ISC Class 12 Economics Board Exam Question Paper 2024 with Solutions

ISC Class 12 Economics Board Exam Question Paper with Solutions

SECTION A - 16 marks

Question 1

(i) If the price elasticity of demand for a commodity is 2 and the percentage change in price is 5, the percentage change in quantity demanded will be: [1 Mark]
(A) 3
(B) 2.5
(C) 10
(D) 7

Answer: (C) 10

Percentage change in quantity demanded = Price elasticity of demand × Percentage change in price = 2 × 5 = 10.

Teacher's Note:
a) Use the formula for price elasticity of demand: Ed = (Percentage change in quantity demanded) / (Percentage change in price).
b) Students often mistakenly divide the elasticity by the percentage change instead of multiplying.

(ii) Assertion: An increase in public expenditure during recession can help to control the situation. [1 Mark]
Reason: Government reduces subsidies to overcome its budget deficit.
(A) Both Assertion and Reason are true, and Reason is the correct explanation of Assertion.
(B) Both Assertion and Reason are true, but Reason is not the correct explanation of Assertion.
(C) Assertion is true but Reason is false.
(D) Assertion is false but Reason is true.

Answer: (C) Assertion is true but Reason is false.

Increasing public expenditure boosts aggregate demand during a recession, making the assertion true, but reducing subsidies is a fiscal measure unrelated to proving this assertion.

Teacher's Note:
a) Expansionary fiscal policy involves increasing government spending and reducing taxes during a recession.
b) Read both statements independently before evaluating their causal connection.

(iii) At the point of inflexion ............... is maximum. [1 Mark]
(A) total product
(B) total cost
(C) average product
(D) marginal product

Answer: (D) marginal product

The point of inflexion on the total product curve corresponds to the level of output where marginal product reaches its maximum.

Teacher's Note:
a) At the point of inflexion, the slope of the total product curve stops increasing and begins to decrease.
b) Do not confuse the point of inflexion with the maximum of total product or average product.

(iv) In which one of the following types of market, are Average Revenue curve and Market Demand curve the same? [1 Mark]
(A) Monopoly
(B) Oligopoly
(C) Perfect Competition
(D) Monopolistic Competition

Answer: (C) Perfect Competition

In perfect competition, the firm is a price taker, making its average revenue equal to the market price, which coincides with the market demand curve.

Teacher's Note:
a) The demand curve facing a perfectly elastic firm is a horizontal straight line parallel to the X-axis.
b) In imperfect competition markets, the AR curve slopes downward from left to right.

(v) The diagram given below shows the change in price of cotton shirts. Which one of the following causes the equilibrium price to move from P₁ to P₂? [1 Mark]
[Figure: Demand and supply curves showing equilibrium shifting from e₁ to e₂ with supply shifting right from S₁S₁ to S₂S₂ and demand curve D remaining constant, price falling from P₁ to P₂ and quantity rising from Q₁ to Q₂]
(A) Increase in excise duty on raw cotton.
(B) Expected fall in future price of cotton shirts.
(C) Fall in the price of synthetic shirts.
(D) Increase in wage rate.

Answer: (C) Fall in the price of synthetic shirts.

A decrease in the price of substitute goods (synthetic shirts) causes producers to switch production away from cotton shirts, increasing cotton shirt supply and shifting the supply curve rightward.

Teacher's Note:
a) A rightward shift in supply leads to a decrease in equilibrium price and an increase in equilibrium quantity.
b) Carefully observe whether the shift is in the demand curve or the supply curve.

(vi) Refer to the diagram given below and choose the incorrect statement. [1 Mark]
[Figure: Cost and revenue curves showing MC, AC, AR=MR at price P₁ with equilibrium point E, and lower price P₂ with point C and break-even point]
(A) E is the equilibrium point.
(B) The diagram shows a situation of normal profit.
(C) C is the shut down point.

(D) E is the break even point.

Answer: (D) E is the break even point.

Point E represents the equilibrium point where MC equals MR and price is above minimum AC, indicating super-normal profits rather than a break-even point.

Teacher's Note:
a) The break-even point occurs where price equals minimum average cost.
b) Always check the intersection of cost and revenue curves to identify profit status.

(vii) Government of India purchased Raffle aircrafts from France in recent times. Which one of the following market forms is applicable for this product in India? [1 Mark]
(A) Monopsony
(B) Monopoly
(C) Oligopoly
(D) Monopolistic Competition

Answer: (A) Monopsony

A monopsony market structure exists when there is only one buyer for a particular product or service, which applies to the Government of India purchasing defence aircraft.

Teacher's Note:
a) Monopsony is characterised by a single buyer and multiple sellers.
b) Do not confuse monopsony (single buyer) with monopoly (single seller).

(viii) Revenue receipts in the government's budget: [1 Mark]
(A) create liability.
(B) reduce liability and create assets.
(C) reduce assets.
(D) keep liability and assets unaltered.

Answer: (D) keep liability and assets unaltered.

Revenue receipts do not create any liabilities or reduce any assets for the government.

Teacher's Note:
a) Capital receipts either create liabilities or reduce assets.
b) Tax and non-tax revenues are categorised under revenue receipts.

(ix) If S > I, it will lead to: [1 Mark]
(A) excess demand.
(B) deficient demand.
(C) notional demand.
(D) actual demand.

Answer: (B) deficient demand.

When planned savings exceed planned investment (S > I), aggregate demand falls short of aggregate supply, leading to deficient demand.

Teacher's Note:
a) Deficient demand causes deflationary gaps in the economy.
b) Remember that equilibrium requires planned saving to equal planned investment.

(x) An increase in the number of firms in the market causes a rightward shift in the market supply curve, but the individual supply curve may shift leftwards. Justify the statement. [1 Mark]
(A) True
(B) False

Answer: (A) True

More firms increase total market supply, but increased competition can reduce individual market share and raise costs, shifting individual supply left.

Teacher's Note:
a) Market supply is the horizontal summation of individual supplies.
b) Entry of new firms increases market supply while potentially contracting individual firm output.

(xi) State whether the following is True of False. Give a reason for your answer.
TVC is an avoidable cost. [1 Mark]

Answer: True.
Total Variable Cost (TVC) can be avoided by stopping production levels, making it non-unavoidable.

Teacher's Note:
a) Variable costs vary directly with the level of output.
b) Fixed costs are unavoidable in the short run even if production is zero.

(xii) Mention any one difference between Induced investment and Autonomous investment. [1 Mark]

Answer:
Induced investment is positively related to the level of income, whereas autonomous investment is independent of the level of income.

Teacher's Note:
a) Induced investment is profit-motivated.
b) Autonomous investment is typically undertaken by the government for social welfare.

(xiii) Why is the demand curve for foreign exchange negatively sloped? [1 Mark]

Answer:
The demand curve for foreign exchange is negatively sloped because as the exchange rate (price of foreign currency) falls, foreign goods become cheaper, increasing the demand for imports and foreign currency.

Teacher's Note:
a) Inverse relationship exists between the exchange rate and the quantity demanded of foreign currency.
b) Depreciation of domestic currency increases export demand and decreases import demand.

(xiv) Mention any one difference between Balance of Trade and Balance of payment. [1 Mark]

Answer:
Balance of Trade records only visible items (goods), whereas Balance of Payments records both visible and invisible items, as well as capital transfers.

Teacher's Note:
a) Balance of Trade is a narrow concept compared to Balance of Payments.
b) BOT is a component of the current account in BOP.

(xv) How is APS obtained from APC? [1 Mark]

Answer:
APS is obtained by subtracting APC from 1 (APS = 1 - APC).

Teacher's Note:
a) Since income is either consumed or saved, APC + APS = 1.
b) Ensure formulas are written clearly without algebraic errors.

(xvi) With reference to Simple Keynesian model, give the meaning of ex-ante demand. [1 Mark]

Answer:
Ex-ante demand refers to the planned or intended demand for goods and services by consumers, businesses, and the government before they actually make their purchases.

Teacher's Note:
a) Ex-ante variables are planned or desired magnitudes.
b) Ex-post variables refer to actual or realised outcomes.

SECTION B - 32 marks

Question 2

(i) Milk is used for making curd, sweets and chocolates. What type of demand does milk have? Give a reason. [1 Mark]

Answer:
Milk has joint or derived demand because it is sought for various products like curd, sweets, and chocolates, which drive its demand.

Teacher's Note:
a) Joint demand occurs when two or more goods are demanded together for satisfying a single want.
b) Derived demand arises when a good is needed for producing another commodity.

(ii) Figures (A), (B) and (C) given below represent different types of Demand curves.
[Figure: Three demand curves - (A) upward sloping demand curve for X, (B) downward sloping rectangular hyperbola for X, (C) steeper downward sloping curve for X]
What kind of goods do each of these Demand curves represent? Give a reason for each of the curves. [3 Marks]

Answer:
(A) Upward sloping curve: Represents Giffen goods or Veblen goods where demand increases with an increase in price.
(B) Rectangular hyperbola: Represents unitary elastic demand (Ed = 1) where total expenditure remains constant at all prices.
(C) Steep downward sloping curve: Represents inelastic demand (Ed < 1) where percentage change in demand is less than percentage change in price.

Teacher's Note:
a) Identify the slopes of the curves carefully before classifying the type of elasticity or good.
b) Mention the specific mathematical or behavioral property for each curve.

Question 3

(i) A huge production of onions and lack of storage facilities have caused a continuous fall in its price. This may adversely affect the production of onions in the subsequent year. With the help of a diagram, briefly explain the measure that the government should adopt to combat this situation. [2 Marks]

Answer:
The government should adopt a price floor (minimum support price) policy by purchasing excess supply to prevent prices from falling below a remunerative level, thus protecting producers.

Teacher's Note:
a) A price floor is set above the equilibrium market price.
b) Draw a clear equilibrium diagram showing the minimum price line and surplus stock purchased by the government.

(ii) Draw and explain Average Fixed Cost curve. [2 Marks]

Answer:
The Average Fixed Cost (AFC) curve is a rectangular hyperbola that slopes downward from left to right as output increases, because total fixed cost is spread over a larger output.

Teacher's Note:
a) AFC can approach zero but can never touch or intersect the X-axis.
b) Label the axes (Average Fixed Cost on Y-axis and Output on X-axis) correctly.

Question 4

With the help of a diagram, explain the relationship between Average Product and total product under the Law of Variable Proportions. [4 Marks]

Answer:
1. When Total Product (TP) increases at an increasing rate, Average Product (AP) rises.
2. When TP increases at a decreasing rate, AP reaches its maximum and then starts falling.
3. When TP reaches its maximum, AP continues to fall as long as it remains positive.
4. AP can never be zero or negative as long as TP is positive.

Teacher's Note:
a) Divide the production process into three stages of returns to scale.
b) Ensure curves are drawn with correct inflections and maximum points aligned vertically.

Question 5

(i) Briefly discuss the implication of 'freedom of entry and exit' under perfect competition. [2 Marks]

Answer:
1. It ensures that firms earn only normal profits in the long run.
2. It promotes efficient allocation of resources as inefficient firms are forced out.

Teacher's Note:
a) Mention both entry and exit dynamics.
b) Connect freedom of entry to the elimination of super-normal profits.

(ii) Per unit price of electricity is higher in the Commercial sector as compared to the Domestic sector. Identify and briefly describe this phenomenon. Name the market in which it is applicable. [2 Marks]

Answer:
This phenomenon is Price Discrimination, where a monopolist charges different prices for the same product to different consumer groups based on elasticity of demand. This is applicable in a Monopoly market.

Teacher's Note:
a) Price discrimination is profitable when markets can be separated and elasticities differ.
b) State both the economic term and the market structure clearly.

OR

(i) Briefly discuss the importance of Selling Cost under oligopoly market. [2 Marks]

Answer:
1. Selling costs (like advertising) help firms differentiate their products and build brand loyalty.
2. They are crucial for maintaining market share and influencing consumer preferences in non-price competition.

Teacher's Note:
a) Oligopoly firms heavily rely on non-price competition.
b) Selling costs increase the demand for the firm's product.

(ii) There are many manufacturers of pencils in the market who produce pencils in different designs and colours to attract children. Which market form is referred to here? Briefly explain the feature of this market form indicated in the given situation. [2 Marks]

Answer:
The market form is Monopolistic Competition. The feature indicated is Product Differentiation, where firms produce goods that are close substitutes but differ in design, color, or branding.

Teacher's Note:
a) Product differentiation gives each firm some degree of monopoly power over its product.
b) Differentiate between homogeneous products (perfect competition) and differentiated products.

Question 6

(i) What is meant by autonomous consumption expenditure? Show it on a diagram. [2 Marks]

Answer:
Autonomous consumption refers to the minimum consumption expenditure that occurs even when national income is zero, funded through past savings or borrowings.

Teacher's Note:
a) It is represented by the intercept of the consumption function on the Y-axis.
b) Autonomous consumption is denoted by the term c-bar in the consumption equation.

(ii) When National Income rises from Rs. 600 cr. to Rs. 1000 cr., the consumption expenditure increases from Rs. 500 cr. to Rs. 800 cr. Calculate MPC and hence the value of Investment Multiplier. [2 Marks]

Answer:
Change in Income (\(\Delta Y\)) = Rs. 1000 - 600 = Rs. 400 cr.
Change in Consumption (\(\Delta C\)) = Rs. 800 - 500 = Rs. 300 cr.
MPC = \(\Delta C / \Delta Y\) = 300 / 400 = 0.75.
Multiplier (K) = 1 / (1 - MPC) = 1 / (1 - 0.75) = 1 / 0.25 = 4.

Teacher's Note:
a) Always show formula, substitution, and final calculation steps clearly.
b) Ensure correct units (crores) are stated in the working.

Question 7

(i) A large amount of fiscal deficit proves to be counter-productive. Give any two reasons in support of this statement. [2 Marks]

Answer:
1. Crowding out effect: Government borrowing increases interest rates, reducing private investment.
2. Inflationary pressure: Excess borrowing leads to an increase in money supply and higher inflation.

Teacher's Note:
a) Fiscal deficit implies heavy reliance on borrowings.
b) High debt servicing charges consume a major part of government revenue.

(ii) What is meant by no quid pro quo of a tax? Name any two direct taxes. [2 Marks]

Answer:
No quid pro quo means taxpayers do not receive a direct, proportional benefit or service in return for paying taxes. Two direct taxes are Income Tax and Wealth Tax.

Teacher's Note:
a) Taxes are compulsory payments made to the government without direct quid pro quo.
b) Distinguish clearly between direct taxes and indirect taxes.

Question 8

(i) Categorise the following items into Current Account or Capital Account of Balance of Payment of India. [2 Marks]
(a) Acquisition of land in India by an American firm.
(b) Use of transport by Indian tourists in Dubai.
(c) Dividend paid to foreigners on their investment in shares in India.
(d) Loan taken by India from International Monetary Fund (IMF) to cover its BOP deficit.

Answer:
(a) Capital Account (Foreign Direct Investment / asset creation).
(b) Current Account (Invisible trade - services).
(c) Current Account (Investment income).
(d) Capital Account (Borrowing creating liability).

Teacher's Note:
a) Current account records trade in goods, services, and unilateral transfers.
b) Capital account records transactions altering assets and liabilities.

(ii) Briefly explain the effect of the following on the Balance of Payment of a country. [2 Marks]
(a) Inflationary pressure in the economy.
(b) Appreciation in domestic exchange rate.

Answer:
(a) Inflationary pressure makes domestic goods expensive, reducing exports and increasing imports, adversely affecting the BOP.
(b) Appreciation makes domestic currency stronger, making imports cheaper and exports expensive, worsening the trade deficit.

Teacher's Note:
a) Inflation reduces international competitiveness.
b) Exchange rate appreciation discourages exports.

OR

(i) Suppose the exchange rate was $1 = Rs. 80 and later changed to $1 = Rs. 92. What will be its effect on the following? [2 Marks]
(a) Export of cotton garments by India to the USA.
(b) Export of technical knowledge by the USA to India
(c) Import of wheat by India from the USA.
(d) Import of gold jewellery by the USA from India.

Answer:
(a) Exports will increase as Indian garments become cheaper for US buyers.
(b) Cost of technical knowledge imported from the USA will increase in rupee terms.
(c) Imports of wheat from the USA will become costlier.
(d) Exports of gold jewellery to the USA will increase due to depreciation of the rupee.

Teacher's Note:
a) A rise in exchange rate implies depreciation of the domestic currency (Rupee).
b) Depreciation promotes exports and discourages imports.

(ii) Briefly discuss the fixed exchange rate system of determining foreign exchange rate. [2 Marks]

Answer:
Under a fixed exchange rate system, the value of a country's currency is pegged to another major currency or gold by the central bank, which intervenes in the foreign exchange market to maintain stability.

Teacher's Note:
a) The central bank uses foreign exchange reserves to maintain the pegged rate.
b) Differentiate between fixed exchange rate and flexible exchange rate systems.

Question 9

Draw a well labelled diagram and explain the circular flow of income in a four-sector model. [4 Marks]

Answer:
[Figure: Circular flow diagram showing Households, Firms, Government, Foreign Sector, and Financial Market with factor payments, consumption expenditure, taxes, savings, and borrowings]
Explanation:
1. Households provide factor services to firms and receive factor incomes.
2. Firms produce goods and services purchased by households, government, and the foreign sector.
3. Government collects taxes and undertakes public expenditure.
4. Financial sector channels savings into investments.

Teacher's Note:
a) Label all four sectors clearly along with leakages and injections.
b) Explain injections (investment, government spending, exports) and leakages (savings, taxes, imports).

SECTION C - 32 marks

Question 10

(i) How is Total Revenue under perfect competition different from Total Revenue under imperfect competition? Give two points to show the difference. [2 Marks]

Answer:
1. Under perfect competition, Total Revenue increases at a constant rate as output increases (straight line from origin).
2. Under imperfect competition, Total Revenue initially increases at a diminishing rate, reaches a maximum, and then falls.

Teacher's Note:
a) Shape of TR depends on the behavior of Marginal Revenue (MR).
b) Price remains constant under perfect competition but falls with output under imperfect competition.

(ii) Explain the short run equilibrium of a perfectly competitive firm with an earning supernormal profit with the help of a diagram. [6 Marks]

Answer:
[Figure: Short run equilibrium diagram showing AR = MR horizontal line, MC curve intersecting MR at point E, and AC curve below AR at equilibrium output Q, with shaded supernormal profit rectangle]
Explanation:
1. Equilibrium condition requires MR = MC and MC must cut MR from below.
2. At equilibrium output Q, Price (AR) is greater than Average Cost (AC).
3. The firm earns super-normal profits equal to the shaded area (P - AC) × Q.

Teacher's Note:
a) Ensure equilibrium point E satisfies both conditions for producer equilibrium.
b) Clearly shade the rectangular area representing total super-normal profits.

Question 11

(i) Draw a straight-line demand curve joining both the axes. Indicate the following on the demand curve. [2 Marks]
(a) Elasticity of demand is equal to zero
(b) Elasticity of demand is greater than one

Answer:
[Figure: Straight-line downward sloping demand curve intersecting both axes, showing Ed = 0 at the Y-axis intercept and Ed > 1 in the upper segment of the demand curve]

Teacher's Note:
a) Elasticity varies along a linear demand curve from infinity at the Y-intercept to zero at the X-intercept.
b) Mid-point of the linear demand curve has unitary elasticity (Ed = 1).

(ii) Observe the graph given below and answer the questions that follow.
[Figure: Indifference curve IC intersecting budget line D]
(a) Give a reason to explain if the graph shown above can be a common phenomenon or not. [2 Marks]
(b) What is an indifference map? Draw its diagram. [2 Marks]
(c) State any two differences between cardinal utility and ordinal utility. [2 Marks]

Answer:
(a) No, it is not common because indifference curves normally slope downward from left to right and cannot intersect or touch axes arbitrarily in standard convex shapes.
(b) An indifference map is a set of indifference curves representing different levels of satisfaction. [Figure: Indifference map showing IC₁, IC₂, IC₃]
(c) Difference table:

Teacher's Note:
a) Cardinal utility approach was propounded by Marshall, while ordinal utility is associated with Hicks and Allen.
b) Ensure all sub-parts are answered concisely with correct economic terminology.

OR

(i) Give two differences between intended supply and actual supply. [2 Marks]

Answer:

Teacher's Note:
a) Intended supply reflects willingness based on market expectations.
b) Actual supply is the realized market outcome.

(ii) Refer to the diagram given below and answer the questions that follow.
[Figure: Indifference curve diagram showing budget line AB and equilibrium point E on indifference curve IC₂]
(a) What does the line AB represent? Why is the line AB negatively sloped? [2 Marks]
(b) At which one of the given points, D, E and F, will the consumer attain equilibrium? Explain. [2 Marks]
(c) Briefly explain why the consumer is not in equilibrium at the other two points. [2 Marks]

Answer:
(a) Line AB represents the budget line showing various combinations of two goods a consumer can purchase with given income and prices. It is negatively sloped because to buy more of one good, the consumer must give up some quantity of the other good.
(b) The consumer attains equilibrium at point E because at this point the budget line is tangent to the highest possible indifference curve (IC₂), where MRS_xy = P_x/P_y.
(c) At points D and F, the budget line intersects the lower indifference curve IC₁, meaning the consumer can achieve higher satisfaction on a higher indifference curve by reallocating expenditure.

Teacher's Note:
a) Consumer equilibrium requires tangency condition and convexity condition.
b) Clearly explain why points of intersection do not represent optimal choice.

Question 12

(i) State whether the following items will be included in the estimation of National Income or not? Give a reason for your answer. [2 Marks]
(a) Government expenditure on street lighting.
(b) Profit earned by State Bank of India in a foreign country.

Answer:
(a) Included, as it is government final consumption expenditure.
(b) Included, as it is factor income from abroad (part of Net Factor Income from Abroad).

Teacher's Note:
a) Government consumption expenditure is a component of GDP using the expenditure method.
b) Factor incomes earned abroad by residents are added to domestic income to get national income.

(ii) Calculate GNP_MP and NNP_FC from the following data by Expenditure Method. [6 Marks]
PARTICULARS - Rs. (crores)
(i) Mixed income of self employed - 550
(ii) Private Final Consumption Expenditure - 1100
(iii) Net factor income from abroad - (-)120
(iv) Net indirect taxes - 250
(v) Consumption of fixed capital - 270
(vi) Net domestic capital formation - 480
(vii) Net exports - (-)130
(viii) Interest - 300
(ix) Government Final Consumption Expenditure - 650
(x) Indirect taxes - 90
(xi) Profits - 23
(xii) Depreciation - 75
(xiii) Factor income paid abroad - 30

Answer:
GDP_MP = Private Final Consumption Expenditure + Government Final Consumption Expenditure + Net Domestic Capital Formation + Consumption of Fixed Capital + Net Exports
= 1100 + 650 + 480 + 270 + (-130) = Rs. 2,370 crores.
GNP_MP = GDP_MP + Net Factor Income from Abroad
= 2370 + (-120) = Rs. 2,250 crores.
NNP_FC = GNP_MP - Depreciation - Net Indirect Taxes
= 2250 - 270 - 250 = Rs. 1,730 crores.

Teacher's Note:
a) Be careful to select only relevant items for the expenditure method.
b) Check whether capital formation is gross or net before adding depreciation.

OR

(i) State whether the following items will be included in the estimation of National Income or not? Give a reason for your answer. [2 Marks]
(a) Fresh tomatoes used by a food processing company.
(b) Wooden cupboard purchased by a family.

Answer:
(a) Not included, because it is an intermediate consumption expenditure.
(b) Included, because it is a final consumption expenditure on durable goods by a household.

Teacher's Note:
a) Intermediate goods are excluded to avoid double counting.
b) Final goods purchased by households are included in private consumption expenditure.

(ii) Calculate National Income using Income method and Output method. [6 Marks]
PARTICULARS - Rs. (crores)
(i) Value of output - 1200
(ii) Wages and salaries - 165
(iii) Rent - 60
(iv) Subsidies - 15
(v) Mixed income of self employed - 180
(vi) Employer's contribution to social security - 15
(vii) Value of intermediate consumption - 600
(viii) Interest - 7
(ix) Factor income earned from abroad - 15

Answer:
Output Method:
Value Added (GDP_MP) = Value of Output - Intermediate Consumption = 1200 - 600 = Rs. 600 crores.
National Income (NNP_FC) = GDP_MP - Depreciation + NFIA - Net Indirect Taxes (assuming missing values as zero or standard adjustments). Following key formula:
National Income = Value of Output - Intermediate Consumption + Factor income earned from abroad - Factor income paid abroad + Subsidies - Indirect Taxes - Depreciation. Using provided items: 1200 - 600 + 15 - 0 + 15 - 0 - 0 = Rs. 435 crores.
Income Method:
National Income (NDP_FC) = Wages and salaries + Employer's contribution + Rent + Interest + Mixed income = 165 + 15 + 60 + 7 + 180 = Rs. 427 crores. Adding NFIA (15): 427 + 8 = Rs. 435 crores.

Teacher's Note:
a) Apply both income and output methods accurately using standard formulas.
b) Check for missing components like depreciation or indirect taxes in partial data sets.

Question 13

Read the passage given below and answer the questions that follow.
The Monetary Policy Committee (MPC) increased the repo rate, at which RBI lends short term funds to the commercial banks, from 6.25 to 6.50 percent. This increase in repo rate is based on the increase in the key rate by 250 bps. The Committee also decided to continue the withdrawal of money supply in the economy.
[Source (Edited): The Economic Times, Feb 8, 2023]

(i) Which function of central bank is hinted at, in the passage given above? [1 Mark]

Answer:
Controller of credit.

Teacher's Note:
a) Repo rate is a quantitative instrument used for credit control.
b) Central bank manages monetary stability through policy rates.

(ii) In which situation does central bank adopt the measure given in the above passage? [1 Mark]

Answer:
Excess demand / Inflationary gap.

Teacher's Note:
a) Raising repo rate makes borrowing expensive, reducing money supply to curb inflation.
b) Contractionary monetary policy is adopted during excess demand.

(iii) Explain any two monetary measures that can be used to accomplish a similar objective, other than the one given in the above passage. [4 Marks]

Answer:
1. Open Market Operations (OMO): Central bank sells government securities to commercial banks to absorb liquidity from the banking system.
2. Higher Reserve Requirements (CRR/SLR): Increasing Cash Reserve Ratio forces commercial banks to keep more reserves with RBI, reducing their lending capacity.

Teacher's Note:
a) Both are quantitative tools of monetary policy.
b) Explain how each measure restricts credit creation.

(iv) Differentiate between Reserve Bank of India and Commercial banks by giving any two points. [2 Marks]

Answer:

Teacher's Note:
a) RBI is the apex financial institution of the country.
b) Commercial banks deal directly with the general public.