Sample Paper 3
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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1. Inventory is a ______ concept whereas the change in inventory is a ____ concept.
A1. Inventory is a stock concept whereas the change in inventory is a flow concept. Read stock and flow concept.
2. If in an economy the value of Net factor income from abroad is Rs 200 crores and the value of factor income to abroad is Rs 40 crores. What will be the factor income from abroad?
A2. Net Factor income from abroad = Factor income from abroad – Factor income to abroad
200 = Factor income from abroad – 40
Factor income from abroad = Rs. 240 crores Read national income basic conversion.
3. In the present COVID-19 times, many economists have raised their concerns that the Indian economy may have to face a deflationary situation, due to reduced economic activities in the country. Suppose you are a member of the high-powered committee constituted by the Reserve Bank of India (RBI).
You have suggested that as the supervisor of commercial banks, …………….
(restriction/release) of the money supply be ensured, by the Reserve Bank
of India (RBI).
A3. Money supply should be released as there exists deflation in the economy. Read Deficient demand.
4. Supply of money refers to…………………..
A4. currency held by the public and demand deposits with a commercial bank. Read the introduction to the money supply.
A5. b) B-ii Read Balance of Trade.
6. Identify which of the following statements is true? (Choose the correct alternative)
a. The flexible exchange rate system gives the government more flexibility to maintain large stocks of foreign exchange reserves.
b.In the Managed floating exchange rate system, the government intervenes to buy and sell foreign currencies.
c. In the Managed floating exchange rate system, the central bank intervenes to moderate exchange rate fluctuations.
d. In the Fixed exchange rate system, market forces fix the exchange rate.
A6. c is a correct option. Read what is the foreign exchange?
7. An Indian real estate company receives rent from Google in New York. This transaction would be recorded on ______ side of _______account.
A7. Credit side of capital account. Read Balance of payment.
Read the following news report and answer Questions 7-10 on the basis of the same:
The Reserve Bank of India (RBI), cut Repo Rate to 4.4%, the lowest in at least 15 years. Also, it reduced the Cash Reserve Ratio (CRR) maintained by the banks for the first time in over seven years. CRR for all banks was cut by 100 basis points to release ₹ 1.37 lakh crores across the banking system. RBI governor Dr. Shaktikanta Das predicted a big global recession and said India will not be immune. It all depends on how India responds to the situation. Aggregate demand may weaken and ease core inflation.
The Economic Times; March 27th, 2020
a. Cut in Repo rate by RBI is likely to……….. (increase/decrease) the demand for goods and services in the economy.
A. Increase. Read monetary policy and its tools.
b. Decrease in Cash Reserve Ratio will lead to…
A. rise in aggregate demand. Read monetary policy and its tools.
c. The difference by which actual Aggregate Demand exceeds the Aggregate Demand, required to establish full employment equilibrium is known as……………….(inflationary gap/deflationary gap).
A. Inflationary gap. Read Excess demand.
d. The impact of „Excess Demand‟ under Keynesian theory of income and employment, in an economy are:
A. no change in output/employment but increase in general price level. Read Excess demand.
9. State with valid reason, which of the following statement is true or false:
a. Gross Value Added at market price and Gross Domestic Product at market price are one and the same thing.
A. True. Gross value added and Gross domestic product are the same thing.
GVAmp = GDPmp = Value of output – Intermediate Consumption. Read value added method.
b. Intermediate goods are always durable in nature.
A. The given statement is false as intermediate goods are generally non-durable in nature. They are the goods used as raw material and they lose their identity in the production process for the creation of a new commodity, during an accounting year. Read What is national income?
10. State, giving valid reasons, whether the following statements are true or false:
a. Current account in Balance of Payments records only the exports and imports of goods and services.
It is that account which records exports and imports of goods and services (invisible).
Current account includes the followings:
- Exports and imports of goods (visible) – Like the sale of a machine.
- Exports and imports of services (invisible) – It includes the following: a. Non Factor services, that are exports and imports of services of doctors, teachers. b. Income from factor services like plumber, electrician, etc.
3. Unilateral Transfers- These are those receipts which resident of a country receives or the payments that the resident of a country make without getting anything in return. For example, gifts, charity, donation, etc.
Read Balance of Payment.
b. Borrowings from abroad are recorded in the Capital Account of the Balance of Payments on the debit side.
It is recorded in the capital account as it impacts change in the ownership of assets abroad. It does not involve the movement of goods and services across the borders.
Borrowings are recorded with a plus or credit side of the BOP account because it leads to receipts of foreign exchange from the rest of the world.
Read Balance of Payment.
11. “Trade Deficit must exist if a country is facing a situation of Current Account Deficit‟.
Defend or refute the statement, with a valid argument.
A11. The given statement is refuted as the Current Account Deficit (CAD) is a broader concept. CAD occurs when the foreign exchange payments on account of visible, invisibles and current transfers are in excess over the receipts of visible, invisibles and current transfers. A country may face a situation of CAD, even if the country has trade surplus, with greater negative balances on account of services and unilateral transfers.
Read Balance of Trade.
12. a. Define money multiplier.
A12. The money multiplier or deposit multiplier is the same. It measures the amount of money that the banks are able to create in the form of deposits with every unit of money that it keeps as a reserve.
It is calculate as : Money Multiplier (MM or K) = 1/ CRR times
12 b. “Credit creation is inversely related to the reserve deposit ratio‟. Justify the given statement, using a hypothetical example.
A12. Process of credit creation by commercial banks
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:
- All depositors do not approach the bank for withdrawal of money at the same time.
- There is a constant flow of new deposits into the banks.
- Suppose initial deposits in the bank are Rupees 1000 and CRR is 20%.
- Banks are required to keep Rupees 200 as cash reserve and are free to lend Rupees 800.
- Suppose they lend Rupees 800 to the borrower as a loan, who used it for making payments.
- 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.
- This will increase the demand deposits of the bank by Rupees 800.
- 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.
- This process keeps on repeating until the total cash reserve becomes equal to the initial reserves.
13. In an economy C= 200 + 0.5 Y is the consumption function where C is the consumption expenditure and Y is the national income. Investment expenditure is ₹ 400 crores. Is the economy in equilibrium at an income level ₹1500 crores? Justify your answer.
A13. Y = C + I
Y = 200 +0.5Y + 400
Y – 0.5Y = 600
0.5Y = 600
Y = 600/0.5
Y = 1200
No, the economy is not in the equilibrium at an income level of 1500 crores. As justified above, the equilibrium income should be 1200 crores.
14. Define: i) Ex-Ante Savings ii) Full Employment
A14. Ex-ante savings – It refers to planned savings corresponding to the different levels of income in an economy.
Full employment – It refers to a situation when all those who are able to work and are willing to work at an existing wage are getting work or employment.
15. “India‟s GDP contracted 23.9% in the April-June quarter of 2020-21 as compared to the same period of 2019-20, suggesting that the lockdown has hit the economy hard‟. The Hindustan Times, 1st September 2020
State and discuss any two fiscal measures that may be taken by the Government of India to correct the situation indicated in the above news report.
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.
16. a. “Domestic/household services performed by a woman may not be considered as an economic activity‟.
Defend or refute the given statement with a valid reason.
A16. The given statement is defended; as it is difficult to measure the monetary value of the services performed by a woman (homemaker). Therefore, these activities may not be considered as an economic activity.
When someone asks is GDP a good measure, they generally mean nominal GDP. So, the answer to the above question is “No”. Now, let’s see why it is not a good measure:
- Nominal GDP can increase even without any increase in physical output because it is affected by a change in prices. It increases without any actual increase in production, but due to the rise in prices affecting nominal GDP.
- Nominal GDP does not reflect the actual distribution of GDP. The rise in nominal GDP could be due to an increase in inequalities in the distribution of income. Thus, the gap between rich and poor increases.
- It ignores non-monetary transactions. Many activities in an economy are not calculated in monetary terms like the services of housewives are not included in GDP. However, they influence economic welfare.
b. “Compensation to the victims of a cyclone is an example of a welfare measure taken by the government‟.
State with valid reason, should it be included/not included in the estimation of national income of India.
A 16. Compensation given to the victims of a cyclone is an example of a social welfare measure taken by the government. However, it is not included in estimation of national income as it is a transfer payment which does not lead to corresponding flow of goods and services.
17. Suppose the Gross Domestic Product (GDP) of Nation X was ₹ 2,000 crores in 2018-19, whereas the Gross Domestic Product of Nation Y in the same year was ₹ 120,000 crores. If the Gross Domestic Product of Nation X rises to ₹ 4,000 crores in 2019-20 and the Gross Domestic Product of Nation Y rises to ₹ 200,000 crores in 2019-20.
Compare the rate of change of GDP of Nations X and Y, taking 2018-19 as the base year.
A17. Real GDP of nation X = 2000
Real GDP of nation Y = 120000
Nominal GDP of nation X = 4000
Nominal GDP of nation Y = 200000
Use the real GDP formula to calculate price index:
REAL GDP = NOMINAL GDP X 100/ PRICE INDEX
REAL GDP OF X = 4000 X 100/ PRICE INDEX
2000= 400000/ PRICE INDEX
PRICE INDEX OF X = 400000/2000 = 200
NOW FOR Y NATION
120000 = 200000 X 100/ PRICE INDEX
PRICE INDEX = 200000 X 100/ 120000 = 166. 67
So, inflation has increased in nation X as compared to nation Y.
Read Real and Nominal GDP.
18. a. Elaborate on the objective of “allocation of resources‟ in the Government budget.
A 18. Government Budget is an annual statement showing item wise estimates of receipts and expenditures during a fiscal year. Reallocation of Resources:i The government aims to reallocate resources according to economic and social priorities through its budgetary policy. .ii Government encourages the production of certain commodities by giving subsidies or tax reliefs. For e.g. the government encourages the use of khadi products by providing subsidies.iii Government can discourage the production of harmful goods like liquor or cigarettes by imposing heavy excise duties or taxes. In India, we use progressive taxation i.e. higher taxes from rich people and distribute these receipts through various welfare activities. Read Government Budget.
b. Discuss briefly how the Government budget can be used as an effective tool in the process of employment generation.
A18. Government budget can be used as an effective tool in the process of employment generation in various ways. Investment in infrastructural projects like construction of flyovers, bridges, expansion of roads etc. creates jobs for different sections of the workforce. In rural/urban areas government can provide jobs through various employment generation schemes like MGNREGA, SJSRY, PMRY etc. Explain these schemes.
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