Solved Board Paper For ICSE Class 12 Economics

i)Mixed income is the total income of self employed people like doctors, street hawkers, etc. and income of unincorporated enterprises like farmers, small-scale handicraft producers. It is summation of income from work and income from property and entrepreneurship because it is difficult to differentiate between labour element and capital element in the services of a factor of production.

ii) Money payments made by the firm to the owners of various factors of production for services rendered by them in the production of a commodity are known as ‘Explicit costs’. For example wages paid to labour
The estimated/imputed value of inputs owned by the firm and used by it, in its own production unit is known as ‘Implicit cost’. For example the imputed value of land owned by the owner on which factory building is built.

iii) Price elasticity of demand is inelastic or less than unitary elastic due to which percentage increase in demand for a commodity is less than percentage fall in price of that commodity resulting in lesser amount of total expenditure on that commodity even after a decrease in its price i.e. As total expenditure changes in the same direction of price, that means price changes relatively more than quantity (inelastic demand).

iv) Appreciation vs. Revaluation

viii) MPS = 0.2

MPS + MPC = 1

Hence, MPC = 1 – MPS

Putting in the Value of MPS, we get

MPC = 1 – 0.2

= 0.8

Now, Multiplier = 1/(1-MPC)

Putting in the value of MPC, we get

Multiplier = 1/(1-0.8)

= 5

ix) Initial price (P) = `20

New price = `15

Change in price (∆p) = 20-15= 5

Initial quantity supplied (Q) = 2000

Change in quantity supplied (∆q) = ?

Supply at new price = 2000 - 1500 = 500 units.

a)If government sets floor price higher than the equilibrium price, an economy experiences surplus production. This is the result of deficient demand.

Effects of Minimum Price (floor price) above Equilibrium Price:
1.Fixation of Minimum Price leads to surplus output as suppliers supply more than the actual quantity demanded. This encourages some suppliers to lower their price in order to sell out the unsold stock. In this way they outlaw the government.
2.Generally government steps in to maintain floor price by purchasing surplus stock which is left with suppliers at minimum price level (floor price). This builds up huge amount of stock with government.

b) Normal goods are those goods, the demand for which increases with increase in income. For example, milk. Thus, there exists a positive relation between income and demand of normal goods. This is show in the diagram below.
Income demand curve for normal goods-

In contrast, inferior goods are those goods, the demand for which decreases with increase in income. For example, bajra. Thus, there exists a negative relation between income and demand of inferior goods. This is show in the diagram below.

Income demand curve for inferior goods-

(c) A consumer consuming two goods A and B attains equilibrium when the ratio of marginal utility of good A to its price is equal to the ratio of marginal utility of good B to its price which is equal to marginal utility of money i.e.

When the price of good B falls, the ratio of marginal utility of good B to its price becomes greater than the ratio of marginal utility of good A to its price i.e.

This indicates the rise in demand for good B and increase in its consumption by consumer. The process would continue until the utility to price ratio of both goods are equalized again.

a)

b)

(c) The law of diminishing return to a factor states, ‘As more and more units of variable factors are used with fixed factors, after a certain level, its marginal physical product decreases with further employment of it.

As we can see in the diagram, as more and more units of labour is employed with a given quantity of fixed factor, TPP increases at a diminishing rate and MPP goes on falling (as seen in the 2^nd stage). The law operates when there is no improvement in state of technology.
Reasons for operation of law are as follows:
(i) Use beyond optimum capacity - When optimum combination of fixed and variable factors is reached, any further increase in variable inputs will decrease the efficiency in the production process.
(ii) Imperfect substitution - When a variable input is increased beyond a certain limit then due to imperfect substitution between fixed and variable inputs the efficiency in the production process starts decreasing.
(iii) Scarcity of factors- Factors of production become scarce as the level of production increases.
(iv) Factor proportion- Fall in quantity of fixed factor inputs per unit of variable factor input.

a)Backward sloping supply curve implies that lesser quantity is supplied with increase in wage rate. This type of backward sloping supply curve could be experienced in labour market where labour supply increases with increase in wage rate but beyond certain level workers don’t increase their labour, rather prefer enjoying the higher income level which leads to fall in labour supply with further increase in wage rate.

(b) Under perfect competition, a firm can incur losses in short run if it’s average cost (AC) is higher than average revenue (AR).In the given diagram, firm will produce at point E where MC=MR which is a profit maximizing

condition of Producer’s equilibrium.

A firm will produce ON units of output which will lead to losses to the firm as at E, average cost (AC) is OB but average revenue (AR) is OP. So the total loss will be the area covered by PBAE. But the firm will keep producing as long as it is covering it’s variable cost. In case, there is inadequate revenue to cover even variable cost then it becomes necessary for a firm to cease all its production activities which will remove the burden of variable cost and firm will be left with only fixed cost to bear which it has to in any way at least in short run.

(c)The assumptions underlying Indifference Curve are as follows:
(i) Utility is ordinal and it can be measured according to the order of preferences of the consumer.
(ii) Consumer is a rational person and he wants to get maximum satisfaction with his money income.
(iii) The consumer is assumed to be consistent is his choice of goods and services.
(iv) The law of diminishing marginal rate of substitution exists in the economy
(v) Consumer preferences remain constant.

(a) Commercial banks provide loans to the consumers against securities however amount of loan is not equal to the total value of securities. This difference between the value of security and the amount of loan granted is termed as marginal requirement. Suppose if marginal requirement is 10%. The bank will give the loan of ` 9000 only against security of value ` 10,000. It is used as an instrument to control credit by the central bank.

When the central bank wants to increase the availability of credit, it reduces the marginal requirement and vice-versa. For example, if the central bank increases marginal requirement from 10% to 15%, then the borrower would get a loan of ` 8,500 in place of `9000 against security of `10,000. On the other hand, if it wants to increase the bank credit, it would reduce marginal requirement.

(b) Balance of payment (BOP) always balances in an accounting sense because BOP accounts are prepared on the basis of double entry system under which receipts are always equal to payments. The balance of current account may show surplus or deficit. The deficit or surplus in current account is balanced by an equal amount of surplus or deficit in capital account. Thus, BOP inclusive of both balance of current account and balance of capital account is always balanced.

(c) Cash deposits with a bank and reserve requirements are the key elements in credit expansion and money creation within the banking sector. This is explained by the following example.

We assume that an initial deposit of `1,000 is made in a bank. The bank keeps a certain percentage (we assume 10 %) of the deposited amount as cash reserve and uses the rest for new loans or investments (e.g. in treasury bonds). The process of money creation starts as soon as payments resulting from the additional loans or investments (in our case: `900) are credited to checking accounts with other banks. The second round bank(s) will keep 10 % of the deposits (`90) as cash reserve, too, and use the rest (`810) for new loans or investments. These new loans or investments will, again, lead to increased deposits with other banks in a third round. The process will continue depending on the reserve requirements, decreasing additional amounts in every step. At the end of the process, the originally deposited amount of `1,000 would have induced a 10 fold increase in new deposits and would have "created" additional money of `9,000 and led to an increase in total money supply by `10,000. The following table illustrates this process.

Process of Money Creation through the Banking System

Total additional money supply = Initial additional depositX1/reserve ratio
In the example above, this gives:
10,000 = 1,000 X1/0.1
The above formula indicates the maximum amount of additional money created in the banking system with the influx of an initial cash deposit.

(a)
(i) Recovery of loan- It is a capital receipt because loans given to others are assets of the government.
(ii) External grant-in-aid- It is revenue receipts because it is a financial help from the foreign governments and international organization, and the government is under no obligation to return the amount.
(iii) Borrowings- It is capital receipts because in case of borrowings, government is under obligation to return the amount along with interest.

(b)
Balanced Budget- It is the budget which shows that the government’s estimated receipts are equal to its estimated expenditure.
Surplus Budget- When government’s estimated receipts are more than government’s estimated expenditure in the budget, the budget is called a surplus budget.
Deficit Budget-When government expenditure exceeds government receipts in the budget, the budget is said to be a deficit budget.

(c) Types of budget are-
1.Union Budget- It is the annual financial statement prepared by the central government for the country as a whole and presented before the Lok Sabha and the Rajya Sabha. It is divided into railway budget and main budget.
2.State Budget- It is the annual financial statement prepared by the state government and presented before the state legislative assembly. Example: The government of UP prepares its own budget.
3.Plan Budget- It is the document that shows the budgetary provisions for important programmes and schemes in the central five year plan of the country. It gives a detailed break- up of the proposed outlay on various economic, social, community and general services.
4.Performance Budget- It presents the main projects, programmes and activities to achieve certain objectives and give an assessment of the previous year’s Budget and achievements. This budget provides a link between financial allocations and achievement by the concerned spending agency.

(a) Investment multiplier can be explained with the help of a diagram.

Here income is shown along X axis and desired aggregate expenditure i.e. consumption and investment expenditure is shown on Y axis. The initial equilibrium is at E₀ , where AD₀ intersects the 45˚degree line. Investment increases by ∆ I , Aggregate Demand curve shifts from AD₀ to AD₁ and income increases by ∆Y, equilibrium income shifts from OY₀ to OY₁ .
Equilibrium Shifts From E₀ TO E₁ .
Here, Y₀ Y₁ = ∆ Y= E₀ N
and
∆ I = E₁ M

(b) Marginal Propensity to consume = 0.6

Multiplier = 1/(1-MPC)

1/(1-0.6)

1/0.4=2.5

Total Increase in income=

Increase in investment x Multiplier
=200x2.5
=`500 crores
Increase in consumption expenditure=

Increase in income x Marginal propensity to consume =500x0.6
=`300 crores

(c) When aggregate demand in an economy exceeds total output level at the full employment level of income, it is termed as the situation of excess demand. The given diagram depicts the situation.

At point E, Aggregate Demand is equal to ME which indicates full employment level of aggregate demand. Let’s suppose there is an increase in autonomous investment which would lead to a parallel outward shift in Aggregate Demand curve from AD to AD .
AD₁ is planned AD in excess of its full employment level. This increase in Aggregate demand would actually result in excess demand in the economy as we already were at full employment output level earlier. Excess Demand would result in increase in prices.

The difference between aggregate demand and aggregate supply at full employment level is called the inflationary gap which can be seen in the diagram as FE

Following monetary policy measures are taken by the government to correct excess demand-

• Increase in Bank Rate- Increase in bank rate discourages commercial banks to borrow from central bank as it makes borrowings costlier which results in lesser amount of funds with commercial banks to lend and hence decreases aggregate demand.
• Sale of Securities in Open Market- It decreases flow of money in the economy by selling government securities in open market. Thereby reduces spending limit of people resulting in a fall in aggregate demand.
• Increase in Cash Reserve Ratio- It reduces the amount of funds with commercial banks which limits their lending capacity. This results in a decrease in aggregate demand.

(a)The problem of double counting is the problem of estimating the value of goods and services more than once. For example a farmer sells wheat to miller for 500. Miller grinds wheat into flour and sells to baker for 600. Baker makes bread from flour and sells it to shopkeeper for 800. Shopkeeper sells the bread for 900. Now,

Value of output = (500 +600 + 800 +900) = 2800

Every producer treats the commodity he sells as final.

But the value of wheat is already included in the value of flour and the value of flour is already included in the value of bread. The value of a commodity (wheat, flour, bread) is counted more than once. This is an error of double counting.

(b) Estimation of national income by expenditure method involves the following steps.
1. All the economic units which incur expenditure on final products are divided into four groups:
(i) Households
(ii) Business sector
(iii) Government sector
(iv) Rest of the world

2. Final expenditure on final goods and services in the economy divided into four broad categories:
(i) Consumption expenditure
(ii) Investment expenditure
(iii) Government expenditure
(iv) Net exports

3.This step involves the measurement of the components of final expenditure:
(i) Estimation of Private final consumption expenditure
(ii) Estimation of Investment Expenditure
(iii) Estimation of Government Expenditure
(iv) Estimation of Net Exports

4. The sum total of four items- consumption, investment (net), government spending and net exports- is the total final expenditure which gives us Net Domestic Product at market prices. By deducting net indirect taxes, we get Net Domestic Product at Factor cost.

5. At last, net factor income earned from abroad is added to net domestic product at factor cost to arrive at Net National Product at factor cost or National income.

National Income (NNP) = Private Final Consumption Expenditure + Government Final Consumption Expenditure + Net Domestic Capital Formation + Net Exports – Net Indirect Taxes + Net Factor Income from Abroad

(c) By income method

National Income = Compensation of Employees + Rent + Interest + Profit + Mixed Income + Net Factor Income from Abroad.

National Income = 1000 + 200 + 270 + 700 + 560 + 30

= 2,760 crores

By expenditure method

National Income = Private Final Consumption Expenditure + Government Final Consumption Expenditure + Net Domestic Capital Formation + Net Exports – Net Indirect Taxes + Net Factor Income from Abroad

National Income = 500 + 1500 + 850 + (-)20 – 100 + 30

= 2,760 crores