ISC Class 12 Economics Sample Paper 2022 with Solutions

SECTION A - 8 MARKS

Question 1

(i) Firm A sells flour to firm B for Rs. 100/- Firm B sells biscuits to the wholesaler C for Rs. 160/- and Firm C sells biscuits to consumers for Rs. 200/. Hence, the gross value added is: [1 Mark]
(a) Rs. 460/-
(b) Rs. 305/-
(c) Rs. 244/-
(d) Rs. 200/-

Answer: (d) Rs. 200/-

Gross value added is the sum total of value added by all the firms in the economy. The final value of output sold to consumers by Firm C is Rs. 200/-.

Teacher's Note:
a) Gross Value Added at market price (GVAmp) is equal to Value of Output minus Intermediate Consumption, or simply the final price paid by the ultimate consumer when calculated through final output value.
b) Students often mistakenly add the values at each stage of production (Rs. 100 + Rs. 160 + Rs. 200), failing to realize that value added method sums up only the net value added at each intermediate stage, which ultimately equals the final sale price.

(ii) Medium of exchange and measure of value are: [1 Mark]
(a) Primary functions of money
(b) Secondary functions of money
(c) Tertiary functions of money
(d) Contingent functions of money

Answer: (a) Primary functions of money

Medium of exchange and unit of account (measure of value) constitute the primary or main functions of money.

Teacher's Note:
a) Primary functions are the most important functions performed by money in any economy, overcoming the drawbacks of the barter system.
b) Do not confuse primary functions with secondary functions, which include standard of deferred payments, store of value, and transfer of value.

(iii) Aggregate supply is equal to: [1 Mark]
(a) C + I
(b) C + S
(c) I + C
(d) S1 + S2

Answer: (b) C + S

Aggregate supply represents total national income, which is either consumed (C) or saved (S).

Teacher's Note:
a) Aggregate Supply (AS) = C + S is a fundamental identity in macroeconomics.
b) Students frequently confuse Aggregate Supply (C + S) with Aggregate Demand (C + I).

(iv) Transfer earning in National income refers to: [1 Mark]
(a) transfer of income from one person to another.
(b) income received by selling goods.
(c) unilateral payment received not related to any production.
(d) earning received by offering services.

Answer: (c) unilateral payment received not related to any production.

Transfer earnings or transfer payments are one-way payments made without any corresponding good or service being provided in return.

Teacher's Note:
a) Transfer payments are excluded from National Income because they do not represent any productive activity.
b) Remember that factor incomes involve rendering factor services, whereas transfer incomes do not.

(v) A consumer spending on purchase of goods regardless of the income in possession, is an example of _______ consumption. [1 Mark]

Answer: autonomous

Autonomous consumption refers to minimum consumption that takes place even when income is zero.

Teacher's Note:
a) Autonomous consumption is denoted by the symbol c-bar in consumption function equations.
b) Ensure correct spelling of the term 'autonomous' in exams.

(vi) ______________ is the creation of new currency to fill the gap between Government revenue and Government expenditure of the country. [1 Mark]

Answer: Deficit financing

Deficit financing involves printing new currency notes by the central bank or borrowing from the central bank to cover budget deficits.

Teacher's Note:
a) Deficit financing is often resorted to by governments of developing nations to finance planned economic development.
b) Excessive deficit financing can lead to inflationary pressures within the economy.

(vii) GNP(fc) = GNP(mp) - ______________ [1 Mark]

Answer: Net Indirect Tax

Market price includes indirect taxes and excludes subsidies, whereas factor cost excludes net indirect taxes.

Teacher's Note:
a) The conversion formula is Factor Cost = Market Price - Indirect Taxes + Subsidies (or Net Indirect Tax).
b) Be precise with abbreviations such as fc (factor cost) and mp (market price).

(viii) Give one difference between a Direct tax and an Indirect tax. [1 Mark]

Answer:
The impact and incidence of a direct tax fall on the same person, whereas the impact and incidence of an indirect tax fall on different persons.

Teacher's Note:
a) Direct taxes cannot be shifted to others (e.g., Income Tax), while indirect taxes can be shifted (e.g., GST).
b) Keep the distinction clear using the standard economic terms 'impact' and 'incidence'.

SECTION B - 12 MARKS

Answer the following questions briefly.

Question 2. Differentiate between CRR and SLR. [2 Marks]

Answer:

Teacher's Note:
a) Both CRR and SLR are quantitative instruments of monetary policy used by the central bank.
b) Ensure both points of difference (custody/location and objective) are clearly stated in tabular form.

Question 3. Briefly explain two reasons for the adverse Balance of Payments in any economy. [2 Marks]

Answer:
1. Cyclic fluctuations: Cyclical fluctuations in business activity lead to BOP disequilibrium. During a depression, the volume of both exports and imports falls, but exports may decline more due to a drop in domestic production, causing an adverse BOP.
2. Price changes (Inflation): If there is domestic inflation, export prices rise, reducing export demand, while import demand increases. This creates an adverse balance of payments.

Teacher's Note:
a) An adverse (or unfavorable) Balance of Payments occurs when total payments exceed total receipts on current and capital accounts.
b) Clearly explain the cause and its direct impact on exports and imports for each point.

Question 4. Draw a well labelled diagram of two sector model of circular flow of income including the financial sector. [2 Marks]

Answer:
The two sector model of circular flow of income includes households and firms, with the financial sector (banks, insurance companies, mutual funds) acting as an intermediary for savings and investments.

[Figure: Circular flow diagram showing Households and Firms. Upper flow from Households to Firms labeled 'Labour, Land, Capital, Enterprise' and opposite flow from Firms to Households labeled 'Wages, Rent, Interest, Profits (Factor Payments)'. Lower flow from Households to Firms labeled 'Consumption Expenditure' and opposite flow from Firms to Households labeled 'Flow of Goods and Services'.]

Teacher's Note:
a) Ensure all arrows indicating the real and monetary flows between households and firms are drawn correctly.
b) Mentioning the financial sector explicitly in the text description is essential when asked to include it.

Question 5. Complete the following schedule - [2 Marks]

Answer:

Working Notes:
1. For Y = 100, C = 90: APC = C / Y = 90 / 100 = 0.9. MPC cannot be calculated for the first level.
2. For Y = 120, C = 108: APC = 108 / 120 = 0.9. MPC = Delta C / Delta Y = (108 - 90) / (120 - 100) = 18 / 20 = 0.9.

Teacher's Note:
a) APC is calculated as Consumption divided by Income (C / Y), while MPC is change in consumption divided by change in income (Delta C / Delta Y).
b) Note that MPC for the initial row is undefined or represented by a dash as there is no prior income level given.

Question 6

(i) Differentiate between Cash Credit and Outright Loans. [2 Marks]

Answer:
1. Cash credit is a short-term credit facility sanctioned by banks to businesses and companies to meet their working capital requirements, allowing withdrawals up to a specified limit.
2. An outright loan is a lump-sum amount advanced by a bank to a borrower for a specific period, which the borrower intends to use fully and repay according to an agreed schedule.

Teacher's Note:
a) Cash credit allows borrowing as and when needed up to a limit, and interest is charged only on the amount withdrawn.
b) An outright loan involves disbursement of the entire principal amount at once, with interest charged on the total sanctioned amount.

OR

(ii) How is Devaluation of currency different from Depreciation of currency? Give any two differences. [2 Marks]

Answer:

Teacher's Note:
a) Devaluation is government-induced under fixed exchange rates, whereas depreciation is market-induced under flexible exchange rates.
b) Ensure both terminology distinctions are clearly contrasted in the table.

Question 7. What is meant by the following functions of the Central bank: [2 Marks]

(i) Clearing house [1 Mark]

Answer:
The central bank acts as a clearing house for commercial banks. Since all commercial banks keep their accounts with the central bank, mutual claims of banks against each other are easily settled through simple book entries of transfer by the central bank.

Teacher's Note:
a) This function saves physical transfer of cash between commercial banks during interbank settlements.
b) Mentioning book entries of transfer is vital for full credit.

(ii) Lender of the last resort [1 Mark]

Answer:
When commercial banks fail to meet their financial requirements from other sources during a financial crunch, they approach the central bank as a last resort for loans and advances, thereby saving the banking system from collapse.

Teacher's Note:
a) The central bank provides emergency financial assistance by discounting approved securities and bills of exchange.
b) This function ensures financial stability and prevents panics or bank runs.

SECTION C - 20 MARKS

Question 8

(i) What is meant by Equilibrium income? How is it determined by using Saving and Investment approach? [4 Marks]

Answer:
Equilibrium income refers to the level of national income where aggregate demand (AD) is equal to aggregate supply (AS), or equivalently, where planned savings (S) equal planned investment (I).
According to the Saving and Investment approach, equilibrium is attained when planned savings are equal to planned investment (S = I):
1. When planned savings are less than planned investment: At income levels below equilibrium, households consume more than firms expect, leading to a shortfall in inventory stock (unplanned inventory reduction). To restore desired inventory, firms increase production, leading to higher output, income, and employment.
2. When planned savings are more than planned investment: At income levels above equilibrium, households consume less than expected, resulting in an undesired accumulation of inventory stocks. To clear stocks, firms cut down production, leading to lower output, income, and employment.

Teacher's Note:
a) Equilibrium is established only when planned (ex-ante) savings equal planned (ex-ante) investment.
b) Explain both situations (S < I and S > I) clearly to show the adjustment mechanism toward equilibrium.

OR

(ii) Discuss the mechanism of investment multiplier with the help of a numerical. [4 Marks]

Answer:
Investment multiplier (K) measures the multiple times by which income increases due to an initial increase in investment expenditure. It is based on the principle that one person's expenditure is another person's income.
Mechanism and Numerical: Suppose there is an increase in investment (Delta I) of Rs. 100 crore in constructing a road. This immediately increases the income of workers by Rs. 100 crore. Assuming Marginal Propensity to Consume (MPC) is 0.75, workers spend 75% of this additional income (Rs. 75 crore) on consumer goods. This becomes the income of producers, who in turn spend 75% of Rs. 75 crore (Rs. 56.25 crore), and this process continues in rounds.
Formula: K = 1 / (1 - MPC) = 1 / (1 - 0.75) = 1 / 0.25 = 4.
Change in income (Delta Y) = K × Delta I = 4 × Rs. 100 crore = Rs. 400 crore.

Teacher's Note:
a) The multiplier formula connects MPC with the magnitude of income expansion: K = 1 / (1 - MPC) or 1 / MPS.
b) Show both the step-by-step round logic and the mathematical formula calculation for full marks.

Question 9. How is the rate of exchange determined in a flexible exchange rate system? [4 Marks]

Answer:
Under a flexible exchange rate system, the rate of exchange is determined by the market forces of demand and supply of foreign exchange.
1. Demand for foreign exchange: The demand curve is downward sloping because there is an inverse relationship between the exchange rate and the quantity demanded of foreign exchange (higher exchange rate makes foreign goods expensive, lowering demand).
2. Supply of foreign exchange: The supply curve is upward sloping due to a direct relationship between the exchange rate and the quantity supplied of foreign exchange (higher exchange rate encourages foreign investment and exports, increasing supply).
3. Equilibrium determination: The equilibrium exchange rate is determined at the intersection of the demand curve and the supply curve, where quantity demanded equals quantity supplied.

[Figure: Two separate diagrams. First diagram shows a downward sloping Demand curve (D) with Foreign Exchange Rate on Y-axis and Quantity of Foreign Exchange on X-axis. Second diagram shows an upward sloping Supply curve (S) with Foreign Exchange Rate on Y-axis and Quantity of Foreign Exchange on X-axis, intersecting at point E with equilibrium rate P₁ and quantity Q₁.]

Teacher's Note:
a) Explain the slopes of both demand and supply curves clearly before stating the equilibrium condition.
b) A well-labelled diagram showing the intersection point E at equilibrium rate is mandatory.

Question 10. Explain the steps involved in calculating the National income by Income method. [4 Marks]

Answer:
The income method measures national income as the sum total of all factor incomes generated within the domestic territory plus net factor income from abroad. The steps involved are:
Step I: Identification and classification of producing enterprises into primary, secondary, and tertiary sectors.
Step II: Classification of factor income generated into three broad components:
1. Compensation of Employees (COE): Wages, salaries in cash and kind, and employer contributions to social security schemes.
2. Operating Surplus: Income from property and entrepreneurship, comprising rent, royalty, interest, and profits (dividends, corporate tax, and undistributed profits).
3. Mixed Income of Self-Employed: Income generated by self-employed persons having characteristics of both COE and operating surplus (e.g., doctors, lawyers).
Step III: Estimation of Domestic Factor Income (NDPfc) by summing COE, Operating Surplus, and Mixed Income.
Step IV: Estimation of National Income (NNPfc) by adding Net Factor Income from Abroad (NFIA) to NDPfc.

Teacher's Note:
a) State the final identity clearly: NNPfc = COE + Operating Surplus + Mixed Income + NFIA.
b) Ensure all sub-components of operating surplus and factor incomes are explicitly defined.

Question 11. Explain the following methods of redemption of Public Debt: [4 Marks]

(i) Debt conversion [2 Marks]

Answer:
Debt conversion is a process where the government converts an existing high-interest public debt into a low-interest public debt. When market interest rates fall, the government replaces old high-yield bonds with new low-yield securities, thereby reducing its interest burden and income inequalities.

Teacher's Note:
a) This method is useful when market interest rates decline significantly.
b) Mention both the benefit of reduced interest burden and the alleviation of fiscal pressure.

(ii) Sinking fund [2 Marks]

Answer:
A sinking fund is a separate fund established by the government where a fixed sum of money is credited annually out of current revenues so that by the time the public debt matures, the accumulated fund is sufficient to pay off the debt.

Teacher's Note:
a) According to Dalton, sinking funds should ideally be accumulated out of current government surpluses, not through raising new loans.
b) It is a systematic and safe method of debt redemption that enhances government creditworthiness, though it is relatively slow.

Question 12. Read the given extract carefully and answer the following questions.

Mr. X wanted to buy an expensive motorcycle for his son but he did not have sufficient money to buy it. He approached a public sector commercial bank for the loan. The bank asked Mr. X to deposit 20% cash of the loan amount and rest 80% of the loan amount was given by the bank.

(i) Briefly explain a Commercial Bank. [1 Mark]

Answer:
A commercial bank is a financial institution that accepts deposits from the general public and extends loans for the purpose of earning a profit.

Teacher's Note:
a) Commercial banks form the backbone of the money creation process in an economy.
b) Keep the definition concise, covering both deposit acceptance and lending functions.

(ii) What is the regulation of consumer credit in selective credit control? [2 Marks]

Answer:
Regulation of consumer credit involves laying down rules regarding installment payments for the purchase of durable consumer goods. It involves two main aspects:
1. Minimum down payment (margin requirement), which restricts the initial cash required.
2. Maximum period of payment (installment duration).

Teacher's Note:
a) Selective credit controls are qualitative instruments used by the central bank to regulate credit for specific purposes.
b) Clearly mention both down payment and repayment period as core mechanisms of consumer credit regulation.

(iii) Name the bank which controls all the commercial banks and financial institutions in the country. [1 Mark]

Answer:
Central Bank (Reserve Bank of India in India).

Teacher's Note:
a) The central bank is the apex institution regulating the entire banking and monetary structure.
b) Mentioning both the general term 'Central Bank' and the specific Indian context 'Reserve Bank of India' is ideal.