2nd PUC Economics Model Question Paper 3 with Answers

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Karnataka 2nd PUC Economics Model Question Paper 3 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.
Central problems of an economy includes
(a) What to produce
(b) How to produce
(c) For whom to produce
(d) All of the above
Answer:
(d) All of the above

Question 2.
The equation of Budget line is
(a) Px + p₁x₁ = M
(b) M = P₀x₀ + Px
(c) P₁x₁ + p₂x₂ = M
(d) Y = Mx + C
Answer:
(c) P₁x₁ + p₂x₂ = M

Question 3.
The change in output per unit of the change in the input is called
(a) Marginal product
(b) Average Product
(c) Total product
(d) Product
Answer:
(a) Marginal product

Question 4.
By deducting undistributed profit from national income, we get
(a) Personal Disposable income
(b) Personal income
(c) Private income
(d) Subsidies.
Answer:
(b) Personal Income

Question 5.
In this standard all currencies were defined in terms of gold
(a) Metal standard
(b) silver standard
(c) Gold standard
(d) None of the above
Answer:
(c) Gold Standard

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

Question 6.
Method of adding two individual demand curve is called as ______.
Answer:
Horizontal summation.

Question 7.
For a price taking firm Marginal Revenue is equal to ______.
Answer:
Market price.

Question 8.
If the supply curve shifts rightward and demand curve shifts leftward equilibrium price will be ______.
Answer:
Decreasing.

Question 9.
Non paying users of public goods are known as _____.
Answer:
Free riders.

Question 10.
Average Propensity to Consume (APC) is the consumption per unit of _______.
Answer:
Income.

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

Question 11.

A	B
1. Centrally planned economy	(a) QD = QS
2. Excess demand	(b) Government
3. Market equilibrium	(c) Rise in Price
4. Repurchase Agreement	(d) Trade in goods and services
5. Balance of payment	(e) Repo

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

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

Question 12.
What is demand?
Answer:
The concept ‘demand’ refers to the quantity of a goods or services that a consumer is willing and able to purchase at various prices, during a period of time. It includes desire for a commodity, ability to pay and willingness to pay.

Question 13.
What is Average product?
Answer:
Average Product is defined as the output per unit of variable input. We calculate it as AP_L =TP_L /L.

Question 14.
Give the meaning of imports.
Answer:
When the economy buys goods from the rest of the world, they are called imports.

Question 15.
How do you get net value added?
Answer:
We obtain net value added by deducting the value of depreciation from Gross value added.

Question 16.
What do you mean by fixed exchange rate?
Answer:
Fixed exchange rate is an exchange rate between the currencies of two or more countries that is fixed at some level. Under this system, the government fixes the exchange rate at a particular level.

Part – B

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

Question 17.
Distinguish between positive economics and normative economics.
Answer:

• The positive economics is the study of ’what was’ and ’what is’ under the given set of circumstances. It deals with the scientific explanation of the working of the economy.
• The normative economics studies ’what ought to be’. It explains about ‘what should be and should not be done’.

Question 18.
What do you mean price elasticity of demand?
Answer:
Price elasticity of demand is a measure of the responsiveness of the demand for a goods to changes in its price.
In the words of Prof. Stonier and Hague, “Price elasticity of demand is a technical term used by economists to describe the degree of responsiveness of the demand for a goods to a change in its price.”
It is measured by using the following formula.

Question 19.
Give the meaning of marginal product. Write its formula.
Answer:
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.
Its formula is MP_L = ΔTP_L/ΔL.

Question 20.
Distinguish between excess demand and excess supply.
Answer:

Excess Demand	Excess Supply
1. It is situation where market demand exceeds the market supply.	1. It is a situation where the market supply exceeds the market demand.
2. Here the price of the product increases.	2. Here the price of the product decreases
3. Qd > Qs	3. Qs > Qd

Question 21.
Write the meaning of monopolistic competition and give an example.
Answer:
When the market structure has large number of firms, free entry and exit of firms and differentiated goods, then it is called monopolistic competition.

For example, there are large number of soaps producing firms. But many of the soaps being produced are associated with some brand name and are distinguishable from the other companies. The consumer develops a preference for a particular brand of soap over time or becomes loyal to a particular brand like some people always prefer Mysore Sandal Soap.

Question 22.
Mention any four features of monopoly.
Answer:

1. It is a market with one seller or firm with many buyers.
2. No close substitutes.
3. Restrictions on the entry of new firms.
4. The Average Revenue curve slopes downwards.
5. Uniform price or price discrimination.

Question 23.
Give the meaning of intermediate goods. Give example.
Answer:
These are the goods used by other producers as material inputs. These are used as raw material for production of other commodities. These are not final goods.
Example: Steel sheets, Raw cotton, Sugarcane.

Question 24.
How do we get personal disposable income?
Answer:
The personal disposable income is obtained by deducting personal tax payments and non tax payments from personal income.

Question 25.
What is GDP deflator?
Answer:
It is the ratio of nominal GDP to real GDP i.e., GDP deflator = GDP/gdp; where GDP is nominal Gross Domestic Product and ‘gdp’ stands for real Gross Domestic Product.

Question 26.
What role of RBI is known as ‘Lender of Last Resort’?
Answer:
When commercial banks need more funds in order to be able to create more credit, they may go to the market for raising such funds or go to the RBI. The RBI provides them funds through various instruments. This role of RBI, that of being ready to lend to banks at all times is said to be the “lender of last resort.”

Question 27.
Write the difference between marginal propensity to Save (MPS) and Average Propensity to Save.
Answer:
MPS is the change in savings per unit change in income. It is denoted by ‘S’ and is equal to 1-c. APS is the savings per unit of income. It is obtained by dividing savings by income i.e., s/y. where s is savings and y is income.

Question 28.
What is paradox of thrift?
Answer:
The paradox of thrift is a situation where, if all the people of the economy increase their savings, the total value of savings in the economy will not increase but it either decreases or remains constant. That means, the people become more thrifty and they end up saving less or same as before.

Question 29.
Mention the non-tax revenues of the central government.
Answer:
The non-tax revenues of the central government mainly consists of the following:

• Interest receipts on account of loans by the central government
• Dividends and profits on investments made by the government
• Fees and other receipts for services rendered by the government
• Grants-in-aid from foreign countries and international organizations.

Question 30.
Differentiate between depreciation and devaluation.
Answer:
The difference between depreciation and devaluation is as follows:

Depreciation	Devaluation
1. Here the price of foreign currency in terms of domestic currency increases.	1. Here, the government deliberately makes the domestic currency cheaper by increasing exchange rate.
2. It happens because of market forces i.e., demand for foreign exchange and supply of foreign exchange.	2. It is a deliberate action of government.

Part – C

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

Question 31.
Briefly explain the production possibility frontier.
Answer:
The production possibility frontier is a graphical representation of the combinations of two commodities (cotton and wheat) that can be produced when the resources of the economy are fully utilized. It is also called as Production Possibility Curve (PPC)also known as transformation curve. It gives the combinations of cotton and wheat that can be produced when the resources of the economy are fully utilized. The production possibility frontier can be explained with the help of following table.

Combination	Cotton	Wheat
A	10	0
B	8	1
C	5	2
D	2	3
E	0	4

In the above table, we can see that, if a country’ uses all its resources to grow cotton it can grow 10 units, which is shown in combination A. Similarly, if all resources are used to grow wheat, it can grow 4 units of wheat. If the resources are to be used for both the commodities, the combinations of B, C or D can be chosen.

This can be graphically represented as follows:

As per the above graph, the combinations A to E lying on the production possibility curve represent that a country can produce both the commodities with the help of available resources technology If the points lying strictly below the production possibility curve represents a combination of cotton and wheat that will be produced when all or some of the resources are either underemployed or are utilized in a wasteful fashion.

Question 32.
Explain the indifference map with the diagram.
Answer:
A family of indifference curves is called as indifference map. It refers to a set of indifference curves for two commodities showing different levels of satisfaction.

The higher indifference curves show higher level of satisfaction and lower indifference curve represent lower satisfaction. A rational consumer always chooses more of that product that offers him a higher level of satisfaction which is represented in higher indifference curve. It is also called ‘monotonic preferences’.

The consumer’s preferences over all the bundles can be represented by a family of indifference curves as shown in the following diagram.

In the above diagram, we see the group of three indifference curves showing different levels of satisfaction to the consumer. The arrow indicates that bundles on higher indifference curves are preferred by the consumer to the bundles on lower indifference curves.

Question 33.
Write a brief note on returns to scale.
Answer:
The returns to scale can happen only in the long run as both the factors (Labour and Capital) can be changed. One special case in the long run occurs when both factors are increased by the same proportion or factors are scaled up.

• Constant returns to scale: When a proportional increase in all inputs results in an increase in output by the same proportion, the production function is said display constant returns to scale.
• Increasing returns to scale: When proportional increase in all inputs results in an increase in output by a larger proportion, the production function is said to display increasing returns to scale.
• Decreasing returns to scale: When a proportional increase in all inputs results in an increase in output by a smaller proportion, the production function is said to display decreasing returns to scale.

For example, if in a production process, all inputs get doubled. As a result, if the output gets doubled, the production function exhibits constant returns to scale, if output is less than doubled, exhibits decreasing returns to scale and if is more than doubled, exhibits increasing returns to scale.

Question 34.
Explain how the firms behave in oligopoly.
Answer:
If the market of a particular commodity consists of a few number of sellers, the market structure is termed oligopoly.

Given there are a few firms, each firm is relatively large when compared to the size of the market. As a result each firm is in a position to affect the total supply in the market and thus influence the market price.

For example, if a firm decides to double its output, the total supply in the market will increase, causing the price to fall. This fall in price affects the profits of all firms in the industry. Other firms will respond to such a move in order to protect their own profits, by taking fresh decisions regarding how much to produce. Therefore the level of output in the industry, the level of prices, and the profits are outcomes of how firms are interacting with each other.

Case-1: Firms could decide to collude with each other to maximize profits. Here the firms form a cartel (an association) that acts as a monopoly. The quantity supplied collectively by the industry and the price charged are the same as a single monopoly firm.

Case-2: The firms could decide to compete with each other. For example, a firm may lower its price a little below the other firms, in order to attract away their customers. Certainly, the other firms would retaliate by doing the same. So the market price keep falling.

In reality, cooperation of the kind that is needed to ensure a monopoly outcome is often difficult to achieve in the real world. The firms may realize that competing fiercely by continuous price cuts is harmful to their own profits.

Question 35.
Explain the features of perfect competition.
Answer:
Perfect competition is a market where there will be existence of large number of buyers and sellers dealing with homogenous products. It is a market with highest level of competition.

(1) Large number of sellers and sellers: The first condition which a perfectly competitive market must satisfy is concerned with the sellers side of the market. The market must have such a large number of sellers that no one seller is able to dominate in the market. No single firm can influence the price of the commodity.

The sellers will be the firms producing the product for sale in the market. These firms must be all relatively small as compared to the market as a whole. Their individual outputs should be just a fraction of the total output in the market.

There must be such a large number of buyers that no one buyer is able to influence the market price in any way. Each buyer should purchase just a fraction of the market supplies. Further the buyers should have any kind of union or association so that they compete for the market demand on an individual basis.

(2) Homogeneous products: Another prerequisite of perfect competition is that all the firms or sellers must sell completely identical or homogeneous goods. Their products must be considered to be identical by all the buyers in the market. There should not be any differentiation of products by sellers by way of quality, colour, design, packing or other selling conditions of the product.

(3) Free Entry and Free exit for firms: Under perfect competition, there is absolutely no restriction on entry of new firms in the industry or the exit of the firms from the industry which want to leave. This condition must be satisfied especially for long period equilibrium of the industry.

If these four conditions are satisfied, the market is said to be purely competitive. In other words, a market characterized by the presence of these four features is called purely competitive. For a market to be perfect, some conditions of perfection of the market must also be fulfilled.

(4) Price Taker: The single distinguishing character of perfect competition is the price taking behaviour of the firms. A price taking firm believes that if it sets a price above the market price, it will be unable to sell any quantity of the good that it produces.

On the other hand, if the firm set the price less than or equal to the market price, the firm can sell as many units of the good as it wants sell. The firms in the perfect competitive market are price takers. That means, the producers will continue to sell their goods and services in the price existing in the market. Firms have no control over the price of the product.

(5) Information is perfect: Price taking is often thought to be a reasonable assumption when the market has many firms and buyers have perfect information about the price prevailing in the market. Since all firms produce the same good and all buyers are aware of the market price, the firm in question loses all its buyers if it rises price.

Question 36.
What is the implication of free entry and exit of firm on market equilibrium? Briefly explain.
Answer:
In perfect competitive market, it is assumed that there will be free entry and exit of firms. This assumption implies that in equilibrium, no firm earns super normal profit or incurs loss by remaining in production. Here, the equilibrium price will be equal to the minimum average cost of the firms.

Let us discuss in detail why there will be no super normal profit or no loss to the firms. Suppose, at the prevailing market price, each firm is earning super normal profit. The possibility of earning super normal profit will attract some new firms. As new firms enter the market supply curve shifts rightward. However, demand remains same. This causes market price to fall. As prices decrease, super normal profits will eventually extinct. At this point, with all firms in the market earning normal profit.

Similarly, if the firms are incurring loss (less than normal profit) at the prevailing price, some firms will exit. This will lead to an increase in price. Then the profits of each firm will increase to the level of normal profit. At this point, no firm will want to leave since they will be earning normal profit.

Therefore, with free entry and exit, each firm will always earn normal profit at the prevailing market price.

Question 37.
What is market demand curve? Draw a market demand curve for a monopoly firm.
Answer:
The market demand curve shows the quantities that consumers as a whole are willing to purchase at difference prices.
The market demand curve for a monopoly firm can be explained with the help of diagrams follows:

In the given diagram, price is measured in Y axis and quantity is measured in X axis. If the market price is at P₀ consumers are willing to purchase the q₀ quantity. If the market price is less i.e., P₁ consumers are willing to buy more quantity i.e., ₁. That means, price in the market affects the quantity demanded by the consumers.

Therefore, monopoly firm’s decision to sell a larger quantity is possible only at a lower price. If the monopoly firm brings a smaller quantity of the commodity into the market for sale it will be able to sell at a higher price. Thus, for the monopoly firm, the price depends on the quantity of the commodity sold.

For a monopoly firm. price is decreasing function of the quantity sold. So, the market demand curve for a monopolist expresses the price that consumers are willing to pay for different quantities supplied. This idea is reflected in the statement that the monopoly firm faces the downward sloping market demand curve.

Question 38.
Briefly explain in what way macro economics is different from micro economics.
Answer:
The micro and macro economics are distinguished on the following grounds
Scope:

• Micro Economics studies individual units so its scope is narrow.
• Macro Economics studies in aggregates, so its scope is wider.

Method of Study:

• The Micro Economics follows slicing method as it studies individual unit.
• The Macro Economics follows lumping method as it studies in aggregates.

Economic Agents:

• In Micro Economics, each individual economic agent thinks about its own interest and welfare.
• In Macro Economics, economic agents are different among individual economic agents and their goal is to get maximum welfare of a country.

Equilibrium:

• Micro Economics studies the partial equilibrium in the country.
• Macro Economics studies the general equilibrium in the economy.

Domain:

• Micro Economics consists of theories like consumer’s behaviour, production and cost, rent, wages, interest, etc.
• Macro Economics comprises of theory of income, output and employment, consumption Function, investment function, inflation, etc.

Question 39.
Write a short note on the concept of final good.
Answer:
The final goods are those goods which are meant for final use and will not pass through any more stages of production or transformations. They are called final goods because, once they have been sold they pass out of the active economic flow. However, they may undergo transformation by the action of the ultimate purchaser.

In fact, many final goods are transformed during their consumption. For instance, Tea leaves purchased by the consumer are not consumed in that form – they are used to make drinkable tea. which is consumed. Similarly most of the items that enter our kitchen are transformed through the process of cooking. But cooking at home is not an economic activity, even though the product involved undergoes transformation.

Home cooked food is not sold to the market. However. if the same cooking or tea was done in hotel where the cooked product would be sold to customers, then the same items are not considered as final goods and would be counted as inputs to which economic value addition can take place.

Thus, it is not in the nature of the good but in the economic nature of its usage that a good becomes a final good.

Question 40.
Briefly explain the functions of money.
Answer:
The functions of money are as follows:

(1) Medium of Exchange: Money plays an important role as a medium of exchange. It facilitates exchange of goods for money. It has solved the problems of barter system. Money has widened the scope of market transactions. Money has become a circulating material between buyers and sellers.

(2) Measure of Value/Unit of account: The money acts as a common measure of value. The values of all goods and services can be expressed in terms of money.

(3) Store of value: People can save part of their present income and hold the same for future. Money can be stored for precautionary motives needed to overcome financial stringencies. Money solves one of the deficiencies of barter system i.e., difficulty to carry forward one’s wealth under the barter system.

(4) Transfer of value: Money acts as a transfer of value from person to person and from place to place. As a transfer of value, money helps us to buy goods, properties or anything from any part of the country or the world. Further, money earned in different places can be brought or transferred to anywhere in the world.

Question 41.
Give the meaning of Aggregate demand function. How can it be obtained graphically?
Answer:
The aggregate demand function shows the total demand at each level of income. Graphically it means the aggregate demand function can be obtained by vertically adding the consumption and investment function.

Here, OM = C, OJ = I, OL = C + I
The aggregate demand is obtained by vertically adding the consumption and investment functions. The aggregate demand function is parallel to the consumption i.e., they have the same slope of ‘c’.

Part – D

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

Question 42.
Write a note on balance of trade.
Answer:
Balance of trade is the difference between the value of exports and value of imports of goods of a country in a given period of time. Export of goods is entered as a credit item in balance of trade. Import of goods is entered as a debit item in balance of trade. It is also called as Trade balance.

Balance of trade is said to be in balance when exports of goods are equal to the imports of goods i.e., balanced balance of trade. Surplus balance of trade arises if country’s exports of goods are more than its imports. Deficit balance of trade arises if a country’s imports of goods are more than its exports.

Balance of trade is narrow concept and it may not show the international economic position of an economy. It gives partial picture of international transactions and it is less reliable. It does not include net invisibles i.e., the difference between the value of exports and value of imports of invisibles (services) of a country in a given period of time.

Question 43.
Explain the movement along the demand curve and shift in demand curve with the help of two diagrams.
Answer:
It is important to note that the amount of a good that the consumer chooses depends on the price of the good, the prices of other goods, income of the consumer and her tastes and preferences. The demand function is a relation between the amount of the good and its price when other things remain constant.

The demand curve is a graphical representation of the demand function. At higher prices, the demand is less and at lower prices, the demand is more. Thus, any change in the price leads to movements along the demand curve.

On the other hand, changes in any of the other things like, income of consumer, price of related goods (substitutes and complementary goods) and taste and preferences, lead to a shift in the demand curve. The following two diagrams depict the movement along the demand curve and a shift in the demand curve.

The above diagrams show movement along a demand curve and shift of a demand curve. Diagram (a) depicts a movement along the demand curve and diagram (b) depicts a shift in the demand curve.

Question 44.
Explain the law of variable proportions with the help of a diagram.
Answer:
The law of variable proportions say that the marginal product of a factor input initially rises with the employment level. But after reaching a certain level of employment, it starts falling. The law of variable proportions can be explained, with the help of the following table and diagram.

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.

If we plot the above table in graph, placing labour on X axis and output on Y axis, we get the curves shown in the diagram below:

The TP increases as labour input increases. But the rate at which it increases is not constant. An increase in labour from 1 to 2 increases TP by 10 units. An increase in labour from 2 to 3 increases TP by 12 units. The rate at which TP increases is shown by the MP. The MP first increases (till 3 units of labour) and then begins to fall. This tendency of the MP to first increase and then fall is called the law of variable proportions.

The law of variable proportions is also known as law of diminishing marginal product. It occurs because of change in factor proportions. Factor proportions represent the ratio in which the two inputs are combined to produce output. As we hold one factor fixed and keep the other increasing, the factor proportions change. Initially, as we increase the amount of Y the variable input, the factor proportions become Output more and more suitable for the production and marginal product increases. But after a certain level of employment, the production process becomes too crowded with the variable input.

In the above diagram, TP is Total Product curve which is increasing in different proportions due the change in labour input. The AP and MP 0 curves are increasing in the beginning and decreasing later. But the change in MP is greater than AP.

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.

Question 49.

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
Germany	Euro
Japan	Japanese Yen
China	Chinese Yuan
Argentina	Argentine Peso
UAE	UAE Dirham
Bangladesh	Bangladeshi Taka
Russia	Russian Ruble