CFQ ISC Economics XII

ISC Competency Focused Questions 1
PREFACE
With a growing emphasis on competency-based education globally, the educational landscape in
India has also steered towards high-quality learning experiences that allow learners to incorporate
critical thinking and problem-solving approaches. This approach goes beyond rote memorisation and
focuses on developing the skills and knowledge that students need to apply in their real-world
scenarios.
The Council for the Indian School Certificate Examinations (CISCE), as a national-level progressive
examination board, has taken several steps to infuse competency-based education in CISCE schools
through teacher capacity-building on item development for competency-based assessments and the
incorporation of competency-focused questions at the ICSE and ISC levels from the examination
year 2024.
To further facilitate the adoption of competency-based assessment practices in schools and to support
teachers and students towards the preparation for attempting higher-order thinking questions in future
board examinations, Item Banks of Competency-Focused Practice Questions for selected subjects
at the ICSE and ISC levels have been developed. This Item Bank consists of a rich variety of
questions, both objective and subjective in categories, aimed at enhancing the subject-specific critical
and analytical thinking skills of the students.
In this Item Bank, each question is accompanied by the topic and cognitive learning domain/s that it
intends to capture. The cognitive domains reflected in these questions include understanding,
analysis, application, evaluation and creativity, along with some questions of the higher-order recall
domain. The Answer Key at the end presents the possible answers to a given question, but it is neither
limiting nor exhaustive.
These practice questions are also meant to serve as teacher resources for classroom assignments and
as samplers to develop their own repository of competency-focused questions. Apart from offering a
good practice of higher-order thinking skills, engaging with these questions would allow students to
gauge their own subject competencies and use these assessments for learning to develop individual
learning pathways.
During the development of this Item Bank, a large pool of questions was prepared by a team of
experienced CISCE teachers. The questions that were finalised by the internal and external reviewers
as being higher-order competency-focused questions have been collated in this item bank.
I acknowledge and appreciate all the ICSE and the ISC subject matter experts who have contributed
to the development and review of these high-quality competency-focused questions for CISCE
students.
We are hopeful that teachers and students will utilise these questions to support their
teaching-learning processes.
July 2024 Dr. Joseph Emmanuel

Chief Executive & Secretary
CISCE
Economics ISC-Class-XII
Table of Contents
S.No. Types of Questions Page Nos.
I. Multiple Choice Questions (MCQs) 1-8
II. Assertion-Reason Questions 9-10
III. Very Short Answer Questions 11-13
IV. Short Answer Questions 14-15
V. Long Answer Questions 16-17
VI. Very Long Answer Questions 18-19
Answer Key 20-29
ISC Competency-Focused Practice Questions 2024

Economics ISC-Class XII
COMPETENCY-FOCUSED PRACTICE QUESTIONS

ISC-CLASS XII
Economics
I: Multiple Choice Questions (1 Mark Each)
Please select ONE correct answer from the following options provided in MCQs.
S.No. Questions
1. [Micro Economic Theory: Demand]
During the festival season, the demand for sweets increases even when the price remains
the same. What will be the effect on the demand curve of sweets?
(a) The demand curve will shift towards the right.
(b) The demand curve will shift towards the left.
(c) There will be upward movement in the demand curve.
(d) There will be a downward movement in the demand curve.
(Recall & Understanding)

According to the law of equi-marginal utility, consumer will be in equilibrium while
purchasing X and Y commodity when:
(a) MUx- MUy = 1
(b) MUx= MUy
Py
(c) MUx = MUy
Px PY
(d) TUx+TUy =MU (Recall)

Vyom read in the newspaper that under the ‘two-wheeler’ segment the price of X, a
popular model, has been significantly reduced. Y is another two-wheeler brand known
for its reliability but with a slightly higher price. Analyse the potential impact of the price
reduction of X on Y.
(a) Expansion in demand.
(b) Contraction in demand.
(c) Increase in demand.
(d) Decrease in demand. (Application)
ISC Competency-Focused Practice Questions 2024 1

S.No. Questions
4. [Micro Economic Theory: Supply]
If the market supply curve for cars shifts to the right, what can be the most probable
reason for the same?
(a) Increase in the price of steel.
(b) Increase in the Goods and Services Tax (GST) rate on cars.
(c) Introduction of a new technology that makes the production of that commodity
cheaper.
(d) Reduction in subsidies granted to produce cars. (Application)

Which one of the following is a reason behind an upward sloping demand curve?
(a) Substitution effect
(b) Income effect
(c) Conspicuous consumption
(d) Law of diminishing marginal utility (Understanding)
6. [Micro Economic Theory: Concept of Production and Production Function]

In the below schedule, which of the following relationships are true:
Labour Total Average Marginal

Units Product Product Product
(TP) (AP) (MP)
1 100 100 100
2 220 110 120
3. 360 120 140
i. Marginal Product (MP) of the additional worker is greater than the Average Product
(AP) of the existing workers.
ii. When the schedule is plotted graphically, the MP curve will not intersect the AP
curve.
iii. Total Product (TP) is increasing at a decreasing rate.
iv. Average Product (AP) is maximum at the employment of third unit of labour.
(a) Statement i. and iii are true.
(b) Statement i. and ii are true.
(c) Statement iii. and iv are true.
(d) Statement ii. and iii are true. (Application)

S.No. Questions
In the short run Total Product (TP) increases at an increasing rate, as the producer
increases the variable factors of production in proportion to fixed factors of production.
The reason for this can be attributed to which of the following options?
(a) Imperfect substitutability of factors of production.
(b) Economies of scale as the firm can buy raw material in bulk cheaply.
(c) The idle capacity of fixed factor of production is utilised more effectively as more
variable factors of production are applied to it.
(d) The firm can undertake research and development, thus discovering new techniques
of production over time. (Understanding)

Increasing returns to scale is a concept used to describe a situation in the long run where
production efficiencies are achieved. Which of the following statements accurately
reflects increasing returns to scale?
(a) In the long run, all factors of production remain fixed, and a proportional increase in
output is observed.
(b) All factors of production can be adjusted in the long run, and a proportional increase
in output matches the increase in inputs.
(c) In the long run, with proportional increases in all factors of production, the resulting
increase in output is greater than the proportional increase in inputs.
(d) Factor proportions must change in the long run to achieve increasing returns to scale.
(Understanding)

S.No. Questions
Based on the above graphs, which of the following statements are true?
i. At the point of inflexion, Marginal Product (MP) is maximum.
ii. When Marginal Product (MP)= Average Product (AP); AP is maximum.
iii. Average Product (AP) curve is upward sloping and AP is positive in the third stage.
iv. At point I, total product (TP) is maximum.
(a) Statement i and ii are true.
(b) Statement i and iii are true.
(c) Statement ii and iii are true.
(d) Statement iii and iv are true. (Recall)
10. [Micro Economic Theory: Cost and Revenue]

Opportunity cost arises because of scarcity of resources and the fact that resources have
alternative uses.
When we express opportunity cost in monetary terms; it is the same as of which of the
following?
(a) Social cost
(b) External cost
(c) Accounting cost
(d) Economic cost (Understanding)
11. [Theory of Income and Employment]

Resources are more than fully utilised when:
(a) there is under-employment equilibrium.
(b) aggregate demand is equal to aggregate supply beyond full employment level.
(c) aggregate demand is equal to aggregate supply at the full employment level.
(d) none of the above. (Recall)

S.No. Questions
12. [Money and Banking]
The Central Bank has the monopoly right of note issue. Which of the following options
describe its advantage/s?
(a) Brings uniformity.
(b) Exercises better control over money supply.
(c) It ensures public faith in the currency.
(d) All of the above. (Recall)

Using monetary policy, how is the inflationary gap reduced?
(a) By increasing tax.
(b) By reducing government expenditure.
(c) By decreasing availability of credit.
(d) By imposing tax on imports. (Understanding)

How will aggregate demand be affected by the increase in Cash Reserve Ratio (CRR)?
Increase in Cash Reserve Ratio (CRR):
(a) will have no effect on aggregate demand.
(b) decreases aggregate demand.
(c) increases aggregate demand.
(d) changes aggregate demand. (Analysis)

The Central Bank asks commercial banks to keep higher value of security (collateral) for
sanction of loans. When such a policy is undertaken, what happens to the supply of
money?
(a) It increases.
(b) It decreases.
(c) It does not change.
(d) None of the above. (Understanding)
16. [National Income]

Which of the following is NOT an intermediate good?
(a) Refrigerator installed by Coca Cola.
(b) Ink purchased by a publisher.
(c) Coal bought by steel industry.
(d) Sugar bought by a bakery. (Recall)

S.No. Questions
17. [Balance of Payments and Exchange Rate]
In present times, the exchange rate is affected by the market forces of demand and supply.
Earlier, the value of $ 1 was ₹80 and now it is ₹90. As a result of it, which of the following
options will take place?
(a) Imports will rise and exports will fall.
(b) Imports will fall and exports will rise.
(c) Imports will remain the same and exports will rise.
(d) Both import and export will fall. (Analysis)

In a certain exchange rate system, the exchange rate is determined by the market forces
of demand and supply, but the Central Bank may intervene to keep the external value of
the domestic currency within limits. Which of the following system it refers to?
(a) Clean floating exchange rate system
(b) Dirty floating exchange rate system
(c) Fixed exchange rate system
(d) Flexible exchange rate system (Recall & Understanding)
19. [Public Finance]

Match the Column A with Column B by selecting appropriate options from below:
Column A Column B
I Revenue receipts A Construction of roads
II Capital Expenditure B Total Expenditure >Total receipts
III Fiscal deficit C No reduction in assets
IV Deficit budget D Debt trap
(a) I-D, II-C, III-B, IV-A

(b) I-B, II-A, III-D, IV-C
(c) I-C, II-A, III-D, IV-B
(d) I-C, II-D, III-A, IV-B (Recall & Understanding)

Which of the given statements is true about direct taxes?
(I) They are certain and can be evaded.
(II) They generate civic consciousness among the people and can be used to reduce
consumption of harmful goods.
(III) Their impact and incidence lie on the same person.
(IV) They have a positive effect on a person’s ability to work, save and invest.
(a) (I) & (II)
(b) (I) & (III)
(c) (I), (II) & (III)
(d) (I), (III) & (IV) (Analysis)

S.No. Questions
Observe the image given below carefully and identify the type of goods.
(a) Substitute goods

(b) Complementary goods
(c) Superior goods
(d) Luxurious goods (Application)

An Indian footwear company, Metro Brands Ltd. leased a 3.25 lakh sq. ft warehousing
space in Bhiwandi.
Source(edited):
https://economictimes.indiatimes.com/industry/transportation/shipping-/-transport/as-
india-makes-and-consumes-more-a-new-realty-sector
booms/articleshow/108267921.cms
For Metro Brands Ltd., lease rental payments to the public warehouse will be a part of
which of the following options?
i. Explicit cost and will have impact on the Marginal Cost (MC) curve.
ii. Economic cost and will not have impact on the Marginal Cost (MC) curve.
iii. Implicit cost and will have impact on the Marginal Cost (MC) curve.
iv. External cost and will not have impact on the Marginal Cost (MC) curve.
(a) i and ii
(b) ii and iii
(c) i and iv
(d) iii and iv (Application)

S.No. Questions
ABC Company issues a cheque of ₹ 50,000 but has only ₹ 10,000 as balance in the
account. Still money gets credited to the payee’s account on submission of the cheque.
What type of bank account is it?
(a) Recurring deposit account
(b) Savings deposit account
(c) Current deposit account
(d) Fixed deposit account (Application)

Reserve Bank of India (RBI) had raised the Repo rate from 8.3% to 9.5% in the month
of August 2022.
Source: RBI Bulletin, 2nd Quarter, 2022-2023.
What impact will it have on the market for real estate sector?
(a) Growth of home loan disbursement by commercial banks.
(b) Increase in investment in real estate business.
(c) Fall in housing loans.
(d) Rise in housing loans. (Application)

‘Various International agencies such as World Bank, the International Monetary Fund
(IMF), the Organization for Economic Cooperation and Development (OECD) and Asian
Development Bank (ADB) project India to grow between 6.4 percent,6.3 percent,6.1
percent and 6.7 percent respectively in 2024-25.’
Source: PIB, Delhi. Ministry of Finance, Government of India. 01 Feb. 2024.
Does this necessarily mean that the welfare of the people will increase at the same rate?
(a) Yes, welfare will increase at the same rate.
(b) No, it may lead to a decrease in welfare.
(c) The welfare of the people will remain unaffected.
(d) Both (a) and (c) are correct. (Analysis)

II: Assertion-Reason Questions (1 Mark Each)
S.No. Questions
Assertion (A): Income effect is one of the reasons behind the downward slope of the
demand curve.
Reason (R): In case of income effect, the change in the demand occurs due to change in
the income of the consumer.
(a) Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct
explanation for 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. (Understanding)
27. (Micro Economic Theory: Cost and Revenue)

Assertion (A): Average Fixed Costs (AFC) curve is a rectangular hyperbola.
Reason (R): Total Fixed Cost (TFC) = Average Fixed Costs (AFC) x Q
(a) Both Assertion (A) and Reason (R) are true, and Reason is the correct explanation
for Assertion (A).
(b) Both Assertion (A) and Reason (R) are true, but Reason is not the correct explanation
for Assertion (A).
(c) Assertion (A) is true, Reason (R) is false.
(d) Assertion (A) is false, Reason (R) is true. (Understanding & Analysis)

Assertion (A): An inward-looking trade strategy is aimed at replacing imports with
domestic production.
Reason (R): The policy is based on the notion that industries of developing countries are
not in a position to compete against the goods produced by more developed economies.
(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)
(d) Assertion (A) is false, but Reason (R) is true. (Evaluate)


Assertion (A): Gross National Disposable Income (GNDI) includes net current transfers
from the rest of the world but excludes net current transfers from the government.
Reason (R): Net current transfers from the government bring about a change in the
nation’s disposable income.
for Assertion (A).
(b) Both Assertion (A) and Reason (R) are true, but Reason is not the correct explanation
of Assertion (A).
(d) Assertion (A) is false, but Reason (R) is true. (Understanding)
30. (Balance of Payments and Exchange Rate)

Assertion (A): In case of a flexible exchange rate system, the foreign exchange rate is
determined by the demand and supply of foreign exchange.
Reason (R): The government is not responsible for stabilising the external value of the
domestic currency under the flexible exchange rate mechanism.
for Assertion (A).
(b) Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct
explanation of Assertion (A).
(d) Assertion (A) is false, but Reason (R) is true. (Recall)

III: Very Short Answer Questions (1 Mark Each)
S.No. Questions
Observe the diagram given below carefully. Which concept does it represent?
(Application)

What will be the shape of the supply curve for spinach which is a perishable commodity?
(Application)

In terms of the level of satisfaction, what will be the difference between IC1 and IC3?
(Recall & Understanding)

With reference to elasticity of demand, how one would view/ understand the demand of
insulin for a diabetic patient? (Application)

If the cotton suppliers expect an increase in the price of cotton in the future, how does
the current supply of cotton change? (Analysis)

S.No. Questions
_____________is independent of the fixed cost. This cost curve is common to both
Average Variable Cost (AVC) and Average Total Cost (ATC) curves.
(Understanding)
37. [Micro Economic Theory: Main Market Forms]

Break-even point is when Average Revenue (AR)=Average Cost (AC).
Does the firm earn profits or suffers losses at this point in short run equilibrium under
perfect competition? (Understanding)

“Abnormal profits cannot exist in the long run equilibrium for a firm under perfect
competition”. Give reason for this statement. (Understanding)

_________a part of economic cost, is the minimum payment which is a reward for the
risk undertaken by the producer. (Understanding)

India exported Covid vaccines worth US$ 208 million. Will it have a positive or negative
effect on Balance of Payment (BOP)? Justify with a reason. (Analysis)

Commercial banks park their surplus funds with the Reserve Bank of India (RBI).
Analyse the impact on the credit creation capacity of the banks. (Application &Analysis)

Comment on the trend of Repo rate exhibited in the diagram. How does this trend affect
the lending activity of commercial banks? How do you think it will affect the inflationary
pressure in the economy?
(Understanding & Analysis)

S.No. Questions
An additional facility of withdrawing money more than deposit amount is provided to
current account deposit customers of commercial banks. Identify it. (Recall)

How do you clarify that money has an advantage in value storage?
(Understanding & Evaluate)

Differentiate between Appreciation and Revaluation of the currency.
(Understanding & Analysis)

There may be a surplus or deficit in the Balance of Trade account, but the Balance of
Payments account is always in equilibrium. Assess. (Evaluate)

A 14-year-old Ravi Mohan Sain bagged ₹ 1 crore prize after he appeared on Kaun Banega
Crorepati Junior in 2001. Will Ravi’s receipt be a part of national income or personal
income? Why? (Analysis)

“Commodity taxation in India is regressive and unjust”. Defend or refute the statement.
(Evaluate)

An economy suffers from depression, what type of budget- surplus or deficit is suitable
in such a situation? Why? (Analysis & Application)

IV: Short Answer Questions (2 Marks Each)
S.No. Questions
50. (Micro Economic Theory: Supply)
The GST Council, headed by Union Finance Minister Nirmala Sitharaman gave a nod to
levy 28% GST on online gaming, horse racing and casinos at full value.
Source: Economic Times 5 March, 2024.
Analyse the impact on the supply of online gaming. Explain with the help of diagram.
(Application)
51. [Micro Economic Theory: Elasticity of Demand]

Tanmay increases the demand for a commodity from 40 units to 60 units when its price
falls by 10 per cent. What is the price elasticity of demand? (Application)
52. [Micro Economic Theory: Elasticity of Demand]

If the elasticity of demand of commodity ‘X’ is greater than one, how will it impact the
consumer’s total expenditure if the price of commodity ‘X’ decreases. (Application)
53. (Micro Economic Theory: Demand)

What does convexity of indifference curve imply? (Recall)

Explain why Average Fixed Costs (AFC) curve though slope downward never touches
the axes. (Understanding)

Explain why Total Revenue (TR) curve has a constant positive slope under perfect
competition. (Understanding)

From Europe to India, farmers have taken to the streets in recent months to protest against
agricultural policies, free trade, and cheaper imports. These policies add to the
competition farmers face from thousands of others because they sell an identical product.
In such a market form, an individual farmer is a price taker or a price maker. Justify your
answer. (Analysis)

“The demand curve faced by an oligopolist is indeterminate due to interdependence of
firms.”
Justify the statement above. (Understanding)

S.No. Questions
Calculate equilibrium level of income in the economy if C = 750 + (0.6) Y and Investment
Expenditure = ₹ 300. (Application)

How does the Central Bank use buying and selling of securities to control inflation? What
is this method called? (Understanding)

A rational investor would deposit his/her money in a fixed deposit account instead of a
savings deposit account. Justify by giving two points. (Recall)

If planned saving is less than planned investment, what happens to the National Income?
Show with the help of a diagram. (Understanding)

Import substitution and export promotion are two measures to overcome a deficit in the
balance of payments. Which one of the two, is an effective measure with respect to goods
like gold, silver, TV, tyres, etc.? (Evaluate)

If one pays road tax, it does not mean that the road outside one’s home is perfect. Which
characteristic of a tax is referred to in the given sentence? Explain. (Application)

Categorise the following into revenue and capital receipts:
(a) Interest receipts
(b) Disinvestment proceeds
(c) Provident fund
(d) Custom duties (Understanding)

“In a simple two sector model of circular flow of income, someone’s expenditure is the
other’s income”. Justify the statement. (Evaluate)

V: Long Answer Questions (4 Marks Each)
S.No. Questions
66. [Micro Economic Theory: Market Mechanism]
Due to government’s intervention when the maximum price is set below the equilibrium
level:
(a) Identify the problem that arises. Explain the reason behind the occurrence of the
problem? [2 Marks]
(b) Explain any two ways through which the limited stock is allocated? [2 Marks]
(Application)

Indian Airline Companies posted huge losses during Financial Year (FY) 2020-2021.
In airlines, huge, fixed costs are already incurred before the flight sails on the air, for
example leasing costs, parking costs, etc. Indian airlines can hardly cover their variable
costs (employee costs, fuel costs etc.), let alone the fixed expenses.
Source(edited):https://insider.finology.in/business/reasons-why-airlines-industry-
always-struggling
(a) Why should the airline firms continue production in the short run, despite incurring
losses? [2 Marks]
(b) Illustrate with a diagram, the short-run equilibrium of a perfectly competitive firm
incurring losses; along with the shut-down point. [2 Marks]
(Analysis)

Walk down through any US supermarket and one would come across rows of similar—
yet different— food products competing for attention. As new flavours fill store shelves,
consumers are buying them, often at the expense of the original product’s market share.
Competition among new varieties has kept product markups mostly unchanged.
Source(edited):https://www.chicagobooth.edu/review/do-shoppers-have-too-many-
choices
(a) Identify the form of market discussed in the paragraph. [1 Mark]
(b) Explain any three distinctive features of this market form. [3 Marks]
(Application)

S.No. Questions
69. Read the following extract and answer the questions that follow:
The Government of India is putting in all efforts to promote the “Make in India” strategy
to boost the Indian economy. India is trying to impress private foreign investors and
specially MNCs to invest in India and has been somewhat successful. India has attracted
total new Foreign Direct Investment (FDI) inflow of US$ 25 billion during first three
months of 2021-22. FDI is likely to increase in 2024. The government is supporting this
by introducing various reforms and initiatives, which include allowing FDI up to 100%
in certain sectors and removing certain sector specific restrictions. All this has decreased
the marginal propensity to save up to 0.2.
[Theory of Income and Employment]
(a) Calculate the expected change in income that may be caused due to the additional
new investment mentioned above. (Analyse & Application)
[Balance of Payments and Exchange Rate]
(b) What would be one advantage and one disadvantage to the Indian economy if 100%
FDI is opened in some economic sectors?
(Evaluate)
Formulate a suitable public expenditure policy:
(a) to bring about equitable distribution of income and wealth.
(b) to overcome regional disparity. (Create)

VI: Very Long Answer Questions (8 Marks Each)
S.No. Questions
71. The Cabinet Committee on Economic Affairs (CCEA), on March 7, approved a hike in
the Minimum Support Price (MSP) of raw jute for the 2024-25 season to ₹5,335 per
quintal. This is up from the current MSP of ₹ 5,050 per quintal.
Source: Money control,7 April 2024.
[Micro Economic Theory: Market Mechanism]

(a) Who is benefited directly from the “approved hike in MSP”? [2 Marks]
(b) Which phenomenon emerges due to the imposition of MSP? [1 Mark]
(c) With the help of diagram, explain the concept of MSP. [3 Marks]
[Micro Economic Theory: Main Market Forms]
(d) “Sales promotion expenditure incurred by firms to promote their products is a part of
selling cost”. Which market does not need to incur this cost? Why? [2 Marks]
(Application)

(i) How does the following affect the supply of a commodity?
(a) Effect of flood on the supply of fruits. [2 Marks]
(b) Increase in the subsidy provided by the government. [2 Marks]
(c) Use of advanced technology in the manufacturing process. [2 Marks]
[Micro Economic Theory: Elasticity of Demand]
(ii) Identify whether the demand for the following conditions will be elastic or inelastic
and give reason for the same. [2 Marks]
(a) Price of coffee increases, what will be the effect on the demand of a coffee addict?
(b) If the price of air conditioners reduces, how will it affect the demand for the same?
(Application)

S.No. Questions
73. (Micro Economic Theory: Concept of Production and Production Function)
Case study: Read the following extract and answer the questions that follow:
A farmer inherited a plot of land of 10 acres. As he started working on it, the land: labour
ratio was 10:1. Soon his wife joined him and the land: labour ratio changed to 10:2 and
his output also increased by 150%.
Due to lack of alternate job opportunity, his sons too start working on the same piece of
land changing the land: labour ratio to 10:4. Now the output increased negligibly by only
105%.
(a) Explain the stages of production under the law of variable proportions that are
depicted in the case-study.
(b) Illustrate the law and all its stages with the help of a diagram.
(c) Will a rational producer operate in a stage where Average Product (AP) is positive
while Marginal Product [MP] is negative? Give reason for answer.
(Analysis)

Imagine John writes a check from his account at Bank A (let's call him the drawer) and
gives it to Sarah (the payee) to pay her back. Sarah deposits the check into her account at
Bank B.
(a) How does the money move between the banks? What role does the Central Bank play
in this process? [6 Marks]
(b) How will credit availability from commercial banks be affected if people develop
more banking habits? [2 Marks]
(Analysis)

(a) Under a flexible exchange rate system any fluctuation in the exchange rate is
automatically corrected by the market forces of demand and supply. Explain using a
suitable diagram. [6 Marks]
[National Income]
(b) Distinguish between net exports and net factor income from abroad. [2 Marks]
(Application)

ANSWER KEY
S.No. Expected Answers

1. (a) The demand curve will shift towards the right.
(c) MUx = MUy
2.
Px PY
3. (d) Decrease in demand.
4 (c) Introduction of a new technology that makes the production of that commodity
cheaper.
5. (b) Conspicuous consumption
6. (b) Statement i. and ii are true.
7. (c) The idle capacity of fixed factor of production is utilised more effectively as more
variable factors of production are applied to it.
8. (c) In the long run, with proportional increases in all factors of production, the resulting
increase in output is greater than the proportional increase in inputs.
9. (a) Statement i. and ii are true.
10. (d) Economic cost
11. (b) aggregate demand is equal to aggregate supply beyond full employment level.
12. (d) All of the above.
13. (c) By decreasing availability of credit.
14. (b) decreases aggregate demand.
15. (b) It decreases.
16. (a) Refrigerator installed by Coca Cola.
17. (b) Imports will fall and exports will rise.
18. (b) Dirty floating exchange rate system
19. (c) I-C, II-A, III-D, IV-B
20. (b) (I) & (III)
21. (b) Complementary goods.


22. (a) i and ii
23. (c) Current deposit account.
24. (c) Fall in housing loans.
25. (b) No, it may lead to decrease in welfare.
26. (c) Assertion (A) is true, but Reason (R) is false.
27. (a) Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation
for Assertion (A).
30. (b) Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct
explanation for Assertion (A).
31. Backward sloping supply curve which is an exception to supply.
32. Perfectly inelastic supply curve as it is a perishable commodity.
33. IC3 gives more satisfaction as it is far from the origin than IC1.
34. Perfectly inelastic because whatever be the price, it will be needed by the diabetic patient.
35. If the cotton suppliers expect an increase in the price of cotton in the future, then they
will supply less currently and supply more in the future to earn maximum profits.
36. Marginal cost.
37. • No profit-no loss.

• Covers all cost (fixed & variable).
• Covers cost which includes Normal profit.
(Any one point will be accepted).
38. Free entry and free exit.
39. Normal Profit.
40. Positive effect because increase in export means increase in credit balance or current
receipt of Balance of Payment (BOP).
41. When the commercial banks park their surplus funds with the RBI as a mandatory /
compulsory deposit for Cash Reserve Ratio (CRR), their lending or credit creation
capacity reduces. Thus, credit creation in the whole economy decreases.


42. The diagram shows an increase in repo rate over a period of one year. The lending
capacity will fall. This will definitely reduce the inflationary pressure in the economy.
(Optional)
Repo rate is the rate at which the Central Bank of a country, Reserve Bank of India (RBI)
lends money to commercial banks in the event of any shortfall of funds. Repo rate is used
by RBI to control inflation. During inflation, RBI increases repo rate as this acts as a
disincentive for banks to borrow from the RBI. This ultimately reduces the money supply
in the economy and thus helps in arresting inflation.
43. Overdraft facility.
44. It was not possible to store value during the barter system. With money, people can store
purchasing power in liquid form for use anytime. Also, money is easily portable.
45. Appreciation/Revaluation mean the value of the domestic currency against foreign
currency increases. However, appreciation happens by the Market Forces of Demand
and Supply, whereas revaluation is done by The Central Bank.
46. The Balance of Payments account is maintained in form of a standard double entry
bookkeeping system; therefore, it is always in equilibrium while Balance of Trade deals
with visible goods only. Hence, can be a surplus or a deficit.
47. Personal income.

Because national income excludes Transfer Payments whereas personal income
includes transfer incomes.
48. The statement is defended. Since these taxes are imposed on consumption of goods, both
rich and poor pay these at the same rate. Hence, the burden is more on the poor people.
49. Deficit Budget.

Government spending is more than its income this would lead to an increase in aggregate
demand and level of economic activity will expand.
50. It will lead to a decrease in supply as at the same price, GST imposed is more so profit
margins will reduce.


51. Percentage change in quantity
= Q1 – Q x 100
Q
= 60 – 40 x 100
40
= 50
Ep = Percentage change in quantity/ Percentage change in price = 50/10 = 5
(Elastic demand).
52. Total expenditure will increase as in this case change in total expenditure for commodity
‘X’ is more than change in the price of it.
53. It implies that an indifference curve bows inward to the point of origin as it follows the
law of diminishing marginal rate of substitution, as the rate at which the consumer is
willing to give up further units of commodity X to get more units of commodity Y
diminishes.
54. Downward sloping: AFC falls with an increase in output. [1Mark]

It is Asymptotic/ Never touches the axes, as TFC is always positive at all levels of output,
thus AFC cannot be 0. [1Mark]
55. Under perfect competition, firms are price takers, hence constant price.
They do not need to reduce prices to sell more output. [1Mark]
Hence, TR (Price * Qty) goes on increasing, with increasing levels of output. [1Mark]
Thus, positive slope. constant as determined by price.
56. Price Taker; Perfect Competition. [1Mark]

Large number of sellers, Individual farmer’s output too small to exert any influence on
price. [1Mark]
57. Interdependence: In an oligopoly, the number of firms/competitors is small,thus,

decisions of one firm affect the other. [1Mark]
Demand Curve: Any change in price of one firm may result in a change in the price by
the rival firm. Hence, dd curve keeps shifting/, is not definite/ indeterminate. [1Mark]
58. Given, C = 750 + (0.6)Y and I = 300

Therefore, Y = C + I
or, Y = 750 + (0.6)Y + 300
or, Y = 1050 + (0.6)Y
or, Y – (0.6)Y = 1050
or, (0.4)Y = 1050
or, Y = 1050 / (0.4)
or, Y = 2625
So, equilibrium level of income in the economy is ₹ 2625.


The Central Bank sells treasury bills and government securities in order to reduce money
59.
supply which impacts the deposits and reserves of commercial banks and their ability to
provide credit reduces as they are compelled to buy these securities. Thus, inflation is
controlled.
This method is called Open Market Operation (OMO) under quantitative credit control
of the Central Bank.
60. (a) Saving deposits have a very nominal (lowest among all deposits) rate of interest. Fixed
deposits have the higher (highest among all deposits) rate of interest.
(b) Saving deposits can be withdrawn by cheque anytime.
Fixed deposits cannot be withdrawn anytime until maturity of the fixed term period.
When planned saving is less than planned investment, then National Income increases
61.
from Y1 to Y.
62. Import substitution is a better measure because these are non-essential imports and can
be replaced by domestically produced goods.
63. No quid pro quo.

This means that there is no direct return against payment of tax. One cannot expect any
direct benefit against any tax that one pays.
64. (a) revenue receipts
(b) capital receipts
(c) capital receipts
(d) revenue receipts
65. Spending by households and investment expenditure on the output produced generates
demand for goods and services leading to generation of income which in turn is again
spent and again there is generation of income and circular flow is generated.


66. (a) It leads to the problem of excess demand.
As the maximum price is set below the equilibrium price there is shortage of the
commodity (QD>QS).
(b) The two ways are as follows:
i. Rationing- The government issues a ration card to each Below Poverty Line (BPL)
family which enables them to buy a specified quantity of the product at a fixed
price.
ii. First come, first served- Sellers will sell the limited stock to the people who come
first.
iii. Allocation by seller’s preference- The shopkeeper prefers to sell the stock to his
regular customers.
(Any two ways to be explained, 1 mark each)
67. (a) In the short run, if a firm exercises the option of closing down and produce nothing,
the losses would be equal to its fixed cost.
Or
Shut down: loss equal to fixed cost. [1Mark]
So, the firm will produce in the short run, if its AR/P>AVC or
TR > TVC [1Mark]
(b)
Loss rectangle marked: [1Mark]

Shut down point: [1Mark]
68. (a) Monopolistic Competition [1Mark]

(b) Any three features explained: [3 Marks]
● Large number of buyers and sellers
● Differentiated products
● Free entry and free exit
● Selling Cost
● Non-price Competition
● Independent Price Policy


69. (a) Additional new autonomous investment or change in investment (∆I) = US$ 25
billion
Marginal propensity to save or MPS (s) = 0.2
Investment multiplier or K =1/s = 1/0.2 = 5: Also, K = ∆Y/∆I or ∆Y = K x ∆I = 5 x
25 = 125
Therefore, change in income or ∆Y = US$125 billion.
(b) Advantage: “Make in India” strategy will reduce India’s dependence on imports to
some extent. Also, more output with more export motive will definitely increase
export earnings. Thus, the Balance of Payment (BOP) situation in the economy will
have a positive impact.
Disadvantage: Local firms might face heavy competition and might exit from
the market.
70. (a) For equitable distribution of income and wealth the government can spend on:
• Welfare measures like free education, free medical facilities, etc.
• Social Security like old age pensions, unemployment compensation, disablement
benefits, etc.
• Subsidised food through Public Distribution System.
(b) To overcome regional disparity the government can spend on:
• Setting up industries in backward regions.
• Develop social and economic infrastructure.
• Give subsidies to producers to set up industries in backward regions.


71. (a) Minimum Support Price (MSP) directly helps the farmers involved in the production
of jute.
(b) Excess supply emerges due to the imposition of supply.
(c)
The MSP is set at a price above the equilibrium level, the actual quantity bought and
sold will be OQ1, and at AB- excess supply will emerge.
(d) Monopoly
Or
Perfect Competition
Because these two markets do not have competitors to compete with.
72. (i)
(a) Due to floods the supply of fruits will decrease as it is a natural calamity.
[2 Marks]
(b) An increase in subsidy would lead to increase in the supply as it will reduce the
cost of production and encourage the producers. [2 Marks]
(c) Use of advanced technology will increase the supply of commodity as cost of
production will reduce and profit margin will increase. [2 Marks]
(ii) [2 Marks]
(a) The demand for a coffee addict will be inelastic, as he is habitual of consuming
coffee.
(b) The demand will be elastic, as now many consumers will buy air conditioners.


73. (a)
Stage 1: Stage of Increasing Returns:
Up till land: labour ratio is 10:2.
● As TP increases at an increasing rate.

● AP is increasing.
● MP is increasing, then becomes maximum, then starts declining.
Stage 2: Stage of Diminishing Returns
When land: labour ratio is 10:4.
● Now, TP increases at a decreasing rate and then will reach maximum.

● AP is decreasing.
● MP continues to diminish and later will become zero.
(b)
Three stages,
TP curve
AP curve
MP curve
(c) A Rational producer will not operate in Stage 3,
Stage of Negative Returns.
In this stage, there is a decline in total product and the marginal product becomes
negative.
AP is decreasing but is positive.


74. (a) The person writing the cheque known as the drawer instructs the bank to transfer the
amount of money to the payee, that is the person receiving the money. When the
payee deposits the cheque, the bank withdraws the specified amount from the
drawer’s account and transfers it to the payee’s account.
The Central Bank acts as a “clearing house” by providing free services to commercial
banks in transferring and settling their mutual claims. Since the RBI holds reserves
of commercial banks, it facilitates the clearing of cheques by transferring funds
between banks. The principle of bookkeeping is followed in this procedure to make
transfer entries into their accounts.
(b) When people develop more banking habits, they hold less cash with them and deposit
more in banks. Thus, commercial banks have more cash reserves and if CRR does not
increase, they are left with more funds to lend. Thus, credit creation increases.
75. (a) Under a flexible exchange rate system, the exchange rate is determined by the market
forces of demand and supply. Any appreciation or depreciation in the value of the
domestic currency versus the foreign currency is hence automatically corrected.
In the figure, E is the equilibrium point and r is the equilibrium rate of exchange. If
the exchange rate rises to r1 (depreciation happens) imports become expensive hence
they fall and demand for foreign currency ($) falls whereas exports become cheaper,
and they rise leading to a rise in supply of
dollars. Excess supply conditions arise, and
exchange rate falls to r.
If the exchange rate falls to r2 (appreciation
happens) imports become cheap, they rise
and demand for $ rises. On the other hand,
exports become expensive, they fall and
the supply of $ falls. Excess demand
conditions arise, and the exchange rate
goes back to r.
Hence, any fluctuation in exchange rate is
automatically corrected.
(b) Net exports are the difference between domestic spending on foreign goods and
foreign spending on domestic goods whereas Net Factor Income from Abroad (NFIA)
includes net compensation of employees, net income from property and
entrepreneurship, net retained earnings of resident companies abroad.

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ISC Competency Focused Questions 1

July 2024 Dr. Joseph Emmanuel

S.No. Types of Questions Page Nos.

I. Multiple Choice Questions (MCQs) 1-8

II. Assertion-Reason Questions 9-10

III. Very Short Answer Questions 11-13

IV. Short Answer Questions 14-15

V. Long Answer Questions 16-17

VI. Very Long Answer Questions 18-19

Answer Key 20-29

ISC Competency-Focused Practice Questions 2024

COMPETENCY-FOCUSED PRACTICE QUESTIONS

I: Multiple Choice Questions (1 Mark Each)

2. [Micro Economic Theory: Demand]

3. [Micro Economic Theory: Demand]

ISC Competency-Focused Practice Questions 2024 1

5. [Micro Economic Theory: Demand]

6. [Micro Economic Theory: Concept of Production and Production Function]

Labour Total Average Marginal

1 100 100 100

2 220 110 120

3. 360 120 140

ISC Competency-Focused Practice Questions 2024 2

8. [Micro Economic Theory: Concept of Production and Production Function]

ISC Competency-Focused Practice Questions 2024 3

10. [Micro Economic Theory: Cost and Revenue]

11. [Theory of Income and Employment]

ISC Competency-Focused Practice Questions 2024 4

13. [Theory of Income and Employment]

14. [Theory of Income and Employment]

15. [Money and Banking]

16. [National Income]

ISC Competency-Focused Practice Questions 2024 5

18. [Balance of Payments and Exchange Rate]

19. [Public Finance]

(a) I-D, II-C, III-B, IV-A

20. [Public Finance]

ISC Competency-Focused Practice Questions 2024 6

(a) Substitute goods

22. [Micro Economic Theory: Cost and Revenue]

ISC Competency-Focused Practice Questions 2024 7

24. [Money and Banking]

25. [National Income]

ISC Competency-Focused Practice Questions 2024 8

II: Assertion-Reason Questions (1 Mark Each)

27. (Micro Economic Theory: Cost and Revenue)

28. [Balance of Payments and Exchange Rate]

ISC Competency-Focused Practice Questions 2024 9

29. [National Income]

30. (Balance of Payments and Exchange Rate)

ISC Competency-Focused Practice Questions 2024 10

III: Very Short Answer Questions (1 Mark Each)

32. [Micro Economic Theory: Supply]

33. [Micro Economic Theory: Demand]

(Recall & Understanding)

34. [Micro Economic Theory: Demand]

35. [Micro Economic Theory: Supply]

ISC Competency-Focused Practice Questions 2024 11

37. [Micro Economic Theory: Main Market Forms]