Kerala Plus Two Economics Model Question Paper 3
Time: 2½ Hours
Cool off time : 15 Minutes
General Instructions to candidates:
- There is a ‘cool off time’ of 15 minutes in addition to the writing time of 2½ hrs.
- Your are not allowed to write your answers nor to discuss anything with others during the ‘cool off time’.
- Use the ‘cool off time’ to get familiar with the questions and to plan your answers.
- Read questions carefully before you answering.
- All questions are compulsory and only internal choice is allowed.
- When you select a question, all the sub-questions must be answered from the same question itself.
- Calculations, figures and graphs should be shown in the answer sheet itself.
- Malayalam version of the questions is also provided.
- Give equations wherever necessary.
- Electronic devices except non programmable calculators are not allowed in the Examination Hall.
Answer all questions from 1 to Qno 14
The consumer prefer the bundle which has more of at least one of the good and no less of the other good as compared to the other public, consumer preference is
a. Indifference Preference
b. Mono tonic preference
c. Both indifferent and monotonic preference
d. None of the above
Micro economics is also known as
a. Price theory
b. Demand theory
c. Income theory
d. Cost theory
When two commodities are complementary to one another
a. They may be jointly demanded
b. They may be complementary goods
c. They may be substitutes
d. None of the above
Observe the following figures and identify the market situations.
Match the column B and C with column A.
The average revenue curve of two market situations are given below.
a. State the market situation corresponding to AR curves.
b. Give reasons for the different shapes.
Show a circular flow in the following chart.
Find the odd man out and justify your answer.
a. GDP, GNP, NNP, CSO
b. Doctor, Lawyers, Teachers, House wives.
Classify the following items into tax revenue and non tax revenue.
Fees, Profession tax, Sales tax, Fines, Issue of currency, Income from public property, building tax, Escheats, Customs duty.
State whether the following statements are true or false and justify your answer.
a. If MPC = 0.7 MPS will be 0.7.
b. The amount of consumption when income is zero is called negative consumption.
How we can express real exchange rate.
Fill in the missing cells
Complete the chart.
Write down the three identities of calculating GDP of a country by the three methods.
Answer any 6 questions from Qno. 15 to 21. Each question carry 3 score.
Given below is a production possibility curve of an economy. Compare the point in the context of production possibilities of the economy.
Match the following.
b. Interest – Land
c. Profit – Labor
d. Wage – Organizer
The following is a diagram drawn by a student of +2 class.
a. Can you find any mistake in it ? If so redraw correctly.
b. Write any three relationship between AC and AVC.
Suppose that the market demand in a perfectly competitive industry is given by,
Qd = 700 – 500P and the market supply function is given by, Qs = 4000 + 250P. Find the market equilibrium price.
The price of goods which are used by us is determined by the forces of demand and supply. While the price of certain goods are controlled by the government. Do you agree with this? Elucidate your answer with example
Imagine that you are a monopolist, can you sell more of the commodity at a higher price. Present your argument with the help of a diagram.
Define rate of exchange. If 300 Indian Rupees are exchanged for 6 US Dollar, what is the rate of exchange between Indian Rupee and US Dollar?
Answer any 4 questions from Qno. 22 to 27. Each question carry 5 score.
Under perfect competition, a firm will not produce output level in cases under (a)P>MC and (b) P< MC. If so,what is the condition of profit maximizing output in the short run.Give diagrammatic illustration.
(Hint : Short run equilibrium of a firm under perfect competition).
Complete the following tables and identify the market structure.
Suppose marginal propensity to consume is 0.75 and there is a 20 percent proportional income tax. Find the change in equilibrium income for the following.
a. Government purchase increase by 20.
b. Transfer decrease by 20.
“Tax multiplier is smaller in absolute value than the government expenditure multiplier”. Do you agree substantiate it with one example.
Calculate Private Income, Personal Disposable Income, Net National Disposable
From the schedule given below, calculate the Total Revenue (TR) and derive the demand schedule.
Answer any 2 questions from Qno. 28 to 30. Each question carry 8 score.
a. Prepare a note on market equilibrium.
b. What will happen if the price prevailing in the markets.
i. Above the equilibrium price.
ii. Below the equilibrium price.
c. Discuss the impact of the factors mentioned below on equilibrium price and quantity.
i. Shift in demand to right
ii. Shift in demand to left
iii. Shift in supply to right
iv. Shift in supply to left
Diagrammatically explain the effects of changes in autonomous spending on equilibrium demand in the product market.
a. Classify the following functions under two heads:
Accepting deposits, giving loans and advances, discounting bills, credit creation, re discounting bills, note issue, custodian of foreign exchange reserve
b. The most important role RBI is credit creation and control of money supply. Explain the instruments which RBI uses for conducting monetary policy.
Both indifference and monotonic preference
They maybe jointly demanded
ii. Monopolistic competition
a. Perfect competition, monopoly
b. In a perfectly competitive market AR and MR is equal to price. Here, producer is a price taker.
a. CSO – All others are related to National Income.
b. Service of housewives – All others are included in National Income estimate.
a. False – MPS = 0.3
b. False – Autonomous Consumption
i. Product method
ii. Income method
iii. Expenditure method
Point A: It indicates the efficient utilization of available resources.
Point B : It shows that the available resources of the economy are not fully utilized. In other words it is an indication of the under utilization of resources.
Point C : It is outside the production possibility frontier. This means that the economy cannot produce at this point using the available resources.
a. Rent – Land
b. Interest – Capital
c. Profit – Organizer
d. Wage – Labor
b. 1. When AC fails,AVC also falls
2. AVC reaches its minimum point even before AC reaches it minimum point.
3. When AC rises, AVC also rises, but asymptotically to AC.
Equilibrium is determined by the condition, Qd = Qs
In the present problem
7000 – 50P = 4000 + 250P
7000 – 4000 = 250P + 500 P
3000 = 750 P
P = 3000/750 = 4
The equilibrium price in the market is Rs.4.
Yes, I strongly agree with this statement. Government has controlled certain goods like kerosene, sugar etc. Government control on these commodities are essential for ensuring availability of these commodities to the poor people at reasonable price.
A monopolist is a price maker. A monopolist can sell more units of a commodity only at a lower price. That is why the demand curve facing a monopolist is a downward sloping curve.
The monopolist sells Q units of goods at OP1 price. He can increase the sale to OQ1 only at the lower price OP0
An exchange rate (also known as the foreign exchange rate, forex rate or FX rate) between two currencies is the rate at which one currency will be exchanged for another it is also regarded as the value of one country’s currency in terms of another currency. There are two types of exchange rate namely fixed exchange rate and flexible exchange rate
Perfect Competition – Short Run Equilibrium In the model of price and output determination under perfectly competitive market conditions, price is determined by the impersonal market forces of supply and demand, and not by individual actions of buyers and sellers. The individual firm in such a market may be said to be a price taker. Perfect competition is used by economists not so much as an attainable goal, but as pure state against which all other markets can be measured.
For a market to be perfectly competitive, the following necessary conditions must, in general, prevail.
1. There must be many firms acting independently. Each firm is small enough relative to the size of the market, so that a single firm’s decision to either stop production entirely or to produce to full capacity will not have any perceptible effect on market supply to cause a change in market price.
2. Entry and exit from the market are free and friction less for both the firms and consumers.
3. The products offered for sale are homogeneous and divisible into small units.
4. Buyers and sellers have perfect knowledge about the market conditions.
5. Price is determined by the impersonal market forces of supply and demand , and not by individual actions of buyers and sellers. The individual firm in such a market may be said to be a price taker.
6. There is a perfect knowledge among consumers about the price at which goods are being sold in the market. Sellers thus cannot manipulate the commodity price and there by exploit the consumer.
7. There is perfect mobility of goods and factor of production among firms. Uniformity in factor prices is prevalent in the market.
If these necessary condition prevail, the firm can lose its entire market if it sets its price above the market price. It can also expect no gain by lowering price, since it can sell all it wishes to produce at the market price.The competitive firm has no price discretion. Market price will not be affected by the independent action of a single firm. No firm is able to influence market price. The objective of each firm is to maximize profit. Profit is the difference between revenue and cost of production. Marginal cost (MC) is the cost incurred to produce an additional unit of the product. If the per unit price of a commodity is greater than the marginal cost, the firm will be interested in producing more of the commodity. On the other hand if price falls below marginal cost, the firm will curtail its production. Equilibrium condition will prevail at a point where profit is maximized. This happens where price is equal to marginal cost (P = MC). Also at the point of equilibrium, the marginal cost curve must be upward sloping.
In the diagram the given price is P. Again the firm will produce the level of output for which MC = MR. This occurs at point E, giving a level of output of Q. Notice that at this point AR = AC, so the firm is making normal profit. In the short run, a perfectly competitive firm could be making super normal profit, or as a loss, or just normal profit,depending on the given market price.Note that if the firm’s losses get too big in the short run (AR < AVC) then it will have to shut down.
The change in equilibrium income when government purchase increase by 20 is
A decrease in transfer of 20 will raise equilibrium income by
Thus we find that income increased by less than it increased with a rise in government purchase.
Yes, I agree with this statement that tax multiplier is smaller in absolute value than the government expenditure multiplier. This is because the government expenditure multiplier. This is because the government expenditure directly affect the total expenditure, while tax multiplier enter the different process. Therefore, the tax multiplier is always less in absolute value than the government expenditure multiplier.
For example: MPC = 0.75, then Government expenditure multiplier.
Private Income = 6000 + 120 + 100 – 300 – 80 = Rs. 5840 crores
Personal Disposable = 5840 – 60 – 160 -200 = Rs. 5420 crores.
a. Equilibrium is defined as a situation where plans of all consumers and firms in the market match and the market clears. In equilibrium, the aggregate quantity that all firms wish to sell equals the quantity that all the consumers in the market wish to buy, in other words, market supply equals market demand. The price at which equilibrium is reached is called equilibrium price and the quantity bought and sold at this price is called equilibrium quantity. Therefore,
qD(P*) = qS(P*)
where P* denotes the equilibrium price and gD(P*)and qS(P*) denote the market demand and market supply of the commodity respectively at price P*.
b. i. If the price prevailing in the market is above equilibrium price, supply will exceed demand. Under such a situation some firms will not be able to sell their desired quantity, so they will lower their price. All other things remaining constant as price falls quantity demanded rises quantity supplied falls, and finally equilibrium price P* will be restored. At P* quantity demanded will be equal to quantity supplied.
ii.If the price prevailing in the market is above equilibrium price, demand will exceed supply. Under such a situation some consumers will be ready to pay more prices to get the commodity. This will tend to increase the price. All other things remaining constant as price rises quantity demanded falls, quantity supplied rises, and finally equilibrium prices P* will be restored. At P*, quantity demanded will be equal to quantity supplied
c. i.When demand curve shift to right (increase in demand), there will be increase in equilibrium price and increase in equilibrium quantity. This changes is shown in the diagram
ii.When demand curve shift to left (decrease in demand), both equilibrium quantity and equilibrium price falls. This is shown in the diagram.
iii. When supply curve shift to right (increase in supply), the equilibrium price decreases and the equilibrium quantity increases. This is given in the following diagram.
iv. When supply curve shift to left (decrease in supply), the equilibrium price increases and the equilibrium quantity decreases. This is given in the following diagram.
a. There are two situations of shift of demand and supply curves in the same direction.
1 .Demand and supply curves shift forward. In this case equilibrium quality will increases. Equilibrium price may increase, decrease or remain unchanged.
2.Demand and supply curves shift backward. In this case situation equilibrium quality will decrease. Equilibrium price may increase, decrease or remain unchanged.
b. There are two situations of shift of demand and supply curves in the opposite direction.
1. In this situation equilibrium price will increase, Equal quantity may increase, decrease or remain unchanged.
2. Demand decreases and supply increases In this situation equilibrium price will decrease. Equilibrium quantity may increase decrease or remain unchanged.
b. Monetary policy refers to the credit control measures adopted by the central bank of a country. G K Shaw defines it as “any conscious action undertaken by the monetary authorities to change the quantity, availability or cost of money”. Instruments of Monetary Policy: The instruments of monetary policy are of two types: first, quantitative, general or indirect; and second, qualitative, selective or direct. They affect the level of aggregate demand through the supply of money, cost of money availability of credit. Of the two types of instruments, the first category includes bank rate variations, open market operations and changing reserve requirements. They are meant to regulate the overall level of credit controls aim at controlling specific types of credit. They include changing margin requirements and regulation of consumer : credit. We discuss them as under:
Bank Rate Policy: The bank rate is the minimum lending rate of the central bank at which it red is counts first class bills of exchange and government securities held by the commercial banks. When the central bank finds that inflationary I pressures have started emerging within the economy, it raises the bank rate. Borrowing from the central bank becomes costly and commercial banks borrow less from it. The commercial banks, in turn, raise their lending rates to the business community and borrowers borrow less from the commercial banks. There is contraction of credit and prices are checked from rising further. On the contrary, when prices are depressed, the central bank lowers the bank rate. It is cheap to borrow from the central bank on the part of commercial banks. The latter also lower their lending rates. Businessmen are encouraged to borrow more. Investment is encouraged. Output, employment, income and demand start rising and the downward movement of checked.
Open market Operations: Open market operation refer to sale and purchase of securities in the money market by the central bank. When prices are rising and there is need to control them, the central bank sells securities. The reserves of commercial banks are reduced and they are not in a position to lend more to the business commonly
Changes in Reserve Ratio: This weapon was suggested by Keynes in his Treatise on Money and the USA was the first to adopt it as a monetary device. Every bank is required by law to keep a certain percentage of its vaults and also a certain percentage with the central bank. When prices are rising, the central bank raises the reserve ratio. Banks are required to keep more with the central bank. Their reserves are reduced and they lend less. The volume of investment, output and employment are adversely affected. In the opposite case, when the reserves ratio is lowered the reserved of commercial banks are raised. They lend more and the economic activity is favorably affected.
Selective Credit Controls: Selective credit controls are used to influence specific types of credit for particular purposes. They usually take the form of changing margin requirements to control speculative activities within the economy. When there is brisk speculative activity in the economy or in particular sectors in certain commodities and prices start rising, the central bank raises the margin requirement on them. The result is that the borrowers are given less money in loans against specified securities. For instance, raising the margin requirement to 60% means that the pledge of securities of the value of Rs 10,000 will be given 40% of their value, i.e Rs 4000 as loan. In case of recession in a particular sector, the central bank encourages borrowing by lowering margin requirements.
conclusion: For an effective anti-cyclical monetary policy, bank rate, open market operations, reserve ratio and selective control measures are required to be adopted simultaneously. But it has been accepted by all monetary theorists that (i) the success of monetary policy is nil in a depression when business confidence is at its lowest ebb; and (ii) it is successful against inflation. The monetarists contend that as against fiscal policy, monetary policy possesses greater flexibility and it can be implemented rapidly.