Solution

CLASS 12 ECO BM 2 SETB

Class 12 - Economics
SECTION A : ATTEMPT ANY 10 QUESTIONS
1.
(b) All these
Explanation: Money is used as medium of exchange, measure of value and store of value, a unit of account, etc. So, all are the
function of money.
2.
(c) Demand Deposits
Explanation: Demand Deposits
3.
(c) sell securities in the open market.
Explanation: RBI may sell securities in the open market that will soak the liquidity from the market which tends to reduce the
money supply and inflation is controlled.
4.
(c) Short-term borrowings by commercial banks
Explanation: Short-term borrowings by commercial banks
5.
(d) Reserve Bank of India
Explanation: Reserve Bank of India is the apex bank of India which has solo note issuing authority in India.
6.
(c) 0.20
Explanation: 0.20
7.
(b) a horizontal straight line
Explanation: a horizontal straight line
8.
(c) ₹ 300 Crores
Explanation: ₹ 300 Crores
9.
(c) Negative savings
Explanation: '-a' denotes autonomous savings. So, these are done at a zero levels of income.
10.
(b) The value of consumption exceeds the value of income
Explanation: When consumption expenditure exceeds income, we have negative savings. Thus, APS being the function of
saving is negative.
11. (a) Option (a) and (b)
Explanation: Import substitution policy and Inward looking strategy
12.
(d) restrict imports and protect domestic firms from foreign competition.
Explanation: restrict imports and protect domestic firms from foreign competition.
SECTION B : ATTEMPT ANY 4 QUESTIONS
13. Static functions of money refer to conventional function of money. They basically include the primary and secondary functions of
money e.g. medium of exchange, a measure of value, store of value, transfer of value and standard for deferred payments.
14. Increase in Reverse Repo Rate: Reverse Repo Rate is the rate of interest at which commercial banks can deposit their surplus
funds with the Central Bank, for a relatively shorter period of time. To deal with the situation of excess demand, Reverse Repo
Rate may be increased by the Central Bank. It encourages the Commercial Banks to park their surplus funds with Central Bank. It

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 will reduce the credit creating power of Commercial Banks. As a result, consumption expenditure and investment expenditure
may get reduced, leading to reduction in Aggregate Demand.
Open Market Operations (Sale of securities): Open market operations refer to sale and purchase of securities in the open
market by the central bank. It directly influences the level of money supply in the economy. During excess demand, central bank
offers securities for sale. Sale of securities reduces the reserves of commercial banks. It adversely affects the bank's ability to
create credit and decreases the level of aggregate demand in the economy.

15. (Y) (in crores) (S) (in crores) Δ S (in crores) Δ Y (in crores)

0 -20 - -

50 -10 -10 - (20) = 10 50 - 0 = 50

100 0 0 - (-10) = 10 100 - 50 = 50

150 30 30 - 0 = 30 150 - 100 = 50

200 60 60 - 30 = 30 200 - 150 = 50

a. MPS at ₹ 150 crores level of income = ΔS

ΔY

= 30

50

= 0.6
b. Autonomous consumption (consumption at 0 level of income) Y - S = 0 - (-20)
= 20 crores
16. Hence, Y = ₹ 1,000, C = ₹ 750,
S = Y - C = ₹ 1,000 - 750 = ₹ 250 crore
APS = = Y
S 250

1,000

APS = 0.25
17. MPC is the ratio of change in consumption (ΔC) due to a change in income (ΔY). Literally marginal means additional (or
incremental) and propensity to consume means desire (or urge) to consume. Thus MPC is the ratio of additional consumption
(ΔC) to additional income (ΔY). It indicates the proportion of additional income that is being spent on additional consumption.
MPC is calculated by dividing the increment (or decrement) in consumption with the corresponding increment (or decrement) in
income.
Symbolically,
Marginal Propensity to Consume (MPC)
Change in Consumption (ΔC)
=
Change in Income (ΔY )

Relationship between Marginal Propensity to Consume (MPC) and Marginal Propensity to Save (MPS) is explained below:
As we know, Change in Income
(ΔY ) =Change in Consumption (ΔC)

+Change in Saving (ΔS)

so, ΔY

ΔY
= +
ΔC

ΔY
ΔS

ΔY

(on dividing throughout by ΔY)

Hence, 1=MPC+MPS
or MPS=1-MPC
and MPC=1-MPS
18. Following are the major steps taken by the government to develop small scale industries:
i. Reservation- The government provided statutory reservation of many specific items for exclusive production for small scale
industries.
ii. Credit Facilities- A number of financial institutions were established for providing financial help to small scale industries on
easy terms and conditions.
iii. Infrastructure- Industrial estates were set up all over India which had factory sheds, premises and other infrastructural
facilities for setting up small industrial units.
SECTION C : ATTEMPT ANY 3 QUESTIONS
19. Deferred payments refer to those payments which are made sometimes in the future. Money has made deferred payments much
easier than before. Credit has become the life and blood of a modern capitalist economy. In millions of transactions, instant
payments are not made. The debtors make a promise that they will make payment on some future date. In those situations money

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 acts as a standard of deferred payments. It has become possible because money has general acceptability, its value is stable, it is
durable and homogeneous. This function of money has led to the emergence of financial market which deals in borrowing and
lending of money.
20. The process of credit creation is based on the following assumptions
i. There is single banking system in the economy. it means all banks are treated as single banks.
ii. All transactions are routed through banks.
Working of the credit creation process:
Total credit creation = money multiplier(m) X initial deposits
= 1

LRR
X initial deposits
Deposits Loans Legal Reserves

Initial deposit 10,000 9,000 1,000

first round 9,000 8,100 900

second round 8,100 7,290 810

- - - -

- - - -

- - - -

1,00,000 90,000 10,000

Since Legal Reserve Ratio is 10%, banks keep ₹ 1,000 as reserves and give loans of ₹ 9,000 which ultimately comes back to bank
as deposits. Out of these ₹ 9,000 banks keep 10% i.e. ₹ 900 crore as reserves and gives loans worth ₹ 8,100. In this way in every
round 90% of the loans are converted into deposits totaling to ₹ 1,00,000. The rule is:
Total deposit creation = New deposits( LRR
1
)

= 10, 000 ( 1
)
10%

= ₹ 1,00,000
Average
Income Change in Saving Consumption Change in Consumption Marginal Propensity
Propensity to
(Y) Income (ΔY) (S) (C) Expenditure (ΔC) to Consume
21. Save

0 - -12 12 - - -

20 20 -6 26 14 0.7 -0.3

40 20 0 40 14 0.7 0

60 20 6 54 14 0.7 0.1
Formulae used
C = Y-S, MPC =ΔC/ΔY, APS = S/Y.
22. a. At equilibrium: AD = Y
160 + 0.8 Y = Y
0.2Y = 160 ⇒ Y = = 800160

0.2

b. From the aggregate demand function, MPC = 0.8

Autonomous consumption (C¯ ) = 100
Therefore, Consumption function equation:
C = 100 + 0.8 Y Substituting Y = 800, we get C = 100 + 0.8 (800) = 100 + 640 = 740
S = Y - C = 800 - 740 = 60
Therefore, Total Savings at equilibrium level of income = ₹ 60 crore
Alternately From AD function, total autonomous expenditure
A = C + I = 160
¯ ¯ ¯

Given, C = 100. Therefore, I = 160 - 100 = 60

¯

We know that at equilibrium level of income, S = I

Thus, Total Savings (S) at equilibrium = I = ₹ 60 crore

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23. Green Revolution technology implemented in the agricultural sector in India. At independence, productivity in the agricultural
sector was very low because of the use of old technology and the absence of required infrastructure. Green revolution technology
was implemented to permanently break the stagnation in agriculture during the colonial rule. Benefits of Green Revolution are
explained below:
i. Self-sufficiency in food grains: In the second phase of the green revolution (mid-1970s to mid- 1980s), the green revolution
technology involving use of HYV seeds spread to a large number of states and benefited a large variety of crops, especially
wheat and rice. It enabled India to achieve self-sufficiency in food grains. We no longer had to import food from America or
any other nation.
ii. Increase in marketed surplus resulting in decline in the price of food grains: A good proportion of the wheat and rice
produced during the green revolution period (available as marketed surplus) was sold by the farmers in the market. As a result,
the price of food grains declined relative to other items of consumption. The low income groups, who spend a large percentage
of their income on food, benefited from this.
iii. Buffer Stock: The green revolution enabled the government to procure sufficient amount of food grains to build buffer stock
which could be used in times of food shortage.
SECTION D : ATTEMPT ANY 1 QUESTION
24. Expenditure Method:
GDPMP = Private final consumption expenditure + Govenment final consumption expenditure + Gross domestic capital formation
+ Net exports
Gross domestic capital formation = Net domestic capital formation + Consumption of fixed capital
GDPMP = 250 + 50 + (30 + 25) + (-10) = Rs.345
NDPFC = GDPMP - Depreciation - NIT
(Indirect tax - Subsidies)
NDPFC = 345 - 25 - (20 - 10)
= Rs.310 crore
Gross National Disposable Income:
= NDPFC + Net factor income from abroad + Net indirect tax + Consumption of fixed capital + Net current transfers from abroad
= 310 +15 + (20 - 10) + 25 + (-5)
= 350 + 10 - 5
= Rs.355 crores
25. Consumption expenditure refers to that portion of income which is spent on the purchase of goods and services at the given level
of income. Consumption function refers to functional relationship between consumption and national income.
C = f(Y)
Where, C = Consumption; Y = National Income; f = Functional relationship
The relationship between consumption and income
Consumption Schedule
Income (Y) Consumption (C)
(₹ Crores) (₹ Crores)

0 40

100 120

200 200

300 280

400 360

500 440

600 520

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National Income is measured on X-axis and consumption expenditure on the Y-axis.
Important Observations from
i. Starting Point of Consumption Curve: Consumption curve (CC) starts from point C on the Y-axis. This implies that there is
autonomous consumption (c̄) of OC even when the national income is zero.
ii. Slope of Consumption Curve: CC has a positive slope, which indicates that as income increases, consumption also rises.
However, proportionate rise in consumption is less than probortionate rise in income as part of income is saved.

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