CBSE Sample Papers for Class 12 Economics Outside Delhi -2014

Time allowed : 3 hours Maximum marks 100

GENERAL INSTRUCTIONS

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

SET I

SECTION A
Question.1 The government has started promoting foreign capital. What is its economic value in – the context of Production Possibilities Frontier?
Answer. Promotion of foreign capital by the government will lead to an increase in resources as fresh investment into the country will increase leading to a rightward shift in PPF (Production Possibility Frontier).

Question.2 Define indifference curve.
Answer. An indifference curve is a curve which shows all those combinations (bundles) of two goods that give same level of (equal) satisfaction to the consumer.

Question.3 Define marginal product.
Answer. Marginal product refers to addition to the total product (output) when an additional unit of a variable factor (e.g., labour) is employed.

Question.4 What is market supply of a product?
Answer. Market supply of a product is the total quantity of a commodity supplied by all the producers at a given price, during a given period.

Question.5 What is imperfect oligopoly?
Answer. If in an oligopoly market, the firms produce differentiated products, it is called imperfect oligopoly e.g., Automobile industry.

Question.6 Why is Production Possibilities Curve concave? Explain.
Answer. The PP curve is concave because marginal rate of transformation, which is also its slope, increases continuously as more and more of one good is produced by reducing the quantity of the other good. It means that to produce more and more units of one good, each time the quantity of the other good is sacrificed at an increasing rate. MRT increases because no resource is equally efficient in production of all goods.

Question.7 When the price of a good falls from 710 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’?
Answer.

According to expenditure approach:
When price of a good falls and the total expenditure on the good also falls, the demand for that good is said to be inelastic, i.e., E_p<1. Here price and total expenditure both move in same direction, i.e., total expenditure is falling with a decrease in the price of the commodity, therefore elasticity of demand is less than unity.

Question.8 Explain how technological progress is a determinant of supply of a good by a firm.
Answer. Technological advancement is a continuous process on account of research and innovation constantly taking place in a society. Generally, advancement in technology raises productivity and thus reduces per unit cost. This makes production of the good using advanced technology more profitable. This induces the producer to produce more.
Or
Explain how input prices are a determinant of supply of a good by a firm.
Answer. Change in the price of raw material and remuneration of factors (rent, wages, interest, etc.)
influence the cost of production of a commodity and thereby the supply is affected.
For example, When prices of inputs fall then cost also falls leading to a rise in profit and increase in supply, shifting the supply curve to the right.

Question.9 Why is Average Revenue always equal to price ?
Answer. Average Revenue is the same thing as price. TR (Total Revenue) equals price multiplied by number of units sold and AR (Average Revenue) equals TR divided by number of units sold. Thus, price equals AR as proved in the following equation:

Question.10 Why is the number of firms small in oligopoly? Explain.
Answer. The main cause of a limited number of firms in oligopoly is the barriers in the form of patent rights, large capital, critical raw materials, etc.
For example, A new firm may find it extremely difficult to make a large capital investment or the patent holder may give licence only to a few firms to produce the product.

Question.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.
Answer. The basic condition of consumer’s equilibrium in the case of two commodities according to utility analysis is:

As such, if the price of good X rises, the per rupee marginal utility of good Y will become more than that of good X. This will induce the consumer to buy more of good Y and less of good X by transferring expenditure from good X to good Y. This shows that when price of a good rises, its demand falls (the consumer will go on buying more of good Y till he reaches equilibrium again).
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.
Answer. Consumer’s equilibrium, according to utility analysis is established at a point where marginal utility in money terms is equal to the price of the commodity. Marginal utility goes on declining but price remains the same. Therefore, in such a situation a consumer shall go on consuming a commodity till he reaches a point where MU is equal to price. Consumer’s equilibrium in purchase of a single good is attained when:

Question.12 Give the meaning of “inferior” good and explain the same with the help of an example.
Answer. A good whose demand by a consumer falls with the rise in income of that consumer is called an inferior good, e.g., if a consumer reduces the consumption of toned milk when his income rises then toned milk is an inferior good for the consumer.
It is the income level of the individual consumer that makes a good normal or inferior for
him.

Question.13 Giving reasons, explain the ‘Law of Variable Proportions’.
Answer. The law of Variable Proportions states that “as we increase the quantity of only one input, keeping other inputs fixed, the total product increases at an increasing rate in the beginning, then increases at a decreasing rate after a level of output and ultimately falls.”
According to the law, the change in TP and MP are classified into three phases:
Phase I. TP increases at increasing rate and MP also increases. In the beginning the quantity of the variable input is so small that fixed inputs cannot be effectively utilised. As the quantity of variable input, e.g., labour increases, more effective utilisation of fixed inputs takes placejraising the marginal product of the variable input.
Phase II. TP increases at decreasing rate and MP decreases but remains positive. With increase in the quantity of variable input, a pressure is now being felt on the fixed inputs. The amount of fixed input looks smaller than actually required to engage the increasing variable input. This reduces MP of the variable factor, which however remains positive. Phase III. TP falls and MP becomes negative. This happens because the quantity of the variable input becomes too big in relation to the quantity of fixed inputs reducing the efficiency of the variable input.

Question.14 Explain why is an indifference curve (a) downward sloping and (b) convex.
Answer. An indifference curve is a curve which shows all the combinations of two goods that give the same level of satisfaction to the consumers.
(a) An indifference curve is downward sloping to the right. It means that if the quantity consumed of one good is decreased then the quantity consumed of the other good has
to be increased to compensate the consumer so that his level of satisfaction remains unchanged.
(b) Indifference curves are convex to the origin because of decreasing marginal utility. This is due to the fact that”as the consumer has more and more of good X, its marginal utility to him declines and that of the other commodity, i.e., good Y goes up. He is then willing to give up less and less of good Y for an increment of good X. So, due to law of diminishing marginal utility, MRS is decreasing making the indifference curve convex to the origin.
Or
Explain the concept of ‘Marginal Rate of Substitution’ with the help of a numerical example. Also explain its behaviour along an indifference curve.
Answer. The slope of an indifference curve is measured with the help of marginal rate of substitution, i.e., MRS. It is the rate at which die consumer is willing to sacrifice one good (Y) to obtain one more unit of the other good (X):
MSR = ΔY/ΔX
This can be explained with the help of a schedule and a diagram.
The indifference schedule of a consumer.

Question.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.

Solution.

Reason. At the 3rd and the 4th units of output, revenue and total cost, profit is maximum which is equal to 1 in both the cases. But the producer will be in equilibrium at the 4th unit only because it is only at this level of output that both the equilibrium conditions are being satisfied, i.e.,
(i) MC = MR= Rs 6
(ii)MC > MR (8 > 6) after the MC = MR output level.

Question.16 Market of a commodity is change till the market again reaches equilibrium. Use diagram.
Answer. See Q. 14, 2014 (II Delhi).

SECTION B
Question.17 What are time deposits?
Answer. Time deposits are the deposits in a bank which cannot be withdrawn before the expiry of the stipulated time for which deposits have been made. Fixed deposits are time deposits.

Question.18 Define inflationary gap.
Answer. Inflationary gap refers to the gap by which actual aggregate demand exceeds the aggregate supply required to establish full employment equilibrium.

Question.19 What is full employment?
Answer. Full employment refers to a situation in which all those people, who are willing and able to work at the existing wage rate, get work without any difficulty.

Question.20 Define fiscal deficit.
Answer. Fiscal deficit refers to the excess of total expenditure over the total receipts (excluding . borrowings) during the given fiscal year.
Fiscal Deficit = Total Budget Expenditure – Revenue Receipts + Capital Receipts excluding borrowings

Question.21 Define foreign exchange rate.
Answer. Foreign exchange rate refers to the rate at which One currency is exchanged for another currency.

Question.22 What are externalities? Give an example of a positive externality and its impact on welfare of the people.
Answer. Externalities refer to the benefits of harms of an activity caused by a firm or an individual for which they are not paid or penalised. Activities resulting in benefits to others are called positive externalities.
Example, Construction of a flyover or a highway reduces transport cost and journey time of its users. Expenditure on construction is included in GDP but not the positive externalities which increase welfare. This implies that the welfare is much more than indicated by GDP.

Question.23 Explain the significance of the ‘Unit of Account* function of money.
Answer. The unit of account function of money is also called the measure of value function. Money as a unit of account means a standard unit for quoting prices. It makes money a powerful medium of comparing prices of goods and services. By reducing the value of all the goods and services to a single unit, we have a common denominator in terms of money and then it becomes very easy to find out the exchange ratios between them.
Or
Explain the significance of the ‘Standard of Deferred Payment’ function of money.
Answer. Money as a standard of deferred payment means standard of payment contracted to be made at some future date. This is possible because value of money remains more or less
Constant and has the merit of general acceptability. This function of money has facilitated borrowing and lending activities. It has also led to the creation of financial institutions. Which are the lifeline of modem business.

Question.24 Is the following a revenue receipt or a capital receipt in the context of government budget and why?
(i) Tax receipts (ii) Disinvestment
Answer.

Tax receipts. These are revenue receipts as they neither create any liability nor lead to any reduction in the value of assets.
Disinvestment. This is a capital receipt as it leads to reduction in assets.

Question.25 Distinguish between ‘autonomous’ and ‘accommodating’ Balance of Payments transactions.
Answer. See Q. 29, 2013 (Comptt.I Delhi).

Question.26 Foreign exchange rate in India is on the rise recently. What impact is it likely to have on exports and how?
Answer. A rise in foreign exchange rate makes the domestic goods cheaper to foreigners. As a result foreign demand for domestic goods increases leading to increase in exports. Example, if price of 1 US dollar rises from Rs 50 to Rs 55, then exports to USA will increase as Indian goods will become relatively cheaper. This will also raise supply of foreign exchange.

Question.27. Explain ‘Banker to the Government’ function of the central bank.
Answer. As banker to the government (both Central as well as State Governments), central bank provides all those services and facilities to the Government which public gets from commercial banks. The central bank accepts Government’s deposits and undertakes inter¬bank transfers. It also gives loans to the Government.
As an agent, it manages public debt and undertakes payment of interest on this debt.
As an advisor, it gives advice to the Government regarding money market, capital market and on economic policy matters.
Or
Explain ‘Bankers’ Bank’ function of the central bank.
Answer. Being the apex bank, the central bank acts as the banker to other banks in three capacities.

It is the custodian of their cash reserves. Banks of the country are required to keep a certain percentage of their deposits with the central bank (known as Cash Reserve Ratio). In this way, central bank acts as a custodian of cash reserves of commercial banks.
As lender of the last resort, the central bank extends loans to commercial banks when all other sources of raising funds are practically closed.
It acts as a bank of central clearance, settlements and transfers. As all commercial banks have their accounts with the central bank, it can easily settle claims of various commercial banks against each other by making debit and credit entries in their accounts. As a supervisor, the central bank regulates and controls the commercial banks by taking care of their licensing, branch expansion, etc.

Question.28 Calculate Marginal Propensity to Consume from the following data about an economy which is in equilibrium.
National income = 2,000
Autonomous consumption expenditure = 200
Investment expenditure = 100
Solution.

*Question.29. Tax rates on higher income group have been increased. Which economic value does it reflect? Explain.
Answer. Economic inequality is an inherent part of every economic system. Government aims to influence distribution of income by imposing taxes on the rich and spending more on the welfare of the poor. Increase in tax rates will reduce income of the rich. The amount so collected will be spent -for the welfare of poor and will raise their standard of living, thereby reducing inequalities in the distribution of income.

Question.30 Calculate ‘Net National Product at factor cost’ and ‘Gross National Disposable Income’ from the following:

Answer.

Question.31 How should the following be treated in estimating national income of a country? You must give reason for you answer.

Taking care of aged parents
Payment of corporate tax
Expenditure on providing police services by the government.

Answer.

Taking care of aged parents. It is a non-economic activity as love and affection cannot be measured in terms of money and hence should not be included while estimating national income.
Payment of corporate tax. It is a part of profit which is already included in national income. So it will not be included in national income separately.
national income as it is a part of government final consumption expenditure.

Question.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.
Answer. According to the saving and Investment approach, the national income in an economy is in equilibrium when planned savings are equal to planned investment. Savings are the excess of income over consumption expenditure whereas investment refers to the expenditure incurred on creation of new capital assets.
We can understand this with the help of a schedule and -diagram:

As per the diagram, Investment curve (I) being autonomous in nature, is parallel to the X-axis. The Saving curve (S) slopes upwards showing a positive relationship between savings and income. The income is in equilibrium at point E where ex-ante saving is equal to ex-ante investment.
If there is any deviation from the equilibrium level of income, then a process of readjustments will start which will bring the economy back to the equilibrium level.

When saving is more than Investment. If planned saving is more than planned investment, i.e., after point E (in the diagram), it means that households are not consuming as much as the firms expect them to. Hence, inventory rises above the desired level. As a result, firms would plan to reduce production till saving and investment become equal again.
When saving is less than Investment. This means that households are consuming more and saving less than what the firms expect them to. As a result, inventory falls below the desired level. Therefore, the firms increase production till saving again becomes equal to investment.

Or
Outline the steps required to be taken in deriving the Consumption Curve from the given Saving Curve. Use diagram.

Answer. Consumption and saving curves are complementary curves. This means that if one of the functions is known then the other can be easily obtained. Consumption function refers to the functional relationship between consumption and national income.
As shown in the diagram, a straight line saving curve is plotted showing saving function at different levels of income.

First we draw a 45° income line from the origin.
At zero level of income, autonomous consumption expenditure will be shown equal to OC (same as dissaving equal to OS). This is the starting point C of the Consumption curve.
At income level OR saving is zero implying that consumption expenditure must be equal to income? Therefore, by drawing a perpendicular from point R which intersects the 45° line, we obtain point B.
(w) By joining points C and B and extending it further, we derive the Consumption curve. Note: The following question is for the Blind Candidates only in lieu of Q. No. 32.

Define Investment. Explain national income equilibrium through saving and Investment function. Also explain the changes that take place in an economy when the economy is not in equilibrium.
Answer. Please read the above answer to Q. 32.
Or
What is Consumption Function? How can it be derived from the Saving Function? Explain.
Answer. Please read the above answer to Q. 32(Or).

SET II

Note: Except for the following questions, all the remaining questions have been asked in Set-1.
SECTION A
Question.3 Give the meaning of ‘inelastic demand’.
Answer. When the percentage change in demand is less than the percentage change in price demand is said to be less elastic or inelastic.

Question.5 Define marginal revenue.
Answer. Marginal revenue is defined as addition to the total revenue from producing one more unit of output.

Question.8 When the price of a good rises from Rs10 to Rs 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’?
Solution.

According to expenditure method, if price and expenditure are inversely related, demanc is considered elastic. Here price is increasing and total expenditure is decreasing. Therefore, E_pis greater than one, i.e., E_p>1.

Question.13 How does change in price of a substitute good affect the demand of the given good?
Explain with the help of an example.
Answer. Two goods are said to be substitutes if one can be used in place of the other. There is a positive relation between the price of a substitute and the demand for the given good. Example, In case of tea and coffee, if price of coffee falls then the demand for tea is also likely to fall as it has now become relatively expensive in comparison to coffee. As such, with the fall in price of a substitute (coffee) the demand for the given good (tea) falls.

Question.14 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.
Answer. Market equilibrium is achieved when quantity demanded is equal to quantity supplied in the market.
Chain of effects. See Q. 16, 2011 (I Delhi).

SECTION B
Question.18 What is floating exchange rate?
Answer. If the market forces determine the conversion rate of currencies, it is called floating exchange rate.

Question.20 Define deflationary gap.
Answer. Deflationary gap is the gap by which actual aggregate demand falls short of aggregate supply required to establish full employment equilibrium.

Question.24 When foreign exchange rate in a country is on the rise, what impact is it likely to have on imports and how?
Answer. A rise in foreign exchange rate would make foreign goods more expensive for the domestic buyers. This simply means that for imports buyers shall have to pay more. This would reduce their demand and hence lead to a decline in domestic country’s imports.

Question.29 Calculate investment expenditure from the following data about an economy which is in equilibrium:
National income = 1,000
Marginal propensity to save = 0.20
Autonomous consumption expenditure = 100
Solution.

Question.31 Calculate ‘National Income’ and ‘Net National Disposable Income’ from the following:

Answer.

SET III

Note: Except for the following questions, all the remaining questions have been asked in Set-I and Set-11.
SECTION A
Question.1 Define variable cost.
Answer. Variable costs are the costs which change with the change i,n level of output of a good.

Question.5 What is meant by monotonic preferences?
Answer. Monotonic preferences means that a consumer always prefers more of a good as it offers him a higher level of satisfaction.

Question.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’?
Solution.

If a fall or rise in price leaves the total expenditure unaffected, elasticity of demand is unitary elastic. Therefore, in this case E_p = 1, as despite a decrease in price, total expenditure has remained the same.

Question.11 How does change in price of a complementary good affect the demand of the given good? Explain with the help of an example.
Answer. Complementary goods are a pair of goods which are used together to satisfy a given want. A fall in the price of one commodity leads to rise in the demand of the other commodity also, e.g., car and petrol. If price of petrol falls, demand for its complementary good, say, car will increase.

SECTION B
Question.17 What is ‘excess demand’ in macroeconomics?
Answer.The excess of aggregate demand over aggregate supply at full employment level of output is called ‘excess demand’ in macroeconomics.

Question.19 What is ‘managed floating exchange rate’?
Answer. The managed floating exchange rate refers to a system in which foreign exchange rate is determined by market forces and the central bank stabilizes the value of currency in case of extreme appreciation or depreciation.

Question.23 Explain the effect of appreciation of domestic currency on exports.
Answer. Appreciation of domestic currency means a rise in the price of domestic currency in terms of foreign currency. After the appreciation of domestic currency, less of the domestic currency is required to buy the foreign currency. This means that the domestic goods become more expensive for the foreign buyers leading to a decline in their demand. Hence exports would decline.

Question.27 Calculate Autonomous Consumption Expenditure from the following data about an economy which is in equilibrium:
National income = 500
Marginal propensity to save = 0.30 Investment expenditure = 100
Solution.

Question.32 Calculate ‘Net National Product at Market Price’ and ‘Gross National Disposable Income’ from the following:

Solution.

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