ISC Class 12 Economics Sample Paper 2023 with Solutions

SECTION A - 16 MARKS

Question 1

(i) Indifference curve is convex to the origin due to: [1]
(a) Axiom of transitivity.
(b) Law of DMU.
(c) Law of DMRS.
(d) Axiom of non-satiety.

Answer: (c) Law of DMRS.

An indifference curve is convex to the origin because of the diminishing marginal rate of substitution (DMRS).

Teacher's Note:
a) DMRS states that as a consumer consumes more of one good, they are willing to give up progressively smaller amounts of the other good.
b) Do not confuse DMRS with the law of diminishing marginal utility, which applies to a single commodity framework.

(ii) When supply of a commodity increases by 24% following the rise in price by 8%, supply curve will be: [1]
(a) positively sloped with positive intercept.
(b) positively sloped with negative intercept.
(c) horizontal.
(d) parallel to price axis.

Answer: (b) positively sloped with negative intercept.

Elasticity of supply is greater than 1 (\( e_s = 24\% / 8\% = 3 \)), which means the supply curve is positively sloped and intersects the negative region of the X-axis (negative intercept).

Teacher's Note:
a) When a linear upward-sloping supply curve cuts the X-axis to the right of the origin, it has a negative intercept.
b) Always check the percentage change formula to determine elasticity before identifying the intercept nature.

(iii) In the figure given above, D is demand curve for normal good. It shifts to D' which is a case of: [1]
(a) extension of demand due to change in price level.
(b) increase in demand due to rice in expected future price of the commodity.
(c) contraction of demand due to increase in price of the substitute.
(d) increase in demand due to rise in price of the complimentary good.

[Figure: A standard demand graph showing price on Y-axis and quantity on X-axis with an original downward-sloping demand curve D shifting rightwards to a new parallel demand curve D']

Answer: (b) increase in demand due to rice in expected future price of the commodity.

A rightward shift of the demand curve indicates an increase in demand caused by factors other than the good's own price, such as an expectation of higher future prices.

Teacher's Note:
a) A shift of the demand curve represents a change in demand, whereas movement along the curve represents a change in quantity demanded.
b) Note the spelling typo in the paper option (rice instead of rise); understand that expectations of future price rises increase current demand.

(iv) A demand curve parallel to X axis signifies: [1]
(a) perfectly elastic.
(b) perfectly inelastic.
(c) elastic.
(d) inelastic.

Answer: (a) perfectly elastic.

A horizontal demand curve parallel to the X-axis has infinite elasticity (\( e_d = \infty \)), indicating perfectly elastic demand.

Teacher's Note:
a) Perfectly elastic demand means consumers are willing to buy any quantity at a given price, but nothing at a slightly higher price.
b) A demand curve parallel to the Y-axis would represent perfectly inelastic demand.

(v) Which one of the following is a pair of direct taxes? [1]
(a) Excise duty and Wealth Tax
(b) Service Tax and Income Tax
(c) Excise Duty and Service Tax
(d) Wealth Tax and Income Tax

Answer: (d) Wealth Tax and Income Tax

Direct taxes are those whose incidence and impact fall on the same person. Wealth tax and income tax are direct taxes.

Teacher's Note:
a) Excise duty and service tax (or GST) are indirect taxes as their burden can be shifted to others.
b) Direct taxes cannot be shifted.

(vi) Which one of the following is included in the calculation of National Income? [1]
(a) Transfer Earnings
(b) Sale proceeds of Shares and Bonds
(c) Black Money
(d) None of the Above

Answer: (d) None of the Above

Transfer earnings, sale proceeds of financial assets like shares and bonds, and illegal money (black money) are all excluded from national income estimation.

Teacher's Note:
a) Financial assets are mere paper claims and do not represent production of new goods and services.
b) Transfer payments do not involve any corresponding productive service.

(vii) Indian Railways charges lower freight rates for transporting essential products like food, coal etc., as compared to freight charges for other products like T.V., Air coolers etc. This is an example of: [1]
(a) Price ceiling.
(b) Price discrimination.
(c) Price control.
(d) Floor pricing.

Answer: (b) Price discrimination.

Charging different prices for the same service based on the nature of the product is known as price discrimination.

Teacher's Note:
a) Railways can practice price discrimination because essential goods have more inelastic demand compared to luxury items.
b) Price discrimination is a common feature under monopoly or monopolistic competition.

(viii) A firm produces its profit maximising level of output only when: [1]
(a) MR = AR
(b) MR > MC
(c) AR < MR
(d) MC = MR

Answer: (d) MC = MR

The necessary condition for a firm's profit maximization is that Marginal Cost equals Marginal Revenue (\( MC = MR \)).

Teacher's Note:
a) Along with \( MC = MR \), the second-order condition requires that MC must be rising at the point of equilibrium.
b) If \( MR > MC \), it is profitable for the firm to expand output.

(ix) Complete the following table: [1]

Answer:
MPC = \(\Delta C / \Delta Y = (8000 - 6800) / (10000 - 8000) = 1200 / 2000 = 0.6\)
MPS = \(1 - MPC = 1 - 0.6 = 0.4\)

Teacher's Note:
a) Marginal Propensity to Consume (MPC) is the ratio of change in consumption to change in income.
b) The sum of MPC and MPS is always equal to 1.

(x) What is investment multiplier? [1]

Answer:
Investment multiplier (\( k \)) is the ratio of change in income (\( \Delta Y \)) to change in investment (\( \Delta I \)). Formula: \( k = \Delta Y / \Delta I = 1 / (1 - MPC) = 1 / MPS \).

Teacher's Note:
a) Multiplier measures the multiple effect of a given change in investment on total income.
b) There is a direct relationship between MPC and the value of multiplier.

(xi) Mention any two sources of receipts from tax revenue of government budget. [1]

Answer:
1. Income Tax (Direct Tax)
2. Goods and Services Tax / GST (Indirect Tax)

Teacher's Note:
a) Tax revenue consists of compulsory payments made to the government without direct quid pro quo.
b) Mention one direct and one indirect tax for a complete answer.

(xii) State whether the following statement is True or False. Give one reason for your answer.
Undistributed profits are not a part of domestic factor income. [1]

Answer:
False. Undistributed profits (also known as retained earnings or savings of private corporate sector) are a component of operating surplus, which is a part of domestic factor income.

Teacher's Note:
a) Operating surplus comprises rent, interest, royalty, and corporate profits (which include dividends, corporate tax, and undistributed profits).
b) Always classify components of domestic income accurately under compensation of employees, operating surplus, and mixed income.

(xiii) An oligopolist has an indeterminate demand curve. What is the reason for this feature of Oligopoly? [1]

Answer:
Interdependence among competing firms in an oligopoly leads to uncertainty regarding rivals' reactions to price changes, making the demand curve indeterminate.

Teacher's Note:
a) Because there are few large firms, any price change by one firm prompts retaliatory reactions from competitors.
b) This gives rise to the kinked demand curve model.

(xiv) Why is AR=MR=P a horizontal straight line under perfect competition in the short run? [1]

Answer:
A firm under perfect competition is a price taker. It can sell any amount of output at the prevailing market price, making average revenue, marginal revenue, and price equal and constant at all levels of output.

Teacher's Note:
a) Since price remains constant, total revenue increases at a constant rate, making AR equal to MR.
b) Graphically, this results in a horizontal straight-line demand curve parallel to the X-axis.

(xv) What does 0<c<1 signify? [1]

Answer:
It signifies that the Marginal Propensity to Consume (\( c \)) is greater than zero but less than one, meaning an increase in income leads to a positive increase in consumption, but by less than the full increase in income.

Teacher's Note:
a) Consumers do not spend their entire additional income on consumption; a part of it is saved.
b) This psychological law of consumption ensures that the multiplier has a finite value greater than one.

(xvi) What is meant by autonomous consumption? [1]

Answer:
Autonomous consumption refers to the minimum level of consumption that takes place even when the level of national income or disposable income is zero.

Teacher's Note:
a) It is financed through past savings or borrowings.
b) It is represented by the intercept on the Y-axis in a linear consumption function equation: \( C = \bar{C} + bY \).

SECTION B - 32 MARKS

Question 2

(i) The following headline appeared in the newspaper -
"Crop damage in Himachal Pradesh sent tomato prices soaring in Delhi."
Analyse the statement with reference to the relationship between price and supply. [4]

Answer:
1. The headline indicates a decrease in the supply of tomatoes due to crop damage caused by adverse natural factors (unfavourable weather/floods in Himachal Pradesh).
2. A leftward shift in the supply curve occurs when supply decreases while demand remains constant.
3. According to the law of supply, price and quantity supplied are directly related, but here a reduction in supply leads to excess demand at the initial price.
4. This shortage pushes the market price upward until a new equilibrium is established at a higher price and lower quantity.

Teacher's Note:
a) Explain how a non-price determinant of supply (natural calamity) shifts the supply curve leftwards.
b) Conclude with the price mechanism adjustment that leads to soaring market prices.

(ii) The initial demand for a commodity was 100 units. With a rise in price by Rs. 5, the demand for the quantity decreases by 5 units. The elasticity of demand is 1.2. Calculate the price before the change in demand. [4]

Answer:
Given:
Initial quantity (\( Q_1 \)) = 100 units
Change in quantity (\( \Delta Q \)) = -5 units
Change in price (\( \Delta P \)) = Rs. 5
Elasticity of demand (\( E_d \)) = 1.2
Let initial price be \( P \).
Formula for price elasticity of demand:
\( E_d = (\Delta Q / \Delta P) \times (P / Q_1) \)
\( 1.2 = (-5 / 5) \times (P / 100) \)
\( 1.2 = (-1) \times (P / 100) \)
Ignoring the negative sign for absolute elasticity:
\( 1.2 = P / 100 \)
\( P = 1.2 \times 100 = \text{Rs. } 120 \).
The price before the change in demand was Rs. 120.

Teacher's Note:
a) State the percentage method or proportional method formula clearly before substituting the values.
b) Mention the absolute value of elasticity to avoid sign confusion during calculation.

Question 3

(i) State any two differences between a direct tax and an indirect tax. [4]

Answer:

Teacher's Note:
a) Provide clear tabular distinction covering economic incidence and progressivity.
b) Give examples such as income tax for direct tax and GST for indirect tax if space permits.

(ii) Refunding and Debt conversion are two methods of Debt redemption. Briefly explain these two methods of debt redemption. [4]

Answer:
1. Refunding: It is a process by which the government pays off maturing public debt by issuing new bonds and securities. The government floats a new loan to pay off the old lenders.
2. Debt Conversion: It refers to the process of converting high-interest public debt into low-interest public debt. The government offers existing bondholders the option to convert their high-yielding securities into new low-yielding securities before maturity.

Teacher's Note:
a) Debt redemption means repayment of public debt by the government.
b) Distinguish clearly between issuing new loans to pay off old ones (refunding) and lowering the interest burden on existing debt (conversion).

Question 4

(i) What is marginal cost of a firm? [1]

Answer:
Marginal cost is the addition made to total cost by producing one more unit of output.

Teacher's Note:
a) Formula: \( MC_n = TC_n - TC_{n-1} \).
b) Marginal cost is independent of fixed costs in the short run.

(ii) Calculate Total fixed cost, Marginal cost and Average Cost from the following data: [3]

Answer:

Teacher's Note:
a) TFC is equal to total cost when output is zero (Rs. 100) and remains constant at all levels of output.
b) AC = TC / Output, and MC = Change in TC / Change in Output.

Question 5

(i) Explain any two features of Perfect Competition. [2]

Answer:
1. Large number of buyers and sellers: There are numerous buyers and sellers in the market such that no single buyer or seller can influence the market price.
2. Homogeneous product: The firms produce identical products in terms of quality, design, and features, making them perfect substitutes for one another.

Teacher's Note:
a) Mention other features like free entry and exit or perfect knowledge if required.
b) Homogeneity of product ensures that firms charge a uniform price.

(ii) What is meant by intense competition under Oligopoly? [2]

Answer:
Intense competition under oligopoly refers to the fierce rivalry among a few large firms where each firm constantly watches and reacts to the price, output, and advertising strategies of its competitors.

Teacher's Note:
a) Because of few competitors, any strategic move by one firm directly impacts others.
b) This often leads to price rigidity or non-price competition like heavy advertising.

OR

(i) Explain the equilibrium of a firm when it enjoys supernormal profit in the short run under perfect competition. [4]

Answer:
1. A firm under perfect competition is in equilibrium when two conditions are satisfied: (i) \( MC = MR \) and (ii) MC cuts MR from below.
2. Supernormal profit occurs when total revenue exceeds total cost, or when Average Revenue (AR) is greater than Average Cost (AC) at the equilibrium output.
3. In the short run, due to fixed plant size and high demand, a competitive firm can earn abnormal profits where \( P = AR > AC \).
4. The excess of AR over AC represents the per-unit supernormal profit earned by the firm at the profit-maximizing output level.

Teacher's Note:
a) Clearly state both equilibrium conditions.
b) Emphasize that supernormal profits exist in the short run only; entry of new firms wipes them out in the long run.

Question 6

(i) In the short run under perfect competition, a firm should produce if and only if P or AR \( \ge \) AVC. Justify. [4]

Answer:
1. In the short run, a firm incurs both fixed and variable costs. Fixed costs are sunk costs that must be paid even if production is zero.
2. If price (AR) is greater than or equal to Average Variable Cost (AVC), the firm is able to cover its variable costs and contribute towards covering its fixed costs.
3. If price falls below AVC (\( P < AVC \)), the firm fails to cover even its variable costs, meaning every unit produced adds to its operating losses.
4. Therefore, the shutdown point of the firm occurs when \( P = AVC \); hence, production should continue only if \( P \ge AVC \).

Teacher's Note:
a) Explain the shutdown point clearly.
b) Differentiate between fixed costs and variable costs in the short run.

(ii) Why do firms earn normal profit in the long run under Perfect competition? [4]

Answer:
1. In the long run, all factors of production are variable, and there is complete freedom of entry and exit for firms.
2. If existing firms are earning supernormal profits in the short run, new firms are attracted to the industry due to zero barriers to entry.
3. This entry increases market supply, lowers the market price, and drives down individual firm profits until supernormal profits are eliminated.
4. Conversely, if firms are suffering losses, existing firms exit, reducing supply and raising the price until remaining firms cover all costs, leaving them earning just normal profits (\( P = AC \)).

Teacher's Note:
a) Highlight the role of free entry and exit of firms.
b) Explain that normal profit is the minimum return necessary to keep entrepreneurs in business.

Question 7

(i) What is meant by inflation? Mention the types of Inflation. [4]

Answer:
1. Inflation refers to a sustained and appreciable rise 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.
2. Types of inflation based on speed/rate:
(a) Creeping Inflation: Slow and mild rate of price rise (less than 3% annually).
(b) Walking Inflation: Moderate price rise (3% to 7% annually).
(c) Running Inflation: Rapid price rise (10% to 20% annually).
(d) Galloping / Hyperinflation: Extremely rapid and uncontrollable price rise (triple digit or more).

Teacher's Note:
a) Define inflation as a persistent rise in the price level, not a one-time price increase.
b) Mention classification based on speed or causation (demand-pull and cost-push).

(ii) Explain the role of 'repo rate' in controlling inflation. [4]

Answer:
1. Repo rate is the rate at which the central bank lends short-term funds to commercial banks.
2. During inflation, the central bank increases the repo rate to make borrowing expensive for commercial banks.
3. In response, commercial banks raise their lending rates for the general public and businesses.
4. Higher borrowing costs discourage credit creation, reduce investment and consumption demand, and help control inflation.

Teacher's Note:
a) Repo rate is a quantitative instrument of monetary policy.
b) Explain the transmission mechanism from central bank rate hike to contraction in aggregate demand.

Question 8

(i) Illustrate the process of credit creation by Commercial banks with the help of a numerical example. [4]

Answer:
1. Credit creation depends on initial primary deposits and the Legal Reserve Ratio (LRR).
2. Formula: Total Credit Creation = Initial Deposit \(\times (1 / LRR)\).
3. Numerical Example: Let initial deposit = Rs. 1,000 and LRR = 20% (0.2).
- Banks keep 20% (Rs. 200) as reserves and lend out the remaining Rs. 800.
- This expenditure comes back to banks as secondary deposits of Rs. 800.
- Banks keep 20% of Rs. 800 (Rs. 160) and lend Rs. 640.
4. Total Credit Creation = \( 1000 \times (1 / 0.2) = \text{Rs. } 5,000 \).

Teacher's Note:
a) Show the step-by-step round-by-round mechanism or use the multiplier formula with a clear numerical illustration.
b) Emphasize that credit multiplier is the reciprocal of LRR.

OR

(ii) How does Central bank control credit by using Qualitative methods? [4]

Answer:
1. Margin Requirements: The difference between the market value of the security offered and the loan amount granted. Raising margins restricts credit during inflation.
2. Moral Suasion: Psychological persuasion and advice given by the central bank to commercial banks to follow general monetary directives.
3. Selective Credit Controls (Rationing of Credit): Directing or restricting credit flows to specific sectors or speculative activities in the economy.
4. Direct Action: Penal actions taken by the central bank against commercial banks that fail to comply with directives.

Teacher's Note:
a) Qualitative methods regulate the direction and purpose of credit, unlike quantitative methods which regulate the overall volume.
b) Explain at least three effective qualitative instruments.

Question 9

Explain the equilibrium level of income and output determination by Aggregate demand and Aggregate supply approach with the help of a diagram. [4]

Answer:
1. According to the AD-AS approach, equilibrium output and income are determined where Aggregate Demand (AD) equals Aggregate Supply (AS).
2. Aggregate Demand is the sum of Consumption and Investment (\( AD = C + I \)), while Aggregate Supply represents total output and equals National Income (\( AS = Y = C + S \)).
3. Equilibrium Condition: \( AD = AS \) (or \( I = S \)).
4. Adjustment Mechanism:
- If \( AD > AS \), planned spending exceeds production, leading to inventory depletion; firms increase output until \( AD = AS \).
- If \( AD < AS \), output exceeds demand, leading to unintended inventory accumulation; firms reduce output until equilibrium is restored.

[Figure: Keynesian 45-degree cross diagram showing Y on X-axis, AD and AS on Y-axis, AS as a 45-degree line, AD starting from above the origin, and equilibrium point E where AD intersects AS]

Teacher's Note:
a) Clearly define AD and AS components.
b) Describe the disequilibrium situations (\( AD > AS \) and \( AD < AS \)) to show how equilibrium is attained.

SECTION C - 32 MARKS

Question 10

(i) State the law of variable proportions. Explain its three stages by using a diagram. [6]

Answer:
1. Law of Variable Proportions states that as the proportion of the variable factor is increased combined with a fixed factor, the marginal product of the variable factor initially increases, then starts declining, and eventually becomes negative.
2. Stage I (Increasing Returns): Total Product (TP) increases at an increasing rate, Marginal Product (MP) rises and reaches its maximum.
3. Stage II (Diminishing Returns): TP increases at a decreasing rate, MP falls continuously and becomes zero when TP is at its maximum.
4. Stage III (Negative Returns): TP starts declining, MP becomes negative.

[Figure: Two-panel production diagram showing TP curve rising, peaking, and falling in the upper panel, and corresponding MP and AP curves showing Stage I, Stage II separated where MP=AP, and Stage III where MP is negative]

Teacher's Note:
a) State the law with proper assumptions (short run, homogeneous variable factor units).
b) Clearly demarcate the three stages based on the behavior of MP and TP.

(ii) Briefly explain why the producer is comfortable in the second stage of production. [2]

Answer:
1. In the second stage, Marginal Product (MP) is positive but diminishing, and Total Product (TP) reaches its maximum point.
2. The rational producer operates in this stage because both Marginal Product and Average Product are positive and contributing efficiently to output, unlike Stage I (underutilization) and Stage III (overutilization/negative returns).

Teacher's Note:
a) Stage II is known as the stage of economic operation.
b) Explain that MP is falling but greater than zero, ensuring efficient utilization of fixed factors.

Question 11

(i) Differentiate between total utility and marginal utility. [2]

Answer:

Teacher's Note:
a) Distinguish clearly between aggregate and additional satisfaction.
b) Mention the mathematical relationship between TU and MU.

(ii) Explain the Consumer's equilibrium through Indifference curve approach with the help of a diagram. [6]

Answer:
1. Consumer equilibrium refers to a situation where a consumer maximizes satisfaction given their income and market prices of two goods.
2. Conditions for consumer equilibrium:
(a) Necessary condition: Marginal Rate of Substitution must equal the price ratio (\( MRS_{xy} = P_x / P_y \)).
(b) Sufficient condition: Indifference curve must be convex to the origin at the point of equilibrium.
3. Explanation: At the point of tangency between the budget line and the highest attainable indifference curve, the slope of the indifference curve equals the slope of the budget line.

[Figure: Indifference map with budget line AB, tangent to indifference curve IC2 at point E, showing equilibrium quantities of good X and good Y]

Teacher's Note:
a) State both equilibrium conditions clearly.
b) Explain why a consumer cannot be in equilibrium where the budget line only intersects an indifference curve.

OR

(i) Differentiate between increase in demand and contraction of demand with the help of diagrams. [2]

Answer:

Teacher's Note:
a) Emphasize the distinction between a shift in demand (change in demand) and movement along the demand curve (change in quantity demanded).
b) Mention rightward shift for increase and upward movement for contraction.

(ii) Explain four properties of Indifference curves. [6]

Answer:
1. Indifference curves slope downwards from left to right: To consume more of one good, the consumer must give up some units of the other good to maintain the same level of satisfaction.
2. Indifference curves are convex to the origin: This is due to the diminishing marginal rate of substitution (DMRS).
3. Higher indifference curves represent higher levels of satisfaction: A higher IC represents larger quantities of both goods or more of at least one good.
4. Indifference curves never intersect each other: If they intersect, it would violate the assumption of consistency and transitivity in consumer preferences.

Teacher's Note:
a) List all four standard properties with brief economic reasoning.
b) Explain why intersection of indifference curves leads to contradictory conclusions.

Question 12

(i) What is the difference between \( GDP_{mp} \) and \( NNP_{fc} \)? [2]

Answer:
1. \( GDP_{mp} \) (Gross Domestic Product at Market Price) is the market value of all final goods and services produced within the domestic territory of a country inclusive of depreciation and net indirect taxes.
2. \( NNP_{fc} \) (Net National Product at Factor Cost) is the total income earned by normal residents of a country as factor income, exclusive of depreciation and net indirect taxes.

Teacher's Note:
a) State the conversion formula: \( NNP_{fc} = GDP_{mp} - \text{Depreciation} + \text{NFIA} - \text{NIT} \).
b) Clearly highlight domestic versus national and market price versus factor cost differences.

(ii) Calculate Domestic Income and National Income from the following information: [6]

Answer:
Domestic Income (\( NDP_{fc} \)) = Wages & Salaries (Item 4) + Employer's contribution to social security schemes (Item 9) + Rent (Item 1) + Interest (Item 2) + Profits (Item 3) + Mixed income of self-employed (Item 8)
\( NDP_{fc} = 330 + 30 + 120 + 15 + 45 + 360 = \text{Rs. } 900 \text{ crore} \).
National Income (\( NNP_{fc} \)) = Domestic Income (\( NDP_{fc} \)) + Net Factor Income from Abroad (NFIA)
NFIA = Factor income earned abroad (Item 6) - Factor income paid abroad (Item 7) = \( 30 - 60 = (-)30 \) crore.
\( NNP_{fc} = 900 + (-30) = \text{Rs. } 870 \text{ crore} \).

Teacher's Note:
a) Use the income method to calculate \( NDP_{fc} \) first.
b) Add NFIA (Factor income earned abroad minus Factor income paid abroad) to get National Income.

OR

(i) Differentiate between personal income and national income. [2]

Answer:

Teacher's Note:
a) Personal Income includes transfer payments and excludes corporate savings and taxes.
b) National Income measures factor earnings only.

(ii) Calculate the \( GNP_{mp} \) and \( NDP_{fc} \) from the following data: [6]

Answer:
Using Expenditure Method:
\( GDP_{mp} \) = Private final consumption expenditure (6) + Government final consumption expenditure (1) + Net domestic capital formation (7) + Consumption of fixed capital (8) + Net Exports (Export (4) - Import (3))
\( Net\ Exports = 250 - 300 = (-)50 \)
\( GDP_{mp} = 1200 + 800 + 385 + 85 + (-50) = \text{Rs. } 2420 \text{ crore} \).
\( GNP_{mp} = GDP_{mp} + \text{NFIA (2)} = 2420 + (-10) = \text{Rs. } 2410 \text{ crore} \).
\( NDP_{fc} = GDP_{mp} - \text{Consumption of fixed capital (8)} - \text{Net Indirect Taxes (5)} \)
\( NDP_{fc} = 2420 - 85 - 70 = \text{Rs. } 2265 \text{ crore} \).

Teacher's Note:
a) Calculate \( GDP_{mp} \) first using the expenditure components.
b) Adjust for depreciation, NFIA, and net indirect taxes to arrive at the required aggregates.

Question 13

Read the passage given below and answer the questions that follow.
India is predominantly an agriculture based country. It is the second largest producer of wheat in the world and wheat export is also an important component in its international business transactions. Recently, Indian Government put a ban on the export of wheat to other countries to control inflation in the country. This decision of Indian Government may decrease the flow of foreign exchange in credit side of the balance of payments of our country in comparison to the debit side of it. This may affect the Balance of Payment as India has been following flexible exchange rate system, to some extent, since 1991-92.

(i) What is meant by balance of payments? [1]

Answer:
Balance of Payments (BOP) is a systematic statement of all economic transactions between the residents of a country and the rest of the world during a given period of time.

Teacher's Note:
a) BOP records current account and capital account transactions.
b) It must always balance in an accounting sense.

(ii) State any two causes of adverse balance of payments. [2]

Answer:
1. Heavy dependence on imports of essential goods like petroleum and capital goods.
2. Increase in international prices of imported goods resulting in a wider trade deficit.

Teacher's Note:
a) Adverse BOP implies a deficit in current account transactions.
b) Other causes include inflation and foreign capital outflow.

(iii) In the context of international business relations, what does flexible exchange rate system mean? [2]

Answer:
Flexible exchange rate system refers to a system where the exchange rate of a currency is determined freely by market forces of demand and supply of foreign exchange without central bank intervention.

Teacher's Note:
a) Also known as floating exchange rate.
b) Equilibrium is determined where demand for foreign exchange equals supply.

(iv) What is meant by net exports? [2]

Answer:
Net exports refer to the difference between the value of exports and the value of imports of goods and services of a country during a given period (\( Net\ Exports = Exports - Imports \)).

Teacher's Note:
a) It is a crucial component of aggregate demand in an open economy.
b) Positive net exports indicate a trade surplus, while negative net exports indicate a trade deficit.

(v) What economic variables are measured along x-axis and y-axis for the determination of foreign exchange rate? [1]

Answer:
Quantity of foreign exchange is measured along the X-axis, and the exchange rate (price of foreign currency in terms of domestic currency) is measured along the Y-axis.

Teacher's Note:
a) Standard market equilibrium graph convention applies.
b) The intersection of downward-sloping demand and upward-sloping supply of foreign exchange determines the equilibrium rate.