ISC Class 12 Economics Sample Paper 2027 with Solutions

SECTION A - 16 MARKS

Question 1

(i) Study the diagram given below and choose the correct option.
With an increase in income, the demand for an inferior good will move from point: [1 Mark]
(a) A to B.
(b) B to C.
(c) C to B.
(d) B to A.

[Figure: Demand and income axes showing demand curve shifting leftwards from D to D1, with points A, B, C, D marked on different curves corresponding to income levels.]

Answer: (C) C to B.

Teacher's Note:
a) For an inferior good, demand is inversely related to consumer income, shifting leftward when income rises.
b) Ensure students read graph axes and shifts carefully before identifying points.

(ii) The supply of a commodity will be relatively inelastic when: [1 Mark]
(a) the producer is a risk averter.
(b) the product is durable in nature.
(c) modern technology is used in production.
(d) the product is supplied over a long period.

Answer: (a) the producer is a risk averter.

Teacher's Note:
a) Risk-averse producers are hesitant to significantly alter production levels in response to price changes, making supply relatively inelastic.
b) Perishable goods, short time horizons, and lack of storage also contribute to inelastic supply.

(iii) Sometimes a firm can sell its product at different prices to different buyers at the same time.
Which of the following market forms supports this practice? [1 Mark]
(a) Oligopoly
(b) Monopoly
(c) Monopsony
(d) Monopolistic competition

Answer: (b) Monopoly

Teacher's Note:
a) Price discrimination is a key characteristic of a monopoly market where a single seller charges different prices to different consumers for the same product.
b) Perfect competition and monopolistic competition prevent price discrimination due to the presence of many buyers and sellers.

(iv) A perfectly competitive firm must close its production in the short run when: [1 Mark]
(a) marginal revenue is less than average cost.
(b) marginal revenue is less than marginal cost.
(c) average variable cost is less than average cost.
(d) average revenue is less than average variable cost.

Answer: (d) average revenue is less than average variable cost.

Teacher's Note:
a) The shutdown point in the short run occurs when price (or average revenue) falls below average variable cost.
b) If price covers variable costs and a part of fixed costs, it is rational to continue operating in the short run.

(v) Which of the following statements is correct in the context of Keynesian break-even point? [1 Mark]
(a) APC < 1
(b) APS > 1
(c) APS = 0
(d) APC = 0

Answer: (c) APS = 0

Teacher's Note:
a) At the break-even point, consumption equals income (C = Y), meaning total savings is zero, so average propensity to save is zero.
b) Concurrently, at this point, APC equals 1.

(vi) 'The RBI delivered its first rate cut since Feb. 2025 on Friday, lowering the policy repo rate by 25 basis points to 5.25%.'
(Source: The Times of India, Saturday, December 6, 2025)
Which one of the following will MOST LIKELY be the impact of this move on Indian economy? [1 Mark]
(a) Economic growth will accelerate.
(b) Loanable fund will become cheap.
(c) Fixed deposit interest rate will fall.
(d) Consumers' purchasing power will increase.

Answer: (b) Loanable fund will become cheap.

Teacher's Note:
a) A reduction in the repo rate directly lowers the borrowing costs for commercial banks, making loanable funds cheaper for borrowers.
b) While economic growth may be stimulated eventually, cheaper loanable funds is the immediate primary mechanism.

(vii) The table given below shows the Total Utility (TU) that a consumer derives by consuming slices of pizza:

At which level of consumption does the marginal utility begin to diminish? [1 Mark]
(a) 1^st slice
(b) 2^nd slice
(c) 5^th slice
(d) 6^th slice

Answer: (b) 2^nd slice

Teacher's Note:
a) Marginal utility (MU) for the 1st slice is 12, for the 2nd is 10 (22 - 12), and for the 3rd is 8 (30 - 22). Thus MU begins diminishing at the 2nd slice.
b) Always calculate successive marginal utilities (Delta TU / Delta Q) to locate the exact point of diminishing returns.

(viii) Given below are two statements marked Assertion and Reason. Read the statements carefully and choose the correct option.
Assertion: The standard of living of a country may fall even if its nominal per capita income rises.
Reason: Nominal per capita income does not adjust for inflation. [1 Mark]
(a) Both Assertion and Reason are true, and Reason is the correct explanation of Assertion.
(b) Both Assertion and Reason are true, but Reason is not the correct explanation of Assertion.
(c) Assertion is true but Reason is false.
(d) Both Assertion and Reason are false.

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

Teacher's Note:
a) If inflation rate exceeds the growth rate of nominal per capita income, real income falls, lowering the standard of living.
b) Nominal income reflects current prices and does not account for changes in the purchasing power of money caused by inflation.

(ix) Given below are two statements marked Assertion and Reason. Read the statements carefully and choose the correct option.
Assertion: The demand curve under oligopoly is indeterminate.
Reason: MR curve is always discontinuous in oligopoly. [1 Mark]
(a) Both Assertion and Reason are true, and Reason is the correct explanation of Assertion.
(b) Both Assertion and Reason are true, but Reason is not the correct explanation of Assertion.
(c) Assertion is true but Reason is false.
(d) Both Assertion and Reason are false.

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

Teacher's Note:
a) The oligopoly demand curve is indeterminate due to rival firms' unpredictable reactions, leading to a kinked demand curve and a discontinuous marginal revenue curve, but the reason states MR is "always" discontinuous which is specific to the kinked demand model.
b) Students must understand that indeterminacy arises from strategic interdependence among firms.

(x) 'The Summary of Union Budget 2026-27 confirms the absolute fiscal deficit is projected at Rs. 16.96 lakh crore.'
(Source: Government of India, Ministry of Finance (2026) Budget at a glance 2026-27)
Which of the following steps may be adopted by the government to meet the deficit? [1 Mark]
(a) Sale of Treasury Bills to the RBI
(b) Repurchase of bonds from the public
(c) Salary hike for government employees
(d) Reduction of income tax rate on the high-income group

Answer: (a) Sale of Treasury Bills to the RBI

Teacher's Note:
a) Selling treasury bills to the central bank (deficit financing) is a primary borrowing method used by the government to finance its fiscal deficit.
b) Options (b), (c), and (d) either increase expenditure or reduce revenue, worsening the deficit.

(xi) What will be the value of MPS if the change in income is twice the change in investment expenditure? [1 Mark]

Answer:
Given, Delta Y = 2 Delta I
Therefore, Income multiplier k = Delta Y / Delta I = 2
We know that multiplier k = 1 / MPS
2 = 1 / MPS
MPS = 1 / 2 = 0.5

Teacher's Note:
a) Establish the relationship between the multiplier and change in income versus change in investment.
b) Use the inverse relationship between the multiplier (k) and Marginal Propensity to Save (MPS).

(xii) What is sinking fund? [1 Mark]

Answer: Sinking Fund is a debt redemption method in which the government deposits a fixed equal amount every year into a separate fund. These deposits earn interest and gradually accumulate over time which can be used to repay public loan.

Teacher's Note:
a) A sinking fund is created by the government as a systematic way to accumulate reserves for future debt repayment.
b) Mentioning regular contributions and interest earnings is essential for full credit.

(xiii) Study the data given below and answer the question that follows.

(Source: website.rbi.org.in)
Compare the trend of CRR and SLR over the period shown above. [1 Mark]

Answer: CRR falls whereas SLR remains unchanged.

Teacher's Note:
a) Cash Reserve Ratio (CRR) shows a declining trend from 3.75 percent to 3.00 percent over the given period.
b) Statutory Liquidity Ratio (SLR) remains constant at 18.00 percent throughout.

(xiv) 'Under Indira Gandhi National Old Age Pension Scheme, a monthly pension of Rs. 200/- is given to elderly aged 60-79 years belonging to BPL category.'
(Source: pib.gov.in)
This monthly pension scheme contributes to the growth of GDP in India.
Defend or refute the statement by giving a valid reason. [1 Mark]

Answer: This statement is refuted. Monthly Pension Scheme does not directly contribute to the GDP as it is a transfer payment.
Or
This statement is defended. Monthly Pension Scheme may cause increase in demand for goods and services which will stimulate the production and hence growth in GDP. Therefore, it indirectly contributes to the growth of GDP.

Teacher's Note:
a) Examiners accept either a defense or refutation provided a logical economic justification is provided.
b) Refutation focuses on pensions being transfer payments, whereas defense highlights the multiplier effect of increased consumption demand.

(xv) State the Law of Diminishing Marginal Utility. [1 Mark]

Answer: With a continuous increase in the consumption of a commodity, total utility increases at a diminishing rate, i.e., marginal utility diminishes.

Teacher's Note:
a) The law states that as consumption of a good increases, the extra satisfaction derived from each additional unit declines.
b) Key terms like "diminishing rate" or "marginal utility diminishes" must be included.

(xvi) Briefly discuss whether the image shown above depicts Returns to Scale or Returns to a Factor. [1 Mark]

[Figure: Two illustrations. Left: 1 Labourer + 1 Handloom = 1 Saree. Right: 2 Labourers + 1 Handloom = 3 Sarees.]

Answer: The image depicts the law of Returns to a Factor. Here production (number of sarees) has increased due to increase in labour (L) from one labourer to two labourers, but the number of handlooms, i.e., the capital (K) remains unaltered. Here K/L ratio is variable.

Teacher's Note:
a) Returns to a factor operate in the short run where at least one factor is fixed while others are varied.
b) Identifying that capital remains constant while labor changes is crucial for confirming returns to a factor.

SECTION B - 32 MARKS

Question 2

(i) Aman compares two consumption bundles:
- Bundle A: 2 burgers + 1 pack of juice
- Bundle B: 4 burgers + 2 packs of juices
He claims that Bundle B lies on a higher indifference curve.
Explain with an appropriate reason whether Aman's claim is correct or not. [2 Marks]

Answer: Aman's claim is correct. Bundle B contains both commodities in larger quantities than Bundle A. Following the axioms of non-satiety and monotonicity, Bundle B is preferred to Bundle A, i.e., Bundle B provides a higher level of utility. It lies on a higher indifference curve because a higher indifference curve represents a higher level of utility.

Teacher's Note:
a) Monotonic preferences state that a consumer always prefers more of a commodity bundle containing more of at least one good and no less of the other.
b) Mentioning indifference curves and utility levels ensures full credit.

(ii) Agro Gold Wheat Traders supplies wheat in the market. The firm purchases advanced grain storage technology, which reduces wastage and lowers its cost of handling wheat. As a result, Agro Gold is able to supply more wheat at the same price as before.
Later, due to a sudden rise in international wheat prices, the market price of wheat increases, leading Agro Gold to supply more wheat.
Illustrate these two types of changes in the supply of wheat in separate diagrams. [2 Marks]

Answer:
1. The first situation indicates an increase in supply (shift in supply curve) due to cost reduction from technology adoption, illustrated by a rightward shift of the supply curve.
2. The second situation indicates an expansion of supply (movement along the same supply curve) due to an increase in market price.

[Figure: Two separate supply diagrams. First diagram shows rightward shift of supply curve from S to S1 at constant price P*. Second diagram shows upward movement along supply curve S from P1 to P2.]

Teacher's Note:
a) Distinguish clearly between a shift in supply (change in supply due to non-price factors) and movement along a supply curve (change in quantity supplied due to price changes).
b) Proper labeling of axes, curves, and arrows in both diagrams is mandatory.

Question 3

(i) Compare the demand curve faced by a perfectly competitive firm with the one faced by a monopolist. Substantiate your comparison with suitable reasons. [2 Marks]

Answer: A perfectly competitive firm faces a horizontal or perfectly elastic demand curve because a firm can sell any amount of the product at the market-determined price as it is a price taker. A monopolist, on the other hand, faces a negatively sloped demand curve because if it wants to sell more, price must be lowered to induce consumers to demand the increased quantity.

Teacher's Note:
a) Price-taking behavior under perfect competition results in constant average and marginal revenue, generating a horizontal demand curve.
b) Market power under monopoly necessitates lowering prices to expand sales, leading to a downward-sloping demand curve.

(ii) Briefly explain the meaning of the following terminologies in the context of market structure: [2 Marks]

(a) Product differentiation in monopolistic competition [1 Mark]

Answer: Each firm under monopolistic competition sells a non-homogeneous product. Products are close substitutes but not identical, as their advertisement, packaging, after-sales service, and quality of inputs used in production differ.

Teacher's Note:
a) Product differentiation creates brand loyalty and gives firms limited control over price.
b) Mentioning non-homogeneous products and distinguishing features is essential.

(b) Intense competition in oligopoly [1 Mark]

Answer: As there are a few big firms under an oligopoly market, each firm is aware of the strategy of rival firms and uses appropriate strategies to deal with competitors for increasing its own market share through price and non-price competition.

Teacher's Note:
a) Interdependence among a small number of large firms creates fierce rivalry.
b) Both price and non-price competitive measures should be highlighted.

Question 4

Attempt either subparts (i) and (ii) or (iii) and (iv).

(i) 'Uber and Ola Cabs are two major app-based taxi services that operate in major cities in India. Each closely monitors the pricing strategy of the other. During peak hours, a surge in demand triggers an automatic increase in fares through surge pricing.'
(Source (edited): Economic Research Centre, CUHK, 31 May 2022)
Identify the market form in the above context. Outline two features of this market form evident in the scenario. [2 Marks]

Answer:
Market Form: Oligopoly (specifically duopoly).
Features evident:
1. Few sellers: The scenario highlights only two major service providers (Uber and Ola).
2. Interdependence and intense competition: Each company closely monitors the pricing strategy of the other.

Teacher's Note:
a) Identify duopoly as a special case of oligopoly with two firms.
b) Clearly link the features mentioned in the text to standard oligopolistic characteristics.

(ii) If the state government imposes ceiling price on cab fares, it may cause a deficit in the supply of the cab services.
As owner of an app-based cab service company, formulate a measure that you would take to overcome this problem. Illustrate the suggested measure with the help of a diagram. [2 Marks]

Answer:
Suggested Measure: Declaration of bonuses or incentives to drivers during peak hours to encourage them to operate on the road, leading to an increase in supply and stabilization of fares.

[Figure: Supply and demand diagram showing rightward shift of supply curve from S1 to S2, lowering equilibrium price from P1 to P2 and expanding quantity from Q1 to Q2.]

Teacher's Note:
a) Incentives increase driver participation, shifting the supply curve rightward to overcome shortages caused by price ceilings.
b) Diagrams must clearly show the shift in supply and the new equilibrium point.

OR

(iii) The Indian government significantly reduced GST rates on many fast-moving consumer goods with effect from September 2025. One of these products was soap. Indian Soap and Detergent market have 700 companies including ITC Limited, Procter & Gamble and Hindustan Unilever Limited. These companies try to make their products different from those of other companies by adding various features to the existing product and promoting their products. What distinguishes them from one another are their marketing strategies and production.
With the help of a diagram, explain the effect of government's initiative on the price of the said product given that demand for this product is relatively elastic. [2 Marks]

Answer: Reduction in GST rate will enable firms to supply the same quantity at a lower price or higher quantity at a given price. This leads to a rightward shift in the supply curve to S2, resulting in a lower equilibrium price (P2).

[Figure: Equilibrium diagram showing rightward shift of supply curve from S1 to S2, leading to a fall in price from P1 to P2.]

Teacher's Note:
a) Lower tax reduces production costs, increasing market supply.
b) Explain both the shift in supply and the resultant decrease in price.

(iv) You have decided to start a soap manufacturing business. As a new entrepreneur in soap industry, devise a strategy to secure the market share of your product. Justify your strategy with a valid argument. [2 Marks]

Answer:
Suggested strategies:
1. Add new features such as new fragrance or medicinal herbal extracts for skincare.
2. Use eco-friendly, reusable packaging.
Justification: These steps achieve product differentiation, making the product unique and attractive to consumers in a monopolistically competitive market.

Teacher's Note:
a) Product differentiation is vital for securing market share under monopolistic competition.
b) Any logical, creative business strategy focused on product uniqueness is acceptable.

Question 5

(i) Selling cost remains absent in a perfectly competitive market. Discuss. [2 Marks]

Answer: Firms under perfect competition sell homogeneous products and face a perfectly elastic demand curve, allowing them to sell any quantity at the market price. Furthermore, buyers possess perfect market knowledge, making advertising and selling costs unnecessary.

Teacher's Note:
a) Selling costs are incurred primarily to promote differentiated products under monopolistic competition and oligopoly.
b) Homogeneous products and perfect knowledge eliminate the need for competitive advertising.

(ii) What is meant by supernormal profit? Show it with the help of a diagram. [2 Marks]

Answer: Supernormal profit is the profit earned by a firm over and above normal profit, occurring when total revenue exceeds total cost of production.

[Figure: Equilibrium diagram showing AR and MR curves, AC and MC curves, with price P0 and output Q0, where rectangle P0 E A B represents supernormal profit.]

Teacher's Note:
a) Supernormal profit exists when Average Revenue exceeds Average Cost at the profit-maximizing output level.
b) Ensure proper shading of the profit rectangle bounded by price and average cost.

Question 6

(i) Calculate GNP_mp and National Income using the expenditure method. [4 Marks]

Answer:
GNP_mp = (a) + (b) + [(c) - (g)] + (h) - (e) + (d)
= 2750 + 300 + [250 - 30] + 45 - 50 + (-25)
= 2750 + 300 + 220 + 45 - 50 - 25
= Rs. 3,240 Cr.
National Income (NNP_fc) = GNP_mp - Depreciation (i) - Net Indirect Taxes (j) + Net Factor Income from Abroad (already included or adjusted)
= 3240 - 100 - 100
= Rs. 3,040 Cr.

Teacher's Note:
a) Gross Domestic Capital Formation = Gross Domestic Fixed Capital Formation + Change in Stock (where decrease in stock is negative change in stock).
b) Verify formula conversions carefully from GDP_mp to National Income.

OR

(ii) Calculate the Income from Entrepreneurship from the following data: [4 Marks]

Answer:
NDP_fc = GDP_fc - Consumption of fixed capital (c)
= 500 - 100 = Rs. 400 Cr.
Also, NDP_fc = Compensation of employees (d + h) + Operating surplus (Rent + Interest + Profit/Income from Entrepreneurship) + Mixed income of self-employed (e)
Wages and salaries (90) + Employer's contribution to ESI (50) + Employer's contribution to PF (j: 20) = COE = 160.
Operating Surplus = Rent (30) + Interest (20) + Income from Entrepreneurship.
NDP_fc = 160 + 30 + 20 + Profit + 105
400 = 315 + Income from Entrepreneurship
Income from Entrepreneurship = 400 - 315 = Rs. 85 Cr.

Teacher's Note:
a) Compensation of employees includes wages, employer contributions to social security schemes (ESI and PF).
b) Interest-free loans to staff are fringe benefits or loans, not employer social contributions, and are excluded from COE calculation.

Question 7

(i) The pie chart below presents a scenario depicting the distribution of public expenditure. Study it carefully and answer the question that follows.
Comment on the distribution of public expenditure as revenue expenditure and capital expenditure shown in the above pie chart. [2 Marks]

[Figure: Pie chart with segments: Salaries and Pensions 35%, Interest Payments 20%, Subsidies 15%, Construction of Highways 12%, Defence Equipment Purchase 10%, Building Government Schools 8%.]

Answer: Revenue expenditures comprise Salaries and Pensions (35%), Subsidies (15%), and Interest Payments (20%), totaling 70% of budgetary expenditure. Capital expenditures comprise Defence Equipment Purchase (10%), Construction of Highways (12%), and Building Government Schools (8%), totaling 30%. Thus, the budget provides significantly more for revenue expenditure than capital expenditure.

Teacher's Note:
a) Revenue expenditures do not create physical or financial assets, whereas capital expenditures do.
b) Summing the percentages correctly for each category is essential for full marks.

(ii) Observe the bar chart of deficit indicators and answer the questions that follow.
(Source: Economic Survey, 2025-26)

[Figure: Bar chart comparing Revenue deficit, Fiscal deficit, and Primary deficit across FY24, FY25, and FY26 as proportion of Budget Estimates.]

(a) Compare the revenue deficit and fiscal deficit for the financial year 2024 (FY24). [1 Mark]

Answer: In the Financial Year 2024, the revenue deficit was estimated at 40% of B.E., whereas the fiscal deficit was around 50% of B.E., showing that the fiscal deficit was higher than the revenue deficit.

Teacher's Note:
a) Fiscal deficit includes total borrowings, which typically exceed revenue deficit.
b) Read bar heights accurately against the percentage axis.

(b) What is the implication of the trend in primary deficit over the period depicted in the graph? [1 Mark]

Answer: The primary deficit shows an alarming increase in Financial Year 2026, implying that government borrowings were heavily utilized to meet current consumption expenditure other than interest payments.

Teacher's Note:
a) Primary deficit is fiscal deficit minus interest payments.
b) An increasing primary deficit signals fiscal imprudence and reliance on borrowing for non-interest commitments.

Question 8

Attempt either subparts (i) and (ii) or (iii) and (iv).

(i) 'In its Monetary Policy Statement dated February 8, 2024, the Reserve Bank of India (RBI) observed that retail inflation stood at 5.1% in January 2024. The RBI further noted that a significant portion of bank credit was being directed towards speculative activities in the stock market and real estate sector, leading to artificial price increase.'
(Source: Ministry of Statistics and Programme Implementation (MOSPI), Government of India; RBI Monetary Policy Statement, February 2024)
To control this situation, the measure Margin Money would be more appropriate than repo rate in a developing country like India. Justify the statement. [2 Marks]

Answer: Raising margin requirements targets specific speculative sectors (stock market and real estate) without restricting credit flow to priority sectors. Conversely, raising the repo rate makes all loans expensive across the entire economy, which is undesirable for growth in a developing country like India.

Teacher's Note:
a) Margin requirement is a selective credit control instrument.
b) Contrast selective controls with general monetary instruments like the repo rate.

(ii) The process of credit creation comes to an end when the required reserves become equal to the initial deposit. Defend or refute the statement with a valid reason. [2 Marks]

Answer: The statement is defended. Commercial banks lend from deposits over and above required reserves. If required reserves equal initial deposits (i.e., CRR = 100%), no surplus funds remain for lending, halting the credit creation process entirely.

Teacher's Note:
a) Credit creation multiplier depends inversely on the reserve ratio.
b) A 100% reserve ratio reduces the money multiplier to 1, stopping secondary credit creation.

OR

(iii) In different border areas of India, currency of neighbouring country is used as money, but not as legal tender. Justify the statement. [2 Marks]

Answer: People in border areas use neighbouring currency as a medium of exchange for buying and selling goods and services. However, it lacks legal backing from the government of the country where it is used, meaning creditors are not legally bound to accept it in settlement of debts.

Teacher's Note:
a) Anything serving as a medium of exchange functions as money.
b) Legal tender status requires backing by government fiat and law.

(iv) 'Digital payments have become deeply embedded in India's everyday life. As of early 2026, UPI is the dominant payment method in India, accounting for 57% of transaction and surpassing cash.'
(Source: PIB and Ministry of Finance (India))
This development propels people to hold less cash which ultimately leads to the reduction of money supply in the economy. Defend or refute the statement with a valid reason. [2 Marks]

Answer: This statement is refuted. Digital payments reduce currency held by the public (C) but increase demand deposits (DD) with commercial banks. Through the credit creation process, higher demand deposits expand the total money supply (M1) in the economy.

Teacher's Note:
a) Money supply M1 equals currency plus demand deposits (C + DD).
b) Shifting cash into bank deposits increases bank lending capacity, thereby expanding overall money supply through the credit multiplier.

Question 9 [4 Marks]

India's nominal GDP is projected to grow by 8.6% over the previous year in FY 2025-26.
Does this indicate the economic welfare of the country? Justify your answer with four reasons.

Answer: No, it does not necessarily indicate economic welfare for the following reasons:
1. Inflation effect: Increase in nominal GDP may merely reflect rising price levels rather than real output growth.
2. Population growth: High population growth means per capita GDP may not rise despite higher aggregate GDP.
3. Income distribution: Growth in nominal GDP does not ensure equitable distribution of income among citizens.
4. Environmental degradation: Negative externalities such as pollution and resource depletion are not accounted for in nominal GDP calculations.

Teacher's Note:
a) GDP is a quantitative measure and imperfect index of economic welfare.
b) Students must outline all four non-monetary or distributional limitations of GDP as a welfare indicator.

SECTION C - 32 MARKS

Question 10

(i) Explain how the following factors affect the price elasticity of demand for a product: [6 Marks]

(a) Availability of substitutes [1.5 Marks]

Answer: Products with many close substitutes have elastic demand because a price rise prompts consumers to switch to alternatives. Conversely, goods with few or no substitutes have inelastic demand.

Teacher's Note:
a) More substitutes increase consumer responsiveness to price changes.
b) Emphasize the ease of switching between products.

(b) Proportion of income spent [1.5 Marks]

Answer: If a very small proportion of income is spent on a commodity (e.g., matchboxes), demand is inelastic. If a noticeable proportion of income is spent, demand is more elastic.

Teacher's Note:
a) Budget share directly influences price sensitivity.
b) Small-ticket items do not significantly impact consumer purchasing behavior when prices change.

(c) Necessity versus Luxury [1.5 Marks]

Answer: Necessities have inelastic demand as consumption cannot be reduced despite price hikes. Luxuries have elastic demand because consumption can be postponed or curtailed when prices rise.

Teacher's Note:
a) Urgency of need determines elasticity.
b) Differentiate clearly between life-sustaining goods and discretionary goods.

(d) Short run versus long run [1.5 Marks]

Answer: Demand is generally inelastic in the short run as consumers cannot alter habits or find substitutes quickly. In the long run, demand becomes more elastic as alternatives become available and habits change.

Teacher's Note:
a) Time horizon allows consumers to adjust purchasing patterns.
b) Long-term responses to price changes are more pronounced.

(ii) Explain two reasons for the upward slope of the supply curve. [2 Marks]

Answer:
1. Profit motive: Higher prices raise profit margins, encouraging producers to supply larger quantities.
2. Increase in marginal cost: Producing additional units leads to diminishing marginal returns and higher costs, requiring higher market prices to cover costs.

Teacher's Note:
a) Supply curves slope upward due to increasing marginal costs and profit incentives.
b) Listing any two valid economic reasons secures full credit.

Question 11

Attempt either subparts (i) and (ii) or (iii) and (iv).

(i) Compare repo rate and reverse repo rate in the context of the Indian monetary policy. [2 Marks]

Answer:
Similarity: Both are short-term monetary instruments used by the central bank to control inflation (by raising rates) and recession (by lowering rates).
Dissimilarity: Repo rate is the interest rate charged by the central bank on loans given to commercial banks, whereas reverse repo rate is the interest rate offered by the central bank when it borrows short-term funds from commercial banks.

Teacher's Note:
a) Clearly distinguish the direction of lending and borrowing between the central bank and commercial banks.
b) Mention both similarities and dissimilarities for complete credit.

(ii) With the help of a diagram, explain the concept of Deficient Demand. Discuss one fiscal measure and one monetary measure to correct it. [6 Marks]

Answer: Deficient demand refers to the situation where aggregate demand falls short of aggregate supply at full employment level of output.

[Figure: Keynesian cross diagram showing aggregate expenditure and income, with full employment output YF, actual aggregate demand ADP below required aggregate demand ADF, and deficient demand gap MN.]

Fiscal Measure - Taxation: Government can reduce direct taxes to increase people's disposable income, thereby stimulating consumption expenditure and aggregate demand.
Monetary Measure - Bank Rate: Central bank can reduce the bank rate, lowering commercial lending rates, which encourages borrowing for consumption and investment.

Teacher's Note:
a) Deficient demand causes a deflationary gap.
b) Explain both fiscal policy (taxation/spending) and monetary policy (bank rate/repo rate) transmission mechanisms.

OR

(iii) How is High Powered Money different from Broad Money? [2 Marks]

Answer:
1. High Powered Money (M0) is the monetary base consisting of currency held by public, cash reserves of banks, and deposits with RBI, whereas Broad Money (M4) is total money supply including currency, demand/time deposits, and total postal savings.
2. High Powered Money has the highest liquidity, while Broad Money is comparatively less liquid.

Teacher's Note:
a) High Powered Money acts as the base for credit creation by commercial banks.
b) Highlight differences in composition and liquidity levels.

(iv) National output or real national income is said to be at equilibrium level when aggregate supply becomes equal to the aggregate demand. Explain this phenomenon with the help of a diagram.
Does this equilibrium always take place at full employment level? Explain. [6 Marks]

Answer: Equilibrium national income is determined where aggregate demand (AD = C + I) intersects aggregate supply (AS = Y) at income level Ye.

[Figure: Income-expenditure equilibrium diagram showing 45-degree line (AS=Y), AD curve, equilibrium income Ye, and off-equilibrium points Y1 and Y2.]

No, equilibrium does not always take place at full employment level. It can occur at under-employment equilibrium if desired aggregate expenditure is insufficient, or at over-full employment equilibrium if aggregate demand exceeds full employment output.

Teacher's Note:
a) Equilibrium requires planned saving to equal planned investment (S = I) or AD = AS.
b) Emphasize that macroeconomic equilibrium can occur below, at, or above full employment.

Question 12

Attempt either subparts (i) and (ii) or (iii) and (iv).

(i) Green Field Farm, located on the outskirts of a city, owns a fixed area of 10 acres of land. The farm manager decided to increase the number of workers to boost output.
Initially, the hiring of additional workers led to a rapid increase in total crop production. The workers were able to divide tasks such as ploughing, sowing, watering, and harvesting more efficiently, leading to better utilisation of resources.
However, the increase in total output began to slow down after a certain point, despite the employment of more workers which eventually led to a decline in the farm's total output.
(a) With the help of a diagram, explain the law applicable to this situation. [4 Marks]

Answer: The situation illustrates the Law of Variable Proportions.

[Figure: Total Product (TP), Average Product (AP), and Marginal Product (MP) curves divided into Stage I (Increasing returns), Stage II (Diminishing returns), and Stage III (Negative returns).]

Stage I: TP increases at an increasing rate up to the point of inflexion.
Stage II: TP increases at a diminishing rate; MP falls and becomes zero.
Stage III: TP declines; MP becomes negative.

Teacher's Note:
a) Explain all three stages of the Law of Variable Proportions clearly.
b) Proper labeling of TP, AP, and MP curves in the diagram is mandatory.

(b) '... which eventually led to a decline in the farm's total output'.
Briefly explain the reasons behind this phenomenon. [2 Marks]

Answer:
1. Machine breakdown and overcrowding: Excess workers on a fixed land/capital base lead to overcrowding and machinery breakdown, reducing efficiency.
2. Inefficient labour management: Too many workers cause poor coordination, management bottlenecks, and distraction.

Teacher's Note:
a) Focus on causes operating in Stage III of production.
b) Highlight the fixed nature of land and capital relative to excessive labor.

(ii) Explain the total cost curve. [2 Marks]

Answer: The Total Cost (TC) curve is a positively sloped, inverted-S-shaped curve originating from the vertical axis at the level of total fixed costs. It is initially concave due to increasing returns, then becomes convex due to diminishing returns.

Teacher's Note:
a) Total cost is the sum of total fixed cost and total variable cost.
b) Mention the positive intercept and inflection point for complete credit.

OR

(iii) A potato farmer sells his produce at Rs. 850 per quintal, like other potato farmers.
Consider the following data:
- For 6 quintals of potato, MR = Rs. 850 & MC = Rs. 850
- For 7 quintals of potato, MR = Rs. 850 & MC = Rs. 845
- For 8 quintals of potato, MR = Rs. 850 & MC = Rs. 850
- For 9 quintals of potato, MR = Rs. 850 & MC = Rs. 856
(a) What amount of potato will he produce to maximise his profit? With reference to the given data, explain the principles that would motivate his decision. [4 Marks]

Answer: The farmer will produce 8 quintals of potato.
Profit-maximization requires two conditions:
1. Necessary condition: MR = MC. This is satisfied at both 6 and 8 quintals.
2. Sufficient condition: MC must be rising beyond the equilibrium point (slope of MC > slope of MR). At 7 quintals, MC (Rs. 845) < MR (Rs. 850). At 9 quintals, MC (Rs. 856) > MR (Rs. 850). Thus, 8 quintals satisfies both conditions.

Teacher's Note:
a) Both necessary and sufficient conditions must be checked for profit maximization.
b) Explain why 6 quintals is rejected despite MR=MC.

(b) Represent the profit maximising level of output diagrammatically. [2 Marks]

Answer: [Figure: Perfectly competitive equilibrium diagram showing horizontal MR curve at P0, upward-sloping MC curve intersecting MR at two points, with E2 as the stable profit-maximizing output OQ2.]

Teacher's Note:
a) Show the intersection of horizontal MR and rising MC.
b) Clearly mark the equilibrium output corresponding to the second intersection point.

(iv) Explain the total revenue curve under the imperfectly competitive market. [2 Marks]

Answer: The Total Revenue (TR) curve under imperfect competition is a positively sloped, concave curve originating from the origin. Since firms must lower prices to sell more, TR increases at a diminishing rate until it reaches a maximum, then falls.

Teacher's Note:
a) Concavity reflects falling marginal revenue.
b) Mention origin start and downward-sloping MR implications.

Question 13

Study the graph given below and read the excerpt that follows. Answer the questions based on the information provided.

[Figure: Line graph showing exchange rate value of Indian Rupee against US Dollar from Aug 25 to Jan 26, rising from 87.06 to 90.28.]

1. India's total exports during April-December 2025 are estimated at US$634.26 billion registering a positive growth of 4.33 percent. Total imports during April-December 2025 are estimated at US$730.84 billion registering a growth of 4.95 percent.
2. The Indian diaspora sent home $135.46 billion in the last fiscal year, the highest on record.
3. Foreign investors started December on a sharply negative note, pulling out Rs. 11,820 crore from the Indian equities in the first week. This offloading by the foreign portfolio investors was majorly driven by the steep decline of the rupee.
(Sources (edited): Economics Times; Times of India; https://www.pib.gov.in and: https://www.xe.com/)

(i) Analyse the trend in exchange rate of rupee in terms of US dollar over the period depicted in the graph. [2 Marks]

Answer: In August 2025, 1 USD = Rs. 87.06, which increased to Rs. 90.28 in January 2026. This indicates that more rupees were required to buy one US dollar, showing a continuous decline in the value of the Rupee (depreciation of the Rupee).

Teacher's Note:
a) Indirect quote interpretation: rising exchange rate means depreciation of domestic currency.
b) Cite data points from August 2025 and January 2026.

(ii) The present trend of Indian rupee is associated with the flexible exchange rate system. Discuss whether this trend would be possible in fixed exchange rate system. [2 Marks]

Answer: Under a fixed exchange rate system, rates are determined and maintained by the central bank, so market forces alone cannot cause depreciation. However, the central bank can deliberately devalue the currency to correct adverse balance of payments, making such a trend possible through official intervention.

Teacher's Note:
a) Distinguish market-driven depreciation from official devaluation.
b) Fixed exchange rates permit value adjustments through government/central bank policy.

(iii) Categorise the transactions mentioned in the passage into different components of Balance of Payments. [2 Marks]

Answer:
1. Point 1 (total exports and imports of goods) falls under Current Account (Visible trade).
2. Point 2 (remittances from Indian diaspora) falls under Current Account (Unilateral transfers/transfers).
3. Point 3 (foreign portfolio investments outflow) falls under Capital Account.

Teacher's Note:
a) Balance of Payments comprises Current Account and Capital Account.
b) Accurately link each excerpt point to its specific BOP component.

(iv) Predict the impact of change in exchange rate of rupee against US dollar, on the national income of India. [2 Marks]

Answer: Depreciation of the Rupee makes Indian exports cheaper and imports expensive, increasing net exports (X - M). Since National Income equals C + I + G + (X - M) + NFIA, a rise in net exports leads to an increase in India's national income.

Teacher's Note:
a) Link currency depreciation to trade competitiveness and net exports.
b) Use the expenditure method identity to explain the impact on national income.