Economics (030) · Class XII · Chapter-wise Board Questions

(A) firms, households

(A) (i) and (ii)

(B) Statement 1 is false and statement 2 is true.

(D) India

(B) Capital Goods

(C) Both Statements 1 and 2 are true.

(B) Only II

(D) 150

(C) Net Factor Income from Abroad, Net Domestic Product

(B) (i) and (ii)

(A) Real, constant

(B) (iv), (ii), (i), (iii)

(D) Both Statements I and II are false.

(C) Mixed income

(A) Intermediate

(A) Both Statements I and II are true.

(B) (b) – (ii)

(D) (iii) and (iv)

(D) Net Indirect Taxes, subtracted

(B) depreciation, subtracted

(B) Income generated from smuggling

(C) 6.5, 125

(B) Statement 1 is false and Statement 2 is true.

(C) GNP_MP = GDP_MP + Net Factor Income from Abroad

(D) Both statements 1 and 2 are false.

(D) Sum of Gross National Product (GNP) and Gross Domestic Product (GDP) is always equal to zero (0). [1]

(C) Assertion (A) is true, but Reason (R) is false. [1]

(D) An Indian working in an American Company located in New York for a period of more than 1 year. [1]

(B) Statement 1 is false and Statement 2 is true. [1]

(a) net indirect taxes

(b)

(c) Both Statements 1 and 2 are true

(a) Real flow

(a) Statement 1 is true and Statement 2 is false.

(b) Annual expenditure of a school

(c) Factor, Consumption

(d) Compensation of employees

(a) A-(i)

(b) 4000,10400,4000,4400

(c) increase in flow of goods and services

(C) 169.92

(A) Factor

(C) Both Statements 1 and 2 are true.

(D) Assertion (A) is false, but Reason (R) is true.

Positive externalities refer to benefits caused by one entity to another, without being paid for it. [½]

Whereas, negative externalities refer to the harms caused by one entity to another, without being penalised for it. [½]

For example: A new park developed by the municipal corporation raises the welfare of the locality, is an example of positive externalities. In case the same park is used by people for anti-social activities which leads to insecurity among the residents, is an example of negative externalities. [1]

(any other suitable example to be awarded marks)

Stock variables are those variables whose quantity is measured at a particular point of time. [½]

Whereas, flow variables are those variables whose quantity is measured over a period of time. [½]

For example: Wealth is a stock variable and Income is a flow variable. [1]

(any other suitable example to be awarded marks)

Two precautions to be taken while estimating National Income are:

(i) Income from sale of shares is not included as such transactions are mere paper claims and do not lead to value addition. (There is no corresponding flow of goods and services) [1]

(ii) Windfall gains will not be included as there is no corresponding flow of goods and services. [1]

(any other relevant point/argument to be allotted marks)

Value of Output is the money value of all the final goods and services, produced during a year in an economy. [1]

Whereas, Value added is the excess of value of output over the value of intermediate consumption. [1]

Net Factor Income from Abroad shows negative value when the factor income earned from rest of the world is less than the factor income paid to the rest of the world. [2]

(to be marked as a whole)

Retained earnings refer to that part of the profit which the firms keep as reserve after paying the corporate tax and dividends. They are also known as undistributed profits. [2]

(to be marked as a whole)

Consumption goods refer to those goods which directly satisfy the wants of the end user (consumer). [1]

Whereas, Capital goods are those final goods which help in production of other goods and services. [1]

(any other relevant point/reason/argument should be awarded marks accordingly)

(i) Population of India as on 31st March, 2021 is a stock variable as it is measured at a particular point of time. [1]

(ii) Domestic Income of Indian Economy during the fiscal year 2020-21 is a flow variable as it is measured over a period of time. [1]

Factor income is the income received by the factors of production for rendering their services to the firms. [1]

Whereas, transfer income is unilateral income received without rendering any goods and services. [1]

Domestic Income is the money value of all the final goods and services produced within the domestic territory by residents/non-residents of a country during an accounting year. [1]

Whereas, National Income refers to money value of all the final goods and services produced by the normal residents residing within/outside a country, during an accounting year. [1]

Consumption goods refer to those final goods which directly satisfy the wants of the end user/consumer. [1]

Whereas;

Capital goods are those final goods which help in the production of other goods and services. [1]

The given statement is refuted, as national income is the factor income earned by the normal residents of a country, irrespective of whether earned within or outside the domestic territory. [2]

(To be marked as a whole)

Gross Domestic Product (GDP) after adjusting for inflation (Real GDP) is a better measure of welfare than GDP at current prices (Nominal GDP). [1]

Real GDP is a true indicator of economic growth of a country as it changes only with the change in physical output. Thus, it eliminates the effect of changes in prices, showing the real growth of the economy. [1]

In contrast, Nominal GDP might change with the change in output or/and change in prices. [1]

Harry’s opinion is correct.

The money received from the sale of an old car will not be included in India’s National Income because its value was already included in the year it was originally produced. Hence, it does not contribute to the current flow of goods and services. [1½]

However, the brokerage paid to the car dealer is included in India’s National Income, as it represents payment for productive services rendered in the current year. [1½]

Net Domestic Product at Factor Cost (NDP_FC) = (iv) - (iii) - (vii) [½]
= 200 – 50 – 10
= ₹ 140 crore [½]

NDP_FC = Compensation of Employees + (v) + (i) + (vi) + (ii) [1]

Compensation of Employees = 140 – 25 – 45 – 5 – 20 [½]
= ₹ 45 crore [½]

Gross Domestic Capital Formation refers to addition to the capital stock which includes replacement for the wear and tear which the capital stock undergoes. [1]

Two Components of Gross Domestic Capital Formation:

• Gross Domestic Fixed Capital Formation. [1]
• Inventory Investment. [1]

(Any other valid component to be awarded marks)

A good can be classified as a final good or not, depending on the economic nature of its use. Once a good is sold to the consumer, it crosses the production boundary and any further transformation at the hands of the producer is not possible. Although it may undergo further transformation at the hands of the ultimate purchaser but it is non-economic in nature.

However, if the same product is used for further production or resale in the same year, it will be treated as an intermediate good as value addition at any further stage is possible. [3]

(To be marked as a whole)

Gross Domestic Product at Market Price (GDP_MP)
= (i) + (ii) + {(iv) + (v) + (vi) + (viii)} – (iii) [1]
= 800 + 700 + {100 + 50 + 300 + 130} - 200 [½]
= ₹1880 crore [½]

Gross Domestic Product at Factor Cost (GDP_FC) = GDP_MP – (vii) [½]
= 1880 – 70
= ₹1810 crore [½]

Two precautions to be adopted while estimating National Income by Income method are:

• Income from sale of financial assets should not be included in the estimation of National Income, as such transactions are mere paper claims and do not add to the current flow of goods and services. [1½]
• Transfer income should not be included as such income is not earned through any productive activity and is unilateral in nature. [1½]

(Any other valid precaution to be awarded marks)

Income from Property and Entrepreneurship = (ii) + (iv) + (vi) + (v) + (ix) + (viii) [1½]
= 700 + 200 + 350 + 100 + 200 + 150 [1]
= ₹ 1,700 crore [½]

National Income (NNP_FC) = (vi) + (xii) + (iii) + (xi) + (viii) + (v) + (i) + (ii) [1½]
= 1700 + 80 + 150 + 350 + 150 + 250 + 550 + (−50) [1]
= ₹ 3,180 crore [½]

(i) Expenditure on stationery items by a firm will not be included in the estimation of domestic income. It is an intermediate consumption expenditure and including it would lead to the problem of double counting. [1½]

(ii) Interest received by a branch of State Bank of India (SBI) in Germany on loans will not be included in the estimation of domestic income, as it is the income generated outside the domestic territory of India. [1½]

Net Value Added at Factor Cost (NVA_FC) = (iii) + (ii) – (iv) – (v) – {(vii) – (vi)} [1½]
= 10,625 + 600 – 2,625 – 500 – {1,200 – 400} [1]
= ₹ 7,300 crore [½]

Net Factor Income from Abroad (NFIA) is the difference between factor income received from the rest of the world and factor income paid to the rest of the world. [1½]

Whereas;

Net Exports (X – M) is the difference between the value of exports of goods and services and the value of imports of goods and services. [1½]

Gross Domestic Product (GDP) deflator is the ratio of nominal Gross Domestic Product (GDP) to real Gross Domestic Product (GDP). [1]

GDP deflator is a tool which is used to eliminate the effect of price fluctuations in the economy and to determine the real change in physical output of current year. GDP deflator helps in comparison of growth rate of the economy. [2]

Two precautions to be taken while estimating National Income by Expenditure Method are:

• Expenditure on intermediate goods should not be included as it will lead to the problem of double counting. [1½]
• Expenditure on purchase of second-hand goods should not be included as it does not add to the flow of goods and services in the current year. [1½]

(Any other valid precaution to be awarded marks)

Percentage change in Real Gross Domestic Product (GDP) in the year 2022-23
= (Change in Real GDP / Real GDP) x 100 [1½]
= {(6000 − 5000)/5000} x 100 [1]
= 20% [½]

Steps pertaining to the estimation of National Income under the Income method:

1. Identify and classify production units into distinct heads namely primary, secondary and tertiary sector. [1]

2. Estimate and classify the factor income in different categories as Compensation of Employees, Operating Surplus and Mixed Income. The sum of factor income represents the contribution of the sectors to Domestic Income (NDP_FC). [1]

3. Finally, estimate and add the value of Net Factor Income from Abroad (NFIA) to arrive at National Income (NNP_FC). [1]

Percentage change in Real Gross Domestic Product (GDP) in the year 2022-23
= (Change in Real GDP / Real GDP) x 100 [1½]
= {(6000 − 5000)/5000} x 100 [1]
= 20% [½]

Domestic Income (NDP_FC) = (i) – (ii) – (v) – {(iii) – (iv)} [1½]
= 2,500 – 200 – 50 – {20 – 50} [1]
= ₹ 2,280 lakh [½]

Net Factor Income from Abroad (NFIA) is the difference between factor income received from the rest of the world and factor income paid to the rest of the world. [1½]

Components of NFIA:

• Net Compensation of Employees (COE) refers to the difference between compensation earned by normal residents from abroad and compensation paid to non-residents working within domestic territory. [½]
• Net Income from Property and Entrepreneurship refers to difference between income earned by residents from rent, interest, and profits and similar payments made to non-residents. [½]
• Net retained earnings refers to difference between retained earnings of resident companies overseas and foreign companies operating domestically. [½]

Value of Sales = (viii) – {(iv) – (iii)} + (v) – (i) + (vi) [1½]
= 2,000 – (600 – 100) + 3,000 – 200 + 700 [1]
= ₹ 5,000 lakh [½]

Two precautions to be taken while estimating National Income by Income method are:

• Transfer Income should not be included as they are unilateral in nature. [1½]
• Income from sale of second-hand goods should not be included as it does not add to the flow of goods and services in the economy in the current year. [1½]

(Any other valid precaution to be awarded marks)

National Income (NNP_FC) = (i) + (ii) + (iii) + (v) + (iv) – (vi) + (vii) – (viii) [1½]
= 1,000 + 2,000 + 1,000 + 50 + 100 – 100 + 20 – 200 [1]
= ₹ 3,870 crore [½]

Net Domestic Product at Factor Cost (NDP_FC) = (v)+(iii)+(i)+(vi)+(ii-vii)-(iv)-(viii) [1½]
=470+320+200+(-40)+(50-60)-35-50 [1]
= ₹ 855 crore [½]

(i) Externalities refer to benefits/harms which are caused by one entity to another without being paid/ penalised for it. [1½]
For example: Newly developed public park [½]
(Any other relevant example to be awarded marks)

(ii) Factor income earned in the form of rent, royalties, interest and profits are together called ‘Operating Surplus’. [1]

Gross National Product at Factor Cost (GNP_FC) = (i)+ (ii)+(iii)+(iv)+(vi)+(v)+(vii) [1½]
= 2,000+ 700+ 500+ 300+150+200+(-50) [1]
= ₹ 3800 crore [½]

National Income (NNP_FC) = (ii) + (i) + (iii) + (v) + (iv) − (vi) − {(vii) − (viii)} + (ix) [1½]
= 200 + 110 + 30 + 20 + (−40) − 15 − 60 + 15 + (−40) [1]
= 220 crore [½]

Three precautions to be taken while estimating National Income by Expenditure Method are:

• Expenditure on intermediate goods should not be included. [1]
• Expenditure on purchase of second-hand goods should not be included. [1]
• Expenditure on purchase of financial instruments (shares, bonds, debentures etc.) should not be included. [1]

(Any other valid precaution to be awarded marks)

Net National Product at Factor Cost (NNP_FC) = (i) + (iii) + (ii) + (ix) + (vi) – (iv) – (vii) – (v) + (viii) [1½]
= 1,200 + 500 + 800 + 70 + (–50) – 100 – 200 − 150 + 80 [1]
= ₹ 2,150 crore [½]

The given statement is refuted. Disposition phase of circular flow of income indicates the flow of spending by the households on purchase of goods and services produced by firms.

Whereas, the aforesaid statement depicts the distribution phase which involves the flow of factor incomes, which comprises of rent, wages, interest and profits from firms to households. [3]

(To be marked as a whole)

Depreciation on fixed capital goods = Fixed Capital / Expected Life Span = 15/5 = 3

Net Value Added at Factor Cost (NVA_FC) = (ii) + (iv) + (iii) – (v) − Depreciation – (vi) [1½]
= 200 + 10 + (−10) – 120 – (3) – 20 [1]
= ₹ 57 lakh [½]

Net Indirect Taxes = (i) + (iv) – (iii) [1½]
= 1,400 + 100 – 1,300 [1]
= ₹ 200 crore [½]

Net Value Added at Factor Cost (NVA_FC) = (i) + (ii) – (iii) – [(iv) – (v)] – (vi) [1½]
= 1,000 + 150 – 300 – [100 – 80] – 20 [1]
= ₹ 810 crore [½]

Value Addition refers to the excess of ‘Value of Output’ over the ‘Value of Intermediate Consumption’.
Value Addition = Value of Output – Value of Intermediate Consumption [1½]

Whereas;

Final Value of output refers to the total money value of goods and services produced during a given period of time.
Final Value of output = (Number of units produced) x (Price per unit) [1½]

Value added = Value of output - Intermediate consumption
Value added by firm A = (iii)- (v) – (ii + iv) [1½]
= 10 - 3 –(2+50) [1½]

(No marks to be deducted for negative value in the answer)

Net Domestic Product at Factor Cost (NDP_fc)= (i)+(ii)+(iii)+(iv)+(v)–(vii)–(vi)-(viii) [1½]
= 2,000+1,500+1,000+300+700–200–350–250 [1]
= ₹ 4,700 crore [½]

Value of output refers to the total money value of goods and services produced during a given period of time.
Value of output = (Number of units produced) X (Price per unit) [1½]

Whereas;

Value Added refers to the excess of ‘Value of Output’ over the ‘Value of Intermediate Consumption’.
Value Added = Value of Output – Value of Intermediate Consumption [1½]

Yes. Depreciation is the continuous fall in the value of an asset due to expected obsolescence. Value of fixed assets may fall owing to change in technology over a period of time.

(To be marked as a whole)

National Income (NNP_FC) = Gross Domestic Product at Market Price (GDP_MP) – Depreciation + Net factor income from abroad – Net Indirect Taxes [1½]
850 = 1,100 – Depreciation + 100 – 150 [½]
Depreciation = 1,100 + 100 – 150 – 850 [½]
Depreciation = ₹ 200 crore [½]

Percentage (%) Change in Real GDP = (Change (Δ) in Real GDP ÷ Base Year Real GDP) × 100 [½]
= ((5,500 – 5,000) ÷ 5,000) × 100 [1]
= 10% [½]

(Any other relevant method to be allotted marks)

National Income (NNP_FC) = GDP_MP – Consumption of Fixed Capital - Net factor income paid by the economy to the rest of the world – Net Indirect Taxes [1½]
3,500 = 5,000 - Consumption of Fixed Capital – 450 – 400 [1]
Consumption of Fixed Capital = ₹ 650 crore [½]

Three precautions that are taken while estimating national income by production method:

• Value of intermediate goods should not be included in the estimation of National Income, to avoid the problem of double counting (as their value has already been included in the value of final goods) [1]
• Imputed value of goods for self-consumption should be taken into consideration while estimating National Income, as it adds to the current flow of goods and services. [1]
• Sale and purchase of financial assets should not be included in the estimation of National Income, as such transactions are mere paper claims and do not lead to value addition. [1]

(Any other valid precaution to be allotted marks)

Given,
Real GDP = ₹ 500 crore
Price index = 125

Price index = (Nominal GDP / Real GDP) × 100 [1]
∴ 125 = (Nominal GDP / 500) × 100 [1]
Or, Nominal GDP = (125 × 500)/100 [½]
Nominal GDP = ₹ 625 crore [½]

(i) Purchase of shares of Sethi Ltd. by an investor in the Bombay Stock Exchange is a transaction, which is a mere paper claim and do not lead to any value addition and thus will not be included. [1]

(ii) Salaries paid by Indian Embassy situated at Japan, to the local workers is a factor income paid to non-residents and thus will not be included. [1]

(iii) Depreciation on capital assets is not included as it is a mere accounting entry that is needed to accommodate regular wear and tear of capital. [1]

Counting the value of a good or service more than once while estimating National Income by value added method is called double counting problem. [1]

This may be illustrated with the following example:

Suppose a farmer produces 50 kg of wheat and sells it for ₹ 500 to a flour mill owner. If intermediate cost for farmer is assumed to be zero, then the value added will be ₹ 500. For the flour mill owner, wheat is an intermediate good which is converted into flour and sold for ₹ 700 to a baker. For the baker, flour becomes an intermediate product which is converted into bread and sold to the final consumers for ₹ 1,000 as the final product.

In the given example, wheat is a final product for the farmer, flour for the flour mill owner, bread for the baker.

However, the value of wheat is included in the value of flour as well as in the value of bread. As a result, the value of wheat and flour are counted more than once. This may cause the problem of double counting. [2]

(marks to be allotted for tabulated example too)

Real Gross Domestic Product (GDP) is the money value of final goods and services measured at base year prices.

Whereas, Nominal Gross Domestic Product (GDP) is money value of final goods and services measured at current year’s prices.

For example, suppose a country produces only one product. In the year 2000 it had produced 100 units which was sold at ₹ 10 per unit. GDP at current price for year 2000 was ₹ 1,000.

In 2001, the same quantity is produced but is sold at ₹15 per unit.

In this case the Nominal GDP in 2001 was ₹ 1,500 (=100 × ₹ 15), however the Real GDP (in 2001) will be ₹ 1,000 (=100 × ₹ 10). [3]

(to be marked as a whole)

(a) Payment of indirect taxes by a firm will not be included in national income as it is a transfer payment, occurring without any corresponding value addition. [1½]

(b) Purchase of goods by foreign tourists will be included in the national income as it is considered as exports of goods. [1½]

( no marks to be awarded if no / wrong reason(s) given)

[2]

Thus, we may say that the value of GDP deflator/price level has risen by 25% (125-100) over the given period of time. [1]

Three phases of circular flow of Income:

• Firms hire factor services from the households (owner of factor services). [1]
• Households receive factor income for rendering their services to the firms. [1]
• Households spend factor income earned on purchase of final goods and services produced by firms, thereby completing the circular flow. [1]

Real GDP = (Nominal GDP / Price Index) × 100 [1]
300 = (Nominal GDP / 110) × 100 [1]
Nominal GDP = (300/100) × 110 [½]
Nominal GDP = ₹ 330 crores [½]

(i) It will be included in domestic income as goods purchased by Japanese tourist is the expenditure made by him in India. It will be considered as exports. [1½]

(ii) It will be included in domestic income because it is the income received by the broker in return for providing his factor services. [1½]

A rise in Gross Domestic Product (GDP) may not benefit all the sections of the society in the same dimension. This is because a given rise in GDP may be concentrated in the hands of very few individuals or firms. For the rest, the income may not vary or may have fallen. In such a case, the welfare of the entire country may not increase despite the increase in GDP. [3]

(to be marked as a whole)

GVA_mp = (ii) + (iii) + (iv) – (v) [1½]
= 200 + (-10) + 10 - 120 [1]
= ₹ 80 lakh [½]

Two precautions of Expenditure Method are:

(i) Any expenditure on intermediate consumption should not be included, as it may lead to problem of double counting. [1½]

(ii) Expenditure on transfer payments should not be included, as these are unilateral in nature. [1½]

(any other valid precaution to be allotted marks)

Gross Value Added of Firm B = (i) – (iv) [½]
= 1,000 – 250 = ₹ 750 crore [½]
Gross Value Added of Firm A = Gross Value Added of Firm B = ₹ 750 crore
Domestic Sales of Firm A = Gross Value Added of Firm A – (iii) – (v) + (ii) [1]
= 750 – 200 – 150 + 300 [½]
= ₹ 700 crore [½]

Value-Added Method:
Gross Domestic Product at Market Price = (ii) − (viii) [½]
= 1,900 – 330 [½]
= ₹ 1,570 crore [½]

Expenditure Method:
Gross Domestic Product at Market Price = (i) + (iii) + (iv) + (vii) [½]
= 500 + 400 + 600 + 70 [½]
= ₹ 1,570 crore [½]

(I) Two factors of production and their respective remunerations earned are:

• Land - Rent [½ + ½]
• Capital - Interest [½ + ½]

(II) The remuneration earned by the Land can be defined as:
Rent: Income earned by the owner of the land (natural resources). [1]

Gross Value Added of Firm Y = (i) – (iv) [½]
= 700 – 150
= ₹ 550 crore [½]

Domestic Sales of Firm Y = Gross Value Added of Firm Y + (iv) [½]
= 550 + 150
= ₹ 700 crore [½]

Gross Value Added of Firm X = Gross Value Added of Firm Y = ₹ 550 crore

Domestic Sales of Firm X = Gross Value Added of Firm X – (iii) – (v) + (ii) [1]
= 550 – 100 – 50 + 200 [½]
= ₹ 600 crore [½]

Factor Income:

• Rental income from a flat she owns. [½]
• Interest income from her fixed deposits. [½]
• Retirement pension (Deferred Payment) [½]

Transfer Income:

• Money sent by her children settled abroad. [½]

Factor income is the income earned by the factors of production for rendering their services. [1]

Transfer income is the income received without rendering any productive service in return. [1]

Stock Variable: National Savings [½]

Flow Variables:

• National Income [½]
• Gross Domestic Product [½]
• Depreciation on capital goods [½]
• Investment on new capital goods [½]

Stock variables are those variables which are measured at a particular point of time whereas; flow variables are those variables which are measured over a period of time. [1½]

(i) Given, Nominal Gross National Product (GNP) = ₹ 2,500 crore
Gross National Product estimated at the prices of base year = ₹ 3,000 crore

Gross National Product (GNP) deflator (in percentage) = (Nominal GNP / Real GNP) x 100 [1]
= (2,500 / 3,000) x 100 [½]
= 83.33 [½]

(ii) The given statement is refuted. As the value of Gross National Product (GNP) deflator of 83.33 indicates that the price level in the year under consideration has reduced by 16.67% (100 - 83.33) compared to base year. [2]

No.

Final Goods:

• Machinery purchased to manufacture printers [1]
• Printer Sold to Households [1]

Intermediate Good:

• Printer Sold to Dealer [1]

Final goods refer to those goods which are used either for consumption purposes or for investment purpose. [½]

Whereas, Intermediate goods refer to those goods which are either used for production or resale purposes in the same year. [½]

(i) Gross investments refer to addition to the capital stock which includes replacement for the wear and tear which the capital stock undergoes. [1]

(ii) Two components indicated in the given image are:

• Gross Public Investment [½]
• Gross Residential Construction Investment [½]

(Any other valid indicated component to be awarded marks)

(iii) Gross Public Investment refers to the expenditure incurred by the government on creating fixed assets such as flyovers, roads, dams etc. [2]

(Any other valid component to be awarded marks)

The items like Utensils, Small Gas Stove and Tea can be categorized as final goods as these goods are used either for consumption purposes or for investment purpose. [1½]

However, the items like Tea Leaves, Sugar, Milk, Water and Ginger can be categorized as Intermediate Goods, as these goods are used for further production/resale in the same year. [2½]

The output of petrochemical industrial unit contributes to the Gross Domestic Product (GDP) through value addition in the economy. However, it generates negative externalities such as groundwater pollution, deteriorating air quality and health problems for people living in nearby villages. This will increase healthcare costs and reduce the overall quality of life. Therefore, GDP may increase but at the cost of welfare of people in general. [4]

(To be marked as a whole)

The income earned by Ms. Sarika in the form of rent and interest can be classified as factor income, as it is the income earned by the factors of production for rendering their services. [2]

Whereas;

Cash transfers received by Ms. Sarika from her family members abroad can be classified as transfer income as it is the income received without rendering any productive service in return. [2]

The final expenditure incurred by the sectors of an economy can be:

• Private Final Consumption Expenditure: It is the expenditure incurred by households and non-profit institutions serving households on final consumption of goods and services. [2]
• Net Exports: It refers to the excess of value of exports of goods and services over the value of imports of goods and services, during an accounting year. [2]

(i) GNP_FC = (i) + (ii) + (iv) + (v) + (vii) + (viii) [1½]
= 12,000 + 1,800 + 1,500 + 1,100 + (−)120 + 1,300 [1]
= ₹ 17,580 crore [½]

(ii) Rent is a factor income earned by the owners for lending their services such as land, building etc. [1]

Royalty is the income earned by a person /institution for lending Intellectual Property Rights and rights of sub soil assets. [1]

(i) NVA_FC = (i) + (iii) + (iv) − (v) + (vi) [1½]
= 580 + 20 + 15 − 20 + 3 [1]
= ₹ 598 thousand [½]

(ii) Value of output is the estimated money value of final goods and services, inclusive of change in stock and production for self consumption. [1]

Whereas, Value added is the excess of value of output over the value of intermediate consumption. [1]

GDP_FC = (ii) + Government Final Consumption Expenditure + (viii + x) + (v) – (iv) [1]
370 = 210 + Government Final Consumption Expenditure + (70 + 60) + (−20) − 20 [1]
Government Final Consumption Expenditure = ₹ 70 crore [½]

GDP_FC = (i) + Operating Surplus + (ix) + (xi) [1]
370 = 175 + OS + 40 + 70 [1]
Operating Surplus = ₹ 85 crore [½]

(i) NVA_FC = (i × ii) + (v) − (vi) − (iv) − (iii) [1½]
NVA_FC = (20 × 1,250) + (−500) − 6,000 − 1,000 − 5,000 [½]
NVA_FC = 25,000 − 12,500 [½]
NVA_FC = ₹ 12,500 crore [½]

(ii) The distinction between final and intermediate goods is required to estimate the correct value of Gross Domestic Product (GDP). In the absence of this distinction, GDP may be over-estimated and may lead to problem of double counting. [2]

(to be marked as a whole)

(i) Externalities refers to benefits (positive externalities) / harms (negative externalities) which are caused by one entity to another without being paid/penalised for it. [2]

For example: A new park developed by Municipal Corporation raises the welfare of the locality is the example of positive externalities. In case the same park is used by people for anti-social activities, this will lead to insecurity among the residents is an example of negative externalities. [1]

(ii) Net Factor Income from Abroad is the difference between factor incomes earned from rest of the world (ROW) and factor incomes paid to Rest Of the World (ROW).
Whereas, Exports refers to sale of goods and services by the country to the Rest Of the World, thus exports are not a part of Net Factor Income from Abroad. [2]

Income Method
NNP_FC = (iv) + (iii) + (vi) + (v) [1½]
= 1,400 + 740 + 1,000 + 40 [1]
= ₹ 3,180 crores [½]

Expenditure Method
(ii) NNP_FC = (x) + (xi) + [(vii + viii)] + (i) + (v) – (ii) [1]
= 2,000 + 1,000 + [500 + (–100)] + (–60) + 40 – 150
= ₹ 3,230 crores [1]

(MARKS ARE TO BE AWARDED EVEN IF THE VALUES OF NATIONAL INCOME ARE DIFFERENT)

(i) Operating surplus = (v) – (iii) – (i) [1]
= 650 - 100 - 300 [½]
Operating surplus = ₹ 250 crore [½]

(ii) Components of net factor income from abroad are as follows:

• Net compensation of employees [1]
• Net Income from property and entrepreneurship [1]
• Net retained earnings [1]

(with valid explanations)

(I) Operating Surplus = (i) + (ii) + (iii) + (v) [1½]
= 5 + 75 + 30 + 45 [1]
= ₹ 155 crore [½]

(II) Fixed investment refers to addition to the stock of fixed assets in the hands of producers during an accounting year. [1]

Whereas, inventory investment is addition to the stock of inventory (unsold finished goods, semi-finished goods, raw material) with the producers during an accounting year. [1]

(I) Compensation of Employees (COE) = (ii) + (iii) + (iv) [1½]
= 60,000 + 30,000 + 7,500 [1]
= ₹ 97,500 crore [½]

(II) Stock refers to that quantity of an economic variable which is measured at a particular point of time. [1]

Whereas, flow is that quantity of economic variable which is measured over a period of time. [1]

(a) Percentage change in Real GDP = (Change in Real GDP / Real GDP) × 100 [1]
= ((9.2 - 7.3)/7.3) × 100 [½]
= 26.02 % [½]

(b) (i) Two economic variables which have shown positive sign after the pandemic period are:

1. India’s real GDP is estimated to grow by 9.2 % in 2021-22 as compared to the corresponding figure of 7.3% in 2020-21. [1]
2. Private consumption has also improved to recover approximately 97% of the corresponding pre-pandemic level and stands fully recovered in the second half of the financial year 2021-22. [1]

(ii) Real Gross Domestic Product (GDP) is defined as the money value of all the final goods and services produced within the domestic territory of an economy, measured at base year prices. [1]

Operating Surplus = (i) + (ii) + (ix) [1½]
= 120 + 200 + 30 [1]
= ₹ 350 crore [½]

Gross Domestic Product at Market Price (GDP_MP) = (iii) + (viii) + {(vi) - (vii)} [1½]
= 720 + 200 + (150 – 50) [1]
= ₹ 1,020 crore [½]

(i) Real Gross Domestic Product (GDP) refers to the market value of final goods and services produced in the domestic territory of an economy during a given period of time, measured at constant prices. [1]

Whereas;

Nominal Gross Domestic Product (GDP) refers to the market value of final goods and services produced in the domestic territory of an economy during a given period of time, measured at current year prices. [1]

For example, considering base year be 2022 and current year be 2025.

(Any other valid example to be awarded marks)

(ii) Externalities refer to benefits/harms which are caused by one entity to another without being paid/ penalised for it. [2]

(i) Domestic Product refers to the value of all final goods and services arising out of economic activity within the domestic territory of a country over a specific period of time. [1½]

Whereas;

National Product measures the value of all final goods and services arising out of economic activity undertaken by the normal residents of a country over a specific period of time. [1½]

(ii) National Income measured at constant prices is a better indicator of the overall real increase in production of the country as it changes only with the change in physical output. Thus, it eliminates the effect of changes in prices, showing the real growth of the economy.

In contrast, National Income measured at current year prices might change with the change in output or/and change in prices. [3]

(To be marked as a whole)

(i) Two precautions to be adopted while estimating National Income by Expenditure Method are:

• Expenditure on intermediate goods should not be included as it will lead to the problem of double counting. [1½]
• Expenditure on purchase of second-hand goods should not be included as it does not add to the flow of goods and services in the current year. [1½]

(Any other valid precaution to be awarded marks)

(ii) The given statement is refuted. Gross Domestic Product (GDP) may not affect the welfare of all the sections of the society in the same dimension. This is because a given rise in GDP may not increase the per capita availability of goods due to concentration in a few hands. For the rest, the income may have fallen. In such a case, the welfare of the entire economy may not increase despite the increase in GDP. (To be marked as a whole) [3]

(i) Stock variables refer to those variables which are measured at a particular point of time. [1]

Example: National Wealth [½]

Flow variables refer to those variables which are measured over a period of time. [1]

Example: National Income (Any other valid example to be awarded marks) [½]

(ii) The components of ‘Profit’ as per Income Method of estimating National Income (NNP_FC):

• Corporate Tax: Taxes imposed on the income made by the corporations (or private sector firms). [1]
• Undistributed Profits: Part of the profit earned by the private and government-owned firms which are not distributed among the factors of production. [1]
• Dividend: The residual profit which is distributed among the shareholders (owners of capital). [1]

(i) National Income (NNP_FC) = (1) + (2) + (3) + (4) + (8) – (5) + (6) – (7) [2]
= 2,000 + 1,500 + 1,000 + 400 + 700 – 50 + 100 – 200 [1½]
= ₹ 5,450 crore [½]

(ii) Real flow refers to the flow of goods and services between households and firms. [1]

Whereas;

Money flow refers to the flow of money in the form of factor payments and payment for goods and services between households and firms. [1]

(i) Sewing machine purchased by Gauhar for her boutique can be classified as a Final Good. [1]

As the same will be used for investment purposes. [1]

Fabric, buttons and thread can be classified as intermediate goods. [1]

As they are completely used up in the further production of goods and services in the same year. [1]

(ii) The given statement is defended.

National Income = Domestic Income + Net Factor Income from Abroad

In a two sector economy, due to no interaction with the external sector, Net Factor Income from Abroad has no significance. Hence, National Income is always equal to Domestic Income. (To be marked as a whole) [2]

(i)

(Any other valid method to be awarded marks)

(ii) The construction of two new Express Highways may impact the Gross Domestic Product (GDP) positively as improved infrastructure generally attracts higher investments in an economy and may lead to an increase in employment opportunities. It may also reduce travel time and average transportation costs. Consequently, increasing the well-being of citizens. (To be marked as a whole) [2]

(i) National Income (NNP_FC) = (i) + (iv) + (ii) + (iii) + (vii) + (vi) - (v) - (x) + (ix) - (viii) [1½]
= 800 + 270 + 150 + 120 + 130 + 50 – 20 – 40 + (-25) -20 [1]
= ₹ 1,415 crore [½]

(ii) The given statement is refuted. Producer goods can be categorized as single-use producer goods (intermediate goods) and durable producer goods (capital goods). These goods are used for further production of goods and services. Intermediate goods are completely used up in the production process during the same year. Whereas, capital goods are used for more than one year. Thus, all producer goods are not essentially capital goods. (To be marked as a whole) [3]

(i)

Net Domestic Product at Market Price (NDP_MP) = GDP_MP – Depreciation [½]
= 5,700 – 120
= ₹ 5,580 [½]

(Any other valid method to be awarded marks)

(ii) The construction of 2,000 new schools may impact the Gross Domestic Product (GDP) positively as construction generally attracts higher investments in an economy and may lead to an increase in employment opportunities. It may lead to provision of high-quality education, enhancing knowledge, skills, efficiency and increasing civic engagement. Consequently, the well-being of citizens will increase. (To be marked as a whole) [3]

(i) The given statement is refuted. Consumption goods can be categorised as durable and non-durable. Non-durable consumption goods, such as food, have a shorter lifespan. Whereas durable consumption goods, like cars and home appliances, can be used over an extended period usually more than one year. Hence, not all consumption goods are durable in nature. (To be marked as a whole) [3]

(ii) National Income (NNP_FC) = (i) + (iv) + (ii) + (iii) + (vii) + (vi) – (v) – (x) + (ix) – (viii) [1½]
= 1,800 + 2,170 + 1,150 + 1,020 + 1,300 + 540 – 720 – 440 + (-250) – 240 [1]
= ₹ 6,330 crore [½]

(i)

Net Domestic Product at Market Price (NDP_MP) = GDP_MP – Depreciation [½]
= 5,700 – 120
= ₹ 5,580 [½]

(ii) The construction of 2,000 new schools may impact the Gross Domestic Product (GDP) positively as construction generally attracts higher investments in an economy and may lead to an increase in employment opportunities. It may lead to provision of high-quality education, enhancing knowledge, skills, efficiency and increasing civic engagement. Consequently, the well-being of citizens will increase. [3] (To be marked as a whole)

(i) Real Gross Domestic Product (GDP) is the money value of all the final goods and services produced in the domestic territory of an economy, measured at base year prices. [1½]

Whereas;

Nominal Gross Domestic Product (GDP) is the money value of all the final goods and services produced in the domestic territory of an economy, measured at current year prices. [1½]

(ii) The increased sales of Electric Vehicles (EVs) is expected to have positive impacts on both Gross Domestic Product (GDP) and welfare. An increase in the sale of EVs directly contributes to the value addition, in turn GDP of an economy. Moreover, EVs are eco-friendly as they do not produce pollutants and are energy efficient. Consequently, the well-being of citizens will increase thereby creating positive externalities. [3] (To be marked as a whole)

(i) No. Net Factor Income from Abroad (NFIA) needs to be added to Domestic Income to arrive at the value of National Income. Domestic Income will be less than National Income, when NFIA is positive, i.e. factor income from abroad is greater than factor income to abroad. Whereas, Domestic Income will be more than National Income, when NFIA is negative i.e. factor income from abroad is less than factor income to abroad. On the other hand, if NFIA is zero, Domestic income will be equal to National Income. [3] (To be marked as a whole)

(ii) Positive externalities refer to benefits caused by one entity to another without being paid for it. [1]
Example: Newly developed public park. [½]

Whereas;

Negative externalities refer to harms caused by one entity to another, without being penalised for it. [1]
Example: Smoke emitted by a factory. [½]

(Any other suitable example to be awarded marks)

(i) Yes. In a two-sector economy model, households are the owners of factors of production (Land, Labour, Capital, Entrepreneur). Firms combine these factors of production to produce goods and services. They make factor payments (Rent, Wages, Interest, Profits) to households, which in turn, are completely spent by the households on the consumption of final goods and services.
Thus, the income earned by the factors of production flows back to the production units in the form of aggregate consumption expenditure. [3] (To be marked as a whole)

(ii) Problem of double counting refers to counting the value of goods and services more than once. This leads to an overestimation of the output in the economy. [1½]

Example: A farmer had produced ₹ 100 worth of wheat for which no inputs were required. The baker had to buy ₹ 50 worth of wheat to produce bread worth ₹ 200. To estimate the net contribution of the baker, the value of wheat (₹ 50) needs to be subtracted from the value of bread. Otherwise, ₹ 50 worth of wheat will be counted twice leading to the problem of double counting. [1½]

(a) Gross Domestic Product (GDP) deflator is the ratio of nominal Gross Domestic Product (GDP) to real Gross Domestic Product (GDP). [1]
GDP deflator is a tool which is used to eliminate the effect of price fluctuations in the economy and to determine the real change in physical output of current year. GDP deflator helps in comparison of growth rate of the economy. [2]

(b) Real Gross Domestic Product (GDP) is the market value of all the final goods and services produced in the domestic territory of an economy, measured at base year prices. [1½]

Whereas;

Nominal Gross Domestic Product (GDP) is market value of all the final goods and services produced in the domestic territory of an economy, measured at current year prices. [1½]

(a) In a two-sector economy model, households are the owners of factors of production (Land, Labour, Capital, Entrepreneur). Firms combine these factors of production to produce goods and services. They make factor payments (Rent, wages, Interest, Profits) to households, which in turn, are spent by the households on the consumption of final goods and services.

Thus, the income earned by the factors of production flows back to the production units in the form of aggregate consumption expenditure. Thereby, completing the circular flow of income. [3]

(To be marked as a whole)

(b) Yes. Real Gross Domestic Product (GDP) is the money value of all the final goods and services produced in the domestic territory of an economy, measured at base year prices. Whereas, Nominal Gross Domestic Product (GDP) is money value of all the final goods and services produced in the domestic territory of an economy, measured at current year prices.

For example:

Real GDP is a better indicator to make comparison in terms of physical output and it eliminates the effect of price change. [3]

(To be marked as a whole)

(i) Externalities refer to benefits/harms which are caused by one entity to another without being paid/ penalised for it. [1]

(ii) Positive externalities refer to benefits caused by one entity to another, without being paid for it. [1]

Whereas;

Negative externalities refer to the harms caused by one entity to another, without being penalised for it. [1]

(iii) Carbon pricing should be promoted by either placing a fee on emitting or offering subsidies on lesser emission. Through instruments like carbon tax, green cess, eco tax, etc. economy moves toward greener technology, eliminating negative externalities. Hence, carbon pricing is an important tool to ensure ecological balance. [3]

(To be marked as a whole)

(i) In a two-sector economy model, households are the owners of factors of production (Land, Labour, Capital, Entrepreneur). Firms combine these factors of production to produce goods and services. They make factor payments (Rent, Wages, Interest, Profits) to households, which in turn, are spent by the households on the consumption of final goods and services.

Thus, the income earned by the factors of production flows back to the production units in the form of aggregate consumption expenditure, thereby completing the circular flow of income. [3]

(To be marked as a whole)

(ii) Gross Domestic Product (GDP) measures the market value of all the final goods and services produced within the domestic territory of a country, during an accounting year.

Gross Value Added (GVA) measures the value addition by each production unit in an economy, during an accounting year.

Therefore, the sum of Gross Value Added (GVA) by the three sectors is always equal to the Gross Domestic Product of the economy. [3]

(To be marked as a whole)

(i) No. GDP deflator is the ratio of Nominal GDP to Real GDP. [1]

As indicated in the above example, the value of GDP is changing due to change in the prices only, the volume of output being unchanged. [3]

(Any other valid example to be awarded marks)

(ii) Factor income earned in the form of rent, royalties, interest and profits are together called ‘Income from Property and Entrepreneurship’ [2]

(a) In the past few decades, Indian economy has experienced a rapid rise in infrastructure. Infrastructural development is a core element in promoting economic growth and attracting foreign investment for sustainable production and productivity. The benefits of infrastructural development may be enjoyed by the people without paying for the same. Hence, such infrastructural development adds to the welfare in an economy and creates positive externalities. [3]

(To be marked as a whole)

(b) Steps pertaining to the estimation of National Income under the Value Added method:

• Identify and classify production units into distinct heads namely into primary, secondary, and tertiary sector. [1]
• Estimate and add Gross Value Added of each sector to arrive at Gross Domestic Product at Market Price. [1]
• Finally, estimate and deduct the value of Depreciation, Net Indirect Taxes and add Net Factor Income from Abroad to arrive at National Income (NNP_FC). [1]

(a) The increased sales of electric vehicles may have positive impacts on both GDP and welfare. An increase in sales of E-vehicles directly contributes to the value addition in the economy which in turn leads to increase in Gross Domestic Product.

Electric vehicles are generally considered environment-friendly and improve public welfare. [3]

(To be marked as a whole)

(b) In a two-sector economy model, households are the owners of factors of production (Land, Labour, Capital, Entrepreneur). Firms combine these factors of production to produce goods and services. They make factor payments (Rent, Wages, Interest, Profits) to households, which in turn, are spent by the households on the consumption of final goods and services.

Thus, the income earned by the factors of production flows back to the production units in the form of aggregate consumption expenditure, thereby completing the circular flow of income. [3]

(To be marked as a whole)

(a) Stock variables are the variables which are measured at a particular point of time. For example: National Wealth [1 + ½]

Whereas;

Flow variables are the variables which are measured over a period of time. For instance: National Income [1 + ½]

(b) Yes, externalities may not directly correlate with the Gross Domestic Product (GDP) as externalities do not have any market in which they can be bought/sold. GDP does not take into account any such negative/positive impact on the third-party as they are not penalised/paid for such harms/benefits. Consequently, it may lead to overestimation/underestimation of the actual welfare of the economy. [3]

(To be marked as a whole)

(a) No. Net factor income from abroad (NFIA) is the component which depicts the difference between National income (NNP_FC) and Domestic income (NDP_FC). National income can be less than the domestic income in case of negative NFIA i.e. when, Factor Income from abroad < Factor Income to abroad. [3]

(To be marked as a whole)

(b) No. This is because Gross Domestic Product (GDP) by expenditure method takes into account the aggregate spending on all the final goods and services in the domestic territory, whether incurred by the residents or non-residents during a given period of time. [3]

(To be marked as a whole)

(i) Yes, there are many goods and services that may contribute to welfare in an economy but may not be included in the estimation of Gross Domestic Product. These transactions are referred to as non-market transactions. Transactions like domestic services rendered by a home maker contribute to welfare but are not included in the estimation of GDP as they are not paid for. [3]

(To be marked as a whole)

(ii) Final Goods refer to those goods which are either used for consumption purpose or for investment purpose. For example: A shirt purchased by a consumer. [1½]

Whereas;

Intermediate goods are those goods which are either used for resale or further production purposes in the same year. For example: Cloth used by a firm to manufacture shirts. [1½]

(i) Real Gross Domestic Product (GDP) is the money value of all the final goods and services produced in the domestic territory of an economy, measured at base year prices. [1]

Whereas;

Nominal Gross Domestic Product (GDP) is money value of final goods and services produced in the domestic territory of an economy, measured at current year prices. [1]

For example, considering base year be 2000 and current year be 2001

[1½]

It is evident from the above data that nominal GDP is more than real GDP owing to an increase in price without any corresponding change in output level. [½]

(ii) Normal resident of a country refers to an individual or an institution who ordinarily resides in a country and whose centre of economic interest also lies in that country. [2]

(a) Household and private sector consumption, as measured by Private Final Consumption Expenditure(PFCE) was at 39.7 trillion in nominal term in Q 1 FY 23 compared with 28.4 trillion for the same period last year and 39.2 trillion in the fourth quarter of 2021-22. As a percentage of nominal GDP, PFCE was 61.1 %, compared with 55.5% in Q 1 FY 22. In real terms, PFCE grew just 9.88%, compared with Q1 of 2019-20. [4]

(To be marked as a whole)

(b) Private final consumption expenditure (PFCE) refers to the expenditure incurred by the household sector on all types of consumer goods.

It is a measure of total amount spent by consumers on the purchase of final goods and services. Therefore, it is an important factor determining Gross Domestic product at Market Price. [2]

(To be marked as a whole)

(a) No. Capital goods are those final goods which help in the production of other goods and services. A machine purchased by a firm will be a capital good when it is used for the production of other goods and services. However, if it is purchased by a firm for resale purposes in the same year, it will not be considered as a capital good. [3]

(To be marked as a whole)

(b)
(i) Net Export refers to the excess of the value of exports of goods and services over the value of imports of goods and services of an economy, during an accounting year. [1]

(ii) Externalities refer to benefits (positive externalities)/ harms (negative externalities) which are caused by one entity to another without being paid/ penalised for it. [1]

(iii) Problem of double counting refers to the counting of the value of a good or service, more than once in the estimation of national income. [1]

(I)

(i) Profits earned by foreign banks in India should not be included in the National Income because it is a factor income paid to non-residents. [1½]

(ii) Expenditure on upgradation of fixed asset by a firm should be included in the National Income, as it is a part of capital formation. [1½]

(II)

National Income (NNP_FC) = Gross Domestic Product at Market Price (GDP_MP) – Depreciation + Net factor income from abroad – Net Indirect Taxes [1½]
850 = 1,100 – Depreciation + 100 – 150 [½]
Depreciation = 1,100 + 100 – 150 – 850 [½]
Depreciation = ₹ 200 crore [½]

(I) No. This is because Gross Domestic Product (GDP) by expenditure method takes into account the aggregate spending on all the final goods and services in the domestic territory, whether incurred by the residents or non-residents during a given period of time. [3] (To be marked as a whole)

(II) Domestic Income (NDP_FC) = (iii) + (i) + (iv) + (vi) + (vii) + (ix) [1½]
= 1,700 + 1,300 + 400 + 300 + 400 + 1,400 [1]
= ₹ 5,500 crore [½]

(i) Domestic Income is the sum total of income earned by the factors of production (wages, profits, rent, interest) within the domestic territory of a country, during an accounting year. [2]

(ii) Distribution of income is one of the limitations of using GDP as an index of welfare.

A rise in Gross Domestic Product (GDP) may not benefit all sections of society in the same dimension. The benefit of increase in GDP may be concentrated in the hands of a few individuals while the majority of people may remain deprived of such benefits. This may lead to inequitable distribution of income.

Hence, the welfare of the entire economy may not increase despite the increase in GDP. [4]

(Any other valid explanation to be allotted marks)
(To be marked as a whole)

Net Value Added at Factor Cost (NVA_FC) = v + ix + iii – viii – i – iv [1½]
= 2160 + 240 + 240 – 840 – 90 – 60 [1]
= ₹ 1,650 crore [½]

Factor income = xi + x + xii + vi + vii [1½]
= 720 + 90 + 540 + 180 + 120 [1]
= ₹ 1,650 crore [½]

(I) Gross Domestic Product (GDP) refers to the market value of final goods and services produced in the domestic territory of an economy during a given period of time. [1]

(II) Real Gross Domestic Product refers to the market value of final goods and services produced in the domestic territory of an economy during a given period of time, measured at constant prices, i.e., adjusted for inflation. Hence, the projection represents Real GDP. [1]

Real GDP is a better indicator of economic growth as it is affected by only physical output and it eliminates the effect of price change. [1]

(III) India holds a strong global position and is moving towards becoming the third largest economy by 2030. This strength is driven by decisive policymaking and structural reforms, resilient domestic demand, moderating inflation, higher labour force participation, revival of domestic investment, strong investor confidence and deeper global integration, leading to broad-based and sustained economic growth. [3]

(D) Assertion (A) is false, but Reason (R) is true.

(B) requires banks to maintain a percentage of deposits in the form of liquid assets.

(C) 1,64,000

(D) Medium of exchange

(C) Demand deposits with commercial banks

(D) Conducts periodic inspections.

(C) Both Statements I and II are true.

(B) 20

(C) (i), (ii) and (iv)

(C) stock, public

(A) increase, 5,000

(C) deposits

(C) Medium of exchange and standard of deferred payments

(D) 10 (Ten)

(C) decrease, increase

(C) Standard of Deferred Payments

(A) (I), (II) and (III)

(C) Reserve Bank of India

(A) Purchase and sale of securities on behalf of general public

(B) increasing the bank rate

(C) ₹ 100

(B) Reserve Bank of India

(B) loans provided by them create deposits.

(C) Both Statements 1 and 2 are true.

(C) 4,000

(A) (i) and (iv)

(D) (iii) only

(C) 1000, 3200, 25000, 20000

(C) Both statements 1 and 2 are true.

(C) It is not binding on the commercial banks.

(C) Both Statements 1 and 2 are true. [1]

(D) 1800, 1620, 20000, 18000 [1]

(A) increasing, bank rate [1]

(D) (i), (ii) and (iii) [1]

(D) Standard of deferred payments [1]

(B) 40,000 [1]

(C) Money supply [1]

(B) 4,000 [1]

(c) Both Statements 1 and 2 are true.

(b) Bank rate

(d) Banker’s Bank

(a) Only (i)

(b) Only (ii)

(c) Central Bank

(c) Central agency preparing the annual budget of the Government

(a) (i) and (iii)

(a) sells, decrease

(c) or (d)

(c) A store of value

(d) Both statements 1 and 2 are false

(a) reduce Cash Reserve Ratio

(A) Store of Value

(A) 580

(B) 1935

(C) Both Statements 1 and 2 are true.

(C) Medium of exchange and standard of deferred payments

The Reserve Bank of India (RBI) serves as banker to the government, managing its accounts, receiving deposits and processing payments. Exchanges, remittances and various banking operations are facilitated by the RBI on behalf of the government.

In addition to this, during any financial crisis, RBI provides credit to the government to ensure its smooth functioning and to support the state in managing its obligations effectively. [3]

(To be marked as a whole)

The given statement is defended.

The above example depicts that there exists a direct relationship between money multiplier and the total amount of credit created by the commercial banks.

(Any other valid alternative solution to be awarded marks)

Yes. The Central Bank acts as the banker to banks and performs the clearing house function. Since, it maintains the cash reserves of all commercial banks it becomes convenient for the Central Bank to settle their mutual claims. The Central Bank adjusts these obligations by making entries without any physical transfer of cash. This process ensures smooth, quick and efficient settlement of such interbank transactions. [3]

(To be marked as a whole)

(a) Money supply refers to the total volume of money held by the public at a particular point of time. [1]

(b) Net Demand Deposits (DD) held by commercial banks is one of the components of money supply. These are chequable deposits that can be withdrawn by the account-holder on demand. [2]

(Any other valid component to be awarded marks)

The given statement is defended. Repo Rate and Bank Rate are the rates at which the Central Bank lends money to the commercial banks, the key difference lies in terms of short-term and long-term needs.

A change in either of them will have the similar implication on the money supply in the economy. A decrease in Repo/Bank Rate by the Central Bank will encourage the commercial banks to decrease their lending rates making the credit more affordable for the general public, thereby, encouraging the borrowings. Consequently, money supply will rise and vice versa. [3]

(To be marked as a whole)

Yes. The Reserve Bank of India (RBI) is the sole authority for issuing currency in India, except for the ₹1 note and coins, which are issued by the Ministry of Finance.

The monopoly of RBI ensures uniformity in note circulation and strengthens public faith in the currency system. Furthermore, it enables the RBI to effectively regulate the money supply and maintain the value of rupee (₹). [3]

(To be marked as a whole)

The reduction in Cash Reserve Ratio (CRR) from 4% to 3% by Reserve Bank of India (RBI) leads to reduction in the amount of reserves to be maintained by the Commercial Banks. This enhances the lending capacity of the Commercial Banks, thereby, increasing the availability of credit in the economy. Consequently, promoting credit expansion. [3]

(To be marked as a whole)

One of the indicated functions of the Central Bank i.e. Reserve Bank of India (RBI) is the Banker’s Bank and Supervisor. [1]

RBI accepts deposits from commercial banks and also advances loans to them as and when required. It maintains reserves of all commercial banks and utilizes it to settle inter-bank claims. Being the supreme authority of the banking system, it acts as the financier of last recourse to the commercial banks. RBI supervises, regulates and controls the commercial banks. [2]

(Any other valid function to be awarded marks)

Bank rate is the rate at which the Central Bank lends to the commercial banks for long term requirements.

Any increase in bank rate will force commercial banks to increase their lending rates. This will make borrowing to general public dearer, thereby reducing demand for credit in the economy. [3]

(to be marked as a whole)

Reduction in the bank rate (by the Central Bank), may lead to a fall in the lending rates by the commercial banks. Consequently, loans available at lower rates may encourage the general public to borrow more. This may result in an increase in the demand for credit in the economy. [3]

(To be marked as a whole)

Reserve Ratio is the percentage of deposits that every commercial bank must keep as reserves and rest of the deposits can be used to give loans. Reserve Ratio is fixed by the Central Bank to avoid ‘over lending’ by commercial banks. This is legally binding to all commercial banks.
Hence, the statutory requirement of the Reserve Ratio acts as a limit to the amount of credit that banks can create. [3]

Yes. The Reserve Bank of India (RBI) serves as the Government's banker, managing its accounts, receiving deposits, and processing payments. Exchanges, remittances and various banking operations are facilitated by the RBI on behalf of the government.
In addition to this, during any financial crisis, RBI provides credit to the government to ensure its smooth functioning and to support the state in managing its obligations effectively. [3]

The monetary measure being exercised in the text above by the Reserve Bank of India (RBI) is Margin Requirement. [1]

Margin requirement refers to the difference between the amount of the loan and the value of the security offered by the borrower against the loan. An increase in the loan amount to 90% of the security value, from the prior rate of 80% reflects a reduction in margin requirement which in turn encourages the public to borrow more. Consequently, money supply will increase leading to increase in the Aggregate Demand in the economy. [3]

(i) The decision of the Monetary Policy Committee (MPC) to reduce Cash Reserve Ratio (CRR) addresses the deflationary pressure in the economy. The rationale behind this reduction was to ensure infusion of greater liquidity in the economy to maintain overall economic stability. [1]

Reduction in the CRR will lead to greater availability of funds with the commercial banks, which may increase the lending capacity of commercial banks. Thereby, reducing CRR, will increase the money supply and Aggregate Demand in the economy, ultimately addressing the issue of deficient demand. [2]

(ii) Cash Reserve Ratio (CRR) refers to the percentage of deposits which commercial banks are required to keep as cash reserves with the Central Bank. [1]

Given, Primary Deposits = ₹ 500
Reserve Ratio = 25%

Total deposits = Primary deposits × 1/Reserve Ratio [1]
= 500 × 1/0.25 [½]
= ₹ 2,000 [½]

Total lending = Total deposits – Primary deposits [1]
= 2,000 – 500 [½]
= ₹ 1,500 [½]

(i) Money Supply is a stock variable as it is the total volume of money held by the public at a particular point of time. [2]

(ii) The Central Bank as a banker to the Government maintains accounts of the government. It accepts receipts, makes payments, carries out exchange, remittance and other banking operations on behalf of the government. It also provides loans to the government to meet its requirements. [2]

Given, Primary Deposits = ₹ 1,000

With the increase in Reserve Ratio from 20% to 25%, the amount of credit creation falls from ₹ 5,000 to ₹ 4,000. Hence, there exists an inverse relationship between Reserve Ratio and the amount of credit creation. [1]

Central Bank acts as the banker to the government. It accepts receipts and makes payments for the government, and carries out exchange, remittance and other banking operations. The Central Bank also provides short-term credit to the government, so that the government can meet any shortfalls in receipts over disbursements.

As the government’s banker, the Central Bank also has the responsibility of managing the public debt.

As indicated in the above text, the Central Bank also advises the government on various financial, economic and monetary matters. [4] (To be marked as a whole)

Margin requirement refers to the difference between the amount of the loan and value of the security offered by the borrower against the loan. An increase in margin requirement implies a decrease in the amount of loan available to households and firms on the security offered. However, a decrease in margin requirement implies an increase in the amount of loan available to households and firms on the security offered.
Thus, an alteration in margin requirement may change the quantum of credit available to households and firms. [4] (To be marked as a whole)

Given, primary deposits ₹ 1,000 crore and change in Reserve Ratio from 10% to 20% the change in amount of money creation is depicted as follows:

It may be concluded from the two cases shown in the table that, with ₹ 1,000 crore of primary deposits and change in Reserve Ratio (RR) from 10% to 20%, the amount of money creation reduces from ₹ 10,000 crore to ₹ 5,000 crore.

(a) The Central Bank has the sole authority for issuing currency in the economy. This ensures uniformity in the issue of currency and it gives the Central Bank control over the money supply in the economy. [2]

(b) Deferred payments are contracted to be made at some future date. Money facilitates such transactions of borrowing and lending. Hence, money serves as a standard of deferred payments. [2]

(a) Inflation in the economy may be the economic issue indicated in the above text. [1]
The situation of excess demand may be the underlying cause behind the decision taken by the Reserve Bank of India (RBI) to keep the benchmark lending rate unchanged at 6·5%. [1]
(Any other valid economic issue may be awarded marks)

(b) If the rate setting panel would have decreased the benchmark lending rate, the commercial banks may reduce their lending rates. Consequently, it may encourage the borrowings by the general public leading to an increase in the money supply in the economy. [2]

The Reserve Bank of India (RBI) acts as a banker to both central as well as state governments. The RBI maintains account, accepts receipts and makes payments for the government and carries out exchange, remittance and other banking operations. It advances credit/loan to the government to meet its requirements in case of crisis. [4]

(To be marked as a whole)

The Reserve Bank of India (RBI) can regulate the money supply in the economy by the sale/ purchase of government securities in the open market.

When RBI sells government securities, the availability of funds with commercial banks reduces, which in turn curtails their lending capacity. Consequently, the money supply in the economy falls.

On the contrary, when RBI buys government securities, the availability of funds with commercial banks rises, which in turn increases their lending capacity. Consequently, the money supply in the economy rises. [4]

(To be marked as a whole)

The Central Bank acts as a banker to both central as well as state governments. The Central Bank maintains account, accepts receipts and makes payments for the government and carries out exchange, remittance and other banking operations. It advances credit/loan to the government to meet its requirements in case of crisis.

As a financial advisor, the Central Bank advises the government on various financial and economic matters. [4]

(To be marked as a whole)

Reserve Bank of India (RBI) accepts the deposits from commercial banks and also advances loans to them as and when required. It maintains reserves of all commercial banks and utilizes it to settle inter-bank claims.

Being the supreme authority of the banking system, it acts as the financier of last recourse to the commercial banks. It forwards short-term credit to the commercial banks against approved securities.

The RBI supervises, regulates and controls the commercial banks. The regulation of banks may be related to their licensing, branch expansion, liquidity of assets, management, amalgamation and liquidation. [4]

(To be marked as a whole)

The Reserve Bank of India (RBI) can regulate the money supply in the economy by the sale/ purchase of government securities in the open market.

When RBI sells government securities, the availability of funds with commercial banks reduces, which in turn curtails their lending capacity. Consequently, the money supply in the economy falls.

On the contrary, when RBI buys government securities, the availability of funds with commercial banks rises, which in turn increases their lending capacity. Consequently, the money supply in the economy rises. [4]

(To be marked as a whole)

The Reserve Bank of India (RBI) as the banker to the government maintains account, accepts receipts and makes payments, carries out exchange, remittance, and other banking operations.

The Reserve Bank of India advances loans to the government to meet its requirements, in case of financial crisis. Thus, the Reserve Bank of India facilitates the same banking functions for the government just as the commercial banks do for the general public. [4]

(To be marked as a whole)

Inflation in the economy may be the cause behind the rise in the benchmark lending rate by the Central bank. [1]

This step may force the commercial banks to increase the cost of borrowing for the general public. It may discourage the general public from taking loans. As a result, it may lead to fall in Aggregate Demand and subsequent fall in inflation. [3]

(Any other valid explanation to be allotted marks)

The central bank acts as a banker to the Government. It maintains the banking accounts of the government for the purpose of receiving/making payments on its behalf. It provides loans to the government, as per its requirements. The central bank also purchases/ sells government securities in the open market on behalf of the government.

(To be marked as a whole)

Reserve ratio (RR) is the minimum reserves that a commercial bank must maintain as per the directions of the central bank. Credit creation is inversely related to the reserve ratio.

Example: Suppose the initial deposit is ₹1000

The above example, depicts the effect of rise in Reserve Ratio on credit creation by the commercial banks.

(To be marked as a whole)

(Any other valid example/explanation to be allotted marks)

The given statement is true. This can be proved with the help of the following example:

The process of credit creation is based on the assumptions that:

• entire banking system is a single unit.
• all transactions are routed through the bank only.

When a commercial bank receives initial/primary deposits (say ₹ 1,000), as per the requirement of the Central Bank, it has to maintain some reserves. The remaining amount is made available for loans. The lent sum of money is received back in the next round of deposits as secondary deposits.

Total deposit creation = Initial deposits x 1/Reserve Ratio
= 1,000 x 1/0.2
= ₹ 5,000

This process of deposit, reserve and lending continues till initial deposits become equal to the sum total of reserves.

(To be marked as a whole)

(i) The two monetary policy measures mentioned in the above text are of quantitative nature. [1]

(ii) An increase in the repo rate will force the commercial banks to increase the lending rates, which may make borrowing costlier to the general public. It may discourage general public from borrowing funds. As a result, Aggregate Demand in the economy may decrease, thereby controlling the inflationary pressures in the economy. [3]

(To be marked as a whole)

The process of money creation is based on the assumptions that:

• entire banking system is a single unit.
• all transactions are routed through the bank only.

When a commercial bank receives initial/primary deposits (say ₹ 1,000), as per the requirement of the Central Bank, it has to maintain some reserves. The remaining amount is made available for loans. The lent sum of money is received back in the next round of deposits as secondary deposits. This process of deposit, reserve and lending continues till initial deposits become equal to the sum total of reserves.

Total deposit creation = Initial deposits X 1/Reserve Ratio
= 1000 x 1/0.2
= ₹ 5,000

Hence, total deposits of ₹ 5000 are created.

(To be marked as whole)

(Any other valid explanation to be allotted marks)

(a) The function being discussed here is the Bank Of issue or Currency Authority. [1]

In India, the Central bank has the sole authority for issuing currency in the economy. This ensures uniformity in the issue of currency and it gives the central bank, control over the money supply. [2]

(b) Two advantages of Digital Rupee:

• Easier
• Cheaper
• Faster

(Any two) [1]

(Any other valid explanation to be allotted marks)

Inflation in the economy may be the cause behind the rise in repo rate by the Monetary Policy Committee (MPC) of Reserve Bank of India (RBI). [1]

This step may force commercial banks to increase the lending rates. It may discourage the borrowings by the general public. This may lead to fall in Aggregate Demand and thus may result in fall in rate of inflation. [3]

(Any other valid explanation to be allotted marks)