CBSE Class 12

Economics
Previous Year Question Paper 2016
Series: ONS Set-1
Code no. 58/1

● Please check that this paper contains 9 printed pages.

● Code number given on the right hand side of the question paper should
be written on the title page of the answer-book by the candidate.
● Please check that this question paper contains 30 questions.
● Please write down the Serial Number of the question in the answer-
book before attempting it.
● 15 minute time has been allotted to read this question paper. The question
paper will be distributed at 10.15 a.m. From 10.15 a.m. to 10.30 a.mThe
students will read the question paper only and will not write any answer
on the answer-book during this period.

ECONOMICS

Time Allowed: 3 hours Maximum Marks: 100

General Instructions:
Read the following instructions very carefully and strictly follow them.
● All questions in both the sections are compulsory.
● Marks for questions are indicated against each question.
● Question Nos. 1 – 5 and 16 – 20 are very short-answer questions carrying
1 mark each. They are required to be answered in one sentence each.
● Question Nos. 6 – 8 and 21 – 23 are short-answer questions carrying 3
marks each. Answers to them should normally not exceed 60 words each.

Class XII Economics www.vedantu.com 1

 ● Question Nos. 9 – 11 and 24 – 26 are also short-answer questions carrying
4 marks each. Answers to them should normally not exceed 70 words each.
● Question Nos. 12 – 15 and 27 – 30 are long-answer questions carrying 6
marks each. Answers to them should normally not exceed 100 words each.
● Answers should be brief and to the point and the above word limits should
be adhered to as far as possible.

SECTION - A
1. What is the relation between Average Variable Cost and Average Total
Cost, if Total Fixed Cost is zero? 1 Mark
Ans: When Total Fixed Cost is equal to Zero, Average Variable Cost is equal to
Average Total Cost.
This can be explained below,
TFC+TVC
ATC=
Quantity

And if TFC=0, then,

0+TVC
ATC=
Quantity

That is,
TVC
ATC=
Q

Which ultimately equates ATC with AVC, that is,

ATC = AVC, when TFC is zero.

2. A firm is able to sell any quantity of a good at a given price. The firm’s
marginal revenue will be: (Choose the correct alternatives) 1 Mark
(a) Greater than Average Revenue
(b) Less than Average Revenue
(c) Equal to Average Revenue

Class XII Economics www.vedantu.com 2

(d) Zero
Ans: (c) Equal to Average Revenue.

3. When does ‘change in demand’ take place? 1 Mark

Ans: Change in demand takes place when all the factors change except price of
a good.

4. Differentiated products is a characteristic of: (Choose the correct

alternative) 1 Mark
(a) Monopolistic competition only
(b) Oligopoly only
(c) Both monopolistic competition and oligopoly
(d) Monopoly
Ans: (c) Both Monopolistic competition and Oligopoly

5. Demand curve of a firm is perfectly elastic under: 1 Mark

(a) Perfect competition
(b) Monopoly
(c) Monopolistic competition
(d) Oligopoly
Ans: (a) Perfect Competition

6. A consumer consumes only two goods X and Y. Marginal utilities of X and

Y are 3 and 4 respectively. Prices of X and Y are Rs. 4 per unit each. Is
consumer in equilibrium? What will be the further reaction of the
consumer? Give reasons. 3 Marks
Ans: To get consumer equilibrium, the marginal utility of X over price X should
be equal to the marginal utility of Y over price Y.

Class XII Economics www.vedantu.com 3

Hence,
Mx My
=
Px Py

Marginal utility of X=3 and Price = 4

Whereas, Marginal utility of Y=4 and Price = 3
3 4
As per the formula mentioned above, to attain equilibrium =
4 3
3 4
But, is not equal to
4 3
Therefore, the consumer is not in equilibrium.
If the consumer wants to attain equilibrium, he should reduce the consumption of
good X, and increase the consumption of good Y.

7. What will be the effect of 10 percent rise in price of a good on its demand
if price elasticity of demand is 3 Marks
(a) Zero
Percentage change in quantity demanded
Ans: Price elasticty=
Percentage chage in price

Percentage change in quantity demanded

0=
10
Hence, the Percentage change in quantity demanded= 0%, which means there will
be no change in demand, when elasticity of demand is 0.
(b) -1
Percentage change in quantity demanded
Ans: Price elasticty=
Percentage chage in price

Percentage change in quantity demanded

-1=
10
-1 × 10 = Percentage Change in Quantity Demanded
-10% = Percentage Change in Quantity Demanded

Class XII Economics www.vedantu.com 4

Therefore, the percentage change in quantity demanded = -10%, which means
there that the demand will fall by 10%, if the price rises by 10%.
Hence, the Percentage change in quantity demanded is -10%, which means that
there will be 10% decrease in demand, if elasticity of demand is -1.
(c) -2.
Percentage change in quantity demanded
Ans: Price elasticty=
Percentage chage in price

Percentage change in quantity demanded

-2=
10
-2 × 10 = Percentage Change in Quantity Demanded
-20% = Percentage Change in Quantity Demanded
Therefore, the percentage change in quantity demanded is -20%, which means
there that demand will fall by 20%, elasticity of demand id -2.

8. What is the minimum price ceiling? Explain its implications. 3 Marks

Ans: Minimum price ceiling also called price floor, is stated as the minimum
limit fixed by the government for any product. For an instance, the government
fixes the price of the farm product that regulates the income of the farmers.
These products are sold in the market for very little time as they are seasonal in
nature, due to this, supply increases which results in a price crash. The income of
farmers will be very low despite a large number of outputs. Government fixes the
price for the welfare of farmers as they fix the price which the trader must pay to
the farmers in the wholesale market.
The implication of price floor is:
With the effect of the price floor, the price of the product increases hence,
● There is a contraction of demand
● There is an extension of supply
As a result, there is an excess supply of the product so the government buys the
surplus and stores it as buffer stock. Afterward, this surplus is used for public
distribution.
Or

Class XII Economics www.vedantu.com 5

If the prevailing market price is above the equilibrium price, explain its
chain of effects. 3 Marks
Ans: The chain of effects are as follows:
● The price ceiling causes an excess of supply when the price is higher than
the equilibrium market price of a good (OP).
● The equilibrium price and quantity are denoted by the letters OP and OQ in
the diagram. Because the equilibrium price for farmers is low, the
government establishes a price floor, i.e.,the price level increases from OP
to OP1, resulting in a decrease in quantity demand from OQ2 to OQ1 and,
as a result, there will be excess supply in the market.
● As a result of the increased competition among sellers, the price will come
down to the equilibrium point when market demand equals market supply.

9. Define demand. Name the factors affecting market demand. 4 Marks

Ans: Demand refers to different possible quantities of a commodity that the
consumer is ready to buy at different possible prices of that commodity.
Market demand functions show how market demand for a commodity is related
to its various determinants.
Factors affecting market demand are:
a. Own Price of the commodity: Other things remaining the same, with the
rise in own price of the commodity, the demand decreases. And with a fall
in its own price, rises the demand of the commodity.

Class XII Economics www.vedantu.com 6

 i. Price of related goods: There are two types of goods which affect
the demand of the product.
ii. Substitute goods: These are the goods which are substituted for
each other, like tea and coffee. Increase in the price of one causes an
increase in demand for the other whereas decrease in the price of one
causes fall in the demand for other.
b. Complementary goods: Those goods which complete the demand for
each other. A fall in the prices of one cause in the demand for the other and
a rise in the price of one cause decrease in the demand for the other. For
example, car and petrol, pen and ink are complementary goods, increase in
price of one good will affect the demand for other goods as well.
c. Income of the consumer: Change in the income of the consumer also
affects demands for different products. The demand for normal products
tends to rise with the rise in income whereas demand for inferior goods
falls due to the rise in income of the consumer.
d. Taste and Preferences: The demand is also affected by an individual's
taste. It is influenced by advertisements, changes in fashion, climate
change, new inventions etc. Other things remain the same, demand for the
good changes when consumers develop strong taste. Contrary, if
preference is fading its demand will fall.
e. Expectation: If a consumer expects a significant change in availability of
product, he decides to change his demand. If he expects a shortage in the
near future, he will increase the demand of the product at its existing price.
f. Population size / Number of Buyers: Demand increases with increase in
the number of buyers for a commodity. Example, Owing to a substantial
increase in the number of buyers, the demand for cars has substantially
risen in India.
g. Distribution of Income: If redistribution of income increases inequality,
the demand for luxury products will increase. Also, the income of the poor
will decrease, he may shift its demand from normal to inferior goods. The
demand for inferior goods will rise.

10. Define fixed cost. Give an example. Explain with reason the behavior of
Average Fixed Cost as output is increased. 4 Marks
Ans: Fixed costs are the costs associated with the use of fixed factors of
production. It does not vary with increase or decrease in production. These are

Class XII Economics www.vedantu.com 7

fixed costs. Even when the production is zero, these costs are likely to incur.
These are incurred on the fixed factors like machines, building, etc.
For example
A sugar mill usually remains closed for 5 months in a year for want of raw
material but the mill owner has to pay certain costs like rent of the building,
interest on salaries of permanent employees, past borrowings, taxes, etc. These
costs are known as fixed costs.
Reason for the behavior of Average Fixed Cost as output is increased.
The connection between the Average fixed cost and Total Fixed Cost is that AFC
is fixed cost per unit of output.
TFC
That is, AFC=
output produced

No. Of Units
TFC AFC
Produced
0 150 ∞
1 150 150
2 150 75
3 150 50
4 150 37.5

The shape of the AFC curve is downward sloping curve from left to right because
average fixed cost goes on falling with every increase in the output because TFC
remains constant.

Class XII Economics www.vedantu.com 8

AFC does not touch X- Axis as well as Y- Axis. As AFC is a rectangular
hyperbola, it can never be zero, moreover it cannot touch x axis, hence it isn’t
possible for AFC to be zero. When output is increased, with increased output, the
cost is spread over a large quantity, thus reducing the AFC.
Or
Define marginal product. State the behavior of marginal product when only
one input is increased and other inputs are held constant. 4 Marks
Ans. Marginal product refers to change in total product when one or more units
of the variable factor is used and the fixed factor remains constant.
MPn =YPn -TPn-1

Table:
Land Labour TP AP MP Effect
1 0 0 - -
1 1 2 2 2
1 2 6 3 4 MP
1 3 12 4 6 increases
1 4 20 5 8 upto 4th
unit.
1 5 25 5 5 MP
1 6 29 4.8 4 decreases
1 7 31 4.4 2 upto 7th
unit.
1 8 31 3.9 0 MP
becomes 0,
TP is
maximum
1 9 29 3.2 -2 MP
becomes
negative,
When TP
starts
falling.

● TP increases continuously. The MP curve initially increases, reaches its

maximum and ultimately decreases taking the shape of an inverted U.
● AP curve first increases, reaches its maximum and then decreases taking
the shape of an inverted U.

Class XII Economics www.vedantu.com 9

 ● It is evident from the table that MP kept rising till 4th unit, then keeps on
decreasing till the 7th and ultimately became zero at 8th unit, and then
negative at 9th unit.
● The reason behind this is that increasing just labour while keeping other
factors constant, will not result in an increase in the MP.
● This will decrease the MP and it might go negative as well. With labour if
there is increase in land, then it would have resulted in an increase in MP.

11. When the price of a commodity falls from Rs. 12 per unit to Rs. 9 per
unit, the producer supplies 75 percent less output. Calculate price elasticity
of supply. 4 Marks
Ans. Percentage change in quantity supplied = -75%
Old price = Rs.12,
New Price = Rs. 9,
Change in Price ( ): 9 – 12 = -3

 −3 
=   × 100
Percentage change in Price
 12 
= -25%
Percentage change in quantity demanded
Price elasticty of supply=
Percentage chage in price

−75%
=
−25%
=3
Hence, price elasticity of supply is 3.

12. Why do central problems of an economy arise? Explain the central

problem of “for whom to produce”? 6 Marks
Ans. The primary economic activities of life are the production, distribution, and
disposition of products and services. Every society must deal with resource

Class XII Economics www.vedantu.com 10

shortage as a result of these actions. As a result of the scarcity, every society must
decide how to distribute the limited resources.
The following are the main issues that any country's economy faces:
● What to produce?
● How to produce?
● For whom to produce?
Reasons for the problems:
● People have unlimited wants: People have unlimited desires and wants,
when one want is fulfilled, another want arises.
● The resources in the society are limited: There exists scarce resources in
the economy as compared to human wants. This leads to the problem of
choice, that what goods are to be produced.
● There exist alternative uses for resources: The resources are scarce, as
well as they have varied alternative uses, which generates the problem of
resource allocation.
For Whom to Produce:
This dilemma is about deciding which group of individuals will ultimately
consume the commodities, i.e. whether to produce items for richer and poorer
people or for richer and poorer people.
Because resources are limited in any economy, no society can meet all of its
citizens' needs. As a result, a decision problem occurs. This problem is about the
distribution of income among the production components who contribute to the
production process.
The issue can be divided into two categories:
● Personal Distribution: This refers to how an economy's national income
is dispersed across various categories of people.
● Functional Distribution: This entails determining the proportion of
various production components in the total national product of the country.
The guiding principle of 'For whom to Produce' is to ensure that each production
factor's urgent needs are met to the greatest extent possible.

Class XII Economics www.vedantu.com 11

There are two more Central Problems in addition to 'Resource Allocation.' (i) The
problem of better fuller and more effective resource utilization. (ii) The problem
of resource growth.

13. Explain three properties of indifference curves. 6 Marks

Ans. An indifference curve is a diagrammatic representation of a consumer's
indifference set. It is a convergence of all such points that illustrate various
combinations of two items that provide the same level of consumer happiness.
Number of
Combination Number of Apples
Oranges
A 1 10
B 2 7
C 3 5
D 4 4

Properties of Indifference Curve:

a. IC Slopes Downward:
Indifference Curve slopes downward from left to right. It means IC has a
negative slope. It states that if the consumer decides to have more of one
good, he must have less of the other. Because it assumes that the consumer
has monotonic preference. More of a good gives customers more
satisfaction.
So that when the consumer moves from 2 apples to 3 apples, his
satisfaction level is increasing. If a customer is consuming more apples, he

Class XII Economics www.vedantu.com 12

 will consume less oranges so that the rise in satisfaction level of apples is
counterbalanced by the fall in satisfaction level in oranges.
b. IC is Convex to the Origin:
It means that the slope of IC tends to decline as we move from left to right.
The slope of IC declines because the rate at which the consumer substitutes
one commodity for the others to decline. It is known as the marginal rate
of substitution. IC is convex to the origin because MRS tends to decrease.
c. IC does not touch X-Axis or Y-Axis:
It is because IC analysis assumes the consumption of two goods. If IC
touches the Y-axis, it would mean that the consumption of apples is zero.
Similarly, if the IC touches X-axis, it would mean that the consumption of
oranges is zero. This is not possible because there is a consumption of two
goods.

14. Examine the effect of (a) fall in the own price of good X and (b) rise in
tax rate on good X, on the supply curve. Use diagrams. 6 Marks
(a) Fall in the price of good X:
Ans: It leads to the contraction in supply. When the quantity supplied of the
commodity falls with the fall in the price and the other things remain constant is
called contraction in the supply curve. Contraction is shown as the downward
movement.

Quantity of Quantity of
Price Supply
Firm A Firm B
20 30 15 45
15 20 10 30
10 10 5 15
5 0 0 0

Class XII Economics www.vedantu.com 13

 In the diagram and table, we can say that as the own price of the commodity
reduces from 20 to 10, the supply also falls from 200 to 100 through a downward
movement.
b) Rise in tax rate on good X on the supply of curve
It leads to a shift in supply curve. Supply of the commodity decreases due to
factors other than price. The leftward shift in the supply curve indicates a decrease
in the supply. In case of decrease in supply, the supply curve is shifted to the left.

As the tax rate rise, with the price being constant, the supply curve shifts to the
left from SS2 to SS1.
(a) For blind candidates in lieu of Q. No. 14.
Examine the effect of (a) fall in the own price of good X and (b) rise in tax
rate on good X on supply of a good. Use a schedule. 6 Marks
Ans: (a) Fall in the price of good X:

Class XII Economics www.vedantu.com 14

The following schedule explains the impact of a decrease in the own price of good
X:
● The supply decreases from 120 to 110 units as the price rises from Rs 10
to Rs 11.
● The price rises to Rs 12 and the number of units available drops to 100.
● The relationship between price and supply is inversely proportional.

Price(Rs) Supply(in units)

10 120
10 110
10 100

(b) Rise in tax rate on good X on supply of a good

An increase in the tax rate on good X has an effect on the supply of that good.
The following schedule explains the decrease in the own price of good X:
● Throughout, the price remains unchanged.
● When the tax rate on good X is raised, the supply of good X drops from
120 to 110 units.
● A Good's tax rate and supply are inversely connected.

Price(Rs) Supply(in units)

10 120
10 100
10 110

15. Explain the implications of the following in a perfectly competitive

market: 6 Marks
a) Large number of sellers.
In a perfectly competitive market, there are a large number of small sellers selling
homogeneous products to its buyers. The number of sellers are so large, that no

Class XII Economics www.vedantu.com 15

single firm can influence the overall market price or market supply. Hence no
individual seller by altering its sale or supply can impact the overall market
supply or market price. Also, in this form of market, the firm is a price taker, and
not price maker, as the share of each firm in the market is so insignificant to
impact the price of the commodity.
Also, the price line in such a market is a horizontal straight line which depicts
that the firm can sell any quantity of a product only at a certain price. If the firm
tries to change the price, the overall demand falls to zero, because as there are
large number of small firms, no firm is capable enough to impact the overall price
or supply. The price line is shown as below:

b) Homogenous Product
Homogeneous products are those products that are identical in all respects such
as in terms of shape, size, weight, color, height, features etc., and are the perfect
substitutes for each other. In a perfectly competitive market, the products are
homogeneous, hence all the firms charge the same price for their products. And
if in case , any firm decides to change the price, the firm’s overall demand may
fall to zero, as the price change of the product may shift the buyer to another
seller.
Therefore there exists zero degree of product differentiation in the market, and
all the firms follow a uniform pricing policy, with each firm acting as a price taker
and not price maker. Due to this feature of homogeneous products, the firms do
not spend any amount on advertising or promoting their products.
Or
Explain the implications of the following in an oligopoly market:
(a) Barriers to entry of new firms
There exists high entry barriers owing to the cut throat competition between the
firms, hence it becomes very difficult for the new firm to enter into the oligopoly

Class XII Economics www.vedantu.com 16

market. Factors such as economies of scale, high capital investment, patent rights,
high-end technology, government licensing, intense selling costs discourages the
new entrants thus acting as a barrier for the entry of new firms.
The firms which hold the power to face such intense competition, and pass the
other barriers can enter this form of market. Due to this barrier to entry of new
firms, oligopolies keep on earning supernormal profits in the long run.
(b) A few or a few big sellers
An oligopoly is a market that has a few large firms with their pricing and output
policies dependent on one another. Because the number of enterprises are small,
each one holds some market power.
In this form of market, every seller holds a decent market share in overall market
supply, and hence that’s why they are in a position to affect the overall market
supply and have a partial control in the market price. These few large firms
dominate the market through their intense advertising tactics, and earn
supernormal profits in the long run.

SECTION - B
16. Define flows. 1 Mark
Ans: A flow is a quantity which is measured over a period of time. For example;
National Income.
17. National income is the sum of factor incomes accruing to: 1 Mark
(a) Nationals
(b) Economic territory
(c) Residents
(d) Both residents and non-residents
Ans (d) Residents

18. What are revenue receipts in a government budget? 1 Mark

Ans. Revenue receipts are the government receipts which neither creates
liabilities nor reduces assets. Tax revenue and non-tax revenue are the revenue
receipts in the government budget.

Class XII Economics www.vedantu.com 17

19. Primary deficit equals: (Choose the correct alternative) 1 Mark
(a) Borrowings
(b) Interest payments
(c) Borrowings less interest payments
(d) Borrowings and interest payments both
Ans. (c) Borrowing less interest payments.

20. Foreign exchange transactions which are independent of other

transactions in the Balance of Payments Account are called: 1 Mark
(a) Current transactions
(b) Capital transactions
(c) Autonomous transactions
(d) Accommodating transactions
Ans. (d) Autonomous transactions

21. Assuming real income to be Rs. 200 crore and price index to be 135,
calculate nominal income. 3 Marks
Ans: Real Income = 200 crores
Price Index = 135
Let the base year’s price index be 100
Nominal Income =?
Nominal Income
Real Income=
Price Index of current year

X = price index of base year

 Nominal income 
200   × 100
 135 

Class XII Economics www.vedantu.com 18

Nominal Income=
( 200 × 135)
100
27000
=
100
= Rs. 270 crores.

22. What is aggregate demand? State its components. 3 Marks

Ans: Aggregate demand is the sum total of expenditure that the people plan to
incur on the purchase of the goods and services produced in the economy
corresponding to their different levels of income.
There are four components of AD. The components are:
a. Household or Private Consumption Demand (C): Value of goods and
services that households are willing to buy.
b. Private Investment Demand (I): This refers to the planned expenditure on
buying of new capital assets by private entrepreneurs. This investment is
done to increase production capacity in future.
c. Government Demand for Goods and Services (G): It is the government
expenditure on purchase of consumer and capital goods to fulfill common
needs of the society.
d. Net Exports Demand (X-M): Net exports is the difference between the
export of goods and services and imports of goods and services during a
given period.

Or
Explain how controlling money supply is helpful in reducing excess demand?
3 Marks
Ans: When the planned aggregate expenditure is greater than the available output
at full employment level, this situation is termed as excess demand. It leads to an
inflationary gap in the economy. It arises due to the increase of money supply in
the market. So, there is a need to control the money supply in order to curb the
demand levels in the economy, as there will be a reduction in excess demand with
reduction in the purchasing potential in the economy. Monetary and fiscal policy
can be used to curb the situation of excess demand.

Class XII Economics www.vedantu.com 19

Dear money policy, that is raising the cost of credit to curb excess demand is used
in this case. The following instruments could be used to curb the situation of
excess demand in the economy:
a. Cash Reserve Ratio: It refers to the minimum percentage of total deposits
that the commercial banks are required to maintain in the form of cash
reserves with the Central Bank.
To curb excess demand, the central bank can increase the CRR, which will
lead to the contraction of credit in the economy, as the commercial banks
now have to maintain higher reserves with the central bank, which will
reduce their credit creation capacity. Reduction in credit would decrease
the money supply in the economy (because of low availability of credit),
which further reduces the purchasing power of people, and the situation of
excess demand is corrected.
b. Statutory Liquidity Ratio (SLR): It is the ratio fixed by the Central bank
of liquid assets and total deposits that the commercial banks are required
to maintain with itself.
To curb excess demand, the central bank can increase the SLR, which will
lead to the contraction of credit in the economy, as the commercial banks
now have to maintain a ratio of liquid assets with itself. This will reduce
their credit creation capacity, and hence there will be a decrease in the
money supply in the economy (because of low availability of credit), which
further reduces the purchasing power of people, and the situation of excess
demand is corrected.
c. Open Market Operations: It refers to the sale and purchase of government
securities by the central Bank in the open market.
To curb the situation of excess demand, the Central Bank sells the
government securities in the open market, which will reduce the flow of
money in the economy, due to reduced purchasing power of people, and
reduced credit creation capacity of commercial banks. Due to this reason,
there will be contraction of demand, and the situation of excess demand
will be corrected.
d. Bank Rate: The rate at which the Central Bank provides loans to the
commercial banks is termed as bank rate.
In order to curb the situation of excess demand, the Central bank increases
the bank rate so as to contract the credit creation capacity of the commercial
banks. This reduces the availability of credit, and due to the reduced

Class XII Economics www.vedantu.com 20

 purchasing power in the economy, the flow of money also falls in the
economy, and thus the situation of excess demand can be corrected.
e. Margin Requirements: This is the minimum percentage of total
borrowings that the borrower must make, while borrowing from the
commercial bank.
A rise in margin requirements by the Central bank will make the borrower
provide a higher down payment to the commercial banks, thus
discouraging them to take a loan. This will ultimately reduce the flow of
money and purchasing power in the economy, and the situation of excess
demand can be corrected.

23. An economy is in equilibrium. Calculate Marginal Propensity to

Consume: 3 Marks
National income = 1000
Autonomous consumption expenditure = 200
Investment expenditure = 100
Ans. National Income = consumption + Investment Expenditure
Y= National Income
C=Autonomous consumption expenditure
I=Investment expenditure
c= Marginal Propensity to consume
Y=C+cY+I
1000=200+c(1000) +100
1000=300+c(1000)
1000-300=c(1000)
700
c=
1000
c=0.7
Marginal Propensity to consume = 0.7

Class XII Economics www.vedantu.com 21

24. Sales of petrol and diesel cars are rising particularly in big cities. Analyze
its impact on gross domestic product and welfare. 4 Marks
Ans: The impact will be:
● Impact on GDP: The impact of increased sales of petrol and diesel cars on
GDP will increase as there is an increasing demand for petrol and diesel
cars in the big cities. To fulfill the increasing demand, the companies have
to produce more and increase their production level, which will drive an
increase in production.
● Impact on Welfare: The impact of rising petrol and diesel cars in the big
cities is continuously increasing pollution, and it is setting out to be a threat
for the people living there. This high level of pollution makes people suffer
from many vulnerable diseases like asthma, heart disease, lung disease,
cancer, etc. Thus, reducing the welfare of the people.

25. Explain the ‘medium of exchange’ function of money. How has it solved
the related problem created by barter? 4 Marks
Ans: A thing which is commonly believed as a medium of exchange is called
money. For example, A rupee in India is money, as it is a commonly accepted
medium of exchange here. Likewise, a dollar in the USA is money, as it is a
commonly accepted medium of exchange there.
Barter system is a system in which products are exchanged for goods. If you have
surplus rice you have to look for someone who needs rice in order to make the
barter possible.
There are few drawbacks which are solved by money.
● Double coincidence of wants: Double coincidence of wants implies that
the two individuals are in acquisition of such goods which they are ready
to return for the satisfaction of their wants. Money as a medium of
exchange has separated the act of sale and purchase.
● Lack of a Common Unit of Value: Evaluation of money has given us a
common unit of value and therefore, a system of accounting.
● Difficulty of future payments or contractual payments- These payments
were very difficult in the barter system. Evolution of money has facilitated
contractual payments.
Or

Class XII Economics www.vedantu.com 22

Explain the ‘standard of demand payment’ function of money. How has it
solved the related problem created by barter? 4 Marks
Ans: Money as a standard of deferred payment is it is stated as an act of medium
through which future payment has to be done. There are many transactions that
take place which are not completed instantly. Therefore, money facilitates these
transactions and helps in economic development.
Barter system of exchange of goods is a system in which goods are exchanged
for goods. If you have surplus number or rice you have to look for someone who
needs rice. There are few drawbacks which are solved by money.
● Double coincidence of wants: Double coincidence of wants implies that
the two individuals are in possession of such goods which they are willing
to exchange for the satisfaction of their wants, Money as a medium of
exchange has separated the act of sale and purchase.
● Lack of a Common Unit of Value: Evaluation of money has given us a
common unit of value and therefore, a system of accounting.
● Difficulty of future payments or contractual payments: These payments
were very difficult in the barter system. Evolution of money has facilitated
contractual payments

26. Explain how ‘Repo Rate’ can be helpful in controlling credit creation:
4 Marks
Ans: The repo rate is how the central bank, the RBI, loans money to commercial
banks. It is a monetary policy instrument. Banks can borrow from the RBI if they
are short on cash. When the repo rate declines, it is easier for banks to obtain
funds at a lower cost and vice versa.
When RBI increases the repo rate, banks are forced to pay greater interest to the
RBI, prompting them to boost interest rates on the loans they provide to their
customers. Consumer loans become more expensive, resulting in a money
shortage and less liquidity in the economy. In this way, the repo rate aids in credit
creation control.
As a result, an increase in the repo rate suppresses the flow of money and credit
in a given economy.

26.What is the difference between direct tax and indirect tax? Explain the
role of the government budget in influencing allocation of resources.

Class XII Economics www.vedantu.com 23

 6 Marks
Ans: The function of the government budget in influencing allocation of
resources is to reduce the inequalities of income and wealth. The government can
influence distribution of income by levying taxes on the rich people and granting
subsidies to the poor people.
Government levies a higher rate of tax on rich and lowers the rate on the low-
income group people. Government provides amenities and subsidies to people
whose income level is low. Fiscal instruments like taxation, subsidies and public
expenditure can be made use of no influence distribution of income in the society.
The difference between direct tax and indirect tax.
Direct Tax Indirect Tax
When the liability to pay tax and the When the liability to pay tax is on
burden of that falls on the same person, one person and the burden of that tax
it is called direct tax. falls on some other person, it is
called indirect tax.
The burden of these taxes are borne by The burden of these taxes can be
the person on whom it is imposed. shifted.
It is progressive in nature It is regressive in nature
Example- Income tax, wealth tax Example- Excise duty, custom duty

28. Given saving curve, derive consumption curve and state the steps in
doing so. 6 Marks
Ans: A straight line saving curve is drawn in the diagram to represent the saving
function at various income levels.
● There is negative saving at a zero income level, as one cannot save
anything when the income is zero.
● Negative savings helps in the creation of consumption curve from the left
of R, where consumption expenditure is more than the income to show
dissavings.
● Point OR shows zero savings, which helps in showing that consumption is
equal to income at point R, because savings can only be zero when both
consumption and income are equal.
● Consumption expenditure is indicated as OC at zero income, which is equal
to dissaving of OS on the y axis, hence OC = OS, when income is zero.

Class XII Economics www.vedantu.com 24

 ● As a result, C represents the start of the consumption curve. Because saving
is zero at the OR level of income, consumption spending must equal OR
income.
● This allows you to plot OD as consumption expenditure equal to OR,
resulting in a point B on a 45-degree line that shows OD equal to OR.
● As a result, B becomes the proposed consumption curve's point.
● The point on the consumption curve when total consumption expenditure
(C) equals income is designated as B.
● APC (C/Y) = 1 at point B.

● After point R of the saving curve, and B of consumption curve, there is

positive savings which helps in the formulation and extension of
consumption and income curve. That is, the Y curve is higher than that of
the C curve because savings can only be positive when income exceeds
consumption.

29. Indian investors lend abroad. Answer the following questions: 6 Marks
(a) In which sub-account and on which side of the Balance of Payments
Account such lending is recorded? Give reasons.
Ans: Such lending is recorded in the Capital Account, and on the debit side of
the Balance of Payment Account.
Reason:

Class XII Economics www.vedantu.com 25

 ● For capital Account: It will be recorded in the capital account because a
capital account is that account which shows those transactions of a country
with the rest of the world, that involves the change in the ownership of
assets. And, in this case, lending of money to abroad leads to the creation
of foreign exchange assets, making it an aspect of a capital account.
● For Debit Side: Lending abroad leads to the outflow of foreign exchange,
and thus it is the negative item in the capital account of balance of payment,
and hence is recorded on the debit side.
(b) Explain the impact of this lending on market exchange rate.
Ans: Lending abroad will reduce the supply of foreign currency, because lending
is the outflow of foreign currency. This leads to the reduction in the supply and
there is a rise in the exchange rate. This can be shown in the figure below:

● In the diagram, we can see that lending leads to the reduction in supply
from SS to S1S1, and due to this the quantity of foreign currency also falls
from Q to Q1.
● The equilibrium shifts from E to E1.
● Due to reduced supply, the demand will increase for foreign currency and
there is a rise in the exchange rate from R to R1.

30. Find Gross National Product at Market Price and Private Income:
(Rs. Crore)

Class XII Economics www.vedantu.com 26

(i) Private final consumption expenditure 800
(ii) Net current transfers to abroad 20
(iii) Net factor income to abroad (-)10
(iv) Government final consumption expenditure 300
(v) Net indirect tax 150
(vi) Net domestic capital formation 200
(vii) Current transfers from government 40
(viii) Depreciation 100
(ix) Net imports 30
(x) Income accruing to government 90
50
(xi) National debt interest
Ans: (a) GDPMp =
GDPmp = Private final consumption expenditure + Government Final
Consumption Expenditure + (net domestic capital formation + depreciation) - Net
Exports
GDPmp =800+300+(200+100)-30

= I 100 + (300) - 30
= 1400 - 30
= R s .1370 crores
GNPmp = G D P - net factor income to abroad

= 1370 - ( - 10)
= R s .1380 crores
(b) Private Income = GDPmp - Net indirect taxes - Depreciation - Income accruing
to government- Net factor income to abroad + Current transfers from Government
- Net current transfers to abroad +National debt interest
=1.370-150-100-90-(-10)+40-20+50
=Rs. 1,110 crore

Class XII Economics www.vedantu.com 27