• Subject: Economics
• Time: 03 Hrs
• Max Marks: 100

1. The two features of resources that give rise to an economic problem are (i) resources are limited and (ii) they have alternative uses.
2. Total expenditure will increase.
3. Equilibrium price will increase.
4. It is the price at which market demand and market supply are equal.
5. Cost of producing a good is the sum of actual expenditure on inputs and the imputed expenditure on the inputs supplied by the owner.
6. The factors causing an increase in demand of a commodity are:
(i) Rise in the price of substitute goods.
(ii) Fall in the price of complementary goods.
(iii) Rise in income of its buyers (in case of a normal good).
(iv) Fall in income of its buyers (in case of an inferior good).
(v) Favourable change in taste etc for the good.
(vi) Increase in the number of its buyers. (Any three)

7. Es = 1, at any point on the supply curve if it touches the origin when extended.
Es >1, at any point on the supply curve if it touches the y-axis when extended.
Es<1, at any point on the supply curve if if it touches the x-axis when extended.
Note: This question if answered with the help of diagrams will also be treated as correct.

8. Production Possibility Frontier (PPF) is a downward sloping, concave curve. It shows increasing Marginal Rate of Transformation (MRT) as more quantity of one good is produced by reducing quantity of the other good. This behaviour of the MRT is based on the assumption that all resources are not equally efficient in production of all goods. As more of one good is produced, less and less efficient resources have to be transferred to the production of the other good which raises marginal cost i.e. MRT.
OR
In a market economy resources are privately owned. The central problems in such an economy are solved by the price mechanism and the objective of production is to earn profit. In a centrally planned economy the resources are owned by the state. All economic activities are planned by the government or a central authority. The objective of production is social welfare.

9. A commodity for a person may be a necessity, a comfort or a luxury.
When a commodity is a necessity its demand is generally inelastic.
When a commodity is a comfort its demand is generally elastic.
When a commodity is a luxury its demand is generally more elastic that the demand for comforts.

10. When price is lower than equilibrium price, market demand is greater than
market supply. This will result in competition among buyers. The price will rise.
A rise in price will reduce the demand and raise the supply. This will reduce the
original gap between market demand and market supply. These changes will
continue till price rises to a level at which market demand is equal to market
supply. This is the equilibrium price.

11. (i) Price is constant. As price means average revenue, so average revenue is also constant. Average revenue is constant only when marginal revenue is equal to average revenue. Thus, when a firm is able to sell more quantity of output at the same price marginal revenue is equal to average revenue.

(ii) If more can be sold only by lowering the price, it means that average revenue falls as more is sold. Average revenue falls only when marginal revenue is less than average revenue. Thus, when a firm is able to sell more quantity by lowering the price, marginal revenue will be less than the average revenue.
OR
(i) When the prices of factor inputs decreases, the cost of production decreases. Thus, it becomes more profitable to produce the commodity and so its supply will increase.

(ii) When the prices of other goods rise, it becomes relatively more profitable to produce these goods in comparison to the given good. This results in diversion of resources from the production of given good to other goods. So, the supply of the given good decreases.

12. Average Total Cost (ATC) minus Average Variable Cost (AVC) is equal to Average Fixed Cost (AFC). AFC = TFC / Output. As the level of output increases, AFC falls. So, the difference between ATC and AVC decreases with increase in output.

ATC and AVC can never be equal at any level of output as AFC can never be zero because TFC is positive.

13. (a) The number of sellers is so large that the share of each is insignificant in the total supply. Hence, an individual seller cannot influence the market price. Similarly, a single consumer’s share in total purchase is so insignificant because of their large numbers that she cannot influence the market price on her own.

(b) The implication is that firms will earn only normal profit in the long run. In the short run, there can be abnormal profits or losses. If there are abnormal profits, new firms enter the market. The total market supply increases, resulting in a fall in market price and a fall in profits. This trend continues till profits are reduced to normal. Similarly, if there are losses, firms start exiting. The total market supply decreases resulting in a rise in market price, and a reduction in losses. This trend continues till losses are wiped out.

Section B:

14. Involuntary unemployment occurs when those who are able and willing to work at the prevailing wage rate do not get work.
15. The sum of MPC and MPS is equal to one.
16. Indian currency has appreciated.
17. The two components of money supply are: currency held with the public and demand deposits with commercial banks.

18. Cash reserve ratio is the ratio of bank deposits that commercial banks must keep as reserves with the Central bank.
19. NVAfc = (ii) + (v) – (vi) – (vii) - (iii) + (i)
= 800 + 20 - 50 – 500 – 30 + 40
= Rs 280 lakhs

20. Nominal GDP values the current year’s output in an economy at current year prices.
Real GDP values the current year’s output in an economy at base year prices.
Real GDP is the indicator of economic welfare.

21. Whether ‘machine’ is a final good or not depends on how it is being used.
If the machine is bought by a household, then it is a final good.
If the machine is bought by a firm for its own use, then also it is a final good.
If the machine is bought by a firm for re-sale then it is an intermediate good.

22. Depreciation of domestic currency mean a fall in the price of domestic currency (say rupee) in terms of a foreign currency (say $). It means one $ can be exchanged for more rupees. So with the same amount of dollars more of goods can be purchased from India. It means exports to USA have become cheaper. They may result in increase of exports to USA.
OR
Appreciation of domestic currency means a rise in the price of domestic currency (say rupee) in terms of a foreign currency (say $) It means one rupee can be exchanged for more $. So with the same amount of money (Rupees) more goods can be purchased from USA. It means imports from USA have become cheaper. They may result in increase of imports (from USA).

23. The current account records transactions relating to the export and import of goods and services, income and transfer receipts and payments during a year. The capital account records transactions affecting foreign assets and foreign liabilities during a year. Since import of machinery is an import of good, it is recorded in the current account.

24. Government budget is a statement of expected receipt and expenditure of the government during a financial year.
(a) Revenue deficit is the excess of revenue expenditure over revenue receipts
(b) Fiscal deficit is the excess of total expenditure over total receipts excluding borrowings.

25.
(a) It is a capital receipt as it results in a reduction of assets.
(b) It is a capital receipt as it creates a liability.
(c) It is a revenue receipt as it neither creates a liability nor reduces any asset.
(d) It is a revenue receipt as it neither creates a liability nor reduces any asset.

26. Money creation (or deposit creation or credit creation) by the banks is determined by (1) the amount of the initial fresh deposits and (2) the Legal Reserve Ratio (LRR), the minimum ratio of deposit legally required to be kept as cash by the banks. It is assumed that all the money that goes out of banks is redeposited into the banks.

Let the LRR be 20% and there is a fresh deposit of Rs. 10,000. As required, the banks keep 20% i.e. Rs. 2000 as cash. Suppose the banks lend the remaining Rs. 8000. Those who borrow use this money for making payments. As assumed those who receive payments put the money back into the banks. In this way banks receive fresh deposits of Rs. 8000. The banks again keep 20% i.e. Rs. 1600 as cash and lend Rs. 6400, which is also 80% of the last deposits. The money again comes back to the banks leading to a fresh deposit of Rs. 6400. The money goes on multiplying in this way, and ultimately total money creation is Rs. 50000.

Given the amount of fresh deposit and the LRR, the total money creation is :
Total money creation = Initial deposit x 1/LRR