Instructions - · PDF fileInstructions Attempt all ... Examples Explicit cost ... Describe the causes for disequilibrium in BOP. (2) Ans. The causes for disequilibrium in BOP are :

7/20/2015 Class 12 Economics Papers ICSE, ICSE Class 12 Economics, Class 12 Economics ICSE | Extraminds

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Instructions

Attempt all questions from Section A and any four questions from Section B.

The intended marks for questions or parts of questions are given in brackets ().

SECTION A (40 Marks)

Question 1

(a) Give any two characteristics of economic resources. (2)

Ans. Two characteristics are:

(i) Resources are limited or scarce in relation to their demand(ii) Resources can be put to diverse uses

(b) Define opportunity cost and explain it with the help of an example. (2)

Ans. The opportunity cost of any commodity is defined as the cost of next best alternative, which has been sacrificed for producing the given commodity.The concept of opportunity cost is derived from the diverse or alternate uses of the resources available in the economy. If the resources are used for theproduction of one alternative then, the benefit of the given resource from other alternative is sacrificed. This sacrifice of withdrawing the given resources inalternative activity, in order to carry out a given activity, is termed as opportunity cost.

(c) Why PPC is also called the transformation curve? (2)

Ans. Production possibility curve represents various combinations of two commodities that can be produced from a given scarce resources. It is based onthe assumption of fuller and efficient utilization of resources in the economy which represents that any point of production possibility curve represents themaximum level of production in the economy. Fuller utilization of resources also implies that the production level of one commodity can be increased onlyby reducing the production of another commodity i.e. the resources are withdrawn from production of one commodity to increase the production of anothercommodity. Thus, one commodity is transformed into the other not physically but by transforming resources to it. Therefore, PPC is also called thetransformation curve.

(d) Distinguish between fixed cost and variable cost. (2)

Ans. (i) Fixed cost are those cost which do not change with the change in the level of output while variable cost changes with the change in the level of output.(ii) Fixed cost remain constant at all levels of output and can never be zero,while variable cost is zero with zero output.

(e) What does the price elasticity of supply mean? How does we measure it? (2)

Ans. It is the degree of responsiveness of change in quantity supplied due to change in price. We can measure the elasticity of supply as per givenformula

Es = Change in Quantity supplied x Price Change in price x Quantity

= Change in Q x P Change in PQ

P = PriceQ = Quantity

Question 2

(a) Distinguish between explicit cost and implicit cost. (2)

Ans. Explicit costs are the cost, which are paid to outside factors of production while Implicit cost is the cost of self owned and self occupied resources.

Examples

Explicit cost Implicit cost(1) Advertisement (1) Rent of owned building(2) Insurance (2) Interest of own capital

(b) Define Production Function. (2)

Ans. The Production function represents the technological relationship between physical input and output of a product. In other words it shows that with agiven state of technology and during a particular period of time. How much we can produce with the given inputs. Symbolically, production function can bewritten as fallows



Q = f ( f1, f2, f3.......f4 )

f1 f2 f3 are factors of production.

Generally Land, Labour, Capital and Entrepreneur are the factors of production used in the production process.

(c) Define marginal cost with an example. (2)

Ans. Marginal cost is defined as the cost for producing one additional unit of the commodity. For example ,if total cost of producing 20 units of acommodity is Rs.200 and if 21 units are produced, the cost increases to Rs 250.The marginal cost would be

Rs 250 Rs.200 = Rs.50

(d) What is a foreign exchange rate ? (2)

Ans. It is the rate at which currency of one country can be exchanged for currencyof another country.

(e) BOT shows a deficit of Rs.5,000 crores and value of imports are Rs.9,000 crores. What is the value of exports? (2)

Ans. We can calculate the value of exports as follows:

BOT = Value of exports – Value of imports

5,000 = Value of exports – 9,000

Value of exports = 9,000 – 5,000 = 4,000 crores

Question 3

(a) What are the sources of supply of foreign exchange? (2)

Ans. The supply of foreign exchange comes by:

(i) Exporting of goods and services by domestic exporters.(ii) Transfer payments in the form of gifts, donations, cash remittances by families etc.(iii) Foreigners who invest and lend in the home currency.(iv) Income receipts in the form of profits, dividends interest, compensation of employees etc.

(b) Describe the causes for disequilibrium in BOP. (2)

Ans. The causes for disequilibrium in BOP are :

(i) Large imports due to large scale development expenditure(ii) High domestic prices(iii) New sources of supply and new substitutes(iv) Political instability(v) Changes in taste, fashion and preferences

(c) Explain the concept of foreign exchange market. (2)

Ans. A foreign exchange market is a market that facilitates the trading of the currencies of different countries.

It performs the following functions:

1. Transfer function2. Credit function3. Hedging function

(d) What do you mean by trade surplus and trade deficit? (2)

Ans. Trade surplus occurs when the exports exceed the imports.It shows positive net exports. while the negative net exports are the trade deficit. Itmeans the imports exceed the exports.

Net Exports = Exports Imports If Exports > Imports, there is a trade surplus. If Exports < Imports, there is a trade deficit.

(e) What are unilateral transfers? (2)

Ans. Unilateral transfers refer to invisible trade. Invisible trade means the various items that are received free of cost. They are considered to be transferpayment. Gifts, donations, indemnity etc are the various items of unilateral transfer.



Question 4

(a) Define consumption demand. (2)

Ans. Consumption demand is defined as the demand for goods and services that households are able and willing to buy for consumption at a particulartime.

(b) Define average propensity to save? (2)

Ans. Average propensity to save is the ratio of total saving and total income i.e., the average rate of saving in proportion to the income.

Symbolically, APS = S/Y.

(c) Explain the concept of induced investment. (2)

Ans. Induced investment is that investment which is income elastic. It is positively related to the level of income in an economy. If national income goesup, investment also goes up. According to Keynes, induced investment is determined by marginal efficiency of capital. Following are the features ofinduced investment:

a) It is income elastic.b) It is generally done in the private sector.c) It depends upon the level of income.d) It is reflected by a upward rising curve to the right.

(d) In a situation of excess demand, what happens to output and prices in an economy? (2)

Ans. (i) In a situation of excess demand, the level of output remains constant because it is the situation of full emplyment and factors are already fullyemployed. However, in the long run output can be increased by increasing the productivity of labour.

(ii) Flow of goods and services remains constant owing to constant output. This creates pressure on demand of existing output. Excess pressure ofdemand on existing output causes price rise or inflation in the economy.

(e) What is meant by full employment equilibrium? (2)

Ans. Full employment equilibrium is that point where all available resources in the economy are employed fully. It is characterized by no involuntaryunemployment. At this point the aggregate demand becomes equal to the aggregate supply, i,e. there is neither excess demand nor deficient demand. Thisis the ideal situation that every economy aspires to achieve.

SECTION B (40 Marks)

Question 5

(a) How the government can increase aggregate demand during deflation? (5)

Ans. (1) Increasing public expenditure The government can step up public works, like roads, and dam construction, bridges, railway lines, etc so as toprovide more employment which will allow money flow to the general public.

(2) Reducing tax on income so that people have more purchasing power.

(3) Encouraging deficit financing i.e, printing of more notes resulting in increased money supply

(4) Reducing bank rates and cashreserve ratio so that credit is cheaply and easily available. Another result of this is that banks will be encouraged to givecredit since they will have more money at their disposal.

(5) Open market operationsBy purchasing government securities from banks, the central bank can increase the total money with the banks, therebymaking it easier for them to disburse credit.

(6) Reducing margin requirementThrough this borrowing will be encouraged and entrepreneurs will be able to get more credit against their security becausehave to keep less reserves with them.

(7) Foreign trade policyThe government should refocus its export policy which should encourage exports while discouraging imports as increasing exportswill generate growing employment and income.

(b) Explain the concept of investment multiplier. Is there any relationship between multiplier and MPC? (5)

Ans. When investment increases by a certain amount, aggregate income increases by a multiple of that investment. Thus, investment multiplier is basedon the change in income due to the change in investment. The change in income is determined by marginal propensity to consume.

There is a direct relationship between multiplier and marginal propensity to consume. The value of multiplier is determined by the value of MPC. Higherthe marginal propensity to consume, greater will be the value of multiplier and vice versa.



Question 6

(a) Write a short note on the behaviour of aggregate demand. (5)

Ans. Aggregate demand refers to the totaldemand forgoods and services in an economy in a particular year. Four components of aggregate demand areprivate consumption demand, private investment demand, government demandfor goods and servicesand net exports. But for the sake ofsimplicity,aggregate demand is denoted in terms of consumption demand and investment demand. Symbolically,

AD = C + I Following are the features ofaggregate demand:

i) Aggregate demand depends upon the level of income. The greater the income,greaterwill be the aggregate demand.

ii) At zero level of income, there is always some minimum level of aggregate demand because consumption is never zero.

iii) As income rises, demand also increases but after a particular level of income, people start saving a part of their income. So the expenditure tends tolag behind the increasing income.

(b) Prove that MPC + MPS = 1. (5)

Ans. We know that,

[Since increase in income leads to increase in consumption and saving]

Question 7

(a) Explain the determination of equilibrium level of income with the help of a diagram. (5)

Ans. Equilibrium level of income is determined at a point when aggregate demand is equal to aggregate supply.

Aggregate demand is the total expenditure on goods and services in an economy. It consists of consumption and investment expenditure.

Aggregate supply refers to total production of goods and services in an economy.The equilibrium level of income is determined at a point where AD = AS.

Determination of equilibrium level of income:Hypothetical Schedule of ADAS Approach

National Income(Y) Consumption (C) Investment

(I)Aggregate

Demand (AD) AD = AS

0 200 100 300

300 250 100 350

400 300 100 400 Equilibrium500 350 100 450



The above table and the diagram shows that the equilibrium level of income is Rs 400 crores because at this level of income (E)

AD (400) = AS (400).

(b) Bring out few differences between excess and deficient demand. (5)

Ans. Excess demand is the situation wherein the planned aggregate expenditure is greater than the available output at full employment level. Deficientdemand is the situation wherein the planned aggregate expenditure falls short of output at full employment.

Excess demand represents post full employment situation whereas deficient demand represents underemployment situation.

Excess demand causes price rise as opposed to deficient demand causes a fall in price.

The increase in aggregate demand does not bring about an increase in employment and output as it occurs at full employment level. In the case ofdeficient demand, as aggregate demand rises it brings about an increase in output and employment.

Question 8

(a) The level of income is Rs.1000 crores and marginal propensity to consume is 0.8. The government has invested Rs.100 crores forestablishing schools in rural areas. How much income will it generate in the economy as a result of Rs.100 crores investment? (5)

Ans. Given,

ΔI = Rs. 100 croreWe know that

ΔY = K.ΔI

We also know that

(b) Why is foreign exchange demanded? State the factors governing supply of foreign exchange? (5)

Ans. The demand for foreign exchange arises due to following reasons:

1. Payment for importsfrom rest of the world



2. Investment in rest of the world3. Gifts and grants to the rest of the world4. Payment of international loans

The supply of foreign exchange depends upon the following factors:

1. Exports of goods and services to rest of the world2. Investment by foreigners.3. Direct purchases of goods and services by the nonresidents in the domestic market4. Remittances by the nonresidents living in foreign countries

Question9

(a) Explain how is deficit budget used to correct deficient demand in an economy? (5)

Ans. Deficit budget is one where the estimated revenue is less than the estimated expenditure. Deficit budget increases the aggregate demand becausewhen government makes deficit budget it increases developmental expenditure. Increase in government expenditure, increases the demand in theeconomy leading to employment generation. The multiplier effect of deficit budget is higher than that of balanced budget. Deficit budget is a good policy tosolve the problem of unemploymentand deficient demand.

(b) Define fiscal deficit. How is fiscal deficit met? (5)

Ans. Fiscal deficit is defined as the excess oftotal expenditure over total receipts reduced by borrowings. Fiscal deficit does not take into account theborrowings. In terms of formula,

Fiscal deficit = Total budget expenditure Total budget receipts net of borrowings.

OR

Fiscal deficit is the difference between the government's total expenditure and its total receipts excluding borrowings.

Fiscal deficit is met by the following two measures:

a) Borrowing: Fiscal deficit can be met by borrowing from domestic sources and external sources both.

b) Deficit financing: Fiscal deficit can be met by borrowing from the RBI which is the sole authority of issuing currency notes.

Question10

(a) What are the revenue items? (5)

Ans. Revenue items are the items of recurring or repetitive in nature. Revenue items may be classified into revenue receipts and revenue expenditure.Revenue receipts are the receipts which do not create liabilities or cause any reduction in assets. Revenue expenditure is the expenditure which neithercreates assets nor reduces liabilities.

(b) Explain the meaning of fiscal deficit and its importance in economic development? (5)

Ans. Fiscal deficit is the excess of total expenditure (revenue + capital) over total receipts (revenue + capital other than borrowings). Fiscal deficit is equalto the total borrowings and other liabilities of the government.

Fiscal deficit is the sign of increase in government expenditure. Government increases expenditure to increase the rate of development in the country.Government spend money for various development projects in the sectors which are lagging behind in the process of development. Government spend thismoney in the agriculture sector, rural development and various infrastructure schemes. Government spending creates employment opportunities in variousfields. Fiscal deficit facilitate nations to escape from economic recession because increase in government expenditure increases aggregate demand in themarket.

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7/20/2015 Economics Sample Paper 12, ICSE Economics Sample Paper 12, Economics Sample Paper 12 of ICSE Board | Extraminds


Instructions

Attempt all questions from Section A and any four questions from Section B.

The intended marks for questions or parts of questions are given in brackets ().

SECTION A (40 Marks)

Question 1

(a) What is Economics all about? (2)

Ans. Economics is a social science which studies individuals and organizations engaged in the production, distribution and consumption of goods andservices. It is considered a social science. Itis different from material sciences like Chemistry, Physics or Biology. It deals with people as individuals orgroups.Consumption in economics means using of goods and services, for e.g. consumingfood, using services of teachers etc.Production means transformationof inputs into outputs by adding utility to it. Distribution means sharing ofproduced outputamong different consumers. Same person can be a consumerwhen he is using a good or service and he can also be a producerwhen he is engaged in production.

(b) What do you understand by “Growth of Resources”? (2)

Ans. Growth of resources represents the increase in productive capacity of the economy due to an increase in thequantity of available resources in theeconomy.It can be achieved by :

Increase in the quantity of the available resources ordevelopment of new and better substitutes.Improvement in technology used in the production process thereby,improving the efficiency of human resources through training and development ofresources.

Growth of resources leads to a rightward shift in production possibility curve which represents an increase in productive capacity of the economy. Thismeans that the economy is able to produce more of both the goods without sacrificing the production of another good.

(c) What are the main factors of production? (2)

Ans. Land, labour, capital and entrepreneurship are the four main factors of production that helps in the production process.

(d) Why is the PPC concave to the origin? (2)

Ans. Production possibilities curve is based on the assumption of increasing marginal rate of transformation (MRT). Due tothis, PPC is always concave tothe origin. The slope of PPC represents the marginal rate of transformation between two commodities i.e. the rate or ratio at which one commodity issacrificed in order to increase the production of another commodity by one unit. Increasing MRT states that the rate of sacrifice of one good in order toincrease the production of another good increases with production of every additional unit of the latter commodity. Due tothis,the production possibilitycurve is alwaysconcave to the origin.

(e) What is mixed economy? (2)

Ans. Mixed economy has the characteristics of both market economy and centrally planned economy. In the mixed economy, economic activities are leftto the free play of market forces of demand and supply, but side by side the government exercises the control to ensure social justice, for example IndianEconomy.

Question 2

(a) Give four examples of normative economic analysis. (2)

Ans. Four examples are:

(1) India should spend more money on defence(2) Rich people should be taxed more(3) India should not take loan from foreign country(4) People in India should be given free education

(b) Give four examples of positive economic analysis. (2)

Ans. Four examples are:

(1) India is an overpopulated country.(2) Air is a mixture of gases.(3) Prices have been rising in India.(4) An increase in per capita income increases the standard of living of the people

(c) Distinguish between a centrally planned economy and market economy. (2)



Ans. In a centrally planned economy all economic decisions are taken by the Government or central authority. Main objective is the maximization of socialwelfare. Whereas, in a market economy all economic activities are organized though the price mechanism. Main motive is to earn maximum profit.

(d) What is a market? (2)

Ans. An institution which organises free interaction of buyers and sellers to affect purchase and sale of the commodity is called a market .

(e) Explain the problem of “What to produce”. (2)

Ans. What to produce is defined as the problem of choice between different commodities that can be produced from the given scarce resources. Thechoice between different goods and services is made on the basis of various economic and social factors.

For example an economy can make a choice between consumer goods and capital goods to be produced from a given scarce resources. A developedeconomy has to maintain its level of capital and infrastructure due to which it can give more preference to consumer goods. On the other hand adeveloping economy will give more preference to capital goods in order to increase the production and growth rate in the economy.

Another aspect of this problem is to decide on the quantities of different commodities to be produced from the given amount of resources.

Question 3

(a) What are the various factors determining perfect market? (2)

Ans. Factors determining the forms of Market are :

1. Number of buyers and Sellers: The first important feature of perfect competition is that there are large number of buyers and sellers. The number ofsellers is so large that an individual seller produces a small portion of the total output of the market. Similarly, the number of buyers is so large that anindividual buyer cannot influence the market.

2. Nature of the product: The product sold under perfect competition is homogeneous. No close substitutes of the product are available.

3. Entry and Exist of Firm: Under prefect market the entry and exit of a new firm is free from restriction. Firms are free to enter or leave the industry anytime.

(b) Define oligopoly. (2)

Ans. An oligopoly is a market form in which a market is dominated by a small number of sellers because there are few participants. In this type of market,each firm is aware of the actions of the others. Oligopoly markets are characterized by interactivity. The decision of one firm influences the decisions ofother firms. In other words, oligopoly market is a structure with just a few firms controlling a high percentage of total sales, such as car manufacturing

(c) What happens when demand and supply curves do not intersect each other? (2)

Ans. In a nonviable industry,a situation may arise when there are prospective consumers and producers of a commodity but still it is not produced. Ithappens when the price at which producers are ready to produce is so high that the consumers are not willing to buy even a single unit of thecommodity. Thus, a nonviable industry is one whose demand and supply curves do not intersect each other at any positive quantity. It is an industry inwhich costs are too high for any positive output to be produced. This type of industry is called a nonviable industry.

(d) Define market. (2)

Ans. A market in economics refers to whole of region in which buyers and sellers of a commodity are in close contact to effect sale and purchase of thecommodity. Essential ingredients ofthe market are :

(1) Commoditiesand services arebought and sold(2) Area having communication between buyers and sellers.(3) Close contact between buyers and sellers.

(e) Which market form has more elastic demand curve, monopoly ormonopolistic competition? (2)

Ans. Both market forms have negatively sloped demand curve but monopolistic competition has more elastic demand curve than the monopoly because ofthe presence of large number of buyers and sellers.

Question 4

(a) What are the main forms of market? (2)

Ans. There are three main forms of market:

1. Perfect Competition2. Monopoly3. Monopolistic Competition

(b) What is meant by the term equilibrium? (2)



Ans. Equilibrium is defined as a situation where thedemand of all consumers and supply of all firms in the market match with each other. The aggregatequantity that all firms wish to sell equals the quantity that all consumers in the market wish to buy. In other words, market supply equals market demand.The price at which the commodity is sold in the market is known as equilibrium price.

(c) Define market. (2)

Ans. A market in economics refers to whole of region in which buyers and sellers of a commodity are in close contact to effect sale and purchase of thecommodity. Essential ingredients ofthe market are :

(1) Commoditiesand services arebought and sold(2) Area having communication between buyers and sellers.(3) Close contact between buyers and sellers.

(d) 'A monopoly firm is a price maker', how? (2)

Ans. Monopoly is a market situation where there is a single firm selling the commodity. There are no close sustitutes available of the commodity sold bythe monopolist. A monopoly firm is a price maker as it has the power to influence the price ofacommodity as well as the output. Main motive of themonopolist is to earn maximum profit.

(e) Define perfect competition. (2)

Ans. Perfect competition is a market situation in which there are a large number of buyers and sellers. Buyers and sellersoperate freely andthe commodityis sold at an uniform price. Industry is the price maker and the firm is the price taker. No close substitutes of the commodity are available. Besides, thereis no restriction on entry and exit of firms.

SECTION B (40 Marks)

Question 5

(a) Explain how the supply shifts affect the market equilibrium. (5)

Ans. Suppose, initially, the market is in equilibrium at point E, here the market demand curve DD intersects the market supply curves SS such that theequilibrium price is OP and the equilibrium quantity is OQ.

(a)

RIGHTWARD SHIFT OF SUPPLY CURVE: This is indicated with the help of diagram (a). OP is the original price and OQ is the original quantity.Equilibrium is at point E. When the supply curve shifts rightward the new equilibrium will be at point E' and the equilibrium price will increase to OP' andequilibrium quantity will decrease to OQ'.

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Instructions - · PDF fileInstructions Attempt all ... Examples Explicit cost ... Describe the causes for disequilibrium in BOP. (2) Ans. The causes for disequilibrium in BOP are :