Sample Paper 1 of Macroeconomics
Hi students, in this post, you will see that I will be solving a sample paper of economics for the class XII CBSE examination. I will be providing the full explanation for the answer as well.
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Q1. Which of the following is not a non-tax revenue receipt?
(A) Goods and Services tax
(B) External grants
(C) Dividends and profits
A1. Goods and Services tax because it is a tax revenue receipt and it comes under the indirect tax. Read the structure of the Government budget.
Q2. Deflationary gap indicates _________ (excess/deficient) demand in an economy.
A2. Deficient demand. It refers to the situation when AD < AS corresponding to the full employment level of output in the economy. When the actual level of AD is less than the full employment level of AD then that gap between full employment AD and actual AD is known as the deflationary gap. Read deficient demand.
Q3. State, whether the following statement is true or false:
‘‘Government budget is an annual statement showing actual receipts and actual payments of the government for the last fiscal year.’’
A3. False. The government budget is an annual statement showing item wise estimates of receipts and expenditure of the government during a financial year. Read The Government Budget.
Q4. Name the components of money supply. 1
Money supply is denoted by M1.
M1 = CURRENCY HELD BY THE PEOPLE + NET DEMAND DEPOSITS HELD BY COMMERCIAL BANKS + OTHER DEPOSITS WITH RBI
M1 is the most liquid form of money. It includes cash at the bank and cash in hand. Read the Introduction to Money.
Q5. If the exchange rate of the home currency rises, the value of exports of the economy is likely to ________.
A5. Fall. This is an appreciation that refers to a rise in the value of the domestic currency in relation to the foreign currency. For example, if the exchange rate becomes INR 40 for 1 USD. So, in this case, imports will rise and exports will fall. Read Equilibrium in the Foreign exchange market.
Q6. State the meaning of Involuntary Unemployment. 1
A6. It refers to a situation when people are willing to work at an existing wage rate but are not getting work due to the lack of demand in the market. Read Deficient Demand.
Average Propensity to Save (APS) is the ratio of ________ and ________ .
Savings and National Income. Read Average and Marginal Propensity to save.
Q7. State, whether the following statement is true or false :
‘‘The official reserve transactions are taken as the accommodating item in Balance of Payment (BOP).’’
A7. True. These are undertaken to establish the Balance of payment equilibrium. Read Balance of Trade.
Q8. Under the Statutory Liquidity Ratio, commercial banks are required to keep a fraction of _________ in the form of liquid assets. (Choose the correct alternative)
(A) Total deposits
(B) Term deposits
(C) Total demand and term deposits
(D) Current deposits
A8. (A) Total deposits or (C) Total demand and term deposits
SLR is the minimum percentage of deposits of commercial banks (Net demand and time liabilities) which every bank is required to maintain with itself in the form of liquid assets like current account balances. Read Monetary Policy & its tools.
Q9. Define ‘Foreign Exchange Rate’.
A9. Foreign exchange is a rate at which the currency of 1 country can be exchanged for the currency of the other country. For example, INR 70 = 1 USD. It implies that in order to buy 1 USD, Indians need to spend INR 70. Read What is the foreign exchange?
Q10. Primary deficit can be zero if _________ .
(Fill in the blank with the correct alternative)
(A) Fiscal deficit = Interest payments
(B) Fiscal deficit < Interest payments
(C) Fiscal deficit > Interest payments
(D) Revenue deficit < Fiscal deficit
A 10. (A) Fiscal deficit = Interest payments. If the primary deficit is 0 then the fiscal deficit is equal to the interest payment, which indicates that interest payment on the previous loans had lead to the borrowings. Read the budget deficit.
Q11. Distinguish between a ‘Current account deficit’ and a ‘Trade deficit’.
|Current Account Deficit||Trade Deficit|
|CAD refers to excess payments for the value of imports of goods and services over the value of exports of goods and services.||The trade deficit is also known as the balance of trade deficit.|
|Current Account Deficit (CAD) refers to excess payments for the value of import of visible items, invisible items, and unilateral transfers over the receipts from the value of export of visible items, invisible items, and unilateral transfers.||Trade deficit refers to the excess of the payments for the value of import of visible items over the value of receipts of export of visible items.|
Q12. ‘‘Balance of Payment (BOP) is always balanced in the accounting sense.’’ Defend or refute the given statement with valid reasons.
A12. The balance of payment of a country is a systematic record of the economic transactions between residents of a country and residents of a foreign country during a given period of time.
The given statement is defended, like Balance of payment (BOP) is based on the principles of the double-entry bookkeeping system. Any deficit/ surplus created through autonomous transactions is corrected by the corresponding surplus/deficit in accommodating transaction by the monetary authority.
Q13. From the following data, calculate (a) Revenue deficit and (b) Fiscal deficit :
A13. Revenue Receipts = Tax Revenue + Non Tax Revenue
Revenue Receipts = 1000 + 2000 = 3000
Revenue Deficit = Revenue Expenditure – Revenue Receipts
Revenue Deficit = 3821 – 3000 = 821 (Rs in crores)
Fiscal deficit = Total Expenditure – Total Receipts =
Total Expenditure = Revenue Expenditure + Capital Expenditure
Total Expenditure = 3821 + 574 = 4395
Total Receipts = Revenue Receipts + Capital Receipts
Total Receipts = 3000 + Recovery of loans + Disinvestment = 3000 + 135 + 100
Total Receipts = 3000 + 235 = 3235
Fiscal Deficit = 4395 – 3235 = 1160 (Rs in crores)
Read The Budget Deficit
Q14. In the given figure, what does the gap ‘KT’ represent? State and discuss any two fiscal measures to correct the situation.
KT’ represents inflationary gap Two fiscal measures are –
- a) Increase in Taxes – To curb the inflationary gap the government may increase the taxes. This may reduce the purchasing power in the hands of the public which in turn may reduce the Aggregate Demand in the economy to bring it equal to the Aggregate Supply.
- b) Reduction in Government Expenditure- To curb the inflationary gap the government may reduce its non-developmental expenditure. This may reduce the purchasing power in the hands of the people which in turn will reduce the Aggregate Demand in the economy to bring it equal to the Aggregate Supply.
Q15. What is meant by deflationary gap ? State and discuss any two fiscal measures to correct the situation of deflationary gap.
It refers to the situation when AD < AS corresponding to the full employment level of output in the economy. When the actual level of AD is less than the full employment level of AD then that gap between full employment AD and actual AD is known as the deflationary gap.
The deflationary gap measure the size of the deficient demand. As shown in the diagram AD and AS intersect each other at point E which indicates full-employment equilibrium, but actual AD that is, AD intersects AS at point E1 indicating underemployment. The gap between actual AD and planned AD is EBE1 is known as the deflationary gap.
Measures to correct Deficient Demand
To correct deficient demand we have fiscal policy and monetary policy:
Fiscal policy refers to the revenue and expenditure policy of the government to control the situation of inflation and deflation in the economy.
To control deficient demand, the government will adopt the following tools:
1. Increase in Government Spending
The increase in government spending is an expenditure policy. If the economy is suffering from the deflationary gap, the government should increase its expenditure on public works such as road construction, flyovers, etc. with a view to providing additional income to the people. This will increase AD and the situation of deficient demand gets corrected.
2. Reduction in Taxes
This is a revenue policy of the government so, in a situation of a deflationary gap, the government should reduce the rate of taxes which will increase the purchasing power of the people. This will help in increasing people spending on consumption and investment. Finally, it will raise the level of AD and deficient demand will get corrected. Read Deficient Demand.
Q16. ‘‘To boost the falling demand in the economy, the Reserve Bank of India recently reduced Repo rate.’’ Elaborate on the rationale behind the steps taken by the Central Bank.
A16. Repo rate is the rate at which the Reserve Bank of India lends funds to the commercial banks for a short period of time. A decline in repo rate may induce commercial banks to reduce lending rates. This may encourage demand for loans in the market-leading to greater funds at the disposal of the general public. This may lead to the creation of higher Aggregate Demand in the economy. Read Monetary Policy and Its Tool.
Q17. Calculate Gross Value Added at Market Price (GVAMP) from the following data :
GVAmp = Value of output – Intermediate Consumption
Value of output = SALES + CHANGE IN STOCK
Sales = Domestic Sales + Exports = 200 + 10 = 210
Value of output = Sales + (-10) = 210 – 10 = 200
GVAmp = 200 – Single Use Producer Goods = 200 – 120 = 80
Read the value added method
Q18. The value of the Nominal Gross National Product (GNP) of an economy was = 2,500 crores in a particular year. The value of GNP of that country during the same year, evaluated at the price of the base year was = 3,000 crores.
Calculate the value of the GNP deflator of the year in percentage terms. Has
has the price level risen between the base year and the year under consideration?
Nominal Gross National Product = 2500
Price of the base year = 3000
GNP deflator = Nominal GNP x 100/ price of the base year
GNP deflator = 2500 x 100 / 3000
GNP deflator = 83.33%
No, the price level has reduced from base year to current year by 16.67%. Read Real and Nominal GDP.
Q19. Define the problem of double counting in the estimation of National Income. Discuss two approaches to correct the problem of double counting.
A19. The counting of the value of a commodity more than once is called double-counting. The problem of double counting leads to an overestimation of the value of goods and services produced. Thus, the importance of avoiding double-counting lies in avoiding overestimating the value of domestic products.
To avoid the problem of double counting 2 method are used which are:
1. Final Output Method
According to this method, the value of intermediate goods is not considered. Only the value of final goods and services is considered. For example, the value of final goods that is bread is Rs. 900, which will be included in the calculation of national income.
2. Value added method
The total value added at each stage of production is considered. For example, the value-added at each stage of production is added, 400 + 200+200+100 = 900. Read about the problem of double counting.
Q20. Answer the following questions based on the data given below :
(i) Planned investment = Rs 100 crore
(ii) C = 50 + 0·5 Y
(a) Determine the equilibrium level of income.
(b) Calculate the saving and consumption expenditure at the equilibrium level of National Income.
A 20. Equilibrium level of income,
Y = C + I
Y = 50 + 0.5Y + 100
0.5Y = 150
Y = 150/0.5
Y = 300
C = 50 + 0.5 (300) = 50 + 150
C = 200
Y = C + S
300 = 200 + S
S = 100 Read how to solve problems on AD and AS.
Q21. Define the following :
(a) Capital Goods
These are those final goods which help in the production of other goods & services. Read What is National Income?
(b) Gross Domestic Product
It is defined as the gross market value of all the final goods and services produced by all the production units within the domestic territory of the country for one year. Read National Income formulas and tricks.
(c) Flow Variables
A flow concept is a quantity measured over a specific period. For example; your pocket allowance is 1500 rupees, per month on which you will get 4% annual interest by the bank. So, this value is a flow concept because they are measured over an hour, a month, an year. Read Stock and Flow variables.
(d) Income from property and entrepreneurship
Rent refers to the income earned from property and profit refers to the income generated from entrepreneurship. Profit can be further categorized into the following three categories as dividends, corporate profit tax, undistributed profits. Read Income method
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