2nd PUC Economics Model Question Paper 1 with Answers

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Karnataka 2nd PUC Economics Model Question Paper 1 with Answers

Time: 3.15 Hours
Max Marks: 100

Part – A

I. Choose the correct answer each question carries one mark: ( 1 × 5 = 5 )

Question 1.
A vertical demand curve is
(a) Perfectly elastic
(b) Perfectly inelastic
(c) Unitary elastic
(d) None of the above
Answer:
(b) Perfectly inelastic

Question 2.
Cobb-Douglas production function is
(a) q = (x, x)
(b) q = (x₁, x₂)
(c) q = (x₁^α, x₂^β)
(d) q = (0)
Answer:
(c) q = (x₁^α, x₂^β)

Question 3.
The firm’s profit is denoted by
(a) Σ
(b) Δ
(c) Φ
(d) π
Answer:
(d) π

Question 4.
The year of Great Depression
(a) 1920
(b) 1889
(c) 1929
(d) 2018
Answer:
(c) 1929

Question 5.
Pollution is an example for ________ externalities.
Answer:
Negative

II. Fill in the blanks. each carries one mark: ( 1 × 5 = 5 )

Question 6.
In reality all economies are ______.
Answer:
Mixed Economies.

Question 7.
SMC curves cuts the AVC curve at the _______ point of AVC curve from below.
Answer:
Minimum

Question 8.
_______ cost of some activity is the gain forgone from the second best activity.
Answer:
Opportunity cost

Question 9.
The net contribution made by a firm is called its _________.
Answer:
value added.

Question 10.
The Bretton Woods conference held in the year
Answer:
1944.

III. Match the following: ( 1 x 5 = 5 )

Question 11.

A	B
1. CRS	(a) QD = QS
2. TR	(b) Trade in goods and services
3. Market Equilibrium	(c) C + I + cY
4. Balance of Payments	(d) Constant returns to scale
5. Aggregate demand	(e) P × Q

Answer:
1 – (d)
2 – (e)
3 – (a)
4 – (b)
5 – (c).

IV. Answer the following questions in a sentence/word. ( 1 × 5 = 5 )

Question 12.
What is equilibrium price?
Answer:
The price at which equilibrium is reached is called equilibrium price.

Question 13.
Write the equation of the demand function.
Answer:
q = 20 – 2p. where ‘q‘ is quantity sold and ‘p’ is the price.

Question 14.
Write the meaning of autonomous consumption.
Answer:
The consumption which is independent of income is called as autonomous consumption.

Question 15.
What do you mean by barter system?
Answer:
The economic exchanges without the mediation of money is called Barter system.

Question 16.
What do you mean by public provision?
Answer:
Public provision means that they are financed through the budget and can be used without any direct payment.

Part – B

V. Answer any NINE of the following questions in FOUR sentences each. ( 9 × 2 = 18 )

Question 17.
What do you mean by production possibility set?
Answer:
The collection of all possible combinations of the goods and services that can be produced from a given amount of resources and a given stock of technological knowledge is called the production possibility set of the economy.

Question 18.
State the law of demand.
Answer:

• Law of demand states that other things being equal, there is a negative relation between demand for a commodity and its price.
• In other words, when price of the commodity increases, demand for it falls and when price of the commodity decreases, demand for it rises, other factors remaining the constant.
• The law can be explained in the following manner: ‘”Other things being equal, a fall in price leads to expansion in demand and a rise in price leads to contraction in demand”.

Question 19.
Give the meaning of the concepts of short run and long run.
Answer:

1. he concepts of short run and long run are defined as a period simply by looking at whether all the inputs can be varied or not. It is not advisable to define short run and long run in terms of days, months or years.
2. In the short run, at least one of the factor – labour or capital cannot be varied and therefore, remains fixed. In order to vary the output level, the firm can vary only the other factor. The factor that remains fixed is called the fixed factor and the other factor which the firm can vary is called the variable factor.
3. In the long run, all factors of production can be varied. A firm in order to produce different levels of output in the long run may vary both the inputs simultaneously. So, in the long there is no fixed factor.

Question 20.
Write the meaning of opportunity cost with an example.
Answer:
Opportunity cost of some activity is the gain foregone from the second best alternative activity. For example, you have Rs. 10000 which you decide to invest in your family business. What is the opportunity cost of your action? If you do not invest this money, you can either keep it in the house safe which will give you zero return or you can deposit it in either bank A or bank B in which case you get an interest at the rate of 20 percent or 10 percent respectively.

So the maximum benefit that you may get from other alternative activities is the interest from the bank A, but this opportunity w ill no longer be there once you invest the money in your family business. The opportunity cost of investing the money in your family business is therefore the amount of foregone interest from the bank A.

Question 21.
Give the meaning of price elasticity of supply and write its formula.
Answer:
The price elasticity of supply refers to the proportionate change in quantity supplied to a proportionate change in price of a commodity.

Question 22.
What is marginal revenue product labour (MRP)?
Answer:
The extra output produced by one more unit of labour is its marginal product and by selling each extra unit of output, the additional learning of the firm is the marginal revenue she gets from that unit.

Therefore, for each extra unit of labour, she gets an additional benefit equal to marginal revenue times marginal product is called as Marginal Revenue Product of Labour (MRP ).
MRP_L = MR x MP_L.
where MR – Marginal Revenue: MP_L – Marginal productivity of Labour.

Question 23.
State the relationship between Marginal revenue and price elasticity of demand.
Answer:
The values of marginal revenue have a relation with the price elasticity of demand. Price elasticity of demand is more than one when the marginal revenue has a positive value and becomes less than the unity when marginal revenue has a negative value.

Question 24.
Who are the macroeconomic decision makers?
Answer:
The macroeconomic decisions makers are state itself or statutory bodies like the Reserve Bank of India, Securities and Exchange Board of India and similar institutions. Each such statutory body will have one or more public goals to pursue as defined by law or the constitution of India itself.

Question 25.
Mention three methods of measuring GDP (national income).
Answer:
The three methods of measuring GDP are:

1. Product or Value Added Method
2. Expenditure Method
3. Income Method.

Question 26.
What do you mean by externalities? Mention its two types.
Answer:
Externalities refer to the benefits or harms that a firm or an individual causes to another for which they are not paid or penalized. They do not have any market in which they can be bought and sold.
The two types of externalities are positive externalities and negative externalities.

Question 27.
Mention the two motives of demand for money.
Answer:
The two motives of demand for money are as follows:

1. The transaction motive
2. he speculative motive.

Question 28.
Give the meaning of paradox of thrift.
Answer:
As people become more thrifty, they end up saving less or same as before in aggregate, known as paradox of thrift. In other words. If all the people of the economy increase the proportion of income they save, total value of savings in the economy will not increase it will either decrease or remain unchanged. This result is known as the paradox of thrift.

Question 29.
Distinguish between revenue receipts and capital receipts.
Answer:

• Revenue receipts are those receipts that do not lead to a claim on the government. They consist of tax and non-tax revenues.
• All those receipts of the Government which create liability or reduce financial assets are termed as capital receipts.

Question 30.
What do you mean by foreign exchange rate? Give example.
Answer:
Foreign exchange rate is the price of one currency in terms of another currency. It links the currencies of different countries and enables comparison of international costs and prices. For example, if we need to pay Rs.68 for 1 dollar, then the exchange rate is Rs.68 per dollar.

Part – C

VI. Answer any SEVEN of the following questions in TWELVE sentences each. ( 4 × 7 = 28 )

Question 31.
Briefly explain the central problems of an economy.
Answer:
An economic system or economy is a mechanism here the scarce resources are channelized on priority to produce goods and services. These goods and services produced by all the sectors of the economy determine the national income.

Generally, human wants are unlimited and resources to satisfy them arc limited. If there was a perfect match between human wants and availability of resources there would have been no scarcity, no problem of choice and no economic problems at all. So. one has to select the most essential want to he satisfied with limited resources. In economics, this problem is called ‘Problem of Choice’.

The problem of choice arising out of limited resources and unlimited wants is called economic problem. Every economy whether developed or under developed. Capitalistic or socialistic or mixed economy. there will he three basic economic problems viz.. What to produce. How to produce and For whom to produce. Let us discuss in detail.

(1) What to Produce i.e., what is to be produced and in what quantities:: Every country has to decide which goods are to be produced and in what quantities. Whether more guns should be produced or more foodgrains should be grown or whether more capital goods like machines, tools. etc.. should he produced or more consumer goods (electrical goods, daily usable products etc.) will he produced.

What goods to he produced and in what quantity depends on the economic system of the country. In socialistic economy. the Government decides and in capitalistic economy market forces decide and in mixed
economy both the Government and market forces provide solutions to this problem.

(2) How to Produce i.e. how are goods produced?: There are various alternative techniques of producing a product. For example. cotton cloth can be produced with either handloom or power looms. Introduction of cloth with handloom requires more labour and production which power loom use of more machines and capital. It involves selection of technology to produce goods and services.

There are two types of techniques of production viz.. (a) Labour intensive technology and (b) Capital intensive technology.

The society has to decide whether production he based on labour intensive or capital intensive techniques. Obviously, the choice of technology would depend on the availability of different factors of production (land, labour, capital) and their relative prices (rent, wages, interest).

(3) For whom to produce i.e., for whom are the goods to be produced: Another important decision which an economy has to take is for whom to produce. The economy cannot satisfy all ants of all the people. Therefore, it has to decide who should get how much of the total output of goods and services. The society has to decide about the shares of different groups of people – poor, middle class and the rich, in the national output.

Thus, every economy faces the problem of allocating the scarce resources to the production of different possible goods and services and of distributing the produced goods and services among the individuals within the economy. The allocation of scarce resources and the distribution of the final goods and services are the central problems of an economy.

Question 32.
Write the differences between substitutes and complements.
Answer:

Substitute goods	Complementary goods
1. These are alternative goods available to satisfy our wants.	1. These are the goods which are consumed together.
2. If the price of a product increases, the demand for its substitute also increases.	2. If the price of a product increases, the demand for its complementary good decreases.
3. Example for substitute goods are Tea and Coffee. Colgate and Pepsodant, etc.	3. Example for complementary goods are Pen and Ink, Shoes and Socks, etc.
4. Here the demand curve shifts to the right in case of price rise.	4. Here the demand curve shifts to left in case of price rise.
5. Price and demand move in same direction.	5. Price and demand move in opposite directions.

Question 33.
Explain TP, MP and AP with the example.
Answer:
Total Product (TP): Total product is the relationship between a variable input and output when all other inputs are held constant. Suppose we vary a single input and keep all other inputs constant. Then for different levels of that input, we get different levels of output. This relationship between the variable input and output, keeping all other inputs constant, is often referred to as Total Product of the variable input.

Average Product (AP): Average Product is defined as the output per unit of variable input. We calculate it as AP_L = TP /L. where AP_L is the Average Product of Labour, TP_L is the Total product of labour and L is the amount of labour input used.

Marginal Product (MP): Marginal Product of an input is defined as the change in output per unit of change in the input when all other inputs are held constant. It is the additional unit of output per additional unit of variable input. It is calculated by dividing the change in output by change in input labour.
MP_L = ΔTP_L/ΔL

The concepts of TP. AP and MP can be explained with the help of following table:

The above table shows the Total Product of Labour. Marginal Product of Labour and Average Product of Labour. The total product is also sometimes called as total return to or total physical product of the variable input labour. The third column gives us a numerical example of Marginal product of labour. The values in this column are obtained by dividing change in TP by change in Labour. The last column gives us a numerical example of average product of labour. The values in their column are obtained by dividing TP by Labour.

Question 34.
Write a short note on profit maximization of a firm under the following conditions
(a) P = MC
(b) MC must be none decreasing at q₀
Answer:
A firm always wishes to maximize its profit. The firm would like to identify the quantity q₀, the firm’s profits are less than at q₀. For profits to be maximum, the following conditions must hold
at q₀.

(a) The price P must equal MC (P = MC): Profit is the difference between Total Revenue and Total Cost. Both Total Revenue and Total Cost increase as output increases. As long as the change in total revenue is greater than the change in total cost, profits will continue to increase.

The change in total revenue per unit increase in output is the marginal revenue and the change in total cost per unit increase in output is the marginal cost.

Therefore, we can conclude that as long as marginal revenue is greater than marginal cost, profits are increasing and as long as marginal revenue is less than marginal cost, profits will fall. It follows that for profits to be maximum, marginal revenue should be equal to marginal cost.

For the perfectly competitive firm, we have established that the MR = P. So the firm’s profit maximizing output becomes the level of output at which P = MC.

(b) Marginal cost must be non-decreasing at q₀: It means that the marginal cost curve cannot slope downwards at the profit maximizing output level. This can be explained with the help of diagram:

In the above diagram, at output levels q₁ and q₄ the market price is equal to the marginal cost. However, at the output level q₁ the marginal cost curve is downward sloping. The q₁ is not profit maximizing output level.

If we observe all output levels left to the q₁ the market price is lower than the marginal cost. But the firm’s profit at an output level slightly smaller than q₁ exceeds that corresponding to the output level q₁. Therefore, q₁ cannot be a profit maximizing output level.

Question 35.
Write a table to show the impact of simultaneous shifts on equilibrium.
Answer:

Question 36.
Calculate the TR and MR from the following table.

Answer:
Hint: TR = P × Q; MR = TR_n – TR_n-1

Question 37.
Explain the circular flow of income of an economy.
Answer:

• Existence of two sectors viz., household sector and producers.
• Households are the owners of the factors of production.
• Households receive income by selling the factor services.
• There are no savings.
• The firms produce goods to the households.
• The economy is a closed economic system (where no Government or external trade or savings).

The circular flow of income in a simple economy can be illustrated with the help of following chart.

In the above chart, the uppermost arrow, going from the households to the firms, represents the spending by the households to buy goods and services produced by the firms. The second arrow going from the firms to the households is the counterpart of the arrow above. It stands for the goods and services which are flowing from the firms to the households. Thus the two arrows on the top represent the goods and services market – the arrow above represents the flow of payments for the goods and services, the arrow below represents the flow of goods and services.

The two arrows at the bottom of the diagram similarly represent the factors of the production market. The lower most arrow going from the households to the firms symbolizes the services that the households re rendering to the firms. Using these services the firms are producing the output. The arrow above this, going from the firms to the households, represents the payments made by the firms to the households for the services provided by the households.

Thus, when the income is spent on the goods and services produced by the firms, it takes the form of aggregate expenditure received by the firms. Since the value of expenditure must be equal to the value of goods and services, we can measure the aggregate income by calculating the aggregate value of goods and services produced by the firms. This is clearly shown above in the form of circular flow of income.

Question 38.
Briefly explain the functions of RBI.
Answer:
The main functions of RBI are as follows:
(1)Printing and issuing currency notes: It has complete authority of printing and issuing currency notes in the country. RBI issue all denominations of currency notes (Rs.2, Rs.10, Rs.20, Rs.50, Rs. 100, Rs.500 and Rs.2000) except one rupee note, which is issued by Finance Ministry, Government of India. The minimum reserve system of note issue was followed by RBI after 1956.

(2) Banker to Government: RBI works as banker to the Government. It does all activities of banking on behalf of Government activities like opening account, receiving money, making payments, transfer government funds, manages public debt and also maintains accounts of expenditure of government it also gives credit to government relating to Financial matters RBI gives advice to government.

RBI also acts as agent to the Government through performing the transfer of funds from government to beneficiaries. RBI also advises the government during some circumstances like not to go for over expenditure during inflation.

(3) Act as Bankers’ bank: All banks and financial institutions in India are under the control of RBI. It advices and gives direction on all transactions of commercial banks. All commercial banks in India have to keep certain portion of its deposits as cash reserves with RBI. All Commercial banks have to submit a detailed document and report about its transactions to RBI.

As a banker’s bank RBI functions as follows:

• Lender of last resort: RBI provides financial assistance to commercial banks like giving credit, discounting bills, giving advances, etc. during their financial crisis and helps the banks as a lender of last resort.
• Clearing house: Commercial Banks in crisis can approach RBI for loans and advances. RBI re-discounts bills and lends money to commercial banks. It also advances money on other securities.

(4) Controls credit creation activities of commercial banks: The credit provided by all commercial banks is controlled by RBI. RBI implements both quantitative and qualitative techniques to control the credit generated by commercial banks. The quantitative measures to control credit are Bank Rate Policy.

Open Market Operation, Cash Reserve Ratio and Statutory Liquidity Ratio. The qualitative techniques of credit control include fixation of margin requirements for loans, introduction of a system of credit rationing, moral suasion and direct action.

(5) Controls money market: RBI is the leader of money market. All the activities and components of money market like commercial banks and financial institutions are controlled and directed by RBI.

(6) Custodian of foreign exchange reserves: RBI has regular and continuous contacts with international monetary institutions relating to foreign exchange reserves. Precious foreign exchanges is preserved and protected by it.

Question 39.
Explain the consumption and investment function with the help of graphs.
Answer:
In a two sector model, there are two sources of final demand. The first is consumption and the second is investment. The investment function was shown as I = I. Graphically, this is show n as a horizontal line at a height equal to I above the horizontal axis.

In this model. I is autonomous  which means, it is the same no matter  whatever is the level of income. The consumers demand can he expressed by the equation C = \(\hat{C}\) + cY. where \(\hat{C}\) is autonomous expenditure and c is the marginal propensity to consume.
The consumption function can be shown as follows:

The consumption function can he graphically expressed as follows:

In the above diagram \(\hat{C}\) is the intercept of the consumption. ‘c’ is slope of consumption function equals α.

Question 40.
Write the chart of the Government budget.
Answer:

Question 41.
Write the chart of components of current account.
Answer:

Part – D

VII. Answer any FOUR of the following questions TWENTY sentences each. ( 4 × 6 = 24 )

Question 42.
Explain the optimal choice of consumer with the help of diagram.
Answer:
(a) It is assumed that the consumer chooses her consumption bundle on the basis of her taste and preferences over the bundles in the budget set. It is generally assumed that the consumer has well defined preferences over the set of all possible bundles. She can compare any two bundles. In other words, between any two bundles, she either prefers one to the other or she is indifferent between the two goods.

(b) ft is further assumed that the consumer is a rational individual. A rational individual clearly know s what is good or what is bad for her and in any given situation, she always tries to achieve the best for herself. From the bundles which are available to her, a rational consumer always chooses the one which gives her maximum satisfaction. The consumer always tries to move to a point on the highest possible indifference curve given her budget set.

(c) Thus, the optimum point would be located on the budget line. A point below the budget line cannot be the optimum. Compared to a point below the budget line, there is always some point on the budget line which contains more of at least one of the goods and no less of the other. Thus, the consumer’s preferences are monotonic.

(d) The point at which the budget line is tangent to one of the indifference curves would be the optimum choice of consumer. This is because, the budget line other than the point at which it touches the indifference curves lies on a lower indifference curve is considered as inferior. So such a point cannot be the consumer’s optimum. The optimum bundle is located on the budget line at the point where the budget line is tangent to an indifference curve.

This can be explained with the help of the following diagram:

In the above diagram. PQ is budget line, IC₁, IC₂, and IC₃, are indifference curves showing different levels of satisfaction. Banana is measured in OX axis and mango is measured in OY axis.

The above diagram illustrates the consumer’s Mango optimal choice also known as consumer’s equilibrium. At (x₁, x₂). the budget line PQ is tangent to the indifference curve IC₂. The indifference curve just touching the budget line is the highest possible indifference curve given the consumer’s budget set. Bundles on the indifference curve above IC₂ are not affordable. Points on the indifference curve IC₂ are certainly inferior to the points on the IC₂ as they lie on IC₁
Therefore. (x₁, x₂) is the consumer’s optimum bundle.

Question 43.
Explain the shapes of TP, MP and AP curves.
Answer:
Total Product(TP): Total product is the relationship between a variable input and output when all other inputs are held constant. Suppose we vary a single input and keep all other inputs constant. Then for different levels of that input, we get different levels of output. This relationship between the variable input and output, keeping all other inputs constant, is often referred to as Total Product of the variable input.

The total product curve in the input-output plane is a positively sloped curve as follows:

The above diagram shows the total product curve for labour. When all other inputs are held constant, it shows the different output levels obtainable from different units of labour. Labour is measured in OX axis and output is measured in OY axis. With L units of labour, the firm can at most produce q1 units of output.

Average product (AP) and Marginal Product (MP): Average Product is defined as the output per unit of variable input. We calculate it as APL = TP_L/L, where APL is the Average Product of Labour, TP_L is the total product of labour and L is the amount of labour input used. Marginal Product of an input is defined as the change in output per unit of change in the input when all other inputs are held constant. It is the additional unit of output per additional unit of variable input. It is calculated by dividing the change in output by change in input labour.
MP_L = ΔTP_L/ΔL

According to the law of variable proportions, the marginal product of an input initially rises and then after a certain level of employment, it starts falling. The MP curve therefore, looks like an inverse ‘U’ shaped curve.

For the first unit of the variable input, one can easily check that the MP and the AP are same. As the amount of input is increased, the MP rises. AP being the average of marginal output products also rises, but rises less than MP. Then after a point, the MP starts falling. However, as long as the value of MP remains higher than the value of the AP, the AP continues to rise. Once MP has fallen sufficiently, its value becomes less than the AP and the AP also starts falling. So AP curve is also inverse ‘U’ shaped.

This can be diagrammatically represented as follows:

In the above diagram. MPL is marginal product of labour, APL is the average product labour. As long as the AP increases, it must be the case that MP is greater than AP. Otherwise, AP cannot rise. Similarly, when AP falls, MP has to be less than AP. It follows that MP curve cuts AP curve from above at its maximum. In the diagram, AP is maximum at L. To the left of L, AP is rising and MP is greater than AP. To the right of L, AP is falling and MP is less than AP.

Question 44.
Explain the long run supply curve of a firm with the help of a diagram
Answer:
To derive the long supply curve of a firm we split the derivation into two parts. First we determine the firm’s profit-maximising output level when the market price is greater than or equal to the minimum long run average cost.

Case 1: Price greater than or equal to minimum of LRAC:

In the above diagram, if the market price is p₁, which exceeds the minimum LRAC, with LRMC rising, q₁ output is produced. LRAC at q₁ does not exceed the market price p₁. Hence, when the market price is p₁, the firm’s supply, in the long run become an output equal to q₁.

Case 2: Price less than the minimum LRAC:

If the market price is P₂, which is less than the minimum LRAC the firm will not produce. Here the firm will not produce positive output. The market price P₂ must be greater than or equal to the LRAC at the level of output. So, in the above diagram, LRAC exceeds P₂.

By combining both the cases, we conclude that a firm’s long run supply curve is the rising part of the LRMC curve from and above the minimum LRAC together with zero output for all the prices less than the minimum of LRAC. The following diagram shows the long run supply curve of the firm.

Question 45.
Suppose the demand and supply curves of wheat are given by q^D = 200 – P and q^s = 120 + P
(a) Find the equilibrium price.
(b) Find the equilibrium quantity of demand and supply.
(c) Find the quantity of demand and supply when P is greater than equilibrium price.
(d) Find the quantity of demand and supply when P is lesser than equilibrium price.
Answer:
(a) By definition
q^D = q^S
200 – P = 120 + P ⇒ 200 – P – 120 -P
2P – 80 ⇒ 2P = 80
P = \(\frac{80}{2}\) ⇒ P = 40

(b) q^D = 200 – P = 200 – 40 ⇒ q^D = 160
q^D = 120 + P = 120 + 40 ⇒ q^S = 160
∴ Equilibrium quantity is supplied and demand is 160.

(c) When P is greater than equilibrium price
If P = 45
q^D = 200 – 45 ⇒ q^D = 155 ⇒ q^S = 120+45 = 165  ∴ q^S > q^D

(d) When P is less than equilibrium price
If P = 35
q^D = 200 – 35 ⇒ q^D = 165  ⇒ q^S = 120 + 35 = 155  ∴ q^D >q^S

Question 46.
Explain the short run equilibrium of a monopolist firm, when the cost of production is positive by using TR and TC curves with the help of diagram.
Answer:
The short run equilibrium of a monopolist firm, when the cost of production is positive by using TR and TC curves can be explained with the help of diagram as follows:

In the above diagram Total Cost, Total Revenue and Profit curves are drawn. The profit received by the firm equals the total revenue minus the total cost. In the diagram, if quantity q₁ is produced, the Total Revenue is TR₁ and Total cost is TC₁. The difference TR₁ – TC₁ is the profit received. The same is depicted by the length of the line segment AB ie., the vertical distance between the TR and TC curves at q₁ level of output.

If the output level is less than q₂, the TC curve lies above the TR curve, i.e., TC is greater than TR and therefore profit is negative and the firm makes losses. The same situation exists for output levels greater than q₃ .Hence, the firm can make positive profits only at output levels between q₂ and q₃ where TR curve lies above the TC curve. The monopoly firm will chose that level of output which maximizes its profit. This would be level of output for which the vertical distance between TR and TC is maximum and TR is above the TC ie., TR – TC is maximum This occurs at the output level q₀.

Question 47.
Explain the macro economic identities.
Answer:
The macro economic identities are as follows:
(1) Gross Domestic Product (GDP): Gross Domestic Product measures the aggregate production of final goods and services taking place within the domestic economy during a year. But the w hole of it may not accrue to the citizens of the country. It includes GDP at Market prices and GDP at Factor cost.

GDP at market price is the market value of all final goods and services produced within a domestic territory of a country measured in a year. Here everything is valued at market prices. It is obtained as follows:
GDPMP = C + I + G + X – M

GDP at factor cost is gross domestic product at market prices minus net indirect taxes. It measures money value of output produced by the firms within the domestic boundaries of a country in a year.
GDPFC = GDPMP – NIT.

(2) Gross National Product: It refers to all the economic output produced by a nation’s normal residents, whether they are located within the national boundary or abroad. It is defined as GDP plus factor income earned by the domestic factors of production employed in the rest of the world minus factor income earned by the factors of production of the rest of the world employed in the domestic economy. Therefore,
GNP = GDP + Net factor income from abroad

(3) Net National Product (NNP): A part of the capital gets consumed during the year due to wear and tear. This wear and tear is called depreciation. If we deduct depreciation from GNP the measure of aggregate income that we obtain is called Net National Product. We get the value of NNP evaluated at market prices. So, NNP = GNP – Depreciation.

(4) Net National Product (NNP) at factor cost: The NNP at factor is the sum of income earned by all factors in the production in the form of wages, profits, rent and interest etc., belong to a country during a year. It is also known as National income. We need to add subsidies to NNP and deduct indirect taxes from NNP to obtain NNP at factor cost.
NNPFC = NNP at market prices – indirect taxes + subsidies.

(5) Personal Income (PI): It refers to the part of National income (NI) which is received by households. It is obtained as follows:
PI = NI – Undistributed Profits – Net interest payments made by the households – Corporate tax + Transfer payments to the households from the Government and firms.

(6) Personal Disposable Income (PDI): If we deduct the personal tax payments (income tax) and Non-tax payments (fines, fees) from personal income, we get PDI. Therefore,
PDI = PI – Personal tax payments – Non-tax payments.

Question 48.
Briefly explain the foreign exchange market with fixed exchange rates with the help of a diagram.
Answer:
Under fixed exchange rate system, the government decides the exchange rate at a particular level. The foreign exchange market with fixed exchange rates can be explained with the help of following diagram:

In the above diagram, the market determined exchange rate is where demand and supply intersect. However, if the government wants to encourage exports for which it needs to make rupee cheaper for foreigners it would do so by fixing a higher exchange rate say, Rs.70 per dollar from the current exchange rate of Rs.65 per dollar. Thus, the new exchange rate set by the government is E, where E is greater E. At this exchange rate, supply of dollars exceeds the demand for dollars.

The RBI intervenes to purchase the dollars for rupees in the foreign exchange market in order to absorb this excess supply which has been marked as AB in the diagram. Thus, by interfering, the government can maintain any exchange rate in the economy. If the government wants to set an exchange rate at a level E, there would be an excess demand for dollars, the government would have to withdraw dollars from its past holds of dollar. If the government fails to do so, it will encourage black market transactions.

Part – E

VIII. Answer any TWO of the following project oriented questions. ( 2 × 5 = 10 )

Question 49.
Compute the total revenue marginal revenue and average revenue schedules from the following table when market price of each unit of goods is Rs.10.

Answer:
Hint: TR Multiply Price and Quantity ( P x Q);
MR = TR_n – TR_n-1 and AR = TR/Q

Question 50.
Write a note on Demonetisation.
Answer:
Demonetisation was a new step taken by the Government of India on 8th November. 2016. It was introduced to tackle the problem of corruption, black money, terrorism and circulation of fake currency in the economy. Old currency notes of Rs.500 and Rs.1000 were no longer legal tender.

New currency notes in denomination of Rs.500 and Rs.2000 were introduced. The public were advised to deposit old currency notes in their bank account till 31 st of March 2016 without any declaration and upto 31 st March 2017 with the RBI with declaration.

In order to avoid a complete breakdown and scarcity of cash, Government allowed exchange of Rs.4000 old currency notes with new currency restricting to a person per day. Further till 12th December 2016, old currency notes were acceptable as legal tender at petrol pumps, Government hospitals and for payment of Government dues like taxes, power bills etc.

This initiative had both appreciation and criticism. There were long queues outside banks and ATM centres. There was acute shortage of currency notes and had adverse effect on economic activities. But now, normalcy has returned.

The demonetization also has positive effects. It improved tax compliance as a large number of people were bought in the tax ambit. The savings of individual were channelized into the formal financial system. As a result, banks have more resources at their disposal which can be used to provide more loans at low rate of interest.

Demonetisation helps in curbing black money, reducing tax evasion and corruption will decrease. It also help in tax administration in another way, by shifting transaction out of the cash economy into the formal payment system. Now a days, households and firms have started to shift from cash payment to electronic payments. This family has surplus budget as its income is more than expenditure.

Question 51.
Name the currencies of any five countries of the following
USA, UK, Germany, Japan, China, Argentina, UAE, Bangladesh, Russia.
Answer:

Countries	Currency
USA	US Dollars
UK	British Pound
UAE	UAE Dirham
Germany	Euro
Japan	Japanese Yen
China	Chinese Yuan
Argentina	Argentine Peso
Bangladesh	Bangladeshi Taka
Russia	Russian Ruble