## CBSE Sample Papers for Class 12 Economics Delhi – 2008

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) 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.
(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 to them should normally not exceed 70 words each.
(vi) 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.
(vii) 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.l. Give the meaning of opportunity cost.
Answer. Opportunity cost is defined as the value of the benefit that is forgone by choosing one alternative rather than the other.
Or
Opportunity cost of using a given resource is defined as the value of the next best use to which the resource could be put.

Question.2. Define market demand.
Answer. Market demand for a commodity is the sum total of all individual demands for that commodity.

Question.3. What does cost mean in Economics?
Answer. Cost is the expenditure incurred on the production of a commodity. It includes both fixed cost and variable cost.

Question.4. Define revenue.
Answer. Revenue refers to the money receipts of a firm from selling its output.

Question.5. Define market for a good.
Answer. Market is defined as an area where potential buyers and sellers of a commodity come in contact with each other.

Question.6. Explain the central problem of “What to produce”.
Answer. This problem signifies ‘what goods should be produced and in what quantities’. This problemâ€˜arises when due to scarcity of resources we cannot produce each and every tiling that we want ‘Therefore, a decision is to be taken as to what goods should be produced and in what quantities. In short, we have to see whether we should produce consumer goods or producer goods or defence goods or all the goods in some quantity combination.
So, on the basis of importance of various goods, an economy has to decide which goods should be produced and in what quantities.

Question.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.

When price rises, the total expenditure on the commodity falls. This inverse relation between price and total expenditure shows that me demand for the commodity is elastic (i.e., ed > 1).

Question.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.
Answer. (a) If the fall in the price of commodity X leads to a rise in the demand for good Y, then X and Y are complementary goods which means they are used with each other for the satisfaction of same want, e.g., bread and butter.
(b) In case of fall in the price of commodity X leads to a fall in demand for commodity Y, then the commodities X and Y are substitutes for each other, i.e., they can be used in place of each other for the satisfaction of same want, e.g., tea and coffee.

Question.9. Explain the effect of technical progress on the supply of a good.
Answer. Technical progress leads’ to an increase in the supply of a commodity, i.e., at the same price more quantity is supplied during a given period. In such a case, as shown in Diagram 1, a rightward shift: takes place in the supply curve.
Or

Explain the effect of rise in input prices on the supply of a good.
Answer. Rise in the price of inputs will lead to a decrease in the supply of a good which means that at the same price lesser quantity will be offered for sale during a period of time.
Graphically, it can be shown as leftward shift in the supply curve, as shown in Diagram 2.

Question.10. State three features of monopoly.
Answer. Three features of monopoly are:

1. Single seller of a commodity. This means the firm and industry are one and the same,
2. No close substitutes. The product offered for sale by the monopolist has no competition from other products.
3. No entry of firms, i.e., new firms cannot enter this market.

Question.11. Explain the conditions leading to maximisation of profits by a producer. Use total cost and total revenue approach.
Answer. Producer’s equilibrium means that combination of price and quantity of;Output which yields maximum profit. Under total revenue and total cost approach, produces equilibrium refers to the stage of output level where the difference between TR and TC is maximum and total profits fall as more units of output are produced.
The two essential conditions are:

1. The difference between TR and TC is maximum.
2.  Total profits fall if output increases beyond equilibrium output ,h . TC Producer’s equilibrium can graphically be shown taking the example of perfect competition.TR is a 45 ° straight line since AR (price) is constant. TC is total cost curve.

At OQ level of output, profit i.e. the gap between AR and AC is maximum. This is the point of producer’s equilibrium. Output beyond OQ level, will reduce the total profit.

Note: This example relates to perfect competition.

Question.12. Complete the following table:

Question.13. Complete the following table:

(or)
Compute the following table?

Question.14. A consumer consumes only two goods. Explain his equilibrium with tire help of utility approach.
Answer. A consumer is in a state of equilibrium when he spends his given income on purchase of a commodity (or combination of goods) in such a way that gives him maximum satisfaction. In case of two commodities, consumer attains equilibrium when

Here ${ MU }_{ x }$  and ${ MU }_{ y }$ = Marginal utilities of x and y respectively.
${ P }_{ x }$ and ${ P }_{ y }$ are prices of x and y.
${ MU }_{ m }$ is marginal utility of money.
This implies that a consumer attains equilibrium, (maximum satisfaction) when the marginal utility obtained from the last rupee spent on both goods becomes equal. This is known as the law of Equi-Marginal Utility.

Question.15. Explain the Law of Variable Proportions through the behaviour of both Total Product and ‘Marginal Product. Give reasons.
Answer. The law of variable proportions explains the relationship between inputs and outputs in the short run. In die short run, some factors of production (inputs) are fixed and other factors inputs are variable. The quantity of output can be increased by increasing the use of variable input.
As more and more units of variable input are employed, the proportion between the fixed and variable factors keeps on changing. The output passes through three phases. These three phases are identified with respect to the marginal product.
Phase I: TP increases at an increasing rate. The first phase of production lasts till the marginal product keeps rising and reaches its highest point. This is the phase of Increasing Returns to a factor and during this phase, total product increases at an increasing rate.
Phase II: TP increases at a diminishing rate. In this phase, Marginal Product is declining, but is positive. In this phase total product increases but at a diminishing rate. This phase ends when Marginal Product is zero and Total Product is at its maximum level. A producer always operates in this stages.
Phase III: TP is falling. In this third phase of production, Marginal Product is declining and is negative. Here total product starts falling.

These phases are shown graphdally in Diagram 4.

The reasons for the Operation of the Law are:

1. Optimum combination of factors. The phase of increasing marginal product is due to optimum combination of factors that is required for any given technology, therefore fixed factors get better utilised.
2.  However, when more and more units of variable factors are employed to a fixed factor, the fixed factor cannot absorb it and there is overcrowding of variable factors due to which the marginal product falls and becomes negative. This is the phase of diminishing marginal product.

Question.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.
Answer. Market for a good will be in equilibrium when quantity demanded and supplied are equal. However, when supply and demand change, changes take place in the equilibrium price and quantity according to the changes in the supply and demand. In the given example, both

demand and supply change equally. Thus, as shown in the Diagram) both demand and supply curves shift towards right by equal distance. Initially, the point of equilibrium was E and now in the changed situation it is F. The price remains die same, i.e., OP, but equilibrium quantity increases from OQ to OQ1.

For Blind Candidates only in lieu of Q. No. 16

Question.16. Market for goods 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 schedule.

The new equilibrium price will be the same i.e., Rs.7, but the equilibrium quantity will increase from 16 to 18 units.

SECTIONS
Question.17. Give meaning of involuntary unemployment
Answer. In an economy when all able persons, who are willing to work at the prevailing wage rate, do not get ,work and are unemployed, it is called involuntary unemployment.

Question.18. Define inflationary gap.
Answer. Inflationary gap is a situation when aggregate demand is greater than die aggregate supply at the full employment level.

Question.19. What is a central bank?
Answer. Central bank’Mute apex institution in the banking structure of a country that manages a state’s currently, money supply, interest rates and oversees the commercial banking system.

Question.20. State any one objective of government budget.
Answer. One objective of government budget is reallocation of resources for efficient utilisation of government resources and maximising social benefits.

Question.21. Define flexible exchange rate system.
Answer. The foreign exchange rate which is determined by the forces of demand for and supply of the foreign exchange is known as flexible exchange rate.

Question.22. Calculate ‘Value of Output’ from the following data:

Answer. Value of Output = NVAFC + IC + Depredation + Net Indirect taxes
= (i) + (ii) + (v) + {(iii) – (iv)}
= 100 + 75 + 10 + (20 – 5) = 185 + 15 = Rs. 200 lakhs.

Question.23. “When Exchange Rate of foreign currency rises, its supply rises. How Explain?
Answer. There is direct relationship between foreign exchange rate and its supply This means higher the exchange rate, higher will be the supply of foreign exchange. As sucb, when exchange rate of foreign currency rises, its supply also rises because the Indian rupee (home currency) becomes relatively cheaper in terms of the foreign currency. This encourages exports of Indian goods and ensures more supply of foreign exchange in the market.

Question.24. State components of the current account of Balance of Payments Account.
Answer. Components of the Current Account of Balance of Payments Account are:
(i) Export and import of goods (visibles)
(ii) Export and import of services (invisibles)
(iii) Transfer receipts and payments, such-as gifts and unilateral payments or receipts
(iv) Investment income.

Question.25. What is bank rate policy? How does it work as a method of credit control?
Answer. Bank Rate is the rate of interest which central bank charges from commercial banks for giving them loans.
There is direct relationship between bank rate and rate of interest, |but the relationship between rate of interest and demand for credit is inverse.Thus, when volume of credit is to be reduced, bank rate is increased. On the other hand, when volume of credit is to be increased, bank, rate is reduced. In the aforesaid manner, bank rate is used for controlling the volume of credit.
(or)
What are open market operations? How does it work as a method of credit control?
Answer. Open market operations refer to the purchase and sale of government securities in the open market by the central bank.
The functioning of this method is like this: When central bank of the country wants to increase the volume of credit, it starts purchasing securities from the market. These securities are generally bought at a higher price than the market price. As such, banks start selling them, as a result of which their cash reserves increase, i.e., their liquid assets increase. As a result of this, banks now can create more credit. On the contrary, when central bank wants to control the volume of credit, it starts selling securities in the market which are bought by the commercial banks. With the result, their cash reserves are reduced and this adversely affects their power of creating credit.

Question.26. Give meaning of capital receipts and revenue receipts with an examine of each.
Answer. Capital receipts are those receipts which are created either by incurring a liability or by disposing off assets, such as public debt, disinvestment, etc. Revenue Receipts are those receipts which do not create any asset or liability or which do not reduce assets, such as tax revenue.

Question.27. As a result of increase in investment by Rs. 125 crores, National Income increases by Rs. 500 crores. Calculate marginal propensity to consume.

Question.28. Give four agency functions of commercial banks.
Or
Explain the acceptance of deposits function of commercial banks.
Answer.(Out of Syllabus for 2011 examination and onwards)

Question.29. What is fiscal deficit? What are its implications?
Answer. Fiscal deficit refers to the excess of total expenditure over total receipts (excluding borrowings) during the given fiscal year.
Implications of Fiscal Deficit are as follows:

1. (1) Debt trap: As fiscal deficit indicates, the total borrowing requirements of the government include both, i.e., repayment of the principal amount and also the payment of interest.
It increases the revenue expenditure in the form of interest payment leading to revenue deficit. This ultimately creates a vicious circle of fiscal and revenue deficit forcing the government to take more loans to service and settle the previous loans.
2.  Inflation: For meeting the borrowing requirements, file government may borrow from the Reserve Bank of India. When RBI prints new currency to meet the deficit requirements, it increases the money supply in the economy and creates inflationary pressure.
3.  Reduces future growth: The debt and financial burden of interest payments on the . revenue expenditure causes a reduction on the capital expenditure for growth and development of the economy.
4. Foreign dependence: In case fire government borrows from the rest of the world, then dependence of the country on other countries increases and it may not augur well for its prestige.

Note: Points (3) and (4) are not included in the present syllabus

Question.30. Calculate ‘Net Domestic Product at Factor Cost and Gross National Disposable Income from the following data:

Answer.  NDP at${ F }_{ c }$

Question.31. Explain determination of equilibrium level of income using ‘consumption plus investment’ approach. Use diagram.
Answer. ‘Consumption plus Investment’ approach determining the equilibrium level of income is the Aggregate Demand and Aggregate Supply Approach. According to this approach, the equilibrium level of income.is determined at a point where aggregate demand and aggregate supply are equal.
Aggregate Demand (AD). It represents total expenditure in an economy. Consumption expenditure and investment expenditure are its main components. Consumption is a function of income but there is autonomous consumption expenditure also, i.e., consumption at zero level of income.
In the table given below, consumption expenditure is shown in Column II. Investment expenditure is autonomous and is the same at all levels of income. In Column III, investment expenditure is shown. Adding Column II and Column III, we get aggregate demand shown in Column IV.
Aggregate Supply is the value of goods and services produced is equal to National Income. It is shown in Column V.

The equilibrium level of income will be 300 because at this level AD and AS are equal.
According to Diagram 6, the equilibrium level of income will be OQ, because at this level AD and AS are equal.

Question.32.Explain the determination of equilibrium level of income using ‘saving-investment approach’. Use diagram
Answer. At the equilibrium level of income, aggregate demand is equal to aggregate supply, and saving is equal to investment. Saving is that part of income which is not consumed. By investment we mean physical investment i.e., creation of physical investment like machines, buildings, etc. Savers and investors are different persons. Those who save are not necessarily those who invest. Savings are done in small amounts and investments are made in huge amounts. Therefore, it is possible that the amount which savers save, may not be the same amount which investors want to invest. It means planned saving may not be equal to planned investment but actual saving is always equal to actual investment.
According to the table (on the next page), the equilibrium level of income rate will be 300, because at this level saving and investment are equal. At any other level of income, either saving is more than investment or less than investment.

According to Diagram 7, saving and investment curves intersect each other at point E, when the level of income is OQ.

For Blind Candidates only in lieu of

Question. No. 31 Explain determination of equilibrium level of income using consumption plus investment approach. Use schedule.
Or
Explain determination of equilibrium level of income using savings-investment approach. Use schedule.
Answer.  Both the questions have been answered above. But blind candidates do not have to draw diagrams.

Question.32. Giving reasons explain how the following are treated while estimating national income:
(i) Payment of fees to a lawyer engaged by firm.
(ii) Rent free house to an employee by an employer.
(iii) Purchases by foreign tourists.
Answer. (i) It is an intermediate expenditure by the firm hiring the services of a lawyer, hence it will not be included in the National Income.
(ii) It is included in the National Income as compensation of employees.
(iii) It is included, as purchases by foreign tourists generate factor income in the domestic market.

### SET II

Note : Except for the following questions,’’all the remaining questions have been asked in Set I.

SECTION A
Question.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 expenditure on the good to find price elasticity of demand.

With the fall in the price, the total expenditure on the commodity remains unchanged. Therefore ${ E }_{ d }$ = 1 (unitary elastic).

Question.9. State three features of monopolistic competition.
Answer. Features of monopolistic competition are:
1. Large number of sellers selling closely related but not homogeneous products.
2. Product differentiation: The products of the firms are closely related but not perfect substitutes of other firms. There is differentiation in the product on the basis of size, colour, composition, brand, etc.
3. Freedom of entry and exit of firms: The firms can freely enter and exit in this form of market.

Question.10. Explain the central problem of ‘How to produce’.
Answer. The central problem of ‘How to produce’ refers to the choice of the economy in the technique of production. This choice is made because of the difference in the availability of resources. If labour is abundant and cheap, labour intensive technology of production would lead to cost effective production.
In case labour is scarce and costly, capital intensive technology would be used.
For example, cloth can be produced by using more labour (labour intensive technique) as in handloom sector, or cloth can be produced in textile mills using capital intensive technology (i.e., using more machines).

Question.15. Market for a good is in equilibrium. What is the effect on equilibrium price and quantity if the proportionate increase in market demand is greater than increase in market supply. Use diagram.
Answer. When there is increase in demand and supply, both the curves shift towards tight as shown in Diagram 8. DD (demand curve) shifts to D1D1 and supply curve (SS) shifts to SJSJ. Since increase in demand is more than the increase in supply, the shift in DD curve is greater than the shift in SS curve. The initial point of intersection is E, where price is OP and equilibrium of quantity is OQ.

The new point of intersection is F, where price is OPj and equilibrium output is OQr Thus, in the given situation, both price and equilibrium quantity are greater than the initial position.

SECTION B
Question.17. Define Deflationary Gap.
Answer. Deflationary gap is the excess of aggregate supply over aggregate demand at the full employment level.

Question.21. Give die meaning of full employment
Answer. Full employment refers to the situation in an economy when all the able persons, who are willing to work at the prevailing Wage rate, are fully employed.

Question.26. Calculate ‘intermediate consumption’ from the following data:

Question.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.
Answer. Given: AY = Rs. 600 crores and MPC = 0.75.

Question.31. Calculate Gross National Product at market price and Net National Disposable Income from the following data:

Answer.${ GNP }_{ MP }$

### SET III

Note: Except for the following tfuestions, all the remaining questions have been asked in Set I and Set II.

SECTION A
Question.8. State three features of perfect competition.
Answer. Three features of perfect competition are:

1. Large number of buyers and sellers: There are so many buyers and sellers that no individual buyer or seller can influence the price of the commodity in the market.
2. Homogeneous products: Firms in the market supply homogeneous products, i.e., the products are perfect substitutes for each other.
3. Free entry and exit of firms: Firms have the freedom to move in or move out of the industry or the market. There are no barriers to their entry or exit.

Question.9. Explain the central problem of “for whom to produce.”
Answer. The central problem of ‘for whom to produce’ is the problem of distribution of national product among different people eg., rich and poor. This is known as Personal Distribution of the National Product.
‘For whom to produce’ also refers to the functional distribution of National Income to the factors of production -> in lieu of the factor services generated by them, eg., land earns rent, labour earns wages.

Question.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?

According to total expenditure method when price and total expenditure move in opposite directions, elasticity of demand will be greater than one. In the given example, price and total expenditure are moving in opposite directions, therefore,${ e }_{ d }$ > 1.

Question.14. Market for a good is in equilibrium. What is the effect on equilibrium price and quantity if increase in market demand is less than increase in market supply? Use diagram. 6
Answer. The market for a good will be in equilibrium when quantity demanded and quantity supplied are equal. In the given question both demand and supply increase.

With the result, both demand and supply curves will shift to the right. As shown in foe diagram, supply curve will shift from SS to S1S1 and demand curve will shift from DD to DJDJ. Earlier foe point of equilibrium was E and now it is Er Since foe increase in demand is less than foe increase in supply, foe fall in foe price will be less than foe increase in quantity. Thus, as a result of increase in demand and supply both, price will fall , and equilibrium quantity will increase.

SECTION B
Question.20. What is underemployment equilibrium?
Answer. Underemployment equilibrium refers to foe situation in an economy where foe aggregate demand falls short of aggregate supply at full employment.

Question.21. What is consumption function?
Answer. Consumption function refers to -the functional relationship between consumption and National Income.
C =f(Y), where C is Consumption and Y is National Income.

Question.25. Calculate sales from the following data: