Solution

IMPORTANT QUESTIONS

Class 12 - Economics

1. (b) as on any point time

Explanation: as on any point time
2. (a) form
Explanation: form
3. (a) demand
Explanation: demand
4. (d) does not form
Explanation: does not form
5. (c) It is a statement of expected annual receipts and expenditures of the government
Explanation: It is a statement of expected annual receipts and expenditures of the government
6. (d) indirect tax
Explanation: indirect tax
7. (b) regressive
Explanation: regressive
8. (d) indirect
Explanation: indirect
9. (c) Secondary deposits
Explanation: Secondary deposits
10. (c) Estimated revenues ≠ estimated expenditure
Explanation: Unbalanced budget is one when estimated revenues are not equal to the estimated expenditures. It may be a
deficit or surplus budget. When estimated expenditure is greater than estimated revenues, it is a deficit budget and when
estimated revenues are greater than estimated expenditure, then it is a surplus budget.
11. (a) Downward sloping
Explanation: At lower exchange rate more foreign currency is demanded and at higher exchange rate less foreign currency is
demanded.
12. (b) Raises CRR
Explanation: Raises CRR
13. (c) Devaluation of currency
Explanation: Devaluation of currency
14. (d) A is false but R is true.
Explanation: The principal function of the central bank is to control the supply of credit in the economy. It implies an increase
or decrease in the supply of money in the economy by regulating the 'creation of credit' by commercial banks.
15. (b) Both A and R are true but R is not the correct explanation of A.
Explanation: Goverment budget is an annual and estimated statement of receipts and expenditure. Various objectives are
targetted using the budget.
16. (c) A is true but R is false.
Explanation: A is true but R is false.
17. (a) Both A and R are true and R is the correct explanation of A.
Explanation: Both A and R are true and R is the correct explanation of A.
18. (d) A is false but R is true.
Explanation: Loans from the rest of the world are a positive item. It is recorded on the capital account of BoP.
19. State True or False:

1/4
Download RKG INSTITUTE App for Online Learning
 (i) (b) False
Explanation: False. Demand deposits can be withdrawn on-demand at any time by demanding the cheque.
(ii) (a) True
Explanation: True
(iii) (a) True
Explanation: True. The depreciation of domestic currency leads to a rise in exports.
(iv) (b) False
Explanation: False. A rise in margin requirements reduces the demand for credit.
(v) (b) False
Explanation: In this case, the Current Account Deficit is financed entirely by international borrowings without any
reserve movements. So, there is no official reserves transactions, i.e. no accommodating transactions.
20. Fill in the blanks:
(i) 1. Statutory Liquidity Ratio
2. SLR
(ii) 1. Revenue
(iii) 1. positively
(iv) 1. RBI
(v) 1. Current Account balance
21. Commercial Bank -: Accept deposits and issue loans
Reserve Bank -:Control the entire banking system
Barter System -: Exchange of Goods and Services
NABARD-: Apex bank for agriculture
22. (a) - (iv), (b) - (iii), (c) - (ii), (d) - (i)

23. (a) - (iii), (b) - (i), (c) - (iv), (d) - (ii)

24. (a)-(iv) , (b)-(iii) , (c)-(ii) , (d)-(i)
25. (a) - (iv), (b) - (i), (c) - (ii), (d) - (iii)
26. i. Current Account : The account allows infinite number of transactions and also provide cheque facility.
ii. Saving Account: Provide cheque facility and carry a rate of interest.
iii. Fixed Deposit : These deposits carry a high rate of interest.
iv. a. By opening more banks.
b. By widening the scope of banking system.
27. i. We know that Revenue Deficit = Revenue Expenditure - Revenue Receipts = 100 - 80 = Rs. 20 Arab.
ii. Fiscal Deficit = (Revenue Expenditure + Capital Expenditure) - (Revenue Receipt + Capital Receipt Net of Borrowing) = (100
+ 110) - (80 + 95) = 210 - 175 = Rs. 35 Arab.
iii. Primary Deficit = Fiscal Deficit - Interest Payments. Here Fiscal Deficit is equal to 35 Arab and Interest Payments are equal to
10, therefore Primary Deficit = 35 - 10 = 15 Arab.
28. The foreign exchange rate is the price of one currency in terms of another. The foreign exchange rate affects exports. When the
foreign exchange rate is on the rise, it implies that the price of the Indian rupee has increased in terms of the currency of another
country (say American Dollar). As a result, the purchasing power of the foreign currency (Dollar) decreases and one Dollar can be
exchanged for fewer rupees. Now, Indian goods become costly in foreign markets and exports to become costly. This results in a
decrease in exports to foreign countries. For example, if the value of the rupee in terms of US Dollar increases say ₹ 60 to ₹ 55 per
dollar, Indian exporter will lose ₹ 5 per dollar. This works as a disincentive (obstacle) to the exporter and export is likely to fall.
29. If the Indian rupee has depreciated against the US dollar ($) this means that now the rupee is the weaker currency
as its value has decreased.
For example if 1 = ₹64now 1=₹70 this means that rupee has depreciated against dollar. For the same $ now we
will be paying more rupees.
The impact will be that imports will become costlier and therefore imports will decrease
30. Foreign exchange rate shares an inverse relationship with the demand for the currency. Here, the currency itself is taken as a
commodity which follows the law of demand. Thus, with the increase in the price of foreign currency, it's demand falls and vice
versa. Thus, with less of foreign goods are purchased. With a fall in the price of foreign exchange, the value of domestic currency

2/4
Download RKG INSTITUTE App for Online Learning
 increases (i.e. appreciation of domestic currency) and that means foreign goods become cheaper and their domestic demand (i.e.
imports) increases. The rising domestic demand for foreign goods implies higher demand for foreign exchanges which increases
from OQ1 to OQ2 as shown in the figure

The supply of foreign currency is directly proportional to the price of foreign exchanges. Here, foreign currency is taken as a
commodity that follows the law of supply. Thus, the higher the price of foreign currency in terms of domestic currency, higher the
quantity of foreign exchange supplied in the foreign exchange market. When the price of a foreign currency falls, it leads to
cheaper imports and exports because it leads to an appreciation of domestic currency. The exporters are discouraged due to
costlier exports. This results in lesser inflow or supply of foreign currency in the economy. As a result the supply of foreign
exchange decreases from OQ2 to OQ as shown in the figure.

31. i. Cash Reserve Ratio or CRR is the portion of total deposits that banks are required to keep with the central bank.
ii. SLR stands for Statutory Liquidity Ratio. The minimum percentage of deposits that the bank has to maintain in form of gold,
cash or other approved securities.
iii. Bank rate is the rate at which the central bank lends money to commercial banks as the lender of the last resort.
iv. Legal reserves include CRR and SLR. Lowering of CRR and SLR increases the credit creating power of commercial banks
which adds more liquidity in the market.
v. A general increase in the price level of goods and services.
vi. Lower the production of crops higher the inflation.
32. Commercial banks have the power to create credit on the basis of deposits they receive. The central bank exercises control over
this power by changing the legal reserve requirements from time to time.
Following are the components of the Legal Reserve Ratio:
i. Cash Reserve Ratio- Cash reserve ratio is a minimum proportion of cash reserve which is kept by commercial banks with the
central bank against its deposits. The cash reserve ratio is fixed by the central bank to control the creation of credit. Central
banks will reduce the cash reserve ratio to expand credit for reducing deficient demand. Central banks will raise the cash
reserve ratio to discourage the creation of credit for reducing excess demand.
ii. Statutory Liquidity Ratio- Statutory liquidity ratio is the proportion of total demand and time liabilities which is to be kept
by commercial banks in the form of liquid assets including cash, gold and unencumbered approved securities. If the statutory
liquidity ratio is increased by the central bank, the ability of commercial banks to give credit is reduced. Central banks will
reduce the statutory liquidity ratio to encourage commercial banks to create more credit.
33. Balance of Trade
= Exports - Imports
= [60 + 200 + 90] - (150+120+140)
= 350- 410
= (-) ₹ 60 crores Trade Deficit
34. (i) Current account: Current account is that account which records imports and exports of goods and services and unilateral
transfers, income and transfer payments during a year.

3/4
Download RKG INSTITUTE App for Online Learning
(ii) Capital account: Capital account is that account which records all such transaction between residents of a country and rest of
the world which cause a change in the asset or lability status of the residents of a country or its government.
(iii) Import of machinery is an import item. So, it will be included or recorded under the current account.

4/4
Download RKG INSTITUTE App for Online Learning