Posted by Anjali Kaur on Dec 04, 2020

Sample Paper 2 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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Let’s start.

Q1. In order to control the money supply in the economy, the Central Bank may ________. (Choose the correct alternative)

(A) Buy securities in the open market (B) Sell securities in the open market (C) Reduce cash reserve ratio (D)Reduce repo rate

A1. To control the excess money supply, the Central Bank may sell securities in the open market. Read Monetary Policy and its tools.

Q2. State whether the following statement is true or false: “Government Budget is an important monetary policy instrument.”

A2. False. Government Budget is a part of Fiscal Policy. Read Excess demand or inflationary gap.

Q3. Disinvestment is a_______ (capital/revenue) receipt of the government.
A3. Disinvestment is a capital receipt of the government. Read The structure of the government budget.

Q4. Effective demand is defined as ______

A4. that level of output and employment where Aggregate Demand is equal to Aggregate supply.

Q5. Two-component of money supply are _____ and ______
A5. (i) Currency held with public
(ii) Demand deposits with commercial banks. Read Introduction to money.

Q6. State whether the following statement is true or false: “Expected obsolescence is included in depreciation.”

A6. True. Read the Gross and net investment.

Q7. Fiscal deficit can be estimated using the formula ______
A7. Total Expenditure ─ Total Receipts except borrowing. Read the budget deficit.

Q8. According to the theory of Keynesian Economics, the value of average propensity to consume can never be ______

A8. ZERO. Read average and marginal propensity to consume.

Q9. ________ is one of the most important sources of demand for foreign currency.

A9. Import of goods and services. Read What is the foreign exchange?

Q10. State whether the following statement is true or false:
“As per Keynesian theory in an economy, full employment can never exist.”

A10. False. Read Concept of short-term equilibrium.

Q11. Define “Trade Surplus”
A11. Trade Surplus refers to the excess of the receipts of exports of visible items over the value of payments for imports of visible items. Read Balance of Trade.

Q12. “Final goods include only those goods which are consumed by the households”. Defend or refute the given statement with valid reason.
A12. The given statement is refuted as final goods include those goods which are either consumed by the households or purchased by a producer for investment purposes.

  • These are those goods which are used either for consumption or for investment.
  • They are included in both national and domestic income.
  • They are considered to have crossed the production boundary because they are ready for consumption.
  • Examples; Milk purchased by the household for consumption, a car purchased as an investment. Read what is national income?

Q13. “Circular flow principle is based on the assumption that one’s expenditure will become other’s income.” Explain the given statement.

A13. In a simple economy, that is, where we have only two sectors namely: producer and household. It refers to the cycle of a generation of income in the production process and its distribution among various factors of production. It also includes the provision of service and payments from the Household sector to the Producer sector.

Let’s understand this step by step:

  1. Factor services such as land, labor, capital, and entrepreneurship flow from household to producer sector, and this type of circulation where the money is not involved is called Real Flow.
  2. Factor payments such as rent, wages, interest, and profits flow from the producer sector to household for their services and this type of circulation where the money is involved is called money or nominal flow.
  3. Final goods and services, flow from the producer sector to the household sector and it is the real flow as money is not involved.
  4. Final consumption expenditure on goods and services flow from household to producer sector in exchange for goods and services, as it involves payment for the goods purchased by the household. This is money flow.
  5. We assume that there is No savings and investments. So, the total production of goods and services by the firms is equal to the total consumption expenditure on goods and services by the household.
    1. Factor payments by the firms should be equal to the factor income of the household.
    2. Consumption expenditure of household should be equal to the income of the producer sector

As shown below is the diagrammatic presentation of the circular flow of income in a simple economy with two sectors:

L- Labor who receives wages in return for their services

L- Land on which rent is paid as a payment.

K- Capital on which interest is paid

E-Entrepreneurship who receives final profit. Read circular flow of income.

Q14. Justify the following statement with a valid reason.
“Ex- ante Aggregate Demand is always equal to Ex- ante Aggregate Supply.”

A14. Ex-ante Aggregate Demand is equal to Ex-ante Aggregate Supply only when the economy is in equilibrium. At the under-employment equilibrium level, when Ex-ante Aggregate Demand falls short of Ex-ante Aggregate Supply, it will lead to the accumulation of unplanned inventories. Hence the producer will reduce employment leading to a reduction in output and income till the two forces become equal to each other and vice versa. Read Deficient demand.

Q15. Using a hypothetical numerical example, explain the process of credit creation by a commercial bank.

A15. The deposits held by banks are used for giving loans. However, banks can not use whole deposits for lending.

It is legally compulsory for the bank to keep a certain minimum fraction of the deposit as a reserve. This is known as Cash Reserve Ratio (CRR) or Legal Reserve Ratio (LRR).

Banks only keep a fraction of deposits as cash reserve because of their experience banks have observed:

  1. All depositors do not approach the bank for withdrawal of money at the same time.
  2. There is a constant flow of new deposits into the banks.
  3. Suppose initial deposits in the bank are Rupees 1000 and CRR is 20%.
  4. Banks are required to keep Rupees 200 as cash reserve and are free to lend Rupees 800.
  5. Suppose they lend Rupees 800 to the borrower as a loan, who used it for making payments.
  6. As all the transactions are routed through banks, the money spent by the borrower comes bank into the bank in the form of deposit accounts of those who have received this payment.
  7. This will increase the demand deposits of the bank by Rupees 800.
  8. With a new deposit of Rupees 800, banks again keep 20% as CRR and lend the balance of Rupees 640 ( 800 x 20/100 is CRR and remaining is available for making payment) to the borrowers for making their payments.
  9. This process keeps on repeating until the total cash reserve becomes equal to the initial reserves. Read the process of credit creation.

Q16. “Central bank acts as the banker to the government”. Elaborate the given statement.

A16. The Central bank acts as a banker agent and a financial advisor to the Central Government and all the State governments.

As a banker, it carries out all banking business of the Government like maintaining Current Account, accepting receipts and making payment, also giving out loans for managing public debts.

As a financial advisor, the Central Bank advises the Government from time to time, economic, financial, and money matters. Read the Central Bank and its functions.

Q17. “India is taking huge leaps in the index of Ease of doing Business; as a result many MNCs are shifting their production base to India.” In the light of the above statement, comment upon the flow of foreign exchange and its likely impact on the Indian Economy.

A17. India, with greater ease of doing business, may attract many more MNC’s to shift their production base to India, thereby increasing the inflow of foreign exchange (say $) to the Indian economy. This increase in foreign direct investments (FDI) by MNCs will lead to increase in the supply of foreign exchange in India leading to a fall in the rate of foreign exchange, i.e. Indian Rupee (₹) may appreciate. Increase in FDI will result in increase in production and hence may also generate employment opportunities in the Indian economy.

Q18. (a) Define ‘Revenue Expenditure’.
A18. (a) Revenue Expenditures are those expenditures of the government that neither create any assets nor reduce any liabilities of the government. Read the government budget

Q19. Distinguish between Direct tax and Indirect Tax
A19. Direct taxes are those taxes in which the impact and incidence of the tax lie on the same entities. The burden of direct taxes cannot be shifted to any other entity like Income tax. Whereas,
Indirect taxes are those taxes in which the impact and incidence of the tax lie on different entities. The burden of indirect taxes can be shifted to other entities like GST. Read the structure of the government budget.


A20. GDPmp = Value of Output – Intermediate consumption

GDPmp = NDPfc + Depreciation + Net indirect taxes

GDPmp = 200 + 40 + (IT – SUBSIDIES)

GDPmp = 240 + ( 0-10) = 230


VOO = 400 + Change in stock

230 = VOO – 100

VOO = 330

330 = 400 + CHANGE IN STOCK

CHANGE IN STOCK = – 70 = Rs – 70 crores

Read value added method

Q21. Define Real Gross Domestic Product.

A21. Real GDP or GDP at base year price or GDP at the constant price are all the same.

When the GDP of a given year is estimated at the price of the base year, it is called Real GDP. This is called real GDP because it takes inflation into account, that is, Real GDP shows the real picture after adjusting the inflation.

By inflation, we mean a rise in the prices of goods and services.

IB Economics - Calculating GDP - IB Economics

Read Real and Nominal GDP.

Q22. Discuss briefly the three components of ‘Income from Property and Entrepreneurship.’
Answer: Income from property and entrepreneurship (operating surplus) includes:

  1. Rent/Royalties
  2. Interest
  3. Profit

Read Income method.

Q23. What are ’externalities’? State its types with suitable examples.
A23. Externalities refer to the benefits and harms of an activity caused by a firm or individual for which they are not paid or penalized. Externalities are of two types:

a. Positive Externailties

Activities which result in benefits to others are called positive externalities.

For example, Use of public parks by the people for pleasure.

b. Negative Externalities

Activities for which no payments are made by the people activities which result in harm to others are called negative externalities.

For example, Environmental population caused by the industry.

Read GDP and welfare.

Q24. In an economy, if initial investments are increased by ₹ 100 crores, discuss the working of investment multiplier presuming marginal propensity to consume is 0.8

A24. The working of investment multiplier is based on the principle that one’s expenditure is another’s income.

Given initial investment = ₹ 100 crores and MPC = 0.8

Read Working of Investment Multiplier.

Thank You.

Try Sample paper 1 of macroeconomics

Try Sample paper 1 of Indian economy.

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