CBSE Class 12

Economics
Previous Year Question Paper 2017
Series: GBM Set- 1
Code no. 58/1

• Please check that this paper contains 9 printed pages.

• Code number given on the right hand side of the question paper should be
written on the title page of the answer-book by the candidate.
• Please check that this question paper contains 30 questions.
• Please write down the Serial Number of the question in the answer-
book before attempting it.
• 15 minute time has been allotted to read this question paper. The question
paper will be distributed at 10.15 a.m. From 10.15 a.m. to 10.30 a.m., the
students will read the question paper only and will not write any answer on
the answer-book during this period.

ECONOMICS

Time Allowed: 3 hours Maximum Marks: 100

General Instructions:
Read the following instructions very carefully and strictly follow them.
1. All questions in both the sections are compulsory.
2. Marks for questions are indicated against each question.

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3. Question Nos. 1 – 5 and 16 – 20 are very short-answer questions carrying 1 mark
each. They are required to be answered in one sentence each.
4. Question Nos. 6 – 8 and 21 – 23 are short-answer questions carrying 3 marks each.
Answers to them should normally not exceed 60 words each.
5. Question Nos. 9 – 11 and 24 – 26 are also short-answer questions carrying 4 marks
each. Answers to them should normally not exceed 70 words each.
6. Question Nos. 12 – 15 and 27 – 30 are long-answer questions carrying 6 marks
each. Answers to them should normally not exceed 100 words each.
7. Answers should be brief and to the point and the above word limits should be
adhered to as far as possible.

SECTION – A
1. Any statement about demand for a good is considered complete only when
the following is/are mentioned in it (Choose the correct alternative): 1 Mark
(a) Price of the good
(b) Quantity of the good
(c) Period of time
(d) All of the above
Ans: Correct answer is (d).
Reason: Demand for a good is considered complete only when we know the price of
the good, quantity of the good and period of time. Price determines the quantity of
goods to be purchased because at different prices we get different quantities of
goods. Quantity determines the willingness and ability to purchase and since demand
is a flow concept it is expressed in time (both quantity and price fluctuate with time).

2. Demand for a good is termed inelastic through the expenditure approach

when if (Choose the correct alternative) 1 Mark
(a) Price of the good falls, expenditure on it rises

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(b) Price of the good falls, expenditure on it falls
(c) Price of the good falls, expenditure on it remains unchanged
(d) Price of the good rises, expenditure on it falls
Ans: Correct answer is (b).
Reason: When the price of a good falls it becomes cheaper than before. Therefore,
it will cost less and thus total expenditure will also reduce.

3. Define Indifference Curve. 1 Mark

Ans: It is a curve that shows the combination of two goods which give equal levels
of satisfaction. This implies that the consumer will be indifferent while choosing any
one of those combinations on the indifference curve. It is also known as ISO- Utility
curve.

4. A seller cannot influence the market price under (Choose the correct
alternative) 1 Mark
(a) Perfect competition
(b) Monopoly
(c) Monopolistic competition
(d) All of the above
Ans: Correct answer is (a).
Reason: In perfect competition we have a large number of sellers as well as buyers
and there is homogeneity of product. Therefore, a single seller cannot
impact/dominate the industry price i.e. the price set by the forces of demand and
supply. Homogeneity of a product implies that products of one seller will be a perfect
substitute of the product of another seller so if one seller will raise the price then the
buyers will switch to another seller.

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5. State any one feature of monopolistic competition. 1 Mark
Ans: Differentiated products are produced in monopolistic competition which are
neither homogeneous nor completely different. The products thus produced are
substitutes but not perfect substitutes for products produced by other sellers. They
can differ in color, size, chemical composition, content, packaging etc.

6. Give the meaning and characteristics of production possibility frontier.

3 Marks
Ans: Production possibility frontier is also known as production possibility curve. It
is a graphical representation which shows alternative production possibilities that an
economy can undertake at full efficiency levels. There are two main characteristics
of the frontier:
a. It slopes downward to the right.
b. It is concave to the origin.
The reason for both the characteristics is that opportunity cost applies here.

7. Explain the problem of ‘‘how to produce’’. 3 Marks

Ans: The problem of ‘how to produce’ is related to the choice of production. A good
can be produced through alternative methods of production so this problem
addresses ‘which production method is the most efficient method’, ‘what quantities
of different resources are required’ and ‘which technology must be put to use’. The
choice to produce depends on availability of supplies and the prices of factors of
production.

8. Distinguish between ‘increase in demand’ and ‘increase in quantity

demanded’ of a good. 3 Marks
Ans: The difference between increase in demand and increase in quantity is as
follows:

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 Increase in Demand Increase in Quantity Demanded
It implies an increase in the quantity It implies there is an increase in the
demanded by all consumers at different demand of a commodity due to a fall in
prices due to change in factors other than price.
the price of the commodity e.g. income,
tastes and preferences etc while price
remains the same.
It results in a forward shift in the demand It results in downward movement on the
curve. demand curve.

Or
Explain the meaning of ‘Budget set’ and ‘Budget line’. 3 Marks
Ans:
● Budget set: It is the bundle of all the combinations of two commodities that
a person can afford to buy with her/his given budget. These combinations
include all those combinations that lie on the budget line as well as those that
lie below it.
● Budget line: It is a line that shows the possible combinations of two goods
that a consumer can buy with her/his given money income/budget such that
the entire budget is spent. It is negatively sloped because to increase the
quantity of one good the person will have to let go of some quantity of another
good.

9. Explain with the help of a numerical example, the meaning of diminishing

marginal rate of substitution. 4 Marks
Ans: Diminishing marginal rate of substitution states that when consumer substitutes
more and more quantity of good Y to increase an additional unit of good X then
he/she will give up lesser quantity of good Y for each additional unit of good x.

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 Quantity of
good Y given Diminishing marginal
Combinatio Good up for rate of substitution =
Good X ΔY
n Y additional
units of good ΔX
X
A 2 8 - -
B 3 5 -3 3:1
C 4 3 -2 2:1
D 5 2 -1 1:1

Quantity of good Y given up for additional units of good X is written with (-) sign
because the negative sign in diminishing marginal rate of substitution indicates the
downward slope of the Indifference curve.
When we increase the quantity of good X by forgoing some units of good Y, then,
we see that the units of good Y that are given up gradually become less and less for
each additional unit of good X. It is so because the marginal utility of X is high
initially but declines gradually as the consumer reaches the satiety level and
therefore he/she is willing to let go of smaller quantities of good Y.

10. Define market supply. Explain the factor ‘input prices’ that can cause a
change in supply. 4 Marks
Ans: Market supply refers to the quantities of a commodity that is produced by all
the firms and offered in the market or the quantities that the firms are willing to
produce and sell in the market at a given price and at a given time.
Inputs/factors means raw materials, labour, machines etc. If the factors of production
are procured at a high price then the cost of production will increase. Therefore, the
producers will procure less inputs which will result in less production and
consequently less supply. Similarly when input prices are low supply will increase.

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 Or
Give the behaviour of marginal product and total product as more and more
units of only one input are employed while keeping other inputs as constant.
4 Marks
Ans: When more and more units of only one input (variable factor) are employed
while keeping other inputs (fixed factors) as constant then -
● Initially there will be increasing returns to the factor so total product will
increase at an increasing rate and Marginal product will also rise.
● On further addition of more units of variable factor, the total product will
increase at a decreasing rate therefore Marginal product will start to diminish.
● Eventually with further addition the total product increases at constant rate
until it reaches its maximum point(T).
● The corresponding marginal product will continue to diminish until it reaches
0.
● When total product will be maximum the corresponding marginal product will
be 0.
● After attaining the maximum point, the total product will decline and the
corresponding marginal product will become negative.
It can be seen from the diagram below-

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 PRODUCT
T
P
TOTAL

O
L L L UNITS OF LABOUR (
1 2 3 VARIABLE FACTOR)

.
MARGINAL
PRODUCT

O L L L UNITS OF LABOUR (
1 2 3 VARIABLE FACTOR)
M
P

11. Explain ‘‘perfect knowledge about the markets’’ feature of perfect

competition. 4 Marks
Ans: ‘‘Perfect knowledge about the markets’’ feature of perfect competition implies
that the consumers and producers have all the relevant market related information.
Producers will not be ready to sell at any price below the market price while
consumers will not be ready to to buy at any price above the existing market price.
This eliminates the price differences in the market and helps in quickly achieving
the equilibrium level of price level. Also, the firms in an industry will know about
the prevailing cost conditions related to production therefore they will use the best
available techniques of production.

12. When the price of a good rises from Rs. 10 per unit to Rs. 12 per unit, its
quantity demanded falls by 20 percent. Calculate its price elasticity of demand.

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How much would be the percentage change in its quantity demanded, if the
price rises from Rs. 10 per unit to Rs. 13 per unit. 6 Marks
Ans: Original price = Rs. 10
Increased price = Rs. 12
Change (fall) in demand = -20% (negative sign is used because there is a fall in
demand)
 Q  
  Δ  .100 
 Q  =e = ΔQ . P
Price elasticity of demand =  P
 P   ΔP Q

 O Δ  .100 
  
ΔP 2
When the percentage change in price = .100= .100=20%
P 10

price elasticity =
( -20% ) .100
20%
We see that 20% change in price has resulted in 20% change in demand. So we can
conclude it is a unitary elastic demand.

Now,
Percentage change in the quantity demanded
eP =
Percentage change in price
Percentage change in the quantity demanded =e P . Percentage change in price

So, if the price rises from Rs. 10 per unit to Rs. 13 per unit. Then percentage change
 3
in price will be   .100=30%
 10 
If the price rose by 30% and demand elasticity is unitary (as concluded from the first
part) then percentage change in quantity demanded will be,
Quantity demanded = 1.30=30%

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i.e. quantity demanded falls by 30% for a 30 % rise in the price of a commodity.

13. Complete the following table: 6 Marks

Average Average
Output Marginal Average cost
Fixed Cost variable cost
(units) cost (Rs.) (Rs.)
(Rs.) (Rs.)
1 60 20 ….. ….
2 …. …. 19 ….
3 20 …. 18 ….
4 …. 18 …. ….
5 12 …. 31 ….

Ans:

Average Average Total

Output Marginal Average Total
Fixed variable variable
(units) cost (Rs.) cost (Rs.) cost
Cost (Rs.) cost (Rs.) cost
1 60 20 20 80 80 20
2 30 18 19 49 98 38
3 20 16 18 38 114 54
4 15 18 18 33 132 72
5 12 23 19 31 155 95

1. As the fixed cost remains constant throughout the production therefore, we

get Rs. 60 as fixed cost ( it is given that AFC=60 at Q=1; Tfc=Afc.Q=60
).

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 2. At unit 1 TVC=AVC=MCwhich is equal to 20 in the given question.
3. We have also calculated the total cost to find out the average cost and total
variable cost to find out the average variable cost.
4. Following formulas have been used to calculate the missing values-
Tfc
● Average fixed cost =
q

 ΔTc 
● Marginal cost =  
 ΔQ 
TVC
● Average variable cost =
Q

TC
● Average cost = or AFC+AVC
Q

Where TVC= total variable cost, TC= total cost, Q= quantity, TFC= total factor cost,
AFC = Average factor cost and AVC= Average Variable cost.

14. From the following total cost and total revenue schedule of a firm, find out
the level of output, using marginal cost and marginal revenue approach, at
which the firm would be in equilibrium. Give reasons for your answer.
6 Marks

Output (units) Total Revenue Total cost

1 10 8
2 18 15
3 24 21
4 28 25
5 30 33

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Ans:

Output Total Revenue= Total cost= Marginal Marginal

(units) P.Qd TFC=TVC revenue cost=TCn –
=TRn - TRn-1 TCn-1
1 10 8 - -

2 18 15 8 7

3 24 21 6 6

4 28 25 4 4

5 30 33 2 8

Under the marginal cost and marginal revenue approach, a firm would be in
equilibrium when given 2 conditions are fulfilled-
1. Marginal revenue= marginal cost
2. Marginal cost curve should intersect the marginal revenue curve from below.
Marginal revenue is the increase in the revenue by selling an additional unit of a
given good. Whereas, marginal cost is the additional cost that is incurred by
producing an additional unit of a given good.
In the table there are 2 output levels where marginal cost equals marginal revenue
i.e. at output level 3 and 4 where the marginal cost and marginal revenue is equal to
6 and 4 respectively.
When at equilibrium level MR=MC then it should also fulfill one more condition
that at higher than equilibrium level of output, MR should be less greater than MC.
In the above table,

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MC=MR=6 at output level 3
MC=MR=4 at output level 4
But, the output at which a firm would be in equilibrium is at output level 4 i.e. where
MR=MC=4.
If equilibrium is at MR=MC=6 then it means that the equilibrium level is at output
level 3. Therefore, MR at output level 4 must be less than MC at output level 4 but
it is untrue as MR=MC=4at output level 4. Therefore, this is not the equilibrium
level.
If equilibrium is at MR=MC=4 then it means that the equilibrium level is at output
level 4. Therefore, MR at output level 5 must be less than MC at output level 5 which
is true as MR<MC= i.e 2<8. Therefore this is the equilibrium level.
MC will always be greater than MR after the point of equilibrium and MC will
always be less than MR before the point of equilibrium because MC cuts the MR
curve from below.

15. Distinguish between perfect oligopoly and imperfect oligopoly. Also explain
the ‘‘interdependence between the firms’’ feature of oligopoly. 6 Marks
Ans: Difference between perfect oligopoly and imperfect oligopoly is as follows:
Nature of the product determines the basis for perfect and imperfect oligopoly.

Perfect oligopoly Imperfect oligopoly

When homogenous/undifferentiated If differentiated products are produced
products are produced in oligopoly it is it is an imperfect oligopoly, for e.g.
perfect oligopoly, for e.g. Indian oil. Godrej.

Whereas, Interdependence between the firms is very important in oligopoly. Due to

the smaller number of firms, each firm is concerned with the activities of their rivals.
Any change in the price (especially fall in the price), output(especially rise in the
output) etc. of the product by one firm will force the firms in the market to follow

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up. However, if one firm raises its prices or reduces its output, rest of the firms might
not follow up.
The activities of rival firms determine their own actions i.e. the firms in the oligopoly
react to the actions of their rival firms. For e.g. the telecom industry in India, when
Jio reduced its prices all the other companies like Airtel, Vodafone etc. had to
introduce similar plans.
Or
Explain the meaning of excess demand and excess supply with the help of a
schedule. Explain their effect on equilibrium price. 6 Marks
Ans:

Price Supply Demand

10 15 75
20 30 60
30 45 45
40 60 30
50 75 15

At the price of Rs. 30 both supply and demand are equal therefore it is the
equilibrium price level. Above the equilibrium level, at Rs. 10 and 20, the market
demand is more than the market supply, therefore it is excess demand.
Whereas, below the equilibrium level, at Rs. 40 and 50 market supply is more than
the market demand therefore it is excess supply.
● Effect of excess demand on equilibrium price: The equilibrium price will
rise as a result of excess demand because of insufficient supply.
● Effect of excess supply on equilibrium price: The equilibrium price will
fall as a result of excess supply because producers want to sell more

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 SECTION - B
16. Demand deposits include (Choose the correct alternative) 1 Mark
(a) Saving account deposits and fixed deposits
(b) Saving account deposits and current account deposits
(c) Current account deposits and fixed deposits
(d) All types of deposits
Ans: Correct option is (b) Saving account deposits and current account deposits
Reason: Demand deposits are the deposits with commercial banks that can be
withdrawn from the bank without any prior notice. Both savings and current account
allow for such withdrawals.

17. Define marginal propensity to consume. 1 Mark

Ans: Marginal propensity to consume is the ratio of change in consumption to the
ratio of change in income. It lies between 0 to 1 and tells how much of the increased
income has been consumed and how much has been saved.

18. If the marginal propensity to consume is greater than marginal propensity

to save, the value of the multiplier will be (Choose the correct alternative)
1 Mark
(a) greater than 2
(b) less than 2
(c) equal to 2
(d) equal to 5
Ans: Correct option is (a) greater than 2 .
Reason: MPC+MPS=1, if MPC >MPS then lets say that MPC is 0.8 so the MPS will
be 0.2. If we calculate the value of the multiplier then it will be 5. While if MPC is
0.6 the multiplier will be 2.5. Therefore it will vary but it will be greater than 2

Class XII Economics www.vedantu.com 15

19. Define Government budget. 1 Mark
Ans: It is a detailed estimate of government revenue and expenditure for a given
financial or fiscal year. It is an annual financial statement. It also gives details about
the fiscal policies and the corresponding financial plan.

20. What is meant by depreciation of the domestic currency? 1 Mark

Ans: Depreciation means decrease in the value of a domestic currency in terms of
a foreign currency. It shows that domestic currency has weakened. For e.g. Rs. 54
to 1$ changes to Rs. 59 to 1$ then the currency is said to have depreciated.

21. Explain with the help of an example, the basis of classifying goods into final
goods and intermediate goods. 3 Marks
Ans: The difference between final good and intermediate good is as follows:

Basis Final Goods Intermediate goods

Use For final consumption Not for final
consumption. They are
used again in the further
process of production.
Need of Directly meet the needs of the Indirectly meet the needs
consumers consumers. of the consumers.
Examples Food items such as bread is a Grains, seeds are used for
final good made from wheat growing crops. When
flour which is an intermediate these crops are grown
good. they are further used for
making final goods such
as bread, cakes, biscuits

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22. Explain ‘‘difficulty in storing wealth’’ problem faced in the barter system
of exchange. 3 Marks
Ans: In the barter system goods and services were exchanged with other goods and
services as per the short term needs. There was no commonly accepted means of
payment that was taken in exchange for any given goods and services.
Also, goods such as fruits, vegetables etc. are perishable therefore there was
difficulty in storing them in the form of wealth. Similarly, transportation of goods
from one place to another for exchange resulted in loss of value and additional costs
for e.g. carrying cattle, large amounts of wheat to exchange them with other goods
was very difficult.
Or
Explain the ‘‘medium of exchange’’ function of money.
Ans: Medium of exchange function of the money implies that money is a commonly
accepted measure of payment and any goods and services can be availed in exchange
of it. It has general trust of people because it is a widely accepted medium of
exchange and also has government/central bank backing. Thus it is convenient for
both the buyers and sellers to use it. It has also removed the disadvantages of the
barter system as it can be easily stored and does not require the double coincidence
of wants.

23. Distinguish between direct taxes and indirect taxes. Give an example of
each. 3 Marks
Ans: The difference between direct tax and indirect tax is given below:

Direct Taxes Indirect Taxes

The taxes whose impact and incidence The taxes whose impact is borne by
are both borne by the same person. one person and incidence is borne by
someone else.
Levied on income and properties. Levied on goods and services.

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 E.g. income tax, corporation tax E.g. VAT, sales tax
24. Explain the ‘‘bankers’ bank’’ function of the central bank. 4 Marks
Ans: “Bankers bank” function of the central bank describes the relationship between
central bank and commercial banks. The central bank-
● Takes care of those cash reserves of commercial banks which are kept with
the central bank under a statutory obligation..
● Gives short-term credit to commercial banks.
● Give financial assistance through loans, purchasal of securities etc.
● Gives instructions and guidance to regulate the functioning of commercial
banks and minimise their risks.
● It makes the financial system of the country stronger and capable of
withstanding during the times of financial crisis.
● It forms the basis for a large and elastic credit system.
● It allows the central bank to regulate the process of credit creation.
Or
Explain The Process Of Credit Creation By Commercial Banks. 4 Marks
Ans: Commercial banks have a unique function of creating credit from deposit
money. It is a process where the primary deposits are converted to derivative
deposits (by opening an account of the borrower). The bank creates multiple
derivative deposits because it is aware that all the deposit holders will not withdraw
the money on the same day/time. While the cash demand of depositors is met from
a small percentage of the amount kept as cash reserves. The process is better
explained as follows:
Assumptions to credit creation-
● There is a minimum cash reserve ratio of 20%.
● Remaining part of the deposit is excess reserve i.e. reserve for loans and
advances.

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Suppose a person deposits Rs. 1000 in the Canara bank. The bank is required to keep
20% of it as reserves and the rest is considered as excess reserve. So the bank will
keep Rs.200(20% of 1000 ) as reserve to meet cash demand of depositors and loan
the remaining Rs.800.
Suppose the person who takes the loan of Rs.800, deposits the cheque in another
XYZ bank. Now this bank will also keep Rs.160(20% of 800 ) as reserve to meet
cash demand of depositors and loan the remaining Rs.640.
This chain of deposits will keep occurring until the excess reserve is too small to be
given as a loan. Thus, at the end bank is able to create new deposits of Rs 5000
which is calculated as follows:

 1 
New deposits =   .Initial change in deposits ( ∆ D)
 reserve ratio ( 20% ) 

25. An economy is in equilibrium. From the following data, calculate the

marginal propensity to save: 4 Marks
(a) Income = 10,000
(b) Autonomous consumption = 500
(c) Consumption expenditure = 8,000
Ans: Marginal Propensity to save = 1 - c (Marginal propensity to consume)
Aggregate consumption = autonomous consumption + marginal propensity to
consume* Income = a+ cY
Therefore , 8000= 500+ c* 10000
8000 - 500= c* 10000
7500/10000=c
c = Marginal propensity to consume = 0.75
MPS = 1- 0.75 = 0.25

Class XII Economics www.vedantu.com 19

26. Explain how government budget can be helpful in bringing economic
stabilization in the economy. 4 Marks
Ans: Government budget can be helpful in bringing economic stabilization in the
economy in the following ways -
● It is a planned financial statement. The allocation of resources is done as per
the understanding of economic needs. Therefore it allows the government to
undertake and manage economic activities wisely.
● It includes fiscal policies which allow the government to take desired fiscal
measures to meet the interconnected objectives of those policies.
● The assessment of revenue and expenditure will help the government to keep
a check on activities related to corruption, inefficiency etc.
● It helps in proper allocation of resources as per the needs of the economy
● It also helps in achieving price stability, equilibrium in balance of payment
and economic development.
● Taxes aim to generate income for the government to undertake development
activities while expenditures aim for reduction in economic and social
inequalities.

27. Distinguish 6 Marks

(a) between current account and capital account, and
Ans: The difference between current account and capital account is as follows-

Current Account Capital Account

Current account keeps the records of Whereas, the Capital Account keeps
those international transactions that are records of those international
related to exports and imports, foreign transactions that are related to
incomes and unilateral transfers. financial(borrowing or lending) and
physical assets. They change the stock
of the country.

Class XII Economics www.vedantu.com 20

 It includes export and imports of goods It includes direct investment, portfolio
and merchandise, shipping service, investment etc.
banking service, investment income
abroad etc.

(b) between autonomous transactions and accommodating transactions of

balance of payments account.
Ans: The difference between autonomous transactions and accommodating
transactions is as follows

Autonomous Transactions Accommodating Transactions

Autonomous transactions are the Accommodating transactions are the
transactions that are done irrespective of transactions that are done to influence
the state of balance of payments. the balance of payment.

They do not have any business motive. They have a business motive.

Autonomous receipts improve the They are done to correct the

balance of payment position while disequilibrium level. If there is deficit in
autonomous expenditure worsens the BoP measures to increase the BoP will
balance of payment position. be undertaken and vice versa.

28. Explain the precautions that should be taken while estimating national
income by expenditure method. 6 Marks
Ans: Precautions that must be taken while estimating national income by
expenditure method are as follows:
● All final goods must be included even if expenditure has been incurred on
them.

Class XII Economics www.vedantu.com 21

 ● Intermediate goods/ expenditure on them must not be included because it has
been included in final goods.
● The goods related to self consumption, self ownership, own-account
production must be assigned a value and must be added as a final product.
● Second hand goods must be excluded.
● Expenditure on financial assets must be excluded because they indicate only
change in ownership.
● Expenditure by the government on transfer payments must be excluded
because they do not contribute anything to production.
● The inventory must be valued at current prices.
Or
Will the following be included in the domestic product of India? Give reasons
for your answer.
(a) Profits earned by foreign companies in India
Ans: Profits earned by foreign companies in India will be included in the domestic
product of India because domestic products include the values of all final goods and
services which are produced by manufacturers/service provided within the domestic
territory.
(b) Salaries of Indians working in the Russian Embassy in India
Ans: Salaries of Indians working in the Russian Embassy in India will not be
included because factor income from abroad are included in national product and
not domestic product.
(c) Profits earned by a branch of State Bank of India in Japan
Ans: Profits earned by a branch of the State Bank of India in Japan will not be
included because profits are not earned in the domestic territory.

29. Calculate (a) National Income, and (b) Net National Disposable Income:
6 Marks

Class XII Economics www.vedantu.com 22

 (Rs. in crores)
(i) Compensation of employees 2,000
(ii) Rent 400
(iii) Profit 900
(iv) Dividend 100
(v) Interest 500
(vi) Mixed income of self-employed 7,000
(vii) Net factor income to abroad 50
(viii) Net exports 60
(ix) Net indirect taxes 300
(x) Depreciation 150
(xi) Net current transfers to abroad 30
Ans:
(a) National income as per income method = Compensation of employees + Rent +
prof its + interest + mixed income of self employed - Net f actor income to abroad
(Net factor income to abroad is deducted because it is income to foreign country,
not a domestic country.)
2000+400+900+500+7000-50=Rs. 10750
(b) Net national disposable income = national income + net indirect taxes – Net
current transfers to abroad
10750+300-30=Rs. 11020

30. Given a consumption curve, outline the steps required to be taken in

deriving a saving curve from it. Use diagram. 6 Marks

Class XII Economics www.vedantu.com 23

Ans: A consumption curve represents how the consumption behaves given a certain
level of income, while the saving curve represents the level of savings, given a
certain level of income.
The first part of the graph is the consumption curve. Considering a two sector
economy, saving is that part of the income that is not spent on consumption
expenditure. Both consumption and saving are a rising function of income.

Y=C+S
C
CONSUM
PTION

a
Y
Y Y Y INCO
1 2 3 ME
SAVI
NGS

S
O
- Y Y Y INCO
a 1 2 3 ME

Steps related to derivation of saving curve-

1. Ac is the consumption line and Yy(C+S) is the income line at 45⁰. The vertical
distance between the income line and consumption line in the upper panel
indicates saving. The distance increases with the increase in income.
2. We produce 3 different income levels of Y1, Y2 and Y3 on the lower panel
of the graph.
3. At the Y1 level of income when consumption line (C) is above income line
(Y) in the upper panel there are negative savings (autonomous expenditure).
This is shown as the vertical distance from a point on the income line below
the x-axis to a point on the x-axis in the lower panel.

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 4. At the Y2 level of income, the consumption line (C) is at the same point as
the income line (Y) in the upper panel; therefore, saving is 0 and lies on the
x-axis on the lower panel.
5. At Y3 the income consumption line (C) is below the income line (Y) therefore
there is savings which is shown as the vertical distance between x-axis and a
point on the income line in the lower panel. If we join the three points lying
below, on and above the x-axis on the lower panel we will get the saving
curve.

Note: The following question is for the Blind Candidates only in lieu of Q. No.
30. Give two alternative conditions of national income equilibrium. Explain
what is likely to happen, if the economy is not in equilibrium. 6 Marks
Ans: Two alternative conditions for national income equilibrium are:
1. Aggregate demand = aggregate supply (At this point, consumers are able to
purchase what they desire and producers are able to sell what they desire. )
2. Planned investment = planned saving (At this point whatever part of output
that is not purchased by consumers is purchased by producers thus,Aggregate
demand = aggregate supply )
The economy is not in equilibrium in following cases
1. When Aggregate supply exceeds aggregate demand
2. When Aggregate demand exceeds aggregate supply
If the produced output (Aggregate supply) exceeds the equilibrium level of
output/income(Aggregate demand) then, aggregate supply will increase and
aggregate demand will become less. The excess of goods in absence of demand will
be added to inventories which will consequently reduce the production of new goods
and reduce the levels of income. So gradually when demand will increase the goods
in the inventory will be utilised then output production will rise, new incomes will
get generated and this will happen till equilibrium is achieved.
Similarly when there is excess demand, the prices of the goods will go up in the
absence of supply stock. Gradually, when suppliers will increase their levels of

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production to meet the extra demand, new incomes will be generated and this will
happen till equilibrium is achieved.

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