Revision 4(B)

ECONOMICS KEY

1. (c) Reserve Bank of India

2. (b) Credit side of the capital account
3. (a) Compensation of employees
4. (d) Assertion (A) is true but Reason (R) is false
5. (d) Autonomous transactions , or (c) zero
6. a) Statement 1 is false and statement 2 is true
7. (d) Both (a) and (b)
8. (b) Accepting deposits of general public or (d) currency held by the
public and demand deposits with commercial banks
9. (b) Statement 1 is true and statement 2 is false
10.(a) Both statements 1 and 2 are false
11.(b) Visible items
12.(b) Borrowings
13.(a) 1st April to 31st March
14.(c) Secondary sector or (a) Flows
15.(c) depreciation
16.(a) C - (iii)
17.(d) Non-tax revenue receipts
18.(a) Who ultimately bears the money burden of the tax
19.(b) Both (A) and (R) are true and Reason (R) is the correct explanation of
Assertion (A)
20.(c) Both statements 1 and 2 are false or (a) Statement 1 is false and
statement 2 is true
Section B – 3 marks
21.Real GDP = Nominal GDP/Price Index , = 180/120 = 150 crores
22.When price of foreign exchange rises, import becomes costlier, demand
for imports will fall. As a result demand for foreign currency falls.
When price of foreign exchange rises, domestic goods become cheaper
for foreign buyers, because they can now buy more from one unit of
foreign currency. As a result demand for exports rise, leading to increase
in supply of foreign exchange.
Thus, it can be concluded, that the demand for foreign currency and its
price has an inverse relationship, while, supply has a direct relationship
with the price of foreign exchange.
 Or
The components of current account are:
(i) Export and import of Goods;
(ii) Export and import of Services;
(iii) Unilateral Transfers to and from abroad;
(iv) Income receipts and payments to and from abroad.
23.Value of output = i+v+(iii-iv)+ii
= 100 + 10+20-5+75
= 200 lakhs
24. Difference between Depreciation and Devaluation
Aspect Depreciation Devaluation

A decrease in the value of a

A deliberate decrease in the value
currency in the foreign
Definition of a currency by a government or
exchange market due to
central bank.
market forces.

Market forces such as

supply and demand Government policy intervention
Cause
imbalances in the foreign or monetary action.
exchange market.

Generally not controlled by

It is controlled and initiated by
Control the government or central
the government or central bank.
bank.

It reflects changes in Often aimed at improving trade

Purpose economic conditions and balance, boosting exports, or
market sentiment. addressing economic imbalances.

It can occur spontaneously It can be implemented at a

Timing and is responsive to specific time chosen by the
economic factors. government or central bank.

Impact on Can have both positive and Intended to provide short-term

Economy negative effects, depending benefits for the economy,
on the economic context. particularly in terms of trade and
 competitiveness.

May improve the trade It can directly impact

Implication
balance by making exports international trade by altering the
for Trade
more competitive. cost of imports and exports.

International Not necessarily indicative of It reflects government

Image government policy. intervention in currency matters.

This can occur in both fixed It is typically associated with

Exchange
and floating exchange rate fixed or managed exchange rate
Rate System
systems. systems.

If Country X’s currency If Country Y’s central bank

depreciates by 10% against intentionally devalues its
Examples
the US dollar due to market currency by 15% to boost
dynamics. exports.

OR
Incentives for exports are aimed at increasing exports. Increase in exports will
bring more foreign exchange into the country. Demand for foreign exchange
remaining unchanged, exchange rate is likely to fall
Section – C – 4 marks
25. It also refers to a country's Gross Domestic Product (GDP) demand.
Aggregate demand is also known as Aggregate Expenditure (AE) as
AE is the total expenditure incurred by all the sectors of the economy. The
aggregate demand includes factors such as personal consumption,
investment, government demand, and net exports.
Or
APC is the ratio of total consumption to total income in an economy.
Since consumption and income are both positive values, APC cannot be
zero. It will always have a positive value, although it can be less than one
if total consumption is less than total income.
MPC, on the other hand, is the change in consumption that occurs as a
result of a change in income. It is the slope of the consumption function
and indicates how much of an increase in income is spent on
 consumption. MPC can be zero if there is no change in consumption even
if there is a change in income. For example, if an individual receives a
bonus but decides to save the entire amount, their MPC will be zero.
However, in most cases, MPC is a positive value since most people tend
to spend some of their additional income on consumption.
In summary, while APC cannot be zero, MPC can be zero if there is
no change in consumption even if there is a change in income.
26.A. True, there is an inverse relationship between the value of MPS and
investment multiplier. We know that higher the value of MPS the lower is
the value of multiplier and vice-versa.
K = 1/mps
if MPS = 0.10 then 1/0.10 = 10
if MPS = 0.20 then 1/0.20 = 5
B. False , as the value of MPS will not be negative and its value varies
from zero to one and is never negative
27.Open Market Operations refer to buying and selling of government
securities by the central bank in the open market. The central bank can
reduce this gap by buying securities. The money flows out from Central
bank into the commercial banks. This raises lending capacity of
commercial banks and therefore banks lend more.
28.A. Bank rate can be raised – borrowing will become expensive
B. CRR should be increased – the funds available for credit creation with
commercial bank get reduced
OR
Marginal Propensity to consume refers to the percentage change in
consumption for every one rupee of change in the income.
MPC= change in consumption/ change in income = ^C/^Y
MPS= change in savings/ change in income = ^S/^Y
MPC+MPS
= ^C/^Y+ ^S/^Y
=^C+^S/ ^Y
=^Y/^Y
=1
 Hence, MPC+MPS=1.
29.Saving is a function of income, i.e., S = f(Y). Saving is positively related
to income so the saving curve is upward sloping. At very low levels of
income, saving can be negative. This is because at low levels of income,
consumption can be more than income and there can be dissaving in the
economy. We will consider the investment to be autonomous, and thus,
the investment curve is a horizontal line parallel to the x-axis. In the
diagram, point E is the equilibrium point where S = I. At this point, the
amount of money withdrawn from the economy is equal to the amount of
money injected into the economy. At this level AD = AS in the economy.
When S > I, some of the planned output remains unsold and producers
have to hold the stocks of unsold goods. To clear the stocks, producers
will reduce the production and the level of output goes down. Thus, the
income in the economy reduces. Lesser income indicates lesser savings
and the process will continue till saving becomes equal to investment.

30.(i) AD > AS When AD is greater than AS, flow of goods and services in
the economy tends to be less than their demand. The existing stocks of the
producers will be sold out. To rebuild the desired stocks, the producers
will plan greater production. AS will increase to become equal to AD.
(ii) AD < AS When AD is less than AS, flow of goods and services in the
economy tends to exceed their demand. As a result, some of the goods
will remain unsold. To clear unwanted stocks, the producers would plan a
 cut in production. Consequently, AS will reduce to become equal to AD.
This is how AS adapts itself to AD.

Section – D – 6 marks
31.A. GDPmp = iv+xi+x+iii+v
= 1,200 + 200 + 220 + 40 + 70 = 1,730
B. EB Will be treated as an intermediate expenditure, which will not
include in estimation of NI. Excluded
or
A. NDP fc = ii+(vi-vii)-viii-ix+iii-iv
= 2000 + 100 -200 -1000 -150 +20-50 = 720
B. payment of interest on borrowing by the government is treated as a
payment for unproductive borrowing . So it not included in NI . it is a
Transfer payment
32.Commercial banks plays an important role of 'money creator' in the
economy. They have the capacity to generate credit through demand
deposits. These demand deposits make credit more than the initial
 deposits.The process of money creation can be explained by taking an
example;
Suppose a depositor deposits Rs.10,000 in his savings account of a bank
XYZ, which will become the demand deposits of the bank. Based on the
assumption that not all customers will turn up at the same day to withdraw
their deposits, banks maintains a minimum cash reserve of 10% of the
demand deposits, Rs.10,000. It lends the remaining amount of Rs.9000 in
the form of credit to other customers. This further creates deposits for the
bank XYZ. With the cash reserve of Rs.1000, the credit creation is worth
Rs.10,000. So, the credit multiplier is given by:
Credit multiplier=110%=10
The money supply in the economy will increase by the amount (times) of
credit multiplier.
NUMERICAL EXAMPLE;
1. We will make some assumption;
(i) All banks are one unit.
(ii) All the transactions are made through banks.
2. Initial deposits are Rs.10,000 and the legal reserve requirement
proposed by the central bank is 10%.
Then,
Credit creation=Initial deposits×1LRR
= 10,0000.1
= Rs.1,00,000
As we know that, Money multiplier=1LRR, so
Money multiplier=10.1
which is MM=10 Times
So, the money multiplier is 10 times the initial deposits.
33.A.GDP mp = Value of output – intermediate consumption
= iii-I
 = (1000 + 900 + 700) – (500 + 400 + 300)
= 2600 – 1200
= 1400 cr
B. GNP fc = GDPmp – (vi+iv)
= 1400 – 10 +(-20)
= 1400 -10 -20
= 1370 cr
or
(a) NNPmp= (ii) + (xi) + (iv) + (vii) + (x) - (ix) + (viii)
=1,200+250+300+400+500 -20+300
= 2,930 crores

(b) NVA= (iii) + (iv) - (ii) *Depreciation

= 25+(-2)-6-3-14 Lakhs
*Despreciation = Cost of the fixed capital good /Life span
= 15 /5
=3

34.. (a) Expenditure on subsidies is revenue expenditure as it does not lead

to any creation of assets or reduction in liabilities.

(b) Expenditure on grants given to state governments is revenue

expenditure as it does not lead to any creation of asset or reduction in
liabilities.

(c) Repayment of loans is capital expenditure because it reduces the

liabilities.

(d) Expenditure on construction of school building is capital expenditure

because it leads to creation of an asset for the school