TIMPANY SCHOOL

PRE-BOARD - JAN 2025

ECONOMICS (A)
KEY PAPER
28 Jan 2025

CLASS XII ​ ​ ​ ​ ​ ​ ​ QUESTION PAPER : 80

SECTION - A (16 MARKS)

QUESTION 1 ​ ​ ​ ​ ​ ​ ​ ​ ​ [16]
(i)​ c - The government has imposed a tax on the product.
(ii)​ c - 1.0
(iii)​ c - Both (a) and (b).

(iv)​ a - Zero
(v)​ b - Autonomous Items.
(vi)​ d - Option II and IV

(vii)​ d - A
(viii)​ c - Both (a) and (b).
(ix)​ a - Corporation Tax.
(x)​ b - Super-normal profits.

(xi) Justify the statement.

●​ India’s 80% of crude oil needs are met through imports.

●​ There is an increase in the cost of crude oil due to the global crises /
geopolitical tensions - Russia - Ukraine War.
●​ Thus the increase of oil prices has raised the cost of imports and leads to a
higher outflow of US dollars from India.
●​ BOP is the economic transactions between a country and the rest of the
world.
●​ Rising crude oil prices increase the import bill under the Current Account.
●​ If the increase in import expenditure is not offset by a rise in export revenue, it
leads to a widening of the Current Account Deficit (CAD).
●​ For India, this creates a negative impact on the BoP, as the higher outflow of
US dollars weakens its external economic position.
●​ This puts pressure on the currency, impacting overall economic stability.

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(xii) True or False. ​

TRUE due to structural constraints such as -

1. Lack of infrastructure – Poor transportation, electricity, and communication

networks hinder the ability to scale production.

2. Limited resources – Scarcity of capital, raw materials, and skilled labor restricts
the production capacity.

3. Inefficient industries – Outdated technologies and unproductive methods prevent

quick responses to changes in demand.

4. Institutional barriers – Bureaucratic hurdles, corruption, and weak governance

slow down economic adjustments.

Thus, even if prices rise, these economies may struggle to increase production and
supply proportionally.

(xiii) M4 measure of money supply.

M4 = M3 + TDP = C + DD + OD + TD + TDP
= Currency notes and coins with public (C )
+ Demand deposits of the people with commercial bank banks (DD)
+ other deposits with the RBI (OD)
+ time deposits with commercial bank (TD)
+ total deposits with the post office saving organisation, excluding national
saving certificates(TDP)

(xiv) Ex-ante Demand and Ex-post Demand.

Ex-ante Demand - refers to the amount of goods that consumers want to or willing
to buy during a particular period of time.
It is also known as land demand or desired demand.
Ex-post Demand - refers to the amount of goods that the consumers actually
purchase during a specific period.

(xv) Complementary Goods.

It refers to goods that are used jointly or consumed together to satisfy a given want.

(xvi) Break even point. (Pg.214)

●​ The break-even point in economics refers to the level of production or sales at

which total revenues equal total costs, resulting in no profit or loss. At this

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 point, a business covers all its fixed and variable costs but earns no additional
profit.
●​ Helps businesses determine the minimum output or sales required to avoid
losses.
●​ A useful tool for decision-making, especially when launching a new product or
analyzing pricing strategies.

In the break-even analysis graph. The key elements are:

Total Costs : The fixed costs plus variable costs as production increases.

Total Revenue : The revenue generated from sales.

Break-Even Point : The point where total revenue equals total costs.

At this point, the business neither makes a profit nor incurs a loss.

SECTION - B (32 MARKS)

QUESTION 2
(i) Price Elasticity of Supply​ ​ ​ ​ ​ ​ [2]

The Price Elasticity of Supply will be less than 1, indicating that the supply is
inelastic.

The Price Elasticity of Supply (PES) measures how responsive the quantity supplied
of a good is to a change in its price. It is calculated as:

e = Percent Change in Quantity Supplied / Percent Change in Price

•The price of mobile handsets has risen.

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•Dealers have not been able to increase the supply proportionately, meaning the
percentage change in quantity supplied is smaller than the percentage change in
price.

This could happen due to factors like production constraints, limited stock availability,
or time required to produce more handsets.

(ii) The Price Elasticity of Demand in the following commodities are - ​​ [2]
a)​ Eating in a five star hotel - Relatively Elastic because it is a luxury for many
people.

b)​ Match Boxes - Relatively inelastic because the consumer spends a very
small proportion of his income.

c)​ Tea - Relatively elastic because coffee is a good substitute which is available.
Inelastic if Tea is a habit.

d)​ Electricity - Relatively elastic because it can be put to many uses.

QUESTION 3
(i) The reasons behind the negative Returns Stage are - ​ (Pg.129)​ ​ [2]

The Law of Variable Proportions states that as more units of a variable input are
added to fixed inputs, the output initially increases at an increasing rate, then at a
diminishing rate, and eventually reaches a stage of negative returns, where
additional input decreases total output.

Reasons Behind the Negative Returns Stage:

1. Overcrowding of Variable Inputs: When too many units of the variable input are
used in conjunction with fixed inputs, there is excessive use of resources. For
example, too many workers on the same piece of land or using the same machine
leads to inefficiency and reduced productivity.

2. Fixed Input Constraints: The fixed inputs, such as machinery or land, become a
limiting factor. Beyond a certain point, they cannot support additional units of variable
input effectively, leading to inefficiencies.

3. Poor Coordination and Management: As more variable inputs are employed,

managing and coordinating them effectively becomes challenging. This can lead to
operational inefficiencies and reduced output.

4. Overutilization of Fixed Inputs: Fixed inputs are overused or stressed when too
many variable inputs are added, causing them to function inefficiently or break down.
For example, excessive use of a machine can lead to malfunctions, reducing overall
output.

5. Decline in Marginal Productivity:

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 After a certain level of input, the marginal product becomes negative due to the
diminishing contribution of each new unit. This is the hallmark of the negative returns
stage.

Hence, the negative returns stage occurs due to the imbalance between variable and
fixed inputs, resulting in inefficiencies, poor resource utilization, and declining
productivity.

(ii) Indifference Curves are convex to the point of origin..​​ ​ ​ [2]

●​ Indifference Curves are convex to the point of origin
●​ The slope of the indifference curve decreases as we move down the
indifference curve
●​ because of the diminishing marginal rate of substitution (MRS).
●​ This means that as the consumer moves downwards from left to right, MRS
declines.
●​ i.e. The MRS is the amount of a good that a consumer is willing to give up for
a unit of another good, without any change in the level of satisfaction.
●​ The consumer is less willing to sacrifice a commodity when the stock of the
commodity is low.

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 ●​ From The above schedule and graph, through the combination A to
combination D, the household is consuming a lesser and lesser quantity of
cloth and more and more quantity of food.
●​ According to the DMRS, the rate at which the consumer is willing to give up
cloth to get more food diminishes
●​ The slope of the indifference curve shows the marginal rate of substitution
because it indicates the rate at which the consumer is willing to substitute one
good for another.
●​ Hence it implies that the slope of the indifference curve must be decreasing
from left to right and must be convex to the origin.

QUESTION 4
(i) The Demand Curve of different types of Market Forms. ​ ​ ​ [2]

●​ In the first picture The demand curve is parallel to the x-axis and hence the
elasticity of demand is perfectly Elastic where it is equal to Infinite.
●​ In a perfectly elastic demand the consumers are prepared to purchase all that
they can get at a particular price but nothing at all at a slightly higher price
●​ This is an extreme or upper limit of price elasticity.
●​ This is found in a perfect competition market where the firm is a price taker.
●​ at a given price every seller can sell any amount of output in the market.
●​ Thus under perfect competition the firm is a price taker and the industry is a
price maker.
●​ In the second picture this type of demand curve is found under a monopoly.
●​ The monopolist faces a downward sloping demand curve.
●​ It means if he wants to sell more he can do so only by lowering the price. He
can also raise the price if he is prepared to forgo sales.
●​ Alternatively the monopolist can also lower the price by increasing the supply
and can increase the price by reducing his supply.
●​ Here the demand curve faced by a Monopoly firm is less elastic
●​ This is because there is absence of close substitutes in the Monopoly market
●​ He has complete control over the market and does not lose much sales when
it raises the price of its product.

(ii) Product Differentiation feature under Monopolistic Competition.​ ​ [2]

●​ Product differentiation is a unique feature of monopolistic competition.
●​ In the monopolistic competition firms produce differentiated products which
are similar in nature but are differentiated in terms of brand name shape and
size colour quality type of service etc .

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 ●​ The products produced by different firms are substitutes for each other but not
perfect substitutes nor are they homogeneous.
●​ They are regarded as the same commodity but are sufficiently different so that
consumers tend to regard them different from each other.
●​ Products of different firms under monopolistic competition may be different
from each other in two ways -
●​ Firstly on the basis of physical characteristics of the product - such as the
physical and chemical ingredients, size, colour, etc.
●​ Example cool drinks of different brands.
●​ Secondly on the basis of conditions surrounding the sale of the product -
relate to the location of the seller, his reputation, efficiency, courtesy, trust
worthiness, credit facility, etc .
●​ For example you may be willing to pay more for a shirt in the neighbourhood
store than at a store located 10 km away.
●​ Thus the individual firm has monopoly of its own differentiated product.
●​ To differentiate the products, different producers produce their products under
different brand names.
●​ This is the Monopoly element in the monopolistic competition.
●​ But each firm has to compete with other firms producing similar products with
different brand names. This is the competition element of the monopolistic
competition.
●​ Thus under Monopolistic Competition, there is Monopoly of the brand, but
competition from rival sellers selling close substitutes of the product produced
by one particular firm.

QUESTION 5
(i) Explain​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ [4]
a)​ Total Fixed Cost
●​ It is also known as unavoidable cost or supplementary cost or overhead cost .
●​ It refers to the total cost incurred by the firm on the use of all fixed factors of
production.
●​ It is independent of the output i.e. it does not change with the change in the
quantity of output.
●​ It remains constant irrespective of the quantity of output produced.
●​ It includes interest on capital investment, rent, insurance premium, property
tax ,wages and salaries of permanent employees, etc.
●​ Even if nothing is produced, the fixed cost has to be incurred.
●​ TC = TFC + TVC

b)​ Total Variable Cost

●​ It is also known as avoidable cost or prime cost or direct cost.
●​ It refers to the total cost incurred by a firm on the use of the variable factors.
●​ This cost includes payment of raw materials, wages paid to temporary and
casual workers,payment for fuel and power used in the production, expenses
incurred on transportation, etc.
●​ The cost of the variable factors of production varies in accordance with the
level of output.

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●​ These costs vary directly with the change in the volume of output.
●​ Variable cost is not incurred if nothing is produced .
●​ TC = TFC + TVC

c)​ Average Fixed Cost

●​ AFC Is the per unit cost of the fixed factors of production.
●​ It is obtained by dividing Total Fixed Cost with the total units of output
produced.
●​ The Average Fixed Cost curve slopes downwards throughout its length from
left to right, showing continuous fall in the Average Fixed Cost with an
increase in output.
●​ Mathematically speaking, the AFC curve is asymptotic to the axes. The curve
approaches the X - axis and the Y - axis at each end but never touches it
because the Average Fixed Cost cannot be zero, since the Total Fixed Cost is
positive.
●​ The AFC curve is a rectangular hyperbola showing the same level of Total
Fixed Cost at all points .
●​ AFC = TFC / Q

d)​ Marginal Cost

●​ MC Is the addition to Total Cost as one more unit of output is produced.

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 ●​ It is the addition to the Total Cost of producing n units instead of a n - 1 units.
Where ‘n’ is a given number.
●​ Marginal Cost is the change in the Total Cost as a result of change in output
by one unit.
●​ Diagrammatically Marginal Cost for any level of output can be calculated by
taking the slope of the total cost curve corresponding to that level of output.
●​ MC = ΔTC / ΔQ
●​ Marginal Cost is associated with variable cost and thereby with the total cost.
●​ The MC curve is ‘U’ shaped.
●​ TVC = MC1 + MC2 + MC3 +....MCn

OR
(i) Relationship between Marginal Cost, Average Cost and Average Variable
Cost.​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ [3]
●​ MC bears a unique relationship to average cost.
●​ AC and MC curves are ‘U’ shaped curves. AVC curve is also an ‘U’ shaped
curve.
●​ As long as AC is falling, MC is less than AC.
●​ AC is falls till point ’C’
●​ As long as AVC is falling, till point ‘B’, MC is less than AVC.
●​ Beyond point ‘C’, AC bigins to rise.
●​ At this stage MC is more than AC.
●​ Likewise when AVC begins to rise after point ‘B’ is reached, MC is more than
AVC.
●​ MC begins to rise beyond point ‘A’, whereas AC begins to rise only when
point ‘C’ is reached.
●​ Likewise AVC begins to rise when point ‘B’ is reached.
●​ Rising MC cuts AC at point ‘C’ when AC is minimum.
●​ Similarly it cuts AVC at its lowest point ‘B’.
●​ The level of output corresponding to point ‘C’ when AC = MC and Ac is
minimum, it is known as the Optimum Output i.e. OQ output in the figure.
●​ It can be observed that the relationship between MC and AC is only about the
direction of the movement of AC and the magnitude of MC.

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 ●​ When marginal cost is less than average cost, the average cost is falling but
the marginal cost itself may be falling or rising.
●​ In the given figure below, marginal cost (M) is more than average cost (A)
rises
●​ A falls when M is less than A.
●​ A is constant when M is equal to A.

(ii) Production Function​ ​ ​ ​ ​ ​ ​ ​ ​ [1]

A production function describes the relationship between the inputs used in
production (such as labor, capital, and raw materials) and the output of goods or
services produced.
It shows how inputs are combined to produce a given level of output and is typically
represented as:
Q = f(L, K, M,....)
Where:
​ •​ Q = Output (quantity of goods or services produced)
​ •​ L = Labor input
​ •​ K = Capital input
​ •​ M = Raw materials or other inputs

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​ •​ f = The functional relationship between inputs and output

QUESTION 6
(i) What is C= C + bY. ​ ​ ​ ​ ​ ​ ​ ​ ​ [2]
●​ It is the Consumption Function.
●​ Where C = consumption
●​ C = autonomous consumption
●​ b = marginal propensity to consume
●​ Y = income
●​ Consumption Function expresses the relationship between the income of the
economy and the level of consumption made by the households.
●​ It is also known as the Propensity to Consume.
●​ It implies the desire or willingness of households to purchase goods and
services at a given level of income in a given period of time.
●​ It is also called Private Consumption Demand.
●​ The consumption function is based on JM keens psychological law of
consumption.
●​ The Law states that as income increases, consumption also increases but the
increase in consumption is less than the increasing income.
●​ It means that there is a tendency among people not to spend all the increased
income on consumption but to save a part of it.
●​ Consumption increases by ’b’ for every rupee increase in income.
●​ ‘b’ implies the proportion of income which is spent on consumption and is
termed as marginal propensity to consume (MPC).
●​ Consumption function consists of two components namely Autonomous
Consumption and Induced Consumption.
{Or}
The consumption function ( C = c + bY ) consists of two main components:
1.​ Autonomous Consumption (c)
This is the portion of consumption that is independent of income. It represents the
minimum level of consumption that occurs even when income ( Y ) is zero. This
could be financed through savings, borrowing, or other means.
2.​ Induced Consumption ( bY )
This is the portion of consumption that depends on income. Here, ( b ) is the
marginal propensity to consume (MPC), which represents the fraction of additional
income that is spent on consumption. As income ( Y ) increases, induced
consumption increases proportionally.
In summary:
- ( c ) = Autonomous consumption (income-independent).
- ( bY ) = Induced consumption (income-dependent).

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(ii) Equilibrium when savings and investments are equal.​​ ​ ​ [2]
a)​ S > I
●​ When savings exceeds investment, the aggregate supply exceeds the desired
aggregate demand, since consumption is low due to higher amounts of
savings.
●​ The consumption expenditure of the households and the investment
expenditure of the firms will not be sufficient to purchase the entire output
produce.
●​ Hence, there would be excess production.
●​ Inventory will pile up with the producers.
●​ To reduce the inventory, the producers will cut down production and layoff
workers.
●​ As a result, the level of income output and employment will decrease.
●​ This process will continue till the income decreases to equilibrium level.

b)​ S < I
●​ When planned investment of the firm exceeds savings of the household by
GH amount, the demand for the goods will be more than the current
production by GH due to high consumption expenditure and low savings.
●​ A part of the current demand will be met by reducing inventory stock of goods.
●​ Therefore, firms would like to expand production, hire more workers to build
up their inventories.
●​ The level of income, output and employment will rise.
●​ This process will continue until the output increases to OY0 where savings
equals planned investment.

QUESTION 7
(i) The role of Money Multiplier in Credit Creation. ​​ ​ ​ [1]
The Role of Money Multiplier in Credit Creation is -
●​ The money multiplier plays a crucial role in the process of credit creation by
commercial banks.
●​ It determines how much money the banking system can generate from a
given amount of initial deposits.
●​ This concept is central to the functioning of fractional reserve banking, where
banks keep only a fraction of total deposits as reserves and lend out the rest.

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 ●​ Money Multiplier (MM) is the ratio that shows how much money the banking
system can create with each unit of reserves. It is calculated as:
●​ MM = 1 / RR
●​ Where:​
‘RR’ is the Reserve Ratio
●​ The Reserve Ratio is the fraction of total deposits that banks are required to
keep as reserves by the central bank.
●​ For example, if the reserve ratio is 10% (0.10), the money multiplier would be:
●​ This means that for every $1 million in reserves, the banking system can
create $10 million in total money supply.
●​ The money multiplier directly affects the amount of credit banks can create in
the economy.

1.Initial Deposit: Suppose a person deposits $1,000 in a bank.

2.Reserve Requirement: If the reserve ratio is 10%, the bank keeps $100 as
reserves and lends out $900.

3.Re-deposit & Further Lending: The $900 loaned out is spent and eventually
redeposited in another bank, which again keeps 10% ($90) as reserves and lends
out the remaining $810.

4.Process Continues: This process repeats multiple times, expanding the money
supply.

Using the money multiplier formula, the total money created from an initial deposit of
$1,000 with a 10% reserve ratio would be:

Thus, a small initial deposit results in a much larger total money supply due to the
credit creation process.

●​ Thus a Higher Reserve Ratio → Lower Money Multiplier → Less Credit

Creation
●​ Lower Reserve Ratio → Higher Money Multiplier → More Credit Creation
●​ Credit creation fuels economic growth but can also lead to inflation if
excessive.
●​ Thus the money multiplier is a key determinant of the money supply in an
economy.
●​ Through the process of credit creation, banks use this multiplier effect to
expand the available money, thereby influencing investment, consumption,
and overall economic activity.
●​ However, central banks regulate this process using tools like the reserve ratio,
open market operations, and interest rates to ensure economic stability.

(ii) Secondary functions of money.​ (Pg.250)​ ​ ​ ​ ​ [3]

●​ Standard of Deferred Payments -
○​ Means a payment to be made in future in money terms.
○​ Future payments means Interest rent salaries pensions loans
insurance premium etc.

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 ○​ Money is a convenient Bridge between the present and the future .
●​ Store of value
○​ Wealth stored in the form of money
○​ It has solved many difficulties found in the barter system.
○​ Money is the most convenient and economical way of storing wealth.
○​ Other assets like bonds shares debentures etc also serve as store of
value
○​ But money is a better store of money value since it is a perfectly liquid
asset.
○​ It is the purchasing power of a consumer Which can be used at any
time in the future to purchase goods and services and other assets.
●​ Transfer of value.
○​ Money is a convenient mode of transfer of value as it is a generally
acceptable medium of exchange
○​ it helps us to transfer value from one person to another
○​ It is easy, quick and efficient .

QUESTION 8
(i) Differences between Balance of Trade and Balance of Payments ​ ​ [2]
BALANCE OF TRADE
●​ Balance of trade (BoT) is the difference that is obtained from the export and import of
visible goods in a given year.
●​ Transactions related to goods are included in BoT.
●​ BoP need not be balanced. There can be a surplus in the balance of payments or a
deficit in the balance of payments.
●​ Balance of Trade = export of goods - import of goods.

BALANCE OF PAYMENTS
●​ Balance of payments (BoP) is the difference between the inflow and outflow of foreign
exchange. it includes total debits and credits relating to all the items on account of which
a country makes payments to and receives payments from the rest of the world.
●​ Transactions related to transfers, goods, and services are included in BoP.
●​ It is the sum total of balance of current account and balance of capital account.
●​ It is more comprehensive compared to the balance of current account and balance of
capital account
●​ Balance of payment is always in equilibrium.
●​ It follows the form of standard double-entry bookkeeping system, under which each
international transaction undertaken by residents of a country is shown on both sides,
which results in debit and credit of equal amount.
●​ In theory, balance of payment is always an equilibrium, but normally it is in deficit or
surplus.

BALANCE OF TRADE (BoT) BALANCE OF PAYMENTS (BoP)

DEFINITION
The difference between a country’s A comprehensive record of all
exports and imports of goods. economic transactions (goods,
services, capital, and financial

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 transfers) between a country and
the rest of the world.

COMPONENTS
Includes only visible trade (exports Includes current account, capital
and imports of goods). account, and financial account
transactions.

SCOPE
A narrower concept, dealing only A broader concept covering
with trade in goods. goods, services, and capital flows.

BALANCE TYPE
Can be favorable (surplus) or Always balanced as all
unfavorable (deficit) based on transactions are recorded
goods trade. systematically (deficit or surplus is
adjusted by financial flows).

IMPACT ON
Affects exchange rates and Reflects the overall economic
ECONOMY
domestic industries based on trade position of a country, influencing
performance. exchange rates, foreign
investments, and reserves.

SUBCATEGORY
Yes, it is a part of the current No, it is a broader measure
OF BoP
account in BoP. encompassing BoT and other
financial flows.

EXAMPLE
Example,If a country exports $500 BoP includes BoT plus
billion worth of goods and imports transactions like foreign
$400 billion, BoT = + $100 billion investments, remittances, foreign
(surplus). aid, and financial assets.

(ii) The appreciation of Indian Rupee in the flexible exchange rate market.​ [2]
●​ The Indian Rupee will appreciate when its demand increases or its supply
decreases relative to the foreign currency.
●​ In a flexible exchange rate system the value of the Indian rupee (INR) is
determined by market forces of demand and supply in the foreign exchange
market.
●​ However Global factors like oil prices jio political risk monetary policy of major
economies also impact the Rupee movement.
●​ The factors leading to the appreciation of the Indian Rupee are-
1.​ Increase in foreign Investments(FDI FD & FPI) -
2.​ Rise in Indian exports -
3.​ Increase in remittances from NRIs -
4.​ Reduction in Imports -
5.​ Higher interest rates in India -

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 6.​ Strong Foreign Exchange Reserves -
7.​ Weakening of the US Dollar (USD) -
8.​ Improved economic growth -
OR
(i) The relationship between foreign exchange rate and supply of foreign
exchange. ​ (Pg.305)​ ​ ​ ​ ​ ​ ​ ​ ​ [2]

●​ There is a direct relationship between the exchange rate and the supply of
foreign exchange.There is a direct (Positive) relationship.
●​ Higher exchange rates generally lead to higher foreign exchange supply, as
exports, investments, and remittances increase.
●​ However, economic policies, trade balances, and investor confidence also
play a crucial role in determining the overall availability of foreign exchange in
a country.
●​ The foreign exchange rate (or exchange rate) is the price of one currency in
terms of another.
●​ The supply of foreign exchange refers to the availability of foreign currency in
the market, which comes from various sources such as exports, foreign
investments, remittances, and foreign aid.
●​ The supply of foreign exchange increases when the exchange rate rises
(currency depreciates).
●​ The supply of foreign exchange decreases when the exchange rate falls
(currency appreciates).

(ii) Types of deficit in a budget​ (Pg. 355)​ ​ ​ ​ ​ ​ [2]

a)​ Fiscal Deficit
●​ It is the excess of total expenditure of the government over its revenue and
capital receipts, excluding borrowings.
●​ Fiscal deficit= total budgetary expenditure - revenue receipts - capital receipts
(excluding borrowings)
●​ Therefore, it is a measure of excess expenditure over what may be termed
this government’s own income, which includes revenue receipts, and recovery
of loans and other receipts under capital receipts.
●​ It is the key indicator of budgetary deficit in India, large fiscal deficit implies a
large amount of borrowings.
●​ It increases the future liability of the government in the payment of interest
and repayment of loans. Hence, it increases the revenue deficit and may lead
to more borrowing.
●​ This may sometimes lead to a debt trap.
●​ High physical deficit generally leads to wasteful and unnecessary expenditure.
●​ It also leads to inflationary pressure in the economy.

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 b)​ Primary Deficit
●​ It is the difference between fiscal deficit and interest payments by the
government on its borrowings.
●​ Primary deficit = Fiscal deficit - interest payments.
●​ It indicates the real position of the government finances.
●​ It shows how much the government is borrowing to meet its expenses, other
than the interest payments.

QUESTION 9
(i) Leakages and Injections. (Pg. 375)​​ ​ ​ ​ ​ ​ [2]
LEAKAGES
●​ Or withdrawal is the amount of money which is withdrawn from the flow of
income.
●​ Since the money is not passed on to the circular flow of income it is not
available for expenditure.
●​ Leakages reduce the flow of income in the economy.
INJECTIONS
●​ It is the amount of money which is added to the flow of income.
●​ It is an exogenous addition to the income of the firm or household.
●​ Injections increase the flow of income in an economy.
●​ As long as leakages are equal to injections the circular flow of income will
continue indefinitely.
●​ Financial institutes play the role of intermediaries.

●​ the major source of leakages and injections are -

1.​ TWO SECTOR ECONOMY
●​ Leakages - Savings (S)
●​ Injections - Investment (I)

2.​ THREE SECTOR ECONOMY

●​ Leakages - Savings (S) + Taxes (T)
●​ Injections - Investment (I) + Government expenditure (G)

3.​ FOUR SECTOR ECONOMY

●​ Leakages - Savings (S) + Taxes (T) + Imports (M)
●​ Injections - Investment (I) + Government expenditure (G) + Exports
(X)

(ii) Factor Income and Transfer Receipts.​ ​ ​ ​ ​ ​ [2]

a)​ Bonus given to workers by an employee - Factor Income
b)​ Unemployment allowance - Transfer Receipts
c)​ Rent free quarters provided by the employer to his workers - Factor Income

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 d)​ ₹1000 pocket money given by father to his son - Transfer Receipts

SECTION - C (32 MARKS)

QUESTION 10
(i) Determination of Equilibrium Price and Equilibrium Quantity. (Pg. 105)​ [6]
●​ Price is determined in the competitive market through the interaction of
market demand and market supply.
●​ The demand schedule and the supply schedule belly less trade how the
equilibrium price and quantity is determined.

●​ The table shows the demand schedule and supply schedule of various
quantities of shirts that the consumers are willing to buy at various prices and
the various quantities of shirts that sellers are willing to sell at these prices .
●​ The market demand is inversely proportional to the price i.e. as the price of a
good falls, the demand rises.
●​ The market supply is directly related to the price i.e. the producers are willing
to supply more at a higher price .
●​ The table clearly illustrates that at Rs. 800 the quantity demanded and the
quantity supplied are equal.
●​ Therefore this is the equilibrium price i.e. Rs.800 and the equilibrium quantity
i.e. 45000 shirts.

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 ●​ All other prices are in disequilibrium and quantity demanded does not equal to
the quantity supplied at these prices.
●​ In case the price of the shirt is below Rs 800, the consumers are willing to
purchase a larger quantity than the producers are willing to sell.
●​ Therefore the quantity demanded exceeds the quantity supplied by 5000
shirts.
●​ The amount by which quantity demanded exceeds the quantity supplied is
called Excess Demand .
●​ Due to the excess demand, consumers may offer higher prices in an attempt
to get goods and producers may begin to ask for higher prices in view of the
fact that there are not enough goods to meet the demand.
●​ Generally whenever there is a shortage of goods buyers compete with each
other.
●​ For sellers, shortage provides an opportunity to increase the prices and sales.
●​ Thus excess demand will push the price upward till it reaches the equilibrium
price and quantity at which the shortage disappears.
●​ In case of prices higher than rupees 800 the consumers are willing to
purchase a smaller quantity than the producers are willing to sell.
●​ The quantity supplied exceeds quantity demanded.
●​ In the above table, at Rs.1000 per shirt the buyers would be willing to buy
3000 shirts whereas the suppliers would be willing to supply 5600 shirts .
●​ Therefore the quantity supplied exceeds the quantity demanded by 2600
shirts.
●​ This is known as Excess Supply since the quantity supplied exceeds the
quantity demanded.
●​ When this happens the sellers may begin to sell shirts at a lower price to get
rid of the excess supply.
●​ This leads to lowering of prices by other producers due to the competition.
●​ Thus an excess supply will push the prices downwards and the market will
move towards equilibrium .
●​ The above diagram clearly illustrates the above explanation.

(ii) The impact on price and quantity.​ ​ ​ ​ ​ ​ ​ [2]

(a)​An increase in a consumer's income.

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●​ An increase in consumers' income would lead to an increase in demand.
●​ The demand curve will shift to the right.
●​ The equilibrium price and quantity demanded and quantity supplied will rise.
●​ In the given figure -
○​ The equilibrium price is OP and the equilibrium quantity is OQ.
○​ With an increase in demand, the demand curve shifts from DD to DD’
○​ As a result –
​The equilibrium point shifts from E to E1.
​The equilibrium quantity increases from OQ to OQ1.
​The equilibrium price increases from OP to OP1.

(b)​A decrease in the price of inputs.

●​ A decrease in the price of inputs will result in an increase in supply.

●​ As a result the equilibrium price falls and the quantity demanded and quantity
supplied increases.
○​ In the diagram -
○​ The equilibrium price is OP and the equilibrium quantities OQ>
○​ With an increase in supply, the supply curve shifts from SS to SS1.
■​ As a result -
■​ The equilibrium price falls to OP1.
■​ The equilibrium quantity rises to OQ1.

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QUESTION 11
(i) Contraction of Demand and Decrease in Demand - meaning, causes, effect on
Demand curve ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ [4]

BASIS
Contraction of Demand Decrease in Demand

MEANING When the quantity demanded of When the quantity demanded of

a commodity Falls due to a rise a commodity Falls due to a
in the price of the commodity it is change in any of the Other
known as contraction in demand determinants of demand and not
due to any change in price it is
known as decrease in demand.

CAUSES It is caused due to a change in It is caused due to a change in

the price of the commodity. the determinants of demand
other than price.

EFFECT ON Upward movement on the Demand curve shifts to the left.

DEMAND demand curve.

DIAGRAM

(ii) Elucidate with a diagram how the budget line changes when the consumer’s
income increases from ₹20 to ₹40. The prices of the two goods which the consumer
wants to consume are ₹ 4 and ₹ 5 respectively. ​ ​ ​ ​ ​ [2]

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 ●​ An increase in consumers income implies that the consumer can purchase
increased quantities of both commodities at the prevailing market prices .
●​ As a result the consumer would be faced with a new budget line.
●​ The new budget line will shift rightwards parallel to the original budget line.
●​ In the diagram, given M = Rs. 20, the budget line formed an intercept at 4
units on Y-axis and 5 units on X-axis.
●​ With the increase in M to Rs. 40, the new intercepts are formed at 8 units on
Y-axis and 10 units on X-axis.
●​ The new budget line is parallel to the original line.

(iii) Elasticity of Demand at different points of a Demand Curve.​ ​ ​ [2]

●​ AB is a straight line demand curve touching both the axes.

●​ According to Geometric method the last city at any point on the demand curve
is measured as follows -
●​ Ep = Lower segment of the Demand Curve / Upper segment of the Demand
Curve.
●​ Hence The elasticity of demand curve at different points of a straight line can
be calculated as follows -
●​ At point A, where the demand curve touches the Y-axis, the elasticity of
demand will be Infinity, since Ep = BA / zero. Ep = infinity. Perfectly Elastic.
●​ At point R, where Point R lies above the midpoint, the elasticity of demand will
be more than unity, since Ep is equal to BR > AR. Ep > 1
●​ At point S, where Point S lies in the middle of the demand curve, the elasticity
of demand will be unity, since Ep = BS / AS. Ep = 1

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 ●​ At point W, where Point W lies below the midpoint, the elasticity of demand
will be less than unity, since Ep = BW / AW. Ep < 1
●​ At point B, where the demand curve touches the X-axis, the elasticity of
demand will be zero, since Ep = zero / AB. Ep = 0.
OR
(i) The effects of simultaneous increase in demand and supply on equilibrium
price. ​(Pg. 110)​ ​ ​ ​ ​ ​ ​ ​ ​ ​ [2]
●​ An increase in demand and supply always leads to an increase in the
equilibrium output.
●​ But an increase in demand leads to a rise in price where else an increase in
supply results in a fallen price.
●​ Therefore when there is a simultaneous increase in demand and supply, the
equilibrium price may remain the same, fall or rise depending upon the
relative magnitude of increase in demand and supply. There are three
possibilities which are diagrammatically shown below.

●​ WHEN THE EQUILIBRIUM PRICE REMAINS SAME

●​ When demand and supply increase in the same proportion the equilibrium
price remains the same.
●​ In the lustration given above, DD is the initial demand curve SS is the initial
supply curve, the initial equilibrium is E, the equilibrium price is O, .the
equilibrium quantity is OQ.
●​ An increase in demand results in the shift of the demand curve to D1 D1 and
supply curve shifts to S1 S1 when supply increases.
●​ Since increase in demand is equal to the increase in supply, the equilibrium
shifts to E1, where the demand curve D1 D1 intersects with the supply curve
S1 S1.
●​ Thus the equilibrium quantity increases from OQ to OQ1 but the equilibrium
price remains unchanged at OP.

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 ●​ WHEN THE EQUILIBRIUM PRICE RISES.

●​ When increase in demand is more than the increase in supply the price will
rise along with an increase in equilibrium quantity.
●​ In the diagram both demand and supply increase but demand increases by a
larger proportion then the increasing supply.
●​ The equilibrium shifts from E to E1.
●​ The new equilibrium is E1 where the new demand curve D1 D1 intersects the
new supply curve S1 S1.

●​ WHEN THE EQUILIBRIUM PRICE FALLS.

●​ When the increase in supply Is more than the increase in demand, the price
falls but the equilibrium quantity will increase.
●​ In the figure, both demand and supply increases but supply increases by a
larger proportion than the increase in demand.
●​ The equilibrium shifts from E to E1.
●​ The equilibrium price falls from OP to OP1 but the equilibrium quantity
increases from OQ to oak Q1.
(ii) Equilibrium of a firm under long run. ​ ​ ​ ​ ​ ​ [2]
●​ In the long run all factors of production become variable and there is free
entry or exit of firms.
●​ Therefore the firms will adjust it's output according to long run price which is
determined by long run forces of demand and supply.
●​ Long run price and ensures normal profits to the firm.

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 ●​ Therefore the firms will not incur losses in the long run.
●​ The firm will be in equilibrium when AR = MR = LAC = LMC.
●​ All firms in the industry will be operating at a break-even point that is AR =
AC.

●​ The diagram illustrates the long run equilibrium of a firm.

●​ OM is the equilibrium quantity where the average revenue OP and average
cost MR are equal. Hence the firm is making only normal profits.
●​ If the existing firms are making abnormal profits in the short run new firms will
be attracted to the industry to earn these abnormal profits.
●​ the total market supply would increase.
●​ the market price will fall till all films in the industry are earning normal profits
only.
●​ if the existing forms a suffering from losses in the short run, the firms would
start leaving the industry.
●​ this will shift the market supply curve to the left.
●​ as a result the market price will rise.
●​ the exit process would continue till the firms rurning only normal profits.
●​ hence the following to conditions must be full field for a perfectly competitive
firm to be in equilibrium in the long run.
●​ First P (AR) = LAC
●​ MC = MR and LMC cuts MR from below.
●​ Since AR = MR under perfect competition, the equilibrium conditions are AR =
MR = MC = LAC

(iii) Characteristic of a market (Pg. 169)​​ ​ ​ ​ [1+1+1+1]

a)​ Perfect Competition
Free entry and exit
b)​ Monopoly
Closed or Restricted entry
c)​ Monopsony
Closed entry

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 d)​ Oligopoly
Closed or Restricted entry

QUESTION 12
(i) Differentiate between real flow and money flow of income.​​ ​ ​ [2]

BASIS REAL FLOW MONEY FLOW

MEANING It is the flow of goods and It is the flow of money between

services between households households and firms.
and firms.

KIND OF Goods and services are goods and services are

EXCHANGE exchanged for Other goods and exchanged for money.
services.

DIFFICULTY it involves barter exchange there involves no such difficulties

difficulties

ALTERNATIVE it is also known as physical flow it is known as nominal flow

NAME

DIAGRAM

(ii) Calculate the personal income and the national income from the given data.
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ [6]
NATIONAL INCOME BY INCOME METHOD
●​ NDPfc = Compensation of employees ( wages and salaries + employer’s
contribution to social security) + Operating Surplus (rent + royalty +interest +
profit) + Mixed Income of Self-employed
= 100 + 20 + 20 + 20 + 40 + 70 = Rs 270 crores.
●​ NNPfc = NDPfc + Net Factor Income from Abroad - Net Factor Income to
Abroad
= 270 - 10 = RS. 260 crores

PERSONAL INCOME
Personal income = Private income - undistributed profits
= 200 - 30 = Rs 170 crores.

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 OR
(i) The problem of Double Counting.​ ​ ​ ​ ​ ​ ​ [2]
●​ Double counting is the error which arises in national income estimation if we
add up the total output of all the sectors in the economy instead of adding up
the output of final goods and services only.
●​ The problem of double counting in national income occurs when the value of
intermediate goods is counted multiple times while measuring the Gross
Domestic Product (GDP).
●​ This leads to an overestimation of the actual national income.
●​ Double counting happens when the value of a product is counted more than
once at different stages of production.
●​ For example -
○​ A farmer sells wheat to a flour mill for Rs. 10.
○​ The flour mill processes it into flour and sells it to a bakery for Rs 20.
○​ The Bakery then uses the flour to make bread and sells it to consumers
for Rs. 30
○​ If we simply add these values (10 + 20 + 30 = Rs. 60) we would be
counting the same value multiple times which inflates national income.
●​ However the correct final value of the product is only Rs. 30 - the price at
which the final good (bread) is sold to consumers.
●​ Thus while estimating National Income we solve the problem of double
counting by taking the value of final goods and services only.
●​ Thus national income is the total value of final goods and services produced.
{Or}

Double counting can lead to several problems in economic measurement,

particularly in GDP calculation. They are:

1.Overestimation of National Income – Counting intermediate goods multiple

times inflates the GDP, making the economy appear larger than it actually is.

2.Misleading Economic Analysis – Policymakers and analysts may make incorrect

decisions based on exaggerated data, leading to ineffective economic policies.

3.Distorted Sectoral Contributions – It becomes difficult to accurately determine

how much each sector contributes to the economy if values are counted multiple
times.

4.Incorrect Taxation and Planning – Governments rely on GDP and national

income data for tax policies and development planning. Double counting can result in
inappropriate tax rates and resource allocation.

5.Inaccurate International Comparisons – If an economy inflates its GDP due to

double counting, it may appear more developed than it actually is when compared to
other countries.

To avoid these issues, the value-added method is used, ensuring that only the final
output of goods and services is counted in GDP calculations.

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(ii) Calculate Net Indirect Taxes .​ ​ ​ ​ ​ ​ ​ [2]
●​ GDPmp = NNPfc + Depreciation - NFIA + NIT
●​ NIT = GDPmp - NNPfc - Depreciation + NFIA
●​ = 6000 - 4500 - 300 + 1500
●​ = Rs. 2700 Crores

(iii) Calculate Subsidy​ ​ ​ ​ ​ ​ ​ ​ ​ [2]

●​ GNPmp = NNPfc + Depreciation + IBT - Subsidy
●​ Subsidy = NNPfc - GNPmp + Depreciation + IBT
○​ = 26000 -45000 + 3000 + 1500
○​ = Rs. (-) 14,500 Crores

(iv) Calculate Private Income.​ ​ ​ ​ ​ ​ ​ ​ [2]

●​ Private Income = GNPmp + Interest on National Debt + Current Transfer from
Government + Net current Transfers from rest of the world - Consumption of
fixed capital - Net Indirect Taxes - Net Domestic Product accruing to public
sector
■​ = 7000 + 5500 + 2000 + 2300 - 300 - 550 3700
■​ = 16800 - 4550
■​ = Rs 12250 Crores

QUESTION 13
(i) Revenue Receipts and Capital Receipts of the government. (Pg. 324) [3+3]
A.​ REVENUE RECEIPTS
●​ The government budget is presented in two parts, namely Revenue Budget
and Capital Budget.
●​ The Revenue Budget consists of Revenue Receipts and Revenue
Expenditure
●​ The Capital Budget consists of Capital Receipts and Capital Expenditure.
●​ Thus the Revenue Receipts are all those receipts which are non-redeemable
●​ Capital Receipts are the receipts of the government, which create liabilities or
reduce the assets of the government.
●​ Revenue Receipts are divided into two receipts from tax revenue and receipts
from non-tax revenue.
Receipts from tax revenue
It is the most important source of revenue for the government.
Indian Central government imposes seven main taxes -
1.​ Personal income tax
2.​ Corporation tax
3.​ Custom duties
4.​ Central excise tax

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 5.​ Service tax
6.​ GST
7.​ Interest tax
Receipts from non-tax revenue
1.​ Interest receipts
2.​ Dividends and profits
3.​ Revenue from services provided by the government
4.​ Grants-in-Aid

B.​ CAPITAL RECEIPTS (Pg.326)

When the government raises funds either by incurring, the liability by disposing of
reducing assets is called capital receipt.
It consist of -
1.​ Recovery of loans and advances.
2.​ Market loans.
3.​ Special deposits.
4.​ Small savings.
5.​ Provide funds.
6.​ External assistance.
(ii) Proportional and Progressive Tax (Pg. 302)​ ​ [1+1]​ ​
PROPORTIONAL TAX
The rate of taxation remains the same as the income of the taxpayer increases.
All incomes are taxed at a single uniform rate.
The tax liability increases in the same proportion as the increase in the income.
The tax liability increases in absolute terms i.e. total tax amount, but the proportion of
the income tax remains the same.

PROGRESSIVE TAX
The rate of taxation increases as the taxpayers income increases.
With an increase in income, the rate of tax goes on increasing in this system.
The lower income is taxed at a lower rate, and the higher income is taxed at a higher
rate.
In this system, the larger the income, the larger is the percentage of people's
income.
The tax liability increases with an increase in income, not in absolute terms, but as a
proportion of their income.

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