Solution
2+3
Class 12 - Economics
Section A
1.
(c) M1
Explanation:
M1
2.
(d) Low
Explanation:
Low
3.
(b) Total money reserves become equals to initial deposit
Explanation:
Total money reserves become equals to initial deposit
4.
(d) Primary deposits
Explanation:
Primary deposits
5. (a) Disposable income.
Explanation:
Because savings are started when first taxes are deducted from income.
6.
(b) APC
Explanation:
APC
7. (a) The value of consumption exceeds the value of income
Explanation:
APC = C
APC > 1 when C > Y
8.
(c) A is true but R is false.
Explanation:
A is true but R is false.
9.
(c) Fiscal deficit
Explanation:
Fiscal deficit
10. (a) Open Market Operations
Explanation:
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Open Market Operations
11.
(c) Inflationary
Explanation:
Doing so would increase money supply leading to lower interest rates and further excess demand via the multiplier process.
12. (a) Both the statements are false.
Explanation:
Both the statements are false.
13.
(d) Involuntary Unemployment
Explanation:
Involuntary Unemployment
14.
(c) not defined (∞ )
Explanation:
not defined (∞ )
15. (a) ₹ 2,500 Crore
Explanation:
₹ 2,500 Crore
16.
(c) A is true but R is false.
Explanation:
A is true but R is false.
17.
(d) Excess Demand
Explanation:
Excess Demand
18.
(c) Decrease in bank rate
Explanation:
Decrease in bank rate
19.
(b) Raises the general price level
Explanation:
Raises the general price level
20.
(d) A is false but R is true.
Explanation:
A is false but R is true.
Section B
21. i. By separating the act of sale and purchase, money has overcome the problem of double coincidence of wants.
ii. Money serves as a medium of exchange. Accordingly, the scope of exchange has greatly widened.
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iii. Money facilitates storage of value which is difficult in the barter system.
iv. Money facilitates satisfaction of wants even in the smaller units which is not possible in the barter system.
22. i. AD = Consumption expenditure (C) + Investment demand (I)
AD = 600 + 300 = ₹ 900 crores.
ii. We know, aggregate supply (AS) and national income (Y) mean one and the same thing.
So, AS = ₹ 1,000 crores
iii. Given AS = 1,000 and C = 600 (∵ Y = C + S)
It means, Saving (S) = Y - C = ₹ 400 Crore
23. Reserve Bank of India (RBI) can use the instrument of Cash Reserve Ratio or CRR to raise the investment level in economy
which will help to boost the economic growth.
If RBI lowers CRR, then it will raise the lending capacity of commercial banks. As a result, borrowing from banks will increase,
which will lead to rise in demand for investment funds. As investment increase, it will definitely boost up the rate of economic
growth.
24. Full employment equilibrium Underemployment equilibrium
It refers to the situation where AD = AS and all those who are It refers to the situation where AD = AS, but all those who are
able to work and willing to work (at the existing wage rate) are able to work willing to work (at the existing wage rate) are not
getting work. getting work.
It is a stable equilibrium and real output reaches its maximum It is not a stable equilibrium and real output does not reach its
point. maximum point.
Attempt to increase production beyond full employment Attempt to increase production beyond underemployment
equilibrium causes an inflationary gap. equilibrium does not cause an inflationary gap.
Section C
25. Reserve ratio (RR) is the minimum reserves that a commercial bank must maintain as per the directions of the central bank. Credit
creation is inversely related to the reserve ratio.
Example: Suppose the initial deposit is ₹ 1,000
Case Reserve Ratio (RR) Credit Multiplier ( 1
RR
) Credit Creation (Initial Deposit × Credit Multiplier)
I 0.2
1
0.2
=5 1,000 × 5 = ₹ 5,000
II 0.5
1
0.5
=2 1,000 × 2 = ₹ 2,000
The above example, depicts the effect of rise in Reserve Ratio on credit creation by the commercial banks.
26. Given,
National income (Y) = 900
Marginal Propensity to save (MPS) = 0.10
Investment expenditure = 80
Therefore, marginal propensity to consume
(MPC) = 0.90 (MPC + MPS = 1)
Now, we know that
Y=C+1
Here, C = c̄ + bY, where b = MPC
¯
Putting the given value, we get
900 = c̄ + 0.90 × 900 + 80
¯
900 = c + 810 + 80
¯¯
c = 900 - 800
¯¯
c = 10
¯¯
27. a. Inflation in the economy may be the economic issue indicated in the above text. The situation of excess demand may be the
underlying cause behind the decision taken by the Reserve Bank of India (RBI) to keep the benchmark lending rate unchanged
at 6·5%.
b. If the rate setting panel would have decreased the benchmark lending rate, the commercial banks may reduce their lending
rates. Consequently, it may encourage the borrowings by the general public leading to an increase in the money supply in the
economy.
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28. Given, C = 200 + 0.75Y; I0 = 300
a. At equilibrium level of income
Y=C+I
Y = (200 + 0.75Y) + 300
0.25Y = 500
Y = 2,000
b. At the Equilibrium level of income
AD = Y = AS
∴ AD = 2,000
c. MPS = 1 - MPC
d. MPS = 1 - 0.75 = 0.25
29. The national income determination can be better understood with the help of following diagram:
The two alternative approaches of national income determination are:
i. AD = AS which is on E in the upper part of diagram when AD curve intersects the 45o line with equilibrium income OM.
ii. S = I which is E1 in the lower part of the diagram when saving curve intersects the investment curve at E1 with OM1 as the
equilibrium income level.
30. India’s GDP contracted 23.9% in the April-June quarter of 2020-21 as compared to same period of 2019-20, suggesting that the
lockdown has hit the economy hard. The situation suggests that Aggregate Demand is less than Aggregate Supply. Following two
fiscal measures may be taken to control it:
a. Decrease in Taxes: To curb the situation, the government may decrease the taxes. This may increase the purchasing power in
the hands of the general public. This may increase the Aggregate Demand in the economy to bring it equal to the Aggregate
Supply.
b. Increase in Government Expenditure: The government may also increase its expenditure. This may increase the purchasing
power in the hands of the general public which in turn may increase the Aggregate Demand in the economy to bring it equal to
the Aggregate Supply.
Section D
31. The alternative definitions of money supply in India can be the four measures of money supply. They are explained as under:
Measure of M1 Include:
i. Currency notes and coins with the public (excluding cash in hand of all commercial banks [C]
ii. Demand deposits of all commercial and co-operative banks excluding inter-bank deposits. (DD),
Where demand deposits are those deposits which can be withdrawn by the depositor at any time by paid on such deposits.
iii. Other deposits with RBI [O.D]
M1 = C + DD + OD
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Where, Other deposits are the deposits held by the RBI of all economic units except the government and banks. OD includes
demand deposits of semi-government public financial institutions (like IDBI, IFCI, etc.), foreign central banks and governments,
the international Monetary Fund, the World Bank, etc.
Measures of M2
i. M1[C + DD + OD]
ii. Post office saving deposits
Measures of M3
i. M1
ii. Time deposits of all commercial and co-operative banks.
Where, Time deposits are the deposits that cannot be withdrawn before the expiry of the stipulated time for which deposits are
made. Fixed deposits are made. Fixed deposit is an example of time deposit.
Measures of M4
i. M3
ii. Total deposits with the post office saving organization (excluding national saving certificates).
32. i. The shaded area OS1B1 represents the dis-savings.
ii. Point B indicates break-even level of income where Consumption (C) is equal to Income (Y) or Savings (S) are zero.
iii. Average Propensity to Consume will be equal to one at point B, as here Average Propensity to Save is zero. The correspending
level of income = OB1
iv. Point B indicates break-even level of income where Savings (S) are zero. Thus saving curve above the point B signifies the
positive savings at levels of income greater than OB1 level of income.
v. APS will be equal to zero at point B1 as it indicates break-even level of income where savings (S) are zero or consumption (C)
is equal to Income (Y), i.e. at OB1 level of income.
vi. 'OS1' is the amount of dissavings at zero level of income. means autonomous consumption.
33. i. Bank of issue Central Bank of the country has the sole authority of currency issue in the country, which gives it a monopoly
issuing currency. As in India, RBI issues the currency except for one rupee notes which are issued by the Ministry of Finance
of the Government of India. However, both currency notes and coins are circulated by RBI, which gives RBI the power to
control, supervise and enhance the money supply in the economy.
ii. Banker's bank Central Bank keeps the cash balances of Commercial Banks and issues loans to them on requirements in the
same manner as the Commercial Bank does for its customers. A Central Bank has almost the same relationship with the other
Commercial Banks of the country that the Commercial Banks have with the common public. That is why the Central Bank is
also called banker's bank. Further central bank is the lender of last resort for other banks in difficult times because on such
occasions there is no hope of getting help from any competing institution.
34. Monetary policy deals with the control of liquidity or flow of credit in the market with a view to managing inflationary or
deflationary gaps in the economy. Two monitory measures to correct the inflationary gap are:
a. Bank rate: It refers to the rate of interest at which the RBI lends money to commercial banks. The increase in the bank rate is
often followed by the increase in the market rate of interest. Accordingly, the cost of capital increases. This lowers the demand
for credit and therefore, the supply of money tends to fall. Accordingly, inflation is corrected.
b. Cash reserve ratio: it refers to the minimum percentage of a bank's total deposits required to be kept with the RBI. It is fixed
by the RBI and is varied from time to time to regulate the supply of money in the economy. When the supply of money is to
be reduced, CRR is raised.
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