CBSE Sample Papers for Class 12 Economics Paper 7 are part of CBSE Sample Papers for Class 12 Economics. Here we have given CBSE Sample Papers for Class 12 Economics Paper 7.
CBSE Sample Papers for Class 12 Economics Paper 7
|Sample Paper Set||Paper 7|
|Category||CBSE Sample Papers|
Students who are going to appear for CBSE Class 12 Examinations are advised to practice the CBSE sample papers given here which is designed as per the latest Syllabus and marking scheme, as prescribed by the CBSE, is given here. Paper 7 of Solved CBSE Sample Paper for Class 12 Economics is given below with free PDF download solutions.
Time : 3 hrs
Maximum Marks : 80
- All questions in both the sections A and B are compulsory. However, there is internal choice in questions of 3,4 and 6 marks.
- Question Nos. 1-4 and 13-16 are very short answer type questions, carrying 1 mark each.
They are required to be answered in one sentence each.
- Question Nos. 5-6 and 17-18 are short answer I type questions, carrying 3 marks each.
Answers to them should not normally exceed 60 words each.
- Question Nos. 7-9 and 19-21 are short answer II type questions, carrying 4 marks each.
Answers to them should not normally exceed 70 words each.
- Question Nos. 10-12 and 22-24 are long answer type questions, carrying 6 marks each.
Answers to them should not normally exceed 100 words each.
- Answers should be brief and to the point and the above word limit be adhered to as far as possible.
Section – A
Which of the following is a statement of normative nature in economics?
(a) Economics is study of choices/ alternatives.
(b) Government should be concerned with how to reduce unemployment.
(c) According to an estimate, inspite of severe shortage, more than 10% of houses in Indian cities are lying vacant.
(d) Accommodation of refugees is posing a big problem for Europe.
Define marginal physical product.
A firm is operating with a total variable cost of X 500 when 5 units of the given output are produced and the total fixed costs are ₹ 200. What will be the average total cost of producing 5 units of output?
In an imperfectly competitive market, if the total revenue is maximum, marginal revenue will be……
State and discuss any two factors that will shift the Production Possibility Frontier (PPF) to the right.
Draft a hypothetical schedule for a straight line production possibility curve.
Giving reason, state the impact of each of following on demand curve of a normal good X if
(i) Price of its complementary good falls.
(ii) News reports claim that consumption of product X has harmful effect on human health.
(iii) Income of consumer increases.
(i) Arrange the following coefficients of price elasticity of demand in ascending order:
(-)0.87, (-)0.53, (-)3.1, (-)0.80
(ii) Comment upon the degree of elasticity of demand for commodity X, if the price of the commodity falls from ₹ 28 per unit to ₹ 23 per unit and its quantity demanded rises from 50 units to 100 units.
What is meant by price floor? Discuss in brief, any one consequence of imposition of floor price above equilibrium price with the help of a diagram.
How is the price of a commodity determined in a perfectly competitive market? Explain with help of a diagram.
Explain how the following factors affect the supply of the commodity (any two).
(i) Price of factor inputs
(ii) State of technology
(iii) Government taxation policy
(i) A consumer, Mr Aman is in state of equilibrium consuming two goods X and Y, with given prices PX and PY. What will happen if
(ii) Identify which of the following is not true for the indifference curve theory. Give valid reasons for choice of your answer.
(a) Lower indifference curve represents lower level of satisfaction.
(b) Two indifference curves can intersect each other.
(c) Indifference curve must be convex to origin at the point of tangency with the budget line at the consumer’s equilibrium.
(d) Indifference curves are drawn under the ordinal approach to consumer equilibrium.
A consumer has total money income of ₹ 500 to be spent on two goods X and Y with prices of ₹ 50 and ₹ 10 per unit respectively. On the basis of the given information, answer the following questions:
(i) Give the equation of the budget line for the consumer.
(ii) What is the value of slope of the budget line?
(iii) How many units can the consumer buy if he is to spend all his money income on good X?
(iv) How does the budget line change if there is a 50% fall in price of good Y?
(i) Why is total variable cost curve inverse S-shaped?
(ii) What is average fixed cost of a firm? Why is an Average Fixed Cost Curve a rectangular hyperbola? Explain with help of a diagram.
Suppose the value of demand and supply curves of a commodity X is given by the following two equations simultaneously:
Qd= 200 – 10p
Qs = 50 + 15p
(i) Find the equilibrium price and equilibrium quantity of commodity X.
(ii) Suppose that the price of a factor inputs used in producing the commodity has changed, resulting in the new supply curve given by the equation Qs1 = 100 + 15p
Analyse the new equilibrium price and new equilibrium quantity as against the original equilibrium price and equilibrium quantity.
Define money supply.
State one fiscal measure that can be used to reduce the gap between rich and poor.
Define the capital receipts of a government.
From the following data calculate fiscal deficit.
Estimate the value of ex-ante AD, when autonomous investment and consumption expenditure (A) is ₹ 50 crore, and MPS is 0.2 and level of income is ₹ 300 crore.
Calculate multiplier, when MPC is — and —. From the calculations, establish the relation between size of multiplier and size of MPC.
Discuss the significance of 45 degree line in Keynesian economics.
Elaborate economic growth as objective of government budget.
Use following information of an imaginary country:
(i) For which year is real GDP and nominal GDP same and why?
(ii) Calculate real GDP for the given years. Is there any year for which real GDP falls?
How will reverse repo rate and open market operations’ control excess money supply in an economy?
Illustrate with the help of a hypothetical numerical example the process of credit creation.
(i) Define externality.
(ii) Find national income from the following using expenditure method
|S.No.||Items||in crores ₹|
|1||Current Transfers from Rest of the World||50|
|2||Net Indirect Taxes||100|
|5||Private Final Consumption Expenditure||900|
|6||Net Domestic Capital Formation||200|
|7||Compensation of Employees||500|
|8||Net Factor Income from Abroad||-10|
|9||Government Final Consumption Expenditure||400|
|11||Mixed Income of Self-employed||400|
Will the following factor income be included in domestic factor income of India?
Give reasons for your answer.
(i) Compensation of employees to the resident of Japan working in Indian embassy in Japan.
(ii) Payment of fees to a Chartered Accountant by a firm.
(iii) Rent received by an Indian resident from Russian embassy in India.
(iv) Compensation given by insurance company to an injured worker.
State whether the following statements are true or false. Give valid reasons for your
(i) Unplanned inventories accumulate when planned investment is less than planned saving.
(ii) Deflationary gap exists when aggregate demand is greater than aggregate supply at full employment level.
(iii) Average propensity to save can never be negative.
(i) “Devaluation and depreciation of currency is one and the same thing.” Do you agree? How do they affect the exports of a country?
(ii) What is meant by official reserve transactions? Discuss their importance in Balance of Payments.
(b) Government should be concerned with how to reduce unemployment.
Marginal Physical Product (MPP) is the change in Total Physical Product (TPP) when one additional unit of labour is employed. Symbolically,
MPP = TPPn – TPPn–1, where
TPPn = Total Physical Product at (n) units
TPPn–1 = Total Physical Product
= (n – 1) units.
(a) ₹ 140
Hint Total Cost = Total Variable Cost + Total Fixed Cost = 500 + 200 = ₹ 700
= ₹ 140
in an imperfectly competitive market, total revenue is maximum when marginal revenue is zero.
Two factors that will shift the production possibility frontier to the right are as follows :
- Increase in resources available for producing the goods.
- Improvement in technology of production of both the goods.
Production possibility curve will be a downward sloping straight line if the Marginal Rate of Transformation (MRT) is constant, as is depicted is the following hypothetical schedule.
Production Possibility Schedule of Wheat and Pulses:
|Wheat (X)(in lakh quintal)||Pulses (Y)
(in lakh quintal)
- Complementary goods are those which are consumed together. e.g. car and petrol. If the price of complementary good of normal good X falls, then it will result in increase in demand for the complementary good as well as good X. Therefore, the demand curve of good X will shift rightwards.
- If there are reports which claim that consumption of good X has harmful effect, then consumers will stop consuming it. Because of this, the demand for good X will fall at the same price. Accordingly, the demand curve will shift leftwards.
- When income of consumers increase then they will increase the consumption of normal good X .
at the same price. Accordingly the demand curve will shift rightwards.
- The coefficients of price elasticity of demand arranged in ascending order are as follows:
(–) 0.53, (-) 0.80, (-) 0.87, (-) 3.1
Minus sign is to be ignored as it merely depicts the inverse relationship between price and quantity demanded.
- Original Price (P) = ₹ 28
Change in Price (∆P) = 23 – 28 = (–) 5
Original Quantity Demanded (Q) = 50 units
Change in Quantity Demanded (∆Q) = 100 – 50 = 50 unitsElasticity of Demand (Ed) = (–)On Substituting the Variables, we get (Ed) = (–)
It is indicative of relatively elastic demand
Price floor means the minimum price fixed by the government for a commodity in the market which is more than the equilibrium price prevailing in the market.
Government fixes price floor to protect the interest of the farmers, so that they are able to get a fair price for their produce.
In the above graph, equilibrium price is OP but the floor price is OP*. At this price, market demand is OL1 but producers are willing to supply OL2. This results in excess supply of L1,L2.
One Consequence of imposition of price floor is that producers stocks remain unsold because at price floor market demand is less than the market supply.
Under perfect competition, market equilibrium is determined at the point where market demand equals the market supply of the commodity. The equilibrium price is determined by the industry and each firm accepts this price.
In the given graph, equilibrium price is determined by the intersection of market demand and market supply curve. At OP price each firm sells its output.
The following factors affect the supply of the commodity: (any two)
- Price of Factors of Production (PF) With the rise in the price of factors of production, the cost of production rises, which results in decrease in supply due to lesser profit margin and vice-versa.
- State of Technology (T) New discoveries bring reduction in costs and increase in production. This will increase the level of supply also. A cost saving technology increases the supply.
- Government Taxation Policy Increase in taxes by government will increase the cost of production due to which profit decreases. Supplier will decrease the supply of commodity while decrease in government taxation will decrease the cost of production and the producer will be induced to increase the supply of the commodity.
- if then this implies that the consumer is getting more utility from the consumption of good X, therefore he will increase the consumption of good X and decrease the consumption of good Y. Because of this, marginal utility derived from additional units of good X will fall and that of good Y will rise, till the time equilibrium is reached and,
- The second statement “Two indifference curves can intersect each other” is not true. If two indifference curves will intersect, then this will indicate that there exists one such point which yield similar satisfaction corresponding to two indifference curves, which is not possible. Consider the graph given below:
In the above graph,
Satisfaction derived at point A = Satisfaction derived at point E … (i)
(both lie on Indifference Curve IC1)
Also, Satisfaction derived at point D = Satisfaction derived at point E … (ii)
(both lie on Indifference Curve IC2)
From 1 and 2 we get,
Satisfaction derived at point A = Satisfaction derived at point D, which cannot be true because at point D, consumer is getting more units of good X and no less units of good Y. Hence, it can be concluded that two indifference curves can never intersect.
- Equation of the budget line of the consumer is as follows:
50X + 10Y = 500
- Slope of the budget line = (–)
- If the consumer spends all his money on purchase of good X, then number of units of good X that can be purchased can be computed as follows:
No. of units of good X
= = 10 units.
- If there is a 50% fall in price of good Y, then the consumer will be able to buy more units of good Y, keeping the consumption of good X constant. Because of this, there will be outward rotation in the budget line on the T-axis as is represented in the graph below:
- The total variable cost curve is S shaped due to the operation of the law of variable proportion. Initially, when output increases at an increasing rate, the total variable cost increases at decreasing rate and when output increases at decreasing rate, the total variable cost increases at an increasing rate. Because of this, the slope of the curve changes from convex to concave, giving it a S shape.
- Average Fixed Cost (AFC) is per unit of the fixed cost. Symbolically,
AFC = Average fixed cost is derived from total fixed cost which remains constant for all levels of output. Because of this, the area under average fixed cost curve remains constant for all levels of output. As a result, average fixed cost curve is a rectangular hyperbola.
In the above graph, area of rectangle OABC is equal to area of rectangle ODEF.
(i) Equation of Demand Curve of Commodity X = Qd = 200 – 10P
Equation of Supply Curve of Commodity X = Q1 =50 + 15 P
At Equilibrium Price,
Quantity Demanded = Quantity Supplied
∴ 200-10P = 50 + 15P
200 – 50 = 10P + 15P
150 = 25P
= P = ₹ 6
Substituting the Value of P in Demand Equation, we get
Qd = 200 – 10×6
= 200 – 60 = 140 units
Therefore, Equilibrium Price = ₹ 6, and Equilibrium Quantity = 140 units
(ii) Equation of Demand Curve of Commodity X = Qd = 200 — 10P
Equation of New Supply Curve of Commodity X = Qs’ = 100 + 15 P
At Equilibrium Price,
Quantity Demanded = Quantity Supplied
∴ 200 – 10P = 100+ 15P
200 – 100 = 10P+ 15P
100 = 25 P
= P = ₹ 4
Substituting the Value of P in Demand Equation, we get
Qd =200 – 10P
= 200 – 10 × 4 = 200 – 40 = 160 units
So, new equilibrium price is ₹ 4 and new equilibrium quantity is 160 units.
So, it is clear that equilibrium price has fallen and equilibrium quantity has increased
Money supply refers to the stock of money in circulation in an economy at a point of time.
The government can use the fiscal measure of increasing taxes on the richer sections of society.
Capital receipts are those which either result in reduction of assets or increase in liabilities
Fiscal Deficit = Borrowings = ₹ 32 Billions
Given, Autonomous Investment and Consumption Expenditure () = ₹ 50 crore
Marginal Propensity to Save (MPS) = 0.2, and Income (Y) = ₹ 300 crores
We know that, Marginal Propensity to Consume (MPC or b)
= 1 – MPS = 1 – 0.2 = 0.8
Now Aggregate Demand (AD) = Consumption (C) + Investment (I)
or AD = + bY
= 50 + 0.8 × 300 = 50 + 240
= ₹ 290 crore
We know that, Multiplier (K) =
So, when Marginal Propensity to Consume (MPC) = = 0.8
Then, K = =
And when MPC = = 0.5
Then, K = = = 2
We observe that when the value of MPC falls from 0.8 to 0.5, then value of K also falls from 5 to 2. So, there exists a direct relation between MPC and multiplier.
The 45 degree line in Keynesian economics represents the Aggregate Supply (AS) curve. The AS curve originates from the point of origin and establishes the below stated relation.
AS = Income (Y) = Consumption (C) + Savings (S)
It is represented by the given schedule and graph :
Income, Consumption and Saving Schedule
|Level of Income (Y)||Consumption
(‘Y – C)
|AS = C + S|
In the above graph, income, consumption and expenditure are all represented in the same unit. Also at all points on the AS curve, consumption is equal to income. Therefore, the 45 degree line has a slope of one and it helps in Keynesian economic analysis.
Economic growth means a continuous and sustainable increase in the gross domestic product of a country. The government can use budget to promote economic growth in the following ways :
- The growth rate of a country depends on the rate of saving and investment. Therefore, the roles that are assigned to budgetary policy in this regard are to create conditions conductive for increase in savings and investment.
The government can encourage savings and investment by providing tax rebates and other incentives for productive ventures and projects.
- The government can increase its expenditure on infrastructure development as it helps to increase the production activity in the country and increases the level of aggregate demand. However, this measure should be taken only if the rate of inflation is under control.
Nominal Gross Domestic Product (GDP) and Real GDP are same in the base year, as proved below:
= = 6.5
(ii)Real GDP for 2014-15 = = 6.5
Real GDP for 2015-16 = = 6
Real GDP for 2016-17 = = 7.2
The Real GDP has fallen from 6.5 in 2014-15 to 6 in 2015-16 due to high rate of inflation
Excess money supply could be checked with the help of the following quantitative methods:
- Reverse Repo Rate It is the rate at which commercial banks can park their surplus funds with Central Bank for short period of time. To expand the money supply, the Central Bank reduces this rate. As the rate reduces the commercial banks are not inclined to park their surplus funds with the Central Bank and instead increase the disbursement of credit leading to expansion of money supply. On the other hand, to reduce the money supply, the Central Bank increases this rate. This motivates the commercial banks to deposit their funds with the Central Bank thereby reducing money supply.
- Open Market Operations Under open market operations, Central Bank purchases or sells government securities to general public for the purpose of increasing or decreasing the stock of money in an economy. The purchase or sale of securities controls the money in the hands of public as they deposit or withdraw the money from commercial banks. Thus, money creation by commercial banks get affected. Purchase of securities increases the money creation of commercial banks and similarly, sale of securities decreases the credit creation of commercial banks. Thus, the Central Bank controls the process of money creation by commercial banks by open market operations.
Process of money creation is a process of creating credit money by commercial banks which is in far excess of their initial deposits. The capacity of banks to create credit depends on the amount of initial fresh deposits or primary deposits and the Legal Reserve Ratio (LRR).
Further, it should be kept in mind that the process of money creation is based on two assumptions:
- The whole of the commercial banking system is treated as one unit.
- All monetary exchanges in an economy are routed through banks.
Now let us understand the process of credit creation with the help of an example:
Let the LRR be 20% and there is a fresh deposit of ₹10,000. As required, the banks keep 20%, i.e. ₹ 2,000 as cash.
Suppose the banks lend the remaining ₹ 8,000. 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, bank receives fresh deposits ₹ 8,000.
The banks again keep 20%, i.e. ₹ 1,600 as cash and lend ₹ 6,400, which is also 80% of the last deposits. The money again comes back to the bank leading to a fresh deposit of ₹ 6,400.
In this way, the money goes on multiplying and ultimately total money creation is ₹ 50,000.
Given the amount of fresh deposit and the LRR, the total money creation is :
Here, LRR = Legal Reserve Ratio
So, on substituting the variables, we get,
= ₹ 50,000.
- Externalities refers to the benefits (or harms) that a firm or an individual causes to another for which they are not charged (or penalised). Externalities do not have any market in which they can be bought and sold. e.g. river pollution created by an oil refinery has disastrous effects on aquatic life. As a result, the fishermen of the river may be losing their livelihood. Such harmful effect that the refinery is inflicting on others, for which it will not bear any cost, are called negative externalities.
In such a situation, there will be either overproduction or underproduction in the market than what is socially desired.
- National Income by Expenditure Method = Private Final Consumption Expenditure + Government Final Consumption Expenditure + Net Domestic Capital Formation + Net Exports + Net Factor Income from Abroad – Net Indirect Taxes
= 900 + 400 + 200 + (-25) + (-10) – 100 = ₹ 1,365 crores
- It will be included as it is a part of factor income earned within the domestic territory qf the country.
- It is not included in the domestic factor income of India as it is an intermediate expenditure for the firm. Therefore, it is deducted from the value of output of the firm.
- It is not included in the domestic factor income of India because Russian Embassy is not a part of domestic territory of India, and hence rent received from Russian Embassy will be factor income received from abroad.
- It is not included in the domestic factor income because compensation has been given by the insurance company and not by the employer.
- The given statement is true. When planned investment is less than planned savings then this causes Marginal Propensity to Consume (MPC) to fall. As MPC falls, the level of aggregate demand in the economy also falls leading to accumulation of inventory.
- The given statement is false. When aggregate demand is greater than aggregate supply then inflationary gap exists in the economy.
- The given statement is false. When income is less than the level of autonomous consumption, then there are dissavings and in such a case Average Propensity to Save (APS) can be negative.
- Depreciation of domestic currency occurs when the value of domestic currency decreases in relation to the value of other currencies in the foreign exchange market.Devaluation refers to a fall in the value of domestic currency in relation to foreign currency as planned by the Central Bank in a situation, when exchange rate is not determined by market forces of demand and supply.Depreciation and devaluation both encourage exports from the country. As the value of domestic currency falls, the foreign countries can purchase more quantity of goods and services for the same amount of foreign currency from the domestic country. As a result, exports will rise.
- The transactions which cause a change in the official reserves of the country are referred to as official reserve transactions. These transactions are undertaken by the monetary authorities of the country. These transactions are undertaken to finance autonomous deficit in balance of payments or to use surplus in the balance of payments.
Examples of such transactions are as follows:
- Reducing the reserves of foreign currency.
- Borrowings from international monetary fund.
- Purchase of foreign securities, foreign currency, gold, etc.
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