ICSE Class 10 Economic Applications Sample Paper 2019 with Solutions

PART I (40 Marks)

Attempt all questions from this part.

Question 1

a) What is qualitative or selective credit control? [2 Marks]

Answer:
Qualitative or selective credit control refers to the discriminatory policy of the Central Bank in favour of or against certain sectors of the economy. In priority sectors, the flow of credit may be encouraged to stimulate production (positive approach), while credit for speculative activities may be discouraged during inflation (negative approach).

Teacher's Note:
a) Qualitative controls regulate the direction and purpose of credit rather than its total volume.
b) Students must clearly distinguish between positive approaches (priority sectors) and negative approaches (speculative activities).

b) What is the difference between income effect and substitution effect? [2 Marks]

Answer:
Income effect is the change in the quantity demanded when the real income of the buyer changes as a result of a change in the price of a commodity. Substitution effect is the substitution of one commodity with another when the latter becomes relatively cheaper due to a price change.

Teacher's Note:
a) Income effect relates to the change in purchasing power.
b) Substitution effect relates to relative price changes between competing commodities.

c) What is meant by supply curve? How to derive the market supply curve from individual supply curves? [2 Marks]

Answer:
A supply curve is a graphical representation of a supply schedule, indicating the positive relationship between the price of a commodity and its quantity supplied. The market supply curve is derived by the horizontal summation of the individual supply curves of all firms in the industry.

Teacher's Note:
a) Ensure the mention of 'horizontal summation' as it is a key term expected by examiners.
b) The positive slope of the supply curve reflects the law of supply.

d) Mention any two important sources of tax revenue of the Central Government. [2 Marks]

Answer:
1. Union excise duties: Taxes levied on the production of various goods within the country (except alcoholic liquors and certain drugs).
2. Custom duties: Taxes imposed by the Central Government on imported or exported items.

Teacher's Note:
a) Give clear examples of indirect taxes collected by the central authority.
b) Do not confuse tax revenue sources with non-tax revenue sources like fees and fines.

e) What are the two primary functions of money? Give the meaning of each. [2 Marks]

Answer:
The two primary functions of money are medium of exchange and measure of value.
1. Medium of exchange: Money facilitates the process of exchange by removing the double coincidence of wants inherent in the barter system.
2. Measure of value: Money serves as a common unit of account, expressing the monetary value of all goods and services.

Teacher's Note:
a) Primary functions form the foundation of monetary economics.
b) Distinguish clearly between primary functions and secondary or contingent functions.

Question 2

a) What is price elasticity of demand and income elasticity of demand? [2 Marks]

Answer:
Price elasticity of demand measures the responsiveness of the quantity demanded of a commodity due to a percentage change in its price (\( e_p = \frac{\text{Percentage change in quantity demanded}}{\text{Percentage change in price}} \)). Income elasticity of demand shows the responsiveness of the quantity demanded due to a percentage change in the money income of the consumer.

Teacher's Note:
a) Mentioning the formula adds clarity and completeness.
b) Keep definitions precise regarding percentage changes.

b) How is supply different from stock? [2 Marks]

Answer:

Teacher's Note:
a) Always tabulate differences for clarity.
b) Highlight that stock is potential supply, while supply is actual quantity offered for sale.

c) Differentiate between a tax on income and a tax on commodity. [2 Marks]

Answer:

Teacher's Note:
a) Emphasize incidence and shifting of tax burden.
b) Direct taxes are progressive, whereas commodity taxes are generally regressive.

d) Is monopoly a price maker? [2 Marks]

Answer:
Yes, a monopolist is a price maker because they have full control over the price of their product. Being the sole seller with no close substitutes and protected by barriers to entry, the monopolist can determine either the price or the output, but not both independently.

Teacher's Note:
a) Mention absence of close substitutes and lack of competition as core reasons.
b) Contrast with perfect competition where firms are price takers.

e) What are the functions of the Central Bank? [2 Marks]

Answer:
The main functions of the Central Bank include: (1) Issuing of currency notes, (2) Acting as banker, agent, and advisor to the government, (3) Acting as banker's bank, supervisor, and lender of last resort, (4) Custodian of cash reserves and foreign exchange reserves, and (5) Controller of credit and promoter of economic development.

Teacher's Note:
a) Students should list at least four major functions clearly.
b) Controller of credit is considered the most vital function of a central bank.

Question 3

a) Define bandwagon effect. [2 Marks]

Answer:
The bandwagon effect is a phenomenon where a consumer's demand for a commodity is influenced and increased by the taste and preference of the social class or peer group to which they belong, desiring to conform or keep up with others.

Teacher's Note:
a) Emphasize the sociological aspect influencing consumer demand.
b) Contrast briefly with the snob effect if required for context.

b) What is the consequence of a straight line downward sloping demand curve for a monopoly firm? [2 Marks]

Answer:
When a firm's demand curve slopes downwards, Average Revenue (AR) is greater than Marginal Revenue (AR > MR). As AR decreases, MR also decreases but at a faster rate, causing the MR curve to lie entirely below the AR curve.

Teacher's Note:
a) Highlight the geometric relationship where MR bisects the distance between the y-axis and the AR curve.
b) Ensure AR and MR notations are clearly stated.

c) Mention any two sources of non-tax revenue of the Central Government. [2 Marks]

Answer:
1. Interest receipts on loans provided by the Central Government to state governments and union territories.
2. Dividends and profits received from public sector enterprises (e.g., railways, postal services, public sector undertakings).

Teacher's Note:
a) Non-tax revenues arise from sources other than taxes.
b) Fees, fines, and penalties are also valid examples.

d) Define demand-pull inflation. [2 Marks]

Answer:
Demand-pull inflation refers to inflation generated by excess aggregate demand in the economy over aggregate supply. When total demand exceeds total output at full employment, the general price level rises.

Teacher's Note:
a) Identify excess demand as the core driver.
b) Contrast with cost-push inflation in terms of origin.

e) Why is the Central Bank referred to as the lender of the last resort? [2 Marks]

Answer:
The Central Bank is called the lender of the last resort because when commercial banks fail to secure financial accommodation from any other source during a liquidity crisis, they approach the Central Bank, which advances loans against approved securities to save them from failure.

Teacher's Note:
a) Emphasize the emergency role played by the central monetary authority.
b) Mention that it prevents systemic banking panics.

Question 4

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

Answer:
Shifting cultivation degrades the environment through large-scale deforestation, severe soil erosion, loss of soil nutrients, and destruction of indigenous flora and fauna, reducing the traditional agricultural cycle from 15 - 20 years to just 2 - 3 years.

Teacher's Note:
a) Connect unsustainable farming practices directly to ecological degradation.
b) Highlight deforestation and loss of biodiversity.

b) What are the differences between tax and subsidy? [2 Marks]

Answer:
A tax is a compulsory payment made by individuals and businesses to the government, increasing government revenue while increasing prices and reducing taxpayer income. A subsidy is a financial assistance payment by the government to producers or consumers, which reduces government revenue while lowering market prices and increasing consumer purchasing power.

Teacher's Note:
a) Tax is a revenue receipt for the government; subsidy is a revenue expenditure.
b) Note opposite effects on commodity prices.

c) What is meant by progressive tax? Explain with an example. [2 Marks]

Answer:
A progressive tax is one where the rate of tax increases as the taxpayer's income increases, resulting in a higher proportion of tax paid by higher-income earners. For example, in India, income tax rates increase (e.g., from 20% to 30%) as an individual's annual income crosses specified higher slabs.

Teacher's Note:
a) Emphasize that both absolute liability and tax rate increase with income.
b) Mention equity as the primary objective of progressive taxation.

d) What is meant by deflation? [2 Marks]

Answer:
Deflation is a situation of a persistent and continuous decrease in the general price level of an economy, typically caused by overproduction of goods and services alongside deficient aggregate demand and falling employment and income opportunities.

Teacher's Note:
a) Contrast deflation with inflation (falling vs. rising price levels).
b) Mention deficient demand as the underlying macroeconomic cause.

e) Mention any two ways how a deflationary condition changes the qualitative methods of credit control. [2 Marks]

Answer:
1. Reduction of margin money requirements, which induces borrowers to avail more loans from commercial banks.
2. Relaxation in credit authorization, where the Central Bank reduces ceilings on credit disbursement for specific purposes to stimulate economic activity.

Teacher's Note:
a) Focus on expansionary qualitative measures during deflation.
b) Margin requirements are lowered to encourage borrowing.

PART II (60 Marks)

Attempt any four questions from this part.

Question 5

a) What is meant by oligopoly? Explain the main types of oligopoly. [8 Marks]

Answer:
Oligopoly is a market structure characterized by a few large firms dominating the market and a large number of buyers. There is a high degree of interdependence among firms regarding price and output decisions, leading to intense competition.
Main types of oligopoly:
1. Pure/Perfect oligopoly: Firms produce homogeneous products (e.g., cement, steel).
2. Differentiated/Imperfect oligopoly: Firms produce differentiated but close substitute products (e.g., automobiles, soaps).
3. Collusive oligopoly: Firms enter into mutual agreements, forming cartels to fix prices and output quotas to avoid competition.
4. Non-collusive oligopoly: Firms operate independently without formal agreements, determining their price and output based on rival reactions.

Teacher's Note:
a) Mutual interdependence is the hallmark of oligopoly.
b) Clearly categorize all four types with examples for full credit.

b) What is Cash Reserve Ratio? Explain its role in credit control. [7 Marks]

Answer:
Cash Reserve Ratio (CRR) refers to the minimum percentage of a commercial bank's total deposits that must be mandatorily kept in cash with the Central Bank.
Role in credit control:
- During inflation: The Central Bank increases the CRR, reducing commercial banks' lending capacity. This contracts credit creation, lowers aggregate demand, and controls inflation.
- During deflation: The Central Bank reduces the CRR, increasing banks' lending capacity, boosting credit creation and aggregate demand to revive the economy.

Teacher's Note:
a) Define CRR precisely as a statutory requirement under the RBI Act.
b) Explain both inflationary and deflationary adjustments clearly.

Question 6

a) Read the following extract and answer the questions that follow:
Economic Times, May 8th, 2015
“Inflation eased to 4.9 percent in April from March's three-month low of 5.2 percent, comfortably below the RBI's target of 6 percent by January 2016. Although recent untimely rains damaged crops, raising concerns about a sharp rise in food prices, its impact has not been felt so far as the government might be offsetting some of the loss in output by releasing stocks. The likelihood of soft international commodity prices, including oil, as well as the persistence of subdued core inflation is likely to mean that headline CPI remains below the RBI's target of 6 percent,” said Jyotinder Kaur, principal economist at HDFC Bank. “We expect inflation to average 5.4 percent over fiscal year 2016, which should keep space open for repo rate cuts of another 50 basis points over the course of the fiscal year”.

i. Define inflation. [2 Marks]

Answer:
Inflation is defined as a sustained upward movement in the general price level of goods and services in an economy over a period of time, leading to a fall in the purchasing power of money.

Teacher's Note:
a) Emphasize sustained price rise rather than temporary spikes.
b) Mention loss of purchasing power.

ii. Explain any three types of inflation in an economy. [3 Marks]

Answer:
1. Creeping inflation: Price level increases at a very slow rate of 2% to 2.5% per annum.
2. Walking inflation: Price level increases at a moderate rate of 5% to 6% per annum.
3. Hyperinflation: Extreme inflation where prices rise at an astronomical rate of 200% or more per month.

Teacher's Note:
a) Classify inflation based on the rate of price increase.
b) Highlight hyperinflation as a destructive economic crisis.

iii. Explain the effect of a high inflation on investors. [2 Marks]

Answer:
High inflation adversely affects fixed-income investors holding bonds and debentures as their real returns decline. Conversely, equity (share) holders benefit because corporate profits and dividends generally rise during inflationary periods.

Teacher's Note:
a) Contrast fixed income vs. variable income investors.
b) Explain why equity acts as a hedge against inflation.

iv. Explain any two causes of inflation. [4 Marks]

Answer:
1. Increase in public expenditure: Excessive government spending raises aggregate demand beyond aggregate supply, triggering demand-pull inflation.
2. Hoarding: Artificial scarcity created by hoarders who stockpile essential commodities leads to excess demand and rising prices.

Teacher's Note:
a) Provide clear economic mechanisms for each cause.
b) Mention monetary and non-monetary factors.

v. Explain any two fiscal measures to control inflation. [4 Marks]

Answer:
1. Reduction in public expenditure: Cutting government spending reduces aggregate demand and lowers purchasing power in the economy.
2. Increase in taxation: Raising direct taxes reduces disposable income of households and firms, thereby curbing consumer spending and aggregate demand.

Teacher's Note:
a) Differentiate monetary policy from fiscal policy measures.
b) Explain how fiscal tools directly impact disposable income and government demand.

Question 7

a) Distinguish between direct and indirect tax. Discuss their relative merits and demerits. [7 Marks]

Answer:
A direct tax is one where the impact and incidence fall on the same person (burden cannot be shifted, e.g., income tax). An indirect tax is one where the impact is on the producer but incidence is shifted to the consumer (burden can be shifted, e.g., GST).
Merits of Direct Tax: Equity (based on ability to pay) and Certainty.
Demerits of Direct Tax: Evasion is common and inconvenient to pay.
Merits of Indirect Tax: Broad coverage and convenience (paid in small amounts).
Demerits of Indirect Tax: Regressive in nature as poor bear a heavier relative burden.

Teacher's Note:
a) Ensure clear distinction between incidence and impact.
b) Balance merits and demerits for both tax categories.

b) What is meant by industrialisation? Explain four impacts of industrialisation on the environment. [8 Marks]

Answer:
Industrialisation is the process of transforming an economy from primarily agricultural to manufacturing-based through the establishment of industries.
Impacts on the environment:
1. Global warming: Emission of greenhouse gases (CO₂, methane) increases global temperatures.
2. Air pollution: Release of toxic gases (sulphur dioxide, nitrogen oxides) causes acid rain and health hazards.
3. Soil pollution: Dumping of industrial chemical waste destroys soil fertility and structure.
4. Water pollution: Effluents discharged into water bodies contaminate water resources and harm aquatic life.

Teacher's Note:
a) Define industrialisation comprehensively.
b) Detail all four major environmental hazards caused by industrial waste and emissions.

Question 8

a) Discuss the positive and negative aspects of the policy of privatisation of commercial banks. [8 Marks]

Answer:
Positive aspects:
1. Greater autonomy in loan advancement, allowing banks to target high-return and secure sectors.
2. Introduction of innovative deposit schemes to attract customers.
3. Enhanced operational efficiency due to competitive market pressures.
Negative aspects:
1. Potential reduction in employment opportunities driven by profit motives.
2. Risk of concentration of economic power and increased inequality.
3. Inadequate guarantee that domestic savings will be recycled locally if merged with foreign entities.

Teacher's Note:
a) Provide a balanced view covering efficiency gains vs. equity concerns.
b) Highlight profit motives versus social welfare objectives.

b) Define ecosystem? Explain any two causes responsible for the destruction of an ecosystem. [7 Marks]

Answer:
An ecosystem is a biological community of interacting living (biotic) and non-living (abiotic) components functioning together as a unit in a specific environment.
Causes of destruction:
1. Changes in land use: Rapid deforestation for agriculture, housing, and infrastructure destroys natural habitats, pushing species to extinction.
2. Urbanisation: Expansion of urban centers depletes water resources, generates slums, and causes permanent loss of biodiversity and falling groundwater levels.

Teacher's Note:
a) Define biotic and abiotic components in the context of ecosystems.
b) Explain human-induced ecological destruction clearly.

Question 9

a) Calculate the market demand for a good. In a market, there are 20 consumers of a good and the demand of each individual consumer is similar as given below: [7 Marks]

Answer:

Teacher's Note:
a) Market demand is calculated by multiplying individual demand by the number of consumers (20).
b) Ensure proper tabular presentation showing step-by-step calculation.

b) Explain the price elasticity of demand. [8 Marks]

Answer:
Price elasticity of demand measures the degree of responsiveness of quantity demanded to a change in price. It is expressed as \( e_p = \frac{\text{Percentage change in demand}}{\text{Percentage change in price}} \).
Degrees of price elasticity:
1. Inelastic demand (\( e_p \lt 1 \)): Percentage change in demand is less than percentage change in price.
2. Unitary elastic demand (\( e_p = 1 \)): Percentage change in demand equals percentage change in price.
3. Elastic demand (\( e_p \gt 1 \)): Percentage change in demand is greater than percentage change in price.

Teacher's Note:
a) Mention that price elasticity is always negative due to the law of demand.
b) Clearly define numerical boundaries for elastic, inelastic, and unitary elastic demand.

Question 10

a) What is the total expenditure method? Explain the three possible situations in the total expenditure method. [8 Marks]

Answer:
The total expenditure method measures price elasticity of demand by observing the change in total consumer expenditure resulting from a change in the price of a commodity.
Three possible situations:
1. Unitary elastic (\( e_p = 1 \)): Total expenditure remains unchanged despite a rise or fall in price.
2. Elastic (\( e_p \gt 1 \)): Total expenditure increases when price falls and decreases when price rises.
3. Inelastic (\( e_p \lt 1 \)): Total expenditure decreases when price falls and increases when price rises.

Teacher's Note:
a) Marshall's total expenditure method is crucial for numerical and conceptual questions.
b) Emphasize the inverse relationship between price and expenditure in elastic demand.

b) Explain the demand for a good in relation to the price of substitute goods with diagrams. [7 Marks]

Answer:
Substitute goods are alternative goods that can satisfy the same want (e.g., tea and coffee).
- Increase in price of substitute: When the price of coffee rises, demand for tea increases at the same price, causing a rightward (forward) shift of the demand curve for tea from \( D_1 \) to \( D_2 \).
- Decrease in price of substitute: When the price of coffee falls, demand for tea decreases at the same price, causing a leftward (backward) shift of the demand curve for tea from \( D_1 \) to \( D_2 \).
[Figure: Two graphs showing shift in demand curve. Fig (a) shows rightward shift of demand curve from D1 to D2 for tea when substitute price rises. Fig (b) shows leftward shift of demand curve from D1 to D2 for tea when substitute price falls, with price OP1 and quantities OT1 and OT2.]

Teacher's Note:
a) Explain direct relationship between price of substitute and demand for the commodity.
b) Clearly distinguish between movement along a demand curve and shift of the demand curve.