CBSE Class 12

Economics
Previous Year Question Paper 2018
Series: SGN Set- 1
Code no. 58/1

● Please check that this question paper contains 7 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 24 questions.
● Please write down the Serial Number of the question 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.m., the
students will read the question paper only and will not write any answer
on the answer script during this period.

ECONOMICS

Time Allowed: 3 hours Maximum Marks: 80

General Instructions:
Read the following instructions very carefully and strictly follow them.
1. All questions in both the sections are compulsory.
2. Marks for questions are indicated against each question.

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 3. Question Nos. 1 – 4 and 13 – 16 are very short-answer questions carrying 1
mark each. They are required to be answered in one sentence each.
4. Question Nos. 5 – 6 and 17 – 18 are short-answer questions carrying 3 marks
each. Answers to them should normally not exceed 60 words each.
5. Question Nos. 7 – 9 and 19 – 21 are also short-answer questions carrying 4
marks each. Answers to them should normally not exceed 70 words each.
6. Question Nos. 10 – 12 and 22 – 24 are long-answer questions carrying 6
marks each. Answers to them should normally not exceed 100 words each.
7. Answers should be brief and to the point and the above word limits should
be adhered to as far as possible.

SECTION - A
(Micro Economics)
1. State one example of positive economics. 1 Mark
Ans: Positive economics is demonstrated by raising the interest rate to encourage
individuals to save.

2. Define fixed cost. 1 Mark

Ans: Fixed costs are those that do not change as a result of the level of output. Take,
for example, factory rent.

3. When the Average Product (AP) is maximum, the Marginal Product (MP)
is: (Choose the correct alternative) 1 Mark
(a) Equal to AP
(b) Less than AP

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(c) More than AP
(d) Can be any one of the above
Ans: Equal to AP
Explanation: When the Average Product (AP) is maximum, the Marginal Product
(MP) is equal to Average Product (AP).

4. When the total fixed cost of producing 100 units is Rs. 30 and the average
variable cost Rs. 3, total cost is : (Choose the correct alternative) 1 Mark
(a) Rs. 3
(b) Rs. 30
(c) Rs. 270
(d) Rs. 330
Ans: Rs. 330
Explanation:
TC = TFC + TVC
TC = 30+ AVC × Q
TC = 30+3×100
TC = Rs. 330

5. Explain the central problem of ‘‘for whom to produce’’. 3 Marks

Ans: The choosing of the category of individuals who will ultimately consume the
items is referred to as the problem of whom to manufacture. Because resources are
limited in any economy, no society can meet all of its citizens' desires. As a result, a
decision problem occurs.

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The "For Whom to Produce" economic dilemma is primarily concerned with the
distribution mix of the final commodities and services produced. The distribution of
final goods and services corresponds to the allocation of national income (or national
product) among production factors such as land, labour, capital, and entrepreneurs.
The problem can be divided into two categories:
I. Personal Distribution: Personal Distribution refers to how an economy's
national revenue is distributed across various groups of people.
II. Functional Distribution: Functional Distribution entails determining the
proportion of various production elements in the country's total national
output. The ‘For whom to Produce' guiding principle is to ensure that each
productive factor's urgent needs are met to the greatest extent possible.
Or
Explain the central problem of ‘‘choice of technique’’. 3 Marks
Ans: The problem of “choice of technique” is the economy's second-largest central
challenge in history. In general, there are two techniques to choose from:
● Capital-intensive technique: This is a technique that necessitates more
capital than labour.
● Labour-intensive technique: This is a technique in which labour is more
important than capital.
An economy must choose which method to employ in order to achieve efficient
output. It is the most pressing issue in every economy since it has an impact on both
production (or efficiency) and employment levels. Higher productivity is frequently
associated with a lower level of employment.

6. What is meant by inelastic demand? Compare it with perfectly inelastic

demand. 3 Marks
Ans: Elasticity is a measure of how sensitive a quantity required is to price changes.

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 ● The term "inelastic demand" refers to the fact that demand for a product does
not increase or decrease in response to price changes. Because the percentage
change in quantity demanded is smaller than the percentage change in price,
elasticity is less than one in this scenario.
For Example: The percent change in quantity requested is 10%
whereas the percent change in price is 20%
As a result, Elasticity (Ed < 1) = 0.5
● Perfectly inelastic demand, on the other hand, occurs when a price rise or drop
has no effect on the quantity desired.
For Example: The price is raised by 10% but the amount desired remains
unchanged, i.e.,
Percentage change in quantity demand = 0
Percentage change in price = 20%
As a result, elasticity is zero.
Hence, in case of perfectly inelastic demand, the elasticity of demand is zero,
whereas in case of inelastic demand, the elasticity of demand is less than 1.

7. Given the price of a good, how will a consumer decide as to how much
quantity to buy of that good? Explain. 4 Marks
Ans: Consumer equilibrium describes the scenario in which a consumer derives the
greatest amount of satisfaction/utility from the items he or she consumes. It's the
situation in which a customer chooses how many units of a product to buy.

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When the MU of a thing exceeds its price, the price remains constant, and the
consumer decides not to buy the goods.
Also, if MU is less expensive than its price, consumers will reduce their
consumption. As a consumer, you will only consume when MU is equal to price.
MUX = PX
In the figure,
X - axis = Consumption
Y - axis = Price
E = Consumer Equilibrium
Or
What is Indifference Curve? State three properties of indifference curves.
4 Marks
Ans: A graph curve connecting those combinations of quantities that the customer
considers to be of similar value (the axis of which represent amounts of two items).

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Ic = Indifference Curve
X – axis = Goodx
Y – axis = Goody
Properties:
● The higher the IC, the higher the level of satisfaction.
● Two Indifference curves will never meet.
● To the origin, the indifference curve is convex.

8. When the price of a commodity changes from Rs. 4 per unit to Rs. 5 per unit,
its market supply rises from 100 units to 120 units. Calculate the price elasticity
of supply. Is supply elastic? Give reason. 4 Marks
Ans: P=Rs.4 Qs =100

P1 =Rs.5 Q1 =120

ΔP=P1 -P ΔQs =Q1 -Qs

ΔP=5-4 ΔQs =120-100

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ΔP=1 ΔQs =20

P ΔQS
ES = ×
QS ΔP

4 20
ES = ×
100 1
ES =0.8

ES =0.8<1

Because the elasticity is less than one, it is inelastic.

9. What is meant by price ceiling? Explain its implications. 4 Marks

Ans: A price ceiling exists when the price charged is greater than or less than the
equilibrium price set by market forces of demand and supply. Price ceilings that are
too high have been shown to be ineffective. In the housing rent market, the
importance of a price ceiling has been discovered.

Price Ceiling Consequences:

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 ● The existence of a price ceiling allows the impoverished to obtain basic
commodities at a reasonable cost. This makes it possible to improve people's
well-being.
● When the price level falls, the demand for a good rises faster than the supply
of the good. As a result, there is an excess demand for goods.

10. Explain the conditions of consumer’s equilibrium using Indifference Curve

Analysis. 6 Marks
Ans: A customer achieves equilibrium when their budget line is tangent to their
indifference curve, according to indifference curve analysis. When the slope of the
indifference curve (MRS) equals the slope of the budget line (Px/Py), consumer
equilibrium is established.
MRS = Px ÷ Py (Ratio of Price of two goods)
We can determine the combination that gives the consumer the most satisfaction
based on the consumer's indifference map (preference schedule) and budget or price
line.
The consumer's goal is to achieve the best combination on his indifference map,
therefore he tries to go to the highest indifference curve with the budget line he has.
Only at the intersection of a budget line and the maximum attainable indifference
curve would he be in balance.
At the point where the budget line intersects the indifference curve, a consumer is in
equilibrium. The slope of the indifference curve (called MRS) equals the slope of
the budget line at this moment.

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 ● P is the equilibrium position in the preceding diagram, where budget line M
just brushes up against the maximum feasible indifference curve IC2 within
the customer budget.
● Combinations on IC3 are out of reach due to his wealth, however combinations
on IC1 provide less gratification than IC2.
● As a result, the optimal combination occurs at P, where the budget line
intersects the indifference curve IC2.
● At this point, the consumer achieves maximum satisfaction in the equilibrium
state.
Two requirements are required for consumer equilibrium:

I. (
The budget line MRS= Px
Py ) should be tangent to the indifference curve.
II. The indifference curve must be convex at the origin (i.e., MRS should be
diminishing at a point of equilibrium.)

11. Explain the conditions of producer’s equilibrium in terms of marginal

revenue and marginal cost. 6 Marks

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Ans: The state in which a producer makes his maximum profit or minimises his
losses is referred to as the producer's equilibrium. When the Marginal Revenue (MR)
equals the Marginal Cost (MC) and the Marginal Cost curve cuts the Marginal
Revenue curve from below, the producer is in equilibrium, according to the MR-MC
approach.
This method is subject to two conditions:
I. MR=MC
II. The MC curve should either be cutting the MR curve from below or
ascending.
MR is the increase in TR due to the sale of one additional unit of output, and MC is
the increase in TC due to an increase in production of one unit. Firms compare their
MR with their MC in order to maximise earnings.
It is profitable for a company to continue producing more units of output as long as
the increase in revenue exceeds the increase in cost. The X-axis represents output,
while the Y-axis represents revenue and cost.
P = MR = AR is a horizontal line parallel to the X-axis, and the Marginal Cost (MC)
curve is U-shaped.

Situation upto OQ1 level:

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 ● At points R and K in the diagram, MC = MR, but profits are highest at point
K, which corresponds to the OQ level of output.
● MR outperforms MC between OQ and Q1 output levels. As a result, the
company will not stop at point R, but will continue to manufacture in order to
profit from the increased profit. As a result, equilibrium will be found at point
K, where both conditions are met.
Situation beyond OQ1 level:
● MR is less than MC when the output level exceeds OQ1
● MR less than MC indicates that the corporation is losing money on its last unit
of output. As a result, a rational producer reduces output to maximise profit
as long as MC is greater than MR.
● Hence, the company shifts its output to OQ units.

12. State three characteristics of monopolistic competition. Which of the

characteristics separates it from perfect competition and why? 6 Marks
Ans: The following are the main characteristics of monopolistic competition:
I. Large Number of Buyers and Sellers: There are a lot of businesses, but not
as many as there would be if there was ideal competition. As a result, each
firm has some control over its price-output policy. It is expected that a firm's
price-output strategy will not elicit a response from other firms, therefore each
firm pursues its own price policy.
II. Less Mobility : Both the factors of production, as well as the commodities
and services, are not perfectly mobile in monopolistic competition.
III. More Elastic Demand: The demand curve is more elastic in monopolistic
competition. Firms must lower their prices in order to sell more.

The following features distinguish monopolistic competition from perfect

competition:

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 I. Nature of Firms: An industry with perfect competition has a large number of
enterprises. Each company in the business produces a very small portion of
the total output. The businesses must accept the pricing set by the industry. In
monopolistic competition, on the other hand, the number of enterprises is
limited. Individual acts by corporations can have an impact on the market
price.
II. Nature of Price and Output: Price is equal to both marginal cost and
marginal revenue in ideal competition, but it is not under imperfect
competition. Although marginal cost and marginal revenue are equal under
monopolistic competition, the price is not.
III. Nature of Product: Firms generate homogeneous items in ideal competition.
The demand for cross elasticity across goods is unlimited. Under imperfect
competition, all firms manufacture differentiated goods, and demand cross
elasticity between them is quite low.
Or
Explain the implications of the following: 6 Marks
(a) Freedom of entry and exit of firms under perfect competition
Ans: In perfect competition, firms have the flexibility to enter and exit. This means
that under perfect competition, firms make only normal profits in the long run,
therefore new firms do not enter or depart the market. In the long run, the enterprises
in this rivalry do not make abnormal gains or losses. Firms enter and depart the
market only in the short term.
(b) Non-price competition under oligopoly
Ans: In an oligopoly market, firms do not compete for price changes. If the company
raises its pricing, competitors may not follow suit, resulting in a market loss.
Consumers will switch to competitors.
On the other hand, if the firm lowers its pricing, other firms may lower theirs as well,
resulting in a loss of total revenue. The product will not experience a rise in demand.
They take into account the decisions of competitors, and as a result, the price does

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not fluctuate freely, resulting in non-price competition. In the market, high selling
costs prevail, resources are not properly utilised, and welfare is not maximised.

SECTION - B
13. Which of the following affects national income? (Choose the correct
alternative) 1 Mark
(a) Goods and Services tax
(b) Corporation tax
(c) Subsidies
(d) None of the above
Ans: (c) Subsidies

14. Define money supply. 1 Mark

Ans: The total amount of money in circulation or in existence in a country at any
given time is referred to as the money supply.

15. The central bank can increase availability of credit by: (Choose the correct
alternative) 1 Mark
(a) Raising repo rate
(b) Raising reverse repo rate
(c) Buying government securities
(d) Selling government securities
Ans: (c) Buying government securities

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16. Why does consumption curve not start from the origin? 1 Mark
Ans: Because autonomous consumption is included in consumption, autonomous
consumption can never be zero.

17. Which among the following are final goods and which are intermediate
goods? Give reasons. 3 Marks
(a) Milk purchased by a tea stall
Ans: It is classified as an intermediate good since it is utilised by the producer during
the tea-making process rather than for final consumption.
(b) Bus purchased by a school
Ans: It is a finished product because it is purchased by the school for its own use.
(c) Juice purchased by a student from the school canteen
Ans: It is a final good because it is purchased for final consumption by a student.
Or
Given nominal income, how can we find real income? Explain. 3 Marks
Ans: The following formula can be used to compute real income:
Nominal Income
Real Income = × Price Index of base year
Price Index of current year

Assume that the base year's price index is 100. With the use of the GDP deflator, we
may turn nominal income into real income. i.e,
Nominal Income
Real Income = × 100
GDP deflator

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18. Define multiplier. What is the relation between marginal propensity to
consume and multiplier? Calculate the marginal propensity to consume if the
value of multiplier is 4. 3 Marks
Ans: A multiplier is a factor in economics that determines whether the increases in
total production are greater than the change in spending that created them. It's most
commonly applied to the link between investment and total national revenue.
The multiplier and marginal propensity to consume are related.
MPC and Multiplier have a direct relationship: the higher the MPC, the higher the
multiplier, and vice versa.
1
⇒ Multiplier=
1-MPC
1
⇒ 4=
1-MPC
⇒ MPC=0.75

19. Explain the role of the Reserve Bank of India as the ‘‘lender of last resort’’.
4 Marks
Ans: The lender of last resort is a person or organisation that is willing to assist an
individual or organisation in need of quick financial assistance to get out of financial
difficulties. It means that if a commercial bank is unable to obtain financial
assistance from other sources, it will turn to the Reserve Bank as a last resort.
The Reserve Bank provides loans to these banks in exchange for recognised
securities. When the Reserve Bank provides a loan to a commercial bank in an
emergency, it assures that:
● The country's banking system has not suffered any setbacks.
● The money market has remained steady.

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It protects people's deposited funds and prevents panicked withdrawals from banks
with temporary low liquidity, ensuring the banking and financial system's stability.
Central banks have been attempting to avoid great depressions for more than a
century and a half by serving as lenders of last resort in times of financial crisis.

20. What is meant by inflationary gap? State three measures to reduce this gap.
4 Marks
Ans: The amount by which the actual gross domestic product exceeds the potential
GDP at full-employment level is referred to as an inflationary gap. The following
are three strategies for closing the gap:
I. Fiscal Policy: Fiscal policy refers to the government's spending and income
(taxation) policies in order to achieve its goals.
The goal of fiscal policy in cases of excess demand (where current demand
exceeds aggregate supply at full employment) is to reduce aggregate demand.
II. Monetary Policy: The central bank of a country's monetary policy is to keep
the money supply and credit in the economy under control. As a result, it's
also known as the Central Bank's Credit Control Policy. Money refers to
monetary notes and coins in general, whereas credit refers to loans, which are
funds provided to others at a fixed rate of interest.
The cost of credit (interest rate) and credit availability are influenced by
monetary measures (instruments). As a result, it aids in the control of excess
demand when credit availability is limited and credit is made more expensive.
III. Miscellaneous: Other anti-inflationary strategies include import promotion,
salary freezes, liquid asset control and blocking, mandatory household savings
schemes, increased production by utilising idle capacity, and so on.
Or
What is meant by aggregate demand? State its components. 4 Marks

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Ans: The overall demand for final products and services in an economy at any one
time is known as aggregate demand (AD) or domestic final demand (DFD). It
describes the total amount of products and services to be purchased at all pricing
points.
Aggregate demand is made up of the following elements:
AD = C + I G + (X - M)
Where,
C= Consumption
I = Investment
G = Government Spending
X(Exports) – M(Imports) = Net Export
I. Consumption: Households are responsible for this, and consumption
accounts for a considerable share of aggregate demand at times. The AD curve
swings to the right as consumption rises.
II. Investment: The second of the four components of aggregate demand,
investment, refers to company spending rather than family consumption.
Investment, on the other hand, is the most volatile aspect of AD. Increased
investment pushes AD to the right in the short span and, in the long run, helps
to improve the quality and quantity of production elements.
III. Government Spending: Government spending accounts for a significant
portion of aggregate demand, and an increase in government spending causes
aggregate demand to move to the right. Transfer payments and capital
spending are two types of spending.
Pensions and unemployment benefits are examples of transfer payments,
while capital investment includes items like roads, schools, and hospitals. The
government pays to improve health-care utilisation, education spending, and
income redistribution. They might also spend in order to boost aggregate
demand.

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IV. Net Exports: Imports are foreign commodities purchased by domestic
consumers, whereas exports are domestic goods purchased overseas. The
difference between exports and imports is known as net exports, and this
component can also be net imports if imports exceed exports.
A rise in net exports causes aggregate demand to move to the right. Net
exports are influenced by the exchange rate and trade policy.

21. The value of marginal propensity to consume is 0.6 and initial income in the
economy is Rs. 100 crores. Prepare a schedule showing Income, Consumption
and Saving. Also show the equilibrium level of income by assuming autonomous
investment of Rs. 80 crores. 6 Marks
Ans: Given that,
Marginal propensity to consume (MPC) = 0.6
Initial income = Rs. 100 crores
Autonomous investment = Rs.80 crores

C = C + MPC(Y)
C = 0 + 0.6(Y)

Saving (Rs.)
Income (Rs.) Consumption (1-MPC = MPS) Investment
MPS = 0.40
100 60 40 80
200 120 80 80
300 180 120 80
400 240 160 80
500 300 200 80

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Aggregate Demand (AD) = Aggregate Supply (AS)
AD = C + I and AS = C + S
AD = C + I and AS = C + S
120 + 80 = 200
AS = C + S
120 + 80 =200
Therefore, when income is 200, both investment and savings are equal making the
equilibrium level of income Rs. 200 crores.

22. Explain the meaning of the following: 6 Marks

(a) Revenue deficit
Ans: When the net income generated (revenues less expenditures) falls short of the
predicted net income, a revenue shortfall ensues. When the real amount of money
collected and the actual number of expenditures do not match the anticipated
revenue and expenditure figures, this occurs.
(b) Fiscal deficit
Ans: A fiscal deficit occurs when a government's overall expenditures exceed its
revenue, excluding money borrowed from the public. Deficit is distinct from debt,
which is the result of a series of annual deficits.
(c) Primary deficit
Ans: The deficit can be calculated with or without interest payments on the debt as
an expense. The primary deficit is the difference between the current government's
spending on goods and services and all current receipts from all taxes.
Or
Explain the following objectives of government budget: 6 Marks

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(a) Allocation of resources
Ans: It is one of the most essential goals of the government's budget. In a mixed
economy, private producers strive for profit maximisation while the government
seeks to maximise welfare.
The corporate sector has a tendency to focus resources on high-profit industries
while ignoring areas of social welfare. In such circumstances, the government uses
fiscal policy to reallocate resources in conformity with the country's economic and
social priorities.
(b) Reducing income inequalities
Ans: The government makes every effort to decrease income disparities through its
budget. In a country like India, income disparities are extremely common. To attain
this goal, the government uses taxation and subsidies as fiscal instruments.
The government redistributes income in favour of the poor by levying taxes on the
wealthy and providing subsidies to the needy. Food grain distribution to BPL (below
poverty line) populations through "fair price stores" is a key step in this direction.
The distribution of money and wealth in an equitable manner is a sign of social
justice.
As a result, the government budget helps to eliminate income disparities.

23. 6 Marks
(a) Explain the impact of rise in exchange rate on national income.
Ans: When a country's exchange rate falls against another country, its exports
become cheaper and imports become more expensive. For example, if the currency
rate was previously US$1=INR60 and then fell to US$1=INR70, businesses selling
their products in the United States would receive more money.
So, if my goods was priced at US$5, I used to receive 5×60= INR 300, but now the
exchange rate has depreciated to , so I will receive 5×70 =INR 250 for the
same priced product in the US.

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Similarly, the Currency exchange rate depreciated to , and if I want to buy a
Smartphone worth $200, I had to spend 200×60=INR 12,000 before. Now I’ll pay
INR14,000(200×70).
When the currency rate appreciates, the exact opposite will occur. For example, if
US$1=INR60, US$1= INR50 will be the result.
(b) Explain the concept of ‘deficit’ in balance of payments.
Ans: The balance of autonomous transactions in the Balance of Payments (BOP)
determines the deficit in the BOP. If autonomous receipts are less than autonomous
payments, the BOP will be in deficit.
Because autonomous receipt implies a foreign exchange receipt and autonomous
payment implies a foreign exchange payment, BOP will show a deficit when foreign
exchange receipts are less than foreign exchange payments, implying that the BOP
deficit will reflect the depletion of the country's foreign exchange reserves.

24. Calculate (a) Net National Product at market price, and (b) Gross Domestic
Product at factor cost: 6 Marks
(Rs. in crores)
(i) Rent and interest 6,000
(ii) Wages and salaries 1,800
(iii) Undistributed profit 400
(iv) Net indirect taxes 100
(v) Subsidies 20
(vi) Corporation tax 120
(vii) Net factor income to abroad 70
(viii) Dividends 80
(ix) Consumption of fixed capital 50

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(x) Social security contribution by employers 200
(xi) Mixed income 1,000
Ans:
a. Net National Product at market price:
Ans: NDPFC =Wages and Salaries + SSC by employer + Rent and interest +
Dividend + Corporation tax + Undistributed profit + Mixed income
NDPFC = 1800+200+6000+80+120+400+1000
NDPFC =Rs. 9600 Cr
NNPMP =NDPFC = NFIA + NIT
NNPMP= Rs. 9600 +(-70)+100
NNPMP= Rs. 9630 Cr
b. Gross Domestic Product at factor cost:
GDPFC = NDPFC + Consumption of fixed capital
GDPFC = Es. 9600+50
GDPFC = Rs. 9650 Cr

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