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## Karnataka 2nd PUC Economics Model Question June 2019

Time: 3 hrs 15 minutes
Max. Marks: 100

PART-A

I. Choose the correct answer (5 × 1 = 5)

Question 1.
The scarce resources of an economy have
(a) Competing usages
(b) Single usages
(c) Unlimited usages
(d) None of the above
(a) Competing usages

Question 2.
The equation of Budget line is
(a) Px+P1x1 = M
(b) M = P0X0+Px
(c) P1x1 + p2x2 = M
(d) Y=Mx+C
(c) P1x1 + p2x2 = M

Question 3.
Cobb-Douglas production function is
(a) q=(x, x)
(c) q=(x1α, x1β)
(b) q=(x1, x2)
(d) q=(0)
(c) q= (x1α, x1β)

Question 4.
The individuals or institutions which take economic decisions are;
(a) Economic variables
(b) Economic Agents
(c) Economists
(d) none of the above.
(b) Economic Agents

Question 5.
Which of the following is an example for ‘paper tax’?
(a) Income tax
(c) Wealth tax
(b) Excise taxes
(d) Customs taxes
(c) Wealth tax

II. Fill in the blanks: (5 × 1 = 5)

Question 6.
In reality all economies are______
Mixed Economies.

Question 7.
The point of minimum AVC where the SMC curve cuts the AVC curves is called as_____.
Shut down point.

Question 8.
TR = ____
Price X quantity.

Question 9.
The revenue received by the firm per unit of commodity sold is called________.
Average Revenue.

Question 10.
Revenue deficit = Revenue expenditure minus______.
Revenue Receipts.

III. Match the following: (5 × 1 = 5)

Question 11.

(i) – e; (ii) – d; (iii) – a; (iv) – b: (V) – c.

IV. Answer the following questions in a sentence/word: (5 × 1 = 5)

Question 12.
What is price ceiling?
The government imposed upper limit on the price of a good or service is called price ceiling. Example, price ceiling on necessary items like selected medicines, kerosene, wheat, etc. Imposition of price ceiling below the equilibrium leads to an after excess demand.

Question 13.
What is monopoly?
It is a market with one seller or firm with many buyers.

Question 14.
Name the well-known work of Adam Smith.
Wealth of Nations.

Question 15.
Write the meaning of autonomous consumption.
The consumption which is independent of income is called as autonomous consumption.

Question 16.
Who are free riders?
Free riders are the consumers who will not voluntarily pay for what they can get for free and for which there is no exclusive title to the property being enjoyed. Here the link between the producer and the consumer is broken and the government steps in to provide for such goods.

PART – B

V. Answer any nine of the following questions in four sentences each (9 × 2 = 8)

Question 17.
What do you mean by inferior goods? Give example.
The inferior goods are those goods for which the demand increases with the fall in income of consumer and vice-versa. That is, there will be a negative relationship between income of consumer and demand for inferior goods.
Example: ragi, jowar, etc.

Question 18.
State the law of demand.
Law of demand states that other things being equal, there is a negative relation between demand for a commodity and its price. In other words, when price of the commodity increases, demand for it falls and when price of the commodity decreases, demand for it rises, other factors remaining the constant.

The law can be explained in the following manner, i.e. “Other things being equal, a fall in price leads to expansion in demand and a rise in price leads to contraction in demand”.

Question 19.
Give the meaning of concepts of short run and long run.
The concepts of short-run and long-run are defined aa a period simply by looking at whether all the inputs can be varied or not. It is not advisable to define short run and long run in terms of days, months or years.

In the short run, at least one of the factor – labour or capital cannot be varied and therefore, remains fixed. In order to vary the output level, the firm can vary only the other factor. The factor that remains fixed is called the fixed factor and the other factor which the firm can vary is called the variable factor.

In the long run, all factors of production can be varied. A firm in order to produce different levels of output, in the long run, may vary both the inputs simultaneously. So, in the long run there is no fixed factor.

Question 20.
Give the meaning of Price elasticity of supply and write its formula.
The price elasticity of supply refers to the proportionate change in the quantity supplied of a commodity due to change in its price. In other words, the price elasticity of supply of a good measures the responsiveness of quantity supplied to changes in the price of the good. It is measured with the help of the following formula:
$$\text { Price elasticity of supply }=\frac{\text { Percentage change in quantity supplied }}{\text { Percentage change in price }}$$

Question 21.
Define equilibrium price and quantity.
The price at which equilibrium is reached is called equilibrium price. The quantity bought and sold at equilibrium price is called equilibrium quantity.

Therefore, price and quantity will be in equilibrium if qD(p) = qs (p), where p is price and qD is quantity demanded and qs is quantity supplied.

Question 22.
Give the meaning of monopolistic competition? Give example.
When the market structure has large number of firms, free entry and exit of firms and differentiated goods, then it is called monopolistic competition.

For example, there is large number of soaps producing firms. But many of the soaps being produced are associated with some brand name and are distinguishable from the other companies. The consumer develops a preference for a particular brand of soap over time or becomes loyal to a particular brand like some people always prefer Mysore Sandal Soap.

Question 23.
What is the difference between consumer goods and capital goods.

 Consumer Goods CapitalGoods • These are the goods which are purchased for consumption by ultimate consumers. • Examples are food, clothes, and services like recreation. • These are the durable goods which are used in the production process. • Examples are machinery, tools, implements, etc.

Question 24.
Write the difference between nominal and real GDP.

 Nominal GDP Real GDP • It is the value of GDP at current prevail­ing prices • It is evaluated at constant set of prices, i.e. by keeping base year’s price index • It is not reliable • It is reliable • It does not give real picture of economic development of a country • It gives real picture of economic development of a country

Question 25.
Mention the two motives of demand for money.
Transaction motives speculative motive.

Question 26.
Write the meaning of excess demand and deficient demand.
If the equilibrium level of output is more than the full employment level; it is due to the fact that the demand is more than the level of output produced at full employment level. This situation is called excess demand.

If the equilibrium level of output is less than the full employment of output, it is due to fact that demand is not enough to employ all factors of production. This situation is called deficient demand.

Question 27.
What are the factors which cause change in aggregate demand?

1. Change in consumption
2. Change in Investment.

Question 28.
Mention the non-tax revenues of the central government.
The non-tax revenues of the central government mainly consists of the following:

1. Interest receipts on account of loans by the central government.
2. Dividends and profits on investments made by the government.
3. Fees and other receipts for services rendered by the government.
4. Grants-in-aid from foreign countries and international organizations.

Question 29.
Mention the three linkages of open economy.
The three linkages of open economy are as follows:

• Output market linkage
• Financial market linkage
• Labour market linkage.

Question 30.
What is foreign exchange rate?
Foreign exchange rate is the price of one
currency in terms of another currency. It links the currencies of different countries and enables comparison of international costs and prices.

For example, if we need to pay Rs.68 for 1 dollar, then the exchange rate is Rs.68 per dollar.

PART -C

VI. Answer any seven of the following questions in twelve sentences each. (7 × 4 = 28)

Question 31.
Distinguish between positive and normative economics.

 Positive Economics Normative Economics • The positive economics is the study of ‘what was’ and ‘what is’ under the given set of circumstances • The normative economics studies ‘what ought to be’ • It deals with the scientific explanation of the working of the economy • It explains about ‘what should be and should not be done’ • Here we study how the different mechanisms function • Here we try to understand that whether the mechanisms are desirable or not

Question 32.
Write the differences between Total Utility and Marginal Utility.

Question 33.
Explain Isoquant with the help of diagram.
An isoquant is the set of all possible combinations of the two inputs that yield the same maximum possible level of output. Each isoquant represents a particular level of output and is labelled with that amount of output. It is just an alternative way of representing the production function.

The concept of isoquant can be explained with the help of following diagram:

The given diagram generalizes the concept of isoquant. In the above diagram, labour is measured in OX axis and capital is measured in OY axis. There are 3 isoquants for the three output levels, viz. q=q1 q=q2 and q=q3. Two input combinations (L1, K2) and (L2, K1) give us the same level of output q1.

If we fix capital at K1 and increase labour to L3, output increases and we reach a higher isoquant q=q2. When marginal products are positive, with greater amount of one input, the same level of output can be produced only using lesser amount of the other. Therefore, isoquant curves slope downwards from left to right (negatively sloped).

Question 34.
Write a brief note on returns ta scale.
The returns to scale can happen only in the long run as both the factors (labour and capital) can be changed. One special case, in the long run, occurs when both factors are increased by the same proportion or factors are scaled up.

a. Constant returns to scale:
When a proportional increase in all inputs results in an increase in output by the same proportion, the production function is said display constant returns to scale.

b. Increasing returns to scale:
When proportional increase in all inputs results in an increase in output by a larger proportion, the production function is said to display increasing returns to scale.

c. Decreasing returns to scale:
When a proportional increase in all inputs results in an increase in output by a smaller proportion, the production function is said to display decreasing returns to scale.

For example, if in a production process, all inputs get doubled. As a result, if the output gets doubled, the production function exhibits constant returns to scale, if output is less than doubled, exhibits decreasing returns to scale and if it is more than doubled, exhibits increasing returns to scale.

Question 35.
Explain the determinants of a firm’s supply curve.
A firm’s marginal cost curve is a part of its marginal cost curve. Any factor that affects a firm’s marginal cost curve is a determinant of its supply curve. Following are the two factors determining a firm’s supply curve:

a. Technological progress:
The organisational innovation by the firm leads to more production of output. That means to produce a given level of output, the organisational innovation allows the firm to use fewer units of inputs. It is expected that this will lower the firm’s marginal cost at any level of output, i.e. there is a rightward shift of the MC curve. As the firm’s supply curve is essentially a segment of the MC curve, technological progress shifts the supply curve of the firm to the right. At any given market price, the firm now supplies more quantity of output.

b. Input prices:
A change in the prices of factors of production (inputs) also influences a firm’s supply curve. If the price of input (e.g. wage) increases, the cost of production also increases. The consequent increase in the firm’s average cost at any level of output is usually accompanied by an increase in the firm’s marginal cost at any level of output, which leads to an upward shift of the MC curve. That means the firm’s supply curve shifts to the left and the firm produces less quantity of output.

Question 36.
Explain the features of perfect competition.
Perfect competition is a market where there will be existence of large number of buyers and sellers dealing with homogenous products. It is a market with highest level competition.

1. Large number of sellers and buyers:
The first condition which a perfectly competitive market must satisfy is concerned with the sellers’ side of the market. The market must have such a large number of sellers that no one seller is able to dominate in the market. No single firm can influence the price of the commodity. The sellers will be the firms producing the product for sale in the market. These firms must be all relatively small as compared to the market as a whole.

Their individual outputs should be just a fraction of the total output in the market. There must be such a large number of buyers that no one buyer is able to influence the market price in any way. Each buyer should purchase just a fraction of the market supplies. Further, the buyers should have any kind of union or association so that they compete for the market demand on an individual basis.

2. Homogeneous products:
Another prerequisite of perfect competition is that all the firms or sellers must sell completely identical or homogeneous goods. Their products must be considered to be identical by all the buyers in the market. There should not be any differentiation of products by sellers by way of quality, colour, design, packing or other selling conditions of the product.

3. Free entry and free exit for firms:
Under perfect competition, there is absolutely no restriction on entry of new firms in the industry or the exit of the firms from the industry which want-to leave. This condition must be satisfied especially for long period equilibrium of the industry.

If these three conditions are satisfied, the market is said to be purely competitive. In other words, a market characterized by the presence of these four features is called purely competitive. For a market to be perfect, some conditions of perfection of the market must also be fulfilled.

4. Price taker:
The single distinguishing character of perfect competition is the price-taking behaviour of the firms. A price-taking firm believes that if it sets a price above the market price, it will be unable to sell any quantity of the good that it produces. On the other hand, if the firm set the price less than or equal to the market price, the firm can sell as many units of the good as it wants to sell.

The firms in the perfect competitive market are price takers. That means, the producers will continue to sell their goods and services in the price existing in the market. Firms have no control over the price of the product.

5. Information is perfect:
Price taking is often thought to be a reasonable assumption when the market, has many firms and buyers have perfect information about the price prevailing in the market. Since all firms produce the same good and all buyers are aware of the market price, the firm in question loses all its buyers if it raises price.

Question 37.
Explain the role of the government (state) and household sectors in both developed and developing countries.
1. Role of government:
In both the developed and developing countries, apart from capitalist sector, there is the institution of state. The role of the state includes framing laws, enforcing them and delivering justice. The state here refers to the government which performs various developmental functions for the society as whole.

It undertakes production, apart from imposing taxes and spending money on building public infrastructure, running schools, providing health services, etc. These economic functions of the state have to be taken into account when we want to describe the economy of the country.

2. Role of household sector:
By household we mean a single individual who takes decisions relating to her own consumption or a group of individuals for whom the decisions relating to consumption are jointly determined. Households consist of people. These people work in firms as workers and earn wages.

They are the one who work in government departments and earn salaries or they are the owners of firms and earn profits. Therefore, the market in which the firms sell their products could not have been functioning without the demand coming from the households. Further, they also earn rent by leasing land or earn interest by lending capital.

Question 38.
Write a note on externalities.
An externality is a cost or benefit conferred upon second or third parties as a result of acts of individual production and consumption. But the cost or benefit of an externality cannot be measured in money terms because it is not included in market activities.

In other words, externalities refer to the benefits or harm a firm or an individual causes to another for which they are not paid or penalized. They do not have any market in which they can be bought and sold. There are two types of externalities viz.,

• Positive externalities
• Negative externalities.

For example, let us imagine that there is chemical fertilizer industry. It produces the chemical fertilizers required for agriculture. The output of the industry is taken for counting GDP of an economy. This is positive externality.

While carrying out the production, the chemical fertilizer industry may also be polluting the nearby river. This may cause harm to the people who use the water of the river. Hence their health will be affected. Pollution also may kill fish and other organisms of the river. As a result, the fishermen of the river may lose their livelihood. Such harmful effects that the industry is inflicting on others, for which it will not bear any cost are called negative externalities.

Question 39.
Briefly explain the functions of RBI.
The main functions of RBI are as follows:

a. Printing and issuing currency notes:
It has complete authority of printing and issuing currency notes in the country. RBI issues all denominations of currency notes (Rs.2, Rs.10, Rs.20, Rs.50, Rs.100, Rs.500 and Rs.2000) except one rupee note, which is issued by finance ministry, Government of India. The minimum reserve system of note issue was followed by RBI after 1956.

b. Lender of last resort:
RBI provides financial assistance to commercial banks like giving credit, discounting bills, giving advances, etc. during their financial crisis and helps the banks as a lender of last resort.

c. Act as banker to the government

d. Controls credit creation activities of commercial banks:
The credit provided by all commercial banks is controlled by RBI. RBI implements both quantitative and qualitative techniques to control the credit generated by commercial banks. The quantitative measures to control credit are bank rate policy, open market operations, repo and reverse repo rates, cash reserve ratio and statutory liquidity ratio.

e. Controls money market:
RBI is the leader of money market. All the activities and components of money market like commercial banks and financial institutions are controlled and directed by RBI.

f. Act as banker to the banks.

g. Custodian of foreign exchange reserves.

Question 40.
Explain the consumption and investment functions with the help of graphs.
In a two-sector model, there are two sources of final demand. The first is consumption and the second is investment. The investment function was shown as I = I.

Graphically, this is shown as a horizontal line at a height equal to I above the horizontal axis.

In this model, I is autonomous which means, it is the same no matter whatever is the level of income. The consumers demand can be expressed by the equation C = $$\hat{\mathrm{C}}$$ + cY, where $$\hat{\mathrm{C}}$$ is autonomous expenditure and c is the marginal propensity to consume.
The consumption function can be graphically expressed as follows:

In the above diagram $$\hat{\mathrm{C}}$$ is the intercept of the consumption, ‘c’ is slope of consumption function equals α.

Question 41.
Write the chart of components of current account.
The chart which consists of different components of current account can be drawn as follows:

PART-D

VII. Answer any four of the following questions in 20 sentences each (4 × 6 = 24)

Question 42.
Explain the features of indifference curves with the help of diagrams.
A family of indifference curves is called as in difference map. It refers to a set of indifference curves for two commodities showing different levels of satisfaction. The higher indifference curves show higher level of satisfaction and lower indifference curve represent lower satisfaction. A rational consumer always chooses more of that product which offers him a higher level of satisfaction which is represented in higher indifference curve. It is also called ‘monotonic preferences’.

The consumer’s preferences over all the bundles . can be represented by a family of indifference curves as shown in the following diagram.

In the given diagram, we see the group of three indifference curves showing different levels of satisfaction to the consumer. The arrow indicates that bundles on higher indifference curves are preferred by the consumer to the bundles on lower indifference curves.

Question 43.
Suppose the demand and supply curves of wheat are given by qD=200-P and qS=120+P.

1. Find the equilibrium price.
2. Find the equilibrium quantity of demand and supply
3. Find the quantity of demand and supply when P > equilibrium price.
4. Find the quantity of demand and supply when P < equilibrium price.

1. By definition
qD = qs
200 – P = 120 + P
200 – P – 120-P
2P – 80
2P = 80
P = $$\frac{80}{2}$$
P = 40

2. qD = 200 – P
= 200 – 40
qD = 160
qs = 120 + P = 120 + 40
qs = 160
∴ Equilibrium quantity is supplied and demand is 160

3. When P is greater than equilibrium price
If P = 45
qD = 200 – 45
qD =155
qs = 120 + 45 = 165
∴ qs> qD

4. When P is less than equilibrium price
If P = 35
qD = 200 – 35
= 165
qs= 120 + 35
= 155
∴ qD > qs

Question 44.
Explain how the firms behave in Oligopoly.
Oligopoly is one of the non-competitive markets where the market of a particular commodity consists of more than one seller but the number of sellers is few. The special case of oligopoly where there are exactly two sellers is termed duopoly.

Under oligopoly market there are only a few firms. The output decisions of any one firm would necessarily affect the market price and therefore the amount sold by the other firms. It is, therefore, only to be expected that other firms would react to protect their profits. This reaction would be through taking fresh decisions about the quantity and price of their own output. There are various ways in which this can be theorized. They are as follows:

1. Firstly, duopoly firms may collude together and decide not to compete with each other and maximize total profits of the two firms together. In such a case, the two firms would behave like a single monopoly firm that has two different factories producing the commodity.

2. Secondly, take the case of a duopoly where each of the two firms decides how much quantity to produce by maximizing its own profit assuming that the other firm would not change the quantity that it is supplying.

3. Thirdly, some economists argue that oligopoly market structure makes the market price of the commodity rigid, i.e., the market price does not move freely in response to changes in demand. The reason for this lies in the way in which oligopoly firms react to a change in price initiated by any one firm.

If one firm feels that a price increase would generate higher profits and therefore increases the price at which it sells its output, other firms do not follow. The price increase would, therefore, lead to a huge fall in the quantity sold by the firm leading to fall in its revenue and profit. It is therefore not rational for any firm to arbitrarily increase the price.

Similarly, if a firm estimates that it could earn a larger revenue and profit by selling a larger quantity of output and therefore lowers the price at which it sells the commodity, other, firms would perceive this action as a threat and therefore follow the first firm and lower their price as well.

The increase in the total quantity sold due to the lowering of price is therefore shared by all the firms and the firm that had initially lowered the price is able to achieve only a small increase in the quantity it sells. A relatively large lowering of price by the first firm leads to a relatively small increase in the quantity sold.

Therefore, any firm finds it irrational to change the prevailing price, leading to prices that are more rigid compared to perfect competition.

Question 45.
Explain the numerical example to show that all the three methods of estimating GDP gives us the same answer.
The three methods of calculating GDP, viz. product or value added method, expenditure method, and income method, give us the same answer. This can be explained with the help of numerical example as follows.

Let us imagine, there are two firms X and Y. Suppose X use no raw material and produces cotton worth Rs.50. X sell its cotton to firm Y, who uses it to produce cloth. Y sells the cloth produced to consumers for Rs. 200.

1. GDP in the phase of product or the value-added method:
Here, the value-added = Sales – Intermediate goods.
Thus, VAX = 50 – 0
VAY = 200 – 50 = 150.
Thus, GDP = VAX + VAY= 50 + 150 = 200.
GDP distribution for firms X and Y.

 Particulars Firm X Firm Y Sales 50 200 Intermediate consumption 0 50 Value added 50 150

2. GDP in the phase of expenditure method:
Under this method, GDP is the sum of final expenditure/s on goods and services for end-use. In the above case, final expenditure is expenditure by consumers on cloth. Therefore, GDP = 200.

3. GDP in the phase of income method:
Under this method, GDP is obtained by adding factor payments. Let us imagine firm X, from Rs. 50 received gives Rs. 30 as wages and keeps the remaining Rs. 20 as its profits. Similarly, firm Y gives Rs.100 as wages and keeps Rs. 50 as profits. It can be stated in the following table:

Now the GDP by income method = total of factor payments (incomes) which is equal to total wages received (workers of firms X and Y) and total profits earned (by firms X and Y). Thus, GDP = Wages + Profits,
i.e. GDP = 130 + 70 = 200.
Thus, all the three methods of estimating GDP give us the same answer.

Question 46.
Write down some of the limitations of using GDP as an index of welfare of a country.
Gross domestic product (GDP) is the sum total of value of goods and services created within the geographical boundary of a country in a particular year, dt gets distributed among’the people as incomes except retained earnings. So we consider that higher level of GDP of a country is an index of greater well being of the people of that country.

Welfare of a country means the well being of entire population of the country. But there are certain limitations of using GDP as an index of welfare of a country. They are as follows:

a. Distribution of gross domestic product (GDP):
Generally, the rise in GDP will not represent increase in the welfare of the country. If the GDP of the country is rising, the welfare may not rise as a consequence. This is because the rise in gross domestic product may be concentrated in the hands of only a few individuals or firms. For the remaining, the income may in fact might have decreased. In such a situation, the welfare of the entire country cannot be said to have improved.

b. Non-monetary exchanges:
Some of the activities in a country are not evaluated in terms of. money. For instance, the domestic services of housewife are pot paid for. The-exchanges which take place in the informal sector without the help of money are called barter exchanges. In barter exchanges, goods are directly exchanged against each other.

As money is not used here, these exchanges are not registered as part of economic activity. In India, because of many remote areas, these kinds of exchanges still take place and they are generally not counted in the GDP. Therefore, gross domestic product calculated in the standard manner may not give us a clear indication of welfare of a country.

c. Externalities:
An externality is a cost or benefit conferred upon second or third parties as a result of acts of individual production and consumption. In other words, externalities refer to the benefits or harms, a firm or an individual causes to another for which they are not paid or penalized.

These do not have any market in which they can be bought and sold. But the cost or benefit of an externality cannot be measured in money terms because it is not included in market activities. For example, the pleasure one gets from his neighbour’s garden is an external benefit and external cost is environmental pollution caused by industries. Both are excluded from na¬tional income estimates.

d. Leisure and work:
One of the important things that affect the welfare of a society is leisure. But this is not included in GDP. For example, longer working hours may make people unhappy because their leisure is reduced. On the contrary, shorter working hours per week may increase leisure and make people happy.

e. Manner of production:
The economic welfare also depends on the manner of production of goods and services. If goods are produced by child labour or by exploitation of workers, then the economic welfare cannot increase.

Question 47.
Explain the functions of Money. How does money overcome the shortcomings of barter system?
The functions of money are broadly classified as follows:

1. Primary functions
2. Secondary functions
3. Contingent functions.

1. Primary functions:
The primary functions of money are as follows:

a. Medium of exchange:
Money plays an important role as a medium of exchange. It facilitates exchange of goods for money. It has solved the problems of barter system. Barter exchanges become extremely difficult in a large economy because of the high costs people would have to incur looking for suitable persons to exchange their surpluses.

It helps the people to sell in one place and buy in another place. Money has widened the scope of market transactions. Money has become a circulating material between buyers and sellers.

b. Measure of value:
The money acts as a common measure of value. The values of all goods and services can be expressed in terms of money. As a measure of value, money performs following functions:

1. The value of all goods and services measured and expressed in terms of the money.
2. Rate of exchange of goods and services expressed in money.
3. Facilitates the maintenance of accounts. It facilitates price mechanism.
4. It makes goods and services comparable in terms of price.

For instance, when we say that the value of a book is ₹500, we mean that the book can be exchanged for 500 units of money where a unit of money is rupee in this case. If the price of a pencil is ₹5 and that of a pen is ₹10, we can calculate the relative price of a pen with respect to a pencil i.e., a pen is worth 10/5 = 2 pencils.

2. Secondary functions: The secondary functions of money are as follows:

a. Store of value:
People can save part of their present income and hold the same for future. Money can be stored for precautionary motives needed to overcome financial stringencies. Money solves one of the deficiencies of barter system i.e., difficulty to carry forward one’s wealth under the barter system.

For instance, we have an endowment of wheat which we do not wish to consume today entirely. We may regard this stock of surplus wheat as an asset which we may wish to consume or even sell-off, for acquiring other commodities at some future date. But wheat is a perishable item and cannot be stored beyond a certain period.

Also, holding a large stock of wheat requires a lot of space. We may have to spend considerable time and resources looking for people with a demand for wheat when we wish to exchange our stock for buying other commodities. This problem can be solved if we sell our wheat for money. Money is not perishable land its storage costs are also less.

b. Standard of deferred payments:
All the credit transactions are expressed in terms of money. The payment can be delayed or postponed. So, money can be used for delayed settlement of dues or financial commitments.

c. Transfer of value:
Money acts as a transfer of value from person to person and from place to place. As a transfer of value, money helps us to buy goods, properties or anything from any part of the country or the world. Further, money earned in different places can be brought or transferred to anywhere in the world.

3. Contingent functions of money:
Other than primary and secondary functions, money also performs other functions which are as follows:

a. Basis of credit:
Money serves as a basis of the credit. The modem credit system exists only because of existence of money.

b. Distribution of national income:
Money helps in distribution of national income. The reward paid to factors of production in the form of rent, wages, interest, and profit are nothing but the distribution of national income at factor prices.

c. Provides liquidity and uniformity:
Money provides liquidity to all kinds of assets both moveable and immovable. Money can be. converted into any type of asset and all assets can be converted into money.

d. Helps, in consumers’ and producers’ equilibrium:
All goods and services are expressed in terms of money. The consumer attains equilibrium when the price of a product is equal to his marginal utility. Similarly, the producers reach equilibrium if they get maximum satisfaction. Both consumers and producers try to achieve equilibrium with the help of money.

Question 48.
Write a note on balance of payment.
The balance of payments is the record of the transactions in goods, services and assets between residents of a country with the rest of the world for a specified time period, i.e. a year. The balance of payments consists of two accounts, viz. current account and capital account.

a. Current account:
It is the record of trade in goods and services and transfer payments. The main components of current account are trade in goods, i.e. exports and imports of goods. The trade-in services includes the factor income and non-factor income transactions. Transfer payments are the receipts which the residents of a country get for free without having to provide any goods or services in return. They consist of gifts, remittances, and grants. They could be given by the government or by private citizens living abroad.

Current account is in balance when receipts on current account are equal to the payments ‘ on the current account. A surplus current account means that the nation is a lender to other countries and a deficit Current account means that the nation is a borrower from other countries.

b. Capital account:
It is the record of all international transactions of assets. An asset is any one of the forms in which wealth can be held. For example, stocks, bonds, government debt, etc. Purchase of assets is a debit item on the capital account. If an Indian buys a UK car company it inters capital account transactions as a debit item. On the other hand, sale of assets like sale of share of an Indian company to a USA customer is a credit item on the capital account.

The capital account mainly consists of foreign direct investment, foreign institutional investments, external borrowings, and assistance. The capital account will be in balance when capital inflows are equal to capital outflows. Surplus in capital account arises when capital flows are greater than capital outflows and deficit in capital account arises when capital inflows are lesser than capital outflows.

c. Capital inflows:
Loans from abroad, sale of assets or shares in foreign companies. Capital outflows: Repayment of loans, purchase of assets or shares in foreign countries.

PART – E

VIII. Answer any four of the following questions in 20 sentences each (2 × 5 = 10)

Question 49.
A consumer wants to consume two goods. The Price of bananas is ₹4 and price of mangoes is ₹5. The consumer income is ₹20.

1. How much bananas can she consume if she spend her entire income on that good
2. How much mangoes can she consume if she spend her entire income on that good
3. Is the slope of budget line is downward or upward
4. Are the bundles on the budget line equal to the consumers’ income or not
5. If you want to have more of banana you have to give up mangoes. Is it true?

1. 5 Bananas (20/4).
2. 4 Mangoes (20/5).
3. Slope of budget line is downward.
4. Yes, the bundles on the budget line are equal to the consumer’s income.
5. True, if we want to have more of banana we have to give up mangoes.

Question 50.
Compute the total revenue, marginal revenue and average revenue schedules from the following table when market price of each unit of goods is Rs.10.