1 Time Allowed: 3 Hours Maximum Marks: 100

ractice aper 1 Time Allowed: 3 Hours Maximum Marks: 100 (i) All questions in both sections are compulsory However, there is internal choice in some questions (ii) Marks for questions are indicated against each question (iii) uestion No 1-5 and 16-20 are very short answer questions carrying 1 mark each They are required to be answered in one sentence (iv) uestion No 6-8 and 21-23 are short answer questions carrying 3 marks each Answers to them should not normally exceed 60 words each (v) uestion No 9-11 and 24-26 are also short answer questions carrying 4 marks each Answers to them should not normally exceed 70 words each (vi) uestion No 12-15 and 27-30 are long answer questions carrying 6 marks each Answers to them should not normally exceed 100 words each (vii) Answers should be brief and to the point and the above word limit be adhered to as far as possible SEC TIN A: IN TR UC TR MI CR EC NMICS 1 When price of a good falls, the impact on demand curve of its substitute good is indicated by: 1 (a) a shift in demand curve to the right (b) a shift in demand curve to the left (c) an upward movement along the curve (d) a downward movement along the curve Ans (b) a shift in demand curve to the left 2 A consumer is in equilibrium when MU = 4, MU = 10 and = 5 At the equilibrium point, will be: 1 (a) 1 (b) 2 (c) 25 (d) 4 Ans (b) 2 3 Which of following curves indicate short period costs? 1 (a) TVC (b) TC TTAL VARIABLE CST TTAL CST UTUT UTUT (c) TC TTAL CST UTUT Ans (a and c)

2 am idea Economics II 4 What is meant by price ceiling? 1 Ans rice ceiling refers to the maximum price that can be legally charged from the buyers of product ften this price is lower than the equilibrium price, so that the poorer sections of the society can afford to buy the product 5 When more of a commodity can be sold only at the lower price, the demand curve will be: 1 (a) downward sloping from left to right (b) upward sloping from left to right (c) a straight line (d) none of these Ans (a) downward sloping from left to right 6 A shift from actual level of output to the potential level of output is not indicated by shift in C to the right Comment 3 In case technology remains constant, what option do we have to raise the level of output? Give reason in support of your answer Ans C would not shift to the right as it indicates the potential level of output And, actual level of output cannot exceed the potential level of output In case technology remains constant, output level can be raised by (i) increasing the quantity of resources, and (ii) efficient utilisation of resources However, it must be noted that when quantity of resources increases, C curve (indicating potential level of output) shifts to the right n the other hand, efficient utilisation of resources does not lead to a shift in C It only causes increase in output within the limits of existing C 7 Labour absorbing technology is given up in preference to capital-intensive technology State its economic value in the context of production possibility frontier for the domestic economy 3 Ans Capital-intensive technology is more efficient/productive than the labour-intensive technology Adoption of capital-intensive technology (in place of labour-intensive technology) would mean that the domestic economy operates at a higher C, indicating higher level of potential output 8 Explain the behaviour of short run average cost curve 3 Ans (i) Initially, AC falls because both AVC and AFC tend to AC = AFC + AVC fall AC (ii) Subsequently, it stabilises, as the impact of falling AVC AFC is neutralised by the rising AVC (iii) Finally, it rises, as the impact of rising AVC dominates the impact of falling AFC (iv) AC is U-shaped in accordance with the law of variable proportions utput 9 Elasticity of demand and slope of demand curve are the two different concepts o you agree? Give reasons 4 Ans es Elasticity of demand and slope of demand curve are the two different concepts Slope of demand curve (at point R) = RS Elasticity of demand (at point R) = ST 1 Slope ST RS 1 1 rice Costs 1 S R T 1 uantity AFC

ractice apers 3 10 Explain the concept of price ceiling with the help of a diagram 4 Explain the concept of floor price with the help of a diagram Ans rice Celing S rice * A E B Equilibrium rice : Equilibrium uantity : Ceiling rice : * Consequences: (i) Excess emand = AB = 1 2 (ii) Black marketing (related to excess demand) * 1 A uantity rice Floor 2 B S rice E Equilibrium rice : Equilibrium uantity : Floor rice : * Consequences: 1 uantity (i) Excess Supply = AB = 1 2 (ii) Market price would reduce to the level of equilibrium price, unless Support rice is offered It is a price at which surplus product of the producer is purchased by the government (lower than the equilibrium price) 11 A consumer s expenditure rises from ` 512 to ` 624 when the price of the commodity falls from ` 16 per unit to ` 12 per unit Calculate the price elasticity of demand by percentage method 4 Ans When price = ` 16, total expenditure ( ) = ` 512 uantity demanded 512 = 32 units 16 When, price = `12, total expenditure ( 1 1 ) = ` 624 New quantity demanded ( 1 ) 624 = 52 units 12 2 Given, = 16; 1 = 12; 1 = 12 16 = ( ) 4 = 32 units; 1 = 52 units; 1 = (52 32) units = 20 units

4 am idea Economics II rice elasticity of demand (E d ) = ( ) 20 = ( ) 4 16 32 = 25 rice elasticity of demand = 25 12 A spurt in input prices has increased the cost of production of capital goods Use a diagram and economic theory to analyse the impact of the above statement on the supply of capital goods and its impact on the market equilibrium in the domestic economy 6 Ans Impact of Increase in Input rices on Supply: Supply curve will shift to the left as shown in figure Supply curve shifts from S to S 1 following a spurt in input prices ther things remaining constant, market price will tend to rise and market quantity will tend to fall 13 How is short run production function different from long run production function? Use diagram 6 Ans Short Run roduction Function: = f( x 1, x 2 ) x 1 indicates constant factor (fixed factor) x 2 indicates variable factor rice Since one factor is constant factor ratio must vary as output is increased This leads to the law of variable proportions Long Run roduction Function: 1 1 uantity = f( x1, x 2 ) Both x 1 and x 2 are variable factors Factor ratio remains constant But, there are increasing, diminishing returns to scale, because of the economies/diseconomies of scale Both short run as well as long run production function lead to U-shaped AC But there is a difference Broadly, while short run AC exhibits returns to a factor (increasing and diminishing returns), long run AC exhibits returns to scale (increasing and diminishing returns) as in Fig (A) and Fig (B) respectively (A) Short Run Average Cost Curve, exhibiting Returns to a Factor SRACC E 1 E S 1 S Initial Equilibrium : E Equilibrium rice : Equilibrium uantity : (B) Long Run Average Cost Curve, exhibiting Returns to Scale LRACC Cost Cost utput utput Note: Change in the scale of production makes LRACC flatter than SRACC

ractice apers 5 14 A consumer consumes only two goods and State the conditions of consumer s equilibrium with the help of utility analysis How is equilibrium affected when price of one good falls? 6 Ans Two conditions of equilibrium are: (i) MU MU (ii) Marginal utility of money remains constant (iii) Law of diminishing marginal utility is valid In case falls (other things remaining constant), MU MU In such a situation the consumer will spend more on and less on Accordingly, MU will fall and MU will rise The process of substituting for would continue till MU is again equal to MU 15 (a) Competition means rivalry But under perfect competition there is no rivalry How do you explain this fact 6 (b) Monopolistic competition includes the elements of both monopoly as well as perfect competition Explain how Ans (a) erfect competition is a form of the market in which the rivalry is eliminated because: (i) Homogeneous product is sold (ii) There is large number of firms in the market Each firm caters such a small fragment of the total market supply, that any increase or decrease in the firm s sale leaves no impact on the market supply (iii) Uniform price prevails in the market, leading to zero market control (iv) There is a freedom of entry and exit so that each firm earns only normal profits (b) Monopolistic competition includes the elements of perfect competition as: (i) there is a large number of buyers and sellers of a commodity, so that the market price is determined largely by the forces of supply and demand And (ii) there is a freedom of entry and exit in the market, which leads to normal profits in the long run Monopolistic competition includes the elements of monopoly as: (i) a firm under monopolistic competition exercises control over price, even though it is not a full control but only partial artial control is exercised through product differentiation, (ii) a firm under monopolistic competition (like a monopoly firm) faces a downward sloping demand curve SEC TIN B: IN TR UC TR MAC R EC NMICS 16 Read the following dialogue between two people Rohit Aarushi Rohit : I want 1 kg of mango : What will you give in exchange? : I can give you 1 pair of shoes in return for the mangoes Aarushi : I don t need shoes I want some chocolates Which of the following problems is being faced by Rohit and Aarushi in their exchange process? 1 (a) Lack of store of value (c) Lack of standard of deferred payment Ans (b) Lack of double coincidence of wants (b) Lack of double coincidence of wants (d) Absence of common units of value

6 am idea Economics II 17 The difference between the rate of interest charged by the commercial banks for the money they lend and the rate of interest paid by them for the deposits they accept is called: 1 (a) market rate (b) nominal rate (c) spread (d) reserves Ans (c) spread 18 A car running between elhi and Simla covers a distance of 360 km in 5 hours The statement includes: 1 (a) only stock variable (c) both a stock and a flow variable Ans (c) both a stock and a flow variable (b) only flow variable (d) none of these [Note: istance is a stock variable Speed (360/5 Hrs) is a flow variable] 19 Which one of these is a capital expenditure? 1 (a) urchase of shares (b) Repayment of loans (c) Expenditure on plant and machinery (d) All of these Ans (d) All of these 20 Which of the following is not correct? 1 (a) rimary eficit = Fiscal deficit Interest payment (b) Revenue eficit = Revenue expenditure Revenue receipts (c) Fiscal eficit = rimary deficit + Interest payment (d) None of these Ans (d) None of these 21 Where will the import of defence goods be recorded in the balance of payments accounts? Give reasons 3 Ans Import of defence goods will be recorded in the Balance of Trade Account (a component of Current Account Bo) Because trade of all goods (consumption goods or capital goods) is recorded as merchandise or visible trade in the Current Account Bo 22 Explain the role of repo rate in correcting the deficiency of demand in an economy 3 Ans Repo rate is the rate at which commercial banks can raise loans from the Central Bank (RBI) A cut in repo rate enhances credit creation capacity of the commercial banks The same amount of cash deposits with the RBI allows the commercial banks to create more demand deposits Accordingly supply of money is increased and the level of demand is raised in the economy The deficiency of demand is corrected 23 In an economy, the autonomous consumption is 220 and the marginal propensity to save is 04 If the equilibrium level of income is 1,700, then the investment expenditure in this economy will be 400 True or False? Justify your answer 3 In an economy, the equilibrium level of income is 900 and the autonomous saving is 100 If marginal propensity to save is 03, consumption expenditure in this economy will be 500 True or False? Justify your answer Ans No, it is not true Given, autonomous consumption (C) = 220 Marginal propensity to save (MS) = 04 Equilibrium level of income () = 1,700 Marginal propensity to consume (MC) = 1 MS = 1 04 = 06

ractice apers 7 At the equilibrium level,, = C + I = C + MC () + I 1,700 = 220 + 06 (1,700) + I 1,700 = 220 + 1,020 + I 1,700 = 1,240 + I I = 1,700 1,240 I = 460 Thus, it is proved that the given statement is false The investment expenditure in the economy = 460 No, it is not true Given, autonomous saving (S) = 100 Marginal propensity to save (MS) = 03 Equilibrium level of income () = 900 Autonomous consumption = (S) = ( 100) = 100 Marginal propensity to consume (MC) = 1 MS We know that, = 1 03 = 07 C = C + MC () = 100 + 07 (900) = 100 + 630 = 730 Thus, it is proved that the given statement is false The consumption expenditure in the economy = 730 24 istinguish between intermediate goods and final goods 4 State the two ways of avoiding the problem of double counting in estimating national income Ans Intermediate goods are those goods which are used as raw material for further production or are purchased for resale Final goods are those goods which are used either for final consumption or for investment Example: Shirt purchased by a firm for resale is an intermediate good Shirt purchased by the household is a final good (i) Use value-addition method (ii) Consider only final goods For details, Refer page 323, am Idea 25 istinguish between depreciation of currency and appreciation of currency Give an example 4 Ans epreciation of currency refers to a fall in the value of domestic currency (rupee) in relation to a foreign currency (say US dollar) Appreciation of currency refers to a rise in the value of domestic currency (rupee) in relation to a foreign currency (say US dollar) Example: If the exchange rate for a US$ slides from 60 to 50, it is depreciation of US currency and appreciation of the Indian currency

8 am idea Economics II 26 Giving reason, explain how the following are treated in the estimation of national income: 4 Ans (i) Services rendered by the housewives (ii) ayment of business corporate tax (i) Services rendered by the housewives are not included in national income Reasons: (a) It is difficult to estimate their market value (b) Housewives render their services not with the motive of earning income (ii) ayment of business corporate tax is not included in national income Reason: All taxes are transfer payments 27 How is budgetary policy used to promote G growth in the economy? 6 Ans Budgetary policy is used to promote G growth in the following ways: (i) Tax holidays and subsidies are offered to promote investment in backward regions or in the production of socially useful goods (ii) Budgetary allocations are raised for investment in ublic Sector Undertakings (SUs) (iii) Economic and social infrastructure is promoted through budgetary allocations It serves as an engine of G growth (iv) Subsidised inputs are supplied to the farmers to promote cultivation (v) Employment is generated (along with value addition) through public expenditure on welfare schemes like MGNREGA 28 Explain the significance of export promotion in correcting the situation of deflationary gap in the economy 6 Ans Export promotion implies a rise in foreign demand for the domestically produced goods and services It leads to a rise in aggregate demand (A) in terms of component of A When domestic demand is low, demand from rest of the world (see page 424, am Idea, for details) plays a significant role in correcting deflationary gap 29 Explain the process of credit creation with the help of a numerical example 6 Ans Refer pages 367 & 368, am idea 30 Find out (a) Gross National roduct at Market rice, and (b) Net Current Transfers from Abroad: 6 Items ( in crore) (i) Net national disposable income 1,120 (ii) Net indirect tax 140 (iii) rivate final consumption expenditure 770 (iv) Government final consumption expenditure 270 (v) Net domestic fixed capital formation 220 (vi) Net imports ( ) 60 (vii) Net factor income to abroad ( ) 20 (viii) epreciation 70 (ix) Change in stock 30 Find (a) Net National roduct at Market rice, and (b) Gross National isposable Income: Items ( in crore) (i) Wages and salaries 750 (ii) Rent 150 (iii) Net current transfers to abroad 60 (iv) Net indirect tax 120 (v) Royalty 100

ractice apers 9 (vi) rofits 350 (vii) Net factor income to abroad ( ) 20 (viii) Consumption of fixed capital 170 (ix) Social security contribution by employers 110 (x) Social security contribution by employees 90 (xi) Interest 450 Ans (a) Gross National roduct at Market rice = rivate final consumption expenditure + Government final consumption expenditure + Net domestic fixed capital formation + epreciation + Change in stock Net imports Net factor income to abroad = ` 770 crore + ` 270 crore + ` 220 crore + 70 crore + ` 30 crore ( ) ` 60 crore ( ) ` 20 crore = ` 770 crore + ` 270 crore + ` 220 crore + 70 crore + ` 30 crore + ` 60 crore + ` 20 crore = ` 1,440 crore (b) Net National isposable Income = Gross national product at market price epreciation + Net current transfers from abroad, Net Current Transfers from Abroad = Net national disposable income Gross national product at market price + epreciation = ` 1,120 crore ` 1,440 crore + ` 70 crore = ( ) ` 250 crore (a) Gross national product at market price = 1,440 crore (b) Net current transfers from abroad = ( ) 250 crore (a) Net National roduct at Market rice = Wages and salaries + Social security contribution by employers + Rent + Royalty + rofits + Interest + Net indirect tax Net factor income to abroad = ` 750 crore + ` 110 crore + ` 150 crore + ` 100 crore + ` 350 crore + ` 450 crore + 120crore ( ` 20 crore = ` 750 crore + ` 110 crore + ` 150 crore + ` 100 crore + ` 350 crore + ` 450 crore + 120crore ` 20 crore = 2,050 crore (b) Gross National isposable Income = Net national product at market price + Consumption of fixed capital Net current transfers to abroad = ` 2,050 crore + ` 170 crore ` 60 crore = ` 2,160 crore (a) Net national product at market price = ` 2,050 crore (b) Gross national disposable income = ` 2,160 crore