CBSE Sample Papers for Class 12 Economics Paper 3

CBSE Sample Papers for Class 12 Economics Paper 3 are part of CBSE Sample Papers for Class 12 Economics Here we have given CBSE Sample Papers for Class 12 Economics Paper 3.

CBSE Sample Papers for Class 12 Economics Paper 3

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 3 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 are 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.

Questions

Section A: Microeconomics

Question 1:
Which of the following is a statement of normative nature in economics ?
(a) Economics is study of choices/altematives.
(b) Government should be concerned with how to reduce unemployment.
(c) According to an estimate, in spite of severe shortage, more than 10% of houses in Indian cities are lying vacant.
(d) Accommodation of Refugees is posing a big problem for the Europe.

Question 2:
Define Marginal Physical Product.

Question 3:
A firm is operating with a Total Variable Cost of ₹ 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 ?
(i) ₹ 140
(ii) ₹ 100
(iii) ₹ 120
(iv) ₹ 300

Question 4:
In an imperfectly competitive market, if the Total Revenue is maximum, Marginal Revenue will be _____.

Question 5:
State and discuss any two factors that will shift the Production Possibility Frontier (PPF) to the right.
OR
Draft a hypothetical schedule for a straight line Production Possibility Curve.

Question 6:
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.

Question 7:
(a) Arrange the following coefficients of price elasticity of demand in ascending order :
– 0.87, – 0.53, – 3.1, – 0.80
(b) 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.

Question 8:
What is meant by Price Floor ? Discuss in brief, any one consequence of imposition of floor price above equilibrium price with help of a diagram.
OR
How is the price of a commodity determined in a perfectly competitive market ? Explain with help of a diagram.

Question 9:
Explain how the following factors affect the supply of the commodity (any two):
(a) Price of factor inputs.
(b) State of technology.
(c) Government taxation policy.

Question 10:
(a) 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 \(\frac { MUx }{ Px }\) >  \(\frac { MUy }{ Py }\)  ?
(b) Identify which of the following is not true for the Indifference Curves theory. Give valid reasons for choice of your answer :
(i) Lower indifference curve represents lower level of satisfaction.
(ii) Two indifference curves can intersect each other.
(iii) Indifference curve must be convex to origin at the point of tangency with the budget line at the consumer’s equilibrium.
(iv) Indifference curves are drawn under the cardinal approach to consumer equilibrium.
OR
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 :
(a) Give the equation of the budget line for the consumer.
(b) What is the value of slope of the budget line ?
(c) How many units can the consumer buy if he is to spend all his money income on good X ?
(d) How does the budget line change if there is a 50% fall in price of good Y ?

Question 11:
(a) Why is Total Variable Cost curve inverse S – shaped ?
(b) What is Average Fixed Cost of a firm ? Why is an Average Fixed Cost Curve a rectangular Hyperbola ? Explain with help of a diagram.

Question 12:
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
Qs’ = 100 + 15p
Analyse the new equilibrium price and new equilibrium quantity as against the original equilibrium price and equilibrium quantity.

Section B : Macroeconomics

Question 13:
Define money supply.

Question 14:
State one fiscal measure that can be used to reduce the gap between rich and poor.

Question 15:
Define the capital receipts of a government.

Question 16:
From the following data calculate Fiscal Deficit:

Question 17:
Estimate the value of ex-ante AD, when autonomous investment and consumption expenditure (A) is ₹50 Crores, and MPS is 0.2 and level of income is ₹ 300 Crores.

Question 18:
Discuss the significance of 45 degree line in Keynesian Economics.

Question 19:
Elaborate ‘economic growth’ as objective of government budget.

Question 20:
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 ?

Question 21:
How will ‘Reverse Repo Rate’ and ‘Open Market Operations’ control excess money supply in an economy ?
OR
Illustrate with the help of an hypothetical numerical example the process of credit creation.

Question 22:
(a) Define Externality.
(b) Find National Income from following using expenditure method :

                                                                                                              ( ₹ in Crores)
1. Current Transfers from Rest of the World                                                 50
2. Net Indirect Taxes                                                                                         100
3. Net Exports                                                                                                 (-) 25
4. Rent                                                                                                                   90
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
10. Profit                                                                                                               220
11. Mixed Income of Self-Employed                                                               400
12. Interest                                                                                                           230

OR

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) PaymenJ 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.

Question 23:
State whether the following statements are true or false. Give valid reasons for your answers.
(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.

Question 24:
(a) ‘Devaluation and Depreciation of currency are one and the same thing/ Do you agree ? How do they affect the exports of a country ?
(b) What is meant by ‘official reserve transactions’ ? Discuss their importance in Balance of Payments.

Answers

Answer 1:
(b) Government should be concerned with how to reduce unemployment.

Answer 2:
Marginal physical product may be defined as the change in output (total physical product) by employing one additional unit of the variable input when the employment of all other inputs is kept constant. Thus,

Answer 3:
(i) ₹ 140

Answer 4:
In an imperfectly competitive market, if the Total Revenue is maximum, Marginal Revenue will be zero.

Answer 5:
Following are the factors that will shift the Production Possibility Frontier (PPF) to the right:

1.  Increase in Resources – When there is increase in resources (natural, physical or human resources) to an economy, there is an increase in the output potential in an economy. This will result in shift of Production Possibility Frontier away from origin.
2.  Improvement in Technology – Production potential of an economy depends on the technology of production. When an economy uses an improved technology, production potential of the economy increases resulting in more output from given resources.

Or

If it is desired to have a straight line Production Possibility Curve, Marginal Rate of Transformation has to be constant i.e., MRT will neither decrease nor increase when units of one good are sacrificed to get more units of other good.

Production Possibility Schedule

Answer 6:
(i) Demand curve of good X will shift towards right implying that demand of the good X increases. The reason is that complementary goods are consumed together and there is an inverse relationship between demand of the given good and price of its complementary good.
(ii) Demand curve of good X will shift towards left implying that demand of the good X decreases. The reason is that media reports of harmful effect of good X will change the inclination and taste of consumers against the good X.
(iii) Demand curve of good X will shift towards right implying that demand of the good X increases. The reason is that when income of the consumer increases, he is in a position to spend more on the good X.

Answer 7:
(a) – 0.53, – 0.80, – 0.87, – 3.1
Here, minus sign is not relevant as it represents the inverse relation between price of the good and its quantity demanded.

Answer 8:
A Price Floor is the minimum price at which a commodity can be sold legally. Price Floor if fixed above the equilibrium price, serves the purpose of welfare of the producers (say farmers). When price floor is fixed at P” quantity demanded will contract to OQ” but at this price, suppliers will be ready to supply OQ’. As a result, surplus of QQ” will emerge.

Imposition of floor prices above equilibrium price will have the following major implications :

• Surpluses – The quantity actually brought and supplied will shrink as a direct consequence of price flooring, as a result, a part of producer’s stock will remain unsold. As shown in the figure the surplus of Q’Q” arises.
  
•  Buffer Stock – In order to maintain the support price, the government may design some programmes to enable producers to dispose of their surplus stocks. One such programme can take the form of buffer stock.
  Government may purchase the surplus to store or sell it at subsidised prices. Subsidy is required to lower the price and make it competitive in the market. Government may also use it as aid and send it to other countries.(a) 

OR

In a perfectly competitive market, there are a large number of sellers and buyers. The price of a commodity is determined by the whole industry i.e., by the combined forces and actions of all the sellers and buyers. An individual seller has no role in the determination of the price of the commodity because he is a price taker. In this way price of a commodity is determined by the industry. Price of a commodity is determined by market demand and market supply of the commodity. It may be shown as under :

DD and SS are market demand and market supply curves intersecting at E. OQ quantity (Equilibrium Quantity) would be offered for sale and demanded by the buyers at OP price (Equilibrium Price) per unit. The industry is in equilibrium.

Answer 9:
Supply of a commodity is affected by following factors :

(a) Price of factor inputs – Supply of a good is affected by the cost of production and there is inverse relationship between cost and supply of a commodity. When there is a fall in the prices of factor inputs, the production of the commodity becomes more profitable in comparison to other commodities. As a result, the supply of the commodity will increase. Conversely, when there is a rise in the prices of factor inputs, the marginal cost of production increases and there will be decrease in the supply.

(b) State of technology – Technology of production affects the marginal cost of production. Where there is an improvement in technique of production, it is possible to produce more goods witlj the same inputs. As a result of higher productivity, there will be lower cost of production and the production of the commodity becomes more profitable in comparison to other commodities. As a result, the supply of the commodity will increase.

(c) Government taxation policy – Supply of a commodity is affected by the cost of production and there is an inverse relationship between cost and supply of the commodity. If the government increases taxes on the commodity, it will increase the cost of production adversely and hence supply decreases. If the government decreases the tax, the cost of production will fall and the producer will be induced to increase the supply of the commodity.

Answer 10:
(a) When Aman is in state of equilibrium, he will be satisfying following condition :
\(\frac { MUx }{ Px }\) =  \(\frac { MUy }{ Py }\)
It means that the ratio of marginal utility to price in case of good X should be equal to that of good Y. MUx MUy, then it means that satisfaction derived from consumption of good X is greater than the satisfaction derived from consumption of good Y.
Mr. Aman will reallocate his income by spending more on good X. Utility derived from X goes on
diminishing and reverse preposition occurs for good Y, this process will continue till \(\frac { MUx }{ Px }\) becomes equal to \(\frac { MUy }{ Py }\)

(b) The second statement ‘Two regular convex to origin indifference curves can intersect each other’ is not true as the intersection of two regular indifference curves indicate one such point (point of intersection) which yields the similar satisfaction of two different indifference curves which is not possible.

One indifference curve represents only one level of satisfaction on all the points on if. For different levels of satisfaction, there have to be different indifference curves.
Let us see the adjoining figure.
In the figure, there are two indifference curves IC₁ and IC₂ intersecting each other, there is clear violation of assumption of monotonic preference.
As per figure, satisfaction derived at point A = satisfaction derived at point C (on IC₁) and satisfaction derived at point D = satisfaction derived at point E (on IC₂).
At intersecting point B; satisfaction derived by consumer at points A, C and B is equal and
A = C = B (on IC₁) X
D = E = B (on IC₂)
Consequently A = D (which is absurd and against the definition of indifference curve).
Thus, we can say that IC’s can’t intersect each other.

OR

(a) PxQx + PyQy = M
50Qx + lOQy = 500
(b) Slope of budget line = (-)  \(\frac { Px }{ Py }\)
= (-)  \(\frac { 50 }{ 10 }\) = (-) 5

(c) If a consumer spends all his money income on good X, it means that quantity purchased of Y is zero. In this case, budget equation will be
50Qx + 10Qy = 500
50Qx + 10(0) = 500
50Qx = 500
Qx = \(\frac { 500 }{ 50 }\) =  10 units
(d)Old price = ₹ 10
New price of P = ₹ 5
(Since 50% of ₹ 10 = ₹ 5)
New budget line will be
50Qx + 5Qy = 500

Answer 11:
(a) Total variable cost is inverse S-shaped which means that Total Variable Cost (TVC) initially increases at decreasing rate and later, it increases at increasing rate. It is due to the operation of Law of Variable Proportions.
(b) Average fixed cost is the per unit fixed cost i.e., total fixed cost divided by the output.
AFC =  \(\frac { Total Fixed Cost }{ output }\)
Since total fixed cost does not increase with the increase in output,

Since total fixed cost remains same at different levels of output in the short run, average fixed cost falls as the level of output is increased. Average fixed cost keeps on falling as the level of output increases.
Average fixed cost curve looks like a rectangular hyperbola. The reason is that if we multiply any value of output with its corresponding average fixed cost, we always get a constant total fixed cost. The area of the rectangle gives us the total fixed

Answer 12:
(i) The basic condition for equilibrium price and equilibrium quantity is as under :
Quantity demanded = Quantity supplied
Qd = Qs
200 – 10p – 50 + 15p
= 10p – 15p = 50 – 200
– 25/7 = – 150
P =  \(\frac { 150 }{ 25 }\)  = ₹6
Putting the vallie of p in Qd
Qd = 200 – 10p
= 200 – 10 x 6
= 200 – 60
= 140  units
Equilibrium price = ₹ 6
Equilibrium quantity = 140 units
(ii) Quantity demanded = Quantity supplied
Qd = Qs
200- 10p= 100+ 15p
– 10p – 15p = 100-200
-25p =- 100
P =  \(\frac { 100 }{ 25 }\)
p = Equilibrium price = ₹ 4
Qd = 200 – 10p
= 200 – 10 x 4= 160 units Equilibrium quantity = 160 units
As a result of change in supply, the equilibrium price has come down from ₹ 6 to ₹ 4 and equilibrium quantity has increased from 140 to 160 units.

Answer 13:
Money supply may be defined as a stock of money in circulation in a country at any given point of time.

Answer 14:
Increasing the taxes on rich and using such revenue to benefit the poor.
or
Increasing the expenditure on facilities to poor.

Answer 15:
Capital receipts of a government may be defined as receipts of the government that create liability of repayment on government or involve reduction in the assets.

Answer 16:
Fiscal deficits = Borrowings = ₹ 32 billion.

Answer 17:
MPS = 0.2 (given)
MPC = 1 –  MPS
= 1- 0.2 = 0.8
Aggregate Demand (AD) = C + I
= A + bY
= 50 + 0.8 (300)
= 50 + 240 = ₹290 Crores

OR

From the above two cases, it is observed that there exists positive or direct relation between marginal propensity to consume (MPC) and investment multiplier. Higher MPC means higher consumption which induces producers to produce more resulting in increase in income.

Answer 18:
In Keynesian Economics, the 45 degree line represents aggregate supply of the economy. Aggregate supply may be defined as the total value of goods and sendees available in the economy during an accounting year.
Aggregate supply = Consumption + Saving
It may be shown as under :

At all points on 45 degree line, Consumption is equal to Income. It helps under the Keynesian Economic analysis. Since the two variables (Consumption/Aggregate Expenditure and Income) are measured in the same units, the 45 degree line has a slope of one and it bisects the 90 degree angle formed by the two axes.

Answer 19:
Economic growth implies a sustainable increase in real GDP of an economy, i.e., an increase in volume of goods and services produced in an economy. Budget can be an effective tool to ensure the economic growth in a country.

1. If the government provides tax rebates and other incentives for productive ventures and projects, it can stimulate savings and investments in an economy.
2. Spending on infrastructure of an economy enhances the production activity in different sectors of an economy. Government expenditure is a major factor that generates demand for different types of goods and services in an economy which induces growth in private sector too.
   However, before planning such expenditure, rebates and subsidies government should check the rate of inflation and tax rates. Also there may be the risk of debt trap if loans are too high to finance the expenditure.

Answer 20:
(i) Real GDP and Nominal GDP is same for year 2014-2015. It is so because 2014-20 15 is the base year.
(ii)

The Real GDP declined in the year 2015-2016. It could be due to high rate of inflation or price levels.

Answer 21:
Reverse Repo Rate – Reverse repo rate is the rate at which central bank of a country borrows money from commercial banks. Reverse repo rate is fixed by the central bank of the country. To control the excessive money supply, central bank will increase the reverse repo rate. It motivates the commercial banks to lend to central bank and reduces the availability of funds with the commercial banks to create credit.

Open Market Operations – Open market operations refer to buying and selling of government securities by central bank from/to commercial banks. To control the excessive money supply, central bank of the country sells government securities to the commercial banks. This reduces the reserve of commercial banks and adversely affects commercial banks ability to create credit. As a result, money supply decreases in the economy.

OR

The credit creation by commercial banks is determined by amount of initial deposit and the legal reserve ratio. Suppose customer deposits ₹ 1,000 in bank. Bank has to pay interest on this amount for which bank should lend this money to someone. A part of the amount is to be retained with bank to meet its customer’s obligations. Say, if LRR is 20%, the banks will keep 20% of deposits as reserves and will lend remaining 80% i.e., ₹ 800. Those who borrow will spend this money and same ₹ 800 will come back to banks in form of deposits. This raises the total deposits to ₹ 1,800 now. Banks again keep 20% of 800 as reserve and lend ₹ 640 to those who needs. This will further raise the deposits with banks. In this way deposits will go on increasing @ 80% of the last deposit. The number of times the total deposit will become, is determined by money multiplier i.e., 1/LRR = 1/0.2 = 5 times.
Total deposits will be Initial Deposits x Money Multiplier = ₹ 1,000 x 5 = ₹ 5,000.

Answer 22:

• Externalities refer to those benefits or harms accruing to another for which they are not paid or penalised. Externalities may be positive or negative.
  Externality occurs when the actions of consumers or producers give rise to negative or positive side effects on third party who are not part of these actions, and whose interests are not taken into consideration. E.g., introduction of metro rail on one hand has increased the prices of property but has also saved the time and money of general public and has provided safe means of transports.
•  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
  = 1,500- 135
  = ₹ 1,365 Crores

OR

(i) Compensation of employees to the resident of Japan working in Indian embassy in Japan will be included in domestic factor income of India because Indian embassy in Japan is a part of domestic territory of India and income earned within domestic territory is domestic factor income.
(ii) Payment of fees to a chartered accountant by a firm will not be included in the domestic factor income of India because it is an intermediate expenditure for the firm and only value of final goods and services is included in the domestic factor income.
(iii) Rent received by an Indian resident from Russian embassy in India will not be included in the domestic factor income of India because it is a factor income received from abroad. Russian embassy in India is not a part of domestic territory of India and domestic factor income includes only those incomes which are earned within domestic territory of the country.
(iv) Compensation given by an insurance company to an injured w’orker will not be- included in the domestic factor income of India because it is not a factor income and is a transfer income which is not included in the domestic factor income. However, if compensation is given by the employer, it would be included in the domestic factor income.

Answer 23:

1. True – When planned investment is less than planned savings, the aggregate demand wall fall. As a result, unplanned inventories accumulate.
2.  False – Deflationary gap exists when aggregate demand is less than aggregate supply at full employment level.
3. False – Average propensity to save can be negative because there are dissavings at income levels which are lower than break-even point.

Answer 24:
(a) Depreciation and devaluation both imply a fall in external value of a currency; however the term depreciation is used under the floating exchange rate system i.e., when the exchange rate system is determined by the combined market forces of demand and supply. A currency loses or gains value because of fluctuations in demand and supply.
The term devaluation is used in a system of fixed exchange rates. In this system, the exchange value of a currency is decided by the government. Devaluation of currency is the deliberate action of the government.
Depreciation and devaluation of a currency normally encourages exports from a country, as exports become cheaper for the foreign nationals and foreign currency can now buy more of domestic goods, i.e., the international competitiveness of the goods and services of such a nation gets better.
(b) The transactions carried on by monetary authorities of a country, which causes changes in official reserves are termed as official reserve transactions.
Autonomous receipts and autonomous payments give rise to either deficit or surplus on balance of payments. The central bank may finance a deficit by :

1.  Reducing reserves of foreign currency,
2. by borrowing from the IMF or monetary authorities.

This will be shown as decrease in reserves. The central bank may use surplus to purchase foreign securities, foreign currency, gold etc. which may result in increase in reserves of the nation.

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