SOLUTIONS OF SAMPLE PAPER I

Q.NO. SECTION A – MACRO ECONOMICS MARKS

1 (c) Both statements 1 and 2 are true 1
2 (b) 500 1
3 (d) 4 1
4 (c) Floating exchange rate system or (a) Exports 1
5 (c) Income from the sale of second hand goods or (c) GNPMP will be greater than 1
GDPMP when NFIA will be more than zero
6 (a) Consumption= National Income 1
7 (a) Both Assertion (A) and Reason(R) are true and Reason(R) is the correct 1
explanation of Assertion (A)
8 (b) Autonomous items 1
OR
(C) Accommodating items
9 (d) Deficient Demand – Rise in employment and output level 1
10 (b) Actual AD< Required AD 1
11 Statement ‘GDP as good index of economic welfare is refuted due to the 3
following reasons:
i. It does not include non-monetary exchanges
ii. It does not take into account externalities
iii it is not distributed among all sections of society.
12 Difference between Balance of Trade and Balance of Payment 3

Balance of Trade Balance of Payment

It records only trade in goods It records transactions in both goods and
services
Narrow concept Wider concept
It may be favourable, unfavourable or BOP always remains in balance
balanced

OR
i) It will be recorded on debit side of balance of payment because
foreign exchange is flowing out from country.
ii) It will be recorded on credit side of balance of payment because
foreign exchange is coming in country.
iii) It will be recorded on credit side of balance of payment because
foreign exchange is coming in country.

13 S = - 100 + 0.30Y 4
Equilibrium Income (Y) = 600 crore
 i) Autonomous consumption = 100
ii) Investment?
In equilibrium
S=I
- 100 + 0.30Y= I
- 100 + 0.30(600) = I
-100+ 180 = I
Thus, I = 80

iii) MPC = 1-MPS

= 1-0.30
= 0.70
iv) Multiplier= 1/1-mpc
=1/0.30
Thus, multiplier= 3

14 Adjustment mechanism in AD and AS. 4

i) When AD >AS
 In this situation producer will increase the production
 Producer will increase the use of factors of production to
increase production of goods
 Increase in output will increase the level of aggregate demand
in the economy.
 Finally after adjustment, AD will be equal to AS

When AD < AS
 In this situation there will be unsold stock of goods. Here producers
will decrease the output.
 Producer will reduce the use of factors of production to cut down
production of goods.
 It will decrease income level in the economy
 Finally after adjustment, AD will be equal to AS

15 Impact of increase in LRR on credit creation by using an imaginary example 4

Suppose initial deposits = 1000 crore
LRR = 0.20
Then, Credit Multiplier or Money Multiplier = 1/LRR
= 1/0.20
Thus, Money multiplier= 5
Therefore, total credit creation in the economy = 5*1000
=5000 crores.
 Now, Suppose LRR has increased to 0.25 and the intial deposits are 1000 crore
Then, Credit Multiplier or Money Multiplier = 1/LRR
= 1/0.25
Thus, Money multiplier= 4
Therefore, total credit creation in the economy = 4*1000
=4000 crores.
It can thus be concluded that, after increase in LRR, The total credit creation in
the economy decreases from 5000 crore to 4000 crore
OR
i) Repo rate is the rate at which central bank gives short term loan to
commercial banks. If there is inflation in the economy, RBI will
increase the repo rate to decrease liquidity in the economy.
ii) Money Supply: It refers to the total stock of money held by the public
at any particular point of time in the form of paper money, coins and
demand deposits at the banks.
16 Value of Output (VO) = Sales + Change in Stock 6
= 440+35-50
Thus, Value of Output = 425
NVAFC = VO - Intermediate consumption-depreciation(CFC) - NIT(Sales + excise
duty- subsidies)
= 425 – 20 – 120- (80 + 55- 40)
= 285-95
Thus NVAFC = 190
OR
i) Precautions to be taken while calculating national income by
expenditure method are:
 Expenditure on second hand goods is not included
 Intermediate expenditure not to be included
 Transfer payments are not included.
ii) Double counting can be avoided in calculation of National Income:
 Count only value added by each production unit.
 Count only value of final product.
 What is fiscal deficit? Explain the implications of Fiscal Deficit.

17 Revenue 6
i) Fiscal Deficit = Total Expenditure(Revenue Expenditure+Capital Expenditure) +
Total Reciepts (Revenue receipt + Capital recieptother than borrowing)
Implications of Fiscal Deficit
 Increase in Money Supply
 Increase in Borrowing
 Can lead country to debt trap.
SECTION B
INDIAN ECONOMIC DEVELOPMENT
18 a)More than Half of India’s Foreign trade was restricted to Britian 1

19 a) Both Assertion (A) and Reason(R) are true and Reason(R) is the correct 1
explanation of Assertion (A)
20 a) ii,i,iii,iv 1
OR
b) 1958
21 b)Labour Force – Work Force 1
Disguised unemployment is a situation when number of workers actually
employed is greater than the number of workers required.
22 c)Agriculture 1
23 a)Both Assertion (A) and Reason(R) are true and Reason(R) is the correct 1
explanation of Assertion (A)
24 d)All of the above 1
25 c) Both statements 1 and 2 are true 1
OR
a)Statement 1 is true and statement 2 is false
26 a)Global Warming and Ozone depletion or d)Generates wealth 1
27 a)Service Sector 1
28 The factors contributes to human capital formation are 3
i.Information
ii.On the job training
iii.Migration
iv.Expenditure on Education
v.Expenditure on Health.
29 Organic Farming 3
It is a system of farming in which farmers use organic manures, biofertilizers and
organic pesticides. Organic farming helps in maintaining ecological balance.
Organic farming promotes sustainable development:
 By producing toxic free food
 Maintain fertility of the soil.
This type of farming is ecofriendly and promotes sustainable development.
30  In case of India and China lowest contribution in GDP was made by 4
agriculture sector
 Manufacturing sector has major role in Chinese economy followed by
Services and agriculture sector.
 Majority of workforce was engaged in Agriculture sector in case of India
and China.
 Maximum proportion of workforce was engaged in Service sector in case
of China.
31 i) Outsourcing refers to a system in which a company hires regular 4
services of different nature from other countries.
ii) To attain self sufficiency in food grain production.
 Benefits to farmers
 Increase in employment
 Increase in income
 Increase in marketable surplus
 Increase in output

32 It is important to generate employment opportunities in formal sector because 4

of the following reasons:
 Provides job security
 Social security Benefits
 Ensures regular income
 Follow labour laws and regulations.

33 i) Jobless Growth: 6
It refers to a phenomenon when GDP or production of goods and services rises
without any rise in employment opportunities.
ii) Informalisation of workforce
It is a situation when employment growth declines in organized sector and
increase in the unorganized sector Worker Population Ratio
iii) It is defined as the percentage of total population contributing to
GDP of a nation.
Worker Population Ratio = Workforce/Total Population*100
OR
i) Functions of the environment
 Environment Assimilates waste
 Environment sustains life
 Environment provides aesthetic services
 Environment supplies resources
ii) Role of Non – farm employment
Since agriculture is already overcrowded, it is important for rural inhabitants to
go for employment in non-farm sectors. Reasons to go for non – farm sectors
are:
 Sustainable employment opportunities
 Sustainable income
 Dynamic linkages and high income growth

34 i) The GDP of a country is derived from the different sectors of the 6

economy, namely the agricultural sector, the industrial sector and
the service sector. The contribution made by each of these sectors
makes up the structural composition of the economy.
ii) It is important to ensure that the benefits of economic prosperity
reach the poor sections as well instead of being enjoyed only by the
 rich. So, in addition to growth, modernisation and self-reliance,
equity is also important
iii) Modernisation does not refer only to the use of new technology but
also to changes in social outlook such as the recognition that women
should have the same rights as men