Answers to REC–DS2/Set 3

1. (b) Statement 1 is false and statement 2 is true

2. (a) Statement 1 is true and statement 2 is false
Or
(a) Depreciation
3. (c) Credit side of Capital Account
4. (a) Cash Reserve Ratio
5. (a) Statement 1 is true and statement 2 is false
6. (a) ` 400 crores
Working Note:
Consumption (C)
Average Propensity to Consume (APC) =
Income (Y)
Consumption (C)
0.8 =
2,000
Consumption (C) = ` 1,600 crores
Savings (S) = Income (Y) – Consumption (C)
= 2,000 – 1,600
= ` 400 crores
Or
(c) Marginal Propensity to Consume
7. (b) Only (ii) is correct
8. (b) 40,000
Working Note:
Let value of Exports be x
x
\ Value of Imports =
2
Balance of Trade (BoT) = Exports (X) – Imports (M)
x
20,000 = x –
2x – x 2
= 20,000
2
x = 40,000
\ Value of Exports = ` 40,000 crores
Or
(b) ` 1,000 crores
Working Note:
Trade deficit = Value of import of goods – Value of export of goods
Value of export of goods = 2000 – 1000
= ` 1,000 crores
(b) Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation
9.
of Assertion (A)

Economics – 12
(1)
 10. (c) Assertion (A) is true but Reason (R) is false
11. National Income = (ii) + (iv) + (vi) + (x) – (viii) – (vii) – (ix)
= 600 + 200 + 110 + (–10) – (–20) – 10 – 70
= ` 840 crores
12. Selling of securities by Foreign Institutional Investors (FIIs) in Indian capital market will
lead to fall in the supply of foreign currency in the economy. This situation might lead to
excess demand of foreign currency at the prevailing foreign exchange rate. As a result, a
new equilibrium rate of foreign exchange will be determined which will be higher than the
prevailing foreign exchange rate, leading to depreciation of domestic currency.
Or
Investments by large Multinational Corporations (MNCs) in India will ensure greater inflow
of foreign exchange, leading to an increase in the supply of foreign currency. This situation
may result into excess supply of foreign currency in the economy at the prevailing foreign
exchange rate. As a result, a new equilibrium rate of foreign exchange will be determined
which will be lower than the prevailing foreign exchange rate, leading to appreciation of
domestic currency.
13. Here, in first condition,
Given that,
National Income (Y) = ` 80 crore
Consumption Expenditure (C) = ` 64 crore
Savings (S) = Income (Y) – Consumption (C)
= 80 – 64
= ` 16 crore
Savings 16
Now, Average Propensity to Save (APS) = = = 0.20
Income 80
Again, when income and consumption expenditure rises,
National Income (Y) = ` 100 crore
Consumption Expenditure (C) = ` 78 crore
Consumption 78
So, Average Propensity to Consume (APC) = = = 0.78
Income 100
DC 14
and, Marginal Propensity to Consume (MPC) = = = 0.70
DY 20
14. The functions of Central Bank (RBI) indicated in the given case are:
(a) The Central Bank is the sole authority for the issue of currency in the country. Notes
issued by it are circulated as legal tender money. It has its issue department which issues
notes and coins. Coins are manufactured in the government mint but they are put into
circulation through the Central Bank. While issuing currency notes, a minimum fixed
amount of gold and foreign currencies is kept by the Central Bank. The monopoly of
issuing notes vested in the Central Bank ensures uniformity in the notes issued, which
helps in facilitating exchange and trade within the country. By having a monopoly of
note issue, the Central Bank can restrict or expand the supply of cash according to the
requirements of the economy.

Economics – 12
(2)
 (b) The Central Bank also acts as a banker to the Government. As the banker to the
Government, the Central Bank provides a large number of routine banking functions
to the government like maintaining the balances, arranging and managing funds of the
government and so on. It also holds the surplus cash reserves of the government. Central
Bank also acts as a financial advisor to the government as well. (any one)
15. National income (as per the savings and investment approach) is determined in an economy
at a point where planned savings equal planned investment, i.e., S = I.
Y
S
Savings and Investment

I E
I

O
X
M

Income

Now explaining the NI determination on the basis of the above diagram. In the given
diagram, point E denotes the point of equilibrium where Savings = Investment at the
income level OM, which is the equilibrium level of income (NI). At any output level less
than the equilibrium level, Savings < Investment. This means there is an unplanned decrease
in the inventories. To increase the inventories to the planned level, producers increase the
output, leading to an increase in employment and thereby increase in income.
With such a rise in income, savings rise again till S = I at the equilibrium point E.
(Explanation with S > I is also correct)
Or
Inflationary gap refers to a situation where aggregate demand exceeds aggregate supply at
the full employment level of income. It is called inflationary because it sets in motion the
forces that cause inflation.
Y
In the given diagram, point E denotes the point of AD (C + I)
equilibrium, as at this point AD curve intersects AD E
C
the 45° line. OM is the equilibrium income. OF
B }D
denotes full employment level of income. At
this level DF denotes aggregate supply, (Since
income is same as Aggregate Supply). But the 45° X
O F M Income
Aggregate Demand (AD) at full employment is CD — Inflationary Gap
OF — Full Employment level of income
CF. It means that AD (CF) is more than what is
required to sustain full employment output. It denotes a situation of Excess Demand equal
to CD (CF – DF), which denotes ‘‘Inflationary Gap’’.

Economics – 12
(3)
 To correct inflationary gap, the following measures can be taken:
(a) Reduce government spending (Fiscal measure), which will directly reduce AD and
thereby remove the inflationary gap.
(b) The central bank can raise the bank rate, as a result the commercial banks are compelled
to raise their lending rate, so demand for loans will fall. This is turn will reduce investment
and in turn reduce AD in the economy. (or any other relevant point)

16. (a) Basis Stock Flow

(a) Meaning The economic variables that are The economic variables that are
measured at a particular point of measured during a period of time are
time are known as stock variables. known as flow variables.
(b) Dimensions It has no time dimensions. It has time dimensions, like 1 year, 6
months, 10 days, etc.
(c) Examples Capital, bank deposits, water in a Capital formation, interest on capital,
tank water flowing in a stream

Capital is a stock variable, as it can be measured at any point of time whereas net
investment is a flow variable, as it is measured during a period of time.
(b) Some limitations of using GDP as an index of welfare are as follows:
(i) Non-monetary exchanges: GDP measures the goods and services produced in an
economy during a particular period of time. However, it does not take into account
those transactions that do not come under monetary terms. In less developed
countries there are non-monetary exchanges, particularly in rural areas. Hence,
these transactions remain outside the domain of GDP. The household sector and
volunteer sectors get ignored in GDP.
(ii) Inflation: GDP does not take into account the level of prices in a country. Because
of inflation, the cost of living increases leading to a decrease in the standard of
living. The loss of welfare due to this decrease is not taken into consideration by
GDP as an index of welfare.
(iii) Externalities: Increase in the national income is associated with increased levels
of pollution, accidents, disasters, shortage and depletion of natural resources, etc.
These factors affect human health and lead to ecological degradation. GDP fails
to consider the costs or valuations of such factors.
(iv) Income pattern: GDP disregards the income distribution pattern. The increase
in aggregate national income may be a result of the increase in income of a few
individuals. Thus, this may lead to false interpretation of social welfare.
(v) Welfare: GDP ignores the welfare component as the goods and services produced
may or may not add to the welfare to a society. For example, the production of goods,
like guns, narcotic drugs, high-end luxurious goods increase the monetary value of
production, but they do not add to the welfare of the majority of population.
(any three)

Economics – 12
(4)
 (a) • The given pie chart shows the composition of taxes in Gross Tax Revenue in 2021-22
17.
Budget Estimate (BE).
• Goods and Services Tax (GST) forms the major portion of 29% followed by
Corporation Tax and Taxes on income other than Corporation Tax of 25% each
respectively.
• Union Excise Duties constitute 15% whereas Custom contributes least in Gross Tax
Revenue at 6%.
(b) A government budget is an annual statement of the estimated receipts and expenditure
of the government over the fiscal year, which runs from 1st April to 31st March.
The two sources of revenue receipts are tax receipts and dividend from Public Sector
Undertakings (PSUs).
Recovery of loans and deposits in the Public Provident Fund (PPF) are two sources of
capital receipts.
Or
(a) Government expenditure aimed at providing benefits to the people and enhancing the
development of the country. On such basis, expenditure is classified into:
(i) Capital expenditure: The expenditure incurred by the government which leads to an
increase in government assets and reduction in government liabilities, is termed as
capital expenditure. For example, expenses on the construction of national highways,
dams and repayment of loans, etc.
(ii) Revenue expenditure: The expenditure incurred by the government which neither
cause any increase in the government assets nor cause any reduction in government
liabilities, is termed as revenue expenditure. For example, expenditure on old age
pensions, salaries, etc.
(b) Government budget shows its comprehensive exercise on the taxation and subsidies. The
government uses the fiscal instruments with a view to improve the distribution of income
and wealth in the economy. For example, in India progressive tax structure is followed
(i.e. tax rate increases with increase in income) to redistribute income from the rich to
the poor.
18. (d) All of the above
19. (d) International Monetary Fund (IMF)
Or
(d) (iii), (iv), (ii), (i)
20. (b) Pakistan
Or
(b) 1983

Economics – 12
(5)
 21. (b) Regional Rural Banks (RRBs)
22. (c) C – (iii)
23. (a) Statement 1 is true and statement 2 is false
(c) Both statements 1 and 2 are true
24.
(b) Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation
25.
of Assertion (A)
26. (c) Stratosphere
Or
(d) CNG in public transport
27. (d) Assertion (A) is false but Reason (R) is true
The given image indicates towards the environmental challenge of ‘Plastic waste’. Plastic
28.
water bottles are harmful to the environment in a number of ways. The amount of plastic
that is used in manufacturing tends to be much higher than we can imagine. Every year
thousands of tons of plastic water bottles are produced. Plastic water bottles affect the
environment in other ways too. When they first emerge from the factory, they are full of
toxins that leak out into the air, polluting the soil where they are eventually harvested.
Plastic bottles made from synthetic material also tend to absorb a lot of heat and thus
contribute in environmental pollution.
The main disadvantages of unemployment are:
29.
(a) Increase in poverty: The main cause of poverty is unemployment. People do not have
enough money to support their family. This leads to the situation of poverty.
(b) Wastage of resource: Human capital is an important economic resource. Unemployment
leads to wastage of manpower resource. People who are an asset for an economy turn
into a liability. This creates a feeling of despair among the youth.
(c) Increase in dependent population: Unemployment tends to increase the economic
overload. The dependence of the unemployed on the working population increases.
(or any other relevant point)
Or
The real progress of a country does not mean simply the growth and expansion of industrial
urban centres. It is mainly the development of the villages, the rural sector. The development
of rural sector is important because:
• Agriculture is the major source of livelihood in the rural sector of India

• More than two-third of India’s population depends on agriculture

• Bulk of raw materials for industries come from agriculture and rural sector

However, the level of agricultural productivity is so low that one-third of rural India still
lives in abject poverty. Thus, it is important to develop rural India if our nation has to
realise real economic and social progress.

Economics – 12
(6)
 The given table shows the comparison of China with India and Pakistan on the basis of
30.
demographic trends (2017-18).
It is very much clear from the table that although China ranks first in population in the
world followed by India and Pakistan respectively. China’s population growth rate is also
much less than that of India and Pakistan. Density of population in China is also less as
compare to India and Pakistan. That day is not far behind when India will overtake China
in world population.
The inefficient management of the Indian economy led to huge amount of borrowings from
31.
national and international financial institutions. As a result, India met with an economic
crisis in 1991 due to its failure to repay its borrowings from abroad. Crisis led to rise in
prices of essential goods. In order to overcome the crisis, India approached IMF and World
Bank for loan. The IMF and World Bank announced New Economic Policy as a condition
to support Indian economy. Thus, India needed to introduce economic reforms to:
• Maintain sufficient foreign exchange reserves
• Keep inflation under control
• Improve economic efficiency
• Remove rigidities in various areas
• Increase international competitiveness
Or
Privatisation means the induction of private management and control in the public sector
enterprises. With a view to improve the performance of the public sector enterprises, the
wave of privatisation has spread all over the world. Need for privatisation was felt mainly
because of the inefficiency of the public sector enterprises. Thus, the private sector was
given a larger space to operate in the areas reserved exclusively for the public sector.
Privatisation can be done in two ways:
(a) By withdrawal governmental control from the management and ownership of public
sector companies
(b) By outright sale of public sector companies
(a) The given statement is false, as human capital is intangible in nature and cannot be sold
32.
in the market.
(b) The given statement is false, as organic farming generates more employment opportunities
as it requires more labour input than conventional farming.
(a) The advantages of cooperative marketing in India are:
33.
(i) End of middle man: The agricultural cooperative marketing has ended the presence
of middle man in the process of sale and purchase of products. With the help of
cooperative marketing, agriculturalists get fair price of their products.
(ii) Increased bargaining power of the producers: With the help of cooperative
marketing, farmers are less prone to exploitation and malpractices. Instead of
marketing their produce individually, they market it together through one agency.
This increase their bargaining strength as merchants and intermediaries.

Economics – 12
(7)
 (iii) Direct dealing with final buyers: The cooperatives can altogether skip the
intermediaries and enter into direct dealing with the final buyers, which eliminates
exploiters and ensure fair prices to both the producers and the consumers.
(iv) Control over the supply of produce: Prices of the produce falls during cropping
season due to excess supply in the market. The cooperative marketing societies
provide storage facilities. As a result, there remains a control over the supply of
produce. The farmers can wait for better prices.
(v) Credit facilities: The cooperative marketing societies provide credit facilities to the
farmers to save them from the necessity of selling their produce immediately after
harvesting. This ensures better returns to the farmers. (any three)
(b) India has the potential to become a leading knowledge-based economy. With its youth
population and growing Information and Communication Technology (ICT) industry,
India can become a major global knowledge-based economy. However, there is a need
for measures such as:
(i) Supportive laws
(ii) Improved infrastructure
(iii) Removal of barriers to trade and investment
(iv) Up-skilling of labour force
(v) Higher spending in research and development
(vi) Innovative financing for small businesses and enterprises
A shift to knowledge-based growth would help developing country like India to avoid
the middle-income trap and also address the issue of rising income inequalities.
Or
(a) Higher income leads to development of high level of human capital and vice-versa. In
other words, high level of human capital leads to growth of income. It is believed that even
a large population, which is trained and educated, can become an asset in accelerating
economic growth and ensuring social change in desired directions.
However, it is difficult to establish a relation of cause and effect from the growth of
human capital to economic growth as the rate of growth of human capital in developing
countries has been faster than the rate of growth of per capita real income.
(b) School dropouts are giving way to child labour. This is certainly a loss to human capital
because if these children were allowed to complete their education, they would have
attained enough education to become skilled workers with higher income earning
capacities. Their productivity would have been more and they would have contributed
to human capital formation. In this way, school dropouts are definitely a loss to human
capital.

Economics – 12
(8)
 (a) Liberalisation is the process or means of the elimination of control of the state over
34.
economic activities. It provides a greater autonomy to the business enterprises in decision-
making and eliminates government interference. In other words, Liberalisation refers
to a situation where inessential restrictions and controls are removed from a country’s
economy to ensure that businesses and enterprises can maximise their contribution. It is,
however, important to note that liberalisation does not mean an uncontrolled economy.
The Indian economy was liberalised in the year 1991. In India, the concept of liberalisation
was introduced to attain several objectives – industrialisation, expansion in the role of
private and foreign investment, and introducing a free market system. Restrictions were
relaxed for private companies to enter several core industries, which were previously
reserved for the public sector.
(b) Some positive impact of Liberalisation on India are:
• Liberalisation, in a positive and effective manner, results in higher foreign investment
in the nation. The investments are in different sectors such as manufacturing,
industrial, and infrastructural.
• Basic infrastructure is the most important factor in a company for it to work. As the
investment increases, this basic facility also develops, and several industries start
to grow. This results in high demand for employment and reduces the problem of
unemployment.
• Liberalisation lubricates the manufacturing of a nation. The smooth functioning of
different sectors gives better Gross Domestic Product (GDP) as an end product.
• The growth in the gross domestic product increases the export of good and reduces
the import of goods. This reduces the dependency of the nation over the other
nation(s).
• The infrastructure of the nation is developed rapidly with the growth of the industries.
New highways, lines of electricity, and communication are installed. 
• Relaxation in economic laws also lead to a rise in the stock market’s value, thus
encouraging more trading among investors. (any four)
Some negative impact of Liberalisation on India are:
• Liberalisation managed to develop some regions rapidly while it lacked behind in
the other regions. This gap of development divided the nation into two different
regions.
• Heavy investment in developed industries hampered the small scale industries
drastically. The small industries could not match the quality and price of the mass
production of big companies after liberalisation.
• Liberalisation of industries boosts the inflation rate. One section of the nation
becomes richer while the other section struggles even more to survive.

Economics – 12
(9)
 • Such a severe economic reform led to the redistribution of political and economic
power that destabilised the Indian economy to quite an extent.
• In the period of pre-liberalisation, multinational companies had no role to play in the
Indian economy. However, soon after, Indian companies faced increased competition
from MNCs, which threatened the existence of several smaller firms.
• The increased scope of mergers and acquisitions in the post-liberalisation period
has posed a threat to the employees of smaller firms. In the event of a merger with
bigger companies, employees of the smaller firms had to undergo rigorous re-skilling
that led to a stagnation of productivity. (any four)

Economics – 12
(10)