Sample of Exam Hand Book in Economics (Macro & IED) For CBSE Exam 2020 in 80 Pages Only For 100% Marks (Shree Radhey Publications) To Be Released in A Week

Economics XII
Section-A Section-B
Macroeconomics Indian Economic Development
Unit Name of the Unit Marks Unit Name of the Unit Marks
1. National Income and Related Aggregates 10 Development Experience (1947-90) and
6. 12
2. Money and Banking 6 Economic Reforms since 1991
3. Determination of Income and Employment 12 7. Current Challenges facing Indian Economy 22
4. Government Budget and the Economy 6 Development Experience of India – A

8. 06
Comparison with Neighbours
5. Balance of Payments 6
Total 40
Total 40
CBSE Syllabus CBSE Syllabus

Unit 1: National Income and Related Aggregates Unit 6: Development Experience (1947-90) and
Economic Reforms since 1991
• What is Macroeconomics?
• Some basic concepts: consumption goods, capital goods, final goods, • A brief introduction of the state of Indian economy on the eve of
intermediate goods; stocks and flows; gross investment and depreciation independence.
• Circular flow of income (two sector model) • Common goals of Five Year Plans.
• Methods of calculating national income–Value Added or Product • Main features, problems and policies of:
method, Expenditure method and Income method – agriculture (institutional aspects and new agricultural strategy, etc.),
• Aggregates related to national income: Gross National Product (GNP), – industry (industrial licensing, etc.) and
Net National Product (NNP), Gross and Net Domestic Product (GDP – foreign trade.
and NDP)–at market price, at factor cost
• Economic Reforms since 1991:
• Real and Nominal GDP; GDP and welfare
Features and appraisals of liberalisation, globalisation and
Unit 2: Money and Banking privatisation (LPG policy)
• Money – meaning and supply of money – Currency held by the • Concepts of demonetization and GST
public and net demand deposits held by commercial banks
• Money creation by the commercial banking system Unit 7: Current Challenges facing Indian Economy
• Central bank and its functions (example of the Reserve Bank of
• Poverty
India) : Bank of issue, Govt. Bank, Banker’s Bank, Controller of Absolute and relative;
Credit through Bank Rate, CRR, SLR, Repo Rate and Reverse Repo Main programmes for poverty alleviation: A critical assessment
Rate, Open Market Operations, Margin requirement.
• Rural development
Unit 3: Determination of Income and Employment – Key issues
– credit and marketing - role of cooperatives;
• Aggregate demand and its components – Agricultural diversification;
• Propensity to consume and propensity to save (average and – Alternative farming - organic farming
marginal) • Human Capital Formation
• Short-run equilibrium output – How people become resource;
• Investment multiplier and its mechanism – Role of human capital in economic development;
• Meaning of full employment and involuntary unemployment – Growth of Education Sector in India
• Problems of excess demand and deficient demand; measures to correct • Employment
them– change in government spending, taxes and money supply – Formal and informal growth
– Problems and policies
Unit 4: Government Budget and the Economy • Infrastructure
• Government budget–meaning, objectives and components – Meaning and Types: Case Studies
• Classification of receipts – revenue receipts and capital receipts – Energy and Health: Problems and Policies - A critical assessment
• Classification of expenditure – revenue expenditure and capital • Sustainable Economic Development
expenditure Meaning, Effects of Economic Development on Resources and
• Measures of government deficit – revenue deficit, fiscal deficit Environment, including global warming.
and primary deficit: their meaning
Unit 8: Development Experience of India – A Comparison
Unit 5: Balance of Payments with Neighbours
• Balance of payments account– meaning and components; balance • A comparison with neighbours – India and Pakistan, India and
of payments deficit–meaning China
• Foreign exchange rate– meaning of fixed and flexible rates and • Issues: growth, population, sectoral development and other
managed floating Human Development Indicators.
• Determination of exchange rate in a free market
Exam Handbook in Economics XII for CBSE Examination 2020 – S. rimati Radharani (Shree Radhey Publications) 1
12 Marks
Unit 3 Determination of Income and Employment

Top Tip: MPS represents the slope of the savings function as it
3.1 Consumption and Savings Functions represents change in savings due to a given change in income
(MPS = DS/DY).
Ex-ante and Ex-post Measures
The planned values of the variables–consumption, investment Average propensity to consume (APC) is the consumption
per unit of income, i.e. C/Y. In other words, APC is the ratio of
or output of final goods–are called their ex-ante measures
consumption and income at a given level of income.
whereas the actual or realised value of the variables is Average propensity to save (APS) is the savings per unit
called their ex-post measures. The ex-ante variables (ex- of income, i.e. S/Y. In other words, APS is the ratio of savings
ante consumption and ex‑ante investment) are the basis of and income at a given level of income.
determination of national income. The sum of APC and APS is equal to one. Explanation: Y = C +
S. Dividing both sides of the equation by Y,
Ex-ante consumption: It refers to planned consumption Y/Y = C/Y + S/Y fi 1 = APC + APS.
expenditure on final goods in the economy. Therefore, APS = 1 – APC and APC = 1 – APS.
Ex-ante investment: It refers to planned investment expenditure
on final goods in the economy. Derivation of savings curve from consumption curve
Ex-ante savings: It refers to the planned savings at different Step 1: Take OS1 equal to OC because at zero income, negative
levels of income in an economy. savings is exactly equal to the autonomous consumption.
Step 2: From the break-even point B, we draw a perpendicular on X-axis
Consumption Function and Savings Function which cuts the X-axis at B1. At OB1 level of income, savings must be
Consumption function describes the relation between zero because at this level of income consumption equals income.
consumption and income. Consumption function: C = C + bY. Step 3: Join S1 and B1 and extend it by a straight line to get the
Consumption function has two components: savings curve S1S.
(i) Autonomous consumption (C): It refers to to the minimum
level of consumption for survival even at a zero level of income. It
is called autonomous consumption because the consumption
expenditure does not depend upon the level of income.
(ii) Induced consumption (bY): It is directly determined by the
level of income. Clearly, bY shows dependence of consumption
on income. For example, if the consumption function equation
is C = 100 + 0.8Y, C = 100 and MPC = 0.8, so when income
rises by `100, induced consumption rises by ` 80 (0.8 × 100).
Marginal propensity to consume (MPC) is the change in
consumption due to a given change in income. It is denoted by ‘b’
and is equal to DC/DY.
When income changes, change in consumption (DC) can never
exceed the change in income (DY). Therefore, the maximum value of Derivation of consumption curve from savings curve
MPC can be 1. Step 1: Draw a 45° line from origin.
Generally, MPC lies between 0 and 1 (inclusive of both values). This Step 2: Given the savings curve S1S, take OC = OS1 because in the
means that as income increases either the consumers do not increase economy the autonomous consumption is exactly equal to dissavings
consumption at all (MPC = 0) or use entire change in income on at zero income.
consumption (MPC = 1) or use part of the change in income for Step 3: At point B1, savings = 0. We draw a perpendicular from B1
changing consumption (0< MPC<1). till it intersects the 45° line at B.
Top Tip: MPC represents the slope of the consumption function Step 4: Join C and B and extend it by a straight line to get the
as it represents change in consumption due to a given change in consumption curve CC.
income (MPC = DC/DY). • Break-even point is the point at which total consumption is
Savings is that part of income which is not consumed. In equal to total income i.e., C = Y.Then APC = 1.
other words, S = Y – C. When the consumption and income are equal, the savings
Substituting C = C + bY, we get S = Y – (C + bY) will be zero. Hence, APS = S/Y = 0/Y = zero. However,
or S = – C + (1 – b)Y APC can never be zero even at zero level of income,
or S = – C + sY there will be some minimum amount of consumption (i.e.
where – C is the dissavings at zero level of income. Since even autonomous consumption) for survival.
at zero level of income, there will be some minimum amount • The value of APC can be greater than one. This is because total
of consumption (i.e. autonomous consumption) for survival, consumption can be greater than total income (i.e., C > Y), due
therefore at zero level of income, there will be dissavings. to the existence of autonomous consumption.
‘s’ is Marginal propensity to save (MPS), which refers to When total consumption is greater than total income, Savings
the change in savings due to a given change in income, i.e. DS/ will be negative and APS (= S/Y)will also be negative.
DY. It is equal to 1 – MPC.
It implies that the sum of MPC and MPS is equal to 1. Explanation: • When consumption is less than income (i.e., C < Y), APC (=
Since S = Y – C, therefore C/Y) is less than one.
MPS = DS/DY = D(Y – C)/DY = DY/DY – DC/DY = 1 – MPC. When consumption is less than income, saving is positive.
Then, APS (= S/Y) is positive.
• When AD > Y, it means buyers are planning to buy more
3.2 Investment Function goods and services than producers are planning to produce.
Investment expenditure refers to the addition to the stock of Thus, inventories in hand with the producers will start falling.
physical capital and change in inventories of a firm in an economy. As a result, producers will plan to raise the production. This will
Investment decisions by firms, such as whether to buy a new increase the level of output and income till Y = AD.
machine, depend, to a large extent, on the market rate of In Fig., at point E, C + I curve intersects the 45° line. At point E,
interest. However, for simplicity, we assume here that firms Y = AD. Equilibrium level of income/output is OY.
plan to invest the same amount every year. We can write the
ex-ante investment demand as I = I where I is a positive
constant which represents the autonomous investment in
the economy in a given year. So, investment curve will be a
horizontal straight line parallel to X-axis.
Autonomous investment refers to the investment expenditure
which is independent of income whereas, Induced investment
refers to the investment expenditure which is dependent on the
level of income.
3.3 Aggregate Supply, Aggregate Demand

Aggregate Supply (AS) is the value of total quantity of final Savings-Investment Approach: Derivation from C+I
goods and services produced in the economic teritory of a country. It
Approach
refers to the ex-ante, i.e. planned aggregate output in the economy. Under C + I approach that equilibrium level of income is determined
It is equal to the National Income and is represented by a 45 degree where AD = Y, or Y = C + I ...(i)
line from origin because at every point on it, AS = Y. Also Y = C + S ...(ii)
Aggregate Demand (AD) means total expenditure planned From (i) and (ii), we have C + S = C + I fi S = I.
to be incurred on final goods and services. Its components are: Thus, equilibrium level of income/output is that level of income at which
planned savings and planned investment are equal.
(i) Consumption Expenditure(C) (ii) Investment Expenditure(I)
(iii) Government’s final expenditure (G) (iv) Net exports.
In a two sector economy, there are only two components of
aggregate demand, viz. (i) Consumption Expenditure(C)
(ii) Investment Expenditure(I).
Consumption Expenditure(C)– It is that portion of income
which is spent on purchase of goods and services by the
consumers in an economy during the accounting period.
Investment Expenditure (I)– It refers to the addition to the stock of
physical capital and change in inventories of a firm in an economy.
Thus, in a two sector economy, AD = C + I fi AD = C + bY + I • When S > I, it implies AD < Y. There is unplanned accumulation of
inventories. Producers plan to cut down production. This reduces output
fi AD = A + bY, where A = C + I = Autonomous expenditure.
and income till Y = AD and hence, S = I.
Note that the slope of aggregate demand function is given by • When S < I, it implies AD > Y. Inventories start falling. Producers plan to
‘b’, i.e. MPC. Thus, the aggregate demand curve is parallel to the raise the production. This raises output and income till Y = AD and hence,
consumption curve since they have the same slope. S = I.
What is Effective Demand Principle? Discuss with the
Top Tip: In reality, the two components of autonomous help of imaginary numerical example.
expenditure behave in different ways. C remains more or less Effective Demand refers to that level of income/output where
stable over time. However, I undergoes periodic fluctuations. ex-ante aggregate demand is equal to the ex-ante aggregate
We have assumed that investment is autonomous, which means
supply, i.e. AD = AS.
that it does not depend on income. But, investment may increase
Numerical Example:
at lower interest rates.
Determination of Equilibrium Income or Output
(C = 100, MPC = 0.8 and I = 300)
3.4 Equilibrium Level of Income/Output Income Consumption Savings Investments Aggregate Aggregate
(Y) (C) (S = Y (I) Demand Supply
C + I approach or AD-AS approach –C) (AD = C + I) (AS = Y)
Equilibrium income/output (or effective demand) refers to 0 100 –100 < 300 400 > 0
that level of income/output where ex-ante aggregate demand 1000 900 100 < 300 1200 > 1000
is equal to the ex-ante aggregate supply, i.e. AD = AS. 2000 1700 300 = 300 2000 = 2000
Since AS = Y, therefore the economy is in equilibrium if 3000 2500 500 > 300 2800 < 3000
Y = AD fi Y = C + I (the equilibrium condition in a two 4000 3300 700 > 300 3600 < 4000
sector economy) At Y = 0, and Y = 1,000; AD > AS. This causes unplanned decrease in
• When AD < Y, it means buyers are planning to buy less goods inventories inducing producers to produce more output.
and services than producers are planning to produce. Thus, At Y = 2,000; AD = AS. This keeps the inventory level unchanged. Thus,
there will be unplanned accumulation of inventories. As a Effective Demand (AD = AS) is obtained at `2,000 crores level of
result, producers will plan to cut down production. This reduces income/output which is the equilibrium level of income/output.
output and income till Y = AD. At Y = 3,000 and Y = 4,000; AD < AS. This causes unplanned increase in
inventory of unsold goods inducing producers to produce less.
16 Exam Handbook in Economics XII for CBSE Examination 2020– S. rimati Radharani (Shree Radhey Publications)
What is the minimum and maximum value of investment
3.5 Investment Multiplier Mechanism
multiplier? Why does an initial change in investment
Investment Multiplier (k) is a measure of the effect of an causes a multiple change in final income?
initial increase in investment on increase in final income based Minimum value of investment multiplier is 1 when MPC = 0
1 since k = 1/(1 – MPC) = 1/(1–0) = 1/1 = 1.
on MPC since k = .
1 - MPC Maximum value of multiplier can be • (infinity) when MPC = 1
Investment multiplier is the ratio of the change in income due since k = 1/(1 – MPC) = 1/(1–1) = 1/0 = •.
to a given change in initial investment, i.e. k = DY/DI. However, in reality 0 < MPC < 1, therefore, 1 < k < •
(Investment multiplier ranges between one and infinity.)
Working of Investment Multiplier
fi k > 1 fi DY/DI > 1
Numerical Example: Suppose increase in investment by government
fi DY > DI. Thus, change in final income is greater
for a bullet train project, DI = `1000 crore and MPC = 0.8.
than initial change in investment since k >1.
Rounds DY DC DS
I 1000 800 200 3.4 Deficient Demand and Excess Demand
II 800 640 160 Meaning of involuntary unemployment and Full
III 640 512 128
employment
    Involuntary unemployment refers to a situation when a
Total 5000 4000 1000 person who is willing and able to work at the prevailing wage
• In Ist round, this additional investment will generate an extra rate, does not get work. It is distinguished from Voluntary
unemployment which refers to that part of population which
income of `1000 crore.
are able to work by voluntarily prefer not to work.
• Since MPC is 0.8, people will spend `800 crores (0.8 × 1000),
Full employment refers to a situation of no involuntary
which in return becomes additional income of other people
unemployment. Thus, full employment level of income/output
during second round (as one man’s expenditure is another
is that level of income where all the factors of production are
man’s income).
fully employed in the production process.
• Similarly, in third round `640 crores of additional income is
generated. Top Tip: Equilibrium level of output determined by the
• This process will go on infinitely till the total increase in equality, Y = AD does not necessarily mean the full
income is equal to multiplier times the initial investment. employment level of output. The equilibrium level of output may
Total increase in income, be more or less than the full employment level of output.
Ê 1 ˆ Ê 1 ˆ 1 If it is less than the full employment of output, it is due to the fact
DY = DI ◊ Á = 1000 ¥ Á = 1000 ¥ = 1000 ¥ 5 = `5000 crores
Ë 1 - MPC ˜¯ Ë 1 - 0.8 ˜¯ 0.2 that demand is not enough to employ all factors of production. This
situation is called the situation of deficient demand.
Value of multiplier, k = DY/DI = 5000/1000 = 5 On the other hand, if the equilibrium level of output is more than
In figure, observe that increase in income/output (DY) is the full employment level, it is due to the fact that the demand is
greater than the initial increase autonomous investment (DI). more than the level of output produced at full employment level.
That is, a change in investment causes a multiple change in This situation is called the situation of excess demand.
income. Deficient demand and deflationary gap
When aggregate demand is less than the full employment level
of aggregate supply, it is a situation of deficient demand.
Deficient demand gives rise to deflationary gap. Deflationary
gap is the amount by which the aggregate demand falls
short of full employment level of aggregate supply. It is called
deflationary because it leads to decline in prices in the long run.
The economy will be operating at under employment equilibrium
level. (When aggregate demand and aggregate supply are equal
at below full employment level, it is called under-employment
equilibrium.) It results into excess of output available over the
anticipated aggregate demand at full employment level.
In figure, aggregate demand is GQ, which is less than FQ, i.e. full
Relationship between MPC and investment multiplier employment level of aggregate supply. The deflationary gap is FG.
k = 1/(1 – MPC) Direct/Positive relation between MPC and
investment multiplier (k): If MPC rises, value of multiplier
increases. For example, if MPC of an economy increases from 0.6
to 0.8, value of multiplier increases from k = 1/(1–0.6) = 1/0.4
= 2.5 to k = 1/(1–0.8) = 1/0.2 = 5. Thus, investment multiplier
carries direct relation with rate of growth in an economy.
Relationship between MPS and investment multiplier
k = 1/MPS. Inverse/Negative relation between MPS and
investment multiplier: If MPS rises, value of multiplier decreases.
For example, if MPS of an economy increases from 0.2 to 0.5,
value of multiplier decreases from k = 1/0.2 = 5 to k = 1/0.5 = 2.
Thus, rising MPS hampers the rate of growth in the economy. That
is why, economists are concerned with rising MPS.
Remedy to correct the situation of deficient demand Fiscal policy measures: (i) Decrease in government expenditure:
and deflationary gap : To tackle the situation of deficient Decrease in government expenditure will reduce aggregate
demand, the aggregate demand has to be increased up to the demand and remove the inflationary gap. The fall in government
level that the stocks can be cleared. expenditure should be equal to the inflationary gap.
Fiscal policy measures: (i) Increase in government expenditure: (ii) Increase in taxes: The government may increase the rate of
Government should increase its own expenditure to leave more taxes (both direct and indirect taxes). This will reduce purchasing
personal disposable income. Then, aggregate demand will increase power in the hands of general public. This will help to decrease
to correct the deflationary situation. (ii) Decrease in taxes: The aggregate demand and reduce the inflationary gap.
government under its fiscal policy may decrease the rate of Monetary policy measures: Decrease in money supply: Central
taxes (both direct and indirect taxes). This will ensure greater Bank can decrease the money supply in the economy. Central
purchasing power in the hands of general public. This will help bank can use tools like bank rate, cash reserve ratio, repo and
to increase aggregate demand and remove the deflationary gap. reverse repo rates etc. to ensure lesser money in the hands
Monetary policy measures: Increase in money supply: Central bank of general public which would in turn decrease the aggregate
through its expansionary monetary policy can increase the money demand in the economy and be helpful in reducing/removing
supply in the economy. Central bank can use tools like bank rate, the inflationary gap.
cash reserve ratio, repo and reverse repo rates etc. to ensure
greater money in the hands of general public which would in turn “Analysing, Evaluating and Creating”
increase the aggregate demand in the economy and be helpful in type questions (with answers)
reducing/removing the deflationary gap. 1. Which of the two, average propensity to consume
Excess demand and inflationary gap or average propensity to save, can be negative and
When aggregate demand is more than the full employment why? (CBSE 2019) (3)
level of aggregate supply, it is a situation of excess demand. Ans. APC cannot be negative as even at zero level of income, there
will be some minimum amount of consumption (i.e. autonomous
Excess demand gives rise to inflationary gap. Inflationary gap
consumption) for survival. While, APS can be negative because
is the amount by which the aggregate demand exceeds the full
at zero level of income, there can be dis-savings.
employment level of aggregate supply. (or, The inflationary gap
2. Value of which of the following can be greater than
is the amount by which the actual aggregate demand exceeds the
level of aggregate demand required to establish the full-employment one and why? (CBSE 2019) (3)
equilibrium.) It is called inflationary because it leads to rise in (a) Marginal Propensity to Consume (MPC)
(b) Average Propensity to Consume (APC)
prices in the long run, called demand pull inflation, i.e., an
Ans. (b) The value of Average Propensity to Consume (APC) can
aggregate demand induced rise in the price level.
be greater that unit (1).
In figure, aggregate demand is GQ, which is more than FQ, i.e. full This is because total consumption can be greater than total
employment level of aggregate supply. The inflationary gap is GF. income, due to the existence of autonomous consumption.
3. Discuss the working of the adjustment mechanism in
the following situation :
(a) Ex-Ante Aggregate demand is greater than
Ex‑Ante Aggregate supply.
(b) Planned Investments are lesser than Planned
Savings. (CBSE 2019) (6)
Ans. (a) When ex-ante aggregate demand is greater than ex-
ante aggregate supply (AD>AS), buyers are planning
to, buy more goods and services than what producers
are planning to produce. It will lead to fall in planned
inventories below the desired level. The producers in
turn will produce more, which will raise the income level
i.e. AS, till AD becomes equal to AS.
(b) Planned investments are lesser than planned savings
(I < S) means buyers are planning to buy lesser output
Impact of excess demand in the economy: (i) On employment
as to what producers are planning to produce. It will lead
– There will be no change in the employment as the economy
to rise in planned inventories above the desired level. As
is already working at the full employment. Thus, there is no a result the producers will cut down production, leading
further scope of creation of employment. (ii) On output – Output to reduction of income till savings becomes equal to
cannot increase because full employment level of output is the investments.
largest output that the economy is capable of producing since 4. Discuss the working of the adjustment mechanism in
all resources are fully employed. the following situation :
(ii) On general price level – Production cannot be increased beyond (a) Aggregate demand is lesser than Aggregate
the full employment level. Increase in aggregate demand here Supply.
onwards, will only increase the general price level. (b) Ex-Ante Investments are greater than Ex-Ante
Remedy to correct the situation of excess demand and Savings. (CBSE 2019) (6)
Ans. (a) When Aggregate Demand is lesser than Aggregate
inflationary gap: In order to remedy the problem of excess Supply (AD<AS), buyers are planning to buy lesser
demand, the aggregate demand has to be reduced by an amount goods and services than what producers are planning
equal to the inflationary gap. This will keep the economy at full to produce. It will lead to rise in planned inventories
employment equilibrium but will lower the price level and thus above the desired level. The producers in turn will
combat the inflation. The aggregate demand may be reduced by produce less, which will reduce the income level i.e. AS.
taking recourse to fiscal policy or to monetary policy. This process will continue till AD becomes equal to AS.
(b) Ex-ante investments are greater than ex-ante savings Ans. (a)
The given statement is true; an excess of aggregate
(I > S)means buyers are planning to buy more output demand over full employment level of aggregate supply
as to what producers are planning to produce. It will represents a situation of inflationary gap, production
lead to fall in planned inventories below the desired cannot be increased beyond this level. Increase in AD
level. As a result the producers will raise production, here onwards, will increase only the general price level.
leading to increase in income till savings becomes equal
to investments. (b) The given statement is false.
5. “An economy facing unintended accumulation of Let the value of MPS = x. Therefore, MPC = 4x.
inventories would try to reduce aggregate demand.” We know that MPC + MPS = 1
Do you agree with the given statement? Support your x + 4x = 1
answer with valid reasons. (CBSE 2019 Compt.) (3) 5x = 1
Ans. The given statement is not correct. MPS (x) = 1/5 = 0.20
The situation of unintended accumulation of inventories Substituting the value of MPS in k = 1/MPS = 1/0.20 = 5
arises when ex-ante aggregate demand is lesser than the Thus, the value of multiplier is 5 and not 4.
ex-ante aggregate supply. This would pile up the stock with 10. Giving valid reasons, state whether the following
the producers, thus to tackle this situation the economy statements are true or false: (CBSE 2019 Compt.) (4)
must increase AD. (a) Ex-post investment means fixed capital with
6. State which of the following statements are true or production units during a particular period of
false. Give valid reasons. (CBSE 2019) (4) time.
(a) According to Keynesian theory of employment, (b) Marginal propensity to consume represents the
the state of full employment is obtained only slope of the consumption function.
when the economy is in equilibrium. Ans. (a) The given statement is false, as ex-post investment
(b) In a two-sector economy, if consumption is includes both fixed as well as inventory investment with
equal to income, average propensity to save will the production unit during a period of time
be zero. (b) The given statement is true, as it represents change
Ans. (a) The given statement is false – as per Keynesian theory in consumption due to a given change in income.
of Employment the economy can be in equilibrium at MPC = ΔC/ΔY
less than or more than full employment level also. 11. Giving reason state whether the following statements
(b) The given statement is true – if the consumption and are True or False: (CBSE 2018) (6)
income are equal, the savings will be zero. Hence, (i) Average propensity to save cannot be negative.
APS = S/Y = 0/Y = zero (ii) Value of marginal propensity to consume can be
7. State which of the following statements are true or greater than one.
false. Give valid reasons. (CBSE 2019) (4) (iii) Average propensity to consume can be greater
(a) According to Keynesian theory of employment, than one.
Ex-Ante savings and Expost savings are always Ans. (i) False, average propensity to save can be negative at a
equal. level when consumption is greater than income.
(b) In a two-sector economy if income is zero, (ii) False, value of marginal propensity to consume cannot
consumption will also be zero. be greater than one as change in consumption cannot
Ans. (a) The given statement is false, as ex-ante savings are those
be greater than change in income.
which all the households plan to make at different level of
income during a period, whereas ex-post savings are the (iii) True, average propensity to consume can be greater
actual amount of savings made in the economy during a than one, when consumption is greater than income.
period. So, the two may or may not be equal. 12. State giving reason whether the following statements
(b) The given statement is false, even at zero level of are true or false: (6)
income there is still some minimum consumption (a) Value of investment multiplier varies between
(autonomous consumption) in the economy, as it is zero and infinity.
essential for survival. (b) When marginal propensity to consume is zero, the
8. State which of the following statements are true or value of investment multiplier will also be zero.
false. Give valid reasons. (CBSE 2019) (4) (c) When marginal propensity to consume is greater
(a) According to Keynesian theory of employment, a than marginal propensity to save, the value of
state of under-employment can never exist in an investment multiplier will be greater than 5.
economy. Ans. (a) False: Value of investment multiplier, k = 1/(1–MPC).
(b) In a two-sector economy, if income is zero, Since 0 < MPC < 1, therefore, value of multiplier ranges
average propensity to consume will also zero. between 1 and ∞ (infinity).
Ans. (a) The given statement is false, according to Keynesian (b) False: Value of investment multiplier, k = 1/(1–MPC).
theory of employment the state of under employment When MPC = 0, k = 1/(1 – 0) = 1/1 = 1
can exist. This may occur at that level of income where (c) False: When MPC = MPS, MPS = 1/2 (since MPC + MPS = 1).
equilibrium between AD and AS happens at less than Value of multiplier = 1/MPS = 2
full employment level.
Therefore, when MPC > MPS, MPS < 1/2; Therefore, k > 2.
(b) The given statement is false, because when income is
zero, autonomous consumption may exist in economy 13. State giving reason whether the following statements
for survival, thus APC (C/Y) will not be zero. are true or false: (6)
9. Giving valid reasons, state whether the following (a) If MPC is double the MPS, value of investment
statements are true or false: (CBSE 2019 Compt.) (4) multiplier will be 2.
(a) An excess of aggregate demand over full (b) When MPC is equal to MPS, increase in national
employment level of aggregate supply represents income will be twice the initial increase in
a situation of inflationary gap. investment.
(b) If the ratio of Marginal Propensity to Consume (c) When investment multiplier is 1, the value of
(MPC) and Marginal Propensity to Save (MPS) is marginal propensity to consume is zero.
4 : 1, the value of investment multiplier will be 4.
Ans. (a) False: MPC = 2MPS ; MPC + MPS = 1
Numerical Questions (with solutions)
⇒ 2MPS + MPS =1
⇒ 3MPS = 1 1. Calculate autonomous consumption and induced
⇒ MPS = 1/3 consumption from the following:
Value of investment multiplier, k = 1/MPS = 3 National income = `1000 crore, MPS = 0.25 and
(b) True: Equality between MPC and MPS signifies that Consumption expenditure = `850 crore (3)
both of them are equal to 0.5 (as MPC + MPS = 1). Ans. C = C + bY, where b = MPC = 1 – MPS = 1 – 0.25 = 0.75
Therefore, value of investment multiplier (k) = 1/MPS = Therefore, 850 = C + 0.75 × 1000
1/0.5 = 2. 850 = C + 750 ⇒ C = 100
It means that increase in income in the economy will be (i) Autonomous consumption C = `100 crore
twice the initial increase in investment. (ii) Induced consumption, bY = `750 crore
(c) True: k = 1/(1 – MPC). 2. Given the consumption function of an economy
Since k = 1, therefore, 1 = 1/(1 – MPC) C = 100 + 0.8Y
⇒ 1 – MPC = 1 ⇒ MPC = 0 (a) Derive the corresponding savings function.
14. State giving reason whether the following statements (b) What is the value of MPS?
are true or false: (6) (c) Show that in this economy as income increases,
(a) An increase in the bank rate is effective to combat APC declines and APS increases.
inflation. (d) What is the level of income at Break-Even Point?
(b) In situation of deficient demand, the central Ans. (a) C = 100 + 0.8Y
bank raises cash reserve ratio. S = Y – C = Y – (100 + 0.8Y) = –100 + 0.2Y.
Ans. (a) True: During inflation, the Central bank increases the (b) From the consumption function, MPC = 0.8. Therefore,
bank rate. Therefore, commercial banks also increase MPS = 1 – MPC = 1 – 0.8 = 0.2.
their lending rates. This will discourage people to take (c) Y C S APC APS
loans. This will reduce the money supply and the level of 1000 900 100 0.9 0.1
aggregate demand in the economy to combat inflation.
2000 1700 300 0.85 0.15
(b) False: In situation of deficient demand, the Central
bank decreases the cash reserve ratio (CRR). As a 3000 2500 500 0.83 0.17
result, banks are required to hold smaller fraction of The table shows that as income increases from 1000 to
their deposits as cash reserves with the central bank. 3000, APC declines from 0.9 to 0.83 but APS increases
Therefore, the lending capacity of the banks increases. from 0.1 to 0.17.
It leads to an increase in money supply. This will raise (d) At Break even point, C = Y
the level of aggregate demand and correct the situation 100 + 0.8Y = Y ⇒ 0.2Y = 100
of deficient demand. Y = 100/0.2 = 500
15. (a) Currency is issued by the Central Bank, yet we Break even level of income = `500 crore
say that commercial banks create money. Explain. 3. Complete the following table:
(b) How is this money creation by commercial banks
Income APS MPC Consumption
likely to affect the national income? Explain.
1000 0.50 – 500
(CBSE 2015) (4)
Ans. (a) Money supply has two components: Currency and 2000 0.55 – –
demand deposits with commercial banks. Currency is 2500 0.60 – –
issued by the central bank while deposits are created by Ans. Y DY C DC S APS MPC
commercial banks by lending money to the people. In
1000 – 500 – 500 0.5 –
this way commercial banks also create money.
(b) Commercial banks lend money mainly to investors. 2000 1000 900 400 1100 0.55 0.4
The rise in investment in the economy leads to rise in 2500 500 1000 100 1500 0.6 0.2
national income through the multiplier effect. 4. Complete the following table:
16. Government of India launched ‘Jan-Dhan Yojna’,
Income Consumption APS MPS
which aimed at every household in the country to
have at least one bank account. Explain how deposits 400 240 0.4
made under the plan affected national income of the 800 440 – –
country. (CBSE 2015) (4) – 520 0.48 –
Ans. • Opening more bank accounts means more bank deposits.
Ans. Y DY C DC S DS APS APC MPS
• More deposits means increase in the lending capacity of
the commercial banks. 400 – 240 – 160 – 0.4 0.6 –
• More lending by banks means more investment in the 800 400 440 200 360 200 0.45 0.55 0.5
country. 1000* 200 520 80 480 120 0.48 0.52 0.6
• The rise in investment in the economy leads to rise in
*APC = C/Y. When APC = 0.52, C = 520
national income through the multiplier effect.
Therefore, 0.52 = 520/Y ⇒ Y = 520/0.52 = 1000
17. In the situation of inflation, more credit creation
5. In an economy, the ratio of average propensity to
by commercial banks has negative impact on the
consume and average propensity to save is 5 : 3. The
economy. How? (3)
level of income is ` 6000. How much is the savings?
Ans. Credit creation by commercial banks in inflationary situation
Calculate.
in the economy increases the money supply and hence
Ans. APC/APS = 5/3 ⇒ (C/Y)/(S/Y) = 5/3 ⇒ C/S = 5/3
aggregate demand. It creates the situation of excess
(Y – S)/S = 5/3 ⇒ (6000 – S)/S = 5/3
demand and inflationary gap if aggregate demand exceeds
⇒ S = 2250
the full employment level of output/income.
Therefore, savings in the economy are ` 2250 crore.
6. If in an economy consumption function is given by At equilibrium income Y = C + I
C = 100 + 0.75 Y, and autonomous investment is 5000 = 2500 + I
`150 crore. Estimate (i) Equilibrium level of income I = 5000 – 2500 = 2500
by C + I approach and (ii) Consumption and Savings \ Investment expenditure I = ` 2500 crore
at the equilibrium level of income. 11. Calculate Autonomous consumption expenditure
Ans. C = 100 + 0.75Y; I = ` 150 crore from the following data about an economy which is
(i) At equilibrium level of income: Y = C + I in equilibrium:
Y = 100 + 0.75Y + 150 ⇒ Y – 0.75Y = 250 National income ` 1200 crore
0.25Y = 250 ⇒ Y = 250/0.25 = 1000 Marginal propensity to save 0.20
Equilibrium level of income Y = ` 1000 crore Investment expenditure ` 100 crore
(ii) Consumption at the equilibrium level of income: Ans. Since MPS = 0.20, therefore, MPC = b = 1 – MPS = 1 – 0.20
C = 100 + 0.75Y = 100 + 0.75 (1000) = 0.80
= 100 + 750 = ` 850 crore Consumption function equation C = C + bY = C + 0.80Y
Savings at the equilibrium level of income: At equilibrium level of national income Y = C + I
S = Y – C = 1000 – 850 = ` 150 crore Y = C + 0.80Y + I
7. Savings function of an economy is S = –200 + 0.25Y. 1200 = C + 0.80 × 1200 + 100
The economy is in equilibrium when income is equal 1200 = C + 960 + 100 ⇒ C = 140
to ` 2000 crore. Calculate: (i) Investment expenditure Autonomous consumption expenditure = ` 140 crore
at equilibrium level of income and (ii) Autonomous 12. If in an economy savings function is given by S =
consumption. (–) 50 + 0.2 Y and Y = ` 2000 crore; consumption
Ans. (i) Equilibrium level of income Y = ` 2000 crore, Savings expenditure for the economy would be ` 1650 crore
function S = –200 + 0.25Y and the autonomous investment is ` 350 crore and
Savings at equilibrium level of income the marginal propensity to consume is 0.8. True or
S = –200 + 0.25(2000) = –200 + 500 = ` 300 crore False? Justify your answer with proper calculations.
At equilibrium, planned savings and planned investment Ans. Level of income Y = ` 2000 crore
expenditure are equal. So, investment expenditure at Savings S = –50 + 0.2Y
equilibrium level of income I = ` 300 crore = –50 + 0.2(2000) = –50 + 400 = ` 350 crore
(ii) From the Savings function S = –200 + 0.25Y, we get Consumption expenditure C = Y – S = 2000 – 350 = `1650
dissavings at zero income = ` 200 crore, which is equal to crore (Which is true.)
autonomous consumption. From the savings function equation, MPS = 0.2
Therefore, autonomous consumption = ` 200 crore. MPC = 1 – MPS = 1 – 0.2 = 0.8 (Which is true.)
8. Measure the level of ex-ante aggregate demand when At equilibrium level of income, Savings = Investment = `350
autonomous investment and consumption expenditure crore (Which is also true.)
(A) is ` 50 crore, and MPC is 0.8 and level of income Thus, all the given values are correct.
(Y) is ` 4000 crore. State whether the economy is in 13. Calculate Marginal Propensity to Consume from the
equilibrium or not (cite reasons). (NCERT) following:
Ans. Sum of autonomous investment (I) and autonomous Equilibrium income ` 350
consumption (C) = A = ` 50 crore, MPC = b = 0.8 and Consumption expenditure at zero income ` 20
national income (Y) = ` 4000 crore Investment ` 50
Ex-ante aggregate demand, AD = C + I Ans. Consumption expenditure at zero income (Autonomous
= C + bY + I = (C + I) +bY = A + bY consumption) C = 20,
= 50 + 0.8 × 4000 = `3250 crore Equilibrium income Y = 350, Investment I = 50
Since AD (` 3250 crore) is less than National Income Consumption function equation
(Y = `4000 crore), therefore, the economy is not equilibrium. C = C + bY = 20 + 350b
The economy is in equilibrium when AD = Y. At equilibrium level of national income Y = C + I
9. In an economy the autonomous investment is ` 60 350 = 20 + 350b + 50
crore and the marginal propensity to consume is 0.8. ⇒ 350 = 70 + 350b
If the equilibrium level of income is ` 400 crore, then 350b = 350 – 70 = 280
the autonomous consumption is ` 30 crore. True or b = 280/350 = 4/5 = 0.8
False? Justify your answer. \ Marginal propensity to consume = 0.8
Ans. At equilibrium, Y = C + I 14. In an economy 75% of the increase in income is
Y = C + bY + I spent on consumption. Investment is increased by
400 = C + 0.8 × 400 + 60 `1000 crore. Calculate:
400 = C + 320 + 60 (i) Total increase in income
Autonomous consumption C = ` 20 crore (ii) Total increase in consumption expenditure
The given value of autonomous consumption (` 30 crore) is (iii) Change in savings
incorrect. Ans. In the economy 75% of the increase in income is spent on
10. From the data given below about an economy, consumption, i.e., MPC = 75% = 0.75
calculate investment expenditure and consumption Increase in investment DI = ` 1000 crore
expenditure: k = 1/(1 – MPC) = 1/(1 – 0.75) = 1/0.25 = 4
Equilibrium level of income ` 5000 crore k = DY/DI ⇒ 4 = DY/1000 ⇒ DY = 4000
Autonomous consumption ` 500 crore MPC = DC/DY ⇒ 0.75 = DC/4000
Marginal propensity to consume 0.4 ⇒ DC = 3000
Ans. Equilibrium income Y = ` 5000 crore, Autonomous DS = DY – DC = 4000 – 3000 = 1000
consumption C = ` 500 crore, MPC = b = 0.4 (i) Increase in income = ` 4000 crore
Consumption expenditure C = C + bY (ii) Increase in consumption expenditure = ` 3000 crore
= 500 + 0.4(5000) = 500 + 2000 = ` 2500 crore (iii) Change in savings = ` 1000 crore
15. An increase of ` 250 crore in investment in an Ans. Given, APC=1, which means that income (Y) is equal to the
economy results in income increasing by three times consumption (C), i.e. Y=C.
more than the increase in investment. Calculate: C= 40+0.8Y ⇒ Y = 40+0.8Y (since Y=C)
(i) Marginal propensity to consume Y – 0.8Y = 40
(ii) Change in savings 0.2Y = 40 ⇒ Y = `200 crores
(iii) Change in consumption expenditure 20. The saving function of an economy is given as:
(iv) Value of multiplier S = (–) 10 + 0.20Y
Ans. DI = 250, DY = 250 + 3 × 250 = 1000 If the ex-ante investments are `240 crores, calculate
k = DY/DI = 1000/250 = 4 the following: (i) Equilibrium level of income in the
k = 1/(1 – MPC) ⇒ 4 = 1/(1 – MPC) ⇒ MPC = 3/4 economy. (ii) Additional investments which will be
DC = MPC × DY = 3/4 × 1000 = 750 needed to double the present level of equilibrium
DS = DY – DC = 1000 – 750 = 250 income. (CBSE 2019) (6)
(i) Marginal propensity to consume = 3/4 = 0.75 Ans. We know that the equilibrium level of income in an economy
(ii) Change in savings = ` 250 crore is determined when: S=I
(iii) Change in consumption expenditure = ` 750 crore –10+0.20Y=240 ⇒ 0.20Y = 250 ⇒ Y = `1,250 crores
(iv) Value of multiplier = 4 To double of the existing income level (DY = 1,250 crores),
16. In an economy the equilibrium level of income is K = DY/DI = 1/MPS
` 12000 crore. The ratio of marginal propensity 1250/DI = 1/0.2 ⇒ DI = ` 250crores
to consume and marginal propensity to save is 21. If marginal Propensity to Save is 20% and is constant
3 : 1. Calculate the additional investment needed to at all levels of income and autonomous consumption
reach a new equilibrium level of income of `20000 crore. is `100 crores, construct consumption function of the
Ans. Required increase in income DY = 20000 – 12000 = 8000, given hypothetical economy. (CBSE 2019) (3)
MPC : MPS = 3 : 1 Ans. MPS = 20% = 0.2 and c = `100 crore, MPC = 1-MPS= 0.8,
MPC/MPS = 3/1 ⇒ MPC = 3MPS C= c + MPC(Y) , C = 100 + 0.8Y
MPC + MPS = 1 ⇒ 3MPS + MPS = 1 22. Estimate the change in final income, if Marginal
⇒ 4MPS = 1 ⇒ MPS = 1/4 Propensity to Consume (MPC) is 0.75 and change in
k = 1/MPS = 4 initial investment is `2,000 crores. (CBSE 2019) (3)
k = DY/DI ⇒ 4 = 8000/DI ⇒ DI = 8000/4 = 2000 Ans. Multiplier K = 1/(1 – MPC)
Therefore, additional investment needed = ` 2000 crore When MPC = 0.75, K = 1/(1 – 0.75) = 1/0.25 = 4
17. If in an economy C = 500 + 0.9 Y and I = `1000 crore. Also, K = ∆Y/∆I, 4 = ∆Y/2,000, ∆Y =4 × 2,000 = 8,000.
(Where C = Consumption expenditure, Y = National Change in final income = `8,000 crores
income, I = Investment) 23. In an economy, autonomous consumption is `100
Calculate the following : crore and autonomous investment is `60 crore. In
(i) Equilibrium level of income this economy, with every increase in income, 80% of
(ii) Value of investment multiplier (CBSE 2018) it is spent on consumption. Calculate the additional
Ans. (i) Equilibrium level of income will be determined when investment required to reach the full employment
Y = C + I level of income `1000 crore.
Y = 500 + 0.9Y + 1000 Ans. Autonomous consumption C = 100, MPC = b = 80% = 0.8,
Y – 0.9Y = 1500 Autonomous investment I = 60
Y = 1500/0.10 = `15000 crore. Consumption function equation C = C + bY = 100 + 0.8Y
(ii) From the consumption function C = 500 + 0.9Y, MPC = 0.9 At equilibrium level of income, Y = C + I
Therefore, value of Investment Multiplier = 1/(1 – MPC) = ⇒ Y = 100 + 0.8Y + 60 ⇒ Y – 0.8Y = 160
1/(1 – 0.9) = 1/0.1 = 10 ⇒ 0.2Y = 160 ⇒ Y = 160/0.2 = 800
18. The saving function of an economy is given as: Therefore, equilibrium level of income = `800 crore
S = – 250 + 0.25Y Full employment level of income = `1000 crore.
If the planned investment is `2,000 crores, calculate Since equilibrium level of income is less than full
the following: employment level of income, it is a situation of deficient
(a) Equilibrium level of income in the economy. demand. Therefore, required increase in income to combat
(b) Aggregate demand of income of `5,000 crores. deflationary gap DY = 1000 – 800 = `200
(CBSE 2019 Compt.) (6) k = 1/(1 – MPC) = 1/(1 – 0.8) = 1/0.2 = 5
Ans. S = –250 + 0.25Y (Given) k = DY/DI ⇒ 5 = 200/DI ⇒ DI = 200/5 = 40
(a) Equilibrium level of income in the economy exist when: Hence, additional investment required to reach the full
S=I employment of level of income = `40 crore
Substituting the values of saving and investment, 24. In an economy the equilibrium level of income is `800
–250 + 0.25Y = 2000 crore whereas the full employment level of income
0.25Y = 2000 + 250 is `800 crore. The marginal propensity to consume is
0.25Y = 2250 ⇒ Y = 2250/0.25 ⇒ Y = `9000 crores 0.75. Calculate the decrease in investment required to
(b) C = C + b(Y) combat the inflationary gap.
= 250 + 0.25 (5000) Ans. Inflationary gap = 800 – 500 = `300 crore. Thus, required
= 250 + 1250 = 1,500 decrease in income DY = (–)`300 crore
AD = C + I k = 1/(1 – MPC) = 1/(1 – 0.75) = 1/0.25 = 4
AD = 1500 + 2000 = `3500 crores. k = DY/DI ⇒ 4 = –300/DI
19. Consumption function of an economy is : C = 40 + 0.8Y ⇒ DI = –300/4 = –75
(amount in ` crores). Determine that level of income Thus, required decrease in investment required to combat
where average propensity to consume will be one. the inflationary gap = `75 crore
(CBSE 2019) (3)
14. In the Keynesian analysis of determination of equilibrium level of
Objective Type Questions, MCQs ( 1 mark each)
income in the short-run, aggregate demand curve is parallel to
1. Given the consumption function of an economy: ________ because they have the same ________ .
C = `100 crore+ 0.8 Y 15. Which of the following is the equilibrium condition in a two
The equilibrium level of income is ` 800 crore. sector economy?
The values of the two components of the consumption C C
function when the economy is in equilibrium are ________ . (a) Y= (b) Y =
MPS 1 - MPS
2. The value of MPC can exceed one. True/False? Give valid
reason. C+ I C+ I
3. The value of MPS ranges from ________ . (c)
Y= (d) Y =
1 - MPC MPC
4. If in an economy, the consumption and savings curves are
16. The consumption function of an economy is given by
parallel to each other, the value of investment multiplier will
C = `100 crore + 0.8Y
be______ .
In this economy, national income increases by `500 crore,
5. Ex-post value of total output is always equal to the ex-post
what is the increase in autonomous expenditure in the
aggregate expenditure in the economy. True/False? Give
economy?
reason.
(a) `100 crore (b) `500 crore
6. What causes the Aggregate Demand Curve swing downwards
(c) `600 crore (d) Nil
from AD1 to AD2 ?
17. As MPC becomes larger the multiplier increases. True/False?
Y
AS = Y Give reason.
AD2 18. The ratio of the total increment in equilibrium value of
Aggregate Demand
E1 AD1
final goods output to the initial increment in autonomous
expenditure is called _______ of the economy.
E2 19. Full employment means absence of _________ .
A
20. If the equilibrium level of output is more than the full
employment level, this situation is called the situation of
__________ .
o
45
21. If C = 100 + 0.75 Y, then the corresponding Savings Function
O Y2
Income/Output
Y1 X will be expressed as:
(a) S = 100 + 0.25Y (b) S = –100 + 0.75Y
7. The level of output determined by the equality of Y and AD
(c) S = –100 + 0.25Y (d) S = 75 + 0.25Y
necessarily mean the level of output at which everyone is
22. If the savings function of an economy is given as:
employed. True/False? Give reason.
S = –100 + 0.40Y, then MPC is:
8. The impact of ‘Excess Demand’ under the Keynesian theory of
(a) 1 (b) 0.40
income and employment, in an economy are:
(c) 0.60 (d) None of these
(a) Decrease in output, income, employment and price level.
23. State giving reason whether the following statement is True
(b) Increase in output, income employment and price level.
or False:
(c) Rise in the price level and the nominal income but no
The point at which consumption curve intersects the 45
change in the output and employment.
degree line, APS is zero.
(d) Increase in output, income and employment; but no
24. State giving reason whether the following statement is True
change in the price level.
or False:
9. In the given figure, what does the gap ‘KT’ represent?
The value of marginal propensity to save can never be
Y
negative.
25. When aggregate demand is greater than aggregate supply,
inventories
Aggregate Demand
AS= Y
AD
(a) fall (b) rise
K
(c) do not change (d) first fall, then rise
E T 26. State giving reason whether the following statement is true
or false:
If MPS = 1, change in national income will be exactly equal to
A
45o change in investment.

27. Aggregate demand can be increased by:
O Y Yf Income/Output X
10. A change in initial investment causes a change in final (a) increasing bank rate
income by an amplified amount, which is a multiple of the (b) selling government securities by Reserve Bank of India
change in initial investment and depends upon the value of (c) increasing cash reserve ratio
____________. (d) none of the above
11. Which of the following is not true for MPC in an economy? 28. The saving function of an economy is:
(a) MPC can be zero. S = –10 + 0.20Y
(b) MPC may lie between zero and one. If the planned investment is `100 crores, aggregate demand
(c) MPC can exceed one at income of `300 crores will be:
(d) Both (b) and (c) (a) `550 crores (b) `350 crores
12. As income increases, APC ______while APS __________ . (c) `300 crores (d) `100 crores
(increases/decreases) 29. In which one of the following situation, there will be unplanned
13. In order to understand the determination of national income, increase in inventory of unsold goods?
we need to know the ________ (ex-ante/ex-post) values of (a) AD > AS (b) AD = AS
the components of aggregate demand. (c) AD < AS (d) None of these
30. The savings function of an economy is given as: 10. MPC
S = –10 + 0.20Y. If the planned investment is `100 crore, the 11. (c) MPC can exceed one
equilibrium level of income in the economy will be ________ . 12. decreases, increases
13. ex-ante
31. At zero level of income consumption is
14. consumption curve; slope, i.e. MPC
(a) zero (b) positive
C+ I
(c) negative (d) zero or negative 15. (c) Y =
1 - MPC
32. Break even point occurs when
(a) Y = S (b) S = 0 16. (a) `100 crore
17. True: There is a direct/positive relation between MPC and value of
(c) C > Y (d) Y > C
multiplier. Thus, as MPC rises, the value of multiplier increases as k =
33. Suppose in a hypothetical economy, the income rises from 1/(1 – MPC).
`5,000 crores to `6,000. As a result, the consumption 18. Investment multiplier
expenditure rises from `4,000 crores to `4,600 crores. 19. involuntary unemployment
Marginal propensity to consume in such a case would be 20. excess demand
__________. 21. (c) S = –100 + 0.25Y
(a) 0.8 (b) 0.4 22. (c) 0.60
(c) 0.2 (d) 0.6 23. True: Because at this point (called Break-even point), consumption is
equal to income and hence, saving is zero.
34. In an economy the equilibrium level of income is `10,000 crore.
Therefore, APS = S/Y = 0/Y = 0
Due to change in autonomous expenditure by `1,000 crore, 24. True: MPS = DS/DY. When income increases (DY is positive), savings
the aggregate demand curve shifts upward parallel to itself also increases (DS is positive); so MPS is positive. Also, when income
with slope remaining the same at a value of 0.8. The new decreases (DY is negative), savings also decreases (DS is negative);
equilibrium level of income will be ____________. so MPS is positive.
35. The slope of the savings curve in an economy is 0.1 and 25. (a)
change in final income is `15,000. The change 26. True: When MPS = 1, k = 1/MPS = 1/1 = 1
in initial investment was ____________. k = DY/DI = 1
DY = DI
36. If marginal propensity to save is 20% and is constant at all
Thus, change in national income will be exactly equal to change in
levels of income and the subsistence level of the consumption investment.
in the economy is `100 crore, the consumption function of 27. (d)
this hypothetical economy will be: 28. (b) `350 crores
(a) C = 0. 2Y (b) C = 0.8Y Explanation: Since S = –10 + 0.20Y, therefore C = 10 + 0.80Y
(c) C = ` 900 crore + 0.2Y (d) C = ` 100 crore + 0.8Y AD = C + I = 10 + 0.80Y + 100 = 110 + 0.80 (300)
37. The consumption function of an economy is C = 40 + 0.8Y = 110 + 240 = 350
(amount in ` crores). The level of income where average 29. (c) AD < AS
30. `550 crore
propensity to consume will be one is ____________.
Explanation: At equilibrium, S = I
38. The savings function of an economy is given as: – 10 + 0.20Y = 100
S = – 10 + 0.2Y. If the ex-ante investment are `240 crore, 0.20Y = 110
what will be the additional investments needed to double the Y = 110 / 0.20 = 550
present level of equilibrium income ? 31. (b) positive
(a) `500 crore (b) `250 crore 32. (b) S = 0
(c) `750 crore (d) `1,000 crore 33. (d) 0.6
39. If ex-ante investments are greater than ex-ante savings, it 34. `15,000 crore
Explanation: Slope of AD curve = MPC = 0.8 , ∆A = ∆(C + I)
will lead to ___________ (increase/decrease) in planned
= ∆I = 1,000
inventories. k = 1/(1 – MPC) = 1/(1 –0.8) = 5
40. There exists ________ (direct/inverse) relationship between k = DY/DI ⇒ 5 = DY/1,000
marginal propensity to save and investment multiplier. ⇒ DY = 5,000
New equilibrium level of income = 10,000 + 5,000 = 15,000.
Answers to Objective Type Questions, MCQs 35. `1,500 crore.
Explanation: Slope of savings curve, MPS = 0.1
1. Autonomous Consumption C = `100 crore
k = 1/MPS = 1/0.1 = 10
Induced consumption, bY= 0.8 ×` 800 crore = ` 640 crore
k = DY/DI ⇒ 10 = 15,000/DI
2. False: MPC = DC/DY. When income changes, change in consumption
⇒ DI = 1,500
(DC) can never exceed the change in income (DY).
36. (d) C = ` 100 crore + 0. 8Y
3. 0 to 1
37. `200 crore
4. Value of multiplier, k = 2
Explanation: APC = 1 means total consumption is equal to total
Explanation: Consumption and savings curves are parallel to each
income, i.e. C = Y
other means they have the equal slopes, i.e. MPC = MPS.
40 + 0.8Y = Y
Since MPC + MPS= 1, so MPS + MPS = 1
0.2Y = 40
2 MPS = 1
Y = 40/0.2 = 200
MPS = ½ = 0.5
38. `250 crore
Therefore, Value of multiplier, k = 1/MPS = 1/0.5 = 2
Explanation: Existing level of income is determination at: S = I
5. True; ex-post value of total output (Y) must always be equal to
– 10 + 0.2Y = 240
the sum total of ex-post consumption expenditure (C) and ex-post
0.2Y = 250
investment expenditure (I) in the economy.
⇒ Y = 250/0.2 = 1,250
6. Decline in MPC, i.e. slope of the AD curves decreases.
To double the exiting income level (∆Y = 1,250)
7. False: The equilibrium level of output may be greater than the full
k = 1/MPS = 1/0.2 = 5
employment level of output (the situation of excess demand) or less
k = DY/DI
than the full employment level of output (the situation of deficient
⇒ 5 = 1,250/DI
demand).
⇒ ∆I = 250
8. (c) Rise in the price level and the nominal income but no change in
39. decrease
the output and employment.
40. inverse
9. The vertical gap ‘KT’ represents the situation of ‘Deficient Demand’.
6 Marks
Unit 10 Development Experience of India

– A Comparison with Neighbours
Comparison of common events in India, China and GDP Growth Rate and Sectoral Contribution in India,
Pakistan China and Pakistan
Events India China Pakistan Issues India China Pakistan
Independence/ India got inde- People’s Pakistan Annual growth of GDP
People’s pendence from Republic of became inde- 1980-90 5.7 % 10.3% 6.3%
Republic British rule in China was pendent nation 2015-2017 7.3% 6.8% 5.3%
1947 established in in 1947
Sectoral share of GDP (2015 - 2017)
1949
Agriculture 17% 9% 25%
First five year 1951 1953 1956 Industry 30 % 43 % 21%
plan Services 53% 48% 54%
Introduction 1991 1978 1988
of economic
Comparison of Human Development Indicators of
reforms India, China and Pakistan
Human Development Indicators India China Pakistan
Sequence of Events in China
Maternal Mortality Rate 174 27 178
I Establishment of People’s Republic of China 1949 (per 1 lakh births)
II Announcement of first five year plan 1953 People living below poverty line 60.4% 23.5% 46.4%
(based international poverty rate of $
III Initiated the Great Leap Forward (GLF) campaign, aimed 1958
3.20 a day)
at industrialising the country on a massive scale
Life Expectancy (2016-17) 68.8 76.4 66.6
IV Mao introduced the Great Proletarian Cultural 1965
years years years
Revolution (under which students and professionals
were sent to work and learn from the countryside) Infant Mortality Rate 174 27 178
(per 1 lakh births)
V Introduction of Economic Reforms 1978
Population using improved 44.2% 75% 58.3%
Stages of Economic Development in Pakistan sanitation
Percentage of undernourished 37.9% 8.1% 46.4%
I Import-Substitution based industrialisation Late 1950,
children
and introduction of Green Revolution and 1960s
II Nationalisation of capital goods industries 1970s Key Term
III Denationalisation and encouragement of Late 1970s Liberty Indicators: Liberty indicators are those indicators
private sector and 1980s which represent the degree of social and political freedom to
IV Introduction of economic reforms 1988 individuals in a country. Human development indicators are not
sufficient. Without including liberty indicators, the construction of
Comparison of Demographic Indicators of India, a human development index may be said to be incomplete and
China and Pakistan its usefulness limited.
Examples of liberty indicators: (i) A measure of “the extent of
Demographic India China Pakistan constitutional protection given to rights of citizens”.
Indicators
(ii) A measure of the extent of constitutional protection of the
Annual 1.2% 0.5% 2.1% independence of Judiciary and the Rule of Law.
growth rate (is in the danger (lowest ; main- (highest)
of population zone of more than ly due to one- “Understanding, Analysing, Evaluating and
(2015) 1% p.a.) child norm)
Creating” type questions (with answers)
Child sex ratio 929 941 947
(2015) (highly skewed) Q.1 Explain the Great Leap Forward campaign of China
as initiated in 1958. Also, state the problems which GLF
Fertility rate 2.3 1.6 3.7
(2015) (low) (very high)
campaign met with. (4)
Ans. The Great Leap Forward (GLF) campaign was initiated in
Density 441 146 245
China in 1958, which aimed at industrialising the country on a
(per sq. km) (highest) (lowest)
massive scale.
Urbanisation 33% 56% 39%
• People were encouraged to set up industries in their backyards.
(2015)
• In rural areas, communes were started. Under the Commune
system, people collectively cultivated lands. In 1958, there were
26,000 communes covering almost all the farm population.
However, GLF campaign met with many problems: Pakistan 188
1. A severe drought caused havoc in China killing about 30
million people. 2. Density: Though China is the largest nation and
2. When Russia had conflicts with China, it withdrew its geographically occupies the largest area among the three
professionals who had earlier been sent to China to help in nations, its density is the lowest.
the industrialisation process. Country Density (per sq. km)
Q.2 “The present day fast industrial growth in China can be India 441
traced back to the reforms introduced in 1978.”
China 146
Defend or refute the above statement. (4)
Ans. The given statement is correct. Pakistan 245
1. In the initial phase, reforms were initiated in agriculture, 3. Annual growth of population: The population growth is the
foreign trade and investment sectors. highest in Pakistan, whereas it is the lowest in China. ‘One
For instance, in agriculture commune lands were divided Child norm’ introduced in China in the late 1970s is the
into small plots which were allocated (for use not ownership) major reason for low population growth in China.
to individual households. They were allowed to keep all
The annual population growth rate of India is in the danger
income from the land after paying taxes.
zone of more than 1% p.a. India will be overtaking China as
2. In the later phase, reforms were initiated in the industrial
the most populous country in the world in near future.
sector.
Private sector firms and township & village enterprises Country Annual Growth of population (2015)
were allowed to produce goods. At this stage, State Owned India 1.2
Enterprises (SOEs) were made to face competition. China 0.5
3. The reform process also involved ‘dual pricing’. Pakistan 2.1
This means fixing the prices in two ways – farmers and industrial
units were required to buy and sell fixed quantities of inputs
4. Child sex ratio: The child sex ratio is low and biased against
and output on the basis of prices fixed by the government and
females in all three countries. ‘Preference for son’ may be
the rest were purchased and sold at market prices. Over the
the major reason for this.
years, as production increased, proportion of goods and inputs
transacted in the market also increased. Amongst the three countries, India has most skewed data
4. In order to attract foreign investors, special economic zones sex ratio (929 females per 1,000 males). This is one of the
were set up. major concerns for the demographers in India.
Q.3 Describe the path of developmental initiatives Country Child sex ratio (2015)
taken by Pakistan for its economic development. (4) India 929
Ans. Development initiatives taken by Pakistan:
China 941
1. In the late 1950s and 1960s, Pakistan introduced a variety of
regulated policy framework (for import substitution-based Pakistan 947
industrialisation). The policy combined tariff protection and 5. F
ertility rate: The fertility rate is low in China and very high
direct-import controls. in Pakistan.
The introduction of Green Revolution led to mechanisation
and increase in public investment in infrastructure, which Country Fertility rate (2015)
led to a rise in the production of food grains. India 2.3
2. In the 1970s, nationalisation of capital goods industries China 1.6
took place. Pakistan 3.7
3. Pakistan then shifted its policy orientation in the late 1970s
and 1980s when the major thrust areas were denationalisation 6. U
rbanisation: Urbanisation is high in China with India having
and encouragement of private sector. During this period, only 33% of its people living in urban areas.
Pakistan received financial support from western nations Country Urbanisation (2015)
and remittances from Pakistani workers in the middle-east.
India 33%
This helped the country in stimulating economic growth. The
government also offered incentives to the private sector. All China 56%
this created a conducive climate for new investments. Pakistan 39%
4. In 1988, economic reforms were initiated in Pakistan.
Q.5 China did not have any compulsion to introduce
Q.4 Mention the salient demographic indicators of
reforms as dictated by the World Bank and International
China, Pakistan and India. (6)
Monetary Fund to India and Pakistan. Why did China
Ans. Demographic indicators of India, China and Pakistan:
introduce structural reforms in 1978? Also, evaluate the
1. Population: The population of China is the highest followed various factors that led to the rapid growth in economic
by India. Out of every six persons living in this world, one is development in China in the post reform period. (6)
an Indian and another a Chinese. The population of Pakistan Ans. China introduced economic reforms in 1978 because of
is very small. the following reasons:
Country Estimated population (in million) 1. The new leadership at that time in China was not happy
(2015) with the slow pace of growth and lack of modernisation
India 1311 in the Chinese economy under the Maoist rule. They felt
China 1371 that Maoist vision of economic development based on
decentralisation, self-sufficiency and shunning of foreign
technology, goods and capital had failed. 1. Volatile performance of agriculture sector – Agricultural
2. Despite extensive land reforms, the Great Leap Forward growth and food supply situation were based not on an
(GLF) and other initiatives, per capita grain output in 1978 institutionalised process of technical change but on good
was the same as it was in the mid-1950s. During 1980-90, harvest. When there was a good harvest, the economy was
when many developed countries were finding it difficult to in good condition, when it was not, the economic indicators
maintain a growth rate of even 5 per cent, China was able showed stagnation or negative trends.
to maintain double-digit growth rate of 10.3% p.a. 2. Over-dependence on remittances and foreign aid – In
The various factors that led to the rapid growth in economic Pakistan most foreign exchange earnings came from
development in China in the post-reform period were as follows: remittances from Pakistani workers in the middle-east
(i) Establishment of infrastructure in the areas of education and the exports of highly volatile agricultural products.
and health. There was also growing dependence on foreign loans, and
(ii) Land reforms increasing difficulty in paying back the loans.
(iii) Long existence of decentralised planning 3. Political instability over a long period of time.
(iv) Existence of small enterprises However, during the last few years, Pakistan has recovered its
Each reform measure was first implemented at a smaller level economic growth. In 2015-16, the GDP registered a growth of
and then extended on a massive scale. The experimentation 4.7 per cent, highest when compared to the previous eight years.
under decentralised government enabled to assess the While agricultural sector recorded growth rate far from
economic, social and political costs of success or failure. satisfactory level, industrial and service sectors grew at 6.8
For instance, when reforms were made in agriculture (by and 5.7 per cent respectively.
handing over plots of land to individuals for cultivation), it Q.8 “Till the late 1970s, India, China and Pakistan – all the
brought prosperity to a vast number of poor people. It created three countries were maintaining the same level of low
conditions for the subsequent growth in rural industries and development. The last three decades have taken these
built up a strong support-base for more reforms. countries to different levels.”
Q.6 “In China, the lack of political freedom and its implications Do you agree with the given statement? Give valid
for human rights are major concerns; yet, in the last three reasons in support of your answer. (6)
decades, it has succeeded in raising the level of growth along Ans. The given statement is correct.
with alleviation of poverty. China is moving ahead of India and India
Pakistan in terms of many human development indicators.“
The annual growth of GDP increased moderately from 5.7%
Defend or refute the above statement. (4)
during1980-90 to 7.3% during 2015-2017. The share of service
Ans. The given statement is correct.
sector in GDP is the largest (53%).
China used the ‘market system without losing political
• A majority of its people still depend on agriculture. In
commitment’ and succeeded in raising the level of growth along
2015-2017 about 43% of India workforce was engaged in
with alleviation of poverty. Unlike India and Pakistan, which are
agriculture.
attempting to privatise their PSEs China has used the market
• Infrastructure is lacking in many parts of the country.
mechanism to create additional social and economic opportunities.
• It is yet to raise the level of living of more than one-fourth
By retaining collective ownership of land and allowing
of its population that lives below the poverty line.
individuals to cultivate lands, China has ensured social security
in rural areas. Public investment in infrastructure in the areas of Pakistan
education and health brought about positive results in human • The annual growth rate of GDP has fallen from 6.3% during
development indicators in China. 1980-90 to 5.3% during 2015-2017.
China is moving ahead of India and Pakistan in terms of Human • The official data of Pakistan indicate rising poverty there.
Development indicators as shown below: The proportion of poor which was 25 per cent in 1980s
started rising again in 1990s.
HD Indicators India China Pakistan Political instability over a long period of time, over-dependence
Life expectancy 68.8 years 76.4 years 66.6 years on remittances and foreign aid and volatile performance of
People below poverty line 60.4% 23.5% 46.4% agricultural sector are the reasons for the slowdown of the
Infant Mortality Rate 34.6 8.5 64.2
Pakistan economy. However, during the last three years, Pakistan
(per 1,000 live births) has recovered its economic growth. In 2015-16, GDP growth
rate was 4.7%, highest in last 8 years. Many macroeconomic
Maternal Mortality Rate 174 27 178
(per 1 Lakh births) indicators also began to show stable and positive results.
China
Q.7 “In Pakistan the reform process led to worsening of all
the economic indicators. However, during the last few years, In China, the lack of political freedom and its implication
Pakistan has recovered its economic growth and has been for human rights are major concerns; yet, in the last three
sustaining.” Defend or refute the above statement. (6) decades, it used the ‘market system without losing political
Ans. The given statement is correct. commitment’ and succeeded in raising the level of growth
1. Declining growth rate – The reform process introduced along with alleviation of poverty.
in Pakistan led to declining growth rate in Pakistan. The • China has used the market mechanism to create additional
annual growth of GDP was 6.3 per cent during 1980-90, social and economic opportunities.
which decreased to 5.3 per cent during 2015-2017. • By retaining collective ownership of land and allowing
2. Re-emergence of poverty – The proportion of poor in 1980s individuals to cultivate lands, China has ensured social
was 25 per cent, which started rising again during 1990s. security in rural areas.
The reasons for the slow-down of growth and re-emergence of • Public investment in social infrastructure brought about
poverty in Pakistan’s economy are as follows: positive results in human development indicators in China.
11. China discontinued the one child policy because:
Objective Type Questions, MCQs (1 mark each)
(a) There will be more elderly people in proportion to young people.
1. Identify the correct sequence of alternatives given in Column (b) It increased the number of dependent population.
II by matching them with respective events in Column I: (c) People became dissatisfied with the policy.
(d) Population of the country decreased.
Column I Column II
12. China succeeded in achieving higher growth rate than India because:
A. India announced its first five year plan (i) 1951 (a) It followed communist pattern of economy.
B. Pakistan announced its first five year plan, now (ii) 1953 (b) It started reforms early.
called the Medium Term Development Plan. (c) It gave much importance to manufacturing sector.
(d) All of above
C. China announced its first five year plan. (iii)1956
13. What are the various means by which countries are trying to
2. Identify the correct sequence of alternatives given in Column II strengthen their own domestic economies?
by matching them with respective events of China in Column I: 14. Match the columns:
Column I Column II A. India (i) 13th Five Year plan (2016-20)
(a) Regional and global economic (i) Students and professionals B. China (ii) 11th Five Year plan (2013-18)
grouping’s such as the SAARC, were sent to work and learn C. Pakistan (iii) Followed Five Year plan based development
G–8, G–20, ASEAN etc. from the country side. model until March 2017
(b) The Great Leap Forward (ii) Means to strengthen their 15. China is ahead of India and Pakistan on many human
(GLF) campaign initiated by own domestics economies. development indicators. These improvements were attributed
China in 1958.
to the reform process initiated in China in 1978. (True/False)
16. Match the following:
(c) The Commune system in (iii) People collectively
China. cultivated lands. A. Followed the classical development (i) India
pattern of gradual shift from
(d) The Great Proletarian (iv) Industrialising the country agriculture to manufacturing and
Cultural Revolution on a massive scale. then to services.
introduced by Mao in 1965. B. Shift has been direct from agriculture (ii) China
3. Identify the correct sequence of alternatives given in Column II to service sector.
(iii) Pakistan
by matching them with respective events of China in Column I:
17. What similar developmental strategies have India and
Column I Column II Pakistan followed for their respective developmental paths?
(a) Introduction of economic reforms in China (i) 1949 18. Name the revolution introduced in China in 1965 under which
students and professionals were sent to work and learn from
(b) Establishment of People’s Republic of China (ii) 1953
the country side.
(c) China announced its first five year plan (iii) 1958 19. Mention any two important implications/limitations of the
(d) Great Leap Forward campaign initiated in China (iv) 1978 ‘one child norm’ in China, which led China to allow couples to
have two children.
4. Match the following:
(a) High degree of urbanisation (i) India
Answers
1. A. – (i), B. – (iii), C. – (ii)
(b) Very high fertility rate (ii) China 2. (ii), (iv), (iii), (i)
(c) Lowest density of population (iii) Pakistan 3. A – (iv) , B – (i) , C – (ii) , D – (iii).
4. A – (ii) , B – (iii) , C – (ii) , D – (i)
(d) Growth due to service sector 5. Pakistan
5. First five year plan of ____________ commenced in the year 6. income indicator of human development
7. Health indicator of human development
1956. (Pakistan/China)
8. (b) China
6. GDP per capital, or proportion of population below poverty line 9. (c) Pakistan
is ___________ . (income indicator of human development/ 10. (a) Attract foreign investors.
Health indicator of human development) 11. (a) There will be more elderly people in proportion to young people.
7. Mortality rates, literacy, life expectancy etc. are ____________. 12. (c) It gave much importance to manufacturing sector.
(income indicator of human development/Health indicator of 13. (i) Formation of regional and economic groups such as SAARC, G-8,
human development) G-20 etc.
8. Which of the following countries has the lowest density of (ii) Understanding the development process pursued by their
neighbouring nations.
population?
14. (iii), (i), (ii)
(a) India (b) China 15. False: China is ahead of India and Pakistan on many human
(c) Pakistan (d) None of the above development indicators. However, these improvements were
9. Growth rate of population is highest in which of the following attributed not to the reform process but the strategies that China
country? adopted in the pre-reform period.
(a) India (b) China 16. (i) – (B), (ii) – A, (iii) – (B)
(c) Pakistan (d) None of the above 17. India and Pakistan followed similar development strategies, such as
10. Special Economic Zones were set up by China to: creating a large public sector and raising public and raising public
expenditure.
(a) Attract foreign investors.
18. The Great Proletarian Cultural Revolution (1966-76)
(b) To develop the backward regions. 19. (i) Low population growth (0.5% p.a.)
(c) To maintain economic equality. (ii) Decline the child sex ratio (941 females per thousand males)
(d) To promote private sector. (iii) After a decades, in China, there will be more elderly people in
proportion to young people.
Exam Tips
Important Tips for Attempting CBSE Economics XII Examination 2020
• During 15 minutes Reading Time, read all questions  Give answer in points, as far as possible, rather than in
carefully. Select the Option to be answered in questions having paragraphs.
internal choice. When reading, underline the key lines with  Leave one line space between two headings
pencil which help you to write answers. Do calculations for  Leave at least 2-3 lines space between two answers of
all Numerical Questions during the reading time. 1 mark questions.
• Timing is an essential ingredient of success. Attempting the  Step by Step Calculation is always appreciable by the
full paper on time with at least 20 minutes Revision Time in examiner.
hand to check calculations is necessary to score 100% marks  Write the main heading in capital letters. (Use dark and
in Economics Paper. Economics paper is worth 80 marks and bold pen like Pilot V10)
must be completed in 180 minutes. Allowing 20 minutes  Underline the headings with pencil.
revision time, this leaves 160 minutes or 2 minutes per mark.
 Explanation/description from next line of heading.
So, do not spend 10 minutes on a question worth just 3 marks!
 Use bullets while giving explanation.
Do not exceed the time you have allocated for each question.
 Attempt all parts of a question together.
The following Time Schedule will help you managing your
time when sitting the examination hall.  Write impersonally. In other words, do not use ‘I’ or ‘We’
For each Section: Macroeconomics and Indian in your answers. For example, do not write — “I don’t
Economic Development agree with the statement.” Rather you must write —
“The given statement is not correct.”
Types of Marks Word limit Number of Total Estimated
Questions Questions Marks Time  Take care with sentences and punctuation. In general, try
to write short sentences.
OTQs/MCQs 1 One word 10 10 10 min.
to a sentence • During last 25 minutes of revision, first of all make sure
SA-I 3 60-80 words 2 6 10 min. that you have attempted all the questions and written Question
Number for each answer. If any question(s) left, attempt it
SA-II 4 80-100 words 3 12 30 min.
first. Don’t leave it even if you don’t know the proper answer.
LA 6 100-150 2 12 30 min. Remember that writing something is always better than leaving
words it at all. Then check the calculations in Numerical Questions
20 Minutes one by one. Then, read your answers one by one underlining
– Revision the key lines using pencil.
Total 17 40 90 min. • Economics Paper requires a relaxed mind to attempt the
• The following table shows a list of key directive words which Numerical Questions/Applying or Creating or Analysing
are most likely to occur in CBSE Economics examination based Questions. ‘Study the whole night before the exam.’
questions. You should read these carefully and understand is the major cause of under-performance in Economics
what each means. Paper. Successful students always have given proper rest
to their mental faculty so as to do all calculations correctly
Directive Words The examine is supposed to: and to attempt Numerical Questions/Applying or Creating or
Name/Identify/ Write the name of the concept/term only Analysing based Questions when sitting the Examination Hall.
Which In my teaching career, I’ve seen even good students making
Define Give the exact meaning calculations as 2 × 3 = 5 or 1/0.2 = 2 who ultimately score
State Make clear
70 or 80 per cent only, just because they had spent the
whole night revising the whole syllabus and solving numerical
Explain Give clear reasons questions.
Describe Give a description of I hope these tips will help you take CBSE Economics
Illustrate Give example/diagram XII Examination 2020 successfully and you will score
Discuss Give the important arguments, for and against sky touching marks.
So, good luck in your examination. I hope that you
Comment Give your reasoned opinions on
obtain the results you deserve. Finally, I pray the
Calculate/Compute Work out using the information provided Supreme Divine to bestow His best of blessings on
Defend/Refute Write whether given statement is correct/incorrect you!
Serving the cause of education.
• To score 100% marks, the presentation of answers is as much
important as their content. With warm regards
 Don’t forget to write Question Number you are answering. Your servant
 Answer each question from new page (except 1 mark
Subhash Dey
questions)
Time allowed: 3 hours CBSE Sample Question Paper (2019-20) Maximum Marks: 80
General Instructions:
i. All the questions in both the sections are compulsory. Marks for questions are indicated against each question.
ii. Question number 1 - 10 and 18 - 27 are very short-answer questions carrying 1 mark each to be answered in one word or one sentence each.
iii. Question number 11-12 and 28-29 are short-answer questions carrying 3 marks each. Answers to them should not normally exceed 60-80 words each.
iv. Question number 13-15 and 30-32 are also short-answer questions carrying 4 marks each. Answers to them should not exceed 80-100 words each.
v. Question number 16 - 17 and 33 - 34 are long answer questions carrying 6 marks each. Answers to them should not exceed 100-150 words each.
vi. Answer should be brief and to the point and the above word limit be adhered to as far as possible.
SECTION - A (Macroeconomics) 13. Discuss any one of the following functions of a central bank:
1. Value of Money Multiplier ___________ (increases/ (a) As government’s bank
decreases/remains unchanged) with an increase in Cash (b) Open market operations. (4)
Reserve Ratio. (1) 14. “Foreign Institutional Investors (FIIs) remained net seller in
2. Define an intermediate good. (1) the Indian capital markets over the last few weeks”.
3. Average Propensity to Consume can never be _____. –The Economic Times.
(a) positive (b) zero State and discuss the likely effects of the given statement
(c) more than one (d) less than one (1) on foreign exchange rate with reference to the Indian
4. Name any two quantitative tools to control credit creation in Economy. (4)
an economy. OR
OR “Many large Multinational Corporations (MNCs) have
What are demand deposits? (1) recently shifted their investments from China and have
5. The monetary policy generally targets to ensure ____. (1) started their production in India, thereby boosting the Make
(a) price stability in the economy in India plans of the Government.”
(b) employment generation in the country Presuming other factors being constant, discuss the effects
(c) stable foreign relations of the given statement on Foreign Exchange rates with
(d) greater tax collections for the government reference to the Indian Economy. (4)
6. In an economy, break-even point and equilibrium point may 15. Elaborate the objective of ‘reallocation of resources’ in the
lie at the same level of income, if ex-ante investments are government budget. (4)
___________. (1) 16. (a) “Real Gross Domestic Product is a better indicator
7. State whether the given statement is true or false: of economic growth than Nominal Gross Domestic
‘Managed Floating Exchange Rate is decided by market Product.”
forces but remains within a specific range as decided by Do you agree with the given statement? Support your
central bank’. (1) answer with a suitable numerical example. (4)
8. The formula to calculate Primary deficit is _______. (1) (b) Calculate ‘Depreciation on Capital Asset’: (2)
9. From the set of statements given in Column I and Column II, S. No. Particulars Amount (` crore)
choose the correct pair of statements: (1)
i. Capital value of the asset 1,000
Column I Column II
ii. Estimated life of the asset 20 years
(a) Export of software to (i) Debit side of current account
France iii. Scrap Value Nil
(b) Import of Machinery (ii) Capital Account of Balance of OR
from China Payments
(a) “Circular flow of income in a two sector economy is based
(c) Remittances to relative (iii) Debit side of Current Account on the axiom that one’s expenditure is other’s income.”
staying abroad of Balance of Payments
Do you agree with the given statement? Support your
(d) Investment by Apple (iv) Credit side of Current Ac- answer with valid reasons. (3)
phones firm in India count of Balance of Payments
(b) Calculate compensation of employees from the following
10. Government expenditure on Mid-Day Meal scheme running in data: (3)
government (state run) schools is a type of _____________
expenditure in government budget. (1) S. No. Particulars ` crore
11. “India’s GDP is expected to expand 7.5% in 2019‑20: World i. Profits after tax 20
Bank” - The Economic Times. Does the given statement mean ii. Interest 45
that welfare of people of India increase at the same rate?
Comment with reason. (3) iii. Gross Domestic Product at Market Price 200
12. Calculate the value of Marginal Propensity to Consume, if in iv. Goods and Services Tax 10
an economy, autonomous consumption is `500 crore, ex-ante v. Consumption of Fixed Capital 50
investments are `4000 crore and equilibrium level of Income
vi. Rent 25
of the economy is `18,000 crore. (3)
OR vii. Corporate Tax 5
Suppose in a hypothetical economy, the savings increase by 17. “An economy is operating at under-employment level of income.”
`20 crore when national income increases by `100 crore. What is meant by the given statement? Discuss one
Compute the additional investments needed to attain an fiscal measure and one monetary measure to tackle the
increase in national income by `6,000 crore. (3) situation. (6)
SECTION - B (Indian Economic Development) OR
18. Name any two taxes which were subsumed in Goods and “Power sector in India has major issues with its installed
Services Tax (GST). (1) capacity.” Discuss the given statement. (3)
19. State weather the following statement is true or false: 29. “Education Commission 1964-66 had recommended that at
‘The latest demonetization of currency was undertaken by the least 6 per cent of GDP must be spent on education.”
Government of India on November 8, 2016’. (1) How far India has been able to achieve the said goal? (3)
20. Identify the correct sequence of alternatives given in Column II by 30. ‘The opening up of the Indian Economy has led to a
matching them with respective terms in Column I: (1) rapid increase in Foreign Direct Investments and Foreign
Column I Column II
Exchange Reserves of the country’. Defend or refute the
given statement. (4)
A. Land Ceiling (i) Increase in production of food grain 31. Define the following terms:
using high yielding variety seeds
(a) Disinvestment
B. Land reforms (ii) Portion of agricultural produce sold in (b) Outsourcing (4)
the market OR
C. Green (iii) Fixing the maximum limit of land Define the following terms:
Revolution holding for an individual. (a) Import Substitution
D. Marketed (iv) Change in the ownership of land (b) Quota (4)
Surplus (land to tillers) 32. Answer the following questions on the basis of the following
data:
21. Agriculture marketing does not comprise of _______. (1)
(a) Comment upon the population growth rates among the
(a) Transportation of the produce to the market place for
three countries. (3)
sale
(b) Which country has most skewed in sex ratio? (1)
(b) Grading of the produce according to the quality.
(c) Storage of the produce for sale in future Country Estimated Annual Growth of Sex
(d) Credit taken to meet expenditure on agriculture Population Population (in %) Ratio
(in million)
22. Under ______ type of unemployment, marginal product gained
by employing one additional unit of labour is zero. (1) India 1311 1.2 929
OR China 1371 0.5 941
__________ an indicator which is used for analyzing the
Pakistan 188 2.1 947
employment situation of a country. (1)
23. In 1955, Karve committee was constituted for aiming the 33. “Rural Economic development is essential for Indian
__________. (1) Economic development”.
24. Write the correct sequence of alternatives given in Column II by Do you agree with the given statement? Support your
matching them with respective terms in Column I: (1) answer with valid reasons. (6)
Column I Column II
34. ‘In spite of the increase in public health expenditure Indian
Health System is an ailing system in itself’. Defend the
A. Study Group formed by Planning Commission i. 2005 statement citing any three major problems of Health sector
for Poverty
in India. (6)
B. ‘Task Force on Projections of the Minimum ii. 1962 OR
Needs and Effective Consumption Demand’ Study the following chart showing the Growth of Employment
C. Mahatma Gandhi National Rural Employment iii. 2014 and Gross Domestic Product and analyse the trend of the
Guarantee Act two variables from 1990‑2012.
D. Jan Dhan Yojana iv. 1979 10
8.7
9
25. Solar energy can be converted into electricity with the help of
8
______________ (Photovoltaic cell/Lithium cells). (1) 7
7.8
6.1 6.1
26. Arrange the following events of China in chronological 6
5.7 5.8
order: 5
4.2
4.8
(i) Great Proletarian Cultural Revolution 4 3.6

3.3
3.4
2.8
(ii) Great Leap Forward campaign 3
(iii) Introduction of Economic Reforms 2

0.85 2.03 1.99 1.84 1.89 2.28 1.12
0.39 1.73 0.28
(iv) First five year plan (1) 1 1.5
0.98
0
27. Introduction of Economic Reform in Pakistan took place in 1951-56 1956-61 1961-66 1969-74 1974-79 1980-85 1985-90 1990-92 1997-2000 1999-2005 2005-10 2010-12
__________ . GDP Employment
(a) 1978 (b) 1980 Growth of Employment and Gross Domestic Product (GDP) during 1951-2012 (in %)
(c) 1988 (d) 1991 (1)

28. “Recently Indians have drifted away from the traditional
knowledge and practices and caused large scale damage to
environment.”
Explain how, adopting the traditional practices can be helpful
in achieving the objective of sustainable development? (3)
Answers (through Author’s Pen)
Sample Question Paper – 2 (Expected Questions for CBSE Examination 2020)
SECTION - A (Macroeconomics) OR
1. If Real GDP = `240 crore and Price Index = 120, Nominal GDP = In an economy, autonomous consumption is `100 crore and
__________? (1) autonomous investment is `60 crore. In this economy, with every
2. __________ is the main source of money in an economy. (1) increase in income, 80% of it is spent on consumption. Calculate
(a) Central bank (b) Commercial banks the additional investment required to reach the full employment
(c) Both (a) and (b) (d) Government level of income `1000 crore. (3)
3. If the Reserve Ratio is 20% and the primary deposits are `100, 13. Discuss any one of the following functions of a Central Bank: (4)
the total lending by the banking system will be __________.(1) (a) Lender of last resort (b) Bank Rate Policy
4. Revenue deficit is calculated after deducting __________ from 14. “Through its budgetary policy government allocates resources
revenue expenditure. (1) in accordance with the requirements of the country.” Do you
(a) Fiscal deficit (b) Tax revenue agree with the given statement? Support your answer with valid
(c) Non-tax revenue (d) Both (b) and (c) reasons. (4)
5. Which of the following excludes interest payments? (1) 15. “Government of India doubled the import duty on gold.”
(a) Revenue deficit (b) Fiscal deficit State and discuss the likely effects of the given statement on
(c) Primary deficit (d) All of above foreign exchange rate with reference to the Indian Economy. (4)
6. Given the consumption function of an economy: (1) OR
C = `100 crore + 0.8 Y Indian investors lend abroad. Answer the following questions:
The equilibrium level of income is ` 800 crore. (a) In which sub-account and on which side of the Balance of
The values of the two components of the consumption function Payments such lending is recorded? Give reasons.
when the economy is in equilibrium are ________ . (b) Explain the impact of this lending on foreign exchange rate.
7. If in an economy, the consumption and savings curves are parallel to (4)
each other, the value of investment multiplier will be______ . (1) 16. (a) ‘Gross Domestic product (GDP) does not give us a clear
8. What causes the Aggregate Demand Curve swing downwards indication of economic welfare of a country.’’
from AD1 to AD2? (1) Define or refute the given statement with valid reasons. (3)
Y
AS = Y (b) In an economy, following transactions took place:
AD2
(i) Firm A sold to firm B goods of `80 crore; to firm C
`50 crore; to households `30 crore and goods of value
Aggregate Demand
E1 AD1 `10 crore remains unsold.

(ii) Firm B sold to firm C goods of `70 crore; to firm D
E2
`40 crore; goods of value `30 crore were exported and
A goods of value `5 crore was sold to government.
Calculate: (i) Value of output of Firm A and Firm B.
o
(ii) Value added by Firm B (3)
45
O
OR
Suppose there are only two firms, A and B in an imaginary
Y2 Y1 X
Income/Output
economy. Firm A uses no raw material and produces cotton worth
OR
`50 lakhs. Firm A gives `20 lakhs to the workers as wages and
In the given figure, what does the gap ‘KT’ represent?
Y
keeps the remaining `30 lakhs to be distributed as rent, interest
and profits. Firm A sells its cotton to firm B, who uses it produce
cloth. Firm B sells the cloth produced to consumers for `200 lakhs
Aggregate Demand
and gives `60 lakhs as wages and keeps the remaining income
AS= Y
AD generated as profits.
Assuming no depreciation and indirect taxes or subsidies,
K
E T calculate GDP by three methods. (6)

17. “Excess of Aggregate Demand over Aggregate Supply corresponding
A
to the full employment level causes rise in general price level.”Explain
45o the given statement with diagram. Discuss one fiscal measure and
O Y Yf Income/Output X one monetary measure to tackle the situation. (6)
9. The price of one currency in terms of the other is known as the SECTION - B (Indian Economic Development)
________ . (1) 18. Arrange the following events of India before the independence in
(a) Purchasing Power Parity (b) Repo Rate chronological order: (1)
(c) Reverse Repo Rate (d) Exchange Rate (i) The opening of the Suez Canal
10. In international trade if the domestic price of goods is more than (ii) Introduction of the railways
the world price (1) (iii) Second stage of demographic transition
(a) The country will become an exporter of the goods (iv) Incorporation of the Tata Iron and Steel Company
(b) The country will become an importer of the goods 19. Why, despite the implementation of green revolution, 65 per cent
(c) The country will neither import nor export of our population continued to be engaged in the agriculture
(d) Additional information is required sector till 1990? (1)
11. If in a locality, a new park is developed by the municipal 20. Goods and Services Tax Act, came into effect from _____________
corporation, it will have externalities, both positive and negative. in India and was to be implemented by the Centre, 28 states and
State on example each of both types of externalities with 7 Union Territories. (1)
reason. (3) 21. In 1991, an immediate measure to resolve the balance of
12. Saving function of an economy is given as: S = (–) 10 + 0.20Y payments crisis was: (1)
If the ex-ante investments are `240 crores, calculate the (a) to free the determination of rupee value in the foreign
following: (i) Equilibrium level of income in the economy. exchange market from government control.
(ii) Additional investments which will be needed to double the (b) devaluation of rupee against foreign currencies.
present level of equilibrium income. (3)
(c) removing the trade barriers –quotas and tariffs. 31. As an important member of WTO, Indian has been in the
(d) simplification of export and import procedures. forefront of framing fair global rules, regulations and safeguards
22. Identify the correct sequence of alternatives given in Column II and advocating the interests of the developing world. However,
by matching them with respective events in Column I: (1) some scholars question the usefulness of India being a member
Column I Column II
of the WTO.
Examine the above statement. (4)
A. India announced its first five year plan (i) 1951 32. “In Pakistan the reform process led to worsening of all the
B. Pakistan announced its first five year plan, now (ii) 1953 economic indicators.” Defend or refute the above statement. (4)
called the Medium Term Development Plan. 33. (a) Distinguish between ‘Absolute Poverty’ and ‘Relative Poverty’.
(b) Study the following chart showing number of poor (in
C. China announced its first five year plan. (iii)1956 million) and Head Count Ratio (in %) and analyse the trend,
23. Special Economic Zones were set up by China to: (1) in poverty in India from 1973-2012. (6)
(a) Attract foreign investors. Number of Poor (in million) Head Count Ratio (in %)
(b) To develop the backward regions. 350 60
(c) To maintain economic equality. 300

50
250
(d) To promote private sector. 200
40
24. Economists identify the poor on the basis of their _______ and 150
30
ownership of assets. 100 20
(a) Income (b) Occupation 50 10
0 0
(c) Expenditure (d) Living standard 1973-74 1983-84 1993-94 2004-05 2009-10 2011-12 1973-74 1983-84 1993-94 2004-05 2009-10 2011-12
25. In 2009 the government of India enacted ____________ to make Rural Urban Rural Urban
free education a fundamental right of all children in the age group Trends in Poverty in India 1973-2012
of 6-14 years. 34. What is ‘Agricultural marketing’? Do you think various measures
OR taken by the government to improve agricultural marketing are
National Bank of Agriculture and Rural Development was set up sufficient? Discuss. (6)
in _____ as an apex body to coordinate the activities of all OR
institutions in the rural financing system. Define ‘Sustainable Economic Development’. What are the
(a) 1969 (b) 1982 strategies for sustainable development? Explain briefly any five
(c) 1949 (d) 1991 strategies. (6)
26. Unemployed person is one who is not able to get employment of
even one hour in half a day.
This definition is given by: Answers
1. `288 crore 2. (c)
(a) Economists
3. `400 4. (d)
(b) National Sample Survey Organisation
5. (c)
(c) Census of India
6. Autonomous Consumption C = `100 crore
(d) Directorate general of Employment and Training
Induced consumption, bY= 0.8 ×` 800 crore = ` 640 crore
27. Write the correct sequence of alternatives given in Column II by
7. Value of multiplier, k = 2
matching them with respective terms in Column I:
8. Decline in MPC, i.e. slope of the AD curves decreases.
A. Global burden of (i) Infant mortality rate, life expectancy OR
diseases (GBD) and nutrition levels The vertical gap ‘KT’ represents the situation of ‘Deficient Demand’.
B. Indian Systems of (ii)
A variety of hospitals at the village 9. (d) 10. (b)
Medicine (ISM) level 11. (Q. 7 on page no. 7)
12. (Q. 20 and Q.23 on page no. 22)
C. Primary Health (iii) Ayurveda, Yoga, Unani, Siddha,
14. (Q.5 on page no. 27)
Centres (PHCs) Naturopathy and Homeopathy
15. (Q.6 and 13 on page no. 31 and 32)
D. Health Indicators (iv) An indicator to gauge the number of 16. (a) (Q. 5 on page no. 7)
people dying prematurely due to a (b) (i) Value of output of Firm A = `145 crore
particular disease. (ii) Value added by Firm B = `65 crore
28. Explain the role of human capital in economic ‘development of a OR
country’. (3) GDP = `200 lakh
29. What measures have been taken by the government of India in 17. (Q. 11 on page no. 8)
creating opportunities for employment generation in India? (3) 18. (ii), (i), (iv), (iii)
OR 19. This is so because the industrial sector and the service sector did
“Infrastructure is the foundation of economic development not absorb the people working in the agricultural sector.
of a country.” How far India has been able to develop its 20. 1 July 2017
infrastructure? (3) 21. (b) devaluation of rupee against foreign currencies.
30. “India could not develop a sound industrial base under the British 22. A. – (i), B. – (iii), C. – (ii)
colonial rule. Even as the country’s world famous handicraft 23. (a) Attract foreign investors.
industries declined, no corresponding modern industrial base was 24. (b) Occupation
allowed to come up to take pride of place so long enjoyed by the 25. the Right to Education Act OR (b) 1982
former.” 26. (a) Economists
In the light of the above statement, critically appraise some of the 27. (iv), (iii), (ii), (i)
shortfalls of the industrial policy pursued by the British colonial 28. (Q.2 on page no. 52)
administration. (4) 29. (Q.7 on page no. 58) OR (Q.3 on page no. 60)
OR 30. (Q.5 on page no. 35) OR (Q.7 on page no. 39)
Why was ‘Green Revolution’ technology implemented in the 31. (Q. 6 on page no. 45)
agricultural sector in India? How did it benefit the Indian 32. (Q. 7 on page no. 66)
economy? (4) 33. (Q.4 on page no. 48)
34. (Q.4 on page no. 54) OR (Q.1 on page no. 62)

Sample of Exam Hand Book in Economics (Macro & IED) For CBSE Exam 2020 in 80 Pages Only For 100% Marks (Shree Radhey Publications) To Be Released in A Week

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Economics XII

3. Determination of Income and Employment 12 7. Current Challenges facing Indian Economy 22

4. Government Budget and the Economy 6 Development Experience of India – A

CBSE Syllabus CBSE Syllabus

Unit 3 Determination of Income and Employment

3.3 Aggregate Supply, Aggregate Demand

45o change in investment.

Unit 10 Development Experience of India

(i) Great Proletarian Cultural Revolution 4 3.6

(iii) Introduction of Economic Reforms 2

__________ . GDP Employment

(c) 1988 (d) 1991 (1)

E1 AD1 `10 crore remains unsold.

E T calculate GDP by three methods. (6)

(c) To maintain economic equality. 300

ownership of assets. 100 20

(a) Income (b) Occupation 50 10

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Sample of Exam Hand Book in Economics (Macro & IED) For CBSE Exam 2020 in 80 Pages Only For 100% Marks (Shree Radhey Publications) To Be Released in A Week

Uploaded by

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Original Description:

Original Title

Copyright

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Sample of Exam Hand Book in Economics (Macro & IED) For CBSE Exam 2020 in 80 Pages Only For 100% Marks (Shree Radhey Publications) To Be Released in A Week

Uploaded by

Copyright:

Available Formats

Economics XII

3. Determination of Income and Employment 12 7. Current Challenges facing Indian Economy 22

4. Government Budget and the Economy 6 Development Experience of India – A

CBSE Syllabus CBSE Syllabus

Unit 3 Determination of Income and Employment

3.3 Aggregate Supply, Aggregate Demand

45o change in investment.

Unit 10 Development Experience of India

(i) Great Proletarian Cultural Revolution 4 3.6

(iii) Introduction of Economic Reforms 2

__________ . GDP Employment

(c) 1988 (d) 1991 (1)

E1 AD1 `10 crore remains unsold.

E T calculate GDP by three methods. (6)

(c) To maintain economic equality. 300

ownership of assets. 100 20

(a) Income (b) Occupation 50 10

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(i) Great Proletarian Cultural Revolution 4 3.6