Solution

GUESS PAPER 1

Class 12 - Economics
SECTION A – MACRO ECONOMICS
1.
(b) Both the Statements are true.
Explanation: Both the Statements are true.
2.
(b) M3
Explanation: M3 is the benchmark currency measure used to control the money supply in the economy.

3. (a) C¯
Explanation: C¯
4.
(c) managed floating
Explanation: managed floating
5.
(d) 100
Explanation: 100
6. (a) Increase in government expenditure
Explanation: Increase in government expenditure
7. (a) Falls, Rises
Explanation: Falls, Rises
8.

(b)

Explanation:

9.
(d) Central bank, Commercial bank
Explanation: The central bank, Commercial bank. Central Bank did by Monetary policy and commercial bank through credit
creation.
10. (a) Flexible
Explanation: Flexible
11. The Gross Domestic Product at factor cost is the sum of net value added by all the producers in the domestic territory of the
country and consumption of fixed capital during an accounting year.
Gross Domestic Product at Factor Cost = Net
Domestic Product at Factor Cost + Depreciation
There is another way of calculating the GDP at factor cost. That is, by deducting net indirect taxes from the gross domestic
product at market price.
12. Current account refers to an account which records all the transactions relating to export and import of goods and services and
unilateral transfers during a given period of time. The components of the current account include:

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 i. Export and imports of visible items, i.e. goods
ii. Unilateral transfers to and from abroad.
iii. Export and import of services.
iv. Income receipts and payments to and from abroad.
Capital account of BOP records all those transactions, between the residents of a country and the rest of the world, which cause a
change in the assets or liabilities of the residents of the country or its government. The components of capital account include:
i. Investment to and from abroad.
ii. Borrowings and lendings to and from abroad.
iii. Change in foreign exchange reserves.
OR
Equilibrium rate of exchange is established at a point where the quantity demanded and quantity supplied of foreign exchange are
equal. In the foreign exchange market, if disequilibrium occurs, it may lead to a situation of excess demand or excess supply.
The market mechanism will drive the exchange rate back to the equilibrium level. This implies that the free market forces of
demand and supply will operate in such a manner that the equilibrium rate of exchange is automatically restored.
13. a. An excess of aggregate demand over full employment level of aggregate supply represents a situation of inflationary gap. The
given statement is true; an excess of aggregate demand over full employment level of aggregate supply represents a situation
of inflationary gap, production cannot be increased beyond this level. Increase in AD here onwards, will increase only the
general price level.
b. An economy facing unintended accumulation of inventories would try to reduce aggregate demand. The given statement is not
correct. The situation of unintended accumulation of inventories arises when ex-ante aggregate demand is lesser than the ex-
ante aggregate supply. This would pile up the stock with the producers, thus to tackle this situation the economy must increase
AD.
14. Inflationary gap may be defined as an excess of aggregate demand over available aggregate supply at full employment level.
Inflationary gap = planned aggregate expenditure - equilibrium level of expenditure.
Inflationary gap is the result of excess demand. Excess demand is a situation under which AD is in excess of AS. Excess demand
causes a rise in the price level i.e. inflation. .The concepts of exceed demand and inflationary gap are shown in Fig.
i. In the given diagram, income, output and employment are measured on the X-axis and aggregate demand is measured on the
Y-axis.
ii. Aggregate demand (AD) and aggregate supply (AS) curves intersect at point E, which indicates the full employment
equilibrium.
iii. Due to increase in investment expenditure (Δl ), aggregate demand rises from AD to AD1. It denotes the situation of excess
demand and the gap between them, i.e., EF is termed as inflationary gap.

OR
Given,
Marginal Propensity to Save (MPS) = 0.2
¯
¯¯¯
Autonomous Consumption (C ) =120
Investment expenditure (I) = 150

Now, Marginal Propensity to Consume (MPC) = 1 - MPS

= 1 - 0.2 [MPS = 0.2]

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 ∴ MPC = 0.8
Since the economy is in equilibrium,
Saving = Investment
¯
¯¯¯
Y = C+ I
¯
¯¯¯
or Y = C + bY + I,
¯
¯¯¯
C = C + bY
On substituting the given variables in equation (i),we get
Y =120 + 0.8 Y + 150
Y - 0.8 Y=270
0.2Y =270
270
Y = = 1, 350
0.2

∴ National Income (Y) = 1,350

15. Demand deposits are the deposits which can be withdrawn on demand at any point of time. Also these are chequable deposits
(cheques can be drawn against such deposits). On the other hand, time deposits are the deposits which cannot be withdrawn before
a specified period of time. These deposits are non-chequable,( one cannot draw cheques against such deposits).
It includes following deposits:
i. Fixed deposits
ii. Recurring deposits
16. Answer the following questions:
(i) i. Note: In the given example, only subsidies are given. There can be two ways to solve this:
(i) Add subsidies (as factor cost is to be calculated from the market price); or
(ii) Write formula (Indirect taxes - Subsidies) and put value of indirect taxes as zero.
GNP at FC
= NDPMP + Depreciation + (Factor income from abroad - Factor income to the rest of the world) + Subsidies
= 25,000 + 5,000 + (400 - 600) + 30 =₹ 29,830 crores
or
= NDPMP + Depreciation + (Factor income from abroad - Factor income to the rest of the world) - (Indirect tax -
Subsidies)
= 25,000 + 5,000 + (400 - 600) - (0 - 30)
= ₹ 29,830 crores GN P =₹ 29,830 crores
FC

ii. By value-added method,

GDP at MP= value of output - intermediate consumption
Value of output= Sales+ change in stock
a. Value Added by firm A
= Sales by firm A - Purchases from firm B + Change in stock
(Closing stock - Opening stock)
= ₹100 lakh - ₹40 lakh + (₹20 lakh - ₹25 lakh)
= ₹100 lakh - ₹40 lakh - ₹5 lakh
= ₹55 lakh
Value Added by firm B
= Sales by firm B - Purchases from firm A + Change in stock
(Closing stock - Opening stock)
= ₹200 lakh - ₹60 lakh + (₹35 lakh - ₹45 lakh)
= ₹200 lakh - ₹60 lakh - ₹10 lakh
= ₹130 lakh
Ans. Value Added by firm A = ₹55 lakh.
Value Added by firm B = ₹130 lakh.
b. Gross Value Added or Gross Domestic Product at Factor Cost
= Value added by firm A + Value added by firm B - Indirect taxes
= ₹55 lakh + ₹130 lakh - ₹30 lakh
= ₹185 lakh - ₹30 lakh
= ₹155 lakh

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 Ans. Gross domestic product at factor cost = ₹155 lakh.
[Note: Value added by firm A and firm B here implies gross value added at market price.]
(ii) OR
i. GDP Deflator/Price Index = NOMINAL GDP

REALGDP
× 100

2014-15 2015-16 2016-17

Nominal GDP or GDP at Current Price = 10,000 (Assume) 10,840 11,815

Real GDP or GDP at Base Price = 10,000 (Assume) 7742 (approx) 9452 (approx)
ii. Gross Value Added at Market Price (GVAMP) = (Domestic Sales + Exports) + Net Change in Stocks - Single use
Producer Goods
Gross Value Added at Market Price (GVAMP) = (200 + 10) + (-10) - 120 = ₹ 80 lakhs
Therefore, GVAMP is ₹ 80 lakhs

17. Answer the following questions:

(i) Subsidies are treated as revenue expenditure by the government because of this expenditure:
i. does not reduce the liability of the government.
ii. does not add to the assets of the govt.
(ii) i. Reallocation of Resources.
ii. Economic Stability.
iii. Reducing inequalities in income and wealth.
iv. Economic Growth.
SECTION B – INDIAN ECONOMIC DEVELOPMENT
18.
(b) Agriculture
Explanation: Agriculture
19. (a) Organisation for Economic Co-operation and Development
Explanation: The Organisation for Economic Co-operation and Development (OECD) is an intergovernmental economic
organisation with 35 member countries, founded in 1960 to stimulate economic progress and world trade.It is a forum of
countries describing themselves as committed to democracy and the market economy, providing a platform to compare policy
experiences, seeking answers to common problems, identify good practices and coordinate domestic and international policies
of its members.
20.
(d) Exports, Imports
Explanation: Exports refers to a product or service sold abroad. Imports refers to bring (goods or services) into a country from
abroad for sale.
21. (a) Public distribution system
Explanation: PDS implies distribution of food grains through fair price shops at subsidised rates.
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.
(c) UGC
Explanation: University Grants Commission was established in November 1956 by the Government of India through an act of
Parliament for the coordination, determination and maintenance of standards of university education in India.
24. (a) Industrial
Explanation: Industrial
25.
(c) 0.08 hectare
Explanation: The per capita forest land in the country is only 0.08 hectare against the requirement of 0.47 hectare to meet
basic needs, resulting in an excess felling of about 15 million cubic metre forests over the permissible limit.

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26. (a) Both the statements are true.
Explanation: Both the statements are true.
27. (a) (a) - (i), (b) - (iii), (c) - (ii), (d) - (iv)
Explanation: (a) - (i), (b) - (iii), (c) - (ii), (d) - (iv)
28. The need for reduction of forest coverage or deforestation arises due to the growing demand for land, wood, rise in population,
and river valley projects. Deforestation leads to a reduction in oxygen level in the air, soil erosion, climate change, and global
warming due to the rise in the CO2 level. Thus, measures are needed to promote afforestation, opening up of sanctuaries and
national parks such as Jim Corbett National Park.
OR
In India, air pollution is wide-spread in urban areas because of vehicles, factories and other reasons. Air pollution is a great
concern because it has serious harmful effects on the general population. For example, the number of motor vehicles has increased
from about 3 lakh in 1957 to 67 crores to 2003. In 2003, personal transport vehicles (two wheelers vehicles and cars only)
constituted . about 80% of the total number of registered vehicles. This growth directly contributes to air pollution.
29. 1. Increase student exposure to jobs that are in demand—as well as providing a better understanding of industry needs.
2. Post secondary partnerships.
3. Industry-focused skills programs for students.
4. Better align workforce demand with college instruction.
30. Atmanirbhar Bharat had been at the roots of the Indian planning process in the form of self reliance as an objective of the planning
process. The given statement is correct. In the early post-independence period, the aim of the government's policy was to reduce
the dependence on the foreign countries for goods, services, technology and capital. The first seven five year plans gave
importance to self-reliance which stressed on the use of domestic resources to avoid foreign interference, as it was feared that the
dependence on the imported food supplies, foreign technology and foreign capital may increase foreign interference in the policies
of our country. Similarly, the main thrust of the 'Atmanirbhar Bharat' is also to make India an economy that is self-reliant and self-
sufficient.
31. Liberalisation was introduced to put an end to those restrictions which became major hindrances in growth and development, and
open various sectors of the economy. Liberalisation measures introduced in 1991:
i. Deregulation of Industrial sector
Industrial licensing was abolished for almost all products categories except alcohol, cigarettes, hazardous chemicals,
industrial explosives, electronics, aerospace and drugs and pharmaceuticals.
The only industries which are now reserved for the public sector are a part of defence equipment, atomic energy
generation and railway transport.
Many goods produced by small-scale industries have now been deserved.
In many industries, the market has been allowed to determine the prices.
ii. Financial Sector Reforms
One of the major aims is to reduce the role of RBI from regulator to facilitator of financial sector. This means that the
financial sector is allowed to take decisions on many matters without consulting the RBI.
Freedom to banks to setup new branches without the approval of the RBI.
Establishment of private sector banks-both Indian as well as foreign banks.
Foreign investment limit in banks was raised to around 50 per cent.
Foreign Institutional Investors (Fils) such as merchant bankers, mutual funds and pension funds, are now allowed to
investment in Indian financial markets.
iii. Tax Reforms
Personal income tax rates have been reduced since 1991 as it was felt that high rate of income tax were an important
reason for tax evasion. Moderate rates of income tax encourage savings and more tax compliance.
Corporate tax rate, which was very high earlier, has been gradually reduced.
Indirect taxes rates have been substantially lowered. Recently, the Parliament passed Goods and Services Tax Act,
2016 to simplify and introduce a unified indirect tax system in India.
iv. Foreign Exchange Reforms
In 1991, as an immediate measure to resolve the balance of payments crisis, the rupee was devalued against foreign
currencies. This led to increase in exports and thus more inflow of foreign exchange.
Determination of foreign exchange rate through market forces of demand and supply, without any government control.

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 v. Trade and Investment Policy Reforms: Liberalisation of trade and investment was initiated to increase international
competitiveness of domestic goods; and to increase the inflow of foreign investment (FDI, Fils etc.) and technology into the
economy. The trade policy reforms aimed at: (i) Dismantling quantitative restrictions on imports and exports; (ii) Reduction in
tariff rates; and (iii) Removal of licensing procedures for imports.
Import licensing was abolished except in case of hazardous and environmentally sensitive industries.
Quantitative restrictions on imports of manufactured consumer goods and agricultural products were fully removed
from April 2001.
Export duties have been removed to increase the competitive position of Indian goods in the international market.
OR
Following steps were taken under the Liberaliation measure:
i. Free determination of interest rate by the commercial Banks: Under the policy of liberalisation interest rate of the banking
system will not be determined by RBI rather all commercial Banks are independent to determine the rate of interest.
ii. Increase in the investment limit for the Small Scale Industries (SSIs): Investment limit of the small scale industries has been
raised to Rs. 1 crore. So these companies can upgrade their machinery and improve their efficiency.
iii. Freedom to import capital goods: Indian industries will be free to buy machines and raw materials from foreign countries to do
their holistic development.
iv. Freedom for expansion and production to Industries: In this new liberalized era now the Industries are free to diversify their
production capacities and reduce the cost of production.
v. Abolition of Restrictive Trade Practices: According to Monopolies and Restrictive Trade Practices (MRTP) Act 1969, all
those companies having assets worth Rs. 100 crore or more were called MRTP firms and were subjected to several
restrictions.
The following steps are taken for privatisation:
1. Sale of shares of PSUs: Indian Govt. started selling shares of PSU’s to public and financial institution e.g. Govt. sold shares of
Maruti Udyog Ltd. Now the private sector will acquire ownership of these PSU’s. The share of private sector has increased
from 45% to 55%.
2. Disinvestment in PSU’s: The Govt. has started the process of disinvestment in those PSU’s which had been running into loss.
3. Minimisation of Public Sector: Previously Public sector was given the importance with a view to help in industralisation and
removal of poverty.
Number of industries reserved for public sector was reduces from 17 to 3.
a. Transport and railway
b. Mining of atomic minerals
c. Atomic energy
Following steps are taken for Globalisation:
i. Reduction in tariffs: Custom duties and tariffs imposed on imports and exports are reduced gradually just to make India
economy attractive to the global investors.
ii. Long term Trade Policy: Forcing trade policy was enforced for longer duration. Main features of the policy are:
a. Liberal policy
b. All controls on foreign trade have been removed
c. Open competition has been encouraged.
iii. Partial Convertibility of Indian currency: Partial convertibility can be defined as to convert Indian currency (up to specific
extent) in the currency of other countries.
iv. Increase in Equity Limit of Foreign Investment: Equity limit of foreign capital investment has been raised from 40% to 100%
percent. In 47 high priority industries foreign direct investment (FDI) to the extent of 100% will be allowed without any
restriction. In this regard Foreign Exchange Management Act (FEMA) will be enforced.
32. The expenditure on education by the government is expressed in two ways (i) as a percentage of ‘total government expenditure’
(ii) as a percentage of Gross Domestic Product (GDP). The percentage of ‘education expenditure of total government expenditure’
indicates the importance of education in the scheme of things before the government. The percentage of ‘education expenditure of
GDP’ expresses how much of our income is being committed to the development of education in the country. During 1952-2002,
education expenditure as percentage of total government expenditure has increased from 7.92% to 1317% and as percentage of
GDP from 0.64% to 4.02%.
A major share of government expenditure on education goes to elementary education. It is least for tertiary sector but expenditure
per student is highest in tertiary sector. The per capita education expenditure differs considerably from region to region. It is Rs.

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 3,440 in Lakshadweep and Rs. 386 in Bihar.
An education cess of 2% has been levied on all union taxes. In addition to this govt. has also sanctioned a large outlay for the
promotion of higher education and new loan schemes for students to pursue higher education.
33. Answer the following questions:
(i) i. Mahatma Gandhi once said that the real progress of India does not mean simply the growth and expansion of
industrial urban centres but mainly the development of villages. Growth of the rural economy depends primarily on
infusion of capital, as the time gestation between crop sowing and realization of in come after production is quite
long. Informal sources of credit exploited small and marginal farmers leading to debt-trap.Thus, the expansion and
promotion of rural banking is important for the development of a nation.
ii. Two problems being faced in the process of rural banking in India are as follows:
Insufficient credit availability: Growth of rural economy depends primarily on infusion of capital. Farmers
need funds due to long gestation period. However, it has been observed that the volume of credit in rural
India, is insufficient.
Dependence on informal credit system: In the absence of collateral, many small and marginal farmers and
other rural poor do not have access to formal banking system pushing them into debt trap. As the last resort,
they have to be dependent on the informal credit system, falling into debt trap.
(ii) OR
i. Emerging alternate marketing channels for agricultural products are as follows:
a. Direct selling: If farmers directly sell their produce to consumers, it increases their incomes. Some example of
these channels are:
Apni Mandi (Punjab, Haryana and Rajasthan)
Rythu Bazars (Vegetables and fruits markets in Andhra Pradesh and Telangana)
Hadaspar mandi (Pune)
b. Contracts/Alliances with national and multi-national fast food chains. They encourage farmers to cultivate farm
products (vegetables, fruits etc) of the desired quality by providing them seeds and other inputs as well as
assured procurement of the produce at pre-decided prices. Benefit is as mentioned-
Such arrangements will help in reducing the price risks of farmers and would also expand the markets for farm
products.
ii. Arguments against farm subsidies:
Benefit to fertilizer industries: It is often argued that farm subsidies have helped the fertilizer industry much
more than helping the needy farmers.
Fiscal burden: Economists argue that subsidies are a huge burden on government’s finances.
34. i. Economic advantages of China Pakistan Economic Corridor (CPEC) to the economy of Pakistan are:
a. China provided financial and technical expertise to help Pakistan build its road infrastructure, supporting employment and
income in the economy
b. CPCE has led to a massive increase in power generation capacity of Pakistan. It has brought an end to supply-side
constraints in the nation, which had made blackouts a regular phenomenon across the country.
ii. China has become famous for its ‘Debt Trap Diplomacy’ in recent times. Under this China provides financial and technical
expertise/assistance to help various nations to bring them under its direct or indirect influence. The first and the foremost
implication of the diplomacy is that Beijing has now become Islamabad’s largest creditor. According to documents released by
Pakistan’s finance ministry, its total public external debt stood at USD 44.35 billion in June 2013, just 9.3 percent of which
was owed to China. By April 2021, this external debt had ballooned to USD 90.12 billion, with Pakistan owing 27.4 percent
—USD 24.7 billion — of its total external debt to China, according to the IMF.

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