As per the latest Reduced and Bifurcated Syllabus for Academic Year 2021-22

for Semester-2 Examination to be held in March-April, 2022

Goyal’s

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I.S.C.

Economics

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Question Bank
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with
Model Test Papers
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For Class 12
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Semester-2 Examination 2022
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CISCE’s Modified Assessment Plan for Academic Year 2021-22

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Reduced and Bifurcated Syllabus for Semester-2 Examination

Chapterwise Summary and Important Points
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Chapterwise Question Bank having all varieties of expected

Questions with answers for Semester-2 Examination to be held in
March-April, 2022
Specimen Question Paper (Solved) for Semester-2 Examination
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issued by CISCE
5 Model Test Papers based on the latest specimen question
paper issued by CISCE for Semester-2 Examination to be held in
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March-April, 2022
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GOYAL BROTHERS PRAKASHAN

NEW DELHI
 Author
Vandeep Bajaj
Ex. Faculty, K.R. Mangalam Institute of Management,
Greater Kailash, New Delhi

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Editors
Vaishali Jain Suman Lata Swati Gupta

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GOYAL BROTHERS PRAKASHAN

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EDUCATIONAL PUBLISHERS
Sales & Registered Office :
11/1903, Chuna Mandi, Paharganj, New Delhi-110055

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Post Box : 5720, Phones : 43551877 & 43561877
E-mail : [email protected]
Website : www.goyal-books.com

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Administrative Office :
D-231, Sector 63, Noida-201301 (U.P.)
Phone : 0120-4655555
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Showrooms
Ahmedabad: Y-10, Dev Castle Complex Opp. Radhekrishan Villa, Jaymala-Govindwadi Road Isanpur, Ahmedabad -
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Nagpur: Thakkar Villa, House No. 436 Joshiwadi, Sibuldi, Nagpur - 440012, Phone: 9823655077
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To buy our books and e-books online log on to www.goyal-books.com

© Reserved
Edition : January 2022
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Price: 130
Published & Printed by
Roshan Lal Goyal for Goyal Brothers Prakashan, New Delhi
 SYLLABUS
(Reduced for academic year 2021-22)

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There will be two papers in the subject:
Paper I - Theory: 3 hours ……80 marks
Paper II- Project Work ……20 marks

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PAPER - I (THEORY) – 80 Marks
Part I (20 marks) will consist of compulsory short answer questions testing knowledge, application and

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skills relating to elementary/fundamental aspects of the entire syllabus.
Part II (60 marks) will consist of eight questions out of which candidates will be required to answer five
questions, each carrying 12 marks.

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Note: The syllabus is intended to reflect a study of the theory of Economics with specific reference to
the Indian Economy. Therefore, examples and specific references to the Indian Economy must be made
wherever relevant.
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1. Micro Economic Theory
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(i) Demand: meaning, factors affecting demand; Demand function; Law of Demand; derivation of
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demand curve; movement and shift of the demand curve; exceptions to the Law of Demand.
Law of Diminishing Marginal Utility, Law of Equimarginal Utility, consumer’s equilibrium through utility
approach (Cardinal) and indifference curve analysis (Ordinal).
The concept of demand: meaning. A demand function to be specified incorporating the determinants
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of demand. Diagrams should be used in explaining the Law of Demand, reasons for downward slope
of demand curve, its derivation using demand schedule. Derivation of market demand curve from
individual demand curve.
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(a) Cardinal Utility Analysis: meaning of utility, total utility, marginal utility, relationship of TU and
MU, Law of Diminishing Marginal Utility (schedule and diagram, Only assumptions to be taught,
criticisms not required), Consumer’s equilibrium – one commodity (schedule and diagram), Law of
Equimarginal Utility (statement, schedule) and conditions of consumer’s equilibrium using marginal
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utility; (b) Ordinal Utility Analysis: Indifference Curve – its meaning and properties (including MRS
and DMRS), indifference map, consumer’s budget line, Consumer’s equilibrium – condition (to be
explained with the help of a diagram).
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(ii) Elasticity of demand: meaning, types of elasticity of demand, measurement of elasticity of demand;
factors affecting elasticity of demand.
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Various methods of measurement of the elasticity of demand: point method - percentage method,
expenditure method and geometric method. (Numericals required on percentage method only). The
cross and income elasticity of demand must be explained. Degrees of elasticity of demand to be
explained. Use diagrams wherever necessary.
 (iii) Supply: meaning; difference between stock and supply; determinants of supply; Law of Supply;
movement and shift of the supply curve; elasticity of supply
Difference between stock (intended supply) and supply (actual supply) with the help of relevant
examples. A supply function should be specified and explained. Law of Supply: Meaning, supply
schedule and supply curve. Derivation of market supply curve from individual supply curve.
Movement and shift of the supply curve, exceptions to the Law of Supply. Elasticity of Supply:

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Meaning, degrees of elasticity of supply and measurement of elasticity of supply by percentage
method and geometric method.

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(iv) Market Mechanism: Equilibrium and disequilibrium; Equilibrium price and effect of changes in
demand and supply on the equilibrium price. Simple applications of tools of demand and supply.
A basic understanding of the concept of equilibrium. The effects of changes in demand and supply -

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both along the curves and shift of the curves to be explained. Basic understanding of Price control,
rationing, Price ceiling and Floor price with the help of demand and supply curves.
(v) Concept of production and production function: (short run and long run production function),

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returns to a factor, returns to scale (meaning only) total, average and marginal physical products;
Law of Variable Proportions and its three stages.
A production function (concept only). Law of Variable Proportions: statement, assumptions,
schedule (for the purpose of understanding and not for testing), diagram and explanation to the

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three stages.
(vi) Cost and revenue: Basic concepts of cost; fixed cost, variable cost, total cost, marginal cost and
average cost – their relationships; opportunity cost; short run cost curves. Revenue: meaning; average
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revenue, marginal revenue and total revenue and their relationships under perfect competition and
imperfect competition, Producer’s equilibrium.
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Basic concepts – private cost, economic cost, social cost, money cost, real cost, explicit cost, implicit cost.
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Cost concepts – Fixed cost, variable cost, total cost, marginal cost, average cost with schedule and
diagram; relationship between average cost, marginal cost, total cost (only short run cost curves,
derivations not required). Opportunity cost – meaning only. Difference between accounting cost and
opportunity cost.
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Revenue – Average revenue, marginal revenue, total revenue – concepts and relationships under
perfect competition and imperfect competition. Producer’s equilibrium (Profit maximization goal) –
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meaning; conditions: MR and MC approach along with diagram.

(vii) Main market forms: perfect competition, monopolistic competition, oligopoly, monopoly, monopsony;
characteristics of the various market forms; equilibrium of a firm in perfect competition under short run.
Features of perfect competition, monopolistic competition, oligopoly, monopoly and monopsony
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(meaning only). Equilibrium of a firm in perfect competition under short run by MR and MC approach
(explanation and diagram, shut down point and break-even point).
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2. Theory of Income and Employment

Basic concepts and determination of Income and Employment

The concept of demand (exante) and effective (expost) demand. Aggregate demand and its components,
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propensity to consume and propensity to save (average and marginal), equilibrium output; investment
multiplier (its meaning and mechanism).
 3. Money and Banking

(i) Money: meaning, functions of money, supply of money.

Meaning, kinds of money, functions of money (primary, secondary and contingent) to be explained;
supply of money (only meaning of M0, M1, M2, M3 & M4). Inflation: meaning, demand pull and cost
push (diagrams not required)

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(ii) Banks: functions of commercial bank; high powered money; Central Bank: functions.
Basic understanding of the functions of commercial banks. The regulatory role of the Central Bank,

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its functions and the way it controls the flow of credit needs to be explained. A brief mention may
be made of quantitative CRR, SLR, Bank Rate policy (repo rate and reverse repo rate) and Open
Market Operations) and qualitative methods.

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4. Balance of Payment and Exchange Rate

Balance of Payment – meaning, components; foreign exchange – meaning, determination of exchange rate

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(Flexible).
Balance of Payment - Meaning and components; Causes of disequilibrium and how the disequilibrium can
be corrected; Foreign Exchange Rate – meaning, meaning of fixed and flexible exchange rate, determination
of exchange rate in a free market. Concepts of depreciation, appreciation, devaluation and revaluation

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(meaning only).

5. Public Finance

(i) Fiscal Policy: meaning and instruments of fiscal policy.

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Meaning and instruments of fiscal policy – Public Revenue: Meaning, taxes (Meaning and types), difference
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between direct and indirect taxes; Public Expenditure: Meaning and importance; Public Debt: Meaning
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and redemption; Deficit Financing: meaning.

(ii) Government Budget: meaning, types and components.
Meaning and types of Government budget – union, state; components – revenue and capital. Concept
of deficit budget: revenue deficit, fiscal deficit, primary deficit meaning.
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6. National Income
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(i) Circular flow of Income.

A simple model explaining the circular flow of income with two, three and four sector models with

leakages and injections.
(ii) Concepts and definition of NY, GNP, GDP, NNP; relationship between the income concepts.
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A brief understanding of the mentioned national income aggregates is needed. The concepts of
GNP and NNP should be explained both at factor cost and market prices, real GDP and nominal
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GDP, GDP and Welfare, GDP as an indicator of Economic welfare.

(iii) Methods of measuring National Income: product or value-added method; income method and
expenditure method with simple numericals based on them (Numericals not required).
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Simple numericals based on all the methods to be covered for better understanding of the concept
(Numericals not required). Precautions and difficulties of measuring National Income for each
method.
 PAPER II – PROJECT WORK – 20 Marks
Candidates will be expected to have completed two projects from any topic covered in Theory.
The project work will be assessed by the teacher and a Visiting Examiner appointed locally and
approved by the Council.

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Mark allocation for each Project [10 marks]:

Overall format 1 mark

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Content 4 marks

Findings 2 marks

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Viva-voce based on the Project 3 marks

A list of suggested Projects is given below:

1. Study a Public Sector Enterprise with reference to its relevance to the Indian Economy and its future

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prospects. Analyse the trend of its growth for the last ten years.
2. Conduct a Socio-Economic survey of a locality (minimum sample size should be 30 households)
with reference to:

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(a) Demographic features.
(b) Consumption Pattern – Expenditure on necessities, comforts and luxuries.
(c) Occupational structure.
3. Compare the contribution made by different sectors of the economy towards GDP growth during
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the planning period.
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4. Prepare a report on the competition in the Aviation Sector in India with reference to:
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(a) Performance of the Public Sector and Private Sector.

(b) Operational strategies adopted by budget/low cost carriers.
5. Make a comparative analysis of lending performance of five Commercial Banks in the past six years
with reference to the changing CRR and SLR.
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6. Many thinkers believe that we are rapidly depleting our natural resources. Assume that there are
only two inputs (labour and natural resources) producing two goods (wheat and gasoline) with no
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improvement in technology over time. Show what would happen to the Production Possibility Curve
over time as natural resources are exhausted. How would invention and technological improvement
modify your answer? On the basis of this example, explain why it is said “economic growth is a race
between depletion and invention.”
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7. Make a comparative study of the allocation of financial resources of the Central Government Budget
on Agriculture, Defence, Industry and Education in the last ten years. Prepare a report on your
observations.
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8. Prepare a trend Analysis of Growth and Productivity of any one industry such as:
Textile / Automobiles / Electronic and Tele-communication, etc. in India for the past ten years.
NOTE: No question paper for Project Work will be set by the Council.
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 BIFURCATED SYLLABUS
(As per the Reduced Syllabus for ISC - Class XII Year 2022 Examination)
SEMESTER 1 SEMESTER 2
(Marks: 40) (Marks: 40)

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UNIT UNIT
NAME OF THE UNIT NAME OF THE UNIT
NO. NO.

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1. Micro Economic Theory 2. Theory of Income and Employment

3. Money and Banking

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4. Balance of Payment and Exchange Rate

5. Public Finance

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6. National Income

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 CONTENTS

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SECTION A : QUESTION BANK

1. Theory of Income and Employment ... ... ... 1 –16

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2. Money and Banking ... ... ... 17 – 29

3. Balance of Payment and Exchange Rate ... ... ... 30 – 45

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4. Public Finance ... ... ... 46 – 62

5. National Income ... ... ... 63 – 81

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SECTION B : SPECIMEN QUESTION PAPER
[Released by CISCE for Semester-2 Examination to be held in March-April, 2022]

Specimen Question Paper (Solved) ... ... ... 82 – 86

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SECTION C : MODEL TEST PAPERS
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[Based on the Latest Specimen Question Paper released by CISCE]

Model Test Paper 1 (Unsolved) ... ... ... 87 – 88

Model Test Paper 2 (Unsolved) ... ... ... 89 – 90

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Model Test Paper 3 (Unsolved) ... ... ... 91 – 92

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Model Test Paper 4 (Unsolved) ... ... ... 93 – 94

Model Test Paper 5 (Unsolved) ... ... ... 95 – 96

Answers to Model Test Papers ... ... ... 96

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 1
Section A: Question Bank

Theory of Income and

Employment

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Summary
Economy must produce goods and services and general income for its citizens. For this it must

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provide employment opportunities. In this context if it is important to ask the question:
How much output should be produced in the economy?
What should be produced in the economy?

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What should be the level of income and employment?
Aggregate Demand: Aggregate demand of an economy is defined as the total demand for good
and services at a given price level. Prices are given or fixed because in a short-run period,

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prices of goods and services do not change. A measure of aggregate demand is the aggregate
expenditure incurred by the different consuming sectors of the economy on consumption of goods
and services at the prevailing price level. AD = C + I + G + (X – M).
Effective Demand: According to Keynes who gave the theory of equilibrium income. In other
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words, an effective demand in the economy refers to the point where aggregate demand equals
the level of output in the short run, given the price level. This implies that the equilibrium level
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of income reflects the effective demand in the economy.
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Multiplier: It is the ratio of change in income to the initial change in investment expenditure.
It given relationship between investment and income. It explains the number of times income
changes due to change in investment.
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Let's understand the concept of multiplier with the help of a numerical procedure. Assume that
additional investment = `20 crores, MPC = 0.5.
Time Period ∆I ∆Y ∆C ∆S
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1 20 20 10 10

2 — 10 5 5
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3 — 5 2.5 2.5

4 — 2.5 1.25 1.25

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↓ — ↓ ↓ ↓
This process keeps on repeating till the additional income is generated in `40 crores.
1 1
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K = = =2
1 – MPC 1 – 0.5
∆Y = ∆I × 2 = 20 × 2

∆Y = `40 crores

Goyal's ISC Economics Question Bank with MTP Class 12 for Semester-2 Examination 1
 Propensity to Consume Propensity to Save

APC MPC APS MPS

APC + APS = 1 MPC + MPS = 1

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Ex-ante demand refers to the desired demand or planned demand during the period of one year.

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This is the market demand which is intended to be expected in the economy during the period
of one year by the consumers.
Ex-post demand refers to the actual demand in the economy during the period of one year.
This aspect of demand is considered in the estimation of equilibrium price and output in

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the economy.

Question Bank

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A. Multiple Choice Questions [1 Mark]
1. Multiplier is estimated as

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1 1 1 1
(a) (b) (c) (d)
MPC 1 + MPC 1 – MPC 1 – MPS
2. Investment which is independent of the level of income is called
(a) Autonomous investment (b) Induced investment
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(c) Fixed investment (d) Inventory investment
3. MPC + MPS = ?
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(a) – 1 (b) 2 (c) 1 (d) 0
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4. The main component of aggregate demand is

(a) Individual consumption (b) Public consumption
(c) Investment (d) All of these
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5. If MPC = 0.5, then multiplier (K) will be

(a) 1/4 (b) 0 (c) 1 (d) 2
6. In Keynesian viewpoint, the equilibrium level of income and employment in the economy will
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be established where
(a) AD > AS (b) AD = AS (c) AS = AD (d) None of these
7. An increase in aggregate demand of equilibrium level of income and employment causes an
increase in
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(a) Employment (b) Production (c) Income (d) All of these

8. Keynesian multiplier establishes a relationship between
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(a) Investment and income (b) Income and consumption

(c) Saving and investment (d) None of these
9. Which of the following is correct?
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(a) MPC and multiplier have a direct relationship

(b) MPS and multiplier have an inverse relationship
(c) Both (a) and (b)
(d) None of these

2 Goyal's ISC Economics Question Bank with MTP Class 12 for Semester-2 Examination
 10. The important factor influencing the propensity to consume in an economy is
(a) The level of income (Y) (b) The level of investment
(c) The level of consumption (d) The level of savings
11. The average propensity to consume can be greater than one.
(a) False (b) True (c) Can't say (d) Insufficient

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12. What can be the minimum value of the investment multiplier?
(a) 0 (b) 1.0 (c) 2 (d) 3

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13. Average propensity to save (APS) is equal to
(a) Y/S (b) ∆Y/∆S (c) S/Y (d) ∆S/∆Y
14. According to Keynes, equality (equilibrium) between AD and AS can take place in a situation

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(a) Less than full employment (b) Full employment
(c) Beyond full employment (d) All of these
15. The relation between consumption and savings are

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(a) Inverse (b) Direct
(c) Both (a) and (b) (d) None of these
16. If MPC is greater than MPS, the value of the multiplier will be

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(a) Greater than 2 (b) Equal to 2
(c) Less than 2 (d) Equal to 5
17. Which is the determining factor for investment?
(a) Marginal efficiency of capital (b) Interest rate
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(c) Both (a) and (b) (d) None of these
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18. The value of Keynesian investment multiplier depends on
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(a) Income level (b) Marginal propensity to capital

(c) Marginal propensity to consume (d) Investment level
19. The value of MPC is
(d) ∞
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(a) 1 (b) 0 (c) > 1

20. If MPC being equal to 0.5, what will be ∆I if income increases by ` 100?
(a) ` 60 (b) ` 50 (c) ` 40 (d) ` 70
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ANSWERS
1. (c) 2. (a) 3. (c) 4. (d) 5. (d) 6. (b) 7. (d) 8. (a) 9. (c) 10. (a)
11. (b) 12. (b) 13. (c) 14. (d) 15. (a) 16. (a) 17. (c) 18. (c) 19. (c) 20. (b)
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B. Fill in the Blanks [1 Mark]

1. The maximum value of multiplier is _____________ when the value of MPC is ___________.
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(Infinity, one/Infinity, zero)

Ans. Infinity, one
2. Ex-ante savings refer to ___________ during the period of one year. (Desired/Planned/Actual
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saving)
Ans. Desired/Planned saving
3. Average propensity to consume can never be _____________. (Zero/one)
Ans. Zero
Goyal's ISC Economics Question Bank with MTP Class 12 for Semester-2 Examination 3
 4. Income and employment are determined by _____________. (By market demand/Total demand,
Total supply)
Ans. Total demand, Total supply
5. If MPC is 40%, then MPS will be ___________. (40%/60%)
Ans. 60%

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C. Very Short Answer Type Questions [1 Mark]
1. Define investment multiplier.

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Ans. Investment multiplier is the ratio of change in income to a given change in investment.
2. How do you define equilibrium level of income?
Ans. Equilibrium level of income is that level of income where AS = AD. Also, equilibrium income

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is struck when S = I.
3. Define marginal propensity to consume.
Ans. Marginal propensity to consume is the ratio of change in consumption expenditure to change in

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total income. Symbolically,
MPC = ∆C
∆Y
4. Define marginal propensity to save.

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Ans. Marginal propensity to save is the ratio of change in saving to change in income. Symbolically,

MPS = ∆S
∆Y
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5. What is the value of MPC when MPS is zero?
Ans. Value of MPC is 1 when MPS = 0.
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6. When APC and MPC will be equal?
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Ans. When APC is constant, then APC will be equal to MPC.

7. When APS will be negative?
Ans. When saving is negative or when consumption is greater than income.
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8. Define propensity to save.

Ans. Propensity to save refers to the proportion of income which is kept as saving. It is measured as
the ratio between S and Y.
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9. The disposable income is ` 1000 crores and level of consumption is ` 800 crores calculate average
propensity to consume?

Ans. APC = 800 = 0.8

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1000
10. Define aggregate demand schedule.
Ans. Aggregate demand schedule is a table showing AD (or aggregate expenditure) corresponding to
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different levels of income in the economy.

11. Why cannot the value of MPC be greater than one?
Ans. It is because change in consumption cannot be greater than change in income.
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12. What is average propensity to save?

Ans. Average propensity to save is the ratio of aggregate saving to aggregate income.
S
APS =
Y

4 Goyal's ISC Economics Question Bank with MTP Class 12 for Semester-2 Examination
 13. Define propensity to consume.
Ans. Propensity to consume refers to the proportion of income used as consumption expenditure. It
is measured as the ratio between C and Y.
14. Can consumption be greater than income?
Ans. Yes, consumption can be greater than income. There is always some minimum level of

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consumption even when income is zero, also known as autonomous consumption.
15. How much is the MPS in an economy in which the MPC is 0.75?

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Ans. MPS = 0.25 since MPC + MPS = 1.
16. If APC is constant, C and Y should also be constant–defend or refute.
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Ans. Constant APC only implies that the ratio is constant. Hence the above statement is

as
Y
incorrect.
17. What is meant by an effective demand?
Ans. Effective demand refers to that level of aggregate demand which is 'effective' which is equal to

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aggregate supply.
18. What can be the maximum value of multiplier?
Ans. The maximum value of multiplier can be infinity. It is possible when MPC = 1.

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19. What is value of multiplier when MPS is zero?
1 1
Ans. Multiplier (K) = = = Infinity.
MPS 0
20. What is the range of investment multiplier?
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Ans. One to infinity
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D. Short Answer Type Questions [2 Marks]
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1. Average propensity to save is always less than 1. How, explain it?

Ans. The value of APS is always less than 1. Because a part of income (Y) must be consumed
(C cannot be zero). Implying that only a part of Y is saved consequently; APS must always be
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less than 1.
2. Calculate the value of multiplier if the (a) MPS is 0.40; (b) Equal to MPC.
1 1
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Ans. (a) Multiplier (K) = = = 2.5

MPS 0.40

(b) If MPS = MPC, then MPS = 0.5
1 1
Multiplier (K) = = =2
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MPS 0.5
3. Higher the value of MPC, more is the value of multiplier. Is it true?
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Ans. Yes, it is true. It happens because multiplier (K) is directly related to MPC, i.e.
1
K=
1 – MPC
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4. What is the relationship between the MPS and multiplier?

Ans. The higher (MPS), the lower the value of multiplier, i.e. multiplier is inversely related to MPS, i.e
1

Multiplier (K) =
MPS

Goyal's ISC Economics Question Bank with MTP Class 12 for Semester-2 Examination 5
 5. If MPS is 0.3 then what is the value of marginal propensity to consume?
Ans. Here, MPS = 0.3
Also, MPC = 1 – MPS
= 1 – 0.3 = 0.7
MPC = 0.7

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6. The value of MPC is double the value of MPS. Find the value of multiplier.
Ans. Ratio of MPC and MPS is 2:1.

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2 1
So, MPC is and MPS is   .
3 3
1 1 1 1
Multiplier = = = 3 or = = 3.
MPS 1 1 – MPC 2

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1–
3 3
7. What are the components of aggregate demand?
Ans. Aggregate demand = C + I + G + (X – M).

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where, C = Consumption expenditure
I = Investment expenditure
G = Government expenditure

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X – M = Net exports
where, X = Exports
M = Imports
8. What is meant by an effective demand?
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Ans. Effective demand refers to the situation where aggregate demand is equal to aggregate supply
in the economy which indicates that the total desired output in the economy matches the total
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expenditure in the economy through demand.
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9. What is meant by Ex-post demand?

Ans. Ex-post demand means the amount of goods that the consumer actually buy during a specific
time period.
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10. There is an increase in investment of ` 1000 crores in an economy. MPC is zero, what is the
total increase in income? Calculate.
Ans. ∆I = ` 1000 crores
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MPC = 0, ∆Y = ?

1 ∆Y 1
K= or ∆I =
1 – MPC 1 – MPC
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∆Y 1
= = ∆Y = 1,000 crores.
1000 1 – 0
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11. Can an investment multiplier be infinity?

Ans. Here, if MPC is 0, the value of investment multiplier will be 1 and if MPC is 1, the value of
investment multiplier will be infinity (the value of MPC ranges from 0 to 1).
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12. Explain investment expenditure (I), a component of AD?

Ans. It refers to the total expenditure incurred by all private firms on capital goods. It includes an
addition to the stock of physical capital assets such as machinery, equipment, buildings, etc.,
and change in inventory.

6 Goyal's ISC Economics Question Bank with MTP Class 12 for Semester-2 Examination
 13. What is the aggregate demand in a two-sector model?
Ans. Since the determination of income and employment is to be studied in the context of two-sector
model (households and firms), the third and fourth components of AD are not discussed. We will
assume only consumption and investment expenditure in AD.
AD = C + I

n
14. "Economists are generally concerned about the rising MPS in an economy". Explain, why?
Ans. Economists are justified in being concerned about the rising MPS in the economy, as rising MPS

ha
would be at the cost of falling MPC. This is a cause of grave concern as the proportion of
additional income is going to lead to more saving and less consumption. Thus, fall in consumption
will have an adverse impact on the economy, culminating in a fall in equilibrium level of income

as
in the economy.
15. Give the meaning of average propensity to save (APS) and average propensity to consume (APC).
Can the value of APS be negative? If yes, when?

ak
Ans. Average propensity to save (APS) is the ratio of total savings to total income.
S
Symbolically, APS =
Y
Average propensity to consume (APC) is the ratio of total consumption to total income.

Pr
C
APC =

Y

The value of APS can be negative when consumption expenditure exceeds income. At lower
levels of income, saving is negative. For example, if income is `1,000 and consumption
s
expenditure is ` 1,200. Saving is –200. It means that APS = – 0.2.
r
16. Complete the following table.
he

Income Savings MPC Average Propensity to Save

100 40 — 0.4
ot

200 — 0.5 —

250 120 — —
Br

∆C S
Income Savings C=Y–S MPC = APS =
∆Y Y
al

100 40 60 — 40/100 = 0.4

200 100 100 0.5 100/200 = 0.5

oy

250 120 130 20 120/250 = 0.48

= 0.4
50
17. As a result of increase in investment by ` 60 crores, national income rises to ` 240 crores, then
G

calculate the MPC?

Ans. ∆I = ` 60 crores, NI = ` 240 crores; MPC = ?
∆Y 240
K= = =4
∆I 60
Goyal's ISC Economics Question Bank with MTP Class 12 for Semester-2 Examination 7
 1 1
⇒K= =4=
1 – MPC 1 – MPC
⇒ 4 – 4 MPC = 1

3

4 MPC = 4 – 1, MPC = = 0.75
4

n
18. In India, propensity to consume is fairly high. Why is that the manufacturing sector in India
shows a low rate of growth because of low demand?

ha
Ans. High propensity to consume in India is primarily because of low income of the people. When
income is low, the bulk of it is used as expenditure on food and allied items. Having spent
the bulk of these incomes on food (and related items), the people have limited capacity to buy
manufacturing Sector goods. Thus, demand of manufacturing Sector goods remains low. That is

as
why, manufacturing sector shows a low rate of growth.
19. Given that, S = – 25 + 0.5y and I = 5000. Find equilibrium y and equilibrium C.
Ans. In equilibrium, S = I

ak

So that, – 25 + 0.5Y = 5000
0.5Y = 5000 + 25
0.5Y = 5025

Pr
5025
∴Y = + 10,050
0.5
S = – 25 + 0.5 (10,050)
s
= – 25 + 5,025 = 5000
We know that Y = C + S
r
C =Y–S
he

C = 10,050 – 5,000 = 5,050

20. Do you think that increase in MPS should be beneficial to the growth of GDP in India?
Ans. Increase in MPS implies that people start saving more when their income rises. This is good
ot

for the GDP growth, provided people put their savings in the banks and the banks are able to
convert savings into investment. However, in countries like India where banking habits of the
people are yet not grown, savings may remain as idle cash balances with the people. Implying
Br

that additional income of the people is not converted into additional demand. This may cause
deficiency of AD. Deficient AD may lead to economic slowdown.
21. An economy is in equilibrium, calculate the marginal propensity to save from the following:
al

National income = ` 500; Autonomous investment = ` 30; Investment expenditure = ` 70.

Ans. Given, National income (Y) = ` 500


oy

Autonomous consumption c = ` 500

Investment expenditure (I) = ` 70

At the equilibrium level,
G

S=I
c + MPS (Y) = I
– 30 + MPS (500) = 70
8 Goyal's ISC Economics Question Bank with MTP Class 12 for Semester-2 Examination
 500 (MPS) = 70 + 30
500 (MPS) = 100
100
MPS = = 0.2
500
22. If the ratio of marginal propensity to consume and marginal propensity to save is 8:2, the value

n
of investment multiplier will be 4.
Ans. False, because if the ratio of MPC and MPS is 8:2, MPC will be 0.8 and MPS = 0.2 (because

ha
MPC + MPS = 1 and MPC is 4 times MPS. In such a case,
1
K=
1 – MPC

as
1 1
= = =5
1 – 0.8 0.2

Explanation: Let us assume that MPC = 4x and MPS = 1x, as ratio of MPC and

ak
MPS = 4 : 1
MPC + MPS = 1 ⇒ 4x + 1x = 1

1
5x = 1 ⇒ x = = 0.2

Pr
5

Accordingly, MPC = 4 × 0.2 = 0.8
23. Why should rising MPS be a cause of worry when it is a sign of rising GDP in the economy?
Ans. Rising MPS implies falling MPC, as MPS + MPC = 1. It indicates that lesser proportion of
s
the additional income goes to consumption expenditure. Implying a gradual shrinkage of AD
(aggregate demand) in relation to Y (income), in such a state, it will be a cause of recession
r
and economic slowdown.
he

24. Calculate MPC from the following schedule:

Income (Y) Consumption (C)
ot

0 60
100 110
200 150
Br

300 180
400 200
Ans. Calculations:
al

Change in Change in MPC

Consumption (C) Consumption (∆C) Income (∆Y)  C 
 MPC 
Income (Y)

oy

 Y 

0 60 — — —
100 110 50 100 0.50
G

200 150 40 100 0.40

300 180 30 100 0.30
400 200 20 100 0.20

Goyal's ISC Economics Question Bank with MTP Class 12 for Semester-2 Examination 9
 25. Find consumption and saving when autonomous consumption is ` 40, MPC is 0.4 and income
is ` 1,000. Is there greater increase in income as compared to consumption when income
increases to ` 1,500?
Ans. We know that: C = c + b Y, where C is consumption.
c = Autonomous consumption, b is MPC, Y is income.
Autonomous consumption, b is MPC, Y is income.

n
When y = ` 1000 crores
C = 40 + 0.4 (1,000) = ` 440 crores

ha
Saving (S) = Y – C = 1000 – 440 = ` 560 crores
When y = ` 1500 crores
C = 40 + 0.4 (1500) = ` 640 crores

as
Increase in consumption = 640 – 440 = ` 220 crores. Yes, the increase in income is greater than
increase in consumption when income rises from ` 1,000 crores to ` 1,500 crores.
26. "The concept of multiplier is based on the fact that one person's expenditure is another person's

ak
income." Explain it.
Ans. When investment is increased, it also increases the income of the people. People spend a part
of this increased income on consumption. However, the amount of increased income spent on
consumption depends on the value of MPC.

Pr
(i) In case of higher MPC, people will spend a large proportion of their increased income on
consumption. In such case, value of multiplier will be more.
(ii) In case of low MPC, people will spend lesser proportion of their increased income on
consumption. In such case, value of multiplier will be comparatively less.
s

Thus, the value of multiplier depends upon the MPC.
r
27. Measure the level of ex-ante aggregate demand when autonomous investment and consumption
expenditure (A) is `50 crores, and MPS is 0.2 and level of income (Y) is `4000 crores. State
he

whether the economy is in equilibrium or not.

Ans. Consumption expenditure (A) = ` 50 crores.
MPS = 0.2
ot

So, MPC = 1 – MPS

= 1 – 0.2 = 0.8
We know that AD = A + c Y ...(1)
Br

Putting the value in equation (1),

AD = 50 + 0.8 × 4000
= 50 + 3200
= 3250 crores
al

But ` 3250 < ` 4000

It implies that AD < Y
Hence, the economy is not in equilibrium.
oy

28. In an economy, investment is increased by ` 2000 crores. Calculate the change in total income,
if MPS is 0.25.
Ans. Here, ∆ I = ` 2000 crores. MPS = 0.25
G

1 1 ∆Y ∆Y
Now, multiplier (K) = = =4⇒K= ⇒4=
MPS 0.25 ∆I 2000
∆ Y = 2000 × 4 = 8000
Change in total income (∆ Y) = `8000 crores.

10 Goyal's ISC Economics Question Bank with MTP Class 12 for Semester-2 Examination
 E. Long Answer Type Questions [4 Marks]
1. What is an "effective demand"? How will you derive the autonomous expenditure multiplier
when price of final goods and the rate of interest are given?
Ans. Effective demand refers to a situation in which equilibrium output is determined solely by the
level of aggregate demand. This is because of the assumption that the supply is infinitely elastic

n
and if there exists any inequality between the aggregate demand (AD) and the aggregate supply
(AS), then the equilibrium output will only be influenced by AD. The concept of effective demand

ha
can be explained with the help of given diagram.
y
AS
AD

as
E

ak
AD

Pr
X
0 G Income/Output
Autonomous expenditure multiplier is derived as
Y = AD (at equilibrium)
s
Y = A + CY (where AD = A + CY)
Y – CY = A
r
Y(1 – C) = A
he

A
Y =
1–C
Where, A = Autonomous expenditure
ot

C = MPC
Y = Level of income
Br

1
= Autonomous expenditure multiplier
1–C

So, the autonomous expenditure multiplier is dependent on the income and MPC.
2. Explain the comparison between APC and MPC.
al

Ans. Differences between:

Basis APC MPC
oy

Meaning It is the ratio of consumption It is the ratio of change in

expenditure (C) to the consumption expenditure (∆C) to
corresponding level of income change in income (∆Y) over a
G

(Y) at a point of time. period of time.

Value more than APC can be more than one as long as MPC cannot be more than one as
one consumption is more than national change in consumption cannot be
income, i.e., till the break-even point. more than change in income.

Goyal's ISC Economics Question Bank with MTP Class 12 for Semester-2 Examination 11
 Response to change When income increases, APC When income increases, MPC also
in income falls but at a rate less than that falls but at a rate more than that of
of MPC. APC.
Formulae C ∆C
APC = MPC =
Y ∆Y
Consumption Change in Consumption

n
= =
Income Change in Income

ha
3. (a) If MPC is one-third of MPS and consumption at zero-level of National Income is ` 40 crores,
derive the consumption and saving function.
1
Ans. Given that: MPC = MPS ... (1)

as
3
We know: MPC + MPS = 1 ... (2)
Putting value of MPC from equation (1) in equation (2),

ak
1
We get, MPS + MPS = 1
3
3
MPS = = 0.75

Pr
4
1
MPC = × 0.75 = 0.25 (Alternately MPC = 1 – MPS = 1 – 0.75 = 0.25)
3
Consumption function is given as: C = c + b (Y)
s
Autonomous consumption, c = `40 crores and b or MPC = 0.25
Putting the values of b and c in the consumption function, we get
r
C = 40 + 0.25 (∆Y)
he

Saving function is given as: S = – c + (1 – b) Y

Putting the values of (1 – b) or
MPS and – c , we get:
ot

S = – 40 + 0.75 (Y)
(b) What are the two types of propensities to save?
Br

Ans. (i) APS (Average Propensity to Save): It refers to the ratio of saving (S) to the
corresponding level of income (Y).
S
i.e., APS =
Y
al

(ii) MPS (Marginal Propensity to Save): It refers to the ratio of change in saving (∆S) to
change in total Income (∆Y).
∆S
oy

i.e., MPS = ∆Y

4. The equilibrium level of income in an economy is ` 5,000 crores. The autonomous consumption
expenditure is equal to ` 250 crores and investment expenditure ` 1,000 crores. Calculate:
G

(i) Consumption expenditure at equilibrium level of national income

(ii) MPS (iii) Saving function
(iv) Investment multiplier (v) Break-even level of income

12 Goyal's ISC Economics Question Bank with MTP Class 12 for Semester-2 Examination
 Ans. (i) Consumption expenditure at equilibrium level of national income or C + I = Y
Investment expenditure = ` 1,000 crores
Income expenditure = ` 5,000 crores
C + 1000 = 5000
C = 5000 – 1000 = 4,000 crores

n
(ii) Consumption function is given as: C = c + b (Y)
Putting the values of C, c and Y in the consumption function, we get:

ha
⇒ 4,000 = 250 + 5,000 b
⇒ 5,000 b = 4000 – 250
⇒ 5000 b = 3750
⇒ b or MPC = 0.75

as

MPS = 1 – MPC = 1 – 0.75 = 0.25
(iii) Saving function

ak
S = – c + (1 – b) (Y)
S = – 250 + 0.25 (Y)
1 1
(iv) Investment multiplier (K) = = =4
MPS 0.25

Pr
(v) Break-even level of income
At break-even point, C = Y
Putting y = C in the consumption function, we get:
⇒ Y = 250 + 0.75Y
s
⇒ 0.25Y = 250
r
∴ Y = 1,000
he

Break-even level of income = ` 1,000 crores.

5. (a) Briefly explain the multiplier process.
Ans. The working of the multiplier assumes the following process:
ot

Change in investment Change in income

∆I ∆y
Change in consumption Change in income
Br

∆C ∆y
Change in investment causes change in income. As a result, there is change in consumption.
Consumption expenditure of one person is an income of the other. Hence, change in
consumption leads to change in income. This process continues till ∆c reduces the zero.
al

MPC is the core factor in the process of income generation. Higher the MPC, greater is the
conversion of income into consumption expenditure. Accordingly, greater is the generation
oy

of income. Because, ultimately it is expenditure which is converted into income. Expenditure

is an injection into the income generation process, saving is a leakage.
(b) How does investment multiplier work through change in consumption?
G

Ans. Initial increase in income due to initial investment expenditure causes increase in consumption
which (because it is an expenditure) becomes somebody's income again. So, greater the
additional consumption (∆C) out of additional income (∆Y), greater is the generation of income.
Or, greater the marginal propensity to consume (∆C/∆Y), greater is the value of the multiplier.

Goyal's ISC Economics Question Bank with MTP Class 12 for Semester-2 Examination 13
 6. (a) Complete the following table.

Level of Income (`) Consumption Expenditure MPC MPS

400 240 — —

500 320 — —

n
600 395 — —

ha
700 465 — —
Ans. Calculations:

Level of Consumption MPC MPS

as
Income (`) Expenditure (MPC = ∆C ÷ ∆Y) (MPS = ∆S ÷ ∆Y)

400 240 — —

ak
500 320 0.80 (80 ÷ 100) 0.20 (1 – 0.80)
600 395 0.75 (75 ÷ 100) 0.25 (1 – 0.75)
0.70 (70 ÷ 100)

Pr
700 465 0.30 (1 – 0.70)

(b) Which of the following can have the value of more than one and less than zero?
(i) APC (ii) APS (iii) MPC (iv) MPS
Ans. APC can be more than one as long as consumption is more than national income, i.e.,
s
before the break-even point, APC > 1.
r
APS can be less than zero at income levels which are lower than the break-even point.
Both MPC and MPS cannot be more than one or less than zero as change in consumption
he

or saving cannot be more than change in income.

7. Discuss the mechanism of investment multiplier with the help of numerical example.
Ans. Investment multiplier refers to increase in national income as a multiple of a given increase in
ot

investment. Its value is determined by MPC. It is denoted by "K" where,

∆Y = additional income generated
∆I = additional investment
Br

1 1
Multiplier = =
1 – MPC MPS
where, MPC = Marginal propensity to consume
al

MPS = Marginal propensity to save

Suppose increase in investment is `1000 and MPC = 0.8. The increase in national income is
represented in the following sequence.
oy

(i) Increase in investment raises income of those who supply investment goods by `1000. This
is the first round increase.
(ii) Since MPC = 0.8, the income earners spend `800 on consumption. This raises the income
G

of the suppliers of consumption goods by `800. This is the second round of increase.
(iii) In the similar way, the third round increase is `640 = 800 × 0.8. In this way, national income
goes on increasing round after round.
(iv) The total increase in income is `5000.
14 Goyal's ISC Economics Question Bank with MTP Class 12 for Semester-2 Examination
 8. What is meant by ex-ante demand and ex-post demand?
Ans. Ex-ante demand refers to the desired demand or planned demand during the period of one year.
This is the market demand which is intended to be expected in the economy during the period
of one year by the consumers.
Ex-post demand refers to the actual demand in the economy during the period of one year.
This aspect of demand is considered in the estimation of equilibrium price and output in

n
the economy.

ha
Ex-ante and ex-post are two Latin words used to predict the return against security. Moreover
when transcribed from Latin, Ex-ante means 'before the event'. It provides predictions of a
specific future event like a potential turnover of a company. On the other hand, ex-post stands
for 'after the event' which means looking at an event after it is complete. Moreover, Ex-post

as
offers an analysis of any occasion and encourages critical analysis and learning from it.
9. An increase of `250 crores in investment in an economy resulted in total increase in income of
`1,000 crores. Calculate the following:

ak
(a) MPC (b) Change in saving
(c) Change in consumption expenditure (d) Value of multiplier
Change in income (∆Y) 1000

Pr
Ans. Multiplier (K) = = =4
Change in investment (∆I) 250
1
We know that, multiplier (K) =
1 – MPC
1
s
4 =
1–4
r
1
1 – MPC =
he

4
Hence, MPC = 1 – 0.25 = 0.75
Change in consumption (∆C)
MPC =
Change in income (∆Y)
ot

∆C
0.75 =
1000
∆C = 0.75 × 1000 = ` 750 crores
Br

So, change in consumption expenditure (∆C) = ` 750 crores
Change in saving = change in income – change in consumption expenditure
So, change in saving = 1000 – 750 = ` 250 crores
al

(a) MPC = 0.75.
(b) Change in saving = ` 250 crores
oy

(c) Change in consumption expenditure = ` 750 crores

(d) Value of multiplier = 4
10. Assuming that increase in investment is ` 900 crores and marginal propensity to consume (MPC)
G

is 0.6, explain the working of multiplier.

Ans. Given that ∆I = ` 900 and MPC = 0.6. Increase in income is in the following sequence:
(i) Increase in investment raises income of those who supply investment goods by ` 900. This
is first round increase.
Goyal's ISC Economics Question Bank with MTP Class 12 for Semester-2 Examination 15
 (ii) Since MPC = 0.6, income earners spent ` 540 on consumption. This raises income by ` 540
= 900 × 0.6 in the second round increase.
(iii) In the similar way, third round increase in income is 324 = 540 × 0.6.
(iv) In this way, income goes on increasing round by round with each round increase in income
equal to 60 percent of the previous round increase.

n
(v) The total increase in income is:
1 1
∆Y = ∆I × = 900 ×

ha
1 – MPC 1 – 0.6
= ` 2,250 crores

F. Case Study Based Questions [4 Marks]

as
Passage 1
Read the passage very carefully and answer the questions that follow.
First increase since March: The combined consumption of petrol, diesel, liquefied petroleum gas, naphtha

ak
and pet coke, among others, was 84.1% of last years' level in April-October. That reflects the prolonged
impact of one of the harshest lock-downs in the world to contain the pandemic.
(i) Explain the concept of Aggregate supply? [1]

Pr
Ans. Aggregate supply is the sum total of expenditure on the domestically produced goods and services
during the period of an accounting year.
(ii) Write and explain the component of AD. [2]
s
Ans. C + I + G + (X – M)
(iii) What is the slope of consumption function? [1]
r
Ans. Marginal propensity to consume
he

Passage 2
Read the passage very carefully and answer the questions that follow.
ot

Corona Virus Impact: RBI to infuse liquidity via OMO.

With the heightening of Covid-19 pandemic risks, certain financial market segments have been
experiencing a tightening of financial conditions. After reviewing the current liquidity and financial
Br

conditions, the central bank has decided to conduct open market operations on March 20, 2020 in the
form of purchase of an aggregate amount of `10,1000 crores of the Government securities through a
multi-security auction.
al

(i) Explain the concept of inflationary gap. [2]

Ans. The difference by which actual aggregate demand exceeds the aggregate demand, required to
establish full employment equilibrium is known as inflationary gap.
oy

(ii) Write and explain any two functions of RBI. [1]

Ans. Sale and purchase of securities, to review the current liquidity and financial conditions
(iii) Write about Aggregate demand. [1]
G

Ans. Aggregate demand curve starts from point above the origin.

16 Goyal's ISC Economics Question Bank with MTP Class 12 for Semester-2 Examination
 Section B: Specimen Question Paper

SPECIMEN QUESTION PAPER (Solved)

(For Semester - 2 Examination)
[Issued by CISCE]

n
ha
Maximum Marks : 40
Time allowed: One and a half hour
Candidates are allowed an additional 10 minutes for only reading the paper.
They must NOT start writing during this time.

as
Answer all questions in Section A, Section B and Section C.
The intended marks for questions or parts of questions are given in brackets.[ ]

ak
SECTION A – 8 MARKS
Question 1
(i) Firm A sells flour to firm B for ` 100/- Firm B sells biscuits to the wholesaler C for ` 160/- and

Pr
Firm C sells biscuits to consumers for ` 200/. Hence, the gross value added is: [1]
(a) ` 460/- (b) ` 305/- (c) ` 244/- (d) ` 200/-
Ans. (d) ` 200
(ii) Medium of exchange and measure of value are: [1]
s
(a) Primary functions of money (b) Secondary functions of money
r
(c) Tertiary functions of money (d) Contingent functions of money
Ans. (a) Primary functions of money
he

(iii) Aggregate supply is equal to: [1]

(a) C + I (b) C + S (c) I + C (d) S1 + S2
Ans. (b) C + S
ot

(iv) Transfer earning in National income refers to: [1]

(a) transfer of income from one person to another.
Br

(b) income received by selling goods.

(c) unilateral payment received not related to any production.
(d) earning received by offering services.
Ans. (c) unilateral payment received not related to any production.
al

(v) A consumer spending on purchase of goods regardless of the income in possession, is an example
of _______ consumption. [1]
Ans. autonomous consumption
oy

(vi) _____________ is the creation of new currency to fill the gap between Government revenue and
Government expenditure of the country. [1]
Ans. Fiscal deficit
G

(vii) GNPFC = GNPMP – ______________ [1]

Ans. Indirect taxes
(viii) Give one difference between a Direct tax and an Indirect tax. [1]
Ans. Direct taxes are imposed on income and profits, indirect taxes are levied on goods and services.

82 Goyal's ISC Economics Question Bank with MTP Class 12 for Semester-2 Examination
 SECTION B – 12 MARKS

Answer the following questions briefly.

Question 2 [2]
Differentiate between CRR and SLR.

n
Ans. CRR is the percentage of money, which a bank has to keep with RBI in the form of cash. On
the other hand, SLR is the proportion of liquid assets to time and demand liabilities. CRR reg-
ulates the flow of money in the economy whereas SLR ensures the solvency of the banks.

ha
Question 3 [2]
Briefly explain two reasons for the adverse Balance of Payments in any economy.
Ans. (i) Fall in export demand: BOP deficit may arise because of fall in demand of country’s

as
goods and services abroad. This may be due to several factors like change in taste, fashion,
income in other countries.
(ii) Inflationary situation: Deficit in BOP may also result from domestic inflation, it leads to
decrease in country's competitiveness in the world markets.

ak
Question 4 [2]
Draw a well labelled diagram of two sector model of circular flow of income including the
financial sector.

Pr
Ans.
Factor Payments
(Rent, Wages, Interest, Profits)
s
Households Savings Financial Market Savings Firms
r
he

Consumption Loans Investment Loans

Household
Consumption Expenditure
ot

Circular flow of income including the financial sector.
Question 5 [2]
Complete the following schedule:
Br

Y C APC MPC
100 90 ? ?
120 108 ? ?
al

Ans. Calculation:
C ∆C
Y C S(Y – C) APC = MPC =
∆Y
oy

Y
100 90 10 0.90 –
120 108 12 0.90 0.90
G

Question 6 [2]
(i) Differentiate between Cash Credit and Outright Loans.
Ans. Cash Credit: Cash credit refers to a loan given to the borrower against this current assets
like shares, stock, bonds etc. A credit limit is sanctioned and the amount is credited in his
account.
Goyal's ISC Economics Question Bank with MTP Class 12 for Semester-2 Examination 83
 Outright loans: An outright loan would be a lump sum of money that the borrower intended
to use for sure.
OR
(ii) How is Devaluation of currency different from Depreciation of currency? Give any two
differences.
Ans. Differences between:

n
Devaluation Depreciation

ha
(i) Devaluation refers to reduction in price of Depreciation refers to fall in market price
domestic currency in terms of all foreign of domestic currency in terms of a foreign
currencies under fixed exchange rate currency under flexible exchange rate regime.
regime.

as
(ii) It takes place due to government. It takes place due to market forces of demand
and supply.
Question 7 [2]

ak
What is meant by the following functions of the Central bank:
(i) Clearing house
Ans. Clearing House: As the custodian of the cash reserves of the commercial banks, the central bank

Pr
acts as the clearing house for these banks since all banks have their accounts with the central
bank, the central bank can easily settle the claims of various banks against each other simply
by book entries of transfers from and to their accounts.
(ii) Lender of the last resort
Ans. Lender of the last resort: Central Bank acts as the lender of the last resort. If a commercial
s
bank is faced with a financial crisis, the only institution that can finally come to its rescue, is
r
the central bank.
he

SECTION C – 20 MARKS
Question 8 [4]
(i) What is meant by Equilibrium income? How is it determined by using Saving and Investment
ot

approach?
Ans. According to S-I approach, equilibrium income is determined at a point where savings are equal
to investment. Saving means withdrawal from the circular flow and investment means injection
Br

into the flow of income. Thus, the equilibrium condition is satisfied where S = I.
Y

S
al

E
I0
I0
oy
S/I
G

O X
S Income Y

84 Goyal's ISC Economics Question Bank with MTP Class 12 for Semester-2 Examination
 In the above figure I0I0 curve represents planned investment which is shown by a horizontal
line. SS curve represents planned savings at different income levels.
At OY income level, planned investment = planned saving. It means that an economy invests
what it has saved. Thus OY is the equilibrium level of income.
OR
(ii) Discuss the mechanism of investment multiplier with the help of a numerical.

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Ans. Investment multiplier refers to increase in national income as a multiple of a given increase in
investment. Its value is determined by MPC. It is denoted by 'K' where, ∆Y = additional income

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generated and ∆I = additional investment.
1 1
Multiplier = = ;
1 – MPC MPS

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where MPC = Marginal propensity to consume; MPS = Marginal propensity to save.
Suppose increase in investment is ` 1000 and MPC = 0.8, then there is an increase in national
income in the following sequence.
(i) Increase in investment raises income of those who supply investment goods by ` 1000. This

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is the first round increase.
(ii) Since MPC = 0.8, the income earners spend ` 800 on consumption. This raises the income of
the supplies of consumption goods by ` 800. This is the second round increase.

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(iii) In the similar way, the third round increase is ` 640 = 800 × 0.8. In this way, national
income goes on increasing round after round.
(iv) The total increase in income is ` 5000. The size of multiplier depends upon the size of
MPC. The larger the MPC, the greater will be the size of multiplier and vice versa that is
s
1
K =
1 – MPC
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Multiplier works in both forward and backward directions.
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Question 9 [4]
How is the rate of exchange determined in a flexible exchange rate system?
Ans. Exchange rate is determined under flexible exchange rate system by the interaction of the forces
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of demand and supply. The equilibrium exchange rate is determined at a level where demand
for foreign exchange is equal to the supply of foreign exchange. This is shown in the following
diagram:
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In the diagram: Demand and supply Y

of foreign exchange (say dollar) are
Exchange rate (Prices of $ in `)

measured along the X-axis. Exchange D S

rate (Price of dollar in rupee) is shown Equilibrium
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exchange
on the Y-axis.
rate
Demand curve (DD) and supply curve
E Equilibrium
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(SS) intersect each other at point E. R

Prices
The equilibrium exchange rate is
determined at OR. At this exchange
rate, quantity demanded and quantity
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supplied of dollars are equal to OQ. S D

Equilibrium quantity
O X
Q
Demand and Supply for foreign exchange
Goyal's ISC Economics Question Bank with MTP Class 12 for Semester-2 Examination 85
 Question 10 [4]
Explain the steps involved in calculating the national income by income method.
Ans. Income method measures national income from the perspective of factor incomes. Under this
method, incomes received by all the residents of a country for their productive services during a
year are added up to obtain the national income. According to this method, all the incomes that
accrue to the factors of production by way of wages, profits, rent, interest, etc., are summed up

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to obtain the national income.
Steps involved in income method:

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(i) First step is to identify and classify of producing units which employ factor inputs.
(ii) Factor incomes paid by each sector are grouped into the following heads.
(a) Compensation of employees (b) Mixed income
(iii) Then factor incomes of all the sectors are added to get domestic income.

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Domestic factor income (NDPFC) = Compensation of employees + Rent + Royalty + Interest
+ Profit
(iv) Finally, NFIA is added to domestic income to obtain national income.

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Question 11 [4]
Explain the following methods of redemption of Public Debt:
(i) Debt conversion

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Ans. Redemption of debt means the repayment of a debt. There are several ways of paying off a
public debt in which these are:
Debt conversion: Conversion of loans is another method of debt redemption. It means that an
old loan is converted into a new loan. In this method, when the rate of interest falls in the
s
market, the government asks the lenders to take their money back. The government borrows
more money to pay off the old debts. In this way high burden debts are replaced by low
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burden debts. In this method the lenders have to take either their money back or to get it
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renewed at a lower rate of interest.

(ii) Sinking fund
Ans. Sinking fund: In this method, the government establishes a separate fund known as sinking
fund. A fixed amount of money is credited by the government to this fund every year. By
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the time the debt matures and there is enough amount in the fund to pay off loans along
with interest there upon.
Question 12
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Read the given extract carefully and answer the following questions.
Mr. X wanted to buy an expensive motorcycle for his son but he did not have sufficient money to
buy it. He approached a public sector commercial bank for the loan. The bank asked Mr. X to deposit
20% cash of the loan amount and rest 80% of the loan amount was given by the bank.
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(i) Briefly explain a Commercial Bank. [1]

Ans. A commercial bank is an institution that deals in money and credit with a view to earn profit.
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(ii) What is the regulation of consumer credit in selective credit control? [2]
Ans. These can be used in both a positive as well as a negative manner. In a positive manner,
measures can be used to encourage credit to particular sectors, usually the priority sectors. And
in a negative manner, measures can be used to restrict the flow of credit to particular sectors
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such as speculation.
(iii) Name the bank which controls all the commercial banks and financial institutions in the
country. [1]
Ans. Central Bank
86 Goyal's ISC Economics Question Bank with MTP Class 12 for Semester-2 Examination
 Section C: Model Test Papers

MODEL TEST PAPER – 1 (Unsolved)

Maximum Marks : 40

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Time allowed: One and a half hour
Candidates are allowed an additional 10 minutes for only reading the paper.

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They must NOT start writing during this time.
Answer all questions in Section A, Section B and Section C.
The intended marks for questions or parts of questions are given in brackets.[ ]

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SECTION A – 8 MARKS
Question 1

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(i) If GDP at MP is `10,000 crores, intermediate consumption is `2,500 and the ratio of sales to
change in stock is 2:1, then sales will be: [1]
(a) `4,000 (b) `5,000 (c) `3,000 (d) `2,000

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(ii) Monetary policy is the policy of [1]
(a) Government (b) Central bank (c) Commercial bank (d) NABARD
(iii) The level of equilibrium income is determined by: [1]
(a) AD and national income (b) AD and investment
s
(c) AD and consumption (d) AD and AS
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(iv) Nominal GNP is the same as, [1]
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(a) GNP at constant prices (b) Real GNP

(c) GNP at current prices (d) GNP less net factor income from abroad
(v) AD curve is given by ________ + Income approach [1]
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(vi) ___________(Revenue receipts/Capital Receipts) are those receipts that do not lead to a claim on
the government. They are non-redeemable. [1]
(vii) NDPMP = NNPMP + _____________________ [1]
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(viii) State giving reason whether the following statement is true or false: [1]

Public Sector Undertaking (PSU) disinvestment is an example of non-debt creating capital receipts.
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SECTION B – 12 MARKS

Answer the following questions briefly.

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Question 2 [2]

What is meant by margin requirements?
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Question 3 [2]
Explain the structure of B.O.P.
Question 4 [2]
Why does national income include only final goods?

Goyal's ISC Economics Question Bank with MTP Class 12 for Semester-2 Examination 87
 Question 5 [2]
An increase in investment by `400 crores leads to increase in national income by `1,600 crores.

Calculate MPC.
Question 6 [2]
Explain the components of legal reserve ratio.

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OR

What will be the effects of – Government of India has doubled the import duty on gold on

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exchange rate of India?
Question 7 [2]
What is meant by the following functions of the central bank:

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(i) Currency Authority (ii) Banker to the Government

SECTION C – 20 MARKS

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Question 8 [4]

What is the relationship between APS and APC? Can the value of APS be negative? If yes,
when?

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OR

In an economy, planned savings exceed planned investment. How will an equality between the
two be achieved? Explain.
Question 9 [4]
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How does ‘interest rates’ and ‘level of income’ in an economy affects the foreign exchange rate?
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Question 10 [4]
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Explain the steps involved in calculation of National Income by Value Added Method.
Question 11 [4]
The Government under Ujjwala Yojana, is providing free LPG kitchen gas connections to the
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families ‘Below the Poverty Line’. What objective the government is trying to fulfil through the
government budget and how? Explain.
Question 12
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When credit is to be expanded the central bank reduces the bank rate. By this central bank
encourages the commercial banks to keep small proportion of their deposits as reserves in the
borrowings from central bank is now less costly than before. This measure is also helpful in
present COVID–19 situation also.
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(i) What is Bank Rate? [1]

(ii) By reducing bank rate what is the main purpose of Central bank. Explain. [2]
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(iii) How is decrease in bank rate helpful in COVID–19 situation? [1]

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88 Goyal's ISC Economics Question Bank with MTP Class 12 for Semester-2 Examination
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