epee 10, u. 2. Answers to Sample Paper 2 (©) Both statements 1 and 2 are true (@ All transfer receipts are recorded as debit items. (@ Reserve Bank of India (RBI) (@ % 50,000 Working Not Opening stock = Closing stock + Change in stock = 37,700 + 12,300 = % 50,000 (a) Statement 1 is true and statement 2 is false (0) Both statements 1 and 2 are true (6) Only (i) is correct (a) % 18,000 lakh Working Not Current A unt Balance = (if) ~ (iti) + (i) = 10,000 - 4,500 + 12,500 = 7 18,000 lakh (@) Assertion (A) is false but Reason (R) is true (a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A) The sum of MPC and MPS always equal to 1, ie, MPC + MPS = 1 a ()) When MPC = MPS, then the value of both of them will be: > 2MPC = 1 = Mpc = $ The value of multiplier can be calculated as k= 2 T- MPS. Thus, the value of multiplier is 2. (A) “Devaluation” of domestic currency is a phenomenon of the fixed exchange rate system, because it is the government which decides when to change the existing exchange rate. Whereas “Depreciation” of domestic currency is a phenomenon of the flexible exchange rate system. Under this system, the exchange rate is determined by the free play of the forces of demand and supply of foreign exchange in the foreign exchange market. EAD Economies ~ 12 02B. 14. or (B) When price of a foreign currency falls, less Indian rupees are needed to get one unit of that foreign curreney. Accordingly, demand for goods and services for which payments are to be made in terms of foreign currency tends to rise. This leads to a rise in demand for that foreign currency. The various components of a rise in demand for foreign currency are as follows: (@) With for foreign currency. in price of foreign currency, imports tend to rise, leading to a rise in demand (®) A fall in price of foreign currency makes travelling to rest of the world less expensive. So, de .d for foreign currency rises. (©) Investment in rest of the world becomes less expensive, leading to a rise in demand for foreign currency. (@) Opportunity cost of holding foreign currency tends to fall. Accordingly, demand for foreign currency tends to expand. ‘When Aggregate Demand is greater than Aggregate Supply (AD > AS) at full employment level, a situation of ‘excess demand’ takes place. In an economy, if aggregate demand is greater than aggregate supply, it implies that buyers now plan to purchase more goods and services than producers are planning to supply. Producers keep the stock ready in the form of ‘inventories’. When AD > AS, this iplies that buyers are buying start falling and fall below the desired level. So to bring back the inventories at their desired level, producers produce more, which raises the output level, which keeps on going up, till AD = AS, once again. ter than what the sellers had expected, Thus the inventories The two monetary measures that may be taken by the government of India through Central Bank (RBI) to correct the given situation of deficient demand are: ase the (@) Decrease in bank rate. For controlling deficient demand, the central bank should de bank rate, A decrease in bank rate lowers the rate of interest and credit becomes cheaper. Accordingly, the demand for credit expands and aggregate demand increases. (b) Purchase of government securities. For controlling deficient demand, the central bank should resort to buying of government securities. By buying the government securities, the central bank injects additional purchasing power in the system which results in the expansion of credit. As a result, aggregate demand increases. (or any other relevant monetary measure) 15, (A) The Central Bank is the sole authority for the issue of currency in the country. Notes issued by it are circulated as legal tender money. It has its issue department which issues notes and coins. Coins are manufactured in the government mint but they are put into circulation through the central bank. While issuing currency notes, a minimum fixed amount of gold and foreign currencies is kept by the Central Bank. The monopoly of issuing notes vested in the central bank ensures uniformity in the notes issued, which helps in facilit country. By having a monopoly of note issue, the central bank can restrict or expand the supply of cash according to the requirements of the economy. ting exchange and trade within the EAD Economies ~ 12 a@) 16. (a) @) 17. (A) Or Moni determined by th gal Reserve Ratio (LRR) which is the minimum ratio of deposit legally required to be kept as cash by the banks. It is assumed that all the money that goes out of banks is redeposited into the banks. Let the LRR be 20% and there is a fresh deposit of % 10,000. As required, the banks keep 20%, ie., 2,000 as cash. Suppose, the banks lend the remaining % 8,000 to the borrowers. As assumed, those who receive payment put the money back into the ‘ion (or deposit creation or credit creation) by the commercial banks amount of initial fresh deposits and the Li bank. In this way, bank receives fresh deposits of € 8,000. The bank again keep 20%, ie., € 1,600 as cash and lend % 6,400, which is also 80% of the last deposit. The money again comes back into the bank leading to a fresh deposit of € 6,400. In this way, the money goes on multiplying and ultimately total money creation is % 50,000, ic., five times the initial deposit, 1 Total ation = Initial deposit x —1— fotal money creation = Initial deposit x a Real Gross Domestic Product is also known as GDP at constant prices whereas Nominal Gross Domestic Product is known as GDP at current pric al GDP rel ed within the domestic territory of a country during an accounting year, estimated at the base year prices! constant year prices whereas, Nominal GDP refers to the market value of the final goods and services produced within the domestic territory of a country during an accounting year, rs to the arket value of the final goods and servi s produc estimated at the current year prices. + Real GDP will increase only when there is an increase in the flow of goods and services in the economy (prices being constant) whereas Nominal GDP can increase when there is no increase in the flow of goods and services in the economy, but only price level happens to ‘+ Real Gross Domestic product is a better index of welfare of the people, because it indicates the change in quantity of goods and services available to the people. (®) Profits earned by a foreign bank from its branches in India will be included in domestic factor income of India because it is the fa India med in tor income of a foreign company (i) Scholarships given by the government of India will not be included in domestic factor income of India because it is a transfer payment and does not contribute to the flow of goods and service (iii) Profits earned by a resident of India from his company in Singapore will not be included in domestic factor income of India because it is the income of the resident earned abroad. When revenue re cipts are less than revenue expenditure in the government budget, this shortfall of receipts is known as revenue deficit. The implications of revenue deficit are as follows: ‘+ High revenue deficit shows accumulated and recurring expenses of government such as expenses on defence, payment of interest, ete. EAD Economies = 12 ——_— @‘+ The revenue deficit is managed by borrowing or disinvestment. Hence, high revenue deficit cither increases government liability or reduction of government assets. + High revenue deficit leads to inflationary situation in the economy, as high government expenditure increases the aggregate demand of the economy. * High revenue deficit implies high future burden of loan and interest payments on the government, (B) Fiscal deficit is the excess of total expenditure of the government over its total revenue and capital receipts, excluding borrowings and other liabilities of the government. Alternatively, fiscal deficit is an aggregate of budgetary deficit plus government borrowings and other liabilities. Fiscal Deficit = Total Expenditure ~ Total Receipts (excluding borrowings) or Fiscal Deficit = Total Expenditure ~ (Total Revenue Receipts + Non-debt Capital Receipts) or Fiscal Deficit Budgetary Deficit + Borrowings and other Liabilities, The important implications of fiscal deficit are: © Large budgetary and fiscal deficit is an indication that the government has been spending beyond its means. ‘© The mounting fiscal deficit implies that the increase in the tax revenue is not consistent with the revenue requirements of the government or the tax collections are relatively sluggish. The implication may also follow that the tax system is relatively less elastic. + The increasing fiscal deficit implies that the government's reliance over market and other borrowings has been rising. Moreover, it implies that the burden of debt has been increasing. or (C) When the burden of a tax and its liability to pay falls on the same person, then it is a “direct tax”. When the burden of a tax and liability to pay falls on different persons, then it is an “indirect tax”. An example of direct tax is “Income Tax. joods and Services Tax’ (GST). An example of indirect tax is ‘ (D) () Tax receipts are revenue receipts because they neither results in the creation of physical/ financial assets nor cause any reduction in the liabilities of the government. (i) Disinvestment is a capital receipt because it leads to reduction in the assets of the government, Disinvestment is the opposite of investment. It occurs when the government sells off its shares of public sector enterprises to the private sector, 18. (d) (iti), (v), @). © 19. (c) Indian Oil Corporation Ltd EAD Economies ~ 12 “20. 21. 2. 2. 24. 25, 26. 27. 28, 29. (®) China (©) apex @ D-@) (a) direct (©) Both st fatements 1 and 2 are true (6) United Nations Conference on Environment and Development (a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A) (@) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A) (@) False, as chemical fertilizers reduce the fertility of soil and become the caus ¢ of degradation of land and soil. (®) False, as short-term loans are generally availed by the landless farmers. (A) The following steps can be taken to increase the employment opportunities: (a) Increase in production: To increase employment, it is essential to increase production in agriculture and industrial sectors. Development of small and cottage industries should be encouraged. (b) Increase in productivity: Demand of labour is directly related to the productivity of labour. Higher productivity generates higher profits and therefore, greater demand for labour. Accordingly, productivity (implying efficiency) of labour must improve (6) High rate of capital formation: Rate of capital formation in the country should be increased. Also, investment must be directed to such areas of production where employment potential is high. Notably, capital-outpout ratio should be kept low. (4) Technique of production: Technique of production should suit the needs and means of the country. It is essential that labour-intensive technology is encouraged in place of the capital-intensive technology. (any three) or (B) The government has made the following efforts for rural development: (a) It has prepared a road map for agricultural diversification with focus on horticulture, floriculture, animal husbandry and fisheries. (®) Ithas started Vishesh Krishi Upaj Yojana on Ist April, 2004 as a special agricultural produce scheme with the objective of promoting exports of fruits, vegetables, flowers, minor forest produce, dairy and poultry, (©) It has focused on micro irrigation, finance, insurance and rural credit (@) It has strengthened agricultural marketing infrastructure. (any three) EAD Economies = 12 —_ °30. 31. 32. Sectoral contribution of India and Pakistan stands on the same ground. Service sector contributes significantly towards India’s and Pakistan’s GDP, followed by industrial sector. On the contrary, the industrial and services sectors contribute nearly equally in China’s GDP. The process of economic growth has led to a tremendous shift in the sectoral share of output and. employment. All three nations have undergone structural transformation from primary to industrial and service sectors, (A) State of industries in India on the eve of independence: (@) The role of the public sector in development of industries was restricted to the railways, power generation, communications, ports and some other departmental undertakings There was no growth of industrial base in India. (b) Before the advent of British in India, the traditional handicraft industries ‘enjoyed a worldwide reputation for their quality and standard of craftsmanship. But the colonial government caused its intentional and planned decline and did not allow any corresponding industrial base to come up. (c) Some modern industries were set up in areas of cotton textiles, iron and steel, sugar, paper, cement, ete. but the profits were used for debt payments of the British in their home country rather than using them for further development of Indian industries. ince the (d) There were hardly any capital goods industries to promote further industrialis Bri units set up were no substitute of the complete displacement of the loc: or had no interest in the development of Indian economy. A few manufacturing industries, (B) The New Economic Policy of India consisted of wide range of economic reforms. The core policies were intended to create a more competitive environment in the economy and remove the barriers to entry and growth of firms. This set of policies can broadly be classified into two groups: aimed to correct the weaknesses (a) Stabilisation measures: These are short-term measur developed in the balance of pa yyments and to bring inflation under control. (6) Structural reform measures: off various segments of the Indian economy. these are long-term measures initiated to improve economic sncy and increase its international competitiveness by eliminating the rigidities in The given image indicates towards the environmental challenge of “Air Pollution”. Air pollution has resulted in several respiratory disorders and heart diseases among humans. The cases of lung cancer have increased in the last few decades. Children living near polluted areas are more prone to pneumonia and asthma, Many people die every year due to the direct or indirect effects of air pollution, Due to the emission of greenhouse gases, there is an imbalance in the gaseous composition of the air. This has led to an increase in the temperature of the earth. This increase in earth’s temperature is known as global warming. This has resulted in the melting of glaciers and an increase in sea level Many areas have submerged under water. EAD Economies ~ 12 °33. (A) Problems of human capital formation in India are: (®) Rapidly rising population adversely affects the quality of human capital formation in developing countries, It reduces per capita availability of existing facilities. A large population. also requires large investment in education and health, This might divert the scarce funds pital of developing countries to production of human capital at the cost of physical (i) The process of human capital formation is a long period policy because skill formation is time consuming. The process which produces skilled manpower is, thus, slow. (ii) Regional and gender inequality lowers the human capital formation levels. (iv) Migration of highly skilled labour termed as “Brain Drain”, adversely affects the economic development. (any three) (B) Investment in education system in India has been a woeful failure. The fact of the matter is that, in 1952 we were spending a meager 0.6% of our GDP on education that rose to only about 4% in 2014. This has fallen well short of 6% target as proposed by the Education Commission, 1964, Moreover, throughout this period the increase in education expenditure has not been uniform and there has been irregular rise and fall. This shows the apathy of the government towards investment in the education system. One can imagine, if the recommended 6% p.a. of, the GDP would have been spent properly the present education system would have reached unforeseen heights. or (C) The government has introduced certain policy instruments to safeguard the interests of farmers. These instruments are: (®) Fixation of Minimum Support Price (MSP): MSP is announced before the sowing season and assures agricultural producers against any sharp fall in farm prices. It provides long- term guarantee to the farmers. (ii) Buffer Stock: The Food Corporation of India purchases wheat and rice from the farmers in states where there is surplus production and maintain it as buffer stock. Buffer stock is maintained by the government to stabilise prices. It helps in making the foodgrains available in the deficit areas and hence, resolves the problem of food shortage during adverse weather conditions or during the periods of calamity. (iii) Public Distribution System (PDS): The PDS operates through fair price shops, also known as ration shops. The government offers essential commodities like wheat, rice, sugar, kerosene, edible oils, coal, cloth, etc. at a price below the market price to poor section of the society. (D) Disguised unemployment is the characteristic feature of the Indian agriculture. It is almost rampant for owing to heavy pressure of population, joint family system and the lack of vocational avenues outside agriculture. However, it is a phenomenon not confined in agriculture alone. A deeper look into the functioning of public sector enterprises shows lots of people sitting idle all, the time. It is a point to the fact the more people are employed than actually needed. Surely, it is a sign of disguised unemployment EAD Economies ~ 12 ”34. (a) (b) Self-reliance means reliance on the domestically available resources for the growth and development of the economy. More specifically it means non-reliance on foreign investment andjor foreign aid, It was considered essential to minimise our dependence on foreign aid/ investment as it often leads to political interference by the donor countries. Aid is often tied to the project and policies as dictated by the donor countries. Self-relance refers to the state of non-independence on rest of the world for the financial resources. It represents a different way of thinking about the processes and outcomes of economic development. It is an individual's ability to garner and hold economic resources in excess of their basic needs Self-sufficient refers to the state of non-dependence upon rest of the world for essential supplies in the domestic country. It is a state of not requiring any aid, support, interaction or trade with the outside world, EAD Economies ~ 12 @