Solution

ECONOMICS FULL MACRO

Class 12 - Economics
Section A
1. (a) A machine purchased by a dealer of machines,
Explanation: A machine purchased by a dealer of machines it is intermediate goods because it is for resale.
2.
(c) Annual expenditure of a school
Explanation: Annual expenditure of a school
3. (a) Both (i) and (ii)
Explanation: Both (i) and (ii)
4.
(d) Both Flow of Services and Flow of Goods
Explanation: Both Flow of Services and Flow of Goods
5.
(c) The consumption curve will be a horizontal line.
Explanation: The consumption curve will be a horizontal line.
6. (a) Aggregate supply
Explanation: Aggregate supply is the total amount of money which is paid to factors of production against their factor services for the production of goods and services in a country.
7.
(d) ratio of consumption to the income
Explanation: ratio of consumption to the income
8.
(b) S = -a + (1 - b)Y
Explanation: S = -b + (1 - b)Y, where 1 - b implies marginal propensity to save.
9.
(d) Government Finance
Explanation: Government Finance
10.
(c) revenue deficit
Explanation: revenue deficit
11.
(c) output-intermediate consumption
Explanation: Output-intermediate consumption value-added is the difference between the value of the output of an enterprise and the value of intermediate consumption.
12.
(b) Net fixed capital formation plus consumption of fixed capital plus change in stock
Explanation: Net fixed capital formation plus consumption of fixed capital plus change in stock
13.
(c) All 3 methods give same value of national income
Explanation: All 3 methods give same value of national income
14.
(d) 1991
Explanation: Banking Sector Reforms in India began in 1991.
15. (a) decreasing the bank rate
Explanation: decreasing the bank rate
16.
(d) RBI
Explanation: Central Bank of the country i.e., RBI functions as the advisor to the central government.
17.
(d) Central Bank
Explanation: Central Bank
18.
(b) margin requirement
Explanation: Margin requirement refers to the difference between the current value of the security offered for a loan and the value of loan granted. It is a qualitative method of credit
control adopted by the central bank in order to stabilize the economy from inflation or deflation.
19.
(d) Margin Requirement
Explanation: Margin Requirement
20. (a) Both A and R are true and R is the correct explanation of A.
Explanation: The value of intermediate good should not be included as it leads to double counting which will lead to increase in national income. Thus, the norm is to include the value of
final goods only.
21. (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.
22. (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.
23.
(d) A is false but R is true.

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 Explanation: A is false but R is true.
Assertion is false because government budget is item wise estimation of all receipt and expenditure are incurred in a fiscal year.
24. (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.
25. (a) Both A and R are true and R is the correct explanation of A.
Explanation: Paper Currency in general don’t have any market value, it is the legal promise and trust in the banking system that makes these paper currencies accept as a medium of
exchange.
26. Fill in the blanks:
(i) 1. Expected
27. (a) - (iv), (b) - (iii), (c) - (ii), (d) - (i)
28.
(c) (a) - (iv), (b) - (i), (c) - (ii), (d) - (iii)
Explanation: (a) - (iv), (b) - (i), (c) - (ii), (d) - (iii)
29. (a) price stability in the economy
Explanation: price stability in the economy
30. (a) Revenue deficit
Explanation: Revenue deficit
31.
(c) 3, 1, 2, 4
Explanation: Evolution of money was started from the use of gold, silver and other metal coins, later on monetary authorities of countries issued official paper money (currency notes).
Due to modernisation and computerisation debit and credit cards are being used as plastic money. Now, the use of money through electronic means is called digital money.
32.
(d) Statement I is true and statement II is false.
Explanation: Statement I is true and statement II is false.
33.
(c) Statement (c) is true.
Explanation: Both Consumption at zero level of National Income is ₹ 50 crores and People spend 60% of rise in income on consumption.
34.
(d) Option (a)
Explanation: Government budget is prepared for upcoming fiscal year.
35.
(b) I only
Explanation: I only
36. (a) IDBI Bank
Explanation: IDBI Bank
37. (a) Lack of Measure of Value
Explanation: Lack of Measure of Value
Section B
38. Producer goods are those goods which are used for further production. These may be used either as raw material (like wood used in making chairs) or as fixed assets (like a tractor used in
farming).
39. No, this is false. Money flows are only reciprocal of real flows. Real flows (flow of goods and services) are the essence of consumption and production activities in the economy.
40. Everybody saves some part of his income and purchasing power to fulfil the various objectives of the future. It is known as store of value, which was not possible under barter system.
41. Revenue Deficit = Revenue Expenditure - Revenue Receipts = 1,200 - 1,000 = ₹ 200 crores.
42. Yes, it is included in national income because it is a part of the private final consumption expenditure.
43. Problem of double counting
44. It refers to that policy of the government which combats excess and deficient demand by regulating the cost of credit and availability of credit.
Section C
45. Read the text carefully and answer the questions:
Budget expenditure is also classified as plan and non-plan expenditure.
In India, non-plan expenditure is a significant part of the total government expenditure. This is why fiscal discipline in the country often remains a serious challenge.
(1) Plan Expenditure: Plan expenditure refers to that expenditure that relates to (i) specified plans and programs of development, and (ii) assistance of the central government to the state
governments. It includes both revenue expenditure (like assistance to the states) and capital expenditure (like expenditure on the construction of roads, bridges, and hospitals). (2) Non-plan
Expenditure: Broadly, all expenditure other than plan expenditure is classified as non-plan expenditure. Specifically, nonplan expenditure relates to expenditure on the routine functioning of
the government.
As a matter of convention, all grants given by the center to the state governments (and the governments of Union territories) are treated as revenue expenditure, even when some grants may
result in the creation of assets.
(i) (a) offers
Explanation: offers
(ii) (a) non-plan
Explanation: non-plan
(iii) (c) non-plan
Explanation: non-plan
46. State True or False:
(i) (a) True
Explanation: True, non durable or single use consumption goods are those goods which are used up in a single act of consumption. For example, the bread that you eat is used
up in a single act of consumption.
(ii) (a) True
Explanation: Because at break-even point Consumption = Income and so saving 0.
(iii) (a) True
Explanation: Fiscal Deficit - Interest Payment = Primary Deficit. So, a rise in fiscal deficit would amount to a rise in primary deficit if interest payments are constant.

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47. The given statement is defended, as subsidy is a transfer payment. Subsidy is the financial assistance provided by the government to producers to fulfil its social welfare objectives.
Government does not get anything in consideration for the same. It does not contribute to the current flow of goods and services and hence do not contribute to any value addition.
48. Yes, it is correct that printing of currency is not always a matter of concern as new currency might be printed on the virtue of replacing older ones. Also with the growth of an economy,
demand increases hence new currency are printed in accordance with the growth of the economy.
49. We have equillibrium level of income (Y) = Rs. 2,000;
¯
¯¯¯
Autonomous ConsumptionC = Rs. 200,
Investment (I) = Rs. 800,
In order to calculate MPC we use following formula,
¯
¯¯¯
Consumption Expenditure (C) = C + (MPC)Y and Y = C + I
¯
¯¯¯
Y =C + (MPC)Y + I
2,000 = 200 + (MPC) 2,000 + 800 Or MPC(2,000) = 2,000 - 1000 Or
1,000
MPC =
2,000
= 0.5 . Therefore Marginal Propensity to Consume is equal to 0.5.
50. Government budget is a statement of expected/estimated receipts and expenditure of the government over a period of one financial year, i.e. from 1st April to 31st March.
Fiscal deficit: Fiscal deficit is the difference between the government's total expenditure and total receipts excluding borrowings.
Fiscal Deficit = Total Budget Expenditure - Total Budget Receipts ( Excluding borrowings ) or Fiscal Deficit = Borrowings.
Primary deficit: The difference between fiscal deficit and interest payments is known as the primary deficit.
Primary Deficit = Fiscal Deficit - Interest Payments. Interest payments on public debt are transfer payments made by the government. The difference between fiscal deficit and transfer
payments shows the importance of interest payments on public debt incurred in past.
Revenue deficit: When the revenue receipts are less than the revenue expenditures in a government budget, this shortfall is termed as revenue deficit.
Revenue Deficit = Revenue Expenditure - Revenue Receipts.
51. NDPFC=GDPMP-Consumption of fixed capital-Net Indirect taxes
=900*-50-(150-20)
=720 crores
*GDPMP= Sales - Intermediate costs + Change in stock (Closing stock - Opening stock)
= 2000 - 1000 + (100 - 200)
= Rs.900 crore
Net National Disposable Income
NDPFC + Net Indirect tax - Net factor income to abroad - Net current transfer to abroad
= 720 + 130 - 30 + 10
= Rs.830 crore
52. The central bank controls the money supply and credit in the best intersts of the economy. As central bank has monopoly in issuing currency, it can control credit and money supply of the
economy. For this it makes use of two instrumebts.
A. Quantitative Instruments : These instruments are used to influence the total volume of credit in circulation. The various methods under this are : a) Bank rate policy b) Open market
operations and c) Legal Reserve requirements.
B. Qualitative Instruments : These instruments are used to regulate the direction of credit. In other words, these methods affect allocation of credit among the alternative uses. The various
instruments are : a) Margin Requirements b) Moral Suasion and c) Selective Credit Controls.
53. There are usually hundreds of banks in a country. There should be some agency to regulate and supervise their proper functioning. This duty is performed by the central bank. Central Bank
acts as a banker, advisor and agent to the Central and State Governments. As the common public keep their cash balance, demand deposits and time deposits with Commercial Banks, in the
same way, the Central Bank manages the cash reserves and demand deposits of governments in current accounts. It carries out the exchange, remittance and other banking operations on
behalf of the government, i.e the Central Bank maintains the same relationship with the government as Commerical Banks has with the general public.
54. Broadly speaking, the Central bank acts as a bankers' bank in three capacities:
(i) As the custodian of the cash reserves of the commercial banks.
(ii) As the lender of the last resort.
(iii) As the bank of central clearance, settlement and transfers. A Central Bank has almost the same relationship with the other Commercial Banks of the country that the Commercial Banks
have with the common public. That is why the Central Bank is also called banker's bank.
Section D
55. Read the text carefully and answer the questions:
Money is an economic unit that functions as a generally recognized medium of exchange for transactional purposes in an economy. Money provides the service of reducing transaction costs,
namely the double coincidence of wants. Money originates in the form of a commodity, having a physical property to be adopted by market participants as a medium of exchange. Fiat money
or fiat currency is money whose value is not derived from any intrinsic value or guarantee that it can be converted into a valuable commodity (such as gold). Instead, it has value only by
government order (fiat). Usually, the government declares the fiat currency (typically notes and coins from a central bank, such as the Federal Reserve System in the U.S.) to be legal tender,
making it unlawful not to accept the fiat currency as a means of repayment for all debts, public and private. Fiduciary money refers to money backed up by trust between the payer ad payee.
Fully bodied money refers to money in terms of coins whose commodity value is equal to the money value as and when these are issued. Credit money refers to that money of which money
value is more than commodity value.
(i) (c) fiat
Explanation: fiat
(ii) (a) fiduciary
Explanation: fiduciary
(iii) (c) money
Explanation: money
(iv) (a) commodity
Explanation: commodity
56. Read the text carefully and answer the questions:
If all the people of the economy increase the proportion of income they save (i.e. if the MPS of the economy increases) the total value of savings in the economy will not increase-it will
either decline or remain unchanged. This result is known as the Paradox of Thrift-which states that as people become more thrifty they end up saving less or same as before. Let us
understand it with the help of an example.
Suppose at the initial level, income (Y) = 250, MPC = 08 and MPS = 02.
Now, people decide to cut down their expenditure as there is a threat of an imminent war. Hence the MPS of the economy increases, or, alternatively, the MPC decreases from 0.8 to 0.5. At
the initial income level of this sudden decline in MPC will imply a decrease in aggregate consumption spending and hence in aggregate demand, by an amount equal to (0.8 - 0.5) 250 = 75.
But as aggregate demand decreases by 75, there emerges an excess supply equal to 75 in the economy. So, producers decide to cut the value of production by 75 in the next round to restore
equilibrium in the market.
But that would mean a reduction in factor payments in the next sound and hence a reduction in income by 75. As income decreases people reduce consumption proportionately but, this time,
according to the new value of MPC which is 0.5. Consumption expenditure, and hence aggregate demand, decreases by (0.5) 75, which creates again an excess supply in the market. In the

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 next round, therefore, producers reduce output further by (0.5) 75. Income of the people decreases accordingly and consumption expenditure and aggregate demand goes down again by
(0.5)2 75 . So, as income decreases, savings also decreases.
(i) 1. decrease
(ii) (a) It will Decrease
Explanation: It will Decrease
(iii) 1. 0.2, 0.5
(iv) (d) It create excess supply in the market
Explanation: It create excess supply in the market
57. These are the flow/macro variables that cause an expansion in the process of production/income generation in the economy.
It refers to the introduction of income into the circular flow.
Injections in four sector economy:
i. Investment.
ii. Government Expenditures.
iii. Exports.
iv. Taxes.
58. a. At equilibrium: AD = Y
160 + 0.8 Y = Y
0.2Y = 160 ⇒ Y = = 800
160

0.2

b. From the aggregate demand function, MPC = 0.8

Autonomous consumption (C¯ ) = 100
Therefore, Consumption function equation:
C = 100 + 0.8 Y Substituting Y = 800, we get C = 100 + 0.8 (800) = 100 + 640 = 740
S = Y - C = 800 - 740 = 60
Therefore, Total Savings at equilibrium level of income = ₹ 60 crore
Alternately From AD function, total autonomous expenditure
A = C + I = 160
¯ ¯ ¯

Given, C¯ = 100. Therefore, I = 160 - 100 = 60

We know that at equilibrium level of income, S = I
Thus, Total Savings (S) at equilibrium = I = ₹ 60 crore
59. Revenue deficit:-
Revenue Deficit is a situation where the revenue does not match with the expenses to be incurred. A dissimilarity in the expected revenue and expenditure can result in revenue deficit. The
shortage of total revenue receipts compared to total revenue expenditure is defined as Revenue deficit.
Fiscal deficit:-
The difference between total revenue and total expenditure of the government is called as fiscal defici. It is also defined as the excess of total budget expenditure over total budget receipts
excluding borrowings during a fiscal year.
Fiscal Deficit is justified as long as the expenditures are being incurred to finance activities leading to creation of national asset. High Fiscal deficit becomes a matter of worry , for if incurred
year after year, they cumulatively create a huge debt for the government. Further it also leads to high trade deficit.
60. EXPENDITURE METHOD
1. GDP​MP=Private final consumption expenditure + Government final consumption expenditure + Gross domestic capital formation { Net domestic fixed capital formation +Change in
stocks (Closing stock - Opening stock) + Consumption of fixed capital }- Net imports
= 500 + 150 + 100 + 10 -10 + 50 - 20
= Rs.780 crore
GNP​MP = GDP​MP + Net factor income from abroad
= 780 -(-15)
= 795 crore
2. Net Current Transfer from Abroad
NNDI = NNPFC + NIT + Net current transfer from rest of the world......(i)
NNPFC = GNPMP - Depreciation - NIT
=795 - 50 - 35
= Rs.710 ,putting in ........(i)
750 = 710 + 35 + Net current transfer from Rest of the world
Rs.5 crore = Net current transfer from rest of the world.
61. Two instruments of credit control are:
i. Repo rate– It is the rate of interest at which the central bank lends to commercial banks by buying the government securities in the open market for their short term requirements. An
increase in repo rate will force commercial banks to increase their lending rates. It will make borrowings costlier to the general public. This lowers the demand for credit and accordingly,
the supply of money in the economy decreases.
ii. Open market operations- It refers to the sale and purchase of securities in the open market by the RBI on behalf of the government. By selling the securities in the open market, the RBI
soaks liquidity from the economy. And, by buying the securities, the RBI releases liquidity. When liquidity is soaked, cash reserves of the commercial banks are squeezed. Implying a cut
in their credit creation capacity. On the other hand, when liquidity is released, cash reserves of the banks tend to rise. Implying a rise in credit creation capacity of the commercial banks.
Section E
62. The equilibrium level of national income is determined when aggregate demand is equal to aggregate supply.
At equilibrium level of income,
Planned spending (AD) = Planned output (AS)

When AD > AS :
When AD is more than AS, it means demand for goods and services in the economy is more than their flow.
In other words, it means buyers are buying faster than sellers are expecting, as a result as a result inventory would fall below the desired level.
To increase inventory up to the desired level, firms would plan to increase the production (output). It increases employment level, output level and level of income.
This process will continue till AD and AS become equal to each other.

When AD < AS :
When AD is less than AS, it means demand for goods and services in the economy is less than their flow.
In other words, it means consumers are not consuming as much the firms producing, as a result, some goods remain unsold in the firms and undesired inventory increases in the firms.

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 To clear this undesired inventory, firms would plan to reduce the production (output) and lay off workers. It decreases employment level, output level and level of income.
This process will continue till AD and AS become equal to each other.
63. (i) Activities or transactions that are not included from Gross National Product measurement are:
Purely Financial Transaction: Buying and selling of security: - Because it does not rather add to any production services. Government transfer payments:- Because it is a one-sided
payment made by the Government.
Transfer of used (Second hand) goods: - Because it is already counted at the time of production and hence it will lead to double counting.
Non- market goods and services: - Because it is not bought and sold into the market and thus it is not included.
The value of leisure: - Because leisure does not refer any productive services.
(ii) Gross Value Added at Factor Cost by Firm X
= Sales + Change in stock (Closing stock – Opening stock) + Subsidy – Purchase of intermediate products
= 2000 thousand + (80 thousand – 120 thousand) + 160 thousand – 1200 thousand
= 2000 thousand – 40 thousand + 160 thousand – 1200 thousand
= 920 thousand
64. Calculation of Gross National Product at Factor Cost :
By Income Method By Expenditure Method

GNPFC = Private Final Consumption Expenditure + Government Final Consumption Expenditure + Net Domestic
GNPFC = Compensation of Employees + Rent + Interest + Profits +
Capital Formation + Consumption of Fixed Capital + Net Exports + Net Factor Income from Abroad - Net Indirect
Net Factor Income from Abroad + Consumption of Fixed Capital
Taxes

= 1,850 + 400 + 500 + 1,100 + (-50) + 100

= 2,600 + 1,100 + 500 + 100 + (-100) + (-50) - 250 = 4,300 - 400
= 3,950 - 50
= Rs. 3,900 crores
= Rs. 3,900 crores

65. The monetary policy (credit policy) of RBI involves the two instruments given in the flow chart below:

Quantitative Measures: Quantitative measures refer to those measures that affect the variables, which in turn affect the overall money supply in the economy. It directly affect the money
supply of an economy and Either it is expansionary monetary policy or Contractionary monetary policy
Instruments of quantitative measures:
a. Bank rate- The rate at which the central bank provides a loan to commercial banks is called the bank rate. This instrument is a key at the hands of RBI to control the money supply.
b. Varying reserve ratios: The reserve ratio determines the reserve requirements, wherein banks are liable to maintain reserves with the central bank.
The three main ratios are:
i. Cash Reserve Ratio (CRR): It refers to the minimum amount of funds that a commercial bank has to maintain with the Reserve Bank of India, in the form of deposits.
ii. Statuary Liquidity Ratio (SLR): SLR is concerned with maintaining the minimum reserve of assets with RBI, whereas the cash reserve ratio is concerned with maintaining cash
balance (reserve) with RBI.
c. Open Market Operations (OMO): Open Market operations refer to the buying and selling of securities in an open market, in order to affect the money supply in the economy.
d. Repo Rate is the rate of interest at which central bank lends to commercial banks for a short period.
Qualitative Measures : These Measures affect allocation of credit between alternative uses. These are:
a. Marginal Requirements: The commercial banks' function to grant loan rests upon the value of the security being mortgaged.
b. Moral Suasions: A persuasion technique followed by the central bank to pressurize the commercial banks to abide by the monetary policy is termed as moral suasion.

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