ISC Class 12 Economics Sample Paper 2025 with Solutions

SECTION A - 16 MARKS

Question 1

(i) Points K and T will NOT be attained by the consumer. Select the reason from the options given below. [1 Mark]
(a) K does not lie on any IC and entire money is not spent at T.
(b) K is beyond the financial capacity of the consumer and T provides a lower level of satisfaction.
(c) Equilibrium should be unique and that is point E.
(d) K gives more of both the goods A and B and T gives less B.

[Figure: Indifference curve graph showing budget line with consumer equilibrium at point E, point K lying above the budget line, and point T lying on a lower indifference curve below the budget line.]

Answer: (b) K is beyond the financial capacity of the consumer and T provides a lower level of satisfaction.

Point K lies outside the budget line, meaning it is unaffordable, while point T lies on a lower indifference curve representing lesser utility than the optimal point E.

Teacher's Note:
a) Consumer equilibrium occurs where the budget line is tangent to the highest possible indifference curve.
b) Students often confuse unreachable bundles with suboptimal bundles lying within the budget set.

(ii) Utility maximising consumers would like to decrease the consumption when [1 Mark]
(a) MU_x = P_x
(b) MU_x > P_x
(c) MU_x < P_x
(d) MU_x = P_y

Answer: (c) MU_x < P_x

When marginal utility is less than price, the consumer gains less satisfaction than the sacrifice made in terms of money spent, prompting them to reduce consumption.

Teacher's Note:
a) Consumer equilibrium in case of a single commodity is attained when marginal utility equals price (MU_x = P_x).
b) Remind students that if MU > P, consumption should be increased, and if MU < P, it should be decreased.

(iii) With reference to the diagram shown above, select the reason for the movement from point M to N from the following options. [1 Mark]
(a) Increase in the real income of the consumer and rise in relative price of the commodity.
(b) Increase in the real income of the consumer and fall in relative price of the commodity.
(c) Decrease in the real income of the consumer and rise in relative price of the commodity.
(d) Decrease in the real income of the consumer and fall in relative price of the commodity.

[Figure: Demand curve downward sloping from point M to point N, showing expansion of demand along the same demand curve as price falls and quantity increases.]

Answer: (b) Increase in the real income of the consumer and fall in relative price of the commodity.

Movement from M to N represents an expansion of demand along the same demand curve caused by a fall in the price of the commodity, which increases the consumer's real purchasing power.

Teacher's Note:
a) Movement along the demand curve is caused by a change in the price of the commodity itself.
b) A fall in price leads to an increase in real income (real purchasing power), resulting in higher quantity demanded.

(iv) Naseer is planning to buy a car for his family. Observe the image shown below and select the MOST rational reaction of Naseer. [1 Mark]
(a) Naseer will not change his decision to buy a car.
(b) He will postpone his plan to buy a car.
(c) Naseer will become indecisive.
(d) He will decide to purchase two cars instead of one.

[Figure: Cartoon showing a petrol pump nozzle pointing upward like a graph line representing a steep rise in the price of petrol, alongside a car parked at the station.]

Answer: (b) He will postpone his plan to buy a car.

A continuous rise in petrol prices increases the running cost of owning a car, making consumers defer their purchase decisions.

Teacher's Note:
a) Application-based questions require analyzing external economic shocks on consumer behavior.
b) Rising complementary goods prices (like petrol) reduce the demand for durable goods (like cars).

(v) Which one of the following statements is CORRECT with reference to government budget? [1 Mark]
(a) Interest paid on government's borrowing reduces liability of the government.
(b) Financial aid received from the World Bank for cyclone affected areas is revenue receipt.
(c) Grants given by the central government to the state government is capital expenditure.
(d) Profits of BHEL, a PSU, increases the assets of the government.

Answer: (b) Financial aid received from the World Bank for cyclone affected areas is revenue receipt.

Grants and financial aid that do not create any liability or reduce financial assets are classified under revenue receipts.

Teacher's Note:
a) Revenue receipts neither create liabilities nor reduce assets.
b) Interest payment is a revenue expenditure that does not reduce the principal liability.

(vi) If the value of US Dollar increases continuously in terms of Yen, it will result in [1 Mark]
(a) more import from USA by Japan.
(b) more import from Japan by USA.
(c) more export of USA to Japan.
(d) less export of Japan to USA.

Answer: (b) more import from Japan by USA.

When the US Dollar appreciates against the Yen, Japanese goods become cheaper for American consumers, leading to increased imports from Japan by the USA.

Teacher's Note:
a) Currency appreciation makes domestic goods expensive abroad and foreign goods cheaper at home.
b) A stronger US dollar increases American purchasing power vis-a-vis Japanese goods.

(vii) Sometimes, a firm considers the action and reaction of its rival firms while determining its price and output levels. Which market form does such firm belong to? [1 Mark]
(a) Perfect Competition
(b) Monopoly
(c) Monopolistic competition
(d) Oligopoly

Answer: (d) Oligopoly

Interdependence among firms is the defining characteristic of an oligopolistic market structure.

Teacher's Note:
a) Oligopoly features a small number of large firms where each firm's decision directly affects its rivals.
b) Perfect competition and monopoly do not involve strategic rivalry between firms.

(viii) Given below are two statements marked as Assertion and Reason. Read the statements carefully and choose the correct option. [1 Mark]
Assertion: A firm is able to sell more quantity of a commodity by reducing its price.
Reason: As it sells additional units of the commodity at a lower price, the firm's marginal revenue will be less than its average revenue.
(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: (b) Both Assertion and Reason are true but Reason is not the correct explanation of Assertion.

Both statements are economically correct principles of demand and revenue curves, but the reason explains revenue behavior rather than why a firm sells more at a lower price.

Teacher's Note:
a) A downward sloping demand curve ensures inverse relation between price and quantity demanded.
b) Marginal revenue lying below average revenue is a mathematical property of falling demand curves.

(ix) Given below are two statements marked as Assertion and Reason. Read the statements carefully and choose the correct option. [1 Mark]
Assertion: GST is a kind of Proportional tax.
Reason: The tax rate remains same irrespective of the level of income of the people.
(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.

Goods and Services Tax (GST) is levied at a flat percentage rate on commodities regardless of the consumer's income level, making it proportional with respect to the tax rate.

Teacher's Note:
a) A proportional tax applies a constant tax rate across all income levels.
b) Students should note that while GST is proportional in rate, indirect taxes can be regressive in overall burden on lower-income groups.

(x) Oligopoly differs from monopolistic competition on the basis of number of sellers. State any other difference between these two market forms. [1 Mark]

Answer:

Teacher's Note:
a) Ensure students state differences using a clear common basis of contrast.
b) Product differentiation and degree of interdependence are key distinguishing features.

(xi) APC can be greater than one, but MPC is always less than one. Give a reason to justify this phenomenon. [1 Mark]

Answer:
When consumption exceeds national income (\( C > Y \)), the Average Propensity to Consume (\( APC = C / Y \)) is greater than one. However, the Marginal Propensity to Consume (\( MPC = \Delta C / \Delta Y \)) is always less than one because the increase in consumption is always less than the increase in income, as a portion of additional income is saved.

Teacher's Note:
a) APC can exceed 1 at low levels of income due to dissaving (living off past savings or borrowings).
b) MPC is always between 0 and 1 because individuals do not consume their entire additional income.

(xii) If aggregate demand exceeds aggregate supply in a situation of full employment, what will be its impact on the economy? [1 Mark]

Answer:
It will generate an inflationary gap in the economy, leading to a rise in the general price level and inflation without any increase in real output.

Teacher's Note:
a) Excess demand at full employment cannot increase real output since all resources are fully employed.
b) The entire excess demand manifests as price inflation.

(xiii) If autonomous payments are higher than autonomous receipts, how can BOP be brought into balance? [1 Mark]

Answer:
The deficit in the Balance of Payments can be brought into balance through accommodating capital receipts, such as borrowing from abroad or running down official foreign exchange reserves.

Teacher's Note:
a) Autonomous transactions are undertaken for economic motives, independent of BOP status.
b) Accommodating transactions are official reserve transactions undertaken to restore balance.

(xiv) Monopsony is regarded as a buyers' market. Do you agree? Give a reason. [1 Mark]

Answer:
Yes, monopsony is regarded as a buyers' market because there is only a single buyer in the market who has dominant influence over the determination of the price and quantity of the product or factor purchased.

Teacher's Note:
a) Monopsony represents market power concentrated on the demand side.
b) Contrast this with monopoly, which is a sellers' market.

(xv) Illustrate that Investment multiplier is inversely proportional to MPS. [1 Mark]

Answer:
The investment multiplier is expressed as \( k = 1 / MPS \). Since MPS is in the denominator, a higher marginal propensity to save reduces the multiplier value (\( k \)), while a lower MPS raises it.

Teacher's Note:
a) Multiplier and MPS share an inverse mathematical relationship.
b) Higher leakages in the form of savings result in a smaller income propagation effect.

(xvi) Cite one measure to overcome a deflationary gap. [1 Mark]

Answer:
The central bank can reduce the repo rate and bank rate to encourage borrowing and investment in the economy.

Teacher's Note:
a) Deflationary gap is caused by deficient demand.
b) Monetary policy measures (like lowering CRR, SLR, repo rate) and fiscal measures (increasing government expenditure, cutting taxes) help correct it.

SECTION B - 32 MARKS

Question 2

(i) Prices of air conditioners and refrigerators have shot up in the new year as consumer durables makers pass on the impact of rising raw material costs and higher freight charges to customers, while home appliances like washing machines may witness 5-10 per cent price hike later this month or by March. (Source: The Economic Times)
Explain the behaviour of supply of this consumer durable. Illustrate the same in a diagram. [2 Marks]

Answer:
Supply of the consumer durable will decrease because of an increase in the cost of production (rising raw material costs and higher freight charges). Producers will supply a lower quantity at the same price, or the same quantity only at a higher price. Consequently, the supply curve shifts leftwards from \( S \) to \( S_1 \).

[Figure: Leftward shift of the supply curve from \( S \) to \( S_1 \) showing higher price \( P_1 \) and lower quantity \( Q_1 \).]

Teacher's Note:
a) An increase in input costs shifts the supply curve to the left.
b) Students must label axes (Price and Quantity) and arrows correctly in the diagram.

(ii) If the price hike in the market is about 10% and this leads to the fall in the quantity demanded by 12%, calculate the price elasticity of demand. Mention the degree of price elasticity of demand. [2 Marks]

Answer:
\( e_p = \frac{\text{\% change in Quantity demanded}}{\text{\% change in price}} = \frac{12}{10} = 1.2 \)
Since \( e_p > 1 \), the demand is relatively elastic.

Teacher's Note:
a) State the formula clearly before substituting percentage values.
b) Conclude with the correct degree of elasticity based on the numerical value.

Question 3

(i) Union Finance Minister Mrs. Nirmala Sitharaman announced during her Budget speech that the Centre would reduce its fiscal deficit to 5.1% of gross GDP in 2024 - 25. (The present fiscal deficit is 5.8% of GDP.) (Source: Union budget 2024-25)
What would be the impact of this decision on government borrowing? Why? [2 Marks]

Answer:
The decision to reduce the fiscal deficit will lead to a decrease in government borrowing. This is because fiscal deficit represents the total borrowing requirements of the government (Fiscal Deficit = Total Expenditure - Total Receipts excluding borrowings). Therefore, a lower fiscal deficit directly implies reduced borrowing.

Teacher's Note:
a) Fiscal deficit is identically equal to total borrowings and other liabilities of the government.
b) Lowering the fiscal deficit curbs inflationary pressures and macroeconomic instability.

(ii) It is believed that increase in public expenditure leads to Inflation. Under what circumstances, may a government consider it prudent to increase public expenditure to control inflation? [2 Marks]

Answer:
During emergencies like natural calamities or pandemics (such as COVID-19), supply chains get severely disrupted, causing cost-push inflation. In such unusual situations, the government may prudently increase public expenditure by providing subsidies to producers of basic necessities to reduce production costs and control upward price pressures.

Teacher's Note:
a) Public expenditure normally increases aggregate demand, but supply-side subsidies help lower production costs.
b) Targeted government spending can alleviate structural bottlenecks during crises.

Question 4

(i) Given that fixed cost is Rs. 30. Calculate TVC and TC from the following data. [2 Marks]

Answer:

Working Notes:
1. TVC is the sum of Marginal Costs up to that level of output (\( \Sigma MC \)).
2. TC = Fixed Cost (Rs. 30) + TVC.

Teacher's Note:
a) At zero output, TVC is zero and TC equals Total Fixed Cost.
b) Subsequent TVC values are obtained by cumulatively adding MC values.

(ii) Cite any two differences between Returns to Factor and Returns to Scale. [2 Marks]

Answer:

Teacher's Note:
a) Returns to factor studies output changes when variable factor is changed keeping fixed factors constant.
b) Returns to scale examines output changes when all factors of production are varied simultaneously.

OR

(i) Draw a well labelled diagram to show AFC and AC curves. State the nature of each curve. [2 Marks]

Answer:
AFC curve is a rectangular hyperbola showing that total fixed cost remains constant at all levels of output. AC curve is a U-shaped curve reflecting the law of variable proportions.

[Figure: AFC curve sloping downwards as a rectangular hyperbola and AC curve shaped like a U.]

Teacher's Note:
a) AFC asymptotically approaches both axes but never touches them.
b) AC is U-shaped due to operation of increasing, constant, and diminishing returns to a factor.

(ii) Study the data given below and identify the laws followed in the production of A and B depicted in the Table I and Table II. Justify your answer with a reason for each. [2 Marks]

Answer:
Table I depicts the Law of Variable Proportions because output increases due to a change in the variable factor (labour) while fixed factors (machines) remain constant, altering the factor proportion. Table II depicts the Law of Returns to Scale because all factors of production (machines and labour) are increased in the same proportion (doubling and tripling), maintaining a constant factor ratio (\( K/L = 1/2 \)).

Teacher's Note:
a) Check whether factor ratio changes or remains constant.
b) Variable proportions apply to short-run production analysis.

Question 5

(i) A perfectly competitive firm always enjoys normal profit in the long run irrespective of the situation it faces in the short run. Discuss the statement in brief. [2 Marks]

Answer:
In the long run, freedom of entry and exit ensures that supernormal profits attract new firms, increasing market supply and lowering prices until abnormal profits are wiped out. Conversely, short-run losses drive inefficient firms out of the industry, reducing supply and raising prices until remaining firms earn only normal profits (\( P = AC \)).

Teacher's Note:
a) Long-run equilibrium under perfect competition always yields zero economic profit (normal profit).
b) Market forces of entry and exit automatically eliminate short-run disequilibrium profits.

(ii) A car company 'W' hired an international cricket player for its endorsement in India while two other car companies 'Y' and 'R' hired two famous Bollywood film stars for this purpose. Explain the feature of the competitive market indicated above. [2 Marks]

Answer:
This highlights the feature of non-price competition under an oligopoly. Due to intense competition and interdependence among firms, companies rely heavily on heavy advertising, sales promotion, and celebrity endorsements rather than price cuts to capture market share.

Teacher's Note:
a) Oligopolistic firms avoid price wars to prevent mutual ruin.
b) Non-price competition distinguishes oligopoly and monopolistic competition from perfect competition.

Question 6

(i) A firm under perfect competition is a price taker but the industry is the price maker. Defend or refute this statement by giving a reason. [2 Marks]

Answer:
The statement is defended. Market price is determined by the interaction of total market demand and market supply, making the industry the price maker. An individual firm has an insignificant market share and cannot influence the price, so it must accept the market-determined price.

Teacher's Note:
a) Perfectly competitive firms face a perfectly elastic demand curve.
b) The industry sets the price; individual firms are quantity adjusters.

(ii) Normal profits for a firm imply that the firm is breaking even. Explain. [2 Marks]

Answer:
Normal profit is the minimum profit necessary to keep an entrepreneur in business and is included in total cost. A firm breaks even when total revenue equals total cost (\( TR = TC \)), yielding neither economic profit nor loss, which coincides with earning normal profits.

Teacher's Note:
a) Break-even point occurs where price equals average cost (\( P = AC \)).
b) Normal profit is treated as an implicit cost of production.

Question 7

(i) India has been operating on a managed floating exchange rate regime since March 1993. Explain the statement. [2 Marks]

Answer:
Under a managed floating exchange rate system, the exchange rate is primarily determined by market forces of demand and supply of foreign exchange. However, the central bank (RBI) intervenes by purchasing or selling foreign currencies to curb excessive exchange rate volatility and maintain stability.

Teacher's Note:
a) Managed floating combines features of both flexible and fixed exchange rate systems.
b) It is also known as dirty floating when central bank intervention is covert.

(ii) List different components of Balance of Payment on current account and capital account. [2 Marks]

Answer:
Components of the current account are: (1) Export and import of goods (visible trade), (2) Export and import of services (invisible trade), (3) Income receipts and payments, and (4) Unilateral transfers. Components of the capital account are: (1) Foreign Direct Investment (FDI), (2) Portfolio investment, and (3) External borrowings and assistance.

Teacher's Note:
a) Current account records transactions that affect the income and output of a country.
b) Capital account records transactions that alter the assets or liabilities of residents and government.

Question 8

(i) With the help of a reason, explain why the following are included in calculation of National Income. [2 Marks]
(a) Goods supplied free of cost by the government
(b) Own account production

Answer:
(a) Goods supplied free of cost by the government are included because they form part of government final consumption expenditure.
(b) Own account production (such as production for self-consumption) is included because it contributes to the current flow of final goods and services in the economy.

Teacher's Note:
a) Imputed values are added for non-marketed output to prevent underestimation of national income.
b) Government free services are evaluated at cost to the government.

(ii) Outline any two precautions that should be taken in estimation of National income by Expenditure method. [2 Marks]

Answer:
1. Expenditure on intermediate goods must be excluded to avoid double counting.
2. Expenditure on second-hand goods is excluded because their value was already counted in the year of their original production.

Teacher's Note:
a) Only final expenditure is included in national income estimation.
b) Financial assets (shares and bonds) transfer transactions must be excluded as they do not represent production of goods and services.

OR

(i) Differentiate between Personal income and Private income. [2 Marks]

Answer:

Teacher's Note:
a) Personal Income = Private Income - Corporate Tax - Undistributed Profits + Transfer Payments.
b) Private income includes all incomes generated within or received by the private sector.

(ii) Why are net exports added in the total expenditure in measuring National income by Expenditure method? [2 Marks]

Answer:
Exports represent foreign expenditure on domestically produced goods and must be added, while imports represent domestic expenditure on foreign goods and must be subtracted. Therefore, net exports (\( X - M \)) are added to total domestic expenditure to arrive at Gross Domestic Product.

Teacher's Note:
a) Expenditure method sums up all final expenditures within the domestic economy.
b) Adjusting for net exports ensures foreign trade balance is correctly accounted for.

Question 9 [4 Marks]

With the help of a diagram, determine the equilibrium level of output and income by using Aggregate demand and Aggregate supply approach. [4 Marks]

Answer:
Equilibrium income is determined at the point where Aggregate Demand (\( AD = C + I \)) equals Aggregate Supply (\( AS = Y \)), shown at point E where the AD curve intersects the 45-degree line. If \( AD > AS \), unintended inventory depletion forces producers to increase output until equilibrium is restored. If \( AD < AS \), unintended inventory accumulation causes output to fall.

[Figure: Keynesian cross diagram showing 45-degree AS line, AD curve (\( C+I \)), and equilibrium point \( Y_e \) where \( AD = AS \).]

Teacher's Note:
a) Clearly label axes as Income/Output on X-axis and Aggregate Demand/Supply on Y-axis.
b) Explain adjustment mechanisms when AD does not equal AS.

SECTION C - 32 MARKS

Question 10

(i) What are Average product and Marginal product? With the help of a suitable diagram, discuss the relationship between Average product and Marginal Product. [6 Marks]

Answer:
Average Product (\( AP \)) is total product per unit of the variable factor (\( AP = TP / L \)). Marginal Product (\( MP \)) is the change in total product resulting from a unit change in the variable factor (\( MP = \Delta TP / \Delta L \)).
Relationship: (1) When \( MP > AP \), \( AP \) rises. (2) When \( MP = AP \), \( AP \) is at its maximum. (3) When \( MP < AP \), \( AP \) falls. (4) \( MP \) can become zero or negative, but \( AP \) remains positive as long as total product is positive.

[Figure: AP and MP curves divided into three stages of production, showing MP intersecting AP at its maximum point.]

Teacher's Note:
a) The relationship between AP and MP is a standard application of the average-marginal mathematical rule.
b) Ensure diagrams show the three distinct stages of the Law of Variable Proportions.

(ii) Which stage of the Law of Variable proportions will be the best for the producer? Explain with a reason. [2 Marks]

Answer:
Stage II (Stage of Diminishing Returns) is the best for a rational producer. Stage III is eliminated because \( MP < o \), and Stage I is avoided because fixed factors are underutilized and AP is still rising over the entire stage. A rational producer will operate only in Stage II where marginal productivity is positive but diminishing.

Teacher's Note:
a) Rational producers operate where marginal product is declining but positive.
b) Both Stage I and Stage III are economically inefficient.

Question 11

(i) Will you defend or refute the case depicted in the following diagram? Provide a rationale in support of your view. [2 Marks]

[Figure: Graph showing a straight line downward sloping Indifference Curve between Good A and Good B.]

Answer:
The case depicted in the diagram is refuted. A straight-line indifference curve implies a constant Marginal Rate of Substitution (MRS), whereas standard indifference curves for imperfect substitutes are convex to the origin due to the assumption of Diminishing Marginal Rate of Substitution (DMRS).

Teacher's Note:
a) Convexity of IC reflects DMRS.
b) A straight-line IC represents perfect substitutes.

(ii) Name the law which deals with the behaviour of marginal utility when the consumer consumes a commodity continuously at a given time. Explain this law with the help of a diagram. [6 Marks]

Answer:
The law is the Law of Diminishing Marginal Utility (DMU). It states that as a consumer consumes successive units of a commodity continuously, the marginal utility derived from each additional unit goes on declining.
Assumptions: cardinal measurement of utility, homogeneous units, and continuous consumption.
Explanation: As consumption increases up to saturation point \( Q \), Total Utility (TU) increases at a diminishing rate while Marginal Utility (MU) falls. Beyond point \( Q \), TU starts falling and MU becomes negative.

[Figure: Two panels showing Total Utility rising to a maximum then falling (Figure 1) and Marginal Utility sloping downwards, intersecting the X-axis and becoming negative (Figure 2).]

Teacher's Note:
a) State assumptions clearly alongside the definition of the law.
b) Explain the interrelationship between TU and MU curves.

Question 12

(i) Discuss the categories of Factor income considered in calculating the National income by Income method. [4 Marks]

Answer:
Factor incomes are broadly classified into three categories: (1) Compensation of Employees (COE) - wages, salaries, and employer contributions to social security; (2) Operating Surplus - income from property and entrepreneurship, comprising rent, interest, profit, and royalty; and (3) Mixed Income of Self-Employed - earnings of self-employed workers using their own labor and capital.

Teacher's Note:
a) Summing these three categories gives Net Domestic Product at Factor Cost (\( NDP_{fc} \)).
b) Transfer incomes are strictly excluded.

(ii) Calculate GDP_mp and NNP_fc from the following data. [4 Marks]

Answer:
\( NDP_{fc} = \text{Wages & salaries} + \text{Employer's contribution} + \text{Rent} + \text{Interest} + \text{Profits} + \text{Royalty} \)
\( NDP_{fc} = 170 + 30 + 10 + 20 + 25 + 5 = \text{Rs. } 260 \text{ Crore} \)
\( NNP_{fc} = NDP_{fc} + \text{NFIA} = 260 + (-3) = \text{Rs. } 257 \text{ Crore} \)
\( GDP_{mp} = NDP_{fc} + \text{Consumption of fixed capital} + \text{Net indirect tax} \)
\( GDP_{mp} = 260 + 34 + 38 = \text{Rs. } 332 \text{ Crore} \)

Teacher's Note:
a) Dividend is a part of profit and should not be added separately if profits are already included.
b) Convert domestic product at factor cost to national product at market price using standard aggregates formulas.

OR

(i) Explain the different components of Final Expenditure in calculating the National income by Expenditure method. [4 Marks]

Answer:
Components of final expenditure are: (1) Private Final Consumption Expenditure (PFCE) by households; (2) Government Final Consumption Expenditure (GFCE); (3) Gross Domestic Capital Formation (GDCF) - investment in fixed capital and inventory; and (4) Net Exports (exports minus imports).

Teacher's Note:
a) Summing these components yields Gross Domestic Product at Market Price (\( GDP_{mp} \)).
b) Mention gross fixed capital formation and change in stock as sub-components of investment.

(ii) Calculate GNP_mp using Income method and Expenditure method from the following data. [4 Marks]

Answer:
Income Method:
\( NDP_{fc} = COE (\text{viii}) + \text{Rent (iii)} + \text{Interest (iv)} + \text{Profit (vi)} = 800 + 40 + 60 + 120 = \text{Rs. } 1020 \text{ Crore} \)
\( GNP_{mp} = NDP_{fc} + \text{Depreciation (x)} + \text{NIT (ix)} + \text{NFIA (xi)} = 1020 + 20 + 100 + (-30) = \text{Rs. } 1110 \text{ Crore} \)

Expenditure Method:
\( NDP_{fc} = \text{PFCE (i)} + \text{GFCE (v)} + [\text{NDCF (vii)} + \text{Net Exports (ii)}] - \text{NIT (ix)} = 800 + 200 + [100 + 20] - 100 = \text{Rs. } 1020 \text{ Crore} \)
\( GNP_{mp} = NDP_{fc} + \text{Depreciation (x)} + \text{NIT (ix)} + \text{NFIA (xi)} = 1020 + 20 + 100 + (-30) = \text{Rs. } 1110 \text{ Crore} \)

Teacher's Note:
a) Both methods must yield identical national income aggregates.
b) Check treatment of depreciation and net indirect taxes carefully.

Question 13

Read the passage given below and answer the questions that follow.
In India, Fixed deposits have long been a favourite investment choice of people especially senior citizens as it promises steady returns. It attracts those people who are seeking a stable income. But it's an illusion in the period of inflation.
Inflation is the rate at which the general level of prices for goods and services rises, subsequently eroding the purchasing power of money. In simple terms, what money could buy today, it might not a few years down the line. Fixed deposits are financial instruments offered by banks where you deposit a lump sum amount for a fixed period at a predetermined rate of interest. Consider an investment of Rs 1 crore in a fixed deposit at a 6% annual interest rate and the annual rate of inflation is 5%. By the 10th year your pre inflation return is 1.79 crore, but post inflation it's just 1.10 crore. The nominal value of investment in fixed deposits may appear to grow, inflation significantly diminishes their real value and purchasing power over time. (Source: https://www.linkedin.com)

[Figure: Table showing FD investment growth over years 1, 10, and 20 comparing beginning amount, interest earned, end of year total, and adjusted for inflation.]

(i) What is the theme of the extract? [2 Marks]

Answer:
The theme of the extract is that fixed deposits are an illusion during periods of inflation because inflation erodes the purchasing power of money, significantly diminishing the real value of returns over time.

Teacher's Note:
a) Comprehension questions require extracting the core message in one's own words.
b) Highlight the distinction between nominal returns and real purchasing power.

(ii) Differentiate between Demand pull and Cost push inflation. [2 Marks]

Answer:
Demand-pull inflation originates from an excess of aggregate demand over aggregate supply in the economy. Cost-push inflation is caused by an increase in the cost of production due to rising wage rates, raw material prices, or profit margins.

Teacher's Note:
a) Demand-pull is characterized as "too much money chasing too few goods".
b) Cost-push arises from supply-side shocks and factor cost increases.

(iii) What are the demand deposits and time deposits? [2 Marks]

Answer:
Demand deposits are bank deposits that can be withdrawn by depositors at any time by cheques or orders (e.g., current and savings account deposits). Time deposits are deposits that are locked in for a fixed maturity period and cannot be withdrawn prematurely without penalty or cheque facility (e.g., fixed deposits and recurring deposits).

Teacher's Note:
a) Demand deposits form part of narrow money (\( M_1 \)).
b) Time deposits are included in broader measures of money supply like \( M_3 \).

(iv) Since 1998 RBI has been using new measures of money supply, \( M_0 \), \( M_1 \), \( M_2 \) and \( M_3 \). Which one of these measures incorporates fixed deposit as one of its components? Mention the other components of that measure. [2 Marks]

Answer:
\( M_3 \) incorporates fixed deposits. The other components of \( M_3 \) are currency held by the public (\( C \)), demand deposits with commercial banks (\( DD \), and other deposits with the RBI (\( OD \)).

Teacher's Note:
a) \( M_3 \) is known as aggregate monetary resources or broad money.
b) Formula: \( M_3 = M_1 + \text{Net Time Deposits with commercial banks} \).