.
7. When price of a good is ` 12 per unit, the consumer buys 24 units of that good. When
price rises to ` 14 per unit, the consumer buys 20 units. Calculate price elasticity of
demand. 3
Ans. Given, P = ` 12; P1 = ` 14; DP = P1 – P = ` 14 – ` 12 = ` 2
Q = 24 units; Q1 = 20 units; DQ = Q1 – Q = (20 – 24) units = (–) 4 units
DQ P - 4 12
Elasticity of Demand (Ed) = (–) ´ = ( -) ´ =1
DP Q 2 24
Elasticity of demand = 1.
11. A consumer consumes only two goods X and Y. At a certain consumption level of these
goods, he finds that the ratio of marginal utility to price in case of X is lower than in case
of Y. Explain the reaction of the consumer. 4
Ans. Equilibrium condition in case of two commodities:
MU X MU Y
= = MUM
PX PY
MU X MU Y
Given, <
PX PY
The consumer would react to this situation by increasing the consumption of Y in place of
æ MU Y ö
X, because rupee worth of satisfaction in case of Y çç = ÷ is greater than in case of X
è PY ÷ø
æ MU X ö
ç= ÷. As consumption of X is reduced, MUX would start rising. Likewise, increase in
ç PX ÷ø
è
the consumption of Y would cause a fall in MUY. The process of substituting Y for X would
MU X MU Y
continue till = , when the consumer maximises his satisfaction.
PX PY
15. Explain any three properties of indifference curves. 6
SECTION–B
22. List the transactions of current account of the balance of payments account. 3
24. In an economy the marginal propensity to save is 0.4. National income in the economy
increases by ` 200 crore as a result of change in investment. Calculate the change in
investment. 3
Ans. Given, marginal propensity to save (MPS) = 0.4.
Increase in national income (DY) = ` 200 crore.
We know that,
1 1
Multiplier (K) = = = 2.5
MPS 0.4
DY
DI
DY 200
Þ DI = = = 80
K 2.5
Change in investment = ` 80 crore.
income:
(i) Social security contributions by employees
(ii) Pension paid after retirement. 4
Ans. (i) Social security contributions by employees are not separately included in the
estimation of national income as these are paid out of compensation of employees.
(ii) Pension paid after retirement is included in the estimation of national income because
this is a kind of deferred wage payment and is therefore, treated as a component of
compensation of employees.
32. Calculate (a) ‘Net National Product at Market Price’ and (b) ‘Private Income’ from the
following: 6
Items (` in crore)
(ii) Mixed income 600
(iii) Subsidies 20
(iv) Operating surplus 200
(v) National debt interest 70
(vi) Net factor income to abroad 10
(vii) Compensation of employees 1,400
(viii) Indirect tax 100
(ix) Domestic product accruing to government 350
(x) Current transfers by government 50
Ans. (a) Net Domestic Product at Market Price (NDPMP)
= Compensation of employees + Operating surplus + Mixed income + Net indirect tax
= ` 1,400 crore + ` 200 crore + ` 600 crore + (` 100 crore – ` 20 crore)
= ` 2,280 crore
Net National Product at Market Price (NNPMP)
= NDPMP – Net factor income to abroad
= ` 2,280 crore – ` 10 crore = ` 2,270 crore
(b) Factor Income from Net Domestic Product accruing to Private Sector
= NDPMP – Net indirect tax – Domestic product accruing to government
= ` 2,280 crore – (` 100 crore – ` 20 crore) – ` 350 crore
= ` 1,850 crore
Private Income
= Factor income from net domestic product accruing to private sector – Net Factor
income to abroad + National debt interest + Current transfers by government
– Net current transfers to abroad
= ` 1,850 crore – ` 10 crore + ` 70 crore + ` 50 crore – ` 30 crore
= ` 1,930 crore
(a) Net national product at market price (NNPMP) = ` 2,270 crore.
(b) Private income = ` 1,930 crore.
SET–III
SECTION–A
1. Define macroeconomics. 1
Ans. Macroeconomics deals with such issues or problems which are concerned with the economy
as a whole. Example: Problem of unemployment, inflation and deflation.
7. From the following data calculate price elasticity of demand: 3
Price Demand
(`) (Units)
9 100
9 150
Ans. Given, P = ` 9; P1 = ` 9; DP = P1 – P = ` 9 – ` 9 = 0
Q = 100 units; Q1 = 150 units; DQ = Q1 – Q = (150 – 100) units = 50 units
DQ P 50 9 450
Elasticity of Demand (Ed) = (–) ´ = ´ = =¥
DP Q 0 100 0
Elasticity of demand = ¥.
11. Explain the law of diminishing marginal utility with the help of a total utility schedule. 4
explained with the help of the following schedule:
Total Utility Schedule
Units of MUX
Commodity-X
1 25
2 20
3 15
4 10
5 5
6 0
7 –5
The given schedule reveals that as the consumer consumes more of commodity-X, the
marginal utility diminishes. Accordingly, marginal utility curve (MU) slopes downward
from left to right.
15. Explain the concepts of (i) marginal rate of substitution and (ii) budget line equation with
the help of numerical examples. 6
Ans. (i) Marginal rate of substitution (MRS) is the rate at which a consumer is willing to
substitute Good-1 for Good-2. Or, it is the rate at which a consumer is willing to give up
Good-2 for a unit more of Good-1.
DGood-2
It is estimated as at any point on IC.
DGood-1
The concept of MRS is explained with the help of given table.
Marginal Rate of Substitution
Combination Apples Oranges MRS
A 1 10 —
B 2 7 3:1
C 3 5 2:1
D 4 4 1:1
Above table indicates that the consumer will give up 3 oranges for getting the second
apple, 2 oranges for getting the third apple and 1 orange for getting the fourth apple.
In other words, marginal rate of substitution of apples for oranges goes on
diminishing. It is because of the diminishing MRS that the IC becomes convex to the
origin.
(ii) The budget line shows all the different combinations of the two commodities that a
consumer can purchase, given his money income and the price of two commodities.
The equation of a budget line is given by
M = PX . Q X + PY . Q Y
Where, M = Money income of the consumer.
PX = Price of good-X.
PY = Price of good-Y.
QX = Quantity of good-X.
QY = Quantity of good-Y.
Supposing a consumer has an income of ` 40 to be spent on apples and oranges. Price
of a orange is ` 5 and a apple is ` 10. With his given income and given prices of apples
and oranges, the different combinations that a consumer can get of these two goods are
shown in the given table.
Combination Income (M) Apples Oranges
A 40 0 8
B 40 1 6
C 40 2 4
D 40 3 2
E 40 4 0
Y
Fig. 9
8 A
ORANGES
6 B
4 C
2 D
E
O X
1 2 3 4
APPLES
A consumer can purchase any of the above combinations in accordance with the
budget line equation.
SECTION–B
22. Distinguish between balance of trade and balance on current account of balance of
payments. 3
Ans. Balance of trade account includes only visible items of trade. It is defined as the difference
Balance of trade account = Export of visible items – Imports of visible items
On the other hand, balance on current account of balance of payments includes
transactions of visible items, invisible items and unilateral transfers.
24. As a result of increase in investment by ` 60 crore, national income rises by ` 240 crore.
Calculate marginal propensity to consume. 3
Ans. Given, increase in investment (DI) = ` 60 crore.
Increase in national income (DY) = ` 240 crore.
We know that,
DY
Multiplier (K) =
DI
240
= =4
60
1
1-MPC
1
Þ 4=
1-MPC
1
Þ 1 – MPC =
4
Þ 1 – MPC = 0.25
Þ MPC = 1 – 0.25 = 0.75
Marginal propensity to consume = 0.75.
income:
(i) Expenditure on maintenance of a building.
(ii) Expenditure on adding a floor to the building. 4
Ans. (i) Expenditure on maintenance of a building is not included in national income, as it is a
part of intermediate consumption. A building is an income generating asset.
(ii) Expenditure on adding a floor to the building is included in national income because it
is a part of investment expenditure or capital formation.
32. Calculate (a) ‘Gross National Product at Market Price and (b) ‘Personal Disposable
Income’ from the following: 6
Items (` in crore)
(i) Net factor income to abroad 10
(ii) Private income 1,700
(iii) Operating surplus 300
(iv) Corporation tax 150
(v) Undistributed profit 30
(vi) Mixed income 500
(viii) Personal taxes 200
(ix) Compensation of employees 1,200
(x) Net indirect tax 250
Ans. (a) Gross National Product at Market Price (GNPMP)
= Compensation of employees + Operating surplus + Mixed income + Consumption
of fixed capital + Net indirect tax – Net factor income to abroad
= ` 1,200 crore + ` 300 crore + ` 500 crore + ` 100 crore + ` 250 crore – ` 10 crore
= ` 2,340 crore
(b) Personal Disposable Income

= Private income – Corporation tax – Undistributed profits – Personal taxes
= ` 1,700 crore – ` 150 crore – ` 30 crore – ` 200 crore
= ` 1,320 crore
(a) Gross national product at market price (GNPMP) = ` 2,340 crore.
(b) Personal disposable income = ` 1,320 crore.
Foreign
(iv) Question No. 6 - 10 and 22 - 26 are short-answer questions carrying 3 marks each. Answers to them should
SET–I
SECTION–A
1. Define microeconomics. 1
Ans. Microeconomics studies economic relationships or economic issues at the level of an
individual–an individual firm, an individual household or an individual consumer.
2. What is market equilibrium? 1
Ans. Market equilibrium is a situation where market demand is exactly equal to its supply.
3. Define market demand. 1
Ans. Market demand is the total demand by all buyers of a commodity in the market.
4. Give meaning of “Change in quantity supplied”. 1
Ans. Expansion and contraction in quantity supplied due to change in the own price of the
commodity is known as change in the quantity supplied.
5. Define ‘Revenue’. 1
6. Explain how a production possibility curve is affected when resources are inefficiently
employed in an economy. 3
Ans. Production possibility curve is drawn on the assumption that the given resources are fully as
well as efficiently utilized, along with the given technology. If resources are inefficiently
employed in an economy, it implies that the economy is not maximising its output with the
given resources. It is a situation when the concerned economy is NOT operating on the
production possibility curve, but is somewhere within the production possibility curve. So
that, it is possible to increase the level of output of Good-X, or Good-Y, or both X and Y.
Fig 1. Y
P
PPC, indicating level of output of
Good-X and Good-Y when
resources are fully as well as
GOOD-Y
efficiently utilized, along with the

given technology.
A Points like A and B (within the
Production Possibility Frontier)
B indicate that the resources are
inefficiently utilized.
O X
P2 P
GOOD-X
7. A consumer buys 17 units of a good at a price of ` 10 per unit. When price falls to ` 8 per unit
the consumer buys 23 units. Using the expenditure approach, what will you say about price
elasticity of demand of the good? 3
Ans.

10 17 170
8 23 184
Price elasticity of demand of the good in this case will be greater than unitary elastic because
with fall in price of the commodity, total expenditure increases.
8. Giving examples, distinguish between fixed cost and variable cost. 3
Ans. Fixed costs are those costs which do not change with the change in output of a good. They
remain constant at all levels of output. Fixed costs never become zero. These costs remain
unchanged even if output of a good is zero. Examples: Salary of the permanent staff and
rent of the factory building, etc.
Variable costs are those costs which change with the change in output of a good. If output is
zero, these costs are also zero. As output of the good increases, these costs also increase.
Examples: Costs incurred on raw materials, electricity, etc.
9. Draw total revenue curve and marginal revenue curve of a firm which is free to sell any
quantity of the good at a given price. Explain. 3
Ans. A firm under perfect competition is free to sell any quantity of the good it produces at a
given price. A firm is a price taker implying that AR is constant under perfect competition.
In case AR is constant, MR is also constant. Implying that TR increases at a constant rate.
Hence, TR forms a straight line sloping upward and starting from the point of origin as
shown in Fig. 2 and MR in this case will be a horizontal straight line parallel to X-axis.
Y
Fig. 2 Y
AVERAGE AND MARGINAL

TR
TOTAL REVENUE (`)

T
REVENUE (`)
S S
P AR=MR
X X
O L O L
OUTPUT (Units) OUTPUT (Units)
Fig. 1 Fig. 2
10. Explain the implication of the feature ‘freedom of entry and exit to firms’ under perfect
competition.
Or
Explain the implication of the feature ‘large number of sellers’ under perfect
competition. 3
Ans. Under perfect competition, there is no legal restriction on the entry or exit of the firms. A
firm can enter and leave any industry, any time. Thus, whenever there are extra-normal
profits some new firms will enter the industry and whenever there are extra-normal losses,
some existing firms will leave the industry. Consequently, under perfect competition only
normal profits prevail in the long run.
Or
The number of sellers of a commodity is very large under perfect competition. The number
of firms selling a particular commodity is so large that an individual seller contributes only a
small fraction to the market supply. Thus, any increase or decrease in supply by an
individual firm hardly impacts the total market supply and consequently, an individual firm
cannot impact market price of the commodity.
11. Derive the inverse relation between price of a good and its demand from the single
commodity equilibrium condition ‘Marginal utility = Price’. 4
Ans. Fig. 3 shows consumer equilibrium in case of a single commodity, when
Marginal Utility (MU) = Price (P).
Y Y
Fig. 3
MARGINAL UTILITY (MU)
30
30
PRICE (`)
20 20
10 10 DD Curve
X X
O 1 2 3 4 O 1 2 3 4
QUANTITY (Units) MUX QUANTITY (Units)
When MU = P = 10; quantity purchased by the consumers is 3 units. When price (= marginal
utility) rises to 20, quantity purchased by the consumers is 2 units and further when price
rises to 30, the quantity purchased by the consumers falls to 1 unit. Thus, demand curve is
derived by joining all the points corresponding to price and quantity purchased.
12. Explain how a fall in prices of the related goods affects the demand for the given good.
Give example. 4
Ans. The relation between the demand for a good and price of related goods is different in case
of substitute goods and complementary goods. This is explained with reference to Fig. 4.
Y
D1
Fig. 4 D2
D
PX
L K S
P
Demand curve (from DD to D1D1) when price of the
shifts to the left complementary good decreases
(from DD to D2D2) when
price of the substitute D1
good decreases D2 D
O X
QX
(i) Substitute Goods: When price of the substitute goods decreases, demand curve for
Good-X shifts to the left, implying quantity demanded decreases from PK to PL even
when price of Good-X continues to be OP.
(ii) Complementary Goods: When price of the complementary goods decreases, demand
curve for Good-X shifts to the right, implying quantity demanded increases from PK to
PS even when price of Good-X continues to be OP.
13. What is a supply schedule? Explain how does change in technology of producing a good
affect the supply of that good.
Or
Define supply curve. How does fall in price of an input affect the supply of the good using
that input? 4
Ans. Supply schedule is a table showing a relationship between price and quantity supplied of a
commodity.
A cost saving technological progress will reduce the marginal cost of production. So the
marginal cost curve shifts downward. Since MC curve is the same as supply curve of the
firm, downward shift in MC curve implies a downward shift in supply curve. It means
supply curve shifts to the right, signifying increase in supply. Fig. 5 illustrates this situation.
Fig. 5 Y
Supply curve
prior to technological S1
improvement S2
PRICE
Supply curve after
K T technological improvement
P
S1
S2
O X
QUANTITY
Or
Supply curve is a graphic presentation of supply schedule, showing positive relationship
between price of a commodity and its quantity supplied.
Fall in input price shifts the marginal cost curve downward. Accordingly, supply curve shifts
downward or to the right implying more supply at the same price. Fig. 6 illustrates this
situation. S1S1 is the initial supply curve. When input price decreases, supply curve will shift
to the right from S1S1 to S2S2.
Fig. 6 Y
S1
S2
R K
PRICE
Supply curve shifts to the right in

case of decrease in the input price
S1
S2
O X
QUANTITY
14. Giving reason, explain the behaviour of total product under the Law of Variable
Proportions. Use diagram. 6
utilisation of the fixed factor. Thus, broadly, we have situations of increasing MP, decreasing
MP and negative MP when the law of variable proportions is in operation. In a situation
when MP is increasing, TP should be increasing at an increasing rate. When MP is
decreasing, TP should be increasing at a decreasing rate. And, when MP is negative, TP
should be declining. Of course TP should be maximum when MP = 0.
Y
Fig. 7 T
TOTAL PRODUCT
TP
L S
O X
Returns Returns
MARGINAL PRODUCT
O X
L S – ve
MP
Diagram shows that:

15. Explain the conditions of consumer’s equilibrium with the help of indifference curve
analysis. 6
or
Slope of IC and slope of price line are equal to each other.
In Fig. 8, AB is the budget or price line. IC1, IC2 and IC3 are indifference curves. A
consumer can buy any of the combinations, A, B, C, D and E of Good-X and Good-Y shown
on the price line AB. No combination is ‘attainable’ beyond the line AB, because AB sets
the limit of attainable combinations with the given income. Out of A, B, C, D and E
combinations, the consumer will be in equilibrium at combination ‘E’, because at this
point, price line (AB) is tangent to the highest indifference curve IC2. Also, at E, IC is
convex to the origin. No doubt, the consumer can buy ‘C’ or ‘D’ combinations as well but
these will not give him maximum satisfaction being located on lower indifference curve
IC1. It means consumer’s equilibrium point is the point of tangency of price line and
indifference curve.
Y
Fig. 8
A
Slope of Indifference Curve
GOOD-Y
E = Slope of Budget or Price

L P
Line or MRSXY = X ,
IC3 PY
IC2 and at the point of equilibrium,
IC is convex to the origin.
D IC1
O X
M B
GOOD-X
16. Market for a good is in equilibrium. Supply of the good ‘decreases’. Explain the chain of
effects of this change. Use diagram.
Or
Distinguish between ‘cooperative’ and ‘non-cooperative’ oligopoly. Explain the
following features of oligopoly:
(i) Barriers to the entry of firms.
(ii) Non-price competition. 6
Ans. Effect of decrease in supply of a commodity on its equilibrium price and equilibrium
Fig. 9 Y
D S1
P2
S
P1 E1
PRICE
P E
S1
D
S
O X
Q2 Q1 Q
QUANTITY
Decrease in supply implies a shift in supply curve to the left. It is indicated by S1S1. This sets
in motion the following Chain of Effects:
Decrease in supply implies that less is supplied at the existing price. Given the demand,
be supplied at the price OP2. Or, at the price of OP, only OQ2 quantity will now be offered
for sale. Rise in price will cause contraction of demand and extension of supply. This
Or
Cooperative (or collusive) oligopoly is a form of the market in which there are few firms in
the market and all decide to avoid competition through a formal agreement. They collude
to form a cartel, and fix for themselves output quota and market price. Whereas,
non-cooperative (or non-collusive) oligopoly is a form of the market in which there are few
firms in the market, and each firm pursues its price and output policy independent of the
rival firms. Each firm tries to increase its market share through competition.
(i) Barriers to the Entry of Firms: There are various barriers to the entry of new firms.
These barriers are almost similar to those under monopoly. Patent-rights is the most
important form of entry-barrier. Entry of the new firms is extremely difficult, if not
impossible.
(ii) Non-price Competition: Under oligopoly, firms tend to avoid price competition.
Example: In India both Coke and Pepsi drinks sell at the same price. However, in
order to enhance its share of the market, each firm tries to resort to non-price
competition. Example: Coke and Pepsi sponsor different games and sports; they also
offer lucrative schemes (like of maintenance of school garden) when bulk purchases
are made on regular basis.
SECTION-B
17. Define ‘capital goods’. 1
Ans. Capital goods are fixed assets of the producers which are repeatedly used in the production
of other goods and services.
18. Define ‘real’ gross domestic product. 1
Ans. Real gross domestic product refers to GDP, estimated at constant prices or prices prevailing
during the base year (defined as the year of comparison).
19. Define legal reserve ratio. 1
Ans. Every bank is required to maintain a fixed percentage of its assets in the form of cash or
other liquid assets, called legal reserve ratio.
20. What are demand deposits? 1
bank on demand or by writing a cheque any time.
21. What is balance of payments? 1
Ans. Balance of payments refers to the statement of accounts recording all economic
transactions of a country with rest of the world in an accounting year.
22. What are the components of the current account of the balance of payments account? 3
Ans. The components of the current account of the balance of payments includes:
23. Explain how ‘externalities’ are a limitation of taking gross domestic product as an index
of welfare. 3
Ans. Externalities are the good and bad impact of an activity without paying the price or penalty
for that. Example: Positive externalities occur when a beautiful garden maintained by Mr.
X raises welfare of Mr. Y even when Mr. Y is not paying for it. There is no valuation of it in
the estimation of GDP. Negative externalities occur when smoke omitted by factories causes
air pollution, or the industrial waste is driven into rivers causing water pollution.
Environmental pollution causes a loss of social welfare. But nobody is penalised for it and
there is no valuation of it in the estimation of GDP. Impact of externalities (positive or
negative) is not accounted in the index of social welfare in terms of GDP. To that extent,
GDP as an index of welfare is not an appropriate index. It either underestimates or
overestimates the level of welfare.
24. An economy is in equilibrium. Its consumption function is C = 300 + 0.8Y where C is

consumption expenditure and Y is income and investment is ` 700. Find national
income. 3
Ans. Given, Consumption expenditure (C) = 300 + 0.8Y
Investment (I) = 700
At equilibrium,
Y =C+I
Y = 300 + 0.8Y + 700
Y = 1,000 + 0.8Y
Y – 0.8Y = 1,000
0.2Y = 1,000
Y = 5,000
\ National income (Y) = ` 5,000.
25. Explain with the help of examples, the distinction between direct tax and indirect tax. 3
Ans. The main differences between direct tax and indirect tax are as follows:
(i) Direct taxes are those taxes the final burden of which falls on that very person who
makes the payment to the government. On the other hand, indirect taxes are those
which are paid to the government by one person but their final burden is borne by
another person.
(ii) Direct taxes cannot be shifted to other persons whereas the indirect taxes can be shifted
to other persons.
Example: A shopkeeper pays sales tax to the government but usually recovers it from
the customers as a part of price of the commodity sold. So, impact of sales tax (an
indirect tax) is ultimately shifted to the consumers. But, the impact of income tax is to
be finally borne by the tax payer himself. He cannot shift its burden onto others.
26. When price of a foreign currency rises, its supply also rises. Explain, why.
Or
When price of a foreign currency falls, its demand rises. Explain, why. 3
Ans. Rise in the price of a foreign currency causes a rise in its supply, owing to the following
reasons:
(i) Now domestic currency becomes cheaper in relation to the foreign currency.
Accordingly, foreign investors will make larger investment in the domestic economy.
Implying, a rise in the supply of foreign currency.
(ii) Now domestic exporters will get an opportunity to increase their exports, because
domestic goods become cheaper in relation to foreign goods (Example: If US $
becomes expensive, it can buy more goods in the Indian market). Accordingly, supply
of foreign currency (or flow of foreign currency into our economy) will tend to rise.
(iii) Rise in the price of a foreign currency (say US $) would mean more Indian rupees per
US dollar. Accordingly, NRIs would make greater transfers to their home country.
Implying, a rise in the flow of foreign currency into the domestic economy.
Or
When price of a foreign currency falls, its demand rises, owing to the following reasons:
(i) Indian players in the international market will now buy more of foreign currency,
because now it is available at a lower price. Thus, the demand rises.
(ii) Now, imports become cheaper than before. Accordingly, imports tend to rise, implying
a rise in the demand for foreign currency.
(iii) Travelling abroad now becomes cheaper. Accordingly, demand for the foreign
currency rises.
27. Explain the ‘economic stability’ objective of a government budget.
Or
Explain the ‘allocation of resources’ objective of a government budget. 4
Ans. Free play of market forces (or the forces of supply and demand) tend to generate trade
correct) inflationary gap.
Or
Through its budgetary policy, the government of a country directs the allocation of
28. From the following data about a government budget, find (a) revenue deficit, (b) fiscal
deficit and (c) primary deficit: 4
Items (` in arab)
(i) Plan capital expenditure 120
(ii) Revenue expenditure 100
(iii) Non-plan capital expenditure 80
(iv) Revenue receipts 70
(v) Capital receipts net of borrowing 140
(vi) Interest payments 30
Ans. (a) Revenue Deficit = Revenue Expenditure – Revenue Receipts

= ` 100 arab – ` 70 arab
= ` 30 arab
(b) Fiscal Deficit = Revenue expenditure + Plan capital expenditure + Non-plan capital
expenditure – Revenue receipts – Capital receipts net of borrowing
= ` 100 arab + ` 120 arab + ` 80 arab – ` 70 arab – ` 140 arab
= ` 300 arab – ` 210 arab
= ` 90 arab
= ` 90 arab – ` 30 arab
= ` 60 arab
income:
(i) Payment of income tax by a firm.
(ii) Festival gift to employees. 4
Ans. (i) Income tax by a firm implies corporate tax. It is a transfer payment by the firm to the
government. It has nothing to do with the estimation of national income. It is paid out
of income.
(ii) Festival gift to employees is not included in the estimation of national income because
this is a transfer payment.
30. Explain the role of the following in correcting deficient demand in an economy:
(a) Government expenditure.
(b) Legal reserve.
Or
Explain the role of the following in correcting inflationary gap in an economy:
(a) Open market operations.
(b) Government expenditure. 6
Ans. (a) In a situation of deficient demand, aggregate demand (measured in terms of aggregate
expenditure) is less than the aggregate supply corresponding to the full employment
level in the economy. Accordingly, aggregate demand needs to be stepped up. But,
because of poor market sentiments (a characteristic feature of deficient demand),
private expenditure continues to be low. It is in such a situation that the government
expenditure (which is not driven by profit-motive) can play a significant role. It will act
as an injection of demand into the system and is expected to trigger private
expenditure. Accordingly, the situation of deficient demand will be corrected.
(b) Legal reserve refers to the legally determined ratio between liquid assets and total
assets of the commercial banks. The commercial banks are required to maintain
minimum SLR, also known as legal reserves as fixed by the central bank from time to
time.
During situations of deficient demand, legal reserve ratio is lowered. This raises credit
creation capacity of the commercial banks. Accordingly, availability of credit increases
in the capital market. As a result, aggregate demand is increased as required to correct
deficient demand in the economy.
Or
(a) Open market operations is the policy that focuses on increasing and decreasing the
securities by the central bank. When cash balances need to be reduced (as during
situations of excess demand or inflationary gap), the central bank starts selling
securities. Sale of securities sucks purchasing power from the money market.
Consequently, aggregate demand is decreased and inflationary gap is corrected.
(b) Inflationary gap refers to a situation of excess demand, when aggregate demand is
greater than aggregate supply corresponding to full employment in the economy.
During this situation, general price level tends to rise, causing a rise in the rate of
interest and consequently, a fall in investment and a fall in the growth rate of GDP.
Correction of inflationary gap calls for a cut in expenditure, but, owing to rising prices,
wage rate tends to rise (along with other factor costs) which stokes the rate of inflation.
In such a situation, a cut in government expenditure (particularly) non-development
expenditure like on defence, law and order and subsides to the consumers will cause an
overcall cut in aggregate demand. So that excess aggregate demand is corrected and
inflationary gap is eliminated.
31. How do commercial banks create credit? 6
more than their cash reserves. If cash reserves are (say) ` 1,000 and if demand deposits
are (say) ` 10,000, then the commercial banks are creating credit ten times of their
cashreserves. Accordingly, on the basis of cash reserves of ` 1,000, the commercial banks
are contributing ` 10,000 to the supply of money. Here comes the basic question: how are
cash reserves of ` 1,000 with the banks converted into demand deposits of ` 10,000?
1
CRR
1
= × ` 1,000
10%
= 10 × ` 1,000 = ` 10,000.
32. Calculate National Income and Personal Disposable Income from the following: 6
Items (` in crore)
(i) Personal tax 150
(ii) Net imports (–)10
(iv) Private income 600
(v) Undistributed profit 20
(vi) Net domestic capital formation 120
(vii) Government final consumption expenditure 200
(viii) Net factor income to abroad (–)5
(ix) Corporation tax 100
Ans. National Income = Private final consumption expenditure + Government final
consumption expenditure + Net domestic capital formation – Net imports – Net indirect
tax – Net factor income to abroad
= ` 700 crore + ` 200 crore + ` 120 crore – (–) ` 10 crore – ` 105 crore – (–) ` 5 crore
= ` 930 crore
Personal Disposable Income = Private income –Undistributed profit – Corporation tax
– Personal tax
= ` 600 crore – ` 20 crore – ` 100 crore – ` 150 crore
= ` 600 crore – ` 270 crore
= ` 330 crore
National income = ` 930 crore.
Personal disposable income = ` 330 crore.
SET–II
SECTION–A
1. What is a market economy? 1
Ans. A market economy is the one in which decisions regarding ‘what, how and for whom to
produce’ are governed by the market forces of supply and demand.
7. A consumer buys 19 units of a good at a price of ` 11 per unit. When price rises to ` 13 per
unit the consumer buys 17 units. Using the expenditure approach, what will you say
about price elasticity of demand of the good? 3
Ans.
Price (`) Demand (Units) Total Expenditure
11 19 209
13 17 221
Price elasticity of demand of the good in this case will be less than unitary elastic because
with the rise in price of the commodity, total expenditure on the commodity also rises.
11. Explain the relation between total utility and marginal utility. 4
Ans. The relation between total utility and marginal utility is as follows:
(i) Marginal utility of all units of consumption, when added, will be total utility.
(ii) When MU decreases, TU increases at a diminishing rate.
(iii) When MU is zero, total utility is maximum.
(iv) When marginal utility is negative, total utility diminishes.
15. Explain the concept of Marginal Rate of Substitution. Explain the reaction of the
consumer when Marginal Rate of Substitution is higher than the ratio of prices. 6
Ans. Marginal rate of substitution between Good-X and Good-Y (briefly MRSXY) is the rate at
which the consumer is ready to sacrifice Good-Y for a unit more of Good-X. This is in
DY
accordance with the preferences of the consumer, and is expressed as . This is the same
DX
as the slope of IC.
P
We know the consumer strikes this equilibrium when MRSXY = X .
PY
PX
In a situation when MRSXY> , equilibrium of the consumer is disturbed. On the
PY
PX
assumption that remains constant (and also income of the consumer is constant)
PY
P
equilibrium can be struck only when MRSXY starts falling and becomes equal to X . This
PY
happens only when the consumer starts consuming more of X in place of Y. That is, he
moves downward to the right along the IC. Convexity of the IC ensures that as the
consumer moves downward to the right along his IC, MRSXY tends to fall.
P
Briefly, when MRSXY > X , the consumer would react to this situation by substituting X for
PY
Y so that MRSXY declines and becomes equal to price ratio.
SECTION–B
22. Distinguish between ‘balance of current account’ and ‘balance of trade’. 3
Ans. Balance on current account includes transactions of visible items, invisible items and
unilateral transfers.
Whereas, balance of trade includes only visible items of trade. It is defined as the difference
Balance of Trade = Export of visible items – Imports of visible items
24. An economy is in equilibrium. The economy’s consumption function is C = 100 + 0.5Y
where C is consumption expenditure and Y is national income. National income is 1,000.
Find out investment expenditure in the economy. 3
Ans. Given, Consumption expenditure (C) = 100 + 0.5Y
National income (Y) = 1,000
At equilibrium, Y =C+I
Or, I =Y–C
= 1,000 – 100 – 0.5Y
= 1,000 – 100 – 0.5 (1,000)
= 1,000 – 100 – 500
= 400
\ Investment expenditure in the economy (I) = 400.
income:
(i) Subsidy on the output produced.
(ii) Contribution to provident fund by the employees. 4
Ans. (i) Subsidy on the output produced is not separately included while estimating national
income. It is an integral component of NNPFC. We know NNPFC – Subsidies + Indirect
taxes = NNPMP. This equation shows that subsidies are an integral component of
NNPFC or national income.
(ii) Contribution to provident fund by the employees is an integral component of income.
It is paid out of income. It is therefore not separately added in the estimation of
national income.
32. Calculate ‘Net National Product at Factor Cost’ and ‘Gross National Disposable Income’
Items (` in crore)
(i) Profits 200
(ii) Net current transfers to abroad (–)10
(iii) Royalty 10
(iv) Wages and salaries 600
(vi) National debt interest 80
(vii) Interest paid by production units 120
(viii) Social security contributions by employers 100
(ix) Net factor income to abroad (–)20
(x) Rent 50
(xi) Net indirect tax 70
Ans. Net National Product at Factor Cost (NNPFC)
= Wages and salaries + Social security contribution by employers + Profits + Royalty
+ Interest paid by production units + Rent – Net factor income to abroad
= ` 600 crore + ` 100 crore + ` 200 crore + ` 10 crore + ` 120 crore + ` 50 crore
– (–) ` 20 crore
= ` 1,100 crore
Gross National Disposable Income = NNPFC + Consumption of fixed capital + Net
indirect tax – Net current transfer to abroad
= ` 1,100 crore + ` 60 crore + ` 70 crore – (–) ` 10 crore
= ` 1,240 crore
National product at factor cost = ` 1,100 crore.
Gross national disposable income = ` 1,240 crore.
SET–III
SECTION–A
1. What is ‘opportunity cost’? 1
Ans. Opportunity cost is the value of a factor in its second best alternative use.
7. A consumer buys 9 units of a good at a price of `11 per unit. When price falls to ` 9 per
unit the consumer buys 11 units. Using the expenditure approach, what will you say
about price elasticity of demand of the good? 3
Ans.
11 9 99
9 11 99
Price elasticity of demand of the good in this case will be unity, because change in price has
no effect on total expenditure.
11. What is ‘marginal utility’? Explain the law of diminishing marginal utility with the help
of a utility schedule. 4
Ans. Marginal utility is the utility derived from the consumption of an additional unit of a
commodity.
The law of diminishing marginal utility states that the marginal utility derived from the
consumption of a commodity must diminish as more units of that commodity are consumed
at a point of time. Two basic assumptions of the law are: (i) only standard units of the
commodity are consumed, like a cup of tea (not a spoon of tea) or a glass of water (not a drop
of water), and (ii) consumption is continuous.
Utility Shedule
Units of Commodity X MUX
1 50
2 40
3 30
4 20
5 10
6 0
7 –10
The above schedule and Fig. 10 reveal that as the consumer consumes more of commodity
X, the marginal utility diminishes. Accordingly, marginal utility curve (MU) slopes
downwards from left to right. MU curve cuts across X-axis implying that MU may even be
zero or negative.
Y
Fig. 10
50
40
MUX 30
20
10
Zero Utility
O X
1 2 3 4 5 6 7
–10
Units of X MU (– ve)
15. Explain three properties of indifference curves. 6

22. Distinguish between autonomous and accommodating transactions in the balance of
payments. 3
items are known as below the line items.
24. An economy is in equilibrium. Its national income is ` 5,000 and autonomous
consumption expenditure is ` 500. What is the total consumption expenditure if
marginal propensity to consume is 0.7? 3
Ans. Given, National income (Y) = ` 5,000
Autonomous consumption expenditure (C) = ` 500
MPC = 0.7
Consumption expenditure (C) = C + MPC (Y)
= 500 + 0.7 (5,000)
= 500 + 3,500
= 4,000
\ Total consumption expenditure (C) = ` 4,000.
SECTION–B
income: 4
(i) Contribution to provident fund by the employers.
(ii) Free dress provided to nurses by the hospital.
Ans. (i) Contribution to provident fund by the employers is included in national income,
because it is paid by the employers on behalf of the employees. It is included in national
income as a part of the compensation of employees.
(ii) Free dress provided to nurses by the hospital is included in the estimation of national
income because it is a kind of wages in kind, and therefore a part of compensation of
employees.
32. Calculate ‘Net Domestic Product at Factor Cost’ and ‘Net National Disposable Income’: 6
Items (` in crore)
(i) Net factor income to abroad 30
(ii) Sales 2,000
(iii) Subsidies 20
(iv) Consumption of fixed capital 50
(v) Net current transfers to abroad (–)10
(vi) Closing stocks 100
(vii) Opening stocks 200
(viii) Intermediate costs 1,000
(ix) Indirect tax 150
Ans. Net Domestic Product at Factor Cost (NDPFC)

= Sales – Intermediate costs + Change in stock (Closing stocks – Opening stocks)
– Consumption of fixed capital – Net indirect tax
= ` 2,000 crore – ` 1,000 crore + (` 100 crore – ` 200 crore) – ` 50 crore – (` 150 crore
– ` 20 crore)
= ` 2,000 crore – ` 1,000 crore – ` 100 crore – ` 50 crore – ` 130 crore
= ` 720 crore
Net National Disposable Income = NDPFC + Net indirect tax – Net factor income to abroad
= ` 720 crore + (` 150 crore – ` 20 crore) – ` 30 crore – (–) ` 10 crore
= ` 720 crore + ` 130 crore – ` 30 crore + ` 10 crore
= ` 830 crore
Net domestic product at factor cost = ` 720 crore.
Net national disposable income = ` 830 crore.
CBSE EXAMINATION PAPERS
DELHI–2012
(iii) Question No. 1-5 and 17-21 are very short-answer questions carrying 1 mark each. They are required to
(iv) Question No. 6-10 and 22-26 are short-answer questions carrying 3 marks each.
(v) Question No. 11-13 and 27-29 are also short-answer questions carrying 4 marks each. Answers to them
(vi) Question No. 14-16 and 30-32 are long-answer questions carrying 6 marks each. Answers to them should
SET–I
SECTION–A
1. Give meaning of an economy. 1
Ans. Economy is the sum total of economic activities directed towards the satisfaction of
unlimited wants using the scarce means.
2. What is market demand? 1
3. What is the behaviour of average fixed cost as output increases? 1
Ans. Average fixed cost continuously decreases as output increases.
4. What is the behaviour of average revenue in a market in which a firm can sell more only
by lowering the price ? 1
Ans. Average revenue continuously decreases in such a market in which a firm can sell more only
by lowering the price.
5. What is a price taker firm? 1
Ans. A price taker firm means that it has to accept the price as determined by the forces of
market demand and market supply.
6. What is opportunity cost? Explain with the help of a numerical example. 3
Ans. Opportunity cost is the value of a factor in its next best alternative use. Example: If Mr. X
has three options of employment: A with ` 5,000 p.m., B with ` 6,000 p.m, C with ` 7,000
p.m. then Mr. X should be choosing the best option (C) of ` 7,000 p.m. and its opportunity
cost would be ` 6,000 p.m.
7. Given price of a good, how does a consumer decide as to how much of that good to buy? 3
Ans. Given price of a good, consumer purchases that much of the commodity where rupee
æ MU X ö
worth of additional satisfaction çç ÷÷ from the consumption of a unit more of a good is
è PX ø
equal to marginal utility of money (MU M ) for the consumer. So that, in a state of equilibrium:
MU X
= MUM
PX
8. Draw average variable cost, average total cost and marginal cost curves in a single
diagram. 3
Ans. Fig. 1 shows average total cost (ATC), average variable cost (AVC) and marginal cost (MC).
All the three curves are U shaped. Also, MC curve must cut both ATC and AVC from their
lowest points (A & B in the diagram).
Fig. 1 Y
MC ATC
AVC
COST
O X
Q Q1
OUTPUT
9. An individual is both the owner and the manager of a shop taken on rent. Identify implicit
cost and explicit cost from this information. Explain. 3
Ans. As a manager, the owner is rendering his own services. Managerial services are not hired
from the market. So, they are implicit cost. Implicit costs are incurred on the use of
self-owned factors/inputs. Rent paid of a shop is explicit cost because it is the expense
incurred by the producer for purchasing the inputs from the market.
10. Explain the implication of large number of buyers in a perfectly competitive market.
Or
Explain why are firms mutually interdependent in an oligopoly market. 3
that by varying his purchase, an individual buyer cannot affect total market demand for a
Or
In an oligopoly market, there is a small number of big firms. Accordingly, there is a high
degree of mutual interdependence. Implying that, price and output policy of one firm has a
significant impact on the price and output policy of the rival firms in the market. When one
firm lowers its price, the rival firms may also lower the price. And, when one firm raises the
price, the rival firms may not do so. It is because of this interdependence that it becomes
very difficult to estimate change in firm’s sales caused by a change in price. Implying that a
precise relationship between price and sales cannot be established. Or, that the firm’s
demand curve cannot be drawn.
11. Define an indifference curve. Explain why an indifference curve is downward sloping
from left to right. 4
Ans. Indifference curve is a curve showing different combinations of two commodities, each
combination offering the same level of satisfaction to the consumer. The slope of an
indifference curve shows the rate at which the consumer is willing to substitute one
commodity for the other. Or, it shows the marginal rate of substitution.
An indifference curve slopes downwards from left to right. This is because of monotonic
preferences of a consumer. If a consumer is simultaneously buying two goods, he can have
more of one good only when he has less of the other so that his total satisfaction (at any point on
IC) remains the same. An IC, therefore, must slope downward.
12. When price of a good is ™7 per unit a consumer buys 12 units. When price falls to ™6 per
unit he spends ™72 on the good. Calculate price elasticity of demand by using the
percentage method. Comment on the likely shape of demand curve based on this measure
of elasticity. 4
Ans. Given, P = ` 7; P1 = ™ 6; DP = P1 – P = ™ 6 – ™ 7 = (–) ™ 1
72
Q = 12 units; Q1 = =12 units; DQ = Q1 – Q = (12 – 12) units = 0
6
P DQ
Ed = (–) ´
Q DP
7 0
Þ = (–) ´ =0
12 -1
Price elasticity of demand = 0.
Demand curve in this case will be a vertical straight line parallel to Y-axis. Because, no
matter what the change in price is, there is no change in quantity demanded of the
commodity.
13. What does the law of variable proportions show? State the behaviour of total product
according to this law.
Or
Explain how changes in prices of other products influence the supply of a given product. 4
Ans. Law of variable proportions states that as more and more of the variable factor is combined
subsequently stabilise, but must finally decrease. Of course, initially, MP may rise owing to
better coordination between the factors and better utilisation of the fixed factor. Thus, we
have three phases of production viz. phases of increasing MP, decreasing MP and negative
MP. It is further illustrated through Fig. 2. In a situation when MP is increasing, TP should be
increasing at an increasing rate. When MP is decreasing, TP should be increasing at a
decreasing rate. And, when MP is negative, TP should be declining. Of course TP should be
maximum when MP = 0.
Fig. 2 Y
TP
TP
MP
Phase I: Phase II: Phase III:
Increasing Diminishing Negative
Returns Returns Returns
O X
M – ve
MP
Or
Prices of other products may rise or fall. In case of a rise, other products start yielding
greater profit than the given product, on the assumption that cost of production in case of
all the goods remains constant. Accordingly, the producers will start shifting to the
production of other goods. Less of the given good will be produced. Supply curve of the
given good will shift to the left, from SS to S1S1 in Fig. 3.
In case of a fall in prices of other goods, profit on the other good will start shrinking. The
producers will start shifting to the production of the given good. Implying that the supply
curve will shift to the right, from SS to S2S2 in Fig. 3.
Y
Fig. 3
S2
SS : Initial supply curve
S
S1 prices of other goods rise
PRICE

prices of other goods fall
S2 S1
S
O X
QUANTITY
Of course, if the price of the substitute good rises, the buyers would shift from the substitute
good to the given good. More of the given good will be purchased, even when own price of
the good remains constant. Implying a forward shift in supply curve of the given good.
14. Explain how do the following influence demand for a good:
(i) Rise in income of the consumer.
(ii) Fall in prices of the related goods. 6
Ans. (i) Effect of rise in income of the consumer on demand for a good is different in case of
normal good and inferior good, as shown in Fig. 4:
(a) Normal Goods: When income rises, demand curve for the normal good (say milk)
shifts to the right from PK to PT as shown in Fig. 4(a). Or, there is a positive
relationship between income and demand for normal goods.
(b) Inferior Goods: When income rises, demand curve for inferior good (say coarse
grain) shifts to the left from PT to PK as shown in Fig. 4(b). Or, there is a negative
relationship between income and demand for inferior goods.
Fig. 4 (a) (b)

Y Y
D2 D1
D2
PRICE OF MILK
D1
K T K T
P P
D2
D1 D1
D2
O X O X
Q1 Q2 Q2 Q1
(ii) Related goods may be: (a) substitute goods, or (b) complementary goods. Fig. 5
illustrates how demand for a given good is influenced by a fall in price of a substitute
good as well as a complementary good.
each other. When price of a substitute good decreases, demand for a given good
(Good-X) tends to fall. Demand curve for Good-X will shift to the left, implying
quantity demanded decreases from PK to PS even when price of Good-X continues to
be OP.
the demand for each other. When price of complementary goods decreases,
demand for Good-X tends to rise. Demand curve for Good-X will shift to the right,
implying quantity demanded increases from PK to PL even when price of Good-X
continues to be OP.
Fig. 5 illustrates the effect of fall in price of the related goods.
Y
Fig. 5 D D1 Demand curve shifts to the
D2 left (from DD to D2D2) when
Initial demand curve price of the substitute good
decreases
PRICE OF X
Demand curve shifts to the
right (from DD to D1D1) when
S K L price of the complementary
P good decreases
D1
D2 D
O X
QX
QUANTITY OF X
15. Explain the conditions of a producer’s equilibrium in terms of marginal cost and
marginal revenue. Use diagram. 6
According to marginal cost and marginal revenue approach, producer strikes his
(i) MR = MC, and
(ii) MC is rising (or MC curve cuts MR curve from below) at the point of equilibrium.
This is illustrated through Fig. 6.
Fig. 6 Y
MC
COST/REVENUE
E Q AR=MR
P
O X
L
OUTPUT (Units)
Fig. 6 shows that producer strikes his equilibrium at point Q where OL units of output are
produced. Note carefully that it is only when OL units of output are produced that MC = MR,
and MC curve is rising. At point E also, MR = MC. But E is not the point of equilibrium.
Because, here MC is falling. Since price is constant, (implying constant MR), falling MC
would mean MR>MC beyond point E (and between points E & Q). This points to the
possibility of greater profits if output is increased beyond point E. Profits are maximised
only at point Q where MR = MC and also MC is rising. Any attempt to raise output beyond
point Q would mean getting into a situation where MR<MC. Hence, it is only at point Q
that profits are maximised and the equilibrium is struck.
16. Market for a good is in equilibrium. There is simultaneous “increase”, both in demand
and supply of the good. Explain its effect on market price.
Or
Market for a good is in equilibrium. There is simultaneous “decrease”, both in demand
and supply of the good. Explain its effect on market price 6
Ans. Effect of a increase in both the market demand and market supply of a commodity on its
market price is discussed with reference to Fig. 7 (a, b, c) illustrating three different
situations.
Situation 1: Situation 2: Situation 3:

Fig. 7 Increase in Demand > Increase in Demand < Increase in Demand =
Increase in Supply Increase in Supply Increase in Supply
Price tends to rise owing Price tends to fall owing Price does not change owing
to excess demand to deficient demand to proportionate increase in
demand and supply
Y (a) Y (b) Y (c)
D2 S1
D2 S1 D2 S1
D1 S2 D1 S2 D1 S2
PRICE
PRICE
PRICE
P2 P1
P1 P1
P2
S1 D2 S1 D2 S1
S2 D2
D1 S2 D1 S2 D1
O X O X O X
Q1 Q2 Q1 Q2 Q1 Q2
QUANTITY QUANTITY QUANTITY
The diagrams (in Fig. 7) explain the following situations:

(i) In Fig. 7(a), D1D1 is the initial demand curve and S1S1 is the initial supply curve. OP1 is
equilibrium price and OQ1 equilibrium quantity. Due to increase in demand, D2D2 is
the new demand curve. Due to increase in supply, S2S2 is the new supply curve. In the
diagram, increase in demand (from D1D1 to D2D2) is more than increase in supply
(from S1S1 to S2S2). It is a situation of excess demand. Accordingly, the market price will
rise from OP1 to OP2, as in Fig. 7(a). Equilibrium quantity increases from OQ1 to OQ2.
(ii) In Fig.7(b), increase in demand (from D1D1 to D2D2) is less than increase in supply
(from S1S1 to S2S2). It is a situation of excess supply. Accordingly, the market price falls
from OP1 to OP2. Equilibrium quantity increases from OQ1 to OQ2.
(iii) In Fig. 7(c), increase in demand is exactly equal to increase in supply. Accordingly, the
market price remains unchanged i.e., OP1. Equilibrium quantity increases from OQ1
to OQ2.
Or
Effect of a decrease in both the market demand and market supply of a commodity on its
market price is discussed with reference to Fig. 8 (a, b, c) indicating three different
situations.
Situation 1: Situation 2: Situation 3:

Fig. 8 Decrease in Demand > Decrease in Demand < Decrease in Demand =
Decrease in Supply Decrease in Supply Decrease in Supply
Price tends to fall owing Price tends to rise owing Price does not change
to deficient demand to excess demand owing to proportionate fall
in demand and supply
Y (a) Y (b) Y (c)
D1 D1 S2 S2
S2 D1
D2 S1
PRICE
PRICE
D2 S1 S1 D2
PRICE
P1
P2
P2 P1 P1
S2 D1 S2 D1 S2
S1 D2 S1 D1
S1 D2 D2
O Q2 Q1 X O X O X
Q2 Q1 Q2 Q1
The diagrams (in Fig. 8) explain the following situations:

(i) In Fig. 8(a), D1D1 is the initial demand curve and S1S1 is the initial supply curve. OP1 is
equilibrium price and OQ1 equilibrium quantity. Due to decrease in demand, D2D2 is
the new demand curve. Due to decrease in supply, S2S2 is the new supply curve. In the
diagram, decrease in demand (from D1D1 to D2D2) is more than decrease in supply
(from S1S1 to S2S2). It is a situation of excess supply. Accordingly, the market price falls
from OP1 to OP2, as in Fig. 8(a). Equilibrium quantity decreases from OQ1 to OQ2.
(ii) In Fig. 8(b), decrease in demand (from D1D1 to D2D2) is less than decrease in supply
(from S1S1 to S2S2). It is a situation of excess demand. Accordingly, the market price
rises from OP1 to OP2. Equilibrium quantity decreases from OQ1 to OQ2.
(iii) In Fig. 8(c), decrease in demand is exactly equal to decrease in supply. Accordingly, the
market price remains unchanged i.e., OP1. Equilibrium quantity decreases from OQ1
to OQ2.
SECTION-B
17. Define stock variable. 1
Ans. Stock variable is that quantity of an economic variable which is measured at a particular
point of time.
18. Define capital goods. 1
Ans. Demand deposits are those deposits which can be withdrawn from the bank on demand or
by writing a cheque any time.
20. Define a tax. 1
Ans. A tax is a legally compulsory payment imposed by the government on the households, firms
and producers.
21. Give meaning of managed floating exchange rate. 1

Ans. Managed floating is a system that allows adjustments in exchange rate according to a set of
rules and regulations which are officially declared in the foreign exchange market.
22. Calculate Gross Value Added at Factor Cost:
Items
(i) Units of output sold (units) 1,000
(ii) Price per unit of output (™) 30
(iii) Depreciation (™) 1,000
(iv) Intermediate cost (™) 12,000
(v) Closing stock (™) 3,000
(vi) Opening stock (™) 2,000
(vii) Excise (™) 2,500
(viii) Sales tax (™) 3,500
3
Ans. Gross Value Added at Factor Cost
= Sales (Units of output sold ´ Price per unit of output) + Closing stock - Opening stock
– Intermediate cost – Excise – Sales tax
= (1,000 ´ ` 30) + ` 3,000 – ` 2,000 – ` 12,000 – ` 2,500 – ` 3,500
= ` 30,000 + ` 3,000 – ` 2,000 – ` 12,000 – ` 2,500 – ` 3,500
= ` 13,000
Gross value added at factor cost = ` 13,000.
23. Explain the significance of the ‘Store of Value’ function of money. 3
Ans. Store of value means store of wealth in terms of money.
In the absence of money, people used to save in terms of expensive goods which involved
difficulty of storage and transportation/portability. With the invention of money, people
found a very convenient means of saving their wealth on account of the following
characteristics of money:
(i) Saving in terms of money allows convenient portability. It involves only paper titles
which can be handled anywhere and in any part of the world with just a click of the
mouse.
(ii) Saving in terms of money allows fractional denominations to any extent. It is unlike
saving in terms of goods which have limited divisibility.
(iii) Saving in terms of money allows a high degree of liquidity which is not possible in case
of goods.
Note: While saving is a virtue from the individual’s point of view, it may not always be so
from the viewpoint of the economy as a whole. Saving means not spending, which may lead
to a situation of deficiency of aggregate demand and therefore a situation of recession or
depression in the economy.
24. Outline the steps taken in deriving saving curve from the consumption curve. Use
diagram. 3
Ans. Fig. 9 shows how saving curve is derived from consumption curve.
Y Y
Fig. 9
bY C
C+
C=
CONSUMPTION/SAVING
Break-even
point Q
)Y S
1 –b
+(
A –C
S=
45°
O X
P INCOME
A'
Y'
It involves the following steps:

(i) We take OA ¢ =OA. Because OA = consumption when Y = 0, so that, OA ¢ (= OA) is
negative saving when Y = 0. It is indicated by – C in the saving function.
(ii) Point P on the saving curve is marked corresponding to point Q on the consumption
curve. While Q indicates that Y = C, point P indicates that S = 0. Obviously, when Y = C,
S = 0.
(iii) By joining points A ¢ and P and stretching it to form a straight line, we get S curve.
S-function is linear C-function.
Note: Since MPC + MPS = 1, MPS = 1 – MPC. So that while in C-function MPC is indicated
by b, in S-function it is indicated by 1 – b.
25. Find national income from the following:
Autonomous consumption =™100
Marginal propensity to consume= 0.80
Investment = ™50. 3
Ans. We know that, Y= C + I
Or, Y = C + MPC (Y) + I
Y = 100 + 0.80Y + 50
Y – 0.80Y = 150
0.20Y = 150
Y = 750
National income = ™ 750.
26. Distinguish between revenue expenditure and capital expenditure in a government

budget. Give examples.
Or
Explain the role of government budget in allocation of resources. 3
Ans. Revenue expenditure is that expenditure of the government which does not either create
assets for the government or causes a reduction in liabilities of the government. Example:
Expenditure on interest payments, expenditure on salaries, etc.
Capital expenditure is that expenditure of the government which either creates assets for
the government or causes a reduction in government liability. Example: Expenditure on
purchase of shares, expenditure on purchasing building, etc.
Or
Through its budgetary policy, the government of a country directs the allocation of
27. Giving reason explain how should the following be treated in estimating national income:
(i) Expenditure on fertilisers by a farmer.
(ii) Purchase of tractor by a farmer. 4
Ans. (i) Expenditure on fertilisers by a farmer is not included in national income, because it is
an intermediate cost for the farmer as fertilisers are used up in the process of
production.
(ii) Purchase of tractor by a farmer is included in national income because it is investment
expenditure or capital formation. A tractor is used by the farmer for several years in
the process of farming and he is a final user of it.
28. Explain the components of Legal Reserve Ratio.
Or
Explain ‘bankers’ bank’ function of central bank. 4
Ans. Legal reserve ratio has two variants: (i) Cash reserve ratio and (ii) Statutory liquidity ratio.
Cash reserve ratio (CRR) refers to cash reserves of commercial banks with the central bank
as a percentage of their deposits. Statutory liquidity ratio (SLR) 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.
Note: (i) 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 & SLR are legal reserve ratios.
(ii) CRR and SLR cannot be treated as components of legal reserve ratio. Because, whereas
CRR by definition includes cash reserves only, SLR includes (a) cash reserves, (b) gold
reserves, and (c) reserves of approved securities, with the commercial banks.
(iii) If CRR and SLR are treated as components of legal reserve ratio, both CRR & SLR
should add upto LRR (legal reserve ratio). In practice, however, this is not true. If
CRR + SLR = LRR then, in a situation when LRR is constant, any increase in CRR
must imply a corresponding decrease in SLR. There is no evidence to such a situation
whatsoever.
Hence, the students are advised to treat CRR and SLR NOT as components of LRR,
but only as variants of LRR.
Or
Central bank is an apex bank of all banks in the country. The central bank has almost the
same relation with other banks in the country as a commercial bank has with its customers.
As a banker’s bank, the central bank offers loans to the commercial bank, and also accepts
deposits from them. The central bank keeps some cash balances of the commercial banks as
a compulsory deposit. Central bank uses these funds to offer loans to the commercial banks
as and when they need it. For its short period loans to commercial banks, the banks charges
interest rate, often called Repo-rate. The central bank also offers commercial banks the
facility of parking their surplus funds with it. The interest paid to commercial banks for
these funds is called ‘Reverse-repo-rate’. This is how the central bank of a country plays the
role of a banker’s bank.
29. Explain ‘revenue deficit’ in a government budget? What does it indicate? 4
Ans. Revenue deficit is the excess of revenue expenditure of the government over its revenue
receipts for the year of estimation. Revenue deficit indicates that the current expenditure
of the government is greater than its current receipts. It points to the need for borrowing:
30. Find out (a) National Income, and (b) Net National Disposable Income:
Items (™ crore)
(i) Factor income from abroad 15
(v) Net current transfers to abroad (–) 5
(vi) Net domestic fixed capital formation 110
(viii) Net imports (–) 20
(x) Change in stocks (–) 10
4, 2
Ans. (a) National Income
expenditure + Net domestic fixed capital formation + Change in stocks – Net
imports - Net indirect tax – Net factor income to abroad
= ` 600 crore + ` 200 crore + ` 110 crore + (-) ` 10 crore – (-) ` 20 crore – ` 70 crore
- ` 10 crore
= ` 600 crore + ` 200 crore + ` 110 crore - ` 10 crore + ` 20 crore – ` 70 crore - ` 10 crore
= ` 840 crore
(b) Net National Disposable Income

= National income + Net indirect tax – Net current transfers to abroad
= ` 840 crore + ` 70 crore – (–) ` 5 crore
= ` 840 crore + ` 70 crore + ` 5 crore
= ` 915 crore
(a) National income = ` 840 crore.
(b) Net national disposable income = ` 915 crore.
31. Explain the concept of ‘excess demand’ in macroeconomics. Also explain the role of
‘open market operation’ in correcting it.
Or
Explain the concept of ‘deficient demand’ in macroeconomics. Also explain the role of
bank rate in correcting it. 6
Ans. Excess demand refers to a situation when aggregate demand (AD) is in excess of aggregate
supply (AS) corresponding to full employment in the economy. It causes inflationary gap in
the economy.
Open market operations is the policy that focuses on increasing and decreasing the stock of
liquidity (or cash balances) with the people, through sale and purchase of securities by the
central bank. When cash balances need to be reduced as during situations of excess demand,
the central bank starts selling securities. Sale of securities sucks purchasing power from the
money market. Also primary deposits with the commercial banks are reduced which lowers
their credit creation capacity, and therefore their capacity to lend. Consequently, aggregate
demand is reduced and excess demand is corrected.
Or
Deficient demand refers to a situation when aggregate demand (AD) is short of aggregate
supply (AS) corresponding to full employment in the economy. It causes deflationary gap in
the economy.
Bank rate is the rate at which the central bank lends money to the commercial banks. To
correct the situation of deficient demand, bank rate is decreased. As a follow-up action, the
commercial banks lower the market rate of interest (the rate at which the commercial banks
lend money to the consumers and the investors). This increases demand for credit.
Consequently, consumption expenditure and investment expenditure are increased.
Implying a expansion in aggregate demand, as required to correct deficient demand.
32. Explain the distinction between autonomous and accommodating transactions in
balance of payments. Also explain the concept of balance of payments ‘deficit’ in this
context. 6
Ans. Autonomous items of BoP are those items which are autonomous of (or independent of) the
BoP status. These are those economic transactions with rest of the world which are largely
governed by the consideration of profit. It is on account of these transactions that there
arises surplus or deficit in the country’s BoP. These are also called ‘above the line items of
BoP.’
Accommodating items are those items which are meant to correct the situation of deficit in
BoP or cover up the situation of surplus BoP. It is because of the accommodating items that
BoP always balances.
Balance of payments deficit refers to a situation when payments of a country on account of
autonomous transactions exceed the receipts of the country on account of these
transactions. Deficit on balance of payments is estimated only by the autonomous
transactions (also known as above the line items of BoP) of the domestic economy with rest
of the economy.
SET–II
(Uncommon Questions)
SECTION–A
6. What is ‘marginal rate of transformation’? Explain with the help of an example. 3
Ans. Marginal rate of transformation is the rate at which output of Good-Y is to be sacrificed for a
unit more of Good-X, when the given resources are fully and efficiently utilised in the
production of goods X and Y, and the technology remains constant.
Example: Output of Y Output of X
10 10
7 11
DY 3
Loss of output of Y = 3 units, while gain of output of X =1 unit. MRT = = = 3. It
DX 1
refers to the slope of PPC (production possibility curve). It is also called the opportunity cost
of producing a unit more of Good-X in terms of the loss of output of Good-Y.
9. A producer borrows money and opens a shop. The shop premises is owned by him.
Identify the implicit and explicit costs from this information. Explain. 3
Ans. Imputed rent of owner’s self-owned shop is implicit cost because implicit costs are
incurred on the use of self-owned factors/inputs. Interest paid on the borrowed money is
explicit cost because it is the expense incurred by the producer for borrowing money
from the market.
11. Define marginal rate of substitution. Explain why is an indifference curve convex. 4
Ans. Marginal rate of substitution between Good-X and Good-Y is the rate at which the
consumer is willing to sacrifice Good-Y for an additional unit of Good-X. It is expressed as:
DGood - Y
at any point on IC.
DGood - X
An indifference curve will ordinarily be convex to the point of origin. This implies that the
slope of an indifference curve tends to fall as the consumer moves downward along the
curve. The slope of the indifference curve is the same as marginal rate of substitution. The
falling slope of IC thus implies that MRSXY tends to fall as the consumer moves downward
along the curve. In other words, it is because of the diminishing MRSXY that the IC is
convex to the origin. MRSXY tends to fall because marginal utility of X tends to fall as more
and more of X is acquired, while marginal utility of Y tends to rise as less and less of it
remains with the consumer. As a result, the consumer is willing to sacrifice less and less of Y
for every additional unit of X.
12. A consumer buys 10 units of a good at a price of ™ 9 per unit. At price ™ 10 per unit he
buys 9 units. What is price elasticity of demand? Use expenditure approach. Comment
on the likely shape of demand curve on the basis of this measure of elasticity. 6
Ans.
(`) (Units) (`)
9 10 90
10 9 90
Since, total expenditure remains constant, price elasticity of demand is equal to unity.
Demand curve will be a rectangular hyperbola, provided total expenditure remains
constant at all levels of price of the commodity.
NOTE
If elasticity of demand is found to be equal to unity (Ed = 1) corresponding to a given level of
price of the commodity, the students are advised NOT to jump to the conclusion that the
demand curve must be a rectangular hyperbola. The demand curve will be a rectangular
hyperbola only when Ed = 1 (or total expenditure remains constant) at all levels of price of the
commodity.
Check the following figure.
Fig. 10 Y The figure shows that Ed is different at

different levels of price of the
Ed = ¥ commodity. Higher the level of price of
the commodity, higher the elasticity of
demand.
PX
Ed = 1
Ed = 0
O X
QX
It shows Ed = 1 at the mid-point, Ed = 0 at the bottom-end and Ed = ¥ at the top-end of the

demand curve. It is just a straight line demand curve, sloping downward. And, it shows all
possibilities of Ed. Important it is to note that Ed is different at different points of demand curve.
Exceptional situations are:
(i) Rectangular hyperbola demand curve when Ed = 1 at all levels of price of the commodity.
(ii) Horizontal straight line demand curve (parallel to X-axis) when Ed = ¥ at all levels of
price of the commodity.
(iii) Vertical straight line demand curve (parallel to Y-axis) when Ed = 0 at all levels of price of the
commodity.
SECTION–B
22. Calculate Net Value Added at Factor Cost:
Items
(i) Consumption of fixed capital (™) 600
(ii) Import duty (™) 400
(iii) Output sold (units) 2,000
(iv) Price per unit of output (™) 10
(v) Net change in stocks (™) (–) 50
(vi) Intermediate cost (™) 10,000
(vii) Subsidy (™) 500
3
Ans. Net Value Added at Factor Cost
= Sales (Output sold ´ Price per unit of output) + Net change in stocks - Intermediate
cost - Consumption of fixed capital - Import duty + Subsidy
= (2,000 ´ ` 10) + (–) ` 50 – ` 10,000 – ` 600 – ` 400 + ` 500
= ` 20,000 – ` 50 – ` 10,000 – ` 600 – ` 400 + ` 500
= ` 9,450
Net value added at factor cost = ` 9,450.
25. Find ‘investment’ from the following:
National income =™ 500
Autonomous consumption = ™100
Marginal propensity to consume = 0.75. 3
Ans. We know that, Y= C + I
Or, Y = C + MPC (Y) + I
Or, I = Y – C – MPC (Y)
I = 500 – 100 – 0.75(500)
I = 500 – 100 – 375
I = 25
Investment = ™ 25.
(i) Payment of bonus by a firm.
(ii) Payment of interest on a loan taken by an employee from the employer. 4
Ans. (i) Payment of bonus by a firm is included in national income as it is a component of
compensation of employees.
(ii) Payment of interest on the loan taken by an employee is not included in national
income as the loan is not taken for production purposes.
30. Find out (a) Net National Product at Market Price, and (b) Gross National Disposable
Income:
(™ crore)
(i) Net current transfers from abroad (–)10
(ii) Wages and salaries 1,000
(iii) Net factor income to abroad (–) 20
(iv) Social security contributions by employers 100
(v) Net indirect tax 80
(vi) Rent 300
(viii) Corporation tax 50
(ix) Dividend 200
(x) Undistributed profits 60
(xi) Interest 400
4, 2
Ans. Net National Product at Market Price
= Wages and salaries + Social security contributions by employers + Rent + Interest +
Corporate tax + Dividend + Undistributed Profits + Mixed income + Net indirect tax
– Net factor income to abroad
= ` 1,000 crore + ` 100 crore + ` 300 crore + ` 400 crore + ` 50 crore+ ` 200 crore
+ ` 60 crore + ™80 crore – (-) ` 20 crore
= ` 1,000 crore + ` 100 crore + ` 300 crore + ` 400 crore + ` 50 crore+ ` 200 crore
+ ` 60 crore + ™80 crore + ` 20 crore
= ` 2,210 crore
= Net National Product at Market Price+ Consumption of fixed capital + Net current
transfers from abroad
= ` 2,210 crore + ` 120 crore + (–) ` 10 crore
= ` 2,320 crore
(a) Net national product at market price = ` 2,210 crore.
(b) Gross national disposable income = ` 2,320 crore.
SET–III
SECTION–A
6. State reasons why does an economic problem arise. 3
Ans. Economic problem is a problem related to the allocation of resources (or problem of
choice). It arises due to the following reasons:
(i) Unlimited Wants: Human wants are unlimited.
(ii) Limited or Scarce Means: Resources are scarce in relation to human wants.
(iii) Alternative Uses: Resources have alternative uses. Land, for example, may be used to
produce rice or wheat or it may be used for the construction of buildings.
9. A producer invests his own savings in starting a business and employs a manager to look
after it. Identify implicit and explicit costs from this information. Explain. 3
Ans. Imputed interest of owner’s self-owned savings is implicit cost because implicit costs are
incurred on the use of self-owned factors/inputs. Salary paid to a manager to look after the
business is explicit cost because it is the expense incurred by the producer for hiring the
services of the manager from the market.
11. Define an indifference map. Explain why an indifference curve to the right shows higher
utility level. 4
Ans. Indifference map refers to a set of indifference curves corresponding to different income
levels of the consumer.
An indifference curve to the right shows higher utility level. Because in a indifference map,
a higher indifference curve represents those combinations which yield higher level of
satisfaction than the combinations on the lower indifference curve. In other words, each point on a
higher indifference curve shows that for a given level of consumption of Good-Y, the consumption
of Good-X tends to be more than before. This implies higher level of utility in accordance with the
monotonic preferences of the consumer.
12. A consumer buys 20 units of a good at a price of ™5 per unit. He incurs an expenditure of
™120 when he buys 24 units. Calculate price elasticity of demand using the percentage
method. Comment upon the likely shape of demand curve based on this information. 4
120
Ans. Given, P = ` 5; P1 = = ` 5; DP = P1 – P = ` 5 – ` 5 = 0
24
P DQ 5 4 20
Ed = (–) ´ = (–) ´ = =¥
Q DP 20 0 0
Price elasticity of demand = ¥ (infinity).
Demand curve in this case will be a horizontal straight line parallel to X-axis, provided there
is an infinite change in quantity demanded corresponding to all levels of price of the
commodity.
SECTION–B
22. Find Net Value Added at Market Price:
(i) Output sold (units) 800
(iii) Excise (™) 1,600
(iv) Import duty (™) 400
(v) Net change in stocks (™) (–) 500
(vi) Depreciation (™) 1,000
(vii) Intermediate cost (™) 8,000
3
Ans. Net Value Added at Market Price

= Sales (Output sold ´ Price per unit of output) + Net change in stocks - Intermediate
cost - Depreciation
= (800 ´ ` 20) + (–) ` 500 – ` 8,000 – ` 1,000
= ` 16,000 – ` 500 – ` 8,000 – ` 1,000
= ` 6,500
Net value added at market price = ` 6,500.
25. Find consumption expenditure from the following:
Autonomous consumption = 100 (™)
Marginal propensity to consume = 0.70
National income = 1,000 (™). 3
Ans. We know that, C = C + MPC (Y)
= 100 + 0.70(1,000)
= 100 + 700 = 800
Consumption expenditure = ™ 800.
(i) Interest paid by banks on deposits by individuals.
(ii) National debt interest. 4
Ans. (i) Interest paid by banks on deposits by individuals is included in national income
because banks are expected to have used individual’s saving for productive purpose.
(ii) National debt interest is not included in national income as it is assumed that
government uses the national debt for the consumption purpose only.
30. Find out (a) Gross National Product at Market Price, and (b) Net Current Transfers from
Abroad:
Items (™ crore)
(i) Net indirect tax 35
(iii) Net national disposable income 750
(iv) Closing stock 10
(vi) Net domestic fixed capital formation 100
(vii) Net factor income to abroad (–) 15
(ix) Opening stock 10
(x) Consumption of fixed capital 50
4, 2
Ans. Gross National Product at Market Price

+ Net domestic fixed capital formation + Change in stocks (Closing stock – Opening
stock) + Consumption of fixed capital – Net imports – Net factor income to abroad
= ` 500 crore + ` 150 crore + ` 100 crore + ( ` 10 crore – ™ 10 crore) + ` 50 crore
– ` 20 crore - (–) ` 15 crore
= ` 500 crore + ` 150 crore + ` 100 crore + ` 0 crore + ` 50 crore – ` 20 crore + ` 15 crore
= ` 795 crore
= Gross National Product at Market Price – Consumption of fixed capital + Net current
transfers from abroad
Or, Net Current Transfers from Abroad
= Net National Disposable Income – Gross National Product at Market Price
+ Consumption of fixed capital
= ` 750 crore – ` 795 crore + ™ 50 crore = ™ 5 crore
(a) Gross national product at market price = ™ 795 crore.
(b) Net current transfers from abroad = ` 5 crore.
All India–2012
General Instructions: Same as CBSE Examination Paper, Delhi.
SET–I
SECTION–A
1. Define microeconomics. 1
Ans. Microeconomics studies economic issues or economic problems at the level of an
individual– an individual firm, an individual household or an individual consumer.
2. Give one reason for a shift in demand curve. 1
Ans. Change in income of the consumer causes shift in demand curve.
3. What is the behaviour of total variable cost, as output increases? 1
Ans. Initially, total variable cost increases at decreasing rate and eventually it increasing at an
increasing rate.
4. What is the behaviour of marginal revenue in a market in which a firm can sell any
quantity of the output it produces at a given price? 1
Ans. Marginal revenue is constant at all levels of output in such a market in which a firm can sell
any quantity of the output at a given price.
5. What is a price-maker firm? 1
Ans. A price-maker firm refers to that firm which has complete control over price of the product
in the market.
6. Define production possibilities curve. Explain why it is downward sloping from left to
right. 3
Ans. Production possibility curve (also called production possibility frontier) is a curve showing
different combinations of two goods which can be produced with the given resources and
technique of production. The production possibility curve is downward sloping from left to
right, because more of Good-X can be produced only with less of Good-Y in a situation when
the given resources are assumed to be fully and efficiently utilised, using the given
technology.
7. A consumer consumes only two goods X and Y and is in equilibrium. Price of X falls. Explain
the reaction of the consumer through the utility analysis. 3
Ans. In a situation of equilibrium in case of two commodities:
MU X MU Y
=
PX PY
MU X MU Y
When PX falls, > . Implying that rupee worth of satisfaction is greater for X
PX PY
than Y. Accordingly, the consumer will start buying more of X in place of Y. When
consumption of X increases, MUX must fall, while a cut in consumption of Y would mean a
MU X MU Y
rise in MUY. Accordingly, will start falling while will start rising. The consumer
PX PY
MU X MU Y
will stop buying more of X (in place of Y) only when = .
PX PY
Briefly, when PX falls, more of X will be purchased in place of Y.
8. Draw total variable cost, total cost, and total fixed cost curves in a single diagram. 3
Ans. Fig. 1 shows total cost (TC), total variable cost (TVC) and total fixed cost (TFC). Total cost
is the sum of total variable cost and total fixed cost. So TC curve is the vertical summation
of TFC and TVC curves.
Y
Fig. 1
80
70 TC
TVC
60
COST (™)
50
Note: TC is parallel
40
to TVC because
30 TFC is constant
20
10 TFC
O 1 2 3 4 5 6 7 8
X
OUTPUT
9. A producer starts a business by investing his own savings and hiring the labour. Identify
implicit and explicit costs from this information. Explain. 3
Ans. Implicit costs are incurred on the use of self-owned factors/inputs. Accordingly, interest
foregone by the producer on account of the use of his own savings is the implicit cost of
production. Explicit cost is incurred when inputs are hired/purchased from the market.
Thus, cost of hiring labour (wages) is an explicit cost of production.
10. Explain the implications of large number of sellers in a perfectly competitive market.
Or
Explain why there are only a few firms in an oligopoly market. 3
Ans. The number of sellers of a commodity is very large under perfect competition. The number
of firms selling a particular commodity is so large that an individual seller contributes only a
small fragment to the market supply. Thus, any increase or decrease in supply by an
individual firm hardly impacts the total market supply and consequently, an individual firm
cannot impact price of the commodity.
Or
By definition, oligopoly is a form of the market in which there is a small number of big firms.
Each firm is so big that it controls a significant segment of the market.
Example: Firms producing cars in India.
Why only a few firms? Because,

(i) Production requires huge capital investment, that deters the entry of new firms.
(ii) Technology used in production is so distinct that it is difficult for an ordinary firm to
acquire it.
(iii) The firms often form trusts and cartels, converting the market almost into a monopoly
market, which becomes impregnable for the small firms.
(iv) The firms often get patent rights for their products, and their branded products
happen to achieve consumer’s loyalty over time. This keeps the new firms at bay.
(v) The firms happen to achieve control over strategic inputs, making it difficult for the
new firms to enter the market.
(vi) Owing to their large scale production and economies of scale, the existing firms start
incurring so much of advertisement expenditure that the entry of new firms virtually
becomes impossible.
11. Define an indifference map. Why does an indifference curve to the right show more
utility? Explain. 4
Ans. Indifference map refers to a set of indifference curves corresponding to different income
levels of the consumer.
An indifference curve to the right shows higher utility level. Because in a indifference map,
a higher indifference curve represents those combinations which yield higher level of
satisfaction than the combinations on the lower indifference curve. In other words, each point on a
higher indifference curve shows more goods and higher level of satisfaction based on the
assumption of monotonic preference.
12. A consumer buys 10 units of a commodity at a price of ™10 per unit. He incurs an
expenditure of ™200 on buying 20 units. Calculate price elasticity of demand by the
percentage method. Comment upon the shape of demand curve based on this
information. 4
Ans. 200
Given, P = ` 10; P1 = = `10; DP = P1 – P = `10 – `10 = 0
20
P DQ
Ed = (–) ´
Q DP
10 10 100
Þ = (–) ´ = =¥
10 0 0
Demand curve in this case will be a horizontal straight line parallel to X-axis.
13. What does the law of variable proportions show? State the behaviour of marginal product
according to this law.
Or
Explain how changes in prices of inputs influence the supply of a product. 4
subsequently stabilise, but must finally decrease. Initially, MP may rise owing to better
coordination between the factors and better utilisation of the fixed factor. Thus, the we have
three phases of production viz. phases of increasing MP, decreasing MP and negative MP.
These are illustrated through Fig. 2.
Y
Fig. 2
MP
Phase I: Phase II: Phase III:
Increasing Diminishing Negative
O X
M – ve
MP
Or
Increase in input price shifts the marginal cost curve upward. Implying higher cost for the
same level of output, and therefore lower profits. Accordingly, supply curve shifts upward or to
the left implying less supply at the same price (i.e., same supply at higher price). Fall in input
price shifts the marginal cost curve downward. Implying lower cost for the same level of
output, and therefore higher profits. Accordingly, supply curve shifts downward or to the
right implying more supply at the same price (i.e., same supply at lower price). Fig. 3
illustrates this situation. SS is the initial supply curve. When input price increases, supply
curve will shift to the left from SS to S1S1. When input price decreases, supply curve will
shift to the right from SS to S2S2.
Fig. 3 Y
S1 S
S2
T R K
PRICE
Supply curve shifts to the right in

case of decrease in the input price.
S1 Supply curve shifts to the left in
S case of increase in the input price.
S2
O X
QUANTITY
14. Explain the difference between (i) inferior goods and normal goods and (ii) cardinal
utility and ordinal utility. Give example in each case. 6
Ans. (i) A normal good is that good the consumption of which increases with increase in
income of the consumer, so that there is a positive relationship between consumer
income and demand for the good. Example: milk. An inferior good is that good the
consumption of which decreases with increase in income of the consumer, so that there
is a negative relationship between consumer income and demand for the good.
Example: coarse grain.
(ii) Cardinal utility refers to the measurement of utility in terms of units like 2, 4, 6, and 8.
Whereas ranking of utility is called ordinal measurement of utility. In other words, in
ordinal measurement system, utility is compared or expressed in terms of higher,
lower or equal level of satisfaction across different situations.
15. Explain the distinction between “change in quantity supplied” and “change in supply”.
Use diagram. 6
Ans. Change in quantity supplied refers to expansion and contraction of supply of a commodity
caused by change in own price of the commodity. When price increases there is an upward
movement (a ® b) along the supply curve, called expansion of supply; and when price
decreases there is a downward movement (b ® a) along the supply curve, called contraction
of supply. See Fig. 4(a).
Change in supply refers to increase or decrease in supply of a commodity caused by change
in factors other than own price of the commodity. When other factors change in a positive
direction the supply curve shifts to the right, showing increase in supply; and when the
changes occur in the negative direction, the supply curve shifts to the left showing a
decrease in supply. See Fig. 4(b).
(a) (b)
Fig. 4 Y Y
Expansion: S2
a®b S S
S1
P1
b
PRICE
PRICE
P P
a
S2 S1S1 ® Increase in Supply
Contraction: S2S2 ® Decrease in Supply
S b®a S
S1
O X O X
Q Q1 Q2 Q Q1
QUANTITY QUANTITY
16. Market for a good is in equilibrium. There is simultaneous “decrease” both in demand
and supply but there is no change in market price. Explain with the help of a schedule
how it is possible.
Or
Market for a good is in equilibrium. Explain the chain of reactions in the market if the
price is (i) higher than equilibrium price and (ii) lower than equilibrium price. 6
Ans.
Price (`) Quantity Demanded Quantity Supplied
(Units) (Units)
5 40 80
4 60 60
3 80 40
After Simultaneous Decrease in Demand and Supply

5 20 40
4 30 30
3 40 20
From the above schedule, it is clear that at price ™4 the market demand is equal to market
supply of 60 units. Hence at ™4, the market is in equilibrium. For market price to remain
unchanged or constant decrease in demand should be exactly equal to decrease in supply.
In the above schedule, 50 per cent decrease in both demand and supply causes no change in
market price. Therefore, new equilibrium is also struck at a price ™4 per unit.
OR
Y
Fig. 5 D S
Excess Supply
P1 B
A
PRICE (`)
P E
C F
P2
Excess
S Demand D
O X
Q
QUANTITY (Units)
The equilibrium price is the price at which market demand and market supply are equal to
each other. In Fig. 5, DD is demand curve and SS is supply curve. They intersect each other
at point E, where market demand = market supply. Thus, point E is the equilibrium point.
This point shows that equilibrium price is OP and equilibrium quantity is OQ.
(i) When price prevailing in the market (OP1) is higher than the equilibrium price (OP),
then market demand will be less than market supply. There is excess supply in the
market equal to AB. Excess supply will trigger competition and force the market price
to decrease. This will lead to extension of demand and contraction of supply. The
process of extension and contraction would continue till the equilibrium between
supply and demand is struck. It is at point E, that the situation of excess supply is finally
eliminated. Now, quantity demanded = quantity supplied = OQ. Thus, equilibrium
price will be restored through the free play of market forces at point OP. The market
will reach the point of equilibrium at a lower price than in a situation of excess supply.
(ii) When price prevailing in the market (OP2) is lower than the equilibrium price (OP),
then market demand will be more than market supply. There is excess demand in the
market equal to CF. Pressure of excess demand will cause a rise in market price causing
contraction of demand and extension of supply. The process of contraction and
extension would continue till the equilibrium between supply and demand is struck. It
is at point E, that the situation of excess demand is finally eliminated. Now, quantity
demanded = quantity supplied = OQ. Equilibrium price will again be restored through
the free play of market forces. The market will reach the point of equilibrium at a higher
price than in a situation of excess demand.
SECTION-B
17. Define flow variable. 1
Ans. Flow variable is that quantity of an economic variable which is measured per unit of time
period.
18. Define consumption goods. 1
Ans. Consumption goods are those goods which are used for the direct satisfaction of human
wants. Example: milk used by households.
19. What are time deposits? 1
Ans. Time deposits are those deposits which cannot be withdrawn from the bank as and when
needed or by writing a cheque any time. These deposits involve a lock-in period.
20. Define a ‘direct tax’. 1
Ans. A direct tax is that tax the final burden of which falls on that very person who is liable to pay
it to the government.
21. What is a fixed exchange rate? 1
Ans. Fixed rate of exchange is a rate which is fixed and determined by the government.
22. Find Net Value Added at Market Price:
Items
(i) Depreciation (™) 700
(ii) Output sold (units) 900
(iii) Price per unit of output (™) 40
(iv) Closing stock (™) 1,000
(v) Opening stock (™) 800
(vi) Sales tax (™) 3,000
(vii) Intermediate cost (™) 20,000
3
= Sales (Output sold ´ Price per unit of output) + Closing stock - Opening stock
- Intermediate cost - Depreciation
= (900 ´ ` 40) + ` 1,000 – ` 800 – ` 20,000 – ` 700
= ` 36,000 + ` 1,000 – ` 800 – ` 20,000 – ` 700
= ` 15,500
23. Explain the ‘standard of deferred payment’ function of money. 3
Ans. Deferred payments refer to those payments which are made in future. Money is accepted as
a standard of deferred payments because, (a) its price remains stable, (b) it has general
acceptability, (c) it is more durable compared to other commodities.
Briefly, money is a convenient means of borrowing and lending and is therefore accepted as
a standard for deferred payments.
24. Outline the steps taken in deriving consumption curve from the saving curve. Use
diagram. 3
Ans. Fig. 6 shows how consumption curve is derived from the saving curve.
Y Y
Fig. 6
bY C
C+
C=
CONSUMPTION/SAVING
Break-even
point Q
)Y S
1 –b
+(
A –C
S=
45°
O X
P INCOME
A'
Y'

(i) We take OA = OA ¢. Because OA ¢ = negative saving when Y = 0, and this is exactly
equal to minimum consumption when Y = 0.
(ii) Point Q on the Y-line (45° angle) is marked corresponding to point P on the saving curve.
Because at P, saving = 0, and at point Q, consumption = income (implying that S = 0).
(iii) Joining points A & Q and stretching it to form a straight line, we get C-curve.
C-function is linear as it is derived from a linear S-function.
Note: Since MPC + MPS = 1, MPS = 1 – MPC. So that while in C-function, MPC is indicated
National income = ™ 5,000
Autonomous consumption = ™ 1,000
= 1,000 + 0.80(5000)
= 1,000 + 4,000
= 5,000
Consumption expenditure = ™ 5,000.
26. Distinguish between revenue receipts and capital receipts in a government budget. Give
example in each case.
Or
Explain the role of government budget in bringing economic stability. 3
Ans. Revenue receipts are those receipts which do not create either a liability or lead to reduction
in assets. For example, receipts from tax revenue like income tax and sales tax and receipts
from non-tax revenue like interest and dividends.
On the other hand, capital receipts are those receipts which either create a liability or lead
to reduction in assets. For example, recoveries of loans from state governments, market
loans, and disinvestment.
Or
Free play of market forces (or the forces of supply and demand) tend to generate trade
correct) inflationary gap. In other words, in a situation of inflation, the government can
increase taxes and also lower its expenditure to moderate the level of aggregate demand in
the economy. In a situation of deflation, on the other hand, tax rates may be lowered and
government expenditure increased, so that the level of aggregate demand is raised.
27. Should the following be treated as final expenditure or intermediate expenditure? Give
reasons for your answer.
(i) Purchase of furniture by a firm.
(ii) Expenditure on maintenance by a firm. 4
Ans. (i) Purchase of furniture by a firm is a final expenditure because furniture is repeatedly
used by the firm for several years and these are of high value.
(ii) Expenditure on maintenance by a firm is an intermediate expenditure as the things
purchased for repair and maintenance are used up during the period of one year.
28. Explain the ‘lender of last resort’ function of the central bank.
Or
Explain ‘government’s banker’ function of the central bank.
Ans. The central bank acts as lender of last resort for the commercial banks of the country. It
against approved securities. It helps commercial banks to manage their financial crises.
Or
Central bank acts as a banker, agent and financial advisor to the government. As a banker to
29. Explain the concept of ‘fiscal deficit’ in a government budget. What does it indicate? 4
Ans. Fiscal deficit is the excess of budgetary expenditure over the budgetary receipts of the
government, excluding borrowing. It indicates ‘borrowing requirement’ of the
government to cope with the expenditures. Higher borrowing implies higher burden of
repayment of loans and of interest on the future generations.
Higher fiscal deficit points to lack of financial discipline in the economy. Often it triggers
inflationary pressures in the economy and lowers credit-rating of the domestic economy in
the international markets. Accordingly, investment process is hampered and GDP growth is
challenged.
30. Find out (a) Gross National Product at Market Price, and (b) Net Current Transfers to
Abroad:
Items (™ crore)
(i) Private final consumption expenditure 1,000
(ii) Depreciation 100
(iii) Net national disposable income 1,500
(iv) Closing stock 20
(vi) Net indirect tax 50
(vii) Opening stock 20
(viii) Net domestic fixed capital formation 110
(ix) Net exports 15
(x) Net factor income to abroad (–) 10
4, 2
Ans. (a) Gross National Product at Market Price
expenditure + Net domestic fixed capital formation + Change in stocks (Closing
stock – Opening stock) + Depreciation + Net exports – Net factor income to abroad
= ` 1,000 crore + ` 300 crore + ` 110 crore + ( ` 20 crore – ™ 20 crore) + ` 100 crore
+ ` 15 crore - (–) ` 10 crore
= ` 1,000 crore + ` 300 crore + ` 110 crore + ` 0 crore + ` 100 crore + ` 15 crore
+ ` 10 crore
= ` 1,535 crore
= Gross national product at market price – Depreciation – Net current transfers to
abroad
Or, Net Current Transfers to Abroad
= Gross national product at market price – Depreciation – Net national disposable

income
= ` 1,535 crore – ` 100 crore – ` 1,500 crore
= (–) ` 65 crore
(a) Gross national product at market price = ` 1,535 crore.
(b) Net current transfers to abroad = (–) ` 65 crore.
31. Explain the concept of ‘inflationary gap’. Also explain the role of ‘legal reserves’ in
reducing it.
Or
Explain the concept of ‘deflationary gap’. Also explain the role of ‘margin requirements’
in reducing it. 6
Legal reserves refer to that part of bank deposits which commercial banks are legally
required to set aside in the form of (i) cash (ii) gold or (iii) approved securities. These
reserves are determined by CRR (cash reserve ratio), and SLR (statutory liquidity ratio).
During inflation, both CRR and SLR are raised with a view to mopping up liquidity from
the banking system. This reduces credit creation capacity of the commercial banks.
Accordingly, availability of credit decreases in the capital market. As a result, aggregate
demand reduces as required to correct inflationary gap in the economy.
Or
Deflationary gap is the shortfall in aggregate demand from the level required to maintain
full employment equilibrium in the economy.
Margin requirements refer to minimum down payment that the borrowers are to make as a
percentage of their total borrowing from the commercial banks. Margin requirement is
reduced to correct situations of deflationary gap. Lower margin requirement induces
borrowing. This raises borrowing capacity of even the marginal borrowers. Implying a rise
in the flow of credit and therefore a rise in aggregate demand. This is what is required to
correct deficient demand or deflationary gap.
32. Give the meaning of ‘foreign exchange’ and ‘foreign exchange rate’. Giving reason,
explain the relation between foreign exchange rate and demand for foreign exchange. 6
Ans. Foreign exchange refers to any currency other than the domestic currency.
Foreign exchange rate is the rate at which one currency can be exchanged for the other
currency in the international foreign exchange market.
Foreign exchange rate and demand for foreign exchange are inversely related to other.
When the price of foreign currency falls, (or the availability of foreign exchange becomes
cheaper than before) we get more dollar per unit of our currency. Accordingly, domestic
traders would tend to buy more goods in the international market. This raises demand for
foreign currency from OD to OD1 when exchange rate falls from OR to OR1 in Fig. 7.
Similarly, when the price of foreign currency rises, we get less dollar per unit of our
currency. Accordingly, domestic traders would be able to buy less goods in the international
market. As a result, demand for foreign currency will fall from OD to OD2 when exchange
rate rise from OR to OR2 in Fig. 7.
Y
Fig. 7
D
RATE OF EXCHANGE
R2
R1
D
O X
D2 D D1
QUANTITY DEMANDED
(Foreign currency)
SET–II
SECTION–A
6. Explain the central problem of ‘how to produce’. 3
Ans. The problem of how to produce is a problem relating to choice of technology. It is a central
problem because no economy can ever escape it. Broadly, it is the problem of deciding input
ratio of different factor inputs and efficient use of resources. There are two techniques of
production: (i) Labour intensive technique in which labour is used more than capital, and
(ii) Capital intensive technique in which capital is used more than labour. Optimum
technology is the one that maximises productivity (output per unit of input) or minimises
cost of production.
9. A farmer takes a farm on rent and carries on farming with the help of family members.
Identify explicit and implicit costs from this information. Explain. 3
Ans. The farmer is using the services of his family members for farming. Farming services are not
hired or purchased from the market. So, these services involve an implicit cost. Because,
working outside the family farm, the family members would have earned some wages. The
wages foregone are the implicit costs. Rent paid of a farm taken on rent is explicit cost
because it is the expense incurred by the producer for purchasing the inputs from the
market.
11. Define a budget line. When can it shift to the right? 4
Ans. Budget line is a line showing different combinations of a set of 2-Goods that a consumer can
buy, given his income and prices of the goods. It is also called price line, as it shows price
ratio between Good-X and Good-Y.
Position of the budget line depends on income of the consumer and prices of the two goods.
If prices of two goods remain unchanged, then with an increase in income, budget line of
the consumer shifts to the right. Similarly, if income of the consumer remains unchanged,
the budget line will shift to the right when there is a proportionate fall in the prices of both
goods X and Y. Thus, if the prices of both X and Y are reduced to half, the budget line will
shift to the right showing twice the possible purchase of X and Y than before.
12. A consumer buys 14 units of a good at a price of ™ 8 per unit. At price ™ 7 per unit he
spends ™ 98 on the good. Calculate price elasticity of demand by the percentage method.
Comment upon the shape of demand curve based on this information. 6
Ans. Given, P = ` 8; P1 = ` 7; DP = P1 – P = ` 7 – ` 8 = (–) 1
98
Q = 14 units; Q1 = = 14 units; DQ = Q1 – Q = (14 – 14) units = 0 units
7
P DQ
Ed = (–) ´
Q DP
8 0 0
Þ = (–) ´ = =0
14 –1 –14
Demand curve will be a vertical straight line parallel to Y-axis, provided quantity demanded
remains constant at all levels of price of the commodity..
SECTION–B
22. Find Gross Value Added at Factor Cost:
Items
(i) Units of output sold 2,000
(iii) Depreciation (™) 2,000
(iv) Change in stock (™) (–)500
(v) Intermediate cost (™) 15,000
(vi) Subsidy (™) 3,000
3
= Sales (Units of output sold ´ Price per unit of output) + Change in stock - Intermediate
cost + Subsidy
= (2,000 ´ ` 20) + (–) ` 500 – ` 15,000 + ` 3,000
= ` 40,000 – ` 500 – ` 15,000 + ` 3,000
= ` 27,500
Investment =™200. 3
Ans. We know that, Y=C+I

Or, Y = C + MPC (Y) + I
Y = 100 + 0.60Y + 200
Y – 0.60Y = 300
0.40Y = 300
Y = 750
National income = ™750.
27. Giving reason, explain how should the following be treated while estimating national
income:
(i) Expenditure on free services provided by government.
(ii) Payment of interest by a government firm. 4
Ans. (i) Expenditure on free services provided by government should be included in the
estimation of national income because expenditure on these services is a part of
government final consumption expenditure.
(ii) Payment of interest by a government firm should be included while estimating
national income because it is a kind of factor payment.
Items (™ crore)
(i) Net imports (–)10
(ii) Net domestic fixed capital formation 100
(v) Change in stocks (–) 50
(viii) Net current transfers to abroad 30
4, 2
expenditure + Net domestic fixed capital formation + Change in stocks – Net
imports – Net indirect tax – Net factor income to abroad
= ` 600 crore + ` 200 crore + ` 100 crore + (-) ` 50 crore – (-) ` 10 crore - ` 70 crore
- ` 20 crore
= ` 600 crore + ` 200 crore + ` 100 crore - ` 50 crore + ` 10 crore - ` 70 crore
- ` 20 crore
= ` 770 crore

= ` 770 crore + ` 70 crore – ` 30 crore
= ` 810 crore
(a) National income = ` 770 crore.
(b) Net national disposable income = ` 810 crore.
SET–III
SECTION–A
6. What is opportunity cost? Explain with the help of an example. 3
Ans. Opportunity cost is the value of a factor in its next best alternative use. Example: If Mr. X
has three options of employment: A with ` 5,000 p.m., B with ` 6,000 p.m, C with ` 7,000
p.m. then Mr. X should be choosing the best option (C) of ` 7,000 p.m. and its opportunity
cost would be ` 6,000 p.m.
9. A producer borrows money and starts a business. He himself looks after the business.
Identify implicit and explicit costs from this information. Explain. 3
self-owned factors/inputs. Interest paid on borrowed money is explicit cost because it is the
expense incurred by the producer for borrowing money from the market.
11. What is budget set? Explain what can lead to change in budget set. 4
Ans. Budget set refers to the attainable combinations of a set of two goods, given prices of the
goods and income of the consumer.
Consumption Possibilities for a Consumer
Units of Good–1 Units of Good–2
0 15
10 10
20 5
30 0
[Note: This table is drawn on the assumptions that consumer’s income/budget = ™ 30,
PGood–1 = ™ 1 per unit and PGood–2 = ™ 2 per unit.]
A budget set is based on the assumptions that income of the consumer and prices of the two
goods (consumed by the consumer) remain unchanged. Accordingly, a change, either in
prices or in consumer’s income will lead to a change in the budget set.
12. A consumer buys 8 units of a good at a price of ™7 per unit. When price rises to ™8 per
unit he buys 7 units. Calculate price electricity of demand through the expenditure
approach. Comment upon the shape of demand curve based on this information. 4
Ans.
7 8 56
8 7 56
Demand curve is a rectangular hyperbola, if total expenditure remains constant at all levels
of price of the commodity.
SECTION–B
22. Find out Net Value Added at Factor Cost:
Items
(i) Price per unit of output (™) 25
(ii) Output sold (units) 1,000
(iii) Excise duty (™) 5,000
(iv) Depreciation (™) 1,000
(v) Change in stocks (™) (–)500
(vi) Intermediate costs (™) 7,000
3
= Sales (Output sold ´ Price per unit of output) + Change in stocks - Intermediate costs
- Depreciation - Excise duty
= (1,000 ´ ` 25) + (–) ` 500 – ` 7,000 – ` 1,000 – ` 5,000
= ` 25,000 – ` 500 – ` 7,000 – ` 1,000 – ` 5,000
= ` 11,500
25. Find investment from the following:
National income = ™ 600
Or, Y = C + MPC (Y) + I
Or, I = Y – C – MPC (Y)
I = 600 – 150 – 0.70(600)
I = 600 – 150 – 420
I = 30
27. How should the following be treated while estimating national income? Give reasons.
(i) Expenditure on education of children by a family.
(ii) Payment of electricity bill by a school. 4
Ans. (i) Expenditure on education of children by a family is included in national income since
it is a part of private final consumption expenditure.
(ii) Payment of electricity bill by a school is not included in national income since it is a part
of intermediate consumption.
30. Find out (a) Net National Product at Market Price, and (b) Gross National Disposable
Income from the following:
Items (™ crore)
(i) Undistributed profits 20
(ii) Compensation of employees 800
(iii) Rent 300
(iv) Dividend 100
(v) Royalty 40
(vi) Net current transfers to abroad (–)30
(viii) Interest 400
(ix) Depreciation 70
(x) Net factor income from abroad (–)10
(xi) Net indirect tax 60
4, 2
Ans. (a) Net National Product at Market Price
= Compensation of employees + Rent + Royalty + Interest + Undistributed Profits
+ Dividend + Corporation tax+ Net indirect tax + Net factor income from abroad
+ ` 50 crore + ™ 60 crore + (-) ` 10 crore
+ ` 50 crore + ™ 60 crore - ` 10 crore
= ` 1,760 crore
(b) Gross National Disposable Income
= Net national product at market price + Depreciation – Net current transfers to
abroad
= ` 1,760 crore + ` 70 crore – (–) ` 30 crore
= ` 1,760 crore + ` 70 crore + ` 30 crore
= ` 1,860 crore
FOREIGN–2012
General Instructions: Same as CBSE Examination Paper, Delhi-2012.
SET–I
SECTION–A
1. Define macroeconomics. 1
Ans. Macroeconomics studies economic issues or economic problems at the level of the economy
as a whole.
2. What does an indifference curve show? 1
Ans. An indifference curve shows different combinations of two commodities between which a
consumer is indifferent.
Ans. Marginal cost is the addition to total cost when a unit more of output is produced.
4. What is the behaviour of average revenue in a market in which a firm can sell any quantity
of a good at a given price? 1
Ans. Average revenue is constant at all levels of output in a market in which a firm can sell any
quantity of a good at a given price.
5. Define oligopoly. 1
Ans. Oligopoly is a form of the market in which there are a few big sellers of a commodity and a
large number of buyers.
6. Explain, giving reason, why production possibilities curve is concave. 3
æ D loss of Y ö
Ans. PPC is concave to its origin because marginal opportunity cost çç ÷ of shifting
÷
è D gain of X ø
resources from commodity-Y to commodity-X tends to rise. And, marginal opportunity cost
tends to rise because of the law of diminishing returns. When more and more resources are
allocated to X, additional gain of output (per unit of input) tends to decrease; and as more
and more resources are withdrawn from Y, additional loss of output tends to rise.
æ D loss of Y ö
Accordingly, the ratio çç ÷ tends to rise. Implying a rise in the slope of PPC as
÷
è D gain of X ø
more and more resources are shifted from Y to X. Rising slope of PPC means that PPC is
concave to the origin.
7. A consumer consumes only two goods X and Y and is in equilibrium. Price of X rises.
Explain the reaction of the consumer with the help of utility analysis. 3
Ans. Equilibrium condition in case of two commodities:
MU X MU Y
=
PX PY
MU X MU X MU Y
When PX rises, the ratio falls and < . Since X becomes relatively
PX PX PX
expensive (than Y), the consumer will start consuming less of X and more of Y. As a
MU X MU Y
consequence will start rising while will start falling. The adjustment process
PX PY
MU X MU Y
would continue till = . Briefly, if PX rises the consumer will react by buying
PY PY
less of X.
8. Draw supply curves showing price elasticity of supply equal to
(i) zero,
(ii) one, and
(iii) infinity throughout. 3
Ans.
Fig. 1 Y
S
(a) Y (b) Y (c)
S
P1 Es = 0 P1 Es = 1
PRICE
PRICE
PRICE
Es = ¥
P P P S
S
S S
O X O X O X
Q Q1 Q Q1
9. A producer borrows money to start a business and looks after the business himself.
Identify the implicit and explicit costs from this information. Explain. 3
self-owned factors/inputs. Interest paid on borrowed money is explicit cost because it is the
expense incurred by the producer for borrowing the money from the market.
10. Explain the implications of ‘homogeneous product’ in a perfectly competitive market.
Or
Explain the implications of ‘differentiated product’ in monopolistic competition. 3
Ans. A product being perfectly homogeneous implies that all units of a commodity are identical
homogeneous product is sold in the market. Since a large number of sellers sell a
homogeneous product, there is a zero control over price. All sellers in the market have to
sell the product at a uniform price. If ever an individual firm tries to charge higher price, it
would lose all its buyers to a large number of other sellers in the market. A firm is simply a
price taker.
Or
Product differentiation or differentiated product is a distinct feature of monopolistic
competition. Though the number of firms is large but their product differs in colour, shape,
brand, quality, durability, etc. It has two important implications:
(i) it allows a firm a partial control over price of its product, and
(ii) it causes high elasticity of demand for the firm’s product owing to the availability of a
large number of close substitutes.
11. Explain why is an indifference curve downward sloping from left to right. State the
conditions of consumer’s equilibrium in indifference curve analysis. 4
Ans. An indifference curve slopes downwards from left to right. This is because of monotonic
preferences of a consumer. If a consumer is simultaneously buying two goods, he can have
more of one good only when he has less of the other so that his total satisfaction (at any point on
IC) remains the same. An IC, therefore, must slope downward.
In terms of indifference curve (IC) analysis, a consumer attains equilibrium when:
or
12. A consumer buys 13 units of a good at a price of ™11 per unit. When price rises to ™ 13 per
unit he buys 11 units. Use expenditure approach to find price elasticity of demand. Also
comment on the shape of the demand curve based on this information. 4
Ans.
(`) (Units) (`)
11 13 143
13 11 143
Demand curve will be a rectangular hyperbola in case expenditure on the commodity
remains constant at levels of price of the commodity.
13. How does the change in tax on a product influence the supply of that product? Explain.
Or
What is revenue? Explain the relation between marginal revenue and average revenue. 4
Ans. When government imposes a tax on the production of the good, marginal and average
costs of the production tend to rise. Other things remaining constant, it causes a cut in
profits. Accordingly, producers will supply less of the good at the existing price, or they will
sell the same quantity only at a higher price. This implies a backward shift in supply curve or
decrease in supply as shown in Fig. 2. S1S1 is the initial supply curve. When government
imposes tax, supply curve will shift backward from S1S1 to S2S2.
Y
Fig. 2 S2
Supply curve S1
after tax
Supply curve
PRICE
before tax
K
P
T
S2
S1
O X
QUANTITY
Or
Revenue refers to the money receipts of a firm from the sale of its output.
Relationship between Marginal Revenue (MR) and Average Revenue (AR):
competition.
(ii) When average revenue is diminishing, it is greater than marginal revenue. It is true in
situations of monopoly and monopolistic competition.
14. Explain the distinction between:
(i) ‘Change in demand’ and ‘Change in quantity demanded’
(ii) Budget set and Budget line. 6
Ans. (i)
Change in Demand Change in Quantity Demanded
1. Change in demand refers to increase or 1. Change in quantity demanded refers to
decrease in demand of a commodity at its extension or contraction of demand in
existing price. response to change in own of the commodity.
2. Change in demand occurs due to change 2. Change in quantity demanded occurs due
in factors other than own price of the to change in own price of the commodity.
commodity.
forward or backward shift in demand downward or upward movement on the
curve. same demand curve.
(ii) Budget set refers to a set of attainable combinations of two goods, given market price of
the goods and income of the consumer. Whereas, budget line is a line showing
different possible combinations of Good-1 and Good-2, which a consumer can buy,
given his money income and the prices of Good-1 and Good-2.
15. State the phases of changes in total product in the law of variable proportions. Also
explain the reason behind each phase. Use diagram. 6
Ans. Phases of changes in total product in the law of variable proportions is shown with the help
of Fig. 3.
Y
Fig. 3
T
TOTAL PRODUCT
TP
K
Phase I Phase II Phase III
L S
O X
Y Increasing Diminishing Negative
MARGINAL PRODUCT
Phase I E Phase II Phase III
O X
L S – ve
MP
(i) Phase I: It is between O to K on the TP curve. In this stage, MP tends to rise till OL
units of labour are used with the constant application of land. When MP is rising, TP
tends to rise at an increasing rate. This occurs till point K on the TP curve and point E
on the MP curve. This is a situation of increasing returns to a factor. It occurs owing to:
(a) fuller utilisation of the fixed factor, and (b) better coordination among the factors of
production.
(ii) Phase II: It is between K to T on the TP curve. Beyond OL units of labour, MP tends to
decline, and TP increases only at diminishing rate. This occurs between E and S on MP
curve, and between K and T on TP curve. This corresponds to a situation of
diminishing returns to a factor. It occurs owing to: (a) excessive utilisation of the fixed
factor and lower availability of the fixed factor (capital) per unit of the variable factor
(labour). (b) Poor coordination among factors of production, owing to excessive
employment of the variable factor.
(iii) Phase III: It is beyond point T on the TP curve. Beyond OS units of labour, MP becomes
negative. Now TP starts declining. This corresponds to a situation of negative returns.
This occurs owing to: excessive employment of the variable factor to such an extent
that some units of the variable factor (labour) remain absolutely unproductive even when
they are apparently employed. This is like a situation of disguised unemployment
when unproductive workers are only a hindrance in the efficiency of productive
workers, so that marginal product is negative and total product starts declining.
16. Market for a good is in equilibrium. Explain the chain of reactions in the market when
there is (i) “decrease” in supply (ii) “decrease” in demand.
Or
Market for a good is in equilibrium. There is simultaneous “increase” both in demand
and supply but there is no change in price. Explain how is it possible. Use a schedule. 6
Ans. (i) Effect of decrease in supply of a commodity on its equilibrium price and equilibrium
Y
Fig. 4 D S1
P2
S
P1 E1
PRICE
P E
S1
D
S
O X
Q2 Q1 Q
QUANTITY
Decrease in supply implies a shift in supply curve to the left from SS to S1S1. This sets in
motion the following Chain of Effects:
Decrease in supply implies that less is supplied at the existing price. Given the demand,
price of the commodity will tend to increase, from OP to OP2: same quantity (OQ) will
now be supplied at the price OP2. Or, at the price of OP, only OQ2 quantity will now be
offered for sale. Rise in price will cause contraction of demand and extension of supply.
This process of extension and contraction will continue till quantity demanded is equal
to quantity supplied (OQ1). The equilibrium price is struck at OP1.
(ii) Effect of decrease in demand for a commodity on its equilibrium price and equilibrium
Y D
Fig. 5 S
D1
P E
PRICE
P1 E1
P2 D
S
D1
O X
Q2 Q1 Q
QUANTITY
Decrease in demand implies a shift in demand curve to the left. It is indicated by D1D1.
This sets in motion the following Chain of Effects:
Decrease in demand implies that less is demanded at the existing price. Given the
supply, price of the commodity will tend to decrease, from OP to OP2: same quantity
(OQ) will now be demanded at the price OP2. Or, at the price of OP, only OQ2 quantity
will now be offered for demand. Fall in price will cause extension of demand and
contraction of supply. This process of extension and contraction will continue till quantity
demanded is equal to quantity supplied (OQ1). The equilibrium price is struck at OP1.
Or
Price Quantity Demanded Quantity Supplied
(`) (Units) (Units)
5 10 30
4 20 20
3 30 10
After Simultaneous Increase in Demand and Supply
5 20 60
4 40 40
3 60 20
From the above schedule, it is clear that at price ™4 the market demand is equal to market
supply of 20 units. Hence at ™4, the market is in equilibrium. For market price to remain
unchanged or constant increase in demand should be exactly equal to increase in supply. In
the above schedule, 100 per cent increase in both demand and supply causes no change in
market price. Therefore, new equilibrium is also struck at a price ™4 per unit.
SECTION-B
17. Define capital goods. 1
18. Define flow variables. 1
Ans. Flow variable is that quantity of an economic variable which is measured per unit of time period.
19. What is bank money? 1
Ans. Bank money is the money created by the bank in the form of demand deposits, over and
above cash deposits of the people with the banks. It is a credit money, and not a legal tender.
20. Define indirect tax. 1
Ans. Indirect tax is a tax on goods and services. Those who are liable to pay this tax need not bear
the final burden of this tax.
21. What is a flexible exchange rate? 1
22. Find out Net Value Added at Market Price:
(i) Intermediate cost (™) 10,000
(ii) Change in stock (™) 1,000
(iii) Output sold (™) 750
(v) Import duty (™) 2,000

(vi) Consumption of fixed capital (™) 3,000 3
= Sales (Output sold ´ Price per unit of output) + Change in stock - Intermediate cost
- Consumption of fixed capital
= (750 ´ ` 40) + ` 1,000 – ` 10,000 – ` 3,000
= ` 30,000 + ` 1,000 – ` 10,000 – ` 3,000
= ` 18,000
23. Explain the ‘unit of account’ function of money. 3
Ans. Money serves as a measure of value in terms of unit of account, i.e., in monetary unit. For
example, value of sugar can be expressed in monetary unit by saying that price of sugar is
` 15 per kg. In the absence of money as a unit of account, some goods were used as a unit of
account to assess the value of other goods. It was a cumbersome procedure and a hindrance
in the process of exchange. Money serves as a standard unit of account for all goods and
services. It has enhanced the process of exchange.
24. Draw consumption curve and saving curve in a single diagram and mark the ‘break-even
point’. 3
Ans. In Fig. 6, C is the consumption curve and S is the saving curve. OA is the minimum
consumption when income level is zero and OA ¢ is negative saving when income is zero. At
point E, consumption is equal to income, and saving is equal to zero. This is called the
break-even point.
Y Y=C
Fig. 6
CONSUMPTION (C)\SAVINGS (S)
G
C
Break-even
point
E E1
S Note: Break-even
A occurs when Y = C,
G' or when S = 0
45º
O X
Y1 Y2 INCOME (Y)
A'
25. Find ‘investment’ from the following:

National income =™ 800
Autonomous consumption= ™ 50
Or, Y = C + MPC (Y) + I
Or, I = Y – C – MPC (Y)

I = 800 – 50 – 0.8(800)
I = 800 – 50 – 640
I = 110
26. Distinguish between revenue expenditure and capital expenditure in a government
budget. Give example in each case.
Or
Explain the role of government budget in reducing income inequalities. 3
Ans. Revenue expenditure is that expenditure which creates no assets or causes no
reduction in liabilities of the government. Examples: (i) expenditure on interest
payments, (ii) expenditure on salaries.
Capital expenditure is that expenditure of the government which either creates assets or
causes a reduction in government liability. Examples: (i) expenditure on purchase of
shares, (ii) expenditure on buildings.
Or
Government’s budgetary policy can help reduce inequalities of income through
redistribution of income and wealth in the economy. To achieve this objective, government
uses fiscal instruments of taxation and subsidies. By imposing taxes on rich and giving
subsidies to the poor, government redistribute income in favour of poorer sections of the
society. Equitable distribution of income and wealth is a sign of social justice.
27. Giving reason, explain how the following should be treated while estimating national income:
(i) Payment of excise duty by a firm.
(ii) Payment of interest by a firm. 4
Ans. (i) Payment of excise duty only increase the market value of final goods and services.
Therefore, this is not included in the estimation of national income.
(ii) Payment of interest by a firm is included in the national income because a firm takes
loans for productive purposes.
28. Explain ‘bank of issue’ function of central bank.
Or
Explain the distinction between ‘Statutory liquidity ratio’ and ‘Legal reserve ratio’. 4
Ans. The central bank is the sole note-issuing authority in the country. Often, the central
banks divides its functions into two departments–banking department and issuing
department. It is the issuing department that is responsible for note-issuing. It issues
currency to cope with the demand for it, which depends upon the level of economic
activity in the economy.
Or
Statutory liquidity ratio (SLR) requires the commercial banks to maintain a specified
percentage of their deposits (implying their liabilities) in the form of liquid assets. The
liquid reserves may be in the form of (i) cash reserves, (ii) gold reserves, and (iii) unencumbered
approved securities.
Legal reserve ratio may be defined as CRR, referring to cash reserves held by the
commercial banks with the central bank, as a percentage of their demand deposits, and as a
matter of legal requirement.
Note: Legal Reserve Ratio should not be confused as comprising of two components, viz.,
SLR and CRR. These are just the two variants of legal reserve ratio.
29. Explain the concept of ‘primary deficit’ in a government budget. What does it indicate? 4
Ans. Primary deficit is the difference between fiscal deficit and interest payment.
Primary Deficit =Fiscal Deficit – Interest Payment
Primary deficit indicates borrowing requirement of the government owing to fiscal deficit
net of interest payment. Payment of interest highlights the extent to which we are already in
debt trap. Primary deficit indicates the extent to which we are adding to the pile of existing
debt during the budgetary year.
30. Find (a) Net National Product at Market Price, and (b) Gross National Disposable Income:
Items (™ crore)
(i) Wages and salaries 700
(ii) Rent 100
(iv) Net indirect tax 70
(v) Royalty 50
(vi) Profits 300
(vii) Net factor income to abroad (–)20
(viii) Consumption of fixed capital 120
(ix) Social security contribution by employers 60
(x) Social security contribution by employees 40
(xi) Interest 400
6
Ans. (a) Net National Product at Market Price
= Wages and salaries + Social security contribution by employers + Rent + Royalty
+ Profits + Interest + Net indirect tax – Net factor income to abroad
+ ™ 70 crore – (-) ` 20 crore
+ ` 70 crore + ™ 20 crore
= ` 1,700 crore
(b) Gross National Disposable Income
= Net National Product at Market Price + Consumption of fixed capital
= ` 1,700 crore + ` 120 crore – ` 10 crore
= ` 1,810 crore

31. Explain the concept of ‘deflationary gap’. Also explain the role of ‘open market
operations’ in reducing it.
Or
Explain the concept of ‘excess demand’. Also explain the role of ‘bank rate’ in reducing
it. 6
Ans. Deflationary gap is the shortfall in aggregate demand from the level required to maintain
full employment equilibrium in the economy. It causes deflationary gap in the economy.
Owing to deficient demand, planned level of output is reduced. Along with reduction in the
level of output, level of income and employment also tend to reduce. The economy is
driven into a state of low level equilibrium trap.
Open market operations is the policy that focuses on increasing and decreasing the stock of
liquidity (or cash balances) with the people as well as with the commercial banks, through
sale and purchase of securities by the central bank. During the situations of deflationary
gap, when cash balances need to be increased (to stimulate the level of aggregate demand)
the central bank starts buying securities. Purchase of securities injects purchasing power
into the money market. Cash balances of the commercial banks start picking up. This
enhances their capacity to create credit. Consequent upon the greater flow of credit flow in
the economy, aggregate demand is increased. Deflationary gap is corrected.
Or
Excess demand refers to a situation when aggregate demand (AD) is in excess of
aggregate supply (AS) corresponding to full employment in the economy. It causes
inflationary gap in the economy. Price level tends to rise without any rise in the level of
income or employment.
Bank rate is the rate at which the central bank lends money to the commercial banks. To
correct the situation of excess demand, bank rate is increased. As a follow-up action, the
commercial banks raise the market rate of interest (the rate at which the commercial banks
lend money to the consumers and the investors). This reduces demand for credit.
Consequently, consumption expenditure and investment expenditure are reduced.
Implying a reduction in aggregate demand, as required to correct excess demand.
32. Give two sources each of demand and supply of foreign exchange. Giving reason, explain
the relation between foreign exchange rate and supply of foreign exchange. 6
Ans. Two sources of demand for foreign exchange are as these:
(i) Payments of international loans.
(ii) Gifts and grants to rest of the world.
Two sources of supply of foreign exchange are as these:
(i) Purchases of domestic goods by the foreigners.
(ii) Direct foreign investment as well as portfolio investment in home country.
Ordinarily, foreign exchange rate and supply of foreign exchange are positively related.
Suppose, when the price of foreign currency falls (in relation to domestic currency),
purchasing power of foreign currency in the domestic economy tends to reduce. This
causes reduction in export from the domestic economy. Accordingly, supply of foreign
currency reduces from OS to OS2 when exchange rate falls from OR to OR2 as shown in Fig. 7.
Y
Fig. 7 S
RATE OF EXCHANGE
R1
R2
O S2 S S1 X
QUANTITY SUPPLIED
(Foreign currency)
Similarly, when the price of foreign currency rises (in relation to domestic currency),
purchasing power of foreign currency in the domestic economy tends to increase. This
causes increase in export from the domestic economy. Accordingly, supply of foreign
currency increases from OS to OS1 when exchange rate rises from OR to OR1 as shown in Fig. 7.
SET–II
SECTION–A
6. Define production possibilities curve. Explain why it is downward sloping from left to
right. 3
Ans. Production possibility curve (also called production possibility frontier) is a curve showing
different combinations of two goods, which can be produced with the given resources and
technique of production. It is also assumed that the given resources are efficiently utilised.
The production possibility curve slopes downward from left to right. This is because (owing
to fuller and efficient utilisation of the given resources, as well as given technology) output
of Good-X can be increased only by sacrificing some output of Good-Y.
9. A producer starts a business by investing his own savings. He employs a manager to look after
the business. Identify the explicit and implicit costs from this information. Explain. 3
Ans. Imputed interest of owner’s savings is implicit cost because implicit costs are incurred on
the use of factors/inputs. Salary paid to a manager to look after the business is explicit cost
because it is the expense incurred by the producer for hiring the services of the manager
from the market.
11. Explain the concept of marginal rate of substitution with the help of a numerical
example. 4
Ans. Marginal rate of substitution (MRS) is the rate at which a consumer is willing to substitute
Good-1 for Good-2. Or, it is the rate at which a consumer is willing to give up Good-2 for a
unit more of Good-1.
DGood-2
DGood-1
The concept of MRS is explained with the help of a table as under:

A 1 10 —
B 2 7 3:1
C 3 5 2:1
D 4 4 1:1
Above table indicates that the consumer is willing to give up 3 oranges for getting the
second apple, 2 oranges for getting the third apple and 1 orange for getting the fourth
apple. In other words, marginal rate of substitution of apples for oranges goes on
diminishing. It is because of the diminishing MRS that the IC becomes convex to the origin.
12. A consumer buys 11 units of a good at a price of ™10 per unit. He can buy 13 units of the
same by incurring an expenditure of ™ 130. Calculate price elasticity of demand by the
percentage method. Also comment on the shape of the demand curve based on this
information. 4
Ans. 130
Given, P = ` 10; P1 = = ` 10; DP = P1 – P = ` 10 – ` 10 = 0
13
Q = 11 units; Q1= 13 units; DQ = Q1 – Q = (13 – 11) units = 2 units
P DQ 10 2 20
Ed = (–) ´ = (–) ´ = =¥
Q DP 11 0 0
Demand curve will be a horizontal straight line parallel to X-axis, provided there is an
infinite change in quantity demanded corresponding to all levels of price of the commodity.
SECTION–B
22. Find Net Value Added at Factor Cost:
Items
(i) Intermediate cost (™) 15,000
(ii) Output sold (units) 9,000
(iii) Price per unit of output (™) 4
(iv) Consumption of fixed capital (™) 2,000
(v) Excise duty (™) 4,000
(vi) Change in stock (™) (–) 1,000 3
= Sales (Output sold ´ Price per unit of output) + Change in stock - Intermediate cost
- Consumption of fixed capital - Excise duty
= (9,000 ´ ` 4) + (–) ` 1,000 – ` 15,000 – ` 2,000 – ` 4,000
= ` 36,000 – ` 1,000 – ` 15,000 – ` 2,000 – ` 4,000
= ` 14,000

Autonomous consumption =™150
Marginal propensity to consume = ™ 0.75
National income = ™ 1,000. 3
= 150 + 0.75(1,000)
= 150 + 750 = 900
Consumption expenditure = ™ 900.
27. How should the following be treated while estimating national income? Give reasons for
your answer.
(i) Festival gift from an employer.
(ii) Rent free house from an employer. 4
Ans. (i) Festival gift from an employer is not included in the estimation of national income
because this is a transfer payment.
(ii) Rent free house from an employer is included in the estimation of national income
because it is a kind of wages in kind, and therefore a part of compensation of employees.
30. Find out (a) Gross National Product at Market Price, and (b) Net Current Transfers from
Abroad:
Items (™ crore)
(i) Net national disposable income 1,100
(ii) Net indirect tax 120
(v) Net domestic fixed capital formation 200
(vi) Net imports (–) 40
(vii) Net factor income to abroad (–) 20
(viii) Depreciation 50
4, 2
Ans. (a) Gross National Product at Market Price
expenditure + Net domestic fixed capital formation + Depreciation + Change in
stock – Net imports – Net factor income to abroad
= ` 750 crore + ` 250 crore + ` 200 crore + ™ 50 crore + ` 10 crore – (–) ` 40 crore
- (–) ` 20 crore
= ` 750 crore + ` 250 crore + ` 200 crore + ™ 50 crore + ` 10 crore + ` 40 crore
+ ` 20 crore
= ` 1,320 crore

= Gross national product at market price – Depreciation + Net current transfers from
abroad
Or, Net Current Transfers from Abroad
= Net national disposable income – Gross national product at market price + Depreciation
= ` 1,100 crore – ` 1,320 crore + ` 50 crore = (–) ` 170 crore
(a) Gross national product at market price = ` 1,320 crore.
(b) Net current transfers to abroad = (–) ` 170 crore.
SET–III
SECTION–A
6. Explain the concept of marginal rate of transformation with the help of an example. 3
Ans. Marginal rate of transformation is the rate at which output of Good-Y is to be sacrificed to
produce a unit more of Good-X. It refers to the slope of PPC (Production Possibility Curve).
It is also called opportunity cost of producing a unit more of good-X.
Example: Output of Y Output of X
10 10
7 11
When some resources are shifted from use-Y to use-X, there is a loss of output of 3 units of Y
DY 3
for a unit more of Good-X. MRT = = = 3. [Here, DY refers to loss of output of Good-Y.
DX 1
DX refers to loss of output of Good-X.]
9. A producer takes a building on rent for carrying out business. He looks after the business
himself. Identify the implicit and explicit costs from this information. Explain. 3
Ans. As the producer is carrying out the business himself, he is rendering his own services.
Managerial services are not hired from the market. So, they are implicit cost. Implicit
costs are incurred on the use of self-owned factors/inputs. Rent paid of a building taken
on rent is explicit cost because it is the expense incurred by the producer for purchasing
the inputs from the market.
11. What are monotonic preferences? Explain why an indifference curve to the right shows
higher utility. 4
An indifference curve to the right shows higher utility level. Because each point on a higher
IC shows that, corresponding to a given level of consumption of good-Y, the consumption of
good-X is greater than before. Implying higher level of satisfaction, in tune with the
assumption of monotonic preferences of the consumer.
12. A consumer buys 10 units of a good at a price of ™11 per unit. When the price falls to ™9
per unit, he spends ™ 90 on the good. Calculate price elasticity of demand using the
percentage method. Also comment upon the shape of demand curve based on this
information. 4
Ans. Given, P = ` 11; P1 = ` 9; DP = P1 – P = ` 9 – ` 11 = – ™ 2

90
Q = 10 units; Q1= = 10 units;
9
DQ = Q1 – Q = (10 – 10) units = 0 units
P DQ 11 0 0
Ed = (–) ´ = (–) ´ = =0
Q DP 10 – 2 20
Price elasticity of demand = 0 (zero).
Demand curve will be a vertical straight line parallel to Y-axis, provided there is no change
in quantity demanded at all levels of price of the commodity.
SECTION–B
22. Find Gross Value Added at Factor Cost:
Items
(i) Import duty (™) 1,000
(ii) Excise (™) 1,000
(iii) Output sold (units) 5,000
(v) Change in stock (™) 600
(vi) Intermediate cost (™) 16,000
(vii) Subsidy (™) 500
3
= Sales (Units of output sold ´ Price per unit of output) + Change in stock - Intermediate
cost – Import duty – Excise + Subsidy
= (5,000 ´ ` 6) + ` 600 – ` 16,000 – ` 1,000 – ` 1,000 + ` 500
= ` 30,000 + ` 600 – ` 16,000 – ` 1,000 – ` 1,000 + ` 500
= ` 13,100
Autonomous consumption= ™ 200
Investment = ™ 700. 3
Or, Y = C + MPC (Y) + I
Y = 200 + 0.70Y + 700
Y – 0.70Y = 900
0.30Y = 900
Y = 3,000
National income = ™ 3,000.
27. Giving reason, explain how the following should be treated while estimating national
income:
(i) Free medical facilities by the employer.
(ii) Contribution to provident fund by employees. 4
Ans. (i) Free medical facilities by the employer is included in the estimation of national income
because it is a kind of wages in kind, and therefore a part of compensation of employees.
(ii) Contribution to provident fund by the employees is an integral component of income.
It is paid out of income. It is therefore not separately added in the estimation of
national income.
Items (™ crore)
(i) Net domestic fixed capital formation 200
(ii) Factor income from abroad 30
(iii) Change in stock (–) 20
(iv) Net indirect tax 120
(v) Net current transfers to abroad (–) 10
(vi) Private final consumption expenditure 800
(viii) Government final consumption expenditure 300
(ix) Net factor income to abroad 40
(x) Net imports (–) 50
4, 2
expenditure + Net domestic fixed capital formation + Change in stock – Net
imports – Net indirect tax – Net factor income to abroad
= ` 800 crore + ` 300 crore + ` 200 crore + (-) ` 20 crore – (-) ` 50 crore - ` 120
crore – ` 40 crore
= ` 800 crore + ` 300 crore + ` 200 crore - ` 20 crore + ` 50 crore - ` 120 crore
– ` 40 crore
= ` 1,170 crore
= ` 1,170 crore + ` 120 crore – (–) ` 10 crore
= ` 1,170 crore + ` 120 crore + ` 10 crore
= ` 1,300 crore
(a) National income = ` 1,170 crore.
(b) Net national disposable income = ` 1,300 crore.
CBSE Examination Papers
Delhi–2013
General Instructions: Same as CBSE Sample Question Paper.
SET–I
SECTION–A
1. Give two examples of fixed costs. 1
Ans. (i) Rent of a building, and (ii) Salary to permanent employees.
Ans. Marginal cost is the change in total cost when an extra unit of output is produced.
3. When is the demand for a good said to be inelastic? 1
Ans. Demand for a good is said to be inelastic when percentage change in quantity demanded is
less than percentage change in own price of the good.
4. Give the meaning of market demand. 1
5. Under which market form a firm’s marginal revenue is always equal to price? 1
Ans. Under perfect competition, a firm’s marginal revenue is always equal to price.
6. Explain the difference between an inferior good and a normal good. 3
Ans. Inferior good is a good whose demand decreases with rise in income and increases with fall
in income of the consumer. So that, there is inverse (or negative) relation between
consumer’s income and demand for the good. Example: Coarse grain. On the other hand,
normal good is a good whose demand increases with rise in income and decreases with fall
in income of the consumer. So that, there is a positive relation between consumer’s income
and demand for the good. Example: Milk.
7. Explain the law of diminishing marginal utility with the help of a total utility schedule. 3
Or
Explain the conditions of consumer’s equilibrium with the help of utility analysis.
explained with the help of the following schedule:
Total Utility Schedule
Units of Commodity-X TUX MUX
1 25 25
2 45 20
3 60 15
4 70 10
5 75 5
6 75 0
7 70 –5
The above schedule reveals that as the consumer consumes more of commodity-X, the
marginal utility diminishes. It may reduce to zero, and even become negative.
Or
Conditions of consumer’s equilibrium, using utility approach are as follows:
(i) In case of a single commodity:
MU X
= MUof Money
PX
In case of two commodities:
MU X MU Y
= = MU of Money
PX PY
Where, MUX is marginal utility of commodity-X; MUY is marginal utility of
commodity-Y; PX is price of commodity-X and PY is price of commodity-Y.
(ii) Marginal utility of money remains constant.
(iii) Law of diminishing marginal utility must hold good. Implying that marginal utility
must decline as more of a commodity is consumed.
8. When the price of a good rises from ` 20 per unit to ` 30 per unit, the revenue of the firm
producing this good rises from ` 100 to ` 300. Calculate the price elasticity of suply. 3
Ans. Given, P = ` 20; P1 = ` 30; DP = P1 - P = ` 30 – ` 20 = ` 10
When price = ` 20, total revenue (P × Q) = ` 100
100
\ Quantity supplied (Q) = = 5 units
20
When, price = ` 30, total revenue (P1 × Q1) = ` 300
300
\ New quantity supplied (Q1 ) = = 10 units
30
Q = 5 units; Q1= 10 units; DQ = Q1 - Q = (10 – 5) units = 5 units
P DQ
Price elasticity of supply (Es ) = ´
Q DP
20 5
= ´ =2
5 10
Units of Labour Average Product Marginal Product

(Units) (Units)
1 8 —
2 10 —
3 — 10
4 9 —
5 — 4
6 7 —
Ans.
Units of Labour Average Product Marginal Product Total Product
(Units) (Units) (Units)
1 8 8 8
2 10 12 20
3 10 10 30
4 9 6 36
5 8 4 40
6 7 2 42
10. Explain “large number of buyers and sellers” feature of a perfectly competitive market.
3
Ans. The number of buyers and sellers of a commodity is very large under perfect competition.
The number of firms selling a particular commodity is so large that an individual seller
contributes only a small fragment to the market supply. Thus, any increase or decrease in
supply by an individual firm hardly impacts the total market supply and consequently, an
individual firm cannot impact price of the commodity.
Not only is the number of sellers very large, but the number of buyers is also very large
under perfect competition. It is so large that by varying his purchase, an individual buyer
cannot affect total market demand for a commodity. Accordingly, an individual buyer
cannot affect market price. He can buy any quantity at the existing price of the commodity.
An individual buyer is a price taker.
11. Production in an economy is below its potential due to unemployment. Government
starts employment generation schemes. Explain its effect using production possibilities
curve. 4
Ans. PPC (Production Possibility Curve) is drawn on the assumption that the given resources are
fully as well as efficiently utilised. When production is below its potential due to
unemployment, it would mean that the concerned economy is not operating on the PPC
but is somewhere inside the PPC. This is indicated by point ‘B’ in Fig. 1. Since, our resources
and technology remain the same, PPC would not shift. With the commencement of
employment generation schemes, employment level will rise. Consequently, the point B
will start shifting closer to the PP line. Once full employment is achieved (other things
remaining constant), the point B will finally be located somewhere on the PP line.
Y
Fig. 1
COMMODITY–Y
B
O X
P
COMMODITY–X
12. Explain the conditions of producer’s equilibrium with the help of a numerical
example. 4
Ans. A producer strikes his equilibrium when following two conditions are satisfied:
(i) MR = MC, and
(ii) MC is rising or MC curve cuts MR curve from below.
Consider the following schedule and see how producer’s equilibrium is worked out by
fulfilling above two conditions:
Output MR MC
(Units) (`) (`)
1 24 30
2 24 28
3 24 25
4 24 24
5 24 20
6 24 24
7 24 26
The above table shows that MR and MC are equal when the level of output is = 4, and also
when it is = 6. But, when the output level is = 4, MC is NOT rising (instead, it is falling). It is
only when output level is 6 that MC = MR, and also MC is rising. Thus, a producer is in
equilibrium when he produces 6 units of the output.
13. The price elasticity of demand for a good is –0.4. If its price increases by 5 per cent, by
what percentage will its demand fall? Calculate. 4
Or
Explain any two factors that affect the price elasticity of demand. Give suitable examples.
Ans. Given, Ed = – 0.4
Percentage change in price = 5%
Percentage change in quantity demanded
Price elasticity of demand (Ed) = (–)
Þ – 0.4 = (–)
5%
Þ Percentage change in quantity demanded = – 0.4 × 5 = – 2
\ Percentage fall in quantity demanded = 2%.
Or
Price elasticity of demand is affected by the following two factors:
like tea and coffee. Commodities having no substitutes like liquor and cigarettes, etc.
have inelastic demand.
(i) A monopolist can sell any quantity he likes at a price.
(ii) When equilibrium price of a good is less than its market price, there will be
competition among the sellers. 6
Ans. (i) No, the statement is false. A monopolist can sell more only by lowering the price of his
product.
(ii) Yes, the statement is true. Equilibrium price is that price at which there is neither
excess demand nor excess supply in the market. When equilibrium price is less than
market price (price that prevails in the market) it points to a situation of excess supply
in the market. Implying that there are undesired stocks of the product with the sellers.
Obviously, this will lead to competition among the sellers who will like to clear their
undesired stocks. Fig. 2 illustrates this situation.
Y
Fig. 2 D S
A B
P1
Market Price
PRICE
Equilibrium Price
P
Excess Supply: AB
Consequence: Competition
among sellers to clear the
undesired stocks
S D
O
QUANTITY X
15. Explain the Law of Variable Proportions with the help of total product and marginal
product curves. 6
Y
Fig. 3
T
TOTAL PRODUCT
TP
L S
O X
MARGINAL PRODUCT
Returns Returns
O X
L S – ve
MP
Diagram shows that:

16. Explain consumer’s equilibrium with the help of indifference curve analysis. 6
Or
Explain the relationship between
(i) Prices of other goods and demand for the given good.
(ii) Income of the buyers and demand for a good.
P
(i) MRS (Marginal rate of substitution) = X (Slope of the price line).
PY
PX
(ii) IC is convex to the origin at the point where MRSXY = .
PY
Y
Fig. 4
P
GOOD-Y
L Q
IC
O X
M P
GOOD-X
P
MRS (indicated by the slope of IC) = X (indicated by the slope of price line)
PY
Also, at point Q, indifference curve is convex to the origin.
Or
(i) Other goods may be: (a) substitute goods, or (b) complementary goods. The relation
between the demand for a given good and price of other goods is different in case of
substitute goods and complementary goods. This is explained with reference to Fig. 5.
each other. When price of a substitute good increases, demand for a given good
(Good-X) tends to rise. Demand curve for Good-X will shift to the right, implying
quantity demanded increases from PK to PL even when price of Good-X continues
to be OP.
the demand for each other. When price of complementary goods increases,
demand for Good-X tends to fall. Demand curve for Good-X will shift to the left,
implying quantity demanded decreases from PK to PS even when price of Good-X
continues to be OP.
Fig. 5 illustrates the effect of rise in price of the other goods.
Y
Fig. 5 D D1 Demand curve shifts to the
D2 right (from DD to D1D1) when
Initial demand curve price of the substitute good
increases
PRICE OF X
Demand curve shifts to the
left (from DD to D2D2) when
S K L price of the complementary
P good increases
D1
D2 D
O X
QX
QUANTITY OF X
(ii) The relation between the demand for a good and income of the buyers is different
in case of normal goods and inferior goods. This is explained with reference to
Fig. 6.
(a) Normal Goods: A normal good is that good the consumption of which increases
with increase in income of the buyer, so that there is a positive relationship between
buyer’s income and demand for the good. When income rises, demand curve for
the normal good (say milk) shifts to the right from PK to PT as shown in Fig. 6(a).
(b) Inferior Goods: An inferior good is that good the consumption of which decreases
with increase in income of the buyer, so that there is a negative relationship
between buyer’s income and demand for the good. When income rises, demand
curve for inferior good (say coarse grain) shifts to the left from PT to PK as shown in
Fig. 6(b).
(a) (b)
Fig. 6
Y Y
D2 D1
D2
PRICE OF MILK
D1
K T K T
P P
D2
D1 D1
D2
O X O X
Q1 Q2 Q2 Q1
SECTION–B
17. How can increase in foreign direct investment affect the price of foreign exchange? 1
Ans. Increase in foreign direct investment increases the supply of foreign exchange. Implying
decrease in price of foreign exchange.
19. Give one example of “externality” which reduces welfare of the people. 1
Ans. Pollutants dumped by steel factories in rivers pollutes water and kill the fish in the river.
20. Give two examples of indirect taxes. 1
Ans. (i) Value added tax, and (ii) Sales tax.
21. What is a government budget? 1
Ans. Government budget is a statement of expected receipts and expenditure of the
government over the period of a financial year.
22. Explain the problem of double coincidence of wants faced under barter system. How has
money solved it? 3
Ans. Double coincidence of wants means that goods in possession of two different individuals are
needed by each other. But it is difficult to find a person who wants your good and at the
same time possesses a good that you want to buy. Accordingly, under the barter system,
exchange remained extremely limited.
Money as a medium of exchange has removed the major difficulty of double coincidence of
wants. It means that money acts as an intermediary for the goods and services in exchange
transactions. In the monetary system, acts of sale and purchase of the goods and services are
separated from each other. If one wants to buy goods, he can do so with money. And, if one
wants to sell goods, he can sell these for money.
23. Distinguish between revenue expenditure and capital expenditure in government
budget. Give an example of each. 3
Or
Distinguish between revenue deficit and fiscal deficit.
Ans. Revenue expenditure is that expenditure of the government which does not create assets
for the government or does not cause reduction in liabilities of the government. Example:
Expenditure on interest payments.
purchasing building.
Or
Revenue deficit is the excess of revenue expenditure of the government over its revenue
receipts. Fiscal deficit is the excess of total budget expenditure over total budget receipts
excluding borrowings. Fiscal deficit indicates borrowings by the government to cope with
its expenditures.
24. Explain any one objective of government budget. 3
Ans. One of the main objectives of government is to promote equity through the redistribution
of income and wealth. Distribution of income is impacted largely by way of ‘progressive
taxation policy’. It implies greater tax burden on the rich than the poor. In fact, those with
very low incomes are exempted from the payment of tax. Subsidies are offered to poorer
sections of the society so that their real disposable income is scaled up. Also, essential food
items are sold to the BPL families (below poverty line families) at subsidised rates. The
government makes provision regarding these expenditures in its annual budget.
25. Explain the effect of appreciation of domestic currency on imports. 3
Ans. Appreciation is the rise in the value of domestic currency in relation to foreign currency in a
international money market. When domestic currency appreciates, value of domestic
currency in terms of foreign currency rises. Consequently, domestic goods become
expensive in terms of foreign currency. Accordingly, imports from foreign country tend to
rise. On the other hand, our exports would decline.
26. Distinguish between balance of trade and balance on current account. 3
Ans. Balance on trade account includes only visible items of trade. It is defined as the difference
Balance on Trade Account = Export of visible items – Imports of visible items
Balance on Current Account = Trade balance + Invisible balance
27. Calculate “sales” from the following data: 4
Items (™ in lakh)
(ii) Depreciation 60
(iv) Intermediate cost 1,000
(v) Exports 200
(vi) Indirect taxes 60
= Sales + Change in stock – Intermediate cost – Depreciation – Indirect taxes
Sales
= Net value added at factor cost – Change in stock + Intermediate cost + Depreciation
+ Indirect taxes
= ` 560 lakh – (–) ` 30 lakh + ` 1,000 lakh+ ` 60 lakh + ` 60 lakh
= ` 560 lakh + ` 30 lakh + ` 1,000 lakh + ` 60 lakh + ` 60 lakh
= ` 1,710 lakh
Sales = ` 1,710 lakh.
28. Giving reasons categorise the following into stock and flow:
(i) Capital (ii) Saving
(iii) Gross domestic product (iv) Wealth. 4
Or
Explain the circular flow of income.
Ans. (i) Capital is a stock variable because it is measured at a point of time.

(ii) Saving is a flow variable as it is measured per unit of time period.
(iii) Gross domestic product is a flow variable as it is measured per unit of time period.
(iv) Wealth is a stock variable because it is measured at a point of time.
Or
income gives rise to demand for goods and services, and demand for goods and services in
turn gives rise to expenditure. Expenditure leads to further production. Thus, the flow of
production, income and expenditure becomes circular with no beginning or no end. This
flow is shown in Fig. 7.
Fig. 7 Production
Expenditure
Income
Circular Flow
of Income
29. Explain “Banker to the Government” function of the central bank. 6

the government, it keeps all accounts of all government and manages government
treasuries across the country. The central bank offers interest-free loan to the government
for short period. As an agent to the government, it buys and sells securities, treasury bills on
behalf of the government. It also transfers government funds. As an advisor to the
government, it helps the government in framing policies to regulate the money market.
30. C = 100 + 0.4Y is the consumption function of an economy where C is consumption
expenditure and Y is national income. Investment expenditure is 1,100. Calculate
( i) Equilibrium level of national income.
Ans. Given, C = 100 + 0.4Y
Investment expenditure = 1,100.
At equilibrium, Y= C + I
Y = 100 + 0.4Y + 1,100
Y = 1,200 + 0.4Y
Y – 0.4Y = 1,200
0.6Y = 1,200
Y = 2,000
C = 100 + 0.4Y
= 100 + 0.4(2,000)
= 100 + 800
= 900
(i) Equilibrium level of national income = 2,000.
(ii) Consumption expenditure at equilibrium level of national income = 900.
31. Complete the following table:
Income Consumption Marginal Propensity Average Propensity
(`) Expenditure to Save to Save
(`)
0 80 — —
100 140 0.4 —
200 — — 0
— 240 — 0.20
— 260 0.8 0.35
Ans.
Income Consumption Saving Marginal Average
(`) Expenditure (`) Propensity to Save Propensity to
(`) DS S
(= ) Save (= )
DY Y
0 80 – 80 — —
100 140 – 40 40 - 40
= 0.4 = – 0.4
100 100
200 200 0 40 0
= 0.4 =0
100 200
300 240 60 60 60
= 0.6 = 0.20
100 300
400 260 140 80 140
= 0.8 = 0.35
100 400
32. Calculate National Income from the following data: 6

Items (™ in crore)
(i) Private final consumption expenditure 900
(ii) Profit 100
(iii) Government final consumption expenditure 400
(iv) Net indirect taxes 100
(v) Gross domestic capital formation 250
(vi) Change in stock 50
(vii) Net factor income from abroad (–) 40
(viii) Consumption of fixed capital 20
(ix) Net imports 30
Or
Calculate Net National Disposable Income from the following data:
(i) Gross domestic product at market price 2,000
(ii) Net current transfers to rest of the world (–) 200
(iii) Net indirect taxes 150
(iv) Net factor income to abroad 60
(v) National debt interest 70
(vi) Consumption of fixed capital 200
(vii) Current transfers from government 150
Ans. National Income
+ Gross domestic capital formation – Net imports - Consumption of fixed capital - Net
indirect taxes + Net factor income from abroad
= ` 900 crore + ` 400 crore + ` 250 crore – ` 30 crore – ` 20 crore – ` 100 crore + (–) ` 40 crore
= ` 900 crore + ` 400 crore + ` 250 crore – ` 30 crore – ` 20 crore – ` 100 crore – ` 40 crore
= ` 1,360 crore
National income = ` 1,360 crore.
Or
= Gross domestic product at market price - Consumption of fixed capital – Net factor
income to abroad – Net current transfers to rest of the world
= ` 2,000 crore – ` 200 crore – ` 60 crore – (–) ` 200 crore
= ` 2,000 crore – ` 200 crore – ` 60 crore + ` 200 crore
= ` 1,940 crore
Net national disposable income = ` 1,940 crore.
SET–II
SECTION–A
1. Give two examples of variable costs. 1
Ans. (i) Cost of raw material, and (ii) Payment of electricity bill.
8. A firm’s revenue rises from ` 400 to ` 500 when the price of its products rises from ` 20
per unit to ` 25 per unit. Calculate the price elasticity of supply. 3
Ans. Given, P = ` 20; P1 = ` 25; DP = P1 - P = ™ 25 – ™ 20 = ™ 5
400
20
When, price = 25, total revenue (P1 × Q1) = 500
500
25
Q = 20 units; Q1= 20 units; DQ = Q1 - Q = (20 – 20) units = 0 unit
P DQ
Price elasticity of supply (Es ) = ´
Q DP
20 0
= ´ =0
20 5
\ Price elasticity of supply = 0 (zero).
Output Average Cost Marginal Cost
(Units) (`) (`)
1 12 —
2 10 —
3 — 10
4 10.5 —
5 11 —
6 — 17
Ans.
Output Average Cost Marginal Cost Total Cost
(Units) (`) (`) (`)
1 12 12 12
2 10 8 20
3 10 10 30
4 10.5 12 42
5 11 13 55
6 12 17 72
10. Explain any two features of monopoly market. 3
Ans. Two main features of monopoly market are as under:
(i) Single Seller and Large Number of Buyers: Under monopoly, there is a single
producer of a commodity. He may be alone, or there may be a group of partners or a
joint stock company or a state. However, there is a large number of buyers of the
product.
(ii) Restrictions on the Entry of New Firms: Under monopoly, there are some restrictions
on the entry of new firms into monopoly industry. As for instance, there are patent
rights or exclusive control over a technique or raw material.
12. The demand for good rises by 20 per cent as a result of fall in its price. Its price elasticity
of demand is (–)0.8. Calculate the percentage fall in price. 4
Or
How is price elasticity of demand affected by:
(i) Number of substitutes available for the good.
(ii) Nature of the good.
Ans. Given, Ed = –0.8

Percentage change in quantity demanded = 20%
Price elasticity of demand (Ed) =
20%
–0.8 =
20%
Percentage change in price =
–0.8
Percentage change in price = –25%
\ Percentage fall in price = 25%.
Or
(i) Larger the number of substitutes of a commodity, greater is the elasticity of demand
(like tea and coffee). On the other hand, if a commodity has no close substitute (like
liquor and cigarettes) elasticity of demand will be low.
(ii) Goods may be necessaries, luxuries or comforts. Demand for necessaries (like salt,
vegetables) is highly inelastic. Demand for luxuries (like ACs) is highly elastic. Demand
for comforts (like TV, coolers) is moderately elastic.
SECTION–B
28. How do commercial banks create deposits? Explain. 4
Ans. Deposit/Credit creation is an important function of the commercial banks Following
observations highlight how it happens:
(i) Banks receive cash deposits from the people.
(ii) Banks lend many times more than their cash reserves.
(iii) Lending is done not in cash but by way of opening demand deposits in favour of the
borrowers. Thus, cash reserves of the banks are only a small percentage of their
demand deposits. This is possible because, banks by way of their historical experience
know that only a small percentage of deposits is withdrawn as cash during a period of
time. Banks enjoy confidence of the people that their money is safe with the banks.
(iv) Example: If cash reserves of the commercial banks are ` 10,000 and their demand
deposits (total liability of the commercial banks towards the people) are ` 10,000, then
the commercial banks have converted ` 10,000 into ` 1,00,000. Implying that the
supply of money through deposit/credit creation amounts to ` 1,00,000, even when
cash reserves of the banks are only ` 10,000. Credit multiplier = 1,00,000/10,000 = 10.
(v) In cash of crises of confidence (when people start making bulk withdrawals from the
banks) the central bank plays its role as a lender of last resort and sees to it that the
banks are not pushed in liquidity crises.
(vi) Cash reserves of commercial banks are governed by the central bank through CRR
(cash reserve ratio) which is a legally determined ratio of cash reserves to the total
demand deposits of the commercial banks. These cash reserves (according to CRR) are
to be kept by the commercial banks with the central bank. Beyond these legally
required cash reserves, the commercial banks tend to keep some reserves with
themselves. These are called ‘chest cash’.
30. In an economy, S = – 100 + 0.6Y is the saving function, where S is saving and Y is national
income. If investment expenditure is 1,100, calculate:
Ans. Given, S = –100 + 0.6Y
At equilibrium, S= I
–100 + 0.6Y = 1,100
0.6Y = 1,100 + 100
0.6Y = 1,200
Y = 2,000
We know at equilibrium,
S= I
\ S = 1,100
OR
S = – 100 + 0.6Y
= – 100 + 0.6(2,000)
= – 100 + 1,200
= 1,100
We also know that, Y= C + S
Or, C= Y – S
= 2,000 – 1,100
= 900
(i) Equilibrium level of national income = 2,000.
(ii) Consumption expenditure at equilibrium level of national income = 900.
Income Saving Average Marginal

(`) (`) Propensity Propensity to
to Consume Consume
0 – 40 — —
50 – 20 — —
100 0 — 0.6
150 30 0.8 —
200 50 — —
Ans.
Income Saving Consumption Average Propensity Marginal Propensity
(`) (`) (`) to Consume to Consume
C DC
(= ) (= )
Y DY
0 –40 40 — —
50 –20 70 70 30
= 1.4 = 0.6
50 50
100 0 100 100 30
=1 = 0.6
100 50
150 30 120 120 20
= 0.8 = 0.4
150 50
200 50 150 150 30
= 0.75 = 0.6
200 50
SET–III
SECTION–A
1. Give an example each of fixed cost and variable cost. 1
Ans. (i) Example of Fixed Cost: Rent of a building.
( ii) Example of Variable Cost: Cost of raw material.
8. The price elasticity of supply of a good is 0.8. Its price rises by 50 per cent. Calculate the
percentage increase in its supply. 3
Ans. Given, Ed = 0.8
Price elasticity of supply (Es) =
0.8 =
50%
Percentage change in quantity supplied = 50 × 0.8
Percentage change in quantity supplied = 40%
\ Percentage increase in supply = 40%.
Units of Labour Average Product Marginal Product
(Units) (Units)
1 16 —
2 20 —
3 — 20
4 18 —
5 — 8
6 14 —
Ans.
Units of Labour Average Product Marginal Product Total Product
(Units) (Units) (Units)
1 16 16 16
2 20 24 40
3 20 20 60
4 18 12 72
5 16 8 80
6 14 4 84
10. Explain “freedom of entry and exit to firms in industry” feature of monopolistic
competition. 3
Ans. Firms are free to enter the industry or leave it. But under monopolistic competition new
firms may have to face several difficulties. Products of some firms may be legally patented.
New firms cannot produce those the patented brands of the product. Example: No rival
firm can produce and sell a patented item like Woodland shoes even when there is a
freedom of entry in the shoe industry. It may be noted that, owing to the freedom of entry
and exit, only normal profits would prevail under monopolistic competition in the long
run. In case of extra normal profits, some new firms will join the industry (though with a
different brand name). Overall supply of the product will rise, leading to a fall in market
price and normal profits. In case of extra normal losses, on the other hand, some of the
existing firms will leave the industry. Overall supply of the product will fall, leading to a rise
in market price and normal profits.
12. Give the meaning of producer’s equilibrium. A producer produces that quantity of his
product at which marginal cost and marginal revenue are equal. Is he earning maximum
profits? Give reasons for your answer. 4
It occurs when (i) MR = MC, and (ii) MC is rising or MC curve cuts MR curve from below.
We can consider two situations: (i) when MR > MC, and (ii) when MR < MC.
(i) When MR > MC, every additional unit of output contributes greater revenue than cost.
Increase in output in such a situation would increase the level of profits.
(ii) When MR < MC, every additional unit of output causes greater cost than revenue.
A cut in the level of output in such a situation would increase the level of profits.
Thus, when MR > MC, output needs to be increased, and when MR < MC output needs to
be decreased to reach the point when profits are maximised. Accordingly, profits are
maximised only when MR = MC.
SECTION–B
27. Calculate “sales” from the following data: 4
Items (™ in lakh)
(i) Intermediate costs 700
(ii) Consumption of fixed capital 80

(iv) Subsidy 60
(v) Net value added at factor cost 1,300
(vi) Exports 50
= Sales + Change in stock – Intermediate costs – Consumption of fixed capital + Subsidy
Sales
= Net value added at factor cost – Change in stock + Intermediate costs + Consumption
of fixed capital – Subsidy
= ` 1,300 lakh – (–) ` 50 lakh + ` 700 lakh + ` 80 lakh – ` 60 lakh
= ` 1,300 lakh + ` 50 lakh + ` 700 lakh + ` 80 lakh – ` 60 lakh
= ` 2,070 lakh
31. C = 50 + 0.5Y is the consumption function where C is consumption expenditure and Y is
national income and investment expenditure is 2,000 in an economy. Calculate
(i) Equilibrium level of (national) income.
(ii) Consumption expenditure at equilibrium level of (national) income. 6
Ans. Given, C = 50 + 0.5Y
Y = 50 + 0.5Y + 2,000
Y = 2,050 + 0.5Y
Y – 0.5Y = 2,050
0.5Y = 2,050
Y = 4,100
C = 50 + 0.5Y
= 50 + 0.5(4,100)
= 50 + 2,050
= 2,100
(i) Equilibrium level of (national) income = 4,100.
(ii) Consumption expenditure at equilibrium level of (national) income = 2,100.

Consumption Saving Income Marginal Propensity
Expenditure (`) (`) to Consume
(`)
100 50 150 —
175 75 — —
250 100 — —
325 125 — —
Ans.
Consumption Saving Income Marginal Propensity
Expenditure (S) (Y = C + S) to Consume
(C) (`) (`) DC
(= )
(`) DY
100 50 150 —
175 75 250 75
= 0.75
100
250 100 350 75
= 0.75
100
325 125 450 75
= 0.75
100
zzz
All India–2013
SET–I
SECTION–A
Ans. Marginal revenue is the change in total revenue when an extra unit of output is sold.
2. What does a rightward shift of demand curve indicate? 1
Ans. Rightward shift of demand curve indicates that quantity demanded of the commodity
increases even when own price of the commodity does not change.
3. Under which market form is a firm a price taker? 1
Ans. Under perfect competition, a firm is a price taker.
4. When is the demand for a good said to be perfectly inelastic? 1
Ans. Demand for a good is said to be perfectly inelastic when change in price of the good causes
no change in the quantity demanded.
5. Give one reason for an “increase” in supply of a commodity. 1
Ans. Supply of a commodity increases when number of firms increases in the market.
6. How is the demand for a good affected by a rise in the prices of other goods? Explain. 3
Ans. Other goods may be: (i) substitute goods, or (ii) complementary goods.
commodity increases, demand for its substitute will increase and vice-versa. For example, if
price of Pepsi rises, consumers will shift from the consumption of Pepsi to Coca Cola,
accordingly demand for Coca Cola rises.
Complementary goods are those goods which are used simultaneously. If price of a
commodity increases, demand for its complementary will decrease and vice-versa. For
example, if price of car rises, consumers will reduce the use of cars, leading to a fall in the
demand for petrol.
7. A firm supplies 10 units of a good at a price of ` 5 per unit. Price elasticity of supply is
1.25. What quantity will the firm supply at a price of ` 7 per unit? 3
Ans. Let the quantity supplied after change be M units.
Given, P = ` 5; P1 = ™ 7; DP = P1 – P = ™ 7 – ™ 5 = ™ 2
Q = 10 units; Q1 = M units; DQ = Q1 – Q = (M – 10) units
Es = 1.25
P DQ
Price elasticity of supply (Es) = ´
Q DP
5 M – 10
1.25 = ´
10 2
M – 10
1.25 =
4
Þ M – 10 = 5
Þ M = 5 + 10
= 15
New quantity = 15 units.
8. Explain the meaning of diminishing marginal rate of substitution with the help of a
numerical example. 3
DGood - 2
Good-1 for Good-2. It is estimated as at any point on IC.
DGood -1
It tends to diminish as move along an IC from left to the right. Implying that the consumer
is willing to give up less and less of Good-2 (measured on Y-axis) for every additional unit of
of Good-1 (measured on X-axis). It is because of the law of diminishing marginal utility.
Example:
Diminishing Marginal Rate of Substitution
A 1 10 —
B 2 7 3:1
C 3 5 2:1
D 4 4 1:1
Above table indicates that the consumer is willing to give up 3 oranges for getting the
second apple, 2 oranges for getting the third apple and 1 orange for getting the fourth
apple. It is because of the diminishing MRS that the IC becomes convex to the origin.
9. From the following table, find out the level of output at which the producer will be in
Output Marginal Revenue Marginal Cost

(Units) (`) (`)
1 8 10
2 8 8
3 8 7
4 8 8
5 8 9
Ans.
Output Marginal Revenue Marginal Cost
(Units) (`) (`)
1 8 10
2 8 8
3 8 7
4 8 8
5 8 9

Reason: At output levels 2nd and 4th unit, MR and MC (= 8). But the producer is in
equilibrium when 4 units of output are produced. Because, it is here only that: (i) MR =
MC, and (ii) MC is rising.
10. Why can a firm not earn abnormal profits under perfect competition in the long run?
Explain. 3
Or
Why is the demand curve of a firm under monopolistic competition more elastic than
under monopoly? Explain.
Ans. A perfectly competitive firm in the long run can earn only normal profits, i.e., there will be
zero abnormal profits. It is owing to the freedom of entry and exit. In case abnormal profits
(TR > TC or AR > AC) are earned, new firms will join the industry. This will shift market
supply curve to the right. Accordingly, market price will reduce and abnormal profits
would be wiped out. In a situation of abnormal losses (TR < TC or AR < AC) some of the
existing firms will leave the industry. Accordingly, market supply curve will shift to the left,
forcing the price to move up, till the situation of zero abnormal profits is reached.
Or
Demand curve for a monopolistic competitive firm is flatter, i.e., more elastic than the
demand curve for a monopoly firm. This is so because a product under monopolistic
competition has a large number of close substitutes while there are no close substitutes of
monopoly product. We know, larger the number of substitutes of a commodity greater is
the elasticity.
11. Equilibrium price of an essential medicine is too high. Explain what possible steps can be
taken to bring down the equilibrium price but only through the market forces. Also
explain the series of changes that will occur in the market. 4
Ans. Possible steps to lower the market price of an essential medicine are as these:
(i) The government can lower/abolish excise duty on the production of the medicine.
(ii) The government can offer subsidy to the producer engaged in the production of the
concerned medicine
In either situation the market supply of the product is expected to rise, leading to a shift in
the supply curve to the right, as in the diagram below:
Y S1
Fig. 1 D
S2
A B Initial equilibrium price
P1
Excess
Supply
PRICE
New equilibrium price
P2
S1
S2 D
O X
Q1 Q2
QUANTITY
A shift in supply curve from S1S1 to S2S2 generates excess supply = AB. This leads to a fall in
market price, triggering extension of demand and contraction of supply. Finally, new
market equilibrium is struck, indicating lower market price and higher equilibrium
quantity (OP2 price rather than OP1, and OQ2 quantity rather than OQ1).
12. Explain the meaning of opportunity cost with the help of production possibility schedule. 4
Or
With the help of suitable example explain the problem of ‘for whom to produce’.
Ans. Opportunity cost is the value of a factor in its next best alternative use. Or, it is the sacrifice
involved (in terms of the loss of output of Good-2) for every additional unit of output of
Good-1 when some of the given resources are shifted from Good-2 to Good-1 (technology
remaining constant). Example:
Production Possibility Schedule
Production Production of Good-X Production of Good-Y
Possibilities (Units) (Units)
A 0 20
B 1 18
C 2 15
D 3 11
Initially, (at combination B) in order to produce one unit of Good-X, 2 units of Good-Y are
sacrificed. At combination C, for producing another unit of Good-X, 3 units of Good-Y are
sacrificed. When one more unit of Good-X is to be produced (at combination D), 4 units of
Good-Y are to be sacrificed. Thus, at combination B, opportunity cost is 2 units of Good-Y for
one unit of Good-X; at combination C, opportunity cost is 3 units of Good-Y for one unit of
Good-X while at combination D, opportunity cost is 4 units of Good-Y for one unit of Good-X.
Or
For whom to produce is a problem relating to choice of users of the goods and services. For
example, if we produce goods for those who can pay high price, we shall end up producing
goods and services for a relatively richer section of the society (like luxury cars, ACs, etc.) or
that of the poor would stagnate or deteriorate further. As such, the gulf between the rich
and the poor would keep on widening. On the other hand, if goods are produced for the
poor only (like wheat, rice, etc.), they may not afford to buy, reducing profits of the
producers. Accordingly, level of output may remain low, and the process of growth will
suffer. Hence, the problem of choice related to the final users of goods and services.
13. A 5 per cent fall in the price of a good raises its demand from 300 units to 318 units.
Calculate its price elasticity of demand. 4
Ans. Given, percentage change in price = – 5%
18
Percentage change in quantity demanded = ´ 100 = 6%
300
6%
=
( -) 5%
= – 1.2
\ Price elasticity of demand = – 1.2.
14. Explain three properties of indifference curves. 6
Or
Explain the conditions of consumer’s equilibrium under indifference curve
approach.
Ans. The principle three properties of indifference curves are as follows:
(i) Indifference Curves are Negatively Sloped or they Slope Downward: An indifference
curve slopes downwards from left to right. It shows that more of one commodity implies
less of the other, so that total satisfaction (at any point on IC) remains the same. This is
because the consumer is supposed to have monotonic preferences.
(ii) Indifference Curves are Convex to the point of Origin: An indifference curve will
rate of substitution which indicates that consumer is willing to sacrifice less and less of
one good for every additional unit of the other.
(iii) Higher Indifference Curve represents Higher Level of Satisfaction: In indifference
level of satisfaction than the combinations on the lower indifference curve, based on
the assumption of monotonic preferences of the consumer.
Or
Consumer’s equilibrium refers to a situation when a consumer maximises his satisfaction
or
In Fig. 2 AB is the budget or price line. IC1, IC2 and IC3 are indifference curves. A consumer
can buy any of the combinations, A, B, C, D and E of Good-X and Good-Y shown on the
price line AB. He cannot get any combination on IC3 as it is away from price line AB. He can
buy those combinations which are not only on price line AB but also coincide with the
highest indifference curve which is IC2 in this case. Out of A, B, C, D and E combinations, the
consumer will be in equilibrium at combination ‘E’, because at this point price line (AB) is
tangent to the highest indifference curve IC2. No doubt, the consumer can buy ‘C’ or ‘D’
combinations as well but these will not give him maximum satisfaction being located on
lower indifference curve IC1. It means consumer’s equilibrium point is the point of
tangency of price line and indifference curve. At equilibrium,
P
PY
Fig. 2 Y
A
GOOD-Y
E
L
IC3
IC2
D IC1
O X
M B
GOOD-X
Also, at point E, the IC2 is convex to the origin. Accordingly, equilibrium is stable. If IC2 is
not convex at the point of equilibrium, we shall never have stable equilibrium.
15. If equilibrium price of a good is greater than its market price, explain all the changes that
will take place in the market. Use diagram. 6
Ans. In Fig. 3, DD is the market demand curve and SS is the market supply curve. Market demand
and market supply curves are equal at point E. Thus, point E shows the equilibrium price.
This point signifies that equilibrium price is OP and equilibrium quantity is OQ.
In the diagram, OP1 is the market price which is lower than the equilibrium price. At the
given market price, there is excess demand = AB. This triggers a rise in market price. In
response to the rise in price the quantity supplied tends to rise, leading to an upward
movement along the supply curve, from point A to point E. Also, a rise in price leads to
backward movement along the demand curve, from point B to point E, indicating a fall in
quantity demanded. Movements along the supply and demand curves would continue to
occur till excess demand is eliminated, and equilibrium is restored. This occurs at point E,
where market demand = market supply, and equilibrium price = OP.
Fig. 3 Y
D S
PRICE
P E
A
P1 B
Excess Demand
S D
O X
Q1 Q Q2
QUANTITY
(i) Average product will increase only when marginal product increases.
(ii) With increase in level of output, average fixed cost goes on falling till it reaches zero.
(iii) Under diminishing returns to a factor, total product continues to increase till
marginal product reaches zero. 6
Ans. (i) The statement is false. Average product can rise even when marginal product falls. See
AP and MP corresponding to output range MQ in Fig. 4.
Fig. 4 Y
AP, MP
AP
O X
M Q
UNITS OF LABOUR MP
(ii) It is a wrong statement because as the level of output increases, average fixed cost falls
but can never be zero, because average of any positive value (fixed cost) can never be
zero.
(iii) The statement is true. Under diminishing returns to a factor, marginal product tends
to fall. Falling marginal product implies that total product increases at a diminishing
rate. TP is maximum when MP = 0.
SECTION–B
17. Give two examples of intermediate goods. 1
Ans. (i) Wood used by a carpenter in making furniture, and (ii) Cloth purchased by a garment
firm for making shirts.
18. State the components of supply of money. 1

19. What one step can be taken through market to reduce the consumption of a product
harmful for health? 1
Ans. Introducing heavy tax on such a product will substantially increase price of the product
which is expected to reduce its demand/consumption.
20. How can Reserve Bank of India help in bringing down the foreign exchange rate which is
very high? 1
Ans. By selling foreign exchange in the international money market from its reserves, Reserve
bank can increase its supply. This is expected to bring down the foreign exchange rate.
21. What is revenue deficit? 1
Ans. Revenue deficit is the excess of revenue expenditure over revenue receipts. It is estimated
as under:
Revenue Deficit = Revenue expenditure – Revenue receipts
22. Explain the ‘medium of exchange’ function of money. 3
Or
Explain the ‘lender of last resort’ function of central bank.
barter system. In the monetary system, acts of sale and purchase of the goods and services
are separated from each other. If one wants to buy goods, he can do so with money. And, if
one wants to sell goods, he can sell these for money. Accordingly, volume of exchange has
substantially risen, leading to the growth of market economies
Or
The central bank acts as lender of last resort for the commercial banks of the country. It
against approved securities. It helps commercial banks to manage their financial crises,
particularly when they start losing confidence of their depositors.
23. Distinguish between revenue receipts and capital receipts. Give an example of each. 3
Ans. Revenue receipts are those receipts which do not create a liability or lead to reduction in
assets of the government. Example: Receipts from tax revenue like income tax and sales
tax.
to reduction in assets of the government. Example: Recoveries of loans from state
governments.
24. How can budgetary policy be used to reduce inequalities of income? 3
Ans. Government’s budgetary policy can help reduce inequalities of income through
redistribution of income and wealth in the economy. To achieve this objective, government
uses fiscal instruments of taxation and subsidies. By imposing taxes on rich and giving
subsidies to the poor, government redistribute income in favour of poorer sections of the
society. Equitable distribution of income and wealth is a sign of social justice.
25. Explain the effect of depreciation of domestic currency on exports. 3
Ans. Depreciation is the fall in the value of domestic currency in relation to foreign currency in a
international money market. When domestic currency depreciates, value of domestic
currency in terms of foreign currency falls. Thus, domestic goods become cheaper in terms
of foreign currency. Accordingly, exports to foreign country would rise. On the other hand,
our imports would decline.
26. How is exchange rate determined in the foreign exchange market? Explain. 3
Ans. In a free market, exchange rate is determined by the forces of supply and demand for
foreign exchange in the international market. If the demand for foreign exchange rises its
value will also rise and if demand for foreign exchange falls its value will also fall. Similarly,
supply of foreign exchange also influences the exchange rate. Greater the supply, lower the
rate of exchange. Thus, equilibrium exchange rate is determined at a point where demand
for and supply of foreign currency are equal.
27. Calculate ‘Sales’ from the following data: 4
Items (` in lakh)
(i) Subsidies 200
(ii) Opening stock 100
(iii) Closing stock 600
(iv) Intermediate consumption 3,000
(vi) Profit 750
(vii) Net value added at factor cost 2,000
= Sales + Change in stock (Closing stock – Opening stock) – Intermediate cost
– Consumption of fixed capital + Subsidies
Sales
= Net value added at factor cost – Change in stock (Closing stock – Opening stock)
+ Intermediate cost + Consumption of fixed capital – Subsidies
= ` 2,000 lakh – (` 600 lakh – ` 100 lakh) + ` 3,000 lakh+ ` 700 lakh – ` 200 lakh
= ` 2,000 lakh – ` 500 lakh + ` 3,000 lakh + ` 700 lakh – ` 200 lakh
= ` 5,000 lakh
28. Distinguish between “real” gross domestic product and “nominal” gross domestic
product. Which of these is a better index of welfare of the people and why? 4
Or
Distinguish between stocks and flows. Give two examples of each.
Of these, real GDP is an better index of economic welfare. This is because only real GDP
shows the change in the flow of goods and services in the economy.
Or
Stocks Flows
(i) Stock is that quantity of an economic (i) Flow is that quantity of an economic
variable which is measured at a particular variable which is measured during the
point of time. period of time.
(ii) Stock has no time dimension. (ii) Flow has time dimension as per hour, per
day, per month.
(iii) Stock is a static concept. (iii) Flow is a dynamic concept.
(iv) Examples: Quantity of money, wealth. (iv) Examples: Consumption, investment.
29. Explain the credit creation role of commercial banks with the help of a numerical
example. 4
Ans. Credit creation is an important function of the commercial banks. By creating credit,
commercial banks contribute to money supply in the economy. 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) ` 1,000 and if demand deposits are (say)
` 10,000, then the commercial banks are creating credit ten times of their cash reserves.
Accordingly, on the basis of cash reserves of ` 1,000, the commercial banks are
contributing ` 10,000 to the supply of money. Here, comes the basic question: how are
cash reserves of ` 1,000 are converted into demand deposits of ` 10,000? Following is a
brief description of how it happens.
(ii) If experience shows that withdrawals are generally around 10 per cent of the deposits,
the banks need to keep only 10 per cent of deposits as cash reserves. In India, CRR
(cash reserve ratio) is fixed by the RBI.
1
CRR
1
= × ` 1,000
10%
= 10 × ` 1,000 = ` 10,000.
equation, demand deposits are in fact pointing to loans or liability of the commercial banks.
30. From the data given below about an economy, calculate (a) investment expenditure, and
(b) consumption expenditure.
(i) Equilibrium level of income 5,000.
(ii) Autonomous consumption 500.
(iii) Marginal propensity to consume 0.4. 6
Ans. Given, equilibrium level of income (Y) = 5,000
Autonomous consumption (C) = 500
Marginal propensity to consume (MPC) = 0.4
We know that, C = C + MPC(Y)
= 500 + 0.4(5,000)
= 500 + 2,000
= 2,500
Or, I= Y – C
= 5,000 – 2,500
= 2,500
(a) Investment expenditure = 2,500.
(b) Consumption expenditure = 2,500.
31. Explain the meaning of underemployment equilibrium. Explain two measures by which
full employment equilibrium can be reached. 6
Ans. Underemployment equilibrium refers to the situation where AD = AS but all those who are
able to work and willing to work (at the existing wage rate) do not get work.
Fig. 5 explains the situation of underemployment equilibrium.
Fig. 5 Y AD=AS
Point of full
employment equilibrium
AD1 (Full employment)
EXPENDITURE
F
AD (Underemployment)
R
E K
S Point of underemployment
equilibrium
45º
O X
L L1
INCOME/OUTPUT
Underemployment equilibrium occurs owing to the lack of AD, according to Keynes.

Accordingly, this can be addressed by way of increasing AD. Two important measures to
raise AD and reach the situation of full employment are as under:
(i) Public expenditure on public works, public welfare and public investment should be
increased. All this will act as an injection of demand into the system and is expected to
induce private expenditure. Accordingly, aggregate demand is expected to rise and
the situation of full employment equilibrium will be reached.
(ii) Central bank should decrease the bank rate or repo rate. It is the rate at which the
central bank lends money to the commercial banks. A decrease in bank rate lowers the
market rate of interest, promoting a rise in demand for credit. A rise in the demand for
credit expands leads to a rise in aggregate demand. Accordingly, the situation of full
employment equilibrium will be reached.
32. Calculate “Gross National Product at Market Price” from the following data: 6
Items (` in crore)
(i) Compensation of employees 2,000
(ii) Interest 500
(iii) Rent 700
(iv) Profits 800
(v) Employer’s contribution to social security schemes 200
(vi) Dividends 300
(viii) Net indirect taxes 250
(ix) Net exports 70
(x) Net factor income to abroad 150
(xi) Mixed income of self-employed 1,500
Or
Calculate “Gross National Disposable Income” from the following data: 6
Items (` in crore)
(i) Net domestic product at factor cost 3,000
(ii) Indirect taxes 300
(iii) Net current transfers from rest of the world 250
(iv) Current transfers from the government 100
(v) Net factor income to abroad 150
(vii) Subsidies 100
= Compensation of employees + Interest + Rent + Profits + Mixed income of
self-employed + Consumption of fixed capital + Net indirect taxes – Net factor income
to abroad
= ` 2,000 crore + ` 500 crore + ` 700 crore + ` 800 crore + ` 1,500 crore + ` 100 crore
+ ` 250 crore – ` 150 crore
= ` 5,700 crore
Gross national product at market price = ` 5,700 crore.
Or
= Net domestic product at factor cost + Consumption of fixed capital + Net indirect
taxes + Net current transfers from rest of the world – Net factor income to abroad
= ` 3,000 crore + ` 200 crore + (` 300 crore – ` 100 crore) + ` 250 crore – ` 150 crore
= ` 3,000 crore + ` 200 crore + ` 200 crore + ` 250 crore – ` 150 crore
= ` 3,500 crore
Gross national disposable income = ` 3,500 crore.
SET–II
SECTION–A
5. Give one reason for “decrease” in supply of a commodity. 1
Ans. Increase in price of factor inputs causes decrease in supply of a commodity.
7. The price elasticity of supply of a commodity is 2.0. A firm supplies 200 units of it at a
price of ` 8 per unit. At what price will it supply 250 units? 3
Ans. Given, P = ` 8; P1 = X; DP = P1 – P = ™ (X – 8)
Es = 2
P DQ
Price elasticity of supply (Es) = ´
Q DP
8 50
2= ´
200 X – 8
2
2=
X– 8
Þ X – 8= 1
Þ X= 1 + 8 = 9
New price = ` 9.
8. What is a budget line? Why is it downward sloping? 3
Ans. Budget line is a line showing different possible combinations of a set of 2-Goods that a
consumer can buy, given his income and prices of the goods.
Budget line is a downward sloping line because (given prices of goods X and Y, and income
of the consumer) more of Good-X (on X-axis) can be purchased only when less of Good-Y
(on Y-axis) is purchased.
13. When the price of a commodity falls by 20 per cent, its demand rises from 400 units to 500
units. Calculate its price elasticity of demand. 4
100
400
25%
= = –1.25
( -) 20%
\ Price elasticity of demand = –1.25.
SECTION–B
23. Distinguish between revenue expenditure and capital expenditure in government
budget. Give an example of each. 4
Ans. Revenue expenditure is that expenditure of the government which does not create assets
or does not cause a reduction in liabilities of the government. Example: Expenditure on
interest payments.
purchase of shares, expenditure on purchasing building.
29. How does central bank control credit creation by commercial banks through open
market operations? Explain. 4
Ans. Open market operations refers to sale and purchase of government securities in the open
market by the central bank of the country. By selling the securities, the central bank
withdraws cash balances from the system and by buying the securities, the central bank
injects cash balances into the system.
To control credit creation by the commercial banks, cash reserves needs to be reduced. For
reducing cash reserves, securities are sold off by the central bank. Sale of securities sucks
purchasing power from the money market. When liquidity is sucked (as during inflation)
cash reserves of the commercial banks are squeezed. Implying a cut in their credit creation
capacity. Because any change in cash reserves of the banks causes a multiple change in the
supply of money in the economy.
31. Distinguish between inflationary gap and deflationary gap. State two measures by which
these can be corrected. 6
Ans.
Inflationary Gap Deflationary Gap
(i) Inflationary gap is the excess of AD over and (i) Deflationary gap is the deficiency of AD
above its level required to maintain full required to maintain full employment
employment equilibrium in the economy. equilibrium in the economy.
(ii) Inflationary gap occurs when AD>AS (ii) Deflationary gap occurs when AD<AS
(corresponding to full employment level). (corresponding to full employment level).
(iii) Inflationary gap points to a situation of rise (iii) Deflationary gap points to a situation of fall
in the general price level (owing to excess in the general price level (owing to
demand), without any rise in the level of deficiency of demand), leading to a fall in the
output/employment in the economy. level of output/employment in the economy.
Inflationary gap and deflationary gap from the economy can be corrected by adopting
following two measures:
(i) Government expenditure (consumption as well as investment expenditure) should be
increased to correct deflationary gap and decreased to correct inflationary gap.
(ii) Bank rate or repo rate should be increased to correct inflationary gap and decreased to
correct deflationary gap. A rise in repo rate is expected to cause a rise in market rate of
interest, leading to a fall in demand for funds in the money market. Implying a fall in
expenditure or AD, correcting inflationary gap. A fall in repo rate, on the other hand,
is expected to release greater liquidity in the system, leading to a rise in AD which is
expected to correct the deflationary gap.
32. In an economy C = 200 + 0.75Y is the consumption function where C is consumption
expenditure and Y is national income. Investment expenditure is 4,000. Calculate
equilibrium level of income and consumption expenditure. 6
Ans. Given, C = 200 + 0.75Y.
Y = 200 + 0.75Y + 4,000
Y = 4,200 + 0.75Y
Y – 0.75Y = 4,200
0.25Y = 4,200
Y = 16,800
C = 200 + 0.75Y
= 200 + 0.75(16,800)
= 200 + 12,600
= 12,800
Equilibrium level of income = 16,800.
Consumption expenditure = 12,800.
SET—III
SECTION–A
5. Give the meaning of market supply. 1
Ans. Market supply refers to supply by all the firms producing a commodity.
7. A 15 per cent rise in the price of a commodity raises its supply from 300 units to 345 units.
Calculate its price elasticity of supply. 3
Ans. Given, percentage change in price = 15%
45
Percentage change in quantity supplied = ´ 100 = 15%
300
Percentage change in quantity supplied 15%
Price elasticity of supply (Es) = = =1
Percentage change in price 15%
8. Explain the conditions of consumer’s equilibrium under utility analysis. 3
Ans. Conditions of consumer’s equilibrium, using utility approach are as follows:
(i) In case of a single commodity:
MU X
= MU of Money
PX
In case of two commodities:
MU X MU Y
= = MU of Money
PX PY
Where, MUX is marginal utility of commodity-X; MUY is marginal utility of
commodity-Y; PX is price of commodity-X and PY is price of commodity-Y.
(ii) Marginal utility of money remains constant.
must decline as more of a commodity is consumed.
13. Price elasticity of demand of a good is – 0.75. Calculate the percentage fall in its price that
will result in 15 per cent rise in its demand. 4
Ans. Given, Ed = –0.75
Percentage change in quantity demanded = 15%
15%
– 0.75 =
15%
– 0.75
Percentage change in price = – 20%

SECTION–B
23. State three sources each of revenue receipts and capital receipts in government budget.
3
Ans. Sources of Revenue Receipts in Government Budget:
(i) Direct and indirect taxes,
(ii) Interest, and
(iii) Dividend on investment made by the government.
Sources of Capital Receipts in Government Budget:
(i) Recoveries of loans from state government, union territory government and other
parties,
(ii) Borrowings from the market, Reserve Bank and other sources, and
(iii) Receipts on account of disinvestment.
29. Explain any two methods of credit control used by central bank. 4
Ans. The following are the two principal methods of credit control used by central bank:
(i) Bank Rate/Repo Rate: Bank rate is the rate at which the central bank lends money to
the commercial banks. The increase (or decrease) in bank rate is often followed by
increase (or decrease) in the market rate of interest. Accordingly, the cost of credit (also
called the cost of capital) changes in the market. During inflation, the cost of capital is
increased by increasing the bank rate. This reduces the flow of credit, as desired. On
the other hand, during deflation the cost of capital is reduced by reducing the bank
rate. This increases the flow of credit.
(ii) Open Market Operations: Open market operations refers to sale and purchase of
securities by the central bank in the open market. To increase money supply (as during
deflation) securities are purchased by the central bank. On the other hand, to decrease
money supply (as during inflation) securities are sold off. By buying the securities, the
central bank releases liquidity, and hence a rise in capacity to create credit of the
commercial banks. By selling the securities, liquidity is sucked from the economy and
hence a reduction in capacity to create credit of the commercial banks.
30. From the following data about an economy, calculate (a) equilibrium level of national
income, and (b) total consumption expenditure at equilibrium level of national income.
(i) C = 200 + 0.5Y is the consumption function where C is consumption expenditure
and Y is national income.
(ii) Investment expenditure is 1,500. 6
Ans. Given, C = 200 + 0.5Y
Y = 200 + 0.5Y + 1,500
Y = 1,700 + 0.5Y
Y – 0.5Y = 1,700
0.5Y = 1,700
Y = 3,400
C = 200 + 0.5Y
= 200 + 0.5(3,400)
= 200 + 1,700
= 1,900
(a) Equilibrium level of national income = 3,400.
(b) Total consumption expenditure at equilibrium level of national income = 1,900.
32. Explain all the changes that will take place in an economy when aggregate demand is not
equal to aggregate supply. 6
Ans. (i) If aggregate demand is greater than aggregate supply, i.e., AD > AS, flow of goods and
services in the economy tends to be less than their demand. The existing stocks of the
producers would be sold out and the producers would suffer the loss of unfulfilled
demand. To rebuild the desired stocks and avoid the loss of unfulfilled demand, the
producers would plan greater production. AS would increase to become equal to
AD. This is how AS converges with AD.
(ii) If aggregate demand is less than aggregate supply, i.e., AD < AS, flow of goods and
services in the economy tends to exceed their demand. As a result, some of the goods
would remain unsold. To clear unwanted stocks, the producers would plan a cut in
production. Consequently, AS would reduce to become equal to AD. This is how AS
adapts itself to AD.
zzz
Foreign–2013
SET–I
SECTION–A
Ans. Production function refers to the functional relationship between (physical) inputs and
(physical) output.
2. When will marginal revenue be negative? 1
Ans. Marginal revenue will be negative when total revenue starts declining.
3. What is meant by price elasticity of demand? 1
Ans. Price elasticity of demand (Ed) is the degree of responsiveness of quantity demanded in
response to some percentage change in own price of the commodity.
Ed =
4. Define opportunity cost. 1

Ans. Opportunity cost is the value of a factor in its next best alternative use.
5. Give one reason for a rightward shift of demand curve. 1
Ans. Increase in consumer’s income causes rightward shift of demand curve.
6. How is the demand for a good affected by the rise in prices of related goods? Explain. 3
Ans. Related goods may be: (i) substitute goods, or (ii) complementary goods.
commodity increases, demand for its substitute will increase and vice-versa. For example, if
price of Pepsi rises, consumers will shift from the consumption of Pepsi to Coca Cola,
accordingly demand for Coca Cola rises.
Complementary goods are those goods which are used simultaneously. If price of a
commodity increases, demand for its complementary will decrease and vice-versa. For
example, if price of car rises, consumers will reduce the use of cars, leading to a fall in the
demand for petrol.
7. By spending his entire income only on two goods X and Y a consumer finds that
Marginal Utility of X Marginal Utility of Y
Price of X
> Price of Y
Explain how will the consumer react. 3
MU X MU Y
= = MUM
PX PY
Here, MUX = Marginal utility of X; MUY = Marginal utility of Y; PX = Price of X; PY = Price
of Y.
Marginal utility of X Marginal utility of Y
Given, >
Price of X Price of Y
The consumer will increase the consumption of Good-X in place of Good-Y. Accordingly,
MUX would start declining while MUY would start rising. The process of substituting X for
MU X MU Y
Y would continue till (rupee worth of MUX) and (rupee worth of MUY) are
PX PY
8. Explain the problem of ‘what to produce’. 3
Or
Why does an economic problem arise? Explain.
Ans. Because resources are scarce, we cannot produce everything in whatever quantity we wish
to. We are bound to face the problem of what to produce and how much.
Illustration: Let us assume that resources are available worth ` 5 crore. Assuming
technology to be constant, we can utilise these resources entirely for the production of (say)
guns and produce 500 guns, or utilise these resources entirely for the production of (say)
bread and produce 500 tons of bread. We need guns for the defence and bread for the
masses. Accordingly, both the guns and the bread are to be produced. How much of each is
to be produced? It depends on the wisdom of the planners in a planned economy, and
depends upon the market forces of demand and supply in a free economy.
Or
Economic problem is a problem related to the allocation of resources (or problem of
choice). An economic problem arises due to the following reasons:
(ii) Alternative Uses: Resources have alternative uses like, for example, land may be used
to produce wheat or may be used for the construction of buildings.
9. Total revenue of a firm rises from ` 400 to ` 500 when the price of its product rises from ` 8
per unit to ` 10 per unit. Calculate the price elasticity of supply. 3
Ans. Given, P = ™ 8; P1 = ™ 10; DP = P1 - P = ™ 10 – ™ 8 = ™ 2
400
8
When, price = `10, total revenue (P1 × Q1) = ` 500
500
10
Q = 50 units; Q1= 50 units; DQ = Q1 - Q = (50 – 50) units = 0 unit
P DQ 8 0
Price elasticity of supply (Es ) = ´ = ´ =0
Q DP 50 2
Price elasticity of supply = 0 (zero).
10. Explain the relationship between marginal cost and average variable cost. 3
Ans. Fig. 1 offers the following observations on the relationship between marginal cost (MC) and
average variable cost (AVC):
Fig. 1 Y
AVC
MC
AVC/
MC
O
OUTPUT X
(i) When AVC is falling, AVC > MC.

(ii) When AVC is rising, AVC < MC.
(iii) MC curve cuts AVC curve at its lowest point. Here, AVC = MC.
(iv) Both AVC and MC curves are U-shaped.
(v) AVC can fall even when MC is rising.
11. Market for a necessary good is competitive in which the existing firms are earning
super-normal profits. How can the policy of liberalisation by the government help in
making the market more competitive in the interest of the consumers? Explain. 4
Ans. Policy of liberalisation will remove certain barriers like licencing, quotas from the market.
Consequently, new firms will join the industry. This will make the market more competitive,
and the market supply will increase. Implying a shift in the market supply curve to the right.
Other things remaining constant, a rightward shift in the market supply curve will lead to a
fall in equilibrium price and a rise in equilibrium quantity. Extra normal profits will ultimately
be wiped out, and consumers are expected to enjoy larger quantity at a lower price.
12. From the following table find out the level of output at which the producer is in equilibrium.
Give reasons for your answer. (Use marginal cost–marginal revenue method). 4
Output (Units) Marginal Cost (™) Total Revenue (™)
1 12 10
2 10 20
3 8 30
4 10 40
5 12 50
Ans.
Output Marginal Total Total Marginal Revenue Profit
(Units) Cost (MC) Revenue (TR) Cost (TC) (MR) (p = TR – TC)
(™) (™) (™) (™) (™)
1 12 10 12 10 –2
2 10 20 22 10 –2
3 8 30 30 10 0
4 10 40 40 10 0
5 12 50 52 10 –2

Reason: At output levels 2nd and 4th unit both MR and MC are equal which is 10 in this
case. But the producer is in equilibrium at 4th unit only where MR = MC (= 10) and MC is
rising.
13. A 20 per cent fall in the price of a good, raises its demand from 600 units to 750 units.
Calculate its price elasticity of demand. 4
Or
Explain any two factors that affect the price elasticity of demand.
150
600
25%
= = – 1.25
( -) 20%
\ Price elasticity of demand = –1.25.
Or
Price elasticity of demand is affected by the following two factors:
like tea and coffee. Commodities having no substitutes like liquor and cigarettes, have
inelastic demand.
14. Explain the effect of “increase” in demand for a good on its equilibrium price and
equilibrium quantity. 6
Or
Give the meaning of ‘collusive’ oligopoly. Explain any two features of oligopoly.
Ans.
When the demand increases while supply remains constant, the equilibrium price as well as
equilibrium quantity tend to rise. In the diagram, the initial demand curve is DD and
supply curve is SS. E is the equilibrium point. OP is the equilibrium price and OQ is the
equilibrium quantity. When demand increases while supply remains unchanged, demand
curve shifts upward (rightward) from DD to D1D1, the equilibrium price will increase from
OP to OP1 and equilibrium quantity increases from OQ to OQ1.
Y Increase in Demand
Fig. 2
D1
S
D
E1
P1
PRICE
E
P
D1
D
S
O X
Q Q1
QUANTITY
Or
and fix for themselves output quota and market price. Sometimes a leading firm in the
market is accepted by the cartel as a price leader. Members of the cartel accept the price as
fixed by the price leader.
Two main features of oligopoly are as under:
(i) Few Firms: A few firms, but large in size, dominate the market for a commodity. Each
firm commands a significant share of the market: it can impact market price of the
product through its independent price-output policy.
(ii) Barriers to the Entry of Firms: There are various barriers to the entry of new firms.
These barriers are almost similar to those under monopoly. Patent-rights is the most
important form of entry-barrier. Entry of the new firms is extremely difficult, if not
impossible.
15. Explain the conditions of consumer’s equilibrium under indifference curve analysis. 6
P
PY
PX
(ii) IC is convex to the origin at the point where MRSXY = .
PY
Y
Fig. 3
P
GOOD-Y
L Q
IC
O X
M P
GOOD-X
P
PY
16. Explain the distinction between “movement along the supply curve” and “shift of supply
curve”. Use diagrams. 6
Ans. The movement along the supply curve represents expansion and contraction of supply of a
commodity caused by change in own price of the commodity. When price increases there is
an upward movement (a ® b) along the supply curve, called expansion of supply; and when
price decreases there is a downward movement (b ® a) along the supply curve, called
contraction of supply. See Fig. 4(a).
(a) (b)
Fig. 4 Y Y
Expansion: S2
a®b S S
S1
P1
b
PRICE
PRICE
P P
a
S2 S1S1 ® Increase in Supply
Contraction: S2S2 ® Decrease in Supply
S b®a S
S1
O X O X
Q Q1 Q2 Q Q1
QUANTITY QUANTITY
Shift in supply refers to increase or decrease in supply of a commodity caused by change in

factors other than own price of the commodity. When other factors change in a positive
direction, the supply curve shifts to the right, showing increase in supply; and when the
changes occur in the negative direction, the supply curve shifts to the left showing a
decrease in supply. See Fig. 4(b).
SECTION–B
17. Define domestic product. 1
Ans. Domestic product is the sum total of factor income generated within the domestic territory
of country during the period of an accounting year.
19. The country needs a huge amount of imports for developmental programmes. Name one
step which the central bank can take to make imports cheaper using the foreign exchange
market. 1
Ans. By selling foreign exchange in the international money market from its reserves, central
bank can increase the supply of foreign exchange, leading to a fall in the foreign exchange
rate or appreciation of the domestic currency. This will make imports cheaper.
20. What is primary deficit? 1
Ans. Primary deficit is the difference between fiscal deficit and interest payment.
Primary Deficit = Fiscal Deficit – Interest Payment
21. What is a direct tax? 1
Ans. A direct tax is that tax the final burden of which falls on that very person who is liable to pay
it to the government.
22. Distinguish between revenue deficit and fiscal deficit. 3
Or
Distinguish between revenue receipts and capital receipts in a government budget. Give
an example of each.
Ans. Revenue deficit is the excess of revenue expenditure of the government over its revenue
receipts. Whereas, fiscal deficit is the excess of total budget expenditure over total budget
receipts excluding borrowings. Fiscal deficit indicates total borrowings by the government
to cope with its mounting expenditure. It is a sign of poor fiscal discipline in the country
and it lowers credit rating of the economy in the international money market.
Or
Revenue receipts are those receipts which do not create a liability or lead to reduction in
assets of the government. Example: Receipts of tax revenue, like income tax and sales tax.
to reduction in assets of the government. Example: Recoveries of loans from state
governments.
23. Explain the medium of exchange function of money. 3
barter system. In the monetary system, acts of sale and purchase of the goods and services
are separated from each other. If one wants to buy goods, he can do so with money. And, if
one wants to sell goods, he can sell these for money.
24. State three objectives of budgetary policy. 3

Ans. Three principle objectives of government budget are as under:
(i) Redistribution of Income and Wealth: Distribution of income is sought to be
improved through subsidies and taxation.
(ii) Reallocation of Resources: Learning from the past experience, the government seeks
to reallocate resources with a view to maximising social welfare.
(iii) Economic Stability: Using its revenue and expenditure policy, the government tries to
achieve/maintain economic stability in the economy.
25. Distinguish between current account and capital account of balance of payments
account. 3
Ans. Current account BoP is that part of BoP which records items of:
(i) Export and imports of goods (visibles).
(ii) Export and import of services (invisibles).
(iii) Unilateral transfers.
Capital account BoP is that part of BoP which records items of:
(i) Investments (FDI as well as portfolio investment).
(ii) External Assistance.
(iii) Commercial Borrowings.
(iv) NRI Deposits.
26. Explain any three sources of demand for foreign currency. 3
Ans. Three sources of demand for foreign exchange are as under:
(i) Payments of international loans.
(ii) Gifts and grants to rest of the world.
(iii) Direct purchases abroad as well as imports from rest of the world.
27. How will you treat the following while calculating domestic product of India? Give
reasons for your answer.
(i) Profits earned by a foreign company in India.
(ii) Salary of Indian residents working in Russian Embassy in India. 4
Or
Explain the circular flow of income.
Ans. (i) Profits earned by a foreign company in India is a part of domestic product of India,
because the company is within the domestic territory of India. Hence, it is included in
domestic product of India.
(ii) Salary of Indian residents working in Russian Embassy in India is not included in
domestic product of India because Russian Embassy is not a part of domestic territory
of India.
Or
income gives rise to demand for goods and services, and demand in turn gives rise to
expenditure. Expenditure leads to further production. Thus, the flow of production,
income and expenditure becomes circular with no beginning or no end. This flow is shown
in Fig. 5.
Fig. 5
Production
Expenditure
Income
Circular Flow
of Income
28. From the following data calculate “Gross Value Added at Factor Cost”: 4
(i) Sales 8,000
(ii) Change in stock 100
(iii) Subsidies 200
(v) Intermediate consumption 5,500
(vi) Rent 500
= Sales + Change in stock – Intermediate consumption + Subsidies
= ` 8,000 crore + ` 100 crore – ` 5,500 crore + ` 200 crore
= ` 2,800 crore
Gross value added at factor cost = ` 2,800 crore.
29. What is bank rate? How is it used by the central bank to control credit creation by
commercial banks? 4
Ans. Bank rate is the rate at which the central bank offers loans to the commercial banks. To
control credit creation in the economy, central bank increases bank rate.
Increase in bank rate makes borrowings by commercial banks from the central bank costlier
than before. Accordingly their liquidity reduces. This reduces credit creation capacity of
the commercial banks. Also, increase in bank rate causes increase in market interest rate
(rate of interest charged by the commercial banks from the general public). Owing to
increase in market rate of interest, borrowings from commercial banks tend to shrink. This
further restricts credit creation capacity of the commercial banks.
30. Explain all the changes that take place in an economy when aggregate demand and
aggregate supply are not equal. 6
Or
Explain the working of investment multiplier with the help of a numerical example.
Ans. (i) If aggregate demand is greater than aggregate supply, i.e., AD > AS, flow of goods and
services in the economy tends to be less than demand. The existing stocks of the
producers would be sold out and the producers would suffer the loss of unfulfilled
demand. To rebuild the desired stocks and avoid the loss of unfulfilled demand, the
producers would plan greater production. AS would increase to become equal to
AD. This is how AS converges with AD.
(ii) If aggregate demand is less than aggregate supply, i.e., AD < AS, flow of goods and
services in the economy tends to exceed their demand. As a result, some of the goods
would remain unsold. To clear unwanted stocks, the producers would plan a cut in
production. Consequently, AS would reduce to become equal to AD. This is how AS
adapts itself to AD.
Or
Investment multiplier is the ratio between change in income and change in investment.
DY
K=
DI
Here, K = Multiplier; DY = Change in income; DI = Change in investment.
It shows the number of times income would rise as a result of an initial rise in investment.
MPC (marginal propensity to consume) is the principal determinant of K : higher the value
of MPC, higher should be the value of K. Keynes considers saving as a leakage from the
process of income generation.
Following table explains how the multiplier process works. It is based on the assumption
that I (leading to increase in expenditure in the economy) = ` 100 crore and that MPC =
0.5.
Working of Multiplier (` crore)
Round DI DY Induced Change Leakage/Saving
in Consumption
1 100 100 50 50
2 — 50 25 25
3 — 25 12.5 12.5
and so on ...
DI = 100 DY = 200 100 100
The table shows that in round-1, additional investment of ` 100 crore leads to additional
income of ` 100 crore. But in every subsequent round half of additional income is spent
(as consumption, because MPC = 0.5) and the other half leads to leakage/saving (because
MPS = 0.5). Thus in round-2, additional income = ` 50 crore, in round-3 it is = ` 25 crore,
in next round it is = ` 12.5 crore, and so on till the sum total of additional income = ` 200
crore.
The number of times income would increase consequent upon the initial increase in
investment may be estimated by using the following formula:
1 1 1
K= = = =2
1 –MPC 1 – 0.5 0.5
Given that DI = 100, and K = 2,
DY = 2 ´ 100 = ` 200 crore.
31. Calculate ‘National Income’ from the following data: 6
(i) Net exports (–) 300
(ii) Compensation of employees 6,000
(iii) Rent 400
(iv) Dividend 200
(vi) Change in stock 50
(vii) Profits 800
(viii) Net factor income to abroad (–) 80
(ix) Net indirect taxes 600
(x) Interest 500
= Compensation of employees + Rent + Interest + Profits – Net factor income to abroad
= ` 6,000 crore + ` 400 crore + ` 500 crore + ` 800 crore – (–) ` 80 crore
= ` 6,000 crore + ` 400 crore + ` 500 crore + ` 800 crore + ` 80 crore
= ` 7,780 crore
National income = ` 7,780 crore.
32. In an economy, the consumption function is C = 400 + 0.75Y, where C is consumption
expenditure and Y is national income and investment expenditure is 2,000. Calculate the
equilibrium level of national income and consumption expenditure. 6
Ans. Given, C = 400 + 0.75Y
Y = 400 + 0.75Y + 2,000
Y = 2,400 + 0.75Y
Y – 0.75Y = 2,400
0.25Y = 2,400
Y = 9,600
C = 400 + 0.75Y
= 400 + 0.75(9,600)
= 400 + 7,200
= 7,600
Equilibrium level of national income = 9,600.
Consumption expenditure = 7,600.
SET–II
SECTION–A
1. How is marginal product calculated? 1
Ans. Marginal product is calculated as under:
MP = TPn - TPn - 1
or
DTP
MP =
DL
Here, MP = Marginal product; TPn = Total product of ‘n’ units; TPn – 1 = Total product of
‘n – 1’ units; DTP = Change in total product; DL = Change in labour.
2. Define market supply. 1
Ans. Market supply refers to supply by all the firms producing a commodity.
3. What is a budget line? 1
Ans. Budget line is a line showing different combinations of a set of 2-Goods that a consumer can
buy, given his income and prices of the goods.
5. Give one reason for a leftward shift in demand curve. 1
Ans. Decrease in consumer’s income causes leftward shift in demand curve.
7. By spending his entire income only on two goods X and Y a consumer finds that
Marginal Utility of X Marginal Utility of Y

Price of X
< Price of Y
Explain how will the consumer react. 3
MU X MU Y
= = MUM
PX PY
Here, MUX = Marginal utility of X; MUY = Marginal utility of Y; PX = Price of X; PY = Price

of Y.
Marginal utility of X Marginal utility of Y
Given, <
Price of X Price of Y
The consumer will increase the consumption of Good-Y in place of Good-X. Accordingly,
MUY would start declining while MUX would start rising. The process of substituting Y for
MU Y MU X
X would continue till (rupee worth of MUY) and (rupee worth of MUX) are
PY PX
9. A fall in the price of a firm’s product results in a fall in its supply by 40 per cent. Its price
elasticity of supply is 1.6. Calculate the percentage fall in its price. 3
Ans. Given, Es = 1.6
Percentage change in quantity supplied = – 40%
– 40%
1.6 =
– 40%
Percentage change in price=
1.6
Percentage change in price = – 25%
10. Explain the relationship between marginal cost and average cost. 3
Ans. Fig. 6 offers the following observations highlighting the relationship between MC and
AC:
Fig. 6 Y
MC AC
AVC/
MC
O
OUTPUT X
(i) When AC is falling, AC > MC.

(ii) When AC is rising, AC < MC.
(iii) MC curve cuts AC curve at its lowest point. Here, AC = MC.
(iv) AC can fall even when MC is rising.
(v) Both AC and MC curves are U-shaped.
16. Explain the Law of Variable Proportions. Use diagram. 6

Y
Fig. 7
T
TOTAL PRODUCT
TP
L S
O X
MARGINAL PRODUCT
Returns Returns
O X
L S – ve
MP
Diagram shows that:

(i) MP tends to rise till OL units of the variable factor are used with the constant application
of the fixed factor. This corresponds to point E on the MP curve. This is a situation of
increasing returns to a factor.
SECTION–B
17. Define national income. 1
Ans. National income or NNP at factor cost is the sum total of factor incomes earned by normal
residents of a country during the period of one year.

20. State two sources of non-tax revenue receipts. 1
Ans. (i) Fees, and (ii) Fines.
21. What is an indirect tax? 1
Ans. Indirect tax is a tax on goods and services. Those who are liable to pay this tax need not bear
the final burden of this tax.
26. Explain the reason for inverse relationship between price of a foreign currency and its
demand. 3
Ans. There is an inverse relationship between price of a foreign exchange and its demand. The
reasons for this inverse relationship are as under:
(i) When foreign exchange (say US $) becomes cheaper (in relation to the domestic
exchange), we get more dollar per unit of our currency. Accordingly, imports become
lucrative. This raises demand for foreign exchange.
(ii) When foreign exchange becomes cheaper and purchasing power of domestic
currency increases in the international money market, domestic investors will be
induced to make greater investment in rest of the world. Accordingly, demand for
foreign exchange rises.
(iii) When foreign exchange becomes cheaper, Indians will find it less expensive to travel
abroad. Accordingly, demand for foreign exchange will rise.
The opposite will happen in case foreign exchange becomes expensive.
29. Explain the meaning of “open market operations”. How does the central bank use it for
controlling credit creation by commercial banks? 4
Ans. Open market operations refers to sale and purchase of government securities in the open
market by the central bank of the country.
To control credit creation by the commercial banks, cash reserves needs to be reduced. For
reducing cash reserves, securities are sold off by the central bank. Sale of securities sucks
purchasing power from the money market. When liquidity is sucked (as during inflation)
cash reserves of the commercial banks are squeezed. Implying a cut in their credit creation
capacity. Because any change in cash reserves of the banks causes a multiple change in the
supply of money in the economy.
SET—III
SECTION–A
1. Give the meaning of total revenue. 1
Ans. Total revenue is the sum total of money receipts of a producer derived from the sale of all
units of the commodity.
2. When is supply of a good said to be inelastic? 1
Ans. When the percentage change in quantity supplied is less than the percentage change in price,
supply of a good is said to be inelastic.
3. What is meant by consumer’s equilibrium? 1

5. What is a normal good? 1
Ans. Normal good is a good whose demand increases with rise in income and decreases with fall
in income of the consumer.
7. Explain the meaning of diminishing marginal rate of substitution. 3
Good-1 for Good-2.
DGood - 2
DGood -1
Diminishing MRS implies that for every additional unit of Good-1, the consumer is willing
DGood - 2
to give up less and less amount of Good-2. So that tends to decline as we move
DGood -1
along the IC curve from left to the right. This happens owing to the law of diminishing
marginal utility. It is because of the diminishing MRS that the indifference curve is convex
to the origin.
9. Price elasticity of supply of a good is 2. By what percentage should its price rise so that its
supply rises by 30 per cent? 3
Ans. Given, Es = 2
Percentage change in quantity supplied = 30%
30%
2=
30%
2
\ Percentage rise in price = 15%.
10. Show with the help of a numerical example that average cost is constant when marginal
cost is equal to it. 3
Ans. Following table considers a situation when MC = AC over a range of output. It is a situation
of constant returns to a factor.
Output Total Cost MC AC
1 10 10 10
2 20 10 10
3 30 10 10
4 40 10 10
5 50 10 10
The table shows that when constant returns to a factor prevail over a range of output (1-5
units of output) MC remains constant. Consequent, TC increases at a constant rate, and MC
and AC are found to be equal to each other. In the entire range of output when AC = MC,
AC is also found to be constant (like MC).
16. Explain the distinction between “decrease in supply” and “contraction in supply”. Use
diagrams. 6
Ans. When a fall in price of a commodity leads to decrease in quantity supplied of a commodity,
it is called contraction in supply. If quantity supplied falls due to factors other than own
price of the commodity, it is a situation of decrease in supply. Tables (a) and (b) show,
respectively, the situations of ‘contraction in supply’ and ‘decrease in supply’ respectively.
Likewise, Fig. 8(a) shows contraction, while Fig. 8(b) shows decrease.
(a) Contraction in Supply (b) Decrease in Supply

Fig. 8
Price Quantity Price Quantity
20 200 10 200
10 100 10 100
Y Y
S
20 S1
B S
PRICE
PRICE
E1
10 A 10 E
S S1
S
O X O X
100 200 100 200
QUANTITY QUANTITY
Based on the assumption that price of Based on the assumption that price of
Good-X decreases, other determinants of the good remaining constant, other
supply remaining constant. determinants of supply changes.
SECTION–B
17. Define national product. 1
Ans. National product is the market value of the final goods and services produced in the
economy during the period of an accounting year, inclusive of net factor income from
abroad.
20. Define capital expenditure. 1
Ans. Capital expenditure is that expenditure of the government which leads to creation of assets
for the government or causes a reduction in liabilities of the government.
21. Give one example each of direct tax and indirect tax. 1
Ans. Example of Direct Tax: Income tax.
Example of Indirect Tax: Value added tax.
26. How are exports affected by depreciation of foreign currency? Explain. 3

Ans. Depreciation of foreign currency implies a rise in the value of domestic currency in relation
to the foreign currency. One US $ will now convert into a smaller amount of Indian
currency. This reduces purchasing power of a foreign currency in the Indian domestic
market. This is expected to cause a cut in demand for the Indian products by rest of the
world. Accordingly, our exports are expected to decline.
29. Explain “Bankers’ bank and supervisor” function of the central bank. 4
Ans. As a bankers’ bank, the central bank offers loans to the commercial banks to tide over their
financial crises. It also accepts surplus funds of the commercial banks as deposits. The rate
at which the central bank offers loans to the commercial banks is called Repo Rate (Bank
Rate), and the rate at which the central bank accepts deposits from the commercial banks is
called ‘Reverse Repo Rate’.
While discharging its supervisory functions, the central bank regulates and controls credit
creation activity of the commercial banks by fixing ‘2 ratios’ and ‘2 rates’ which are to be
followed in practice by the commercial banks as a matter of legal binding.
The 2 ratios are: (i) CRR (Cash Reserve Ratio), and (ii) SLR (Statutory Liquidity Ratio).
The 2 rates are: (i) Repo Rate, and (ii) Reverse Repo Rate.
It is by varying these rates and ratios that the central bank supervises/monitors the
functioning of commercial banks.
zzz
Solved
CBSE
Examination
Paper, Delhi–2014
(iii) Question Nos. 1-5 and 17-21 are very short-answer questions carrying 1 mark each. They are required
to be answered in one sentence each.
(iv) Question Nos. 6-10 and 22-26 are short-answer questions carrying 3 marks each. Answer to them
(v) Question Nos. 11-13 and 27-29 are also short-answer questions carrying 4 marks each. Answer to them
(vi) Question Nos. 14-16 and 30-32 are long-answer questions carrying 6 marks each. Answer to them
(vii) Questions marked star (*) are value based questions.
(viii) Answer should be brief and to the point and the above word limits should be adhered to as far as
possible.
SET–I
SECTION–A
*1. Unemployment is reduced due to the measures taken by the government. State its
economic value in the context of production possibilities frontier. 1
Ans. Reduction of unemployment will make the economy move closer to the production
possibility frontier, implying higher level of output.
2. Define budget set. 1
Ans. Budget set refers to the attainable combinations of a set of two goods, given the prices of
goods and income of the consumer.
3. What is meant by revenue in microeconomics? 1
4. Give meaning of 'returns to a factor'. 1

Ans. Returns to a factor refers to the behaviour of physical output owing to change in physical
input of a variable factor, fixed factors remaining constant.
5. What is perfect oligopoly? 1
Ans. Perfect oligopoly is that market situation in which all the firms produce homogeneous
product.
6. Explain the central problem ‘for whom to produce’. 3
Ans. The problem ‘for whom to produce’ is a problem relating to the distribution of output (or
income) in the economy. Who gets how much? It has two aspects: (i) Factoral distribution of
income, and (ii) Inter-personal distribution of income. Factoral distribution of income
relates to income-share of different factors of production, viz., wages for labour, interest for
capital, and rent for land. Inter-personal distribution refers to income-share of individuals
and households in the society. Whether, it is factoral distribution or inter-personal
distribution, the problem revolves around equality (or inequality) in the society. In the
market economies, profits tend to escalate faster than wages, leading to inequality. In the
regulated economies, the government tries to promote equality through various measures
like taxes and subsidies.
7. A consumer buys 18 units of a good at a price of ™ 9 per unit. The price elasticity of
demand for the good is (–)1. How many units the consumer will buy at a price of ™ 10 per
unit? Calculate. 3
Ans. Given, Ed = – 1, P = ` 9, P1 = ` 10; DP = P1 – P = ` 10 – ` 9 = ` 1, Q = 18 units, Q1 = ?
DQ P
Price elasticity of demand (Ed) = (–) ´
DP Q
DQ 9
– 1= ´
1 18
DQ = – 2
Now, DQ = Q1 – 18
– 2 = Q1 – 18
Q1 = 16 units.
8. State the relation between marginal revenue and average revenue. 3
Or
State the relation between total cost and marginal cost.
Ans. Relationship between Marginal Revenue (MR) and Average Revenue (AR):
competition.
(ii) When average revenue is diminishing, it is greater than marginal revenue. It is true in
situations of monopoly and monopolistic competition.
Or
(a)
Fig. 1 Y TC
T Till point K, MC is falling.

Accordingly, till point T, TC is
increasing at a decreasing rate.
TC
Beyond point K, MC is increasing.
Accordingly, beyond point T, TC is
increasing at an increasing rate.
S
O X
OUTPUT
Y
(b)
MC
MC
O X
OUTPUT
Relation between TC and MC:

(i) When MC is rising, TC increases at an increasing rate.
(ii) When MC is falling, TC increases at a diminishing rate.
(iii) When MC is constant, TC increases at a constant rate.
9. What is the behaviour of average fixed cost as output is increased? Why is it so? 3
Ans. As output increases, average fixed cost continuously decreases. This is because total fixed
cost remains unchanged with the change in the level of output, i.e., it is constant at all levels
of output. The average fixed cost curve (AFC) is a rectangular hyperbola and can never
touch any axis.
Average Fixed Cost
Fig. 2 Y
10
AVERAGE FIXED COST (`)
9
8
7
6
5
Rectangular Hyperbola
4
3
2
1 AFC
O X
1 2 3 4 5 6 7 8
OUTPUT (Units)
10. Why are the firms said to be interdependent in an oligopoly market? Explain. 3
Ans. In an oligopoly market, there is a small number of big firms. Accordingly, there is a high
degree of mutual interdependence. Implying that price and output policy of one firm has a
significant impact on the price and output policy of the rival firms in the market. When one
firm lowers its price, the rival firms may also lower the price. And, when one firm raises the
price, the rival firms may not do so. It is because of this interdependence that it becomes
very difficult to estimate change in firm’s sales caused by a change in price which implies
that a precise relationship between price and sales cannot be established.
11. A consumer consumes only two goods. Explain consumer’s equilibrium with the help of
utility analysis. 4
Or
A consumer consumes only two goods A and B and is in equilibrium. Show that when
price of good B falls, demand for B rises. Answer this question with the help of utility
analysis.
Ans. Consumer consuming only two goods, say X and Y, will attain equilibrium when:
æ MU X ö
(i) Marginal utility per rupee çç ÷÷ must be same between both the goods purchased
è PX ø
by the consumer. Thus,
MU X MU Y
=
PX PY
MU X MU Y
(ii) Marginal utility of money remains constant. That is, or should be equal to
PX PY
MUM, which implies that utility per rupee obtained by the consumer from Good-X or
Good-Y should be equal to marginal utility of money. Thus,
MU X MU Y
= = MUM
PX PY
declines as more and more of a commodity is consumed.
Or
In case of two commodities, say A and B, consumer's equilibrium is attained when:
MU A MU B
=
PA PB
MU A MU B
But when price of good B falls, < which shows that rupee worth of satisfaction
PA PB
is greater for B than A. Accordingly, the consumer will buy more of B instead of A. As a
MU B MU A
consequence, will start falling while will start rising. The consumer will stop
PB PA
buying more of B when
MU A MU B
=
PA PB
Thus, when price of good B falls, demand for it rises.
12. What happens to the demand for a good when consumer’s income changes? Explain. 4
Ans. Effect of a change in income of a consumer on demand is different in case of normal goods
and inferior goods.
In case of normal goods, there is a positive relationship between income and demand.
When income of a consumer rises, demand for the normal good increases which will make
its demand curve shift to the right. For example, wheat is a normal good. Demand for wheat
increases with an increase in consumer’s income. Similarly, a fall in consumer’s income will
cause a fall in demand of a normal good which, in turn, will make its demand curve move to
the left.
Y
Fig. 3 D1
D from (DD to D1D1) when income
PRICE OF WHEAT
D2 of the consumer increases.

Demand curve shifts to the left
P from (DD to D2D2) when income
of the consumer decreases.
D1
D
D2
O X
Q1 Q2
DEMAND FOR WHEAT
In case of inferior goods, there is a negative relationship between income and demand.
When income of a consumer rises, demand for the inferior goods decreases which makes its
demand curve shift leftwards. Coarse grain is an example of inferior good. Demand for
coarse grain decreases with an increase in consumer’s income. Similarly, a fall in consumer's
income will cause an increase in demand of an inferior good which will make its demand
curve shift rightwards.
13. State the behaviour of marginal product in the law of variable proportions. Explain the
causes of this behaviour. 4
subsequently stabilise, but must finally decrease.
Thus, initially, MP rises owing to (i) the better coordination between the factors of
production and (ii) better utilisation of the fixed factor.
Then, MP starts to diminish due to (a) excessive utilisation of the fixed factor and lower
availability of the fixed factor (capital) per unit of the variable factor (labour), (b) poor
coordination among factors of production, owing to excessive employment of the variable
factor.
Finally, MP becomes negative which occurs owing to the excessive employment of the
variable factor to such an extent that some units of the variable factor (labour) remain
absolutely unproductive even when they are apparently employed. This is like a situation of
disguised unemployment when unproductive workers are only a hindrance in the
efficiency of productive workers, so that marginal product is negative. Thus, we have three
phases of production in terms of marginal product, viz., phases of increasing MP,
decreasing MP and negative MP.
14. Explain the conditions of consumer’s equilibrium with the help of the indifference curve
analysis. 6
Or
Explain the three properties of the indifference curves.
Ans. In terms of IC analysis, a consumer attains equilibrium when:
P
PY
P
(ii) IC is convex to the origin at the point where MRSXY = X
PY
It can be explained with the help of the Fig. 4:
Y
Fig. 4
P
GOOD-Y
Q
L
IC
O X
M P
GOOD-X
Q is the point of equilibrium. Here, IC and price line-PP are tangent to each other. Or, we
can say that the slope of IC = slope of price line. Or, it is here that:
P
PY
In a state of equilibrium, the consumer is buying OM amount of Good-X and OL amount of
Good-Y. It is here that he is maximising his satisfaction. Any departure from this point
would only mean less satisfaction.
Or
The principal properties of indifference curves are as follows:
(i) Indifference Curves are negatively Sloped or they Slope Downward: An indifference
curve slopes downwards from left to right, or that, its slope is negative. Because if a
consumer uses more quantity of one good he will use less quantity of the other, then
only he will have equal satisfaction from their different combinations. This is true in
the context of the assumption that the consumer has monotonic preferences.
ordinarily be convex to the point of origin. Convexity of the curve means that it bows
inward to the origin. This implies that the slope of an indifference curve tends to fall as
the consumer moves downward along the curve. The slope of the indifference curve is
called the marginal rate of substitution because it indicates the rate at which the
consumer is willing to substitute one good for the other. The falling slope of IC, thus,
implies that MRSXY tends to fall as the consumer moves downward along the curve. In
other words, it is because of the diminishing MRSXY that the IC is convex to the origin.
level of satisfaction than the combinations on the lower indifference curve. The
assumption of monotonic preferences of the consumer permits us to conclude that
greater the consumption, higher must be the level of satisfaction.
15. From the following information about a firm, find the firm’s equilibrium output in terms
of marginal cost and marginal revenue. Give reasons. Also find profit at this output. 6
Output Total Revenue Total Cost
(units) (`) (`)
1 7 8
2 14 15
3 21 21
4 28 28
5 35 36
Ans.
Output Total Revenue Marginal Revenue Total Cost Marginal Cost
(units) (`) (`) (`) (`)
1 7 7 8 8
2 14 7 15 7
3 21 7 21 6
4 28 7 28 7
5 35 7 36 12
In the above table, MR = MC in two situations: (i) when 2 units of output are produced, and
(ii) when 4 units of output are produced. However, in situation 1, when output is 2 units,
MC is falling, whereas in situation 2, when output is 4 units, MC is rising. A producer strikes
(i) MR = MC (ii) MC is rising
This means that the equilibrium will be struck when 4 units of output are produced and not
when 2 units of output are produced.
When 4 units of output are produced, TR = 28 and TC = 28
Profit = TR – TC
Profit = 28 – 28 = 0
Thus, the producer is earning only normal profits at the point of equilibrium. Normal
profits are a part of TC.
16. Market of a commodity is in equilibrium. Demand for the commodity “increases”.
Explain the chain of effects of this change till the market again reaches equilibrium. Use
diagram. 6
Ans. Effect of an increase in demand for a commodity on equilibrium price and equilibrium
quantity can be explained with the help of the diagram given below:
Fig. 5 Y D1
S
P2
D
P1 E1
PRICE
P
E
D1
D
S
O X
Q Q1 Q2
QUANTITY
equilibrium quantity and OP is the equilibrium price. Increase in demand implies a shift in
demand curve to the right. It is indicated by D1D1. This sets in motion the following Chain
of Effects:
Increase in demand implies that more is demanded at the existing price. Given the supply,
be demanded at the price OP2. Or, at the price of OP, only OQ2 quantity will now be offered
for demand. Rise in price will cause contraction of demand and extension of supply. This
SECTION–B
bank on demand or by issuing a cheque any time.
18. What is involuntary unemployment? 1
rate of wages but does not get work.
19. Define marginal propensity to consume. 1
Ans. Marginal propensity to consume (MPC) refers to the proportion of additional income going
to consumption expenditure. It is measured as the ratio between change in consumption
(DC) and change in income (DY). Thus,
DC
MPC =
DY
20. Define government budget. 1
Ans. A government budget is a statement showing estimated receipts and estimated expenditure
of the government during a fiscal year.
21. Give meaning of balance of trade. 1
Ans. Balance of trade is defined as the difference between the value of imports and exports of
only physical goods or visible items.
22. Define externalities. Give an example of negative externality. What is its impact on
welfare? 3
for that. Externalities can be positive or negative.
An example of negative externality would be the smoke emitted by factories that causes air
pollution, or the industrial waste is driven into rivers causing water pollution.
Environmental pollution causes a loss of social welfare. But nobody is penalised for it and
there is no valuation of it in the estimation of GDP.
Impact of externalities is not accounted in the index of social welfare in terms of GDP which
makes GDP, as an index of welfare, an inappropriate index. It either underestimates or
overestimates the level of welfare.
23. Explain the significance of ‘store of value’ function of money. 3
Or
Explain the significance of ‘medium of exchange’ function of money.
Ans. Store of value means store of wealth in terms of money.
mouse.
(iii) Saving in terms of money allows a high degree of liquidity which is not possible in case
of goods.
Or
One of the primary functions of money is to serve as a medium of exchange in the sale or
purchase of goods and services. In the absence of money, goods were exchanged for goods
which required double coincidence of wants. Thus, exchange was difficult and limited as well.
Introduction of money has separated these two acts and double coincidence of wants is no
longer required. Exchange function of money has changed the nature of production
activity as well as the level of production activity. The nature of production has changed
because production is now market oriented and not subsistence-oriented. The level of
production has substantially risen with the introduction of money because the act of sale
and purchase has now been separated.
24. Is the following revenue expenditure or capital expenditure in the context of
government budget? Give reason. 3
(i) Expenditure on collection of taxes.
(ii) Expenditure on purchasing computers.
Ans. (i) Expenditure on collection of taxes is a revenue expenditure because it neither causes
a rise in assets of the government nor does it lead to a reduction in the liabilities of the
government.
(ii) Expenditure on purchasing computers is a capital expenditure because this results in

the creation of assets for the government. Hence, such expenditures add to the assets
of the government.
25. Explain the meaning of balance of payments deficit. 3
Ans. A disequilibrium in balance of payments (BoP) occurs when the sum total of current
account balance and capital account balance is not zero; instead it is either a positive
number or a negative number.
If the sum total of current account balance and capital account balance is some negative
number, it indicates BoP deficit. In other words, BoP deficit occurs when the sum total of
current account balance and capital account balance is a negative number, pointing
towards the net outward flow of foreign exchange, causing a decrease in official reserves.
26. Recently Government of India has doubled the import duty on gold. What impact is it
likely to have on foreign exchange rate and how? 3
Ans. With the doubling of the import duty, the commodity is set to cost more now. Since most of
the demand for gold is met by imports, with the increased import duty the import of gold is
likely to fall. This will reduce the demand for foreign exchange. Other things remaining
constant, a reduction in the demand for foreign exchange will lead to: (i) a fall in foreign
exchange rate and (ii) reduction in (CAD) (current account deficit).
27. Define money supply and explain its components. 4
Or
Explain the ‘lender of last resort’ function of central bank.
point of time. The components of money supply are:
(i) Currency held by the public,
(ii) Demand deposits of the people with the commercial banks, and
(iii) Other deposits (demand deposits with RBI of domestic and foreign institutions other
than of the government of the country and commercial banks with the country).
Or
One of the principal functions of the Central bank is to act as a lender of last resort for the
other banks of the country. It means that if a commercial bank fails to get financial
accommodation from anywhere it approaches the central bank as a last resort. Central bank
advances loan to such a bank against approved securities.
28. Calculate investment expenditure from the following data about an economy which is in
equilibrium: 4
National income = 1000
Marginal propensity to save = 0.25
Autonomous consumption expenditure = 200
Ans. Given,
National income (Y) = 1000
Autonomous consumption expenditure (C) = 200
Marginal propensity to save (MPS) = 0.25
Therefore, marginal propensity to consume (MPC) = 0.75 (MPC + MPS = 1)
Now, we know that

Y= C + I
Here, C = C + bY, where b = MPC
Putting the given values, we get
1000 = 200 + 0.75 × 1000 + I
1000 = 950 + I
I = 50
*29. Government raises its expenditure on producing public goods. Which economic value
does it reflect? Explain. 4
Ans. When the government raises its expenditure on producing public goods, it has two
implications in terms of its economic value. First, it raises the level of social welfare as the
people are provided with more of roads, parks, besides better law and order and defence of
the country.
Second, it is expected to generate employment, so that the growth process becomes
inclusive. More and more people share the benefits of growth, as more and more people are
involved in the process of growth.
30. Calculate national income and gross national disposable income from the following:
4+2 = 6
(™ Arab)
(i) Net current transfers to abroad (–) 15
(iii) Subsidies 20
(v) Indirect tax 120
(vi) Net imports 20
(viii) Net change in stocks (–) 10
(ix) Net factor income to abroad 5
(x) Net domestic capital formation 110
+ Net domestic capital formation – Net imports – Net factor income to abroad – Indirect
taxes + Subsidies
= ` 600 + ` 100 + ` 110 – ` 20 – ` 5 – ` 120 + ` 20
= ` 685 Arab
= National income + Consumption of fixed capital + Net indirect taxes (Indirect Taxes –
Subsidies) + Current transfers from the rest of the world
= ` 685 + ` 35 + ` (120 – 20) – (–) ` 15
= ` 835 Arab
31. Giving reason explain how should the following be treated in estimating gross domestic
product at market price? 6
(i) Fees to a mechanic paid by a firm.
(ii) Interest paid by an individual on a car loan taken from a bank.
(iii) Expenditure on purchasing a car for use by a firm.
Ans. (i) Fees to a mechanic paid by a firm will not be included in the estimation of gross
domestic product at market price because this fees is an intermediate expenditure for
the firm and not a final expenditure.
(ii) Interest paid by an individual on a car loan taken from a bank will not be included in
estimation of gross domestic product at market price because such loans are not used
for production purpose, rather are made for consumption purposes.
(iii) Expenditure on purchasing car by a firm will be included in the estimation of gross
domestic product at market price because it is an investment expenditure. The car
purchased will be used by the firm for many years and the firm will be a final user of the
car, provided it is neither a second hand car nor purchased for further sale.
32. Explain national income equilibrium through aggregate demand and aggregate supply.
Use diagram. Also explain the changes that take place in an economy when the economy
is not in equilibrium. 6
Or
Outline the steps required to be taken in deriving saving curve from the given
consumption curve. Use diagram.
Ans. In an economy, equilibrium level of income and employment is determined when AD
(aggregate demand) is equal to AS (aggregate supply).
According to Keynes, AS may be assumed to be perfectly elastic in an economy where full
employment (of resources) is yet to be achieved. Accordingly, AD becomes the principal
determinant of equilibrium level of income.
In Fig. 6, AD represents aggregate demand curve and 45° line is the line of reference where
AS = AD. Equilibrium level of income Y is determined at point E, where AD = AS. Prior to
point E, aggregate demand exceeds aggregate supply leading to an increase in level of
income upto point E. Beyond point E, aggregate supply exceeds aggregate demand
leading to a fall in income back towards point E.
Y
Fig. 6
AD
+I
=C
=
AS
AD
E
AD = AS
Point of
Equilibrium
45°
O X
Y1 Y Y2
INCOME/OUTPUT
It is only when AS = AD that the equilibrium is struck. Because the equality between AS and
AD implies that the desired level of output in the economy (as indicated by AS) is exactly
equal to the desired level of expenditure (indicated by AD) in the economy. So that, the entire
output as planned by the producers (during an accounting year) is purchased by the buyers.
There are no undesired or unwanted inventories (stock of goods) with the producers.
Or
Fig. 7 shows the derivation of saving curve from a given consumption curve.
Y Y
Fig. 7
bY C
C+
C=
CONSUMPTION/SAVING
Break-even
point Q
)Y
–b S
(1
A – C+
S=
45°
O X
P INCOME
A'
Y'

(i) We take OA ¢ = OA. Because OA = consumption when Y = 0, so that, OA ¢ (= OA) is the
S = 0.
(iii) By joining points A ¢ and P and stretching it to form a straight line, we get S curve.
Note: Since MPC + MPS = 1, MPS = 1 – MPC. So that while in C-function MPC is indicated
SET–II
SECTION–A
5. What is meant by cost in economics? 1
Ans. Cost is the expenditure incurred by the producer on account of the production of a
commodity. Often, costs are split as fixed costs and variable costs. However, costs are also
classified as explicit costs and implicit costs.
8. Price elasticity of demand of a good is (–)1. When its price per unit falls by one rupee, its
demand rises from 16 to 18 units. Calculate the price before change. 3
Ans. Given, Ed = – 1
Q = 16 units
Q1 =18 units; DQ = Q1 – Q = 18 – 16 = 2 units

DP = ™ 1, P = ?
DQ P
DP Q
2 P
– 1= ×
( -)1 16
–8=–P
Thus, P=™8
13. Explain the change in demand of a good on account of change in prices of related goods. 4
Ans. Change in Price of Related Goods: Market demand of a commodity is influenced by
change in price of related goods. Related goods are of two types:
(a) Substitute Goods: Substitute goods are those goods which can be substituted for each
other like tea and coffee. When price of Good-X (tea) increases, demand for Good-Y
(coffee) tends to rise. Demand curve for coffee will shift to the right. More coffee is
demanded at its existing price. Fig. 8 explains the concept:
Fig. 8 Y D1
D
Initial demand
curve for coffee
PRICE
K
P S Demand curve for
D1
D
O X
QUANTITY
(b) Complementary Goods: Complementary goods are those goods which complete the
demand for each other like pen and ink. When price of Good-Y (pen) increases,
demand for Good-X (ink) tends to fall. Demand curve for ink will shift to the left. Less
ink is demanded at its existing price. Fig. 9 explains the situation:
Y D
Fig. 9 D1
Initial demand
curve for ink
PRICE
P K S
Demand curve for
ink shifts to the left when
price of pen increases
D
D1
O X
QUANTITY
14. Market for a product is in equilibrium. Demand for the product “decreases”. Explain the
chain of effects of this change till the market again reaches equilibrium. Use diagram. 6
Ans. Effect of decrease in demand for a commodity on equilibrium price and equilibrium
quantity is discussed with Fig. 10.
Y
D1
Fig. 10 S
D2
F
P1 E
PRICE
P2 K
D1
S D2
O X
Q2 Q1
QUANTITY
In Fig. 10, D1D1 is the initial demand curve, crossing supply curve SS at point E, the point of
initial equilibrium. Owing to decrease in demand, demand curve shifts to the left, from
D1D1 to D2D2. And at the existing price (OP1), quantity demanded falls from point E to
point F. As an immediate impact of decrease in demand, there is excess supply in the
market, equal to EF (at the existing price). Due to the excess supply (and sluggish demand)
price of the commodity tends to be lower than the equilibrium price. Owing to lowering
price, quantity demanded tends to extend. Extension of demand occurs from point F
towards point K. However, at lowering price, quantity supplied tends to contract. The
contraction of supply occurs from point E towards point K. The process of extension of
demand and contraction of supply (triggered by the lowering price) continues till excess
supply is fully exhausted and the market clears itself once again. K is the point of new
equilibrium, where quantity supplied is equal to quantity demanded. Corresponding to the
new equilibrium, quantity demanded/supplied is equal to OQ2 and equilibrium price is
OP2.
Thus, the net effect of decrease in demand is: (a) decrease in equilibrium price from OP1 to
OP2, and (b) decrease in equilibrium quantity from OQ1 to OQ2.
SECTION–B
18. What is ‘current account deficit’ in the balance of payments? 1
Ans. Current account includes receipts and payments of foreign exchange on account of all
items of exports and imports (visibles as well as invisibles). Current account deficit occurs
when the foreign payment receipts fall short of the foreign exchange payments in the short
period.
20. Give meaning of full employment. 1
Ans. Full employment is a situation in which all those who are able to work and are willing to
work at the existing rate of wage get work.
24. Visits to foreign countries for sightseeing etc. by the people of India is on the rise. What
will be its likely impact on foreign exchange rate and how? 3
Ans. Increasing visits of Indian people to foreign countries will simply increase the demand of
foreign exchange to be used in the foreign countries. Supply of the foreign exchange
remaining unchanged, it will cause a rise in foreign exchange rate.
29. Calculate autonomous consumption expenditure from the following data about an
economy which is in equilibrium. 4
National income = 1,200
Investment expenditure = 100
Ans. Given,
Autonomous consumption expenditure (C) = ?
Now, we know that
Y= C + I
Where, C = C + bY, where b = MPC
1,200 = C + 0.80 × 1,200 + 100
1,200 = C + 960 + 100
C = 1,200 – 1,060
C = 140
31. Calculate ‘net national product’ at factor cost and ‘private income’ from the following:
3, 3
(™ Arab)
(i) National debt interest 60
(ii) Wages and salaries 600
(iv) Rent 200
(v) Transfer payments by government 70
(vi) Interest 300
(vii) Net domestic product at factor cost accruing to government 400
(viii) Social security contributions by employers 100
(ix) Net factor income paid to abroad 50
(x) Profits 300
= Wages and salaries + Rent + Interest + Profit + Employers’ contribution to social
security schemes – Net factor income to abroad
= ` 600 + ` 200 + ` 300 + ` 300 + ` 100 – ` 50
= ` 1,450 Arab
Private Income
= National Income – Net domestic product at factor cost occurring to government – Net
current transfers to abroad + National debt interest + Net current transfers by
government
= ` 1,450 – ` 400 – ` 20 + ` 60 + ` 70
= ` 1,160 Arab
SET–III
SECTION–A
Ans. Marginal revenue is additional revenue as a result of selling one more unit of output.
MRn = TRn – TRn–1
DTR
Or MR =
DQ
5. Define indifference map. 1
Ans. Indifference map refers to a set of indifference curves placed together in a figure. An IC
which is to the right and above another IC corresponds to higher level of income and
therefore, represents higher level of satisfaction.
10. A consumer buys 30 units of a good at a price of ™ 10 per unit. Price elasticity of demand
for the good is (–)1. How many units the consumer will buy at a price of ™ 9 per unit?
Calculate. 3
P = ™ 10
P1 = ™ 9; DP = P1 –P = ™ 9 – ™ 10 = ™ (–)1
Q = 30 units, Q1 = ?
DQ P
DP Q
DQ 10
–1= ´
-1 30
DQ = 3
Now, DQ = Q1 – 30
3 = Q1 – 30
Q1 = 33 units.
11. What is market demand for a good? Name the factors determining market demand. 4
Ans. Market demand refers to total demand by all buyers of a commodity in the market.
Market demand for a commodity is affected by the following factors:
(i) Price of the Commodity: When price of the commodity increases in the market, its
quantity demanded decreases and vice versa.
(ii) Income of the Consumer: Market demand for a commodity is directly related to
income of the consumer. Increase in income of consumer causes increase in market
demand for the commodity.
(iii) Prices of Related Goods: In case of substitute goods, demand for a commodity falls with
a fall in price of the substitute commodity. In case of complementary goods, market
demand for the commodity rises with a fall in the price of complementary commodity.
15. Market for a product is in equilibrium. Supply of the product “decreases”. Explain the
chain of effects of this change till the market again reaches equilibrium. Use diagram. 6
Ans. Effect of a decrease in supply of a commodity on its equilibrium price and equilibrium
Y S2
Fig. 11 D S1
K
P2
PRICE
F E
P1
S2
S1 D
O X
Q2 Q1
QUANTITY
In Fig. 11, S1S1 is the initial supply curve, crossing demand curve DD at point E, which is the
point of initial equilibrium. Now, owing to a decrease in supply, supply curve shifts to the
left, from S1S1 to S2S2. As an immediate impact of decrease in supply, there is excess
demand, equal to EF (at the existing price). Because of this excess demand (and sluggish
supply), price of the commodity tends to be higher than the equilibrium price. Owing to
rising price, quantity demanded tends to contract. Contraction of demand occurs from
point E towards point K. But due to rising price, quantity supplied tends to extend. The
extension of supply occurs from point F towards point K. The process of extension of
supply and contraction of demand (triggered by the rising price) continues till the excess
demand is fully tackled. K is the point of new equilibrium where the market clears itself
once again. Corresponding to the new equilibrium, quantity demanded is equal to the
quantity supplied, i.e., OQ2. And, equilibrium price is OP2.
Thus, the net effect of decrease in supply is: (a) equilibrium price increases from OP1 to
OP2, and (b) equilibrium quantity decreases from OQ1 to OQ2.
SECTION–B
17. Define aggregate supply? 1
Ans. Aggregate supply refers to the planned or ex-ante output during the year. It is the output
which the producers intend to produce during the year.
19. What is ‘devaluation’? 1
Ans. Devaluation is the fall in the value of domestic currency in relation to foreign currency as
planned by the government in a situation when exchange rate is not determined by the
forces of supply and demand but is fixed by the government of different countries.
23. How does giving incentives for exports influence foreign exchange rate? Explain. 3
Ans. Exports incentives are given for the promotion of exports of a country. With the increase in
the exports of an economy, the inflow of foreign exchange is expected to increase. This
implies an increase in the supply of foreign exchange. Demand remaining constant,
increase in supply of foreign exchange will lead to a fall in foreign exchange rate.
27. Calculate marginal propensity to consume from the following data about an economy
which is in equilibrium: 4
National Income = 1,500
Ans. Given,
National income (Y) = 1,500
Now, we know that
Y= C + I
Where, C = C + bY, where b = MPC
1,500 = 300 + b × 1,500 + 300
1,500 = 600 + b × 1,500
900 = b × 1,500
b = 0.60
32. Calculate net domestic product at factor cost and net national disposable income from
the following: 4, 2
(™ Arab)
(ii) Government final consumption expenditure 100
(iii) Net indirect tax 80
(vi) Gross domestic fixed capital formation 50
(vii) Net imports (–) 10
(viii) Closing stock 25
(ix) Opening stock 25
Ans. Net domestic product at factor cost
+ Gross domestic fixed capital formation + Change in stocks – Net imports – Consumption
of fixed capital + Net factor income to abroad
= ` 300 + ` 100 + ` (50 + 25 – 25) – (–) ` 10 – ` 20 – ` 80
= ` 360 Arab
Net national disposable income

= Net national product at factor cost + Net indirect taxes – net factor income to abroad
= ` 360 + ` 80 – ` 10 – ` 5
= ` 425 Arab
zzz
Solved
CBSE
Examination Paper,
All India–2014
General Instructions: Same as CBSE Examination Paper, Delhi–2014.
SET–I
SECTION–A
*1. The government has started promoting foreign capital. What is its economic value in the
context of Production Possibilities Frontier? 1
Ans. The inflow of foreign capital is expected to increase the availability of the resources.
Consequently, production possibility frontier will shift to the right.
2. Define indifference curve. 1
Ans. It is a curve showing different combinations of a set of 2-Goods, each combination offering
the same level of satisfaction to the consumer.
3. Define marginal product. 1
Ans. Marginal product or marginal physical product is the change in total product as a result of a
unit change in the input of a variable factor. Symbolically,
MP = TPn – TPn–1
DTP
Or MP =
DL
4. What is market supply of a product? 1
5. What is imperfect oligopoly? 1
Ans. Imperfect oligopoly is that market situation in which all firms produce differentiated
products.
6. Why is Production Possibilities Curve concave? Explain. 3
Ans. Production possibility curve (PPC) is concave to its origin because marginal opportunity
DLoss of Y ö
cost æç ÷ of shifting resources from commodity-Y to commodity-X tends to rise.
è DGain of X ø
And marginal opportunity cost tends to rise because of the law of diminishing returns.
When more and more resources are allocated to X, additional gain of output (per unit of
input) tends to decrease; and as more and more resources are withdrawn from Y, additional
DLoss of Y ö
loss of output tends to rise. Accordingly, the ratio æç ÷ tends to rise. Implying a rise
è DGain of X ø
in the slope of PPC as more and more resources are shifted from Y to X. Rising slope of PPC
means that PPC is concave to the origin.
7. When the price of a good falls from ™ 10 to ™ 8 per unit, its demand rises from 20 units to
24 units. What can you say about price elasticity of demand of the good through the
‘expenditure approach’? 3
Ans.
Price Quantity Demanded Total Expenditure

(`) (Units) (`)
10 20 200
8 24 192
Here, total expenditure decreases with a fall in price; hence, price elasticity of demand of
the good is less than unity. It is a situation of inelastic demand.
8. Explain how technological progress is a determinant of supply of a good by a firm. 3
Or
Explain how input prices are a determinant of supply of a good by a firm.
Ans. Technological progress is an important determinant of supply of a good by a firm.
Technological improvement tends to lower the cost of production since better technology
facilitates higher output with the same inputs. Accordingly, the producer is willing to supply
more at the existing price.
Or
Supply of a good is affected by the prices of inputs used for the production of the
commodity. If the input price decreases, cost of production also reduces. Accordingly, more
of the commodity is supplied at its existing price. On the contrary, if the input price
increases cost of production also increases. In such a situation, less quantity of the good is
supplied at its existing price.
9. Why is Average Revenue always equal to price? 3
Ans. Average revenue is the revenue per unit of output sold,
TR
i.e., AR = ...(i)
Q
And Total Revenue (TR) = P × Q ...(ii)
Where P = price per unit and Q = quantity sold
Now, putting the value of TR from (ii) in (i)
P´Q
AR = = Price
Q
Thus, AR is always equal to price.
10. Why is the number of firms small in oligopoly? Explain. 3

Ans. By definition, oligopoly is a form of the market in which there is a small number of big firms.
Each firm is so big that it controls a significant segment of the market.
The reasons that there are only a few firms in oligopoly are as follows:
(i) Production requires huge capital investment that deters the entry of new firms.
(ii) Technology used in production is so distinct that it is difficult for an ordinary firm to
acquire it.
(iii) The firms often form trusts and cartels, converting the market almost into a monopoly
market, which becomes impregnable for the small firms.
(iv) The firms often get patent rights for their products and their branded products
happen to achieve consumer’s loyalty over time. This keeps the new firms at bay.
(v) The firms happen to achieve control over strategic inputs, making it difficult for the
new firms to enter the market.
(vi) Owing to their large scale production and economies of scale, the existing firms start
incurring so much of advertisement expenditure that the entry of new firms virtually
becomes impossible.
11. A consumer consumes only two goods X and Y and is in equilibrium. Show that when the
price of good X rises, the consumer buys less of good X. Use utility analysis. 4
Or
Given the price of a good, how will a consumer decide as to how much quantity of that
good to buy? Use utility analysis.
Ans. In case of two commodities, say X and Y, consumer’s equilibrium is attained when:
MU X MU Y
=
PX PY
MU X MU Y
But when price of good X rises, < which shows that rupee worth of satisfaction
PX PY
is less for X than Y. Since X is now relatively expensive than Y, the consumer will start
MU Y MU X
consuming less of X and more of Y. As a consequence, will start falling while will
PY PX
start rising. The consumer will start buying more of X when
MU X MU Y
=
PX PY
Thus, when price of good X rises, demand for the same falls.
Or
Given price of the commodity, the consumer will first ascertain his marginal utility schedule
from the consumption of a good.
MU X
As a second step, he will find MU per rupee or rupee worth of satisfaction as he
PX
consumes more and more units of the commodity.
As a third step, he will compare rupee worth of satisfaction from every additional unit with
the MUM (marginal utility of money).
Finally, he will consume that much of a commodity where,

MU X
= MUM
PX
In this entire exercise, it is assumed that (i) law of diminishing marginal utility holds good
and (ii) marginal utility of money remains constant. Thus, there are three conditions
determining how many units of a good the consumer will buy:
MU X
(i) = MUM
PX
(ii) Marginal utility of money remains constant, and
(iii) Law of diminishing marginal utility holds good.
12. Give the meaning of “inferior” good and explain the same with the help of an example. 4
Ans. An inferior good is that good the consumption of which decreases with increase in income
When income rises, demand curve for inferior goods shifts to the left. For example:
Demand curve for coarse grain shifts backward or leftwards from D1D1 to D2D2 when
consumer’s income increases.
Fig. 1
Y
D1
D2
D1
D2
O X
Q2 Q1
DEMAND FOR COARSE GRAIN
13. Giving reasons, explain the ‘Law of Variable Proportions’. 4

subsequently stabilise, but must finally decrease.
Initially, the marginal product increases, due to the following reasons:
(i) Greater application of the variable factor ensures better utilisation of the fixed factor.
(ii) Greater application of the variable factor facilitates better division of labour, and
(iii) Greater application of the variable factor improves co-ordination between the factors.
Later on, when marginal product starts declining, it is due to:
(i) Fixity of the Factor: As more and more units of a variable factor are combined with the
fixed factor, the latter gets over-utilised. Hence, the diminishing returns.
(ii) Factors of production are imperfect substitutes of each other.

(iii) The coordination between factors starts deteriorating so that marginal product of the
variable factor declines.
14. Explain why is an indifference curve (a) downward sloping and (b) convex. 6
Or
Explain the concept of ‘Marginal Rate of Substitution’ with the help of a numerical
example. Also explain its behaviour along an indifference curve.
Ans. (i) An indifference curve slopes downwards from left to right, or that, its slope is
negative. Because if a consumer uses more quantity of one good he will use less
quantity of the other, only then he will have equal satisfaction from their different
combinations. This is true in the context of the assumption that the consumer has
monotonic preferences.
(ii) An indifference curve will ordinarily be convex to the point of origin. Convexity of the
curve means that it bows inward to the origin. This implies that the slope of an
indifference curve tends to fall as the consumer moves downward along the curve. The
slope of the indifference curve is called the marginal rate of substitution because it
indicates the rate at which the consumer is willing to substitute one good for the other.
The falling slope of IC, thus, implies that MRSXY tends to fall as the consumer moves
downward along the curve. In other words, it is because of the diminishing MRSXY
that the IC is convex to the origin.
Or
Marginal rate of substitution (MRS) is the rate at which a consumer is willing to substitute
Good-1 for Good-2. Or, it is the rate at which a consumer is willing to give up Good-2 for a
unit more of Good-1.
DGood-2
DGood-1
The concept of MRS is explained with the help of given table.
A 1 10 —
B 2 7 3:1
C 3 5 2:1
D 4 4 1:1
Above table indicates that the consumer will give up 3 oranges for getting the second apple,
2 oranges for getting the third apple and 1 orange for getting the fourth apple. In other
words, marginal rate of substitution of apples for oranges goes on diminishing. It is because
of the diminishing MRS that the IC becomes convex to the origin.
Now, we know that Marginal rate of substitution of X for Y (MRSXY) is defined as the
amount of Y, the consumer is willing to forego for a unit more of X.
Y
Fig. 2
Diminishing
10 A
MRSXY
8 MRSXY
E B3:1
GODO-Y
7
MRSXY
6 2:1
F C MRSXY
5
D 1:1
4 IC
O X
1 2 3 4
GOOD-X
AE BF
In Fig. 2 at point A, MRSXY = . At point B, MRSXY = and so on. When the consumer
EB FC
moves from point A to point B he gives up 3 units of Good-Y to obtain one unit of Good-X.
In this situation, consumer’s marginal rate of substitution is 3 : 1. When he moves from B to
C, he gives up only 2 units of Good-Y to get one additional unit of Good-X. The marginal
rate of substitution now drops to 2 : 1. Implying that MRSXY tends to diminish as the
consumer moves downwards along the IC. Why should MRSXY diminish? It is because, as
the consumers gives up more and more of good Y, his intensity of desire for Y tends to rise.
On the other hand, as the consumer gets more and more of Good-X, his intensity of desire
for X tends to fall.
15. From the following information about a firm, find the firm’s equilibrium output in terms
of marginal cost and marginal revenue. Give reasons. Also find profit at this output. 6
(units) (™) (™)
1 6 7
2 12 13
3 18 17
4 24 23
5 30 31
Ans.
Output Total Revenue Total Revenue Total Cost Total Revenue
(units) (™) (™) (™) (™)
1 6 6 7 7
2 12 6 13 6
3 18 6 17 4
4 24 6 23 6
5 30 6 31 8
This means that the equilibrium will be struck when 4 units of output are produced and not
when 2 units of output are produced.
When 4 units of output are produced, TR = 24 and TC = 28
Profit = TR – TC
Profit = 24 – 23 = 1
Thus, the producer is earning supernormal profit of ` 1 at the point of equilibrium.
16. Market of a commodity is in equilibrium. Demand for the commodity “decreases”.
diagram. 6
Ans. Effect of decrease in demand for a commodity on equilibrium price and equilibrium
quantity is discussed with Fig. 3.
Y
Fig. 3 D1
S
D2
F
P1 E
PRICE
P2 K
D1
S D2
O X
Q2 Q1
QUANTITY
initial equilibrium. Owing to decrease in demand, demand curve shifts to the left, from
D1D1 to D2D2. And at the existing price (OP1), quantity demanded falls from point E to
point F. As an immediate impact of decrease in demand, there is excess supply in the
market, equal to EF (at the existing price). Due to the excess supply (and sluggish demand)
price of the commodity tends to be lower than the equilibrium price. Owing to lowering
price, quantity demanded tends to extend. Extension of demand occurs from point F
towards point K. However, at lowering price, quantity supplied tends to contract. The
contraction of supply occurs from point E towards point K. The process of extension of
demand and contraction of supply (triggered by the lowering price) continues till excess
supply is fully exhausted and the market clears itself once again. K is the point of new
equilibrium, where quantity supplied is equal to quantity demanded. Corresponding to the
new equilibrium, quantity demanded/supplied is equal to OQ2 and equilibrium price is
OP2.
Thus, the net effect of decrease in demand is: (a) decrease in equilibrium price from OP1 to
OP2, and (b) decrease in equilibrium quantity from OQ1 to OQ2.
SECTION–B
18. Define inflationary gap. 1
Ans. Inflationary gap, also known as excess demand, occurs when aggregate demand is greater
than aggregate supply corresponding to full employment level in the economy.
19. What is full employment? 1
Ans. Full employment is a situation in which all those who are able to work and are willing to
work at the existing rate of wage get work.
20. Define fiscal deficit. 1
Ans. Fiscal deficit is equal to the excess of total expenditure over the sum of revenue receipts and
capital receipts excluding borrowing. Fiscal deficit occurs when:
Total Expenditure > (Revenue Receipts + Capital Receipts – Borrowing).
21. Define foreign exchange rate. 1
money market is known as foreign exchange rate.
22. What are externalities? Give an example of a positive externality and its impact on
welfare of the people. 3
for that. Externalities can be positive or negative.
Example of a positive externality is when a beautiful garden maintained by Mr. X raises
welfare of Mr. Y even when Mr. Y is not paying for it. There is no valuation of it in the
estimation of GDP.
Impact of externalities (positive or negative) is not accounted in the index of social welfare
in terms of GDP. To that extent, GDP as an index of welfare is an inappropriate index. It
either underestimates or overestimates the level of welfare.
23. Explain the significance of the ‘Unit of Account’ function of money. 3
Or
Explain the significance of the ‘Standard of Deferred’ function of money.
Ans. Money serves as a measure of value in terms of unit of account. Unit of account means that
the value of each good or service is measured in the monetary unit. Measurement of value
was very difficult in the barter system: one good was valued in terms of the other. It was a
cumbersome procedure and a hindrance in the process of exchange. Money serves as a
standard unit of account for all goods and services. It has enhanced the process of
exchange. Accordingly, size of the market has expanded, leading to higher opportunities of
investment and growth.
Or
Deferred payments refer to those payments which are made in future. Money is accepted as
a standard of deferred payments because,
(i) its price remains stable,
(ii) it has general acceptability,

(iii) it is more durable compared to other commodities.
24. Is the following revenue receipt or a capital receipt in the context of government budget
and why? 3
(i) Tax receipts (ii) Disinvestment
Ans. (i) Tax receipts is a revenue receipt because it neither creates any liability nor reduces
the assets of the government.
(ii) Disinvestment is a capital receipt. Capital receipts either create a liability or lead to a
reduction in the assets of the government. Disinvestment results in the reduction of
assets of the government.
25. Distinguish between ‘autonomous’ and ‘accommodating’ Balance of Payments
transactions. 3
items are known as below the line items.
26. Foreign exchange rate in India is on the rise recently. What impact is it likely to have on
exports and how? 3
Ans. With the recent rise in foreign exchange rate of foreign currency in India, there has
been an appreciation of the foreign currency in relation to the domestic currency. So
now a unit of foreign currency can buy more goods and services in the domestic
economy. Accordingly, exports are likely to rise.
27. Explain ‘Banker to the Government’ function of the central bank. 4
Or
Explain the ‘Bankers’ Bank’ function of central bank.
the government it keeps the accounts of all government banks and manages government
Or
Central bank is an apex bank of all banks in the country. The central bank has almost the
same relation with other banks in the country as a commercial bank has with its customers.
As a banker’s bank, the central bank offers loans to the commercial bank and also, accepts
deposits from them. The central bank keeps some cash balances of the commercial banks as
a compulsory deposit. Central bank uses these funds to offer loans to the commercial banks
as and when they need it. For its short period loans to commercial banks, the banks charges
interest rate, often called Repo-rate. The central bank also offers commercial banks the
facility of parking their surplus funds with it. The interest paid to commercial banks for
these funds is called ‘Reverse-repo-rate’. This is how the central bank of a country plays the
role of a banker’s bank.
28. Calculate Marginal Propensity to Consume from the following data about an economy
Ans. Given,
Now, we know that
Y= C + I
2000 = 200 + b × 2000 + 100
2000 = 300 + b × 2000
1700 = b × 2000
b = 0.85
*29. Tax rates on higher income group have been increased. Which economic value does it
reflect? Explain. 4
Ans. Increasing the tax rates on higher income group implies that the government is following
progressive tax policy. This would reduce the inequalities in the distribution income. The
purchasing power of higher income people would fall while it would remain the same for
the low income people. This would reduce the gap between these two groups. Also, the
revenue of government is likely to increase by increasing the tax on higher income people
which can be used in developmental programs for the economy.
30. Calculate ‘Net National Product at Factor Cost’ and ‘Gross National Disposable Income’
from the following : 6
(™ in Arab)
(i) Social security contributions by employees 90
(ii) Wages and salaries 800
(iii) Net current transfers to abroad (–) 30
(iv) Rent and royalty 300
(v) Net factor income to abroad 50
(vi) Social security contributions by employers 100
(vii) Profit 500
(viii) Interest 400
(ix) Consumption of fixed capital 200
Ans. Net National Product at Factor Cost

= Wages and salaries + Rent and royalty + Profit + Interest + Social security contributions
by employers – Net factor income to abroad
= ` 800 + ` 300 + ` 500 + ` 400 + ` 100 – ` 50
= ` 2050 Arab
= Net National product at factor cost+ Consumption of fixed capital + Net indirect taxes
– Current transfer to rest of the world
= ` 2050 + ` 200 + ` 250 – (–) ` 30
= ` 2530 Arab
31. How should the following be treated in estimating national income of a country? You
must give reason for your answer. 6
(i) Taking care of aged parents
(ii) Payment of corporate tax
(iii) Expenditure on providing police services by the government
Ans. (i) Taking care of aged parents should be included in the estimation of national income as
it involves generation of services that are rendered for the parents.
(ii) Payment of corporate tax should not be included in the estimation of national income
because it is a transfer payment by the firm. It is paid out of income and therefore, it is
not to be separately added in the national income.
(iii) Expenditure on providing police services by the government should be included in
the estimation of national income because expenditure incurred by the government is
a part of government's final consumption expenditure
32. When is an economy in equilibrium? Explain with the help of Saving and Investment
functions. Also explain the changes that take place in an economy when the economy is
not in equilibrium. Use diagram. 6
Or
Outline the steps required to be taken in deriving the Consumption Curve from the given
Saving Curve. Use diagram.
Ans. Equilibrium level of income is determined at a point where ex-ante or planned saving is
equal to planned investment. This is because, in equilibrium
AS = AD
Or, C+S =C+I
Or, S= I
Fig. 4 illustrates the situation of equilibrium when S = I.
Y
Fig. 4
SAVING/INVESTMENT
Saving
Investment
S
S=I
I E
I
O X
Y
S
INCOME/OUTPUT
Equilibrium is struck at point E where S and I lines intersect each other. OY is the
equilibrium level of income.
There may or may not be a situation of full employment at the point of equilibrium.
Because equilibrium simply refers to a situation when the desired level of saving (implying a
leakage from the circular flow of income) is equal to the desired level of investment
(implying an injection into the circular flow of income). This equality may or may not
coincide with the situation of full employment in the economy.
Or
The Fig. 5 shows the derivation of consumption curve from a given saving curve.
Fig. 5 Y Y
bY C
C+
C=
CONSUMPTION/SAVING
Break-even
point Q
– b)Y S
(1
A – C+
S=
45°
O X
P INCOME
A'
Y'

(i) We take OA = OA ¢. Because OA ¢ = negative saving when Y = 0 and this is exactly equal
to minimum consumption when Y = 0.
(ii) Point Q on the Y-line (45° angle) is marked corresponding to point P on the saving curve.
Because at P, saving = 0 and at point Q, consumption = income (implying that S = 0).
(iii) Joining points A and Q and stretching it to form a straight line, we get C-Curve.
C-function is linear as it is derived from a linear S-function.
Note: Since MPC + MPS = 1, MPS = 1 – MPC. So that while in C-function, MPC is indicated by b,
in S-function, it is indicated by 1 – b.
SET–II
SECTION–A
3. Give the meaning of 'inelastic demand'. 1
Ans. When percentage change in quantity demanded is less than percentage change in price,
the demand is said to be inelastic.
Ans. Marginal revenue is additional revenue as a result of selling one more unit of output.
MRn = TRn – TRn–1
8. When the price of a good rises from ™ 10 to ™ 12 per unit, its demand falls from 25 units to
20 units. What can you say about price elasticity of demand of the good through the
‘expenditure approach’? 3
Ans.
Price Quantity Demanded Total Expenditure

(™) (Units) (™)
10 25 250
12 20 240
Here, total expenditure decreases with a rise in price; hence, price elasticity of demand of
the good is more than unity. It is a situation of elastic demand.
13. How does change in price of a substitute good affect the demand of the given good?
Explain with the help of an example. 4
Ans. Substitute goods are those goods which can be substituted for each other like tea and
coffee. When price of Good-X (tea) increases, demand for Good-Y (coffee) tends to rise.
Demand curve for coffee will shift to the right. More coffee is demanded at its existing
price. The Fig. 6 explains the concept:
Fig. 6
Y D1
D
Initial demand
curve for coffee
PRICE

D1
D
O X
QUANTITY
14. Market of a commodity is in equilibrium. Demand for the commodity ‘increases’.

diagram. 6
Ans. Effect of an increase in demand for a commodity on equilibrium price and equilibrium
Fig. 7 Y
D2
S
D1
K
P2
PRICE
E
P1 F
D2
S D1
O X
Q1 Q2
QUANTITY
initial equilibrium. Owing to increase in demand, demand curve shifts to the right, from
D1D1 to D2D2. And at the existing price (OP1), quantity demanded rises from point E to
point F. As an immediate impact of increase in demand, there is excess demand in the
market, equal to EF (at the existing price). Due to the pressure of demand, price of the
commodity tends to be higher than the equilibrium price. Owing to rising price, quantity
demanded tends to contract. Contraction of demand occurs from point F towards point K.
However, at rising price, quantity supplied tends to extend. The extension of supply occurs
from point E towards point K. The process of extension of supply and contraction of
demand (triggered by the rising price) continues till excess demand is fully tackled and the
market clears itself once again. K is the point of new equilibrium, where quantity supplied is
equal to quantity demanded. Corresponding to the new equilibrium, quantity
demanded/supplied is equal to OQ2 and equilibrium price is OP2.
Thus, the net effect of increase in demand is: (a) increase in equilibrium price from OP1 to
OP2, and (b) increase in equilibrium quantity from OQ1 to OQ2.
SECTION–B
18. What is floating exchange rate? 1
Ans. Floating rate of exchange is that rate which is determined by the demand for and supply of
Ans. Deflationary gap, also known as deficient demand, occurs when aggregate demand is less
than the aggregate supply corresponding to full employment level in the economy.
24. When foreign exchange rate in a country is on the rise, what impact is it likely to have on
imports and how? 3
Ans. A unit of the domestic currency will now buy less goods from rest of the world while a unit of
foreign currency can now buy more goods and services in the domestic economy. Goods
produced in the domestic economy become cheaper to the buyers in foreign countries
while foreign goods become relatively expensive to the domestic buyers. As a result,
imports are expected to fall.
29. Calculate investment expenditure from the following data about an economy which is in
equilibrium: 4
Ans. Given,
Now, we know that
Y= C + I
1000 = 100 + 0.80 × 1000 + I
1000 = 900+ I
I = 100
31. Calculate ‘National Income’ and ‘Net National Disposable Income’ from the following: 6
(™ in Arab)
(i) Net change in stocks 50
(ii) Government final consumption expenditure 100
(iv) Gross domestic fixed capital formation 200
(vi) Net imports 40
(vii) Depreciation 70
(viii) Net factor income to abroad (–) 10
(x) Net capital transfers to abroad 25
+ Gross domestic fixed capital formation + Net change in stocks – Net imports – Depreciation
– Net indirect taxes – Net factor income to abroad
= ` 500 + ` 100 + ` 200 + ` 50 – ` 40 – ` 70 – ` 120 – (–) ` 10
= ` 630 Arab

= National income + Net indirect taxes – Net current transfers to abroad
= ` 630 + ` 120 – ` 30
= ` 720 Arab
SET–III
SECTION–A
1. Define variable cost. 1
Ans. Variable costs are those costs which rise when the level of output rises and fall when the level
of output falls. Example: Cost incurred on the purchase of raw material.
5. What is meant by monotonic preferences? 1
10. A consumer buys 27 units of a good at a price of ™ 10 per unit. When the price falls to ™ 9
per unit, the demand rises to 30 units. What can you say about price elasticity of demand
of the good through the ‘expenditure approach’? 3
Ans.
Price (™) Quantity Demanded (Units) Total Expenditure (™)
10 27 270
9 30 270
Here, total expenditure remains constant with a fall in price; hence, price elasticity of
demand of the good is equal than unity. Demand curve is a rectangular hyperbola in the
case when expenditure remains constant at all levels of price of the concerned good.
11. How does change in price of a complementary good affect the demand of the given good?
Explain with the help of an example. 4
Ans. Complementary goods are those goods which complete the demand for each other like car
and petrol. When price of Good-Y (car) increases, demand for Good-X (petrol) tends to fall.
Demand curve for petrol will shift to the left. Less petrol is demanded at its existing price.
Fig. 8 illustrates this situation:
Y D
Fig. 8 D1
Initial demand
curve for petrol
PRICE
P K S
Demand curve for
petrol shifts to the left when
price of car increases
D
D1
O X
QUANTITY
SECTION–B
17. What is ‘excess demand’ in macroeconomics? 1
Ans. Excess demand, also known as inflationary gap, occurs when aggregate demand is greater
19. What is ‘managed floating exchange rate’? 1
Ans. Managed floating is a tool employed by the central bank to restore the value of the country’s
currency (in relation to other currencies) within the desired limits, even when exchange
rate is determined by the market forces of demand and supply.
23. Explain the effect of appreciation of domestic currency on exports. 3
Ans. Appreciation of the domestic currency refers to a situation when domestic currency gains
value in relation to a foreign currency (say dollar). Implying that less rupees are required to
buy a dollar. This means that a dollar can buy lesser amount of goods and services in the
domestic economy. Accordingly, exports of the country are likely to fall.
27. Calculate Autonomous Consumption Expenditure from the following data about an
economy which is in equilibrium: 4
National Income = 500
Ans. Given,
Marginal propensity to save (MPS) =0.30
Marginal propensity to consume (MPC) =0.70 (MPC + MPS = 1)
Autonomous Consumption Expenditure (C) = ?
Now, we know that
Y= C + I
500 = C + 0.70 × 500 + 100
500 = C + 350 + 100
C = 500 – 450
C = 50
32. Calculate ‘Net National Product at Market Price’ and ‘Gross National Disposable
(™ in Arab)
(i) Closing stock 10
(ii) Consumption of fixed capital 40
(iv) Exports 50
(v) Opening stock 20

(vii) Imports 60
(viii) Net domestic fixed capital formation 80
(ix) Net current transfers to abroad (–) 10
Ans. Net National Product at Market Price
+ Net domestic fixed capital formation + Change in stocks (Closing stock – Opening
stock) + Exports – Imports – Net factor income to abroad
= ` 600 + ` 100 + ` 80 + ` (10 – 20) + ` 50 – ` 60 – ` 30
= ` 730 Arab
= Net National Product at Market Price + Consumption of fixed capital – Net current
transfer to abroad
= ` 730 + ` 40 – (–) ` 10
= ` 780 Arab
zzz
Solved
CBSE
Examination Paper,
Foreign–2014
General Instructions: Same as CBSE Examination Paper, Delhi–2014
SET–I
SECTION–A
*1. Large number of technical training institutions have been started by the government.
State its economic value in the context of production possibilities frontier. 1
Ans. This would lead to technological innovations in the economy. When the level of
technology improves production possibility frontier is expected to shift to the right.
There would be better utilization of the resources and the economy will move closer to the
production possibility frontier.
2. Define utility. 1
Ans. Want satisfying capacity of a commodity is known as utility.
3. Give the meaning of variable cost. 1
Ans. Variable costs are those costs which change with a change in output of a good. For example:
Costs incurred on raw materials, electricity, etc.
Ans. Production function refers to the functional relationship between (physical) inputs and
(physical) output.
5. What is meant by collusive oligopoly? 1
Ans. Collusive oligopoly is a form of the market in which there are few firms in the market and all
decide to avoid competition through a formal agreement.
6. Why is a production possibilities curve downward sloping? Explain. 3
Ans. The production possibility curve is downward sloping from left to right, because more of
Good-X can be produced only with less of Good-Y in a situation when the given resources
are assumed to be fully and efficiently utilised, using the given technology. This implies that
production of both the goods cannot be increased.
7. When price of a good falls from ™ 15 per unit to ™ 12 per unit, its demand rises by 25 per
cent. Calculate price elasticity of demand. 3
Ans. Given,
P = ` 15
P1 = ` 12; DP = P1 – P = ` 12 – ` 15 = ` (–)3
DP -3
Percentage change in price = ´ 100 = ´ 100 = (–) 20
P 15
Percentage change in quantity demanded = 25
25
Ed = (–)
( -) 20
Ed = 1.25
8. How does change in per unit tax influence the supply of a good by a firm? Explain. 3
Or
How does subsidy influence the supply of a good by a firm. Explain.
When government imposes a tax on the production of the good, marginal and average
costs of the production tend to rise. Other things remaining constant, it causes a cut in
profits. Accordingly, producers will supply less of the good at the existing price, or they will
sell the same quantity only at a higher price. This implies a backward shift in supply curve or
decrease in supply as shown in Fig. 1. S1S1 is the initial supply curve. When government
imposes tax, supply curve will shift backward from S1S1 to S2S2.
Y
Fig. 1
Supply curve S2
after tax S1
Supply curve
PRICE
before tax
K
P T
S2
S1
O X
QUANTITY
Or
When government gives a subsidy on the production of a good, marginal and average costs
of production tend to fall. Accordingly, supply curve shift forward or to the right implying
more supply at the same price or same supply at the lower price. This can be explained with
the help of Fig. 2. In Fig. 2, S1S1 is the initial supply curve. When government gives subsidy,
supply curve will shift forward from S1S1 to S2S2.
Y
Fig. 2
Supply curve S1
before subsidy S2
Supply curve
after subsidy
PRICE
P
T K
S1
S2
O X
QUANTITY
9. Under what market condition does Average Revenue always equal Marginal Revenue?
Explain. 3
Ans. Under perfect competition price is given to a firm, as determined by the industry. Constant
price implies constant AR, and constant AR implies that AR = MR. Accordingly, AR and MR
under perfect competition are shown by a horizontal straight line.
Market price as determined Firm’s accepts market price as given
Fig. 3 by supply and demand forces. no matter how much it produces.
Y Y Thus, AR=MR for all levels of output.
S
AR, MR
PRICE
AR = MR
O X O X
SUPPLY/DEMAND OUTPUT
10. Explain the implication of large number of buyers in a perfectly competitive market. 3
that by varying its demand, an individual buyer cannot affect total market demand for a
11. Assuming that a consumer consumes only two goods, explain the conditions of
consumer’s equilibrium with the help of Utility Analysis. 4
Or
A consumer consumes only two goods X and Y and is in equilibrium. Show that when
price of good X falls, demand for good X rises. Use Utility Analysis.
Ans. Conditions of consumer's equilibrium in case of two commodities, using utility analysis are
as follows:
æ MU X ö
(i) Marginal utility per rupee çç ÷ must be same between both the goods purchased by
÷
è PX ø
the consumer. Thus,
MU X MU Y
=
PX PY
MU X MU Y
(ii) Marginal utility of money remains constant. That is, or should be equal to
PX PY
MUM. Which implies that utility per rupee obtained by the consumer from Good-X or
Good-Y should be equal to marginal utility of money
MU X MU Y
= = MUM
PX PY
declines as more and more of a commodity is consumed.
Or
In case of two commodities, say X and Y, consumer’s equilibrium is attained when:
MU X MU Y
=
PX PY
MU X MU Y
But when price of good X falls, > which shows that rupee worth of satisfaction
PX PY
is more for X than Y. Since X is now relatively less expensive than Y, thus, the consumer will
MU X
start consuming more of X and less of Y. As a consequence, will start falling while
PX
MU Y
will start rising. The consumer will stop buying more of X when
PY
MU X MU Y
=
PX PY
Thus, when price of good X falls, demand for it rises.
12. Distinguish between an inferior good and a normal good. Is a good which is inferior for
one consumer also inferior for all the consumers? Explain. 4
Ans. A normal good is that good the consumption of which increases with increase in income of
the consumer, so that there is a positive relationship between consumer income and
demand for the good. Example: wheat.
An inferior good is that good the consumption of which decreases with increase in income
A good that is inferior for one consumer might not be inferior for all the consumers. This is
because the demand for an inferior good depends upon the income of the consumer and
consumers with high income might not demand inferior good at all.
13. State the different phases of change in total product according to the Law of Variable
Proportions. Use diagram. 4
Ans. Phases of changes in total product according to the law of variable proportion are shown in
Fig. 4:
Fig. 4 Y
T
TOTAL PRODUCT
TP
L S
O X
MARGINAL PRODUCT
Returns Returns
O X
L S – ve
MP
(i) Phase I—Phase of Increasing Returns: It is between O to K on the TP curve. In this stage,
MP tends to rise till OL units of labour are used with the constant application of land.
When MP is rising, TP tends to rise at an increasing rate. This occurs till point K on the TP
curve and point E on the MP curve. This is a situation of increasing returns to a factor.
(ii) Phase II—Phase of Diminishing Returns: It is between K to T on the TP curve.
Beyond OL units of labour, MP tends to decline and TP increases only at diminishing
rate. This occurs between E and S on MP curve and between K and T on TP curve. This
corresponds to a situation of diminishing returns to a factor.
(iii) Phase III—Phase of Negative Returns: It is beyond point T on the TP curve. Beyond
OS units of labour, MP becomes negative. Now, TP starts declining. This corresponds
to a situation of negative returns.
14. State the conditions of consumer’s equilibrium in the Indifference Curve Analysis and
explain the rationale behind these conditions. 6
Or
Explain the three properties of the Indifference Curves.
Ans. Consumer’s equilibrium refers to a situation when a consumer maximises his satisfaction by
(i) Indifference curve and price line are tangent to each other.
or
When slope of IC and slope of price line is equal to each other
Fig. 5 Y
A
GOOD-Y
E
L
IC3
IC2
D IC1
O X
M B
GOOD-X
In Fig. 5, AB is the budget or price line. IC1, IC2 and IC3 are indifference curves. A
the highest indifference curve which is IC2 in this case. Out of A, B, C, D and E
combinations, the consumer will be in equilibrium at combination ‘E’, because at this point
price line (AB) is tangent to the highest indifference curve IC2. No doubt, the consumer can
buy ‘C’ or ‘D’ combinations as well but these will not give him maximum satisfaction being
situated on lower indifference curve IC1. It means consumer’s equilibrium point is the
point of tangency of price line and indifference curve. At equilibrium,
Slope of Indifference Curve = Slope of Budget or Price Line or
P
Or, MRSXY = X
PY
Also, at point E, the IC2 is convex to the origin. Accordingly, equilibrium is stable. If IC2 was
not convex at the point of equilibrium, we shall never have stable equilibrium. In a state of
equilibrium, the consumer is buying OL amount of Good-Y and OM amount of Good-X. It
is here that he is maximising his satisfaction. Any departure from this point would only
mean lesser satisfaction.
Or
The principal properties of indifference curves are as follows:
(i) Indifference Curves are negatively Sloped or they Slope Downward: An indifference
curve slopes downwards from left to right, or that, its slope is negative. Because if a
consumer uses more quantity of one good he will use less quantity of the other, only
then he will have equal satisfaction from their different combinations. This is true in
the context of the assumption that the consumer has monotonic preferences.
ordinarily be convex to the point of origin. Convexity of the curve means that it bows
inward to the origin. This implies that the slope of an indifference curve tends to fall as
the consumer moves downward along the curve. The slope of the indifference curve is
called the marginal rate of substitution because it indicates the rate at which the
consumer is willing to substitute one good for the other. The falling slope of IC, thus,
implies that MRSXY tends to fall as the consumer moves downward along the curve. In
other words, it is because of the diminishing MRSXY that the IC is convex to the origin.
level of satisfaction than the combinations on the lower indifference curve. The
assumption of monotonic preferences of the consumer permits us to conclude that
greater the consumption, higher must be the level of satisfaction.
15. From the following information about a firm, find the firm’s equilibrium output in
terms of marginal cost and marginal revenue. Give reasons. Also calculate profit at this
output. 6
(units) (™) (™)
1 8 10
2 16 18
3 24 23
4 32 31
5 40 41
Ans.
Output Total Revenue Marginal Revenue Total Cost Marginal Cost
(units) (™) (™) (™) (™)
1 8 8 10 10
2 16 8 18 8
3 24 8 23 5
4 32 8 31 8
5 40 8 41 10
This means that in the above scenario, equilibrium will be struck when 4 units of output are
produced and not when 2 units of output are produced.
When 4 units of output are produced, TR = ` 32 and TC = ` 31
Profit = TR – TC
Profit = ` 32 – ` 31 = ` 1
Thus, the producer is earning supernormal profit of ` 1 at the point of equilibrium.
16. What is ‘excess demand’ for a good in a market? Explain its chain of effect on the market
for that good. Use diagram. 6
Ans. When market demand exceeds market supply of a commodity at a given price, it is known
as excess demand.
Now, equilibrium price refers to the price at which market demand is equal to market
supply (i.e., there is no ‘excess demand’ or ‘excess supply’). So, the price with ‘excess
demand’ is not an equilibrium price.
The chain of effects of excess demand on the market for the good is discussed with
reference to Fig. 6.
Y
Fig. 6 D S
PRICE
P E
A
P1 B
Excess Demand
S D
O X
Q1 Q Q2
QUANTITY
At OP1 level of price, AB = Q1Q2 is the excess demand. With the market demand greater
than market supply, the pressure exists to move the price upwards. The quantity supplied
tends to increase in correspondence with rising price (because producers supply more at
higher price) and movement along the supply curve SS, from point A to point E. At higher
price OP, quantity supplied increases from OQ1 to OQ. Consumers reacts to rising price by
reducing consumption, hence, movement along demand curve DD, from point B to point
E. Thus, quantity demanded falls from OQ2 to OQ. The equilibrium is struck at point E,
with OP and OQ as the equilibrium price and equilibrium quantity respectively. At OP
price, there is no ‘excess demand’.
SECTION–B
17. What is a central bank? 1
Ans. A central bank is an apex institution of a country that controls and regulates the monetary
and financial system of the country.
18. Give meaning of ‘deficient demand’ in macroeconomics. 1
Ans. Deficient demand, also known as deflationary gap, occurs when aggregate demand is less
19. Define aggregate supply. 1
Ans. Aggregate supply refers to the flow of goods and services in an economy during one year.
This is ex-ante output during the year, or the output which the producers intend to
produce during the year.
20. What is ‘primary deficit’? 1
Ans. Primary deficit is equal to fiscal deficit reduced by interest payments. Primary deficit indicates
borrowing requirement of the government owing to fiscal deficit net of interest payment
21. What is excess of exports of goods over the imports of goods called? 1
Ans. The excess of export of goods over the import of goods is called surplus balance of trade.
22. What are non-monetary exchanges? Give an example. Explain their impact on use of
gross domestic product as an idex of welfare of the people. 3
Ans. In economies like of India, barter system of exchange is not totally non-existent.
Non-monetary transactions are quite evident in rural areas where payments for
farm-labour are often made in kind rather than cash. But such transactions are not
recorded, because they are outside the monetary system of exchange. To this extent GDP
remains underestimated. Thus, non-monetary exchanges make gross domestic product an
inappropriate index of welfare.
23. Explain the ‘Standard of deferred payment’ function of money. 3
Or
Explain the ‘store of value’ function of money.
Ans. Deferred payments refer to those payments which are made in future. Money is accepted as
a standard of deferred payments because,
(i) its price remains stable,
(ii) it has general acceptability,
(iii) it is more durable compared to other commodities.
Or
Store of value means store of wealth in terms of money.
mouse.
24. Giving reason, state whether the following is a revenue expenditure or a capital
expenditure in a government budget: 3
(i) Expenditure on scholarship
(ii) Expenditure on building a bridge
Ans. (i) Expenditure on scholarships is a revenue expenditure because it neither reduces
liability nor adds to the assets of the government.
(ii) Expenditure on building a bridge is a capital expenditure because it adds to the assets
of the government.
25. How is balance of payment ‘deficit’ measured? Explain 3
Ans. The sum total of current account balance and capital account balance is some negative
number it indicates BoP deficit, pointing to the net outward flow of foreign exchange and
causing a decrease in official reserves.
Autonomous items refer to such BoP transactions which are undertaken for considerations
of profit. Accommodating items, on the other hand, are free from the considerations of
profit. Only autonomous items are considered for the estimation of BoP deficit.
26. What is depreciation of Rupee? What is its likely impact on Indian imports and how? 3
Ans. Depreciation of Rupee is the fall in the value of Indian currency in relation to foreign
currency in a situation when exchange rate is determined by the forces of supply and
demand in the international money market.
Depreciation of the Indian currency, i.e., rupee, implies that more rupees are now required
to buy a unit of foreign currency or that a unit foreign currency can now buy more goods
worth in the domestic economy. This will make foreign goods expensive to the buyers in
India and Indian goods cheaper to the buyers in foreign countries. As a result, imports are
likely to fall.
27. Explain the Concept of money supply and its components. 4
Or
Explain the ‘Currency authority’ function of Central bank.
point of time. The components of money supply are:
(i) Currency held by the public,
(ii) Demand deposits of the people with the commercial banks, and
(iii) Other deposits (demand deposits with RBI of domestic and foreign institutions other
than of the government of the country and commercial banks with the country).
Or
The central bank is the sole note-issuing authority in the country. Often, the central bank
divides its functions into two departments-banking department and issue department. It is
the issue department that is responsible for note-issuing. It issues currency to cope with the
demand for it, which depends upon the level of economic activity in the economy.
28. Calculate ‘Autonomous Consumption Expenditure’ from the following data about an
economy which is in equilibrium. 4
Marginal Propensity to save = 0.10
Ans. Given,
Marginal Propensity to save (MPS) =0.10
Now, we know that
Y= C + I
900 = C + 0.90 × 900 + 80

900 = C + 810 + 80
C = 900 – 890
C = 10
*29. Government has started spending more on providing free services like education and
health to the poor. Explain the economic value it reflects? 4
Ans. When the government spends more on providing free services like education and health to
the poor, health and education levels are expected to rise. This leads to a rise in human
capital formation. Consequently, efficiency and productivity levels are expected to rise.
Improvement in physical health has a direct bearing on efficiency of the workers. On the
other hand, improvement in education standards leads to skill formation. It facilitates
research and innovations. Level of technology tends to scale up. Consequently, PPC tends
to shift to the right. Higher level of output is achieved with the same level of inputs.
30. Calculate ‘Gross National Product at Market Price’ and ‘Net National Disposable
(™ in Arab)
(i) Net factor income to abroad (–) 10
(ii) Net current transfers to abroad 20
(iii) Wages and Salaries 400
(iv) Corporation Tax 50
(v) Profit after corporation tax 150
(vi) Social security contributions by employers 50
(vii) Rent 100
(viii) Interest 70
(ix) Mixed income of self-employed 300
(xi) Consumption of fixed capital 80
= Wages and salaries + Social security contribution by employers + Profits after
corporation tax + Corporation tax + Rent + Interest + Mixed Income of self employed
+ consumption of fixed capital + Net indirect taxes – Net factor income to abroad
= ` 400 + ` 50 + ` 150 + ` 50 + ` 100 + ` 70 + ` 300 + ` 80 + ` 140 – (–) ` 10
= ` 1350 Arab
= Gross National Product at Market Price – Consumption of fixed capital – Net current
transfers to abroad
= ` 1350 – ` 80 – (–) ` 20
= ` 1290 Arab
31. How should the following be treated while estimating national income? You must give
reason in support of your answer. 6
(i) Bonus paid to employees
(ii) Addition to stocks during a year
(iii) Purchase of taxi by a taxi driver.
Ans. (i) Bonus paid to employees will be included in the estimation of national income since it
is a component of compensation of employees.
(ii) Addition of stocks during a year will be included in the estimation of national income
because change in stock is a part of investment expenditure.
(iii) Purchase of taxi by a taxi driver will be included in the estimation of national income
because it is an investment expenditure. A taxi will be used by the taxi driver for several
years to earn his living.
32. Explain national income determination through the two alternative approaches. Use
diagram. 6
Or
Outline the steps in deriving saving curve from the given consumption curve. Use diagram.
Ans. In an economy, equilibrium level of income and employment is determined when AD
(aggregate demand) is equal to AS (aggregate supply).
According to Keynes, AS may be assumed to be perfectly elastic in an economy where full
employment (of resources) is yet to be achieved. Accordingly, AD becomes the principal
determinant of equilibrium level of income.
In Fig. 7, AD represents aggregate demand curve and 45° line is the line of reference where
AS = AD. Equilibrium level of income Y is determined at point E, where AD = AS. Prior to
point E, aggregate demand exceeds aggregate supply leading to an increase in level of
income upto point E. Beyond point E, aggregate supply exceeds aggregate demand
leading to a fall in income back towards point E.
Fig. 7 Y
AD
+I
=C
=
AS
AD
E
AD = AS
Point of
Equilibrium
45°
O X
Y1 Y Y2
INCOME/OUTPUT
Equilibrium level of income can also be determined at a point where ex-ante or planned
saving is equal to planned investment. This is because, in equilibrium
AS = AD
Or, C+S =C+I
Or, S= I
Fig. 8 illustrates the situation of equilibrium when S = I.
Y
Fig. 8
SAVING/INVESTMENT
Saving
Investment
S
S=I
I E
I
O X
Y
S
INCOME/OUTPUT
Equilibrium is struck at point E where S and I lines intersect each other. OY is the
equilibrium level of income.
Or
Fig. 9 shows the derivation of saving curve from a given consumption curve.
Fig. 9 Y Y
bY C
C+
C=
CONSUMPTION/SAVING
Break-even
point Q
)Y
–b S
(1
A – C+
S=
45°
O X
P INCOME
A'
Y'

(i) We take OA' =OA. Because OA = consumption when Y = 0, so that, OA' (= OA) is
S = 0.
(iii) By joining points A’ and P and stretching it to form a straight line, we get S curve.
Note: Since MPC + MPS = 1, MPS = 1 – MPC. So that while in C-function, MPC is indicated
by b, in S-function, it is indicated by 1 – b.
SET–II
SECTION–A
3. Define supply. 1
Ans. Supply refers to various quantities of a commodity that a seller is willing to sell
corresponding to different possible prices at a given point of time.
5. When is demand called perfectly inelastic? 1
Ans. Perfectly inelastic demand refers to the situation when the quantity demanded remains
unchanged, irrespective of any change in own price of the commodity.
8. Price elasticity of demand of a good is (–) 1. Calculate the percentage change in price that
will raise the demand from 20 units to 30 units. 3
Q =20 units
Q1 =30 units; DQ = Q1 – Q = 30 – 20 = 10 units
DQ 10
Percentage change in quantity demanded = ´ 100 = ´ 100 = 50
Q 20
Percentage change in price = ?
50
–1 = (–)
Thus, percentage change in price = 50%.
13. Distinguish between demand by a individual consumer and market demand of a good.
Also state the factors leading to fall in demand by an individual consumer. 4
Ans. Individual demand shows demand for a commodity by an individual buyer in the market at
different prices, whereas market demand shows demand for a commodity by all the buyers
in the market at different prices. Market demand is the horizontal summation of individual
demands as under:
Market Demand Schedule
Price of A’s Demand B’s Demand Market Demand
Ice cream (`) (1) (2) (3) (= 1+2)
1 4 5 4+5=9 Assumption:
2 3 4 3+4=7 There are only
2 buyers of a
3 2 3 2+3=5 commodity in the
4 1 2 1+2=3 market.
Above schedule shows the individual A’s and B’s demand and market demand at different
prices.
Column (3) shows the market demand which is the summation of individual demand in
columns (1) and (2).
Fall in demand is a situation when demand curve shifts to the left. Or, it is a situation when
the consumer buys less of a commodity at its existing price. Following are the principal
factors that lead to a fall in consumer’s demand:
(i) decrease in income of the consumer,
(ii) decrease in price of substitute good or increase in price of complementary good,
(iii) change in consumer’s tastes and preferences against the commodity,
(iv) expectation of a fall in price of the commodity in the near future.
14. What is meant by ‘excess supply’ of a good in a market? Explain its chain of effects on the
market for that good. Use diagram. 6
Ans. Excess supply means market supply of a commodity is more than market demand for a
commodity at the given price.
Now, we know that equilibrium price is struck when market demand is equal to market
supply (i.e., there is no ‘excess supply’). So, the price with ‘excess supply’ is not an
equilibrium price.
The chain of effects of excess supply on the market for the good is discussed with reference
to Fig. 10.
Fig. 10 Y
D S
Excess
A supply B
P1
PRICE
P E
S
D
O X
Q1 Q Q2
QUANTITY
Excess supply equal to AB = Q1Q2 as shown in Fig. 10, implies market supply is greater
than market demand. This puts pressure on price (OP1) to decline. The producers reduce
the quantity supplied at the lower price (OP) from OQ2 to OQ. With declining price, the
consumers react by increasing the quantity demanded from OQ1 (at OP1 price) to OQ (at
OP price). Equilibrium is struck at point E.
Thus, OP and OQ are the equilibrium price and equilibrium quantity respectively, with no
‘excess supply’.
SECTION–B
18. What is devaluation? 1
Ans. Devaluation is the fall in the value of domestic currency in relation to foreign currency as
planned by the government in a situation when exchange rate is not determined by the
forces of supply and demand but is fixed by the government of different countries.
20. What is meant by ‘excess demand’ in macroeconomics? 1
Ans. Excess demand, also known as Inflationary gap, occurs when aggregate demand is greater
24. What is ‘appreciation’ of domestic currency? What is its likely effect on exports and
how? 3
Ans. Appreciation of the domestic currency refers to a situation when domestic currency (rupee)
appreciates (gains value) in relation to a foreign currency (say US dollar). This implies that
less rupees are required to buy a dollar which means that a dollar can now buy lesser amount
of goods in the domestic market. Accordingly, exports of the country are likely to fall.
29. Calculate ‘Marginal Propensity to Consume’ from the following data about an economy
Ans. Given,
Now, we know that
Y= C + I
800 = 100 + b × 800 + 100
800 = 200+ b × 800
b = 0.75
31. Calculate ‘National Income’ and ‘Gross National Disposable Income’ from the following:
6
(™ in Arab)
(i) Net Imports 60
(ii) Net current transfers to abroad (–) 10
(iii) Net domestic fixed capital formation 300
(vii) Net change in stocks 30
(viii) Net factor income to abroad 20

+ Net domestic fixed capital formation + Net change in stocks – Net imports – Net indirect
taxes – Net factor income to abroad
= ` 700 + ` 200 + ` 300 + ` 30 – ` 60 – ` 100 – (–) ` 20
= ` 1090 Arab
= National income + Consumption of fixed capital + Net indirect taxes – Net current
transfers to abroad
= ` 1090 + ` 70 + ` 100 – ` (–) 10
= ` 1270 Arab
SET–III
SECTION–A
1. Define fixed cost. 1
Ans. Fixed costs are those costs which do not change with the change in output. They remain
constant at all levels of output. For Example: Salary of the permanent staff and rent of the
factory building, etc.
5. What is law of diminishing marginal utility? 1
consumed at a point of time.
10. Price elasticity of demand of two goods A and B is (–) 3 and (–) 4 respectively. Which of the
two goods has higher elasticity and why? 3
Ans. Given,
Price elasticity of demand (Ed) of good A = (–) 3
Price elasticity of demand (Ed) of good B = (–) 4
Price elasticity of good B is higher as compared to good A. This is because the negative sign
just indicates the inverse relationship between price and demand. It does not relate to the
value of elasticity of demand. Accordingly, in terms of elasticity of demand (–) 4 is to be
treated as higher than (–) 3.
11. Explain the change in demand for a good on account of change in prices of related
goods. 4
Ans. Related goods are of two types:
(i) Substitute goods, and (ii) Complementary goods.
(i) Substitute Goods: When price of the substitute goods increases, demand curve for
Good-X shifts to the right, implying quantity demanded increases from PK to PS even
when price of Good-X continues to be OP and vice versa.
(ii) Complementary Goods: When price of the complementary goods increases, demand
curve for Good-X shifts to the left, implying quantity demanded decreases from PK to
PL even when price of Good-X continues to be OP and vice versa.
Fig. 11 illustrates the effect of change in price of the related goods.
Y
Fig. 11 D D1
D2
PX
L K S
P
Demand curve Demand curve shifts to the right
shifts to the left (from DD to D1D1) when price of the
(from DD to D2D2) substitute good increases
when price of the
complementary D1
D
good increases D2
O X
QX
15. Market for a good is in equilibrium. Supply of the good ‘decreases’. Explain the chain of
effects of this change on the market for the good. Use diagram. 3
Ans. Effect of a decrease in supply of a commodity on its equilibrium price and equilibrium
Y S2
Fig. 12 D S1
K
P2
PRICE
F E
P1
S2
S1 D
O X
Q2 Q1
QUANTITY
In Fig. 12, S1S1 is the initial supply curve crossing demand curve DD at point E, which is the
point of initial equilibrium. Now, owing to a decrease in supply, supply curve shifts to the
left, from S1S1 to S2S2. As an immediate impact of decrease in supply, there is excess
demand, equal to EF (at the existing price). Because of this excess demand (and sluggish
supply), price of the commodity tends to be higher than the equilibrium price. Owing to
rising price, quantity demanded tends to contract. Contraction of demand occurs from
point E towards point K. But due to rising price, quantity supplied tends to extend. The
extension of supply occurs from point F towards point K. The process of extension of
supply and contraction of demand (triggered by the rising price) continues till the excess
demand is fully tackled. K is the point of new equilibrium where the market clears itself
once again. Corresponding to the new equilibrium, quantity demanded is equal to the
quantity supplied, i.e., OQ2. And, equilibrium price is OP2.
Thus, the net effect of decrease in supply is: (a) equilibrium price increases from OP1 to
OP2, and (b) equilibrium quantity decreases from OQ1 to OQ2.
SECTION–B
Ans. Deflationary gap, also known as deficient demand, occurs when aggregate demand is less
19. What is meant by flexible exchange rate? 1
23. How is depreciation of Indian Rupee likely to affect Indian exports? Explain. 3
Ans. Depreciation of the domestic currency refers to a situation when domestic currency (rupee)
looses value in relation to a foreign currency (say US dollar). This implies that more rupees
are required to buy a dollar which means that a dollar can now buy more goods and services
in the domestic economy. Accordingly, exports are expected to rise.
27. Calculate ‘Investment Expenditure’ from the following data about an economy which is
in equilibrium: 4
National Income = 700
Ans. Given,
Marginal propensity to consume (MPC) =0.80
Now, we know that
Y= C + I
700 = 70 + 0.80 × 700 + I
700 = 630 + I
I = 70
32. Calculate ‘Net Domestic Product at Market Price’ and ‘Private Income’ from the
following: 6
(™ in Arab)
(i) Income form domestic product accruing to government 120
(ii) Wages and Salaries 400
(iii) National debt Interest 60
(iv) Profit 200
(v) Net factor income to abroad (–) 20
(vi) Rent 100
(vii) Current transfers from government 30
(viii) Interest 150
(ix) Social security contribution by employers 50

(xi) Net current transfer to abroad (–) 10
Ans. Net Domestic Product at Market Price (NDPMP)
= Wages and salaries + Social security contribution by employers + Rent + Profit +
Interest + Net indirect taxes
= ` 400 + ` 50 + ` 100 + ` 200 + ` 150 + ` 70
= ` 970 Arab
Factor Income from Net Domestic Product accruing to Private Sector
= NDPMP – Net indirect tax – Income from domestic product accruing to government
= ` 970 – ` 70 – ` 120
= ` 780 Arab
Private Income
= Factor income from net domestic product accruing to private sector – Net Factor income
to abroad + National debt interest + Current transfers by government – Net current
transfers to abroad
= ` 780 – (–) ` 20 + ` 60 + ` 30 – (–) ` 10
= ` 900 Arab
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ECONOMICS

Supply curve shifts backward in case of

10. State three features of monopoly. 3

Cost, Revenue and Profit

13. Complete the following table: 4

Diagram shows that:

New output level when t times old

24. State components of the current account of balance of payments account. 3

9. State three features of monopolistic competition. 3

21. Give meaning of full employment. 1

Ans. GNPMP = Compensation of employees + Rent + Interest + Royalty + Profit

6. Why does an economic problem arise? Explain. 3

Two sources of supply of foreign exchange are as follows:

economy is in a situation of deficient demand. This can be eliminated by increasing

22. Complete the following table: 3

15. Explain the causes of a leftward shift in demand curve of a commodity. 6

Consumer strikes his equilibrium when:

(ii) Products The product has no close Differentiated products but

P K S Demand curve for

P K S Demand curve for

(Hint: C = C+ cY; where, C = 90 at Y = 0 and c = 0.6)

Ans. (a) Income Method:

9. Complete the following table: 3

Producer is in equilibrium at 6th unit of output.

29. How is foreign exchange rate determined in the market? 4

(Hint: C = C + cY; where C = 30 at Y = 0 and c = 0.75.)

25. Explain any two functions of a Central Bank. 3

6. Explain the problem of ‘ how to produce’. 3

15. Explain three causes of a shift in demand curve of a commodity. 6

Price remaining constant at Rs 5, quantity demanded decreases from 100 to 75 units.

6. Distinguish between ‘increase in demand’ and ‘increase in quantity demanded’ of a

Initially, the consumer

When Output = 3 units, AFC = Rs 20

Fig. 7 explains the behaviour of TP and MP.

Diagram shows that:

26. Distinguish between devaluation and depreciation of domestic currency. 3

(x) Net current transfers from rest of the world (–) 10

= Rs 1,130 crore + Rs 50 crore + Rs 70 crore – Rs 20 crore – Rs 40 crore – (–)Rs 10 crore

Q = 160, Q1 = 200, DQ = Q1 – Q = 200 – 160 = 40

(iv) Rent 300

Net Factor Income from Abroad

25. Distinguish between autonomous and accommodating transactions of balance of

Average Total Cost (Rs) 80 48 40

AFC = Rs 30, when output = 2

Price per unit (Rs) Output (Units) Total Cost (Rs)

The producer is in equilibrium at 3rd unit of output according to MR and MC approach.

Table 1. Law of Variable Proportions

Value of Output = Rs 500 + Rs 700 + Rs 900 + Rs 1,000 = Rs 3,100

Total Cost (Rs) 80 96 120

Average Fixed Cost (Rs) 60 30 20

Net Factor Income from Abroad

Increase in Demand Increase in Quantity Demanded

When P1 = Rs 5, total revenue (P1 ´ Q1 ) = Rs 750

Average Variable Cost (Rs) 20 16 18

10. Explain how firms are interdependent in an oligopoly market. 3

Output (Units) Marginal Revenue (Rs) Total Cost (Rs)

Producer is in equilibrium at 3rd unit of output.

24 Explain the two components of the government budget. 3

Ans. Gross Domestic Product at Factor Cost

8. From the following schedule, calculate the price elasticity of supply: 3

When, P = 5, total revenue (P1 ´ Q1 ) = 1,200

Average Variable Cost (Rs) 40 32 36

27. State the functions of money. Explain any one of them. 4

8. From the following schedule, calculate the price elasticity of supply: 3