ICSE Class 10 Economic Applications Board Exam Question Paper 2014 with Solutions

ICSE Class 10 Economics Applications Board Exam Question Paper with Solutions

PART I

Question 1

State whether the following statements are true or false. Give reasons.

a) The price elasticity of demand for commodities having close substitutes is relatively high. [2 Marks]

Answer:
True. The price of the commodity falls in relation to its substitute. Consumers can easily switch from one good to another even if there is only a small change in price and so its demand will increase.

Teacher's Note:
a) The presence of close substitutes makes demand more elastic as consumers have alternatives.
b) Students must clearly mention the shifting behavior of consumers to secure full marks.

b) Rate of taxation depends upon the income groups in a progressive tax structure. [2 Marks]

Answer:
True. The rate of taxation increases with increase in income. It helps in reducing the income inequality among different sections of the people in a society. Since the rich pay a higher average tax rate than the poor, the gap between the rich and the poor is narrowed down.

Teacher's Note:
a) A progressive tax imposes a higher percentage rate on higher-income earners.
b) Always explain the economic objective of reducing income inequality when discussing progressive taxation.

c) The price level in a perfectly competitive market is determined by an individual seller. [2 Marks]

Answer:
False. A large number of buyers and sellers exist in a competitive market. The demand of an individual buyer relative to the total market demand is very small. Similarly, the supply of an individual seller is very small relative to total market supply. Thus, no individual seller or buyer can influence the market price by changing their demand or supply condition. Sellers sell the product only at the market demand price.

Teacher's Note:
a) Individual sellers in perfect competition are price takers, not price makers.
b) Market price is determined by the intersection of total market demand and total market supply.

d) Efficiency of labour is influenced by working conditions. [2 Marks]

Answer:
True. The poor and unhealthy working conditions in most of the Indian factories, particularly in the unorganised sector, aggravate the problem of inefficiency of workers. More hygienic and congenial conditions would help in achieving higher levels of efficiency.

Teacher's Note:
a) Good working conditions reduce fatigue and health hazards, boosting productivity.
b) Link the argument to industrial psychology and worker welfare.

e) Supply and price are inversely proportional. [2 Marks]

Answer:
False. There is a direct relationship between the price of a commodity and its quantity supplied. If the price of the product becomes higher and is more than the marginal cost of production, then the firm can earn excess profits by selling its product at a higher price. Therefore, the supply of that commodity may also rise.

Teacher's Note:
a) The Law of Supply states that price and quantity supplied move in the same direction.
b) Ensure students do not confuse the law of demand with the law of supply.

Question 2

a) Draw and briefly explain a perfectly inelastic supply curve. [2 Marks]

Answer:
Supply is said to be perfectly inelastic when supply does not respond to change in the price of the commodity. Supply is constant even at a zero price. E_s = 0.

[Figure: Vertical straight line parallel to the Y-axis labeled S S, showing constant quantity across different price levels P₁ and P₂, with E_s = 0 indicated near the top]

Teacher's Note:
a) Perfectly inelastic supply is represented by a vertical straight line.
b) The numerical value of elasticity of supply in this case is zero.

b) How does the practice of shifting cultivation affect the environment? [2 Marks]

Answer:
The practice of shifting cultivation is an extravagant and unscientific form of land use. The effects of shifting cultivation are devastating and far-reaching in degrading the environment and ecology of the region. The previous 15 to 20 year cycle of shifting cultivation on a particular land has now reduced to 2 to 3 years. It resulted in large-scale deforestation, soil and nutrient loss and invasion by weeds and other harmful species. The indigenous biodiversity has been affected to a large extent.

Teacher's Note:
a) Emphasize the loss of forest cover and topsoil erosion.
b) Mention how shortening fallow periods prevent soil regeneration.

c) In which form of market do producers and consumers have perfect knowledge about the market conditions? [2 Marks]

Answer:
In a perfectly competitive market, all the buyers and sellers have perfect knowledge about the market condition. They have complete knowledge about the price and quality of the product, which has one price in the market.

Teacher's Note:
a) Perfect knowledge ensures a single uniform price prevails throughout the market.
b) This condition prevents buyers from paying more and sellers from charging different prices.

d) State two measures taken by the Government to reduce income inequality in an economy. [2 Marks]

Answer:
Revenue policy and public expenditure policy are two measures undertaken by the Government to reduce income inequality in an economy. The progressive and proportional system of taxation helps to reduce the gap between rich and poor. All the public expenditure incurred in the projects will benefit the middle classes and poor sections of an economy.

Teacher's Note:
a) Fiscal policy tools include progressive taxation and targeted social welfare spending.
b) Clearly distinguish between tax policy and expenditure policy.

e) Mention two features of monopoly. [2 Marks]

Answer:
Two features of monopoly are as follows:
1. One seller and a large number of buyers of the product.
2. Restrictions on the entry of new firms.

Teacher's Note:
a) Highlight the absence of close substitutes in a monopoly market.
b) Mention barriers to entry as the key protective feature for a monopolist.

Question 3

a) How does the central bank act as a 'lender of the last resort'? [2 Marks]

Answer:
When a commercial bank fails to get financial accommodation from any other source, it approaches the central bank as a last resort. The central bank advances loan to such a bank against approved securities. Thus, the central bank acts as a lender of the last resort.

Teacher's Note:
a) This function prevents systemic financial panic and bank runs.
b) Loans are provided against eligible securities at the bank rate.

b) The quantity of a commodity supplied increases by 25% when its price rises by 10%. Calculate price elasticity of supply. [2 Marks]

Answer:
Price elasticity of supply (E_s) = Percentage change in quantity supplied / Percentage change in price
= 25% / 10%
= 2.5

Teacher's Note:
a) State the formula clearly before substituting values.
b) Since E_s is greater than 1, supply is elastic.

c) State an adverse impact of urbanisation on the ecosystem. [2 Marks]

Answer:
Adverse impact of urbanisation on the ecosystem:
Temperature: Temperature increases severely due to factors such as paving over formerly vegetated land, increasing the number of residences and giant apartments and industries.
Air pollution: There is enormous growth of factories and automobiles due to urbanisation. Harmful emissions of gases and smoke from factories and vehicles cause air pollution. It contributes to allergies and respiratory problems, thereby becoming a huge health hazard.

Teacher's Note:
a) Urban heat island effect is a direct consequence of concrete expansion.
b) Mentioning specific pollutants adds depth to the answer.

d) An indirect tax is not always equitable. Give two reasons to support your answer. [2 Marks]

Answer:
An indirect tax is not always equitable:
1. Indirect taxation is inequitable because each individual pays the same rate on their purchases; the poor pay a larger proportion of their incomes.
2. Indirect taxes are levied on the commodities which only the rich people consume and by limited people. It brings in very less tax revenue for the Government. Therefore, the Government has to impose taxes on a wide range of commodities.

Teacher's Note:
a) Indirect taxes are regressive in nature as they do not account for the taxpayer's ability to pay.
b) Clearly explain the disproportionate burden on lower-income groups.

e) State two characteristics of capital as a factor of production. [2 Marks]

Answer:
Characteristics of capital as a factor of production:
1. Capital is productive. Hence, production can be increased to a larger extent if workers work with capital.
2. Use of capital increases the productivity of labour. Hence, there will be an increase in the future earning of workers. This will lead to a higher standard of living.

Teacher's Note:
a) Capital is a man-made factor of production.
b) Emphasize that capital helps in generating further income and enhancing efficiency.

Question 4

a) Suggest two measures to improve the efficiency of labour in India. [2 Marks]

Answer:
Two measures to improve the efficiency of labour in India are as follows:
1. Eradication of illiteracy is perhaps the first priority to improve the efficiency of labour.
2. Adequate provisions for imparting training to the workers are necessary to improve the efficiency of labour.

Teacher's Note:
a) Education and skill development are fundamental to raising labor productivity.
b) Mentioning better health and working conditions is also acceptable.

b) What is meant by product differentiation? [2 Marks]

Answer:
Product differentiation is a situation when different producers under monopolistic competition try to differentiate their product in terms of its shape, size, packaging and trademark. It is done in order to attract buyers of rival firms in the market.

Teacher's Note:
a) Product differentiation is the hallmark of monopolistic competition.
b) It can be real (quality, design) or imaginary (branding, packaging).

c) State the Law of Supply. Explain it with the help of a diagram. [2 Marks]

Answer:
The law of supply states that other things being equal, the quantity of a good supplied increases with an increase in price level and decreases with a decrease in price level of the good. The supply schedule and supply curve given below show the positive relationship between price and quantity supplied.

[Figure: A Cartesian coordinate system with Price on the Y-axis (0 to 15) and Quantity on the X-axis (0 to 300). An upward sloping supply curve labeled S starts from origin area and moves up right, passing through points corresponding to table values (5, 100), (10, 200), and (15, 300)]

Teacher's Note:
a) Mention the assumption of ceteris paribus (other things remaining constant).
b) Ensure the supply curve slopes upwards from left to right.

d) How does money act as a standard of deferred payment? [2 Marks]

Answer:
Deferred payments refer to those payments which are made in the future. Money has made deferred payments easier. When money is borrowed, the principal and interest amounts have to be returned to the lender. However, these transactions are not possible in terms of goods and services. Money performs this function more effectively.

Teacher's Note:
a) Deferred payments involve credit transactions over time.
b) Money serves as a standard due to its stable value compared to commodities.

e) State an important difference between demand deposits and time deposits. [2 Marks]

Answer:
Demand deposits and time deposits:
1. Demand deposits can be withdrawn at any time, whereas the time deposits can be withdrawn only after the expiry of a specific period.
2. There is no interest rate on demand deposits, whereas the time deposits carry a higher interest rate.
3. Demand deposits are chequable and can be withdrawn through cheques, whereas time deposits are not chequable.

Teacher's Note:
a) Demand deposits form part of narrow money (M1).
b) Time deposits are fixed-term deposits yielding higher interest returns.

PART II

Question 5

a) Define elasticity of supply. Explain any four of its determinants. [7 Marks]

Answer:
Elasticity of supply is a measure of the degree of responsiveness of quantity supplied to changes in the product's own price.
Factors determining elasticity of supply are as follows:
1. Chances of shifting from production: The size or degree of response depends on how easily producers can shift the production of another product to the one whose price has increased. When the producers can easily shift from one production to another, it means the supply would be more price elastic.
2. Length of time: Producers cannot shift the production immediately due to a change in price of other products within the short duration. But it may be possible to do so over a period of time. Hence, supply tends to be relatively inelastic in the short run and relatively elastic in the long run.
3. Behaviour cost of production: Elasticity of supply is highly influenced by how the cost of production responds to output changes. If an increase in output by the firms in an industry causes only a slight increase in their cost per unit or leads to a decrease in cost per unit, supply will be fairly elastic. Otherwise, when an increase in supply leads to a large increase in the cost of production, supply would be relatively inelastic.
4. Risk-taking: The elasticity of supply is determined based on the willingness of entrepreneurs to take risk. Supply is more elastic when entrepreneurs are willing to take risk and inelastic when they hesitate to take risk.

Teacher's Note:
a) Definition must be precise using percentage changes in price and quantity supplied.
b) Explain each determinant clearly with economic reasoning.

b) Define a tax. Explain the following with examples: [8 Marks]
i. Regressive tax   ii. Proportional tax   iii. Degressive tax

Answer:
A tax is a compulsory payment imposed on persons or companies by the Government to meet the expenditure incurred on providing common benefits to the people.
1. Regressive tax:
In regressive tax, the average tax rate decreases with an increase in income of an individual. The absolute amount of tax collection increases with the increase in income.
Example:
Income per month: Rs 2,000 | Rs 4,000
Tax rate: 10% | 7.5%
Tax collection: Rs 200 | Rs 300
2. Proportional tax:
In proportional tax, the tax rate is constant irrespective of the increase in income. All tax payers pay an equal proportion of income in the form of taxes.
Example:
Income per month: Rs 2,000 | Rs 4,000
Tax rate: 10% | 10%
Tax collection: Rs 200 | Rs 400
3. Degressive tax:
Degressive tax means the rate of tax which increases up to a certain limit and later the uniform rate is charged. This system is a mixture of proportional tax and progressive tax. The absolute amount of tax collection falls with the increase in income.
Example:
Income per month: Rs 2,000 | Rs 4,000
Tax rate: 10% | 2.5%
Tax collection: Rs 200 | Rs 100

Teacher's Note:
a) Provide clear numerical tables for each tax structure to demonstrate calculation.
b) Ensure the distinction between regressive and degressive taxes is highlighted.

Question 6

a) What is meant by industrialisation? Explain four impacts of industrialisation on the environment. [7 Marks]

Answer:
Industrialisation means a process in which a change of series of systematic production takes place. It implies creation and growth of manufacturing units. The process of industrialisation was started during the second five-year plan in India. Due to the progress of industries such as iron and steel, chemical, coal, cement, thermal power etc., the renewable and non-renewable resources are slowly depleting. Impacts of industrialisation on the environment are:
1. Global warming: The most serious consequence of industrial pollution is global warming. The emission of a variety of greenhouse gases such as CO₂, methane etc. has raised the temperature of the Earth, leading to global warming. Global warming causes various health hazards and diseases such as malaria, dengue, cholera etc. It also results in the melting of glaciers and snow-capped mountains, causing an increase in the water levels in seas and rivers, leading to the chances of flood.
2. Air pollution: Air pollution has also increased enormously with the increase in the number of industries and factories. Carbon dioxide, sulphur and nitrogen are the gases emitted from various industries. These gases lead to environment and health hazards such as acid rain and skin disorders in individuals.
3. Soil pollution: Due to various natural and artificial reasons, the soil loses its structure and fertility. Dumping of industrial wastes is the main factor which contributes to soil pollution. Industrial wastes contain chemicals which get accumulated on the top layer of the soil, leading to loss of fertility of the soil. There will be a change in the ecological balance of the environment because of fewer plants.
4. Water pollution: Water pollution has also increased enormously with the increase in the number of industries and factories. Dumping of industrial waste products into water resources and improper treatment of industrial wastes result in water pollution.

Teacher's Note:
a) Define industrialisation as the transition from an agrarian economy to a manufacturing-based economy.
b) Detail both causes and environmental consequences for each impact.

b) Define joint demand. With the help of diagrams explain the difference between individual demand and market demand. [8 Marks]

Answer:
When the demand for different complementary goods is created at one time, it is termed joint demand. For example, the demand for computer hardware and software is created jointly.
The individual demand curve is a curve showing different quantities of the commodity which one particular buyer is willing to buy at different possible prices of the commodity at a point of time. In the diagram given below, the quantity of commodity is given on the X-axis and the price on the Y-axis. DD is the demand curve representing the individual demand schedule. The demand curve slopes downwards from left to right, indicating an inverse relationship between the price and the quantity demanded.
The market demand curve is the horizontal summation of the individual demand curves. It indicates various quantities of the commodity which all consumers in the market are willing to buy at different possible prices of the commodity at a point of time. The diagram below shows that the market demand curve represents the market demand schedule assuming two consumers A and B in the market. The market demand curve also slopes downward indicating an inverse relationship between the price and quantity demanded.

[Figure: Three separate demand curve diagrams. Diagram 1 shows A's Demand Curve labeled DD sloping downward from (0, 4) to (4, 0). Diagram 2 shows B's Demand Curve labeled DD sloping downward identically. Diagram 3 shows Market Demand Curve labeled DD, representing horizontal summation of A and B, sloping downward with quantities spanning up to 4 units on X-axis and price from 0 to 4 on Y-axis]

Teacher's Note:
a) Joint demand implies that two or more goods are demanded together to satisfy a single want.
b) Explain clearly that market demand is derived by horizontal summation of individual demand curves.

Question 7

a) State one difference between an entrepreneur and other factors of production. Explain any four qualities in an individual to be a successful entrepreneur. [7 Marks]

Answer:
In the production of goods, all other factors of production are employed by the entrepreneur. Land, labour and capital are the factors engaged by the entrepreneur on a contractual basis. Entrepreneurs make payments as rent for land, wages for labour and interest to capital. The income of entrepreneurs is residual in nature as their profit is generated after making payments out of their income to the other factors of production employed in the production process.
Four qualities of an individual to be a successful entrepreneur:
1. Organisational ability: A good organiser will always be a successful entrepreneur. There are certain people who are good at work but are poor organisers. In that case, they will not be a good entrepreneur.
2. Attitude of risk taking: An entrepreneur must carry the risk of the uncertainty of business as it is one of the main functions of an entrepreneur. Therefore, a person who has strong aversion to take risks will not be a good entrepreneur.
3. Ability to make quick decisions: An entrepreneur must make a proper analysis of risks and decision making must be prudent because reckless risk-taking may bring disaster to a business firm. Therefore, the ability to make quick decisions is another good quality of an entrepreneur.
4. Negotiating skills: An ideal entrepreneur must have good negotiating skills because successful running of a business firm requires negotiations on various issues with various parties such as clients, trade unions, the Government etc.

Teacher's Note:
a) Emphasize that the entrepreneur is the risk bearer and residual claimant, unlike wage-earning labour or contracted land.
b) Detail each entrepreneurial quality with practical business relevance.

b) Define a commercial bank. Explain three ways by which commercial banks advance loans to the public. [8 Marks]

Answer:
A commercial bank is defined as a financial institution which provides services such as accepting deposits, giving business loans, mortgage lending and basic investment products such as savings account and certificates of deposit.
Loans advanced by a commercial bank are:
1. Ordinary loans: Commercial banks advance ordinary loans for purchasing consumer durables, building houses etc.
2. Cash credit: Commercial banks allow the borrower to withdraw up to a certain amount on a given security which constitutes stocks of goods and bills receivable from others. Interest will be paid by the borrower only on the actual amount withdrawn from the bank.
3. Overdraft facilities: Under the overdraft facilities, an account holder can withdraw money in excess of the amount deposited with the bank. But the borrower will pay interest on excess amount withdrawn from the bank.

Teacher's Note:
a) Commercial banks operate for profit by accepting deposits and extending credit.
b) Clearly distinguish between cash credit and overdraft facilities.

Question 8

a) Define labour as a factor of production. Explain in brief three characteristics of labour. [7 Marks]

Answer:
Labour can be defined as the aggregate of all human physical and mental effort used in the creation of goods and services.
Three characteristics of labour are as follows:
1. Labour cannot be accumulated: Labour cannot be accumulated by a labourer, i.e. a capitalist can go on accumulating capital or a landowner can go on increasing the amount of land owned by him. It is a crucial difference between labour and other factors of production.
2. Labour is mobile: Labour can move from one place to another or from one use to another use. Generally, the mobility of labour depends on the education and skill of labourers, wage difference between different sectors, social customs etc.
3. Labour has alternative uses: It is possible for any labour to engage itself in different fields of work. For example, an unskilled worker can work as a coolie, hawker, peddler etc.

Teacher's Note:
a) Labour is an active factor of production that cannot be separated from the labourer.
b) Highlight the perishable nature of labour as it cannot be stored for future use.

b) With the help of an example explain the meaning of price discrimination. To which market is it relevant? Explain any two similarities between a perfect market and a monopolistically competitive market. [8 Marks]

Answer:
Price discrimination is a situation when a monopolist charges a different price from different buyers of the same commodity in order to maximise profit. For example, a monopoly surgeon may charge a low fee from poor patients and a high fee from rich patients.
Price discrimination is a situation prevalent in a monopoly market.
Similarities between a perfect market and a monopolistically competitive market:
1. Both perfect market and monopolistically competitive market have a large number of sellers and buyers.
2. Level of profit in the long run in both the markets are AR = AC (implying normal profit), where AR = average revenue and AC = average cost.

Teacher's Note:
a) Price discrimination is uniquely possible under monopoly due to lack of competition.
b) Ensure both market structures are compared accurately regarding long-run equilibria.

Question 9

a) Define money. How does money perform its role as a
i. Medium of exchange   ii. Store of value [7 Marks]

Answer:
Money is defined as a thing which is commonly accepted as a medium of exchange. Money is an instrument which serves as a medium of exchange, a measure of value, a store of value and a standard for deferred payments.
1. Medium of exchange: The introduction of money resulted in the end of a barter system where goods were exchanged according to needs. Now, money acts as an intermediate in the exchanging process, and thus, it is known as a medium of exchange. Anyone can exchange goods for money and buy commodities which are required by them.
For example, a fruit seller wants to sell his fruits in order to buy wheat. In the absence of money, he will have to look for some person who wants to sell wheat and buy fruits. This is not easy and always possible. However, with the availability of money as a medium of exchange, the fruit seller just has to find a buyer for his fruits. After fruits are exchanged for money, he can purchase wheat from the market.
2. Store of value: People keep their wealth in the form of money because money is the most liquid form of wealth. Savings in the form of money is maintained for purchasing commodities in the future. In this case, the value of commodities is being stored. Hence, money acts as a store of value.

Teacher's Note:
a) Money overcomes the double coincidence of wants inherent in a barter system.
b) Liquidity is the key attribute that enables money to act as a store of value.

b) What are public sector undertakings? Explain four reasons for the privatisation of public sector undertakings. [8 Marks]

Answer:
A public sector undertaking (PSU) is owned and controlled by the Government. The main aim of the sector is to maximise social welfare. It gives more stress to the production of capital goods. Nearly 26% of the national income comes from the public sector and 20% of the total working population is engaged in this sector. This sector enjoys monopoly form of market.
Reasons for the privatisation of PSUs:
1. Lack of management: Effective managerial policies can change the total outcome of a nation. But India is lagging in this context. Most of the Government officers are inefficient to execute the work. Lack of efficient management has thrown most of the PSUs in darkness.
2. High construction cost: Most of the Government projects were unable to complete within the stipulated time, so the estimated expenditures had increased over the period. An excessive delay in the completion of work obstructs the work culture and running cost of construction cross the average limit.
3. Improper utilisation of capacity: Most of the resources were unused or mis-used which lead to heavy loss with no profit situation in PSUs.
4. Labour problem: Labour indiscipline and lack of completing the work on time are the main reasons behind a low level of profit. Frequent lock outs, strikes, labour unrest and overstaffing decline their efficient management.

Teacher's Note:
a) Define PSUs clearly focusing on state ownership and social welfare objectives.
b) Privatisation aims to improve efficiency, reduce fiscal burden, and increase market competitiveness.

Question 10

Read the extract given below and answer the questions that follow:
TNN, 15th August 2013
Rising vegetable prices and the impact of a weak rupee pushed inflation to a five month high of 5.29% in July 2013. Posing yet another challenge for Asia's third largest economy battling to defend the rupee and boost growth.
Official data released on Wednesday showed inflation, as measured by the Wholesale Price Index, jumped to 5.79% in July from previous month's 4.86%. Easing Wholesale Price Inflation had fuelled expectation of a moderation in tight monetary policy, but the slide of the rupee against the dollar has dashed those hopes for now.

i. What is meant by running inflation? [2 Marks]

Answer:
Running inflation is inflation where the general price level increases a bit faster and the rate of growth of price level is about 10 percent per annum. The inflation rate becomes double digit. Here, the price movements are compared with the trotting of a horse.

Teacher's Note:
a) Running inflation is a medium-pace inflation that requires prompt monetary control.
b) Contrast it briefly with creeping or galloping inflation for better conceptual clarity.

ii. Mention two fiscal measures to control inflation. [1 Mark]

Answer:
Two fiscal measures to control inflation are taxation and government expenditure.

Teacher's Note:
a) Fiscal policy involves government revenue and expenditure management.
b) During inflation, taxes should be increased and public expenditure reduced.

iii. Briefly explain the effect of a high level of inflation on the following:
1. Fixed income groups [2 Marks]
2. Producers [2 Marks]
3. Creditors and debtors [2 Marks]

Answer:
1. Fixed income groups: The hardest hit are people who receive a fixed income. People who live on past savings, fixed interest or rent, pensions, salaries etc. suffer during periods of rising price as their incomes remain fixed. The middle class who by their hard work take care of their children's education, livelihood in times of sickness and old age, and accommodate day-to-day expenses find it difficult to survive in times of serious inflation.
2. Producers: When a price increases, producers gain on account of windfall profits because prices rise at a faster rate than the cost of production. Furthermore, there is a time-lag between the price rise and the increase in cost. Moreover, producers gain because the prices of their stock go up due to inflation. They also stand to gain being generally borrowers of money for business purposes.
3. Creditors and debtors: Debtors borrow from creditors to repay with interest at some future date. Changes in price level affect them differently at different time periods. During inflation, when the prices rise and the real value of money goes down, the debtors pay back less in real terms than what they had borrowed, and thus, to that extent, they are gainers. On the other hand, the creditors get less in terms of goods and services than what they had lent and lose to that extent.

Teacher's Note:
a) Inflation redistributes income and wealth unevenly across different economic groups.
b) Highlight that debtors gain and creditors lose during inflationary periods.

iv. Explain three monetary policies of the Reserve Bank of India to control credit. [6 Marks]

Answer:
Three monetary policies of the Reserve Bank of India to control credit:
1. Bank rate policy: Bank rate policy is used as the main instrument of monetary control during the period of inflation. When the central bank raises the bank rate, it is said to have adopted a dear money policy. The increase in bank rate increases the cost of borrowing which reduces commercial banks borrowing from the central bank. Consequently, the flow of money from commercial banks to the public gets reduced. Therefore, inflation is controlled to the extent it is caused by the bank credit.
2. Cash reserve ratio: When controlling inflation, the central bank raises the cash reserve ratio (CRR) which reduces the lending capacity of commercial banks. Consequently, the flow of money from commercial banks to the public decreases. In the process, it halts the rise in prices to the extent it is caused by bank credits to the public.
3. Open market operations: Open market operations refer to the sale and purchase of government securities and bonds by the central bank. When controlling inflation, the central bank sells Government securities to the public through banks. This results in the transfer of a part of bank deposits to the central bank account and reduces credit creation capacity of commercial banks.

Teacher's Note:
a) Quantitative credit control tools regulate the overall volume of money in the economy.
b) Explain how raising policy rates contracts credit creation during inflationary phases.