ISC Class 12 Economics Board Exam Question Paper 2025 with Solutions

ISC Class 12 Economics Board Exam Question Paper with Solutions

SECTION A - 16 MARKS

Question 1

(i) In the diagram given above, CD is the budget line. What does the point G represent? [1 Mark]
(A) Combination of two goods on which a consumer spends her entire money income
(B) Combination of two goods on which a consumer spends less than her money income
(C) Combination of two goods on which a consumer spends greater than her money income
(D) Consumer spends her entire money income either on Good A or Good B

[Figure: A budget line CD on a Cartesian plane with Good A on the X-axis and Good B on the Y-axis. Point C is on the Y-axis, point D is on the X-axis, and point G lies inside the triangle OCD.]

Answer: (B) Combination of two goods on which a consumer spends less than her money income

Point G lies inside the budget line CD, indicating that the consumer is not spending all of her available income.

Teacher's Note:
a) Points inside the budget line represent attainable combinations where total expenditure is less than the consumer's total money income.
b) Students must remember that points on the budget line represent full utilization of income, while points outside are unattainable.

(ii) Abhinav derives total utility of 11 utils after consuming 4 mangoes and 9 utils after consuming 6 mangoes. What is his marginal utility on consuming the 6^th mango? [1 Mark]
(A) 1 util
(B) 21 utils
(C) 10 utils
(D) -1 util

Answer: (D) -1 util

Marginal Utility = Change in Total Utility / Change in Quantity = (9 - 11) / (6 - 4) = -2 / 2 = -1 util.

Teacher's Note:
a) Marginal utility can be negative when consumption of an additional unit causes total utility to fall.
b) Ensure students do not confuse the change in quantity of mangoes (which is 2 units, from 4 to 6) while calculating.

(iii) Law of Variable Proportions is NOT applicable when: [1 Mark]
(A) all factor inputs increase in the same proportion.
(B) the time period is short.
(C) all the units of variable input are equally efficient.
(D) technology remains constant.

Answer: (A) all factor inputs increase in the same proportion.

When all factor inputs increase in the same proportion, it refers to Returns to Scale, which applies to the long run.

Teacher's Note:
a) The Law of Variable Proportions operates in the short run where at least one factor is fixed and factor proportions change.
b) Changing all factors in the same proportion defines the long run concept of Returns to Scale.

(iv) Refer to the diagram given below and choose the correct statement. [1 Mark]
(A) E₁ is the equilibrium point as MR = MC
(B) E₁ and E₂ are equilibrium points as MR = MC
(C) E₂ is the equilibrium point because MC > MR beyond this point.
(D) E₂ is the equilibrium point because MC < MR beyond this point.

[Figure: A firm equilibrium graph with Output on the X-axis and Cost & Revenue on the Y-axis. Marginal Cost (MC) is a U-shaped curve intersecting the horizontal Marginal Revenue (MR) line at two points, E₁ (falling portion of MC) and E₂ (rising portion of MC), with outputs Q₁ and Q₂ respectively.]

Answer: (C) E₂ is the equilibrium point because MC > MR beyond this point.

At E₂, not only is MR = MC, but MC is also rising (MC cuts MR from below), satisfying the second order condition for producer equilibrium.

Teacher's Note:
a) Point E₁ is not an equilibrium because MC is falling at that point, meaning producing more adds more to revenue than to cost.
b) Always check both conditions for producer's equilibrium: (1) MR = MC, and (2) MC must be rising or cut MR from below.

(v) Identify the correct statement with reference to the measures of money supply. [1 Mark]
(A) M₃ includes M₂.
(B) M₃ includes Time Deposits with commercial banks.
(C) M₁ includes Time Deposits with commercial banks.
(D) M₂ includes National Saving Certificates.

Answer: (B) M₃ includes Time Deposits with commercial banks.

M₃ = M₁ + Net Time Deposits with commercial banks, representing broad money.

Teacher's Note:
a) M₁ consists of currency with the public, demand deposits, and other deposits with RBI (it excludes time deposits).
b) M₃ is the most widely used measure of money supply in macroeconomics.

(vi) Suppose the total receipts are Rs. 1045 Cr. and total payments are Rs. 1526 Cr. in the Balance of Payments account of India. In the above context, which of the following can improve the Balance of Payments of India? [1 Mark]
(A) Indian tourists buying souvenirs in the foreign countries.
(B) Foreign Institutional Investor (FII) buying shares of Indian companies.
(C) Indian students joining foreign universities for higher education.
(D) Value of the US dollar falling against the Indian rupee.

Answer: (B) Foreign Institutional Investor (FII) buying shares of Indian companies.

FII investment brings foreign exchange into India, creating a credit item in the capital account which helps improve the BoP deficit.

Teacher's Note:
a) A BoP deficit means autonomous payments exceed autonomous receipts.
b) Inflows of foreign capital create positive entries in the capital account, reducing the overall deficit.

(vii) Which of the following scenarios correctly represents a Regressive tax system? [1 Mark]
(A) Ruhi paid income tax in three consecutive years at the rate of 10% on her income of Rs. 10,000, 15% on her income of Rs. 20,000 and 15% on her income of Rs. 30,000.
(B) Goods and Service tax on gold ornaments is 3% and 18% on fine dining in restaurants.
(C) Roshan was promoted to the position of Senior Manager and received a raise in his income. But he continued paying 10% of his income as tax.
(D) Suhana paid TDS at a higher rate on her increased interest income in the current year as compared to the previous year.

Answer: (C) Roshan was promoted to the position of Senior Manager and received a raise in his income. But he continued paying 10% of his income as tax.

In a regressive tax, the tax rate remains constant or falls as income increases, imposing a relatively heavier burden on lower-income earners.

Teacher's Note:
a) A regressive tax takes a smaller percentage of income as income increases.
b) Proportional taxes have a constant rate, while progressive taxes have increasing rates for higher incomes.

(viii) Given below are two statements marked Assertion and Read the statements carefully and choose the correct option. [1 Mark]
Assertion: Rise in price of burger at Burger Bliss raises the demand for burgers at Burger Heaven.
Reason: There is a negative relationship between the demand for a good and the price of the complementary good.
(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 and Reason is less. [Note: printed as less in error in paper]
(D) Both Assertion and Reason are false.

Answer: (B) Both Assertion and Reason are true but Reason is not the correct explanation of Assertion.

Burgers at Burger Bliss and Burger Heaven are substitute goods, not complementary goods.

Teacher's Note:
a) Substitutes have a positive cross-price relationship, meaning a price rise in one increases demand for the other.
b) Complements have a negative cross-price relationship, making the reason statement true in general but incorrect for this context.

(ix) Given below are two statements marked Assertion and Read the statements carefully and choose the correct option. [1 Mark]
Assertion: Commercial banks can deposit their surplus funds with RBI.
Reason: A high reserve repo rate enables the commercial banks to earn an income.
(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 and Reason is false.
(D) Both Assertion and Reason are false.

Answer: (A) Both Assertion and Reason are true and Reason is the correct explanation of Assertion.

Commercial banks park excess funds with the central bank at the reverse repo rate, which serves as interest income for them.

Teacher's Note:
a) Reverse repo rate is the rate at which the central bank borrows from commercial banks.
b) This is an effective monetary tool used to absorb excess liquidity from the banking system.

(x) With the help of a diagram, illustrate the effect of an increase in the price of the product shown in Image A on the demand for the product shown in Image B. [1 Mark]

[Figure: Two images - Image A showing an economy car and Image B showing a luxury sedan.]

Answer:
The products are substitute goods. An increase in the price of the product in Image A leads to a rightward shift in the demand curve for the product in Image B.

Teacher's Note:
a) Substitutes show a direct relationship between the price of one good and the demand for another.
b) Students must correctly label the shift of the demand curve to the right (D to D') on a standard price-quantity graph.

(xi) The long run average cost curve is U shaped due to the Law of Variable Proportions. Defend or refute the statement with a reason. [1 Mark]

Answer:
The statement is refuted. The long run average cost curve is U-shaped due to economies and diseconomies of scale, not the Law of Variable Proportions.

Teacher's Note:
a) Law of Variable Proportions is a short run law operating with a fixed factor.
b) In the long run, all factors are variable, and the scale of production changes.

(xii) Amit withdrew Rs. 50,000 from his savings to invest in his own business. He bought a Xerox machine for Rs. 30,000 for his office the same day. Identify the explicit cost and the implicit cost in the above situation. [1 Mark]

Answer:
Explicit Cost is Rs. 30,000 (the cost of the Xerox machine). Implicit Cost is Rs. 50,000 (opportunity cost of self-owned funds withdrawn from savings).

Teacher's Note:
a) Explicit costs are out-of-pocket payments made to outsiders for inputs.
b) Implicit costs are the estimated value of self-owned, self-employed resources.

(xiii) If Indian companies raise the wages in accordance with the Minimum Wage Act, it will lead to cost push inflation. Give a reason to support this statement. [1 Mark]

Answer:
Higher wages increase the cost of production for businesses, which is passed on to consumers in the form of higher prices, causing cost-push inflation.

Teacher's Note:
a) Cost-push inflation is driven by an increase in the cost of wages or raw materials.
b) Producers maintain their profit margins by raising final selling prices when input costs rise.

(xiv) Sagarika wants to buy a car worth Rs. 10 lakhs. She has only Rs. 3 lakhs and plans to borrow the remaining amount from the bank. Name and briefly explain the selective credit control measure that enables Sagarika to get maximum loan from the bank. [1 Mark]

Answer:
Margin Requirement. It refers to the difference between the market value of the security offered and the loan amount granted by the bank.

Teacher's Note:
a) A lower margin requirement allows borrowers to secure a higher loan amount against their collateral.
b) It is a qualitative or selective tool of credit control used by the central bank.

(xv) Why does the supply of foreign exchange increase with an increase in the foreign exchange rate? [1 Mark]

Answer:
When the exchange rate rises, domestic goods and assets become cheaper for foreigners, increasing their demand for domestic currency and thereby raising the supply of foreign exchange.

Teacher's Note:
a) There is a direct relationship between the foreign exchange rate and the supply of foreign exchange.
b) Exporters and foreign investors find higher returns when domestic currency depreciates.

(xvi) What is meant by primary deficit? [1 Mark]

Answer:
Primary deficit is the difference between fiscal deficit of the current year and interest payments on previous borrowings.

Teacher's Note:
a) Formula: Primary Deficit = Fiscal Deficit - Interest Payments.
b) It indicates how much of the government's borrowing requirement is going towards meeting expenses other than interest payments.

SECTION B - 32 MARKS

Question 2

(i) Ibrahim works as a mechanic and earns Rs. 5000 per month. To increase his family income, his wife and parents also begin to work. Over a period of time when his income increases to Rs. 20,000, Ibrahim asks his family members not to work and enjoy leisure.
The phenomenon indicated in this situation does not conform to the Law of Supply. Give a reason to support this statement. Draw the supply curve based on the given situation. [2 Marks]

[Figure: A backward-bending supply curve of labour with Wage Rate on the Y-axis and Number of hours worked on the Q-axis, showing output bending backward at higher wage levels W₄.]

Answer:
1. The situation describes a backward-bending supply curve of labour, where beyond a certain wage rate, an increase in wages leads to a reduction in labour supplied as workers prefer leisure over work.
2. This violates the Law of Supply, which states a direct relationship between price and quantity supplied.

Teacher's Note:
a) The substitution effect dominates at lower wages, while the income effect dominates at higher wage levels.
b) Students must draw the backward-bending curve correctly with axes labeled Wage Rate and Quantity of Labour.

(ii) When the price of potato chips falls from Rs. 40 to Rs. 20 per unit, its demand increases by 20 units. If the price elasticity of demand is (-) 0.5, calculate the quantity demanded of potato chips at Rs. 20. [2 Marks]

Answer:
Given: E_d = (-) 0.5, P₁ = 40, P₂ = 20, Change in Quantity (\Delta Q) = 20.
E_d = (\Delta Q / \Delta P) \times (P₁ / Q₁)
0.5 = (20 / (20 - 40)) \times (40 / Q₁)
0.5 = (20 / -20) \times (40 / Q₁) = -1 \times (40 / Q₁)
Q₁ = 80 units.
Quantity demanded at P₂ (Q₂) = Q₁ + \Delta Q = 80 + 20 = 100 units.

Teacher's Note:
a) Always write the elasticity formula clearly before substituting values.
b) Pay careful attention to signs when calculating percentage changes in price and quantity.

Question 3

(i) Study the schedule given below and explain the relation between Average Revenue and Marginal Revenue by giving a suitable reason. [2 Marks]

Answer:
1. Both Average Revenue (AR) and Marginal Revenue (MR) fall as more units are sold, but MR falls at a faster rate than AR.
2. This occurs in imperfect competition where a firm must lower its price to sell an additional unit.

Teacher's Note:
a) AR represents price per unit, while MR is the addition to total revenue from selling one more unit.
b) The relation can be summarized as: when AR falls, MR falls faster and lies below AR.

(ii) With the help of a diagram, illustrate the effect of a simultaneous and proportional decrease in demand and supply on equilibrium price and quantity. [2 Marks]

[Figure: Equilibrium graph showing parallel leftward shifts of both Demand (D to D₁) and Supply (S to S₁) curves by equal proportions, resulting in lower equilibrium quantity but unchanged equilibrium price.]

Answer:
When demand and supply decrease simultaneously and in the same proportion, the equilibrium price remains unchanged, but the equilibrium quantity decreases.

Teacher's Note:
a) Ensure the magnitude of shift is identical for both curves to show no change in price.
b) A decrease in both curves always pulls the equilibrium quantity downward.

Question 4

(i) Why is fixed cost a short run phenomenon? Draw the Total Fixed Cost curve. [2 Marks]

[Figure: A Total Fixed Cost (TFC) curve represented as a horizontal straight line parallel to the X-axis at a positive distance above the origin.]

Answer:
1. Fixed cost is a short run phenomenon because, in the short run, some factors of production (like plant and machinery) cannot be varied.
2. In the long run, all factors become variable, meaning fixed costs cease to exist.

Teacher's Note:
a) TFC remains constant regardless of the level of output.
b) The TFC curve is parallel to the output axis.

(ii) How do Total Product, Average Product and Marginal Product behave under the Law of Increasing Returns to a Factor? Briefly explain one reason for the operation of this law. [2 Marks]

Answer:
1. Under increasing returns, Total Product (TP) increases at an increasing rate, Marginal Product (MP) rises and reaches its maximum, and Average Product (AP) rises.
2. Reason: Division of labour and specialization lead to better utilization of fixed factors.

Teacher's Note:
a) Increasing returns typically operate in the initial stages of production.
b) Efficiency improves as variable factors are added to an underutilized fixed factor.

Question 5

(i) Laxman & Sons is a leading producer of perfume among many other firms. Recently, it introduced a new fragrance and offered gift vouchers to the customers who bought this product.
Identify the form of market and explain the feature implied in this situation. [2 Marks]

Answer:
1. Market Form: Monopolistic Competition.
2. Feature Implied: Non-price competition, where firms compete through advertising, gift vouchers, and product differentiation rather than changing prices.

Teacher's Note:
a) Monopolistic competition features many buyers and sellers with differentiated products.
b) Non-price competition helps firms attract consumers without engaging in price wars.

(ii) Briefly discuss the situations when a perfectly competitive firm continues to produce even after facing losses in the short run. [2 Marks]

Answer:
A perfectly competitive firm continues to produce in the short run as long as Price (P) is greater than or equal to Average Variable Cost (AVC), because stopping production would result in losses equal to total fixed costs.

Teacher's Note:
a) Operating covers a portion of fixed costs when P >= AVC.
b) The shut-down point occurs only when price falls below AVC.

OR

(i) The main occupation of the villagers in a village is beekeeping. The villagers sell their produce only to firm X.
(a) Identify the type of market prevalent here.
(b) Is it a buyer's market or a seller's market? Give a reason. [2 Marks]

Answer:
(a) Monopsony.
(b) It is a buyer's market because there is only one buyer (Firm X), giving the buyer greater control over price and purchasing conditions.

Teacher's Note:
a) Monopsony is a market structure with many sellers but a single buyer.
b) Buyers dictate terms in a monopsony due to the absence of alternative purchasers.

(ii) Monopolistic competition is a blend of perfect competition and monopoly. Discuss the statement by giving two reasons. [2 Marks]

Answer:
1. Large number of sellers (like perfect competition), allowing free entry and exit.
2. Product differentiation (like monopoly), giving each firm some degree of price control over its specific product.

Teacher's Note:
a) It combines elements of both market extremes.
b) Firms face a downward-sloping demand curve due to product differentiation.

Question 6

Aditi deposits Rs. 1,000 in a bank which leads to an increase in money supply in the economy to the extent of Rs. 4,000. Name and explain the process of this increase in money supply. [4 Marks]

Answer:
1. Name of the Process: Credit Creation process by commercial banks.
2. Explanation: Banks keep a fraction of deposits as Cash Reserve Ratio (CRR) and lend out the remaining amount. Loans create new deposits in the banking system in rounds.
3. Formula: Total Money Supply = Initial Deposit \times (1 / CRR).
4. Calculation: (1 / 0.25) \times 1,000 = Rs. 4,000.

Teacher's Note:
a) The money multiplier is inversely related to the legal reserve ratio.
b) Every loan granted becomes a deposit in the banking system, multiplying initial cash.

Question 7

(i) The Indian rupee fell 14 paisa to 83.91 against the US dollar on Wednesday amid outflow of foreign capital and volatile domestic equity markets. (Source: The Pioneer, August 22, 2024)
The above situation would lead to a surplus in Balance of Payments account of India. Defend or refute the statement by giving a reason. [2 Marks]

Answer:
The statement is refuted. Outflows of foreign capital create a deficit in the capital account, worsening the overall Balance of Payments rather than creating a surplus.

Teacher's Note:
a) Depreciation of currency driven by capital outflows reflects a deficit condition.
b) Capital inflows strengthen domestic currency and improve BoP.

(ii) The government initiated the 'Make in India' programme to attract global investment in the Indian economy. Explain the impact of this programme on the Balance of Payments. [2 Marks]

Answer:
1. FDI Inflows: Attracts foreign direct investment, creating a credit entry in the capital account.
2. Trade Balance: Boosts domestic production, reducing import dependency and improving the current account deficit.

Teacher's Note:
a) Capital account improves through direct foreign investments.
b) Current account improves by substituting imports with domestic manufacturing.

OR

(i) In July 2024, India's retail inflation rate was 3.54%. Though it is falling yet it continues to persist. Explain how this would affect India's Balance of Payments. [2 Marks]

Answer:
1. Inflation makes domestic goods expensive, reducing exports and increasing imports, which widens the current account deficit.
2. High inflation can trigger capital outflows due to declining currency purchasing power, worsening the capital account.

Teacher's Note:
a) Persistent inflation erodes international competitiveness.
b) Trade deficit widens when exports become uncompetitive globally.

(ii) Tata Motors purchase of iconic British luxury car maker Jaguar Land Rover ($2.3 billion) has proved to be a master stroke. (Source: economictimes.indiatimes.com)
State whether the above transaction will be recorded under the Debit side or the Credit side of Balance of Payments. Give a reason. [2 Marks]

Answer:
Debit side of the Capital Account because it represents an outflow of foreign exchange from India to acquire foreign assets (capital outflow).

Teacher's Note:
a) Asset acquisition abroad is recorded as a negative or debit entry in the capital account.
b) Outflows of capital reduce the foreign exchange reserves of the country.

Question 8

(i) With reference to government budget, classify the following as Revenue receipt or Capital receipt. Give a valid reason for each.
(a) Financial help from a Multinational Corporation (MNC) for victims in a flood affected area.
(b) Sale of shares of a Public Sector Undertaking (PSU) to a private company. [2 Marks]

Answer:
(a) Revenue Receipt: It neither creates any liability nor reduces government assets, representing a grant.
(b) Capital Receipt: It reduces government ownership of public enterprises (disinvestment), reducing assets.

Teacher's Note:
a) Grants and donations are non-recurring revenue receipts if they create no liability.
b) Disinvestment is a classic capital receipt as it depletes government assets.

(ii) Budget 2024 outlined the sources of government revenue which comprised 19% from Income Tax, 18% from Goods and Service Tax and the remaining from borrowings. (Source: Business Standard)
Categorize the two types of taxes mentioned above. State any one difference between them. [2 Marks]

Answer:
1. Categorization: Income Tax is a Direct Tax, and Goods and Services Tax (GST) is an Indirect Tax.
2. Difference: The burden of a direct tax cannot be shifted to others, whereas the burden of an indirect tax can be shifted from producers to consumers.

Teacher's Note:
a) Direct taxes are levied directly on income or wealth.
b) Indirect taxes are levied on goods and services, shifting the incidence of tax.

Question 9

(i) Under the Gruha Lakshmi Scheme in Karnataka, the state government provides Rs. 2,000 monthly assistance to head female member in each family. Will this receipt be a part of National Income accounting? Explain. [2 Marks]

Answer:
No, it will not be a part of National Income because it is a transfer payment made without any corresponding productive service or output creation.

Teacher's Note:
a) Transfer payments are excluded from national income calculations.
b) Only payments for factor services contributing to current production are included.

(ii) State whether the following are True or False. Give a reason for each.
(a) In a closed economy, GDP is always equal to GNP.
(b) Money received by an Indian cricketer as Man of the Match does not contribute to the National Income of India. [2 Marks]

Answer:
(a) True. In a closed economy, Net Factor Income from Abroad (NFIA) is zero, making GDP equal to GNP.
(b) False. Income earned by a resident cricketer for services rendered is factor income and forms part of National Income.

Teacher's Note:
a) GNP = GDP + NFIA. When NFIA is zero, domestic and national aggregates are identical.
b) Earnings for professional services are earned income, not transfer payments.

SECTION C - 32 MARKS

Question 10

(i) The price of chocolates increased during the Valentine week in February leading to an increase in the supply at a greater rate.
Identify the price elasticity of supply and illustrate it on a diagram. [2 Marks]

[Figure: Supply curve graph showing elastic supply where the supply curve originates from the Y-axis, indicating price elasticity of supply greater than 1 (PES > 1).]

Answer:
Price Elasticity of Supply is greater than 1 (Elastic Supply, PES > 1), as supply changes at a greater rate than the change in price.

Teacher's Note:
a) Elastic supply means proportional change in quantity supplied exceeds proportional change in price.
b) The supply curve must intercept the Y-axis when extended.

(ii) Robert consumes commodities X and Y. The price of commodity X is Rs. 2 and the price of commodity Y is Rs. 1. He has decided to spend Rs. 11 on these two commodities.
(a) Using the following schedule, identify the combination of the two commodities X and Y that gives maximum satisfaction to Robert. [4 Marks]

Answer:
Allocation for maximum satisfaction:
- Buy 3 units of X: Cost = 3 \times Rs. 2 = Rs. 6
- Buy 5 units of Y: Cost = 5 \times Rs. 1 = Rs. 5
- Total expenditure = Rs. 6 + Rs. 5 = Rs. 11
At this combination: (MU_x / P_x) = (MU_y / P_y) = 6.

Teacher's Note:
a) Students should calculate MU per rupee for both goods (MU/P) to find matching ratios.
b) Total expenditure must exactly equal the given budget constraint of Rs. 11.

(b) State the underlying law related to the schedule given above. Mention the equilibrium condition. [2 Marks]

Answer:
1. Law: Law of Equi-Marginal Utility.
2. Equilibrium Condition: (MU_x / P_x) = (MU_y / P_y) = Marginal Utility of Money, and total expenditure equals income.

Teacher's Note:
a) The law states that a consumer maximizes utility when the marginal utility per rupee spent is equal across all goods.
b) Budget constraint must be fully exhausted.

Question 11

(i) What is investment multiplier? Briefly explain how it is related to Marginal Propensity to Consume (MPC). [2 Marks]

Answer:
1. Investment multiplier (K) measures the ratio of change in total income to change in investment (K = \Delta Y / \Delta I).
2. Relationship: K is directly related to MPC (K = 1 / (1 - MPC)). Higher MPC leads to a higher multiplier value.

Teacher's Note:
a) Multiplier and MPC share a direct positive relationship.
b) Multiplier and MPS share an inverse relationship.

(ii) Refer to the diagram given below and answer the questions that follow. [6 Marks]

[Figure: Keynesian income determination model showing Aggregate Demand (AD) and AD₁ curves, 45-degree line, deflationary gap EG, full employment equilibrium income Y_f, and deficient income Y₀.]

(a) What does the gap EG represent? Explain. [2 Marks]

Answer:
Deflationary gap. It is the excess of aggregate supply over aggregate demand at the full employment level of output, causing deflationary pressure in the economy.

Teacher's Note:
a) Deflationary gap indicates deficient demand.
b) It leads to falling prices and involuntary unemployment.

(b) Recommend any two fiscal measures and any two monetary measures to combat the situation referred to in subpart (a). [4 Marks]

Answer:
Fiscal Measures:
1. Decrease in Taxes: Increases disposable income and boosts aggregate demand.
2. Increase in Government Expenditure: Injects money into the economy to raise aggregate demand.
Monetary Measures:
1. Reduce Bank Rate: Lowers borrowing costs, encouraging commercial banks to lend more.
2. Open Market Operations (OMO): Central bank purchases government securities to inject liquidity into the banking system.

Teacher's Note:
a) Measures aimed at deficient demand focus on expanding money supply and aggregate spending.
b) Both fiscal and monetary policies must work in tandem during deflationary gaps.

Question 12

(i) Discuss the problem of double counting with the help of an example. How can it be solved? [4 Marks]

Answer:
1. Problem: Counting the value of intermediate goods along with final goods, leading to an overestimation of Gross Domestic Product.
2. Example: Farmer sells wheat for Rs. 10 to miller, miller sells flour for Rs. 20 to baker, baker sells bread for Rs. 30. If all transactions are added, total = Rs. 60 (incorrect). Correct value is only the final product value, Rs. 30.
3. Solutions: (a) Final Goods Approach, or (b) Value Added Method.

Teacher's Note:
a) Double counting distorts true national income figures.
b) Value added method avoids this by summing up value additions at each stage of production.

(ii) Calculate NDP_FC and NNP_FC on the basis of the following information. [4 Marks]

Answer:
Step 1: Calculate GDP_MP (Value of Output - Intermediate Consumption)
Value of Output = 1300 + 700 = Rs. 2000 Cr.
Intermediate Consumption = 800 + 600 = Rs. 1400 Cr.
GDP_MP = 2000 - 1400 = Rs. 600 Cr.
Step 2: Calculate NDP_FC
NDP_FC = GDP_MP - Depreciation (CFC) - Net Indirect Taxes (Indirect Taxes - Subsidies)
Net Indirect Taxes = 120 - 40 = Rs. 80 Cr.
NDP_FC = 600 - 85 - 80 = Rs. 435 Cr.
Step 3: Calculate NNP_FC
NNP_FC = NDP_FC + Net Factor Income from Abroad (NFIA)
NFIA = 15 - 30 = (-) Rs. 15 Cr.
NNP_FC = 435 + (-15) = Rs. 420 Cr.

Teacher's Note:
a) Follow the sequential steps from output method to factor cost aggregates.
b) Double check subtractions for depreciation and net indirect taxes.

OR

(i) Discuss two reasons for NOT considering GDP a true indicator of economic welfare. [4 Marks]

Answer:
1. Non-Monetary Exchanges: Barter transactions and household chores are excluded from GDP, understating welfare.
2. Externalities: Negative externalities like pollution and deforestation increase GDP through remedial costs but reduce overall societal welfare.

Teacher's Note:
a) GDP measures output, not well-being.
b) Distribution of income and composition of output heavily impact actual welfare.

(ii) Calculate GDP_MP and National Income from the following information. [4 Marks]

Answer:
Step 1: Calculate GDP_MP (Expenditure Method)
GDP_MP = Private Final Consumption Expenditure + Government Final Consumption Expenditure + Gross Domestic Fixed Capital Formation + Change in Stock + Net Exports
Gross Domestic Fixed Capital Formation = Net Fixed Capital Formation + Depreciation = 500 + 120 = 620 Cr.
GDP_MP = 2500 + 700 + 620 + 60 + 30 = Rs. 3910 Cr.
Step 2: Calculate National Income (NNP_FC)
NNP_FC = GDP_MP - Depreciation - Net Indirect Taxes + NFIA
NNP_FC = 3910 - 120 - 500 + (-30) = Rs. 3260 Cr.

Teacher's Note:
a) Convert Net Capital Formation to Gross Capital Formation by adding depreciation.
b) Verify formula substitutions carefully before final computation.

Question 13

Read the passage given below and answer the questions that follow
In May 2016, the Ministry of Petroleum and Natural Gas (MOPNG), introduced the Pradhan Mantri Ujjwala Yojana (PMUY) as a flagship scheme with an objective to make clean cooking fuel such as LPG available to the rural and deprived households. Under the Union Budget for the Financial Year 2021-22, provision for release of additional 1 Crore LPG connections was made. In this phase, special facility was given to migrant families.
LPG belongs to a market form where small number of competitors produce a relatively homogenous product and are aware of one another's presence. To survive in the market, they have to match one another's marketing strategy which sometimes influences the prices of their own products. (Source: www.myscheme.gov.in)

(i) Identify the form of market referred to in the above passage. Name any two industries which come under the same market form. [2 Marks]

Answer:
1. Market Form: Oligopoly.
2. Industries: Automobile industry and Telecommunication industry.

Teacher's Note:
a) Oligopoly features a few large firms dominating the market.
b) Mutual interdependence is the hallmark of this market structure.

(ii) Explain any two important features of the market form referred to in the passage. [2 Marks]

Answer:
1. Few Large Firms: A small number of firms control the majority of market supply.
2. Interdependence: Firms closely monitor and react to competitors' pricing and output strategies.

Teacher's Note:
a) Actions of one firm directly affect rival firms.
b) Price rigidity often prevails due to fear of retaliation.

(iii) Briefly discuss the nature of demand curve in this form of market. [2 Marks]

Answer:
The demand curve in an oligopoly is kinked (indeterminate) due to asymmetric price reactions by rivals, reflecting price rigidity.

Teacher's Note:
a) A kink occurs at the prevailing market price.
b) Above the kink, demand is elastic; below the kink, it is inelastic.

(iv) Distinguish between perfect competition and imperfect competition on the following basis:
(a) Nature of product
(b) Nature of demand curve [2 Marks]

Teacher's Note:
a) Perfect competition assumes identical products sold by numerous sellers.
b) Imperfect competition features product differentiation and sloping demand curves.