CBSE Sample Papers for Class 12 Economics Paper 1

CBSE Sample Papers for Class 12 Economics Paper 1 are part of CBSE Sample Papers for Class 12 Economics Here we have given CBSE Sample Papers for Class 12 Economics Paper 1.

CBSE Sample Papers for Class 12 Economics Paper 1

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 1 of Solved CBSE Sample Papers for Class 12 Economics is given below with free PDF download solutions.

Time Allowed : 3 Hours
Maximum Marks : 80

General Instructions

(i) All questions in both sections are compulsory.
(ii) Question Nos.1 – 4 and 13 – 16 are very short answer questions carrying 1 mark each. They arc required to be answered in one sentence each.
(iii) Question Nos. 5 – 6 and 17 – 18 are short answer questions carrying 3 marks each. Answers to them should not exceed 60 words each.
(iv) Question Nos.7 – 9 and 19 – 21 are also short answer questions carrying 4 marks each. Answers to them should normally not exceed 70 words each.
(v) Question Nos. 10 – 12 and 22 – 24 are long answer questions carrying 6 marks each. Answers to them should normally not exceed 100 words each.
(vi) Answers should be brief and to the point and the above word limits should be adhered to as far as possible.

Section A : Microeconomics

Question 1:
Define opportunity cost.

Question 2:
At what level of production is total cost equal to total fixed cost ?

Question 3:
Which of the following does not cause shift of supply curv e of a good ? (Choose the correct alternative)
(a) Price of input.
(b) Price of the good.
(c) Goods and sendees tax.
(d) Subsidy.

Question 4:
Which of the following measures of price elasticity shows elastic supply ? (Choose the correct alternative) .
(a) 0
(b) 0.5
(c) 1.0
(d) 1.5

Question 5:
Explain the central problem of “What is produced and in what quantities”.

OR

In what circumstances may the production possibility frontier shift away from the origin ? Explain.

Question 6:
A consumer buys 200 units of a good at a price of ₹20 per unit. Price elasticity of demand is (-) 2. At what price will he be willing to purchase 300 units ? Calculate.

Question 7:
Write a budget line equation of a consumer if the two goods purchased by the consumer, Good X and Good Y are priced at ₹ 10 and ₹ 5 respectively and the consumer’s income is ₹ 100.

OR

Define marginal rate of substitution. Explain its behaviour along an indifference curve.

Question 8:
Explain the conditions of producer’s equilibrium under perfect competition.

Question 9:
Explain the implications of “freedom of entry and exit of firms” under perfect competition.

Question 10:
A consumer consumes only two goods X and Y. Explain the conditions of consumer’s equilibrium using Utility Analysis.

Question 11:
Draw Average Variable Cost (AVC), Average Total Cost (ATC) and Marginal Cost (MC) curves in a single diagram. State the relation between MC curve and AVC and ATC curves.

Question 12:
Define price floor. Explain the implications of price floor.

Or

Market of a good is in equilibrium. If the demand for the good effects of this change.

SECTION B: MACROECONOMICS

Question 13:
Give one example of negative externalities.

Question 14:
Credit creation by commercial banks is determined by (Choose the correct alternative):
(a) Cash Reserve Ratio (CRR).
(b) Statutory Liquidity Ratio (SLR).
(c) Initial Deposits.
(d) All the above.

Question 15:
State the two components of Mj measure of Money Supply.

Question 16:
Define aggregate supply.

Question 17:
Distinguish between stock and flow variables with suitable examples.

Or

What are capital goods ? How are they different from consumption goods ?

Question 18:
Define investment multiplier. How is it related to marginal propensity to consume ?

Question 19:
What is monetary policy ? State any three instruments of monetary policy.

Question 20:
Define full employment in an economy. Discuss the situation when aggregate demand is more than aggregate supply at full employment income level.

OR

What are two alternative ways of determining equilibrium level of income ? How are these related ?

Question 21:
What is ex-ante consumption ? Distinguish between autonomous consumption and induced consumption.

Question 22:
What is government budget ? Explain its major components.

OR

Explain (a) allocation of resources and (b) economic stability as objectives of government budget.

Question 23:
Discuss briefly the meanings of:
(i) Fixed Exchange Rate
(ii) Flexible Exchange Rate
(iii) Managed Floating Exchange Rate

Question 24:
Calculate (a) Operating Surplus, and
(b) Domestic Income :

                                                                                    (₹ in Crores)
(i) Compensation of employees                                    2,000
(ii) Rent and interest                                                        800
(iii) Indirect taxes                                                              120
(iv) Corporation tax                                                          460
(v) Consumption of fixed capital                                    100
(vi) Subsidies                                                                       20
(vii) Dividend                                                                     940
(viii) Undistributed profits                                              300
(ix) Net factor income to abroad                                     150
(x) Mixed income                                                               200

Answers:

Answer 1:
Opportunity cost is the cost of having a little more of one good in tenns of the amount of the other good that has to be foregone.

Answer 2:
At zero (0) level of production.

Answer 3:
(b) Price of the good.

Answer 4:
(d) 1.5

Answer 5:
Resources available to an economy are scarce. An economy cannot produce all that the society needs. This compels the economy to utilise its scarce means so that society gets maximum aggregate satisfaction. For example, from a given quantity of land, either wheat or cotton can be produced or a combination of them. Some wheat will have to be sacrificed for producing more cotton. Following table shows the combinations of wheat and cotton :

An economy will choose any combination out of them. Production of wheat has to be decreased to increase the production of cotton.

Or

The production possibility curve can shift to the right or to the left. A production possibility curve shifts to the right due to following reasons :

1. Increase in resources such as capital or labour.
2. Improvement in technology.

A production possibility curve can shift to the left when resources decrease due to fall in population or large scale natural calamities and war etc.

In the diagram, MN is the production possibility curve. Production possibility curve shifts to right when there is increase in production capacity i.e., resources.
The curve shifts to left when there is decrease in production capacity. It is a rare phenomenon. However, it may happen due to large scale calamities, war etc,

Answer 6:
Original price per unit (P) = 20
Original demand (Q) = 200
New demand (Q₁) = 300
Change in demand = 300 – 200 = 100 units
Elasticity of demand = (-) 2

Answer 7:
Budget line equation may be expressed as under :
PX + PY = M
where P = Price
X = Good X units
Y = Good Y units
M = Consumer’s income
10X +57= 100

Or

Marginal rate of substitution may be defined as the rate by which a consumer is willing to give up one good (Goody) to obtain one additional unit of the another good (Good x).
The ratio of the amount of goody lost to gain the amount of good x is called marginal rate of substitution of good y for good x. Thus, MRS of Good y for Good x

An indifference curve is convex to the origin due to diminishing marginal rate of substitution. Marginal rate of substitution of y for x (MRSyx) is the rate by which amount of y is sacrificed to obtain one additional unit of x.
MRSyx is continuously falling because as he obtains more and more units of x, marginal utility of x declines and the consumer will like to sacrifice less y to obtain one additional unit of x. Thus, concavity of an indifference curve implies diminishing marginal rate of substitution.
Following schedule explains the concept of MRS :

Answer 8:
Producer’s equilibrium is the position where a producer earns maximum profits and as a result, there is no tendency to change.
According to marginal cost and marginal revenue approach, there are two conditions of producer’s equilibrium :
(i) Marginal Revenue (MR) = Marginal Cost (MC)
(ii) Marginal cost must be rising i.e., MC curve must cut MR curve from below. In other words, marginal cost becomes greater than marginal revenue after this level of output. (MC > MR after the MC = MR out put level)
Under perfect competition, the price charged for selling different units of the commodity is always uniform because a producer is a price taker and not a price maker. We can Wow producer’s, equilibrium under perfect, competition, as in figure.

In the diagram, marginal revenue and marginal cost are equal to each other at two points A and E. But, the producer will be at equilibrium at E because at this level rising marginal cost is equal to marginal revenue. Producer will earn more profit at E than at A because number of units produced are maximum.

Answer 9:
There is freedom of entry and exit of firms in perfect competition. As such, there is unrestricted entry and exit. Any one, who wishes to enter or leave the market, may do so without any restriction. As a result of this feature, there is no abnormal profit in the long run and firms will earn only normal profit. If there are abnormal profits in the short run, new finns enter the market. This will shift the market supply curve to the right which will reduce the price as well as profit. If there are losses in the short run, some of the existing firms will leave the market. This will shift the market supply curve to the left which will raise the market price and wipe out the losses. Thus, in the long run, all finns will earn only nonnal profits and there will be neither profits nor loss to any firm under perfect competition.

Answer 10:
Considering that a consumer is consuming only two goods X and Y, the conditions of consumer’s equilibrium are :
(i)  \(\frac { MUx }{ px }\) = \(\frac { MUy }{ py }\)
(ii) MU of a good falls as more units of the goods are consumed.
If MUx/Px is greater than MUy/Py, it means that the satisfaction a consumer derives from spending a rupee on good X is greater than the satisfaction derived from spending a rupee on good Y. In such situation, a consumer will be motivated to substitute good X for good Y and will relocate his income to satisfy the condition of consumer’s equilibrium.
As the consumption of good X increases its marginal utility will fall. As the consumption of good Y decreases, its marginal utility will increase. This is due to the law of diminishing marginal utility.
This process will continue till MUx/Px becomes equal to MUy/Py and the consumer is in equilibrium.
If MUx/Px is lower than MUy/Py, it means that the satisfaction a consumer derives from spending a rupee on good X is lower than the satisfaction derived from spending a rupee on good Y. In such a situation, a consumer will be motivated to substitute good Y for good X. As the consumption of good Y increases, its marginal utility will fall. As the consumption of good X decreases, its marginal utility will increase.
This process will continue till \(\frac { MUx }{ px }\) = \(\frac { MUy }{ py }\)
Unless MU of a good falls, as more units are consumed, the consumer will not reach the equilibrium.

Answer 11:
Adjoining diagram shows Average Variable Cost (AVC), Average Total Cost (ATC) and Marginal Cost (MC) curves.

Following are the points of relation between MC curve and AVC and ATC curves :

1. All three curves are U-shaped due to Law of Variable Proportions.
2. All three curves fall initially and after sometimes all three curves rise.
3. MC curve falls and rises at a faster rate than AVC and ATC curves.
4. MC curve intersects AVC and ATC curves at their lowest point.
5. Since MC curve moves faster than AVC and ATC curves, MC curve reaches at its minimum point earlier than other two curves.
6. Vertical distance between ATC curve and AVC curve goes on declining as output increases.

Answer 12:
Price floor is a system under which a floor is laid on the price of a commodity as a result of which sellers (producers) need not sell at a price lower than the price fixed by the government.
Floor price is higher than the equilibrium price. Such a step is taken to protect the interests of producers (generally farmers) who are assured of a given price for their commodity. The impact of price floor may be shown in diagram.

In the diagram, OP is equilibrium price. The government fixes the floor price at OC. As a result of price floor, price is increased from OP to OC. At this price supply increases to CN i.e., OV. But the demand of the commodity is only CM i.e., OU. As a result, there is a surplus of commodity equal to MN or UV. To avoid the problem of surplus, the government may purchase the commodity.

Or

When market of a commodity is in equilibrium, it implies that demand for the commodity is equal to its supply. When demand for the product decreases, equilibrium price gets disturbed and there will be a situation of deficient demand i.e., excess supply.

There will be following changes in the market for the commodity :

1. Since the demand is less than the supply, all the sellers will not be able to sell the quantity they want to sell. As a result of this, price will tend to fall.
2. When the price of the commodity starts falling, sellers will like to supply less.
3. Fall in the price of the commodity will lead to increase in demand till demand is equal to supply.

As a result of above changes, deficient demand will be corrected. In the diagram OP is the equilibrium price because supply and demand for commodity are equal. When demand decreases to DJDJ, market price becomes OP l. After sometime, market price will reach to OP.

Answer 13:
Smoke out of chimneys of factories.

Answer 14:
(d) All the above

Answer 15:
(i) Currency with the public.
(ii) Demand deposits with the banks.

Answer 16:
Aggregate supply may be defined as the total value of goods and services available in the economy during an accounting year.
Thus, Aggregate Supply = Consumption (C) + Savings (S)

Answer 17:

OR

Capital goods may be defined as the durable goods (assets and properties) which are used by the producers in the production of goods and services.

Answer 18:
Investment multiplier means the rate of change in national income due to change in investment. Thus,

Multiplier = \(\frac { Change m National Income }{ Change in Investment }\)

Multiplier depends on the value of marginal propensity to consume (MPC).
Marginal propensity to consume is the proportion of income that is consumed out of additional income. When there is increase in investment, there will be increase in the income of some persons who will again spend it on consumption goods which will again become the income of producers of consumption goods. Higher marginal propensity to consume means higher consumption which induces producers to produce more resulting in increase in national income. Thus, investment multiplier is positively related to marginal propensity to consume.
Multiplier coefficient is obtained by following formula :

K = \(\frac { 1 }{ 1 – MPC }\)
It implies that higher the marginal propensity to consume, higher will be the multiplier. Minimum value of investment multiplier can be one because minimum value of MPC can be zero.

Answer 19:
Monetary policy is the policy of the central bank of a country to regulate money supply and credit in the country.
Following are instruments of monetary policy :
(i) Bank rate policy –  Bank rate is the minimum rate at which commercial banks rediscount its eligible securities or borrow from the central bank. Bank rate is raised to discourage frequent borrowings and vice-versa. As the commercial banks are required to pay more for the financial accommodation, commercial banks can only be expected to lend at higher rates of interest.
(ii)  Open market operations – Open market operations consist of buying and selling government securities in the market by the central bank. When central bank sells government securities to commercial banks, these banks lose equivalent amount of cash reserves. This reduces the availability of credit. Similarly, if central bank purchases government securities from commercial banks, liquid position of commercial banks improves and availability of credit is more.
(iii) Varying reserve requirements – Commercial banks are required to maintain reserves with the central bank on account of Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR).
Linder Cash Reserve Ratio, the banks are required to deposit with the central bank a percentage of their net demand and time liabilities. An increase in the CRR will lower the banks’ ability to give credit.
SLR requires the banks to maintain a specified percentage of their net total demand and time liabilities in the form of liquid assets. If SLR is increased, the ability of banks to give credit reduces.

Answer 20:
Full employment is a situation in which all resources are fully employed and economy produces the largest output that the economy is capable of producing.
When aggregate demand is more than the aggregate supply at full employment income level, there will be situation of excess demand or inflationary gap. Thus,
Excess Demand = Aggregate Demand – Aggregate Supply
Following diagram shows the concept of excess demand :

In case of excess demand, output and employment cannot be increased. It only generates pressure of demand on the existing flow of goods and services in the economy. This will lead to deaccumulation of unintended inventories with businessmen. After some time, output, income and employment will be reached where AD = AS.

OR

Following are two alternative ways of determining equilibrium level of income :

1. Aggregate demand and supply approach.
2. Saving and Investment approach.

According to aggregate demand and supply approach, income is determined at a point where aggregate demand and aggregate supply are equal to each other. Alternatively, according to saving and investment approach, income is determined at a point where savings and investment are equal to each other. Both the approaches give the same result because saving and investment approach is derived from aggregate demand and supply,
According to aggregate demand and supply approach
Aggregate supply = Aggregate Demand
C + S =C + I
S = I
It may be shown as under:

Income is determined at a point Q where AS = AD and at point Q₁ where S = I.

Answer 21:
Ex-ante or planned or intended consumption means the consumption desired to be made by the people during a period.
Following points highlight the distinction between autonomous consumption and induced consumption :

Answer 22:
A government budget may be defined as a statement of government’s estimated incomes and expenditures for a period of one financial year.
Following are two components of the government budget:

1.  Revenue Budget
2. Capital Budget

Revenue Budget – Revenue budget is a statement of the government’s estimated revenue receipts and revenue expenditure for a period of one financial year. Revenue budget covers revenue items which are of recurring nature and are non-redeemable. Revenue budget contains the following :
(i) Revenue Receipts (ii) Revenue Expenditure.
Revenue receipts neither create a liability nor lead to reduction in assets. Revenue receipts include tax revenue and non-tax revenue.

Following are examples of tax revenue :

•  Income Tax
• Goods and Service Tax
• Corporation Tax
•  Gift Tax

Following are examples of non-tax revenue :

•  Price
•  Gifts
• Grants
•  Escheat
• Fines.

Revenue expenditure does not lead to any creation of assets or reduction in liabilities. It includes plan expenditure and non-plan expenditure.
Capital Budget – Capital budget is a statement of the government’s estimated capital receipts and capital expenditure. Capital budget covers capital items which are of non-recurring nature.
Following are two components of capital budget:

1.  Capital receipts
2. Capital expenditure

Capital receipts either create a liability or lead to reduction in assets.
Following are examples of capital receipts :

• Loan from public
• Foreign debt
•  Grants.

Capital expenditures leads to creation of assets or reduction in liabilities.
Following are examples of capital expenditure :

•  Expenditure on roads
• Construction of school buildings
•  Repayment of loans.

(A) Allocation of Resources – One of the objectives of a government budget is to secure reallocation of resources in line with economic and social priorities of the country. For this purpose, the budget of the government may have a liberal expenditure policy in favour of public goods such as national defence, roads, government administration etc., to promote social welfare. The government can use its taxation policy to mobilise resources for investment. The government can also give subsidies to encourage production in some sectors and small scale industries. The government may discourage the production of undesirable goods through heavy taxation.

(B) Economic Stability – One of the objectives of government is to ensure stability in the economy. The government budget prevents business fluctuations and maintains price stability. If the aggregate demand falls short of aggregate supply, the government will have to take some measures in its budget to discourage savings and to encourage investments. For this, the government would decrease taxes but increase public expenditure. If the aggregate demand exceeds aggregate supply, the government would encourage savings and discourage investments by increasing taxes and reducing public expenditure.

Answer 23:
(i) Fixed Exchange Rate – Fixed exchange rate means the exchange rate which is officially declared and fixed uver a specified period. It is changed from time to time according to need. It requires regular control and monitoring by the government. It is stable and certain and not subject to wide fluctuations. It checks speculation in foreign exchange market.
(ii) Flexible Exchange Rate – Flexible exchange rate means the exchange rate which is floating because it is determined by demand and supply in the foreign exchange market. It does not require any intervention by the government. It is uncertain and subject to wide fluctuations. It encourages speculation.
(iii) Managed Floating Exchange Rate – Managed floating foreign exchange rate means flexible foreign exchange rate system in which gradual adjustments in rate of exchange take place through the intervention of the government.
This is done to control the exchange rate i.e., to make exchange rate stable. Thus, managed floating system is a mixture of flexible and fixed exchange rates. However, managed floating requires strict rules and guidelines otherwise it may be abused to detriment of other countries.

Answer 24:
(a) Operating Surplus
= Rent and interest + Corporation tax + Dividend + Undistributed profits
= 800 + 460 + 940 + 300 = ₹ 2,500 Crores

(b) Domestic Income
= Operating surplus + Compensation of employees + Mixed income
= 2,500 + 2,000 + 200 = ₹ 4,700 Crores.

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