SOLUTION : PRACTICE PAPER – 5

Q. 1. (A)
(1) (4) d
(2) (2) b and c
(3) (1) a
(4) (4) b, c and d
(5) (3) c
Q. 1. (B)
(1) Odd word – Individual income
(2) Odd word – Driving
(3) Odd word – Oranges
(4) Odd word – Raincoat
(5) Odd word – Issuing currency notes
Q. 1. (C)
(1) Diamond
(2) Recession
(3) Margin requirement
(4) Oligopoly
(5) Change in supply

Q. 1. (D)

(1) A financial security which derives its value / price from the underlying assets
such as bonds, stocks, currency, interest rates, commodities, etc – Derivatives.

(2) Factor payment received by labour in the form of money – Wages.

(3) A statistical tool to measure changes in an economic variable over a period of

time – Index numbers.

(4) The nature of elasticity of demand for essential goods – Relatively less elasticity
of demand.

(5) A state beyond the point of satiety – A state of dissatisfaction.

Q. 2. (A)
(1) (A) Identified concept : Time utility.
(B) Explanation of concept : Utility increased/ derived by changing the time
of utilization of a commodity is called time utility.
(2) (A) Identified concept : Exceptional supply due to urgent need for cash.
(B) Explanation of concept : In exceptional cases, if a seller needs cash
urgently he / she is forced to sell more even at a less prices / below market
prices. Therefore, the sale of goods influenced by the urgent need for cash
is considered as an exception to the Law of Supply.

SOLUTIONS TO NAVNEET PRACTICE PAPERS : STD XII (ECONOMICS) 1

 (3) (A) Identified concept : Composite Index Numbers.
(B) Explanation of concept : Index numbers that are computed for measuring
general change in a group of variables over a period of time or between two
different localities is known as Composite Index Numbers.
(4) (A) Identified concept : Product for self consumption.
(B) Explanation of concept : The product for self-consumption is the part of
the product that is set aside to meet the needs of oneself and one’s family.
(5) (A) Identified concept : Ancillary functions of commercial banks.
(B) Explanation of concept : Commercial banks provide many customer
services to the customers. The function of providing these services is called
ancillary functions of commercial banks.

Q. 2. (B)

(1) Special Assessment Special Levy

1. Meaning

The payment made by the citizens of A duty levied by the government on un-
a particular locality in exchange for healthy items with the basic intention
certain special facilities given to them of discouraging citizens from consum-
by the authorities is known as special ing unhealthy items is known as special
assessment. levy.

2. Examples

A special tax levied by local bodies on Duty levied on wine, opium and other
the residents of a particular area where intoxicants are the examples of special
extra / special facilities of roads, energy, levy.
water supply are provided is an example
of special assessment.

(2) Perfectly Elastic Demand Unitary Inelastic Demand

1. Meaning

When a slight proportionate change When the proportionate change in the

in the price of a commodity brings price of a commodity brings exactly
an infinite (unlimited) proportionate equal proportionate change in its
change in its quantity demanded, the quantity demanded, the demand is said
demand is said to be perfectly elastic. to be unitary elastic.

2. Numerical Value

In the case of perfectly elastic demand, In the case of unitary elastic demand,
the numerical value of the elasticity of the numerical value of the elasticity of
demand is infinite. demand is one.

2 NAVNEET PRACTICE PAPERS : STD. XII (COMMERCE)

(3) Increase in Supply Decrease in Supply

1. Meaning

A rise in supply caused by favourable A fall in supply caused by unfavourable

changes in other factors than price is changes in other factors than price is
called increase in supply. called decrease in supply.

2. Equilibrium point

In increase in supply, the new In decrease in supply, the new

equilibrium point of price and supply equilibrium point of price and supply
shifts from the left to the right on the shifts from the right to the left on the
new supply curve. new supply curve.

(4) Trends in Imports of Foreign

Trends in Exports of Foreign Trade
Trade

1. Meaning

The import trend of foreign trade is the The export trend of foreign trade is the
tendency of a country to reflect goods tendency of a country to reflect goods sold
purchased from other countries, total to other countries, the total dimensions
dimensions of goods purchased from of goods sold to other countries, the total
other countries, total value to be paid for value derived from goods sold to other
goods purchased from other countries, countries, etc.
etc.

2. Types

Trends in imports of foreign trade Trends in exports of foreign trade of

of India include the commodities India include the commodities like
like petroleum, gold, fertilizers, iron engineering goods, petroleum products,
and steel, sophisticated machinery, chemical products, gems and jewellery,
chemicals, etc. textiles and readymade garments, etc.

(5) Demand Deposits Time Deposits

1. Meaning

Deposits that are withdrawn on demand Deposits that are withdrawn after a
are called demand deposits. certain period of time are called time
deposits.

2. Types

Current deposits and savings deposits Recurring deposits and fixed deposits
are the types of demand deposits. are the types of time deposits.

SOLUTIONS TO NAVNEET PRACTICE PAPERS : STD XII (ECONOMICS) 3

Q. 3.
(1) The historical review of macroeconomics can be explained with the help of the
following points :
(1) Macro approach to study economy is comparatively new and is of recent origin.
(2) Though it is a modern approach, it did prevail even before the evolution of
microeconomics.
(3) In the 16th and 17th century, followers of Mercantilists (a group of English
merchants) advocated policies to the government which were based on macro
approach.
(4) In the 18th century, Physiocrats (French Thinkers) tried to analyse the concept of
national income and wealth.
(5) The Classical Economic theories of Prof. Adam Smith, Prof. Ricardo and Prof. J. S.
Mill discussed the determination of national income into total wages, total rent and
total profit. But their macro analysis was combined with micro analysis.
(6) The Neo-classical economists especially Dr. Marshall and Pigou, relegated
macroeconomics to the background. Their micro analysis ruled the world of
economics till the Great Depression of 1930s.
(7) After the Great Depression, revolutionary and fundamental changes took place
in the economic thinking. Lord John Maynard Keynes published his very
famous book the “General Theory of Employment, Interest and Money” in
1936. Keynes used macro approach to analyse economic problems. After the
publication of Keynesian theory, macroeconomic analysis became the more
important and popular approach to economic analysis. Therefore, the credit for the
development of macroeconomic approach goes to Lord Keynes.
(8) Besides Keynes, Malthus, Karl Marx, Wicksell, Walrus, Irving Fisher are other
economists who have participated in the development of macroeconomics.
(2) The features of monopolistic competition are as follows :

(a) Fairly large number of sellers : Although the number of sellers in a monopolistic

competition is large, it is still smaller than that in a perfectly competitive market.
Since number of sellers is large, each seller has a limited control over the market
supply. However, each seller has monopoly over his brand. Thus, in monopolistic
competition each producer enjoys an element of monopoly on one hand and on the
other they have to face competition from sellers selling close substitutes.

(b) Fairly large number of buyers : In monopolistic market, there are fairly large
number of buyers. Consequently, no single buyer can influence the price of the
product by changing his individual demand.

(c) Product differentiation : Product differentiation is the main feature of

monopolistic competition. In monopolistic competition, there are many firms
producing differentiated products. In this market, the product of each firm is

4 NAVNEET PRACTICE PAPERS : STD. XII (COMMERCE)

 in some way differentiated from the product of every other firm in the market.
Product differentiation may take the form of brand names, trademarks, peculiarity
of package or container, shape, quality, cover, design, colour, etc. This means
that the product of each firm may find close substitutes and the cross elasticity of
demand for each firm’s product is very high. For example, mobile handsets, soaps,
toothpastes, two wheelers, etc.

(d) Free entry and exit : Under monopolistic competition there is freedom of entry
and exit. The new firms are free to enter the market if there is opportunity of
earning profit. Similarly, existing firms can exit the market, if they find it difficult
to survive due to possibility of losses.
(3)

Commodity Base Year Current Year

P0 q0 P0q0 P1 Q1 P1q1
A 40 15 600 70 20 1400
B 10 12 120 60 22 1320
C 50 10 500 90 18 1620
D 20 14 280 100 16 1600
E 30 13 390 40 15 600

Total ∑p0q0 1890 ∑p1q1 = 6540

∑p1q1
Value Index Number V01   100
∑p0q0
6540
 V01  100
1890
65400
 V01
189
 V01 346.031
 Value Index Number = 346.031
(4) Co-operative banks in the organised sector of money market of India can be
explained with the help of the following points :

(1) Co-operative banks came into existence in India under the Co-operative Credit
Societies Act, 1904. Co-operative banks cater to the credit needs of the local people
and thereby complement the efforts of commercial banks.

(2) Co-operative banks mainly cater to the banking needs of low and middle income
groups.

(3) The co-operative banking sector in India has a three tier co-operative credit
structure like (i) Primary Co-operative Society (in rural areas), (ii) District
Central Co-operative Bank (in rural and urban areas) and (iii) State Co-operative
Bank (Apex Bank).

SOLUTIONS TO NAVNEET PRACTICE PAPERS : STD XII (ECONOMICS) 5

 (4) The three-tier co-operative credit structure of the co-operative banking sector in
India is explained with the help of the following diagram :

(5) Change in demand can be explained with the help of the following points :
(a) Meaning : Price remaining constant, a rise or fall in demand due to the change in
the other factors, is called change in demand. Change in demand is of the following
two types :
(b) Increase in Demand : Price remaining constant, a rise in demand due to favourable
changes in other factors, is called increase in demand.
(c) Decrease in Demand : Price remaining constant, a fall in the demand due to
unfavourable changes in other factors is called decrease in demand.
(d) Diagram : Change in demand can be explained with the help of the following
diagram :

  From the above diagram, it can be seen that price remaining equal, i.e. OP due
to favourable changes in other factors, demand rises from OQ to OQ1. This rise in
demand is called as increase in demand. In increase in demand, demand curve shifts
to the right of the original demand curve and the equilibrium point of price and
demand shifts from the left to the right (e to e1) on the new demand curve.
  On the other hand, price remaining equal, i.e. OP due to unfavourable changes in
other factors, demand falls from OQ to OQ2. This fall in demand is called as decrease in
demand. In decrease in demand, demand curve shifts to the left of the original demand
curve and the equilibrium point of price and demand shifts from the right to the left
(e to e2) on the new demand curve.

6 NAVNEET PRACTICE PAPERS : STD. XII (COMMERCE)

Q. 4. 
(1) No, I disagree with this statement.
Reasons :
(1) Macroeconomics is the study of entire economy. On the other hand, microeconom-
ics is a study of a particular segment of an economy.
(2) Macroeconomics studies aggregate demand, aggregate supply, national income,
general price level, etc. On the other hand, microeconomics studies individual
demand, individual supply, individual income, price determination of particular
product, etc.
(3) Macroeconomics follows general equilibrium analysis. On the other hand,
microeconomics follows partial equilibrium analysis. Macroeconomics uses
lumping method. On the other hand, microeconomics uses slicing method.
Therefore, macroeconomics is different from microeconomics.
(2) No, I disagree with this statement.
Reasons :
Following are some of the other determinants of demand :
(1) Price : Price is one of the most important factors that affect market demand.
Usually, larger quantity is demanded at a lower price and vice versa.
(2) Income : Income is yet another important factor that affects market demand.
Income affects the purchasing power of a consumer. Income and demand are
directly related to each other. Normally, demand rises with increasing income and
vice versa.
(3) Prices of Substitute Goods : Market demand also gets influenced by the
prices of substitutes. If a substitute is available at a lower price, people demand the
substitute goods in greater quantities than the commodity in question. For example,
if the price of tea falls, demand for coffee tends to fall.
(3) No, I disagree with this statement.
Reasons :
(1) Agricultural goods require suitable climatic conditions and sufficient period of
growth. Therefore, the supply of agricultural goods cannot be increased overnight
though their prices rise.
(2) Similarly, favourable weather conditions brings in a bumper harvest. In such con-
ditions the supply of agricultural goods may rise even at their constant prices.
(3) Similarly, unfavourable weather conditions brings in poor harvest. In such
conditions the supply of agricultural goods may fall even at their constant price.
Thus, the Law of Supply is not applicable for agricultural goods.

SOLUTIONS TO NAVNEET PRACTICE PAPERS : STD XII (ECONOMICS) 7

 (4) Yes, I agree with this statement.
Reasons :
(1) In perfect competition, there is a large number of potential sellers selling their com-
modity in the market.
(2) In perfect competition, the seller’s number is so large that the single seller cannot
influence the market price.
(3) The price of the product in perfect competition is determined by market supply and
market demand of a commodity and it is accepted by all sellers and buyers in perfect
competition.
Thus, seller is price taker in the perfect competition.
(5) Yes, I agree with this statement.
Reasons :
The following are the various steps in constructing quantity index number :
(1) ∑q1  Adding the quantities of various commodities of the current year.
(2) ∑q0  Adding the quantities of various commodities of the base year.
∑q1
(3) 
  100 Multiplying the ratio of sum of the quantities of various commodities
∑q0
of the current year and sum of the quantities of various goods of the base year
by 100.
Q. 5. 
(1) (i)

(ii) Other factors remaining constant, a rise in demand due to a fall in price is
called expansion of demand. In expansion of demand, new equilibrium point of
price and demand moves downwards from the left to the right on the same
demand curve.

8 NAVNEET PRACTICE PAPERS : STD. XII (COMMERCE)

 (2)
(i) Marginal utility curve slopes downwards from the left to the right. Initially it has
positive value, then its value becomes zero and at the end it may have negative
value.
(ii) At 5th unit of consumption, the marginal utility is zero. Thus, it is a point of
satiety. If a consumer consumes 6th unit of consumption he will get disutility
from it, i.e. at 6th unit, marginal utility will be  2. Thus, at 6th unit, consumer
will derive dissatisfaction.
(3)
(i) Gold is the second most imported commodity in India after petroleum. India’s gold
import fell significantly to 27.5 billion in 2013-14 from 53.3 billion in 2010-11. It has
also fallen recently in 2020. However, the import of gold is huge as gold is evident
in India’s festivals, weddings, sweets and even cloths.
(ii) Gold import was declined in 2013-14 due to policy of restrictions by the government
on gold imports. Gold import was declined in 2020 due to the spread of COVID-19
(Corona Virus).
Q. 6.
(1) The importance of elasticity of demand can be explained with the help of the
following points :
(a) Importance to producers : The concept of elasticity of demand helps the
seller in fixing the prices of his products. If the demand for a commodity sold by the
producer is inelastic, the producer can charge higher price for such a commodity
and can earn the maximum profit. On the other hand, if the demand for a commodity
sale by the producer is elastic, the producer can charge lower price for such a com-
modity and can earn the profit by its maximum sale.

(b) Importance to the Government : The concept of elasticity of demand helps the fi-
nance minister and the government in framing the taxation policy. If the demand
for a particular commodity is inelastic, the government can collect more revenue
by imposing heavy taxes on such a commodity. Therefore, generally heavy taxes are
imposed on commodities like cigarettes, liquor, etc. On the other hand, if the demand
for a particular commodity is elastic, the government can impose low taxes and can
encourage sale of such a commodity and can collect revenue from it.

(c) Importance in factor pricing : The concept of elasticity of demand also helps

in the determination of wages of workers. For example, the demand for skilled
employees performing higher intellectual work is less elastic, therefore they can
demand more salary. On the other hand, the demand for unskilled labourer
performing physical work is more elastic, therefore they have to accept
comparatively low wages.
(d) Importance in foreign trade : The concept of elasticity of demand is helpful to

SOLUTIONS TO NAVNEET PRACTICE PAPERS : STD XII (ECONOMICS) 9

 the government in determining the terms and conditions for international trade
and framing the export and import policy. If the demand for a commodity exported
is inelastic, the country can raise the price of that commodity in the international
market. On the other hand, if the demand for a commodity exported is elastic, the
country can focus on its maximum export at low price in the international market.
(e) Public utilities : The concept of elasticity of demand is helpful to government in tak-
ing decisions regarding manufacturing and selling various goods and services by vari-
ous sectors in a mixed economy. In order to avoid the exploitation of the consumers
and to promote the social welfare, public sector manufactures and sells certain goods
and services having less elastic demand. For example, public utilities like railways
have inelastic demand. Therefore to avoid the exploitation of consumers, the govern-
ment can either subsidise or nationalise such public utilities. On the other hand, gov-
ernment allows private sector to produce and sell those commodities having relatively
elastic demand.
(f) Proportion of expenditures : The concept of elasticity of demand is also
helpful in taking decisions regarding consumption of various goods and services.
If a proportion of expenditure on a particular product in a person’s total income
is small and recurring, the demand for such a product is relatively inelastic. For
example, expenditure on a newspaper. Consumer can regularly consume such
a commodity. On the other hand, if a proportion of expenditure on a particular
product in a person’s total income is large and occasional, the demand for such a
product is relatively elastic. With proper economic planning, a consumer can
consume such a commodity. For example, planned expenditure on luxury goods.
(2) Expenditure method of measuring national income is also known as Outlay
Method. According to this method, national income is calculated by summing up
all consumption expenditure and investment expenditure made by all individuals,
firms as well as the government of a country during a year. Thus, gross national
product is found by using the following formula :
NI = C + I + G + (X-M) + (R-P). The expenditure method can be explained with the
help of the following points :
(a) Private Final Consumption Expenditure (C) : Private final consumption
expenditure by households may be on non-durable goods such as food which are
used immediately, or on durable goods such as car, computer, television set, washing
machine, which are generally used for a longer period of time or on services such
as transport services, medical services, etc. National income takes into account the
private final consumption expenditure.
(b) Gross Domestic Private Investment Expenditure (I) : It refers to expenditure

10 NAVNEET PRACTICE PAPERS : STD. XII (COMMERCE)

 made by private businesses on replacement, renewals and new investments.
National income takes into account the gross domestic private investment
expenditure.
(c) Government’s Final Consumption and Investment Expenditure (G) :
Government’s final consumption expenditure refers to the expenditure in-
curred by government on various administrative services like law and order,
defense, education, etc. Government’s investment expenditure refers to the
expenditure incurred by government on creating infrastructural facilities such as
construction of roads, railways, bridges, dams, canals, which are used by the busi-
ness sector for production of goods and services in any economy. National income
takes into account the government’s final consumption expenditure and invest-
ment expenditure.
(d) Net Foreign Investment / Net Exports (X-M) : It refers to the difference between
exports and imports of a country during a period of one year. National income takes
into account the value of net exports.
(e) Net receipts (R-P) : It refers to the difference between expenditure incurred by
foreigners in the country (R) and expenditures incurred abroad by residents (P).
National income takes into account the value of net receipts.
(3) (A) Definitions :
(1) According to Hugh Dalton : “Public finance is one of those subjects which are on
the borderline between economics and politics. It is concerned with the income and
expenditure of public authorities and with the adjustment of one with the other.”
(2) According to Prof. Findlay Shirras : “Public finance is the study of the
principles underlying the spending and raising of funds by public authorities.”
(B) Meaning and Nature :
(1) The concept of public finance is a combination of two words viz. ‘public’ and
‘finance’. ‘Public’ is a collective for the individuals living within an administrative
territory. In economics, the term public is used to signify the government which
represents the public. ‘Finance’ simply means income and expenditure. (2) Thus
‘public finance’ is a branch of economics studying the principles of income and
expenditure of the central government, state government and governments at local
levels.
________

SOLUTIONS TO NAVNEET PRACTICE PAPERS : STD XII (ECONOMICS) 11