CLASS – XII

ECONOMICS
SOLVED SAMPLE PAPER

Que. State the three central problems of an economy.

Ans. Central problems of an economy are:
(A) What to produce? : - The problem of choice related to the
production of different goods.

(B) How to produce? : - The problem of choice related to the technique

of production.
(C) For whom to produce? : - The problem of choice related to the
distribution of output.

Que. Explain the Law of Demand with the help of demand schedule.
Ans. The law of demand states that, other things remaining constant, the
amount demanded of a commodity decreases with rises in its price and
increases with fall in its price. So, there is an inverse relationship between
price and quantity demanded of a commodity. The given table and the
diagram show the inverse relationship between price and quantity
demanded.

DEMAND SCHEDULE

Price per Unit (Rs.) Quantity Demanded

10 50
8 60
6 70
 4 80
2 90

Y D
DEMAND CURVE
10

PRICE 6

2
D1
O X
50 60 70 80 90
QUANTITY DEMANDED

Que. Draw the supply curves showing:

(A) Elasticity of supply equal to 1
(B) Elasticity of supply greater than 1
(C) Elasticity of supply less than 1
Ans.
 (A) Y

Unitary Elastic
E=1 S

PRICE
P1
P

S
O X
Q Q1
QUANTITY SUPPLIED

(B) Y

More Elastic
E>1
S2
PRICE
P1
P

S2
O X
Q Q1
QUANTITY SUPPLIED
 (C) Y

Less Elastic S1
E<1

PRICE
P1
P
S1
O X
Q Q1
QUANTITY SUPPLIED

Que. State any three factors affecting supply of a commodity.

Ans. (a) Technological changes : When there is technological
improvement, output is produced at lower cost. Lower cost of
production increases the supply of the commodity. The supply
curve shifts to the right.
(b) Prices of other goods: When price of a substitute good increases,
the quantity supplied of the concerned good decreases and there is
backward shift of the supply curve. Supply curve shifts forward in
case price of the substitute good decreases.

(c) Prices of factors of production: If factors price decreases, cost of

production also decreases. Accordingly supply increases and the
supply curve shift to the right. If factor price increases, supply tends
to decline and there is a backward shift in supply curve.

Que. The quantity demanded of a commodity at a at the price of Rs.10 per unit
is 40 units. Its price elasticity of demand is 2. its price falls by Rs. 2 per
unit. Calculate its quantity demanded at the new price.
Ans. Given that,
 Q1 − Q P
. =–2
P1 − P Q

Q1 − 40 10
. =–2
8 − 10 40
Q1 − 40 1
. =–2
−2 4
Q1 − 40
=–2
−8
Q1 – 40 = 16
Q1 = 16 + 40 = 56
Quantity demanded at new price = 56 units

Que. Complete the following table:

Output (in units) Total Cost (Rs.)
0 60
1 140
2 190
3 240
4 300
Marginal Cost Average Variable
(Rs.) Cost (Rs.)
- -
- -
- -
- -
- -

Ans.
Output(in units) T.C (Rs.) TFC (Rs.) TVC (RS.) AVC (Rs.) MC (Rs.)
0 60 60 0 0 -
1 140 60 80 80 80
2 190 60 130 65 50
3 240 60 180 60 50
4 300 60 240 60 60
Que. Distinguish between increases in quantity supplied (expansion of supply)
And increase in supply. Use diagrams.
Ans. Expansion Increase in Supply : - When a rise in the price of a commodity
leads to increase in quantity supplied, it is called expansion/extension of
 supply. If the quantity supplied increases in the market due to factors
others than price of the concerned commodity. It is a situation of
increase in supply. Tables (A) and (B) show, respectively, the situations of
‘expansion’ and ‘increase’. Likewise, Figure (A) shows expansion, while
Figure (B) shows increase.

(A) Y
Expansion of Supply
PriceQuantity 10
S 20 100
200
PRICE
20 B
10 A
S
O 100 200 X
QUANTITY

(B) Y
Increase of Supply
PriceQuantity 10
10 100
S 200
S1
PRICE E
10 E1
S S1

O 100 X
200
QUANTITY
Que. Explain any two main features of monopolistic competition of monopolistic
competition.
Or
Explain any two main features of monopoly.
Ans. Following are the important features of monopolistic competition.
(a) Large number of buyers and sellers:- The number of buyers and
sellers of a commodity is very large.
(b) Product Differentiation :- Each producer tries to differentiate his
product with a view to attracting the buyers.
Or
Ans. Main features of monopoly market are as under:-
(i) Single seller and large number of buyers of a product.
(i) Entry of new firms not possible.

Que. Explain the law of variable proportion in terms of behaviour of Total

Physical Product, with the help of a diagram.
Ans. Law of variable proportions states that as more and more of the variable
factor is used with the fixed factors, a stage must come when marginal
product(MP) of the variable factor starts diminishing. Diminishing MP may
become zero or negative.

Of course, initially, MP may rise owing to better coordination between the

factors and better utilization of the fixed factor. But, continuous increase
of the variable factor must cause mismatch between the variable and the
fixed factor, and must ultimately decline. Following table shows how the
law operates in terms of the behaviour of TP and MP.

Variable Factor MP TP
Units (Variable Factor)
1 10 10
2 15 25
3 20 45
 4 20 65
5 20 85
6 10 95
7 0 95
8 -10 85

Observations: -
(i) Initially, when MP is rising,(10 → 15 → 20), TP tends to rise at the
increasing rate. This is also described as a situation of increasing
returns.
(ii) Subsequently, when MP is constant (20→20→20), TP increases at
the constant rate. This is also described as a constant returns.
(iii) Further, when MP is declining (20→10→0), TP increases at the
diminishing rate. This is also described as a situation of diminishing
returns.
(iv) Ultimately, when MP becomes negative, TP starts declining. This is
described as a situation of negative returns.

Que. Define equilibrium price. Explain with the help of a diagram the effect of an
increase in demand of a commodity on its equilibrium price and
equilibrium quantity.
Or
“If the demand and supply of a commodity both increase, the equilibrium
price may not change, may increase, may decrease.” Explain using
diagrams.
Ans. The price which equates market demand of a commodity with its market
supply is the equilibrium price.
 Y Increase in Demand
D1
S
D
E1
P1
PRICE E
P

S D1
D
O Q Q1 X
QUANTITY

Equilibrium Price:- Market Demand = Market Supply

When the demand increases while supply remains constant the
equilibrium price increases. Figure shows that while supply remains
unchanged and demand curve shifts upwards (rightwards) from DD to
D1D1, the equilibrium price will increase from OP to OP1 and equilibrium
quantity increases from OQ to OQ1.
Or

Ans. If the demand and supply of a commodity change equally, there will be no
effect on its price. On the other hand, an unequal change in demand and
supply will affect equilibrium price. When demand increases more than
supply, price will rise. On the other hand, when supply increases more
than demand, price will fall.
 (a) Y
D1
S
D S1

PRICE
P
S
D1
S1 D
O Q X
Q1
QUANTITY

(b) Y

D1
D S

S1
PRICE P
P1
S
D1
S1 D
O Q X
Q1
QUANTITY

In Figure increase in demand and supply happen to be equi –

proportionate. Accordingly, price decreases from OP to OP1.

Que. Explain ant three factors other than the price of a commodity that affect its
demand.
Ans. Demand for a commodity is affected by the following factors:
(i) Prices of related goods: - In case of substitute goods, demand for a
 commodity falls with fall in price of the substitute commodity. In
case of complementary goods, demand for the commodity rises
with a fall in the price of complementary commodity.
(ii) Taste and preferences: - If income distribution is even, market
demand of the commodity will also change.
(iii) Income distribution : - If income distribution is even, market demand
For commodities will be at a higher level, than otherwise.

Que. Calculate value added by firm X from the following data.

Rs. (in lakh)
(a) Sales 600
(b) Purchase of raw material 200
(c) Import of raw material 100
(d) Import of machines 200
(e) Closing stock 40
(f) Opening stock 10
Ans. Value Added = (Sales + Change in stock) – Purchase of new material
= 600 + (40 – 10) – 200
= 600 + 30 – 200
= 630 – 200
= Rs. 430 lakh

Que. Explain any three components of aggregate demand.

Ans. Components of aggregate demand are explained as follows:
(i) Household consumption expenditure (C) is the amount of the
money spent by the people on the purchase of goods and services
in order to satisfy their wants directly.
(ii) Government consumption expenditure (G) is the expenditure made
by the government on the purchase of goods and services.
(iii) Investment expenditure (I) is the expenditure that increases the
stock of capital goods like machines, factories, houses, etc.
Que. Distinguish between revenue expenditure and capital expenditure. Give
an example of each.
Ans. Any expenditure that creates an asset or reduces a liability is categorized
as capital expenditure. Example, investment in shares. Any expenditure
that neither creates an asset nor reduces a liability is categorized as
revenue expenditure. Example, expenditure on law and order.

Que. In an economy, the level of income is Rs. 2000 crore and marginal
propensity to consume is 0.75. Calculate the total increase in income if
investment increases by Rs. 200 crore.
Ans. ∆Y = K. ∆I ………………. (i)
∆Y: Increase in Income
K: Multiplier
∆I = Increase in investment
1
K= ……………… (ii)
1 − MPC
1 1
K= = =4
1 − 0.75 .25
Accordingly
∆Y = 4. ∆1
∆Y = 4 × 200
= Rs. 800 crore

Que. State the main objectives of budgetary policy.

Ans. Budget is a comprehensive statement of the expected receipts and the
expenditure of the government during the financial year (1st April to 31st
March).
Following are the principal objectives that the government pursues
through the budget.
 (i) Re-allocation of Resources: The government seeks to re-allocate
resources with a view to maximizing social welfare.
(ii) Re-distribution of Income: Distribution of income is sought to be
improved through subsidies and taxation.
(iii) Economic Stability: Using its revenue and expenditure policy, the
government ensures economics stability in the economy.
(iv) Direct Participation and Economic Growth: The government seeks
to accelerate the pace of growth by establishing public sector
enterprises.

Que. State the main functions of money.

Ans. The function of money can be classified into the following three
categories:
(i) Primary Functions are those functions which are common to all
countries during all time period. These include the following:
(a) Medium of exchange, (b) Measure of value.
(ii) Secondary Functions are those functions which are
supplementary to the primary functions. These include the
following:
(a) Standard of deferred payments, (b) Store of value, (c) Transfer
of value.
(iii) Contingent Functions are those functions which help in the
economic development of the country. These include the following:
(a) Basis of credit creation, (b) Distribution of national income,
(c) Bearer of option, (d) Guarantee of solvency, (e) Increase in the
liquidity of capital.

Que. Describe any one method of quantitative credit control.

Or
Describe two main functions of Commercial Bank.
Ans. Bank rate policy is an important method of credit control used by Central
Bank. The bank rate is the rate at which the central bank lends to the
commercial banks against approved securities. An increase in the bank
rate increases the cost of securing funds from the central bank. This
reduces the ability of the commercial banks to create credit. Therefore,
when bank rate rises, it will cause the commercial banks to increase their
lending rates, thus reducing the volume of credit. Similarly, lowering of
bank rate will reduce the cost of borrowing from central bank. The
commercial banks will reduce their lending rates and thus the volume of
credit will increase.
Or
Ans. Two main functions of Commercial Banks:
(i) Acceptance of Deposits: Commercial banks accept deposits from
the general public. Broadly base deposits are classified as (i)
demand deposits and (ii) term deposits. Demand deposits are
chequable deposits and can be withdrawn by the depositor by
issuing a cheque. Term deposits are not chequable deposits. These
are like fixed deposits with the bank for the specified period of time.
(ii) Advancing Loans and Creation of Credit: Commercial banks
advance loans to the general households and the producers. In the
process, they tend to create credit and add to the supply of money
in the economy.

Que. Name the main component of the current account of Balance of Payments
accounts. What does the deficit in current account indicate?
Ans. Principal Items of current account balance of payments are as under:
(a) Merchandise: It refers to all such items of exports and imports
which are visible, and is therefore also called “visible trade” relating
to “exports and imports”. Current account showing export and
import visibles is often referred to the Balance of Trade Account.
 (b) Invisibles: It refers to all such items which are rendered to rest of
the world or received from rest of the world in the form of services.
Invisibles in India’s balance of payments include the following
principal services:
Travel, Transportation, Insurance and Banking.
Services rendered to the rest of the world are treated like exports,
and services received from the rest of the world are treated like
imports.
(c) Transfers: It refers to unilateral transfers such as gifts or donations.
These are broadly divided as: (i) official transfers, and (ii) private
transfers. Donations and gifts received from rest of the world are
shown as “receipts” while those given to rest of the world are shown as
“payments”.
(d) Investment Income: It refers to income by way of rent, interest and
profit. Income earned by our country from our country is shown as
“payment” in the current account balance of payment.
(e) Compensation of Employees: It refers to income earned or paid to
rest of the world by way of wages or salaries.
Deficit in current account indicates that the imports of goods and
services into the country are more than the exports of goods and
services from the country.

Que. Explain the concept of inflationary gap with the help of a diagram. Give
any two measures of reducing it.
Or
Explain the concept of equilibrium level of income with the help of C + I
curve. Can there be unemployment at equilibrium level of income?
Explain.
Ans. Inflationary gap is the excess of aggregate demand over and above its
level required to maintain full employment equilibrium in the economy. In
the figure AS is the aggregate supply curve and AD is the demand curve.
 Equilibrium between AD and AS is struck at point E corresponding to
which to which all the OM number of workers are employed and there is
full employment. If the level of demand increases to AD 1 it is in excess of

what is required to maintain full employment. The difference between AD 1

and AD i.e. FE point to inflationary gap.

Y Over Full Employment

AS
Equilibrium AD
Inflationary
Gap F
AD

EXPENDITURE E
Full Employment
Equilibrium

Full Employment

O X
M
INCOME / EMPLOYMENT

Inflationary gap can be reduced through increased bank rate of taxation to

reduce excess demand for goods and services, and through increased
bank rate which makes credit dear.
Or
Ans. According to the Modern Theory of Income and Employment
determination, in any economy at any given time , income and
employment are determined at that level where aggregate demand is
equal to aggregate supply.
in the figure AD represents aggregate supply curve. From figure it is clear
that equilibrium level of income (Y) is determined at point E, where AD
curve and AS curve intersect each other (AD = AS). Hence ‘E’ indicates
equilibrium point and OY is equilibrium level of income. Any point to the

left of E (like E 1 ) would mean that AD > AS. Accordingly, level of output
would be raised till it reaches E. likewise, any point to the right of E (like E
 2 ) would mean that AD < AS. Accordingly, level of output be decreased. It
is only at point E that the equilibrium could be struck where AD = AS.

Y
AS

AD
AD<AS
E E
E
AD
AD>AS

45°
O X
Y
INCOME / EMPLOYMENT

Yes, there can be unemployment at equilibrium level of income. In fact,

equilibrium can be struck:
(i) at full employment, (ii) at less than full employment, or (iii) at more than
full employment.

Que. Will the following be included in Gross National Product? Give reasons for
your answer:
A. Profits earned by a foreign company in India.
B. Money received from sale of shares.
C. Salary paid to Americans working in Indian embassy in America.
D. Money received from sale of old house.
E. Scholarship received by a student.
F. Remittances from abroad.
Ans. (i) Profits earned by a foreign company in India ia a part of domestic
income, not of national income.
(iii) Money received from the sale of shares is not be included in GNP
as there is no value added corresponding to the sales and the
purchase of shares.
 (iv) Salary paid to Americans working in Indian embassy in America is a
part of the net factor income from abroad.
(v) Money received from the sale of old house is not to be included in
GNP, because it is an old house of which value added has already
been accounted for in the earlier year when the house was
constructed.
(vi) Scholarship received by the student is not included in the GNP
because it is a transfer payment corresponding to which there is no
value addition.
(vii) Remittances from abroad are transfer payment in case these are by
the non-residents, but are the part of net factor income in case
these are by the normal residents of a country. Transfer payments
are not to be included in GNP but anything that is a part of net
factor income from abroad is to be included in GNP.

Que. Calculate GNP by income method and expenditure method from the
following data:
(Rs. in crore)
a. Rent 40
b. Private final consumption expenditure 800
c. Net Exports 20
d. Interest 60
e. Profit 120
f. Government final consumption expenditure 200
g. Net domestic capital formation 100
h. Compensation of employees 800
i. Consumption of fixed capital 20
j. Net indirect taxes 100
k. Net factor income from abroad (-)20
Ans. GNP
(i) Income Method:

GNP (Rs. in crore)

= Rent 40
+ Interest 60
+ Profit 120
+ Compensation of employees 800
+ Consumption of fixed capital 20
+ Net Indirect Taxes 100
+ Net factor income from abroad -20
= 1.120

(ii) Expenditure Method:

GNP (Rs. in crore)

= Private final consumption expenditure 800
+ Net Exports 20
+ Government final consumption expenditure 200
+ Net domestic capital formation 100
+ Consumption of fixed capital 20
+ Net factor income from abroad (-)20
= 1.120