Model paper: 2
ECONOMICS
CBSE - XII

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Q 16. Calculate the National Income by (a) Income method and (b) Expenditure method from the following data:
(Rs. In Crores)

[5]

Ans: NNPfc by income method == profits + royalties + rent + compensation of employees + interest +net factor income from abroad
90+20+700+80+50+(-10)= 930 Crores is
Ans.
NNPfc by expenditure method == private final consumption expenditure +net capital formation+net exports+government final consumption expenditure+consumption of fixed capital +net indirect taxes GDPmp from GDPmp to get NNPfc we Have to deduct consumption of fixed capital and net indirect taxes plus net factor income from abroad.

Ie; 660+110+(-20)+210+10+20-10-20+(10)=950
Ans

Please note that it is not necessary to get the same result with income and expenditure method.
Q 17. What is the problem faced in estimating value of output produced by general government? How is this problem solved? How is value added by general government calculated? [5]

Ans : In the government sector goods and services are not sold to the citizens but provided to the citizens. Therefore, it is not possible to find out the market value of the government's output. We will have to see it from the cost side.
In the production account on the left hand side only the two cost components are mentioned, 1) the intermediate consumption and 2) compensation of employees and there are no rent, interest, profits, and net indirect taxes are nil. Therefore, the value of output is equal to the sum of these two components.
The net value added is obtained by subtracting intermediate consumption from the value of output. Hence when we deduct intermediate consumption from the value of output we get only one factor payment on the left-hand side. This is the value added which is equal to the compensation of employees.

Q 18. State the various steps involved in measuring National income by value added method. [5]

Ans : The value-added method measures the national income by estimating the contribution of each producing enterprise in the domestic territory of the country in an accounting year. This method involves the following steps:
a) To identify all the producing units within the domestic and to classify them in various industrials sectors like primary, secondary and tertiary on the basis of their activities.
b) To estimate the net value added at factor cost (NVAfc) by each producing enterprises as well as each industrial sector.
c) To compute net domestic product at fc (NDPfc) by adding up NVAfc of all industrial sectors in the domestic economy.
d) To estimate net factor income from abroad and adding it to domestic income to get national income.

SECTION B ECONOMIC THEORY

Q 19. If in an economy investment is greater than saving, what is the effect on national income. [1]

Ans : The level of national income will rise.

Q 20. What is the relationship between marginal propensity to consume and marginal propensity to save? [1]

Ans : MPC+MPS=1

Q 21. Why does marginal revenue product decline even when the price of the product remains constant. [1]

Ans : marginal revenue product will decline due to application of the law of diminishing returns to a variable factor.

Q 22. Why is the value of marginal product equal to the marginal revenue product under perfect competition? [1]

Ans : under perfect competition AR=MR, so value of marginal product (MRP) will always be equal to marginal revenue product (MRP). VMP is also known as MRP in perfect competition.

Q 23. How do changes in the prices of factors of production affect the supply of a commodity? [2]

Ans : In case of higher price of factor of production there is lesser supply and at lower cost of production, the supply will be higher.

Q 24. Explain any one of the central problems relating to the allocation of resources. [2]

Ans : what to produce? Is one of the central problem of an economy and it explains that the economy has limited me
Ans, so all types of goods, in unlimited quantity cannot be produced, so we have to decide the type and quantity of goods to be produced and allocate our resources accordingly between these goods.

Q 25. Define monopolistic competition. Can a seller in such market influence the price? Explain. [3]

Ans : monopolistic competition is a market situation in which both the monopolistic element and the competitive element are both present. One of the features in this market situation is product differentiation. Each firm produces a product that is somewhat different from the product of its competitors. But it is not entirely distinct, it is very close to the product of other firms. They are close substitutes. Yet each firm is known for its product by brand name. Hence each firm can influence the price to some extent

Q 26. Distinguish the various sources of loanable funds. [3]

Ans : there are several sources of loanable funds:
(a) Savings of households and firms: whenever the current consumption is less than income, households can lend their savings to earn income. The savings increase when the rate of interest is high and vice versa.
(b) Banks: banks help in channeling the savings of the households and firms. Besides this they can create money through credit creation.
(c) Government: the government may issue new currency and controls the supply of loanable funds through exp
Ansion and contraction of money supply.

Q 27. Explain any three fiscal measures for reducing inflationary gap. [3]

Ans : in a situation of excess demand , government should curtail its expenditure on roads, buildings, rural development, irrigation works thereby reducing the money income of the people and their demand for goods and services.
The other part is of fiscal policy is revenue policy, which is expressed, is term of taxes. During inflation, government should raise rates of all taxes especially on rich people because taxation withdraws purchasing power from the taxpayers and to that extent reduces effective demand. And finally deficit financing should be avoided.

Q 28. How does the demand for a factor of production differ from the demand for a commodity? [3]

Ans : Like the price of the commodity, the Demand and Supply of the factor also determines the price of the factors of production. Difference between them lies in the nature of Demand and Supply.
Main features of demand for the factor of production

(a) Derived demand: Demand for a factor is derived demand, which me
Ans demand derived from the demand for some other commodity, whereas the demand for a commodity is direct demand.
For example demand for a building is a direct demand, which satisfy the demand directly, whereas the demand of bricks, cement, lime etc. is derived demand which has been derived from the demand for the building.
(b) Joint demand: Demand for the factor of production is Joint demand me
Ans they (factors of production) demand jointly for satisfying a particular demand. As against it commodity may be demanded singly.
(c) Demand for services: Factor's demand is for their services but the demand for commodity relates to the demand of the commodity itself.

Q 29. Mention various components of aggregate demand. [3]

Ans : Aggregate Demand
Meaning
Aggregate demand me
Ans the total demand of good and services in an economy. Aggregate demand can also be viewed as total expenditure since the demand for the real goods and services arises only out of expenditure.
Components
· Household( or private) consumption demand
It is the total demand of goods and services for consumption purpose by all the households in the country.
· Private investment demand
Total expenditure on currently produced real assets like plant, machinery, raw materials etc., which help in production.
· Government demand for goods and services
Government demand for the consumer and capital goods for common needs of the society.
· Net export demand
It me
Ans difference between export and import but for aggregate demand, it reflects demand of foreign countries for our goods and services. Net export me
Ans net foreign demand for the country's output.

Q 30. Is it demand or supply, which is more active in determining price? Explain. [3]

Ans : Generally demand and supply both are equally important in determining the price of a commodity. Without one other is useless. Both are like the blades of a scissors. It is difficult to say which blade whether lower or upper is important. So in the absence of anyone price cannot be determined.
But if we talk about period of time we can make some results like
In case of very short period, Demand is more important than the supply because supply is fixed in that period and it is only the demand which can influence the price of the commodity me
Ans if demand increases price will go up and if demand decreases price will go down.
But in case of short run, Supply may have more influence because supply can be adjusted according to demand, which in turn will influence the price of the commodity.

Q 31. State how the aggregate demand and aggregate supply can be in equilibrium at less than full employment. [3]

Ans : The concept relates to s situation of deficient demand wherein at full employment level aggregate demand is less than aggregate supply. The extent by which aggregate demand falls short of aggregate supply is known as deflationary gap.
Deficient demand me
Ans that demand is insufficient to eliminate involuntary unemployment. Equality between aggregate demand and aggregate supply is at a point less than the level of full employment. The difference between aggregate supply and aggregate demand before the full employment level is called the deflationary gap.

Q 32. What affects the demand for a factor of production by a firm under conditions of perfect competition? [3]

Ans : a firm under perfect competition will go on employing a factor so long as the employment of a factor will add to its revenue than its cost. In other words the factors will be employed to the extent where the marginal revenue productivity of the factor is greater than its marginal cost.
Under conditions of perfect competition, the price of the factor, which me
Ans the average cost of the factor incurred by the firm also equals the marginal cost of the factor. The MRP curve of a factor keeps on increasing till the highest point C and thereafter it declines. There could be two points where the MRP of a factor is equal to MCF. But the firm would prefer to stop employing a factor at the point where the falling MRPf is equal to the MCF. At this point the firm is in equilibrium.

Q 33. What happens in an economy, when credit availability is restricted and credit made costlier? [3]

Ans : to check excess demand in the economy, rate of interest should be increased. It will have negative effect on consumption expenditure and investment expenditure - the two important components of aggregate demand. For this purpose central bank should increase bank rate. As a result market rate of interest will increase. This policy of increasing the rate of interest to correct excess demand is called as dear money policy.
The restricted availability of credit can be made possible through the following measures:
· Increasing the reserve ratio of member banks
· Open market operations
· Increasing the margin requirements
· Moral suasion
Through these monetary measures availability of credit can be decreased and hence the problem of excess demand can be checked.

Q 34. Briefly explain the main features of Ricardian theory of rent. How is the modern approach to rent different from it? [5]

Ans : The Ricardian theory of rent is associated with the famous British economist David Ricardo. According to him "Rent is that portion of the product of the earth which is paid to the landlord for the use of the original and indestructible powers of the soil". Ricardo maintained that it is the difference in the fertility of the land that is responsible for the emergence of rent. By nature, some pieces of land are more fertile as compared to that of other and these more fertile grades of land earn more income than the less fertile pieces of land. This surplus income earned by the superior tracts of land signifies nothing but rent.
Special features of Ricardian theory of rent
1. Rent is payable to landlord on account of the original and indestructible power of the soil.
2. Rent is differential surplus
3. Rent is influenced by the price but it does not influence price: Rent of a piece of land will be high if the price of wheat grown on this piece of land is high. The price of the land will not be high because the rent of the piece of land is high.
4. Rent is pure surplus so it is an unnecessary payment.
Difference between Ricardian theory of rent and Modern theory of rent:
1. Ricardo opines that rent arises on land only, where as modern economists prove that economic rent may arise to all factor of production.
2. According Ricardo rent will arise if there is marginal piece of land, where as modern economists feel that marginal piece of land is not necessary for the emergence of rent.
3. According to Ricardo rent is the produce of super marginal piece of land over the produce marginal piece of land, where as according to modern approach rent is the excess of present earnings over its tr
Ansfer earnings.

Q 35. Define monopoly. In what ways does it differ from perfect competition? [5]

Ans : Monopoly is a market situation in which a single seller controls the entire output of a particular good or service. The seller is then able to set the price and output of the good entirely in his own interests. It is implicit in this definition that the monopolist is faced by a large number of competing buyers. Obviously, there is no difference between firm and industry under monopoly. On the other hand, perfect competition is a situation where there is large number of buyer and sellers in the market, the product is homogenous and the price is prevail in the market. The main differences between the two are:
1. Number of Firms: Perfect competition is an anti-thesis of monopoly. There is large number of firms in perfect competition whereas in monopoly, there is a single firm.
2. Average and marginal revenue curves: Under perfect competition, AR and MR curves coincide each other and are horizontal straight line and AR and MR are equal at all levels. On the contrary, under monopoly AR and MR curves are sloping downwards and MR is below the AR curves.
3. Price and output: Under monopoly price is generally higher and output is smaller than the perfect competition.
4. Entry of firms: Under monopoly, there are strong barriers to the entry of new firms whereas under perfect competition, there is free exit and entrance of firms.
5. Price discrimination: A monopolist can discriminate prices for his product, but perfect competition it is not possible.
6. Control of price: All firms are price taker under perfect competition .No firm can alter the price. On the other hand, a monopolist is a price maker and has full control on price.

Q 36. Explain the law of variable proportions. Use diagram. [5]

Ans :
The law:
When more and more units of a variable factor are applied with fixed factors, then total product firstly give increasing returns, then decreasing and finally starts giving negative returns.
Assumptions:
-Land is assumed to be the fixed factor and labour is the variable factor.
-It is possible to make changes in the factor-proportions.
-No change in technique of production and organisation.
-All units of the variable factor are homogeneous.

Explanation:
Its operation can be divided into three stages:
STAGE I: The total product firstly increases at an increasing rate and then it starts increasing at a decreasing rate. Marginal product keeps rising. The average product is rising throughout this stage. This stage ends at the point where average product reaches its highest point.
STAGE II: This is called the Stage of Diminishing Returns. The total product continues to increase at a diminishing rate till it reaches the maximum point. Both marginal and average products are falling but both are positive. This stage is crucial because the firms would like to produce in this stage.
STAGE III: This is the stage of negative returns in which the total product curve starts sloping downwards. Marginal product becomes negative and goes below the x-axis. The average product is falling but remains positive. In this stage the number of the variable factor becomes excessive relative to the fixed factor so that they start getting into each other's way resulting in fall in output instead of increasing it.

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