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 CBSE 2026

ECONOMICS
Including Case Based Questions

CLASS 12

Chapter-wise Question Bank

Based on Previous 20 Years 63 Papers

NODIA AND COMPANY

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CBSE Class 12th Economics Question Bank
Edition May 2025
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 CONTENTS
CBSE Examination Paper 2025 5-16

PART-A Introductory Macroeconomics

CHAP 1. National Income and Related Aggregates 17-85

CHAP 2. Money and Banking 86-116

CHAP 3. Determination of Income and Employment 117-186

CHAP 4. Government Budget and the Economy 187-225

CHAP 5. Foreign Exchange Market and Balance of Payments 226-261

PART-B Indian Economic Development

CHAP 6. Indian Economy on The Eve of Independence 262-286

CHAP 7. Indian Economy (1950-1990) 287-323

CHAP 8. Liberalisation, Privatisation and Globalisation : An Appraisal 324-356

CHAP 9. Human Capital Formation in India 357-387

CHAP 10. Rural Development 388-423

CHAP 11. Employment : Growth, Informalisation and Other Issues 424-454

CHAP 12. Environment and Sustainable Development 455-484

CHAP 13. Comparative Development Experiences of India & Its Neighbors 485-514

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 CBSE EXAMINATION PAPER 2025

CBSE EXAM PAPER 2025

CLASS XII
ECONOMICS
Time : 3 Hours Max. Marks : 80
General Instructions :
1. This question paper contains 34 questions. All questions are compulsory.
2. This question paper contains two sections :
Section A – Macro Economics
Section B – Indian Economic Development
3. This question paper contains 20 Multiple Choice Type Questions of 1 mark each.
4. This question paper contains 4 Short Answer Type Questions of 3 marks each to be answered in 60 to 80
words.
5. This question paper contains 6 Short Answer Type Questions of 4 marks each to be answered in 80 to 100
words.
6. This question paper contains 4 Long Answer Type Questions of 6 marks each to be answered in 100 to 150
words.
7. Attempt all parts of a question together.
8. In addition to this, NOTE that a separate question has been provided for Visually Impaired candidates in
lieu of questions having visual inputs, map etc. Such questions are to be attempted by Visually Impaired
candidates only.
9. There is no overall choice in the paper. However, an internal choice has been provided in few questions. Only
one of the choices in such questions has to be attempted.

2. Suppose for an economy, autonomous consumption

SECTION-A stands as ₹100 crore and total consumption is
₹130 crores. The value of induced consumption
(Macro Economics) would be ₹_____ crore.
(A) 30
1. As the Banker to the Bank, Reserve Bank of India (B) 80
performs all functions except _____. (C) 100
(A) Purchase and sale of securities on behalf of (D) 130
general public
(B) Maintaining current account for Commercial Ans :
Banks (A) 30
(C) Clearing and settlement of Interbank Autonomous consumption is the base level of
transactions consumption that occurs regardless of income.
(D) Facilitating governmental transactions Here, with total consumption at ₹130 crores
and autonomous consumption at ₹100 crores,
Ans :
the induced portion is the difference, ₹30
(A) Purchase and sale of securities on behalf of crores. Therefore, induced consumption exactly
general public equals total consumption minus autonomous
The Reserve Bank of India acts as the banker consumption, confirming option (A) as the correct
to commercial banks and the government by answer, indeed.
providing services like maintaining current
accounts and facilitating interbank settlements. 3. Value Addition = _____ – Value of Intermediate
However, it does not undertake retail banking Consumption.
functions, such as purchasing or selling securities (i) Domestic sales
on behalf of the general public. Thus, indeed, (A) (ii) Sales – change in stock
is correct. (iii) Value of output
(iv) (Number of units produced) × (Price per
unit)

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PAGE 6 CBSE CLASS 12 ECONOMICS CHAPTERWISE PYQ

Options: In Keynesian economics, the 45° line, known

(A) (i) and (ii) as the reference line, is drawn from the origin.
(B) (ii) and (iii) It represents the equilibrium condition where
(C) (ii), (iii) and (iv) aggregate income equals aggregate expenditure.
(D) (iii) and (iv) This graphical tool is fundamental for analyzing
income determination, thereby confirming option
Ans :
(C) as correct, without exception.
(D) (iii) and (iv)
Value addition is calculated as the value of output 6. Identify, which of the following is not to be
minus the value of intermediate consumption. considered while estimating Revenue Deficit of a
The term “value of output” can be directly country.
stated or derived by multiplying the number of (A) Wages and salaries paid by the government
units produced by the price per unit. Therefore, (B) Interest payments made by the Central
expressions (iii) and (iv) correctly represent this Government
measure, making option (D) correct. (C) Direct Tax Collection
(D) Expenditure incurred on construction of
4. Read the following statements: Assertion (A) and flyover
Reason (R). Choose one of the correct options
given below: Ans :
Assertion (A): In case of public goods no one can (D) Expenditure incurred on construction of
be excluded from enjoying the benefits. flyover
Reason (R): Public goods are non-rivalrous and Revenue deficit is determined by comparing
non-excludable in nature. revenue receipts with revenue expenditures,
(A) Both Assertion (A) and Reason (R) are true which include current expenses like wages and
and Reason (R) is the correct explanation of interest payments. Capital expenditure, such as
Assertion (A). spending on flyover construction, is treated as
(B) Both Assertion (A) and Reason (R) are true, an investment rather than a recurring expense.
but Reason (R) is not the correct explanation Therefore, flyover construction is excluded,
of Assertion (A). making option (D) correct.
(C) Assertion (A) is true, but Reason (R) is false.
(D) Assertion (A) is false, but Reason (R) is true. 7. The monetary policy is formulated by the
______ in the Indian economy.
Ans : (A) Central Government
(A) Both Assertion (A) and Reason (R) are true (B) State Governments
and Reason (R) is the correct explanation of (C) Reserve Bank of India
Assertion (A) (D) World Bank
Public goods are defined by two key characteristics: Ans :
non-rivalry and non-excludability. The assertion
that no one can be excluded from enjoying public (C) Reserve Bank of India
goods is true because of non-excludability, which The formulation of monetary policy in India is
is precisely explained by the reason provided. the exclusive responsibility of the Reserve Bank
Hence, both the assertion and reason are correct, of India. The RBI regulates the country’s money
and the reason explains the assertion, making (A) supply, interest rates, and liquidity, independent
correct, absolutely correct. of the central or state governments. This central
role in monetary management confirms option
5. In the Keynesian Economics, _____ starts from (C) as the correct answer.
the origin and is always drawn at an angle of 45°.
(A) Consumption curve 8. To arrive at the value of equilibrium level of
(B) Aggregate demand curve income, there must exist an equality between ex-
(C) Reference line ante ______ and ex-ante ______.
(D) Investment curve (i) Aggregate Demand, Aggregate Supply
(ii) Aggregate Demand, Savings
Ans : (iii) Aggregate Demand, Investment
(C) Reference line (iv) Savings, Investment

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 CBSE EXAMINATION PAPER 2025

Options: Ans :
(A) (i) and (ii) (C) Balanced
(B) (i) and (iv) A balanced budget occurs when government
(C) (ii) and (iii) expenditure exactly equals government revenue,
(D) (iii) and (iv) implying no deficit or surplus exists. In this case, the
Ans : government spends an amount equal to its revenue
collections. This fiscal scenario, representing
(B) (i) and (iv) prudent financial management, confirms option
In Keynesian theory, equilibrium income is (C) as the correct description of such a budget.
achieved when planned aggregate expenditure
equals actual output, meaning aggregate demand 11. (a) “The government generally levies higher
equals aggregate supply. Simultaneously, planned Goods and Services Tax (GST) on socially
savings must equal planned investment to avoid undesirable products like cigarettes, tobacco,
unintentional inventory changes. Therefore, both liquor etc.” Identify and explain the indicated
conditions—(i) aggregate demand equals aggregate government budget objective in the above
supply and (iv) savings equal investment—must statement.
hold, validating option (B) or
(b) Two friends Ramesh (a software engineer) and
9. Read the following statements: Assertion (A) and Pihu (a bakery owner) are discussing their
Reason (R). Choose one of the correct options contribution to the nation’s economy through
given below: tax payments. Ramesh earns ₹ 8,00,000 per
Assertion (A): If the value of Marginal Propensity year, which makes him liable to pay income
to Save is 0.5, Marginal Propensity to Consume tax. Pihu pays Goods and Service Tax (GST)
will be equal to Marginal Propensity to Save. on the sale of cakes and pastries.
Reason (R): Sum of Marginal Propensity to On the basis of the given text, identify whether
Consume and Marginal Propensity to Save always Ramesh is paying a direct tax or an indirect
equals to unity. tax. Explain valid differences between two
(A) Both Assertion (A) and Reason (R) are true types of taxes.
and Reason (R) is the correct explanation of
Assertion (A). Ans :
(B) Both Assertion (A) and Reason (R) are true, (a) The statement indicates the use of a “sin tax”
but Reason (R) is not the correct explanation as a government budget objective. Sin taxes
of Assertion (A). are higher levies on socially undesirable goods
(C) Assertion (A) is true, but Reason (R) is false. to discourage their consumption, correct
(D) Assertion (A) is false, but Reason (R) is true. negative externalities, and promote public
Ans : health and social welfare. By increasing the
cost of items like cigarettes, tobacco, and
(A) Both Assertion (A) and Reason (R) are true liquor, governments aim to reduce their
and Reason (R) is the correct explanation of consumption, lessen associated healthcare
Assertion (A) and social costs, and raise additional revenue
The marginal propensity to consume (MPC) and that can be allocated towards mitigating the
the marginal propensity to save (MPS) always adverse impacts of these products. Overall, it
sum to one. Hence, if the MPS is 0.5, then MPC serves purposes.
must also be 0.5. This direct mathematical
relationship confirms both the assertion and the or
reason, making option (A) correct. (b) Ramesh is paying a direct tax, specifically
10. The budget under, which the government may income tax. Direct taxes are levied directly
spend an amount equal to the revenue it collects on an individual’s income or wealth and
is referred as ______ Budget. cannot be passed on to someone else. In
(A) Surplus contrast, indirect taxes such as GST are
(B) Deficit imposed on goods and services and are
(C) Balanced collected by sellers, who then pass the cost
(D) Deflationary onto consumers. Direct taxes are generally

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PAGE 8 CBSE CLASS 12 ECONOMICS CHAPTERWISE PYQ

progressive, meaning higher incomes incur financial management and supporting

a higher tax burden, while indirect taxes overall economic operations, thereby
tend to be regressive, affecting lower-income strengthening national development.
groups proportionately more.
or
12. Define Real Gross Domestic Product. How is it (b) An increase in the reserve ratio from 20%
different from Nominal Gross Domestic Product? to 25% significantly reduces the money
Ans : multiplier effect, thereby curbing credit
creation by commercial banks. With primary
Real Gross Domestic Product (GDP) measures
deposits of ₹1,000, the initial multiplier at
an economy’s output adjusted for inflation, using
20% (1/0.20) allowed up to ₹5,000 in credit.
constant prices from a selected base year. This
When the reserve ratio increases to 25%,
adjustment isolates changes in the quantity of
the multiplier falls to 1/0.25 or 4, reducing
goods and services produced, offering a clearer
potential credit creation to ₹4,000. This
picture of economic growth over time. In contrast,
means banks must retain a larger fraction
Nominal GDP is calculated using current market
of deposits as reserves, leaving less available
prices, so it reflects both changes in production
for lending. Consequently, the overall supply
and fluctuations in price levels. Consequently,
of credit contracts, which can slow economic
while Nominal GDP can be influenced by inflation
activity and reduce investment opportunities.
or deflation, Real GDP provides a more accurate
This policy move tightens the money market.
assessment of an economy’s true performance.
14. (a) On the basis of the given image (showing
13. (a) Justify the following statements with valid
inflation in India), explain the steps which
arguments:
may be taken by the Government of India to
(i) Money supply in an economy is an
control the indicated macroeconomic issue.
example of a stock variable.
(ii) The Central Bank provides several
Banking services to the government.
or
(b) Assuming for a hypothetical economy, Central
Bank increases the Reserve Ratio from 20% to
25% and the total primary deposits stand at
₹ 1,000. Explain the effect of rise in Reserve
Ratio on credit creation by commercial banks.
Ans :
(a) (i) Money Supply as a Stock Variable :
Money supply is a stock variable because
it is measured at a specific point in time.
It represents the total money available in
an economy at a given moment, offering
a snapshot of liquidity. Unlike flow
variables such as income or expenditure, (b) Define ‘Open Market Operations’.
which measure changes over a period,
money supply captures the current state Ans :
of money circulation. (a) To control inflation, the Government of India
(ii) Central Bank’s Banking Services to can reduce unnecessary public expenditure,
the Government : The Central Bank thereby lowering the fiscal deficit. Additionally,
provides several banking services to the it may increase direct or indirect taxes to
government. It maintains government curb excessive demand. Strengthening supply
accounts, facilitates transactions, chains through infrastructural development
offers loans, and manages public debt. and streamlined regulations can reduce
These services promote fiscal stability production bottlenecks, stabilizing prices.
and liquidity, ensuring efficient public Encouraging foreign investment and domestic

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 CBSE EXAMINATION PAPER 2025

manufacturing fosters competition, further (ii) Differentiate between factor income and
easing inflationary pressures. Ensuring transfer income.
effective coordination with the Reserve or
Bank of India for prudent monetary policies, (b) (i) “In a two sector economy, National
including higher interest rates, helps control Income is always less than Domestic
rising prices, fostering economic stability. Income.” Defend or refute the given
(b) Open Market Operations refer to the buying statement with valid reasons.
and selling of government securities by a central (ii) Gauhar has recently completed her
bank in the open market to regulate the money fashion designing studies and started a
supply and interest rates in the economy. boutique. To produce dresses for sale, she
purchased various materials, including
15. Suppose for an economy, government proposes a sewing machine, fabric, buttons and
investment projects for construction of thread. These items are essential for
expressways with an incremental investment of producing the dresses. Classify the
₹2400 crore. Assuming, 80% of increase in income material purchased by Gauhar as Final or
is spent on consumption. Intermediate goods, giving valid reasons
Estimate the following on the basis of above in support of the classifications.
information:
Ans :
(a) Change in income (ΔY)
(b) Change in consumption (ΔC) (a) (i) Estimation of Domestic Income (NDPFC):
Using the expenditure approach, first
Ans :
calculate GDP (market prices):
(a) Change in Income (ΔY) : Using the investment Private final consumption + Government
multiplier formula, 1/(1 – MPC), with MPC final consumption = 2000 + 1500 = 3500
= 0.8, the multiplier is 1/0.2 = 5. Multiplying Gross fixed capital formation + Addition to
the incremental investment of ₹2400 crore by stock = 1000 + 400 = 1400
5 gives ΔY = 5 × 2400 = ₹12000 crore. Net Exports = 700
(b) Change in Consumption (ΔC): Since 80% of
Thus, GDP = 3500 + 1400 + 700
the income increase is spent on consumption,
the induced change in consumption is ΔC = = 5600 crore.
MPC × ΔY = 0.8 × 12000 = ₹9600 crore. Next, adjust for net indirect taxes:
GDP at factor cost = 5600 – 200 = 5400 crore
16. (a) (i) On the basis of the data given below, Then, subtract depreciation (consumption of
estimate the value of Domestic Income fixed capital):
(NDPFC)
NDPFC = 5400 – 50 = 5350 crore
S. Items Amount (ii) Differentiate between Factor Income and
No. (₹ in crore) Transfer Income:
(1) Private final consumption 2,000 Aspect Factor Income Transfer
expenditure Income
(2) Government final 1,500 Definition Income earned Income
consumption expenditure by factors of received
(3) Gross domestic fixed 1,000 production for without a
capital formation contributing corresponding
to economic productive
(4) Addition to stock 400 output. contribution.
(5) Consumption of fixed 50 Source Derived from Comes from
capital wages, interest, government
(6) Net factor income from 100 rent, and redistributions
abroad profits from like pensions,
labor, capital, subsidies, and
(7) Net indirect Taxes 200 and land. welfare.
(8) Net Exports 700

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PAGE 10 CBSE CLASS 12 ECONOMICS CHAPTERWISE PYQ

Basis of Based Granted • Non-factor services such as travel,

Payment on active regardless transportation, insurance etc.
participation in of current • Transfers which do not involve any value in
production. production or exchange.
work effort. • Income which includes compensation of
employees and investment income.
Examples Salaries, Unemployment
dividends, benefits, The capital account reflects the net changes in
rent, interest social security financial claims on rest of the world.
payments. payments, and The capital account can be broadly broken up
other welfare into two categories:
transfers. • Non-debt flows such as direct and portfolio
investments.
or • Debt flows such as external assistance,
(b) (i) Refutation: In a two-sector economy, only commercial borrowings, non-resident deposits
households and firms exist and there is etc.
no foreign sector. National Income (NI) The sum of the two accounts indicates the overall
is defined as Domestic Income (DI) plus balance, which could be either be in surplus
net factor income from abroad. Since or deficit. The movement in overall balance is
net factor income from abroad is zero reflected in changes in international reserves of
in a two-sector economy, NI equals DI. the country.
Therefore, the statement that “National Source: https://mospi.gov.in/109-balance-
Income is always less than Domestic payments (adopted and modified)
Income” is incorrect. On the basis of the given text and common
(ii) Classification of Gauhar’s Purchases: understanding, answer the following questions:
1. Sewing Machine : This is a capital good (a) Define Balance of Payments.
used repeatedly over multiple production (b) Differentiate between the two accounts of
cycles. It is classified as a final good, Balance of Payments.
reflecting investment expenditure rather (c) Give the meaning of Balance of Payments
than intermediate consumption. deficit with formula.
2. Fabric, Buttons, and Thread : These items Ans :
are consumed during the production
(a) The Balance of Payments (BoP) is a
process and their value is embedded in
systematic record of all economic transactions
the final dresses. Thus, they are classified
between a country and the rest of the world
as intermediate goods.
during a specified period. It summarizes both
17. Read the following text carefully: inflows and outflows of funds related to trade,
Balance of Payments (BoP) systematically services, income, and financial transfers.
summarises the economic transactions of an (b) The BoP is divided into two main accounts:
economy with the rest of the world, over a given the Current Account and the Capital Account.
period of time. The Current Account covers transactions
The BoP can be broadly divided into two accounts involving goods, services, income, and
namely: unilateral transfers, including the merchandise
• Current account account (exports and imports of goods) and
• Capital account the invisible account (services, transfers, and
The current account measures the transfer of investment income). In contrast, the Capital
goods, services, income, and transfers between Account records changes in the country’s
an economy and rest of the world. The current financial assets and liabilities, covering
account may be sub-divided into merchandise non-debt flows such as direct and portfolio
account and invisible account. investments and debt flows like commercial
Merchandise account consists of transactions borrowings and external assistance.
related to export and import of goods. (c) A BoP deficit arises when total outflows
In the invisible account, there are three broad exceed inflows, represented by: BoP Deficit
categories: = (Current Account + Capital Account) < 0.

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 CBSE EXAMINATION PAPER 2025

This situation indicates that the economy is

spending more on international transactions
than it is earning, thereby necessitating
adjustments in external financing.

SECTION – B
(Indian Economic Development)
18. _____ is based on the idea that education and
health are integral to human well-being.
(A) Human Resource (A) Informalisation of Workforce
(B) Human Development (B) Casualisation of Workforce
(C) Human Capital (C) Jobless Growth
(D) Economic Development (D) Formalisation of Workforce

Ans : Ans :
(B) Human Development (C) Jobless Growth
Human development focuses on enhancing Post the 1990–92 economic reforms, India
people’s well-being by improving education, experienced robust GDP growth without
health, and living standards. It goes beyond mere a proportional increase in employment
economic productivity or resource management, opportunities—a phenomenon known as jobless
addressing broader human capabilities. This growth. The chart illustrates this disconnect
approach integrates social, cultural, and economic between rising output and stagnant job creation,
dimensions, making it integral to overall human highlighting that economic expansion did not
progress and quality of life. translate into sufficient labor market absorption.

19. In recent years, all the adults are encouraged to 21. Read the following statements carefully:
open bank accounts as a part of a scheme known Statement 1: Environmental concerns of waste
as _____. generation and pollution have become critical, due
(A) Jan-Dhan Yojana to reversal of demand and supply relationship.
(B) Jan-Aushadhi Yojana Statement 2: Environmental crisis happens, when
the rate of resource extraction is less than that of
(C) Jan-Soochna Yojana
regeneration of resource.
(D) Jan-Arogya Yojana
In the light of the given statements, choose the
Ans : correct option from the following:
(A) Statement 1 is true and Statement 2 is false.
(A) Jan-Dhan Yojana
(B) Statement 1 is false and Statement 2 is true.
Jan-Dhan Yojana is a flagship financial inclusion
(C) Both statements 1 and 2 are true.
initiative launched by the Government of India.
(D) Both statements 1 and 2 are false.
It encourages all adults to open bank accounts,
thereby providing them access to formal financial Ans :
services such as credit, savings, and insurance. (A) Statement 1 is true and Statement 2 is false
This initiative aims to empower economically Statement 1 correctly notes that environmental
weaker sections and promote financial security concerns have escalated due to imbalances
nationwide. in waste generation versus the environment’s
capacity. In contrast, Statement 2 is incorrect
20. The given chart indicates the problem of _____
because environmental crises occur when resource
in the Indian Economy post 1990-92.
extraction exceeds natural regeneration, not when
extraction is lower. Thus, only Statement 2 is
false.

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PAGE 12 CBSE CLASS 12 ECONOMICS CHAPTERWISE PYQ

22. _____ of agriculture refers to production of (B) Only (ii)

crops for sale in the open market rather than for (C) (i) and (ii)
self consumption purpose. (D) (i), (ii) and (iii)
(A) Commercialisation
Ans :
(B) Diversification
(C) Digitisation (D) (i), (ii) and (iii)
(D) Modernisation All three statements highlight areas where
information and technology are crucial.
Ans : Sustainable development and food security
(A) Commercialisation increasingly rely on advanced information systems
Commercialisation in agriculture refers to shifting and technological innovations. Moreover, the
the focus from self-sustenance to market-oriented dissemination of information regarding emerging
production. Farmers produce crops primarily technologies directly underscores the role of IT.
for sale rather than personal consumption. This Collectively, these aspects emphasize technology’s
transformation, driven by market forces and significance, validating option (D).
policy reforms, enhances income opportunities
and stimulates broader economic development, 25. Read the following statements: Assertion (A) and
thereby marking a significant change in production Reason (R). Choose one of the correct options
orientation. given below:
Assertion (A): Under the land reforms, Indian
23. Read the following statements carefully: government fixed the minimum land size which
Statement 1 : In 1978, commune lands were divided could be owned by an individual.
into small plots to the individual households for Reason (R): The purpose of land ceiling was to
cultivation. avoid the concentration of land ownership in a
Statement 2 : Under commune system, few hands.
professionals were sent to work and learn from (A) Both Assertion (A) and Reason (R) are true
the country side. and Reason (R) is the correct explanation of
In the light of the given statements, choose the Assertion (A).
correct option from the following: (B) Both Assertion (A) and Reason (R) are true,
(A) Statement 1 is true and Statement 2 is false. but Reason (R) is not the correct explanation
(B) Statement 1 is false and Statement 2 is true. of Assertion (A).
(C) Both statements 1 and 2 are true. (C) Assertion (A) is true, but Reason (R) is false.
(D) Both statements 1 and 2 are false. (D) Assertion (A) is false, but Reason (R) is true.
Ans : Ans :
(C) Both statements 1 and 2 are true. (D) Assertion (A) is false, but Reason (R) is true
Both statements are correct. The commune Indian land reforms primarily imposed a ceiling
system involved redistributing lands, where on land holdings to prevent concentration, not
communal fields were divided among households a minimum size. Therefore, the assertion that a
for individual cultivation, marking a significant minimum land size was fixed is incorrect. However,
shift in agricultural practices. Additionally, the the reason accurately reflects the purpose of land
state often deployed professionals to rural areas ceilings—to avoid excessive concentration of land
to work and learn directly from the agricultural ownership—making it true and supporting option
environment, facilitating skill transfer and (D).
practical experience.
26. _____ are the people who operate their own
24. Identify the options that emphasize the role of farms / enterprises.
information and technology. (A) Hired Workers
(i) Achieving sustainable development (B) Casual Wage Workers
(ii) Attainment of food security (C) Regular Salaried Employees
(iii) Disseminates information regarding emerging (D) Self-Employed
technologies.
Ans :
Options:
(A) Only (i) (D) Self-Employed

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 CBSE EXAMINATION PAPER 2025

Self-employed individuals operate their own Ans :

farms or enterprises and make independent (a) Danish did not invest in human capital.
decisions regarding production and management. Human capital refers to investments in
Unlike hired workers, casual wage workers, or education, skills, and knowledge that enhance
salaried employees, they assume both the risks the abilities of people. Danish’s expenditure
and rewards of their ventures. This autonomy in on advanced farming machinery, irrigation
decision-making and income generation clearly systems, and high-quality seeds represents
characterizes self-employment, confirming option physical capital investment. In contrast,
(D). Medhya’s focus on agricultural courses,
modern farming techniques, and training
27. Agricultural marketing is a process that involves laborers reflects human capital development.
the _____ of agricultural commodities. Therefore, Danish’s investments, although
(i) Privatisation crucial for increasing production efficiency,
(ii) Processing are categorized as investments in physical
(iii) Assembling assets rather than in human capital.
(iv) Grading
Options: or
(A) (i) and (ii)
(b) I agree with the statement. Spending on
(B) (ii) and (iii)
preventive, curative, and social medicine is a
(C) (i), (ii) and (iii)
crucial investment in human capital because
(D) (ii), (iii) and (iv)
it improves overall health and well-being.
Ans : Better health leads to higher productivity,
(D) (ii), (iii) and (iv) reduced absenteeism, and enhanced
Agricultural marketing involves post-harvest cognitive development, which in turn bolster
activities that add value to produce. It includes educational outcomes and labor efficiency.
processing commodities into marketable forms, A healthy population can contribute more
assembling products for distribution, and grading effectively to economic development, driving
them to meet quality standards. Privatisation, innovation and growth. Therefore, such
however, is a policy measure, not an intrinsic medical expenditures are not just social
marketing process. Hence, only processing, necessities but also strategic investments that
assembling, and grading are integral, making (D) yield significant economic returns over time.
correct. 29. Briefly explain the dual pricing policy adopted
28. (a) Medhya and Danish both had their own by China.
farms. Medhya invested in a few agricultural Ans :
courses, learnt modern farming techniques
China’s dual pricing policy involves maintaining
and trained her labourers on best practices
two separate pricing systems for certain goods.
related to soil fertility, crop management,
The government sets a fixed, often lower, price
pest control etc.
for domestic consumption to ensure affordability
Whereas, Danish invested heavily in, by
and social stability, while allowing a higher
purchasing advanced farming machinery,
market-determined price for exports. This system
irrigation systems and high quality seeds.
enables domestic consumers to access essential
Do you agree that, Danish had made
commodities at controlled rates, while producers
investment in human capital?
can earn additional revenue from foreign markets,
Give valid reason in support of your answer.
contributing to foreign exchange earnings.
or
Essentially, dual pricing serves as an interim
(b) “Expenditure on preventive medicine,
mechanism during economic transition, balancing
curative medicine and social medicine helps
domestic welfare objectives with the need for
in building human capital and economic
international competitiveness and efficient
development.”
resource allocation.
Do you agree with the given statement? Give
valid arguments in support of your answer.

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PAGE 14 CBSE CLASS 12 ECONOMICS CHAPTERWISE PYQ

30. Explain the volume and direction of foreign trade taken vital initiatives to generate employment
during the British rule. directly / indirectly.”
Justify the statement giving valid arguments.
Ans :
or
During British rule, foreign trade was structured (b) “Micro credit programmes have been very
to serve colonial interests. India became a supplier helpful in supporting rural development and
of raw materials such as cotton, jute, spices, and improving livelihoods in India.”
indigo, which were exported primarily to Britain Do you agree with the given statement? Give
and its industrial allies. At the same time, India valid reasons in support of your answer.
imported British manufactured goods, ranging
from textiles to machinery, leading to a one-sided Ans :
trade pattern. Although the overall volume of (a) The Indian government has launched
trade expanded in absolute terms, it was heavily numerous initiatives targeting employment.
skewed, resulting in a chronic trade imbalance. MGNREGA directly provides guaranteed
The export-import ratio was manipulated wage employment in rural areas. Pradhan
to benefit British industries, contributing to Mantri Kaushal Vikas Yojana (PMKVY)
deindustrialization in India, a drain of wealth, and focuses on skilling the youth, enhancing their
limited development of indigenous manufacturing employability. Schemes like Mudra Yojana
capabilities. and Startup India promote entrepreneurship,
indirectly creating jobs as new businesses
31. On the basis of the given data, compare and grow. Additionally, policies like ’Make in
analyse the Distribution of workforce and its India’ and the Production Linked Incentive
contribution to Gross Value added in India and (PLI) schemes aim to boost manufacturing,
China. leading to job creation in factories. Significant
Sectoral Share of Employment and GVA (%) in investment in infrastructure also generates
2018-2019 substantial direct and indirect employment,
Sector Contribution to GVA Distribution of Workforce validating the government’s efforts across
various sectors.
India China Pakistan India China Pakistan

Agriculture 16 7 24 43 26 41 or
Industry 30 41 19 25 28 24 (b) Yes, I agree with the statement. Microcredit
Services 54 52 57 32 46 35 programs, often facilitated through Self-Help
Groups (SHGs), have played a vital role in
Total 100 100 100 100 100 100
Indian rural development. They provide
Source: Human Development Report 2019: Key essential financial access to the rural poor,
Indicators of Asia and Pacific 2019 particularly women, who often lack collateral
Ans : required by formal banks. This enables
investment in small income-generating
1. Agriculture : India employs a vast workforce
activities like farming inputs, livestock
(43%) for low GVA (16%), indicating low
rearing, or setting up micro-enterprises. By
productivity. China employs fewer (26%) for
fostering financial inclusion and supporting
even lower GVA (7%).
grassroots entrepreneurship, microcredit
2. Industry : China shows high industrial
empowers individuals, improves household
productivity (41% GVA from 28% workforce).
incomes, and contributes significantly to
India’s industry is less dominant (30% GVA
enhancing livelihoods and reducing poverty
from 25% workforce).
in rural communities across India.
3. Services : This sector leads GVA in both
nations (India 54%, China 52%). India shows 33. (a) (i) “To promote green revolution, the Indian
very high productivity here (54% GVA from government provided fertilizer subsidies to
32% workforce), while China employs more the farmers.”
people in services (46%). Briefly explain any two arguments in favour
of such subsidies.
32. (a) “In the recent times through various schemes
(ii) As per a news report dated, 8th Oct. 2021,
and policies, the Government of India has
the Government of India sold its entire

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 CBSE EXAMINATION PAPER 2025

100% stake in Air India. Tata Sons, the international trade.

original founder of Air India won the bid and 2. Foreign investment policies were
purchased the airline for ₹18,000 crore. liberalized, allowing higher foreign direct
(1) Identify the step taken by the Government investment (FDI) and foreign institutional
of India. investment (FII) in various sectors.
(2) State any two ways in which identified These measures increased investor confidence,
step can be executed by the government. encouraged global businesses to invest in
or India, and as a result, foreign exchange inflows
(b) (i) “After 1991, reforms in external sector rose significantly, improving the country’s
led to an increase in foreign exchange foreign exchange reserves and overall external
inflows”. Justify the given statement with position.
valid argument. (ii) 1. Lack of Private Sector Capability : After
(ii) “During the planning period, public independence, the private sector lacked
sector was given a dominant role in Indian the capital and technical expertise to
Economy.” Justify the rationale behind this undertake large-scale industrial and
step taken by the Government of India. infrastructure projects, such as steel
plants, railways, and dams. Hence, the
Ans :
government had to take the lead.
(a) (i) 1. Support to Marginal and Small
2. Balanced Regional Development and
Farmers : Fertilizer subsidies reduce the
Social Welfare : The public sector
cost of production for small and marginal
was seen as a tool to ensure equitable
farmers who may not afford fertilizers
development across regions, reduce income
at market prices. This enables them to
inequalities, generate employment, and
increase agricultural productivity and
provide essential services like education,
income.
health, and transport — which may not
2. Increased Agricultural Production : By
have been priorities for the private sector
making fertilizers affordable, subsidies
focused on profit.
encourage their use, leading to better
crop yields and promoting food security, 34. Read the following text carefully:
which was a key goal during the Green Climate change and sustainability of environment
Revolution. are two pressing issues that have captured global
(ii) 1. Step taken by the Government of India : attention. In recent years, the world has witnessed
The government has undertaken a surge in extreme weather events including
disinvestment by selling its entire stake severe droughts, cloud bursts, floods, land slides,
in Air India. receding coastlines and the alarming melting of
2. Two ways this step (disinvestment) can arctic ice and Himalayan Glaciers. Wildfires have
be executed by the government: become more frequent and intense.
Public Offering : Selling shares of public In this context, sustainable agriculture emerges as
sector enterprises to the general public a crucial solution.
through the stock exchange. This refers to those farming practices that meet
Strategic Sale : Selling a major portion of today’s requirements while preserving resources
the government’s shareholding along with for the future generation. This means adopting
the transfer of management control to a methods that protect the environment, reduce
private entity, as was done in the case of dependence on chemical inputs, efficiently using
Air India. water and land and ensuring socio-economic
or equity for farmers.
On one hand sustainable agricultural practices
(b) (i) Justification : After 1991, India
are necessary, on the other, they are often more
introduced Liberalisation, Privatisation
expensive to implement compared to conventional
and Globalisation (LPG) reforms. In the
methods. Sustainable practices like organic
external sector:
farming, climate-smart technologies, modern
1. Trade policy reforms such as removal of
irrigation system may seem costly upfront,
quantitative restrictions and reduction
but they offer long-term benefits by improving
of tariffs made India more open to

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PAGE 16 CBSE CLASS 12 ECONOMICS CHAPTERWISE PYQ

productivity, and environmental stewardship. pollution and conserve fossil fuels.

Without accessible and affordable financing 2. Adopting eco-friendly technologies in
options, the much needed shift to sustainable agriculture and industry that minimize
farming practices will remain a distant dream for environmental damage and promote
many. efficient resource use.
Therefore, sustainable finance should not only
promote eco-friendly practices but also ensure
that financial resources are available to the www.nodia.in
farmers who need it.
Source: https://website.vbi.org.in/web/rbi/-/
speeches – interview/financing-for-sustainable-
agriculture (adopted and modified)
On the basis of the given text and common
understanding, answer the following questions:
(a) Give the meaning of Sustainable Agriculture.
(b) “Sustainable Agriculture emerges as a crucial
solution to the problem of climate change.”
Do you agree with the given statement? Give
valid explanation in support of your answer.
(c) State any two ways to achieve sustainable
development.
Ans :
(a) Sustainable agriculture refers to farming
practices that meet current needs without
compromising the ability of future generations
to meet theirs. It focuses on protecting the
environment, reducing the use of chemical
inputs, using land and water efficiently, and
ensuring fairness and economic viability for
farmers.
(b) Yes, I agree with the statement. Sustainable
agriculture addresses climate change in the
following ways:
1. Environmental Protection: It minimizes
environmental degradation by reducing
the use of chemical fertilizers and
pesticides, which lowers soil and water
pollution.
2. Efficient Resource Use: It promotes
efficient use of land and water through
techniques like drip irrigation and crop
rotation, conserving essential resources.
3. Climate Resilience: Climate-smart
agricultural methods help crops adapt to
changing weather patterns, reducing the
risk of crop failure.
4. Reduction in Emissions: Organic
and sustainable practices help lower
greenhouse gas emissions, which are a
major contributor to climate change.
(c) Two ways to achieve sustainable development.
1. Using renewable energy sources such as
solar, wind, and hydro power to reduce

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CHAPTER 1
NATIONAL INCOME AND RELATED AGGREGATES

8. CONSUMPTION GOODS OR CONSUMER GOODS

SUMMARY
Consumer goods are those goods which are
bought by consumers as final goods to satisfy
1. MACRO ECONOMICS their wants, e.g., durable, non-durable and semi-
durable goods.
It is the study of large scale or aggregate economic
variables of an economy. 9. PRODUCER GOODS
2. FINAL GOODS It refers to those goods which are used in the
process of production of goods and services. These
These are those goods which are used either for
can be further classified as:
final consumption or for investment. Their value
1. Intermediate or non-durable goods like raw
is included in national income.
materials.
3. INTERMEDIATE GOODS 2. Capital goods
These goods are used either for resale or for 10. GOODS FOR SELF-CONSUMPTION
further production and are not included in
These goods are produced by the producers and
national income.
retained for their own use. It is also called own-
4. STOCKS account production.
Variables whose magnitude is measured at a 11. DEPRECIATION OR CONSUMPTION OF FIXED CAPITAL
particular point of time.
It is a fall in the value of fixed asset due to normal
5. FLOWS wear and tear, passage of time and expected
obsolescence. This concept is used to differentiate
Variables whose magnitude is measured over a
between gross and net.
period of time.
12. FACTOR INCOME (OR PAYMENT)
6. INVESTMENT
Payment received in exchange for rendering
It is an increase in the stock of capital during a
productive services is called factor income. It is
year. It is also called capital formation. Following
included in national income, e.g., rent, wages,
are the types of investment-
interest and profit.
1. Fixed investment: It is an increase in the
stock of fixed capital assets of firms during a 13. TRANSFER INCOME (OR PAYMENT)
year.
It refers to any income received without providing
2. Inventory investment: It refers to change in any good or service in return, e.g., scholarship,
stock. old age pension etc.
3. Net Investment: Gross investment –
Depreciation 14. CURRENT TRANSFERS
A transfer made out of current income of the payer
7. CAPITAL GOODS
and added to the current income of the recipient
Capital goods are those final goods which are used is called a current transfer, e.g., tax, donations,
and help in the process of production of other gifts, etc.
goods and services, e.g., plant and machinery.

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CH 1 : NATIONAL INCOME AND RELATED AGGREGATES

15. CAPITAL TRANSFERS 20. INDIRECT TAX

A transfer made out of wealth or capital of the It is a tax whose impact (liability to pay) and
payer and is added to the wealth or capital of the incidence (actual burden) lie on different persons,
recipient e.g., capital grants, payment made to e.g., sales tax, customs duties etc. Imposition of
people affected by natural calamities etc. indirect tax increases market price of goods and
services.
16. NET FACTOR INCOME FROM ABROAD (NFIA)
It is the difference between the factor incomes 21. SUBSIDY
earned by our residents from abroad and These are financial support given by the
factor income earned by non-residents within government to a firm to promote the production
our country. It is used to differentiate between of certain commodities. Subsidies reduce market
national product and domestic product. price of goods and services.

17. DOMESTIC (OR ECONOMIC) TERRITORY 22. NET INDIRECT TAXES (NIT)
It is the geographical territory administered by Difference between indirect tax and subsidies:
a government within which persons, goods and Important Points:
capital circulate freely. (- Depreciation)
(i) Gross Net
The scope of domestic territory covers: (-)[Indirect Tax + Subsidy]
(i) Political frontiers including territorial waters (ii) Market Price (MP) or (-) Net Indirect Taxes

and air space. Factor Cost (FC)

(+) NFIA
(ii) Embassies, consulates, military bases etc. (iii) Domestic Product (DP) National
located abroad but excluding those located Product (NP)
within the political frontiers.
23. CIRCULAR FLOW IN A TWO-SECTOR ECONOMY
(iii) Ships, aircrafts etc. operated by the residents
between two or more countries. Factor Payments
(iv) Fishing vessels, oil and natural gas rigs etc.
operated by the residents in the international
waters or other areas over which the country
enjoys the exclusive rights or jurisdiction.

18. NORMAL RESIDENTS OF A COUNTRY

A resident, whether a person or an institution,
is one whose centre of economic interest lies in
the domestic territory of the country in which he
lives.

19. CENTRE OF ECONOMIC INTEREST IMPLIES

24. GROSS DOMESTIC PRODUCT (GDP)
(i) The resident lives or is located within the
economic territory. GDP is total monetary value of all the finished
(ii) The resident carries out the basic economic goods and services produced within the country’s
activities of earnings, spending and borders in a specified time period, by both citizens
accumulation from that location. and non-citizens.
Implication of the above two concepts:
24.1 Nominal GDP (GDP at current prices)
(i) Domestic Product. Domestic Product is the
total production of final goods and services When the final goods and services produced in
within the domestic territory of the country, a year are valued at current prices (i.e., prices
irrespective of whether the production units prevailing in that particular year), it is called
are residents or non-residents. Nominal GDP.
(ii) National Product. It is the total production
24.2 Real GDP (GDP at constant prices)
of final goods and services by residents
only irrespective of whether the production In real GDP, market value of final output is
activities are performed within the domestic expressed in terms of prices prevailing in a
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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 19

Conversion of nominal GDP into Real GDP: higher welfare of the people. Following are the
Nominal GDP reasons of it:
Real GDP = 100
Current Price Index # (i) Distribution of GDP. Increased GDP may
be concentrated in a few hands leading to
25. NET DOMESTIC PRODUCT OR DOMESTIC FACTOR inequality in income distribution.
INCOME (NDPFC) (ii) Composition of GDP. Increase in GDP may
It is the total factor income earned by the factors be caused by rise in war goods or goods like
of production within the domestic territory of a liquor which will not increase welfare.
country in an accounting year. (iii) Non-monetary exchanges. Services like those
Its components have been shown in the given flow provided by a housewife are not included
chart: in national income leading to its under-
estimation.
(iv) Externalities. These are benefits (or harms)
caused during the production process for
which people are not paid (or penalized).
These benefits (positive externalities) or
harms (negative externalities) are not
considered while estimating national income.

30. METHODS OF CALCULATING NATIONAL INCOME

26. GROSS NATIONAL PRODUCT (GNP) 30.1 Methods of Estimation of National Income
It measures the value of goods and services Production or Value Added Method:
produced by only country’s citizens both (i) Value Added (GVAMP) = Value of output –
domestically and abroad. Intermediate consumption
GNP = GDP + NFIA (Net Factor Income from [Value of Output = Sales + Change in Stock;
Abroad) Change in Stock = Closing stock - Opening
Stock
27. NATIONAL INCOME (NNPFC)
(ii) NVAFC = GVAMP – Depreciation – NIT
It is the sum total of value added at factor
(iii) NVAFC = NDPFC (or Domestic Income)
cost or net domestic product at factor cost and
net factor income from abroad. It is net of the NNPFC (or National income) = NDPFC +
national income which means it does not include NFIA
depreciation.
30.2 Problem of Double Counting
28. PRIVATE INCOME This means counting the value of the same
It is the income accruing to the private sector product more than once in calculating National
from all sources before payment of direct taxes. Income. This happens when proper distinction is
It includes: not made between final and intermediate goods.
(i) Income from domestic product accruing to This can be avoided by taking the value added
private sector. method in the calculation of national income.
(ii) Net factor income from abroad (NFIA).
31. INCOME METHOD
(iii) Current transfers –
(a) Interest on national debt Components of income method are as follows –
(b) Net current transfer from the rest of the
world
(c) Current transfer from the government.
GNP deflator = Nominal GNP # 100
Real GNP

29. GDP AND WELFARE

A higher GDP means more production of goods
and services but it may not necessarily mean

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CH 1 : NATIONAL INCOME AND RELATED AGGREGATES

NDPFC = Compensation of Employees + 3. On the basis of the given figure identify the type
Operating Surplus + Mixed Income of flow indicted by B and D:
NNPFC = NDPFC + NFIA

32. EXPENDITURE METHOD

Components of final expenditure method are as
follows—
(i) Private final consumption expenditure
(ii) Government final consumption expenditure
(iii) Gross domestic capital formation
(a) Gross domestic fixed capital formation
(b) Change in stock
Alternatives:
(iv) Net Exports (Exports – Imports)
(a) Real flow
GDPMP = (i) + (ii) + (iii) + (iv) (b) Money flow
(c) Nominal flow
NDPFC = GDPMP – NIT – Depreciation (d) National flow

NNPFC = NDPFC + NFIA Ans : OD 2023

(a) Real flow

4. The difference between Gross domestic product

and Net domestic product is due to _____.
MULTIPLE CHOICE QUESTION (a) Net indirect taxes
(b) Depreciation
(c) Net factor income from abroad
1. With a rise in Real National Income, welfare of (d) Subsidies
the people: Ans : OD 2013
(a) Rises
(b) Falls (b) Depreciation
(c) Remains unchanged 5. Goods which normally lose their own identity in
(d) None of the above the production process are known as _____.
Ans : COMP 2024 (a) Consumer durables
(b) Intermediate goods
(a) Rises
(c) Services
2. Complete the table: (d) Final goods
Ans : FOREIGN 2014
Producer Value of Intermediate Value
output Consumption Added (b) Intermediate goods
Farmer 2,000 – 2,000 6. Which of the following is a stock?
Baker _(i)_ 2,000 2,000 (a) Wealth
Retail 4,400 _(iii)_ 400 (b) Savings
Seller (c) Exports
(d) Profit
Total _(ii)_ 6000 _(iv)_
Ans : OD 2016
Alternatives:
(a) 4,000, 10,400, 4,000, 4,000 (a) Wealth
(b) 4,000, 10,400, 4,000, 4,400
7. The production method of calculating National
(c) 2,000, 6,000, 6,000, 4,400
Income gives us the following National Income
(d) 4,000, 10,400, 6,000, 4,000
Aggregate:
Ans : COMP 2023 (a) NDPMP (b) NDPFC
(b) 4,000, 10,400, 4,000, 4,400 (c) GDPMP (d) GDPFC

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 21
Ans : OD 2015
(c) Purchase of uniforms for nurses by a hospital
(c) GDPMP (d) Purchase of car by a household

8. Following is not true about Operating Surplus, a Ans : FOREIGN 2020

component of the Income Method of calculating (c) Purchase of uniforms for nurses by a hospital
National Income.
(a) it is also termed as Income from Property and 13. Which of the following is not included while
Entrepreneurship estimating National Income?
(b) it includes rent, royalty, interest and profit (a) Net imports
(c) interest includes interest paid on loans taken (b) Indirect taxes
for production and consumption purposes (c) Depreciation
(d) corporate tax is a component of profit (d) Both (a) and (c)

Ans : FOREIGN 2016 Ans : DELHI 2021

(c) interest includes interest paid on loans taken (d) Both (a) and (c)
for production and consumption purposes
14. A major cause of underestimation of GDP in an
9. Which of the following is a transfer income? economy is:
(a) Scholarship (a) Exclusion of value of intermediate goods
(b) Wages and salaries (b) Exclusion of non-monetary exchanges
(c) Rent (c) Exclusion of positive externalities
(d) Interest (d) Exclusion of old age pension

Ans : SQP 2017 Ans : SQP 2022

(a) Scholarship (b) Exclusion of non-monetary exchanges

10. If Nominal GDP is `4400 crore and price index is 15. Unilateral payments are also called as _____.
110, than Real GDP will be: (a) One sided payments
(a) `4400 crore (b) Transfer payments
(b) `4000 crore (c) Factor payments
(c) `4800 crore (d) Both (a) and (b)
(d) `3600 crore Ans : OD 2000

Ans : COMP 2018 (d) Both (a) and (b)

(b) `4000 crore
16. In which of the following cases will NNPFC be
11. Problem of double counting involves: equal to GDPFC?
(a) Omission of some values while estimating (a) When NFIA and depreciation are zero
value of output (b) When NIT and depreciation are zero
(b) Addition of values more than once while (c) When NFIA and NIT are zero
estimating value of output (d) When NFIA is more than depreciation
(c) Including the value of only intermediate
Ans : FOREIGN 2001
goods while estimating value of output
(d) Including the value of only final goods while (a) When NFIA and depreciation are zero
estimating value of output
17. Which of the following is correct for calculation of
Ans : OD 2019 Domestic Factor Income?
(b) Addition of values more than once while (a) Value of Output – Intermediate Consumption
estimating value of output NIT
(b) Value of Output – Depreciation – NIT
12. Which of the following is not included while (c) Value of Output – Intermediate Consumption
estimating National Income? Depreciation – NIT
(a) Addition to machinery, factory buildings and (d) Value of Output – Intermediate Consumption
equipments by firms – Depreciation
(b) Purchase of goods by foreign tourists
Ans : DELHI 2002

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CH 1 : NATIONAL INCOME AND RELATED AGGREGATES

(c) Value of Output – Intermediate Consumption Ans : SQP 2016

Depreciation – NIT (c) Normal wear and tear and foreseen obsolescence

18. Goods purchased for the following purpose are 24. Foreign embassies in India are a part of India’s:
final goods : (a) Economic territory
(a) For satisfaction of wants (b) Geographical territory
(b) For investment in firm (c) Both (a) and (b)
(c) Both (a) and (b) (d) None of the above
(d) None of the above
Ans : COMP 2017
Ans : SQP 2017
(b) Geographical territory
(c) Both (a) and (b)
25. National income is the sum of factor incomes
19. Which of the following is not a flow? accruing to :
(a) Capital (a) Nationals
(b) Income (b) Economic territory
(c) Investment (c) Residents
(d) Depreciation (d) Both residents and non-residents
Ans : COMP 2015 Ans : FOREIGN 2016

(a) Capital (c) Residents

20. What is the consumption of fixed capital known 26. If NDPFC = `1,000 and Net factor income paid to
as? abroad = `800, then NNPFC will be :
(a) Depreciation (a) `1,800 (b) `200
(b) Capital formation (c) `2,000 (d) `1,000
(c) Investment
(d) All of the above Ans : DELHI 2018

Ans : OD 2016
(b) `200

(a) Depreciation 27. Which of the following is not a part of operating

surplus?
21. Which of the following is a flow? (a) Rent
(a) Deposits in a bank (b) Mixed income of self employed
(b) Capital (c) Interest
(c) Depreciation (d) Profits
(d) Wealth
Ans : DELHI 2018
Ans : OD 2016
(b) Mixed income of self employed
(c) Depreciation
28. The difference between Gross domestic product
22. Which of the following is a stock? and Net domestic product is due to :
(a) Savings (a) Depreciation
(b) Production (b) Net indirect taxes
(c) Consumption of fixed capital (c) Net factor income from abroad
(d) Capital (d) Change in stock
Ans : OD 2016 Ans : DELHI 2018

(d) Capital (a) Depreciation

23. Depreciation of fixed capital assets refers to : 29. The difference between domestic income and
(a) Normal wear and tear national income is due to :
(b) Foreseen obsolescence (a) Depreciation
(c) Normal wear and tear and foreseen (b) Net factor income from abroad
obsolescence (c) Net indirect taxes
(d) Unforeseen obsolescence (d) Change in stock

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 23
Ans : FOREIGN 2019
(b) Net National product (GNP) at Market price
(b) Net factor income from abroad = NNP at factor cost.

30. Which of the following will not be included in 35. From the statements given in Column-I and
national income? Column-II, Choose the correct pair.
(a) Rent
(b) Mixed income of self employed Column I Column II
(c) Scholarships A. Vegetables grown (i) Non marketing
(d) Interest in the Personal activity
garden
Ans : COMP 2019
B. A car used as a taxi (ii) Consumer good
(c) Scholarships
C. An air-conditioner (iii) Capital good
31. The sum of factor payments is equal to _____. used by household
(a) Domestic Income
D. Scholarship given (iv) Factor income
(b) National Income
to students by
(c) Per Capita Real Income
government
(d) Per Capita Nominal Income
(a) A–(i)
Ans : SQP 2020
(b) B–(ii)
(a) Domestic Income (c) C–(iii)
(d) D–(iv)
32. Which of the following is not a ‘factor payment’ ?
(a) Free uniform to defence personnel. Ans : SQP 2023

(b) Salaries to the Members of Parliament. (a) A–(i)

(c) Rent paid to the owner of a building.
(d) Scholarship given to the students. 36. Identify, which of the following is not considered
as ‘Normal Resident’ of India?
Ans : OD 2020
(a) An Indian citizen working in U.S.A. embassy
(d) Scholarship given to the students. located at New Delhi.
(b) An Indian official working in Indian embassy
33. When Nominal Gross Domestic Product (GDP) in China.
is `840 crore and price Index is 120, then the Real (c) An Indian diploma visiting Canada for a
GDP will be _____. summit.
(a) `700 crore (d) An Indian working in an American Company
(b) `900 crore located in New York for a period of more
(c) `800 crore than one year.
(d) `500 crore
Ans : FOREIGN 2024
Ans : FOREIGN 2020
(d) An Indian working in an American Company
(a) `700 crore located in New York for a period of more than
34. Which of the following statement is incorrect? one year.
(a) Gross Domestic Product (GDP) at Market 37. Net Domestic Product at Factor Cost (NDPFC)
price is a critical economic aggregate used to measure
= GDP at factor cost plus Net Indirect taxes. income. Which of the following best describes
(b) Net National product (GNP) at Market price what NDPFC represents in an economy?
= NNP at factor cost. (a) Total factor income earned domestically
(c) Gross National Product (GNP) at Market including NFIA
price (b) Total factor income earned by production
= GDP at Market price Plus Net factor factors within the domestic territory
income from abroad. (c) Total value of all goods and services produced
(d) Net National Product (NNP) at factor cost within the domestic territory
= National Income. (d) Total income from all sources, including
Ans : DELHI 2020 current transfers

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CH 1 : NATIONAL INCOME AND RELATED AGGREGATES
Ans : OD 2000
(a) Machinery used in the production of goods
(b) Total factor income earned by production (b) Fertilizer purchased by a farmer for
factors within the domestic territory agricultural production
NDPFC represents income earned by factors of (c) A car purchased by a household for personal
production within a country’s domestic territory use
during an accounting year. (d) Food served in a restaurant for direct
consumption
38. Private Income is a significant component in
calculating economic performance. Which of the Ans : SQP 2003

following components are included in Private (b) Fertilizer purchased by a farmer for agricultural
Income earned by individuals in a country before production
direct taxes are paid? Intermediate goods are used in the production of
(a) Net current transfers from the rest of the final goods. Fertilizer is utilized for agricultural
world output and is therefore classified as intermediate.
(b) Gross Domestic Product (GDP) generated
within domestic boundaries 41. Factor Payments play a critical role in the
(c) Interest on national debt, along with other Circular Flow of Income. Which of the following
current transfers best describes factor payments in an economic
(d) Both (a) and (c) system?
(a) Payments made for intermediate goods used
Ans : FOREIGN 2001
in production
(d) Both (a) and (c) (b) Payments made to households for providing
Private income includes income from domestic productive services like labor and capital
products accruing to the private sector, net factor (c) Payments made by the government to firms
income from abroad (NFIA) and current transfers as subsidies
such as interest on national debt. (d) Payments made for consumer goods purchased
in the market
39. When discussing Gross Domestic Product (GDP),
there is often a distinction between Nominal GDP Ans : FOREIGN 2006

and Real GDP. How are Nominal GDP and Real (b) Payments made to households for providing
GDP fundamentally different from each other? productive services like labor and capital
(a) Nominal GDP is adjusted for inflation, while Factor payments include wages, rent, interest
Real GDP is not. and profits earned by households for contributing
(b) Real GDP is valued at base year prices, while productive resources to the economy.
Nominal GDP is valued at prices prevailing
in the year of production. 42. Net Factor Income from Abroad (NFIA) is a
(c) Nominal GDP includes NFIA, while Real key concept in differentiating National Product
GDP excludes it. from Domestic Product. What is the formula
(d) Real GDP excludes depreciation, while for calculating NFIA in the context of national
Nominal GDP includes it. income accounting?
(a) Total factor income earned within the
Ans : DELHI 2002
domestic territory
(b) Real GDP is valued at base year prices, while (b) Factor income earned by residents abroad
Nominal GDP is valued at prices prevailing in the minus factor income earned by non-residents
year of production. domestically
Nominal GDP measures output using current year (c) Net current transfers from abroad minus
prices, whereas Real GDP adjusts for inflation by domestic consumption
using base year prices. (d) Depreciation subtracted from Gross National
Product
40. Intermediate Goods play a vital role in the
production process but are excluded from national Ans : COMP 2004

income calculations. Which of the following (b) Factor income earned by residents abroad
qualifies as an intermediate good in the context minus factor income earned by non-residents
of economic activity? domestically

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 25

NFIA measures the net difference between income (c) Total production of intermediate goods for
earned by residents abroad and income earned by resale or further production
non-residents within the domestic economy. (d) Non-monetary exchanges and externalities

43. Subsidies are crucial for reducing the cost of Ans : SQP 2008

production and ensuring affordable goods for (b) Total production by residents, including
consumers. How can subsidies be best defined income earned abroad
in the context of government policies to support GNP accounts for goods and services produced by
production? residents regardless of whether production occurs
(a) Taxes imposed on goods and services paid by within or outside the domestic territory.
consumers
(b) Financial support provided by the government 46. National Income calculations do not include
to reduce production costs and encourage certain types of activities. Which of the following
specific goods is excluded from national income due to the
(c) Penalties imposed on firms for producing absence of market transactions?
harmful goods (a) Subsidies provided by the government to
(d) The difference between market price and producers
factor cost (b) Non-monetary exchanges like household
services
Ans : OD 2005
(c) Factor income earned by residents abroad
(b) Financial support provided by the government (d) Depreciation of fixed capital
to reduce production costs and encourage specific
Ans : COMP 2009
goods
Subsidies are monetary aids provided by the (b) Non-monetary exchanges like household
government to promote the production of specific services
goods, reducing their market price. Non-monetary exchanges, such as services
provided by homemakers, are not included in
44. The GNP Deflator is an essential tool in adjusting national income since they do not involve market-
nominal values for inflation. What is the primary based transactions.
purpose of the GNP Deflator in economic
calculations? 47. Gross Domestic Product (GDP) is often used as
(a) To differentiate between gross and net an economic indicator, but its scope is specific.
national income What does GDP represent in terms of economic
(b) To adjust nominal GDP for inflation to output and who is included in its calculation?
calculate Real GDP (a) The total production of goods and services
(c) To calculate depreciation for fixed capital within the country’s borders, excluding non-
assets residents.
(d) To measure income distribution among citizens (b) The total production of goods and services by
both residents and non-residents within the
Ans : DELHI 2007
country’s borders.
(b) To adjust nominal GDP for inflation to (c) The total production of goods and services
calculate Real GDP by citizens, whether within or outside the
The GNP Deflator accounts for inflation, country.
converting nominal GDP into real GDP by using (d) The total value of all goods and services
price indices. exchanged in the global economy.

45. Gross National Product (GNP) is a broader Ans : OD 2010

measure than GDP. Which of the following (b) The total production of goods and services
statements accurately represents what GNP by both residents and non-residents within the
includes? country’s borders.
(a) Total production within the domestic territory GDP measures the monetary value of all final
by residents and non-residents goods and services produced within a country’s
(b) Total production by residents, including borders, including contributions from residents
income earned abroad and non-residents.

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CH 1 : NATIONAL INCOME AND RELATED AGGREGATES

48. Real GDP is often preferred over Nominal GDP Ans : SQP 2013

for analyzing economic performance. Why is Real (a) Factor Income is payment for productive
GDP considered more accurate for comparing services, while Transfer Income is received without
output across years? providing any goods or services in return.
(a) It excludes the effects of inflation by using Factor Income includes wages, rent, interest and
base year prices. profits earned for providing productive services,
(b) It adjusts for depreciation in the value of while Transfer Income refers to payments
fixed assets. like scholarships and pensions without any
(c) It includes factor income from abroad, making corresponding economic activity.
it more comprehensive.
51. Net Domestic Product at Factor Cost (NDPFC)
(d) It measures only the physical volume of is an essential economic measure. How is it
production. calculated using the Income Method?
Ans : FOREIGN 2011
(a) Compensation of employees + operating
surplus + mixed income of self-employed.
(a) It excludes the effects of inflation by using
(b) GDP at market prices - depreciation - net
base year prices.
indirect taxes.
Real GDP adjusts for changes in price levels,
ensuring that output comparisons across years (c) GNP + net factor income from abroad
reflect real growth rather than inflationary effects. (NFIA).
(d) Net exports + government spending -
49. Private Income is a crucial component in intermediate goods.
determining economic activity. What is included
in Private Income and how is it calculated? Ans : COMP 2014

(a) Income from domestic product, NFIA and (a) Compensation of employees + operating
current transfers like interest on national surplus + mixed income of self-employed.
debt.
NDPFC represents the income earned by factors
(b) GDP, depreciation and subsidies provided by
of production within a country and is calculated
the government.
by summing the income components using the
(c) GNP minus current transfers and NFIA.
Income Method.
(d) Only income earned by private businesses
operating domestically. 52. Subsidies are an essential economic tool used
Ans : DELHI 2012
by governments to support production. How do
subsidies impact the market price of goods and
(a) Income from domestic product, NFIA and services?
current transfers like interest on national debt. (a) They increase the market price by reducing
Private Income includes all income accruing to production costs for producers.
the private sector before taxes, including domestic
(b) They reduce the market price by lowering the
product income, NFIA and current transfers.
effective cost of production.
50. The term Factor Income is widely used in national (c) They increase the demand for goods,
income accounting. What does Factor Income indirectly increasing the market price.
represent and how is it different from Transfer (d) They do not have any direct impact on market
Income? prices.
(a) Factor Income is payment for productive
services, while Transfer Income is received Ans : OD 2015

without providing any goods or services in (b) They reduce the market price by lowering the
return. effective cost of production.
(b) Factor Income includes gifts and donations,
Subsidies provide financial support to producers,
while Transfer Income excludes these.
enabling them to lower production costs, which in
(c) Factor Income is earned only domestically,
turn reduces market prices for consumers.
while Transfer Income is earned abroad.
(d) Factor Income and Transfer Income are
synonymous and interchangeable terms.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 27

53. The problem of double counting is a common issue Ans : SQP 2018

in calculating national income. What is double (d) GDP excludes NFIA, while GNP includes
counting and how can it be avoided? NFIA in its calculation.
(a) Counting intermediate goods as final goods; GNP is calculated by adding Net Factor Income
avoided by using value-added methods. from Abroad (NFIA) to GDP, accounting for
(b) Counting only goods produced by residents; income earned by residents abroad.
avoided by including non-resident production.
(c) Counting depreciation twice; avoided by using 56. Circular flow of income in a two-sector economy
net investment values. describes the interaction between households
(d) Counting private income as public income; and firms. What type of payments flow from
avoided by using income methods. households to firms?
(a) Factor payments for wages and rent
Ans : FOREIGN 2016
(b) Payments for goods and services consumed
(a) Counting intermediate goods as final goods; by households
avoided by using value-added methods. (c) Subsidies received by producers
Double counting occurs when the value of (d) Taxes collected by the government
intermediate goods is included in national income
Ans : COMP 2019
calculations, leading to overestimation. This is
avoided by calculating the value added at each (b) Payments for goods and services consumed by
stage of production. households
In a two-sector model, households make payments
54. Net Factor Income from Abroad (NFIA) is vital to firms for the goods and services they consume,
for differentiating between national and domestic completing the circular flow of income.
product. What does a positive NFIA indicate
about a country’s economic activities? 57. Net Factor Income from Abroad (NFIA) is
(a) Non-residents are contributing more to the calculated as the difference between ______
domestic economy than residents abroad. and ______.
(b) Residents are earning more abroad than non- (a) Domestic factor income, depreciation
residents are earning domestically. (b) Factor income earned by residents abroad,
factor income earned by non-residents
(c) There is a surplus in the trade balance due to
domestically
higher exports.
(c) GDP, subsidies provided by the government
(d) The country is dependent on foreign
(d) Private income, current transfers
investments for growth.
Ans : OD 2019
Ans : DELHI 2017
(b) Factor income earned by residents abroad,
(b) Residents are earning more abroad than non- factor income earned by non-residents domestically
residents are earning domestically. NFIA represents the net earnings of residents
A positive NFIA implies that residents are earning from abroad after deducting the income earned
higher incomes from economic activities abroad by non-residents within the domestic territory.
compared to the income earned domestically by
non-residents. 58. Subsidies provided by the government ______
the cost of production and ______ the market
55. What is the main difference between Gross price of goods.
Domestic Product (GDP) and Gross National (a) Increase, decrease
Product (GNP)? (b) Decrease, decrease
(a) GDP includes only domestic production, (c) Increase, increase
while GNP includes income from abroad. (d) Decrease, increase
(b) GDP is always higher than GNP, irrespective
of economic conditions. Ans : FOREIGN 2020

(c) GDP includes intermediate goods, while GNP (b) Decrease, decrease
includes only final goods. Subsidies lower production costs for producers,
(d) GDP excludes NFIA, while GNP includes which leads to a reduction in the market price of
NFIA in its calculation. goods and services.

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CH 1 : NATIONAL INCOME AND RELATED AGGREGATES

59. Real GDP is calculated by expressing the value Ans : OD 2024

of final goods and services in terms of ______. (a) Intermediate goods, final goods
(a) Current year prices Double counting happens when the value of
(b) Base year prices intermediate goods is added to the value of final
(c) Market prices including NFIA goods, inflating the national income figures.
(d) Prices adjusted for net indirect taxes
63. Gross National Product (GNP) is calculated by
Ans : DELHI 2021
adding ______ to GDP.
(b) Base year prices (a) Depreciation
Real GDP uses prices from a fixed base year (b) Net Factor Income from Abroad (NFIA)
to adjust for inflation, allowing for accurate (c) Net Indirect Taxes (NIT)
comparisons of economic output over time. (d) Transfer payments

60. In the Income Method of calculating national Ans : FOREIGN 2000

income, NDPFC is the sum of ______, (b) Net Factor Income from Abroad (NFIA)
______ and ______. GNP includes the income earned by residents
(a) Compensation of employees, operating from abroad, added to GDP to reflect the total
surplus, mixed income national production.
(b) Net exports, depreciation, subsidies
(c) Private income, transfer payments, current 64. Goods produced by a farmer and retained for
transfers personal consumption are called ______.
(d) Factor income, indirect taxes, intermediate (a) Consumer goods
goods (b) Capital goods
(c) Goods for self-consumption
Ans : SQP 2022
(d) Intermediate goods
(a) Compensation of employees, operating
Ans : DELHI 2001
surplus, mixed income
NDPFC is calculated by summing the incomes (c) Goods for self-consumption
earned by employees, the operating surplus of Goods retained by producers for their own use are
firms and the mixed income of self-employed classified as goods for self-consumption and are
individuals. part of the economic activities.

61. Net Domestic Product at Factor Cost (NDPFC) is 65. A subsidy is a ______ payment made by the
derived by subtracting ______ and ______ government to ______ the cost of production.
from GDP at Market Price (GDPMP). (a) Direct, increase
(a) Depreciation, indirect taxes (b) Direct, decrease
(b) Net Indirect Taxes (NIT), depreciation (c) Financial, decrease
(c) Subsidies, capital transfers (d) Financial, increase
(d) Depreciation, factor income from abroad Ans : SQP 2002

Ans : COMP 2023 (c) Financial, decrease

(b) Net Indirect Taxes (NIT), depreciation Subsidies are financial payments given by the
NDPFC is obtained by deducting depreciation government to reduce production costs and
and Net Indirect Taxes (NIT) from GDPMP to encourage the supply of certain goods.
arrive at the factor income earned within the
66. The scope of domestic territory includes
domestic territory.
______ and ______.
62. Double counting in national income calculations (a) Airspace over the country, consulates of other
occurs when ______ are included along with countries within the borders
______. (b) Territorial waters, embassies and consulates
(a) Intermediate goods, final goods of the country located abroad
(b) Private transfers, factor income (c) International waters, all imported goods
(c) Subsidies, market prices (d) Domestic businesses, foreign investments
(d) Exports, imports Ans : COMP 2003

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 29

(b) Territorial waters, embassies and consulates of negative.

the country located abroad (a) Both Assertion (A) and Reason (R) are true
The domestic territory covers political frontiers, and Reason (R) is the correct explanation of
including territorial waters and consulates of the Assertion (A).
country located abroad. (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.
ASSERTION AND REASON (d) Assertion (A) is false but Reason (R) is true.
Ans : DELHI 2015
67. Assertion : Subsidies are also referred to as
(a) Assertion and reason both are correct
economic or financial assistance.
statements and reason is correct explanation for
Reason : Subsidies do not lead to any value
assertion.
addition.
(a) Both Assertion (A) and Reason (R) are true 70. Assertion : National Income at constant prices
and Reason (R) is the correct explanation of may give a misleading picture of economic
Assertion (A). performance.
(b) Both Assertion (A) and Reason (R) are true Reason : Due to price fluctuations National
and Reason (R) is not the correct explanation Income at current prices may give an incorrect
of Assertion (A). picture of economic growth.
(c) Assertion (A) is true but Reason (R) is false. (a) Both Assertion (A) and Reason (R) are true
and Reason (R) is the correct explanation of
(d) Assertion (A) is false but Reason (R) is true.
Assertion (A).
Ans : OD 2024 (b) Both Assertion (A) and Reason (R) are true
(b) Assertion and reason both are correct and Reason (R) is not the correct explanation
statements but reason is not correct explanation of Assertion (A).
for assertion. Subsidies are granted to promote (c) Assertion (A) is true but Reason (R) is false.
exports or to set up industries in backward areas. (d) Assertion (A) is false but Reason (R) is true.
Ans : MAIN 2012
68. Assertion : Purchases by one production unit from
other production units can be of intermediate as (d) Assertion is false but Reason is true.
well as final goods. National income at current prices may give a
Reason : Intermediate goods have direct demand misleading picture of economic performance.
whereas final goods have derived demand.
71. Assertion : Composition of GDP supports the use
(a) Both Assertion (A) and Reason (R) are true of GDP as an index of economic welfare.
and Reason (R) is the correct explanation of Reason : Increase in GDP may not necessarily
Assertion (A). result in increase in economic welfare.
(b) Both Assertion (A) and Reason (R) are true (a) Both Assertion (A) and Reason (R) are true
and Reason (R) is not the correct explanation and Reason (R) is the correct explanation of
of Assertion (A). Assertion (A).
(c) Assertion (A) is true but Reason (R) is false.
(b) Both Assertion (A) and Reason (R) are true
(d) Assertion (A) is false but Reason (R) is true.
and Reason (R) is not the correct explanation
Ans : SQP 2024 of Assertion (A).
(c) Assertion is true but Reason is false. (c) Assertion (A) is true but Reason (R) is false.
A production unit can purchase raw materials as (d) Assertion (A) is false but Reason (R) is true.
well as machinery from other production units. Ans : COMP 2017

69. Assertion : Domestic Income can be greater than (d)Assertion is false but Reason is true.
National Income. GDP may also increase due to production of war
Reason : National Income is less than domestic goods which can be a limitation for GDP as an
income when net factor income from abroad is index of economic welfare.

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CH 1 : NATIONAL INCOME AND RELATED AGGREGATES

72. Assertion : Gross investment adds to the stock of Ans : SQP 2021

capital in the domestic economy. (d) Assertion is false but Reason is true. Domestic
Reason : Gross domestic capital formation is the Income is a territorial concept.
expenditure on acquiring goods for investment by
the production units located within the domestic 75. Assertion : Sale and purchase of second hand
territory. goods is not included in National Income.
Reason : The imputed value of goods produced for
(a) Both Assertion (A) and Reason (R) are true
self consumption is included in national income as
and Reason (R) is the correct explanation of
they are not sold in the market.
Assertion (A).
(a) Both Assertion (A) and Reason (R) are true
(b) Both Assertion (A) and Reason (R) are true
and Reason (R) is the correct explanation of
and Reason (R) is not the correct explanation
Assertion (A).
of Assertion (A).
(b) Both Assertion (A) and Reason (R) are true
(c) Assertion (A) is true but Reason (R) is false. and Reason (R) is not the correct explanation
(d) Assertion (A) is false but Reason (R) is true. of Assertion (A).
Ans : OD 2011
(c) Assertion (A) is true but Reason (R) is false.
(d) Assertion (A) is false but Reason (R) is true.
(a) Assertion and reason both are correct
statements and reason is correct explanation for Ans : MAIN 2013

assertion. (b) Assertion and reason both are correct

statements but reason is not correct explanation
73. Assertion : Transfer income is not included in for assertion. Sale and purchase of second hand
national income. goods does not add to the current flow of goods
Reason : Transfer income is a bilateral concept. and services.
(a) Both Assertion (A) and Reason (R) are true
and Reason (R) is the correct explanation of 76. Assertion : Real Gross Domestic Product is a
Assertion (A). better indicator of economic growth of a nation as
(b) Both Assertion (A) and Reason (R) are true compared to Nominal Gross Domestic Product.
and Reason (R) is not the correct explanation Reason : Real Gross Domestic Product measures the
of Assertion (A). value of goods and services at current year prices.
(c) Assertion (A) is true but Reason (R) is false. (a) Both Assertion (A) and Reason (R) are true
(d) Assertion (A) is false but Reason (R) is true. and Reason (R) is the correct explanation of
Assertion (A).
Ans : SQP 2019 (b) Both Assertion (A) and Reason (R) are true
(c) Assertion is true but Reason is false. and Reason (R) is not the correct explanation
Transfer income is a unilateral concept. It does of Assertion (A).
not reflect any production of goods and services. (c) Assertion (A) is true but Reason (R) is false.
(d) Assertion (A) is false but Reason (R) is true.
Ans : COMP 2018
(c) Assertion is true but Reason is false.
74. Assertion : Domestic Income is a geographical
concept.
Reason : Domestic Income includes the value
of final goods and services produced within the STATEMENT BASED QUESTIONS
domestic territory of a country.
(a) Both Assertion (A) and Reason (R) are true
and Reason (R) is the correct explanation of 77. Statement 1 : Gross Domestic Product (GDP) is
Assertion (A). the sum total of the gross market value of all the
(b) Both Assertion (A) and Reason (R) are true final goods and services added by all the sectors
and Reason (R) is not the correct explanation in the economy during a fiscal year.
of Assertion (A). Statement 2 : Gross Value Added at Market Price
(c) Assertion (A) is true but Reason (R) is false. (GVAMP) is equal to the excess of value of output
(d) Assertion (A) is false but Reason (R) is true. over intermediate consumption.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 31

(a) Statement 1 is true & Statement 2 is false. 80. Which of the following statements about subsidies
(b) Statement 1 is false & Statement 2 is true. is true?
(c) Both statements 1 & 2 are true. (i) Subsidies increase production costs for
(d) Both statements 1 & 2 are false. producers.
(ii) Subsidies lower the market price of goods.
Ans : FOREIGN 2020
(iii) Subsidies encourage production and
(c) Both statements 1 & 2 are true. consumption of certain goods.
(iv) Subsidies are included as indirect taxes in
78. Identify the correct combination of statements
GDP calculations.
about Net Factor Income from Abroad (NFIA) :
(a) (ii) and (iii)
(i) NFIA is the difference between income
(b) (i), (ii) and (iii)
earned by residents abroad and non-residents
(c) (ii), (iii) and (iv)
domestically.
(d) (i) and (iv)
(ii) NFIA is always negative for every country.
(iii) NFIA is used to calculate Gross National Ans : SQP 2012
Product (GNP). (a) (ii) and (iii)
(iv) NFIA is excluded when calculating GDP. Statements (ii) and (iii) are correct as subsidies
(a) (i) and (ii) reduce production costs, lowering market prices
(b) (i), (iii) and (iv) and promoting the production and consumption
(c) (i) and (iii) of targeted goods. Subsidies are not included as
(d) (ii), (iii) and (iv) indirect taxes.
Ans : OD 2009
81. Which of the following statements about Subsidies
(c) (i) and (iii) is true?
Statements (i) and (iii) are correct because NFIA (i) Subsidies reduce the market price of goods
represents the net earnings from international and services.
activities and is used to calculate GNP. However, (ii) Subsidies increase the production costs for
NFIA is not always negative and it is excluded in producers.
GDP calculations. (iii) Subsidies encourage the production and
consumption of certain goods.
79. Which of the following statements about Real
(iv) Subsidies are added to Net Indirect Taxes
GDP is correct?
(NIT).
(i) Real GDP adjusts for inflation using base
(a) (i) and (iii)
year prices.
(b) (i), (ii) and (iv)
(ii) Real GDP is always lower than Nominal
(c) (ii) and (iv)
GDP.
(d) (iii) and (iv)
(iii) Real GDP measures the physical volume of
production. Ans : SQP 2017
(iv) Real GDP is calculated by excluding Net (a) (i) and (iii)
Factor Income from Abroad (NFIA). Statements (i) and (iii) are correct because
(a) (i) and (ii) subsidies lower market prices and promote
(b) (i) and (iii) production and consumption of targeted goods.
(c) (i), (iii) and (iv) They do not increase production costs or form
(d) (ii), (iii) and (iv) part of NIT.
Ans : FOREIGN 2010
82. Which of the following statements about Gross
(b) (i) and (iii) National Product (GNP) is accurate?
Statements (i) and (iii) are correct because Real (i) GNP includes all goods and services produced
GDP accounts for inflation using base year prices by residents, domestically and abroad.
and measures the physical production volume. It (ii) GNP excludes Net Factor Income from
is not always lower than Nominal GDP and NFIA Abroad (NFIA).
is not part of Real GDP. (iii) GNP adjusts GDP by adding or subtracting
NFIA.
(iv) GNP is always greater than GDP.

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CH 1 : NATIONAL INCOME AND RELATED AGGREGATES

(a) (i) and (iii) 85. Select the correct statements about Net Domestic
(b) (ii) and (iv) Product at Factor Cost (NDPFC) :
(c) (i), (ii) and (iii) (i) NDPFC is calculated by subtracting
(d) (i), (iii) and (iv) depreciation from GDP.
(ii) NDPFC includes Net Indirect Taxes (NIT) in
Ans : DELHI 2011
its calculation.
(a) (i) and (iii) (iii) NDPFC represents the income earned by
Statements (i) and (iii) are correct as GNP production factors within the domestic
includes domestic and international production economy.
by residents and adjusts GDP by NFIA. GNP can (iv) NDPFC excludes NFIA.
be less than GDP if NFIA is negative. (a) (i), (ii) and (iii)
(b) (ii) and (iv)
83. Identify the correct combination of statements
(c) (i), (iii) and (iv)
about Intermediate Goods :
(d) (i) and (ii)
(i) Intermediate goods are used for resale or
further production. Ans : COMP 2013
(ii) Their value is not included in national income. (c) (i), (iii) and (iv)
(iii) Intermediate goods are counted as final goods Statements (i), (iii) and (iv) are correct because
in GDP calculations. NDPFC excludes NFIA, is derived by subtracting
(iv) Including intermediate goods in national depreciation from GDP and reflects domestic
income causes double counting. income. NIT is excluded in its calculation.
(a) (i), (ii) and (iv)
(b) (ii), (iii) and (iv) 86. Select the correct statements about Factor Income
(c) (i), (ii) and (iii) :
(d) (i) and (iii) (i) Factor income is earned in exchange for
rendering productive services.
Ans : OD 2014
(ii) Factor income includes rent, wages, interest
(a) (i), (ii) and (iv) and profit.
Statements (i), (ii) and (iv) are correct because (iii) Factor income is excluded from national
intermediate goods are used for resale or further income calculations.
production, excluded from national income and (iv) Factor income reflects the payments made to
including them leads to double counting. factors of production.
(a) (i), (ii) and (iv)
84. Which of the following statements about Real
(b) (ii), (iii) and (iv)
GDP is accurate?
(c) (i), (ii) and (iii)
(i) Real GDP eliminates the effects of inflation.
(d) (i), (iii) and (iv)
(ii) Real GDP is calculated at current prices.
Ans : COMP 2019
(iii) Real GDP uses base year prices for
comparison. (a) (i), (ii) and (iv)
(iv) Real GDP is always equal to Nominal GDP. Statements (i), (ii) and (iv) are correct because
factor income includes payments made for
(a) (i), (ii) and (iii)
productive services, is a part of national income
(b) (ii) and (iv)
and comprises rent, wages, interest and profit.
(c) (i) and (iii)
(d) (ii), (iii) and (iv)
Ans : FOREIGN 2015

(c) (i) and (iii) GRAPH BASED QUESTIONS

Statements (i) and (iii) are correct as Real GDP
adjusts for inflation using base year prices. It is
not calculated at current prices and is not always 87. Which category, crucial for government-led
equal to Nominal GDP. development initiatives, is likely to have the
highest percentage in the distribution of economic
activities?

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 33

89. Based on the bar graph, which component has the

second-highest value?

(a) Public Expenditure (a) Subsidies

(b) Private Investment (b) Net Indirect Taxes (NIT)
(c) Exports (c) Depreciation
(d) Imports (d) Net Factor Income from Abroad (NFIA)
Ans : COMP 2024 Ans : FOREIGN 2022

(a) Public Expenditure (c) Depreciation

The pie chart shows that Public Expenditure has The bar graph indicates that Net Indirect Taxes
the largest share at 40%, reflecting its importance (NIT) have the highest value at 50 billion dollars,
in funding infrastructure, social welfare and followed by Depreciation at 40 billion dollars.
development programs, which are key drivers of
economic growth. 90. According to the pie chart, which sector has the
largest contribution to GDP?
88. Based on the bar graph, which economic aggregate
has the highest value?

(a) GDP (Nominal)

(b) GDP (Real)
(c) Net Domestic Product (NDP) (a) Agriculture
(d) Gross National Product (GNP) (b) Industry
(c) Services
Ans : OD 2021
(d) Exports
(d) Gross National Product (GNP)
Ans : DELHI 2023
The bar graph shows that Gross National
Product (GNP) has the highest value at 110 (c) Services
billion dollars, compared to other aggregates like The pie chart indicates that the Services sector
GDP (Nominal), GDP (Real) and Net Domestic has the largest contribution to GDP at 35%,
Product (NDP). followed by Agriculture (30%), Industry (25%)
and Exports (10%).

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CH 1 : NATIONAL INCOME AND RELATED AGGREGATES

PASSAGE BASED QUESTION (c) Depreciation and NFIA

(d) Private final consumption and taxes
Ans : DELHI 2006
91. Net Factor Income from Abroad (NFIA) is the (a) Depreciation and Net Indirect Taxes (NIT)
difference between income earned by residents NDPFC adjusts GDP by subtracting depreciation
abroad and income earned by non-residents within and NIT to reflect income earned within the
the domestic territory. It is a key component for domestic economy.
calculating Gross National Product (GNP), which
adjusts GDP to include net income from abroad. 94. Nominal GDP values goods and services produced
What is Net Factor Income from Abroad (NFIA)? in a year at current prices, while Real GDP uses
(a) Income earned by all residents domestically base year prices to adjust for inflation. Real GDP
(b) Difference between income earned by residents provides a more accurate comparison of economic
abroad and non-residents domestically performance over time.
What is the key difference between Nominal GDP
(c) Total income earned domestically by non-
and Real GDP?
residents
(a) Nominal GDP includes NFIA, while Real
(d) Income earned from government subsidies GDP excludes it.
Ans : OD 2004 (b) Real GDP adjusts for inflation using base year
prices, while Nominal GDP uses current prices.
(b) Difference between income earned by residents
(c) Nominal GDP includes depreciation, while
abroad and non-residents domestically
Real GDP does not.
NFIA adjusts for the net income from
(d) Real GDP excludes subsidies, while Nominal
international economic activities by accounting
GDP includes them.
for the difference between income earned abroad
by residents and income earned domestically by Ans : SQP 2007
non-residents. (b) Real GDP adjusts for inflation using base year
prices, while Nominal GDP uses current prices.
92. Gross National Product (GNP) is derived by Real GDP accounts for inflation by using a fixed
adding Net Factor Income from Abroad (NFIA) base year’s prices, while Nominal GDP reflects
to GDP. It measures the total value of goods current prices without adjustment.
and services produced by a country’s residents,
regardless of their location. 95. Double counting occurs when the value of
How is Gross National Product (GNP) calculated? intermediate goods is added along with final
(a) By adding Net Factor Income from Abroad goods in national income calculations, leading to
(NFIA) to GDP overestimation. It can be avoided by using the
(b) By subtracting depreciation from GDP value-added method.
(c) By adding net indirect taxes to GDP What is double counting in national income and
(d) By including income from current transfers how can it be avoided?
(a) Adding private income twice; avoided by
Ans : FOREIGN 2005
subtracting NIT
(a) By adding Net Factor Income from Abroad (b) Counting intermediate goods with final
(NFIA) to GDP goods; avoided by value-added method
GNP includes all goods and services produced by (c) Including subsidies with taxes; avoided by
a country’s residents and is calculated by adding GDP adjustments
NFIA to GDP. (d) Including NFIA twice; avoided by recalculating
GDP
93. Net Domestic Product at Factor Cost (NDPFC)
is calculated by subtracting depreciation and Net Ans : COMP 2008
Indirect Taxes (NIT) from GDP. It represents the total (b) Counting intermediate goods with final goods;
factor income earned within the domestic territory. avoided by value-added method
What components are subtracted from GDP to Double counting inflates national income by
calculate NDPFC? including intermediate goods, which can be
(a) Depreciation and Net Indirect Taxes (NIT) avoided by calculating the value added at each
(b) Subsidies and net exports production stage.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 35

96. Real GDP uses base year prices to measure (a) GNP includes NFIA, while GDP excludes it.
the market value of final goods and services, GNP adjusts GDP by adding income earned by
eliminating the impact of inflation. This provides residents abroad and subtracting income earned
a more realistic assessment of economic growth by non-residents domestically, represented by
compared to Nominal GDP. NFIA.
Why is Real GDP preferred over Nominal GDP
for economic analysis? 99. Intermediate goods are those used in the
(a) It includes subsidies to adjust for price production of final goods and are not included
changes. in national income calculations. They prevent
(b) It uses base year prices to account for double counting, ensuring accurate measurement
inflation. of economic output.
(c) It excludes depreciation from the total GDP. Why are intermediate goods excluded from
(d) It measures only physical production volume. national income calculations?
(a) They are considered part of factor income.
Ans : OD 2009
(b) Including them would result in double
(b) It uses base year prices to account for inflation. counting.
Real GDP adjusts for inflation using a base year, (c) They represent non-monetary transactions.
providing a more accurate representation of (d) They are not sold in the domestic market.
economic growth over time. Ans : SQP 2011

97. Net Domestic Product at Factor Cost (NDPFC) (b) Including them would result in double
represents the total income earned by factors counting.
of production within a domestic economy. It is Intermediate goods are excluded from national
calculated by subtracting depreciation and Net income to avoid double counting, as their value is
Indirect Taxes (NIT) from GDP at market prices. already included in the final goods.
Which components are deducted from GDP at
market prices to calculate NDPFC? 100. A subsidy is a financial aid provided by the
(a) Subsidies and transfer payments government to reduce production costs, making
(b) Depreciation and Net Indirect Taxes (NIT) goods and services more affordable for consumers.
(c) Intermediate goods and final consumption It lowers market prices and encourages production.
(d) Net Factor Income from Abroad (NFIA) and What is the primary purpose of a subsidy provided
NIT by the government?
(a) To increase market prices and discourage
Ans : FOREIGN 2010
consumption.
(b) Depreciation and Net Indirect Taxes (NIT) (b) To reduce production costs and make goods
NDPFC is derived by subtracting depreciation affordable.
and NIT from GDP to measure income earned (c) To increase indirect taxes on final goods.
within the domestic territory. (d) To improve factor income calculations in
GDP.
98. Gross National Product (GNP) includes all goods
and services produced by residents of a country, Ans : COMP 2012

both domestically and abroad. It is calculated by (b) To reduce production costs and make goods
adding Net Factor Income from Abroad (NFIA) affordable.
to GDP.
How does GNP differ from GDP in national
income accounting?
(a) GNP includes NFIA, while GDP excludes it. ONE MARK QUESTIONS
(b) GDP measures only domestic production,
while GNP excludes international activities.
(c) GNP excludes depreciation, while GDP 101. What is macroeconomics?
includes it. Ans : OD 2024
(d) GDP accounts for current transfers, while
GNP does not. Macroeconomics studies the behavior of overall
economic aggregates and averages.
Ans : DELHI 2010

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CH 1 : NATIONAL INCOME AND RELATED AGGREGATES

102. Define ‘Resident’. Final goods are those used for consumption
or investment and are not involved in further
Ans : FOREIGN 2023
production.
A resident is someone who lives and earns within
the boundaries of a country. 111. Define intermediate goods.

103. Define Inventory or Stocks. Ans : SQP 2011

Intermediate goods are utilized in production and

Ans : DELHI 2020
are not counted in National Income calculation.
Stocks are variables measured at a specific point
in time, such as the capital invested by a firm on 112. Define capital formation.
31st March 2015. Ans : OD 2016

104. Define unplanned inventories (stock). Capital formation refers to the creation of physical
assets like buildings and machines to enhance
Ans : SQP 2020
production within an accounting year.
Unplanned inventory refers to unexpected changes
in the stock of goods. 113. Define investment.

105. Define flows. Ans : FOREIGN 2013

Investment, or capital formation, is the creation

Ans : COMP 2016
of physical assets to increase production capacity,
Flow variables are economic measures assessed adding to an economy’s capital stock.
over a period of time, such as income, expenditure
and savings. 114. Define national product.

106. Define Consumption goods. Ans : DELHI 2014

National product is the net monetary value of all

Ans : OD 2014
final goods and services produced by a country’s
Consumption goods are items used by consumers residents in one year.
for satisfaction, not for resale or further production,
such as a car purchased by a household. 115. Define domestic product.

107. Give the meaning of Capital goods. Ans : SQP 2014

Domestic product is the value of final goods and

Ans : FOREIGN 2014
services produced within a country’s economic
Capital goods are assets like machinery that territory in one year.
form a country’s capital stock and are used in
production processes. 116. What are two sources of domestic income?

108. Give two examples of intermediate goods. Ans : OD 2011

Domestic income comprises income from the

Ans : OD 2014
domestic product accruing to the private sector
Examples of intermediate goods include: and the government.
(i) Milk used in a dairy shop for resale.
(ii) Milk used for investment in a firm. 117. Give the meaning of depreciation.

109. Define the term ‘Public Goods’. Ans : COMP 2014

Depreciation is the decline in the value of fixed

Ans : DELHI 2020
assets due to wear and tear, passage of time, or
Public goods are services provided for the whole expected obsolescence.
society, where one person’s use does not reduce
availability for others, such as streetlights. 118. State, whether the given statement is true or false
:
110. Define final goods. ‘Unexpected obsolescence is a component of
Ans : COMP 2010,2013 depreciation.’

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 37
Ans : FOREIGN 2020
services produced within a country’s domestic
Correct, unexpected obsolescence is considered a territory, plus net factor income from abroad, in
capital loss, not depreciation. a year.

119. State, whether the following statement is true or 127. What is the difference between GNP and NNP?
false : Ans : COMP 2019
‘Inventory is a stock variable.’
GNP includes depreciation, whereas NNP
Ans : SQP 2020
excludes it.
True. As it is related to a point of time.
128. What is the difference between GNP and NDP?
120. Define domestic income. Ans : OD 2017
Ans : COMP 2021
NDP = GNP – Depreciation – Net Foreign
Domestic income is the monetary value of final Income.
goods and services produced within a country’s
domestic territory in a year. 129. Give two examples of net indirect taxes.
Ans : FOREIGN 2016
121. What is transfer payment?
Examples of net indirect taxes include excise duty
Ans : OD 2010
and sales tax.
Transfer payments are one-way payments received
without contributing to the current production of 130. What is dividend?
goods and services. Ans : DELHI 2019

122. Define intermediate consumption. Dividend is the portion of a company’s profit

distributed to its shareholders.
Ans : FOREIGN 2013

Intermediate consumption refers to the use of 131. Combined factor income, which can’t be separated
intermediate goods in the production of final into various factor income components is known
goods. as _____.
Ans : SQP 2020
123. `2,000 note lying in wallet of Rohini, a student,
is an example of _____ (stock/flow) variable. Mixed income of the self employed.

Ans : DELHI 2020 132. Net Domestic Fixed Capital Formation + Change
Stock in Stock = _____.
Ans : COMP 2020
124. Define GDP.
Net Domestic Fixed Capital Formation + Change
Ans : FOREIGN 2012
in Stock = Net Domestic Capital Formation
GDP is the total monetary value of final goods
and services produced within a country’s domestic 133. State, whether the following statement is true or
territory in a year. false:
‘Purchase of machinery by a producer is an
125. Define GNP. intermediate good.’
Ans : DELHI 2018 Ans : OD 2020

GNP is the total monetary value of final goods False; Purchase of machinery by a producer is a
and services produced within a country’s domestic final good.
territory, plus net factor income from abroad, in
a year. 134. Rent + Interest + Profit = _____.
Ans : FOREIGN 2020
126. Define NNP.
Rent + Interest + Profit = Operating Surplus
Ans : SQP 2020

NNP is the net monetary value of final goods and

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CH 1 : NATIONAL INCOME AND RELATED AGGREGATES

135. When does Net Factor Income from Abroad Ans : FOREIGN 2023

(NFIA) show Negative Value? A country’s normal residents are individuals or

Ans : DELHI 2020
institutions whose center of economic interest is
within the domestic territory. This means they
Net Factor Income from Abroad (NFIA) is the live or are located in the economic territory
difference between factor income received from and conduct primary activities such as earning,
abroad and factor income paid to abroad and it is spending and accumulation from that location.
negative when income earned from abroad is less
than the income paid. 141. Giving reasons, classify the following into
intermediate and final goods:
136. State the meaning of retained earnings. (i) Machines purchased by a dealer of machines.
Ans : SQP 2020 (ii) A car purchased by a household.
Retained earnings are the portion of profits Ans : OD 2010
reserved after paying corporate tax and dividends.
(i) Machines bought by a dealer are intermediate
137. Define National Income. goods as they are meant for resale.
(ii) A car purchased by a household is a final
Ans : COMP 2013
good since the expenditure on it is final and
National Income is the monetary value of final it is not intended for resale.
goods and services produced within a country’s
domestic territory in a year, plus net factor 142. Giving reasons, classify the following into inter-
income from abroad. mediate products and final products:
(i) Furniture purchased by a school.
138. Is National Income a stock or flow variable? (ii) Chalks, dusters, etc. purchased by a school.
Ans : OD 2015 Ans : DELHI 2011

National Income is a flow variable as it is measured (i) Furniture for a school is a final product as it
over a specific period of time. contributes to capital formation.
(ii) Chalks and dusters are intermediate products
as they are consumed in the production of
teaching services, serving as inputs rather
TWO MARK QUESTIONS than ends themselves.

143. Giving reasons classify the following into

139. Disposition Phase of circular flow of Income intermediate products and final products:
involves flow of factor Income, which comprises (i) Computers installed in an office.
of rent, wages, interest and profits from firms to (ii) Mobile sets purchased by a mobile dealer.
households.
Ans : COMP 2011
Defend or refute the statement, giving valid
reasons in support of your answer. (i) Computers installed in an office are final
Ans : FOREIGN 2024
products as they are used for investment
purposes.
Income generation and distribution occur in
(ii) Mobile sets meant for resale are intermediate
phase 2, where factors of production receive
products as they serve as goods for further
payments like rent, wages, interest and profit. In
sale.
phase 3, income disposition takes place through
consumption expenditure by households and 144. Giving reason identify whether the following are
investment expenditure by producers, reflecting final expenditures or intermediate expenditures:
the expenditure of income generated earlier. (i) Expenditure on maintenance of an office
Thus, phase 3 involves spending, following income building.
generation in phase 2. (ii) Expenditure on improvement of a machine in
a factory.
140. State the meaning of ‘normal resident’ of a
country. Ans : SQP 2011

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 39

(i) Expenditure on office building maintenance is (i) Purchases by foreign tourists are included in
intermediate expenditure as it involves single- national income as they are treated as exports
use producer goods. of goods and services.
(ii) Expenditure on improving a factory machine is (ii) Purchases of shares by a domestic firm are
final expenditure as it constitutes investment. excluded from national income as they are
financial transactions without any production
145. Should the following be treated as final involved.
expenditure or intermediate expenditure? Give
reasons for your answer. 149. How should the following be treated in estimating
(i) Purchase of furniture by a firm. National Income of a Country? Give valid reasons.
(ii) Expenditure on maintenance by a firm. (i) Profits earned by Foreign Banks in India.
(ii) Expenditure on up-gradation of fixed asset by
Ans : OD 2012
a firm.
(i) A firm’s purchase of furniture is final
expenditure as it represents investment. Ans : OD 2023

(ii) on maintenance by a firm is intermediate (i) Earned by foreign banks in India is excluded
expenditure as it is recurrent and not from national income as it constitutes factor
permanent. income paid abroad to non-residents for their
contribution to production in India’s domestic
146. Net exports reflect the difference between a territory.
country’s exports and imports. They show the (ii) Expenditure on upgrading a firm’s fixed
role of international trade in generating income. assets is included in national income as it
Why are net exports included in National Income? forms part of gross fixed capital formation.
Explain.
150. How should the following be treated in the
Ans : DELHI 2011
calculation of national income? Give reasons for
Net exports, being part of the domestic product, your answer.
are included in the national income as they (i) Interest on public debt
reflect the value of goods and services produced (ii) Bonus given to railway employees
domestically. Since national income accounts for
the domestic product generated by residents, net Ans : SQP 2013

exports form an integral component of it. (i) Interest on public debt is not included in
national income as it is paid on loans taken
147. Giving reasons, explain the treatment assigned to by the government for consumption purposes,
the following while estimating National Income: not investment.
(i) Family members working free on the farm (ii) Bonus to railway employees is included in
owned by the family. national income as it is part of compensation
(ii) Payment of interest on borrowings by general of employees, a component of the income
government. method of calculating national income.
Ans : COMP 2011
151. Giving reason state how the following are treated
(i) Production for self-consumption is included in estimation of national income:
in national income as it contributes to the (i) Expenditure on old age pensions by
economy’s total output. government.
(ii) Non-factor payments, not involving the flow (ii) Expenditure on engine oil by car service
of goods and services, are excluded from station.
national income.
Ans : OD 2019
148. How should the following be treated while
(i) Expenditure on old age pensions by the
calculating national income? Give reasons for
government is excluded from national income
your answer.
as it is a transfer payment.
(i) Purchases by foreign tourists.
(ii) Purchase of shares by a domestic firm. (ii) Expenditure on engine oil by a car service
station is excluded from national income as it
Ans : SQP 2012 is an intermediate expenditure.

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CH 1 : NATIONAL INCOME AND RELATED AGGREGATES

152. Giving reasons, explain the treatment assigned to 156. Giving reasons, explain the treatment assigned to
the following while estimating National Income: the following while estimating National Income:
(i) Social security contributions by employees (i) Contribution to provident fund by the
(ii) Pension paid after retirement employers.
(ii) Free dress provided to nurses by the hospital.
Ans : DELHI 2011
Ans : OD 2015
(i) Social security contributions are included as
part of compensation of employees and are (i) Employers’ contributions to the provident
not separately counted in national income. fund are included in national income as they
(ii) Pension payments after retirement are form part of employees’ compensation.
excluded from national income as they are (ii) Free dresses provided to nurses by the hospital
considered transfer payments. are included in national income as they are
also part of employees’ compensation.
153. Giving reasons, explain the treatment assigned to
the following while estimating National Income: 157. Giving reason explain how should the following
(i) Expenditure on maintenance of a building. be treated in estimating National Income:
(ii) Expenditure on adding a floor to the building. (i) Expenditure on fertilizers by a farmer.
(ii) Purchase of tractor by a farmer.
Ans : SQP 2011
Ans : DELHI 2012
(i) Expenditure on building maintenance (i) Expenditure on fertilizers by a farmer is
is excluded from national income as it excluded from national income as it is an
is intermediate expenditure, not final intermediate cost and part of the value of
expenditure. output, not national income.
(ii) Expenditure on adding a floor to a building is (ii) Purchase of a tractor by a farmer is included
included in national income as it contributes in national income as it represents an
to domestic capital formation. investment.

154. Giving reasons, explain the treatment assigned to 158. Giving valid reasons, explain how the following
the following while estimating National Income: would be treated while estimating National
(i) Payment of income tax by a firm. income:
(ii) Festival gift to employees. (i) Payment of indirect taxes by a firm.
(ii) Purchase of goods by foreign tourists.
Ans : COMP 2015
Ans : SQP 2022
(i) Income tax paid by a firm is already accounted
(i) Indirect tax payments by firms are excluded
for under corporate tax and is not separately
from National Income estimates as they are
included in national income.
transfer payments with no corresponding
(ii) Festival gifts to employees are part of services provided by the government.
compensation of employees and are included (ii) Expenditures by foreign tourists on domestic
in national income. products are considered exports of goods and
services, hence included in National Income
155. Giving reasons, explain the treatment assigned to
calculation.
the following while estimating National Income:
(i) Subsidy on the output produced 159. Giving reason explain how should the following
(ii) Contribution to provident fund by the be treated in estimating National Income:
employees (i) Payment of bonus by a firm
Ans : FOREIGN 2017 (ii) Payment of interest on a loan taken by an
employee from the employer.
(i) Subsidy on output is excluded from national
income as it is a unilateral transfer payment Ans : OD 2012
by the government to firms. (i) Bonus is part of employee compensation and
(ii) Employees’ contributions to provident funds is included in National Income as it reflects
are not separately included as they are payment for services rendered.
already part of wages and salaries. (ii) Interest on loans taken by employees for
consumption is excluded from National

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 41

Income as it does not contribute to production Ans : SQP 2012

or income generation. (i) A family’s expenditure on children’s

education is final consumption expenditure,
160. Giving reason explain how should the following representing payment for services and is
be treated in estimating National Income: included in National Income.
(i) Interest paid by banks on deposits by (ii) A school’s electricity payment is an
individuals. intermediate cost, used to calculate value-
(ii) National debt interest. added and is not directly included in National
Ans : OD 2012 Income.
(i) Interest paid by banks to individuals is 164. How should the following be treated in the
included in National Income as it represents calculation of national income? Give reasons for
a factor payment for the use of capital by your answer.
producers. (i) Government expenditure on street lighting.
(ii) Interest on national debt is excluded from (ii) Sale of an old house
National Income since it is a transfer payment
for loans used for government consumption, Ans : OD 2016

not production. (i) Government expenditure on street lighting is

included in National Income as it represents
161. Should the following be treated as final final consumption expenditure in the
expenditure or intermediate expenditure? Give expenditure method.
reasons for your answer. (ii) Sale of an old house is not included in National
(i) Purchase of furniture by a firm Income since it does not contribute to the
(ii) Expenditure on maintenance by a firm. current production of goods and services; it
Ans : OD 2012 was accounted for when first constructed.
(i) A firm’s purchase of furniture is considered 165. How are the following treated while calculating
final expenditure as it qualifies as investment, national income? Give reasons for your answer.
contributing to National Income. (i) Receipts from sale of land
(ii) Maintenance expenditure by a firm is (ii) Profits earned by the branch of an Indian
intermediate expenditure since it is recurring bank in France.
and does not involve permanent investment,
excluding it from National Income. Ans : COMP 2016

(i) Receipts from land sales are excluded

162. Giving reason, explain how should the following from National Income as land is a natural
be treated while estimating National Income: resource and its sale does not involve current
(i) Expenditure on free services provided by production.
government.
(ii) Profits from an Indian bank branch in France
(ii) Payment of interest by a government firm.
are included in National Income as they
Ans : OD 2017 represent factor income earned by an Indian
(i) Government’s final consumption expenditure resident from abroad.
is included in National Income as it reflects
166. How should the following be treated while
spending on goods and services for public
calculating national income? Give reasons for
welfare.
your answer:
(ii) Interest paid on loans for productive purposes
(i) Profits earned by a branch of foreign bank in
is included in National Income as it constitutes
India.
a factor payment by producers.
(ii) Salary received by Indian employees working
163. How should the following be treated while in American embassy in India.
estimating National Income? Give reasons. Ans : SQP 2016
(i) Expenditure on education of children by a
(i) Profits earned by a foreign bank’s branch in
family.
India are considered factor income to abroad
(ii) Payment of electricity bill by a school.
and are not included in National Income.

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CH 1 : NATIONAL INCOME AND RELATED AGGREGATES

(ii) Salaries received by Indian employees in (ii) National debt interest.

the American embassy in India are included
Ans : SQP 2010
in National Income as factor income from
abroad. (i) Interest paid by banks to depositors is
included in National Income as it represents
167. How should the following be treated while income earned by depositors from funds used
calculating national income? Give reasons for by banks for productive purposes.
your answer. (ii) National debt interest is not included in
(a) Interest received by households from banks. National Income as it is a transfer payment,
(b) Dividend received by shareholders. reflecting loans used for both productive and
Ans : DELHI 2016
non-productive purposes.

(i) Interest received by households from banks is 171. State the three components of Income from
included in National Income as it represents Property and Entrepreneurship.
factor income earned from productive
Ans : COMP 2020
activities by a production unit.
(ii) Dividends received by shareholders are Income from property and entrepreneurship,
included in National Income as they are part known as Operating Surplus, comprises :
of profits distributed by production units to Rent : Income from land.
their owners. Interest : Earnings from capital.
Royalty : Income from patents or copyrights.
168. Giving reason, explain how are the following Profit : Includes dividend, corporate tax and
treated in estimating National Income by the retained earnings (undistributed profits).
income method:
(i) Interest on a car loan paid by an individual. 172. Are all producer goods capital goods? Give reason.
(ii) Interest on a car loan paid by a government- Ans : SQP 2020
owned company.
Producer goods include intermediate goods, such
Ans : FOREIGN 2010 as raw materials and capital goods, like machinery.
(i) Interest on a car loan paid by an individual is Thus, while all capital goods are producer goods,
not included in National Income because it is not all producer goods qualify as capital goods.
taken for consumption purposes and does not
173. Can any value addition be made to final goods?
contribute to production.
(ii) Interest is included in National Income only Ans : OD 2015
if it relates to loans taken for investment Final goods are those that are outside the
purposes, contributing to productive production boundary, ready for sale and used
activities. by the ultimate consumer for consumption or
investment. These goods undergo no further value
169. Explain the interdependence between the two
addition.
economic units in a two sector circular flow model.
Ans : DELHI 2011 174. Is there any difference between GDPMP and
GDPFC in a two sector economy?
In a two-sector circular flow model without
government or foreign trade, the economy Ans : FOREIGN 2019
comprises two units : firms and households. In a two-sector economy with only firms and
Households provide factor services (like labor, households, there is no government sector.
capital) to firms and earn income in return. Consequently, there is no difference between GDP
This income is fully spent on goods and services at Market Price (GDPMP) and GDP at Factor
produced by firms, creating a continuous flow of Cost (GDPFC), as net indirect taxes (indirect
income and expenditure within the economy. taxes minus subsidies) are absent.
170. Giving reason, explain how are the following 175. Why are net exports (i.e., exports – imports)
treated in estimation of National Income by the included while estimating domestic income?
income method:
(i) Interest paid by banks to depositors. Ans : COMP 2016

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 43

Exports are included in National Income as they conducted within the framework of an organized
represent goods and services produced within the market structure, further excluding them from
domestic territory. Conversely, imports are treated the economic activity category.
as a negative item since they involve expenditure
on goods produced outside the domestic territory. 179. Which among the following are capital goods and
which are consumer goods and why?
176. Will expenditure on purchase of second hand (i) A car used as a taxi
plant and machinery from the rest of the world be (ii) Refrigerator in a hotel
included while estimating national income. Give (iii) Air-conditioner in a house
reasons for your answer.
Ans : DELHI 2018
Ans : SQP 2013
(i) A car used as a taxi is classified as a capital
A second-hand asset, when freshly purchased, good because it serves as a long-term
is treated as domestic fixed capital formation investment for the buyer, generating income
and included in National Income estimation. It through its use in business operations.
contributes to the domestic economy’s capital (ii) A refrigerator in a hotel is considered a
stock. capital good since it represents a long-term
investment that supports the hotel owner’s
business activities.
(iii) An air conditioner in a house is categorized as
THREE MARK QUESTIONS a consumer good because it is utilized by the
consumer for personal consumption rather
than for income-generating purposes.
177. Define Intermediate consumption and explain it
with an example. How is it different from Final 180. Giving reasons, categorise the following into
consumption? stocks and flows:
(i) Losses
Ans : DELHI 2018
(ii) Capital
Intermediate consumption includes the value (iii) Production
of goods and services that a production unit (iv) Wealth
purchases to use completely within the same year
Ans : COMP 2011
or for resale. It is excluded from the domestic
income calculation. Examples are raw material
(i) Losses are flows : Because they are
stocks or semi-finished goods, like milk for
related to a period
restaurants or cotton for factories. Conversely,
of time.
final consumption includes goods purchased
for consumption or investment, like milk by a (ii) Capital is a stock : Measured at a point
consumer or a machine by a producer. of time.
(iii) Production is a : Because it is
178. ‘Domestic services (Household services) performed
flow measured over a
by a woman are not considered as an economic
period of time.
activity.’
Defend or refute the given statement with valid (iv) Wealth is a stock : As it measured at a
reason. point of time.
Ans : FOREIGN 2020
181. Giving reason, categories the following into stocks
I support the statement that domestic services and flows:
performed by women are not classified as (i) Profits
economic activities. This is because these services (ii) Gross domestic product
are driven by love and affection rather than the (iii) Savings
intent to earn income, making it challenging to (iv) Balance in a bank account
assign them a market value. Additionally, such
activities do not contribute to the production of Ans : OD 2011,2013

goods and services in the economy and are not (i) Profits are considered flows because they

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CH 1 : NATIONAL INCOME AND RELATED AGGREGATES

are measured over a specific period of time, from Abroad (NFIA) for the following reasons :
reflecting the earnings generated during that (i) Exports represent the purchase of goods
duration. produced domestically by the rest of the
(ii) Gross Domestic Product (GDP) is a flow world. Since these goods are produced within
since it represents the total value of goods the domestic territory, they are included in
and services produced within a specific time the GDP, not NFIA.
frame, usually a fiscal year. (ii) Export receipts are the revenue earned by
(iii) Savings are categorized as flows as they firms from selling their output. They do not
accumulate over a period of time, indicating constitute factor income, which includes rent,
the portion of income not spent during that interest, profits and wages earned abroad.
duration. Furthermore, exports are a domestic concept,
(iv) Balance in a bank account is a stock because while NFIA pertains to a national concept.
it represents the amount available at a specific
point in time. 185. Explain the following terms:
(i) Operating surplus
182. What is Gross Domestic Product (GDP)? (ii) Mixed income
(iii) Transfer payments.
Ans : FOREIGN 2023

The gross monetary value of final goods and Ans : SQP 2013

services produced within a country’s domestic (i) Operating Surplus : This is the total of rent,
territory in a year is termed the domestic product. interest and profit. It represents income
It includes the portion of fixed capital consumed derived from the ownership of resources or
during the year, known as depreciation, but entrepreneurship.
excludes net factor income earned from abroad. (ii) Mixed Income : This refers to the combined
Gross Domestic Product (GDP) is derived by income of self-employed individuals or own-
subtracting ‘net factor income from abroad’ from account workers and profits of unincorporated
Gross National Product (GNP). Represented enterprises that do not maintain formal
mathematically : accounts.
GDP = GNP – Net Factor Income from Abroad (iii) Transfer Payments : These are unilateral
GDP = NNP + Depreciation – Net Factor Income payments received without contributing to
from Abroad the production of goods and services. As they
do not add to the current economic output,
183. Discuss briefly the concept of ‘Externalities’, with they are excluded from National Income.
suitable example. Examples include scholarships awarded to
Ans : OD 2012 students.
Externalities are the unintended benefits or harms 186. Define ‘net factor income from abroad’. How is it
caused by an activity of a firm or individual, different from ‘net exports’ ?
for which no payment or penalty is imposed.
Activities causing harm to others are termed Ans : DELHI 2019

negative externalities. Net Factor Income from Abroad (NFIA) is the

For instance, factories produce goods that difference between what a country’s factors of
contribute to economic welfare, but they also production earn abroad and what foreign factors
pollute the environment, adversely affecting earn within the country. It is part of the national
people’s well-being. While the production of product but excluded from the domestic product.
goods enhances welfare, the resulting pollution Net Exports, by contrast, represents the difference
reduces it. However, this negative impact is not between a country’s exports and imports.
reflected in the GDP measurement. The key distinction is that net exports are a
domestic concept, encompassing non-factor
184. Export are not a part of ‘Net Factor Income from services, while NFIA is a national concept,
abroad.’ involving only factor services such as rent, wages,
Elaborate the reason behind the given statement. interest and profits.
Ans : COMP 2022

Exports are excluded from Net Factor Income

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 45

187. Define ‘value of output’. How is it different from On the other hand, subsidies are financial or
‘value addition’ ? in-kind support provided by the government to
promote economic or social objectives. Subsidies
Ans : SQP 2019
are given to firms or households to enhance
The value of all goods and services produced general welfare, encourage exports, foster
within an accounting year is referred to as the industrialization in backward regions, or boost
value of output, which includes both intermediate the production of specific goods. Unlike transfer
and final goods. Alternatively, it can be calculated payments, subsidies contribute to production and
as the sum of sales and the change in stock (closing are included in National Income.
stock minus opening stock) for the year.
Value addition, however, represents the 190. Giving reason state how are the following treated
difference between the value of output and in estimation of national income.
intermediate consumption. It reflects the (i) Payment of interest by an individual to a
contribution of factors of production during the bank on a loan to buy a car.
production process. (ii) Expenditure by government on providing free
educational services.
188. Explain the following: (iii) Expenditure on purchasing a machine
(i) Why are imports deducted while calculating installed in a production unit.
domestic product through the expenditure
method? Ans : OD 2017

(ii) Why is ‘indirect tax’ deducted while (i) Payment of Interest by a Bank to an
estimating national income by expenditure Individual : This is excluded from national
method? income estimation because the loan is used
for personal consumption purposes, not for
Ans : COMP 2013
production or investment.
(i) Net Exports (X - M) : Net exports, calculated (ii) Expenditure on Free Educational Services by
as exports (X) minus imports (M), form part the Government : This is included in national
of GDP under the expenditure method. Since income as it constitutes final government
imports are sourced from the rest of the world, expenditure, contributing to the economy’s
they are excluded from GDP calculations as welfare and output.
they do not represent domestic production. (iii) Expenditure on a Machine Installed in
(ii) Expenditure Method and National Income a Production Unit : This is included in
: National income, under the expenditure national income since it is a final investment
method, is initially calculated at market expenditure, directly contributing to
prices. To determine national income at production capacity and economic output.
factor cost (NNP at FC), indirect taxes are
subtracted, as these are included in market 191. Explain why subsidies are added to and indirect
prices but do not represent income earned by taxes are deducted from domestic product at
factors of production. market price to arrive at domestic product at
factor cost.
189. ‘Subsidies to the producers, should be treated as
transfer payments.’ Defend or refute the given Ans : OD 2010

statement with valid reason. A subsidy is a financial grant provided by the

government to producers to lower the prices
Ans : SQP 2020
consumers pay. In contrast, indirect taxes are
I disagree with the statement, as subsidies and levied on firms and households, increasing the
transfer payments are distinct concepts. Transfer final price of commodities. Subsidies do not
payments refer to payments made without any impose a financial burden on producers, unlike
exchange of factor services, intended purely to indirect taxes and are not directly linked to the
transfer purchasing power to specific groups, cost of production. As a result, subsidies are not
such as the elderly or destitute women. Examples included in production costs like indirect taxes.
include old-age pensions and unemployment To calculate domestic product at factor cost from
allowances, which are excluded from National domestic product at market price, subsidies are
Income calculations. added and indirect taxes are subtracted.

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CH 1 : NATIONAL INCOME AND RELATED AGGREGATES

192. Giving reason explain how should the following 194. How will you treat the following while estimating
be treated in estimating gross domestic product National Income of India? Give reasons for your
at market price? answer.
(i) Fees to a mechanic paid by a firm. (i) Dividend received by a foreigner from
(ii) Interest paid by an individual on a car loan investment in shares of an Indian company.
taken from a bank. (ii) Profits earned by a branch of an Indian bank
(iii) Expenditure on purchasing a car for use by a in Canada.
firm. (iii) Scholarship given to Indian student studying
in India by a foreign company.
Ans : OD 2014
Ans : OD 2010
(i) Fees Paid to a Mechanic by a Firm : This
is treated as intermediate expenditure by the (i) Factor Income to Abroad : This represents
firm and, therefore, is not included in GDP income paid to foreign factors of production
at Market Price (GDPMP), as it does not operating within the domestic territory. It is
constitute final output. subtracted from National Income as it does
(ii) Interest Paid by an Individual on a Car Loan not contribute to the country’s domestic
: This is excluded from GDPMP because the economy.
loan is used for consumption purposes, not (ii) Profit Earned by an Indian Bank Abroad
for production or investment and hence does : This is considered income earned from
not contribute to the economy’s productive abroad and is included in National Income,
output. as it reflects earnings generated by domestic
entities outside the country.
(iii) Expenditure on Purchasing a Car for Use by a
(iii) Transfer Payment : Such payments do not
Firm : This is included in GDPMP since it is
involve the production of goods or services
a final investment expenditure, representing
and are therefore excluded from National
a durable asset that contributes to the firm’s
Income estimation.
production activities.
195. Will the following be included in the national
193. How will you treat the following while estimating
income of India? Give reason for your answer:
domestic product of a country? Give reasons for
(i) Financial assistance to flood victims.
your answer:
(ii) Profits earned by the branches of a foreign
(i) Profits earned by branches of country’s bank
bank in India.
in other countries.
(iii) Salaries of Indians working in the American
(ii) Gifts given by an employer to his employees
Embassy in India.
on independence day.
(iii) Purchase of goods by foreign tourists. Ans : OD 2017

Ans : OD 2017 (i) Financial Assistance to Flood Victims : These

are classified as transfer payments since no
(i) Profits Earned by a Bank Outside the
economic activity occurs in exchange for
Domestic Territory : These are excluded from
these payments. Consequently, they are not
domestic product estimation because they
included in the National Income of India.
are earned outside the country’s domestic
territory and are part of net factor income (ii) Profits Earned by Foreign Bank Branches
from abroad (NFIA). in India : These are excluded from India’s
National Income as they are considered factor
(ii) Gifts Given by Employers to Employees :
income paid abroad. To calculate National
These are considered transfer or unilateral
Income, these profits are subtracted from
payments, not linked to the production of
Domestic Income.
goods or services and are therefore excluded
from the domestic product calculation. (iii) Salaries of Indians Working in the American
(iii) Goods Purchased by Foreign Tourists : These Embassy in India : These are included in
goods are produced within the domestic National Income as they represent factor
territory and are treated as exports. They income received from abroad, given that the
are included in domestic product estimation American Embassy is considered part of the
using the Expenditure Method. U.S. domestic territory.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 47

196. Giving reason explain how should the following (iii) Interest received on loans given to a friend for
be treated in estimation of National Income: purchasing a car.
(i) Expenditure by a firm on payment of fees to
Ans : OD 2012
a chartered accountant
(ii) Payment of corporate tax by a firm (i) Dividend as Factor Income from Abroad
(iii) Purchase of refrigerator by a firm for own use : Dividend is a component of profit and
represents factor income from abroad. Since it
Ans : OD 2015
contributes to domestic income, it is included
(i) Fees Paid to a Chartered Accountant by a in the estimation of National Income.
Firm : This is not included in National Income (ii) Exclusion of Non-Productive Payments
as it is considered intermediate expenditure : Payments that are not a result of the
by the firm and does not contribute to the production or flow of goods and services are
final output. excluded from National Income, as they do
(ii) Payment of Corporate Tax by a Firm : not reflect economic output.
Corporate tax is a transfer payment from the (iii) Loan for Consumption Purposes : Loans taken
firm to the government and is not directly for consumption purposes are not included in
included in National Income. However, it is National Income estimation, as they do not
accounted for as part of the firm’s profit, correspond to the flow of goods and services
which is a factor income. Therefore, it should within the economy.
not be separately added to National Income.
(iii) Purchase of a Refrigerator by a Firm for Own 199. How should the following be treated in estimating
Use : This is included in National Income as national income of a country? You must give
it is considered final consumption expenditure reason for you answer.
by the firm, contributing to economic output. (i) Taking care of aged parents.
(ii) Payment of corporate tax.
197. Will the following be included in the domestic (iii) Expenditure on providing police services by
product of India? Give reasons for your answer: the government.
(i) Profits earned by foreign companies in India.
Ans : COMP 2014
(ii) Salaries of Indians working in the Russian
Embassy in India. (i) Taking Care of Aged Parents : This is a
(iii) Profits earned by a branch of State Bank of non-economic activity as it arises from love
India in Japan. and affection, which cannot be monetarily
measured. Hence, it is excluded from National
Ans : OD 2017
Income estimation.
(i) Profit Generated Within India’s Domestic (ii) Payment of Corporate Tax : Corporate tax
Territory : This is included in the domestic is a part of profit, which is already included
product of India because the profit is in National Income. Therefore, it is not
generated within the country’s domestic accounted for separately in National Income.
boundaries. (iii) Expenditure on Police Services by the
(ii) Income Earned in the Russian Embassy : This Government : This is included in National
is not included in India’s domestic product Income as it forms part of government final
because the embassy is considered part of consumption expenditure, contributing to the
Russia’s domestic territory, not India’s. economy’s overall output.
(iii) Profits Earned in Japan : These are excluded
from India’s domestic product since they are 200. Giving reason explain how should the following
generated in Japan, which is outside India’s be treated in estimating national income:
domestic territory. (i) Electricity consumed by a firm.
(ii) Pension paid to the retired employees.
198. How will you treat the following while estimating (iii) Free treatment of the poor in hospitals.
National Income of India?
Ans : COMP 2013
(i) Dividend received by an Indian from his
investment in shares of a foreign company. (i) Electricity Consumed by a Firm : This is
(ii) Money received by a family in India from excluded from National Income because it is
relatives working abroad. an intermediate product. Including it would

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CH 1 : NATIONAL INCOME AND RELATED AGGREGATES

lead to double counting, as electricity is 203. How will you treat the following in the calculation
already accounted for when produced. of Gross Domestic Product of India? Give reasons
(ii) Pension Paid to Retired Employees : This for your answer.
is not included in National Income since it (i) Profits earned by a branch of foreign bank in
is a transfer payment, representing income India.
without any corresponding productive (ii) Salaries of Indian employees working in
activity. embassy of Japan in India.
(iii) Free Treatment of the Poor in Hospitals : This (iii) Salary of residents of Japan working in Indian
is excluded from National Income as it is a embassy in Japan.
transfer payment. Free treatment is provided
Ans : COMP 2012
without any productive service in return,
thus not contributing to economic output. (i) Profits Earned by a Branch of a Foreign Bank
in India : These profits are included in the
201. Giving reasons, state whether the following
domestic product of India because the bank
statements are true or false.
operates within India’s domestic territory,
(i) Real gross domestic product can be equal to
contributing to domestic economic activity.
nominal gross domestic product.
(ii) Salaries of Indian Employees Working in the
(ii) Savings are a stock.
Embassy of Japan in India : These are not part
(iii) Butter is only a final product. of India’s domestic product as the Embassy of
Ans : COMP 2012
Japan is considered part of Japan’s domestic
territory, not India’s.
(i) True : Real Gross Domestic Product (GDP) (iii) Salaries Paid to Residents of Japan Working
and Nominal GDP will be equal if the price in the Indian Embassy in Japan : These are
level remains constant, as there would be no included in the domestic product of India
need to adjust for inflation or deflation. because the Indian Embassy in Japan is
(ii) False : Savings are always measured over considered part of India’s domestic territory.
a specific time period, making them a flow
variable, not a stock. 204. Giving reason explain how the following should
(iii) False : Butter is a final product only when be treated in estimation of national income:
purchased by households for consumption. (i) Payment of interest by a firm to a bank
When bakeries buy butter to produce cakes (ii) Payment of interest by a bank to an individual
and pastries, it is considered an intermediate (iii) Payment of interest by an individual to a
good, as it serves as raw material for further bank
production.
Ans : OD 2015
202. What are externalities? Give an example of a
(i) Payment of Interest by a Firm to a Bank :
positive externalities and its impact on welfare of
This is included in National Income since the
the people.
interest is paid on a loan taken for productive
Ans : DELHI 2014 purposes. It is a factor payment made by a
Externalities are the unintended benefits or producer for utilizing financial resources.
harms resulting from the activities of a firm (ii) Payment of Interest by a Bank to an Individual
or individual, for which they are neither : This is considered a factor payment as the
compensated nor penalized. Positive externalities bank borrows funds to facilitate its banking
arise when activities benefit others. For instance, services. Therefore, it is included in National
the construction of a flyover or highway reduces Income.
transport costs and journey times for users. While (iii) Payment of Interest by an Individual to
the expenditure on construction is included in a Bank : This is not included in National
GDP, the welfare gains from positive externalities Income because it is a non-factor receipt.
are not accounted for. This suggests that actual The loan is used for consumption purposes
welfare exceeds the level indicated by GDP. rather than production, making it irrelevant
to economic output.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 49

205. How does increase in inequalities in distribution transport reduce greenhouse gas emissions, while
of income affect welfare of the society? Explain. reliable infrastructure streamlines supply chains
and facilitates efficient cross-border movement
Ans : COMP 2017
of goods and services. Thus, infrastructure
An increase in inequality implies that the rich investment directly and positively impacts
grow richer while the poor become poorer. Even economic growth.
if a country’s GDP rises, it does not guarantee
an improvement in overall welfare. This occurs 208. What is real GDP? State three limitations of
when the additional income from increased GDP GDP as an index of economic welfare.
is concentrated in the hands of a few, while others Ans : COMP 2016
may experience a decline in income. Since the
utility of money is greater for the poor than for National Income calculated at constant prices is
the rich, rising inequalities may reduce the overall referred to as real GDP. However, a higher GDP
welfare of society despite economic growth. does not always equate to greater welfare for the
following reasons :
206. Explain how ‘externalities’ are a limitation on (i) Unequal Income Distribution : GDP does
taking gross domestic product as an index of not account for income distribution, meaning
welfare. that the additional income generated might
Ans : FOREIGN 2011 be concentrated in the hands of a few, leaving
others with stagnant or declining welfare.
Externalities are the unintended benefits or
(ii) Exclusion of Non-Monetary Exchanges : Non-
harms caused by a firm or individual to others,
monetary activities, such as domestic services
without compensation or penalty. They do not
provided by housewives, are excluded from
operate within any market system where they
GDP calculations, despite their significant
can be bought or sold. Positive externalities
contribution to societal well-being.
improve welfare without direct payment, such
as when a well-maintained garden by Mr. X (iii) Externalities : GDP does not measure the
enhances Mr. Y’s enjoyment. However, such positive or negative externalities of economic
benefits are not reflected in GDP calculations. activities. For example, environmental
Negative externalities cause harm, like factory pollution caused by production harms social
emissions causing air or water pollution. While welfare, which is not reflected in GDP figures.
the factory’s output contributes to GDP, the
209. Gross Domestic Product (GDP) does not give
environmental damage reduces social welfare
us a clear indication of economic welfare of a
and no penalties or valuations are incorporated
country.” Defend or refute the given statement
into GDP. Consequently, GDP as a welfare index
with valid reason.
is imprecise, as it may either underestimate or
overestimate actual welfare. Ans : SQP 2011

207. “In the past few decades, Indian economy has (i) Unequal Income Distribution : GDP does
been fairly benefited by positive externalities not account for the distribution of income,
created by rapid rise in infrastructure.” Justify so an increase in GDP may benefit only a
the given statement with valid arguments. few, leaving a large section of the population
unaffected.
Ans : SQP 2024
(ii) Exclusion of Non-Monetary Exchanges
A positive externality refers to the benefits arising : Non-monetary contributions, such as
from the production or consumption of a product. domestic services provided by housewives, are
Investments in good infrastructure yield significant excluded from GDP calculations despite their
positive externalities. They reduce commute significant role in enhancing welfare.
times, ensure access to clean water and energy (iii) Externalities : GDP ignores the positive or
and provide safe public spaces for recreation, negative impacts of economic activities that
enabling individuals to lead more balanced lives do not involve direct rewards or penalties.
with time for personal development. Moreover, For instance, environmental pollution is a
infrastructure enhances employment, healthcare negative externality that harms welfare but is
and education quality. Clean energy and public not reflected in GDP.

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CH 1 : NATIONAL INCOME AND RELATED AGGREGATES

210. Explain how ‘distribution of gross domestic 213. “Many goods and services which may contribute
product’ is a limitation in taking gross domestic to welfare, but are not included in estimating
product as an index of welfare. Gross Domestic Product (GDP).”
Do you agree with the given statement? Give
Ans : DELHI 2011
valid reason in support of your answer.
The distribution of increased Gross Domestic
Product (GDP) significantly impacts economic Ans : SQP 2023

welfare. If a rise in GDP leads to greater income I agree with the statement. GDP does not
inequalities, the resultant improvement in account for transactions that are not expressed in
economic welfare may not align with the GDP monetary terms, which is a significant limitation
growth. In such cases, the gap between the rich as an index of a country’s welfare. Many non-
and the poor widens. Notably, an increase in the monetary activities, though crucial for growth
welfare of the rich contributes less to overall welfare and development, are excluded due to the
compared to a similar increase in the welfare of absence of authentic data. For instance, services
the poor, due to the diminishing marginal utility provided by housewives or social workers, often
of income among the wealthy. motivated by love and affection, are not evaluated
in monetary terms and therefore not included in
211. Explain how ‘non-monetary exchanges’ are a
GDP calculations.
limitation in taking gross domestic product as an
index of welfare. Such non-market transactions significantly
enhance economic welfare, yet their exclusion leads
Ans : OD 2011 to an underestimation of welfare, making GDP an
Many activities, such as domestic services incomplete measure of a nation’s well-being.
performed by women at home, are not evaluated
214. Is gross domestic product a true index of economic
in monetary terms. If these services were hired
welfare of the people? Give two reasons in support
from the market, their payments would have
of your answer.
been included in Gross Domestic Product (GDP).
Consequently, the exclusion of such non-monetary Ans : COMP 2014
exchanges results in an underestimation of GDP.
Welfare refers to a sense of well-being, influenced
This underestimation negatively impacts the
by both economic and non-economic factors.
assessment of economic welfare, as it fails to account
While GDP can be an indicator of economic
for significant contributions to societal well-being
welfare, it has significant limitations :
that are not captured in monetary terms.
(i) Externalities : These are unintended benefits
212. Management of a water polluting oil refinery says or harms caused by an activity that are not
that it (oil refinery) ensures welfare through its accounted for in market transactions. Since
contribution to Gross Domestic Product.” GDP excludes these effects, it may either
Defend or refute the argument of management underestimate or overestimate welfare. For
with respect to GDP as a welfare measure of the example, pollution from industries harms
economy. social welfare, while a public park enhances
it, but neither is reflected in GDP.
Ans : FOREIGN 2020
An increase in per capita real GDP generally (ii) Non-Monetary Exchanges : Activities like
suggests greater availability of goods and services, services provided by housewives or self-
implying enhanced economic welfare. However, produced goods, which contribute to welfare,
GDP may not accurately reflect true welfare due are excluded from GDP calculations due to
to its limitations. For instance, an oil refinery challenges in data collection and valuation.
contributes to GDP but harms economic welfare Consequently, GDP fails to capture their
by causing water pollution, a negative externality. impact on welfare accurately.
This pollution adversely impacts public health,
reducing overall welfare. Since GDP does 215. How can distribution of income be a limitation
not account for such negative externalities, it of using gross domestic product as an index of
overestimates actual welfare. Thus, the statement welfare? Explain.
that GDP reliably indicates economic welfare is Ans : OD 2011
refuted.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 51

The distribution of increased national income is 218. Suppose a ban is imposed on consumption of
a critical factor in assessing its impact. A rise liquor/tobacco in the country. Examine its effects
in national income does not guarantee that all on:
individuals’ incomes increase proportionately. (i) gross domestic product and
Some may experience greater gains, while others (ii) welfare.
might see little or even a decline in their income.
Ans : OD 2017)
This unequal distribution can lead to increased
income inequalities, which negatively impact (i) Gross Domestic Product (GDP) : Imposing a
the overall economic welfare of society. Thus, ban on the consumption of liquor or tobacco
to evaluate the true effect of a rise in national will reduce their demand, subsequently
income, it is essential to determine whether it lowering their production. Since production
reduces or exacerbates income inequalities. contributes to GDP, this decline will result in
a decrease in GDP.
216. Government incurs expenditure to popularize (ii) Welfare : Despite their widespread
yoga among the masses. Analyses its impact on consumption, liquor and tobacco are
gross domestic product and welfare of the people. detrimental to consumer health. A ban on
Ans : DELHI 2016
their consumption will likely enhance societal
welfare by improving public health and
By promoting yoga among the masses, the reducing the negative externalities associated
government aims to foster health awareness with their use.
and encourage a healthier lifestyle. Over time,
this initiative will benefit both society and the 219. As per The Economic Times report, dated April
economy. Adopting healthy habits will enhance the 11, 2023 “Electric Vehicle sales cross 10 Lakh
physical and emotional well-being of individuals, mark in financial year 2022-23.” Analyses the
contributing to overall welfare. A healthy likely impacts of this news on Gross Domestic
workforce positively impacts GDP by improving Product (GDP) and Welfare.
productivity and efficiency, increasing stamina
Ans : COMP 2024
and reducing absenteeism. These improvements
result in higher output and greater availability of The increased sales of electric vehicles positively
goods and services per person, further enhancing impact both GDP and welfare. Higher sales
the economic welfare of the population. directly contribute to economic value addition,
boosting Gross Domestic Product (GDP).
217. Sale of petrol and diesel cars is rising particularly Electric vehicles are environmentally friendly,
in big cities. Analyses its impact on gross domestic reducing carbon emissions and mitigating the
product and welfare. harmful effects of pollution. This improvement
Ans : OD 2016
in air quality enhances public health, reduces
healthcare costs and promotes overall welfare.
The final sale of cars contributes to GDP as Thus, the shift towards electric vehicles supports
cars are considered final products, providing economic growth while contributing to a healthier
transportation convenience and enhancing welfare. and more sustainable environment.
However, the increased sale of petrol and diesel
cars, especially in big cities, leads to significant 220. Explain ‘non-monetary exchanges’ as a limitation
negative externalities. Air and noise pollution of using gross domestic product as an index of
caused by vehicle emissions release harmful gases, welfare of a country.
adversely affecting citizens’ health, including
Ans : OD 2017
respiratory problems and other health issues.
These negative externalities diminish societal GDP does not account for transactions not
welfare and can have a detrimental impact on expressed in monetary terms, which is a significant
GDP over time due to increased healthcare costs limitation as an index of a country’s welfare. Many
and reduced productivity. Thus, while car sales non-monetary activities, such as services provided
boost GDP, the associated harms reduce overall by housewives or social workers, contribute to
welfare. national growth and welfare but are excluded
from GDP due to the lack of authentic data and
valuation challenges. These non-market activities,

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CH 1 : NATIONAL INCOME AND RELATED AGGREGATES

driven by love and affection, enhance economic (iii) Yes, as their centre of economic interest lies in
welfare. Consequently, GDP underestimates true India.
welfare and may not accurately reflect the overall
well-being of a nation. 224. During a given year nominal national income
increased by 14% while the real national income
221. Calculate Intermediate consumption from the increased by only 6%. Population increased by
following information: 2%. What has caused the difference between
nominal income and real income. What is the rise
Items (` in crores) in the real per capita income?
(i) Value of output 200 Ans : COMP 2017
(ii) NVAFC 80 Nominal income can change on account of –
(iii) Customs duty 15 (i) change in quantity of goods and services
produced and
(iv) Depreciation 20
(ii) change in price level. However, real national
(v) Rent 5 income changes only on account of changes in
quantity of goods and services.
Ans : SQP 2011
Therefore, a change of 14% in nominal national
NVAFC = (i) – Intermediate Consumption – (iv) – (iii) income is partly on account of 6% change in
80 = 200 – Intermediate Consumption – 20 – 15 quantity of goods and services and the remaining
Intermediate consumption = `85 crore 8% must be on account of rise in general price level.
Rise in real per capita income
222. Calculate sales from the following: = Rise in real national income – Rise in population
Items (` in crores) = 6% – 2% = 4%

(i) Subsidies 200 225. Explain the basis of classifying goods into
(ii) Opening stock 100 intermediate and final goods. Give suitable
examples.
(iii) Closing stock 600
Ans : DELHI 2010
(iv) Intermediate consumption 3000
Intermediate goods are products or services
(v) Consumption of fixed 700 bought by one production unit from another and
capital are entirely consumed or resold within the same
(vi) Profits 750 year, such as tires used in car manufacturing. Final
(vii) NVAFC 2000 goods are either purchased or self-produced for
consumption or investment purposes. Examples
(viii) Exports 100 include bread bought by households or machines
purchased by firms.
Ans : COMP 2010

NVAFC = Sales + (iii) – (ii) – (iv) – (v) + (i) 226. What is Gross Domestic Product (GDP)?

2000 = Sales + 600 – 100 – 3000 – 700 + 200 Ans : FOREIGN 2023

Sales = `5,000 crore The gross monetary value of final goods and
services produced within a country’s domestic
223. Are the following residents of India? Give reason: territory in a year is termed the domestic product.
(i) Indian going abroad for medical treatment. It includes the portion of fixed capital consumed
(ii) Foreigners working in Indian embassy. during the year, known as depreciation, but
(iii) Indians working in the office of the United excludes net factor income earned from abroad.
Nations Organization in India. Gross Domestic Product (GDP) is derived by
Ans : OD 2000 subtracting ‘net factor income from abroad’ from
(i) Yes, as visit for medical treatment is a short Gross National Product (GNP). Represented
period visit. mathematically :
(ii) No, as they are residents of the country to GDP = GNP – Net Factor Income from Abroad
which they belong. GDP = NNP + Depreciation – Net Factor Income
from Abroad

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 53
Ans :
FOUR MARK QUESTIONS DELHI 2015

The ‘Jan Dhan Yojana’ aims to provide every

household with at least one bank account,
227. Explain the circular flow of income. integrating demand deposits into the money supply.
or This initiative impacts national income as follows :
Discuss briefly, the circular flow of income in a (i) Increased bank accounts lead to more
two sector economy model. deposits, expanding the money supply.
(ii) With the legal reserve ratio constant, higher
Ans : OD 2016,2024
deposits enhance banks’ capacity for money
The flow of production, income generation and or credit creation.
expenditure involving different sectors of the (iii) Greater deposits boost banks’ lending
economy in the form of wages, rent and dividends, capacity.
is known as circular flow of income (as shown in (iv) Increased lending promotes investment and
the diagram). Production gives rise to income capital formation in the economy.
(factor incomes), which in turn gives rise to (v) Consequently, aggregate demand grows, driving
demand for goods and services. Circular flow of an increase in the country’s national income.
income refers to continuous circular movement
of aggregate value of goods and services between 229. Distinguish between stocks and flows. Give two
households and firms, either as factor payments, examples of each.
or as expenditure on goods and services. In an Ans : `OD 2013
economy, money keeps on flowing in the form
of income and expenditure among the different Difference between Stocks and Flows
sectors of the economy.
Basis Stocks Flows
1. Meaning Stocks Flows relate
relate to to a period of
a point of time.
time.
2. Time Stocks Flows have
Dimension do not a time
have time dimension.
dimension.
3. Affect- Stocks are Flows are
ability affected by affected by
flows, e.g., stocks, e.g.,
more is more is the
the saving, stock of
This demand leads to expenditure by households more is the capital, more
on goods and services produced. The movement stock of is the volume
of factor payments from production units to capital. of output.
households and that of payment for goods 4. Relativity Some stocks Some flows
and services from households to firms is called have related have related
money flow as shown by the outer loop in the flows such stocks, such as
given diagram. In this way income generated by as money flow of water
production units goes back to production units supply and and quantity
and makes the circular flow complete. change of water in a
in money tank.
228. Government of India has recently launched
supply.
‘Jan Dhan Yojna’ aimed at every household in
the country to have at least one bank account. 5. Example Its examples Its examples
Explain how deposits made under the plan are are Wealth, are Raw
going to affect National Income of the country. Stock of materials,
capital etc. Fuel etc.

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CH 1 : NATIONAL INCOME AND RELATED AGGREGATES

230. Explain the problem of double counting in secondary and tertiary based on their
estimating National Income with the help of an activities.
example. Also explain two alternative ways of (ii) Calculate Net Value Added at FC : For
avoiding the problem. each unit, determine Net Value Added at
Ans : OD 2010
Factor Cost (NVA at FC) by subtracting
intermediate consumption, depreciation and
While estimating national product, the value of net indirect taxes from the value of output.
a commodity should be counted only once. If the
(iii) Aggregate by Sector : Sum the NVA at FC
value of a commodity is counted more than once,
of all producing units within each industrial
this is known as the problem of double counting,
sector to find the sector’s total NVA at FC.
such as counting the value of sugarcane and sugar
(iv) Compute Domestic Income (NDP at FC) :
both. Here, sugarcane used as raw material in the
Add the NVA at FC of all industrial sectors
production of sugar has been counted twice. In
to derive Domestic Income.
the given example, we should only count the value
of sugar which is a final product. Sugarcane is a (v) Add NFIA : Include Net Factor Income
raw material or an intermediate good. Therefore, from Abroad (NFIA) to Domestic Income to
while calculating the national product, value of calculate National Income (NNP at FC).
intermediate goods should not be counted. In
232. State the steps pertaining to the estimation of
this way, by finding the value of final goods, the
National Income by Income Method.
problem of double counting can be solved.
The problem of double counting can be solved Ans : SQP 2024

with the help of value added method also. This Steps involved in estimating national Income by
can be explained with the help of the example of Income Method:
production of sugar taken above. Let us say that
Step 1 : Identify and classify the production units.
the value of sugarcane is `1,000 and that of sugar
All the producing enterprises employing various
`1,500. Here, in the first production stage, where
factors of production are identified and classified
sugarcane is produced, value added is `1,000
into primary, secondary and tertiary sectors.
(sale price - cost of production) and during the
second and final production stage where sugar Step 2 : Estimate the factor income paid by each
is manufactured, value added is `500 (`1,500 – sector.
`1,000). Therefore total value added is `1,500 The factor incomes paid by each sector are
(`1,000 + `500) which is equal to the value of classified under the following heads :
final product i.e., sugar. (i) Compensation of employees;
This can be understood well looking at the value- (ii) Rent and Royalty;
added statement given below: (iii) Interest;
(iv) Profit;
Production Sale Cost Value Expenditure on
Stage Price added Final Product (v) Mixed Income.
1. Sugarcane 1,000 Zero 1,000 ... Step 3 : Calculate Domestic Income (NDPFC).
When factor incomes of all the sectors are summed
2. Sugar 1,500 1,000 500 1,500
up, we get domestic income (NDPFC). In short,
Thus, the problem of double counting can be NDPFC = Compensation of Employees + Rent
avoided either by finding value added or by and Royalty + Interest + Profit + Mixed Income
finding the value of final goods. Step 4 : Estimate net factor income from abroad
(NFIA) to arrive at National Income.
231. State the steps pertaining to the estimation of
National Income by Value Added Method. In the final step, NFIA is added to domestic
income to arrive at National Income (NNPFC),
Ans : COMP 2024
i.e., NNPFC = NDPFC + Net factor income from
The process of estimating national income using abroad.
the Value Added Method (Product Method)
involves these steps : 233. Describe the expenditure method of calculating
(i) Classify Producing Units : Identify all Gross Domestic Product at market price.
producing units in the domestic economy Ans : OD 2015,2024
and group them into three industrial sectors,

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 55

In the final expenditure method of calculating included since they represent productive
National Income, we take the sum of final services.
expenditures on consumption and investment. (v) Exclude Shares and Bonds : These are
This sum equals GDPMP. These final expenditures financial claims and do not contribute to the
are on the output produced within the domestic flow of goods or services, so they are excluded.
territory of the country.
Its main components are – 235. “While estimating Gross Domestic Product
(i) Private final consumption expenditure; (GDP) by expenditure method, entire focus is
(ii) Government final consumption expenditure. on expenditures incurred by the residents of the
(iii) Gross domestic capital formation: country.”
(a) Gross domestic fixed capital formation Do you agree with the given statement? Give
(b) Change in stock (Closing stock - Opening valid reason in support of your answer.
stock) Ans : SQP 2023
(iv) Net Exports (Exports – Imports)
Disagree with the statement because the
The following steps are involved in calculating
expenditure method emphasizes final expenditure
National Income by Expenditure method:
on goods and services (consumption and capital)
1. Identify and classify the economic units
produced within the domestic territory. These
incurring final expenditure into (a) Household
goods can be purchased by :
sector, (b) Government sector, (c) Firms, (d)
(i) Residents : Reflected as Private Final
Rest of the world.
Consumption Expenditure.
2. Final expenditure incurred by these economic
(ii) Government : Included as Government Final
units is estimated and classified under the
Consumption Expenditure.
following heads, the sum of which gives us
(iii) Firms and Government : Represented by
Gross Domestic Product at Market Price
Gross Domestic Capital Formation.
(GDPMP).
(iv) Non-Residents : Accounted for as Net Exports
GDPMP= Private final consumption expenditure (exports minus imports).
+ Government final consumption expenditure Imports are subtracted as they are not produced
+ Gross Domestic Capital Formation domestically. Thus, the expenditure method
+ Net Exports focuses only on expenditures contributing to
domestic production.
234. State any four precautions that are taken while
calculating national income by expenditure 236. What (any four) precautions should be taken
method. while estimating national income by income
method?
Ans : OD 2016
Ans : COMP 2015
Precautions for the expenditure method in
national income estimation are : Precautions for the Income Method in national
(i) Exclude Intermediate Expenditure : Avoid income estimation are :
including intermediate goods expenditure (i) Exclude Transfer Incomes : Receipts like
as it is already part of final expenditure; scholarships and donations are excluded as
counting it again causes double counting. they do not arise from productive activities.
(ii) Exclude Second-Hand Goods Purchases (ii) Exclude Income from Second-Hand Goods
: Expenditure on second-hand goods is : Such income is not included because the
excluded since it was accounted for when first original sale has already been accounted for.
purchased. However, payments for related (iii) Exclude Income from Shares and Bonds :
services like brokerage or commission are Earnings from shares, bonds and debentures
included as productive services. are not included as they do not contribute
(iii) Omit Transfer Payments : Payments like to the current flow of goods and services
donations and charities are excluded as they but represent paper claims and ownership
are non-productive and do not add value. changes.
(iv) Include Own Account Production : (iv) Exclude Windfall Gains : Profits from lotteries
Expenditure on self-consumed goods or and similar activities are omitted since they
imputed rent of owner-occupied houses is are unrelated to productive efforts.

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CH 1 : NATIONAL INCOME AND RELATED AGGREGATES

237. With suitable examples, distinguish between final (iii) Include Imputed Rent : Rent of owner-
goods and intermediate goods. occupied houses is imputed and included.
(iv) Avoid Intermediate Goods : Their value is
Ans : FOREIGN 2023
excluded to prevent double counting, as it is
Difference between Intermediate goods and Final already part of final goods’ value.
goods (v) Include Fixed Capital Assets : Own-
account production of fixed capital assets by
Basis Intermediate Final goods
production units is considered, as these are
goods
produced for the market.
1. Meaning Intermediate Final goods refer to (vi) Include Retained Goods : The value of goods
goods refer to those goods which
those goods which are used either for
retained for self-consumption is added.
are used either consumption or for
for resale or for investment. 239. Distinguish between Nominal Gross Domestic
further production Product and Real Gross Domestic Product.
in the same year.
Ans : DELHI 2010
2. Nature They are not They are included
included in both in both national Difference between Nominal GDP and Real GDP
national and income as well as
domestic income. Domestic income. Basis Nominal GDP Real GDP
3. Demand They have a They have a direct 1. Meaning The aggregate Real GDP refers
derived demand demand as they market value of to the value of
as their demand satisfy the wants the economic economic output
depends on the directly. output produced produced in a
demand for final in a year within given period,
goods. the boundaries adjusted
of the country is according to the
4. Boundary These goods These are those
known as Nominal general price
line are still within goods which
GDP. level.
the production have crossed
boundary line. the boundary of 2. Inflation Nominal GDP Real GDP adjusts
consumption or does not take into the inflation into
investment. consideration the it.
5. Example Intermediate These goods effects of inflation.
goods are used are used by 3. Expressed in Current year Base year prices
by the industry house holds for prices. or constant
to produce final consumption. for prices.
goods. Example, example, Wheat
Wheat and sugar and sugar are 4. Value It gives higher It generally gives
are intermediate final goods for a value. the lower value.
goods for a bakery consumer.
that produces 5. Uses Comparison of Comparison of
bread and biscuits. various quarters of two or more
the given year can financial year can
be made. be done easily.
238. Explain the precautions that are taken while
6. Economic Economic growth It is the good
estimating national income by value added
growth cannot be analyses indicator of
method. easily. economic growth.
Ans : OD 2017

Precautions for measuring national income using 240. How is Real Gross Domestic Product (GDP)
the Value Added Method include : different from Nominal Gross Domestic Product
(i) Exclude Second-Hand Goods : Their sale (GDP)? Explain using a numerical example.
and purchase are omitted since they were Ans : FOREIGN 2019
included in earlier years. However, brokerage
The aggregate market value of the economic
or commission earned on such transactions is
output produced in a year within the boundaries
included as it facilitates a productive activity.
of the country is known as Nominal GDP. It is
(ii) Include Production for Self-Consumption :
expressed in current year prices and is considered
The imputed value of self-consumed goods is
as GDP without the effect of inflation.
added as it contributes to current output.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 57

Real GDP, on the other hand, refers to the value air and water pollution, negatively affecting the
of economic output produced in a given period health of nearby residents. Such external costs are
adjusted according to the changes in the general not reflected in real income calculations. Thus,
price level. real national income overlooks these impacts,
It is inflation adjusted GDP and is expressed in limiting its reliability as a welfare measure.
base year prices or constant prices.
242. Distinguish between ‘nominal income’ and ‘real
Real GDP is always considered as a better income’. Explain why due to the presence of non-
indicator of economic growth. monetary production, real national income on its
For example, an economy produces only one own cannot be treated as a true index of welfare.
commodity say rice and it produced 20 kg of rice
in year 2018 (base year). Suppose price of rice is Ans : OD 2013

`20/kg in 2018. So GDP of 2018 is `400 (i.e., 20 Real income, measured at constant prices,
kg × `20). Thus nominal as well as real GDP of reflects changes due to variations in the volume
2018 at current and constant prices is the same in of goods and services, not prices, making it
2018. Now, due to inflation the price of rice goes suitable for comparisons. Conversely, nominal
upto `25 kg in 2019 and economy produces same income, measured at current prices, is influenced
amount of rice, i.e., 20 kg. Now, Nominal GDP primarily by price changes and is less reliable for
has increased from `400 to `500 in 2019 but since comparative purposes.
the economy is producing same amount of rice, However, GDP calculations often exclude
i.e., 20 kg, it does not reflect growth. activities not evaluated monetarily, such as
In order to ascertain growth, real GDP of unpaid domestic work by women or barter
2019 needs to be estimated. For this value of rice exchanges, which involve direct trade of goods
produced in 2019 at base year price, i.e., price of or services without money. These exchanges,
rice in 2018 should be calculated. common in underdeveloped regions of developing
Production of rice in 2019 = 20 kg countries, remain unregistered, leading to GDP
Price of rice in base year, i.e., 2018 = `20/kg underestimation. Thus, GDP may not fully
Hence there is no growth. represent a country’s productive activity or well-
Now, suppose rice production in 2019 increases to being.
30 kg, then
243. Distinguish between “real” gross domestic
Nominal GDP = 25 × 30 = `750
product and “nominal” gross domestic product.
and Real GDP = 30 × 20 = `600 Which of these is a better index of welfare of the
people and why?
Growth Rate = 600 - 400 # 100
400 Ans : OD 2013

= 200 # 100 = 50% Real Gross Domestic Product (GDP) is calculated

400
at constant prices, using a fixed base year, while
241. Explain the concept of “real income”. Explain Nominal GDP is calculated at current prices.
why, due to the presence of externalities, real Real GDP reflects changes solely in the volume
national income in itself cannot be treated as a of output, whereas Nominal GDP is influenced by
true index of welfare. both output and price changes.
GDP is a superior indicator of welfare
Ans : (OD 2013
as it shows the actual growth in goods and
Real national income, measured at constant services available to people, unaffected by price
prices, reflects the output of goods and services fluctuations. Nominal GDP, on the other hand,
in an economy. While it increases with rising may rise due to inflation without indicating an
production, it cannot always serve as a true improvement in living standards. Thus, Real GDP
indicator of welfare. This is due to factors like provides a more accurate measure of economic
externalities, where the activities of firms or well-being.
individuals create unintended benefits or harms
without compensation.
For example, an oil refinery may increase national
income by producing more oil, but it also causes

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CH 1 : NATIONAL INCOME AND RELATED AGGREGATES

NUMERICAL QUESTIONS 246. Calculate Gross Value Added at Factor Cost:

Particulars (` in crores)
244. From the following data calculate “Net value (i) Units of output sold (units) 1,000
added at factor cost”. (ii) Price per unit of output 30
Particulars (` in crores) (`)

(i) Purchase of intermediate 500 (iii) Depreciation (`) 1,000

goods (iv) Intermediate cost (`) 12,000
(ii) Sales 750 (v) Closing stock (`) 3,000
(iii) Import of raw materials 50 (vi) Opening stock (`) 2,000
(iv) Depreciation 60 (vii) Excise (`) 2,500

(v) Net indirect taxes 100 (viii) Sales tax (`) 3,500

(vi) Change in stock (–) 30 Ans : DELHI 2012

(vii) Exports 20 Gross Value Added at Factor Cost (GVAFC)

= (Units of output sold × Price per unit of
Ans : OD 2011
output) + Closing stock - Opening stock -
Net Value Added at Factor Cost Intermediate cost - Excise duty - Sales tax
= Sales + Change in stock – Purchase of = (1,000 × 30) + 3,000 – 2,000 – 12,000 – 2,500
intermediate goods – Depreciation – Net – 3,500
indirect taxes = 33,000 – 20,000 = `13,000
= 750 + (–30) – 500 – 60 – 100
= 750 – 690 = `60 crores 247. The value of nominal GNP of an economy was
`2500 crores in a particular year. The value
245. From the following data calculate “Net value of GNP of that country during the same year,
added at factor cost”: evaluated at the prices of same base year was
`3000 crores. Calculate the value of the GNP
Particulars (` in crores) deflator of the year in percentage terms. Has the
(i) Sales 500 price level risen between the base year and the
year under consideration?
(ii) Purchase of intermediate 350
goods Ans : SQP 2013

(iii) Opening stock 60 GNP Deflator = Nominal GNP # 100

Real GNP
(iv) Indirect taxes 50 2, 500
= 100 = 83.3%
3, 000 #
(v) Consumption of fixed 90 No, the price level has not risen but fallen from
capital 100% to 83.3%.

(vi) Imports of raw materials 85 248. Find Net Value Added at Market Price:

(vii) Closing stock 80 (i) Depreciation (`) 700

(ii) Output sold (units) 900

Ans : COMP 2011

Net Value Added at Factor Cost (iii) Price per unit of output (`) 40
= Sales + Closing stock – Opening stock – (iv) Closing stock (`) 1,000
Purchase of intermediate goods – Consumption
(v) Opening stock (`) 800
of fixed capital – Indirect taxes
= 500 + 80 – 60 – 350 – 90 – 50 (vi) Sales tax (`) 3,000
= 580 – 550 = `30 crores (vii) Intermediate cost (`) 20,000

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 59
Ans : OD 2012
251. Find Net Value Added at Factor Cost:
Net Value Added at Market Price
= (Units of output sold × Price per unit of Particulars (` in lakhs)
output) + Closing stock – Opening stock – (i) Durable use producer 10
Intermediate cost – Depreciation goods with a life span of
= (900 × 40) + 1,000 – 800 – 20,000 – 700 10 years
= 36,000 + 1,000 – 21,500 = `15,500
(ii) Single use producer goods 5
249. Find out Net Value Added at Factor Cost:
(iii) Sales 20
(i) Price per unit of output (`) 25
(iv) Unsold output produced 2
(ii) Output sold (units) 1,000 during the year

(iii) Excise duty (`) 5,000 (v) Taxes on production 1

(iv) Depreciation (`) 1,000 Ans :

(v) Change in stocks (`) (–) 500 Depreciation

Value of durable use producer goods
=
(vi) Intermediate costs (`) 7,000 Life span
= ` 10 lakhs = `1 lakh
Ans : COMP 2014 10 years
NVA at Factor Cost Value of Output
= [Price per unit of output × Output sold = Sales + Unsold output produced during the
(units)] + Change in stocks – Intermediate year
costs – Depreciation – Excise duty = `20 + `2 = `22 lakhs
= (25 × 1,000) + (–500) – 7,000 – 1,000 – 5,000 Gross Value Added at market price (GVAMP)
= 25,000 – 13,500 = `11,500 = Value of Output – Single use producer goods
= 22 – 5 = `17 lakhs
250. Calculate “Net Value added at factor cost” from Net Value Added at Factor Cost (NVAFC)
the following data: = GVAMP – Depreciation – Taxes on production
Particulars (` in lakhs) = 17 – 1 – 1 = `15 lakhs

(i) Intermediate consumption 300 252. Calculate Gross Value Added at Market Price:
(ii) Change in stock 50 S.No. Particulars Amt. (in ` lakhs)
(iii) Net indirect taxes 70
(i) Depreciation 20
(iv) Sales 500
(ii) Domestic Sales 200
(v) Consumption of fixed capital 20
(vi) Imports 40 (iii) Change in Stocks (–)10

Ans : FOREIGN 2014

(iv) Exports 10

Value of output = Sales + Change in stock (v) Single use producer 120
= 500 + 50 = `550 lakhs goods
GVA at Market Price
Ans : FOREIGN 2020
= Value of output - Intermediate consumption
= 550 – 300 = `250 lakhs Value of Output
NVA at Factor Cost = Domestic Sales + Exports + Change in Stocks
= GVAMP – Net indirect taxes – Consumption of = 200 + 10 + (–10) = 200
fixed capital GVA at MP
= 250 – 70 – 20 = `160 lakhs = Value of Output - Single use producer goods
= 200 – 120 = `80 lakhs

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CH 1 : NATIONAL INCOME AND RELATED AGGREGATES

253. Calculate “Sales” from the following data: (iii) Intermediate consumption 200
Particulars (` in lakhs) (iv) Net indirect taxes 40
(i) Net value added at factor 560 (v) Exports 50
cost (vi) Depreciation 30
(ii) Depreciation 60 Ans : SQP 2014
(iii) Change in stock (–) 30
Value of output = Sales + Change in stock
(iv) Intermediate cost 1,000 = 400 – 20 = `380 lakhs
(v) Exports 200 GVAMP
(vi) Indirect taxes 60 = Value of output – Intermediate consumption
= 380 – 200 = `180 lakhs
Ans : DELHI 2013 NVAFC
Sales = GVAMP – Depreciation – Net indirect taxes
= Net value added at factor cost + Depreciation
= 180 – 30 – 40 = `110 lakhs
+ Indirect taxes + Change in stock +
Intermediate cost 256. Calculate Net Value Added at Market Price.
= 560 + 60 + 60 – (–30) + 1,000
= `1,710 lakhs Particulars (` in crores)
(i) Intermediate consumption 1,000
254. From the following data, calculate Net Value
Added at Factor Cost. (ii) Consumption of fixed 50
capital
Particulars (` in crores)
(iii) Net Indirect taxes 150
(i) Sales 300
(iv) Sales 2,000
(ii) Opening stock 40
(v) Exports 200
(iii) Depreciation 30
(vi) Net factor income to abroad (–) 100
(iv) Intermediate consumption 120
(vii) Change in stock (–) 50
(v) Exports 50
Ans : OD 2015
(vi) Change in stock 20
GVAMP
(vii) Net indirect taxes 15
= Sales + Change in stock – Intermediate
(viii) Factor income to abroad 10 consumption
= 2,000 + (–50) – 1,000 = `950 crores
Ans : OD 2015
NVAMP
Value of output = Sales + Change in stock = GVAMP – Consumption of fixed capital
= 300 + 20 = `320 crores = 950 – 50 = `900 crores
Gross Value of Product (GVAMP)
257. Calculate Net Value Added at Factor Cost
= Value of output – Intermediate consumption
(NVAFC) from the following data:
= 320 – 120 = `200 crores
Net Value Added at factor cost (NVAFC) Particulars (in ` lakh)
= GVAMP – Depreciation – Net Indirect Taxes
(i) Fixed capital goods 15
= 200 – 30 – 15 = `155 crores
(expected life span - 5 years)
255. From the following data, calculate “Net value (ii) Domestic Sales 200
added at factor cost”.
(iii) Change in stock (–) 10
Particulars (` in lakhs) (iv) Exports 10
(i) Sales 400 (v) Single use producer goods 120
(ii) Change in stock (–) 20 (vi) Net indirect taxes 20

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 61
Ans : OD 2024
= 20 + 2 = `22 lakh
Depreciation on Fixed capital goods Durable producer goods
Depreciation =
Fixed capital goods 15 Life span
= = =3
Expected life span 5
= 10 = `1 lakh
Net Value Added at Factor Cost (NVAFC) 10
= Domestic sales + Exports + Change in stock GVA at MP
– Single use producer goods – Depreciation – = Value of Output - single use producer goods
Net indirect taxes = 22 – 5 = `17 lakh
= (ii) + (iv) + (iii) – (v) – 3 – (vi) ...[From (i) NVA at FC = GVAMP – Depreciation – GST
= `200 + `10 + (–10) – `120 – `3 – `20
= 17 – 1 – 1 = `15 lakh
= `57 lakh

258. Calculate Net Value Added at Factor Cost 260. Calculate Net Domestic Product at Factor Cost
(NVAFC) from the following data: by Production Method.

S.No. Particulars Amount Particulars (` in crores)

(in ` (i) Net value added at market 1,000
crores) price by primary sector
(i) Value of output 800
(ii) Wages and salaries 2,000
(ii) Intermediate consumption 200
(iii) Indirect taxes 30 (iii) Social security 100
contributions by employers
(iv) Depreciation 20
(v) Subsidies 50 (iv) Net value added at market 600
price by the secondary
(vi) Purchase of machinery 50
sector
Ans : DELHI 2020
(v) Corporation tax 30
GVAMP = Value of Output
(vi) Retained earnings of 10
– Intermediate Consumption private corporation
= 800 – 200 = `600 crores
(vii) Net value added at market 1,400
NVAFC = GVAMP – Depreciation price by the tertiary sector
– (Indirect taxes – Subsidies)
(viii) Dividend 60
= 600 – 20 – (30 – 50) = `600 crores
(ix) Rent 300
259. Calculate Net Value Added at factor cost from
the following data: (x) Interest 300
(xi) Net indirect tax 200
S.No. Particulars Amt.
(` in lakhs) (xii) Social security contribution 80
by employees
(i) Durable producer goods 10
(with a life span of 10 Ans : OD 2011
years)
NDPFC by Production Method
(ii) Single use producer goods 5
= Net value added at market price by primary
(iii) Sales 20 sector + Net value added at market price
(iv) Unsold Goods (Stock) 2 by the secondary sector + Net value added
at market price by the tertiary sector - Net
(v) Goods & Services Tax 1
indirect tax
(GST)
= 1,000 + 600 + 1,400 – 200 = ` 2, 800 crores
Ans : DELHI 2023

Value of output = Sales + Unsold goods

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CH 1 : NATIONAL INCOME AND RELATED AGGREGATES

261. From the following data, calculate Net Value = Value of output in the economic territory –
Added at Factor Cost (NVAFC): Intermediate purchases by the primary sector
– Intermediate purchases by the secondary
S.No. Particulars Amount in sector – Intermediate purchases by the tertiary
(` crores) sector – Consumption of fixed capital – Indirect
(i) Price per unit of output 20 taxes
(ii) Output sold (units) 1,250 units = (i) – (iii) – (v) – (viii) – (xi) – (x)
= 4,100 – 600 – 700 – 700 – 50 – 100
(iii) Excise duty 5,000 = 4,100 – 2,150 = `1,950 crores
(iv) Consumption of fixed 1,000
capital 263. On the basis of the data given below for an
imaginary economy, estimate the value of Net
(iii) Change in stock (–) 500
Domestic Product at factor cost (NDPFC):
(v) Single use producer good 6,000
S.No. Particulars Amt. in
Ans : COMP 2023 (` crores)
NVAFC (i) Household Consumption 2,000
= Price per unit of output × Output sold (units) Expenditure
+ Change in stock – Single use producer goods (ii) Government Final 1,500
– Consumption of fixed capital – Excise duty Consumption Expenditure
= (20 × 1,250) + (–500) – 6,000 – 1,000 – 5,000
= 25,000 – 500 – 6,000 – 1,000 – 5,000 (iii) Gross Domestic Fixed 1,000
= `12,500 crores Capital Formation
(iv) Net Additions to stock 300
262. Calculate ‘Net Domestic Product at Factor Cost’
by the Production method. (v) Exports 700
(vi) Net Indirect Taxes 350
Particulars (` in crores)
(vii) Imports 200
(i) Value of output in the 4,100
economic territory (viii) Consumption of Fixed 250
Capital
(ii) Net imports (–) 50
(iii) Intermediate purchases by 600 Ans : COMP 2023

the primary sector NDPFC

(iv) Private final consumption 1,450 = (i) + (ii) + (iii) + (iv) + (v) – (vi) – (vii) –
expenditure (viii)
= 2,000 + 1,500 + 1,000 + 300 + 700 – 350 – 200
(v) Intermediate purchases by 700
– 250
the secondary sector
= 5500 – 800 = `4,700 crores
(vi) Government final 400
consumption expenditure 264. On the basis of the data given below for an
imaginary economy, estimate the value of Net
(vii) Net domestic fixed capital 200
Domestic Product at Factor Cost (NDPFC):
formation
(viii) Intermediate purchases by 700 S.No. Particulars Amt. in
the tertiary sector (` crores)
(ix) Net change in stocks (–) 50 (i) Household Consumption 3,000
(x) Indirect taxes 100 Expenditure

(xi) Consumption of fixed 50 (ii) Government Final 1,000

capital Consumption Expenditure

Ans : SQP 2010 (iii) Net Domestic Fixed Capital 1,000

NDPFc (Production Method) Formation

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(iv) Change in stock 200 (v) Net indirect tax 150

(v) Exports 500 (vi) Net domestic capital 200
(vi) Indirect Taxes 350 formation

(vii) Imports 300 (vii) Current transfers from 40

government
(viii) Subsidies 50
(viii) Depreciation 100
Ans : FOREIGN 2023 (ix) Net imports 30
NDPFC (x) Income accruing to 90
= (i) + (ii) + (iii) + (iv) + (v) – (vi) – (vii) + government
(viii)
= 3,000 + 1,000 + 1,000 + 200 + 500 – 350 – 300 (xi) National debt interest 50
+ 50 = `5,100 crores Ans : OD 2016

265. On the basis of the data given below for an NDPMP

imaginary economy, estimate the value of Gross = Private final consumption expenditure +
National Product at Market price (GNPMP): Government final consumption expenditure +
Net domestic capital formation – Net imports
S.No. Particulars Amt. in = 800 + 300 + 200 – 30 = `1,270 crores
(` crores) GNPMP
(i) Household Consumption 2,000 = NDPMP + Depreciation – Net factor income
Expenditure to abroad
(ii) Government Final 1,000 = 1,270 + 100 – (– 10) = `1,380 crores
Consumption Expenditure
267. Estimate the value of Net National Product
(iii) Gross Fixed Capital 1,100 at Factor Cost (NNPFC), using the following
Formation information:
(iv) Net Addition to Stock 200
Items (` in crores)
(v) Exports 600
(i) Household Consumption 1,200
(vi) Net factor income from 150 Expenditure
abroad
(ii) Business Fixed investment 800
(vii) Imports 400 Expenditure
Ans : DELHI 2023 (iii) Government Final 500
Consumption Expenditure
GNPMP
= (i) + (ii) + (iii) + (iv) + (v) + (vi) – (vii) (iv) Excess of Imports over 100
= 2,000 + 1,000 + 1,100 + 200 + 600 + 150 – Exports
400 = `4,650 crores (v) Net indirect tax 150
266. Find Gross National Product at Market Price: (vi) Change in Inventory (–) 50
(vii) Consumption of fixed 200
Particulars (` in crores)
capital
(i) Private final consumption 800
(viii) Net factor income from 80
expenditure
Abroad
(ii) Net current transfers to 20
(ix) Public fixed investment 70
abroad
(iii) Net factor income to (–) 10 Ans : OD 2024
abroad NNPFC
(iv) Government final 300 = (i) + (ii) + (iii) – (iv) – (v) + (vi) – (vii) +
consumption expenditure (viii) + (ix)

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CH 1 : NATIONAL INCOME AND RELATED AGGREGATES

= 1200 + 800 + 500 – 100 – 150 + (– 50) – 200 (viii) Net factor income from 80
+ 80 + 70 = `2,150 crores Abroad
268. Estimate the value of Net Domestic Product (ix) Public fixed investment 70
at Factor Cost (NDPFC), using the following
Ans : SQP 2024
information:
GDPMP = (i) + (ii) + (iii) – (iv) – (vi) + (ix)
Items (` in crores)
= 1200 + 800 + 500 – 100 + (–50) + 70
(i) Household Consumption 1,200
= `2,420 Crore
Expenditure
(ii) Business Fixed investment 800 270. Calculate Net Domestic Product at factor cost
Expenditure from the following data:
(iii) Government Final 500 Particulars (` in crores)
Consumption Expenditure
(i) Government final 2,000
(iv) Excess of Imports over 100 consumption expenditure
Exports
(ii) Net factor income to (–) 40
(v) Net indirect tax 150 abroad
(vi) Change in Inventory (–) 50 (iii) Gross domestic capital 800
(vii) Consumption of fixed 200 formation
capital (iv) Change in stock (–) 30
(viii) Net factor income from 80 (v) Net domestic capital 620
Abroad formation
(ix) Public fixed investment 70 (vi) Net indirect taxes 250
Ans : COMP 2024 (vii) Net Current transfers 800
NDPFC from rest of the world

= (i) + (ii) + (iii) – (iv) – (v) + (vi) – (vii) + (ix) (viii) Net exports (–) 500
= 1200 + 800 + 500 – 100 – 150 + (–50) – 200 + (ix) Profits 700
70 = `2,070 crore (x) Private final consumption 5,000
expenditure
269. Estimate the value of Gross Domestic Product
at Market Price (GDPMP), using the following Ans : OD 2011
information:
NDPFC
Items (` in crores) = Private final consumption expenditure +
(i) Household Consumption 1,200 Government final consumption expenditure +
Expenditure Net domestic capital formation + Net exports
– Net indirect taxes
(ii) Business Fixed investment 800
= 5,000 + 2,000 + 620 + (–500) – 250
Expenditure
= 7,620 – 750 = `6,870 crores
(iii) Government Final 500
Consumption Expenditure 271. Calculate Net domestic product at factor cost
(iv) Excess of Imports over 100 data:
Exports Particulars (` in crores)
(v) Net indirect tax 150 (i) Net indirect tax 130
(vi) Change in Inventory (–) 50 (ii) Government final 100
(vii) Consumption of fixed 200 consumption expenditure
capital (iii) Profits 90

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(iv) Net domestic capital 120 GNPMP

formation = NDPMP + Gross domestic fixed capital
(v) Change in stocks (–) 10 formation + Change in stock – Net domestic
capital formation + Factor income from abroad
(vi) Private final consumption 500 – Factor income to abroad
expenditure = 4,100 + 600 + (–20) – 500 + 50 – 100
(vii) Net imports 20 = 4,750 – 620 = `4,130 crores
(viii) Net current transfers to 10 273. Find out Gross National Product at Market Price:
abroad
(ix) Net factor income to 30 Particulars (` in crores)
abroad
(i) Net indirect tax 35
(x) Gross domestic capital 160
formation (ii) Private final consumption 500
expenditure
Ans : FOREIGN 2023

NDPFC (iii) Net national disposable 750

income
= Private final consumption expenditure +
Government final consumption expenditure + (iv) Closing stock 10
Net domestic capital formation – Net imports
(v) Government final 150
– Net indirect tax
consumption expenditure
= 500 + 100 + 120 – 20 – 130 = `570 crores
(vi) Net domestic fixed capital 100
272. Calculate Gross National Product at Market
formation
Price from the following data:
(vii) Net factor income to (–) 15
Particulars (` in crores) abroad
(i) Private final consumption 3,000 (viii) Net imports 20
expenditure
(ix) Opening stock 10
(ii) Factor income to abroad 100
(x) Consumption of fixed 50
(iii) Government final 800 capital
consumption expenditure
Ans : SQP 2011
(iv) Net export (–) 200
GNPMP
(v) Net current transfers from 300
rest of the world = Private final consumption expenditure +
Government final consumption expenditure
(vi) Gross domestic fixed 600
+ (Net domestic capital formation + Closing
capital formation
stock – Opening stock + Consumption of fixed
(vii) Change in stock (–) 20 capital) – Net imports – Net factor income to
(viii) Net indirect taxes 400 abroad
= 500 + 150 + (100 + 10 – 10 + 50) – 20 – (–15)
(ix) Factor income from 50 = 650 + 150 – 20 + 15
abroad
= 815 – 20 = `795 crores
(x) Net domestic capital 500
formation 274. Find out National Income:
Ans : DELHI 2011 Particulars (` in crores)
NDPMP (i) Net imports (–) 10
= Private final consumption expenditure + (ii) Net domestic fixed capital 100
Government final consumption expenditure + formation
Net domestic capital formation + Net exports
= 3,000 + 800 + 500 + (–200) = `4,100 crores

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CH 1 : NATIONAL INCOME AND RELATED AGGREGATES

(iii) Private final consumption 600 = Private final consumption expenditure +

expenditure Government final consumption expenditure
+ Gross domestic capital formation – Net
(iv) Consumption of fixed 60 imports – Consumption of fixed capital + Net
capital factor income from abroad – Net indirect taxes
(v) Change in stocks (–) 50 = 900 + 400 + 250 – 30 – 20 + (–40) – 100
(vi) Government final 200 = `1,360 crores
consumption expenditure
276. Calculate National Income:
(vii) Net factor income to 20
abroad (` in crores)

(viii) Net current transfers to 30 (i) Personal tax 80

abroad
(ix) Net indirect tax 70 (ii) Private final consumption 600
expenditure
(x) Factor income from 10
abroad (iii) Undistributed profits 30

Ans : OD 2012 (iv) Private income 650

National Income (NNPFC) (v) Government final 100
= Private final consumption expenditure + consumption expenditure
Government final consumption expenditure (vi) Corporate tax 50
+ [Net domestic fixed capital formation +
(vii) Net domestic fixed capital 70
Change in stocks] – Net imports – Net factor
formation
income to abroad – Net indirect tax
= 600 + 200 + [100 + (–50)] – (–10) – 20 – 70 (viii) Net indirect tax 60
= 800 + 100 – 50 + 10 – 90 (ix) Depreciation 14
= 910 – 140 = `770 crores
(x) Change in stocks (–) 10
275. Calculate National Income from the following (xi) Net imports 20
data:
(xii) Net factor income to 10
(` in crores) abroad

(i) Private final consumption 900 Ans : DELHI 2015

expenditure
National Income
(ii) Profit 100 = Private final consumption expenditure +
(iii) Government final 400 Government final consumption expenditure +
consumption expenditure Net domestic fixed capital formation + Change
in stocks – Net imports – Net factor income to
(iv) Net indirect taxes 100
abroad – Net indirect tax
(v) Gross domestic capital 250 = 600 + 100 + 70 + (–10) – 20 – 10 – 60
formation = `670 crores
(vi) Change in stock 50
277. Calculate ‘Net National Product at Market Price’:
(vii) Net factor income from (–) 40
abroad (` in crores)
(viii) Consumption of fixed 20 (i) Transfer payments by 7
capital government
(ix) Net imports 30 (ii) Government final 50
consumption expenditure
Ans : DELHI 2013
(iii) Net imports (–) 10
National Income (NNPFC)

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(iv) Net domestic fixed capital 60 = Private final consumption expenditure +

formation Net domestic capital formation + Change
in stock + Net exports + Government final
(v) Private final consumption 300 consumption expenditure
expenditure
= 500 + 100 + 20 + 40 + 200 = `860 crores
(vi) Private income 280 National Income (NNPFC)
(vii) Net factor income to (–) 5 = NDPMP + Net factor income from abroad –
abroad Net indirect taxes
= 860 + 30 – 50 = `840 crores
(viii) Closing stock 8
(ix) Opening stock 8 279. Calculate National Income.
(x) Depreciation 12 (` in crores)
(xi) Corporate tax 60 (i) Gross domestic fixed 200
(xii) Retained earnings of 20 capital formation
corporations (ii) Change in stock (–) 30
Ans : OD 2015 (iii) Net factor income to 50
abroad
NNPMP
(iv) Private final consumption 1500
= Private final consumption expenditure +
expenditure
Government final consumption expenditure +
Net domestic fixed capital formation + Closing (v) Net indirect taxes 100
stock – Opening stock – Net imports – Net (vi) Net exports 60
factor income to abroad
(vii) Profit 500
= 300 + 50 + 60 + 8 – 8 – (–10) – (–5)
= `425 crores (viii) Government final 600
consumption expenditure
278. Calculate National Income.
(ix) Consumption of fixed 20
(` in crores) capital

(i) Private final consumption 500 (x) Net current transfer to (–) 10
expenditure abroad

(ii) Net domestic fixed capital 100 Ans : OD 2015

formation
DDPMP
(iii) Net factor income from 30
= Private final consumption expenditure +
abroad
Government final consumption expenditure
(iv) Change in stock 20 + Gross domestic fixed capital formation +
(v) Net exports 40 Change in stock + Net Exports
= 1,500 + 600 + 200 – 30 + 60 = `2,330 crores
(vi) Net indirect taxes 50
National Income (NNPFC)
(vii) Mixed income 300
= NDPMP + Net factor income from abroad
(viii) Government final 200 - Net indirect taxes
consumption expenditure = 860 + 30 - 50 = `840 crores
(ix) Consumption of fixed 60 National Income (NNPFC)
capital
= GDPMP – Consumption of fixed capital – Net
(x) Net current transfer to (–) 10 indirect taxes – Net factor income to abroad
abroad = 2,330 – 20 – 100 – 50 = `2,160 crores
Ans : OD 2015

NDPMP

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CH 1 : NATIONAL INCOME AND RELATED AGGREGATES

280. Calculate national income: (vi) Net indirect taxes 100

(` in crores) (vii) Net exports (–) 60
(i) Net factor income to (–) 50 (viii) Net factor income to (–) 80
abroad abroad
(ii) Net indirect taxes 800 (ix) Net current transfer from 100
abroad
(iii) Net current transfers from 100
rest of the world (x) Dividend 100
(iv) Net imports 200 Ans : OD 2017
(v) Private final consumption 5,000 GDPMP
expenditure
= Private final consumption expenditure +
(vi) Government final 3,000 Government final consumption expenditure
consumption expenditure + Gross domestic fixed capital formation +
(vii) Gross domestic capital 1,000 Change in Stock + Net Exports
formation = 8,000 + 3,000 + 400 + 50 + (–60)
(viii) Consumption of fixed 150 = `11,390 crore
capital NNPMP
= GDPMP – Consumption of fixed capital – Net
(ix) Change in stock (–) 50
factor income to abroad
(x) Mixed income 4,000 = 11,390 – 40 – (–80) = `11,430 crore
(xi) Scholarship to students 80
282. Calculate (i) Gross Domestic product at market
Ans : DELHI 2020 price and (ii) National Income:
GDPMP (` in crores)
= Private final consumption expenditure + (i) Government final 4,000
Government final consumption expenditure + consumption
Gross domestic capital formation + Change in
stock – Net imports (ii) Private final consumption 3,500
= 5,000 + 3,000 + 1,000 + (–50) – 200 expenditure
= `8,750 crores (iii) Gross domestic capital 1,100
NNPFC (National Income) formation
= GDPMP – Consumption of Fixed Capital – Net (iv) Net exports 500
Factor Income to Abroad – Net indirect taxes
(v) Net factor income from 100
= 8,750 – 150 – (–50) – 800 = `7,850 crores abroad
281. Calculate net national product at market price: (vi) Net indirect taxes 300

(` in crores) (vii) Subsidies 40

(i) Gross domestic fixed 400 (viii) Change in stock 80
capital formation
(ix) Consumption of fixed 120
(ii) Private final consumption 8,000 capital
expenditure
Ans : OD 2018
(iii) Government final 3,000
consumption expenditure GPDMP
(iv) Change in stock 50 = Government final consumption expenditure +
Private final consumption expenditure + Gross
(v) Consumption of fixed 40
domestic capital formation + Net exports
capital
= 4,000 + 3,500 + 1,100 + 500 = `9,100 crores

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National Income (NNPFC) 285. Calculate the value of Domestic Income from the
= GDPMP + Net factor income from abroad – Net following data:
indirect taxes – Consumption of fixed capital S.No Particulars Amt. in
= 9,100 + 100 – 300 – 120 = `8,780 crores (` crores)
283. Calculate ‘Net Domestic Product at Factor Cost’ (i) Rent and Royalties 1,300
: (ii) Net Indirect Taxes 200
(` in crores) (iii) Wages & Salaries (in cash 1,700
(i) Net factor income to 30 & in kind)
abroad (iv) Corporate Tax 400
(ii) Sales 2,000 (v) Depreciation 400
(iii) Subsidies 20 (vi) Retained Earnings 300
(iv) Consumption of fixed 50 (vii) Dividends 400
capital
(viii) Net factor income from (–) 120
(v) Net current transfer to (–) 10 Abroad
abroad
(ix) Mixed Income of Self 1,400
(vi) Closing stocks 100 Employed
(vii) Opening stocks 200 (x) Change in Stock (–) 200
(viii) Intermediate costs 1,000
Ans : SQP 2023
(ix) Indirect tax 150
Domestic Income (NDPFC)
Ans : FOREIGN 2011 = (i) + (iii) + (iv) + (vi) + (vii) + (ix)
NDPFC = 1300 + 1700 + 400 + 300 + 400 + 1400
= `5,500 crore
= Sales + Closing stocks – Opening stocks –
Intermediate costs – Indirect tax + Subsidies 286. Calculate Net Domestic Product at factor cost.
– Consumption of fixed capital
= (ii) + (vi) – (vii) – (viii) – (ix) + (iii) – (iv) S.No Particulars Amt. in (` crores)
= 2,000 + 100 – 200 – 1,000 – 150 + 20 – 50 (i) Interest 700
= 2,120 – 1,400 = `720 crores
(ii) Compensation of 3,000
284. Suppose in a financial year, the Gross Domestic employees
Product (GDP) at market price of a country was (iii) Net Indirect Taxes 500
`1,100 crore. Net factor income from Abroad was
(iv) Rent and Profit 700
`100 crore, the net indirect taxes was `150 crore
and National income was `850 crore. (v) Transfer Payments 10
Calculate the value of depreciation, on the basis by Governments
of above information.
Ans : DELHI 2023
Ans : COMP 2011
NDPFC
NNPFC = Interest + Compensation of Employees + Rent
= GDPMP – Net Indirect Taxes – Depreciation + and Profit
Net Factor Income from abroad = 700 + 3000 + 700 = `4,400 crores
850 = 1100 – 150 – Depreciation + 100
287. Calculate the value of “Rent” from the following
Depreciation = 1100 + 100 – 150 – 850 data:
= `200 crore
(` in crores)
(i) Gross Domestic Product 18,000
at Market Price

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CH 1 : NATIONAL INCOME AND RELATED AGGREGATES

(ii) Mixed Income of Self- 7,000 Given:

Employed GDPMP = `27,500 crores
(iii) Subsidies 250 NDPFC = GDPMP – Indirect taxes + Subsidies
– Consumption of fixed Capital
(iv) Interest 800
NDPFC = 27,500 – 2,100 + 750 – 1,100
(v) Rent ?
= `25,050
(vi) Profit 975
NDPFC = Compensation of Employees
(vii) Compensation of 6,000
+ Interest + Profits + Rent
Employees
+ Mixed income of self employed
(viii) Consumption of Fixed 1,000
25,050 = 17,300 + 1,200 + 1,800 + 2,000
Capital
+ mixed income of self employed
(ix) Indirect Tax 2,000
Mixed income of self-employed
Ans : COMP 2019 = 25,050 – 17,300 – 1,200 – 1,800 – 2,000
Given: GDPMP = Z18,000 crores = `2,750 crores
NDPFC = GDPMP – Indirect Tax + Subsidies 289. From the following data, calculate:
– Consumption of fixed capital (i) Gross Domestic Product at Factor Cost
= 18,000 – 2,000 + 250 – 1,000 (ii) Factor Income to Abroad
= 16,000 – 750 = `15,250 crores (` in
Now, ‘000 crores)
NDPFC = Compensation of Employees (i) Compensation of 800
+ Interest + Rent + Profit employees
+ Mixed income of self employed (ii) Profits 200
15,000 = 6,000 + 800 + Rent + 975 + 7,000 (iii) Dividends 50
Rent = `15,250 – `14,775
(iv) Gross national product at 1,400
Rent = `475 crores MP

288. Calculate the value of “Mixed Income of self- (v) Rent 150
employed”from the following data: (vi) Interest 100

(` in crores) (vii) Gross domestic capital 300

formation
(i) Compensation of 17,300
employees (viii) Net fixed capital formation 200

(ii) Interest 1,200 (ix) Change in Stock 50

(iii) Consumption of Fixed 1,100 (x) Factor income from 60

Capital abroad

(iv) Mixed Income of Self- ? (xi) Net indirect taxes 120

Employed
Ans : DELHI 2010
(v) Subsidies 750
(i) Gross Domestic Product at Factor Cost
(vi) Gross Domestic Product 27,500 GDPFC = Compensation of employees + Rent
at Market Price + Interest + Profits
(vii) Indirect Tax 2,100 + Gross domestic capital formation
(viii) Profits 1,800 – Net fixed capital formation
– Change in Stock
(ix) Rent 2,000
= 800 +200 + 150 + 100 + 300 – 200 – 50
Ans : OD 2019
= 1,600 – 250 = `1,300 (in ‘000 crore)

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(ii) GDPFC = GNPMP (vi) Rent 300

– Net factor income from abroad
(vii) Interest 400
– Net indirect taxes
(viii) Factor income to abroad 120
1300 = 1400 – (Factor income from abroad
(ix) Net indirect taxes 250
– Factor income to abroad) – 120
(x) Net domestic capital 650
1300 = 1400 – (60 – Factor income to abroad)
formation
– 120
Factor income to abroad (xi) Gross fixed capital 700
formation
= 1300 – 1400 +60 +120
= `80 (in ‘000 crores) (xii) Change in stock 50

Ans : OD 2010
290. From the following data, estimate the value of
Net Indirect Taxes (NIT): (i) Gross Domestic Product at Market Price
GDPMP = Compensation of employees + Rent
S.No Particulars Amt. in
+ Interest + Profits
(` crores)
+ (Gross fixed capital formation)
(i) Net National Product at 1,400
+ Change in stock
Market Price (NNPMP)
– Net domestic capital formation
(ii) Net Factor Income from (–) 20 + Net indirect taxes
abroad
= 1,500 +300 + 400 +500 + (700 + 50
(iii) Gross National Product at 1,300
– 650)+250
Factor Cost (GNPFC)
= 1,500 + 300 + 400 + 500 + 100 + 250
(iv) Consumption of fixed 100
= `3,050 crore (in ‘000 crores)
capital
(ii) GDPMP = GNPFC + Net indirect taxes
Ans : COMP 2002 = 2,800 + 250 = 3,050
NNPMP = GNPFC + Net Indirect Tax Net factor income earned from abroad
– Depreciation = GNPMP – GDPMP = 3,050 – 3,050
(i) = (iii) + Net Indirect Tax – (iv) =0
1,400 = 1,300 + Net Indirect Tax – 100 Factor income from abroad + Factor income
to abroad = 0
Net Indirect Taxes = 1,400 – 1200 = `200 Or, Factor Income from abroad – 120 = 0
Factor income from abroad
291. Calculate:
(i) Gross Domestic Product at Market Price = `120 (in ‘000 crores)
(ii) Factor Income from Abroad from the following
292. From the following data calculate:
data:
(i) Gross domestic product at market price
(` in (ii) Factor income from abroad.
‘000 crores)
(` in
(i) Profits 500 ‘000 crores)
(ii) Exports 40 (i) Gross national product at 6,150
(iii) Compensation of 1,500 factor cost
employees (ii) Net exports (–) 50
(iv) Gross national product at 2,800 (iii) Compensation of 3,000
factor employees
(v) Net current transfers from 90 (iv) Rent 800
rest of the world

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CH 1 : NATIONAL INCOME AND RELATED AGGREGATES

(v) Interest 900 (ix) Contribution to social 200

(vi) Profit 1,300 security schemes by
employers
(vii) Net indirect taxes 300
(x) Dividends 100
(viii) Net domestic capital 800
formation (xi) Undistributed profits 20

(ix) Gross fixed capital 850 (xii) Net factor income to 0

formation abroad

(x) Change in stock 50 Ans : OD 2011

(xi) Dividend 300 NDPFC = Wages and salaries + Contribution

(xii) Factor income to abroad 80 to social security schemes by employers
+ Rent + Interest paid by production
Ans : OD 2010
units + Corporation tax + Dividends
(i) Gross Domestic Product at Market Price: + Undistributed profits
GDPMP = Compensation of employees + Rent = 1,000 + 200 + 100 + 130 + 50 + 100 + 20
+ Interest + Profit + Net indirect tax
= `1,600 crores
+ (Gross fixed capital formation
+ Change in stock 294. Calculate ‘Net National Product at Factor Cost’
– Net domestic capital formation) from the following:
= 3,000 + 800 + 900 + 1,300 + 300 (` in crores)
+ (850 + 50 – 800)
(i) Profits 200
= 6,300 + 100 = `6,400 crore
(ii) Net current transfers to (–) 10
(ii) Factor Income from abroad
abroad
= GNPFC – GDPMP + Net indirect tax
+ Factor income to abroad (iii) Royalty 10
= 6,150 – 6,400 + 300 + 80 (iv) Wages and salaries 600
= 6,530 – 6,400 = `130 crore (v) Consumption of fixed 60
capital
293. Calculate ‘Net Domestic Product at Factor Cost’ (vi) National debt interest 80
from the following:
(vii) Interest paid by 120
(` in crores) production units
(i) Domestic product accruing 300 (viii) Social security 100
to government contributions by employers
(ii) Wages and salaries 1,000 (ix) Net factor income to (–) 20
(iii) Net current transfers to (–) 20 abroad
abroad (x) Rent 50
(iv) Rent 100 (xi) Net indirect tax 70
(v) Interest paid by the 130
Ans : FOREIGN 2011
production units
NNPFC = Wages and salaries + Social security
(vi) National debt interest 30
contribution by employers + Rent
(vii) Corporation tax 50
+ Interest paid by production units
(viii) Current transfers by 40 + Royalty + Profits
government – Net factor income to abroad
= 600 + 100 + 50 + 120 + 10 + 200 – (–20)
= `1,100 (crores)

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295. Find out Net National Product at Market Price: (x) Net factor income to 150
(` in crores) abroad
(xi) Mixed income of self- 1,500
(i) Net current transfers from (–) 10 employed
abroad
Ans : OD 2013
(ii) Wages and salaries 1,000
Gross National Product at Market Price
(iii) Net factor income to (–) 20 GNP at MP
abroad = Compensation of employees + Interest + Rent
+ Profits + Mixed income of self-employed +
(iv) Social security 100
Consumption of fixed capital + Net indirect
contributions by employers
taxes – Net factor income to abroad
(v) Net indirect tax 80 = 2,000 + 500 + 700 + 800 + 1,500 + 100 + 250
(vi) Rent 300 – 150 = `5,700 crores
(vii) Consumption of fixed 120 297. Calculate ‘Net National Product at Factor Cost’
capital from the following:
(viii) Corporation Tax 50
(` in crores)
(ix) Dividend 200
(x) Undistributed profits 60 (i) Social security 90
contributions by
(xi) Interest 400 employees
Ans : DELHI 2012
(ii) Wages and salaries 800
Net National Product at Market Price
= Wages and salaries + Social security (iii) Net current transfers to (–) 30
contributions by employers + Rent + Interest abroad
+ Corporation tax + Dividend + Undistributed (iv) Rent and royalty 300
profits + Net indirect tax – Net factor income
to abroad (v) Net factor income to 50
= 1,000 + 100 + 300 + 400 + 50 + 200 + 60 + abroad
80 – (–) 20 = `2,210 crores
(vi) Social security 100
296. Calculate “Gross National Product at Market contributions by employers
Price” from the following data:
(vii) Profit 500
(` in crores)
(viii) Interest 400
(i) Compensation of 2,000
employees (ix) Consumption of fixed 200
capital
(ii) Interest 500
(iii) Rent 700 (x) Net indirect tax 250
(iv) Profits 800 Ans : OD 2014

(v) Employer’s contribution 200 NNPFC

to social security schemes
= Wages and salaries + Social security
(vi) Dividends 300 contributions by employers + Rent and royalty
(vii) Consumption of fixed 100 + Interest + Profit – Net factor income to
capital abroad
= 800 + 100 + 300 + 400 + 500 – 50
(viii) Net indirect tax 250
= 2,100 – 50 = `2,050 crores
(ix) Net exports 70

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CH 1 : NATIONAL INCOME AND RELATED AGGREGATES

298. Calculate ‘Gross National Product at Market (v) Current transfers from 10
Price’: government
(` in crores) (vi) Undistributed profits 20
(i) Rent 100 (vii) Corporation tax 30
(ii) Net current transfers to 30 (viii) Interest 150
rest of the world (ix) Social security 100
(iii) Social security 47 contribution by employers
contributions by employers (x) Net domestic product 250
(iv) Mixed income 600 accruing to government
(v) Gross domestic capital 140 (xi) Net current transfers to 5
formation rest of the world
(vi) Royalty 20 (xii) Dividends 50
(vii) Interest 110 Ans : OD 2015

(viii) Compensation of 500 National Income (NNPFC)

employees = Wages and salaries + Social security
(ix) Net domestic capital 120 contributions by employers + Rent + Interest
formation + Undistributed profits + Corporation tax +
Dividends – Net factor income to abroad
(x) Net factor income from (–) 10 = 700 + 100 + 200 + 150 + 20 + 30 + 50 – 10
abroad
= `1,240 crores
(xi) Net indirect tax 150
300. Find national income:
(xii) Profit 200
(` in crores)
Ans : DELHI 2015
(i) Wages and salaries 1,000
Depreciation
= Gross domestic capital formation – Net (ii) Net current transfer to 20
domestic capital formation abroad
= 140 – 120 = `20 (iii) Net factor income paid to 10
NDPFC abroad
= Compensation of employees + Rent + Interest (iv) Profit 400
+ Royalty + Profit + Mixed income
(v) National debt interest 120
= 500 + 100 + 110 + 20 + 200 + 600
= `1,530 crores (vi) Social security 100
Gross National Product at Market Price contributions by employers
= NDPFC + Depreciation + Net indirect tax + (vii) Current transfers from 60
Net factor income from abroad government
= 1,530 + 20 + 150 + (–10) = `1,690 crores (viii) National income accruing 150
to government
299. Calculate the ‘National Income’:
(ix) Rent 200
(` in crores) (x) Interest 300
(i) Rent 200 (xi) Royalty 55
(ii) Net factor income to 10
Ans : DELHI 2016
abroad
NDPFC
(iii) National debt interest 15
= Wages and salaries + Social security
(iv) Wages and salaries 700
contributions by employers + Profit + Rent +
Interest + Royalty

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 75

= 1,000 + 100 + 400 + 200 + 300 + 50 (vi) Net indirect taxes 1,000
= `2,050 crores
(vii) Rent 800
NNPFC (National Income)
= NDPFC – Net factor income paid to abroad (viii) Consumption of fixed 1,200
capital
= 2,050 – 10 = `2,040 crores
(ix) Profit 1,500
301. Find net national product at market price: (x) Net current transfers to 200
rest of the world
(` in crores)
(xi) Interest 700
(i) Personal taxes 200
Ans : OD 2016
(ii) Wages and salaries 1,200
NDPMP
(iii) Undistributed profit 50 = Compensation of employees + Mixed income
+ Rent + Profit + Interest + Net indirect
(iv) Rent 300
taxes
(v) Corporation tax 200 = 4,000 + 8,000 + 800 + 1,500 + 700 + 1,000
= `16,000 crores
(vi) Private income 2,000
303. Calculate National Income.
(vii) Interest 400
(` in crores)
(viii) Net indirect tax 300
(i) Compensation of 2,000
(ix) Net factor income to 20 employees
abroad
(ii) Rent 400
(x) Profit 500
(iii) Profit 900
(xi) Social security 250
contributions by employers (iv) Dividend 100
(v) Interest 500
Ans : DELHI 2016
(vi) Mixed income of self- 7,000
NNPMP employed
= Wages and salaries + Social security (vii) Net factor income to 50
contributions by employers + Rent + Interest abroad
+ Profit – Net factor income to abroad + Net
(viii) Net exports 60
indirect tax
= 1,200 + 250 + 300 + 400 + 500 – 20 + 300 (ix) Net indirect taxes 300
= `2,930 crores (x) Depreciation 150

302. Calculate net domestic product at market price: (xi) Net current transfers to 30
abroad
(` in crores)
Ans : OD 2017
(i) Compensation of 4,000
employees NDPFC
= Compensation of employees + Rent + Profit +
(ii) Dividend 500 Interest + Mixed income of self-employed
(iii) Mixed income 8,000 = 2,000 + 400 + 900 + 500 + 7,000 + 7,000
(iv) Social security 400 = `10,800 crores
contribution by employers NNPFC (National Income)

(v) Net factor income to 600 = NDPFC – Net factor income to abroad
abroad = 10,800 – 50 = `10,750 crores

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CH 1 : NATIONAL INCOME AND RELATED AGGREGATES

304. Calculate the Gross National Product at market (vii) Wages and salaries 600
price.
(viii) Indirect tax 120
(` in crores) (ix) Net factor income to 30
(i) Compensation of 2,500 abroad
employees (x) Rent 80
(ii) Profit 700
Ans : COMP 2017
(iii) Mixed income of self- 7,500
employed GDPMP

(iv) Government final 3,000 = Wages and salaries + Social security

consumption expenditure contributions by employers + Operating
surplus + Mixed income of self-employed +
(v) Rent 400 Indirect tax – Subsidy + Consumption of fixed
(vi) Interest 350 capital
(vii) Net factor income from 50 = 600 + 100 + 300 + 500 + 120 – 20 + 70
abroad = `1,670 crores

(viii) Net current transfers to 100 306. Calculate (i) Operating Surplus and (ii) Domestic
abroad Income:
(ix) Net indirect taxes 150
(` in crores)
(x) Depreciation 70
(i) Compensation of 2,000
(xi) Net exports 40 employees
Ans : OD 2017 (ii) Rent and interest 800
NDPFC (iii) Indirect taxes 120
= Compensation of employees + Profit + Rent +
(iv) Corporation tax 460
Interest + Mixed income of self-employed
= 2,500 + 700 + 400 + 350 + 7,500 (v) Consumption of fixed 100
= `11,450 crores capital
GNPMP
(vi) Subsidies 20
= NDPFC – Depreciation + Net indirect taxes +
Net factor income from abroad (vii) Dividend 940
= 11,450 + 70 + 150 + 50 = `11,720 crores (viii) Undistributed profits 300
(ix) Net factor income to 150
305. Calculate Gross Domestic Product at Market
abroad
Price:
(x) Mixed income 200
(` in crores)
Ans : DELHI 2018
(i) Net current transfers to (–) 10
the rest of world (i) Operating Surplus
= Interest + Corporation Tax + Dividend +
(ii) Consumption of fixed 70 Undistributed Profits
capital = 800 + 460 + 940 + 300 = `2,500 crores
(iii) Mixed income of self- 500 (ii) Domestic Income (NDPFC)
employed = Compensation of employees + Rent and
Interest + Corporation tax + Dividend +
(iv) Subsidies 20
Undistributed Profits + Mixed Income
(v) Social security 100 = 2,000 + 800 + 460 + 940 + 300 + 200
contributions by employers = `4,700 crores
(vi) Operating surplus 300

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 77

307. Give the following data, find the missing value consumption expenditure + 5,000 + 40,000
of ‘Government Final Consumption Expenditure’ Government final consumption expenditure
and ‘Mixed Income of Self Employed’. = 75,000 – 10,000 – 5,000 – 40,000
(` in crores) = 75,000 – 55,000 = `20,000 crores

(i) National income 71,000 308. Given the following data, find the missing values
(ii) Gross domestic capital 10,000 of ‘Private Final Consumption Expenditure’ and
formation ‘Operating Surplus’.
(iii) Government final ? (` in crores)
consumption expenditure
(i) National income 50,000
(iv) Mixed income of self- ?
(ii) Net indirect taxes 1,000
employed
(iii) Private final consumption ?
(v) Net factor income from 1,000
expenditure
abroad
(iv) Gross domestic capital 17,000
(vi) Net indirect taxes 2,000
formation
(vii) Profits 1,200
(v) Profits 1,000
(viii) Wages and salaries 15,000
(vi) Government final 12,500
(ix) Net exports 5,000 consumption expenditure
(x) Private final consumption 40,000 (vii) Wages and salaries 20,000
expenditure
(viii) Consumption of fixed 700
(xi) Consumption of fixed 3,000 capital
capital
(ix) Mixed income of self- 13,000
(xii) Operating surplus 30,000 employed
Ans : SQP 2019 (x) Operating surplus ?
National Income, (xi) Net factor income from 500
NNPFC = `71,000 abroad
NDPFC = NNPFC – NFIA (xii) Net exports 2,000
= 71,000 – 1,000 = `70,000 crore Ans : SQP 2013
NDPFC = Mixed income of self employed National Income,
+Wages and Salaries NNPFC = `50,000
+ Operating Surplus
NDPFC = NNPFC – NFIA
`70,000 = Mixed income of self employed
= 50,000 – 500 = `49,500 crore
+ 15,000 + 30,000
NDPFC = Wages and Salaries + Mixed income
Mixed income of Self Employed
= 70,000 – 15,000 – 30,000 of self employed+ Operating surplus
= 70,000 – 45,000 = `25,000 crore 49,500 = 20,000 + 13,000 + Operating Surplus
GDPMP = NNPFC – NFIA + Net Indirect Taxes Operating surplus = 49,500 – 20,000 – 13,000
+ Consumption of fixed capital = 49,500 – 33,000
GDPMP = 71,000 – 1,000 + 2,000 + 3,000 = `16,500 crore
= 70,000 + 5,000 = `75,000 crore GDPMP = NNPFC+ Consumption of fixed capital
GDPMP = Gross capital formation + Net indirect taxes
+ Government final consumption expenditure = Net factor income from abroad
+ Net exports + Private final GDPMP = 50,000 + 700 + 1,000 – 500
consumption expenditure
= `51,200 crore
75,000 =10,000 + Government final

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CH 1 : NATIONAL INCOME AND RELATED AGGREGATES

GDPMP= Private final consumption expenditure Given:

+Government final consumption Nominal GDP = `1, 200
expenditure Price Index = 120; Real GDP = ?
+ Gross domestic capital formation
Real GDP = Nominal GDP # 100
+ Net exports Price Index
`51,200 = Private final consumption expenditure 1, 200
Real GDP = 100 = `1,000
+ 12,500 + 17,000 + 2,000 100 #
Private final consumption expenditure 313. If the Real GDP is `300 and Nominal GDP is
= 51,200 – 12,500 – 17,000 – 2,000 `330, calculate Price Index (base = 100).
= 51,200 – 31,500 = `19,700 crore Ans : DELHI 2015

309. If the Real Gross Domestic Product (GDP) in Given:

an economy is `520 crores and Nominal Gross Nominal GDP = `330; Real GDP = `300;
Domestic Product (GDP) is `650 crores, calculate Price Index = ?
the price Index.
Real GDP = Nominal GDP # 100
Ans : (2020 Series : HMJ/5) Price Index
300 = 330 100
Real GDP = Nominal GDP # 100 Price Index #
Price Index
650 Price Index = 330 # 100 = `110
520 = 100 300
Price Index #
65, 000 If the Real GDP is `500 and Price Index (base =
Price Index = = `125 crores 314.
520
100) is 125, calculate the Nominal GDP.
310. When Nominal Gross Domestic Product (GDP) Ans : OD 2015
is `850 crores and Price Index is 170, Real Gross
Given: Real GDP = `500
Domestic Product (GDP) will be .......... .
(Fill up the blank with correct answer) Price Index = 125; Nominal GDP = ?

Ans : FOREIGN 2020 Real GDP = Nominal GDP # 100

Price Index
As we know,
500 = Nominal GDP
125
Real GDP = Nominal GDP # 100
Price Index 500 # 125 = `625
Nominal GDP =
100
= 850 # 100 = `500 crores
170
315. If the Nominal GDP is `600 and Price Index (base
311. If Real GDP is `200 and Price Index (with base = = 100) is 120, calculate the Real GDP.
100) is 110, calculate Nominal GDP.
Ans : OD 2015
Ans : DELHI 2015
Given: Nominal GDP = `600
Given:
Price Index = 120; Real GDP = ?
Real GDP = `200
Price Index =110 and Nominal GDP = ? Real GDP = Nominal GDP # 100
Price Index
Real GDP = Nominal GDP # 100 Real GDP = `600 # 100 = `500
Price Index 120
200 = Nominal GDP # 100
110 316. If nominal income is `500 and price index is 125,
calculate real income.
Nominal GDP = 200 # 110 = `220
100
Ans : OD 2016

312. If the Nominal GDP is `1,200 and Price Index Given:

(with base = 100) is 120, calculate Real GDP. Nominal Income = `500
Ans : DELHI 2015 Price Index = 125;

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 79

Real Income = Nominal GDP # 100 Calculate the percentage change in Real Gross
Price Index
Domestic Product (GDP) in year 2019 using 2018
Real Income = `500 # 100 = `400 as the base year.
125
Ans : FOREIGN 2023
317. If real income is `400 and price index is 105,
calculate nominal income. Year Units Market price Real GDP (`)
Ans : OD 2016 (MP) (`) Units × MP

Given: Real Income = `400 2018 100 50 50 × 100 = 5,000

Price Index = 105 2019 110 55 55 × 110 = 6,000

Real Income = Nominal GDP # 100 % change in Real GDP

Price Index
Change in Real GDP
= 100
`400 = No minal Income 100
# Base Year Real GDP #
105
5, 500 - 5, 000
= # 100
5, 000
Nominal Income = `400 # 105 = `420
100
= 500 # 100 = 10%
5, 000
318. Assuming real income to be `200 crore and price
index to be 135, calculate nominal income. 321. Suppose only one Good `X’ is produced in the
Ans : OD 2016
country. Output of `Good X’ during 2018 & 2019
were 100 units & 120 units respectively. The
Real Income = `200 crore, market price of the product during the two years
Price index = 135 was `50 and `60 per unit respectively.
Calculate the percentage change in Real Gross
Real Income = Nominal GDP # 100 Domestic Product (GDP) in year 2019, using
Price Index
2018 as the base year.
`200 = Nominal Income # 100
135 Ans : FOREIGN 2023

Nominal Income = `200 # 135 Year Units Price per Real GDP (`)
100
unit (`) Units × Price Per
= `270 crore
Unit
319. If the Real GDP is `300 and Nominal GDP is 2018 100 50 5,000
`350, calculate the Price Index (base = 100).
2019 120 60 6,000
Ans : OD 2016
% Change in Real GDP
Given: Real GDP = `300; Change in Real GDP
= 100
Price Index = ? Base Year Real GDP #
Nominal GDP = `350 6, 000 - 5, 000
= # 100
5, 000
Real GDP = Nominal GDP # 100 1, 000
Price Index = 100 = 20%
5, 000 #
300 = 350 100
Price Index # 322. Using the following information, calculate and
Price Index = 350 # 100 analyse the value of Gross Domestic Product
300
(GDP) deflator:
= `116.6 (Approx)
Ans : COMP 2022

320. Suppose only one Good ‘X’ is produced in the

country. Output of Good X during year 2018 and Year 2014-15 2016-17
2019 were 100 units and 110 units respectively. Nominal GDP 6.5 9
The market price of the product during the two
Real GDP 6.5 7.2
years was `50 and `55 per unit respectively.

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CH 1 : NATIONAL INCOME AND RELATED AGGREGATES

For 2014 - 15: (iii) Following is an advantage of real GDP:

(a) It is used to make international
GDP Deflator = Nominal GDP # 100
Real GDP comparison
= 6 . 5 100 = 100% (b) It shows the availability of goods and
6.5 # services to the people
For 2016 - 17: (c) It ignores the inequalities in the
GDP Deflator = Nominal GDP # 100 distribution of income
Real GDP (d) Both (a) and (b)
= 9 # 100 = 125% (iv) Match the following :
7.2

Column I Column II
1. Real Flows A. milk used by a
CASE BASED QUESTION bakery
2. Intermediate B. physical flow of
goods goods and services
323. Read the para given below and answer the
questions that follow: 3. Money Flows C. nominal flow
Economic growth has improved living standards 4. Final goods D. food grains used
globally, but Gross Domestic Product (GDP), by a household
the common measure of growth, focuses only on
(a) B, A, D, C
economic size, ignoring welfare. GDP measures
(b) B, A, C, D
the value of goods and services produced in an
(c) A, C, B, D
economy but does not account for the social or
(d) A, B, C, D
environmental costs of production. For instance,
it includes the value of cars and sugar-laced drinks Ans :
but excludes the pollution and health issues they (i) Capital Loss
cause. (ii) (d) Expenditure incurred by a foreign tourist
GDP also overlooks vital aspects like in the country.
environmental degradation and income inequality. (iii) (d) Both (a) and (b)
While it increases with higher production, it fails (iv) (b) B, A, C, D
to reflect the damage to natural resources or the
unequal distribution of wealth, which leads to 324. Read the paragraph given below and answer the
societal discontent and polarization. Policymakers questions that follow:
must address these limitations to evaluate true India’s GDP is calculated using two methods,
development effectively. yielding slightly different but comparable figures.
The first method calculates GDP at factor
(i) Loss in the value of fixed assets due to national cost, based on the net value changes across
calamities and economic recession is called as eight economic sectors. This figure, commonly
_____ (Depreciation/Capital Loss). reported in the media, helps gauge the economy’s
overall health and informs policy and investment
(ii) Which of the following is included in the
decisions.
estimation of National Income.
The second method calculates GDP at market
(a) Remittances from abroad
prices by summing expenditures on final goods
(b) Salary paid to a foreign technical
and services, including household consumption,
(c) Reimbursement of travelling expenses
net investments, government spending and net
to salesman incurred while doing official
trade. While the results from these methods
work.
may not match precisely, they provide valuable
(d) Expenditure incurred by a foreign tourist
insights into the contributions of various sectors
in the country.
to the economy.

(i) From the set of statements given in column I

and II, choose the correct pair of statements:

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 81

Column I Column II 325. Read the paragraph given below and answer the
questions that follow:
1. GDP A. Sum of factor The production process relies on factors
incomes generated of production like land, labor, capital and
in the domestic entrepreneurship, for which producers incur
territory. costs. These costs, referred to as factor costs,
2. Domestic B. Value of all final include expenses like rent, wages, interest
factor goods and services and entrepreneurial profit but exclude taxes.
income produced by the Subsidies, however, are included as they directly
normal residents of offset production costs.
the country. Price is the price consumers pay, which is
calculated by adjusting the factor cost. Taxes are
3. GNP C. Value of final
added since they increase the price, while subsidies
goods and services
are subtracted as they reduce the effective cost.
produced in the
For example, if the government provides a subsidy
domestic territory.
on interest, it lowers the interest cost (a factor
4. National D. Sum of factor cost), reducing the market price of the product.
income incomes of normal
residents of the (i) Sales + Change in stock = _____.
country. (a) Value of output
(b) Intermediate consumption
(a) 1-A
(c) Gross value added
(b) 2-B
(d) Net value added
(c) 3-C
(d) 4-D (ii) Which of the following will be included in the
estimation of domestic income of the nation?
(ii) The difference between National Income and
(a) Profits earned by branches of country’s
Domestic Income is:
bank in another country
(a) Net indirect taxes
(b) Gift given by an employer to his employees
(b) Consumption of fixed capital
on Independence Day
(c) Net factor income earned from abroad
(c) Purchase of goods by foreign tourists in
(d) Subsidies
our country
(iii) Identify the items which will be excluded (d) Scholarships given by the government
from the estimation of National Income:
(iii) Net indirect taxes = Indirect taxes – _____.
(a) Profits earned by an Indian bank from its
(Subsidies/Intermediate consumption)
branches abroad
(b) Proceeds from sale of land (iv) Road constructed by a factory owner to
(c) Earnings of a self-employed doctor having connect the village and town is an example of
a clinic at his residence a _____ (positive/negative) externality.
(d) Contribution to provident fund by an
employer Ans :
(i) (a) Value of output
(iv) National Income at current price will be equal (ii) (c) Purchase of goods by foreign tourists in
to National Income at constant prices when our country
price in the base year will be equal to price in (iii) Subsidies
the _____ (current/past) year. (iv) Positive
Ans :
326. Read the paragraph given below and answer the
(i) (d) 4-D questions that follow:
(ii) (c) Net factor income earned from abroad = Net Foreign Factor Income (NFFI) refers to the
National Income Minus Domestic Income difference between a nation’s Gross National
(iii) (b) Proceeds from sale of land Product (GNP) and its Gross Domestic Product
(iv) Current (GDP). It measures the net balance of earnings
generated abroad by a nation’s citizens and

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CH 1 : NATIONAL INCOME AND RELATED AGGREGATES

companies versus the income earned by foreign (iii) Domestic demand for goods and services
individuals and companies within the country. refers to:
In most nations, the NFFI level is relatively (a) Value of final goods and services produced
minor as earnings from citizens and payments within the domestic territory which are
to foreigners tend to offset each other. However, being demanded within the country and
in smaller economies with significant foreign abroad.
investment and limited overseas assets, NFFI (b) Value of final goods and services produced
can be substantial. For such nations, GDP might within the country and abroad which are
exceed GNP significantly, as GDP includes the being demanded within the country.
profits foreign companies remit back to their (c) Both (a) and (b)
home countries.
(d) Neither (a) nor (b)
For instance, if a country has high remitted profits
compared to its overseas earnings, the NFFI will (iv) What will be the GDP of a country based on
be negative and its GNP will fall below GDP. the following data:
In today’s globalize world, where cross-border
movement of people and businesses is easier, S.No. Particulars Amount (in ` crore)
NFFI plays an increasingly significant role in 1. GNP 1,000
understanding national economic dynamics.
2. NFFI 275
(i) From the set of statements given in column (a) `1275 crore
I and column II, choose the correct pair of (b) `875 crore
statements: (c) `725 crore
(d) `1000 crore
Column I Column II
Ans :
1. Value of output A. production (i) (b) 2-B
of goods and (ii) (d) Medical expenses of a firm on treatment
services valued at of employees family
current prices (iii) (b) Value of final goods and services produced
2. Real GDP B. production within the country and abroad which are
of goods and being demanded within the country.
services valued at (iv) (c) `725 crore
constant prices
327. Read the paragraph given below and answer the
3. Depreciation C. market value questions that follow:
of goods and GDP measures both the economy’s total income
services produced and the economy’s total expenditure on goods
during a year and services. Thus, GDP per person tells us the
4. Nominal GDP D. consumption of income and expenditure of the average person
fixed capital in the economy. Because most people would
prefer to receive higher income and enjoy higher
(a) 1-A
expenditure, GDP per person seems a natural
(b) 2-B
measure of the economic well-being of the average
(c) 3-C
individual.
(d) 4-D
GDP is not, however, a perfect measure of well-
(ii) Which of the following items is part of being. Few things that contribute to a good life
compensation of employees? are left out of GDP. One is leisure. Suppose, for
(a) Entertainment allowance to an employee instance, that everyone in the economy suddenly
to entertain business guests started working all the days of the week, rather
(b) Old age pension than enjoying leisure on weekends. More goods
(c) Payment of Insurance claim by LIC to and services would be produced and GDP would
the injured worker rise. Yet despite the increase in GDP, we can not
(d) Medical expenses of a firm on treatment conclude that everyone would be better off. The
of employees family loss from reduced leisure would offset the gain

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 83

from producing and consuming a greater quantity that the GDP concept fails to account for the
of goods and services. “using up” of valuable resources that may have
Because GDP uses market prices to value goods been necessary in order to generate the measured
and services, it excludes the value of almost flow of output.
all activities that takes place outside markets.
Another thing that GDP excludes is the quality (i) Factor income paid to non-residents within
of the environment. Imagine that the government the domestic territory of a country leads to:
eliminated all environmental regulations. Firms (a) Decrease in national income
could then produce goods and services without (b) Increase in domestic income
considering the pollution they create and GDP (c) No change in both domestic and national
might rise. Yet well-being would most likely fall. income
The deterioration in the quality of air and water (d) Both (a) and (b)
would offset the gains from greater production.
(ii) From the set of statements given in column-I
(i) GDP as a measure of welfare includes: and II, choose the correct pair of statements:
(a) Externalities Column-I Column-II
(b) Social progress index
(c) Market transactions 1. GDP measured at A. Nominal GDP
(d) Both (a) and (c) base year prices
(ii) Following is an example of positive externality: 2. Sum of factor B. Domestic
(a) Construction of flyovers incomes generated income
(b) A newly developed park being frequented in the domestic
by anti social elements territory
(c) Opening of water polluting oil refinery
(d) Increase in production of tobacco 3. Difference C. National
between domestic income
(iii) _____ is a better indicator of economic
income and
growth.
national income
(Real GDP/Nominal GDP)
Ans : 4. Sum of factor D. Net factor
incomes earned by income earned
(i) (c) Market transactions normal residents from abroad
(ii) (c) Opening of water polluting oil refinery of a country
(iii) (a) Real GDP
(a) 1-A
328. Read the paragraph given below and answer the (b) 2-B
questions that follow: (c) 3-C
One formal definition of GDP is “the market (d) 4-D
value of all the final goods produced in the
entire country in the course of a year”. The (iii) State the impact of Ban on tobacco products
“market value” component is important because on gross domestic product Ban on and
economists use money prices to solve the problem welfare.
of aggregation. When estimating GDP with real-
(iv) NFIA is negative when:
world data, economists use two approaches. One is
(a) Income earned from abroad is more than
to add up the total income earned by the various
income paid to abroad
factors of production. The other is to add up the
(b) Income earned from abroad is less than
total expenditures on final goods and services
income paid to abroad
that are produced within the country. These two
(c) Income earned from abroad is equal to
approaches are formally equivalent because in a
income paid to abroad
given transaction, the seller’s income equals the
(d) NFIA of current year is the same as that
buyer’s expenditure.
of last year
It is important to remember that GDP is a gross
measure of output (not a net measure), meaning

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CH 1 : NATIONAL INCOME AND RELATED AGGREGATES

Ans : (iii) Increase in GDP may not lead to increase in

(i) (d) Both (a) and (b) welfare as Increased GDP may be concentrated
(ii) (b) 2-B in a few hands leading to inequality in income
(iii) Ban on tobacco products will lead to decrease distribution. (True/False)
in the gross domestic product of the country Ans :
but will definitely improve welfare of the
(i) (d) Both (a) and (b)
society.
(ii) As we know,
(iv) (b) Income earned from abroad is less than
income paid to abroad Real GDP = Nominal GDP # 100
GDP deflator
329. Read the paragraph given below and answer the Nominal GDP = 1, 100 # 120 = `1, 320
100
questions that follow:
In Gross domestic product, “gross” means that (iii) True
GDP measures production regardless of the various
uses to which the product can be put. Production 330. Read the paragraph given below and answer the
can be used for immediate consumption, for questions that follow:
investment into fixed assets or inventories, or for The Budget Estimate for total spending in 2021-
replacing fixed assets that have been depreciated. 22 is `34.83 lakh crore, compared to the Revised
“Domestic” means that the measurement of GDP Estimate (RE) of `34.5 lakh crore for 2020-21.
contains only products from within its borders. Considering a nominal GDP growth projection of
Nominal GDP is calculated by using the prices 14.4% and a real GDP forecast of 11%, the GDP
that are current in the year in which the output is deflator is 3.4%. To maintain spending at the
produced. It takes into account all of the changes same real level, central spending should have risen
that occurred for all goods and services produced to `35.7 lakh crore. Since this increase has not
during a given year. It is the market value of all occurred, the 2021-22 budget indicates a negative
final goods produced in a geographical region, fiscal stimulus for the economy.
usually a country. That market value depends on However, it could be argued that 2020-21 was
the quantities of goods and services produced and an exceptional year and the government may be
their respective prices. Therefore, if prices change justified in reducing its welfare spending as the
from one period to the next and the output does economy unlocks and vaccinations progress. This
not change, the nominal GDP would change even reflects a strategic rollback of pandemic-related
though the output remained constant. fiscal measures.
Real GDP is calculated using the prices of a (i) State the significance of GDP deflator.
selected base year. To calculate Real GDP, you
must determine how much GDP has been changed (ii) If the real GDP is ‘500 and price index (base
by inflation since the base year and divide out the = `100) is 125, the value of Nominal GDP
inflation each year. Real GDP, therefore, accounts will be _____.
for the fact that if prices change but output does
not, nominal GDP would change. (iii) State why expenditure on intermediate goods
In contrast, real gross domestic product accounts are not included while estimating National
for price changes that may have occurred due to Income from expenditure method.
inflation. In other words, real GDP is nominal
(iv) Expenditure on shares and bonds is excluded
GDP adjusted for inflation.
while estimating National Income Aggregates
(i) Change in nominal GDP includes: as it implies paper claims only. It does not
(a) Change in current year prices add to the flow of goods and services. (True/
(b) Change in production of goods and False)
services Ans :
(c) Change in base year prices
(d) Both (a) and (b) (i) The GDP deflator, also called implicit price
deflator, is a measure of inflation. It is the
(ii) If GDP deflator is 120 % and real GDP is ratio of the value of goods and services an
1100, then what will be nominal GDP. economy produces in a particular year at
current prices to that of prices that prevailed

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 85

during the base year.

(ii) As we know,
Nominal GDP = Real GDP # Price Index
100
= 500 # 125 = `625
100
(iii) Expenditure on intermediate goods is not
included while estimating GDP through
expenditure method as it has already been
included in the value of final product. If it is
included, it will lead to the problem of double
counting.
(iv) True

www.nodia.in

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CH 2 : MONEY AND BANKING

CHAPTER 2
MONEY AND BANKING

and facilitates trade.

SUMMARY (ii) Unit of account : This means that money acts
as a common measure of value. It acts as a
standard unit for quoting the value of goods
1. MONEY
and services called as price. This has made
Money is anything which is generally accepted as possible the keeping of business accounts.
a medium of exchange, measure of value, store
Secondary Functions :
of value and as means of standard of deferred
payment. (i) Standard of deferred payments : Deferred
payments are those payments which are to be
2. BARTER EXCHANGE made in future. This has facilitated borrowing
and lending activities. It has also led to the
Barter is a system of exchange where goods or
creation of financial institutions.
services are directly exchanged for other goods
(ii) Store of value : This means that the money
or services without using a medium of exchange.
can be stored for use in future as it does not
Difficulties of barter system:
lose value. This is possible because money
(i) Lack of double coincidence of wants : Double
comes in convenient denominations, is easily
coincidence of wants means finding a person
portable and economical to store and has
who is willing to buy a good or service
general acceptability.
being offered and also possesses the good or
service which the former wants. Such double 4. MONEY SUPPLY (MS)
coincidence was a difficult probability.
(ii) Lack of common measure of value : This It refers to the total volume of money held by
problem related to the rate of exchange public at a particular point of time in an economy.
between different commodities. The price of It is a stock variable.
each commodity had to be quoted in terms of 5. COMPONENTS OF MONEY SUPPLY
every other commodity.
(iii) Problem of deferred payments : Transactions (i) Currency with the public. This includes coins
regarding future payments could not take and currency notes in circulation.
place with ease, This was because the quality (ii) Demand deposits: A deposit on which a
of good could deteriorate over time. cheque can be written.
(iv) Lack of store of value : For storing purpose, Measures of money supply:
good must be portable, non-perishable, MS = C + DD + OD
require less space and acceptable for exchange ...where [C = Currency held by the public; DD
anytime. = Demand deposits with banks; OD = Other
deposits with RBI
3. FUNCTIONS OF MONEY
Functions of money can be classified into primary 6. BANK MONEY
and secondary. It refers to the demand deposits with the banks.
Primary or Basic Functions :
6.1 Legal Tender Money
(i) Medium of exchange : It means that money
can be used to make payments for exchange Money which has legal sanction behind it and is
of goods and services. This function solves accepted as a means of payment is called legal
the problem of double coincidence of wants tender money.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 87

6.2 High Powered Money

Further 640 152 128
It consists of currency held by the public and cash deposit
reserves of banks.
h h h h
7. FIAT MONEY Total 5,000 4,000 1,000
It refers to money which under law must be
Money Multiplier = 1 - 1 =5
accepted for all debts, i.e., currency. LRR 20%
8. LEGAL RESERVE RATIO (LRR) Total Demand Deposits

It is that fraction of deposits with the commercial = Money Multiplier × Cash Reserves
banks which is legally compulsory for the banks = 5 # 1, 000 = `5, 000
to keep in the form of cash and liquid assets as
reserves. 13. CENTRAL BANK
It is an apex body that controls, operates,
9. STATUTORY LIQUIDITY RATIO (SLR)
regulates and directs the entire banking and
The fraction of deposits which banks are required monetary structure of the country.
to keep in the form of liquid assets, including cash
within the bank itself. 13.1 Currency Authority or Bank of Issue
It has the sole authority to issue currency in the
10. CASH RESERVE RATIO (CRR)
country. The advantages of this function are:
The fraction of deposits the banks are required to (i) It gives uniformity in issue of currency and
keep with the Central Bank. note circulation.
(ii) t gives power to central bank to control
11. COMMERCIAL BANK
money supply.
It is a financial institution which accepts deposits (iii) It stabilises the internal and external value of
from the public and gives loans for purposes of currency.
consumption and investment.
13.2 Banker to the Government
12. MONEY CREATION/DEPOSIT CREATION/CREDIT
As a banker it carries out all banking business
CREATION BY COMMERCIAL BANKS
of the government and maintains current account
Let us understand this process with the help of for keeping cash balances of the government. It
an example: accepts receipts and makes payments and also
Suppose, there is an initial deposit of `1,000 and gives loans and advances to the government. It
legal reserve ratio (LRR) is 20%, i.e., the bank manages the public debt and also acts as the
has to keep `200 and lend the rest `800. It is financial advisor to the government.
assumed that all the transactions are routed
through banks. The borrower withdraws his `800 13.3 Banker’s Bank and Supervisor
for making payments which are routed through It acts as a banker to other banks in the country
banks in the form of deposit accounts. and performs the following functions:
The bank receives `800 as deposit and keeps 20% (i) Custodian of cash reserves : Commercial
of it, i.e., `160 as reserve and lends `640. Again banks must keep a proportion of their net
the borrower uses this for payment which flows total deposits with the central bank as cash
back into the banks thereby increasing the flow reserves.
of deposits. (ii) Lender of last resort : When commercial
banks face financial crisis, they approach to
the central bank which gives them loans and
Round Deposits(`) Loan (`) LRR(20%) advances.
(iii) Clearing house function : Since the central
Initial 1,000 800 200 bank holds the cash reserves of commercial
deposit banks, it also acts as the clearing house for
Further 800 640 160 these banks.
deposit (iv) Supervisor : The central bank supervises the

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CH 2 : MONEY AND BANKING

functioning of commercial banks. It makes 14.4 Open Market Operations

rules regarding licensing, management, It refers to the buying and selling of securities
branch expansion, liquidation etc. by the central bank from/to the public and
commercial banks. It sells government securities
13.4 Custodian of Foreign Exchange Reserves
during excess demand and buys securities during
It acts as a custodian of country’s stocks of gold deficient demand.
and foreign exchange reserves and thus helps in
stabilizing the external value of money. 14.5 Legal Reserve Ratio (LRR)
Central bank can influence the credit creation
13.5 Controller of Money Supply and Credit
power of commercial banks by making changes in
During economic fluctuations, the Central CRR and SLR.
Bank influences money supply and credit in 1. Cash Reserve Ratio (CRR) : It refers to
the economy by controlling the lending power the minimum percentage of net demand
of the commercial banks. This, it does through and time deposits which commercial banks
qualitative and quantitative instruments. The are required to keep with the central bank.
former refers to direction of credit whereas the During inflation, when money supply has
latter refers to the volume of credit. to be reduced, central bank increases CRR
and decreases it during deflation or deficient
14. QUANTITATIVE INSTRUMENTS
demand.
Quantitative instruments are tools used by the 2. Statutory Liquidity Ratio (SLR) : It refers to
central bank to control the overall supply of money the minimum percentage of net demand and
and credit in the economy. These measures focus time deposits which the commercial banks
on maintaining price stability and influencing are required to keep with itself in the form
aggregate demand during different phases of the of cash reserves. By changing the SLR, the
economic cycle. amount of credit and hence money supply can
be greatly affected. It increased during excess
14.1 Bank Rate Policy demand and vice-versa.
It refers to the rate at which the central bank lends
money to commercial banks as a lender of the 15. QUALITATIVE INSTRUMENTS
last resort. During inflation (excess demand) the Qualitative instruments are tools used by the
central bank increases the bank rate and reduces central bank to regulate credit flow and influence
the same in times of deflation (deficient demand). the allocation of resources in the economy. These
measures are designed to address specific sectors
14.2 Repo Rate or purposes rather than the overall money supply.
It may be defined as the rate at which the central
bank lends money to the commercial banks in the 15.1 Margin Requirements
event of any shortfall of funds in the short-run. It is the difference between the amount of loan
Increase in repo rate discourages commercial and market value of the security offered by the
banks to borrow from central bank and thus borrower against the loan. Margin requirements
reduces money supply in the economy whereas are increased during inflation and decreased
decrease in repo rate encourages borrowings by during deflation.
commercial banks and thus increases money
supply in the economy. 15.2 Selective Credit Controls
Central bank gives directions to other banks to
14.3 Reverse Repo Rate
give or not to give credit for certain purposes to
It is the rate at which the central bank of a particular sectors.
country borrows money from commercial banks.
Increase in repo rate encourages commercial 15.3 Moral Suasion
banks to deposit funds with the central bank It is a combination of persuasion and pressure
reducing availability of funds with it. This, thus that central bank applies on other banks in order
helps in curtailing money supply in the economy to get them to act in accordance with its policies.
and vice-versa.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 89

MULTIPLE CHOICE QUESTION (b) The fraction of deposits banks keep with the
central bank
CRR is the mandatory proportion of total deposits
1. Which of the following represents a primary that commercial banks must maintain with the
function of money, essential for its role in central bank, impacting their ability to lend and
facilitating trade and providing a common create money by restricting or freeing up funds.
measure of value for goods and services in an
economy? 4. How does the central bank use the repo rate as
(a) Medium of exchange and store of value a monetary policy tool to influence borrowing
(b) Standard of deferred payments and unit of costs for commercial banks and regulate the
account money supply in the economy during inflationary
(c) Medium of exchange and unit of account periods?
(d) Store of value and standard of deferred (a) By reducing the money supply during
payments deflation
(b) By encouraging borrowing to reduce money
Ans : SQP 2024 supply
(c) Medium of exchange and unit of account (c) By increasing borrowing costs to reduce
The primary functions of money include acting money supply
as a medium of exchange to facilitate the buying (d) By eliminating inflation directly
and selling of goods and services and serving as a Ans : OD 2008
unit of account to provide a standard measure for
quoting their value. (c) By increasing borrowing costs to reduce
money supply
2. In the context of the total money available within The central bank raises the repo rate to make
an economy, which of the following best defines borrowing more expensive for commercial banks,
the term “money supply,” considering the public’s discouraging loans and reducing the overall money
holdings at a given point in time? supply to curb inflation.
(a) Total volume of currency and deposits held
by the central bank 5. How do qualitative instruments of monetary
(b) Total volume of money held by the public at policy, such as margin requirements and moral
a particular point in time suasion, differ from quantitative instruments like
(c) Total deposits in commercial banks only CRR and SLR in addressing credit allocation and
(d) Currency in circulation within banks only money supply?
(a) Quantitative instruments target inflation;
Ans : COMP 2006 qualitative instruments target GDP.
(b) Total volume of money held by the public at (b) Qualitative instruments regulate credit
a particular point in time flow to specific sectors, while quantitative
Money supply refers to the aggregate amount of instruments influence overall credit supply.
currency held by the public, demand deposits, (c) Quantitative instruments focus on subsidies;
and other deposits with the RBI, indicating the qualitative instruments focus on taxes.
liquidity available in the economy at a specific (d) Qualitative instruments are used only during
time. inflation.
Ans : SQP 2013
3. What is the Cash Reserve Ratio (CRR), and how
does it influence the banking system’s capacity to (b) Qualitative instruments regulate credit
extend loans and create credit in the economy? flow to specific sectors, while quantitative
(a) The fraction of deposits banks keep with instruments influence overall credit supply.
themselves Qualitative instruments, such as margin
(b) The fraction of deposits banks keep with the requirements and selective credit controls, address
central bank specific sectoral credit needs, while quantitative
(c) The percentage of deposits invested in tools, including CRR and repo rate, affect the
government securities overall money supply and economic demand.
(d) The percentage of deposits available for loans
Ans : DELHI 2007

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CH 2 : MONEY AND BANKING

17. The rate at which Commercial Banks borrow Ans : SQP 2022

from Central Bank is called _____. (d) Net time deposits with banks
(a) Bank rate
(b) Legal reserve ratio 23. The short term borrowing rate at which Reserve
(c) Reverse repo rate Bank of India borrows money from Commercial
(d) Cash reserve ratio Banks is called _____.
(a) Bank rate
Ans : COMP 2015
(b) Discount rate
(a) Bank rate (c) Repo rate
(d) Reverse repo rate
18. _____ is the main source of money supply in
an economy. Ans : DELHI 2014

(a) Central Bank (d) Reverse repo rate

(b) Commercial Banks
(c) Government 24. What would be the total money creation in the
(d) Both (a) and (b) economy, If initial fresh deposits with banks =
`50,000 and LRR = 20%
Ans : FOREIGN 2020
(a) `2,50,000
(d) Both (a) and (b) (b) `5,00,000
(c) `10,00,000
19. Measuring the value of goods and services refers (d) `12,00,000
to which of the following functions of money?
(a) Store of value Ans : OD 2017

(b) Unit of value (a) `2,50,000

(c) Standard of deferred payments
(d) Medium of exchange 25. Which Bank is authorised to issue currency?
(a) Central Bank
Ans : SQP 2015
(b) Commercial Bank
(b) Unit of value (c) Cooperative Bank
(d) Scheduled Bank
20. Which of the following functions of money
simplifies the process of borrowing and lending? Ans : COMP 2002

(a) Store of value (a) Central Bank

(b) Medium of exchange
(c) Standard of deferred payments 26. Which one of the following is a qualitative measure
(d) Unit of value of credit control by the Central Bank?
(a) Bank rate
Ans : COMP 2018
(b) Open market operations
(c) Standard of deferred payments (c) Marginal requirements
(d) Cash reserve ratio
21. Which of the following is not included in money
supply? Ans : MAIN 2006

(a) Currency held by public (c) Marginal requirements

(b) Inter-bank-deposits
(c) Demand deposits in Banks 27. _____ refers to the proportion of total deposits
(d) Saving deposits with post office banks. which Banks are required to keep in the form of
reserves with themselves.
Ans : MAIN 2019
(a) Cash deposit ratio
(b) Inter-bank-deposits (b) Statutory liquidity ratio
(c) Bank rate
22. M1 of money supply does not include. (d) Reserve deposit ratio
(a) Currency held by public
(b) Other deposits in RBI Ans : SQP 2007

(c) Demand deposits with the Commercial Banks (d) Reserve deposit ratio
(d) Net time deposits with banks

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 91

(c) By selling government securities to reduce (c) Fiat money is backed by gold reserves held by
money supply the central bank.
During inflation, the central bank sells government (d) Legal tender money is freely exchangeable for
securities to absorb excess money from the foreign currency.
economy, reducing demand and controlling price
levels. Ans : FOREIGN 2000

(a) Fiat money derives value from the

12. What is the significance of Statutory Liquidity government’s declaration of its acceptance.
Ratio (SLR), and how does it help regulate the Fiat money has value because the government
credit creation power of commercial banks? mandates its acceptance for debts, making it a
(a) It ensures all deposits are converted into critical element of the modern economy despite
liquid assets for immediate withdrawal. lacking intrinsic value.
(b) It mandates banks to keep a percentage of
deposits in cash or approved securities. 15. What is the primary purpose of the central bank
(c) It determines the maximum interest rate acting as the “lender of last resort” for commercial
banks can offer on loans. banks?
(d) It restricts banks from lending beyond a fixed (a) To ensure the government’s financial stability
percentage of their total deposits. during fiscal crises
Ans : COMP 2011
(b) To provide short-term liquidity support to
commercial banks in distress
(b) It mandates banks to keep a percentage of
(c) To guarantee repayment of loans to
deposits in cash or approved securities.
international investors
SLR requires banks to maintain a fraction of their
(d) To facilitate long-term investments in
deposits in liquid assets like cash or approved
infrastructure
securities, controlling their lending power and
influencing money supply. Ans : SQP 2003

13. Why is the Legal Reserve Ratio (LRR) critical for (b) To provide short-term liquidity support to
the central bank’s ability to influence the overall commercial banks in distress
credit availability in the economy? The central bank acts as the lender of last resort
(a) It ensures commercial banks meet their loan by providing financial assistance to commercial
obligations to the government. banks facing liquidity crises, ensuring the stability
(b) It regulates the minimum reserves banks must of the banking system.
hold to create credit.
16. Which statement best defines high-powered
(c) It directs commercial banks to invest a
money and its role in the monetary system?
portion of deposits in foreign reserves.
(a) It includes the total deposits with commercial
(d) It limits banks’ ability to invest in long-term
banks used for lending.
securities.
(b) It refers to currency held by the public and
Ans : DELHI 2012 reserves with commercial banks.
(b) It regulates the minimum reserves banks must (c) It is the value of government securities issued
hold to create credit. by the central bank.
LRR, including CRR and SLR, determines the (d) It denotes the total money supply in the
proportion of deposits commercial banks must economy during a financial year.
maintain, thereby controlling their ability to
Ans : OD 2004
extend loans and influence credit supply.
(b) It refers to currency held by the public and
14. How do legal tender money and fiat money differ, reserves with commercial banks.
and what characteristic makes fiat money an High-powered money comprises currency held by
essential part of the modern monetary system? the public and cash reserves of banks, forming the
(a) Fiat money derives value from the base for the creation of credit in the economy.
government’s declaration of its acceptance.
(b) Legal tender money is used only for
international transactions.

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CH 2 : MONEY AND BANKING

6. What is the primary objective of Open Market 9. How does the Cash Reserve Ratio (CRR) serve
Operations conducted by the central bank, and as a tool for monetary policy, and what impact
how does it impact the overall credit availability does its alteration have on the commercial banks’
and economic stability? lending capacity?
(a) To increase government revenue through (a) CRR helps the government increase taxes on
taxation banking institutions.
(b) To manage the supply of credit in the economy (b) CRR determines the liquidity banks must
(c) To influence the allocation of credit to specific hold with themselves for emergencies.
sectors (c) CRR is the proportion of deposits banks keep
(d) To reduce inflation by controlling imports with the central bank, impacting lending.
(d) CRR limits the percentage of profits banks
Ans : FOREIGN 2010
can retain for reinvestment.
(b) To manage the supply of credit in the economy
Through Open Market Operations, the central Ans : DELHI 2021

bank buys or sells government securities to (c) CRR is the proportion of deposits banks keep
regulate the availability of credit, ensuring with the central bank, impacting lending.
economic stability by controlling inflation or By adjusting the CRR, the central bank can
deflation. increase or decrease the funds available for
commercial banks to lend, influencing credit
7. Which of the following best describes the concept creation and money supply.
of “money supply,” highlighting its significance
in representing the total liquidity available to 10. What role does the repo rate play in regulating
the public at a specific point in time within an inflation, and how does an increase in this rate
economy? affect the borrowing behavior of commercial
(a) The volume of currency held exclusively by banks?
the central bank (a) It increases borrowing costs, discouraging
(b) Total money held by the public, including loans and reducing money supply.
demand deposits and currency (b) It decreases borrowing costs, encouraging
(c) Deposits with banks that can be accessed banks to lend more.
through loans (c) It has no direct impact on inflation but
(d) The amount of cash reserves kept by regulates international trade.
commercial banks with the central bank (d) It directly impacts public borrowing from the
Ans : COMP 2016 government.

(b) Total money held by the public, including Ans : OD 2023

demand deposits and currency (a) It increases borrowing costs, discouraging

Money supply includes the total currency held by loans and reducing money supply.
the public, demand deposits, and other deposits, An increase in the repo rate makes borrowing
reflecting the overall liquidity in the economy. from the central bank more expensive, reducing
the money supply and helping control inflation.
8. Which of the following is an example of a
qualitative instrument of monetary policy aimed 11. In what way does Open Market Operations
at regulating credit allocation to specific sectors (OMO) contribute to the central bank’s efforts
of the economy? in stabilizing the economy, particularly during
(a) Open Market Operations inflationary pressures?
(b) Repo Rate Adjustments (a) By increasing direct taxes on commercial
(c) Margin Requirements banks
(d) Cash Reserve Ratio (b) By buying government securities to inject
Ans : FOREIGN 2001 money into the economy
(c) By selling government securities to reduce
(c) Margin Requirements
money supply
Margin requirements are qualitative tools used by
(d) By lowering interest rates for long-term
the central bank to influence credit allocation by
borrowing
setting the difference between the loan amount
and the value of securities offered by borrowers. Ans : SQP 2009

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 93

28. Which one of the following is a quantitative tool Ans : SQP 2023

of credit control used by RBI? (b) Price stability

(a) Bank rate policy
(b) Marginal requirements 34. Who regulates money supply?
(c) Moral suasion (a) Government of India
(d) Direct action (b) Reserve Bank of India
(c) Commercial Banks
Ans : COMP 2008
(d) Planning Commission
(a) Bank rate policy
Ans : COMP 2001

29. The ratio of total deposits that a commercial (b) Reserve Bank of India
Banks has to keep with Reserve Bank of India is
called 35. _____ is not related with banking system.
(a) Deposit ratio (a) Bank rate
(b) Cash reserve ratio (b) Fiscal deficit
(c) Legal reserve ratio (c) Credit creation
(d) Statutory liquidity ratio (d) Cash Reserve Ratio

Ans : MAIN 2010 Ans : DELHI 2021

(b) Cash reserve ratio (b) Fiscal deficit

30. Which of the following is not a problem of barter 36. Central Bank as _____ manages public debt of
system of exchange? the government.
(a) store of value (a) Custodian of Foreign Exchange
(b) double coincidence of wants (b) Agent
(c) unit of account (c) Financial Advisor
(d) Unemployment (d) Supervisor

Ans : SQP 2013 Ans : OD 2021

(d) Unemployment (b) Agent

31. Money supply includes _____. 37. Statutory Liquidity Ratio implies to that
(a) all deposits in banks percentage of _____.
(b) only demand deposits in banks (a) total deposits of the commercial banks which
(c) only time deposits in banks must be kept in the current account, with the
(d) currency with the banks Reserve Bank of India.
(b) total deposits of the commercial banks which
Ans : COMP 2016
must be kept in the form of liquid assets, with
(b) only demand deposits in banks the Reserve Bank of India.
(c) net time and demand deposit liabilities of the
32. Demand deposits include _____. commercial banks which must be kept in the
(a) Saving account deposits and fixed deposits form of cash, with the Reserve Bank of India.
(b) Saving account deposits and current account (d) net time and demand deposit liabilities of the
deposits commercial banks which must be kept with
(c) Current account deposits and fixed deposits themselves in the form of liquid assets.
(d) All types of deposits
Ans : SQP 2009
Ans : MAIN 2021
(d) net time and demand deposit liabilities of
(b) Saving account deposits and current account the commercial banks which must be kept with
deposits themselves in the form of liquid assets.
33. Which of the following is not a function of money? 38. If the Legal Reserve Ratio is 20% and Initial
(a) Medium of exchange deposit is `2,000, then value of money multiplier
(b) Price stability and total money creation will be _____ and
(c) Store of value _____.
(d) Unit of account

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CH 2 : MONEY AND BANKING
Ans : DELHI 2023
(a) Both Assertion and Reason are true and
(a) Both Assertion and Reason are true and Reason is the correct explanation of Assertion.
Reason is the correct explanation of Assertion. (b) Both Assertion and Reason are true and
Reason is not the correct explanation of
56. Assertion : Coins are limited legal tender money. Assertion.
Reason : Coins represent money which is accepted (c) Assertion is true but Reason is false.
by the people to an unlimited extent. (d) Assertion is false but Reason is true.
(a) Both Assertion and Reason are true and
Reason is the correct explanation of Assertion. Ans : FOREIGN 2009

(b) Both Assertion and Reason are true and (c) Assertion is true but Reason is false.
Reason is not the correct explanation of
Assertion. 60. Assertion : The Central Bank is also known as the
(c) Assertion is true but Reason is false. bank of issue.
(d) Assertion is false but Reason is true. Reason : The Central Bank enjoys the sole
monopoly of issuing currency to ensure control
Ans : COMP 2021
over volume of currency and money supply.
(c) Assertion is true but Reason is false (a) Both Assertion and Reason are true and
Reason is the correct explanation of Assertion.
57. Assertion : LRR represents the minimum reserve (b) Both Assertion and Reason are true and
ratio essential to be maintained by banks. Reason is not the correct explanation of
Reason : Banks create deposits in the process of Assertion.
making loans to their customers. (c) Assertion is true but Reason is false.
(a) Both Assertion and Reason are true and (d) Assertion is false but Reason is true.
Reason is the correct explanation of Assertion.
(b) Both Assertion and Reason are true and Ans : COMP 2012

Reason is not the correct explanation of (a) Both Assertion and Reason are true and
Assertion. Reason is the correct explanation of Assertion.
(c) Assertion is true but Reason is false.
(d) Assertion is false but Reason is true. 61. Assertion : Demand deposits are created by
commercial banks.
Ans : OD 2001
Reason : Demand deposits form a significant part
(b) Both Assertion and Reason are true and of the total money supply in the economy.
Reason is not the correct explanation of Assertion. (a) Both Assertion and Reason are true and
Reason is the correct explanation of Assertion.
58. Assertion : Bank rate is decreased when credit is (b) Both Assertion and Reason are true and
to be expanded. Reason is not the correct explanation of
Reason : Selective credit control involves specifying Assertion.
the amount and purpose for which credit is to be (c) Assertion is true but Reason is false.
given. (d) Assertion is false but Reason is true.
(a) Both Assertion and Reason are true and
Reason is the correct explanation of Assertion. Ans : DELHI 2004

(b) Both Assertion and Reason are true and (b) Both Assertion and Reason are true and
Reason is not the correct explanation of Reason is not the correct explanation of Assertion.
Assertion.
(c) Assertion is true but Reason is false. 62. Assertion : Credit creation is inversely related to
(d) Assertion is false but Reason is true. the Legal Reserve Ratio.
Reason : LRR is fixed by the market forces of
Ans : SQP 2011
demand and supply.
(b) Both Assertion and Reason are true and (a) Both Assertion and Reason are true and
Reason is not the correct explanation of Assertion. Reason is the correct explanation of Assertion.
(b) Both Assertion and Reason are true and
59. Assertion : Open market operations are used to Reason is not the correct explanation of
influence money supply in the economy. Assertion.
Reason : Central bank sells government securities (c) Assertion is true but Reason is false.
to increase the flow of credit in the economy. (d) Assertion is false but Reason is true.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 95

47. In the Indian economy, _____ are issued by the Ans : DELHI 2020

Reserve Bank of India and acts as legal tender (a) increasing, bank rate
money.
(i) Coins of all denomination 52. Under the _____ Exchange Rate System, the
(ii) Currency notes of various denominations, Central Bank can control the rise/fall of foreign
except one rupee note exchange rate in a range bound manners.
(iii) Demand deposits (a) fixed
(a) Only (i) (b) flexible
(b) Only (ii) (c) managed floating
(c) Only (iii) (d) gold standard
(d) (i) and (ii) Ans : OD 2017

Ans : OD 2023 (c) managed floating

(b) Only (ii)
53. If in an economy the initial deposits are `4,000
48. _____ formulates the Monetary Policy in the crore and Reserve Ratio (RR) is 10%. The value
economy. of total deposit created would be ` _____ crore.
(a) Commercial Banks (a) 4,000
(b) International Monetary Fund (b) 40,000
(c) Central Bank (c) 2,000
(d) Central Government (d) 20,000

Ans : FOREIGN 2023 Ans : FOREIGN 2008

(c) Central Bank (b) 40,000

49. ‘Money is an asset which can be stored for use in

future.’
In the light of given statement, identify the ASSERTION AND REASON
function of money.
(a) A measure of value
(b) A standard of deferred payment 54. Assertion : Supply of money is a flow variable.
(c) A store of value Reason : It is measured at a point of time.
(d) A medium of Exchange (a) Both Assertion and Reason are true and
Reason is the correct explanation of Assertion.
Ans : SQP 2023
(b) Both Assertion and Reason are true and
(c) A store of value Reason is not the correct explanation of
Assertion.
50. “Mr. Sahotra borrowed funds from bank for
(c) Assertion is true but Reason is false.
purchasing a new house”.
(d) Assertion is false but Reason is true.
From the above statement, identify the indicated
function of money: Ans : SQP 2016
(a) Medium of exchange (d) Assertion is false but Reason is true.
(b) Store of value
(c) Unit of account 55. Assertion : Demand deposits are also called bank
(d) Standard of deferred payments money.
Reason : Demand deposits are created by
Ans : COMP 2012
commercial banks.
(d) Standard of deferred payments (a) Both Assertion and Reason are true and
Reason is the correct explanation of Assertion.
51. The Central Bank can reduce the Money Supply
(b) Both Assertion and Reason are true and
in the economy by _____ the _____.
Reason is not the correct explanation of
(a) increasing, bank rate
Assertion.
(b) decreasing, cash reserve ratio
(c) Assertion is true but Reason is false.
(c) decreasing, bank rate
(d) Assertion is false but Reason is true.
(d) buying, government securities

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CH 2 : MONEY AND BANKING

(a) 5 and `10,000 (b) Banking facilities to public

(b) 4 and `8,000
(c) 6 and `2,000 43. Read the following dialogue between two people:
(d) 4 and `10,000 Sita: I want 1 kg of potatoes.
Rani: What will you give in exchange?
Ans : COMP 2011
Sita: I can give you 2 liters of milk in return for
(a) 5 and `10,000 the potatoes.
Money Multiplier = 1 = 1 = 100 = 5 Rani: I don’t need milk. I want a pair of shoes.
LRR 20% 20 Which of the following problem is being faced by
and Total Money Creation Sita and Rani in their exchange process?
= Initial Deposit × MM = `2,000 × 5 = `10,000 (a) Lack of double coincidence of wants
(b) Absence of common units of value
39. Process of credit creation by commercial banks
(c) Lack of store of value
comes to an end when _____.
(d) Lack of standard of deferred payment
(a) Fresh deposits with Banks become zero.
(b) Reserve Ratio becomes zero. Ans : FOREIGN 2019

(c) Money multiplier becomes zero. (a) Lack of double coincidence of wants
(d) Total money reserves become equal to initial
deposit. 44. The main aim of monetary policy is _____.
(a) to bring price stability in the economy
Ans : FOREIGN 2021
(b) employment generation in the country
(d) Total money reserves become equal to initial (c) to increase trade surplus
deposit. (d) to generate greater tax revenue
Ans : SQP 2020
40. Which of the following statements does not
support with the function of RBI as supervisor to (a) to bring price stability in the economy
the commercial banks?
(a) Regulates the expansion, merger, acquisition 45. To reduce credit availability in the economy, the
etc. of the banks. Central Bank may _____.
(b) Formulates all rules and regulations for (a) buy securities in the open market
commercial banks. (b) sell securities in the open market.
(c) Extend loans to the commercial bank. (c) reduce reserve ratio.
(d) Inspection of operations of banks. (d) reduce repo rate.
Ans : COMP 2020
Ans : DELHI 2021
(b) sell securities in the open market.
(a) Regulates the expansion, merger, acquisition
etc. of the banks. 46. Ms. lqra Ansari, a teacher, was explaining in her
class about various types of deposits with the
41. Credit creation by commercial banks is determined
commercial banks. She quoted that –
by:
“These deposits form a part of M1 measure of
(a) Cash Reserve Ratio (CRR)
money supply and are payable on demand by the
(b) Statutory Liquidity Ratio (SLR)
commercial banks.”
(c) Initial Deposits
Identify the type of deposits she was explaining
(d) All the above
about and choose the correct alternative:
Ans : DELHI 2018 (i) Demand Deposits
(d) All the above (ii) Time Deposits
(iii) Post Office Deposits
42. Which of the following is not the function of the Alternatives:
central bank? (a) Only (i)
(a) Banking facilities to government (b) Only (ii)
(b) Banking facilities to public (c) (i) and (ii)
(c) Lendings to government (d) (i), (ii) and (iii)
(d) Lendings to commercial banks Ans : DELHI 2023

Ans : OD 2019 (a) Only (i)

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 97
Ans : FOREIGN 2003
66. Which of the following statements about Repo
(c) Assertion is true but Reason is false. Rate is correct?
I. It is the rate at which the central bank lends
63. Assertion : Only net demand deposits held by money to commercial banks for short-term
commercial banks are taken as part of money needs.
supply. II. An increase in repo rate discourages borrowing
Reason : Only deposits of the public held by the by commercial banks.
banks are included in money supply. III. A decrease in repo rate reduces the money
(a) Both Assertion and Reason are true and supply in the economy.
Reason is the correct explanation of Assertion. IV. Repo rate is used to manage liquidity and
(b) Both Assertion and Reason are true and inflation in the economy.
Reason is not the correct explanation of (a) Only I, II, and IV are correct.
Assertion. (b) Only II and III are correct.
(c) Assertion is true but Reason is false. (c) All statements are correct.
(d) Assertion is false but Reason is true. (d) Only I and IV are correct.
Ans : OD 2000 Ans : OD 2004

(a) Both Assertion and Reason are true and (a) Only I, II, and IV are correct.
Reason is the correct explanation of Assertion. Repo rate impacts borrowing and liquidity. An
increase discourages borrowing, while a decrease
64. Assertion : Reserve Ratio and Credit creation
increases money supply. Statement III is incorrect
power of commercial bank are directly related.
as a decrease in repo rate increases money supply.
Reason : Credit Creation is the product of the
reciprocal of Reserve Ratio (RR) and Primary 67. Identify the correct statements about the
deposit. functions of money.
(a) Both Assertion and Reason are true and I. Money acts as a medium of exchange, solving
Reason is the correct explanation of Assertion. the problem of double coincidence of wants.
(b) Both Assertion and Reason are true and II. Money serves as a unit of account, providing
Reason is not the correct explanation of a common measure of value.
Assertion. III. Money cannot act as a store of value over
(c) Assertion is true but Reason is false. time due to inflation.
(d) Assertion is false but Reason is true. IV. Money facilitates deferred payments, enabling
Ans : OD 2021 borrowing and lending activities.
(a) Only II and III are correct.
(d) Assertion is false but Reason is true.
(b) Only I, II, and IV are correct.
(c) All statements are correct.
(d) Only I and IV are correct.

STATEMENT BASED QUESTIONS Ans : FOREIGN 2000

(b) Only I, II, and IV are correct.

Money acts as a medium of exchange, unit of
65. Statement 1: All the coins are issued by Finance account, and store of value. It also facilitates
Ministry in India. deferred payments. Statement III is incorrect
Statement 2: All the currency notes are issued by as money can store value despite inflation to an
Reserve Bank of India. extent.
(a) Statement 1 is true & Statement 2 is false.
(b) Statement 1 is false & Statement 2 is true. 68. Which of the following statements about Open
(c) Both statements 1 & 2 are true. Market Operations (OMO) is correct?
(d) Both statements 1 & 2 are false. I. OMO refers to the buying and selling of
Ans : SQP 2005
government securities by the central bank.
II. Selling securities reduces money supply in the
(a) Statement 1 is true & Statement 2 is false. economy during inflation.
III. Buying securities increases money supply in
the economy during deflation.

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CH 2 : MONEY AND BANKING

Moral suasion relies on persuasion rather than exceeding 15 days.

enforcement to encourage banks to follow
monetary policies. It does not involve penalties, 91. Loans offered by commercial banks _____
direct regulation of interest rates, or mandatory (increase/decrease) the money supply in the
controls. economy.
Ans : OD 2020

Increase

ONE MARK QUESTIONS 92. If ‘legal reserve ratio’ is 20%, what will be the
value of money multiplier?

84. What is barter? Ans : OD 2018

Money Multiplier = 1 = 1 =5
Ans : COMP 2014
LRR 0.2
Barter is an exchange system where goods and
services are traded directly for other goods and ...[Given: LRR = 20% = 20 = 0.20
100
services without using money.
93. What is meant by bank rate?
85. Give the meaning of Money. Ans : FOREIGN 2022

Ans : DELHI 2017 Bank rate is the interest rate at which a country’s
Money is anything widely accepted as a medium Central Bank lends money to commercial banks.
of exchange with general acceptability.
94. Define ‘Statutory Liquidity Ratio’.
86. Define Money supply. Ans : SQP 2002

Ans : OD 2020 SLR is the minimum percentage of net demand

Money supply refers to the total stock of money and time deposits that commercial banks must
in circulation, including currency held by the hold as cash, designated assets, or securities, as
public and demand deposits, at a specific time. directed by the central bank.

87. Two components of money supply are _____ 95. What is Reverse Repo rate?
and _____. Ans : COMP 2006

Ans : FOREIGN 2015 It is the interest rate at which the Central Bank
Two components of money supply are Currency accepts deposits from commercial banks.
with the public and Demand Deposits.
96. What are open market operations?
88. What is included in money supply? Ans : OD 2018

Ans : SQP 2018 Open market operations involve the Central

Money supply comprises currency (paper notes Bank buying and selling government securities
and coins) and people’s bank deposits with and bonds to regulate the money supply in the
commercial banks. economy.

89. What are demand deposits?

Ans : COMP 2019

Demand deposits are bank deposits that can be

TWO MARK QUESTIONS
withdrawn by depositors anytime.
97. Money has separated the acts of sale and purchase.
90. What are Time Deposits?
Explain.
Ans : DELHI 2022
Ans : DELHI 2007
Time deposits are bank deposits that cannot be
With the advent of money, individuals can
withdrawn before the stipulated period, typically
purchase or sell goods without engaging in

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 99

III. A lower repo rate reduces liquidity in the The Reverse Repo Rate is not higher than the
economy. Repo Rate, making option (d) incorrect.
(a) Only II and III are correct.
(b) All statements are correct. 75. The bar graph above illustrates the percentage
(c) Only I and III are correct. distribution of various components of the money
(d) Only I and II are correct. supply. Which of the following statements is
correct?
Ans : FOREIGN 2020

(d) Only I and II are correct.

Repo rate impacts borrowing by commercial
banks. A higher rate discourages borrowing,
reducing liquidity. A lower repo rate increases
liquidity, making statement III incorrect.

GRAPH BASED QUESTIONS

74. The bar graph below shows the rates of various

monetary policy instruments used by the central
bank. Based on the graph, which of the following
statements is correct?
(a) Demand Deposits constitute the largest share
of the money supply.
(b) Time Deposits have a smaller share than
Currency with Public.
(c) Other Deposits have the highest percentage
in the money supply.
(d) Currency with Public constitutes the smallest
share of the money supply.
Ans : COMP 2007

(a) Demand Deposits constitute the largest share

of the money supply.
From the graph:
Demand Deposits have the highest share at 40%,
making option (a) correct.
Time Deposits (35%) are higher than Currency
(a) The Cash Reserve Ratio (CRR) rate is higher
with Public (22%), making option (b) incorrect.
than the Reverse Repo Rate.
Other Deposits (3%) have the smallest share,
(b) The Repo Rate is the highest among all
making option (c) incorrect.
instruments.
Currency with Public is not the smallest, making
(c) The Statutory Liquidity Ratio (SLR) has the
option (d) incorrect.
lowest rate.
(d) The Reverse Repo Rate is higher than the
Repo Rate.
Ans : SQP 2024
76. The pie chart above depicts the percentage
(a) The Cash Reserve Ratio (CRR) rate is higher distribution of government expenditure across
than the Reverse Repo Rate. various sectors. Based on the chart, which of the
From the graph: CRR is 4.0%, which is higher following statements is correct?
than the Reverse Repo Rate at 3.35%.
The SLR is the highest at 18.0%, making option
(b) incorrect.

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CH 2 : MONEY AND BANKING

IV. OMO is only used for long-term economic (c) Only I, II, and III are correct.
adjustments. LRR includes CRR and SLR, which are tools to
(a) Only I, II, and III are correct. regulate credit creation. CRR is maintained with
(b) Only II and IV are correct. the central bank, and SLR with the bank itself.
(c) All statements are correct. LRR is a quantitative measure, not qualitative,
(d) Only I and IV are correct. making IV incorrect.
Ans : SQP 2003
71. Which of the following statements about Central
(a) Only I, II, and III are correct. Bank functions is correct?
OMO involves the buying and selling of government I. The central bank is the sole authority to issue
securities to regulate money supply. It is used for currency in the country.
short- and medium-term adjustments. Statement II. It acts as a banker to the government by
IV is incorrect. managing its accounts and loans.
III. The central bank directly provides loans to
69. Which of the following statements about Cash the public for investments.
Reserve Ratio (CRR) and Statutory Liquidity (a) Only I and II are correct.
Ratio (SLR) is correct? (b) Only II and III are correct.
I. CRR is the fraction of deposits that (c) All statements are correct.
commercial banks must keep with the central (d) Only I and III are correct.
bank.
II. SLR is the fraction of deposits that banks Ans : DELHI 2014

are required to maintain in the form of liquid (a) Only I and II are correct.
assets. The central bank issues currency and acts as a
III. Both CRR and SLR are used to influence banker to the government. It does not directly
credit creation by commercial banks. provide loans to the public, which is done by
IV. CRR reduces money supply directly, while commercial banks.
SLR impacts money supply indirectly.
(a) Only I and II are correct. 72. Which of the following statements about Money
(b) Only II, III, and IV are correct. Supply is correct?
(c) All statements are correct. I. Money supply refers to the total volume of
(d) Only III and IV are correct. money held by the public at a particular
point of time.
Ans : DELHI 2012
II. It includes currency with the public, demand
(c) All statements are correct. deposits, and other deposits with the RBI.
CRR is maintained with the central bank, and III. Money supply measures the flow of money
SLR is maintained in liquid assets by commercial over a period of time.
banks. Both tools regulate credit creation and (a) Only I and II are correct.
money supply, with CRR having a direct effect (b) Only II and III are correct.
and SLR an indirect one. (c) All statements are correct.
(d) Only I and III are correct.
70. Which of the following statements about Legal
Reserve Ratio (LRR) is correct? Ans : OD 2017

I. LRR includes both CRR and SLR. (a) Only I and II are correct.
II. CRR is kept with the central bank, while Money supply is a stock variable, measured at a
SLR is maintained by the bank itself. specific time. It includes currency with the public
III. Increasing CRR and SLR reduces the credit and deposits but does not measure the flow of
creation ability of commercial banks. money over time.
IV. LRR is a qualitative measure to control
credit. 73. Which of the following statements about Repo
(a) Only II and IV are correct. Rate is correct?
(b) All statements are correct. I. Repo rate is the rate at which the central
(c) Only I, II, and III are correct. bank lends money to commercial banks.
(d) Only I and III are correct. II. A higher repo rate discourages borrowing by
commercial banks.
Ans : COMP 2005

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 101

25%, which is significantly lower than Services, do not fit the purpose of CRR adjustment.
making option (a) incorrect. The Industry
sector contributes 20%, which is less than 81. Open Market Operations (OMO) involve the
Services, making option (c) incorrect. Lastly, buying and selling of government securities by
Trade contributes only 10%, which is lower than the central bank to regulate money supply. Selling
Agriculture’s 25%, making option (d) incorrect. securities reduces money supply, while buying
Thus, the correct answer is that the Services securities increases liquidity in the economy.
sector accounts for the largest share in GDP. How does selling government securities during
inflation affect the economy?
(a) It reduces money supply.
(b) It increases money supply.
PASSAGE BASED QUESTION (c) It encourages lending by banks.
(d) It stabilizes market prices.
Ans : DELHI 2019
79. Repo rate is the rate at which the central bank
(a) It reduces money supply.
lends money to commercial banks for short-term
Selling securities absorbs liquidity from the
needs. An increase in the repo rate discourages
market, reducing money supply, which is necessary
borrowing by commercial banks, reducing
to control inflation. The other options do not
liquidity in the economy. Conversely, a decrease
describe the effect of selling securities.
in the repo rate encourages borrowing, increasing
the money supply. 82. Statutory Liquidity Ratio (SLR) is a percentage
What happens when the central bank increases of a bank’s deposits that must be kept in liquid
the repo rate? assets like cash, gold, or government-approved
(a) Borrowing by commercial banks is encouraged. securities. It is used to control credit creation by
(b) Liquidity in the economy increases. banks.
(c) Borrowing by commercial banks is discouraged. What is the impact of decreasing SLR during
(d) Money supply remains unchanged. deflation?
Ans : SQP 2015 (a) Reduces the lending capacity of banks.
(b) Increases the lending capacity of banks.
(c) Borrowing by commercial banks is discouraged.
(c) Stabilizes money supply in the economy.
A higher repo rate increases the cost of borrowing
(d) Decreases liquidity in the market.
for commercial banks, discouraging borrowing
and reducing liquidity. The other options do not Ans : OD 2022
align with the repo rate’s function. (b) Increases the lending capacity of banks.
A lower SLR leaves more funds with banks,
80. Cash Reserve Ratio (CRR) is the percentage of
enabling them to lend more, which helps increase
a commercial bank’s total deposits that must be
money supply during deflation. Other options are
kept with the central bank as reserves. During
incorrect based on SLR’s function.
inflation, the central bank increases CRR to
reduce money supply, while it decreases CRR 83. Moral suasion is a qualitative monetary policy
during deflation to enhance money supply. tool used by the central bank to influence and
What is the purpose of increasing CRR during persuade commercial banks to follow its directives
inflation? without any strict enforcement.
(a) To enhance credit creation. What is the primary objective of moral suasion by
(b) To reduce money supply in the economy. the central bank?
(c) To encourage borrowing by commercial (a) To enforce penalties on non-compliant banks.
banks. (b) To persuade banks to align with central bank
(d) To stabilize the banking system. policies.
Ans : COMP 2018 (c) To regulate the interest rates directly.
(d) To mandate strict credit controls.
(b) To reduce money supply in the economy.
Increasing CRR reduces the amount of money Ans : FOREIGN 2002
available with banks for lending, thereby reducing (b) To persuade banks to align with central bank
money supply during inflation. The other options policies.

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CH 2 : MONEY AND BANKING

(a) Agriculture accounts for the largest share of

GDP at 45%.
(b) Services sector contributes the largest share
of GDP at 45%.
(c) Trade contributes the same percentage as
Agriculture.
(d) Industry is the smallest contributor to GDP.
Ans : OD 2010

(b) Services sector contributes the largest share

of GDP at 45%.
From the pie chart, the Services sector has the
highest contribution of 45% to GDP, making
(a) Education receives the highest share of option (b) correct. Agriculture contributes
government expenditure at 30%. 25%, not 45%, so option (a) is incorrect. Trade
(b) Healthcare and Defense receive equal shares contributes 10%, which is significantly less than
of government expenditure. Agriculture’s 25%, making option (c) incorrect.
(c) Infrastructure receives the smallest share of Industry contributes 20%, which is higher than
government expenditure. Trade’s 10%, so option (d) is incorrect. Thus, the
(d) Defense has the largest allocation among all Services sector is the largest contributor to GDP.
sectors.
78. The bar graph below shows the percentage
Ans : FOREIGN 2013
contribution of various sectors to GDP. Which of
(a) Education receives the highest share of the following statements is correct?
government expenditure at 30%.
From the pie chart, Education has the largest share
at 30%, making option (a) correct. Healthcare
and Defense each receive 25%, which are equal
but not the largest, making option (b) incorrect.
Infrastructure receives 20%, which is the smallest
share, making option (c) incorrect. Defense’s
25% allocation is not the largest, making option
(d) incorrect. Thus, Education has the highest
allocation.

77. The pie chart below illustrates the percentage

contribution of various sectors to GDP. Based on
the chart, which of the following statements is
correct?

(a) The Agriculture sector contributes the highest

percentage to GDP.
(b) The Services sector accounts for the largest
share in GDP.
(c) The Industry sector contributes more than
the Services sector.
(d) Trade contributes more than Agriculture.
Ans : DELHI 2008

(b) The Services sector accounts for the largest

share in GDP.
The Services sector has the highest contribution
to GDP at 45%, making it the largest contributor
among all sectors. Agriculture contributes

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 103

reciprocal exchanges. This innovation resolves the rise in primary deposits leads to more secondary
barter system’s challenge of requiring a double deposits and increased credit creation. Enhanced
coincidence of wants, thereby simplifying trade credit creation boosts economic growth by
and economic transactions. providing greater access to credit for investment
purposes.
98. Is the general price level in the economy influenced
by money supply? Explain. 103. Define Legal Reserve Ratio.
Ans : OD 2008 Ans : OD 2023

An increased money supply boosts aggregate The Legal Reserve Ratio (LRR) is the proportion
demand. Without a matching rise in aggregate of total deposits that commercial banks must
supply, this leads to an increase in the general legally reserve with the central bank. It consists
price level within the economy. of :
(i) Cash Reserve Ratio (CRR): The minimum
99. Intrinsic value refers to the material worth of funds commercial banks must deposit with
money, while face value is its nominal worth as the central bank.
currency. When these values diverge significantly, (ii) Statutory Liquidity Ratio (SLR): The reserve
it can lead to unusual economic behaviors. What of assets maintained by banks with the central
happens when the intrinsic value of money exceeds bank.
its face value?
104. State the role played by the central bank as the
Ans : FOREIGN 2010
“lender of last resort”.
Money functions as a commodity when its intrinsic
value, derived from the material it is made of, Ans : FOREIGN 2019

surpasses its face value, which is the value printed When commercial banks cannot fulfill their
on the currency or coin. financial needs from other sources, they turn to
the central bank, which acts as the lender of last
100. Do you consider a commercial bank “creator of resort, providing loans and advances.
money” in the economy?
105. State, whether the following statement is true or
Ans : SQP 2013
false:
Commercial banks significantly contribute to ‘All’ financial Institutions are banking institutions.
credit creation in the economy. They generate
credit through demand deposits linked to loans. Ans : SQP 2020

These demand deposits often exceed cash False; As a financial institution can be a banking
reserves. For instance, if cash reserves are `1,000 institution only when it performs both the
and demand deposits are `10,000, banks create functions of accepting deposits and advancing
credit ten times their reserves. loans.

101. Will credit creation by commercial banks during 106. State, whether the following statement is true or
an inflationary situation be beneficiary to the false:
economy or have a negative impact? ‘Margin requirement is raised by the Central
Bank to increase money supply.’
Ans : COMP 2016

Credit creation by commercial banks raises the Ans : COMP 2020

money supply, boosting aggregate demand. False; Central Bank reduces the margin
During inflation, this results in excess demand, requirements in order to increase money supply.
worsening the situation and driving prices higher,
thereby having a negative impact on the economy. 107. How can Reserve Bank of India help in bringing
down the foreign exchange rate which is very
102. How can improvement in banking habits of the high?
people accelerate the pace of economic growth?
Ans : DELHI 2001
Ans : DELHI 2021
The Reserve Bank of India can devalue the
Improved banking habits encourage people to Indian rupee to reduce the high exchange rate.
deposit cash in banks rather than holding it. This Alternatively, it can increase the supply of foreign

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CH 2 : MONEY AND BANKING

Consequently, banks prefer advancing loans, 132. Giving reasons, state whether the following
which boosts credit creation and increases the statements are true or false.
money supply in the economy. (i) CRR and SLR are complementary to each
other in controlling credit creation in the
130. Giving reasons, state whether the following economy.
changes by RBI will increase or decrease the (ii) Market rate of interest and bank rate share a
money supply. direct relationship.
(i) Decrease in bank rate. (iii) Currency created by the central bank is called
(ii) RBI increases the margin from 20% to 30%. bank money.
(iii) Purchase of securities in the open market.
Ans : FOREIGN 2021
Ans : OD 2016
(i) True: A rise in the Cash Reserve Ratio (CRR)
An increase in the money supply raises aggregate and Statutory Liquidity Ratio (SLR) reduces
demand, and if aggregate supply does not rise the funds available for commercial banks to
correspondingly, it leads to higher general price lend, thereby restricting their credit creation
levels. capacity.
(i) Decrease in Borrowing Costs: This increases (ii) True: An increase in the Bank Rate by the
the money supply as lower borrowing costs Central Bank raises the borrowing costs for
encourage people to take more loans, boosting commercial banks, leading them to raise their
credit and demand. market interest rates. Conversely, a decrease
(ii) Increase in Margin Requirements: This in the Bank Rate lowers these costs and
reduces the money supply, as higher margins market rates.
mean smaller loans relative to the security (iii) False: Money issued by the Central Bank
value. This discourages borrowing, reducing is referred to as high-powered money, not
credit creation. regular money supply.
(iii) Purchase of Securities by RBI: This raises
the money supply, as the RBI releases funds 133. Describe any two main functions of a Central
to purchase securities, increasing commercial Bank.
banks’ resources for lending, thereby
Ans : SQP 2023
expanding credit and money supply.
The Central Bank serves as the apex institution
131. As per the following news published in “The of a country’s monetary system and performs
Hindu” on 6th August, 2022: several key functions, including:
The Monetary Policy Committee (MPC) of the (i) Bank of Issue: This function refers to the
Reserve Bank of India raised the Repo Rate by Central Bank’s exclusive legal right to issue
50 basis points.” Identify and explain the likely currency, ensuring a monopoly on note
cause and consequences behind this type of action issuance. This monopoly brings uniformity to
taken by the Reserve Bank of India. currency circulation and grants the Central
Ans : COMP 2023
Bank the authority to influence the money
supply, as currency held by the public is a
The Repo Rate is the interest rate charged by the component of the money supply.
Central Bank on loans to commercial banks. (ii) Bankers’ Bank: The Central Bank acts
Effect During Excess Demand and Inflation: as a bank for other banks, maintaining a
The Central Bank raises the Repo Rate to relationship similar to the one commercial
discourage borrowing by commercial banks. banks have with their customers. It holds
Higher Repo Rates lead commercial banks to their required cash reserves, provides
increase their lending rates, making credit more financial securities, offers advice, discounts
expensive for borrowers. This reduces the demand bills and securities, and extends loans during
for loans and discourages investment. emergencies.
Additionally, reduced credit availability helps lower
aggregate demand, addressing the inflationary 134. Describe any two methods by which Reserve Bank
gap and controlling inflation effectively. of India can regulate money supply.
Ans : COMP 2001

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 105

The store of value function allows wealth to be 1. Medium of Exchange: Money acts as an
saved for future use. Money facilitates this by intermediary for exchanging goods and
enabling individuals to save earnings until they services, eliminating the need for a double
choose to spend them. Its convenience arises coincidence of wants and fostering trade
from: (i) availability in suitable denominations, among individuals and nations.
(ii) ease of portability and economical storage, 2. Measure of Value: It enables all goods
and (iii) general acceptability, allowing it to be and services to have prices, simplifying
exchanged for goods anytime. In contrast, the the comparison and measurement of their
barter system lacked suitable assets for storage, exchange values.
as goods needed to be non-perishable, portable, 3. Standard of Deferred Payment: Money’s stable
and acceptable for exchange—qualities fulfilled value, durability, and general acceptability
by money, overcoming this limitation. make it ideal for future payments, unlike
fluctuating commodities.
114. Explain the ‘Unit of Account’ function of money. 4. Store of Value: Money can be stored without
How has it solved the related problem created by losing value, unlike perishable goods, offering
barter? a convenient and durable way to preserve
Ans : OD 2003 wealth.
The unit of account function means measuring the 117. Currency is issued by the Central Bank, yet we
value of goods and services in monetary terms. say that commercial banks create money. Explain.
The barter system faced challenges in determining How is this money creation by commercial banks
exchange rates since, without a common value likely to affect the national income? Explain.
unit, each commodity’s price had to be expressed
relative to others, leading to complexity. The Ans : COMP 2017

introduction of money solved this issue by Money creation, or credit creation, is a crucial
providing a standard measure to compare prices. function of commercial banks, enabling them to
Money allows values to be expressed simply, like generate credit far exceeding the initial deposits.
`20 per meter or `10 per kilogram, standardizing The money supply has two components: currency
borrowing, lending, and business accounting, with the public, issued by the Central Bank, and
thereby facilitating trade. demand deposits, created by commercial banks.
When banks grant loans, they create equivalent
115. Explain the ‘standard of deferred payment’ deposits in the borrower’s name, adding to the
function of money. How has it solved the related money supply. This process promotes investment
problem created by barter? by providing funds to investors. An increased
Ans : FOREIGN 2005 money supply boosts aggregate demand, thereby
raising national income.
The standard of deferred payment refers to the
use of money for transactions settled in the 118. How do changes in bank rate affect money creation
future. In a modern economy, many payments by commercial banks? Explain.
are deferred and conveniently stated in monetary
terms due to money’s relatively stable value and Ans : DELHI 2020

general acceptability. In the barter system, future The Bank Rate is the interest rate at which the
payments were challenging due to fluctuations Central Bank provides funds to commercial banks
in commodity values and disagreements over the during emergencies, acting as the “lender of the
quality of goods. Money resolves these issues, last resort.” Adjusting the bank rate impacts
facilitating borrowing and lending, promoting borrowing costs for banks and, subsequently, the
trade, and enabling the establishment of financial economy:
institutions. 1. Increase in Bank Rate: Raising the bank
rate raises borrowing costs for commercial
116. How does money overcome the problems of barter banks, leading them to hike lending rates for
system? Explain briefly. the public and businesses. This discourages
Ans : SQP 2014 borrowing, reduces credit creation, and
decreases money supply in the economy.
Money addresses the limitations of the barter
2. Decrease in Bank Rate: Lowering the bank
system through the following functions:

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CH 2 : MONEY AND BANKING

exchange by selling from its reserves, thereby 1. CU (Currency with the Public): Includes
lowering its value. currency notes issued by the Reserve Bank of
India and coins in circulation.
2. DD (Demand Deposits at Banks): Refers to
the demand deposits held by the public in
THREE MARK QUESTIONS banks.
3. OD (Other Deposits): Comprises demand
deposits with the RBI from public financial
108. Explain the problem of double coincidence of institutions, foreign central banks, foreign
wants faced under barter system. How has money governments, and international financial
solved it? institutions like the IMF.
Ans : OD 2009
These components together define the money
supply in the economy.
The barter system involved direct exchange of
goods without using money. It required a “double 111. State the meaning and components of money
coincidence of wants,” meaning both parties supply.
needed to have goods that the other wanted.
Ans : SQP 2012
For instance, Ram needing cloth from Shyam
would only work if Shyam desired what Ram The supply of money refers to the total stock of
offered. Finding such matching needs was often money available with the public on a given day.
challenging, hindering trade. Money simplified It is expressed as:
transactions by acting as a universal medium of M = C + DD
exchange, allowing individuals to purchase goods 1. Currency with Public (C): This includes
or services they need without relying on reciprocal coins and currency notes held by the public,
needs. excluding any currency held by banks.
2. Demand Deposits (DD): These are bank
109. The barter system, based on the direct exchange
deposits on which cheques can be issued and
of goods and services, had inherent limitations
are payable on demand. They are considered
that made it inefficient for larger economies. One
equivalent to currency and form part of the
significant issue was related to the preservation
money supply.
of value over time. Explain “difficulty in storing
This measure reflects the money accessible for
wealth” problem faced in the barter system of
transactions in the economy.
exchange.
Ans : FOREIGN 2011 112. Explain the “medium of exchange” function of
money. How has it solved the related problem
Storing value refers to preserving purchasing power
created by barter?
for future use, which the barter system failed to
ensure. Goods like wheat and vegetables lacked Ans : COMP 2004

durability and degraded over time. Additionally, One key function of money is serving as a medium
storing goods required significant resources, of exchange, enabling payment for goods and
and bulky items were difficult to exchange services. Producers sell goods to wholesalers for
conveniently, often leading to losses during urgent money, and wholesalers, in turn, sell to consumers
trades. The introduction of money addressed in exchange for money. Similarly, individuals
these issues. Money is durable, involves lower sell their services for money and use it to buy
storage costs, and enjoys general acceptability, necessities. This role of money eliminates the
effectively connecting the present with the future double coincidence of wants inherent in the barter
and serving as a reliable store of value. system. Bank money also functions as a medium
of exchange when it gains general acceptability,
110. State the two components of M1, measure of
underscoring its value and utility in transactions.
Money Supply.
Ans : DELHI 2018 113. Explain the ‘Store of Value’ function of money.
How has it solved the related problem created by
The components of the measure of money supply
barter?
M1 are:
Ans : DELHI 2000

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 107
Ans : DELHI 2002
127. Explain the role of Repo Rate in reducing money
The Cash Reserve Ratio (CRR) is the mandated supply.
percentage of a bank’s total deposits that must Ans : SQP 2008
be kept as cash with the Central Bank. Changes
in CRR directly impact the lending capacity of The Repo Rate is the interest rate at which the
banks and the money supply. Central Bank (RBI) provides short-term loans to
Effect on Increasing Money Supply: When the commercial banks. It is a tool used to regulate
CRR is lowered, banks hold less cash with the money supply and credit creation.
Central Bank, freeing up more funds for lending. 1. Impact of Rising Repo Rate: Higher Repo
This increases credit creation and expands the Rates make borrowing costlier for commercial
money supply in the economy. Therefore, to boost banks, prompting them to increase lending
the flow of credit, the Central Bank reduces the rates for the public. This discourages
CRR. borrowing, reduces credit demand, and lowers
credit creation in the economy.
125. Explain the role of Statutory Liquidity Ratio in 2. Impact of Falling Repo Rate: Lower Repo
increasing money supply. Rates reduce borrowing costs for banks,
encouraging them to lend more. This increases
Ans : OD 2006
credit creation and expands the money supply
The Statutory Liquidity Ratio (SLR) is the in the economy.
percentage of a bank’s deposits that it must
maintain as reserves in the form of liquid assets 128. Explain the role of reverse repo rate in controlling
like cash, gold, or government-approved securities. money supply.
The Central Bank can modify the SLR to influence Ans : COMP 2010
credit and money supply.
Effect on Increasing Money Supply: When The Reverse Repo Rate is the interest rate
the Central Bank reduces the SLR, banks are the Central Bank pays commercial banks for
required to maintain a smaller portion of deposits depositing surplus funds with it.
as reserves. This allows banks to lend more, 1. Effect of Increasing Reverse Repo Rate: A
thereby increasing credit creation and expanding higher rate incentivizes commercial banks to
the money supply in the economy. deposit more funds with the Central Bank,
reducing their liquidity and lending capacity.
126. What is Legal Reserve Ratio? Explain its This curtails credit creation by commercial
components. banks.
2. Effect of Decreasing Reverse Repo Rate: A
Ans : FOREIGN 2007
lower rate discourages banks from depositing
The Legal Reserve Ratio is the legally mandated excess funds with the Central Bank,
minimum fraction of a bank’s deposits that must increasing their liquidity. This enhances their
be held as reserves, either in cash or liquid assets. lending capacity, boosting credit creation in
It has two components: the economy.
1. Cash Reserve Ratio (CRR): The portion of
deposits that commercial banks must keep as 129. Explain the role of Reverse Repo Rate in
reserves with the Central Bank. increasing money supply.
2. Statutory Liquidity Ratio (SLR): The portion Ans : DELHI 2013
of deposits that commercial banks must
maintain in cash, liquid assets, or approved The Reverse Repo Rate is the interest rate at
securities with themselves. which the RBI borrows funds from commercial
The Legal Reserve Ratio is the sum of CRR and banks for a short period. Banks use this facility
SLR, ensuring liquidity and financial stability in to park their surplus funds with the RBI and earn
the banking system. interest.
Role in Increasing Money Supply: To expand
credit or increase the money supply, the Central
Bank lowers the Reverse Repo Rate. This makes
lending to the public more profitable for banks
compared to depositing funds with the RBI.

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CH 2 : MONEY AND BANKING

rate reduces borrowing costs for commercial 121. Explain the ‘bank of issue’ function of the Central
banks, enabling them to lower lending rates. Bank.
This encourages borrowing, increases credit
Ans : FOREIGN 2015
creation, and boosts money supply in the
economy. The Central Bank exclusively issues currency in
a country. In India, the Reserve Bank of India
119. Elaborate, how does a Central Bank stabilize (RBI) is authorized to issue paper currency,
money supply through ‘Bank Rate’. except one-rupee notes and coins, which are
Ans : SQP 2020
issued by the Ministry of Finance. This authority
ensures uniformity in note circulation and allows
Bank rate is the rate at which the central bank the Central Bank to directly regulate the money
of a country gives credit to the commercial banks supply. Centralized currency issuance enhances the
to meet their long-term needs. Through changes efficiency of the financial system and strengthens
in bank rate, the central bank affects the money monetary control.
supply in the economy.
Decrease in Bank Rate. When credit is to be 122. Explain the role of ‘Open market operations’ in
expanded or money supply is to be increased, reducing money supply.
the central bank reduces the bank rate. A low
Ans : SQP 2019
bank rate encourages the banks to keep a small
proportion of the deposits as reserves and use Open Market Operations involve the Central
a greater portion for giving out loans to the Bank buying or selling government securities to
borrowers or investors. Thus, money supply regulate the money supply.
increases. On the other hand, when money supply Effect on Reducing Money Supply: During
is to be reduced, Central Bank raises the bank inflation or excess demand, the Central Bank
rate. An increase in bank rate increases the cost sells government securities. Payments for these
of borrowings of commercial banks forcing them securities are made through banks, reducing the
to increase the lending rates which discourages cash reserves of commercial banks. This limits
the borrowers from taking loans. This decreases their ability to lend, decreasing credit creation and
money supply in the economy. the overall money supply. Since the money flows
back to the Central Bank and exits circulation,
120. Discuss the function of Central Bank as ‘Banker, aggregate demand in the economy falls, helping
Agent and Advisor’ to the Government. to control inflation.
or
Explain ‘Government’s Bank’ function of Central 123. Explain the role of Cash Reserve Ratio in
Bank. controlling credit creation.

Ans : OD 2020 Ans : COMP 2022

The Central Bank serves as a banker, agent, and The Cash Reserve Ratio (CRR) is the proportion
financial advisor to the government: of a commercial bank’s net demand and time
1. As a Banker: It performs all banking functions deposits that must be held as cash reserves with
for the government, including: the Central Bank.
(i) Maintaining a current account for 1. Increase in CRR: Banks must hold a higher
government cash balances. fraction of their deposits with the Central
(ii) Accepting receipts, making payments, Bank, reducing their ability to lend. This
and managing exchanges and remittances. decreases borrowings and limits the banks’
(iii) Providing short-term loans and advances credit creation capacity, leading to a decline
to the government. in the money supply.
2. As an Agent: It manages public debt on 2. Decrease in CRR: Banks hold a smaller
behalf of the government. fraction of deposits with the Central Bank,
3. As a Financial Advisor: It offers guidance on increasing their lending capacity. This boosts
economic, financial, and monetary matters to credit creation and raises the money supply
assist in policymaking. in the economy.

124. Explain the role of Cash Reserve Ratio in

increasing money supply.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 109

The Central Bank regulates the money supply 136. Explain, using a numerical example, how an
and credit in the economy through the following increase in reserve deposit ratio affects the credit
measures: creation power of the banking system.
(i) Bank Rate Policy: This refers to the interest
Ans : SQP 2019
rate at which the Central Bank provides funds
to commercial banks during emergencies, The reserve deposit ratio refers to the minimum
acting as the lender of last resort. An increase reserves a bank must maintain at any given
in the bank rate raises the cost of borrowing time, typically expressed as a percentage. This
for commercial banks, prompting them to ratio, mandated by the central bank, represents
raise their lending rates. This discourages the portion of deposits that commercial banks
borrowing by the public, thereby reducing are required to hold. It is a key monetary policy
the volume of credit and money supply in the instrument, essential for regulating money
economy. supply. A higher reserve deposit ratio decreases
(ii) Open Market Operations: These involve the the lending capacity of banks. During inflation,
Central Bank buying or selling government central banks often raise the ratio to limit credit
securities in the open market. When the creation. For instance, if a bank holds `100 crore
Central Bank buys securities, payments in deposits and the reserve ratio is set at 6%, it
to sellers are deposited in commercial must maintain `6 crore as reserves. If the central
banks, increasing their cash reserves and bank raises the ratio to 10%, the required reserves
lending capacity, which expands the money increase to `10 crore. Consequently, the bank’s
supply. Conversely, selling securities reduces lending capacity reduces from `94 crore to `90
commercial banks’ cash reserves and lending crore due to the 4% increase in the reserve deposit
ability, thereby decreasing the money supply. ratio, demonstrating how a higher ratio curbs
lending power.

FOUR MARK QUESTIONS

NUMERICAL QUESTIONS
135. Explain any two functions of money.
137. Explain ‘Bankers’ Bank’ function of the Central
Ans : DELHI 2009
Bank.
Money serves four primary functions : or
1. Medium of Exchange: Money facilitates the Elaborate the ‘Banker’s Bank and Supervisor’
trade of goods and services by acting as a function of the Reserve Bank of India.
universally accepted medium. It overcomes
Ans : COMP 2024
the limitations of the barter system, enabling
easier transactions and offering individuals Being the apex bank, the Central Bank acts as
freedom to choose goods and negotiate better the banker to other banks, i.e., it has the same
deals. relationship with commercial banks as the latter
2. Standard of Deferred Payment: Money maintains with the general public.
is widely accepted for future payments, As the banker to banks, the Central Bank
supporting borrowing and lending, and functions in following capacities:
fostering financial institutions. (i) Custodian of Cash Reserves: It is the custodian
3. Unit of Account: Money provides a standard of their cash reserves. Banks of the country
measure for valuing goods and services, aiding are required to keep a certain percentage of
in price comparison, maintaining business their deposits with the Central Bank (known
records, and enabling the banking system. as Cash Reserve Ratio). In this way, Central
4. Store of Value: Money preserves value over Bank acts as a custodian of cash reserves of
time, is portable, and offers lower storage commercial banks.
costs, eliminating issues of perishability and (ii) Lender of the last Resort: When commercial
enabling future use. banks fail to meet their financial requirements
from other sources, they approach the Central
Bank to give loans and advances as lender of

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CH 2 : MONEY AND BANKING

(ii) From the set of statements given in Column I Gross capital formation, representing total
and II, choose the correct pair or statements: investments in fixed capital, fell sharply. Savings
and current account deposits dropped by 8%
Column I Column II due to higher withdrawals, while the growth in
1. Bank money A. exchange of money currency notes held by the public exceeded bank
for goods deposits.
Although a rise in money supply often signals
2. Barter B. a component of
growth in consumption and business investments,
exchange money supply.
analysts noted that this increase was unlikely
3. Demand C. demand deposits to drive either. Instead, it reflected higher cash
deposits with created by withdrawals to meet needs during the lockdown
banks commercial banks until economic conditions stabilize.
4. Legal tender D. money which can (i) _______ (quantitative / qualitative)
be legally used to instruments of monetary policy affect the
make payment of direction of credit in the economy.
debts. (ii) Choose the correct pair of statements from
(a) 1-A the given statements in Column I and II:
(b) 2-B
(c) 3-C Column I Column II
(d) 4-D 1. LRR A. rate of interest
(iii) Who regulates money supply in India? at which Central
(a) Government of India Bank lends to
commercial banks
(b) Reserve Bank of India
for long term
(c) Commercial banks
(d) Planning Commission 2. Reverse Repo B. rate at which
Rate the RBI borrows
(iv) Which of the following is not a function of money from
The Reserve Bank of India? commercial banks
(a) It helps in barter exchange.
3. Bank Rate C. rate at which
(b) It issues the currency of the country.
Central Bank
(c) It acts as a bank of the banking system.
advances short
(d) It is the custodian of the foreign exchange
term loans to
reserves of the economy.
commercial banks
Ans :
4. Repo Rate D. minimum reserve
(i) (c) It includes term deposits with the banks. maintained by a
(ii) (d) 4-D commercial bank
(iii) (b) Reserve Bank of India (a) 1-A
(iv) (a) It helps in barter exchange. (b) 2-B
(c) 3-C
149. Read the para given below and answer the (d) 4-D
questions that follow:
The uncertainty caused by the COVID-19 (iii) Which of the following statements is true?
pandemic in India led to a sharp rise in currency (a) Money Multiplier is inversely related to
circulation as people hoarded cash or shifted LRR.
money to accessible deposits to guard against (b) Loans given by Commercial banks are
salary cuts or job losses. RBI data shows that equal to the amount of deposits they
India’s M3 money supply increased by 6.7% in receive.
the first five months of 2020 compared to 2019, (c) CRR is decreased to control inflation
marking the highest growth in seven years. (d) Demand deposits refer to the cash
Currency in circulation, including money with the reserves of Commercial Banks.
public and banks, also surged significantly.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 111

Rounds Deposits Legal Loan The deposit creation process will be as follows: As
(`) Reserves (`) given in the question, the initial deposit is `10,000
(LRR = 20%) and LRR is 0.1 or 10%. In this case, banks keep
`1,000 as reserve and lend the remaining `9,000.
Initial 1000 200 800 The borrowed money is used to make payments
First Round 800 160 640 and the recipients of these payments deposit the
money back in the banks. In this way, banks
Second 640 128 512
receive new deposits of `9,000 of which 10%,
Round
i.e., `900 is kept as reserves and the remaining
h h h h amount (i.e., `8100) is given as loans. In this way,
Total 5,000 1,000 4,000 in every round, 90% of the loans are converted
into new deposits.
Commercial banks create money : They create
Given the amount of initial deposits and LRR,
demand deposits in the process of giving loans.
the total deposit creation is:
The money creation process can be explained
with the help of an example. = Initial deposit # 1
LRR
Suppose, initial deposit is `1,000 and LRR is 0.2
or 20%. In this case, banks keep 20%, i.e., `200 as = `10, 000 # 1 = `1, 00, 000
0.1
reserves and lend the remaining `800. Those who
borrow this money use it for making payments 143. If Legal Reserve Ratio is 0.2 and new deposits are
and those who receive payments put the money `5000, explain the process of money creation by
back into banks. In this way, banks receive new commercial banks.
deposits of `800. The banks again keep 20%,
Ans : DELHI 2003
i.e., `160 as cash and lend the rest, i.e., `640.
In this way, in every round, 80% of the loans are Process of Money Creation
converted into deposits.
Given the amount of initial deposits and LRR, Round Deposits Legal Loan
the total money creation is: (`) Reserves (`)
(LRR = 20%)
Total Demand Deposit = Initial deposit # 1
LRR Initial 5,000 1,000 4,000
= `1,000 × 1 = `5,000 First 4,000 800 3,200
0.2
Round
Since bank deposits are a part of money supply, it
is also called money creation. Second 3,200 640 2,560
Round
142. If Legal Reserve Ratio is 0.1 and new deposits are
h h h h
`10,000, explain the process of deposit creation
by the commercial banks. Total 25,000 5,000 20,000

Ans : COMP 2000 The money creation process will be as follows:

As given in the question, the initial deposit is
Process of Deposit Creation `5,000 and LRR is 0.2 or 20%. In this case, banks
Round Deposits Legal Loan keep `1,000 as reserve and lend the remaining
(`) Reserves (`) `4,000. The borrowed money is used to make
(LRR = 10%) payments and the people who have received these
payments again deposit the money in banks. In
Initial 1,000 1,000 9,000 this way, banks receive new deposit of `4,000 of
First 9,000 900 8,100 which 20% i.e., `800 is kept as reserve and the
Round remaining amount (i.e., `3,200) is given as loans.
In this manner, in every round, 80% of the loans
Second 8,100 810 7,290
advanced are converted into new deposits.
Round
Given the amount of initial deposit and LRR, the
h h h h total amount of money creation is:
Total 1,00,000 10,000 90,000 = Initial deposit # 1
LRR

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CH 2 : MONEY AND BANKING

the last resort. The power of commercial banks which enables

(iii) Clearing House: It acts as a bank of central them to expand their deposits through loans is
clearance, settlements and transfers. As all called credit creation. Through this process,
commercial banks have their accounts with commercial banks are able to create credit, which
the Central Bank, it can easily settle claims of is in far excess of their cash reserves.
various commercial banks against each other This process is based on the following assumptions:
by making debit and credit entries in their (i) There is a single banking system in the
accounts. economy.
(iv) Act as a Supervisor: As a supervisor, the (ii) All transactions are routed through banks.
Central Bank regulates and controls the Numerical Example: Suppose, a customer
commercial banks by taking care of their deposits `10,000 in bank and the Legal Reserve
licensing, branch expansion, etc. Ratio (LRR) is 20%. Bank has to pay interest
on these deposits. Therefore, it further lends this
138. Explain the relationship between legal reserve money to people after retaining a part of this
ratio and money multiplier with a numerical amount to meet its customers’ obligations. Since
example. LRR is 20%, the bank will keep 20% of deposits
Ans : OD 2011 as reserve, i.e., `2,000 and will lend the remaining
80%, i.e., `8,000. Those who borrow will spend
Money Multiplier = 1
LRR this money and these `8,000 will come back to the
bank in the form of deposits. Bank again keeps
There is an inverse relationship between the two,
20% of `8,000, i.e., `1,600 as reserves and lends
i.e., lower the LRR, higher the value of money
`6,400 to those who need it. In this way, deposit
multiplier and vice-versa.
will go on increasing @ 80% of the last deposit.
For example,
This deposit creation comes to an end when the
Suppose, LRR is 20%, then money multiplier will
total reserves become equal to the initial deposit,
be
i.e., `10,000 in this case.
Money multiplier = 1 = 1 = 5 Deposit creation by Commercial Bank
LRR 0.20
Now, if LRR is 10%, then Rounds Deposits (`) Loons (`) Reserves(`)
Money multiplier = 1 = 1 = 10 I 10,000 8,000 2,000
LRR 0.10
Therefore, when LRR decreases, money multiplier II 8,000 6,400 1,600
increases. III 6,400 5,120 1,280
139. Suppose initial fresh deposits with banks = h h h h
`50,000 and LRR is 20%. How much would be the Total 50,000 40,000 10,000
total money creation in the economy?
Total Credit Creation = Initial deposits × 1
Ans : FOREIGN 2012 LRR
LRR = 20% or 0.20 = 10,000 × 1
Initial fresh deposit = `50,000 0.2
Total Deposit Creation = 10, 000 # 5 = `50, 000
= Initial fresh deposit # 1 Since LRR is 20% therefore money multiplier
LRR 1
b LRR l = 5
= 50,000 # 1
0.20 Thus, the total deposit creation is 5 times the
= 50,000 × 5 = `2,50,000 initial deposit.

140. “The process of credit creation by commercial 141. If Legal Reserve Ratio is 0.2 and new deposits are
banks comes to an end when the total of required `1,000, explain the process of money creation by
reserves become equal to the initial deposits.” the commercial banks.
With the help of a numerical example, prove that Ans : SQP 2004
the given statement is true.
Process of Money Creation
Ans : DELHI 2023

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 113

purchasing securities from the market. These (ii) Which of the following is not a quantitative
securities are generally bought at a higher method of credit control?
price than the market price. As such, banks (a) open market operation
start selling them, as a result of which their (b) bank rate policy
cash reserves increase, i.e., their liquid assets (c) legal reserve requirements
increase. This means that banks now can (d) margin requirements
create more credit. (iii) The central bank does not performs the
(ii) On the contrary, when central bank wants to following functions.
control the volume of credit, it starts selling (a) conducts sale and purchase of securities
securities in the market which are bought by for foreign governments securities.
the commercial banks. With the result, cash (b) acts as a lender of the last resort.
reserves of commercial banks are reduced and (c) controls money supply and credit.
this adversely affects their power of creating (d) manages the nation’s reserves of
credit. international currency.
(iv) Loans offered by commercial banks _____
(increase/decrease) the money supply in the
CASE BASED QUESTION economy.
Ans :
(i) (a) accepting deposits and lending
147. Read the para given below and answer the
(ii) (d) margin requirements
questions that follow:
(iii) (a) conducts sale and purchase of securities
The Reserve Bank of India (RBI) announced on
for foreign governments securities.
Friday that interest rates will remain unchanged,
(iv) Increase
while ensuring ample liquidity to support economic
recovery and manage the government’s borrowing 148. Read the para given below and answer the
requirements. The six-member Monetary Policy questions that follow:
Committee (MPC) decided to continue its The money supply encompasses all currency and
accommodative stance to revive growth and liquid instruments in a country’s economy at a
mitigate COVID-19’s economic impact, while specific time, including cash and deposits easily
keeping inflation within the target range, said convertible to cash. Governments, through central
Governor Shaktikanta Das. banks and treasuries, issue currency and coins,
The Union Budget 2021 outlined an while regulators influence the money supply
expansive fiscal approach to boost growth, and through reserve requirements, credit policies, and
the RBI affirmed its support through appropriate other regulations.
monetary policies. To manage higher government Economists assess the money supply to
borrowings, retail investors were given direct design policies by controlling interest rates and
access to invest in government securities. The regulating the economy’s money flow. An increase
RBI also raised the Cash Reserve Ratio (CRR) to in money supply typically lowers interest rates,
withdraw surplus funds from banks and use them boosting investment, consumer spending, and
for targeted market operations. business production. This, in turn, raises labour
The MPC kept the repo rate at 4 percent and demand. Conversely, a reduction in money supply
the reverse repo rate at 3.35 percent. Governor or slower growth can lead to opposite effects,
Das announced CRR restoration to 3.5 percent in reducing economic activity.
March and 4 percent in May, enabling the central
bank to use the funds for open market operations (i) Which of the following statement is not true
and liquidity management. regarding money supply?
(a) It is a stock variable.
(i) The two essential conditions for a financial (b) It does not include money held by
institution to become a bank are: government and the banking system.
(a) accepting deposits and lending (c) It includes term deposits with the banks.
(b) printing currency notes (d) It includes currency held with the public.
(c) both (a) and (b)
(d) neither (a) nor (b)

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CH 2 : MONEY AND BANKING

= `5,000 # 1 = `25, 000 First 900 90 810

0.2
Round
144. Explain the process of money creation by the Second 810 81 729
commercial banks with the help of a numerical Round
example.
h h h h
Ans : OD 2005
Total 10,000 1,000 9,000
Money or credit creation by commercial banks is
Money Multiplier = 1 = 1 = 10
one of the most important function of commercial LRR 0.10
banks. It is determined by: Total Demand Deposits
(i) the amount of initial deposits; and
(ii) the Legal Reserve Ratio (LRR). It is the = Money Multiplier × Cash Reserve Deposits
minimum ratio of deposits legally required by = 10 × `1,000 = `10,000
the commercial bank to be kept as cash. This shows that the supply of money has increased
Process of credit creation : The process of credit by `10,000 in the form of demand deposits.
creation by banks is made on the assumption
that all receipts and payments in the economy 145. Explain the ‘lender of last resort’ function of
are made through banks. This can be illustrated Central Bank.
with the help of an example. Suppose, that all Ans : FOREIGN 2014
banks receive initial cash deposits of `1,000 and
CRR is 10%. It means that banks are required to When commercial banks exhaust all resources to
keep only 10% of deposits (i.e., `100) and lend supplement their funds at the time of liquidity
the remaining amount of `900. Banks do not give crisis, the Central Bank acts as the lender of the
loans in cash rather they open an account in the last resort for them. When commercial banks
borrower’s name and deposit the loan amount in cannot meet obligations of their depositors, the
his account. The borrower is free to withdraw the Central Bank comes to their help. The Central
amount as and when he wishes. These are called Bank advances credit against eligible securities
secondary deposits. subject to certain terms and conditions. This saves
Suppose, borrowers withdraw the entire amount the commercial banks from a possible breakdown.
of loan and spend it for making payments of This is an important function of the Central Bank
goods and services received. The sellers of these in the banking system of a country.
goods and services receive `900 as revenue and 146. Explain how open market operations are helpful
deposit the same in their respective banks. It will in controlling credit creation.
increase the demand deposits of banks by `900. or
Now, Banks keep 10% of these new deposits, “Open Market Operation by the Reserve Bank of
i.e., `90 as cash reserve and lend the remaining India (RBI) helps in regulating money supply in
amount of `810. The borrowers will again use the economy.” Justify the given statement.
their loans for making payments which again
come back into the accounts of those who have Ans : SQP 2020

received these payments. An important tool in the hands of the Central

Banks again will keep 10% of `810 and lend the Bank for affecting money creation by Commercial
remaining amount of `729 (`810 – `81). banks is open market operations. Open market
Like this in each successive round creation of operations mean the sale and purchase of all kinds
deposits will be 90% of the previous round. of bills and securities by the central bank in the
This working has been shown in the following open market.
table: Process of Credit Creation According to this method, central bank controls
the volume of credit by increasing or decreasing
Round Deposits Legal Loan
the quantity of money in the economy through
(`) Reserves (`)
sale and purchase of securities in the money
(LRR = 10%)
market.
Initial 1,000 1,000 9,000 (i) When central bank of the country wants
to increase the volume of credit, it starts

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 115

(iv) The moral influence that the Central Bank (iii) The monetary policy generally targets to
applies on member banks in order to get ensure:
them to act in line with its policy is called as (a) price stability in the economy.
______. (b) employment generation in the country.
(c) stable foreign relations.
Ans :
(d) greater tax collections for the government.
(i) Qualitative
(iv) Lowering the bank rate is a measure to:
(ii) (b) 2-B
(a) encourage foreign investment in the
(iii) (a) Money Multiplier is inversely related to
economy.
LRR.
(b) increase money supply in the economy.
(iv) Moral suasion
(c) discourage investment activity in the
150. Read the para given below and answer the economy.
questions that follow: (d) increase government expenditure.
The Reserve Bank of India (RBI) serves as Ans : FOREIGN 2018
India’s central bank and stands at the apex of the
(i) (c) 5
country’s banking structure. As a key governing
(ii) (a) reduce cash reserve ratio.
and regulatory body, it plays a vital role in
(iii) (a) price stability in the economy.
facilitating the government’s economic functions.
(iv) (b) increase money supply in the economy.
Established on April 1, 1935, and nationalized
in 1949, the RBI operates under the provisions 151. Read the following text carefully. Answer the
of the RBI Act. Its activities are overseen by a given questions on the basis of the same and
government-appointed Board of Directors. The common understanding:
RBI is the sole authority for issuing currency, On 30th September 2022, the Reserve Bank of
responsible for printing, distributing, and India (RBI) raised Repo Rate for the fourth time
regulating the flow of money in the economy. in a row. The Monetary Policy Committee (MPC)
The RBI provides essential banking services decided to raise the policy rate by 50 basis points
to both central and state governments, including
(1 basis point = 1 th of a percent).
deposits, remittances, loans, and advances. It 100
supervises commercial banks, offering them After this announcement, the new Repo
financial assistance through short-term loans. rate stands at 5.9%, while the Reverse repo rate
As the custodian of foreign exchange reserves, continues to stand at 3.35%.
the RBI safeguards the value of the rupee in the Commercial banks borrow money from the
global market by maintaining adequate reserves Central Bank, when there is a shortage of funds.
to counteract fluctuations. With the surge in the Repo rate, borrowings
Additionally, the RBI regulates credit by general public will become costlier. This is
and money supply in the economy. It employs because, as RBI hikes its Repo rate, it becomes
qualitative and quantitative tools to expand or costly for the banks to borrow short term funds
contract available credit based on economic needs, from the Central Bank.
ensuring stability and growth. As a result, the banks hike the rate at
(i) If the legal reserve ratio is 20%, the value of which customers borrow money from them to
money multiplier would be: compensate for the hike in the Repo rate. This
(a) 2 happens because banks offer loans to retail
(b) 3 consumers at an interest rate which is generally,
(c) 5 directly proportional to the Repo rate.
(d) 4 The increase of 0.50 percent in Repo rate will
lead to higher interest rates on loans for borrowers,
(ii) In order to encourage investment in the implying that the Equated Monthly Installments
economy, the central bank may: (EMIs) for repaying the existing loans will also
(a) reduce cash reserve ratio. increase.
(b) increase cash reserve ratio. (i) Define ‘Repo Rate’.
(c) sell government securities in open market. (ii) Outline the recent change made by the
(d) increase the bank rate. Monetary Policy Committee of Reserve Bank
of India in the Repo rate.

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CH 2 : MONEY AND BANKING

(iii) “Increase in Repo rate is an important

tool used by Monetary Policy Committee
to combat the situation of inflation in the www.nodia.in
Economy.” Justify the given statement.
(iv) State the meaning of reverse repo rate.
(v) In order to bring down the rate of inflation
outline and discuss the step taken by the
Monetary Policy Committee of Reserve Bank
of India.
Ans : OD 2023

(i) Repo Rate. It may be defined as the rate at

which the Central Bank lends money to the
commercial banks in the event of any shortfall
of funds in the short-run.
(ii) The Monetary Policy Committee decided to
raise the policy rate by 50 basis points
(1 basis point = 1 th of a percent).
100
The new Repo rate is now 5.9%.
(iii) Repo rate is the rate of interest charged by
Central Bank on loans given to commercial
banks. During a situation of excess demand
leading to inflation, the Central Bank raises
the Repo rate which discourages commercial
banks in borrowing from the Central Bank.
Increase in Repo rate forces commercial banks
to increase their own lending rates making
credit costlier. As a result, the demand for
loans falls discouraging investment. Also
reduction in availability of credit helps in
correcting the situation of excess demand and
reducing inflationary gap.
(iv) Reverse Repo Rate. It is the rate at which
the Central bank of a country borrows money
from the commercial banks.
Increase in repo rate encourages commercial
banks to deposit funds with the Central bank
reducing avail-ability of funds with it. This,
thus helps in curtailing money supply in the
economy and vice-versa.
(v) Steps taken in order to bring down the Rate of
Inflation. During a situation of excess demand
leading to inflation, the Central Bank raises
the repo rate which discourages Commercial
Banks in borrowing from the Central Bank.
Increase in repo rate forces Commercial Banks
to increase their own lending rates making
credit costlier. As a result, the demand for
loans falls discouraging investment. Also
reduction in availability of credit helps in
correcting the situation of excess demand and
reducing inflationary gap.

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CHAPTER 3
DETERMINATION OF INCOME AND EMPLOYMENT

(iv) Slope of AD curve is positive which indicates

SUMMARY that as income increases aggregate demand
(or expenditure) also increases.
1. AGGREGATE DEMAND (AD) 4. AGGREGATE SUPPLY
It refers to the total value of final goods and It refers to the total value of final goods and
services demanded in an economy in a year. It is services in the economy in a year. It is the
the same as aggregate expenditure. planned aggregate output in the economy. It is
measured as the sum total of consumption (C)
2. COMPONENTS OF AGGREGATE DEMAND
and savings (S). Aggregate supply is the same
Aggregate Demand (AD) is the total demand for thing as National Income.
goods and services in an economy at a given price
AS = C + S and
level and time. The components of aggregate
demand are as follows : Y (National Income) = AS
(i) Private Final Consumption Expenditure (C) Y= C + S
: Expenditure incurred by the household on
AS curve is a 45° line starting from the origin and
the purchase of goods and services.
every point on this line is equidistant from X &
(ii) Government final consumption expenditure
Y-axis.
(G) : It refers to the expenditure incurred by
the government on the purchase of goods and 5. CONSUMPTION FUNCTION (PROPENSITY TO
services. CONSUME)
(iii) Private Investment expenditure (I) : It refers
The relationship between consumption and
to the expenditure incurred by private firms
income is called consumption function. It is also
on the purchase of capital goods such as plant
called as propensity to consume.
and machinery.
(iv) Net Exports (X-M) : It refers to the difference C = f (Y)
between export and import. Equation of consumption function.
AD = C + I + (X – M) C = C + b ^Y h
In a two sector economy, AD = C + I
6. RELATIONSHIP BETWEEN CONSUMPTION AND
3. BEHAVIOR OF AGGREGATE DEMAND INCOME
Aggregate Demand represents the total The relationship between consumption and
expenditure in an economy at various levels of income explains how households allocate their
income. It shows the relationship between income income between consumption and savings. It is a
and spending behavior : key concept in understanding economic behavior.
(i) There are two components of AD. Consumption (i) As income increases, consumption also
demand and investment demand. increases but not by the same proportion.
(ii) Autonomous Consumption (C) : Minimum (ii) Consumption can never be zero (even at zero
level of consumption even when income is level of income).
zero. (iii) Break even point when consumption is equal
(iii) Consumption increases with increase in to income, i.e., Y = C
income but not at the same rate. (iv) Savings start after the break-even point.

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CH 3 : DETERMINATION OF INCOME AND EMPLOYMENT

7. TYPES OF PROPENSITY TO CONSUME (iii) It is a straight line indicating constant slope

The propensity to consume refers to the of saving curve.
proportion of income that households spend on
8.2 Types of Propensity to Save
consumption. It can be classified into two types
based on income and consumption behavior. The propensity to save refers to the proportion
of income that households allocate to savings. It
7.1 Average Propensity to Consume (APC) highlights the relationship between income and
It is the ratio of total consumption to total income. saving behavior :
(i) Average Propensity to Save (APS): It is the
APC = C ratio of total saving to total income.
Y
Here APS = S
Y
APC > 1, before the break-even point (ii) Marginal Propensity to Save (MPS): It is
APC = 1, at break even point the ratio of change in saving to a change in
APC < 1, beyond the break-even point income.
APC can never be zero as consumption is never
zero. MPS = DS
DY
7.2 Marginal Propensity to Consume (MPC) 9. RELATIONSHIP BETWEEN APC AND APS
It is the ratio of change in consumption to change The sum of APC and APS is always equal to 1.
in income.
APC + APS = 1 or APC = 1 – APS
MPC = DC
DY or APS = 1 – APC
Here,
10. RELATIONSHIP BETWEEN MPC AND MPS
MPC = 1 (when entire additional income is
consumed) The sum of MPC and MPS is always equal to 1.
MPC = 0 (when entire additional income is saved) MPC + MPS = 1 or MPS = 1 – MPC
However, MPC generally varies between 0 and 1
or MPC = 1 – MPS
as additional income is neither entirely consumed
nor entirely saved 11. INVESTMENT
8. SAVING FUNCTION (PROPENSITY TO SAVE) It means an addition to the existing stock of
It indicates the tendency of the households to capital. There are two types of Investment:
save at a given level of income. (i) Induced Investment. Investment made with
the motive of earning profit.
S = f (Y)
(ii) Autonomous Investment. Investment which is
It is also called as propensity to save. independent of the level of income.
Equation of saving function:
S =- C + ^1 - b h Y 11.1 Determinants of Investment
Where, S = Saving, - C = = Amount of negative Investment decisions are influenced by various
saving at zero income level, (1 – b) = MPS and factors that determine the willingness and
Y = Income ability of firms to invest in capital goods. These
factors shape the overall level of investment in an
8.1 Relation between Saving and Income economy.
The saving curve illustrates the relationship (i) Marginal efficiency of investment or the
between income and saving, highlighting how expected rate of return.
households allocate income to savings as it (ii) Rate of interest
increases.
12. EX-ANTE SAVING (INTENDED OR PLANNED SAVING)
(i) It slopes upwards indicating a direct
relationship between saving and income. Amount of saving which households plan to save
(ii) It starts from the negative side of the Y-axis at different levels of income in the economy.
implying negative savings at zero level of
income.

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13. EX-ANTE INVESTMENT (PLANNED INVESTMENT) 20. UNDER-EMPLOYMENT EQUILIBRIUM

Amount of investment which firms plan to invest It refers to a situation when AD becomes equal
at different levels of income in the economy. to AS, when people are not fully employed. This
happens due to deficiency in AD.
14. EX-POST SAVING
It refers to actual saving in an economy during 21. INVESTMENT MULTIPLIER
a year. It explains the relationship between increase in
investment and the resultant increase in income.
15. EX-POST INVESTMENT It is the ratio of change in income to change in
It refers to actual investment in an economy investment.
during a year. K = DY or K = 1
DI 1 - MPC
16. INVOLUNTARY UNEMPLOYMENT
or K= 1
It refers to a situation in which people are ready MPS
to work at prevailing wage rate, but do not find There is a direct relationship between K and MPC
work. and inverse relationship between K and MPS.

17. FULL EMPLOYMENT 21.1 Working of the Multiplier

It refers to a situation when all able and willing This can be explained with the help of the following
persons at the given wage rate find a job. example which is based on the assumption, i.e.,
DI = `100 crores and MPC = 0.75.
18. EQUILIBRIUM LEVEL OF INCOME MULTIPLIER PROCESS
The determination of equilibrium level of income
and employment in the Keynesian theory depends
on the level of AD and AS.
Equilibrium level of income and output is
determined where:
(i) Aggregate Demand (AD) = Aggregate Supply
(AS).
(ii) Planned Saving (S) = Planned Investment
(I).
(iii) In case, when AD > AS (S < I)
1. It means buyers are planning to buy
more than what the sellers are planning Explanation:
to produce. (i) As per the table, an initial increase in
2. Inventory starts falling. investment of `100 crores increases income by
3. So the producers expand production. the same amount in the first rounds.
4. Income level starts rising till AD = AS. (ii) MPC being 0.75, they will spend or consume
(iv) In case, when AD < AS (S > I) `75 crores (3/4 of `100 crore) on new
1. It means that buyers would be willing consumption of goods. Spending on consumer
to buy less than what the producers are goods by one will increase the income of the
willing to produce. other by the same amount in the second round.
2. Planned inventory rises. (iii) This process continues with each round
3. So the firms reduce production till the of income being 0.75 times (3/4th) of the
economy is back in equilibrium, i.e., AD previous level.
= AS. (iv) The resultant increase in income is multiple
of initial increase in investment.
19. FULL-EMPLOYMENT EQUILIBRIUM
In this case,
It is that level of income at which AD equals AS
at full employment. Multiplier (K) = DY = 400 = 4
DI 100
or K= 1
1 - MPC

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CH 3 : DETERMINATION OF INCOME AND EMPLOYMENT

K= 1 =4 (iv) Rise in exports

1 - 0.75 (v) Fall in imports
Minimum value of multiplier is 1 when MPC is Impact:
also minimum i.e., 0. Maximum value of multiplier
(i) Output remains constant but excess pressure
is 3, when MPC is 1.
on existing supply.
22. DEFICIENT DEMAND (ii) Economy is already operating on full
employment. So, there is no possibility of
It refers to a situation where aggregate demand in
increase in employment.
the economy falls short of aggregate supply of goods
(iii) Price level rises.
and services at full employment. The deficiency or
gap between AD and AS is called deflationary gap. Measures to correct excess demand –
The economy, in this case, attains under- I. Fiscal policy measures
employment equilibrium. (i) Reducing the government expenditure
(ii) Increase in taxes
Causes:
II. Monetary policy measures
(i) Fall in levels of private consumption and
(i) Increase in bank rate (Repo Rate).
investment expenditure.
(ii) Increase in reverse repo rate.
(ii) Cut in government expenditure.
(iii) Increase in legal reserve ratio.
(iii) Rise in taxes.
(iv) Raising of margin requirement.
Impact: (v) In open market operation Central bank sells
(i) Fall in output and under-utilisation of factors. the securities in the open market.
(ii) Fall in the level of employment.
(iii) Fall in the price level in the economy.
Measures to correct deficient demand –
I. Fiscal measures MULTIPLE CHOICE QUESTION
(i) Increase in government expenditure.
(ii) Reduction in taxes to increase disposable
1. What does the term Aggregate Demand (AD)
income.
primarily represent in the context of an economy
II. Monetary measures
and how is it defined according to economic
(i) Reduction in legal reserve ratio (CRR and
principles?
SLR).
(a) The total value of final goods and services
(ii) Reduction in Bank rate (Repo rate).
produced in an economy in a year
(iii) Reduction in Reverse Repo Rate.
(b) The total value of final goods and services
(iv) In open market operations, central bank
demanded in an economy in a year
purchases securities from the market.
(c) The total savings made by households and
(v) Reduction in margin requirement.
firms in an economy
(vi) Under selective credit controls, credit for
(d) The total investment expenditure of private
speculative purposes is withdrawn.
firms in an economy
23. EXCESS DEMAND Ans : SQP 2024

It is a situation, where the current aggregate (b) The total value of final goods and services
demand is greater than the aggregate supply that demanded in an economy in a year
is required to achieve full employment equilibrium. Aggregate Demand refers to the total value of
The gap by which the actual aggregate demand final goods and services demanded in an economy
exceeds the level of aggregate supply required in a year, as mentioned in the text.
to establish the full employment equilibrium is
called inflationary gap. 2. In a simplified two-sector economy, which formula
Causes: is used to represent Aggregate Demand (AD) in
terms of its components?
(i) Increase in private consumption and
(a) AD = C + I + (X – M)
investment expenditure.
(b) AD = C + I + G
(ii) Increase in government expenditure.
(c) AD = C + I
(iii) Cut in taxes
(d) AD = C + S

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 121
Ans : COMP 2008
to consumption
(c) AD = C + I APC is equal to 1 at the break-even point, where
In a two-sector economy, AD includes only private consumption is equal to income (Y=C), as per
final consumption expenditure (C) and private the text.
investment expenditure (I), as per the text.
6. How is the relationship between Marginal
3. What is meant by Autonomous Consumption and Propensity to Consume (MPC) and Marginal
what role does it play in the aggregate demand of Propensity to Save (MPS) mathematically
an economy? expressed in the economy?
(a) It refers to consumption that depends entirely (a) MPC – MPS = 1
on the income levels of households (b) MPC + MPS = 1
(b) It is the minimum level of consumption even (c) PC × MPS = 1
when income is zero (d) MPC ÷ MPS = 1
(c) It is the consumption expenditure that Ans : SQP 2021
exceeds income at the break-even point
(d) It refers to consumption that is proportional (b) MPC + MPS = 1
to savings The text mentions that the sum of MPC and
MPS is always equal to 1.
Ans : DELHI 2010

(b) It is the minimum level of consumption even 7. What are the economic impacts of deficient
when income is zero demand and how does it affect overall output and
Autonomous Consumption is defined as the employment in the economy?
minimum level of consumption that occurs even (a) Rise in price level and full utilization of
when income is zero, as stated in the text. resources
(b) Fall in output, under-utilization of factors
4. What is the correct formula for calculating the and reduction in employment
Average Propensity to Consume (APC) and how (c) Increase in employment and investment due
is it interpreted? to higher savings
(a) APC = Y/C (d) Rise in exports and reduction in imports
(b) APC = C/Y Ans : COMP 2023
3C
(c) APC = 3 Y
(b) Fall in output, under-utilization of factors
(d) APC = C × Y and reduction in employment
Ans : OD 2013 Deficient demand leads to a fall in output,
under-utilization of factors and a reduction in
(b) APC = C/Y employment, as per the text.
APC is calculated as the ratio of total consumption
to total income, APC = C/Y , as provided in the 8. Which of the following fiscal policy measures is
text. commonly implemented to address excess demand
in an economy?
5. At which specific point does the Average (a) Reduction in taxes and increase in government
Propensity to Consume (APC) become equal expenditure
to 1 and what does it signify about income and (b) Increase in government expenditure and
consumption? reduction in CRR
(a) When savings are negative and below the (c) Reduction in government expenditure and
break-even point increase in taxes
(b) At the break-even point when income is equal (d) Reduction in taxes and increase in disposable
to consumption income
(c) Beyond the break-even point when income
exceeds consumption Ans : DELHI 2011

(d) When there is no income but autonomous (c) Reduction in government expenditure and
consumption exists increase in taxes
Ans : FOREIGN 2017 To correct excess demand, fiscal measures like
reducing government expenditure and increasing
(b) At the break-even point when income is equal taxes are used, as mentioned in the text.

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CH 3 : DETERMINATION OF INCOME AND EMPLOYMENT

22. Deficient demand in an economy leads to a Ans : OD 2020

______ gap, where aggregate demand falls (d) both (a) and (b)
short of aggregate supply at full employment.
(a) Deflationary 27. At equilibrium level, when C = 1000 + 0.5Y and
(b) Inflationary I = `100 crore, then income will be:
(c) Savings (a) `2000 crore
(d) Multiplier (b) `2100 crore
(c) `2200 crore
Ans : COMP 2018
(d) `2300 crore
(a) Deflationary
Ans : FOREIGN 2002
Deficient demand causes a deflationary gap,
where AD is less than AS at full employment, as (c) `2200 crore
mentioned in the text. As we know, Y = C + I
Y = 1000 Y – 0.5Y + 100
23. The sum of Average Propensity to Consume
(APC) and Average Propensity to Save (APS) is Y – 0.5Y = 1100
always equal to ______. 0.5Y = 1100
(a) 0
(b) 1 Income Level (Y) = 1100 = 2, 200 crore
0.5
(c) MPC
(d) MPS 28. At break even point:
Ans : DELHI 2022 (a) APS is equal to 1
(b) income is equal to consumption
(b) 1
(c) both (a) and (b)
The text states that APC+APS = 1, indicating
(d) neither (a) nor (b)
that total consumption and savings account for
the entire income. Ans : SQP 2014

(c) both (a) and (b)

24. The ratio between total income and total
consumption is referred to as ______. 29. Investment Multiplier is the ratio of change in
(a) MPC _____ due to an change in _____.
(b) APC (a) national income, investment
(c) slope of consumption curve (b) saving, investment
(d) effective demand (c) investment, national income
(d) consumption, national income
Ans : COMP 2015
Ans : COMP 2018
(b) APC
(a) national income, investment
25. Identify the incorrect statement from the
following: 30. From the following, identify the cause of deficient
(a) APS can never be negative. demand:
(b) the sum of APS and APC cannot be greater (a) decrease in government expenditure
or less than one. (b) decrease in propensity to consume
(c) consumption does not increase in the same (c) decrease in net exports
proportion as income. (d) all of the above
(d) planned expenditure on net exports is a part Ans : DELHI 2022
of aggregate demand. (d) all of the above
Ans : DELHI 2019

(a) APS can never be negative. 31. _____ policy is the policy adopted by the
Central Bank of an economy in the direction of
26. Consumption curve starting from y-axis indicates: credit control or money supply.
(a) positive consumption at zero income level (a) fiscal
(b) negative savings at zero income level (b) revenue
(c) zero consumption at zero income level (c) expenditure
(d) both (a) and (b) (d) monetary

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 123

15. What happens to the multiplier (K) when the (a) Aggregate Supply (AS), Planned Investment
Marginal Propensity to Consume (MPC) reaches (I)
its maximum value of 1? (b) Aggregate Demand (AD), Aggregate Supply
(a) The multiplier is zero because no additional (AS)
income is saved (c) Aggregate Demand (AD), Consumption (C)
(b) The multiplier is infinite as all additional (d) Aggregate Supply (AS), Net Exports (X-M)
income is consumed
(c) The multiplier remains constant regardless of Ans : DELHI 2019
MPC (b) Aggregate Demand (AD), Aggregate Supply
(d) The multiplier decreases because additional (AS)
income is saved Equilibrium level of income occurs where AD=AS,
Ans : FOREIGN 2006 which balances the economy, as per the text.
(b) The multiplier is infinite as all additional 19. The ______ curve starts from the negative
income is consumed side of the Y-axis, indicating dissaving at zero
When MPC is 1, all additional income is income levels.
consumed, leading to an infinite multiplier effect, (a) Aggregate Supply (AS)
as explained in the text. (b) Saving (S)
16. Aggregate Supply (AS) is the total value of final (c) Aggregate Demand (AD)
goods and services in the economy in a year and (d) Investment (I)
it is measured as the sum of ______ and Ans : OD 2020
______.
(a) Consumption, Investment (b) Saving (S)
(b) Consumption, Savings The saving curve begins on the negative side of
(c) Investment, Savings the Y-axis, reflecting negative savings or dissaving
(d) Consumption, Exports at zero income, as stated in the text.

Ans : SQP 2012 20. The slope of the Aggregate Demand (AD) curve
(b) Consumption, Savings is ______, indicating that as income increases,
Aggregate Supply is calculated as AS = C+S, aggregate demand also increases.
where C is consumption and S is savings, as (a) Negative
mentioned in the text. (b) Zero
(c) Positive
17. The ______ is the ratio of total consumption (d) Constant
to total income and it can never be zero as Ans : FOREIGN 2002
consumption is never zero.
(a) Marginal Propensity to Save (MPS) (c) Positive
(b) Average Propensity to Consume (APC) The AD curve has a positive slope, showing that
(c) Marginal Propensity to Consume (MPC) aggregate demand increases with an increase in
(d) Average Propensity to Save (APS) income, as mentioned in the text.

Ans : COMP 2015 21. At the break-even point, ______ is equal to

(b) Average Propensity to Consume (APC) ______ and savings are zero.
The Average Propensity to Consume (APC) is (a) Consumption, Income
APC = Y/C and it cannot be zero since there is (b) Income, Savings
always some level of consumption, as explained (c) Savings, Investment
in the text. (d) Aggregate Demand, Aggregate Supply
Ans : SQP 2014

(a) Consumption, Income

18. In the Keynesian theory, equilibrium level of At the break-even point, income equals
income is determined when ______ equals consumption (Y=C) and there are no savings, as
______. explained in the text.

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CH 3 : DETERMINATION OF INCOME AND EMPLOYMENT

9. What is the minimum possible value of the 12. How does the economy react when aggregate
investment multiplier (K) and under what demand (AD) exceeds aggregate supply (AS) at
condition does this occur in the economy? the full employment level?
(a) 0, when MPC is maximum (a) Inventory levels fall, leading to an expansion
(b) 1, when MPC is 0 in production
(c) Equal to MPC when additional income is (b) Producers reduce output to control excess
entirely consumed demand
(d) Equal to MPS when additional income is (c) Price levels fall due to reduced demand for
entirely saved goods and services
(d) Employment decreases as the economy
Ans : OD 2005
operates below capacity
(b) 1, when MPC is 0
The minimum value of the multiplier is 1 when Ans : COMP 2009

MPC is 0, as explained in the text. (a) Inventory levels fall, leading to an expansion
in production
10. What is the primary cause of involuntary When AD > AS, buyers plan to purchase more
unemployment and how is it defined in terms of than producers are willing to supply, causing
aggregate demand? inventories to fall, leading to increased production
(a) Excess aggregate demand causing inflationary until equilibrium is restored, as stated in the text.
pressures
(b) Low aggregate demand insufficient to provide 13. What is the significance of the break-even
jobs to willing workers point in the relationship between income and
(c) High levels of investment leading to consumption?
overproduction (a) It is the point where income exceeds
(d) Increased savings leading to reduced consumption, leading to savings
consumption (b) It represents a situation where consumption
Ans : FOREIGN 2007 is equal to income
(c) It is the stage where savings are negative due
(b) Low aggregate demand insufficient to provide
to autonomous consumption
jobs to willing workers
(d) It indicates the point where additional income
Involuntary unemployment occurs when aggregate
is entirely consumed
demand is insufficient to provide jobs for all
willing workers at the prevailing wage rate, as Ans : DELHI 2016
stated in the text. (b) It represents a situation where consumption
11. What does the term “Full Employment is equal to income
Equilibrium” signify in the context of an economy? The break-even point occurs when income equals
(a) A situation where all resources are utilized consumption (Y=C), as per the text.
and aggregate demand equals aggregate 14. What fiscal measures can be taken to address
supply at full employment deficient demand in an economy?
(b) A condition where aggregate demand is (a) Reducing government expenditure and
greater than aggregate supply increasing taxes
(c) A state where some resources remain (b) Increasing government expenditure and
unemployed due to excess demand reducing taxes
(d) A scenario where planned savings exceed (c) Increasing bank rate and legal reserve ratios
planned investments (d) Selling securities in the open market
Ans : SQP 2003
Ans : OD 2001
(a) A situation where all resources are utilized (b) Increasing government expenditure and
and aggregate demand equals aggregate reducing taxes
supply at full employment To correct deficient demand, fiscal measures like
Full Employment Equilibrium occurs when increasing government expenditure and reducing
aggregate demand equals aggregate supply and taxes to boost disposable income are implemented,
all able and willing persons are employed at the as mentioned in the text.
given wage rate, as per the text.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 125
Ans : SQP 2004 Ans : FOREIGN 2017

(d) monetary (a) increase in government expenditure

32. From the following, identify the qualitative 37. If planned savings is more than planned
instrument of credit control. investment, then:
(a) bank rate (a) national income is likely to rise
(b) margin requirement (b) national income is likely to fall
(c) open market operations (c) no change in national income
(d) legal reserve requirements (d) none of the above
Ans :
Ans : SQP 2021
(b) margin requirement
(b) national income is likely to fall
33. If MPC is greater than MPS, the value of
38. ______ refers to the gap by which actual
multiplier will be:
aggregate demand exceeds the aggregate supply
(a) greater than 2
required to establish full employment equilibrium:
(b) less than 2
(a) deflationary gap
(c) equal to 2
(b) deficient demand
(d) equal to 5
(c) inflationary gap
Ans : COMP 2008 (d) excess demand
(a) greater than 2 Ans : DELHI 2023

34. ______ refers to the addition to the stock of (c) inflationary gap
physical capital and change in Inventory of a firm
39. The value of multiplier is:
in an economy:
(a) 1/MPC
(a) consumption expenditure
(b) 1/MPS
(b) investment expenditure
(c) savings (c) 1/1 – MPS
(d) multiplier (d) 1/MPC – 1

Ans : DELHI 2010 Ans : DELHI 2015

(b) investment expenditure (b) 1/MPS

35. Excess demand in an economy leads to: 40. If MPC = 1, the value of multiplier is:
(a) decrease in output, income, employment and (a) 0
price level (b) 1
(b) rise in the price level but no change in output (c) Between 0 and 1
and employment (d) Infinity
(c) increase in output, income and employment
but no change in the price level Ans : FOREIGN 2015

(d) increase in output, income, employment and (d) Infinity

price level
41. If the marginal propensity to consume is greater
Ans : OD 2013
than marginal propensity to save, the value of the
(b) rise in the price level but no change in output multiplier will be
and employment (a) greater than 2
(b) less than 2
36. From the following, identify the fiscal policy (c) equal to 2
measure which can be adopted as a remedy to (d) equal to 5
tackle deflationary gap:
(a) increase in government expenditure Ans : DELHI 2017

(b) increase in taxes (a) greater than 2

(c) increase in prices
(d) decrease in government expenditure

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CH 3 : DETERMINATION OF INCOME AND EMPLOYMENT

42. Aggregate demand can be increased by: 47. What will be change in income if MPC = 0.8 and
(a) increasing bank rate change in investment is `1000 crore?
(b) selling government securities by Reserve Bank (a) `8,000 crore
of India (b) `5,000 crore
(c) increasing cash reserve ratio (c) `3,000 crore
(d) none of the above (d) `2,000 crore
Ans : COMP 2011 Ans : COMP 2019

(d) none of the above (b) `5,000 crore

43. If national income increases by `1000 crore due to 48. If the value of Average Propensity to Consume
an additional investment of `400 crore. What will (APC) is 0.8 and National Income is `4,000 crore,
be the value of multiplier? the value of savings will be _____.
(a) 1.5 (a) `100 crore
(b) 2.5 (b) `200 crore
(c) 4 (c) `800 crore
(d) 5 (d) `500 crore
Ans : DELHI 2018 Ans : DELHI 2020

(b) 2.5 (c) `800 crore

44. If value of investment multiplier is 4, what will be 49. If income rises from `50,000 to `60,000,
the value of marginal propensity to save? consumption increases from `40,000 to `48,000. In
(a) 0.75 this situation, what will be the value of Marginal
(b) 0.25 Propensity to Consume (MPC)?
(c) 0.50 (a) 0.80
(d) 0 (b) 0.20
(c) 0.10
Ans : DELHI 2018
(d) 0.90
(b) 0.25
Ans : OD 2020
45. Suppose in a hypothetical economy, the income (a) 0.80
rises from `5,000 crore to `6,000 crore. As a
result, the consumption expenditure rises from 50. If the value of Average Propensity to Save (APS)
`4,000 crore to `4,600 crore. Marginal propensity is 0.2 and National Income is `4,000 crore, then
to consume in such a case would be _____. consumption will be _____.
(a) 0.8 (a) `4,000 crore
(b) 0.4 (b) `3,200 crore
(c) 0.2 (c) `3,800 crore
(d) 0.6 (d) `2,600 crore
Ans : OD 2005 Ans : FOREIGN 2020

(d) 0.6 (b) `3,200 crore

46. In an economy, as a result of increase in investment 51. In case of an underemployment equilibrium, which
by `1000 crore, national income rises by `1000 of the following alternative is not true?
crore. What will be the marginal propensity to (a) Aggregate demand is equal to Aggregate
consume? supply.
(a) 0.9 (b) There exists excess production capacity in
(b) 0.8 the economy.
(c) 0.1 (c) Resources are not fully and efficiently utilised.
(d) 0.2 (d) Resources are fully and efficiently utilised.
Ans : SQP 2019 Ans : SQP 2020

(b) 0.8 (d) Resources are fully and efficiently utilised.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 127

52. If Marginal Propensity to Save (MPS) is 0. 25 and 57. _____ refers to that level of Aggregate Demand,
initial change in investment is `250 crore, then which can be met by the corresponding supply in
the final change in income would be _____. the economy.
(a) `1,000 crore (a) Autonomous Consumption
(b) `1,200 crore (b) Effective Demand
(c) `500 crore (c) Excess Demand
(d) `3500 crore
(d) Deficient Demand
Ans : COMP 2020
Ans : OD 2023
(a) `1,000 crore
(b) Effective Demand
53. If a linear consumption curve takes a parallel shift
58. If a straight line consumption function makes a
downwards, the value of investment multiplier
positive intercept at the Y-axis, it implies that
will _____.
the Marginal Propensity to Consume _____
(a) fall
and Average Propensity to Consume _____ as
(b) rise
the level of income rises.
(c) be doubled
(a) remains constant, rises
(d) not change
(b) falls, falls
Ans : DELHI 2023
(c) rises, rises
(b) rise (d) remains constant, falls
54. If in an economy, the Investment Multiplier is 4 Ans : OD 2020
and Autonomous Consumption is `30 crore, the
(d) remains constant, falls
relevant consumption function would be _____.
(a) C = 30 + 0.75Y 59. Arrange the following in the correct sequential
(b) C = – 30 + 0.25Y order, if the government of a nation is trying to
(c) C = 30 + 0.25Y curtail the situation of inflationary gap:
(d) C = – 30 – 0.25Y (i) Decrease in disposable income
Ans : OD 2023 (ii) Increase in taxes
(a) C = 30 + 0.75Y (iii) Decrease in Aggregate Demand
Alternatives:
55. If increase in National Income is equal to increase (a) (i), (ii), (iii)
in Savings, the value of Marginal Propensity to (b) (iii), (ii), (i)
Consume would be _____. (c) (ii), (iii), (i)
(a) equal to unit (d) (ii), (i), (iii)
(b) greater than one
Ans : OD 2007
(c) less than one
(d) equal to zero (d) (ii), (i), (iii)
Ans : DELHI 2023 60. In a hypothetical economy, if entire additional
(d) equal to zero income is consumed, the value of investment
multiplier would be _____.
56. In an economy, the value of Marginal Propensity (a) One (1)
to Save (MPS) is 0.25, what will be the value (b) Zero (0)
of increase in income, if investments increased by (c) Between zero (0) and one (1)
`200 crore? (d) Infinity (3)
(a) `200 crore
Ans : OD 2017
(b) `150 crore
(c) `1,000 crore (d) Infinity (3)
(d) `800 crore
61. If in an economy the initial deposits are `4,000
Ans : SQP 2023 crore and Reserve Ratio (RR) is 10%. The value
(d) `800 crore of total deposit created would be ` _____ crore.

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CH 3 : DETERMINATION OF INCOME AND EMPLOYMENT

82. Consider the following statements about the Statement 2: Aggregate demand curve always
measures to correct deficient demand: starts from point of origin with positive slope.
1. Increasing government expenditure is a fiscal (a) Statement 1 is true & Statement 2 is false.
measure to boost demand. (b) Statement 1 is false & Statement 2 is true.
2. Reducing taxes increases disposable income, (c) Both statements 1 & 2 are true.
stimulating demand. (d) Both statements 1 & 2 are false.
3. Reducing the bank rate encourages borrowing Ans : SQP 2023
and increases spending.
(a) Statement 1 is true & Statement 2 is false
4. Selling securities in the open market is
an effective monetary measure to address 86. Statement 1: Consumption and Savings are the
deficient demand. components of National output of an economy.
Which of the above statements are correct? Statement 2: Higher level of Income often leads
(a) 1 and 4 only to lower savings.
(b) 1, 3 and 4 only (a) Statement 1 is true & Statement 2 is false.
(c) 2, 3 and 4 only (b) Statement 1 is false & Statement 2 is true.
(d) 1, 2 and 3 only (c) Both statements 1 & 2 are true.
Ans : DELHI 2011
(d) Both statements 1 & 2 are false.

(d) 1, 2 and 3 only Ans : DELHI 2008

Statements 1, 2 and 3 are correct. Fiscal measures (a) Statement 1 is true & Statement 2 is false
like increasing government expenditure and
reducing taxes, along with reducing the bank
rate, boost demand. Statement 4 is incorrect;
selling securities reduces money supply, which is GRAPH BASED QUESTIONS
counterproductive to correcting deficient demand.

83. Statement 1: Ex-post savings and Ex-post 87. The bar graph above shows the percentage
investments are equal at all levels of income. contribution of different components to Aggregate
Statement 2: Under the effective demand Demand (AD) in an economy.
principle, the equilibrium output is equal to ex-
ante Aggregate Demand (AD).
(a) Statement 1 is true & Statement 2 is false.
(b) Statement 1 is false & Statement 2 is true.
(c) Both statements 1 & 2 are true.
(d) Both statements 1 & 2 are false.
Ans : OD 2024

(c) Both statements 1 & 2 are true.

84. Statement 1: The induced consumption shows, the

direct relation between consumption and income.
Statement 2: With a certain increase in income,
induced consumption also increases.
(a) Statement 1 is true & Statement 2 is false.
(b) Statement 1 is false & Statement 2 is true.
Based on the bar graph, which component
(c) Both statements 1 & 2 are true.
contributes the highest percentage to Aggregate
(d) Both statements 1 & 2 are false.
Demand (AD)?
Ans : FOREIGN 2023 (a) Private Consumption (C)
(c) Both statements 1 & 2 are true. (b) Government Expenditure (G)
(c) Private Investment (I)
85. Statement 1: In a two sector economy, consumption (d) Net Exports (X-M)
expenditure and investment expenditure are the
Ans : OD 2001
two components of Aggregate Demand.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 129

67. Assertion : While determining equilibrium level of Ans : OD 2012

income in an economy, investment expenditure is (c) Assertion is true but Reason is false.
assumed to be autonomous. Taxation rates can be increased during excess
Reason : Investments are deemed necessary for demand to control the disposable income and
national well being and are made even when levels reduce the level of aggregate demand in the
of disposable income are insufficient or zero as economy.
they are made by the government keeping in mind
public welfare. 70. Assertion : During deficient demand, the Central
(a) Both Assertion and Reason are true and Bank decreases the Reverse Repo Rate.
Reason is the correct explanation of Assertion. Reason : Reverse Repo Rate is the rate of interest
(b) Both Assertion and Reason are true and at which Commercial Banks can deposit their
Reason is not the correct explanation of surplus funds with the Central Bank.
Assertion. (a) Both Assertion and Reason are true and
Reason is the correct explanation of Assertion.
(c) Assertion is true but Reason is false.
(b) Both Assertion and Reason are true and
(d) Assertion is false but Reason is true.
Reason is not the correct explanation of
Ans : COMP 2001 Assertion.
(c) Assertion is true but Reason is false.
(a) Assertion and reason both are correct
(d) Assertion is false but Reason is true.
statements and reason is correct explanation for
assertion. Ans : FOREIGN 2015

(b) Assertion and reason both are correct

68. Assertion : In the situation of deficient demand,
statements but reason is not correct explanation
aggregate expenditure falls short of planned
for assertion.
investment at the full employment level.
Decrease in Reverse Repo Rate discourages the
Reason : Decrease in investment expenditure
commercial banks to deposit their surplus funds
leads to a fall in aggregate demand leading to
with the Central Bank thereby raising their credit
deficient demand.
creating power.
(a) Both Assertion and Reason are true and
Reason is the correct explanation of Assertion. 71. Assertion : The savings curve has a negative
(b) Both Assertion and Reason are true and intercept on the y-axis of the same magnitude as
Reason is not the correct explanation of the positive intercept of the consumption curve.
Assertion. Reason : After the break-even point, savings is
(c) Assertion is true but Reason is false. negative.
(d) Assertion is false but Reason is true. (a) Both Assertion and Reason are true and
Ans : DELHI 2006 Reason is the correct explanation of Assertion.
(b) Both Assertion and Reason are true and
(d) Assertion is false but Reason is true.
Reason is not the correct explanation of
Deficient demand arises when planned aggregate
Assertion.
expenditure falls short of aggregate supply at the
(c) Assertion is true but Reason is false.
full employment level.
(d) Assertion is false but Reason is true.
69. Assertion : Changes in taxes by the government Ans : SQP 2019
directly influence the level of aggregate demand
(c) Assertion is true but Reason is false.
in the economy.
The negative intercept of the savings curve on
Reason : Decrease in taxes help control the
the y-axis indicates negative savings equal to the
situation of excess demand and vice versa.
amount of autonomous consumption.
(a) Both Assertion and Reason are true and
Reason is the correct explanation of Assertion. 72. Assertion : The maximum value of the multiplier
(b) Both Assertion and Reason are true and is one.
Reason is not the correct explanation of Reason : When the economy consumes the whole
Assertion. of its additional income, then the value of MPC
(c) Assertion is true but Reason is false. will be equal to 1 implying a continuous increase
(d) Assertion is false but Reason is true. in the consumption expenditure.

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CH 3 : DETERMINATION OF INCOME AND EMPLOYMENT

(a) 4,000 64. Assertion : Involuntary unemployment exists at

(b) 40,000 full employment level.
(c) 2,000 Reason : The term full employment implies that
(d) 20,000 demand for labour is equal to its supply.
(a) Both Assertion and Reason are true and
Ans : OD 2002
Reason is the correct explanation of Assertion.
(b) 40,000 (b) Both Assertion and Reason are true and
Reason is not the correct explanation of
62. Identify, what does the shaded area ( DEFG ), in
Assertion.
the given figure indicate?
(c) Assertion is true but Reason is false.
(d) Assertion is false but Reason is true.
Ans : OD 2003

(d) Assertion is false but Reason is true.

Full employment implies absence of involuntary
unemployment.

65. Assertion : There exists a direct relationship

between MPC and the value of multiplier.
Reason : Higher MPC implies a greater proportion
of income being spent on consumption leading to
I. Consumption > Income
higher value of multiplier.
II. Saving = Zero (0)
(a) Both Assertion and Reason are true and
III. Consumption < Income
Reason is the correct explanation of Assertion.
IV. Saving < Zero (0)
(b) Both Assertion and Reason are true and
Alternatives :
Reason is not the correct explanation of
(a) I and II
Assertion.
(b) II and III
(c) Assertion is true but Reason is false.
(c) III and IV
(d) Assertion is false but Reason is true.
(d) I and IV
Ans : FOREIGN 2009
Ans : COMP 2020
(a) Assertion and reason both are correct
(b) II and III
statements and reason is correct explanation for
assertion.

66. Assertion : When planned savings is more than

ASSERTION AND REASON planned investment, inventory rises above the
desired level.
Reason : The unwanted increase in inventory can
63. Assertion : APC can never be zero. be cleared by reducing production.
Reason : At the break even point, consumption is (a) Both Assertion and Reason are true and
equal to income. Reason is the correct explanation of Assertion.
(a) Both Assertion and Reason are true and (b) Both Assertion and Reason are true and
Reason is the correct explanation of Assertion. Reason is not the correct explanation of
(b) Both Assertion and Reason are true and Assertion.
Reason is not the correct explanation of (c) Assertion is true but Reason is false.
Assertion. (d) Assertion is false but Reason is true.
(c) Assertion is true but Reason is false.
(d) Assertion is false but Reason is true. Ans : SQP 2016

Ans : DELHI 2007

(b) Assertion and reason both are correct
statements but reason is not correct explanation for
(b) Assertion and reason both are correct assertion. More savings implies less consumption
statements but reason is not correct explanation by households.
for assertion. Consumption can never be zero at
any level of income.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 131

4. An increase in MPC leads to an increase in Ans : FOREIGN 2017

the value of the multiplier. (a) 1, 2 and 3 only

Which of the above statements are correct? Statements 1, 2 and 3 are correct. Induced
(a) 1, 2 and 4 only investment depends on profit motives and income,
(b) 1 and 3 only while autonomous investment is independent of
(c) 1, 2, 3 and 4 income. Statement 4 is incorrect as autonomous
(d) 2 and 4 only investment does not change with income levels.
Ans : DELHI 2010
80. Consider the following statements about the
(a) 1, 2 and 4 only Saving Function:
Statements 1, 2 and 4 are correct. The multiplier 1. The saving curve starts from the negative
is K= 3 Y/ 3 I , has a minimum value of 1 when side of the Y-axis.
MPC=0 and increases as MPC increases. 2. It indicates dissaving at zero income levels.
Statement 3 is incorrect; the multiplier can 3. The saving curve has a constant slope,
theoretically approach infinity but not have “no representing the Marginal Propensity to Save
maximum.” (MPS).
4. Savings are equal to zero at the break-even
78. Consider the following statements about the point.
causes of deficient demand: Which of the above statements are correct?
1. A fall in the level of private consumption and (a) 1, 2 and 3 only
investment expenditure. (b) 1, 3 and 4 only
2. A reduction in government expenditure. (c) 1, 2, 3 and 4
3. A rise in taxes that reduces disposable income. (d) 2 and 4 only
4. A rise in exports and fall in imports.
Which of the above statements are correct? Ans : SQP 2021

(a) 1 and 4 only (c) 1, 2, 3 and 4

(b) 1, 2 and 3 only All the statements are correct. The saving curve
(c) 2, 3 and 4 only starts negatively, representing dissaving at zero
(d) 1, 3 and 4 only income. Its constant slope reflects MPS and
Ans : OD 2013
savings become zero at the break-even point.

(b) 1, 2 and 3 only 81. Consider the following statements about Excess
Statements 1, 2 and 3 are correct. Deficient Demand:
demand is caused by reduced private and 1. It refers to a situation where current AD
government expenditure and increased taxes. exceeds AS at full employment.
Statement 4 is incorrect; a rise in exports and fall 2. Excess demand creates an inflationary gap.
in imports would increase aggregate demand, not 3. Output remains constant, but pressure on
cause deficient demand. existing supply increases.
4. Excess demand leads to under-utilization of
79. Consider the following statements about types of factors of production.
investment: Which of the above statements are correct?
1. Induced investment is made with the motive (a) 1, 2 and 3 only
of earning profit. (b) 1 and 4 only
2. Autonomous investment is independent of the (c) 2, 3 and 4 only
level of income. (d) 1, 3 and 4 only
3. Induced investment depends on income and
profit expectations. Ans : COMP 2023

4. Autonomous investment changes directly (a) 1, 2 and 3 only

with income levels. Statements 1, 2 and 3 are correct. Excess demand
Which of the above statements are correct? creates an inflationary gap, keeping output
(a) 1, 2 and 3 only constant but increasing pressure on existing
(b) 1 and 4 only resources. Statement 4 is incorrect as excess
(c) 2, 3 and 4 only demand leads to over-utilization, not under-
(d) 1, 3 and 4 only utilization, of resources.

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CH 3 : DETERMINATION OF INCOME AND EMPLOYMENT

(a) Both Assertion and Reason are true and 1. Aggregate Supply refers to the total value of
Reason is the correct explanation of Assertion. final goods and services in the economy in a
(b) Both Assertion and Reason are true and year.
Reason is not the correct explanation of 2. Aggregate Supply is measured as the sum of
Assertion. consumption and investment.
(c) Assertion is true but Reason is false. 3. AS is the same as National Income and is
(d) Assertion is false but Reason is true. represented as AS=C+S.
4. The AS curve is a 45° line starting from the
Ans : COMP 2020
origin.
(d)Assertion is false but Reason is true. Which of the above statements are correct?
The maximum value of consumption multiplier (a) 1 and 3 only
is infinity. (b) 1, 3 and 4 only
(c) 2, 3 and 4 only
73. Assertion : At the break-even level of income, the
(d) 1, 2 and 3 only
value of Average Propensity to Consume (APC)
is zero. Ans : SQP 2004
Reason : Sum of Average Propensity to Consume (b) 1, 3 and 4 only
(APC) and Average Propensity to Save (APS) is Statements 1, 3 and 4 are correct. Aggregate Supply
always equal to one. is measured as AS=C+S, the same as National
(a) Both Assertion and Reason are true and Income and the AS curve is a 45° line. Statement
Reason is the correct explanation of Assertion. 2 is incorrect because AS is not measured as the
(b) Both Assertion and Reason are true and sum of consumption and investment.
Reason is not the correct explanation of
Assertion. 76. Consider the following statements about Marginal
(c) Assertion is true but Reason is false. Propensity to Consume (MPC):
(d) Assertion is false but Reason is true. 1. MPC is the ratio of change in consumption to
change in income.
Ans : DELHI 2023
2. MPC = 1 when the entire additional income
(d) Assertion is false but Reason is true. is consumed.
74. Assertion : Full employment refers to, absence of 3. MPC = 0 when the entire additional income
involuntary unemployment. is saved.
Reason : Under full employment situation, all 4. MPC + MPS is always equal to 2.
willing and able bodied people get employment at Which of the above statements are correct?
prevailing wage rate. (a) 1, 2 and 3 only
(a) Both Assertion and Reason are true and (b) 1, 2 and 4 only
Reason is the correct explanation of Assertion. (c) 2, 3 and 4 only
(b) Both Assertion and Reason are true and (d) 1 and 4 only
Reason is not the correct explanation of Ans : COMP 2008
Assertion.
(c) Assertion is true but Reason is false. (a) 1, 2 and 3 only
(d) Assertion is false but Reason is true. Statements 1, 2 and 3 are correct. MPC is the
ratio of 3 C/ 3 Y and MPC=1 when all income
Ans : OD 2023
is consumed, MPC=0 when all income is saved.
(a) Assertion and reason both are correct Statement 4 is incorrect; MPC+MPS=1, not 2.
statements and reason is correct explanation for
assertion. 77. Consider the following statements about the
Investment Multiplier (K):
1. It is the ratio of change in income to change
in investment.
STATEMENT BASED QUESTIONS 2. The multiplier has a minimum value of 1
when MPC is 0.
75. Consider the following statements about 3. The multiplier has no maximum value, even if
Aggregate Supply (AS): MPC = 1.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 133

(a) Private Consumption (C) Which component has the second-largest

The bar graph shows that Private Consumption contribution to Aggregate Demand (AD) based
(C) contributes 60% to Aggregate Demand, which on the pie chart?
is the highest percentage among all components. (a) Private Consumption (C)
(b) Government Expenditure (G)
88. The bar graph above shows the percentage (c) Private Investment (I)
contribution of different components to Aggregate (d) Net Exports (X-M)
Supply (AS) in an economy.
Ans : SQP 2012

(b) Government Expenditure (G)

The pie chart shows that Government Expenditure
(G) contributes 25%, making it the second-largest
component after Private Consumption (C), which
contributes 60%.

PASSAGE BASED QUESTION

90. Aggregate Supply (AS) is the total value of final

goods and services produced in an economy in a
year. It is measured as the sum of consumption
(C) and savings (S), represented as AS = C + S .
Which two components contribute equally to Aggregate Supply (AS) is calculated as the sum
Aggregate Supply (AS) according to the graph? of:
(a) Savings (S) and Consumption (C) (a) Consumption (C) and Savings (S)
(b) Savings (S) and Investment (I) (b) Consumption (C) and Investment (I)
(c) Investment (I) and Net Exports (X-M) (c) Consumption (C) and Net Exports (X-M)
(d) Consumption (C) and Net Exports (X-M) (d) Savings (S) and Investment (I)
Ans : FOREIGN 2006 Ans : OD 2005
(b) Savings (S) and Investment (I) (a) Consumption (C) and Savings (S)
The bar graph indicates that Savings (S) and AS is measured as AS = C + S , as per the passage.
Investment (I) both contribute 20% to Aggregate
Supply, making their contributions equal. 91. The break-even point occurs when income equals
consumption, \( Y = C \) and savings are zero.
89. The pie chart above shows the percentage What happens at the break-even point in the
contribution of different components to Aggregate economy?
Demand (AD) in an economy. (a) Income equals consumption and savings are
zero
(b) Consumption exceeds income and savings are
negative
(c) Income exceeds consumption and savings are
positive
(d) Income equals savings and consumption is
zero
Ans : FOREIGN 2007

(a) Income equals consumption and savings are

zero
At the break-even point, income equals
consumption and no savings occur, as described
in the passage.

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CH 3 : DETERMINATION OF INCOME AND EMPLOYMENT

129. Define effective demand. Discuss how, effective income levels. These adjustments continue until
demand can be restored, if ex-ante Aggregate aggregate demand matches aggregate supply,
Demand (AD) is more than ex-ante Aggregate achieving economic equilibrium. This process
Supply (AS). aligns the economy’s production with market
or demand, ensuring stability at full employment.
“In an economy, Aggregate Demand (AD) is
more than Aggregate Supply (AS).” Elaborate 132. Explain the changes that take place when
the possible impacts of the same, on the level of Aggregate Demand and Aggregate Supply are
output, income and employment. not equal.

Ans : OD 2024, 2020 Ans : DELHI 2016

When ex-ante aggregate demand exceeds aggregate (i) When AD > AS, buyers plan to purchase
supply, buyers plan to purchase more goods more than producers intend to supply, causing
and services than producers intend to provide, inventory levels to fall below the desired level.
causing inventory levels to fall below the desired To restore inventories, producers increase
amount. To restore inventory, producers increase production, which raises income levels. This
production, leading to higher employment, output upward adjustment continues until aggregate
and income. This process continues, with rising demand equals aggregate supply, restoring
levels of production and income, until aggregate equilibrium.
demand equals aggregate supply and the economy (ii) When AD < AS, buyers plan to purchase
achieves equilibrium. less than what producers plan to supply,
leading to an inventory buildup above the
130. “With the objective to correct deflation, Reserve desired level. Producers respond by reducing
Bank of India may decrease the Bank rate.” production and laying off workers, lowering
Discuss the rationale behind the step taken by income levels. This downward adjustment
the Reserve Bank of India (RBI). persists until aggregate demand matches
Ans : OD 2024
aggregate supply, achieving equilibrium.

Bank Rate is the interest rate the Central Bank 133. Explain the distinction between ex-ante measures
charges commercial banks for providing credit. and ex-post measures.
There is an inverse relationship between the
Ans : (2014 COD)
bank rate and the demand for credit. When the
bank rate increases, borrowing becomes costlier, Ex-ante measures refer to planned or desired
reducing the demand for credit. values, while ex-post measures indicate actual
To correct deflation, the RBI may lower the bank or realized values. These terms are commonly
rate. This reduces borrowing costs, increasing the used for savings and investment. Ex-ante savings
demand for credit. Higher credit availability boosts represent the savings individuals or entities plan to
aggregate demand in the economy, addressing the make during a year and ex-ante investment refers
deficient demand and helping stabilize economic to the planned investment for the same period. In
output. contrast, ex-post savings and ex-post investment
reflect the actual savings and investment that
131. Define effective demand. Discuss how effective occur in the economy over the year.
demand can be restored if ex-ante saving is less
than ex-ante investment. 134. Define aggregate demand. What are its
components?
Ans : COMP 2020
Ans : OD 2014, 2013
Effective demand is the output level where
aggregate demand equals aggregate supply, Aggregate demand is the total planned expenditure
ensuring full resource employment. Excess ex- on final goods and services by all sectors of the
ante aggregate demand over supply indicates that economy at a given income level during a specific
buyers plan to purchase more than producers period. Its components include:
plan to supply, reducing inventory below desired (i) Private Consumption Expenditure (C): The
levels. Producers then increase production to planned spending by households on final
restore inventory, raising employment, output and consumer goods and services.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 135

producers are willing to supply in an economy DY = Change in Income

during a given time period.
108. Can the value of MPC and MPS be negative?
103. State whether the following statement is true or Why?
false. Given reason for your answer:
Ans : OD 2018
Inventories accumulate when planned investment
is less than planned saving. Both consumption and savings have positive or
direct relationships with income and both are
Ans : OD 2016
functions of income. Therefore, MPS and MPC
True. When planned investment is less than can never be negative.
planned savings, aggregate demand falls short
of aggregate supply, causing inventories to 109. If the value of average propensity to consume is
accumulate. given as 0.75, the value of average propensity to
save would be _____.
104. Give the meaning of Autonomous consumption.
Ans : OD 2018
Ans : OD 2015
As we know, APS = 1 – APC
Autonomous consumption is the expenditure on
basic needs at zero income, while autonomous APS = 1 – 0.75 = 0.25
investment, independent of income, is influenced
by non-income factors. 110. What can be the minimum value of investment
multiplier?
105. Define average propensity to consume. Ans : OD 2012
Ans : DELHI 2012
The investment multiplier’s minimum value is 1.
The ratio of total consumption expenditure (C)
to total income (Y) is called Average Propensity 111. State whether the following statement is true or
to Consume (APC). false. Give reason for your answer.
Average propensity to save can be negative.
In short, APC = C
Y Ans : OD 2016
where, C = Consumption expenditure; True. Average Propensity to Save (APS) can
Y = Total Income be negative when consumption exceeds income,
typically at income levels below the break-even
106. Define marginal propensity to consume. point.
Ans : OD 2014
112. What is involuntary unemployment?
MPC is the proportion of change in consumption
Ans : DELHI 2014
expenditure to ‘change in income’:
Involuntary unemployment refers to the portion
In short, MPC = DC
DY of the labor force willing to work but unable to
where DC = Change in Consumption find jobs at the prevailing wage rate.

DY = Change in Income 113. Define inflationary gap.

107. How is the value of marginal propensity to save Ans : OD 2014

calculated? An inflationary gap is the excess of actual

aggregate demand over the aggregate supply
Ans : OD 2012
needed for full employment equilibrium.
Marginal Propensity to Save is the ratio of
the change in saving to the change in income, 114. Define deflationary gap.
calculated by dividing the change in saving by the Ans : OD 2014
change in income.
A deflationary gap is the shortfall of actual
Marginal Propensity to Save (MPS) = DS
DY aggregate demand compared to the aggregate
where, DS = Change in Savings; supply needed for full employment equilibrium.

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CH 3 : DETERMINATION OF INCOME AND EMPLOYMENT

TWO MARK QUESTIONS 119. Explain the meaning of average propensity

to consume. What is its relation with average
propensity to save?
115. What is ‘excess demand’ and deficit defined in Ans : COMP 2014
macroeconomics?
Average propensity to consume refers to the ratio
Ans : OD 2019, 2014 of consumption expenditure to the corresponding
Excess demand arises when aggregate demand level of income.
surpasses aggregate supply at the full employment Consumption (C)
APC =
level in an economy. Conversely, deficient demand Income (Y)
occurs when aggregate demand is lower than We know that Y= C + S
aggregate supply, even at full employment. Both Dividing both sides by Y, we get
scenarios highlight imbalances between demand Y=C+S
and supply, impacting overall economic stability. Y Y Y
116. Give the meaning of Full employment. 1 = APC + APS
Ans : FOREIGN 2008 as APC = C and APS = S
Y Y
Full employment signifies a state where everyone
or APC = 1 – APS
willing and able to work at prevailing wage rates
because income is either consumed or saved.
finds employment without difficulty. It represents
a scenario where there are no unemployed 120. Giving reasons, state whether the following
individuals seeking jobs. statements are true or false:
(i) When marginal propensity to consume is
117. State whether the following statement is true or
zero, the value of investment multiplier will
false. Give reason for your answer.
also be zero
Inflationary gap exists when aggregate demand is
(ii) Value of average propensity to save can never
greater than aggregate supply.
be less than zero.
Ans : OD 2016
Ans : OD 2010
Correct. An inflationary gap occurs when, at full
(i) The statement is false because when the
employment, aggregate demand exceeds aggregate
marginal propensity to consume (MPC) is 0,
supply, leading to upward pressure on prices.
the value of the investment multiplier is 1,
118. Distinguish between consumption function not 0, as the multiplier formula is 1
1 - MPC
equation and saving function equation.
(ii) The statement is false because the average
Ans : DELHI 2012 propensity to save (APS) can be less than
Consumption Function Equation: 0 if consumption exceeds income, indicating
C = C + MPC ^Yh negative savings.

where C = Total Consumption 121. Giving reasons, state whether the following
statements are true or false:
C = Autonomous Consumption
(i) Average propensity to save is always greater
MPC = Marginal Propensity to Consume than zero.
Y = National Income (ii) Value of investment multiplier varies between
zero and infinity.
Saving Function Equation:
S =- C + MPS (Y) Ans : DELHI 2010

where S = Total Saving (i) The statement is correct. APS can indeed
be negative when APC exceeds 1, meaning
C = Autonomous Consumption consumption surpasses income, resulting in
MPS = Marginal Propensity to Save negative savings.
(ii) The statement is partially true. If MPC is 0,
Y = National Income
the multiplier equals 1. However, if MPC is 1,

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 137

the multiplier theoretically becomes infinite, demand are distinct concepts.

not undefined.
126. Does increase in aggregate demand always lead to
122. Give the meaning of: increase is price level?
(i) involuntary unemployment and
Ans : SQP 2022
(ii) inflationary gap.
Before full employment, an increase in aggregate
Ans : FOREIGN 2012
demand (AD) leads to a proportional rise in
(i) Involuntary Unemployment: It refers to aggregate supply (AS), keeping the price level
a situation where individuals in the labor constant. However, beyond full employment,
force, willing and able to work at the any further increase in AD does not result in a
prevailing wage rate, are unable to find corresponding increase in AS, causing the price
jobs due to the economy’s failure to create level to rise.
sufficient employment opportunities. This
unemployment is against their will. 127. What will be the value of multiplier if the entire
(ii) Inflationary Gap: It occurs when aggregate additional income is saved?
demand exceeds aggregate supply at the full Ans :
employment level (AD > AS). The difference
Additional income = DY
between aggregate demand and aggregate
Additional consumption DC
supply is termed the inflationary gap.
In this situation DC will be zero as additional
123. Explain the role of taxation in reducing excess income is saved not consume.
demand. We know, MPC = DC
DY
Ans : DELHI 2016
MPC = 0
Excess demand arises when aggregate demand
Now, Multiplier, K= 1
surpasses aggregate supply (AD>AS) at full 1 - MPC
employment. To curb excess demand, the
government can implement fiscal policy measures K= 1 = 1
1-0
like increasing taxes on households and producers.
This reduces their purchasing power, leading to a
decrease in aggregate demand.

124. What would be the likely impact of the ‘make THREE MARK QUESTIONS
in India’ campaign launched by the government
of India, on the aggregate supply of goods and
128. Suppose, the Indian Government decides to boost
services?
public investments with a defence project of
Ans : OD 2021 `40,000 crore.
Increased foreign investment and improved Explain the likely impacts of the given situation
resource mobilization would enhance the on the Income, Employment and Output of the
economy’s productive capacity, leading to a economy, assuming all other factors as constant.
potential rise in the aggregate supply of goods Ans : OD 2024
and services in the future.
Government expenditure on activities like
125. Is Aggregate Demand the same as Market defense or maintaining law and order can help
Demand? Justify your answer. address deficient demand. Increasing government
spending injects funds into the circular flow of
Ans : FOREIGN 2018
income, releasing liquidity to counter deflation.
Market demand pertains to microeconomics, Such expenditure boosts aggregate demand,
representing the total demand for a specific which in turn raises income, employment and
commodity in the market. In contrast, aggregate output levels in the economy, steering it toward
demand belongs to macroeconomics and refers to full employment and economic stability.
the total demand for all goods and services within
an economy. Thus, market demand and aggregate

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CH 3 : DETERMINATION OF INCOME AND EMPLOYMENT

92. Autonomous Consumption refers to the minimum ONE MARK QUESTIONS

level of consumption even when income is zero.
Autonomous Consumption is defined as:
(a) The minimum level of consumption when 95. State the meaning of ‘unintended accumulation
income is zero of inventories’.
(b) Consumption that increases proportionately
Ans : OD 2024
with income
(c) Savings that occur at zero income level Unintended inventory accumulation occurs when
(d) The total consumption in an economy at full firms experience an increase in unsold stock due
employment to an unexpected drop in sales.
Ans : SQP 2003 96. Define Effective Demand Principle.
(a) The minimum level of consumption when Ans : OD 2024
income is zero
The effective demand principle represents the
Autonomous Consumption is the consumption
level of aggregate demand that matches the
that occurs even without any income, as stated
corresponding aggregate supply in the economy.
in the passage.
97. Give the meaning of ex-ante savings.
93. The slope of the Aggregate Demand (AD) curve
is positive, indicating that as income increases, Ans : OD 2010
aggregate demand also increases. Planned savings are also referred to as ex-ante
The positive slope of the AD curve indicates: savings.
(a) AD decreases as income increases
(b) AD remains constant regardless of income 98. What is ex-ante aggregate demand?
(c) AD increases as income increases
Ans : OD 2010
(d) AD decreases as savings increase
Ex-ante aggregate demand refers to the planned
Ans : COMP 2009
expenditure on consumption and investment that
(c) AD increases as income increases people are willing to make.
A positive slope means that AD rises with income,
as mentioned in the passage. 99. Give the meaning of aggregate demand.
Ans : FOREIGN 2010
94. Average Propensity to Consume (APC) is the
ratio of total consumption to total income, Aggregate demand is the total expenditure on
C
expressed as APC = Y . consumption and investment goods.
Average Propensity to Consume (APC) is 100. What is ‘aggregate demand’ in macro-economics?
calculated as:
DC Ans : OD 2015
(a)
DY
Aggregate demand refers to the total value of
C final goods and services which all the sectors of
(b) Y
an economy are planning to buy at a given level
Y of income during a period of one accounting year.
(c) C

(d)
C+S 101. Define aggregate supply.
Y
Ans : SQP 2010
Ans : DELHI 2016 Aggregate supply is the total value of final
(b) Y
C goods and services planned for production by all
economic units over a specific period.
APC is the ratio of total consumption to total
C 102. What is ‘aggregate supply’ in macro-economics?
income, represented as APC = Y , as per the
passage. Ans : COMP 2015

Aggregate supply is the monetary value of

the total quantity of final goods and services

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 139

(ii) Investment Expenditure (I): Planned total savings to total income. In short,
spending by producers on new capital goods.
APS = S
(iii) Government Expenditure (G): Planned Y
spending by the government on providing free The sum of APC and APS is always equal to
services to the public. unity, i.e., APC + APS = 1, because income is
(iv) Net Exports (): Planned net spending by either consumed or saved.
foreigners on the country’s goods and services. Also, since Y = C + S, APC can never be negative
but APS can be negative when autonomous
135. Distinguish between autonomous investment and
consumption
induced investment.
(C > Marginal Propensity to Save (MPS).
Ans : OD 2014

Difference between Autonomous Investment and 137. Which of the two, average propensity to consume
Induced Investment or average propensity to save, can be negative and
why?
Basic Autonomous Induced
Ans : COMP 2019
Investment Investment
Average Propensity to Consume (APC) is the
1. Meaning It refers to the It refers to the
ratio of total consumption to total income, while
investment investment
Average Propensity to Save (APS) is the ratio
which is not which depends
of total savings to total income. Since income is
affected by on the profit
either consumed or saved, the sum of APC and
changes in expectations
APS equals one. APC is never negative, but APS
the level of and is directly
can be negative when savings are negative. This
income and is influenced by
occurs if consumption exceeds income, such as
not induced income level.
when autonomous consumption is higher than the
solely by
Marginal Propensity to Save (MPS).
profit motive.
2. Motive It is done It is driven by 138. What is the difference between marginal
for social profit motive. propensity to consume and marginal propensity
welfare. to save? What is the relation between the two?
3. Investment Its curve is Its curve slopes Ans : OD 2017

curve parallel to upwards as it is Difference between MPC and MPS

X-axis as it income elastic.
is income Basic Marginal Marginal
inelastic Propensity Propensity to
to Consume Save (MPS)
(MPC)
1. Meaning It is defined It is the ratio
as the ratio of the change
of change in in savings to
136. Explain the relationship between average consumption a change in
propensity to consume and average propensity to expenditure income.
save. Which of these can have a negative value to change in
and when? income.
Ans : OD 2011 2. Formula MPC = DC MPS = DS
DY DY
Average Propensity to Consume (APC) is the
ratio of total consumption expenditure to total 3. Slope MPC It represents
income. represent the slope
the slope of of savings
APC = C
Y consumption function.
Average Propensity to Save (APS) is the ratio of function.

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CH 3 : DETERMINATION OF INCOME AND EMPLOYMENT

Relationship between MPS and MPC. Sum of • When all additional income is spent,
MPC and MPS is always equal to 1. DS = 0 , so MPS = 0 DS = 0
MPS + MPC =1 or, 1 – MPC = MPS • When all additional income is saved,
DC = 0
or 1 – MPS = MPC
141. Explain the meaning of investment multiplier.
139. Distinguish between marginal propensity to What can be its minimum and maximum value?
consume and average propensity to consume.
Give a numerical example. Ans : OD 2014

Investment multiplier is the ratio of increase

Ans : DELHI 2016
in national income (DY) due to an increase in
The differences between Average Propensity to investment (DI)
Consume (APC) and Marginal Propensity to
Multiplier, K = DY or K = 1
Consume (MPC) are: DI 1 - MPC
(i) Definition: Maximum value of multiplier. The maximum
• APC measures the proportion of total value of multiplier is infinity when the value of
consumption expenditure to total income, MPC is 1. MPC = 1 indicates that the economy
i.e., APC = C . decides to consume the whole of its additional
Y
• MPC measures the proportion of change income.
in consumption to the change in income, We know that,
1
i.e.,MPC = DC K=
1 - MPC
DY
(ii) Behavior with Income Increase: Both APC When, MPC = 1,
and MPC decrease as income rises, but MPC 1 =1=3
then K=
declines more rapidly. 1-0 0
(iii) Example: Minimum value of multiplier. The minimum value
• Initial incomeY = `100 crore; of multiplier is 1 (one) when the value of MPC is
consumption C = `80 crore. zero MPC = 0 indicates that the economy decides
APC = 80 = 0.8 to save the whole of its additional income.
100 1
K=
• Income rises to `150 crore, consumption 1 - MPC
rises to `90 crore.
When, MPC = 0, then K = 1 = 1 = 1
1-0 1
MPC = 90 - 80 = 10 = 0.2
150 - 100 50
142. Define Investment Multiplier. How is it related to
140. Which of the following cannot have a negative marginal propensity to consume?
value? Give reasons.
(i) Average propensity to save. Ans : DELHI 2018

(ii) Marginal propensity to save. Investment multiplier is defined as the ratio of

Ans : OD 2015
change in income ( DY ) to change in investment (
DI ). It explains how many times income increases
(i) Average Propensity to Save: as a result of an increase in investment.
Saving ^Sh
APS =
Income (Y) Algebraically, it is expressed as : K = DY
DI
Average Propensity to Save (APS): APS The relationship between multiplier and marginal
can be negative or less than one. It becomes propensity to consume (MPC) can be expressed
negative when income is below the break-even as:
point (where consumption equals income) 1
because the economy experiences dissaving Multiplier, K =
1 - MPC
(consumption exceeds income). where [MPC is the proportion of additional
(ii) Marginal Propensity to Save (MPS): MPS,
income that an individual consumes, i.e., DC
defined as MPS = DS , cannot be negative DY
DY
K = DY = DY DY = DC + DI
and ranges between 0 and 1. DI DY - DC

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 141

DY MPC = 2 MPS
= DY
DY
DC ...[Dividing by DY Substituting this in the above equation, we get
DY - DY
2MPS + MPS = 1
= 1
1 - MPC 3 MPS = 1 MPS = 1
3
Thus, K = 1
1 - MPC Now multiplier, K = MPS = 11 = 3
3
The value of the multiplier can be determined Value of multiplier is 3.
by the size of MPC as MPC and investment
multiplier are directly related. This implies that 145. State whether the following statement is true or
higher the value of MPC, greater would be the false. Give reasons for your answer:
value of the multiplier and vice-versa. When marginal propensity to consume is greater
than marginal propensity to save, the value of
143. What is the relationship between (a) Marginal investment multiplier will be greater than 5.
propensity to save and marginal propensity to
Ans : DELHI 2010
consume. (b) Marginal propensity to save and
investment multiplier. Not always true. For example, when MPC is 0.6,
0.7 and 0.8 (> MPS), the value of K is not more
Ans : CD 2015
than 5. It is greater than 5 only when MPS is 0.1.
(a) Marginal Propensity to Consume (MPC) may (i) For example, MPC > MPS, but K < 5
be defined as that proportion of income which
MPC = 0.6 MPS = 0.4
is consumed. In other words, it is the ratio of
K= 10 = 2.5
change in consumption to change in income. 4
Marginal Propensity to Save (MPS) is that
(ii) For example, MPC > MPS, but K > 5
part of income which is saved. In other words,
it is equal to the ratio of change in saving to MPC = 0.9 MPS = 0.1
change in income. The relationship between K= 1 = 10
MPC and MPS becomes clear by looking at 0.1
the equations given below:
146. Giving reasons, state whether the following
DY = DC + DS statements are true or false:
DY = D C + D S Dividing by DY (i) If the ratio of marginal propensity to consume
DY D Y D Y and marginal propensity to save is 4 : 1, the
or 1 = MPC + MPS value of investment multiplier will be 4.
(ii) Sum of marginal propensity to save and
MPS = 1 – MPC
marginal propensity to consume is always
(b) Marginal Propensity to Save (MPS) and
equal to 1.
Investment Multiplier (K):
Since Investment Multiplier Ans : OD 2010

K= 1 (i) False. As, MPC + MPS = 1

1 - MPC When MPC : MPS is 4 : 1
We know that, MPS = 1 – MPC MPC = 0.8 and MPS = 0.2
Investment Multiplier = 1 Since, K = MPS
MPS
Investment multiplier and MPS are inversely Multiplier (K) = 1 = 5
0.2
related. Higher the value of MPS, lower will (ii) True
be the value of multiplier and vice-versa.
As, DY = DC + DS
144. The value of marginal propensity to consume is Dividing both sides by, DY
double the value of marginal propensity to save. DY = D C + D S
Find the value of multiplier. DY D Y D Y

Ans : SQP 2000 1 = MPC + MPS

We know that, MPC + MPS = 1 As, DC is MPC and DS = MPS

DY DY
Given: MPC is double the value of MPS

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CH 3 : DETERMINATION OF INCOME AND EMPLOYMENT

155. Give the meaning of (i) Cash Reserve Ratio, (ii) credit to borrowers.
Bank Rate and (iii) Open Market Operations. These steps collectively boost the money supply
and aggregate demand.
Ans : COMP 2002

(i) Cash Reserve Ratio (CRR): The proportion of 158. How will the following monetary measures will
deposits that commercial banks are required be useful in correcting the situation of excess
to keep as reserves with the central bank. demand:
(ii) Bank Rate: The interest rate charged by the (i) Bank rate
central bank on loans provided to commercial (ii) Open market operations
banks. (iii) Change in legal ratio.
(iii) Open Market Operations (OMO): The buying Ans : DELHI 2006
and selling of securities by the central bank in
the open market, involving transactions with To address excess demand, monetary tools can be
commercial banks to regulate money supply. applied to reduce aggregate demand and align it
with aggregate supply:
156. “With the objective to correct deflation, Reserve (i) Bank Rate: The central bank should raise
Bank of India may decrease Repo-rate.” Discuss the bank rate, increasing borrowing costs
the rationale behind the step taken by the Reserve and reducing credit demand. This decrease in
Bank of India (RBI). credit demand negatively impacts aggregate
demand.
Ans : OD 2020
(ii) Open Market Operations: The central bank
Repo Rate is the interest rate at which the Central should sell securities in the open market,
Bank lends money to commercial banks. To purchased by commercial banks. This reduces
address deflation, the Central Bank reduces the their liquidity, limiting their capacity to
repo rate, prompting commercial banks to lower extend credit, thereby curbing aggregate
their lending rates. This makes credit cheaper and demand.
encourages firms to borrow more for investment (iii) Change in Legal Ratio: The legal reserve ratio,
purposes. The increased investment demand raises including the Cash Reserve Ratio (CRR) and
aggregate demand, helping to eliminate deficient Statutory Liquidity Ratio (SLR), should be
demand and stabilize the economy, countering increased. Higher reserve requirements reduce
deflationary conditions. the cash available to commercial banks,
restricting their ability to create credit and
157. What is the role of the following monetary
lowering aggregate demand.
measures in solving the problem of deficient
demand? 159. Explain how controlling money supply is helpful
(i) Open Market Operations in reducing excess demand.
(ii) Change in Reserve Ratio
(iii) Statutory Liquidity Ratio Ans : OD 2016

Excess demand arises when aggregate demand

Ans : DELHI 2004
exceeds aggregate supply (AD > AS) at the full
To address deficient demand, central and employment level in the economy. To manage
commercial banks can take the following measures this, the central bank regulates the money supply
to increase credit availability: by controlling the credit creation by commercial
(i) Open Market Operations: The central bank banks. Credit creation during excess demand can
should purchase securities from commercial be restrained through the following measures:
banks, increasing their cash reserves, which • Increasing the bank rate or repo rate;
enhances their capacity to lend. • Selling government securities in the open
(ii) Change in Reserve Ratio: The central bank market to absorb liquidity from the economy;
should lower the Cash Reserve Ratio (CRR), • Raising the Cash Reserve Ratio (CRR) and
improving commercial banks’ liquidity and Statutory Liquidity Ratio (SLR);
enabling them to offer more loans. • Increasing the margin requirement.
(iii) Statutory Liquidity Ratio (SLR): Reducing A reduced money supply limits the purchasing
the SLR improves commercial banks’ power of individuals, thereby curbing their
liquidity, allowing them to extend additional demand for goods and services.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 143

151. Distinguish between inflationary gap and 153. Explain the meaning and implications of
deflationary gap. deflationary gap.
Ans : OD 2015 Ans : (2011 COD)

Difference between Inflationary gap and When aggregate demand (AD) equals aggregate
Deflationary gap supply (AS) at a level below full employment,
the economy experiences deficient demand. This
Basic Inflationary gap Deflationary occurs when AD is insufficient to generate output
gap that provides employment to all willing workers.
1. Meaning It is the amount It is the The shortfall of AD relative to AS at the full
by which the amount by employment output level creates a deflationary
actual aggregate which the gap. This gap, represented as the amount by
demand exceeds actual which AD (EF) falls short at the full employment
the aggregate aggregate level, illustrates the economy’s underutilized
supply at the demand falls resources and unemployment.
full employment short of
level. aggregate
supply at the
level of full
employment.
2. Leads to Inflationary gap Deflationary
causes a rise gap causes
in price level a decline
which is called in output,
inflation. income and
employment
along with
154. In an economy aggregate demand is less than
persistent fall
aggregate supply. Explain the changes that will
in prices.
take place in this economy.
3. Result of Inflationary gap Deflationary
Ans : OD 2011
is the result of gap is the
a situation of result of a If equilibrium is established before the full
excess demand situation employment level of output, it is a situation where
in the economy. of deficient aggregate demand is less than aggregate supply.
demand in the The gap between the two is deflationary gap as
economy. shown by EF in the adjacent diagram.

152. Give the meaning of aggregate demand and full

employment.
Ans : OD 2015

Aggregate Demand (AD): Aggregate Demand

represents the total planned expenditure on final
goods and services by all sectors of the economy
at a given income level over a specific period.
It reflects the economy’s planned aggregate
expenditure.
Full Employment: Full employment is a condition
where all individuals willing and able to work at This gap can be rectified by increasing the level
the prevailing wage rate can find jobs without of aggregate demand. In this case autonomous
significant difficulty. It implies a situation where investment needs to be increased.
there are no unemployed job seekers. This situation can be exhibited with the help of a
given diagram.

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CH 3 : DETERMINATION OF INCOME AND EMPLOYMENT

Therefore, MPC + MPS = 1. (Hence proved) 3. Value APC can be APS can
greater than never be
147. Distinguish between marginal propensity to
one when greater than
consume and marginal propensity to save, with
consumption one. This
the help of numerical examples.
is more than implies that
Ans : OD 2012 income. it is always
Propensity to consume is the ratio of change in less than
consumption over change in income. one because
only a part
In short, MPC = DC
DY of income is
Propensity to save is the ratio of change in saving saved.
to change in income. Relation between APC and APS. Out of a rupee
In short, MPS = DS of income, either one can spend on consumption
DY
or save or partly do both.
Here MPC + MPS = 1
This shows the inverse relationship between MPC APC + APS = 1 or APC = 1 – APS
and MPS as the income either may be consumed or APS = 1 – APC
or saved. MPC and MPS are shown in the table:
149. ‘Excess demand creates greater opportunities of
Y C DC MPC S DS MPS
employment in the economy.’ Defend or refute the
= DC = DS given statement with valid explanation.
DY DY
Ans : OD 2022
0 50 – – – 50 – –
100 100 50 0.5 0 50 0.5 Excess demand occurs when aggregate demand
exceeds aggregate supply at the full employment
200 150 50 0.5 50 50 0.5
level of output in the economy. It represents
300 200 50 0.5 100 50 0.5 the surplus of planned expenditure over the
400 250 50 0.5 150 50 0.5 full employment output value. This situation
500 300 50 0.5 200 50 0.5 is undesirable as it does not increase aggregate
supply since the economy is already at full
employment. Additionally, employment levels
remain unchanged because the economy is
operating at full employment equilibrium, with
148. Distinguish between average propensity to no involuntary unemployment.
consume and average propensity to save. What is
the relation between the two? 150. Distinguish between voluntary unemployment
and involuntary unemployment. What is the
Ans : OD 2017
significance of this distinction?
Difference between APC and APS
Ans : OD 2011

Basic Average Average Voluntary unemployment occurs when individuals

Propensity to Propensity to choose not to accept jobs at the prevailing wage
Consume (APC) Save (APS) rate, while involuntary unemployment arises
1. Meaning It refers to It refers to the when capable individuals willing to work cannot
the ratio of proportion of find jobs at the given wage rate, leaving them
consumption total income unemployed against their will.
expenditure which is This distinction highlights economic gaps:
to the saved. • Involuntary unemployment signals a
corresponding deflationary gap, where output can be
level of income. increased to the full employment level by
stimulating demand.
2. Formula APC = Saving (S
APS = • Voluntary unemployment reflects conditions
Consumption (C) Income (Y
where output cannot be increased, indicating
Income (Y)
constraints unrelated to demand.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 145

160. In the given figure, what does the gap ‘KT’ at which the Central Bank lends money to
represent? State any two fiscal measures to correct commercial banks. To address excess demand
the situation. and inflation, the Central Bank raises the repo
rate. This discourages commercial banks from
borrowing, prompting them to increase their
lending rates. Costlier credit reduces the demand
for loans, discourages investment and curtails the
availability of credit. These measures help correct
excess demand and reduce the inflationary gap.

162. Explain the situation of deficient demand in an

economy. Also explain the role of Repo Rate in
correcting this.
Ans : OD 2016

Deficient Demand: This occurs when aggregate

demand falls short of the aggregate supply of
Ans : FOREIGN 2008 goods and services at full employment, leaving the
In the figure, the gap KT represents the economy’s resources underutilized and resulting
inflationary gap, which is the excess of actual in under-employment.
aggregate demand over aggregate supply at the Impacts of Deficient Demand:
full employment level. It quantifies the extent (i) It causes a decline in income, output and
by which aggregate demand surpasses output at employment levels.
full employment, serving as a measure of excess (ii) A prolonged fall in demand may lead to a
demand. state of economic depression.
To address the inflationary gap, the government Role of Repo Rate:
can use fiscal measures (budgetary tools). Two The repo rate is the interest rate at which the
key measures are: Central Bank lends to commercial banks. To
(i) Taxes: The government increases taxes, address deficient demand, the Central Bank
particularly on high-income earners, to lowers the repo rate, prompting commercial banks
reduce their purchasing power. This decrease to reduce their lending rates. Cheaper credit
in disposable income helps lower aggregate increases the money supply, encouraging firms
demand, making taxation an effective tool to to borrow for investment. This rise in investment
counter excess demand or inflationary gaps. boosts aggregate demand, eliminating the effects
(ii) Expenditure: By reducing its expenditure of deficient demand and revitalizing the economy.
on areas like health, education, law and 163. Draw a hypothetical propensity to consume curve
order and subsidies, the government directly and from it derive the propensity to save curve.
decreases aggregate demand in the economy,
helping to rectify the inflationary gap. Ans : SQP 2010

161. Explain the concept of Inflationary Gap. Explain

the role of Repo Rate in reducing this gap.
Ans : OD 2015

Inflationary Gap: When the equilibrium level of

income is achieved beyond the full employment
stage, it creates a situation of excess demand.
Excess demand arises when aggregate demand
(AD) exceeds aggregate supply (AS) at the full
employment output level. This excess demand
results in an inflationary gap, where prices rise
because output cannot increase to match the
higher demand.
Repo Rate: The repo rate is the interest rate

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CH 3 : DETERMINATION OF INCOME AND EMPLOYMENT

1. Perpendicular from Break-even Point: Locate FOUR MARK QUESTIONS

the break-even point B’ on the consumption
curve, where savings are zero (i.e., income
equals consumption). Draw a perpendicular 165. State and discuss the components of Aggregate
from B’ to the X-axis and label it B Demand in a two-sector economy.
2. Negative Savings on Y-axis: Measure OC
Ans : COMP 2019
on the positive Y-axis (representing positive
savings). Take an equal distance OS on In a two-sector economy, aggregate demand
the negative Y-axis (representing negative consists of consumption demand and investment
savings). demand. Aggregate demand, or expenditure,
3. Draw the Savings Curve: Join the points reflects the spending intentions of households and
S (negative savings) and B (zero savings). entrepreneurs on consumption and investment.
Extend this line upward into the positive Thus, Aggregate Demand (AD) equals the
quadrant to represent increasing savings as sum of Consumption Demand and Investment
income rises. This forms the savings curve. Demand. Consumption demand depends on the
community’s propensity to consume and the
164. Measure the level of ex-ante aggregate demand, national income level, typically increasing directly
when autonomous investment and consumption with income, but at a slower rate, as per Keynes’s
expenditure (A) is 50 crore and MPS is 0.2 and consumption theory. Investment demand, the
level of income (Y) is 4000 crore. State whether second component, relies on the marginal efficiency
the economy is in equilibrium or not. Give reasons. of capital and the interest rate. In the short run,
Ans : COMP 2012 it primarily varies with the marginal efficiency of
capital, reflecting entrepreneurs’ expected profits
To determine whether the economy is in from capital investments.
equilibrium:
1. Aggregate Demand (AD): 166. What is aggregate supply? Use a schedule and a
We are given: diagram to explain it.
AD = C + I Ans : COMP 2012

And C = C + bY , Aggregate supply represents the value of final

where C is autonomous consumption and b is the goods and services that producers plan to produce
marginal propensity to consume (MPC). in a given period. This value, equivalent to the
Substituting: national income, shows a direct relationship
AD = C + bY + I between aggregate supply and national income, as
Given: both are equal. The aggregate supply price line is
depicted as a 45° line, also referred to as the line
C = 50 of equality. In the diagram, the line OE represents
AD = 50 + 0.8 (4, 000) + I aggregate supply, with every point on this line
indicating equality between aggregate supply
AD = 50 + 3, 200
(AS) and national income (Y). According to the
AD = 3, 250 crore table, when Y is `100 crore, AS is `100 crore and
2. Aggregate Supply (AS): when Y is `0, AS is also `0.
Given AS = Y = 4,000
National Income (Y) Aggregate Supply
3. Comparison: (` in crore) (AS)
Since
100 100
AD = 3, 250 AD < AS
Conclusion: 200 200
The economy is not in equilibrium because 300 300
aggregate demand is less than aggregate supply. 400 400
This reflects a situation of deficient demand.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 147

As shown in the diagram investment curve II is a

straight horizontal line because it is not affected
by the income.

168. Outline the steps taken in deriving saving curve

from the consumption curve. Use diagram.
Ans : OD 2012

167. Explain the distinction between ‘autonomous

investment’ and ‘induced investment’.
Ans : OD 2013

Induced Investment refers to investment driven

by the goal of earning profit. It varies directly
with changes in national income. For instance, a
rise in national income boosts demand, prompting
increased investment to meet higher supply needs.
Thus, induced investment is income-elastic,
responding positively to income changes.
Autonomous Investment, on the other hand, remains
unaffected by income levels and is influenced by
factors unrelated to income, such as technological
advancements or government policies. Its volume
stays constant regardless of income changes, making
it income-inelastic. Keynes considered investment
as autonomous. The distinction between these two The saving function describes the relationship
concepts is better understood through the table and between saving and income. Savings and
diagram that follow. consumption curves are complementary since
together they equal income:
Income (Y) = Consumption (C) + Saving (S).
Key points about the saving function and curve:
1. Consumption depends on income, but some
consumption occurs even at zero income,
termed autonomous consumption (OC). At
this point, savings (S) are negative, or dis-
saving (OS).
2. In the diagram, CC represents the
consumption curve, while the 45° line shows
the income curve.
3. Point E is the break-even point where income
equals consumption (Y = C), so savings are
Income Investment zero (point R).
0 100 4. The saving curve starts at S (negative savings)
on the Y-axis, intersects the X-axis at R and
100 100
rises above it as savings become positive with
200 100 increasing income.
300 100 By joining S and R and extending upward, the
saving curve is derived.
400 100

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CH 3 : DETERMINATION OF INCOME AND EMPLOYMENT

169. Outline the steps taken in deriving Consumption 4. Connecting points C and E and extending the
Curve from the Saving Curve. Use diagram. line forms the consumption curve.
Ans : OD 2012
170. If planned savings exceed planned investments in
The consumption function explains the an economy, explain its likely impact on income,
relationship between consumption and income. output and employment.
Even at zero income, there is some consumption, Ans : DELHI 2023
known as autonomous consumption (OC). Saving
represents the portion of income not consumed. According to the Savings and Investment
approach, an economy’s national income is in
equilibrium when planned savings (S) equal
planned investment (I). Savings represent income
not spent on consumption, while investment
involves spending on new capital assets.
Key Points with the Schedule and Diagram:
1. The Savings Curve (SS) starts at a negative
value, reflecting autonomous consumption
(spending at zero income). It shows planned
savings at different income levels.
2. The Investment Curve (II) is a horizontal line,
representing autonomous investment, which
remains constant regardless of income changes.
3. Equilibrium occurs at point E, where planned
savings equal planned investment and
equilibrium income is OY.
Analysis of the Table:
• At low income levels (e.g., `200 crore), S <
I, leading to excess demand and prompting
firms to increase production.
• At high income levels (e.g., `500 crore), S >
I, creating excess inventory as firms produce
Key relationships include: more than what households consume. This
• Saving = Income – Consumption forces firms to reduce production, lowering
• Consumption = Income – Saving income and savings until S = I.
Key Features of the Relationship:
Income Consump- Savings Investment Remarks
1. When consumption exceeds income, savings
(Y) tion (C) (S) (I)
are negative (dis-saving).
2. When consumption equals income, savings 0 40 -40 40 S<I
are zero. 100 120 -20 40 S<I
3. When consumption is less than income,
200 200 0 40 S<I
savings become positive.
Consumption and saving curves are 300 280 20 40 S<I
complementary; knowing one allows the derivation 400 360 40 40 S=I
of the other. In the diagram: (Equilibrium)

1. A 45° line (OY) represents the income curve. 500 440 60 40 S>I
2. At zero income, autonomous consumption is
600 520 80 40 S>I
OC, equivalent to dis-saving (OS), forming
the starting point (C) of the consumption When S > I, excess savings reduce demand,
curve. creating unsold inventory. Firms cut production,
3. At income level OR, savings are zero and lowering income and savings until equilibrium
consumption equals income. Drawing a is restored. This demonstrates the interplay
perpendicular from R to the 45° line gives between savings, investment and national income
point E. adjustments.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 149

171. Distinguish between Aggregate Demand and therefore, AS = C + S.

Aggregate Supply. Aggregate supply curve is a 45° line drawn from
the origin indicating that every point on this line
Ans : OD 2014, 2013
is equidistant from X and Y-axis.
Aggregate Demand (AD) refers to the total value
of final goods and services which all the sectors of 172. What is ex-ante consumption? Distinguish
an economy are planning to buy at a given level between autonomous consumption and induced
of income during a period of one accounting year. consumption.
Even though AD has four components, we assume Ans : OD 2014, 2013
that AD is a function of only consumption
expenditure and investment expenditure, i.e., AD Ex-ante consumption means planned consumption
= C + I. expenditure on final goods in the economy. Ex-
AD curve has a positive slope indicating that as ante consumption is divided into two parts –
the income increases, aggregate expenditure also (i) Autonomous consumption
increases. (ii) Induced consumption.
In the diagram: Total Consumption (C) comprises two components:
(i) AD curve has a positive slope which means Autonomous Consumption (C): Even when income
when income increases; AD also increases. (Y) is zero, there is some minimum consumption
(ii) AD curve does not begin from origin because for survival, known as autonomous consumption
of autonomous consumption. which is always positive. It is denoted as C. Thus,
(iii) Investment curve is a straight line parallel C > 0.
to X-axis because according to Keynes, level Induced Consumption (bY): This is influenced
of investment remain constant at all level of by change in income. When income increases
income during short-period. consumption also increases. But, the rate of
increase in consumption is less than the rate of
increase in income (Keynesian Psychological
Law of Consumption). This portion of increased
consumption is termed as induced consumption.
Consumption function is represented as:
C = C + b ^Y h
...where [C = Consumption; C = Autonomous
consumption; bY = Induced consumption
Difference between Autonomous Consumption
and Induced Consumption

Basic Autonomous Induced

Aggregate Supply (AS) refers to money value Consumption Consumption
of goods and services that all the producers are 1. Meaning At the zero When income
willing to supply in an economy in the given level of increases
period. income, there consumptions
is minimum also increases
consumption but not by
for survival the same
called proportion.
Autonomous
Consumption.
2. Motive It is denoted It is the
by C. function of
income, so it
Aggregate supply is the sum of consumption and is written as
saving. Since aggregate supply is equal to national bY.
income and income is either consumed or saved,

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CH 3 : DETERMINATION OF INCOME AND EMPLOYMENT

by households and firms on final goods and services AD = AS

within a year, while Planned Output represents Diagram Explanation:
the total production planned by firms for the • Income is shown on the X-axis and Aggregate
same period. An economy reaches equilibrium Demand (AD) on the Y-axis.
when planned spending equals planned output, • The CC curve represents the consumption
i.e., AD = AS or C + I = Y, where: function.
• Consumption Expenditure (C) + Investment • Investment, denoted by CI, is constant across
Expenditure (I) = Income (Y). income levels (autonomous investment).
Equilibrium Condition: Adding CI to the consumption curve yields
In equilibrium, all goods produced are either the AD curve.
consumed by households or invested by firms, • Equilibrium is reached at point E, where
ensuring no surplus or shortage in the economy. the AD curve intersects the 45° line and the
Disequilibrium Case: AD > AS equilibrium level of income is OY.
• If planned spending exceeds planned output Adjustments to Disequilibrium:
(AD > AS), firms experience an unplanned 1. When AD > AS:
decrease in inventories, as consumers and • Buyers plan to purchase more than
firms purchase more than the firms produce. producers plan to supply, causing
• To restore inventory levels, firms expand inventories to fall below the desired level.
production and increase employment, leading • Producers respond by expanding
to higher output and income. production, which increases income. This
• This process continues until equilibrium is process continues until AD equals AS,
reached, where AD = AS. restoring equilibrium.
Thus, equilibrium ensures stable output and 2. When AD < AS:
income, aligning planned expenditure with • Buyers plan to purchase less than
planned production. producers plan to supply, leading to an
undesired rise in inventories.
177. Explain national income equilibrium through
• Producers cut back on production and
aggregate demand and aggregate supply. Use
reduce employment, which lowers income.
diagram. Also explain the changes that take
The downward adjustment continues
place in an economy when the economy is not in
until AD equals AS, re-establishing
equilibrium.
equilibrium.
Ans : OD 2014 This dynamic ensures that the economy naturally
Aggregate demand refers to the total value of gravitates toward equilibrium, balancing
final goods and services demanded in an economy aggregate demand and supply.
in a year. 178. Answer the following questions on the basis of the
given figure:

Aggregate Supply (AS) represents the total (i) At which level of income Average Propensity
planned output by producers in an economy during to Save (APS) will be equal to zero and why?
a given accounting year. The equilibrium level of (ii) What does ‘OA’ signify with respect to
national income is established when Aggregate consumption function.
Demand (AD) equals Aggregate Supply (AS):

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 151

demand, equilibrium occurs where Aggregate Equilibrium occurs when total planned
Demand (AD) equals Aggregate Supply (AS). expenditure (AD) equals total planned output
• Aggregate Demand (AD) is the total (AS), i.e., C + I = Y, where Y is income.
expenditure on consumption and investment, Since income is either consumed or saved, we
derived by summing consumption and also have Y = C + S. Thus, at equilibrium:
investment at each income level. C + I = C + S, implying I = S (Investment
• Aggregate Supply (AS) is the total production equals Savings).
value of goods and services, equivalent to 2. Planned Investment (I) = Planned Savings
national income or output. (S):
Key Features : Equilibrium income is achieved when planned
1. Effective demand is established at the savings are equal to planned investment.
equilibrium point (E), where AD = AS. Diagram Interpretation:
2. The diagram illustrates that point E is where (i) AD = AS (Upper Part): The equilibrium
the aggregate demand curve intersects the point E is where the AD curve intersects
aggregate supply curve. the 45° line (AS curve) and the
Schedule: corresponding income level is OM.
(ii) I = S (Lower Part): Equilibrium occurs
Income Consump- Invest- Aggregate Aggregate
at point E1, where the savings curve
(` tion (` ment (` Demand Supply (`
crore) crore) crore) (` crore) crore) intersects the investment curve. The
equilibrium income corresponding to this
0 50 100 150 0
point is OM1.
100 100 100 200 100
In both cases, equilibrium ensures that the
200 150 100 250 200 economy’s planned spending aligns with planned
300 200 100 300 300 production, stabilizing income at the determined
400 250 100 350 400 level.

At point E (Income = `300 crore), effective

demand is achieved as AD = AS (`300 crore).
Beyond or below this point, disequilibrium occurs,
reflecting either excess supply or demand.

175. What are two alternative ways of determining

equilibrium level of income? How are these
related?
Ans :
There are two approaches to determine the 176. In an economy planned spending is greater than
equilibrium level of income and output in an planned output. Explain all the changes that will
economy: take place in the economy.
1. Planned Aggregate Demand (AD) = Planned Ans : OD 2015
Aggregate Supply (AS):
Planned Spending refers to the total expenditure

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CH 3 : DETERMINATION OF INCOME AND EMPLOYMENT

3. Graphical
representa-
tion

4. Elasticity It is income- It is income-

inelastic. elastic.
5. Nature It cannot be It can be
zero. It must equal to
be greater zero when
than zero i.e., Marginal
C>0 propensity to This can be explained with the help of the given
consume is diagram:
zero. (i) SS is the saving curve that shows planned
saving at different levels of income. It starts
173. When is an economy in equilibrium? Explain from a negative value because there must be
with the help of Saving and Investment functions. some consumption when income is zero.
Also explain the changes that take place in an (ii) Investment curve (II) is parallel to X-axis
economy when the economy is not in equilibrium. representing autonomous investment which
Use diagram. remains unchanged as income increases.
or (iii) E is the equilibrium point where S = I and
Explain the national income determination in an OY is the equilibrium level of income where
economy using saving and investment approach. ex-ante saving is equal to ex-ante investment.
Use diagram. If there is any deviation from the equilibrium
Ans : OD 2014
level of income, then a process of re-adjustments
will start which will bring the economy back to
Saving and Investment Approach. According the equilibrium level.
to the Saving and Investment approach, the (i) When Saving is more than Investment (S >
national income in an economy is in equilibrium I). If planned saving is more than planned
when planned savings (S) are equal to planned investment, i.e., after point E (in the
investment (I). Savings are the excess of income diagram), it means that households are not
over consumption expenditure whereas investment consuming as much as the firms expect them
refers to the expenditure incurred on creation of to. Hence, inventory rises above the desired
new capital assets. level. As a result, firms would plan to reduce
We can understand this with the help of a schedule production till saving and investment become
and diagram: equal again.
Equilibrium by Saving and Investment Approach (ii) When Saving is less than Investment (S < I).
This means that households are consuming
Y C S I Remark
more and saving less than what the firms
0 40 – 40 40 S<I expect them to. As a result, inventory falls
100 120 – 20 40 S<I below the desired level. Therefore, the firms
increase production till saving again becomes
200 200 0 40 S<I
equal to investment.
300 280 20 40 S<I
174. What is meant by the “Effective Demand
400 360 40 40 S = I (Equilibrium)
Principle” in Keynesian theory of employment?
500 440 60 40 S>I Discuss using a schedule or a diagram.
600 520 80 40 S>I Ans : SQP 2019

Effective Demand refers to consumers’ willingness

and ability to purchase goods at various price
levels. According to Keynes’ principle of effective

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 153

(iii) What does the shaded area AOB indicate? crore spend 80% (`640 crore) as consumption
(iv) What is the significance of point B? and save the rest. This `640 crore becomes
Ans : DELHI 2020 the income for others in the economy.
3. Second Round: From the additional income
Here is a detailed explanation of the points
of `640 crore, 80% (`512 crore) is spent on
provided:
consumption and the rest is saved.
(i) At OB level of income, APS = 0: Average
4. Subsequent Rounds: This process continues,
Propensity to Save (APS) is zero when savings
with consumption in each round being 80%
are zero. This happens at the break-even
of the additional income from the previous
point (B), where income equals consumption
round.
(Y = C), leaving no portion of income to be
Total Increase in Income:
saved.
The cumulative increase in income from this
(ii) OA represents dis-saving (autonomous
multiplier process sums up to `4,000 crore
consumption): At zero income, consumption is
approximately, despite the initial investment
still positive due to autonomous consumption,
being only `800 crore.
represented by OA. This is the minimum
Formula:
consumption required to sustain life, financed
1. Multiplier (K):
through borrowing or using past savings.
K= 1
(iii) Shaded area (AOB) indicates negative savings 1 - MPC
(dis-saving): The triangle AOB represents
Substituting MPC = 0.8:
negative savings, where consumption exceeds
K= 1 =5
income. At zero income, dis-saving is 1 - 0 .8
maximum (OA) and gradually decreases until
2. Total Income Increase:
savings reach zero at the break-even point
(OB). DY = K # D I
(iv) Point B as the break-even point: At point DY = 5 # 800 = `4,000
B, income equals consumption (Y = C), Thus, the multiplier shows how initial spending
so savings are zero. This point signifies the triggers a chain reaction, amplifying the total
transition from dis-saving to positive saving impact on income.
as income rises.
This analysis illustrates the relationship between 180. Assuming that increase in investment is `1000
income, consumption and savings, highlighting crore and marginal propensity to consume is 0.9,
the concept of autonomous consumption and the explain the working of multiplier.
break-even point in the saving function. Ans : OD 2017

179. Assuming that increase in investment is `800 The working of the multiplier is based on the fact
crore and marginal propensity to consume is 0.8, that one person’s expenditure is another person’s
explain the working of multiplier. income.
Ans : OD 2017
Let us understand this with the help of an
example:
The multiplier effect demonstrates how an initial (i) Suppose an additional investment of `1,000
increase in investment leads to a more significant crore is made to construct a flyover. This
overall increase in income. The process operates extra investment will generate an extra
on the principle that one person’s expenditure income of `1,000 crore in the first round.
becomes another person’s income. Let’s break it (ii) Assuming MPC to be 0.9, the recipients of
down: this additional income will spend 90% of
Example: `1,000 crore, i.e., `900 crore as consumption
1. Initial Investment: An additional investment expenditure and the remaining amount will
of `800 crore (e.g., for constructing a flyover) be saved. It will increase the income of others
generates an initial income of `800 crore in by `900 crore in the same round.
the first round. (iii) In the second round, 90% of the additional
2. Marginal Propensity to Consume (MPC): income of `900 crore, i.e., `810 crore will be
Assuming MPC = 0.8, recipients of this `800 spent on consumption and the remaining
amount will be saved.

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CH 3 : DETERMINATION OF INCOME AND EMPLOYMENT

(iv) This multiplier process will go on, with the with each round’s consumption being 60% of
consumption expenditure in every round the income received in the previous round.
being 0.9 times of the additional income Total Increase in Income:
received from the previous round. The total increase in income due to this multiplier
The process of working of multiplier is further, effect sums to approximately `2,250 crore, despite
illustrated in the following table: the initial investment being only `900 crore.
Multiplier Formula:
1. Multiplier (K):
K= 1
1 - MPC
Substituting MPC = 0.6:
K= 1 = 2.5
1 - 0 .6
2. Total Income Increase:
DY = K # D I
DY = 2.5 # 900 = `2,250
Conclusion:
The multiplier process shows how initial spending
triggers a chain reaction, ultimately resulting in
Thus, an initial investment of `1,000 crore leads
a total income increase of `2,250 crore, with a
to a total increase in income of `10,000 crore
multiplier value (K) = 2.5.
(approx.)
As a result, 182. Define full employment in an economy. Discuss
10, 000
Multiplier, K = DY = = 10 the situation when aggregate demand is more
DI 1, 000
than aggregate supply at full employment income
1 1 level.
Also, Multiplier = = = 1 = 10
1 - MPC 1 - 0.9 0.1 Ans : FOREIGN 2018

181. Assuming that ‘increase’ in investment is `900 Full employment occurs when all individuals
crore and marginal propensity to consume is 0.6, willing and able to work at the prevailing wage
explain the working of multiplier. rate are employed. At this level, the economy
operates at its maximum capacity, with no idle
Ans : OD 2017
resources.
The multiplier effect explains how an initial Excess Demand and Inflationary Gap:
investment leads to a multiplied increase in 1. Excess Demand:
income, based on the principle that expenditure • This arises when Aggregate Demand
by one person becomes income for another. Here’s (AD) exceeds Aggregate Supply (AS) at
a step-by-step explanation with the example the full employment level of income.
provided: • It results in a demand-supply imbalance,
Example: pushing prices upward—a phenomenon
1. Initial Investment: An additional investment known as demand-pull inflation.
of `900 crore (e.g., for constructing a flyover) 2. Inflationary Gap: The gap between actual
generates an initial income of `900 crore in AD (QG) and required AD (QF) for full
the first round. employment equilibrium is termed the
2. Marginal Propensity to Consume (MPC): inflationary gap (FG).
Given MPC = 0.6, recipients of the `900 crore 3. Implications:
spend 60% (`540 crore) on consumption and • Since the economy is already at full
the rest is saved. This `540 crore becomes employment level of income (OQ), there
income for others. is no scope for increasing output or
3. Second Round: From the additional income employment.
of `540 crore, 60% (`324 crore) is spent on • The rise in demand leads only to higher
consumption and the rest is saved. price levels, as supply cannot expand
4. Subsequent Rounds: The process continues, further to match the additional demand.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 155

Diagram Explanation: • Increase interest rates to discourage

• OQ represents the full employment level of borrowing and reduce consumption and
income. investment.
• QF indicates the AD required for full • Reduce money supply through open
employment equilibrium. market operations (selling government
• QG, being greater than QF, signifies actual securities).
AD. Diagram Explanation:
• At point G, AD exceeds AS at the full
• The gap FG reflects the inflationary gap due
employment level of output.
to excess demand.
• Corrective measures aim to reduce AD,
This situation highlights the importance
shifting it downward to point F, where AD
of managing aggregate demand to prevent
equals AS, eliminating the inflationary gap
overheating in the economy, which causes inflation
and stabilizing the economy.
without enhancing production or employment.
Implementing these policies helps balance demand
183. In an economy aggregate demand is greater than and supply, curbing inflation while maintaining
aggregate supply. Explain the changes that will the economy at full employment.
take place in this economy.
184. “In an economy ex-ante Aggregate Demand is
Ans : OD 2011 more than ex-ante Aggregate Supply.”
Explain its impact on the level of output, income
and employment.
Ans : SQP 2023

When Aggregate Demand (AD) exceeds Aggregate

Supply (AS) at the full employment level of
income, the economy experiences a situation
of excess demand, leading to an inflationary
gap. This gap triggers demand-pull inflation,
characterized by rising prices due to an inability
to increase output further.
Key Features:
1. Full Employment Level of Income (OQ):
At full employment, all resources are fully
When Aggregate Demand (AD) exceeds utilized and the economy cannot produce
Aggregate Supply (AS) at the full employment beyond this level in the short run.
level of output, it results in an inflationary gap 2. Equilibrium AD (QF): For full employment
(GF) as shown in the diagram. This gap reflects equilibrium, aggregate demand should be QF,
the excess demand, causing upward pressure on where AD equals AS.
prices since supply cannot increase further in the 3. Excess AD (QG): Actual aggregate demand
short run. exceeds QF, reaching QG, creating an
Steps to Address Inflationary Gap: inflationary gap represented by FG.
Since aggregate supply cannot be increased in 4. Impact of Excess Demand:
the short term, the focus should be on reducing
• Output and employment remain
aggregate demand by an amount equal to the
unchanged since the economy is already
inflationary gap (GF). This can be achieved using
at full employment.
contractionary policies:
• Prices rise due to increased demand
1. Contractionary Fiscal Policy:
with no additional supply, resulting in
• Reduce government spending to lower
inflation.
overall demand.
Diagram Explanation:
• Increase taxes to decrease disposable
• OQ represents the full employment income
income and, consequently, consumption
level.
and investment.
• QF denotes the aggregate demand required
2. Contractionary Monetary Policy:
for equilibrium.

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CH 3 : DETERMINATION OF INCOME AND EMPLOYMENT

• QG signifies actual aggregate demand. C +I =C+S

• The gap FG illustrates the inflationary gap as C + I = AD
caused by excess demand.
and C + S = AS
This situation underscores the need for policy
measures to control aggregate demand and I = S or S = I ...(2)
prevent overheating in the economy, which can Determination of Equilibrium level of income
destabilize prices. (AD = AS and S = I)
Equation (1) and (2) are the two approaches for
basic equilibrium for determination of national
income.
At the equilibrium level of national income
actual saving and investment are also equal. This
implies that at equilibrium level of income, the
part of income which is left after consumption is
demanded by business firms for investment.
At equilibrium level of income, equality of
aggregate supply (AS) and aggregate demand
(AD) and that of S and I can be explained with
the help of the diagram given.
In the given diagram, OY is aggregate supply
line and (C + I) is aggregate demand line which
185. How is ‘saving and investment’ approach derived intersect each other at point E where equilibrium
from the ‘aggregate demand and supply’ approach level of income is OYE. In the same diagram
of income determination? Use diagram. saving (SS) and investment (101) lines intersect
at point R, where the level of income is OYE.
Ans : OD 2010
Therefore, at OYE level of income AS is equal to
The equilibrium level of national income is AD and S is equal to I.
determined at the point where aggregate demand
(AD) equals aggregate supply (AS).
AD = AS ...(1)
In a two sector economy, aggregate demand 186. Give two alternative conditions of national income
(Expenditure) is sum of consumption (C) and equilibrium. Explain what is likely to happen, if
investment (I) and aggregate supply is value the economy is not in equilibrium.
of flow of goods and services (national income) Ans : OD 2017
which is either consumed or saved.
The equilibrium level of national income is
determined at the point where aggregate demand
(AD) equals aggregate supply (AS).
AD = AS ...(1)
In a two sector economy aggregate demand
(Expenditure) is the consumption (C) and
Investment (I) and aggregate supply is value
of flow of goods and services (national income)
which is either consumed or saved.
C + I= C + S
as C + I = AD
and C + S = AS
I = S or S = I ...(2)

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187. Explain the meaning of under-employment

equilibrium. Explain two measures by which full
employment equilibrium can be reached.
Ans : OD 2013

Under-employment equilibrium occurs when the

equilibrium level of income is below the full-
employment level of output. In this situation,
aggregate demand (AD) is insufficient to utilize
all available resources, resulting in unemployment.
To achieve full-employment equilibrium, aggregate
demand must be increased.
Measures to Increase Aggregate Demand:
1. Lowering the Bank Rate:
• The bank rate is the interest rate the
central bank charges commercial banks
Equation (1) and (2) are the two approaches for
for credit.
basic equilibrium for determination of national
• There is an inverse relationship between
income. At the equilibrium level of national
the bank rate and demand for credit.
income, actual saving and investment are also
• In a scenario of deficient demand, the
equal . This implies that at equilibrium level of
central bank lowers the bank rate, making
income, the part of income which is left after
credit cheaper.
consumption is demanded by business firms for
• This reduction in the interest rate
investment.
encourages borrowing, increases credit
At equilibrium level of income, equality of
demand and boosts aggregate demand.
aggregate supply (AS) and aggregate demand
2. Open Market Operations:
(AD) and that of S and I can be explained with
• These involve the buying and selling of
the help of the diagram given. In the diagram, OY
securities by the central bank in the open
is aggregate supply line and (C + I) is aggregate
market.
demand line which intersect each other at point
• During deficient demand, the central
E where equilibrium level of income is OYE. In
bank buys securities, paying sellers and
the same diagram saving (SS) and investment
increasing the money supply.
(101) lines intersect at point R, where the level
• The money flows into commercial banks
of income is OYE. Therefore, at OYE level of
as deposits, enhancing their lending
income AS is equal to AD and S is equal to I.
capacity.
(i) What happens when AD > AS : It means
• With more accessible credit, borrowing
that the buyers are planning to buy more
increases, further raising aggregate
goods and services than the producers are
demand.
planning to produce (i.e., supply). In this
By implementing such measures, the economy
situation, inventories start falling and come
can move closer to full-employment equilibrium,
below the desired level. To bring back the
increasing output and reducing unemployment.
inventories to the desired level, the producers
expand production. This raises the income 188. Explain all the changes that will take place in an
level, which keeps on rising till AD and AS economy when aggregate demand is not equal to
are equal again. aggregate supply.
(ii) What happens when AD < AS : It means
that the buyers are planning to buy less than Ans : OD 2013

what the producers are planning to produce. When AD < AS : It is not necessary that
As a result, inventories start rising and move equilibrium level in an economy always takes place
above the desired level. So the producers at the full-employment level. It may take place
cut back on production and lay off workers. before the stage of full-employment and also it
This reduces the income level, i.e., AS. This may take place after the stage of full-employment.
downward trend continues till AD and AS If equilibrium level takes place before the full
once again become equal. employment level, it is a case of deficient demand.

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CH 3 : DETERMINATION OF INCOME AND EMPLOYMENT

This signifies that deficiency of aggregate demand 189. Define and represent ‘inflationary gap’ on a
does not lead to the full use of given resources at diagram. Explain the role of the ‘varying reserves
the full-employment level. In this case involuntary requirement’ in removing the gap.
unemployment exists. Therefore, for reaching
Ans : OD 2010
the stage of full employment where all the given
resources are fully utilised, efforts should be made Inflationary gap relates to a situation of excess
to increase the level of aggregate demand. demand. In such a case, real aggregate demand
In the given diagram (i) OYF is full employment at the full employment level is more than the
level and OY* is the actual output level, where aggregate demand which is required to maintain
AD equals AS. the full employment level. The excess of real
aggregate demand over the full employment level
aggregate demand is called inflationary gap. In
other words, inflationary gap is the measure of
excess demand.

Diagram (i)
When AD > AS : If equilibrium takes place
after the stage of full employment, it is a case of
excess demand. In this case the level of aggregate
demand at the level of equilibrium is higher and The concept of inflationary gap can be explained
hence cannot be met by full use of given resources. with the help of the given diagram. At full
Therefore, in this case output does not increase employment level OY, real aggregate demand
and only price increases. Therefore, for achieving is GY, whereas aggregate demand required to
the stage of full employment necessary methods maintain the full employment is FY.
should be used for reducing the level of aggregate Thus, real aggregate demand exceeds by FG
demand. and this is inflationary gap or measure of excess
demand. For removing excess demand, central
bank should limit the credit creating capacity of
commercial banks. For attaining this objective,
reserve ratio should be increased so that the
banks are required to maintain more cash reserves
with the central bank and thus are able to create
less credit. So decline in credit availability in the
economy will tend to reduce AD and remove the
inflationary gap.

190. Explain the role of the following in correcting the

inflationary gap in an economy:
(i) Legal reserves
(ii) Bank rate
Diagram (ii)
In diagram (ii) OYF is the full employment level Ans : OD 2011

and OYF is the actual level of employment at An inflationary gap occurs when aggregate demand
equilibrium, where AD equals AS. (AD) exceeds aggregate supply (AS) at the full
employment level of output, leading to inflation
since resources are fully utilized and output

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 159

cannot increase further. To restore equilibrium, 2. Reduction in Government Expenditure:

AD must be reduced because increasing AS is not • The government can cut its spending on
possible in this situation. public works like roads, buildings and
Measures to Reduce Aggregate Demand: rural electrification.
(i) Legal Reserves: • Reduced government spending decreases
• Legal reserves are the minimum money income in the hands of people,
percentage of deposits that commercial leading to a drop in their demand for
banks are required to hold as cash, either goods and services.
with themselves or the central bank. • This helps eliminate or reduce the
• The central bank can increase the inflationary gap by aligning aggregate
legal reserve requirement to address an demand with aggregate supply.
inflationary gap. By applying these measures, the economy can
• Higher reserves reduce the funds available stabilize prices and reduce inflation caused by
for banks to lend, decreasing the credit excess demand.
supply and subsequently lowering
aggregate demand. 192. Explain the role of the following in correcting the
(ii) Bank Rate: deflationary gap in an economy:
• The bank rate is the interest rate charged (i) Open market operations
by the central bank to commercial banks (ii) Margin requirements
for loans. Ans : OD 2013
• An increase in the bank rate leads to
A deflationary gap occurs when aggregate
higher interest rates for loans from
demand (AD) is less than aggregate supply (AS)
commercial banks to the public.
at the full employment level of output, leading to
• This discourages borrowing for
unemployment and under-utilization of resources.
investment and consumption, reducing
To eliminate the gap, aggregate demand must be
credit demand and aggregate demand.
increased to match aggregate supply.
• Reduced credit demand decreases the
Measures to Increase Aggregate Demand:
money supply in circulation, exerting
(i) Open Market Operations:
downward pressure on inflationary forces.
• The central bank engages in buying and
By implementing these monetary tools, the central
selling securities to adjust the money
bank can effectively control aggregate demand,
supply and correct the deflationary gap.
mitigating the inflationary gap and stabilizing
• To increase aggregate demand, the central
the economy.
bank buys securities from commercial
191. Explain the role of the following in correcting the banks.
inflationary gap in an economy: • This improves the liquidity position of
(i) Open market operations commercial banks, enabling them to lend
(ii) Government expenditure more.
• With increased credit availability, people
Ans : FOREIGN 2013
can borrow more, stimulating spending
Measures to Reduce Aggregate Demand: and raising aggregate demand.
(i) Open Market Operations: (ii) Reduction in Margin Requirements:
• These involve the sale and purchase of • When extending loans, commercial banks
securities by the central bank. do not advance the full value of collateral;
• To address excess demand, the central they maintain a margin. For example,
bank sells securities in the open market, they may lend only 80% of the value of a
receiving payments from buyers. security, keeping 20% as a margin.
• This withdrawal of money from the • To address the deflationary gap, banks
economy reduces commercial banks’ reduce the margin requirement, enabling
reserves, thereby lowering their lending borrowers to receive more credit against
capacity. their securities.
• The reduced availability of credit • This increases borrowing capacity,
decreases consumption and investment, encouraging higher expenditure and
lowering aggregate demand. subsequently boosting aggregate demand.

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CH 3 : DETERMINATION OF INCOME AND EMPLOYMENT

By implementing these measures, the economy when aggregate demand (AD) exceeds aggregate
can address under-employment, enhance resource supply (AS) at full employment, leading to an
utilization and bridge the deflationary gap. inflationary gap.
(i) Inflationary Gap:
193. Explain the role of the following in correcting • The inflationary gap is the difference
‘excess demand’ in an economy: between the actual aggregate demand and
(i) Bank rate the aggregate demand required for full
(ii) Open market operations employment equilibrium.
Ans : OD 2011 • Since output cannot increase beyond the
full employment level, excess demand results
Excess demand occurs when aggregate demand
in rising prices without an increase in real
(AD) exceeds aggregate supply (AS) at the full
output.
employment level of income, leading to inflation
(ii) Role of Reverse Repo Rate (RRR) in
without any increase in real output. To address
Controlling Excess Demand:
this, aggregate demand must be reduced to
• Reverse Repo Rate (RRR): The RRR is
stabilize the economy.
the interest rate at which commercial banks
Measures to Reduce Aggregate Demand:
deposit their excess funds with the central
(i) Bank Rate Policy:
bank.
• The bank rate is the interest rate at which
• How RRR Helps Reduce Excess Demand:
the central bank lends to commercial
- To address excess demand, the central
banks.
bank increases the Reverse Repo Rate.
• To control excess demand, the central
- A higher RRR incentivizes commercial
bank increases the bank rate, making
banks to deposit more funds with the
borrowing costlier for commercial banks.
central bank, reducing their liquidity.
• This leads to higher lending rates for
- With less liquidity, commercial banks’
the public, discouraging borrowing for
ability to create credit decreases.
investment and consumption.
- Reduced credit availability lowers
• Reduced borrowing decreases aggregate
borrowing by the public, leading to a
demand, helping to correct the
decrease in aggregate demand.
inflationary pressures.
- This helps in narrowing the inflationary
(ii) Open Market Operations (OMO):
gap and stabilizing the economy.
• OMOs involve the sale and purchase of
By raising the RRR, the central bank effectively
securities by the central bank in the open
curtails liquidity and credit in the economy,
market.
reducing the inflationary pressures caused by
• To address excess demand, the central
excess demand.
bank sells securities to the public.
• Payments for these securities flow out 195. Explain the role of the following in correcting
of commercial banks to the central ‘deficient demand’ in an economy:
bank, reducing the liquidity available for (i) Open market operations
lending. (ii) Bank rate
• This lowers the credit supply, which
reduces consumption and investment, Ans : OD 2011)

ultimately curbing aggregate demand. The situation of deficient demand exists when at
By implementing these measures, the central the full employment level, aggregate demand is less
bank can reduce the inflationary gap and stabilize than aggregate supply. This creates the problem
the economy at the full employment level. of involuntary unemployment. For tackling this
problem, the level of aggregate demand needs
194. What is ‘excess demand’ ? Explain the role of to be increased for which, besides other things,
‘Reverse Repo Rate’ in removing it. volume of credit should be increased.
Ans : OD 2015 (i) Open market operations refer to the sale and
purchase of securities by the central bank.
When the equilibrium level of income is
In the situation of deficient demand, central
established beyond the full employment level, it
bank buys the securities in the open market
indicates a situation of excess demand. This arises
and makes payment to the sellers. The money

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 161

flows out of the central bank and ultimately By implementing these measures, fiscal and
reaches the commercial banks as deposits. monetary policies work together to stimulate
This raises the lending capacity of the banks. aggregate demand, address unemployment and
People can borrow more and this will raise bring the economy back to full employment
aggregate demand. equilibrium.
(ii) Bank rate is the rate of interest which central
bank charges from commercial banks for
giving them credit. However, the relationship
between rate of interest and demand for credit NUMERICAL QUESTIONS
is inverse. Thus, when bank rate is increased,
the demand for credit falls. Thus, in case
of deficient demand, bank rate should be 197. Suppose, an economy is in equilibrium. From the
lowered. This will lead to a fall in the rate of following data, calculate investment expenditure
interest, finally leading to an increase in the in the economy:
demand for credit. This will raise aggregate (a) National Income (Y) = `10, 000 crore
demand. (b) Marginal Propensity to Consume
(MPC) = 0.8
196. Explain the role of the following in correcting (c) Autonomous Consumption (C ) = `100 crore
deficient demand in an economy:
(i) Government expenditure Ans : OD 2024

(ii) Legal reserve Given: Y = `10, 000 crore, MPC = 0.8,

Ans : FOREIGN 2011 Autonomous consumption,
Deficient demand arises when aggregate demand C = `100 crore
(AD) is less than aggregate supply (AS) at At equilibrium,
the full employment level, causing involuntary Y = C+I
unemployment and underutilization of resources.
The deflationary gap reflects this shortfall in And, C = C + (MPC) Y
demand and measures are required to boost AD Y = C + (MPC) Y + I
and restore full employment equilibrium.
10, 000 = 100 + (0.8) 10, 000 + I
Measures to Address Deficient Demand:
(i) Increase in Government Expenditure: 10, 000 = 8100 + I
• The government can increase spending on Investment Expenditure,
infrastructure, public services and social I = `10, 000 - `8, 100
welfare programs.
• This injects money into the economy, = `1, 900 crore
raising incomes and employment levels.
198. If the value of marginal propensity to save is 0.4,
• Increased government expenditure
what will be the value of investment multiplier?
directly boosts aggregate demand,
helping to close the deflationary gap and Ans : OD 2012
address unemployment.
Multiplier, K= 1
(ii) Reduction in Legal Reserve Ratio (LRR): MPS
• The LRR is the proportion of deposits
commercial banks must hold as reserves = 1 = 10 = 2.5
0.4 4
with the central bank or as cash.
• Lowering the LRR improves commercial 199. On the basis of the following schedule, answer the
banks’ liquidity, increasing their capacity given questions:
to create credit.
• Greater credit availability encourages Income (in ` crore) 0 50 100 150 200
borrowing for consumption and Savings (in ` crore) –20 –10 0 30 60
investment, raising aggregate demand. (a) Calculate Marginal Propensity to Save (MPS)
• This, in turn, helps correct the deficient at `150 crore level of income.
demand and eliminate the deflationary (b) What is the value Autonomous Consumption?
gap.

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CH 3 : DETERMINATION OF INCOME AND EMPLOYMENT

Y - 0.8Y = 1, 000 (a) = 100

0.2Y = 1, 000 MPC (b) = 0.60
Y = 1000 Investment (I) = 200
0.2
National Income, Y = `5, 000 Income (Y) = a + bY + I
= 100 + 0.6Y + 200
223. An economy is in equilibrium. Its National
Income is `5,000 and autonomous consumption Y (1 - 0.6) = 100 + 200 = 300
expenditure is `500. What is the total consumption Y (0.4) = 300
expenditure if marginal propensity to consume is
0.7? Y = 300 # 10
4
Ans : FOREIGN 2011 Y = `750
Given: Y = `5, 000 , MPC = 0.7 Therefore, National Income is `750.
Autonomous Consumption, 226. Find Investment from the following:
C = 500 National Income = `600
Autonomous Consumption = `150
As we know, C = C + MPC (Y)
Marginal propensity to consume = 0.70
= 500 + 0.7 (5000)
Ans : OD 2012
= 500 + 3, 500 = 4, 000
Given: National Income
Consumption expenditure
(Y) = `600
= `4, 000
Autonomous Consumption
224. Find National Income from the following: (a) = `150
Autonomous consumption = `100 MPC (b) = 0.70 Y = a + bY + I
Marginal propensity to consume = 0.80
Investment = `50 or 600 = 150 + (0.7 # 600) + I

Ans : COMP 2021 or 600 = 150 + 420 + I

Given: Autonomous consumption or 600 - 570 = I

(C ) = `100 I = 30
and MPC (b) = `0.80
227. Suppose an economy is in equilibrium. From the
and Investment following data, calculate investment expenditure
(I) = `50 in economy:
(a) National Income (Y) = `10,000 crore
Y = C + bY + I
(b) Marginal Propensity to Save (MPS) = 0.2
Y = 100 + 0.8Y + 50 (c) Autonomous Consumption (C ) = `100 crore
0.2Y = 150 Ans : OD 2007

Y = 150 Given: Y = `10, 000 crore, MPS = 0.2,

0.2
Autonomous consumption,
Y = 750
So, National Income is `750. C = `100 crore
At equilibrium,
225. Find National Income from the following: Y = C+I
Autonomous Consumption = `100
Marginal propensity to consume = 0.60 Y = C + (MPC) Y + I
Investment = `200 [C = autonomous consumption + (MPC)Y and
MPC = 1 – MPS]
Ans : OD 2012
10, 000 = 100 + (1 - 0.2) 10, 000 + I
Given: Autonomous Consumption
10, 000 = 100 + (0.8) 10, 000 + I

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 163
Ans : OD 2010
Change in income = `8,000 crore
Given: TI = `100 crore,
207. In an economy the marginal propensity to
TY = `1, 000 crore consume is 0.75. Investment expenditure in the
1, 000 economy increases by `75 crore. Calculate the
We know, K = TY = = 10
TI 100 total increase in national income.
Now, K= 1 Ans : OD 2011
1 - MPC
1 We know that,
10 =
1 - MPC K (Multiplier) = 1
1 - MPC
10 - 10 MPC = 1
K= 1
or - 10 MPC = 1 - 10 1 - 0.75
Therefore, [MPC = 0.75 (given)
MPC = 9 = 0.9 K= 1 = 100 =4
10 0.25 25
Again, TY = TI # K
205. If marginal propensity to save is one, what is
the value of multiplier? What can you say about TY = 75 # 4 = 300
the change in national income, given change in (TI = `75 crore)
investment? (2010 CD) Change in Income,
Ans : OD 2010 TY = `300 crore

Given: MPS = 1 208. As a result of increase in investment by `60 crore,

As we know, K = 1 National Income rises by `240 crore. Calculate
MPS marginal propensity to consume.
K =1 =1 Ans : OD 2011
1
Since the multiplier is 1, therefore Change in Given: TY = 240 and TI = 60
investment (TI) will bring the same amount of
change in National Income ^TY h, e.g., if Multiplier, K = TY = 240 = 4
TI 60
TI = `500 crore Now, K= 1
1 - MPC
As we know, K = TY
TI 4= 1
1 - MPC
I = TY (TY = `500 crore)
500 4 - 4MPC = 1

206. In an economy, investment is increased by `2,000 - 4MPC =- 3

crore. Calculate the change in total income, if MPC = 3 = 0.75
marginal propensity to save is 0.25. 4

Ans : OD 2010 209. In an economy, a 20 per cent increase in investment

results in a 100 per cent increase in income.
Given: TI = `200 and MPS = 0.25
Calculate the marginal propensity to consume.
We know that,
Ans : OD 2012
K= 1
MPS
K = TY
Or K = 1 = 100 = 4 TI
0.25 25 % Change in Income
=
Now, K = TY % Change in Investment
TI
= 100 = 5
4 = TY 20
2, 000
We know, K= 1
TY = `8,000 crore MPS

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CH 3 : DETERMINATION OF INCOME AND EMPLOYMENT
Ans : OD 2022
8S = 18, 000
(a) As we know, 18, 000
Savings, S= = 2, 250
Change in Savings (TS) 8
MPS =
Change in Income (TY)
202. In an economy, the consumption expenditure is
= 30 - 0 = 30 = 0.6
150 - 100 50 `8,750 crore and the ratio of average propensity
(b) At zero level of income, the consumption is to consume and average propensity to save is 7 :
called autonomous consumption. 1. Calculate the level of income in the economy.
Autonomous consumption Ans : OD 2010
= Income – Savings Given: Let APC = 7 (APC : APS = 7 : 1)
8
= 0 – (–20) = 20
Consumption,
200. In an economy 75 percent of the increase in income C = 8, 750
is spent on consumption. Investment increased by We know that,
`1,000 crore.
APC = C
Calculate the total increase in income on the basis Y
of given information. 7 = 8, 750
8 4
Ans : OD 2022
Therefore, Income,
Given. MPC = 75% or 0.75 8, 750 # 8
Y = = `10, 000 crore
Change in investment 7

^Tl h = 1000 203. Given that national income is `80 crore and
As we know, consumption expenditure `64 crore, find out
Multiplier (K) = 1 average propensity to save. When income rises
1 - MPC to `100 crore and consumption expenditure to
= 1 = 1 `78 crore, what will be the average propensity to
1 - 0.75 0.25 consume and the marginal propensity to consume?
= 100 = 4 Ans : OD 2011
25
We also know that, National Income,
K = TY Y =80; Consumption, C = 64;
TI
Saving, S = Y - C = 80 - 64 = 16
4 = TY
1, 000
We know, APS = S = 16 = 0.2
TY (Increase in Income) = `4,000 crore Y 80
After rise in the Income:
201. In an economy, the ratio of average propensity to New Income, Y1 = 100
consume and average propensity to save is 5 : 3.
Change in Income
The level of income is `6000. How much are the
savings? Calculate. ^TY h = 100 - 80 = 20
New Consumption,
Ans : OD 2010
C1 = 78
Given:
Change in Consumption
APC : APS = 5 : 3
^TC h = 78 - 64 = 14
APC = 5 and APS = 3
8 8 APC = C1 = 78 = 0.78
Y1 100
Income (Y) = 6,000 C
MPC = T = 14 = 0.70
We know that, TY 20
APS = S
Y 204. In an economy, as a result of increase in investment
3= 5 by `100 crore, national income rises by `1,000
8 6, 000 crore. Find marginal propensity to consume.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 165

Also, K = TY 219. If marginal propensity to consume is 0.9, calculate

TI the value of investment multiplier.
3 = TY Ans : OD 2017
300
Increase in national income, TY = `900 crore Given: MPC = 0.9, K = ?
216. Suppose marginal propensity to consume is 0.8. K= 1 = 1 = 10
1 - MPC 1 - 0 .9
How much increase in investment is required
Investment multiplier, K = 10
to increase national income by `2000 crore?
Calculate. 220. National income increases by `2,000 crore due to
Ans : OD 2016 an additional investment of `400 crore. Calculate
the value of investment multiplier.
Given: MPC =0.8, TY = `2, 000 crore,
Ans : OD 2017
TI = ?
1 Given: TY = `2, 000 crore
K=
1 - MPC TI = `400 crore
= 1 = 1 =5 Investment multiplier,
1 - 0 .8 0.2
K = TY = 2000 = 5
Also, K = TY TI 400
TI
5 = 2000 221. If in an economy:
TI Change in initial Investments
2, 000
TI =
5
= `400 crore ^TI h = `500 crore
Marginal Propensity to Save
217. In an economy an increase in investment by `100 (MPS) = 0.2
crore led to ‘increase’ in national income by `1000 Find the values of the following:
crore. Find marginal propensity to consume. (a) Investment multiplier (K)
Ans : OD 2016 (b) Change in final income ^TY h
Ans : COMP 2019
Given: TI = `100 crore,
TY = `1, 000 crore (a) TI = `500 crore; MPS = 0.2
As we know, K = 1 = 1 =5
1, 000 MPS 0.2
K = TY = = 10
TI 100 (b) TY = ?
1
Also, K=
1 - MPC K = TY
TI
1
10 =
1 - MPC 5= Y
T
`500
10 - 10 MPC = 1 TY = `500 # 5 = `2, 500 crore
10 - 1 = 10 MPC
222. An economy is in equilibrium. Its consumption
MPC = 9 = 0.9 function is C = 300 + 0.8Y where C is
10
consumption expenditure and Y is income and
218. If marginal propensity to consume is 0.5, calculate investment is `700. Find National Income.
the value of investment multiplier. Ans : FOREIGN 2011

Ans : OD 2017 As we know,

Given: MPC = 0.9, K = ? Y = C+I
1 1 where [C = 300 + 0.8Y, I = 700 (Given)
K= = =2 Substituting the values, we get
1 - MPC 1 - 0 .5
Investment multiplier, K = 2 Y = 300 + 0.8Y + 700

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CH 3 : DETERMINATION OF INCOME AND EMPLOYMENT

= `3, 900 Ans : OD 2016

Given: Y = 1, 000, C = 200, I = 100

233. Calculate equilibrium level of income:
(a) Autonomous consumption = 200 MPC = ?
(b) Marginal propensity to consume = 0.9 Consumption,
(c) Investment expenditure = 1,000 C = C + (MPC) Y .....(1)
Ans : OD 2015 C = 200 + (MPC) 1, 000
Given, Autonomous Consumption At equilibrium level,
(C ) = 200 MPC = 0.9, I = 1, 000 Y = C+I
At equilibrium level 1, 000 = 200 + (MPC) 1, 000 + 100
Y = C+I .....(1) .....[From (1)
and C = C + bY .....where [b = MPC] 1, 000 - 200 - 100 = (MPC) 1, 000
C = 200 + (0.9) Y 700 = (MPC) 1, 000
Y = 200 + (0.9) Y + 1000 [From (1) MPC = 700 = 0.7
1000
Y - (0.9) Y = 1200
(0.1) Y = 1200 236. An economy is in equilibrium. Find investment
expenditure:
Y = 1200 = 12, 000 National income = 1,200
0.1
Autonomous consumption expenditure = 150
234. In an economy autonomous consumption is 500, Marginal Propensity to consume = 0.8
marginal propensity to save is 0.2 and investment Ans : OD 2016
expenditure is 2,000. Calculate its equilibrium
level of income. Given: Y = 1, 200, C = 150, MPC = 0.8, I = ?
Consumption function,
Ans : OD 2015
C = C + (MPC) Y
Given: C = 500, MPS = 0.2, I = 2, 000
C = 150 + (0.8) 1, 200
We know that,
MPC = 1 - MPS C = 150 + 960 = 1, 110
At equilibrium level of national income,
MPC = 0.8 = 1 - 0.2
Y = C+I
Consumption function,
C = C + bY .....where [b = MPC] I = Y-C
Investment,
C = 500 + 0.8Y
I = 1, 200 - 1, 110 = 90
At equilibrium level,
Y = C+I 237. Suppose, an economy is in equilibrium. From the
Y = 500 + 0.8Y + 2, 000 following data, calculate Investment Expenditure
in the economy:
Y - 0.8Y = 500 + 2, 000 (i) National Income = `10,000 crore
0.2Y = 2, 500 (ii) Marginal Propensity to Save (MPS) = 0.2
2, 500 25, 000 (iii) Autonomous Consumption (C ) = `200 crore
Y = =
0.2 2 Ans : OD 2021
Y = 12, 500
Given: Y = `10, 000 crore, MPS = 0.2
235. An economy is in equilibrium. Calculate Marginal Autonomous consumption,
Propensity to Consume: C = `200
National income = 1,000 At equilibrium,
Autonomous consumption expenditure = 200
Y = C+I
Investment expenditure = 100

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 167

10, 000 = 8, 100 + I 230. Calculate Marginal Propensity to Consume from

Investment Expenditure, I the following:
(i) Consumption expenditure at zero income =
= 10, 000 - 8, 100
`70
= `1, 900 crore (ii) Equilibrium income = `700
(iii) Investment = `140
228. Suppose an economy is in equilibrium. From the
following data, calculate Investment Expenditure Ans : OD 2013

in the economy: Here: Equilibrium Income,

(i) National Income = `40,000 crore Y = `700
(ii) Marginal Propensity to Consume (MPC) =
0.8 Investment, I = `140, a = `70
(iii) Autonomous Consumption (C ) = `100 crore Now, Y = a + cY + I
Ans : OD 2017 700 = 70 + c (700) + 140
Given: Y = `40, 000 crore, MPC = 0.8, 700 - 210 = c (700)
Autonomous consumption, c = 490 = 0.7 MPC = 0.7
700
C = `100 crore
At equilibrium, 231. S =- 100 + 0.2Y is the saving function in
Y = C+I an economy. Investment expenditure is 5,000.
Calculate the equilibrium level of income.
Y = C + (MPC) Y + I
(C = C + (MPC) Y) Ans : OD 2015

40, 000 = 100 + (0.8) 40, 000 + I Given S = - 100 + 0.2Y and i = 5, 000
40, 000 = 100 + 32, 000 + I At equilibrium level of income, S = 1
Investment Expenditure, - 100 + 0.2Y = 5000
I = 40, 000 - 32, 100 0.2Y = 5000 + 100 = 5, 100
= `7, 900 crore 5, 100 51, 000
Y = =
0.2 2
229. Calculate equilibrium level of income from = 25, 500
following:
(i) Consumption expenditure at zero income = 232. Suppose an economy is in equilibrium. From the
`40 following data, calculate Investment Expenditure
(ii) Marginal Propensity to Consume = 0.8 in the economy:
(iii) Investment = `80 (i) National Income = `20,000 crore.
Ans : OD 2013 (ii) Marginal Propensity to Consume (MPC) = 0.8
(iii) Autonomous consumption (C ) = `100 crore.
Here: MPC (c) = 0.8, Investment, I = `80
Ans : OD 2020
Autonomous Expenditure,
a = `40 Given: Y = `20, 000 crore, MPC = 0.8
Autonomous consumption,
Now, Y = a + cY + I
C = `100 crore
Y = 40 + (0.8) Y + 80
At equilibrium,
Y = 120 + 0.8Y Y = C+I
or Y - 0.8Y = 120 Therefore, Y = C + (MPC) Y + I
0.2Y = 120 (C = Autonomous consumption + (MPC) Y
Y = 120 = 600 20, 000 = 100 + (0.8) 20, 000 + I
0.2
Therefore, Income, 20, 000 = 100 + 16000 + I

Y = `600 I = 20, 000 - 16, 100

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CH 3 : DETERMINATION OF INCOME AND EMPLOYMENT

MPS = 1 = 1 = 0.2 We know that,

K 5
K = TY
MPC = 1 - MPS = 1 - 0.2 = 0.8 TI
K = 20 =1
210. In an economy 20 per cent fall in investment 20
results in 40 per cent fall in income. Calculate the
value of marginal propensity to consume. 213. In an economy investment increases from 300
to 500. As a result of this equilibrium level of
Ans : OD 2012 income increases by 2,000. Calculate the marginal
propensity to consume.
We know, K = TY = 0.4 = 2
TI 0.2
Ans : OD 2012
Since, K= 1
MPS Given: TY = 2000,
MPS = 1 TI = 500 - 300 = 200
K
As we know,
2= 1 2, 000
K K = TY = = 10
TI 200
K =1 1
2 Also, K=
1 - MPC
MPC = 1 - MPS 1
10 =
1 - MPC
= 1 - 1 = 1 or 0.5
2 2
10 - 10 MPC = 1
211. Marginal propensity to consume is zero. Calculate 10 - 1 = 10 MPC
the change in income if investment falls by `1,000
9 = 10 MPC
crore.
MPC = 9 = 0.9
Ans : OD 2012 10
Marginal propensity to consume, MPC = 0.9
Given: MPC =0
MPS = 1 - MPC = 1 - 0 = 1 214. In an economy 20 per cent of increased income is
saved. How much will be the increase in income if
Multiplier, K = 1 = 1 = 1 investment increases by 10,000? Calculate.
MPS 1
We know that, Ans : OD 2012

K = TY
TI Given: MPS = 20% = 20 = 0.2
100
1 = TY
TI As we know, K = 1 = 1 = 10 = 5
MPS 0.2 2
TY = 1 # - 1, 000 =- 1, 000 T Y T Y
Also, K = = =5
Income will fall by `1,000 crore. TI 10, 000

212. In an economy, income increases from `5,000 crore TY = 50, 000

to `6,000 crore as a result of 20 per cent increase Therefore, increase in investment by `10,000,
in investment. Calculate the value of investment increases the income by `50,000.
multiplier.
215. In an economy investment is increased by `300
Ans : OD 2012 crore. If marginal propensity to consume is 2/3,
calculate increase in national income.
Given: TY = `6, 000 - `5, 000
Ans : OD 2014
= `1, 000 crore
As we know, K = TY Given: MPC = 2 , TI = `300 crore, TY = ?
TI 3
1, 000 Multiplier, K = 1 = 1 2 =3
% Change in income = 100 = `20 1 - MPC 1- 3
5, 000 #

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 169

Therefore, Y = C + (1 - MPS) Y + 1 AD = C + MPC (Y) + I

C = autonomous consumption + (MPC)Y and AD = C + I + MPC (Y)
MPC = 1 – MPS
AD = 500 + (1 - 0.2) (4000)
10, 000 = 200 + (0.8) 10, 000 + I
(MPC = 1 – MPS)
10, 000 = 200 + 8, 000 + I
AD = 500 + 3200 = 3700 crores
I = 10, 000 - 8, 200
Now, Y = AS = `4000 crore
= `1, 800 crore At equilibrium level of Income, AD = AS
Since, AD (`3,700 crore) is less than AS (`4,000
238. An economy is in equilibrium. Calculate Marginal crore), the economy is not in equilibrium.
Propensity to Consume:
National income = 1,000 240. On the basis of following information, identify
Autonomous consumption expenditure = 200 whether the economy is in equilibrium or not:
Investment expenditure = 100
S.No. Particulars Amount
Ans : OD 2016
(i) Autonomous Consumption `200
Given: Y = `1, 000, C = 200, I = 100, and Investment Expenditure crore
(A)
MPC = ?
Consumption function equation, (ii) Marginal Propensity to 0.70
C = C + (MPC) Y .....(1) Consume (MPS)

C = 200 + (MPC) 1, 000 (iii) National Income `1,000

crore
At equilibrium level,
Y = C+I Ans : DELHI 2020

1, 000 = 200 + (MPC) 1, 000 + 100 Given: A = C + I = `200 crore, MPC = 0.70;
.....[From (1)]
Y = `1, 000
1, 000 - 200 - 100 = (MPC) 1, 000 We know that,
700 = (MPC) 1, 000 AD = C + I
MPC = 700 = 0.7 AD = C + MPC (Y) + I
1000
AD = 200 + 0.70 (1000)
239. On the basis of following information, identify (C + I = A) (given)
whether the economy is in equilibrium or not:
AD = 200 + 700 = `900 crore
S.No. Particulars Amount At equilibrium,
(i) Autonomous Consumption `500 AD = AS
and Investment Expenditure crore Since, AD (`900 crore) is less than AS (`1000
(A) crore), the economy is not in equilibrium.
(ii) Marginal Propensity to Save 0.2 241. On the basis of following information, identify
(MPS) whether the economy is in equilibrium or not :
(iii) National Income `4,000
S.No. Particulars Amount
crore
(i) Autonomous Consumption `700
Ans : COMP 2020 and Investment Expenditure crore
(A)
Given: A = C + I = `500 crore, MPS = 0.2;
Y = `4, 000 (ii) Marginal Propensity to 0.8
We know that, Consume (MPS)

AD = C + I (iii) National Income `4,000

crore

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CH 3 : DETERMINATION OF INCOME AND EMPLOYMENT
Ans : SQP 2020
At equilibrium level of national income,
Given: A = C + I = `700 crore, MPC = 0.80; Y = C+I
Y = `4, 000 1, 000 = 900 + I
We know that, Investment, I = 1, 000 - 900 = 100
AD = C + I
244. From the following data calculate marginal
AD = C + MPC (Y) + I
propensity to consume.
AD = 700 + 0.80 (4, 000) (i) Equilibrium level of income = 2,000
(C + I = A) (given) (ii) Autonomous consumption = 200
(iii) Investment expenditure = 800
AD = 700 + 3, 200 = `3, 900 crore
At equilibrium, Ans : OD 2016

AD = AS Given: Y = 2, 000, C = 200, I = 800

Now, AS = Y = `4000 crore We know that,
Since, AD (`3900 crore) is less than AS (`4000 C = C + (MPC) Y
crore), the economy is not in equilibrium.
and Y = C+I
242. An economy is in equilibrium. Find investment Y = C + (1 - MPS) Y + 200
expenditure:
2, 000 = 200 + (MPC) 2, 000 + 800
National income = 1,200
Autonomous consumption expenditure = 150 1, 000
MPC = = 0.5
2, 000
Marginal Propensity to consume = 0.8
Ans : OD 2016 245. Calculate investment expenditure in the economy
from the following data:
Given: Y = 1, 200, C = 150, MPC = 0.8 (i) Equilibrium level of income = 10,000
I =? (ii) Autonomous consumption = 500
Consumption function, (iii) Marginal propensity to consume = 0.75
C = C + (MPC) Y Ans : OD 2016

C = 150 + (0.8) 1, 200 Given: Y = 10, 000, C = 500, MPC = 0.75

C = 150 + 960 = 1, 110 We know that,
At equilibrium level of national income, C = C + (MPC) Y
Y = C+I and Y = C+I
1, 200 = 1, 110 + I Y = C + (1 - MPS) Y + I
Investment, I = 1, 200 - 1, 110 = 90 10, 000 = 500 + (0.75) # 10, 000 + I

243. An economy is in equilibrium. Find investment I = 10, 000 - 500 - 7, 500

expenditure: I = 2, 000
National Income = 1000
Autonomous Consumption = 100 246. From the following data calculate investment
Marginal Propensity to consume = 0.8 expenditure:
Ans : OD 2016
(i) Marginal propensity to save = 0.2
(ii) Equilibrium level of income = 22,500
Given: Y = 1, 000, C = 100, MPC = 0.8 (iii) Autonomous consumption = 500
I =? Ans : OD 2016

Consumption function,
Given: MPS = 0.2, Y = 22, 500,
C = C + (MPC) Y
C = 500, I = ?
C = 100 + (0.8) 1, 000 We know that,
C = 100 + 800 = 900

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 171

MPC = 1 - MPS 249. In an economy total savings are `2,000 crore

and the ratio of average propensity to save and
MPC = 1 - 0.2 = 0.8
average propensity to consume is 2 : 7. Calculate
At equilibrium level,
the level of income in the economy.
Y = C+I
Ans : OD 2016)
and C = C + (MPC) Y
Given: S = 2, 000, APC : APS = 2 : 7
Y = C + (MPC) Y + I
As we know,
22, 500 = 500 + (0.8) 22, 500 + I
APS = S
Y
I = 22, 500 - 500 - 18, 000
2 = 2, 000
I = 4, 000 9 Y
2, 000 # 9
247. In an economy investment expenditure is 1,000, Y =
2
autonomous consumption is 500 and marginal
propensity to save is 0.2. Calculate its equilibrium Y = `9, 000 crore
level of income.
250. Find the value of multipliers given:
Ans : OD 2016 (i) marginal propensity to consume = 1 and
(ii) marginal propensity to save = 1.
Given: I = 1, 000, C = 500,
Ans : OD 2010
MPS = 0.2, Y = ?
We know that, (i) When MPC = 1,
MPC = 1 - MPS K= 1 = 1
MPS 1 - MPC
MPC = 1 - 0.2 = 0.8 (ii) When MPS = 1,
At equilibrium level, K = 1 =1
MPS 1
Y = C+I
K =1
and C = C + (MPC) Y
Y = C + (MPC) Y + I 251. From the following data calculate Investment
Multiplier and Equilibrium level Income in the
Y = 500 + (0.8) Y + 1, 000
economy.
0.2Y = 1, 500 (i) Change in initial investment (TI) = `1,000
1, 500 crore
Y =
0.2 (ii) Marginal Propensity to Save (MPS) = 0.5
Y = 7, 500 (iii) Autonomous consumption (C ) = `50 crore
(iv) Planned investment = `100 crore
248. Calculate consumption expenditure in the Ans : OD 2024
economy whose equilibrium level of income is
20,000, autonomous consumption is 500 and Given:
marginal propensity to save is 0.5. Change in initial investment
(TI) = `1, 000 crore
Ans : COMP 2004
Marginal Propensity to Save
Given: Y = 20, 000, C = 500, MPS = 0.5 MPS = 0.5
Now, MPC = 1 - MPS Autonomous Consumption,
MPD = 1 - 0.5 = 0.5 C = `50 crore
Planned investment
As we know, C = C + MPC (Y)
= `100 crore
C = 500 + (0.5) 20, 000
Investment Multiplier
Consumption C = 500 + 10, 000
(K) = 1 = 1 = 2
= 10, 500 MPS 0.5

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CH 3 : DETERMINATION OF INCOME AND EMPLOYMENT

Y = 500; MPS = 0.30 Given: Y = 1, 000, MPC = 0.8, I = 100

Investment expenditure, Autonomous consumption,
I = 100 C =?
Marginal propensity to consume, Y = C+I
MPC = b = 1 - MPS .....(AD = AS = Y and AD = C + I)
MPC = b = 1 - 0.30 = 0.70 and C = C + MPC (Y)
We know that, Y = C + MPC (Y) + I
Y = C+I .....(AD = AS and C + I)
1, 000 = C + 0.8 # 1, 000 + 100
Y = C + b (Y) + I .....(C = C + b (Y))
C = 1, 000 - 100 - 800
500 = C + 0.7 (500) + 100
C = 100
C = 500 - 350 - 100 = 50
Autonomous Consumption, 264. An economy is in equilibrium. Find Marginal
Propensity to Conxume from the following:
C = 50
National income = 2,000
Autonomous consumption = 400
262. An economy is in equilibrium. Calculate national
Investment expenditure = 200
income from the following:
Autonomous consumption = 100 Ans : OD 2015
Marginal propensity to save = 0.2 Given: National Income,
Investment expenditure = 200
Y = 2, 000
Ans : OD 2015
Autonomous Consumption,
Given: Autonomous consumption, C = 400
C = 100 and MPS = 0.2
I = 200, MPC (b) = ?, Y = C + I
MPC = 1 - MPS = 1 - 0.2 = 0.8
and C = C + MPC (Y)
and I = 200
Y = C + b (Y) + I
At equilibrium,
.....(AD = AS = Y and AD = C + I)
Y = C+I
2, 000 = 400 + b # 2, 000 + 200
.....(AD = AS = Y and AD = C + I)
2, 000 - 400 - 200 = 2, 000 b
and C = C + MPC (Y)
1, 400
b= = 0.7
Y = C + MPC (Y) + I 2, 000
Y = 100 + 0.8Y + 200 MPC = 0.7
Y = 300 + 0.8Y
265. An economy is in equilibrium. Calculate
Y - 0.8Y = 300 Investment Expenditure from the following:
0.2Y = 300 National Income = 800
Marginal Propensity to Save = 0.3
Y = 300 = 1, 500 Autonomous Consumption = 100
0.2
National Income, Ans : OD 2015

Y = 1, 500 Given: Y = 800

Marginal Propensity to Save, MPS = 0.3
263. An economy is in equilibrium. Find autonomous
Autonomous consumption, C = 100
consumption from the following:
Investment Expenditure = ?
National Income = 1,000
Marginal propensity to consume = 0.8 MPC = 1 - MPS = 1 - 0.3 = 0.7
Investment expenditure = 100 Y = C+I
Ans : OD 2015 .....(AD = AS = Y and AD = C + I)

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 173

257. For a hypothetical economy, assuming there is an At equilibrium level of income :

increase in the Marginal Propensity to Consume Y = C+I
(MPC) from 75% to 90% and change in investment
to be `1,000 crore. C = Y-I
Using the concept of investment multiplier, C = 2, 000 - 100
calculate the increase in income due to change in
= 1, 900
Marginal Propensity to Consume (MPC).
Consumption function is given as :
Ans : DELHI 2023
C = C + b (Y)

MPC MPS Investment Change in Income 1, 900 = 200 + 2, 000 b

Multiplier, TY = K # TI 2, 000 b = 1, 900 - 200
K = MPS
1
(` in crore)
2, 000 b = 1, 700
0.75 0.25 1 =4 4 # 1, 000 = 4, 000
0.25 b = 1700 = 0.85
2000
0.90 0.10 1 = 10 10 # 1, 000 = 10, 000 Marginal Propensity to Consume,
0.10 b = 0.85
Change in income due to change in MPC is
260. Calculate investment expenditure from the
`10, 000 - `4, 000 = `6, 000 crore. following data about an economy which is in
equilibrium:
258. Calculate autonomous consumption expenditure National income = 1,000
from the following data about an economy which Marginal propensity to save = 0.20
is in equilibrium. Autonomous consumption expenditure = 100
National income = 1,200
Marginal propensity to save = 0.20 Ans : OD 2014

Investment expenditure = 100 National Incomem

Ans : OD 2014 Y = 1, 000 and MPS = 0.20
Autonomous consumption expenditure,
MPC, b = 1 - MPS = 1 - 0.20 = 0.80
We know that C = 100

Y = C+I MPC = b = 1 - MPS

Y = C + b (Y) + I (C = C + b (Y)) MPC = 1 - 0.20 = 0.80

We know that,
1, 200 = C + 0.8 (1, 200) + 100
Y = C+I
1, 200 = C + 960 + 100
.....(AD = AS = Y and AD = C + I)
C = 1, 200 - 960 - 100 Y = C + b (Y) + I (C = C + b (Y))
= 140 I = Y - C - b (Y)
Therefore, Consumption expenditure,
I = 1, 000 - 100 - 0.81 (1, 000)
C = 140
I = 1, 000 - 100 - 800
259. Calculate Marginal Propensity to Consume from I = 100
the following data about an economy which is in
equilibrium. 261. Expenditure from the following data about an
National income = 2,000 economy which is in equilibrium:
Autonomous consumption expenditure = 200 National income = 500
Investment expenditure = 100 Marginal propensity to save = 0.30
Ans : OD 2014 Investment expenditure = 100

Given: National income, Y = 2, 000 Ans : OD 2014

Autonomous consumption expenditure, C = 200 Given: National income,

Investment expenditure, I = 100

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CH 3 : DETERMINATION OF INCOME AND EMPLOYMENT

Now, MPC = 1 - MPS = 1 - 0.5 = 0.5 TI = 200 # 10 = `80 crore

At equilibrium, 25

Y = C+I 254. If marginal propensity to consume is 0.8, how

Therefore, Y = C + (MPC) Y + I much will be the value of investment multiplier?
[C = Autonomous consumption + (MPC) Y Calculate.
Y = 50 + (0.5) Y + 100 Ans : OD 2017

0.5Y = 150 Given: MPC = 0.8; K = ?

Y = `300 crore K= 1 = 1
1 - MPC 1 - 0 .8
252. If national income is `50 crore and saving `5 crore, = 1 =5
find out average propensity to consume. When 0.2
income rises to `60 crore and saving to `9 crore, Investment multiplier,
what will be the average propensity to consume K =5
and the marginal propensity to save?
255. An economy is in equilibrium. The economy’s
Ans : OD 2011
consumption function is C = 100 + 0.5Y where
Given: National Income C is consumption expenditure and Y is National
(Y) = 50; Saving (S) = 5 Income. National Income is 1,000. Find out
Consumption investment expenditure in the economy.
(C) = Y - S = 50 - 5 = 45 Ans : FOREIGN 2011

APC = C = 45 = 0.90 As we know, Y = C + I or I = Y - C

Y 50
After change: .....where [Y = 1000, C = 100 + 0.5 Y (Given)
Substituting these values, we get
Income (Y1) = 60
I 1, 000 - (100 + 0.5Y)
Change in Income
(TY) = 60 - 50 = 10 I = 1, 000 - 100 - 0.5 (1, 000)
Change in Saving I = 1, 000 - 100 - 500 = 400
(TS) = 9 - 5 = 4 Therefore, Investment expenditure = 400
Consumption 256. The consumption function of an economy is:
(C1) = 60 - 9 = 51 C = 40 + 0.8Y (amount in ` crore). Determine
As we know, that level of income where average propensity to
consume will be one.
APC = C1 = 51 = 0.85 and
Y1 60
Ans : SQP 2019
MPS = TS = 4 = 0.40
TY 10 Given: APC = 1
Average Propensity Consume
253. In an economy the marginal propensity to save
is 0.4. National Income in the economy increases (APC) = C = 1
Y
by `200 crore as a result of change in investment.
Calculate the change in investment. C =Y .....(1)

Ans : OD 2011
We have, C = 40 + 0.8Y

1 = 1 = 10 = 2.5 Y = 40 + 0.8Y .....(Using (1))

Multiplier, K=
MPS 0.4 4 Y - 0.8Y = 40
.....(MPS = 0.4 (given))
0.2Y = 40
TY = 200 (given)
Y = 40 = 200
Now, TI = TY 0.2
K
Therefore, at income level of `200 crore, APC will
TI = 200 be one.
2.5

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 175

and C = C + MPC (Y) 268. An economy is in equilibrium. From the following

data about an economy calculate autonomous
Y = C + MPC (Y) + I
consumption.
800 = 100 + 0.7 # 800 + I (i) Income = 5,000
I = 800 - 100 - 560 = 140 (ii) Marginal propensity to save = 0.2
Investment expenditure, (iii) Investment expenditure = 800

I = 140 Ans : OD 2017

Given: Y = 5, 000; MPS = 0.2; I = 800

266. An economy is in equilibrium. Calculate the
Marginal Propensity to Save from the following: As we know,
National Income = 1000 MPC = 1 - MPS
Autonomous Consumption = 100 MPC = 1 - 0.2 = 0.8
Investment = 120
At equilibrium,
Ans : OD 2015
Y = C + I and
Given: Y = 1, 000, C = 100, I = 120 C = C + (MPC) Y
As we know, Y = C + I Therefore, Y = C + (MPC) Y + I
and C = C + MPC (Y) Substituting the values in the equation,
(Y = C + MPC (Y) + I) 5, 000 = C + (0.8) 5000 + 800
1, 000 = 100 + MPC # 1000 + 120 C = 5000 - 4000 - 800 = 200
1, 000 - 100 - 120 = 1, 000 MPC
269. An economy is in equilibrium. From the following
780 = MPC data about an economy, calculate investment
1, 000
expenditure.
0.78 = MPC (i) Income = 10,000
Now, MPS = 1 - MPC (ii) Marginal propensity to consume = 0.9
(iii) Autonomous consumption = 100
MPS = 1 - 0.78
Ans : OD 2015
MPS = 0.22
Given: Y = 10,000; MPS = 0.9, C = 100 ; I = ?
267. An economy is in equilibrium. Calculate the At equilibrium, Y = C + I
National Income from the following: and C = C + ^MPC h Y + I
Autonomous Consumption = 120
Y = C + ^MPC h Y + I
Marginal Propensity to Save = 0.2
Investment Expenditure = 150 10,000 = 100 + ^0.9h 10, 000 + I
Ans : OD 2015 I = 10, 000 - 9, 100 = 900

Given: C = 120, MPS = 0.2, I = 150, = 900

Y =? 270. An economy is in equilibrium. From the following

We know that, data calculate autonomous consumption.
MPC = 1 - MPS = 1 - 0.2 = 0.8 (i) Income = 10,000
(ii) Marginal propensity to save = 0.2
Y = C+I (iii) Investment = 1,500
and C = C + MPC (Y) Ans : OD 2017
Y = C + MPC (Y) + I Given: Y = 10000; MPS =0.2; C = ? , I = 1,500
.....(AD = AS = Y & AD = C + I) At equilibrium, Y = C + I
Y = 120 + 0.8Y + 150 and C = C + ^MPCh Y + I
Y - 0.8Y = 270 Therefore, Y = C + ^MPCh Y + I
Y = 270 = 1, 350 Here, MPC = 1 – MPS = 1 – 0.2 = 0.8
0.2

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CH 3 : DETERMINATION OF INCOME AND EMPLOYMENT
Ans : OD 2010
Investment Expenditure, I = 1,100
Given: MPC = 0.75 (i) Now, Y= C + I
Increased Investment, DI = `1000 crore
Y = 100 + 0.4Y + 1,100
We know, K= 1
1 - MPC or 0.6Y = 1,200
= 1 = 1 = 100 = 4 1, 200
1 - 0.75 0.25 25 Y = = 2, 000
0.6
(a) Total increase in income Therefore, Equilibrium level of National Income,
DY = DI # K Y = 2,000.
= 1, 000 # 4 = `4000 crore (ii) Now, C = 100 + 0.4Y
(b) Total increase in consumption expenditure, At Y = 2,000, C = 100 + 0.4(2,000)
DC = MPC ( DY ) = 0.75(4,000) Consumption, C = 100 + 800 = 900
= `3000 crore
284. In an economy, S = – 100 + 0.6Y is the saving
282. In an economy the equilibrium level of income is function, where S is Saving and Y is National
`12,000 crore. The ratio of marginal propensity Income. If investment expenditure is 1100,
to consume and marginal propensity to save is 3 : calculate:
1. Calculate the additional investment needed to (i) Equilibrium level of National Income
reach a new equilibrium level of income of `20,000 (ii) Consumption expenditure at equilibrium
crore. level of National Income.

Ans : OD 2010 Ans : OD 2013

Saving function, S = –100 + 0.6Y

We have, DY = `20,000 – `12,000
Investment, I = 1,100
= `8,000 crore Y = National Income
Given, MPC = 3 MPC = 3 (i) Given: S = – 100 + 0.6Y
MPS 1 1 - MPC
We know that
3 - 3MPC = MPC 4MPC = 3 S= I
MPC = 3 1,100 = – 100 + 0.6Y
4
Now, K = 1 = 1 3 1,200 = 0.6Y
1 - MPC 1- 4
1 Y = 1,200 # 10 = `2,000
= =4 6
1
4 Therefore, Equilibrium level of National Income,
We know that, Y = 2,000.
K = DY (ii) Y = C + I
DI
2,000 = C + I
`8, 000
Therefore, DI = DY =
K 4 C = 2,000 – 1,100, C = 900
= `2000 crore Therefore, Consumption expenditure at
equilibrium level = 900.
283. C = 100 + 0.4Y is the Consumption Function of
an economy where C is Consumption Expenditure 285. C = 50 + 0.5Y is the consumption function where
and Y is National Income. Investment expenditure C is consumption expenditure and Y is National
is 1100. Calculate Income and investment expenditure is 2,000 in an
(i) Equilibrium level of National Income. economy.
(ii) Consumption expenditure at equilibrium Calculate:
level of National Income. (i) Equilibrium level of (national) income
(ii) Consumption expenditure at equilibrium
Ans : OD 2013 level of (national) income.
Given: National Income, Y = ? Ans : OD 2013
Consumption Function, C = 100 + 0.4Y

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 177

800 440 – – 279. Complete the following table:

– 520 0.48 – Income Consumption Marginal Average
(`) Expenditure Propensity Propensity
Ans : OD 2012 (`) to save to save
0 80 ... ...
^Y h C S = Y - C APS MPS APC
100 140 0.4 ...
400 240 160 0.4 – 0.6
200 ... ... 0
800 440 360 0.45 0.50 0.55
... 240 ... 0.20
1,000 520 480 0.48 0.60 0.52
... 260 0.8 0.35

277. Complete the following table : Ans : OD 2013

Income Average Marginal Consumption

Propensity Propensity to Expenditure Income C S = Y - C MPS APS APC
to save Consumption 0 80 – 80 3 – –
1,000 0.50 500 100 140 – 40 0.4 – 0.4 1.4
2,000 0.55 – – 200 200 0 0.4 0 1
2,500 0.60 – – 300 240 60 0.6 0.20 0.80
Ans : OD 2012 400 260 140 0.8 0.35 0.65

^Y h C S = Y - C APS MPC APC 280. Complete the following table:

1,000 500 500 0.50 – 0.50 Consumption Savings Income Marginal
2,000 900 1,100 0.55 0.4 0.45 Expenditure (`) (`) Propensity
(`) to Consume
2,500 1,000 1,500 0.60 0.2 0.40
100 50 150 ...
278. Complete the following table : 175 75 ... ...
Income Savings Average Marginal 250 100 ... ...
(`) (`) Propensity to Propensity to 325 125 ... ...
Consumption Consumption
0 – 40 ... ... Ans : OD 2013

50 – 20 ... ...
Consumption Savings Income Marginal
100 0 ... 0.6 Expenditure (S) _Y = C + S i Propensity
150 30 0.8 ... (C) (`) (`) to Consume
200 50 ... ... (`) (MPC)
DC
b DY l
Ans : OD 2013

100 50 150 ....

Y S C ^Y - S h APC MPC
175 75 250 0.75
0 – 40 40 3 3
250 100 350 0.75
50 – 20 70 1.4 0.6
325 125 450 0.75
100 0 100 1 0.6
150 30 120 0.8 0.4 281. In an economy 75 per cent of the increase in
200 50 150 0.75 0.6 income is spent on consumption. Investment is
increased by `1,000 crore. Calculate:
(a) Total increase in income
(b) Total increase in consumption expenditure

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CH 3 : DETERMINATION OF INCOME AND EMPLOYMENT
Ans : SQP 2006
(iii) When aggregate demand is greater than
(i) (c) To minimise the deficiency in demand. aggregate supply, then inventories:
(ii) (a) lowering of margin requirement (a) fall
(iii) (a) Economic development (b) rise
(iv) (b) C, A, D, B (c) do not change
(d) first fall then rise
298. Read the paragraph given below and answer the
(iv) Identify the incorrect statement from the
questions that follow:
following:
India plans to take more steps to boost consumer
(a) autonomous investments are made by the
demand including injecting liquidity through
general public
banks and simplifying personal taxes, a top
(b) autonomous investments are not induced
government economic adviser said on Friday,
by profit motive
in a bid to raise economic growth from six-
(c) there is a positive relationship between
year low. Krishnamurthy Subramanian, Chief
induced investment and income
Economic Adviser at the finance ministry, said,
(d) induced investment is motivated by
“the government had slashed corporate taxes
expected profitability
to attract investment and was looking for ways
to boost consumer demand to support that Ans : COMP 2008
investment. In the short-run, we are taking steps (i) (c) 1.0
to increase consumption so that anticipating that As we know,
consumption, investment also goes up,” he told ` ^500 - 400h
MPC = DC = =1
Reuters in an interview. Last month Finance DY ` ^600 - 500h
Minister Nirmala Sitharaman cut corporate tax (ii) (a) increase in household demand for goods
rates from over 30% to 25% and to 15% for new and services
manufacturing companies, putting it at par or (iii) (a) fall
even ahead of some of its Asian peers. (iv) (a) autonomous investments are made by the
That landmark move has raised hopes that general public
the government might consider similar cuts to
personal taxes to put more money into the hands 299. Read the paragraph given below and answer the
of consumers and especially the middle class who questions that follow:
form the core of Prime Minister Narendra Modi’s India’s first union budget after a once-in-a-
ruling group. century global pandemic and only the fourth to
(i) Suppose in a hypothetical economy, the follow a contraction in its independent history
income rises from `500 crore to `600 crore. voted for an infrastructure-led, counter-cyclical
As a result, the consumption expenditure fiscal stimulus to mend the broken economy. The
rises from `400 crore to `500 crore. Marginal idea clearly, was to push the growth multiplier
propensity to consume, in such a case would rather than stoke consumption steroidally, even
be: if that meant stretching the glide path of fiscal
(a) 0.8 deficit. In the current milieu of weak revenues,
(b) 0.4 the government decided to normalize spending
(c) 1.0 to support growth, while making budgetary
(d) 0.6 transactions transparent. This means fiscal deficit
at 9.5% in fiscal 2021, 6.8% in fiscal 2022 and
(ii) Which of the following may lead to excess a very gradual normalization to 4.5% of gross
demand in the economy? domestic product (GDP) by fiscal 2026.
(a) increase in household demand for goods In addition to the expansionary fiscal policy,
and services the budget was also used as a platform to signal
(b) fall in Net Export demand reforms – the notable one being privatization of
(c) decrease in government demand public sector banks, transfer of non-performing
(d) decrease in household demand for goods assets to a ‘bad bank’, adequate allocation
and services. for recapitalization and increase in foreign
direct investment limit in insurance. Relentless
implementation of these measures is crucial.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 179

Y = National Income Y - 0.75Y = 4,200

Consumption Function, C = 50 + 0.5Y
or 0.25Y = 4,200
Investment, I = 2,000
(i) Y= C + I Y = 4, 200 # 100
25
Y = 50 + 0.5Y + 2,000 Income expenditure, Y = 16,800
Consumption expenditure,
or 0.5Y = 50 + 2,000 = 2,050
C = 200 + 0.75Y
Y = 2050 = 4, 100
0.5 C = 200 + 0.75(16,800)
Therefore, Equilibrium level of National Income
C = 200 + 12,600 = 12,800
= 4,100.
(iii) Given: C = 50 + 0.5Y 288. From the following data about an economy,
At Y = 4,100 calculate its equilibrium level of income:
(i) Marginal propensity to consume = 0.5
C = 50 + 0.5(4,100)
(ii) Autonomous consumption = 300
C = 50 + 2,050 = 2,100 (iii) Investment = 6,000
Therefore, Consumption expenditure at
Ans : OD 2014
equilibrium level = 2,100.
Given: Autonomous Consumption, C = 300
286. From the data given below about an economy, MPC, b = 0.5
Calculate: (a) investment expenditure and Investment, I = 6,000
(b) consumption expenditure: We know that, Y = C + I
(i) Equilibrium level of income 5,000 and C = C + b ^Y h
(ii) Autonomous consumption 500
(iii) Marginal propensity to consume 0.4 Y = 300 + 0.5Y+ 6,000

Ans : OD 2013 Y – 0.5Y = 6,300

0.5Y = 6,300
Income, Y = 5,000;
Autonomous consumption, a = 500; Y = 6300 = 12, 600
0.5
MPC, c = 0.4
(a) Now, Y= C + I 289. From the following data about an economy,
calculate its equilibrium level of income:
or Y = a + cY + I [C = a + cY
(i) Marginal propensity to consume = 0.8
or 5,000 = 500 + 0.4(5,000) + I (ii) Investment = 5,000
or 5,000 = 500 + 2,000 + I (iii) Autonomous Consumption = 500

I = 5,000 – 2,500 = 2,500 Ans : OD 2014

Investment expenditure, I = 2,500 Given: Autonomous Consumption, C = 500

MPC, b = 0.8
(b) Consumption expenditure,
Investment, I = 5,000
C = Y – I = 5,000 – 2,500 = 2,500 We know that, Y = C + I
and C = C + b(Y)
287. In an economy C = 200 + 0.75Y is the consumption
function where C is consumption expenditure and We get, Y = C + b ^Y h + I
Y is national income. Investment expenditure is Y = 500 + 0.8Y + 5000
4,000. Calculate equilibrium level of income and
Y - 0.8Y = 5500
consumption expenditure.
0.2Y = 5500
Ans : OD 2013

Consumption function, C = 200 + 0.75Y, Y = 5500 = 27, 500

0.2
Investment, I = 4,000
Now, Y = C + I
or Y = 200 + 0.75Y + 4,000

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CH 3 : DETERMINATION OF INCOME AND EMPLOYMENT

10,000 = C + ^0.8h 10, 000 + 1, 500 Income Consumption Saving MPC APC
C = 10, 000 - 8, 000 - 1, 500 = 500 ^Y h ^C h ^S h b DC l bY
C
l
DY
271. An economy is in equilibrium. From the following
100 60 40 – 0.6
data, calculate the marginal propensity to save:
(i) Income = 10,000 200 110 90 0.5 0.55
(ii) Autonomous consumption = 500 250 130 120 0.4 0.52
(iii) Consumption expenditure = 8,000
Ans : OD 2017 274. Complete the following table :
Given: Y = 10,000; C = 500 ; C = 8,000; MPS = ? Income Consumption Average Marginal
As we know, Expenditure Propensity Propensity
C = C + ^MPCh Y to save to save
8,000 = 500 + (MPC) 10,000 200 120 0.4 –
10,000 (MPC) = 7,500 400 220 – –

10,000 (MPC) = 7,500 – 250 0.5 –

7, 500 Ans :
MPC = , MPC = 0.75 OD 2012
10, 000
and MPS = 1 - MPC Income ^C h S = Y - C APS MPS
MPS = 1 - 0.75 = 0.25 ^Y h S
bY l
DS
b DY l

272. Complete the following table : 200 120 80 0.40 –

Income Marginal Saving Average 400 220 180 0.45 0.5
Propensity Propensity 500 250 250 0.50 0.7
to Consume to Consume
100 – 40 0.60 275. Complete the following table:
200 – 90 – Income Marginal Average Consumption
– – 125 0.50 Propensity Propensity Expenditure
to save to save
Ans : OD 2012
200 – 0.4 120
Income Saving Consumption APC MPC 400 – – 220
^Y h ^S h Expenditure C
bY l
DC
b DY l – – 0.48 260
_C = Y - S i
100 40 60 0.60 – Ans : OD 2012

200 90 110 0.55 0.5 Income C S = Y - C APS APC MPS

250 125 125 0.50 0.3 ^Y h
200 120 80 0.40 0.60 –
273. Complete the following table :
400 220 180 0.45 0.55 0.5
Income Saving Marginal Average 500 260 240 0.48 0.52 0.6
Propensity Propensity
to Consume to Consume 276. Complete the following table:
100 40 – 0.6
Income Consumption Average Marginal
200 – 0.5 – Expenditure Propensity Propensity
250 120 – – to save to save
200 240 0.4
Ans : OD 2012

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 181

(iii) (b) John Maynard Keynes Ans : COMP 2003

(iv) (c) 2.5 (i) perfectly

(ii) full employment
293. Read the paragraph given below and answer the (iii) (c) As we know, Multiplier (K)
questions that follow:
Some economists have suggested that in developing = 1 = 1 =4
MPS 0.25
countries like India Keynesian multiplier did not
Now, TY = K # DI
work in real terms, that is, it does not operate to
increase income and employment by a multiple of = 4 # `2, 000 = `8000 crore
the initial increase in investment. (iv) True
They have claimed that in underdeveloped
countries there was little excess capacity in 294. Read the paragraph given below and answer the
consumer goods industries and therefore supply questions that follow:
of output was inelastic. Therefore, when there is Aggregate demand is a macroeconomic concept
injection of investment and as a result through representing the total demand for goods and
successive rounds of the operation of multiplier, services in an economy. This value is often used as
aggregate demand for consumer goods increases, a measure of economic well-being or growth. Both
it results mainly in a rise in money income brought fiscal policy and monetary policy can impact
about through rise in prices and not an increase aggregate demand because they can influence the
in real national income. factors used to calculate it: consumer spending
on goods and services, investment spending on
For the working of multiplier in real terms, there
business capital goods, government spending on
should be involuntary open unemployment so
public goods and services, exports and imports.
that when aggregate demand for goods increases
as a consequence of new investment, the adequate Fiscal policy affects aggregate demand through
supply of workers must be forthcoming to be changes in government spending and taxation.
employed in the production processes of various Those factors influence employment and
industries. This condition was not being fulfilled household income, which then impact consumer
in the under-developed countries where there spending and investment. Expansionary fiscal
existed disguised unemployment, especially in the policy, usually enacted in response to recessions
agricultural sector. The disguisedly unemployed or employment shocks, increases government
workers who are supported by the joint family spending in areas such as infrastructure, education
system could not be easily shifted to be employed and unemployment benefits.
in the industries for expansion of output to Monetary policy impacts the money supply in an
achieve the multiplier effect. economy, which influences interest rates and the
inflation rate. It also impacts business expansion,
(i) The shape of the Keynesian Aggregate net exports, employment, the cost of debt etc.—
Supply before the level of full employment is all of which directly or indirectly impact aggregate
attained, is _____ elastic. demand. Monetary policy is enacted by central
(ii) According to classical Economists there banks by manipulating the money supply in an
always exists _____ equilibrium in the economy. The money supply influences interest
economy. rates and inflation, both of which are major
determinants of employment, cost of debt and
(iii) In an economy, investment is increased by
consumption levels.
`2,000 crore. What will be the change in total
income, if MPS = 0.25. (i) Following is not a component of aggregate
(a) `4,000 demand:
(b) `6,000 (a) private consumption expenditure
(c) `8,000 (b) investment expenditure
(d) `10,000 (c) government expenditure
(d) net factor income earned from abroad
(iv) Investment multiplier and Marginal propensity
to consume share a direct relationship. (True/
False)

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CH 3 : DETERMINATION OF INCOME AND EMPLOYMENT

290. From the following data about an economy, CASE BASED QUESTION
calculate its equilibrium level of income:
(i) Autonomous Consumption = 200
(ii) Marginal propensity to consume = 0.9 292. Read the paragraph given below and answer the
(iii) Investment = 1,000 questions that follow:
Ans : OD 2014
The investment multiplier is an important
concept of Keynesian Macroeconomic theory. It
Given: Autonomous consumption, C = 200 refers to the concept that any increase in public
Marginal Propensity to Consume, MPC (b) = 0.9 or private investment spending has a more than
Investment, I = 1,000 proportionate positive impact on aggregate
We know that, Y = C + I income and the general economy. The multiplier
and C = C + b ^Y h attempts to quantify the additional effects of
Y = C + b ^Y h + I investment spending beyond those immediately
measurable. The larger an investment multiplier,
Y = 200 + 0.9Y + 1000 the more efficient it is increasing and distributing
Y - 0.9Y = 1200 , wealth throughout the economy. In simple words,
the investment multiplier can be defined as the
0.1Y = 1200
ratio of the change in national income to the
Y = 1200 initial change in planned investment expenditure
0.1
that brings about it.
= 1200 # 10 = 12, 000 (i) The value of multiplier is :
1
(a) 1
Therefore, Equilibrium level of income will be MPC
12,000.
(b) 1
MPS
291. From the following data about an economy,
(c) 1
calculate its equilibrium level of income: 1 - MPS
(i) Marginal propensity to consume = 0.75 1
(ii) Autonomous Consumption = 200 (d)
MPC - 1
(iii) Investment = 6,000
(ii) If MPC = 1, the value of the multiplier is:
Ans : OD 2014 (a) 0
Autonomous consumption, C = 200 (b) 1
Marginal Propensity to Consume, MPC (b) = (c) Between 0 and 1
0.75 (d) Infinity
Investment, I = 6000 (iii) The concept of investment multiplier is rooted
We know that, Y = C + I in economic theories of _____.
and C = C + b ^Y h (a) Adam Smith
(b) John Maynard Keynes
Y = C + b ^Y h + I
(c) Alfred Marshall
Y = 200 + 0.75Y + 6,000 (d) David Ricardo
Y - 0.75Y = 6,200 (iv) If the value of marginal propensity to save
0.25Y = 6,200 is 0.4, what will be the value of Investment
multiplier?
Y = 6200 = 6, 200 # 100 (a) 2
0.25 26
(b) 4
= 24, 800 (c) 2.5
Therefore, Equilibrium level of income will be (d) 5
24,800.
Ans : SQP 2001

(i) (b) 1
MPS
(ii) (d) Infinity

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 183

strike a balance between aggregate demand and economic and comprehensive package of `20 lakh
aggregate supply. Monetary policy and Fiscal crore equivalent to 10 percent of India’s GDP with
policy are very different but how they interact an aim to encourage business, attract investments
with each other matters for the economy. While and strengthen the resolve for ‘Make in India’.
each is independent from the other, new challenges This was stated by Shri Anurag Singh Thakur,
call for them to work together. Monetary and Union Minister of State for Finance & Corporate
Fiscal policy are two important tools to keep the Affairs in a written reply to a question in Rajya
economy healthy. Both influence the economy Sabha. The Minister stated that on the monetary
but in different ways. Monetary policy is about front, the Reserve Bank of India (RBI) responded
keeping the prices of the goods and services with a mix of conventional and unconventional
stable in the economy. It is the Central bank’s monetary and liquidity measures to mitigate the
obligation to make sure that inflation remains negative economic fallout of COVID 19. The
low, stable and predictable. Fiscal policy refers policy rates have been significantly reduced and
to the economic decisions that the Government around `9.57 lakh crore or 4.7 per cent of GDP
takes. Governments can decide to spend money to have been injected since February 2020 to enhance
provide public services, support the economy and the credit flow in the economy.
reduce inequalities. They can collect this money (i) This was not the objective of ‘Make in India’
through taxes or by borrowing from financial program.
markets. (a) Promote investment
(i) Which one of the following is a fiscal measure (b) Provide employment opportunities
to maintain price stability in the economy? (c) To minimise the deficiency in demand.
(a) Taxes (d) Enhance the development of skills.
(b) Bank rate (ii) A situation of deficient demand can be
(c) Open market operations corrected by using the following monetary
(d) Moral Suasion instruments:
(ii) Which one of the following is a qualitative (a) lowering of margin requirement
tool under monetary policy? (b) increasing of CRR
(a) Moral suasion (c) increasing of repo rate
(b) Open market operations (d) selling of securities in the open market
(c) Bank rate (iii) Enhancing credit flow in the economy leads
(d) Cash reserve ratio to
(iii) The excess of aggregate demand over (a) Economic development
aggregate supply at the full employment level (b) Inequalities of income
is known as _____. (Inflationary gap/ (c) Economic crisis
deflationary gap) (d) Savings
(iv) During the situation of excess demand, the (iv) Match the following:
Central Bank _____. (increases/decreases)
the tax rate on income and profits. Column I Column II

Ans : FOREIGN 2004

1. 45 degree line A. Parallel to X axis

(i) (a) net factor income earned from abroad 2. Shape of B. C = Y

(ii) (a) C, A, D, B autonomous
(iii) Inflationary gap investment curve
(iv) Increases 3. Equilibrium level C. AS curve

297. Read the paragraph given below and answer the 4. Break even point D. AD = AS
questions that follow: (a) B, A, C, D
The Government has implemented a judicious (b) C, A, D, B
mix of fiscal and monetary policies to mitigate the (c) D, B, A, C
negative impact of COVID-19 on the economy. (d) C, D, B, A
On May 12 2020, Government announced the
Atma Nirbhar Bharat Package (ANBP), a special

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CH 3 : DETERMINATION OF INCOME AND EMPLOYMENT

(ii) Match the following: particular activities, saving by households etc.

The simple investment multiplier shows the effects
Column I Column II of an injection of new spending on the final size of
1. Aggregate A. Changes in a country’s national income.
Demand government Understanding the multiplier concept is important
spending. in terms of describing how national income
changes and how policy makers can assess the
2. Fiscal Policy B. Planned or desired
likelihood that their policies are successful.
level of savings.
(i) Formula for calculating the multiplier is
3. Monetary C. Total demand for
Policy goods and services (a) K = DY
DI
in an economy. 1
(b) K =
4. Dis-savings D. Changes in interest 1 - MPC
rates. (c) K = 1
MPS
(a) A, B, D, C (d) All of the above
(b) C, B, A, D
(c) B, D, A, C (ii) When AD is greater than AS then:
(d) C, A, D, B (a) there will be increase in planned level of
inventories
(iii) Following is not a characteristic of autonomous (b) producers will increase the level of
investment: production
(a) it remains constant irrespective of the (c) more factors of production will be
level of income. employed
(b) it is income elastic. (d) both (b) and (c)
(c) it is generally done by the government
sector. (iii) Identify the incorrect statement from the
(d) it is done for public welfare. following:
(a) there exists an inverse relation between
(iv) At the break even point, savings is equal to MPS & K
_____ (zero/one). (b) there exists a direct relation between K
Ans : DELHI 2003 and MPC
(c) higher the value of MPC, lower will be
(i) (d) net factor income earned from abroad
the value of K
(ii) (d) C, A, D, B
(d) both (b) and (c)
(iii) (b) it is income elastic.
(iv) zero (iv) In a situation of deficient demand, the
government will _____. (increase/decrease)
295. Read the paragraph given below and answer the the rate of taxes.
questions that follow:
Ans : OD 2002
Every time when there is an injection of new
demand into the circular flow of income there is (i) (d) All of the above
likely to be a multiplier effect. This is because (ii) (d) both (b) and (c)
an injection of extra income leads to more (iii) (c) higher the value of MPC, lower will be
spending, which creates more income and so on. the value of K
The multiplier effect refers to the increase in final (iv) decrease
income arising from any new injection of spending.
The size of the multiplier depends upon a 296. Read the paragraph given below and answer the
household’s marginal decisions to spend, called questions that follow:
the marginal propensity to consume (MPC), or Both monetary and fiscal policy play a key role
to save, called the marginal propensity to save in maintaining price stability in the economy.
(MPS). It is important to remember that when Monetary policy is the policy adopted by the
income is spent, this spending becomes someone Central bank to control credit and money supply
else’s income and so on. Marginal propensities in the economy.
show the proportion of extra income allocated to On the other hand, Fiscal policy is the revenue and
expenditure policy adopted by the government to

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 185

(i) Identify the incorrect statement from the consumption smoothing. Consumption smoothing
following: is the practice of optimizing over standard
(a) multiplier is directly related to MPC of living by ensuring proper balance between
(b) multiplier is inversely related to MPS spending and saving during the different phases
(c) higher the value of MPS, higher is the of our lives. Thus, Consumption function is the
value of multiplier functional relationship between consumption
(d) lower the value of MPC, lower is the and income. On the other hand, the functional
value of multiplier relationship between saving and income is called
(ii) Choose the correct pair from the following: Saving function. It expresses the relationship
between saving and the level of income. It is
Column I Column II simply the desire of households to hoard a part
of their total disposable income. In simple words,
1. Fiscal measures A. Increase in
Saving function relates the level of saving to the
to reduce excess LRR
level of income. It is the desire or tendency of the
demand
households to save at a given level of income. Thus,
2. Monetary B. Consumption consumption plus saving is equal to income. Since
measures to demand and income equals consumption plus saving, Saving is
reduce excess investment the difference between income and consumption.
demand demand Therefore, to find saving at each level of income,
3. Net demand for C. Net Exports consumption is subtracted from income.
domestic goods (i) The ratio of change in consumption to change
and services by in income is known as average propensity to
the rest of the consume. (True/False)
world
(ii) If in an economy 75% of the increase in income
4. Aggregate D. Reduction in is spent on consumption, then marginal
demand Government propensity to save is _____.
Expenditure
(iii) Find out the correct pair:
(a) 1-A
(b) 2-B Column I Column II
(c) 3-C 1. APC A. DC
(d) 4-D DY
(iii) The revenue and expenditure policy of the 2. MPC B. C
government which is used to correct situations Y
of excess and deficient demand is known as
3. K C. 1
_____. 1 - MPC
(a) monetary policy
(b) fiscal policy 4. MPS D. 1
MPC
(c) both (a) and (b)
(d) neither (a) nor (b) (iv) What will be the value of investment
Ans : DELHI 2005 multiplier if in an economy the equilibrium
level of income is `12,000 crore and the ratio
(i) (c) higher the value of MPS, higher is the
of MPC and MPS is 3 : 1?
value of multiplier
(ii) (c) 3-C Ans : OD 2007
(iii) (b) fiscal policy (i) False
300. Read the paragraph given below and answer the (ii) Here MPC = 75% = 0.75
questions that follow: As we know, MPS = 1 – MPC
Consumption function is a relationship = 1 - 0.75 = 0.25
between current disposable income and current
(iii) 3-C
consumption. It is intended as a simple description
(iv) Given: MPC : MPS = 3 : 1
of household behaviour that captures the idea of
As we know, MPC + MPS = 1

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CH 3 : DETERMINATION OF INCOME AND EMPLOYMENT

3x + 1x = 1 (iv) Low output level due to unemployment

and reduced investment is the outcome of
4x = 1
_____. (excess demand/deficient demand)
x = 0.25
Ans : FOREIGN 2012
Here, MPC : MPS = 0.25 × 3 : 0.25 = 0.75 :
0.25 (i) (b) Savings by households
Now, Investment Multiplier, (ii) Autonomous
(iii) (b) Aggregate demand is more than aggregate
K= 1 = 1 = 4
MPS 0.25 supply
(iv) Deficient demand
301. Read the paragraph given below and answer the
questions that follow: www.nodia.in
Aggregate Demand and Aggregate supply are
two main components of macro economic theory.
The balance between them directly influence the
general price level in the economy. Aggregate
demand refers to the total demand for final
goods and services in an economy during a
year. Aggregate Demand is very important for
economists as it provides the tool to measure the
strength of an economy. Generally economists
evaluate the total market for things produced in
an economy for a year. It is usually believed that
if the aggregate demand is high then the economy
is strong, meaning it can sell many products. On
the other hand, aggregate supply refers to the
monetary value of all final goods and services
purchasable by an economy over a specific period.
It reflects the movement of goods and services in
the economy. Aggregate supply is nothing more
than national income because the money value of
final goods and services equals net value added.
The synergy between aggregate demand and
aggregate supply determines the general price
level in the economy.
(i) Which of the following is not the component
of Aggregate demand.
(a) Consumption Expenditure by households
(b) Savings by households
(c) Government Consumption expenditure
(d) Net exports
(ii) _____ consumption that is unaffected by
the level of income. (Autonomous/Induced)
(iii) Producers will enhance the level of output
and production if:
(a) Aggregate demand is less than aggregate
supply
(b) Aggregate demand is more than aggregate
supply
(c) Aggregate demand is equal to aggregate
supply
(d) None of the above

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 187

CHAPTER 4
GOVERNMENT BUDGET AND THE ECONOMY

for managing its finances and addressing fiscal

SUMMARY priorities.
(i) Budget receipt : Budget receipt includes
revenue and capital receipts. It refers to the
1. BUDGET
estimated money receipts of the government
It is an annual statement of the estimated receipts from all sources during the fiscal year.
and expenditure of the government over the fiscal (ii) Budget expenditure : It refers to the estimated
year which runs from 1st April to 31st March. expenditure to be incurred by the government
under different heads in a fiscal year. It
1.1 Objectives of Government Budget
includes revenue and capital expenditure.
The government budget is a crucial tool for
achieving various socio-economic goals and 2. REVENUE RECEIPT
ensuring the balanced growth of the economy. Revenue receipts refer to those receipts which do
It aims to address multiple economic challenges not either create a liability or lead to reduction
effectively in assets.
(i) Re-allocation of resources : The government Features of revenue receipt are as follows :
corrects the allocation of resources through (i) These receipts do not create a liability for the
its tax policy due to social and economic government.
consideration. (ii) They do not cause any reduction in the assets.
(ii) Re-distribution of income and wealth :
Through its tax and expenditure policy, the 3. CLASSIFICATION OF REVENUE RECEIPT
government attempts to reduce inequalities of
Revenue receipts are the funds collected by the
income.
government without creating liabilities or reducing
(iii) Economic stability : The government tries to
assets. These are primarily generated through tax
prevent business fluctuations and maintain
and non-tax sources.
economic stability.
(iv) Management of public enterprises : 3.1 Tax Revenue
Government undertakes commercial activities
Revenue that arises on account of taxes levied
that are of the nature of natural monopolies,
by the government. The taxes imposed by the
heavy manufacturing etc. through its public
government are of two types:
enterprise.
(i) Direct taxes : Direct taxes are a significant
1.2 Divisions of Government Budget source of government revenue, designed to
ensure equity and fairness in taxation by
Government Budget can be dividend into two
targeting individual income and property.
types are as follows :
(i) Revenue Budget : It includes revenue receipts (a) These taxes are paid by the same person
and revenue expenditure of the government. on whom they been imposed.
(ii) Capital Budget : It includes capital receipts (b) They are levied on the property and
and capital expenditure of the government. income of persons.
(c) They are progressive in nature, e.g.,
1.3 Broad Components of the Budget income tax, corporation tax etc.
The government budget is divided into two (ii) Indirect taxes : Indirect taxes are designed
main components to provide a clear structure to collect revenue from consumers indirectly

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CH 4 : GOVERNMENT BUDGET AND THE ECONOMY

through goods and services, ensuring broader 1. It is that expenditure which does not create
participation in tax collection. assets nor lead to any reduction in liability of
1. The burden of these taxes can be shifted. the government. Example, payment of salary
These are levied on one person but paid and pension, union grants to state etc.
by another. 2. These are incurred for normal functioning of
2. These affect the income and property the government and is recurring in nature.
of persons through their consumption
expenditure. Example, customs duty, 6. CAPITAL EXPENDITURE
sales tax etc. Capital expenditure refers to government
Basis of classification of direct and indirect spending that leads to the creation of assets or
tax is that whether the burden of tax can be reduction in liabilities, contributing to the long-
shifted to others or not. If the burden cannot term development of the economy.
be shifted then it is a direct tax otherwise 1. Creates Assets or Reduces Liabilities :
indirect tax. Examples include repayment of borrowings
and spending on the acquisition of capital
3.2 Non-tax Revenue
assets like infrastructure.
Non-tax revenue refers to the receipts of the 2. Development-Oriented : These expenditures
government from sources other than taxation, focus on building and enhancing economic
contributing to public finances without imposing capacity.
a direct burden on taxpayers.
Sources : 7. DEFICIT IN GOVERNMENT BUDGET
1. Interest : Income earned from loans given by A budget may be in surplus, in deficit or balanced.
the government. 1. Surplus budget : It is one where the estimated
2. Profits and Dividends : Revenue from public revenue of the government is greater than the
sector enterprises. estimated expenditure. This type of budget is
3. Gifts and Grants : Contributions received good for controlling inflation.
from foreign governments or organizations. 2. Balanced budget : It is one where the estimated
4. Special Assessment : Charges levied for revenue equals the estimated expenditure.
specific services or benefits. 3. Deficit budget : It is one where the estimated
5. Administrative Revenue : Includes fees, fines, revenue is less than the estimated expenditure.
penalties, etc., collected by the government. This type of budget is good for fighting
4. CAPITAL RECEIPTS recession or when there is deficient demand
in the economy.
These are those monetary receipts which either
create a liability for the government or cause 8. MEASURES OF GOVERNMENT DEFICIT
reduction in the assets of the government. Government deficits indicate the shortfall between
Sources of capital receipts: revenue and expenditure, necessitating corrective
1. Recovery of loans (from state governments, actions to maintain fiscal balance.
union territories etc.).
8.1 Revenue Deficit
2. Loans and borrowings (from general public,
RBI, foreign governments and other bodies). It refers to excess of government revenue
3. Disinvestment in public sector enterprises. expenditure over revenue receipts.
Basis of classification of government receipts into Revenue deficit = Total Revenue Expenditure –
revenue and capital receipts is whether they lead Total Revenue Receipts
to any increase in liability or reduction in assets Implications:
of the government. If this happens then it is a (i) It implies that government is spending more
capital receipt. than the current income.
(ii) This implies that government will have to
5. REVENUE EXPENDITURE borrow or use savings of other sectors to
Revenue expenditure refers to the recurring finance a part of its consumption expenditure.
expenses incurred by the government for its (iii) Reduction in expenditure often implies
routine functioning without creating any assets or reduction in productive capital or welfare
reducing liabilities. expenditure.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 189

Measures to reduce revenue deficit: (c) Fiscal deficit is the sum of primary deficit and
(i) Reduction in revenue expenditure. interest payment.
(ii) Increase receipts from various tax and non- (d) Fiscal deficit is the difference of primary
tax revenue sources. deficit and interest payment.

8.2 Fiscal Deficit Ans : FOREIGN 2014

It is the excess of governments total expenditure (c) Fiscal deficit is the sum of primary deficit and
over total receipts excluding borrowings. Fiscal interest payment.
deficit = Total expenditure — Total receipts
2. Which of the following is not an example of direct
excluding borrowings
RRevenue Exp.V R V tax?
S W S Revenue Receipts W (a) Corporate tax
=S + W-S + W
SS Capital Exp. WW SSNon - Debt Capital ReceitpsWW (b) Wealth tax
T X T X (c) Entertainment tax
(d) Income tax
Implication:
(i) Fiscal deficit indicates the total borrowing Ans : FOREIGN 2009
requirements of the government. (c) Entertainment tax
(ii) Large borrowings create a large burden of
interest payments and loan repayment in the 3. Which of the following is a capital receipt?
future. (a) Profits
(iii) If borrowing is from RBI, then it could imply (b) Fees and fines
deficit financing (printing of currency notes) (c) Interest
which could lead to inflation. (d) Disinvestment
(iv) Foreign borrowings may also lead to economic
Ans : SQP 2011
and political interference.
Measures to reduce fiscal deficit: (d) Disinvestment
(i) Borrowings
4. Which one of the following is a combination of
(ii) Disinvestment
direct taxes?
(iii) Improved fiscal discipline
(a) Excise duty and Wealth tax
8.3 Primary Deficit (b) Excise duty and Income tax
(c) Service tax and Income tax
It is equal to fiscal deficit less interest payment. (d) Wealth tax and Income tax
Primary deficit = Fiscal deficit – Interest payment
Ans : COMP 2014
Significance:
(i) It indicates how much government borrowing (d) Wealth tax and Income tax
is going to meet expenses other than interest
5. Borrowing in government budget is:
payments.
(a) Fiscal deficit
(iii) High primary deficit indicates the fiscal
(b) Revenue deficit
irresponsibility of the government.
(c) Primary deficit
(ii) Low primary deficit implies that the
(d) None of the above
government is borrowing largely to make
previous interest payments. Ans : DELHI 2018

(a) Fiscal deficit

6. Which of the following is not an objective of

MULTIPLE CHOICE QUESTION government budget?
(a) Reallocation of resources
(b) Economic stability
1. Which of the following statements is true? (c) Generation of Employment
(a) Fiscal deficit is the difference between total (d) Management of public enterprises
expenditure and total receipts.
Ans : OD 2020
(b) Primary deficit is the difference between total
receipt and interest payments. (c) Generation of Employment

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CH 4 : GOVERNMENT BUDGET AND THE ECONOMY

30. Fiscal deficit equals : (b) (ii) only

(a) Primary deficit minus interest payments
(b) Primary deficit plus interest payments 35. Identify which of the following is an example of
(c) Total budget expenditure minus total budget non-debt capital receipt.
receipts (a) Financial aid from MNC for victims in flood
(d) None of the above affected area.
(b) Borrowings from International Monetary
Ans : OD 2013
Fund (IMF).
(b) Primary deficit plus interest payments (c) Recovery of loans from State Governments.
(d) Dividend paid by State Bank of India (SBI)
31. Primary deficit is borrowing requirements of to the Government.
government for making _____. Ans : OD 2021
(a) Interest payments
(b) Other than interest payments (c) Recovery of loans from State Governments.
(c) All types of payments 36. ‘Budget is used as an important policy instrument
(d) Some specific payments to combat fluctuations in an economy.’
Ans : DELHI 2018 In the light of above lines, identify the related
objective of government budget.
(b) Other than interest payments
(a) Allocation of resources
32. Dividends received from Public Sector (b) Stabilization of prices
Undertakings (PSU) are a part of the government’s (c) Growth of the economy
_____. (d) Redistribution of income
(a) Non-tax Revenue receipts Ans : OD 2021
(b) Tax Receipts
(c) Capital Receipts (b) Stabilization of prices
(d) Capital Expenditure 37. If the value of export of merchandise is `1,500
Ans : COMP 2019 crore and Imports of goods are 20 percent more
than exports. The value of imports and trade
(a) Non-tax Revenue receipts
deficit will be ` _____ corer and ` _____
33. In the Annual Budget 2022-23, the Government corer respectively.
of India set up disinvestment targets of `65,000 (a) `1800, `3300
corer”. Such proceeds from disinvestment can be (b) `1800, `300
classified as _____ receipts in the Government (c) `1200, `300
Budget as it leads to _____ of the Government. (d) `1200, `3300
(a) Capital, decrease in assets Ans : OD 2021
(b) Revenue, increase in assets
(c) Capital, increase in liabilities (b) `1800, `300
(d) Revenue, decrease in liabilities Import of Goods = 1500 # 120 = `1,800
100
Ans : DELHI 2023
Trade Deficit = Import - Export
(a) Capital, decrease in assets = 1800 - 1500 =`300
34. In order to tackle the problem of rising general 38. What is the definition of Revenue Deficit and
price level in an economy, government may come how is it calculated in the context of government
up with a surplus budget to achieve the budget finances?
objective of _____. (a) Excess of total revenue receipts over total
(i) Reallocation of resources revenue expenditure
(ii) Price stability (b) Excess of total revenue expenditure over total
(iii) Redistribution of income revenue receipts
Alternatives: (c) Difference between revenue receipts and
(a) (i) only (b) (ii) only capital receipts
(c) only (iii) (d) (i) and (iii) (d) Excess of total borrowings over total
Ans : OD 2023 expenditure

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 191

18. The non-tax revenue in the following is : 24. Which one of the following is an indirect tax?
(a) Export duty (a) Profit Tax
(b) Import duty (b) Wealth Tax
(c) Dividends (c) Customs duty
(d) Excise (d) Gift tax
Ans : SQP 2004 Ans : COMP 2009

(c) Dividends (c) Customs duty

19. Direct tax is called direct because it is collected 25. Borrowing in government budget is :
directly from : (a) Revenue deficit
(a) The producers on goods produced (b) Fiscal deficit
(b) The sellers on good sold (c) Primary deficit
(c) The buyers of goods (d) Deficit in taxes
(d) The income earners
Ans : DELHI 2002
Ans : COMP 2007
(b) Fiscal deficit
(d) The income earners
26. Primary deficit in a government budget is :
20. What is the objective of Government Budget? (a) Revenue expenditure – Revenue receipts
(a) Economic Development (b) Total expenditure – Total receipts
(b) Redistribution of Income and Wealth (c) Revenue deficit – Interest payments
(c) Balance Regional Development (d) Fiscal deficit – Interest payments
(d) All of the above
Ans : OD 2011
Ans : DELHI 2008
(d) Fiscal deficit – Interest payments
(d) All of the above
27. Which of the following is a correct measure of
21. Which of the following is not a revenue receipt? primary deficit?
(a) Recovery of loans (a) Fiscal deficit minus revenue deficit
(b) Foreign grants (b) Revenue deficit minus interest payments
(c) Profits of public enterprises (c) Fiscal deficit minus interest payments
(d) Wealth tax (d) Capital expenditure minus revenue
expenditure
Ans : OD 2010

(a) Recovery of loans Ans : SQP 2018

(c) Fiscal deficit minus interest payments

22. What is period for which a government budget is
prepared? 28. Fiscal deficit equals :
(a) 2 years (a) Interest payments
(b) 1 year (b) Borrowings
(c) 5 years (c) Interest payments less borrowing
(d) None of the above (d) Borrowings less interest payments
Ans : FOREIGN 2003 Ans : COMP 2020

(b) 1 year (b) Borrowings

23. Which of the following is a source of capital 29. Primary deficit is the difference between _____.
receipt? (a) Fiscal deficit and revenue deficit
(a) Foreign donations (b) Revenue deficit and interest payment
(b) Dividends (c) Total expenditure and total revenue receipts
(c) Disinvestment (d) Fiscal deficit and interest payment
(d) Indirect taxes
Ans : DELHI 2017
Ans : SQP 2005
(d) Fiscal deficit and interest payment
(c) Disinvestment

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CH 4 : GOVERNMENT BUDGET AND THE ECONOMY

7. Which one of the following is an indirect tax? (c) Borrowings

(a) Custom duty
(b) State duty 13. Which one of the following is a debt creating
(c) Corporate tax capital receipt?
(d) Wealth tax (a) Disinvestment
(b) Borrowings
Ans : FOREIGN 2017
(c) Dividends
(a) Custom duty (d) Interest

8. Which one of the following is an example of Non Ans : SQP 2022

tax revenue? (b) Borrowings

(a) State duty
(b) Excise duty 14. If interest paid by the government is `20 corer,
(c) Borrowings which is 25% of primary deficit, then the
(d) Dividends borrowings of the government will be:
(a) `40 cr.
Ans : SQP 2013
(b) `80 cr.
(d) Dividends (c) `60 cr.
(d) `25 cr.
9. Which one of the following is a revenue expenditure
in a government budget? Ans : COMP 2021

(a) Interest payments (b) `80 cr.

(b) Construction projects
(c) Repayment of loans 15. Revenue deficit is the difference between:
(d) Purchase of land (a) Total budget expenditure and Total budget
receipts.
Ans : COMP 2015
(b) Total budget expenditure and Total budget
(a) Interest payments receipts excluding borrowing.
10. Fiscal deficit – _____ = Primary deficit. (c) Total revenue expenditure and Total revenue
(Fill up the blank with a correct alternative) receipts.
(a) Subsidies (d) Fiscal deficit and interest payments.
(b) Dividends Ans : DELHI 2021
(c) Interest payments
(d) Revenue deficit (c) Total revenue expenditure and Total revenue
receipt
Ans : DELHI 2012

(c) Interest payments 16. Fees and fines collected by the government comes
under the category of:
11. Which one of the following is a capital receipt? (a) Direct tax revenue
(a) Interest (b) Indirect tax revenue
(b) Profits (c) Capital receipts.
(c) Recovery of loans (d) Non-tax revenue
(d) Fees Ans : OD 2023
Ans : OD 2016 (d) Non-tax revenue
(c) Recovery of loans
17. Primary deficit equals :
12. Which of the following sources of receipts in (Choose the correct alternative)
government budget increases its liabilities? (a) Borrowings
(a) Direct taxes (b) Interest payments
(b) Recovery of loans (c) Borrowings less interest payments
(c) Borrowings (d) Borrowings and interest payments both
(d) Dividend from public sector undertakings Ans : FOREIGN 2001
Ans : FOREIGN 2019 (c) Borrowings less interest payments

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 193
Ans : SQP 2000 Ans : OD 2007

(b) Excess of total revenue expenditure over total (c) It indicates the total borrowing requirements
revenue receipts of the government
Revenue deficit refers to the excess of government Fiscal deficit is the total borrowing requirement
revenue expenditure over revenue receipts. It of the government when total expenditure exceeds
shows that the government is spending more on total receipts, excluding borrowings.
its current expenses than it earns.
42. What is the significance of Primary Deficit in
39. Among the following, which represents a Capital government budgeting and how is it calculated?
Receipt and why is it classified as such? (a) It measures the total debt of the government.
(a) Interest earned on loans given by the (b) It indicates borrowing used for expenses other
government than interest payments.
(b) Income tax collected from individuals (c) It shows the difference between revenue and
(c) Loans and borrowings from the RBI capital expenditure.
(d) Penalties and fines collected by the (d) It equals fiscal deficit plus interest payments.
government
Ans : FOREIGN 2008
Ans : COMP 2001
(b) It indicates borrowing used for expenses other
(c) Loans and borrowings from the RBI than interest payments
Loans and borrowings from the RBI are capital Primary deficit is calculated as
receipts because they create a liability for the Fiscal Deficit−Interest Payments and highlights
government, distinguishing them from revenue the government borrowing used for non-interest
receipts. expenditures.

40. In government budgeting, what does a Balanced 43. Which of the following is NOT a source of Non-
Budget signify and why is it important for fiscal Tax Revenue and why is it excluded from this
discipline? classification?
(a) Estimated revenue exceeds estimated (a) Gifts and grants
expenditure (b) Profits and dividends
(b) Estimated revenue equals estimated (c) Customs duty
expenditure (d) Administrative fees
(c) Estimated expenditure exceeds estimated
Ans : FOREIGN 2002
revenue
(d) Revenue receipts equal capital receipts (c) Customs duty
Customs duty is a tax revenue source, while gifts,
Ans : DELHI 2004
grants and administrative fees are considered
(b) Estimated revenue equals estimated non-tax revenue because they are not generated
expenditure through taxation.
A balanced budget means the government’s
estimated revenue matches its estimated 44. What does Revenue Deficit imply for the
expenditure, ensuring no fiscal deficit or surplus government’s financial health and spending
and maintaining fiscal stability. patterns?
(a) Government is saving more than it spends.
41. Which of the following statements accurately (b) Government is spending more than its current
describes Fiscal Deficit and its implications for income.
the economy? (c) Borrowings of the government are reduced.
(a) It measures the total savings of the (d) Government is incurring high capital
government. expenditure.
(b) It equals revenue expenditure minus revenue
Ans : SQP 2010
receipts.
(c) It indicates the total borrowing requirements (b) Government is spending more than its current
of the government. income
(d) It represents the difference between revenue Revenue deficit indicates the government is
receipts and capital receipts. spending more on revenue expenditure than it
earns from revenue receipts, leading to borrowing

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CH 4 : GOVERNMENT BUDGET AND THE ECONOMY

or using savings. (b) Whether the burden of tax can be shifted to

others
45. Which measure can effectively reduce a Fiscal
(c) Whether they create liabilities or assets
Deficit and why is it considered a viable solution?
(a) Reduction in revenue receipts (d) Whether they are progressive or regressive
(b) Borrowings from foreign governments Ans : OD 2009
(c) Disinvestment in public sector enterprises
(b) Whether the burden of tax can be shifted to
(d) Increase in revenue expenditure
others
Ans : COMP 2003 Taxes are classified as direct or indirect based
(c) Disinvestment in public sector enterprises on whether the burden can be shifted. Direct
Disinvestment in public sector enterprises taxes are borne by the person paying them, while
generates funds for the government without indirect taxes are shifted to consumers.
increasing liabilities, making it an effective way 49. In the context of the Government Budget, which
to reduce fiscal deficit. division specifically refers to the classification that
46. Which of the following is NOT an objective of the includes revenue and capital receipts and why is it
Government Budget and how does it differ from essential for understanding government finances?
the stated goals of resource reallocation, income (a) Revenue Budget
redistribution and economic stability? (b) Capital Budget
(a) Re-allocation of resources (c) Budget Receipt
(b) Reduction in business fluctuations (d) Budget Expenditure
(c) Management of private enterprises Ans : COMP 2014
(d) Redistribution of income and wealth
(c) Budget Receipt
Ans : SQP 2011 Budget Receipt includes both revenue and capital
(c) Management of private enterprises receipts, covering all sources of government
The government budget focuses on managing income during the fiscal year, which is crucial for
public enterprises, not private enterprises. The estimating fiscal health.
other options, like resource reallocation and 50. What is the primary feature of Revenue Receipts
income redistribution, are integral to achieving and why are they distinguished from Capital
socio-economic goals. Receipts in terms of liabilities and assets?
47. What does a Surplus Budget indicate in terms of (a) They create liabilities for the government.
government revenue and expenditure and when is (b) They lead to a reduction in government assets.
it typically used? (c) They do not create liabilities or reduce assets.
(a) Estimated revenue is less than estimated (d) They are used for capital expenditure only.
expenditure Ans : DELHI 2018
(b) Estimated revenue is greater than estimated
(c) They do not create liabilities or reduce assets
expenditure
Revenue receipts are funds collected by the
(c) Borrowing requirements of the government
government without increasing liabilities or
(d) Total receipts equal total expenditure
reducing assets, making them different from
Ans : DELHI 2005 capital receipts.
(b) Estimated revenue is greater than estimated 51. What is the primary basis for classifying taxes as
expenditure Direct or Indirect and how does this classification
A surplus budget occurs when estimated revenue affect the incidence and burden of taxation?
exceeds expenditure, which is often used to control (a) Whether the tax is levied on individuals or
inflation in the economy. corporations
48. On what basis are taxes classified as direct or (b) Whether the burden of the tax can be shifted
indirect and how does this classification affect tax to others
incidence? (c) Whether the tax contributes to revenue or
capital receipts
(a) Whether they are levied on income or
(d) Whether the tax is progressive or regressive
property

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 195
Ans : OD 2020
(d) The government is reducing its revenue
(b) Whether the burden of the tax can be shifted expenditure.
to others Ans : COMP 2015
Direct taxes are borne by the individual or entity on
whom they are levied, while indirect taxes allow the (b) The government is spending more than its
burden to be shifted to others, such as consumers. current income
Revenue deficit implies that the government
52. In the context of Capital Receipts, which of the is spending more on revenue expenditure than
following is an accurate example and how does it earns through revenue receipts, leading to
it reflect the creation of government liabilities or potential borrowing.
reduction in assets?
(a) Interest earned on loans given by the 55. How does the concept of Fiscal Deficit differ from
government other budget deficits and what does it primarily
(b) Income tax collected from individuals indicate about the government’s borrowing
(c) Loans and borrowings from the RBI requirements?
(d) Penalties and fines collected by the (a) It measures the total savings of the
government government.
Ans : FOREIGN 2017 (b) It equals revenue expenditure minus revenue
receipts.
(c) Loans and borrowings from the RBI
Loans and borrowings from the RBI are (c) It indicates the total borrowing requirements
capital receipts as they create liabilities for the of the government.
government, differentiating them from revenue (d) It represents the difference between revenue
receipts. receipts and capital receipts.

53. What is the significance of Revenue Expenditure Ans : DELHI 2012

in the government’s financial management and (c) It indicates the total borrowing requirements
how does it impact routine functioning without of the government
creating assets or reducing liabilities? Fiscal deficit reflects the total amount the
(a) It is spent on creating long-term capital government needs to borrow to cover its
assets. expenditures when its total receipts (excluding
(b) It helps in managing recurring expenses like borrowings) fall short.
salaries and pensions.
(c) It is used to finance public enterprises. 56. What does the concept of Primary Deficit
(d) It leads to a reduction in government reveal about government borrowing and how is
liabilities. it calculated to exclude interest payments from
fiscal deficit?
Ans : SQP 2013
(a) It measures the total debt of the government.
(b) It helps in managing recurring expenses like
(b) It indicates borrowing used for expenses other
salaries and pensions
than interest payments.
Revenue expenditure is used for the day-to-day
functioning of the government and does not lead (c) It shows the difference between revenue and
to the creation of assets or reduction of liabilities. capital expenditure.
(d) It equals fiscal deficit plus interest payments.
54. What is the key implication of a Revenue Deficit
in the context of government finances and what Ans : OD 2016
does it signify about the government’s spending (b) It indicates borrowing used for expenses other
relative to its revenue income? than interest payments
(a) The government is saving more than it Primary deficit is calculated as Fiscal Deficit –
spends. Interest Payments and highlights the borrowing
(b) The government is spending more than its required for non-interest expenses.
current income.
(c) The government is investing heavily in capital
projects.

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CH 4 : GOVERNMENT BUDGET AND THE ECONOMY

(iii) Indirect taxes are regressive in nature, 83. Consider the following statements about Fiscal
affecting lower-income groups more heavily. Deficit :
(iv) Examples of indirect taxes include income tax (i) Fiscal deficit measures the total borrowing
and corporation tax. requirements of the government.
Which of the above statements are correct? (ii) It is calculated as total expenditure minus
(a) 1, 2 and 3 only total receipts, including borrowings.
(b) 2 and 4 only (iii) A high fiscal deficit may lead to inflationary
(c) 1, 3 and 4 only pressure in the economy.
(d) 1, 2, 3 and 4 (iv) Borrowing to cover fiscal deficit can increase
the burden of interest payments.
Ans : OD 2022
Which of the above statements are correct?
(a) 1, 2 and 3 only (a) 1, 3 and 4 only
Indirect taxes are levied on goods and services, (b) 1, 2 and 4 only
their burden is shifted to consumers and they are (c) 2 and 3 only
regressive. Income tax and corporation tax are (d) 1, 2, 3 and 4
direct taxes, not indirect.
Here are new types of statement-based questions Ans : COMP 2016

with answers and explanations, derived from the (a) 1, 3 and 4 only
given matter. Fiscal deficit is calculated as total expenditure
minus total receipts excluding borrowings. It
82. Which of the following statements correctly indicates borrowing needs and may lead to
differentiate Revenue and Capital Receipts? inflation and higher interest burdens.
(i) Revenue receipts neither create liabilities nor
reduce assets, while capital receipts either 84. Identify the correct statements about Fiscal
create liabilities or reduce assets. Deficit and its significance :
(ii) Revenue receipts include taxes and non- (i) Fiscal deficit reflects the difference between
tax revenue, while capital receipts include total expenditure and total receipts, including
borrowings and disinvestment. borrowings.
(iii) Revenue receipts are used for long-term (ii) It measures the total borrowing requirements
development projects, whereas capital of the government.
receipts are used for day-to-day government (iii) A high fiscal deficit may lead to inflation due
operations. to increased borrowing and spending.
(iv) Both revenue and capital receipts involve (iv) Fiscal deficit reduction requires higher
creating liabilities for the government. borrowing and lower spending.
(a) 1 and 2 only (a) 1 and 3 only
(b) 1, 2 and 3 only (b) 2 and 3 only
(c) 3 and 4 only (c) 2, 3 and 4 only
(d) 2 and 4 only (d) 1, 2 and 3 only
Ans : FOREIGN 2021 Ans : COMP 2000

(a) 1 and 2 only (d) 1, 2 and 3 only

Statements 1 and 2 are correct. Revenue receipts Statements 1, 2 and 3 are correct. Fiscal deficit
do not create liabilities or reduce assets, while is the gap between expenditure and receipts
capital receipts do. Additionally, revenue receipts (excluding borrowings) and shows borrowing
are generated through taxes and non-tax sources, needs. A high fiscal deficit can cause inflation.
while capital receipts arise from borrowings, Statement 4 is incorrect because fiscal deficit
disinvestment, etc. Statement 3 is incorrect as reduction requires lower borrowing or higher
revenue receipts are for recurring expenses and revenues, not higher borrowing.
capital receipts are used for long-term investments.
Statement 4 is also incorrect because revenue 85. Which of the following statements best describe
receipts do not create liabilities. Non-Tax Revenue?
(i) Non-tax revenue includes income from public
sector profits and dividends, administrative
fees and interest on loans.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 197

64. Indirect taxes, unlike direct taxes, are those Ans : FOREIGN 2003

where the burden of taxation can be ______ (c) Creates assets, reduces liabilities
to another person, usually the ______ of the Capital expenditure involves spending that results
goods or services. in the creation of assets or reduction of liabilities,
(a) Shifted, producer fostering long-term development and economic
(b) Shifted, consumer growth.
(c) Retained, government
(d) Transferred, taxpayer
Ans : SQP 2004

(b) Shifted, consumer

Indirect taxes are levied on one party but the
tax burden is transferred to consumers through ASSERTION AND REASON
increased prices of goods and services.

65. The government uses a surplus budget to 68. Assertion : A high primary deficit indicates fiscal
_______ inflation by ______ the excess responsibility of the government.
demand in the economy through fiscal measures. Reason : Government deficit can be reduced by
(a) Control, expenditure increasing taxes.
(b) Stimulate, demand (a) Both Assertion and Reason are true and
(c) Control, reducing Reason is the correct explanation of Assertion.
(d) Stimulate, increasing (b) Both Assertion and Reason are true and
Ans : DELHI 2008
Reason is not the correct explanation of
Assertion.
(c) Control, reducing
(c) Assertion is true but Reason is false.
A surplus budget helps control inflation by
(d) Assertion is false but Reason is true.
reducing excess demand in the economy through
reduced government expenditure or increased Ans : FOREIGN 2015
taxation.
(b) Assertion and reason both are correct
66. Primary deficit, an indicator of fiscal health, is statements but reason is not correct explanation
equal to the fiscal deficit of the government minus for assertion.
______, highlighting the borrowing required
69. Assertion : Revenue deficit increases inflationary
for non-interest expenditures.
pressures in the economy.
(a) Revenue receipts
Reason : Foreign borrowings often lead to
(b) Borrowings
economic and political interference by lender
(c) Interest payments
countries.
(d) Capital receipts
(a) Both Assertion and Reason are true and
Ans : OD 2010 Reason is the correct explanation of Assertion.
(c) Interest payments (b) Both Assertion and Reason are true and
Primary deficit is calculated as Reason is not the correct explanation of
Fiscal Deficit−Interest Payments and reflects the Assertion.
borrowing used for expenses other than paying (c) Assertion is true but Reason is false.
interest on existing debt. (d) Assertion is false but Reason is true.
67. Capital expenditure is a critical component of Ans : SQP 2012
government spending as it either ______ or (d) Assertion is false but Reason is true. Fiscal
______, contributing to long-term economic deficit increases foreign dependence.
development.
(a) Creates assets, increases liabilities 70. Assertion : In market economies, allocation of
(b) Reduces assets, increases income resources is determined by the forces of demand
(c) Creates assets, reduces liabilities and supply.
(d) Increases income, reduces borrowing Reason : Market economies are driven by profit
motive.

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CH 4 : GOVERNMENT BUDGET AND THE ECONOMY

57. In what way does a Surplus Budget benefit the (a) The government, refunded
economy and under what conditions is it typically (b) The individual or entity, shifted
used by the government to address inflationary (c) Corporations, reduced
pressures? (d) Consumers, transferred
(a) Estimated revenue is less than estimated
Ans : DELHI 2023
expenditure
(b) Estimated revenue is greater than estimated (b) The individual or entity, shifted
expenditure Direct taxes are borne by the individual or entity
on whom they are levied, with no possibility of
(c) Borrowing requirements of the government
shifting the tax burden to another party.
(d) Total receipts equal total expenditure
Ans : FOREIGN 2019
61. Non-tax revenue, which forms an important source
of government income, includes ______ from
(b) Estimated revenue is greater than estimated public sector enterprises and ______ earned
expenditure from loans provided by the government.
A surplus budget, where revenue exceeds
(a) Profits, interest
expenditure, is used to control inflation by
reducing excess demand in the economy. (b) Dividends, disinvestment
(c) Grants, repayments
58. The government budget is divided into two main (d) Fees, savings
components, one focusing on revenue and the other
on capital. These components are ______ and Ans : COMP 2007

______. (a) Profits, interest

(a) Revenue Budget, Capital Budget Non-tax revenue consists of profits earned by
(b) Revenue Receipt, Capital Receipt public sector enterprises and interest on loans
(c) Revenue Expenditure, Capital Expenditure given by the government, contributing to revenue
(d) Revenue Deficit, Capital Deficit without imposing taxes.
Ans : SQP 2022
62. Fiscal deficit, a key measure of government
(a) Revenue Budget, Capital Budget borrowing requirements, is calculated as the total
The government budget is categorized into Revenue expenditure of the government minus ______.
Budget (including revenue receipts and revenue (a) Revenue expenditure
expenditure) and Capital Budget (including (b) Total receipts excluding borrowings
capital receipts and capital expenditure). (c) Capital receipts
(d) Total receipts including borrowings
59. Revenue receipts refer to those government
receipts which do not ______ or ______, Ans : OD 2000

distinguishing them from capital receipts. (b) Total receipts excluding borrowings
(a) Increase income, reduce assets Fiscal deficit is the excess of total expenditure
(b) Create liabilities, reduce assets over total receipts, excluding borrowings and
indicates the borrowing needs of the government.
(c) Create assets, increase income
(d) Increase borrowing, reduce liabilities 63. Revenue deficit occurs when the government’s
Ans : COMP 2021
______ exceeds its ______, indicating
financial imbalance.
(b) Create liabilities, reduce assets (a) Revenue receipts, revenue expenditure
Revenue receipts are funds collected by the (b) Revenue expenditure, revenue receipts
government without increasing liabilities or (c) Capital expenditure, capital receipts
reducing assets, which differentiates them from (d) Total receipts, total expenditure
capital receipts.
Ans : FOREIGN 2001
60. Direct taxes, which form a significant part of (b) Revenue expenditure, revenue receipts
government revenue, are paid by ______ and Revenue deficit arises when the government’s
cannot be ______ to other individuals or spending on revenue expenditure surpasses its
entities. revenue receipts, leading to a financial shortfall.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 199
Ans : DELHI 2001
79. Consider the following statements about Revenue
(b) Both Assertion and Reason are true and Deficit :
Reason is not the correct explanation of Assertion. (i) It occurs when revenue receipts exceed
revenue expenditure.
77. Assertion : Direct taxes are paid by the person on (ii) It indicates the government is spending more
whom they are levied. than its current income.
Reason : Tax is an optional payment made by a (iii) It highlights the need for borrowing or using
person or a firm to the government. savings to meet expenses.
(a) Both Assertion and Reason are true and (iv) A reduction in revenue deficit often requires
Reason is the correct explanation of Assertion. an increase in revenue receipts or a cut in
(b) Both Assertion and Reason are true and expenditure.
Reason is not the correct explanation of Which of the above statements are correct?
Assertion. (a) 1 and 2 only
(c) Assertion is true but Reason is false. (b) 2, 3 and 4 only
(d) Assertion is false but Reason is true. (c) 1 and 4 only
(d) 3 and 4 only
Ans : OD 2004
Ans : SQP 2012
(c) Assertion is true but Reason is false.
(b) 2, 3 and 4 only
Revenue deficit occurs when revenue expenditure
exceeds revenue receipts (not the reverse),
STATEMENT BASED QUESTIONS indicating the government spends more than it
earns and may need borrowing or expenditure
reduction.
78. Consider the following statements regarding
80. Consider the following statements about Non-Tax
Revenue Deficit and its implications :
Revenue :
(i) Revenue deficit indicates that the government
(i) Non-tax revenue includes income from profits
is spending more than its current income from
and dividends from public enterprises.
revenue receipts.
(ii) It includes fees, fines and interest earned on
(ii) A high revenue deficit suggests the need for loans provided by the government.
the government to borrow for meeting its (iii) Non-tax revenue contributes to reducing the
consumption expenditure. government’s reliance on external borrowings.
(iii) Revenue deficit directly measures the overall (iv) It is a more significant source of revenue than
financial health of the government. tax revenue in most economies.
(iv) To reduce revenue deficit, the government must Which of the above statements are correct?
increase revenue expenditure significantly. (a) 1, 2 and 3 only
Which of the above statements are correct? (b) 1, 3 and 4 only
(a) 1 and 2 only (c) 2 and 4 only
(b) 1, 2 and 3 only (d) 1, 2, 3 and 4
(c) 2, 3 and 4 only Ans : DELHI 2019
(d) 1, 2 and 4 only
(a) 1, 2 and 3 only
Ans : SQP 2023 Non-tax revenue includes profits, dividends, fees
(a) 1 and 2 only and interest, reducing reliance on borrowings.
Statements 1 and 2 are correct as revenue deficit However, it is generally a smaller revenue source
reflects excess expenditure over revenue receipts, than tax revenue.
often requiring borrowing. Statement 3 is incorrect
81. Consider the following statements about Indirect
because revenue deficit specifically measures the
Taxes :
shortfall in revenue, not overall financial health.
(i) Indirect taxes are levied on goods and services
Statement 4 is also incorrect; reducing revenue
and are paid by consumers.
deficit requires reducing expenditure or increasing
(ii) The burden of indirect taxes can be shifted
revenue, not increasing expenditure.
from producers to consumers.

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CH 4 : GOVERNMENT BUDGET AND THE ECONOMY

(a) Both Assertion and Reason are true and Assertion.

Reason is the correct explanation of Assertion. (c) Assertion is true but Reason is false.
(b) Both Assertion and Reason are true and (d) Assertion is false but Reason is true.
Reason is not the correct explanation of
Ans : FOREIGN 2021
Assertion.
(c) Assertion is true but Reason is false. (a) Assertion and reason both are correct
(d) Assertion is false but Reason is true. statements and reason is correct explanation for
assertion.
Ans : COMP 2016

(a) Assertion and reason both are correct 74. Assertion : Capital expenditure creates assets for
statements and reason is correct explanation for the government.
assertion. Reason : Repayment of loans is an example of
capital expenditure.
71. Assertion : Economic stability promotes growth (a) Both Assertion and Reason are true and
and development. Reason is the correct explanation of Assertion.
Reason : Absence of price fluctuations promotes (b) Both Assertion and Reason are true and
stability and growth in an economy. Reason is not the correct explanation of
(a) Both Assertion and Reason are true and Assertion.
Reason is the correct explanation of Assertion. (c) Assertion is true but Reason is false.
(b) Both Assertion and Reason are true and (d) Assertion is false but Reason is true.
Reason is not the correct explanation of
Ans : COMP 2000
Assertion.
(c) Assertion is true but Reason is false. (b) Both Assertion and Reason are true and
(d) Assertion is false but Reason is true. Reason is not the correct explanation of Assertion.

Ans : DELHI 2019 75. Assertion : Borrowings undertaken to finance

(a) Assertion and reason both are correct revenue deficit in the present, further increases it
statements and reason is correct explanation for in the future.
assertion. Reason : Revenue expenditure does not create
assets for the government.
72. Assertion : Profits and dividends are sources of (a) Both Assertion and Reason are true and
revenue receipts for the government. Reason is the correct explanation of Assertion.
Reason : If a tax burden cannot be shifted, it is (b) Both Assertion and Reason are true and
an indirect tax. Reason is not the correct explanation of
(a) Both Assertion and Reason are true and Assertion.
Reason is the correct explanation of Assertion. (c) Assertion is true but Reason is false.
(b) Both Assertion and Reason are true and (d) Assertion is false but Reason is true.
Reason is not the correct explanation of
Ans : SQP 2023
Assertion.
(c) Assertion is true but Reason is false. (b) Both Assertion and Reason are true and
(d) Assertion is false but Reason is true. Reason is not the correct explanation of Assertion.

Ans : OD 2022 76. Assertion : Public goods satisfy the collective

(c) Assertion is true but Reason is false. wants of the people.
Profits and dividends do not create a liability for Reason : Government directly produces the goods
the government. and services which are ignored by the private
sector.
73. Assertion : A balanced budget implies that the (a) Both Assertion and Reason are true and
government is spending within its means. Reason is the correct explanation of Assertion.
Reason : In a balanced budget, estimated revenues (b) Both Assertion and Reason are true and
equal estimated expenditures. Reason is not the correct explanation of
(a) Both Assertion and Reason are true and Assertion.
Reason is the correct explanation of Assertion. (c) Assertion is true but Reason is false.
(b) Both Assertion and Reason are true and (d) Assertion is false but Reason is true.
Reason is not the correct explanation of

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 201

(ii) Non-tax revenue contributes to reducing

reliance on direct taxes for funding government
operations.
(iii) It represents a significant source of government
income, often exceeding tax revenue.
(iv) Non-tax revenue does not involve generating
liabilities or reducing assets.
(a) 1 and 4 only
(b) 1, 2 and 4 only
(c) 2 and 3 only
(d) 1, 2, 3 and 4
Ans : DELHI 2001

(b) 1, 2 and 4 only Which component contributes the highest

Statements 1, 2 and 4 are correct. Non-tax percentage to the government budget as shown
revenue comes from sources like fees, interest in the graph?
and dividends, reducing reliance on taxes and (a) Revenue Receipts
not creating liabilities. Statement 3 is incorrect
(b) Capital Receipts
because non-tax revenue generally forms a smaller
part of total revenue compared to tax revenue. (c) Revenue Expenditure
(d) Capital Expenditure
86. Which statements accurately explain the nature
Ans : FOREIGN 2007
and effects of Indirect Taxes?
(i) Indirect taxes are levied on goods and services (c) Revenue Expenditure
but paid indirectly by consumers through According to the bar graph, Revenue Expenditure
higher prices. accounts for the highest percentage (60%),
(ii) The burden of indirect taxes can be shifted followed by Capital Expenditure (50%), Revenue
from producers to consumers. Receipts (40%) and Capital Receipts (30%).
(iii) Indirect taxes are regressive as they This highlights the significant share of recurring
disproportionately affect lower-income government spending in the budget.
groups.
88. The line graph below depicts the trends in the
(iv) Indirect taxes are only applied to luxury
percentage contribution of Direct Taxes and
goods to avoid burdening the poor.
Indirect Taxes to government revenue from 2018
(a) 1 and 2 only
to 2022.
(b) 2 and 4 only
(c) 1, 2 and 3 only
(d) 1, 3 and 4 only
Ans : OD 2004

(c) 1, 2 and 3 only

Statements 1, 2 and 3 are correct. Indirect taxes
are levied on goods and services, their burden
is passed to consumers and they are regressive.
Statement 4 is incorrect as indirect taxes are not
limited to luxury goods.

GRAPH BASED QUESTIONS

Which type of tax has shown a consistent increase
87. The bar graph below displays the percentage
in its contribution over the years and what does
contributions of different components of the
this trend suggest?
government budget.

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CH 4 : GOVERNMENT BUDGET AND THE ECONOMY

116. What is meant by revenue deficit? Fiscal deficit = Total budget expenditure – Total
budget receipts (excluding borrowings).
Ans : OD 2012

Revenue deficit is the shortfall when the 122. The government plays a vital role in managing
government’s revenue expenditure exceeds its the economy by outlining its financial plan for the
revenue receipts, calculated as : fiscal year. This plan ensures efficient allocation
Revenue Deficit = Revenue Expenditure – of resources and economic stability. Define a
Revenue Receipts. government budget.

117. Name any one step that the government can Ans : OD 2023

take through its budget to check inflation that is A government budget is an annual financial
causing hardships to the people. statement detailing estimated revenues and
anticipated expenditures for a fiscal year. It
Ans : FOREIGN 2016
outlines government receipts and expenditures for
To control inflation, the government should a specific period, usually one year.
reduce public expenditure.
123. What one step can be taken through market to
118. State, whether the given statement is true or false reduce the consumption of a product harmful for
: ‘Expenditure on Ujjwala Yojana launched by the health?
Government is an example of capital expenditure.’
Ans : COMP 2022
Ans : DELHI 2020
The government should impose a high tax on
True, as it promotes human resource development harmful products to discourage their consumption,
and empowers women. protecting public health.
119. Subsidies are capital expenditure of the 124. Name any one step the government can take
governments. State whether the given statement through its budget to reduce the gap between the
is true and false. rich and the poor.
Ans : SQP 2019 Ans : DELHI 2021

False, they are part of revenue expenditure as The government can bridge the wealth gap by
they neither create assets nor reduce liabilities. taxing the rich and subsidizing essential goods
and services for the poor.

125. Explain the budgetary measures for achieving

TWO MARK QUESTIONS following objective.
Setting up of production units in backward
regions.
120. With valid reasons, classify the given item
Ans : FOREIGN 2000
into capital receipt or Revenue receipt of the
government : Loan taken by the government from The government can encourage balanced regional
Reserve Bank of India (RBI). development by promoting production units in
backward areas through tax concessions, increased
Ans : OD 2024
funding for infrastructure, subsidies and other
A loan taken by the government from the RBI is incentives.
a capital receipt as it creates a liability for the
government. 126. State any two sources of non-tax revenue receipts.
Ans : SQP 2001
121. What is fiscal deficit?
or Two sources of non-tax revenue receipts are:
State the meaning and formula of Fiscal deficit. (i) Fees and fines
(ii) Commercial revenue
Ans : OD 2024
(iii) Interest
Fiscal deficit refers to the excess of total budget (iv) Dividends
expenditure over total budget receipts, excluding
borrowing, during a fiscal year. 127. Distinguish between Direct tax and Indirect tax.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 203

Between 2018 and 2022, which deficit has shown (a) By reducing the purchasing power of
a relatively stable trend and what could this consumers.
indicate about government finances? (b) By increasing government spending on welfare
(a) Revenue Deficit, indicating consistent programs.
borrowing for recurring expenses (c) By encouraging borrowing and investments.
(b) Fiscal Deficit, showing stable overall (d) By increasing subsidies and tax cuts.
borrowing needs Ans : FOREIGN 2015
(c) Revenue Deficit, showing declining reliance (a) By reducing the purchasing power of
on recurring borrowings consumers.
(d) Fiscal Deficit, indicating fluctuating A surplus budget reduces demand in the economy
borrowing patterns by lowering government spending or increasing
Ans : DELHI 2003
taxes, helping control inflation.

(b) Fiscal Deficit, showing stable overall borrowing 94. The government budget is a comprehensive
needs statement outlining the government’s receipts and
The graph shows that Fiscal Deficit remains expenditures for the fiscal year. It aims to achieve
relatively stable over the years, fluctuating socio-economic goals, such as economic stability
between 38% and 45%, while Revenue Deficit and resource allocation.
shows more variation. This suggests consistent How does the government budget contribute to
government borrowing to finance overall deficits achieving socio-economic goals?
while possibly managing recurring expenses (a) By controlling private sector activities
better over time. (b) Through planning and balancing its fiscal
priorities
(c) By encouraging monopolistic practices
(d) By increasing revenue through exports
PASSAGE BASED QUESTION Ans : SQP 2005

(b) Through planning and balancing its fiscal

92. Primary deficit is fiscal deficit minus interest priorities
payments. It shows how much borrowing is used The budget allows the government to align its
for non-interest expenses, such as development financial resources with its socio-economic goals,
projects or welfare programs. ensuring stability and resource allocation.
What does a high primary deficit indicate about
government spending? 95. Non-tax revenue includes profits from public
(a) Most borrowings are used to repay past loans. sector enterprises and interest earned on loans.
(b) Borrowings are largely allocated for current These sources do not rely on taxation and
expenditures. contribute significantly to government income.
(c) Government revenue exceeds its expenses. How does non-tax revenue benefit the government
(d) Government has no fiscal responsibility. compared to tax revenue?
(a) It provides a consistent and equitable income
Ans : OD 2013
source.
(b) Borrowings are largely allocated for current (b) It reduces reliance on external borrowing and
expenditures. taxation.
A high primary deficit indicates that significant (c) It directly targets consumers and businesses.
borrowing is used for non-interest government (d) It primarily funds short-term capital projects.
spending, such as welfare and development.
Ans : COMP 2020
93. Surplus budgets occur when estimated revenue
(b) It reduces reliance on external borrowing and
exceeds expenditure. These budgets are often
taxation.
used to control inflation by reducing demand in
Non-tax revenue supplements government income
the economy.
without taxing citizens, reducing the need for
How does a surplus budget help in controlling
borrowing or increasing taxes.
inflation?

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CH 4 : GOVERNMENT BUDGET AND THE ECONOMY

(a) Direct Taxes, indicating a focus on income- 90. The bar graph below illustrates the percentage
based taxation contribution of various sources of government
(b) Indirect Taxes, suggesting a greater reliance revenue.
on consumption-based revenue
(c) Both Direct and Indirect Taxes, showing
equal growth in contributions
(d) Neither, as tax contributions remained
unchanged
Ans : OD 2005

(b) Indirect Taxes, suggesting a greater reliance

on consumption-based revenue
The graph shows a consistent increase in the
percentage contribution of Indirect Taxes from
40% in 2018 to 46% in 2022, indicating a growing
reliance on consumption-based taxes. Direct Taxes
also increased but at a slower pace, reflecting a
focus on diversifying revenue sources.
Which source contributes the least percentage to
89. The bar graph below depicts the percentage the government’s revenue as shown in the graph?
distribution of different types of government (a) Direct Taxes
deficits. (b) Indirect Taxes
(c) Non-Tax Revenue
(d) Borrowings
Ans : SQP 2008

(c) Non-Tax Revenue

According to the graph, Non-Tax Revenue and
Borrowings each contribute 20%, but when
compared to taxes (Direct : 35%, Indirect : 25%),
Non-Tax Revenue is smaller due to its nature
of being supplementary income rather than a
primary revenue source.

91. The line graph below shows the trends in Revenue

Deficit and Fiscal Deficit as a percentage of total
government spending from 2018 to 2022.
Which type of government deficit has the highest
percentage contribution according to the graph?
(a) Revenue Deficit
(b) Fiscal Deficit
(c) Primary Deficit
(d) All deficits contribute equally
Ans : COMP 2010

(b) Fiscal Deficit

The graph shows that Fiscal Deficit contributes
the most at 45%, followed by Primary Deficit at
30% and Revenue Deficit at 25%. This highlights
the significant role of fiscal deficit in indicating
government borrowing requirements.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 205

an economy? taxes.
(a) It increases revenue receipts.
(b) It reduces the need for capital expenditure. 108. Gift tax is a direct tax.” State whether the given
(c) It may lead to higher interest payments and statement is true or false.
inflation. Ans : FOREIGN 2009
(d) It allows for lower tax collections.
True, because the burden of direct taxes cannot
Ans : SQP 2018 be shifted to others.
(c) It may lead to higher interest payments and
109. Define indirect tax.
inflation.
A high fiscal deficit can lead to excessive borrowing, Ans : SQP 2002

resulting in increased interest payments and An indirect tax is when the liability to pay and the
inflationary pressures. incidence of the tax fall on different individuals.

110. Give two examples of indirect taxes.

Ans :
ONE MARK QUESTIONS
COMP 2011

Excise duty and Sales tax are the two examples

of indirect taxes.
102. Give any one example of ‘debt creating capital
111. Define capital expenditure.
receipts’ in the Government Budget.
Ans : DELHI 2015
Ans : FOREIGN 2020
Capital expenditure refers to spending that creates
Borrowings are an example of debt-creating
assets or reduces liabilities, such as purchasing
capital receipts in the government budget.
land, buildings, equipment, or investments in
103. What is a government budget? shares.

Ans : FOREIGN 2007 112. Define ‘revenue receipts’ in a government budget.

A government budget is a detailed financial Ans : DELHI 2014
statement outlining anticipated revenues and
Revenue receipts are funds the government earns
expenditures for a fiscal year.
without creating liabilities or reducing assets, like
104. Write any one objective of Government Budget. tax revenue.

Ans : SQP 2008 113. What are Capital Receipts in a government

The government aims to stabilize the economy by budget?
controlling business fluctuations. Ans : OD 2018

105. Define tax. Capital receipts in a government budget are funds

that either create liabilities, such as borrowings,
Ans : COMP 2010
or reduce assets, like disinvestment of PSU.
A tax is a mandatory payment to the government
to cover its expenses. 114. What is a ‘revenue expenditure’ in a government
budget?
106. Define direct tax.
Ans : SQP 2017
Ans : DELHI 2003
Revenue expenditure refers to spending that does
A direct tax is one whose burden is borne by the not create assets or reduce liabilities, such as
individual on whom it is imposed, such as income salary payments.
tax.
115. Give two examples of revenue expenditure.
107. Give two examples of direct tax.
Ans : COMP 2013
Ans : OD 2005
Examples of revenue expenditure : Expenditure
Wealth tax and income tax are examples of direct on Salaries, Pensions etc.

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CH 4 : GOVERNMENT BUDGET AND THE ECONOMY

The allocation of resources is an essential Ans : DELHI 2016

responsibility of the government, which includes One of the key functions of the government
providing public goods like national defense and budget is to ensure price stability, which means
government administration. Unlike private goods, maintaining steady prices without significant
public goods cannot be supplied through market fluctuations. The government achieves this by
mechanisms but are crucial for the well - being of utilizing its taxation and expenditure policies to
all citizens. Hence, the government must balance manage aggregate demand. In times of inflation,
resources between private and public goods. it reduces government expenditure and increases
While private goods are limited to individuals taxes to curb excessive demand. Conversely,
who can afford them, public goods are accessible during periods of falling prices or deflation,
to everyone, including those who cannot afford the government boosts aggregate demand by
them, ensuring broader social welfare. increasing its spending and reducing taxes,
ensuring economic balance and price stability.
146. What are the three levels at which the budget
impacts the economy? 149. Taxation is an effective tool to reduce the
Ans : FOREIGN 2013
inequalities of income.
Justify the given statement with valid reasons.
(i) Aggregate fiscal discipline refers to
Ans : FOREIGN 2020
maintaining a proper balance between the
government’s revenue and expenditure, Economic inequality is a natural feature of all
ensuring financial stability. economic systems and governments strive to
(ii) Resource allocation is carried out in alignment minimize such disparities through budgetary
with social priorities, focusing on addressing policies. One key approach is the implementation
the needs and welfare of society. of progressive taxation, where tax rates increase
with higher income levels. The government
(iii) Effective and efficient program delivery
imposes higher taxes on wealthy individuals while
highlights how well the government
taxing lower-income groups at reduced rates. This
achieves its set objectives, ensuring that
strategy narrows the gap in disposable income
the implemented programs meet intended
between the rich and the poor, helping to reduce
goals and deliver maximum benefits to the
income inequalities and fostering a more equitable
population. Together, these principles form
distribution of wealth in society.
the foundation of sound fiscal management.
150. The government budget plays a crucial role in
147. Explain the ‘economic stability’ objective of a
addressing economic imbalances and ensuring
government budget.
the optimal use of available resources. How can
or
a government budget help in reallocation of
Explain how government budget can be helpful in
resources? Explain.
bringing economic stabilization in the economy.
Ans : SQP 2015
Ans : COMP 2012
A key aim of the government budget is to allocate
Economic stability refers to maintaining steady
resources effectively to achieve socio-economic
prices without significant fluctuations. The
goals. The government can reallocate resources
government plays a crucial role in achieving this
using its taxation policies. It may reduce taxes
by managing general price levels through tools like
on goods that promote desired production and
taxes, subsidies and expenditure. Both inflation
increase taxes on those it aims to discourage.
and deflation are detrimental to the economy.
For instance, taxes on essential goods for mass
To address these issues, budgetary measures are
consumption might be reduced, while higher taxes
employed. During inflation, the government may
could be imposed on luxury items. Additionally,
reduce its expenditure to curb demand, while
resources can be directed toward enhancing
during deflation, it can lower taxes and provide
investments, reducing income inequality and
subsidies to boost spending, thereby stabilizing
improving health care and education.
the economy and promoting sustainable growth.
151. Tax rates on higher income group have been
148. Explain the ‘price stability’ function of a
increased. Which economic value does it reflect?
government budget.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 207
Ans : COMP 2004
Simply put, primary deficit is calculated by
Direct taxes, like income tax, are borne by the subtracting interest payments from the fiscal
individuals on whom they are imposed, with no deficit.
possibility of shifting the burden. Indirect taxes, Formula : Primary Deficit = Fiscal Deficit –
such as excise duty and sales tax, are levied on Interest Payments.
traders or manufacturers but ultimately passed It reflects the current financial position without
on to consumers of the taxed goods. the burden of previous debts.

128. Giving reasons classify the following into direct 132. ‘Fiscal deficit is always harmful’. State whether
and indirect tax: the given statement is true and false.
(i) Wealth tax Ans : COMP 2005
(ii) Value added tax
This statement is incorrect, as it can also result in
Ans : DELHI 2007
an increase in the supply of goods and services or
(i) Wealth tax is a direct tax as its burden is enhance the productive capacity of the economy.
borne solely by the individual on whom it is By fostering better utilization of resources, it
imposed, without transfer to others. contributes to economic growth and development,
(ii) Value-added tax (VAT) is an indirect tax, ensuring a more efficient and robust production
paid by producers and sellers, but its burden framework that benefits the overall economy.
is shifted to consumers who ultimately bear
the cost. 133. Suppose you are a member of the “Advisory
Committee to the Finance Minister of India”.
129. Is the following a revenue receipt or a capital The Finance Minister is concerned about the
receipt in the context of government budget and rising Revenue Deficit in the budget.
why? Suggest any one measure to control the rising
(i) Tax receipts Revenue Deficit of the government.
(ii) Disinvestment Ans : DELHI 2019
Ans : OD 2008
The government can reduce its revenue deficit
(i) Tax receipts are revenue receipts because by lowering productive capital expenditure or
they do not create liabilities or reduce asset curtailing welfare spending. This involves cutting
values. costs on development projects or social welfare
(ii) Disinvestment is a capital receipt as it results programs to balance the budget. However, such
in a reduction of government assets. measures may have implications for economic
growth and social development, as reduced
130. Does public debt impose a burden. Explain. investment in these areas can impact long-term
Ans : FOREIGN 2010 productivity and societal well-being.
A burden arises only when : 134. _____ Deficit includes interest payment by the
(i) The government imposes new taxes or Government on the past loans. (Fill up the blank
increases existing ones. with correct answer)
(ii) Public debt is raised for unproductive
Ans : DELHI 2020
purposes.
(iii) Debt repayment is done by printing currency Fiscal deficit includes interest payment by the
notes. government on the past loans.
Fiscal deficit encompasses the total borrowing
131. How is primary deficit calculated? requirements of the government, including
or the interest payments on past loans. It reflects
State the meaning and formula of Primary deficit. the shortfall between the government’s total
Ans : SQP 2003 expenditure and its revenue, excluding borrowings.
The inclusion of interest payments in fiscal deficit
Primary deficit represents the fiscal deficit
indicates the government’s obligation to service
after deducting interest payments. It indicates
its existing debt, adding to its overall financial
the borrowing requirements of the government
burden.
excluding interest obligations on past borrowings.

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CH 4 : GOVERNMENT BUDGET AND THE ECONOMY

96. Revenue deficit occurs when revenue expenditure (a) They enable the government to meet recurring
exceeds revenue receipts, forcing the government expenditures without increasing debt.
to borrow funds or reduce its savings to meet Revenue receipts help fund regular expenses
recurring expenses. without adding to liabilities, allowing the
What does a revenue deficit indicate about government to manage its operations effectively.
government spending?
(a) The government is generating a budget 99. Direct taxes are imposed on income and property
surplus. and are paid by the person on whom they are
(b) The government is overspending its recurring levied. These taxes cannot be shifted to others
income. and are progressive in nature.
(c) The government is increasing its revenue How does the progressive nature of direct taxes
receipts. benefit society?
(d) The government is prioritizing capital (a) By increasing the tax burden on low-income
investments. groups
(b) By ensuring those with higher incomes pay a
Ans : FOREIGN 2014
larger share
(b) The government is overspending its recurring (c) By distributing the tax burden equally among
income. citizens
Revenue deficit highlights that the government (d) By reducing government dependence on
is spending more than it earns from revenue indirect taxes
receipts, requiring external funds to fill the gap. Ans : DELHI 2002

97. Indirect taxes are levied on goods and services and (b) By ensuring those with higher incomes pay a
their burden is ultimately borne by consumers. larger share
Examples include customs duties and sales taxes. Progressive taxes ensure that individuals with
Why might indirect taxes disproportionately higher incomes contribute more, reducing income
affect lower-income groups? inequality.
(a) They are progressive and target high earners.
(b) They increase with property ownership. 100. Capital expenditure refers to spending that results
(c) They are regressive and take a larger share of in the creation of assets or reduction of liabilities.
lower incomes. It is crucial for long-term economic development
(d) They are only applied to luxury goods. and includes investments in infrastructure.
Why is capital expenditure essential for an
Ans : DELHI 2017
economy’s growth?
(c) They are regressive and take a larger share of (a) It ensures government operations run
lower incomes. smoothly.
Indirect taxes are regressive because they (b) It helps reduce revenue deficits.
represent a higher percentage of income for lower (c) It builds productive capacity and enhances
earners compared to higher-income groups. infrastructure.
(d) It increases short-term revenues.
98. Revenue receipts are collections by the government
from various sources without creating liabilities. Ans : OD 2011

They include tax revenues and non-tax revenues, (c) It builds productive capacity and enhances
such as fees and interest from loans. infrastructure.
Why are revenue receipts important for the Capital expenditure is vital for creating assets
government’s functioning? like infrastructure, which supports sustainable
(a) They enable the government to meet recurring economic growth.
expenditures without increasing debt.
(b) They help the government manage capital 101. Fiscal deficit measures the gap between the
investments. government’s total expenditure and its total
(c) They are used solely for paying off borrowings. receipts (excluding borrowings). It reflects the
(d) They include only indirect taxes. borrowing needs of the government to cover
expenses.
Ans : COMP 2009
What is a potential risk of a high fiscal deficit for

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 209

Meaning Capital receipt Revenue Up’ campaign encourages LPG users who can
are these Receipt are afford market prices to voluntarily forgo their
receipts which those receipt LPG subsidies. This initiative has been highly
are created which do not effective, with numerous households surrendering
either by create any their subsidies, directly reducing the government’s
incurring a liability or financial burden. The savings generated from this
liability or by which do not initiative provide the government with additional
disposing off reduce assets, funds, which can be reallocated to produce
assets such as such as tax essential public goods and services, addressing
public debt, revenue. critical societal needs and fostering economic
disinvestment, growth and welfare.
etc.
143. Explain any one objective of Government Budget
Nature Non-recurring Recurring
in 50 words.
Value of It decreases the It increases or
Ans : COMP 2018
or Assets value of asset decrease the
Liability or increases value of asset or One of the main aims of a government budget is
the value of liability. to ensure economic stability. A nation’s economy
liability. often experiences fluctuations, such as booms and
Example Provident fund, Proceeds from depressions, which can benefit some while harming
small savings taxes, interest others. To address these imbalances, governments
deposits. and dividend. employ stabilization measures designed to regulate
aggregate demand. These measures help prevent
141. “Under ‘Zero Defect, Zero Effect’ (ZED) scheme, inflation and reduce unemployment, ensuring
the government of India provides up to 80% stable growth. Through effective policy actions,
subsidy to Mini, Small and Medium Enterprises economic stability can be maintained, minimizing
(MSME).” the adverse effects of economic fluctuations on
Identify and explain the objective of government different segments of the population.
budget, highlighted in the above text. 144. State three objectives of a government budget.
Ans : OD 2024
Ans : DELHI 2020
The government budget in this context emphasizes
(i) The government utilizes the budget as a tool
the objective of resource allocation. By providing
to allocate resources effectively, aiming to
subsidies to Micro, Small and Medium Enterprises
achieve socio - economic objectives.
(MSME), the government aims to boost national
output, attract advanced technology and create (ii) By leveraging the budget, it seeks to influence
employment opportunities. These efforts align the distribution of income in the country.
with broader socio-economic objectives, such Efforts are directed towards ensuring a fairer
as reducing poverty and promoting equitable distribution of wealth and income, thereby
growth. In a developing country like India, such reducing economic inequalities and benefiting
measures play a vital role in fostering inclusive the underprivileged sections of society.
economic development, enhancing productivity (iii) Additionally, the government employs
and contributing to the overall growth and the budget to promote economic stability,
sustainability of the economy. addressing the challenges posed by booms
and depressions to maintain steady economic
142. Responding to the Prime Minister’s ‘Give it up growth.
campaign’ a large number of Indian families have
voluntarily surrendered their cooking gas subsidy. 145. Explain the ‘allocation of resources’ objective of a
Identify and explain the objective behind this government budget.
action taken by the Government of India. or
Explain how government can influence allocation
Ans : OD 2024
of resources through government budget.
The government budget objective highlighted
Ans : OD 2017
here is the allocation of resources. The ‘Give It

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CH 4 : GOVERNMENT BUDGET AND THE ECONOMY

135. Revenue deficit can be lowered by borrowings (ii) Expenditure on purchasing computers is
and disinvestment. Does the same apply to fiscal considered capital expenditure because it
deficit as well? Explain. involves the creation of tangible assets,
contributing to the government’s productive
Ans : OD 2002
capacity and long-term infrastructure
No, this is not possible because disinvestment, development. Both expenditures serve
classified as a capital receipt, is already accounted distinct purposes in fiscal management.
for when calculating fiscal deficit. Consequently,
fiscal deficit cannot be managed through
disinvestment alone. The government must rely
on borrowings to address fiscal deficits, as it THREE MARK QUESTIONS
represents the shortfall in resources that cannot
be bridged by other revenue or capital receipts.
139. “Under the ‘Production Linked Incentive’ scheme,
136. Trade deficit is always a great cause of worry for the Government of India offers various benefits
an economy. (True/false) like reduced import-export duties, incentives to
Ans : COMP 2020 investors, tax-rebates etc.”
In the light of above statement, identify and
False; a trade deficit is not always a cause for
explain the Budget objective and its likely
concern. Initially, it may indicate an improved
consequences.
standard of living, as residents gain access
to diverse goods and services at competitive Ans : OD 2024
prices, potentially lowering inflation. However, The Production Linked Incentive (PLI) Schemes
a persistent trade deficit can lead to predictable introduced by the Indian government aim to
negative impacts on economic growth and achieve significant economic benefits, primarily
stability. Its implications depend on the broader by reducing reliance on foreign countries and
economic context. boosting employment in labor-intensive sectors. A
core objective of this scheme is to promote GDP
137. Are fiscal deficits necessarily inflationary? growth, a key focus of the government’s budgetary
Ans : FOREIGN 2011 policy. By encouraging both foreign and domestic
companies to establish or expand production
Fiscal deficits can lead to inflation if financed by
units in India, the scheme enhances the global
printing new currency, as this increases the money
competitiveness of Indian products by lowering
supply, driving up demand and prices. However,
production costs. Additionally, it attracts foreign
if the fiscal deficit results in an increased supply
investments and advanced technologies, fostering
of goods and services or is directed towards
core sector development, export growth and
infrastructure development and other capital
job creation. The scheme’s advantages include
projects, it may not cause inflation and could
reducing imports, generating employment and
instead boost economic growth.
driving sustainable economic growth.

140. Distinguish between revenue receipts and capital

receipts. Give an example of each.
138. Is the following revenue expenditure or capital Ans : OD 2024
expenditure in the context of government budget?
Give reason. Revenue receipts are those receipts which do not
(i) Expenditure on collection of taxes. create any liability or which do not reduce assets,
such as tax revenue.
(ii) Expenditure on purchasing computers.
Capital receipts are those receipts which are created
Ans : SQP 2014 either by incurring a liability or by disposing off
assets, such as public debt, disinvestment, etc.
(i) Expenditure on tax collection is classified as
Capital Receipt and Revenue Receipt
revenue expenditure since it does not lead
to the creation of any asset or reduction in Basis Capital Receipt Revenue
government liability. Receipt

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 211

Explain. and enhances the living standards of the poor.

Ans : COMP 2021
154. Government incurs expenditure to popularize
Economic inequality is a fundamental characteristic yoga among the masses. Analyses its impact on
of all economic systems and governments actively gross domestic product and welfare of the people.
work to reduce these disparities. By implementing Ans : DELHI 2023
taxation policies that impose higher taxes on the
wealthy, the government reduces their disposable The government’s effort to promote yoga aims
income. The revenue generated from these taxes to enhance health awareness and encourage the
is then redirected toward welfare programs aimed adoption of a healthy lifestyle among the masses.
at supporting the underprivileged. Initiatives This initiative offers long-term benefits to both
like education, healthcare and social support society and the economy by improving physical
help improve the standard of living for the poor. and emotional well-being. A healthier, fitter
This approach effectively narrows income gaps workforce contributes positively to the country’s
and promotes a more equitable distribution of GDP through increased productivity, efficiency
resources. and reduced absenteeism. Improved fitness levels
and stamina enable individuals to work more
152. Reduction in income inequalities raises welfare effectively, resulting in higher availability of goods
of the people. How can government help through and services per capita, ultimately enhancing
government budget, in this regard? Explain. societal welfare and economic prosperity.
Ans : SQP 2022
155. Distinguish between revenue receipts and capital
Income inequalities negatively impact the welfare receipts. Give two examples of each.
of people, as those in lower-income groups often
Ans : COMP 2009
struggle to meet their basic needs. To enhance
societal welfare, it is essential to reduce these Revenue receipts are those receipts that do not
disparities. The government plays a crucial role create a liability for the government nor lead to a
in this effort through its budgetary policies. reduction in its assets. They include tax revenue,
By taxing the wealthy and allocating funds to such as income tax and non-tax revenue, like fees,
projects that directly benefit the poor such as free fines and dividends. In contrast, capital receipts
education, healthcare services and minimum wage are funds acquired by the government either
programs the government works toward equitable through the creation of liabilities or the sale of
growth. In India, significant public spending is assets. Examples include borrowing funds from
dedicated to such welfare initiatives, improving the public or raising money through disinvestment
the lives of the underprivileged. by selling shares of public sector units. Unlike
revenue receipts, capital receipts involve either
153. How can government budget be helpful in altering incurring liabilities or reducing government-
the income distribution? Explain. owned assets.
or
How can budgetary policy be used to reduce 156. Government raises its expenditure on producing
inequalities of income? public goods. Which economic value does it
reflect? Explain.
Ans : OD 2019
Ans : OD 2000
The government budget plays a significant role
in influencing the redistribution of income within The government enhances economic and social
society. By employing fiscal tools such as taxation, welfare by increasing expenditure on public goods,
subsidies and public expenditure, the government helping to control deflationary trends and achieve
can promote greater equity. Higher taxes can be economic stability. Economic stability, defined
imposed on individuals in higher income brackets, as the absence of price fluctuations, is essential
thereby reducing their disposable income. The for reducing uncertainties in the economy. By
revenue generated can be allocated to welfare managing its spending, the government addresses
programs for underprivileged groups, such as such fluctuations effectively. For instance, to
providing subsidies for essential goods and counter deflation, it can increase investment in
services. This approach reduces income disparities public goods and welfare programs, accelerating

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CH 4 : GOVERNMENT BUDGET AND THE ECONOMY

Do you agree with the given statement? Present Basis Direct Tax Indirect Tax
valid arguments in favour of your answer.
1. Meaning A tax is Indirect
Ans : OD 2024
called a taxes are
In developing countries like India, income and direct tax those
wealth distribution is highly unequal, leaving when the which are
burden of the ultimately
the poor trapped in a cycle of poverty. Limited
tax is borne borne by
skills and resources prevent them from bridging
by the one a third
this economic gap, leading to worsening living upon whom person, i.e.,
standards and underutilization of a significant it is levied. other than
portion of the workforce. To address this, the the open
government employs revenue and expenditure upon whom
policies. It can impose higher taxes on the rich it is levied.
and goods they consume while reducing taxes 2. Transferability The burden The burden
for lower-income groups, narrowing the income of tax cannot of tax can
disparity. Revenue generated can fund welfare be shifted be shifted
programs, transfer payments, subsidies and free to another to another
services like healthcare and education, boosting person. person.
disposable incomes, improving living standards 3. Example For example, For
and enhancing overall welfare. Income tax, example,
Wealth tax, Excise duty,
etc. Sales tax,
etc.

167. Explain the basis of classifying taxes into direct

168. What is government budget? Explain its major
and indirect tax. Give examples.
components.
or
Distinguish between Direct tax and Indirect tax Ans : DELHI 2018

with suitable examples. A government budget is a formal statement

Ans : OD 2024 presenting the estimated government receipts
and expenditures for the upcoming fiscal year. It
Direct Taxes are taxes imposed on individuals comprises two key components:
or entities based on their income or property. (i) Budget Receipts :
Examples include Income Tax and Corporate Tax. (a) Capital Receipts : These involve
In the case of direct taxes, both the responsibility borrowings, loan recoveries, disinvestment
to pay and the burden of the tax fall on the same and small savings, as they create liabilities
individual or entity, meaning the liability cannot or reduce assets.
be transferred to another person. (b) Revenue Receipts : These include tax and
Indirect Taxes on the other hand, are levied on non-tax revenues like interest, profits,
goods or services, such as Service Tax and Value fees and fines, without creating liabilities
Added Tax (VAT). Unlike direct taxes, the or reducing assets.
liability to pay and the actual burden of these (ii) Budget Expenditure :
taxes fall on different individuals, as their cost is (a) Capital Expenditure : Spending that
ultimately passed on to consumers. builds assets or reduces liabilities, such as
Basis of Classification : Shifting of burden is the basis investment in assets or shares.
of classifying taxes into Direct and Indirect Tax. (b) Revenue Expenditure : Costs for running
(i) If burden of a tax can be shifted to others, it government departments and services,
is an indirect tax. like salaries, without asset creation or
liability reduction.
(ii) If it cannot be shifted to others, it is a direct
tax.
Difference between Direct taxes and Indirect taxes

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 213

162. Classify the following into revenue and capital (iv) Income tax
receipts. Give reasons.
Ans : SQP 2005
(i) Sale of shares of a PSU.
(ii) Profit and divided received from public sector (i) Corporation tax is classified as a direct tax
undertakings. because both its impact and incidence fall on
(iii) Cash grants-in-aid from foreign countries and the same entity the company paying the tax.
international organizations. (ii) Entertainment tax is an indirect tax since its
(iv) Recovery of loan impact and incidence are borne by different
individuals; the provider collects the tax but
Ans : COMP 2007
passes the burden to consumers.
(i) A capital receipt occurs when it results in a (iii) Excise duty is another example of an indirect
reduction of the government’s assets. tax, as its payment burden can be shifted
(ii) A revenue receipt is characterized by the fact from manufacturers to consumers.
that it neither creates any liability nor leads (iv) Income tax is a direct tax, where both its
to a reduction in the government’s assets. impact and incidence rest on the individual
(iii) Another example of a revenue receipt is one earning the income.
that does not affect the government’s assets
or liabilities. 165. Explain ‘revenue deficit’ in a government budget?
(iv) A capital receipt arises when there is a decrease What does it indicate?
in the government’s assets, reflecting its non- Ans : DELHI 2002
recurring nature in financial transactions.
Revenue deficit occurs when total revenue
163. With valid reasons, classify the following into expenditure exceeds total revenue receipts,
Capital receipts or Revenue receipts of the calculated as :
government: Revenue Deficit = Total Revenue Expenditure –
(i) Dividend received by the government from a Total Revenue Receipts.
Mahabharata company. It highlights the shortfall in current expenditure
(ii) Receipts of the government from sale of that revenue receipts cannot cover, indicating the
shares of a Public Sector Undertaking (PSU) need for borrowings to bridge the gap. An increase
in open market. in revenue expenditure without a proportional
(iii) Debt cleared by Sri Lanka Government to the rise in revenue receipts leads to a higher revenue
Indian Government. deficit. This, in turn, necessitates additional
borrowing, thereby increasing the government’s
Ans : OD 2024
financial liability and impacting fiscal stability.
(i) Dividends received by the government from a
Maharatna company are considered revenue
receipts because they constitute income and
do not create any liability or reduce the FOUR MARK QUESTIONS
government’s assets.
(ii) Proceeds from the sale of shares of a Public
Sector Undertaking (PSU) in the open 166. Explain the need for reduction in inequalities of
market are capital receipts, as they result in income and wealth. Explain any two budgetary
a reduction of the government’s assets. measures by which it can be done.
(iii) Repayment of debt by the Sri Lankan or
government to the Indian government is Explain how taxes and government expenditure
categorized as a capital receipt because it can be used to influence distribution of income in
decreases the financial assets of the Indian the society.
government. or
Explain how the government can use the budgetary
164. Classify the following taxes into direct and policy in reducing inequalities in incomes.
indirect tax. Give reasons for your answer: or
(i) Corporation tax ‘Government Budget can be a useful instrument
(ii) Entertainment tax in reducing inequalities in the distribution of
(iii) Excise duty income and wealth in an economy’.

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CH 4 : GOVERNMENT BUDGET AND THE ECONOMY

economic growth. Since public goods cannot be capital receipts are those that do not involve
supplied by the private sector through market borrowings and, hence, do not lead to debt
mechanisms, the government ensures their accumulation. Examples include recovery of loans
availability to meet societal needs and drive and proceeds from disinvestment.
development. (i) Recovery of loans : The government provides
loans to states and union territories, which
157. In its budget, the government of India proposed
are financial assets. When these loans are
to raise the excise duty on liquor. The Finance
recovered, it results in a capital receipt as it
minister also proposed to increase income tax
decreases government assets.
on individuals earning more than ` 1 corer per
annum. (ii) Disinvestment : Selling shares of public sector
Identify and explain the type of taxes proposed undertakings constitutes disinvestment. The
by the finance minister. What possible welfare proceeds are capital receipts because they
objectives could the government be considering? reduce government-owned assets.

Ans : FOREIGN 2001 160. Explain the basis of classifying government

receipts into revenue receipts and capital receipts.
Excise duty is an indirect tax, where the tax
Which type of these receipts are borrowings by
burden can be transferred to others, while income
government and why?
tax is a direct tax paid by the individual on
whom it is levied. Beyond revenue generation, Ans : OD 2010
these taxes serve broader welfare objectives. For
Receipts are classified into revenue receipts and
instance, higher excise duty can raise product
capital receipts based on whether they create or
prices, discouraging harmful consumption and
reduce liability. Revenue receipts are those that
improving public health. Increased income tax
neither create a liability nor lead to a reduction in
on higher earners reduces income inequalities,
government assets, such as tax revenues and non-
fostering social equity. Additionally, the extra
tax revenues. In contrast, capital receipts either
revenue generated can be allocated to welfare
create a liability or reduce the government’s
programs for the underprivileged, enhancing their
assets. For example, government borrowings
quality of life.
are considered capital receipts, as they generate
158. State three sources each of revenue receipts and liabilities that the government is obligated to
capital receipts in government budget. repay in the future, reflecting their distinct
financial impact.
Ans : SQP 2004

The government generates revenue through 161. Classify the following into capital receipts and
various sources, classified into revenue and revenue receipts. Give reasons for your answer.
capital receipts. Key sources of revenue receipts (i) Recovery of loans
include direct taxes, such as income tax, indirect (ii) Interest received on loans
taxes like GST and commercial revenue from Ans : FOREIGN 2003
government-owned enterprises. Capital receipts,
on the other hand, are obtained from sources such (i) The recovery of loans is categorized as a
as loan recoveries, borrowings from domestic or capital receipt because it results in a reduction
international markets and funds raised through of the government’s financial assets. This
disinvestment of government stakes in public occurs when the government recovers funds
sector undertakings. These receipts are crucial previously loaned to states, union territories,
for funding public expenditures and supporting or other entities.
economic development initiatives. (ii) Interest received on loans, on the other
hand, is classified as a revenue receipt. This
159. What are non-debt creating capital receipts? Give is because it represents income earned by
two examples of such receipts. the government and does not involve the
Ans : DELHI 2008 creation of liabilities or the reduction of any
government assets, making it a recurring
Capital receipts are classified as either debt- source of revenue.
creating or non-debt-creating. Non-debt-creating

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 215

169. Distinguish between Primary deficit and Revenue taxes, expenditure and subsidies.
deficit.
Ans : SQP 2018
Ans : OD 2011
Through budgetary measures like taxes and
Difference between Primary deficit and Revenue subsidies, the government seeks to influence
deficit economic activities and achieve efficient resource
allocation. In market-driven economies, resources
Basis Primary Deficit Revenue Deficit are primarily allocated based on demand and
Meaning It shows the It shows the supply, often prioritizing profit over social
difference excess of total welfare. The government intervenes through its
between expenditure over taxation policies to strike a balance between
fiscal deficit total revenue economic welfare and social welfare. For instance,
and interest excluding it discourages the production of harmful goods
payment. borrowings. like cigarettes and liquor by imposing high taxes.
Conversely, tax concessions and subsidies are
Indicator It indicates the It indicates the provided to boost the production of essential goods
total borrowing total borrowing
such as food grains and kerosene, as well as to
requirements of requirements of
promote productive activities in underdeveloped
the government the government
regions.
excluding including interest.
interest. 172. The Government decides to give budgetary
Formula Primary deficit Fiscal deficit = incentives to investors for making investments
= Fiscal deficit Total expenditure in backward regions. Explain these possible
– Interest – Total Receipts incentives and the reasons for the same.
payment excluding Ans : COMP 2020
borrowings
The government designs the budget to achieve
specific economic and social objectives, ensuring
170. Explain the role the government can play through
balanced regional development and fostering
the budget in influencing allocation of resources.
economic growth. By reallocating resources,
Ans : FOREIGN 2014 it prioritizes socially productive sectors where
The government budget plays a vital role in private sector participation is limited, such as
allocating resources to achieve socio-economic public sanitation and rural electrification. To
objectives. Resources are directed toward various stimulate investment in backward regions, the
projects and activities through budgetary policy. government offers budgetary incentives, including
The government encourages investment by offering tax concessions and subsidies. These measures
tax concessions and subsidies to producers. It encourage private enterprises to undertake
also discourages harmful goods like cigarettes and activities that require significant investment or
liquor through heavy taxation while promoting face inadequate infrastructure. Additionally,
beneficial goods like khadi with subsidies. When the establishment of Special Economic Zones
private enterprises avoid producing essential (SEZ) is a crucial step. SEZ offer liberal taxation
goods due to low profitability, the government laws, simplified licensing rules and enhanced
steps in to produce them directly. Additionally, infrastructure, attracting investment and
the budget is used to increase investments, supporting balanced regional growth.
reduce income inequalities by taxing the wealthy
173. Explain the distinction between Revenue receipts
and enhance healthcare and education for the
and Capital receipts in a government budget.
underprivileged.
Give their components.

171. Explain how taxes and subsidies can be used to Ans : OD 2018

influence allocation of resources. Revenue receipts & Capital receipts

or
Explain how the allocation of resources can be Basis Revenue Capital receipts
influenced in the government budget through receipts

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CH 4 : GOVERNMENT BUDGET AND THE ECONOMY

Meaning Revenue Capital receipts like post office deposits and sales of National
receipts refer refer to those Savings Certificates.
to those receipts which 174. Define Revenue receipts in a government budget.
receipts which either create a Explain how government budget can be used to
neither create liability or cause bring in price stability in the economy.
any liability a reduction in
nor cause any the assets of the Ans : FOREIGN 2017

reduction in government. Revenue receipts refer to the government’s money

the assets of the inflows that neither create liabilities nor reduce
government. assets. These include tax revenues such as income
Nature These are These are tax, duties, fines and non-tax revenues like
regular and irregular in interest, dividends and earnings from government
recurring in nature. investments. The government budget plays a
nature. critical role in maintaining economic stability
by addressing inflation or deflation, which cause
Future There is In case of certain
economic uncertainties. Price stability is essential
Obligation no future capital receipts
for a stable economy and the government manages
obligation to (like borrowings),
fluctuations through fiscal measures. During
return the there is a future
inflation, it can curb spending by raising taxes
amount. obligation to
and reducing its expenditure. Conversely, during
return the
deflation, it can stimulate spending by offering
amount along
tax concessions, subsidies and increasing public
with its interest.
expenditure.
Examples Taxes received Loans taken by
by the the government, 175. The Government, under Ujjwala Yojana, is
government, recovery loans providing free LPG kitchen gas connections to the
non-tax given to the state families ‘below the poverty line’. What objective
revenue like governments etc. the government is trying to fulfil through the
interest, fees government budget and how? Explain.
etc. Ans : DELHI 2020

Components of Revenue Receipts: The government seeks to reduce income and wealth
Revenue Receipts are government incomes that inequalities through measures like providing free
do not create liabilities or reduce assets. They LPG connections to families below the poverty
include : line. Such inequalities are socially unjust as
(i) Tax Revenue : This comprises taxes and they leave many unable to meet basic needs like
duties levied by the union government, such food, clothing and shelter. To address this, the
as income tax, corporate tax, excise duty, government redistributes income by charging
customs duty and service tax. higher LPG prices to wealthier households and
(ii) Non-Tax Revenue : This includes incomes using the revenue to subsidize LPG for the
from sources other than taxes, such as interest, underprivileged. This redistribution function
dividends, fees, fines, gifts and grants. extends to offering subsidies and essential services
Capital Receipts are funds that create liabilities or like free education and healthcare to low-income
reduce government assets. Key components are : groups. Progressive income taxation, where
higher incomes attract higher tax rates, is another
(i) Borrowings : Funds raised from the open
effective tool to combat inequality.
market, central banks, foreign governments
and institutions like the World Bank and 176. Distinguish between Capital expenditure and
IMF. Revenue expenditure.
(ii) Loan Recovery : Repayments of loans provided or
to state governments and union territories. Distinguish between Revenue Expenditure and
(iii) Other Receipts : These include disinvestment Capital
of public sector undertakings, small savings Expenditure of a government, with suitable

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 217

example. functions but do not add to the nation’s asset

base.
Ans : SQP 2013
Capital Expenditure, on the other hand, results
Capital expenditure and Revenue expenditure in the creation of long-term assets or reduces
existing liabilities. Examples include investments
Basis Capital Revenue
in infrastructure like roads, bridges and buildings,
Expenditure Expenditure
as well as the purchase of land. Payment of
1. Meaning An An salaries is revenue expenditure since it neither
expenditure expenditure builds assets nor lowers liabilities.
which either which neither
178. Explain the concept of ‘fiscal deficit’ in a
creates an asset creates asset
government budget. What does it indicate?
or reduces nor reduces
liability is liability is Ans : OD 2016
called Capital called Revenue Fiscal deficit represents the shortfall when the
Expenditure. Expenditure. government’s total expenditure exceeds its total
2. Used for It is incurred It is incurred receipts, excluding borrowings, within a fiscal
for acquisition for normal year. It reflects the borrowing needs of the
of assets and functioning government and has significant implications for
granting of of the the economy :
loans and government. (i) Increased Borrowings : A rising fiscal deficit
advances. indicates growing government borrowings,
3. Nature It is non- It is recurring which lead to higher debt repayment
recurring in in nature. obligations in the future.
nature. (ii) Inflationary Pressure : To meet borrowing
needs, the government may rely on the
4. Example Construction Expenditure
Reserve Bank of India (RBI). When the RBI
of a Hospital on medicines
prints additional currency, it increases money
Building, Re- and salaries
supply, fueling inflation.
payment of of doctors,
loan, purchase subsidies, (iii) Reduced Capital Expenditure : High fiscal
of computers. payment deficits strain revenue expenditure for debt
of interest, servicing, leaving fewer resources for capital
grants, investments crucial for economic growth and
collection of development.
taxes.
179. Explain the meaning and implications of revenue
deficit.
177. What is the basis of classifying government
expenditure into ‘Revenue Expenditure’ and Ans : DELHI 2012

‘Capital Expenditure’ ? Which of these types of Revenue deficit refers to the situation where the
expenditure is payment of salaries to government government’s total revenue expenditure exceeds
employees and why? its total revenue receipts. It is calculated as :
Ans : COMP 2015 Revenue Deficit = Total Revenue Expenditure –
Total Revenue Receipts.
Government expenditure is classified into Revenue
Revenue expenditures include payments for
Expenditure and Capital Expenditure based on
salaries, pensions and interest, along with costs for
whether it leads to asset creation or liability
maintaining administrative and defense services.
reduction.
Revenue receipts, on the other hand, consist of
Revenue Expenditure includes spending that
tax and non-tax revenues.
neither creates assets nor reduces liabilities.
Implications :
It typically involves recurring expenses such
(i) A revenue deficit indicates a shortfall that
as salaries, pensions and operational costs of
must be covered by the capital budget,
government departments. These expenditures are
leading to either liabilities or asset reduction.
necessary for maintaining routine government

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CH 4 : GOVERNMENT BUDGET AND THE ECONOMY

186. Using the given data, calculate the following:(a) (ii) Fiscal Deficit
revenue deficit, (b) fiscal deficit and (c) primary = Plan capital expenditure + Revenue
deficit. expenditure + Non-plan capital
expenditure – Revenue receipts – Capital
(` arab) receipts net of borrowings
(i) Tax Revenue 47 = 120 + 100 + 80 – 70 – 140
= 300 – 210 = `90 arab
(ii) Capital Receipts 34
(iii) Primary Deficit
(iii) Non-tax Revenue 10 = Fiscal Deficit – Interest payments
(iv) Borrowings 32 = 90 – 30 = `60

(v) Revenue Expenditure 80 188. Determine the total borrowing by the government
if interest is estimated to be `20 crore. Which is
(vi) Interest Payments 20
25% of primary deficit.
Ans : OD 2000 Ans : COMP 2004

(i) Revenue Deficit Interest = 25% of primary deficit

= Revenue Expenditure – Revenue Receipts
= Revenue Expenditure – Tax Revenue 20 = 25 # Primary Deficit
100
– Non-tax Revenue
= 80 – 47 – 10 = `23 arab Primary Deficit = 20 # 100 = `80 crore
25
(ii) Fiscal Deficit
Again,
= Revenue Expenditure – Revenue Receipts
+ Capital Expenditure – Capital Receipts Primary Deficit = Fiscal deficit - Interest payment
Net of Borrowings 80 = Fiscal deficit – 20
= Revenue Expenditure – Tax Revenue Fiscal deficit = 80 + 20 = `100 crore
– Non-tax Revenue – (Capital Receipts Here, Fiscal deficit = Borrowings = `100 crore
– Borrowings)
= 80 – 47 – 10 – (34 – 32)
= 112 – 91 = `21 arab
(iii) Primary Deficit CASE BASED QUESTION
= Fiscal Deficit – Interest payments
= 21 – 20 = `1 arab
189. The government budget is a comprehensive
187. From the following data about a government statement of the estimated receipts and
budget, find out : (a) revenue deficit, (b) fiscal expenditures for a fiscal year, running from 1st
deficit and (c) primary deficit. April to 31st March. It is divided into the Revenue
Budget and the Capital Budget. Revenue receipts
(` arab)
include tax revenue and non-tax revenue, which
(i) Plan capital expenditure 120 do not create liabilities or reduce assets. Tax
revenue comprises direct taxes, such as income
(ii) Revenue expenditure 100
tax and corporation tax and indirect taxes, such
(iii) Non-plan capital expenditure 80 as customs duty and sales tax.
Capital receipts, on the other hand, either create
(iv) Revenue receipts 70
liabilities or reduce financial assets. Examples
(v) Capital receipts net of 140 include loans from the public, borrowings from
borrowing the Reserve Bank of India and recovery of loans
(iv) Interest payments 30 given to states. While revenue expenditure refers
to recurring expenses for the routine functioning
Ans : FOREIGN 2001 of the government, capital expenditure focuses
on creating assets or reducing liabilities, such
(i) Revenue Deficit
as infrastructure development and repayment of
= Revenue expenditure – Revenue receipts
loans.
= 100 – 70 = `30 arab

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 219

Basis Fiscal deficit Primary NUMERICAL QUESTIONS

deficit
1. Meaning Fiscal deficit Primary 184. Using the given data, calculate the following:
is defined deficit is
(i) Fiscal Deficit
as excess of defined as
(ii) Primary Deficit
total budget fiscal deficit
(iii) Interest Payments
expenditure of current
over total year minus (` in crore)
budget interest
receipts payments on (i) Revenue expenditure 70
excluding accumulated (ii) Borrowings 15
borrowings debt.
during a (iii) Revenue receipts 50
fiscal year. (iv) Interest payments 25% of revenue
2. Measurability It measures It indicates deficit
the how much Ans : DELHI 2023
government government
needs to borrowing (i) Fiscal Deficit = Borrowings = `15 crore
borrow from is needed (ii) Primary Deficit = Fiscal deficit – interest
market to to meet its payments
meet its expenses = 15 – 5 = `10 crore
expenditures. other than Revenue Deficit = (i) – (iii)
interest
= 70 – 50 = `20 crore
payments.
(iii) Interest payments = 25% of `20 = `5 crore
3. Formula Fiscal deficit Primary
= Total deficit = 185. Using the given data, calculate the following:
expenditure Fiscal deficit (i) Revenue deficit
– Total – Interest (ii) Fiscal deficit and
Receipts deficit (iii) Primary deficit.
excluding
borrowings. (` arab)
(i) Capital receipts net of 95
183. Explain the role the government can play through borrowings
the budget in influencing allocation of resources.
(ii) Revenue expenditure 100
Ans : FOREIGN 2014
(iii) Interest payments 10
The government budget plays a vital role in
(iv) Revenue receipts 80
allocating resources to achieve socio-economic
objectives. Resources are directed toward various (v) Capital expenditure 110
projects and activities through budgetary policy.
The government encourages investment by offering Ans :
tax concessions and subsidies to producers. It (i) Revenue Deficit
also discourages harmful goods like cigarettes and = Revenue expenditure – Revenue receipts
liquor through heavy taxation while promoting = `100 – `80 = `20 arab
beneficial goods like khadi with subsidies. When
(ii) Fiscal deficit
private enterprises avoid producing essential
= Revenue expenditure + Capital
goods due to low profitability, the government
expenditure – Revenue receipts – Capital
steps in to produce them directly.
receipts net of borrowings
= 100 + 110 – 80 – 95 = `35 arab
(iii) Primary deficit
= Fiscal deficit – Interest payments
= 35 – 10 = `25 arab

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CH 4 : GOVERNMENT BUDGET AND THE ECONOMY

(ii) High revenue deficits signal the need for the borrowed funds.
government to reduce expenditure or increase Difference between Revenue deficit & Fiscal
revenue. deficit
(iii) It reflects reliance on borrowing to finance
routine expenditures, highlighting a Basis Revenue Fiscal deficit
potentially unsustainable fiscal policy. deficit
Meaning It is the It is the
180. Give meanings of revenue deficit, fiscal deficit and
excess of excess of
primary deficit.
total revenue total over the
Ans : FOREIGN 2019 expenditure total receipts
Revenue Deficit occurs when the government’s over total excluding
total revenue expenditure exceeds its total revenue revenue borrowings.
receipts. It is calculated as : receipts.
Revenue Deficit = Total Revenue Expenditure – Measurability Revenue It is the
Total Revenue Receipts. deficit excess of
Examples of revenue expenditure include payments measures the total over the
for salaries, pensions, interest and administrative inability of the total receipts
or defense services. Revenue receipts primarily government excluding
consist of tax and non-tax revenues. to meet its borrowings.
Fiscal Deficit refers to the gap between total regular needs.
government expenditure and its total receipts, Formula Revenue Fiscal deficit
excluding borrowings. The formula is : deficit = = Total
Fiscal Deficit = Total Expenditure – Total Revenue expenditure –
Receipts (excluding borrowings). This deficit expenditure Total receipts
reflects the extent of government borrowing. – Revenue excluding
Primary Deficit measures fiscal deficit minus receipts borrowings.
interest payments on prior borrowings, indicating
additional borrowing needed to cover non-interest
expenses.
Primary Deficit = Fiscal Deficit – Interest
Payments. 182. Distinguish between Fiscal deficit and Primary
deficit.
181. Distinguish between revenue deficit and fiscal
deficit. Ans : COMP 2021

Ans : SQP 2022 Fiscal Deficit represents the shortfall when the
government’s total expenditure, including both
Revenue Deficit refers to the shortfall when
revenue and capital expenditures, exceeds its total
total revenue expenditure exceeds total revenue
receipts, comprising revenue and capital receipts,
receipts. It is calculated as :
excluding borrowings. It highlights the borrowing
Revenue Deficit = Total Revenue Expenditure –
needs of the government for the fiscal year. The
Total Revenue Receipts.
formula is :
In contrast, Fiscal Deficit represents the excess
Fiscal Deficit = Total Expenditure – Total
of total government expenditure over the sum
Receipts (excluding borrowings).
of revenue and capital receipts, excluding
Primary Deficit is derived by subtracting interest
borrowings. The formula is :
payments on past borrowings from the fiscal
Fiscal Deficit = Total Budget Expenditure – deficit, reflecting the actual borrowings needed to
(Revenue Receipts + Capital Receipts excluding meet current expenditures.
borrowings).
Primary Deficit = Fiscal Deficit – Interest
The key distinction is that revenue deficit pertains
Payments.
specifically to revenue receipts and revenue
Fiscal deficit and Primary deficit
expenditures, whereas fiscal deficit encompasses
the gap between total expenditures (both
revenue and capital) and total receipts, excluding

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 221

(i) Define the government budget and explain its (ii) Explain the difference between tax revenue
main divisions. and non-tax revenue.

(ii) Differentiate between revenue receipts and (iii) What distinguishes capital receipts from
capital receipts with examples. revenue receipts?

(iii) What is the role of capital expenditure in the (iv) How does capital expenditure benefit the
economy and how does it differ from revenue economy?
expenditure?
Ans :
(iv) List and explain the types of taxes included (i) The two main components of the Union
under revenue receipts. Budget are Revenue Budget and Capital
Ans : Budget.
(i) A government budget is an annual statement (ii) Tax revenue comes from taxes like income
of estimated receipts and expenditures for a tax and sales tax. Non-tax revenue includes
fiscal year. It is divided into: income from interest, fees and grants.
(a) Revenue Budget : Includes revenue (iii) Revenue receipts do not create liabilities or
receipts and revenue expenditure. reduce assets, while capital receipts either
(b) Capital Budget : Includes capital receipts create liabilities or reduce assets.
and capital expenditure. (iv) Capital expenditure helps in asset creation
(ii) Revenue receipts do not create liabilities and long-term economic growth, e.g., building
or reduce assets, e.g., income tax. Capital infrastructure.
receipts create liabilities or reduce assets, e.g.,
borrowings. 191. Read the para given below and answer the
(iii) Capital expenditure creates assets or reduces questions that follow:
liabilities, e.g., infrastructure projects. As per Article 112 of the Indian Constitution,
Revenue expenditure is recurring, covering the presentation of a budget in Parliament before
operational costs, e.g., salaries. the start of each financial year is mandatory.
(iv) Revenue receipts include: The Union Budget aims to promote rapid and
(a) Direct Taxes : Levied on income and balanced economic growth while ensuring social
property, e.g., income tax. justice and equality.
(b) Indirect Taxes : Levied on goods and It optimally allocates resources to maximize
services, e.g., customs duty. government profits, fostering public welfare. One
of its key objectives is to reduce poverty and
190. The Union Budget is divided into two main create employment opportunities. The budget
components : Revenue Budget and Capital also influences income distribution through
Budget. Revenue receipts, a part of the Revenue subsidies and taxation. Higher taxes are levied
Budget, do not create liabilities or reduce assets on the wealthy to reduce their disposable income,
and include tax and non-tax revenues. Tax revenue while lower-income groups are charged lower tax
is further classified into direct taxes, like income rates to ensure adequate disposable income.
tax and corporation tax and indirect taxes, such The Union Budget plays a vital role in managing
as sales tax and customs duty. economic fluctuations. It helps control inflation
Capital receipts, on the other hand, either create by implementing surplus budget policies and
liabilities or reduce financial assets. These include addresses deflation through deficit budget
borrowings from the public, loans from foreign policies, maintaining price stability. Additionally,
governments and recovery of loans given by the it outlines changes to the country’s direct and
central government. While revenue expenditure indirect tax structures, including revisions to
involves recurring costs like salaries and pensions, income tax rates and brackets.
capital expenditure focuses on asset creation, The Union Budget has a significant impact on
such as infrastructure projects. various aspects of the economy, making it essential
to understand its purpose and importance.
(i) What are the two main components of the
Union Budget?

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CH 4 : GOVERNMENT BUDGET AND THE ECONOMY

194. Read the para given below and answer the (iii) Revenue expenditure refers to the expenditure
questions that follow: which neither _____ (creates/reduces)
The Union Budget, presented by India’s Finance assets nor _____ (creates/reduces)
Minister, is divided into the Capital Budget and liabilities.
Revenue Budget. The Capital Budget is further
categorized into capital receipts and capital (iv) Which of the following statements is true?
expenditure. (a) Loans from IMF is a revenue receipt.
Capital receipts refer to cash inflows that either (b) Higher revenue deficit necessarily leads to
create liabilities or reduce financial assets. They higher fiscal deficit.
can be classified into debt and non-debt receipts. (c) Borrowings by government represent a
Loans from the general public, foreign governments situation of fiscal deficit.
and the Reserve Bank of India (RBI) constitute
(d) Revenue deficit is the excess of capital
a major portion of capital receipts. Recovery
receipts over the revenue receipts
of loans extended by the central government to
states and other entities is also included in this Ans :
category. In the government’s balance sheet, (ii) (c) They are irregular and non recurring.
capital receipts are listed under the liabilities (ii) (b) Leads to deflationary pressure.
section and are generally non-recurring in nature. (iii) Creates, reduces
Capital receipts are tax-free unless specific (iv) (c) Borrowings by government represent a
provisions apply. Non-debt receipts, which do situation of fiscal deficit.
not impose future repayment obligations, account
for approximately 75% of the government’s total 195. Study the given picture carefully:
budget receipts. Examples include the recovery of Sources of State and Local
loans, disinvestment proceeds and the issuance of Government tax revenues for a financial year
bonus shares.
Debt receipts, on the other hand, involve borrowing
and must be repaid by the government. They
finance about 25% of government expenditure.
These receipts include market loans, external
borrowings and the issuance of special securities
to public-sector banks. Reducing reliance on debt
receipts can significantly improve the economy’s
financial health. Most of the government’s capital
receipts are debt-based, indicating the importance
of managing these liabilities for fiscal stability.

(i) Following is not a characteristic of capital

receipts:
(a) They are irregular and non recurring.
Answer the following questions based on common
(b) They create a future obligation to return
knowledge and picture:
the amount.
(c) They decrease government’s liabilities. (i) Categories the given items in the picture into
(d) They lead to reduction in assets of the tax/ non-tax receipts.
government.
(ii) “Government has started spending more on
(ii) Following is not an implication of fiscal providing free services like education and
deficit: health to the poor.”
(a) A vicious circle of borrowings is created. In the light of above statement, explain how
(b) Leads to deflationary pressure. the government can use the budgetary policy
(c) Increases foreign dependence. in reducing ‘inequalities of income’.
(d) Creates economic burden for future
generations. Ans :
(i)

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 223

193. The para given below and answer the questions (a) A, B, C, D
that follow: (b) A, D, B, C
In 2019-20, the Central Government’s fiscal deficit (c) C, D, A, B
reached 4.6% of GDP, exceeding the target of (d) A, C, B, D
3.5%. Fiscal deficit, representing the gap between
government earnings and expenditures as a (iii) Government expenditure on Mid-Day Meal
percentage of GDP, rose significantly due to lower- scheme running in Government (state-run)
than-expected gross tax revenue. The government schools is a type of _____ expenditure in
earned 20.1 trillion against the revised estimate the government budget.
of 21.63 trillion, leaving a shortfall of over 1.5
(iv) Match the following:
trillion. Simultaneously, expenditure cuts were
constrained, further worsening the fiscal balance. Column I Column II
The financial year 2020-21 faced similar challenges,
with economic contraction threatening both 1. Fiscal deficit A. implies an
central and state governments’ tax collections. increase in
To mitigate financial pressures, governments government
froze dearness allowance and dearness relief for spending
employees and pensioners and raised taxes on resulting in
petrol and diesel, despite collapsing oil prices. an increase
Increased government borrowing to cover fiscal in aggregate
deficits has led to higher debt levels, creating demand.
upward pressure on interest rates. The Reserve
2. Primary deficit B. signifies total
Bank of India has sought to reduce these rates,
borrowing
but this has negatively impacted returns on
requirements of
fixed deposits. Additionally, rising government
the government.
debt risks further downgrades of India’s credit
rating by global agencies, potentially affecting 3. Budgetary C. signifies that
systematic investment plans (SIPs), the rupee’s deficit the government
value against the US dollar and overall economic is living beyond
stability. its means even
to conduct its
(i) Disinvestment by government means.
day to day
(a) Selling its fixed capital assets.
operations.
(b) Selling of its buildings.
(c) selling of shares of public enterprises held
4. Revenue deficit D. signifies
by it.
borrowing
(d) selling of shares by private investors in
requirements of
public undertakings.
the government
(ii) Identify the correct pair of statement, from exclusive
the statements given in Columns I and II: of interest
payments.
Column I Column II
(a) B, D, A, C
1. Direct Tax A. Corporation tax (b) D, C, B, A
B. impact and (c) A, B, D, C
incidence of tax (d) B, D, C, A
is on different
Ans :
persons.
(ii) (a) Selling its fixed capital assets.
2. Indirect Tax C. profits and
(ii) (b) A, D, B, C
dividend.
(iii) Revenue
D. its burden cannot (iv) (c) A, B, D, C
be shifted.

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CH 4 : GOVERNMENT BUDGET AND THE ECONOMY

(i) Those goods or services which are open to Bharat.

use by all members of society are called as In February 2021, the Finance Minister presented a
_____ goods. 34.5 lakh crore Budget for the financial year 2021-
22, set against the backdrop of the pandemic. The
(ii) Government tries to reallocate resources: Budget focused on boosting capital expenditure,
(a) Through taxation and subsidies. enhancing healthcare capacity and developing
(b) Through population control. agricultural infrastructure, all expected to
(c) By generating employment opportunities. create a multiplier effect on the economy. It also
(d) By reducing income inequality. allocated significant resources to railways, roads
and defence, with the highest-ever capex growth
(iii) Excess of government revenue expenditure
of 34.4 percent.
over revenue receipts leads to
She noted that despite the economic impact of
(a) Revenue deficit
the pandemic, the government continued to
(b) Primary deficit
implement crucial reforms necessary for achieving
(c) Current deficit
the country’s long-term objectives. Stressing the
(d) Fiscal deficit
reform-driven approach of the Budget, she stated
(iv) Match the following: that these measures would pave the way for India
to emerge as one of the world’s leading economies
Column I Column II in the coming decades.
1. Revenue A. Disinvestment
Expenditure in public sector (i) When the fiscal deficit is equal to interest
undertakings payments, then the primary deficit is
_____.
2. Capital B. expenditure on
Receipts collection of taxes (ii) A _____ primary deficit indicates that
C. interest paid on interest commitments on earlier loans have
loan taken by the forced the government to borrow.
government (iii) Identify the correct statement:
D. borrowing from (a) Fiscal deficit is the difference between
general public planned revenue expenditure and planned
revenue receipts.
(a) 1-A, B; 2-C, D
(b) Fiscal deficit is the difference between
(b) 1-B, C; 2-A, D
total planned expenditure and total
(c) 1-A, C; 2-B, D
planned receipts.
(d) 1-A, D; 2-B, C
(c) Primary deficit is the difference between
Ans : total planned receipts and interest
(i) Public payments.
(ii) (a) Through taxation and subsidies. (d) Fiscal deficit is the sum of primary deficit
(iii) (a) Revenue deficit and interest payments.
(iv) (b) 1-B, C; 2-A, D
(iv) What will be the primary deficit in the
192. Read the para given below and answer the government budget, if the fiscal deficit is `50
questions that follow: crore and interest payment is `2 crore?
Finance Minister Nirmala Sitharaman highlighted (a) `50 cr.
that despite the challenges posed by the COVID-19 (b) `48 cr.
pandemic, the government has remained steadfast (c) `52 cr.
in its commitment to reforms aimed at achieving (d) `100 cr.
long-term sustainable growth. Addressing the Lok Ans :
Sabha during the debate on the 2021-22 Budget,
(ii) Zero
she emphasized that the Prime Minister continued
(ii) Low
to seize opportunities to implement reforms,
(ii) (d) Fiscal deficit is the sum of primary deficit
positioning the Budget as a foundation for India’s
and interest payments.
journey towards self-reliance or Aatmanirbhar
(iv) (b) `48 cr.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 225

Tax Receipts Non-Tax Receipts (iii) If government borrowing increases, which of

the following statements will be incorrect for
Individual Income tax Fines the current fiscal year?
Property Tax Motor Vehicle (a) Primary deficit will increase.
License Fee (b) Fiscal deficit will increase.
Sales & Gross Receipts (c) Revenue deficit will decrease.
Corporate Income Tax (d) Government burden for future payments
will increase.
(ii) Government budget can be an effective
instrument of changing the pattern of (iv) Which among the following is an example of
distribution of income with a view to help Indirect Tax?
weaker section of society and promoting (a) Income Tax
social justice. It does so by taxing the rich (b) Corporation Tax
and providing subsidies to the low income (c) Excise Duties
group people. It also tries to incur public (d) Gift Tax
expenditure on such schemes which help the
poor the most such as providing health care (v) If government borrowing for the fiscal year
and education. is `35,000 crore and interest payments are
`5,000 crore then the value of fiscal deficit
196. Budged 2021-22 " From Where The Rupee will be.
Comes ? (a) `35,000 crore
(b) `30,000 crore
S. Items Amount
(c) `40,000 crore
No. (Paisa/
(d) `7,000 crore
Rupee)
(i) Corporation Tax 13 (vi) Match the items of Column-I with Column-II
and choose the correct pair:
(ii) Income Tax 14
(iii) Customs 3 Column-I Column-II

(iv) Union Excise Duties 8 A. Revenue (i) Interest Paid

Receipt
(v) Goods and Service Tax 15
B. Capital Receipt (ii) Grants received
(vi) Non-Tax Revenue 6
C. Revenue (iii) Profits of PSU
(vii) Non-Debt Capital Receipts 5 Expenditure
(viii) Borrowing & other 36 D. Capital (iv) Loan repaid
liabilities Expenditure
(a) A-(i)
(i) What is the percentage share of total tax
(b) B-(ii)
revenue in government’s total receipts?
(c) C-(iii)
(a) 50%
(d) D-(iv)
(b) 53%
(c) 59% Ans :
(d) 45%
(ii) (b) 13 + 14 + 3 + 8 + 15 # 100 = 53%
100
(ii) Identify which of the following is not an
(ii) (a) 50%
example of non-tax revenue?
(iii) (c) I, III and IV
I. Fees and fines
(iv) (c) Revenue deficit will decrease.
II. Income Tax
(v) (a) `35,000 crores
III. Borrowings
(vi) (d) D-(iv)
IV. Grants
(a) Only II www.nodia.in
(b) II and III
(c) I, III and IV
(d) I and IV

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CH 5 : FOREIGN EXCHANGE MARKET AND BALANCE OF PAYMENTS

CHAPTER 5
FOREIGN EXCHANGE MARKET AND BALANCE OF PAYMENTS

the Central Bank enters the foreign exchange

SUMMARY market to buy/sell foreign currency in order
to control fluctuations in the market.
1. FOREIGN EXCHANGE 1.4 Sources of Demand for Foreign Exchange
Foreign exchange refers to all currencies other The demand for foreign exchange arises due to
than the domestic currency of a country. It is various international economic activities and
essential for international trade, investment and transactions. Some demands of foreign exchange
tourism. Examples include the US Dollar, Euro are as follows :
and Japanese Yen. It facilitates global transactions (i) Payment of loans and interest to international
and cross-border financial activities. organizations.
(ii) Gifts and grants to rest of the world.
1.1 Foreign Exchange Rate
(iii) Foreign investment across the world.
The foreign exchange rate is the price at which (iv) Foreign trade, i.e., imports.
one currency is exchanged for another. It reflects (v) Foreign exchange trade for speculation.
the value of one currency in terms of another and (vi) Foreign tourism.
varies based on market factors like demand and
supply. For example, 1 USD = 80 INR indicates 1.5 Sources of the Supply of Foreign Exchange
the exchange value of a dollar in rupees. The supply of foreign exchange is driven by
various international transactions and inflows
1.2 Foreign Exchange Market
into the domestic economy. Sources of the supply
The foreign exchange market is a global platform of foreign exchange are as follows :
where national currencies are traded. It operates
(i) Exports of goods and services from domestic
continuously and involves participants like central
country.
banks, commercial banks and traders. The market
(ii) Foreign investment : (a) Foreign direct
helps determine exchange rates and facilitates
investment (FDI); (b) Portfolio
international transactions.
(iii) Foreign tourism from abroad.
1.3 Types of Exchange Rate Systems (iv) Purchases by non-residents in the domestic
The exchange rate system defines how the value country.
of one currency is determined relative to another (v) Remittances from abroad.
in the global market.
(i) Fixed Exchange Rate system : It refers to a 1.6 Demand Curve of Foreign Exchange
system in which exchange rate for a currency It slopes downwards from left to right showing
is fixed by the government and not determined inverse relationship between exchange rate and
by market forces. demand for foreign exchange.
(ii) Flexible Exchange Rate : It is the rate which Supply curve of Foreign Exchange
is determined by forces of demand and supply The supply curve slopes upwards to the right
in the foreign exchange market. establishing a direct relation between price of
(iii) Managed Floating Rate : It is the flexible foreign currency (exchange rate) and the supply
exchange rate which can be influenced by of that foreign currency.
the intervention of the central Bank in the
foreign exchange market. Under this system,

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 227

1.7 Determination of Equilibrium Exchange Rate 6.3 Components of BOP

The equilibrium exchange rate is determined The Balance of Payments consists of various
at a point where demand and supply of foreign accounts that record all economic transactions
exchange are equal. between residents of a country and the rest of the
world.
2. DEPRECIATION OF DOMESTIC CURRENCY 1. Current Account : It records the following
It means fall in the value of domestic currency in items:
terms of foreign currency. For example, from 1$ = (a) Visible items of trade : The balance of
`70 to 1$ = `80. It occurs due to: exports and imports of goods is called
(i) Increase in demand for foreign currency; balance of trade.
(ii) Decrease in supply of foreign currency (b) Invisible items : The balance accruing on
account of export and import of services
3. DEVALUATION OF DOMESTIC CURRENCY is called balance of invisible trade.
It occurs when the price of domestic currency is (c) Unilateral transfers : The net value of
decreased by the official action (Government/ balances of trade, of invisible trade and
Central Bank) under the fixed exchange rate of unilateral transfers is the balance on
system. current account.
2. Capital Account : It is that account of BOP
4. APPRECIATION OF DOMESTIC CURRENCY which records all such transactions between
It means a rise in the price of domestic currency the residents of a country and rest of the world
in terms of foreign currency (fall in exchange which cause a change in the asset or liability
rate). For example, from 1$ = `80 to 1$ = `70. It of the country. It records the following items:
occurs due to : (a) Direct investment : It means purchasing
(i) Fall in demand for foreign currency. an asset in another country and acquiring
(ii) Increase in supply of foreign currency. control of it.
(b) Portfolio investment : It is the acquisition
5. REVALUATION of asset like purchase of shares which does
It refers to increase in the price of domestic not give control over the asset.
currency by the government and happens under (c) Loans : It includes borrowings by
fixed exchange rate system. government and private sector.
(d) Banking capital transactions : It refers to
6. BALANCE OF PAYMENTS external financial assets and liabilities of
commercial and cooperative banks.
It is a systematic record of all economic
3. Other items in the balance of payment :
transactions between residents of a country and
Official reserve transactions : All transactions
the residents of foreign countries during a given
except those in this category may be termed
period of time. It includes both visible and
as autonomous transactions.
invisible items, unilateral and capital transfers.
6.4 Debit Items (Negative Sign)
6.1 Balance of Trade (BOT)
Debit items represent transactions that lead to
It is the difference between exports and imports
payments made to foreign entities. Examples
of goods of a country during the period of one
include imports of goods and services, repayment
year.
of foreign loans and remittances sent abroad.
6.2 Economic Transactions in BOP These transactions reduce the country’s foreign
exchange reserves.
(i) Export and import of goods (visible items of
trade). 6.5 Credit Items (Positive Sign)
(ii) Invisible Items. It includes factor as well as
Credit items reflect transactions that result in
non-factor services like shipping, banking,
receipts from foreign entities. Examples include
etc.
exports of goods and services, foreign investments
(iii) Unilateral transfers
and remittances received from abroad. These
(iv) Capital transfers related to capital receipts
transactions increase the country’s foreign
and capital payments.
exchange reserves.

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CH 5 : FOREIGN EXCHANGE MARKET AND BALANCE OF PAYMENTS

37. Identify, which of the following is not a source of 41. A managed floating exchange rate system
demand for foreign exchange for Indian economy? allows currency regulation through ______
(a) Import of goods and services intervention to stabilize the foreign exchange
(b) Remittances by foreigners living in India to market.
their families abroad (a) Central bank
(c) Indian tourists visiting foreign countries (b) Private sector
(d) Loans from Rest of the World (ROW) (c) International banks
(d) Market forces only
Ans : COMP 2003

(d) Loans from Rest of the World (ROW) Ans : SQP 2011

(a) Central bank

38. The exchange rate in the foreign exchange market In a managed floating system, the central bank
is determined by the ______, ensuring a intervenes to stabilize the currency by buying or
balance between currency supply and demand. selling foreign currency during fluctuations.
(a) Inflation rates
(b) Supply and demand 42. The supply of foreign exchange for a country
(c) Government policies increases significantly when ______ are sent
(d) Trade agreements back home by citizens living abroad.
(a) Exports
Ans : DELHI 2005 (b) Remittances
(b) Supply and demand (c) Imports
The price of foreign currency is determined by its (d) Inflation rates
supply and demand, ensuring equilibrium in the Ans : COMP 2014
foreign exchange market.
(b) Remittances
39. Depreciation of domestic currency occurs when Remittances sent by citizens working abroad add
there is a significant ______ in the demand to the foreign exchange reserves, strengthening
for foreign currency in a flexible exchange rate the supply of foreign currency.
system.
43. What is the primary role of the foreign exchange
(a) A decrease
market in global trade and finance?
(b) No change
(a) Facilitating domestic trade transactions.
(c) An increase
(b) Enabling the exchange of national currencies.
(d) Government intervention
(c) Setting fiscal policies for countries.
Ans : OD 2009
(d) Regulating international exports and imports.
(c) An increase
Ans : SQP 2000
Depreciation happens when demand for foreign
currency exceeds supply, reducing the domestic (b) Enabling the exchange of national currencies.
currency’s value relative to foreign currencies. The foreign exchange market is essential for
exchanging currencies needed for international
40. Balance of Trade (BOT) measures the net trade and investments. It allows countries and
difference between a country’s exports and businesses to conduct financial transactions.
imports of ______ during a specific period. Without it, cross-border trade and economic
(a) Visible goods cooperation would be impossible.
(b) Banking services
(c) Capital investments 44. How is the fixed exchange rate system controlled
(d) Foreign aid and implemented in an economy?
(a) By market forces of demand and supply.
Ans : FOREIGN 2002
(b) By government or central bank policies.
(a) Visible goods (c) By international financial institutions.
BOT focuses on tangible goods traded (d) By decisions of private investors.
internationally, excluding services or capital
transactions, which are part of the current Ans : COMP 2001

account. (b) By government or central bank policies.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 229
Ans : DELHI 2002
13. Which of the following transactions determine
(c) Unilateral transfers balance of trade.
(a) Export and import of goods
8. The balance of trade shows a deficit of `500 crore, (b) Export and import of services
the value of exports is `1000 crore. What is the (c) All exports and imports of a country
value of imports? (d) Export and import of capital
(a) `1,500 crore
(b) `500 crore Ans : OD 2013

(c) `5,000 crore (a) Export and import of goods

(d) `1,000 crore
14. _____ Refers to the exchange rate at which
Ans : OD 2011
demand for and supply of foreign currency are
(a) `1,500 crore equal.
(a) Equilibrium exchange rate
9. An Indian company located in India invests in (b) Fixed exchange rate
a company located abroad. This transaction is (c) Flexible exchange rate
entered in India’s balance of payment account on: (d) Managed floating exchange rate
(a) Credit side of current account
(b) Debit side of capital account Ans : FOREIGN 2015

(c) Credit side of capital account (a) Equilibrium exchange rate

(d) Credit side of capital account
15. Final balance of payments of a country is:
Ans : FOREIGN 2014
(a) Always deficit
(b) Debit side of capital account (b) Always balanced
(c) Always surplus
10. Rise in the price of foreign currency implies (d) Fluctuates
_____ in the value of domestic currency.
(a) Revaluation Ans : SQP 2012

(b) Appreciation (b) Always balanced

(c) Depreciation
(d) None of the above 16. Export of goods is called trade in:
(a) Visible items
Ans : SQP 2018
(b) Invisible items
(c) Depreciation (c) Basic items
(d) Real items
11. Current account records transactions relating to:
(a) Export and import of goods Ans : COMP 2016

(b) Current transfers (a) Visible items

(c) Non factor and factor income
(d) All of the above 17. Visible imports include:
(a) Computer software
Ans : COMP 2020
(b) Machinery
(d) All of the above (c) Remittance
(d) All of the above
12. Which of the following is not a function of foreign
exchange market? Ans : DELHI 2019

(a) Transfer function (b) Machinery

(b) Allocative function
(c) Hedging function 18. If balance of trade is (–) `1000 crore and value
(d) Credit function of exports is `500 crore then the value of imports
will be:
Ans : DELHI 2017
(a) `500 crore
(c) Hedging function (b) `5,000 crore
(c) `1,500 crore
(d) `2,000 crore

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CH 5 : FOREIGN EXCHANGE MARKET AND BALANCE OF PAYMENTS

6.6 Autonomous Items Ans : OD 2024

It refers to those international economic (a) Autonomous

transactions that take place due to some economic
3. If in an economy the Balance of Trade is showing
motive like profit maximization. These items are
a deficit of `200 crore and the value of import is
called “above the line items”.
`900 crore, then the value of exports would be
The balance of payments is in deficit if the
` _____ crore. (Fill in the blank with correct
autonomous receipts are less than autonomous
alternative)
payments.
(a) 200
6.7 Accommodating Items (b) 1,100
(c) 700
These refer to those transactions that are done
(d) 900
to cover the deficit or surplus in BOP. They are
called “ below the line items”. Ans : OD 2024

(c) 700
6.8 Disequilibrium in Balance of Payments (BOP)
Disequilibrium could be in the form of a surplus 4. A company located in India receives a loan from a
or deficit. Following factors are responsible for it: company located abroad. How is this transaction
(i) Economic factors: recorded in India’s balance of payments account?
(a) Large Scale developmental expenditure (Choose the correct alternative)
leading to large imports. (a) Credit side of current account
(b) Increase in imports due to domestic (b) Debit side of current account
inflation. (c) Credit side of capital account
(c) Cyclical fluctuations like recession or (d) Debit side of capital account
depression. Ans : SQP 2023
(ii) Political factors : Political instability may
restrict foreign investment. (c) Credit side of capital account
(iii) Social factors : Change in consumer tastes and 5. If the value of a rupee in terms of U.S. dollar
preferences may affect imports and exports moves from `75 to `70 to a dollar. It will be called
_____ of Indian currency.
(a) Depreciation
(b) Appreciation
MULTIPLE CHOICE QUESTION (c) Devaluation
(d) None of these
1. Under the _____ Exchange Rate System, the Ans : SQP 2005
Central Bank can control the rise/fall of foreign (b) Appreciation
exchange rate in a range bound manners. (Fill up
the blank with correct alternative.) 6. Which one of the following is not included in
(a) Fixed current account of BOP.
(b) Flexible (a) Portfolio investments
(c) Managed floating (b) Exports of goods
(d) Gold standard (c) Unilateral transfers
(d) Imports of good
Ans : OD 2024

(c) Managed floating Ans : COMP 2009

(a) Portfolio investments

2. The measurement of Balance of Payments deficit
is based on _____ transactions. (Fill up the 7. Which of the following is not included in capital
blank with correct alternative.) account of BOP.
(a) Autonomous (a) Portfolio investments
(b) Accommodating (b) Banking capital transactions
(c) Current account (c) Unilateral transfers
(d) Capital account (d) Direct investments

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 231
Ans : DELHI 2023 Ans : OD 2021

(b) A deficit trade balance for Country X (d) All transfer receipts are recorded as debit
items.
28. _____ Is the difference between value of export
and import of services; transfer payments in a 33. Identify the false statement in context of India’s
given period of time. foreign trade.
(a) Balance of trade (a) Exporter of raw material.
(b) Net Invisibles (Services) (b) Surplus in foreign trade account.
(c) Trade surplus (c) Importer of finished goods
(d) Current account of BOP
(d) Import of gems and pearls from Britain.
Ans : COMP 2017
Ans : MAIN 2016
(b) Net Invisibles (Services)
(a) Exporter of raw material.
29. Which of the following items will be entered on
the credit side of current account in Balance of 34. Which of the following statements is incorrect?
Payment of a country? (a) Balance of Payment (BOP) is a flow concept.
(a) Borrowings from abroad (b) Balance of Trade includes export and import
(b) Import of Machinery of goods only.
(c) Export of tea (c) Charity to foreign countries is recorded in
(d) Foreign Direct Investment Capital Account of BOP.
Ans : OD 2021 (d) Balance of Payment is broader concept than
balance of trade.
(c) Export of tea
Ans : FOREIGN 2008
30. Price of one currency in relation to another
currency, determined by the free market forces, is (c) Charity to foreign countries is recorded in
known as _____. Capital Account of BOP.
(a) Equilibrium Price
35. Which of the following items is included in capital
(b) Fixed Exchange Rate
account of Balance of Payments of a country?
(c) Foreign Exchange Rate
(a) Interest and rent received from assets abroad
(d) Flexible Exchange Rate
(b) Income from banking services
Ans : COMP 2012
(c) Remittances from abroad
(d) Flexible Exchange Rate (d) Foreign Direct Investment
31. In 1991, _____ was the immediate impact of Ans : OD 2021
devaluation of Indian Rupee.
(d) Foreign Direct Investment
(a) Increase in inflow of foreign exchange
(b) Decrease in inflow of foreign exchange 36. From the following, identify the correct reasons
(c) Increase in outflow of foreign exchange that may affect the supply of foreign exchange in
(d) Fall in foreign exchange reserve an economy:
Ans : OD 2021 I. Purchase of land in England by an Indian.
(a) Increase in inflow of foreign exchange II. Foreign tourists visiting Taj Mahal.
III. Donation of $ 500 million from Microsoft.
32. In context of current account, identify the IV. Indian students going to Australia for studies
incorrect statement from the following:
Alternatives:
(a) Export of goods and services are recorded as
(a) I and II
credit items.
(b) II and IV
(b) Imports of goods and services are recorded as
(c) II and III
debit items.
(d) I and IV
(c) All transfer payments are recorded as debit
items. Ans : SQP 2010
(d) All transfer receipts are recorded as debit (c) II and III
items.

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CH 5 : FOREIGN EXCHANGE MARKET AND BALANCE OF PAYMENTS
Ans : OD 2022
24. As per the Reserve Bank of India (RBI) press
(c) `1,500 crore report, dated 22 nd June, 2022:
“Net Foreign Portfolio Investment (FPI) recorded
19. _____ Refers to purchase of assets abroad an outflow of US$ 15.2 billion mainly from the
along with acquiring the power to control them equity market.”
(a) Portfolio investment The above transaction will be recorded in the
(b) Autonomous investment _____ account on _____ side of Balance of
(c) Induced investment Payments Account of India.
(d) Direct investment (a) Current, credit
Ans : FOREIGN 2021 (b) Current, debit
(c) Capital, credit
(d) Direct investment
(d) Capital, debit
20. Other things remaining unchanged, when in Ans : DELHI 2023
a country the price of foreign currency rises,
(d) Capital, debit
national income is :
(a) Likely to rise 25. Assuming that, the following data is given for an
(b) Likely to fall imaginary economy: (2023 Series : HFG1E/2)
(c) Likely to rise
(d) Not affected and fall both Items 2020 (` in 2021 (` in
Cr.) Cr.)
Ans : COMP 2000
Exports of visibles 1,000 1,100
(a) Likely to rise
Imports of visibles 800 850
21. Foreign exchange transactions dependent on other
The Balance of Trade from 2020 to 2021 _____
foreign exchange transactions are called :
by `_____ crore.
(a) Current account transactions
(a) Increased, 200
(b) Capital account transactions
(b) Decreased, 200
(c) Autonomous transactions
(c) Increased, 50
(d) Accommodating transactions
(d) Decreased, 50
Ans : DELHI 2001
Ans : OD 2007
(d) Accommodating transactions
(c) Increased, 50
22. Foreign exchange transactions which are
26. Suppose, the price of one UK Pound (£) has
independent of other transactions in the Balance
increased from `70 to `80, owing to market forces.
of Payments Account are called :
This means that value of Indian Currency (`) has
(a) Current transactions
_____.
(b) Capital transactions
(a) Appreciated
(c) Autonomous transactions
(b) Depreciated
(d) Accommodating transactions
(c) Revalued
Ans : OD 2004 (d) Devalued
(c) Autonomous transactions Ans : MAIN 2015

23. Other things remaining the same, when in a (b) Depreciated

country the market price of foreign currency falls,
27. Suppose, Country X has more inflation than
national income is likely :
Country Y. Which of the following is most likely
(a) To rise
situation to happen in such a case, assuming other
(b) To fall
factors being constant?
(c) To rise or to fall
(a) A surplus trade balance in Country X
(d) To remain unaffected
(b) A deficit trade balance for Country X
Ans : DELHI 2018 (c) A rise in exports from Country X to Country
(b) To fall Y
(d) A deficit trade balance for Country Y

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 233

A fixed exchange rate is determined by a country’s 48. What happens when the domestic currency
government or central bank, keeping the currency appreciates in terms of exchange rate?
value stable. Unlike flexible rates, it does not (a) The exchange rate rises for domestic currency.
change based on market fluctuations, ensuring (b) Domestic currency becomes more valuable.
predictability in trade and investments. (c) Exports become cheaper internationally.
(d) Demand for foreign currency increases.
45. Which key factor contributes to the depreciation
Ans : SQP 2010
of domestic currency value?
(a) Growth in exports to foreign nations. (b) Domestic currency becomes more valuable.
(b) Rising demand for foreign currency in the Appreciation increases the value of domestic
market. currency relative to foreign currency, making
(c) Reduction in domestic inflation rates. imports cheaper but potentially reducing export
(d) Increase in remittances from abroad. competitiveness. This is common when foreign
currency supply increases or demand decreases.
Ans : DELHI 2004

(b) Rising demand for foreign currency in the 49. What is the primary purpose of the capital
market. account in the balance of payments?
Depreciation occurs when foreign currency (a) To record trade of goods and services.
demand surpasses supply, reducing the value (b) To track financial flows affecting assets and
of domestic currency. This often happens due liabilities.
to increased imports, foreign loan payments, or (c) To regulate international trade policies.
speculative trade in foreign exchange markets. (d) To monitor tourism and remittance activities.
Ans : COMP 2003
46. What does the downward slope of the foreign
exchange demand curve signify? (b) To track financial flows affecting assets and
(a) Higher prices increase demand. liabilities.
The capital account tracks changes in ownership
(b) Lower prices increase demand.
of assets between nations, including investments
(c) Demand remains constant regardless of price. and loans. It complements the current account
(d) There is no relation between price and by focusing on financial transactions rather than
demand. trade of goods and services.
Ans : OD 2007
50. What does disequilibrium in the balance of
(b) Lower prices increase demand. payments indicate for an economy?
C The demand curve slopes downward, indicating (a) Equal exports and imports of goods.
an inverse relationship between the exchange (b) A surplus or deficit in economic transactions.
rate and demand for foreign currency. When (c) Rising capital investments abroad.
the exchange rate decreases, foreign goods and (d) Increased stability in foreign reserves.
services become cheaper, increasing demand. Ans : DELHI 2005

47. What does foreign exchange mean in the context (b) A surplus or deficit in economic transactions.
of international financial systems? Disequilibrium arises when a country’s receipts
(a) Currency used for domestic transactions. from foreign transactions do not match its
(b) Currencies other than the domestic one. payments. This imbalance can result from
(c) The value of gold and reserves in a country. economic, political, or social factors and may
affect the nation’s financial stability.
(d) Rules governing international trade policies.
Ans : FOREIGN 2008
51. What role do unilateral transfers play in the
current account of BOP ?
(b) Currencies other than the domestic one. (a) They record one-sided payments like
Foreign exchange refers to currencies used in remittances or grants.
international transactions, differing from domestic (b) They balance the trade deficit in visible
currency. These currencies facilitate cross-border goods.
trade, investment and economic cooperation (c) They include bilateral trade agreements.
globally. (d) They are part of banking capital transactions.

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CH 5 : FOREIGN EXCHANGE MARKET AND BALANCE OF PAYMENTS

(a) Both Assertion and Reason are true and (b) Both Assertion and Reason are true and
Reason is the correct explanation of Assertion. Reason is not the correct explanation of Assertion.
(b) Both Assertion and Reason are true and
Reason is not the correct explanation of 82. Assertion : Unilateral transfers are a part of
Assertion. Current Account.
(c) Assertion is true but Reason is false. Reason : Capital account records transactions
(d) Assertion is false but Reason is true. which cause a change in the assets or liabilities of
the Government.
Ans : SQP 2007
(a) Both Assertion and Reason are true and
(c) Assertion is true but Reason is false. Reason is the correct explanation of Assertion.
(b) Both Assertion and Reason are true and
79. Assertion : Disequilibrium in BOP is caused by Reason is not the correct explanation of
autonomous receipts and autonomous payments. Assertion.
Reason : Receipts of autonomous transactions are (c) Assertion is true but Reason is false.
recorded on the credit side of the BOP account. (d) Assertion is false but Reason is true.
(a) Both Assertion and Reason are true and
Reason is the correct explanation of Assertion. Ans : FOREIGN 2005

(b) Both Assertion and Reason are true and (b) Both Assertion and Reason are true and
Reason is not the correct explanation of Reason is not the correct explanation of Assertion.
Assertion.
(c) Assertion is true but Reason is false. 83. Assertion : The Balance of Payments is in
(d) Assertion is false but Reason is true. surplus, if autonomous receipts are greater than
autonomous payments.
Ans : COMP 2008
Reason : Autonomous transactions are determined
(b) Both Assertion and Reason are true and by the difference in the Balance of Payments.
Reason is not the correct explanation of Assertion. (a) Both Assertion and Reason are true and
Reason is the correct explanation of Assertion.
80. Assertion : Exports of invisibles are recorded on (b) Both Assertion and Reason are true and
the debit side of the current account of BOP. Reason is not the correct explanation of
Reason : Inflow of foreign exchange is recorded on Assertion.
the credit side. (c) Assertion is true but Reason is false.
(a) Both Assertion and Reason are true and (d) Assertion is false but Reason is true.
Reason is the correct explanation of Assertion.
(b) Both Assertion and Reason are true and Ans : SQP 2009

Reason is not the correct explanation of (c) Assertion is true but Reason is false.
Assertion.
(c) Assertion is true but Reason is false.
(d) Assertion is false but Reason is true.
STATEMENT BASED QUESTIONS
Ans : DELHI 2010

(d) Assertion is false but Reason is true.

84. Statement 1 : Foreign exchange refers to all
81. Assertion : Import of machinery is recorded in the currencies other than the domestic currency.
current account. Statement 2 : It includes only the currencies used
Reason : Capital transactions relate to Capital for international trade.
receipts and capital payments. (a) Both statements are true.
(a) Both Assertion and Reason are true and (b) Both statements are false.
Reason is the correct explanation of Assertion. (c) Statement 1 is true and Statement 2 is false.
(b) Both Assertion and Reason are true and (d) Statement 1 is false and Statement 2 is true.
Reason is not the correct explanation of
Ans : COMP 2002
Assertion.
(c) Assertion is true but Reason is false. (c) Statement 1 is true and Statement 2 is false.
(d) Assertion is false but Reason is true. Foreign exchange includes all foreign currencies,
not just those used for trade, but also for financial
Ans : OD 2003
and speculative purposes.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 235

58. What is meant by autonomous items in the Ans : OD 2016

balance of payments? (b) It increases export competitiveness.

(a) Items driven by profit motives and not for Devaluation reduces the price of domestic goods
balancing the BOP. in foreign markets, making them more attractive
(b) Transactions made to adjust BOP deficits. to buyers and boosting exports.
(c) Items regulated by international banks.
(d) Government loans for foreign trade. 62. What is the key purpose of the capital account in
the BOP framework?
Ans : SQP 2013
(a) Monitoring trade of visible goods.
(a) Items driven by profit motives and not for (b) Tracking capital inflows and outflows.
balancing the BOP.
(c) Balancing unilateral transfers.
Autonomous items include economic transactions,
such as trade or investments, conducted for profit (d) Regulating domestic fiscal policies.
rather than to address BOP imbalances. Ans : FOREIGN 2019

59. What does the term “accommodating items” refer (b) Tracking capital inflows and outflows.
to in the BOP? The capital account records financial transactions,
(a) Transactions for profit-making in international such as foreign investments, loans and asset
trade. ownership changes between countries.
(b) Adjustments made to balance deficits or
63. What is the role of managed floating exchange
surpluses in BOP.
rate in currency stability?
(c) Government policies to regulate exchange
rates. (a) Allows currency value to be fixed by the
(d) Trade agreements between nations. government.
(b) Enables central banks to intervene in currency
Ans : COMP 2015
fluctuations.
(b) Adjustments made to balance deficits or (c) Fully relies on market forces of demand and
surpluses in BOP. supply.
Accommodating items are economic transactions (d) Completely eliminates foreign exchange
conducted specifically to address disequilibrium volatility.
in the BOP, often carried out by governments or
central banks. Ans : SQP 2022

60. Which factor can cause disequilibrium in the (b) Enables central banks to intervene in currency
balance of payments? fluctuations.
(a) Stable international trade policies. Under a managed floating system, central banks
(b) Large-scale development leading to higher step in to stabilize the currency by buying or
imports. selling foreign currency to control excessive
(c) Decrease in domestic inflation rates. volatility.
(d) Increase in remittances from abroad.
64. What happens when the domestic currency
Ans : DELHI 2012 depreciates in the foreign exchange market?
(b) Large-scale development leading to higher (a) The value of domestic currency rises.
imports. (b) Domestic goods become cheaper for foreign
Increased development expenditures often buyers.
result in higher imports, contributing to a trade (c) The demand for domestic exports decreases.
imbalance and disequilibrium in the BOP.
(d) Foreign currency demand reduces.
61. How does devaluation of domestic currency Ans : COMP 2021
impact trade under a fixed exchange rate system?
(b) Domestic goods become cheaper for foreign
(a) It reduces export competitiveness. buyers.
(b) It increases export competitiveness. Depreciation lowers the price of domestic goods in
(c) It raises the domestic currency value. the global market, boosting exports but making
(d) It leads to increased imports. imports more expensive.

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CH 5 : FOREIGN EXCHANGE MARKET AND BALANCE OF PAYMENTS
Ans : OD 2009
(goods) and invisible trade (services), which are
(a) They record one-sided payments like key elements of a nation’s economic transactions
remittances or grants. with the rest of the world.
Unilateral transfers include payments that are
one-way, such as remittances sent by individuals 55. What does the supply curve of foreign exchange
or grants provided by governments. These depict in the market?
transactions do not involve an exchange of goods (a) An inverse relationship between price and
or services. supply.
(b) A direct relationship between price and
52. How is the balance of trade calculated within the supply.
current account of BOP ? (c) No correlation between price and supply.
(a) By subtracting imports of services from (d) A constant supply irrespective of price
exports of goods. changes.
(b) By the difference between exports and
Ans : DELHI 2018
imports of goods.
(c) By adding visible and invisible items of trade. (b) A direct relationship between price and supply.
The foreign exchange supply curve slopes upwards,
(d) By balancing unilateral transfers with services
indicating that as the price of foreign currency
trade.
increases, more of it is supplied to the market.
Ans : FOREIGN 2002
56. How is the balance of trade different from the
(b) By the difference between exports and imports
balance of payments?
of goods.
(a) BOT includes only trade in goods, while BOP
The balance of trade focuses solely on the net
includes all economic transactions.
value of goods exported and imported. It forms a
major component of the current account but does (b) BOT includes services, while BOP focuses
not include services or other transfers. only on goods.
(c) Both BOT and BOP include unilateral
53. What does revaluation of domestic currency mean transfers.
under a fixed exchange rate system? (d) BOT includes all trade, while BOP excludes
(a) Increase in its value by government visible items.
intervention.
Ans : OD 2020
(b) Decrease in its value by market forces.
(c) Depreciation due to foreign demand. (a) BOT includes only trade in goods, while BOP
(d) Adjustment in its value by inflation rates. includes all economic transactions.
The balance of trade measures the net export-
Ans : SQP 2011
import value of goods, while the balance of
(a) Increase in its value by government payments includes goods, services, transfers and
intervention. capital flows.
Revaluation occurs when a government
intentionally increases the value of its currency 57. What causes appreciation of domestic currency in
under a fixed exchange rate system. It reflects terms of foreign exchange?
the country’s economic strength and impacts (a) Increase in demand for foreign currency.
international trade. (b) Decrease in demand for foreign currency.
(c) Reduction in exports of goods.
54. What is the main component of the current
(d) Decrease in foreign currency supply.
account in the balance of payments?
(a) Loans taken by the government. Ans : FOREIGN 2017
(b) Export and import of goods and services.
(b) Decrease in demand for foreign currency.
(c) Portfolio investments by foreigners.
When demand for foreign currency falls, the value
(d) Banking capital transactions.
of the domestic currency increases, leading to its
Ans : COMP 2014 appreciation in the foreign exchange market.
(b) Export and import of goods and services.
The current account focuses on visible trade

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 237

72. How does appreciation of domestic currency 75. Assertion : Incentives given for increasing exports
impact exports? result in a fall in foreign exchange rate.
(a) Exports become more expensive for foreign Reason : Increased inflow of foreign exchange,
buyers. demand for foreign exchange remaining
(b) Exports become cheaper for foreign buyers. unchanged, brings a likely fall in foreign exchange
(c) Export demand remains unaffected. rate.
(d) Export prices depend solely on inflation. (a) Both Assertion and Reason are true and
Reason is the correct explanation of Assertion.
Ans : FOREIGN 2003
(b) Both Assertion and Reason are true and
(a) Exports become more expensive for foreign Reason is not the correct explanation of
buyers. Assertion.
Appreciation increases the value of domestic (c) Assertion is true but Reason is false.
currency, making goods more expensive in foreign (d) Assertion is false but Reason is true.
markets and reducing export competitiveness.
Ans : DELHI 2000

(a) Both Assertion and Reason are true and

Reason is the correct explanation of Assertion.
ASSERTION AND REASON 76. Assertion : Depreciation of a currency occurs
under flexible exchange rate system.
73. Assertion : Increase in price of foreign currency Reason : Depreciation and devaluation both
increases exports. imply a fall in the price of domestic currency in
Reason : Increase in foreign exchange rate makes terms of foreign currency.
home currency cheaper to foreigners leading to (a) Both Assertion and Reason are true and
increase in foreign demand for domestic goods. Reason is the correct explanation of Assertion.
(a) Both Assertion and Reason are true and (b) Both Assertion and Reason are true and
Reason is the correct explanation of Assertion. Reason is not the correct explanation of
(b) Both Assertion and Reason are true and Assertion.
Reason is not the correct explanation of (c) Assertion is true but Reason is false.
Assertion. (d) Assertion is false but Reason is true.
(c) Assertion is true but Reason is false. Ans : OD 2001
(d) Assertion is false but Reason is true.
(a) Both Assertion and Reason are true and
Ans : SQP 2021 Reason is the correct explanation of Assertion.
(a) Assertion and reason both are correct
77. Assertion : Capital account transactions do not
statements and reason is correct explanation for
directly affect the level of national income.
assertion.
Reason : Capital account transactions are called
74. Assertion : There is a direct relationship between below the line transactions.
the price of a foreign currency and demand for (a) Both Assertion and Reason are true and
foreign exchange. Reason is the correct explanation of Assertion.
Reason : When the exchange rate rises, demand (b) Both Assertion and Reason are true and
for foreign exchange falls and vice versa. Reason is not the correct explanation of
(a) Both Assertion and Reason are true and Assertion.
Reason is the correct explanation of Assertion. (c) Assertion is true but Reason is false.
(b) Both Assertion and Reason are true and (d) Assertion is false but Reason is true.
Reason is not the correct explanation of Ans : FOREIGN 2004
Assertion.
(c) Assertion is true but Reason is false.
(c) Assertion is true but Reason is false.
(d) Assertion is false but Reason is true. 78. Assertion : The trade account is also called the
Ans : COMP 2023 merchandise account.
Reason : The balance of exports and imports of
(d) Assertion is false but Reason is true
visible and invisible items is called balance of
trade.

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CH 5 : FOREIGN EXCHANGE MARKET AND BALANCE OF PAYMENTS

90. Which category contributes the second highest

amount to the Balance of Payments?
(a) Autonomous Transactions
(b) Accommodating Items
(c) Invisible Trade
(d) Visible Trade
Ans : DELHI 2016

(a) Autonomous Transactions

According to the graph, visible trade contributes
the highest (80 billion dollars), followed by
autonomous transactions at 60 billion dollars,
making it the second-highest contributor.

DIRECTION : Read the following line graph and

answer the following question : 92. In which year did the foreign exchange demand
experience a decline compared to the previous
year?
(a) 2017
(b) 2018
(c) 2020
(d) 2021
Ans : FOREIGN 2022

(c) 2020
The line graph shows that the foreign exchange
demand decreased from 50 billion dollars in 2019
to 40 billion dollars in 2020, indicating a decline.

91. In which year did the supply of foreign exchange PASSAGE BASED QUESTION
experience the highest value?
(a) 2018
(b) 2019 93. Depreciation of a domestic currency means a fall
(c) 2021 in its value relative to foreign currency, occurring
(d) 2022 in a flexible exchange rate system. It often
happens when the demand for foreign currency
Ans : OD 2019
increases or its supply decreases.
(d) 2022 What causes depreciation of domestic currency?
The line graph indicates that the supply of foreign (a) Increase in foreign currency demand.
exchange peaked in 2022 at 60 billion dollars,
(b) Increase in domestic inflation rates.
showing a steady increase over the years.
(c) Fixed exchange rate system.
(d) Higher remittances from abroad.
Ans : DELHI 2018

DIRECTION : Read the following graph carefully (a) Increase in foreign currency demand.
and answer the following question : Depreciation occurs when demand for foreign
currency rises, reducing the relative value of the
domestic currency under a flexible exchange rate
system.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 239

85. Statement 1 : Depreciation of domestic currency Ans : SQP 2020

occurs due to an increase in demand for foreign (c) Statement 1 is true and Statement 2 is false.
currency. Autonomous transactions occur naturally in trade
Statement 2 : It leads to domestic goods becoming or investments for profit and are not intended to
cheaper in foreign markets. address BOP deficits.
(a) Both statements are true.
(b) Both statements are false.
(c) Statement 1 is true and Statement 2 is false.
(d) Statement 1 is false and Statement 2 is true. GRAPH BASED QUESTIONS
Ans : DELHI 2011

(a) Both statements are true. 89. The bar graph represents various sources of
Depreciation occurs when demand for foreign foreign exchange for a country in billion dollars.
currency rises, reducing the value of domestic Based on the data, which category contributes
currency, making exports cheaper. the highest amount of foreign exchange?
86. Statement 1 : Balance of Trade (BOT) is the net
difference between exports and imports of goods.
Statement 2 : BOT includes services like banking
and shipping.
(a) Both statements are true.
(b) Both statements are false.
(c) Statement 1 is true and Statement 2 is false.
(d) Statement 1 is false and Statement 2 is true.
Ans : OD 2014

(c) Statement 1 is true and Statement 2 is false.

BOT only accounts for tangible goods traded
internationally, excluding services, which are part (a) Exports
of invisible trade. (b) Imports
(c) Remittances
87. Statement 1 : A managed floating exchange rate (d) FDI
allows central bank intervention.
Ans : COMP 2012
Statement 2 : Under this system, the government
fixes the exchange rate permanently. (b) Imports
(a) Both statements are true. According to the bar graph, imports contribute
(b) Both statements are false. the highest value at 70 billion dollars, indicating
(c) Statement 1 is true and Statement 2 is false. significant demand for foreign currency due to
(d) Statement 1 is false and Statement 2 is true. international trade activities.
Ans : FOREIGN 2018
DIRECTION : Read the following bar graph and
(c) Statement 1 is true and Statement 2 is false.
answer the following question :
Managed floating systems permit central banks to
stabilize market fluctuations but do not involve
permanently fixed exchange rates.

88. Statement 1 : Autonomous transactions in the

Balance of Payments are profit-driven.
Statement 2 : These transactions are primarily
undertaken to balance the BOP deficit.
(a) Both statements are true.
(b) Both statements are false.
(c) Statement 1 is true and Statement 2 is false.
(d) Statement 1 is false and Statement 2 is true.

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CH 5 : FOREIGN EXCHANGE MARKET AND BALANCE OF PAYMENTS

65. What is the main distinction between depreciation (a) Export and import of physical goods.
and devaluation of currency? (b) Transactions involving services like banking
(a) Depreciation is voluntary, while devaluation or shipping.
is imposed by the market. (c) Loans and investments between nations.
(b) Depreciation occurs in flexible rates, while (d) Payments for foreign direct investment.
devaluation is under fixed rates. Ans : SQP 2004
(c) Depreciation is a government decision, while
(b) Transactions involving services like banking
devaluation is market-driven.
or shipping.
(d) Both occur only due to changes in export
Invisible items include non-physical services, such
activity.
as transport, banking, or insurance, which are
Ans : DELHI 2023 recorded in the current account.
(b) Depreciation occurs in flexible rates, while 69. What does “autonomous transactions” in BOP
devaluation is under fixed rates. refer to?
Depreciation is natural in a flexible exchange rate (a) Transactions made to address trade deficits.
system, while devaluation is a deliberate action (b) Economic activities motivated by profit
under a fixed system. maximization.
66. What does the supply curve of foreign exchange (c) Loans and grants from foreign nations.
signify in international markets? (d) Government interventions in the capital market.
(a) Lower exchange rates increase foreign Ans : COMP 2007
exchange supply.
(b) Economic activities motivated by profit
(b) Higher exchange rates increase foreign
maximization.
exchange supply.
Autonomous transactions are natural economic
(c) Supply is constant irrespective of exchange
activities, like trade and investments, that occur
rates.
due to business or profit motives.
(d) Supply depends only on government
regulations. 70. What is a key factor causing surplus in the
Ans : OD 2000 balance of payments?
(b) Higher exchange rates increase foreign (a) Increase in imports of goods and services.
exchange supply. (b) Decline in foreign investments.
The upward-sloping supply curve shows that as (c) Higher remittances from abroad.
the exchange rate rises, more foreign currency is (d) Increased domestic inflation rates.
supplied to the market. Ans : DELHI 2008

67. How does inflation affect the balance of payments (c) Higher remittances from abroad.
in a country? A rise in remittances adds to foreign exchange reserves,
(a) It reduces export costs and encourages leading to a surplus in the balance of payments.
imports.
71. How do official reserve transactions function in
(b) It increases import costs, leading to trade
the balance of payments?
deficits.
(a) They are used to adjust deficits or surpluses
(c) It balances trade by reducing both imports
in BOP.
and exports.
(b) They only include loans taken by the
(d) It has no significant effect on trade balances.
government.
Ans : FOREIGN 2001 (c) They monitor bilateral trade agreements.
(b) It increases import costs, leading to trade (d) They are part of autonomous items.
deficits. Ans : OD 2010
Domestic inflation makes local goods expensive
(a) They are used to adjust deficits or surpluses
and imports more attractive, often resulting in a
in BOP.
deficit in the balance of payments.
Official reserve transactions involve central banks
68. What are invisible items in the current account buying or selling foreign currency to stabilize the
of the BOP? BOP.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 241

94. Balance of Trade (BOT) refers to the difference 97. The supply of foreign exchange increases when
between exports and imports of goods. It is part exports rise, foreign tourists visit, or remittances
of the current account in the balance of payments are sent by citizens living abroad. Higher foreign
and only includes visible items like physical goods direct investments also boost the supply of foreign
traded internationally. exchange.
What does the Balance of Trade include? What contributes to an increase in the supply of
(a) Only visible items like goods. foreign exchange?
(b) All services and goods. (a) Domestic inflation.
(c) Loans and investments. (b) Rise in exports and remittances.
(d) Banking capital transactions. (c) Higher demand for foreign currency.
(d) Political instability in the country.
Ans : OD 2020

(a) Only visible items like goods. Ans : COMP 2015

The Balance of Trade focuses on tangible goods (b) Rise in exports and remittances.
traded internationally, excluding services and Exports, remittances and foreign investments
capital transactions. increase the supply of foreign exchange,
strengthening the foreign reserves of the country.
95. Managed floating exchange rate is a flexible
rate influenced by central bank interventions.
The central bank buys or sells foreign currency
to stabilize exchange rates and control market
fluctuations.
ONE MARK QUESTIONS
How does a central bank manage the exchange
rate? 98. What is foreign exchange?
(a) By fixing rates permanently.
(b) By buying or selling foreign currency. Ans : COMP 2017

(c) By relying on market demand alone. Foreign exchange refers to the currency of other
(d) By increasing inflation rates. countries, such as US dollars, UK pounds, etc.
Ans : FOREIGN 2017 99. Define foreign exchange rate.
(b) By buying or selling foreign currency. Ans : DELHI 2013
The central bank intervenes in a managed floating
system to stabilize exchange rates, ensuring Foreign exchange is the value of a foreign currency
minimal market volatility. expressed in terms of the domestic currency, e.g.,
1 USD = `80.
96. Autonomous items in the Balance of Payments
refer to economic transactions driven by profit 100. What is ‘devaluation’ ?
motives. These include international trade and Ans : OD 2015
foreign investments, which occur independently
Devaluation of domestic currency refers to the
of any need to balance the BOP.
government’s deliberate action to increase the
What are autonomous items in the Balance of
price of foreign currency in terms of domestic
Payments?
currency.
(a) Transactions to balance the BOP.
(b) Government loans to manage deficits. 101. What is meant by depreciation of domestic
(c) Economic activities motivated by profit. currency?
(d) Banking capital transfers.
Ans : FOREIGN 2012
Ans : SQP 2013
Currency depreciation is the decline in the value
(c) Economic activities motivated by profit. of domestic currency relative to foreign currency.
Autonomous items occur naturally in international
trade and investments, independent of balancing 102. What is a fixed exchange rate?
the Balance of Payments. Ans : SQP 2016

A fixed exchange rate is one that is set and

maintained by the government or central bank.

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CH 5 : FOREIGN EXCHANGE MARKET AND BALANCE OF PAYMENTS

become more competitive in the international reduction in the volume of imports, as purchasing
market due to their lower relative prices. foreign products becomes less economical.
Therefore, depreciation of a country’s currency
typically results in a rise in its export levels. 136. Depreciation of the Indian Currency will lead
to promotion of Indian exports. State the given
133. What is meant by official reserve transactions? statement is true or false.
Discuss their importance in balance of payments?
Ans : DELHI 2023
Ans : COMP 2019
Depreciation of the Indian currency means that
Transactions that lead to changes in the official more rupees are now needed to purchase a foreign
reserves of a country’s Central Bank are referred currency, such as the US dollar. This also signifies
to as official reserve transactions. Also known that with the same amount of foreign currency,
as accommodating transactions in the Balance a larger quantity of goods can be purchased
of Payments (BOP), these adjustments aim to from the domestic market. Consequently, the
address imbalances in the BOP. When a BOP depreciation of the Indian currency enhances the
deficit occurs, the Central Bank reduces its official competitiveness of Indian exports on the global
reserves to manage the shortfall. Conversely, stage. As Indian goods become more affordable for
during a BOP surplus, official reserves are international buyers, this promotes exports and
increased. These transactions play a vital role in strengthens their position in the global market.
maintaining the overall equilibrium in a nation’s
international financial position. 137. Depreciation of currency has same effect on
exports as devaluation of currency. State whether
134. In which sub-account and on which side of balance the given statement is true or false.
of payments account will foreign investments in Ans : SQP 2020
India be recorded? Give reasons.
In both depreciation and devaluation scenarios,
Ans : OD 2023 the exports of goods and services from a country
Foreign investments in India are entered on the tend to increase. This happens because the
credit side of the Capital Account in the Balance reduced value of the domestic currency allows
of Payments (BOP) and denoted by a positive other countries to purchase more goods and
sign. This is because borrowings and investments services at a relatively lower cost. Consequently,
from the international community constitute the exports become more attractive and competitive
primary components of the Capital Account. in international markets. This enhanced afford-
Furthermore, any inflow of foreign exchange or ability encourages higher demand for domestic
financial receipts from other nations is treated goods and services abroad, thereby boosting
as a credit entry. These investments signify a export levels and contributing positively to the
positive flow of funds into the country, enhancing country’s trade balance and economic growth.
its financial position and contributing to the
138. What effect will depreciation of the Indian rupee
balance of the Capital Account.
have on the current account deficit?
135. Explain, what can be the likely impact of Ans : COMP 2017
depreciation of the home currency on imports to
the country. The depreciation of the rupee makes foreign goods
more expensive, leading to a reduction in imports.
Ans : DELHI 2020 Simultaneously, exports are likely to increase
Depreciation refers to a decrease in the value as domestic goods become cheaper and more
of the domestic currency relative to a foreign attractive to foreign buyers. This should ideally
currency. As a result, the domestic currency loses reduce the current account deficit. However,
value, requiring more units of it to purchase one if essential commodities and raw materials
unit of the foreign currency. This change makes dominate imports, reducing their volume may not
imports more expensive because a higher amount be feasible. In such cases, the import bill could
of domestic currency is needed to buy goods worth rise despite depreciation, potentially worsening
$ 1. Consequently, foreign goods become costlier the current account deficit instead of improving
for domestic consumers, which typically causes a it.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 243

113. Explain the impact of this lending on market total imports of `1,600 crore.
exchange rate.
117. What is ‘current account deficit’ in the balance
Ans : FOREIGN 2007
of payments?
When Indian investors lend money abroad, it Ans : OD 2003
results in a reduction in the domestic supply of
foreign exchange due to the outflow of currency. A current account deficit occurs when the foreign
This decrease in foreign exchange availability exchange receipts in a country’s current account
triggers an increase in the exchange rate, signifying are insufficient to cover its foreign exchange
that the value of the Indian rupee depreciates payments. This imbalance signifies that the nation
relative to foreign currencies, impacting the is spending more on imports, services and other
overall balance of payments and trade dynamics outflows than it earns from exports, investments,
adversely. or remittances, leading to a shortfall in the current
account and potential economic challenges.
114. How can Reserve Bank of India help in bringing
down the foreign exchange rate which is very 118. Explain the concept of ‘deficit’ in the Balance of
high? Payments.

Ans : SQP 2008

Ans : FOREIGN 2005

The Reserve Bank of India may consider A balance of payments (BOP) deficit arises when
devaluing the Indian rupee to address and reduce autonomous receipts fall short of autonomous
the high exchange rate. By intentionally lowering payments, creating a financial imbalance. To
the rupee’s value relative to foreign currencies, address this deficit, countries often rely on
this measure aims to make Indian exports more borrowing from international institutions like
competitive globally, stimulate economic growth the International Monetary Fund (IMF). Such
and bring the exchange rate to a more manageable borrowings are classified as accommodating
and favorable level for international trade and items, ensuring that the BOP is ultimately
economic stability. balanced, maintaining global financial stability
and enabling countries to manage their external
115. Differentiate between disequilibrium and deficit obligations effectively.
in BOP?
119. Giving reasons state whether the following
Ans : COMP 2008
statements are true or false:
Disequilibrium in the Balance of Payments Export and import of machines are recorded
(BOP) occurs when there is either a surplus or in capital account of the balance of payments
a deficit in the account, disrupting the financial account.
equilibrium. Among these, a deficit in the BOP Ans : SQP 2009
represents one significant form of disequilibrium,
indicating that a country’s outflows of foreign The statement is incorrect. The export and import
exchange exceed its inflows. This imbalance can of machinery are not recorded in the current
impact the nation’s economy, requiring corrective account of the Balance of Payments (BOP).
policy measures to restore stability. Instead, these transactions are included in the
capital account as they involve the exchange of
116. The balance of trade shows a deficit of `600 crore, physical assets. The current account primarily
the value of exports is `1,000 crore. What is the captures trade in goods and services, income and
value of imports? current transfers.
Ans : DELHI 2010
120. State the effect of the following on the balance
The Balance of Trade (BOT) is calculated as the of payments situation. Increase in import duty
difference between exports and imports, expressed of gold.
by the formula : BOT = Exports – Imports. In Ans : COMP 2002
this case, the BOT is negative at –600 crore, with
exports amounting to 1,000 crore. Solving for Raising the import duty on gold will discourage
imports : Imports = Exports – BOT. Substituting its import by making it more expensive, leading
the values, Imports = 1,000 + 600, resulting in to a reduction in gold imports. This decrease in

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CH 5 : FOREIGN EXCHANGE MARKET AND BALANCE OF PAYMENTS

103. What is floating exchange rate? enhance the availability of foreign exchange
within the economy.
Ans : COMP 2019

A floating exchange rate is determined by market 109. State two sources of demand for foreign exchange.
forces without government or central bank Ans : COMP 2001
intervention.
The demand for foreign exchange stems from two
104. Give meaning of managed floating exchange rate. primary sources :
(i) Payments required for importing goods and
Ans : DELHI 2022
services from other countries, ensuring access
A managed floating exchange rate is a system to global resources and products and
where the government, through the central bank, (ii) Payments made for unilateral transfers,
may intervene to influence the exchange rate. which include sending gifts, remittances, or
other one-sided financial contributions to
105. Give the meaning of balance of payments. individuals or organizations abroad. These
Ans : FOREIGN 2021 factors collectively generate the need for
foreign currency.
The Balance of Payments is a systematic record
of all economic transactions between a country’s 110. When price of a foreign currency falls, the supply
residents and the rest of the world over a specific of that foreign currency also falls. Why?
period.
Ans : DELHI 2018

106. What is ‘trade balance’ ? A decrease in the price of a foreign currency (i.e.,
or a fall in the exchange rate) leads to higher export
Give meaning of Balance of Trade. prices for foreign buyers. This increase in export
Ans : OD 2023 costs discourages foreign demand for domestic
goods and services, resulting in a decline in the
The trade balance, or balance of trade, is the
inflow or supply of foreign currency into the
difference between the value of a country’s
domestic economy, impacting trade dynamics.
imports and exports of tangible goods.
111. How can increase in foreign direct investment
107. Name two ‘invisibles’ of the balance of payments
affect the price of foreign exchange?
account.
Ans : DELHI 2002
Ans : SQP 2000
An increase in foreign direct investment (FDI)
Insurance and banking. boosts the inflow of foreign currency into the
domestic economy, leading to an enhanced supply
of foreign exchange. This higher availability of
TWO MARK QUESTIONS foreign exchange typically reduces its market
price, making it more affordable and stabilizing
exchange rate fluctuations, thereby benefiting the
108. State two sources of supply of foreign exchange. overall economic environment and fostering trade.
or
112. What will be the effect of foreign investments in
State any two factors responsible for inflow of
India on exchange rate? Explain.
foreign currency.
Ans : OD 2004
Ans : COMP 2019
Foreign investments in India contribute to
Foreign exchange supply arises primarily from a greater inflow of foreign currency, thereby
three sources : increasing its supply in the domestic market. This
(i) Receipts from exporting goods and services, surplus of foreign exchange causes a reduction in
(ii) Investments by foreign firms in domestic the exchange rate, meaning that the value of the
markets, purchasing goods or services and domestic currency rises or appreciates relative to
(iii) Inflow of foreign currency facilitated by the foreign currency. Such appreciation reflects
speculators or currency dealers engaging in a stronger domestic currency, influencing trade
market activities. These sources collectively balances and economic transactions favorably.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 245

inflow of foreign exchange into the domestic Meaning It refers to fall It refers to
economy. in the value reduction
(ii) Transfers of funds to relatives abroad are of domestic in price of
entered on the debit side of the Current currency in domestic
Account as they involve an outflow of terms of foreign currency in
domestic currency, reducing the country’s currency terms of foreign
foreign exchange reserves. under flexible currency under
128. There will sale of machinery to abroad be exchange rate fixed exchange
recorded in the Balance of Payments Accounts? regime. For rate regime.
Give reasons. example, rupee-
dollar exchange
Ans : DELHI 2013 rate changes
The sale of machinery abroad qualifies as an export from 1 dollar =
of a visible item and forms part of a country’s `70 to 1$ = `80
visible trade. Visible trade, which includes the Government There is no It is done by
export and import of goods, is recorded under Interruption government the government
the Current Account of the Balance of Payments interruption as authorities.
(BOP). Since exports generate foreign exchange it is done on the
inflows, the sale of machinery abroad is recorded basis of forces
as a credit item (positive entry) in the Current of demand and
Account of the BOP. supply in the
market.
129. Where is ‘borrowings from abroad’ recorded in
the Balance of Payments Accounts? Give reasons. Rate It is done by It is done by
using floating using fixed
Ans : OD 2015
exchange rate. exchange rate.
Borrowings from abroad” are recorded in the
Capital Account of the Balance of Payments 131. What is meant by appreciation and depreciation
(BOP) because they increase the country’s of domestic currency? Explain.
international liabilities. The Capital Account
Ans : SQP 2016
documents international transactions that
impact a nation’s foreign assets and liabilities. In currency depreciation, the domestic currency’s
Borrowings by entities such as the private sector value decreases against a foreign currency. For
or government are entered on the credit side of instance, when the rupee-dollar rate shifts from
the Capital Account, as they result in an inflow 1$ = `70 to 1$ = `80. In contrast, currency
of foreign exchange into the domestic economy. appreciation occurs when the domestic currency’s
value rises relative to foreign currency, such as a
shift from 1$ = `80 to 1$ = `70. These phenomena
are driven by supply and demand forces in the
foreign exchange market, influencing the value of
a nation’s currency in global trade and financial
transactions.
THREE MARK QUESTIONS
132. Explain the effect of depreciation of domestic
currency on exports.
130. Give the meaning of ‘devaluation’ and
‘depreciation’ of domestic currency. Ans : COMP 2023

When the domestic currency depreciates, it leads

Ans : FOREIGN 2012
to an increase in exports and a decline in imports.
Depreciation of Currency and Devaluation of This occurs because, with the same amount of
Currency foreign currency, more goods can be purchased in
the domestic market. For instance, one American
Basis Depreciation of Devaluation of
dollar will now buy a larger quantity of goods
Currency Currency
domestically. Consequently, domestic products

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CH 5 : FOREIGN EXCHANGE MARKET AND BALANCE OF PAYMENTS

demand for gold will, in turn, lower the demand Ans : OD 2014

for foreign exchange required to purchase it. The statement is false A deficit in the balance
Consequently, this measure is likely to have a of payments occurs when the outflow of foreign
positive and favorable impact on the Balance of exchange from autonomous transactions exceeds
Payments (BOP) by reducing external outflows. the inflow. This imbalance indicates that a country
is spending more on imports, investments, or
121. If inflation is higher in country A than in country other autonomous activities than it earns, leading
B and the exchange rate between the two countries to a shortfall in the overall balance of payments.
is fixed, what is likely to happen to the trade
balance between the two countries? 125. In which sub-account and on which side of the
Ans : DELHI 2011
Balance of Payments Account such lending is
recorded? Give reasons.
When country B increases exports to country A,
it experiences a surplus in its balance of trade due Ans : FOREIGN 2018

to the higher volume of goods sold. However, the When Indian investors lend money abroad, the
elevated prices in country A make imports from transaction is recorded on the debit side of the
country B more expensive, causing country A’s Capital Account in the Balance of Payments. This
imports to rise. This results in a trade balance deficit is because such lending results in the creation
for country A, highlighting the interconnected of foreign exchange assets while simultaneously
nature of international trade dynamics. causing an outflow of foreign exchange from the
domestic economy. The debit entry reflects the
122. Dividend received from investment abroad is reduction in available foreign currency reserves
recorded on the credit side of the capital account. due to these international investments.
or
Giving valid reason, state whether the following 126. Giving reasons, state whether the following
statement is true or false. statements are true or false:
Ans : SQP 2023
(i) Current account of Balance of Payments
account records only exports and imports of
The statement is false Dividend received from goods and services.
investments abroad is recorded in the Current (ii) Foreign investments are recorded in the
Account of the Balance of Payments, not the capital account of balance of payments.
Capital Account This income is entered on the
credit side of the Current Account, as it reflects Ans : SQP 2020

earnings rather than changes in a country’s assets (i) The statement is false : The current account
or liabilities, thus not impacting the financial of the Balance of Payments not only records
position under the Capital Account. the export and import of goods and services
but also includes unilateral transactions such
123. ‘Indians investing in assets abroad’ will be as one-sided receipts and payments, like gifts,
recorded under debit side of capital account in remittances, or grants.
Balance of Payments. (ii) The statement is true : Foreign investments,
Ans : COMP 2020 which involve financial flows for acquiring
assets or stakes, are recorded under the
The statement is true. When Indians invest in
capital account of the Balance of Payments.
assets abroad, it results in an outflow of foreign
exchange from the country. Such transactions 127. Are the following entered (i) on the credit side
are classified under the Capital Account in the or the debit side and (ii) in the current account
Balance of Payments and are recorded on the debit or capital account in the Balance of Payments
side as negative items, reflecting the reduction in account? You must give reason for your answer.
the country’s foreign exchange reserves due to (i) Investments from abroad.
outward financial investments. (ii) Transfer of funds to relatives abroad.
124. Excess of foreign exchange receipts over foreign Ans : COMP 2017
exchange payments on account of accommodating (i) Investments from abroad are recorded on
transactions equals deficit in the balance of the credit side of the Capital Account in the
payments. (True/false) Balance of Payments because they result in an

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 247

139. Explain the effect of a rise in the price of foreign markets.

currency on exports.
or 142. Explain the effect of appreciation of domestic
Foreign exchange rate in India is on the rise currency on exports.
recently. What impact is it likely to have on Ans : SQP 2016
exports and how?
The appreciation of domestic currency signifies an
Ans : DELHI 2013 increase in its value relative to foreign currency.
When the price of foreign currency rises, it leads As a result, fewer units of the domestic currency
to an increase in the home country’s exports, are required to purchase foreign currency. This
indicating a depreciation of the domestic currency. appreciation makes domestic goods more expensive
For example, if the value of the US dollar increases for international buyers, reducing their demand.
against the Indian rupee from `70 to `80, a US Consequently, the country’s exports experience a
citizen can now purchase goods worth `80 with decline due to higher prices, negatively affecting
one dollar, compared to `70 previously. This foreign trade and competitiveness in global
makes Indian goods more affordable for American markets. Thus, appreciation has significant
buyers, encouraging them to purchase more from implications for export-oriented businesses and
India. Consequently, the depreciation boosts the broader economic balance.
India’s exports by enhancing their international
competitiveness. 143. Explain the effect of a fall in the price of foreign
currency on exports.
140. Foreign exchange rates have risen considerably in Ans : COMP 2019
a country. What is its likely impact on imports of
that country and why? A decrease in the price of foreign currency
adversely impacts a home country’s exports.
Ans : OD 2015 When the value of a foreign currency declines,
An increase in the foreign exchange rate occurs foreign buyers must spend more of their currency
when foreign currency becomes costlier relative to purchase the same quantity of goods from
to the domestic currency. In Country A, where the home country. This increase in relative
foreign exchange rates have risen significantly, cost discourages foreign buyers, leading to
imported goods become more expensive. This reduced demand for the home country’s exports.
means Country A must spend more of its currency Consequently, export volumes drop, negatively
to pay for the same amount of imports, leading to affecting trade balances and the competitiveness
higher import costs. Consequently, this adversely of the home country’s goods in international
impacts the volume of imports, as purchasing markets. This highlights the economic challenges
foreign goods becomes less economical. To address of foreign currency depreciation.
this, efforts are typically focused on reducing the
country’s reliance on imports. 144. Explain the effect of a fall in the price of foreign
currency on imports.
141. Explain the effect of appreciation of domestic
Ans : DELHI 2022
currency on imports.
When the price of foreign currency decreases,
Ans : FOREIGN 2012
imports become more affordable. Consequently,
Appreciation of the domestic currency refers to citizens of the home country, such as India, can
an increase in its external value in the foreign purchase a larger quantity of foreign goods for the
exchange market. For instance, if the rupee-dollar same amount of Indian rupees. This leads to a rise
exchange rate changes from 1$ = `80 to 1$ = in imports as foreign products become more cost-
`70, the domestic currency has appreciated. This effective. For instance, if the value of the American
appreciation makes imports more affordable, dollar drops, Indian buyers will increase imports
leading to an increase in imported goods and from America since American goods will now be
services. Conversely, exports tend to decline cheaper for them. This shift encourages greater
because foreign buyers now pay a reduced amount consumption of imported goods due to favorable
for the same quantity of goods, making domestic exchange rates.
products relatively less competitive in global

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CH 5 : FOREIGN EXCHANGE MARKET AND BALANCE OF PAYMENTS

145. Recently Indian Rupee (`) has depreciated needed for sending transfer payments to
significantly. This has lead to distress for Indian other countries, including gifts, donations, or
Importers.’ Defend or refute the given statement remittances. These factors collectively drive the
with valid reasons. need for foreign currency in the global economy.
Ans : COMP 2020
148. State any three sources of supply of foreign
I support this statement. Depreciation refers to exchange.
a decline in the value of the domestic currency Ans : FOREIGN 2023
relative to a foreign currency. This implies that
$1 will now require more Indian rupees (`) for The supply of foreign exchange originates from
exchange. In simpler terms, a larger amount several key sources:
of domestic currency is needed to purchase (i) Exports : Foreign exchange is earned through
goods worth one Dollar. Consequently, imports the export of goods and services to other
become more expensive, leading to a reduction countries, as foreign buyers pay in their
in the volume of imports. This situation creates currency.
financial challenges for Indian importers, as they (ii) Unilateral transfers : It also flows in from
face increased costs for procuring foreign goods gifts, donations and remittances sent by
and services. individuals or organizations from abroad.
(iii) Foreign investments : Investments made by
146. Differentiate between the concepts of ‘demand foreign entities or individuals in the home
for domestic goods and services’ and ‘domestic country, such as in businesses, real estate, or
demand for goods and services.’ financial assets, contribute significantly to
the supply of foreign exchange, enhancing the
Ans : DELHI 2020
country’s reserves.
The demand for domestic goods and services
refers to the consumption of goods and services 149. Why are foreign exchange rate and demand for
produced within a country’s domestic territory foreign exchange inversely related? Explain.
by both domestic and foreign consumers. It Ans : SQP 2000
represents the total demand for products and
services originating from within the country, When the foreign exchange rate increases, it
irrespective of who consumes them. On the indicates a depreciation of the domestic currency
other hand, domestic demand for goods and relative to foreign currency. Domestic consumers
services includes not only those produced within must now spend more to purchase goods and
the domestic territory but also those produced services from abroad, reducing their demand for
outside the country and consumed by domestic imports and subsequently lowering the demand
residents. This distinction highlights the scope of for foreign exchange. Conversely, when the foreign
demand based on production origin and consumer exchange rate decreases, the domestic currency
location. appreciates in value. This makes imports cheaper,
encouraging consumers to buy more foreign goods,
147. State any three sources of demand for foreign which increases the demand for foreign exchange.
exchange. Thus, the foreign exchange rate and the demand
for foreign exchange share an inverse relationship.
Ans : OD 2021

The demand for foreign exchange arises due to 150. Giving two examples, explain the relation between
several reasons: the rise in price of a foreign currency and its
demand.
(i) Imports : Foreign exchange is essential for
or
governments and individuals to pay for
Explain why is there a fall in demand for foreign
imported goods and services from other
exchange when its price rises.
countries.
(ii) Purchase of financial assets abroad : Investors Ans : COMP 2001
seeking to buy financial assets, such as stocks,
There is a clear inverse relationship between
bonds, or real estate in foreign countries,
the price of a foreign currency and its demand.
require foreign currency for such transactions.
When the price of foreign currency rises, more of
(iii) Unilateral transfers : Foreign exchange is

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 249

the domestic currency is required to import the When the price of a foreign currency decreases,
same quantity of goods, making imports costlier. its demand increases as more of it is utilized
Consequently, the demand for foreign currency to purchase foreign goods and services. This
decreases. For instance : heightened demand reduces the availability
(i) If the value of the US dollar rises in terms of foreign currency in the market, leading to a
of Indian rupees, Indian consumers must pay decline in its supply. In other words, a lower price
more to purchase the same goods from the for foreign currency results in increased usage and
US, reducing imports and the demand for consumption, thereby reducing its overall supply.
dollars. This relationship indicates that as the price of
(ii) Similarly, a higher dollar price decreases foreign currency drops, its supply in the market
demand for US services like banking or also tends to diminish, reflecting a direct impact
insurance, further reducing dollar demand. of demand on availability.

151. Explain why there is an inverse relationship 154. Explain why is there a direct relationship between
between price of foreign currency and its demand. price and supply of a foreign currency.

Ans : DELHI 2004

Ans : FOREIGN 2008

When the price of foreign currency rises, imports The supply of foreign currency shares a direct
from that country become more expensive. For relationship with its price. When the price of
example, if the value of the US dollar increases, foreign currency rises, its supply also increases
domestic buyers (e.g., Indians) must spend more to and conversely, when the price falls, its supply
purchase the same quantity of goods from the US. decreases. A decline in the price of foreign
This discourages imports, leading to a decrease in currency boosts its demand as consumers require
the demand for foreign goods and, consequently, a more foreign currency to purchase goods and
fall in the demand for foreign currency. Conversely, services from abroad.
when the price of foreign currency falls, imports This heightened demand reduces the available
from that country become more affordable. This supply of foreign currency. Conversely, when the
encourages increased imports, resulting in a rise price of foreign currency increases, the supply also
in the demand for foreign currency. rises as it becomes more profitable for holders to
exchange or trade it.
152. Explain why there is an increase in demand for
foreign currency when its price falls. 155. Why are foreign exchange rate and supply of
or foreign exchange directly related? Explain.
When price of foreign currency falls, its demand Ans : SQP 2010
rises. Explain why?
When the foreign exchange rate increases,
Ans : SQP 2020 domestic goods become more affordable for
foreign buyers since they can purchase a larger
There is a clear inverse relationship between the
quantity of domestic goods with the same amount
price of foreign exchange, such as the US dollar
of foreign currency. This boost in afford-ability
and its demand in terms of domestic currency,
raises the demand for exports, thereby increasing
like the Indian rupee. When the price of foreign
the supply of foreign exchange.
exchange decreases, its demand increases. A lower
Conversely, when the foreign exchange rate
price makes imports cheaper, encouraging higher
decreases, domestic goods become more expensive
imports and consequently increasing the demand
for foreign buyers, reducing the demand for
for the foreign currency. For instance, if the US
exports. As a result, the supply of foreign exchange
dollar costs `80, India spends `80 to buy goods
declines. Hence, there is a direct relationship
worth one dollar. If the price drops to `70, imports
between the foreign exchange rate and the supply
become cheaper, prompting higher imports and
of foreign exchange.
greater demand for US dollars in the market.
156. Explain why there is an increase in supply of
153. When price of a foreign currency falls, the supply
foreign currency when its price rises.
of that foreign currency also falls. Explain, why.
or
Ans : OD 2007 When price of a foreign currency rises its apply

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CH 5 : FOREIGN EXCHANGE MARKET AND BALANCE OF PAYMENTS
Ans : COMP 2012
Yes, a deficit or surplus in the Balance of Payments
The Balance of Payments (BOP) is considered (BOP) significantly impacts the exchange rate.
in surplus when a country’s autonomous receipts A BOP deficit occurs when payments exceed
exceed its autonomous payments during a specific receipts, indicating higher demand for foreign
period. This indicates that the domestic country exchange. This increased demand pushes up the
has net claims on foreign countries, reflecting a exchange rate, causing the domestic currency to
favorable trade and financial position. A surplus depreciate. Conversely, a BOP surplus implies
can stimulate economic growth in the short run by that receipts exceed payments, resulting in
increasing foreign reserves and boosting domestic an increased supply of foreign currency. This
production. However, over the long term, reliance surplus reduces the exchange rate, leading to an
on export-driven growth may pose risks, as appreciation of the domestic currency. Thus, the
excessive dependence on external demand can state of the BOP directly influences the value of a
make the economy vulnerable to global market country’s currency in the exchange market.
fluctuations and trade uncertainties.
170. Define with suitable examples, autonomous
167. Explain the meaning of balance of payments transactions and accommodating transactions in
deficit. the Balance of Payments of an economy.
Ans : DELHI 2016 Ans : SQP 2021

Transactions in the Balance of Payments (BOP) Autonomous transactions : Autonomous

are categorized into autonomous transactions transactions in the Balance of Payments (BOP)
and accommodating transactions. Autonomous mean those items which are motivated by
transactions occur due to economic motives, such profit consideration. Therefore, those items of
as earning profits or returns on investments. international economic transactions which are
When the total inflows from autonomous motivated by profit consideration are autonomous
transactions fall short of the total outflows, it items such as import and export of goods and
results in a deficit in the BOP account. This services and inflow and outflow of capital items.
deficit indicates that the country is engaging Autonomous items are independent of the State’s
in significant lending or transfers to foreign or the Country’s balance of payments.
countries. Such a situation reflects an imbalance, Accommodating transactions :
where the nation is sending out more resources Accommodating items correct the disequilibrium
than it receives, impacting the overall economic in the balance of payments. BOP accounts may
stability. reflect deficit or surplus. These situations are
corrected by the government by injecting or
168. Which transactions determine the balance of withdrawing funds. These transactions pertain to
trade? When is balance of trade in surplus? funding of or withdrawal from the official reserve
Ans : OD 2019 system using gold, special drawing rights and
foreign exchange reserves. When there is a deficit
The balance of trade is determined by two
in the BOP accounts this is rectified through
primary types of transactions : payments made
accommodating items.
for imports and payments received for exports of
goods. It specifically accounts for visible items, 171. What will be the effect of the following on the
meaning tangible goods traded internationally. balance of payments?
When the value of goods exported exceeds the (i) Make in India’ programme
value of goods imported, the balance of trade is (ii) Import of pulses
in surplus, indicating a favorable trade position.
Ans : COMP 2023
Conversely, if the value of imports surpasses that
of exports, the balance of trade will be in deficit. (i) The Make in India’ initiative is expected
This measure reflects the trade performance of a to attract significant foreign investment,
country based solely on goods. resulting in an inflow of foreign exchange into
the country. This increased supply of foreign
169. Is the exchange rate effected by deficit or surplus exchange will strengthen India’s foreign
in BOP? Explain. exchange reserves, thereby improving the
Ans : FOREIGN 2022 balance of payments position.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 251

banking, insurance and tourism.

(iii) Transfer receipts and payments : These
include unilateral transfers, such as gifts,
remittances and donations between countries.
(iv) Investment income : This comprises earnings
from foreign investments, such as interest,
dividends and profits.

164. State the components of capital account of

balance of payments.
Ans : FOREIGN 2013

The Capital Account of the Balance of Payments

In the accompanying diagram, the new equilibrium includes the following key components:
point shifts to E1, where the exchange rate falls (i) Borrowings and lensings with foreign entities
from OP to OP1, reflecting the reduced demand : This involves loans taken from or extended
and strengthened rupee value. to other countries, including both public and
private sector transactions.
162. What does balance of payments account show?
(ii) Foreign investments : It records investments
Name the two parts of the balance of payments
made by residents in foreign countries and
account.
foreign investments within the domestic
Ans : DELHI 2020 economy, such as Foreign Direct Investment
The Balance of Payments (BOP) account reflects (FDI) and portfolio investments.
a country’s foreign exchange inflows and outflows (iii) Changes in foreign exchange reserves : This
over a specific period. It is divided into two key reflects the adjustments in a country’s reserve
parts: holdings of foreign currencies, managed by
(i) The Current Account : This section captures the central bank to stabilize the economy.
all transactions related to the import
and export of goods and services, along 165. List the items included as invisibles in the balance
with unilateral transfers such as gifts and of payments account.
remittances during the given time frame.
Ans : SQP 2015
(ii) The Capital Account : It records all financial
transactions between the residents of a The Balance of Payments account includes
country and the rest of the world, including certain transactions classified as invisibles, which
investments, loans and other capital represent non-tangible economic exchanges. These
movements. Together, these components items include:
offer a comprehensive view of international (i) Exports and imports of services : These refer
economic activity. to services traded internationally, such as
tourism, banking, insurance and consulting.
163. List the transactions of Current Account of the
(ii) Transfers to and from abroad : These involve
Balance of Payments Account.
unilateral transfers like remittances, gifts,
Ans : OD 2017 donations, or aid sent or received between
The Current Account of the Balance of Payments countries.
(BOP) consists of several essential components (iii) Income from and to abroad : This encompasses
that capture a country’s trade and financial earnings such as interest, dividends and
transactions over a specific period : profits derived from investments made in
(i) Exports and imports of goods : Also referred foreign countries or by foreign entities in the
to as visibles, these include tangible products domestic economy.
traded internationally.
166. Explain the concept of ‘surplus’ in the balance of
(ii) Exports and imports of services : Known
payments account.
as invisibles, these encompass services like

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CH 5 : FOREIGN EXCHANGE MARKET AND BALANCE OF PAYMENTS

184. How does giving incentives for exports influence Influence on Current Capital
foreign exchange rate? Explain. the economy account transactions
Ans : COMP 2002 transactions bring about a
bring a change in the
Providing incentives for exports boosts export
change in the capital stock of
volumes, increasing the inflow of foreign currency
current level a country.
and shifting the supply curve from SS to S1S1. This
of a country’s
rise in foreign currency supply establishes a new
income.
equilibrium at point E1, causing the exchange rate
to decline from OP to OP1. The lower exchange Components Current Capital
rate signifies a decrease in the price of foreign account = Account =
currency relative to domestic currency, indicating Visible trade + Borrowings and
an appreciation of the domestic currency. This Invisible trade lending to and
appreciation makes foreign goods cheaper for + Unilateral from abroad
domestic consumers and reflects the impact of transfers + Investments
enhanced export activities on the foreign exchange + Income to and from
market dynamics. receipts and abroad +
payments. Change
in foreign
exchange
reserves.

186. Name the broad categories of transactions

recorded in the ‘capital account’ of the Balance of
Payments Accounts.
Ans : FOREIGN 2020

The capital account of the Balance of Payments

records transactions between a country’s residents
and the rest of the world that lead to changes in
assets or liabilities of residents or the government.
Focused on financial transfers, it does not directly
185. Distinguish between Current Account and Capital impact income, output, or employment. Key
Account. categories include :
(i) Borrowings and lensings internationally by
Ans : COMP 2014 individuals, institutions and the government;
Current Account and Capital Account (ii) Investments from and to abroad, such as
foreign investments in Indian shares and
Basis Current Capital real estate or Indian investments in foreign
Account Account companies and properties and
Meaning An account Capital account (iii) Changes in foreign exchange reserves, where
which records of BOP records withdrawals reduce foreign assets (credit
the export all those entry) and vice versa.
and import transactions,
187. Distinguish between Current Account Deficit
of goods and between the
(CAD) and Current Account Surplus (CAS).
services and residents of a
unilateral country and Ans : SQP 2020
transfers done the rest of the Difference between Current Account Deficit and
during the world such Current Account Surplus are as follows :
year. as trading of
foreign assets Basis Current Current
and liabilities. Account Account
Deficit Surplus

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 253

(ii) On the other hand, the import of pulses represents income earned from a foreign
necessitates an outflow of foreign exchange to country. All types of investment income,
pay for these goods. This outflow negatively including interest, rent and profits earned
impacts the country’s balance of payments, from abroad, are consistently recorded as
as it increases expenditures on imports, credits in the current account, reflecting
potentially widening the deficit and reducing inflows of foreign exchange.
the nation’s foreign exchange reserves. (ii) The import of mobile phones from China is
categorized as part of the country’s visible
172. Define “Trade surplus”. How is it different from trade and is recorded on the debit (negative)
“Current Account Surplus”? side of the current account. Payments for
Ans : COMP 2019 imported goods are always reflected as
outflows of foreign exchange, reducing the
Trade Surplus refers to a condition where the
overall balance in the account.
value of a country’s exports of goods and services
exceeds the value of its imports. It reflects a 175. In the context of balance of payments account,
favorable trade balance, indicating that the state whether the following statements are true or
country is selling more to the rest of the world false. Give reasons for your answer.
than it is buying. (i) Profits received from investments abroad is
A trade surplus differs from a Current Account recorded in capital account.
Surplus, which is a broader measure within (ii) Import of machines is recorded in current
the Balance of Payments. The current account account.
includes not only the trade balance (exports and
imports of goods and services) but also unilateral Ans : OD 2001

transfers, such as remittances and gifts. (i) The statement is incorrect. Profits earned
from investments abroad are part of factor
173. Trade Deficit must exist, if a country is facing income and are included under exports
situation of Current Account Deficit (CAD). and imports of services. These transactions
Defend or refute the above mentioned statement are recorded in the current account of the
with valid arguments. Balance of Payments, as they do not impact
Ans : DELHI 2000 foreign exchange assets or liabilities directly.
Thus, the claim that profits from foreign
The statement is refuted because the Current
investments do not belong to the current
Account Deficit is a broader concept than the
account is false.
Trade Deficit. A Current Account Deficit occurs
(ii) The statement is correct. The export and
when a country’s foreign exchange payments for
import of goods, known as visible trade,
visibles (goods), invisibles (services) and unilateral
include transactions such as the import of
transfers exceed its receipts from these sources.
machinery. Since this is part of tangible goods
It is possible for a country to experience a Current
trade, it falls within the scope of the current
Account Deficit even while maintaining a trade
account. Therefore, the statement is true.
surplus. This can happen if the negative balances
from services and unilateral transfers outweigh 176. Name the broad categories of transactions
the surplus generated by the trade of goods. recorded in the ‘current account’ of the Balance
Hence, the Current Account Deficit reflects a of Payments Accounts.
more comprehensive imbalance.
Ans : FOREIGN 2004
174. State on which side of capital account/current The transactions recorded in the current account
account will the following transactions be recorded of the Balance of Payments are categorized as
and why : follows:
(i) Interest on loan received from Nepal (i) Export and Import of Goods (Visible) : This
(ii) Import of mobile phones from China refers to the trade of tangible goods and
Ans : DELHI 2019 the difference between visible exports and
imports is called the balance of trade.
(i) Interest received on a loan from Nepal is
(ii) Export and Import of Services (Invisible
recorded on the credit side of the current
Trade) : This includes transactions in services
account in the Balance of Payments, as it

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CH 5 : FOREIGN EXCHANGE MARKET AND BALANCE OF PAYMENTS

also rises. Explain. Why? A managed floating exchange rate system is one
where the exchange rate is primarily determined by
Ans : COMP 2003
market forces but is also influenced by the central
When the price of a foreign currency, such as bank’s interventions in the foreign exchange market.
the US dollar, increases relative to the domestic This system combines elements of both fixed and
currency, such as the Indian rupee - rising from 1$ flexible exchange rate systems. The central bank
= `70 to 1$ = `80 - it makes the home country’s intervenes to minimize excessive fluctuations,
goods more affordable for foreign buyers. In this keeping the exchange rate within acceptable limits.
case, Americans can now purchase Indian goods If the exchange rate rises too high, the central bank
worth `80 instead of `70 for the same dollar. This sells foreign currency from its reserves. Conversely,
encourages America to import more goods from if the exchange rate falls too low, the central bank
India, boosting Indian exports. Consequently, the buys foreign currency. This approach, often called
supply of foreign exchange, like the US dollar, “dirty floating,” aims to maintain exchange rates
increases. Thus, an increase in the price of foreign near desired target levels’.
currency leads to higher supply.

157. What are fixed and flexible exchange rates?

Ans : DELHI 2005
160. The central bank takes steps to control rise in the
A fixed exchange rate system is one where the price of foreign exchange. Explain the economic
government or central bank sets and maintains values it involves as far as the common man is
the exchange rate for a currency, ensuring it is concerned.
unaffected by the forces of demand and supply Ans : SQP 2014
in the foreign exchange market. This system is
primarily adopted to maintain stability in foreign In a managed floating exchange rate system,
trade and facilitate smooth capital movements. In market forces primarily determine the exchange
contrast, a flexible exchange rate system allows rate, but the central bank intervenes to limit
the exchange rate to be determined by market excessive fluctuations. An increase in the
forces, specifically the demand and supply of exchange rate negatively impacts imports,
currencies. With no government intervention, this raising the cost of foreign goods and potentially
system is also referred to as a floating exchange hindering the country’s development. Reduced
rate. import capacity can lead to inflation, increasing
the prices of essential goods and services. This
158. Give the meaning of foreign exchange rate. How inflation directly affects the common man by
is it determined under flexible exchange rate eroding purchasing power, making everyday
regime? expenses more burdensome. Therefore, central
Ans : OD 2002
bank intervention helps stabilize exchange rates
and safeguard economic stability.
The rate at which one country’s currency is
exchanged for another’s is called the exchange rate. 161. Recently Government of India has doubled the
It can be either fixed or flexible. A fixed exchange import duty on gold. What impact is it likely to
rate is set deliberately by the government, have on foreign exchange rate and how?
ensuring stability. In contrast, a flexible exchange Ans : COMP 2018
rate is determined by market forces, specifically
the demand for and supply of foreign exchange. The Government of India’s decision to double
Presently, most exchange rates are flexible. There the import duty on gold increases the cost of
is an inverse relationship between the demand importing gold, leading to reduced demand for
for a foreign currency and its price in domestic foreign currency to purchase it. This reduction
currency, whereas the supply of foreign currency in demand shifts the demand curve for foreign
shares a direct relationship with its price. currency leftward, represented as D1D1. With
the supply of foreign currency unchanged,
159. Explain the meaning of Managed Floating the exchange rate decreases, resulting in an
Exchange Rate appreciation of the Indian rupee.
Ans : FOREIGN 2011

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 255

rates. It is characterised by some intervention in Indian citizens.

exchange rate movement by monetary authorities.
However, intervention is discretionary.

181. How is exchange rate determined in the foreign

exchange market? Explain.
Ans : FOREIGN 2005

183. Government takes measures to restrict autonomous

imports of gold. Explain the economic values
desired to be achieved from this.
The foreign exchange rate is established through Ans : DELHI 2011
the interaction of demand and supply forces in the Government initiatives to limit gold imports
foreign exchange market, applying the principles reduce the demand for foreign currency, shifting
of demand-supply theory. There exists an inverse the demand curve leftward from DD to D1D1. This
relationship between the exchange rate and the decrease in demand leads to a new equilibrium at
demand for foreign currency as the rate rises, point E1, where the exchange rate drops from OR
demand decreases. Conversely, the relationship to OR1. The decline in the exchange rate signifies
between the exchange rate and the supply of a lower price for foreign currency relative to the
foreign currency is direct, meaning a higher domestic currency, resulting in an appreciation of
rate encourages greater supply. Consequently, the domestic currency. This appreciation reflects
the demand curve for foreign currency slopes the reduced necessity for foreign exchange, as
downward, while the supply curve slopes upward. restricted gold imports lessen the outflow of
The equilibrium exchange rate is determined at domestic currency to purchase foreign goods,
the intersection point (E) of these two curves, as stabilizing the currency’s external value.
illustrated graphically.

182. Visits to foreign countries for sight-seeing etc. by

the people of India is on the rise. What will be its
likely impact on foreign exchange rate and how?
Ans : SQP 2009

When Indian citizens travel abroad for sightseeing,

the demand for foreign exchange increases. This
shift causes the demand curve for foreign exchange
(D1D1) to move rightward. If the supply of foreign
exchange remains constant, the increased demand
results in a new equilibrium at a higher exchange
rate (E1). Consequently, the value of the Indian
rupee depreciates relative to foreign currencies.
This depreciation reflects a higher cost of foreign
exchange, driven by the surge in demand without In the Diagram, E1 is the new equilibrium point
a corresponding increase in supply, making where the exchange rate decreases from OR to
foreign travel and imports more expensive for OR1.

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CH 5 : FOREIGN EXCHANGE MARKET AND BALANCE OF PAYMENTS

(buying/selling) foreign exchange from its (a) Capital account is a stock concept
reserves. (b) Capital transactions bring about a change
in the capital stock of a country.
Ans :
(c) Capital account includes portfolio
(i) (a) B, A, D, C investments
(ii) (d) Both (a) and (b) (d) Capital account surplus arises when debit
(iii) Appreciated items are more than credit items.
(iv) Increase selling
(iii) International transactions which take place
193. Read the para given below and answer the due to some economic motive are called
questions that follow: _____.
India posted its first current account surplus of (a) Accommodating transactions.
1.7% of GDP in April-December 2020 quarter after (b) Autonomous transactions.
nine years. The last time we witnessed a surplus (c) Both (a) and (b)
was in 2007. Many analysts and trade pundits (d) Neither (a) nor (b)
welcome this development as it can give a much-
needed shot in the arm to investor confidence in (iv) Match the following:
the country as well as the Indian currency.
A current account surplus has a direct Column I Column II
positive impact on the rupee. The current account 1. Accommodating A. Inflows of foreign
reflects all payments between countries for goods, transactions exchange.
services, dividends and interests. A surplus in 2. Balance of trade B. One way
the current account means that the country transaction.
is expected to receive payment in rupees. This
means other countries are likely to buy rupee and 3. Unrequited C. Difference
sell foreign currencies. This means the rupee could transactions between exports
appreciate in the near future. While a current and imports of
account surplus is welcome, it is important to goods.
understand how the surplus has been achieved. 4. Credit side D. Transactions
A current account surplus occurs partly due to done to cover
an increase in exports. This leads to a stronger the deficit or
economy and an increase in consumer spending. surplus in BOP.
On the other hand, it could also be a result of
(a) A, B, C, D
weak domestic demand. This could result in lower
(b) A, C, B, D
consumer spending and decrease in imports.
(c) D, B, C, A
Meaning, exports did not rise, but imports fell.
(d) D, C, B, A
Hence, analysts in some quarters feel that a
surplus indicates a weak economic growth in the Ans :
country. (i) Current
Some analysts feel that a current account (ii) (d) Capital account surplus arises when debit
surplus is not a cause for celebration as it reflects items are more than credit items.
weak investment demand in the country. This (iii) (b) Both (a) and (b)
directly impacts the pickup of imports from the (iv) (d) D, C, B, A
country. In the last four months itself, imports fell
by 16.33% due to lower gold and oil imports. This 194. Read the para given below and answer the
reflects poorly on the investment opportunities in questions that follow:
the country. While a capital account deals with the change
in ownership of a country’s assets, the current
(i) _____ Account transactions bring about account reflects the change in a country’s net
a change in the current level of a country’s income. These two accounts capital and current
income. together form the balance of payments or BOP of
a country. When we refer to balance of payments,
(ii) Identify the incorrect statement from the
this refers to the record of all commercial
following :
transactions between a country along with the

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 257

Meaning Current Current essential for correcting imbalances in the BOP,

account deficit account ensuring economic stability.
arises when surplus is a 189. Distinguish between trade account and current
the value of situation that account of balance of payments account.
exports of arises when
goods and the receipts Ans : OD 2018

services and on current The difference between Trade account and

unilateral account are Current Account are as follows :
transfers is less more than
than the value the payments Basis Trade Account Current
of imports on current Account
of goods and account. Meaning It is that It is that
services and account which account which
unilateral records the records imports
transfers. exports and and exports of
Balance on A deficit in A surplus in imports of goods, services
Current A/c the current the current goods during a and unilateral
account must account must year. transfers during
be settled by be matched a year.
a surplus on by a deficit Scope Trade account Current
the capital on the capital is a part account
account. account. of current includes trade
Significance This signifies This situation account. account.
that the nation signifies that Balances Balance on Current
is a borrower the nation is trade account account
from the rest a lender to is said to be in surplus arises
of the world. the rest of the surplus when when foreign
world. exports of exchange
goods is more receipts are in
188. Distinguish between the autonomous transactions than imports excess of foreign
and the accommodating transactions in the and deficit exchange
Balance of Payments. What is the significance of when exports payments and
this distinction? of goods is less deficit arises in
or than imports. case of excess
State the meaning of autonomous and of foreign
accommodating items, under Balance of Payments exchange
of India, with the help of an example. payment
Ans : SQP 2017 over foreign
exchange
Autonomous transactions in the Balance of receipts.
Payments (BOP) refer to those international
economic activities driven by profit motives. Components It records only It records both
These include items like the import and export visible items. visible and
of goods and services, as well as the inflow and invisible items.
outflow of capital. Autonomous transactions
occur independently of a country’s BOP status.
In contrast, accommodating transactions aim to
address disequilibrium in the BOP, such as a deficit 190. Distinguish between autonomous and
or surplus. Governments intervene by injecting or accommodating transactions of balance of
withdrawing funds from official reserves, including payments account. Explain the significance of this
gold, foreign exchange reserves, or Special distinction.
Drawing Rights (SDR). These transactions are

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CH 5 : FOREIGN EXCHANGE MARKET AND BALANCE OF PAYMENTS

like shipping, banking, insurance and tourism. 179. Give the meaning of ‘foreign exchange’ and
(iii) Unilateral Transfers : These are one-way foreign exchange rate’. Giving reason, explain
transfers, such as gifts, donations and personal the relation between foreign exchange rate and
remittances, sent or received internationally. demand for foreign exchange.
(iv) Income Receipts and Payments : These
Ans : DELHI 2010
include investment incomes, such as interest,
rent and profits earned or paid abroad. Foreign exchange refers to foreign currency or a
country’s reserves of foreign currency held at a
specific time. It represents the stock of foreign
currencies that a nation possesses. The foreign
FOUR MARK QUESTIONS exchange rate is the price at which one country’s
currency is exchanged for another, such as Indian
rupees (`) for US dollars ($). This rate reflects
177. Why does the demand for foreign currency fall the external value of the domestic currency and its
and supply rise when its price rises? Explain. purchasing power compared to another currency.
There is an inverse relationship between the
Ans : SQP 2007
exchange rate and foreign exchange demand. A
The demand for foreign currency decreases when lower exchange rate makes foreign goods cheaper,
its price rises for two reasons : firstly, higher foreign increasing demand for foreign currency, while a
exchange rates make imports more expensive, higher rate decreases demand.
reducing import volumes and the need for foreign
currency. Secondly, costlier foreign currency 180. Distinguish between fixed and flexible foreign
discourages international tourism, further exchange rate. Also, explain the managed floating
lowering its demand. Conversely, the supply of exchange rate.
foreign currency increases with its price. This Ans : OD 2003
is because higher exchange rates make domestic
Fixed Exchange Rate and Floating Exchange
goods more affordable to foreign buyers, boosting
Rate
exports and bringing in more foreign exchange.
Additionally, a weaker domestic currency attracts Basis Fixed Exchange Floating
foreign tourists, increasing their spending and Rate Exchange Rate
enhancing the supply of foreign currency in the
Meaning The exchange The exchange
economy.
rate for a rate which is
178. Explain three sources of demand for foreign currency which determined
is called fixed by the market
exchange and three sources of supply of foreign
exchange rate forces of demand
exchange. is fixed by the and supply is
Ans : COMP 2008 government. known as flexible
exchange rate.
The demand for foreign exchange arises primarily
from importers who require foreign currencies to Government There is complete There is no
control government government
pay for imported goods and services, constituting
control as only intervention and
the largest share of foreign currency demand. government has it fluctuates
Additionally, foreign exchange is needed for the power to freely according
sending remittances abroad, including gifts change it. to market
and other transfer incomes. Those investing in condition.
financial assets like shares and debentures of Stability in The exchange The exchange
foreign companies also contribute to its demand. exchange rate rate generally rate keeps on
On the supply side, foreign investment serves as remain exchange changing.
a significant source, as investors bring currencies rate stable. A
into the domestic market. Exporters contribute by very small change
earning foreign currencies through international from the fixed
sales, while non-residents further boost supply value is possible.
through direct purchases in the domestic economy. Managed floating Exchange Rate : Managed
floating is a hybrid of fixed and flexible exchange

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 259

(iii) Identify the incorrect statement from the the nation’s capital and housing markets, which
following: in turn boosts domestic consumption through the
(a) There exists an inverse relation between wealth effect. Currency devaluations can be used
exchange rate and demand for foreign by countries to achieve economic policy. Having a
exchange. weaker currency relative to the rest of the world
(b) Under flexible exchange rate system, huge can help boost exports, shrink trade deficits
foreign exchange reserves are required to and reduce the cost of interest payments on its
be maintained by the government. outstanding government debts.
(c) An increase in demand for imported There are, however, some negative effects of
goods raises the foreign exchange rate. devaluations. They create uncertainty in global
(d) Flexible exchange rate system can markets that can cause asset markets to fall or
generate inflationary pressures in the spur recessions. Countries might be tempted to
economy. enter a tit for tat currency war, devaluing their
own currency back and forth in a race to the
(iv) Identify the reason behind rise in the demand bottom. This can be a very dangerous and vicious
for foreign exchange accompanied by a fall in cycle leading to much more harm than good.
its price:
(a) Increase in imports (i) Match the following:
(b) Boost to tourism
Column I Column II
(c) Both (a) and (b)
(d) Neither (a) nor (b) 1. Appreciation A. Leads to fall in
of domestic imports.
Ans :
currency.
(i) Managed Floating Exchange Rate System.
2. Depreciation B. Domestic
(ii) Rise
of domestic currency
(iii) (b) Under flexible exchange rate system, huge
currency. becomes more
foreign exchange reserves are required to
valuable.
be maintained by the government.
(iv) (c) Both (a) and (b) 3. Source of supply C. Sending
of foreign remittances
192. Read the para given below and answer the exchange. abroad.
questions that follow:
4. Source of D. Foreign
Ever since world currencies let go of the gold
demand for investment
standard and allowed their exchange rates to
foreign exchange.
float freely against each other, there have been
many currency devaluations that have hurt not (a) B, A, D, C (b) A, B, D, C
only the citizens of the country but have also led (c) B, A, C, D (d) D, A, C, B
to a greater impact across the globe. Despite the (ii) Identify the incorrect statement from the
fallout, countries often choose to devalue their following.
currency. (a) Appreciation and depreciation of the
A strong currency may not necessarily be in a currency mean the same.
nation’s best interests. A weak domestic currency (b) Purchase of financial assets abroad is a
makes a nation’s exports more competitive source of supply for foreign exchange.
in global markets and simultaneously makes (c) Demand of foreign currency rises when
imports more expensive. Higher export volumes its price falls.
spur economic growth, while pricey imports also (d) Both (a) and (b)
have a similar effect because consumers opt for
local alternatives to imported products. This (iii) Fall in the price of US Dollar from `80 to `75
improvement in the terms of trade generally implies that the Indian currency has _____
translates into a lower current account deficit (appreciated/depreciated).
(or a greater current account surplus), higher (iv) In order to decrease the foreign exchange
employment and faster GDP growth. The rate, the Reserve Bank of India can _____
stimulative monetary policies that usually result (increase/decrease) the supply of foreign
in a weak currency also have a positive impact on exchange in the free market by _____

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CH 5 : FOREIGN EXCHANGE MARKET AND BALANCE OF PAYMENTS
Ans : COMP 2013
transactions.

Basis Autonomous Accommodating

transactions transactions
Meaning These are These are the CASE BASED QUESTION
international transactions
economic that take place
transactions to re-establish 191. Read the para given below and answer the
that take equilibrium in questions that follow:
place for the country’s No single institution or organization determines
profit motive. balance of the exchange rate of rupee in India at present,
These are payments. Such not even the RBI. Rather, the exchange rate of
independent transactions rupee with foreign currencies is determined by
of all other are essentially a combination of market factors, with the RBI
transactions monetary in only intervening in case of extreme appreciation
in the BOP. nature. or depreciation. But this was not always the case.
They are not Prior to the period of economic liberalization in
influenced the 1990, India followed a fixed exchange rate
by foreign system. The Indian rupee was pegged to the US
exchange dollar and a basket of other currencies. In pegging,
position of
the value of a currency is fixed in a predetermined
the country.
ratio to another more stable and internationally
Equilibrium If autonomous These are used currency or to a bunch of such currencies.
receipts are compensation The RBI ensured that the exchange rate of the
less than short-term rupee is fixed with respect to other currencies by
autonomous capital playing a direct hand in their supply and demand
payments, transactions process.
balance of which are meant The value of a currency, just like any other
payments is to correct a commodity, is determined by its supply and
in deficit. disequilibrium in demand in the market. The RBI maintained a
the autonomous
reserve of US dollars to ensure a fixed exchange
items of BOP.
rate. When the demand for US dollars was high,
Description In the BOP, In the BOP, its value appreciated with respect to the rupee.
these items these items are To counter this, RBI would pump US dollars into
are called called “Below the market from its reserve to meet the demand
“above the the line items”. and thereby bring down the appreciating value of
line items”. the dollar. Similarly, if the rupee was appreciating
Balancing Deficit in Final deficit with respect to the dollar, then to maintain the
BOP may or surplus of peg (fixed exchange rate) RBI would sell the
be financed BOP is removed rupee to buy US dollar to bring down its value.
by depleting with the help of However, RBI almost ran out of its dollar
reserves accomodating reserves in 1992 and was close to being unable to
of foreign items and thus maintain the fixed exchange rate. It was during
currency or help to balance this period that sweeping economic reforms were
by borrowings the BOP. made and the floating exchange rate was gradually
from IMF. adopted in India.
Significance of this distinction. Autonomous
(i) The market exchange rate system in which
transactions are the reason for the imbalance
the Central Bank actively intervenes is called
in BOP (BOP surplus or BOP deficit) which is
as _____.
restored through Accommodating transactions
undertaken by the Central Bank of our country.
(ii) If the exchange rate of the home currency
Therefore, the magnitude of accommodating
rises, the value of exports of the economy is
transactions is determined by the autonomous
likely to _____.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 261

rest of the world. The country, in this context, 2. Devaluation B. reduction in the
includes the government, private entities and value of domestic
citizens. currency by the
Both the Capital Account and Current Account government.
can have deficit or surplus situations. A Surplus
Capital Account means that money is flowing into 3. Exchange Rate C. exchange rate
the country, but these inflows reflect changes in determined by
the ownership of national assets by way of sale or the government.
borrowing. 4. Fixed D. fall in the value
A deficit situation in the capital account occurs Exchange Rate of domestic
when more money is flowing out of a country to currency in the
acquire assets and rights abroad. It also means market.
that though the money is going out of the country,
(a) 1-A
it results in the acquisition of assets or rights.
(b) 2-B
Here is an interesting example of a capital
(c) 3-C
account transaction. A foreign entity acquires a
(d) D-4
hotel chain in India. Such a transaction involves
the payment of billions of dollars that helps the (v) What will be the value of imports, if a
capital account to become surplus. The country country has a trade deficit of `3000 crore and
will then receive inflows of billions of dollars but the value of exports is `12,000 crore?
this also means that a domestic entity will lose (a) `15,000 crore
ownership of the hotel chain. The surplus account (b) `9,000 crore
will not be against any goods or services supplied (c) `12,000 crore
by a domestic entity to a foreign entity that can (d) `10,000 crore
qualify as income or payment of a fee against
Ans :
delivery of some service.
(i) (c) Investments to and from abroad.
(i) Following is not a component of current (ii) (b) To fall
account: (iii) (b) 2-B
(a) Export and import of goods. (iv) (a) `15,000 crore
(b) Export and import of services.
(c) Investments to and from abroad. www.nodia.in
(d) Unilateral transfers to and from abroad.

(ii) Other things remaining the same, when in a

country the market price of foreign currency
falls, National Income is likely:
(a) To rise
(b) To fall
(c) To rise or to fall
(d) To remain unaffected

(iii) Choose the correct pair of statements from

the statements given in column I and II:
Column I Column II
1. Depreciation A. value of foreign
of domestic currency in terms
currency of domestic
currency.

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CH 6 : INDIAN ECONOMY ON THE EVE OF INDEPENDENCE

CHAPTER 6
INDIAN ECONOMY ON THE EVE OF INDEPENDENCE

serve British interests (e.g., railways, ports).

SUMMARY The development of railways helped the British
exploit natural resources and transport finished
1. INTRODUCTION goods from Britain to India. Basic infrastructure
like health, education, and electricity was grossly
The Indian economy before independence was underdeveloped.
characterized by backwardness, stagnation, and
colonial exploitation. The British policies were 2.4 Foreign Trade
primarily aimed at promoting the interests of India became an exporter of primary products
their home country. (raw materials like cotton and jute) and an
2. FEATURES OF THE INDIAN ECONOMY ON THE EVE OF importer of finished goods.
INDEPENDENCE Trade policies were formulated to make India a
supplier of raw materials to British industries and
The features of the Indian economy on the eve of a consumer of British manufactured goods.
independence are as follows : This resulted in the drain of India’s wealth to
Britain.
2.1 Agrarian Economy
Agriculture was the primary source of livelihood, 2.5 Demographic Condition
with about 85% of the population dependent India had a high birth rate and death rate, leading
on it. The agricultural sector was stagnant and to low life expectancy (44 years in 1947).Literacy
backward due to: rate was very low (16%). Public health facilities
Land tenure systems: Zamindari, Mahalwari, were inadequate, and the prevalence of diseases
and Ryotwari systems led to high exploitation of like plague and malaria was high.
peasants.
Low productivity: Due to traditional methods, 2.6 Poverty and Unemployment
lack of irrigation, and negligible investment in A large proportion of the population lived below
infrastructure. the poverty line. Lack of industrialization and
Commercialization of agriculture: Farmers were poor agricultural productivity led to widespread
forced to grow cash crops (indigo, cotton) to serve unemployment and underemployment.
British industries rather than food crops.
2.7 Lack of Social Infrastructure
2.2 Industrial Backwardness
Educational and health facilities were
India lacked a sound industrial base. De underdeveloped. There were very few institutions
industrialization occurred as traditional for higher education. Female literacy and gender
handicrafts were systematically destroyed by equality were extremely low.
British policies. Few modern industries like
cotton, jute, and iron and steel (TISCO in 1907) 2.8 Economic Drain
were set up by Indian entrepreneurs. There was The British drained India’s wealth through:
a lack of capital, infrastructure, and technical Export of raw materials and import of finished
expertise. goods. Salaries and pensions of British officials
2.3 Low Level of Infrastructure paid from Indian revenue. Profits from British
companies operating in India.
Infrastructure was developed primarily to

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 263

3. IMPORTANT TERMS Ans : OD 2010

(c) both (a) and (b)

3.1 De-industrialization
5. The primary cause of stagnation in agriculture
Decline of traditional handicraft industries due to
was:
competition from British goods.
(a) Systems of land settlement
3.2 Drain of Wealth (b) Commercialization of agriculture
(c) Zamindari system
Continuous transfer of India’s wealth to Britain (d) All of the above
without adequate returns.
Ans : COMP 2021
3.3 Commercialization of Agriculture
(d) all of the above
Shift in farming from food crops to cash crops to
serve British industries. 6. The Indian economy on the eve of Independence
was characterized by the following features:
(a) Colonial
(b) Stagnant
MULTIPLE CHOICE QUESTION (c) Backward
(d) All of the above
Ans : OD 2001
1. In which year did the British introduce the
Railways in India? (d) all of the above
(a) 1805 (b) 1855 7. Which year was considered as the year of the
(c) 1850 (d) 1860 great divide?
Ans : OD 2024 (a) 1921
(c) 1850 (b) 1947
(c) 1951
2. When did the second stage of demographic (d) 1931
transition begin? Ans : FOREIGN 2020
(a) After 1921
(b) Before 1921 (a) 1921
(c) From 1921 8. During British rule, the export surplus was
(d) None of the above utilized to:
Ans : SQP 2024 (a) Import invisible items.
(a) After 1921 (b) Make payments for expenses incurred by an
office setup by the colonial government in
3. Who among the following economists did not Britain.
provide an estimate of the national and per capita (c) Meet the expenses on War fought by the
income during the colonial period? British government.
(a) Dadabhai Naoroji (d) All of the above
(b) V.K.R.V. Rao Ans : SQP 2019
(c) Horace Secrist
(d) Findlay Shirras (d) all of the above

Ans : DELHI 2023 9. The first official census was conducted in the year
(c) Horace Secrist (a) 1921
(b) 1951
4. During British rule, the public sector was limited (c) 1881
to the following areas of operation: (d) 1851
(a) Railways Ans : OD 2014
(b) Power generation
(c) Both (a) and (b) (c) 1881
(d) None of the above

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CH 6 : INDIAN ECONOMY ON THE EVE OF INDEPENDENCE

10. Occupational structure refers to: Ans : OD 2000

(a) The total workforce of a country (b) Jamshedpur

(b) The distribution of working persons across
different industries and sectors 16. During colonial period, estimates of _____
(c) Population of a country on national income and per capita income were
(d) None of the above considered very significant. (Fill up the blank
with correct alternative)
Ans : COMP 2009
(a) Dadabhai Naoroji
(b) the distribution of working persons across (b) William Digby
different industries and sectors (c) V.K.R.V. Rao
(d) R.C. Desai
11. What was the nature of the Indian economy on
the eve of independence? Ans : OD 2021

(a) Stagnant (c) V.K.R.V. Rao

(b) Backward
(c) Underdeveloped 17. During the second half of the 19th century, the
(d) All of these cotton textile mills odly dominated by Indian
entrepreneurs were located odly in _____ (Fill
Ans : DELHI 2017
up the blank with correct alternative)
(d) All of these (a) Bengal
(b) Maharashtra
12. Manufacturing activity is included in which of the (c) Calcutta
following sectors? (d) Madhya Pradesh
(a) Primary
(b) Tertiary Ans : OD 2021

(c) Secondary (b) Maharashtra

(d) All of these
18. What percentage of country’s total population
Ans : OD 2015
was engaged in agriculture during the time of
(c) Secondary independence?
(a) 55%
13. What was the major occupation in India on the (b) 65%
eve of independence? (c) 75%
(a) Industry (d) 85%
(b) Services
(c) Agriculture Ans : DELHI 2018

(d) None of these (c) 75%

Ans : FOREIGN 2011
19. What share of Indian workforce was engaged in
(c) Agriculture services, during the colonial period.
(a) 10%
14. What was the average life expectancy at birth in (b) 20%
India during the time of Independence? (c) 25%
(a) 44 years (d) 30%
(b) 50 years
Ans : DELHI 2018
(c) 60 years
(a) 10%
(d) All of these
Ans : SQP 2002 20. What was the infant mortality rate in India
during the colonial period?
(a) 44 years
(a) 218 per thousand
15. Where was the first iron and steel company in (b) 118 per thousand
India established? (c) 150 per thousand
(a) Kolkata (b) Jamshedpur (d) 250 per thousand
(c) Patna (d) Ranchi Ans : OD 2018

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 265

(a) 218 per thousand Ans : COMP 2016

(b) Second
21. In which year was the planning commission set The second stage of demographic transition in
up? (Choose the correct alternative) India began post-1921, marked by changes in
(a) 1948 population dynamics.
(b) 1956
(c) 1950 26. During the colonial period, the cropping pattern
(d) 1958 in India shifted from food crops to ______
Ans : OD 2019
crops due to the commercialization of agriculture.
(a) Subsistence
(c) 1950 (b) Cash
(c) Industrial
22. During the British rule in India, Indian agricultural
(d) Non-edible
output witnessed stagnation due to _____.
(Choose the correct alternative) Ans : SQP 2012
(a) Decline in handicrafts (b) Cash
(b) Drain of Indian wealth The commercialization of agriculture led to a
(c) Land settlement focus on cash crops instead of food crops to serve
(d) Introduction of railways British economic interests.
Ans : OD 2008
27. The agricultural sector in colonial India accounted
(c) Land settlement for approximately ______ of the workforce.
(a) 30-35%
23. Under the British Rule, commercialization of
(b) 50-55%
agriculture resulted in shifting of agricultural
(c) 70-75%
production from _____ crops to _____
(d) 85-90%
crops.
(a) Cash, food Ans : COMP 2017
(b) Cotton, jute (c) 70-75%
(c) Food, cash] The agricultural sector dominated the
(d) Jute, food occupational structure during the colonial period,
Ans : OD 2015 employing the majority of the workforce.
(d) Jute, food 28. The colonial government’s restrictive policies
adversely affected India’s ______ trade.
24. The colonial government followed policies to
(a) Domestic
reduce India to an exporter of ______ for
(b) Foreign
British industries.
(c) Regional
(a) Finished goods
(d) Local
(b) Manufactured items
(c) Raw materials Ans : DELHI 2014
(d) Precious metals (b) Foreign
Ans : FOREIGN 2010 Restrictive policies disrupted India’s foreign
trade, od taining a British monopoly over exports
(c) Raw materials
and imports.
The colonial government’s policy aimed to export
raw materials from India to Britain to fuel their 29. The generation of a large export surplus during the
industries. colonial period ultimately led to the ______ of
Indian wealth.
25. After 1921, India entered the ______ stage of
demographic transition. (a) Drain
(a) First (b) Preservation
(b) Second (c) Growth
(c) Third (d) Utilization
(d) Final
Ans : COMP 2014

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CH 6 : INDIAN ECONOMY ON THE EVE OF INDEPENDENCE

(b) It resulted in agricultural stagnation and low (a) Indian economy was flourishing before the
productivity. advent of British.
The zamindari system caused stagnation by (b) British developed the railway system in India
prioritising revenue collection over agricultural for their own benefit.
improvement, worsening the plight of farmers. (c) India had a sound industrial base under the
British.
42. Which of the following best explains the state
(d) India’s foreign trade throughout the colonial
of social development indicators such as literacy
period was marked by a large export surplus.
levels, health facilities, and life expectancy in
India during British rule? Ans : OD 2008

(a) Social indicators improved significantly due (c) India had a sound industrial base under the
to British reforms. British.
(b) Poor literacy and inadequate public health
45. Which of the following is NOT true about foreign
facilities kept life expectancy low.
trade during the colonial rule? (Choose the correct
(c) Mortality rates dropped due to extensive alternative)
healthcare initiatives. (a) India suffered from large trade deficit.
(d) Public education and health systems made (b) Restrictive policies of commodity production,
India socially advanced. were followed.
(c) Britain Obtained a monopoly control over
Ans : COMP 2022 India’s exports and imports.
(b) Poor literacy and inadequate public health (d) India became an exporter of primary products
facilities kept life expectancy low. and an importer of finished consumer goods.
Social indicators such as literacy and health Ans : OD 2023
facilities reoded poor under British rule,
(a) India suffered from large trade deficit.
contributing to low life expectancy and high
mortality rates. 46. From the set of the events given in Column-I and
the corresponding year in Column-II, Choose the
43. What was the occupational structure of India
incorrect pair:
during the British colonial period, and how did it
reflect the state of the economy? Column-I Column-II
(a) It was balanced, with equal contribution from
agriculture, manufacturing, and services. (A) Introduction of (i) 1850
(b) Agriculture dominated, employing 70-75% of railways in India
the workforce, while other sectors lagged.
(B) Incorporation of (ii) 1807
(c) Manufacturing and services employed the TISCO
majority, indicating industrial growth.
(d) Infrastructure and education sectors provided (C) First Official Census (iii) 1881
significant employment opportunities. of India

Ans : DELHI 2016 (D) Opening of Suez (iv) 1869

(b) Agriculture dominated, employing 70-75% of Canal
the workforce, while other sectors lagged.
Alternatives:
Agriculture employed the majority of the (a) A-(i)
workforce, with minimal contributions from (b) B-(ii)
manufacturing and services, reflecting an (c) C-(iii)
underdeveloped economy. (d) D-(iv)
44. Which of the following statements about the Ans : OD 2003
Indian economy during the colonial period is (b) B-(ii)
incorrect? Carefully analyze each option based on
historical facts::

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 267

(c) Export and import trade was liberalised to 39. How did the policies of the British colonial
encourage Indian industrial growth. government affect the traditional handicraft
(d) Indian exports were directed towards industries of India?
developing infrastructure and reducing (a) They encouraged modernisation and export
poverty. of Indian handicrafts.
Ans : COMP 2003 (b) They led to a decline due to competition from
British manufactured goods.
(b) The surplus created during trade primarily
(c) They created a system to subsidise and
enriched Britain and drained India’s wealth.
promote handicraft production.
Export surplus benefited Britain, leading to
a massive drain of Indian wealth, while trade (d) They shifted the focus to small-scale industries
policies restricted India’s economic progress. producing luxury goods.
Ans : FOREIGN 2010
37. During British colonial rule in India, which sector
contributed the largest share of the workforce, (b) They led to a decline due to competition from
and what was the proportion of workers employed British manufactured goods.
in that sector? Indian handicrafts declined as British goods,
(a) Services sector, employing around 50-60% of often sold at cheaper prices, dominated the Indian
the workforce. market, and local industries were neglected.
(b) Manufacturing sector, employing 30-35% of
40. Which of the following accurately describes the
the workforce.
nature and purpose of infrastructure development,
(c) Agricultural sector, employing 70-75% of the
such as railways and ports, by the British colonial
workforce.
government in India?
(d) Infrastructure development sector, employing
(a) Infrastructure was built to improve India’s
40-45% of the workforce.
economy and reduce poverty.
Ans : DELHI 2007 (b) It was developed to facilitate the efficient
(c) Agricultural sector, employing 70-75% of the exploitation of India’s resources for Britain.
workforce. (c) The focus was on rural development and
The agricultural sector dominated the workforce, irrigation to benefit Indian farmers.
with about 70-75% engaged in farming, while (d) Infrastructure development helped the Indian
manufacturing and services had a much smaller manufacturing sector grow significantly.
share.
Ans : SQP 2004

38. What was one of the primary goals of the two-fold (b) It was developed to facilitate the efficient
policy pursued by the British colonial government exploitation of India’s resources for Britain.
in India, and how did it impact the country? The infrastructure developed under British rule,
(a) Promote industrial growth in India to make it such as railways and ports, was primarily intended
self-reliant. to transport raw materials to Britain and finished
(b) Reduce land disputes by introducing modern goods to Indian markets.
revenue systems.
41. What was the impact of the zamindari system
(c) Turn India into a market for British finished
introduced by the British colonial government on
goods and a supplier of raw materials.
the Indian agricultural sector?
(d) Create a balance between agricultural and
(a) It boosted productivity and reduced land
industrial development.
disputes.
Ans : OD 2006 (b) It resulted in agricultural stagnation and low
(c) Turn India into a market for British finished productivity.
goods and a supplier of raw materials. (c) It improved the living standards of small
The British used India as a supplier of raw materials farmers.
for their industries and as a market for finished (d) It abolished exploitative practices in revenue
British products, harming India’s economy. collection.
Ans : OD 2012

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CH 6 : INDIAN ECONOMY ON THE EVE OF INDEPENDENCE

(a) Drain Colonial policies neglected social development,

The large export surplus was not beneficial to resulting in poor literacy levels, inadequate public
India but resulted in a drain of wealth to Britain. health facilities, and low life expectancy.

30. Infrastructure such as railways, ports, and 34. Which of the following statements correctly
telegraphs was developed during colonial rule to describes the economic strategies pursued by the
serve ______ interests. British colonial government in India and their
(a) Local impact on the country’s economy?
(b) Indian (a) Agricultural productivity improved
significantly under British rule.
(c) British
(b) India was turned into a supplier of raw
(d) Industrial
materials and a consumer of British
Ans : DELHI 2015 manufactured goods.
(c) British (c) The colonial government heavily invested in
Infrastructure was built primarily to benefit developing indigenous industries.
British economic and administrative needs. (d) The focus of agricultural commercialisation
was on food crops to meet domestic needs.
31. At the time of independence, India faced enormous
______ challenges due to British colonial rule. Ans : OD 2015

(a) Cultural (b) India was turned into a supplier of raw

(b) Political materials and a consumer of British manufactured
(c) Social and economic goods.
India was reduced to exporting raw materials
(d) Educational
and importing British goods, which weakened its
Ans : OD 2015 economy and industries.
(c) Social and economic
35. What was the primary effect of the
The two-century-long colonial rule left India with
commercialisation of agriculture introduced by
significant social and economic challenges.
the British in India during colonial rule?
32. The restrictive trade policies of the colonial (a) It led to a rise in food crop production and
government were aimed at benefiting ______ food security.
industries. (b) It caused a shift in cropping patterns from
(a) Local food crops to commercial crops for export.
(b) Indian (c) It abolished systems like the zamindari
(c) British system, benefiting small-scale farmers.
(d) It allowed Indian farmers to modernise
(d) Global
agricultural practices successfully.
Ans : OD 2004
Ans : OD 2017
(c) British
(b) It caused a shift in cropping patterns from
These policies ensured that Indian raw materials
food crops to commercial crops for export.
and markets were used to support British
The British encouraged the production of
industries.
commercial crops like cotton and indigo, reducing
33. Social development indicators like literacy rates food crop cultivation.
and public health facilities during colonial rule
36. Which of the following best represents the
were ______.
nature of India’s foreign trade under British rule,
(a) Encouraging
especially concerning export surplus?
(b) Advanced
(a) India’s export surplus contributed to
(c) Discouraging
significant economic growth within the
(d) Neutral
country.
Ans : FOREIGN 2007 (b) The surplus created during trade primarily
(c) Discouraging enriched Britain and drained India’s wealth.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 269

ASSERTION AND REASON (c) Assertion is true but Reason is false.

(d) Assertion is false but Reason is true.
Ans : OD 2020
47. Assertion : The policies of the colonial government
brought a fundamental change in the structure of (d) Assertion is false but Reason is true.
the Indian economy.
50. Assertion : Lack of Capital Goods industry
Reason : The economic policies pursued by the
hindered the industrialisation in India.
colonial government favoured the promotion of
Reason : This was done to ensure that India was
their economic interest.
not dependent on any country for the supply of
(a) Assertion and Reason both are correct
Capital goods and heavy equipment.
statements and Reason is correct explanation
(a) Assertion and Reason both are correct
for Assertion.
statements and Reason is correct explanation
(b) Assertion and Reason both are correct
for Assertion.
statements but Reason is not correct
(b) Assertion and Reason both are correct
explanation for Assertion.
statements but Reason is not correct
(c) Assertion is true but Reason is false.
explanation for Assertion.
(d) Assertion is false but Reason is true.
(c) Assertion is true but Reason is false.
Ans : FOREIGN 2019 (d) Assertion is false but Reason is true.
(a) Assertion and Reason both are correct Ans : COMP 2011
statements and Reason is correct explanation for
(c) Assertion is true but Reason is false.
Assertion.
51. Assertion : During the British rule, there was a
48. Assertion : During the pre-British period, the
huge export surplus due to excess exports.
land settlement system was one of the od reasons
Reason : The British government odtained
for stagnation in agriculture.
monopoly control over India’s foreign trade and
Reason : Though, a large proportion of the
used this export surplus for India’s development.
population was dependent on agriculture, the
(a) Assertion and Reason both are correct
country was not self-sufficient in food.
statements and Reason is correct explanation
(a) Assertion and Reason both are correct for Assertion.
statements and Reason is correct explanation (b) Assertion and Reason both are correct
for Assertion. statements but Reason is not correct
(b) Assertion and Reason both are correct explanation for Assertion.
statements but Reason is not correct (c) Assertion is true but Reason is false.
explanation for Assertion. (d) Assertion is false but Reason is true.
(c) Assertion is true but Reason is false. Ans : DELHI 2021
(d) Assertion is false but Reason is true.
(c) Assertion is true but Reason is false.
Ans : SQP 2008
52. Assertion : The public sector reoded confined to
(b) Assertion and Reason both are correct
some departmental undertakings like railways,
statements but Reason is not correct explanation
communications etc.
for Assertion.
Reason : The restricted growth of the public
49. Assertion : India’s foreign trade was restricted sector was a drawback for the industrial sector.
only to Great Britain. (a) Assertion and Reason both are correct
Reason : India became an exporter of primary statements and Reason is correct explanation
products like jute, Indigo etc. for Assertion.
(a) Assertion and Reason both are correct (b) Assertion and Reason both are correct
statements and Reason is correct explanation statements but Reason is not correct
for Assertion. explanation for Assertion.
(b) Assertion and Reason both are correct (c) Assertion is true but Reason is false.
statements but Reason is not correct (d) Assertion is false but Reason is true.
explanation for Assertion. Ans : OD 2013

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CH 6 : INDIAN ECONOMY ON THE EVE OF INDEPENDENCE

65. Statement 1 : The agricultural sector in colonial during colonial rule.

India accounted for 70-75% of the workforce. (a) Statement 1 is true, and Statement 2 is false.
Statement 2 : The manufacturing and services (b) Statement 1 is false, and Statement 2 is true.
sectors had an equal share of the reoding (c) Both Statement 1 and Statement 2 are true.
workforce. (d) Both Statement 1 and Statement 2 are false.
(a) Statement 1 is true, and Statement 2 is false.
Ans : OD 2018
(b) Statement 1 is false, and Statement 2 is true.
(c) Both Statement 1 and Statement 2 are true. (b) Statement 1 is false, and Statement 2 is true.
(d) Both Statement 1 and Statement 2 are false. The colonial government neglected social
development, leading to poor literacy rates,
Ans : OD 2015
inadequate health facilities, and low life
(a) Statement 1 is true, and Statement 2 is false. expectancy.
The agricultural sector dominated employment,
while the manufacturing and services sectors did 69. Statement 1 : The British colonial policies aimed
not have an equal share, with manufacturing at to protect India’s economic interests.
10% and services at 15-20%. Statement 2 : These policies were more focused on
promoting British economic interests.
66. Statement 1 : Commercialization of agriculture (a) Statement 1 is true, and Statement 2 is false.
during colonial rule led to higher food grain (b) Statement 1 is false, and Statement 2 is true.
production in India. (c) Both Statement 1 and Statement 2 are true.
Statement 2 : It caused a shift in cropping patterns (d) Both Statement 1 and Statement 2 are false.
towards cash crops.
Ans : DELHI 2022
(a) Statement 1 is true, and Statement 2 is false.
(b) Statement 1 is false, and Statement 2 is true. (b) Statement 1 is false, and Statement 2 is true.
(c) Both Statement 1 and Statement 2 are true. British colonial policies were designed to promote
(d) Both Statement 1 and Statement 2 are false. the economic interests of Britain, often at the
expense of India’s economic development.
Ans : FOREIGN 2004

(b) Statement 1 is false, and Statement 2 is true. 70. Statement 1 : India faced enormous social and
Commercialization of agriculture did not result economic challenges at the time of independence
in higher food grain production but shifted due to the long British colonial rule.
cropping patterns to cash crops, often causing Statement 2 : These challenges were resolved
food shortages. immediately after independence.
(a) Statement 1 is true, and Statement 2 is false.
67. Statement 1 : The restrictive trade policies of the (b) Statement 1 is false, and Statement 2 is true.
colonial government odtained British monopoly (c) Both Statement 1 and Statement 2 are true.
over India’s imports and exports. (d) Both Statement 1 and Statement 2 are false.
Statement 2 : These policies boosted India’s
Ans : OD 2005
domestic industries.
(a) Statement 1 is true, and Statement 2 is false. (a) Statement 1 is true, and Statement 2 is false.
(b) Statement 1 is false, and Statement 2 is true. India faced significant challenges at independence,
(c) Both Statement 1 and Statement 2 are true. but these issues required extensive efforts and
(d) Both Statement 1 and Statement 2 are false. time to resolve, not immediate solutions.

Ans : SQP 2007 71. The colonial government’s policies ensured Britain
(a) Statement 1 is true, and Statement 2 is false. odtained monopoly control over India’s imports
The colonial trade policies ensured British control and exports, adversely affecting the country’s
over imports and exports, leading to the decline trade structure.
of Indian domestic industries instead of boosting How did the colonial government affect India’s
them. trade?
(a) By encouraging local industries
68. Statement 1 : The literacy rate and public health (b) By odtaining monopoly control over imports
facilities in colonial India were encouraging. and exports
Statement 2 : Social development indicators like (c) By reducing tariffs on Indian exports
life expectancy and mortality rates were poor (d) By promoting free trade

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 271
Ans : OD 2008
(c) Both statements 1 & 2 are true.
(a) Assertion and Reason both are correct
statements and Reason is correct explanation for 62. Statement 1 : The colonial government developed
Assertion. infrastructure like railways and ports to improve
the living standards of Indian people.
59. Assertion : GDP and per capita income of the Statement 2 : The infrastructure was primarily
country were very low during the British rule developed to serve British economic and
Reason : Progress in social infrastructure and administrative interests.
not economic infrastructure contributed greatly (a) Statement 1 is true, and Statement 2 is false.
towards it. (b) Statement 1 is false, and Statement 2 is true.
(a) Assertion and Reason both are correct (c) Both Statement 1 and Statement 2 are true.
statements and Reason is correct explanation (d) Both Statement 1 and Statement 2 are false.
for Assertion. Ans : COMP 2014
(b) Assertion and Reason both are correct
statements but Reason is not correct (b) Statement 1 is false, and Statement 2 is true.
explanation for Assertion.
63. Statement 1 : India’s world-famous handicraft
(c) Assertion is true but Reason is false.
industries declined during colonial rule due to the
(d) Assertion is false but Reason is true.
introduction of modern industrial techniques in
Ans : OD 2015 India.
(c) Assertion is true but Reason is false. Statement 2 : The colonial government’s two-fold
policy aimed to reduce India to an exporter of raw
60. Assertion : India could not develop a sound materials and a market for British finished goods.
Industrial-base during the British rule. (a) Statement 1 is true, and Statement 2 is false.
Reason : Britishers followed restrictive trade (b) Statement 1 is false, and Statement 2 is true.
policies, which strengthened Indian handicraft (c) Both Statement 1 and Statement 2 are true.
industries. (d) Both Statement 1 and Statement 2 are false.
(a) Assertion and Reason both are correct Ans : SQP 2012
statements and Reason is correct explanation
for Assertion. (b) Statement 1 is false, and Statement 2 is true.
(b) Assertion and Reason both are correct India’s handicraft industries declined not due to
statements but Reason is not correct modern industrial techniques but because of the
explanation for Assertion. colonial government’s two-fold policy. This policy
(c) Assertion is true but Reason is false. reduced India to an exporter of raw materials and
(d) Assertion is false but Reason is true. a market for British goods.

Ans : COMP 2019 64. Statement 1 : The commercialization of agriculture

(c) Assertion is true but Reason is false. during the colonial period led to a shift from food
crops to cash crops.
Statement 2 : This shift benefited Indian farmers
by increasing their income and improving their
STATEMENT BASED QUESTIONS economic conditions.
(a) Statement 1 is true, and Statement 2 is false.
(b) Statement 1 is false, and Statement 2 is true.
61. Statement 1 : Agricultural productivity was very (c) Both Statement 1 and Statement 2 are true.
low during the British Rule. (d) Both Statement 1 and Statement 2 are false.
Statement 2 : In absolute terms, there was Ans : OD 2017
growth in agricultural sector due to expansion of
(a) Statement 1 is true, and Statement 2 is false.
aggregate area under cultivation.
The commercialization of agriculture led to a shift
(a) Statement 1 is true & Statement 2 is false.
from food crops to cash crops, but this change
(b) Statement 1 is false & Statement 2 is true.
primarily benefited British economic interests
(c) Both statements 1 & 2 are true.
rather than Indian farmers, who faced exploitation
(d) Both statements 1 & 2 are false.
and economic distress.
Ans : FOREIGN 2010

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CH 6 : INDIAN ECONOMY ON THE EVE OF INDEPENDENCE

(a) Assertion and Reason both are correct (b) Assertion and Reason both are correct
statements and Reason is correct explanation for statements but Reason is not correct explanation
Assertion. for Assertion.

53. Assertion : Development of railways enhanced 56. Assertion : Indian economy, under the British
commercialization of agriculture. Colonial rule, reoded fundamentally agrarian.
Reason : The British government developed infra- Reason : Commercialization of agriculture, land
structure in India to serve their own colonial settlement system and partition of the country
interests. adversely affected Indian agriculture.
(a) Assertion and Reason both are correct (a) Assertion and Reason both are correct
statements and Reason is correct explanation statements and Reason is correct explanation
for Assertion. for Assertion.
(b) Assertion and Reason both are correct (b) Assertion and Reason both are correct
statements but Reason is not correct statements but Reason is not correct
explanation for Assertion. explanation for Assertion.
(c) Assertion is true but Reason is false. (c) Assertion is true but Reason is false.
(d) Assertion is false but Reason is true. (d) Assertion is false but Reason is true.
Ans : FOREIGN 2001 Ans : COMP 2003

(a) Assertion and Reason both are correct (a) Assertion and Reason both are correct statements
statements and Reason is correct explanation for and Reason is correct explanation for Assertion.
Assertion.
57. Assertion : The large import surplus generated
54. Assertion : On the eve of Independence, both during the colonial period came at a huge cost to
birth rate and death rate were very high. the Indian economy.
Reason : Life Expectancy was also high at 68 Reason : This created scarcity of essential
years compared to the present 44 years. commodities in the domestic market and did
(a) Assertion and Reason both are correct not result in any flow of gold and silver into our
statements and Reason is correct explanation country.
for Assertion. (a) Assertion and Reason both are correct
(b) Assertion and Reason both are correct statements and Reason is correct explanation
statements but Reason is not correct for Assertion.
explanation for Assertion. (b) Assertion and Reason both are correct
(c) Assertion is true but Reason is false. statements but Reason is not correct
(d) Assertion is false but Reason is true. explanation for Assertion.
(c) Assertion is true but Reason is false.
Ans : SQP 2000
(d) Assertion is false but Reason is true.
(c) Assertion is true but Reason is false.
Ans : DELHI 2006
55. Assertion : The discriminatory tariff policy (d) Assertion is false but Reason is true.
followed by the British led to the decline of Indian
handicrafts. 58. Assertion : During the British rule, in agriculture,
Reason : The composition of exports and imports low productivity resulted in low production.
of the Indian economy made it backward and Reason : Owners of the soil were different from
stagnant. the tillers of the soil who had no incentive to
(a) Assertion and Reason both are correct increase land productivity.
statements and Reason is correct explanation (a) Assertion and Reason both are correct
for Assertion. statements and Reason is correct explanation
(b) Assertion and Reason both are correct for Assertion.
statements but Reason is not correct (b) Assertion and Reason both are correct
explanation for Assertion. statements but Reason is not correct
(c) Assertion is true but Reason is false. explanation for Assertion.
(d) Assertion is false but Reason is true. (c) Assertion is true but Reason is false.
Ans : OD 2002 (d) Assertion is false but Reason is true.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 273
Ans : OD 2020
The bar graph shows the percentage of the
(b) By odtaining monopoly control over imports workforce employed in various sectors during
and exports. colonial India. Which sector accounted for the
largest share of the workforce?
72. Statement 1 : The zamindari system introduced (a) Agriculture
by the colonial government increased agricultural (b) Manufacturing
productivity. (c) Services
Statement 2 : It prioritized revenue collection (d) Trade
over the welfare of cultivators.
(a) Statement 1 is true, and Statement 2 is false. Ans : SQP 2005

(b) Statement 1 is false, and Statement 2 is true. (a) Agriculture

(c) Both Statement 1 and Statement 2 are true. The bar graph clearly shows that agriculture
(d) Both Statement 1 and Statement 2 are false. accounted for 75% of the workforce, which is
significantly higher compared to manufacturing
Ans : COMP 2009
(10%) and services (15%). This highlights the
(b) Statement 1 is false, and Statement 2 is true. agrarian nature of India’s economy during the
The zamindari system caused stagnation in colonial period.
agriculture due to its focus on revenue collection,
neglecting cultivators’ welfare and productivity. 75. Read the following bar graph

73. Statement 1 : The second stage of demographic

transition in India began before 1921.
Statement 2 : This stage was marked by changes
in population growth dynamics.
(a) Statement 1 is true, and Statement 2 is false.
(b) Statement 1 is false, and Statement 2 is true.
(c) Both Statement 1 and Statement 2 are true.
(d) Both Statement 1 and Statement 2 are false.
Ans : FOREIGN 2023

(b) Statement 1 is false, and Statement 2 is true.

The second stage of demographic transition began
after 1921, indicating shifts in population growth The bar graph shows India’s trade composition
due to changes in mortality and fertility rates. during the colonial period. Which component had
the highest percentage share?
(a) Imports
(b) Exports
GRAPH BASED QUESTIONS (c) Domestic Trade
(d) Services
Ans : OD 2009
74. Read the following bar graph
(b) Exports
The bar graph indicates that exports accounted
for 80% of India’s trade, which is significantly
higher than imports at 20%. This reflects the
colonial policy of generating a large export surplus
to benefit British industries.

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CH 6 : INDIAN ECONOMY ON THE EVE OF INDEPENDENCE

The stagnation was primarily caused by 100. What do you mean by colonialism ?
exploitative land settlement systems introduced
Ans : OD 2014
by the colonial government.
The practice of establishing colonies through
92. What is productivity in agriculture? conquest or other methods involved making them
Ans : FOREIGN 2008
dependent, serving as a means for a country
to expand its power, control, and rule over the
Productivity in agriculture means output per political and economic life of regions beyond its
hectare of land. borders.
93. Name the economists who estimated India’s per 101. Which industries were set up in India during the
capita income during the colonial period? second half of the 19th century ?
Ans : SQP 2010 Ans : FOREIGN 2016
V.K.R.V. Rao, Dada Bhai Naoroji, Findlay, Cotton and jute mills were set up in the Eastern
William Digby, R.C. Desai etc. part of the country which were dominated by the
foreigners and textile industry in Maharashtra
94. What are capital goods industries ?
and Gujarat.
Ans : DELHI 2007
102. Which industries were set up in India after the
Capital goods industries are those that produce
Second World War ?
machinery, tools, and equipment used for
manufacturing other goods. Ans : SQP 2015

Steel, cement, sugar, and paper industries were

95. What is meant by infant mortality rate?
established in India after the Second World War.
Ans : COMP 2012
103. Name the first steel industry of India.
Infant mortality rate is the number of deaths of
children under the age of one year per 1,000 live Ans : COMP 2004
births in a given year. Tata Iron and Steel Company (TISCO).
96. What is life expectancy? 104. What factors are responsible for limited foreign
Ans : DELHI 2017 trade of India ?
Life expectancy means average life of a person. Ans : OD 2005

Restrictive colonial policies on production, trade,

97. What was the od characteristic of India’s foreign
and tariffs hindered the growth of foreign trade.
trade throughout the colonial period ?
Ans : SQP 2022 105. What was the Infant mortality rate during the
colonial rule?
It was marked by a large export surplus, which
often drained India’s wealth. Ans : DELHI 2003

218 per thousand

98. What was the motive behind the infrastructure
development during the British rule ? 106. What is the first stage of demographic
Ans : COMP 2018 transition ?
The primary motive was to serve British economic Ans : DELHI 2023
and administrative interests, not to benefit the The first stage is characterized by high birth and
Indian population. death rates, resulting in slow population growth
due to limited medical knowledge and food
99. What is capital goods industry?
shortages.
Ans : OD 2021
107. Why half of India’s foreign trade was restricted to
Industries that produce machinery and tools used
Britain in pre-independence period ?
for manufacturing other goods.
Ans : FOREIGN 2009

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 275

80. The colonial government introduced land 84. What do you mean by commercialization of
settlement systems like the zamindari system, agriculture?
which led to stagnation and low productivity in
Ans : COMP 2024
agriculture.
What was the od impact of the zamindari system It refers to producing crops primarily for sale in
on agriculture? the market rather than for self-consumption.
(a) Increased productivity
85. Define tertiary sector.
(b) Agricultural stagnation
(c) Technological advancements Ans : DELHI 2000
(d) Expansion of irrigation Tertiary sector may be defined as that sector
Ans : COMP 2008 which includes trade and commerce, transport,
storage, communication, trade, financing etc.
(b) Agricultural stagnation
86. Define occupational structure.
81. India could not develop a sound industrial base
because there was hardly any capital goods Ans : OD 2001
industry, and the colonial government’s policies Occupational structure refers to the distribution
led to the decline of handicrafts. of the working population among different sectors
Why was India unable to develop a strong of the economy, such as agriculture, industry, and
industrial base during colonial rule? services.
(a) Lack of skilled workers
(b) Decline of handicrafts and absence of capital 87. What was the adverse effect of partition at the
goods industries time of independence ?
(c) Insufficient demand for goods
Ans : FOREIGN 2002
(d) Poor natural resources
A significant portion of fertile and irrigated land
Ans : DELHI 2020
went to Pakistan.
(b) Decline of handicrafts and absence of capital
goods industries 88. What was the intention of the Britishers regarding
Industrial development in India ?
82. At the time of independence, India faced
Ans : SQP 2001
enormous social and economic challenges due to
two centuries of British colonial rule. To make India a supplier of raw materials and a
What was the condition of India at the time of market for British finished goods..
independence?
89. What was the purpose of the British colonial rule
(a) It had a strong industrial base
in India ?
(b) It faced major social and economic challenges
(c) It was free from poverty and unemployment Ans : COMP 2002
(d) It had no challenges due to colonial rule The sole purpose of the British colonial rule in
Ans : FOREIGN 2011 India was to reduce it into a feeder economy for
Great Britain’s own rapidly expanding industrial
(b) It faced major social and economic challenges.
base.

90. What was the od aim of the Zamindars ?

ONE MARK QUESTIONS Ans : DELHI 2003

The primary interest of the Zamindars was to

collect rent without considering the economic
83. What is meant by subsistence agriculture ? condition of the cultivators, leading to widespread
Ans : OD 2024
misery and social unrest.

Subsistence agriculture means producing crops 91. What was the od cause of stagnation in the
for self-consumption rather than for marketing. agricultural sector during the British rule ?
Ans : OD 2006

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CH 6 : INDIAN ECONOMY ON THE EVE OF INDEPENDENCE

76. Read the following bar graph The Zamindari system affected 60% of agricultural
land, making it the most impactful, as shown in
the bar graph.

78. Read the following bar graph

The bar graph shows the contribution of various

manufacturing activities in colonial India. Which
activity contributed the most to the manufacturing
sector?
The bar graph shows the colonial government’s
(a) Cotton Textiles
spending priorities. Which category received the
(b) Handicrafts
highest percentage of spending?
(c) Metal Works
(a) Infrastructure
(d) Silk Textiles
(b) Social Development
Ans : COMP 2022
(c) Public Health
(b) Handicrafts (d) Education
The bar graph shows that handicrafts had the
highest contribution of 50%, followed by cotton Ans : OD 2023

textiles (30%) and metal works (20%). (a) Infrastructure

The bar graph indicates that 80% of the spending
77. Read the following bar graph
was on infrastructure, compared to only 20%
on social development, highlighting the colonial
government’s focus on economic interests rather
than societal welfare.

PASSAGE BASED QUESTION

79. India’s economy during the colonial period was

characterised by various manufacturing activities,
including handicrafts, cotton and silk textiles,
and metal works, but agriculture reoded the od
The bar graph depicts the impact of land source of livelihood.
settlement systems on agriculture. Which system What was the primary source of livelihood in
affected the largest percentage of agricultural India during the colonial period?
land? (a) Handicrafts
(a) Zamindari System
(b) Agriculture
(b) Ryotwari System
(c) Mahalwari System (c) Metal works
(d) Permanent Settlement (d) Textile production

Ans : DELHI 2018 Ans : SQP 2019

(a) Zamindari System (b) Agriculture

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 277

For all practical purposes, Britain odtained a Ans : SQP 2001

monopolistic control over India’s exports and Cotton textile and jute industry.
imports. As a result, more than half of India’s
foreign trade was restricted to Britain. 116. When was the first official census conducted in
India?
108. What is tariff ?
Ans : COMP 2002
or
Why are tariffs imposed ? 1881
Ans : DELHI 2014 117. What do you mean by the occupational structure
A tariff is a tax or duty imposed on imported or of an economy?
exported goods, aimed at generating revenue or Ans : OD 2006
protecting domestic industries.
It refers to the distribution of working population
109. What were the od characteristics of Indian according to different occupations like agriculture,
economy before the British Rule in India ? industry, trade etc.
Ans : OD 2019 118. _____ is one of the od positive contribution
Self-sufficient villages, developed handicrafts, made by the British in India. (Fill up the blank
flourishing trade, and indigenous banking systems. with correct answer)
Ans : OD 2020
110. Write down any two positive aspects of British
rule. Introduction of Railways
Ans : FOREIGN 2000

(i) Introduction of railways.

(ii) Political unification of the country. TWO MARK QUESTIONS
111. Why was population growth low in pre-
independence India ? 119. “Opening up of Suez Canal helped in establishing
Ans : SQP 2008 the British monopoly control over India’s foreign
trade”. Justify the given statement with valid
Population growth was low due to widespread
arguments.
poverty, malnutrition, and lack of proper
healthcare facilities. Ans : OD 2024

The opening of the Suez Canal shortened the

112. By whom were jute mills situated in Bengal
trade route between India and Britain, reducing
dominated in colonial rule ?
transportation costs and time. This facilitated
Ans : COMP 2020 the export of raw materials like cotton and jute
Jute mills in Bengal were dominated by British from India and the easy import of British finished
industrialists. goods. It reinforced British control over India’s
foreign trade while sidelining other trading
113. Which country had monopoly to control on nations.
foreign trade of India ?
120. What was the two-fold motive behind the
Ans : DELHI 2011
systematic de-industrialization affected by British
Britain had a monopoly over India’s foreign trade. in per-independence India.

114. Name a modern industry which was in operation Ans : SQP 2008

at the time of independence. (i) To reduce India to the status of merely

Ans : FOREIGN 2013
being a supplier of raw materials for British
industries.
Cotton textiles (ii) To transform India into a market for the
finished goods produced by those industries.
115. Which two industries were adversely affected by
partition of the country?

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CH 6 : INDIAN ECONOMY ON THE EVE OF INDEPENDENCE

(ii) Growth of domestic industry under protection (vi) There was prevalence of rampant poverty and
led to its failure in achieving international unemployment.
standards in quality of products being
produced. Growth through competition and 140. What were India’s most crucial economic
diversification was conveniently neglected. challenges at the time of independence?
(iii) The inward looking policy of import or
substitution proved to be a failure in saving Underscore some of India’s most crucial economic
foreign exchange. Our foreign exchange challenges at the time of independence.
reserves started shrinking and were at an all Ans : OD 2000
time low by the end of 1990.
At the time of independence, India faced enormous
(iv) The policy of unwanted control over the entry
social and economic challenges:
of foreign capital led to slow transfer of foreign
technology to the domestic industries and 1. The agricultural sector suffered from surplus
they continued to produce old and outdated labour and low productivity.
goods. 2. The industrial sector needed modernization,
diversification, capacity building and heavy
139. What was the od focus of the economic policies public investment.
pursued by the colonial government? Explain the 3. The infrastructural facilities including the
impact of these policies. framed railway network, needed up-gradation,
or public orientation and expansion.
By the time India won its independence, the
4. Widespread poverty and unemployment.
impact of the two century long British colonial
rule was already showing on all aspects of the 5. Foreign trade was oriented to feed the
Indian economy. Elucidate. industrial revolution in Britain.
6. Increased dependence of people on agriculture
Ans : DELHI 2019
as a means of livelihood.
The economic policies pursued by the colonial 7. The literacy level and life expectancy were
government in India were concerned more with low whereas the overall mortality rate was
the protection and promotion of the economic high.
interests of their home country rather than with 8. Shortage of raw materials for cotton and jute
the development of the Indian economy. Such industries as most of the cotton and jute
policies brought about a fundamental change growing areas went to Pakistan.
in the structure of the Indian economy, i.e.,
9. Rehabilitation of large number of refugees
transforming the country into supplier of raw
from Pakistan.
materials and consumer of finished industrial
products from Britain. 141. Indian economy, at the time of independence,
Impact of economic policies of the colonial was colonial, stagnant, backward, dependent and
government : disintegrated in nature. Explain the statement.
(i) The system of land settlement, and
Ans : FOREIGN 2008
commercialization of agriculture, caused
stagnation in the agricultural sector. The British rule turned the Indian economy into
(ii) The policy of de-industrialization led to the a colonial, stagnant, backward, dependent and
collapse of India’s world famous handicraft disintegrated economy.
industries. Also, there was hardly any This is proved by the following :
capital goods industry to promote further (i) Colonial economy. India as a supplier of raw
industrialization in India. material and as a consumer of finished goods
(iii) India was reduced to the status of a mere became a feeder economy to the British
exporter of raw materials and importer of industries.
finished consumer goods. (ii) Stagnant economy. During the British rule,
(iv) Our foreign trade was oriented to feed the the Indian economy was growing at a very
industrial revolution in Britain. low rate. According to studies, the country’s
(v) The infrastructural facilities needed up- growth of real output during the first half of
gradation, expansion and public orientation. the 20th century was less than 2%.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 279
Ans : COMP 2004
128. State the two-fold motive for the systematic
During British rule, India’s export surplus destabilization of indigenous Indian industries in
generated a favorable balance of trade, but the Britishers.
the earnings were not reinvested in the Indian Ans : OD 2020
economy. Instead, the surplus was used to finance
Britain’s industrial growth, administrative Two-Fold Motive for the Systematic
expenses in India, and wars. This wealth transfer, Destabilization of Indigenous Indian Industries
known as the “economic drain,” impoverished During British Rule:
India despite its contributions to trade. Essential (i) To convert India into a supplier of raw
sectors like agriculture and industry eroded materials, such as cotton and jute, for British
underdeveloped, leaving the Indian economy industries.
stagnant and dependent on Britain. (ii) To eliminate Indian industries and make India
a captive market for British manufactured
126. Read the following text carefully goods by imposing high taxes on local
The colonial economic policies were designed products and flooding the market with
to benefit Britain at the expense of India. This cheaper British goods.
resulted in a continuous transfer of India’s wealth
to Britain, commonly referred to as the “drain of 129. The export surplus generated in foreign trade
wealth. during the British rule resulted in a loss to India
State three ways in which there was a drain of in more than one ways. How?
Indian wealth during the colonial period. Ans : DELHI 2007

Ans : FOREIGN 2016 The Britishers diverted a large volume of India’s

During the British rule, India became an exporter foreign trade for their benefits. There was a large
of primary products and there was a huge export generation of export surplus under the British
surplus due to excess exports. Raj. This export surplus came at the cost of low
However this export surplus was used: production of essential goods like clothes, food
(i) To make payments for expenses incurred by grains, kerosene etc. Resources were heavily
an office set up by the colonial government in being used to produce items for export, leading
Britain. to an acute shortage of civil goods. The surplus
(ii) To meet expenses on War fought by the generated from India’s foreign trade was not
British government. invested in the Indian economy, rather it was used
(iii) To import invisible items. for administrative and war purposes.

127. What were the od causes of India’s agricultural 130. Read the following text carefully :
stagnation and backwardness during the British rule? India’s demographic profile during the colonial
period reflected the socio - economic challenges of
Ans : COMP 2017
the time. The population was largely rural, with
OD Causes of Agricultural Stagnation and low literacy rates, poor health facilities, and high
Backwardness during British Rule: mortality rates. Give a quantitative appraisal of
(i) Exploitative Land Revenue Systems : Systems India’s demographic profile during the colonial
like Zamindari heavily burdened farmers period.
with high rents, regardless of their economic Ans : OD 2005
condition.
(ii) Focus on Cash Crops : Farmers were forced (i) High Birth and Death Rates : Birth rates
to grow cash crops like cotton and indigo for were 48 per thousand, and death rates were
British industries, neglecting food crops. 40 per thousand.
(iii) Lack of Investment : No efforts were made (ii) Low Life Expectancy : Life expectancy was
to improve irrigation, farming techniques, or only 32 years.
infrastructure. (iii) High Infant Mortality : Infant mortality rate
(iv) Rural Indebtedness : Farmers relied on was 218 per thousand.
moneylenders, leading to perpetual debt. (iv) Stagnant Population Growth : Slow
(v) Neglect of Farmers’ Welfare : No support or population growth due to poor healthcare,
subsidies for agricultural development. malnutrition, and frequent famines.

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CH 6 : INDIAN ECONOMY ON THE EVE OF INDEPENDENCE

121. India’s occupational structure before independence 123. Read the following text carefully:
was largely shaped by the policies and priorities The partition of India in 1947 not only divided
of the colonial government. The distribution of the nation politically but also had far-reaching
workforce among various sectors highlighted the economic consequences. One of the most affected
stagnation and imbalance in the economy. sectors during this time was agriculture, as the
Highlight the salient features of India’s pre- division altered the availability of resources and
independence occupational structure. land.
What was the impact of partition on the Indian
Ans : FOREIGN 2010
agricultural sector on the eve of independence?
Salient features of India’s pre-independence
occupational structure are as follows : Ans : DELHI 2014

(i) Predominance of agricultural sector. The Impact of Partition on Indian Agriculture on the
agricultural sector accounted for 72% of the Eve of Independence are as follows :
workforce in 1951. (i) Loss of fertile and irrigated lands, particularly
(ii) States like Tamil Nadu, Andhra Pradesh, in Punjab and Bengal, to Pakistan.
Kerala, and Bengal experienced a decline (ii) Disruption of agricultural production and
in workforce dependence on agriculture. In trade networks.
contrast, states such as odisha, Rajasthan, (iii) Loss of major jute-producing areas, affecting
and Punjab saw an increase in the proportion the jute industry in India.
of their workforce engaged in agriculture (iv) Displacement of farmers, leading to reduced
during the same period. productivity and instability.
(v) Increased strain on agricultural resources due
to population shifts.
(vi) Loss of agricultural infrastructure, further
THREE MARK QUESTIONS hindering growth and efficiency.

124. What were the characteristics of foreign trade

during the British rule?
122. Read the following text carefully
During the British colonial rule, the agricultural Ans : SQP 2015

sector in India underwent significant changes. Characteristics of Foreign Trade During British
One of the most notable changes was the shift in Rule are as follows :
the purpose of agricultural production, driven by (i) Export surplus odly consisted of raw materials
the policies of the colonial government. like cotton, indigo, and jute.
What is commercialization of agriculture? How (ii) Import of British manufactured goods,
did it affect the Indian economy during the especially textiles, dominated the Indian
British rule? market.
Ans : OD 2024 (iii) Trade was controlled under a British
monopoly, limiting connections with other
Commercialization of Agriculture : It refers to the
nations.
transition from subsistence farming to cultivating
(iv) The structure caused a significant drain of
crops for sale in the market, often for export.
wealth to Britain.
Effect on Indian Economy : Commercialization
(v) Trade policies benefited Britain’s economy,
during British rule forced Indian farmers to grow
leaving India economically weakened.
cash crops like cotton, jute, and indigo instead of
food crops, leading to frequent famines and food 125. Read the following text carefully :
shortages. It made Indian agriculture dependent During British rule, India consistently had a
on global market fluctuations, adversely impacting favourable balance of trade due to its large export
farmers. While it benefited British industries surplus. However, this surplus did not translate
by ensuring raw materials for their factories, it into economic growth for India and instead
impoverished Indian farmers, increasing rural contributed to the country’s impoverishment.
indebtedness and economic distress. The period of British rule has been called as an
economic drain despite a favorable balance of
trade. Why?

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 281

(i) Predominance of Agricultural sector over 137. The British developed Railways to sub-serve their
manufacturing and service sector : The colonial interest but its social benefits outweighed
agricultural sector accounted for the largest the economic losses to the country. Explain the
share of workforce, which usually reoded at a statement.
high of 70-75%, while the manufacturing and
Ans : COMP 2015
the service sectors accounted for only 10%
and 15-20% respectively. The British developed Railways in order to
(ii) Regional variation. facilitate the movement of raw material from their
(a) Though agricultural sector was the major source to the ports for further transportation to
sector in terms of share of workforce England. Railways also led to the expansion of the
absorbed in it, still there were regional market for British products. But it also helped
variations. the Indian economy in many ways:
(b) Parts of then Madras Presidency (i) It helped in keeping a check on famines by
(comprising states of Tamil Nadu, facilitating movement of grains.
Andhra Pradesh, Kerala, Karnataka), (ii) It enabled people to undertake long distance
Bombay and Bengal witnessed a decline travel and thereby break geographical and
in the workforce in agricultural sector cultural barriers.
and showed an increase in the workforce (iii) The volume of India’s exports also increased
in manufacturing and service sectors. though its benefits did not accrue to the
(c) However, there had been an increase Indian people.
in the share of workforce in agriculture (iv) India’s industrial development, i.e., cotton
during the same time in states such as textile industries in Bombay, jute industry in
Orissa, Rajasthan and Punjab. Calcutta, tea plantation in Assam and Bengal
owe their development to the expansion of
136. Highlight the positive contributions made by the Railways.
British in India.
or 138. “The policy of protectionism encouraged the
“The British rule brought a few advantages to the growth of domestic industries, but at the same
Indian economy.” Explain. time proved to be an impediment.”
Do you agree with the given statement? Give
Ans : SQP 2018
valid reasons in support of your answer.
(i) Better means of transportation. Development Ans : OD 2020
of roads and railways opened new opportunities
The policy of protectionism implies protection
for economic and social growth.
from global competition which encouraged the
(ii) Shift to a monetary economy. The British rule growth of domestic industries. It made possible
helped in the transition from barter system of for indigenous industries to prosper specially in
exchange to monetary system of exchange. the field of electronics and automobile sector.
(iii) Check on famines. Roads and Railways help It also had a favorable impact on employment
in keeping a check on the occurrence of generation as protection to small scale industries
famines as food supplies could now be easily helped to achieve the objectives of employment
transported to the affected areas. and equity. Economic growth got a big push and
(iv) Effective administrative set-up. The British industrial output recorded a significant rise.
rule in India left a legacy of an efficient system However, there were some negative effects to
of administration which served as a ready the strategy of industrial growth adopted during
reckoner for our politicians and planners. 1947-1950 :
(v) Improvement in agricultural productivity. (i) The development of large number of public
Commer-cialisation of agriculture resulted sector enterprises became a huge economic
in improvement in agricultural productivity. burden as these enterprises were running into
Agriculture gradually came to be accepted losses and were termed sick enterprises. By
as a profitable venture rather than merely a incurring huge losses, public sector enterprises
means of subsistence. led to inefficient use of scarce national
resources.

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CH 6 : INDIAN ECONOMY ON THE EVE OF INDEPENDENCE

(v) Low Literacy Rates : Literacy levels were The railways improved connectivity, facilitated
abysmally low, with only about 16% of the internal trade, and supported the development of
population being literate. towns. It provided a faster means of transportation,
boosting commerce and communication. However,
131. What objectives did the British sought to it was primarily designed for colonial exploitation,
achieve through their policies of infrastructure enabling the export of raw materials to Britain
development in India? and the import of British goods, which suppressed
or local industries. Additionally, the profits generated
State and explain any two od causes behind by railways were drained to Britain, with minimal
infrastructural development by British rule. reinvestment in India, making it both a benefit
Ans : SQP 2023 and a challenge for the Indian economy.
The British aimed to achieve the following
through their infrastructure development policies:
(i) Railways were introduced to transport
finished goods to the interiors of the country
FOUR MARK QUESTIONS
and expand market access.
(ii) Roads were built to mobilize the military 134. The arrival of British economic policies and
quickly and transport raw materials from industrial goods had a devastating impact on
rural areas to nearby railway stations or ports India’s traditional industries, particularly its
for export to Britain. flourishing handicrafts sector.
(iii) The Post and Telegraph system was The traditional handicrafts industry was ruined
established to ensure effective communication under the British rule. Do you agree? Justify your
and odtain law and order across India. answer.

132. Development of Railways during British rule Ans : OD 2024

encouraged colonial exploitation of the Indian Yes, the Indian handicrafts were systematically
resources. destroyed owing to the discriminatory policies
Justify the given statement with valid arguments. of the British government besides other factors
which have been explained below:
Ans : OD 2015
(i) Discriminatory tariff policy : This policy
The British introduced the Railways in India in allowed tariff free export of raw material
1850. The Railways affected the structure of the from India and import of British industrial
Indian economy in many ways. on the positive product into India but placed a heavy duty
side, it enabled the people to undertake long on the export of Indian handicraft products.
distance travel and thereby break geographical and (ii) Decline in state patronage : The disappearance
cultural barriers. The volume of India’s exports of princely courts implied the end of state
also expanded after the introduction of Railways patronage to handicraft industry thereby
but its benefits did not accrue to the Indian leading to their decay.
people. It also led to the expansion of market for (iii) Change in demand pattern : The spread of
British products. It fostered commercialization of British culture led to the emergence of a new
Indian agriculture which adversely affected the class in India which was keen to adopt the
self sufficiency of the village economies in India. western lifestyle leading to a decline in the
demand for traditional handicrafts.
133. Read the following text carefully
(iv) Competition from machine made goods : The
The British introduced railways in India
low cost machine made products from Britain
primarily to serve their administrative and
gave stiff competition to Indian handicrafts.
economic interests. While it created a significant
infrastructure, it had both positive and negative 135. Explain the changes that were observed in India’s
impacts on the Indian economy. How did occupational structure during the British rule.
introduction of Indian railways prove to be a boon
as well as a challenge for the Indian economy? Ans : SQP 2023

The state of occupational structure during the

Ans : OD 2009
British rule can be given as under:

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 283

(iii) Backward economy. At the end of the British (i) The decline of the handicraft industry was
rule, Indian economy was underdeveloped and caused due to:
backward. Our agricultural and industrial (a) Discriminatory policies
sector were both very backward and our per (b) Low demand
capita income was also very low. (c) Indian imports
(iv) Dependent economy. During the British rule, (d) Export surplus
our foreign trade came to depend odly on
(ii) TISCO was established in _____.
Britain. We started importing commodities
(a) 1809
which we used to export earlier.
(b) 1907
(v) Disintegrated economy. The division of our (c) 1908
country resulted in many adverse impacts like (d) 1806
shortage of raw materials, loss of markets etc
(iii) An industry that produces machines for
production of goods meant for consumption
is called _____ goods industry.
CASE BASED QUESTION (a) Capital
(b) Consumer
(c) Final
142. Read the para given below and answer the (d) None of these
questions that follow :
Even as the country’s world famous handicraft (iv) Which industry suffered a setback due to the
Industries declined, no corresponding modern partition of the country in 1947?
industrial base was allowed to come up to take the (a) Handicraft
place of pride so long enjoyed by the former. The (b) Jute
primary motive of the colonial government behind (c) Cotton
this policy of systematic de-industrialization was (d) Both (b) and (c)
to reduce India to the status of a mere exporter Ans :
of important raw materials for the upcoming (i) (a) Discriminatory policies
modern industries in Britain and to turn India (ii) (b) 1907
into a sprawling market for the finished products (iii) (a) Capital
of Britain’s modern industries so that their (iv) (d) Both (b) and (c)
continued expansion could be ensured to the
maximum advantage of their home country. 143. Read the para given below and answer the
In the unfolding economic scenario, the decline of questions that follow:
the indigenous handicraft Industries created not The details of the demographic condition regarding
only massive unemployment in India but also a the population of British India were primarily
new demand in the Indian consumer market which obtained through a Census in 1881. Though
was profitably met by the increasing imports of suffering from several conditions, it unveiled the
cheap manufactured goods from Britain. unevenness in the growth of Indian population.
India was forced to open its large markets to Consequently, in every ten years, such census
British goods which could be sold in India procedures were conducted. Prior to 1921, India
without any tariff or duties compared to local was in the initial step of demographic transition.
Indian producers who were heavily taxed. In The second step of transition started after 1921.
Britain, protectionist policies such as bans and At the time of independence, neither the total
high tariffs or duties were implemented to restrict population nor its growth rate was very high.
Indian goods, specially textiles, from being sold Despite this, the social development indicators
there, whereas raw cotton was imported from were not very promising. The overall literacy level
India without tariffs to Britain factories which was less than 16% out of which the female literacy
manufactured textiles. British economic policies level was negligible at about 7%. Life expectancy
gave them a monopoly over India’s vast markets was quite low at about 32 years as compared to
and raw materials such as cotton. the present 69 years. There was a lack of public
health facilities which led to widespread water
and air borne diseases.

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CH 6 : INDIAN ECONOMY ON THE EVE OF INDEPENDENCE

(i) _____ Refers to an average number of sector continued to experience stagnation and
years that a person can expect to live. deterioration. This stagnation was odly due to the
(a) Infant mortality rate various systems of land settlement, particularly
(b) Life expectancy the zarnindari system. Under this system, the
(c) Death rate profit accruing out of the agricultural sector
(d) Birth rate went to the zamindars instead of the cultivators
who did nothing to improve the condition of
(ii) The purpose of the British rule in India was agriculture. To a large extent, the terms of the
to: revenue settlement were also responsible for the
(a) Develop the Indian economy. zamindars adopting this attitude. Other factors
(b) Develop the world economy. responsible for the low levels of agricultural
(c) Promote British interest. productivity were low levels of technology, lack of
(d) Accelerate the process of industrialization irrigation facilities and negligible use of fertilisers.
in India. Despite some progress made in irrigation, India’s
agriculture was starved of investment in terracing,
(iii) The infant mortality rate at the time of
flood control, drainage and desalinization of soil.
Independence was _____ per thousand in
contrast to the present infant mortality rate (i) Commercialization of agriculture resulted
of _____ per thousand. in shifting of agricultural production from
(a) 218,60 (b) 381,63 _____ crops to _____ crops.
(c) 218,63 (d) 381,60 (a) Food, cash
(b) Wheat, Rice
(iv) Match the following:
(c) Both (a) & (b)
Column-I Column-II (d) Neither (a) nor (b)
1. Female literacy A. Less than 2% (ii) The od reason for stagnation in agriculture
rate was:
(a) Commercialization of agriculture.
2. Year of the great B. 1850
(b) Decline of handicraft Industries.
divide
(c) Discriminatory trade policies.
3. Introduction of C. About 7% (d) Land settlement system.
Railways in India
(iii) Identify the statement which is not true in
4. India’s annual D. 1921 the context of the agricultural sector of India
growth rate during during the British rule:
British period (a) Commercialization of agriculture helped
(a) 1-C, 2-D, 3-B, 4-A farmers economically.
(b) 1-B, 2-A, 3-D, 4-C (b) Agricultural sector was stagnant.
(c) 1-C, 2-D, 3-A, 4-B (c) Farmers use old and outdated techniques
(d) 1-A, 2-D, 3-B, 4-A of production.
(d) The terms of revenue settlement were
Ans :
also responsible for the backward state of
(i) (b) Life expectancy agriculture.
(ii) (c) Promote British interest.
(iv) Match the following choosing the correct
(iii) (c) 218,63
reason:
(iv) (a) 1-C, 2-D, 3-B, 4-A
Column-I Column-II
144. Read the para given below and answer the
questions that follow: 1. Low level of A. Fertile and
India’s economy under the British Colonial rule agricultural productive land
reoded fundamentally agrarian. About 85% of the production went to Pakistan
country’s population lived mostly in villages and on the eve of during partition.
derived their livelihood directly or indirectly from independence. B. Low contribution
agriculture. However, despite being the occupation of industrial sector
of such a large population, the agricultural to GDP.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 285

2. Poor state C. Exploitative (iii) The large export surplus generated throughout
of industrial British policies. the colonial period was also used to pay for
sector during D. Commercialization the _____ of _____ items.
the British (a) Import, visible
of agriculture. (b) Import, invisible
rule.
(c) Export, visible
(a) 1-B, 2-C (d) Export, invisible
(b) 1-C, 2-D
(c) 1-A, 2-C (iv) Choose the correct pair of statement:
(d) 1-D, 2-B
Column-I Column-II
Ans :
1. India became A. Capital goods
(i) (a) Food, cash an exporter of like machinery.
(ii) (d) Land settlement system.
2. Opening of the B. Primary products
(iii) (a) Commercialization of agriculture helped
Suez Canal such as cotton,
farmers economically.
jute, wool etc.
(iv) (c) 1-A, 2-C
3. India started C. Reduced
145. Read the para given below and answer the importing transportation
questions that follow: cost between
India has been an important trading nation since India and Britain.
ancient times. But the restrictive policies of
4. India’s foreign D. It also traded
commodity production, trade and tariff pursued
trade was odly with China,
by the colonial government adversely affected
with Britain Ceylon and
the structure, composition and volume of India’s
Persia.
foreign trade. Consequently, India became an
exporter of primary products such as raw silk, (a) 1-A
cotton, wool, sugar etc. and an importer of (b) 2-B
finished consumer goods like cotton, silk and (c) 3-C
capital goods like light machinery produced in (d) 4-A
the factories of Britain. More than half of India’s Ans :
foreign trade was restricted to Britain while the
(i) (a) The export surplus generated was used
rest was allowed with a few other countries. The
for India’s benefit.
opening of the Suez Canal further intensified
(ii) (c) 1869
British control over India’s foreign trade. The
(iii) (b) Import, invisible
most important characteristic of India’s foreign
(iv) (d) 4-A
trade throughout the colonial period was the
generation of a large export surplus which came 146. Read the para given below and answer the
at a huge cost to the country’s economy. questions that follow:
Under the colonial regime, basic infrastructure
(i) Which of the following is not a feature of
such as railways, ports, water transport, posts and
India’s foreign trade during the British rule:
telegraphs did develop. However, the real motive
(a) The export surplus generated was used behind this development was not to provide basic
for India’s benefit. amenities to the people but to sub serve various
(b) India was an exporter of primary colonial interests. The roads that were built
products. primarily served the purposes of mobilizing the
(c) Imports of Britain’s manufactured goods army within India and drawing out raw materials
were duty-free. from the countryside to the nearest railway
(d) India imported consumer goods like station or to the port, to send this to England or
cotton, silk etc. other lucrative foreign destinations.
Introduction of the railways was considered as
(ii) The Suez Canal was opened for transport in: the most important contribution by the British.
(a) 1850 (b) 1853 The railways affected the structure of the Indian
(c) 1869 (d) 1901 economy in more than one way. It enabled people

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CH 6 : INDIAN ECONOMY ON THE EVE OF INDEPENDENCE

to undertake long-distance travel and thereby

break geographical and cultural barriers. It also
fostered commercialization of Indian agriculture
which adversely affected the self sufficiency of the
village economies in India. The volume of India’s
exports undoubtedly expanded but its benefits
rarely accrued to the Indian people. The social
benefits, which the Indian people gained owing
to the introduction of the railways, were thus
outweighed by the country’s huge economic loss.

(i) Following is not a positive contribution made

by the colonial government:
(a) Telegraph and postal services
(b) Introduction of railways
(c) Development of industries
(d) Construction of roads

(ii) India benefited from the development of

Railways in the following ways:
(a) Expansion of foreign trade
(b) Helped in the process of industrialization
(c) Helped the people to travel from one
place to another
(d) Both (b) and (c)

(iii) Arrange the following events of India before

independence in a chronological order:
i. Opening of the Suez Canal
ii. Second stage of demographic transition
iii. Introduction of Railways
iv. First census of British India
(a) i, ii, iii, iv
(b) ii, i, iv, iii
(c) iii, i, iv, ii
(d) i, iii, iv, ii

(iv) During the colonial period the _____

sector accounted for the largest share of the
workforce.
(a) Industrial
(b) Service
(c) Agricultural
(d) Agricultural
Ans :
(i) (c) Development of industries
(ii) (d) Both (b) and (c)
(iii) (c) iii, i, iv, ii
(iv) (c) Agricultural

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 287

CHAPTER 7
INDIAN ECONOMY (1950-1990)

namely the agricultural sector, the industrial

SUMMARY sector and the service sector to the GDP of a
country.
NITI Ayog (National Institute for Transforming
1. MEANING OF PLANNING
India), established on 1st January, 2015 has
Planning can be defined as a technique in which replaced the Planning Commission which was
a central planning authority seeks to achieve formed on 15th March, 1950.
definite objectives and targets within a specified
period of time while keeping the country’s 5. COMMON DEVELOPMENT PLANS IN INDIA
available resources in view. Common development plans of India are as
follows :
2. TYPES OF ECONOMIC SYSTEMS
5.1 Growth
2.1 Capitalist Economy
It refers to increase in the country’s capacity to
Capitalist economy is one where the means of produce the amount of goods and services within
production are owned, controlled and operated by the country. A steady increase in GDP is a good
the private sector. indicator of economic growth.
2.2 Socialist Economy 5.2 Modernisation
Socialist economy is one where the allocation of Adoption of new technology to increase the
resources is determined by the government in production of goods and services is called
accordance with needs of the society and not by modernisation. However, modernisation does not
the market forces. refer only to the use of new technology but also to
changes in social outlook.
2.3 Mixed Economy
Mixed economy is a combination of a free market 5.3 Self reliance
economy and a socialist economy, Here, the Self reliance implies reduction in the dependence
market will provide whatever goods and services on foreign aid and avoiding imports of goods
it can produce well, and the government will which could be produced in India itself.
provide essential goods and services which the
market fails to do. 5.4 Equity
To ensure that the benefits of economic growth
3. ECONOMIC PLANNING
are shared by all the citizens, it is necessary to
It means utilization of a country’s resources reduce inequality in the distribution of wealth
into development activities in accordance with and promote equality for the basic necessities like
national priorities. food, housing, healthcare, education etc.
4. GROSS DOMESTIC PRODUCT (GDP) 6. AGRICULTURE
It is the market value of all the goods and services The Indian policy makers after independence
produced in the country during the year. sought to address the problems faced by the
Structural Composition agricultural sector during the Colonial rule by
It is the contribution made by the three sectors, adopting the following measures :

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CH 7 : INDIAN ECONOMY (1950-1990)

6.1 Land Reforms imports with domestic production. A system of

These were the institutional reforms undertaken lo tariffs and quotas was adopted by the government
increase agricultural production and productivity. to protect the domestic industries from foreign
Important among them were abolition of competition.
intermediaries, ceiling on land holdings,
consolidation of land holdings, etc.

6.2 Green Revolution MULTIPLE CHOICE QUESTION

It refers to the large increase in production of food
grains resulting from the use of High Yielding
Variety (HYV) seeds especially for wheat and 1. What is the term used for the portion of
rice. agricultural produce that farmers sell in the
market ?.
6.3 Subsidy (a) Buffer stock
(b) Surplus stock
Subsidies referred to availability of inputs at low
(c) Marketed surplus
prices than the market price, They were needed
(d) None of the above
to encourage farmers to test the new technology.
However the economic justification of subsidies in Ans : OD 2024
agriculture is, at present, a debatable issue, (c) Marketed surplus
7. INDUSTRY 2. The Industrial Policy Resolution, 1956 classified
After independence, recognizing the importance industries into _____ categories.
of industrialization in the development process of (a) 2
the economy, the government adopted a number of (b) 5
policy measures which have been outlined below: (c) 3
(d) 4
7.1 Expansion of Public Sector
Ans : COMP 2023
The government directly assumed responsibility of
country’s industrial development. This was done (b) 5
because of large scale investment requirement, 3. What percentage did the agriculture sector
for development of backward areas and because contribute to the GDP in 1990-91?
the market was not big enough to encourage
(a) 24.6
industrialists to undertake major projects.
(b) 34.9
7.2 Industrial Policy Resolution 1956 (IPR 1956) (c) 40.5
This resolution forms the basis of the second (d) 59.0
five year plan. The purpose of this policy was to Ans : OD 2017
promote regional equality.
(b) 34.9
7.3 Small Scale Industry
4. The policy of protection contributed to the
Small scale industries were needed for promoting growth of:
rural development and for generating employment. (a) Electronics and automobile sector
7.4 Industrial licensing (b) Cotton textiles
According to this, new industry could only be (c) Iron and steel industries
established after obtaining a licence from the (d) Jute industry
government. Ans : SQP 2011

8. TRADE (a) Electronics and automobile sector

An inward looking trade strategy was adopted 5. What is the term for development achieved by
after independence which was called import utilizing domestic resources and minimizing
substitution. This policy aimed at replacing imports?

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 289

(a) Economic growth (b) Increase in percentage share of country’s

(b) Self Reliance finished products
(c) Modernization
(d) Equity 11. What is the primary objective of conducting
various economic activities?
Ans : COMP 2012
(a) Profit
(b) Self Reliance (b) Competition
(c) Public welfare
6. What is the maximum limit of fixed investment (d) Equality
permitted in a small-scale industry?
(a) `5 lakh Ans : OD 2006

(b) `50 lakh (c) Public welfare

(c) `1 crore
(d) `5 crore 12. Which of the following is responsible for the heavy
burden of debt and its interest?
Ans : DELHI 2015
(a) BOP deficit
(c) `1 crore (b) BOP surplus
(c) Equilibrium
7. In which year was India’s first Five-Year Plan (d) None of these
introduced?
(a) 1951 Ans : FOREIGN 2008

(b) 1947 (a) BOP deficit

(c) 1940
(d) 1950 13. What is required to safeguard against natural
calamities such as floods, droughts, locusts, and
Ans : OD 2018
thunderstorms?
(a) 1951 (a) Multiple cropping
(b) Green revolution
8. Which of the following is not considered a land (c) Crop insurance
reform measure? (d) HYV
(a) Tenancy reforms
(b) Fixation of minimum support prices for crops Ans : SQP 2013

(c) Abolition of zamindari system (c) Crop insurance

(d) Ceiling on land holdings
14. In which of the following type of economy are
Ans : FOREIGN 2021
resources owned privately and the main objective
(b) Fixation of minimum support prices for crops behind economic activities is profit-making?
(a) Capitalist
9. Indian Green Revolution is most successful in: (b) Socialist
(a) Wheat and potato (c) Mixed
(b) Rice and wheat (d) Global
(c) Tea and wheat
(d) Tea and coffee Ans : COMP 2014

(a) Capitalist
Ans : SQP 2023

(b) Rice and wheat 15. In which year was the National Development
Council (NDC) established as an adjunct to the
10. What changes were observed in India’s foreign Planning Commission?
trade after independence? (a) 1950
(a) Increase in percentage share of agriculture (b) 1969
(b) Increase in percentage share of country’s (c) 1952
finished products (d) 1979
(c) Rise in traditional exports
(d) None of the above Ans : DELHI 2016

(c) 1952
Ans : DELHI 2003

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CH 7 : INDIAN ECONOMY (1950-1990)

16. Which of the following measures stimulated the 21. What percentage of country’s total population
growth of the economy as a whole by fostering the was engaged in agriculture during the time of
development of industrial and tertiary sectors? independence?
(a) Independence (a) 55%
(b) Planning (b) 65%
(c) Colonial rule (c) 75%
(d) Green revolution (d) 85%
Ans : DELHI 2018
Ans : FOREIGN 2022
(c) 75%
(b) Planning
22. Avoiding imports of those goods which could be
17. _____ is known as the architect of Indian
produced in India itself, is linked with which of
Planning.
the following goals of economic planning?
(a) Jawaharlal Nehru
(a) Growth
(b) P.C. Mahalanobis (b) Equity
(c) Dr. Manmohan Singh (c) Self reliance
(d) Dr. Rajendra Prasad (d) Modernisation
Ans : SQP 2023 Ans : DELHI 2020

(b) P.C. Mahalanobis (d) Modernisation

18. How many industries were reserved for the public 23. Which of the following is not a goal of five year
sector under the Industrial Policy Resolution of plans?
1956? (a) Growth
(a) 17 (b) Self reliance
(b) 21 (c) Modernisation
(c) 15 (d) Deflation
(d) 2 Ans : SQP 2019
Ans : SQP 2010
(d) Deflation
(a) 17
24. ‘It is important to ensure that the benefits of
19. In the first phase of Green Revolution, output economic prosperity reach the poor sections as
was restricted mainly to _____. well, instead of being enjoyed only by the rich’.
(a) Cereal and Pulses Which goal of five year plans is mentioned in the
(b) Wheat and Rice given statement?
(c) Cotton and Jute (a) Self reliance
(d) Jowar and Bajra (b) Equity
(c) Modernisation
Ans : SQP 2023 (d) Growth
(b) Wheat and Rice Ans : SQP 2019

20. Which of the following is not the goal of five year (b) Equity
planning in India?
25. In _____, First ‘Industrial Policy Resolution’
(a) Modernisation
of Independent India was announced. (Fill up the
(b) Self reliance blank with correct alternative)
(c) Equity (a) 1947
(d) Price stability (b) 1948
Ans : DELHI 2018
(c) 1951
(d) 1956
(d) Price stability
Ans : OD 2021

(b) 1948

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 291

26. _____ was known as Architect of Indian (i) To bring positive changes in the social outlook
Economic Planning. (Fill up the blank with (ii) Equitable distribution of income
correct alternative) (iii) Technological Upgradation
(a) Pandit Jawahar Lal Nehru (iv) Increase in Economic Divide
(b) Dr. Manmohan Singh Alternatives:
(c) P.C. Mahalanobis (a) i & ii
(d) Dr. B.R. Arnbedkar (b) ii & iii
(c) i & iii
Ans : OD 2021
(d) i & iv
(c) P.C. Mahalanobis
Ans : OD 2024
27. Co-operative marketing societies have faced a (c) i & iii
downfall in the recent years.’
Identify which of the following was not a reason 31. NITI Aayog replaced the Planning Commission
behind its downfall. on which of the following dates?
(a) Lack of co–ordination between processing and (a) 26th January, 1950
marketing societies. (b) 1st January, 2015
(b) Inefficient financial management. (c) 15th August, 1947
(c) Inadequate coverage of all the members. (d) 15th March, 1950
(d) Intervention of the government is most
Ans : DELHI 2012
essential.
(b) 1st January, 2015
Ans : OD 2021
NITI Aayog was established to replace the
(d) Intervention of the government is most Planning Commission. It focuses on policy
essential. formulation and fostering cooperative federalism.
The Planning Commission was operational from
28. _____ is not a type of land reform introduced 1950 to 2015.
by Government of India, after Independence.
(a) Land ceiling 32. In a capitalist economy, the ownership, control,
(b) Abolition of intermediaries and operation of production resources lie in which
(c) Change in ownership of land holding sector?
(d) Use of High Yielding Variety (HYV) seeds (a) The government
(b) Private sector
Ans :
(c) Cooperative societies
(d) Use of High Yielding Variety (HYV) seeds (d) Non-profit organizations
29. Planning is a technique where a central authority Ans : COMP 2002
seeks to achieve specific objectives and targets. (b) Private sector
What does planning primarily consider while A capitalist economy operates on private ownership
setting these targets? of resources. Individuals or private enterprises
(a) Natural disasters control production and profits. The government
(b) Available resources has minimal interference in business activities.
(c) Political constraints
(d) Population size 33. A mixed economy is described as a combination
of two economic systems. Which two systems does
Ans : SQP 2000
it integrate, and how do they function together?
(b) Available resources (a) Feudal and socialist systems
Planning involves utilizing a country’s available (b) Capitalist and socialist systems
resources optimally. It ensures achieving specific (c) Traditional and command economies
objectives without wasting resources. The focus is (d) None of the above
on effective allocation and implementation.
Ans : OD 2005
30. After independence, the rationale behind choosing (b) Capitalist and socialist systems
Modernization as a planning objective for the A mixed economy combines elements of capitalism
Indian economy were _____ and socialism. The private sector produces

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CH 7 : INDIAN ECONOMY (1950-1990)

61. Consider the following statements about the Which of the above statements are correct?
Green Revolution: (a) (i), (ii), and (iv) only
(i) The Green Revolution introduced High Yield (b) (i), (iii), and (iv) only
Variety (HYV) seeds to increase food grain (c) (ii), (iii), and (iv) only
production. (d) (i), (ii), (iii), and (iv)
(ii) It focused only on cash crops like cotton and Ans : SQP 2005
jute.
(a) (i), (ii), and (iv) only
(iii) The revolution mainly benefitted wheat and
Planning emphasizes achieving national
rice production.
goals within a timeframe, ensuring resource
Which of the above statements are correct? optimization and equitable distribution.
(a) (i) and (iii) only Statement 3 is incorrect, as planning includes
(b) (i) and (ii) only equity in allocation.
(c) (ii) and (iii) only
64. Consider the following statements about the
(d) (i), (ii), and (iii)
capitalist economy:
Ans : OD 2002 (i) The means of production are privately owned
(a) (i) and (iii) only and controlled.
The Green Revolution emphasized HYV seeds (ii) Market forces like demand and supply
for food grains, particularly wheat and rice. determine resource allocation.
Statement 2 is incorrect as it did not focus on (iii) The government directly intervenes in
cash crops like cotton and jute. production and pricing decisions.
(iv) Private enterprises operate with profit as
62. Consider the following statements about their primary motive.
modernization: Which of the above statements are correct?
(i) Modernization refers only to adopting (a) (i), (ii), and (iii) only
advanced technology for production. (b) (i), (ii), and (iv) only
(ii) It involves changes in the social outlook along (c) (ii), (iii), and (iv) only
with technological advancements. (d) (i), (iii), and (iv) only
(iii) Modernization aims to improve production
Ans : COMP 2007
efficiency and societal progress.
Which of the above statements are correct? (b) (i), (ii), and (iv) only
(a) (i) and (ii) only (b) (ii) and (iii) only A capitalist economy relies on private ownership,
(c) (i) and (iii) only (d) (i), (ii), and (iii) market forces, and profit-driven enterprises.
Statement 3 is incorrect, as the government’s role
Ans : FOREIGN 2004
in production is minimal.
(b) (ii) and (iii) only
Modernization includes both technological 65. Consider the following statements about the
advancements and societal changes. Statement 1 Green Revolution:
is incorrect because modernization is not limited (i) It introduced High Yield Variety (HYV) seeds
to technological improvements but encompasses to increase crop productivity.
broader development. (ii) It focused primarily on wheat and rice
production.
63. Consider the following statements regarding (iii) Irrigation and chemical fertilizers were
planning: essential components of the revolution.
(i) Planning focuses on utilizing a country’s (iv) It eliminated the inequality between small
resources in accordance with national and large farmers.
priorities. Which of the above statements are correct?
(ii) It aims to achieve specific objectives and
(a) (i), (ii), and (iii) only
targets within a set period.
(b) (ii), (iii), and (iv) only
(iii) Planning disregards the need for equitable
(c) (i), (iii), and (iv) only
resource allocation.
(d) (i), (ii), (iii), and (iv)
(iv) It ensures the optimal use of resources
available to the country. Ans : DELHI 2009

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 293

on external resources and promotes indigenous Ans : FOREIGN 2006

industries. This ensures economic independence (b) To encourage farmers to adopt new technology
and stability. Subsidies made inputs like fertilizers and HYV
seeds affordable. This motivated farmers to
41. Equity in economic development refers to which experiment with new technology. It played a
of the following? critical role in transforming agriculture.
(a) Equal access to basic necessities for all citizens
(b) Promoting only urban development 45. The Industrial Policy Resolution of 1956 aimed to
(c) Focusing on rapid industrialization achieve which of the following goals?
(d) Encouraging foreign investments (a) Privatizing all industries
Ans : COMP 2023 (b) Promoting balanced regional development
(a) Equal access to basic necessities for all citizens and equality
Equity ensures fair distribution of wealth and (c) Encouraging free trade and open markets
resources. It aims to reduce inequality and provide (d) Focusing only on agriculture
access to food, housing, education, and healthcare. Ans : SQP 2008
This fosters inclusive economic growth.
(b) Promoting balanced regional development
42. Land reforms undertaken post-independence and equality
aimed at achieving which of the following The IPR 1956 emphasized reducing regional disparities
objectives? through industrialization. It focused on promoting
(a) Increasing industrial output public sector industries and creating employment.
(b) Improving agricultural production and This policy shaped the Second Five-Year Plan.
reducing exploitation
(c) Promoting private land ownership 46. What was the primary objective of expanding the
(d) Encouraging mechanized farming only public sector after independence?
(a) Promoting foreign investment
Ans : DELHI 2001
(b) Undertaking large-scale projects and
(b) Improving agricultural production and industrialization
reducing exploitation (c) Encouraging privatization of industries
Land reforms aimed to eliminate intermediaries and (d) Reducing government intervention in the
consolidate holdings. This increased productivity economy
and provided peasants with ownership rights. It Ans : COMP 2013
addressed exploitation in the agricultural sector.
(b) Undertaking large-scale projects and
43. The Green Revolution primarily focused on industrialization
increasing the production of which types of crops? Public sector expansion allowed the government to
(a) Cash crops like cotton and jute manage infrastructure projects. It filled gaps left by
(b) Food grains like wheat and rice private industries and addressed regional inequalities.
(c) Fruits and vegetables This helped accelerate industrial growth.
(d) Medicinal plants
47. What does an inward-looking trade strategy, such
Ans : OD 2003
as import substitution, aim to achieve?
(b) Food grains like wheat and rice (a) Increasing dependency on foreign goods
The Green Revolution introduced HYV seeds, (b) Replacing imports with domestic production
fertilizers, and irrigation. It targeted crops like (c) Promoting global trade partnerships
wheat and rice to address food shortages. This (d) Focusing solely on export growth
revolutionized Indian agriculture in the 1960.
Ans : DELHI 2014
44. What was the role of subsidies in the agricultural (b) Replacing imports with domestic production
sector during the early stages of independence? Import substitution focuses on protecting
(a) To make agricultural exports cheaper domestic industries. Tariffs and quotas were used
(b) To encourage farmers to adopt new technology to encourage local production and reduce reliance
(c) To promote large-scale commercial farming on imports. This policy aimed at self-sufficiency.
(d) To reduce rural employment

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CH 7 : INDIAN ECONOMY (1950-1990)

goods efficiently, while the government manages (a) National Income

essential services. It balances profit motive and (b) Structural composition
social welfare. (c) Economic distribution
(d) Resource allocation
34. How are resources allocated in a socialist economy,
and who determines the allocation for the welfare Ans : COMP 2011

of society? (b) Structural composition

(a) Market forces Structural composition reflects the contribution of
(b) Consumer demand different sectors to GDP. It shows how agriculture,
(c) The government industry, and services drive the economy. This
(d) International bodies helps assess economic balance and growth.
Ans : DELHI 2004
38. Growth in economic terms refers to which of the
(c) The government following changes within a nation’s economy?
In a socialist economy, resource allocation is (a) Population growth
planned and controlled by the government. It (b) Increase in production capacity of goods and
ensures equal distribution based on societal services
needs. Market forces do not determine production (c) Decrease in imports and exports
or distribution. (d) Expansion of rural areas

35. What is the main focus of economic planning, and Ans : OD 2015

how does it contribute to the overall development (b) Increase in production capacity of goods and
of a nation? services
(a) Military expansion Economic growth indicates the ability of a country
(b) Entertainment industry to produce more goods and services. It is measured
(c) National development priorities through a steady increase in GDP. Growth shows
(d) Global trade improvements in economic productivity.
Ans : FOREIGN 2007
39. Modernization involves adopting new technology
(c) National development priorities to achieve which of the following objectives?
Economic planning directs resources toward key (a) Replace manual labor completely
national priorities. It ensures economic growth (b) Increase production and change social outlook
and development in alignment with set objectives. (c) Focus only on industrial output
The focus is on addressing long-term national (d) Maintain traditional farming methods
needs.
Ans : FOREIGN 2018

36. Gross Domestic Product (GDP) is a critical (b) Increase production and change social outlook
economic indicator. What exactly does GDP Modernization includes using advanced
measure within a country for a given year? technology to improve productivity. It also reflects
(a) Population growth changes in mindset and societal progress. It goes
(b) Import and export values beyond technical upgrades to include broader
(c) Market value of all goods and services development.
produced
(d) Total land area 40. What is the primary focus of self-reliance in a
country’s economic policy?
Ans : SQP 2009
(a) Enhancing dependence on foreign aid
(c) Market value of all goods and services produced (b) Reducing dependence on imports and foreign
GDP reflects the total economic output of a aid
country in a year. It measures the value of goods (c) Increasing exports of agricultural goods
and services produced domestically. It indicates (d) Promoting multinational corporations
the overall economic health of a nation.
Ans : SQP 2021

37. The contribution of agriculture, industry, and (b) Reducing dependence on imports and foreign aid
services to GDP is collectively referred to as Self-reliance encourages domestic production
what? to meet national needs. It minimizes reliance

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 295

Land reforms abolished exploitative systems like 58. Consider the following statements about the
Zamindari. They gave ownership to farmers and capitalist economy:
encouraged better use of land. This significantly (i) In a capitalist economy, the means of
boosted agricultural output. production are owned by the government.
(ii) Private sector controls and operates
55. The Green Revolution focused on increasing food production in a capitalist economy.
production through: (iii) The government plays a minimal role in
(a) Encouraging traditional farming techniques regulating the economy.
(b) Using High Yield Variety (HYV) seeds and Which of the above statements are correct?
modern inputs (a) (i) and (ii) only
(c) Expansion of forested areas (b) (ii) and (iii) only
(d) Dependence on imported machinery (c) (i) and (iii) only
Ans : SQP 2002 (d) (i), (ii), and (iii)
(b) Using High Yield Variety (HYV) seeds and Ans : DELHI 2000
modern inputs (b) (ii) and (iii) only
The Green Revolution introduced HYV seeds, A capitalist economy relies on private sector
fertilizers, and irrigation. It targeted crops like ownership and minimal government interference.
wheat and rice, ensuring higher yields. This Statement 1 is incorrect as production is not
helped India achieve food security. owned by the government in a capitalist system.
56. What was the main purpose of the Industrial 59. In what form was protection provided to domestic
Policy Resolution of 1956? industries against foreign competition?
(a) To ensure balanced regional development and (a) Tariffs
promote public sector industries (b) Quotas
(b) To promote privatization and foreign
(c) Licenses
investment
(d) Both (a) and (b)
(c) To focus on developing only large-scale
industries Ans : FOREIGN 2009
(d) To limit government participation in the (d) Both (a) and (b)
economy
60. Consider the following statements regarding
Ans : DELHI 2005
planning in India:
(a) To ensure balanced regional development and
(i) Planning involves the utilization of a country’s
promote public sector industries
resources to achieve national priorities.
The IPR 1956 focused on reducing regional
(ii) Economic planning focuses on military
disparities. It emphasized the role of public sector
expansion and global trade.
industries in driving growth. This policy formed
the basis of the Second Five-Year Plan. (iii) Planning ensures resources are allocated for
development within a specified timeframe.
57. How did subsidies contribute to the success of the Which of the above statements are correct?
Green Revolution? (a) (i) and (iii) only
(a) By making new technology and inputs
(b) (ii) and (iii) only
affordable for farmers
(b) By reducing agricultural exports (c) (i) and (ii) only
(c) By increasing dependency on foreign goods (d) (i), (ii), and (iii)
(d) By eliminating manual labor in farming Ans : COMP 2020
Ans : COMP 2004 (a) (i) and (iii) only
(a) By making new technology and inputs Planning emphasizes resource allocation for
affordable for farmers national priorities, not military expansion or
Subsidies reduced the cost of inputs like fertilizers global trade. Statements 1 and 3 align with the
and seeds. This encouraged farmers to adopt new definition of planning, making them correct.
technology. It played a vital role in agricultural
transformation.

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CH 7 : INDIAN ECONOMY (1950-1990)

48. Planning as a concept ensures that a country (c) The share of government and private
achieves its development goals within a specific enterprises in production
time-line. What does it prioritize during this (d) The geographical distribution of resources
process ?
Ans : SQP 2022
(a) Individual benefits over societal goals
(b) Balanced allocation of resources (b) The contribution of agriculture, industry, and
(c) Unrestricted market competition services to GDP
(d) Private ownership of all resources Structural composition shows the economic
balance among sectors. It indicates the role of
Ans : OD 2016
agriculture, industry, and services in GDP. This
(b) Balanced allocation of resources helps in assessing sectoral growth.
Planning emphasizes the systematic use of
resources to meet national objectives. It ensures 52. What major changes did modernization bring in
economic efficiency and equitable growth. post-independence India?
Development goals are aligned with resource (a) Use of advanced technology and a change in
availability. societal outlook
(b) Expansion of the traditional handicraft sector
49. Why was self-reliance adopted as an important (c) Dependence on foreign aid and resources
goal for post-independence India? (d) Preference for conventional agricultural
(a) To depend less on foreign aid and promote methods
domestic production
Ans : COMP 2010
(b) To attract more foreign investments
(c) To focus on global trade partnerships (a) Use of advanced technology and a change in
(d) To encourage the outsourcing of production societal outlook
Modernization introduced better technology
Ans : DELHI 2019
and improved productivity. It also encouraged
(a) To depend less on foreign aid and promote progressive societal attitudes. This dual approach
domestic production supported economic development.
Self-reliance aimed to make India independent of
foreign resources. It encouraged local industries to 53. Equity as an economic goal ensures:
meet national needs. This reduced vulnerability (a) Equal access to resources and reduced
to external pressures. inequality among citizens
(b) Faster industrial development in urban areas
50. What does GDP (Gross Domestic Product) (c) Government control over all resources
indicate about a country’s economy? (d) High growth in private sector profits
(a) Total population
Ans : OD 2020
(b) The monetary value of all goods and services
produced in a year (a) Equal access to resources and reduced
(c) The number of industries operating in the inequality among citizens
country Equity focuses on fair distribution of wealth and
(d) Growth rate of the population opportunities. It ensures everyone benefits from
economic progress. This goal reduces poverty and
Ans : FOREIGN 2017
social disparities.
(b) The monetary value of all goods and services
produced in a year 54. What was the primary reason for introducing
GDP is the measure of a country’s economic land reforms in the agricultural sector?
output. It reflects the value of goods and services (a) To eliminate intermediaries and improve
produced within its borders annually. A growing productivity
GDP is a sign of economic progress. (b) To encourage foreign investment in agriculture
(c) To reduce labor dependence in farming
51. Structural composition of the economy refers to: (d) To increase export of agricultural goods
(a) The division of population into rural and
Ans : FOREIGN 2000
urban groups
(b) The contribution of agriculture, industry, and (a) To eliminate intermediaries and improve
services to GDP productivity

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 297

(a) (i), (ii), and (iii) only 68. Assertion : The Industrial Policy Resolution of
The Green Revolution boosted food grain 1948 and the directive principles of the Indian
production using HYV seeds, irrigation, and Constitution assigned a leading role to the public
fertilizers. However, it increased inequality as sector.
small farmers struggled to afford new technologies, Reason : Private sector was also encouraged to be
making statement 4 incorrect. part of the plan efforts.
(a) Assertion and Reason both are correct
66. Consider the following statements regarding statements and Reason is correct explanation
modernization: for Assertion.
(i) Modernization involves adopting advanced (b) Assertion and Reason both are correct
technology to increase production. statements but Reason is not correct
(ii) It promotes a progressive outlook in society. explanation for Assertion.
(iii) It applies to both industrial and agricultural (c) Assertion is true but Reason is false.
sectors. (d) Assertion is false but Reason is true.
(iv) Modernization relies entirely on foreign Ans : SQP 2015
investments for development.
(b) Assertion and Reason both are correct
Which of the above statements are correct?
statements but Reason is not correct explanation
(a) (i), (ii), and (iv) only for Assertion.
(b) (i), (iii), and (iv) only
(c) (i), (iii), and (iv) only 69. Assertion : The New Agricultural Strategy helped
(d) (i), (ii), and (iii) only to build a stock which could be used in times of
food shortage.
Ans : OD 2011
Reason : Green Revolution helped increase
(d) (i), (ii), and (iii) only production and productivity in agriculture and
Modernization includes technological progress, resulted in marketable surplus.
societal change, and application across various (a) Assertion and Reason both are correct
sectors. Statement 4 is incorrect, as modernization statements and Reason is correct explanation
does not depend solely on foreign investments. for Assertion.
(b) Assertion and Reason both are correct
statements but Reason is not correct
explanation for Assertion.
ASSERTION AND REASON (c) Assertion is true but Reason is false.
(d) Assertion is false but Reason is true.
Ans : COMP 2018
67. Assertion : The Planning Commission was set up
in 1950 with the Prime Minister as the Chairman. (a) Assertion and Reason both are correct
Reason : The Government adopted economic statements and Reason is correct explanation for
planning for the development of the economy. Assertion.
(a) Assertion and Reason both are correct
70. Assertion : Subsidies in agriculture were
statements and Reason is correct explanation
introduced to enable the fertiliser industry to
for Assertion.
expand rapidly.
(b) Assertion and Reason both are correct
Reason : Subsidies were considered necessary as
statements but Reason is not correct
the new technology was considered risky by the
explanation for Assertion.
farmers.
(c) Assertion is true but Reason is false.
(a) Assertion and Reason both are correct
(d) Assertion is false but Reason is true.
statements and Reason is correct explanation
Ans : OD 2024 for Assertion.
(a) Assertion and Reason both are correct (b) Assertion and Reason both are correct
statements and Reason is correct explanation for statements but Reason is not correct
Assertion. explanation for Assertion.
(c) Assertion is true but Reason is false.
(d) Assertion is false but Reason is true.

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CH 7 : INDIAN ECONOMY (1950-1990)

(a) Import substitution contributes the highest 92. The bar graph shows the distribution of
to post-independence industrial policies. characteristics among capitalist, socialist, and
(b) Small-scale industries contribute more than mixed economies.
public sector expansion.
(c) Public sector expansion contributes the most
to industrial policies.
(d) All three components contribute equally to
industrial policies.
Ans : COMP 2007

(c) Public sector expansion contributes the most

to industrial policies.
From the graph, public sector expansion
contributes 45%, small-scale industries contribute
35%, and import substitution contributes 20%.
This makes public sector expansion the largest
contributor to post-independence industrial
policies. Based on the bar graph, which of the following
statements is correct?
91. The bar graph shows the employment share of (a) Socialist economy has the largest share of
agriculture, industry, and services sectors in India. characteristics among the three systems.
(b) Mixed economy contributes the least to the
distribution of characteristics.
(c) Capitalist and mixed economies have equal
shares in characteristics distribution.
(d) All three systems contribute equally to the
characteristics distribution.
Ans : OD 2011

(c) Capitalist and mixed economies have equal

shares in characteristics distribution.
From the graph, the socialist economy contributes
40%, while capitalist and mixed economies each
contribute 30%. This makes socialist the highest
contributor, while capitalist and mixed economies
Based on the bar graph, which of the following
share equally.
statements is correct?
(a) Agriculture employs the majority of the
workforce in India.
(b) Services sector employs the least number of
people among the three sectors.
PASSAGE BASED QUESTION
(c) Industry employs more people than agriculture
but less than services. 93. India adopted planned economic development
(d) All three sectors have an equal share in post-independence. Land reforms improved
employment. agriculture, and the Green Revolution boosted
food production. Public sector expansion and
Ans : DELHI 2009 import substitution reduced foreign dependency.
(a) Agriculture employs the majority of the What were the key strategies adopted by
workforce in India. India to promote economic development after
From the graph, agriculture employs 50% of the independence?
workforce, services employ 30%, and industry (a) Promoting unregulated industrial growth and
employs 20%. This makes agriculture the largest focusing on export-led policies.
employer among the three sectors. (b) Implementing land reforms, public sector
expansion, and import substitution.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 299
Ans : OD 2013
(b) Assertion and Reason both are correct
(d) Assertion is false but Reason is true. statements but Reason is not correct explanation
for Assertion.
77. Assertion : The second phase of Green revolution
saw the HYV technology spread to a large number 80. Assertion : The proportion of GDP between 1950
of states benefiting a variety of crops. and 1990 contributed by agriculture declined
Reason : The majority of wheat produced during significantly but not the population depending on it.
the Green Revolution was kept by the farmer for Reason : Agricultural productivity increased
self consumption. substantially between 1950 and 1990.
(a) Assertion and Reason both are correct (a) Assertion and Reason both are correct
statements and Reason is correct explanation statements and Reason is correct explanation
for Assertion. for Assertion.
(b) Assertion and Reason both are correct (b) Assertion and Reason both are correct
statements but Reason is not correct statements but Reason is not correct
explanation for Assertion. explanation for Assertion.
(c) Assertion is true but Reason is false.
(c) Assertion is true but Reason is false.
(d) Assertion is false but Reason is true.
(d) Assertion is false but Reason is true.
Ans : DELHI 2022
Ans : FOREIGN 2014
(b) Assertion and Reason both are correct
(c) Assertion is true but Reason is false. statements but Reason is not correct explanation
78. Assertion : Small Scale Industries are a burden on for Assertion.
government finances. 81. Assertion (A) : License Permit Raj was a major
Reason : Small Scale Industries are given obstacle for growth of private sector.
concessions like lower excise duty and bank loans Reason (R) : Private sector wasted huge
at low interest rates. amount in obtaining licences, rather than on
(a) Assertion and Reason both are correct improving the product, quality and international
statements and Reason is correct explanation competitiveness.
for Assertion. (a) Assertion and Reason both are correct
(b) Assertion and Reason both are correct statements and Reason is correct explanation
statements but Reason is not correct for Assertion.
explanation for Assertion. (b) Assertion and Reason both are correct
(c) Assertion is true but Reason is false. statements but Reason is not correct
(d) Assertion is false but Reason is true. explanation for Assertion.
(c) Assertion is true but Reason is false.
Ans : SQP 2016
(d) Assertion is false but Reason is true.
(d) Assertion is false but Reason is true.
Ans : OD 2015

79. Assertion : Abolition of intermediaries did not (a) Assertion and Reason both are correct
completely fulfill the goal of equity. statements and Reason is correct explanation for
Reason : The lower income groups benefited from Assertion.
the decline in prices of food grains as their supply
increased due to the Green Revolution.
(a) Assertion and Reason both are correct
statements and Reason is correct explanation STATEMENT BASED QUESTIONS
for Assertion.
(b) Assertion and Reason both are correct
statements but Reason is not correct 82. Statement 1 : The tax reduction in the economic
explanation for Assertion. reform period was aimed at yielding larger tax
revenue and curb tax evasion.
(c) Assertion is true but Reason is false.
Statement 2 : Tax reductions negatively affected
(d) Assertion is false but Reason is true. the developmental and welfare expenditure of
Ans : COMP 2017 government.

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CH 7 : INDIAN ECONOMY (1950-1990)
Ans : DELHI 2021
(a) Assertion and Reason both are correct
(d) Assertion is false but Reason is true. statements and Reason is correct explanation for
Assertion.
71. Assertion : After independence, the public sector
played a leading role in the industrial development 74. Assertion : Government reserved production of a
of the country. number of products for the small scale industry.
Reason : Private sector was restricted through the Reason : The purpose of equity and social welfare
policy of licensing in setting up of new industries. could be achieved only through direct participation
(a) Assertion and Reason both are correct of the state in the process of industrialisation.
statements and Reason is correct explanation (a) Assertion and Reason both are correct
for Assertion. statements and Reason is correct explanation
(b) Assertion and Reason both are correct for Assertion.
statements but Reason is not correct (b) Assertion and Reason both are correct
explanation for Assertion. statements but Reason is not correct
(c) Assertion is true but Reason is false. explanation for Assertion.
(d) Assertion is false but Reason is true. (c) Assertion is true but Reason is false.
(d) Assertion is false but Reason is true.
Ans : OD 2014
Ans : COMP 2006
(b) Assertion and Reason both are correct
statements but Reason is not correct explanation (b) Assertion and Reason both are correct
for Assertion. statements but Reason is not correct explanation
for Assertion.
72. Assertion : Land Ceiling was meant to promote
equity in agriculture. 75. Assertion : Tariffs were levied on exported goods
Reason : Land Reforms were successfully to make them more expensive.
implemented in the country changing the state of Reason : The policy of import substitution was
agriculture. followed to prevent drain of foreign exchange
(a) Assertion and Reason both are correct reserves.
statements and Reason is correct explanation (a) Assertion and Reason both are correct
for Assertion. statements and Reason is correct explanation
(b) Assertion and Reason both are correct for Assertion.
statements but Reason is not correct (b) Assertion and Reason both are correct
explanation for Assertion. statements but Reason is not correct
(c) Assertion is true but Reason is false. explanation for Assertion.
(c) Assertion is true but Reason is false.
(d) Assertion is false but Reason is true.
(d) Assertion is false but Reason is true.
Ans : FOREIGN 2001
Ans : DELHI 2008
(c) Assertion is true but Reason is false.
(d) Assertion is false but Reason is true.
73. Assertion : The fixation of quotas helped restrict
76. Assertion : The need to raise the standard of
foreign competition for domestic firms.
living of the people made the planners choose
Reason : Industries of developed economies give
economic growth as an objective of Indian plans.
tough competition to industries of developing
Reason : A negligible growth rate of 0.5% in per
countries.
capita output per year led to the adoption of growth
(a) Assertion and Reason both are correct as the main and initial objective of Indian plans.
statements and Reason is correct explanation
(a) Assertion and Reason both are correct
for Assertion.
statements and Reason is correct explanation
(b) Assertion and Reason both are correct for Assertion.
statements but Reason is not correct (b) Assertion and Reason both are correct
explanation for Assertion. statements but Reason is not correct
(c) Assertion is true but Reason is false. explanation for Assertion.
(d) Assertion is false but Reason is true. (c) Assertion is true but Reason is false.
Ans : SQP 2003 (d) Assertion is false but Reason is true.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 301
Ans : OD 2002

(c) Industry contributes less than both agriculture

and services to GDP.
From the graph, the services sector contributes
45%, agriculture contributes 30%, and the
industry sector contributes 25% to GDP. This
makes industry the lowest contributor among the
three sectors.

88. The bar graph shows the contributions of the

public sector, private sector, and small-scale
industries to industrial development.
Based on the bar graph, which of the following
statements is correct?
(a) Agricultural subsidies contribute the most to
economic reforms.
(b) Trade tariffs contribute more than agricultural
subsidies.
(c) Industrial investments contribute the least to
economic reforms.
(d) Trade tariffs and industrial investments
contribute equally to economic reforms.
Ans : SQP 2005

(a) Agricultural subsidies contribute the most to

Based on the bar graph, which of the following economic reforms.
statements is correct? From the graph, agricultural subsidies contribute
(a) The public sector contributes the least to 50%, industrial investments contribute 30%,
industrial development. and trade tariffs contribute 20%. This makes
(b) Small-scale industries contribute more than agricultural subsidies the highest contributor to
the private sector. economic reforms.
(c) The private sector contributes less than
90. The bar graph shows the contributions of
the public sector but more than small-scale
public sector expansion, small-scale industries,
industries.
and import substitution to post-independence
(d) All three sectors contribute equally to
industrial policies.
industrial development.
Ans : FOREIGN 2004

(c) The private sector contributes less than the

public sector but more than small-scale industries.
From the graph, the public sector contributes
40%, the private sector contributes 35%, and
small-scale industries contribute 25%. This makes
the private sector the middle contributor, higher
than small-scale industries but lower than the
public sector.

89. The bar graph shows the contributions of

agricultural subsidies, industrial investments, and Based on the bar graph, which of the following
trade tariffs to economic reforms. statements is correct?

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CH 7 : INDIAN ECONOMY (1950-1990)

(a) Statement 1 is true & Statement 2 is false, Ans : COMP 2020

(b) Statement 1 is false & Statement 2 is true. (a) Statement 1 is true & Statement 2 is false.
(c) Both statements 1 & 2 are true. A capitalist economy relies on private ownership
(d) Both statements l & 2 are false. of resources and minimal government intervention,
Ans : OD 2021
making Statement 2 incorrect.

(c) Both statements 1 & 2 are true. 86. Statement 1 : Modernization involves adopting
new technology and improving social outlook.
83. Statement 1 : Economic planning involves aligning
Statement 2 : Modernization focuses solely on
a country’s resources with national development
industrial sectors, ignoring agriculture and social
priorities.
progress.
Statement 2 : Economic planning disregards the
(a) Statement 1 is true & Statement 2 is false.
need for equitable distribution of resources.
(b) Statement 1 is false & Statement 2 is true.
(a) Statement 1 is true & Statement 2 is false.
(c) Both statements 1 & 2 are true.
(b) Statement 1 is false & Statement 2 is true.
(d) Both statements 1 & 2 are false.
(c) Both statements 1 & 2 are true.
(d) Both statements 1 & 2 are false. Ans : DELHI 2000

Ans : FOREIGN 2010

(a) Statement 1 is true & Statement 2 is false.
Modernization involves technological and societal
(a) Statement 1 is true & Statement 2 is false. advancements across all sectors, including
Economic planning focuses on utilizing resources agriculture and industry, making Statement 2 false.
efficiently for national priorities, while equity
in resource allocation is a key component of
planning, making Statement 2 false.

84. Statement 1 : The Green Revolution significantly GRAPH BASED QUESTIONS

increased food grain production, particularly
wheat and rice.
87. The bar graph shows the contributions of
Statement 2 : The Green Revolution eliminated
agriculture, industry, and services sectors to GDP.
inequalities among small and large farmers.
(a) Statement 1 is true & Statement 2 is false.
(b) Statement 1 is false & Statement 2 is true.
(c) Both statements 1 & 2 are true.
(d) Both statements 1 & 2 are false.
Ans : SQP 2019

(a) Statement 1 is true & Statement 2 is false.

While the Green Revolution improved food grain
output, it widened the gap between small and
large farmers due to unequal access to resources,
making Statement 2 false.

85. Statement 1 : In a capitalist economy, the means Based on the bar graph, which of the following
of production are owned by private individuals or statements is correct?
enterprises.
(a) The services sector contributes the least to
Statement 2 : The government plays an active role GDP.
in regulating production and resource allocation
(b) Agriculture contributes more than the
in a capitalist economy.
services sector to GDP.
(a) Statement 1 is true & Statement 2 is false.
(c) Industry contributes less than both agriculture
(b) Statement 1 is false & Statement 2 is true. and services to GDP.
(c) Both statements 1 & 2 are true. (d) Agriculture and industry contribute equally
(d) Both statements 1 & 2 are false. to GDP.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 303

(c) Relying entirely on foreign investments for Ans : COMP 2018

development. (b) Empowering farmers through land reforms

(d) Eliminating agricultural reforms to focus and promoting domestic industries.
solely on industrialization. India’s policies aimed at empowering farmers via
Ans : FOREIGN 2012 land reforms and boosting domestic industries
(b) Implementing land reforms, public sector through import substitution. Options (a), (c),
expansion, and import substitution. and (d) misrepresent the objectives outlined in
India’s strategy focused on land reforms, public the passage.
sector growth, and reducing foreign dependency 96. Post-independence, India focused on planned
through import substitution. Options (a), (c), economic development to address poverty and
and (d) misrepresent the policies in the passage. stagnation. The Green Revolution improved food
94. Post-independence, India implemented land grain production, and public sector expansion
reforms to improve agriculture and introduced the balanced regional disparities. Import substitution
Green Revolution to boost food grain production. supported domestic industries.
Industrial licensing and public sector expansion Which of the following describes India’s approach
aimed to regulate and balance economic growth. to economic development after independence?
Which of the following strategies were adopted by (a) Relying on imports for industrial and
India to promote balanced economic growth after agricultural needs.
independence? (b) Expanding the public sector and implementing
(a) Encouraging unregulated industrial growth the Green Revolution.
and focusing solely on exports. (c) Prioritizing foreign investment over domestic
(b) Expanding the public sector and introducing industries.
industrial licensing. (d) Abandoning agricultural growth to focus on
(c) Relying on foreign aid to drive economic industrialization.
development. Ans : DELHI 2021
(d) Promoting agricultural stagnation to focus on
(b) Expanding the public sector and implementing
industrialization.
the Green Revolution.
Ans : SQP 2015
India’s economic policies emphasized public
(b) Expanding the public sector and introducing sector growth to reduce regional disparities
industrial licensing. and the Green Revolution to boost agriculture.
India’s economic policies included public sector Options (a), (c), and (d) contradict the strategies
expansion and industrial licensing to balance highlighted in the passage.
growth. Options (a), (c), and (d) contradict the
strategies described in the passage.

95. India’s economic strategy post-independence

emphasized self-reliance and equitable growth.
ONE MARK QUESTIONS
Land reforms abolished intermediaries to empower
farmers, while the Green Revolution increased 97. In which year was the first industrial policy
food grain production. Import substitution announced in India?
encouraged domestic industries to reduce foreign
dependency. Ans : FOREIGN 2023

What were the primary objectives of India’s post- 1948

independence economic policies?
(a) Encouraging unrestricted imports and 98. What is a Plan?
reducing agricultural output. Ans : SQP 2000
(b) Empowering farmers through land reforms
A plan can be defined as making major economic
and promoting domestic industries.
decisions (what, how and for whom to produce)
(c) Eliminating food grain production to focus
by the Central Planning Authority.
solely on industrial growth.
(d) Relying entirely on foreign investments for 99. Why should plans have goals?
economic development.

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CH 7 : INDIAN ECONOMY (1950-1990)

129. The protection provided to Indian industries from 132. ‘Agriculture sector has been adversely affected by
foreign competition was criticized as having done the Economic reform process’. Comment.
more harm than good. How?
Ans : FOREIGN 2023
Ans : COMP 2002
The agriculture sector has been adversely
The protection provided to Indian industries affected by the economic reform process due to
from foreign competition was criticized because reduced government support. Structural reforms
it led to inefficiency, lack of innovation, and focused on liberalization, privatization, and
complacency among domestic industries. Shielded globalization, prioritizing industrial and service
from global competition, industries often failed to sectors. Subsidies for fertilizers, irrigation, and
improve quality, reduce costs, or adopt modern credit declined, while market volatility increased.
technology, hampering overall economic growth. Farmers faced competition from cheap imports,
and inadequate infrastructure further worsened
the situation.

THREE MARK QUESTIONS 133. Why did India choose the path of economic
development under the mixed economy
framework?
130. “Farm subsidies put a huge burden on the Ans : FOREIGN 2005
government finances, but are necessary for the
India adopted the mixed economy framework to
poor and marginal farmers.” Justify the given
combine the benefits of both public and private
statement.
sectors. This approach ensured government
Ans : SQP 2024 control over critical industries like infrastructure
Farm subsidies, while placing a significant burden and defense for equitable growth and social
on government finances, are essential for poor and welfare, while encouraging the private sector to
marginal farmers as they make critical inputs like drive innovation, efficiency, and economic activity.
seeds, fertilizers, and irrigation affordable. These By regulating key areas and allowing private
subsidies ensure food security, increase agricultural participation, India aimed to achieve balanced
productivity, and support livelihoods in rural economic growth, reduce income inequalities,
areas. Without subsidies, small-scale farmers might and promote self-reliance, making it a pragmatic
struggle to compete in markets or sustain themselves, choice for addressing the nation’s developmental
leading to economic distress and inequality. Thus, needs post-independence.
subsidies are necessary for fostering inclusive growth
134. Does modernisation as a planning objective
despite their financial cost.
create contradiction in the light of employment
131. The process of industrialization implied a generation? Explain.
structural shift in the economy. Do you agree? Ans : SQP 2018
Give reasons in support of your answer.
Modernization as a planning objective can create
Ans : DELHI 2023 contradictions with employment generation
Yes, industrialization implies a structural shift in the because it often involves replacing traditional
economy. It transforms an agrarian economy into labor-intensive methods with capital-intensive
an industrial one, reducing reliance on agriculture technology. While modernization boosts
and increasing the contribution of manufacturing productivity, efficiency, and global competitiveness,
and services to GDP. Industrialization leads to it can reduce the demand for manual labor,
urbanization, technological advancement, and leading to job losses in certain sectors. However,
higher productivity. It also creates employment modernization also creates new employment
opportunities, improves infrastructure, and opportunities in technology-driven and service
boosts exports. This structural shift signifies sectors. Balancing technological advancements
economic development, moving from primary with strategies for skill development and labor
sector dominance to a more balanced reliance absorption is essential to avoid unemployment
on secondary and tertiary sectors for sustained and achieve inclusive growth.
growth.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 305

116. Define Gross Domestic Product. 125. Why is Indian economy called a mixed economy?
Ans : FOREIGN 2013 Ans : SQP 2000

Gross Domestic Product (GDP) is the total The Indian economy is called a mixed economy
monetary value of all goods and services produced because it combines features of both private and
within a country’s borders in a specific period. public sector participation in economic activities.

117. What do you mean by public sector? 126. Define Socialist economy.
Ans : COMP 2023 Ans : OD 2003

The public sector refers to government-owned A socialist economy is a system where the
organizations and enterprises that provide goods government owns and controls resources and
and services for public welfare. means of production to ensure equal distribution
and social welfare.
118. What is meant by Economic Planning?
Ans : DELHI 2001

Economic planning is the government’s strategy

to allocate resources for achieving economic and TWO MARK QUESTIONS
social goals.

119. When was the Planning Commission set up? 127. Why do the loss making private sector firms close
down whereas the public sector undertakings
Ans : OD 2008 continue to operate despite them being a drain on
The Planning Commission was set up in 1950. the Indian economy?

120. Define Mixed economy. Ans : OD 2004

Ans : DELHI 2006

Loss-making private firms close down due to
financial unviability, as they rely on profits for
A mixed economy is a system combining both survival. In contrast, public sector undertakings
private and public sector participation in (PSU) continue operating because they serve social
economic activities. objectives like employment and infrastructure
development. The government supports PSU
121. What is Private sector?
despite losses, prioritizing public welfare over
Ans : SQP 2014 profitability, even if it burdens the economy.
The private sector refers to businesses and
128. Read the following text carefully :
organizations owned and operated by individuals
or groups for profit. India’s economic policies after independence aimed
to achieve self-reliance and reduce dependency
122. How many plans were implemented in India till on foreign countries. An inward-looking trade
1991? strategy, also known as import substitution, was
a key component of these policies.
Ans : COMP 2016
Explain the reasons behind adoption of an inward
Seven (excluding three annual plans) looking trade strategy?
123. What is the central objective of planning in India? Ans : DELHI 2003

Ans : OD 2022 India adopted an inward-looking trade strategy

to promote self-reliance and reduce dependence
Growth with social Justice is the central objective
on imports. It aimed to protect domestic
of planning in India.
industries through tariffs and quotas, encourage
124. Who is the Chairperson of the Planning industrialization, and save foreign exchange.
Commission of India? This strategy sought to shield the economy from
external shocks, develop local industries, and
Ans : COMP 2020
achieve balanced economic growth by prioritizing
Prime Minister domestic production over foreign goods.

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CH 7 : INDIAN ECONOMY (1950-1990)
Ans : COMP 2002 Ans : OD 2018

Plans should have goals to provide clear direction Subsistence farming is a type of agriculture
and ensure focused efforts toward achieving where farmers grow crops primarily for their own
desired outcomes. consumption rather than for sale.

100. Define economic growth. 109. What is cooperative farming?

Ans : SQP 2019 Ans : FOREIGN 2012

Economic growth is the increase in a country’s Cooperative farming is a system where farmers
production of goods and services over time, voluntarily pool resources like land and equipment
measured by the rise in its GDP. and share the benefits equally.

101. What do you mean by Perspective plan? 110. In which year economic planning in India began?
Ans : DELHI 2004 Ans : FOREIGN 2010

A Perspective Plan is a long-term strategic plan 1951.

outlining broad development goals and directions,
typically spanning 15-20 years. 111. Distinguish between subsistence farming and
commercial farming.
102. What are subsidies?
Ans : SQP 2015
Ans : OD 2005
Subsistence farming is for self-consumption, while
Subsidies are government financial aids to lower commercial farming focuses on producing crops
costs and promote specific goods or services. for sale and profit.

103. What are Minimum Support Prices? 112. What do you mean by trade deficit?
Ans : FOREIGN 2007 Ans : COMP 2018

Minimum Support Prices are government-fixed A trade deficit occurs when a country’s imports
rates to protect farmers from price fluctuations. exceed its exports, leading to a negative trade
balance.
104. What is marketable surplus?
113. What do you mean by volume of trade?
Ans : SQP 2009

Marketable surplus is the portion of agricultural Ans : DELHI 2021

produce left with farmers after meeting their own Volume of trade refers to the total quantity or
consumption and seed requirements. value of goods and services exchanged between
countries over a specific period.
105. When was the NITI Aayog established ?
114. _____ Policy followed in first seven five year
Ans : SQP 2019
plans of India, aimed at substituting imports
Jan 1, 2015. with domestic production. (Fill up the blank with
correct answer)
106. What are agrarian reforms?
Ans : FOREIGN 2020
Ans : COMP 2011
Import substitution
Various policies and programmes initiated by
the government in agriculture are called agrarian 115. Policy of ‘Import Substitution’ was targeted to
reforms. protect _____ industries.
(Fill up the blank with correct answer)
107. Define the term Growth.
Ans : SQP 2020
Ans : DELHI 2017
Domestic.
Growth refers to increase in Country’s GDP over
the years.

108. Define subsistence farming.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 307

135. “Growth of an economy implies self reliance”. Do 138. Can a substantial size and increase in supporting
you agree with the statement? Give reasons. services like transport and banking be called as
growth of an economy? Comment.
Ans : DELHI 2011

Yes, the growth of an economy implies self-reliance, Ans : FOREIGN 2015

as it reduces dependence on foreign aid, imports, An increase in supporting services like transport
and external support. A growing economy develops and banking indicates economic development but
domestic industries, enhances productivity, and does not solely define economic growth. These
generates sufficient resources to meet its needs. It services enhance efficiency, trade, and industrial
strengthens infrastructure, technology, and human activity, contributing to GDP. However, true
capital, enabling the nation to sustain itself. economic growth requires balanced progress across
Economic growth also boosts exports, earning agriculture, industry, and services, along with
foreign exchange and reducing trade deficits. Thus, rising income, employment, and living standards.
self-reliance is a natural outcome of sustained Growth in services alone, without improvements
economic growth, fostering independence and in production and equity, cannot represent overall
resilience in global markets. economic prosperity.

136. Why is it considered unrealistic to give equal 139. India’s economic planning evolved significantly
importance to all the goals of a plan? after independence, beginning with the
establishment of the Planning Commission. Over
Ans : COMP 2009
time, the need for a more dynamic approach led
Giving equal importance to all goals in a plan to the creation of NITI Aayog. Write a short note
is unrealistic due to limited resources like on the Planning Commission and Niti Ayog.
funds, time, and manpower. Prioritizing allows
efficient resource allocation to address urgent Ans : SQP 2007

or critical issues. Some goals, such as economic Planning Commission : Established in 1950,
growth, can indirectly contribute to others, like the Planning Commission was responsible for
poverty alleviation or employment generation. formulating Five-Year Plans and strategizing
Attempting to focus on all goals equally may resource allocation to achieve economic growth
dilute efforts, resulting in suboptimal outcomes. and development. It played a key role in India’s
Hence, planning involves setting priorities based planned economy but faced criticism for being
on feasibility and the interconnected impact of overly centralized and inefficient.
various objectives. NITI Aayog : Replacing the Planning Commission
in 2015, NITI Aayog emphasizes cooperative
137. What is sectoral composition of an economy? Is it
federalism and policy formulation. It focuses on
necessary that the service sector should contribute
fostering innovation, development, and state-
maximum to the GDP of an economy? Comment.
specific strategies, promoting a more participatory
Ans : OD 2012 and adaptive approach.
Sectoral Composition of an Economy : The sectoral
140. Modernisation as a planning objective shows a
composition refers to the relative contribution of
dichotomy with employment generation. Justify
primary (agriculture), secondary (industry), and
the statement.
tertiary (services) sectors to a country’s GDP. It
indicates the economic structure and development Ans : COMP 2021

level of a nation. Modernization as a planning objective shows a

Comment : It is not necessary for the service dichotomy with employment generation because
sector to contribute the maximum to GDP. While it emphasizes adopting advanced technology,
a dominant service sector reflects a developed which often replaces labor with machines,
economy, balanced growth across all sectors reducing job opportunities in traditional sectors.
is crucial for sustainable development. Over- While modernization improves productivity and
reliance on services can neglect agriculture and efficiency, it can lead to unemployment, particularly
manufacturing, leading to unemployment and for unskilled workers. However, it simultaneously
import dependency. Thus, each sector’s growth creates new opportunities in technology-driven
should align with the country’s development needs. industries. To address this dichotomy, planning

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CH 7 : INDIAN ECONOMY (1950-1990)

must focus on skill development and creating jobs in the agricultural sector. Have these reforms
in emerging sectors, ensuring both technological been successful in their implementation?
progress and inclusive employment. or
Explain the need and type of land reforms
141. Read the text carefully implemented in the agriculture sector.
India’s post-independence economic strategy
prioritized reducing dependence on foreign Ans : COMP 2024

goods to strengthen domestic industries. Import Need for Land Reforms :

substitution played a crucial role in achieving
(i) Reduce Inequality : To address unequal
this objective. Why was the policy of import
land distribution and empower marginalized
substitution considered a prerequisite for
farmers.
achieving the goal of self reliance?
(ii) Increase Productivity : Ensure efficient use of
Ans : OD 2001 land by redistributing surplus holdings.
The policy of import substitution was considered (iii) Eliminate Exploitation : Abolish
essential for achieving self-reliance as it aimed intermediaries like zamindars to protect
to reduce dependence on foreign goods by tenants from exploitation.
encouraging domestic production. By imposing (iv) Social Justice : Improve rural livelihoods and
tariffs and restrictions on imports, it protected reduce poverty.
infant industries, allowing them to grow and Types of Land Reforms :
compete. This policy fostered industrialization, (i) Abolition of Intermediaries : Ended the
conserved foreign exchange, and promoted zamindari system, transferring ownership to
the development of indigenous technologies, tillers.
ultimately strengthening the economy’s capacity (ii) Tenancy Reforms : Provided security of
to meet its needs independently. tenure and regulated rents.
(iii) Land Ceiling Acts : Limited the maximum
142. Equity in agriculture was sought to be achieved
land a person could own, redistributing
through land reforms which was not without its
surplus to the landless.
share of problems. Elaborate on the statement.
(iv) Consolidation of Holdings : Prevented
Ans : COMP 2003 fragmentation to improve agricultural
Equity in agriculture was pursued through land efficiency.
reforms, aiming to redistribute land and ensure Success of Reforms :
fair access for marginalized farmers. Reforms Partially successful - abolition of intermediaries
included abolishing the zamindari system, reduced exploitation, but implementation of land
setting land ceilings, and providing ownership ceiling laws and redistribution faced loopholes,
rights to tenants. However, these reforms faced lack of political will, and administrative challenges,
challenges like lack of political will, inefficient leaving many reforms incomplete.
implementation, and loopholes exploited by large
landowners to retain excess land. Corruption, 144. Distinguish between equal and equitable
inadequate land records, and resistance from distribution of income. Which one is more
vested interests further limited their success. important and why?
Consequently, the goal of achieving true equity Ans : DELHI 2006
remained partially unrealized.
Equal Distribution of Income ensures everyone
receives the same income, regardless of
effort, skills, or needs. While it promotes
FOUR MARK QUESTIONS uniformity, it ignores individual contributions
and circumstances, potentially discouraging
productivity. Equitable Distribution of Income,
143. Equity in agriculture called for land reforms which on the other hand, allocates income fairly based
primarily refers to change in the ownership of land on needs and contributions, reducing disparities
holdings. In light of the given statement, explain while rewarding merit and effort. Equitable
the need and types of land reforms implemented distribution is more important because it balances

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 309

fairness and efficiency, addressing inequality (i) Former zamindars exploited legal loopholes
without undermining motivation to work or to retain large portions of land.
innovate. By ensuring that resources reach the (ii) Many tenants were evicted, with zamindars
most disadvantaged while recognizing individual falsely claiming to be self-cultivators.
efforts, it fosters social justice, economic stability,
and sustainable growth, benefiting society as a (iii) Even after gaining land ownership, the
whole. poorest agricultural laborers often failed to
benefit significantly from the reforms.
145. Discuss briefly the rationale behind choosing
‘self-reliance’ as a planning objective for Indian 147. Explain ‘growth with equity’ as a planning
economy. objective.
Ans : SQP 2024, 2020 Ans : OD 2008

Self-reliance refers to minimizing dependence on The planning objective of growth with equity
external assistance. This key objective focuses on emphasizes achieving economic growth while
preventing foreign interference in critical areas ensuring that its benefits are distributed fairly
such as food supply, capital investments, and across all sections of society. This involves
debt management. A nation can drive economic reducing income inequalities, alleviating poverty,
growth and modernization either by utilizing and providing opportunities for all, especially
its own resources or by relying on imported marginalized groups, to participate in and benefit
resources. During the first seven Five-Year Plans, from economic progress. It seeks to balance rapid
self-reliance was prioritized, emphasizing the industrial and agricultural growth with social
avoidance of imports for goods that could be justice by promoting employment, equitable
produced domestically. This approach aimed to access to resources, and regional development.
reduce reliance on foreign countries, particularly This objective ensures that economic development
for food. The policy was deemed essential leads to an improvement in living standards for
to safeguard India’s sovereignty, as excessive all, not just a privileged few.
dependence on foreign food supplies, technology,
and capital could expose the nation to external 148. Discuss briefly the rationale behind adopting
influence and compromise its autonomy in policy ‘modernization’ as a planning objective for the
making. Indian Economy.
Ans : FOREIGN 2013
146. Goal of Equity was fully served by ‘abolition of
the intermediaries’ in agriculture in the post- The rationale behind adopting modernization as
independence period of India. Do you agree with a planning objective was to enhance productivity
the given statement? Support your answer with and improve the quality of life by introducing
valid arguments. advanced technology, modern infrastructure, and
progressive social changes. After independence,
Ans : SQP 2014
India needed to transition from traditional methods
I do not agree with the statement. Alongside of production to modern techniques in agriculture,
the objectives of growth, modernization, and industry, and services to compete globally and
self-reliance, equity is equally significant. Equity ensure sustainable growth. Modernization also
ensures that every individual can meet basic needs aimed at improving education, health, and gender
like food, housing, education, and healthcare, equality, fostering a more skilled workforce and a
while aiming to reduce wealth inequality. progressive society. It was essential for achieving
As part of land reforms, the Indian government long-term economic growth and breaking away
sought to abolish intermediaries and grant from colonial-era stagnation and backwardness.
ownership rights to those who directly cultivated
the land. This was intended to incentivize tillers 149. While subsidies encourage farmers to use new
to improve the land permanently and enhance technology, they are a huge burden on government
productivity. finances. Discuss the usefulness of subsidies in the
However, the abolition of intermediaries did light of this fact.
not fully achieve the goal of equity due to the
following reasons: Ans : COMP 2016

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CH 7 : INDIAN ECONOMY (1950-1990)

(ii) Use of chemical fertilizers : The new (iv) Diversification : Shift from agrarian to
technology emphasized the application industrial economy helped diversify income
of chemical fertilizers as the HYV seeds sources and modernize the economy.
needed huge amount of soil nutrients. Negative Effects :
(iii) Proper irrigation : The HYV seeds could (i) Regional Imbalance : Industrial growth
be effectively used only when there was was concentrated in certain regions like
adequate availability of water supply. Maharashtra and Gujarat, leading to uneven
(iv) Application of pesticides : To protect the development.
plants from diseases, the use of pesticides (ii) Inefficiency in Public Sector : Many public
was emphasized. enterprises became inefficient due to
bureaucracy and lack of competition.
157. Discuss any two merits and demerits of the Green (iii) Neglect of Consumer Goods : Focus on heavy
Revolution in the agricultural sector in the Indian industries often sidelined the production of
economy. essential consumer goods, creating shortages.
Ans : SQP 2023 (iv) Limited Private Sector Role : License-permit
raj restricted private sector growth and
Merits of Green Revolution :
innovation.
(i) Increased Agricultural Production: The
Green Revolution led to a significant rise in 159. Explain the reasons responsible for the public
food grain output, ensuring food security and sector playing a dominant role in the country’s
reducing dependence on imports. industrial development after independence.
(ii) Rural Development: It spurred economic
Ans : DELHI 2024
growth in rural areas, creating employment
in agriculture-related industries like fertilizer Reasons for Dominant Role of Public Sector in
production and irrigation infrastructure. Industrial Development After Independence
Demerits of Green Revolution : (i) Promoting Self-Reliance : India aimed to
(i) Regional Disparities : Benefits were reduce dependence on foreign countries by
concentrated in states like Punjab and establishing a strong industrial base in key
Haryana, leaving other regions behind, sectors like steel, energy, and defense.
particularly eastern and southern states. (ii) Control of Strategic Sectors : Sectors critical
(ii) Environmental Degradation: Overuse of to national security, such as defense and
chemical fertilizers, pesticides, and water heavy industries, were reserved for the public
caused soil degradation, waterlogging, and a sector to ensure government control.
decline in water tables. (iii) Addressing Regional Disparities : Public
enterprises were set up in backward areas to
158. Briefly evaluate the effects of industrialisation on promote balanced regional development and
the Indian economy during the period 1950-1990. reduce inequalities.
Ans : COMP 2000 (iv) Capital-Intensive Industries : Private sector
lacked the capital to invest in heavy industries;
Effects of Industrialization on the Indian Economy hence, the government took the lead.
(1950-1990)
(v) Social Welfare Goals : Public sector industries
Positive Effects:
focused on generating employment and
(i) Foundation of Heavy Industries : producing essential goods to improve living
Establishment of key industries like steel, standards.
cement, and chemicals under the Five-Year
(vi) Implementation of Planning Goals : Public
Plans promoted industrial growth.
sector enterprises aligned with the Five-Year
(ii) Public Sector Expansion : Public sector Plans to drive industrialization and economic
enterprises were set up to control strategic growth.
sectors, ensuring self-reliance in critical areas
like defense and energy. 160. How did adoption of the industrial policy
(iii) Job Creation : Industrialization provided resolution of 1956 facilitate the development of
employment opportunities, reducing Indian economy on socialist lines?
dependence on agriculture.
Ans : OD 2001

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 311

or Achievements:
Indian agriculture on the eve of Independence was (i) Increase in Food Grain Production: The
totally stagnant which was why top priority was Green Revolution led to self-sufficiency in
given to agriculture during the planning period. food grains, reducing dependency on imports.
Highlight the important features that have (ii) Use of Modern Technology: Adoption
emerged during the period of economic planning. of high-yielding variety (HYV) seeds,
chemical fertilizers, and irrigation improved
Ans : DELHI 2010
productivity.
The main features of Indian agriculture during (iii) Economic Growth: Enhanced agricultural
the period of economic planning were as follows: output contributed significantly to GDP
(i) Fragmented Landholdings : Land was growth.
divided into small, scattered plots, reducing (iv) Creation of Buffer Stocks: Ensured food
productivity and efficiency. security during crises.
(ii) Low Productivity : Traditional farming Limitations :
methods, poor irrigation, and lack of modern (i) Regional Disparities: Benefits were limited
inputs led to low agricultural output. to states like Punjab, Haryana, and Western
(iii) Dependence on Monsoons : Inadequate Uttar Pradesh.
irrigation facilities made agriculture heavily (ii) Neglect of Non-Food Crops: Focus on wheat
reliant on uncertain rainfall. and rice led to the marginalization of pulses
(iv) Socioeconomic Inequalities : Land distribution and oilseeds.
was highly unequal, and tenants faced (iii) Environmental Degradation: Overuse of
exploitation under the zamindari system. fertilizers and water caused soil degradation
(v) Lack of Infrastructure : Poor rural roads, and depletion of water tables.
storage, and marketing systems hindered the (iv) Exclusion of Small Farmers: Marginal farmers
commercialization of agriculture. lacked access to resources to adopt modern
(vi) Financial Constraints : Limited access to methods.
institutional credit forced farmers to rely on
high-interest loans from moneylenders. 156. What is Green Revolution? Explain its features.
These issues necessitated reforms and Ans : FOREIGN 2020
modernization efforts.
Green Revolution in India refers to the large
154. “Green Revolution has helped the government increase in production of foodgrains due to use of
to build its buffer stock that can be used during High Yielding Variety (HYV) seeds in the mid 60.
times of shortage”. Do you agree? The word ‘Green Revolution’ implies two things:
(i) Marked improvement in food grain production
Ans : FOREIGN 2022
sustainable over a long period of time.
I agree with the statement. The adoption of high- (ii) Increase in land productivity due to
yielding variety seeds enabled farmers to produce introduction of new agricultural technology.
significantly larger quantities of food grains, Green revolution in India has the following
far exceeding their requirements for personal features :
consumption. The surplus produce was purchased (i) Focus on potential region : In the new strategy,
by the government and stored for use during a conscious decision was made to concentrate
times of scarcity caused by natural disasters, all the available resources in only potential
war, or other emergencies. As a result, the Green regions so that the growth did not suffer from
Revolution played a pivotal role in helping the inadequacy of complementary resources.
government build and maintain a buffer stock of (ii) Introduction of modern input : Another fact
food grains to address shortages effectively. was that new advanced inputs came to be
introduced in agriculture. These inputs were:
155. Evaluate the achievements and limitations of the
(i) Use of HYV seeds : The basis of the new
new agricultural strategy.
technology was the use of HYV seeds
Ans : OD 2019 which gave larger amount of output and
Achievements and Limitations of the New could be harvested in a shorter span of
Agricultural Strategy time. These seeds came to be known as
miracle seeds.

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CH 7 : INDIAN ECONOMY (1950-1990)

Subsidies to farmers are considered necessary 151. What role did the government play in ensuring
so as to provide them with the incentive for the that the Green Revolution benefited small farmers
adoption of new HYV technology. Farmers looked as well?
upon the new technology as risky. So to encourage
Ans : OD 2017
them to use the new technology, subsidies should
be provided. The Green Revolution might have primarily
The government should also provide agricultural benefited wealthy farmers if the government
subsidies because farming in India is a risky had not actively ensured that small farmers also
business as it mainly depends upon the monsoon. reaped its advantages. The government played a
crucial role in this regard by:
Most of the farmers are very poor and would not
(i) Offering loans to small farmers at low-
be able to afford the required inputs without the
interest rates, enabling them to invest in new
support of subsidies.
technology.
Also elimination of subsidies would increase the (ii) Providing subsidized fertilizers, ensuring that
inequality between rich and poor farmers and small farmers could afford essential inputs.
violate the goal of equity. (iii) Reducing the risk of crop failure due to pest
However, subsidies are a great burden on attacks by establishing research institutes that
government finances. Therefore, some economists offered solutions and support to safeguard
believe that these should be phased out. According crops.
to them, the purpose of providing subsidies These measures ensured that the benefits of
has already been served. Subsidies are largely the Green Revolution were more inclusive and
benefiting the farmers in more prosperous regions extended to small farmers as well.
and the fertilizer industry. It does not benefit
the small farmers and hence, there is no need for 152. “Some economists believe that the economic
continuing with it. reforms have adversely affected the agriculture
sector in India.”
150. “The debate over farm subsidies in India is Do you agree with the given statement? Justify
enraged at different platforms.” your answer with valid reason.
Discuss any two arguments in favour of continuing
Ans : SQP 2020
farm subsidies.
Yes, the economic reforms of 1991 have adversely
Ans : DELHI 2023
affected the agriculture sector in India. The main
An agricultural subsidy refers to financial support reasons are:
provided by the government to farmers to enhance (i) Reduced Public Investment : Liberalization
their income, regulate the supply and availability shifted focus towards industry and services,
of agricultural goods and inputs, and influence reducing government investment in agriculture
their cost and distribution. infrastructure like irrigation, research, and
(i) Subsidies often take the form of reduced rural development.
prices for inputs such as seeds, fertilizers, (ii) Price Instability : Removal of trade
irrigation power, and credit at lower interest restrictions led to increased exposure to
rates. These measures help farmers lower international markets, causing price volatility
their production costs. for agricultural goods.
(ii) Another form of subsidy involves setting a (iii) Neglect of Small Farmers : Emphasis on
minimum procurement price for agricultural export-oriented cash crops benefited large
produce. By doing so, the government ensures farmers, while small and marginal farmers
that farmers recover their costs and earn a faced challenges.
reasonable profit. (iv) Limited Credit Access : Financial liberalization
These subsidies aim to support the 55% of the reduced priority sector lending to agriculture,
population reliant on agriculture, enabling them worsening farmers’ financial issues.
to achieve a basic standard of living and reducing These factors hindered agricultural growth and
the incidence of suicides in India’s agriculture- rural livelihoods.
dependent economy.
153. Explain the problems faced by Indian agriculture
after independence.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 313

The Industrial Policy Resolution of 1956 laid the (iii) Utilization of Local Resources : Use local raw
foundation for India’s economic development on materials, skills, and resources, fostering local
socialist lines by emphasizing state control and economic development.
planning in industrial growth. (iv) Export Promotion : Contribute significantly
Facilitation of Socialist Development to India’s exports by producing handicrafts,
textiles, and other goods.
(i) Categorization of Industries : Industries were
(v) Entrepreneurship Development : Encourage
divided into three categories. The government
self-employment and entrepreneurship among
assumed exclusive control over critical sectors
diverse social groups.
like defense, steel, and energy, while the
(vi) Equity and Inclusivity : Reduce income
private sector operated in non-essential areas
inequalities by supporting small entrepreneurs
under regulation.
and disadvantaged sections.
(ii) Expansion of Public Sector : The resolution
SSIs play a pivotal role in achieving sustainable
promoted the public sector as the driver
and inclusive economic growth in India.
of economic growth, ensuring equitable
distribution of resources and reducing private 162. Large scale industry is not a substitute for small
monopolies. scale industries in the Indian economy. Do you
(iii) Focus on Equity : Industrialization under state agree? Justify your answer.
control aimed to reduce wealth inequalities
and achieve balanced regional development. Ans : FOREIGN 2003

(iv) Promotion of Planning : Aligning with Five- Yes, large-scale industries are not a substitute for
Year Plans, the resolution prioritized heavy small-scale industries (SSI) in the Indian economy,
industries and infrastructural development, as both play complementary roles.
reflecting socialist ideals of self-reliance and Justification
welfare.
(i) Employment Generation SSI are labor-
(v) Support for Cottage Industries :
intensive and provide employment to
Encouragement of small and cottage
a significant portion of the population,
industries provided employment and
especially in rural and semi-urban areas.
preserved traditional crafts.
(ii) Regional Development SSIs promote balanced
161. What are small scale industries? Explain their regional development by flourishing in less
importance in the growth process of the Indian industrialized areas, while large industries are
economy. concentrated in specific regions.
or (iii) Contribution to Exports SSIs contribute
Discuss briefly the role of small-scale industries in significantly to exports, particularly in
the growth Journey of India. handicrafts, textiles, and small machinery,
boosting foreign exchange earnings.
Ans : COMP 2024
(iv) Economic Inclusivity SSIs enable the
Small-Scale Industries (SSIs) participation of marginalized sections in
Small-scale industries are industrial undertakings economic activities, fostering entrepreneurship
in which the investment in fixed assets in plant and reducing inequalities.
and machinery does not exceed a specified limit, While large-scale industries are essential for
typically defined by government policies (e.g., Rs heavy infrastructure and global competitiveness,
1 crore to Rs 5 crores in India). These industries SSIs address grassroots development and
include manufacturing, service, and production socioeconomic equity.
units characterized by small-scale operations.
163. How did the policy of licensing help in promoting
Importance in India’s Economic Growth:
regional equality?
(i) Employment Generation : SSIs are labor-
intensive, providing jobs to millions, especially Ans : SQP 2006

in rural and semi-urban areas. The policy of licensing, introduced under

(ii) Regional Balance : Promote industrialization India’s Industrial Policy, aimed to regulate
in underdeveloped regions, reducing regional industrial growth and promote balanced regional
disparities. development.

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CH 7 : INDIAN ECONOMY (1950-1990)

168. What do you mean by tariff and non-tariff In order to be self reliant, India has followed the
barriers? Explain their impact on foreign trade. strategy of replacing many imports by domestic
production. This inward looking trade strategy
Ans : DELHI 2022
was called ‘Import Substitution’.
Tariff Barriers : These are taxes or duties imposed Import Substitution refers to a policy of
on imported goods to protect domestic industries replacement or substitution of imports by
and generate revenue. Examples include customs domestic production. The main aim of this policy
duties and import taxes. was to protect domestic industries from foreign
Non-Tariff Barriers (NTBs) : These are non-tax competition to achieve the underlying objectives
measures used to restrict imports, such as quotas, of self reliance and saving foreign exchange.
licensing requirements, quality standards, and Reasons for Import Substitution: The policy of
embargoes. protection was based on the notion that industries
The import substitution policy had both positive of developing countries like India, were not in a
as well as negative impacts on the economy: position to compete against the goods produced
Positive Impacts of Import Substitution Policy : by more developed economies. With protection,
(i) Industrial Growth: The industrial sector’s they would be able to compete in due course of
contribution to GDP increased from 1(i)8% time.
in 1950-51 to 2(iv)6% in 1990-9(i) Restriction on import was necessary as there was
(ii) Diversification : Industries diversified, a risk of drain of Foreign Exchange Reserves due
producing a wide range of consumer and to increasing imports.
engineering goods, with sectors like electronics Protection from imports took two forms:
and automobiles benefiting from protection. (i) Tariffs refer to taxes levied on imported
(iii) Investment Opportunities : Encouragement goods. The main aim for imposing heavy duty
of small-scale industries allowed individuals on imported goods was to make them more
with limited capital to start businesses, expensive and discourage their use.
promoting equitable growth. (ii) Quotas refer to fixing the maximum limit on
Negative Impacts of Import Substitution Policy: the imports of a commodity by a domestic
(i) Inefficient Public Monopolies : Public sector producer.
enterprises dominated sectors, producing Using the protection provided by the policy
goods/services even when redundant. of tariffs and quotas, the domestic firms could
(ii) Lack of Modernization : Protectionist policies expand without fear of competition from the
discouraged innovation, leading to outdated foreign market.
production methods.
170. India’s foreign trade, limited by the inward
(iii) Persistent Loss-Making Units : Many
looking trade-policies, faced a number of hurdles.
unprofitable public enterprises continued to
Discuss the principal problems faced by India
operate due to difficulty in closing government
during 1950-1990 in foreign trade.
undertakings.
Ans : OD 2010
169. Evaluate the import substitution policy adopted
India’s foreign trade during 1950-1990 faced
by the policy makers to protect the domestic
significant challenges due to inward-looking trade
industries.
policies emphasizing self-reliance and import
or
substitution. Key problems included:
The policy of protection through tariffs and
(i) Limited Export Growth : Focus on domestic
quotas was based on the notion that industries of
production over export competitiveness led to
developing countries cannot compete against the
stagnant export volumes, primarily consisting
goods produced by more developed economies.
of low-value agricultural and raw material
Comment.
goods.
or
(ii) High Import Dependence : Essential goods
“Policy of import substitution can protect the
like machinery, petroleum, and technology
domestic industry from foreign competition”.
had to be imported, causing trade deficits.
Do you agree? Give reasons in support of your
(iii) Restricted Market Access : Protectionist
answer.
policies and lack of export diversification
Ans : COMP 2017 limited India’s access to global markets.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 315

After independence, India’s planners aimed at (vi) Outcomes & Challenges: Industrial
rapid industrialization to achieve economic self- production grew faster than in the colonial
reliance and reduce dependence on imports. era. Key sectors like steel, machinery, and
The early planning period (1950s–1960s) under chemicals took root. However, overprotection
Five-Year Plans was instrumental in shaping the bred inefficiency, low-quality outputs, and
country’s industrial base. This era emphasized limited competitiveness. By the mid-1960s,
heavy industries, public sector leadership, and an it was clear that deeper reforms and better
inward-looking trade strategy. efficiency were needed to sustain growth.
Key Features of Early Industrial Growth
167. “Economists say that poor nations can progress
(i) Public Sector Dominance & Heavy Industry
only if they have a good industrial sector.”
Focus : The government took the lead in
Comment.
setting up heavy, capital-intensive industries
- steel, machinery, mining, and chemicals. Ans : SQP 2016
Inspired by the Mahalanobis model, the
Industries play an important role in the growth
Second Five-Year Plan prioritized capital
and development of a country. The process of
goods to build a domestic industrial
establishing more and more industries is called as
ecosystem. Investments in infrastructure-
industrialisation.
power, transport, communications-supported
this expansion. Following points highlight the importance of the
process of industrialisation and industries for a
(ii) Import Substitution Industrialization (ISI) : developing economy like India:
India adopted a policy of replacing imports
(i) Rising Income Levels : Industries drive
with domestic production. High tariffs,
economic growth, increasing national and
quotas, and controls shielded local industries
per capita income due to higher productivity
from foreign competition. The strategy aimed
compared to agriculture.
at self-reliance and development of indigenous
technology. While it did foster initial growth, (ii) Agricultural Advancement : Industrialization
it also limited exposure to global best supports agriculture by supplying essential
practices. inputs like tractors, fertilizers, and irrigation
equipment.
(iii) The License Raj : Industrial licensing regulated
investment decisions and capacity expansion. (iii) Resource Utilization : It enables efficient
Initially meant to promote balanced growth, use of natural resources, boosting economic
this system led to bureaucratic delays potential.
and inefficiencies. Foreign investment was (iv) Infrastructure Development : Expanding
restricted; technology transfers were preferred industries lead to growth in infrastructure,
over direct equity inflows. including transport, communication, and
(iv) Financial & Institutional Support : power sectors.
Development finance institutions like IFCI, (v) Capital Formation : Heavy investments in
IDBI, and SFCs provided long-term funds industries enhance income levels and savings,
and technical guidance. Research bodies accelerating capital formation.
under CSIR built a technological base. These Boost to Foreign Trade : Industrialization
institutions eased capital constraints and fosters trade by encouraging the import of
enabled industry to grow beyond traditional machinery and export of finished goods.
boundaries.
(vi) Employment Opportunities : Industries
(v) Private Sector Participation : Though the provide stable jobs, reducing pressure
state dominated the “commanding heights,” on agriculture and addressing disguised
the private sector also expanded, often unemployment.
benefiting from protectionist policies. Small-
scale industries received support through This is why it is said that growth occurs
reservations and incentives to generate with the spread of industrialisation. In fact,
employment and broaden the industrial base. industrialisation has emerged as an inevitable
route to the process of growth.

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CH 7 : INDIAN ECONOMY (1950-1990)

agricultural yield, which were introduced through 4. Marketed D. Change in the

the Green Revolution. Surplus ownership of land
The Green Revolution centered on three key (land to tillers)
strategies: expanding farming areas, implementing
double cropping on existing farmland, and using (a) D, B, A, C
genetically improved seeds. It was a technological (b) A, C, D, B
initiative that involved High Yielding Varieties (c) D, B, C, A
(HYVs) of staple cereals like rice and wheat,
(d) C, D, A, B
irrigation or controlled water management, and
the application of fertilizers and pesticides. This (iv) Which of the following does not qualify as a
revolution enabled the government to stockpile land reform measure.?
sufficient food grains, ensuring reserves for times (a) Abolition of intermediaries.
of shortage. (b) Tenancy reforms.
Despite its benefits, the Green Revolution carried
(c) Fixation of minimum support prices for
notable risks. One concern was that it widened the
crops.
gap between small and large farmers, as the latter
were better positioned to afford the necessary (d) Ceiling on land holdings.
inputs and thus benefited disproportionately. Ans : SQP 2007
Additionally, India struggled to extend the use (i) (d) Government fixed the minimum support
of HYV seeds beyond food grains, limiting their price to ensure fair returns to the farmers.
application across other crops and regions. (ii) True
(i) Which of the following statements is correct?: (iii) (d) C, D, A, B
(a) The second phase of Green revolution (iv) (c) Ceiling on land holdings.
was also called as the wheat revolution. 178. Read the para given below and answer the
(b) Green revolution helped in removing the questions that follow:
inequalities in rural poverty. The concept of subsidies emerged during the Green
(c) Green revolution helped in removing the Revolution, with fertilizer subsidies enabling
dependence on monsoons for irrigation. farmers to purchase fertilizers at prices below the
(d) Government fixed the minimum support Maximum Retail Price (MRP). These subsidies
price to ensure fair returns to the farmers. were initially justified as a means to encourage
(ii) In subsistence farming, production is meant the adoption of new High Yield Variety (HYV)
for self consumption. (True/False). technology, particularly among small farmers, by
mitigating the perceived risks associated with
(iii) Identify the correct sequence of alternatives unfamiliar agricultural practices.
given in Column II by matching them with While subsidies played a crucial role in the early
respective terms in Column I. stages of the Green Revolution, there is now a
growing consensus that they should be phased out
Column I Column II as their original purpose has largely been fulfilled.
Fertilizer subsidies, though intended to benefit
1. Land A. increase in
farmers, also provide significant advantages to the
Ceiling production of food
fertilizer industry and impose a heavy financial
grains using High
burden on the government.
Yielding Variety
Additionally, over-subsidized fertilizers, such
seeds.
as urea, are often misused for non-agricultural
2. Land B. Portion of purposes. Under the current “no denial” policy,
Reforms Agricultural anyone, including non-farmers, can purchase
produce sold in the unlimited quantities of fertilizers. This has led
market. to bulk purchases by unintended beneficiaries,
3. Green C. Fixing the diverting subsidies away from genuine farmers
Revolution maximum limit of who truly need them.
land holding for an
individual.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 317

(iv) Balance of Payments Crisis : Persistent trade (ii) Diversification : Sectors like electronics and
deficits strained foreign exchange reserves, automobiles grew, creating a foundation for
leading to external debt. industrial self-reliance.
(v) Inefficiency in Production : Lack of global Negative Effects :
competition under import restrictions
(i) Inefficiency : Lack of competition led to
resulted in low-quality products, reducing
complacency, inefficiency, and low-quality
export potential.
production.
These challenges highlighted the need for
(ii) Outdated Technology : Domestic industries
trade liberalization and global integration.
were slow to modernize due to limited
171. How does a country gain from its foreign trade exposure to global innovations.
during its growth process? (iii) High Costs : Consumers faced higher prices
and limited choices because of the lack of
Ans : FOREIGN 2019
foreign goods.
Foreign trade benefits a country during its growth (iv) Trade Isolation : Protectionist policies reduced
process in the following ways: India’s global trade integration, restricting
(i) Access to Resources : Enables imports of export growth and foreign exchange earnings.
essential goods, raw materials, and advanced Thus, while protection fostered initial growth,
technologies not available domestically, it hindered long-term competitiveness and
boosting productivity. efficiency.
(ii) Market Expansion : Exports allow domestic
producers to access larger international 173. Highlight the main changes that took place with
markets, increasing production and income. regard to the composition and direction of foreign
(iii) Specialization and Efficiency : Promotes trade after independence.
specialization based on comparative Ans : COMP 2000
advantage, enhancing economic efficiency and
The composition of trade refers to the types of
global competitiveness.
goods and services a country exports and imports.
(iv) Foreign Exchange Earnings : Exports
After independence, India witnessed notable
generate foreign currency, supporting imports
changes in the composition of its foreign trade:
and stabilizing the balance of payments.
(i) Decline in Agricultural Exports : The share of
(v) Technology Transfer : Trade fosters the
agricultural exports reduced as farm products
exchange of knowledge and innovation, aiding
were increasingly used domestically for
industrial and technological growth.
industrial raw materials and self-consumption.
(vi) Employment Generation : Expanding
(ii) Reduction in Conventional Exports : Exports
industries for export production creates job
of items like jute, tea, food grains, and minerals
opportunities.
declined due to growing domestic demand.
(vii) Economic Diversification : Reduces reliance
(iii) Rise in Manufactured Exports : The share of
on a single sector, ensuring economic stability
manufactured goods in total exports increased
and resilience against shocks.
significantly, indicating industrial growth.
Overall, foreign trade accelerates economic
These changes signified a structural shift from
growth, development, and global integration
a primary-sector-dominated economy to one
172. The policy of protection encouraged the growth of focused on secondary and tertiary sectors.
domestic industries but at the same time proved The direction of trade reflects the countries
to be an impediment. How? involved in imports and exports.
(i) Post-1950, India diversified its trade partners,
Ans : SQP 2020
moving beyond pre-independence reliance on
The policy of protection supported domestic the UK, USA, and Commonwealth nations.
industries by shielding them from foreign (ii) Key trading partners included the UAE,
competition, but it also had several drawbacks : China, USA, Switzerland, Singapore, and
Positive Effects : others.
(iii) The UAE emerged as a prominent trade
(i) Domestic Industrial Growth : Protection
partner, marking a notable change in India’s
allowed infant industries to develop without
trade direction.
the threat of foreign competitors.

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CH 7 : INDIAN ECONOMY (1950-1990)

Role in Promoting Regional Equality : (iv) Balanced Regional Development : Promoted

(i) Control over Location of Industries : Licenses industrialization in backward areas to reduce
were granted with a focus on setting up regional disparities.
industries in backward and underdeveloped (v) Socialistic Objectives : Aimed at equitable
regions, reducing regional disparities. wealth distribution and employment
(ii) Incentives for Backward Areas : Entrepreneurs generation.
were offered subsidies, tax exemptions, This policy laid the foundation for self-
and cheaper land to establish industries in reliance, modernization, and equitable growth
economically lagging regions. in India.
(iii) Decentralized Industrial Growth : Licensing
restricted the concentration of industries in 165. Discuss the important policy measures adopted
already developed states, ensuring equitable by the Indian government for the rapid industrial
distribution of industrial benefits across the development of the country after independence.
country. Ans : OD 2013
(iv) Support for Infrastructure Development :
After independence, the government recognized
To facilitate industrialization in backward
the importance of industrialisation in the
regions, the government invested in improving
development process of the economy.
infrastructure like roads, power, and water
Therefore, it adopted a number of measures some
supply, fostering regional equality.
of which have been discussed:
(v) This policy aimed to integrate neglected areas
(i) Industrial Policy Resolutions:
into the mainstream economy and reduce
(i) 1948 : Defined the role of public and
income disparities among regions.
private sectors in a mixed economy.
164. How did the Industrial Policy Resolution, (ii) 1956 : Focused on public sector expansion
1956 help in accelerating the pace of industrial in core industries and private sector
development under the mixed form of economy? growth in non-core areas.
or (ii) Five-Year Plans : Emphasized heavy industries,
Discuss the main features of the Industrial Policy infrastructure, and regional industrialization
Resolution 1956. to reduce disparities, especially in the Second
Plan.
Ans : DELHI 2008
(iii) Industrial Licensing : The Industries
The Industrial Policy Resolution (IPR), 1956 (Development and Regulation) Act, 1951,
aimed to accelerate industrial development in regulated industrial growth and ensured
India under a mixed economy by emphasizing a resource allocation through licensing.
balanced role for the public and private sectors.
(iv) Support for Small-Scale Industries (SSIs) :
Key contributions include:
Encouraged SSIs through incentives, financial
(i) Categorization of Industries : Divided aid, and tax benefits to promote employment
industries into three categories: and reduce regional disparities.
(i) Exclusive government control (e.g., (v) Economic Reforms (1991) : Introduced
defense, railways). liberalization, privatization, and globalization
(ii) Government-dominated industries but (LPG) to deregulate industries, attract FDI,
with private participation (e.g., mining, and boost private sector participation.
steel). These measures ensured balanced growth,
(iii) Private sector-led industries. modernization, and self-reliance in industrial
(ii) Public Sector Expansion : Focused on development.
strengthening the public sector to develop
heavy and basic industries, ensuring 166. After the introduction of planning, industrial
infrastructure and industrial growth. sector of the country witnessed an accelerated
(iii) Private Sector Role : Encouraged private growth rate. Highlight and discuss the main
industries in non-reserved sectors with features of India’s industrial growth during the
government support through licenses, early phases of planning.
subsidies, and tax benefits. Ans : FOREIGN 2014

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 319

(iv) Following is not an achievement of economic 3. Import C. protection of

planning. Substitution domestic firms
(a) Growth and diversification of economic Policy from foreign
activities. competition
(b) Development of economic and social 4. Self Reliance D. to regulate the
infrastructure. private sector
(c) High rate of inflation. through a system
(d) Employment generation. of licensing
Ans : OD 2004 (a) A, C, D, B
(i) (c) Reduction in economic inequality (b) D, A, C, B
(ii) (d) Employment opportunities (c) C, A, B, D
(iii) (a) 1-D, 2-C, 3-B, 4-A (d) D, A, B, C
(iv) (c) High rate of inflation (ii) The policy of import substitution was adopted
176. Read the para given below and answer the to:
questions that follow: (a) Save foreign exchange
A nation’s development heavily depends on its (b) To protect domestic Industries from
industrial sector, which provides more stable foreign competition
employment opportunities compared to the (c) Both (a) and (b)
agricultural sector. However, at the time of India’s (d) Neither (a) nor (b)
independence, industrialists lacked sufficient (iii) Schedule A of IPR 1956 included _____
capital and resources to enhance or expand their industries that were directly under the
production capacities. _____ sector.
To address this, the Indian government implemented (a) 18, private
new foreign trade policies and promoted import (b) 17, public
substitution from independence until the 1980s. (c) 18, public
This inward-looking policy was applied across (d) 17, private
major economic sectors to strengthen India’s
industrial base and trade. Its primary aim was (iv) Following is not a characteristic of small scale
to restructure the economy by replacing imported industry:
goods with domestically produced ones. By (a) They are labour intensive
substituting foreign goods with local production, (b) They promote regional equality
the policy sought to protect Indian consumer (c) They lead to socialistic pattern of society
goods from international competition. Extensive (d) They contribute heavily towards India’s
trade barriers were introduced to shield the foreign trade
domestic market, resulting in a significant boost
Ans : FOREIGN 2005
in the production and sale of domestic products.
(i) (b) D, A, C, B
(i) Write the correct sequence of alternator given (ii) (c) Both (a) and (b)
in Column II by matching them with the (iii) (b) 17, public
respective terms in Column I: (iv) (d) They contribute heavily towards India’s
foreign trade
Column I Column II
177. Read the para given below and answer the
1. Industrial A. to courage
questions that follow:
Policy farmers for
The Green Revolution transformed India from
Resolution, adopting the
a food-deficient nation to one of the world’s
1956 HYV Technology
leading agricultural producers. Until 1967, the
2. Subsidies B. freedom from government primarily focused on expanding
foreign aid farmland, but the rapid population growth
outpaced food production. This necessitated
immediate and significant measures to boost

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CH 7 : INDIAN ECONOMY (1950-1990)

174. How far has Indian planning been successful in by the Planning Commission of India, which
achieving its objectives during 1951-1990? Briefly was responsible for improving the standard
assess the achievements and failures of planning of living by efficiently allocating resources,
in India during this period. boosting production, and creating employment
opportunities for all. The Five-Year Plans served
Ans : DELHI 2002
as centralized and integrated economic programs
Indian planning (1951-1990) aimed to achieve at the national level.
economic growth, self-reliance, modernization, and In the aftermath of partition, with the nation
equitable distribution. Its assessment highlights: grappling with an influx of refugees, acute food
Achievements : shortages, and rising inflation, the first Five-Year
(i) Economic Growth : The GDP grew at an Plan prioritized the primary sector, particularly
average rate of (iii)5%, with significant agriculture and irrigation. These plans aimed
progress in industrial and agricultural sectors. to make India self-reliant, stimulate industrial
(ii) Industrialization : Establishment of heavy growth, and extend development beyond urban
industries and infrastructure created a strong areas to reach rural interiors.
industrial base.
(i) Which of the following is not a dimension of
(iii) Agricultural Development : Green Revolution
the objective of economic and social justice?
increased food grain production, ensuring
(a) Reduction in economic inequality
food security.
(b) Uplifting the weaker sections of the
(iv) Self-Reliance : Reduced dependence on foreign society
goods through import substitution policies. (c) Development of the Indian economy
(v) Social Justice : Initiatives in health, (d) Curbing concentration of economic power
education, and rural development aimed to
reduce poverty and inequality. (ii) Economic growth is indicated by an increase
Failures : in _____.
(a) Infrastructural facilities
(i) Low Growth Rate : Economic growth lagged
(b) National Income
behind potential, termed the “Hindu rate of
(c) Employment opportunities
growth.”
(d) All of the above
(ii) Inefficiencies : Public sector enterprises often
operated inefficiently, incurring losses. (iii) Match the following column:
(iii) Unemployment : High population growth
undermined employment creation efforts. Column I Column II
(iv) Regional Disparities : Economic benefits were 1. Mixed A. Development of
unevenly distributed across states. economy primary sector
(v) Overregulation : Excessive government control
2. Objective B. Co-existence of
stifled private enterprise and innovation.
of economic both private and
Indian planning succeeded in laying the foundation planning public sector
for economic development but faced challenges in
achieving equitable and sustainable growth. 3. Self reliance C. To promote social
interest over
individual interest

CASE BASED QUESTION 4. Focus of first D. Avoiding

plan dependence on
imports
175. Read the paragraph given below and answer the (a) 1-B, 2-C, 3-D, 4-A
questions that follow: (b) 1-A, 2-B, 3-C, 4-D
The Indian Government adopted Five-Year (c) 1-C, 2-B, 3-D, 4-A
Plans as a formal planning framework after (d) 1-D, 2-C, 3-B, 4-A
independence to ensure effective and balanced
resource utilization. These plans were devised

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 321

(i) Which of the following is not a shortcoming 179. Read the para given below and answer the
of the Green Revolution? questions that follow:
(a) Risk of pest attack At the time of independence, Indian industrialists
(b) Limited crops did not have the capital to undertake investment
(c) Inadequate social infrastructure in industrial ventures required for the development
of Indian economy nor was the market big enough
(d) Regional imbalance
to encourage industrialists to undertake major
(ii) Why should subsidies be provided? projects even if they had the capital to do so. It
(a) To encourage the farmers to adopt the was mainly for this reason that the government
new technology. had to play an extensive role in promoting
industrial development in the country.
(b) The new technology is found very
In spite of the contribution made by the public
profitable
sector to the growth of the Indian economy, there
(c) Poor farmers cannot afford the cost of
has been criticism of the performance of many
new technology.
public sector enterprises. Many public sector firms
(d) All of the above incurred huge losses but continued to function
(iii) _____ implies use of advanced technology: because it is difficult to close a government
(a) Modernization undertaking even if it is a drain on the nation’s
(b) Globalization limited resources. The excessive regulations
(c) Privatization through the licensing system prevented firms from
(d) Liberalization becoming more efficient as more time was spent
in obtaining the license rather than on thinking
(iv) Match the following and choose the correct about productivity. The protection from foreign
alternative: competition made the producers aware that they
had a captive market and thus, they had no
Column I Column II incentive to improve the quality of their goods.
1. Prime Minister A. Industries to be (i) In 1955, the Village and Small-Scale
left to the private Industries Committee, also called the
sector _____ committee, noted the possibility
of using small scale industries for promoting
2. Karve B. Quantity of
rural development.
Commit-tee, goods that can
1955 be imported. (ii) Why did Indian planners emphasize the need
3. Quota C. Using small- for rapid industrial development?
scale industries (a) To accelerate the pace of capital
to promote rural formation.
development. (b) For promoting export substitution.
(c) To restrict foreign investment.
4. Schedule C, D. Chairperson of
(d) To control the private sector.
IPR 1956 the planning
commission (iii) Permission or approval to start an industry
with a certain capacity in a specified area is
(a) 1-B, 2-A, 3-D, 4-C
called a license. (True/False)
(b) 1-A, 2-B, 3-C, 4-D
(c) 1-D, 2-C, 3-B, 4-A (iv) During the period 1951-90, Indian industry
(d) 1-A, 2-B, 3-D, 4-C was faced with the following problems.
(a) Technological backwardness
Ans : COMP 2009
(b) Low productivity
(i) (c) Inadequate social infrastructure
(c) Rapid growth of population
(ii) (d) All of the above
(iii) (a) Modernization (d) Both (a) and (b)
(iv) (c) 1-D, 2-C, 3-B, 4-A Ans : DELHI 2011

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CH 7 : INDIAN ECONOMY (1950-1990)

(i) Karve (ii) Inward looking trade strategy aimed at

(ii) (a) to accelerate the pace of capital formation. _____.
(iii) True
(iv) (d) both (a) and (b) (iii) State whether the given statement is true or
false: Mechanization of the Indian agriculture
180. Read the para given below and answer the was one of the cause of Green Revolution in
questions that follow: India.
The performance of the Indian economy during
(iv) Read the following statements - Assertion (A)
the first seven Five-Year Plans (1950–1990)
and Reason (R)
was satisfactory, though not exceptionally
impressive. At the time of independence, India Assertion (A) : Many public sector
was industrially underdeveloped. However, over undertakings incurred huge losses due to
this period, industries became significantly more operational inefficiencies.
diversified, with a focus on public investment in Reason (R) : Red-tapism was one of the
the industrial sector. reasons for continuation of such enterprises.
The policy of import substitution protected Select the correct alternative from the
domestic industries from foreign competition following:
but failed to build a strong export surplus. (a) Both Assertion (A) and Reason (R) are
While the public sector expanded considerably, true and reason is the correct explanation
it did not achieve the expected level of growth of assertion.
in the secondary sector. Excessive government (a) Both Assertion (A) and Reason (R)
regulations stifled entrepreneurial growth, as the are true and reason is the not correct
lack of competition led to minimal innovation and explanation of assertion.
modernization in the industrial sector.
(c) Both Assertion (A) and Reason (R) are
Many Public Sector Undertakings (PSUs) true.
incurred substantial losses due to inefficiencies,
(d) Both Assertion (A) and Reason (R) are
bureaucratic red tape, outdated technology,
false.
and similar issues. Despite being a drain on the
nation’s limited resources, these PSUs continued Ans : OD 2012

to operate, as closing government enterprises was (i) (c) Private entrepreneurs lacked sufficient
often challenging. capital for investment.
On the agricultural front, the Green Revolution (ii) Protecting domestic industries from
helped India achieve near self-sufficiency in food international competition.
grain production. However, by the 1990s, the
(iii) True
need for economic policy reforms became evident
to address inefficiencies and adapt to a rapidly (iv) (c) Both Assertion (A) and Reason (R) are
changing global economic environment, aiming to true
achieve sustainable growth.
181. The adoption of a socialist framework as the
(i) Which of the following was not a reason for national objective necessitated that industries
the public sector’s prominent role in the early of strategic importance and those serving public
phase of Indian Economic Planning? utility functions remain under the public sector’s
control. Additionally, industries deemed essential
(a) Private entrepreneurs lacked sufficient
and requiring significant investment were also to
capital for investment.
be managed by the public sector.
(b) Government aimed at social welfare. To implement this vision effectively, the
(c) The market was big enough to encourage Government of India classified industries into
private industrialists for investment. three categories. This classification aimed to
(d) The government wanted to protect the ensure the government’s active involvement,
indigenous producers from the foreign either directly or indirectly, in guiding industrial
competition. development and fostering economic growth in
alignment with socialist principles.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 323

(i) In the Industrial Policy Resolution 1956, (a) Narrow

Industries were classified into _____ (b) Finite
categories. (c) Comprehensive
(a) One (d) Superficial
(b) Two Ans : FOREIGN 2015
(c) Three
(i) (c) Three
(d) Four (ii) (d) Both (a) and (c)
(iii) (b) Second
(ii) ‘Under IPR 1956, the private sector was kept
(iv) (a) Both the statements are true.
under state control through licensing system.’
(v) (c) License was not required for expansion
The objective of such policy was _____.
(vi) (c) Comprehensive
(Choose the correct alternative)
(a) To promote regional equality www.nodia.in
(b) To ensure that production exceeds what
the economy required.
(c) To ensure that private sector enterprises
should not create monopoly.
(d) Both (a) and (c)

(iii) Industrial Policy Resolution 1956, formed the

basis of _____ five year plan.
(a) First
(b) Second
(c) Third
(d) Fourth

(iv) Read the following statements carefully and

choose the correct alternative:
Statement–I : Under IPR 1956, First Category
comprised Industries exclusively owned by
state.
Statement–II : Second Category comprised
of Industries where state will supplement
private sector.
Alternatives :
(a) Both the statements are true.
(b) Both the statements are false.
(c) Statement–I is true, Statement–II is false.
(d) Statement–II is true, Statement–I is false.

(v) Which of the following statements is incorrect?

(a) State had complete control over the
industries, that were vital for economy.
(b) Industries left for private sector were kept
under control of government through
licensing.
(c) License was not required for expansion.
(d) The purpose of licensing was to promote
regional equality.

(vi) Industrial Policy is a _____ combination/

pack of policy measures.

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CH 8 : LIBERALISATION, PRIVATISATION AND GLOBALISATION

CHAPTER 8
LIBERALISATION, PRIVATISATION AND GLOBALISATION : AN APPRAISAL

energy generation and railway transport.

SUMMARY 3. De-reservation of production by small scale
industries.
4. Price determination by market forces of
1. ECONOMIC CRISIS OF 1991
demand and supply.
Factors Leading to the Economic Crisis of 1991 5. Import of capital goods-Freedom to import
are as follows : capital goods and technology in order to
1. Adverse balance of payment develop strong infrastructure base of the
2. Depletion of foreign exchange reserves country.
3. Increase in prices
4. Increase in fiscal deficit 3.2 Financial Sector Reforms
5. Poor performance of public sector Financial sector includes financial institutions
undertakings such as commercial banks, investment banks,
stock exchange operations and foreign exchange
2. MAIN FEATURES OF THE NEW ECONOMIC POLICY
market.
Main features of the new economic policy are as 1. To reduce the role of RBI from regulator to
follows : facilitator of financial sector.
1. Liberalization : Liberalization of the economy 2. Establishment of private sector banks which
means its freedom from direct or physical increase competition.
control imposed by the Government. 3. Foreign investment limit in banks was raised
2. Privatization : It means transfer of ownership, to around 51%.
management and control of public sector 4. Those banks which fulfilled certain conditions
enterprises to the entrepreneurs in the private were given freedom to set up new branches
sector. without the approval of RBI.
3. Globalization : Globalization means
integrating the national economy with the 3.3 Fiscal / Taxation Reforms
world economy through removal of barriers on These refer to reforms in government’s taxation
international trade and capital movements. and public expenditure policies, which are
collectively known as its ‘fiscal policy’.
3. REFORMS UNDER LIBERALIZATION
1. Reduction in direct taxes like Income tax and
Corporation tax.
3.1 Industrial Sector Reforms or Deregulation of Industrial
2. Reforms in indirect taxes to facilitate the
Sector
establishment of a common national market
This included reduction in industrial licensing, for goods and services.
decrease in the role of public sector, de-reservation 3. Simplification of tax paying procedure to
under small scale industries. encourage better compliance on the part of
1. Industrial licensing was abolished for almost tax payers.
all products except for some industries which
are of strategic importance for a nation like 3.4 Foreign Exchange Reforms
alcohol, cigarettes, hazardous chemicals etc. 1. Devaluation of rupee which encouraged
2. Decrease in the role of public sector : The exports and discouraged imports.
only industries which are reserved for the 2. Determination of the foreign exchange rate
public sector are defense equipments, atomic through market forces of demand and supply.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 325

3.5 Trade and Investment Policy Reforms 7. OUTSOURCING

Liberalization of trade and investment regime was In outsourcing, a company hires regular service
initiated to increase international competitiveness from external sources, mostly from other countries,
of industrial production and also foreign which was previously provided internally or from
investments and technology into the economy. within the country like legal advice, computer
These reforms included – service, advertisement etc.
1. Removal of quantitative restrictions on
imports and exports. 8. AN ASSESSMENT OR AN APPRAISAL OF LPG POLICIES
2. Removal of export duties. The Liberalization, Privatization and
3. Reduction in import duties. Globalization (LPG) reforms of 1991 marked a
4. Relaxation in import licensing system. turning point in India’s economic history. These
policies aimed to integrate the Indian economy
4. PRIVATIZATION with the global market, enhance efficiency and
Privatization refers to transfer of ownership, promote overall growth. However, the impact
management and control of government sector of these reforms has been a mix of significant
enterprises to the private sector. It can be done achievements and notable limitations.
in two ways : Achievements
1. By withdrawal of the government from
1. There has been an increase in the overall
ownership and management of public sector
growth rate (GDP) during the reform period.
companies.
Post LPG policies, the growth of GDP has
2. By outright sale of public sector companies.
become as high as 8% per annum.
Privatisation of the public sector undertakings by
2. Stimulant to industrial production : Due to
selling off part of the equity of PSU to the private
LPG policies, the IT industry in India has
sector is known as disinvestment.
achieved global recognition.
5. GLOBALIZATION 3. Structural changes : The growth rate of about
8% is mainly driven by growth in the service
It is the outcome of the policies of liberalization
sector.
and privatization. Globalization refers to free
4. Increase in foreign direct investment and
interaction among all the countries of the world
foreign exchange reserves.
in various fields like trade, technology loans,
investment, outsourcing etc. 5. India is now seen as a successful exporter of
auto parts, engineering goods, IT software,
5.1 Features of Globalization textiles etc.
Features of Globalization are as follows : 6. Inflation has been brought under control from
16.7% in 1991 to around 2.9% in 2017-18.
1. Increase in equity limit of foreign investment.
7. Fiscal deficit has reduced from 8.5% to nearly
2. Long term trade policy which remove almost 3.5% of GDP.
all restrictions on external trade. 8. Deficit in Balance of Payments has also
3. Reduction in tariffs. reduced.
4. Withdrawal of quantitative restrictions. Limitations
5. Modifications in technology agreements.
1. Though the GDP growth rate increased in
6. Partial convertibility of rupee. the reform period, yet the reform led growth
did not generate sufficient employment
6. WORLD TRADE ORGANIZATION (WTO)
opportunities in the country.
The World Trade Organization (WTO) was 2. Due to globalization, our economy was
founded in 1995 as the successor organization open to greater flow of goods and services
to the General Agreement on Trade and Tariff from developed countries. This reduced the
(GATT). The WTO agreements cover trade in demand for domestic goods.
goods and services to facilitate bilateral and 3. Disinvestment initiated by government
multilateral trade by removing tariff and non- policies was not much successful because the
tariff barriers. proceeds were not used for the development
of the country.

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CH 8 : LIBERALISATION, PRIVATISATION AND GLOBALISATION
Ans : COMP 2019
gains tax
(b) 1995 (d) Import duties, customs duties and taxes on
petroleum products
23. When was VAT introduced in most of the States
of India? Ans : DELHI 2016

(a) 1995 (b) State-level sales tax, central excise duty and
(b) 2001 service tax
(c) 2005 GST subsumed multiple indirect taxes such as
(d) 2006 state sales tax, central excise duty and service tax
into one unified system to eliminate the cascading
Ans : DELHI 2015
effect of taxes and simplify compliance.
(c) 2005
27. Selective Credit Controls, a qualitative monetary
24. What is the complete name of the world bank? policy tool, are implemented by the central bank
(a) International Monetary Fund for what purpose in the context of credit flow in
(b) International Bank for Reconstruction and the economy?
Development. (a) To uniformly distribute credit across all
(c) World Trade Organization. economic sectors
(d) General Agreement on Trade and Tarriff. (b) To restrict or encourage credit to specific
Ans : SQP 2019 sectors based on economic needs
(c) To increase the legal reserve ratio for
(b) International Bank for Reconstruction and
commercial banks
Development.
(d) To mandate fixed interest rates for all
25. The term “disinvestment” is frequently used in commercial lending
the context of privatization in India. What does Ans : OD 2023
it signify and how does it impact the functioning
(b) To restrict or encourage credit to specific
of public sector enterprises?
sectors based on economic needs
(a) Completely shutting down non-profitable
Selective Credit Controls allow the central bank
public sector enterprises
to direct credit to priority sectors or limit credit
(b) Selling equity or shares of public sector
flow to speculative activities, thereby supporting
companies to private investors
economic objectives.
(c) Allocating additional government funds to
PSU for modernization 28. One of the primary objectives of the New
(d) Merging public sector units to reduce Economic Policy introduced in 1991 was to
operational inefficiencies enhance economic efficiency and growth by
Ans : COMP 2012 reducing direct government controls. Which of
the following best describes this objective?
(b) Selling equity or shares of public sector
(a) Increasing the fiscal deficit to stimulate
companies to private investors
demand
Disinvestment refers to the transfer of ownership
(b) Encouraging private sector participation
and management of public sector units to private
through liberalization
entities, often by selling shares or equity, as part
(c) Strengthening public sector ownership and
of privatization reforms.
management
26. The Goods and Services Tax (GST) is a (d) Promoting state-led industrialization over
revolutionary reform introduced to simplify private enterprise
indirect taxation in India. Which of the following Ans : SQP 2011
types of taxes were merged under GST to create
(b) Encouraging private sector participation
a unified tax system?
through liberalization
(a) Corporate tax and income tax levied by the
The New Economic Policy aimed to liberalize
government
the economy by reducing government-imposed
(b) State-level sales tax, central excise duty and
controls, encouraging private sector growth and
service tax
promoting market-driven policies.
(c) Property tax, entertainment tax and capital

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 327

4. Local Body Taxes : Taxes imposed by 6. To subsume all indirect taxes at centre and
municipalities and other local authorities, state level.
such as property tax, are excluded from GST. 7. To eliminate the cascading effect of indirect
taxes on a single transaction.
10.3 Taxes That Have Been Subsumed Under GST 8. To promote consumption based tax instead of
The implementation of GST has led to the manufacturing.
unification of several indirect taxes at both central
and state levels. These include
1. Central level taxes. Central excise duty,
Service tax and Central sales tax. MULTIPLE CHOICE QUESTION
2. State level taxes. Entertainment tax

10.4 Types of GST 1. The process of ________ refers to the transfer

GST in India is categorized into four types, of ownership, management and control of public
ensuring a seamless taxation process across sector enterprises to private sector entrepreneurs.
different jurisdictions. These are : (a) Liberalization
1. Central GST (CGST) : It is levied and (b) Privatization
collected by the central government on any (c) Globalization
transaction of goods and services that takes (d) Nationalization
place within a state.
Ans : COMP 2024
2. State GST(SGST) : It is the tax levied and
collected by the state government on every (b) Privatization
intra-state (within one state) transaction of Privatization involves reducing government
goods and services. control and ownership of public sector enterprises
3. Union Territory GST(UTGST) : It is the by transferring them to private entities to improve
GST applicable on goods and services efficiency and competition.
transactions that take place in any of the five 2. ________ is the rate at which the central
union territories of India. bank of a country lends money to commercial
4. Integrated GST(IGST) : It is applicable on banks for short-term needs.
interstate( between two States) transaction of (a) Repo Rate
goods and services. (b) Reverse Repo Rate
10.5 Advantages of GST (c) Bank Rate
(d) Lending Rate
The implementation of GST has brought
significant benefits to the Indian economy, which Ans : OD 2024
include :
(a) Repo Rate
1. It has fostered economic growth.
Repo Rate is the short-term lending rate at
2. Introduction of a single tax has led to ease of
which the central bank lends funds to commercial
doing business for enterprises.
banks, influencing the overall money supply in
3. It has helped in attracting foreign investment.
the economy.
4. It has insured better tax compliance.
5. The cascading effect of GST has led to 3. The ________ refers to the minimum
reduction in the cost of goods. percentage of net demand and time deposits that
commercial banks must keep with the central
10.6 Objectives of GST
bank.
The Goods and Services Tax (GST) was (a) Cash Reserve Ratio (CRR)
introduced with the following key objectives : (b) Statutory Liquidity Ratio (SLR)
1. To eliminate multiple taxes. (c) Repo Rate
2. To improve tax compliance. (d) Open Market Operations
3. To boost economic growth. Ans : OD 2023
4. To increase the ease of doing business. (a) Cash Reserve Ratio (CRR)
5. To reduce the overall tax burden.

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CH 8 : LIBERALISATION, PRIVATISATION AND GLOBALISATION

4. Market driven globalization has widened 9.3 Impact of Demonetization

the economic disparities among nations and The demonetization drive had profound effects on
people. the Indian economy, which include :
5. Spread of MNC in the country as a 1. Slowdown in the growth process due to
consequence of LPG policies has resulted in reduction in both demand and supply.
large scale spread of consumerism and has 2. decline in the stock of black money.
induced the masses to spend beyond their 3. increase in bank deposits.
means. 4. decline in the indirect and corporate taxes to
6. LPG has accelerated the growth of Indian the extent of slowdown in the growth process.
economy but it is lopsided as it is increasingly
relying on service sector of the economy. 10. GOODS AND SERVICES TAX (GST)
7. The growth process has been concentrated The Goods and Services Tax (GST) is an indirect
more in the urban areas. tax levied on the supply of goods and services.
8. Agricultural sector has suffered a serious GST Act was passed in the Parliament on 24th
neglect and its growth rate has depleted. March, 2017 and it came into effect from 1st
9. Economic reforms have imposed limits on July, 2017. Before the implementation of Goods
the growth of public expenditure specially in and Services Tax (GST) various central, state
social sectors. and local area taxes were levied in India. These
indirect taxes have now been subsumed under
9. DEMONETIZATION
GST which is based on the principle of ‘One
It is a situation where the central bank of the Nation One Tax.’
country withdraws the old currency notes of
certain denomination as an official mode of 10.1 Features of GST
payment. The Goods and Services Tax (GST) is a
On 8th November 2016, the Government of India revolutionary reform in India’s taxation system.
announced the demonetization of `500 and `1000 Its distinctive features are as follows :
bank notes of the Mahatma Gandhi series and the
1. It is a comprehensive tax as various indirect
issuance of new `500 and `2000 bank notes of the
taxes have been merged in this.
Mahatma Gandhi series in the exchange for the
old bank notes. 2. It is a multi-stage tax as it is proposed to be
levied at all stages.
9.1 History of Demonetization 3. It is a value added tax because it is levied
In India the Indian government had demonetized on value addition at each stage of the supply
bank notes on two prior occasions once in 1946 chain.
and again in 1978 to combat tax evasion by black 4. It is a destination based tax as the tax would
money held outside the formal economic system. accrue to the tax authorities which have
jurisdiction over the place of consumption.
9.2 Aims of Demonetization
10.2 Taxes Not Merged Under GST
The demonetization initiative was implemented
with the following primary objectives : Although GST has subsumed a majority of
1. Curb Corruption : To penalize illicit activities indirect taxes in India, certain taxes remain
and reduce corruption. outside its scope due to their unique nature and
2. Eliminate Counterfeit Currency : To remove the need for state or local government control.
fake currency from circulation. These taxes include :
3. Reduce Tax Evasion : To bring more income 1. Customs Duty : Duties levied on the import
under the tax net and improve compliance. and export of goods remain outside the
4. Promote Formal Banking : To channelize purview of GST.
savings into the formal banking system. 2. Taxes on Petroleum Products : GST excludes
5. Shift to Digital Economy : To encourage the taxes on petrol, diesel, aviation fuel and
adoption of digital payment systems and natural gas.
reduce reliance on cash transactions. 3. Taxes on Alcoholic Drinks : Excise duty and
VAT on alcoholic beverages are not subsumed
under GST.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 329

12. As a consequence of the policy of liberalization, 17. Why there was a need for economic reforms in
there has been a shift in the role of RBI from a India?
regulator to that of a _____. (a) Due to fiscal deficit
(a) Controller (b) Due to adverse BOP
(b) Coordinator (c) Rise in prices
(c) Facilitator (d) All of the above
(d) None of the above
Ans : COMP 2002
Ans : COMP 2004
(d) All of the above
(c) Facilitator
18. How much loan was provided by World Bank and
13. Following is not a reason which led to the IMF during the nineties to bail India out of the
introduction of economic reforms in 1991 : crisis?
(a) Balance of payment crisis (a) $10 million
(b) Failure of the public sector (b) $10 billion
(c) Lack of competition for domestic industries (c) $7 billion
(d) Increase in prices (d) $20 billion
Ans : DELHI 2001 Ans : DELHI 2005

(c) Lack of competition for domestic industries (c) $7 billion

14. Following is a policy initiative to promote 19. In which year did India adopt the economic
privatization reforms?
(a) Transfer of ownership of a public sector (a) 1991
undertaking to the private sector (b) 1993
(b) Disinvestment (c) 1998
(c) Entry of private sector Industries into (d) 2001
industries reserved exclusively for the public
Ans : OD 2011
sector
(d) All of the above (a) 1991

Ans : OD 2003 20. What is the main feature of New Economic

(d) All of the above Policy?
(a) Liberalization
15. Following is not an advantage of GST : (b) Privatization
(a) Development of a common national market. (c) Globalization
(b) Boost to foreign investment. (d) All of the above
(c) Make our products more competitive in the
Ans : FOREIGN 2014
international market.
(d) Difference in prices throughout the country. (d) All of the above

Ans : FOREIGN 2007 21. Where is the headquarters of WTO located?

(d) Difference in prices throughout the country. (a) Italy
(b) Geneva
16. Which of the following GST is applicable in case (c) New York
of transactions of goods and services between (d) Washington
States?
Ans : COMP 2017
(a) UTGST
(b) IGST (b) Geneva
(c) SGST
22. In which year was the World Trade Organization
(d) CGST
(WTO) founded? (Choose the correct alternative)
Ans : SQP 2009 (a) 1990
(b) IGST (b) 1995
(c) 1992
(d) 1998

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CH 8 : LIBERALISATION, PRIVATISATION AND GLOBALISATION
Ans : FOREIGN 2015
47. The vaccination campaign for containing
(b) To promote corruption-free governance by COVID-19 is an example of _____ medicine.
penalizing illicit activities (Fill up the blank with correct alternative)
The demonetization drive aimed to curb black (a) Preventive
money, reduce corruption and promote formal (b) Curative
banking and digital transactions for a more (c) Social
transparent economy. (d) Emotional

45. The New Economic Policy of 1991 in India Ans : OD 2021

introduced the concept of ________, which (a) Preventive

aims at integrating the national economy with the
global economy by removing trade and investment
barriers.
(a) Liberalization ASSERTION AND REASON
(b) Privatization
(c) Globalization
(d) Disinvestment 48. Assertion : The new economic policy, announced
in 1991, consisted of a wide range of economic
Ans : SQP 2006
reforms.
(c) Globalization Reason : The private sector performed poorly
Globalization, under the New Economic Policy, during the period 1950-1990.
focuses on removing restrictions on international (a) Assertion and Reason both are correct
trade and capital movements, thereby integrating statements and Reason is correct explanation
the Indian economy with the world economy. for Assertion.
46. Match the items of Column-I to Column-II & (b) Assertion and Reason both are correct
choose the correct alternative : statements but Reason is not correct
explanation for Assertion.
Column-I Column-II (c) Assertion is true but Reason is false.
(d) Assertion is false but Reason is true.
A. Goods produced (i) Tax Reforms
by small scale Ans : FOREIGN 2006
industries were de- (b) Assertion and Reason both are correct
reserved. statements but Reason is not correct explanation
B. Foreign Investment (ii) Foreign for Assertion.
limit raised to Exchange
49. Assertion : Liberalization involves deregulation
around 50%. Reforms
and reduction of government controls.
C. The rate of (iii) Financial Sector Reason : Liberalization aimed at encouraging the
corporation tax has Reforms private sector and multinational corporations to
been reduced. invest and expand.
(a) Assertion and Reason both are correct
D. Market determined (iv) Deregulation statements and Reason is correct explanation
exchange rate of Industrial for Assertion.
system was Sector
(b) Assertion and Reason both are correct
adopted.
statements but Reason is not correct
(a) A-(iv), B-(iii), C-(i), D-(ii) explanation for Assertion.
(b) A-(iii), B-(iv), C-(i), D-(ii) (c) Assertion is true but Reason is false.
(c) A-(iv), B-(iii), C-(ii), D-(i) (d) Assertion is false but Reason is true.
(d) A-(iii), B-(iv), C-(ii), D-(i) Ans : SQP 2013

Ans : OD 2021 (a) Assertion and Reason both are correct

(a) A-(iv), B-(iii), C-(i), D-(ii) statements and Reason is correct explanation for
Assertion.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 331

29. The World Trade Organization (WTO), (c) It is a consumption-based tax applicable only
established as the successor to GATT, plays a at the final stage
crucial role in regulating international trade. (d) It is a fixed tax rate unaffected by the supply
Which of the following agreements or principles chain process
under WTO aim to facilitate free trade among
Ans : COMP 2010
nations?
(a) Imposing export subsidies to boost domestic (b) It is a multi-stage tax levied at every stage of
industries production and distribution
(b) Establishing trade barriers to protect national GST ensures that tax is levied at all stages of
interests production and supply, but input tax credits
(c) Removing tariff and non-tariff barriers to prevent double taxation and reduce the cascading
promote multilateral trade effect.
(d) Prioritizing bilateral trade agreements over
32. The foreign exchange reforms introduced under
multilateral engagements
the LPG policy aimed to enhance India’s trade
Ans : FOREIGN 2021 competitiveness. Which of the following measures
(c) Removing tariff and non-tariff barriers to was a part of these reforms?
promote multilateral trade (a) Fixing the exchange rate by the government
The WTO focuses on removing trade restrictions to stabilize imports
like tariffs and non-tariff barriers to facilitate free (b) Devaluing the rupee to encourage exports
trade among member nations and promote global and discourage imports
economic integration. (c) Eliminating all foreign investment in domestic
markets
30. What is the rationale behind the government’s (d) Restricting private players from participating
demonetization initiative, specifically the in the forex market
withdrawal of 500 and 1000 notes in 2016 and
Ans : DELHI 2008
how was it expected to impact the economy?
(a) To discourage digital payments and boost (b) Devaluing the rupee to encourage exports and
cash transactions discourage imports
(b) To increase the fiscal deficit by reducing Devaluation of the rupee made Indian exports
revenue collection more competitive internationally and discouraged
(c) To curb corruption, eliminate counterfeit unnecessary imports, boosting foreign exchange
currency and promote formal banking reserves.
(d) To reduce tax compliance among individuals
33. Outsourcing is a key feature of globalization
and businesses
that gained prominence after the 1991 economic
Ans : SQP 2018 reforms. How does outsourcing benefit companies
(c) To curb corruption, eliminate counterfeit and nations involved?
currency and promote formal banking (a) By increasing import duties on outsourced
he demonetization initiative aimed to reduce goods and services
corruption, tackle counterfeit currency and (b) By providing specialized services from
encourage formal banking and digital payments, external sources at lower costs
promoting a transparent and efficient economy. (c) By reducing the demand for skilled labor in
the global market
31. The Goods and Services Tax (GST) in India (d) By encouraging companies to eliminate
introduced multiple reforms to simplify the service-based operations
taxation system. Which unique characteristic of
Ans : OD 2004
GST ensures that tax is applied at all stages of
the supply chain while providing credit for taxes (b) By providing specialized services from external
paid on inputs? sources at lower costs
(a) It is a single tax applicable across the entire Outsourcing allows companies to access
nation specialized services from other nations at reduced
(b) It is a multi-stage tax levied at every stage of costs, enhancing efficiency and global trade
production and distribution interconnectivity.

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CH 8 : LIBERALISATION, PRIVATISATION AND GLOBALISATION

CRR is a quantitative tool used by the central bank Ans : FOREIGN 2010

to regulate liquidity in the economy by mandating (a) GATT

banks to maintain a specified percentage of their
deposits with the central bank. 8. Under the financial sector reforms, foreign
investment limits in banks were raised to
4. The main objective of ________ under ________, promoting competition in the
the 1991 economic reforms was to free the banking sector.
economy from government-imposed controls and (a) 100%
restrictions. (b) 51%
(a) Globalization (c) 49%
(b) Liberalization (d) 75%
(c) Privatization
Ans : COMP 2023
(d) Outsourcing
(b) 51%
Ans : OD 2011
The reforms aimed to enhance foreign participation
(b) Liberalization in the banking sector by allowing a majority stake,
Liberalization aimed at reducing government thus increasing competitiveness and efficiency.
control in business operations by eliminating
licensing and other restrictive practices, thus 9. The ________ is an indirect tax levied on
promoting a market-driven economy. goods and services, introduced in India with the
principle of ‘One Nation, One Tax.’
5. In the context of demonetization, ________ (a) Customs Duty
refers to the withdrawal of specific currency (b) Excise Duty
denominations as an official medium of exchange. (c) Goods and Services Tax (GST)
(a) Globalization (d) Corporation Tax
(b) Privatization
Ans : DELHI 2021
(c) Disinvestment
(d) Demonetization (c) Goods and Services Tax (GST)
GST replaced multiple indirect taxes in India,
Ans : FOREIGN 2012
unifying the taxation system for seamless business
(d) Demonetization operations across states.
Demonetization involves ceasing the validity of
certain currency notes to curb corruption, black 10. ________ Under the New Economic Policy
money and promote a cashless economy. aimed to improve tax compliance by simplifying
procedures and reducing direct taxes.
6. Goods and Services Tax (GST) in India is a (a) Fiscal Reforms
________ tax, which is levied on the supply (b) Trade Reforms
chain at each stage based on the value added. (c) Industrial Reforms
(a) Direct (d) Exchange Reforms
(b) Value-added
Ans : OD 2018
(c) Fixed
(d) Income (a) Fiscal Reforms
Fiscal reforms included simplifying the tax-paying
Ans : SQP 2016
process and reducing direct taxes like income and
(b) Value-added corporation taxes to enhance compliance and
GST is a value-added tax applied at every stage reduce evasion.
of the supply chain, ensuring tax transparency
and eliminating cascading effects. 11. When did India join the WTO?
(a) 1995
7. The World Trade Organization was founded in (b) 1947
1995 as the successor organization to : (c) 1951
(a) GATT (d) 1985
(b) SAARC
Ans : SQP 2008
(c) ASEAN
(d) G-20 (a) 1995

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 333

(a) Complete ban on foreign direct investments Outsourcing allows businesses to access specialized
in strategic sectors services at lower costs, fostering efficiency and
(b) Introduction of quantitative restrictions on interdependence in the global economy.
exports
(c) Long-term trade policy promoting free trade 42. The World Trade Organization (WTO) was
and reduction of tariffs established to promote global trade. Which of
(d) Increased dependence on government funding the following principles does the WTO uphold to
for industrial growth ensure free and fair trade among nations?
(a) Imposing restrictions on exports to protect
Ans : FOREIGN 2005
domestic industries
(c) Long-term trade policy promoting free trade (b) Removing both tariff and non-tariff barriers
and reduction of tariffs to facilitate multilateral trade
Globalization reforms included removing trade (c) Encouraging unilateral trade agreements over
barriers, reducing tariffs and promoting free trade multilateral cooperation
to integrate the Indian economy with the global (d) Limiting the involvement of developing
market. nations in global trade discussions

40. The Goods and Services Tax (GST) was Ans : DELHI 2019

introduced to simplify India’s taxation structure. (b) Removing both tariff and non-tariff barriers
Which of the following features distinguishes GST to facilitate multilateral trade
from previous indirect tax systems? The WTO aims to eliminate trade barriers to ensure
(a) GST is levied only on luxury goods and free and fair trade among its member nations,
services promoting economic cooperation and growth.
(b) GST allows multiple taxes on the same
transaction for better revenue generation 43. What was one of the significant achievements of
(c) GST is a value-added tax applied at each the LPG reforms in India, particularly regarding
stage of the supply chain with input credit the service sector?
benefits (a) Decline in IT and software exports due to
(d) GST eliminates the need for state-level increased competition
taxation (b) Structural transformation driven by rapid
growth in the service sector
Ans : SQP 2011
(c) Increased fiscal deficit due to excessive
(c) GST is a value-added tax applied at each stage reliance on service-based industries
of the supply chain with input credit benefits (d) Reduction in GDP growth rates following the
GST is a comprehensive, multi-stage tax levied reforms
at every stage of the supply chain, ensuring Ans : OD 2017
no cascading effect due to the input tax credit
mechanism. (b) Structural transformation driven by rapid
growth in the service sector
41. Outsourcing is a result of globalization that The LPG reforms led to significant growth in the
has benefited businesses worldwide. How has service sector, contributing to structural changes
outsourcing impacted the global economy? and higher GDP growth rates.
(a) It has reduced employment opportunities in
developed nations 44. Under the demonetization policy of 2016, old
(b) It has led to increased specialization and cost- currency notes were withdrawn. What was one of
efficiency for businesses the primary objectives of this move?
(c) It has minimized the need for skilled labor in (a) To encourage cash transactions over digital
developing countries payments
(d) It has promoted protectionist policies among (b) To promote corruption-free governance by
nations penalizing illicit activities
(c) To reduce the money supply and discourage
Ans : COMP 2014
banking habits among citizens
(b) It has led to increased specialization and cost- (d) To eliminate the usage of small denominations
efficiency for businesses in daily transactions

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CH 8 : LIBERALISATION, PRIVATISATION AND GLOBALISATION

56. Assertion : Performance of PSU improved with (d)Assertion is false but Reason is true.
the infusion of private capital and managerial
capabilities. 59. Assertion : Under the foreign exchange reforms,
Reason : Privatization improved financial the rupee was devalued against foreign currencies.
discipline and facilitated modernization. Reason : In 1991, foreign exchange reserves were
(a) Assertion and Reason both are correct at the lowest level.
statements and Reason is correct explanation (a) Assertion and Reason both are correct
for Assertion. statements and Reason is correct explanation
(b) Assertion and Reason both are correct for Assertion.
statements but Reason is not correct (b) Assertion and Reason both are correct
explanation for Assertion. statements but Reason is not correct
(c) Assertion is true but Reason is false. explanation for Assertion.
(d) Assertion is false but Reason is true. (c) Assertion is true but Reason is false.
(d) Assertion is false but Reason is true.
Ans : DELHI 2018
Ans : SQP 2004
(a) Assertion and Reason both are correct
statements and Reason is correct explanation for (a) Assertion and Reason both are correct
Assertion. statements and Reason is correct explanation for
Assertion.
57. Assertion : WTO was set up to facilitate
international trade by removing tariff as well as 60. Assertion : Industrial sector reforms substantially
non-tariff barriers. reduced the role of the public sector.
Reason : Major volume of international trade Reason : The new policy abolished industrial
occurs among the developed nations. licensing for all except 18 industries which has
(a) Assertion and Reason both are correct been further reduced to 5.
statements and Reason is correct explanation (a) Assertion and Reason both are correct
for Assertion. statements and Reason is correct explanation
(b) Assertion and Reason both are correct for Assertion.
statements but Reason is not correct (b) Assertion and Reason both are correct
explanation for Assertion. statements but Reason is not correct
(c) Assertion is true but Reason is false. explanation for Assertion.
(d) Assertion is false but Reason is true. (c) Assertion is true but Reason is false.
(d) Assertion is false but Reason is true.
Ans : OD 2010
Ans : COMP 2004
(b) Assertion and Reason both are correct
statements but Reason is not correct explanation (b) Assertion and Reason both are correct
for Assertion. statements but Reason is not correct explanation
for Assertion.
58. Assertion : Under the policy of privatization,
many goods earlier produced by small scale 61. Assertion : Removal of export duties was a
industries were de-reserved. structural reform measure adopted by the
Reason : The government sought to make the government.
economy more competitive and improve efficiency Reason : Structural reform measures were meant
of operations. to correct the weakness in the BOP situation.
(a) Assertion and Reason both are correct (a) Assertion and Reason both are correct
statements and Reason is correct explanation statements and Reason is correct explanation
for Assertion. for Assertion.
(b) Assertion and Reason both are correct (b) Assertion and Reason both are correct
statements but Reason is not correct statements but Reason is not correct
explanation for Assertion. explanation for Assertion.
(c) Assertion is true but Reason is false. (c) Assertion is true but Reason is false.
(d) Assertion is false but Reason is true. (d) Assertion is false but Reason is true.

Ans : FOREIGN 2008

Ans : DELHI 2001

(c) Assertion is true but Reason is false.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 335

50. Assertion : Under the New Economic Policy, 53. Assertion : The financial sector reforms reduced
quantitative restrictions on imports and exports the role of RBI from a facilitator to regulator of
were greatly reduced. the financial sector.
Reason : The inward looking trade strategy, Reason : Greater autonomy was ensured to the
followed before 1991, increased the efficiency and financial institutions for their functioning.
competitiveness of domestic industries. (a) Assertion and Reason both are correct
(a) Assertion and Reason both are correct statements and Reason is correct explanation
statements and Reason is correct explanation for Assertion.
for Assertion. (b) Assertion and Reason both are correct
(b) Assertion and Reason both are correct statements but Reason is not correct
statements but Reason is not correct explanation for Assertion.
explanation for Assertion. (c) Assertion is true but Reason is false.
(c) Assertion is true but Reason is false. (d) Assertion is false but Reason is true.
(d) Assertion is false but Reason is true.
Ans : FOREIGN 2016
Ans : COMP 2020
(d) Assertion is false but Reason is true.
(c) Assertion is true but Reason is false.
54. Assertion : India has become a favorable
51. Assertion : There has been a continuous reduction destination of outsourcing for most MNC.
in income and corporate tax rates. Reason : The government has introduced favorable
Reason : Tax procedures have been simplified to policy changes towards MNC in its economic
encourage better tax compliance by tax-payers. reforms.
(a) Assertion and Reason both are correct (a) Assertion and Reason both are correct
statements and Reason is correct explanation statements and Reason is correct explanation
for Assertion. for Assertion.
(b) Assertion and Reason both are correct (b) Assertion and Reason both are correct
statements but Reason is not correct statements but Reason is not correct
explanation for Assertion. explanation for Assertion.
(c) Assertion is true but Reason is false. (c) Assertion is true but Reason is false.
(d) Assertion is false but Reason is true. (d) Assertion is false but Reason is true.
Ans : DELHI 2011
Ans : SQP 2023
(b) Assertion and Reason both are correct (a) Assertion and Reason both are correct
statements but Reason is not correct explanation statements and Reason is correct explanation for
for Assertion. Assertion.
52. Assertion : Reforms in the trade and investment 55. Assertion : The reform policies led to an increase
policy helped increase the international in the limit of foreign investment in banks.
competitiveness of Industrial production. Reason : The devaluation of the rupee against
Reason : Reduction in import duties helped the foreign currencies increased the inflow of foreign
domestic Industries to import raw materials at exchange.
better prices. (a) Assertion and Reason both are correct
(a) Assertion and Reason both are correct statements and Reason is correct explanation
statements and Reason is correct explanation for Assertion.
for Assertion. (b) Assertion and Reason both are correct
(b) Assertion and Reason both are correct statements but Reason is not correct
statements but Reason is not correct explanation for Assertion.
explanation for Assertion. (c) Assertion is true but Reason is false.
(c) Assertion is true but Reason is false. (d) Assertion is false but Reason is true.
(d) Assertion is false but Reason is true.
Ans : COMP 2021
Ans : OD 2012
(b) Assertion and Reason both are correct
(a) Assertion and Reason both are correct statements but Reason is not correct explanation
statements and Reason is correct explanation for for Assertion.
Assertion

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CH 8 : LIBERALISATION, PRIVATISATION AND GLOBALISATION

34. Which of the following significant achievements (b) Simplifying tax procedures to encourage
is attributed to the LPG reforms of 1991, better compliance from taxpayers
particularly in the industrial and service sectors? Fiscal reforms focused on reducing direct taxes
(a) Widening fiscal and trade deficits due to and simplifying tax procedures to improve
increased imports compliance and efficiency in the taxation system.
(b) Decline in GDP growth rates driven by public
sector inefficiencies 37. What are the implications of “disinvestment” in
(c) Growth in IT and service sectors, gaining the context of India’s privatization efforts under
global recognition for Indian industries the New Economic Policy?
(d) Reduction in foreign exchange reserves due to (a) Government retaining complete ownership of
over-reliance on global markets public sector enterprises
(b) Sale of equity in public sector undertakings to
Ans : FOREIGN 2001
private investors
(c) Growth in IT and service sectors, gaining (c) Expansion of the public sector through
global recognition for Indian industries increased government investment
The LPG reforms stimulated industrial and
(d) Nationalization of private enterprises for
service sector growth, particularly in the IT
strategic purposes
industry, establishing India as a global leader in
these sectors. Ans : OD 2002

(b) Sale of equity in public sector undertakings to

35. What was the primary objective of industrial
private investors
sector reforms introduced under liberalization and
Disinvestment refers to the government selling
which of the following was a significant outcome
its stake in public sector enterprises to private
of these reforms?
players, promoting privatization and reducing
(a) Expansion of public sector dominance in all
government control.
industries
(b) Abolishment of industrial licensing for most 38. What does the term “globalization” signify in the
products, except strategic industries context of India’s New Economic Policy and how
(c) Strict government control over the import of has it impacted the nation’s economic structure?
capital goods (a) Expansion of the public sector to cater to
(d) Nationalization of small-scale industries for global demand
better efficiency (b) Removal of barriers on international trade
Ans : COMP 2007 and capital movements to integrate the
Indian economy with the world economy
(b) Abolishment of industrial licensing for most
products, except strategic industries (c) Complete reliance on domestic goods and
Industrial sector reforms aimed to deregulate services to reduce imports
the industry by abolishing licensing for most (d) Increasing focus on rural development to
products, reducing government interference and counter urbanization
promoting market-driven growth. Ans : SQP 2003

36. In the context of India’s fiscal policy reforms (b) Removal of barriers on international trade
under the New Economic Policy, which measure and capital movements to integrate the Indian
was taken to simplify tax compliance and improve economy with the world economy
economic efficiency? Globalization, as per the New Economic Policy,
(a) Increasing indirect taxes to generate higher aimed at removing trade and investment
revenue restrictions, allowing the Indian economy to
(b) Simplifying tax procedures to encourage integrate with the global market, thereby boosting
better compliance from taxpayers trade and investment.
(c) Introducing additional taxes on exports to 39. Which of the following was a key feature of
boost foreign exchange reserves globalization introduced under the 1991 economic
(d) Eliminating all forms of direct taxation reforms and how did it transform the Indian
Ans : DELHI 2009 economy?

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 337

62. Assertion : Post 1991, India has become the 65. Statement 1 : Outsourcing is one of the important
favored outsourcing destination in the world. outcomes of globalization process.
Reason : Indian labour has skilled labour force. Statement 2 : Owing to globalization, many
(a) Assertion and Reason both are correct Indian companies have expanded their operation
statements and Reason is correct explanation abroad.
for Assertion. (a) Statement 1 is true & Statement 2 is false.
(b) Assertion and Reason both are correct (b) Statement 1 is false & Statement 2 is true.
statements but Reason is not correct (c) Both statements 1 & 2 are true.
explanation for Assertion.
(d) Both statements 1 & 2 are false.
(c) Assertion is true but Reason is false.
(d) Assertion is false but Reason is true. Ans : OD 2024

Ans : OD 2021 (c) Both statements 1 & 2 are true.

(b) Assertion and Reason both are correct
statements but Reason is not correct explanation
for Assertion.
ONE MARK QUESTIONS
63. Assertion : The purpose of license policy was to
promote regional equalities.
Reason : The motive of licensing system was to 66. State the meaning of ‘Privatization’.
monitor and control the industrial production. Ans : SQP 2023
(a) Assertion and Reason both are correct
statements and Reason is correct explanation Privatization is the process of transferring
for Assertion. ownership and management of public sector
(b) Assertion and Reason both are correct companies from the government to private entities
statements but Reason is not correct or individuals.
explanation for Assertion. 67. What is the main aim of transition towards a
(c) Assertion is true but Reason is false. cashless economy ?
(d) Assertion is false but Reason is true.
Ans : SQP 2020
Ans : OD 2021
The main objective of promoting a cashless
(a) Assertion and Reason both are correct economy is to minimize corruption in the long
statements and Reason is correct explanation for term.
Assertion.
68. What is an Open Economy?
Ans : OD 2003

STATEMENT BASED QUESTIONS An Open Economy is one where goods, services,

capital and labor can flow freely without any
restrictions.
64. Statement-1 : The demonetization of currency was
undertaken by Indian Government on November 69. What is meant by fiscal deficit?
8, 2016. Ans : SQP 2009
Statement-2 : Demonetization has increased the
Fiscal deficit is the gap between the government’s
popularity of e–wallets in India.
total expenditure and its total receipts, excluding
(a) Statement 1 is true & Statement 2 is false.
borrowings.
(b) Statement 1 is false & Statement 2 is true.
(c) Both statements 1 & 2 are true. 70. What do you mean by quantitative restrictions?
(d) Both statements 1 & 2 are false.
Ans : COMP 2002
Ans : DELHI 2021\
Quantitative restrictions are quotas that define
(a) Statement 1 is true & Statement 2 is false. the specific quantity of goods allowed to be
imported.

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CH 8 : LIBERALISATION, PRIVATISATION AND GLOBALISATION

These reforms integrated the Indian economy with (iii) Increased Foreign Dependence : Borrowing
the global market, boosting trade, investment and from foreign countries raises external debt
economic growth. and may lead to economic and political
interference by lender nations.
99. Discuss the industrial sector reforms and the fiscal (iv) Economic Burden on Future Generations :
sector reforms introduced in the New Economic Future generations inherit the responsibility
Policy. to repay accumulated debts along with
Ans : DELHI 2007 interest, impacting long-term economic
stability.
Industrial Sector Reforms (1991) :
(i) Abolition of Industrial Licensing : Licensing 101. Should the government privatize all public sector
was abolished for most industries, except undertakings irrespective of whether they are
five (liquor, cigarettes, defense equipment, earning profits or incurring losses?
industrial explosives and hazardous
chemicals). Ans : FOREIGN 2002

(ii) Contraction of Public Sector : The number Yes, the need for privatization was felt mainly
of industries reserved for the public sector because of the poor performance of the PSU. The
reduced from 17 to 8 and later to just 2 following observations justify this statement :
(Atomic Energy and Railways). (i) The industrial policy resolution 1956 clearly
(iii) De reservation of Small-Scale Industries : and categorically stated the significance of
Market forces were prioritized for resource PSU in the process of growth and development.
allocation over government directives. The spread of PSU made it possible for India
(iv) Freedom to Import Capital Goods : to diversify its industrial base between the
Industrialists could import capital goods and period 1951-199 (i) It was due to this that
raw materials freely; high-priority industries the Indian economy underwent a structural
received automatic approval for foreign transformation wherein people started
technology agreements. shifting from agriculture to industry as a
(v) MRTP Act Relaxation : Large companies were source of livelihood.
allowed to expand without prior government (ii) However, gradually most public sector
approval. enterprises turned into a social dead weight
Fiscal Sector Reforms : due to mounting losses which after a point
(i) Reduction in Taxes : Lowered income and became unsustainable. Leakage, pilferage,
corporate tax rates to curb tax evasion. inefficiency and corruption had become so
(ii) Reforms in Indirect Taxes : Simplified tax rampant in PSU’s that their privatization
structure; introduced GST to establish a was considered as the only remedy.
unified national market.
The need for privatization arose primarily
(iii) Simplification of Procedures : Made taxation
due to the poor performance of public sector
processes more user-friendly to ensure better
undertakings (PSU). Key observations include :
compliance.
(i) Initial Importance of PSU : The 1956
100. Why is fiscal deficit not considered good for the Industrial Policy recognized PSU as critical
health of an economy? for India’s industrial diversification and
structural transformation, facilitating a shift
Ans : OD 2009
from agriculture to industry from 1951-199(i)
Implications of High Fiscal Deficit : (ii) Deteriorating Performance : Over time, many
(i) Vicious Circle of Borrowings : High fiscal PSU incurred unsustainable losses, becoming
deficit leads to increased borrowing, resulting economic burdens. Issues like inefficiency,
in higher interest payments, which further corruption, leakage and pilferage weakened
raises the deficit and necessitates more their productivity and financial health.
borrowing.
Privatization was seen as a remedy to enhance
(ii) Inflationary Pressure : Borrowing from the
efficiency, reduce fiscal burdens and ensure better
RBI often involves printing more currency
management of resources.
(deficit financing), which increases money
supply, leading to inflation.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 339

86. Name any two industries which are exclusively THREE MARK QUESTIONS
reserved for the public sector.
Ans : DELHI 2019, 2018
91. Why are fiscal deficits considered inflationary in
(i) Atomic energy production nature?
(ii) Defence equipment manufacturing
Ans : SQP 2021
(iii) Railway operations
The government finances its fiscal deficit by
87. In which type of tax does the liability to pay the borrowing from various sources, primarily the
tax and the burden of the tax fall on the same central bank, which issues new currency. This
person? money funds government spending and eventually
Ans : COMP 2011
reaches the public, increasing the money supply and
aggregate demand. If aggregate demand surpasses
Direct taxes impose both the liability to pay and available output, it leads to inflation, or a rise in
the burden on the same individual, as they cannot the general price level. Hence, fiscal deficits can
be transferred to others. Examples include income create inflationary pressures in the economy.
tax and corporate tax.
92. “In a nation like India, self employment provides an
88. Name the economic reforms which were important avenue for employment generation.” Defend
introduced by the government under the policy or refute the given statement with valid arguments.
of liberalization.
Ans : OD 2000
Ans : DELHI 2012
Self-employment involves working independently
Economic reforms under liberalization include : rather than for an employer. It plays a crucial role
(i) Industrial sector reforms in India’s employment generation, particularly
(ii) Financial sector reforms in the informal sector. Self-employment offers
(iii) Tax or fiscal reforms independence, potential for higher earnings and
(iv) Foreign exchange reforms creative freedom. Additionally, self-employed
individuals not only secure livelihoods for
(v) Trade and investment policy reforms.
themselves but also create job opportunities for
89. What do you mean by devaluation of rupee? others by running enterprises.
What effect does it have on exports and imports? 93. Why did India have to agree to the terms of
Ans : OD 2016 World Bank and IMF and introduced the new
Devaluation occurs when the government economic policy?
officially lowers the currency’s value relative to Ans : COMP 2018
foreign currencies. This makes exports cheaper India agreed to the constitutionalities of World
for foreign buyers, boosting exports and imports Bank and IMF and announced the New Economic
more expensive, discouraging foreign purchases. Policy (NEP). The NEP consisted of a wide
90. How can Government companies be converted range of economic reforms. The thrust of these
into private companies? policies was towards creating a more competitive
environment in the economy and removing the
Ans : FOREIGN 2023 barriers to entry and growth of firms.
Government companies can be privatized in two India sought assistance from the World Bank
ways : and IMF, securing a $7 billion loan to address
(i) By the government withdrawing ownership an economic crisis. These institutions demanded
and management from public sector economic liberalization, reduced government
companies. intervention and removal of trade and private
(ii) By the outright sale of public sector sector restrictions. Accepting these conditions,
companies. India introduced the New (NEP), encompassing
extensive economic reforms. The NEP aimed to
foster a competitive environment and eliminate
barriers to the entry and expansion of businesses.

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CH 8 : LIBERALISATION, PRIVATISATION AND GLOBALISATION

71. What do you mean by demonetization? 79. Name any two Navratna companies.
Ans : COMP 2017 Ans : OD 2011

It refers to the process of removing a currency Bharat Petroleum Corporation Limited (BPCL)
unit’s status as an official legal tender, carried out and Oil and Natural Gas Corporation Limited
by the Reserve Bank of India. (ONGC).

72. Define disinvestment. 80. What is the purpose of imposing tariffs?

Ans : COMP 2019 Ans : DELHI 2005

Disinvestment refers to the privatization of public Tariffs are levied to increase the cost of imported
sector enterprises by selling a portion of their goods.
equity to the public.
81. What is GST?
73. What is the objective of World Trade Organization?
Ans : SQP 2019
Ans : FOREIGN 2014
Goods and Services Tax (GST) is a comprehensive
The aim of the WTO is to create a rule-based indirect tax implemented across India, replacing
trading system to promote the optimal utilization multiple cascading taxes previously imposed by
of global resources. central and state governments.

74. World Trade Organization (WTO) was established 82. How will GST benefit the consumers?
in 1995, as a successor organization to _____.
Ans : DELHI 2015
(Fill up the blank with correct answer)
Goods and Services Tax (GST) subsumes several
Ans : DELHI 2020
major central and state taxes, leading to reduced
GATT (General Agreement on Tariffs and Trade). prices and uniformity in the cost of goods and
services across the country.
75. State whether the following statement is true or
false : 83. When did the `500 and `1000 rupee notes stop
‘World Bank is also known as International Bank being legal tender money?
for Registration and Delimitation (IBRD).’
Ans : OD 2006
Ans : SQP 2020
On November 8, 2016, the government
True. The World Bank is also known as the demonetized the two highest denomination notes,
International Bank for Reconstruction and `500 and `1000, rendering them invalid as legal
Development (IBRD). tender except for specific purposes.

76. State, whether the following statement is true or 84. What is meant by economic reforms?
false :
Ans : FOREIGN 2007
“GATT was established in 1923 with 48 member
countries.” Economic reforms refer to policies aimed at
enhancing economic efficiency.
Ans : COMP 2020

True; GATT was established in 1948 with 23

countries. TWO MARK QUESTIONS
77. What is meant by economic reforms?
Ans : FOREIGN 2007 85. State any two objectives of trade reforms.
Economic reforms refer to policies aimed at Ans : COMP 2019
enhancing economic efficiency.
(i) To eliminate quantitative restrictions on
78. What is the full form of BHIM? imports and exports.
(ii) To abolish import licensing procedures,
Ans : FOREIGN 2013
except for hazardous and environmentally
Bharat Interface for Money (BHIM). sensitive industries.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 341

3. Deficit in Balance of Payments (BOP) : A (ii) Bank Rate : RBI sets the bank rate, which is
growing BOP deficit occurred as foreign the interest rate at which commercial banks
payments for imports exceeded foreign borrow funds from the RBI.
receipts from exports. Despite imposing high (iii) Open Market Operations (OMO) : RBI
tariffs and quotas, imports rose sharply while regulates liquidity in the economy by buying
exports stagnated due to low quality and and selling government securities to or from
high prices of Indian goods in international commercial banks.
markets. (iv) Supervision and Regulation : RBI oversees
4. Inefficient Management : During the 1980, and ensures that commercial banks comply
inefficient economic management worsened with financial norms, maintain sound
the crisis. Government expenditure practices and safeguard depositor interests.
consistently exceeded revenue and internal These measures ensure the stability and efficiency
revenue generation from taxation and public of the financial sector.
sector profits was inadequate. Foreign
borrowings were often spent on consumption 98. Explain the external sector reforms introduced
rather than productive needs, deepening the under the policy of liberalization.
crisis. Ans : COMP 2003
5. Poor Performance of Public Sector
External Sector Reforms :
Undertakings (PSU) : Despite diversification
(i) Foreign Trade Policy Reforms : These
across sectors, the overall performance of PSU
reforms aimed to Increase international
was disappointing. Inefficiency, corruption
competitiveness. Promote foreign investments
and poor functioning made PSU an economic
and technology in India. Enhance efficiency
burden, necessitating a shift in government
of local industries and facilitate adoption of
policy from public sector reliance to private
modern technology.
sector engagement.
(ii) Key measures undertaken : Abolition of
6. Fiscal Deficit : Fiscal deficit increased from
Quantitative Restrictions : All restrictions on
4% of GDP in 1981-82 to 8.4% of GDP in
imports and exports were removed.
199(i) To bridge this gap, heavy borrowings
(iii) Reduction of Tariff Barriers : Import duties
were undertaken, pushing the economy into a
were significantly reduced to stimulate
debt trap.
domestic trade and economic growth.
These factors collectively underscored the urgent
Shift to Export Promotion : The earlier
need for structural reforms to stabilize and
focus on import substitution was replaced by
revitalize the economy.
export promotion.
97. How is RBI controlling the commercial banks? (iv) Abolition of Licensing : Licensing requirements
or were eliminated, except for hazardous and
“Though banks have been given permission to environment-sensitive industries.
generate resources from India and abroad, certain Removal of Export Duties : Export duties
managerial aspects have been retained with the were abolished to enhance the competitiveness
RBI to safeguard the interest of the account of Indian goods in global markets.
holders and the nation”. Elaborate. (HOTS) Foreign Exchange Reforms :
(i) Devaluation of Rupee : The government
Ans : SQP 2001
reduced the rupee’s value against foreign
The financial sector, including commercial banks, currencies to address the balance of payments
operates under the regulations and norms set by crisis, encouraging an inflow of foreign
the Reserve Bank of India (RBI). Key control exchange.
mechanisms include : (ii) Market-Determined Exchange Rate :
(i) Reserve Requirements : The RBI mandates Exchange rates were determined by market
commercial banks to maintain a fraction of forces of demand and supply, promoting
their net total demand and time deposits as efficiency in foreign exchange markets.
: Cash Reserve Ratio (CRR) : Cash reserves (iii) Liberalization of Foreign Investment : The
with the RBI. Statutory Liquidity Ratio number of products open to foreign investment
(SLR) : Reserves in liquid assets with the was increased, attracting more global capital
banks themselves. to India.

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CH 8 : LIBERALISATION, PRIVATISATION AND GLOBALISATION

FOUR MARK QUESTIONS Components of NEP :

(i) Liberalization : Replaced licensing with
deregulation in industries and trade.
94. What constitutes the financial sector? Briefly (ii) Privatization : Phased out quotas and
explain the financial reforms introduced under encouraged private sector participation.
the policy of liberalization.
(iii) Globalization : Replaced restrictive permits
Ans : OD 2024 with policies to integrate India with the
The financial sector encompasses institutions global market.
like commercial banks, investment banks, stock Objectives of Economic Reforms :
exchanges and the foreign exchange market, all of (i) To make the economy competitive.
which are overseen by the Reserve Bank of India (ii) To accelerate growth.
(RBI). Under the policy of liberalization, several (iii) To enhance the efficiency and productivity of
financial sector reforms were introduced : production units.
(i) Change in the Role of RBI : The RBI
(iv) To leverage global resources for domestic
transitioned from a regulator to a facilitator
development.
of the financial sector. Before 1991, the
(v) To consolidate past gains.
RBI determined interest rates on loans and
deposits. Post-liberalization, banks gained (vi) To improve fiscal discipline by reducing the
the autonomy to set their own interest rates, fiscal deficit.
fostering competition in the banking sector. These reforms transformed India’s economic
(ii) Establishment of Private Sector Banks : framework and laid the foundation for sustained
Reforms enabled the establishment of Indian growth and globalization.
and foreign private sector banks. Notable
96. State three reasons for the implementation of
examples include Indian banks like ICICI and
NEP.
HDFC and foreign banks like HSBC, which
or
increased competition and offered consumers
State and explain the conditions of the Indian
better services and lower interest rates.
economy that necessitated the introduction of
(iii) Increase Foreign Investment Limits : The
economic reforms in the year 1991.
foreign investment limit in banks was raised
or
to 50% and foreign institutional investors,
Indian economy was on the brink of collapse in
such as merchant bankers, mutual funds
the year 1991. Do you agree? Give reasons in
and pension funds, were allowed to invest in
support of your answer.
Indian financial markets, further boosting the
sector’s growth. Ans : OD 2008

In 1991, India’s economic condition was extremely

95. Write a note on New Economic Policy. What were
dire due to several interlinked factors, prompting
its main objectives?
the need for economic reforms. The key reasons
Ans : DELHI 2010 were :
The New Economic Policy (NEP) of 1991 was 1. Fall in Foreign Exchange Reserves : Foreign
introduced to address the economic crisis of the exchange reserves were heavily utilized for
early 1990s. It consisted of two types of measures : consumption and development projects. By
(i) Stabilization Measures(Short-term) : Aimed 1991, reserves had fallen to a level insufficient
at correcting balance of payments weaknesses to finance more than two weeks of imports
by ensuring adequate foreign exchange or pay interest on international borrowings.
reserves. Focused on controlling inflation by Reserves dwindled from `80-100 cores in the
managing rising prices effectively. 1980s to nearly `6,000 cores by the 1990s.
(ii) Structural Reform Measures (Long-term) 2. Rising Prices/Inflation : Inflation surged to
: Designed to enhance the efficiency of the an all-time high of 17% due to aggregate
economy. Targeted at increasing international supply shortages and deficit financing, where
competitiveness by removing rigidities in the government borrowed from the RBI to
various sectors of the Indian economy. cover fiscal deficits.

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102. “In the post-reform period the government of The government uses two main methods for
India decided to privatize profit making Public disinvestment of public sector undertakings
Sector Undertakings (PSU).” (PSU) :
Do you agree with the given statement? Give (i) Sale of Minority Shares : The government
valid arguments in support of your answer. sells a portion of its equity (less than 50%) in
Ans : OD 2024 small lots to the public, financial institutions,
or other investors. Ownership remains with
I disagree with the statement. Instead, the government.
the Government of India decided to retain
(ii) Strategic Sale : A significant part of the
profit-making PSU to ensure their sustained
government’s stake (51% or more) is sold to a
profitability and significant contribution to the
private company, transferring ownership.
economy. These PSU serve as crucial sources
of revenue through dividends, taxes and other Examples include Modern Foods India,
channels, which are vital for financing economic Videsh Sanchar Nigam Limited (VSNL) and
development, infrastructure expansion and social Maruti Udyog Limited.
welfare initiatives.
105. “Navratna Policy of the government has helped
Moreover, the government granted special
in improving the performance of Public Sector
status to select PSU, enabling them to compete
Undertakings in India.” Do you agree with the
effectively in the global market. This special status
given statement? Justify your answer with valid
included access to financial assistance, advanced
arguments.
technology, favorable trade policies and diplomatic
support. These measures have empowered PSU to Ans : OD 2024

expand internationally, explore new markets and Yes, I agree with the statement. To enhance
strengthen the Indian economy by earning foreign efficiency, infuse professionalism and enable
exchange, creating employment opportunities and Public Sector Undertakings (PSU) to compete
promoting overall economic development. effectively in the liberalized global environment,
the government identified profit-making PSU and
103. How does privatization lead to improvement in
granted them special status by classifying them as
the fiscal health of a country?
Maharatnas, Navratnas and Miniratnas.
Ans : SQP 2005 This classification provided these PSU with greater
(i) Privatize Loss-Making Enterprises : Loss- managerial and operational autonomy, allowing
making public sector undertakings (PSU) them to make key decisions independently.
burden fiscal resources. Privatization can Over the years, these Maharatnas, Navratnas
enhance managerial efficiency by reducing and Miniratnas have demonstrated remarkable
political interference and increasing performance and have established themselves as
investment and employment. market leaders in their respective sectors.
(ii) Retain Welfare-Oriented PSU : PSU
106. “India is often called as ‘Outsourcing Destination’
established for critical infrastructure or
of the world. Discuss the prime reasons for this
public welfare should not be privatized,
name given to India.
even if incurring losses, as privatization may
compromise accessibility and social benefits. Ans : SQP 2020

(iii) Preserve Profit-Making PSU : Profitable PSU

Outsourcing, a growing business practice, is a
provide essential government revenue for
significant outcome of the globalization process.
investments and expenditures, making their
It involves companies hiring regular services from
retention critical for economic stability.
external sources, often from other countries, for
Thus, privatization should focus on non-core,
tasks that were previously performed internally,
under performing PSU while preserving essential
such as legal advice, computer services, advertising
and profitable ones.
and more. Many multinational corporations,
104. Strategic sale of a public sector undertaking as well as smaller companies, outsource their
and minority sale of their shares are methods of services to India due to the availability of skilled
disinvestment. Explain. manpower at lower costs, offering a balance of
afford-ability, skill and accuracy.
Ans : COMP 2011

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CH 8 : LIBERALISATION, PRIVATISATION AND GLOBALISATION

Impact of Economic Reforms on Agriculture : Additionally, globalization has led to cultural

(i) Improved Market Access : Reforms created erosion in Indian society. Economic prosperity
more efficient and transparent markets, has overshadowed other life values, with a
enabling farmers to secure better prices and growing emphasis on independence and material
ensuring agribusinesses had reliable raw wealth, often at the expense of familial and social
material supplies. responsibilities. Traditional virtues like loyalty to
(ii) Inflationary Pressures : A shift toward cash family and society, once central to Indian culture,
crops and subsidy removal led to increased are being discarded in favor of materialistic
food grain prices, raising production costs pursuits, signaling a shift away from the country’s
and negatively impacting the agricultural cultural roots.
sector.
(iii) Liberalized Imports : Reduced import duties 123. Explain any three criticisms of NEP.
under WTO commitments forced small or
farmers to compete with foreign producers. “All that glitters is not gold”. There is a negative
Traditional farming methods struggled side to the story of NEP as well. Justify the
against international competition, adversely statement by giving arguments in support of your
affecting marginal farmers. answer.
Impact of Economic Reforms on Industry : or
(i) Slowdown in Growth : Industrial growth “Industrial sector performed poorly in the
slowed due to factors like declining demand, economic reform period.”
cheaper imports and inadequate infrastructure Elucidate the given statement.
investment. Ans : OD 2024
(ii) Increased Competition : Globalization
The economic reforms introduced in India since
brought greater inflows of goods and capital
1991 have been criticized for their inability
from developed countries, compelling
to address key issues effectively. The major
domestic industries to improve quality and
limitations of these reforms are as follows :
competitiveness.
1. Reforms in Agriculture :
(iii) Export Restrictions : Quota restrictions
Limited GDP Contribution : Growth in GDP
on Indian textile exports were removed
has largely been driven by the secondary and
domestically, but some developed countries,
tertiary sectors, with agriculture lagging.
like the USA, retained restrictions on Indian
textile imports. Reduced Public Investment : Declining
Despite these challenges, the reforms investment and increased input costs made
stimulated overall production, meeting Indian farmers uncompetitive globally.
domestic demand and creating a marketable Impact of WTO Policies : Policies such as
surplus. India emerged as a successful reduced import duties, removal of minimum
exporter of auto parts, engineering goods, IT support prices and lifting of quantitative
software and textiles. restrictions increased international
competition, adversely affecting farmers.
122. Explain how the LPG policies have eroded our Shift to Cash Crops : Export-oriented
culture and spread consumerism in our economy strategies caused a shift from food grains
and society. to cash crops, leading to higher food grain
prices.
Ans : COMP 2018
2. Low Industrial Growth :
The spread of MNC in India, as a result of the LPG Cheaper Imports : Globalization led to an
policies, has significantly contributed to the rise of influx of cheaper imports, reducing demand for
consumerism. The availability of global brands has domestic goods and increasing competition.
encouraged extravagant spending, often beyond Inadequate Infrastructure : Poor
individual financial means. Adopting the Western infrastructure, including unreliable power
culture of spending through borrowing, Indian supply, hindered industrial growth.
society is witnessing an expansion in market size
Non-Tariff Barriers : Developed countries, like
for traders and manufacturers. However, this
the USA, retained import quotas on Indian
trend has increased the financial vulnerability of
textiles, limiting exports.
households as consumers.

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(iii) Favorable Government Policies : The Indian 112. Are bilateral trade agreements different from
government supports outsourcing with multilateral trade agreements? Who facilitates
lucrative incentives such as low tax rates, these agreements?
tax holidays and other business-friendly
Ans : SQP 2013
measures, making the environment conducive
for MNC to outsource operations. Bilateral Trade Agreements refer to agreements
between two countries aimed at promoting trade
110. The benefit of being a member country of the and economic cooperation by reducing trade
WTO is limited for countries like India. Why? barriers like tariffs and import quotas.
Ans : FOREIGN 2006 Multilateral Trade Agreements, on the other
The World Trade Organization (WTO) aims hand, involve multiple countries coming together
to facilitate international trade among its to establish trade rules and reduce trade barriers
member countries in an open, uniform and non- collectively, fostering international cooperation
discriminatory manner. However, its focus is on and market access among participants.
the free movement of capital rather than labor. The World Trade Organization (WTO)
This primarily benefits multinational corporations plays a crucial role in facilitating both bilateral
(MNC), which are predominantly based in and multilateral trade agreements. It promotes
developed nations, allowing them to access free trade by encouraging the reduction of tariff
markets in less developed countries like India. barriers and the elimination of non-tariff barriers,
Free movement of labor, which could have benefited ensuring smoother trade flows and cooperation in
underdeveloped nations by creating economic the global market.
opportunities abroad, is not supported by the WTO. As
113. “Indian economy has certain advantages, which
a result, Indian labor is restricted from freely accessing
have made it a favorite outsourcing destination.”
labor markets in developed countries. Additionally,
Do you agree with the given statement? Give
while developing nations are required to open their
valid reasons in support of your answer.
markets to goods and services from developed nations,
they often face barriers when attempting to access the Ans : OD 2024
markets of developed countries. This imbalance has
Yes, I agree with the statement. Outsourcing, a
led to a sense of exploitation and unfairness among
rapidly growing business practice, is a significant
developing countries.
outcome of globalization. It involves companies
111. How have LPG policies centralized the growth hiring regular services from external sources, often
process in urban areas? from other countries, due to the cost advantage.
These services can include legal advice, computer
Ans : OD 2016
services, advertising and more.
The LPG policies (Liberalization, Privatization India has become a preferred outsourcing
and Globalization) have significantly concentrated destination for multinational corporations and
the growth process in urban areas. Multinational even smaller companies because of its ability
companies (MNC) prefer establishing their to provide these services at a lower cost while
operations in urban regions due to the availability maintaining a reasonable degree of skill and
of better infrastructural facilities, such as accuracy. Key services outsourced to India
transportation, communication and energy, as include voice-based business processes (BPO),
well as skilled labor and access to markets. record-keeping, accountancy, banking services,
Operating from urban areas provides these film editing and even teaching. In the post-reform
companies with convenient access to both tangible era, India’s low-wage rates and abundant skilled
resources (like physical infrastructure) and manpower have established it as a global hub for
intangible resources (like advanced services and outsourcing.
networks). However, this urban-centric growth
has widened the rural-urban divide, exacerbating 114. Though Outsourcing is good for our economy,
economic dualism (disparities in income and the developed countries of the world are feeling
development) and reinforcing social dualism threatened by Outsourcing of work to India.
(inequalities in living standards and opportunities Why?
between rural and urban populations). Ans : OD 2015

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CH 8 : LIBERALISATION, PRIVATISATION AND GLOBALISATION

Key services outsourced to India include voice- (iv) Limited Infrastructure Development : The
based business processes (BPO), record-keeping, private sector often avoids investing in
accountancy, banking services, film editing and economic and social infrastructure due to low
even teaching. In the post-reform period, India returns, impacting long-term growth.
has emerged as a global outsourcing hub, driven
by its competitive wage structure and pool of 108. ‘It is the process of hiring regular service from
skilled professionals. external sources, mostly from other countries,
which was previously provided internally or from
107. Critically evaluate the policy of privatization as within the country.’
part of the New Economic Policy. Identify the concept discussed in the given para.
State three advantages of the concept so identified.
Ans : DELHI 2014

The purpose of privatization is to enhance Ans : COMP 2019

financial discipline and promote modernization The concept highlighted in the paragraph is
by encouraging private sector participation ‘Outsourcing.’ Outsourcing refers to the business
in economic development through their practice of contracting external parties to perform
administrative efficiency. services or produce goods that were traditionally
Privatization has benefited the economy in several handled in-house by a company’s own employees.
ways : In the context of globalization, outsourcing often
(i) Improved Management Efficiency : involves hiring services from external sources,
Entrepreneurs were empowered to make quick frequently from other countries, for tasks that
decisions without government interference or were previously managed internally.
unnecessary formalities. Key advantages of outsourcing include :
(ii) Financial Discipline : Privatization ensured a (i) Focus on Core Functions : By outsourcing
steady supply of funds, overcoming the delays non-core activities such as administrative
that characterized the pre-1991 administrative and back-office operations, organizations can
setup. concentrate on their primary functions and
(iii) Reduction in Fiscal Deficit : It reduced the strategic goals.
government’s financial burden by cutting (ii) Cost Savings : One of the most significant
non-development expenditures and supported benefits of outsourcing is cost reduction.
revenue generation through profits and taxes. Lower operational and labor costs, along with
(iv) Increased Competitiveness : It fostered reduced overhead expenses, make outsourcing
competition in both domestic and an appealing option.
international markets, improving overall (iii) Operational Efficiency : When certain
economic performance. functions become difficult to manage
(v) Rise in Foreign Direct Investment (FDI) : By internally, outsourcing provides an effective
improving financial discipline, privatization solution, ensuring smoother operations and
encouraged greater inflow of FDI, supported better control.
by private sector investments.
(vi) Production Diversification : The private sector 109. What advantages does India enjoy which makes it
efficiently responded to consumer demands, a favourite outsourcing destination?
diversifying and expanding production while Ans : DELHI 2017
promoting consumer sovereignty.
India has emerged as a preferred outsourcing
However, privatization also brought certain
destination for most multinational corporations
drawbacks :
(MNC) due to several factors :
(i) Neglect of Social Welfare : Private entities
(i) Availability of Affordable Labor : Wage rates
focus on profit maximization, often at the
in India are significantly lower compared to
cost of social interests.
developed countries, making it an attractive
(ii) Monopolistic Tendencies : It risks creating
option for cost-effective labor.
private monopolies, leading to concentration
(ii) Vast Skilled Workforce : India boasts a large
of power in a few hands.
pool of skilled manpower that is readily
(iii) Unemployment Concerns : To cut costs, the
available, providing high-quality services
private sector may resort to retrenchment,
across various sectors.
hindering the goal of full employment.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 347

(iii) Outcome of Trans formative Policies : With the introduction of economic reforms under
Globalization results from policies designed the LPG policy in 1991, the Reserve Bank of
to promote greater interdependence and India (RBI) transitioned from being a regulator
integration, as seen in how technological to a facilitator of the financial sector. This shift
advancements in India are influenced by granted greater autonomy to the financial sector,
events happening globally. encouraging the free play of market forces to
(iv) Transcending Boundaries : It creates networks rejuvenate the sector.
and activities that transcend economic, A notable change was that commercial banks
social and geographical barriers, offering were allowed to determine their own interest-rate
opportunities for developing countries to structure, enabling them to function with greater
access global markets and enabling their flexibility and competitiveness. This reform
industries to emerge as significant players on significantly boosted institutional funding for
the international stage. production units in the economy, contributing to
enhanced economic activity and growth.
118. Market driven economic reforms have widened the
economic disparities among nations and people. 120. Discuss economic reforms in the light of social
How? justice.
Ans : SQP 2021 Ans : DELHI 2010

The impacts of economic reforms, privatization Market-driven economic reforms have widened
and globalization can be better understood economic disparities among nations and
through the following observations : individuals. This can be seen through the following
(i) Growth of Monopoly Power : Privatization observations :
has concentrated monopoly power in the (i) Growth of Monopoly Power : Privatization
hands of large business houses, leading to has concentrated economic power in the
significant inequalities in income and wealth hands of large business houses, exacerbating
distribution. inequalities in income and wealth distribution.
(ii) Adverse Effects on Government Employees : (ii) Impact on Government Employees :
Privatization has caused job losses for many Privatization has adversely affected
government employees, negatively affecting government employees, often leading to job
their livelihoods and job security. losses and reduced job security.
(iii) Challenges for Domestic Workers and (iii) Challenges for Domestic Industries :
Producers : Globalization has marginalized Globalization has posed challenges for
domestic workers and producers, as domestic industries, as their products often
their products often fail to compete with fail to compete with international standards,
international standards. discouraging their growth.
(iv) Unequal Benefits of Globalization : (iv) Unequal Benefits of Economic Reforms :
Globalization has been primarily a strategy The benefits of economic reforms have been
for developed countries to expand their skewed, favoring high-income groups and
markets in developing nations, while the concentrating growth in selected areas like
latter have not equally benefited from access the service sector, while vital sectors such as
to developed markets. agriculture and industry have lagged behind.
(v) Skewed Economic Growth : Economic reforms (v) Jobless Growth : While GDP growth rates
have largely benefited high-income groups, have increased during the reform period,
with growth concentrated in specific areas this growth has not translated into adequate
like the service sector, while critical sectors employment opportunities, earning the term
such as agriculture and industry have been “jobless growth.”
left behind.
121. Elaborate how the economic reforms process of
119. “New Economic Policy 1991 altered the role of India impacted the following :
Reserve Bank of India (RBI) in the economy.” (i) Agriculture sector
Explain. (ii) Industrial sector
Ans : OD 2024 Ans : OD 2024

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CH 8 : LIBERALISATION, PRIVATISATION AND GLOBALISATION

interest rates, stimulating economic activity. collection and distribution.

5. Improved Fiscal Position : Higher tax 4. Imports of Goods : Imports are treated
collections will strengthen the government’s as inter-state supplies, attracting IGST
fiscal health, enabling better public spending. in addition to applicable customs duties,
6. Promotion of the Formal Sector : With more ensuring uniform taxation.
transactions moving into formal channels, 5. Imports of Services : Import of services is also
demonetization supports the growth and classified as inter-state supplies and is subject
integration of the formal economy. to IGST, maintaining consistency in taxation.
6. Tax Rate Determination : Rates for CGST,
134. Discuss the various objectives which were aimed SGST/UTGST and IGST are mutually
at by the introduction of Goods and Services Tax decided by the Centre and the States under
in the field of indirect tax reforms. the guidance of the GST Council (GSTC).
Ans : 2014 These features reflect GST’s aim to simplify and
unify India’s indirect tax structure, enhancing
The introduction of the Goods and Services Tax
efficiency and compliance.
(GST) aims to achieve several objectives :
1. Elimination of Multiple Taxes : GST merges 136. GST has been widely heralded for the many
numerous central and state taxes into a single benefits that have accrued to the economy,
tax structure. This reduces cascading effects common man and industry and trade. Discuss
(double taxation) and establishes a unified some of them.
national market, simplifying the tax system.
2. Reduction in Tax Burden : GST aims to Ans : COMP 2019

lower the overall tax burden on goods and The introduction of GST has brought several
services, leading to reduced prices and directly significant benefits :
benefiting the common man. 1. Fostering Economic Growth : By subsuming
3. Boost Economic Growth : By enhancing the major central and state taxes, GST reduces
competitiveness of Indian products in both the cost of locally manufactured goods and
domestic and international markets, GST services, increasing their competitiveness in
contributes to economic growth and faster global markets. This boosts Indian exports,
GDP expansion. economic activities, GDP and employment
4. Improved Tax Compliance : GST simplifies generation.
the tax structure and compliance process. 2. Ease of Doing Business : Under the pre-
Online availability of services like registration, GST regime, multiple indirect taxes required
returns and payments ensures higher separate registrations. GST introduced
compliance and better transparency. a unified tax structure and automated
These objectives position GST as a key procedures for registration, simplifying
reform for streamlining taxation and fostering operations for businesses.
economic development. 3. Attracting Foreign Investment : GST
harmonized the tax base and administrative
135. Discuss some of the salient features of GST. procedures across the nation, boosting foreign
Ans : SQP 2011 investment and promoting the ”Make in
India” initiative.
Salient Features of GST :
4. Ensuring Better Tax Compliance : A
1. Destination-Based Taxation : GST follows the
transparent set-off chain under GST
principle of destination-based consumption
has widened the tax base and improved
taxation, replacing the earlier origin-based
compliance, ensuring efficient revenue
taxation system.
collection.
2. Dual GST Model : Both the Centre (CGST)
5. Reducing Cost of Goods : By preventing
and the States (SGST/UTGST) levy GST
cascading taxes (tax on tax), GST lowers
simultaneously on a common tax base,
production costs, making products cheaper,
ensuring shared revenue.
benefiting consumers and boosting aggregate
3. Integrated GST (IGST) : For inter-state
demand in the economy.
supply of goods or services, IGST is levied
6. Increasing Manufacturing Activities :
by the central government to streamline tax
Reduced tax burdens under GST lower

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 349

3. Ineffective Fiscal Policies : India became a global outsourcing hub due to

Unrealized Revenue Growth : Tax reductions its low wage rates and skilled manpower.
failed to generate higher revenue due to 2. Growth of Service Sector : The share of
limited compliance. services in India’s GDP grew significantly
Restricted Public Expenditure : Social during the reform period.
sector spending was constrained by economic Liberalization opened banking, insurance,
reforms. communication and transport to private
Tax Incentives for Foreign Investors : These participation, driving sectoral growth.
reduced potential tax revenue. 3. Consumer Sovereignty : Indian consumers
Lower Tariff Revenues : Reductions in tariffs now enjoy a wider variety of goods and
and customs duties limited government services from MNC, increasing their welfare
income. and choice.
4. Unbalanced Growth : Growth was 4. Check on Inflation : Inflation declined from
concentrated in select service sectors like IT, 17% in 1990-91 to 2.9% in 2017-18, indicating
telecommunications and finance, neglecting price stability.
agriculture and industry, which support the 5. Increase in Foreign Direct Investment (FDI)
livelihoods of millions. and Foreign Exchange Reserves :
5. Dominance by MNC : Multinational FDI inflows and foreign exchange reserves
corporations dominate the Indian market, grew due to :
exploiting it for profits while marginalizing Devaluation of Rupee : A deliberate reduction
local businesses. in rupee value to boost exports.
6. Jobless Growth : Despite higher GDP growth
Increase in Foreign Investment : Attracted by
rates, employment generation has been
liberal policies.
inadequate, leading to “jobless growth”,
Full Convertibility of Rupee : Enabled free
failing to alleviate poverty effectively.
exchange of rupees for trade purposes.
7. Disinvestment Issues : PSU assets were
6. Competitive Environment : The entry of
undervalued and sold, resulting in losses
MNC created competition in the domestic
for the government. Proceeds were used to
market, offering better quality and variety in
address fiscal deficits rather than developing
products like refrigerators, cars and ACs at
PSU or social infrastructure.
competitive prices.
8. Increased Inequalities : Globalization
7. Recognition as an Emerging Economic Power :
benefited high-income groups, widening
India is now globally acknowledged as a rising
disparities in income and consumption while
economic power, boosting investor confidence
leaving marginalized populations behind.
and international economic ranking.
9. Spread of Consumerism : The presence of MNC
and global brands promoted consumerism, 8. Promotion of Exports : Economic reforms led
encouraging people to spend beyond their to a surplus in production, allowing India to
means, leading to financial vulnerabilities. meet domestic needs and export goods like
These limitations highlight the uneven impact auto parts, engineering goods, IT software
of economic reforms, underscoring the need for and textiles.
balanced growth strategies that address the needs 9. Economic Growth : GDP growth improved
of all sectors and populations. from 5.6% (1980-91) to 8.2% (2007-12),
reflecting enhanced economic performance.
124. “Owing to LPG policies, the Indian economy is These achievements demonstrate the
on the path of a growth momentum.” Explain. transformative impact of LPG policies on India’s
or economy.
How have economic reforms benefited the Indian
economy? 125. What was the purpose of launching the Bhim app
by the Government of India ?
Ans : OD 2008
Ans : SQP 2001
Achievements of the LPG Policies :
1. Outsourcing : Organizations began contracting BHIM (Bharat Interface for Money) is a mobile
out certain activities to third parties. payment application developed by the National
Payment Corporation of India (NPCI) based

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CH 8 : LIBERALISATION, PRIVATISATION AND GLOBALISATION

Yes, outsourcing is beneficial for India. Many Globalization refers to the process of integrating
foreign companies outsource their services to an economy with the global economy, involving
Indian firms due to the availability of affordable the free movement of capital, goods and workforce
labor. India, with its vast pool of IT professionals, across borders. It promotes foreign trade and
has effectively capitalized on this opportunity. facilitates the movement of labor and capital
Outsourcing has contributed to India’s economy among nations. Several policy measures have been
in the following ways : implemented to globalize the Indian economy :
(i) Employment Generation : It has created (i) Increase in Foreign Investment Equity Limit
numerous job opportunities for the workforce. : The equity limit for foreign investment
(ii) GDP Contribution : Outsourcing has was raised from 40% to 51%. Additionally,
significantly added to the country’s GDP. in 47 high-priority industries, foreign direct
(iii) Inflow of Foreign Exchange : The inflow of investment (FDI) up to 100% has been
funds from foreign companies has boosted permitted.
India’s foreign reserves. (ii) Removal of Quantitative Restrictions : From
(iv) Technical Know-How : It has facilitated the 2001, all quantitative restrictions on imports
exchange and adoption of advanced technical were withdrawn, aligning with India’s WTO
expertise. commitments.
(v) Improved Standard of Living : Higher- (iii) Reduction in Tariffs : Customs duties and
paying jobs created through outsourcing have tariffs on imports and exports were reduced
enhanced the quality of life. and modified to enhance competitiveness and
However, developed countries view outsourcing to promote international trade.
India as a threat. It has caused unemployment (iv) Simplified Technology Agreements : The
in their nations and redirected funds, narrowing government eased foreign collaborations,
income disparities between countries. especially those involving advanced
technologies, to encourage technological
115. Briefly explain the factors responsible for the high exchange.
growth of service sector. (v) Rupee Convertibility : The rupee was made
Ans : FOREIGN 2023 convertible for trade and subsequently for
current account transactions, allowing the free
(i) Economic Reforms : The liberalization and exchange of foreign currencies and integrating
economic reforms introduced under the New India further into the global economy.
Economic Policy of 1991 reduced restrictions
on the movement of international finance 117. Although, globalization generally means
and technology. This facilitated the inflow of integration of the economy of the country with
foreign capital and technology, fostering the the world economy, it is a complex phenomenon.
growth of the service sector. Elucidate.
(ii) Availability of Cheap and Skilled Labour :
Ans : DELHI 2011
India’s abundant supply of skilled and cost-
effective manpower made it a profitable Globalization is a direct outcome of the policies
destination for developed countries to of liberalization and privatization, aimed at
outsource their services, boosting the service transforming the world into a unified whole by
sector. fostering a border-less world. It promotes free
(iii) Growth of the IT Sector : Advancements and interaction among nations in various domains
innovations in information technology enabled such as trade, technology, loans, investments and
Internet usage, improved communication outsourcing.
and facilitated electronic transactions across Key aspects of globalization include :
borders, further driving the expansion of (i) Increasing Interaction and Integration :
India’s service sector. Globalization is a system characterized by
heightened interaction, growing economic
116. What is Globalization? What steps have interdependence and expanding economic
been taken by the Indian government for its integration across nations.
implementation? (ii) Economic Integration : It facilitates the
integration of a country’s economy with the
Ans : COMP 2020
global economy, enhancing interconnectedness.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 351

GST is consumption-based, meaning taxes are taxation enhance the ease of doing business and
allocated to the state where goods or services are attract foreign investment. Additionally, reduced
consumed, not the state where they are produced. transaction costs associated with the previous
This approach ensures fairness in tax distribution complex tax regime foster industrial growth and
and simplifies the tax structure. economic efficiency, positioning GST as a pivotal
reform for economic progress.
130. Discuss the short-term impact of demonetization.
132. What was the motive behind undertaking the
Ans : OD 2002
extreme step of demonetization?
The notable short-term impacts of demonetization
are as follows : Ans : DELHI2009

1. Slowdown in Growth : Reduced liquidity The recent demonetization initiative by the

led to a decline in both demand and supply, Government of India aimed to achieve the
slowing economic growth. following objectives :
2. Reduction in Black Money : Many black 1. Curbing Corruption : Targeting illicit
money holders were brought into the tax net, activities and penalizing wealth acquired
leading to a visible decline in unaccounted through corruption.
wealth. 2. Promoting Digitalization : Encouraging a
3. Reduced Money Supply : A temporary shift from cash-based transactions to formal
reduction in money supply occurred until new digital payment systems, fostering a cashless
currency notes were fully circulated. economy.
4. Increase in Bank Deposits : A sharp rise in 3. Counterfeit Currency Control : Reducing the
bank deposits and savings strengthened the circulation of fake currency and enhancing
financial system. the integrity of the monetary system.
5. Higher Government Revenue : Increased tax 4. Taxing Unaccounted Wealth : Bringing
disclosures boosted government revenue, unaccounted private wealth into the formal
while demonetized notes were accepted for economy, ensuring greater transparency and
tax payments and arrears clearance. curbing tax evasion through restricted cash
6. Decline in Indirect and Corporate Taxes transactions and increased digital payments.
: Economic slowdown led to a reduction in 5. Channelizing Savings : Encouraging informal
these tax collections. savings to flow into the formal banking
7. Falling Price Levels : Demand contraction system. Deposited funds provide banks with
caused a decline in the overall price level of resources to offer more loans at lower interest
goods. rates, stimulating economic activity.
8. Negative Impact on GDP : Reduced cash
transactions negatively affected GDP 133. Highlight some of the economic advantages of
formation. adopting the policy of demonetization.
9. Increased Demand for Digital Payments : Ans : FOREIGN 2005
Adoption of alternative payment modes, such
Demonetization is expected to yield several long-
as digital platforms, saw a significant rise.
term economic benefits for the economy, including:
131. How will GST promote foreign investment and 1. Increase in GDP : The widening of the tax net
enhance the ease of doing business? will enhance revenue collection, supporting
higher economic growth.
Ans : COMP 2003
2. Control of Real Estate Sector : By targeting
The introduction of the Goods and Services Tax cash-based and undocumented transactions,
(GST) on July 1, 2017, is a landmark reform in demonetization can help reduce property
India’s tax system. GST aims to create a unified prices and bring transparency to the sector.
national market by replacing multiple indirect 3. Crackdown on Black Money : Discouraging
taxes with a single, streamlined tax structure. investments in physical assets like gold and
By removing tax barriers and eliminating the real estate will sustain efforts to reduce black
cascading effect of taxes, GST reduces the cost money circulation.
of production, encouraging increased industrial 4. Lower Interest Rates : Banks, flush with
output. Lower production costs and simplified surplus funds, can extend credit at lower

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CH 8 : LIBERALISATION, PRIVATISATION AND GLOBALISATION

Indian industries, several Indian industries have (iii) (d) C, D, A, B

substantially increased their sales and also profits. (iv) (c) Removal of export duties.
The increase in competition is reflected in the
increase in marketing costs and fall in profitability, 139. Read the para given below and answer the
but total profits have increased, due to higher questions that follow :
sales. Another indication of increasing competitive The strategy of reforms introduced in India in
strength of Indian companies is the rise in July 1991 presented a mixture of macroeconomic
their export intensity, i.e., the ratio of exports stabilization and structural adjustment. It was
to total sales. The growth impulse provided by guided by short-term and long-term objectives.
the liberalization has increased competition in Stabilization was necessary in the short-run to
the domestic market and also larger business restore balance of payments equilibrium and
opportunities in foreign markets. to control inflation. At the same time changing
the structure of institutions themselves through
(i) Value Added Taxes one of the taxes eliminated reforms was equally important from a long term
after implementation of goods and services point of view.
tax. The new government moved urgently to implement
a programme of macroeconomic stabilization
(ii) Trade between more than two countries is through fiscal correction. Besides this, structural
known as : reforms were initiated in the field of trade,
(a) Bilateral trade industry and the public sector.
(b) multilateral trade The objective of these reforms was to bring about
(c) foreign trade rapid and sustained improvement in the quality
(d) both (a) and (b) of life of the people of India. Central to this goal
was the rapid growth in incomes and productive
(iii) Identify the correct sequence of alternatives
employment. Such growth required investment : in
given in Column II by matching them with
farms, in roads, in irrigation, in industry, in power
respective terms in Column I.
and, above all, in people. And this investment
Column I Column II must be productive. Successful and sustained
1. Establishment of A. 2017 development depends on continuing increases in
general agreement the productivity of our capital, land and labour.
on trade and tariff (i) The World Trade Organization was established
2. Establishment B. 2016 as a successor organization to (GATT).
of World Trade (ii) _____ Measures are long term measures
Organization aiming at improving efficiency of the
3. Implementation of C. 1948 economy and increasing its international
GST competitiveness.
4. Demonetization by D. 1995 (a) Structural reform measures
Indian government (b) Stabilization measures
(c) Both (a) and (b)
(a) B, A, D, C (d) Neither (a) nor (b)
(b) C, A, D, B
(c) D, A, B, C (iii) Sale of less than 49% stake of a public sector
(d) C, D, A, B undertaking to the private sector is called as
_____ sale.
(iv) Which of the following is not a tax reform? (a) Strategic
(a) Simplification of the tax procedures. (b) Minority
(b) Devaluation of rupee. (c) Portfolio
(c) Removal of export duties. (d) Direct
(d) Both (b) and (c).
(iv) Match the following items given in Column I
Ans : OD 2015
with those in Column II to choose the correct
(i) True pair of statement from the options given
(ii) (b) multilateral trade below :

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 353

prices, encouraging consumption. Higher (ii) Which of the following is not referred to as
consumption stimulates production, privatization?
supporting industrial growth. (a) Transferring of ownership of public sector
These benefits highlight GST’s role in enterprises to private sector.
streamlining taxation and fostering economic (b) Disinvestment in public sector enterprises.
development (c) Expansion of public sector.
(d) Strategic sale of public sector enterprises
to the private sector .

CASE BASED QUESTION (iii) The financial sector in India is regulated by

the World Bank. (True/False)

(iv) Identify and match the public sector

137. Read the para given below and answer the
undertakings in Column I with the special
questions that follow :
status granted to them by the government
Disinvestment means sale or liquidation of assets
shown in Column II.
by the Government, usually Central and State
public sector enterprises, projects, or other fixed Column I Column II
assets. The Government undertakes disinvestment
1. Steel Authority of A. Navratnas
to reduce the fiscal burden on the exchequer, or
India
to raise money for meeting specific needs, such as
to bridge the revenue shortfall from other regular 2. MTNL B. Miniratnas
sources. In some cases, disinvestment may be done 3. Airport Authority C. Maharatnas
to privatize assets. However, not all disinvestment of India
is privatization.
(a) 1-B, 2-A, 3-C
Some of the benefits of disinvestment are that
(b) 1-A, 2-B, 3-C
it can be helpful in the long-term growth of the
(c) 1-C, 2-A, 3-B
country; it allows the government and even the
(d) 1-C, 2-B, 3-A
company to reduce debt. Disinvestment allows a
larger share of PSU ownership in the open market, Ans : DELHI 2017
which in turn allows for the development of a (i) (a) Discouraging private ownership.
strong capital market in India. The Government, (ii) (c) Expansion of public sector.
whenever it so desires, may sell a whole enterprise, (iii) False
or a majority stake in it, to private investors. (iv) (c) 1-C, 2-A, 3-B
In such cases, it is known as privatization, in
which the resulting ownership and control of the 138. Read the para given below and answer the
organization does not rest with the government. questions that follow :
The Government usually avoids doing this. The Liberalization has tremendously expanded the
Government mostly retains more than half of the scope of the private industry in India. Prior to
stake in the public sector enterprise so that the liberalization, 17 of the most important industries
control remains in its hands. But when it does were exclusively reserved for the public sector.
not, then the ownership is transferred to the Later many of the industries were liberalized.
private sector, which results in privatization. It is Industries in the private sector faced several
also known as majority disinvestment or complete regulations like Industrial Licensing, clearance
privatization wherein 100 per cent control goes to from MRTP Act and Foreign Exchange restrictions
the private sector. etc. which would hinder private investments.
With the liberalization policy, these restrictions
(i) Following is not an objective of disinvestment: were removed, offering large scope for the
(a) Discouraging private ownership. expansion of the private sector. The liberalization
(b) Maintaining and promoting competition policy of the Government has strengthened the
in the market. performance of Indian industries by becoming
(c) Improving public finances. more competitive. Contrary to the fear expressed
(d) Funding growth and development by several people that liberalization would result
programs. in foreign competition and strangling down of

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CH 8 : LIBERALISATION, PRIVATISATION AND GLOBALISATION

on the Unified Payments Interface (UPI). It 128. ‘In November 2016, the Indian government
was launched on 30th December 2016 as part of withdrew all `500 and `1000 banknotes of the
the government’s initiative to promote digital Mahatma Gandhi series from circulation.’
payments and move towards a cashless economy, Identify the concept discussed in the given
especially in the wake of the 2016 Indian banknote statement. State its objectives.
demonetization.
Ans : SQP 2019
BHIM facilitates e-payments directly through
banks, allowing users to transfer and receive The concept discussed is ‘Demonetization’, which
money seamlessly using their mobile phones, refers to the act of withdrawing a currency unit’s
enhancing convenience and promoting financial status as legal tender. It involves removing the
inclusion in the digital era. current currency notes or coins from circulation
and often replacing them with new ones.
126. How has demonetization helped in bringing down Objectives of Demonetization :
the interest rates in the economy? (i) Curb Illegal Activities : Aimed at tackling
Ans : FOREIGN 2004
unethical business practices such as black
marketing, food adulteration, the sale of
The widening of the tax net following counterfeit goods, human trafficking and the
demonetization has led to increased tax collections, smuggling of gold and drugs.
thereby enhancing the availability of funds in (ii) Combat Fake Currency and Terror Funding
the banking system. With more funds at their : Designed to eliminate fake currency and
disposal, banks can offer loans at reduced interest disrupt the flow of funds for terrorism, arms
rates. This, in turn, stimulates economic activities and ammunition.
by encouraging investments and consumption. (iii) Address Black Money and Corruption : Large
Additionally, demonetization has effectively cash reserves of unaccounted black money
brought a significant portion of unaccounted lose their value, encouraging transparency
money into the formal financial system, and reducing corruption.
channelizing savings through banks and other By targeting these issues, demonetization serves
formal institutions. This integration strengthens as a significant measure to fight black money,
the economy by increasing transparency, corruption and illegal activities, promoting a
expanding the financial system and fostering cleaner economy.
sustainable economic growth.
129. ‘From 1st July 2017, India adopted a dual GST
127. Discuss some of the benefits that will accrue to (Goods and Service) tax model.’
trade and industry due to implementation of In the light of the given statement discuss the
GST. dual GST model adopted by the country.
Ans : DELHI 2007 Ans : COMP 2019
The Goods and Services Tax (GST) has streamlined The Goods and Services Tax (GST) is a value-
the tax structure by subsuming major central and added tax imposed on most goods and services for
state taxes. The setting off of input purchases domestic consumption. It is a comprehensive tax
and the phasing out of Central Sales Tax have covering the manufacture, sale and consumption
significantly reduced the cost of production. This of goods and services across the nation, with
reduction enhances the competitiveness of Indian taxation occurring at each value-added stage.
goods and services in the international market, GST addresses the shortcomings of the previous
providing a boost to Indian exports. tax system by providing a unified structure.
Additionally, GST has introduced simplified India has adopted a dual GST model, where
and automated procedures for processes like taxation is managed by both the Union and State
registration, returns, refunds and tax payments. Governments.
These improvements have brought greater Intra-State Transactions : Levied with Central
transparency, efficiency and certainty to the GST (CGST) by the central government and
taxation system, making compliance easier for State GST (SGST) by the state government.
businesses and fostering a more robust economic Inter-State Transactions and Imports : Subject to
environment. Integrated GST (IGST), collected by the central
government.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 355

Column I Column II (ii) Why is globalization opposed by developed

countries.
1. Foreign exchange A. Reduction in (a) It causes unemployment in their own
Reform tax rates countries.
2. Land Reform B. Devaluation of (b) It results in outflow of funds.
rupee (c) It promotes their service industry.
(d) Both (a) and (b)
3. Financial Sector C. Origin of
Reform private banks (iii) Following is not a factor responsible for the
4. Tax Reform D. Exemption of high growth of the service sector.
industries from (a) Cheap labour and good skills
licensing (b) Jobless growth
(c) Growth of IT sector
(a) 1-A (b) 2-B
(d) Economic reforms
(c) 3-C (d) 4-D
Ans : FOREIGN 2006 (iv) The barriers which are imposed on the
quantity of imports and exports are known as
(i) True
non-tariff barriers.
(ii) (c) Both (a) and (b)
(iii) (b) Minority Ans : SQP 2013
(iv) (c) 3-C (i) (d) Both (a) and (b)
(ii) (d) Both (a) and (b)
140. Read the para given below and answer the
(iii) (b) Jobless growth
questions that follow :
(iv) True
Globalization is the word used to describe the
growing interdependence of the world’s economies, 141. Read the following text carefully and answer
cultures and populations, brought about by cross- the given questions on the basis of the same and
border trade in goods and services, technology common understanding :
and flows of investment, people and information. India urged the World Trade Organization
Countries have built economic partnerships to (WTO) to relax rules to allow the country to
facilitate these movements over many centuries. export food grains from its public stocks to the
The wide-ranging effects of globalization are nations facing food crises. India can help, reduce
complex and politically charged. As with major food insecurity but there is hesitation on the
technological advances, globalization benefits part of the WTO, in relaxing its rules. India’s
society as a whole, while harming certain groups. Finance Minister said food, fuel and fertilizers are
Understanding the relative costs and benefits global public goods and ensuring access of these
can pave the way for alleviating problems while for developing and emerging economies is critical.
sustaining the wider payoffs. She also shared India’s experiences, including
Globalization is the web of relationships between robust gains in agriculture production, citizen
economies worldwide by way of international centric food security programmes and innovative
trade and investments. While the history of delivery mechanisms such as the One Nation one
globalization dates back to ancient times, the Ration Card Scheme.
modern era of globalization began in earnest in
the early nineteenth century. The opposite of (i) State and discuss any two objectives of World
economic globalization or free-market trade across Trade Organization.
borders is protectionism, an economic policy that (ii) Name any two steps taken by India to
attempts to protect domestic businesses from strengthen the food security.
foreign competition and labour markets, usually
Ans : DELHI 2023
by imposing trade barriers like tariffs.
(i) (a) One of the objectives of WTO is to
(i) Following is/are the benefit of globalization : establish a rule based trading regime
(a) Makes production more affordable. in which nations cannot place arbitrary
(b) Brings opportunities to poor countries. restriction on trade.
(c) Exploits cheaper labour markets (b) WTO aims at enlarging production and
(d) Both (a) and (b) trade of services to ensure optimum

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CH 8 : LIBERALISATION, PRIVATISATION AND GLOBALISATION

utilization of world resources.

WTO aims at conducting the international
trade among the member countries in an
open, uniform and non-discriminatory
manner. It focuses on the free movement
of capital across different nations (and not
on the free movement of labour). In fact,
free flow of capital serves the commercial
interest of multinationals (MNC) which
largely belong to the developed nations.
The MNC are able to find markets for
their products in less developed countries
like India. Free flow of labour, which
would have served the economic interests
of underdeveloped countries is not
permitted by WTO. Accordingly, Indian
labour does not have free access to the
labour market of development nations.
Also, developing countries are forced
to open up their markets for developed
countries but are not allowed access to
the markets of developed countries.
Therefore, developing countries feel
cheated.
(ii) Steps taken by India to strengthen the food
security are
(a) Introduction of citizen-centric food
security programmes.
(b) Introduction of innovative delivery
mechanisms such as One Nation One
Ration Card Scheme.

www.nodia.in

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 357

CHAPTER 9
HUMAN CAPITAL FORMATION IN INDIA

implies that basic education and basic health are

SUMMARY important in themselves for an individual in order
to lead a literate and healthy life irrespective of
their contribution to labour productivity.
1. HUMAN RESOURCE
Like any other resource (such as land or minerals, 3.1 Sources of Human Capital Formation
machines, buildings etc.), population is also a Human capital formation is achieved through
resource which is called human resource. Just as various investments that enhance the productivity
a country can turn physical resources like land and efficiency of individuals. These investments
into physical capital like factories, similarly, contribute significantly to the economic and social
it can also turn human resources like students development of a nation.
into human capital like engineers and doctors. 1. Investment in Education : Investment in
Investments in human beings (through education, education is one of the main sources of human
training, medical care, etc,) yields a return just capital formation. People become a resource
like investment in physical capital. only when investment is made in education’
2. Health Expenditure : This keeps workers
2. MEANING OF HUMAN CAPITAL
healthy and enables them to work for a longer
Human capital is a crucial factor in the economic period of time. It makes them contribute
growth and development of a nation. It emphasizes more to the country’s GDP as compared to a
the importance of investing in people to enhance sick person.
productivity and innovation. 3. Expenditure on giving on-the-iob-training :
(i) Human capital can be defined as the Expenditure regarding on-the-job-training is
knowledge, ability, skill and physical capacity also a source of human capital formation as it
of the people which helps them to produce results in increased labour productivity
more. 4. Expenditure on Migration : People migrate
(ii) The process of development of human capital from one place to another to find jobs that
is termed as human capital formation. bring them higher income. It involves cost of
(iii) Population becomes human capital when transport, higher cost of living in the migrated
investment is made in the form of education places and psychic costs of living in a strange
and health. Place.
(iv) Human capital is the stock of skills and 5. Expenditure on acquiring information : People
productive knowledge embodied in human also spend money to acquire information
beings. about the labour market and other markets
like education and health. For example,
3. HUMAN CAPITAL AND HUMAN DEVELOPMENT
people want to know about the level of wages
The two terms are similar but not the same. and salaries in different types of jobs.
Human capital considers education and health as a
means to increase labour productivity. According 3.2 Relationship between Human Capital and Economic
to it, investment in education and health is Growth
unproductive if it does not result in an increase It is difficult to establish a cause and effect
in output of goods and services. On the other relationship between growth of human capital and
hand, human development considers education economic growth. But statistics clearly show that
and health as integral to human well being. This economic growth (measured by real per capita

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CH 9 : HUMAN CAPITAL FORMATION IN INDIA

income) and human capital (measured by literacy 5. PROBLEMS IN HUMAN CAPITAL FORMATION IN INDIA
rate, infant mortality rate and life expectancy) India faces several challenges in the formation of
has grown simultaneously. In fact, growth in one human capital, which hinder its ability to fully
sector has reinforced the growth of the other. utilize its potential. These problems include :
Per capita income at constant prices of 1999- 1. High growth rate of population : Continuous
2000 has increased from rupees 7,513 in 1950-51 rise in population has reduced the per capita
to rupees 82,269 in 2016-17. This has resulted in availability of benefits of economic growth.
higher living standards of the people. As a result, 2. Brain drain : Loss of resources in terms of
life expectancy has increased from 32 years in ‘Brain Drain’ is a serious outcome of migration
1951 to 68.3 years in 2015. when educated and skilled manpower
moves to other countries in search of better
4. ROLE OF HUMAN CAPITAL IN ECONOMIC GROWTH
opportunities of work.
(IMPORTANCE OF HUMAN CAPITAL FORMATION)
3. Lack of proper manpower planning : Due to
Human capital plays a pivotal role in fostering poor manpower planning, there is a lot of
economic growth by enhancing the productivity wastage of society’s resources as capabilities
and efficiency of individuals and societies. Its of educated people are either not utilised or
importance can be summarized as follows : underutilised.
1. Effective use of physical capital : Human 4. Low level of academic standards : Educational
capital leads to efficient utilization of physical facilities in India have not developed as
capital. Technical and professional people can required for economic growth. Deficiency
utilize machines and other productive assets in skills leads to low levels of efficiency and
in a much better way by enhancing their productivity.
productivity 5. Imbalances in resource allocation : There
2. Higher productivity levels : Human capital exists imbalances in resource allocation as
helps in raising productivity levels in the greater proportion of resources have been
country. Education gives people higher allocated to higher education meant for few
thinking skills and other technical skills which people as compared to primary and secondary
increases their capacity to earn more. education.
3. Innovations and inventions : Human capital 6. Inadequate resources : The resources allocated
facilitates innovations and creates ability to to the formation of human capital have been
adopt new technology. An educated person much less than the resources required.
has the potential to develop new skills and
create new techniques which may be more 6. INADEQUACIES AND CHALLENGES IN EDUCATION
efficient. India faces numerous challenges in its education
4. Higher work participation rate : Human sector, which impede the development of human
capital formation increases the rate of capital. Some of the key issues include:
participation of labour force in the process of 1. Inadequate expenditure on education : The
production. Higher participation rate would resources allocated to the formation of human
mean more employment in the country. capital have been much less than the resources
5. Increase in life expectancy : It raises life required. Though government expenditure on
expectancy as better healthcare facilities and education has increased, it is still quite less
availability of nutritive food enable people to than the desired level of 6%.
live a healthy and longer life. 2. Widespread illiteracy : Although literacy
6. Improvement in quality of life : The quality ratio has substantially improved, yet the
of life of people depends upon the level of absolute number of illiterates has increased.
education, health of a person and skill India is home to the largest number of
formation acquired by them which improves illiterate people in the world accounting for
in the process of human capital formation. about one-third of all illiterates.
7. Rural development : Human capital can 3. Gender bias : Educational opportunities are
significantly contribute to rural development not equally available to male and female
as educated farmers can easily adopt new children.
agricultural techniques and methods of 4. Low educational access in rural areas : The
farming. access to education is considerably low in the

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 359

rural areas as compared to urban areas. 9. INDIA AS A KNOWLEDGE ECONOMY

5. Higher education few takers : The number (i) Entrepreneurs, bureaucrats and politicians
of people reaching the higher education level are now advancing views about how India
is very less while the greater proportion of can transform itself into a knowledge based
resources have been allocated to it as compared economy by using information technology
to primary and secondary education. (IT). Likewise, e-governance is being projected
6. Quality of education : The quality of education as the way of future.
is fairly low and is less relevant to the needs (ii) Two independent reports on the Indian
of the economy. economy in recent times say that India would
7. Brain drain : The country incurs loss due to grow faster due to its growth in human
‘Brain drain’ as a huge amount is spent on capital. World Bank has also expressed
technically training people whose services similar views in its report– “India and the
are ultimately not available to the economy knowledge economy-leveraging strengths and
as the more educated and skilled manpower opportunities”. The report states that the
move to other countries in search of better Indian economy has all the necessary key
job opportunities. inputs such as vast group of skilled workers,
8. Difficulties in providing educational facilities a successful democracy and diversified science
: There are areas where it is difficult to and technology infrastructure.
provide facilities of education as population
is spread far and wide and people move to 10. EDUCATION SECTOR IN INDIA
different places in different seasons to make Growth in government expenditure on education—
both ends meet. The expenditure by the government on education
is expressed in two ways:
7. HUMAN CAPITAL FORMATION IN INDIA
(i) As a percentage of ‘total government
Expenditure on education and health are expenditure’ and
carried out by the three tiers of the government- (ii) As a percentage of Gross Domestic Product
Union Government, State Government and (GDP).
Local Government (Municipal corporations,
Municipalities and Village Panchayats). 10.1 Elementary Education
Elementary education plays a vital role in shaping
8. REGULATION OF EDUCATION AND HEALTH SECTORS
the foundation of human capital and receives
IN INDIA
significant attention in public expenditure:
The education and health sectors in India are (i) Major Share in Education Expenditure :
regulated through various ministries, departments Elementary education constitutes the largest
and organizations to ensure systematic portion of total education expenditure in
development and management: India.
(i) Education Sector : The education sector is (ii) State-wise Variation in Expenditure : The
governed by the Ministries of Education at per capita public spending on elementary
the Centre and State levels. Regulatory bodies education varies significantly across states,
such as the National Council of Educational reflecting disparities in resource allocation.
Research and Training (NCERT), University (iii) Differences in Opportunities and Attainments
Grants Commission (UGC) and All India : Variations in expenditure lead to unequal
Council for Technical Education (AICTE) educational opportunities and attainment
oversee curriculum development, higher levels among states, affecting overall
education and technical education standards. development.
(ii) Health Sector : The health sector is regulated (iv) Right to Education Act, 2009 : The
by the Ministries of Health at the Union and Government of India enacted the Right to
State levels, alongside departments of health. Education (RTE) Act in 2009, making free
Organizations like the Indian Council of and compulsory education a fundamental
Medical Research (ICMR) play a crucial role right for all children aged 6-14 years.
in guiding research, policy formulation and
implementation of health programs.

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CH 9 : HUMAN CAPITAL FORMATION IN INDIA

10.2 Secondary Education and quality in education:

Secondary education in India focuses on providing 1. Right to Education (RTE) : The right of
quality education and skill development to prepare children to free and compulsory education
students for higher studies and employment: Act or Right to Education Act (RTE), was
(i) Vocationalisation of Secondary Education passed by the Parliament on August 4, 2009.
: High priority is given to introducing According to it, every child of the age 6 to
vocational courses at the secondary level to 14 years shall have the right to free and
equip students with job-oriented skills. compulsory education in neighbourhood
(ii) Navodaya Vidyalayas : Residential schools, school till completion of elementary education.
known as Navodaya Vidyalayas, were 2. Sary Shiksha Abhiyan : Sary Shiksha
established in 1987-88 to offer modern and Abhiyan (SSA) was launched in 2001. It is
quality education to talented students, one of India’s major flagship programmes for
primarily from rural areas. universalisation of elementary education.
(iii) Kendriya Vidyalayas : Kendriya Vidyalayas 3. Digital India : The government has launched
were set up to provide consistent educational Digital India campaign on July 1, 2015. The
opportunities for children of transferable aim of this was to extend the reach of mobile
central government employees. network to all over India specially the remote
and rural villages in order to convert India
10.3 Higher Education into a digital economy.
Higher education in India focuses on both 4. Mid-day Meal Scheme : With a view to
expanding access and improving quality to meet increase enrollment, retention and attendance
the needs of diverse learners: and simultaneously improve the nutritional
(i) Quantitative Expansion and Quality levels among children, the mid-day meal
Improvement : Efforts are made to expand programme was launched as a centrally
higher education institutions while giving sponsored scheme on August 15, 1995.
special attention to enhancing their quality
through better infrastructure, curricula and
teaching standards.
(ii) Indira Gandhi National Open University MULTIPLE CHOICE QUESTION
(IGNOU) : Established in 1985, IGNOU
provides flexible educational opportunities
for school dropouts, housewives, unemployed 1. Indira Gandhi National Open University
individuals and working professionals, (IGNOU), established in ______, provides
promoting inclusive education. flexible educational opportunities to diverse
groups.
11. EDUCATIONAL ACHIEVEMENTS IN INDIA (a) 1985
(b) 1995
Generally, educational achievements in a country
(c) 2001
are indicated in terms of:
(d) 2015
1. Adult literacy rate : This rate indicates the
percentage of literate adult population who Ans : OD 2024
are aged 15 years and above. (a) 1985
2. Primary education completion rate : It IGNOU was established in 1985 to offer inclusive
includes basic education in reading, writing education through open and distance learning to
and mathematics along with an elementary cater to diverse learners.
understanding of other subjects such as
geography, natural sciences. 2. What is the primary focus of the Sarva Shiksha
3. Youth literacy rate : This rate indicates the Abhiyan (SSA), launched in 2001, as one of the
percentage of literate people between the age major flagship programmes in India’s education
of 15-24 who can read and write. system?
(a) Improving higher education access
12. MAJOR EDUCATIONAL PROGRAMMES (b) Universalizing elementary education
India has implemented several significant (c) Providing vocational training
educational programmes to enhance access, equity (d) Establishing digital infrastructure

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 361
Ans : OD 2000
Navodaya Vidyalayas focus on offering quality
(b) Universalizing elementary education education to talented rural students.
Sarva Shiksha Abhiyan aims to ensure elementary
education for every child, focusing on access, 7. Which organization was set up in 1985 to offer
equity and quality. flexible and inclusive educational opportunities to
diverse groups?
3. Which legislative act passed by the Indian (a) UGC
Parliament in 2009 guarantees free and compulsory (b) IGNOU
education to children aged 6 to 14 years? (c) AICTE
(a) Mid-Day Meal Scheme Act (d) NCERT
(b) Right to Education Act Ans : OD 2012
(c) Digital India Act
(d) National Education Policy Act (b) IGNOU
IGNOU promotes open and distance learning for
Ans : FOREIGN 2001
various groups.
(b) Right to Education Act
The RTE Act ensures free and compulsory 8. What are Kendriya Vidyalayas primarily
education for children aged 6 to 14 years. established to achieve within India’s education
system?
4. What is the main objective of the Digital India (a) Provide vocational education
campaign launched in 2015 to transform the (b) Offer consistent education for central
country’s digital infrastructure? employees’ children
(a) Enhance digital literacy (c) Promote digital learning
(b) Expand internet access (d) Offer rural education
(c) Promote online education Ans : FOREIGN 2005
(d) Provide vocational training
(b) Offer consistent education for central
Ans : DELHI 2010
employees’ children
(b) Expand internet access Kendriya Vidyalayas ensure education for children
Digital India aims to enhance digital connectivity, of transferable government employees.
especially in rural and remote areas.
9. Which factor indicates a country’s educational
5. What was the primary reason behind the achievements?
introduction of the Mid-Day Meal Scheme in 1995 (a) Higher education enrollment
by the Indian government? (b) Adult literacy rate
(a) Ensure free education (c) School infrastructure in rural areas
(b) Increase enrollment and nutrition (d) Spending on technology
(c) Provide scholarships Ans : DELHI 2006
(d) Introduce vocational courses
(b) Adult literacy rate
Ans : SQP 2003
The adult literacy rate reflects the percentage of
(b) Increase enrollment and nutrition literate individuals aged 15 years and above.
The Mid-Day Meal Scheme improves school
attendance and nutritional levels. 10. Which scheme provides free meals to children in
schools to boost enrollment and retention?
6. Which residential schools were established in (a) Digital India Programme
1987-88 to provide modern and quality education (b) Sarva Shiksha Abhiyan
to talented rural children? (c) Mid-Day Meal Scheme
(a) Kendriya Vidyalayas (d) Right to Education Act
(b) Navodaya Vidyalayas Ans : SQP 2007
(c) SSA Schools
(d) Digital Learning Centers (c) Mid-Day Meal Scheme
The Mid-Day Meal Scheme encourages school
Ans : COMP 2004
attendance by providing free meals.
(b) Navodaya Vidyalayas

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CH 9 : HUMAN CAPITAL FORMATION IN INDIA
Ans : SQP 2021
49. Assertion : The Government plays an important
(d) Horticulture is the business related to role in education and health service markets.
producing, storing and distributing food grains. Reason : Government has acquired monopoly
power in the education and health service markets.
47. Distribution of Outstanding Loan of Cultivator (a) Assertion and Reason both are correct
Households (Rural) % : statements and Reason is correct explanation
for Assertion.
S. No. Credit Agency 1971 2002
(b) Assertion and Reason both are correct
(i) Government 7.1 1.7 statements but Reason is not correct
(ii) Co-operative 22 30.2 explanation for Assertion.
Societies/Banks (c) Assertion is true but Reason is false.
(d) Assertion is false but Reason is true.
(iii) Commercial Banks 2.4 26.3
Ans : OD 2018
(iv) Traders 8.4 2.6
(c) Assertion is true but Reason is false.
(v) Relatives and Friends 13.1 6.2
The government tries to ensure that the private
Which Institutional Agency (As given in the providers of these services do not require a
above table) has shown the maximum increase in monopoly power and adhere to the standards
the share of outstanding loan to cultivators: stipulated by it and charge the correct price.
(a) Relatives & Friends
(b) Commercial banks 50. Assertion : Education and health care create
(c) Co-operative Societies/Banks private and social benefits.
(d) Traders Reason : Education and health are important
sources of human capital formation
Ans : SQP 2023, 2001
(a) Assertion and Reason both are correct
(b) Commercial banks statements and Reason is correct explanation
for Assertion.
(b) Assertion and Reason both are correct
statements but Reason is not correct
ASSERTION AND REASON explanation for Assertion.
(c) Assertion is true but Reason is false.
(d) Assertion is false but Reason is true.
48. Assertion : People migrate to other countries to
enhance their earnings. Ans : SQP 2020

Reason : Migration leads to psychic costs due to (b) Assertion and reason both are correct
strange social cultural set up. statements but reason is not correct explanation
(a) Assertion and Reason both are correct for assertion.
statements and Reason is correct explanation Education and health are integral to human
for Assertion. well-being. They lead to an increase in labour
(b) Assertion and Reason both are correct productivity which ultimately leads to benefits to
statements but Reason is not correct the economy and society.
explanation for Assertion.
(c) Assertion is true but Reason is false. 51. Assertion : Human Capital Formation stimulates
(d) Assertion is false but Reason is true. innovation.
Reason : Education provides knowledge to
Ans : OD 2024
understand scientific advancements.
(b) Assertion and reason both are correct (a) Assertion and Reason both are correct
statements but reason is not correct explanation statements and Reason is correct explanation
for assertion. for Assertion.
Inability of the economy to generate employment (b) Assertion and Reason both are correct
opportunities for the technically qualified leads statements but Reason is not correct
to their migration to other countries in search of explanation for Assertion.
better job prospects. (c) Assertion is true but Reason is false.
(d) Assertion is false but Reason is true.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 363

The RTE Act guarantees every child the right to The Mid-Day Meal Scheme was launched in
free and compulsory education. 1995 to enhance school enrollment, retention and
nutrition among children.
20. Which organization was established in 1985 to
provide inclusive education for school dropouts 24. The Digital India campaign, launched in
and working professionals? ______, focuses on expanding digital
(a) NCERT connectivity across rural and remote areas.
(b) IGNOU (a) 1985
(c) UGC (b) 1995
(d) AICTE (c) 2009
(d) 2015
Ans : DELHI 2016

(b) IGNOU Ans : DELHI 2022

IGNOU offers flexible educational opportunities (d) 2015

to diverse groups. The Digital India campaign was initiated in 2015
to enhance digital infrastructure and connectivity
21. What was the primary goal of establishing in India, especially in rural areas.
Navodaya Vidyalayas in 1987-88 ?
(a) Build technical skills among youth 25. Navodaya Vidyalayas, established in ______,
(b) Provide quality education to talented rural aim to provide quality education to talented
students students from rural areas.
(c) Improve urban literacy (a) 1987-88
(d) Support higher education programs (b) 1995
(c) 2001
Ans : COMP 2020
(d) 2015
(b) Provide quality education to talented rural
students Ans : SQP 2023

Navodaya Vidyalayas focus on offering modern (a) 1987-88

education to gifted students from rural areas. Navodaya Vidyalayas were established in 1987-
88 to ensure modern and quality education for
22. The Right to Education (RTE) Act, enacted in talented rural children.
______, ensures free and compulsory education
for children aged 6-14 years. 26. The primary aim of the Sarva Shiksha Abhiyan
(a) 1995 (SSA) is to achieve ______ in elementary
(b) 2001 education across India.
(c) 2009 (a) Digital literacy
(d) 2015 (b) Vocational training
(c) Universalization
Ans : OD 2019
(d) Higher education access
(c) 2009
The Right to Education (RTE) Act was passed Ans : SQP 2011

by the Parliament in 2009, making free and (c) Universalization

compulsory education a fundamental right for The Sarva Shiksha Abhiyan focuses on ensuring
children aged 6 to 14 years. elementary education for all children, promoting
universal access and quality.
23. The Mid-Day Meal Scheme, introduced in
______, aims to increase school enrollment 27. The Mid-Day Meal Scheme was introduced as
and improve children’s nutritional status. a ______ scheme to enhance enrollment and
(a) 1987 retention in schools.
(b) 1995 (a) Privately sponsored
(c) 2001 (b) Centrally sponsored
(d) 2015 (c) State-funded
(d) Internationally funded
Ans : FOREIGN 2021

(b) 1995 Ans : COMP 2001

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CH 9 : HUMAN CAPITAL FORMATION IN INDIA

11. What is the primary focus of expenditure under Ans : SQP 2011

the Sarva Shiksha Abhiyan (SSA)? (b) Expanding internet access

(a) Improve higher education Digital India promotes digital connectivity across
(b) Universalize elementary education rural and remote areas.
(c) Provide scholarships
(d) Enhance digital learning 16. Which program aims at universalizing elementary
education in India?
Ans : COMP 2013
(a) Digital India
(b) Universalize elementary education (b) Sarva Shiksha Abhiyan
Sarva Shiksha Abhiyan aims to provide elementary (c) RTE Act
education for every child in India. (d) Mid-Day Meal Scheme

12. Which act guarantees free and compulsory Ans : COMP 2018

education for children aged 6 to 14 years in India? (b) Sarva Shiksha Abhiyan
(a) SSA Act (b) RTE Act SSA focuses on providing universal access to
(c) Digital India Act (d) NEP Act elementary education.
Ans : OD 2007
17. What is the purpose of Kendriya Vidyalayas in
(b) RTE Act India?
The Right to Education (RTE) Act ensures free (a) Promote digital education
and compulsory education for children aged 6-14 (b) Provide education for rural students
years. (c) Offer consistent education to children of
government employees
13. What is the main aim of the Mid-Day Meal (d) Encourage higher education enrollment
Scheme introduced in 1995?
(a) Promote technical education Ans : OD 2015

(b) Improve enrollment and nutrition (c) Offer consistent education to children of
(c) Expand higher education government employees
(d) Provide scholarships Kendriya Vidyalayas ensure quality education
Ans : FOREIGN 2008
for children of transferable central government
employees.
(b) Improve enrollment and nutrition
The scheme focuses on increasing school 18. Which factor reflects the educational achievement
enrollment and improving the nutritional status of a country?
of children. (a) Number of universities
(b) Adult literacy rate
14. Which schools were established in 1987-88 to (c) Investment in technology
provide quality education to talented students in (d) Number of vocational schools
rural areas?
(a) Kendriya Vidyalayas Ans : FOREIGN 2014

(b) Navodaya Vidyalayas (b) Adult literacy rate

(c) Digital Learning Centers Adult literacy rate indicates the percentage of
(d) SSA Schools literate adults aged 15 and above.
Ans : DELHI 2009
19. What is the main objective of the RTE Act,
(b) Navodaya Vidyalayas enacted in 2009?
Navodaya Vidyalayas aim to provide modern (a) Promote rural literacy
education to talented rural students. (b) Ensure free education for children aged 6-14
years
15. What does the Digital India campaign, launched (c) Build technical colleges
in 2015, primarily focus on? (d) Provide free meals in schools
(a) Providing online courses
(b) Expanding internet access Ans : SQP 2017

(c) Increasing rural literacy (b) Ensure free education for children aged 6-14
(d) Building e-learning platforms years

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 365
Ans : SQP 2009 Ans : SQP 2013

(c) 0.64% (a) (i)-(B); (ii)-(A); (iii)-(C)

38. Which of the following is not a merit of human 43. What was the share of education in total
capital formation? government expenditure in 2014?
(a) Improves technical knowledge (a) 7.92%
(b) Enlarges the size of business (b) 15.7%
(c) Increases cost of production (c) 0.64%
(d) Changes social outlooks (d) 3.31%
Ans : COMP 2011 Ans : COMP 2012

(c) Increases cost of production (b) 15.7%

39. What was the average youth literacy rate in 2015? 44. Benefits of physical capital accrue only to private
(a) 89.5% entities, whereas human capital provides private
(b) 74% as well as _____ benefits. (Fill up the blank
(c) 88% with correct alternative)
(d) 95.5% (a) profitable
(b) social
Ans : OD 2012
(c) fiscal
(a) 89.5% (d) monetary
40. Which of the following organisations regulates the Ans : OD 2023
health sector in India? (b) social
(a) NCERT
(b) UGC 45. Identify, which of the following are associated
(c) AICTE with the problem of human capital formation in
(d) ICMR India?
(i) Brain drain
Ans : FOREIGN 2019
(ii) Low academic standards
(d) ICMR (iii) Rising population
(iv) Changes in social outlook
41. When was Right to Education Act enacted?
Alternatives:
(a) 2008
(a) (i) and (ii)
(b) 2009
(b) (ii) and (iii)
(c) 2010
(c) (i), (ii) and (iii)
(d) 2012
(d) (i) and (iv)
Ans : DELHI 2014
Ans : OD 2023
(d) 2012
(c) (i), (ii) and (iii)
42. Match and choose the correct combination.
46. Identify the incorrect statement from the
Column I Column II following:
(a) Horticulture has emerged as a successful
(i) Preventive A. medical
sustainable livelihood option for farmers in
medicine intervention
India.
during illness
(b) Horticulture is an important sector for
(ii) Curative medicine B. vaccination potential diversification and value addition in
(iii) Social medicine C. the spread of agriculture.
health literacy (c) India is blessed with supportive climatic and
soil conditions for horticulture.
(a) (i)-(B); (ii)-(A); (iii)-(C)
(d) Horticulture is the business related to
(b) (i)-(A); (ii)-(B); (iii)-(C)
producing, storing and distributing food
(c) (i)-(C); (ii)-(B); (iii)-(A)
grains.
(d) (i)-(B); (ii)-(C); (iii)-(A)

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CH 9 : HUMAN CAPITAL FORMATION IN INDIA

(b) Centrally sponsored 32. The various forms of health expenditures include:
The Mid-Day Meal Scheme, launched in 1995, is (a) social medicine
a centrally sponsored initiative to improve school (b) curative medicine
enrollment and nutrition. (c) provision of clean drinking water
(d) all of the above
28. The Digital India campaign, launched in
______, aims to create a digitally empowered Ans : SQP 2004

society. (d) all of the above

(a) 2001
(b) 2009 33. Which of the following is not a source of human
(c) 2015 capital formation?
(d) 1987 (a) expenditure on migration
(b) expenditure on education
Ans : FOREIGN 2022
(c) expenditure on social development
(c) 2015 (d) expenditure on on-the-job training
The Digital India campaign focuses on digital
Ans : DELHI 2005
infrastructure, governance and connectivity to
transform India into a digital economy. (c) expenditure on social development

29. The Right to Education (RTE) Act, passed 34. Which of the following is an indicator of
in 2009, ensures free education for children in educational achievement in a country?
______ schools. (a) adult literacy rate
(a) Neighborhood (b) youth literacy rate
(b) Residential (c) primary completion rate
(c) Digital (d) all of the above
(d) Private Ans : OD 2006

Ans : DELHI 2002 (d) all of the above

(a) Neighborhood
35. Which of the following is not an indicator of
The RTE Act mandates free education for children
education level?
aged 6 to 14 years in neighborhood schools.
(a) Years of schooling
30. Indira Gandhi National Open University (b) Life expectancy
(IGNOU), established in ______, provides (c) Teacher-pupil ratio
education through distance learning methods. (d) Enrollment rate
(a) 1985 Ans : FOREIGN 2007
(b) 2001
(b) Life expectancy
(c) 1995
(d) 2015 36. Which level of education takes a major share of
Ans : OD 2003 total education expenditure in India?
(a) Elementary
(a) 1985
(b) Secondary
IGNOU was established in 1985 to offer flexible
(c) Higher
educational opportunities through open and
(d) Tertiary
distance learning methods.
Ans : DELHI 2008
31. The stock of skill, ability, expertise, education
(a) Elementary
and knowledge embodied in the people is called as
(a) human stock 37. What percent of GDP was invested in education
(b) human development in the year 1952?
(c) human capital (a) 7.92%
(d) all of the above (b) 11.7%
Ans : COMP 2010 (c) 0.64%
(d) 3.31%
(c) human capital

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 367
Ans : DELHI 2019 Ans : SQP 2008

(a) Assertion and reason both are correct (a) Assertion and reason both are correct
statements and reason is correct explanation for statements and reason is correct explanation for
assertion. assertion.

52. Assertion : Formation of human capital raises life 55. Assertion : The General productivity of the
expectancy of the people. economy has remained low.
Reason : Rise in population has increased the Reason : The performance in the fields of Science
quality of human resource. and Development of Modern Technology has
(a) Assertion and Reason both are correct remained unsatisfactory.
statements and Reason is correct explanation (a) Assertion and Reason both are correct
for Assertion. statements and Reason is correct explanation
(b) Assertion and Reason both are correct for Assertion.
statements but Reason is not correct (b) Assertion and Reason both are correct
explanation for Assertion. statements but Reason is not correct
(c) Assertion is true but Reason is false. explanation for Assertion.
(d) Assertion is false but Reason is true. (c) Assertion is true but Reason is false.
(d) Assertion is false but Reason is true.
Ans : FOREIGN 2010

(c) Assertion is true but Reason is false. Ans : COMP 2022

Better health facilities, better standard of living (a) Assertion and reason both are correct
and availability of nutritious food enables people statements and reason is correct explanation for
to live a healthy and longer life. assertion.

53. Assertion : The current expenditure on education 56. Assertion : Brain drain reduces the quality of
is more than adequate. human capital.
Reason : The literacy rates for both adults as well Reason : Imbalance between demand and supply
as youth have increased of human resources of different categories has led
(a) Assertion and Reason both are correct to wastage of resources.
statements and Reason is correct explanation (a) Assertion and Reason both are correct
for Assertion. statements and Reason is correct explanation
(b) Assertion and Reason both are correct for Assertion.
statements but Reason is not correct (b) Assertion and Reason both are correct
explanation for Assertion. statements but Reason is not correct
(c) Assertion is true but Reason is false. explanation for Assertion.
(d) Assertion is false but Reason is true. (c) Assertion is true but Reason is false.
(d) Assertion is false but Reason is true.
Ans : DELHI 2012

(d) Assertion is false but Reason is true. Ans : FOREIGN 2023

The General indicators of educational achievements (b) Assertion and reason both are correct
in our country have shown an improvement. statements but reason is not correct explanation
for assertion.
54. Assertion : Expenditure on health helps maintain Technically qualified persons like doctors, IT
labour productivity. Professionals etc. migrate to other countries
Reason : Poor health and undernourishment because of higher salaries and better job
adversely affect the quality of manpower. opportunities.
(a) Assertion and Reason both are correct
statements and Reason is correct explanation
for Assertion.
57. Assertion : Proper information helps in making
(b) Assertion and Reason both are correct
correct decisions regarding investment in human
statements but Reason is not correct
capital.
explanation for Assertion.
Reason : Expenditure on information provides
(c) Assertion is true but Reason is false.
knowledge about different educational institutions,
(d) Assertion is false but Reason is true.
their educational standards and labour market.

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CH 9 : HUMAN CAPITAL FORMATION IN INDIA
Ans : SQP 2010
(a) Elementary Education
(a) Elementary Education (b) Secondary Education
The graph indicates that Elementary Education (c) Higher Education
receives 50% of the total government expenditure (d) All categories receive equal funding
on education, the highest among the three Ans : OD 2010
categories. Secondary Education follows with 30%
and Higher Education receives 20%. (a) Elementary Education
The pie chart indicates that Elementary Education
77. Based on the graph showing the impact of receives 50% of the government expenditure on
education on economic growth, which factor has education, the largest share among the three
the highest percentage impact? categories. Secondary Education accounts for
30% and Higher Education receives 20%.

79. According to the pie chart on the impact of

education on economic growth, which factor has
the greatest impact?

(a) Increase in Life Expectancy

(b) Higher Productivity
(c) Innovations and Inventions
(d)All have equal impact (a) Increase in Life Expectancy
(b) Higher Productivity
Ans : COMP 2009
(c) Innovations and Inventions
(b) Higher Productivity (d) All factors have equal impact
The graph shows that Higher Productivity has
Ans : SQP 2015
the highest impact percentage at 75%. Increase in
Life Expectancy follows at 68% and Innovations (b) Higher Productivity
and Inventions have a 60% impact. This highlights The pie chart shows that Higher Productivity has
the significant role of education in improving the greatest impact at 75%, followed by an Increase
productivity. in Life Expectancy at 68% and Innovations and
Inventions at 60%.
78. According to the pie chart showing the distribution
of government expenditure on education, which 80. According to the pie chart, which educational
category receives the largest share of the budget? programme was launched the earliest?

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 369

63. Assertion : Education and training increases 66. Which combination of the following statements is
productivity of people. correct about the Right to Education (RTE) Act
Reason : Productivity and production depends on and educational initiatives in India?
technical skills of the people. 1. The Right to Education (RTE) Act guarantees
(a) Assertion and Reason both are correct free and compulsory education for children
statements and Reason is correct explanation aged 6-14 years.
for Assertion. 2. Navodaya Vidyalayas were established in
(b) Assertion and Reason both are correct 2001 to provide technical education to rural
statements but Reason is not correct students.
explanation for Assertion. 3. The Mid-Day Meal Scheme aims to improve
(c) Assertion is true but Reason is false. school enrollment and nutrition among
(d) Assertion is false but Reason is true. children.
4. Sarva Shiksha Abhiyan (SSA) focuses on the
Ans : COMP 2020
universalization of elementary education in
(a) Assertion and reason both are correct India.
statements and reason is correct explanation for (a) Only 1 and 2 are correct
assertion. (b) Only 1, 3 and 4 are correct
(c) Only 2 and 4 are correct
64. Assertion : Rural development in India is a core
(d) All statements are correct
element for overall development of the nation.
Reason : More than two-third of India’s population Ans : FOREIGN 2023
depends on agriculture. (b) Only 1, 3 and 4 are correct
(a) Assertion and Reason both are correct The RTE Act ensures free and compulsory
statements and Reason is correct explanation education for children aged 6-14 years. The Mid-
for Assertion. Day Meal Scheme aims to improve enrollment
(b) Assertion and Reason both are correct and nutrition. Sarva Shiksha Abhiyan focuses
statements but Reason is not correct on elementary education. However, Navodaya
explanation for Assertion. Vidyalayas were established in 1987-88, not 2001
(c) Assertion is true but Reason is false. and they provide quality education to talented
(d) Assertion is false but Reason is true. rural students, not technical training.
Ans : OD 2022
67. Identify the correct combination of statements
(a) Assertion and reason both are correct regarding the Digital India campaign and its
statements and reason is correct explanation for objectives:
assertion. 1. The Digital India campaign was launched in
2015 to expand internet connectivity across
India.
STATEMENT BASED QUESTIONS 2. It focuses on improving digital literacy in
urban and rural areas.
3. It ensures free and compulsory education for
65. Statement 1 : Self Help Groups (SHGs) have children aged 6-14 years.
emerged to fill the gap in formal credit system. 4. It promotes the transformation of India into a
Statement 2 : Formal credit system in India, is digital economy.
not only inadequate but also not fully integrated (a) Only 1, 2 and 4 are correct
with rural social community development. (b) Only 1 and 3 are correct
(a) Statement l is true & Statement 2 is false. (c) Only 2 and 4 are correct
(b) Statement 1 is false & Statement 2 is true. (d) All statements are correct
(c) Both statements 1 & 2 are true. Ans : OD 2001
(d) Both statements l & 2 are false.
(a) Only 1, 2 and 4 are correct
Ans : DELHI 2020 The Digital India campaign was launched in
(a) Statement 1 is true & Statement 2 is false. 2015 to improve digital connectivity and literacy,
transforming India into a digital economy.
However, ensuring free and compulsory education

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CH 9 : HUMAN CAPITAL FORMATION IN INDIA

(a) Assertion and Reason both are correct 60. Assertion : Expenditure on education turns
statements and Reason is correct explanation human beings into human capital.
for Assertion. Reason : Education increases the earning capacity
(b) Assertion and Reason both are correct of people and makes them crave for luxuries.
statements but Reason is not correct (a) Assertion and Reason both are correct
explanation for Assertion. statements and Reason is correct explanation
(c) Assertion is true but Reason is false. for Assertion.
(d) Assertion is false but Reason is true. (b) Assertion and Reason both are correct
statements but Reason is not correct
Ans : COMP 2015
explanation for Assertion.
(a) Assertion and reason both are correct (c) Assertion is true but Reason is false.
statements and reason is correct explanation for (d) Assertion is false but Reason is true.
assertion.
Ans : DELHI 2008
58. Assertion : On-the-job-training is a source of (c) Assertion is true but Reason is false.
human capital formation. Education helps acquire knowledge, skills,
Reason : Workers may be sent off-campus for stimulates innovations and creates ability to
training. absorb new technologies. It helps in changing the
(a) Assertion and Reason both are correct mental outlook and promotes the development of
statements and Reason is correct explanation the economy.
for Assertion.
(b) Assertion and Reason both are correct 61. Assertion : Productivity of physical capital depends
statements but Reason is not correct to a large extent on human capital formation.
explanation for Assertion. Reason : Human capital is needed to make
(c) Assertion is true but Reason is false. effective use of physical capital.
(d) Assertion is false but Reason is true. (a) Assertion and Reason both are correct
statements and Reason is correct explanation
Ans : OD 2007
for Assertion.
(b) Assertion and reason both are correct (b) Assertion and Reason both are correct
statements but reason is not correct explanation statements but Reason is not correct
for assertion. explanation for Assertion.
On-the-job-training improves the skill and (c) Assertion is true but Reason is false.
efficiency of workers and leads to an increase (d) Assertion is false but Reason is true.
in the production of goods and services and
productivity of labour. Ans : SQP 2019

(a) Assertion and reason both are correct statements

59. Assertion : The increase in educational expenditure and reason is correct explanation for assertion.
by the government has been uniform.
Reason : The per capita educational expenditure 62. Assertion : Human capital is not traded in the
differs considerably across states. market; however its services are traded.
(a) Assertion and Reason both are correct Reason : Human capital is intangible in nature.
statements and Reason is correct explanation (a) Assertion and Reason both are correct
for Assertion. statements and Reason is correct explanation
(b) Assertion and Reason both are correct for Assertion.
statements but Reason is not correct (b) Assertion and Reason both are correct
explanation for Assertion. statements but Reason is not correct
(c) Assertion is true but Reason is false. explanation for Assertion.
(d) Assertion is false but Reason is true. (c) Assertion is true but Reason is false.
(d) Assertion is false but Reason is true.
Ans : FOREIGN 2017

(d) Assertion is false but Reason is true. Ans : SQP 2021

There is a difference in the educational (a) Assertion and reason both are correct
opportunities and attainments across states. statements and reason is correct explanation for
assertion.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 371

(a) Only 1 and 2 are correct GRAPH BASED QUESTIONS

(b) Only 1, 2 and 3 are correct
(c) Only 2 and 4 are correct
(d) All statements are correct 75. Based on the bar graph showing educational
Ans : OD 2006
indicators in India, which of the following has the
highest percentage among the listed indicators?
(a) Only 1 and 2 are correct
Navodaya Vidyalayas provide quality education
to talented rural students. They do not focus on
digital literacy or vocational training.

73. Which combination of the following statements is

correct about the Digital India campaign?
1. It was launched in 2015 to promote digital
connectivity across India.
2. It focuses on expanding internet access,
especially in rural areas.
3. It ensures free and compulsory education for
children aged 6-14 years.
4. It aims to transform India into a digital
economy. (a) Adult Literacy Rate
(a) Only 1 and 2 are correct (b) Youth Literacy Rate
(b) Only 1, 2 and 4 are correct (c) Primary Completion Rate
(c) Only 2, 3 and 4 are correct (d) All indicators are equal
(d) All statements are correct
Ans : SQP 2009
Ans : FOREIGN 2007
(c) Primary Completion Rate
(b) Only 1, 2 and 4 are correct The graph shows that the Primary Completion
The Digital India campaign aims to expand Rate is 90%, the highest among the listed
internet access and create a digital economy. indicators. The Youth Literacy Rate follows at
Ensuring free education is the focus of the RTE 85% and the Adult Literacy Rate is 74%.
Act, not Digital India.
76. According to the graph showing the percentage
74. Choose the correct combination of statements distribution of government expenditure on
about Sarva Shiksha Abhiyan (SSA): education, which education level receives the
1. SSA was launched in 2001. highest percentage of funding?
2. It focuses on universalizing elementary
education in India.
3. It ensures free meals to improve student
retention.
4. It aims to improve the quality of elementary
education.
(a) Only 1 and 2 are correct
(b) Only 1, 2 and 4 are correct
(c) Only 2, 3 and 4 are correct
(d) All statements are correct
Ans : DELHI 2008

(b) Only 1, 2 and 4 are correct

SSA was launched in 2001 to universalize
elementary education and improve its quality. (a) Elementary Education
The provision of free meals is part of the Mid-Day (b) Secondary Education
Meal Scheme, not SSA. (c) Higher Education
(d) All levels receive equal funding

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CH 9 : HUMAN CAPITAL FORMATION IN INDIA

is the focus of the RTE Act, not the Digital India 70. Which combination of the following statements
campaign. about the Mid-Day Meal Scheme is correct?
1. The scheme was launched in 1995 as a
68. Which combination of the following statements is centrally sponsored initiative.
correct about Navodaya Vidyalayas and Kendriya 2. It aims to increase school enrollment,
Vidyalayas? retention and attendance.
1. Navodaya Vidyalayas provide quality education 3. It provides vocational training to rural
to talented students from rural areas. students.
2. Kendriya Vidyalayas offer consistent
4. It improves nutritional levels among school-
education for children of transferable
going children.
government employees.
(a) Only 1, 2 and 3 are correct
3. Navodaya Vidyalayas were established in
(b) Only 1, 2 and 4 are correct
1995 to provide vocational training to rural
(c) Only 3 and 4 are correct
students.
(d) All statements are correct
4. Kendriya Vidyalayas focus on universalizing
elementary education in India. Ans : SQP 2004
(a) Only 1 and 2 are correct (b) Only 1, 2 and 4 are correct
(b) Only 1, 3 and 4 are correct The Mid-Day Meal Scheme was launched in 1995
(c) Only 2 and 4 are correct to improve enrollment, retention and nutritional
(d) All statements are correct levels among children. It does not focus on
Ans : FOREIGN 2002 vocational training.
(a) Only 1 and 2 are correct 71. Identify the correct combination of statements
Navodaya Vidyalayas provide quality education regarding the Right to Education (RTE) Act:
to rural students and Kendriya Vidyalayas cater 1. The RTE Act was passed in 2009.
to children of transferable central government 2. It guarantees free and compulsory education
employees. Navodaya Vidyalayas were established for children aged 6-14 years.
in 1987-88, not 1995 and vocational training is 3. It focuses on providing free mid-day meals in
not their primary focus. Kendriya Vidyalayas do schools.
not focus on universalizing elementary education,
4. It ensures education in neighborhood schools
which is the aim of SSA.
for elementary students.
69. Choose the correct combination of statements (a) Only 1, 2 and 4 are correct
about Sarva Shiksha Abhiyan (SSA): (b) Only 2, 3 and 4 are correct
1. SSA was launched in 2001 to promote the (c) Only 1 and 3 are correct
universalization of elementary education. (d) All statements are correct
2. SSA aims to provide free meals to students to Ans : COMP 2005
improve their nutritional status.
(a) Only 1, 2 and 4 are correct
3. SSA focuses on enhancing access, quality and
The RTE Act ensures free and compulsory
retention in elementary schools.
education in neighborhood schools for children
4. SSA ensures free and compulsory education
aged 6-14 years. The mid-day meals are covered
for children aged 6-14 years.
under a different scheme.
(a) Only 1 and 3 are correct
(b) Only 1, 3 and 4 are correct 72. Which combination of the following statements
(c) Only 2 and 4 are correct about Navodaya Vidyalayas is correct?
(d) All statements are correct 1. They were established in 1987-88 to provide
Ans : DELHI 2023 quality education.
2. They are residential schools for talented
(a) Only 1 and 3 are correct
students from rural areas.
SSA focuses on universalizing elementary
education and improving access, quality and 3. They focus on promoting digital literacy in
retention. Free meals are part of the Mid-Day urban areas.
Meal Scheme and free and compulsory education 4. They provide vocational training for rural
is ensured by the RTE Act, not SSA. youth.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 373

(a) Right to Education (RTE) Which statement is correct?

(b) Sarva Shiksha Abhiyan (SSA) (a) Mid-Day Meal ensures free education.
(c) Mid-Day Meal Scheme (b) SSA focuses on elementary education.
(d) Digital India (c) RTE provides free meals.
(d) SSA improves digital literacy.
Ans : COMP 2015

(c) Mid-Day Meal Scheme Ans : SQP 2011

The pie chart shows the relative distribution of (b) SSA focuses on elementary education.
launch years for major educational programmes. The passage states SSA focuses on elementary
The Mid-Day Meal Scheme, launched in 1995, is education. Mid-Day Meal provides meals and
the earliest programme, followed by Sarva Shiksha RTE ensures free education, not meals or digital
Abhiyan (2001), Right to Education (2009) and literacy.
Digital India (2015).
83. The Right to Education (RTE) Act, 2009, ensures
81. Based on the pie chart showing literacy indicators in free and compulsory education for children aged 6
India, which category has the highest percentage? to 14 years. The Mid-Day Meal Scheme, launched
in 1995, provides meals to increase school
attendance and improve nutrition.
Which statement is correct?
(a) RTE focuses on school meals.
(b) Mid-Day Meal improves attendance and
nutrition.
(c) RTE provides vocational training.
(d) Mid-Day Meal ensures free education.
Ans : COMP 2012

(b) Mid-Day Meal improves attendance and

nutrition.
The passage mentions that the Mid-Day Meal
(a) Adult Literacy Rate Scheme focuses on attendance and nutrition,
(b) Youth Literacy Rate while RTE provides free education, not meals or
(c) Primary Completion Rate training.
(d) All categories have equal percentages 84. Sarva Shiksha Abhiyan (SSA), launched in 2001,
Ans : DELHI 2004 aims to universalize elementary education. The
Digital India campaign, launched in 2015, focuses
(c) Primary Completion Rate
on expanding digital connectivity.
The pie chart shows that the Primary Completion
Which statement is correct?
Rate is the highest at 90%, followed by Youth
(a) SSA focuses on digital literacy.
Literacy Rate at 85% and Adult Literacy Rate
(b) Digital India promotes elementary education.
at 74%. This indicates a higher success rate in
(c) SSA aims to universalize elementary
primary education compared to adult and youth
education.
literacy.
(d) Digital India ensures free meals.
Ans : DELHI 2015

(c) SSA aims to universalize elementary education.

PASSAGE BASED QUESTION The passage highlights SSA’s role in elementary
education and Digital India’s focus on digital
connectivity, not education or meals.
82. The Right to Education (RTE) Act, 2009, ensures
free education for children aged 6 to 14 years. 85. The Digital India campaign, launched in 2015,
Sarva Shiksha Abhiyan (SSA), launched in 2001, aims to expand internet connectivity, especially
focuses on elementary education. The Mid-Day in rural areas. Sarva Shiksha Abhiyan (SSA),
Meal Scheme, 1995, increases enrollment by launched in 2001, focuses on improving elementary
providing meals. education.

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CH 9 : HUMAN CAPITAL FORMATION IN INDIA

Which statement is correct? 89. What is India’s ranking among countries on the
(a) SSA aims to expand internet connectivity. Human Development Index?
(b) Digital India focuses on rural internet access.
Ans : DELHI 2002
(c) Digital India promotes elementary education.
(d) SSA provides free meals to students. According to the UNDP Human Development
Report, India is ranked 130th out of 189 countries.
Ans : FOREIGN 2013

(b) Digital India focuses on rural internet access. 90. What is financial capital?
The passage specifies that Digital India focuses Ans : SQP 2003
on internet connectivity, while SSA focuses on
It refers to paper claims on physical capital.
elementary education. Meals are not part of either
programme. 91. What is brain drain?
86. The Mid-Day Meal Scheme, launched in 1995, Ans : COMP 2004
aims to increase school enrollment and improve It refers to the migration of skilled labor to
nutrition. The Right to Education (RTE) Act, developed countries.
enacted in 2009, ensures free and compulsory
education for children aged 6 to 14 years. 92. State, whether the following statement is true or
Which statement is correct? false:
(a) Mid-Day Meal ensures free education. “As per the Human Development Report, 2018,
(b) RTE provides school meals. India was ranked at 180th position.”
(c) Mid-Day Meal increases enrollment and
Ans : OD 2020
nutrition.
(d) RTE focuses on technical education. False; Currently, India ranks 130th on the 2018
Human Development Index.
Ans : OD 2014

(c) Mid-Day Meal increases enrollment and 93. What is Right to Education?
nutrition. Ans : OD 2005
The passage highlights the Mid-Day Meal Scheme’s
In 2009, the Government of India passed the
role in improving enrollment and nutrition, while
Right to Education Act (RTE), making education
RTE ensures free and compulsory education, not
a fundamental right for all children in the age
technical education or meals.
group of 6-14 years.

94. State one major function performed by National

Council Education Research and Training
ONE MARK QUESTIONS (NCERT).
Ans : DELHI 2018

87. What does HDI signify? NCERT functions as the apex organization
Ans : OD 2000
providing academic and technical support for the
qualitative improvement of school education from
HDI stands for Human Development Index, an Class 1 to 12.
indicator of human development based on three
key dimensions: GDP per capita, life expectancy 95. What is vocational education?
at birth and education, measured by adult literacy
Ans : FOREIGN 2006
rate and gross enrollment ratio.
It refers to education aimed at providing skills for
88. Who prepares the Human Development Report? specific occupations.
Ans : FOREIGN 2001
96. What is the current and the desired level of public
The United Nations Development Programme expenditure on education?
(UNDP), an agency of the United Nations, has
Ans : DELHI 2018
been publishing the Human Development Report
annually since 1990. The current level of expenditure on education is
4%, while the desired level is 6%.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 375

97. What is education cess? It has decreased the per capita access to the
benefits of economic growth, such as housing,
Ans : DELHI 2007
healthcare and education. Additionally, the
Education cess is a tax levied to help cover the growing population has diminished the ability
cost of government-sponsored programs, with the to acquire the skills and expertise essential for
revenues specifically earmarked for spending on economic development.
elementary education.
103. What do you mean by universalisation of
98. Which committee took the decision to bring all elementary education?
Indian children in the age group of 6-14 years
under the purview of school education? Ans : FOREIGN 2010

Universalisation of elementary education refers to

Ans : DELHI 2018
ensuring universal access, enrollment, retention
The Tapas Majumdar Committee and quality education for children up to the
age of 14. It aims to make education available
99. Why are there differences in educational
to all children aged 6 to 14, covering classes 1-7.
opportunities and attainments across states?
This concept emphasizes that every child should
Ans : SQP 2008 complete elementary education through either
This is because the per capita public expenditure formal or non-formal methods.
on elementary education varies significantly
104. Investing in people’s skills and education is as
across states.
crucial as investing in physical infrastructure for
100. Name the apex body in the field of medical sustainable progress. Human resources are the
research. backbone of any economy. Define human capital
and explain its significance in economic growth.
Ans : COMP 2009
Ans : DELHI 2011
Indian Council of Medical Research (ICMR).
Human capital is the stock of knowledge, skills
and productivity embodied in people, crucial for
economic growth. It enhances productivity, fosters
TWO MARK QUESTIONS innovation and improves the quality of life by
enabling individuals to effectively use resources
and technology.
101. The progress of a nation is measured not just
105. What are the main sources of human capital
by economic growth but by the well-being and
formation?
opportunities available to its people. Ensuring
access to basic needs and choices is central to this Ans : SQP 2012
idea. State the meaning of ‘Human Development’. The main sources are investment in education,
Ans : OD 2024 health expenditure, on-the-job training,
migration for better opportunities and acquiring
Human Development emphasizes that education
information about markets. These investments
and health are crucial for human well-being,
improve individuals’ capabilities, enabling them
viewing individuals as ends in themselves. It is a
to contribute effectively to the economy.
broader concept, as it recognizes the importance
of both education and health in enhancing the 106. Human beings are considered both ends and means
overall quality of life and well-being. of development. Their abilities, skills and overall
well-being play a crucial role in determining the
102. State, with valid reason whether, the following
progress of a nation. How does human capital
statement is true or false.
differ from human development?
Rising population is not the cause for quality of
human capital formation. Ans : COMP 2013

Ans : OD 2023 Human capital focuses on increasing labour

productivity through education and health,
The continuous increase in population has
while human development emphasizes education
negatively impacted the quality of human capital.

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CH 9 : HUMAN CAPITAL FORMATION IN INDIA

130. Enumerate the main drawbacks of education at with higher education is assuming alarming
the secondary level. proportions. There is a widening gap between
job seekers with higher education and their
Ans : COMP 2009
demand in the job market.
Secondary education in India faces two primary
challenges. Firstly, there is a low enrollment ratio 133. Ensuring universal access to education has
among students aged 14–18 years in secondary been a global goal, with numerous efforts to
(classes 9–10) and senior secondary (classes 11– reduce disparities in learning opportunities.
12) levels, indicating unsatisfactory participation. However, challenges like inequality and resource
Secondly, progress in vocational education is gaps remain. Have we been able to achieve the
inadequate. While the target was to divert 25% “education for all” objective?
of senior secondary students towards vocational Ans : SQP 2019
streams, only about 5% have been enrolled,
reflecting a significant shortfall in meeting Despite an increase in literacy rates among adults
vocational education goals. and youth, the absolute number of illiterates
in India remains as high as the population at
131. Argue in favour of the need for different forms of independence. The Constitution’s Directive
government intervention in education and health Principles in 1950 mandated free and compulsory
sectors. education for children up to 14 years, aiming for
or universal literacy. However, the failure to fully
Why is government intervention in education implement this directive has hindered progress.
sector essential? Achieving this goal would have ensured 100%
literacy by now. Thus, India is still far from
Ans : FOREIGN 2010
realizing the objective of “education for all.”
Investment in education and health is vital for
developing human capital, requiring government 134. ‘There is a downward trend in inequality
intervention for several reasons. First, these worldwide with the rise in the average education
investments have irreversible long-term effects levels’. Comment.
on human resources. Second, consumers often Ans : COMP 2016
lack full information on the quality and costs of
services. Third, without such information, private It would be correct to say that inequality worldwide
providers may exploit their monopoly power. is decreasing as the average education level rises.
Lastly, education and health require substantial This would be due to the fact that education leads
investment and high fixed costs, which private to skill formation and enables a person to generate
players might only undertake at unaffordable more income. Higher income earning capacity and
prices. Government oversight ensures service greater acceptability of modern techniques raises
standards, fair pricing and accessibility for all. the standard and quality of living thereby reducing
inequality in income and promoting opportunities
132. Higher education plays a critical role in advancing for development in the world.
innovation and economic growth, yet challenges
persist in ensuring its accessibility and quality. 135. Why is it important to educate the women of a
Addressing these concerns is vital for holistic country?
development. Highlight the areas of concern in or
higher education. Discuss the need for promoting women’s education
in India.
Ans : DELHI 2015
Ans : OD 2023
Higher education has substantially expanded over
time but there are certain aspects which are still Educating women is essential for the development
lagging behind. These are: of a country because:
(i) The expansion in education is largely 1. Economic Independence: Education empowers
confined to general education. Of the total women to be financially self-reliant and
enrollment for higher education, only 20% is enhances their social standing.
for professional education. 2. Improved Healthcare : Educated women
(ii) The problem of unemployment among those contribute to better healthcare quality and
access for themselves and their children.

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114. The growth and development of a nation force is better able to adopt and integrate new
depend significantly on the quality of its human technologies, driving further progress.
resources. Investing in education, health and
skill development enhances the productivity and 117. Investment in human capital not only enhances
efficiency of individuals. Write a brief note on individual capabilities but also uplifts communities
human capital formation. and economies. Its impact extends beyond
personal gains to societal progress. Human capital
Ans : COMP 2019
creates both private and social benefits. Explain.
Human capital formation refers to the development Ans : COMP 2021
of skills, knowledge and abilities among a
country’s population. It involves acquiring and Human capital benefits both the individual and
enhancing the number of individuals with the society. An educated person can actively engage
necessary education, skills and experience for in the democratic process and contribute to the
economic and political growth. This process is nation’s socio-economic development. Education
seen as an investment in people, turning them into not only improves an individual’s earning potential
productive and creative resources. Human capital but also elevates their social status, helping them
formation thus involves transforming individuals understand societal changes and adapt to new
into capable workers who can contribute to the technologies. Similarly, a healthy person plays a
production of goods and services, continuously key role in preventing the spread of contagious
increasing the human capital stock over time. diseases by maintaining hygiene and sanitation.
Thus, human capital generates both private and
115. What is human capital formation? State three social benefits.
ways of developing human resources.
118. “The causality between human capital and
Ans : OD 2019
economic growth flows in either direction”.
Human capital formation involves developing Explain the statement.
skills and abilities within a country’s population. Ans : DELHI 2022
Three key ways to enhance human resources are:
(i) Ensuring access to good health services to Establishing a direct cause-and-effect relationship
improve life expectancy, strength and vitality. between human capital growth and economic
(ii) Offering on-the-job training to boost skills, growth is challenging, as both likely reinforce
knowledge and productivity of the workforce. each other. Human capital formation boosts
(iii) Providing formal education at elementary, economic growth by enhancing the efficiency
secondary and higher levels to equip the and productivity of the workforce. Conversely,
population with necessary knowledge and economic growth also influences human capital
competencies. formation. Growth leads to higher real per capita
income, which allows for increased investment in
116. “Human Capital Formation gives birth to education and skill development. Thus, it can be
innovation, invention and technological said that human capital growth drives economic
improvements.” growth and economic growth, in turn, fosters
Do you agree with the given statement? Support human capital formation.
your answer with valid arguments.
119. The concept of physical capital is the base for
Ans : SQP 2020
conceptualizing human capital. Do you agree?
I agree with the statement that human capital Justify your answer.
formation enhances productivity and production, Ans : FOREIGN 2010
as skilled and knowledgeable workers utilize
resources more efficiently. It not only improves Economic growth can only be achieved through
human resource productivity but also fosters the efficient use of scarce resources, both physical
innovation and the ability to adapt to new and human. Physical capital, which includes
technologies. Education equips individuals with resources like plant, machinery and equipment,
the knowledge to understand societal changes and is crucial for economic growth. Just as physical
scientific advancements, promoting inventions resources such as land can be transformed into
and innovations. Additionally, an educated labor physical capital like factories, human resources
such as students can be developed into human

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CH 9 : HUMAN CAPITAL FORMATION IN INDIA

and health as essential for well-being, regardless THREE MARK QUESTIONS

of productivity. Human development considers
quality of life and access to basic services as
equally important. 111. Explain the role of affordable healthcare facilities
in promoting human capital in a country.
107. State any two problems in human capital
formation in India. Ans : SQP 2024

Human capital refers to the skills, knowledge,

Ans : OD 2014
expertise and education possessed by individuals.
(i) High population growth reduces per capita To enhance human capital, investment in human
benefits of economic growth, straining resources is essential. Affordable healthcare is a
resources. crucial investment for increasing the availability of
(ii) Brain drain leads to loss of skilled manpower a healthy workforce. Poor health and malnutrition
to other countries, limiting India’s ability to negatively impact the quality of labor. Therefore,
fully utilize its potential workforce. spending on healthcare is vital for developing a
productive workforce and improving people’s
108. Mention two inadequacies in India’s education
quality of life. Proper nutrition and accessible
system.
healthcare contribute to the overall enhancement
Ans : FOREIGN 2015 of human capital.
(i) Inadequate expenditure on education, which
112. Discuss the need for on-the-job training for an
is less than the desired 6%, hampers the
employee.
development of infrastructure and learning
resources. Ans : DELHI 2024, 2020

(ii) Widespread illiteracy, with India home to the The productivity of physical capital improves
largest number of illiterates globally, limits significantly with better human capital, which is
social and economic progress. why many firms offer on-the-job training. This
training is quick and cost-effective, boosting
109. A strong foundation in education equips workers’ skills and efficiency, leading to higher
individuals with the skills and knowledge needed production and productivity. On-the-job training
to contribute effectively to society. Early education can take two forms:
is the starting point for nurturing a capable and (i) training within the firm under the guidance
skilled workforce. Explain the importance of of a skilled worker, or
elementary education in human capital formation. (ii) sending workers for off-campus training.
Ans : DELHI 2016 After training, firms often require workers to stay
for a certain period to recover the benefits of
Elementary education forms the foundation for
the enhanced productivity, making it a valuable
human capital, receiving the largest share of
source of human capital formation.
public expenditure and ensures basic literacy and
numeracy for all children. It also prepares them 113. “National Education Policy 2020 of India stresses
for higher education and skill development. a lot on in-service teachers’ training.”
In the light of the given statement, state and
110. What is the role of Navodaya Vidyalayas in
explain any two advantages of such on-the-job
India’s education system?
training in the upliftment of education sector of
Ans : SQP 2017 any nation.
Navodaya Vidyalayas provide modern, quality Ans : SQP 2024
education to talented students, especially from
The National Education Policy 2020 emphasizes
rural areas, ensuring equitable access to learning.
in-service teacher training to enhance skills and
They aim to bridge the educational gap between
productivity for achieving better performance.
urban and rural areas.
This training helps teachers acquire new skills,
adapt to modern technologies and align with
policy goals. It ensures they effectively implement
the New Education Policy, resulting in positive
outcomes.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 379

Human development are as follows Ans : FOREIGN 2001

A country’s educational achievements are

Human Capital Human Development measured by:
1. Human capital Human development 1. Adult Literacy Rate : The percentage of
considers education considers education literate adults aged 15 and above, where
and health as a and health as being literacy means the ability to read and write.
means to increase integral to human 2. Primary Education Completion Rate : The
labour productivity. well being because percentage of students finishing the final year
only when people are of primary school. A rate below 100% suggests
educated and healthy, issues in providing free and compulsory
they will be able to education.
make better choices. 3. Youth Literacy Rate : The percentage of
literate individuals aged 15-24 who can read
2. Human capital Human Development
and write.
treats human considers human
beings as a means beings as ends in 128. Education is a key driver of human capital
to achieve the end themselves and aims formation, contributing to economic growth and
result. i.e, increase at increasing human social development. Governments emphasize this
in productivity. welfare through by allocating significant funds to improve access
investments in and quality. How is importance of education
education and health. reflected in public expenditure on education?
3. According to According to the Ans : DELHI 2004
the concept of concept of Human
human capital, Development, Government expenditure on education is measured
any investment investment in in two ways:
in education education and health 1 Percentage of Total Government Expenditure
and health is is worthwhile if it : Reflects the priority given to education
unproductive if it increases human within government programs. Greater
does not enhance welfare even though expenditure signifies higher importance.
output of goods it may not result 2. Percentage of GDP : Indicates the share
and services. in higher labour of national income allocated to education
productivity. development.
Higher educational spending as a proportion of
126. Human progress is assessed not only by the skills GDP or government expenditure shows greater
and abilities of individuals but also by their emphasis on education in a country’s economic
overall well-being and access to opportunities. development.
This raises the question: Is human development 129. Why do educational achievements differ in
a broader term as compared to human capital? different states?
Ans : OD 2023
Ans : SQP 2005
Human development is a broader concept Regional differences in educational attainment
emphasizing education and health as essential arise due to:
for overall well-being, while human capital 1. Variations in Per Capita Public Expenditure:
focuses narrowly on their role in boosting labor States like Himachal Pradesh spend
productivity. Human capital views investments in significantly more (`34,651) on elementary
education and health as unproductive unless they education compared to Bihar (`4,088).
increase output. In contrast, human development 2. Employment Opportunities: Uneven
prioritizes improving welfare through such availability of jobs across regions affects
investments, regardless of productivity gains. education levels.
Hence, human development encompasses a more 3. Income Disparities: Different income levels
comprehensive perspective than human capital. and spending capacities of people contribute
127. Discuss the various indicators of educational to varied educational outcomes among states.
achievements.

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CH 9 : HUMAN CAPITAL FORMATION IN INDIA

4. The Mid-Day Meal Scheme increases like inadequate resources, brain drain and
enrollment, retention and attendance in regional disparities in education and healthcare
schools while improving nutritional levels access. Initiatives like the Sarva Shiksha Abhiyan
among children. (SSA), Right to Education Act (RTE) and the
Mid-Day Meal Scheme aim to address these issues
145. Read the para given below and answer the and ensure equitable opportunities for all.
questions that follow: 1. Why is investment in education considered an
Human capital is a vital resource that plays a important source of human capital formation?
pivotal role in economic growth and social 2. How does brain drain affect human capital
development. Investments in education, health formation in India?
and skill development enhance individual 3. Mention two initiatives by the Indian
productivity and societal well-being. Programs government to improve education accessibility.
like Sarva Shiksha Abhiyan (SSA) and Digital 4. What role does health expenditure play in
India have contributed significantly to education human capital formation?
accessibility. However, challenges like inadequate
resources, brain drain and regional disparities Ans :
in access to education persist. The Mid-Day 1. Investment in education enhances knowledge,
Meal Scheme and Right to Education Act aim skills and employability, increasing the
to ensure equitable opportunities for children to productivity and economic value of
receive quality education. individuals.
1. Why is human capital considered essential for 2. Brain drain leads to the loss of skilled and
economic growth? educated individuals, reducing the availability
2. What is the role of the Digital India campaign of human resources for national development.
in improving human capital? 3. Two initiatives are the Sarva Shiksha
3. Mention any two challenges faced by India in Abhiyan (SSA) and the Right to Education
improving human capital. Act (RTE).
4 How does the Right to Education Act 4. Health expenditure ensures a healthy
contribute to human capital formation? workforce, enabling individuals to work
Ans : efficiently and contribute effectively to
economic growth.
1. Human capital enhances productivity,
innovation and the efficient use of resources, 147. Read the para given below and answer the
directly contributing to economic growth and questions that follow:
higher living standards. Education and health are crucial components
2. The Digital India campaign improves of human capital formation, contributing
accessibility to education and skill significantly to economic growth and individual
development through digital connectivity, well-being. Investments in these areas enhance
especially in rural and remote areas. productivity, employability and innovation.
3. Two challenges are inadequate expenditure Initiatives like the Right to Education Act
on education and brain drain, where skilled (RTE), Sarva Shiksha Abhiyan (SSA) and health
individuals migrate for better opportunities expenditure programs aim to improve access
abroad. and quality in education and healthcare. Despite
4. The Right to Education Act ensures free progress, challenges such as regional disparities,
and compulsory education for children aged inadequate funding and brain drain remain key
6–14, laying the foundation for human capital hurdles in achieving equitable development.
development. 1. How do investments in education and health
contribute to human capital formation?
146. Read the para given below and answer the 2. List any two challenges faced by India in
questions that follow: human capital formation.
Human capital formation is essential for economic 3. Name two government initiatives aimed at
and social development. Investments in education, improving education in India.
health and training improve the productivity and 4. Why is health expenditure considered a
skills of individuals, enhancing their contribution significant source of human capital formation?
to the economy. However, India faces challenges

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 381

3. Fertility Rate Impact: They are more likely 137. Highlight the importance of education in the
to understand and adopt family planning process of human resource development.
measures, positively influencing fertility rates. or
4. Gender Equality: Women’s education fosters “Education is the undercurrent of economic and
equality by challenging societal norms and social change.” Highlight its importance in human
promoting equal opportunities. capital.
or
Explain the role of quality education in human
capital formation in a country.
FOUR MARK QUESTIONS Ans : COMP 2024

Education encompasses teaching, training and

136. Differentiate between Physical Capital and learning, playing a pivotal role in societal and
Human capital. individual development. Its importance includes:
1. Responsible Citizens and Skilled Workers :
Ans : FOREIGN 2024
Education cultivates responsible individuals
The difference between Physical Capital and and skilled labor.
Human Capital are as follows : 2. Science and Technology : It fosters scientific
progress and helps people adapt to societal
Physical Capital Human Capital and technological changes.
1. Physical capital is Human capital 3. Enhanced Productivity : Education boosts
tangible and can be is intangible and productivity, raising people’s earning potential.
easily sold in the cannot be sold in the 4. Economic Growth : It encourages active
market. market. participation in economic development,
2. Physical capital (like Human capital (like driving growth.
machinery) can be skills and efficiency 5. Broader Perspectives : Education widens
separated from its of a person) cannot mental horizons, aiding informed decision-
owner. be separated from making.
the owner. 6. Resource Efficiency : It ensures the effective
utilization of natural and human resources
3. It is used to produce It increases the across the country.
goods and services. efficiency to produce 7. Eradication of Social Evils : Education
goods and services. promotes awareness, helping eliminate
4. Physical capital is Formation of human societal issues.
the outcome of a capital is partly a
conscious decision social process and 138. The development of human capital relies on
of the owner and is partly a conscious multiple factors that enhance skills, knowledge
mainly an economic effort of the and productivity. These sources collectively
and technical possessor of human contribute to economic growth and societal
process. capital. progress. Discuss the various sources of human
capital formation.
5. It can be built It is built through
through imports. conscious policy Ans : DELHI 2022

formations. Human capital can be enhanced through various

6. It is more mobile Human capital means. Key sources of its formation include:
between countries. is less mobile 1. Education Expenditure: Investing in
between countries education boosts efficiency and skills, akin
as compared to to firms investing in capital goods for future
physical capital. profits. It broadens mental capabilities,
yielding earnings surpassing the initial costs
7. Physical capital Human capital and transforming individuals into human
creates only private creates private capital.
benefits. as well as social
benefits.

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CH 9 : HUMAN CAPITAL FORMATION IN INDIA

capital like engineers and doctors. While physical India has long recognized the importance of
capital is created by humans, low investment human capital for economic growth. The Seventh
in human capital leads to underutilization of Five Year Plan emphasizes that a large, educated
physical capital, resulting in slower economic and trained population can accelerate growth
growth. Without human capital, physical capital and drive social change. Economic growth is an
would not have been realized, although physical increase in national income and both education
capital serves as the foundation for developing and health enhance an individual’s income-
human capital. generating potential. A healthy person contributes
by providing a steady labor supply, while an
120. “Human capital formation prompts the process of educated person contributes more through
growth and growth prompts the process of human knowledge, innovation and understanding societal
capital formation.” Explain the chain of events changes. Therefore, investing in human capital is
which leads to the above effect. key to accelerating economic development.
Ans : DELHI 2011
123. Access to accurate and relevant information plays
Human capital formation, which refers to a key role in enhancing the skills and productivity
increasing the stock of human capital, ensures of individuals. It serves as a vital resource for
better utilization of physical capital. This building and utilizing human capital effectively.
enhances the productivity of physical capital, What is information with reference to human
resulting in higher output per unit of labor capital?
and capital. Consequently, the GDP rises due
to greater workforce participation, leading to Ans : FOREIGN 2012

increased employment. Higher individual and Human capital information includes details about
household incomes enable greater expenditure various jobs, their wages and salaries. It also covers
on education and healthcare, further enriching information about educational institutions, their
human capital. This ongoing cycle of investment costs and whether they provide appropriate skills.
and development is integral to human capital This information is crucial for making informed
formation. decisions about investing in human capital, as
investments in education and health have long-
121. State, with valid reasons whether, the following term, irreversible effects.
statements are true or false:
“Higher productivity and production are the 124. Migration often enables individuals to access better
outcome of investment in human resources.” opportunities for education, employment and skill
development. These improvements contribute to
Ans : OD 2023
increasing their productivity and economic value.
(i) Higher productivity of physical capital: State why expenditure on migration is considered
Human capital formation enhances the as a source of human capital formation.
productivity of physical capital by allowing
skilled individuals to handle and utilize Ans : COMP 2019

resources more effectively. As people become Migration from rural to urban areas occurs
more intelligent and skilled, they can operate mainly due to unemployment and the pursuit
and manage physical capital better, thus of better income and facilities. It involves costs
driving economic growth. such as transportation, higher living expenses
(ii) Higher productivity levels: Human capital and the psychological adjustment to a new socio-
boosts productivity by equipping individuals cultural environment. Despite these costs, the
with the skills and knowledge needed to earn income gained from migration often surpasses the
more and improve their living standards. expenditure. Therefore, migration expenditure
Education increases a person’s potential to is regarded as a contributor to human capital
contribute to the economy, leading to higher formation.
overall productivity in the country.
125. Differentiate between the concepts of human
122. “Increases in human capital are crucial for capital and human development.
achieving an increase in GDP”. Comment.
Ans : COMP 2022
Ans : COMP 2012
The difference between Human capital and

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 383

142. Explain the challenges being faced by the 4. Unrecognized Activities: Tasks like cooking
education sector despite massive developments. and household care, predominantly performed
by women, are not considered economic
Ans : OD 2021
activities.
Despite significant progress in India’s educational 5. Rural-Urban Disparity: More women work in
sector, several challenges persist: rural areas due to the economic compulsion
1. Gender Bias: Female enrollment in elementary arising from poverty.
education lags behind males. Although the
literacy gap is narrowing, societal attitudes
toward educating girls remain a concern.
2. Lack of Vocational Training: The education CASE BASED QUESTION
system is degree-focused rather than
job-oriented, with inadequate attention
to vocational and technical education, 144. Read the para given below and answer the
contributing to widespread unemployment. questions that follow:
3. Insufficient Government Expenditure: India has made significant progress in human
Government spending on education is about capital formation through investments in
4% of GDP, falling short of the recommended education, health and skill development. These
6%. efforts contribute to economic growth, innovation
4. Privatization: The shift toward private and social well-being. However, challenges like
education, due to better quality and facilities, inadequate resources, brain drain and disparities
makes education unaffordable for many due in educational access persist. Initiatives like the
to high costs. Right to Education Act (RTE), Sarva Shiksha
5. High Illiteracy Rates: While literacy Abhiyan (SSA) and Digital India aim to improve
improved from 18.3% in 1951 to 73% in 2011, access, equity and quality in education. Public
the absolute number of illiterates remains expenditure on elementary education remains
significant. a focus, as it forms the foundation for higher
6 Limited Rural Access: Disparities in education and economic participation.
educational facilities between rural and urban 1. What is human capital formation and how
areas result in lower literacy rates in rural does investment in education contribute to
regions. it?
7. Skills Mismatch: Curricula often fail to align 2. Name two significant initiatives taken by the
with job market requirements, creating a Indian government to improve elementary
gap between the skills provided and those education.
demanded. 3. What are the challenges faced by India in the
education sector, as mentioned in the case?
143. “In India women participation rate is lower in
4. How does the Mid-Day Meal Scheme aim to
urban areas than in the rural areas.” Explain with
improve educational outcomes?
valid arguments.
Ans :
Ans : COMP 2023
1. Human capital formation refers to the
Women’s participation in work, particularly
process of developing skills, knowledge and
among urban women, remains low due to several
productivity in individuals. Investment in
factors:
education enhances cognitive abilities and
1. Lagging Education: Limited educational
technical skills, enabling people to contribute
opportunities for women reduce their access
effectively to the economy.
to jobs.
2. Two significant initiatives are the Right to
2. Family Decisions: In urban areas, families
Education Act (2009) and Sarva Shiksha
often discourage women from working, even
Abhiyan (2001).
when opportunities exist.
3. Challenges include inadequate expenditure on
3. Poverty in Rural Areas: Higher female work
education, brain drain, widespread illiteracy,
participation in rural areas stems from
gender bias and low access to education in
economic necessity, though such jobs are
rural areas.
often low-paying and less productive.

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CH 9 : HUMAN CAPITAL FORMATION IN INDIA

Nobody can guarantee the happiness of the 1. (a) human capital depreciates just like
human beings and the choices which people would physical capital.
make in their lives concern only themselves. 2. (b) multilateral trade
However, human development aims to provide the 3. (d) 4-D
necessary conditions to all the people individually 4. (b) 2001
or collectively for improving their potential and
spending a productive and creative life. 150. Read the para given below and answer the
questions that follow:
1. Which of the following is not true about Capital alludes to the company’s wealth in the
human capital? form of money or assets, that can be utilized for
(a) human capital depreciates just like commencing a business or investing in a running
physical capital. business, to generate more money. It can be of
(b) it is heterogeneous in nature. two types: physical capital or human capital.
(c) it is inseparable from its owner. The physical capital implies the capital which
(d) it is mobile between countries. is tangible in nature, such as money, plant and
2. Trade between more than two countries is machinery, furniture and fixture, building etc. In
known as: Economics, the term ‘physical capital’ is used to
(a) bilateral trade denote the inputs (factor of production) or man-
(b) multilateral trade made goods, which are owned by the company such
(c) foreign trade as computers, machinery, equipment, tools and so
(d) both (a) and (b) forth. It is used in the production process to enable
3. From the statements given in Column I and conversion of raw material into finished goods.
II, identify the correct pair of statements: On the contrary, human capital is relatively
a new concept, which implies the collection of an
Column I Column II individual’s skills, abilities, talent, knowledge,
etc. used by the company to meet its long term
1. ICMR A. published a report
goals. It is not owned by the company, but by
on Global Growth
the employees, which they rent to companies for
Centre.
adequate consideration.
2. IGNOU B. regulate When one wants to start a company, a huge
Institutions under amount of physical capital is invested in the initial
the health sector. stage. For this, the entrepreneur finds out the
3. AICTE C. regulate expected returns from the range of investments
Institutions under and then the one generating relatively higher
the education return is chosen. Therefore, the ownership of
sector. physical capital is a result of a planned and
conscious decision of the entrepreneur.
4. Deutsche D. provides
Human Capital connotes the experience which
Bank educational
an employee takes to the organisation in the form
opportunities
of knowledge, skills, abilities, talents, intelligence,
for unemployed
values etc. which he/she has accrued over time.
working people etc.
As a result, the employees are perceived as an
(a) 1-A asset, whose value can be increased, by investing
(b) 2-B in their training and development, like any other
(c) 3-C asset of the company.
(d) 4-D The concept makes it clear that all the
4. Sarva Shiksha Abhiyan was launched in employees at work are not equal and they differ
_____. in their proficiencies.
(a) 2005 Simply put, it portrays the aggregate value
(b) 2001 of the firm’s intellectual capital, which is a
(c) 2009 sustained source of creativity and innovation. It
(d) 1998 is a standard used to ascertain the economic value
of an employee’s skill set.
Ans :

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 385
Ans : 1. From the following, identify the challenges
1. Investments in education and health being faced in the educational sector in India:
improve knowledge, skills and physical well- (a) insufficient government expenditure.
being, enabling individuals to contribute (b) lack of vocational training.
more effectively to economic and social (c) imbalance in regional growth.
development. (d) both (a) and (b).
2. Two challenges are regional disparities in 2. The availability of healthy labour force
education and inadequate public expenditure facilitates adoption of new technologies.
on health and education. (True/False)
3. Two government initiatives are the Right
to Education Act (RTE) and Sarva Shiksha 3. Following is not a source of human capital
Abhiyan (SSA). formation:
4. Health expenditure ensures a healthy and (a) expenditure on acquiring information
efficient workforce, enabling individuals to about the labour market.
participate actively in productive activities (b) expenditure on health.
and economic growth. (c) expenditure on migration
(d) expenditure on giving on the job training
148. Read the para given below and answer the 4. Public expenditure on education can be
questions that follow: expressed in the following ways:
Human capital is the stock of competencies, (a) as a percentage of total government
knowledge, social and personality attributes expenditure.
embodied in the ability to perform labour so as to (b) as a percentage of gross domestic product.
produce economic value. It is the attributes gained (c) both (a) and (b)
by a worker through education and experience. (d) neither (a) nor (b)
Human capital formation is the process of adding
to the stock of human capital over time. It is Ans :
possible through creation of a skilled, trained 1. (d) both (a) and (b)
and efficient labour force by providing better 2. False
education, care facilities, etc. 3. (a) expenditure on acquiring information
There is a technological shift to knowledge- about the labour market.
based, brainpower industries. Smart countries 4. (c) both (a) and (b)
are those who attempt to make themselves
attractive to the brainpower industry by 149. Read the para given below and answer the
educating their people and creating the required questions that follow:
brain power through education and training. In Beyond the richness of the economies in which
the knowledge economy, the value of intangible the people are living, human development is a
assets is increasing and that of tangible assets concept about the thriving of human life. Human
decreasing. In order to have a cutting edge in this development is an approach focusing on the people
scenario, a proper organisational climate with themselves and the opportunities they have.
the right people competencies is critical. Modern Human development is about providing more
physical technology, which is becoming more and freedom and opportunity to the people for living
more complex, requires the backing of advanced their lives as they wish. For this, people should be
social technology. Social technology covers all able to improve and use their capabilities.
advances in skills acquired by people individually Human development is a multidimensional
and collectively. Poverty is also both a cause and concept. The key dimensions are a long and
consequence of deficiencies in human development. healthy life, being knowledgeable and having
Increased public spending on aspects of human a decent standard of living. When these key
development is more likely to have greater impact dimensions are provided at first, the progress
on poverty reduction and, at the same time, in and improvement opportunities in other areas of
improving human development. In short, human human life will also grow.
resource development is an important condition Mainly, human development means having
for improving productivity, which holds the key more alternatives and more opportunities and this
to economic development. must be the key reference in human development.

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CH 9 : HUMAN CAPITAL FORMATION IN INDIA

2. Health Expenditure: Spending on health 140. “Active Government intervention is essential in

enhances productivity by improving physical education and health sectors in India.”
and mental abilities. Key areas include Do you agree with the given statement? Give
preventive care, treatment, health education, reasons in support of your answer.
clean water and sanitation.
Ans : DELHI 2023
3. On-the-job Training: Firms enhance worker
productivity by offering in-house or external I agree that expenditure on education and health is
training, requiring workers to stay for crucial for human capital formation. Government
stipulated periods to recoup training costs. intervention is essential for the following reasons:
4. Migration: Migration for better opportunities 1. Long-term Impact: Education and health
increases income despite associated costs investments have lasting effects on human
like transport and adaptation to new resources and cannot be undone.
environments. 2. Information Gap: Consumers lack complete
5. Information Expenditure: Costs incurred knowledge about the quality and cost of
in acquiring data about education, health services.
and labor markets aid in making informed 3. Monopoly Risk: Without information, private
decisions, fostering human capital utilization.. providers may exploit their monopoly power
in these sectors.
139. Human capital formation contributes to the 4. High Investment Costs: Education and
process of growth and development. Elaborate. health require significant fixed investments,
or deterring private investors unless high prices
Explain, how does ‘Investment in Human Capital’ are charged.
contribute to the growth of an economy. Government oversight ensures private providers
Ans : SQP 2020
meet standards and maintain fair pricing, keeping
these vital services accessible to all.
Human capital refers to the knowledge, skills,
abilities and physical capacities of individuals 141. “Economists believe that India should spend at
that contribute to production. It represents the least 6% of its GDP on Education for achieving
stock of productive skills within human beings. desired results.” Justify the statement with valid
The development of human capital through reason.
investment is termed human capital formation. Its
Ans : SQP 2020
contributions to growth and development include:
1. Higher Physical Capital Productivity: Skilled Human Capital Formation involves investing
human capital enhances the efficiency of in individuals to develop them as creative and
physical capital, spurring economic growth. productive resources. Education contributes
2. Innovative Skills: Trained personnel significantly to economic growth in several ways:
increase innovation and adaptability to new 1. Higher Earnings and Social Standing:
technologies. Education enhances earning potential and
3. Modern Attitudes: Investments transform improves social status.
outlooks, fostering economic progress. 2. Knowledge and Innovation: It equips
4. Participation and Equality: Improved individuals to understand societal changes
productivity raises employment, boosting and fosters innovation.
participation and equality. 3. Adoption of New Technologies: Education
5. Increased Productivity: Education equips supports technological advancements.
people to earn more, improving living Despite its importance, government expenditure
standards. on education remains below the recommended
6. Life Expectancy: Better health and nutrition level. The Education Commission (1964-66)
lead to longer, healthier lives. suggested allocating 6% of GDP to education,
7. Population Control: Education spreads yet current spending is just over 4%, which is
awareness, reducing population growth. inadequate. Initiatives like the 2009 Right to
8. Rural Development: Education combats Education Act and a 2% education cess on Union
ignorance, enabling rural innovation and taxes aim to improve funding. Achieving the 6%
employment through advanced farming and target is essential for advancing education and
small industries. national development.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 387

Human capital is not owned by the company

rather rented from employees and so there remains
an uncertainty of being lost, when the employee
leaves the organisation.
1. _____ five year plan recognised the
importance of human capital.
(a) Seventh
(b) Third
(c) Eight
(d) Sixth
2. Which of the following is an indicator of
educational achievement in a country?
(a) youth literacy rate
(b) primary completion rate
(c) adult literacy rate
(d) all of the above
3. In the year _____, the Indian government
made education free and compulsory for all
children between 6-14 years.
(a) 2001
(b) 2009
(c) 2003
(d) 2007
4. Following is an example of preventive
medicine:
(a) medical intervention during illness
(b) vaccination
(c) medical education
(d) spread of health literacy
Ans :
1. (a) Seventh
2. (d) all of the above
3. (b) 2009
4. (b) vaccination

www.nodia.in

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CH 10 : RURAL DEVELOPMENT

CHAPTER 10
RURAL DEVELOPMENT

poverty which is why alleviation of poverty

SUMMARY should be an important aspect of rural
development.
1. RURAL DEVELOPMENT 2. RURAL CREDIT
Rural development refers to the overall Rural credit refers to credit for the farmers in
development of the village economy. It can be rural areas. Indian farmers cannot meet their
defined as ‘a process whereby the standard of credit needs from their own sources or savings.
living of rural people especially of the rural poor Hence, they have to rely upon finance from
rises continuously’. Rural development, thus, is outside sources. The government should ensure
defined as improving the living standards of the an effective rural credit delivery system so that
low income people living in rural areas and making timely access to credit is made possible in order
the process of their development self-sustaining. to enhance agricultural productivity.
Two notable aspects regarding the concept of
rural development are: 2.1 Types of Credit
(i) The concept of rural development is much Credit is essential for farmers to sustain and
broader than the concept of agricultural expand their agricultural activities. Based on the
development. duration and purpose, credit can be classified into
(ii) The development of agricultural sector needs the following types:
special attention as agriculture is the main 1. Short-term credit : Indian farmers need short-
source of livelihood of rural people. term credit, i.e., for a period up to 15 months
1.1 Key Issues in Rural Development to purchase inputs like seeds, fertilizers, for
payment of wages, etc.
Rural development is a multifaceted process aimed 2. Medium-term credit : This includes credit
at improving the quality of life and economic well- requirements for the purchase of animals,
being of people living in rural areas. It requires a plough, pumpsets, etc. It ranges for a time
holistic approach that addresses both social and period between 15 months to 5 years.
economic challenges faced by rural communities. 3. Long-term credit : Long-term credit ranges
To achieve this, specific focus areas must be from 5 years to 15 years and is used for
addressed to ensure sustainable and inclusive expenditures on the purchase of additional
growth. land, expensive machinery, etc.
1. The quality of human resource needs to be
improved. 2.2 Credit Classification on The Basis of Purpose
2. The process of rural development should also
Credit can be classified based on its utilization,
involve the development of infrastructure like
reflecting its role in agricultural productivity and
electricity, irrigation, rural credit, roads etc.
rural needs:
3. Introduction and implementation of land
1. Productive credit : When farmers require
reforms should form an important part of the
loans for purchasing seeds, fertilizers,
process of rural development.
agricultural implements etc. for improving
4. Productive resources of localities should also
the productivity of their cultivable land, it is
be developed so as to increase employment
called productive credit.
opportunities.
2. Unproductive credit : When rural people
5. Majority of the rural population still lives in
require credit for fulfilling their consumption

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 389

needs and meeting social obligations which 2.4 Problems of Rural Credit
do not enhance agricultural productivity, it is Despite the availability of credit sources, rural
called unproductive credit. credit systems in India face several challenges that
hinder their effectiveness. These issues include:
2.3 Sources of Rural Credit in India
1. The volume of rural credit in the country is
Rural credit is vital for the agricultural and still insufficient as compared to its growing
economic development of rural areas. The requirement.
sources of credit for rural people can be broadly 2. Rural credit agencies have failed to meet the
categorized into the following: needs of small and marginal farmers.
1. Non-Institutional Sources : Non-institutional 3. Guarantee or security is always demanded
sources of credit to rural people are sources though they are told initially that it will not
other than banks, government etc. Landlords, be asked for.
village traders and money lenders are the 4. Due to slow recovery of agricultural loans, the
three important sources of non-institutional default rate is very high.
credit. 5. The various institutions that provide credit
2. Institutional Sources : Funds can also be to farmers are not well coordinated.
made available to the rural people by various 6. The procedure of getting an agricultural loan
institutions such as cooperatives, commercial involves huge amount of paper work.
banks and regional rural banks.
(i) Cooperative Banks : The agricultural 2.5 Suggestions for Improving Rural Credit in India
cooperative banks are established on To overcome the challenges in the rural credit
cooperative basis. There are two separate system and make it more effective, the following
cooperative institutions which provide measures can be implemented:
agricultural finance – 1. Expansion of Institutional Credit Facilities
(a) Cooperative Banks which provide : Enhancing the reach of institutional credit
short-term and medium-term loans to cover all rural areas, including remote and
and underserved regions, is essential.
(b) Land Development Banks which 2. Ensuring Agricultural Credit on Easy Terms
provide long-term loans to the and Less Paperwork : Simplifying the process
farmers. of obtaining loans by reducing paperwork
(ii) Commercial Banks : Commercial banks and providing credit on favorable terms can
provide loans both directly to the farmers encourage more farmers to access institutional
and indirectly to other agencies such as credit.
cooperative societies who finance farmers. 3. Coordination Among Financial Institutions
(iii) Regional Rural Banks (RRBs) : With : Improved collaboration among cooperative
a view to supplement the efforts of banks, commercial banks, RRBs and
commercial banks and cooperative banks NABARD can ensure streamlined credit
in providing rural credit, regional rural delivery, even in remote areas.
banks were set up. Their main objective 4. Timely and Adequate Availability of Credit
is to meet the credit needs of the weaker : Ensuring that credit is available to farmers
section of rural population. at the right time and in sufficient amounts
(iv) National Bank for Agriculture and can help them meet their agricultural needs
Rural Development (NABARD) : The effectively.
National Bank for Agriculture and 5. Effective Supervision on Actual Usage :
Rural Development was set up as an Regular monitoring of the credit utilization
apex bank to coordinate the activities can ensure that the funds are used for their
of all institutions providing rural credit. intended purposes, reducing the chances of
NABARD provides refinancing facility misuse or diversion.
to state cooperative banks, commercial
banks and regional rural banks which in 3. AGRICULTURAL MARKETING
turn provide credit to the farmers. Agricultural marketing refers to the entire system
which helps the farmers in disposing their surplus
produce. It includes operations like procurement,

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CH 10 : RURAL DEVELOPMENT

grading, storing, transporting and distribution of facilities to the farmers.

agricultural commodities across the country. 4. AGMARK stamp of the department of
agricultural marketing is marked on the
3.1 Defects of Agricultural Marketing graded goods. It is a short-form for agricultural
Agricultural marketing in India faces several marketing.
issues that prevent farmers from obtaining fair 5. Government has also undertaken various
prices for their produce. These include: steps to inform the farmers about the market
1. Due to lack of proper storage facilities, the conditions which helps them in taking various
farmers find it difficult to wait for better decisions regarding sale of their products.
prices for their produce and are forced to sell 6. Another measure is the policy of minimum
early even at low prices. support price and maintenance of buffer stock.
2. In the absence of proper road transportation Government agencies like Food Corporation
in rural areas, farmers cannot reach the of India purchase agricultural commodities
nearby mandis to sell their produce at a fair from the farmers at minimum support prices.
price. 7. The government has also initiated the
3. The large number of intermediaries existing provision of infrastructural facilities like
between the cultivator and the consumer roads, railways, warehouses, cold storages
claim a good amount of margin and, thus and processing units.
reduce the returns of the cultivators.
4. The farmers do not ordinarily get information 3.3 Some New Marketing Channels
about the market prices prevailing in the Farmers have begun to sell their produce directly
markets. to the consumers so as to minimise the share of
5. Indian farmers do not separate the intermediaries in the price paid by the consumers.
qualitatively good crop from the bad crop Apni Mandi (in Punjab, Haryana and Rajasthan),
and therefore fail to get a good price for their Hadaspur Mandi (in Pune), Rythu Bazars
produce. (vegetable and fruit market in Andhra Pradesh)
6. In the absence of adequate institutional are examples of such marketing channels. Further,
finance, Indian farmers have to approach the some national and multinational fast food chains
traders and money lenders for loans and in are increasingly entering into contracts with the
the process get exploited. farmers in a big way.
7. The farmers are not organized and hence cannot
bargain for better prices for their products. 4. DIVERSIFICATION OF AGRICULTURE
Diversification of agriculture is a strategy aimed
3.2 Government Measures for Improving Agricultural at reducing dependency on traditional farming
Marketing practices by expanding into other areas of
The government has implemented several production and activities. It has two main aspects:
measures to enhance agricultural marketing and 1. Diversification of Crops : This involves
ensure better returns for farmers. These include: producing a variety of crops instead of
1. Setting up of regulated markets to protect the focusing on a single specialized crop. It
farmers from malpractices in mandis where helps in reducing risks associated with crop
information is given to farmers regarding failure and enhances income through varied
prices of products. The weights and measures agricultural produce.
used in these markets are standardized and 2. Diversification of Productive Activities : This
controlled by the government. refers to shifting the workforce from purely
2. The government has encouraged organisation farm-based activities to non-farm activities
of cooperative agricultural marketing societies. such as livestock rearing, poultry farming,
Apart from helping the farmers in marketing fisheries and other allied sectors. It helps
their products, cooperative societies also in providing alternative income sources and
distribute fertilizers, seeds, equipments etc. reduces the pressure on land..
among them.
3. To prevent forced sale by the farmers after 4.1 Significance of Agricultural Diversification
the harvesting of crops, the central and state Agricultural diversification plays a crucial role
warehousing corporations are offering storage in improving the economic and social well-being

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 391

of farmers. Its significance can be highlighted as crop diversification and value addition in
follows: agriculture. India accounts for 10% of the
1. Increase in Farmers’ Income : By shifting world production of fruit crops like mangoes,
resources from low-value to high-value bananas, coconut etc.
products, agricultural diversification leads to 4. Information technology : Information
a substantial increase in farmers’ income. technology plays a vital role in achieving
2. Meeting Growing Demand : Diversification sustainable development and food security.
helps meet the rising demand for non-food By using appropriate information and
grain products such as fruits, milk, fish and software tools, government can predict the
eggs, aligning with changing consumption areas of food insecurity and then steps can be
patterns. taken accordingly to prevent the likelihood of
3. Alternative Employment for Small Farmers : an emergency.
It provides small and marginal farmers with 5. Cottage and household industry : This sector
alternative sources of employment, reducing includes activities like spinning, weaving,
dependency on traditional crop farming. bleaching, beekeeping etc. It also includes
4. Stability in Farm Income : Diversification traditional home based industries like pottery,
reduces the risks associated with fluctuations crafts, handlooms etc.
in production and market prices, ensuring
more stable farm income. 5. SUSTAINABLE DEVELOPMENT AND ORGANIC
5. Resilience to Adverse Weather : In case of FARMING
unfavorable weather conditions, farmers For sustainable development of the economy,
can sustain their livelihood by engaging in we need to use eco-friendly technology which
allied activities such as livestock and poultry will help us to enjoy the benefits of economic
farming. development for a long time along with no harm
6. Seasonal Employment Opportunity : As to the environment so that future generations
agriculture is seasonal, diversification can also fulfill their needs. One such eco-friendly
offers rural people alternative employment technology is organic farming.
opportunities during non-cropping seasons,
reducing underemployment. 5.1 Benefits of Organic Farming
Organic farming offers numerous advantages,
4.2 Diversification of Productive Activities
benefiting both farmers and the environment:
Diversification of productive activities is essential 1. Higher Income from Exports : Organically
for creating alternative income sources and grown crops are in high demand globally,
reducing dependence on traditional farming. The enabling farmers to earn more through
following are the key sectors involved: exports.
1. Livestock : Cattle and goats are important 2. Healthier and Nutritional Food : Organically
components of this sector. Livestock grown food is free from harmful chemicals
production provides increased stability in and has higher nutritional value, promoting
income, food security, transport, fuel and better health for consumers.
nutrition for the family. A significant number 3. Environmental Sustainability : Being
of women and landless labourers also find pesticide-free, organic farming reduces soil
employment in the livestock sector. and water pollution, thereby sustaining the
2. Fisheries : Fisheries sector in India has been environment and biodiversity.
recognised as an important income and 4. Increased Employment Opportunities : As
employment generator. This is an important a labor-intensive practice, organic farming
source of livelihood for a large section of the generates more employment opportunities,
economically backward population of the especially in rural areas.
country particularly in the coastal areas.
Kerala, Gujarat, Maharashtra and Tamil 5.2 Limitations of Organic Farming
Nadu are the major producers of marine Despite its benefits, organic farming faces several
products. challenges that limit its widespread adoption:
3. Horticulture : The horticulture sector is now 1. Lack of Awareness : A significant number
a days recognised as an important sector for of farmers are unaware of organic farming

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CH 10 : RURAL DEVELOPMENT
Ans : FOREIGN 2015 Ans : OD 2014

(c) Productive credit (a) To reduce dependency on single crops

The passage states that loans for purchasing The passage explains diversification as a strategy
seeds, fertilizers and implements for improving to reduce risks by producing multiple crops or
productivity are classified as productive credit. engaging in allied activities.

16. What is the main goal of Sarva Shiksha Abhiyan 20. What is the main issue faced by rural credit
(SSA) in the context of rural development and how systems regarding small farmers, as highlighted
does it address the needs of rural communities? in the passage and how does it create barriers for
(a) To develop roads in rural areas them?
(b) To universalize elementary education (a) They demand security despite promises
(c) To implement organic farming practices otherwise
(d) To improve credit delivery systems (b) They provide excessive credit beyond needs
Ans : DELHI 2008 (c) They focus on high-income farmers only
(b) To universalize elementary education (d) They have simplified paperwork processes
The passage highlights Sarva Shiksha Abhiyan as Ans : FOREIGN 2019
focusing on elementary education as part of rural
development efforts. (a) They demand security despite promises
otherwise
17. Which financial institution, as mentioned in the The passage highlights the inconsistency in rural
passage, is responsible for coordinating rural credit credit systems, where guarantees or securities are
systems and providing refinancing facilities? often demanded from small farmers.
(a) Regional Rural Banks (RRBs)
(b) Cooperative Banks 21. What is a key limitation of organic farming as
(c) NABARD described in the passage and how does it affect its
(d) Commercial Banks widespread adoption?
(a) Lack of global demand for organic produce
Ans : SQP 2012
(b) Lower yields compared to modern farming
(c) NABARD (c) Excessive use of chemical fertilizers
NABARD coordinates rural credit institutions by
(d) Limited employment opportunities
providing refinancing facilities to other financial
institutions, as stated in the passage. Ans : DELHI 2015

18. What does the absence of proper storage facilities (b) Lower yields compared to modern farming
result in for Indian farmers and how does it affect The passage mentions that organic farming often
their ability to secure fair prices? results in lower yields, making it less favorable for
(a) Increase in crop quality some farmers.
(b) Delay in market sales 22. What is a primary function of cooperative
(c) Forced sale of produce at low prices agricultural marketing societies, as mentioned in
(d) Higher bargaining power for better prices the passage and how do they assist farmers?
Ans : COMP 2013 (a) To increase minimum support prices
(c) Forced sale of produce at low prices (b) To distribute fertilizers and seeds to farmers
The passage mentions that a lack of storage (c) To improve transportation facilities for
facilities compels farmers to sell their produce farmers
early at lower prices. (d) To enhance organic farming practices
Ans : SQP 2016
19. What is the purpose of diversification in
agriculture, as stated in the passage and how does (b) To distribute fertilizers and seeds to farmers
it help in reducing risks for farmers? Cooperative agricultural marketing societies
(a) To reduce dependency on single crops assist farmers by distributing essential inputs like
(b) To expand land for traditional farming seeds and fertilizers.
(c) To focus entirely on organic farming
(d) To decrease the use of fertilizers

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 393
Ans : SQP 2001
(b) Lower yields compared to modern farming
(c) NABARD The passage mentions that organic farming often
NABARD coordinates rural credit institutions by results in lower yields, making it less favorable for
providing refinancing facilities to other financial some farmers.
institutions, as stated in the passage.
12. What is a primary function of cooperative
8. What does the absence of proper storage facilities agricultural marketing societies?
result in for Indian farmers? (a) To increase minimum support prices
(a) Increase in crop quality (b) To distribute fertilizers and seeds to farmers
(b) Delay in market sales (c) To improve transportation facilities for
(c) Forced sale of produce at low prices farmers
(d) Higher bargaining power for better prices (d) To enhance organic farming practices
Ans : COMP 2002 Ans : SQP 2005

(c) Forced sale of produce at low prices (b) To distribute fertilizers and seeds to farmers
The passage mentions that a lack of storage Cooperative agricultural marketing societies
facilities compels farmers to sell their produce assist farmers by distributing essential inputs like
early at lower prices. seeds and fertilizers.

9. What is the purpose of diversification in 13. What is the significance of AGMARK as

agriculture as stated in the passage? mentioned in the passage?
(a) To reduce dependency on single crops (a) It ensures better transportation of goods
(b) To expand land for traditional farming (b) It promotes organic farming techniques
(c) To focus entirely on organic farming (c) It certifies the quality of agricultural products
(d) To decrease the use of fertilizers (d) It offers loans for rural development
Ans : OD 2003 Ans : COMP 2006

(a) To reduce dependency on single crops (c) It certifies the quality of agricultural products
The passage explains diversification as a strategy AGMARK is a certification mark used to indicate
to reduce risks by producing multiple crops or the grading and quality of agricultural produce,
engaging in allied activities. as stated in the passage.

10. What is the main issue faced by rural credit 14. What is the primary objective of rural development
systems regarding small farmers? as mentioned in the passage and how does it aim
(a) They demand security despite promises to improve the lives of rural people?
otherwise (a) To focus only on agricultural development
(b) They provide excessive credit beyond needs (b) To improve the living standards of rural
(c) They focus on high-income farmers only people
(d) They have simplified paperwork processes (c) To expand industrial activities in rural areas
(d) To reduce the rural population
Ans : FOREIGN 2004
Ans : OD 2007
(a) They demand security despite promises
otherwise (b) To improve the living standards of rural people
The passage highlights the inconsistency in rural The passage defines rural development as
credit systems, where guarantees or securities are improving the living standards of rural people
often demanded from small farmers. and making their development self-sustaining.

11. What is the key limitation of organic farming 15. Which type of credit, as described in the
mentioned in the passage? passage, is primarily used by farmers to buy
(a) Lack of global demand for organic produce seeds, fertilizers and agricultural implements for
(b) Lower yields compared to modern farming increasing productivity?
(c) Excessive use of chemical fertilizers (a) Unproductive credit
(d) Limited employment opportunities (b) Medium-term credit
(c) Productive credit
Ans : DELHI 2009
(d) Long-term credit

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CH 10 : RURAL DEVELOPMENT

techniques and their benefits, limiting its (Fill up the blank with correct alternative)
implementation. (a) NABARD
2. Inadequate Infrastructure and Marketing (b) Self-Help Groups
Facilities : The absence of proper (c) Commercial Banks
infrastructure and marketing systems makes (d) Land Development Banks
it difficult for farmers to sell their organic
Ans : SQP 2024
produce effectively.
3. Lower Yields : Compared to modern (b) Self-Help Groups
agricultural practices, organic farming often
4. What is the primary objective of rural development
results in lower yields, which can affect the
as mentioned in the passage?
income of farmers.
(a) To focus only on agricultural development
4. Shorter Shelf Life and Appearance Issues
(b) To improve the living standards of rural
: Organic produce tends to have more
people
blemishes and a shorter shelf life compared
(c) To expand industrial activities in rural areas
to chemically treated crops, making it less
(d) To reduce the rural population
appealing in the market.
Ans : OD 2010

(b) To improve the living standards of rural people

The passage defines rural development as
MULTIPLE CHOICE QUESTION improving the living standards of rural people
and making their development self-sustaining.

1. According to the passage, what is the primary 5. Which type of credit is used by farmers to buy
purpose of introducing regulated markets for seeds, fertilizers and agricultural implements?
agricultural products? (a) Unproductive credit
(a) To ensure fair prices for farmers by reducing (b) Medium-term credit
malpractices (c) Productive credit
(b) To promote organic farming practices among (d) Long-term credit
rural farmers
Ans : FOREIGN 2011
(c) To provide subsidies for fertilizers and seeds
(d) To eliminate the need for intermediaries (c) Productive credit
The passage states that loans for purchasing
Ans : OD 2024
seeds, fertilizers and implements for improving
(a) To ensure fair prices for farmers by reducing productivity are classified as productive credit.
malpractices
The passage mentions that regulated markets help 6. What is the main goal of Sarva Shiksha Abhiyan
protect farmers from malpractices and ensure fair (SSA) in rural development?
prices for their produce. (a) To develop roads in rural areas
(b) To universalize elementary education
2. Which of the following was NOT the benefit (c) To implement organic farming practices
accruing from ‘Golden Revolution’ ? (d) To improve credit delivery systems
(a) Increase in the income of the farmers.
Ans : DELHI 2018
(b) Increase in production of milk and related
products. (b) To universalize elementary education
(c) Increase in production and exports of fruits The passage highlights Sarva Shiksha Abhiyan as
and vegetables. focusing on elementary education as part of rural
(d) Employment for women in rural areas. development efforts.
Ans : FOREIGN 2024 7. Which financial institution coordinates rural
(b) Increase in production of milk and related credit systems in India?
products. (a) Regional Rural Banks (RRBs)
(b) Cooperative Banks
3. ______ have emerged as an important micro (c) NABARD
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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 395

23. What is the significance of AGMARK, as The passage mentions that NABARD is
described in the passage and how does it help in responsible for coordinating the activities of
agricultural marketing? various institutions providing rural credit.
(a) It ensures better transportation of goods
(b) It promotes organic farming techniques 27. How does agricultural diversification, as stated
(c) It certifies the quality of agricultural products in the passage, help farmers reduce risks and
(d) It offers loans for rural development improve their income?
(a) By focusing only on high-value crops
Ans : COMP 2017
(b) By expanding to non-farm activities like
(c) It certifies the quality of agricultural products livestock and fisheries
AGMARK is a certification mark used to indicate (c) By reducing their reliance on fertilizers
the grading and quality of agricultural produce,
(d) By increasing the area of cultivation for one
as stated in the passage.
crop
24. How does rural development aim to improve the Ans : SQP 2022
standard of living of rural people, as explained in
(b) By expanding to non-farm activities like
the passage?
livestock and fisheries
(a) By focusing solely on agricultural activities
The passage highlights that diversification
(b) By promoting industrialization in rural areas
involves shifting to non-farm activities, reducing
(c) By making their development self-sustaining
risks and enhancing farmers’ income.
(d) By reducing rural population growth
Ans : OD 2019 28. What is one of the key challenges faced by farmers
in the agricultural marketing system, as discussed
(c) By making their development self-sustaining
in the passage?
The passage explains that rural development aims
(a) Access to surplus storage facilities
to raise the standard of living of rural people and
make their development self-sustaining. (b) Overproduction of crops leading to lower
prices
25. What is the key role of rural credit as highlighted (c) Increased transportation costs to export crops
in the passage and why is it important for farmers? (d) Exploitation by intermediaries
(a) It helps farmers meet personal expenses
(b) It enhances agricultural productivity by Ans : COMP 2023

providing timely credit (d) Exploitation by intermediaries

(c) It reduces the need for fertilizers The passage states that intermediaries claim
(d) It promotes international trade a significant margin in agricultural marketing,
Ans : FOREIGN 2020 reducing farmers’ returns.

(b) It enhances agricultural productivity by 29. What is one of the major issues with rural credit
providing timely credit agencies in India, as highlighted in the passage?
The passage emphasizes that rural credit enables (a) They provide excessive credit to farmers
farmers to access necessary funds to sustain and (b) They fail to meet the needs of small and
expand agricultural activities. marginal farmers
(c) They focus exclusively on urban areas
26. What is the significance of NABARD in the rural (d) They offer loans without requiring any
credit system, as described in the passage? paperwork
(a) It acts as an apex bank coordinating all rural
credit institutions Ans : FOREIGN 2001

(b) It directly provides loans to farmers (b) They fail to meet the needs of small and
(c) It funds only cooperative banks for agricultural marginal farmers
purposes The passage emphasizes that rural credit agencies
(d) It provides grants for social development are often unable to cater to small and marginal
Ans : DELHI 2021 farmers’ credit requirements.

(a) It acts as an apex bank coordinating all rural

credit institutions

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CH 10 : RURAL DEVELOPMENT

benefit from collective bargaining in order to Ans : COMP 2004

obtain a better price. (b) Assertion and reason both are correct
statements but reason is not correct explanation
66. Assertion : Livestock sector provides alternate for assertion.
livelihood options to small and marginal farmers With the expansion of the rural banking system,
and landless labourers. farmers can now get credit at cheaper rates for
Reason : Diversification minimises the risk of their production needs.
depending exclusively on farming for livelihood.
(a) Assertion and Reason both are correct 69. Assertion : Diversification of crop production
statements and Reason is correct explanation involves shift from single-cropping to multi-
for Assertion. cropping system.
(b) Assertion and Reason both are correct Reason : Horticulture leads to disguised and
statements but Reason is not correct seasonal unemployment.
explanation for Assertion. (a) Assertion and Reason both are correct
(c) Assertion is true but Reason is false. statements and Reason is correct explanation
(d) Assertion is false but Reason is true. for Assertion.
Ans : FOREIGN 2001
(b) Assertion and Reason both are correct
statements but Reason is not correct
(a) Assertion and reason both are correct explanation for Assertion.
statements and reason is correct explanation for (c) Assertion is true but Reason is false.
assertion. (d) Assertion is false but Reason is true.
67. Assertion : Farmers were exploited by Ans : DELHI 2002
moneylenders. (c) Assertion is true but Reason is false.
Reason : Their accounts were manipulated Diversification is essential to earn more
without their knowledge. and overcome poverty in rural areas. This
(a) Assertion and Reason both are correct diversification was done to promote a shift from
statements and Reason is correct explanation subsistence farming to commercial farming.
for Assertion.
(b) Assertion and Reason both are correct 70. Assertion : Self Help Groups have emerged as a
statements but Reason is not correct major microfinance program for the small and
explanation for Assertion. marginal farmers.
(c) Assertion is true but Reason is false. Reason : Members of SHGs contribute a minimum
(d) Assertion is false but Reason is true. amount from which credit is given to the needy
Ans : SQP 2003
members.
(a) Assertion and Reason both are correct
(a) Assertion and reason both are correct statements and Reason is correct explanation
statements and reason is correct explanation for for Assertion.
assertion. (b) Assertion and Reason both are correct
statements but Reason is not correct
68. Assertion : Expansion of the banking system
explanation for Assertion.
has positively affected rural farm and non-farm
(c) Assertion is true but Reason is false.
income and employment.
(d) Assertion is false but Reason is true.
Reason : Agricultural marketing has helped
farmers dispose of their surplus produce at fair Ans : OD 2005
prices. (a) Assertion and reason both are correct
(a) Assertion and Reason both are correct statements and reason is correct explanation for
statements and Reason is correct explanation assertion.
for Assertion.
(b) Assertion and Reason both are correct 71. Assertion : NABARD coordinates the functioning
statements but Reason is not correct of all financial institutions involved in the rural
explanation for Assertion. financing system.
(c) Assertion is true but Reason is false. Reason : Land Development Banks provide short-
(d) Assertion is false but Reason is true. term credit to small and marginal farmers.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 397

37. Diversification in agriculture involves shifting 41. Shorter shelf life and blemishes in crops are
focus from traditional farming to ______ significant limitations of ______ farming.
activities like livestock and fisheries. (a) Industrial
(a) Non-farm (b) Organic
(b) Seasonal (c) Traditional
(c) Export-based (d) Cooperative
(d) Crop-based
Ans : FOREIGN 2011
Ans : DELHI 2007
(b) Organic
(a) Non-farm The passage highlights that organic produce often
The passage explains that diversification includes has a shorter shelf life and appearance issues,
shifting from farming to allied non-farm activities which are limitations of organic farming.
such as livestock and fisheries.
42. ______ credit is used to buy expensive
38. Organic farming promotes ______ machinery, purchase land, or fund long-term
sustainability by reducing soil and water pollution. agricultural improvements.
(a) Industrial (a) Short-term
(b) Environmental (b) Medium-term
(c) Economic (c) Long-term
(d) Institutional (d) Seasonal
Ans : SQP 2008 Ans : DELHI 2012

(b) Environmental (c) Long-term

The passage highlights that organic farming According to the passage, long-term credit is
is eco-friendly and supports environmental required for large investments like purchasing
sustainability by being pesticide-free. land or expensive machinery.

39. The government sets a ______ to ensure 43. Identify the institutional source of rural credit
farmers get fair prices for their crops even when (a) NABARD
market prices fall. (b) RBI
(a) Minimum Support Price (c) World Bank
(b) Maximum Retail Price (d) SBI
(c) Subsidy Rate
Ans : SQP 2013
(d) Fixed Selling Price
(a) NABARD
Ans : COMP 2009

(a) Minimum Support Price 44. It is the label which is put on standardized
The passage states that the Minimum Support products of agriculture under the supervision of
Price policy helps farmers secure fair prices for government officials.
their produce. (a) AGMARK
(b) FSSAI
40. Farmers often lack information about ______ (c) ISI
prices, which affects their ability to sell their (d) FPO
produce at fair rates.
Ans : COMP 2014
(a) Fixed
(b) Consumer (d) FPO
(c) Market
45. Following is a limitation of organic farming:
(d) Wholesale
(a) Shorter shelf life of organic products
Ans : OD 2010 (b) No use of locally available inputs
(c) Market (c) Leads to soil degradation
The passage mentions that farmers not being (d) Decreasing demand for organic food
informed about market prices leads to them Ans : OD 2023
receiving lower returns for their produce.
(a) Shorter shelf life of organic products

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CH 10 : RURAL DEVELOPMENT

30. How does the diversification of crops benefit 33. Rural development is defined as improving the
farmers, as per the passage? living standards of ______ people and making
(a) It reduces risks associated with crop failure their development self-sustaining.
and market fluctuations (a) Rural poor
(b) It increases the dependency on high-value (b) Urban
crops (c) Wealthy
(c) It eliminates the need for external credit (d) Educated
sources
Ans : SQP 2002
(d) It decreases the need for storage facilities
(a) Rural poor
Ans : DELHI 2010
The passage defines rural development as a
(a) It reduces risks associated with crop failure process to improve the living standards of rural
and market fluctuations poor and make their development self-sustaining.
The passage explains that crop diversification
helps farmers reduce risks and earn more stable 34. ______ credit is used for purchasing seeds,
incomes by growing a variety of crops. fertilizers and other agricultural inputs to improve
productivity.
31. What is the role of organic farming in sustainable (a) Long-term
development, as described in the passage? (b) Medium-term
(a) It increases the use of chemical fertilizers (c) Short-term
(b) It reduces soil and water pollution by avoiding (d) Non-institutional
harmful pesticides
Ans : COMP 2003
(c) It focuses on achieving maximum crop yield
through modern methods (c) Short-term
(d) It eliminates the need for marketing The passage states that short-term credit is
infrastructure essential for farmers to buy inputs like seeds and
fertilizers to enhance agricultural productivity.
Ans : SQP 2000

(b) It reduces soil and water pollution by avoiding 35. The National Bank for Agriculture and Rural
harmful pesticides Development (NABARD) acts as a ______
The passage highlights that organic farming bank to coordinate the activities of rural credit
contributes to environmental sustainability by institutions.
being free of harmful chemicals. (a) Cooperative
(b) Apex
32. How do cooperative agricultural marketing (c) Commercial
societies assist farmers, as mentioned in the (d) Private
passage?
Ans : OD 2005
(a) They provide free fertilizers and seeds to
farmers (b) Apex
(b) They help farmers market their produce and The passage mentions NABARD as an apex
distribute essential inputs bank that coordinates and supports rural credit
(c) They provide long-term loans for agricultural institutions.
development
36. The absence of proper ______ facilities forces
(d) They ensure international trade for farmers’
farmers to sell their produce early at low prices.
produce
(a) Storage
Ans : COMP 2004 (b) Transportation
(b) They help farmers market their produce and (c) Grading
distribute essential inputs (d) Marketing
The passage mentions that cooperative societies Ans : FOREIGN 2006
assist farmers in marketing their products and
(a) Storage
distributing fertilizers, seeds and equipment.
According to the passage, the lack of proper
storage facilities compels farmers to sell their
crops early, even at lower prices.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 399

57. Diversification of agriculture implies: 62. Which of the following states is the leading fish
(a) multiple cropping producer in India?
(b) adoption of modern farming methods (a) Uttar Pradesh
(c) shift of workforce from agriculture to other (b) Kerala
allied activities (c) Rajasthan
(d) (a) and (c) (d) Andhra Pradesh
Ans : COMP 2022 Ans : COMP 2019

(d) (a) and (c) (b) Kerala

58. ______ is a process, which includes all the 63. The scheme of ‘Micro Finance’ is extended
activities from sowing till sale of the final produce through ______ credit provision.
in the market. (Fill up the blank with correct (Fill up the blank with correct alternative.)
alternative) (a) Self help groups
(a) Rural Development (b) Land Development Banks
(b) Agricultural Diversification (c) Regional Rural Banks
(c) Organic Farming (d) Commercial Banks
(d) Agricultural Marketing
Ans : FOREIGN 2018
Ans : OD 2023
(a) Self help groups
(d) Agricultural Marketing
64. _____ farming is the system that restores,
59. ______ is the apex institution which plans and maintains and enhances the ecological balance.
evaluates policies related to rural credit needs. (Fill up the blank with correct alternative.)
(a) Cooperative Credit Societies (a) Conventional
(b) Regional Rural Banks (b) Chemical
(c) Self Help Groups (c) Organic
(d) NABARD (d) Multi-layered
Ans : DELHI 2023 Ans : COMP 2007

(d) NABARD (c) Organic

60. Which one of the following is an apex body to take

care of the rural financing system of the country.
(a) RBI ASSERTION AND REASON
(b) NABARD
(c) ICICI
(d) SBI 65. Assertion : Cooperative marketing helps the
farmers get a fair price for their products.
Ans : SQP 2019
Reason : Regulated markets protect the farmers
(b) NABARD from malpractices of sellers and brokers.
(a) Assertion and Reason both are correct
61. Identify, which of the following alternative statements and Reason is correct explanation
indicates towards incorrect components for Assertion.
combination of Agricultural Marketing System? (b) Assertion and Reason both are correct
(a) Assembling, Storage, Processing, Packaging statements but Reason is not correct
(b) Production, Assembling, Processing, Grading explanation for Assertion.
(c) Assembling, Processing, Packaging, (c) Assertion is true but Reason is false.
Transportation (d) Assertion is false but Reason is true.
(d) Processing, Packaging, Grading, Distribution
Ans : OD 2000
Ans : DELHI 2012
(b) Assertion and reason both are correct statements
(b) Production, Assembling, Processing, Grading but reason is not correct explanation for assertion.
Under Cooperative marketing, farmers form
societies to sell their output collectively and

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CH 10 : RURAL DEVELOPMENT

46. Operation Flood was implemented in Ans : FOREIGN 2021

(a) 1985 (d) All of these

(b) 1966
(c) 1951 52. Which approach was adopted by India in 1969 to
(d) 1995 meet the need of rural credit?
(a) social banking
Ans : OD 2015
(b) multi-agency
(b)1966 (c) both (a) and (b)
(d) none of these
47. What was the growth rate of agricultural output
during 2007-12? Ans : DELHI 2022

(a) 32% per annum (c) both (a) and (b)

(b) 6% per annum
(c) 1.5% per annum 53. When was the National Bank for Agricultural and
(d) 5% per annum Rural Development set up?
(a) 1962
Ans : FOREIGN 2016
(b) 1972
(a) 32% per annum (c) 1982
(d) 1992
48. Which of the following is an institutional source
of rural credit? Ans : SQP 2023

(a) Moneylenders (c) 1982

(b) Regional Rural Banks
(c) Traders 54. Which Indian state has been held as a success
(d) Landlords story in the efficient implementation of milk
cooperatives?
Ans : DELHI 2017
(a) Punjab
(b) Regional Rural Banks (b) Gujarat
(c) Uttar Pradesh
49. What is the name of the vegetable and fruit (d) West Bengal
market in Andhra Pradesh?
(a) Apni Mandi Ans : COMP 2012

(b) Hadaspar Mandi (b) Gujarat

(c) Rythu Bazars
(d) Uzhavar Sandies 55. How much do the “inland sources” contribute to
the total fish production in India?
Ans : COMP 2019
(a) 64%
(c) Rythu Bazars (b) 39%
(c) 50%
50. Which status has been accorded to the retail (d) 75%
chains and supermarkets for selling organic food?
(a) Eco Status Ans : SQP 2003

(b) Sustainable Status (a) 64%

(c) Nutritional Status
(d) Green Status 56. Which among the following is a process that
involves the assembling, storage, processing,
Ans : OD 2020
transportation, packaging, grading and
(d) Green Status distribution of different agricultural commodities
across the country?
51. Which among the following is an initiative taken (a) Agricultural Management
for the development of rural India? (b) Agricultural Banking
(a) Human Capital Formation (c) Agricultural Diversification
(b) Land Reforms (d) Agricultural Marketing
(c) Poverty Alleviation
(d) All of these Ans : SQP 2018

(d) Agricultural Marketing

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 401

(a) Assertion and Reason both are correct food insecurity and accordingly the appropriate
statements and Reason is correct explanation steps can be taken. It also provides information
for Assertion. regarding emerging technologies, prices, weather
(b) Assertion and Reason both are correct and soil conditions for growing different crops.
statements but Reason is not correct
explanation for Assertion. 74. Assertion : An efficient rural credit system is
(c) Assertion is true but Reason is false. crucial for raising agricultural productivity
(d) Assertion is false but Reason is true. Reason : There is a long time gap between crop
sowing and realisation of income.
Ans : FOREIGN 2006
(a) Assertion and Reason both are correct
(c) Assertion is true but Reason is false. statements and Reason is correct explanation
The main objective of NABARD is to promote for Assertion.
the health and strength of credit Institutions (b) Assertion and Reason both are correct
namely cooperatives, commercial banks and statements but Reason is not correct
regional rural banks. explanation for Assertion.
(c) Assertion is true but Reason is false.
72. Assertion : Organic farming promotes sustainable (d) Assertion is false but Reason is true.
development.
Reason : Organically grown food has more Ans : SQP 2007

nutritional value. (a) Assertion and reason both are correct

(a) Assertion and Reason both are correct statements and reason is correct explanation for
statements and Reason is correct explanation assertion.
for Assertion.
(b) Assertion and Reason both are correct 75. Assertion : Organic farming improves soil fertility.
statements but Reason is not correct Reason : Organic farming restores, maintains and
explanation for Assertion. enhances the ecological balance.
(c) Assertion is true but Reason is false. (a) Assertion and Reason both are correct
(d) Assertion is false but Reason is true. statements and Reason is correct explanation
for Assertion.
Ans : DELHI 2006
(b) Assertion and Reason both are correct
(b) Assertion and reason both are correct statements but Reason is not correct
statements but reason is not correct explanation explanation for Assertion.
for assertion. (c) Assertion is true but Reason is false.
Organic farming uses on-farm resources which (d) Assertion is false but Reason is true.
maintain long-term fertility of the soil. Ans : COMP 2008

73. Assertion : IT has revolutionised many sectors in (a) Assertion and reason both are correct
the Indian economy. statements and reason is correct explanation for
Reason : The Golden Revolution has made India assertion.
a world leader in the production of meat, eggs,
wool etc. 76. Assertion : Minimum Support Price safeguards
(a) Assertion and Reason both are correct the interests of farmers.
statements and Reason is correct explanation Reason : The farmers can sell their grains in the
for Assertion. open market at the Minimum Support Price.
(b) Assertion and Reason both are correct (a) Assertion and Reason both are correct
statements but Reason is not correct statements and Reason is correct explanation
explanation for Assertion. for Assertion.
(c) Assertion is true but Reason is false. (b) Assertion and Reason both are correct
(d) Assertion is false but Reason is true. statements but Reason is not correct
explanation for Assertion.
Ans : OD 2009
(c) Assertion is true but Reason is false.
(c) Assertion is true but Reason is false. (d) Assertion is false but Reason is true.
By using appropriate information and software Ans : FOREIGN 2010
tools, the government can predict the areas of
(c) Assertion is true but Reason is false.

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CH 10 : RURAL DEVELOPMENT

(a) Crop Diversification (a) Industrialization in urban areas

(b) Livestock (b) Poverty alleviation and infrastructure
(c) Fisheries development
(d) Horticulture (c) Expanding exports of agricultural products
(d) Increasing migration to urban areas
Ans : FOREIGN 2014

(a) Crop Diversification Ans : OD 2001

The pie chart shows that Crop Diversification (b) Poverty alleviation and infrastructure
accounts for 30%, the highest contribution to development
agricultural diversification. Livestock follows The passage emphasizes that rural development
at 25%, Fisheries at 20% and Horticulture at aims to alleviate poverty and improve
15%. This reflects the prominent role of crop infrastructure, making it a key aspect of improving
diversification in reducing risks and increasing rural living standards.
agricultural productivity.
96. Rural credit provides financial support to farmers
who cannot meet their credit needs from their
own savings. Short-term credit is required for
PASSAGE BASED QUESTION purchasing seeds and fertilizers, while long-
term credit is used for buying land or expensive
machinery. Regional Rural Banks (RRBs) cater
94. Organic farming promotes environmental to the weaker sections and NABARD coordinates
sustainability by avoiding harmful chemicals and all rural credit institutions.
reducing soil and water pollution. It generates What is the role of NABARD in the rural credit
higher income from exports due to increasing system?
global demand for organic produce. However, (a) It directly provides loans to farmers
challenges like lower yields, lack of awareness (b) It finances only cooperative banks
and marketing difficulties hinder its widespread (c) It coordinates rural credit institutions
adoption. (d) It develops farming equipment
What is one of the key challenges faced by organic
farming? Ans : FOREIGN 2002

(a) High market demand (c) It coordinates rural credit institutions

(b) Excessive use of fertilizers The passage highlights that NABARD coordinates
(c) Lack of awareness among farmers the activities of various institutions like RRBs,
(d) High crop yields cooperative banks and commercial banks in the
rural credit system.
Ans : COMP 2024
97. Agricultural marketing in India faces challenges
(c) Lack of awareness among farmers
such as lack of storage facilities, poor road
The passage mentions that organic farming faces
connectivity and exploitation by intermediaries.
challenges such as lack of awareness and marketing
Farmers often do not get accurate information
difficulties, even though it offers environmental
about market prices, which reduces their profits.
and financial benefits.
Regulated markets and minimum support prices
95. Rural development focuses on improving the living have been introduced to address these issues and
standards of low-income people in rural areas and ensure better returns for farmers.
making the process of their development self- What is one of the key measures to improve
sustaining. It involves enhancing the quality of agricultural marketing?
human resources, developing infrastructure like (a) Encouraging more intermediaries
electricity, irrigation and roads and implementing (b) Providing free transportation for farmers
land reforms to create employment opportunities. (c) Introducing regulated markets
Poverty alleviation also forms a key aspect of (d) Increasing taxes on agricultural produce
rural development.
Which of the following is a major objective of Ans : DELHI 2003

rural development? (c) Introducing regulated markets

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 403

81. Which combination of statements about (a) Only 2, 3 and 4 are correct
agricultural diversification is correct? (b) Only 1 and 2 are correct
1. Diversification reduces dependency on (c) Only 1, 3 and 4 are correct
traditional farming. (d) All statements are correct
2. It includes both crop diversification and non-
Ans : COMP 2004
farm activities.
3. Livestock and fisheries are examples of (c) Only 1, 3 and 4 are correct
diversified activities. The passage highlights the environmental benefits,
Diversification eliminates the need for rural credit. export demand and employment potential of
(a) Only 1, 2 and 3 are correct organic farming. However, it mentions that
(b) Only 1 and 4 are correct organic farming often results in lower yields,
(c) Only 2 and 4 are correct making statement 2 incorrect.
(d) All statements are correct
84. Which combination of statements about
Ans : SQP 2003 diversification in agriculture is correct?
(a) Only 1, 2 and 3 are correct 1. Crop diversification reduces the risks
The passage mentions that diversification reduces associated with market fluctuations.
dependency on farming and includes livestock, 2. Non-farm activities like livestock and fisheries
fisheries and crop diversification. It does not help farmers earn alternative incomes.
eliminate the need for rural credit, making 3. Diversification is only suitable for large
statement 4 incorrect. farmers with sufficient resources.
4. It ensures seasonal employment opportunities
82. Identify the correct combination of statements for rural workers.
about rural credit: (a) Only 1, 2 and 4 are correct
1. Cooperative banks provide both short-term (b) Only 1 and 3 are correct
and medium-term loans to farmers. (c) Only 2, 3 and 4 are correct
2. Land Development Banks are part of the (d) All statements are correct
cooperative credit system.
Ans : OD 2008
3. Regional Rural Banks (RRBs) provide loans
to all rural populations. (a) Only 1, 2 and 4 are correct
4. Rural credit agencies often fail to meet the The passage explains that diversification reduces
needs of small and marginal farmers. risks, provides alternative income sources and
(a) Only 2, 3 and 4 are correct offers seasonal employment. It is not limited to
(b) Only 1, 2 and 4 are correct large farmers, making statement 3 incorrect.
(c) Only 1 and 3 are correct
85. Which combination of statements about
(d) All statements are correct
agricultural marketing is correct?
Ans : DELHI 2006 1. Farmers lack reliable information about
(b) Only 1, 2 and 4 are correct prevailing market prices.
The passage mentions that RRBs focus on weaker 2. The absence of proper grading practices
sections of the rural population, not all rural reduces the quality of marketed crops.
people, making statement 3 incorrect. The rest of 3. Government policies like minimum support
the statements are correct. prices help stabilize farmers’ incomes.
4. Agricultural marketing is free from
83. Identify the correct combination of statements intermediary exploitation.
about organic farming: (a) Only 1, 2 and 3 are correct
1. Organic farming reduces soil and water (b) Only 1, 2 and 4 are correct
pollution. (c) Only 2, 3 and 4 are correct
2. It often results in higher yields than modern (d) All statements are correct
farming.
Ans : SQP 2010
3. Organically grown crops have higher export
demand. (a) Only 1, 2 and 3 are correct
4. Organic farming generates more employment The passage mentions that intermediaries exploit
opportunities. farmers, making statement 4 incorrect. The other

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CH 10 : RURAL DEVELOPMENT

Minimum Support Price ensures fair returns to The passage highlights that rural development
the farmers and hence safeguards them from the includes infrastructure development, improved
risk of selling their output at low price in the living standards and poverty alleviation. However,
market. it is broader than just agricultural growth, which
makes statement 3 incorrect.
77. Assertion : Diversification of agricultural
activities provides sustainable livelihood options 79. Which combination of statements about rural
to rural people credit is correct?
Reason : A significant number of women are 1. Rural credit is vital for meeting the financial
employed in the livestock sector. needs of farmers.
(a) Assertion and Reason both are correct 2. Cooperative banks provide long-term loans
statements and Reason is correct explanation through land development banks.
for Assertion. 3. Regional Rural Banks (RRBs) were set up to
(b) Assertion and Reason both are correct meet the credit needs of weaker sections of
statements but Reason is not correct society.
explanation for Assertion. 4. NABARD directly provides loans to farmers
(c) Assertion is true but Reason is false. for their agricultural needs.
(d) Assertion is false but Reason is true. (a) Only 1, 2 and 3 are correct
(b) Only 2 and 4 are correct
Ans : DELHI 2011
(c) Only 1 and 3 are correct
(b) Assertion and reason both are correct (d) All statements are correct
statements but reason is not correct explanation
for assertion. Ans : FOREIGN 2001

Diversification of agricultural activities provides (a) Only 1, 2 and 3 are correct

the small and marginal farmers with alternative The passage explains that NABARD coordinates
sources of employment. It helps in shifting credit activities but does not directly provide
resources from production of low value products loans to farmers, making statement 4 incorrect.
to production of high value products increasing The other statements are correct as per the
the income of the farmers. description of rural credit.

80. Identify the correct combination of statements

about the defects in agricultural marketing:
STATEMENT BASED QUESTIONS 1. Farmers lack access to proper storage facilities
for their produce.
2. The absence of reliable transportation in
78. Identify the correct combination of statements rural areas reduces market access for farmers.
about rural development: 3. Farmers are highly organized and can bargain
1. Rural development focuses on the overall for better prices.
improvement of living standards in rural 4. The large number of intermediaries reduces
areas. farmers’ returns.
2. It includes the development of infrastructure (a) Only 1 and 3 are correct
like electricity, irrigation and rural credit. (b) Only 1, 2 and 4 are correct
3. Rural development is only concerned with (c) Only 3 and 4 are correct
agricultural growth. (d) All statements are correct
4. Alleviation of poverty is a critical aspect of Ans : DELHI 2002
rural development.
(b) Only 1, 2 and 4 are correct
(a) Only 2 and 3 are correct
The passage states that farmers face issues like lack
(b) Only 1 and 3 are correct
of storage, poor transportation and exploitation
(c) Only 1, 2 and 4 are correct
by intermediaries. However, farmers are not well-
(d) All statements are correct
organized, making statement 3 incorrect.
Ans : OD 2000

(c) Only 1, 2 and 4 are correct

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 405
Ans : SQP 2013
(a) 2010 to 2012 (b) 2012 to 2014
(a) Non-Institutional Sources (c) 2014 to 2016 (d) 2018 to 2020
The bar graph shows that Non-Institutional Ans : SQP 2016
Sources provide 40% of rural credit, which is
the highest among all categories. Cooperative (d) 2018 to 2020
Banks provide 25%, Commercial Banks 20% and The graph shows that rural credit disbursement
Regional Rural Banks 15%. This highlights the increased significantly from 500 billion INR in 2018
significant role of non-institutional sources in to 650 billion INR in 2020, the highest increment
rural credit systems. compared to other periods. This highlights the
rapid growth in rural credit availability during
90. Based on the line graph, during which period did this time.
agricultural productivity see the highest increase
in percentage? 92. According to the pie chart, which issue in
agricultural marketing has the highest percentage?

(a) Lack of Storage Facilities

(b) Poor Transportation
(a) 2000 to 2005 (b) 2005 to 2010 (c) Exploitation by Intermediaries
(c) 2010 to 2015 (d) 2015 to 2020 (d) Lack of Market Price Information

Ans : DELHI 2015

Ans : COMP 2013

(c) 2010 to 2015 (c) Exploitation by Intermediaries

The graph shows a significant increase in The pie chart indicates that “Exploitation by
productivity from 70% in 2010 to 85% in 2015, Intermediaries” accounts for 35% of the issues,
the largest increase compared to other periods. the highest among the listed categories. Other
Other intervals had smaller increments, making issues like lack of storage facilities (25%), poor
2010 to 2015 the most substantial growth phase. transportation (20%) and lack of market price
information (20%) contribute significantly but are
91. Based on the line graph, in which period did rural comparatively lower.
credit disbursement witness the largest increase?
93. Based on the pie chart, which activity contributes
the most to agricultural diversification?

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CH 10 : RURAL DEVELOPMENT

statements are accurate regarding the defects and Ans : COMP 2024

measures in agricultural marketing. (a) Animal Husbandry

86. Identify the correct combination of statements 88. Based on the bar graph, which type of rural credit
about the defects in agricultural marketing: has the longest duration?
1. Lack of proper transportation prevents
farmers from accessing markets.
2. Farmers are often forced to sell their produce
early due to inadequate storage facilities.
3. Intermediaries claim a significant share of
farmers’ profits.
4. Farmers are highly organized and have strong
bargaining power.
(a) Only 1, 3 and 4 are correct
(b) Only 2 and 4 are correct
(c) Only 1, 2 and 3 are correct
(d) All statements are correct
Ans : COMP 2015

(c) Only 1, 2 and 3 are correct (a) Short-term Credit

The passage mentions lack of transportation, (b) Medium-term Credit
inadequate storage and intermediary exploitation (c) Long-term Credit
as key defects in agricultural marketing. Farmers (d) All have equal duration
are not well-organized, making statement 4
incorrect. Ans : OD 2011

(c) Longterm credit

The bar graph shows that Long-term Credit has
the longest duration, ranging up to 50 months,
GRAPH BASED QUESTIONS while Medium-term Credit lasts up to 35 months
and Short-term Credit up to 15 months. This
classification reflects the different needs of farmers
87. Study the following picture: based on their agricultural requirements.

89. Based on the bar graph, which source provides

the highest percentage of rural credit?

Identify the kind of activities, which may be

envisaged under ______ as diversification
activity. (Fill up the blank with correct
alternative.)
Alternatives
(a) Non-Institutional Sources
(a) Animal Husbandry
(b) Cooperative Banks
(b) Fisheries
(c) Commercial Banks
(c) Horticulture
(d) Regional Rural Banks
(d) Organic farming

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 407

The passage mentions that regulated markets are Cooperative marketing refers to a system where
set up to reduce malpractices, ensure standardized farmers form marketing societies to collectively
measures and help farmers get fair prices for their sell their produce and benefit from collective
produce. bargaining.

98. Diversification in agriculture involves producing 103. What are regulated markets?
a variety of crops and engaging in non-farm
Ans : COMP 2004
activities like livestock rearing and fisheries.
It reduces risks from market fluctuations and Regulated markets are markets established by
crop failures while providing alternative sources the government where farmers sell their products
of income. Diversification also ensures seasonal directly, without the involvement of middlemen.
employment for small farmers and rural workers.
104. What is minimum support price?
What is a significant benefit of agricultural
diversification? Ans : OD 2005
(a) It reduces the need for rural credit It is the minimum price at which the government
(b) It focuses on traditional farming methods agrees to purchase food grains from farmers.
(c) It reduces risks and provides alternative
income sources 105. What is buffer stock?
(d) It eliminates the need for agricultural
Ans : FOREIGN 2006
marketing
It refers to the stock of grains maintained by the
Ans : SQP 2004
government to stabilize prices and to be used in
(c) It reduces risks and provides alternative emergencies, as well as for distribution through
income sources fair price shops under the public distribution
The passage highlights that diversification reduces system.
dependency on a single crop, minimizes risks
and offers alternative employment and income 106. What is AGMARK?
opportunities. Ans : DELHI 2007

It is a label placed on standardized agricultural

products under government supervision and is a
short form of Agricultural Marketing.
ONE MARK QUESTIONS
107. What is subsistence farming?

99. What do you mean by rural development? Ans : SQP 2008

Ans : OD 2000
It is farming done to produce crops meant for self-
consumption by the farming families.
Rural development involves efforts to improve
areas that are underdeveloped in the overall 108. What is the golden revolution?
village economy of the country.
Ans : COMP 2009

100. What is micro credit? It is the period between 1991 and 2003, when
Ans : FOREIGN 2001
planned investment in horticulture became
highly productive and the sector emerged as a
Micro credit refers to small loans provided to sustainable livelihood option.
impoverished individuals.
109. Name the states that are major producers of
101. What is the function of NABARD ? marine products.
Ans : DELHI 2002
Ans : OD 2010
Its function is to coordinate the activities of all Kerala, Gujarat, Maharashtra and Tamil Nadu
institutions that provide rural credit. are the leading producers of marine products.
102. What is Cooperative marketing?
Ans : SQP 2003

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CH 10 : RURAL DEVELOPMENT

110. Which state has the most efficient implementation promoting cooperative marketing and introducing
of milk cooperatives? policy tools like Minimum Support Prices (MSPs)
and the Public Distribution System (PDS). These
Ans : FOREIGN 2011
initiatives aim to improve market efficiency and
Gujarat support farmers.
111. Define Agricultural diversification. 115. Distinguish between ‘Green Revolution’ and
Ans : DELHI 2023 ‘Golden Revolution’.
Ans : COMP 2020
Agricultural diversification refers to the
reallocation of farm resources like land, capital, Difference between Green Revolution and Golden
equipment and labor to other products, especially Revolution are as follows :
non-farming activities.
Green Revolution Golden Revolution
(i) Green Revolution The period during
refers to the which there was
TWO MARK QUESTIONS large increase rapid growth in
in production of the production of
foodgrains due to horticultural crops
112. Give two examples of alternate marketing use of HYV seeds. such as fruits,
channels. vegetables, flowers
Ans : SQP 2012
etc. is known as
Golden revolution.
The reference to Apni Mandi in Punjab, Haryana
and Rajasthan and Hadaspur Mandi in Pune, (ii) Green Revolution Golden Revolution
pertains to regional market setups aimed at made India self made India a
facilitating direct transactions between farmers sufficient in the world leader in
and consumers. These mandis provide platforms production of food the production of
for agricultural produce trading, ensuring farmers grains, especially mangoes, bananas,
receive better prices by eliminating intermediaries. rice and wheat. coconut and spices.

113. How is green revolution different from golden 116. What are the two notable aspects of rural
revolution? development?
Ans : COMP 2012
Ans : OD 2013

The Green Revolution refers to the significant The two notable aspects of rural development are:
increase in the production of food grains, (i) It is much broader than the concept of
particularly wheat and rice, through the use agricultural development, addressing overall
of high-yielding varieties, chemical fertilizers village economy.
and advanced irrigation methods. On the other (ii) Special attention is needed for the development
hand, the Golden Revolution focuses on the of agriculture, as it is the primary source of
rise in the production of fruits and vegetables, livelihood for rural people.
primarily within the horticulture sector, driven by 117. What are the major defects of agricultural
improved cultivation techniques and better crop marketing in India?
management.
Ans : FOREIGN 2014

114. State the meaning of ‘Agricultural Marketing.’ The major defects include:
Ans : OD 2020
(i) Lack of proper storage facilities, forcing
farmers to sell at low prices.
Agricultural marketing encompasses the processes (ii) Poor road transportation, preventing access
of assembling, storing, processing, transporting, to nearby mandis.
packaging, grading and distributing agricultural (iii) Presence of intermediaries reduces farmers’
products nationwide. To enhance this system, returns.
the government has implemented measures such (iv) Farmers lack information about prevailing
as regulating markets, providing infrastructure, market prices for their produce.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 409

118. What are the main sources of rural credit in use of email, e-governance and the development
India? of information technologwsy reflect the country’s
gradual transformation into a knowledge-based
Ans : DELHI 2015
economy. India’s entry into this knowledge
Rural credit sources are: economy is best represented by its success in the
(i) Non-Institutional Sources: Landlords, Information Technology sector. The country’s IT
moneylenders and traders. industry has expanded rapidly, offering diverse
(ii) Institutional Sources: Cooperative banks, services ranging from software development to
commercial banks, regional rural banks business process outsourcing.
(RRBs) and NABARD, which provide short, According to a World Bank report, India possesses
medium and long-term loans to meet farmers’ all the essential elements needed to transition
credit needs. into a developed economy. These include a large
pool of skilled workers, a thriving democracy
119. State two benefits and two limitations of organic
and a well-established, diversified science and
farming.
technology infrastructure.
Ans : SQP 2016
122. “Infrastructural development is an essential
Benefits:
element to obtain the full potential of the rural
(i) It produces healthier food free from harmful
sector in India”.
chemicals.
Justify the given statement with valid arguments.
(ii) It ensures environmental sustainability by
reducing pollution. Ans : OD 2024

Limitations: To address the challenges in rural development,

(i) Organic farming yields are lower compared to focus should be on improving transport systems,
modern methods. connecting rural and urban areas, providing
(ii) It has shorter shelf life and appearance issues, power, ensuring permanent irrigation solutions,
making it less marketable. facilitating rural credit and enhancing agricultural
research and rural marketing. Strengthening
120. What is diversification of agriculture and why is
infrastructure is crucial to boost production and
it important?
productivity in rural areas. Easy and affordable
Ans : COMP 2017 credit not only creates job opportunities but also
Diversification of agriculture involves: promotes the shift from farming to non-farming
(i) Crop diversification: Growing various crops and allied activities. Therefore, infrastructure
to reduce risks. development plays a pivotal role in advancing the
(ii) Productive activities: Shifting to livestock, overall rural economy.
fisheries and horticulture.
123. Explain the micro credit programmes started by
It is important to reduce dependence on
the government to improve rural credit.
traditional farming, provide alternative incomes
or
and ensure stability against market and weather-
Explain the role of micro credit in meeting the
related risks.
credit requirements of the poor.
Ans : OD 2023

Self Help Groups (SHGs) have emerged as a

THREE MARK QUESTIONS significant development in rural credit, addressing
gaps in the formal credit system. The formal
credit mechanism has often proven inadequate
121. ‘India can transform itself knowledge-based and has not been fully integrated into rural social
economy by using information technology.’ and community development. SHGs encourage
Justify the given statement. savings among rural households, mobilizing
Ans : OD 2024 small savings that are then provided as credit
to members based on their needs. This credit is
India is emerging as a knowledge hub, with the
offered without collateral, at moderate interest
Indian software industry experiencing remarkable
rates and repayable in small installments. SHGs
growth over the past few decades. The widespread

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CH 10 : RURAL DEVELOPMENT

refinance facilities to state cooperative 138. Enumerate the essential features of well organised
banks, commercial banks and regional marketing.
rural banks, which then provide credit to or
farmers. NABARD also plays a key role Explain the features of a regulated market.
in directing, inspecting and supervising
Ans : DELHI 2023
credit flow for agriculture and rural
development. Its main functions include: A well-organized and regulated market should
1. Serving as the apex funding agency include the following key features:
for rural credit institutions, (i) Minimized middlemen: The number of
2. Improving the credit delivery system, intermediaries between farmers and consumers
3. Coordinating rural financing should be kept to a minimum to ensure fair
activities across all credit institutions, prices for both.
4. Monitoring and evaluating financed (ii) Adequate storage facilities: Proper storage
projects, infrastructure should be available to help
5. Assisting non-farm sectors like farmers store their produce, enabling them to
artisans, weavers and village sell at more remunerative prices.
industries. (iii) Affordable transportation: There should
be affordable and efficient transportation
137. “Social banking in rural areas has taken a hit in options so that farmers can transport their
the wake of economic reforms of 1991.” Explain produce to markets, rather than selling it at
the statement. exploitative prices in the village.
(iv) Information dissemination: Information
Ans : FOREIGN 2012
about market conditions and prevailing prices
Since the 1990s, the monetary policy environment should be spread through mass media to keep
in India has undergone significant transformation, farmers informed.
with a primary focus on progressive deregulation (v) Grading and standardization: Facilities
aimed at fostering market development and for grading and standardization should be
improving efficiency. Prior to the reforms, the provided to ensure the quality of agricultural
monetary policy was marked by heavy control by products is maintained.
the Reserve Bank of India (RBI). However, in the
post-liberalization era, the RBI introduced various 139. The creation of orderly and transparent marketing
measures to ensure the safety and stability of the conditions have benefited the farmers as well as
banking system while also encouraging banks to the consumers. How?
play a more active role in promoting economic Ans : COMP 2019
growth.
While banking and financial sector reforms Transparency and a well-structured market
were intended to improve the rural credit system would entail the following:
environment, they largely failed to achieve this (i) Regulation of markets: The initial step in
goal. The new banking culture, shaped by these creating a transparent and orderly marketing
reforms, prioritized lending to large corporates environment was the regulation of markets.
and consumption loans like car loans, rather than This measure protected farmers from
addressing the needs of rural areas. This shift exploitation by brokers and ensured they
adversely impacted the rural credit environment. received reasonable prices for their produce.
Furthermore, the Indian banking system has By eliminating middlemen, the overall cost
not adequately focused on rural banking, as of products decreased, as fewer intermediaries
evidenced by the declining proportion of net meant less commission to be paid, which
bank credit allocated to agriculture. Post-reform, ultimately lowered the price for consumers.
Indian banks have placed greater emphasis on the (ii) Standardization and grading: Using modern
“three C’s”—consumer credit, corporate elite and methods to standardize and grade products
capital market activities—rather than working to ensures that they are comparable and
improve rural credit conditions. competitive. This process guarantees that
higher-quality products command better
prices and consumers receive value for their
money. It also facilitates international trade,

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to a multiple cropping system. It involves Ans : SQP 2024

reallocating resources from the production Agricultural marketing refers to the entire process
of low-value crops to high-value ones. This that assists farmers in selling their surplus produce.
increases farmers’ incomes as they receive It encompasses various activities, including:
more value for the same cost of resources, (a) Procurement: Collecting farm produce after
which remain unchanged. Additionally, it is harvested,
since agriculture is a seasonal occupation, (b) Processing: Preparing the produce for further
crop diversification helps in stabilizing farm use or sale,
income by minimizing risks associated with (c) Grading: Sorting the produce according to
fluctuations in production and market prices. quality,
(ii) Workforce Diversification: This refers to (d) Packaging: Packaging the produce based on
moving the workforce from agriculture to different qualities and quantities,
allied activities such as livestock, poultry (e) Storing: Keeping the produce for future sale
and fisheries, as well as to non-agricultural and
sectors. This shift eases the pressure on (f) Transportation: Moving the produce to
agriculture and contributes to supplementing markets for sale.
rural income. A well-organized agricultural marketing system
offers several benefits:
(a) It helps farmers secure better prices for their
produce.
FOUR MARK QUESTIONS (b) It ensures a consistent supply of agricultural
raw materials to agro-based industries within
the country.
130. “Growth of rural economy depends primarily on
(c) It guarantees a steady availability of food
infusion of capital to realize higher productivity
grains for the population.
in agricultural and non-agricultural sectors.”
(d) It encourages farmers to adopt more
Explain the statement.
productive agricultural techniques, leading to
Ans : COMP 2024 higher agricultural productivity and output.
Capital is essential for any development activity (e) Surplus agricultural produce, when sold in
and the availability of credit plays a crucial role in international markets, contributes to foreign
rural development. Since there is a long gap between exchange earnings for the country.
crop sowing and the realization of income, farmers
132. Rural development essentially focuses on areas
often need to borrow from various sources to cover
that are lagging behind in the overall development
initial expenses like seeds, fertilizers, equipment
of the village economy. In view of the given
and family costs such as marriages or religious
statement, identify such areas.
ceremonies. Banking institutions have supported
or
small and marginal farmers by providing financial
Discuss the challenges facing rural development
assistance, enabling them to engage in agriculture
in India.
and related activities, which in turn has increased
their average income. In some cases, poor families Ans : DELHI 2022

form Self Help Groups or cooperative societies Economists have highlighted several critical
to access institutional credit. These financial issues related to rural development that require
institutions also contribute to rural employment special focus for improving the living standards
by financing various government self-employment of rural populations. Some of the key areas that
programs through public sector banks. need attention and new strategies for rural India’s
progress are:
131. Agricultural marketing plays a vital role in
1. Human resource development: The rural
connecting farmers to consumers, ensuring fair
development plan must address challenges
prices and efficient distribution of produce. It
like improving literacy (especially among
includes various processes like procurement,
women), skill development and healthcare.
storage and transportation to support the rural
2. Land reforms: These are necessary to
economy. What do you mean by agricultural
enhance agricultural productivity, eliminate
marketing? Discuss its various advantages.
middlemen and prevent the exploitation of

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CH 10 : RURAL DEVELOPMENT

have also contributed to the empowerment of (iii) The large number of rural loans, coupled with
women. These micro-credit programs are growing their small amounts, increases transaction
in popularity, with over 7 lakh SHGs operating in costs, adding to the financial burden of the
rural areas, mainly due to their informal credit banks..
delivery system and minimal legal requirements.
127. India’s dairy sector experienced a significant
124. Discuss the importance of credit in rural transformation in the 1970s, improving milk
development. production and rural incomes. This was achieved
through an initiative called Operation Flood.
Ans : COMP 2024 ,2020
Write a short note on “Operation Flood”.
In agriculture, the long gap between crop
sowing and income realization creates a strong Ans : DELHI 2019

need for credit. Farmers require funds to Over the past thirty years, the Indian Dairy
cover initial investments in seeds, fertilizers, Sector has shown remarkable growth, largely due
implements and also to meet personal expenses to the successful implementation of Operation
such as family weddings, funerals and religious Flood. This program involves farmers pooling
ceremonies. Hence, credit plays a vital role in their milk based on quality grades, which is then
agricultural production. A well-functioning rural processed and marketed to urban areas through
credit delivery system is essential for increasing cooperatives. It ensures that farmers receive fair
agricultural productivity and incomes, ultimately prices and stable income from supplying milk to
contributing to rural development.. urban markets. Gujarat serves as a prime example
of the successful and efficient operation of milk
125. Explain the importance of credit availability to cooperatives, a model now adopted by several
farmers in rural development. other states.
Ans : SQP 2023
128. Write a short note on agro-processing industries.
Credit is essential for the rural sector, particularly
in farming, for the following reasons: Ans : OD 2020

(i) The growth of the rural economy relies The agro-processing industry involves the
heavily on a regular infusion of capital, which transformation of products derived from
is necessary to achieve higher productivity agriculture, forestry and fisheries. It can be defined
and production in both agriculture and non- as a set of techno-economic activities aimed at
agriculture sectors. preserving and processing agricultural produce,
(ii) Since there is a long gap between crop sowing making it suitable for use as food, feed, fiber,
and income realization, farmers need credit to fuel, or industrial raw materials. Agro-processing
cover initial investments in seeds, fertilizers, is considered a key sector for India’s economic
implements and other family expenses such as growth, particularly due to its significant potential
weddings, funerals and religious ceremonies. for employment and income generation. The
Indian food processing industry, which includes
126. In India, rural credit plays a crucial role in products like fruits, vegetables, milk, fisheries and
supporting agriculture and rural development, various consumer goods (such as confectionery,
which are the backbone of the economy. Despite chocolates and soy-based products), is a prime
various efforts, commercial banks face numerous example. Other sectors include rice and flour
challenges in extending credit to rural areas. milling, leather tanning and oil pressing.
Briefly discuss some of the problems being faced
by commercial banks in providing rural credit. 129. Agricultural diversification helps improve
rural income by providing alternative sources
Ans : FOREIGN 2018
of earnings. It reduces risks and ensures stable
Some challenges faced by commercial banks in livelihoods for farmers. Explore the link between
extending rural credit include: rural income and agricultural diversification.
(i) The profitability of newly established rural
branches is low due to limited business Ans : FOREIGN 2021

potential in these areas. Diversification involves two key aspects:

(ii) Loan recovery remains unsatisfactory, (i) Agricultural Diversification: This refers
creating a persistent issue for the banks. to shifting from a single cropping system

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(iv) Institutional credit has positively impacted and unproductive purposes, with a
both rural farm and non-farm output and simple and quick borrowing process.
income. Banking institutions have supported Nevertheless, they also charge high
farmers in agricultural and allied activities, interest rates and often manipulate the
boosting their average income. accounts. Additionally, these sources lack
(v) These institutions have contributed to the the resources to meet the medium and
creation of employment opportunities in rural long-term credit needs of farmers.
areas by financing various self-employment 2. Institutional Sources : Institutional sources
programs run by the government through refer to various formal institutions like
public sector banks. cooperative societies, commercial banks,
(vi) They have also succeeded in developing regional rural banks and others.
banking habits among rural people. (i) Cooperative credit societies : These
However, despite these positive developments, societies offer farmers adequate credit at
there are several issues with rural banking: reasonable interest rates and also provide
(i) Inadequate credit : Despite the expansion, guidance in various agricultural activities
rural credit remains insufficient to meet the to enhance crop productivity. The main
growing demand. objectives of these societies are:
(ii) Lack of coordination : The different 1. Ensuring the timely and rapid flow of
institutions providing credit to farmers are credit to farmers,
not well-coordinated. 2. Eliminating moneylenders as credit
(iii) Unequal distribution : Rural credit agencies sources,
have failed to meet the needs of small and
3. Offering trade credit facilities across
marginal farmers, with wealthier farmers
regions,
taking the majority of institutional credit.
4. Providing sufficient credit in areas
(iv) High default rates : Political pressure has led
covered by special development
to reluctance in recovering loans, resulting in
programs.
a high default rate on agricultural loans.
(v) Demand for collateral : Many institutions There are two types of cooperative
require security or guarantees for loans, which institutions for agricultural finance:
often excludes small and marginal farmers • Cooperative banks : They provide
from accessing credit. short-term and medium-term loans.
(vi) Problems in cooperatives : Cooperatives lack • Land Development Banks : These
adequate financial resources to meet the offer long-term loans to farmers.
growing credit demands in rural areas. (ii) Commercial banks : Recognizing the role
(vii) Lack of thrift habits : Most financial of commercial banks in rural credit, the
institutions have not been successful in government nationalized several banks in
fostering a culture of savings among farming 1969. These nationalized banks provide
families, resulting in low deposit mobilization. credit both directly to farmers and
indirectly through cooperative societies.
136. What are the different sources of rural credit in
(iii) Regional Rural Banks (RRBs) and Land
India?
Development Banks : These institutions
Ans : OD 2010 were established to promote credit supply,
Sources of rural or agricultural credit can be particularly in remote and backward
broadly categorized into two groups: rural areas. Operating at the district
1. Non-Institutional Sources: level, RRBs focus on meeting the credit
(i) Rural moneylenders : These are commonly needs of the weaker sections of the rural
used due to the ease with which farmers population, with loans provided only for
can obtain credit. However, they charge productive purposes.
exorbitantly high interest rates. (iv) National Bank for Agriculture and Rural
(ii) Traders and landlords : Historically, Development (NABARD) : NABARD is
these sources have met most of the credit the apex institution responsible for policy,
needs of farmers. They remain popular planning and operations in rural credit
because they lend for both productive and related economic activities. It offers

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CH 10 : RURAL DEVELOPMENT

farmers. Ans : SQP 2023

3. Infrastructure development: Building essential

infrastructure, such as electricity, irrigation, Basis Institutional Non-
credit facilities, transport, agricultural credit institutional
research and information dissemination, is credit
crucial. 1. Sources The sources of Among the non-
4. Poverty reduction: Efforts to alleviate institutional institutional
poverty and improve living standards for credit are sources, we
disadvantaged groups must focus on providing Banks, include village
productive employment opportunities. This cooperatives, money lenders,
involves enhancing the productivity of those RRB’s etc. landlords,
involved in both farm and non-farm activities traders etc.
in rural areas. Moreover, people should be
2. Purpose It is mainly It is provided
encouraged to diversify into non-farm sectors
provided for for both
like food processing.
productive productive and
Additionally, improving healthcare, sanitation
purposes. non-productive
and education for all must be given top priority
purposes.
to ensure rapid rural development.
3. Cost of Since it is Since it is not
133. Why has expansion and promotion of rural banking credit/ regulated by regulated by
sector taken a backseat after reforms? Suggest Rate of the RBI, rate the RBI, the
possible measures to improve the situation. interest of interest cost of credit,
Ans : SQP 2023 generally i.e., the rate
remains low. of interest is
The rapid growth of the banking system positively generally very
impacted rural farm and non-farm production, high.
income and employment, particularly after the
Green Revolution. However, the banking system 4. Motive The motive Non
still faces challenges due to several reasons: behind institutional
(i) Apart from commercial banks, other formal institutional credit is guided
institutions have struggled to mobilize credit is welfare by profit
deposits, as rural farming families have not of the people considerations.
developed a culture of saving.
(ii) High default rates on agricultural loans have 135. Why has Rural banking not been able to give
been a persistent issue. adequate credit to farmers?
(iii) The burden of debt has led to a rise in farmer or
suicides. Critically evaluate the role of Rural banking
As a result, the focus on expanding and system in the process of rural development in
strengthening rural banking has diminished India.
since the reforms. To improve the situation, the Ans : COMP 2015
following measures have been suggested:
(i) Banks should shift from merely lending to Rural banking in India has expanded significantly
fostering relationship banking with borrowers. over time, leading to several positive outcomes:
(ii) Promoting savings habits and efficient use of (i) The nationalization of commercial banks in
financial resources among farmers is essential. 1969 marked the beginning of social banking
(iii) Cooperative credit societies should be in rural areas, providing institutional credit at
transformed into multi-purpose societies with moderate interest rates to rural populations.
adequate funding capacity. (ii) The growth of rural banking has helped
farmers break free from the exploitative debt
trap of rural moneylenders.
(iii) The establishment of NABARD (National
Bank for Agriculture and Rural Development)
134. Distinguish between Institutional credit and Non- brought more organization to the rural credit
institutional credit. system.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 415

as goods are often valued based on their grade strict monitoring of proper scales and weights,
and standard. guaranteeing that farmers receive fair prices
for their produce.
140. What is meant by Agricultural marketing? Discuss (ii) Cooperative Agricultural Marketing Societies:
certain defects of Agricultural marketing in India. The formation of cooperative agricultural
Ans : SQP 2018 marketing societies is encouraged. These
societies offer several benefits to farmers,
Agricultural marketing refers to the comprehensive
including:
system that helps farmers sell their surplus
1. Improved bargaining power: Farmers can
produce. It involves various operations, such as
negotiate better prices through collective
procurement, grading, storage, transportation
action.
and distribution of agricultural commodities
2. Credit facilities: The societies provide
nationwide.
credit to farmers for their immediate
Defects in Agricultural Marketing:
financial needs.
(i) Lack of storage facilities: Farmers face
3. Storage facilities: With storage facilities
difficulties in waiting for better prices due to
available, farmers can hold onto their
inadequate storage options, forcing them to
produce until market prices become more
sell at lower prices.
favorable.
(ii) Poor road infrastructure: Insufficient road
4. Control over supply and prices: The
networks in rural areas prevent farmers from
societies can regulate the supply of
reaching mandis where fair prices can be
produce, influencing prices to benefit
obtained.
their members.
(iii) Presence of intermediaries: The numerous
(iii) Provision of Warehousing Facilities: To
middlemen reduce the farmers’ earnings as
prevent distress sales, the government offers
they claim significant margins.
warehousing facilities through central and
(iv) Lack of price information: Farmers are often
state warehousing corporations. This allows
unaware of prevailing market prices, affecting
farmers to store their produce and sell it
their ability to negotiate effectively.
when market conditions are more favorable.
(v) No grading of crops: Farmers fail to separate
(iv) Subsidized Transport: The government,
good-quality crops from lower-quality ones,
through the railway system, offers subsidized
preventing them from getting better prices.
transportation for farmers to transport their
(vi) Limited access to institutional finance:
produce to urban markets where they can
Inadequate institutional credit forces farmers
fetch better prices.
to rely on moneylenders and traders, leading
(v) Dissemination of Information: Both electronic
to exploitation.
and print media are actively involved in
(vii) Disorganized farmer groups: The lack of
providing farmers with market-related
collective organization among farmers hinders
information, helping them make informed
their ability to negotiate better prices for
decisions about when and where to sell their
their products.
produce.
141. Discuss any two measures initiated by the (vi) Minimum Support Price (MSP) Policy: The
government to improve Agricultural marketing in government ensures a guaranteed price for
India. certain agricultural commodities through the
MSP policy. Before each season, minimum
Ans : FOREIGN 2012
support prices for 24 agricultural products are
To enhance the agricultural marketing system, announced. The Food Corporation of India
the government has implemented several key purchases food grains at these prices, offering
measures, as outlined below: farmers a safety net. However, farmers are
(i) Regulated Markets: The government has free to sell their produce at prices higher than
established regulated markets where the sale the MSP.
and purchase of agricultural products are
overseen by a market committee comprising 142. “Recently the Government of India has taken
representatives from the government, farmers numerous steps towards increasing the farmer’s
and traders. This ensures transparency, with income through agricultural diversification.” In

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CH 10 : RURAL DEVELOPMENT
Ans : DELHI 2018
CASE BASED QUESTION
Organic farming is a comprehensive agricultural
system that restores, maintains and enhances
ecological balance. It focuses on preserving soil 154. Rural credit plays a crucial role in supporting
health (rather than just plant health), ensuring agriculture and rural development. Farmers often
that farming is a sustainable and eco-friendly rely on institutional and non-institutional sources
practice over the long term. for credit to meet their financial needs. However,
Some notable advantages of organic farming over institutional sources like cooperative banks,
conventional farming include: commercial banks and RRBs face challenges like
(a) Rising Demand for Organic Food: The demand slow loan recovery and complex paperwork, which
for organically grown food is increasing restrict timely credit delivery to farmers.
globally due to its higher nutritional value and 1. What are the two main sources of rural
enhanced food safety, making it a preferred credit?
choice for health-conscious consumers. 2. State one major challenge faced by
(b) Eco-friendly Inputs: Organic farming utilizes institutional credit agencies.
eco-friendly technologies and locally produced 3. How do cooperative banks help farmers?
organic inputs, which are more affordable and 4. Why is timely rural credit important for
sustainable than the chemical-based fertilizers farmers?
and toxic pesticides used in conventional
Ans :
farming. These chemicals often deplete soil
health and disrupt natural ecosystems. 1. The two main sources of rural credit are
(c) Sustainable Development: Organic farming institutional and non-institutional sources.
contributes to sustainable development by 2. A major challenge is the complex paperwork
promoting the optimal use of our scarce and involved in obtaining loans.
depleting resources. This approach ensures 3. Cooperative banks provide short-term and
the preservation of resources for future medium-term loans to farmers for agricultural
generations, making it more sustainable in activities.
the long run. 4. Timely credit ensures farmers can buy inputs
(d) Fertilizer Effectiveness: The effectiveness like seeds and fertilizers at the right time for
of chemical fertilizers has been declining, better productivity.
meaning more are required to achieve the
155. Agricultural marketing in India faces issues such
same yield, which leads to diminishing returns
as poor storage facilities, lack of transportation
and increased costs. Organic farming avoids
and the presence of intermediaries. Farmers often
this dependency.
fail to get fair prices for their produce due to
(e) Positive Economic Impact: The heavy
inadequate market information and forced early
importation of fertilizers has caused a drain on
sales. The government has introduced measures
foreign exchange reserves. In contrast, organic
like regulated markets and minimum support
farming relies on locally produced inputs,
prices to address these problems.
helping improve the balance of payments.
1. What is agricultural marketing?
Additionally, the growing global demand
2. Mention one defect in the agricultural
for organic products has increased exports,
marketing system.
leading to an inflow of foreign exchange.
3. How do regulated markets help farmers?
(f) Soil Fertility Maintenance: The use of animal
4. State the role of minimum support prices in
manure and compost in organic farming helps
agricultural marketing.
sustain and enhance soil fertility, ensuring
long-term productivity without depleting the Ans :
land. 1. Agricultural marketing involves selling
In summary, organic farming offers multiple surplus produce through operations like
environmental, economic and health benefits, grading, storing and distribution.
making it a more sustainable alternative to 2. One defect is the lack of proper storage
conventional farming practices. facilities, forcing early sales at low prices.
3. Regulated markets protect farmers from
malpractices and ensure fair prices for their

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1. Predicting Food Insecurity: Governments can aspects:

utilize IT and software tools to predict areas 1. Change in Cropping Pattern: This involves
vulnerable to food insecurity. By analyzing shifting from monocropping (single crop
relevant data, proactive measures can be production) to a more diversified cropping
taken to prevent or mitigate the impact of system.
food shortages or emergencies. 2. Shift of Workforce: This entails moving the
2. Impact on Agriculture: IT has positively workforce from agriculture to allied activities
impacted the agricultural sector by facilitating such as livestock, poultry, fisheries and other
the dissemination of crucial information non-agricultural sectors.
such as emerging technologies, market Agricultural diversification is crucial for
prices, weather forecasts and soil conditions sustainable livelihoods for the following reasons:
for different crops. This enables farmers to (i) Risk Reduction: Relying solely on farming
make informed decisions about the quantity increases the risk to livelihood. Diversification
and quality of crops to produce, improving helps reduce these risks.
efficiency and productivity. (ii) Sustainable Livelihoods: Diversifying into new
3. Employment Generation in Rural Areas: IT areas not only reduces agricultural risk but
also holds significant potential for creating also provides more sustainable and productive
job opportunities in rural areas, helping to livelihood options for rural communities.
bridge the urban-rural employment gap and (iii) Seasonal Employment: Agricultural activities
contributing to rural economic growth. are mostly concentrated in the kharif season
and in areas with poor irrigation, it becomes
145. ‘Though the livestock population is quite difficult to find work during the rabi season.
impressive, it’s productivity remains low.’ Suggest Diversification into other sectors helps
ways to improve the livestock productivity in our provide supplementary employment, raising
country. income and helping to alleviate poverty.
Ans : OD 2020 (iv) Population Pressure on Land: To ease the
pressure of population growth on land,
Livestock productivity in India is relatively low
shifting the workforce to allied and non-
compared to other countries. Several measures
agricultural sectors is necessary.
can help improve it:
(v) Increased Growth and Income: Crop
(i) Adoption of Improved Technology and Better
diversification leads to higher agricultural
Breeds: Introducing advanced technologies
growth and increased income levels for rural
and promoting superior animal breeds can
populations.
significantly boost livestock productivity.
(vi) Income Stability: Diversification stabilizes
(ii) Better Veterinary Care and Access to Credit:
farm income by reducing the impact of
Providing improved veterinary services and
fluctuations in production and market prices.
offering credit facilities to small and marginal
(vii) Meeting Growing Demand: Diversification
farmers can enhance livestock health and
helps meet the increasing demand for
productivity, leading to more sustainable
products like fruits, fish, eggs, milk and dairy
livelihoods.
products, thus supporting food security and
(iii) Investment in Infrastructure and Marketing
rural economies.
Linkages: Strengthening infrastructure,
improving marketing linkages and 147. What is horticulture? How has it become a means
disseminating relevant information can of improving livelihood for the unprivileged
further increase the productivity of livestock classes? What are the challenges being faced in
in India. this sector?
or
146. Why is agricultural diversification considered
How has horticulture encouraged Indian rural
necessary for rural development in India?
development?
Ans : COMP 2023
Ans : DELHI 2021
Agricultural diversification involves reallocating
Horticulture refers to the cultivation of flowers,
some of a farm’s resources into new activities or
fruits, vegetables and other plants such as
crops to reduce market risks. It has two main
medicinal, aromatic and ornamental plants, as well

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CH 10 : RURAL DEVELOPMENT

light of the above statement, explain any two (i) Livestock Production: Livestock farming offers
advantages of diversification in agriculture. stability in income, food security, transport,
fuel and nutrition without disrupting other
Ans : DELHI 2023
agricultural activities. It provides alternative
Agricultural diversification refers to reallocating livelihood opportunities for over 70 million
some of a farm’s resources into new activities or small and marginal farmers, including landless
crops to reduce market risks. It has two main laborers.
components: (ii) Indian Dairy Sector: The performance of the
1. Change in cropping patterns: This involves dairy sector in India has been impressive.
diversifying crop production. Between 1951 and 2014, milk production
2. Shift of workforce: This refers to moving increased more than eightfold, reflecting
workers from agriculture to allied activities significant growth in this sector.
(such as livestock, poultry and fisheries) and (iii) Meat, Eggs, Wool and By-products: In
non-agricultural sectors. addition to dairy, sectors like meat, eggs, wool
Agricultural diversification is essential for and other by-products are emerging as vital
sustainable livelihoods for the following reasons: components for agricultural diversification,
(i) Risk reduction: Relying solely on farming for contributing to rural livelihoods.
livelihood presents significant risks, making (iv) Fisheries and Aquaculture: With increased
diversification necessary. budgetary allocation and the adoption of
(ii) Providing sustainable livelihoods: Shifting new technologies, the fisheries sector in India
towards new areas helps reduce agricultural has made significant progress. Today, fish
risks and provides rural populations with production accounts for 0.8% of India’s total
long-term, productive livelihood options. GDP, offering new employment and income
(iii) Seasonal employment gaps: Much of sources for rural communities.
agricultural work is concentrated in the (v) Horticulture: Horticulture plays a crucial role
kharif season. In areas with limited irrigation, in agricultural diversification. It contributes
employment opportunities during the rabi nearly one-third of agricultural output and
season are scarce. Diversification into 6% of India’s GDP. India is a global leader
other sectors helps provide supplementary in producing fruits like mangoes and bananas
employment and higher income, reducing and is the second-largest producer of fruits
poverty. and vegetables. The horticulture sector has
(iv) Relieving population pressure on land: To improved the economic condition of many
reduce the strain on agricultural land, it is farmers and has become an important source
vital to shift the workforce to allied activities of income for rural families. Activities like
and non-agricultural sectors. flower harvesting, nursery maintenance,
(v) Higher growth and income: Crop hybrid seed production and tissue culture
diversification leads to higher growth and are lucrative employment opportunities,
increases rural incomes. especially for women in rural areas.
(vi) Income stability: Diversification helps stabilize
farm income during periods of fluctuating 144. “IT plays a significant role in achieving sustainable
production levels and market prices. development and food security”. Comment.
(vii) Meeting growing demand: It also addresses or
the increasing demand for products like fruits, Information technology has gone a long way
fish, eggs, milk and dairy products. to bring about new developments to help the
farmers. Elucidate.
143. “The Prime Minister urged to increase the rural
income by increasing non-farm activities.” Ans : SQP 2013

Explain how non-farm activities can lead to rise Information Technology (IT) has brought about
in income of people in rural sector. significant transformations in various sectors of
the Indian economy and it is widely believed that
Ans : FOREIGN 2020
IT can play a vital role in achieving sustainable
Some key non-farm employment areas include development and food security.
animal husbandry, fisheries, horticulture and
other alternative livelihood options:

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150. State the meaning of organic farming. Discuss to diminishing returns and increased costs.
how does it help in promoting sustainable Given these issues, there has been growing recognition
development. of the need for an alternative farming system—one
that avoids the harmful effects of chemical inputs
Ans : COMP 2022
and focuses on long-term sustainability.
Organic farming is a holistic agricultural system
that restores, maintains and enhances ecological 152. What is organic farming? Explain its benefits and
balance. It emphasizes maintaining soil health limitations.
(rather than focusing solely on plant health) to or
ensure that farming becomes both sustainable “Organic Farming is the need of the hour to
and environmentally friendly. promote sustainable development but, has its own
In recent years, significant efforts have been limitations.”
made to raise awareness about the harmful Ans : FOREIGN 2023
impacts of conventional agriculture, which heavily
relies on chemical fertilizers and toxic pesticides. The Green Revolution, which began in the 1960s,
These chemicals contaminate the food supply, significantly boosted agricultural productivity
pollute water sources, harm livestock, deplete soil through the use of chemical fertilizers and
fertility and disrupt the natural ecosystem. As a pesticides. However, this reliance on chemical
result, there has been a growing push to develop inputs has resulted in several critical challenges:
eco-friendly agricultural technologies essential (i) Health Risks: The heavy use of chemical
for sustainable development. Organic farming is fertilizers and pesticides in conventional
one such eco-friendly solution. It is based on the agriculture has contaminated the food
use of organic inputs for cultivation, such as crop supply, leading to serious health concerns for
rotation, animal manures, composts and natural consumers.
pest control, all of which help maintain soil (ii) Environmental Damage: Continuous fertilizer
fertility while minimizing environmental harm. use has contributed to soil degradation,
undermining the long-term sustainability
151. Why did there arise a need for an alternate system of agricultural land and harming the
of farming? environment.
(iii) Balance of Trade Issues: The large-scale
Ans : SQP 2019
importation of fertilizers has become a major
The Green Revolution, which began in the 1960s, burden on India’s balance of trade, requiring
was driven by the use of chemical fertilizers and substantial foreign exchange to meet domestic
pesticides to increase agricultural productivity. demand.
However, this reliance on chemical inputs has led (iv) Declining Fertilizer Effectiveness: Over time,
to several significant problems: the efficiency of fertilizers has decreased,
(i) Health Risks : Conventional agriculture’s necessitating larger quantities to achieve the
heavy use of chemical fertilizers and toxic same crop yields, resulting in higher costs and
pesticides contaminates the food supply, diminishing returns.
posing serious health risks to humans. These problems have led to an increased
(ii) Environmental Damage : The extensive use of recognition of the need for alternative farming
fertilizers has resulted in rising environmental methods—systems that minimize the negative
costs, including soil degradation, which impact of chemical inputs while promoting long-
reduces the long-term sustainability of term agricultural sustainability.
agricultural land.
(iii) Balance of Trade Issues : The heavy 153. Why is organic farming being considered as
importation of fertilizers has placed a an important tool to promote sustainable
significant strain on India’s balance of trade, development?
as the country needs to spend large sums of or
foreign currency to acquire these inputs. “Use of chemical fertilizers to compensate for
(iv) Declining Fertilizer Efficiency : Over time, food shortages gives good dividend at one time
the effectiveness of fertilizers has diminished, in the form of increased production but becomes
meaning more and more fertilizers are required a disaster later in the form of adverse effects on
to achieve the same level of crop yield, leading health.” How can we overcome this problem?

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CH 10 : RURAL DEVELOPMENT

several reasons, presently it has achieved rapid activities (livestock, fisheries and food processing,
growth in organic agriculture and now becomes etc.) are advantageous in lifting the poor above
one of the largest organic producers in the world. the poverty line. Therefore, it becomes imperative
Therefore, organic farming has a great impact to identify the issues of the non-farm rural sector
on the health of a nation like India by ensuring in India to focus on building strong growth
sustainable development. links between the non-farm rural economy and
1. Which of the following is not a benefit of agriculture.
organic farming? The non-farm sector, particularly in rural areas,
(a) cheaper inputs. is being accorded wide recognition in recent years.
(b) attractive returns on investment. A planned strategy of rural non-farm development
(c) greater import possibilities. may prevent many rural people from migrating to
(d) higher nutritional value. urban industrial and commercial centres. Non-farm
2. Identify the policy instruments initiated rural industries are generally less capital-intensive
by the government to improve agricultural and more labour absorbing. Thus, they can play a
Marketing System after independence: critical role in employment growth in rural areas.
(a) regulation of markets Efforts are needed to identify appropriate and
(b) minimum support price effective institutional vehicles for the development
(c) maintenance of buffer stock of non-farm sector policy and interventions for
(d) both (b) and (c) creating employment opportunities.

3. NABARD was set up in 1982 as an apex body 1. Identify the incorrect statement regarding self
to coordinate the activities of all Institutions help groups from the given statements:
involved in the rural financing system. (True/ (a) SHGs focus on rural poor, small and
False) marginal farmers etc.
(b) it is a micro credit program.
4. Nationalisation of commercial banks took (c) they provide long term credit.
place in: (d) they promote thrift in small proportions
(a) 1965 by a minimum contribution from each
(b) 1969 member.
(c) 1967
(d) 1966 2. Cooperatives have received a setback during
the recent past due to:
Ans : (a) inefficient financial management.
1. (c) greater import possibilities. (b) lack of appropriate link between
2. (d) both (b) and (c) marketing and processing cooperatives.
3. True (c) fluctuating farm production.
4. (b) 1969 (d) both (a) and (b)
3. Horticulture provides remunerative
160. Read the para given below and answer the
employment options in the following areas:
questions that follow:
(a) flower harvesting
Due to the economic downturn caused by Covid-19
(b) hybrid seed production
pandemic, India’s GDP contracted by 23.9 %. in
(c) nursery maintenance
the first quarter. However, a silver lining in this
(d) all of the above
degrowth scenario can be noted as agriculture
grew by 3.4%. Despite green shoots, agriculture 4. From the given statements in Column I
in India has been ailing for a long time. It has and Column II, identify the correct pair of
been grappling with issues like fast depleting statements:
groundwater, soil degradation, fragmented
markets, barely functioning agricultural extension Column I Column II
services and speeding up of climate change. It 1. Organic A. rise in the
is due to these factors that agriculture cannot Farming production of fruits
overturn contraction in other sectors, but along and vegetables
with the non-farm rural sector, it could jump-start 2. Diversification B. eco friendly system
the economy. Apart from this, Non-Farm rural of agriculture

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 421

produce. 158. Rural infrastructure, including roads, irrigation

4. Minimum support prices ensure farmers get and electricity, is essential for rural development.
a guaranteed price for their crops, preventing It supports agricultural growth, improves access to
exploitation. markets and enhances rural livelihoods. However,
lack of proper infrastructure still remains a major
156. Diversification of agriculture reduces dependency challenge, affecting farmers’ productivity and
on traditional farming and provides alternative income.
sources of income. This includes diversification of 1. Why is rural infrastructure important for
crops and productive activities such as livestock, farmers?
fisheries and horticulture. It not only stabilizes 2. Mention two components of rural
farmers’ income but also reduces risks associated infrastructure.
with crop failure and market fluctuations. 3. How does rural infrastructure improve market
1. What are the two aspects of agricultural access?
diversification? 4. What impact does poor infrastructure have
2. How does diversification of crops benefit on farmers?
farmers?
3. Name any two productive activities mentioned Ans :
in the case. 1. Rural infrastructure helps farmers improve
4. Why is diversification important for small productivity and access markets for their
farmers? produce.
Ans : 2. Two components are roads and irrigation
facilities.
1. The two aspects are diversification of crops 3. It enables farmers to transport their produce
and productive activities. to markets, ensuring better prices.
2. Diversification reduces risks and ensures 4. Poor infrastructure reduces productivity and
stable income by growing multiple crops. forces farmers to sell at lower prices.
3. Two productive activities are livestock rearing
and fisheries. 159. Read the para given below and answer the
4. It provides alternative income sources, questions that follow:
reducing dependence on land for livelihood. Food quality and safety are the two important
factors that have gained ever-increasing attention
157. Organic farming promotes sustainable agriculture in general consumers. Conventionally grown foods
by avoiding chemical fertilizers and pesticides. have immense adverse health effects due to the
It provides healthier food and protects the presence of higher pesticide residue, more nitrate,
environment but faces limitations like lower heavy metals, hormones, antibiotic residue and
yields and poor market infrastructure. Despite also genetically modified organisms. Moreover,
its benefits, many farmers are unaware of organic conventionally grown foods are less nutritious and
farming techniques, which restricts its adoption. contain lesser amounts of protective antioxidants.
1. What is organic farming? In the quest for safer food, the demand for
2. Mention one benefit of organic farming. organically grown foods has increased during
3. State one limitation of organic farming. the last decades due to their probable health
4. Why is organic farming considered benefits and food safety concerns. Organic food
sustainable? production is defined as cultivation without the
Ans : application of chemical fertilisers and synthetic
pesticides or genetically modified organisms,
1. Organic farming avoids chemical inputs and
growth hormones and antibiotics. The popularity
uses eco-friendly methods for crop production.
of organically grown foods is increasing day by
2. One benefit is healthier and chemical-free
day owing to their nutritional and health benefits.
food with higher nutritional value.
Organic farming also protects the environment
3. A major limitation is the lower yields
and has a greater socio-economic impact on a
compared to modern farming techniques.
nation. India is a country that is bestowed with
4. Organic farming is sustainable because it
indigenous skills and potentiality for growth
prevents soil and water pollution, preserving
in organic agriculture. Although India was far
the environment.
behind in the adoption of organic farming due to

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CH 10 : RURAL DEVELOPMENT

as herbs. It also includes the processing and sale sectors.” Explain the statement.
of these products. India is currently the second-
Ans : OD 2020
largest producer of fruits and vegetables globally
and is a leading producer of mangoes, bananas, The need for diversification stems from the high
coconuts, cashew nuts and various spices. risks associated with relying solely on farming for
The significance of horticulture in improving livelihood. Expanding into other sectors is crucial
livelihoods for farmers and disadvantaged groups to provide supplementary and stable employment
is evident in the following points: opportunities.
(i) Expansion of Horticulture: Over time, there The non-farm economy comprises several
has been a considerable increase in the area segments:
under horticulture. (i) Growing Sectors: These include industries
(ii) The “Golden Revolution”: High crop that offer healthy growth prospects, such
productivity led to the “Golden Revolution” as agro-processing, food processing, leather
in horticulture between 1991 and 2012. industry and tourism.
Planned investments during this period made (ii) Untapped Potential: Some sectors, like
horticulture highly productive, establishing it pottery, crafts and handlooms, have potential
as a sustainable livelihood option. but currently face low productivity due
(iii) Improved Economic Conditions: Many to inadequate infrastructure and support
farmers involved in horticulture have systems.
experienced improved economic conditions Branching out into these non-farm activities can
and it has become a vital source of livelihood help rural populations achieve higher income
for many disadvantaged communities. levels, which in turn can reduce poverty and other
(iv) Reduced Vulnerability : Shifting to challenges. Therefore, there is a need to focus
horticulture farming has decreased the on allied activities, non-farm employment and
economic vulnerability of small and marginal emerging livelihood alternatives as sustainable
farmers. options for rural development.
(v) Employment Opportunities for Women:
149. Discuss the main features of organic farming.
Horticulture has created new employment
avenues for women in rural areas, particularly Ans : FOREIGN 2022
in activities such as flower harvesting, nursery The main features of organic farming are:
maintenance, hybrid seed production, tissue (i) Sustainability: Organic farming is a
culture, fruit and flower propagation and food sustainable agricultural system that ensures
processing. the long-term fertility of the soil by using
(vi) Contribution to Rural Employment: locally produced organic inputs, which helps
Horticulture and related activities generate in preserving the environment.
nearly 20% of total rural employment. (ii) Nutrient Sources: The major sources of
However, the horticulture sector faces several nutrients in organic farming include animal
challenges: dung, crop residues, green manure and bio-
1. Land Use Shift: The expansion of horticulture fertilizers, which are used to enhance soil
has occurred at the expense of acreage used for fertility naturally.
growing pulses, leading to a severe shortfall in (iii) Soil Health Focus: Organic farming
pulse supply and higher prices, which affects emphasizes maintaining soil health rather
consumption. than just focusing on plant health, as healthy
2. Infrastructure and Investment Gaps: More soil is essential for productive and sustainable
investment is needed in key areas such crop growth.
as electricity, cold storage, marketing (iv) Ecological Principles: Organic farming is
linkages, small-scale processing units and grounded in ecological principles, promoting
the dissemination of improved technology to biodiversity and natural processes as the
support the growth of the horticulture sector. foundation for crop production, which reduces
reliance on chemical inputs.
148. “As agriculture is already overcrowded, the ever
increasing labour force needs to find alternate
employment opportunities in other non-farm

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 423

3. White C. pooling and profile and environmental sustainability.

Revolution then marketing 1. Diversification of crop production relates to:
of milk through (a) maintaining natural ecosystem
cooperatives (b) shift from subsistence to commercial
farming
4. Golden D. shifting of (c) hybrid seed production
revolution workforce from (d) production of a variety of fruits
agriculture to
other allied 2. Which of the following poses a challenge to
activities rural development in India?
(a) inadequate institutional credit
(a) 1-A
(b) organic farming
(b) 2-B
(c) unorganised markets
(c) 3-C
(d) lack of irrigation facilities
(d) 4-D
3. Agricultural marketing comprises of the
Ans :
following operations:
1. (c) they provide long term credit. (a) collection of farm produce.
2. (d) both (a) and (b) (b) setting up of regulated markets
3. (d) all of the above (c) transportation
4. (d) 4-D (d) both (a) and (c)

161. Read the para given below and answer the 4. Match the following column and choose the
questions that follow: ciorrect option
The future of India’s agriculture economy lies in
Column I Column II
crop diversification. The continued practice of
wheat and paddy crop production pattern since 1. Grading A. small loans to rural
the Green revolution has adversely impacted poor who have no
the natural resources. Indian government needs access to formal
to promote the growing of less water consuming banking system
crops like oil seeds, cotton, pulses and maize. 2. Rural B. classifying the
Growing of paddy led to depleting water table, Development agricultural
soil fertility issues and stubble burning in the produce according
states of Haryana, Punjab and Uttar Pradesh. to the qualities
Crop diversification refers to the growth of
3. Micro credit C. collective selling
more variety of crops or changes in the existing
of farmers output
pattern of crop production. The downgrading
through cooperatives
ecological situation, depleting groundwater levels
and declining fertility of soil clear the need for 4. Cooperative D. integrated
crop diversification. This is aimed at increasing marketing development of
farmer’s income and decreasing negative impacts rural areas
on the environment while also conserving the (a) A, D, B, C
natural resources. Besides, it also helps to (b) A, 6, C, D
minimize price fluctuations and balance food (c) C, A, B, D
demand. (d) B, D, A, C
Bringing diversity in crops results in
strengthening ties between crop culture and Ans :
livestock. It ensures the availability of rural 1. (b) shift from subsistence to commercial
employment around the year and future of farming
India’s agriculture economy. It also results in 2. (a) inadequate institutional credit
crop intensification (increase yield per hectare) 3. (d) both (a) and (c)
through the genetic engineering of plants. Crops 4. (a) A, D, B, C
grow in their required environmental conditions
thus removing the barriers of lack of irrigation. www.nodia.in
On the top of it, it brings back the soil’s nutrient

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CH 11 : EMPLOYMENT GROWTH, INFORMALISATION AND OTHER ISSUES

CHAPTER 11
EMPLOYMENT GROWTH, INFORMALISATION AND OTHER ISSUES

both employed as well as unemployed people

SUMMARY between the age group of 15-60 years.
9. Workforce : It includes only those persons
who are actually engaged in economically
1. SOME BASIC TERMS
productive activities.
Understanding key economic terms is essential 10. Self-employed : workers who own and operate
to analyze employment, workforce patterns and an enterprise to earn their livelihood are
economic productivity in a country. These terms known as self employed.
help in assessing the contribution of different 11. Casual wage labourers : Such labourers are
sections of society to the economy and identifying casually engaged in other’s firms on temporary
challenges like unemployment and informalization. basis and in return, get remuneration for the
1. Gross Domestic Product (GDP) : It is the work done.
total money value of all goods and services 12. Regular salaried employees : when a worker is
produced in a country in a year. engaged by someone or by an enterprise and
2. Gross National Product (GNP) : when paid his or her wages on a regular basis, they
earnings from foreign transactions are added are known as regular salaried employees.
to Gross Domestic Product, it is called Gross 13. Casualization of workforce : It refers to a situation
National Product for that year. when the percentage of casually hired workers in
3. Workers : All those persons who are engaged the total workforce increases over time.
in economic activities are called workers. 14. Informational of workforce : It refers to a
4. Employment : It is a contract in which one process whereby the proportion of informal
person, the employee, agrees to perform work workers in the total workforce increases.
for another, the employer. 15. Formal sector : Formal sector refers to the
5. Population : It is defined as the total number organized sector of the economy which
of people who reside in a particular locality at includes all government departments, public
a particular point of time, enterprises and private establishments which
6. Worker population Ratio hire 10 or more workers.
16. Informal sector : It includes all those private
= Total number of workers # 100
Total population enterprises which hire less than lo workers.
This ratio is useful in knowing the proportion 17. Formal workers : Those working in the
of population contributed to the production organized sector are called formal workers.
of goods and services of a country. 18. Informal workers : Those working in the
7. Labour force participation rate : It refers unorganized sector are called informal
to the ratio of labour force to the total workers.
population. 2. UNEMPLOYMENT
Labour force participation rate
A person is said to be unemployed when he is able
= Total labour force # 100 and willing to work at the prevailing wage rate
Total population
but does not find work.
8. Labour force : It includes all those persons
who are actually employed in some kind of 2.1 Seasonal Unemployment
economic activity as well as those who can be Unemployment of people engaged in seasonal
engaged in work. Thus, labour force includes activities is called seasonal unemployment. In India,

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 425

it is predominantly associated with agriculture. 5. DISTRIBUTION OF RURAL-URBAN EMPLOYMENT IN

DIFFERENT SECTORS
2.2 Disguised Unemployment
The distribution of employment across sectors
It is a situation in which the number of workers highlights the differences in economic activities
engaged in a job is much more than actually between rural and urban areas. While rural areas
required to do it. rely heavily on agriculture, urban areas focus
more on industries and services.
2.3 Educated Unemployment
It refers to unemployment among the educated 5.1 Employment in Rural Areas
people. The rural workforce in India is predominantly
dependent on agriculture, with fewer opportunities
2.4 Open Unemployment
in industrial and service sectors, reflecting limited
It refers to that economic phenomenon in which diversification in employment.
persons are able and willing to work at the 1. Primary Sector : About 64.1% of the rural
prevailing wage rate, but fail to get work. workforce is engaged in agriculture and allied
activities.
3. DISTRIBUTION OF EMPLOYMENT IN DIFFERENT
2. Secondary Sector : Around 20.4% of rural
SECTORS
workers are employed in industries like
In the course of economic development of a manufacturing and construction.
country, labour flows from agriculture and 3. Tertiary Sector : Approximately 15.5% of
other related activities to industry and services. rural workers are engaged in services such as
Generally, all economic activities are divided into trade, transport and education.
the following eight different industrial divisions-
1. Agriculture 5.2 Employment in Urban Areas
2. Mining and quarrying
Urban areas show a shift away from agriculture,
3. Manufacturing
with a strong focus on industrial and service-
4. Electricity, gas and water supply
based employment opportunities, reflecting higher
5. Construction
economic diversification.
6. Trade
1. Activities like agriculture or mining are not
7. Transport and storage
the major source of employment in urban
8. Services
areas.
4. MAJOR SECTORS OF THE ECONOMY 2. The secondary sector gives employment to
about 35% of urban workforce.
For simplicity, all the working persons engaged in 3. 58.3 percent of urban workers are engaged in
these divisions can be clubbed into three major the service sector.
sectors :
5.3 Employment Opportunities for Men and Women in
4.1 Primary Sector Different Sectors
This sector involves activities that directly use 1. Both men and women workers are
natural resources, such as agriculture, forestry, concentrated in the primary sector, though
fishing and mining. the concentration of women worker’s
4.2 Secondary Sector concentration is very high there.
2. Men get more opportunities of work in both
It includes industrial activities like mining, secondary and service sector as compared to
quarrying, manufacturing, construction and the women.
generation of electricity, gas and water supply.
6. GROWTH AND CHANGING STRUCTURE OF
4.3 Tertiary or Service Sector EMPLOYMENT
This sector focuses on providing services such During the period 1950-2010, GDP of India grew
as trade, transport, storage, communication, positively and was higher than the employment
education, healthcare and other professional growth. However, during this period, employment
services. grew at the rate of not more than 2%.

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CH 11 : EMPLOYMENT GROWTH, INFORMALISATION AND OTHER ISSUES

The gap between growth of GDP and employment The main reason for this being absence of
was continuously widening. This trend was called proper irrigation facilities, lack of subsidiary
as ‘jobless growth’. It refers to a situation, when employment opportunities, heavy dependence
the economy is able to produce more goods and of workers on agriculture, etc.
services without a proportionate increase in 2. Urban Unemployment : This includes
employment opportunities. educated unemployment. This is mainly due
to slow increase in employment opportunities,
7. CHANGE IN OCCUPATIONAL STRUCTURE rapid expansion of general education in the
Over the years, significant changes have been country, lack of vocational education, use of
observed in the distribution of the workforce capital intensive techniques in production,
across various sectors. This transformation etc.
reflects the growing diversification of employment 3. Other Kinds of Unemployment : This
opportunities in the economy. includes open unemployment, structural
1. There has been a substantial shift from farm unemployment (associated with the structural
workers to non-farm workers. changes in the economy like change in demand
2. The proportion of workforce engaged in pattern), underemployment and frictional
primary sector has declined. unemployment (unemployment arising among
3. There is a clear shift in employment to people in between jobs).
secondary and tertiary sectors from primary
sector. 11. CAUSES OF UNEMPLOYMENT
Unemployment in India arises from various
8. INFORMALISATION OF WORKFORCE structural, economic and social factors, impacting
Employment can be broadly classified as both rural and urban areas.
1. Formal sector employment-Hires 10 or more 1. Underdevelopment of the economy.
workers who are protected through various 2. Rapid growth rate of population has adversely
labour laws and get social security benefits affected the unemployment situation.
and better wages. 3. Agriculture is the main source of livelihood
2. Informal sector employment-Hires less than 10 and being a seasonal occupation does not
workers and are not regulated by government provide work to farming communities
laws. throughout the year.
4. Our education system has stressed on general
9. PROBLEMS OF INFORMAL SECTOR education only and is neither job-oriented nor
The informal sector faces numerous challenges due skill-oriented.
to its unregulated nature, affecting both workers 5. Economic reforms have led to the phenomenon
and entrepreneurs and leading to economic of jobless growth.
instability. 6. The decline of cottage and small scale industries
1. Do not get regular income. has resulted in massive unemployment among
2. Use outdated technology. the artisans working in these industries.
3. Entrepreneurs of this sector do not maintain 7. Shortage of capital and lack of modern and
accounts. advanced technology have led to generation
4. Do not have any protection, regulation from of insufficient n employment opportunities in
the government and hence, have no job the industrial sector.
security.
12. REMEDIAL MEASURES FOR UNEMPLOYMENT
5. Workers belonging to this sector generally
reside in slums. Addressing unemployment requires a multi-
dimensional approach focusing on economic
10. NATURE OF UNEMPLOYMENT IN INDIA growth, education reforms and infrastructure
Unemployment in India is categorized based on development to generate sustainable job
its occurrence in rural and urban areas, as well as opportunities
other structural and transitional factors affecting 1. The problem of unemployment can be solved
the workforce. through the process of accelerated growth.
1. Rural Unemployment : This includes 2. Control of population can ensure that the
seasonal and disguised unemployment. additional jobs created do not fall short of

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 427

new entrants to the labour market. MULTIPLE CHOICE QUESTION

3. Encouragement should be given to the small-
scale sector.
4. Improvement in infrastructure facilities will 1. What is meant by the term ‘jobless growth’ as
enable agriculture and industrial sector to discussed in the given content and how does it
produce to their full capacity. impact employment?
5. Special wage employment and self employment (a) Growth with an increase in agricultural
programs should be introduced. employment.
6. Development of agricultural sector is (b) Growth in GDP without a proportional rise
important to increase labour productivity in employment opportunities.
and total output. (c) Growth in industrial output with rising
7. The present educational system should be unemployment.
made more vocational and work oriented.
(d) Growth in employment without GDP growth.
8. Measures like promotion of multiple cropping
by expanding irrigation facilities, promotion Ans : COMP 2024
of activities like animal husbandry, fisheries, (b) Growth in GDP without a proportional rise in
etc., promotion of agro-based industries employment opportunities.
should be introduced to tackle the problem of Jobless growth occurs when the economy produces
seasonal unemployment. more goods and services without creating adequate
13. EMPLOYMENT GENERATION PROGRAMMES employment opportunities for the workforce.

To address unemployment and generate 2. According to the data, what percentage of the
sustainable livelihoods, several employment rural workforce is employed in the primary sector
generation programs have been introduced by the and what does this include?
government : (a) 64.1%; it includes agriculture and allied
activities.
13.1 Swarna Jayanti Gram Swarozgar Yojana (SGSY) (b) 20.4%; it includes mining and manufacturing
The main objective of this scheme was to promote activities.
micro enterprises and to provide assistance to (c) 58.3%; it includes trade, transport and
poor in self-help groups. This program has been services.
reorganized into Deen Dayal Upadhyay Yojana (d) 35%; it includes industries and construction.
(National Rural Livelihood Mission).
Ans : SQP 2023
13.2 Rural Employment Generation Programme (REGP)
(a) 64.1%; it includes agriculture and allied
This program aims at creating self employment activities.
opportunities in urban areas. Under this program, The primary sector engages 64.1% of rural
one can get financial assistance in the form of workers, primarily in agriculture, forestry, fishing
bank loans to set up small industries that generate and allied activities.
employment.
3. The sector where a majority of the rural workforce,
13.3 Swarna Jayanti Shahari Rozgar Yojana (SJSRY) about 64.1%, is engaged, primarily performing
This scheme mainly aims at creating employment activities like agriculture, forestry and fishing, is
opportunities for both self employment and wage known as the __________ sector.
employment in urban areas. It is now called as (a) Secondary
Deendayal Upadhyay Yojana (National Urban (b) Primary
Livelihood Mission). (c) Tertiary
(d) Informal
13.4 Mahatma Gandhi National Rural Employment Guarantee Ans : OD 2023
Act 2005 (MNREGA)
(b) Primary
Under this Act, work is guaranteed for one The primary sector, which involves natural
member of the household for 100 days in every resource-based activities, employs most of the
financial year. The number of days has now been rural workforce in India.
raised to 150.

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CH 11 : EMPLOYMENT GROWTH, INFORMALISATION AND OTHER ISSUES

29. Which employment generation program establish small-scale industries in rural areas.
guarantees 100 days of wage employment in rural
areas? 32. Which of the following statements about the
(a) Swarna Jayanti Shahari Rozgar Yojana primary sector is correct?
(SJSRY) (a) The primary sector involves activities like
(b) Mahatma Gandhi National Rural Employment manufacturing and construction.
Guarantee Act (MNREGA) (b) About 64.1% of the rural workforce is engaged
(c) Rural Employment Generation Programme in the primary sector.
(REGP) (c) The primary sector primarily employs urban
(d) Swarna Jayanti Gram Swarozgar Yojana workers in India.
(SGSY) (d) The primary sector deals only with service-
related activities.
Ans : SQP 2007
Ans : OD 2019
(b) Mahatma Gandhi National Rural Employment
Guarantee Act (MNREGA) (b) About 64.1% of the rural workforce is engaged
MNREGA guarantees 100 days (now extended to in the primary sector.
150 days) of wage employment to rural households The primary sector includes activities like
annually. agriculture, forestry and fishing, which employ a
majority (64.1%) of the rural population.
30. What is one key cause of rural unemployment in
India, as described in the content? 33. Which of the following statements regarding
(a) Over-dependence on agriculture, which is seasonal unemployment is true?
seasonal in nature. (a) Seasonal unemployment is mainly observed in
(b) Growth of small-scale industries in rural industries in urban areas.
areas. (b) It occurs due to over-employment of workers
(c) Rapid increase in capital-intensive industries. in a particular job.
(d) High availability of irrigation and (c) Seasonal unemployment is primarily
infrastructure facilities. associated with agriculture in rural India.
(d) Seasonal unemployment arises because of
Ans : COMP 2008
technological advancements.
(a) Over-dependence on agriculture, which is Ans : FOREIGN 2020
seasonal in nature.
Rural unemployment is caused by agriculture’s (c) Seasonal unemployment is primarily associated
seasonal nature, which cannot provide consistent with agriculture in rural India.
year-round employment. Seasonal unemployment occurs when workers are
jobless during non-cropping seasons, particularly
31. The scheme introduced to provide self-employment in agriculture-dependent rural areas.
opportunities by offering financial assistance for
setting up small industries in rural areas is known 34. Identify, which of the following is the correct
as __________. formula for calculating ‘Worker-Population
(a) Swarna Jayanti Gram Swarozgar Yojana Ratio’ ? (Choose the correct alternative)
(SGSY) (a) Total Labour Force # 100
(b) Swarna Jayanti Shahari Rozgar Yojana Total Population
(SJSRY) (b) Total Workers # 100
(c) Rural Employment Generation Programme Total Population
(REGP) Total Population
(c) 100
(d) Mahatma Gandhi National Rural Employment Total Labour Force #
Guarantee Act (MNREGA) Total Population
(d) 100
Total Workers #
Ans : COMP 2018

(c) Rural Employment Generation Programme Ans :

(REGP) (b) Total Workers 100
REGP aims to create self-employment Total Population #
opportunities by providing financial support to

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 429

11. The economic phenomenon in which a country’s 14. Under the Mahatma Gandhi National Rural
economy grows, producing a higher volume of Employment Guarantee Act (MNREGA), what
goods and services, without creating sufficient is the main objective of the scheme for rural
employment opportunities for the growing households?
workforce is referred to as __________ (a) Guaranteeing 100 days of employment to at
growth. least one member of each household annually.
(a) Structural (b) Providing free skill-based training to rural
(b) Inclusive youth for permanent employment.
(c) Jobless (c) Offering financial support to establish micro-
(d) Seasonal enterprises and industries.
(d) Ensuring vocational education for unemployed
Ans : SQP 2017
rural workers.
(c) Jobless
Jobless growth occurs when the GDP increases Ans : FOREIGN 2021

but does not result in a proportional rise in (a) Guaranteeing 100 days of employment to at
employment opportunities. least one member of each household annually.
MNREGA aims to reduce rural unemployment
12. What does the term ‘casualization of workforce’ by guaranteeing work for 100 days (now extended
refer to, as mentioned in the content? to 150 days) for rural households to enhance
(a) The increase in permanent and salaried jobs livelihoods.
over time.
(b) The rise in the percentage of casually hired 15. Which sector employs the largest percentage of
workers in the total workforce. the urban workforce and what type of activities
(c) The growth of self-employed individuals in does it include?
urban areas. (a) Primary sector ; includes agriculture and
(d) The increase in formal employment forestry.
opportunities in industries. (b) Secondary sector ; includes construction and
manufacturing activities.
Ans : DELHI 2023
(c) Tertiary or service sector ; includes trade,
(b) The rise in the percentage of casually hired transport, education and healthcare.
workers in the total workforce. (d) Informal sector ; includes unregulated small
Casualisation occurs when more workers are hired enterprises.
temporarily without job security or regular wages,
increasing casual employment. Ans : OD 2019

(c) Tertiary or service sector; includes trade,

13. What is the primary reason for seasonal transport, education and healthcare.
unemployment in rural areas, particularly in The service sector employs 58.3% of the urban
India? workforce and includes trade, transport, education,
(a) Lack of modern irrigation facilities and heavy healthcare and other professional services.
dependence on agriculture.
(b) Rapid growth of urban industries and 16. What is the main difference between the formal
migration of rural workers. sector and informal sector as described in the
(c) Limited availability of vocational education content?
and training. (a) Formal sector employs less than 10 workers,
(d) Use of advanced technology in farming, while informal sector employs more than 10
reducing the need for workers. workers.
(b) Formal sector provides job security and social
Ans : SQP 2020
benefits, while informal sector lacks these
(a) Lack of modern irrigation facilities and heavy protections.
dependence on agriculture. (c) Formal sector is unregulated, while informal
Seasonal unemployment arises in rural areas due sector follows government rules.
to agriculture being a seasonal occupation, with (d) Formal sector only includes agricultural
work available only during certain times of the activities, while informal sector includes
year. services.

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CH 11 : EMPLOYMENT GROWTH, INFORMALISATION AND OTHER ISSUES

4. The process in which the proportion of workers Ans : COMP 2013

hired on a temporary basis increases over time, (a) Formal sector

reducing job security and regular wages, is termed The formal sector employs more than 10 workers
as __________. and ensures job security, better wages and social
(a) Informational protections for employees.
(b) Casualization
(c) Disguised unemployment 8. The type of unemployment observed in rural
(d) Seasonal unemployment areas of India, caused primarily due to the
seasonal nature of agricultural activities, where
Ans : FOREIGN 2010
workers remain jobless during off-seasons, is
(b) Casualization called __________ unemployment.
Casualization refers to the rising trend of hiring (a) Open
workers temporarily, depriving them of job (b) Educated
security and social benefits. (c) Seasonal
(d) Disguised
5. The form of unemployment that occurs when the
number of workers employed in a particular job Ans : OD 2014

or activity is much greater than required, leading (c) Seasonal

to low productivity, is called __________ Seasonal unemployment occurs in rural areas
unemployment. because agriculture, being seasonal, does not
(a) Seasonal provide year-round employment.
(b) Educated
(c) Open 9. The informal sector of the economy generally
(d) Disguised includes private enterprises that operate on a
small scale and hire __________ workers,
Ans : DELHI 2011
often without following government regulations or
(d) Disguised providing social security benefits.
Disguised unemployment exists when surplus (a) Skilled and trained
workers do not contribute to increased productivity, (b) More than 10
which is common in rural agricultural activities. (c) Less than 10
6. The government scheme that ensures a minimum (d) Government-employed
of 100 days of guaranteed wage employment for Ans : FOREIGN 2015
at least one member of every rural household in a
(c) Less than 10
financial year is called __________.
The informal sector consists of small
(a) REGP
establishments that hire fewer than 10 workers
(b) MNREGA
and lack regulatory oversight.
(c) SJSRY
(d) SGSY 10. A person is said to be in a state of __________
Ans : SQP 2012 when they are willing and able to work at the
(b) MNREGA prevailing wage rate but fail to find employment
The Mahatma Gandhi National Rural opportunities.
Employment Guarantee Act provides guaranteed (a) Employed
wage employment to reduce rural unemployment. (b) Underemployed
(c) Unemployed
7. The organised sector of the economy, which
(d) Self-employed
includes government departments, public
enterprises and private establishments that Ans : DELHI 2016
hire 10 or more workers, is referred to as the (c) Unemployed
__________ sector. Unemployment refers to individuals who are able
(a) Formal sector and willing to work but cannot secure work at the
(b) Informal sector current wage rate.
(c) Secondary sector
(d) Agricultural sector

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 431
Ans : FOREIGN 2001
26. Which of the following best defines ‘educated
(a) Providing employment opportunities for self- unemployment’ as mentioned in the content?
employment and wage employment in urban (a) Unemployment among people without any
areas. education.
The SJSRY aims to generate employment (b) Unemployment among skilled workers in
opportunities in urban areas through self- urban areas.
employment and wage-based programs. (c) Unemployment among educated people who
cannot find suitable jobs.
23. Which sector employs the majority of the female (d) Unemployment due to lack of formal education
workforce, as per the content? and skills.
(a) Secondary sector
(b) Tertiary sector Ans : OD 2005

(c) Primary sector (c) Unemployment among educated people who

(d) Informal sector cannot find suitable jobs.
Educated unemployment occurs when individuals
Ans : DELHI 2002
with educational qualifications fail to secure jobs
(c) Primary sector matching their skills.
A significant proportion of women workers are
concentrated in the primary sector, which includes 27. What does the term ‘labour force participation
agriculture and allied activities. rate’ indicate?
(a) The ratio of employed people to the
24. What does “in-formalization of workforce” refer unemployed population.
to, as mentioned in the content?
(b) The ratio of the labour force to the total
(a) Increase in the proportion of workers in the
population.
organized sector.
(c) The percentage of people working in the
(b) Reduction in the number of workers employed
formal sector.
in casual jobs.
(c) Growth in the proportion of informal workers (d) The proportion of self-employed workers in
in the total workforce. rural areas.
(d) Decline in self-employed workers over time. Ans : FOREIGN 2005

Ans : SQP 2003 (b) The ratio of the labour force to the total
(c) Growth in the proportion of informal workers population.
in the total workforce. Labour force participation rate measures the ratio
In-formalization refers to an increase in the of people engaged or willing to engage in work
number of workers employed in unorganized, relative to the total population.
informal sectors of the economy.
28. What is the main problem of workers in the
25. What is one key measure suggested to tackle the informal sector as mentioned in the content?
problem of seasonal unemployment in rural areas? (a) Regular income and use of advanced
(a) Promotion of multiple cropping and expanding technology.
irrigation facilities. (b) Lack of job security, low wages and outdated
(b) Increasing the use of capital-intensive technology.
techniques in farming. (c) High wages but lack of job opportunities.
(c) Introducing vocational education in urban (d) Government protection but no social security
regions. benefits.
(d) Providing financial aid for self-employment in Ans : DELHI 2006
industries.
(b) Lack of job security, low wages and outdated
Ans : COMP 2004
technology.
(a) Promotion of multiple cropping and expanding Workers in the informal sector face challenges like
irrigation facilities. irregular income, absence of social protection and
Multiple cropping and irrigation facilities can the use of outdated technology.
help create year-round employment opportunities,
addressing seasonal unemployment.

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CH 11 : EMPLOYMENT GROWTH, INFORMALISATION AND OTHER ISSUES
Ans : DELHI 2020 Ans : SQP 2016

(b) Formal sector provides job security and social (c) Seasonal unemployment and disguised
benefits, while informal sector lacks these protections. unemployment.
The formal sector provides workers with job Seasonal unemployment arises due to seasonal
security, regular wages and social benefits, unlike agricultural activities, while disguised
the informal sector which lacks regulation and unemployment occurs when more workers are
worker protection. employed than needed.

17. Which of the following best defines disguised 20. What is one of the major causes of unemployment
unemployment as mentioned in the content? in India as mentioned in the content?
(a) Workers are engaged in a job that requires (a) Rapid growth of vocational education and
fewer workers than those employed. training.
(b) Unemployment due to seasonal nature of (b) Decline of cottage and small-scale industries
agricultural activities. leading to loss of employment.
(c) Educated individuals unable to find (c) Increase in self-employment opportunities in
employment opportunities. rural areas.
(d) Workers unwilling to work at the prevailing (d) Adequate development of irrigation and
wage rate. modern technology.
Ans : COMP 2019 Ans : COMP 2019

(a) Workers are engaged in a job that requires (b) Decline of cottage and small-scale industries
fewer workers than those employed. leading to loss of employment.
Disguised unemployment refers to the presence The decline of traditional industries like cottage
of more workers than required, where their and small-scale industries has resulted in massive
productivity adds no significant value. unemployment, particularly among artisans.

18. What is the key focus of the Rural Employment 21. What is the significance of the worker-population
Generation Programme (REGP) as highlighted in ratio as described in the content?
the content? (a) It shows the number of workers engaged in
(a) Generating wage employment for rural industrial activities.
households. (b) It reflects the contribution of the population
(b) Creating self-employment opportunities by to the production of goods and services.
setting up small industries. (c) It measures the ratio of workers to agricultural
(c) Providing direct financial assistance to farmers. productivity.
(d) Offering training programs for rural youth. (d) It calculates the percentage of casual workers
in the workforce.
Ans : DELHI 2018

(b) Creating self-employment opportunities by Ans : OD 2000

setting up small industries. (b) It reflects the contribution of the population

The REGP aims to promote self-employment to the production of goods and services.
by offering financial support to establish small The worker-population ratio helps assess how
industries, thus generating jobs in rural areas. much of the population is contributing to
economic production.
19. What are the two main kinds of unemployment
prevalent in rural areas of India, as stated in the 22. What is the main focus of the Swarna Jayanti
content? Shahari Rozgar Yojana (SJSRY)?
(a) Educated unemployment and structural (a) Providing employment opportunities for self-
unemployment. employment and wage employment in urban
(b) Open unemployment and disguised areas.
unemployment. (b) Promoting agriculture and allied activities in
(c) Seasonal unemployment and disguised rural areas.
unemployment. (c) Offering financial aid to farmers to improve
(d) Frictional unemployment and educated crop production.
unemployment. (d) Ensuring employment in large-scale industries.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 433

ASSERTION AND REASON 38. Assertion : Work done by women is often

underestimated and not recognized as productive
work.
35. Assertion : Worker-Population Ratio analyses the Reason : Activities performed by women within
employment situation in the country. their house are not paid for.
Reason : A high Worker-Population Ratio (a) Both Assertion (A) and Reason (R) are true
indicates that a high proportion of population is and Reason (R) is the correct explanation of
not directly involved in economic activities. Assertion (A).
(a) Both Assertion (A) and Reason (R) are true (b) Both Assertion (A) and Reason (R) are true
and Reason (R) is the correct explanation of and Reason (R) is not the correct explanation
Assertion (A). of Assertion (A).
(b) Both Assertion (A) and Reason (R) are true (c) Assertion (A) is true but Reason (R) is false.
and Reason (R) is not the correct explanation (d) Assertion (A) is false but Reason (R) is true.
of Assertion (A).
Ans :
(c) Assertion (A) is true but Reason (R) is false.
(d) Assertion (A) is false but Reason (R) is true. (a) Both Assertion (A) and Reason (R) are true
and Reason (R) is the correct explanation of
Ans : OD 2024 Assertion (A).
(c) Assertion (A) is true but Reason (R) is false.
39. Assertion : Less women are found in regular,
36. Assertion : Workforce includes people employed salaried employment.
in economic and non-economic activities. Reason : Jobs generally require skills and a high
Reason : It includes people who are actually level of literacy.
engaged in productive activities. (a) Both Assertion (A) and Reason (R) are true
(a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of
and Reason (R) is the correct explanation of Assertion (A).
Assertion (A). (b) Both Assertion (A) and Reason (R) are true
(b) Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation
and Reason (R) is not the correct explanation of Assertion (A).
of Assertion (A). (c) Assertion (A) is true but Reason (R) is false.
(c) Assertion (A) is true but Reason (R) is false. (d) Assertion (A) is false but Reason (R) is true.
(d) Assertion (A) is false but Reason (R) is true.
Ans : MAIN 2010
Ans : (a) Both Assertion (A) and Reason (R) are true
(d) Assertion (A) is false but Reason (R) is true. and Reason (R) is the correct explanation of
Assertion (A).
37. Assertion : Urban people have a variety of
employment opportunities. 40. Assertion : There are more male workers in the
Reason : People in urban areas have better primary sector.
educational attainments and skills. Reason : Less female workers are employed in the
(a) Both Assertion (A) and Reason (R) are true secondary sector.
and Reason (R) is the correct explanation of (a) Both Assertion (A) and Reason (R) are true
Assertion (A). and Reason (R) is the correct explanation of
(b) Both Assertion (A) and Reason (R) are true Assertion (A).
and Reason (R) is not the correct explanation (b) Both Assertion (A) and Reason (R) are true
of Assertion (A). and Reason (R) is not the correct explanation
(c) Assertion (A) is true but Reason (R) is false. of Assertion (A).
(d) Assertion (A) is false but Reason (R) is true. (c) Assertion (A) is true but Reason (R) is false.
Ans : DELHI 2021 (d) Assertion (A) is false but Reason (R) is true.
(a) Both Assertion (A) and Reason (R) are true Ans : DELHI 2015
and Reason (R) is the correct explanation of (c) Assertion (A) is true but Reason (R) is false.
Assertion (A).

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CH 11 : EMPLOYMENT GROWTH, INFORMALISATION AND OTHER ISSUES
Ans : DELHI 2023
(a) Self-employed (b) Casual Labourer
(b) Rural employment is concentrated in the (c) Regular Salaried (d) None of the above
primary sector, while urban employment is Ans : OD 2021
concentrated in the tertiary sector.
The graph shows that 64.1% of the rural workforce (a) Self-employed
is engaged in the primary sector (agriculture The bar graph shows that 55% of rural workers
and allied activities), while 58.3% of the urban are self-employed, while only 40% of urban
workforce is employed in the tertiary sector workers fall into this category. This highlights the
(services like trade, transport and education). dominance of self-employment in rural areas due
to agriculture and small enterprises.
62. From the bar graph, which sector shows the
smallest difference in employment distribution 64. Based on the line diagram, which sector shows a
between rural and urban areas? consistent decline in employment share from 2000
to 2020?

(a) Primary Sector (a) Primary Sector

(b) Secondary Sector (b) Secondary Sector
(c) Tertiary Sector (c) Tertiary Sector
(d) None of the above (d) All sectors remain constant
Ans : FOREIGN 2022 Ans : SQP 2020

(b) Secondary Sector (a) Primary Sector

In the bar graph, the Secondary Sector shows The line diagram shows that the Primary Sector
the smallest difference. Rural employment in this experienced a consistent decline in employment
sector is 20.4%, while urban employment is 35%, share, dropping from 60% in 2000 to 40% in 2020,
resulting in a difference of 14.6%. In contrast, the reflecting the shift of the workforce towards the
Primary and Tertiary sectors have significantly secondary and tertiary sectors.
larger differences.
65. Based on the pie chart, which sector holds the
63. From the bar graph, which type of employment largest share of employment in the current
has the largest share in rural areas compared to workforce distribution?
urban areas?

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 435

47. Assertion : Economic development of a country (d) Both statements 1 & 2 are false.
leads to labour flows from agriculture and other
related activities to industry and service sectors. 50. Statement 1 : As per National Sample Survey
Reason : Sector wise distribution of workforce Organization (NSSO) unemployment is a
helps us to know about the quality of employment. situation in which all those who, owing to lack
(a) Both Assertion (A) and Reason (R) are true of work, are not working, but seeking work from
and Reason (R) is the correct explanation of prospective employers, expressed their willingness
Assertion (A). to work under the prevailing condition of work
(b) Both Assertion (A) and Reason (R) are true and remuneration.
and Reason (R) is not the correct explanation Statement 2 : Disguised unemployment is
of Assertion (A). generally a massive problem in the highly
(c) Assertion (A) is true but Reason (R) is false. populated country like India.
(d) Assertion (A) is false but Reason (R) is true. (a) Statement 1 is true & Statement 2 is false.
(b) Statement 1 is false & Statement 2 is true.
Ans : DELHI 2019
(c) Both statements 1 & 2 are true.
(b) Both Assertion (A) and Reason (R) are true (d) Both statements 1 & 2 are false.
and Reason (R) is not the correct explanation of Ans : FOREIGN 2024
Assertion (A).
(c) Both statements 1 & 2 are true.
48. Assertion : The agricultural and industrial
sectors have not been able to create sufficient job 51. Identify the correct combination of statements
opportunities. regarding rural unemployment :
Reason : Rapid increase in population has (i) Rural unemployment includes seasonal and
contributed significantly towards the growing disguised unemployment.
unemployment in the country. (ii) Seasonal unemployment occurs due to the
seasonal nature of agriculture.
(a) Both Assertion (A) and Reason (R) are true
(iii) Disguised unemployment occurs when more
and Reason (R) is the correct explanation of
workers are employed than needed.
Assertion (A).
(iv) Educated unemployment is most prevalent in
(b) Both Assertion (A) and Reason (R) are true
rural areas.
and Reason (R) is not the correct explanation
(a) Only (i), (ii) and (iii) are correct
of Assertion (A).
(b) Only (i) and (iv) are correct
(c) Assertion (A) is true but Reason (R) is false. (c) Only (ii), (iii) and (iv) are correct
(d) Assertion (A) is false but Reason (R) is true. (d) All statements are correct
Ans : OD 2009 Ans :. OD 2000
(a) Both Assertion (A) and Reason (R) are true and (a) Only (i), (ii) and (iii) are correct
Reason (R) is the correct explanation of Assertion (A) Rural unemployment includes seasonal and
disguised unemployment. Educated unemployment
is more common in urban areas, not rural regions.

STATEMENT BASED QUESTIONS 52. Identify the correct combination of statements

about the informal sector :
(i) The informal sector hires less than 10 workers.
49. Statement 1 : Casual workers are hired on a (ii) Workers in the informal sector have job
permanent basis and also get social security security and social benefits.
benefits. (iii) Most informal sector workers use outdated
Statement 2 : Workforce comprises, both employed technology.
and unemployed persons. (iv) Informal sector employment is unregulated
(a) Statement 1 is true & Statement 2 is false. by government laws.
(b) Statement 1 is false & Statement 2 is true. (a) Only (i), (iii) and (iv) are correct
(c) Both statements 1 & 2 are true. (b) Only (ii) and (iv) are correct
(d) Both statements 1 & 2 are false. (c) Only (i) and (iii) are correct
Ans : OD 2024 (d) All statements are correct

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CH 11 : EMPLOYMENT GROWTH, INFORMALISATION AND OTHER ISSUES

41. Assertion : Casual labourers are most vulnerable 44. Assertion : The government has never achieved
in the society. the targeted economic growth rate.
Reason : Casual labourers do not have a permanent Reason : Creation of employment opportunities
earning facility and their earning varies a lot. could not keep pace with the additions to the
They can even lose their jobs with a slight dip in labour force.
the economic growth. (a) Both Assertion (A) and Reason (R) are true
(a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of
and Reason (R) is the correct explanation of Assertion (A).
Assertion (A).
(b) Both Assertion (A) and Reason (R) are true
(b) Both Assertion (A) and Reason (R) are true
and Reason (R) is not the correct explanation
and Reason (R) is not the correct explanation
of Assertion (A).
of Assertion (A).
(c) Assertion (A) is true but Reason (R) is false. (c) Assertion (A) is true but Reason (R) is false.
(d) Assertion (A) is false but Reason (R) is true. (d) Assertion (A) is false but Reason (R) is true.
Ans : COMP 2011 Ans : COMP 2005

(a) Both Assertion (A) and Reason (R) are true (d) Assertion (A) is false but Reason (R) is true.
and Reason (R) is the correct explanation of
45. Assertion : Rural women participate more in
Assertion (A).
productive activities as compared to urban
42. Assertion : Formal sector workers enjoy social women.
security benefits. Reason : Rural women workers always get paid
Reason : The organized sector provides work to in cash.
more than half of the total workforce. (a) Both Assertion (A) and Reason (R) are true
(a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of
and Reason (R) is the correct explanation of Assertion (A).
Assertion (A). (b) Both Assertion (A) and Reason (R) are true
(b) Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation
and Reason (R) is not the correct explanation of Assertion (A).
of Assertion (A). (c) Assertion (A) is true but Reason (R) is false.
(c) Assertion (A) is true but Reason (R) is false. (d) Assertion (A) is false but Reason (R) is true.
(d) Assertion (A) is false but Reason (R) is true. Ans : MAIN 2010

Ans : DELHI 2015 (c) Assertion (A) is true but Reason (R) is false.
(c) Assertion (A) is true but Reason (R) is false.
46. Assertion : The proportion of men is more in
43. Assertion : Informal sector uses outdated regular salaried employment.
technology. Reason : Low level of skills and literacy along
Reason : With the efforts of ILO, the Indian with lack of mobility among women reduce their
government has initiated the modernization of chances of regular salaried employment.
the informal sector. (a) Both Assertion (A) and Reason (R) are true
(a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of
and Reason (R) is the correct explanation of Assertion (A).
Assertion (A). (b) Both Assertion (A) and Reason (R) are true
(b) Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation
and Reason (R) is not the correct explanation of Assertion (A).
of Assertion (A). (c) Assertion (A) is true but Reason (R) is false.
(c) Assertion (A) is true but Reason (R) is false. (d) Assertion (A) is false but Reason (R) is true.
(d) Assertion (A) is false but Reason (R) is true. Ans : COMP 2017

Ans : OD 2000 (a) Both Assertion (A) and Reason (R) are true
(b) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of
and Reason (R) is not the correct explanation of Assertion (A).
Assertion (A).

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 437
Ans : FOREIGN 2006
60. Which combination of statements about employment
(a) Only (i), (ii) and (iv) are correct opportunities for men and women is correct?
Formal workers are employed in the organized (i) Both men and women workers are highly
sector with job security, while informal workers concentrated in the primary sector.
lack these benefits. Statement (iii) is incorrect (ii) Women have more opportunities in the
because the formal sector hires 10 or more workers. secondary sector compared to men.
(iii) Men get more opportunities in both secondary
58. Which combination of statements about and service sectors.
unemployment in India is correct? (iv) Women’s concentration in the primary sector
(i) Seasonal unemployment is predominantly is significantly higher than men’s.
seen in agriculture. (a) Only (i), (iii) and (iv) are correct
(ii) Educated unemployment is mainly prevalent (b) Only (ii) and (iii) are correct
in urban areas. (c) Only (i) and (ii) are correct
(iii) Disguised unemployment reduces overall (d) All statements are correct
productivity. Ans : COMP 2009
(iv) Rural unemployment only includes educated
unemployment. (a) Only (i), (iii) and (iv) are correct
(a) Only (i), (ii) and (iii) are correct Both men and women are concentrated in the
(b) Only (i) and (iv) are correct primary sector, but men dominate in the secondary
(c) Only (ii) and (iii) are correct and service sectors. Women’s employment in the
(d) All statements are correct primary sector is much higher compared to men’s.
Statement (ii) is incorrect as women have fewer
Ans : DELHI 2007 opportunities in the secondary sector.
(a) Only (i), (ii) and (iii) are correct
Seasonal and disguised unemployment are common
in rural areas, while educated unemployment GRAPH BASED QUESTIONS
is prevalent in urban areas. Statement (iv)
is incorrect as rural unemployment includes
disguised and seasonal unemployment. 61. Based on the bar graph, what is the key difference
between rural and urban employment distribution
59. Identify the correct combination of statements across the sectors?
regarding employment in rural areas :
(i) A majority of rural workers are engaged in
the primary sector.
(ii) Rural employment opportunities are higher
in the secondary sector.
(iii) About 20.4% of rural workers are engaged
in industries like manufacturing and
construction.
(iv) Rural employment in the service sector is
around 15.5%.
(a) Only (i), (iii) and (iv) are correct
(b) Only (i) and (ii) are correct (a) Rural employment is highest in the secondary
(c) Only (ii), (iii) and (iv) are correct sector, while urban employment is highest in
(d) All statements are correct the primary sector.
Ans : SQP 2008 (b) Rural employment is concentrated in the
primary sector, while urban employment is
(a) Only (i), (iii) and (iv) are correct
concentrated in the tertiary sector.
The majority of rural workers are employed in the
(c) Both rural and urban employment are equally
primary sector, while 20.4% are in the secondary
distributed across all three sectors.
sector and 15.5% are engaged in the service
(d) Urban employment is highest in agriculture,
sector. Statement (ii) is incorrect as secondary
while rural employment is focused on trade
sector opportunities are fewer.
and services.

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CH 11 : EMPLOYMENT GROWTH, INFORMALISATION AND OTHER ISSUES
Ans : FOREIGN 2001
(i) The primary sector includes agriculture,
(a) Only (i), (iii) and (iv) are correct forestry and fishing.
The informal sector hires fewer than 10 workers, (ii) A large percentage of the rural workforce is
uses outdated technology and operates without employed in this sector.
government regulation. Workers lack job security (iii) Urban areas depend heavily on the primary
and benefits, making statement (ii) incorrect. sector for employment.
(iv) The primary sector directly uses natural
53. Which combination of statements about resources.
casualization of workforce is correct? (a) Only (i), (ii) and (iv) are correct
(i) Casualization refers to the rise in temporarily (b) Only (ii) and (iii) are correct
hired workers over time. (c) Only (i) and (iii) are correct
(ii) Casual workers enjoy regular income and (d) All statements are correct
social security benefits.
(iii) Casualization reduces job security for workers. Ans : COMP 2004

(iv) It increases the proportion of workers without (a) Only (i), (ii) and (iv) are correct
permanent employment. The primary sector relies on natural resources and
(a) Only (i), (iii) and (iv) are correct employs a majority of rural workers. However,
(b) Only (ii) and (iv) are correct urban areas depend more on the secondary and
(c) Only (i) and (iii) are correct tertiary sectors, making statement (iii) incorrect.
(d) All statements are correct
56. Which combination of statements about disguised
Ans : DELHI 2002
unemployment is correct?
(a) Only (i), (iii) and (iv) are correct Statements :
Casualization leads to more temporary workers, (i) Disguised unemployment is common in rural areas.
reducing job security. Casual workers do not (ii) It occurs when more workers are engaged
enjoy regular income or social security, making than required for a job.
statement (ii) incorrect. (iii) Productivity remains unchanged despite
extra workers.
54. Identify the correct combination of statements (iv) It is mainly observed in the industrial sector.
about the service sector in urban areas : (a) Only (i), (ii) and (iii) are correct
(i) The service sector provides employment to (b) Only (ii) and (iii) are correct
58.3% of urban workers. (c) Only (i) and (iv) are correct
(ii) The service sector includes trade, transport, (d) All statements are correct
healthcare and education.
(iii) The service sector provides fewer employment Ans : OD 2005

opportunities than agriculture in urban areas. (a) Only (i), (ii) and (iii) are correct
(iv) The majority of workers in urban areas are Disguised unemployment is mostly found in rural
engaged in service-related activities. agricultural activities, where extra workers do not
(a) Only (i), (ii) and (iv) are correct add to productivity. Statement (iv) is incorrect as
(b) Only (ii) and (iii) are correct it is not common in industries.
(c) Only (i) and (iii) are correct
57. Identify the correct combination of statements
(d) All statements are correct
about formal and informal workers :
Ans : SQP 2003 (i) Formal workers are employed in the organized
(a) Only (i), (ii) and (iv) are correct sector.
The service sector employs the majority of urban (ii) Informal workers lack job security and social
workers (58.3%) and includes trade, healthcare benefits.
and education. Statement (iii) is incorrect as the (iii) The formal sector hires fewer than 10 workers.
service sector provides more employment than (iv) Informal workers are mostly found in
agriculture in urban areas. unorganized small enterprises.
(a) Only (i), (ii) and (iv) are correct
55. Identify the correct combination of statements (b) Only (i) and (iii) are correct
about the primary sector : (c) Only (ii) and (iv) are correct
Statements : (d) All statements are correct

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 439

(a) Primary Sector Open unemployment describes the condition

(b) Secondary Sector where individuals are ready to work but fail to
(c) Tertiary Sector secure employment.
(d) All sectors have equal share
68. The worker population ratio helps understand
Ans : COMP 2019
the proportion of the population contributing to
(c) Tertiary Sector a country’s production of goods and services. It
The pie chart shows that the Tertiary Sector highlights the active workforce.
holds the largest employment share at 32%, What does the worker population ratio indicate?
followed by the Primary Sector at 40% and the (a) The ratio of rural to urban workers
Secondary Sector at 28%. This indicates the (b) The proportion of the population engaged in
growing importance of service-based employment. economic activities
(c) The total unemployment rate in a country
(d) The number of people working in the informal
sector
PASSAGE BASED QUESTION Ans : DELHI 2002

(b) The proportion of the population engaged in

66. Gross Domestic Product (GDP) is the total economic activities
monetary value of all goods and services produced The worker population ratio shows the percentage
within a country’s borders in a year. It is a key of the population involved in economic production
indicator of economic performance. activities.
What does GDP measure?
69. The primary sector includes activities directly
(a) Total monetary value of all imports and
using natural resources, such as agriculture,
exports
forestry, fishing and mining. It is a major source
(b) Total monetary value of all goods and services
of employment in rural areas.
produced in a year
Which of the following activities is part of the
(c) Total income of citizens, including foreign
primary sector?
earnings
(a) Manufacturing goods
(d) The average income per citizen
(b) Transport and communication services
Ans : OD 2000 (c) Fishing and agriculture
(b) Total monetary value of all goods and services (d) Construction work
produced in a year Ans : SQP 2003
GDP represents the total value of goods and
(c) Fishing and agriculture
services produced within a country’s borders
The primary sector involves natural resource-
annually, excluding foreign transactions.
based activities like farming, forestry and fishing.
67. Unemployment occurs when a person is able and
70. Seasonal unemployment is common in agriculture
willing to work at the prevailing wage rate but
when work is available only during specific times
cannot find a job. Open unemployment is one
of the year, leaving workers jobless during the off-
type where individuals are actively seeking work
season.
but remain jobless.
What is seasonal unemployment?
What is open unemployment?
(a) Lack of jobs during economic downturns
(a) A situation where people are not willing to
(b) Joblessness during off-seasons in certain
work
activities
(b) Workers employed in seasonal activities
(c) Unemployment due to a lack of vocational
(c) People actively seeking jobs but unable to
skills
find work
(d) A situation where too many workers share
(d) Individuals engaged in informal sector jobs
the same job
Ans : FOREIGN 2001
Ans : COMP 2004
(c) People actively seeking jobs but unable to find
(b) Joblessness during off-seasons in certain
work
activities

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CH 11 : EMPLOYMENT GROWTH, INFORMALISATION AND OTHER ISSUES

THREE MARK QUESTIONS 99. Distinguish between self employment and wage
employment.
Ans : SQP 2003
96. Why is nature of employment in India considered
multifaceted?
S.No Self Employment Wage Employment
Ans : COMP 2024
1. It is an It is an arrangement
Employment in India is diverse. Some individuals arrangement in in which a worker
work year-round, while others find jobs only for which worker uses sells his labour
a few months annually. Many workers, though his own resources and earns wages in
employed, face the challenge of not receiving fair to make a living. return.
wages for their efforts. These variations highlight
the multifaceted nature of employment in India. 2. In case of self In case of wage
employment, a employment,
97. How is worker-population ratio an indicator person makes use workers do not have
for analyzing the employment situation in the of his own land, any other resource
country? labour, capital and (land, capital and
enterprise. enterprise), except
Ans : OD 2024
their own labour.
The ratio indicates the share of the population
3. E.g. Shopkeepers, E.g. : A doctor
actively contributing to a country’s production of
traders, business- employed by a
goods and services. A higher ratio signifies greater
men, etc. hospital.
engagement in productive activities, whereas a
medium or low ratio suggests that a significant
portion of the population is not directly involved 100. “In a nation like India, self employment provides
in economic activities. an important avenue for employment generation.”
Defend or refute the given statement with valid
98. Distinguish between regular salaried employees arguments.
and casual wage workers. Ans : OD 2000
Ans : DELHI 2002
Self-employment involves working independently
rather than for an employer. It plays a crucial role
S. Regular Salaried Casual Wage in India’s employment generation, particularly
No Employees Workers in the informal sector. Self-employment offers
1. When a worker Workers who are independence, potential for higher earnings and
is engaged by casually engaged creative freedom. Additionally, self-employed
someone or by an and in return get individuals not only secure livelihoods for
enterprise and is remuneration for themselves but also create job opportunities for
paid wages on a the work done are others by running enterprises.
regular basis, then termed as casual
101. In the late 1990’s India experienced a widening
such a worker is wage workers.
gap between the growth of GDP and employment
known as a regular
generation.” Discuss.
salaried employee.
2. They are hired on a They are hired on Ans : DELHI 2015

permanent basis. temporary basis. Jobless growth refers to an economic condition

3. They enjoy social They do not enjoy where the economy grows, but employment levels
security benefits social security either remain stagnant or decline. In simpler
like pension, benefits, job security, terms, it indicates a situation where economic
provident fund, etc. etc. expansion generates minimal job opportunities,
leaving many qualified individuals unemployed.
4. Regular workers Casual workers Despite being among the fastest-growing
account for just account for 30% of economies, India faces a severe job shortage. This
18% of India’s India’s workforce. means the Gross Domestic Product (GDP) grows
workforce. without a proportional increase in employment

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 441

85. Are the following workers – a beggar, a thief, a 90. State with valid reason whether the following
smuggler, a gambler? Why? statement is true or false :
‘Self employed workers are different from hired
Ans : FOREIGN 2005
workers.’
Individuals not contributing to activities included
in GDP calculation cannot be classified as Ans : FOREIGN 2023

workers, as their efforts do not add value to the The statement is true. Self-employed workers
nation’s economic output. manage their own business or profession, such as
a farmer on their farm. In contrast, hired workers
86. Raj is going to school. When he is not in school, are employed by others, providing services in
you will find him working in his farm. Can you exchange for wages or salaries, like a teacher
consider him as a worker? Why? working at a school.
Ans : DELHI 2006
91. What is jobless growth?
Yes, Raj can be considered a worker because he
contributes to the farm’s total output, aligning Ans : DELHI 2009

with the definition of a worker as someone engaged This situation, known as jobless growth,
in productive activities. occurs when an economy’s GDP grows faster
than employment opportunities, leading to
87. Meena is a housewife. Besides taking care of unemployment despite economic expansion.
household chores, she works in the cloth shop
which is owned and operated by her husband. 92. Casual wage Labourer play a significant role
Can she be considered as a worker? Why? in various economic activities, especially in
agriculture and construction sectors. Who is a
Ans : SQP 2007
casual wage labourer?
Meena, by working in a cloth shop and supporting
her husband, contributes to the shop’s output and Ans : SQP 2010

the GDP. Thus, she qualifies as a worker under A casual wage labourer is a person who is hired
the economic definition. for temporary work and paid wages on a daily
or periodic basis without job security or formal
88. Define worker-population ratio. employment benefits.
Ans : COMP 2008
93. What is structural unemployment?
The worker population ratio represents the
population actively involved in producing goods Ans : COMP 2011

and services. It is calculated by dividing the Structural unemployment arises from the
total workforce by the total population and economy’s structural issues, such as a mismatch
multiplying by 100, serving as an indicator to between labor supply and demand. For example, it
assess a country’s employment level at a given occurs when labor supply exceeds demand due to
time. It can be denoted in formula as : a rapidly growing population and limited mobility.
Worker-Population Ratio
94. What is industrial unemployment?
= Total Workforce # 100
Total Population Ans : OD 2012

89. ‘Kavya works on her family farm and is neither This refers to industrial unemployment, where
paid in cash nor in the form of grains.’ illiterate individuals seeking work in industries,
Can she be categorized as a worker? Give valid mining, transport, trade and construction remain
reasons in support of your answer. jobless due to insufficient labor demand.

Ans : OD 2023 95. Define disguised unemployment.

A worker is someone engaged in economic Ans : FOREIGN 2020
activities for a livelihood. Kavya, though unpaid,
Disguised unemployment occurs when more
contributes to goods and services through her
individuals are employed in a job than necessary,
work on the family farm. Thus, she can be
resulting in underutilization of labor without
classified as self-employed.
additional productivity.

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CH 11 : EMPLOYMENT GROWTH, INFORMALISATION AND OTHER ISSUES

FOUR MARK QUESTIONS (vi) No practice of maintaining formal accounts.

122. What are the main causes for the ever increasing
120. Study the following chart of Employment and unemployment problem in India?
Gross Domestic Product. Analyses the trend of Ans : FOREIGN 2012
the two variables between 1990-2012.
Unemployment is a significant global issue
affecting countries regardless of their development
levels. In India, its persistence can be attributed
to several factors :
1. Slow Economic Growth : Employment
generated through five-year plans has not
matched the growing labor force.
2. Population Growth : With over 1.3 billion
people, India’s burgeoning population exerts
immense pressure on resources, causing
widespread unemployment.
3. Underdeveloped Agriculture : High population
density on land and outdated farming
Ans : SQP 2024 practices result in rural unemployment.
The period from 1990 to 2012 marked a significant 4. Insufficient Irrigation : Lack of irrigation
phase for the Indian economy, with the Gross limits multiple cropping, leading to seasonal
Domestic Product (GDP) growth rate rising unemployment in rural areas.
substantially from 3.4% in 1990 to 7.8% in 2012. 5. Industrial Growth Lag : Limited capital has
In contrast, the employment growth rate during hampered industrial employment generation.
this time experienced a steady decline, dropping 6. Flawed Education System : Inadequate
from 1.5% to 1.12%. technical and vocational training increases
India witnessed a peculiar phenomenon known unemployment among the educated.
as jobless growth, where GDP expanded rapidly 7. Decline of Cottage Industries : Modern
without a corresponding increase in employment industry emergence has caused the decay of
opportunities. For instance, between 2005 and traditional small-scale enterprises, leaving
2010, the employment growth rate was a mere many jobless.
0.28%, while GDP soared at an impressive 8.7%. 8. Labor Mobility Issues : Social constraints
Overall, the period saw considerable fluctuations hinder migration for better opportunities,
in GDP and employment growth rates. heightening unemployment.
9. Caste System : Discriminatory caste-
121. Discuss the problems being faced by the informal
based work allocation prevents equitable
or unorganized sector.
employment distribution.
Ans : COMP 2023 10. Seasonal Agriculture : Indian agriculture’s
The informal sector encompasses private seasonal nature leaves workers unemployed
enterprises employing fewer than 10 workers, with for significant portions of the year.
individuals working in this sector termed informal
123. (i) Define Worker Population Ratio. Discuss its
sector workers. Examples include farmers,
usefulness.
agricultural laborers and small enterprise owners.
or
In India, over 90% of employment falls under this
Define worker-population ratio. What does it
unorganized sector.
signify?
The challenges faced by this sector are numerous :
(ii) ‘Mr. Rishi, after completing his education, has
(i) Irregular income for workers and enterprises.
joined his family business but his marginal
(ii) Lack of government protection or regulation.
productivity is zero.’
(iii) Absence of job security, with workers subject
Comment upon the employment status of Mr.
to dismissal without compensation.
Rishi. Give valid reasons in support of your
(iv) Many workers reside in slums or as squatters.
answer.
(v) Reliance on outdated technology.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 443

opportunities, highlighting the challenge of jobless nature of such jobs. It also reflects employers’
growth. preference for temporary over regular or formal
employment.
102. Analyses the trends in sectoral distribution of
work force in India on the basis of data : 105. “It is necessary to generate employment in the
Trends in Employment Pattern (Sector-wise), formal sector rather than the informal sector.”
1972-2012 (in %) Justify the given statement with valid arguments.

Sector 1972- 1983 1993- 1999- 2011- Ans : DELHI 2024

1973 1994 2000 2012 The formal sector, comprising public enterprises
Primary 74.3 68.6 64 60.4 48.9 and private establishments with 10 or more
workers, provides employees with social security
Secondary 10.9 14.5 16 15.8 24.3 benefits and labor law protection. Conversely, the
Tertiary 14.8 16.9 20 23.8 26.8 informal sector lacks such benefits and government
Total 100.0 100.0 100.0 100.0 100.0 regulation. The priority should be job creation in
both sectors. Once jobs are created, government
Ans : FOREIGN 2020 policies can focus on regulating and improving
conditions in the informal sector.
The data reveals a decline in the workforce
engaged in the primary sector, from 74% in 1972- 106. Despite women contributing significantly to the
73 to 48.9% in 2011-12. Conversely, the secondary workforce of the country, they are not considered
sector workforce increased from 11% to 24.3% as workers. Why?
and the tertiary sector from 15% to 27% during Ans : SQP2022
the same period. These trends indicate structural
changes in India’s economy, with employment Women constitute one-third of the rural work
shifting from the primary sector to the secondary force and one-fifth of the urban workforce. They
and tertiary sectors. engage in activities like cooking, fetching water,
gathering fuel wood, farm labor and household
103. What do you mean by supply of labour? Can the tasks, which are not considered productive work.
terms ‘supply of labour and ‘labour force’ be used These contributions are often unpaid, whether in
interchangeably? cash or kind. As a result, women are not formally
classified as workers. This lack of recognition
Ans : COMP 2019 leads to an underestimation of the actual number
The supply of labor represents the amount of women workers in the country.
workers are willing to offer at a specific wage rate,
107. Compared to urban women, more rural women
measured in man-days (8 hours of work equals
are found working. Why?
one day). It is wage-dependent. In contrast, the
labor force includes those currently employed and Ans : DELHI 2021
those available for work, encompassing people The female workforce participation in rural areas
willing to work. Labor supply may vary without is about 30%, compared to 14% in urban areas.
a change in worker numbers due to fluctuations Key reasons include :
in working man-days, whereas labor force changes (i) Agricultural Work : Agriculture and allied
only with shifts in the number of working or activities in rural areas do not require
willing individuals. Thus, these terms are distinct specialized skills, allowing rural women to
and not interchangeable. contribute to family support through such
104. What does casualization of workforce imply? jobs.
(ii) Poverty : Economic hardships in rural areas
Ans : SQP 2015 compel women to work and earn income for
Casualization of the workforce refers to the shift their families.
from self-employment and regular salaried jobs to (iii) Urban Income Levels : Urban families
casual wage work. This trend negatively impacts generally have higher incomes, reducing
wages, job stability and employee social security the necessity for urban women to seek
benefits like provident funds due to the temporary employment.

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CH 11 : EMPLOYMENT GROWTH, INFORMALISATION AND OTHER ISSUES

Seasonal unemployment refers to periods when 78. Greater proportion of women workers are found
workers, particularly in agriculture, lack work in _____ (urban/rural) areas as a component
during non-harvest seasons. of Indian work force.
Ans : COMP 2020

Rural.
ONE MARK QUESTIONS 79. Why is work participation of rural women more
than urban woman?
71. What is employment? Ans : FOREIGN 2018

Ans : FOREIGN 2023 A higher number of rural women work due to

their poorer economic conditions compared to
It describes a situation where an individual is
urban women.
involved in productive economic activity to earn
a living. 80. What do you mean by formal sector establishments?
72. Mention the classification of workers. Ans : FOREIGN 2001

Ans : DELHI 2021 Formal sector establishments are public or private

enterprises employing 10 or more hired workers.
Workers are categorized into two types : (i) Hired
workers, comprising casual and regular workers 81. If a construction site Manager hires two workers
and (ii) Self-employed workers. on daily wage basis, such a situation is covered
under _____ (formal/informal) sector. (Fill up
73. Who are hired workers?
the blank with correct alternative)
Ans : SQP 2012
Ans : DELHI 2020
Hired workers are individuals employed by others
Informal
and compensated with daily wages for their labor.
82. How is the number of unemployed estimated?
74. Define self-employed.
Ans : SQP 2003
Ans : COMP 2015

Self-employed workers are individuals who own Unemployment is calculated using the formula :
and manage an enterprise to earn their livelihood. Number of persons unemployed = Labour force
Work force.
75. Who is a worker?
Ans : OD 2022 83. Define occupational structure.
A worker is a person engaged in productive Ans : COMP 2004

economic activities, earning wages, salary, or The distribution of the workforce among primary,
profit. secondary and tertiary sectors is known as the
occupational structure.
76. Why is the bulk of our workforce rural based?
Ans : SQP 2011

This is primarily due to the majority of jobs being

concentrated in rural areas.
TWO MARK QUESTIONS
77. Why is the proportion of men more in regular
84. Define Casual Wage Labourer.
salaried employment?
Ans : OD 2024
Ans : OD 2000
Workers engaged in part-time or irregular jobs
More men hold regular salaried jobs because such
are called casual workers. They lack permanent
employment demands skills and higher literacy
employment and benefits like gratuity or
levels, which are more prevalent among men.
provident funds. This group largely includes
unskilled laborers.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 445

Informational of the workforce is the increasing Unemployment can be addressed through

share of informal workers in the total labor force, accelerated growth, as employment generation
marked by a shift from self-employment and naturally accompanies economic growth.
regular salaried jobs to informal employment. Enhancing the agricultural sector is crucial to
Key factors driving this trend include : achieving higher growth. Adopting improved
(i) Labor Supply-Demand Gap : Excess production techniques, expanding irrigation
labor supply due to limited employment and increasing public investment in agriculture
opportunities enables producers to favor can boost land and labor productivity, leading
informal labor. to higher output and more job opportunities.
(ii) Cost Reduction : Producers maximize profits Similarly, promoting the small-scale sector
by employing casual labor to minimize costs. through affordable financing, better marketing
(iii) Relaxed Labor Laws : Easier labor regulations facilities and technical training can drive growth
encourage employers to prefer casual over and create additional employment.
regular workers.
118. Discuss the factors responsible for educated
115. How is low level of capital formation responsible unemployment.
for the existing problem of unemployment in the
Ans : COMP 2010
country?
Unemployment among the educated people is
Ans : DELHI 2007
called as educated unemployment. It mainly
Investment is crucial for boosting output and arises due to the following reasons :
creating employment opportunities. Low income (i) The education system in India is not job-
levels lead to reduced savings, which, in turn, limit oriented but degree-oriented because of which
investment and capital formation. This creates degree holders often fail to find jobs.
a vicious cycle of low income, low savings, low (ii) Increase in the size of educated labour force
investment, low capital formation and low output, has been far greater than the increase in
perpetuating unemployment due to insufficient employment opportunities because of which
job opportunities in the economy. Breaking educated unemployment is on the rise.
this cycle is essential for economic growth and
(iii) There has been rapid expansion of general
employment generation.
education and educational institutions which
116. “In rural areas of India, more members of a family has resulted in increase in the number of
are engaged in work, yet the gross income of the educated people.
family is generally low.”
119. Unemployment means loss of potential output.
Identify the type of unemployment indicated in
Do you agree?
the above statement and explain the paradox
associated with it. Ans : OD 2009

Ans : SQP 2023 Yes, I agree with statement. Unemployment

reflects the economy’s inability to optimally use its
Disguised unemployment occurs when more
labor force. It arises when individuals are willing
workers are employed than necessary, contributing
to work at current wage rates but cannot find jobs
no additional output. This is prevalent in rural
due to insufficient employment opportunities. If
areas, where an increase in agricultural workers
all capable and willing individuals were engaged
often does not correspond to an expansion in
in productive work, GDP and overall output
cultivated land. The paradox is that, despite
would significantly increase, boosting economic
more family members working in agriculture,
efficiency and growth.
gross family income remains low. This is because
the surplus labor does not enhance productivity,
resulting in family income not being proportional
to the number of workers.

117. How can accelerating the growth rate of GDP

solve the problem of unemployment?
Ans : FOREIGN 2008

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CH 11 : EMPLOYMENT GROWTH, INFORMALISATION AND OTHER ISSUES

or transportation but failing due to Workers are unable to improve their work-
insufficient skills. expertise in such a paradigm and are deprived of
(b) Educated Unemployment : Affects career growth opportunities and finally are bereft
qualified individuals whose education of the capacity to accumulate significant savings.
does not align with available jobs. Causes In this manner, they are further excluded from
include a flawed education system, lack of the main economy due to their inability to save
skills and preference for formal or white- and invest.
collar jobs.
(c) Technological Unemployment : Results (i) From the following, identify the challenges
from technological advances that replace being faced by the informal sector :
workers with machines, such as improved (a) Low wages and unstable employment
manufacturing techniques or labor-saving (b) Protection through labour laws
devices. (c) Entitlement to social security benefits
(d) Conducive working environment

(ii) Under _____ type of unemployment

marginal product gained by employing one
CASE BASED QUESTION additional unit of labour is zero :
(a) Disguised
(b) Seasonal
132. Read the paragraph given below and answer the
(c) Educated
questions that follow :
(d) Underemployment
Indian poverty persists not only due to insufficient
economic activity but also due to the presence of (iii) A construction site manager hires 2 workers
a large unorganized sector. In 2018, only 50% of on a daily basis : such a situation is covered
the Indian population participated in the labour under _____ (formal/informal) sector.
force, 81% of which was employed in the informal
sector, also known as the unorganized sector. (iv) Match the following column and choose the
Although the informal sector is accredited with the correct option.
absorption of large masses of workers that would Column I Column II
otherwise remain unemployed due to the absence
of formal-sector opportunities, the reprieve 1. Work force A. irregular income
provided by it is detrimental to the country’s 2. Informal B. include both
developmental progress. The informal segment workers employed as well
of the economy is responsible for maintaining as unemployed
India’s unequal status quo. The informal sector persons
consists of enterprises which are labour-intensive.
3. Labour Force C. persons who are
Low-skilled labourers who are desperate enough
actually engaged
to work for miserly wages in order to meet their
in economically
subsistence requirements largely constitute the
productive
labour force of unorganized economic activities.
activities
Since unorganized firms operate outside of the
jurisdiction of corporate law, workers in their 4. Formal workers D. can form trade
employment are assured of neither job-security unions
nor social protection. Owing to the nation’s (a) A, C, B, D
mammoth population, an oversupply of menial (b) C, A, B, D
labour is paving the way for easy exploitation on (c) D, B, A, C
the part of unconscionable entrepreneurs. (d) D, C, B, A
The expendable nature of the unorganized labour Ans :
force causes wages to remain at minimal levels,
(i) (a) Low wages and unstable employment
sometimes lower than the legal minimum. Also,
(ii) (a) Disguised
the prices of products and services produced by
(iii) Informal
these workers usually do not rise in sync with the
(iv) (b) C, A, B, D
rate of inflation, further adding to their despair.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 447
Ans : COMP 2020
Region Estimates Workers Estimated
(i) Worker Population Ratio measures the of Population No. of
share of the population actively involved in Population Ratio Workers (in
producing goods and services. It indicates the (in crores) crores)
employment situation, where a higher ratio
reflects greater economic activity, while a Rural 71.88 41.9 71.88 41.9
100 #
medium or low ratio suggests limited direct
= 30.12
participation in productive activities.
Worker Population Ratio : Urban 28.58 33.7 28.52 33.7
100 #
= Total number of workers # 100
Total Population = 9.61124
This is an indicator which is used for analyzing
Total 100.40 39.5 100.40 39.5
the employment situation in the country. A higher 100 #
ratio indicates that more people are actively = 39.658
engaged in the productive activities of the
economy. Whereas a medium or low ratio means Estimated no. of workers in urban areas
that a very high proportion of its population is = 28.52 # 33.7 = 9.61124
not involved directly in economic activities. 100
Trends in Employment Pattern Therefore it can be seen that workers in urban
(Sector-wise), 1972-2012 (in %) areas were around 9.61 crores and the total
workforce of India was approximately 39.7 crores.
Sector 1972- 1983 1993- 1999- 2011-
1973 1994 2000 2012 125. Distinguish between formal sector workers and
Primary 74.3 68.6 64 60.4 48.9 informal sector workers.

Secondary 10.9 14.5 16 15.8 24.3 Ans : DELHI 2021

Tertiary 14.8 16.9 20 23.8 26.8 S.No. Formal Sector Informal Sector
Total 100.0 100.0 100.0 100.0 100.0 Workers Workers
(ii) This is a case of Disguised Unemployment. 1. Workers working in Workers working
Disguised unemployment occurs when the organized sector in the unorganized
surplus workers have negligible productivity. are called as formal sector are called
Removing them doesn’t affect output. sector workers. as informal sector
Common in rural agriculture, e.g., a farm workers.
requiring 4 workers employs 8, making 4
effectively unemployed. 2. They are entitled They do not enjoy
to social security any social security
124. The following table shows the population and benefits like benefits.
worker population ratio for India in 1999-2000. provident fund,
Can you estimate the workforce (urban and total) gratuity, pension
for India? etc.

Region Estimates Workers Estimated 3. They are protected They remain

of Population No. of by various labour unprotected by
Population Ratio Workers (in laws. labour laws and
(in crores) crores) are therefore,
highly vulnerable.
Rural 71.88 41.9 71.88 41.9
100 # 4. They can form They cannot form
= 30.12 trade unions. trade unions.

Urban 28.58 33.7 126. Has the quality of employment improved over the
Total 100.40 39.5 years? Comment.
Ans : FOREIGN 2022
Ans : SQP 2021

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CH 11 : EMPLOYMENT GROWTH, INFORMALISATION AND OTHER ISSUES

108. Elaborate any two reasons owing to which lesser Ans : DELHI 2016

number of women are found in regular salaried Jobless growth occurs when an economy produces
employment. more goods and services without a proportionate
Ans : OD 2018
rise in employment opportunities. It signifies
GDP growth without corresponding job creation,
Fewer women engage in regular salaried leading to increased income inequality and limited
employment due to : opportunities. This imbalance is detrimental to
(i) Limited Education : Female education is often the economy as it widens disparities and restricts
undervalued in India, leaving many women inclusive growth.
without the necessary qualifications or skills
for professional jobs. 112. Why is casualization of workforce increasing?
(ii) Family Discouragement : Many families
Ans : COMP 2014
discourage women from working outside the
home, especially in jobs requiring long hours, The rise in workforce casualization is attributed
as typical in regular salaried positions. to :
(i) Slow Organized Sector Growth : Limited
109. Discuss the various reasons for lower women expansion of employment in the organized
participation in work. sector.
Ans : FOREIGN 2017
(ii) Cost-Cutting Retrenchment : Industries
reducing workforce to lower production costs.
Women, especially in urban areas, have low (iii) Privatization and Disinvestment : Reduction
workforce participation due to : in public sector jobs due to economic reforms.
(i) Lagging Education : Limited access to (iv) Shift by Small Farmers : Small and marginal
education restricts job opportunities for farmers turning to casual work for alternate
women. livelihoods.
(ii) Family Decisions : Urban families often decide
against allowing women to work, despite 113. What type of unemployment exists in rural areas?
available opportunities. What are the main reasons responsible for it?
(iii) Rural Poverty : Higher rural participation
Ans : SQP 2011
stems from poverty, but women there are
involved in low-paying, less productive jobs. Disguised and seasonal unemployment are the
(iv) Unrecognized Activities : Household tasks two types of unemployment which exist in
like cooking and care giving are not classified rural areas. Disguised unemployment occurs
as productive economic activities, reducing when more people are engaged in a job than
their formal workforce recognition. required. Whereas seasonal unemployment occurs
when people engaged in seasonal activities like
110. Victor is able to get work only for two hours in agriculture become unemployed during off season.
a day. Rest of the day, he is looking for work. Is The main factors responsible for rural
he unemployed? Why? What kind of jobs could unemployment of this type are :
persons like Victor is doing? (i) Lack of alternate employment opportunities
Ans : FOREIGN 2012 compels people to continue working on family
farms.
Victor is not an unemployed worker. But he
is working only two hours a day which is not (ii) Workers engaged in other seasonal activities
sufficient enough to be considered as a full time like sugarcane crushing etc. are engaged in
worker. As per statistics by National Sample work only for a few months in a year.
Survey, one who works for 28 hours a week is (iii) Lack of irrigation facilities have prevented
said to be underemployed. The works that Victor multiple cropping because of which a farmer
could be doing can include delivering newspaper, who grows one crop in a year usually remains
working in a restaurant, courier delivery boy and unemployed for a few months.
teller in bank.
114. What is informational of workforce? Discuss the
111. What is jobless growth? Why is it not considered factors responsible for it.
good for an economy? Ans : OD 2013

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 449

(i) Decline in Production and Income : programs, should be prioritized in economic

Unemployment prevents optimal use of plans.
human resources, leading to reduced output 6. Population Growth Control : Managing
and income levels. population growth ensures that job creation
(ii) Poverty : Unemployed individuals do not meets the demands of the labor market.
contribute to the national income, increasing 7. Support for Small-Scale Enterprises :
poverty as they struggle to meet basic needs. Providing concessional loans, raw materials
(iii) Low Capital Formation : Insufficient income and infrastructure for small enterprises can
limits savings and investments, hampering stimulate job creation.
capital formation and economic growth. 8. Educational Reforms : The education system
(iv) Low Productivity : Disguised unemployment, should emphasize vocational training and
especially in agriculture, lowers productivity job-oriented skills to equip the unemployed
and slows the economy’s growth rate. with practical expertise.
Social Effects :
131. Explain the various types of unemployment.
(i) Reduced Standard of Living : Unemployment
deprives individuals of the means to maintain Ans : OD 2016

a dignified quality of life. Various types of Unemployment are as follows :

(ii) Income Inequality : Higher unemployment
exacerbates income and wealth disparities.
(iii) Social Unrest : Persistent poverty fosters
desperation, leading to theft, fraud and other
crimes.
Unemployment is thus a significant social issue,
fostering inequality and unrest within society.

130. In India, due to increase in labour force at a fast pace

as compared to employment growth rate, the number
of people remaining unemployed has increased over
time. How can this problem be solved?
Ans : COMP 2017
Types of Unemployment
(i) Rural Unemployment: Rural unemployment
To address unemployment in India, the following occurs in villages and is of the following types
measures can be implemented : :
1. Accelerating GDP Growth : Boosting GDP (a) Seasonal Unemployment : Found in
through increased production in agriculture industries with seasonal demand, like
and industry, along with promoting small and agriculture. For instance, workers are
cottage industries, is crucial to creating jobs. needed during the harvest but remain
2. Higher Capital Formation : Investments unemployed in other months.
should focus on sectors with high employment (b) Disguised Unemployment : Common
potential to enhance the rate of capital in agriculture, where surplus workers
formation. contribute little to productivity. For
3. Infrastructure Development : Improving example, 8 family members working on
facilities like irrigation, electricity, roads and a farm where only 4 are needed leads to
healthcare is vital for economic growth and disguised unemployment.
optimizing the agricultural and industrial (c) Open Unemployment : Occurs when
sectors. individuals willing and capable of working
4. Labour-Intensive Technology : Encouraging cannot find full-time employment.
labour-intensive over capital-intensive (ii) Urban Unemployment occurs in cities and
technology will create more jobs. includes :
5. Employment-Focused Programs : Initiatives (a) Industrial Unemployment : Affects
like irrigation and road construction projects, unskilled workers seeking jobs in
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CH 11 : EMPLOYMENT GROWTH, INFORMALISATION AND OTHER ISSUES

According to labour ministry data, around 16.5 a positive impact on food security and rural
lakh people have benefited from the Atmanirbhar livelihoods. Consumption expenditure in rural
Bharat Rozgar Yojana (ABRY) which was India, where 70% of the population lives, in turn
launched in October 2020 to encourage hiring in boosts the overall economy.
the country amid the COVID-19 pandemic till Though India’s economy showed signs of recovery
March 9, 2021. after the first wave peaked in September 2020,
The scheme was introduced on October 1, 2020, the recovery did not hold. Income, employment
to incentive the creation of new employment and nutrition levels were still below baseline pre-
along with social security benefits and restoration lockdown levels by the end of 2020, new research
of loss of employment during the pandemic. has found. Unemployment has been on the rise
This scheme, being implemented through the since March 2021, entering double digits in May.
Employees Provident Fund Organization (EPFO), Besides loss of jobs, wages have also decreased,
reduces the financial burden of the employers of according to multiple household surveys, leaving
various sectors/industries and encourages them to many workers unable to properly feed their
hire more. families.

(i) ____ Refers to a situation when the (i) Labour Force Participation
economy is able to produce more goods and Rate = _____ /Total population × 100
services without a proportionate increase in
employment opportunities. (ii) Why is it necessary to generate employment in
the formal sector rather than in the informal
(ii) A higher _____ indicates that a high sector?
proportion of the population is involved in (a) Formal workers earn more and get social
economic activities. security benefits
(a) Labour Force Participation Rate (b) Formal workers can leave the job anytime
(b) Worker-Population Ratio they want
(c) Work Force Participation Rate (c) Formal workers can form trade unions
(d) Employment Ratio and protect their interests
(d) Both (a) and (b)
(iii) Self employed and casual wage labourer are
found more in rural areas. (True/False) (iii) _____ (Organized/Unorganized) sector
covers those enterprises or places of work
(iv) The newly emerging jobs are mostly found in where the terms of employment are regular
the _____ sector. and thus, people have assured work.
(a) Service
(b) Manufacturing (iv) Self employment is a major source of livelihood
(c) Agricultural for both men and women and this category
(d) Industries accounts for more than _____ percent of
the workforce.
Ans :
(a) 20
(i) Jobless growth (b) 25
(ii) (b) Worker-Population Ratio (c) 30
(iii) True (d) 50
(iv) (a) Service
Ans :
135. Read the paragraph given below and answer the (i) Labour Force
questions that follow : (ii) (d) Both (a) and (b)
India’s rural economy comprises both farm and (iii) Organized
non-farm sectors. Remittances sent by millions (iv) (d) 50
of migrant workers like Ram contribute to its
non-farm economy, which is made up of formal 136. Read the paragraph given below and answer the
and informal employment in sectors such as questions that follow :
retail, construction, manufacturing, hospitality, Around 80% of India’s labour force is employed
education and transportation. Non-farm and in the informal sector and the remaining 20% in
remittance incomes have been found to exert the formal sector. Of the 80% informal sector

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 451

133. Read the paragraph given below and answer the 4. Self employment D. Agriculture,
questions that follow : mining and
In-formalization of labour : Only half and quarrying
sometimes less than half of the urban population
(a) D, A, B, C
finds employment in factories or similar
(b) C, A, B, D
organizations. Rest all are engaged in ‘informal’
(c) B, A, C, D
economic activities which are casual, unskilled,
(d) C, D, A, B
without fixed working hours, low income and
nature of work largely fluctuating and seasonal. (iii) From the following, identify the factor which
Several studies and reports have come out in the is not responsible for causing unemployment
last twenty years, which depict the miserable in the economy :
working conditions of India’s informal sector
(a) Defective educational system
workers. While workers in the informal sector
(b) Underdeveloped agriculture
contribute a considerable amount of output to the
country’s GDP, the conditions under which they (c) Creation of self employment opportunities
work are usually deplorable. More than 70 percent (d) Low capital formation
of the non-agricultural labour force is in informal
employment. If we include agriculture into this, (iv) _____ Refers to a situation whereby the
it will be over 90 percent. Work in the informal proportion of workforce in the informal sector
sector is so common today that it is almost a to total workforce increases.
norm. Today, due to policies of globalization, (a) Jobless growth
facilitated by advances in technology, labour is (b) Casualization of workforce
losing its formal and organized character. Workers (c) informational of workforce
are divided into two groups, who are employed (d) both (a) and (b)
and who are in the reserve army of labour, willing Ans :
to do anything to obtain employment. Large
(i) (a) Job security
number of workers in India, who form this reserve
(ii) (d) C, D, A, B
army, miserably wander to and fro between cities,
(iii) (c) Creation of self employment opportunities
towns and villages, living in different phases of
(iv) (c) informational of workforce
employability in seasonal cycles.
(i) Following is an advantage of working in a 134. Read the paragraph given below and answer the
formal sector. questions that follow :
(a) Job security India is still not out of the woods as far as
(b) Low wages unemployment is concerned since the lock-down
(c) Saved from the hassle of paying tax was imposed to contain the spread of deadly
(d) Closed and direct relationship with the COVID-19 on March 25, 2020 as pandemic-
employer. induced job loss has not tapered off consistently.
The government had imposed a lock-down to curb
(ii) Match the following : the spread of the pandemic but this impacted
economic and commercial activities and resulted
Column I Column II
in job loss and later on the exodus of migrant
1. Seasonal A. Private workers which rocked the entire nation.
Unemployment enterprises The experts are of the view that the farm sector
which hire less has done well which engages over 55 per cent of
than 10 workers the country’s population but there is a need for
2. Primary sector B. when a worker improvement in hiring in urban and industrial
uses his own areas. They opined that the government has
resources to taken many steps to boost fresh hiring in the
make a living country but repeated policy interventions and
monitoring of existing schemes and initiatives at
3. Unorganized C. Unemployment the ground level are required to achieve consistent
sector occurring in improvement in the employment scenario in the
certain seasons country.

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CH 11 : EMPLOYMENT GROWTH, INFORMALISATION AND OTHER ISSUES

Industrialization fosters modernization and 128. Discuss any three causes of unemployment in India.
provides more stable employment opportunities State the most common types of unemployment
than those available in the primary sector. found in India.
Recognizing this, policymakers prioritized
Ans : DELHI 2019
industrial development, aiming to transition
surplus agricultural workers to industries and Causes of Unemployment in India :
enhance their living standards. However, as the (i) Caste System : The caste system remains
nation progressed, the expansion of the formal deeply ingrained in India’s social and
sector fell short of expectations, adversely economic structure, particularly in rural and
affecting the quality of employment. backward areas. Certain types of work are
Despite years of service, workers in the informal still restricted to specific communities, often
sector remain deprived of maternity benefits, neglecting skills and experience. This leads
provident funds and other social security provisions. to widespread unemployment by limiting
Additionally, informal sector workers earn equitable work distribution.
significantly less compared to their formal sector (ii) Population Growth : With a population
counterparts for performing similar jobs. Notably, exceeding 1.3 billion and projected to surpass
only 6% of the workforce is employed in the formal China by 2024, India faces immense pressure
sector, leaving 94% in the informal sector. on its resources. Rapid population growth
Distribution of workforce in Formal and Informal outpaced economic development, leaving
Sectors a significant portion of the population
unemployed.
Sector No. of workers (in % of workers (iii) Seasonality in Agriculture : Agriculture, a
crores) major source of employment, is inherently
Formal 3 6.3 seasonal. Workers are employed during peak
times, like the harvest season, but remain
Informal 44.3 93.7 jobless for large parts of the year.
Total 47.3 100 Common Types of Unemployment in India
(i) Disguised Unemployment : Found mainly
127. Why has the Indian government started paying in rural agriculture, this occurs when more
attention to enterprises and workers in the people are employed than necessary, leading
informal sector and initiated their modernization? to zero or negligible additional productivity.
Ans : OD 2011 For example, a farm requiring four workers
employs eight, making the extra four
Addressing the needs of the informal sector
effectively unemployed.
has been a long-overdue priority. Recently, the
(ii) Seasonal Unemployment : This arises in
government has begun focusing on this sector for
industries or activities with seasonal demand.
several key reasons :
For instance, agricultural laborers are needed
(i) The formal sector’s inability to generate
during harvest but face unemployment in off-
sufficient employment has compelled attention
season periods.
toward informal enterprises and workers.
(iii) Open Unemployment : A visible form of
(ii) A significant portion of the workforce remains unemployment where individuals willing
employed in the informal sector, but these and able to work cannot find jobs. It is
enterprises rely on outdated technology. quantifiable in terms of the number of people
(iii) Informal sector workers lack government actively seeking work but remaining jobless.
protection and regulation.
(iv) Workers in this sector often face irregular 129. Discuss the various economic and social
incomes and can be dismissed without consequences of the existing unemployment
compensation. problem in India.
With the support of the International Labour Ans : SQP 2018
Organization (ILO), the Indian government has
Unemployment has severe economic and social
initiated efforts to modernize informal enterprises
consequences, as outlined below :
and implement social security measures for their
Economic Effects :
workers.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 453

workforce, half work in agriculture and the (iii) Match the following :
remaining in non-agricultural sectors. Of the
40% non-agricultural informal sector workers, Column I Column II
about half live in rural India and the remaining 1. Activity A. Decay of
in urban India. Meanwhile, almost all of the 40% undertaken for Cottage and
agricultural informal sector workers live in rural monetary gain small scale
India. Of the 20% formal sector labour force, 8% industries
are employed in the industrial sector and 12% in
2. One who uses his B. Informational
services (of which about half is public services).
own resources to of workforce
About two-thirds of the rural workforce are
make a living
in agriculture and almost all are informally
employed. The second wave hit rural India hard. 3. Reason for C. Self employed
Rural sentiment fell sharply, but has begun to unemployment
recover since. Wages, the main source of income 4. When proportion D. Economic
for the landless, have been resilient over 2020- of workforce in activity
21, led by good monsoons and elevated reservoir the informal sector
levels. It helped that agricultural production increases over time
and distribution were exempt from the various
(a) D, C, A, B
lock-downs and being ‘essential’, the demand
(b) D, A, B, C
for food remained robust. Recently, domestic
(c) A, B, D, C
demand has been accompanied by strong foreign
(d) B, A, D, C
demand. Agricultural exports have been on the
rise. Alongside, the government has raised social Ans :
welfare spending in rural India over the last year, (i) (c) 33%
which has propped up incomes. (ii) (a) Formation of special economic zones
(i) In 2020 and 2021, there has been a rural (iii) (d) Both (a) and (b)
growth of (iv) (a) D, C, A, B
(a) 30% 137. Read the paragraph given below and answer the
(b) 25% questions that follow :
(c) 33% Female labour participation rate in India fell to
(d) 31% 16.1% during the July-September 2020 quarter, the
(ii) Following is not a reason for casualization of lowest among the major economies, a government
workforce : report said, reflecting the impact of pandemic and
a widening job crisis. The percentage of women
(a) Formation of special economic zones
in the labour force had fallen to a record low of
(b) Slow growth of employment in organized 15.5% during the April-June 2020 quarter, when
sector India imposed strict lockdown to curb the spread
(c) Growing demand for casual labour in of COVID-19 virus, said the report, released late
expanding construction trade and services Monday by the Ministry of Statistics.
(d) Shifting of status of small and marginal According to World Bank estimates, India has
farmers into casual workforce due one of the lowest female labour force participation
to decreasing scope of earnings from rates in the world. Less than one third of women
agricultural activities – defined in the report as 15 or older–are working
or actively looking for a job.
(iv)Which type of unemployment exists in the Most employed women in India are in low-skilled
rural areas? work, such as farm and factory labour and
(a) Disguised unemployment domestic help, sectors that have been hit hard
(b) Seasonal unemployment by the pandemic. The unemployment rate among
(c) Educated unemployment women touched 15.8%, compared with 12.6%
among male workers during three months that
(d) Both (a) and (b)
ended in September 2020, the latest quarter for
which data was released.

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CH 11 : EMPLOYMENT GROWTH, INFORMALISATION AND OTHER ISSUES

(i) What does a low proportion of women workers

in labour force indicate?
(a) The economic and social backwardness of
a nation
(b) That a high proportion of the population
is not involved directly in economic
activities
(c) That women education is still lagging
behind
(d) Both (a) and (c)

(ii) Among regular salaried employment,

_____workers are found to be engaged in
greater proportion. (Male/Female)

(iii) In _____ employment, people are not able

to find jobs during some months of the year.
(Seasonal/Disguised)

(iv) Assertion : Less females are found to be

working as compared to males and the
participation rate of females is still more in
rural areas as compared to urban areas.
Reason : When a worker is engaged by
someone or an enterprise and is paid wages
on a regular basis they are known as regular
salaried employees.
(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).
(c) Assertion (A) is true but Reason (R) is
false.
(d) Assertion (A) is false but Reason (R) is
true.
Ans :
(i) (d) Both (a) and (c)
(ii) Male
(iii) Seasonal
(iv) (b) High earning families in urban areas
discourage female members from taking
up jobs and also many activities in
which urban women are engaged are not
recognized as productive work.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 455

CHAPTER 12
ENVIRONMENT AND SUSTAINABLE DEVELOPMENT

diamonds, lead, manganese, zinc, uranium etc.

SUMMARY But, despite these advantages, there are some
basic problems related to environment. These are:
1. Pollution and
1. ENVIRONMENT
2. Excessive exploitation of natural resources.
Environment is defined as the total planetary Both these problems have emerged due to rapid
inheritance and the totality of all resources. It is economic growth and industrialisation in the
the sum total of external forces that surround us. developed world.
It includes all the biotic and abiotic factors that
influence each other. 3. CHALLENGES TO INDIA’S ENVIRONMENT
India faces significant environmental challenges
1.1 Biotic Elements
that threaten its ecological balance and
These include all living elements like birds, sustainability. These issues stem from human
animals and plants, forests, fisheries etc. activities and natural processes. The challengers
to India’s environment are as follows :
1.2 Abiotic Elements
These include non-living elements like air, water, 3.1 Air Pollution
land etc. Air pollution indicates the presence of pollutants
in the air which causes health problems. It is
1.3 Functions of Environment
mainly caused by industries and vehicles.
1. Environmental resources represent minerals,
wood, water etc. that are used as inputs in 3.2 Water Pollution
production. This means contamination of water by foreign
2. Environment sustains life by providing the matter that deteriorates quality of water. It is
basic necessities of human life. mainly caused by domestic sewage, industrial
3. It absorbs the waste generated by the waste water, chemicals and pesticides used in
production and consumption activities. agriculture and waste generated by thermal power
4. Environment includes land, water bodies, houses.
forests etc. which are pleasing to look at and
also improve the quality of life. 3.3 Noise Pollution
The environment is able to perform these Mechanization has raised the levels of efficiency,
functions as long as demand on the functions is but it has also raised the level of noise pollution.
within its Carrying capacity. Carrying Capacity Man made sources are the main sources of noise
implies two things: pollution.
1. Resource extraction should remain below the
rate of resource generation. 3.4 Degradation of Land
2. Generation of waste should remain within the This means loss of fertility of land. It has put
absorption capacity of the environment. a huge pressure on the country’s limited land
2. STATE OF ENVIRONMENT IN INDIA resources.

India has abundant natural resources in terms of 3.5 Soil Erosion

rich quality of soil, many rivers, lush green forests, Soil erosion takes place when the surface soil is
plenty of mineral deposits like bauxite, copper, washed away due to excessive rains and floods.

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CH 12 : ENVIRONMENT AND SUSTAINABLE DEVELOPMENT

Deforestation is one of the major reasons for soil 3. Poverty issues need to be addressed in order
erosion. to control environmental degradation.
4. Urgent pollution control measures need to be
3.6 Deforestation adopted in order to keep the level of waste
It refers to the removal or destruction of the generated within the carrying capacity of the
forest cover of an area. Deforestation, on a rapid environment.
scale, has disturbed the ecological balance of the 5. Public awareness has to be created about
country. the dangers of pollution and degradation of
environment.
3.7 Loss of Biodiversity
6. MEASURES TAKEN BY THE GOVERNMENT FOR
It is a decline in the amount of specific species in
ENVIRONMENT PROTECTION
a given eco-system. Biodiversity includes different
types of plants, micro-organisms etc. It is a very Government of India has undertaken several
important resource because it enhances natural legal and administrative measures to protect the
beauty, helps in renewing the natural resources environment from further degradation. These
and also helps in the creation of the ecological measures are as follows:
system.
6.1 Environment (Protection) Act, 1986
4. CAUSES OF ENVIRONMENTAL DEGRADATION This act empowered the government to take all
Environmental degradation poses a serious threat measures necessary for protecting and improving
to the planet, impacting both ecosystems and the quality of environment.
human life. The causes are rooted in human
actions and unsustainable practices, as outlined 6.2 Pollution Control Boards
below: In order to address the problem of water and
1. Rapid growth of population has put a huge air pollution in India, the government set up
burden on natural resources. the Central Pollution Control Board (CPCB) in
2. Widespread poverty has led to excessive 1974. Its main function is to investigate, collect
cutting of trees by poor people to be used as and disseminate information related to water, air
fuel. and land pollution and to lay down standards for
3. Rapid industrialisation has led to severe sewage/trade effluent and emissions.
environmental problems due to generation of
6.3 The Forest (Conservation) Act, 1980
a lot of waste.
4. Increasing use of chemical fertilizers, pesticides This act has strict provisions to check the diversion
& insecticides has added to environmental of forest land for any other purpose.
degradation. 7. GLOBAL WARMING
5. Urbanisation has caused clearing of land for
Global warming is an observed projected increase
housing, industries, construction of roads,
in the average temperature of earth’s atmosphere
etc.
and oceans due to increase in greenhouse gases
5. MEASURES TO CONTROL ENVIRONMENTAL since the industrial revolution. The main causes
DEGRADATION of global warming are:
1. Burning of coal and petroleum products
Environmental degradation can be mitigated which are sources of carbon dioxide, methane,
through collective efforts and sustainable nitrous oxide, ozone.
practices. Effective measures are necessary to 2. Deforestation which increases the level of
ensure ecological balance and preserve resources carbon dioxide in the atmosphere.
for future generations. 3. Release of methane gas from animal waste.
1. Vehicular pollution control needs to be given 4. Increased cattle production which contributes
top priority. to deforestation.
2. Domestic and industrial wastes needs to be
recycled and put to productive use. 7.1 Ozone Depletion
It refers to destruction of ozone in the ozone
layer due to presence of chlorine from man-made

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 457

chlorofluorocarbons (CFCs) and other sources. 6. The use of wood, dung cake and other
As a result of depletion of the ozone layer, more biomass as fuel should be discouraged as it
ultraviolet radiation reaches the earth and causes leads to several problems like deforestation,
damage to living organisms. In order to stop air pollution etc. To meet this situation,
the depletion of ozone layer, an international subsidised LPG is being provided by the
agreement was made by the members of United government at subsidised rates. The use of
Nations which was known as the Montreal Accord. Compressed Natural Gas (CNG) as fuel in
The Montreal Accord has significantly reduced public transport system has also substantially
the burden of CFCs in the stratosphere and has reduced the level of air pollution.
helped in ozone recovery.

8. SUSTAINABLE DEVELOPMENT
It is the development, which will allow all future MULTIPLE CHOICE QUESTION
generations to have an average quality of life,
at least as high, which is being enjoyed by the
current generation. 1. Which of the following is not a benefit of organic
Following are the necessary conditions for farming?
sustainable development: (a) Cheaper inputs
1. Controlling the human population to a (b) Attractive returns on investment
level within the carrying capacity of the (c) Greater import possibilities
environment. (d) Higher nutritional value
2. Technological progress should be made input-
efficient instead of input-consuming. Ans : OD 2024

3. Renewable resources should be extracted on a (c) Greater import possibilities

sustainable basis.
4. Renewable substitutes of non-renewable 2. Identify, which of the following is not a correct
resources should be found and used. function of environment?
5. Pollution emissions should be limited to the (i) Exclusion of waste
absorption capacity of the environment. (ii) Sustainance of life
(iii) Provide aesthetic services
9. STRATEGIES FOR SUSTAINABLE DEVELOPMENT Alternatives:
Sustainable development ensures the balance (a) (i) only
between economic growth and environmental (b) (ii) only
protection. It promotes practices that meet (c) (ii) & (iii)
present needs without compromising the future. (d) (i) & (ii)
1. Non-conventional sources of energy like wind, Ans : FOREIGN 2024
power and solar energy should be used to
(a) (i) only
replace thermal and hydro power.
2. Mini Hydel plants can be set up to use the 3. Which of the following is a significant contributor
energy of streams flowing from hilly areas to to global warming, particularly due to its role
move small turbines. in deforestation and methane emissions into the
3. The use of Bio-compost should be encouraged. atmosphere?
4. Chemical pesticides have adverse impacts (a) Increased cattle production
on food products, soil and water bodies. (b) Decrease in methane emissions
Therefore, the use of pesticides based on
(c) Increased use of renewable resources
plant products like neem trees should be
(d) Growth of forest cover
encouraged.
5. There should be a shift to the use of old Ans : OD 2023
practices like Ayurveda and Unani systems of
(a) Increased cattle production
treatment which are environment friendly.
Increased cattle production leads to deforestation
and methane emissions, both of which significantly
contribute to global warming.

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CH 12 : ENVIRONMENT AND SUSTAINABLE DEVELOPMENT

33. Environment includes: 38. Cost of the next best alternative foregone is called
(a) biotic elements ______.
(b) Abiotic elements (a) opportunity cost
(c) both (a) and (b) (b) fixed cost
(d) neither (a) nor (b) (c) variable cost
(d) total cost
Ans : FOREIGN 2002

(c) both (a) and (b) Ans : OD 2006

(a) opportunity cost

34. The ability of the environment to absorb
degradation without causing environmental 39. Following is not an effect of global warming:
damage is called ______. (a) melting of ice
(a) opportunity cost (b) shift in cycle of seasons
(b) environmental degradation (c) timely prediction of natural disasters
(c) absorptive damage (d) increased incidence of tropical diseases
(d) absorptive capacity
Ans : DELHI 2008
Ans : DELHI 2003
(c) timely prediction of natural disasters
(d) absorptive capacity
40. India signed the Montreal protocol in:
35. Following is not a reason for the environmental (a) 1991
crisis currently being faced by the economy: (b) 1992
(a) affluent consumption and production (c) 1993
standards (d) 1994
(b) development process
Ans : SQP 2009
(c) slowdown of demand due to pandemic
(d) extinction of resources (b) 1992

Ans : SQP 2004 41. ______ involves the permanent destruction of

(c) slowdown of demand due to pandemic indigenous forests and woodlands:
(a) deforestation
36. Carrying capacity implies: (b) biodiversity loss
(a) resource extraction should be less than (c) land degradation
resource regeneration (d) soil degradation
(b) waste generated should be within the
Ans : COMP 2010
absorptive capacity of the environment
(c) discovering alternatives to extinct resources (a) deforestation
(d) both (a) and (b)
42. The Central Pollution Control Board was set up
Ans : COMP 2005 by the government in 1974 to address the problem
(d) both (a) and (b) of:
(a) biodiversity loss
37. Reversal of supply-demand relationship implies: (b) water and air pollution
(a) in the past, supply was less than demand, (c) deforestation
unlike now (d) soil erosion
(b) in the past, demand was less than supply,
Ans : OD 2011
unlike now
(c) in the present, demand is beyond the rate of (b) water and air pollution
regeneration of resources, unlike in the past
43. Which of the following is a consequence of ozone
(d) both (b) and (c)
layer depletion?
Ans : FOREIGN 2007 (a) Skin cancer in humans
(d) both (b) and (c) (b) Lower production of phytoplanktons
(c) Hampers growth of terrestrial plants
(d) All of the above

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 459

11. What does “carrying capacity” of the environment Ans : SQP 2015

refer to and how does it help in sustainable (b) To maintain resource consumption within
development? carrying capacity
(a) The total population a country can support Controlling population growth helps ensure that
economically resource use and waste generation stay within
(b) The maximum agricultural yield a region can environmental limits.
produce
(c) The environment’s ability to handle resource 15. What is the primary objective of the Mahatma
extraction and waste absorption Gandhi National Rural Employment Guarantee
(d) The number of industries a region can sustain Act (MGNREGA)?
(a) To guarantee 100 days of work per household
Ans : COMP 2018
per year
(c) The environment’s ability to handle resource (b) To provide employment for 150 days annually
extraction and waste absorption (c) To promote urban employment schemes
Carrying capacity refers to the environment’s (d) To enhance industrial growth
ability to regenerate resources and absorb waste
Ans : DELHI 2021
without degrading.
(a) To guarantee 100 days of work per household
12. Why is the use of neem-based pesticides encouraged per year
as a sustainable practice in agriculture? MGNREGA aims to provide guaranteed
(a) They are cheaper than chemical pesticides employment of 100 days per financial year to
(b) They have no adverse impact on soil, water, rural households.
or food quality
(c) They eliminate the need for irrigation 16. How has the use of Compressed Natural Gas
(d) They increase the productivity of chemical (CNG) in public transport helped in controlling
fertilizers pollution?
(a) It has reduced deforestation in rural areas
Ans : OD 2012
(b) It has reduced noise pollution in urban areas
(b) They have no adverse impact on soil, water, (c) It has eliminated greenhouse gas emissions
or food quality (d) It has significantly decreased vehicular air
Neem-based pesticides are eco-friendly and avoid pollution
contamination of soil, water and food, unlike
Ans : COMP 2013
chemical pesticides.
(d) It has significantly decreased vehicular air
13. How does deforestation significantly disturb the pollution
ecological balance in India? CNG is a cleaner fuel that reduces harmful
(a) It improves soil fertility emissions, thus lowering air pollution levels in
(b) It leads to increased biodiversity cities.
(c) It causes loss of habitat and contributes to
climate change 17. What is the significance of the Forest
(d) It reduces air pollution levels (Conservation) Act, 1980, in India’s environmental
policies?
Ans : FOREIGN 2017
(a) It allows conversion of forest land for
(c) It causes loss of habitat and contributes to industrial use
climate change (b) It promotes timber trade for economic growth
Deforestation results in habitat loss, reduced (c) It encourages monoculture plantations
carbon absorption and climate imbalances. (d) It checks the diversion of forest land for non-
forest purposes
14. Why is it important to control the human
population to achieve sustainable development? Ans : OD 2014

(a) To reduce dependency on renewable resources (d) It checks the diversion of forest land for non-
(b) To maintain resource consumption within forest purposes
carrying capacity The Forest (Conservation) Act, 1980 aims to
(c) To promote rapid industrialization conserve forest cover by restricting its use for non-
(d) To increase urban migration forest activities.

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CH 12 : ENVIRONMENT AND SUSTAINABLE DEVELOPMENT

4. What is the primary goal of sustainable (b) It causes deforestation and pollution; LPG
development and how does it address the need for and CNG promoted
balancing economic growth with environmental The use of wood and biomass as fuel leads to
conservation? deforestation and air pollution, whereas LPG and
(a) Higher resource extraction CNG are cleaner alternatives promoted by the
(b) Development with environmental balance government.
(c) Complete elimination of industrialization
(d) Unlimited use of non-renewable resources 8. What is the main purpose of the Environment
(Protection) Act, 1986, introduced by the Indian
Ans : FOREIGN 2022
government?
(b) Development with environmental balance (a) To take measures to protect and improve
Sustainable development aims to promote environmental quality
economic growth while ensuring that the (b) To promote the use of renewable energy
environment is preserved for future generations. (c) To regulate agricultural practices
(d) To promote afforestation programs
5. What is the primary function of the Central
Pollution Control Board (CPCB) in addressing Ans : COMP 2016

environmental challenges like air, water and land (a) To take measures to protect and improve
pollution in India? environmental quality
(a) Managing renewable energy resources The Environment (Protection) Act, 1986
(b) Investigating and monitoring pollution levels empowers the government to take necessary steps
(c) Increasing industrial productivity to protect and improve the environment.
(d) Protecting forest land from deforestation
9. What is the main cause of ozone layer depletion
Ans : SQP 2021
and how does it affect the environment?
(b) Investigating and monitoring pollution levels (a) Increased use of renewable resources, causing
CPCB is responsible for investigating, monitoring greenhouse effects
and laying down standards for controlling (b) Chlorofluorocarbons (CFCs), allowing more
pollution in air, water and land. ultraviolet radiation to reach Earth
(c) Methane emissions, damaging plant life
6. How can chemical fertilizers and pesticides (d) Deforestation, leading to soil erosion
affect the environment and what alternative
should be encouraged to minimize environmental Ans : OD 2017

degradation? (b) Chlorofluorocarbons (CFCs), allowing more

(a) Increase water resources ultraviolet radiation to reach Earth
(b) Improve the quality of soil CFCs destroy ozone molecules, causing the
(c) Lead to contamination; use bio-compost ozone layer to deplete and increasing ultraviolet
(d) Enhance crop productivity radiation, which harms living organisms.
Ans : DELHI 2022
10. How does rapid urbanization contribute to
(c) Lead to contamination; use bio-compost environmental degradation in India?
Chemical fertilizers and pesticides can (a) It improves water quality in rural areas
contaminate soil and water, so using bio-compost (b) It clears land for housing and industrial
is a sustainable alternative. construction
(c) It increases the use of renewable energy
7. Why is the use of wood and biomass for fuel sources
discouraged and what alternatives have been (d) It reduces air pollution in cities
promoted to address environmental concerns?
(a) It increases food production Ans : SQP 2019

(b) It causes deforestation and pollution; LPG (b) It clears land for housing and industrial
and CNG promoted construction
(c) It reduces air pollution Urbanization leads to deforestation and clearing
(d) It improves soil fertility of land for housing, industries and infrastructure,
causing environmental degradation.
Ans : SQP 2015

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 461

25. The Central Pollution Control Board (CPCB) 29. ______ pollution refers to the presence of
was established to address problems related to harmful substances in water, often caused by
______ pollution in India. domestic sewage and industrial wastewater.
(a) Noise and thermal (a) Air
(b) Land and mining (b) Noise
(c) Wildlife and forest (c) Water
(d) Air and water (d) Land
Ans : SQP 2006 Ans : DELHI 2002

(d) Air and water (c) Water

CPCB investigates and monitors air and water Water pollution occurs when contaminants like
pollution levels and establishes standards to sewage, industrial waste and pesticides degrade
control pollution. water quality.

26. Deforestation leads to ______ by removing 30. The use of ______ as fuel in public transport
trees that help in maintaining ecological balance. systems has significantly reduced vehicular air
(a) Increased biodiversity pollution in India.
(b) Soil erosion and climate change (a) Biomass
(c) Sustainable forest management (b) Coal
(d) Reduced air pollution (c) Compressed Natural Gas (CNG)
(d) Diesel
Ans : COMP 2005

(b) Soil erosion and climate change Ans : SQP 2001

Deforestation causes soil erosion and increases (c) Compressed Natural Gas (CNG)
carbon dioxide in the atmosphere, contributing to CNG is a cleaner fuel and its use in public
climate change. transport systems has helped lower air pollution
levels.
27. The Montreal Accord was established to address
the problem of ______ by reducing the use of 31. The term “loss of biodiversity” refers to the
CFCs. decline in the variety of ______ within an
(a) Ozone depletion ecosystem.
(b) Global warming (a) Species
(c) Deforestation (b) Forests
(d) Biodiversity loss (c) Minerals
(d) Renewable resources
Ans : OD 2004

(a) Ozone depletion Ans : COMP 2000

The Montreal Accord aims to reduce the use (a) Species

of chlorofluorocarbons (CFCs) that destroy the Biodiversity loss occurs when the number of
ozone layer, protecting against harmful ultraviolet species in an ecosystem decreases, disrupting
ecological balance.
28. Rapid ______ has led to the clearing of land
for housing, industries and road construction, 32. Soil erosion, often caused by deforestation, occurs
contributing to environmental degradation. when surface soil is ______ by heavy rains and
(a) Industrialization floods.
(b) Urbanization (a) Enriched
(c) Deforestation (b) Washed away
(d) Biodiversity (c) Contaminated
(d) Compacted
Ans : FOREIGN 2003

(b) Urbanization Ans : OD 2001

Urbanization involves clearing land for (b) Washed away

infrastructure development, causing deforestation Soil erosion is the removal of the top layer of
and other environmental issues. soil due to water or wind, often exacerbated by
deforestation and heavy rains.

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CH 12 : ENVIRONMENT AND SUSTAINABLE DEVELOPMENT

18. How does the excessive use of chemical fertilizers Ans : OD 2009

and pesticides contribute to environmental (b) It encourages responsible behavior to protect

degradation? the environment
(a) It improves crop yield and biodiversity Public awareness helps people understand the
(b) It contaminates soil and water resources consequences of environmental degradation and
(c) It enhances the fertility of the soil adopt practices to protect the environment.
(d) It reduces deforestation in agricultural areas
22. What is a key feature of sustainable development
Ans : FOREIGN 2022
in terms of renewable and non-renewable
(b) It contaminates soil and water resources resources?
Excessive use of chemical fertilizers and pesticides (a) Extract renewable resources sustainably and
leads to contamination of soil and water, harming find substitutes for non-renewable resources
ecosystems and human health. (b) Use all resources at the maximum rate
possible
19. What role do mini Hydel plants play in promoting (c) Focus solely on industrial growth without
sustainable energy practices in India? regard to environmental impact
(a) They produce large-scale electricity for (d) Avoid using non-renewable resources
industries completely
(b) They reduce the dependency on nuclear
power Ans : DELHI 2013

(c) They harness the energy of flowing streams to (a) Extract renewable resources sustainably and
move small turbines find substitutes for non-renewable resources
(d) They replace wind energy production Sustainable development emphasizes using
Ans : SQP 2011
renewable resources carefully and substituting
non-renewable resources with renewable
(c) They harness the energy of flowing streams to alternatives.
move small turbines
Mini Hydel plants generate electricity using the 23. The excessive use of ______ in agriculture
energy of streams, making them an eco-friendly contaminates soil and water resources, leading to
and sustainable energy source. environmental degradation.
(a) Renewable resources
20. What does the term “loss of biodiversity” refer (b) Bio-compost
to and why is it a challenge for the environment? (c) Chemical fertilizers and pesticides
(a) Increase in non-native species (d) Neem-based products
(b) Decline in the variety of species within an
ecosystem Ans : FOREIGN 2008

(c) Excessive planting of a single crop (c) Chemical fertilizers and pesticides
(d) Growth in the number of endangered species Chemical fertilizers and pesticides contaminate
Ans : COMP 2010
soil and water, harming ecosystems, whereas
bio-compost and neem-based products are eco-
(b) Decline in the variety of species within an friendly alternatives.
ecosystem
Loss of biodiversity refers to a reduction in the 24. The ______ Act, 1980, is aimed at preventing
variety of species in an ecosystem, which disrupts the diversion of forest land for non-forest purposes
ecological balance and resource renewal. in India.
(a) Wildlife Protection
21. Why is public awareness crucial in controlling (b) Forest (Conservation)
environmental degradation? (c) Environment (Protection)
(a) It reduces the need for recycling programs (d) National Biodiversity
(b) It encourages responsible behavior to protect
the environment Ans : DELHI 2007

(c) It increases government spending on (b) Forest (Conservation)

industrialization The Forest (Conservation) Act, 1980, restricts
(d) It discourages sustainable development the use of forest land for non-forest purposes to
preserve forest cover.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 463
Ans : FOREIGN 2012 Ans : FOREIGN 2019

(d) All of the above (a) Air

44. From the following, identify the strategy which 50. Following is not a cause of environmental
does not promote sustainable development: degradation.
(a) establishment of Mini-Hydel Plants (a) agricultural practices of using chemical
(b) control of biopest by using chemical fertilizers fertilizers and pesticides
(c) use of cleaner fuels (b) recycling of wastes
(d) use of non-conventional sources of energy (c) urbanisation
(d) poverty
Ans : DELHI 2013

(b) control of biopest by using chemical fertilizers Ans : DELHI 2018

(c) urbanisation
45. CPCB has identified ______ categories of large
and medium Industries as polluting industries: 51. Loss of the top surface soil due to excessive
(a) 15 deforestation is called
(b) 13 (a) soil erosion
(c) 17 (b) biodiversity loss
(d) 19 (c) deforestation
(d) all of the above
Ans : SQP 2014

(b) 13 Ans : SQP 2019

(a) soil erosion

46. The Montreal Protocol relates to:
(a) prevention of ozone depletion 52. Adoption of the following can help achieve
(b) prevention of resource extinction sustainable development.
(c) prevention of biodiversity loss (a) use of non conventional sources of energy
(d) prevention of air and water pollution (b) use of bio-compost
(c) establishment of mini Hydel plants
Ans : COMP 2015
(d) All of the above
(a) prevention of ozone depletion
Ans : COMP 2020
47. Excess of resource extraction over the rate of their (d)All of the above
regeneration leads to:
(a) ozone depletion 53. In order to achieve sustainable development, we
(b) air and water pollution should try to
(c) environmental crisis (a) develop our human resources
(d) global warming (b) develop our infrastructure
(c) Ensure that the rate of extraction of non
Ans : OD 2016
renewable resources does not exceed the rate
(c) environmental crisis of generation of renewable substitutes
(d) achieve technological progress so as to ensure
48. Which of the following is not a function of
a higher rate of economic growth.
environment?
(a) to assimilate waste Ans : OD 2021
(b) to provide aesthetic services (c) Ensure that the rate of extraction of non
(c) to control the growing population renewable resources does not exceed the rate of
(d) to provide resources for production generation of renewable substitutes
Ans : FOREIGN 2017
54. Which of the following is not used as a strategy
(c) to control the growing population for Sustainable Development?
(a) Use of bio-gas
49. Which of the following is an abiotic element of
(b) Use of solar power
environment?
(c) Use of thermal power
(a) Air (b) Plants
(d) Use of hydel power
(c) Animals (d) Forests

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CH 12 : ENVIRONMENT AND SUSTAINABLE DEVELOPMENT

77. Which of the following statements about noise percentages of their contribution to environmental
pollution are correct? degradation.
1. Mechanization and urbanization are major
causes of noise pollution.
2. Noise pollution has no adverse effects on
human health.
3. It can be reduced by adopting quieter
machinery.
4. Natural processes are the primary sources of
noise pollution.
(a) 1 and 3
(b) 2 and 4
(c) 1, 3 and 4
(d) 1, 2 and 3
Ans : SQP 2022 Based on the bar graph, which of the following
(a) 1 and 3 challenges contributes the most to environmental
Noise pollution is mainly caused by human degradation?
activities like mechanization and urbanization (a) Air Pollution
and can be controlled by using quieter machinery. (b) Water Pollution
It affects human health and natural processes (c) Noise Pollution
play a minor role. (d) Soil Erosion
Ans : OD 2010
78. Which of the following statements about the
measures to control environmental degradation (a) Air Pollution
are correct? As per the bar graph, air pollution has the
1. Recycling domestic and industrial waste can highest percentage contribution to environmental
help mitigate environmental degradation. degradation compared to other challenges.
2. Addressing poverty does not impact
environmental issues. 80. The bar graph displays the key causes of
3. Public awareness campaigns can promote environmental degradation and their percentage
eco-friendly practices. contributions (arbitrary values).
4. Pollution control measures help maintain the
environment’s carrying capacity.
(a) 1, 3 and 4
(b) 1, 2 and 3
(c) 2 and 4
(d) 1, 2, 3 and 4
Ans : COMP 2023

(a) 1, 3 and 4
Recycling waste, public awareness and pollution
control measures are key to mitigating
environmental degradation. Poverty issues
must also be addressed as they contribute to Based on the bar graph, which of the following
environmental harm. causes has the highest contribution to
environmental degradation?
(a) Deforestation
(b) Agricultural Runoff
GRAPH BASED QUESTIONS (c) Burning Fossil Fuels
(d) Methane Emissions
Ans : FOREIGN 2011
79. The bar graph shows major environmental
challenges in India, represented by arbitrary (c) Burning Fossil Fuels

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 465

61. Assertion : The indiscriminate use of chemical (a) Both Assertion and Reason are true and
fertilisers and pesticides has led to long term Reason is the correct explanation of Assertion.
adverse effects on soil fertility.
Reason : Population control will help maintain 64. Assertion : Ozone depletion results in more
a balance between extraction of environmental ultraviolet radiation reaching the earth.
resources and their regeneration. Reason : Ozone depletion is caused by increase in
(a) Both Assertion and Reason are true and carbon dioxide and other greenhouse gases through
Reason is the correct explanation of Assertion. the burning of fossil fuels and deforestation.
(b) Both Assertion and Reason are true and (a) Both Assertion and Reason are true and
Reason is not the correct explanation of Reason is the correct explanation of Assertion.
Assertion. (b) Both Assertion and Reason are true and
(c) Assertion is true but Reason is false. Reason is not the correct explanation of
(d) Assertion is false but Reason is true. Assertion.
(c) Assertion is true but Reason is false.
Ans : OD 2002
(d) Assertion is false but Reason is true.
(b) Use of chemical fertilizers and pesticides has Ans : FOREIGN 2009
adversely affected large areas of productive land
by depleting its essential nutrients and minerals. (c) Ozone depletion is caused by high levels
of chlorine and bromine compounds in the
62. Assertion : Industrial pollution can be checked by stratosphere which results in more ultraviolet
promoting the use of better technologies. radiation reaching the earth and causing damage
Reason : Overuse of environmental resources to living organisms
occurs when supply of environmental resources is
much more than their demand. 65. Assertion : Biodiversity loss has serious economic
(a) Both Assertion and Reason are true and and social costs for any country.
Reason is the correct explanation of Assertion. Reason : The existence of many plants and animal
(b) Both Assertion and Reason are true and species is threatened by the destruction of their
Reason is not the correct explanation of habitat, thus disturbing the ecological balance of
Assertion. a country.
(c) Assertion is true but Reason is false. (a) Both Assertion and Reason are true and
(d) Assertion is false but Reason is true. Reason is the correct explanation of Assertion.
(b) Both Assertion and Reason are true and
Ans : DELHI 2019
Reason is not the correct explanation of
(c) Reducing or eliminating waste by modifying Assertion.
production processes, promoting the use of non- (c) Assertion is true but Reason is false.
toxic or less toxic substances and implementing (d) Assertion is false but Reason is true.
conservation techniques can help check industrial Ans : DELHI 2020
pollution.
(a) Both Assertion and Reason are true and
63. Assertion : High density of population and the Reason is the correct explanation of Assertion.
competing uses of land have added to the existing
environmental crisis. 66. Assertion : Poverty causes environmental
Reason : Higher population leads to higher degradation.
demand which leads to higher production which Reason : The Central Pollution Control Board
creates more demand for finite resources leading (CPCB) was set up in 1974 to address the problem
to environmental crisis. of water and air pollution in India.
(a) Both Assertion and Reason are true and (a) Both Assertion and Reason are true and
Reason is the correct explanation of Assertion. Reason is the correct explanation of Assertion.
(b) Both Assertion and Reason are true and (b) Both Assertion and Reason are true and
Reason is not the correct explanation of Reason is not the correct explanation of
Assertion. Assertion.
(c) Assertion is true but Reason is false. (c) Assertion is true but Reason is false.
(d) Assertion is false but Reason is true. (d) Assertion is false but Reason is true.

Ans : COMP 2005

Ans : SQP 2011

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CH 12 : ENVIRONMENT AND SUSTAINABLE DEVELOPMENT
Ans : DELHI 2020
(a) Both Assertion and Reason are true and
(c) Use of thermal power Reason is the correct explanation of Assertion.
(b) Both Assertion and Reason are true and
55. In an economy, when the rate of resource Reason is not the correct explanation of
extraction is lower than the rate of regeneration Assertion.
of the resource, the environment may operate (c) Assertion is true but Reason is false.
______. (Fill up the blank with correct (d) Assertion is false but Reason is true.
alternative)
(a) within its carrying capacity. Ans : FOREIGN 2015

(b) beyond its absorptive capacity. (b) Deforestation can cause loss of nutrients from
(c) beyond its carrying capacity. the soil leading to soil erosion which can in turn
(d) beyond its aesthetic capacity. lead to disastrous flooding since there is no soil to
soak up the rain
Ans : SQP 2023

(a) within its carrying capacity. 59. Assertion : Sustainable development allows all
future generations to have a potentially average
56. Identify, which of the following is an incorrect and balance quality of life.
function of environment? Reason : Sustainable development aims at
(a) Supplies resources preventing further damage to our life-support
(b) Assimilates waste systems.
(c) Land degradation (a) Both Assertion and Reason are true and
(d) Provides aesthetic services Reason is the correct explanation of Assertion.
Ans : COMP 2023 (b) Both Assertion and Reason are true and
Reason is not the correct explanation of
(c) Land degradation
Assertion.
(c) Assertion is true but Reason is false.
(d) Assertion is false but Reason is true.
Ans : COMP 2010

ASSERTION AND REASON (a) Both Assertion and Reason are true and
Reason is the correct explanation of Assertion.

57. Assertion : Affluence in living standards is causing 60. Assertion : The intensive and extensive
environmental degradation. extraction of resources have exhausted some of
Reason : The developmental activities have the environmental resources making them an
resulted in pressure on our finite natural resources economic good.
and environmental pollution. Reason : Global environmental issues, like
(a) Both Assertion and Reason are true and global warming, have led to increased financial
Reason is the correct explanation of Assertion. commitments for the government.
(b) Both Assertion and Reason are true and (a) Both Assertion and Reason are true and
Reason is not the correct explanation of Reason is the correct explanation of Assertion.
Assertion. (b) Both Assertion and Reason are true and
(c) Assertion is true but Reason is false. Reason is not the correct explanation of
(d) Assertion is false but Reason is true. Assertion.
Ans : SQP 2023
(c) Assertion is true but Reason is false.
(d) Assertion is false but Reason is true.
(a) Both Assertion and Reason are true and
Reason is the correct explanation of Assertion. Ans : SQP 2017

58. Assertion : Rapid deforestation has disturbed the (b) Loss of nutrients and soil erosion due to
ecological imbalance of the country. deforestation, loss of plant and animal species
Reason : The growth of the human population due to destruction of their habitat and over
should be controlled to a level which is within the exploitation of resources have led to serious
carrying capacity of the environment. economic and social costs to the country.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 467

ecological balance. (a) 1 and 3

(b) 1, 3 and 4
72. Which of the following statements about the (c) 2 and 4
causes of global warming are correct? (d) 1, 2 and 3
1 Burning of coal and petroleum releases
greenhouse gases. Ans : OD 2019

2. Deforestation decreases carbon dioxide in the (b) 1, 3 and 4

atmosphere. Water pollution is caused by industrial and
3. Methane gas is released from animal waste. domestic waste, chemical fertilizers and pesticides.
4. Increased cattle production contributes to It harms aquatic life, but recycling industrial
methane emissions. wastewater can reduce its effects.
(a) 1 and 2
(b) 1, 3 and 4 75. Which of the following statements about soil
(c) 2, 3 and 4 erosion are correct?
(d) 1, 2 and 4 1. Soil erosion is caused by deforestation and
overgrazing.
Ans : SQP 2017
2. Excessive rains and floods contribute to soil
(b) 1, 3 and 4 erosion.
Burning fossil fuels, methane emissions from 3. Soil erosion improves agricultural productivity.
animal waste and cattle production all contribute 4. Afforestation can help in controlling soil
to global warming. Deforestation increases, not erosion.
decreases, carbon dioxide levels. (a) 1, 2 and 4
(b) 1 and 3
73. Which of the following statements about air (c) 2 and 3
pollution are correct? (d) 1, 2, 3 and 4
1. It is caused by industrial emissions and
vehicle exhaust. Ans : FOREIGN 2020

2. Air pollution has no significant impact on (a) 1, 2 and 4

human health. Soil erosion is caused by deforestation, overgrazing
3. It can be controlled by using cleaner fuels like and floods. Afforestation helps prevent it, but
CNG. it reduces rather than improves agricultural
4. Deforestation has no role in air pollution. productivity.
(a) 1 and 3
(b) 2 and 4 76. Which of the following statements about the
(c) 1, 2 and 3 Forest (Conservation) Act, 1980, are correct?
(d) 1, 3 and 4 1. It aims to conserve forest resources by
preventing their diversion for non-forest
Ans : COMP 2018
purposes.
(a) 1 and 3 2. The act promotes deforestation for industrial
Air pollution is caused by industrial and vehicular growth.
emissions, but using cleaner fuels like CNG can 3. It ensures stricter control over the use of
help reduce it. Deforestation contributes to air forest land.
pollution and it significantly affects human health. 4. The act helps maintain the ecological balance.
(a) 1, 2 and 3
74. Which of the following statements about water (b) 1 and 4
pollution are correct? (c) 1, 3 and 4
1. Water pollution is mainly caused by industrial (d) 2, 3 and 4
wastewater and domestic sewage.
2. Use of chemical fertilizers does not contribute Ans : DELHI 2021

to water pollution. (c) 1, 3 and 4

3. Contaminated water adversely affects aquatic The Forest (Conservation) Act conserves forest
life and humans. land, ensures stricter control and maintains
4. Recycling industrial wastewater can help ecological balance, but it discourages deforestation
reduce water pollution. for industrial growth.

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CH 12 : ENVIRONMENT AND SUSTAINABLE DEVELOPMENT

2. There is a continuous The supply of these have further escalated the environmental crisis.
supply of these resources might get 122. What happens when the wastes generated
resources. exhausted after they are beyond the absorptive capacity of the
become extinct. environment?
3. For example, trees, For example, fossil
Ans : OD 2022
fishes etc. fuels like coal, gas
etc. Absorptive capacity is the environment’s ability
to absorb degradation. Excessive waste generation
119. Biodiversity is vital for maintaining ecological has brought us to an environmental crisis. Past
balance and supporting life on Earth. It development has heavily polluted and depleted
encompasses the variety of living organisms and rivers and aquifers, turning water into a highly
their interactions within ecosystems. What is valued resource. Additionally, intensive extraction
biodiversity? Why is it considered an important of renewable and non-renewable resources has
resource? led to their exhaustion, forcing significant
expenditures on technology and research to
Ans : COMP 2021
discover alternative resources.
Biodiversity comprises various plants, animals and
microorganisms and holds immense importance: 123. India’s environmental problems pose a
1. It enhances natural beauty. “dichotomy”. How?
2. It serves as a source of medicines, derived Ans : SQP 2023
from plants, animals and microorganisms.
India faces a dual environmental challenge, where
3. It supports agricultural productivity.
poverty and affluence create a vicious cycle of
4. It plays a vital role in maintaining ecological
degradation. Poverty drives deforestation for
balance and systems.
fuel, overgrazing, water pollution and forest
120. Why are the opportunity costs of negative encroachment. Conversely, affluent lifestyles
environmental impact considered to be high? increase demand for goods, leading to higher
production and greater resource exploitation.
Ans : OD 2022
Vehicle use and industrial activity escalate
Opportunity cost refers to the value of the next pollution, worsening environmental degradation.
best alternative sacrificed when a choice is made. Additionally, high consumption and production
Environmental degradation, stemming from rapid standards in developed nations generate waste
economic development, has escalated government that exceeds the environment’s absorptive
financial commitments. Issues like global warming capacity, intensifying the crisis.
and ozone depletion have deteriorated air and
water quality, leading to higher health-related 124. Explain how Bio-composing can be helpful
expenditures. in achieving the objectives of sustainable
development.
121. “The developmental activities in India have Ans : COMP 2022
resulted in pressure on its finite natural resources,
besides creating impacts on human health and The Green Revolution led farmers to heavily
wellbeing.” Explain the statement. use chemical fertilizers and pesticides to boost
yields. However, these chemicals have caused
Ans : FOREIGN 2023
contamination in agricultural produce, dairy,
India’s environmental threats arise from poverty, fish, soil and water, including groundwater.
affluence and rapid industrial growth. Key concerns Recognizing these adverse effects, farmers are
include air pollution, water contamination, soil increasingly turning back to organic compost
erosion, deforestation and wildlife extinction. made from various waste materials. Cow dung,
Improved living standards, economic growth and a vital fertilizer and soil enhancer, is now widely
technological advancements have polluted air and adopted. Additionally, earthworms are utilized
water, worsening their quality. This has led to to accelerate the composting process, making
increased respiratory and waterborne diseases. organic composting a popular and sustainable
Overextraction and indiscriminate resource use practice once again.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 469

According to the bar graph, burning fossil fuels contribution from 2000 to 2020?
has the highest percentage contribution to (a) Air Pollution
environmental degradation compared to other (b) Water Pollution
causes. (c) Deforestation
(d) All challenges increased equally
81. The pie chart shows the distribution of major
environmental challenges in India and their Ans : COMP 2013

percentage contributions to environmental (a) Air Pollution

degradation. The line graph shows that air pollution increased
from 20% in 2000 to 40% in 2020, which is the
highest increase compared to water pollution and
deforestation.

83. The pie chart represents the key causes of

environmental degradation and their percentage
contributions.

Which environmental challenge contributes 30%

to the total environmental degradation, as shown
in the pie chart?
(a) Water Pollution
(b) Air Pollution
(c) Deforestation
(d) Soil Erosion
Ans : DELHI 2011 Which of the following causes contributes the
(b) Air Pollution least to environmental degradation as shown in
The pie chart indicates that air pollution the pie chart?
contributes the highest percentage (30%) among (a) Methane Emissions
the listed environmental challenges. (b) Agricultural Runoff
(c) Industrial Waste
82. The line graph shows trends in environmental (d) Deforestation
challenges (air pollution, water pollution and
Ans : SQP 2012
deforestation) over the years from 2000 to 2020,
represented as their percentage contributions. (a) Methane Emissions
The pie chart indicates that methane emissions
have the lowest contribution (5%) among the
listed causes of environmental degradation.

PASSAGE BASED QUESTION

84. Deforestation is the removal of forest cover,

which leads to biodiversity loss and disrupts
the ecological balance. It also contributes to soil
According to the line graph, which environmental erosion and increases carbon dioxide levels in the
challenge shows the highest increase in percentage atmosphere.

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CH 12 : ENVIRONMENT AND SUSTAINABLE DEVELOPMENT

(b) Due to lack of sufficient resources and (a) 1 and 2

improper knowledge, poverty stricken people tend (b) 1 and 3
to overuse every resource available to them for (c) 2 and 4
survival. (d) 3 and 4

67. Assertion : Air pollution causes health problems. Ans : OD 2014

Reason : Land degradation can lead to climate (b) 1 and 3

changes. Urbanization leads to deforestation and chemical
(a) Both Assertion and Reason are true and fertilizers pollute soil and water. Deforestation
Reason is the correct explanation of Assertion. causes, not controls, soil erosion and noise
(b) Both Assertion and Reason are true and pollution is mainly man-made.
Reason is not the correct explanation of
Assertion. 70. Which of the following statements about
(c) Assertion is true but Reason is false. sustainable development are true?
(d) Assertion is false but Reason is true. 1. It focuses on economic growth without
considering environmental impact.
Ans : OD 2003
2. Renewable resources should be extracted on a
(b) Exposure to particulate matter for a long sustainable basis.
time can lead to respiratory and cardiovascular 3. Pollution emissions should stay within the
diseases such as asthma, bronchitis, lung cancer absorption capacity of the environment.
etc. 4. Technological progress should be input-
efficient rather than input-consuming.
68. Assertion : Generation of waste beyond the (a) 1 and 2
absorptive capacity of the environment has (b) 2 and 3
resulted in the present day environmental crisis. (c) 3 and 4
Reason : The opportunity costs of negative (d) 2, 3 and 4
environmental impacts are high.
(a) Both Assertion and Reason are true and Ans : FOREIGN 2015

Reason is the correct explanation of Assertion. (d) 2, 3 and 4

(b) Both Assertion and Reason are true and Sustainable development emphasizes renewable
Reason is not the correct explanation of resource management, limiting pollution and
Assertion. promoting input-efficient technology. It balances
(c) Assertion is true but Reason is false. economic growth with environmental conservation.
(d) Assertion is false but Reason is true.
71. Which of the following statements about
Ans : COMP 2017
biodiversity loss are correct?
(b) The affluent consumption and production 1. It results in a decline in the variety of species
standards of the developed world has led to waste in an ecosystem.
being generated beyond the absorptive capacity 2. Loss of biodiversity enhances ecological
of the environment. balance.
3. It reduces the availability of natural resources
for renewal.
4. Deforestation is a major cause of biodiversity
STATEMENT BASED QUESTIONS loss.
(a) 1 and 3
(b) 1, 3 and 4
69. Which of the following statements about
(c) 2 and 3
environmental degradation are correct?
(d) 1, 2 and 4
1. Urbanization leads to the clearing of forests
for housing and infrastructure. Ans : DELHI 2016

2. Deforestation helps in controlling soil erosion. (b) 1, 3 and 4

3. Chemical fertilizers contaminate soil and Biodiversity loss decreases species variety and
water resources. natural resource renewal while being strongly
4. Noise pollution is caused primarily by natural linked to deforestation. It disrupts, not enhances,
processes.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 471

The passage explains that the act aims to conserve The passage states that sustainable development
forests by limiting their use for purposes other aims to balance economic growth with the need
than forestry. for environmental sustainability.

91. Loss of biodiversity refers to the decline in the

variety of species in an ecosystem. This disrupts
ecological balance and reduces the availability of
natural resources.
ONE MARK QUESTIONS
What does loss of biodiversity result in, as
mentioned in the passage? 94. What is environment?
(a) Improved ecological balance
(b) Decline in natural resource availability Ans : OD 2000

(c) Increased agricultural productivity The total planetary inheritance and all resources
(d) Enhanced industrial growth collectively form the definition of Earth’s wealth.
Ans : DELHI 2007 95. What is environmental crisis?
(b) Decline in natural resource availability Ans : FOREIGN 2001
The passage highlights how biodiversity loss
disrupts ecological balance and reduces natural This occurs when the environment cannot perform
resource availability. its essential functions due to waste generation
exceeding its carrying capacity.
92. Global warming is caused by greenhouse gas
emissions from burning fossil fuels, deforestation 96. What do you mean by biotic elements?
and methane from animal waste. Ans : DELHI 2002
What is a major cause of global warming
Living components such as birds, animals, plants
mentioned in the passage?
and fisheries are classified as biotic elements.
(a) Increased biodiversity
(b) Reduction in carbon emissions 97. What are abiotic elements?
(c) Greenhouse gases from fossil fuels
(d) All of these Ans : SQP 2003

Non-living components like air, water and land

Ans : SQP 2008
are known as abiotic elements.
(c) Greenhouse gases from fossil fuels
The passage identifies emissions from burning 98. What do you mean by “carrying capacity” of the
fossil fuels as a significant contributor to global environment?
warming. Ans : COMP 2004

93. Sustainable development focuses on balancing It means resource extraction must not exceed
economic growth with environmental protection. regeneration rates and waste generation must stay
It encourages renewable resource use and limits within the environment’s absorption capacity.
pollution to within the environment’s carrying
capacity. 99. Identify the two main environmental issues facing
What is the goal of sustainable development as the world.
per the passage? Ans : OD 2005
(a) Maximizing resource extraction
Global warming refers to the Earth’s rising
(b) Balancing economic growth and environmental
temperatures, while ozone depletion signifies the
protection
thinning of the ozone layer.
(c) Encouraging deforestation for industrial
growth 100. Why have some resources become extinct?
(d) Eliminating industrial development
Ans : FOREIGN 2006
Ans : COMP 2009
Certain resources have vanished due to extraction
(b) Balancing economic growth and environmental exceeding their regeneration rate.
protection

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CH 12 : ENVIRONMENT AND SUSTAINABLE DEVELOPMENT

What is a key environmental issue caused by Ans : DELHI 2002

deforestation? (b) Agricultural chemicals and sewage

(a) Increase in biodiversity The passage highlights agricultural chemicals
(b) Soil erosion and climate change and sewage as primary causes of water pollution,
(c) Decrease in agricultural productivity harming aquatic life and human health.
(d) Improvement in air quality
88. Soil erosion occurs when surface soil is washed
Ans : OD 2000
away by heavy rains or floods. Deforestation is a
(b) Soil erosion and climate change significant contributor to soil erosion as it removes
Deforestation causes soil erosion and increases the vegetation that holds soil in place.
carbon dioxide levels, contributing to climate What is the main factor contributing to soil
change and ecological imbalance. erosion according to the passage?
(a) Urbanization
85. Air pollution is caused by vehicle emissions and (b) Deforestation
industrial processes, leading to health problems. (c) Industrialization
Sustainable practices, such as using cleaner fuels (d) Overgrazing
like CNG, can help reduce air pollution.
What is one of the solutions to air pollution Ans : SQP 2003

mentioned in the passage? (b) Deforestation

(a) Using bio-compost in agriculture The passage identifies deforestation as the main
(b) Promoting cleaner fuels like CNG cause of soil erosion due to the loss of vegetation
(c) Recycling industrial waste cover.
(d) Banning public transport
89. India faces water pollution due to industrial
Ans : FOREIGN 2001
waste, domestic sewage and agricultural runoff.
(b) Promoting cleaner fuels like CNG This leads to contamination of water bodies and
The passage mentions CNG as a cleaner fuel that negatively impacts ecosystems.
helps reduce vehicle emissions and air pollution. What are the main sources of water pollution
mentioned in the passage?
86. Noise pollution is primarily caused by urbanization
(a) Deforestation and urbanization
and mechanization, leading to adverse effects on
(b) Industrial waste and agricultural runoff
human health and well-being.
(c) Mining activities and soil erosion
What are the main sources of noise pollution as
(d) Overuse of renewable resources
per the passage?
(a) Urbanization and mechanization Ans : COMP 2004

(b) Deforestation and soil erosion (b) Industrial waste and agricultural runoff
(c) Agricultural activities The passage specifically mentions industrial
(d) Water pollution from industrial waste waste, domestic sewage and agricultural runoff as
Ans : OD 2005 major causes of water pollution.
(a) Urbanization and mechanization 90. The Forest (Conservation) Act, 1980, aims to
The passage identifies urbanization and prevent deforestation by restricting the diversion
mechanization as the key contributors to noise of forest land for non-forest purposes.
pollution. What is the main objective of the Forest
(Conservation) Act, 1980?
87. Water pollution occurs due to contamination by
(a) Encouraging deforestation for economic
domestic sewage, industrial waste and agricultural
growth
chemicals. This affects both aquatic life and
(b) Restricting forest land use for non-forest
human health.
purposes
What is a major cause of water pollution as per
(c) Promoting industrialization in forest areas
the passage?
(d) Allowing mining activities in forested regions
(a) Deforestation
(b) Agricultural chemicals and sewage Ans : FOREIGN 2006

(c) Noise pollution from machinery (b) Restricting forest land use for non-forest
(d) Increased biodiversity purposes

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 473

and livelihoods, particularly in rural and forest- (iv) Increased population demand for firewood.
dependent communities.
116. Define the Absorptive capacity of the environment.
113. The Montreal Protocol is an essential international
Ans : FOREIGN 2018
treaty addressing global environmental challenges.
It focuses on preserving the ozone layer through The absorptive capacity of the environment refers
collective efforts by all participating nations. to its ability to manage degradation, absorbing
What is the Montreal Protocol and why is it waste sustainably without harm. This capacity is
important? under strain as excessive waste generation leads
to an environmental crisis. Development has
Ans : OD 2017
polluted and dried water sources, elevating their
The Montreal Protocol is an international economic value. Overextraction of resources—
agreement established to phase out ozone-depleting renewable and non-renewable—has depleted
substances like CFCs. It is important because it reserves, necessitating costly technological
prevents the depletion of the ozone layer, which exploration for alternatives. High population,
shields Earth from harmful ultraviolet radiation. affluent consumption in developing nations and
This protection reduces the risks of skin cancer, production standards in developed countries
ecological damage and disruptions in food chains impose immense pressure on resources, exceeding
caused by increased UV exposure. the environment’s absorptive capacity, threatening
resource sustainability.

117. Global warming is a pressing environmental

THREE MARK QUESTIONS challenge caused by human activities and natural
processes. Addressing it is crucial to ensuring a
sustainable future for the planet. Write a brief
114. Explain the supply-demand reversal of note on global warming.
environmental resources. Ans : DELHI 2019

Ans : DELHI 2024 Global warming is the gradual rise in Earth’s

Previously, the demand for environmental lower atmosphere temperature due to increased
resources was low compared to their supply due greenhouse gases since the industrial revolution.
to lower living standards, minimal technology use This recent temperature rise is attributed to
and slower industrialization. Pollution remained human activities such as burning fossil fuels and
within the environment’s absorptive capacity deforestation. Combustion of coal and petroleum
and resource extraction was slower than their significantly contributes to carbon dioxide
regeneration. However, rapid industrial growth emissions, further intensifying the greenhouse
has reversed this balance, with resource demand effect.
now exceeding supply, leading to environmental
118. Distinguish between Renewable and Non-
degradation.
renewable sources of energy.
115. How has economic development contributed Ans : SQP 2020
towards deforestation?
Difference between Renewable sources and Non-
Ans : FOREIGN 2024 Renewable sources
In India, economic development has led to
Renewable sources Non-Renewable
indiscriminate use of natural resources, causing
sources
severe environmental issues like deforestation.
Key causes include: 1. These are those These are those
(i) Rising industrial demand for wood and forest resources which can resources which get
products. be used without exhausted with their
(ii) Urbanization, which clears forests for human the possibility constant use.
settlements. of the resources
(iii) Dam construction, leading to soil erosion and becoming depleted
land loss along river channels. or exhausted.

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CH 12 : ENVIRONMENT AND SUSTAINABLE DEVELOPMENT

generations to meet their own needs.” problem of _____ in year _____.

While this definition encapsulates the (iv) _____ plants can be set up to use the
concept, numerous initiatives are essential to energy of streams flowing from hilly areas to
achieve this vital global goal. Over the last two move small turbines.
decades, economic progress has often come at the
Ans :
cost of the environment, with natural resources
being exploited in inefficient and wasteful ways. (i) (d) Both (a) and (c)
This has led to severe consequences like declining (ii) Non-renewable, renewable.
air quality and climate change. (iii) Water and air pollution, 1974.
Sustainable development is a strategic (iv) Mini-Hydel
approach that promotes growth while prioritizing
140. Read the paragraph given below and answer the
efficient resource use, ensuring both immediate
questions that follow:
and long-term benefits for the planet and its
Air pollution in India causes annual financial
inhabitants.
losses of `7 lakh crore ($95 billion), as revealed
There are 3 primary objectives of sustainable
by a recent report. Beyond health impacts, it
development:
quantifies the economic toll on businesses through
(a) Economic growth – building a strong,
six pathways: reduced labour productivity,
competitive economy, by ensuring that
diminished consumer footfall, premature
sufficient land of the right type is available
mortality, lower asset productivity, increased
at the right places and at the right time
health expenses and non-market welfare loss.
to support growth and innovation; and
Direct impacts include premature mortality,
identifying and coordinating development
productivity loss and reduced consumer footfall.
requirements.
Poor air quality discourages shoppers, causing
(b) Environmental protection – contributing to
revenue and potential reputation loss, while
protecting and enhancing our natural and
international tourists often reconsider visiting
developed environment, while helping to
India due to pollution concerns. Premature
improve biodiversity, use natural resources
mortality also imposes a significant opportunity
wisely, minimizing waste and pollution and
cost.
adapting to and helping to decrease climate
Indirect impacts involve increased healthcare
change, including a global shift to low-carbon
costs and non-market welfare loss, with higher
economy.
pollution driving up hospitalizations and limiting
(c) Social inclusion – supporting strong, vibrant
workers’ ability to engage in non-work activities
and healthy communities by providing
like caregiving. If left unaddressed, air pollution
the supply of housing required to meet the
will continue to harm health and businesses
needs of present and future generations; and
nationwide.
by creating a high-quality of development,
On the basis of given text answer the following
with accessible local services that reflect the
questions:
community’s needs and support its health,
social and cultural well-being. (i) From the following, identify the factor which
On the basis of given text answer the following will lead to more air pollution:
questions: (a) promotion of public transport in place of
private vehicles
(i) Following is a feature of sustainable
(b) increasing dependence on thermal energy
development:
plants
(a) Sustains rise in per-capita income
(c) use of cleaner fuels in households
(b) providing education to all
(d) promotion of cleaner technologies and
(c) Rational use of the natural resources.
strengthening of emission standards
(d) Both (a) and (c)
(ii) The following are major contributors to air
(ii) Substituting _____ resources with _____
pollution in India?
resource is a pre-requisite of sustainable
(a) use of fossil fuels in industries
development.
(b) bio fuels like cow dung
(iii) The Central Pollution Control Board (CPCB)
(c) both (a) and (b)
was set up by the government to address the
(d) neither (a) nor (b)

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 475

FOUR MARKS QUESTIONS interrelationships with living beings and property.

It serves four vital functions:
1. Resource Supply: Provides renewable (e.g.,
125. “Serious concerns over the climate change is trees, fish) and non-renewable (e.g., fossil
taking over the attention of the world.” fuels) resources.
In the light of the above statement and given 2. Waste Assimilation: Absorbs waste from
image, discuss any two strategies to tackle this production and consumption activities.
global - concern of Environmental degradation. 3. Aesthetic Services: Offers visual appeal
through natural scenery, enhancing life
quality.
4. Life Sustenance: Provides essentials like air,
water and sunlight.
These functions depend on the environment’s
carrying capacity—resource extraction below
regeneration rates and waste within absorption
limits. Exceeding these limits leads to crises
marked by resource depletion, diseases and costly
research. Rising populations and consumption
worsen the crisis, emphasizing sustainable
practices.

127. Interpret the situation of earth as depicted in

Ans : DELHI 2023
the given picture, with reference to current
Environmental degradation has severe environment challenges.
implications, including the depletion of natural
and human capital. The rise in greenhouse gases
since the industrial revolution has intensified global
warming, necessitating urgent interventions. To
ensure sustainable development, certain strategies
are crucial:
1. Non-conventional Energy Sources: India’s
reliance on thermal and hydro power plants
causes environmental harm. Utilizing its
significant wind and solar energy potential can
provide eco-friendly electricity alternatives.
2. Gas Utilization: Rural households often Ans : OD 2023
use wood and biomass fuels, leading to
The image portrays the critical environmental
deforestation and pollution. Government
issue of global warming, marked by a gradual
initiatives like subsidized LPG and promotion
rise in Earth’s lower atmosphere temperature
of gobar gas plants are addressing this.
due to elevated levels of carbon dioxide and
In urban areas, CNG adoption for public
greenhouse gases. Key contributors include
transport significantly reduces air pollution.
fossil fuel combustion and deforestation. Global
126. Environment, which is the sum of all external warming leads to severe consequences such as
forces surrounding us, performs various functions. rising sea levels, coastal flooding and species
Under which conditions will it not be able to extinction. Similarly, ozone depletion exacerbates
perform its vital functions and what will be its environmental challenges by increasing UV
impact? radiation exposure, harming living organisms.
Both issues demand urgent action to mitigate
Ans : FOREIGN 2022
their widespread impacts on ecosystems and
The environment encompasses the surroundings human life.
and resources influencing human life quality.
As defined by the Environment (Protection) 128. Discuss any two major challenges to India’s
Act, 1986, it includes water, air, land and their environment.

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CH 12 : ENVIRONMENT AND SUSTAINABLE DEVELOPMENT

101. Mention one gas responsible for damage to the TWO MARK QUESTIONS
ozone layer.
Ans : DELHI 2007
109. What is the significance of the Forest
CFC (Conservation) Act, 1980?
102. Mention two main causes of Global Warming. Ans : FOREIGN 2013

Ans : SQP 2008 The Forest (Conservation) Act, 1980, is significant

as it prevents the diversion of forest land for non-
Burning fossil fuels and deforestation are major
forest purposes, ensuring conservation. It protects
causes of environmental degradation.
biodiversity, maintains ecological balance and
103. What is the meaning of air pollution? reduces the adverse impacts of deforestation, such
as habitat loss, soil erosion and climate change.
Ans : COMP 2009
This act is a crucial step toward sustainable
Air pollution is the presence of harmful materials environmental management.
in the air at concentrations detrimental to humans
and the environment. 110. Water pollution poses a significant threat to India’s
ecosystems and public health. Understanding
104. What is land degradation? its root causes is essential to develop effective
Ans : OD 2010
solutions. What are the main causes of water
pollution in India?
Environmental degradation refers to the
deterioration in the quality of soil, water, or Ans : DELHI 2014

vegetation, often caused by human activities. Water pollution in India is mainly caused by
domestic sewage, industrial waste and agricultural
105. Define the Carrying capacity of environment. runoff containing chemicals and pesticides. These
Ans : FOREIGN 2011 pollutants degrade water quality, harming aquatic
ecosystems, reducing biodiversity and posing
Carrying capacity of the environment means
health risks to humans. Poor waste management
resource extraction aligns with the regeneration
and lack of treatment facilities exacerbate the
rate, ensuring wastes produced remain within the
problem, impacting rural and urban water sources.
environment’s capacity to absorb them.
111. What is meant by sustainable development?
106. Define the Sustainable Development.
Ans : SQP 2015
Ans : DELHI 2020
Sustainable development refers to a balanced
Sustainable development is a strategy that fulfills
approach to economic growth while ensuring
present needs without compromising the ability of
environmental protection. It emphasizes the
future generations to meet their own needs.
responsible use of renewable resources, finding
107. Define the Bio-composting. alternatives to non-renewable resources and
maintaining the environment’s carrying capacity.
Ans : SQP 2020
This ensures the needs of current generations are
Bio-composting is the process of transforming met without compromising the ability of future
organic matter into compost, widely adopted by generations to meet their own needs.
farmers for sustainable agriculture.
112. What are the consequences of deforestation?
108. Why is ozone layer significant?
Ans : COMP 2016
Ans : OD 2012
Deforestation results in biodiversity loss, soil
The ozone layer, located 20-60 kilometers above erosion and increased carbon dioxide levels,
Earth’s surface, is a concentrated layer of ozone. contributing to climate change. It disrupts
It safeguards life by absorbing harmful ultraviolet ecological balance, reduces natural resources
rays, preventing their entry to Earth’s surface. and leads to habitat destruction. Additionally,
it affects water cycles and exacerbates
desertification, significantly impacting agriculture

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 477

Achieving development that meets present needs 134. Discuss the strategies which should be adopted
without compromising future generations requires for achieving sustainable development.
the following:
Ans : DELHI 2016
1. Population Growth Control: Population must
be kept within the environment’s carrying Sustainable development can be achieved through
capacity to prevent overburdening resources. the following strategies:
2. Sustainable Use of Renewable Resources: 1. Non-conventional Energy: Utilize India’s vast
Renewable resources should be extracted potential for wind and solar energy to replace
sustainably, ensuring their regeneration rate pollution-intensive thermal and hydro power.
exceeds usage. 2. Mini Hydel Plants: Harness perennial streams
3. Pollution Control: Emissions must be limited in hilly areas to generate local electricity
to the environment’s absorptive capacity to without significant environmental disruption
avoid long-term damage. or high transmission costs.
4. Technological Advancement: Technology 3. Use of Gases: Replace wood and biomass with
should focus on input efficiency, maximizing subsidized LPG in rural areas and promote
output per unit of input to reduce resource CNG in urban public transport to reduce air
exploitation. pollution and deforestation.
5. Resource Substitution: Non-renewable 4. Adopting Traditional Practices: Revive eco-
resources should be gradually replaced by friendly systems like Ayurveda and organic
renewable alternatives, aligning depletion products to reduce industrial and chemical
rates with renewable growth. impact.
5. Bio-compost: Shift from chemical fertilizers
133. Environment sustains life, assimilates waste and to organic manure, improving soil fertility
offers resources for production. Discuss measures and supporting organic farming.
which can help in protecting environment. 6. Bio-pest Control: Employ plant-based
Ans : FOREIGN 2017
pesticides and mixed cropping to reduce
chemical usage and environmental harm.
The environment sustains life through essential 7. Waste Recycling and Plastic Ban: Promote
functions, but its degradation has severe recycling and ban plastic bags to protect
consequences, including the loss of natural and ecosystems and minimize non-biodegradable
human capital. Priority measures to address waste.
environmental degradation include:
1. Population Control: Reducing population 135. Distinguish between economic development and
growth to align with the environment’s sustainable development.
carrying capacity.
Ans : SQP 2015
2. Solid Waste Management: Efficient handling,
segregation, treatment and disposal of waste.
Economic Sustainable
3. Waste Recycling: Reusing domestic and
Development Development
industrial waste, such as converting household
waste into agricultural compost. 1. It refers to long- It refers to increase
4. Promoting Public Transport: Reducing term increase in in real per capita
private vehicle use by improving public real per capita income and economic
transport systems and raising awareness. income and welfare of both the
5. Pollution Control: Tightening emission norms, economic welfare. present and future
promoting clean technologies and minimizing generations.
chemical fertilizer use in agriculture. 2. It does not It lays special
6. Social Awareness: Educating people on specifically take emphasis on
environmental challenges and individual into account environmental
contributions. environmental protection.
7. Afforestation Campaigns: Launching protection.
extensive tree-planting drives.
8. Poverty Eradication: Addressing poverty to
reduce environmentally harmful practices
driven by basic survival needs.

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CH 12 : ENVIRONMENT AND SUSTAINABLE DEVELOPMENT
Ans : DELHI 2019
Air pollution in India is prevalent in urban
India faces significant environmental challenges, areas due to industrial activities, thermal power
primarily land degradation and biodiversity loss: plants and heavy vehicular traffic. Unplanned
1. Land Degradation: This refers to a decline in urbanization has led to a surge in registered
land productivity caused by human-induced vehicles, significantly worsening air quality and
processes. Factors include deforestation, contributing to ozone depletion and climate
overgrazing, forest fires, unsustainable change. Sustainable transport is essential to
resource extraction, improper irrigation and address these challenges, offering mobility while
soil management, excessive pesticide use and supporting economic and social development with
poverty. These practices lead to temporary or minimal environmental impact. It should be safe,
permanent loss of land fertility. affordable, efficient and eco-friendly. Encouraging
2. Biodiversity Loss: This involves the extinction public transportation, such as Delhi Metro,
of plant and animal species, disrupting trains and Bus Rapid Transit Systems (BRTS),
ecosystems and causing economic and social over private vehicles is crucial for promoting
costs. Biodiversity supports ecosystems sustainable development and reducing emissions.
by binding organisms in interdependent
networks. Key contributors to biodiversity 131. Sustainable development is essential for balancing
loss are deforestation, overpopulation, economic growth with environmental preservation
resource overuse, climate change and natural and social equity. It ensures that the needs of the
disasters. Human activities often harm present are met without compromising future
ecosystems, accelerating this loss. generations. Discuss any four suitable strategies
for sustainable development.
129. Sustainable development is a crucial concept Ans : COMP 2021
aimed at harmonizing economic, social and
environmental goals to ensure long-term well- Strategies for sustainable development include:
being. It focuses on preserving resources and 1. Restricting Renewable Resource Use :
promoting equity for future generations. What is Sustainable development requires limiting the
Sustainable Development? Discuss its features. use of renewable resources to ensure extraction
does not exceed regeneration rates. Emphasis
Ans : is placed on adopting non-renewable energy
Sustainable development is a strategy that sources like solar, wind and water energy.
ensures resource management to enhance long- 2. Cleaner Fuels: The promotion of Compressed
term well-being, meeting present needs without Natural Gas (CNG) in urban public transport,
compromising the future generations’ ability to especially in Delhi, exemplifies this. In rural
meet theirs. Key features include: areas, LPG and gobar gas are encouraged
1. Sustained Income Growth: Ensures a to reduce reliance on wood and biomass,
continuous rise in real per capita income preserving the environment.
and economic welfare for current and future 3. Mini Hydel Plants: These eco-friendly plants
generations. in mountainous regions utilize perennial
2. Rational Resource Use: Advocates utilizing streams to power small turbines, generating
natural resources responsibly to improve local electricity sustainably.
present living standards without diminishing 4. Biocomposting: By recycling plant matter
future potential. into organic fertilizers, biocomposting
3. Environmental Protection: Highlights supports organic farming and mitigates the
considering environmental costs in harmful effects of chemical pesticides and
development, allowing resource use while fertilizers on land and water.
preserving sufficient resources for future
generations, maintaining ecological balance. 132. What are the prerequisites for achieving
development that will allow all future generations
130. ‘Stimulating public mode of transportation to have a potential average quality of life that is
may lead to promote sustainable development.’ at least as high as that is being enjoyed by the
Explain with valid arguments. current generation?
Ans : SQP 2022 Ans : OD 2018

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 479

for effective and timely implementation of the G-20 India’s SDG score improved from 60 in 2019
2023 Action Plan to accelerate progress on the to 66 in 2020-21, driven by progress in clean
SDGs; including through actions on eliminating water, sanitation and affordable energy. Kerala
hunger and malnutrition, strengthening global scored 75, followed by Himachal Pradesh and
health and implementation of One Health Tamil Nadu at 74. Among UTs, Chandigarh
approach and delivering quality education.” ranked highest with 79, followed by Delhi at 68.
On the basis of given text answer the following On the basis of given text answer the following
questions: questions:
(i) State and discuss the importance of collective (i) From the following, identify the strategy
fight in achieving SDGs. which is not suitable for promoting sustainable
(ii) Discuss briefly the action plan of G-20 leaders development:
in promoting ‘One Health’ approach. (a) use of non-conventional sources of energy
Ans : OD 2024 (b) discarding old practices in agriculture
and healthcare
(i) To achieve SDGs the leaders have committed
(c) establishment of Mini-Hydel Plants
to take collective actions.
(d) use of Bio-compost
1. To effectively and timely implement the
2030 agenda. (ii) _____ means the ability of the environment
2. to accelerate the commitment towards to absorb degradation without causing
the Action Plan. environmental damage.
3. to achieve strong, sustainable, balanced (a) assimilating waste
and inclusive growth. (b) absorptive capacity
4. to discover environmentally sustainable (c) both (a) and (b)
development pathway. (d) neither (a) nor (b)
5. to pursue reforms for better, comprehensive (iii) The concept of sustainable development was
and more effective financial avenues. emphasised by _____.
(ii) The Action Plan of G-20 leaders in promoting (a) United Nations Conference on
‘One Heath’ approach involves: Environment and Development
1. accelerating the progress on the SDGs (b) General Assembly’s special session on
through actions on eliminating hunger environment
and malnutrition. (c) UNICEF’s special session on environment
2. strengthening global health and (d) None of the above
implementation of One Health approach.
3. delivering quality education. (iv) State any two strategies of sustainable
development, suggested by Herman Daly.
138. Read the paragraph given below and answer the Ans :
questions that follow:
Kerala retained its top rank in NITI Aayog’s SDG (i) (b) discarding old practices in agriculture
India Index 2020-21, with Mizoram, Haryana and and healthcare
Uttarakhand showing the most improvement (ii) (b) absorptive capacity
since 2019. Bihar, Jharkhand and Assam ranked (iii) (a) United Nations Conference on
lowest this year. Environment and Development
The SDG India Index evaluates states and (iv) 1. Limiting the human population to a
UTs on health, education, gender equality, level within the carrying capacity of the
economic growth, climate change and environment. environment.
Launched in December 2018, it monitors SDG 2. Technological progress should be input
progress and fosters competition among states efficient and not input consuming.
and UTs. Developed with the United Nations
139. Read the paragraph given below and answer the
in India, the index tracks performance on 115
questions that follow:
indicators aligned with the National Indicator
The Brundtland Commission describes sustainable
Framework (NIF) of the Ministry of Statistics
development as:
and Programme Implementation. It aids policy-
“Development that meets the needs of the present
making and highlights gaps in SDG tracking,
without compromising the ability of future
emphasizing improved statistical systems.

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CH 12 : ENVIRONMENT AND SUSTAINABLE DEVELOPMENT

3. It overlooks the It takes into (i) Define sustainable development.

exploitation of account the rational (ii) State the public project areas, where Sovereign
natural capital utilisation of natural Green Bond are focussed.
capital to protect the (iii) How can businesses get benefit from green
interests of future finance?
generations. Ans : OD 2024

4. This concept This concept is (i) Sustainable development is the development

is mainly used important for both that meets the need of the present generation
in reference to developed and without harming the ability of the future
under- developed underdeveloped generation to meet their own needs.
economies. economies. (ii) The Sovereign Green Bonds focus on
5. It lays special stress It lays stress on financing public projects such as renewable
on the structural, social awareness energy, climate change, clean transportation,
technical and and responsibilities sustainable water and waste management and
institutional over a period of pollution control.
changes in the time for economic (iii) Green finance can benefit businesses in the
economy. development. following ways:
1. It can help them follow different
environmental norms and regulations and
thus avoid possible fines.
2. Adopting sustainable developmental
CASE BASED QUESTION practices enhances brand value of
businesses.
3. The energy-efficient and other sustainable
136. Read the following text carefully:
development practices help in saving costs
India has aimed to reduce the country’s carbon
and boosting profitability of businesses.
intensity by approximately 45% by 2030. To
achieve this ‘Green finance’ plays a vital role. At 137. “We are One-Earth, One Family and we share
the initial stages, green finance needs a big push One Future.” is the opening sentence of the G-20
from the government. The Indian government has New Delhi Leaders’ Declaration Statement.
identified projects worth `25,000 crore that will In this statement the leaders pledged to “resolve
be financed by proceeds from Sovereign Green to fully and effectively implement the 2030
Bonds. Agenda and the Sustainable Developmental Goals
According to the framework approved by (SDGs)”. The leaders’ commitments contained in
finance ministry, the sovereign green bonds will the Declaration statement reflect, “the philosophy
focus on financing public projects including of living in harmony with our surrounding
renewable energy, climate change, clean ecosystem”.
transportation, sustainable water and waste The Declaration recognises the “Cascading
management and pollution control. challenges and crisis that have reversed gains” on
Businesses that take green finance can get the 2030 Agenda of SDGs.
benefit in various ways. It can help them follow The leaders “affirm that no country should have
different environmental norms and regulations and to choose between fighting poverty and fighting
thus avoid possible fines. Adopting sustainable for our planet”.
developmental practices enhances brand value of The leaders resolved to act
businesses. Customers tend to prefer brands that (a) accelerate strong, sustainable, balanced and
adopt clear sustainable development practices. inclusive growth;
The energy-efficient and other sustainable (b) accelerate the full and effective implementation
development practices promoted by green of 2030 Agenda
finance also often help in saving cost, boosting (c) pursue low-carbon and environmentally
profitability of businesses etc. sustainable development pathways;
—The Economic Times, April 22, 2023 (Modified)
(d) Pursue reforms for better, comprehensive and
On the basis of given text and common more effective finance avenues.
understanding, answer the following questions: The leaders commit to “taking collective actions

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 481

(iii) Identify the function performed by India Cooling Action Plan (ICAP) for space
environment: cooling in buildings, developed after thorough
(a) supplying both renewable and non- stakeholder discussions and mapping of ICAP
renewable resources recommendations.
(b) preventing global warming On the basis of given text answer the following
(c) promoting sustainable development questions:
(d) promoting cleaner technologies (i) _____ refers to the phenomenon of
(iv) Identify the correct pair of statements from reduction in the amount of ozone in the
the given statements in column I and II: stratosphere.
Column I Column II (ii) The opportunity cost of negative
environmental impacts is high which has the
1. Cause of A. rational use of
following implications:
environmental environmental
(a) we have been compelled to spend more
degradation resources
on discovering new resources
2. Feature of B. assimilating (b) health costs due to degraded environment
sustainable waste have been rising
development (c) pollution and drying up of rivers has
3. Strategy of C. use of non- made water an economic good
sustainable conventional (d) all of the above
development sources of energy (iii) The problem of ozone depletion is caused
4. Function of D. increasing by high levels of _____ and _____
environment urbanization compounds in the stratosphere.
(a) 1-A (iv) The compounds identified in Question 42
(b) 2-B originate from _____.
(c) 3-C (a) Oxygen
(d) 4-D (b) Carbon dioxide
(c) Chlorofluorocarbons
Ans : (d) None of the above.
(i) (b) increasing dependence on thermal energy
Ans :
plants
(ii) (c) both (a) and (b) (i) Ozone depletion
(iii) (a) supplying both renewable and non- (ii) (d) all of the above
renewable resources (iii) Chlorine, Bromine
(iv) (c) 3-C (iv) (c) Chlorofluorocarbons

141. Read the paragraph given below and answer the 142. Read the paragraph given below and answer the
questions that follow: questions that follow:
India has phased out major ozone-depleting India’s rank on the 17 Sustainable Development
substances (ODS), fulfilling all obligations under Goals (SDGs) has dropped two places to 117 in
the Montreal Protocol with the help of technical 2021, compared to 115 last year, according to the
and financial assistance, according to Union State of India’s Environment Report 2021. The
Minister Ashwini Choubey. He attributed this decline is attributed to challenges in areas like
success to the active involvement of stakeholders ending hunger (SDG 2), achieving gender equality
like industries, research institutions, line (SDG 5) and building sustainable infrastructure
ministries and consumers at both planning and (SDG 9).
implementation levels. India, with an overall SDG score of 61.9 out
Choubey highlighted the Kigali Amendment, of 100, ranks below Bhutan, Nepal, Sri Lanka
recently ratified by India, emphasizing the need and Bangladesh among South Asian nations.
to address industrial obsolescence and economic The 2030 Agenda for Sustainable Development,
impacts while developing a hydrofluorocarbon adopted in 2015 by all UN Member States,
phase-down strategy. He also launched an action provides a framework of 17 SDGs as a universal
plan to implement recommendations from the call to action for global peace and prosperity.

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CH 12 : ENVIRONMENT AND SUSTAINABLE DEVELOPMENT

On the basis of given text answer the following 143. Read the paragraph given below and answer the
questions: questions that follow:
(i) Identify the correct pair. In 2015, the United Nations General Assembly
adopted the 2030 Agenda for Sustainable
Column I Column II Development, with 193 member countries,
including India, committing to 17 Sustainable
1. CPCD A. 1986
Development Goals (SDGs). These goals aim
2. Environment B. 1983 to end poverty, address inequalities and combat
Protection Act climate change, ensuring no one is left behind.
3. Brundtland C. 1980 India, playing a key role in the declaration,
Commission holds significant responsibility as it represents
17% of the global population. According to the
4. Montreal Protocol D. 1990
SDG India Index by NITI Aayog and the United
(ii) Sustainable development is the development Nations, India scored 58, slightly above the
that meets the needs of the present generation halfway mark for the 2030 target.
without compromising the ability of the The SDGs, established at the 2012 Rio
future generations to meet their own needs. de Janeiro Conference, aim to address global
This definition has been given by: environmental, political and economic challenges.
(a) United Nations Conference on They build on the Millennium Development
Environment and Development Goals (MDGs), tackling broader issues with
(b) United Nations Committee on interconnected targets, where success in one goal
Environment and Development contributes to progress in others.
(c) United Nations Committee on Protection On the basis of given text answer the following
of Environment questions:
(d) United Nations Conference on Protection (i) Technological progress should be input
of Environment _____and not input _____.
(iii) The present generation can promote (a) efficient, producing
development that enhances the natural and (b) consuming, producing
built environment in ways that are compatible (c) efficient, consuming
with: (d) consuming, efficient
(a) conservation of natural assets (ii) ‘In 2015, the United Nations General
(b) preservation of the regenerating capacity Assembly adopted the 2030 Agenda for
of the world’s natural ecological system sustainable development’. What does this
(c) avoiding imposition of added costs on ‘2030 Agenda’ mean?
future generation (a) SDGs are to be achieved by the year 2030
(d) all of the above (b) SDGs are to be reviewed in the year 2030
(iv) A suggested measure to achieve sustainable (c) The member countries are bound till
development is: 2030
(a) technological progress (d) None of the above
(b) industrialisation (iii) _____ can be used to generate electricity
(c) investment in human capital in mountainous regions as a strategy of
(d) rational use of natural resources sustainable development (Wind Power/Mini-
hydel Plants)
Ans : (iv) _____ is a natural process in which
(i) 2 - B biodegradable matter is decomposed and
(ii) (a) United Nations Conference on converted into manure.
Environment and Development Ans :
(iii) (d) all of the above
(iv) (d) rational use of natural resources (i) (c) efficient, consuming
(ii) (a) SDGs are to be achieved by the year 2030
(iii) Mini-Hydel Plants
(iv) Bio-composting

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 483

144. Read the paragraph given below and answer the (iv) Following is not a feature of sustainable
questions that follow: development:
Today’s environmental problems are often linked (a) rise in per capita income and welfare of
to private consumption. The Government’s both present and future generations.
strategy for sustainable consumption emphasizes (b) focus on the protection of environment
collaboration with municipalities, businesses and (c) focus on passing of laws to promote
civil society to help consumers make sustainable sustainable development
choices. Increasing public knowledge about (d) emphasis on the rational use of natural
the environmental impact of consumption and resources
fostering cooperation at all societal levels are key
focus areas. Ans :
Schools are pivotal in educating children (i) (a) the rate of depletion of non-renewable
about consumption and its environmental effects. resources should not exceed the rate of
The Swedish Consumer Agency is proposed to creation of renewable substitutes
work with other actors to support teaching in (ii) (c) both (a) and (b)
this area and promote eco-smart consumption.
(iii) (a) environmental upgradation
This includes encouraging sustainable lifestyles
(iv) (c) focus on passing of laws to promote
through measures like ‘nudging’ consumers to
sustainable development
choose environmentally friendly alternatives.
Efforts to prevent waste focus on food, textiles,
145. Read the paragraph given below and answer the
electronics and construction materials. The
questions that follow:
Swedish Environmental Protection Agency has
Sustainable development is often associated with
developed a revised waste management plan for
the color green, emphasizing its connection to
2018-2023. Additionally, new regulations require
environmental protection. At the 1992 Earth
major companies to report their sustainability
Summit in Rio de Janeiro, world leaders recognized
efforts, recognizing the financial sector’s role in
that social and economic progress must go hand-
achieving sustainability goals.
in-hand with environmental sustainability, as
On the basis of given text answer the following
advancing one without the other leads to failure.
questions:
Sustainable development encompasses health,
(i) The following needs to be done to achieve the education, jobs and ecosystems, promoting
goal of sustainable development: inclusion and addressing social inequality,
(a) the rate of depletion of non-renewable intolerance and violence.
resources should not exceed the rate of It focuses on transforming impoverished
creation of renewable substitutes communities into informed, educated and
(b) prices of cleaner fuels should be increased productive societies while generating wealth that
to impress their importance on the public fosters equality and opportunity. Sustainable
(c) both (a) and (b) development respects planetary boundaries in
(d) neither (a) nor (b) consumption and production while promoting
tolerance and human rights.
(ii) Sustainable consumption is necessary for
sustainable development because: Building on the work of economists like
(a) only then the overall stock of capital Amartya Sen and Mahbul-ul-Haq and the Human
assets can rise over time Development Report of 1990, the UNDP has
(b) It maintains the ability of the future advocated alternative measures of progress,
generations to meet their own needs including the Human Development Index (HDI).
Efforts are underway to adjust the HDI to
(c) both (a) and (b)
include environmental sustainability, enabling
(d) neither (a) nor (b)
better tracking of progress toward sustainable
(iii) Sustainable consumption leads to development. This remains a shared global goal.
(a) environmental upgradation On the basis of given text answer the following
(b) decreasing resource efficiency questions:
(c) low standards of living
(d) Increase in poverty

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CH 12 : ENVIRONMENT AND SUSTAINABLE DEVELOPMENT

(i) Which of the following is not one of the ways

to attain the goal of sustainable development?
(choose the correct alternative)
(a) Use of cleaner fuels
(b) Use of traditional knowledge and practices
(c) Spreading awareness
(d) Sticking to methods to promote
inequalities.
(ii) State whether the given statement is true or
false: As per the UNDP Report education
and health are the broader issues of human
development.
(iii)Sustainable development and economic
growth are ______ (directly/indirectly)
related. (choose the correct alternative)
(iv) Read the following statements – Assertion
and Reason
Assertion : Sustainable Development is about
changes that transform impoverished people,
communities and countries into informed,
educated, healthy and productive societies.
Reason : Sustainable Development advocates
about wealth creation that generates socio-
economic equality and opportunity.
Select the correct alternative from the
following:
(a) Both Assertion and Reason are true
and Reason is the correct explanation of
Assertion.
(b) Both Assertion and Reason are true and
Reason is not the correct explanation of
Assertion.
(c) Assertion is true but Reason is false.
(d) Assertion is false but Reason is true.
Ans :
(i) (d) Sticking to methods to promote
inequalities.
(ii) True
(iii) Directly
(iv) (a) Both Assertion and Reason are true
and Reason is the correct explanation of
Assertion.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 485

CHAPTER 13
COMPARATIVE DEVELOPMENT EXPERIENCES OF INDIA & ITS NEIGHBORS

Plan (2016-20). Until March 2017, India had

SUMMARY been following the Five Year Plan-based
development model.
6. Till the 1980’s, all the three countries had
1. INTRODUCTION
similar growth rates and per capita incomes.
Various regional and global economic groups like
SAARC, European union, Brics, ASEAN, G-8 3. DEVELOPMENT PATH OF CHINA
and G-20 etc, have been formed by nations of the China’s developmental journey reflects its unique
world for protecting their own domestic economies approach to economic and social transformation
so as to survive competition. In the process of under one-party rule. The country’s strategies
globalisation, the developing countries have been have evolved significantly over time, blending
facing competition not only from developed government control with market-oriented reforms.
nations but also from other developing ones. So, 1. The People’s Republic of China (PRC) was
an understanding of the other economies in the established in 1949 under one-party rule,
neighbourhood is required which will help up bringing all critical sectors of the economy
them to understand the developmental processes under government control.
pursued by the neighbouring countries. This will 2. The Great Leap Forward (GLF) campaign of
help them in realising their own strengths and 1958 aimed at large-scale industrialization,
weaknesses in comparison to their neighbours. encouraging people to set up backyard
2. SIMILARITIES IN THE DEVELOPMENTAL PATH OF industries. In rural areas, the Commune
INDIA, PAKISTAN AND CHINA system promoted collective farming.
3. GLF faced setbacks, including a severe
The developmental paths of India, Pakistan and drought that caused widespread devastation.
China share common historical and strategic 4. In 1965, Mao Zedong introduced the Great
milestones. These similarities highlight their Proletarian Cultural Revolution (1966-76),
collective journey toward progress in the post- sending students and professionals to work in
independence era. the countryside.
1. All the three nations started the developmental 5. Reforms began in phases, focusing initially
path at the same time. on agriculture, foreign trade and investment,
2. India and Pakistan got independence in later extending to the industrial sector.
1947 and People’s Republic of China was 6. Private firms and cooperatives were
established in 1949. allowed to set up industrial units, creating
3. All the three countries had started planning competition for government-owned State-
their development strategies in similar ways, Owned Enterprises (SOEs).
India commenced its Five Year Plan in 1951, 7. The Dual Pricing System required farmers and
pakistan in 1956 and China in 1953. industries to transact at both government-
4. India and Pakistan adopted similar strategies fixed and market prices, gradually increasing
such as creating a large public sector market-based transactions.
and raising public expenditure on social 8. Special Economic Zones (SEZs) were
development. established to attract foreign investment and
5. Since 2013, Pakistan is working on the basis boost economic growth.
of 11th Five Year Development Plan (2013-
18), China is now working on 13th Five Year

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CH 13 : COMPARATIVE DEVELOPMENT EXPERIENCES OF INDIA

4. DEVELOPMENT PATH OF PAKISTAN 6. Select Demographic Indicators, 2017-2018:

Pakistan’s development path reflects a mixed
Basis India China Pakistan
economy model, balancing private and public
sector initiatives. Over time, the country has 1. Estimated 1352 1393 212
adapted its policies to address economic challenges population (in
and foster growth. million)
1. Pakistan follows the mixed economy model 2. Annual Growth 1.03 0.46 2.05
where private and public sector co-existed. of population
2. In 1950s and ‘1960s, Pakistan introduced a
3. Density (per sq. 455 148 275
regulated policy framework to industrialise
km)
her economy. This policy combined tariff
protection for manufacturing of consumer 4. Sex ratio 924 949 943
goods with direct import controls on 5. Fertility rate 2.2 1.7 3.6
competing imports.
3. The introduction of Green Revolution led 6. Urbanisation 34 59 37
to mechanisation and increase in public
investment in infrastucture in selected areas. 7. HUMAN DEVELOPMENT INDICATORS
4. Nationalisation of capital goods industries Human Development Index measures the average
took place in 1970s. Pakistan then shifted achievement in the three basic dimensions of
its policy orientation in the late 1970s and human development which are:
1980s when the major thrust areas were 1. A long and healthy life as measured by life
denationalisation and encouragement of expectancy at birth.
private sector. 2. Knowledge as measured by adult literacy
5. During this period, Pakistan received rate.
financial assistance from western countries. 3. A decent standard of living as measured by
It also started receiving remittances in a per capita GDP.
big way from the Pakistani workers settled
in the Middle-East which helped accelerate 8. COMPARISON OF INDIA, CHINA AND PAKISTAN IN
the country’s economic growth and created a HUMAN DEVELOPMENT INDICATORS
favourable environment for new investments. India, China and Pakistan show significant
variations in their human development indicators.
5. COMPARISON OF DEMOGRAPHIC INDICATORS
These differences highlight the progress and
The demographic profiles of China, India and challenges faced by each nation in addressing
Pakistan vary significantly, reflecting differences in income, health and social metrics.
population size, density, growth and urbanization. 1. Income Indicators : China leads in GDP
1. Population Size : China has the highest per capita and has a lower proportion of
population, closely followed by India, while population below the poverty line compared
Pakistan’s population is much smaller, about to India and Pakistan.
one-tenth of China or India. 2. Health Indicators : China performs better
2. Population Density : Despite its vast in health metrics, including lower mortality
geographical area, China has the lowest rates, better access to sanitation, higher adult
population density among the three countries. literacy rates, longer life expectancy and
3. Population Growth : Pakistan has the highest reduced malnourishment.
population growth rate, followed by India, 3. Sanitation Performance : Pakistan
with China having the lowest. outperforms India in both reducing poverty
4. Sex Ratio : All three nations exhibit a low and improving sanitation facilities.
and gender-biased sex ratio, favoring males. 4. Poverty Ratio :China has the lowest poverty
5. Fertility Rate : China has a low fertility rate, ratio among the three nations.
while Pakistan’s fertility rate is significantly 5. Maternal Mortality : Maternal mortality
high. rates remain high in India and Pakistan,
6. Urbanization : Urbanization is highest in while they are significantly lower in China.
China, whereas India has about 33% of its
population living in urban areas..

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 487

9. SECTORAL CONTRIBUTION Basis India China Pakistan

In all the three economies, the industry and 1. Human Development 0.645 0.761 0.557
service sectors have less proportion of workforce, Index (value)
but they contribute more in terms of output. 2. Rank (based on HDI) 130 87 154
Sectoral contribution to GVA (in %) 2018-2019
3. Life Expectancy at 69.7 76.9 67.3
birth (years)
Sectors India China Pakistan
4. Mean years of 6.5 8.1 5.2
Agriculture 16 7 24 Schooling (% aged 15
and above)
Industry 30 41 19
5. Gross National Income 6,681 16,057 5,005
Service 54 52 57 per capita (PPP US$)
Total 100 100 100 6. Percentage of People 21.9* 1.7** 24.3*
living Below Poverty
Line (National)
10. SECTORAL DISTRIBUTION OF WORKFORCE
7. Infant Mortality Rate 29.9 7.4 57.2
The workforce distribution across agriculture, (per 1000 lives births)
industry and services highlights significant
8. Maternal Mortality 133 29 140
differences in the economic structures of India, Rate (per 1 Lakh births)
China and Pakistan. The table below provides
9. Population using at 60 75 60
insights into their sectoral employment patterns least basis Sanitation
for 2018-2019. (%)
10. Population using a 93 96 91
Sectors India China Pakistan least basis drinking
Agriculture 43 26 41 Water Source (%)
11. Percentage of 37.9 8.1 37.6
Industry 25 28 24
Undernourished
Service 32 46 35 Children

Total 100 100 100

12. APPRAISAL OF DEVELOPMENT STRATEGY OF CHINA
1. In the last two decades, the contribution of
agricultural sector to GDP, which employs The slow growth of the economy forced China to
the larger proportion of workforce in all the go in for reforms in 1978.
three countries, has declined. 1. Pre Reform period:
2. In the industrial sector, China has maintained (a) The new leadership in China was
a double-digit growth rate, whereas for India dissatisfied with the slow pace of growth.
and Pakistan, the growth rate has declined. (b) Despite extensive land reforms,
3. In the service sector, India and Pakistan have collectivisation, the Great Leap Forward
stagnated but China has managed to increase and other initiatives, the per capita grain
the rate of growth of its service sector. output in 1978 was the same as it was in
4. China has emerged as the manufacturing the mid 1950s.
hub of the world. China is a world leader (c) There were extension of basic health
in industrial output, consumer products, services in rural areas.
food processing and telecommunication (d) Through the Commune system, there
equipments. was more equitable distribution of food
5. In India and Pakistan, there has been a direct grains.
shift from primary to the tertiary sector. 2. Post Reform period:
(a) Each reform was first implemented at
11. SOME SELECTED INDICATORS OF HUMAN a smaller level and then extended on a
DEVELOPMENT, 2017-2019 massive scale.
(b) Development of infrastructural facilities
The table below presents a detailed comparison of
helped in improving the social and income
the three countries on various aspects of human
indicators.
development, reflecting disparities in health,
(c) Agricultural reforms created conditions
education, income and living standards.
for phenomenal growth in rural industries.

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CH 13 : COMPARATIVE DEVELOPMENT EXPERIENCES OF INDIA

Pakistan introduced its first Five-Year Ans : FOREIGN 2016

Development Plan in 1956, aiming to industrialize (b) 7%

its economy and improve public infrastructure. China’s agricultural sector contributed only 7% to
GDP, reflecting its shift to industrial and service
25. The Human Development Index (HDI) value of sectors for economic growth.
China in 2017-2019 was _______, the highest
among India, China and Pakistan. 29. The population growth rate of _______ is
(a) 0.645 the lowest among India, China and Pakistan,
(b) 0.557 indicating better control over population
(c) 0.761 expansion.
(d) 0.720 (a) India
Ans : SQP 2013 (b) China
(c) Pakistan
(c) 0.761
China’s HDI value of 0.761 reflects better (d) All are equal
achievements in education, health and income Ans : DELH 2017
compared to India and Pakistan.
(b) China
26. _______ has the highest fertility rate among China’s population growth rate is 0.46%, the
India, China and Pakistan, indicating significant lowest, due to effective implementation of
demographic challenges in managing population population control measures like the one-child
growth. policy.
(a) India
30. The Special Economic Zones (SEZs) in China
(b) China
were established to attract ______ and boost
(c) Pakistan
economic growth.
(d) None of the above
(a) Domestic trade
Ans : COMP 2014 (b) Foreign investment
(c) Pakistan (c) Agricultural output
Pakistan’s fertility rate of 3.6 is the highest, (d) Tourism
highlighting challenges in managing population
growth and providing adequate resources. Ans : SQP 2018

(b) Foreign investment

27. The economic growth in Pakistan during the SEZs were created in China to attract foreign
1980s was significantly supported by remittances investment and integrate its economy with global
from workers in _______. markets, significantly boosting its economic
(a) Europe development.
(b) Middle East
(c) North America 31. Among India, China and Pakistan, _______
(d) South Asia has the highest workforce distribution in the
service sector as of 2018-2019.
Ans : OD 2015
(a) India
(b) Middle East (b) China
Pakistani workers in the Middle East sent
(c) Pakistan
substantial remittances during the 1980s,
(d) All are equal
contributing to economic growth and providing
foreign exchange. Ans : COMP 2019

28. In 2018-2019, the agricultural sector’s contribution (b) China

to GDP in China was _______, the lowest China has the highest workforce distribution in
among the three countries. the service sector (46%), indicating its transition
(a) 16% to a more service-oriented economy.
(b) 7%
(c) 24%
(d) 30%

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 489

6. Introduction of Economic Reforms in Pakistan Ans : SQP 2003

took place in year _____. (c) Financial assistance from Western countries
(a) 1978 and remittances
(b) 1980 During this period, Pakistan received substantial
(c) 1988 remittances from workers in the Middle East
(d) 1991 and financial assistance from Western countries,
Ans : COMP 2024
accelerating economic growth.

(c) 1988 10. Which of the following statements about the

sectoral distribution of the workforce in 2018-2019
7. What is a common feature in the developmental highlights the differences in economic structure
strategies of India, Pakistan and China during and employment patterns among India, China
their initial post-independence periods, specifically and Pakistan?
in their efforts to stimulate economic growth and (a) Agriculture employs the majority in all three
address social development challenges? countries.
(a) Adoption of a purely private sector model (b) The service sector employs the majority in
(b) A focus on creating a large public sector India and Pakistan.
(c) Implementation of a communal farming (c) Industrial employment is highest in China
system in all countries among the three countries.
(d) Complete reliance on foreign investments (d) Agriculture’s workforce percentage is higher
Ans : OD 2000 in China than in India.
(b) A focus on creating a large public sector Ans : COMP 2004

All three countries initially focused on creating a (c) Industrial employment is highest in China
large public sector and raising public expenditure among the three countries.
on social development to kick-start their China’s workforce in the industrial sector
economies. stands at 28%, which is higher than India’s 25%
and Pakistan’s 24%, reflecting its status as a
8. How does China’s urbanization rate compare to
manufacturing hub.
India and Pakistan and what does this reveal
about its progress in infrastructure development 11. Among the three countries, India, China and
and population distribution in urban areas? Pakistan, which country has the lowest Human
(a) China has the lowest urbanization rate. Development Index (HDI) value and what
(b) China has the highest urbanization rate. does it indicate about the progress of human
(c) India and Pakistan are equally urbanized. development?
(d) Pakistan leads in urbanization among the (a) India
three. (b) China
Ans : DELHI 2002
(c) Pakistan
(d) All have the same HDI
(b) China has the highest urbanization rate.
China’s urbanization rate is 59%, which is Ans : OD 2005

higher compared to India’s 34% and Pakistan’s (c) Pakistan

37%, reflecting better development in urban Pakistan has an HDI value of 0.557, which is lower
infrastructure. compared to India (0.645) and China (0.761).

9. What were the main drivers of Pakistan’s economic 12. During the Great Leap Forward campaign in
growth during the 1980s and how did they 1958, what specific reforms did China introduce
contribute to creating a favorable environment for to promote large-scale industrialization and rural
new investments? economic development?
(a) Nationalization of all industries (a) Encouragement of backyard industries and
(b) Mechanization through the Green Revolution collective farming
(c) Financial assistance from Western countries (b) The privatization of industries
and remittances (c) Adoption of the Five-Year Plan
(d) Dependence solely on industrial exports (d) Focus on technological advancements in
urban areas

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CH 13 : COMPARATIVE DEVELOPMENT EXPERIENCES OF INDIA

13. APPRAISAL OF DEVELOPMENT STRATEGY OF 2. Pakistan is ahead of India in terms of:

PAKISTAN (a) access to improved sanitation
In Pakistan, the reform process lead to worsening (b) mean years of schooling
of all the economic indicators. The reasons for the (c) life expectancy at birth
slowdown of growth and re-emergence of poverty (d) infant mortality rate
in Pakistan’s economy are: Ans : COMP 2024
1. Agricultural growth and Food Supply
(a) access to improved sanitation
situation was based on good harvest and
not on institutionalized process of technical 3. Economic reforms were introduced in the year
change. _____ in India and in the year _____ in
2. Foreign exchange, an essential component for Pakistan.
any economy, came from remittances from (a) 1978, 1988
Pakistani workers in the middle-east and (b) 1988, 1978
the exports of highly volatile agricultural (c) 1978, 1991
products. (d) 1991, 1988
3. There was growing dependence on foreign
loans and also difficulty in paying back the Ans : FOREIGN 2024

loans. (d) 1991, 1988

4. However, during the last few years, Pakistan
has recovered its economic growth and has 4. In the decade of 1970s, Pakistan nationalised its
been sustaining it. ______ industry.
(a) Medical infrastructure
(b) Consumer goods
(c) Capital goods
MULTIPLE CHOICE QUESTION (d) Foreign trade
Ans : SQP 2024

1. On the basis of the date given below, identify the (c) Capital goods
incorrect statement in terms of annual growth of 5. From the events given in Column-I and facts
GDP (%): (Choose the correct alternative) given in Column-II about China, choose the
Annual Growth of Gross Domestic Product (%). correct pair:
1980-2017
Column - I Column - II
Country 1980-90 2015-2017
(A) Structural (i) Limited
India 5.7 7.3 transformation Urbanisation
China 10.3 6.8
(B) Great leap (ii) Reduced global
Pakistan 6.3 5.3 forward demand for
Alternatives: campaign Chinese products
(a) China was able to maintain near double-digit (C) Less stress of (iii) Low density of
growth during the 1980s. usage on natural population
(b) Pakistan was ahead of India during 1980 - resources
2017.
(c) India experienced a rapid rise in Gross (D) Slowdown in (iv) Aimed at massive
Domestic Product during 2015-17. GDP, since 2014 industrialisation
(d) Both China and Pakistan experienced a (a) (A)-(i)
decline in growth rate during 2015-17. (b) (B)-(ii)
Ans : COMP 2024
(c) (C)-(iii)
(d) (D)-(iv)
(b) Pakistan was ahead of India during 1980 -
2017. Ans : DELHI 2024

(c) (C)-(iii)

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 491
Ans : DELHI 2007
21. Why did China’s economic reforms after 1978
(c) Direct shift from primary to tertiary sectors focus initially on agricultural and rural industries
without strengthening the industrial base before transitioning to other sectors?
In India and Pakistan, there has been a direct (a) To avoid competition with state-owned
shift from agriculture to services without a strong enterprises
industrial foundation, leading to stagnation in the (b) To ensure food security and create conditions
service sector. for rural industrial growth
(c) To establish communal farming practices
19. In the context of China’s economic reforms during (d) To privatize all rural industries immediately
the post-reform period, how were the strategies
Ans : SQP 2008
implemented to ensure effective execution and
gradual transition to a market-based economy? (b) To ensure food security and create conditions
(a) Reforms were implemented simultaneously at for rural industrial growth
a large scale. Agricultural reforms post-1978 in China were
(b) Reforms were first tested at a smaller level aimed at ensuring food security and creating a
before mass implementation. foundation for the growth of rural industries.
(c) Reforms focused only on the agricultural
22. India adopted its first Five-Year Plan in the year
sector.
______, marking the beginning of its planned
(d) Reforms led to the abolition of Special
economic development.
Economic Zones.
(a) 1950
Ans : FOREIGN 2006 (b) 1951
(c) 1952
(b) Reforms were first tested at a smaller level
(d) 1956
before mass implementation.
China’s economic reforms were implemented in Ans : OD 2010

phases, starting small and then expanding to a (b) 1951

larger scale, ensuring effective execution. India launched its first Five-Year Plan in 1951
to initiate planned development and focus on
20. Which of the following correctly describes the
agriculture, industry and social services.
sectoral workforce distribution in India, China
and Pakistan and what it indicates about their 23. The Great Leap Forward campaign in China was
respective economic structures? introduced in ______ to promote large-scale
(a) India’s workforce is primarily concentrated industrialization and collective farming.
in industry, reflecting its manufacturing (a) 1949
strength. (b) 1951
(b) China has a balanced workforce distribution (c) 1953
across all three sectors, showcasing a diverse (d) 1958
economy. Ans : FOREIGN 2011
(c) Pakistan has the highest workforce
concentration in services, indicating advanced (d) 1958
economic development. The Great Leap Forward was a major initiative
launched in 1958 by China to achieve rapid
(d) Agriculture remains the largest employer
industrial and rural development through
in India and Pakistan, while China shows a
collective farming and small-scale industries.
significant shift to industry and services.
Ans : COMP 2009
24. Pakistan adopted its first Five-Year Development
Plan in _______, following India and China
(d) Agriculture remains the largest employer in planning for its economic growth.
in India and Pakistan, while China shows a (a) 1949
significant shift to industry and services. (b) 1953
Agriculture employs a larger proportion of the (c) 1956
workforce in India (43%) and Pakistan (41%), (d) 1960
while China has shifted more significantly to
industry (28%) and services (46%). Ans : DELHI 2012
(c) 1956

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CH 13 : COMPARATIVE DEVELOPMENT EXPERIENCES OF INDIA
Ans : SQP 2024
for Assertion.
(c) Assertion is true but Reason is false.
66. Assertion : In Pakistan, the reform process
63. Assertion : In China, the primary sector improved the economic indicators and resulted in
contributes the lowest to GDP. fast economic growth.
Reason : In China, due to topographic and Reason : In Pakistan, agricultural growth was
climatic conditions, very less area is suitable for based on good harvest and not on institutionalized
cultivation. process of technical change.
(a) Assertion and Reason both are correct (a) Assertion and Reason both are correct
statements and Reason is correct explanation statements and Reason is correct explanation
for Assertion. for Assertion.
(b) Assertion and Reason both are correct (b) Assertion and Reason both are correct
statements but Reason is not correct statements but Reason is not correct
explanation for Assertion. explanation for Assertion.
(c) Assertion is true but Reason is false. (c) Assertion is true but Reason is false.
(d) Assertion is false but Reason is true. (d) Assertion is false but Reason is true.
Ans : OD 2001 Ans : DELHI 2003

(a) Assertion and Reason both are correct (d) Assertion is false but Reason is true.
statements and Reason is correct explanation for
Assertion. 67. Assertion : All the three nations started their
development path at the same time.
64. Assertion : In India, the share of the service sector Reason : Among all the three nations, Pakistan
in GDP is the largest. has performed poorly due to political instability
Reason : Majority of the Indian workforce is and growing dependence on foreign loans.
engaged in the industrial sector. (a) Assertion and Reason both are correct
(a) Assertion and Reason both are correct statements and Reason is correct explanation
statements and Reason is correct explanation for Assertion.
for Assertion. (b) Assertion and Reason both are correct
(b) Assertion and Reason both are correct statements but Reason is not correct
statements but Reason is not correct explanation for Assertion.
explanation for Assertion. (c) Assertion is true but Reason is false.
(c) Assertion is true but Reason is false. (d) Assertion is false but Reason is true.
(d) Assertion is false but Reason is true. Ans : COMP 2005
Ans : SQP 2004
(a) Assertion and Reason both are correct
(d) Assertion is false but Reason is true. statements and Reason is correct explanation for
Assertion.
65. Assertion : A low infant mortality rate indicates
better health and sanitation facilities. 68. Assertion : Pakistan has the highest fertility rate.
Reason : The low growth rate of population Reason : Introduction of one-child policy brought
in China is attributed to the one-child policy down the fertility rate in China.
introduced in 1970. (a) Assertion and Reason both are correct
(a) Assertion and Reason both are correct statements and Reason is correct explanation
statements and Reason is correct explanation for Assertion.
for Assertion. (b) Assertion and Reason both are correct
(b) Assertion and Reason both are correct statements but Reason is not correct
statements but Reason is not correct explanation for Assertion.
explanation for Assertion. (c) Assertion is true but Reason is false.
(c) Assertion is true but Reason is false. (d) Assertion is false but Reason is true.
(d) Assertion is false but Reason is true. Ans : OD 2006
Ans : FOREIGN 2002
(b) Assertion and Reason both are correct
(b) Assertion and Reason both are correct statements but Reason is not correct explanation
statements but Reason is not correct explanation for Assertion.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 493

32. Identify the incorrect statement from the 37. Identify the factors which have helped China in
following: achieving a higher growth rate than India:
(a) Only about 10% of the total land area is (a) earlier initiation of reforms
suitable for cultivation in China (b) adoption of one child policy
(b) More than 80% of the Chinese population is (c) focus on the manufacturing sector
dependent on farming (d) both (a) and (c)
(c) China is the most populous country in the
Ans : SQP 2001
world
(d) China is also called as the People’s Republic (d) both (a) and (c)
of China
38. Identify the factors which led to the re-emergence
Ans : OD 2020 of poverty in Pakistan in 1990s:
(b) More than 80% of the Chinese population is (a) political stability
dependent on farming (b) focus on manufacturing sector
(c) majority of population living below the
33. The Great Leap Forward relates to: poverty line
(a) modernising the economy (d) growing dependence on foreign loans along
(b) transforming the agrarian economy with inability to pay them back
(c) adopting the process of rapid industrialization
Ans : COMP 2002
(d) all of the above
(d) growing dependence on foreign loans along
Ans : FOREIGN 2021
with inability to pay them back
(d) all of the above
39. Which of the following has the highest growth
34. From the following, identify the strategies which rate of population?
were adopted both by Pakistan and India for their (a) India
growth process: (b) China
(a) creating a large public sector (c) Pakistan
(b) increasing public expenditure on social (d) both (a) and (c)
development
Ans : FOREIGN 2003
(c) promoting tertiary sector
(d) both (a) and (b) (c) Pakistan

Ans : DELHI 2022 40. Under the commune system:

(d) both (a) and (b) (a) people set up industries in their backyards
(b) people were allotted land separately which
35. China is ahead of India in terms of: they cultivated
(a) life expectancy (c) people collectively cultivated land
(b) access to improved sanitation (d) government hired groups of people to cultivate
(c) maternal mortality rate land owned by it
(d) all of the above
Ans : DELHI 2004
Ans : SQP 2023
(c)people collectively cultivated land
(d) all of the above
41. The system of dual pricing involved:
36. China set up special economic zones to: (a) government fixed prices for farmers and
(a) promote the development of backward areas market driven prices for industrial units
(b) attract foreign investors (b) farmers and industrial units buying and
(c) promote industrial development selling fixed quantities at prices fixed by the
(d) promote private sector government
(c) fixing separate prices for farmers and
Ans : OD 2000
industrial units and rest of the public
(b) attract foreign investors (d) different price levels depending upon the
quantity being transacted by different
categories of people.

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CH 13 : COMPARATIVE DEVELOPMENT EXPERIENCES OF INDIA
Ans : FOREIGN 2001
Under the Dual Pricing System, farmers
(a) Encouragement of backyard industries and and industries in China transacted at both
collective farming government-fixed and market prices, transitioning
The Great Leap Forward aimed at large-scale toward a market-based economy.
industrialization and encouraged backyard
industries, along with the establishment of the 16. What was a significant drawback of China’s Great
Commune system for collective farming in rural Leap Forward campaign of 1958 that impacted its
areas. economic progress and rural development?
(a) Over-reliance on industrial growth in urban
13. What were the primary causes of Pakistan’s areas
economic challenges during its reform process (b) Setbacks due to severe drought and poor
and how did they impact its overall growth and planning
stability? (c) Discontinuation of communal farming
(a) Dependence on institutionalized agricultural practices
growth (d) Lack of involvement of private firms in
(b) Reliance on remittances and volatile industrial development
agricultural exports Ans : OD 2004
(c) Excessive investment in the industrial sector
(d) Complete withdrawal of foreign loans (b) Setbacks due to severe drought and poor
planning
Ans : DELHI 2007
The Great Leap Forward faced major setbacks,
(b) Reliance on remittances and volatile including a severe drought that caused widespread
agricultural exports devastation, hindering its goals of industrialization
Pakistan’s economy faced challenges due to its and rural development.
dependence on remittances from the Middle East
and the export of highly volatile agricultural 17. How does the demographic profile of Pakistan
products. differ significantly from China and India in terms
of population growth and fertility rates?
14. Considering the sectoral contribution to GDP (a) Pakistan has the lowest population growth
in 2018-2019, which country had the highest rate but the highest fertility rate.
contribution from the service sector and what (b) Pakistan has the highest population growth
does this indicate about its economic structure? rate and the lowest fertility rate.
(a) India (c) Pakistan has the highest population growth
(b) China rate and fertility rate among the three.
(c) Pakistan (d) Pakistan has a balanced population growth
(d) All have equal contribution and fertility rate compared to China and
India.
Ans : SQP 2006
Ans : FOREIGN 2005
(c) Pakistan
Pakistan’s service sector contributed 57% to its (c) Pakistan has the highest population growth
GDP, higher than India (54%) and China (52%). rate and fertility rate among the three.
Pakistan’s population growth rate (2.05%) and
15. What does the Dual Pricing System introduced fertility rate (3.6) are significantly higher than
in China signify in terms of the transition toward those of China and India.
a market-based economy while maintaining
government control in certain areas? 18. What factor has contributed to the stagnation of
(a) Prices set solely by the government the service sector’s growth in India and Pakistan
(b) Prices set by the market compared to China’s rapid expansion in this
(c) Transactions at both government-fixed and sector?
market prices (a) Focus on agricultural exports
(d) Prices determined by international markets (b) Lack of foreign investment in service industries
(c) Direct shift from primary to tertiary sectors
Ans : COMP 2005
without strengthening the industrial base
(c) Transactions at both government-fixed and (d) Limited urbanization compared to China
market prices

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 495

53. The main aim of ‘Great Leap Forward’ (GLF) in Ans : DELHI 2020

China was to ensure rapid increase of ______. (a) 1978

(a) agriculture
(b) industries 59. China initiated _____ in 1958, that aimed at
(c) services industrializing the country on a massive scale.
(d) exports (a) The Great Proletarian Cultural Revolution
(b) Setting up of Special Economic Zones
Ans : FOREIGN 2020
(c) Introduction of Economic Reforms
(b) industries (d) The Great Leap Forward Campaign

54. Which of the following countries adopted ‘One Ans : DELHI 2023

Child Policy’ as a measure to control population? (d) The Great Leap Forward Campaign
(a) India
(b) China 60. _____ acts as a measure of ‘the extent of
(c) Pakistan democratic participation in social and political
(d) Russia decision-making.’
(a) Human Development Index
Ans : SQP 2020
(b) Liberty Indicator
(b) China (c) Economic Growth
(d) Poverty Index
55. Great Proletarian Cultural Revolution was
introduced under the leadership of ______. Ans : SQP 2023

(a) Mao Zedong (b) Liberty Indicator

(b) J.L. Nehru
(c) M.K. Gandhi 61. Identify the incorrect statement from the
(d) M.A. Jinnah following:
(a) China’s Economic growth rate is better than
Ans : COMP 2020
that of Pakistan.
(a) Mao Zedong (b) Pakistan is behind India in HDI ranking.
(c) One Child policy norm was adopted in
56. Which of the following countries initiated its Pakistan.
process of Economic Reforms in the year 1991? (d) In 1991, India adopted New Economic
(a) Pakistan Reforms.
(b) India
(c) Russia Ans : OD 2023

(d) China (c) One Child policy norm was adopted in

Ans : OD 2020
Pakistan.

(b) India

57. “GLF” with respect to the People’s Republic of

China referred to as ______. ASSERTION AND REASON
(a) Giant Leap Forward
(b) Great Lead Forum
62. Assertion : The developmental experiences of
(c) Great Leap Forward
India and Pakistan have a lot of similarities.
(d) Giant Lead Forum
Reason : Both India and Pakistan laid emphasis
Ans : FOREIGN 2020 on creating a large private sector.
(c) Great Leap Forward (a) Assertion and Reason both are correct
statements and Reason is correct explanation
58. Introduction of Economic Reforms in China took for Assertion.
place in the year ______. (b) Assertion and Reason both are correct
(a) 1978 statements but Reason is not correct
(b) 1980 explanation for Assertion.
(c) 1988 (c) Assertion is true but Reason is false.
(d) 1991 (d) Assertion is false but Reason is true.

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CH 13 : COMPARATIVE DEVELOPMENT EXPERIENCES OF INDIA

(a) Only 1, 2 and 3 are correct 90. Which of the following correctly describes the
Pakistan relied on a mixed economy model, sectoral contributions in India, China and
introduced mechanization through the Green Pakistan?
Revolution and nationalized industries in 1. Agriculture employs the largest workforce in
the 1970s. However, reliance on foreign loans all three countries.
continued. 2. Industry contributes the highest percentage
to GDP in China.
88. Which of the following statements is true about
3. India’s service sector contributes more to
China’s economic reforms?
GDP than agriculture and industry combined.
1. China’s reforms began in the 1990s.
2. The Great Leap Forward campaign of 1958 4. Pakistan’s industrial sector has shown
was part of the reform period. consistent double-digit growth.
3. Post-reform, China established Special (a) Only 1 and 3 are correct
Economic Zones (SEZs) to attract foreign (b) Only 1, 2 and 3 are correct
investment. (c) Only 2 and 4 are correct
4. Agricultural reforms in China were (d) All statements are correct
unsuccessful in fostering rural industry Ans : OD 2017
growth.
(b) Only 1, 2 and 3 are correct
(a) Only 3 is correct
Agriculture employs the largest workforce in all
(b) Only 1 and 2 are correct
three countries, China’s industry leads in GDP
(c) 3 and 4 are correct
contribution and India’s service sector dominates
(d) Only 4 is correct
its GDP. Pakistan’s industrial growth has not
Ans : SQP 2005 been consistent.
(a) Only 3 is correct
91. Which of the following statements about human
China’s reforms began in 1978, not the 1990s. The
development indicators in China is incorrect?
Great Leap Forward occurred before the reform
1. China has the highest Human Development
period. Agricultural reforms were successful.
Index (HDI) value among the three countries.
Post-reform, SEZs were established to attract
2. China has the lowest infant mortality rate.
investment.
3. China’s maternal mortality rate is higher
89. Which of the following is true about the than India’s.
demographic indicators of India, China and 4. China has the highest percentage of people
Pakistan? with access to basic sanitation.
1. China has the highest life expectancy at (a) Only 1 is incorrect
birth. (b) Only 2 is incorrect
2. India has the highest fertility rate. (c) Only 3 is incorrect
3. Pakistan has the highest population growth (d) All statements are correct
rate.
4. All three nations have a sex ratio favoring Ans : FOREIGN 2016

males. (c) Only 3 is incorrect

(a) Only 1 and 3 are correct China’s maternal mortality rate (29) is
(b) Only 2 and 4 are correct significantly lower than India’s (133). The other
(c) Only 1, 3 and 4 are correct statements about China’s HDI, infant mortality
(d) All statements are correct and sanitation are correct.
Ans : COMP 2018
92. Which of the following describes the challenges
(c) Only 1, 3 and 4 are correct faced by Pakistan in the post-reform period?
China has the highest life expectancy (76.9 years) 1. Heavy reliance on remittances from workers
and Pakistan has the highest population growth abroad.
rate. India does not have the highest fertility rate; 2. Increased dependence on foreign loans.
Pakistan does. 3. Growth in industrial output through
institutional reforms.
4. Lack of technical changes in agriculture.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 497

69. Assertion : The Great Leap Forward campaign (a) Assertion and Reason both are correct
was initiated in 1968 by Mao. statements and Reason is correct explanation
Reason : The Great Leap Forward campaign was for Assertion.
initiated to modernize China’s economy. (b) Assertion and Reason both are correct
(a) Assertion and Reason both are correct statements but Reason is not correct
statements and Reason is correct explanation explanation for Assertion.
for Assertion. (c) Assertion is true but Reason is false.
(b) Assertion and Reason both are correct (d) Assertion is false but Reason is true.
statements but Reason is not correct
Ans : DELHI 2023
explanation for Assertion.
(c) Assertion is true but Reason is false. (c) Assertion is true but Reason is false.
(d) Assertion is false but Reason is true.
73. Assertion : Special Economic Zones were set up to
Ans : FOREIGN 2007 attract foreign investors.
(d) Assertion is false but Reason is true. Reason : China wanted to transform its agrarian
economy into a modern economy through the
70. Assertion : The post-reform period saw rapid process of rapid industrialisation.
growth in economic development in China. (a) Assertion and Reason both are correct
Reason : The Commune system led to inequitable statements and Reason is correct explanation
distribution of food grains. for Assertion.
(a) Assertion and Reason both are correct (b) Assertion and Reason both are correct
statements and Reason is correct explanation statements but Reason is not correct
for Assertion. explanation for Assertion.
(b) Assertion and Reason both are correct (c) Assertion is true but Reason is false.
statements but Reason is not correct (d) Assertion is false but Reason is true.
explanation for Assertion.
Ans : DELHI 2008
(c) Assertion is true but Reason is false.
(d) Assertion is false but Reason is true. (a) Assertion and Reason both are correct
statements and Reason is correct explanation for
Ans : OD 2011
Assertion.
(c) Assertion is true but Reason is false.
74. Assertion : World Bank and IMF compelled
71. Assertion : During the reform process, China China to introduce reforms in 1978.
adopted dual pricing. Reason : In China, each reform measure was first
Reason : The annual growth rate of the population implemented at a smaller level and then extended
in China is much lower as compared to India. on a massive scale.
(a) Assertion and Reason both are correct (a) Assertion and Reason both are correct
statements and Reason is correct explanation statements and Reason is correct explanation
for Assertion. for Assertion.
(b) Assertion and Reason both are correct (b) Assertion and Reason both are correct
statements but Reason is not correct statements but Reason is not correct
explanation for Assertion. explanation for Assertion.
(c) Assertion is true but Reason is false. (c) Assertion is true but Reason is false.
(d) Assertion is false but Reason is true. (d) Assertion is false but Reason is true.
Ans : COMP2009 Ans : SQP 2010

(b) Assertion and Reason both are correct (d) Assertion is false but Reason is true.
statements but Reason is not correct explanation
for Assertion. 75. Assertion : Public investment in social
infrastructure has brought about positive results
72. Assertion : During 1980’s, economic growth rate in human development indicators in China.
of Pakistan was more than that of India. Reason : Development of infrastructural facilities
Reason : Pakistan followed the path of mixed in the areas of education and health and land
economic structure with equal participation of reforms have helped to improve the social and
the public and the private sector. income indicators.

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CH 13 : COMPARATIVE DEVELOPMENT EXPERIENCES OF INDIA
Ans : OD 2005
47. Which of the following features relate to the
(b) farmers and industrial units buying and selling Chinese economy?
fixed quantities at prices fixed by the government (a) growth due to manufacturing sector.
(b) highest density of population among the three
42. Number of children born to a woman in the Asian countries.
reproductive age on an average is called the (c) direct shift from primary to the tertiary
______. sector.
(a) fertility rate (d) policy of denationalisation in late 1970s.
(b) birth rate
(c) maternal rate Ans : OD 2010

(d) population growth rate (a) growth due to manufacturing sector.

Ans : FOREIGN 2006
48. In which year reforms were initiated in Pakistan?
(a) fertility rate (a) 1970
(b) 1980
43. Which of the following countries has the lowest (c) 1988
density of population? (d) 1991
(a) India
(b) China Ans : SQP 2018

(c) Pakistan (c) 1988

(d) None of these
49. Which of the following countries has the highest
Ans : SQP 2007
Gross Domestic Product (GDP)?
(b) China (a) India
(b) China
44. Which sector of the economy contributes the (c) Pakistan
highest to India’s GDP? (d) Bangladesh
(a) services
(b) industries Ans : COMP 2018

(c) agriculture (b) China

(d) none of the above
Ans : DELHI 2008
50. In which year China announced its first year plan?
(a) 1950
(a) services (b) 1953
(c) 1960
45. Choose the correct statement:
(d) 1965
(a) Pakistan is the most populous country in the
world. Ans : DELHI 2018

(b) One child norm Policy was adopted in India (b) 1953
(c) Pakistan is ahead of India in providing
improved sanitation facilities 51. In which period nationalisation of capital goods
(d) agriculture makes the highest contribution to industries took place in Pakistan?
China’s GDP (a) 1950s
Ans : COMP 2009 (b) 1960s
(c) 1970s
(c) Pakistan is ahead of India in providing
(d) 1980s
improved sanitation facilities
Ans : FOREIGN 2018
46. Which of the following countries initiated the
(b) 1960s
Great Leap Forward campaign?
(a) India 52. India is not a member of which of the following
(b) Pakistan regional/global economic grouping?
(c) China (a) SAARC (b) BRICS
(d) Bangladesh (c) G-7 (d) G-20
Ans : OD 2018 Ans : OD 2020

(c) China (c) G-7

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 499
Ans : COMP 2023
loans.
(d) Both statements 1 & 2 are false. 3. Consistent improvement in poverty and
sanitation indicators since reforms.
83. Which of the following statements about the 4. Shift from a mixed economy model to
developmental paths of India, Pakistan and China complete privatization.
is correct? (a) Only 2 is correct
1. India, Pakistan and China began their (b) Only 1 and 2 are correct
development strategies in different decades. (c) Only 3 is correct
2. All three nations started planning their (d) 1, 2 and 4 are correct
development strategies using Five Year Plans.
3. China implemented its first Five Year Plan Ans : FOREIGN 2021

before India and Pakistan. (a) Only 2 is correct

4. Pakistan never adopted the Five Year Plan Pakistan’s challenges include reliance on foreign
model. remittances and loans, inconsistent agricultural
(a) Only 1 and 2 are correct growth and difficulty repaying loans. Only
(b) Only 2 is correct statement 2 is accurate. Statements 1, 3 and 4
(c) 1, 2 and 3 are correct are incorrect.
(d) Only 4 is correct
86. Which of the following statements about China’s
Ans : COMP 2023
Great Leap Forward (GLF) campaign is correct?
(b) Only 2 is correct 1. GLF aimed at large-scale industrialization.
India, Pakistan and China adopted Five Year 2. Backyard industries were set up as part of
Plans for their development strategies. India GLF.
began in 1951, China in 1953 and Pakistan in 3. The GLF campaign faced setbacks due to
1956. The other statements are incorrect. droughts.
4. GLF was implemented after the economic
84. Which of the following statements about the reforms of 1978.
demographic indicators of India, China and (a) Only 1, 2 and 3 are correct
Pakistan is incorrect? (b) Only 2 and 4 are correct
1. China has the lowest population density (c) All statements are correct
among the three. (d) Only 1 and 4 are correct
2. Pakistan has the highest fertility rate among
the three. Ans : DELHI 2020

3. India has the highest proportion of urbanized (a) Only 1, 2 and 3 are correct
population among the three. GLF aimed at industrialization, promoted
4. All three nations exhibit a low and gender- backyard industries and faced setbacks due to
biased sex ratio. droughts. However, it was implemented before the
(a) Only 1 is incorrect 1978 reforms.
(b) Only 2 is incorrect
(c) Only 3 is incorrect 87. Which of the following statements about
(d) All are correct Pakistan’s development strategies is correct?
1. Pakistan followed a mixed economy model.
Ans : OD 2022
2. The Green Revolution led to mechanization
(c) Only 3 is incorrect in agriculture.
China has the highest urbanization rate (59%), 3. Nationalization of industries occurred in the
followed by Pakistan (37%) and India (34%). 1970s.
Thus, statement 3 is incorrect, while 1, 2 and 4 4. Pakistan completely stopped relying on
are correct. foreign loans in the 1980s.
(a) Only 1, 2 and 3 are correct
85. Which of the following correctly identifies a (b) Only 2 and 4 are correct
challenge in Pakistan’s economic development? (c) Only 3 and 4 are correct
1. Dependence on institutionalized agricultural (d) All statements are correct
growth.
2. Heavy reliance on foreign remittances and Ans : SQP 2019

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CH 13 : COMPARATIVE DEVELOPMENT EXPERIENCES OF INDIA

106. Agriculture contributes 16% to India’s GDP, 24% Ans : OD 2004

in Pakistan and 7% in China. However, China’s It is the proportion of literate adults to the total
industrial sector contributes 41% to GDP, making adult population in a country.
it the largest sector in its economy.
Which sector contributes the most to China’s 113. What do you mean by people below poverty line?
GDP? Ans : FOREIGN 2005
(a) Agriculture
It refers to individuals whose income and
(b) Industry
expenditure levels are inadequate to meet the
(c) Services
minimum specified calorie intake.
(d) None of the above
Ans : FOREIGN 2008 114. Out of the three Nations, which country has the
lowest access to improved sanitation?
(b) Industry
Industry contributes 41% to China’s GDP, the Ans : DELHI 2006
highest among all sectors. India’s success in providing sanitation facilities
to its citizens lags significantly behind China and
Pakistan.

ONE MARK QUESTIONS 115. Mention two growth indicators.

Ans : SQP 2007

107. Mention the problems faced by the Great Leap (i) The rate at which a country’s Gross Domestic
Forward campaign. Product (GDP) increases over time.
(ii) The share of different sectors in the total
Ans : DELHI 2024
GDP.
This campaign faced numerous challenges,
including a severe drought in China that caused 116. What do you mean by sectoral contribution?
the death of around 30 million people. Ans : COMP 2008

108. Why are regional and economic groups formed? It denotes the share of each economic sector in
the country’s GDP.
Ans : OD 2000

They are established to enhance the economic

strength of member countries.

109. Maternal Mortality Rate is high in _____

TWO MARK QUESTIONS
(China/Pakistan). (Fill up the blank with correct
alternative) 117. Explain briefly the problem faced by Great leap
Ans : FOREIGN 2020 forward campaign.
Pakistan. Ans : OD 2022

The Great Leap Forward (GLF) campaign,

110. Name two areas of development where Pakistan is
launched in 1958 in China to promote large-scale
lagging behind.
industrialization, faced significant challenges.
Ans : SQP 2011 Backyard industries were encouraged, but a severe
Health and Education. drought led to mass starvation, killing about 30
million people. The disaster was worsened by
111. What does a high maternal mortality rate imply? ineffective government responses to the famine
Ans : COMP 2003
and Russia’s withdrawal of professionals assisting
with industrialization due to conflicts with China.
It signifies a country’s inability to ensure adequate
and effective healthcare during childbirth. 118. Explain the significance of global economic groups
like SAARC, BRICS and ASEAN.
112. What is adult literacy rate?
Ans : FOREIGN 2009

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 501

(a) Only 1, 2 and 4 are correct Pakistan has the highest population growth
(b) Only 2 and 3 are correct rate and population density higher than China
(c) Only 1, 2 and 3 are correct but lower than India. Urbanization is lower in
(d) All statements are correct Pakistan than in India.
Ans : DELHI 2016
95. Which of the following is true about the human
(a) Only 1, 2 and 4 are correct development indicators of India, China and
Pakistan faced challenges such as reliance on Pakistan?
remittances, dependence on loans and a lack 1. India has the highest HDI value among the
of technical agricultural reforms. However, its three.
industrial output did not grow significantly 2. Pakistan has the lowest mean years of
through institutional changes. schooling.
3. China has the lowest poverty ratio.
93. Which of the following statements about India’s
4. Infant mortality rates are highest in Pakistan.
development strategy is correct?
1. India adopted the Five Year Plan model in (a) Only 1 and 2 are correct
1951. (b) Only 2, 3 and 4 are correct
2 The public sector was prioritized in India’s (c) Only 1, 3 and 4 are correct
early development. (d) All statements are correct
3. India continued its Five Year Plans beyond Ans : O D 2014
2017.
(b) Only 2, 3 and 4 are correct
4. India’s agriculture sector consistently
India does not have the highest HDI value; China
contributed the most to its GDP.
does. Pakistan has the lowest mean years of
(a) Only 1 and 2 are correct
schooling and the highest infant mortality rate,
(b) Only 1, 2 and 4 are correct while China has the lowest poverty ratio.
(c) Only 2 and 3 are correct
(d) All statements are correct 96. Which of the following correctly describes the
sectoral employment patterns in India, China and
Ans : SQP 2015
Pakistan?
(a) Only 1 and 2 are correct 1. India has the highest proportion of workforce
India adopted the Five Year Plan model in 1951 in agriculture.
and prioritized the public sector. However, Five 2. China’s workforce in services is higher than in
Year Plans ended in 2017 and agriculture does agriculture and industry.
not consistently contribute the most to GDP. 3. Pakistan has a balanced workforce distribution
across all three sectors.
94. Which of the following statements about the
4. Agriculture employs the largest proportion of
demographic indicators of Pakistan is true?
the workforce in all three countries.
1. Pakistan has the highest population growth
rate among the three nations. (a) Only 1, 2 and 4 are correct
2. Pakistan’s fertility rate is the lowest among (b) Only 1, 3 and 4 are correct
the three. (c) Only 1 and 4 are correct
3. Urbanization is lower in Pakistan than in (d) All statements are correct
India. Ans : FOREIGN 2013
4. Pakistan’s population density is higher than
(a) Only 1, 2 and 4 are correct
China’s but lower than India’s.
India has the highest workforce in agriculture
(a) Only 1 and 4 are correct
and services dominate employment in China.
(b) Only 2 and 3 are correct However, Pakistan does not have a balanced
(c) Only 1, 3 and 4 are correct workforce distribution.
(d) All statements are correct
Ans : COMP 2015

(c) Only 1, 3 and 4 are correct

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CH 13 : COMPARATIVE DEVELOPMENT EXPERIENCES OF INDIA

(a) Assertion and Reason both are correct (a) Statement 1 is true & Statement 2 is false.
statements and Reason is correct explanation (b) Statement 1 is false & Statement 2 is true.
for Assertion. (c) Both statements 1 & 2 are true.
(b) Assertion and Reason both are correct (d) Both statements 1 & 2 are false.
statements but Reason is not correct
Ans : OD 2023
explanation for Assertion.
(c) Assertion is true but Reason is false. (a) Statement 1 is true & Statement 2 is false.
(d) Assertion is false but Reason is true.
79. Statement 1 : Amongst India, China and Pakistan,
Ans : FOREIGN 2012 China is the largest nation and has the highest
(a) Assertion and Reason both are correct population density.
statements and Reason is correct explanation for Statement 2 : One-child policy introduced in the
Assertion. late 1970s in China led to a considerable decline
in the population growth rate.
(a) Statement 1 is true & Statement 2 is false.
(b) Statement 1 is false & Statement 2 is true.
STATEMENT BASED QUESTIONS (c) Both statements 1 & 2 are true.
(d) Both statements 1 & 2 are false.
Ans : FOREIGN 2023
76. Statement 1 : China has used Market system
(b) Statement 1 is false & Statement 2 is true
mechanism without losing political commitment
to create additional social and economic 80. Statement 1 : Great Proletarian Cultural
opportunities. Revolution was introduced in China in 1950’s.
Statement 2 : India, Pakistan and China have Statement 2 : China’s growth is mainly contributed
similar physical endowments but totally different by the manufacturing sector.
Political systems. (a) Statement 1 is true & Statement 2 is false.
(a) Statement 1 is true & Statement 2 is false. (b) Statement 1 is false & Statement 2 is true.
(b) Statement 1 is false & Statement 2 is true. (c) Both statements 1 & 2 are true.
(c) Both statements 1 & 2 are true. (d) Both statements 1 & 2 are false.
(d) Both statements 1 & 2 are false.
Ans : DELHI 2023
Ans : OD 2024
(d) Both statements 1 & 2 are false.
(c) Both statements 1 & 2 are true.
81. Statement 1 : Special Economic Zones (SEZ’s)
77. Statement 1 : China has used the market policy has led to huge Foreign Direct Investment
mechanism to create additional social and (FDI) flow to China.
economic opportunities for its citizens. Statement 2 : China’s rapid industrial growth was
Statement 2 : In China, Social Infrastructure the result of its economic reform in 1981.
created by the government brought positive (a) Statement 1 is true & Statement 2 is false.
results in human development indicators. (b) Statement 1 is false & Statement 2 is true.
(a) Statement 1 is true & Statement 2 is false. (c) Both statements 1 & 2 are true.
(b) Statement 1 is false & Statement 2 is true. (d) Both statements 1 & 2 are false.
(c) Both statements 1 & 2 are true.
(d) Both statements 1 & 2 are false. Ans : SQP 2023

Ans : FOREIGN 2024

(a) Statement 1 is true & Statement 2 is false.

(c) Both statements 1 & 2 are true. 82. Statement 1 : First Five Year Plan of China
commenced in the year 1956.
78. Statement 1 : China introduced structural Statement 2 : Both India and China adopted
economic reforms on its own, without any Socialist Economy model, following USSR.
pressure. (a) Statement 1 is true & Statement 2 is false.
Statement 2 : Scholars argue that in India, the (b) Statement 1 is false & Statement 2 is true.
economic reforms process led to the worsening of (c) Both statements 1 & 2 are true.
all the economic indicators. (d) Both statements 1 & 2 are false.

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 503

The pie chart shows that 59% of China’s population China’s SEZs attracted foreign investment post-
resides in urban areas, while the remaining 41% 1978. Remittances and loans were a key feature of
lives in rural areas. Pakistan’s strategy.

101. From the line graph showing population growth 103. Pakistan followed a mixed economy model with
rates from 2015 to 2019, which country has both public and private sectors. The Green
consistently had the lowest growth rate? Revolution boosted agriculture, but reliance on
remittances and loans grew. In the 1980s, Pakistan
shifted from nationalization to privatization.
Which of the following describes a key transition
in Pakistan’s economic policy after the 1970s?
(a) Adoption of the Green Revolution.
(b) Focus on the mixed economy model.
(c) Shift from nationalization to privatization.
(d) Heavy investment in Special Economic Zones.
Ans : SQP 2011

(c) Shift from nationalization to privatization.

Pakistan transitioned from nationalization in the
1970s to privatization in the 1980s. SEZs were
part of China’s strategy.

(a) India 104. China, India and Pakistan show demographic

(b) China differences. China has the largest population
(c) Pakistan and lowest growth rate. Urbanization is highest
(d) All have equal growth rates in China (59%), followed by Pakistan (37%) and
Ans : FOREIGN 2003
India (34%).
Which country has the highest rate of urbanization
(b) China among India, Pakistan and China?
The line graph shows that China’s population (a) India
growth rate is consistently the lowest, starting at (b) Pakistan
0.5% in 2015 and remaining at 0.46% by 2019. (c) China
India and Pakistan have higher growth rates (d) All three have equal urbanization rates.
throughout the period.
Ans : COMP 2010

(c) China
China leads in urbanization with 59%, followed
PASSAGE BASED QUESTION by Pakistan (37%) and India (34%).

105. China has the highest Human Development

102. India, Pakistan and China started their Index (HDI) among India, Pakistan and China,
development with Five Year Plans—India in 1951, with a value of 0.761. India’s HDI is 0.645, while
China in 1953 and Pakistan in 1956. Post-1978, Pakistan’s HDI is 0.557.
China introduced Special Economic Zones (SEZs) Which country among India, Pakistan and China
to attract foreign investment, while Pakistan has the highest Human Development Index (HDI)
relied heavily on remittances and loans. value?
What was a key feature of China’s development (a) India
strategy post-1978? (b) Pakistan
(a) Reliance on foreign remittances and loans. (c) China
(b) Implementation of Green Revolution policies. (d) All three have the same HDI value.
(c) Establishment of Special Economic Zones.
(d) Focus solely on agricultural development. Ans : OD 2009

Ans : DELHI 2012

(c) China
China’s HDI (0.761) is the highest, followed by
(c) Establishment of Special Economic Zones. India (0.645) and Pakistan (0.557).

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CH 13 : COMPARATIVE DEVELOPMENT EXPERIENCES OF INDIA

GRAPH BASED QUESTIONS (a) Agriculture

The bar graph shows that 43% of the workforce
in India is employed in agriculture, which is the
97. From the bar graph, which country has the largest proportion compared to industry (25%)
highest Human Development Index (HDI) value, and services (32%).
life expectancy and mean years of schooling?
99. From the pie chart showing sectoral contributions
to India’s GDP, which sector contributes the
highest percentage?

(a) India
(b) China
(c) Pakistan (a) Agriculture
(d) India and Pakistan (b) Industry
Ans : DELHI 2007 (c) Services
(d) All contribute equally
(b) China
The bar graph shows that China has the highest Ans : COMP 2005
HDI value (0.761), life expectancy (76.9 years) (c) Services
and mean years of schooling (8.1) among the The pie chart clearly shows that the services sector
three countries. India and Pakistan rank lower in contributes 54% to India’s GDP, which is higher
all these indicators. than agriculture (16%) and industry (30%).
98. From the bar graph, which sector employs the 100. From the pie chart showing urban and rural
largest proportion of the workforce in India? population distribution in China (2017-2018),
what percentage of the population resides in
urban areas?

(a) Agriculture
(a) 41% (b) 59%
(b) Industry
(c) 50% (d) 70%
(c) Services
(d) None of the above Ans : OD 2004

Ans : SQP 2006 (b) 59%

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 505

Global economic groups protect domestic growth among the three nations.
economies and enable nations to survive global
competition. These groups help developing 123. How do India, China and Pakistan differ in
nations face challenges from developed and Human Development Index (HDI) rankings?
other developing countries. They also foster Ans : FOREIGN 2014
collaboration, strengthen trade relations and help
China leads with an HDI value of 0.761 (rank 87),
member nations achieve sustainable economic
followed by India at 0.645 (rank 130). Pakistan
growth.
lags behind with an HDI value of 0.557 (rank
119. What similarities exist in the developmental 154). The disparities highlight differences in
paths of India, Pakistan and China? their progress in health, education and income
indicators.
Ans : DELHI 2010

India, Pakistan and China started development 124. What role does agriculture play in the economies
after independence, with India and Pakistan of India, China and Pakistan?
beginning in 1947 and China in 1949. All adopted Ans : DELHI 2015
Five-Year Plans and similar strategies, such as
Agriculture employs the majority in India (43%)
public sector creation and social development.
and Pakistan (41%) but contributes minimally to
Until the 1980s, they had comparable growth
GDP. In China, agriculture employs only 26% of
rates and per capita incomes, reflecting similar
the workforce but benefits from modernization
initial progress.
and contributes significantly to food security and
120. Highlight two major features of China’s exports.
development strategy.
125. Discuss the main reasons for China’s economic
Ans : SQP 2011 growth since the 1978 reforms.
China’s strategy includes the Great Leap Forward Ans : SQP 2016
(1958), which aimed for large-scale industrialization
China’s phased reforms focused on agriculture,
by promoting backyard industries and collective
trade and industry. The establishment of SEZs
farming. It also established Special Economic
and the Dual Pricing System helped modernize
Zones (SEZs) to attract foreign investment, boost
its economy and attract foreign investments.
manufacturing and integrate with the global
Additionally, infrastructural development and
economy.
policy changes encouraged private sector growth.
121. Describe Pakistan’s economic policy changes in
126. Why did Pakistan’s economic growth slow down
the 1970s and 1980s.
after the 1980s?
Ans : COMP 2012
Ans : COMP 2017
In the 1970s, Pakistan nationalized capital goods
Pakistan’s growth slowed due to reliance on
industries, giving the public sector a dominant
remittances and volatile agricultural exports.
role. By the late 1970s and 1980s, it shifted
Dependence on foreign loans and repayment
towards denationalization and private sector
challenges worsened the situation. Political
growth. Financial aid and remittances from the
instability and lack of structural reforms further
Middle East also supported economic recovery
impeded sustained economic progress.
during this period.
127. Compare the sectoral contributions to GDP in
122. Compare the population growth rates of India,
India, China and Pakistan.
China and Pakistan.
Ans : OD 2018
Ans : OD 2013
In 2018-19, agriculture contributed 16% to India’s
Pakistan has the highest population growth rate
GDP, 7% to China’s and 24% to Pakistan’s.
at 2.05%, followed by India at 1.03%. China
The service sector dominated GDP in all three,
has the lowest growth rate at 0.46% due to its
contributing 54% in India, 52% in China and 57%
effective one-child policy. These trends reflect
in Pakistan. The industrial sector also showed
varying levels of success in controlling population
significant output, particularly in China.

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CH 13 : COMPARATIVE DEVELOPMENT EXPERIENCES OF INDIA

THREE MARK QUESTIONS 130. From the given data, Compare and analyse the
Annual Growth of Population and Sex Ratio of
China and Pakistan, with valid reasons:
128. (a) “Scholars find son preference as a common Demographic Indicators, 2017-18
phenomenon in India, Pakistan and China.” Coun Estimated Annual Popula- Sex Ferti- Urbani-
Justify the given statement in the light of try Population Growth tion Ratio lity sation
skewed sex-ratio. (in of Density Rate
million) Popul- (per sq.
(b) State any two liberty indicators. ation km)

Ans : SQP 2024 India 1352 1.03 455 924 2.2 34

China 1393 0.46 148 949 1.7 59

(a) In all three countries, a preference for sons
has resulted in a low and biased sex ratio. Paki- 212 2.05 275 943 3.6 37
stan
India has the lowest ratio at 924 females
per 1000 males, followed by Pakistan at 943 Ans : FOREIGN 2024
and China at 949. Recently, all three nations
China, despite being the world’s most populous
have implemented measures to improve this
country in 2017-18, has a lower annual population
disparity.
growth rate (0.46%) compared to Pakistan’s
(b) The liberty indicator measures the extent
(2.05%) due to the One Child Policy introduced
of demographic participation in social and
in the late 1970s, which significantly reduced
political decision-making. Examples include:
population growth. The sex ratio, reflecting the
(i) The level of protection granted to citizens’
number of females per 1000 males, is low and
rights.
biased against females in all three countries. In
(ii) The independence of the judiciary and
China, it stands at 949 females per 1000 males,
adherence to the rule of law.
while in Pakistan, it is 943 females per 1000 males.
129. From the given data compare and analyse the
131. What are the various means by which countries
Population Density and Fertility Rate of China
are trying to strengthen their own domestic
and Pakistan, with valid reasons:
economies?
Demographic Indicators, 2017-18
Ans : FOREIGN 2019
Coun Estimated Annual Popula- Sex Ferti- Urbani-
try Population Growth tion Ratio lity sation Countries strengthen their domestic economies
(in of Density Rate
million) Popul- (per sq. by collaborating through regional and economic
ation km) groupings such as SAARC, ASEAN, EU, G-8
India 1352 1.03 455 924 2.2 34 and G-20, fostering mutual cooperation based
China 1393 0.46 148 949 1.7 59 on shared interests. They analyze development
Paki- 212 2.05 275 943 3.6 37
strategies of members to understand strengths
stan and weaknesses. Economic liberalization by
reducing government intervention enables
Ans : OD 2024 efficient market-driven activities, enhancing
(a) China has a lower population density (148 competitiveness globally. Moreover, globalization
persons per sq. km.) compared to India policies integrate economies, attracting foreign
(455 persons per sq. km.) and Pakistan (275 investments and technology, boosting overall
persons per sq. km.). This is due to China’s economic growth and resilience. These efforts
vast geographical area as the third largest collectively reinforce national economic structures
country and its low annual population growth and global competitiveness.
rate.
(b) Fertility rate, the average number of children 132. Describe the path of developmental initiatives
born to a woman during her reproductive taken by Pakistan for its economic development.
years (15-45), is 1.7 in China due to its One Ans : DELHI 2020
Child Policy. Pakistan has the highest fertility
Pakistan’s development path involved adopting a
rate at 3.6, followed by India at 2.2.
mixed economic model with public and private
sector coexistence. It implemented a regulated
policy framework focusing on import substitution

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 507

and industrialization, including tariff protection Demographic Indicators, 2017-18

and import controls. Mechanization and public
Coun Estimated Annual Popula- Sex Ferti- Urbani-
infrastructure investment, particularly in try Population Growth tion Ratio lity sation
agriculture, were prioritized. Initially, capital (in of Density Rate
million) Popul- (per sq.
goods industries were nationalized, but the focus ation km)
later shifted to denationalization and private India 1352 1.03 455 924 2.2 34
sector encouragement. Incentives were provided
China 1393 0.46 148 949 1.7 59
to attract private investment, creating a favorable
Paki- 212 2.05 275 943 3.6 37
environment for economic growth and new stan
ventures.
Ans : DELHI 2020
133. Compare and analyse the given data of India and
China, with valid reasons: China’s population growth rate is notably
low at 0.46%, reflecting the impact of the One
Country Annual growth rate Gender ratio (Per Child Policy, while Pakistan’s growth rate is
of population (2015) thousand males) significantly higher at 2.05%, over four times
India 1.2% 929 China’s rate. Additionally, China’s urbanization
China 0.5% 941 rate is relatively high at 59%, a result of sustained
developmental strategies. In contrast, Pakistan’s
Ans : SQP 2020 urbanization rate is lower at 37%, indicating a
comparatively lesser degree of urbanization.
Globally, one in every six people is either Indian
or Chinese. Although China is the most populous 136. State certain similarities in the development path
country, its annual population growth rate (0.5%) of India, Pakistan and China.
is lower than India’s (1.2%) due to China’s One
Child Policy introduced in the 1970s. Both Ans : DELHI 2018

countries face a low gender ratio, reflecting bias India, Pakistan and China share similarities in their
against females. In India, there are 929 females developmental paths. All began their development
per 1000 males, while in China, the ratio is slightly journeys around the same period, with India and
better at 941 females per 1000 males. Pakistan gaining independence in 1947 and China
forming the People’s Republic in 1949. Planning
134. Compare and analyse the Annual Growth rate of strategies were initiated similarly, with India’s Five-
population of India and China. Year Plan starting in 1951, Pakistan’s in 1956 and
Country Annual Growth rate of China’s in 1953. India and Pakistan emphasized
population (2015) public sectors and social development expenditure.
By the 1980s, all had comparable growth rates
India 1.2% and per capita incomes. Pakistan and China later
China 0.5% continued Five-Year Plan approaches, while India
transitioned from this model in 2017.
Ans : COMP 2020

China, the world’s most populous country, has 137. What is the significance of the one child norm
a lower annual population growth rate (0.5%) adopted by China in 1979?
compared to India (1.2%) due to its One Child Ans : COMP 2021
Policy introduced in the late 1970s. While effective China’s One Child Policy effectively reduced
in controlling population growth, it also caused its population growth rate but created long-
a decline in the child sex ratio and led to long- term demographic challenges. Over time, the
term demographic challenges, such as an aging proportion of elderly people in China’s population
population with a higher proportion of elderly to will significantly increase compared to the younger
young people. To mitigate these effects, China has demographic. This imbalance means fewer
now permitted couples to have two children. young individuals will bear the responsibility of
135. From the given data, Compare and analyse supporting a larger elderly population, which
Annual growth of Population and Urbanisation of could strain resources, hinder economic growth
China and Pakistan, with valid reasons: and reduce the working-age population, impacting
overall productivity.

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CH 13 : COMPARATIVE DEVELOPMENT EXPERIENCES OF INDIA

China ranks 91, India ranks 131 and Pakistan Sectors India China Pakistan
ranks 148 on the HDI scale.
Agriculture 16 7 24
147. Discuss the one child policy adopted by China. Industry 30 41 19
What were its objectives. Discuss its consequences.
Service 54 52 57
Ans : COMP 2014
Total 100 100 100
China’s one-child policy, introduced in 1979
as part of a birth planning program, aimed to Sectoral distribution of workforce (in %) 2018-19
control the rapid population growth by limiting
Sectors India China Pakistan
families to one child. In the mid-1980s, the policy
was modified to permit rural families a second Agriculture 43 26 41
child if the first was a girl. The primary objective Industry 25 28 24
was to curb the population growth rate, which
Service 32 46 35
was deemed excessively high by the government.
Consequences of the One-Child Policy: Total 100 100 100
1. Reduced Fertility and Birth Rates: The (i) In the last two decades, the contribution of
fertility and birth rates dropped significantly agricultural sector to GDP, which employs
after 1980. the largest proportion of workforce in all the
2. Declined Population Growth: The gap three countries, has declined.
between the birth and death rates narrowed. (ii) In the industrial sector, China has maintained
3. Fewer Births: An estimated 400 million births a double-digit growth rate, whereas for India
were prevented due to the policy. and Pakistan, the growth rate has declined.
4. Skewed Sex Ratio: A preference for sons led (iii) In the service sector, India and Pakistan have
to a male-dominated population, with 33.59 stagnated but China has managed to increase
million more men than women by 2016. the rate of growth of its service sector.
5. Increase in Female Fetus Abortions: The (iv) China has emerged as the manufacturing
desire for male children resulted in a rise in hub of the world. About one half of its GDP
abortions of female fetuses. originates from the industrial sector. The
6. Infanticide and Orphanages: Female service sector comes second and then the
infanticide increased, as did the number of agriculture sector.
girls in orphanages. (v) In India and Pakistan, there has been a direct
7. Incentives for Compliance: Families adhering shift from primary to the tertiary sector.
to the policy received financial benefits and
better employment opportunities. 149. Give a comparative overview of sectoral share of
8. Strict Enforcement: Measures like forced employment and Gross Domestic Product (GDP)
sterilizations and abortions were imposed to in India, China and Pakistan.
ensure compliance. Ans : FOREIGN 2019
This policy significantly influenced China’s
demographic and social structure but drew China and Pakistan have a higher proportion of
criticism for its ethical implications. urban population than India. Due to topographic
and climatic constraints, China has a smaller area
suitable for cultivation. Until the 1980s, over 80%
of China’s population depended on agriculture.
However, various government initiatives shifted
148. Discuss the contribution of various sectors in the
the workforce to sectors like handicrafts,
economy of India, China and Pakistan.
commerce and transport. By 2018-19, only 26%
Ans : OD 2018 of China’s workforce was engaged in agriculture,
Sectoral contribution: In all the three economies, contributing 7% to its GDP (now GVA). In
the industry and service sectors have less contrast, agriculture accounted for 16% of India’s
proportion of workforce, but they contribute more GVA and 24% of Pakistan’s GVA, with 43% of
in terms of output. India’s workforce and 41% of Pakistan’s engaged
Sectoral contribution to GVA (in %) 2018-2019 in farming.
The industrial sector in China employed 28%

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 509

China’s rapid economic growth is attributed to society where socialist principles shaped work,
several key factors. Firstly, reforms were initiated production and social structures.
in agriculture, foreign trade and investments, later The campaign had two primary objectives:
extending to industry. The country prioritized 1. To create an industrialized economy to catch
export-oriented domestic production and utilized up with the West.
its cheap labor force for a cost advantage. 2. To establish a collectivized society defined by
Transitioning from a centrally planned to a market socialist values.
economy also played a pivotal role. Foreign direct The Great Leap Forward aimed for large-scale
investment surged, while the introduction of dual industrialization, encouraging people to set
pricing allowed fixed government rates alongside up backyard industries. It also introduced the
market prices. Additionally, the establishment of commune system, where people collectively
Special Economic Zones (SEZs) attracted foreign cultivated land. However, the campaign was not
investors, boosting industrial and trade activities successful due to inadequate central planning.
significantly. These strategic measures collectively In industry, unattainable production quotas led
propelled China’s economic transformation. to rushed, low-quality outputs. Additionally, the
promotion of inexperienced and unskilled workers
144. Explain the following: to leadership roles resulted in inefficient labor and
(i) The Great Leap Forward campaign resource management.
(ii) Great Proletarian Cultural Revolution In agriculture, leadership was also assigned
Ans : FOREIGN 2012 to inexperienced individuals. The lack of worker
incentives to meet quotas, as profits from
In 1958, Mao Zedong launched the Great Leap
extra efforts were not shared, further hindered
Forward (GLF) to modernize China’s agrarian
productivity. These issues led to a devastating
economy through rapid industrialization. The
famine, causing the deaths of approximately 30
campaign encouraged setting up backyard
million people and leaving a lasting impact on
industries and introduced communes in rural
China.
areas, where collective farming was practiced. By
1958, 26,000 communes encompassed nearly the 146. Explain the meaning and implications of the
entire rural population. However, the GLF faced following:
severe challenges, including a devastating drought 1. Life expectancy at birth
that led to the deaths of about 30 million people. 2. Infant mortality rate
Later, in 1965, Mao initiated the Great Proletarian 3. Human Development Index
Cultural Revolution (1966–76), sending students
and professionals to the countryside to learn from Ans : SQP 2013

rural life. Industrialization efforts also suffered 1. Life Expectancy at Birth: This indicates the
as Russian experts withdrew amidst Sino-Soviet average number of years a person is expected
conflicts. to live. A higher life expectancy reflects a
longer and more active average lifespan.
145. Discuss the Great Leap Forward campaign Among India, China and Pakistan, China
initiated by China. What were its objectives. boasts the highest life expectancy, followed
Why was the Great Leap Forward a failure? by India, with Pakistan ranking the lowest.
Ans : DELHI 2019 2. Infant Mortality Rate (IMR): This metric
represents the number of infant deaths (before
The Great Leap Forward campaign, initiated
one year of age) per thousand live births in a
by Chinese communists between 1958 and the
year. A lower IMR signifies better health and
early 1960s, sought to address China’s industrial
sanitation facilities, as most infant deaths
and agricultural challenges by organizing its
result from poor hygiene and inadequate
vast population, particularly in rural areas.
healthcare. China has the lowest IMR,
This campaign emphasized labor-intensive
reflecting superior healthcare and sanitation,
industrialization, prioritizing manpower over
while Pakistan records the highest.
machinery and capital investment. It aimed to
3. Human Development Index (HDI): HDI is
transform China into a competitive industrialized
a crucial measure of human development,
nation capable of rivaling the West. Additionally,
where a higher HDI value corresponds to
the campaign focused on fostering a collectivized
greater growth and development. Globally,

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CH 13 : COMPARATIVE DEVELOPMENT EXPERIENCES OF INDIA

reforms. The Commune system ensured equitable reduce carbon emissions and expressed confidence
food distribution and granting individual land in its ability to assist other countries.
plots for cultivation significantly improved the The 2020 report reveals that India’s life
livelihoods of the poor. This success in agriculture expectancy at birth in 2019 was 69.7 years,
laid the groundwork for rural industrial growth compared to Bangladesh at 72.6 years and
and further reforms. Pakistan at 67.3 years. Additionally, India’s
gross national income per capita declined to USD
154. Give a brief comparison between Indian economy 6,681 in 2019 from USD 6,829 in 2018, based on
and Pakistan’s economy. purchasing power parity (PPP), which compares
Ans : FOREIGN 2023 currencies by evaluating the prices of similar
goods in different countries.
India and Pakistan share similarities and
India’s HDI value for 2019 is 0.645, placing
differences in their economies. Both nations adopt
the country in the medium human development
a mixed economic system, blending public and
category and ranking it 131 out of 189 nations
private sectors. Economic reforms were introduced
and territories. Between 1990 and 2019, India’s
in Pakistan in 1988 and in India in 1991. India
HDI value rose from 0.429 to 0.645, marking a
excels in telecommunications, information
50.3% improvement over three decades.
technology and human capital formation, while
Pakistan leads in urbanization and sanitation (i) China discontinued the one child policy
facilities. However, India outperforms Pakistan in because:
human development indicators, including infant (a) there were more elderly people in its
mortality rate, maternal mortality rate and adult population
literacy rate, highlighting better social and health (b) the growth rate of the population
outcomes. These distinctions underline the diverse decreased
developmental trajectories of the two nations (c) China’s workforce decreased
despite shared economic systems. (d) both (a) and (c)
(ii) An upward movement in HDI shows:
What does a high HDI indicate?
CASE BASED QUESTION (a) deterioration of an economy
(b) development of an economy
(c) stagnation of an economy.
155. Read the paragraph given below and answer the (d) downfall of an economy.
questions that follow: (iii) Identify the indicators of human development?
India has slipped two positions on the Human (a) GDP per capita
Development Index (HDI), as per the 2020 (b) primary consumption rate
Human Development Report released by the (c) morbidity
United Nations Development Programme (d) Global burden of diseases
(UNDP). Previously ranked 131 among 189 (iv) China’s growth is mainly contributed by the
countries in 2019, Asia’s third-largest economy _____ sector and India’s growth by the
saw a decline despite steady progress. The HDI _____ sector.
measures a nation’s average achievements in three (a) manufacturing, agriculture
key dimensions of human development: education, (b) services, manufacturing
life expectancy and per capita income, which (c) agricultural, services
collectively reflect health, education and living (d) manufacturing, services
standards. Notably, India was ranked 129 in 2018.
While India is ranked 131, neighboring Ans :
countries like Bhutan (129), Bangladesh (133), (i) (d) both (a) and (c)
Nepal (142) and Pakistan (154) have also been (ii) (b) development of an economy
highlighted in the report. UNDP Resident (iii) (a) GDP per capita
Representative Shoko Noda explained that the (iv) (d) manufacturing, services
ranking drop does not imply poor performance by
India but rather reflects better advancements by
other nations. He commended India’s efforts to

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 511

of the workforce and contributed 41% to GVA. 151. Discuss the main reasons responsible for the
India’s industry employed 25% of its workforce, emergence of poverty in Pakistan.
generating 30% of GVA, while Pakistan’s industry
Ans : SQP 2016
employed 24% but contributed only 19%. Across
all three countries, the service sector dominates, The emergence of poverty in Pakistan stems from
contributing the most to GVA and emerging as a multiple factors. First, the nation has struggled
significant employer. with unstable institutional reforms in agriculture,
Between 1980 and 2019, the service sector workforce resulting in a volatile sector highly dependent on
grew from 17% to 32% in India, 12% to 46% in monsoon for good harvests. Second, its economy
China and 27% to 35% in Pakistan. Agricultural heavily relies on foreign remittances, aid from
growth has declined in all three nations over the Western countries and unpredictable agricultural
last three decades. China has achieved notable exports, making growth susceptible to setbacks
growth in its service sector, whereas India’s in these areas. Third, political instability has
growth has been driven primarily by services. escalated public expenditure on law and order.
In Pakistan, all three sectors have experienced Lastly, prioritizing a strong defense system
deceleration. China’s combined manufacturing has diverted significant resources away from
and service sectors have significantly propelled its developmental spending, further hindering
overall growth, while India has relied heavily on progress and exacerbating poverty in the country.
services.
152. Give an appraisal of the developmental initiatives
Sector Contribution to GVA Distribution of taken by Pakistan for its economic development.
workforce
Ans : COMP 2017
India China Pakistan India China Pakistan
In the 1990s, Pakistan experienced economic
Agri- 16 7 24 43 26 41
culture
decline compared to the 1980s, with slower GDP
growth and rising poverty. Key factors included
Industry 30 41 19 25 28 24
reliance on good harvests for agricultural growth
Services 54 52 57 32 46 35 and food supply, rather than systematic technical
Total 100 100 100 100 100 100 advancements. Economic stability fluctuated
with harvest success. Foreign exchange earnings
150. Discuss the reasons for the slowdown in the GDP depended on remittances from Middle East
growth of China in the recent past. workers and exports of unstable agricultural
products. Additionally, rising foreign debt and
Ans : DELHI 2015
repayment challenges intensified economic
Key reasons for China’s GDP growth slowdown difficulties. However, recent years have seen
include: economic recovery, with sustained growth and
1. Global Economic Slowdown: Reduced demand improved macroeconomic indicators, reflecting
for Chinese products due to sluggish global stability and progress in Pakistan’s economy.
economies.
2. Skilled Labor Migration: A significant 153. Give an appraisal of the development strategies
migration of skilled workers seeking higher followed by China.
wages abroad, leading to a workforce deficit. Ans : OD 2022
3. Sustainability Challenges: Rapid GDP
growth has posed challenges to sustainable China initiated reforms to address dissatisfaction
development, straining resources and the with its slow economic growth and lack of
environment. modernization. The leadership believed that the
4. Declining Domestic Demand: A notable Maoist approach—emphasizing decentralization,
drop in domestic consumption has further self-sufficiency and avoidance of foreign technology
contributed to the slowdown in China’s GDP and capital—had failed. Despite efforts like
growth. land reforms, collectivization and the Great
These factors collectively underscore the Leap Forward, per capita grain output showed
challenges faced by China in maintaining its high minimal improvement. However, infrastructure in
economic growth rate. education, health and small enterprises positively
influenced social and income indicators post-

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CH 13 : COMPARATIVE DEVELOPMENT EXPERIENCES OF INDIA

138. Compare and analyse the following information 141. Why is human development considered good for
related to Annual Growth of Gross Domestic the physical environment?
Product (GDP) of India and China:
Ans : COMP 2020
Annual Growth of Gross Domestic Product
Human development is viewed as a pathway to
Country 1980-90 2015-17 higher productivity, as a well-nourished, healthy,
India 5.7 7.3 educated and skilled population is a valuable
asset. Poverty contributes to environmental
China 10.3 6.8 issues such as deforestation and soil degradation.
Ans : OD 2023
Consequently, human development, which aids in
poverty alleviation, also positively impacts the
Between 1980 and 1990, China achieved a physical environment by reducing environmental
remarkable double-digit GDP growth rate of degradation and promoting sustainable practices.
10.3%, while India’s growth rate was 5.7%.
However, during 2015-17, China’s growth rate
declined to 6.8%, whereas India experienced an
upswing, with its GDP growth increasing from
5.7% to 7.3%.
FOUR MARK QUESTIONS
139. Define Liberty Indicator. Give some examples
142. Why is China considered to be ahead of India in
Ans : FOREIGN 2022 majority of economic and social aspects?
The liberty indicator measures the degree of Ans : DELHI 2024
demographic participation in social and political
India and China have pursued growth and
decision-making. Examples include:
development for over six decades, achieving
(i) The extent of protection provided to citizens’
diverse outcomes:
rights.
1. China is more developed than India, with a
(ii) The level of judicial independence and
robust export-oriented manufacturing sector,
adherence to the rule of law.
while India lags in this area.
The Human Development Index (HDI) is
2. China’s economic reforms have significantly
considered incomplete without incorporating
reduced poverty, whereas poverty remains a
these indicators, as they are essential for assessing
major issue in India despite reforms.
true societal progress and human well-being.
3. Superior infrastructure in transportation,
140. Why is HDI is considered multidimensional? communication, energy and banking gives
China an edge over India.
Ans : SQP 2021
4. China’s focus on education and health
The Human Development Index (HDI) is a investments has resulted in better human
composite measure of human development, development indicators than India.
assessing average achievements in health, 5. Economic reforms began earlier in China
education and living standards. While it does (1978) than in India (1991).
not replace GNP, it enhances understanding of 6. China excels in attracting foreign direct
societal well-being. Key features include: investment (FDI), aided by SEZs and liberal
(i) Measuring education and health alongside FDI policies, including in retail.
income. 7. Replacing the Commune farming system with
(ii) Directing policymakers’ focus toward the household cultivation revolutionized Chinese
ultimate goals of development. agriculture, while land ownership remained
(iii) Treating upward movement in HDI as state-controlled.
economic progress. These factors have driven China’s faster economic
(iv) Addressing disparities in income, avoiding the progress compared to India.
relative deprivation linked to GNP.
Thus, HDI is a multidimensional and more 143. Evaluate the factors that led to the rapid economic
meaningful national average compared to GNP. development in China.
Ans : OD 2011

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CBSE CHAPTERWISE QB CLASS 12 ECONOMICS PAGE 513

156. Read the paragraph given below and answer the improved sanitation facilities
questions that follow: (iii) False
India and Pakistan began their economic journeys (iv) 4 – D
around the same time post-independence. While
Pakistan’s per capita GDP once surpassed India’s 157. Read the paragraph given below and answer the
in the 1960s, India has since overtaken Pakistan questions that follow:
on nearly every economic front. Since initiating reforms in 1978, China’s GDP
Today, India is the fifth-largest economy has grown nearly 10% annually, lifting over 800
globally, recently surpassing the UK, while million people out of poverty and improving
Pakistan struggles with a weak economy and access to health and education. Now an upper-
growing debt. India’s GDP is nearly 10 times middle-income country, poverty alleviation must
that of Pakistan, which ranks 45th globally. focus on vulnerabilities of those still considered
Additionally, India ranks 63rd in the World poor, including urban populations.
Bank’s 2020 Ease of Doing Business, ahead of China’s resource-intensive growth model,
Pakistan at 108th. based on manufacturing, exports and low wages,
India has transitioned from an agrarian has reached its limits, creating economic, social
economy to a global economic power, with the and environmental imbalances. To reduce these,
service sector contributing over 60% to GDP. China must transition to high-end manufacturing,
Manufacturing is also pivotal, supported by services and consumption-driven growth.
initiatives like ‘Make in India,’ driving economic Growth has slowed due to structural issues like
growth further. a declining labor force and reduced productivity.
The challenge is to find new growth drivers while
(i) Pakistan is ahead of India in the following addressing the consequences of past development.
Human Development indicator: Institutional gaps must also be bridged, with
(a) people below poverty line the state fostering stable market expectations, a
(b) percentage of undernourished population fair business environment and strong regulatory
(c) life expectancy at birth systems.
(d) maternal mortality
(i) Following economic reforms were introduced
(ii) Choose the correct statement: by China in 1978:
(a) China’s economic growth is mainly (a) the dual pricing system
contributed by the service sector (b) setting up of special economic zones
(b) One child policy was adopted in Pakistan (c) introduction of Green Revolution
(c) Manufacturing sector contributes the (d) both (a) and (b)
highest in GDP in India
(d) Pakistan is ahead of India in providing (ii) In China, the Commune system is related to
improved sanitation facilities _____ sector.
(a) agriculture
(iii) China has a very high fertility rate compared (b) industry
to India and Pakistan. (True/False) (c) service
(iv) Identify the correct pair. (d) informal

Column I Column II (iii) Arrange the following events of China in

chronological order and choose the correct
1. One child policy A India alternative:
2. The great leap B Pakistan I. Great Proletarian Cultural Revolution
forward II. Great Leap Forward campaign
III. Introduction of Economic Reforms
3. Lowest growth of C Pakistan
IV. First Five-Year Plan
population
Options :
4. Lowest Fertility D China (a) II, IV, III, I
rate (b) IV, II, I, III
Ans : (c) II, IV, I, III
(d) IV, I, II, III
(i) (a) people below poverty line
(ii) (d) Pakistan is ahead of India in providing

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CH 13 : COMPARATIVE DEVELOPMENT EXPERIENCES OF INDIA

(iv) In comparison to China Indian Human

development is higher. (True/False)
Ans :
(i) (d) both (a) and (b)
(ii) (a) agriculture
(iii) (b) IV, II, I, III
(iv) True

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