By DeeCee – Divine Classes

Sample Paper 1

Economics

TIME: 3 HOURS M.M.-80

GENERAL INSTRUCTIONS:

1. This question paper contains two sections:

Section A - Macro Economics

Section B - Indian Economic Development

2. This paper contains 20 Multiple Choice Questions type questions of 1 mark each.

3. This paper contains 4 Short Answer Questions type questions of 3 marks each to be answered in 60 to
80 words.

4. This paper contains 6 Short Answer Questions type questions of 4 marks each to be answered in 80 to
100 words.

5. This paper contains 4 Long Answer Questions type questions of 6 marks each to be answered in 100
to 150 words.

Section A – Macro Economics

Q 1. Suppose in a hypothetical economy, the income rises from ₹ 5,000 crores to ₹ 6,000 crores. As a
result, the consumption expenditure rises from ₹ 4,000 crores to ₹ 4,600 crores. Marginal propensity to
consume in such a case would be ______________________. (Choose the correct alternative) (1)

(a) 0.8

(b) 0.4

(c) 0.2

(d) 0.6

Q 2. An Indian company located in India invests in a company located abroad. This transaction is entered
in India's balance of payments account on: (choose the correct alternative) (1)

(a) Credit Side of Current Account

(b) Debit Side of Current Account

(c) Credit Side of Capital Account

(d) Debit Side of Capital Account

Q 3. The ratio of total deposits that a commercial bank has to keep with Reserve Bank of India is called :
(choose the correct alternative) (1)

(a) Statutory liquidity ratio

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(b) Deposit ratio

(c) Cash Reserve Ratio

(d) Legal reserve ratio

Q 4. Read the following statements carefully: (1)

Statement 1: Export of financial services by India will be recorded on credit side of current account.

Statement2: Foreign Direct Investments in India will be recorded on credit side of capital account.

In the light of the given statements, choose the correct alternative:

a) Statement 1 is true and statement 2 is false

b) Statement I is false and statement 2 is true

c) Both statements and 2 are true

d) Both statements 1 and 2 are false

Q 5. Which of the following is not a flow? (1)

(a) Capital

(b) Income

(c) Investment

(d) Depreciation

OR
Foreign embassies in India are a part of India’s: (Choose the correct alternative)

(a) Economic territory

(b) Geographical territory

(c) Both (a) and (b)

(d) None of the above

Q 6. If MPC = 1, the value of multiplier is: (1)

(a) 0

(b) 1

(c) Between 0 and 1

(d) Infinity

Or

The monetary policy generally targets to ensure _______________.

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(a) Price stability in the economy

(b) Employment generation in the country

(c) Stable foreign relations

(d) Greater tax collections for the government

Q 7. Which of the following is not a problem of barter system of exchange? (1)

(a) Store of Value

(b) Double Coincidence of Wants

(c) Unit of Account

(d) Unemployment

Q 8. Who regulates money supply? (1)

(a) Government of India

(b) Reserve Bank of India

(c) Commercial Bank

(d) Planning Commission

Or

The following information is given for an imaginary country:

Current Account Amount (in ₹ Crore)

Visible Exports 100
Visible Imports 150
Invisible Exports 70
Invisible Imports 30
Net current transfer balance 15

Balance on current account will be __________________ of ₹ ____________ thousand Crore.

a) deficit, 10

b) surplus,5

c) deficit, 5

d) surplus, 10

Q 9. Aggregate supply and ______________ are always equal. (1)

(a) National Income

(b) Aggregate Demand

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(c) Marginal Propensity to save

(d) Average Propensity to Consume

Q 10. When planned saving is less than planned investment, it indicates a situation when: (1)

(a) AD < AS

(b) AD = AS

(c) AD > AS

(d) None of these

Q 11. From the following data relating to a firm, calculate its net value added at factor cost: (3)

Particulars ₹ in Lakhs
(i) Subsidy 40
(ii) Sales 800
(iii) Depreciation 30
(iv) Exports 100
(v) Closing stock 20
(vi) Opening stock 50
(vii) Intermediate purchases 500
(viii) Purchase of machinery for own use 200
(ix) Import of raw material 60

Q 12. Write difference between Balance of trade & Balance of Payment. (3)

Or

Write difference between Current Account & Capital Account.

Q 13. In an economy, the consumption function is C = 500 + 0.75Y , (where C is consumption

expenditure and Y is income. Calculate the equilibrium level of income and consumption expenditure,
when investment expenditure is 5,000. (4)

Q 14. Explain the ‘lender of last resort’ function of the Central Bank. (4)

Q 15. Explain the process of money creation by commercial banks, giving a numerical example. (4)

Q 16. a) Define Gross Domestic Product (GDP) deflator and discuss its importance. (3)

b) State and discuss any two precautions to be considered while estimating national income by
Expenditure Method. (3)

Q 17. a) Distinguish between revenue receipts and capital receipts of the government, with suitable
examples. (3)

b) Distinguish between direct and indirect taxes, with suitable examples. (3)

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SECTION B – INDIAN ECONOMIC DEVELOPMENT

Q 18. The foundation of British Empire in India was laid by Battle of Plassey fought in _______________.

(1)

(a) 1757
(b) 1857
(c) 1763
(d) 1747

Q 19. When was the planning commission set up? (1)

(a) 1949
(b) 1950
(c) 1956
(d) 1850

Q 20. ____________ and ___________________ are the reasons for the slowdown of the Pakistan
economy since independence. (1)

I. Political instability
II. Over-dependence or remittances from abroad
III. Stable performance of agriculture sector
IV. Growth of service sector

Alternatives:

(a) I and II
(b) II and III
(c) III and IV
(d) I and IV

Q 21. _______________ is the apex body which coordinates the functioning of different financial
institutions, working for expansion of rural credit. (1)

(a) NABARD
(b) Self-Help Groups
(c) Regional Rural Banks
(d) Commercial Banks

Q 22. Which type of economic system is followed in China? (1)

(a) Mixed Economy

(b) Socialist Economy
(c) Capitalist Economy
(d) None of these

Q 23. ___________ five-year plan recognized the importance of Human Capital. (1)

(a) Seventh

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(b) Third
(c) Eight
(d) Sixth

Q 24. The process of moving from self-employment and regular salaried employment to casual wage
work is known as: (1)

(a) Informalization of work force

(b) Casualization of work force
(c) Both (a) and (b)
(d) Neither (a) nor (b)

Q 25. _____________ is not a cause for environmental degradation. (1)

(a) Waste management

(b) Deforestation
(c) Global warming
(d) Guarding green cover

Q 26. Unemployment that occurs at certain seasons of the year is known as: (1)

(a) Seasonal unemployment

(b) Open unemployment
(c) Hidden unemployment
(d) None of these

Q 27. ____________ means integrating the domestic economy with the world economy. (1)

(a) Globalization
(b) Privatization
(c) Liberalisation
(d) Disinvestment

Q 28. India has abundant natural resources-substantiate the statement. (3)

Q 29. Discuss the role of National Bank for Agricultural and Rural Development (NABARD) in rural credit.

(3)

Q 30. Mention the various indicators of human development. (4)

Q 31. Why was it necessary for a developing country like India to follow self-reliance as a planning
objective? (4)

Q 32. Bring out the differences between human capital and human development. (4)

Q 33. a) Define agricultural marketing. (2)

b) Discuss briefly the importance of micro-credit programmes in rural development. (2)

c) Enlist any two problems faced by farmers in the initial years of organic farming. (2)

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Q 34. Case Based Question: (6)

India's post-1990 economic strategy entailed three important breaks with the past.

• To dismantle the vast network of controls and permits that dominated the economic system.
• To redefine the role of the state as a facilitator of economic transactions and as a neutral
regulator rather than the primary provider of goods and services.
• To move away from a regime of import substitution and to integrate fully with the global trading
system.

The 1991 reforms unleashed the energies of Indian entrepreneurs and gave untold choice to consumers
and changed the face of the Indian economy. The reform agenda constituted a paradigm shift, and has
defined the broad contours of economic policy making for three decades.

Liberalization was adopted as the guiding principle of governance and all governments since 1991, have
broadly stuck to that path.

Today we don't need a paradigm shift. We need to look at individual sectors and see which one of these
needs, reforms to create a competitive environment and improve efficiency. The power sector, the
financial system, governance structures and even agricultural marketing need reforms.

Today's reforms also require much more discussion and consensus-building. The central government
needs to work in tandem with state governments and consult different stakeholders impacted by reform
decisions. Timing and sequencing are critically important in the new reforms agenda.

Source: Excerpts from ‘Like 1991, the 2021 crisis presents an opportunity, by C.Rangarajan, 22nd
January 2021 (livemint.com)

Answer the following questions (A to F) on the basis of above case:

A. According to the given text, ___________ was adopted as the guiding principle of governance and all
governments since 1991.

(A) Modernization

(B) Liberalisation

(C) Privatization

(D) Globalization

B. Read the following statements carefully and choose the correct alternatives given below:

Statement 1: 1991 was a landmark moment in India's post-independence history as that changed the
nature of the economy in fundamental ways.

Statement 2: India's economic establishment launched a multipronged reforms agenda to repair India's
macroeconomic balance sheet and ignite growth.

Alternatives:

(A) Both the statements are true.

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(B) Both the statements are false.

(C) Statement 1 is true and Statement 2 is false.

(D) Statement 2 is true and Statement 1 is false.

C. Read the following statements-Assertion (A) and Reason (R):

Assertion (A): India's pre-1990 economic strategy dismantles the vast network of controls and permits
that dominated the economic system.

Reason (R): The 1991 reforms unleashed the energies of Indian entrepreneurs, gave untold choice to
consumers and changed the face of the Indian economy.

From the given alternatives choose the correct one:

Alternatives:

(A) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).

(B) Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation of Assertion
(A).

(C) Assertion (A) is true but Reason (R) is false.

(D) Assertion (A) is false but Reason (R) is true.

D. In the light of the given text and common knowledge, identify the incorrect statement: -

(A) A severe balance of payments problem triggered an acute economic crisis in 1991.

(B) In 1991, the economic and political leadership launched a multipronged reforms agenda to repair the
macroeconomic situation of the nation.

(C) In post 1991 situation, the state was given the role of primary regulator of the economy.

(D) Post pandemic, individual sectors should be looked closely. Sectors that need reforms should be
identified and corrective action should be taken.

E. Read the following statements carefully and choose the correct alternatives given below:

Statement 1: Timing and sequencing are critically important in the post-economic reform agenda.

Statement 2: Post pandemic reforms in India require a paradigm shift.

Alternatives:

(A) Both the statements are true.

(B) Both the statements are false.

(C) Statement 1 is true and Statement 2 is false.

(D) Statement 2 is true and Statement 1 is false.

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F. Read the following statements- Assertion (A) and Reason (R):

Assertion (A): The 1991 reforms released the vitalities of Indian businesspersons.

Reason (R): The reform agenda established a paradigm shift and defined the broad outlines of economic
policy making for years to come.

From the given alternatives choose the correct one:

Alternatives:

(A) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).

(B) Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation of Assertion
(A).

(C) Assertion (A) is true but Reason (R) is false.

(D) Assertion (A) is false but Reason (R) is true.

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ANSWER KEY

Section A – Macro Economics

Ans 1. (d) 0.6

Ans 2. (d) Debit Side of Capital Account

Ans 3. (c) Cash Reserve Ratio

Ans 4. c) Both statements and 2 are true

Ans 5. (a) Capital

Or

Ans . (b) Geographical territory

Ans 6. (d) Infinity

Or

Ans . (a) Price stability in the economy

Ans 7. (d) Unemployment

Ans 8. (b) Reserve Bank of India

Or

Ans . b) surplus,5

Ans 9. (a) National Income

Ans 10. (c) AD > AS

Ans 11. Net Value Added at Factor Cost

= (ii) + (v) − (vi) – (vii)-(iii)+(i)

= 800 + 20 – 50 – 500 – 30 + 40 = 280 Lakhs

Ans 12.

Basis Balance of Payment (BOP) Balance of Trade (BOT)

Meaning It is an accounting statement that It refers to difference between
provides a systematic record of all amounts of exports and imports of
economic transactions, between visible items.
residents of a country and rest of
the world in a given period of time.
Components It includes visible items, invisible It includes only visible items.
items, unilateral transfers and
capital transfers.
Capital It records all transactions of capital It does not record any transaction of
transactions nature. capital nature.

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Scope It is a wider concept and it includes It is narrower concept as it is only a

BOT. part of BOP account.
Settlement Unfavorable BOP can not be met Unfavorable BOT can be met out of
out of favorable BOT. favorable BOP.

Or

Basis Capital account Current account

Influence on the Capital transactions bring about a Current account transaction bring
economy change in the capital stock of a country. a change in the current level of a
country’s income.
Concepts It is a stock concept as it includes all It is a flow concept as it includes all
items expressing changes in stock. items of flow nature.
Components Capital account = Borrowings and Current account = visible trade +
Lendings to and from abroad + invisible trade + unilateral
investment to and from abroad + transfers + income receipts and
change in foreign exchange reserves. payments.

Ans 13. (i) Equilibrium level of National Income (Y)

At Equilibrium, Y = C + I [ AD = AS = Y and AD = C + I]

(Or, Y = 500 + 0.75Y + 5,000 [C = 500 + 0.75Y]

0.25Y = 5,500

Y = 22,000

(ii) Consumption expenditure at equilibrium level of national income.

Putting value of National Income of 22,000 in consumption function, we get:

C = 500 + 0.75 X 22,000

C = 17,000

Equilibrium level of income = 22,000; Consumption expenditure at equilibrium level of income = 17,000.

Ans 14. Lender of the last resort:

• When commercial banks fail to meet their financial requirement from other sources, they
approach the central bank to give loans and advance as lender of the last resort.
• Central Bank assists these banks through discounting of approved securities and bills of
exchange.
Ans 15. MONEY CREATION OR CREDIT CREATION
• Through the process of money creation, commercial banks are able to create credit, which is in
far excess of the initial or primary deposits.
Let us now understand the process of money creation through an example:

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1. Suppose, initial or primary deposits in banks is ₹1,000 and LRR is 20%. It means, banks are
required to keep only ₹200 as cash reserve and are free to lend ₹800.

2. Suppose they lend ₹800 and borrowers withdrew the entire amount of ₹800 for making
payments. The money spent by the borrowers come back into the banks in the form of deposit. As all
the transaction rotated through bank hence, it will increase the demand deposits of bank by ₹800.

3. With the new deposits of ₹800, Bank keep 20% as cash reserves and lend the balance ₹640,
which are used by the borrowers for making payments, which again comes back into the bank. In this
round the deposits raised by ₹640.

4. The deposits keep on increasing in each round by 80% of last round deposits. At the same time,
cash reserves also go on increasing, each time by 80% of the last cash reserve.

Deposit creation comes to end when total cash reserves become equal to the initial deposit.

Deposits (₹) Loans (₹) Cash reserves (₹)

(LRR=20%)
Initial deposit 1,000 800 200
Round 1 800 640 160
Round 2 640 512 128
Round 3 512 410 102
------ ------ ----- ----
----- ------ ------ ----
Total 5,000 4,000 1,000
5. From the above table, we have observed that intial deposits is the “five times” of reserves
maintain by the banks. This “five times” is nothing, just only the value of “Money Multiplier”.
Ans 16. a) GDP Deflator is the ratio of Nominal to Real GDP. It is a tool which is used to eliminate the
effect of price fluctuations in the economy and to determine the real change in physical output of
current year. GDP deflator helps in comparison of growth rate of the economy.

b) i) Expenditure on second hand goods is not to be included in the final consumption expenditure as
the production of these goods might not be attributed to the current year.

ii) Expenditure on ‘intermediate goods’ are not to be taken into account, to avoid the problem of double
counting of value of goods and services.

Ans 17. a) Revenue receipts are those receipts which neither creates any liabilities nor causes any
reduction in the assets of the government. For example: taxes, dividends received from public
enterprises etc.

Whereas;

Capital receipts are those receipts which either creates liabilities or causes reduction in the assets of the
government. For example: borrowings, disinvestments etc.

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b) Direct taxes are those taxes whose impact and incidence lies on the same entity. In other words, the
liability of paying direct taxes can’t be shifted. For example: income tax.

Whereas;

Indirect taxes are those taxes whose impact and incidence may lie on different entities. In other words,
the liability of paying indirect taxes can be shifted. For example: GST.

SECTION B – INDIAN ECONOMIC DEVELOPMENT

Ans 18. (a) 1757

Ans 19. (b) 1950

Ans 20. (a) I and II

Ans 21. (a) NABARD

Ans 22. (b) Socialist Economy

Ans 23. (a) Seventh

Ans 24. (b) Casualization of work force

Ans 25. (d) Guarding green cover

Ans 26. (a) Seasonal unemployment

Ans 27. (a) Globalization

Ans 28. The given statement is correct. India has abundant natural resources in terms of rich quality of
soil, hundreds of rivers and tributaries, lush green forests, plenty of mineral deposits, etc.

• The black soil of the Deccan Plateau is particularly suitable for cultivation of cotton, leading to
concentration of textile industries in this region.
• The Indo-Gangetic plains spread from the Arabian Sea to the Bay of Bengal are one of the most
fertile, intensively cultivated and densely populated regions in the world.
• India's forests, though unevenly distributed, provide green cover for a majority of its population
and natural cover for its wildlife.
• Large deposits of iron-ore, coal and natural gas are found in the country India alone accounts for
nearly 20% of the world's total iron-ore reserves.
• Bauxite, copper, chromate, diamonds, gold, lead, lignite, manganese, zinc, uranium, etc. are also
available in different parts of the country.

Ans 29. National Bank for Agricultural and Rural Development (NABARD): It is the Apex Bank which
coordinates the functioning of different financial institutions, working for expansion of rural credit.

• lts objective is to promote health and strength of credit institutions (namely, cooperatives,
commercial banks and regional rural banks).
• Besides providing finance to credit institutions, NABARD also provides financial assistance to the
non-farm sector, to promote integrated rural development and prosperity of backward rural
areas.

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Ans 30. The indicators of human development are:

(i) Life Expectancy

(ii) Infant Mortality Rate

(iii) Maternal Mortality Rate

(iv) Mean years of Schooling

(v) Percentage of the population below poverty line

(vi) GDP per capita

(vii) Percentage of the population having access to improved sanitation

(viii) Percentage of the population having access to improved water sources

(ix) Percentage of the population undernourished.

Ans 31. The policy of self-reliance was considered a necessity because of two reasons:

• To reduce foreign dependence: As India was recently freed from foreign control, it is necessary
to reduce our dependence on foreign countries, especially for food. So, stress should be give to
attain self-reliance.
• To avoid Foreign Interference: It was feared that dependence on imported food supplies,
foreign technology and foreign capital may increase foreign interference in the policies of our
country.

Ans 32. The differences between human capital and human development are:

(i) Human capital considers education and health as a means to increase labour productivity.
On the Si other hand, according to human development, education and health are integral
to human well-being.
(ii) Human capital treats human beings as a means to increase in productivity. Any investment
in education and health is unproductive if it does not enhance output of goods and services.
However, according to human development, human beings are ends in themselves. Human
welfare should be increased through investments in education and health even if such
investments do not result in higher labour productivity.

Ans 33. a) Agriculture marketing is a process that involves the assembling, storage, processing,
transportation, packaging grading and distribution of different agricultural commodities across the
country

b) Self-help groups (SHG’s) have emerged to fill the gap in the formal credit system in India as its
delivery mechanism has not only proven inadequate but has also not been fully integrated into the
overall rural social and community development. It came up as the micro finance program. Focus of
SHGs is on those rural people, small and marginal farmers, agricultural and non-agricultural laborers
who do not have sustainable access to formal banking system.

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c) i) Inadequate infrastructure and marketing ii) Compared to conventional farm products, organic
products have more shorter shelf life span.

Ans 34.

A - (B) Liberalisation

B- (A) Both the statements are true.

C - (D) Assertion (A) is false but Reason (R) is true.

D - (C) In post 1991 situation, the state was given the role of primary regulator of the economy.

E - (C) Statement 1 is true and Statement 2 is false.

F - (A) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion
(A).

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