Economics Unsolved Sample Paper Solutions ISC Class 12

Section-A

Answer 1.

(i) (b) 45 units

 Explanation :
  • Market demand = Demand of all individuals in the market
  • So, P’s demand = 12 units
  • Q’s demand = 13 units
  • Therefore, market demand = 12 + 13 + 20 = 45 units

(ii) (d) All of these

 Explanation :

All of these are types of elasticity of demand. Price elasticity shows responsiveness of quantity demanded to change in price. Income elasticity of demand shows the responsiveness of demand to the change in income. While cross elasticity of demand shows the responsiveness of demand of a commodity to the change in the price of some related commodities.

(iii) (c) Unit elastic at C, relatively inelastic at E and perfectly inelastic at B.

 Explanation :

Elasticity is a term used to describe how responsive supply or demand is to changes in price. Small price adjustments will result in significant changes in the amount consumed if a curve is more elastic. It will require significant price changes to result in a change in the amount consumed if a curve is less elastic.

(iv) (a) Zero

 Explanation :

When TU is maximum, MU will be zero. When marginal utility is zero, the consumer derives no further utility from consumption and any further consumption will lead to negative marginal utility.

(v) (b) Law of Variable Proportions

 Explanation :

Law of Variable Proportion explains the short-run production function.

(vi) (a) Equilibrium Price

 Explanation :

The price at which market demand is equal to market supply is called Equilibrium Price.

(vii) (b) AR > MR

 Explanation :

In monopoly and monopolistic competition, the AR is greater than MR. So AR is above MR.

(viii) (b) below the average cost curve

 Explanation :

If an average cost curve has a negative slope, then the marginal cost curve remains below the average cost curve. As long as MC remains below the AC, AC falls.

(ix) (b) Consumption/total income

 Explanation :

The value of consumption function at a particular level of national income is called as average propensity to consume. In other words it is the ratio of aggregate consumption to national income.

(x) (a) monopoly

 Explanation :

A firm can earn super normal profits under monopoly in the long run.

(xi) Investment Multiplier (K) =1/(1-MPC)

 K =1/(1-0.5)

K =1/(1-0.50)

K = 2

(xii) The difference between depreciation and devaluation is as follows:

Depreciation Devaluation
1. Depreciation of currency occurs when the value of a currency reduces in terms of another currency due to the market forces of demand and supply in global market. Devaluation of currency occurs when the government of a country reduces the value of its currency in terms of another currency in consultation with IMF.
2. Depreciation of currency happens under floating exchange rate system. Devaluation of currency happens under fixed exchange rate system.

(xiii) The above statement is true. Increase in foreign direct investment will lead to an increase in the supply of foreign exchange, which, in turn, will reduce the price of foreign exchange.

(xiv) Primary deficit is calculated as the difference between fiscal deficit and interest payments.

In terms of formula,

Primary Deficit = Fiscal Deficit – Interest Payment.

(xv) If a price prevailing in the market is higher than the equilibrium price, there will be excess supply.

(xvi) Union budget is the budget which is prepared by the central government for the country as a whole.

Section-B

Answer 2.

(i) When the prices of petrol and diesel are cut, the demand for cars is expected to rise, because car and petrol are complementary goods. This will lead the demand curve of cars to shift rightward.

  • Change in Autonomous Investment (ΔI) = ₹100 Cr.
  • Marginal Propensity to Consume (MPC) = 0.80
  • Hence, The Multiplier (K) = 1/1 – MPC
  • = 1/1 – 0.80
  • = 1/5
  • So, the increase in income (ΔY) = ΔI × K
  • = 100 × 1/5
  • = ₹20 Cr.
  • Hence, the increase in income is ₹20 Cr.

Answer 3.

  • (i) Two features of monopoly:
  • 1. Single seller of the commodity: There is only one seller or producer of a commodity in the market. As a result, the monopoly firm has full control over the supply of the commodity. The monopolist may be an individual, a firm or a government corporation itself. Monopoly firm is itself a price maker and not the price taker. For example : Indian railways.
  • 2. No close substitute of the product: A product has competition when it has close substitutes, but the product sold by the monopolist has no close substitute. Though some distant substitutes may be available, but they may be rare or even costly. So, the monopolist does not face competition.
  • (ii) 1. ATC is greater than AVC by the amount of AFC.
  • 2. The distance between ATC and AVC curve goes on decreasing as AFC goes on decreasing with increase in number of units produced.
  • 3. ATC is never equal to AVC as AFC is never zero.

Answer 4.

(i) Shape of Average Cost Curve: Average Cost Curve is ‘U’ shaped, both in the short-run as well as in the long-run. Short-run average cost curve is U-shaped in nature because of the law of variable proportion and in the long-run, average cost curve is U-shaped in nature because of the law of returns to scale.

(ii)

Price per Unit Supply by Firm A Supply by Firm B Market Supply
2 5 5 10
3 7 10 17
4 9 15 24
5 11 20 31

Answer 5.

(i) A rise in income leads to a reduction in the demand for the inferior good. Consequently, the demand curve shifts to the left from DD to D1D1 as shown in the figure. The demand for the inferior good becomes less at the same price from Q to Q1.
quantity

(ii) The law of supply states that, other things remaining unchanged, the quantity of any commodity that firms will produce and offer for sale rises with the rise in price and falls with the fall in price.

An improvement in technology, e.g., the invention of new machines and advanced techniques reduce the cost of production and increase the profit margin. Increased profitability induces the producers to produce more and increase the supply.

OR

(i) Expectations regarding future prices: If price of a commodity is rising today and it is likely to rise more in the future, people will buy more even at the existing price and store it up. They will do this in order to avoid the pinch of higher prices in the future. Similarly, when large fall in price of a commodity is anticipated, consumers will postpone their purchase even if the prices fall today so as to purchase this commodity at a lower price in future.

(ii) Conspicuous goods: The law of demand does not apply to status symbol commodities termed as Veblen goods. These goods are demanded more at higher prices by (rich) consumers to increase their social prestige or as a source of display of wealth or richness. For example, diamond, gold, etc.

Answer 6.

(i) Following are the components of aggregate demand (AD) :

  • (a) Household consumption expenditure (C)
  • (b) Government expenditure (G)
  • (c) Investment (I)
  • (d) Net exports (X – M)

Where, X = exports and M = imports.

So, AD = C + I + G + (X – M). Differentiate between revenue and capital components of union budget.

(ii) Marginal propensity to consume refers to the ratio of change in the consumer’s expenditure due to the change in disposable income (income after deducting taxes). In other words, MPC measures how consumption will vary with the change in income.

It can be symbolically represented as:

MPC = ΔC/ΔY

Where, ΔC = Change in consumption

ΔY = Change in income

Answer 7.

(i) Two causes of disequilibrium in the balance of payment in an economy are :

  • 1. Imbalance between exports and imports is the main cause of disequilibrium in BOP, as well as changes in fashions, tastes and preferences of people bring disequilibrium in BOP by influencing imports and exports.
  • 2. Political instability and disturbances causes large capital outflows and hinder inflows of foreign capital.

(ii) Managed flexible foreign exchange rate is a system of exchange rate which has emerged recently. It is a floating rate and is known as ‘managed’ because the central bank tries to influence the rate by entering the market as a bulk buyer/seller. If the floating rate is found to be too high, the central bank starts selling
foreign exchange from its reserves to bring the rate down. On the other hand, when the rate is very low, the central bank starts buying foreign exchange in order to push up the rate. This is done by the Central Bank for the interest of exporters and importers in the economy. This rate is also known as ‘Dirty Floating Rate’.

Answer 8.

  • (i) (a) Public expenditure include government expenditure on public works, subsidies, relief works and transfer payments. Such expenditures help in generating income and creating employment, which help in reducing the income gap in the society.
  • (b) Inflation occurs when there is increased spending in the economy. To control inflation, government can lower the public expenditure. This results in a reduction in aggregate demand which helps in controlling inflationary pressures. Controlling aggregate demand leads to lower growth and hence lower inflation.

OR

(ii) If the government is not able to meet its expenditures through its usual resources of its revenue, it may resort to deficit financing to meet its deficit. Deficit financing means meeting the deficit between government expenditure and revenue through creation of new money. Deficit financing plays an
important role in the economy in the following ways :

  • 1. Tool to combat depression in an economy: It is regarded as an important instrument of economic policy for overcoming depression and raising the level of output and employment. Deficit financing leads to increase in aggregate demand through increased public expenditure. This increases income and purchasing power of the people. As a consequence, there is increase in the level of aggregate demand, overcoming the problem of depression.
  • 2. For solving problems of involuntary unemployment: Involuntary unemployment during the period of depression (when people are ready to do the job at the given wage rate but are not given employment) results from deficiency in demand. According to Keynes, unemployment may be removed by increasing the level of aggregate demand since there is lack of incentive during depression, private sector does not undertake large investment. Therefore, the government through increased public investment financed through deficit financing, will raise the aggregate demand and will lead to larger production by utilizing unemployed resources.
  • 3. Economic development: Deficit financing has been recommended by many economists as a useful method for financing development plans of underdeveloped countries and accelerating their rate of economic development. It helps the government to raise additional resources over taxation and public borrowings due to low taxation capacity and limited services of the public. Hence, deficit financing becomes an attractive alternative to meet the additional demand for money in the course of economic development

Answer 9.

The two-sector circular flow model is shown below. Domestic economy has two sectors which are producers or firms and households. The households provide labour, capital and entrepreneurship to firms and the firms make payments to household in return. The house-holds spend income for consuming goods and services which are produced by the firms.

households

Money flows from firms to households as payments to factor inputs, and then money flows from households to firms. Therefore, there is a circular flow of money. When S = I in a two-sector model, the circular flow of income in the economy continues unabated. The withdrawal of money from the income stream by savings should be offset by injection of money through investment expenditure. A constant money income flow in an economy is to be obtained when planned saving equals planned investment.

Section-C

Answer 10.

(i) The rate at which a consumer is prepared to give up one commodity to get another commodity is called marginal rate of substitution and as a consumer increases his consumption by one unit, his sacrifice from another good goes on decreasing which is called diminishing marginal rate of substitution. In other words, The Diminishing Marginal Rate of substitution refers to the consumer’s willingness to part with less and less quantity of one good in order to get one more additional unit of another good.

MRS indicates the slope of IC. Thus, due to diminishing MRS, indifference curve is always convex to the origin. It can be shown with the help of diagram :

(ii)

Points of Difference Perfect Competition Monopolistic Competition
1. Number of buyers and sellers Buyers and sellers are very large in number. Fairly large number of sellers and buyers.
2. Price taker/maker Firms are price taker. Firms are price makers.
3. MR and AR AR = MR AR > MR
4. Shape of AR and MR MR and AR are parallel to X-axis. Both MR and AR are downward sloping.
5. Relationship between MR and price MR = AR (Price) MR < AR (Price)
6. Nature of product Homogeneous products. Heterogeneous products.
7. Profits in long run Normal profits. Normal profits.
8. Elasticity of demand Demand is perfectly elastic i.e., ed = 1. Demand is relatively elastic i.e., ed > 1.
9. Price discrimination Same price is charged from every customer. There is price discrimination.

OR

  • (i) Following are the factors determining elasticity of supply of a commodity:
  • 1. Nature of commodity: Supply of durable goods is relatively elastic. Durable goods can be stored and producers can meet the market demand by running down their stock. Therefore, supply of such goods can be increased or decreased quickly in response to change in price. On the other hand, perishable goods like milk, vegetables have inelastic supply, change in their supply has to be largely depend upon change in production only.
  • 2. Nature of inputs: Elasticity of supply depends on the nature of inputs used for the production of the commodity. If the production of a product requires inputs that are easily available, its supply would be elastic. On the other hand, if it uses specialised inputs its supply will be less elastic.
  • 3. Risk taking: If entrepreneurs are willing to take risk, the supply will be more elastic whereas if entrepreneurs hesitate to take risks, the supply will be less elastic.
  • 4. Expectation of future price: If producer expects a rise in the price of a commodity in future, the producer will like to hoard the commodity to take advantage of rise in future price. The supply will therefore be less elastic. On the other hand, if they expect a fall in future price, they will release the goods from their stock. The supply will be more elastic.

(ii) The firm under perfect competition is a price taker not the price maker. All the firms in the industry have to sell their output at this equilibrium price in the market.

The reason behind is:

1. The number of firms under perfect competition is so large that no firm can influence the price by its supply,

2. All the firms produce homogeneous products so no firm can make any difference in price policy. Output decision lies in the hands of firm i.e., how much they want to sell at given price as it is clear from the following diagram : where OP = Equilibrium price

OQ = Equilibrium output

AR = Demand curve of firm

imdustry

Answer 11.

(i) We know that a monopolistic competitive firm has relatively elastic demand curve, so AR will be downward sloping. Accordingly, MR can be drawn which will lie below AR curve.

(ii) When the government fixes the maximum price (price ceiling) lower than the market equilibrium price for the commodity, it gives rise to excess demand. That is at the ceiling price, quantity demanded is more and quantity supplied is less causing shortage of the commodity. The figure below illustrate it. In the figure, ‘E ’ is the equilibrium point attained by the intersection of demand and supply curves DD and SS respectively. OPe is the equilibrium price and OQe is the equilibrium quantity. OPm is the maximum price fixed by the government. It is necessarily below the equilibrium OPe. It is the maximum legal price. At this price, OPm quantity supplied is OQ1 units of good and the quantity demand is OQ2 units. Q1Q2 shows excess quantity demanded or shortage of the commodity at this price.
price

Answer 12.

(i) GNPFC is the sum total of factor incomes earned by normal residents of a country, inclusive of depreciation during an accounting year.
GNPFC = NNPFC + Depreciation

Whereas, National Income (NNPFC) is the sum total of factor income earned by normal residents of a country during an accounting year.

NNPFC = NDPFC + Net factor income from abroad
GNPFC includes depreciation but NNPFC (National Income) does not include depreciation.

(ii) 1. National Income by Output method = Value of output – Value of intermediate consumption – consumption of fixed capital – Indirect taxes + subsidies
+ Net factor income from abroad.

₹[12500 – 6500 – 800 – 900 + 200 + (–150)] crore

= ₹4350 crore.

OR

(i) Counting of value for same product more than once in computation of National Income is called double counting. It should be avoided to remove the chance of over estimation of National Income.

(ii) Calculation of National Income by Income Method (In ₹Crore):

NDPFC = Compensation of Employees + Operating Surplus + Mixed Income of Self-employment

= 700 + (600 + 200 + 310) + 350 = ₹2,160

NNPFC = NDPFC + NFIA

= 2,160 + (–) 10 = ₹2,150 crore

Calculation of National Income by Expenditure Method (In ₹Crore)

GDPMP = C + I + G + Xn

= 1,100 + (385 + 65) + 750 +(–) 15

= ₹2285

NNPFC = GDPMP – Depreciation – NIT+ NFIA

= 2,285 – 65 – 60 + (–) 10 =  ₹2,150 crore

Answer 13.

(i) SLR and Open market operations.

(ii) The expectation of RBI was to increase the flow of money and demand levels in the economy which is facing the problem of recession.

By reducing these rates, RBI will boost up the lending capacity of commercial banks. This will increase the flow of money and demand levels.

(iii) Demand deposits are the deposits with the bank by the general public which can be withdrawn on demand.

(iv) A national bank that executes monetary policy, issues currency, and offers financial and banking services to the government and commercial banking systems of its nation.

(v) The portion of a bank’s total deposits that it must keep in liquid funds.

ISC 36 Sample Question Papers

All Subjects Combined for Class 12 Exam 2023

ISC 36 Sample Question Papers

All Subjects Combined for Class 12 Exam 2023 

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