CBSE Sample Papers for Class 12 Economics Outside Delhi -2013
- 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.
Question.1. Define marginal revenue.
Answer. Marginal revenue may be defined as the change in total revenue which takes place by selling an additional unit.
Question.2. What does a rightward shift of demand curve indicate?
Answer. A rightward shift of demand curve indicates increase in demand.
Question.3. Under which market form is a firm a price taker?
Answer. A firm is a price taker under perfect competition.
Question.4. When is the demand for a good said to be perfectly inelastic?
Answer. The demand of a good is said to be perfectly inelastic when quantity demanded does not change with the change in price, in other words, when demand remains constant at all prices.
Question.5. Give one reason for an “increase” in supply of a commodity.
Answer. Increase in supply of a commodity will take place as a result of decline in the prices of inputs.
Question.6. How is the demand for a good affected by a rise in the prices of other goods? Explain.
Answer. Price of other (related) goods. Prices of other goods may also affect the demand for a commodity. The other goods may be substitute goods or complimentary goods. Also See Q.16 (Or)(i), 2013 (I Delhi).
Question.7. A firm supplies 10 units of a good at a price of 75 per unit. Price elasticity of supply is 1.25. What quantity will the firm supply at a price of 77 per unit?
Question.8. Explain the meaning of diminishing marginal rate of substitution with the help of a numerical example.
Answer. The rate at which the consumer can substitute good x for good y is called marginal rate of substitution. In other words, marginal rate of substitution measures consumer’s willingness to substitute one good for the other good. Marginal rate of substitution is always declining. The fact that MRS is declining becomes evident from the schedule given below:
Question.9. From the following table, find out the level of output at which the producer will be in equilibrium. Give reasons for your answer.
The producer will be at equilibrium at the level of output of 4 units, where marginal revenue and marginal cost are equal and the difference between the total revenue and the total cost, i.e., profits are maximum; or the losses are minimum.
At output of 4 units, MR = MC and TR – TC = -1 (=> loss)
At output of 2 units, MR = MC but TR – TC = -2 (=> loss is more)
Question.10. Why can a firm not earn abnormal profits under perfect competition in the long run? Explain.
Answer. Under perfect competition in the long run a firm does not earn abnormal profits, it earns only normal profits. This means price AR is equal to AC and AR is not greater than AC. This is so because if a firm is earning abnormal profits then AR will be greater than AC. But in that case new firms will enter the competition and AR will fall down to the level of AC. This means under perfect competition in the long run AR is equal to AC and not greater than AC. Therefore, a firm earns only normal profits and not abnormal profits.
Why is the demand curve of a firm under monopolistic competition more elastic than under monopoly? Explain.
Answer. A monopoly firm can sell more only by lowering the price of its product. In other, words, the demand for the monopoly product is less elastic. As such the demand curve (AR curve) will have a negative slope. Under monopolistic competition the demand curve will also have a negative slope curve like that of a monopoly firm. However, it (Demand curve) will be less steeper in comparison to that of a monopoly firm. This is due to the fact that there are close substitutes available in case of monopolistic competition, while in monopoly there is no close substitute available for the product.
Question.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.
Answer. Essential medicine is a must for the people. If its price is very high, necessary steps should be taken through market forces to bring down its price. The first step is to increase the supply of the medicine by giving licence to more firms for manufacturing this drug. This will lead to an increase in supply as a result of which equilibrium price of the medicine will be brought down. Since medicine is essential, its demand cannot be reduced. Only supply needs to be increased.
Question.12. Explain the meaning of opportunity cost with the help of production possibility schedule.
Answer. Opportunity cost is the value of an activity that we forgo in case we undertake another activity. This can be explained with the help of an illustration.
Say, on a given piece of land, Only one crop either rice or wheat pan be grown. If rice is grown, its yield will be 10 tonnes. On the other hand, if wheat is grown, its yield will be 8 tonnes. In the given example, opportunity cost of producing 10 tonnes of rice is 8 tonnes of wheat and opportunity cost of producing 8 tonnes of wheat is 10 tonnes of rice.
If we keep on producing one commodity, what we forgo for producing another commodity is its opportunity cost. The rate at which we forgo the other good for producing an additional unit of a commodity is the marginal opportunity cost of producing a commodity.
The idea of marginal opportunity cost becomes clear looking at the given schedule.
With the help of suitable example explain the problem of ‘for whom to produce’
Answer. See Q.8, 2009 (Outside Delhi I).
Question.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.
Question.14. Explain three properties of indifference curves.
Answer. See Q. 15, 2011 (I Delhi).
Explain the conditions of consumer’s equilibrium under indifference curve approach.
Answer. See Q. 14,2010 (I Delhi).
Question.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.
Answer. The equilibrium price of a product is determined at a point where its supply and demand are equal. If the equilibrium price is higher than market price, supply of the product will fall and it will result into increase in its demand. With the result there will be excess demand and therefore, for bringing equality in demand and supply, supply needs to be increased and demand decreased. This is possible only when market price is brought to the level of equilibrium price.
The entire process can be explained with the help of a diagram. In the diagram, equilibrium price is OP. If the price decreases to OP1. (lower than the equilibrium price), supply will fall to OQ1 and demand will increase to OQ2.
Therefore, there will be excess of demand = Q1Q2. This position can be rectified by coming to equilibrium price, i.e., OP.
Note: The following question is for the Blind Candidates only, in lieu of Q. No. 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 a schedule.
Answer. The equilibrium price of a product is determined at a point where supply and demand of the product are equal. If equilibrium price is higher than the market price, demand will increase and supply will decrease, with the result that there will be excess demand and therefore, for bringing equality in demand and supply, supply needs to be increased and demand decreased. This is possible only when market price is brought to the level of equilibrium price.
The entire process can be explained with the help of a schedule given below:
According to the schedule, equilibrium price is Rs 8, because at this price demand and supply are equal. However, when the market price is Rs 7, lower than the equilibrium price, demand will be more than supply. In such a case market price needs to be increased so that demand and supply become equal.
Question.16. Giving reasons, state whether the following statements are true or false:
(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.
Answer. (i) The statement is false. Near the point where MP and AP are equal (where MP cuts AP), MP decreases and AP increases. This is so because AP takes into view MP of earlier units where it is increasing. This is shown in the diagram.
(ii) The statement is false because with the increase in the level of output AFC falls but it never becomes zero. This is shown in the diagram.
(iii)The statement is true. Total product continues to rise till marginal product reaches zero. Beyond that point when marginal product becomes negative, Total Product starts declining. This is shown in the diagram.
Question.17. Give two examples of intermediate goods.
Answer. Raw materials and fuel.
Question.18. State the components of supply of money.
Answer. The components of money supply are currency with the public and demand deposits of banks at a given point of time.
Question.19. What one step can be taken through market to reduce the consumption of a product harmful for health?
Answer. The consumption of a product, which is harmful for health should be reduced by imposition of a high tax on the product by the government.
Question.20. How can Reserve Bank of India help in bringing down the foreign exchange rate which is very high?
Answer. Reserve Bank of India should devalue Indian rupee for bringing down the high rate of exchange. RBI can increase the supply of foreign exchange by selling foreign exchange from its reserves to bring down its value.
Question.21. What is revenue deficit?
Answer. Revenue deficit is equal to the excess of total revenue expenditure over the total revenue receipts.
Question.22. Explain the ‘medium of exchange’ function of money.
Answer. Medium of exchange. Right from the beginning, money has beenperformingthe important function of medium of exchange in the society. Money facilitates transactions of goods and services as a medium of exchange. Producers sell their goods to the wholesalers in exchange of money. Wholesalers sell the same goods to the retailers and the retailers sell these goods to the consumers in exchange for money. In the same way, all sections of society sell their services in exchange for money and with that money buy goods and services which they need. Money, .working as a medium of exchange, has eliminated inconvenience which was faced in barter transactions.
Explain the ‘lender of last resort’ function of central bank.
Answer. Lender of the last resort. Central bank works as lender of the last resort for commercial banks because in the times of need it provides them financial assistance and accommodation. Whenever a commercial bank faces financial crisis, central bank as lender of toe last resort comes to its rescue by advancing loans and the bank is saved from being failed. Central bank helps commercial banks by discounting their bills and securities also.
Question.23.Distinguish between revenue receipts and capital receipts. Give an example of each.
Answer. Revenue receipts are those receipts which do hot create any liability or which do not reduce assets , such as tax revenue.capital receipts are those receipts which are created either by incurring a liability or by disposing off assets such as public debt, disinvestment, etc.
Question.24. How can budgetary policy be used to reduce inequalities of income?
Answer. Government can use budgetary policy for reducing inequalities of income. For achieving this government should suitably formulate its fiscal policy. The fiscal policy should aim at taxing the rich and spending for the schemes which benefit the poor, the most. Government should levy more direct taxes because they are paid by rich people only. On the other hand, schemes like providing for health and education to the poor should be encouraged.
Question.25. Explain the effect of depreciation of domestic currency on exports.
Answer. When the value of domestic currency depreciates, it results in increased exports and decreased imports. This is so because in such a case, with given amount of foreign’ currency, more goods can be bought in the domestic market.
Fer example, one American dollar will now get more goods in toe domestic market. Thus it is clear that when depreciation of domestic currency of a country takes place its exports increase.
Question.26. How is exchange rate determined in toe foreign exchange market? Explain.
Answer. The foreign exchange rate is determined with toe help of forces of demand for and supply of toe foreign exchange in toe market. In other words, demand supply theory ‘ applies with regard to the determination of exchange rate. There is mi inverse relationship between foreign . currency nrte and demand for foreign exchange. On the other hand, the relation between rate of currency and supply of foreign currency is direct. As such toe demand curve for foreign currency will have a negative slope and toe supply curve for foreign currency will have a positive slope. The foreign exchange rate will be determined at a point where demand and supply curves intersect each other. This is shown in the diagram.
Question.27.Calculate ‘Sales’ from the following data:
= 2,000 + 700 + 3,000 – (600 – 100) – 200 = Rs 5,000 Lakhs
Question.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?
Answer. Real gross domestic product (real gross domestic income) is measured at constant prices or at some given price for all the years. On the other hand, nominal gross domestic product (nominal gross domestic income) is measured at current prices.
Therefore, real gross domestic income is a better index at welfare of the people. This is so because nominal domestic income may increase because of increase in prices whereas real domestic income will increase only due to increase in the volume of goods mid services and not in the prices. Therefore, real gross domestic product is a better index of the welfare of the people.
Distinguish between stocks and flows. Give two examples of each.
Answer. Difference between Stocks and Flows:
Question.29. Explain the credit creation role of commercial banks with the help of a numerical example.
Answer. An important function of commercial banks is credit creation. Banks are not like a cloakroom at the railway station where one deposits one’s luggage and gets the same back after paying some charges. What banks do is that they keep a part of deposits to meet the demand of the depositors and the rest is advanced as loans to others. Again banks keep advancing loans keeping a part of the depots of those to whom loans have been advanced. In this way credit is created many times mote than the primary deposits.
For example, If primary deposits are Rs 1,000, Cash Reserve Ratio (the percentage of the deposits which is kept in cash for meeting the demand of depositors) being 10%, the total deposits or credit created will be Rs 10,000. The reciprocal of Cash Reserve ratio is called the Credit Multiplier. This Credit Multiplier = 1/0.10=10
The total amount of Credit Creation = Credit Multiplier times Primal Deposits
=10 x Rs 1,000 =Rs 10,000
In this way, banks play an important role by meeting the demand for credit in an economy. We all know that credit, as a component of money supply, plays an important role in every economy.
Question.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
(b) Investment expenditure, I = 5,000 – 2,500 = 2,500
Question.31. Explain the meaning of under-employment equilibrium. Explain two measures by which ‘ full-employment equilibrium can be reached.
Answer. Under-employment equilibrium is a situation where the equilibrium level of income is established before the full-employment level. As such in this case demand is not adequate to ensure the level of output at the full-employment level. In other words, at the level of equilibrium, aggregate demand is less than aggregate supply. Therefore, for obtaining the situation of fuff-employment level, the level of aggregate demand should be increased.
There are a number of measures which can be used for increasing the level of aggregate demand. These are:
(i) Bank rate is tire rate of interest which the central bank charges from commercial banks for giving them credit. However, the relationship between rate of interest and demand for credit is inverse. Thus, in case of deficient demand, bank rate should be lowered. This will lead to a fall in the rate of interest, leading to an increase in the demand for credit. This will raise aggregate demand.
(ii) Open market operations refer to the sale and purchase of securities by the central bank. In a situation of.deficient demand, central bank buys securities in the open market and the people can borrow more. This will raise aggregate demand.
Question.32. Calculate “Gross National Product at Market Price” from the following data:
Calculate “Gross National Disposable Income” from the following data:
Note: Except for the following questions, all the remaining questions have been asked in Set I.
Question.5. Give one reason for “decrease” in supply of a commodity.
Answer. Increase in the prices of input.
Question.7. The price elasticity of supply of a commodity is 2.0. A firm supplies 200 units of it at a price of Rs 8 per unit. At what price will it supply 250 units?
Question.8. What is budget line? Why is it downward sloping?
Answer. See Q. 10, 2011 (Comptt. I Delhi).
Question.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.
Question.23. Distinguish between revenue expenditure and capital expenditure in government budget Give an example of each.
Answer. See Q. 26, 2008 (I Outside Delhi).
Question.29. How does central bank control credit creation by commercial banks through open market operations? Explain.
Answer. “Open market operations mean the sale and purchase of all kinds of bills and securities by the central bank in the open market.” In narrow terms, this method signifies sale and purchase of government securities by the central bank in the open market. In short, according to this method, central bank controls the volume of credit by increasing or decreasing the quantity of money in the economy through sale and purchase of securities in the money market. 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. This means that 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. In short, “for expanding the volume of credit central bank purchases securities and for reducing the volume of credit, it sells securities in the open market. In this way, according to this method, the volume of credit is controlled and regulated by controlling and regulating the cash reserves and credit creating power of commercial banks.”
Question.31. Distinguish between inflationary gap and deflationary gap. these can be corrected.
- Inflationary gap relates to a situation when equilibrium level takes place after the stage of full employment level. The gap between aggregate demand and aggregate supply at the full employment level is inflationary gap. In this case output cannot be increased and hence price increases. In diagram
- RN is inflationary gap.
- Deflationary gap is a situation that relates to the
equilibrium which takes place before the stage of full employment. In this case aggregate demand falls short of aggregate supply at the full employment ‘ level. The deficiency in aggregate demand in comparison to aggregate supply at full employment level is deflationary gap. In diagram (ii) RF is deflation are gap.
- For correcting the situations of deflationary and inflationary gaps, volume of credit should be regulated and controlled. For doing this the following
two methods can be adopted for controlling the volume of credit.
- Bank rate. For controlling deflationary gap, bank rate should be reduced . This will lead to a decline in the rate of interest and finally volume of credit will increase. In the case of inflationary gap bank rate should be increased so that rate of interest goes up and the demand for credit declines. This will adversely affect aggregate demand.
- Open market operations. Central bank of the country should buy securities in the open market from commercial banks. This will increase credit paying capacity of these banks and the aggregate demand will increase. On the other hand, for controlling the situation of deflationary gap, central bank of the country should sell securities in the open market which will be bought by the commercial bards. This will reduce their credit paying capacity and hence reduce the level of aggregate demand.
Question.32. lit an economy C = 200 + 0.75Y is the consumption function where G is consumption expenditure and Y is national income. Investment expenditure is 4,000. Calculate equilibrium level of income and consumption expenditure.
Note: Except for the following questions, all the remaining questions have been asked in Set I and Set II.
Question.5. Give the meaning of market supply.
Answer. Market supply means the total quantity of a commodity supplied by all the firms at a time at a price.
Question.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.
Question.8. Explain the conditions of consumer’s equilibrium under utility analysis.
Answer. Conditions for consumer’s equilibrium are:
Question.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.
Question.23. State three sources each of revenue receipts and capital receipts in government budget.
Answer. Sources of revenue receipts. (i) Direct tax, (ii) Indirect tax and (iii) Commercial revenue.
Sources of capital receipts, (i) Recovery of loan, (ii) Borrowings and (iii) Funds raised through-disinvestment.
Question.29. Explain any two methods of credit control used by central hank.
Answer. The two methods which central bank can use for controlling the volume of credit are: (i) Bank rate and (ii) Open market operations.
Bank rate is the rate of interest which central bank charges from commercial banks for giving them loans. Thus, when volume of credit is to be reduced in the economy, bank rate is increased. On the other hand, when volume of credit is to be increased, bank rate is reduced. Open market operations refer to the purchase and sale of government securities in the open market (i.e., to the banks and public) by the central bank.
When the 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.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 + 0.5 Y is the consumption function where C is consumption expenditure and Y is national income.
(ii) Investment expenditure is 1,500.
Question.32. Explain all the changes that will take place in an economy when aggregate demand is not equal to aggregate supply.
Answer. It is not necessary that equilibrium level in an economy always takes place at the full employment level. It may take place before the stage of full employment and also it may take place after the stage of full employment.
If equilibrium level takes place before the full employment level, it is a case of deficient demand. This signifies that deficiency of aggregate demand « does not lead to the full use of given resources at the full employment level. In this case involuntary unemployment exists. Therefore, for reaching the stage of full employment where all the given resources are fully utilized, efforts should be made to increase the level of aggregate demand. In Diagram (i) OZ is full employment level and OY is the actual of output level, where AD equals AS.
If equilibrium takes place after the stage of full employment, it is a case of excess demand. In this case the level of aggregate demand at the level of equilibrium is higher and hence cannot be met by full use of given resources. Therefore, in this case output does not increase and only price increases. Therefore/for achieving the stage of full employment necessary methods should be used for reducing the level of aggregate demand. In this case OZ is the full employment level and OY is the actual level of employment at equilibrium, where AD equals AS.