Solution

GUESS PAPER 2

Class 12 - Economics
SECTION A – MACRO ECONOMICS
1.
(c) Both the statements are true.
Explanation: Both the statements are true.
2.
(c) Narrow money
Explanation: Narrow money
3. (a) Consumption, National Income
Explanation: Consumption, National Income
4.
(c) 2,484
₹ 2,00,000
Explanation: $ needed are = 80.50
= $ 2,484

5.
(c) ₹50 crore
Explanation: ₹50 crore
6. (a) Fall in the propensity to consume
Explanation: Fall in the propensity to consume
7.
(d) C + I
Explanation: AD = C + I
8.
(d) All of these
Explanation: All of these
9.
(b) savings and current account deposits
Explanation: savings and current account deposits
10. (a) Direct relationship
Explanation: As the price of foreign currency increases, it's supply increases and as it's price decreases it's supply decreases,
other factors remaining the same.
11. a. False: Capital goods are used up to produce other goods. Capital goods like machines make production of other goods
feasible, but they themselves don’t get transformed in the production process, i.e., they are not used up to produce other goods.
b. False: Whether machine’ is a final good or not depends on how it is being used.
If the machine is bought by a household, then it is a final good because it is used for final consumption.
If the machine is bought by a firm for its own use, then also it is a final good because it is used for investment.
If the machine is bought by a firm for re-sale, then it is an intermediate good.
12. Balance of Payments (BoP) :
A comprehensive and systematic record of all the economic transactions between the residents and non-residents of a country
during an accounting year is called as Balance of Payments (BoP)
Trade balance:
Balance of trade is the net difference of Import and export of all visible items of economic transactions between the normal
residents of a country and the rest of the world.
Balance of Trade = Export of Goods - Import of Goods.
Current account balance:
Current Account is that account of BoP, which records exports and imports of visible and invisible items and unilateral transfers.
OR

1/6
Download RKG INSTITUTE App for Online Learning
 Impact on foreign exchange rate due to increase in import duty on gold:
The import of gold will fall when the government increases the import duty on gold.
This reduces the demand for foreign currency.
With the supply of foreign currency remaining the same, the foreign exchange rate would fall. This implies an appreciation
of rupees.
The given graph clearly shows that when the demand for foreign exchange decreases, then its price also decrease.

13. The given instance where Reserve Bank of India has sold government securities in the secondary market indicates towards
inflation as a possible cause behind the action taken by RBI. By selling off the government securities, RBI withdraws money from
circulation and thereby reducing the lending capacity of the commercial banks. In this process, the economy will experience
contraction of credit, leading to reduction in consumption and investment demand. Consequently, the inflationary pressure in the
economy will get eased out.
14. i. Given, C = 100 + 0.75 Y and I = 800
At the equilibrium level,
Y=C+I
Y = 100 + 0.75 Y + 800
Y = 900 + 0.75 Y
Y - 0.75 Y = 900
0.25 Y = 900
Y= = 3,600
900

0.25

ii. Consumption,
C = 100 + 0.75 Y
= 100 + 0.75 × 3,600 = 2,800
We know that,
Y=C+S
⇒ S = Y - C

= 3,600 - 2,800
= 800
OR
APC is the ratio between total consumption and total income. MPS is the ratio between additional savings and additional income.
i. Calculation of Average Propensity to Consume (APC):
Given,
National Income (Y) =50, Saving (S)=5
Hence, Consumption (C)= Y-S
Consumption =50-5=45
C
APC =
Y
45
= = 0.90
50

ii. Calculation of Average Propensity to Consume after the change and the Marginal Propensity to Save:
Rise in Income(Y1)=60 (given)
Change in Income (ΔY)=60-50=10
Consumption (C1)=60-9=51
Change in Saving (ΔS)=9-5=4
C1 51
AP C = = = 0.85
Y1 60

and MPS= ΔS

ΔY
⇒
4

10
= 0.40

15. Reverse repo rate is the rate of interest offered by RBI when banks deposit their surplus funds with the RBI for short periods.
When banks have surplus funds but have no lending (or) investment options, they deposit such funds with RBI. Banks earn

2/6
Download RKG INSTITUTE App for Online Learning
 interest on such funds. It is a monetary policy instrument which can be used to control the money supply in the country. If the
Central Bank wants to increase the money supply in the economy, then it reduces the reverse repo rate With fall in reverse repo
rate, the commercial banks reduce the deposits of surplus funds with the Central Bank, thereby increasing the money supply. On
the other hand, if the Central Bank wants to decrease the money supply, then it increases the reverse repo rate. With the rise in
reverse repo rate, the commercial banks increase the deposits of surplus funds with the Central Bank, thereby decreasing the
money supply. Thus, reverse repo rate plays an important role in controlling money supply.
16. Answer the following questions:
(i) i. Net Domestic Product at Market Price (NDPMP)
= Private Final Consumption Expenditure + Net Domestic Capital Formation + Government Final Consumption
Expenditure + Net Exports
= 400 +100 + 200 + 40
= Rs. 740 crores

Net National Product at Factor Cost (NNPFC or National Income) = NDPmp - Net factor income paid to abroad -
Net indirect taxes
= 740 - 10 - 80
= Rs. 650 crores
ii. (i) Yes, Net Indirect tax is included in NDP at MP because MP = FC + Net indirect tax.
(ii) Yes, net exports is included in NDP at MP because it is one of the components of NDP when measured by
expenditure method.
(iii) Net factor income from abroad is not included because NDP measures domestic product only.
(iv) Consumption of fixed capital (depreciation) is not included because Net product is equal to Gross product-
Depreciation.
(ii) OR
i. i. Profits earned by foreign companies in India: Profit earned by foreign companies in India will be included in
the domestic product of India as they lie within the domestic territory of the country.
ii. Salaries of Indians working in the Russian Embassy in India: No, this will not be included in the domestic
product as the Russian Embassy is not a part of the domestic territory of India.
iii. Profits earned by a branch of State Bank of India in Japan: No, this will not be included in the domestic
product as the branch of State Bank is located in Japan and thus, is not a part domestic territory of India.
ii. NNPFC = Compensation of employees + Operating surplus (Rent + Royalty + Interest Profit) + Mixed income + Net
factor income from abroad
= 600 + (40 + 10 + 100 + 70) + 0 + (-)25
= Rs.795 crore
GNPMP = NNPFC + Depreciation + NIT
= 795 + 30 + (20 - 5)
= Rs. 840 crore
Net National Disposable Income:
= GNPMP - Consumption of fixed capital - Net current transfer to abroad
= 840 - 30 - (-5)
= Rs.815 crore
17. Answer the following questions:
(i) Capital expenditure means the expenditure which leads to the creation of financial assets or reduction of liabilities.
Following are the characteristics of capital expenditures:
i. Capital expenditures are the expenditures of non-recurring nature.
ii. Its purpose is to add capital stock of the economy and to raise production capacity.
Its examples are as under:
i. Expenditure on land and building
ii. Purchase of shares
(ii) Capital receipts refer to the government receipts which either create a liability for the government or cause a reduction in
its assets.

3/6
Download RKG INSTITUTE App for Online Learning
 Following are the characteristics of capital receipts:
i. Capital receipts are the receipts of non-recurring nature.
ii. The purpose of capital receipts is to create liability or to reduce financial assets.
iii. Capital receipts include non-tax receipts only.
Following are the examples of capital receipts:
i. Loan from public
ii. Foreign Debt
SECTION B – INDIAN ECONOMIC DEVELOPMENT
18. (a) 33 Lakh
Explanation: Indian economic policy after independence was influenced by the colonial experience, which was seen as
exploitative by Indian leaders exposed to British social democracy and the planned economy of Soviet Union. Domestic policy
tended towards protectionism, with a strong emphasis on import substitution industrialisation, economic interventionism, a
large government-run public sector, business organisatiob, and central planning. While trade and foreign investment policies
were relatively liberal. Five year plans of India resembled central planning in the Soviet Union. Steel, mining, machine tools,
telecommunications, insurance, and power plants, among other industries, were effectively nationalised in the mid-1950s.
19.
(c) China
Explanation: Trends in Output Growth in Different Sectors, 1980-2003
1980-90 1990 - 2002/03
Country
Agriculture Industry Service Agriculture Industry Service

India 3.1 7.4 6.9 2.7 6.6 7.9

China 5.9 10.8 13.5 3.9 11.8 8.8

Pakistan 4 7.7 6.8 3.7 3.9 4.3

20.
(b) Development of small scale industries
Explanation: Development of small scale industries
21.
(d) Horticulture
Explanation: Horticulture
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.
(b) inadequate spread of vocational education
Explanation: inadequate spread of vocational education
24.
(b) second
Explanation: China is the second largest economy in the world with a GDP of about 11.22 trillion dollars.
25.
(b) Brundtland Commission
Explanation: The Brundtland Commission emphasises on protecting the future generation. This is in line with the argument of
the environmentalists who emphasise that we have a moral obligation to hand over the planet earth in good order to the future
generation; that is, the present generation should bequeath a better environment to the future generation. At least we should
leave to the next generation a stock of ‘quality of life’ assets no less than what we have inherited.
26.
(c) Statement I is true, but statement II is false.
Explanation: Statement I is true, but statement II is false.

4/6
Download RKG INSTITUTE App for Online Learning
27. (a) (I) and (II)
Explanation: (I) and (II)
28. I think that the government's strategy is correct. Improving the public transport system will motivate people to use this mode of
transport instead of using their personal vehicles. This will definitely help to reduce environmental degradation as studies have
indicated that emissions of harmful gases from trains per passenger/km are nearly half as that of a car. Also, one bus emits far
fewer fumes than twenty cars. So, air pollution will reduce and the quality of environment will improve.
OR
The absorptive capacity of the environment may be defined as the ability of the environment to Absorb degradation. It is the
maximum amount of waste material that can be naturally absorbed by the environment on a sustainable basis, without causing
environmental damage. As a result of economic development, many natural resources have become extinct. For example, wastes
of industries have polluted and dried up rivers and other aquifers making water an economic good. Similarly, deforestation has
resulted in habitat damage, biodiversity loss, and aridity.
29. Employment most generally means the state of having a paid job-of being employed. Employment is considered so important in
the Indian development policy because of the following reasons:
i. Economic Development- Employment is the key to economic development. The process of economic development involves
the utilisation of resources including human resources so that productive potential in a country is realised. Employment
provides the labour force to make a positive contribution to the national income.
ii. Reduction in poverty- A person, if not employed, would be a consumer without being a producer. An unemployed person is
dependent upon others for satisfying his needs and is a burden on the economy. In this way, unemployment leads to poverty.
Employment leads to a reduction in poverty.
iii. Social Effect- Unemployment leads to social unrest. Employment will reduce social crimes such as theft, dacoity, deception,
gloom, etc. Employment promotes peace in society.
30. There are mainly two types of development strategies:
1.Balanced Growth Strategy means proper development of all sectors of the economy with almost same rate of growth. It
requires that the different sectors like agriculture, industry, transport, communication, power etc. should grow together.
2.Unbalanced Growth Strategy implies the development of certain key sectors of the economy only. According to this strategy,
all sectors of the economy cannot grow together because of scarcity of resources. When there is development of key sectors, other
sectors automatically develop because of forward and backward linkages. For example, development of power sector will induce
farmers to install tube wells and industrialists to set up factories.
31. The study reveals that economic growth which started after independence took momentum after economic reforms were
introduced in the economy. Now India is recognized as second fast growing country after china and is emerging as a superpower
in the years to come. Although there has been an increase in the growth rates during reform period, however scholars point out
that growth has not led to creation of employment opportunities. Private sector job growth increased but couldn't keep pace with
the annual increase in labour force and pace of job losses in the public sector. As a consequence number of people working in the
organised sector in India as a percentage of total labour force has decreased. This failure of private sector to generate enough jobs
to compensate for the shrinking public sector is partly to do with India's terrible educational outcome and the rigidity in the labour
market regulation. Moreover, economic reforms had not led to growth of all the sectors equally.
OR
I think it was necessary to introduce economic reforms at the behest of World Bank and International Monetary Fund although
there were a few other alternatives. Since Indian economy was in a very bad position. The foreign reserves were short, BOP was
negative and there was urgent need of funds. Considering the situation, the best option for India was to accept the conditions laid
down by IMF. Also the economic reforms -LPG were very important for the Indian economy. The domestic industries were
performing poorly, the quality of goods was going down, so many PSUs going into losses. It was important to lift the import
quotas and liberalise the economy. Flow of better technology, foreign investment, competition from foreign markets, privatisation
were all important to lift the condition of Indian Industries and sick PSUs. However we could think of a few other alternatives to
solve the problem of BOP crisis.
One such alternative could be to raise funds from Indian public. Government could raise funds by taking loans from Indians by
issuing treasury bills. By making use of these funds in some employment generating printable ventures, we could take the lead
further. Reforms could be introduced later on our own terms and conditions. In that case, it would have proved more fruitful.
32. Following are the main problems concerning the development of education in India:
i. The paucity of Funds- There is a paucity of funds. The government as a whole spends about 4% of the GDP on education.
ii. No Link between Education and Employment- Indian education system is largely irrelevant to the needs of the Indian
economy because there is no linkage between education and employment opportunities.

5/6
Download RKG INSTITUTE App for Online Learning
 iii. Disparity- There is a large disparity in educational standards among regions and institutions. The access level is considerably
low for the rural population compared to the urban. This results in a lack of uniformity.
iv. Drop Out Rate- Drop out rate is very high at all levels of general education. Only 60% of students who enrol in Class I pass
out Class V. Of these who enrol in Class VI, only 50% pass out from Class VIII.
33. Answer the following questions:
(i) i. Increasing use of chemical fertilizers makes country self dependent in food production but it deteriorates
environment and cause harmful impacts on living beings. This problem can be handled by promoting organic
farming. Organic farming is the process of producing safe and healthy food. Moreover, organic agriculture restores,
maintains and enhances the ecological balance. There is an increasing demand for organically grown food, to
enhance food safety throughout the world.
ii. Agricultural diversification is essential for sustainable livelihoods as the need for diversification arises from the fact
that there is a greater risk in depending exclusively on farming for livelihood. Expansion into other related sectors is
desirable to provide supplementary gainful employment and in realising higher levels of income for rural people.
Hence, there is a need to diversify through focus on allied activities, non-farm employment and other emerging
alternatives of livelihood providing sustainable livelihoods in rural areas.
(ii) OR
i. Information technology plays a very significant role in achieving sustainable development and food security in
the following ways:
i. It can act as a tool for releasing the creative potential and knowledge embedded in our people.
ii. It has the potential for employment generation in rural areas.
iii. The quality and quantity of crops can be increased manifold if the farmers are made aware of the latest
equipment, technologies and resources.
iv. IT can help in disseminating information regarding advanced technology and its applications, prices, weather and
soil conditions for growing different crops. Which facilitates farmers in taking effective decisions regarding their
crops and other activities.
ii. In order to change the face of socio-economic scenario, micro enterprises and SHGs are playing significant role in
the self-employment by raising the level of income and standard of living rural people. In this framework, one of the
most vital aspects of rural self employment is the formation of SHGs which is a valuable investment in human
capital through training and capacity building measures. From dairy to mechanised farming, weaving, poultry, food
processing units, mushroom cultivation; Rural India has been busy setting up micro-enterprises by forming SHGs.
The group members use collective wisdom and peer pressure to ensure appropriate use of fund and its timely
repayment. These are informal groups in nature where members come together towards collective action for
common cause. The common need is meeting their emergent economic needs without depending on external help.
SHG movement is supposed to build economic self reliance of rural poor, overcome misuse and create confidence
predominantly among women who are mostly unseen in the social structure.
34. i. Unlike India, China is a global player in the FDI market. Whereas India’s FDI has been generally sluggish till the early 1990s
but later in the 21st century improved. In 2000, China was the world’s fifth-largest recipient of FDI. The possible reasons for
this difference are:
a. The Chinese reform process began more strongly and comprehensively during the 1980s when India was in a mid-stream
of a rather slow growth process.
b. The global exposure of the Chinese economy had been far wider than the Indian economy.
ii. China had been introducing economic reforms in phases. In the initial phase, reforms were initiated in the agriculture, foreign
trade, and investment sectors. In the later phase, reforms were initiated in the industrial sector. To attract foreign investors,
special economic zones (SEZs) were set up. These SEZs were judiciously set up in coastal regions for its advantage of
geographical proximity to Hong Kong—the hub of capital investment in Asia. China also has an upper hand in its political
system, cheap labour, and special incentives for foreign investors. Besides, the overseas Chinese contribute over two-thirds of
the inflows of FDI into the Chinese economy.

6/6
Download RKG INSTITUTE App for Online Learning