[1]

Section A – Micro-Economics

1. Why does AC curve always lie above AVC Curve?OR

What is the area under MP curve equal to?2. "Health Care services provided by the government increases public expenditure" Is it positive or

normative statement?3. Which of the following statements describes the presence of diminishing returns, holding at

least one factor constant? (a) The MPP of a factor is rising and positive (b) The MPP of a factor is falling but positive (c) The MPP of a factor is falling and negative (d) The MPP of a factor is constant

OR The 2nd phase (diminishing returns to a factor) is exhibited which of by the following total

product sequence: (a) 50, 50, 50, 50 (b) 50, 110, 180, 260 (c) 50, 100, 150, 200 (d) 50, 90, 120, 1404. What is meant by market period.5. Whatwilllikelybetheimpactoflargescaleoutflowofforeigncapitalonproductionpossibilities

curve of an economy and why?OR

WhydoCentralproblemsarise?Discussbriefly.6. When price of a commodity X fall by 10%, its demand rises from 150 units to 180 units.

Calculate its price elasticity of demand. How much should be the percentage fall in its price so that its demand rises from 150 units to 210 units.

7. State whether the following statements are true or false (a) Thecoefficientofpriceelasticityofdemandisnegativewhendemandfallsandispositive

when demand uses.

(2018-19)Date : ___________Duration : 3 Hr. Max. Marks : 100

ClassXIIEconomics

Instructions:4 All questions are compulsory.4 This question paper contains 29 questions.4 Question 1– 4 and 13 – 16 are very short-answer type questions carrying 1 mark each.4 Question 5 – 6 and 17 – 18 are short-answer type questions carrying 3 marks each.4 Question 7 – 9 and 19 – 21 are long-answer-I type questions carrying 4 marks each.4 Question 10 – 12 and 22 – 24 are very long-answer-II type questions carrying 6 marks each.

Sample Paper

[2]

OR 'Supply curve is the rising portion of marginal cost curve'. Explain the statement using a

diagram.9. Give reasons for the following- (a) Demand curve is indeterminate under oligopoly. (b) Equilibrium price rises due to increase in price of substitute of commodity. (c) Equilibrium quantity falls when government imposes a tax on the commodity. (d) Demand curve under monopolistic competition is more elastic than demand curve under

monopoly.10. Aconsumeriswillingtosacrifice3unitsofYtoobtainonemoreunitofX.PriceofXandYare

Rs.6andRs.3respectively.Answerthefollowingquestions. [1+2] (i) Is the consumer in equilibrium. (ii) What would be he do to maximise his satisfaction given the price of two commodities. (b) 'Higher indifference curve means higher utility'. Explain. [3]11. (a) State three conditions of monopolistic competition. Which of the characteristics separate

it from perfect competition and why? [3] (b) TheequilibriumpriceofacommodityisRs.15/unit.Governmentfindsittowlowandfix

a price higher than equilibrium price at Rs. 20 per unit. Examine the implications of this decision in the commodity market. Use diagram. [3]

OR (a) Howwillthecommoditymarketbeaffectedifgovernmentfixapricelowerthanequilibrium

price. (b) Explainbrieflytheimplicationsofthefollowingfeatures- (i) Non price competition under oligopoly. (ii) Single seller in monopoly.12. (a) Complete the following table.

Output (Units) Average variable cost (AVC) Total Cost Marginal Cost1 — 50 202 18 — —3 — — 184 20 110 —5 22 — —

(b) WhatwouldbetherelationshipbetweentheMRandARwhentosellmoreoutputfirmhas to lower down the price of a commodity . [3]

Section B – Macro-Economics

13. Whatdoeszeroprimarydeficitmean?OR

Definefiscaldeficit?

(b) The slope will be more than 1 if the demand curve is relatively elastic. (c) All the affordable bundles of the consumer lie on the budget line. (d) Consumerwillconsumeinfiniteunitsofacommodity,ifitisavailableatzeroprice.8. What is meant by supply what will be the elasticity of supply of a commodity if- [4] (i) Supply curve intersects 'X' axis in -ve range. (ii) Supply curve intersects 'Y' axis in +ve range. (iii) Supply curve starts from origin.

[3]

14. ___________ refers to that portion of total deposits of a commercial bank which has to be kept with itself in the form of liquid assets.

(a) cash reserve ratio (b) statutory liquidity ratio (c) Bank rate (d) Repo rate.15. Repayment of loan is a capital receipt. State true or false giving reasons.16. Calculate the legal reserve requirement if initial deposit of Rs 1200 crore leads to creation of the

total deposits of Rs 6000 crores.17. Calculate the additional investment needed if the equilibrium level of income falls short by

Rs. 1000 crores. It is given that the consumption function is given as C = 120 + 0.8 Y.OR

Explain the components of the equation: C = 20 + 0.90Y and construct a schedule for consumptionwhereincomeisRs.200,Rs.250,Rs.300,Rs.350andRs.400.

18. In an economy the planned investment is ` 650 crores and the savings function is S=–400+0.35Y.Whatistheequilibriumlevelofincome?

19. Identify and explain the objective which the government seek to achieve from the following announcements in its budget for the year 2017-18.

(a) raise GST on cigarettes (b) tax incentives for setting industries in backward states (c) increasing income tax rates (d) providing technical help to Public sector enterprises.20. Using a numerical example elaborate the credit creation process as handled by the commercial

banks.OR

Explain the following (a) Reverse repo rate (b) Currency authority function of central bank (c) Role of open market operations in controlling credit (d) Margin requirements21. What is meant by double counting ? How this problem can be avoided?

OR Discussbriefly,thecircularflowofincomeinatwosectoreconomywiththehelpofsuitable

diagram.22. (a) Giving reasons, state whether the following statements are correct or incorrect. (i) Investment on the purchase of shares is a part of net capital formation. (ii) Shivam purchased a car worth Rs. 5,00,000 to commute between his home and

office.Thecarwillbetreatedasintermediateconsumption. (iii) Electricity bill of factory run by Mr. Suresh is Rs. 15,000. This will be included in

national income. (iv) Mrs. Usha received interest on the government bonds owned by her. This interest is

a part of national income. (b) From the following data calculate: (i) NDP at MP (ii) NNP at FC by income and expenditure method

S. No. Items Rs. in crore1. Personal consumption expenditure 6102. Wages and salaries 2303. Employees contribution to social security schemes 150

[4]

4. Grossbusinessfixedinvestment 1805. Gross residential construction 1206. Profit 507. Govt. purchase of goods and services 958. Gross public investment 609. Rent 7010. Inventory investment 5511. Exports 5012. Interest 6013. Imports 6014. Net factor income from abroad –515. Mixed income 38016. Depreciation 4017. Subsides 1018. Indirect taxes 9019. Employers contribution to social security scheme 200

OR (a) Differentiate between National income at Current Prices and National income at Constant

Prices. Which of the two presents a better view of the economic growth of economy and why?

(b) Calculate national income Items 1. Single used producer goods 40 2. Price per Unit 10 3. Fixedassetoflifespan10yrs. 200 4. OutputsoldwithintheboundaryofIndia 300 5. Purchase by foreigner in India 10 6. Unsoldstockattheendoftheyear 30 7. GST 100 8. Net factor income to abroad (–) 45 9. Financial help given to domestic producers 2023. (a) According to recent media reports: 'USA has accused China of currency devaluation to promote exports' In the light of the given media report comment ,how exports can be promoted through the

currency devaluation? (b) State true or false giving suitable reasons 1. Currentaccountdeficit(CAD)isdeficitonBOT 2. Export and Import of machinery are recorded in the capital account of BOP 3. AccommodatingtransactionsarerecordedoncreditsideofBOP,iftheautonomous

payments are greater than autonomous receipts.24. Are the following statements true or false? Give reasons. (a) "RisingMPSisbeneficialforadevelopingeconomy." (b) Duringdeficientdemand,equilibriumisdeterminedatfullemploymentlevel. (c) Consumption function will be linear in case MPC is constant. (d) Average Propensity to save can never be negative. (e) Unplanned inventories accumulate when planned investment is less than planned

savings.

[5]

(f) Govt. spends huge amount of money on public works to control the situation of excess demand.

OR Explain Under employment equilibrium using a diagram. How much increase in investment

should take place to make an economy reach full employment equilibrium?

vvvvv

[6]

Section A – Micro-Economics1. AC in the sum of AVC and ATC and ATC \ AC lies above AVC.

OR TP2. Positive3. (b)

OR (d)

4. Marketperiodreferstoveryshortperiodinwhichoutputcan'tbechangedeitherbychangingfixedfactorsorvariablefactors.

5. ?

OR ?

6. Q = 150 units.

Q1 = 180 units.

\ DQ = Q1–Q=30units.

Percentage change in quantity demanded

= ×∆QQ

100

= × =30

150100 20%

Price elasticity =Percentage change in qty. demanded

Percentage change in priice

=

−=

( ) %%

.2010

2

When demand rises from 150 to 150 units

Ed = 2

Q = 150 units Q1 = 210 units

⇒ DQ = 60 units.

Percentage in quantity demanded = × = × =∆QQ

100 60150

100 40%.

Ed = Percentage change in quantity demanded

Percentage change in price

⇒ 2 = (–) 40%demandedPercentage change in price

⇒ Percentage in price = (–) 20%.

\ Price should fall by 20%.

7. (a) False,coefficientofpriceelasticityofdemandisalwaysnegativeaspriceandquantitydemandedareinverselyrelated.

(b) False, the slope of DD curve will be less than 1 when demand curve is relatively elastic. (c) false, all affordable bundles of the consumer lie within and one the budget line. (d) False, consumer will consumer commodity till point of saturation (MU = 0, TV is maximum)

(2018-19)Date : ___________Duration : 3 Hr. Max. Marks : 100

ClassXIIEconomics

Hints/Solutions to Sample Paper

[7]

8. Supply is the quantity that a producer is willing to offer for sale at a given price during a given period of time. (i) Elasticity of supply will be greater than 1 if supply curve intersects 'X' axis in negative range. (ii) Elasticity of supply will be greater than 1 if supply curve intersects 'Y' axis in positive range.

(iii) Elasticity of supply will be equal to 1.

OR Supply Curve is the Rising Portion of MC Curve: Supply curve shows the various quantities of a commodity offered

forsaleatvariousalternativeprices.Foraperfectlycompetitivefirm,thesupplycurveisnothingelsebuttheupwardmarginal cost curve.

Y

XO

P3

P2

P1

A B

C

DMR3

MR2

MR1

Pri

ce (

in R

s.)

Output (in units)O O1 O2 O3

MC InfigureletOP1istheinitialprice,thatisgiventothefirmbytheindustry.AperfectlycompetitivefirmwillselltheoutputatwhichMCisequaltoMRorprice (as MR is equal to Price under perfect competition). At OP1 price, price line P1cutsMCcurveattwopoints:AandB.ButprofitmaximizingconditionissatisfiedatpointB,whenMR1 is equal to MC and MC is increasing with output.So,theprofitmaximisinglevelofoutputisOQ1, i.e., if price is OP1, then producer would like to supply OQ1 level of output.

If the price of OP2, then equilibrium would be established at point C and producer would supply OQ2 level of output. Similarly for price OP3, producer would supply OQ3 output.

Similarly, each point on the MC curve shows the output, which the producer would supply at different levels of price. Thus,itisonlytheupwardslopingpartofthemarginalcostcurvewhichisthesupplyofaperfectlycompetitivefirm.

9. (a) Indeterminatenessofdemandcurve:Inanoligopolisticmarketwhenafirmlowersdownthepricetopromoteitssaleitaffectsotherfirmsalso.Henceasareactionrivalfirmsalsostartstoreducetheirprices.Inthissituationthefirstfirmmaynotbeabletoincreaseitssaleasmuchasithasthoughtofatthetimeofreducingtheprice.

(b) When the price of substitute the demand of a commodity increases resulting in excess demand in the economy. Due to excess demand equilibrium price rises.

(c) Whengovernmentimposestaxonthecommodityprofitoftheproducerfalls.Heiswillingtosupplythussupplycurve shift left word. This results in fall in equilibrium quantity.

(d) Demand curve under monopolistic competition is more elastic than demand curve under monopoly due to presence of close substitutes. Since, close substitute are available under monopolistic competition, consumer can switch over from one commodity to another with change in price.

10. (a) MRSxy=3PPx

y

= =63

2

(i) NotheconsumerisnotinequilibriumastheconsumeriswillingtosacrificemoreunitsofYascomparedtowhatthemarketexpectshimtosacrifice.

(ii) He would buy more of X and less of Y. As he being more of X, marginal utility derived from X will fall. i.e., MRs will fall. He will keep on buying more of X till MRSxy = Px/Py.

(b) Higher indifference curve represents higher utility. A set of indifference curves representing various levels of satisfaction isknownas indifferencemap. Infinitenumberof indifferencecurvesshowingdifferent levelsofsatisfaction can be drawn as shown in the diagram.

Thehigherindifferencecurve(I3)hashigherutilitythan(I2orI1). This is based on the assumption of ‘monotonic preferences’. Monotonic preferences means that a consumer always prefers the combination which has either more of both

goods or more of at least one good and no less of the other goods. As a consumer moves to higher indifference curves, he is able to have more of both the goods for eg. at point A,

he can have OX1, OY1, but at point B he can have more of X, at point C he can have more of Y and at D he can have more of both the goods. B, C and D lie on a higher indifference curve. Therefore, a higher indifference curve has higher utility.

[8]

Y2

Y1

X1

X2

A

B

C

D

I1

I2

Good Y

Good X

O

\ We conclude that higher indifference curve has higher utility.

11. (a) (i) Large number of buyers and sellers. (ii) Differentiated products. (iii) Selling cost.

DissimilaritiesThe product is homogenous, it is identical in shape, size,colour,quality,etc.

Theproductisdifferentiatedonthebasisofshape,size,colour, brand etc.

Since all products are identical no selling cost is incurred as buyers and sellers have perfect knowledge about market conditions.

Heavy selling costs are incurred on sales due to lack of knowledge among sellers and buyers.

Since there are large number of firms selling homogenous products price is determined by the industryandthefirmisapricetaker.

Sinceproductsaredifferentiated,thefirmhaspartialcontrol over the price.

Demand curve is perfectly elastic as price remains the same at all levels of output.

xUnits/Quantity

y

O

Demand curve slopes downwards as more output can be sold only by lowering the price.

Units/Quantity xO

y

Under this market form AR = MR = Price. AR and MR curves are downward sloping and MR < AR.

Perfect mobility of the factors of production. Lack of perfect mobility of the factors of production. (b) Governmentfixedapricehigherthanequilibriumpricedtoproducttheinterestofproducers.Itiscalledprice

floor. (i) Support Price : It is the minimum guaranteed price assured to the farmers. The objective is to save the

farmersfromlossesifthemarketpricefallstoolow.Theeffectoffloorpricecanbeunderstoodwiththehelp of a diagram.

Pri

ce (

in R

s.)

Quantity demanded and supplied (in unit) Suppose, equilibrium price determined by market forces of demand and supply forces is too low at OP.

Government will then announce support price higher than equilibrium price to protect the interest of farmersandtoprovideincentivetothemforfurtherproduction.Let’sassumegovernmentfixesOP1 as support price. At OP1, quantity supplied is more than quantity demanded resulting in excess supply (= LK). The excess supply is purchased by the government either to increase the buffer stock or for exports.

Thiswaygovernmentinsulatesthefarmersfromfluctuationsintheirincomewhichiscausedbypricevariations in the free market.

OR (ii) Price ceiling or maximum price:Itreferstofixingofthemaximumpriceofacommodityatalevellower

than the equilibrium price. Government imposes price ceiling in case of essential commodities (Wheat, Sugar, Kerosene etc.) when the equilibrium price determined by free market forces (i.e. demand and supply) is high. Let us understand this through a diagram.

[9]

Pri

ce (

in R

s.)

Quantity demanded and supplied of wheat (in unit) In the diagram, suppose equilibrium price determined by free market forces of demand and supply is very high

i.e.atOP.Sincewheatisanessentialcommodity,governmentfixesthemaximumpricelowerthanequilibriumprice at OP1.

At this controlled price (OP1) quantity demanded is more than quantity supplied to the extent of KL. It creates a shortage and to overcome this shortage government may enforce the rationing system.

Rationing is a technique adopted by the government to sell a minimum quota of essential commodities at a price lower than equilibrium price to enable poor people to buy the commodity. Rationing has to be administered by the government effectively otherwise it will result in black marketing.

A black market is any market in which the commodities are sold at a price higher than the maximum price fixedbythegovernment.Blackmarketexistsasconsumersarewillingtopayahigherpricethanthepricefixedupbythegovernment.Shortageandblack-marketingleadstopublicpressureontothegovernmenttoimpose ‘rationing or arrange supply through the public distribution system. Thus the conclusion is to make the maximum price ceiling effective it must be accompanied by rationing, otherwise it may lead to black-marketing.

(b) Explainbrieflytheimplicationsofthefollowingfeatures- (i) Non-pricecompetition:Whenthereareonlyafewfirmstheyarenormallyafraidofcompetingwitheach

otherbyloweringtheprice.Itmaystartapricewarandfirmwhostartsthepricewarmayultimatelylose.Thus,firmsindulgeinnon-pricecompetitioninordertoincreasetheirsharesinsalesandprofit.Under non-price competition they mainly utilise publicity and selling techniques for increasing the sales of their product.

Firms under oligopoly follow the policy of rigidity. Price rigidity refers to a situation in which price tends tostayfixedirrespectiveofchargesindemand&supplyconditions.

(ii) Single seller in monopoly.12. (a)

Output AVC TC Marginal cost

1 20 50 20

2 18 66 16

3 18 84 18

4 20 110 26

5 22 140 30 (b) Relationship between AR and MR (when price falls with rise in output) (i) Underimperfectcompetitionthereareasmallernumberoffirmsinthemarket.Firmscanincreasetheir

volume of sales only by decreasing the price. It means AR falls with increase in sale. (ii) As a result the revenue from every additional unit (i.e. MR) will be less than AR. As a result both AR and

MR curves slope downwards from left to right. This relationship can be better understood through table andfigure.

Units Sold AR (`) TR (`) MR (`)

Ratio of Fall(AR:MR)

1 5 5 5 –

2 4 8 3 1 : 2

3 3 9 1 1 : 2

4 2 8 – 1 1 : 2

5 1 5 – 3 1 : 2

(iii) Both MR and AR fall with increase in output. However the fall in MR is double than that in AR i.e. MR falls at a rate which is twice the rate of fall in AR. As a result, MR curve is steeper than the AR curve.

(iv) When the AR curve is extended till point T, then MR curve cuts the X-axis exactly halfway between the point of origin (O) and point T, so that OS = ST.

Section B – Macro-Economics

13. Ifprimarydeficitiszero,thenfiscaldeficitisequaltointerestpayment.Itisnotaddingtoexistingloans.Itindicatesthat interest commitments on earlier loans have forced the government to borrow.

[10]

OR Fiscaldeficitisdefinedasexcessoftotalexpenditureovertotalreceiptsexcludingborrowingduringafiscalyear.14. (b)15. False . It is a capital expenditure as it leads to fall in the liability.

16. LRR = 0.217. MPC = 0.8 Therefore, k = 1/1-mpc = 1/1-0.8 = 5 Change in income is 1000crores So, 5 = 1000/ change in investment Therefore Change in investment = Rs. 200 crores

OR

Components 20 = autonomous consumption

0.90= MPC

Consumption Schedule

Y C

200 200

250 245

300 290

350 335

400 380

18. I = ` 650 Cr. S=–400+0.35Y At equal level of income S = I –400+0.35Y=650

⇒ 0.35Y=650+400=1050

⇒ Y = 10500 35.

= 3000Cr.

19. (a) reallocation of resources (b) reducing regional inequality (c) redistribution activities (d) management of public enterprises20. Money / Credit Creation by the commercial bank Credit creation by the banks is determined by (i) The amount of initial fresh deposits and (ii) The Legal Reserve Ratio (LRR) = (CRR + SLR). Legal reserve ratio is that fraction of demand deposits with the commercial banks which is legally required to be

kept as cash. It is further assumed that all the money that goes out of bank as loans is redeposited in the banks. Credit creation can be explained with the help of illustration

Deposits Loans Cash reserves

Initial 1,000 800 200

I Round 800 640 160

II Round 640 512 128

• • • •

• • • •

• • • •

• • • •

• • • •

5000 4000 1000

Let LRR be 20% and there is a fresh deposit of ̀ 1,000. As required, the banks keep 20% i.e 200 as cash and lend the remaining ` 800. Those who borrow use this money for making payments. As assumed those who receive payments put the money back into the banks. In this way banks receive fresh deposits of ̀ 800. The banks again keep 20% i.e. 160 as cash and lend ` 640, which is also 80% of the last deposits. The money again comes back to the banks leading to a fresh deposit of `

[11]

640. The money goes on multiplying in this way, and ultimately total money creation is:

Total money creation = Initial deposit × 1LRR

.%

= × =1000 120

5000`

Thusmoney/depositmultiplierisdefinedasthemultiplebywhichdepositscanincreaseduetoanincreaseininitialdeposit.

OR (a) Reverse Repo Rate: It is the rate at which commercial banks park their funds with RBI. Banks are always happy

to park funds with RBI as their money is in safe hands with a good interest rate. (b) Currency Authority function of central bank - Central bank is given the sole monopoly of issuing currency in

order to secure control over volume of currency and credit. RBI issues all currency notes in India from Rs. 2 and above.

(c) Role of open market operations in controlling credit: (i) Open market operations refers to sale and purchase of securities (mainly government securities) in the

open market by the central bank. (ii) The sale of government securities to banks will have the effect of reducing their reserves. When the bank

gives the central bank a cheque for the securities, the central bank collects the amounts by reducing the bank’s reserves by the particular amount. This directly reduces the bank’s ability to give credit and therefore decrease the money supply in the economy.

(iii) When the central bank buys securities from the banks, it gives the banks a cheque drawn on itself in payment for the securities. When the cheque clears the central bank increases the reserves of the bank by a particular amount. This directly increases the bank’s ability to give credit and thus increase the money supply.

(d) Margin Requirements - The difference between the market value of security offered and the value of amount lent is called margin requirement.

21. There are two alternative ways of avoiding double counting: (i) FinalOutputMethod:Accordingtothismethod,thevalueofonlyfinalgoodsshouldbeaddedtodetermine

the national income. Final goods are those goods, which are ready for consumption, i.e., they are ready for sale (andhavecrossedtheboundarylineofproduction).Thevalueoffinaloutputcanbecalculatedbydeductingthe value of intermediate goods from the value of output. In the above example, the value of bread i.e. 220 (520 –300)willbetakeninthenationalincome.

(ii) Value Added Method: According to this method, sum total of the value added by each producing unit of the country should be taken in the national income. Value added refers to the difference between value of output and the value of intermediate consumption. As per the given example, sum total of the value added by each producer will be included in the National Income.

Value of Output Value Added

1. Output produced by an enterprise when valued at market price.

Value of Output = Output produced × price

Itisthecontributionmadebyenterprisetothecurrentflowofgoods&services.

2. It includes value of intermediate goods. It is obtained by subtracting value of intermediate goods from value of output value added = value of output – Intermediate consumption

3. Value of output will lead to double countingtherefore is not used while calculating national income.

Value added is taken to calculate national income because it avoids double counting.

OR Asimpleeconomyassumestheexistenceofonlytwosectorsi.e.householdsectorandfirmsector.Householdsrepresent

theownerofallfactorsofproductionandtheconsumersofgoodsandservices.Ontheotherhand,firmsproduceandsell goods and services to the households. It is the simplest form of closed economy, in which there is no government sector and foreign trade.

Assumptions: (i) There are only 2 sectors in the economy : Households and Firms. It means, there is no government and foreign

sector. (ii) Therearenosavingsintheeconomy,i.e.,neitherthehouseholdssavefromtheirincomes,northefirmssave

fromtheirprofits. (iii) There is no government. (iv) It is a closed economy.

[12]

Therearetwotypesofcircularflows:(i)Realflow (ii)MoneyFlow (i) RealFlow:Realflowreferstotheflowoffactorservicesfromhouseholdstofirmsandthecorrespondingflowof

goodsandservicesfromfirmstohouseholds.Thehouseholdsectorprovidesfactorservicestothefirmswhich,in turn, provide goods and services to them as a reward for their productive services.

(ii) MoneyFlow:Moneyflowreferstotheflowoffactorpaymentsfromfirmstohouseholdsfortheirfactorservicesandthecorrespondingflowofmoney,fromhouseholdstofirmsintheformofconsumptionexpenditureonthepurchaseofgoodsandservicesproducedbythefirms.

Firms make factor payments to households for their factor services and households spend the factor income, in theformofconsumptionexpenditure,ongoodsandservicesproducedbythefirms.

Theentireamountofmoney,whichispaidbyfirmstothefactorowners(households),ispaidbackbyfactorownerstothefirms.So,thereisacircularandcontinuousflowofmoneyincome.Inthecircularflowofincome,production generates factor income which is converted into expenditure.

Conclusions of Circular Flow in a Simple Economy: 1. Total Production = Total Consumption 2. Factor Payment = Factor Income 3. ConsumptionExpenditure=FactorIncome 4. Real Flow = Money Flow Thus, National Product = National Income = National Expenditure 22. (a) (i) Incorrect, net capital formation is the increase in the stock of physical capital whereas shares are part of

financialcapitaljustindicatingmeretransferofownership. (ii) Incorrect,itisprivatefinalconsumptionexpenditure. (iii) Incorrect, it is not included as it is intermediate cost.

OR (a) National income at current prices If goods and services produced in a year are valued at current prices, i.e., prices prevailing in that particular

year, we get national income at current prices. Current prices refer to the prices prevailing in the year in which goods and services are produced. For example, when goods and services produced during the year 2008-2009 are valued at prices of the same year, i.e., 2008-2009, it will be called national income at current prices for the year 2008-2009. National income at current prices is called Nominal National Income.

(b) National income at constant prices Ifgoodsandservicesproducedinayeararevaluedatfixedprices,i.e.,pricesofthebaseyear,wegetnational

income at constant prices. Constant prices refer to the prices prevailing in the base year. A base year is carefully chosenyearwhichisanormalyearfreefrompricefluctuations.(NotethatinIndianow1999-2000istreatedasbase year. National income at constant prices is called Real National Income.

(c) SignificanceofNIatconstantprices(orRealNationalIncome) National incomemeasuredat constantprices truly reflects the real change inphysicaloutputofa country

whereas national income at current prices does not. National income at current prices is affected by two factors namely (a) change in prices (b) change in physical output (amount of goods and services produced) National income at constant prices is affected by only one factor namely, change in physical output. It can rise

onlywhenthereisanincreaseinthelevelofphysicaloutputbecauseherepricesarekeptconstantorfixed. Numerical Illustration

[13]

We can illustrate the concept of ‘National Income at Current Price’ and ‘National Income at Constant Price’ with the help of the following hypothetical schedule:

Commodity

Quantity Produced (2008-09)

Q1

Current Year Price (`) (2008-

09)P1

Base Year Price (`)

(1999-2000)P0

Market Value at the Current Price (`) Q1 × P1

Market Value at the Base

Year Price (`)Q1 × P0

Wheat (Kg) 100 kg. 10 / kg. 7 / kg. 10,000 7,000

Cloth (metres) 500 metres 12 / metre 6 / metre 6,000 3,000

Milk (Litres) 250 litres 10 / litre 8 / litre 2,500 2,000

Total Market Value 18,500 12,000 National income of 2008-09 at the current year prices is considerably higher than national income at the base

year prices for the same level of output. The difference of ` 6,500 is not real. It does not give a true picture of economic growth (as the increase is mearely due to rise in prices). In order to measure the real growth of an economy, we must estimate national income at constant prices.

Expenditure Method:

GDPMP = PFCE + GFCE + GDCF + Net exports

=1+7+(4+5+8+10)+(11–13)

= 610 + 95 + (180 + 120 + 55 + 60) + (50 + 60)

= Rs. 1110

(a) GDPMP = GDPMP – Depreciation

= 1110 – 40 = Rs. 1070 crore

(b) NNPFC

Expenditure Method: NNPFC = NDPMP + NFIFA – NIT

= 1070 + (– 5) – (90 – 10)

= Rs. 985 crore

Income Method:

NNPFC = COE + OS + MISE + NFIFA

= (2) + (19) + (6 + 9 + 12) + 15 + 14

=230+200+50+70+60+380–5

= Rs. 985 crore.

23. (a) Devaluation of a currency encourages exports of a country. As exported goods become cheaper in the international market giving a competitive edge for the domestic country (China) .

(b) (i) False.deficitinBOTisdeficitinonlythevisibletradeofacountry.

WhereascurrentaccountdeficitincludesdeficitinvisibleandinvisibleItems.

(ii) False ; It is Visible trade so part of the BOT and current account.

(iii) TRUE : In order to balance the BOP the credit entry is passed as the payment are more than the receipts.

(a) (i) Incorrect, net capital formation is the increase in the stock of physical capital whereas shares are part of financialcapitaljustindicatingmeretransferofownership.

(ii) Incorrect,itisprivatefinalconsumptionexpenditure.

(iii) Incorrect, it is not included as it is intermediate cost.

(iv) Incorrect, it is not part of national income, it is a kind of loan taken by government for consumption. This will be treated as transfer payment.

(b) Expenditure Method:

GDPMP = PFCE + GFCE + GDCF + Net exports =1+7+(4+5+8+10)+(11–13) = 610 + 95 + (180 + 120 + 55 + 60) + (50 + 60) = Rs. 1110 (i) GDPMP = GDPMP – Depreciation = 1110 – 40 = Rs. 1070 crore (ii) NNPFC

[14]

Expenditure Method: NNPFC = NDPMP + NFIFA – NIT = 1070 + (– 5) – (90 – 10) = Rs. 985 crore Income Method: NNPFC = COE + OS + MISE + NFIFA = (2) + (19) + (6 + 9 + 12) + 15 + 14 =230+200+50+70+60+380–5 = Rs. 985 crore.24. (a) False. As it will reduce spending in the economy and lead to recession. (b) False.During deficient demand, economy attainsunder employment equilibriumwhen some resources are

unemployed. (c) True. MPC is slope of consumption function curve. As slope is constant we will get linear curve. (d) True, at income levels which are lower than the break-even point, APS is negative, i.e., there are dissavings in

the economy. (e) False, householdsarenotconsumingasmuchasfirmsexpectedthemto.As a result inventory starts piling up

above the desired level. (f) False. Govt. curtails expenditure on public work to control the situation of excess demand.

OR DeficientDemand:Whenatfullemploymentincomelevel,ADislowerthanAS,thedeficiencyinADiscalleddeficient

demand.

Deficientdemandreferstoasituationwhenthecurrentaggregatedemandislessthantheaggregatedemandrequiredto achieve full employment of resources.

When AD is less than AS, there is less demand for inputs than actually available. As a result of this, prices of inputs startfalling.Thiscreatesdeflationarysituationintheeconomy.

In the diagram full employment income = OF

At full employment income,

Aggregate Demand = BF

Aggregate Supply = AF (OF)

SinceAD<AS,thereisdeficientdemandintheeconomywhichcreatesdeflationarygap.

DeflationaryGap=AF–BF=AB

Since at OF, AD < AS (i) There is accumulation of stock of inventory. (ii) Producers would cut down production. (iii) They would layoff workers which will reduce employment. (iv) Thus output falls income falls, and it keeps on falling till AD = AS at OU which is called underemployment

equilibrium. Thus underemployment equilibrium is a situation when equilibrium is attained at less than full employment

level of income. Theinvestmentshouldincreasebytheextentofdeflationarygap,i.e.,AB,sothateconomyreachfullemployment

equilibrium from income level U to F.

A

B

Income/Output

AD = (C + I + I)� �

C FU

Aggregatedemand E

C

AS

AD

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