Oswal 36 Sample Question Papers ISC Class 12 Economics Solutions
(i) (b) 45 units
(ii) (d) All of these
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.
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
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
Law of Variable Proportion explains the short-run production function.
(vi) (a) Equilibrium Price
The price at which market demand is equal to market supply is called Equilibrium Price.
(vii) (b) AR > MR
In monopoly and monopolistic competition, the AR is greater than MR. So AR is above MR.
(viii) (b) below the average cost curve
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
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
A firm can earn super normal profits under monopoly in the long run.
(xi) Investment Multiplier (K) =1/(1-MPC)
K = 2
(xii) The difference between depreciation and devaluation is as follows:
(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.
|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.|
(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.
(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.
(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.
|Price per Unit||Supply by Firm A||Supply by Firm B||Market Supply|
(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.
(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.
(i) Following are the components of aggregate demand (AD) :
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
(i) Two causes of disequilibrium in the balance of payment in an economy are :
(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’.
(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 :
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.
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.
(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 :
|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.|
(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
(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.
Whereas, National Income (NNPFC) is the sum total of factor income earned by normal residents of a country during an accounting year.
(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.
(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):
= 700 + (600 + 200 + 310) + 350 = ₹2,160
= 2,160 + (–) 10 = ₹2,150 crore
Calculation of National Income by Expenditure Method (In ₹Crore)
= 1,100 + (385 + 65) + 750 +(–) 15
= 2,285 – 65 – 60 + (–) 10 = ₹2,150 crore
(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.
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