CBSE Sample Papers for Class 12 Economics Paper 5

CBSE Sample Papers for Class 12 Economics Paper 5 are part of CBSE Sample Papers for Class 12 Economics Here we have given CBSE Sample Papers for Class 12 Economics Paper 5.

CBSE Sample Papers for Class 12 Economics Paper 5

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 5 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. However, there is internal choice in some questions.
(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.
(iii) Question Nos. 5 – 6 and 17 – 18 are short answer questions carrying 3 marks each. Answers to them should not normally 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 not normally exceed 70 words each.
(v) Question Nos. 10 – 12 and 22 – 24 are long answer questions carrying 6 marks each. Answers to them should not normally exceed 100 words each.
(vi) Answers should be brief and to the point and the above word limit be adhered to as far as possible.

Questions

Section A: Microeconomics

Question 1:
When is a consumer said to be rational ?

Question 2:
State the meaning of “quantity demanded of a commodity”.

Question 3:
Arrange the following coefficients of price elasticity of demand in ascending order :
-0.7, -0.3, -1.1, -0.8

Question 4:
If a firm’s production department data says that the total variable cost for producing 8 units and 10 units of output is ₹2,500 and ₹ 3,000 respectively, marginal cost of 10th unit will be _____ .
(a) ₹100
(b) ₹150
(c) ₹ 500
(d) ₹ 250

Question 5:
State the behaviour of Marginal Physical Product, under Returns to a Factor.

Question 6:
Justify the statement, “In economics, normal profits are always a part of total cost.”
Or
Calculate Total Variable Cost and Marginal Cost from the following cost schedule of a firm whose Total Fixed Costs are ₹12 :

Question 7:
Explain the concept of marginal opportunity cost using a numerical example.

Question 8:
Identify which of the following is not true for the Indifference Curves. Give valid reasons for choice of your answer :
(a) Lower indifference curve represents lower level of satisfaction.
(b) Two regular convex to origin 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

OR

A consumer has total money income of ₹ 250 to be spent on two goods X and Y with prices of ₹ 25 and ₹ 10 per unit respectively. On the basis of the information given, 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 fall in price of good Y ?

Question 9:
“In a hypothetical market of mobile phones, the brand AWAAZ was leading the market share. Its nearest competitor VAARTA suddenly changed its strategy by bringing in a new model of the mobile phone at a relatively lesser price. In response, AWAAZ too slashed its price.”
Based on the above information, identify the form of market represented and discuss any three features of the market.

Question 10:
A consumer, Mr. Aman is in state of equilibrium consuming two goods X and Y, with given prices P_x and P_y. Explain what will happen if:
(a) M Y_x/P_x >  is greater than MU_y/P_y
(b) P_y falls.

Question 11:
State with valid reasons, which of the following statement are true or false :
(a) Average Revenue curve under the Perfect Competition is a downward sloping curve.
(b) AFC curve is a rectangular hyperbola curve.
(c) When MR is falling but positive, TR will also be falling and positive.

Question 12:
Define Price Floor. What is the common purpose of fixation of floor price by the government ? Explain any one likely consequence of this nature of intervention by the government.
OR
Define Price Ceiling. What is the common purpose for the price ceiling imposed by the government ? Explain any one likely consequence of this nature of intervention by the government in the price determination process.

Section B: Macroeconomics

Question 13:
Primary deficit is equal to _____ .
(i) Fiscal Deficit less interest payments.
(ii) Revenue Deficit less borrowings.
(iii) Borrowings less interest payments.
(iv) Borrowings less Fiscal Deficit.

Question 14:
Identify revenue receipt of the government.
(a) Profit of a public sector undertaking.
(b) Receipt from sale of shares of public undertaking.
(c) Borrowings from public.
(d) Recovery of loans.

Question 15:
Supply of money refers to quantity of money _____ .
(a) as on 31 st March.
(b) during any specified period of time.
(c) as on any point of time.
(d) during a fiscal year.

Question 16:
Which of the following is not a Quantitative Method of credit control ?
(i ) Open Market Operation
(ii) Margin Requirements
(iii) Variable Reserve Ratio
(iv) Bank Rate Policy

Question 17:
Explain how “Depreciation of Currency” promotes exports of a country.

Question 18:
Define Balance of Payments. Discuss briefly the components of current account.
OR
Distinguish between fixed and flexible foreign exchange rate.

Question 19:
Explain the concepts of Real GDP and Nominal GDP, using a suitable numerical example.
Or
State the various precautions of Product Method that should be kept in mind while estimating national income.

Question 20:
Using a numerical example, elaborate the credit creation process as handled by the commercial banks.

Question 21:
Define a government budget. Elaborate “Economic Growth” as an objective of government budget.

Question 22:
What is the range of values of investment multiplier ? Clarify the relation of investment multiplier with marginal propensity to consume (MPC) and with marginal propensity to save (MPS).

Question 23:
From the following information, calculate gross national income by (a) Income Method, and (b) Expenditure Method :
                                                                                                                 (₹ in Crores)
(i) Factor income from abroad                                                                            10
(ii) Compensation of employees                                                                        150
(iii) Net domestic capital formation                                                                   50
(iv) Private final consumption expenditure                                                     220
(v) Factor income to abroad                                                                                15
(vi) Change in stock                                                                                              15
(vii) Employer’s contribution to social security schemes                             10
(viii) Consumption of fixed capital                                                                     15
(ix) Interest                                                                                                              40
(x) Exports                                                                                                               20
(xi) Imports                                                                                                             25
(xii) Indirect taxes                                                                                                  30
(xiii) Subsidies                                                                                                         10
(xiv) Rent                                                                                                                 40
(xv) Government final consumption expenditure                                            85
(xvi) Profit                                                                                                               100

OR

From the following data, calculate (a) Gross Domestic Product at Factor Cost and (b) Factor Income to Abroad :
                                                                                                              (₹ in 000 Crores)
(i) Compensation of employees                                                                          800
(ii) Profits                                                                                                                200
(iii) Dividends                                                                                                          50
(iv) Gross national product at market price                                                  1,400
(v) Rent                                                                                                                    150
(vi) Interest                                                                                                             100
(vii) Gross domestic capital formation                                                             300
(viii) Net fixed capital formation                                                                       200
(ix) Change in stock                                                                                               50
(x) Factor income from abroad                                                                           60
(xi) Net indirect taxes                                                                                           120

Question 24:
From the following information about an economy, calculate (i) its equilibrium level of national income and (ii) savings at equilibrium level of national income.
Consumption function : C = 200 + 0.9Y
(where C = Consumption expenditure and Y = National income)
Investment expenditure : I = ₹ 3,000.

Answers

Answer 1:
A consumer is said to be rational when he aims at maximising his satisfaction (utility) from the consumption of the given commodity within his money income.

Answer 2:
Quantity demanded of a commodity means the quantity of a commodity which a consumer is wi lling to buy at a given price and a given point of time.

Answer 3:
-0.3,-0.7,-0.8,-1.1
(Minus is not a mathematical sign. Minus sign only represents the inverse relation of price and quantity demanded).

Answer 4:
(d) ₹ 250

Answer 5:
Under returns to a factor, there are three stages in the terms of the behaviour of marginal physical product:
(i) Stage I – Marginal physical product rises to its maximum.
(ii) Stage II – Marginal physical product decreases and stays positive to become zero.
(iii) Stage III – Marginal physical product becomes negative.
These stages can be shown in the following schedule :

Answer 6:
The given statement is correct. Total cost refers to the sum of expenses spent by a firm on various factors of production viz. land, labour, capital and enterprise. Rent, wages and interest are the payments for land, labour and capital. Normal profit is the maximum reward that is just sufficient to keep the entrepreneur supplying his factor services. Normal profit induces an entrepreneur to take risk of production and selling. Hence, normal profit is a part of total cost.

OR

Formulae used :
(i) TVC = TC – TFC.
(ii) MC = \(\frac { \Delta TC }{ \Delta Units }\)

Answer 7:
Marginal opportunity cost (MOC) or marginal rate of transformation (MRT) may be defined as the ratio of number of units of a good sacrified to produce an additional unit of another good.

From the above table, we can conclude that MRT has the tendency to increase. As more and more of good Y is produced, factors producing T becomes less productive which requires more and more sacrifice of good X to ensure a unit increase of Y.

Answer 8:
Option (b) is incorrect. Two regular convex to origin indifference
curves cannot intersect each other. One indifference curve represents only one level of satisfaction on all the points on it. For different levels of satisfaction, there have to be different indifference curves. In the given figure there are two indifference curves intersecting each other.

As per the figure
On IC₁ A = C
On IC₂ D = E
At the point of intersection B, the situation emerges A = C = B = D = E.
This is not possible and against the basic definition of indifference curve.

OR

(a) Equation of Budget Line
P_xQ_x + P_yQ_y = M
25Q_x + 10Q_y = 250

(d) If there is fall in price of good Y(P_y) the budget line becomes flatter because a consumer can purchase more units of good Y and new budget line appears. It may be shown as in diagram

Answer 9:
The form of market represented in the given paragraph is oligopoly.
Following are the three features of oligopoly :

1. Few firms – Few firms mean either only a few firms in number or a few big firms producing most of the output of the industry. The exact number of firms is not defined. The word ‘few’ signifies that the number of firms is manageable enough to make a guess of the likely reactions of rival by a firm.
2. Barriers to the entry of firms – The main reason why the number of firms is small is that there are barrieres which prevent entry of firms into industry. Patents, large capital, control over the crucial raw materials etc., prevent new firms from entering into industry. Only those who are able to cross these barriers are able to enter.
3.  Non-price competition – Firms try to avoid price competition for the fear of price war. They use other methods like advertising, better services to customers, etc. to compete with each other.

Answer 10:
(a) If MU_x/P_x > MU_y/P_y, then it means that satisfaction of Mr Aman, derived from spending a rupee on good X is greater than the satisfaction derived from spending a rupee on good Y.
Mr. Aman, will reallocate his income by substituting good X for good Y. As the consumption of good X increases the marginal utility derived from it goes on diminishing and reverse proposition occurs for good Y, this process will continue till MU_x/P_x becomes equal to MU_y/P_y.
(b) If P_y falls. MU_x/P_x < MU_y/p_y then it means that satisfaction derived from spendingh rupee on good X is lesser than the satisfaction derived from spending a rupee on good Y.
Mr. Aman will reallocate his income by substituting good Y for good X. As the consumption of good 7 increases the marginal utility derived from it goes on diminishing and reverse proposition occurs for good X, this process will continue till MU_x/P_x becomes equal to MU_y/P_y

Answer 11:
(a) False. Under the perfect competition, a firm is a price-taker and has to accept the price determined by the industry. As a result, price remains constant irrespective of quantity of goods sold by the firm. Hence, average revenue curve is a straight line parallel to x-axis.
(b) True. Total fixed cost remains constant and does not increase in output.
AFC = \(\frac { Total Fixed Cost }{ Units of Output }\)
As more and more units are produced, AFC continues to decline. AFC curve is a rectangular hyperbola curve. It is so because if we multiply any value of output with corresponding AFC, we always get a constant total fixed cost.
(c) False. When MR is falling but positive, TR will be rising and positive. Total revenue increases so long as marginal revenue is positive whether falling or increasing.

Answer 12:
Price floor may be defined as the lowest legal price of a commodity at which it can be sold. Price floor is a system initiated by the government under which a floor is laid on the price of a commodity as a result of which sellers need not sell at a price lower than the price fixed by the government. Floor price is higher than the equilibrium price.
The common purpose of fixation of floor price by the government is to protect the interests of producers generally farmers and unskilled labourers who are assured of a minimum price. For example, minimum wages are fixed by the government for the welfare of the labourers and minimum support prices are fixed to protect the farmers.
Adjoining diagram shows the consequence of minimum support price.

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 and build buffer stocks which are released in case of shortage of commodities.

OR

Price ceiling may be defined as the maximum limit that the government imposes on the price of a commodity. Price ceiling is a system initiated by the government under which a ceiling is imposed on the price of a commodity as a result of which sellers cannot charge price higher than the price fixed by the government. Ceiling price is lower than the equilibrium price.
The common purpose of fixation of ceiling price by the government is to protect the interests of the consumers (generally poor people) who cannot afford the equilibrium price. For example, maximum retail prices are fixed for good grains, drugs etc.
Adjoining diagram shows the consequence of price ceiling.

In the diagram, OP is equilibrium price. The government fixes ceiling at OC. As a result of price ceiling, price is reduced from OP to OC. At this price demand increases to CN i.e., OV. But the sellers offer only CM i.e., OU quantity of commodity. As a result, there is a shortage of commodity equal to MN or UV. To avoid the problem of shortage, the government adopts the system of Rationing of the commodity.

Answer 13:
(i) Fiscal Deficit less interest payments.

Answer 14:
(a) Profit of a public sector undertaking.

Answer 15:
(c) as on any point of time.

Answer 16:
(ii) Margin Requirements

Answer 17:
When price of foreign currency in terms of domestic currency rises in the foreign exchange market it is termed as depreciation of domestic currency. Any depreciation of home currency results in increase in exports of the country since it increases the global competitiveness of the goods i.e., foreign countries can purchase more quantity of goods and services with the same amount of foreign currency from the domestic country. As a result exports of the domestic country rise. For example, if the value of rupee in terms of US dollar falls say ₹ 60 to ₹ 65 per dollar, Indian exporter will begin to earn an extra ₹ 5 per dollar. This works as an incentive to the exporter.

Answer 18:
Balance of payments is defined as the statement of accounts of a country’s inflows and outflows of foreign exchange in a fiscal year.
Components of Current Account are as under :

1. Visibles refer to the merchandise/goods exported from or imported by a country. Exports which results inflows for the country are placed on the credit side whereas imports are placed on the debit side as they result into outflow of foreign exchange from the country.
2.  Invisibles refer to the different types of services and transfers that take place between nations. They give rise to monetary receipts and payments for the nation.

OR

Following table shows distinction between fixed and flexible foreign exchange rate :

Answer 19:
Real gross domestic product may be defined as the money value of goods and services at base year’s prices produced in*the accounting year within domestic territory of a country. Thus, Real gross domestic product = Output X Base year’s prices.
Nominal gross domestic product may by defined as the money value of goods and services at current year’s prices produced in the accounting year within domestic territory of a country. Thus, Nominal gross domestic product = Output x Current year’s prices.
For example,
assume 2013 as the base year. Output of tea is 2,000 tones in 2013 as well as 2017. But, the prices are ₹ 1,000 and ₹ 1,500 per ton respectively in 2013 and 2017.
Nominal GDP in 2017 will be ₹ 30,00,000 (2,000 x 1,500) while real GDP in 2017 will be ₹ 20,00,000 (2,000 x 1,000).
Real GDP is a good indicator of economic welfare because it shows real increase in the income over a period of time. Real GDP neutralises the effect of changes in prices over a period of time. Nominal GDP becomes inflated due to inflation (increase in prices) and does not reflect the true growth of national income.

OR

Following are the precautions that must be taken while estimating national income by value added method or product method :

1. Double counting – Value added equals value of output less intermediate cost. There is a possibility that instead of counting ‘value added’ one may count value of output. You can verify by taking some imaginary numerical example that counting only values of output will lead to counting the same output more than once. This will lead to overestimation of national income. There are two alternative ways of voiding double counting : (a) count only value-added and (b) count only the value of final products.
2.  Second-hand goods – Sale of second-hand goods should not be included in the national income because it does not represent current year’s production. However, any brokerage or commission paid to facilitate the sale of second-hand goods is a part of national income.
3. Production for self-consumption – Production for self-consumption should be included in the national income because such production is a part of current year’s production. Hence, imputed rent of owner occupied building is a part of national income.
4.  Production from illegal activities – Production from illegal activities like smuggling, theft, gambling etc. should not be included in the national income because no accounts are maintained for such production.

Answer 20:
When a bank grants loan to a person, it does not give it in cash to the borrower rather loan is credited in the borrower’s account. Every bank loan, thus, creates an equivalent deposits with the bank. The bank on the basis of legal reserve ratio is required to maintain a specified percentage of its deposits as cash reserve. Legal reserve ratio (a mix of Cash Reserve Ratio and Statutory Liquidity Ratio) is determined by the central bank of the country. If legal reserve ratio is increased, the capacity of bank to create credit is reduced. Thus, the capacity of commercial banks to create credit depends on following two factors :

•  Amount of deposit
• Legal reserve ratio.

Given the amount of fresh deposits and legal reserve ratio, the total money creation will be as under :
Total money creation = Initial Deposit x  \(\frac { 1 }{ Legal Reserve Ratio }\)
Let us take an example. Suppose a bank gets a deposit of ₹40,000. Legal Reserve ratio is 20%. It means that bank can lend 80% of ₹ 40,000 i.e., ₹ 32,000. Borrowers are not given loan in cash and loan is credited to their account. Again 80% of ₹32,000 may be advanced as a loan to other borrowers. This process goes on and on. As a result, the bank creates credit a number of times (5 times) of primary deposits i.e., ₹2,00,000.
Total money creation = 40,000 x \(\frac { 1 }{ 0.20 }\) =₹ 2,00,000.

Answer 21:
A government budget may be defined as the annual financial statement containing an estimate of all revenues and expenditures of the government for the coming year.
The term “economic growth” refers to a sustained increase in the real GDP of the economy or an absolute increase in the production of goods and services. One of the primary objectives of the government budget is to mobilise resources for production by providing tax rebates, infrastructural stimulation, subsidies etc.
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.

Answer 22:
The value of multiplier depends on marginal propensity to consume (MPC). Thus,
Multiplier = \(\frac { 1 }{ 1 – MPC }\)
Accordingly, the range of investment multiplier is one to infinity. Minimum value of multiplier is one because minimum value of MPC Can be zero. Maximum value of multiplier is infinity because maximum value of MPC can be one.
Investment multiplier and marginal propensity to consume are positively related. If marginal propensity to consume rises, the value of multiplier also rises. Suppose MPC = \(\frac { 3 }{ 4 }\) (0.75), the multiplier will be \(\frac { 1 }{ 1- (3/4) }\) = 4
If MPC rises to \(\frac { 4 }{ 5 }\)(0.80), the multiplier will be \(\frac { 1 }{ 1-(4/5) }\) = 5
Investment multiplier and marginal propensity to save are negatively related. If marginal propensity to save rises, investment multiplier falls. Suppose MPS = \(\frac { 1 }{ 4 }\) the multiplier will be \(\frac { 1 }{ 1/4 }\) = 4. If MPS rises to \(\frac { 1 }{ 3 }\), the multiplier will be \(\frac { 1 }{ 1/3 }\) = 3.

Answer 23:
Gross National Income (GNP_FC) by Income Method
= Rent + Compensation of employees + Interest + Profit + Factor income from abroad – Factor income to abroad + Consumption of fixed capital
= 40 + 150 + 40 + 100 + 10 – 15+ 15
= 355 – 15
= ₹340 Crores.
Gross National Income (GNP_FC) by Expenditure Method
= Private final consumption expenditure + Government final consumption expenditure + Net domestic capital formation + Consumption of fixed capital + Exports – Imports + subsidies – Indirect taxes + Factor income from abroad – Factor income to abroad
= 220 + 85 + 50+ 15 + 20-25 + 10-30+ 10- 15
= 410 – 70
= ₹340 Crores

OR

(a) Gross Domestic Product at factor cost
= Compensation of employees + Rent + Interest + Profits + Gross domestic capital formation – Net fixed capital formation – Change in stock
= 800 + 150 + 100 + 200 + 300 – 200 – 50
= 1,550 – 250
= ₹ 1,300(000) Crores
(b) Factor Income to Abroad
= Factor income from abroad – Net factor income for abroad
Net factor income abroad = Gross national product at factor cost – Gross domestic product at factor cost
= Gross national product at market price – Net indirect taxes – Gross domestic product at factor cost
= 1,400- 120- 1,300
= (-)20 Crores
Factor Income to Abroad = 60 – (- 20)
= ₹ 80(000) Crores

Answer 24:
(i) At equilibrium level of national income, the fundamental condition is that investment and savings must be equal to each other. In the problem, investment expenditure is given ₹3,000. It implies that at equilibrium, savings should also be 3,000.
Savings = Income – Consumption = Y – [200 – 0.9Y]
Equation for desired savings of ₹ 3,000 will be as under :
Y – [200 + 0. 9Y] =3,000
Y – 200 – 0.9Y = 3,000
Y – 0.9Y = 3000 + 200
0.1 Y = 3,200
Y = ₹ 32,000 ,
At 32,000 both savings and investment are equal. Therefore, equilibrium level of national income is 32,000.
(ii) Consumption at equilibrium level will be as under :
C = 200 + 0.9Y
= 200 + 0.9 x 32,000
= 200 + 28,800
= 29,000 Savings
= Income – Consumption
= 32,000 – 29,000
= ₹ 3,000

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