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 CUET(UG) 2025

ECONOMICS

20 PRACTICE PAPERS with Full Explanation

As per Syllabus released by NTA

NODIA AND COMPANY

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CUET (UG) Economics 20 Sets
Edition March 2025
Copyright © By Nodia and Company

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 Contents
PRACTICE PAPER 01 7

PRACTICE PAPER 02 18

PRACTICE PAPER 03 29

PRACTICE PAPER 04 39

PRACTICE PAPER 05 49

PRACTICE PAPER 06 59

PRACTICE PAPER 07 69

PRACTICE PAPER 08 79

PRACTICE PAPER 09 89

PRACTICE PAPER 10 99

PRACTICE PAPER 11 110

PRACTICE PAPER 12 120

PRACTICE PAPER 13 130

PRACTICE PAPER 14 140

PRACTICE PAPER 15 150

PRACTICE PAPER 16 160

PRACTICE PAPER 17 170

PRACTICE PAPER 18 180

PRACTICE PAPER 19 190

PRACTICE PAPER 20 199

PRACTICE PAPER 20 200

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 CUET (UG) Exam - 2025
Syllabus
Economics

Course I : Introductory Microeconomics

This course introduces the learner to economics as a science of abstraction and reasoning.
It introduces some basic concepts and tools to understand economic issues of an individ-
ual or a firm and how decisions are taken in variety of markets. It also intends to provide
exposure to the learners on how choices are made and how a variety of statistical tools are
used to optimally allocate the resources.
Unit I : Introduction
• What is microeconomics?
• Central problems of an economy, production possibility curve and opportunity cost.
Unit II : Consumer Behaviour and Demand
• Consumer’s Equilibrium : meaning and attainment of equilibrium through Utility Ap-
proach : One and two commodity cases.
• Demand : market demand, determinants of demand, demand schedule, demand curve,
movement along and shifts in demand curve, price elasticity of demand, measurement of
price elasticity of demand – percentage, total expenditure and geometric methods
Unit III : Producer Behaviour and Supply
• Production function : returns to factor and returns to scale
• Supply : market supply, determinants of supply, supply schedule, supply curve movement
along and shifts in supply curve, price elasticity of supply, measurement of price elasticity
of supply – percentage and geometric methods
• Cost and Revenue : Concepts of costs; short-run cost curves (fixed and variable costs;
total, average and marginal costs); concepts of revenue – total, average and marginal rev-
enue and their relationship. Producer’s equilibrium – with the help of MC and MR.
Unit IV : Forms of Market and Price Determination
• Forms of market – perfect competition
• Price determination under perfect competition – equilibrium price, effects of shifts in
demand and supply.
Unit V : Simple Applications of Tools of Demand and Supply Curves
• The teachers can be given the flexibility to choose the issues : rationing, floors and ceilings
and Food Availability Decline (FAD) Theory (the teachers may also choose alternative
examples that are simple and easy to understand)
Course II : Introductory Macroeconomics
The overall working of an economy and some of its economic theorisation are introduced
in this course. The learners will get some basic idea of how the government regulates the
functioning of economic aspects of a country through accounting of the production activ-
ities, running financial institutions, budgeting and the accounting of its economic interac-
tion with other countries. The impact it will have on citizens is also briefly introduced.

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Unit I : National Income and Related Aggregates - Basic Concepts and Measurement
• Macroeconomics : meaning.
• Circular flow of income, concepts of GDP, GNP, NDP, NNP (at market price and factor
cost), National Disposable Income (gross and net); Private Income, Personal Income and
Personal Disposable Income
• Measurement of National Income –Value Added method, Income method and Expend-
iture Method
Unit II : Determination of Income and Employment
• Aggregate demand, aggregate supply and their components
• Propensity to consume and propensity to save (average and marginal)
• Meaning of involuntary unemployment and full employment
• Determination of income and employment : two sector model
• Concept of investment multiplier and its working
• Problems of excess and deficient demand
• Measures to correct excess and deficient demand – availability of credit, change in
• government spending
Unit III : Money and Banking
• Money : meaning, evolution and functions
• Central bank : meaning and functions
• Commercial banks : meaning and functions
• Recent significant reforms and issues in Indian Banking System : privatisation and mod-
ernization
Unit IV : Government Budget and the Economy
• Government budget – meaning and its components
• Objectives of government budget
• Classification of receipts – revenue and capital; classification of expenditure – revenue
and capital, plan and non-plan, and developmental and non-developmental
• Balanced budget, surplus budget and deficit budget : meaning and implications
• Revenue deficit, fiscal deficit and primary deficit : meaning and implications; measures to
contain different deficits
• Downsizing the role of government : meaning and implications
Unit V : Balance of Payments
• Foreign exchange rate – meaning (fixed and flexible), merits and demerits; determination
through demand and supply
• Balance of payments accounts – meaning and components
• A brief analysis about recent exchange rate issues

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 PRACTICE PAPER 01

PRACTICE PAPER 01

1. What is the central problem of an economy primarily spent on each good. If MUx/Px = MUy/Py, the consumer
concerned with? cannot increase total utility by reallocating expenditure.
(A) Generating unlimited wants without resources This ensures optimal distribution of the budget across
(B) Allocating scarce resources among competing uses goods, maximizing overall satisfaction given the budget
(C) Regulating foreign trade policies exclusively constraint.
(D) Determining population growth strategies
4. Which of the following does not shift the demand curve


Ans for a product to the right?
(B) Allocating scarce resources among competing uses (A) An increase in consumers’ income for a normal
The central problem of an economy focuses on how good
limited resources can best be allocated to satisfy society’s (B) A successful advertising campaign that enhances
diverse wants. Scarcity drives choices about production, product appeal
distribution, and consumption. Decisions must address (C) A significant decrease in the price of a substitute
what to produce, how to produce, and for whom to (D) An anticipated future price rise that encourages
produce, ensuring optimal resource use under finite current buying
resource constraints.

Ans
2. According to the production possibility curve (PPC), (C) A significant decrease in the price of a substitute
which factor remains constant along the curve? If the price of a substitute product falls, consumers may
(A) Level of technology switch to that cheaper substitute, causing the original
(B) Quantity of goods produced good’s demand curve to shift left rather than right. In
(C) Price of goods contrast, rising incomes, effective advertisements, or
(D) Consumers’ tastes and preferences expectations of price increases all stimulate demand,


Ans shifting the demand curve for the product rightward.

(A) Level of technology 5. Match the economic terms in Column A with their
While drawing a production possibility curve, we assume definitions in Column B:
technology is fixed so that the curve captures trade-offs
Column A Column B
between two goods under a given state of technology.
This assumption helps isolate how resources can be 1. Price Elasticity of i.
Goods where rise
allocated most efficiently without improvements or Demand in the price of one
declines in technology shifting the production frontier. increases demand for
the other
3. In a two-commodity utility approach, consumer’s 2. Movement Along ii. Change in quantity
equilibrium is achieved when: Demand Curve demanded due to price
(A) MU of both goods is identical change alone
(B) Total utility of the goods is always maximized 3. Shift of Demand iii. Responsiveness of
(C) Ratio of MU to price is equal for both goods Curve quantity demanded to
(D) Consumer’s budget is fully utilized regardless of price changes
MU
4. Substitute Goods iv. Change in demand due


Ans to non-price factors
(C) Ratio of MU to price is equal for both goods Options:
In two-commodity analysis, a consumer reaches (A) 1-iii, 2-ii, 3-iv, 4-i
equilibrium by equalizing the marginal utility per rupee (B) 1-iv, 2-iii, 3-ii, 4-i

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(C) 1-ii, 2-iv, 3-i, 4-iii change proportionately. This distinction highlights how
(D) 1-i, 2-iv, 3-ii, 4-iii production adjusts under partial versus proportional


Ans input variation.

(A) 1-iii, 2-ii, 3-iv, 4-i 8. Assertion (A) : Average cost always falls when marginal
Price elasticity of demand measures how quantity cost is below it.
demanded responds to price changes. Movement along Reason (R) : Marginal cost influences the direction of
the demand curve occurs when price changes. A shift average cost.
of the demand curve happens due to non-price factors. (A) Both (A) and (R) are true, and (R) is the correct
Substitute goods have linked demand; a price increase explanation of (A)
in one raises demand for the other. (B) Both (A) and (R) are true, but (R) is not the correct
explanation of (A)
6. Identify the correct statements regarding returns to a (C) (A) is true, (R) is false
factor (assuming other factors remain constant): (D) (A) is false, (R) is true
1. In the initial stages, total product may increase at
an increasing rate.

Ans
2. The law of diminishing marginal returns never (A) Both (A) and (R) are true, and (R) is the correct
applies to any input. explanation of (A)
3. Marginal product can become negative at very high If marginal cost (MC) lies below average cost (AC), it
input levels. pulls AC downward, making AC fall. Conversely, if MC
4. Diminishing returns occur after a certain point of is above AC, it pushes AC upward. The reason statement
adding a variable input. correctly explains the mechanism: marginal cost
(A) 1, 2, and 3 only determines how average cost will change, confirming
(B) 1, 3, and 4 only (A) and (R) and their explanatory relationship.
(C) 2 and 4 only
9. Arrange the following concepts in the order they
(D) 1, 2, and 4 only
appear in the microeconomics framework for producer


Ans analysis:
(B) 1, 3, and 4 only 1. Total Fixed Cost (TFC)
Initially, increasing a variable factor can yield increasing 2. Total Variable Cost (TVC)
returns. Eventually, diminishing marginal returns set in, 3. Total Cost (TC)
often after a threshold is reached. Marginal product can 4. Marginal Cost (MC)
turn negative if too much of the variable factor is used. (A) 1 → 2 → 3 → 4
Statement 2 is incorrect because the law of diminishing (B) 2 → 1 → 3 → 4
marginal returns does apply eventually. (C) 1 → 3 → 2 → 4
(D) 4 → 3 → 2 → 1
7. Which statement best differentiates returns to factor
from returns to scale?

Ans
(A) Returns to factor analyze long-run production; (A) 1 → 2 → 3 → 4
returns to scale analyze short-run production First, a firm identifies fixed costs. Next, it considers
(B) Returns to factor focus on one input varying; variable costs, which vary with output. Summing fixed
returns to scale involve all inputs changing and variable costs yields total cost. Finally, marginal
(C) Both apply only to labor inputs cost, the change in total cost when an extra unit is
(D) Both address constant output with changing inputs produced, is derived. This sequence mirrors how a firm


Ans analyzes costs step by step.

(B) Returns to factor focus on one input varying; returns 10. Which statement best compares perfect competition
to scale involve all inputs changing with monopoly?
Returns to a factor typically refer to short-run (A) Both markets have many sellers and identical
conditions where one variable input changes while other products
inputs remain fixed. Returns to scale relate to long- (B) Perfect competition has unrestricted entry;
run production, where all factors of production can monopoly has high or absolute barriers

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 PRACTICE PAPER 01

(C) In perfect competition, a single seller controls marginal cost at equilibrium output. Firms are price
price; in monopoly, many sellers do takers rather than price setters, contradicting the reason
(D) Profits in perfect competition are always higher statement that they set prices arbitrarily. Hence, (A) is
than in monopoly correct and (R) is an incorrect explanation.


Ans 13. Match each concept in Column A with its characteristic
(B) Perfect competition has unrestricted entry; in Column B:
monopoly has high or absolute barriers
Column A Column B
In perfect competition, numerous sellers freely enter
and exit, producing identical products, so no single 1. Producer’s i. TR ÷ Quantity
firm can set price. A monopoly exists when a single Equilibrium
seller dominates, often due to barriers like patents, 2. Total Revenue ii. Change in TR from
high capital requirements, or licenses. This restriction (TR) selling one more unit
prevents competition, enabling the monopolist to 3. Average Revenue iii. Achieved when MC =
influence market price. (AR) MR
4. Marginal Revenue iv. Price × Quantity
11. Arrange the following market structures from most
(MR)
competitive to least competitive:
1. Perfect Competition Options:
2. Monopolistic Competition (A) 1-iii, 2-iv, 3-i, 4-ii
3. Oligopoly (B) 1-i, 2-ii, 3-iv, 4-iii
4. Monopoly (C) 1-iv, 2-i, 3-iii, 4-ii
(A) 4 → 3 → 2 → 1 (D) 1-ii, 2-iii, 3-i, 4-iv
(B) 1 → 2 → 3 → 4

Ans
(C) 2 → 1 → 3 → 4
(A) 1-iii, 2-iv, 3-i, 4-ii
(D) 1 → 3 → 4 → 2
A producer reaches equilibrium where marginal cost


Ans (MC) equals marginal revenue (MR). Total revenue is
(B) 1 → 2 → 3 → 4 price multiplied by quantity. Average revenue is total
Perfect competition, characterized by many sellers of revenue divided by quantity. Marginal revenue is the
identical products, is the most competitive. Monopolistic additional revenue from selling one more unit. The
competition follows with differentiated products but matching ensures each concept aligns with its precise
multiple firms. Oligopoly has only a few dominant definition.
firms, reducing competitive intensity. Monopoly is least
14. Which statements about price determination under
competitive, since a single seller faces no direct rivals in
perfect competition are true?
supplying the market.
1. Firms face horizontal demand curves
12. Assertion (A) : In a free market with perfect competition, 2. Market demand curve slopes downward
the equilibrium price equals marginal cost. 3. Individual firm can influence market price
Reason (R) : Firms set prices arbitrarily to maximize 4. Equilibrium price is determined by industry supply
revenue in competitive markets. and demand
(A) Both (A) and (R) are true, and (R) is the correct (A) 1, 2, and 4 only
explanation of (A) (B) 2 and 3 only
(B) Both (A) and (R) are true, but (R) is not the correct (C) 1, 3, and 4 only
explanation of (A) (D) 1 and 2 only
(C) (A) is true, (R) is false

Ans
(D) (A) is false, (R) is true
(A) 1, 2, and 4 only


Ans Under perfect competition, each individual firm faces
(C) (A) is true, (R) is false a perfectly elastic (horizontal) demand at the market
In perfect competition, price settles where market price. The overall market has a downward-sloping
supply and demand intersect, so each firm’s price equals demand curve. Firms do not set prices but accept the

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page 10 CUET UG Economics

market price determined by industry-wide supply

Ans

and demand. Hence statements 1, 2, and 4 accurately (C) (A) is true, (R) is false
describe this market. In perfect competition, free entry and exit drive
economic profits to zero over time. The reason given
15. Which of the following could be a real-world example
refers to product differentiation and brand loyalty, which
of price ceiling?
are characteristic of monopolistic or monopolistic
(A) A minimum support price for wheat set above
competition, not perfect competition. Hence, while
equilibrium
(A) is correct, (R) is incorrect for the stated market
(B) Rent control imposed on apartments in a crowded
structure.
city
(C) A fixed wage rate legislated above the market level 18. Arrange these steps in consumer equilibrium using
(D) Free trade policies that reduce tariffs the utility approach (single commodity) in correct


Ans sequence:
1. Identify MU of the commodity
(B) Rent control imposed on apartments in a crowded
2. Compare MU with price
city
3. Check for budget constraint
A price ceiling sets a maximum legal price below the
4. Choose quantity where MU ≥ price
market equilibrium level. Rent control is a classic
(A) 1 → 3 → 4 → 2
example, limiting how much landlords may charge. By
(B) 3 → 1 → 2 → 4
capping rental prices, policymakers aim for housing
(C) 1 → 2 → 4 → 3
affordability. Options like minimum support prices
(D) 1 → 3 → 2 → 4
involve floors, not ceilings, and are fundamentally
different interventions.

Ans
(D) 1 → 3 → 2 → 4
16. Under which market form are many firms producing
First, the consumer recognizes the marginal utility of the
differentiated products, each retaining some price-
commodity (1). Next, they consider available income or
setting power?
budget (3). Then, they compare marginal utility with
(A) Perfect Competition
price (2). Finally, they purchase up to the point where
(B) Monopoly
MU is at least equal to the price (4), achieving single-
(C) Monopolistic Competition
commodity equilibrium.
(D) Oligopoly


Ans 19. Which statements are incorrect about a supply curve?
1. Technological advances can shift the supply curve
(C) Monopolistic Competition
left.
Monopolistic competition features many sellers offering
2. Higher input costs typically shift the supply curve
products that are close substitutes but differentiated
right.
by branding, quality, or other attributes. Each firm has
3. Price elasticity of supply measures how quantity
limited control over price due to product differentiation.
supplied changes with price.
Unlike perfect competition, products are not identical,
4. A movement along the supply curve occurs with a
yet the market still has numerous competing firms
change in the good’s price.
keeping power relatively modest.
(A) 1 and 2 only
17. Assertion (A) : In perfect competition, profits in the (B) 2 and 3 only
long run tend to be normal (zero economic profit). (C) 1, 2, and 4 only
Reason (R) : Product differentiation and brand loyalty (D) 3 and 4 only
allow firms to sustain abnormal profits.

Ans
(A) Both (A) and (R) are true, and (R) is the correct
(A) 1 and 2 only
explanation of (A)
Technological improvements usually shift supply right,
(B) Both (A) and (R) are true, but (R) is not the correct
not left. Higher input costs push supply left, not right,
explanation of (A)
because production becomes costlier. Statements 3
(C) (A) is true, (R) is false
and 4 are correct: price elasticity of supply tracks how
(D) (A) is false, (R) is true
supply responds to price changes, and movement along

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 PRACTICE PAPER 01

the supply curve happens when the product’s own price sum of consumption and investment expenditures.
changes. Government spending appears only when adding the
public sector to create a more comprehensive model of
20. A producer’s equilibrium, using the MC and MR national income and product determination.
approach, is reached when:
(A) MC first equals MR and then exceeds it 23. If marginal propensity to consume (MPC) is 0.8, how
(B) MC is always below MR does an initial injection of 100 units of investment affect
(C) Total cost is minimized total income via the multiplier process (assuming no
(D) Profit is negative but stable leakages)?


Ans (A) Increase by 180 units
(B) Increase by 500 units
(A) MC first equals MR and then exceeds it (C) Increase by 125 units
Producer’s equilibrium occurs where marginal cost (D) Increase by 800 units
equals marginal revenue. Beyond that point, marginal
cost often rises above marginal revenue, indicating

Ans
that producing an additional unit would reduce profits. (B) Increase by 500 units
This ensures the firm’s profit is maximized or losses are The multiplier (k) in a two-sector model is 1/(1 − MPC).
minimized at the output level where MC = MR but then With an MPC of 0.8, k = 1/(1 − 0.8) = 5. Hence, an initial
increases. injection of 100 units increases total income by 100 × 5
= 500 units, demonstrating how consumption spending
21. Which of the following best defines National Disposable multiplies the initial investment.
Income?
(A) Personal Income minus transfer payments 24. Which of the following does not directly reduce the
(B) Net National Product at market price plus net problem of deficient demand?
indirect taxes (A) Lowering the policy interest rate
(C) National Income plus net current transfers from (B) Increasing government expenditures
abroad (C) Raising taxes across all income groups
(D) Gross Domestic Product at factor cost plus (D) Encouraging investment through tax rebates
depreciation

Ans


Ans (C) Raising taxes across all income groups
(C) National Income plus net current transfers from Deficient demand indicates insufficient spending.
abroad Lower interest rates boost credit availability, government
National Disposable Income measures the income spending directly adds to aggregate demand, and
available to a nation for consumption or saving after investment incentives spark production. Conversely,
accounting for net current transfers from abroad. It raising taxes across all income levels decreases
incorporates net inflows of transfer payments (like disposable income, likely further reducing aggregate
remittances or foreign aid), thereby representing the spending and exacerbating the deficiency, rather than
total resources a country can spend or save within a relieving it.
given period.
25. Match each national income concept in Column A with
22. In the two-sector model (households and firms), which its description in Column B:
component is not included in Aggregate Demand?
Column A Column B
(A) Consumption (C)
(B) Investment (I) 1. GDP at market i. GNP at factor cost
(C) Government spending (G) price − taxes + subsidies
(D) Sum of consumption and investment + transfers from
government and rest of


Ans the world
(C) Government spending (G) 2. NDP at factor ii. GDP minus
A simple two-sector model comprises only households cost depreciation evaluated
and firms, omitting government and foreign at factor payments
sectors. Aggregate demand in this model is the

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page 12 CUET UG Economics

3. Personal Income iii. Sum of all final (B) Both (A) and (R) are true, but (R) is not the correct
goods and services explanation of (A)
at prevailing market (C) (A) is true, (R) is false
prices (D) (A) is false, (R) is true
4. Private Income iv. Total income accruing

Ans
to private sector (C) (A) is true, (R) is false
including factor Central banks provide emergency funds to commercial
incomes and transfer banks or the banking system when no other source
incomes is available, hence “lender of last resort.” They do not
Options: generally fund themselves by accepting public deposits
(A) 1-iv, 2-ii, 3-i, 4-iii or routine commercial activities. Thus, while the
(B) 1-iii, 2-ii, 3-i, 4-iv assertion is correct, the reason offered is incorrect.
(C) 1-ii, 2-iv, 3-iii, 4-i
28. Which function of money allows for comparison of the
(D) 1-i, 2-iii, 3-ii, 4-iv
value of different goods and services?


Ans (A) Medium of exchange
(B) 1-iii, 2-ii, 3-i, 4-iv (B) Unit of account
GDP at market price is the market value of all final (C) Store of value
output (1-iii). NDP at factor cost is GDP minus (D) Standard of deferred payments
depreciation and measured at factor payment prices (2-

Ans
ii). Personal income is derived from GNP at factor cost
(B) Unit of account
plus subsidies and transfers, minus direct taxes (3-i).
Money’s “unit of account” function standardizes how
Private income includes private sector earnings (4-iv).
prices and costs are measured, making it possible
26. Which statement correctly contrasts GDP at factor cost to compare the value of diverse goods or services.
with GDP at market price? This contrasts with its role as a medium of exchange
(A) GDP at factor cost includes indirect taxes; GDP at (facilitating transactions), a store of value (preserving
market price excludes them purchasing power), and a standard of deferred payments
(B) GDP at market price = GDP at factor cost + indirect (settling future obligations).
taxes − subsidies
29. Which of the following best describes the principal
(C) Both measures are always identical
function of a commercial bank?
(D) GDP at factor cost = GDP at market price + indirect
(A) Issuing currency notes to the public
taxes + subsidies
(B) Providing loans and accepting deposits from


Ans individuals and businesses
(B) GDP at market price = GDP at factor cost + indirect (C) Managing the government’s fiscal policy
taxes − subsidies (D) Collecting taxes on behalf of the government
GDP at market price measures output’s value at

Ans
consumer-level prices, which incorporate indirect taxes
(B) Providing loans and accepting deposits from
and subtract subsidies. GDP at factor cost measures
individuals and businesses
what producers receive. The relationship is: GDP at
Commercial banks primarily act as financial
market price = GDP at factor cost + (indirect taxes −
intermediaries, accepting deposits from the public
subsidies), reflecting the difference between production
and providing loans to households, firms, and other
costs and final prices.
entities. While they perform certain services for the
27. Assertion (A) : Central banks are “lenders of last resort.” government, they do not manage fiscal policy or issue
Reason (R) : Central banks accept deposits from currency, which fall under the purview of central banks
the public and primarily fund themselves through and government bodies.
commercial activities.
30. Which of the following is not a component of the
(A) Both (A) and (R) are true, and (R) is the correct
government budget?
explanation of (A)
(A) Revenue receipts

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 PRACTICE PAPER 01

(B) Capital receipts government’s day-to-day operations budget. However,

(C) Market equilibrium price it does not directly measure borrowing for capital
(D) Revenue expenditure projects; that would be reflected more accurately in the


Ans fiscal deficit or capital budget gap, not solely in revenue
deficit.
(C) Market equilibrium price
A government budget includes revenue receipts (like 33. Which option best distinguishes between a surplus
taxes), capital receipts (like borrowings), and revenue budget and a balanced budget?
or capital expenditures. “Market equilibrium price” is (A) A surplus budget has higher expenditure than
a microeconomic concept reflecting supply-demand receipts; a balanced budget has zero expenditure
intersection, not a budgetary component. Hence, it does (B) A surplus budget has lower receipts than
not figure in the accounting of government receipts or expenditure; a balanced budget has equal receipts
expenditures in fiscal policy documents. and expenditure
(C) A surplus budget has receipts exceeding
31. Arrange these budget concepts in the usual sequence of expenditure; a balanced budget has receipts equal
budget preparation: to expenditure
1. Revenue Receipts (D) Both represent the same concept under different
2. Revenue Expenditure names
3. Fiscal Deficit
4. Capital Receipts

Ans
(A) 1 → 2 → 3 → 4 (C) A surplus budget has receipts exceeding expenditure;
(B) 1 → 4 → 2 → 3 a balanced budget has receipts equal to expenditure
(C) 1 → 2 → 4 → 3 A surplus budget occurs if the government’s total
(D) 2 → 1 → 4 → 3 receipts exceed its total spending, indicating potential to


Ans pay down debt or save. A balanced budget means total
receipts match total spending, with no surplus or deficit.
(C) 1 → 2 → 4 → 3 They are distinct concepts with different implications
Governments typically first estimate revenue receipts, for fiscal policy and debt management.
then outline revenue expenditures, followed by capital
receipts (borrowings, disinvestments, etc.), and finally 34. Which type of bank reforms primarily aimed
calculate the fiscal deficit (total expenditures minus to modernize Indian banking operations with
total receipts excluding borrowings). This sequence computerization and digital services?
helps policymakers gauge the extent of deficit financing (A) Nationalization of banks
needed after considering both revenue and capital (B) Liberalization of branch licensing
components. (C) Privatization of public sector banks
(D) Technological modernization initiatives
32. Assertion (A) : A revenue deficit means government’s
revenue receipts are less than its revenue expenditure.

Ans
Reason (R) : Revenue deficit directly measures (D) Technological modernization initiatives
government’s additional borrowing requirement for Indian banking has undergone various reforms,
capital projects. including nationalization and changed licensing norms.
(A) Both (A) and (R) are true, and (R) is the correct However, widespread computerization, adoption of core
explanation of (A) banking solutions, and introduction of digital platforms
(B) Both (A) and (R) are true, but (R) is not the correct resulted from deliberate technological modernization
explanation of (A) initiatives. These reforms enhanced service efficiency,
(C) (A) is true, (R) is false reduced transaction costs, and made banking more
(D) (A) is false, (R) is true accessible to customers nationwide.


Ans 35. Identify the true statements about flexible exchange
(C) (A) is true, (R) is false rates:
A revenue deficit indeed arises when revenue expenditure 1. They adjust based on market demand and supply of
exceeds revenue receipts, indicating a shortfall in the currency

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2. They are fixed by the central bank at a predetermined services, remittances, and other intangible exchanges
level (4-i).
3. They can fluctuate daily, reflecting economic
37. Which statement correctly differentiates fixed and
fundamentals
4. They eliminate all risks in foreign exchange markets flexible exchange rate regimes?
(A) 1 and 3 only (A) Fixed rates fluctuate minute-by-minute; flexible
(B) 2, 3, and 4 only rates never change
(C) 1, 3, and 4 only (B) Fixed rates require government or central bank
(D) 1, 2, and 3 only intervention to maintain; flexible rates adjust
automatically based on market forces


Ans (C) Both rely solely on supply-demand without official
(A) 1 and 3 only intervention
Flexible (floating) exchange rates are driven by currency (D) Flexible rates ensure zero exchange rate volatility
supply and demand and can change daily with economic

Ans
news, interest rates, and investor sentiment. They are
not fixed by a central authority and do not remove all (B) Fixed rates require government or central
foreign exchange risks; volatility remains an inherent bank intervention to maintain; flexible rates adjust
aspect of flexible exchange regimes. automatically based on market forces
Under a fixed exchange rate, the central authority
36. Match each external account term in Column A with its commits to a set value against another currency or
description in Column B: basket, intervening as necessary to defend that rate.
Flexible (floating) rates move with currency supply and
Column A Column B
demand, minimizing direct official intervention but
1. Current Account i. Non-physical resulting in more frequent and sometimes unpredictable
transactions like market-driven changes.
services, remittances,
and transfers 38. Which factor does not directly appear in the Balance of
2. Capital Account ii. Records inflows and Payments?
outflows related to (A) Imports and exports of goods
assets, liabilities, and (B) Transfer payments (remittances)
investments (C) Interest on external loans
3. Visible Items iii. Balance of trade in (D) Domestic private consumption of local goods
tangible goods

Ans
4. Invisible Items iv. Transactions involving (D) Domestic private consumption of local goods
imports and exports The Balance of Payments records transactions with
of goods, services, the rest of the world: exports, imports, external debt
income, and current payments, and cross-border transfers. Domestic
transfers consumption of locally produced goods, which involves
Options: no external sector inflow or outflow, does not feature
(A) 1-iv, 2-ii, 3-iii, 4-i in the BoP. Therefore, it does not directly appear in
(B) 1-iii, 2-i, 3-ii, 4-iv external accounts.
(C) 1-ii, 2-iv, 3-i, 4-iii
39. Arrange these steps logically in calculating Net National
(D) 1-i, 2-iii, 3-iv, 4-ii
Product (NNP) at Factor Cost:


Ans 1. Subtract depreciation from Gross National Product
(A) 1-iv, 2-ii, 3-iii, 4-i 2. Add net factor income from abroad to GDP
The current account includes goods, services, income, 3. Subtract net indirect taxes
and current transfers (1-iv). The capital account tracks 4. Start with GDP at market prices
capital transfers, asset purchases, and investments (2-ii). (A) 4 → 2 → 1 → 3
Visible items refer to physical goods traded, forming the (B) 2 → 4 → 1 → 3
merchandise balance (3-iii). Invisible items encompass (C) 4 → 1 → 3 → 2

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 PRACTICE PAPER 01

(D) 1 → 3 → 2 → 4 41. In the above scenario, if a price floor is set above the free-


Ans market equilibrium price for wheat, which outcome is
most likely?
(A) 4 → 2 → 1 → 3 (A) Wheat shortage as supply contracts
First, identify GDP at market prices (4). Then add net (B) Wheat surplus due to higher price
factor income from abroad to get GNP at market prices (C) No change in market as price floor is irrelevant
(2). Next, subtract depreciation to get NNP at market (D) Permanent shift in consumer preferences back to
prices (1). Finally, subtract net indirect taxes to arrive wheat
at NNP at factor cost (3). That sequence ensures correct
measurement.

Ans
(B) Wheat surplus due to higher price
40. Which statements about Balance of Payments are A price floor above equilibrium sets a minimum legal
accurate? price higher than what the market clears. Suppliers
1. It must always show a surplus increase output hoping for higher returns, but consumers
2. Current Account and Capital Account balances reduce quantities demanded due to higher prices. This
must sum to zero (excluding errors and omissions) mismatch typically results in unsold surplus, consistent
3. Persistent deficits can lead to borrowing from with the theoretical outcomes of binding price floors.
abroad
4. It tracks only merchandise trade, ignoring services 42. Which factor does not directly drive the farmers’ shift
(A) 1 and 2 only from wheat to organic millet in the story?
(B) 2 and 3 only (A) Changing consumer tastes for healthier food
(C) 1 and 4 only (B) Higher price and profitability potential for millet
(D) 2 and 4 only (C) Government banning wheat production


Ans (D) Availability of new seeds and farming techniques

(B) 2 and 3 only

Ans

The Balance of Payments (BoP) systematically records (C) Government banning wheat production
all economic transactions between a country and the The scenario does not mention a ban on wheat
rest of the world. The Current and Capital Accounts production; rather, consumer preferences and
together balance out (excluding errors and omissions), profitability incentives steer farmers toward organic
and persistent deficits can force countries to borrow millet. Improving techniques and market signals
internationally. BoP also includes services, so statement encourage the switch. A total ban on wheat is never
4 is incorrect. indicated, so that is not a driver for the community’s
decision to change crops.


Direction :Carefully read the case study provided and then
thoroughly answer the subsequent five questions. 43. How might the transition to millet initially impact the
A small agricultural community faces shifting consumer production possibility curve (PPC) for this community?
preferences. Previously, households demanded primarily (A) Move the PPC outward immediately
wheat, but a recent health trend increased demand for (B) Shift the PPC inward permanently
organic millet. The local wheat producers, operating (C) Cause a temporary shift of resources and a point
under perfect competition, note their average revenue inside the existing PPC
dropping as consumers switch. Simultaneously, producers (D) Make the PPC irrelevant for agricultural analysis
see an opportunity in shifting resources to millet farming,

Ans
which commands a higher price. However, transitioning
requires new seeds, training, and short-term lower yields. (C) Cause a temporary shift of resources and a point
Some farmers weigh whether a government-imposed price inside the existing PPC
floor on wheat could help them sustain revenue during During retraining and initial capital investments,
the shift. Yet, others worry that an artificially high price farmers cannot fully exploit resources. Their focus
for wheat will create surpluses the market cannot absorb. shifts from wheat to millet, but with lower immediate
The community debates how best to adapt production yields, they may operate below potential. Hence, the
decisions for long-term sustainability. economy temporarily produces inside the PPC. As skills

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and output improve, production can move closer to the a tight monetary policy can slow investment and
frontier again. consumption, dampening aggregate demand, whereas
higher government expenditure can push demand up.
44. Assertion (A) : Perfectly competitive wheat producers The finance ministry believes carefully calibrated policy is
cannot individually influence the market price. needed. Observers worry that if demand keeps climbing
Reason (R) : Each farmer produces a unique, branded despite inflation, the economy might overheat. Economists
product. debate whether a more balanced approach, combining
(A) Both (A) and (R) are true, and (R) is the correct moderate rate hikes with targeted fiscal spending, could
explanation of (A) preserve stability without triggering significant economic
(B) Both (A) and (R) are true, but (R) is not the correct slowdowns.
explanation of (A)
(C) (A) is true, (R) is false 46. What is the main purpose of the central bank raising
(D) (A) is false, (R) is true policy interest rates in the scenario?


Ans (A) To stimulate consumer spending
(B) To boost exports immediately
(C) (A) is true, (R) is false (C) To reduce inflation by curbing money supply
In perfect competition, no single producer influences growth
market price because many sellers produce an identical (D) To encourage private sector borrowing
or nearly identical commodity. The reason statement
is false because unique branding is associated with

Ans
monopolistic competition, not perfect competition. (C) To reduce inflation by curbing money supply growth
Hence, the assertion is correct, but the reason provided Raising policy rates increases the cost of borrowing,
does not apply. helping slow the pace of credit expansion. Consumers
and businesses face higher interest expenses, reducing
45. Which of the following is a direct consequence if the spending and investment. Lower spending reduces
government implements a binding price floor on wheat? inflationary pressures by easing demand. This measure
(A) Farmers are forced to reduce output is a classic monetary policy response to rising inflation
(B) There is guaranteed equilibrium of supply and in an economy.
demand
(C) A portion of wheat may remain unsold, creating a 47. Why might higher government expenditure at the same
surplus time as rising interest rates create policy conflict?
(D) Consumer demand for millet suddenly increases (A) Government spending and interest rates have no


Ans correlation
(B) Government expenditure can further boost
(C) A portion of wheat may remain unsold, creating a demand, while higher interest rates aim to restrain
surplus it
When a binding price floor is set above the free-market (C) Interest rates only affect exports, not domestic
price, farmers have an incentive to produce more, but policies
consumers reduce purchases at the artificially higher (D) Higher spending always leads to reduced inflation
price. This mismatch creates excess supply. Surpluses
build up unless the government purchases the extra

Ans
wheat or demand somehow increases to match supply. (B) Government expenditure can further boost demand,
while higher interest rates aim to restrain it


Direction :Carefully read the case study provided and then Fiscal expansion can increase aggregate demand through
thoroughly answer the subsequent five questions. infrastructure projects, job creation, and spending.
A country’s central bank notices rising inflation rates. Simultaneously, higher interest rates intend to dampen
In response, it raises the policy interest rate to control demand by discouraging credit-based expenditures.
money supply and discourage excessive spending. When both policies occur together, they may counteract
Commercial banks follow suit, increasing lending rates for each other, leading to uncertainty in achieving either
businesses and consumers. Meanwhile, the government inflation control or output growth objectives.
wants to boost spending on infrastructure to address
unemployment. This conflicting scenario draws attention:

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 PRACTICE PAPER 01

48. Which statement best contrasts fiscal policy with (D) The central bank ceases open market operations
monetary policy in the above context?

Ans
(A) Fiscal policy is set by the central bank, monetary
policy by the government (A) Aggregate demand might still rise, risking more
(B) Fiscal policy adjusts government spending and inflation
taxation; monetary policy manages the money Government spending boosts overall demand by
supply and interest rates injecting purchasing power into the economy. Even
(C) Both target identical instruments for controlling if interest rates discourage some private spending,
inflation robust fiscal outlays can offset that restraint, causing
(D) Monetary policy deals only with public debt total demand to increase. If the economy is near full
management capacity, this heightened demand can push up prices
and intensify inflationary pressures.


Ans
(B) Fiscal policy adjusts government spending and

*************

taxation; monetary policy manages the money supply

and interest rates
Fiscal policy involves decisions about government
spending and tax rates, typically implemented by the
finance ministry or legislature. Monetary policy, shaped
by the central bank, uses instruments like reserve
requirements, open market operations, and interest
rates to influence credit availability and control inflation.
Each policy tool has distinct mechanics.

49. Assertion (A) : Persistent excess demand can lead to

inflationary pressures in an economy.
Reason (R) : Lowering policy interest rates to near zero
always eradicates inflation.
(A) Both (A) and (R) are true, and (R) is the correct
explanation of (A)
(B) Both (A) and (R) are true, but (R) is not the correct
explanation of (A)
(C) (A) is true, (R) is false
(D) (A) is false, (R) is true


Ans
(C) (A) is true, (R) is false
Excess demand over sustained periods pushes prices
upward, creating inflation. However, the statement
that near-zero interest rates “always eradicate inflation”
is false. Ultra-low rates often boost lending and can
sometimes fuel inflation. Therefore, while the assertion
is valid, the reason is incorrect and does not explain the
assertion.

50. Which outcome might occur if government spending

substantially increases despite high interest rates?
(A) Aggregate demand might still rise, risking more
inflation
(B) Private investment becomes unaffected by costs of
borrowing
(C) The money supply automatically contracts

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PRACTICE PAPER 02

1. “Opportunity cost” of a decision is best described as: (C) The responsiveness of quantity demanded to price
(A) The monetary price paid changes
(B) The benefit from the next best alternative forgone Price elasticity of demand quantifies how much the
(C) The sum of all possible alternatives quantity demanded varies with a change in the good’s
(D) An irrelevant factor in economic choices price, holding other factors constant. This measure helps


Ans predict how shifts in price affect consumer behavior.
Income elasticity and shift factors are distinct concepts
(B) The benefit from the next best alternative forgone from price elasticity of demand.
Opportunity cost refers to the value of the next most
preferred choice that must be forgone to pursue an 4. Which of the following does not increase the supply of
action. It captures the trade-off in selecting one option a commodity?
over another when faced with limited resources. (A) A technological improvement in production
Monetary price alone doesn’t fully reflect the real cost of (B) A decrease in the cost of input materials
sacrificing alternative uses of resources. (C) A producer tax imposed on every unit sold
(D) Entry of new firms into the industry
2. In a typical downward-sloping demand curve for
a normal good, if price is plotted on the Y-axis and

Ans
quantity on the X-axis, what describes the slope? (C) A producer tax imposed on every unit sold
(A) Positive slope because of substitution effects Imposing a tax on each unit sold increases production
(B) Negative slope reflecting inverse price-quantity costs, effectively shifting the supply curve left or
relationship upward. By contrast, technological improvements,
(C) Horizontal slope with fixed quantity cheaper inputs, and new entrants boost output potential
(D) Perfectly vertical slope at market price or competition, increasing supply. Taxes add to per-unit


Ans costs, discouraging production at any given price, thus
reducing supply.
(B) Negative slope reflecting inverse price-quantity
relationship 5. Match the following cost concepts in Column A with
A normal demand curve slopes downward, showing their brief descriptions in Column B:
that as the price of a good falls, consumers typically buy
Column A Column B
more, and as the price rises, they buy less. This inverse
relationship between price and quantity demanded 1. Total Fixed Cost i. Cost per unit of output
is a cornerstone of microeconomic theory regarding (TFC) produced
consumer purchasing behavior. 2. Total Variable ii. Cost that remains the
Cost (TVC) same regardless of
3. “Price elasticity of demand” measures: output
(A) The responsiveness of demand to changes in 3. Average Cost (AC) iii. Cost that changes with
consumer income the level of output
(B) The difference between marginal utility and total
4. Marginal Cost iv. Additional cost of
utility
(MC) producing one more
(C) The responsiveness of quantity demanded to price
unit
changes
(D) The movement from one demand curve to another Options:
(A) 1-iii, 2-ii, 3-iv, 4-i


Ans
(B) 1-ii, 2-iii, 3-i, 4-iv
(C) 1-i, 2-iv, 3-iii, 4-ii

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 PRACTICE PAPER 02

(D) 1-iv, 2-iii, 3-ii, 4-i (A) Many sellers

Ans (B) Homogeneous products
(C) Product differentiation
(B) 1-ii, 2-iii, 3-i, 4-iv (D) Some control over price
Total fixed cost (TFC) remains constant, total variable
cost (TVC) changes with output, average cost (AC)

Ans
is total cost divided by quantity (cost per unit), and (B) Homogeneous products
marginal cost (MC) is the extra cost of one additional Monopolistic competition features many firms selling
unit. Correct matching ensures clarity about each cost similar but not identical goods, differentiating through
component’s behavior in production. branding, quality, or other unique features. This
differentiation gives each firm limited price-setting
6. Which statements correctly describe the law of supply? ability. Homogeneous products with no variety are
1. As price rises, quantity supplied generally increases characteristic of perfect competition, not monopolistic
2. The supply curve may slope downward under competition, where product uniqueness plays a central
normal conditions role.
3. Supply can be perfectly inelastic if production
capacity is maxed out 9. Why do perfectly competitive firms earn only normal
4. Technology has no role in supply determination profits in the long run?
(A) 1 and 3 only (A) Government sets maximum profit limits
(B) 2 and 4 only (B) Barriers to entry prevent new firms
(C) 1, 3, and 4 only (C) Free entry and exit push profits down to normal
(D) 1 and 2 only levels


Ans (D) Firms collude to keep prices low

(A) 1 and 3 only

Ans

The law of supply states that producers are willing (C) Free entry and exit push profits down to normal
to supply more as price increases. In rare situations, levels
supply can be perfectly inelastic at full capacity. The In perfect competition, if firms earn supernormal
normal supply curve slopes upward, not downward, profits, new entrants are attracted, increasing supply and
and technology clearly impacts supply by potentially driving prices lower until profits normalize. Conversely,
lowering costs or raising efficiency. if losses persist, firms exit, reducing supply, pushing
prices upward. This dynamic ensures, over time, only
7. In comparing “short run” with “long run” in production, normal profits survive in the industry.
which statement is most accurate?
(A) All factors are variable in the short run, none in the 10. Assertion (A) : Average Revenue (AR) and Price (P) are
long run the same under perfect competition.
(B) The short run fixes at least one factor; in the long Reason (R) : Firms in perfect competition are price
run, all factors are variable makers, setting AR higher than marginal revenue.
(C) Diminishing returns apply only to the long run (A) Both (A) and (R) are true, and (R) is the correct
(D) Profit maximization is irrelevant in the long run explanation of (A)


Ans (B) Both (A) and (R) are true, but (R) is not the correct
explanation of (A)
(B) The short run fixes at least one factor; in the long (C) (A) is true, (R) is false
run, all factors are variable (D) (A) is false, (R) is true
Economists distinguish between the short run, where
at least one input (often capital) remains fixed, and the

Ans
long run, where all factors of production can be varied. (C) (A) is true, (R) is false
Diminishing returns typically arise in the short run, Under perfect competition, each firm is a price
whereas in the long run, firms can adjust plant size and taker, selling output at the market-determined price.
other inputs more flexibly. Consequently, AR equals the price. Firms do not set
the price. The reason incorrectly states they are price
8. In monopolistic competition, which of the following is
not a typical characteristic?

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page 20 CUET UG Economics

makers. Marginal revenue also equals price under characteristic shapes its competitive behavior and price-
perfect competition, so the reason is invalid. setting capacity.

11. Arrange these events in the sequence they occur when 13. Which statements about price discrimination in
the price of a commodity rises in a competitive market: monopoly are correct?
1. Firms earn supernormal profits 1. It occurs when a monopolist charges different
2. Supply increases prices for the same product to different customers
3. New firms enter 2. It always requires cost differences to justify different
4. Price falls back to normal profit level prices
(A) 1 → 3 → 2 → 4 3. Segmented markets with differing elasticities
(B) 3 → 1 → 2 → 4 support price discrimination
(C) 1 → 2 → 3 → 4 4. Perfect price discrimination captures all consumer
(D) 1 → 3 → 4 → 2 surplus


Ans (A) 1, 3, and 4 only
(B) 1 and 4 only
(A) 1 → 3 → 2 → 4 (C) 2 and 3 only
First, a price rise raises existing firms’ profitability (1). (D) 1, 2, and 3 only
Observing supernormal profits, new firms enter the
market (3). As more producers join, the supply curve

Ans
shifts right (2). Increased supply drives the price down, (A) 1, 3, and 4 only
eventually returning profits to normal levels (4). This Monopolists may charge distinct prices for identical
cycle exemplifies perfect competition dynamics. goods based on elasticity differences across segments.
Perfect price discrimination can theoretically convert
12. Match the forms of market in Column A with one key all consumer surplus into producer surplus. While cost
feature in Column B: differences sometimes prompt varied pricing, it is not
Column A Column B necessary for price discrimination; market segmentation
1. Perfect i. A few dominant firms, can justify differential pricing without cost variance.
Competition often interdependent 14. What primarily differentiates normal goods from
2. Monopoly ii. Single seller controls inferior goods in demand analysis?
the market (A) Normal goods have downward-sloping demand
3. Monopolistic iii. Many sellers with curves, while inferior goods have upward-sloping
Competition free entry, identical ones
products (B) Demand for normal goods increases with income,
4. Oligopoly iv. Many sellers with while demand for inferior goods falls as income
differentiated products rises
(C) Inferior goods never follow the law of demand
Options:
(D) Price elasticity for normal goods is always perfectly
(A) 1-ii, 2-iii, 3-iv, 4-i
elastic
(B) 1-iii, 2-iv, 3-ii, 4-i
(C) 1-iii, 2-ii, 3-iv, 4-i

Ans
(D) 1-iv, 2-iii, 3-i, 4-ii (B) Demand for normal goods increases with income,


Ans while demand for inferior goods falls as income rises
Normal goods have a positive income effect: as
(C) 1-iii, 2-ii, 3-iv, 4-i
consumers’ incomes grow, they buy more. Inferior
Perfect competition: many sellers with identical
goods exhibit a negative income effect: higher incomes
products (1-iii). Monopoly: single seller dominating
reduce demand because consumers can afford better
the market (2-ii). Monopolistic competition: multiple
alternatives. Both typically obey the law of demand
sellers offering similar but differentiated products
regarding price changes, but their income-based
(3-iv). Oligopoly: a few large firms with significant
demand patterns differ.
interdependence (4-i). Each market structure’s defining

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 PRACTICE PAPER 02

15. Which cost curve always declines as output expands, 18. Assertion (A) : Under perfect competition, a firm’s
because fixed costs are spread over more units? demand curve is perfectly elastic.
(A) Average Variable Cost Reason (R) : The firm is the only supplier in the market.
(B) Marginal Cost (A) Both (A) and (R) are true, and (R) is the correct
(C) Average Fixed Cost explanation of (A)
(D) Total Cost (B) Both (A) and (R) are true, but (R) is not the correct


Ans explanation of (A)
(C) (A) is true, (R) is false
(C) Average Fixed Cost (D) (A) is false, (R) is true
Average fixed cost (AFC) is total fixed cost divided by
output. Since fixed costs do not change with quantity,

Ans
as output rises, AFC steadily decreases. Variable cost- (C) (A) is true, (R) is false
based measures, like AVC and MC, can eventually In perfect competition, the firm’s individual demand
increase if diminishing returns set in, whereas total cost curve is perfectly elastic at the market-determined
includes both fixed and variable components. price. However, the reason is incorrect. A firm is not the
sole supplier; there are countless firms, each producing
16. Which does not cause a shift in the demand curve for a a homogeneous product. Thus, the firm faces a fixed
specific product? price and cannot influence it individually.
(A) A change in the product’s own price
(B) A change in consumer income 19. Which statements about oligopoly are correct?
(C) A change in the price of a complementary good 1. Only one firm sets the market price
(D) A change in consumer preferences 2. Firms are interdependent in decision-making


Ans 3. Collusion can occur in some oligopolies
4. Market entry is typically restricted or difficult
(A) A change in the product’s own price (A) 2, 3, and 4 only
A product’s own price change causes movement (B) 1, 2, and 3 only
along the demand curve (expansion or contraction of (C) 1 and 2 only
demand), not a shift. Factors like consumer income, (D) 2 and 4 only
prices of related goods (complements or substitutes),
and preferences can shift the curve left or right. Only

Ans
the good’s own price moves the point along the curve. (A) 2, 3, and 4 only
Oligopolies feature a few dominant firms that closely
17. Arrange these steps to determine producer’s equilibrium watch and react to each other’s strategies, creating
using the MC-MR approach: interdependence. Collusive or cartel behavior can
1. Equate MC and MR appear, though not always legal. Entry barriers such
2. Confirm MC is rising beyond that point as high capital costs or patents often discourage new
3. Identify relevant cost and revenue schedules entrants. One firm alone doesn’t unilaterally set the
4. Choose output level satisfying profit maximization price.
condition
(A) 3 → 1 → 2 → 4 20. If demand falls sharply in a perfectly competitive
(B) 1 → 2 → 3 → 4 market, in the short run firms may:
(C) 3 → 4 → 1 → 2 (A) Instantly leave the market
(D) 2 → 1 → 3 → 4 (B) Increase prices to cover losses


Ans (C) Produce at a loss if price ≥ average variable cost
(D) Raise output to generate higher total revenue
(A) 3 → 1 → 2 → 4
First, the firm examines cost and revenue schedules (3).

Ans
Next, the producer equates marginal cost and marginal (C) Produce at a loss if price ≥ average variable cost
revenue (1). Then, it checks that MC increases after In the short run, a firm may continue production to
that point (2) to ensure maximum profit (rather than cover variable costs, even if total revenue doesn’t fully
minimum). Finally, the firm decides the output level cover fixed costs. If price is above average variable cost
that meets these equilibrium conditions (4). but below average total cost, the firm loses money but

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page 22 CUET UG Economics

still minimizes losses by operating until conditions 24. Which policy would not directly correct excess demand
hopefully improve. in an economy?
(A) Raising the bank rate
21. Which of the following best defines Net Domestic (B) Increasing government spending
Product (NDP) at market price? (C) Selling government securities in open market
(A) GDP at factor cost minus depreciation operations
(B) GDP at market price minus depreciation (D) Increasing cash reserve ratio for banks
(C) GNP at factor cost minus net factor income from
abroad

Ans
(D) GDP at market price plus net factor income from (B) Increasing government spending
abroad Excess demand leads to inflationary pressures.


Ans Contractionary measures like raising interest rates,
selling government securities (to reduce money
(B) GDP at market price minus depreciation supply), or raising reserve requirements curb aggregate
Net Domestic Product (NDP) at market price equals demand. In contrast, increasing government spending
Gross Domestic Product (GDP) at market price minus is expansionary fiscal policy, which would further boost
depreciation. Subtracting depreciation (the capital demand, thereby intensifying excess demand instead of
consumption allowance) adjusts gross output for correcting it.
wear and tear, yielding the net measure of domestic
production valued at consumer-level (market) prices. 25. Match the following monetary policy terms in Column
A with their descriptions in Column B:
22. Which component is not part of Aggregate Demand in
a three-sector model (households, firms, government)? Column I Column II
(A) Consumption (C) 1 Bank Rate i Mandatory reserve
(B) Investment (I) banks keep with the
(C) Government Expenditure (G) RBI as liquid assets
(D) Net Exports (X − M) 2 Open Market ii Sale or purchase of


Ans Operations government securities
by the central bank
(D) Net Exports (X − M)
In a three-sector model, aggregate demand consists 3 Cash Reserve iii Long-term rate at
of consumption, investment, and government Ratio (CRR) which the central bank
expenditures (C + I + G). Net exports (X − M) appear lends to commercial
only when the foreign sector is included, creating a four- banks
sector model. Omitting the rest of the world removes 4 Statutory Liquidity iv Percentage of deposits
trade flows from the calculation of total demand. Ratio (SLR) banks must hold as
reserves with the
23. In the two-sector circular flow model, saving: central bank
(A) Is always greater than investment
Options:
(B) Equals investment in equilibrium
(A) 1-ii, 2-iv, 3-i, 4-iii
(C) Does not exist because households spend all
(B) 1-iii, 2-ii, 3-iv, 4-i
income
(C) 1-iv, 2-iii, 3-ii, 4-i
(D) Consists only of tax payments
(D) 1-i, 2-ii, 3-iii, 4-iv


Ans


Ans
(B) Equals investment in equilibrium
(B) 1-iii, 2-ii, 3-iv, 4-i
In a basic two-sector model (households and firms),
The bank rate is the long-term rate for central bank
equilibrium occurs when planned savings equal planned
lending (1-iii). Open market operations involve buying
investment. This ensures total leakages (savings) are
or selling government securities (2-ii). The cash reserve
balanced by injections (investment). While taxes and
ratio (CRR) is the fraction of deposits banks must keep
foreign trade can exist in more advanced models, the
at the central bank (3-iv). The statutory liquidity ratio
two-sector scenario focuses on the savings-investment
relationship for equilibrium determination.

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 PRACTICE PAPER 02

(SLR) entails holding liquid assets in specified forms (4- Central banks typically function as the lender of
i). last resort, offering emergency liquidity to financial
institutions facing short-term solvency crises. They do
26. Which best contrasts personal income with personal not operate as profit-making private entities, handle
disposable income? standard retail accounts, or set global trade rules. Their
(A) Personal income excludes transfer payments; core roles include monetary policy, financial stability,
personal disposable income includes them and banking supervision.
(B) Personal disposable income is personal income
plus personal taxes 29. Why might the government introduce a fiscal stimulus
(C) Personal disposable income is personal income during a period of high unemployment?
minus personal taxes (A) To lower inflation by cutting demand
(D) They are the same measure of household income (B) To discourage private consumption


Ans (C) To increase aggregate demand and spur job creation
(D) To force central banks to raise interest rates
(C) Personal disposable income is personal income
minus personal taxes

Ans
Personal income measures the total income received (C) To increase aggregate demand and spur job creation
by households from all sources, including transfer A fiscal stimulus, such as increased government
payments. To get personal disposable income, we spending or reduced taxes, injects purchasing power
subtract personal taxes (like income tax). This into the economy, raising overall demand. Higher
disposable portion represents the income actually demand encourages firms to produce more goods and
available for spending or saving after the payment of services, which often leads to hiring additional workers.
mandatory taxes. This approach helps address unemployment by fostering
growth in production and consumption.
27. Assertion (A) : Excessive money creation can lead to
inflation. 30. Which of the following would not help reduce a
Reason (R) : More money available in the economy government’s revenue deficit?
necessarily reduces aggregate demand. (A) Reducing non-essential revenue expenditure
(A) Both (A) and (R) are true, and (R) is the correct (B) Improving tax compliance and collection
explanation of (A) (C) Lowering the interest rate to spur investment
(B) Both (A) and (R) are true, but (R) is not the correct (D) Rationalizing subsidies to cut spending
explanation of (A)

Ans
(C) (A) is true, (R) is false
(D) (A) is false, (R) is true (C) Lowering the interest rate to spur investment
A government’s revenue deficit reflects when revenue


Ans expenses exceed revenue receipts. Measures like cutting
(C) (A) is true, (R) is false non-essential expenditure, boosting tax revenue, or
When the central bank or banking system creates reducing subsidy burdens directly address the deficit.
excessive money, demand can outpace supply, driving up Lowering interest rates is a monetary policy tool to
prices. The reason statement is false because increasing influence economic activity, not a direct measure to
the money supply generally raises spending capacity trim the government’s revenue gap.
(aggregate demand) rather than reducing it. Thus, the
31. Arrange these steps to compute Net National Product
assertion is correct, but the reason is flawed.
(NNP) at factor cost, starting from GDP at factor cost:
28. Which of the following is a function of a central bank? 1. Add net factor income from abroad
(A) Maximizing profits for private shareholders 2. Subtract depreciation
(B) Acting as the lender of last resort 3. Convert GDP at factor cost to GNP at factor cost
(C) Providing retail banking services to citizens directly 4. Convert from gross to net measure
(D) Setting global trading regulations (A) 3 → 1 → 4 → 2


Ans (B) 1 → 3 → 2 → 4
(C) 3 → 2 → 1 → 4
(B) Acting as the lender of last resort (D) 1 → 2 → 4 → 3

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Ans (A) 1 and 3 only

(A) 3 → 1 → 4 → 2 Money provides general acceptability, acting as both a
First, convert GDP at factor cost to GNP at factor cost by store of value and a medium of exchange, simplifying
adding net factor income from abroad (3, then 1). Next, transactions. Thus, statements about it lacking general
move from gross to net measure (4), which involves acceptability or not functioning as a unit of account
subtracting depreciation (2). Thus, you finalize the net are incorrect. It also facilitates measuring goods and
national product at factor cost after these sequential services, making statements 2 and 4 inaccurate.
adjustments.
34. Which statement best contrasts direct and indirect
32. Match the following budget-related terms in Column A taxes?
with their definitions in Column B: (A) Direct taxes are levied on commodities; indirect
taxes are on income
Column A Column B (B) Indirect taxes cannot be shifted, while direct taxes
1 Fiscal Deficit i Government expenditure can
not creating assets (C) Direct taxes are borne by the person on whom they
(salaries, subsidies) are imposed; indirect taxes can be passed on to
2 Primary Deficit ii Fiscal deficit minus others
interest payments (D) Both are paid only by consumers
3 Revenue iii Government expenditure

Ans
Expenditure on asset creation or
(C) Direct taxes are borne by the person on whom they
reduction of liabilities
are imposed; indirect taxes can be passed on to others
4 Capital iv Excess of total expenditure A direct tax, like income tax, is paid by the individual or
Expenditure over total receipts entity upon which it is legally imposed. Indirect taxes,
(excluding borrowings) like sales tax or GST, are collected from one party but
Options: can be shifted to the final consumer through higher
(A) 1-iv, 2-ii, 3-i, 4-iii prices. This shifting characteristic distinguishes indirect
(B) 1-iii, 2-i, 3-iv, 4-ii from direct taxes.
(C) 1-iv, 2-i, 3-ii, 4-iii
(D) 1-ii, 2-iv, 3-iii, 4-i 35. Assertion (A) : A rising fiscal deficit might lead to
higher public debt.


Ans Reason (R) : Fiscal deficits are always financed solely by
(A) 1-iv, 2-ii, 3-i, 4-iii printing new currency.
A fiscal deficit is total expenditure minus total receipts (A) Both (A) and (R) are true, and (R) is the correct
(excluding borrowing) (1-iv). Primary deficit is the explanation of (A)
fiscal deficit after subtracting interest payments (2-ii). (B) Both (A) and (R) are true, but (R) is not the correct
Revenue expenditure includes regular government explanation of (A)
spending that does not create assets (3-i). Capital (C) (A) is true, (R) is false
expenditure refers to spending on creating assets or (D) (A) is false, (R) is true
reducing liabilities (4-iii).

Ans
33. Which statements about money are correct? (C) (A) is true, (R) is false
1. It serves as a store of value A persistent fiscal deficit can indeed increase public debt
2. It lacks general acceptability if the government borrows to cover the gap. However,
3. It simplifies transactions compared to barter deficits are not always financed by printing currency.
4. It cannot function as a unit of account They can be funded through bonds, loans, or other
(A) 1 and 3 only mechanisms. Therefore, while the assertion is valid, the
(B) 1, 2, and 4 only reason is an incorrect generalization.
(C) 2 and 4 only
(D) 1, 2, and 3 only 36. Which reform is most likely aimed at modernizing
commercial banks in India?


Ans (A) Increasing the Cash Reserve Ratio significantly

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 PRACTICE PAPER 02

(B) Nationalizing major banks considered (4), ensuring the BoP statement matches
(C) Introducing Core Banking Solutions (CBS) across double-entry accounting standards.
branches
39. Which statements about flexible exchange rates are
(D) Closing rural branches to cut costs
correct?


Ans 1. They can fluctuate based on supply and demand
(C) Introducing Core Banking Solutions (CBS) across 2. Central bank interventions keep them strictly
branches constant
Core Banking Solutions enable real-time transaction 3. They might experience rapid short-term volatility
processing across a bank’s entire network, modernizing 4. They always ensure a current account surplus
services, improving customer convenience, and (A) 1, 3, and 4 only
enhancing efficiency. Policies like nationalization or (B) 1 and 3 only
closing branches reflect different objectives (public (C) 2 and 3 only
ownership or cost-cutting), whereas implementing CBS (D) 1, 2, and 4 only
addresses technological advancement, aligning with

Ans
modernization goals.
(B) 1 and 3 only
37. Which of the following would not appear in the capital Flexible exchange rates adjust to market forces, so
account of the Balance of Payments? they may exhibit short-term volatility. They are not
(A) External borrowings and repayments kept strictly constant by central bank interventions;
(B) Foreign direct investment inflows that describes a managed or fixed regime. Nor do
(C) Exports of manufactured goods they guarantee current account surpluses, as global
(D) Changes in foreign exchange reserves trade balances depend on numerous other economic


Ans variables.

(C) Exports of manufactured goods 40. Assertion (A) : A persistent current account deficit may
Exports of goods are recorded in the current account, push a nation to deplete foreign exchange reserves.
specifically under the trade of merchandise. The capital Reason (R) : A current account deficit indicates that
account captures capital transfers, acquisitions or exports consistently exceed imports.
disposals of assets, foreign direct investment, and loan (A) Both (A) and (R) are true, and (R) is the correct
inflows/outflows. Hence, manufactured exports belong explanation of (A)
to the current account, not the capital account of the (B) Both (A) and (R) are true, but (R) is not the correct
BoP. explanation of (A)
(C) (A) is true, (R) is false
38. Arrange these steps in calculating Balance of Payments (D) (A) is false, (R) is true
for a country:
1. Record current account transactions

Ans
2. Record capital account transactions (C) (A) is true, (R) is false
3. Aggregate net current and net capital flows A current account deficit emerges when imports exceed
4. Factor in errors and omissions exports over time, often financed by drawing down
(A) 1 → 2 → 3 → 4 foreign reserves or external borrowing. The reason
(B) 2 → 1 → 4 → 3 incorrectly states that exports exceed imports. In reality,
(C) 3 → 1 → 2 → 4 persistent deficits reflect higher imports, which can
(D) 1 → 3 → 2 → 4 lead to a depletion of foreign exchange reserves if not


Ans otherwise financed.

(A) 1 → 2 → 3 → 4

Direction :Carefully read the case study provided and then
First, current account transactions (exports, imports, thoroughly answer the subsequent five questions.
services, transfers) are recorded (1). Next, capital A dairy cooperative in a rural region faces a dilemma.
account flows (investments, loans) are documented (2). Demand for milk has surged locally due to a new health
The totals are combined to see overall net balance (3). awareness campaign promoting dairy protein. However,
Finally, any discrepancies or “errors and omissions” are the cooperative’s production capacity is constrained by

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page 26 CUET UG Economics

limited fodder and unskilled labor. To expand supply, (C) Installing advanced milking technology
the cooperative contemplates hiring skilled workers at (D) Negotiating bulk discounts on fodder imports
higher wages and importing quality fodder. This might

Ans
push up average variable costs in the short run. Yet, if
they successfully expand capacity, average costs may (B) Employing cheaper but unskilled labor
eventually fall in the long run through economies of scale. Cheaper, unskilled labor may initially lower direct wage
Residents worry about rising milk prices if short-run costs costs, but it can result in lower productivity, higher
spike. The cooperative’s board must balance immediate error rates, and inefficiencies that inflate overall costs.
production needs with future efficiency gains to ensure Conversely, subsidies, advanced technology, or bulk
both affordability and steady milk availability. discounts can directly reduce production expenses,
relieving upward pressure on short-run average variable
41. What is “average variable cost” (AVC) for the dairy costs.
cooperative?
(A) Total cost minus variable cost 44. If the cooperative’s short-run average variable cost
(B) Variable cost per unit of output (AVC) rises significantly above milk’s market price,
(C) Cost per unit that includes both fixed and variable which outcome might occur?
costs (A) The cooperative produces more to offset losses
(D) The cost paid only for capital assets (B) The cooperative temporarily shuts down production
(C) The cooperative invests heavily in unprofitable


Ans technology
(B) Variable cost per unit of output (D) The cooperative forces consumers to purchase at
Average variable cost is derived by dividing total variable higher prices
costs (like wages, fodder expenses) by output produced.

Ans
It excludes fixed costs, focusing on expenses that change
with production. In the case study, paying higher wages (B) The cooperative temporarily shuts down production
and buying more fodder directly increase variable costs, In the short run, if the market price falls below AVC,
elevating AVC in the short run. the cooperative loses more money by producing than
by halting production (since fixed costs must be paid
42. Why might average costs “eventually fall in the long run” regardless). Hence, the “shutdown point” is where price
if the cooperative expands capacity? equals AVC. Sustaining output below AVC worsens
(A) Because fixed costs continuously rise with output losses, prompting a temporary closure.
(B) Due to economies of scale lowering per-unit costs
45. Assertion (A) : Short-run cost pressures might push
as production grows
(C) The government mandates lower wage payments milk prices up immediately.
over time Reason (R) : In the long run, economies of scale could
(D) Consumer preferences dictate cost changes potentially offset initial cost spikes.
(A) Both (A) and (R) are true, and (R) is the correct


Ans explanation of (A)
(B) Due to economies of scale lowering per-unit costs as (B) Both (A) and (R) are true, but (R) is not the correct
production grows explanation of (A)
Long-run expansions allow the cooperative to (C) (A) is true, (R) is false
reorganize production, invest in efficient equipment, (D) (A) is false, (R) is true
or bulk-purchase fodder. These measures decrease the

Ans
average cost per unit when volume increases, termed
economies of scale. As higher output spreads overhead (B) Both (A) and (R) are true, but (R) is not the correct
and operational efficiencies, overall cost per unit can explanation of (A)
drop, despite initially higher short-run expenses. Short-run cost increases, such as higher wages and
fodder costs, often lead to price hikes. Separately, the
43. Which factor would not help reduce short-run cost possibility of long-run economies of scale can help
pressures for the cooperative? reduce per-unit costs over time. While both statements
(A) Government subsidies on fodder are valid, the reason doesn’t directly explain why short-
(B) Employing cheaper but unskilled labor run cost pressures elevate prices immediately.

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 PRACTICE PAPER 02

Direction :Carefully read the case study provided and then Expansionary fiscal policy, such as infrastructure
thoroughly answer the subsequent five questions. stimulus, pumps more government spending into the
A national government seeks to boost its economy, economy, raising aggregate demand and potentially
grappling with high unemployment but also persistent employment. Tight monetary policy, by raising interest
inflation. It proposes a stimulus package for infrastructure, rates or restricting money supply, curtails borrowing
aiming to reduce joblessness, while the central bank and spending, limiting aggregate demand. The two can
warns that injecting more money into the system could conflict if pursued simultaneously without coordination.
further fuel inflation. Critics argue that monetary
48. Assertion (A) : Higher infrastructure spending can
restraint—raising interest rates—would curb inflation
but risk deepening unemployment. The finance minister boost long-term productivity.
advocates a moderate fiscal push, insisting that improved Reason (R) : Building roads and utilities rarely benefits
infrastructure will enhance productivity, eventually any sector of the economy.
countering inflation. Observers note this conflicting (A) Both (A) and (R) are true, and (R) is the correct
interplay: expansionary fiscal measures raise aggregate explanation of (A)
demand, while tighter monetary policy reduces demand. (B) Both (A) and (R) are true, but (R) is not the correct
The government aims for a delicate balance, hoping new explanation of (A)
jobs arise faster than inflation accelerates. Yet, skeptics (C) (A) is true, (R) is false
worry the policies could work at cross-purposes, making (D) (A) is false, (R) is true
the outcome uncertain.

Ans

46. Which economic objective is the government directly (C) (A) is true, (R) is false
targeting with its stimulus package? Infrastructure improvements, such as better roads and
(A) Reducing inflation through lowered prices utilities, can reduce transportation costs and improve
(B) Reducing unemployment by creating new jobs efficiency across sectors, raising long-term productivity.
(C) Decreasing interest rates to revive exports The reason statement erroneously claims such
(D) Slashing public debt through higher taxes investments rarely benefit any sector, which contradicts
well-known positive externalities and direct benefits


Ans from effective infrastructure spending.
(B) Reducing unemployment by creating new jobs
49. Which approach would not help reconcile the conflict
Infrastructure spending is a standard fiscal policy
tool aimed at job creation. By funding construction between expansionary fiscal policy and tight monetary
and related projects, the government employs more policy?
workers, tackling unemployment. Although it may have (A) Coordinating policy goals between the finance
secondary effects on inflation or debt, the direct focus ministry and central bank
is to stimulate labor demand and reduce joblessness in (B) Targeting fiscal measures at productivity-enhancing
the economy. projects
(C) The central bank indiscriminately printing more
47. How does expansionary fiscal policy differ from tight money
monetary policy in this scenario? (D) Implementing gradual interest rate changes to
(A) Both are designed purely to reduce inflation avoid sharp demand contractions
(B) Expansionary fiscal policy aims to raise aggregate

Ans
demand; tight monetary policy aims to lower
aggregate demand (C) The central bank indiscriminately printing more
(C) Tight monetary policy increases government money
spending, while expansionary fiscal policy reduces Aligning policy objectives, focusing spending on
spending productivity, and moderate rate adjustments can
(D) They are identical measures to achieve job creation balance growth and inflation. However, indiscriminate
money printing increases money supply drastically,


Ans risking higher inflation. This exacerbates the conflict
(B) Expansionary fiscal policy aims to raise aggregate with fiscal expansion, rather than reconciling it, because
demand; tight monetary policy aims to lower aggregate it undermines monetary restraint aimed at controlling
demand prices.

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50. If the government’s stimulus successfully raises aggregate

demand while the central bank simultaneously enacts
tight monetary policy, what outcome might we observe?
(A) Completely stable price levels with no employment
gains
(B) A rise in economic activity tempered by higher
interest costs
(C) Immediate elimination of all inflationary pressures
(D) An instant replacement of fiscal policy with foreign
direct investment


Ans
(B) A rise in economic activity tempered by higher
interest costs
Expansionary fiscal actions stimulate demand and can
lift economic activity, especially employment. However,
simultaneous monetary tightening raises borrowing
costs, partially offsetting the stimulus effect. Firms and
consumers face more expensive loans, muting some of
the stimulus’s impact. This tug-of-war results in growth,
but with constraints from higher interest rates.

*************

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 PRACTICE PAPER 03

PRACTICE PAPER 03

1. What does the term “opportunity cost” refer to in output than possible. The production possibility curve
microeconomics? represents maximum possible combinations of two
(A) The cost of all productive resources combined goods an economy can produce with given resources
(B) The benefit of the next best alternative forgone and technology when they are fully utilized.
(C) The total monetary cost of producing goods and
4. Which scenario would not shift a nation’s PPC outward?
services
(D) The cost that remains constant in the short run (A) Discovery of improved technology
(B) Increase in the working population


Ans (C) Better education and skill development
(B) The benefit of the next best alternative forgone (D) A decrease in productive capital stock
Opportunity cost is the value of the next best choice lost

Ans
when a decision is made. It represents what one gives up
in order to pursue another option. This concept helps (D) A decrease in productive capital stock
individuals and firms evaluate trade-offs and make A decrease in productive capital stock reduces an
more informed decisions regarding resource allocation economy’s ability to produce, so it would either shift
and production. the PPC inward or keep it the same if other gains offset
losses. By contrast, improved technology, increased
2. Which of the following is not a central problem of an workforce, or enhanced human capital tends to push the
economy? PPC outward, indicating growth.
(A) What to produce
5. What does “marginal utility” measure?
(B) How to produce
(C) How much foreign currency to print (A) Additional satisfaction from consuming one more
(D) For whom to produce unit
(B) Total satisfaction from all units consumed


Ans (C) The difference between average and total utility
(C) How much foreign currency to print (D) The highest price a consumer is willing to pay
An economy addresses three main problems: deciding

Ans
which goods to produce, deciding the methods of
production, and deciding the distribution of output. (A) Additional satisfaction from consuming one more
Printing foreign currency is not a fundamental unit
economic question; it is unrelated to the standard Marginal utility represents the incremental increase
allocation challenges concerning resources and in total utility gained by consuming one more unit of
consumer preferences in traditional economic analysis. a product. Understanding marginal utility helps in
determining how consumers allocate their budgets, as
3. If a country is operating inside its Production Possibility rational consumers continue to consume additional
Curve (PPC), it implies: units until marginal utility equals the price they must
(A) Efficient resource allocation pay.
(B) Full employment of resources
6. A downward-sloping demand curve generally indicates:
(C) Underutilization of resources
(D) The opportunity cost is zero (A) Consumers buy more at higher prices
(B) An inverse relationship between price and quantity


Ans demanded
(C) Underutilization of resources (C) A direct relationship between price and demand
A point inside the PPC indicates that the economy is not (D) A perfectly inelastic demand scenario
using its resources to their full capacity, resulting in less

Ans

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page 30 CUET UG Economics

(B) An inverse relationship between price and quantity (B) Both (A) and (R) are true, but (R) is not the correct
demanded explanation
Demand curves usually slope downward because (C) (A) is true, but (R) is false
higher prices discourage consumers from purchasing (D) (A) is false, but (R) is true
large quantities, and lower prices encourage higher

Ans
consumption. This inverse relationship is one of the
core principles of demand: as price rises, the quantity (A) Both (A) and (R) are true, and (R) is the correct
demanded typically declines, other things being equal, explanation
reflecting consumer preference and budget constraints. Average fixed cost declines as production increases,
while average variable cost typically rises beyond a
7. Which method is best suited for measuring price certain level. Thus, the ATC curve initially slopes
elasticity of demand if you only know total revenue at downward due to spreading fixed costs over more units,
various prices? and later slopes upward as variable costs dominate,
(A) Point elasticity method creating a U-shaped curve.
(B) Midpoint method
10. In the short run, which cost remains constant regardless
(C) Total expenditure method
(D) Percentage change method of output level?
(A) Variable cost


Ans (B) Total cost
(C) Total expenditure method (C) Fixed cost
The total expenditure method examines how total (D) Marginal cost
spending (price × quantity) changes when price

Ans
changes. If total expenditure moves opposite to price,
demand is elastic; if it moves in the same direction (C) Fixed cost
as price, demand is inelastic. This approach is helpful Short-run fixed costs do not change with the quantity
when only total revenue data are available. of output. They represent expenses like rent or salaried
staff, which a firm must pay even if it produces no
8. Comparing movement along a demand curve with a output. Variable costs, on the other hand, vary with
shift in demand curve, the key difference is: production levels, and marginal cost reflects the change
(A) Movement only happens with consumer income in total cost per unit.
changes
11. Which factor would not lead to an increase in market
(B) Shifts occur solely due to product price changes
(C) Shifts occur due to non-price factors while supply?
movement is due to price changes (A) A fall in input costs
(D) Movement means the demand disappears (B) More firms entering the market
(C) Improved technology


Ans (D) Higher taxation on production
(C) Shifts occur due to non-price factors while

Ans
movement is due to price changes
A movement along a demand curve reflects the effect of (D) Higher taxation on production
a price change on quantity demanded, ceteris paribus. An increase in supply typically occurs when production
A shift of the curve occurs when factors other than the becomes cheaper or more efficient, or when more firms
product’s own price change, such as consumer tastes, produce the good. Higher taxes on production, however,
incomes, prices of related goods, or future expectations, raise cost structures, discouraging firms from supplying
altering overall demand. greater quantities at the same price, thus shifting the
supply curve leftward or reducing overall output.
9. Assertion (A) : Average Total Cost (ATC) generally
12. How do returns to factor differ from returns to scale?
declines initially and then rises.
Reason (R) : ATC reflects the influence of both Average (A) Returns to factor concern long-run changes only
Fixed Cost and Average Variable Cost. (B) Returns to scale apply to changes in all inputs,
(A) Both (A) and (R) are true, and (R) is the correct returns to factor to one variable input
explanation (C) Returns to factor and returns to scale are exactly
identical concepts

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 PRACTICE PAPER 03

(D) Returns to scale occur in short-run scenarios only

Ans

Ans (B) (i) → (ii) → (iv) → (iii)

First, aggregate market supply meets aggregate
(B) Returns to scale apply to changes in all inputs,
demand. This intersection sets price. Next, that price
returns to factor to one variable input
information spreads, and finally each individual firm
Returns to factor analyze how output changes when
adjusts its quantity supplied based on the uniform
one input varies, keeping others fixed in the short
price. This sequence ensures that the market determines
run. Returns to scale examine how output changes in
equilibrium price before each firm decides its own
response to a proportional change in all inputs in the
output level.
long run. They are distinct concepts reflecting different
time frames and input variation methods. 16. If market demand increases sharply while supply
remains unchanged, what generally happens to the
13. Which market structure features a large number of
equilibrium price in perfect competition?
buyers and sellers dealing in homogeneous products?
(A) It stays constant
(A) Monopoly
(B) It falls
(B) Perfect competition
(C) It rises
(C) Oligopoly
(D) It drops to zero
(D) Monopolistic competition


Ans


Ans
(C) It rises
(B) Perfect competition
When demand expands significantly with no
In a perfectly competitive market, there are many
corresponding change in supply, the new equilibrium
buyers and sellers trading identical products. No single
occurs at a higher price. In perfect competition, firms
participant can influence market price, leading to firms
are price-takers, so they simply accept this new higher
being price-takers. Homogeneity of products ensures
equilibrium price and adjust their output accordingly,
that the actions of one firm do not significantly affect
but they cannot individually control or set the market
others, a key assumption of perfect competition.
price.
14. In a perfectly competitive market, which is not true?
17. Match the following ceilings/floors with their typical
(A) Price is determined by market demand and supply
consequence:
(B) Each firm takes the market price as given
(C) Firms can freely enter and exit in the long run Column I Column II
(D) A single large firm can influence the price 1. Price ceiling a. Surplus of goods


Ans 2. Price floor b. Shortage of goods
(D) A single large firm can influence the price 3. Rationing c. Controlled distribution
In perfect competition, every seller is too small 4. Black market d. Unauthorized sales at higher
relative to the market to affect the price. Firms accept prices
the market-determined price. Large firm influence Options:
contradicts the perfect competition assumption. With (A) 1-b, 2-a, 3-c, 4-d
free entry and exit, market forces of supply and demand, (B) 1-a, 2-b, 3-d, 4-c
not individual firms, shape the price. (C) 1-c, 2-d, 3-b, 4-a
(D) 1-d, 2-c, 3-a, 4-b
15. Arrange the following steps in price determination
under perfect competition in chronological order:

Ans
(i) Market supply and demand intersection (A) 1-b, 2-a, 3-c, 4-d
(ii) Price formation A price ceiling usually leads to a shortage because it sets a
(iii) Individual firm supply alignment price below equilibrium. A price floor above equilibrium
(iv) Equilibrium price dissemination leads to a surplus. Rationing is a formal mechanism to
(A) (i) → (iv) → (ii) → (iii) distribute limited goods, and black markets emerge
(B) (i) → (ii) → (iv) → (iii) when official controls prompt unauthorized sales above
(C) (iii) → (i) → (ii) → (iv) controlled prices.
(D) (i) → (ii) → (iii) → (iv)

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18. Under a food rationing system, the government typically 21. Distinguish between GDP at factor cost and GDP at
aims to: market prices. Which statement is correct?
(A) Eliminate all subsidies for agricultural products (A) They are always identical
(B) Guarantee a minimum price for producers (B) GDP at factor cost includes net indirect taxes
(C) Distribute essential commodities at controlled (C) GDP at market prices = GDP at factor cost + net
prices indirect taxes
(D) Increase exports by restricting local consumption (D) GDP at factor cost is always higher than GDP at


Ans market prices

(C) Distribute essential commodities at controlled

Ans

prices (C) GDP at market prices = GDP at factor cost + net
Food rationing is employed to ensure basic goods reach indirect taxes
poorer segments affordably by controlling distribution GDP at factor cost sums up incomes paid to factors of
and capping prices. It prevents sudden price surges in production. Adding net indirect taxes (indirect taxes
essential commodities while maintaining domestic minus subsidies) transitions factor cost to market
food security. This system ensures fair access to critical prices. Since market prices often include taxes that raise
resources, especially under conditions of scarcity or consumer prices, GDP at market prices usually exceeds
inflationary pressures. GDP at factor cost, assuming taxes exceed subsidies.

19. Which of the following is excluded from GDP at market 22. If net factor income from abroad is positive, how does it
prices? affect GNP relative to GDP?
(A) Value of final goods (A) GNP is lower than GDP
(B) Additions to inventories (B) GNP equals GDP
(C) Domestic household work by family members (C) GNP is higher than GDP
(D) Net indirect taxes (D) No effect on GNP


Ans

Ans
(C) Domestic household work by family members (C) GNP is higher than GDP
GDP measures market transactions of final goods and GNP equals GDP plus net factor income from abroad.
services produced within a country. Unpaid domestic When a country’s residents earn more from foreign
work, such as cooking or childcare within households, is sources than non-residents earn domestically, net factor
not traded in the market and therefore is not included in income from abroad is positive. This makes GNP exceed
official GDP calculations. Only activities with a market GDP, reflecting the additional income generated by
valuation appear in GDP. citizens outside national boundaries.

20. What is disposable personal income? 23. Place these steps of income determination in a two-
(A) Income after deducting all direct taxes and adding sector economy in chronological sequence:
transfer payments (i) Equilibrium income is established
(B) Gross National Product minus depreciation (ii) Aggregate demand is compared to output
(C) Income earned from foreign investment (iii) Households save a portion of income
(D) National income minus social benefits (iv) Firms adjust output accordingly


Ans (A) (ii) → (iv) → (i) → (iii)
(B) (ii) → (iii) → (iv) → (i)
(A) Income after deducting all direct taxes and adding (C) (iii) → (ii) → (iv) → (i)
transfer payments (D) (iv) → (ii) → (i) → (iii)
Disposable personal income is the portion of personal
income remaining after payment of direct taxes, such

Ans
as income tax, plus any transfer payments (e.g., social (B) (ii) → (iii) → (iv) → (i)
security benefits). It represents the amount households First, aggregate demand (AD) is assessed against
have available for consumption or saving, reflecting an existing output. Households save a portion of income,
individual’s or household’s spending power. reducing immediate consumption. Firms respond
by altering production if AD differs from output. The

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 PRACTICE PAPER 03

point at which total AD equals total output determines (D) Government expenditure is less than consumption
equilibrium income. This sequence reflects basic flow in

Ans
a two-sector model.
(B) The economy’s aggregate demand surpasses its
24. Assertion (A) : Involuntary unemployment arises when productive capacity at current prices
willing workers do not find jobs. Excess demand occurs when total planned expenditure
Reason (R) : Wages can be lowered infinitely until exceeds the economy’s capacity to produce at the existing
everyone is employed. price level. This can lead to inflationary pressures, as
(A) Both (A) and (R) are true, and (R) is the correct resources become scarce relative to demand. It does not
explanation directly refer to trade imbalances or the comparison of
(B) Both (A) and (R) are true, but (R) is not the correct government and household spending alone.
explanation
27. Match the banking concepts in Column I with their
(C) (A) is true, but (R) is false
(D) (A) is false, but (R) is true descriptions in Column II:

Ans Column I Column II

(C) (A) is true, but (R) is false 1 Central bank a Primary deposit-
Involuntary unemployment occurs when individuals holding institution
willing to work at the prevailing wage cannot secure 2 Commercial bank b Regulates and supervises
jobs. Wages do not always drop indefinitely, because monetary policy
factors like minimum wage laws, bargaining power, and 3 Commercial bank c Use of technology in
efficiency wages impose constraints. Therefore, simply banking services
lowering wages does not guarantee full employment in 4 Privatization d Transfer of public
real-world scenarios. sector banks to private
ownership
25. Identify the correct statements about the investment
multiplier (choose the best combination): Options:
1. It magnifies initial investment’s effect on income (A) 1-b, 2-a, 3-c, 4-d
2. It works only in a four-sector model (B) 1-a, 2-b, 3-d, 4-c
3. Its size depends on the marginal propensity to (C) 1-b, 2-a, 3-d, 4-c
consume (D) 1-c, 2-b, 3-a, 4-d
4. It can never exceed 2

Ans
(A) 1 and 3
(A) 1-b, 2-a, 3-c, 4-d
(B) 1 and 4
The central bank conducts monetary policy and regulates
(C) 2 and 4
financial institutions. Commercial banks accept deposits
(D) 1, 3, and 4
and extend loans to the public. Modernization typically


Ans means adopting digital and technology-driven services.
(A) 1 and 3 Privatization refers to shifting state-owned banks into
The investment multiplier amplifies the effect of an the private sector for efficiency and competitiveness in
initial investment on aggregate income. Its magnitude financial markets.
is determined by the marginal propensity to consume.
28. Which does not describe a function of the central bank?
It can operate in simpler two-sector models and may
(A) Bankers’ bank
exceed 2 if the MPC is sufficiently high. Therefore,
(B) Controller of credit
statements 1 and 3 are correct.
(C) Issuer of currency
26. Excess demand in the context of macroeconomics (D) Providing personal home loans directly to citizens
means:

Ans
(A) Aggregate demand equals full employment output
(D) Providing personal home loans directly to citizens
(B) The economy’s aggregate demand surpasses its
A central bank’s main duties include managing the
productive capacity at current prices
nation’s currency, influencing credit, and serving as a
(C) Demand for imports exceeds demand for exports
banker to commercial banks and government. While

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it sets policies that affect lending rates, it typically does 4. Fiscal deficit d. Excess of total
not act as a commercial bank offering routine personal expenditure over total
loans, which is commercial banks’ role. receipts (excluding
29. Money performs the function of a store of value because: borrowing)
(A) It is an easily spoiled good Options:
(B) It loses value quickly over time (A) 1-b, 2-c, 3-a, 4-d
(C) It retains purchasing power over periods (B) 1-c, 2-a, 3-d, 4-b
(D) It cannot be exchanged for goods (C) 1-d, 2-b, 3-c, 4-a
(D) 1-a, 2-d, 3-b, 4-c


Ans


Ans
(C) It retains purchasing power over periods
Money serves as a store of value by allowing individuals (A) 1-b, 2-c, 3-a, 4-d
to hold it and use it later to purchase goods or settle Revenue deficit is the shortfall when revenue expenditures
obligations. Its general acceptance and relative stability surpass revenue receipts. Capital expenditure is allocated
enable savers to transfer purchasing power from the to acquire or enhance assets. A balanced budget sets total
present to the future, although inflation can erode that receipts equal to total expenditures. Fiscal deficit arises
value. when total expenditures exceed total receipts, excluding
borrowings, revealing the government’s financing gap.
30. A commercial bank differs from a cooperative bank
primarily because: 32. Identify correct statements about a deficit budget:
(A) Commercial banks are always government-owned 1. It can stimulate economic growth
(B) Cooperative banks never take deposits 2. It always leads to hyperinflation
(C) Cooperative banks are owned by their members, 3. It may require government borrowing
focusing on community-based lending 4. It is never used in developing countries
(D) Commercial banks cannot lend to industries 5. It can fund social infrastructure
(A) 1, 3, and 5 only


Ans
(B) 2 and 4 only
(C) Cooperative banks are owned by their members, (C) 1, 2, 3, and 5
focusing on community-based lending (D) 1, 4, and 5
Cooperative banks function on a membership basis,


Ans
where members are both owners and customers,
often emphasizing local or community development. (A) 1, 3, and 5 only
Commercial banks are typically larger financial A deficit budget can stimulate growth by injecting funds
institutions catering to diverse clients, including into the economy. It commonly relies on borrowing
individuals, businesses, and corporations, sometimes to bridge gaps. Governments often use this approach
privately owned or government-owned, but not to build social infrastructure. It does not invariably
member-owned like cooperatives. produce hyperinflation; neither is it unused in
developing countries, which frequently resort to deficit
31. Match the budget terms (Column I) with their financing.
definitions (Column II):
33. Assertion (A) : A revenue deficit indicates insufficient
Column I Column II
inflow to meet routine expenses.
1. Revenue deficit a. Total receipts = total Reason (R) : Excessive revenue deficit can push the
expenditure government to borrow for day-to-day operations.
2. Capital b. Excess of revenue (A) Both (A) and (R) are true, and (R) is the correct
expenditure expenditures over explanation
revenue receipts (B) Both (A) and (R) are true, but (R) is not the correct
3. Balanced budget c. Spending on assets or explanation
investment (C) (A) is true, but (R) is false
(D) (A) is false, but (R) is true


Ans

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 PRACTICE PAPER 03

(A) Both (A) and (R) are true, and (R) is the correct (A) 1, 3, and 4
explanation (B) 2 and 3
When government revenue receipts are insufficient to (C) 1 and 2
cover normal revenue expenditures, it faces a revenue (D) 3 and 4 only
deficit. Persistent deficits require borrowing, potentially

Ans
from the market or other sources, to finance daily
expenditures. This can reduce flexibility for development (A) 1, 3, and 4
spending, as borrowed funds go toward operational Fixed exchange rates rely on official intervention to
costs rather than capital investments. maintain a specific currency parity, limiting daily
fluctuations. They reduce uncertainty for international
34. Downsizing the role of government primarily implies: traders but can strain a nation’s foreign exchange
(A) Increasing direct control over private industries reserves when defending the set rate. Hence, statements
(B) Reducing government intervention in economic 1, 3, and 4 are correct, while 2 describes a flexible system.
matters
37. Match the Balance of Payments components in Column
(C) Eliminating all taxes
(D) Nationalizing major corporations I with examples in Column II:

Ans Column I Column II

(B) Reducing government intervention in economic 1 Current account a Purchase of foreign bonds
matters 2 Capital account b Export of software services
Downsizing government involves limiting state 3 Debit item c Foreign travel spending
control over resources, transferring some services to 4 Credit item d Remittances received
private or market-driven mechanisms. The objective
Options:
is to encourage efficiency and competition, reducing
(A) 1-b, 2-a, 3-c, 4-d
bureaucratic oversight. This does not require ending all
(B) 1-a, 2-b, 3-d, 4-c
taxation or nationalizing corporations, but it does mean
(C) 1-b, 2-a, 3-d, 4-c
fewer direct governmental interventions in economic
(D) 1-c, 2-b, 3-a, 4-d
affairs.


Ans
35. Which does not describe a merit of a flexible exchange
(A) 1-b, 2-a, 3-c, 4-d
rate?
Exports of services (software) are recorded under the
(A) Automatic correction of trade imbalances
current account. Purchasing foreign bonds is a capital
(B) Speculative attacks minimized
account transaction. A debit item indicates an outflow
(C) Monetary policy independence
(e.g., expenditure on foreign travel). A credit item
(D) Quick adjustment to external shocks
represents an inflow (e.g., remittances from abroad).


Ans Thus, these matches correspond accurately to each
(B) Speculative attacks minimized category.
Under flexible exchange rates, currency values can freely
38. A favorable balance of payments means:
fluctuate, often attracting speculation and potential
(A) Inflows exceed outflows
volatility. Despite allowing automatic corrections of
(B) Outflows exceed inflows
imbalances, promoting monetary policy autonomy,
(C) All transactions are in equilibrium
and adjusting rapidly to shocks, it does not necessarily
(D) Only exports exist, no imports
reduce speculation; in fact, speculation can sometimes
exacerbate currency fluctuations.

Ans
(A) Inflows exceed outflows
36. Regarding fixed exchange rates, which statements are
A favorable balance of payments suggests a positive net
true?
inflow of foreign currency over a certain period. More
1. They require central bank intervention
money enters the country (through exports, transfers,
2. They fluctuate daily without authority control
and capital inflows) than leaves it (through imports,
3. They reduce exchange rate uncertainty
debt payments, etc.). It does not imply zero imports or
4. They can pressure foreign exchange reserves
perfect balance at all times.

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39. Arrange these steps in exchange rate determination in whether these costs outweighed the benefits to farmers.
chronological order: Some suggested that instead of a price floor, targeted
(i) Demand for a currency changes subsidies or improved technology might better assist
(ii) Supply of that currency changes farmers without creating surpluses or placing the burden
(iii) New equilibrium exchange rate emerges on consumers.
(iv) Traders buy or sell currency based on relative prices
41. What policy did Country X implement for wheat?
(A) (iv) → (i) → (ii) → (iii)
(B) (i) → (iv) → (ii) → (iii) (A) Price ceiling
(C) (i) → (ii) → (iii) → (iv) (B) Price floor
(D) (ii) → (iv) → (i) → (iii) (C) Rationing
(D) Tax subsidy


Ans


Ans
(A) (iv) → (i) → (ii) → (iii)
First, market agents (importers, exporters, investors) (B) Price floor
decide to buy or sell currency based on relative prices or A price floor is a legally imposed minimum price above
expectations. This changes the demand for a currency, the market equilibrium. Country X set a minimum price
then changes its supply (or vice versa). Eventually, those for wheat higher than its equilibrium value, leading to
shifts drive the new equilibrium exchange rate at which surpluses and government intervention. This policy
the currency is traded. aimed to improve farmers’ income but resulted in
additional budgetary costs and higher consumer prices.
40. Assertion (A) : A trade surplus contributes to a current
42. Which was not a direct outcome of the price floor?
account surplus.
Reason (R) : The capital account includes all import and (A) Surplus wheat stocks
export transactions. (B) Consumers paying less for wheat
(A) Both (A) and (R) are true, and (R) is the correct (C) Government purchasing excess supply
explanation (D) Higher income for farmers
(B) Both (A) and (R) are true, but (R) is not the correct

Ans
explanation (B) Consumers paying less for wheat
(C) (A) is true, but (R) is false The price floor raised wheat’s market price above the
(D) (A) is false, but (R) is true equilibrium level, compelling consumers to pay more,


Ans not less. This contributed to surplus production because
(C) (A) is true, but (R) is false demand dropped at the higher price. The government
A trade surplus (exports exceeding imports) typically then bought and stored the excess wheat, increasing
boosts the current account. However, it is the current fiscal expenditure while farmers enjoyed higher
account, not the capital account, that records import incomes.
and export transactions. The capital account deals with 43. Why did the government incur extra costs under this
cross-border investments, loans, and capital flows, so policy?
statement (R) is incorrect. (A) It had to import wheat


Direction :Carefully read the case study provided and then (B) It eliminated farm subsidies
thoroughly answer the subsequent five questions. (C) It purchased and stored surplus wheat
The government of Country X recently introduced a price (D) It lowered tariffs on wheat imports
floor for wheat to support farmers’ incomes. As a result,

Ans
the market price of wheat rose above the equilibrium (C) It purchased and stored surplus wheat
level. While farmers benefited from higher revenues, By setting a price floor, the government guaranteed
consumers faced increased prices, leading to reduced farmers a higher price, which encouraged them to
wheat consumption. Surplus wheat emerged because the produce more. Consumers bought less due to higher
quantity supplied surpassed quantity demanded at the prices, resulting in unsold surplus that the government
imposed minimum price. To handle excess stocks, the purchased and stored. This acquisition and storage
government began purchasing and storing surplus wheat, process created additional expenses for the government.
incurring additional costs. Economic analysts debated

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 PRACTICE PAPER 03

44. How might targeted subsidies differ from a price floor in inclusive growth, improving employment prospects in
supporting farmers? underserved areas.
(A) Subsidies focus on raising market prices universally
46. What initiative did the rural bank in Nation Y launch?
(B) Price floors provide selective income support
without surplus (A) Large industrial loans
(C) Subsidies can help farmers directly without (B) Micro-credit program
necessarily inflating consumer prices (C) Foreign currency deposit scheme
(D) Both always create identical market outcomes (D) High-interest real estate loans

Ans

Ans

(C) Subsidies can help farmers directly without (B) Micro-credit program
necessarily inflating consumer prices A micro-credit program extends small loans to
A price floor raises the market price for everyone, individuals or small-scale entrepreneurs who might lack
leading to surpluses. In contrast, a targeted subsidy access to traditional credit channels. In this scenario,
can deliver financial help straight to farmers, lowering local producers used the funds for tools and raw
their costs or boosting their incomes without forcing materials, boosting regional output and encouraging
consumer prices above equilibrium levels, thereby economic activity through additional employment,
avoiding excessive production and associated surplus income generation, and subsequent reinvestment.
management costs. 47. Which outcome was noted in the region after the
45. What is the primary reason surplus arises under a price program’s introduction?
floor? (A) Rise in local production of handicrafts
(A) Consumers increase their demand (B) Lower default rates
(B) Quantity supplied exceeds quantity demanded (C) Withdrawal of entrepreneurs from the market
(C) Government eliminates minimum price regulations (D) Positive spillovers in neighboring communities
(D) Farmers plant fewer crops

Ans


Ans (C) Withdrawal of entrepreneurs from the market
(B) Quantity supplied exceeds quantity demanded The passage indicates that small entrepreneurs utilized
A price floor fixes the selling price above the the loans successfully, production rose, and default rates
equilibrium. Producers respond by increasing output, remained low. Neighboring communities benefitted
hoping for higher profits, while consumers reduce from increased economic activities. There is no mention
purchases due to the higher price. This mismatch leads of entrepreneurs leaving the market; rather, the program
to surplus, requiring intervention such as government helped their businesses grow and positively impacted
procurement or storage to manage the unsold goods. the broader local economy.

48. According to the passage, why can micro-credit be a

Direction :Carefully read the case study provided and then
thoroughly answer the subsequent five questions. “catalyst for inclusive growth”?
A rural bank in Nation Y introduced a micro-credit (A) It only benefits large corporations
program targeting small-scale entrepreneurs. Many (B) It burdens borrowers with unsustainable debt
recipients used these loans to purchase better tools or raw (C) It enhances access to finance for small producers,
materials. Consequently, local production of handicrafts stimulating local output and employment
rose, creating positive spillovers in neighboring (D) It stops all future bank lending
communities. As entrepreneurs earned more, they

Ans
reinvested a portion of their profits, fueling aggregate (C) It enhances access to finance for small producers,
demand in the region. Bank officials observed that default stimulating local output and employment
rates were relatively low, suggesting that the program Micro-credit gives small producers the financial
efficiently allocated financial resources. However, some means to invest in equipment or materials, increasing
critics contended that if interest rates on microloans rose production capacities. This, in turn, generates
too high, individuals might be unable to repay, leading to employment and raises incomes, helping integrate
potential debt traps. Proponents argued that with prudent more participants into the formal economy. Through
risk management, micro-credit could be a catalyst for prudent implementation, it can broaden economic

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opportunities, creating inclusive growth rather than

excluding smaller businesses.

49. What risk do critics highlight if microloan interest rates

become too high?
(A) Rapid export growth
(B) Greater repayment capacity
(C) Possible debt traps for borrowers
(D) Guaranteed government bailouts


Ans
(C) Possible debt traps for borrowers
High interest rates on small loans can outstrip
borrowers’ ability to repay, leading to cycles of debt.
When entrepreneurs must divert much of their revenue
to cover interest, they struggle to meet principal
obligations, potentially forcing them to borrow more
and risking an unsustainable spiral known as a “debt
trap.”

50. How do proponents and critics of micro-credit mainly

differ in outlook?
(A) Proponents dismiss financial discipline; critics
enforce it
(B) Critics favor only government grants; proponents
favor charity
(C) Proponents see micro-credit as a growth tool;
critics worry about debt burdens
(D) Both groups aim to eliminate entrepreneurship


Ans
(C) Proponents see micro-credit as a growth tool; critics
worry about debt burdens
Proponents argue micro-credit expands financial access
and encourages local economic growth. Critics caution
that high interest rates could trap small entrepreneurs in
debt if returns on investment fail to outpace borrowing
costs. These perspectives highlight the balance between
financial inclusion and ensuring borrowers do not
become overextended.

*************

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 PRACTICE PAPER 04

PRACTICE PAPER 04

1. Which statement best defines microeconomics? improvements, enhanced workforce skills, or additional
(A) It examines national-level income and employment resource discoveries can trigger this shift. However, the
trends destruction of capital stock reduces an economy’s ability
(B) It focuses on the economic system as a whole to produce, shifting the PPC inward or preventing it
(C) It studies individual units like consumers and firms from expanding.
(D) It exclusively analyzes currency exchange rates
4. A point outside the Production Possibility Curve


Ans indicates:
(C) It studies individual units like consumers and firms (A) Attainable production with given resources
Microeconomics investigates how individuals, (B) Underutilization of resources
households, and firms make decisions about resource (C) An unattainable level of output
use and pricing. In contrast, macroeconomics explores (D) Inefficient production practices
aggregate indicators such as GDP and inflation. By

Ans
studying smaller units, microeconomics uncovers
patterns of consumer demand, production costs, and (C) An unattainable level of output
market structures that collectively shape the broader A PPC represents the maximum feasible combinations
economy. of two goods given the current resources and technology.
A point beyond this curve suggests a level of production
2. What is the central theme of the problem of scarcity? that cannot be achieved unless resources or technology
(A) Resources are unlimited, but wants are limited improve. Such points highlight potential future targets if
(B) Wants surpass available resources the economy grows or innovates.
(C) Economic agents do not need to prioritize
5. What happens to the demand curve for a normal good if
(D) All goods are free of cost
consumer income rises?


Ans (A) The demand curve shifts leftward
(B) Wants surpass available resources (B) The demand curve shifts rightward
The fundamental economic problem arises because (C) There is a downward movement along the same
humans have virtually unlimited wants, while resources curve
remain finite. This leads to trade-offs and necessitates (D) Demand completely disappears
choices regarding production, distribution, and

Ans
consumption. If resources were limitless, the concept of
scarcity would vanish, removing the need for economic (B) The demand curve shifts rightward
decision-making and opportunity cost analysis. For normal goods, an increase in consumer income
raises demand at each price level, shifting the demand
3. Which option is not a cause for an outward shift in the curve right. Consumers can afford more, so quantity
Production Possibility Curve? demanded grows even if the price is unchanged. In
(A) Technological breakthroughs contrast, a leftward shift would occur for inferior goods
(B) Increased labor productivity if consumer income rose.
(C) Discovery of more natural resources
6. If the price elasticity of demand for a commodity is
(D) Widespread destruction of capital stock
greater than 1, the demand is:


Ans (A) Perfectly inelastic
(D) Widespread destruction of capital stock (B) Unit elastic
An outward shift of the PPC signifies growth in (C) Elastic
an economy’s productive capacity. Technological (D) Inelastic

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page 40 CUET UG Economics

Ans (B) Additional output from using one more unit of the
(C) Elastic variable factor
A price elasticity of demand (PED) exceeding 1 Marginal product (MP) measures the incremental
indicates percentage change in quantity demanded is change in output resulting from adding one more unit
larger than the percentage change in price. This suggests of a particular input, keeping other inputs constant. In
consumers are relatively sensitive to price variations. production theory, observing MP helps a firm decide
Elastic demand curves are flatter, and firms might see how many units of a resource to employ for optimal
significant shifts in sales volumes as prices fluctuate. efficiency and cost management.

7. How do individual demand and market demand differ? 10. When marginal cost is below average cost,
(A) They are synonyms (A) Average cost must be rising
(B) Market demand is the sum of all individual (B) Average cost stays constant
demands at each price (C) Average cost decreases
(C) Individual demand always exceeds market demand (D) It has no effect on average cost
(D) Market demand exists only under controlled price

Ans
conditions
(C) Average cost decreases


Ans If marginal cost (the cost of producing an extra unit) is
(B) Market demand is the sum of all individual demands less than the current average cost, each additional unit
at each price produced pulls the average cost downward. Conversely,
An individual demand curve reflects one consumer’s if marginal cost is above the average, producing more
willingness to buy at various prices. Market demand units drives the average cost up, reflecting how the two
aggregates every consumer’s demands at those prices, measures interrelate.
creating a broader perspective of total quantity
11. Arrange these short-run production stages in correct
demanded in the market. Thus, market demand is
sequence:
simply the horizontal sum of all individual demand
(i) Increasing marginal returns
curves.
(ii) Negative marginal returns
8. Which does not affect the price elasticity of demand? (iii) Diminishing marginal returns
(A) Availability of substitutes (A) (i) → (iii) → (ii)
(B) Proportion of income spent on the good (B) (iii) → (i) → (ii)
(C) Tastes and preferences (C) (ii) → (i) → (iii)
(D) Quantity supplied (D) (i) → (ii) → (iii)


Ans

Ans
(D) Quantity supplied (A) (i) → (iii) → (ii)
Price elasticity of demand is influenced by how First, marginal product rises as the variable factor
consumers respond to price changes. Availability of initially enhances efficiency (increasing returns).
close substitutes, share of income spent on the good, and Then, with more units added, the benefits diminish
consumer preferences all shape how sharply demand (diminishing returns). Finally, beyond a certain point,
reacts. Quantity supplied is a supply-side factor; it does marginal product can become negative, indicating
not directly determine the demand curve’s elasticity. overcrowding or inefficiency, reducing overall output.
This sequencing is typical in short-run production
9. Marginal product of a variable factor refers to: analysis.
(A) Total output divided by the quantity of the variable
factor 12. Which best explains law of diminishing returns?
(B) Additional output from using one more unit of the (A) Each new unit of input always adds more output
variable factor than the previous one
(C) The cost per extra unit of input (B) Adding more of one variable input eventually yields
(D) The difference between fixed and variable inputs smaller output increments
(C) Fixed factors of production expand proportionally


Ans
with variable inputs

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(D) Marginal cost always remains constant 2 Monopoly b Product differentiation

Ans with many firms
(B) Adding more of one variable input eventually yields 3 Oligopoly c Large number of sellers
smaller output increments with identical goods
The law of diminishing returns states that as a firm 4 Monopolistic d Few dominant firms
continues adding a variable factor to fixed factors competition
beyond a certain point, each additional unit contributes Options:
less additional output than the previous unit. This (A) 1-d, 2-a, 3-c, 4-b
occurs because fixed resources create constraints on (B) 1-c, 2-a, 3-d, 4-b
how effectively additional variable inputs can be utilized. (C) 1-b, 2-c, 3-a, 4-d
13. Which is not a feature of perfect competition? (D) 1-c, 2-d, 3-a, 4-b
(A) Homogeneous product

Ans
(B) Freedom of entry and exit (B) 1-c, 2-a, 3-d, 4-b
(C) One dominant seller controlling price Perfect competition features many sellers offering
(D) Large number of buyers and sellers identical products (c). A monopoly involves a single


Ans seller with unique control (a). Oligopoly is characterized
(C) One dominant seller controlling price by a few large firms (d). Monopolistic competition
Perfect competition entails a market with numerous includes many sellers with differentiated products (b).
sellers offering identical goods, none of which can set These distinct structures reflect varying degrees of
or influence price alone. Free entry and exit guarantee market power and competition.
constant competitive pressure. A single dominant seller 16. Under perfect competition, how does equilibrium price
would alter market dynamics, moving away from the differ from that in a monopoly?
assumptions of perfect competition. (A) Perfect competition sets a higher price to maximize
14. Assertion (A) : In a perfectly competitive market, profits
individual sellers are price takers. (B) Monopoly price is often higher because the
Reason (R) : Sellers can influence market price by monopolist restricts output
altering quantity supplied. (C) There is no difference, both set price at marginal
(A) Both (A) and (R) are true, and (R) is the correct cost
explanation (D) Monopolies always charge below marginal cost
(B) Both (A) and (R) are true, but (R) is not the correct

Ans
explanation (B) Monopoly price is often higher because the
(C) (A) is true, but (R) is false monopolist restricts output
(D) (A) is false, but (R) is true A monopolist can control supply to raise prices above


Ans marginal cost, capturing abnormal profits. In perfect
(C) (A) is true, but (R) is false competition, equilibrium price is determined by the
Under perfect competition, each firm sells a negligible intersection of market supply and demand, and each
portion of total supply and cannot affect market price firm’s price equals marginal cost. By limiting output,
alone. Therefore, they are price takers. The reason a monopoly typically sets a higher price than in
statement is false: changing an individual firm’s quantity competitive markets.
supplied does not shift the entire market supply curve 17. Which policy sets a maximum price below equilibrium
enough to dictate price. to help consumers?
15. Match the market structures in Column I with the key (A) Price floor
characteristic in Column II: (B) Price ceiling
(C) Subsidy
Column I Column II (D) Tax rebate
1 Perfect a Single seller

Ans
competition

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(B) Price ceiling (A) (iv) → (i) → (ii) → (iii)

A price ceiling fixes the maximum allowable charge (B) (i) → (iv) → (ii) → (iii)
for a good or service, keeping it below the equilibrium (C) (i) → (ii) → (iv) → (iii)
price. This policy aims to benefit consumers by making (D) (iv) → (ii) → (i) → (iii)
essentials more affordable. However, it can result in

Ans
shortages if suppliers find production unprofitable,
prompting potential black market transactions. (A) (iv) → (i) → (ii) → (iii)
First, categorize the various production units. Determine
18. Which is not a typical rationale for government- their gross output values. Then, subtract intermediate
imposed price ceilings? consumption to find value added. Summing value
(A) Protect low-income consumers added across all sectors yields GDP by the Value
(B) Ensure affordability of essential goods Added Method. This approach highlights each sector’s
(C) Eliminate all forms of black marketing contribution without double counting intermediate
(D) Prevent runaway inflation in staple commodities goods.


Ans 21. Net National Product (NNP) at factor cost is:
(C) Eliminate all forms of black marketing (A) GNP at market price plus depreciation
Ironically, price ceilings can encourage black markets (B) GDP at factor cost minus net factor income from
if the official price is set too low, creating shortages. abroad
Governments impose ceilings to protect vulnerable (C) Gross National Product at factor cost minus
consumers from excessive prices, keep critical goods depreciation
affordable, and curb sudden inflation. However, black (D) National Disposable Income minus indirect taxes
markets may arise as suppliers seek higher prices than

Ans
the legal limit.
(C) Gross National Product at factor cost minus
19. Which statements about National Disposable Income depreciation
are true? NNP at factor cost refines GNP by subtracting
1. Includes net current transfers from abroad depreciation. It measures the net output available to a
2. Excludes all private consumption nation’s factors of production after accounting for wear
3. Represents the total income available to a nation and tear on capital. This indicates a nation’s sustainable
4. Equivalent to GDP minus depreciation production level over time, reflecting the income truly
5. Can be used for consumption or saving earned by its residents.
(A) 1, 3, and 5 only
22. A higher real GDP most reliably indicates:
(B) 1 and 2
(C) 2, 4, and 5 (A) Lower population growth
(D) 1, 4, and 5 (B) The economy is producing more goods and services
than before


Ans (C) A simultaneous rise in inflation rates
(A) 1, 3, and 5 only (D) That all citizens enjoy identical living standards
National Disposable Income is the total income available

Ans
to residents for spending or saving after accounting for
transfers with other nations. It includes net current (B) The economy is producing more goods and services
transfers, reflecting foreign aid or remittances. It does than before
not inherently exclude private consumption nor is it Real GDP adjusts for price changes, providing a
simply GDP minus depreciation. Thus 1, 3, and 5 apply. clearer picture of an economy’s actual output volume.
When real GDP increases, it suggests more goods and
20. In computing GDP using the Value Added Method, services were produced. This does not guarantee equal
arrange these steps: distribution of income or stable population growth, nor
(i) Identify gross value of output does it automatically signal higher inflation.
(ii) Subtract intermediate consumption
23. Aggregate demand (AD) in a two-sector model
(iii) Sum value added across all sectors
(iv) Categorize firms by production stages comprises:
(A) Consumption demand and investment demand

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(B) Government expenditure and net exports 26. Which is not a direct measure to correct deficient
(C) Consumption demand only demand?
(D) Savings and taxes (A) Decreasing interest rates


Ans (B) Lowering taxes
(C) Raising government expenditure
(A) Consumption demand and investment demand (D) Hiking reserve requirements to restrict lending
In a two-sector model, we consider only households and
firms; there is no government or foreign trade. Thus,

Ans
AD equals the sum of consumption (C) and investment (D) Hiking reserve requirements to restrict lending
(I). Households consume, while firms invest in capital Deficient demand indicates insufficient spending, so
goods. Government spending and net exports appear in expansionary policies aim to boost aggregate demand.
more complex models. Lower interest rates, tax reductions, or elevated
government spending can stimulate consumption and
24. Assertion (A) : A high marginal propensity to consume investment. Increasing reserve requirements restricts
(MPC) can amplify the investment multiplier. credit availability, a contractionary step typically used
Reason (R) : If MPC is greater, each injection of spending to address excess demand or inflation, not deficient
circulates through the economy multiple times. demand.
(A) Both (A) and (R) are true, and (R) is the correct
explanation 27. In modern economies, money is primarily:
(B) Both (A) and (R) are true, but (R) is not the correct (A) Only in the form of precious metals
explanation (B) Fiat currency and demand deposits
(C) (A) is true, but (R) is false (C) Bartered goods
(D) (A) is false, but (R) is true (D) Always fully backed by gold


Ans

Ans
(A) Both (A) and (R) are true, and (R) is the correct (B) Fiat currency and demand deposits
explanation Contemporary money consists largely of government-
When people spend a larger fraction of each additional issued fiat currency and deposits in commercial banks.
unit of income, the multiplier effect grows. Each round These forms derive value from widespread acceptance
of spending leads to more subsequent spending, raising and legal tender status, not from intrinsic worth or
overall equilibrium income. Hence, a higher MPC gold backing. While historically gold and silver served
strengthens the multiplier, making the reason statement as money, today’s systems rely on trust and regulatory
the correct explanation for the assertion. frameworks.

25. Excess demand vs. deficient demand differ in that: 28. Which does not characterize commercial banks?
(A) Both create unemployment (A) Accepting deposits from the public
(B) Both require identical policy responses (B) Providing loans to businesses and consumers
(C) Excess demand leads to inflation, while deficient (C) Issuing currency notes on behalf of the government
demand leads to unemployment (D) Earning profits from the interest rate spread
(D) Neither influences aggregate price levels

Ans


Ans (C) Issuing currency notes on behalf of the government
(C) Excess demand leads to inflation, while deficient In most nations, currency issuance rests with the
demand leads to unemployment central bank, which has the authority to print money.
Excess demand arises when total planned expenditure Commercial banks accept deposits, offer loans, and
exceeds full employment output, generating upward generate income from the difference between deposit
price pressures. Deficient demand is when aggregate rates and lending rates. They do not officially issue
expenditure is inadequate to maintain full employment, currency in the form of bank notes.
causing involuntary unemployment. Policy makers
29. Identify true statements about central banks:
employ opposite measures—tightening in excess
demand, and expansionary in deficient demand—to 1. They act as bankers to the government
restore equilibrium in output and price levels. 2. They set direct tax rates
3. They regulate credit through monetary policy

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4. They manage foreign exchange reserves (C) Salaries paid to government employees
(A) 1, 2, and 3 (D) Acquiring land for infrastructure projects
(B) 1, 3, and 4

Ans
(C) 2 and 4 only
(D) 1 and 4 only (C) Salaries paid to government employees
Capital expenditure involves investments in assets


Ans or activities that create future benefits, such as
(B) 1, 3, and 4 infrastructure or equipment. Salaries to employees fall
Central banks typically serve as the government’s under revenue expenditure because they are regular,
banker, implement monetary policy (like open market recurring payments that do not add to the government’s
operations and reserve requirements), and hold the asset base or reduce its existing liabilities.
country’s foreign exchange reserves. They do not set
33. Put these stages of budget formulation in order:
direct tax rates; that function lies with fiscal authorities,
indicating statement 2 is incorrect. (i) Ministry inputs
(ii) Budget approval by legislature
30. Monetary policy attempts to influence which primary (iii) Drafting overall estimates
target? (iv) Presidential (or Head of State) assent
(A) Government budget deficit (A) (i) → (iii) → (ii) → (iv)
(B) Exchange rates only (B) (iii) → (i) → (iv) → (ii)
(C) Availability and cost of credit in the economy (C) (i) → (ii) → (iii) → (iv)
(D) Labor market regulations (D) (ii) → (iv) → (i) → (iii)


Ans

Ans
(C) Availability and cost of credit in the economy (A) (i) → (iii) → (ii) → (iv)
By adjusting instruments like policy interest rates, Initially, various ministries submit inputs on their
reserve requirements, or open market operations, funding needs. Budget drafters combine these into
monetary authorities manipulate borrowing costs overall estimates. The legislature debates and approves
and liquidity in financial markets. This can either or modifies the budget. Finally, the president (or
encourage lending and expansion or restrain credit and equivalent authority) signs it into law. This structured
curb inflation. Government budgets, exchange rates, process ensures multiple oversight layers in budget
and labor laws, though indirectly affected, are not the allocation decisions.
primary focus.
34. Assertion (A) : Fiscal deficit can be financed through
31. A capital receipt in a government budget is one that: government borrowing.
(A) Is recurring and obtained from tax revenues Reason (R) : All borrowing automatically reduces total
(B) Neither creates liability nor reduces assets investment in the economy.
(C) Involves borrowing, disinvestment, or loans (A) Both (A) and (R) are true, and (R) is the correct
(D) Is used exclusively for defense expenditure explanation


Ans (B) Both (A) and (R) are true, but (R) is not the correct
explanation
(C) Involves borrowing, disinvestment, or loans (C) (A) is true, but (R) is false
Capital receipts either create liabilities or reduce (D) (A) is false, but (R) is true
government assets. Borrowings from the market,
dis investments of public-sector holdings, or loan

Ans
recoveries are examples. These receipts contrast with (C) (A) is true, but (R) is false
revenue receipts from taxes or other non-debt sources, Governments often finance fiscal deficits by issuing
which do not increase liabilities or involve selling off bonds or borrowing. However, borrowing does not
governmental assets. always reduce total investment. While “crowding out”
can happen if government absorbs funds otherwise
32. Which does not fall under capital expenditure for a available for private investment, in some cases,
government? borrowing can stimulate economic activity without
(A) Building roads and highways necessarily cutting private-sector investments.
(B) Purchasing new machinery for public enterprises

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 PRACTICE PAPER 04

35. Balance of Payments (BoP) is defined as: A higher outflow of income to foreign investors implies
(A) A record of only a nation’s imports and exports payments of dividends, interest, or profits leaving the
(B) The difference between a country’s tax revenue and country, reducing net inflows on the current account.
expenditure In contrast, boosting exports, reducing imports, or
(C) A systematic record of all economic transactions receiving remittances all potentially improve the current
between residents of a country and the rest of the account by raising credits or lowering debits in external
world transactions.
(D) A financial statement showing only a nation’s
38. Assertion (A) : A favorable current account shows net
capital transactions
export surplus.


Ans Reason (R) : The capital account records only visible
(C) A systematic record of all economic transactions trade of goods.
between residents of a country and the rest of the world (A) Both (A) and (R) are true, and (R) is the correct
BoP provides a comprehensive account of monetary explanation
flows between a country and foreign entities, covering (B) Both (A) and (R) are true, but (R) is not the correct
trade in goods and services, cross-border financial explanation
flows, and transfers. It includes both current account (C) (A) is true, but (R) is false
transactions (like exports, imports, remittances) and (D) (A) is false, but (R) is true
capital account transactions (investments, loans),

Ans
ensuring a complete picture of external economic
engagement. (C) (A) is true, but (R) is false
A positive current account often reflects that exports of
36. Fixed exchange rate vs. Flexible exchange rate: a key goods and services (plus net transfers) exceed imports.
difference is that in a flexible system: However, the capital account deals with cross-border
(A) Authorities fix the currency value and never change investments, loans, and other capital transactions, not
it just visible trade. Hence, statement (R) is incorrect,
(B) Market forces of supply and demand determine the while (A) is correct regarding surplus in the current
exchange rate account.
(C) It requires large foreign exchange reserves for
39. Which statements about foreign exchange are correct?
stability
(D) Governments impose tight capital controls 1. Demand rises if imports increase
2. Supply rises if exports increase


Ans 3. Demand is unaffected by changes in domestic
(B) Market forces of supply and demand determine the income
exchange rate 4. Speculation can influence demand and supply
In a flexible exchange rate regime, exchange rates (A) 1, 2, and 4
fluctuate freely according to currency supply and (B) 1 and 3
demand in foreign exchange markets. Central banks (C) 2 and 4 only
generally refrain from pegging or intervening to (D) 1, 2, 3, and 4
maintain a specific rate. In contrast, fixed systems

Ans
involve government or central bank actions to hold the
currency at a chosen level. (A) 1, 2, and 4
If a country imports more, it must purchase more
37. Which does not normally improve a country’s current foreign currency, raising demand. Exports bring in
account balance? foreign currency, increasing supply. Speculative buying
(A) Increasing exports or selling based on expected price shifts also affects
(B) Decreasing imports demand and supply. Domestic income changes can
(C) Large remittances from abroad affect import demand, so claiming it never influences
(D) Higher outflow of income to foreign investors demand is incorrect.


Ans
(D) Higher outflow of income to foreign investors

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40. Match these exchange rate terms with their meanings: (C) Imposing higher tariffs on imports
Country Z aimed to protect local manufacturing by
Column I Column II
increasing import duties, making foreign goods costlier.
1 Appreciation a Fall in the value of Higher tariffs reduce competition from imports,
domestic currency potentially aiding domestic firms but raising consumer
2 Depreciation b Rise in the value of prices. This measure is often used to nurture young
domestic currency industries, though it can also diminish variety and raise
3 Fixed exchange c Government sets and living costs.
maintains official rate
42. According to the text, what immediate effect did tariffs
4 Managed float d Authorities intervene to
have on domestic manufacturers?
reduce extreme volatility
(A) Lower production
Options: (B) Encouraged expansion due to reduced foreign
(A) 1-b, 2-a, 3-d, 4-c competition
(B) 1-b, 2-c, 3-a, 4-d (C) Forced them to reduce employment
(C) 1-b, 2-a, 3-c, 4-d (D) Pushed them into bankruptcy
(D) 1-c, 2-d, 3-a, 4-b


Ans


Ans
(B) Encouraged expansion due to reduced foreign
(C) 1-b, 2-a, 3-c, 4-d competition
Currency appreciation denotes a rise in the currency’s With higher tariffs on imported goods, domestic
external value (b). Depreciation is the opposite: a producers gained a price advantage in the home
decline in that value (a). Under a fixed exchange, the market. Foreign products became comparatively more
government or central bank controls the rate (c). A expensive, allowing local factories to grow output,
managed float mostly follows market forces but permits expand employment, and capture a larger share of the
intervention to limit excessive volatility (d). domestic market—though at the expense of higher
costs to consumers.


Direction :Carefully read the case study provided and then
thoroughly answer the subsequent five questions. 43. How did consumer prices change compared to the pre-
A small developing economy, Country Z, sought to tariff situation?
boost local manufacturing by imposing higher tariffs on (A) Consumer prices generally fell
imported consumer goods. Domestic producers rejoiced, (B) Consumer prices stayed the same
seeing reduced foreign competition. Over time, local (C) Consumer prices rose due to less competitive
factories increased output. However, consumer prices pressure
rose because the tariffs made imports more expensive (D) Consumers had more product variety
and local firms faced less price pressure. Consequently,


Ans
households spent more on these costlier goods. Critics
argued that the policy might protect inefficient producers (C) Consumer prices rose due to less competitive
while burdening consumers with higher costs and limited pressure
variety. Proponents insisted that protecting nascent Tariffs inflate the cost of imported goods and allow
industries would create jobs and allow firms to gain domestic firms to reduce the intensity of price
economies of scale. An economic study suggested that competition. With fewer cheaper imports, domestic
while employment improved in manufacturing, overall producers face less incentive to keep prices low. As a
consumer welfare declined due to higher prices and result, consumers often encounter higher price levels
restricted product choices. and potentially a narrower range of product options.

41. What policy change did Country Z implement? 44. Which was not a benefit mentioned by proponents of
(A) Abolishing all trade barriers the tariff policy?
(B) Reducing import tariffs (A) Job creation in local industries
(C) Imposing higher tariffs on imports (B) Achieving economies of scale
(D) Introducing universal basic income (C) Strengthening domestic manufacturing
(D) Guaranteed lower consumer costs


Ans

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 PRACTICE PAPER 04

Ans

Ans
(D) Guaranteed lower consumer costs (B) Currency depreciation
While advocates believed higher tariffs would bolster Currency depreciation occurs when a nation’s currency
domestic industry, raise employment, and facilitate falls in value relative to others. This makes exports
economies of scale, none argued it would reduce cheaper and more attractive abroad but raises the cost
consumer prices. In fact, higher consumer prices are a of imports, sometimes triggering inflation. The scenario
typical short-term consequence of import restrictions, describes exporters celebrating competitive pricing,
as competitiveness and variety tend to drop without while import-dependent firms worry about heightened
external pricing pressure. expenses.

45. In evaluating overall welfare, the study concluded that: 47. Why might import-dependent industries struggle after
(A) Consumers gained more than producers the depreciation?
(B) Manufacturers did worse due to cheap imports (A) Their exports become uncompetitive
(C) Manufacturing employment improved, but (B) They benefit from cheaper imports
consumers faced higher costs and fewer choices (C) They face rising costs for raw materials
(D) No effect on employment occurred (D) They expand due to lower wages


Ans

Ans
(C) Manufacturing employment improved, but (C) They face rising costs for raw materials
consumers faced higher costs and fewer choices Depreciation means more units of the domestic
The policy successfully shielded local production from currency are required to purchase the same amount
foreign competition, spurring output and job growth in of foreign goods. Industries reliant on imported raw
certain sectors. However, it also transferred part of the materials see their costs escalate as they must spend
burden to consumers, who paid more and had limited more domestic currency for each import transaction,
options. Thus, higher employment coexisted with potentially squeezing profits and leading to higher
diminished consumer welfare, reflecting the trade-off in consumer prices downstream.
protectionist measures.
48. Which sector in Country Q gains from the currency’s


Direction :Carefully read the case study provided and then lower value?
thoroughly answer the subsequent five questions. (A) Import-dependent manufacturers
Country Q experienced a currency depreciation against (B) Domestic tourism, due to more foreign visitors
major international currencies. Exporters cheered, (C) All consumers of imported goods
anticipating more competitive pricing abroad for their (D) Creditors holding foreign currency loans
products. Some domestic industries dependent on

Ans
imported raw materials, however, faced rising costs as
imported inputs became more expensive. The tourism (B) Domestic tourism, due to more foreign visitors
sector benefited from an influx of foreign visitors drawn A weaker currency makes travel to Country Q cheaper in
by the favorable exchange rate. Despite the export boom, terms of foreign currency, attracting more international
inflationary pressures arose due to costlier imports, tourists. Exporters also benefit by selling goods more
which spread through the supply chain. Policymakers competitively abroad. By contrast, import-dependent
debated measures to stabilize prices without stifling firms, consumers of foreign goods, and entities owing
export-led growth. Critics warned that if the currency foreign-currency loans might face higher costs or debt
continued to depreciate, the country might struggle with burdens.
a widening trade deficit for essential imports like oil. 49. Which is not an expected outcome of continued
Government officials vowed balanced policies to maintain currency depreciation?
competitiveness yet keep inflation under control. (A) Potential rise in inflation
46. What event did Country Q undergo? (B) Higher cost of imported essentials
(A) Currency appreciation (C) Improved export competitiveness
(B) Currency depreciation (D) Guaranteed trade surplus
(C) Elimination of central bank

Ans
(D) Universal trade surplus

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(D) Guaranteed trade surplus

Although depreciation can stimulate exports by making
them cheaper internationally, it does not ensure a trade
surplus. If the country’s imports (particularly essential
goods) outstrip exports in value, or if rising costs
dampen overall competitiveness, the trade balance can
still remain in deficit despite the currency’s weakening.

50. Assertion (A) : Persistent depreciation might burden

the economy with inflation.
Reason (R) : Import prices become cheaper in domestic
currency terms.
(A) Both (A) and (R) are true, and (R) is the correct
explanation
(B) Both (A) and (R) are true, but (R) is not the correct
explanation
(C) (A) is true, but (R) is false
(D) (A) is false, but (R) is true


Ans
(C) (A) is true, but (R) is false
Prolonged depreciation frequently fuels inflation as
higher import costs pass through to domestic prices.
However, import prices do not become cheaper; they
rise because each unit of foreign currency commands
more units of domestic currency. Thus, the reason
statement contradicts the typical effect of depreciation
on import costs.

*************

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 PRACTICE PAPER 05

PRACTICE PAPER 05

1. What is the central problem of “for whom to produce” (C) I → II → III → IV

primarily concerned with? (D) II → I → III → IV
(A) Allocating resources for capital-intensive goods

Ans
only
(B) Determining the distribution of goods among (D) II → I → III → IV
different sections First, resource constraints are identified to understand
(C) Selecting a production technique to minimize costs scarcity. Next, axes are labeled for two goods to
(D) Maintaining a constant supply of natural resources systematically plot outcomes. Then, attainable and
unattainable points are plotted, reflecting feasible versus


Ans unfeasible combinations. Finally, the PPC is drawn to
(B) Determining the distribution of goods among connect the extreme points, showing the maximum
different sections production possibilities for both goods together.
This question highlights who receives the final goods
4. Which of the following is not one of the central problems
and services in society. The central problem of “for
whom to produce” addresses the distribution of output of an economy?
based on income, equity, or other criteria. By deciding (A) What to produce
which segments consume specific goods, resources are (B) How to produce
allocated according to social and economic priorities (C) Where to produce
and needs. (D) For whom to produce


Ans
2. Which statement best defines opportunity cost in the
context of economic decisions? (C) Where to produce
(A) The net profit from selling all other resources The three central problems of an economy revolve
(B) The cost paid to purchase raw materials around choices regarding which goods to produce,
(C) The next best alternative foregone the methods of production, and the recipients of those
(D) The amount spent to hire additional workers goods. “Where to produce” is not typically included, as
geographic location is not an inherent core economic


Ans problem. Location decisions are secondary to these
(C) The next best alternative foregone fundamental questions.
Opportunity cost reflects the sacrifice made when one
5. In the context of utility approach, how does a consumer
option is chosen over another. It measures the benefits
of the next best alternative that one forgoes to pursue reach equilibrium under the one-commodity case?
a preferred course of action. By analyzing this concept, (A) By equating total utility to zero
individuals and firms can allocate scarce resources more (B) By maximizing marginal utility subject to price
efficiently to maximize satisfaction and welfare. (C) By minimizing average utility
(D) By always consuming at the highest price
3. Arrange the following steps in constructing a Production

Ans
Possibility Curve (PPC) in chronological order:
I. Label axes for two goods (B) By maximizing marginal utility subject to price
II. Identify resource constraints In the one-commodity utility approach, a consumer
III. Plot attainable and unattainable points compares the marginal utility from consuming an
IV. Draw the curve representing maximum possible additional unit with its price. Equilibrium is reached
combinations when marginal utility equals price, ensuring maximum
(A) II → III → I → IV net benefit. Any further consumption would yield lower
(B) II → I → IV → III

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page 50 CUET UG Economics

marginal utility than the cost, thus reducing overall When exact percentage changes in price and quantity
satisfaction and wasting valuable resources. demanded are known, the point elasticity method
is preferred for precise, real-time assessments. This
6. Which factor does not shift the market demand curve method calculates elasticity at a specific point on the
to the right? demand curve, enabling managers to evaluate how a
(A) A decrease in the price of a complement small variation in price influences demand and optimize
(B) An increase in consumer income (for a normal pricing strategies accordingly.
good)
(C) A favorable change in consumer preferences 9. In the short run, which cost remains constant regardless
(D) An increase in the price of the good itself of the level of output?


Ans (A) Total variable cost
(B) Total fixed cost
(D) An increase in the price of the good itself (C) Marginal cost
A change in the good’s own price causes movement (D) Average variable cost
along the demand curve, not a shift. Shifts occur when
non-price determinants, such as consumer tastes,

Ans
related goods’ prices, and income, change. Higher own- (B) Total fixed cost
price reduces quantity demanded along the curve but In the short run, fixed costs, like rent or interest on
does not reposition the entire demand curve outward capital, do not vary with output. These obligations
or inward. must be paid even if production is zero. Variable costs,
by contrast, change based on production volume.
7. Which statement best differentiates a movement along Recognizing this distinction helps producers plan
the demand curve from a shift in the demand curve? efficiently and understand how profits are influenced
(A) Movement refers to changing preferences, while significantly.
shift deals with price
(B) Movement occurs due to price changes, whereas 10. Assertion (A) : Average fixed cost (AFC) declines
shift arises from non-price factors continuously as output increases.
(C) Both occur only when supply changes Reason (R) : Fixed cost remains unchanged regardless
(D) Movement and shift are triggered simultaneously of production level.
by consumer expectations (A) Both (A) and (R) are true, and (R) is the correct


Ans explanation of (A).
(B) Both (A) and (R) are true, but (R) is not the correct
(B) Movement occurs due to price changes, whereas explanation.
shift arises from non-price factors (C) (A) is true, (R) is false.
A movement along the demand curve happens when (D) (A) is false, (R) is true.
the product’s own price changes, altering the quantity
demanded. Conversely, a shift occurs due to variations

Ans
in external determinants, such as consumer income or (A) Both (A) and (R) are true, and (R) is the correct
tastes. These non-price factors redraw the entire demand explanation of (A).
curve, reflecting a fundamentally different relationship Fixed costs stay constant, so when output increases,
between price and quantity. the same total fixed cost is spread over more units.
This leads to a continuously decreasing average fixed
8. What is the most appropriate measure of price elasticity cost. Thus, the reason accurately explains why AFC
of demand for managerial decisions when precise declines with higher production, making option (A) the
percentage changes are available? correct relationship between the statements and actual
(A) Total expenditure method outcomes.
(B) Point elasticity (percentage) method
(C) Arc elasticity method 11. Match the following cost concepts in Column I with
(D) Geometric elasticity method their descriptions in Column II:


Ans Column I Column II
(B) Point elasticity (percentage) method

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 PRACTICE PAPER 05

Ans
1. TFC a. Sum of fixed and variable
costs (B) Many buyers and sellers with no control over price
2. TVC b. Cost that changes with output In perfect competition, numerous buyers and sellers
deal in homogeneous products. No single participant
3. TC c. Additional cost of producing
can influence the market price, which is set by overall
one more unit
supply and demand. Producers can freely enter or exit
4. MC d. Remains constant in the without barriers, ensuring minimal market power.
short run Consequently, price-taking behavior defines this truly
Options: highly competitive and neutral market structure.
(A) 1–d, 2–b, 3–a, 4–c
14. Assertion (A) : In perfect competition, firms are price
(B) 1–b, 2–c, 3–d, 4–a
(C) 1–a, 2–d, 3–c, 4–b takers.
(D) 1–c, 2–a, 3–b, 4–d Reason (R) : Entry barriers are high, preventing new
firms from entering easily.


Ans (A) Both (A) and (R) are true, and (R) explains (A).
(A) 1–d, 2–b, 3–a, 4–c (B) Both (A) and (R) are true, but (R) does not explain
Total Fixed Cost (TFC) remains constant (d), Total (A).
Variable Cost (TVC) changes with output (b), Total (C) (A) is true, (R) is false.
Cost (TC) combines both fixed and variable costs (a), (D) (A) is false, (R) is true.
and Marginal Cost (MC) represents the extra cost for

Ans
producing an additional unit (c). These relationships
clarify how each cost component behaves effectively in (C) (A) is true, (R) is false.
production. Firms in perfect competition accept the market price
due to identical products and many rivals. However,
12. Which of the following statements about the supply entry barriers are low, not high. Easy entry keeps prices
curve are correct? aligned with average costs. Since the reason is incorrect
1. It typically slopes upward. regarding barriers, it cannot absolutely explain why
2. An increase in factor prices shifts it left. firms cannot set prices in that highly market structure.
3. Technological improvement shifts it right.
15. Match the following market structures in Column I with
4. Supply remains constant with price changes.
Select the correct combination. their key characteristics in Column II:
(A) 1, 2, and 3 only Column I Column II
(B) 1 and 4 only 1 Perfect a Single seller, unique
(C) 2, 3, and 4 only Competition product
(D) 1, 2, and 4 only
2 Monopoly b Few large firms,


Ans interdependence
(A) 1, 2, and 3 only 3 Monopolistic c Large number of firms, no
The supply curve normally has a positive slope, Competition product differentiation
increasing factor prices reduce producers’ ability 4 Oligopoly d Many firms, product
to supply and shift the curve left, while improved differentiation
technology reduces costs and shifts it right. Statement
Options:
4 is incorrect because supply expands or contracts with
(A) 1–c, 2–a, 3–d, 4–b
price changes, resulting in movement along the existing
(B) 1–a, 2–c, 3–b, 4–d
curve only.
(C) 1–d, 2–b, 3–c, 4–a
13. What characterizes a perfectly competitive market? (D) 1–b, 2–d, 3–a, 4–c
(A) A single seller dominates the market

Ans
(B) Many buyers and sellers with no control over price
(A) 1–c, 2–a, 3–d, 4–b
(C) Differentiated products offered by competing firms
Perfect competition features many firms with
(D) High barriers to entry for new producers
identical products (c). A monopoly involves a single

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seller providing a unique product (a). Monopolistic (D) 1 and 2 only

competition has multiple sellers, each offering

Ans
differentiated products (d). An oligopoly is marked by a
few dominant firms whose decisions are interdependent (A) 1, 2, and 4 only
(b), significantly shaping market outcomes and Price ceilings set below equilibrium generate excess
strategies. demand or shortages. Because the legal maximum
price is too low, consumers want more than suppliers
16. Which situation does not cause a change in equilibrium can profitably provide. Black markets often emerge as
price under perfect competition? sellers try to circumvent restrictions. Unlimited supply
(A) A shift in market demand (statement 3) is not guaranteed; in fact, shortages
(B) A shift in market supply fundamentally contradict that idea.
(C) A government-imposed price ceiling
19. Match the following price interventions with their
(D) A change in price of the product itself, holding
demand and supply curves constant primary effects:

Ans Column I Column II

(D) A change in price of the product itself, holding 1 Price Ceiling a Encourages overproduction,
demand and supply curves constant lowers consumer price
Under perfect competition, equilibrium price changes 2 Price Floor b Imposed below equilibrium,
only when the demand or supply curves shift, or can cause shortages
government intervention imposes an external 3 Rationing c Imposed above equilibrium,
constraint. Merely altering the product’s price, while can cause surpluses
keeping demand and supply unchanged, means the 4 Subsidy d Restricts quantity consumers
market moves along existing curves, but the equilibrium can buy
price itself remains determined by overall market forces.
Options:
17. If the government imposes a price floor above the (A) 1–b, 2–c, 3–d, 4–a
equilibrium price on wheat, what is the best possible (B) 1–c, 2–b, 3–a, 4–d
outcome? (C) 1–d, 2–a, 3–b, 4–c
(A) A shortage of wheat (D) 1–a, 2–d, 3–c, 4–b
(B) A surplus of wheat

Ans
(C) No effect on wheat supply
(A) 1–b, 2–c, 3–d, 4–a
(D) Perfectly elastic demand for wheat
A price ceiling below equilibrium typically causes


Ans shortages (b). A price floor above equilibrium leads
(B) A surplus of wheat to surpluses (c). Rationing restricts how much each
A price floor set above equilibrium compels suppliers to consumer can purchase (d). A subsidy usually reduces
produce more, while consumers buy less at the higher production costs, encouraging output and lowering
price. This mismatch creates a surplus. In some cases, consumer prices (a). These policy tools significantly
governments purchase the excess or provide storage alter normal market outcomes in practice.
subsidies. The key issue is artificial pricing that disrupts
20. Assertion (A) : Rationing is implemented to ensure
natural market clearing and efficiency for wheat.
equitable distribution during shortages.
18. Which statements about price ceilings are correct? Reason (R) : Rationing always guarantees consumer
1. Imposed below equilibrium price satisfaction.
2. Tend to create shortages (A) Both (A) and (R) are true, and (R) explains (A).
3. Ensure unlimited supplies for consumers (B) Both (A) and (R) are true, but (R) does not explain
4. May lead to black-market transactions (A).
Choose the correct combination. (C) (A) is true, (R) is false.
(A) 1, 2, and 4 only (D) (A) is false, (R) is true.
(B) 1, 3, and 4 only

Ans
(C) 2, 3, and 4 only
(C) (A) is true, (R) is false.

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 PRACTICE PAPER 05

Rationing is indeed used to distribute scarce goods 3 Personal Income c NNP at Market Price
more fairly, especially when demand exceeds supply. – Indirect Taxes +
However, it does not assure consumer satisfaction Subsidies
because people may receive less than they desire.
4 Disposable d Total income received by
Constraints often lead to dissatisfaction or black-market
Personal Income individuals
channels, even though the primary intent is to promote
equitable access and fairness. Options:
(A) 1–b, 2–c, 3–d, 4–a
21. What does GDP at market price measure? (B) 1–c, 2–b, 3–a, 4–d
(A) The total income of foreigners (C) 1–b, 2–a, 3–c, 4–d
(B) The value of all final goods and services produced (D) 1–d, 2–a, 3–b, 4–c
domestically


Ans
(C) The sum of factor payments made abroad
(D) The proportion of net imports (A) 1–b, 2–c, 3–d, 4–a
GNP equals GDP plus net factor income from abroad


Ans
(b). NNP at factor cost is calculated from NNP at market
(B) The value of all final goods and services produced price minus indirect taxes plus subsidies (c). Personal
domestically income is the total income received by individuals (d),
Gross Domestic Product at market price represents and disposable personal income is income after direct
the total monetary value of all final goods and services taxes (a) in national accounts.
produced within a country’s boundaries over a specified
period. It includes indirect taxes but excludes subsidies 24. Which statements are true regarding the circular flow of
in its calculation. This measure helps gauge a nation’s income in a two-sector model?
economic performance and overall production capacity 1. Households supply factors to firms
effectively. 2. Firms distribute profits back to households
3. Imports and exports play a crucial role
22. How do indirect taxes affect the calculation of GDP at 4. Households purchase goods from firms
market price? Choose the correct combination.
(A) They are subtracted from factor cost (A) 1 and 4 only
(B) They are added to factor cost (B) 1, 2, and 4 only
(C) They convert GDP at market price to GDP at factor (C) 1, 2, and 3 only
cost (D) 2, 3, and 4 only
(D) They are ignored in national income accounting


Ans


Ans
(B) 1, 2, and 4 only
(B) They are added to factor cost In a two-sector model, households provide factors
GDP at factor cost reflects production costs without (labor, capital) to firms, receiving wages, rent, and profit
indirect taxes or subsidies. To arrive at GDP at market distributions. They use this income to buy goods and
price, indirect taxes are added while subsidies are services from firms. Imports and exports (statement 3)
subtracted. This adjustment aligns the cost of production are not included in the simplified two-sector framework,
with the actual market value consumers pay, capturing which involves only households and firms directly and
the influence of taxation effectively on prices. exclusively.
23. Match the following national income concepts in 25. Arrange the following steps in calculating equilibrium
Column I with their descriptions in Column II: income in a two-sector model in chronological order:
Column I Column II I. Determine consumption function
II. Assume planned investment
1 GNP a Income after direct taxes
III. Set aggregate demand equal to aggregate supply
2 NNP at Factor b GDP + Net Factor IV. Solve for equilibrium income
Cost Income from Abroad (A) I → II → III → IV
(B) II → I → III → IV
(C) I → III → II → IV

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(D) III → IV → I → II (B) In full employment, some workers remain jobless

Ans involuntarily
(C) In involuntary unemployment, people are willing
(A) I → II → III → IV to work at the prevailing wage but still jobless
First, economists define the consumption function (D) Both states imply zero unemployment
based on income. Next, they specify planned investment
to capture exogenous spending. Then they equate

Ans
aggregate demand (C + I) to aggregate supply (Y). (C) In involuntary unemployment, people are willing to
Finally, solving this equation yields the equilibrium work at the prevailing wage but still jobless
level of income where intended spending equals actual Full employment means everyone desiring work at
output produced precisely and consistently. the current wage finds a job, aside from frictional or
voluntary unemployment. Involuntary unemployment
26. Which of the following does not directly reduce the arises when individuals can’t find work despite readiness
problem of deficient demand? to accept the existing wage. This distinction highlights
(A) Increasing government expenditure the gap between labor supply and demand in actual real
(B) Lowering taxes labor market conditions.
(C) Decreasing the money supply
(D) Reducing policy rates to encourage investment 29. Match the following banking terms in Column I with


Ans their descriptions in Column II:

(C) Decreasing the money supply Column I Column II

Deficient demand occurs when aggregate demand is 1 Cash Reserve a Fraction of deposits banks
below full-employment output. Raising government Ratio must hold in liquid assets
spending, cutting taxes, and lowering interest rates 2 Repo Rate b Interest rate at which
encourage spending, boosting demand. A decreased the central bank lends to
money supply does the opposite, curbing credit commercial banks
availability and consumption, thus potentially further 3 Statutory c Ability of banks to multiply
worsening deficient demand rather than resolving Liquidity Ratio deposits through loans
under utilization of resources and high unemployment.
4 Credit d Percentage of deposits
27. The investment multiplier measures the change in Creation banks keep with the central
equilibrium income resulting from a one-unit change in bank
which component? Options:
(A) Government expenditure (A) 1–d, 2–b, 3–a, 4–c
(B) Exports (B) 1–a, 2–c, 3–b, 4–d
(C) Marginal propensity to consume (C) 1–c, 2–d, 3–a, 4–b
(D) Investment (D) 1–b, 2–a, 3–d, 4–c


Ans

Ans
(D) Investment (A) 1–d, 2–b, 3–a, 4–c
The investment multiplier concept examines how an Cash Reserve Ratio (d) is the portion of deposits banks
increase in autonomous investment leads to multiple must keep at the central bank. The Repo Rate (b) is
increases in national income. Because the initial the interest rate for borrowing from the central bank.
spending circulates repeatedly through consumption, Statutory Liquidity Ratio (a) requires banks to hold
each round generates further demand. Consequently, liquid assets, while credit creation (c) reflects expansion
a single unit of added investment amplifies overall of deposits through loans.
income, reflecting the multiplier effect within robust
macroeconomic equilibrium analysis. 30. Which statements about money are correct?
1. Money is a unit of account
28. Which statement compares involuntary unemployment 2. Money is always backed by gold reserves
to full employment? 3. Money serves as a medium of exchange
(A) In involuntary unemployment, all who want work 4. Fiat money has no intrinsic value
have it

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 PRACTICE PAPER 05

Select the correct combination. inject liquidity, which would raise the money supply
(A) 1, 2, and 3 only instead of curtailing it.
(B) 1, 3, and 4 only
33. Which of the following best defines a surplus budget?
(C) 2 and 3 only
(D) 2 and 4 only (A) Government receipts equal government
expenditure


Ans (B) Government receipts exceed government
(B) 1, 3, and 4 only expenditure
Money functions as a medium of exchange, a unit of (C) Government expenditure exceeds government
account, and a store of value. Modern fiat money, like receipts
currency notes, lacks intrinsic worth but is accepted by (D) Government expenditure is set to zero
law and social convention. Not all currency is backed

Ans
by gold reserves, making statement 2 incorrect in most
economies globally today. (B) Government receipts exceed government
expenditure
31. Arrange the following in the sequence through which A surplus budget arises when the government collects
money is created by commercial banks: more revenue than it spends during a fiscal period.
I. Bank receives deposits This typically indicates contractionary policy, aimed
II. Bank lends out a portion at reducing aggregate demand or controlling inflation.
III. Borrowers spend the loan While it can boost financial stability, persistent
IV. Deposited funds become bank reserves for further surpluses may significantly limit public investment in
lending infrastructure and social welfare programs.
(A) I → III → II → IV
34. Which statements are correct regarding revenue
(B) I → II → III → IV
(C) II → IV → I → III expenditure?
(D) I → IV → III → II 1. It does not create assets
2. It relates to the normal operating expenses of


Ans government
(B) I → II → III → IV 3. It includes spending on building schools and
Initially, deposits enter the bank (I). The bank then hospitals
retains required reserves and lends the remainder (II). 4. It may serve welfare schemes
Borrowers spend these loans (III), creating new deposits Select the correct combination.
in the banking system. Lastly, those newly deposited (A) 1, 2, and 4 only
funds expand reserves (IV), enabling additional lending. (B) 2 and 3 only
This cycle underpins the core commercial banks’ money (C) 1, 3, and 4 only
creation process. (D) 1, 2, and 3 only

32. What is the best way for a central bank to reduce money

Ans
supply in the economy? (A) 1, 2, and 4 only
(A) Lowering the Cash Reserve Ratio Revenue expenditure typically funds ongoing
(B) Buying government bonds in the open market operational costs, wages, and welfare programs without
(C) Increasing the Repo Rate creating lasting assets. Constructing schools or hospitals
(D) Decreasing the Statutory Liquidity Ratio (statement 3) is capital expenditure, generating tangible


Ans assets. However, revenue spending can still benefit
welfare initiatives (statement 4), underscoring the non-
(C) Increasing the Repo Rate asset-based yet essential nature of these very important
An increased Repo Rate makes borrowing costlier for recurring government expenses.
commercial banks, prompting them to limit credit
expansion. This reduces the money supply circulating 35. Which deficit is calculated by subtracting interest
in the economy. Lowering the Cash Reserve Ratio or payments from the fiscal deficit?
Statutory Liquidity Ratio and buying bonds, conversely, (A) Revenue deficit
(B) Primary deficit

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page 56 CUET UG Economics

(C) Budget deficit (D) The official currency holdings of a nation

(D) Effective revenue deficit

Ans


Ans (C) A systematic record of all economic transactions
(B) Primary deficit with the rest of the world
The primary deficit represents the fiscal deficit minus The balance of payments compiles every monetary
interest payments. It gauges the extent to which the transaction between residents and non-residents,
government’s current expenditures exceed receipts, including trade in goods and services, income flows,
excluding past debt obligations. By removing interest and capital transfers. It tracks how money enters and
costs, analysts focus on the core imbalance between exits an economy, offering insights into a nation’s global
revenue and non-interest expenditure, highlighting the position. Surpluses or deficits have crucial impacts on
government’s more immediate operational financial exchange rates and reserves.
standing position.
39. Which component of the BoP records transactions
36. Which of the following is not a classification of involving the import and export of goods and services?
government receipts? (A) Capital Account
(A) Revenue receipts (B) Current Account
(B) Capital receipts (C) Financial Account
(C) Expenditure receipts (D) Official Reserve Account
(D) Tax receipts

Ans


Ans (B) Current Account
(C) Expenditure receipts The current account details trade in merchandise (visible
Government receipts fall primarily into revenue items), services (invisible items), and income flows like
receipts, derived from taxes and non-tax incomes, and interest or dividends. It reflects everyday transactions
capital receipts, which include loans, disinvestment directly affecting national output and consumption. In
proceeds, or recoveries of loans. Tax receipts are a major contrast, the capital and financial accounts track most
subset of revenue receipts. “Expenditure receipts” is not significant investment flows and changes in foreign
a recognized category, as expenditure typically refers assets, liabilities, and reserve movements.
exclusively to government outflows.
40. What is one merit of a fixed exchange rate system?
37. What does a flexible exchange rate system rely on? (A) Exchange rates frequently fluctuate
(A) Central bank fixes the currency value (B) It creates uncertainty for international trade
(B) Government imposes strict exchange controls (C) Price stability in foreign transactions
(C) Market forces of demand and supply (D) Requires zero government intervention
(D) Bilateral treaties only

Ans


Ans (C) Price stability in foreign transactions
(C) Market forces of demand and supply Under a fixed exchange rate, the currency’s value
Under a flexible exchange rate, currency values fluctuate remains pegged to another currency or a basket, offering
based on foreign exchange market conditions. Demand consistency in cross-border contracts. Traders and
for imports, exports, capital flows, and speculation all investors benefit from predictable exchange conversions,
influence the exchange rate. Governments and central reducing risk. However, maintaining this stability often
banks may intervene occasionally, but the primary requires strict government or central bank intervention
determinant is how much buyers and sellers value the and vigilance through foreign exchange reserves.
currency at any moment.


Direction :Carefully read the case study provided and then
38. What is meant by the balance of payments (BoP)? thoroughly answer the subsequent five questions.
(A) A record of only visible trade In a local economy, the government imposes a price
(B) The difference between exports and imports of ceiling on essential cooking oil, setting it below the
goods equilibrium price. Retailers complain that their profit
(C) A systematic record of all economic transactions margins shrink, and some reduce supplies. Long queues
with the rest of the world form at shops, and consumers face rationing. Despite the

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 PRACTICE PAPER 05

low price, not everyone obtains the oil due to shortages. (C) To make cooking oil more affordable for low-
Meanwhile, a parallel market emerges where cooking oil income consumers
is sold illegally at much higher prices. Policymakers argue (D) To eliminate black-market activities entirely
that the measure ensures affordability for low-income

Ans
groups, but critics claim it creates inefficiency and unfair
distribution. Observers note that government agencies (C) To make cooking oil more affordable for low-income
struggle to monitor compliance, and shops often run out consumers
of stock prematurely. Economists suggest alternative ways Governments impose price ceilings primarily to
to support consumers, such as direct subsidies or targeted safeguard vulnerable groups by making essential goods
cash transfers, to reduce distortions. Local producers less expensive. In theory, this policy should help those
complain about reduced incentives to expand production. with limited purchasing power. However, unintended
consequences often arise, such as shortages and black
41. Which phenomenon is most directly highlighted by markets, because producers lose incentives to supply
long queues and limited oil availability? adequate quantities at the lower regulated price.
(A) Surplus in the market
44. What challenge is indicated by retailers reducing
(B) Excess demand leading to shortage
(C) Equilibrium price stability supplies and a parallel market forming?
(D) Perfect competition (A) Effective government monitoring
(B) Equilibrium price discovery


Ans (C) Distortions caused by price controls
(B) Excess demand leading to shortage (D) Unlimited consumer access
The price ceiling set below equilibrium causes

Ans
demand to exceed supply at that artificially low price.
Consequently, consumers queue for scarce quantities, (C) Distortions caused by price controls
indicating a shortage. This mismatch arises because Retailers cut back on stock due to profitability concerns
producers supply less at the reduced price, while under imposed ceilings, creating artificial shortages.
consumers demand more, often illustrating the classic Parallel markets then emerge to meet unsatisfied
regulatory outcome in practice. demand at higher prices. These distortions illustrate
how regulations can disrupt normal real-world market
42. Which outcome in the passage indicates the presence of signals, prompting inefficiency, increased transaction
a black market? costs, and often unequal access for different consumer
(A) Government agencies easily enforcing the price segments.
ceiling
45. What alternative measure could address affordability
(B) Cooking oil sold at a much higher rate illegally
(C) Shops complying fully with official price limits without creating shortages, as noted by economists?
(D) Consumers accessing unlimited oil supplies (A) Maintaining strict ceilings
(B) Outlawing all private sales


Ans (C) Offering direct subsidies or targeted cash transfers
(B) Cooking oil sold at a much higher rate illegally (D) Encouraging hoarding by retailers
A price ceiling below equilibrium typically spawns

Ans
unauthorized trading as suppliers seek higher gains
outside legal channels. Limited official supply cannot (C) Offering direct subsidies or targeted cash transfers
satisfy demand, prompting some sellers to charge illegal Direct subsidies or targeted transfers preserve market
prices. This covert market undermines policy objectives, pricing, ensuring producers receive adequate returns
displaying a direct link between artificial constraints and continue supplying. Consumers in need can afford
and often significantly unregulated, more expensive essential goods without causing artificial shortages.
transactions. This approach minimizes black-market incentives and
administrative complexities, balancing affordability
43. Which statement best describes the rationale behind the with efficiency, ultimately significantly mitigating the
price ceiling? common distortions linked to rigid price ceilings.
(A) To ensure producers earn maximum profit
(B) To stimulate overproduction of cooking oil

Direction :Carefully read the case study provided and then
thoroughly answer the subsequent five questions.

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page 58 CUET UG Economics

In an open economy, a country’s currency fluctuates 48. Which central bank action might slow currency
freely against major world currencies. Recently, exports appreciation?
have surged, driven by improved product quality and (A) Purchasing domestic currency in the open market
competitive pricing. This rising export revenue strengthens (B) Selling domestic currency reserves
the domestic currency’s demand in foreign exchange (C) Banning trade in foreign goods
markets. Meanwhile, investors abroad show interest in local (D) Allowing only fixed exchange rates
bonds due to relatively higher interest rates, further fueling

Ans
capital inflows. As the currency appreciates, exporters
voice concerns about losing price advantage. Importers, (B) Selling domestic currency reserves
however, benefit from cheaper foreign goods. The central By selling domestic currency, the central bank increases
bank debates whether to intervene by selling domestic its supply in foreign exchange markets, potentially
currency reserves to moderate volatility. Critics argue such reducing upward pressure on the exchange rate. This
moves can deplete foreign reserves if not carefully managed. intervention can help moderate rapid appreciation,
Supporters claim limited intervention can stabilize sudden though excessive interference may diminish foreign
swings. Ultimately, the currency’s value remains closely tied reserves. Finding the balance between stability and
to market perceptions and capital flows. Analysts monitor allowing market forces to function is ultimately key.
exchange rate fluctuations to gauge competitiveness. 49. What concern do critics have about intervention in the
46. Why does the currency appreciate according to the foreign exchange market?
passage? (A) It lowers bond yields for foreign investors
(A) Decreased foreign interest in local bonds (B) It can rapidly increase export earnings
(B) Rising export demand and capital inflows (C) It may deplete valuable foreign reserves
(C) A price ceiling enforced by the government (D) It ensures permanent currency depreciation
(D) Official banning of imports

Ans


Ans (C) It may deplete valuable foreign reserves
(B) Rising export demand and capital inflows Critics warn that continuous market intervention
Higher export demand increases foreign buyers’ need for forces the central bank to buy or sell large amounts of
domestic currency, boosting its value. Simultaneously, currency, using up precious foreign reserves. If done
overseas investors purchase local bonds for better interest excessively or without clear policy goals, reserves may
returns, creating additional currency demand. Combined, run dangerously low, disrupting planning. This risk
these factors raise the exchange rate under a flexible makes some policymakers hesitant to stabilize exchange
regime, as market forces reflect stronger overall perceived rates too aggressively.
economic conditions and investment prospects. 50. What fundamental factor does the passage emphasize
47. Which group benefits most from an appreciating for determining a flexible exchange rate?
domestic currency? (A) Strict government regulation
(A) Exporters seeking price competitiveness (B) Global trade bans
(B) Importers buying cheaper foreign goods (C) Market perceptions and capital flows
(C) Tourists visiting expensive destinations (D) Manipulation by external agencies
(D) Domestic workers demanding higher wages

Ans


Ans (C) Market perceptions and capital flows
(B) Importers buying cheaper foreign goods Under flexible exchange regimes, the currency’s value
An appreciating currency reduces the cost of importing largely reflects how participants gauge economic
goods and services, making foreign products more performance, interest differentials, and risk. Positive
affordable for domestic buyers. Conversely, exporters sentiment spurs investment inflows, boosting demand
may lose their competitive edge as their goods become for the currency. Conversely, negative outlooks or
costlier abroad. Thus, import-dependent firms and capital flight weaken it. Thus, market forces, anchored in
consumers gain significant immediate advantages from perceptions and movements of money, shape exchange
stronger exchange rates in global markets overall very. rates directly.


*************

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 PRACTICE PAPER 06

PRACTICE PAPER 06

1. Which of the following best defines microeconomics? Central economic problems revolve around using
(A) The study of aggregate national income scarce resources effectively, deciding what, how, and for
(B) The study of individual units like consumers and whom to produce. Having infinite resources or inputs is
firms unrealistic and not part of standard economic concerns.
(C) The study of interactions between different Instead, scarcity forces choices and trade-offs, defining
countries the core of any economy’s fundamental decision-
(D) The study of government fiscal policy alone making framework.


Ans 4. How do scarcity and choice interrelate in
(B) The study of individual units like consumers and microeconomics?
firms (A) Scarcity eliminates the need for choice
Microeconomics examines how individual decision (B) Choice is unnecessary when resources are abundant
makers—such as consumers, firms, and resource (C) Scarcity compels individuals to make trade-offs
owners—allocate scarce resources. It focuses on among alternatives
market mechanisms that establish relative prices, (D) Choice leads to infinite availability of resources
guiding production and consumption choices. By

Ans
contrast, macroeconomics addresses broader variables
like inflation, employment, and overall output in the (C) Scarcity compels individuals to make trade-offs
national or global economy. among alternatives
Limited resources cannot satisfy unlimited wants,
2. What does the slope of a production possibility curve prompting decision makers to evaluate options and
(PPC) typically represent? forgo certain goods or services for others. This necessity
(A) Opportunity cost between two goods for trade-offs underlies micro economic theory. Each
(B) Total utility gained from consumption choice involves an opportunity cost, reflecting what is
(C) Price elasticity of demand sacrificed when prioritizing one allocation of resources
(D) Income distribution in an economy over another.


Ans 5. Under the law of diminishing marginal utility, what
(A) Opportunity cost between two goods happens as a consumer consumes additional units of a
The PPC illustrates trade-offs when choosing how much good?
of two goods to produce given finite resources. The (A) Total utility remains constant
slope indicates how many units of one good must be (B) Marginal utility decreases
sacrificed to produce an additional unit of another. This (C) Price increases automatically
concept highlights opportunity cost, a central theme of (D) Demand for other goods becomes zero
microeconomic resource allocation.

Ans
3. Which statement is not associated with a central (B) Marginal utility decreases
economic problem? The law of diminishing marginal utility states that as an
(A) Making decisions on what goods to produce individual consumes more of a particular product over
(B) Deciding how to produce those goods a specific time, the additional satisfaction (marginal
(C) Determining for whom these goods are produced utility) gained from each extra unit tends to decline. This
(D) Establishing an infinite stock of inputs principle helps explain why demand curves generally


Ans slope downward, reflecting reduced willingness to pay.

(D) Establishing an infinite stock of inputs

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6. Price elasticity of demand measures the responsiveness (B) 2 and 4 only

of: (C) 1 and 2 only
(A) Demand to changes in consumer income (D) 1, 2, and 3 only
(B) Supply to changes in technology

Ans
(C) Demand to changes in the product’s own price
(D) Costs to changes in production scale (A) 1, 3, and 4 only
Market demand is the aggregate of every individual’s


Ans demand for a product. Non-price factors—such as
(C) Demand to changes in the product’s own price tastes, income, and related goods’ prices—can shift
Price elasticity of demand quantifies how much quantity the entire curve. Statement 2 is incorrect because price
demanded varies when the product’s price changes, changes create movement along the curve, not a shift.
holding other factors constant. A higher elasticity Potential buyers are included in the overall demand
indicates a substantial response in demand to price sum.
fluctuations, while a lower elasticity suggests consumers
9. Which cost curve initially falls due to spreading fixed
are less sensitive to price. This concept guides pricing
and revenue strategies. costs but eventually rises because of diminishing
returns?
7. Match the following concepts with their descriptions: (A) Average Variable Cost
(B) Average Total Cost
Column I Column II
(C) Marginal Cost
1. Substitute goods a.
Goods used together (D) Total Fixed Cost
(like bread and butter)


Ans
2. Complementary b. Goods that replace each
goods other (like tea and coffee) (B) Average Total Cost
3. Normal goods c. Goods whose demand Average total cost (ATC) comprises both fixed and
decreases as income rises variable costs per unit. At lower outputs, fixed costs
spread over more units, decreasing ATC. Later,
4. Inferior goods d. Goods whose demand
diminishing returns cause variable costs to escalate,
increases as income
pushing ATC upward. Thus, ATC typically displays a
increases
U-shaped curve across different production levels in the
Options: short run.
(A) 1–a, 2–b, 3–c, 4–d
(B) 1–b, 2–a, 3–d, 4–c 10. How do variable costs differ from fixed costs in the short
(C) 1–c, 2–d, 3–b, 4–a run?
(D) 1–d, 2–c, 3–a, 4–b (A) Variable costs never change regardless of output
(B) Fixed costs vary directly with output changes


Ans
(C) Variable costs rise with output, whereas fixed costs
(B) 1–b, 2–a, 3–d, 4–c remain constant
Substitutes (b) are goods people use in place of one (D) Both remain constant even if no output is produced
another, such as tea or coffee. Complements (a) are


Ans
consumed jointly, like bread and butter. Normal goods
(d) experience rising demand with higher incomes, (C) Variable costs rise with output, whereas fixed costs
whereas inferior goods (c) see a drop in demand as remain constant
consumers become more affluent. In the short run, fixed costs—such as rent—do not
fluctuate with output levels, whereas variable costs—
8. Which of the following statements about market like raw materials—increase or decrease according to
demand are correct? production volume. This distinction is crucial for cost
1. It sums all individual demands analysis: fixed costs must be paid regardless of output,
2. It shifts only if product price changes while variable costs adjust based on productive activity.
3. It can shift due to changing tastes
4. It includes demands of all potential buyers 11. Assertion (A) : Marginal cost eventually rises in the
(A) 1, 3, and 4 only short run.

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 PRACTICE PAPER 06

Reason (R) : Increasing utilization of variable factors 14. Which market structure is characterized by a single
ultimately leads to diminishing returns. seller and no close substitutes for its product?
(A) Both (A) and (R) are true, and (R) is the correct (A) Oligopoly
explanation of (A). (B) Monopolistic competition
(B) Both (A) and (R) are true, but (R) is not the correct (C) Monopoly
explanation. (D) Perfect competition
(C) (A) is true, (R) is false.

Ans
(D) (A) is false, (R) is true.
(C) Monopoly


Ans A monopoly has one supplier controlling the entire
(A) Both (A) and (R) are true, and (R) is the correct market for a good or service that has no close
explanation of (A). substitutes. High barriers to entry—such as patents or
As more units of variable inputs (e.g., labor) are applied large capital requirements—shield the monopolist from
to fixed facilities, the marginal product eventually competition, granting substantial market power over
declines, raising the cost of producing additional units. price and output levels.
This principle of diminishing returns explains why
15. Arrange these steps to find the equilibrium price under
marginal cost, after initially falling, starts to climb at
higher output levels, making (R) the cause of (A). perfect competition:
I. Draw the market supply curve
12. Which measure is most relevant to a firm deciding II. Identify the market demand curve
whether to produce an additional unit of output? III. Determine the intersection point
(A) Total cost IV. Read off the price at which quantity demanded
(B) Average cost equals quantity supplied
(C) Marginal cost (A) I → II → III → IV
(D) Fixed cost (B) II → I → IV → III


Ans (C) I → III → IV → II
(D) I → II → III → IV
(C) Marginal cost
Marginal cost indicates how much total cost increases

Ans
when one extra unit is produced. If marginal cost is (D) I → II → III → IV
below the market price, producing another unit is First, the market supply curve is plotted (I). Next, the
profitable. By comparing marginal cost to marginal market demand curve is identified (II). Their intersection
revenue, firms determine whether additional output (III) reveals the equilibrium. Finally, reading that
increases or decreases overall profit, guiding short-run intersection value (IV) gives the price where quantity
production decisions. demanded equals quantity supplied. This systematic
approach determines competitive market equilibrium
13. Which of the following is not a feature of perfect effectively.
competition?
(A) Homogeneous products 16. Match the following market situations with their
(B) Large number of buyers and sellers descriptions:
(C) Complete freedom of entry and exit
Column I Column II
(D) Significant price-setting power by individual firms
1 Excess a Quantity supplied exceeds


Ans demand quantity demande
(D) Significant price-setting power by individual firms 2 Excess supply b Government sets minimum
In perfect competition, each firm is a price taker price above equilibrium
because of identical products and intense competition. 3 Equilibrium c Quantity demanded
With many buyers and sellers, no single participant can exceeds quantity supplied
influence the market price. Free entry and exit ensure
4 Price floor d Demand equals supply
continuous alignment of price with average costs,
contradicting any substantial price-setting capacity. Options:
(A) 1–c, 2–a, 3–d, 4–b

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(B) 1–a, 2–c, 3–b, 4–d 19. Which policy tool best addresses consumer shortages
(C) 1–d, 2–b, 3–a, 4–c caused by a price ceiling?
(D) 1–b, 2–d, 3–c, 4–a (A) Implementing a price floor simultaneously


Ans (B) Introducing supply-side measures to boost
production
(A) 1–c, 2–a, 3–d, 4–b (C) Banning all substitutes
Excess demand (c) arises when more is demanded than (D) Allowing producers to form cartels
supplied at a given price. Excess supply (a) is the opposite
case. Equilibrium (d) occurs where quantity demanded

Ans
equals quantity supplied, with no surplus or shortage. (B) Introducing supply-side measures to boost
A price floor (b) is a government-imposed minimum production
above equilibrium, creating potential surpluses. If demand exceeds supply because of an artificially low
ceiling, increasing supply can mitigate shortages without
17. Which statements about subsidy effects are correct? removing the price cap. Supply-side policies—like
1 They lower production costs for producers offering subsidies, improving technology, or reducing
2. They reduce consumer prices if passed on input costs—enable producers to meet higher demand.
3. They remove the concept of opportunity cost This approach tackles root causes rather than simply
4. They can lead to higher output levels adjusting mandated price limits.
(A) 1 and 2 only
(B) 2, 3, and 4 only 20. Which principle underlies the idea of “Food Availability
(C) 1, 2, and 4 only Decline (FAD) Theory” in simple supply-demand
(D) 1, 3, and 4 only applications?


Ans (A) Starvation is never related to supply constraints
(B) Food scarcity arises solely due to incorrect policies
(C) 1, 2, and 4 only (C) A decrease in total food supply causes shortages
Subsidies help producers cover part of their costs and higher prices
(1), enabling lower consumer prices if firms transfer (D) Growing demand always lowers prices
the benefit (2). Extra production may be incentivize,
boosting supply (4). However, subsidies do not eliminate

Ans
opportunity cost (3); resources remain limited, so (C) A decrease in total food supply causes shortages and
supporting one sector still implies trade-offs elsewhere higher prices
in the economy. The Food Availability Decline theory suggests that if
food supply diminishes relative to demand, prices rise
18. Assertion (A) : A price ceiling set above equilibrium has and shortages ensue. This situation often underpins
no immediate effect. famine conditions, illustrating how reduced production
Reason (R) : Equilibrium price is typically lower than or disrupted distribution triggers higher prices,
the ceiling, so transactions proceed at equilibrium levels. eventually limiting access for vulnerable groups in a
(A) Both (A) and (R) are true, and (R) explains (A). straightforward demand-supply framework.
(B) Both (A) and (R) are true, but (R) does not explain
(A). 21. Which of the following is not included in the calculation
(C) (A) is true, (R) is false. of GDP by the value-added method?
(D) (A) is false, (R) is true. (A) Intermediate inputs purchased by firms


Ans (B) Wages paid to labor
(C) Profit earned by entrepreneurs
(A) Both (A) and (R) are true, and (R) explains (A). (D) Depreciation on capital equipment
A price ceiling above equilibrium does not constrain
the market, as the actual transaction price remains at

Ans
equilibrium or below the legal maximum. Hence, it (A) Intermediate inputs purchased by firms
becomes a non-binding control. Since the ceiling never The value-added method adds each firm’s contribution
“bites,” no shortage or surplus is generated, making the to the final product’s value, excluding the costs of
reason valid for explaining the assertion. intermediate goods to avoid double-counting. Wages,
profits, and depreciation reflect part of the firm’s value

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 PRACTICE PAPER 06

addition. Intermediate inputs’ costs are subtracted to broader macroeconomic aggregates, not the portion of
isolate the net increase in product value at every stage. income left after taxes.

22. Which statements about circular flow in a three-sector 25. In a simple Keynesian model, if MPC (marginal
model (households, firms, government) are correct? propensity to consume) is 0.8, what happens when
1. Government injects spending into the economy investment increases by ₹100?
2. Households pay taxes to government (A) National income remains unchanged
3. All income is saved (B) National income increases by ₹100
4. Firms receive factor services from households (C) National income rises by a multiple of ₹100
(A) 1, 2, and 4 only (D) National income decreases by 80% of ₹100
(B) 2 and 3 only

Ans
(C) 1 and 3 only
(D) 2, 3, and 4 only (C) National income rises by a multiple of ₹100
The Keynesian multiplier is 1/(1 – MPC). With MPC


Ans = 0.8, the multiplier is 1/0.2 = 5. Thus, a ₹100 increase
(A) 1, 2, and 4 only in investment leads to an overall ₹500 rise in national
A three-sector model includes government, which taxes income. This expansion occurs because each round of
households (2) and injects expenditures (1). Firms still spending induces additional consumption, multiplying
buy factor services (labor, capital) from households the initial injection’s effect.
(4). Not all income is saved (statement 3 is incorrect);
26. Match the following terms with their definitions:
some is taxed, some is spent, and some is saved, creating
multiple flows in the economy. Column I Column II
23. Which measure is not used to compute national income? 1 Full employment a Desired level of output
(A) Income method firms plan to produce
(B) Expenditure method 2 Involuntary b Willing workers cannot
(C) Value-added method unemployment find jobs at current wage
(D) Depreciation method 3 Aggregate c Situation where all willing


Ans supply workers find jobs
4 Aggregate d Total planned spending
(D) Depreciation method
demand in an economy
National income can be calculated through the income
method (adding all factor incomes), the expenditure Options:
method (summing all final expenditures), or the (A) 1–c, 2–b, 3–a, 4–d
value-added method (sum of value additions at each (B) 1–b, 2–c, 3–d, 4–a
production stage). Depreciation is an adjustment factor, (C) 1–a, 2–d, 3–c, 4–b
not a standalone method for deriving total national (D) 1–d, 2–b, 3–a, 4–c
income.

Ans
24. Which concept represents the total personal income (A) 1–c, 2–b, 3–a, 4–d
minus direct personal taxes? Full employment (c) implies everyone who wants a job
(A) Disposable personal income at prevailing wages gets one. Involuntary unemployment
(B) Gross national income (b) describes job seekers who cannot find work at the
(C) Private income current wage. Aggregate supply (a) captures the total
(D) Net national product output firms intend to produce, while aggregate demand
(d) is total planned expenditure in the economy.


Ans
(A) Disposable personal income 27. Assertion (A) : High marginal propensity to consume
Disposable personal income equals the personal income can lead to a larger multiplier effect.
that households actually have at their disposal after Reason (R) : Saving more of every additional rupee
paying personal direct taxes. It measures how much earned expands the multiplier.
individuals can spend or save. Other concepts—such as (A) Both (A) and (R) are true, and (R) explains (A).
gross national income or net national product—reflect (B) Both (A) and (R) are true, but (R) does not explain

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(A). and acting as a lender of last resort, functions not

(C) (A) is true, (R) is false. performed by commercial banks.
(D) (A) is false, (R) is true.
30. What is the primary function of a central bank’s Cash


Ans Reserve Ratio (CRR)?
(C) (A) is true, (R) is false. (A) To increase government revenue
A higher MPC indeed increases the multiplier, because (B) To safeguard depositors’ money by maintaining
each extra rupee spent circulates multiple times. reserves
However, saving more (low MPC) diminishes the (C) To eliminate all consumer debt
multiplier. Hence, the reason is incorrect: it’s higher (D) To ensure banks hold no vault cash
consumption, not higher saving, that magnifies the

Ans
chain reaction in spending, validating the assertion but
refuting the reason. (B) To safeguard depositors’ money by maintaining
reserves
28. What is the problem of excess demand? The CRR mandates that commercial banks keep a
(A) Planned aggregate demand exceeds the full- certain percentage of their deposits as cash reserves
employment level of output with the central bank. This helps secure depositors’
(B) Planned aggregate demand is less than the output funds, controls money supply, and ensures liquidity. A
available higher CRR decreases banks’ lending capacity, whereas
(C) Unemployment is persistently high a lower CRR allows more funds to be loaned out.
(D) The monetary base contracts unexpectedly
31. Which of the following is not a typical reform in modern


Ans banking systems?
(A) Planned aggregate demand exceeds the full- (A) Modernization of payment infrastructures
employment level of output (B) Enhanced digital services and online banking
Excess demand indicates that overall spending surpasses (C) Complete ban on all private banking operations
an economy’s capacity to produce at full employment. (D) Privatization of certain public-sector banks
As a result, inflationary pressures often arise, with

Ans
prices climbing because goods and services are
insufficient to meet demand. Policymakers may curtail (C) Complete ban on all private banking operations
this by tightening monetary conditions or reducing Recent banking reforms often encourage competition,
government spending to restore equilibrium. innovation, and technology adoption. Privatization and
modernization aim to improve efficiency and financial
29. How do commercial banks differ from the central bank? reach. Outright banning of private banking contradicts
(A) Commercial banks issue currency notes directly these reform goals, as private-sector participation
(B) The central bank is profit-driven, while commercial typically strengthens competitive forces and provides
banks set monetary policy diverse financial services to consumers and businesses
(C) Commercial banks accept deposits and lend, while alike.
the central bank regulates the banking system and
32. Match the following monetary tools in Column I with
issues currency
(D) Both serve exactly the same function in managing their purposes in Column II:
national reserves Column I Column II


Ans 1 Repo rate a Minimum liquid assets
(C) Commercial banks accept deposits and lend, while banks must hold
the central bank regulates the banking system and issues 2 Open Market b Rate at which
currency Operations central bank lends to
Central banks provide the monetary base, oversee (OMOs) commercial banks
financial stability, and craft monetary policy. 3 Bank rate c Buying/selling
Commercial banks focus on deposit-taking, lending, government securities
and other retail or corporate banking activities. The to control money
central bank’s unique power includes issuing currency supply

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 PRACTICE PAPER 06

4 Statutory Liquidity d Long-term rate Meanwhile, GST, income tax, and user charges are
Ratio (SLR) for central bank revenue receipts because they do not involve liabilities
refinancing of or asset reductions.
commercial banks 35. Which of the following does not reduce a fiscal deficit?
Options: (A) Lower government expenditure
(A) 1–b, 2–c, 3–d, 4–a (B) Higher tax revenue
(B) 1–c, 2–b, 3–a, 4–d (C) Borrowing more from international markets
(C) 1–d, 2–a, 3–c, 4–b (D) Sale of surplus government land
(D) 1–a, 2–d, 3–b, 4–c


Ans


Ans
(C) Borrowing more from international markets
(A) 1–b, 2–c, 3–d, 4–a The fiscal deficit measures the shortfall between
The repo rate (b) is the short-term lending rate from government expenditure and revenue (excluding
the central bank. Open Market Operations (c) involve borrowing). Boosting revenue (e.g., taxes) or curbing
purchasing or selling government securities to manage spending narrows that gap. Selling government property
liquidity. The bank rate (d) reflects a longer-term also generates revenue. However, borrowing simply
refinancing rate. Finally, SLR (a) requires banks to hold finances the deficit; it does not reduce the gap and may
a specified proportion of deposits in liquid assets. even raise future debt obligations.

33. Assertion (A) : A government budget can be used to 36. What is revenue deficit?
control inflation. (A) Difference between capital receipts and capital
Reason (R) : Increasing direct taxes will raise disposable expenditure
income, spurring demand. (B) Excess of revenue expenditure over revenue receipts
(A) Both (A) and (R) are true, and (R) explains (A). (C) Shortfall of total receipts over total expenditure
(B) Both (A) and (R) are true, but (R) does not explain (D) Deficit after subtracting interest payments from
(A). total deficit
(C) (A) is true, (R) is false.


Ans
(D) (A) is false, (R) is true.
(B) Excess of revenue expenditure over revenue receipts


Ans
A revenue deficit arises when a government’s current
(C) (A) is true, (R) is false. or operational expenses—such as salaries, subsidies,
Fiscal measures like reducing government spending and interest—exceed its revenue collections (taxes and
or increasing taxes can counter inflation by lowering non-tax revenue). This gap indicates the extent to which
aggregate demand. However, higher direct taxes do routine obligations surpass available inflows, often
not raise disposable income; they reduce it. Thus, the requiring borrowing or asset sales to finance day-to-day
assertion about using the budget to control inflation is operations.
correct, but the reason provided contradicts basic tax
effects. 37. Which factor typically determines the exchange rate
under a floating regime?
34. Which component is part of capital receipts in a (A) Fixed parity set by the central bank
government budget? (B) Legislative decree imposing a specific value
(A) GST collections (C) Demand and supply conditions in the foreign
(B) Income tax revenues exchange market
(C) Disinvestment proceeds from selling public assets (D) Military cooperation pacts with neighboring
(D) Revenue from service charges nations


Ans

Ans
(C) Disinvestment proceeds from selling public assets (C) Demand and supply conditions in the foreign
Capital receipts relate to funds that either create a exchange market
liability or reduce government assets. Disinvestment In a floating exchange rate system, currency values
proceeds come from selling shares or stakes in public fluctuate according to market forces. If there is higher
enterprises, thereby reducing government holdings. demand for a currency—due to exports or capital

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inflows—its value tends to rise. Conversely, weaker (B) 1–c, 2–a, 3–b, 4–d
demand or higher supply drives depreciation. Policy (C) 1–a, 2–d, 3–c, 4–b
interventions are minimal, leaving markets to determine (D) 1–b, 2–c, 3–a, 4–d
the rate.

Ans
38. Which of the following items is recorded in the capital (A) 1–a, 2–c, 3–d, 4–b
account of the Balance of Payments? The current account (a) covers trade in goods and
(A) Import of consumer electronics services plus net income flows. The capital account
(B) Export of agricultural products (c) includes capital transfers like debt forgiveness.
(C) Inflow of foreign direct investment The financial account (d) records foreign direct and
(D) Payment for foreign tourism services portfolio investments. Official reserve transactions (b)


Ans capture central bank actions regarding foreign exchange
reserves to stabilize currency.
(C) Inflow of foreign direct investment
The capital account (often combined with the financial

Direction :Carefully read the case study provided and then
account) tracks cross-border investments, including thoroughly answer the subsequent five questions.
foreign direct investments, portfolio investments, and A regional government launches a subsidy program to
external borrowings. Imports and exports of goods or boost domestic wheat production, aiming to stabilize
services belong in the current account. Tourism-related prices and ensure food security. Farmers receive financial
payments also appear under services in the current support per unit of wheat sold, lowering their effective cost
account, not under capital transactions. of production. Initially, wheat output rises, and market
prices drop slightly, benefiting consumers. However,
39. How does a trade surplus differ from a trade deficit? critics note that some farmers produce wheat on marginal
(A) A surplus arises when imports exceed exports lands with low efficiency, just to collect subsidies. The
(B) A deficit exists when exports exceed imports government’s fiscal burden grows as more producers
(C) A surplus indicates that exports surpass imports file claims. Meanwhile, certain traders report that
(D) Both terms refer only to capital flows, not goods oversupply could lead to wastage if storage infrastructure
trade is inadequate. Proponents argue that expanded output


Ans helps shield the region from sudden supply shocks. Despite
(C) A surplus indicates that exports surpass imports diverging opinions, policymakers maintain that careful
A trade surplus means a country’s exported goods and subsidy design and concurrent investment in agricultural
services exceed its imports in monetary value, typically infrastructure can enhance productivity and overall
leading to a net inflow of foreign currency. By contrast, market stability.
a trade deficit arises when imports outweigh exports, 41. Which outcome is immediately observed from the
reflecting a net outflow of currency for that period. subsidy on wheat?
40. Match the following balance of payments components (A) Rising consumer prices
in Column I with their descriptions in Column II: (B) Decline in wheat output
(C) Increase in wheat production
Column I Column II (D) Ban on wheat exports
1 Current Account a Records trade in goods

Ans
and services
(C) Increase in wheat production
2 Capital Account b Monitors central bank
Subsidies lower production costs and incentivize farmers
dealings in foreign
to grow more wheat, as indicated. This enlarged supply
exchange reserves
can reduce prices for consumers. While the policy aims
3 Financial Account c Reflects government for food security, excessive expansion or poor resource
capital transfers allocation can occur, underscoring the importance of
4 Official Reserve d Tracks portfolio and managing both fiscal costs and productive efficiency.
Transactions direct investment flows
42. Which concern arises when farmers plant wheat on
Options:
marginal lands just to collect subsidies?
(A) 1–a, 2–c, 3–d, 4–b

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 PRACTICE PAPER 06

(A) Higher overall efficiency (B) Higher unemployment in farming areas

(B) Reduced government spending (C) Enhanced resilience against supply shocks
(C) Potential misallocation of resources (D) Greater reliance on food imports
(D) Creation of a black market for wheat

Ans


Ans (C) Enhanced resilience against supply shocks
(C) Potential misallocation of resources By expanding local wheat production, proponents
When farmers exploit subsidies by cultivating in low- argue that the region becomes less vulnerable to
productivity regions, inputs like land and labor may external disruptions like global supply chain breaks.
be wasted. The drive for subsidy payments supersedes An ample domestic supply can help control prices if
optimal land use or crop rotation decisions. This imports falter or if a poor harvest strikes elsewhere. This
distortion can yield subpar yields and strain government stability underpins the core rationale behind the subsidy
budgets, while not necessarily improving long-term program.
food security.


Direction :Carefully read the case study provided and then
43. What fiscal challenge does the government face thoroughly answer the subsequent five questions.
according to the passage? A small nation’s currency faces speculative pressures
(A) Decreasing revenue from import tariffs as investors worry about potential political instability.
(B) Overwhelming subsidy outlays for wheat Foreign capital outflows accelerate, reducing the
(C) Improved tax collection from farmers domestic currency’s value. The central bank intervenes,
(D) Surplus foreign exchange reserves selling foreign reserves to buy local currency and slow


Ans depreciation. Banks raise interest rates to attract short-
term capital inflows. This move temporarily eases pressure
(B) Overwhelming subsidy outlays for wheat on the currency but raises borrowing costs for businesses
As more farmers participate, the fiscal burden increases, and consumers. Exporters gain from a weaker currency,
forcing the government to allocate larger budgetary making their goods cheaper abroad, yet importers
resources to fulfill subsidy commitments. This can complain about higher input costs. Policymakers debate
crowd out other essential expenditures and strain public further interventions, with some advocating stricter
finances. If not carefully monitored, subsidy growth capital controls to stem outflows. Others argue that
may jeopardize fiscal sustainability while still failing to maintaining a flexible exchange rate, coupled with
ensure efficient output expansion. measured policy tools, is healthier in the long run.
44. Which supporting measure is suggested for better Overall, market sentiment and capital mobility shape the
management of increased wheat supply? country’s currency trajectory.
(A) Shutting down local storage facilities 46. What causes the domestic currency to depreciate
(B) Restricting farmers’ land usage initially?
(C) Investing in agricultural infrastructure (A) Rapid political reforms
(D) Eliminating market competition (B) Surge in foreign capital inflows


Ans (C) Speculative fears and capital outflows
(C) Investing in agricultural infrastructure (D) Rising global commodity prices
The passage highlights the risk of wastage from

Ans
oversupply if storage and related facilities are lacking. (C) Speculative fears and capital outflows
Improving warehouses, transportation, and processing Investor anxiety over political uncertainty prompts
infrastructure ensures surplus wheat is preserved and them to withdraw funds, increasing supply of the
distributed effectively. Such investments complement local currency on foreign exchange markets. Reduced
subsidies by preventing resource mismanagement and demand alongside growing supply depresses the
strengthening overall market stability for agricultural currency’s value. This phenomenon underscores how
commodities. market sentiment and capital mobility significantly
45. What broader benefit do subsidy proponents claim for influence exchange rates under relatively open financial
increasing domestic wheat output? conditions.
(A) Elevated inflation rates

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47. Which action does the central bank take to support the 50. What debate emerges among policymakers regarding
currency? future currency management?
(A) Buying foreign currency aggressively (A) Whether to adopt a barter system for all transactions
(B) Selling off domestic reserves to flood the market (B) Imposing capital controls vs. preserving a flexible
(C) Selling foreign reserves to purchase local currency exchange rate regime
(D) Imposing a price floor on the exchange rate (C) Fully abandoning central banking operations


Ans (D) Fixing the currency to foreign inflation rates

(C) Selling foreign reserves to purchase local currency

Ans

The bank draws down its foreign exchange assets to (B) Imposing capital controls vs. preserving a flexible
buy the domestic currency, propping up its value by exchange rate regime
reducing the currency’s market supply. This intervention Officials disagree on restricting capital outflows with
can stabilize the exchange rate in the short term, though tighter regulations or allowing market forces to set the
prolonged interventions risk depleting reserves and exchange rate. Advocates of capital controls want to curb
potentially undermining the bank’s credibility. speculative exits, while proponents of flexibility believe
moderate interventions suffice and that open markets
48. What side effect do higher interest rates have, according foster healthier long-term economic adjustments and
to the passage? investment flows.
(A) They immediately raise inflation
(B) They help businesses borrow more cheaply

*************
(C) They reduce borrowing costs for consumers
(D) They make loans more expensive, slowing
economic activity


Ans
(D) They make loans more expensive, slowing economic
activity
By raising interest rates, banks attract short-term capital
inflows, but businesses and households face costlier
credit. Investment and consumption may decline,
dampening economic momentum. Policymakers must
weigh the trade-off between stabilizing the currency
and maintaining affordable borrowing, highlighting the
delicate balance in monetary interventions.

49. Which group benefits from a weaker currency, as

mentioned?
(A) Importers relying on foreign inputs
(B) Exporters selling goods abroad
(C) Domestic consumers of imported products
(D) Foreign tourists visiting the country


Ans
(B) Exporters selling goods abroad
A weaker domestic currency lowers the price of exported
goods in foreign markets, potentially boosting overseas
sales. However, importers struggle with costlier inputs,
and local buyers of foreign products see rising prices. In
this scenario, export-oriented sectors typically enjoy a
competitive edge when the currency depreciates.

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 PRACTICE PAPER 07

PRACTICE PAPER 07

1. Which central problem deals with choosing one use of even though location decisions can be relevant in
resources over another in an economy? practical contexts.
(A) What to produce?
4. Arrange these steps in the correct chronological order
(B) When to produce?
(C) For whom to produce? when making an economic choice:
(D) How to produce? 1. Identify the alternatives
2. Evaluate the costs and benefits


Ans 3. Make the choice
(A) What to produce? 4. Recognize the scarcity of resources
“What to produce?” focuses on selecting which goods (A) 4 → 1 → 2 → 3
and services will be produced using scarce resources. (B) 1 → 4 → 2 → 3
Societies must prioritize certain outputs over others. (C) 4 → 2 → 1 → 3
This is a fundamental question in resource allocation, (D) 2 → 4 → 1 → 3
guiding decision-making on the best possible use of

Ans
limited factors of production, such as labor and capital.
(A) 4 → 1 → 2 → 3
2. The opportunity cost of a resource is best defined as: Economic decisions begin with realizing resources are
(A) The money spent on acquiring it. scarce (4). Next, viable alternatives are identified (1).
(B) The value of the next best alternative forgone. Then, one weighs costs and benefits of each option (2).
(C) The price paid to keep it in the same use. Finally, the choice is made (3). This sequence reflects the
(D) The profit gained after using it. systematic approach to resolving the problem of scarcity


Ans in economics.

(B) The value of the next best alternative forgone 5. The Law of Diminishing Marginal Utility implies that:
Opportunity cost represents the sacrifice of the next (A) Total utility declines after each unit of consumption.
most valued alternative. When choosing one option, (B) Marginal utility eventually becomes negative after
the lost benefits of the foregone choice become the each successive unit.
opportunity cost. This concept helps in evaluating (C) Additional satisfaction decreases as one consumes
trade-offs and ensuring efficient decisions about the use more units of a good.
of limited economic resources. (D) Price of a good consistently falls as consumption
rises.
3. Which of the following is NOT a central problem of an
economy?

Ans
(A) How to produce? (C) Additional satisfaction decreases as one consumes
(B) What to produce? more units of a good
(C) Where to produce? Diminishing marginal utility states that beyond a
(D) For whom to produce? certain point, each additional unit consumed yields less


Ans additional satisfaction. While total utility can still rise
for a while, the incremental (marginal) utility per unit
(C) Where to produce? decreases. This principle underpins demand curves and
The three central problems of an economy include what consumer equilibrium in microeconomics.
goods to produce, how to produce them, and for whom
they should be produced. “Where to produce?” is not 6. Which of the following statements about market
conventionally recognized as a core economic problem, demand is/are correct?
1. It is the horizontal sum of individual demands.

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2. It depends on factors like income and tastes of all (A) Both (A) and (R) are true, and (R) is the correct
consumers. explanation of (A).
3. It always slopes upward. (B) Both (A) and (R) are true, but (R) is not the correct
4. It shifts left when the price of the good falls. explanation of (A).
(A) 1 and 2 only (C) (A) is true, but (R) is false.
(B) 2 and 3 only (D) (A) is false, but (R) is true.
(C) 1, 2, and 4 only

Ans
(D) 1, 3, and 4 only
(A) Both (A) and (R) are true, and (R) is the correct


Ans explanation of (A).
(A) 1 and 2 only As a consumer buys more units of a product, the
Market demand is formed by adding individual additional satisfaction (marginal utility) each unit offers
demands horizontally (1), and it depends on overall declines, making the consumer less willing to pay the
consumer income, preferences, and related factors (2). same price for further units. This causes the typical
It usually slopes downward, not upward, and a decrease downward slope of demand, linking marginal utility to
in price typically causes movement along the demand demand behavior.
curve rather than a leftward shift.
9. Which method calculates price elasticity of demand by
7. Match the demand-related concepts in Column I with comparing the percentage change in quantity demanded
their descriptions in Column II: to the percentage change in price?
(A) Point method
Column I Column II
(B) Midpoint method
1. Substitute goods a. Demand decreases when (C) Total outlay method
consumer’s income (D) Percentage method
increases


Ans
2. Complementary b. Goods used together
goods (D) Percentage method
3. Inferior goods c. Demand increases with The percentage method computes elasticity by measuring
rising consumer income the proportional (percentage) change in quantity
demanded relative to the proportional (percentage)
4. Normal goods d. Goods used in place of
change in price. It is one of the conventional approaches
each other
to quantify how sensitive consumer demand is to price
Options: variations.
(A) 1-d, 2-b, 3-a, 4-c
(B) 1-b, 2-a, 3-d, 4-c 10. Which statements relate to short-run production?
(C) 1-c, 2-d, 3-a, 4-b 1. At least one factor of production is fixed.
(D) 1-a, 2-c, 3-b, 4-d 2. All factors of production become variable.
3. Diminishing returns to a factor may occur.


Ans
4. Large-scale expansions are always possible.
(A) 1-d, 2-b, 3-a, 4-c (A) 1 and 2
Substitute goods (1) are used in place of each other (B) 1 and 3
(d). Complementary goods (2) are used together (b). (C) 2 and 4
Inferior goods (3) see demand falling as income rises (D) 1, 3, and 4
(a). Normal goods (4) have demand increasing with


Ans
income (c). These relationships influence consumer
behavior significantly. (B) 1 and 3
In the short run, at least one factor is fixed (1). This often
8. Assertion (A) : The demand curve usually slopes leads to diminishing returns to the variable factor (3). In
downward. contrast, all factors of production become variable only
Reason (R) : Marginal utility diminishes with each in the long run, and large-scale expansions typically
additional unit consumed. require more time, not the short-run framework.

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 PRACTICE PAPER 07

11. If a firm’s average fixed cost is Rs. 20 at an output of 100 (B) 1-d, 2-c, 3-b, 4-a
units, its total fixed cost would be: Perfect competition (1) is characterized by many sellers
(A) Rs. 20 producing identical goods (d). Price takers (2) accept
(B) Rs. 200 the market price without influence (c). Equilibrium
(C) Rs. 2,000 price (3) is uniform in perfectly competitive markets (b).
(D) Rs. 2 Excess supply (4) indicates quantity supplied exceeds


Ans quantity demanded, the opposite of shortage (a).

(C) Rs. 2,000 14. Which of the following is NOT a characteristic of a

Average fixed cost (AFC) equals total fixed cost (TFC) perfectly competitive market?
divided by output. Here, AFC = 20, Output = 100. (A) Free entry and exit of firms
Therefore, TFC = AFC × Output = 20 × 100 = 2,000. (B) Differentiated products
Fixed cost remains constant regardless of the firm’s (C) Large number of buyers and sellers
output level in the short run. (D) Perfect knowledge among participants

12. Which curve generally intersects the average cost curve

Ans
at its minimum point in the short run? (B) Differentiated products
(A) Average variable cost curve In perfect competition, products are homogeneous
(B) Marginal cost curve or identical across firms. There is free entry and exit,
(C) Total cost curve many buyers and sellers, and near-perfect information.
(D) Average fixed cost curve Differentiated products are a feature of monopolistic


Ans competition, not perfect competition, making (B) the
exception here.
(B) Marginal cost curve
The marginal cost (MC) curve intersects the average 15. Arrange the following steps in determining equilibrium
total cost (ATC) curve at the ATC’s lowest point because, price under perfect competition in chronological order:
when MC is below ATC, it pulls ATC downward; when 1. Intersection of market demand and supply
MC is above ATC, it pushes ATC upward. This principle 2. Setting the price at that intersection
also applies similarly to average variable cost. 3. Firms accept the price
4. Market adjusts until no surplus or shortage remains
13. Match the following market terms in Column I with (A) 4 → 2 → 1 → 3
their features in Column II: (B) 1 → 2 → 3 → 4
Column I Column II (C) 3 → 2 → 1 → 4
1 Perfect a Situation where quantity (D) 1 → 3 → 2 → 4
competition demanded exceeds

Ans
quantity supplied (B) 1 → 2 → 3 → 4
2 Price taker b Uniform price in a First, the market demand and supply intersect (1).
perfectly competitive Second, that intersection sets the equilibrium price (2).
market Third, firms accept this price in perfect competition
3 Equilibrium price c Firms that must accept (3). Finally, the market adjusts to ensure no surplus or
prevailing market price shortage remains, sustaining equilibrium (4).
4 Excess supply d Market structure
16. If the market supply curve shifts right and demand
with many firms and
remains the same, the equilibrium price will generally:
identical products
(A) Increase
Options: (B) Decrease
(A) 1-b, 2-c, 3-a, 4-d (C) Remain unchanged
(B) 1-d, 2-c, 3-b, 4-a (D) Become indeterminate
(C) 1-d, 2-b, 3-a, 4-c


Ans
(D) 1-a, 2-b, 3-c, 4-d
(B) Decrease


Ans

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page 72 CUET UG Economics

A rightward shift of the supply curve indicates an A price ceiling below equilibrium leads to excess
increase in supply. Holding demand constant, the demand (shortage) (b). A price floor above equilibrium
excess quantity supplied exerts downward pressure on creates excess supply (surplus) (a). A leftward shift in
price until a new equilibrium is reached at a lower price, supply increases price (c). A rightward shift in demand
balancing the increased supply with the unchanged causes higher equilibrium quantity (and price), but
demand. primarily higher quantity demanded (d).

17. Identify the valid applications of demand-supply 19. Assertion (A) : Price floors help protect producers’
analysis: income.
1. Explaining price ceilings in ration shops Reason (R) : Price floors, when set above equilibrium,
2. Demonstrating price floors in agriculture can lead to surplus production.
3. Evaluating how tastes and preferences become (A) Both (A) and (R) are true, and (R) is the correct
irrelevant in supply analysis explanation of (A).
4. Illustrating the effect of supply shifts on equilibrium (B) Both (A) and (R) are true, but (R) is not the correct
(A) 1, 2, and 4 only explanation of (A).
(B) 2 and 3 only (C) (A) is true, (R) is false.
(C) 1 and 3 only (D) (A) is false, (R) is true.
(D) 1, 2, 3, and 4

Ans


Ans (A) Both (A) and (R) are true, and (R) is the correct
(A) 1, 2, and 4 only explanation of (A).
Demand-supply analysis is widely used to illustrate If a price floor is implemented above the free-market
price ceilings (1), price floors (2), and shifts in supply equilibrium, producers receive a higher price, thus
affecting equilibrium (4). Tastes and preferences do securing incomes. However, this often creates a surplus
matter in demand analysis; ignoring them in supply because supply outstrips demand at the artificially
analysis is not the usual approach, making (3) an higher price, explaining why both statements align.
incorrect statement for this context.
20. Food Availability Decline (FAD) theory primarily states
18. Match the scenario in Column I with the appropriate that:
outcome in Column II: (A) Food shortages occur only due to unequal
distribution.
Column I Column II
(B) Food shortages happen if total supply falls relative
1 Government imposes a Surplus in the to demand.
a price ceiling below market (C) Food insecurity is unrelated to supply constraints.
equilibrium (D) Government policies are the sole cause of food
2 Government sets b Shortage in the scarcity.
a price floor above market


Ans
equilibrium
3 Leftward shift in the c Higher equilibrium (B) Food shortages happen if total supply falls relative
supply curve price to demand.
FAD theory emphasizes an overall decline in food
4 Rightward shift in the d Higher equilibrium
availability – specifically supply – as the main factor
demand curve quantity demanded
causing shortages. When demand surpasses available
Options: supply, scarcity arises, leading to famines or severe
(A) 1-b, 2-a, 3-c, 4-d deficits unless corrective measures, like imports or
(B) 1-c, 2-b, 3-a, 4-d rationing, intervene.
(C) 1-a, 2-b, 3-d, 4-c
(D) 1-d, 2-c, 3-a, 4-b 21. Which of the following is not included in the calculation
of National Income by the Income Method?


Ans
(A) Compensation of employees
(A) 1-b, 2-a, 3-c, 4-d (B) Rent
(C) Interest

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 PRACTICE PAPER 07

(D) Transfer payments GDP at market price is the final output at current


Ans market prices (c). NNP at factor cost (often called
National Income) removes indirect taxes and includes
(D) Transfer payments subsidies (a). Private Income includes income from
Transfer payments, such as unemployment benefits and domestic sources plus net factor income abroad, minus
pensions, do not reflect payment for current production government’s retained earnings (d). Personal Disposable
of goods or services. Hence, they are excluded from Income subtracts direct taxes (b).
national income. The main components by the Income
Method include wages, interest, rent, and profits earned 24. Which statements are true about the Expenditure
in current production. Method of measuring national income?
1. Summation of final consumer expenditure and
22. Which is NOT a flow concept in macroeconomics? final investment.
(A) National Income 2. Includes government final consumption.
(B) Depreciation 3. Excludes net exports.
(C) Investment 4. Adds up C + I + G + (X – M).
(D) Capital (A) 1, 2, and 3 only


Ans (B) 1, 2, and 4 only
(D) Capital (C) 2 and 4 only
Flow concepts are measured over a period of time, like (D) 1, 2, 3, and 4
investment or national income. Stock concepts are

Ans
measured at a specific point in time, such as capital. (B) 1, 2, and 4 only
Depreciation also occurs over time, so it is treated as a The Expenditure Method sums final consumption
flow concept, unlike capital. expenditure (C), final investment (I), government
23. Match the following aggregates in Column I with their consumption (G), and net exports (X – M). This means
definitions in Column II: statements 1, 2, and 4 are correct. Excluding net exports
is incorrect, as it must be included, so statement 3 is
Column I Column II wrong.
1 GDP at market a Net national product after
25. Place these steps in the correct chronological order for
price subtracting indirect taxes
and adding subsidies determining equilibrium level of income in a two-sector
model:
2 NNP at factor b Income left with individuals
1 Identify aggregate demand (AD)
cost after paying direct taxes
2. Compare AD with aggregate supply (AS)
3 Private Income c Sum of all final goods and 3. Adjust output until AD = AS
services produced within a 4. Calculate consumption (C) and investment (I)
country valued at current (A) 4 → 1 → 2 → 3
prices (B) 1 → 4 → 2 → 3
4 Personal d Income from domestic (C) 3 → 2 → 1 → 4
Disposable product plus net factor (D) 1 → 2 → 3 → 4
Income income from abroad, less


Ans
government’s retained
earnings (A) 4 → 1 → 2 → 3
Consumption and investment (4) form the components
Options:
of aggregate demand. Next, we identify AD (1) and
(A) 1-c, 2-a, 3-d, 4-b
compare it with AS (2). Finally, output adjusts if there
(B) 1-a, 2-c, 3-b, 4-d
is a discrepancy until AD equals AS (3). This ensures
(C) 1-d, 2-b, 3-a, 4-c
equilibrium in a two-sector model.
(D) 1-c, 2-b, 3-a, 4-d


Ans 26. In the Keynesian framework, which concept explains
how an initial change in investment leads to a multiplied
(A) 1-c, 2-a, 3-d, 4-b
change in national income?

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(A) Fiscal multiplier 29. Money primarily serves which of the following
(B) Tax multiplier functions?
(C) Autonomous multiplier (A) A depreciating asset
(D) Investment multiplier (B) A store of purchasing power


Ans (C) A measure of intangible assets
(D) A direct substitute for capital goods
(D) Investment multiplier
The investment multiplier (k) measures how initial

Ans
investment spending causes a chain reaction of increased (B) A store of purchasing power
consumption and income. This leads to a multiplied Money’s key functions are serving as a medium of
effect on aggregate demand and, consequently, total exchange, a measure of value, a unit of account, and a
national output. The effect size depends on the marginal store of purchasing power. It allows individuals to hold
propensity to consume. wealth in liquid form, to be spent later, bridging time
between earning and spending.
27. Which measure would a government use to correct
excess demand in the economy? 30. Match the banking terms in Column I with their features
(A) Lower taxes alongside higher government spending in Column II:
(B) Lower interest rates on loans
Column I Column II
(C) Reduce government expenditure
(D) Increase transfer payments 1 Central Bank a Interest rate at which
the central bank lends to


Ans commercial banks
(C) Reduce government expenditure 2 Commercial b Interest rate at which
Excess demand indicates inflationary pressure, Banks the central bank lends to
requiring contractionary fiscal policies to reduce overall commercial banks
spending. Decreasing government expenditure is a 3 Cash Reserve c Mandatory reserve kept by
direct way to curb aggregate demand. Other measures, Ratio (CRR) commercial banks with the
like raising taxes or increasing interest rates, also help. central bank
Lower taxes or higher spending would actually intensify
4 Bank Rate d Institutions accepting public
excess demand.
deposits and extending loans
28. Assertion (A) : Involuntary unemployment arises when Options:
people willing to work cannot find jobs at the current (A) 1-b, 2-d, 3-c, 4-a
wage rate. (B) 1-d, 2-c, 3-a, 4-b
Reason (R) : Full employment equates to zero (C) 1-c, 2-a, 3-d, 4-b
unemployment. (D) 1-b, 2-a, 3-c, 4-d
(A) Both (A) and (R) are true, and (R) is the correct


Ans
explanation of (A).
(B) Both (A) and (R) are true, but (R) is not the correct (A) 1-b, 2-d, 3-c, 4-a
explanation of (A). The Central Bank (1) is the apex institution regulating
(C) (A) is true, (R) is false. credit (b). Commercial banks (2) accept deposits and
(D) (A) is false, (R) is true. offer loans to the public (d). The Cash Reserve Ratio
(3) is a percentage of deposits banks must hold with the


Ans
central bank (c). Bank Rate (4) is the rate central banks
(B) Both (A) and (R) are true, but (R) is not the correct charge commercial banks (a).
explanation of (A).
Involuntary unemployment means workers are available 31. Which statements accurately describe recent reforms in
and willing to work, but jobs are unavailable. Full Indian Banking?
employment doesn’t mean zero total unemployment; 1 Enhanced technology and digitalization
it often implies a natural rate of unemployment. Thus, 2. Complete elimination of government ownership
although both statements are true, (R) does not explain 3. Privatization of some banking segments
(A) directly. 4. Zero regulation over banking activities

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 PRACTICE PAPER 07

(A) 1 and 3 only (D) Dividend from public enterprises

(B) 2 and 4 only

Ans
(C) 1, 2, and 3 only
(D) 1, 3, and 4 only (C) Disinvestment proceeds
Revenue receipts come from taxation, interest on


Ans government loans, and dividends on public sector
(A) 1 and 3 only undertakings. Disinvestment proceeds are capital
Indian Banking reforms emphasize improving receipts because they involve selling government’s
technology (1) and privatizing some public banks (3) equity stakes or assets, generating funds from capital
to enhance efficiency. Government ownership has not transactions rather than recurring revenue flows.
been entirely eliminated, and certain regulations remain
35. The fiscal deficit is defined as:
in force. Hence, statements 2 and 4 are incorrect, making
option (A) the correct combination. (A) Total expenditure minus total revenue excluding
borrowing
32. Which of the following is NOT a function of a (B) Total expenditure minus total receipts including
commercial bank? borrowing
(A) Accepting deposits (C) Total expenditure minus total receipts excluding
(B) Issuing currency notes borrowing
(C) Providing loans (D) Revenue expenditure minus revenue receipts
(D) Transfer of funds

Ans


Ans (C) Total expenditure minus total receipts excluding
(B) Issuing currency notes borrowing
Issuing currency notes is the central bank’s job, not a Fiscal deficit measures how much a government’s total
commercial bank’s. Commercial banks accept various expenditure surpasses its total non-borrowed receipts.
types of deposits, extend loans, and facilitate fund Essentially, it reveals the government’s reliance on
transfers. They do not create or issue legal tender notes, borrowed funds to meet expenses. This gap influences
which is a crucial function of the central authority. debt levels and informs policy decisions on government
spending.
33. How do direct taxes differ from indirect taxes?
(A) Direct taxes are regressive, while indirect taxes are 36. Downsizing the role of government, in the context of
always progressive. budgeting, generally means:
(B) Direct taxes are paid by individuals on incomes, (A) Increasing subsidies
while indirect taxes are paid on goods and services. (B) Raising government expenditures
(C) Indirect taxes cannot be shifted to others, whereas (C) Reducing government intervention in economic
direct taxes can be shifted. activities
(D) Both always remain uniform across income (D) Eliminating taxes altogether
brackets.

Ans


Ans (C) Reducing government intervention in economic
(B) Direct taxes are paid by individuals on incomes, activities
while indirect taxes are paid on goods and services. Downsizing implies trimming the governmental share
Direct taxes (e.g., income tax) are levied on individuals in various spheres, possibly through privatization or
or entities, reflecting their ability to pay. Indirect taxes reduced regulation. It aims to empower the private
(e.g., GST) apply to goods and services and can be sector, reduce state involvement, and encourage market-
passed on to the final consumer through price. The driven allocation. This often translates into smaller
other statements misrepresent how these taxes function. budgets or fewer public enterprises, not increases in
subsidies or taxes.
34. Which of the following is NOT typically a revenue
receipt for the government? 37. In a flexible exchange rate system, the exchange rate is
(A) Tax revenue primarily determined by:
(B) Interest receipts on loans given (A) Government-imposed policies
(C) Disinvestment proceeds (B) Export and import licensing

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(C) Demand for and supply of foreign currency

Ans

(D) Fixed administratively by the central bank (A) Favorable balance of trade


Ans A favorable balance of trade occurs when export
earnings exceed import expenditures for visible items
(C) Demand for and supply of foreign currency
(tangible goods). It indicates a trade surplus. If imports
Under a flexible (or floating) exchange rate regime,
outweigh exports, the situation is an unfavorable or
the market determines the price of a currency through
adverse balance of trade, reflecting a trade deficit.
demand and supply. Although central banks may
intervene intermittently, they do not strictly fix the

Direction :Carefully read the case study provided and then
exchange rate. Hence, market forces guide exchange thoroughly answer the subsequent five questions.
rate fluctuations. In a small town, the local government introduced a price
ceiling on essential grains to ensure afford ability for low-
38. A major advantage of a flexible exchange rate system is:
income households. Over time, however, consumers began
(A) Guaranteed stability for exporters
complaining of shortages in local markets. Meanwhile,
(B) Automatic correction of balance of payments
farmers struggled with reduced revenues and had limited
disequilibria
incentive to invest in improved crop yields. Some retailers
(C) Elimination of all exchange rate risks
resorted to unofficial higher pricing or reduced the
(D) Zero government intervention at all times
quality of grains. The policy’s intended benefit of cheaper


Ans staples exposed an unintended consequence: persistent
(B) Automatic correction of balance of payments scarcity and deteriorating product quality. As a result,
disequilibria policymakers explored ways to supplement local supply
In a flexible exchange rate system, if there is a deficit through government procurement or by encouraging
in the balance of payments, the currency depreciates, private traders to import grains. This scenario highlights
stimulating exports and restricting imports. This the complexity of using price controls to balance
self-correcting mechanism helps reduce imbalances. affordability with efficient market outcomes.
Though not flawless, it fosters easier adjustments than a
41. The price ceiling was primarily aimed at:
strictly fixed system.
(A) Boosting farmers’ profits
39. The Balance of Payments (BoP) includes: (B) Encouraging the use of inferior grains
(A) Only visible exports and imports (C) Making essential grains affordable
(B) All transactions of goods, services, and financial (D) Promoting hoarding activities
flows

Ans
(C) Only capital transactions
(C) Making essential grains affordable
(D) Only current account transactions
The local authority set a price ceiling to keep grain prices


Ans within reach of low-income households. By capping
(B) All transactions of goods, services, and financial prices, policy makers intended to reduce food costs, yet
flows shortages and reduced quality emerged as unintended
The BoP encompasses both the current account (covering adverse effects in the supply chain, undermining the
goods, services, income, and current transfers) and the intended objectives.
capital/financial account (covering investments and
42. A key unintended effect of imposing a price ceiling can
financial instruments). Therefore, it captures all cross-
be:
border economic transactions a country undertakes
(A) Rising market price beyond the ceiling
within a specified period.
(B) Surplus of the product
40. If the value of visible exports exceeds the value of visible (C) Chronic shortage
imports, it is known as: (D) End of government intervention
(A) Favorable balance of trade

Ans
(B) Unfavorable balance of trade
(C) Chronic shortage
(C) Equilibrium in balance of payments
Price ceilings below equilibrium often result in chronic
(D) Deficit in balance of payments
shortages because suppliers may be unwilling or unable

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 PRACTICE PAPER 07

to sell at the capped price. Demand rises due to lower

Ans

prices, but the supply side cannot match this quantity (D) Supplementing local supply via government or
at the artificially constrained rate, creating persistent private traders
shortages. When price ceilings create chronic scarcity, authorities
can address supply constraints by sourcing additional
43. Assertion (A) : Farmers had limited incentive to invest
volumes. The government can procure grains directly or
in better yields.
incentivize private traders to import. This helps mitigate
Reason (R) : The price ceiling reduced their potential
shortages while maintaining consumer-friendly prices,
profits.
provided distribution methods are effectively managed
(A) Both (A) and (R) are true, and (R) is the correct
to avoid distortions.
explanation of (A).
(B) Both (A) and (R) are true, but (R) is not the correct

Direction :Carefully read the case study provided and then
explanation of (A). thoroughly answer the subsequent five questions.
(C) (A) is true, (R) is false. A national newspaper featured an investigative report
(D) (A) is false, (R) is true. on how a sudden increase in global oil prices affected


Ans domestic inflation. Households saw significant jumps in
fuel and transportation expenses, and many businesses
(A) Both (A) and (R) are true, and (R) is the correct
passed higher input costs to consumers. The government
explanation of (A).
considered using monetary and fiscal measures to combat
Price ceilings compress profit margins for farmers,
inflation. The central bank hinted at raising key policy
lowering revenues. Because profits are curtailed,
rates to control credit supply, while the finance ministry
farmers face reduced incentives to invest in productivity
debated cutting certain non-essential expenditures.
enhancements or risk new cultivation techniques. The
Economists predicted that if oil prices remained high,
cause (R) directly explains the resulting behavior (A).
the overall price level would further escalate, possibly
44. Which statements accurately describe the market dampening consumer demand. However, some experts
outcome under a binding price ceiling? urged caution, as excessive tightening could reduce
1. Consumers face shortages economic growth. This reflects the constant balancing act
2. Product quality may decline between controlling inflation and maintaining sufficient
3. Imports are taxed heavily economic activity.
4. Parallel markets or black markets may form
46. What triggered the inflationary pressure in this scenario?
(A) 1, 2, and 4 only
(A) Sharp rise in food grain production
(B) 2 and 3 only
(B) Sudden increase in global oil prices
(C) 1 and 3 only
(C) Reduction in fuel taxes
(D) 1, 2, 3, and 4
(D) Elimination of import duties


Ans


Ans
(A) 1, 2, and 4 only
(B) Sudden increase in global oil prices
A price ceiling below equilibrium commonly leads
The global oil price hike raised transportation and
to shortages, and sellers may compromise quality
production costs, which were then passed on to
to manage costs. Black markets can arise as vendors
consumers. Oil is a critical input across many industries,
sell above the ceiling. Taxation on imports (3) is not
so significant price changes have broad ripple effects on
necessarily a direct outcome of price ceilings, so it may
a nation’s overall inflation rate.
not always apply.
47. Which of the following tools can the central bank use to
45. To address shortages while keeping prices affordable,
tighten monetary policy?
policymakers in the case study considered:
(A) Reducing the repo rate
(A) Decreasing government procurement
(B) Buying more government securities
(B) Banning private imports
(C) Increasing the bank rate
(C) Raising retail prices unconditionally
(D) Raising government subsidies
(D) Supplementing local supply via government or
private traders

Ans

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(C) Increasing the bank rate (B) Slightly tightening monetary policy and reducing
The bank rate is one policy tool the central bank adjusts non-essential public expenditure
to manage credit availability. By increasing this rate (C) Eliminating all government interventions in the
(and similarly, the repo rate), the cost of borrowing rises market
for commercial banks, which usually pass these higher (D) Completely capping prices of oil
costs to consumers, thereby reducing the money supply

Ans
and moderating inflation.
(B) Slightly tightening monetary policy and reducing
48. Why might excessive tightening of monetary and fiscal non-essential public expenditure
policies be problematic? A balanced response to inflation involves modest
(A) It instantly solves inflation without side effects monetary tightening to limit credit expansion and
(B) It drives consumer demand higher trimming non-priority fiscal outlays. This helps
(C) It can slow economic growth by curbing aggregate moderate price pressures while avoiding an overly
demand restrictive environment. Extreme measures like
(D) It forces the central bank to spend more on social drastically raising interest rates or controlling prices
programs rigidly risk broader economic disruptions.


Ans


*************
(C) It can slow economic growth by curbing aggregate
demand
Monetary and fiscal tightening reduce overall spending
power. While controlling inflation, this also lowers
economic activity, potentially leading to lower growth
and higher unemployment. The challenge lies in finding
a balanced approach that restrains inflation without
excessively harming output or employment.

49. Assertion (A) : Higher oil prices can lead to cost-push

inflation.
Reason (R) : Cost-push inflation occurs when aggregate
supply decreases due to rising production costs.
(A) Both (A) and (R) are true, and (R) is the correct
explanation of (A).
(B) Both (A) and (R) are true, but (R) is not the correct
explanation of (A).
(C) (A) is true, (R) is false.
(D) (A) is false, (R) is true.


Ans
(A) Both (A) and (R) are true, and (R) is the correct
explanation of (A).
Cost-push inflation arises when higher input prices,
like increased oil costs, diminish aggregate supply and
push up the price level. Rising oil prices directly escalate
transportation and production costs, thereby reducing
supply at any given price point, leading to inflationary
pressure.

50. Which combined approach might help manage inflation

without severely stifling growth?
(A) Drastically raising interest rates while increasing
government spending

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 PRACTICE PAPER 08

PRACTICE PAPER 08

1. The Production Possibility Curve (PPC) depicts: disaster typically reduces available resources, causing
(A) Combinations of two goods that an economy cannot the PPC to shift inward, not outward.
produce at all
4. Arrange these steps in the correct order when analyzing
(B) Combinations of two goods that an economy can
produce with available resources an economy’s allocation problems:
(C) Only the inefficient use of resources 1. Identifying economic resources
(D) The precise pattern of consumer preferences 2. Deciding the production of goods
3. Understanding opportunity cost


Ans 4. Balancing distribution among citizens
(B) Combinations of two goods that an economy can (A) 2 → 3 → 1 → 4
produce with available resources (B) 1 → 3 → 2 → 4
The PPC shows all possible combinations of two goods (C) 1 → 2 → 3 → 4
that can be produced, given existing technology and (D) 2 → 1 → 4 → 3
resource constraints. Points on the curve illustrate

Ans
efficient use of resources, while points inside indicate
inefficiency, and points outside represent unattainable (B) 1 → 3 → 2 → 4
outputs under current conditions. First, one identifies available resources (1). Then, one
examines trade-offs and opportunity costs (3). Next, a
2. Scarcity in economics refers to: decision is made on which goods to produce (2). Finally,
(A) Complete absence of any resource the economy determines how to distribute those goods
(B) Limited means to satisfy unlimited wants among its population (4).
(C) The surplus of goods and services in an economy
5. A consumer’s equilibrium under the two-commodity
(D) A phenomenon only faced by underdeveloped
countries utility approach is reached when:
(A) Price equals total utility


Ans (B) Marginal utility per rupee spent is the same for both
(B) Limited means to satisfy unlimited wants goods
Scarcity underpins all economic activity. Human (C) Average utility is highest for all goods
wants are essentially infinite, but resources are finite. (D) Income is entirely saved
This fundamental mismatch compels societies and

Ans
individuals to make choices, leading to the study of how
best to allocate scarce means among competing ends. (B) Marginal utility per rupee spent is the same for both
goods
3. Which of the following does NOT explain an outward In a two-commodity context, the consumer maximizes
shift of the Production Possibility Curve? total satisfaction by equalizing the marginal utility per
(A) Technological improvement unit of money spent on each good. Any deviation from
(B) Increase in resources this leads to reallocation of expenditure toward the good
(C) Natural disaster destroying resources with higher marginal utility per rupee.
(D) More skilled labor
6. Identify correct statements about shifts in the demand


Ans curve:
(C) Natural disaster destroying resources 1. A change in consumer’s income can shift the
The PPC expands outward when productive capacity demand curve.
grows due to factors like technical progress or higher 2. A change in the price of the good causes shifts
resource endowments (skilled labor, capital). A natural rather than movements along the demand curve.

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page 80 CUET UG Economics

3. Tastes and preferences affect demand shifts. (B) Both (A) and (R) are true, but (R) is not the correct
4. Price elasticity alone dictates curve shifts. explanation of (A).
(A) 1 and 3 only (C) (A) is true, (R) is false.
(B) 1, 2, and 4 only (D) (A) is false, (R) is true.
(C) 2 and 3 only

Ans
(D) 1, 3, and 4 only
(C) (A) is true, (R) is false.


Ans Salt is a necessity, so changes in its price typically do
(A) 1 and 3 only not drastically alter consumption, making its demand
Income and taste changes cause the entire demand curve highly inelastic (A is true). However, consumers do not
to shift. A price change usually results in movement generally postpone salt purchases significantly, so (R) is
along the demand curve, not shifting it. Price elasticity false and unrelated to the reason for salt’s inelasticity.
measures responsiveness but does not itself shift the
9. The slope of a demand curve for a normal good is
curve. Thus, statements 1 and 3 accurately describe
reasons for shifts. usually:
(A) Positive
7. Match the elasticity concepts in Column I with their (B) Negative
descriptions in Column II: (C) Vertical
Column I Column II
(D) Horizontal
1 Perfectly elastic a The percentage change in price

Ans
demand results in the same percentage (B) Negative
change in quantity demanded
Most demand curves slope downward from left to
2 Unitary elastic b Quantity demanded stays the
right, reflecting the inverse relationship between price
demand same regardless of price changes
and quantity demanded for normal goods. When price
3 Relatively c An extremely small change in
decreases, quantity demanded increases; when price
inelastic demand price causes a huge change in
quantity demanded rises, quantity demanded declines, under ceteris paribus
4 Perfectly d The percentage change in
conditions.
inelastic demand quantity demanded is less than
10. Identify valid statements regarding returns to scale:
the percentage change in price
1. They apply in the long run.
Options: 2. They refer to changes in output when all factors are
(A) 1-c, 2-a, 3-d, 4-b variable.
(B) 1-a, 2-d, 3-b, 4-c 3. Diminishing returns always occur in the long run.
(C) 1-b, 2-c, 3-a, 4-d 4. They include increasing, constant, and decreasing
(D) 1-d, 2-a, 3-c, 4-b returns to scale.


Ans (A) 1, 2, and 4 only
(B) 2 and 3 only
(A) 1-c, 2-a, 3-d, 4-b
(C) 1 and 3 only
Perfectly elastic (1) means minor price variations lead
(D) 1, 2, 3, and 4
to huge quantity changes (c). Unitary elastic (2) implies
equal percentage changes (a). Relatively inelastic

Ans
(3) means quantity demanded changes by a smaller (A) 1, 2, and 4 only
percentage (d). Perfectly inelastic (4) means no change Returns to scale examine output changes when all inputs
in quantity despite price alterations (b). vary (long run). They include increasing, constant,
or decreasing returns to scale. Diminishing returns
8. Assertion (A) : The demand for a necessity (like salt) is
is a short-run concept related to one variable factor.
highly inelastic.
Therefore, statement 3 does not universally hold in the
Reason (R) : Consumers can easily postpone buying salt
long run.
for a later period.
(A) Both (A) and (R) are true, and (R) is the correct 11. When a firm’s total revenue is just enough to cover its
explanation of (A). total cost, it is said to be earning:

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 PRACTICE PAPER 08

(A) Supernormal profit when supply exceeds demand (b). Shortage (3) is when
(B) Normal profit demand exceeds supply (c). A price below equilibrium
(C) Economic loss (4) creates upward pressure as buyers compete for
(D) Marginal profit limited goods (d).


Ans 14. Which of the following is NOT typically found in a
(B) Normal profit perfectly competitive market structure?
Normal profit is the minimum necessary to keep a firm (A) Homogeneous products
in operation, covering both explicit and implicit costs. (B) A single seller dominating the market
When total revenue exactly equals total cost, the firm’s (C) Freedom of entry and exit
owners are receiving a return equivalent to their next (D) Many buyers and sellers
best alternative, hence no supernormal profit.

Ans
12. Which of the following situations will likely cause a (B) A single seller dominating the market
rightward shift of the supply curve for a good? Perfect competition requires numerous buyers and
(A) Increase in production taxes sellers, each unable to influence price individually.
(B) Rise in the cost of raw materials A single dominant seller is characteristic of a
(C) An improvement in production technology monopoly, which contradicts the condition of free
(D) Higher wage demands by labor unions entry, homogeneity of goods, and competitive market


Ans dynamics.

(C) An improvement in production technology 15. Order the steps that lead to a new equilibrium price if
Technological advancements reduce production costs supply unexpectedly increases while demand remains
or improve efficiency, leading suppliers to offer more constant:
output at every price. This shifts the supply curve 1. Initial shortage
outward (rightward). Rising input costs or taxes usually 2. Downward pressure on price
cause leftward shifts, while labor wage hikes also 3. Surplus at old equilibrium
typically reduce supply unless offset by productivity 4. Market returns to equilibrium
gains. (A) 3 → 2 → 1 → 4
(B) 1 → 4 → 3 → 2
13. Match the market outcomes in Column I with their (C) 3 → 2 → 4 → 1
respective conditions in Column II: (D) 1 → 2 → 3 → 4
Column I Column II

Ans
1. Market a. Quantity demanded equals (C) 3 → 2 → 4 → 1
equilibrium quantity supplied When supply rises at the old equilibrium price, a surplus
2. Surplus b. Quantity supplied exceeds appears (3). This surplus exerts downward price pressure
quantity demanded (2). The market adjusts, eventually finding a new
3. Shortage c. Quantity demanded equilibrium (4). The mention of an “initial shortage”
exceeds quantity supplied (1) doesn’t align here since the supply rise produces a
4. Price below d. Can result in an upward surplus, not a shortage.
equilibrium pressure on price
16. In perfect competition, an individual firm’s demand
Options: curve is:
(A) 1-a, 2-b, 3-c, 4-d (A) Perfectly inelastic
(B) 1-d, 2-a, 3-b, 4-c (B) Perfectly elastic
(C) 1-c, 2-b, 3-a, 4-d (C) Upward sloping
(D) 1-b, 2-c, 3-a, 4-d (D) U-shaped


Ans

Ans
(A) 1-a, 2-b, 3-c, 4-d (B) Perfectly elastic
Market equilibrium (1) occurs where quantity Under perfect competition, each firm is a price taker
demanded equals quantity supplied (a). Surplus (2) is facing a horizontal (perfectly elastic) demand curve

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page 82 CUET UG Economics

at the market price. Any attempt to raise prices would supply outward or downward (b), making more goods
result in losing all customers to competitors, while available at lower prices.
lowering prices is unnecessary because the firm can sell
19. Assertion (A) : Rationing is sometimes used when a
any amount at the prevailing market price.
price ceiling causes shortages.
17. Which statements about price floors in agriculture are Reason (R) : Rationing allows certain consumers to
correct? purchase unlimited quantities.
1. They guarantee farmers a minimum price. (A) Both (A) and (R) are true, and (R) is the correct
2. They lead to reduced government expenditure. explanation of (A).
3. They can result in surpluses if set above equilibrium. (B) Both (A) and (R) are true, but (R) is not the correct
4. They curb excess production by discouraging explanation of (A).
farmers. (C) (A) is true, (R) is false.
(A) 1 and 3 only (D) (A) is false, (R) is true.
(B) 2 and 4 only

Ans
(C) 1, 2, and 4
(D) 1, 3, and 4 (C) (A) is true, (R) is false.
Rationing is indeed utilized to distribute limited goods


Ans fairly during shortages resulting from price ceilings.
(A) 1 and 3 only However, rationing typically imposes strict quantity
A price floor set above equilibrium ensures farmers limits for each consumer, not unlimited access. Thus,
receive at least a minimum price (1). This can (A) is true, while (R) incorrectly describes the effect of
create surpluses (3). It does not necessarily reduce rationing.
government spending; often, governments buy excess
20. The primary rationale behind food coupons or ration
stock, potentially increasing expenditure. Nor does it
inherently discourage farmers, so statements 2 and 4 are stamps is:
incorrect. (A) To eliminate black markets entirely
(B) To allow free trade without restrictions
18. Match each policy tool in Column I with its result in (C) To ensure equitable distribution of subsidized
Column II: commodities
(D) To maximize government revenue
Column I Column II
1 Price ceiling below a Inward shift of the

Ans
equilibrium supply curve (C) To ensure equitable distribution of subsidized
2 Price floor above b Outward shift of the commodities
equilibrium supply curve Food coupons or ration stamps aim to ensure vulnerable
3 Indirect taxes on c Shortage and low-income groups receive essential goods at
producers subsidized rates. This method often accompanies
price controls, preventing wealthier consumers from
4 Subsidies to d Surplus
cornering limited supplies and assisting fairer resource
producers
allocation among different population segments.
Options:
(A) 1-a, 2-b, 3-d, 4-c 21. If a country’s GNP at market price is greater than its
(B) 1-c, 2-d, 3-a, 4-b GDP at market price, it implies:
(C) 1-d, 2-c, 3-b, 4-a (A) Net factor income from abroad is negative
(D) 1-b, 2-a, 3-d, 4-c (B) Net factor income from abroad is zero
(C) Net factor income from abroad is positive


Ans
(D) The difference is due to depreciation
(B) 1-c, 2-d, 3-a, 4-b


Ans
A price ceiling below equilibrium causes a shortage (c).
A price floor above equilibrium often leads to surplus (C) Net factor income from abroad is positive
(d). Imposing indirect taxes shifts the supply curve GNP (Gross National Product) includes net factor
inward or upward (a). Subsidies to producers shift income from abroad, whereas GDP (Gross Domestic
Product) measures the value of goods and services

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 PRACTICE PAPER 08

produced within domestic territory. If GNP > GDP, the 1. It sums up all factor incomes (wages, rent, interest,
net factor income from abroad must be positive. profit)
2. It ignores self-consumption of output
22. Which item is NOT treated as a part of private income? 3. It includes undistributed profits
(A) Transfer income from the government 4. It excludes intermediate goods
(B) Income from property and entrepreneurship (A) 1, 3, and 4
(C) Income from domestic product accruing to the (B) 1 and 2 only
private sector (C) 2, 3, and 4
(D) Social security contributions by employers (D) 1, 2, 3, and 4


Ans

Ans
(D) Social security contributions by employers (A) 1, 3, and 4
Private income typically includes factor incomes The Income Method sums factor incomes, including
(wages, interest, rent, profit) plus transfer payments undistributed profits (corporate savings), and excludes
from government or rest of the world. Statutory the value of intermediate goods to avoid double
contributions by employers to social security often counting. Self-consumption of output can be imputed
count as part of compensation to employees, but not under factor incomes (e.g., farm produce for self-use),
always as “private income” in national accounting sense. so ignoring it entirely is inaccurate.
Specific classification depends on definitions used, but
typically mandated contributions are separated. 25. Arrange these elements in the correct order in the
Keynesian two-sector model:
23. Match the terms in Column I with their relevance in 1. Aggregate Demand (AD)
Column II: 2. Savings (S)
Column I Column II 3. Consumption (C)
1 NDP at market a Capital consumption 4. Investment (I)
price allowance (A) 3 → 2 → 1 → 4
(B) 1 → 3 → 4 → 2
2 Depreciation b NDP at market price
(C) 3 → 2 → 4 → 1
+ net current transfers
(D) 2 → 3 → 4 → 1
from abroad
3 Personal c NNP at market price –

Ans
Disposable Income net indirect taxes (C) 3 → 2 → 4 → 1
4 National d After-tax personal Consumption (C) and savings (S) stem from household
Disposable Income income income. Investment (I) is autonomous or influenced
by interest rates. Aggregate demand (AD) includes
Options:
consumption plus investment in a two-sector model.
(A) 1-c, 2-a, 3-d, 4-b
So consumption and savings come first, followed by
(B) 1-d, 2-c, 3-b, 4-a
investment, culminating in AD.
(C) 1-a, 2-c, 3-d, 4-b
(D) 1-b, 2-a, 3-c, 4-d 26. Marginal Propensity to Consume (MPC) is defined as


Ans the ratio of:
(A) Change in consumption to change in income
(A) 1-c, 2-a, 3-d, 4-b
(B) Total consumption to total income
NDP at market price is NNP at market price minus
(C) Saving to investment
depreciation, but more directly it aligns with c if we
(D) Income to consumption
interpret net indirect taxes. Depreciation (2) is also
called capital consumption allowance (a). Personal

Ans
Disposable Income is after-tax personal income (d). (A) Change in consumption to change in income
National Disposable Income can be measured as NDP MPC indicates how much of an additional rupee of
plus net current transfers (b). income is spent on consumption. Mathematically,
MPC = ΔC / ΔY. It measures the responsiveness of
24. Which statements are correct about the Income Method
for measuring national income?

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consumption spending to changes in disposable income, are typically fiat money, maintained through public
a key concept in Keynesian analysis. confidence and government regulation rather than
precious metal standards.
27. Which policy is most suitable to correct deficient
demand? 30. Match the monetary policy instruments in Column I
(A) Raising tax rates and reducing government with their brief effects in Column II:
spending
Column I Column II
(B) Lowering interest rates to encourage investment
(C) Imposing import restrictions 1 Open market a Selling or purchasing
(D) Allowing currency depreciation operations government securities to
influence liquidity


Ans
2 Statutory b The proportion of
(B) Lowering interest rates to encourage investment Liquidity Ratio net demand and time
Deficient demand signifies economic slowdown with (SLR) liabilities banks must
lower-than-desired output. An expansionary monetary invest in certain assets
policy, such as lowering interest rates, spurs borrowing 3 Repo rate c Rate at which central
and investment, thereby boosting aggregate demand. bank lends short-term
The other options may not directly or effectively address funds to commercial
insufficient demand within the domestic economy. banks
28. Assertion (A) : Full employment means every single 4 Margin d Restricting the
individual in the economy has a job. requirements proportion of loan value
Reason (R) : There can still be some frictional or banks can lend against
voluntary unemployment at full employment. collateral
(A) Both (A) and (R) are true, and (R) is the correct Options:
explanation of (A). (A) 1-a, 2-d, 3-b, 4-c
(B) Both (A) and (R) are true, but (R) is not the correct (B) 1-a, 2-b, 3-c, 4-d
explanation of (A). (C) 1-d, 2-c, 3-a, 4-b
(C) (A) is true, (R) is false. (D) 1-b, 2-a, 3-d, 4-c
(D) (A) is false, (R) is true.


Ans


Ans
(B) 1-a, 2-b, 3-c, 4-d
(D) (A) is false, (R) is true. Open market operations (1-a) entail the central bank
Full employment doesn’t literally mean zero buying or selling government securities to affect
unemployment. Some frictional or voluntary banking system liquidity. SLR (2-b) is the ratio banks
unemployment persists naturally due to individuals must maintain in specified liquid assets. The repo rate
transitioning between jobs. Hence, (A) is false, while (3-c) is the rate at which banks borrow from the central
(R) correctly indicates the typical understanding of full bank. Margin requirements (4-d) limit loan proportions
employment in economics. against collateral.
29. “Fiat money” refers to: 31. Which statements are correct about commercial banks?
(A) Currency backed by gold reserves 1. They accept deposits
(B) Any money that arises naturally from trading 2. They issue currency on behalf of the government
(C) Government-issued currency not backed by a 3. They grant loans
physical commodity 4. They manage monetary policy
(D) Barter-based exchange system (A) 1 and 2


Ans (B) 1, 3, and 4
(C) 1 and 3 only
(C) Government-issued currency not backed by a
(D) 2 and 4 only
physical commodity
Fiat money has value primarily because governments

Ans
decree it as legal tender, despite lacking intrinsic (C) 1 and 3 only
or commodity backing. Modern paper currencies

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 PRACTICE PAPER 08

Commercial banks accept deposits and extend loans to revenue would reduce or eliminate a fiscal deficit, while
the public (1 and 3). Issuing currency (2) is primarily high revenue expenditure, large loan repayments, and
the central bank’s role. Managing monetary policy (4) capital expenditures could potentially drive it upward if
is also the central bank’s function. Commercial banks revenues are insufficient.
follow policy directives but do not set them.
35. Primary deficit is defined as:
32. The primary functions of a central bank include: (A) Fiscal deficit minus interest payments
(A) Issuing all corporate bonds (B) Fiscal deficit plus interest payments
(B) Acting as a lender of last resort to commercial (C) Revenue deficit minus capital expenditure
banks (D) Total tax revenue minus total expenditure
(C) Setting direct tax rates

Ans
(D) Providing direct subsidies to exporters
(A) Fiscal deficit minus interest payments


Ans The primary deficit isolates the fiscal deficit net of interest
(B) Acting as a lender of last resort to commercial banks obligations on outstanding debt. It effectively indicates
A central bank, like the RBI in India, issues currency the extent to which the government’s current spending
notes, manages foreign exchange, and acts as banker’s surpasses revenue, ignoring past debt servicing costs.
bank and lender of last resort. It does not typically set
36. Which objective is NOT typically associated with a
direct tax rates, handle corporate bonds for every firm,
or provide direct subsidies to exporters. government budget?
(A) Stabilizing the economy
33. Which is a key difference between revenue expenditure (B) Allocating resources efficiently
and capital expenditure for the government? (C) Achieving unlimited surplus
(A) Revenue expenditure involves creating assets, while (D) Ensuring equitable distribution of income
capital expenditure covers daily operations.

Ans
(B) Revenue expenditure is for day-to-day running,
while capital expenditure is for asset creation. (C) Achieving unlimited surplus
(C) Only capital expenditure helps in transferring Government budgets aim for stability, fair resource
subsidies. distribution, and efficiency. Achieving an infinite
(D) Revenue expenditure cannot be financed through budget surplus is neither realistic nor a primary policy
taxes. goal. Balancing or maintaining manageable deficits is
more common. Surpluses, if any, are usually limited and


Ans context-dependent, not unlimited.
(B) Revenue expenditure is for day-to-day running,
37. Under a fixed exchange rate system:
while capital expenditure is for asset creation.
Revenue expenditures are short-term operating (A) The currency’s value is determined solely by the
expenses like salaries or subsidies, while capital open market
expenditures finance long-term asset creation or (B) The exchange rate fluctuates daily with no
infrastructure. This classification aids in budgeting government involvement
decisions, ensuring clarity in how government funds are (C) The government or central bank intervenes to
allocated and utilized. maintain a targeted exchange rate
(D) Trade flows automatically adjust the currency value
34. Which of the following does NOT typically contribute to equilibrium
to a fiscal deficit?

Ans
(A) High revenue expenditure
(B) Increased repayment of prior loans (C) The government or central bank intervenes to
(C) Elevated capital expenditure on infrastructure maintain a targeted exchange rate
(D) Surplus tax revenue In a fixed exchange rate regime, authorities buy or sell
foreign currency (or use monetary policy tools) to keep


Ans the domestic currency at a predetermined level against a
(D) Surplus tax revenue reference currency. Market forces don’t freely dictate the
A fiscal deficit arises when government expenditures exchange rate in this system.
exceed its revenues (excluding borrowing). Surplus tax

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38. How can a country address persistent balance of skilled workers from exploitative wages. Initially, workers
payments deficits under a flexible exchange rate? welcomed the move, expecting higher incomes. However,
(A) By permanently fixing the currency to gold some businesses responded by cutting back on hiring to
(B) Through currency depreciation, making exports control labor costs. As the policy took effect, reports surfaced
cheaper of rising unemployment among youth and inexperienced
(C) Imposing a complete ban on imports workers. Some firms shifted towards automation
(D) By extensively subsidizing imports and invested in labor-saving technology to maintain


Ans profitability. Moreover, a few businesses informalized
part of their operations, avoiding the regulated wage
(B) Through currency depreciation, making exports rules. Government officials considered support programs
cheaper for displaced workers, yet faced criticism about potential
Under a flexible exchange rate, market pressures typically burdens on the public budget. This scenario illustrates
cause the domestic currency to depreciate when there is the delicate balance between ensuring fair wages and
a persistent deficit. This depreciation improves export preserving employment opportunities in the labor market.
competitiveness and discourages imports by making
them pricier, helping correct the balance of payments 41. What policy was introduced by the local municipality?
over time. (A) A new tax on employers
(B) A maximum wage
39. The current account of the Balance of Payments records: (C) A minimum wage above equilibrium
(A) Cross-border flows of goods, services, and income (D) A subsidy to businesses
(B) Official foreign exchange reserves
(C) All transactions of assets and liabilities

Ans
(D) Only illegal capital movements (C) A minimum wage above equilibrium


Ans The municipality set a mandatory wage floor above
the market clearing level, aiming to protect low-skilled
(A) Cross-border flows of goods, services, and income workers. While some beneficiaries earn more, others
The current account details exports and imports of lose jobs as firms cannot sustain higher labor costs,
goods (visible trade), services (invisible trade), income illustrating a typical trade-off inherent in such policies.
(profits, interest, dividends), and current transfers.
Capital transactions like foreign direct investment or 42. Which is NOT a likely consequence of imposing a
portfolio investments are part of the capital and financial minimum wage above the equilibrium?
account, not the current account. (A) Potential unemployment of lower-skilled workers
(B) Firms seeking alternatives like automation
40. A deficit in the current account means: (C) Reduction in labor costs for businesses
(A) The value of imports of goods and services exceeds (D) Rise in the cost of production for firms
exports
(B) Export receipts exceed import payments

Ans
(C) All capital inflows are negative (C) Reduction in labor costs for businesses
(D) The government is running a budget surplus By pushing wages above the market rate, total labor


Ans costs increase for businesses. Firms might reduce staff or
automate to manage costs, but not typically experience
(A) The value of imports of goods and services exceeds lower labor expenses unless they drastically cut their
exports workforce, which has other negative implications.
A current account deficit arises when a nation’s total
imports (goods and services) plus net income and 43. Assertion (A) : Some firms shift operations informally
transfers exceed its total exports and incoming receipts. to avoid higher wages.
This discrepancy must be balanced by a surplus in the Reason (R) : Rigid wage floors can incentivize businesses
capital account or drawdown of reserves. to circumvent regulations.
(A) Both (A) and (R) are true, and (R) is the correct


Direction :Carefully read the case study provided and then explanation of (A).
thoroughly answer the subsequent five questions. (B) Both (A) and (R) are true, but (R) is not the correct
A local municipality decided to impose a minimum explanation of (A).
wage above the market equilibrium to protect low-

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 PRACTICE PAPER 08

(C) (A) is true, (R) is false.

Direction :Carefully read the case study provided and then
(D) (A) is false, (R) is true. thoroughly answer the subsequent five questions.


Ans An emerging economy recently faced a sharp depreciation
of its currency due to increased imports and weakened
(A) Both (A) and (R) are true, and (R) is the correct export competitiveness. Foreign investors began
explanation of (A). withdrawing capital, worried about potential instability.
When wage floors exceed the equilibrium, employers As domestic prices of imported goods soared, inflationary
may face unsustainably high costs. This can motivate pressures rose. The central bank intervened by raising
some to operate informally or illegally. Thus, businesses interest rates, hoping to attract foreign capital flows and
avoiding mandated wages do so because the higher stabilize the currency. However, higher interest rates also
costs disrupt their viability, illustrating direct cause- increased borrowing costs for local firms, slowing down
and-effect. investment and dampening consumer spending. Some
44. Which statements accurately describe the potential analysts questioned whether the country might impose
fallout from a higher-than-equilibrium minimum wage? capital controls to curb outflows. Policymakers remained
1. Job loss for certain groups focused on balancing exchange rate stabilization with
2. Increased earnings for those who remain employed maintaining economic growth, reflecting the multifaceted
3. Zero effect on government programs considerations inherent in managing currency
4. Possible increase in automation fluctuations in a globally connected environment.
(A) 1, 2, and 4 only 46. What triggered the currency’s sharp depreciation?
(B) 2, 3, and 4 only (A) Increased exports and reduced imports
(C) 1 and 3 only (B) Heightened export competitiveness
(D) 1, 2, 3, and 4 (C) Higher import demand and weakened export


Ans competitiveness
(A) 1, 2, and 4 only (D) Restrictive capital controls
Setting a binding minimum wage can cause some

Ans
workers to lose their jobs (1). Those still employed may (C) Higher import demand and weakened export
enjoy higher pay (2). Firms often shift to automation competitiveness
to reduce labor reliance (4). Government programs The currency depreciated partly because imports
might be affected (e.g., supporting the unemployed), so exceeded exports, eroding the trade balance. Reduced
statement 3 is incorrect. export competitiveness worsened the trade gap,
45. Which policy approach could help reduce the negative prompting investors to withdraw capital. This capital
impact on employment while retaining some wage outflow further escalated downward pressure on the
support? currency’s value.
(A) Total removal of any wage regulation 47. Capital controls typically involve:
(B) Providing targeted subsidies or tax credits to (A) Prohibiting all forms of international trade
employers hiring low-skilled workers (B) Government measures to regulate capital inflows
(C) Forcing businesses to keep the same number of and outflows
employees regardless of profitability (C) Encouraging unrestricted capital movements
(D) Introducing blanket price floors on all goods (D) Eliminating all monitoring of foreign investments


Ans

Ans
(B) Providing targeted subsidies or tax credits to (B) Government measures to regulate capital inflows
employers hiring low-skilled workers and outflows
Instead of merely mandating higher wages, offering Capital controls are policies governments employ to
subsidies or tax incentives for hiring low-skilled manage or limit cross-border financial flows. These
workers can mitigate business cost pressures. This may can include restricting foreign direct investment,
help maintain employment levels while still supporting controlling currency exchange for foreign transactions,
workers’ incomes, striking a more balanced approach or placing conditions on repatriation of funds to prevent
than rigid across-the-board regulation. destabilizing outflows or inflows.

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48. Why did the central bank raise interest rates? between stabilizing the exchange rate and maintaining
(A) To discourage foreign investment economic activity.
(B) To reduce the cost of borrowing
(C) To attract foreign capital and support the currency

*************

(D) To cause further depreciation of the currency

Ans
(C) To attract foreign capital and support the currency
A rise in interest rates can attract overseas investors
seeking higher returns, potentially reversing capital
outflows and stabilizing the exchange rate. However, it
also increases domestic borrowing costs, posing a trade-
off between currency stability and economic growth.

49. Assertion (A) : Higher interest rates can lead to reduced

consumer spending.
Reason (R) : Costlier borrowing discourages purchases
of big-ticket items and slows investments.
(A) Both (A) and (R) are true, and (R) is the correct
explanation of (A).
(B) Both (A) and (R) are true, but (R) is not the correct
explanation of (A).
(C) (A) is true, (R) is false.
(D) (A) is false, (R) is true.


Ans
(A) Both (A) and (R) are true, and (R) is the correct
explanation of (A).
When interest rates climb, loans and financing become
costlier. Households may delay or reduce expensive
purchases (like homes, cars), and firms often postpone
capital expansion. This drop in spending and investment
explains why interest rate hikes can curb overall demand.

50. Which balanced approach might help the economy

manage currency stability without excessively harming
growth?
(A) Imposing strict capital controls and letting the
currency float freely
(B) Allowing unlimited depreciation of the currency
(C) Moderately raising interest rates with targeted
support for domestic industries
(D) Completely banning imports of all commodities


Ans
(C) Moderately raising interest rates with targeted
support for domestic industries
A moderate interest rate hike can attract foreign
investors and stem rapid capital flight, supporting the
currency. Offering targeted support (e.g., subsidies or
credit facilities) to domestic businesses can help offset
higher borrowing costs, aiming for a compromise

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 PRACTICE PAPER 09

PRACTICE PAPER 09

1. What does “microeconomics” deal with? (C) The maximum possible combinations of two goods
(A) Aggregate economic indicators given resources and technology
(B) Global trade dynamics A PPF shows the feasible output bundles of two
(C) Behaviour of individual units commodities using available resources at given
(D) Government fiscal policies technology. It highlights trade-offs and opportunity


Ans costs, as producing more of one good implies
producing less of another. Operating on the frontier
(C) Behaviour of individual units indicates productive efficiency; being inside it reveals
Microeconomics studies how individual consumers, underutilization of resources.
firms, and markets operate. It focuses on decision-
making at smaller scales, examining product pricing, 4. Which among the following does NOT typically shift
resource allocation, and consumer choices. Unlike the demand curve?
macroeconomics, which addresses national aggregates (A) Changes in consumer tastes
such as GDP, microeconomics dissects specific (B) Changes in the number of buyers
interactions to understand how supply and demand (C) Changes in consumer income
work in diverse market conditions. (D) Changes in the price of the product itself

2. Which term defines the additional satisfaction gained

Ans

from consuming one more unit of a good? (D) Changes in the price of the product itself
(A) Total utility A movement along the demand curve occurs if the
(B) Marginal utility product’s own price changes. Shifts in the entire curve
(C) Average utility happen because of external factors like consumer
(D) Residual utility preferences, income, or the price of related goods. Thus,


Ans price alone causes movement along a curve, but other
determinants shift it right or left.
(B) Marginal utility
Marginal utility measures how much extra satisfaction 5. How does the law of diminishing returns affect short-
or utility a consumer gets from using or consuming an run production?
additional unit. As usage increases, this incremental gain (A) It leads to endless growth in marginal product
often diminishes due to the principle of diminishing (B) It completely halts production after a point
marginal utility. It is central in determining demand (C) It causes marginal product to eventually decline
curves and how consumers allocate limited resources with added units of a variable input
efficiently. (D) It has no effect on total output

3. What does a Production Possibility Frontier (PPF)

Ans

illustrate? (C) It causes marginal product to eventually decline
(A) All possible wage rates in an economy with added units of a variable input
(B) All possible consumption combinations without In the short run, at least one input is fixed. Adding
trade more of a variable input initially increases marginal
(C) The maximum possible combinations of two goods product but eventually triggers crowding, making the
given resources and technology extra output gained from each additional input smaller.
(D) The total money supply in an economy This principle shapes cost curves and informs decisions


Ans about optimal production levels for firms.

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6. Which concept indicates how responsive the supply of a (A) Both are price makers
good is to changes in its price? (B) Both have a downward sloping demand curve for
(A) Income elasticity of demand the firm
(B) Price elasticity of demand (C) Perfect competition has many price-taker firms; a
(C) Cross elasticity of demand monopoly is a sole price maker
(D) Price elasticity of supply (D) Perfect competition always yields abnormal profits;


Ans monopoly never does

(D) Price elasticity of supply

Ans

Price elasticity of supply gauges the extent to which (C) Perfect competition has many price-taker firms; a
quantity supplied responds to price changes. If supply monopoly is a sole price maker
is highly elastic, producers adjust output swiftly when Under perfect competition, firms are price takers; the
price shifts. An inelastic supply indicates limited market sets the price. Conversely, a monopolist faces
responsiveness due to factors like capacity constraints the entire market demand curve and can influence
or production lags. It informs policy decisions and price. Thus, competitive firms produce where marginal
producer strategies. cost equals market price, while monopolists may restrict
output to raise price and capture higher profits.
7. Which of these is NOT a determinant of market demand
for a product? 10. How do average fixed costs (AFC) differ from average
(A) Consumer expectations variable costs (AVC) as output expands in the short run?
(B) Number of producers in the market (A) AFC remains constant, AVC always rises
(C) Price of related goods (B) AFC declines, AVC may initially fall then rise
(D) Consumer income levels (C) Both remain constant


Ans (D) Both continuously increase with output

(B) Number of producers in the market

Ans

Determinants of demand relate to consumers—such (B) AFC declines, AVC may initially fall then rise
as income, preferences, and prices of substitutes or As production increases, total fixed costs remain the
complements. Number of producers affects market same, so average fixed cost declines per unit. Average
supply rather than demand. Although producer count variable costs can initially decrease if benefits of
can influence equilibrium price indirectly, it does not specialization apply but eventually rise because of
directly factor into the demand schedule, which focuses diminishing marginal returns. Recognizing both
on consumer behavior and choices. behaviors aids firms in evaluating short-run cost
structures and pricing strategies.
8. Which option is NOT considered a part of a firm’s
revenue concepts? 11. Which concept most accurately explains why consumers
(A) Total Revenue buy more when the price falls?
(B) Marginal Revenue (A) Law of Supply
(C) Average Revenue (B) Law of Demand
(D) Variable Revenue (C) Fixed Proportion Hypothesis


Ans (D) Paradox of Thrift

(D) Variable Revenue

Ans

In standard economic analysis, firms track total, (B) Law of Demand
marginal, and average revenue. “Variable revenue” is not The law of demand states that, ceteris paribus, there
a typical standalone concept; rather, revenue changes is an inverse relationship between price and quantity
with units sold, and relevant measures describe how demanded. As price decreases, consumers can afford
extra output affects revenue (marginal) and per-unit more units and are more willing to purchase. This
earnings (average). Total revenue accumulates from fundamental economic principle underlies downward-
overall sales of the good. sloping demand curves, shaping business pricing
decisions and broader market dynamics.
9. How does perfect competition differ from monopoly in
terms of price determination?

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 PRACTICE PAPER 09

12. What best explains the main goal of a profit-maximizing Begin with GDP at market price (domestic). Subtract
firm in perfect competition? depreciation to get NDP at market price. Add net
(A) To create scarcity of products factor income from abroad to obtain GNP at factor
(B) To maximize revenue without considering costs cost. Subtract indirect taxes and add subsidies where
(C) To produce where marginal cost equals marginal needed, arriving eventually at NNP at factor cost. This
revenue progression is commonly taught in macroeconomics.
(D) To always keep prices above competitors
15. Arrange the following budget documents in the correct


Ans chronological order of their preparation/presentation:
(C) To produce where marginal cost equals marginal 1. Estimates of receipts
revenue 2. Estimates of expenditures
In perfect competition, each firm is a price taker, 3. Demands for grants
so maximizing profit means adjusting output until 4. Appropriation Bill
marginal cost equals marginal revenue (which equals (A) 1 → 2 → 3 → 4
price). Producing beyond that point reduces profit due (B) 2 → 3 → 1 → 4
to higher costs, while producing less forfeits potential (C) 1 → 3 → 2 → 4
profits. This equilibrium ensures efficient resource (D) 3 → 1 → 4 → 2
allocation across the industry.

Ans
13. Arrange the following steps in determining equilibrium (A) 1 → 2 → 3 → 4
price in correct chronological order: Budget proposals start by estimating receipts, followed
1. Identify supply schedule by anticipated expenditures. This leads to the demands
2. Identify demand schedule for grants, which specify the sums required by different
3. Locate intersection point ministries. Finally, the Appropriation Bill is introduced,
4. Set equilibrium price based on intersection allowing the government to withdraw funds from the
(A) 2 → 1 → 3 → 4 Consolidated Fund of India for approved expenditures.
(B) 1 → 2 → 4 → 3
16. Match the following concepts (Column I) with their
(C) 2 → 3 → 1 → 4
(D) 1 → 4 → 3 → 2 correct descriptions (Column II):

Ans Column I Column II

(A) 2 → 1 → 3 → 4 1 Marginal Cost a Total revenue ÷ Quantity
First, collect demand data (Step 2) and then the supply 2 Average Revenue b Cost of producing one
data (Step 1). Next, find the intersection (Step 3) of more unit
demand and supply curves. Finally, the price at that 3 Marginal Revenue c Output level maximizing
intersection becomes the equilibrium price (Step 4). profit
This systematic process reveals how markets clear and 4 Producer’s d Extra revenue from
allocate resources efficiently. Equilibrium selling one more unit
14. Put these national income concepts in the correct Options:
sequence of derivation: (A) 1-b, 2-a, 3-d, 4-c
1. GDP at market price (B) 1-a, 2-d, 3-c, 4-b
2. NDP at market price (C) 1-d, 2-c, 3-a, 4-b
3. NNP at factor cost (D) 1-c, 2-b, 3-a, 4-d
4. GNP at factor cost

Ans
(A) 1 → 4 → 2 → 3
(A) 1-b, 2-a, 3-d, 4-c
(B) 1 → 2 → 4 → 3
Marginal cost (MC) is the additional cost for one more
(C) 4 → 1 → 3 → 2
unit. Average revenue (AR) is total revenue divided by
(D) 2 → 1 → 3 → 4
output. Marginal revenue (MR) is the extra revenue


Ans from selling an additional unit. Producer’s equilibrium
(B) 1 → 2 → 4 → 3

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is the point where profit is maximized, typically where

Ans

MC = MR in microeconomics. (A) 1-a, 2-b, 3-c, 4-d
Personal income is what individuals receive before
17. Match the following monetary policy instruments
paying taxes, whereas personal disposable income is
(Column I) with their functions (Column II):
what remains after paying them. National disposable
Column I Column II income is the total income available to the country’s
1 Repo Rate a Percentage of deposits residents after tax. Private income includes earnings of
banks must keep as reserves private sector entities—households and corporations—
2 CRR b Rate at which banks borrow excluding government income.
from the central bank 19. Match the balance of payments components (Column I)
3 Bank Rate c Rate at which central bank with what they record (Column II):
buys/sells government
securities Column I Column II
4 Open Market d Long-term rate for central 1 Current Account a Trade in goods and
Operations bank lending services + transfer
payments
Options:
2 Capital Account b Net change in foreign
(A) 1-b, 2-a, 3-d, 4-c
assets and liabilities
(B) 1-a, 2-b, 3-c, 4-d
(C) 1-c, 2-d, 3-a, 4-b 3 Financial Account c Foreign direct
(D) 1-d, 2-c, 3-b, 4-a investments and
portfolio investments


Ans
4 Official Reserve d Change in central bank
(A) 1-b, 2-a, 3-d, 4-c Transactions reserves
The repo rate is what banks pay to borrow short-term
Options:
from the central bank. The cash reserve ratio is the
(A) 1-a, 2-b, 3-c, 4-d
portion of deposits banks must hold as reserves. The
(B) 1-a, 2-c, 3-b, 4-d
bank rate is a key long-term rate for lending. Open
(C) 1-b, 2-d, 3-a, 4-c
market operations involve buying or selling securities to
(D) 1-c, 2-a, 3-d, 4-b
regulate liquidity.


Ans
18. Match these macroeconomic terms (Column I) with
(A) 1-a, 2-b, 3-c, 4-d
their definitions (Column II):
The current account covers trade in goods and services
Column I Column II plus unilateral transfers. The capital account generally
1 Personal Income a Total income earned includes capital transfers. The financial account records
by individuals before foreign investment transactions (FDI and portfolio).
personal taxes Official reserve transactions show changes in central
2 Personal b Income remaining after bank foreign currency reserves, influencing exchange
Disposable Income personal tax payments rate management and liquidity.
3 National c Sum of incomes 20. Match each market form (Column I) with its feature
Disposable Income available to the nation (Column II):
after tax
Column I Column II
4 Private Income d Income accruing to
private sector (firms + 1 Perfect a Few sellers, identical or
households) Competition differentiated products
2 Monopoly b One seller, high entry
Options:
barriers
(A) 1-a, 2-b, 3-c, 4-d
(B) 1-d, 2-a, 3-b, 4-c 3 Oligopoly c Many buyers and sellers,
(C) 1-b, 2-c, 3-a, 4-d homogeneous product
(D) 1-c, 2-d, 3-b, 4-a

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 PRACTICE PAPER 09

4 Monopolistic d Many sellers, product (C) 1, 3, and 4 only

Competition differentiation (D) 1, 2, and 3 only

Options:

Ans
(A) 1-c, 2-b, 3-a, 4-d (B) 2, 3, and 4 only
(B) 1-d, 2-a, 3-b, 4-c GNP incorporates net factor income from abroad. NNP
(C) 1-a, 2-b, 3-d, 4-c at factor cost is NNP at market price minus net indirect
(D) 1-c, 2-d, 3-a, 4-b taxes (indirect taxes minus subsidies). Personal income


Ans omits undistributed corporate profits and corporate
taxes. GDP at factor cost generally excludes indirect
(A) 1-c, 2-b, 3-a, 4-d taxes; thus Statement 1 is incorrect.
Perfect competition involves many sellers offering an
identical product. A monopoly has a single seller with 23. Four statements about supply:
strong entry barriers. Oligopoly features a few dominant 1. Supply rises with technological improvements.
sellers with products that may be homogeneous or 2. The supply curve slopes downward.
differentiated. Monopolistic competition has many 3. Higher input costs shift supply left.
firms selling slightly differentiated products to compete 4. Per-unit tax shifts the supply curve upward.
on quality or branding. Which statements are true?
(A) 1, 3, 4
21. Four statements about consumer surplus: (B) 2, 3, 4
1. It measures the difference between what consumers (C) 1, 2, 3
are willing to pay and what they actually pay. (D) 1, 2, 4
2. It always equals producer surplus.
3. It can be illustrated as the area under the demand

Ans
curve above the price. (A) 1, 3, 4
4. It helps estimate welfare gains in market Improvements in technology lower production costs,
transactions. increasing supply. An increase in input prices or per-
Which combination is correct? unit taxes raises costs, shifting supply to the left or
(A) 1, 2, 3 upward on the graph. The supply curve typically slopes
(B) 2, 3, 4 upward (not downward), so Statement 2 is false, while 1,
(C) 1, 3, 4 3, and 4 are correct.
(D) 1, 2, 4
24. Four statements about equilibrium in perfect


Ans
competition:
(C) 1, 3, 4 1. Price = Marginal Cost in equilibrium.
Consumer surplus is indeed the gap between willingness 2. Firms cannot earn abnormal profits in the long run.
to pay and the market price, represented graphically 3. Demand curve for an individual firm is perfectly
under the demand curve and above the price line. It inelastic.
aids in calculating how consumers benefit from market 4. Entry of new firms occurs if existing firms earn
exchanges. It does not necessarily equal producer supernormal profits.
surplus; they differ depending on market structures. Which combination is correct?
(A) 1, 2, 4
22. Four statements about national income: (B) 1, 2, 3
1. GDP at factor cost includes indirect taxes. (C) 2, 3, 4
2. GNP includes net factor income from abroad. (D) 1, 3, 4
3. NNP at factor cost = NNP at market price –
(Indirect taxes + subsidies).

Ans
4. Personal income excludes corporate taxes and (A) 1, 2, 4
retained earnings. Under perfect competition, price equals marginal cost
Which set of statements is correct? at equilibrium. In the long run, free entry drives profits
(A) 1 and 2 only to normal levels. If supernormal profits exist, new firms
(B) 2, 3, and 4 only enter. However, each firm’s demand curve is perfectly

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elastic, not inelastic. Hence Statement 3 is incorrect, explanation of A.

while 1, 2, and 4 are correct. (C) A is true, R is false.
(D) A is false, R is true.
25. Five statements about the government budget:
1. Revenue receipts include direct and indirect taxes.

Ans
2. Capital receipts include disinvestment proceeds. (A) Both A and R are true, and R is the correct
3. Revenue expenditure creates government assets. explanation of A.
4. Fiscal deficit = Total expenditure – Total receipts Money functions as a convenient medium of exchange,
(excluding borrowings). eliminating the direct exchange constraints of barter
5. Budget deficit and fiscal deficit are always the same. (double coincidence of wants). Because barter demands
Choose the correct combination: matching desires from two parties, money streamlines
(A) 1, 2, 4 transactions. Hence, the assertion is accurate, and the
(B) 2, 3, 5 reason logically explains why money is widely accepted.
(C) 1, 3, 4
28. Assertion (A) : Excess demand can lead to inflationary
(D) 1, 2, 5
pressures.


Ans Reason (R) : Excess demand does not affect the price
(A) 1, 2, 4 level if supply is perfectly elastic.
Revenue receipts come from taxation and other non- (A) Both A and R are true, and R is the correct
repayable sources. Capital receipts include borrowings explanation of A.
and proceeds from asset sales (disinvestment). Revenue (B) Both A and R are true, but R is not the correct
expenditure does not create assets; it covers salaries, explanation of A.
subsidies, etc. Fiscal deficit is total expenditure minus (C) A is true, but R is false.
total non-borrowed receipts. Budget deficit and fiscal (D) A is false, but R is true.
deficit differ in certain calculations.

Ans
26. Assertion (A) : Under perfect competition, individual (C) A is true, but R is false.
firms are price takers. When aggregate demand exceeds aggregate supply,
Reason (R) : Each firm in perfect competition has inflationary pressures emerge because too much money
significant control over price. chases too few goods. The reason incorrectly states that
(A) Both A and R are true, and R is the correct a perfectly elastic supply would eliminate price effects.
explanation of A. In practice, short-run capacity constraints usually exist,
(B) Both A and R are true, but R is not the correct so excess demand typically drives prices upward.
explanation of A.
29. What happens if Aggregate Demand (AD) is lower than
(C) A is true, but R is false.
(D) A is false, but R is true. Aggregate Supply (AS) at full employment?
(A) Inflation rises immediately


Ans (B) Unemployment could increase
(C) A is true, but R is false. (C) The economy remains perfectly stable
In a perfectly competitive market, firms accept market (D) Government surpluses grow automatically
price; none can influence it alone because of many

Ans
sellers offering identical products. The reason claiming
significant price control contradicts that principle. (B) Unemployment could increase
Thus, the assertion is correct, while the reason given is If AD is insufficient to purchase the output produced at
incorrect regarding price-setting power. full employment, inventories build up, firms scale down
production, and layoffs ensue. This leads to underutilized
27. Assertion (A) : Money serves as a medium of exchange. resources and higher unemployment. Policymakers
Reason (R) : Barter trade requires a double coincidence often respond with expansionary measures—reducing
of wants, which is inconvenient. taxes or increasing spending—to boost aggregate
(A) Both A and R are true, and R is the correct demand and maintain employment levels.
explanation of A.
30. In a two-sector model (no government), the equilibrium
(B) Both A and R are true, but R is not the correct
level of income is determined where:

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 PRACTICE PAPER 09

(A) Savings exceed investment (B) They manage a country’s currency and monetary
(B) Investment equals savings policy
(C) Consumption equals investment (C) They function exactly like commercial banks
(D) Aggregate supply exceeds aggregate demand (D) They earn profit by selling shares on the stock


Ans market

(B) Investment equals savings

Ans

In a simplified model with only households and firms, (B) They manage a country’s currency and monetary
equilibrium occurs where planned investment matches policy
planned savings. Households’ decision to save equals Central banks, such as the Reserve Bank of India,
firms’ intention to invest. If savings exceed investment, regulate currency issuance, control money supply, and
total demand falls, reducing output. When investment steer interest rates to maintain price stability and foster
exceeds savings, demand outstrips supply, prompting economic growth. They differ fundamentally from
higher production until balance is restored. commercial banks, focusing on policy and financial
stability rather than profit through regular banking
31. Which of the following best describes the multiplier operations or stock market activity.
effect in macroeconomics?
(A) It is the ratio of price to quantity demanded 34. In India, which deficit measure excludes interest
(B) It measures a government’s fiscal deficit payments on past borrowings?
(C) It indicates how a change in autonomous spending (A) Revenue Deficit
leads to a greater change in national income (B) Fiscal Deficit
(D) It is the difference between gross and net national (C) Primary Deficit
product (D) Effective Revenue Deficit


Ans

Ans
(C) It indicates how a change in autonomous spending (C) Primary Deficit
leads to a greater change in national income Primary deficit is calculated by subtracting interest
The investment or spending multiplier captures how payments from the fiscal deficit, indicating the extent
an initial injection into the economy triggers multiple to which the government’s current spending surpasses
rounds of spending, each portion re-spent by recipients, current revenue (excluding the burden of past debt). It
resulting in a total income increase larger than the shows how much the government must borrow for basic
initial outlay. The size of the multiplier depends on the expenditures, ignoring legacy interest obligations.
marginal propensity to consume.
35. What happens if the government runs a budget surplus?
32. What defines the money-creating function of (A) It must print more money immediately
commercial banks? (B) Public debt automatically escalates
(A) Issuing currency notes directly (C) Government’s receipts exceed its expenditures
(B) Accepting deposits without lending (D) Aggregate demand drastically declines always
(C) Extending loans using fractional reserve deposits

Ans
(D) Setting the base interest rate for the entire economy
(C) Government’s receipts exceed its expenditures


Ans A budget surplus occurs when government revenue
(C) Extending loans using fractional reserve deposits from taxes and other sources surpasses its total spending.
Commercial banks hold only a fraction of deposits as This can potentially reduce public debt if surplus
reserves, lending out the rest. Loans eventually return funds are used to pay off existing loans. Surpluses do
as deposits, allowing more lending and deposit creation. not necessarily cause an immediate drop in aggregate
This “credit creation” process multiplies the initial demand, especially if managed prudently.
deposits, expanding the money supply. The central
36. Which factor directly affects floating exchange rates?
bank, not commercial banks, issues legal tender and
base rates. (A) Government mandate fixing currency value
(B) Complete insulation from global markets
33. Which statement about central banks is correct? (C) Supply and demand forces for a currency
(A) They always set market prices for goods (D) Barter system existence

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Ans

Ans
(C) Supply and demand forces for a currency (D) Increased outflow of dividends to foreign investors
Under a floating exchange rate regime, the currency’s A current account deficit shrinks when export earnings
value adjusts based on market forces of supply and rise, imports decline, or remittances from abroad
demand in foreign exchange markets. Higher demand grow. However, larger outflows for dividends or other
for a currency appreciates its value, while reduced investment income widen the current account deficit
demand or increased supply depreciates it. Government because they represent money leaving the country.
intervention is minimal unless policy actions Reducing current account gaps relies on boosting
temporarily influence markets. inflows or curbing outflows.

37. Which of the following is included under the current 40. What is the primary economic implication of rationing
account of the Balance of Payments? under price ceilings?
(A) Foreign direct investment flows (A) Surplus of goods in the market
(B) Portfolio investments in domestic equity (B) Equitable distribution and no shortages
(C) Exports and imports of goods and services (C) Emergence of black markets and potential shortages
(D) External commercial borrowings by companies (D) Guaranteed long-run efficiency


Ans

Ans
(C) Exports and imports of goods and services (C) Emergence of black markets and potential shortages
The current account tracks trade in goods and Price ceilings below equilibrium often lead to excess
services and unilateral transfers (like remittances). demand, prompting shortages if producers find it
Investments—foreign direct or portfolio—generally unprofitable to supply sufficient quantities. Rationing
appear under the capital or financial account. External may be introduced to distribute limited goods. However,
borrowings, likewise, are reflected in capital or financial this environment can foster black markets, where goods
flows. The current account specifically measures the are sold illegally at higher prices to circumvent official
nation’s net trade position plus net transfer payments. restrictions.

38. Why might a country prefer a flexible exchange rate

Direction :Carefully read the case study provided and then
system? thoroughly answer the subsequent five questions.
(A) To eliminate all currency fluctuations A rural cooperative plans to expand milk production by
(B) Because it allows market forces to correct external adopting modern technology, anticipating higher demand
imbalances automatically due to government school milk programs. Members pool
(C) To fix its currency below other nations’ values resources to acquire new machinery. Initially, milk output
(D) To guarantee no impact on domestic policy rises significantly with each additional worker. However,


Ans the existing cowshed becomes crowded, and workers start
sharing fewer milking stations. Marginal production of
(B) Because it allows market forces to correct external milk declines. Despite this, the cooperative sees rising
imbalances automatically overall output, just at a decreasing rate. They set a fixed
In a flexible or floating rate regime, exchange rates adjust price contract with schools. Meanwhile, local consumers
according to demand and supply for foreign exchange, benefit from the increased supply. The cooperative’s aim is
potentially balancing trade deficits or surpluses. A trade to avoid milk shortages and keep prices stable. However,
deficit, for instance, can cause depreciation, making future expansion might require a second cowshed, which
exports cheaper and imports costlier, encouraging self- would be a long-run decision, depending on the success of
correction. This approach can offer more autonomy the current initiative.
over domestic monetary policy.
41. What factor eventually causes marginal milk output to
39. Which factor does NOT reduce a nation’s current decline at the cooperative?
account deficit? (A) Rapid price fluctuations
(A) Higher export revenues (B) Crowded cowshed and limited milking stations
(B) Lower import payments (C) A drop in government demand
(C) Increased inward remittances (D) Reduced consumer preference for milk
(D) Increased outflow of dividends to foreign investors

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 PRACTICE PAPER 09

Ans (C) Marginal returns will decline further, limiting

(B) Crowded cowshed and limited milking stations efficiency gains
The cooperative experiences diminishing marginal Continuously adding labor to the same limited cowshed
returns because the fixed capacity of the cowshed intensifies overcrowding, raising constraints. Although
constrains productivity. Initially, more workers increase total output may still rise slightly, each extra worker
output effectively, but eventually, space limitations yields smaller gains in output. Eventually, diminishing
cause them to interfere with each other’s tasks, lowering returns become pronounced, restricting overall
marginal output. This reflects the classic short-run efficiency. A second cowshed or capacity expansion
scenario where at least one factor is fixed. would be a long-run fix for this issue.

42. Which economic principle does the cooperative’s 45. If the cooperative invests in a second cowshed, which
production scenario illustrate? statement best explains its decision?
(A) Law of Diminishing Marginal Returns (A) It represents a short-run cost adjustment
(B) Perfectly Elastic Supply in the Long Run (B) It is a capital expenditure aimed at increasing long-
(C) Indivisibility of Capital run capacity
(D) Shortage as a Permanent Condition (C) It eliminates opportunity costs entirely
(D) It lowers the price below the market equilibrium


Ans


Ans
(A) Law of Diminishing Marginal Returns
When at least one input (the cowshed) is fixed, adding (B) It is a capital expenditure aimed at increasing long-
successive units of a variable input (workers) yields run capacity
progressively smaller increases in output. This is the Building a new facility is a long-run strategic decision
law of diminishing returns, prominent in short-run that changes the scale of operations. It moves the
production. It helps explain why output cannot keep cooperative beyond the short-run constraints by
rising proportionately after a certain point. expanding fixed factors. This investment raises potential
output, helps avoid overcrowding, and allows them to
43. Why does the cooperative fix a price contract with benefit from economies of scale, if demand remains
government schools? robust.
(A) To generate a monopoly
(B) To ensure stable demand and revenue

Direction :Carefully read the case study provided and then
(C) To reduce worker wages thoroughly answer the subsequent five questions.
(D) To stop private consumption A garment producer faces fluctuating demand both
domestically and abroad. Recently, the foreign exchange


Ans
rate moved in favor of exports, making its garments
(B) To ensure stable demand and revenue cheaper for overseas buyers. Sales surged, so the firm hired
By locking in a contract, the cooperative knows how additional employees and purchased more raw materials.
much milk schools will purchase and at what price. This Soon, diminishing returns kicked in because the factory
arrangement helps them plan production efficiently, floor was optimized for fewer workers. Operating costs
manage costs, and reduce uncertainty. Guaranteed began to rise faster than revenue. Meanwhile, domestic
demand encourages investment in modern technology, buyers complained of higher prices, partly due to
aiding consistent supply and potentially stabilizing inflationary pressures and increased input costs. Although
market conditions for local consumers. profit margins grew initially, the owner realized the need
for expanded capacity or a second facility to sustain
44. What might happen if the cooperative keeps expanding
output growth. This instance highlights how exchange rate
without acquiring an additional cowshed?
changes, inflation, and capacity constraints intertwine in
(A) Output will stop completely
real business decisions.
(B) The law of demand will no longer apply
(C) Marginal returns will decline further, limiting 46. Why did the garment producer see a surge in overseas
efficiency gains sales?
(D) All workers will become unemployed (A) Domestic recession


Ans (B) Favorable exchange rate shifts
(C) Negative brand reputation

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(D) Saturated export market

Ans

Ans (B) Expand production capacity

When short-run constraints become binding, investing
(B) Favorable exchange rate shifts
in a larger facility or building a second one allows the
A weaker domestic currency or a favorable exchange
firm to efficiently handle higher production without
movement makes exported goods more price-
incurring rapidly escalating marginal costs. This capital
competitive abroad. Foreign buyers find cheaper
investment is a long-run adjustment that stabilizes
imports appealing, which raises demand for the firm’s
production, sustains competitiveness, and keeps pace
garments. Consequently, orders surge, encouraging
with growing export orders.
the producer to ramp up production in the short run,
sometimes straining existing resources. 50. How do exchange rate fluctuations, inflation, and
capacity constraints collectively affect a firm’s decisions?
47. Which factor contributed to rising operating costs
(A) They have no combined effect on production
despite higher sales?
(B) They make domestic sales completely irrelevant
(A) Unlimited plant capacity
(C) They interact to determine profitability and
(B) Excess labor leading to diminishing returns
expansion plans
(C) Perfect elasticity of supply
(D) They ensure the firm always enjoys high profit
(D) Full government subsidy
margins


Ans


Ans
(B) Excess labor leading to diminishing returns
(C) They interact to determine profitability and
When workers are crowded in a space designed for
expansion plans
fewer people, coordination problems and inefficiencies
Exchange rates influence export competitiveness.
emerge, escalating costs faster than output grows. This
Inflation affects input costs and domestic pricing.
is the classic short-run diminishing returns scenario.
Capacity constraints limit how effectively a firm can
While additional workers boost total output initially,
scale up in response to demand. These forces together
marginal productivity eventually declines, driving up
shape a business’s short-run profitability and drive
per-unit production costs.
strategic, long-run decisions on capital investments,
48. Why did domestic buyers experience higher garment labor hiring, and market diversification.
prices?


*************
(A) Inflationary pressures and higher input costs
(B) Complete ban on imports
(C) Sudden shortage of currency in circulation
(D) Strict government price controls


Ans
(A) Inflationary pressures and higher input costs
As inflation rises, the cost of raw materials, wages,
and transportation can climb, pushing firms to raise
product prices. Furthermore, strong export demand
sometimes redirects supply away from the domestic
market, reducing local availability and contributing to
price increases. These factors jointly fuel the domestic
price surge.

49. Which measure could sustainably support the firm’s

growing export demand?
(A) Maintain the same factory size indefinitely
(B) Expand production capacity
(C) Fire existing labor to reduce costs
(D) Halt exports to maintain domestic price levels

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 PRACTICE PAPER 10

PRACTICE PAPER 10

1. Which term describes the situation where the quantity The main methods for measuring price elasticity of
demanded equals the quantity supplied in a market? demand are the percentage (or proportionate) method,
(A) Disequilibrium the total expenditure method, and the geometric
(B) Shortage method (point and arc). The term “ordinal method”
(C) Equilibrium relates more to utility theory (ordinal utility approach),
(D) Surplus not specifically to calculating elasticity of demand.


Ans 4. When does average cost (AC) equal marginal cost
(C) Equilibrium (MC)?
Equilibrium arises where demand and supply intersect, (A) Only when AC is falling
establishing a market-clearing price and quantity. (B) At the minimum point of the AC curve
Neither surplus nor shortage exists at that point. Buyers (C) Never, because AC and MC cannot intersect
can purchase the exact amount suppliers are willing (D) Only when total cost is at its maximum
to sell at this price. Markets naturally adjust toward

Ans
equilibrium unless external interventions or shocks
disrupt this balance. (B) At the minimum point of the AC curve
Average cost and marginal cost intersect where AC is at
2. What is “consumer equilibrium” under the utility its minimum. Below that output, MC is lower than AC,
approach? pulling the average downward. Beyond that point, MC
(A) The situation when total utility is negative is higher than AC, pushing the average upward. This
(B) The state where a consumer maximizes satisfaction principle helps identify an efficient scale of production
given budget constraints in the short run.
(C) The point at which consumer surplus is zero
5. Why is the supply curve upward sloping in a typical
(D) A scenario when marginal cost equals marginal
utility market?
(A) Producers prefer to sell fewer goods at higher prices


Ans (B) Higher prices generally attract more producers or
(B) The state where a consumer maximizes satisfaction motivate existing ones to supply more
given budget constraints (C) Supply curves are vertical due to fixed resources
Consumer equilibrium is attained when the consumer (D) Demand and supply curves are always identical
cannot increase total utility by reallocating expenditure

Ans
among goods. In the utility approach, this is typically
where the ratio of marginal utilities to prices is equal (B) Higher prices generally attract more producers or
across goods, given a fixed budget. It ensures the best motivate existing ones to supply more
possible satisfaction with limited income. As prices rise, production becomes more profitable,
encouraging firms to boost output and new firms to
3. Which of the following is NOT a method for measuring enter the market. This relationship underpins the typical
price elasticity of demand? upward slope of the supply curve. It assumes other
(A) Percentage method factors remain constant, including technology, input
(B) Expenditure method costs, and producer goals.
(C) Geometric method
6. In which type of market structure can a firm not
(D) Ordinal method
influence the price at all?


Ans (A) Monopoly
(D) Ordinal method (B) Oligopoly

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(C) Monopolistic competition (B) Under perfect competition, AR equals price; under
(D) Perfect competition monopoly, AR is the market demand curve


Ans (C) Under monopoly, AR equals marginal cost
(D) Under perfect competition, AR is the marginal
(D) Perfect competition utility of the good
In a perfectly competitive market, numerous firms sell
identical products, and each firm’s output is negligible

Ans
compared to total market supply. Hence, no single firm (B) Under perfect competition, AR equals price; under
can influence price; they must accept the prevailing monopoly, AR is the market demand curve
market-determined price. By contrast, monopoly, In perfect competition, each firm is a price taker, so
oligopoly, and monopolistic competition permit varying average revenue per unit sold equals the constant market
degrees of price influence. price. A monopolist faces the entire market demand
curve, so selling additional units lowers the average
7. Which of these does NOT factor into determining revenue because the price must be cut for all units sold.
supply for an agricultural product?
(A) Weather conditions 10. Which statement distinguishes macroeconomics from
(B) Technological changes in cultivation microeconomics?
(C) The good’s own price (A) Microeconomics studies the aggregate price level;
(D) Past consumer tastes macroeconomics studies individual prices


Ans (B) Macroeconomics deals with overall economic
variables like GDP, inflation, and unemployment;
(D) Past consumer tastes microeconomics focuses on individual consumer
Supply factors focus on production variables like costs, and producer behavior
technology, natural conditions, and the product’s market (C) They are essentially the same branch of economics
price. While current and future demand can indirectly (D) Macroeconomics is always normative;
affect supply decisions, “past consumer tastes” do not microeconomics is always positive
typically alter present supply. Producers mainly consider
forward-looking demand expectations, input costs, and

Ans
prevailing technology. (B) Macroeconomics deals with overall economic
variables like GDP, inflation, and unemployment;
8. Which scenario would NOT typically be associated with microeconomics focuses on individual consumer and
the law of demand? producer behavior
(A) As the price of coffee rises, fewer people buy it Macroeconomics examines large-scale economic
(B) As ticket prices climb, airline travel quantity factors—national income, growth, inflation, and
demanded drops joblessness. Microeconomics zeroes in on the actions
(C) As a commodity’s price goes up, demand stays of individual agents, such as households or firms, and
strictly the same, unaffected how they make decisions regarding resource allocation
(D) As the price of a product falls, more consumers can and prices in particular markets. Both share analytical
afford it approaches but operate at different levels of aggregation.


Ans
11. What is the main objective of a central bank’s open
(C) As a commodity’s price goes up, demand stays market operations?
strictly the same, unaffected (A) To collect direct taxes
The law of demand states there is an inverse relationship (B) To regulate the interest rates and money supply in
between price and quantity demanded, assuming all else the economy
constant. If the price changes but quantity demanded (C) To create unlimited money
remains entirely unaffected, that would be an exception (D) To handle private investment portfolios
(perfectly inelastic demand). Typically, higher prices
suppress demand, and lower prices encourage it.

Ans
(B) To regulate the interest rates and money supply in
9. How does average revenue (AR) differ between perfect the economy
competition and monopoly?
(A) AR is always identical in both

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 PRACTICE PAPER 10

Open market operations involve buying and selling (C) 3 → 1 → 4 → 2

government securities in the open market. By doing (D) 4 → 3 → 2 → 1
so, a central bank influences liquidity and short-term

Ans
interest rates, impacting broader money supply. This
tool helps stabilize inflation, guide economic growth, (A) 1 → 2 → 3 → 4
and ensure orderly financial markets. The multiplier mechanism starts with an autonomous
injection (1). This raises income for certain recipients
12. Which action would a government likely take to combat (2). They spend more (3), which boosts others’ incomes,
deficient demand? triggering successive rounds of spending (4). Each cycle
(A) Increase taxes significantly continues until leakages like savings, taxes, or imports
(B) Encourage higher savings to reduce consumption dampen the chain effect.
(C) Lower interest rates or boost public spending
15. Arrange these concepts regarding money in historical
(D) Impose strict price ceilings to curb inflation
development order:


Ans 1. Commodity Money
(C) Lower interest rates or boost public spending 2. Metallic Coins
When aggregate demand is too low, governments often 3. Paper Currency
implement expansionary fiscal or monetary policy. 4. Fiat Money (modern)
Lowering interest rates spurs borrowing and investment, (A) 4 → 1 → 3 → 2
while increased public spending injects money into the (B) 2 → 3 → 1 → 4
economy. These measures aim to raise consumption, (C) 1 → 2 → 3 → 4
spur production, and reduce unemployment. Price (D) 1 → 3 → 2 → 4
ceilings mainly address inflation, not deficient demand.

Ans
13. Arrange these steps for measuring national income (C) 1 → 2 → 3 → 4
through the value-added method: Early societies used commodity money like cattle or
1. Identify value added at each stage of production salt. Then minted metal coins appeared, facilitating
2. Sum all value additions across industries standardized trade. Paper currency evolved later to
3. Subtract intermediate consumption from gross represent stored value more conveniently. Modern fiat
output at each stage money, not backed by a physical commodity, is the latest
4. Eliminate double counting of intermediate goods stage, supported by government decree and central bank
(A) 3 → 1 → 4 → 2 policies.
(B) 4 → 3 → 1 → 2
16. Match items in Column I with their meanings in
(C) 1 → 3 → 4 → 2
(D) 3 → 4 → 1 → 2 Column II:

Ans Column I Column II

(C) 1 → 3 → 4 → 2 1 Total Cost a Cost per unit of output
First, determine value added at each stage (1). Then 2 Average Cost b Cost of producing one
calculate it by subtracting intermediate consumption additional unit
from gross output (3). Ensure no double counting 3 Marginal Cost c Sum of all fixed and
of inputs (4). Finally, total all value additions across variable costs
industries (2) to arrive at the economy’s aggregate value 4 Variable Cost d Cost that changes with
added. output level
14. Put these steps of the multiplier process in order: Options:
1. Initial investment (A) 1-b, 2-a, 3-c, 4-d
2. Increase in income (B) 1-c, 2-a, 3-b, 4-d
3. Increase in consumption (C) 1-c, 2-d, 3-a, 4-b
4. Further rounds of spending (D) 1-a, 2-c, 3-d, 4-b
(A) 1 → 2 → 3 → 4

Ans
(B) 2 → 1 → 3 → 4
(B) 1-c, 2-a, 3-b, 4-d

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Total cost includes both fixed and variable expenses. (C) 1-c, 2-a, 3-b, 4-d
Average cost is total cost divided by units of output. (D) 1-d, 2-b, 3-a, 4-c
Marginal cost is the extra cost of producing one

Ans
more unit. Variable cost rises or falls with the level of
production. This classification assists in analyzing (A) 1-c, 2-b, 3-d, 4-a
short-run and long-run costs. Depreciation is the loss in value from wear and tear.
Gross investment indicates total capital additions
17. Match types of unemployment (Column I) with their before subtracting depreciation. Net investment is
primary cause (Column II): the remainder after depreciation is deducted. Capital
replacement is the process of reinvesting to substitute
Column I Column II
aging assets, maintaining production capacity.
1 Frictional a Mismatch of skills and job
Unemployment requirements 19. Match these statements (Column I) to whether they
relate to “Real Flow” or “Money Flow” in the circular
2 Structural b Seasonal shifts in demand flow (Column II):
Unemployment for labor Column I Column II
3 Seasonal c Temporary transitions 1 Households supply a Money Flow
Unemployment between jobs labor to firms
4 Cyclical d Downturn in overall 2 Firms pay wages to b Real Flow
Unemployment economic activity households
Options: 3 Households
(A) 1-c, 2-a, 3-b, 4-d consume goods
(B) 1-b, 2-d, 3-c, 4-a
4 Households’
(C) 1-a, 2-c, 3-d, 4-b
payments for goods
(D) 1-d, 2-b, 3-a, 4-c
Options:


Ans (A) 1-b, 2-a, 3-b, 4-a
(A) 1-c, 2-a, 3-b, 4-d (B) 1-a, 2-b, 3-a, 4-b
Frictional unemployment arises as people move between (C) 1-b, 2-b, 3-a, 4-a
jobs. Structural unemployment results from skills (D) 1-a, 2-a, 3-b, 4-b
becoming obsolete or not matching job needs. Seasonal

Ans
unemployment reflects changes in labor demand
tied to seasons (e.g., agriculture, tourism). Cyclical (A) 1-b, 2-a, 3-b, 4-a
unemployment stems from economic recessions that Real flows refer to the movement of actual goods,
lower aggregate demand for labor overall. services, or resources (labor). Money flows reflect
monetary payments for these real flows. Households
18. Match the following (Column I) with their definitions supplying labor and consuming goods are real flows.
(Column II): Firms paying wages and receiving payments for goods
represent money flows in the circular flow model.
Column I Column II
1 Depreciation a Investment to replace worn- 20. Match the following policy instruments (Column I)
out capital with their descriptions (Column II):
2 Gross b Addition to capital stock Column I Column II
Investment without accounting for wear
1 Deficit a Using government
3 Net Investment c Wear and tear of capital Financing borrowing or printing
assets money to cover expenditure
4 Capital d Gross investment minus 2 Progressive b Tax rate increases as income
Replacement depreciation Tax increases
Options: 3 Reserve Ratio c Fraction of deposits banks
(A) 1-c, 2-b, 3-d, 4-a must hold in reserve
(B) 1-b, 2-c, 3-a, 4-d

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 PRACTICE PAPER 10

4 Subsidy d Financial help from (C) 1, 2, and 4

government to reduce (D) 1, 2, and 3
production cost

Ans
Options: (A) 1, 3, and 4
(A) 1-a, 2-b, 3-c, 4-d Equilibrium in a simple two-sector model occurs
(B) 1-b, 2-a, 3-d, 4-c when investment matches savings. A higher marginal
(C) 1-c, 2-d, 3-b, 4-a propensity to consume (MPC) leads to a bigger
(D) 1-d, 2-c, 3-a, 4-b multiplier. If aggregate demand is insufficient,


Ans unemployment can rise. The multiplier effect depends
critically on MPC, so ignoring MPC (Statement 2) is
(A) 1-a, 2-b, 3-c, 4-d incorrect.
Deficit financing involves borrowing or printing money
to bridge the gap between expenditure and revenue. A 23. Four statements about money:
progressive tax increases in rate with income. The reserve 1. Money as a store of value
ratio stipulates how much of deposit money banks 2. Money must be minted in gold
hold. Subsidies are governmental financial support 3. Money as a medium of exchange
mechanisms that lower production or consumer costs. 4. Money facilitates deferred payments
Which statements are true?
21. Four statements about revenue concepts: (A) 1, 2, and 3
1. Marginal revenue equals the change in total revenue (B) 1, 3, and 4
from selling one more unit (C) 2, 3, and 4
2. Average revenue is total revenue divided by quantity (D) 1, 2, and 4
sold
3. Total revenue is the product price multiplied by

Ans
quantity sold (B) 1, 3, and 4
4. Producer surplus is the same as total revenue Money serves multiple functions: a store of value,
Which combination is correct? a medium of exchange, and a unit of account that
(A) 1, 2, 3 facilitates deferred payments. It need not be backed by
(B) 2, 3, 4 gold in modern economies; fiat money circulates by
(C) 1, 3, 4 government decree. Hence statements 1, 3, and 4 are
(D) 1, 2, 4 correct, while 2 is not.


Ans
24. Four statements on government budget classification:
(A) 1, 2, 3 1. Capital receipts include loan recoveries
MR measures the increment in total revenue from an 2. Revenue expenditure creates assets for the
additional unit. AR is TR divided by quantity. TR is government
price × quantity. Producer surplus differs from total 3. Primary deficit = Fiscal deficit – Interest payments
revenue since it considers the difference between the 4. Non-plan expenditure is the same as development
market price and producers’ minimum acceptable price expenditure
over total units sold. Which combination is correct?
(A) 1, 3
22. Four statements about the determination of income and (B) 2, 4
employment: (C) 1, 2, 3
1. Investment equals savings in equilibrium (D) 2, 3, 4
2. The multiplier effect ignores marginal propensity to
consume

Ans
3. Higher MPC means a larger multiplier (A) 1, 3
4. Aggregate demand shortfalls cause unemployment Capital receipts can include loan recoveries and
Which are correct statements? disinvestment proceeds. Primary deficit is indeed fiscal
(A) 1, 3, and 4 deficit minus interest payments. Revenue expenditure
(B) 2, 3, and 4 does not create government assets; it covers salaries,

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subsidies, etc. Non-plan expenditure is not always additional supply but reduce consumer purchases.
development expenditure; classification depends on (A) Both A and R are true, and R is the correct
nature and objective of the outlay. explanation of A.
(B) Both A and R are true, but R is not the correct
25. Five statements about macroeconomic problems: explanation of A.
1. Inflation erodes purchasing power (C) A is true, R is false.
2. High unemployment means underutilized (D) A is false, R is true.
resources
3. Stagflation combines inflation with stagnation

Ans
4. Hyperinflation is a mild rise in general price level (A) Both A and R are true, and R is the correct
5. Recession indicates a fall in real GDP explanation of A.
Choose the correct combination: A surplus appears if the set price is higher than the
(A) 1, 2, 3, 5 equilibrium, causing suppliers to produce more while
(B) 1, 4, 5 consumers buy less. Consequently, unsold stocks
(C) 2, 3, 4 accumulate. The reason precisely clarifies why a surplus
(D) 1, 2, 3, 4 occurs, forming the logical basis for the assertion. Prices


Ans adjust downward to remove the surplus.

(A) 1, 2, 3, 5 28. Assertion (A) : Deficit financing can trigger inflation.

Inflation reduces the purchasing power of money. Reason (R) : Printing money or borrowing excessively
Unemployment reflects idle factors of production. can boost aggregate demand beyond the economy’s
Stagflation is when output growth stagnates amid rising capacity.
prices. A recession occurs when real GDP contracts over (A) Both A and R are true, and R is the correct
successive quarters. Hyperinflation is an extreme, rapid explanation of A.
price rise—not a mild one—so statement 4 is incorrect. (B) Both A and R are true, but R is not the correct
explanation of A.
26. Assertion (A) : In the short run, a firm cannot adjust all (C) A is true, R is false.
factors of production. (D) A is false, R is true.
Reason (R) : Fixed factors cannot be changed
immediately, while variable factors can be altered

Ans
quickly. (A) Both A and R are true, and R is the correct
(A) Both A and R are true, and R is the correct explanation of A.
explanation of A. When the government finances its deficit by creating
(B) Both A and R are true, but R is not the correct new money or borrowing heavily, aggregate spending
explanation of A. rises. If the economy is near full employment, this extra
(C) A is true, R is false. demand outstrips supply, causing inflationary pressures.
(D) A is false, R is true. Thus, the reason accurately explains how deficit


Ans financing can stoke inflation, validating the assertion.

(A) Both A and R are true, and R is the correct 29. Which of the following would lead to an appreciation
explanation of A. of a country’s currency under a floating exchange rate
The short run is defined by the presence of at least one system?
fixed factor that cannot be immediately increased or (A) A sudden collapse in exports
reduced. Variable factors (e.g., labor, raw materials) can (B) A massive outflow of foreign investment
be adjusted in response to demand changes. Hence, the (C) A rising demand for the country’s currency in
reason correctly explains the assertion about short-run global markets
production constraints. (D) Imposition of higher tariffs on imports

27. Assertion (A) : A surplus arises in the market when

Ans

quantity supplied exceeds quantity demanded at a given (C) A rising demand for the country’s currency in global
price. markets
Reason (R) : Prices above equilibrium tend to encourage

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 PRACTICE PAPER 10

Under a floating regime, exchange rates move with level, causing inflationary gaps
supply and demand. A currency appreciates when (C) Unemployment rises sharply
more global buyers want it for investment, trade, or (D) Widespread unsold inventories accumulate
speculation, pushing its price up. Exports collapses or

Ans
major capital outflows generally cause depreciation.
Tariff changes can have indirect effects but not (B) The economy is operating above its full employment
guaranteed appreciation. level, causing inflationary gaps
Excess demand surfaces when aggregate demand
30. Which statement best describes “balance of payments”? exceeds the economy’s capacity, often pushing output
(A) It is a budget statement of the government’s annual temporarily above the full employment level. This
revenues typically triggers upward price pressures. Conversely,
(B) It records all economic transactions between falling real GDP or rising unemployment implies
residents of a country and the rest of the world deficient demand. Large inventory buildup usually
(C) It only tracks official transactions by public points to insufficient demand, not excess demand.
corporations
33. Which is a defining feature of “perfect competition” in
(D) It is the method of adjusting domestic prices to
match foreign markets product markets?
(A) Firms sell differentiated products


Ans (B) Each producer faces a perfectly elastic demand
(B) It records all economic transactions between curve at the market price
residents of a country and the rest of the world (C) There are only three dominant firms
The balance of payments (BoP) tabulates monetary (D) Price discrimination is widespread
exchanges—imports, exports, capital flows, transfer

Ans
payments, etc.—between one nation’s residents
(individuals, firms, government) and those of (B) Each producer faces a perfectly elastic demand
other countries. It comprises the current account, curve at the market price
capital account, and financial account, capturing a Under perfect competition, products are homogeneous,
comprehensive external transactions ledger. and numerous buyers and sellers exist. Each firm can
sell any quantity at the prevailing price but cannot
31. How does a central bank typically reduce excess liquidity influence that price individually. Hence, the firm’s
during inflation? demand curve is perfectly elastic. Differentiation and
(A) Lowering interest rates drastically price discrimination characterize other structures like
(B) Purchasing government securities in the open monopolistic competition or monopoly.
market
34. Which is the primary reason governments impose price
(C) Increasing reserve requirements or selling
government securities floors?
(D) Imposing a nationwide wage freeze (A) To avoid shortages for essential commodities
(B) To ensure producers receive a minimum reward,


Ans often above equilibrium
(C) Increasing reserve requirements or selling (C) To eliminate black markets altogether
government securities (D) To drive prices below the equilibrium in all
To combat inflation by mopping up liquidity, circumstances
central banks may raise the cash reserve ratio or sell

Ans
government securities. Both actions withdraw funds
from circulation—either by forcing banks to keep more (B) To ensure producers receive a minimum reward,
reserves or by exchanging money in the economy for often above equilibrium
government bonds—thereby cooling aggregate demand A price floor sets a legal minimum price to protect
and price pressures. producers’ incomes, typically used for agricultural
products or labor (minimum wage). If the floor is above
32. Which scenario depicts a situation of excess demand? the equilibrium, it can result in surpluses. Although
(A) Real GDP falls below potential it stabilizes producer revenue, it may also diminish
(B) The economy is operating above its full employment consumer demand at that higher price.

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35. How might a government correct a situation of excess 38. Which factor most strongly influences a firm’s decision
demand? to expand capacity in the long run?
(A) Reduce taxes or lower interest rates (A) Short-term price fluctuations
(B) Increase government spending further (B) Diminishing marginal returns in the existing setup
(C) Impose higher taxes or cut spending (C) Prospects of sustained demand growth and
(D) Provide direct subsidies to stimulate demand profitability


Ans (D) A minor tax rebate for one quarter

(C) Impose higher taxes or cut spending

Ans

Excess demand often requires contractionary measures (C) Prospects of sustained demand growth and
to restrain spending power. By raising taxes, disposable profitability
income falls; by reducing expenditures, overall demand Expanding capacity is a capital-intensive, long-run
declines. These steps counteract inflationary pressures. choice requiring confidence in future demand and
In contrast, increasing government spending or stable profitability. While short-run cost or price
lowering taxes would exacerbate excess demand, risking changes matter, firms only invest in additional plants,
further inflation and economic overheating. machinery, or technology when they anticipate durable
market opportunities that justify the expense and
36. Which of the following is NOT a function of the central potential financing risks.
bank?
(A) Acting as the banker to the government 39. Which statement about “investment multiplier” is
(B) Printing currency notes correct?
(C) Operating as a profit-driven commercial lender (A) It is always equal to one
(D) Supervising and regulating the banking system (B) It amplifies an initial injection of spending into a


Ans larger cumulative change in income
(C) It causes final income change to be smaller than the
(C) Operating as a profit-driven commercial lender initial spending
A central bank’s duties include issuing currency, (D) It does not depend on the marginal propensity to
managing monetary policy, acting as the government’s consume
bank, and overseeing financial stability. It does not
seek profit like commercial banks; its mandate is

Ans
macroeconomic stability and safeguarding the banking (B) It amplifies an initial injection of spending into a
sector. Hence, it is not a typical commercial, profit- larger cumulative change in income
maximizing financial institution. The multiplier mechanism explains how an initial
autonomous spending—like investment or government
37. What typically causes “deficit demand” in a expenditure—resonates through multiple rounds of
macroeconomy? re-spending, generating a total income increase bigger
(A) Excessive government spending than the initial outlay. Its magnitude hinges on MPC:
(B) Oversaving and inadequate consumption or higher MPC yields a larger multiplier, while a lower
investment MPC reduces the effect.
(C) Hyperinflation caused by money supply expansion
(D) High foreign exchange inflows 40. Which statement best explains a government’s rationale


Ans for giving subsidies on essential goods?
(A) To spur deflation
(B) Oversaving and inadequate consumption or (B) To make the goods more affordable, supporting
investment lower-income populations
Deficit demand arises when overall spending is (C) To guarantee that producers earn zero profits
insufficient to purchase the economy’s output at (D) To eliminate the black market entirely
full employment. If households save excessively or
businesses invest insufficiently, aggregate demand lags

Ans
behind aggregate supply. The result is unused capacity, (B) To make the goods more affordable, supporting
increased unemployment, and a downward pressure on lower-income populations
prices unless corrected by expansionary policies.

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 PRACTICE PAPER 10

Subsidies allow producers to offer goods at lower prices With fares capped, operators may not earn enough to
or maintain stable prices despite higher production cover expenses such as fuel, maintenance, and wages.
costs, aiding vulnerable groups. Governments often Lacking profitable returns, they reduce bus frequency
subsidize food, healthcare, or education to ensure basic or withdraw vehicles, exacerbating congestion on
well-being. Although subsidies might distort markets or remaining routes. This unintended consequence
encourage inefficiency, they primarily aim to enhance demonstrates how artificially low prices can harm
affordability and welfare. supply.

Direction :Carefully read the case study provided and then 43. Which phenomenon in the case study is NOT a direct
thoroughly answer the subsequent five questions. effect of the price ceiling?
An urban transport authority implemented a price ceiling (A) Crowded buses
on daily bus fares to encourage public transport usage (B) Longer waiting times
and ease traffic congestion. Initially, more commuters (C) Black market seat reservations
opted for buses due to cheaper fares. However, bus (D) An immediate expansion of bus fleet
operators complained that revenues fell below operating

Ans
costs. Without sufficient income to maintain or add
vehicles, some operators reduced services. Crowded buses (D) An immediate expansion of bus fleet
and longer waiting times frustrated passengers. A black Operators cutting back on services reflect negative
market emerged where certain conductors charged extra consequences of restricted revenue. Crowded buses,
for seat reservations. The transport authority considered waiting lines, and illicit seat selling are consistent
offering subsidies to keep fares low while allowing with excess demand and depressed supply. The case
operators to cover costs. Economists argued that targeted explicitly mentions reduced services; an immediate fleet
subsidies, rather than strict ceilings, might balance public expansion contradicts the reality of lowered revenues
affordability and service availability, reducing black- and is not an outcome of a binding ceiling.
market incentives and ensuring enough buses to serve 44. How might subsidies help resolve this issue?
growing demand. (A) By completely removing the need for public
41. What was the main policy action taken by the transport transport
authority? (B) By compensating operators for lower fares, ensuring
(A) A price floor on bus fares viable services
(B) A price ceiling on bus fares (C) By increasing the ceiling even further
(C) Complete deregulation of transport prices (D) By banning all private operators
(D) A monopoly license for a single operator

Ans


Ans (B) By compensating operators for lower fares, ensuring
(B) A price ceiling on bus fares viable services
The transport authority set a maximum charge that Subsidies provide an additional revenue stream
operators could collect from passengers, intending to for operators to cover costs while maintaining low
make public transport more accessible. This is a price passenger fares. This approach addresses the root
ceiling, placed below the equilibrium fare level to cause—insufficient operator income—so they can
incentivize usage. Such interventions can create service keep or even increase bus availability. Subsidies can
shortages if revenues do not cover costs. reduce the mismatch between regulated fares and the
operational cost structure.
42. Why did some bus operators reduce services?
45. What broader economic principle does this case
(A) They intended to create an artificial shortage
(B) The government mandated fewer bus routes highlight?
(C) The price ceiling cut revenues below operating (A) Price ceilings with no complementary policies risk
costs shortages and black markets
(D) They discovered an alternative product to sell (B) Bus services are never affected by supply constraints
(C) Rationing has zero influence on market equilibrium


Ans (D) Public transport services automatically stay
(C) The price ceiling cut revenues below operating costs profitable despite fare limits

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Ans (D) The government outlawed imports of raw materials

(A) Price ceilings with no complementary policies risk

Ans
shortages and black markets
(B) Supply in these sectors could not quickly adjust to
This scenario exemplifies how imposing a price below
the surge in demand
equilibrium, without measures to ensure supply viability,
Rapid demand growth outpaced short-run productive
sparks unintended outcomes like supply contraction,
capacity, resulting in upward price pressures. When
wait times, and black-market dealings. When costs
firms cannot instantly ramp up output—because of
cannot be covered, providers reduce quantity, and
limited machinery, labor, or raw materials—they
consumers face reduced availability, illustrating classic
respond to strong demand by raising prices. This
price-ceiling distortions in real markets.
partial bottleneck amplifies inflationary risks amid


Direction :Carefully read the case study provided and then expansionary fiscal policy.
thoroughly answer the subsequent five questions.
48. Which measure could help contain rising prices while
A government introduced an aggressive public spending
maintaining growth?
plan to correct deficient demand. Infrastructure projects
(A) Decreasing interest rates further
received top priority, creating jobs in road construction,
(B) Imposing immediate austerity and ending public
bridge building, and public housing. Wages rose, and
projects
newly employed workers spent on consumer goods,
(C) Liberalizing imports or improving capacity to
spurring activity in retail markets. Some sectors, however,
expand supply
faced capacity constraints and couldn’t expand output
(D) Removing all wages for workers
quickly. Prices in these sectors began to climb, signaling
possible inflation if excess demand persisted. Economists

Ans
debated whether the investment multiplier effect was (C) Liberalizing imports or improving capacity to
worth the rising price pressure. The finance ministry expand supply
considered complementary measures like raising interest If certain goods face capacity constraints, opening
rates moderately and import liberalization to ease supply imports or incentivizing domestic expansion can
bottlenecks. Nonetheless, the plan’s short-run impact on boost supply to match high demand. This alleviates
unemployment was positive, demonstrating how fiscal inflationary pressure without negating the benefits
stimulus can jumpstart an underperforming economy. of heightened employment and economic growth.
Tightening monetary policy or cutting public spending
46. Which policy did the government adopt to combat
might curb prices but jeopardizes job creation.
deficient demand?
(A) Contractionary monetary policy 49. Which macroeconomic concept is illustrated by the
(B) Aggressive public spending new spending leading to more rounds of job creation
(C) Strict tax hikes and spending?
(D) Rationing essential goods (A) Crowding out effect


Ans (B) Investment multiplier effect
(C) Marginal utility principle
(B) Aggressive public spending
(D) Stagflation phenomenon
The government boosted expenditure on public works
like roads and housing, aiming to stimulate aggregate

Ans
demand and reduce unemployment. This expansionary (B) Investment multiplier effect
fiscal policy channels funds into infrastructure, creating When the government injects funds into the economy—
employment and additional rounds of spending, a especially through infrastructure projects—workers
classic remedy for deficient demand scenarios. receive wages and spend them, creating further income
for others. Each round of spending multiplies the initial
47. Why might prices start rising in certain sectors despite
injection’s impact on aggregate demand. This cyclical
higher employment?
increase in economic activity epitomizes the multiplier
(A) No consumers were buying those goods
concept taught in macroeconomics.
(B) Supply in these sectors could not quickly adjust to
the surge in demand 50. How do economists justify accepting a certain level of
(C) The plan mandated permanent price controls price increase for reducing unemployment?

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 PRACTICE PAPER 10

(A) They prefer indefinite inflation

(B) They believe inflation has no impact on living
standards
(C) Moderate inflation can be tolerated if it spurs real
output and jobs, boosting overall welfare
(D) Inflation only helps the wealthy


Ans
(C) Moderate inflation can be tolerated if it spurs real
output and jobs, boosting overall welfare
A balanced trade-off exists between controlling inflation
and achieving high employment. Expansionary policies
often raise aggregate demand, helping reduce joblessness
at the risk of some inflation. Many economists endorse
slight inflation if it accelerates growth and reduces
unemployment, given that zero inflation might coincide
with weak demand and lost output.

*************

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PRACTICE PAPER 11

1. Which statement best defines microeconomics? (A) It given resources and technology. Any point on the curve
focuses on the overall functioning of an economy. indicates efficient utilization of resources, whereas points
(B) It studies resource allocation at the global level. inside represent underutilization, and points outside are
(C) It examines individual units like consumers and unattainable with current resource availability.
firms.
4. How is market demand defined?
(D) It exclusively analyzes government budget policies.
(A) Demand of a single consumer in isolation


Ans (B) Aggregate demand of all consumers for a product
(C) It examines individual units like consumers and (C) Only the demand from foreign consumers
firms (D) Demand that reflects government spending
Microeconomics deals with smaller economic units. It patterns
looks at consumer choices, firm production decisions,

Ans
and price determination in individual markets. By
analyzing these units, microeconomics explains how (B) Aggregate demand of all consumers for a product
resources are allocated and prices are set, contrasting Market demand aggregates individual demands of all
with macroeconomics, which focuses on aggregate consumers in a market for a specific product or service.
indicators and broader national issues. It reflects the sum of different preferences, incomes, and
price considerations. This collective quantity demanded
2. What is meant by the term ‘opportunity cost’? is represented graphically by a market demand curve,
(A) The additional cost of producing one extra unit showing price-quantity relationships at various levels.
(B) The cost associated with future expansion of output
5. Which factor does not affect individual demand for a
(C) The cost of the next best alternative foregone
(D) The actual monetary expense of production only good?
(A) Consumer’s income level


Ans (B) Price of the good itself
(C) The cost of the next best alternative foregone (C) Consumer’s tastes and preferences
Opportunity cost is the value of the next best option that (D) Government’s internal loan repayment schedule
is sacrificed when a choice is made. It captures the trade-

Ans
off inherent in selecting one option over another. This
concept is central in economics, guiding decisions about (D) Government’s internal loan repayment schedule
efficient use of scarce resources to maximize gains. Individual demand is influenced by factors like income,
prices of related goods, consumer preferences, and
3. Which best defines a production possibility curve the good’s own price. A government’s internal loan
(PPC)? repayment schedule generally does not directly affect
(A) It shows budget allocations of the government. a single consumer’s demand unless it specifically
(B) It represents national income calculations. influences disposable income or consumer preferences.
(C) It depicts the trade-off between two goods with
6. In the short run, which cost remains constant
fixed resources.
(D) It displays consumer preferences for products. irrespective of output?
(A) Variable cost


Ans (B) Total cost
(C) It depicts the trade-off between two goods with fixed (C) Fixed cost
resources (D) Marginal cost
The production possibility curve illustrates different

Ans
combinations of two goods that can be produced with

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 PRACTICE PAPER 11

(C) Fixed cost consumers’ tendency to buy more at lower prices and
Fixed costs do not vary with the level of production less at higher prices.
in the short run. Examples include rent, insurance, or
10. How is a producer’s equilibrium determined using MC
salaries of permanent staff. Variable costs change with
output. Hence, fixed costs remain the same whether the and MR approach?
firm produces zero units or several units in the short (A) When total cost equals total revenue
run. (B) When marginal revenue equals marginal cost
(C) When average variable cost is minimized
7. Which is a key function of the central bank of a country? (D) When total fixed cost is maximum
(A) Providing discounts and coupons to consumers

Ans
(B) Issuing currency and controlling monetary policy
(C) Managing only rural credit cooperatives (B) When marginal revenue equals marginal cost
(D) Overseeing local municipal tax collection In producer equilibrium, profit is maximized where
Marginal Revenue (MR) equals Marginal Cost (MC),


Ans provided MC is rising. This point indicates an optimal
(B) Issuing currency and controlling monetary policy output level where any additional unit produced will not
A central bank typically regulates the supply of money, increase profit, aligning costs and revenue at an efficient
manages interest rates, issues currency, and oversees level.
financial stability. These responsibilities include guiding
11. What does ‘investment multiplier’ imply in
monetary policy decisions to influence inflation,
employment, and economic growth, ensuring the macroeconomics?
country’s banking system remains robust. (A) The ratio of government expenditure to taxes
(B) The magnitude by which an initial investment
8. Which term represents the net factor income earned by changes national income
residents abroad? (C) The difference between exports and imports
(A) Personal Income (D) The proportion of profit reinvested by firms
(B) Private Income

Ans
(C) Net Factor Income from Abroad
(D) Transfer Payments (B) The magnitude by which an initial investment
changes national income


Ans The investment multiplier reflects how an initial rise
(C) Net Factor Income from Abroad in investment spending leads to a multiple increase
Net Factor Income from Abroad is the difference in income. It hinges on the marginal propensity to
between income earned by a country’s residents consume: higher consumption tendencies lead to
working abroad and income earned by foreign residents repeated spending rounds, amplifying the initial
domestically. It is added to domestic income to obtain investment’s effect on aggregate demand and national
concepts like Gross National Product at factor cost or income.
National Disposable Income.
12. Which best explains the concept of ‘excess demand’ in
9. Why is the slope of a demand curve typically negative? an economy?
(A) Because higher prices always improve consumer (A) When aggregate supply exceeds aggregate demand
satisfaction (B) When desired consumption equals desired saving
(B) Because consumers demand more when price is (C) When aggregate demand is greater than aggregate
low supply at full employment
(C) Because supply and demand are identical (D) When government reduces its spending drastically
(D) Because government sets prices arbitrarily

Ans


Ans (C) When aggregate demand is greater than aggregate
(B) Because consumers demand more when price is low supply at full employment
The law of demand states that other factors being Excess demand occurs when the overall demand in
constant, demand expands when price falls and an economy, at full employment output, surpasses its
contracts when price rises. This inverse relationship ability to produce. This typically results in inflationary
creates a downward-sloping demand curve, reflecting pressures because too much spending chases limited

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page 112 CUET UG Economics

goods and services, pushing up prices and causing (A) Changes in technology
macroeconomic imbalances. (B) Changes in the price of the product itself
(C) Changes in input costs
13. Which of the following is not a feature of perfect (D) Changes in number of producers
competition?
(A) Large number of buyers and sellers

Ans
(B) Homogeneous product (B) Changes in the price of the product itself
(C) Strong individual seller influence on price A price change causes a movement along the existing
(D) Free entry and exit of firms supply curve, not a shift. Supply curve shifts occur due to


Ans changed input costs, improved technology, or a change
in the number of producers. Hence, the product’s own
(C) Strong individual seller influence on price price variation moves quantity supplied along the curve.
In perfect competition, each seller is a price taker
with no control over market price. The other features, 17. How does marginal cost differ from average cost in the
including a large number of firms, homogeneous short run?
products, and free entry or exit, characterize this market (A) They both measure total cost at the same level of
form. Hence, individual price influence contradicts production
perfect competition assumptions. (B) Average cost looks at per-unit total cost; marginal
cost focuses on the cost of an extra unit
14. Which of the following does not form part of a (C) They are always identical in perfect competition
government’s revenue expenditure? (D) There is no difference between marginal and
(A) Payment of salaries average cost
(B) Interest payments on debt
(C) Defence capital outlay for new equipment

Ans
(D) Subsidies (B) Average cost looks at per-unit total cost; marginal


Ans cost focuses on the cost of an extra unit
Average cost is total cost divided by quantity, indicating
(C) Defence capital outlay for new equipment cost per unit. Marginal cost measures the additional
Revenue expenditures are routine, recurring government cost incurred by producing one extra unit. These two
expenses like salaries, subsidies, and interest payments. costs differ in how they change with output and are used
Capital outlays such as purchasing military equipment to determine optimal production levels.
add to assets or capital formation. Therefore, defence
capital expenditure is classified as capital expenditure, 18. Comparing fixed exchange rate and flexible exchange
not revenue expenditure. rate regimes, which statement is true?
(A) Both are determined solely by market forces
15. Which is not typically included in National Income (B) Fixed rates allow currency to fluctuate freely
calculations? (C) Flexible rates are set by government authorities
(A) Imputed rent from owner-occupied dwellings (D) Fixed rates are officially set; flexible rates vary with
(B) Income earned from illegal activities market demand and supply
(C) Corporate profits distributed as dividends
(D) Wages and salaries in cash

Ans

Ans (D) Fixed rates are officially set; flexible rates vary with
market demand and supply
(B) Income earned from illegal activities Under fixed exchange rates, a country’s monetary
National Income typically includes all legitimate authority pegs the currency to another currency or
incomes—wages, salaries, rent, interest, and profits— gold. In contrast, flexible (floating) rates are driven by
accruing within the economy. Illegal or unreported foreign exchange market conditions, with currency
incomes are excluded because they cannot be accurately values determined by supply and demand, subject to
measured and do not reflect standard economic occasional official interventions.
productivity or official economic transactions.
19. Differentiate between revenue receipts and capital
16. Which factor does not shift the supply curve of a receipts in a government budget.
product? (A) Both lead to creation of assets

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 PRACTICE PAPER 11

(B) Revenue receipts do not create liabilities, capital investment. Such actions help boost aggregate demand,
receipts may reducing unemployment.
(C) Revenue receipts create debt, capital receipts do not
22. In determining price under perfect competition, which
(D) Both always have the same tax revenue components
action is most appropriate for a single firm?


Ans (A) Increase its price above market price to maximize
(B) Revenue receipts do not create liabilities, capital profit
receipts may (B) Accept the prevailing market price and adjust
Revenue receipts, including taxes and fees, neither output
create liabilities nor reduce assets. Capital receipts, (C) Advertise aggressively to change consumer
like borrowing or disinvestment proceeds, can create preferences
liabilities (loans) or reduce government assets (sale of (D) Form a cartel to manipulate market price
assets), thus differing fundamentally in their impact on

Ans
government’s financial position.
(B) Accept the prevailing market price and adjust output
20. How do commercial banks differ from the central bank? Under perfect competition, firms are price takers due
(A) Commercial banks issue currency notes; central to homogeneous products and many competitors. A
bank provides loans only single firm cannot influence the market price, so it must
(B) Central bank deals with the public; commercial adapt its output level to maximize profit at that given
banks supervise other banks price. Advertising or forming cartels is irrelevant or
(C) Central bank issues currency and regulates impossible here.
monetary policy; commercial banks accept
23. To handle inflationary pressures, which governmental
deposits and lend
(D) Both are identical in all respects action is most appropriate?
(A) Lowering interest rates drastically


Ans (B) Cutting taxes to increase disposable income
(C) Central bank issues currency and regulates monetary (C) Reducing government expenditure or raising taxes
policy; commercial banks accept deposits and lend (D) Launching large-scale spending programs
A central bank typically issues currency, manages

Ans
monetary policy, and oversees financial stability,
whereas commercial banks primarily accept deposits (C) Reducing government expenditure or raising taxes
from the public and extend loans for business or During inflation, aggregate demand outstrips aggregate
personal purposes. This structural difference defines supply, pushing prices upward. Contractionary fiscal
their separate but interlinked roles in the economy. measures like spending cuts or tax hikes cool down
demand, helping curb inflation. This brings aggregate
21. Which policy measure is best to tackle deficient demand closer to supply levels, stabilizing the overall
demand? price level in the economy.
(A) Raising taxes sharply to reduce disposable income
24. Which action is best for a producer aiming to maximize
(B) Decreasing government spending across all sectors
(C) Increasing government spending or lowering profits in the short run?
interest rates (A) Produce where MR equals MC, if price covers
(D) Restricting access to credit to curb private average variable cost
investment (B) Always produce at full capacity regardless of
demand


Ans (C) Stop production whenever total costs are high
(C) Increasing government spending or lowering (D) Expand production until average fixed cost
interest rates becomes zero
Deficient demand implies inadequate aggregate

Ans
demand relative to an economy’s full employment level.
To stimulate demand, policymakers can raise public (A) Produce where MR equals MC, if price covers
expenditure or adopt an expansionary monetary policy average variable cost
(lowering interest rates), encouraging consumption and Profit maximization occurs where marginal revenue
equals marginal cost, ensuring no additional profit from

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producing extra units. However, the firm must cover at (B) 1 → 2 → 4 → 3

least average variable costs in the short run to justify (C) 2 → 1 → 3 → 4
continued operations and avoid immediate losses that (D) 4 → 2 → 1 → 3
exceed fixed costs.

Ans
25. Arrange the following stages of the circular flow of (B) 1 → 2 → 4 → 3
income in correct chronological order: An economy experiences excess demand (1). This leads
1. Firms produce goods and services to an inflationary gap (2). Prices rise due to heightened
2. Households supply factors of production demand (4). Finally, the government or central bank
3. Households purchase goods and services implements measures (3) like tax hikes or interest rate
4. Firms pay factor incomes increases to contain inflation.
(A) 2 → 1 → 4 → 3
28. Match the items in Column I with the items in Column
(B) 1 → 2 → 3 → 4
(C) 2 → 4 → 1 → 3 II:
(D) 4 → 3 → 2 → 1 Column I Column II


Ans 1. M1 a. Time deposits + other
(A) 2 → 1 → 4 → 3 deposits
Households first supply factors (2), enabling firms 2. MPC b. Demand deposits +
to produce (1). Next, firms pay factor incomes to currency + other deposits
households (4). Finally, households use these incomes 3. Aggregate c. Slope determined by
to buy goods and services (3). This sequence captures demand consumption
the continuous flow of resources, products, and money. 4. M2 d. Sum of consumption,
investment, govt. purchases
26. Arrange these economic concepts in historical
development order: 5. Supply curve e. Ratio of change in
1. Classical Economics consumption to change in
2. Keynesian Economics income
3. Monetarism Options:
4. Modern Microeconomic Theory (A) 1-b, 2-e, 3-d, 4-a, 5-c
(A) 1 → 2 → 3 → 4 (B) 1-a, 2-d, 3-b, 4-e, 5-c
(B) 2 → 1 → 4 → 3 (C) 1-b, 2-e, 3-c, 4-d, 5-a
(C) 1 → 4 → 2 → 3 (D) 1-e, 2-c, 3-d, 4-b, 5-a
(D) 4 → 3 → 2 → 1

Ans


Ans (A) 1-b, 2-e, 3-d, 4-a, 5-c
(A) 1 → 2 → 3 → 4 M1 is demand deposits + currency + other deposits (b).
Classical Economics (18th–19th century) preceded MPC is the ratio of change in consumption to change in
Keynesian Economics (1930s). Monetarism (prominent income (e). Aggregate demand includes C+I+G (d). M2
in the late 20th century) followed Keynesian ideas. is M1 plus time deposits or savings deposits (a). Supply
Modern Microeconomic Theory has continuously curve’s slope is determined by production costs (c).
evolved, but gained significant formal structure more
29. Match the items in Column I with the items in Column
recently, typically after these macroeconomic schools
were established. II
Column I Column II
27. Put these macroeconomic events in chronological order
(earliest to latest) for analysis: 1. Perfect competition a. One seller dominates
1. Excess demand arises 2. Monopoly b. Few large firms
2. Inflationary gap widens 3. Monopolistic c. Free entry,
3. Policy intervention to reduce spending competition homogeneous goods
4. Price level escalates 4. Oligopoly d. Many firms selling
(A) 1 → 4 → 2 → 3 differentiated products

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Options : 3. Devaluation c. Deliberate reduction of

(A) 1-b, 2-c, 3-d, 4-a currency value under
(B) 1-c, 2-a, 3-d, 4-b fixed regime
(C) 1-c, 2-b, 3-a, 4-d
4. Appreciation d. Rise in external value of
(D) 1-d, 2-b, 3-c, 4-a
a currency under floating


Ans conditions
(B) 1-c, 2-a, 3-d, 4-b Options :
Perfect competition (c) has free entry and identical (A) 1-a, 2-b, 3-d, 4-c
products. Monopoly (a) features a single seller (B) 1-b, 2-a, 3-c, 4-d
controlling the market. Monopolistic competition (d) (C) 1-c, 2-d, 3-a, 4-b
has many sellers offering slightly different products. (D) 1-d, 2-c, 3-b, 4-a
Oligopoly (b) involves a few major firms that dominate


Ans
market share.
(B) 1-b, 2-a, 3-c, 4-d
30. Match the items in Column I with the items in Column Under a fixed rate (b), the government sets currency
II Question value. A flexible (floating) rate (a) is determined by
Column I Column II demand and supply. Devaluation (c) is deliberately
lowering currency value in a fixed system. Appreciation
1. Total cost (TC) a. Additional cost per extra
(d) is a currency’s rise in value under floating conditions.
unit
2. Marginal cost b. Fixed cost + variable cost 32. Match the items in Column I with the items in Column
(MC) II
3. Average fixed c. Proportion of fixed cost Column I Column II
cost (AFC) per unit
1. GNP at market a. GDP + Net factor
4. Average variable d. Variable cost per unit price income from abroad
cost (AVC) produced
2. NNP at factor b. GNP – depreciation –
5. Total fixed cost e. Unchanged in the short cost net indirect taxes
(TFC) run regardless of output
3. Personal income c. National income +
Options : transfer payments
(A) 1-b, 2-a, 3-c, 4-d, 5-e – social security
(B) 1-a, 2-b, 3-e, 4-d, 5-c contributions
(C) 1-b, 2-d, 3-c, 4-a, 5-e 4. Private income d. Factor income from
(D) 1-e, 2-c, 3-a, 4-b, 5-d private sector +


Ans undistributed profits +
(A) 1-b, 2-a, 3-c, 4-d, 5-e interest
Total cost (b) is fixed plus variable costs. Marginal cost Options :
(a) is the extra cost for one more unit. Average fixed (A) 1-a, 2-b, 3-c, 4-d
cost (c) is total fixed cost distributed per unit. Average (B) 1-b, 2-a, 3-c, 4-d
variable cost (d) is per-unit variable expense. Total fixed (C) 1-d, 2-b, 3-a, 4-c
cost (e) remains unchanged. (D) 1-a, 2-d, 3-b, 4-c


Ans
31. Match the items in Column I with the items in Column
II (A) 1-a, 2-b, 3-c, 4-d
GNP at MP (a) is GDP plus net factor income from
Column I Column II
abroad. NNP at FC (b) is GNP minus depreciation
1. Fixed rate a. Determined by demand minus net indirect taxes. Personal income (c) is
and supply national income plus transfers minus social security
2. Flexible rate b. Officially pegged by the contributions. Private income (d) includes factor
government income, undistributed profits, and interest.

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33. Which combination of statements about the price

Ans

elasticity of demand is correct? (A) 1, 2, and 3 are correct
1. Perfectly elastic demand has elasticity = 0 Money serves as a medium of exchange, a store of value,
2. Perfectly inelastic demand has elasticity = 0 and a unit of account to measure prices. Though modern
3. Unit elastic demand means percentage change in systems can expand money supply, it is not “unlimited”
quantity equals percentage change in price without consequences such as inflation; thus statement
4. Greater than one elasticity indicates demand is 4 is invalid.
elastic
(A) 1, 2, and 3 are correct 36. Which combination of statements about balance of
(B) 2, 3, and 4 are correct payments (BoP) is correct?
(C) 1, 3, and 4 are correct 1. BoP comprises current and capital account
(D) 1, 2, and 4 are correct transactions
2. A deficit in current account must be offset by capital


Ans
inflows
(B) 2, 3, and 4 are correct 3. Transfer payments belong to the capital account
Perfectly inelastic demand has elasticity = 0. With unitary 4. Errors and omissions can balance unrecorded
elasticity, quantity changes by the same percentage as discrepancies
price. Elastic demand exceeds one in elasticity. Perfectly (A) 1, 2, and 4 are correct
elastic demand theoretically has an infinite elasticity, (B) 2, 3, and 4 are correct
not zero, which makes statement 1 incorrect. (C) 1 and 3 only are correct
(D) 1, 2, and 3 are correct
34. Identify the correct combination about the short-run
production function:

Ans
1. There can be diminishing returns to a factor (A) 1, 2, and 4 are correct
2. Total product declines immediately from the first BoP is divided into current and capital accounts. A
unit current account deficit is financed by capital account
3. Marginal product may rise initially before falling surpluses or reserves. Transfer payments fall under the
4. Fixed factors remain constant current account, making statement 3 incorrect. Errors
(A) 1, 3, and 4 are correct and omissions act as an adjustment entry for unrecorded
(B) 1 and 2 only are correct flows.
(C) 2, 3, and 4 are correct
(D) 1, 2, and 4 are correct 37. Which statements about government budget deficits are
correct?


Ans
1. Revenue deficit arises when revenue expenditure
(A) 1, 3, and 4 are correct exceeds revenue receipts
In the short run, some factors remain fixed, and adding 2. Fiscal deficit includes revenue and capital deficits
more units of a variable factor eventually leads to 3. Primary deficit is fiscal deficit minus interest
diminishing returns. Marginal product often increases payments
initially due to better factor utilization, then decreases. 4. A surplus budget always exists if government
Total product doesn’t necessarily decline immediately borrows heavily
from the start. (A) 1, 2, and 3 are correct
(B) 1, 3, and 4 are correct
35. Regarding money’s functions, which statements are
(C) 1 and 2 only are correct
correct?
(D) 2, 3, and 4 are correct
1. Medium of exchange
2. Store of value

Ans
3. Unit of account (A) 1, 2, and 3 are correct
4. Unlimited production in any quantity Revenue deficit occurs when revenue expenditure is
(A) 1, 2, and 3 are correct more than revenue receipts. Fiscal deficit is the excess of
(B) 1 and 4 are correct total expenditure (revenue + capital) over total receipts
(C) 2 and 4 are correct excluding borrowings. Primary deficit is fiscal deficit
(D) 1, 2, and 4 are correct

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 PRACTICE PAPER 11

minus interest payments. Borrowing heavily doesn’t

Ans

guarantee a surplus budget. (C) (A) is true, (R) is false
Each firm in perfect competition must accept the market
38. Assertion (A) : A supply curve typically slopes upward.
price because products are identical and there are many
Reason (R) : Producers are willing to supply more at
buyers and sellers. Setting a higher price causes loss of
higher prices to increase revenue.
demand. Hence, the assertion is true, but the reason
(A) Both (A) and (R) are true, and (R) is the correct
given is incorrect.
explanation of (A)
(B) Both (A) and (R) are true, but (R) is not the correct

Direction :Carefully read the case study provided and then
explanation of (A) thoroughly answer the subsequent five questions.
(C) (A) is true, (R) is false A local market has experienced dramatic shifts in demand
(D) (A) is false, (R) is true and supply for agricultural products over the past year.


Ans Initially, higher consumer incomes led to increased
demand for fresh produce, pushing up equilibrium
(A) Both (A) and (R) are true, and (R) is the correct
prices. Farmers, attracted by higher prices, planted
explanation of (A)
more crops. Later, favorable weather expanded supply
As price increases, each unit sold generates higher
considerably, resulting in a surplus that pushed prices
revenue, motivating producers to supply more, causing
down. Meanwhile, government interventions through
an upward-sloping supply curve. Hence, the reason
minimum support prices protected farmers when market
given is directly explaining why the assertion is valid in
prices fell below a threshold. Overall, the market displayed
standard micro economic theory.
typical demand and supply dynamics, along with policy
39. Assertion (A) : National income includes only final elements that influence agricultural incomes. Observing
goods and services. these trends helps identify the importance of both market
Reason (R) : Inclusion of intermediate goods would forces and government measures in stabilizing producer
cause double counting of value. earnings and consumer access to essential goods.
(A) Both (A) and (R) are true, and (R) is the correct
41. Which factor initially caused the rise in equilibrium
explanation of (A)
prices for fresh produce?
(B) Both (A) and (R) are true, but (R) is not the correct
(A) Lower consumer income
explanation of (A)
(B) Decreased consumer demand
(C) (A) is true, (R) is false
(C) Higher consumer income
(D) (A) is false, (R) is true
(D) Government subsidies


Ans


Ans
(A) Both (A) and (R) are true, and (R) is the correct
(C) Higher consumer income
explanation of (A)
As stated, increased consumer incomes resulted in
National income calculations exclude intermediate
heightened demand, thus elevating equilibrium prices
goods to avoid counting the same output multiple
for fresh produce. Rising purchasing power makes
times. Only final goods’ values are included, preventing
consumers buy more, shifting the demand curve
duplication of the cost of inputs already accounted for in
rightward and creating short-term price hikes until
the final product’s price.
supply adjusts.
40. Assertion (A) : Under perfect competition, each firm is
42. Why did farmers plant more crops after noticing higher
a price taker.
market prices?
Reason (R) : A firm in perfect competition can set
(A) Because they had surplus seeds
higher prices without losing market share.
(B) Because higher prices signaled greater profit
(A) Both (A) and (R) are true, and (R) is the correct
potential
explanation of (A)
(C) Because demand for agricultural goods was
(B) Both (A) and (R) are true, but (R) is not the correct
declining
explanation of (A)
(D) Because the government mandated it
(C) (A) is true, (R) is false
(D) (A) is false, (R) is true

Ans

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(B) Because higher prices signaled greater profit (D) (A) is false, (R) is true
potential

Ans
In a competitive market, rising prices signal profitability.
Farmers interpret higher prices as an incentive to expand (A) Both (A) and (R) are true, and (R) is the correct
output. This illustrates how supply reacts to changing explanation of (A)
price signals, aligning with basic economic principles of Since agricultural markets can be volatile, producers’
producer motivation and resource allocation. incomes are not always stable by market forces alone.
Government intervention via minimum support prices
43. Which development did not lead to falling prices later helps address this volatility, thus explaining the need for
on? such measures.
(A) Favorable weather increasing supply
(B) Reduced consumer demand

Direction :Carefully read the case study provided and then
(C) Surplus produce in the market thoroughly answer the subsequent five questions.
(D) Market interventions through minimum support A national government launched a large infrastructure
prices project to stimulate economic growth and reduce
unemployment. The project involved building roads,


Ans bridges, and new housing in rural areas. Significant
(B) Reduced consumer demand public spending provided incomes to laborers and
The case highlights that a significant factor was suppliers, who, in turn, spent more on goods and services.
favorable weather boosting supply, creating surplus and This led to multiple rounds of spending, amplifying the
pushing down prices. There’s no mention of a drop in initial injection of funds, consistent with the investment
consumer demand. Rather, the market saw rising supply multiplier concept. However, as the project progressed,
surpassing demand, with a minimum support price inflationary pressures emerged due to higher aggregate
policy also influencing outcomes. demand. Policy makers weighed additional interventions
such as adjusting interest rates to curb rising prices
44. How did government interventions through minimum without stalling growth. Ultimately, the government
support prices help farmers? sought to balance expansionary fiscal policy with
(A) By forcing them to reduce output prudent monetary measures to ensure stable, long-term
(B) By ensuring they receive a price floor when market development that benefits both producers and consumers.
price falls
(C) By eliminating competition among farmers 46. What was the primary objective of the government’s
(D) By banning production of certain crops large infrastructure project?


Ans (A) To reduce exports
(B) To increase inflation
(B) By ensuring they receive a price floor when market (C) To stimulate economic growth and reduce
price falls unemployment
Minimum support prices (MSPs) guarantee farmers (D) To privatize commercial banks
a minimum payment, shielding them against drastic
price drops. This helps stabilize agricultural incomes

Ans
when market forces alone might lead to unsustainable (C) To stimulate economic growth and reduce
low prices. The government acts as a buyer of last resort unemployment
if necessary. The infrastructure project was designed to inject
significant public spending, generating employment and
45. Assertion (A) : Market forces alone cannot always demand. By improving roads, bridges, and housing, the
stabilize producers’ incomes. government aimed to boost overall economic activity
Reason (R) : Government sets minimum support prices and curb unemployment through direct and indirect
to protect farmers in case of low market prices. job creation.
(A) Both (A) and (R) are true, and (R) is the correct
explanation of (A) 47. How did the project illustrate the investment multiplier
(B) Both (A) and (R) are true, but (R) is not the correct concept?
explanation of (A) (A) Through declining aggregate demand
(C) (A) is true, (R) is false (B) Through repeated spending rounds triggered by

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 PRACTICE PAPER 11

initial spending increases in aggregate demand, requiring interest rate

(C) Through zero changes in income manipulation.
(D) By reducing consumer confidence (A) Both (A) and (R) are true, and (R) is the correct


Ans explanation of (A)
(B) Both (A) and (R) are true, but (R) is not the correct
(B) Through repeated spending rounds triggered by explanation of (A)
initial spending (C) (A) is true, (R) is false
The investment multiplier effect occurs when an initial (D) (A) is false, (R) is true
government outlay circulates, causing multiple increases
in income and expenditure. In this scenario, laborers

Ans
and suppliers spend newly earned income, generating (A) Both (A) and (R) are true, and (R) is the correct
further demand, thereby amplifying the impact of the explanation of (A)
original infrastructure spending. As infrastructure spending boosted demand, prices
rose. Therefore, the government considered interest rate
48. Which factor differentiates expansionary fiscal policy adjustments to avoid excessive inflation. This monetary
from concretionary fiscal policy in this context? policy intervention complements expansionary fiscal
(A) Expansionary policy reduces government outlays, actions, illustrating how both policies are used in
while concretionary policy increases them tandem to manage growth and inflationary pressures.
(B) Expansionary policy increases government
spending, while concretionary policy reduces it

*************
(C) Both focus on curbing inflation
(D) Neither influences aggregate demand significantly


Ans
(B) Expansionary policy increases government
spending, while concretionary policy reduces it
Expansionary fiscal policy involves augmenting
government expenditure (or cutting taxes) to spur
growth and reduce unemployment. Concretionary
policy does the opposite by reducing spending or
raising taxes to tame demand and inflation. Here, the
government’s infrastructure project exemplifies an
expansionary approach.

49. Which outcome did not result from the infrastructure

project?
(A) Rising employment in rural areas
(B) Increased aggregate demand
(C) Immediate and sustained price deflation
(D) Multiple rounds of spending in the economy


Ans
(C) Immediate and sustained price deflation
The case specifically mentions inflationary pressures,
not deflation. The project spurred demand, raising
employment and prices. Thus, an outcome of immediate
and sustained deflation contradicts the scenario where
increased spending leads to higher aggregate demand
and associated inflation.

50. Assertion (A) : The government balanced expansionary

fiscal measures with monetary policy adjustments.
Reason (R) : Inflationary pressures can arise from rapid

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PRACTICE PAPER 12

1. What does the term “central problem of an economy” (B) Total production of goods and services by all
refer to? producers at a given price level
(A) Issues related to profit maximization in firms Aggregate supply reflects the total output producers
(B) Problems of what to produce, how to produce, and are willing and able to supply at various overall price
for whom to produce levels in an economy. It’s a macroeconomic concept
(C) Concerns about only distribution of goods comparing with aggregate demand to determine general
(D) Difficulties in limiting foreign exchange reserves price levels and output.


Ans 4. How is “money” generally defined in macroeconomics?
(B) Problems of what to produce, how to produce, and (A) Any good used solely for direct consumption
for whom to produce (B) A measure of consumer satisfaction
Every economy confronts decisions about producing (C) A universally accepted medium of exchange
specific goods, choosing production techniques, and (D) A tool to measure only capital depreciation
distributing output among people. These form the

Ans
central problems of an economy, reflecting resource
scarcity and the need for rational allocation. (C) A universally accepted medium of exchange
Money is anything broadly accepted as payment for
2. How would you define “law of diminishing marginal goods, services, and debt settlement. Beyond serving as
utility”? a medium of exchange, it functions as a store of value
(A) When total utility increases indefinitely with and unit of account, central to monetary transactions
consumption within an economy.
(B) When each additional unit consumed provides less
5. Which schedule represents a table that shows quantities
additional satisfaction
(C) When consumer income diminishes with higher demanded at different price levels?
spending (A) Demand schedule
(D) When average utility always remains constant (B) Supply schedule
(C) Production schedule


Ans (D) Budget schedule
(B) When each additional unit consumed provides less

Ans
additional satisfaction
The law of diminishing marginal utility states that, as a (A) Demand schedule
person consumes more units of a good, the incremental A demand schedule tabulates various quantities a
benefit (utility) gained from each additional unit consumer (or market) is willing and able to purchase
declines. This principle explains why demand curves at distinct price points. A supply schedule, conversely,
tend to slope downward. details quantities producers offer. Production and
budget schedules relate to other economic data sets.
3. Which best defines “aggregate supply”?
6. What does “marginal propensity to consume” (MPC)
(A) Total demand in the economy
(B) Total production of goods and services by all measure?
producers at a given price level (A) Ratio of additional saving to additional income
(C) Total consumption expenditure of households (B) Ratio of additional consumption to additional
(D) Total exports only income
(C) Total consumption divided by total income


Ans (D) Total saving divided by total income


Ans

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 PRACTICE PAPER 12

(B) Ratio of additional consumption to additional diminishing returns on additional units of the variable
income factor.
MPC refers to how much of each additional rupee
10. How is equilibrium price under perfect competition
of income is spent on consumption. If MPC is high,
a large portion of new income goes to consumption, established?
thereby significantly affecting aggregate demand and (A) By the government fixing a price ceiling
the multiplier process. (B) By intersection of market supply and market
demand curves
7. Which cost curve in the short run is generally U-shaped (C) By producers colluding
due to spreading of fixed costs and later rising variable (D) Through consumer boycotts only
costs?

Ans
(A) Marginal Cost curve
(B) Average Fixed Cost curve (B) By intersection of market supply and market
(C) Average Total Cost curve demand curves
(D) Opportunity Cost curve In a perfectly competitive market, the equilibrium price
emerges where aggregate demand meets aggregate


Ans supply. No single buyer or seller can alter this price,
(C) Average Total Cost curve which balances overall quantity demanded with overall
The short-run Average Total Cost (ATC) curve initially quantity supplied.
slopes downward as fixed costs spread over more units,
11. What is the rationale behind a government imposing
then slopes upward when rising variable costs dominate.
This creates the characteristic U-shape. price ceilings on essentials?
(A) To discourage consumers from purchasing goods
8. Which concept refers to official currencies of different (B) To ensure goods remain affordable, preventing
countries being bought and sold? prices from rising above a specified level
(A) Budget line (C) To stimulate producers’ profits substantially
(B) Foreign exchange market (D) To eliminate all indirect taxes
(C) Factor market

Ans
(D) Product market
(B) To ensure goods remain affordable, preventing


Ans prices from rising above a specified level
(B) Foreign exchange market Price ceilings set a maximum allowable price, typically
The foreign exchange market deals with buying and below equilibrium, to protect consumers from excessive
selling national currencies. It comprises banks, financial costs. This practice applies to essential commodities or
institutions, and individuals seeking to exchange services, like food or rent, ensuring broad afford ability
currencies for trade, investment, or speculation. Factor and preventing market-driven spikes.
and product markets concern resources and final goods,
12. Why does the central bank act as a “lender of last resort”?
respectively.
(A) Because commercial banks never give loans
9. Why does the marginal product of a factor initially (B) Because it provides emergency funds when
increase before diminishing? commercial banks face liquidity crises
(A) Improved specialization and division of labor, then (C) Because it offers the highest interest on deposits
overcrowding of variable factor (D) Because it sets all exchange rates for the economy
(B) The law of demand applies to production

Ans
(C) Profits always rise without limit
(D) Producers ignore diminishing returns (B) Because it provides emergency funds when
commercial banks face liquidity crises


Ans The central bank supplies liquidity to banks in distress,
(A) Improved specialization and division of labor, then preventing bank runs and safeguarding financial
overcrowding of variable factor stability. By acting as a lender of last resort, it ensures
In early stages, adding more of a variable factor increases confidence in the banking system, mitigating systemic
efficiency due to better specialization. However, beyond risks.
a point, fixed factors become a bottleneck, leading to

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13. Which of these is not a determinant of demand for a Intermediate goods’ values are excluded to avoid double
normal good? counting, as their worth is already contained in the
(A) Price of the good itself final product’s value. The value-added method focuses
(B) Consumer income on each stage’s contribution, ensuring the final output’s
(C) Consumer preferences total correctly reflects actual production.
(D) Number of sellers in the market
17. How does a movement along the demand curve differ


Ans from a shift in the demand curve?
(D) Number of sellers in the market (A) Movement occurs when the good’s price changes;
Demand is primarily affected by the good’s own price, shift occurs when factors like income change
consumer income, and tastes. The number of sellers (B) Both occur only when supply changes
pertains to supply-side factors, not demand. More (C) There is no difference
sellers increase supply, shifting the supply curve rather (D) Movement occurs with consumer income changes;
than affecting the initial demand curve. shift occurs with the good’s price

14. Which item is not typically included in a government’s

Ans

capital expenditure? (A) Movement occurs when the good’s price changes;
(A) Infrastructure construction shift occurs when factors like income change
(B) Purchase of machinery A demand curve moves along its existing path when
(C) Repayment of past loans price alone changes. Shifts in demand happen due to
(D) Salaries of government employees changes in non-price determinants, such as consumer


Ans income, tastes, or prices of related goods, altering the
entire demand schedule.
(D) Salaries of government employees
Capital expenditure creates assets or reduces liabilities, 18. How do direct taxes differ from indirect taxes?
such as building roads or repaying loans. Salaries (A) Direct taxes are levied on goods; indirect taxes are
constitute a routine operational cost, hence classified on personal income
under revenue expenditure. They do not result in asset (B) Indirect taxes are more progressive
creation for the government. (C) Direct taxes are borne by the person on whom they
are imposed; indirect taxes can be shifted
15. Which does not characterize monopolistic competition? (D) There is no distinction in incidence or shifting
(A) Product differentiation
(B) Freedom of entry and exit

Ans
(C) A single seller controlling the entire market (C) Direct taxes are borne by the person on whom they
(D) Many sellers are imposed; indirect taxes can be shifted


Ans Direct taxes, like income tax, are paid directly by
individuals or firms. Indirect taxes, like sales tax or GST,
(C) A single seller controlling the entire market can be transferred to others, usually consumers, through
Monopolistic competition features many sellers with higher prices. This makes their incidence distinct.
differentiated products, not a single dominant seller.
Although each firm has some market power, none can 19. Compare monopolistic competition and oligopoly in
monopolize the market entirely, unlike a true monopoly. terms of number of firms.
(A) Both have exactly one firm
16. Which of the following is not considered while measuring (B) Both have numerous firms with homogeneous
national income via the value-added method? products
(A) Intermediate goods’ value (C) Monopolistic competition has many firms, while
(B) Value of final output oligopoly features a few dominant firms
(C) Changes in inventory (D) They are identical in all market characteristics
(D) Depreciation


Ans


Ans
(C) Monopolistic competition has many firms, while
(A) Intermediate goods’ value oligopoly features a few dominant firms

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Monopolistic competition involves a large number (B) Produce up to the point where marginal cost equals
of firms offering slightly differentiated products, marginal revenue
while oligopoly is characterized by a few large firms Under perfect competition, the firm cannot set a higher
controlling most market share. The latter can involve price without losing all consumers. Its best approach
strategic interactions and potential collusion. is to adjust output where MC = MR. This ensures
maximizing profit (and total revenue at that market
20. How do exports differ from imports in national income price), as no single firm can manipulate prices.
accounting?
(A) Exports reduce domestic production; imports 23. To address large fiscal deficits, which approach is most
increase it appropriate?
(B) Imports add to a country’s GDP; exports do not (A) Keep borrowing until it covers all expenditures
(C) Exports represent domestic goods sold abroad; (B) Reduce non-essential government spending or
imports represent foreign goods purchased raise tax revenues
domestically (C) Eliminate taxes entirely
(D) Both have no impact on net exports (D) Print unlimited currency without concern


Ans

Ans
(C) Exports represent domestic goods sold abroad; (B) Reduce non-essential government spending or raise
imports represent foreign goods purchased domestically tax revenues
Exports are domestic production sent overseas, A fiscal deficit means government expenditures exceed
generating foreign exchange and adding to receipts. Policy makers typically control deficits by
domestic output. Imports are foreign products cutting non-critical spending, raising tax revenue, or
bought domestically, potentially competing with or both, rather than indefinite borrowing or currency
supplementing local goods. Net exports (exports – issuance, which risk spiraling debt or inflation.
imports) significantly affect GDP.
24. Which action is best for stabilizing currency under a
21. Which is the best policy to curb inflation stemming fixed exchange rate system?
from excessive demand? (A) Let demand and supply freely fluctuate
(A) Increase government capital spending (B) The central bank intervenes by buying or selling
(B) Reduce taxes abruptly while increasing subsidies foreign currency
(C) Implement concretionary monetary or fiscal (C) Do nothing if large supply shocks occur
measures (D) Fully remove trade barriers
(D) Encourage more consumer borrowing

Ans


Ans (B) The central bank intervenes by buying or selling
(C) Implement concretionary monetary or fiscal foreign currency
measures In a fixed exchange rate regime, the central bank
Excessive demand inflates prices. Policy makers can maintains the currency’s official parity by intervening in
adopt concretionary policies—such as raising interest the forex market. Purchasing or selling foreign reserves
rates, reducing government spending, or increasing adjusts the domestic currency supply, keeping the
taxes—to reduce aggregate demand. These actions help exchange rate at the pegged level.
contain inflation, restoring a balance between aggregate
25. Arrange these steps of measuring national income by
demand and supply.
the expenditure method in chronological order:
22. Which strategy is best for a perfectly competitive firm to 1. Summation of consumption, investment,
increase total revenue? government purchases, net exports
(A) Raise the market price above competitors’ price 2. Identify final expenditures on goods and services
(B) Produce up to the point where marginal cost equals 3. Add net exports (exports – imports)
marginal revenue 4. Compute total expenditure on domestic output
(C) Restrict supply to force higher prices (A) 2 → 1 → 3 → 4
(D) Advertise extensively (B) 4 → 2 → 1 → 3


Ans (C) 2 → 4 → 3 → 1

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(D) 2 → 3 → 4 → 1 1. Marginal a. Value of the next best

Ans Propensity to alternative foregone
(A) 2 → 1 → 3 → 4 Save (MPS)
First, identify all final expenditures (2). Then sum 2. Opportunity Cost b. Amount spent when one
consumption, investment, government purchases, and more rupee is earned
net exports (1). Next, calculate net exports (3). Finally, 3. Average Revenue c. Total revenue divided by
arrive at total expenditure on domestic output (4). This (AR) number of units sold
sequence ensures comprehensive coverage of aggregate 4. Private Income d. MPC
spending. 5. Producer Surplus e. Income accruing to
26. Place these market types in order of increasing number private sector including
of sellers: retained earnings
1. Perfect competition Options:
2. Monopoly (A) 1-d, 2-a, 3-c, 4-e, 5-b
3. Monopolistic competition (B) 1-d, 2-a, 3-b, 4-c, 5-e
4. Oligopoly (C) 1-a, 2-d, 3-c, 4-b, 5-e
(A) 2 → 4 → 3 → 1 (D) 1-b, 2-c, 3-d, 4-a, 5-e
(B) 1 → 3 → 4 → 2

Ans
(C) 2 → 4 → 1 → 3
(D) 4 → 2 → 3 → 1 (A) 1-d, 2-a, 3-c, 4-e, 5-b
MPS = 1 – MPC (d). Opportunity cost is the value of


Ans the next best alternative (a). AR = TR / quantity sold
(A) 2 → 4 → 3 → 1 (c). Private Income = income of private sector including
Monopoly (2) has a single seller, oligopoly (4) has a retained earnings (e). Producer Surplus often is price
few dominant firms, monopolistic competition (3) has received minus minimum acceptable price (but not
many, and perfect competition (1) has an extremely listed).
large number. Thus, from least to greatest: Monopoly
29. Match the items in Column I with the items in Column
→ Oligopoly → Monopolistic Competition → Perfect
Competition. II
Column I Column II
27. Arrange these macroeconomic policy actions
chronologically when an economy overheats: 1. Autonomous a. Changes with income
1. Excess demand emerges investment level
2. Government raises taxes or reduces spending 2. Induced b. Made regardless of
3. Prices start increasing investment income changes
4. Aggregate supply is at full capacity 3. Gross investment c. Replacing worn-out
(A) 1 → 3 → 4 → 2 capital
(B) 4 → 1 → 3 → 2 4. Net investment d. Total investment
(C) 1 → 4 → 3 → 2 including depreciation
(D) 4 → 3 → 2 → 1 5. Depreciation e. Capital consumption


Ans due to wear and tear
(C) 1 → 4 → 3 → 2 Options :
Excess demand appears first (1), full capacity utilization (A) 1-a, 2-b, 3-d, 4-c, 5-e
follows (4), causing prices to rise (3). Then government (B) 1-b, 2-a, 3-d, 4-c, 5-e
or central bank intervenes (2) to control inflation. This (C) 1-a, 2-b, 3-c, 4-d, 5-e
sequence outlines how an economy shifts from demand (D) 1-b, 2-d, 3-a, 4-e, 5-c
pressures to policy action.

Ans
28. Column I (Terminology) | Column II (Meaning) (B) 1-b, 2-a, 3-d, 4-c, 5-e
Autonomous investment (b) does not depend on income
Column I Column II
changes, induced investment (a) varies with income.

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 PRACTICE PAPER 12

Gross investment (d) is total, including depreciation. (A) 1-b, 2-c, 3-a, 4-d
Net investment (c) is gross minus replacement. (B) 1-b, 2-a, 3-c, 4-d
Depreciation (e) is wear and tear of capital. (C) 1-a, 2-b, 3-c, 4-d
(D) 1-b, 2-c, 3-d, 4-a
30. Match the items in Column I with the items in Column
II

Ans
(B) 1-b, 2-a, 3-c, 4-d
Column I Column II
The bank rate (1-b) is the long-term lending rate from
1. Price Elasticity of a. Responsiveness of supply
the central bank. Reverse repo rate (2-a) is what the
Demand to price changes
central bank pays banks for their deposits. Repo rate (3-
2. Price Elasticity of b. Responsiveness of demand c) is the short-term lending rate to banks. SLR (4-d) is
Supply to income changes the mandated ratio of liquid assets.
3. Income Elasticity c. Percentage change in
of Demand quantity demanded over 32. Match the items in Column I with the items in Column
percentage change in its II
price
Column I Column II
4. Cross Elasticity of d. Responsiveness of demand
1. Surplus a. Quantity demanded equals
Demand for one good to changes in
price of another
quantity supplied
2. Shortage b. Quantity supplied exceeds
Options :
quantity demanded
(A) 1-c, 2-a, 3-b, 4-d
(B) 1-a, 2-b, 3-c, 4-d 3. Equilibrium c. Government-imposed
(C) 1-b, 2-d, 3-c, 4-a maximum price
(D) 1-d, 2-c, 3-b, 4-a 4. Price Ceiling d. Quantity demanded
exceeds quantity supplied


Ans
5. Black Market e. Illegal transactions when
(A) 1-c, 2-a, 3-b, 4-d official ceilings/bans exist
Price elasticity of demand (1-c) measures demand’s
reaction to price. Price elasticity of supply (2-a) Options:
indicates supply’s reaction to price. Income elasticity of (A) 1-b, 2-d, 3-a, 4-c, 5-e
demand (3-b) measures demand’s reaction to income. (B) 1-d, 2-b, 3-c, 4-a, 5-e
Cross elasticity (4-d) captures demand change for one (C) 1-c, 2-b, 3-d, 4-e, 5-a
good when another’s price changes. (D) 1-d, 2-a, 3-b, 4-c, 5-e


Ans
31. Match the items in Column I with the items in Column
II (A) 1-b, 2-d, 3-a, 4-c, 5-e
A surplus (b) occurs when supply outstrips demand, a
Column I Column II shortage (d) when demand outstrips supply, equilibrium
1. Bank Rate a. Rate at which central bank (a) when they match, a price ceiling (c) sets a maximum,
borrows from commercial and a black market (e) emerges outside legal price
banks controls.
2. Reverse Repo b. Interest rate at which RBI
33. Which set of statements regarding perfect competition
Rate lends to commercial banks
is correct?
for long term
1. Large number of firms
3. Repo Rate c. Rate at which central bank 2. Homogeneous product
lends to commercial banks 3. Brand loyalty is a key feature
for short term 4. No individual firm can influence market price
4. Statutory d. Percentage of deposits (A) 1, 2, and 4 are correct
Liquidity Ratio banks must keep as liquid (B) 2, 3, and 4 are correct
(SLR) assets (C) 1, 3, and 4 are correct
Options: (D) 1, 2, and 3 are correct

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Ans 1. Demand-pull inflation arises from excessive

(A) 1, 2, and 4 are correct aggregate demand
Perfect competition features a large number of sellers 2. Cost-push inflation arises from rising production
producing identical goods, with no single firm affecting costs
price. Brand loyalty doesn’t exist since products are 3. Inflation has no effect on fixed-income groups
homogeneous, making statement 3 incorrect. 4. Moderate inflation can accompany economic
growth
34. Regarding the law of variable proportions, which (A) 1, 2, and 4 are correct
statements are true? (B) 2, 3, and 4 are correct
1. It operates in the short run when some factors are (C) 1, 3, and 4 are correct
fixed (D) 1 and 3 only are correct
2. Marginal product eventually diminishes


Ans
3. Total product falls immediately after one unit of
input is used (A) 1, 2, and 4 are correct
4. Increasing returns may initially occur Demand-pull inflation results from high demand, cost-
(A) 1, 2, and 4 are correct push from increased costs (like wages, materials), and
(B) 2 and 3 only are correct moderate inflation can exist with growth. Fixed-income
(C) 1 and 4 only are correct earners suffer reduced real incomes during inflation,
(D) 2, 3, and 4 are correct making statement 3 incorrect.


Ans 37. Which statements about the budget deficit are correct?
(A) 1, 2, and 4 are correct 1. Primary deficit = Fiscal deficit + interest payments
The law of variable proportions applies in the short 2. Fiscal deficit = Total expenditure – total receipts
run, with some inputs fixed. Marginal product may (excluding borrowing)
rise initially (increasing returns), then diminish. Total 3. Revenue deficit = Revenue expenditure – revenue
product does not necessarily drop right from the first receipts
unit, so statement 3 is incorrect. 4. A fiscal deficit can lead to increased government
borrowing
35. Concerning national income concepts, which (A) 2, 3, and 4 are correct
statements are correct? (B) 1, 2, and 3 are correct
1. GDP at market price includes indirect taxes and (C) 1, 3, and 4 are correct
excludes subsidies (D) 1, 2, and 4 are correct
2. NNP at factor cost = NNP at market price – net


Ans
indirect taxes
3. Net indirect taxes = Indirect taxes + subsidies (A) 2, 3, and 4 are correct
4. Personal disposable income = Personal income – Fiscal deficit is total expenditure minus total receipts
direct taxes (excluding borrowings). Revenue deficit is revenue
(A) 1, 2, and 4 are correct expenditure minus revenue receipts. A fiscal deficit
(B) 1, 3, and 4 are correct often means the government borrows. Primary deficit =
(C) 2, 3, and 4 are correct Fiscal deficit – interest payments, not plus, so statement
(D) 1, 2, and 3 are correct 1 is incorrect.


Ans 38. Assertion (A) : Under oligopoly, firms are interdependent
(A) 1, 2, and 4 are correct in decision-making.
GDP at MP includes indirect taxes minus subsidies. Reason (R) : In oligopoly, a single firm can always ignore
NNP at FC is NNP at MP minus net indirect taxes. Net rivals’ reactions.
indirect taxes = Indirect taxes – subsidies (not plus). (A) Both (A) and (R) are true, and (R) is the correct
Personal disposable income is personal income minus explanation of (A)
direct taxes. (B) Both (A) and (R) are true, but (R) is not the correct
explanation of (A)
36. Which combination of statements about inflation is (C) (A) is true, (R) is false
true? (D) (A) is false, (R) is true

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 PRACTICE PAPER 12

Ans framework notices that multiple new competitors have

(C) (A) is true, (R) is false opened nearby. Initially, the bakery enjoyed higher sales
In oligopoly, each firm must consider how rivals might due to unique recipes. However, as competitors introduced
respond to pricing or output changes, illustrating similar products, customers became more price-sensitive.
interdependence. Hence, ignoring rivals is not always The bakery responded by differentiating its offerings
feasible. The assertion is correct, but the reason is further, introducing organic ingredients and custom
incorrect. designs. Despite these efforts, there was still an upper
limit to the price it could charge without losing customers.
39. Assertion (A) : Investment is a component of aggregate Such market structures combine elements of competition
demand in an economy. and monopoly power. While each firm’s products are
Reason (R) : Investment spending includes expenditure differentiated, the presence of close substitutes constrains
on capital goods that enhance future production pricing freedom. Gradually, promotional efforts increased
capacity. costs, but also helped retain a loyal clientele. The bakery
(A) Both (A) and (R) are true, and (R) is the correct owner recognized that long-run profits might be driven
explanation of (A) down by new entrants.
(B) Both (A) and (R) are true, but (R) is not the correct
explanation of (A) 41. What market structure does the bakery operate in?
(C) (A) is true, (R) is false (A) Monopoly
(D) (A) is false, (R) is true (B) Monopolistic competition
(C) Perfect competition


Ans
(D) Oligopoly
(A) Both (A) and (R) are true, and (R) is the correct


Ans
explanation of (A)
Aggregate demand includes consumption, investment, (B) Monopolistic competition
government purchases, and net exports. Investment The bakery faces numerous competitors offering similar
adds capital goods, boosting future output. Thus, the but differentiated products, which typifies monopolistic
statement and explanation align perfectly, clarifying competition. Firms have some price-making power but
why investment is a key part of aggregate demand. also encounter competition from close substitutes.

40. Assertion (A) : A progressive tax system imposes a 42. Why did customers become more price-sensitive over
higher tax rate on higher income brackets. time?
Reason (R) : Progressive taxes aim at ensuring (A) Because the economy shifted to a complete
proportional burdens across all income levels. monopoly
(A) Both (A) and (R) are true, and (R) is the correct (B) Because more substitutes emerged, reducing the
explanation of (A) bakery’s market power
(B) Both (A) and (R) are true, but (R) is not the correct (C) Because consumers had higher disposable income
explanation of (A) (D) Because government regulations set bakery price
(C) (A) is true, (R) is false caps
(D) (A) is false, (R) is true

Ans


Ans (B) Because more substitutes emerged, reducing the
(B) Both (A) and (R) are true, but (R) is not the correct bakery’s market power
explanation of (A) In monopolistic competition, new entrants with
Progressive taxation levies higher rates on higher income similar offerings increase consumer choices. As variety
groups. While it does help address inequality, describing expands, customers compare prices closely, causing
it as ensuring “proportional burdens” is misleading; it is price sensitivity to rise and curtailing any single firm’s
more than proportional for higher incomes. Hence, the ability to raise prices freely.
reason is not a precise explanation of the assertion.
43. Which factor did not help the bakery retain customers?


Direction :Carefully read the case study provided and then (A) Use of organic ingredients
thoroughly answer the subsequent five questions. (B) Custom designs
A small bakery operating in a monopolistic competition (C) Complete elimination of all competitors

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(D) Product differentiation strategies A government planning committee observed rising

Ans unemployment and sluggish private investment in multiple
regions. To stimulate economic activity, they introduced
(C) Complete elimination of all competitors targeted subsidies for startups in manufacturing.
The bakery cannot eliminate competitors in a Additionally, commercial banks were encouraged to
monopolistic competition market. Instead, retaining reduce lending rates, hoping cheaper credit would attract
customers relies on product differentiation, organic entrepreneurs. Over several months, new businesses
ingredients, and appealing designs. These features emerged, purchasing local raw materials and generating
set the bakery apart while still contending with other employment. However, some economists cautioned
similar businesses. against potential future inflation if aggregate demand
44. How does this bakery’s pricing power differ from that in rose too rapidly. Others worried about budgetary strain
a monopoly? caused by large subsidies. Balancing growth objectives
(A) Both have no competitors with price stability remained a key policy challenge. The
(B) The bakery cannot raise prices indefinitely due to committee weighed phased subsidy rollbacks if the private
close substitutes, whereas a monopolist can set sector became robust enough to thrive independently.
higher prices with fewer substitutes By monitoring credit data and employment indicators,
(C) Both can eliminate competition through policymakers aimed to refine interventions over time.
promotional efforts 46. What policy action did commercial banks take to
(D) The bakery has infinite capacity to charge any price encourage entrepreneurship?


Ans (A) They restricted credit supply
(B) The bakery cannot raise prices indefinitely due to (B) They raised lending rates significantly
close substitutes, whereas a monopolist can set higher (C) They reduced lending rates to make credit cheaper
prices with fewer substitutes (D) They imposed stricter loan qualifications
Under monopolistic competition, firms face many rivals

Ans
producing similar products, limiting price hikes. In a (C) They reduced lending rates to make credit cheaper
monopoly, no close substitutes exist, giving the single The case explicitly states that commercial banks lowered
producer more freedom to set prices. lending rates, facilitating easier access to funds for new
45. Assertion (A) : Promotional efforts may increase costs businesses. Cheaper credit encourages investment, job
for the bakery. creation, and potential economic expansion.
Reason (R) : High promotional expenses can boost 47. Why might inflation occur if aggregate demand rises
brand loyalty but squeeze profit margins in the presence quickly?
of strong competition. (A) Because more goods are produced at lower cost
(A) Both (A) and (R) are true, and (R) is the correct (B) Because sudden demand increases can outpace
explanation of (A) supply, driving up prices
(B) Both (A) and (R) are true, but (R) is not the correct (C) Because foreign investors always invest in emerging
explanation of (A) markets
(C) (A) is true, (R) is false (D) Because all subsidies reduce product costs to zero
(D) (A) is false, (R) is true


Ans


Ans
(B) Because sudden demand increases can outpace
(A) Both (A) and (R) are true, and (R) is the correct supply, driving up prices
explanation of (A) When demand expands faster than supply, goods
Monopolistic competition often involves marketing and become scarce relative to market needs, triggering
advertising to differentiate products. While promotions price hikes (inflation). If businesses or resources cannot
can secure customer loyalty, these added costs reduce immediately meet the heightened demand, prices
profit margins, especially when rivals also compete escalate.
actively, limiting any firm’s pricing freedom.
48. Which concern was not raised by economists regarding


Direction :Carefully read the case study provided and then the policies?
thoroughly answer the subsequent five questions.

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 PRACTICE PAPER 12

(A) Risk of inflation from sudden demand spikes strain. A measured approach allows policymakers to
(B) Potential burden on government budgets due to ensure the economy remains stable, adjusting if growth
subsidies falters or inflation rises.
(C) Excessive private-sector independence from
government

*************

(D) Need for balanced intervention to prevent

economic imbalances


Ans
(C) Excessive private-sector independence from
government
Economists mentioned possible inflation, large subsidies
straining budgets, and the need to balance growth
with price stability. They did not express concern over
“excessive private-sector independence.” Instead, they
worried about sustainability and potential inflationary
issues.

49. Assertion (A) : Targeted manufacturing subsidies can

reduce unemployment.
Reason (R) : Subsidies lower producers’ costs,
encouraging them to expand output and hire more
workers.
(A) Both (A) and (R) are true, and (R) is the correct
explanation of (A)
(B) Both (A) and (R) are true, but (R) is not the correct
explanation of (A)
(C) (A) is true, (R) is false
(D) (A) is false, (R) is true


Ans
(A) Both (A) and (R) are true, and (R) is the correct
explanation of (A)
By subsidizing startups and manufacturing, governments
reduce initial costs of production. This encourages
businesses to increase production, potentially hiring
more workers and thereby reducing unemployment.
The reason directly supports the assertion.

50. If the private sector becomes self-sustaining, what best

policy approach could the government adopt?
(A) Keep subsidies forever, regardless of growth
(B) Immediately abolish all economic regulations
(C) Gradually phase out subsidies while monitoring
stability
(D) Raise taxes sharply to recoup costs


Ans
(C) Gradually phase out subsidies while monitoring
stability
Phasing out subsidies once businesses become viable
prevents perpetual government dependency and budget

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page 130 CUET UG Economics

PRACTICE PAPER 13

1. What best describes “microeconomics”? while points outside are unattainable with current
(A) Study of the economy as a whole resources. It highlights trade-offs and opportunity costs.
(B) Analysis of individual units and markets
4. Which scenario would not shift the PPC outward?
(C) Study of global trade negotiations
(D) Examination of government fiscal policies (A) Technological improvements
(B) Discovery of new resources


Ans (C) Reduction in unemployment
(B) Analysis of individual units and markets (D) Better worker training
Microeconomics focuses on how households, firms,

Ans
and individual markets allocate resources and make
economic decisions. It investigates pricing, market (C) Reduction in unemployment
structures, and consumer and producer behavior at a An outward shift of the PPC occurs when a society’s
smaller scale than macroeconomics, which examines productive capacity increases, often through technology
the entire economy. or new resources. Lowering unemployment moves
production from an inefficient point inside the curve to
2. Which of the following is not a central problem of an a point on the curve. It does not expand the curve itself,
economy? so the frontier remains the same.
(A) What to produce
5. Comparing a movement along the demand curve vs.
(B) How to produce
(C) Where to produce a shift in the demand curve: which factor leads to a
(D) For whom to produce movement along the curve?
(A) Change in consumer incomes


Ans (B) Change in price of the good itself
(C) Where to produce (C) Change in consumer tastes
The core economic problems involve deciding what (D) Change in prices of related goods
goods should be produced, how they should be produced

Ans
using available resources, and for whom they should be
produced to meet society’s needs. “Where to produce” (B) Change in price of the good itself
is less central, as location is usually secondary to these Movements along the demand curve occur when
fundamental allocation and distribution questions. the price of the product changes, altering quantity
demanded at various points. Shifts in the entire
3. A production possibility curve (PPC) demonstrates: demand curve happen due to non-price factors such
(A) Unlimited resources and zero opportunity costs as consumer tastes, incomes, or prices of substitutes
(B) Various combinations of two goods with given and complements, which increase or decrease overall
resources demand.
(C) A single good’s production at different costs
6. To find price elasticity of demand using the percentage
(D) Infinite output possibilities
method, an economist should use:


Ans (A) Change in price divided by original price
(B) Various combinations of two goods with given (B) Total expenditure at different prices
resources (C) Percentage change in quantity demanded divided
The PPC shows all possible combinations of two by percentage change in price
goods that can be produced using available resources (D) Slope of the demand curve in absolute terms
and technology. Each point on the curve indicates an

Ans
efficient allocation; points inside mean underutilization,

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 PRACTICE PAPER 13

(C) Percentage change in quantity demanded divided by First, consumers calculate the marginal utility (MU) of
percentage change in price each good. Next, they compare the ratios of MU to price
The price elasticity of demand is measured by the ratio (MU/P) across goods. Then, they allocate their limited
of the percentage change in quantity demanded to the budget to achieve the highest possible total utility.
percentage change in price. This method standardizes Finally, they confirm no further reallocation would yield
changes, making comparisons meaningful across higher satisfaction.
different goods and price ranges. It reflects consumers’
9. Which term describes output per unit of a variable input
responsiveness to price fluctuations.
when other inputs are fixed?
7. Match the concepts (Column I) with their descriptions (A) Average product
(Column II): (B) Total product
(C) Marginal product
Column I Column II
(D) Opportunity cost
1 Law of Diminishing A As income rises,
Marginal Utility demand rises

Ans
2 Normal Goods B As income rises, (A) Average product
demand falls Average product measures the total output produced
3 Inferior Goods C Utility gained from per unit of a specific input (often labor), holding other
each extra unit factors constant. It is obtained by dividing total product
consumed decreases by the quantity of the variable input. Marginal product,
in contrast, measures the additional output produced by
4 Substitute Goods D Goods replaced by
an extra unit of input.
others in consumption
Options: 10. Which set of statements about returns to factor is
(A) 1–C, 2–A, 3–B, 4–D correct?
(B) 1–A, 2–C, 3–D, 4–B 1. Diminishing returns occur when each additional
(C) 1–D, 2–B, 3–A, 4–C unit of input adds less to total output.
(D) 1–C, 2–B, 3–A, 4–D 2. Increasing returns imply the marginal product is
declining.


Ans
3. Constant returns mean additional inputs add a
(A) 1–C, 2–A, 3–B, 4–D fixed amount of extra output.
The law of diminishing marginal utility states each 4. Negative returns occur if total output falls with
additional unit consumed provides less extra utility. more input.
Normal goods show increased demand with rising (A) 1, 3, and 4 are correct
income, while inferior goods are demanded less as (B) 2, 3, and 4 are correct
income grows. Substitute goods can replace each (C) 1, 2, and 4 are correct
other, such as tea and coffee, depending on consumer (D) 1, 2, and 3 are correct
preferences.


Ans
8. Arrange these steps of consumer equilibrium (utility (A) 1, 3, and 4 are correct
approach) in correct chronological order: In production, diminishing returns show less extra
1. Compare MU/P ratios for all goods output per added unit. Constant returns mean each unit
2. Allocate budget to maximize total utility adds a fixed increase. Negative returns occur if more
3. Calculate marginal utility (MU) for each good input reduces overall output. Increasing returns would
4. Ensure no reallocation can increase total utility mean marginal product rises, contradicting statement
(A) 3 → 1 → 2 → 4 2’s claim that it’s declining, which is incorrect.
(B) 2 → 3 → 1 → 4
(C) 4 → 2 → 3 → 1 11. Which cost remains constant over varying levels of
(D) 1 → 3 → 2 → 4 output in the short run?
(A) Variable Cost


Ans
(B) Marginal Cost
(A) 3 → 1 → 2 → 4 (C) Total Cost

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(D) Fixed Cost Column I Column II

Ans 1 Price Taker A Firms cannot influence
(D) Fixed Cost price
In the short run, fixed costs (like rent or certain salaries) 2 Homogeneous B Key feature of pure
do not change regardless of production level. They Product competition
remain constant even if output is zero. Variable costs 3 Free Entry C Only one firm in the
fluctuate with the level of production, while total cost industry
is the sum of fixed and variable costs, and marginal cost 4 Single Seller D No barriers to market
changes per additional unit. participation
12. Assertion (A) : Marginal cost eventually rises as output Options:
increases. (A) 1–B, 2–C, 3–A, 4–D
Reason (R) : Diminishing marginal returns occur when (B) 1–A, 2–B, 3–D, 4–C
additional units of a variable factor are added to a fixed (C) 1–C, 2–A, 3–B, 4–D
factor. (D) 1–D, 2–B, 3–C, 4–A
(A) Both (A) and (R) are true, and (R) is the correct

Ans
explanation.
(B) Both (A) and (R) are true, but (R) is not the correct (B) 1–A, 2–B, 3–D, 4–C
explanation. In perfect competition, firms are price takers (cannot
(C) (A) is true, (R) is false. set market prices), products are homogeneous
(D) (A) is false, (R) is true. (indistinguishable), and free entry means no significant
barriers. A “single seller” characterizes a monopoly,


Ans where one firm dominates the entire market and can set
(A) Both (A) and (R) are true, and (R) is the correct prices due to the absence of competition.
explanation.
15. Identify correct statements about price determination
As more of a variable factor is employed with a fixed
factor, the marginal product eventually decreases due to under perfect competition:
diminishing returns. This causes marginal cost to rise 1. Individual firms cannot affect market price.
because each additional unit of output requires more 2. Equilibrium price is set where market demand
variable input, increasing the extra cost of producing equals market supply.
one more unit. 3. Government frequently imposes floor prices in
perfect competition.
13. Which market structure is characterized by a large 4. Shifts in demand or supply affect the equilibrium
number of buyers and sellers, with homogeneous price.
products and free entry? (A) 1, 2, and 3 only
(A) Monopoly (B) 1, 3, and 4 only
(B) Monopolistic Competition (C) 2, 3, and 4 only
(C) Perfect Competition (D) 1, 2, and 4 only
(D) Oligopoly

Ans


Ans (D) 1, 2, and 4 only
(C) Perfect Competition In perfect competition, each firm is a price taker (cannot
Perfect competition features many buyers and sellers influence market price). The equilibrium price arises at
dealing in identical products. There are no barriers to demand-supply intersection. Shifts in demand or supply
entry, and firms are price takers, as no single participant will change that intersection. While governments may
can influence market price. Monopoly, monopolistic intervene in some markets, frequent price floors are not
competition, and oligopoly each have features that a standard feature of perfect competition.
differentiate them from perfect competition’s ideal
16. What happens to the equilibrium price if both market
assumptions.
demand and market supply increase simultaneously?
14. Match the following concepts (Column I) with their (A) Price must rise
characteristics (Column II): (B) Price must fall

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(C) Price may rise or fall depending on relative shifts

Ans

(D) Price remains fixed (C) Shortage of goods


Ans If the price is set below equilibrium, quantity demanded
exceeds quantity supplied, creating a shortage.
(C) Price may rise or fall depending on relative shifts
Rationing is often introduced to distribute goods more
When both demand and supply increase, the new
fairly, but it can lead to waiting lines or black markets
equilibrium price depends on which shift is relatively
as consumers cannot buy as much as they desire at the
larger. If demand rises more than supply, price may
controlled price.
increase. If supply rises more than demand, price may
decrease. If both change proportionally, price can remain 20. Assertion (A) : Minimum support prices can create
stable, illustrating the complexity of simultaneous shifts. surpluses.
Reason (R) : When the floor price is above equilibrium,
17. Which term refers to a legally imposed maximum
it motivates producers to supply more, while demand
price below the equilibrium level to make goods more
contracts.
affordable?
(A) Both (A) and (R) are true, and (R) is the correct
(A) Price floor
explanation.
(B) Price ceiling
(B) Both (A) and (R) are true, but (R) is not the correct
(C) Buffer stock price
explanation.
(D) Equilibrium price
(C) (A) is true, (R) is false.


Ans (D) Both (A) and (R) are false.
(B) Price ceiling

Ans
A price ceiling is the highest allowable price set by the
(A) Both (A) and (R) are true, and (R) is the correct
government, usually below the free-market equilibrium,
explanation.
aiming to keep certain goods affordable. This can lead to
A price floor above equilibrium encourages producers
shortages when the mandated price is too low, causing
to produce more since they receive higher guaranteed
demand to exceed supply and potentially creating black
prices, but at that price, consumers buy fewer units. The
markets.
result is an excess supply or surplus, often requiring
18. The concept of Food Availability Decline (FAD) Theory government intervention (like procurement or storage)
primarily deals with: to maintain market stability.
(A) Surplus production in developing nations
21. Match the national income concepts (Column I) with
(B) Decrease in aggregate food supply leading to
their definitions (Column II):
famines
(C) Shifts in tastes for gourmet foods Column I Column II
(D) Stabilizing global food prices 1 GDP at Market A Income available to


Ans Price nation, including net
current transfers
(B) Decrease in aggregate food supply leading to famines
The Food Availability Decline (FAD) Theory posits 2 GNP at Factor B Measures value of all final
that famines occur primarily when there is a significant Cost goods and services within
drop in overall food supply. Although multiple factors domestic territory
(including distribution and entitlement) affect famine 3 Personal C Income earned by
conditions, FAD specifically centers on supply shortfalls Income residents from domestic
as a direct cause of hunger and scarcity. and abroad, minus
depreciation, at factor cost
19. A government imposes rationing. Which outcome is 4 National D Total income received
most likely in the short term if the official price is set Disposable by individuals, including
below equilibrium? Income transfer payments
(A) Surplus of goods
Options:
(B) Equilibrium in quantity demanded and supplied
(A) 1–C, 2–A, 3–B, 4–D
(C) Shortage of goods
(B) 1–B, 2–C, 3–D, 4–A
(D) Elimination of market distortions

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(C) 1–B, 2–A, 3–C, 4–D (B) Personal taxes and non-tax payments
(D) 1–A, 2–D, 3–B, 4–C (C) Personal expenditure on goods


Ans (D) Depreciation and indirect taxes

(B) 1–B, 2–C, 3–D, 4–A

Ans

GDP at Market Price measures final output within (B) Personal taxes and non-tax payments
a country. GNP at Factor Cost adds net income from Disposable personal income represents the income
abroad and subtracts depreciation. Personal Income individuals have available to spend or save. From
includes all income, including transfers, received by personal income, individuals must pay personal taxes
individuals. National Disposable Income incorporates (like income tax) and other mandatory non-tax dues.
net current transfers from abroad, capturing total After these deductions, the remainder is disposable,
resources available to a nation. meaning it can be used for consumption or saved for
future.
22. Arrange the steps of value-added method in the correct
sequence: 25. Select correct statements about aggregate demand (AD)
1. Identify value of output of each producing unit and aggregate supply (AS):
2. Subtract intermediate consumption from total 1. AD = C + I + G + (X−M)
output 2. AS measures total output supplied at different price
3. Sum up value added across all sectors levels
4. Exclude value added abroad by residents 3. AD curve always slopes upward
(A) 3 → 1 → 4 → 2 4. Equilibrium occurs where AD = AS
(B) 1 → 2 → 3 → 4 (A) 1, 2, and 4 only
(C) 2 → 1 → 3 → 4 (B) 2, 3, and 4 only
(D) 4 → 3 → 2 → 1 (C) 1 and 3 only


Ans (D) 1, 3, and 4 only

(B) 1 → 2 → 3 → 4

Ans
First, measure the total output of each unit. Next, (A) 1, 2, and 4 only
subtract intermediate consumption to find each unit’s Aggregate demand is typically the sum of consumption,
value added. Then, sum the value added from all sectors investment, government spending, and net exports.
to get domestic production. Finally, exclude any value The aggregate supply curve displays total real output
added from residents abroad if calculating domestic supplied at various price levels. Macroeconomic
GDP rather than GNP. equilibrium arises where AD and AS intersect.
Statement 3 is incorrect because the AD curve usually
23. Which of the following is not included in calculating a slopes downward, not upward.
country’s National Income by the income method?
(A) Wages and salaries 26. Assertion (A) : When AD exceeds AS at full employment,
(B) Rent the economy faces inflationary pressure.
(C) Interest on loans Reason (R) : Excess demand can push prices up, leading
(D) Transfer payments to an inflationary gap.


Ans (A) Both (A) and (R) are true, and (R) is the correct
explanation.
(D) Transfer payments (B) Both (A) and (R) are true, but (R) is not the correct
Transfer payments, such as unemployment benefits explanation.
or pensions, do not reflect the purchase of goods or (C) (A) is true, (R) is false.
services, nor do they directly add to current output. (D) Both (A) and (R) are false.
Wages, rent, and interest are factor incomes earned
from productive activities. Hence, transfer payments are

Ans
excluded in the income method for measuring national (A) Both (A) and (R) are true, and (R) is the correct
income. explanation.
If aggregate demand surpasses aggregate supply at the
24. Disposable income is personal income minus: full employment level of output, scarcity of available
(A) Corporate taxes and rent

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 PRACTICE PAPER 13

resources drives up prices. This situation is known as an (A) Issuing currency

inflationary gap, where too much money competes for (B) Acting as the government’s banker
limited goods, thereby pushing up the price level. (C) Accepting deposits from individual citizens
(D) Regulating commercial banks
27. Involuntary unemployment refers to people who:
(A) Choose not to work despite vacancies

Ans
(B) Are overqualified but still employed (C) Accepting deposits from individual citizens
(C) Cannot find work despite actively seeking jobs A central bank generally issues the nation’s currency,
(D) Work fewer hours willingly for leisure manages government accounts, regulates and supervises


Ans commercial banks, and controls monetary policy. It
typically does not offer personal banking services to
(C) Cannot find work despite actively seeking jobs individual citizens; that role is performed by commercial
Involuntary unemployment exists when individuals banks and other financial institutions in the country.
are willing and able to work at prevailing wages but
cannot secure employment. This differs from voluntary 30. Which statements about commercial banks are true?
unemployment, where people opt not to work at current 1. They accept deposits and lend to the public.
wage rates. Involuntary unemployment highlights 2. They print and circulate official currency.
systemic issues, such as insufficient aggregate demand 3. They create credit through fractional reserves.
or structural mismatches. 4. They function as bankers to the government.
(A) 1 and 2 only
28. Match the concepts (Column I) with their meanings (B) 1 and 3 only
(Column II): (C) 2, 3, and 4 only
Column I Column II (D) 1, 3, and 4 only
1 Full Employment A Planned or intended

Ans
investment (B) 1 and 3 only
2 Ex-ante B Ratio of change in Commercial banks accept public deposits and extend
Investment income to initial change loans, thereby creating money through the fractional
in investment reserve system. They do not issue official currency; that
3 Marginal C Level of employment is the central bank’s function. Acting as the government’s
Propensity to with no involuntary banker is also a primary function of the central bank,
Save (MPS) unemployment not commercial banks.
4 Investment D Fraction of additional
31. Which of the following is a primary function of money?
Multiplier income that is saved
(A) Store of value
Options: (B) Promotion of consumer credit
(A) 1–C, 2–A, 3–D, 4–B (C) Eliminating trade deficits
(B) 1–B, 2–D, 3–A, 4–C (D) Encouraging capital formation
(C) 1–C, 2–D, 3–B, 4–A


Ans
(D) 1–A, 2–C, 3–D, 4–B
(A) Store of value


Ans
Money primarily serves as a medium of exchange, a
(A) 1–C, 2–A, 3–D, 4–B measure of value (unit of account), and a store of value.
Full employment refers to an economy operating without While credit and capital formation are influenced by
involuntary unemployment. Ex-ante investment is monetary factors, they are not the direct, essential roles
planned before actual outcomes. MPS indicates how of money. Storing value allows purchasing power to be
much of an additional unit of income is saved. The retained for future use.
investment multiplier measures how initial spending
changes income levels, reflecting how new investment 32. A key reason behind bank nationalization in many
ripples through the economy. countries was:
(A) To issue currency more efficiently
29. Which function is not typically performed by a central (B) To prioritize private shareholder profits
bank? (C) To ensure credit availability to neglected sectors

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(D) To impose stringent private banking regulations (A) Estimated government expenditure equals estimated


Ans government receipts
A balanced budget occurs when projected or planned
(C) To ensure credit availability to neglected sectors expenditures match planned receipts for a fiscal period,
Governments often nationalize banks to direct credit reflecting fiscal discipline. This does not necessarily
toward regions and sectors previously underserved by mean no borrowing will occur, but in a strict sense,
private financial institutions. By bringing banks under government aims for revenue and spending parity,
public ownership or tighter state control, policymakers minimizing deficit or surplus at the planning stage.
aim to prioritize social objectives—like rural
development and small-scale industries—over purely 35. Choose correct statements about a deficit budget:
profit-driven considerations. 1. Government expenditure exceeds government
receipts.
33. Match the following (Column I) with (Column II): 2. It always leads to no public debt.
Column I Column II 3. Can stimulate an economy facing sluggish demand.
1 Revenue A Government’s total 4. Reflects an expansionary fiscal stance.
Receipts expenditure exceeds (A) 1, 3, and 4 only
total receipts excluding (B) 2, 3, and 4 only
borrowings (C) 1 and 2 only
(D) 1, 2, and 3 only
2 Capital B Regular income from
Expenditure taxes, profits, etc.

Ans
3 Fiscal Deficit C Shortfall of government’s (A) 1, 3, and 4 only
revenue receipts relative to A deficit budget indicates expenditures surpass receipts,
revenue expenditure potentially causing government borrowing. This
4 Revenue D Spending on creating assets expansionary stance often stimulates demand during
Deficit or reducing liabilities economic downturns. Statement 2 is incorrect because a
deficit typically increases public debt, not eliminates it.
Options:
By spending more than it collects, the government may
(A) 1–B, 2–A, 3–D, 4–C
invigorate growth but accumulates liabilities.
(B) 1–C, 2–B, 3–A, 4–D
(C) 1–B, 2–D, 3–A, 4–C 36. Place these steps of government budgeting in
(D) 1–D, 2–C, 3–B, 4–A chronological order:


Ans 1. Ministries submit expenditure proposals
2. Finance Ministry compiles and reviews proposals
(C) 1–B, 2–D, 3–A, 4–C
3. Final budget is presented in legislature
Revenue receipts are incomes like taxes and dividends.
4. Budget is approved and implemented
Capital expenditure is spending on long-term asset
(A) 1 → 2 → 3 → 4
creation or debt reduction. Fiscal deficit is the gap
(B) 3 → 1 → 4 → 2
between total expenditure (excluding borrowings) and
(C) 2 → 3 → 1 → 4
total receipts. Revenue deficit indicates that revenue
(D) 4 → 2 → 3 → 1
receipts are insufficient to cover revenue expenditures
for day-to-day government activities.

Ans
(A) 1 → 2 → 3 → 4
34. Balanced budget refers to a situation where:
Budgeting starts with ministries submitting spending
(A) Estimated government expenditure equals
and revenue estimates. The Finance Ministry
estimated government receipts
consolidates and revises these proposals, shaping
(B) Actual government receipts exceed actual
the draft budget. Next, the government presents it to
expenditure
the legislative body for debate and approval. Finally,
(C) Government borrows to meet capital expenditures
once passed, the budget is enacted and the approved
(D) Government prints new currency for all
allocations are implemented.
expenditures


Ans 37. A fixed exchange rate regime means:

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 PRACTICE PAPER 13

(A) Currency value determined solely by supply and 40. Which item would not be part of the capital account in
demand the BoP?
(B) Government pegs currency to another currency or (A) Foreign direct investment
basket (B) Portfolio investment
(C) Fluctuations in currency are unrestricted (C) External commercial borrowings
(D) Tariff imposition on imports is mandatory (D) Trade in software services


Ans

Ans
(B) Government pegs currency to another currency or (D) Trade in software services
basket Software services exports or imports are included in
In a fixed exchange rate system, the government or the current account under services trade. The capital
central bank sets its currency’s value relative to another account covers cross-border investments, borrowings,
major currency or a basket of currencies. This stability and other capital flows. FDI, portfolio investment,
can facilitate predictable trade and investment flows but and commercial loans appear in the capital/financial
may require active intervention and maintenance of account, while service transactions belong to the current
adequate foreign exchange reserves. account.

38. In a flexible exchange rate system, an increase in demand

Direction :Carefully read the case study provided and then
for a country’s exports generally leads to: thoroughly answer the subsequent five questions.
(A) Depreciation of its currency In a developing economy, the government introduced a
(B) Appreciation of its currency new policy to provide free agricultural tools to small-scale
(C) No impact on exchange rate farmers, intending to increase overall crop production.
(D) Immediate government intervention Over time, total output in the agricultural sector rose.


Ans However, due to the presence of middlemen, the farmers’
share of the higher crop price remained relatively low,
(B) Appreciation of its currency and consumer prices increased moderately. Meanwhile,
Under flexible exchange rates, if foreigners buy more urban consumers demanded a price ceiling on essential
of a nation’s exports, they need that country’s currency. grains. The government hesitated, fearing shortages if the
Higher demand for the currency drives its price up ceiling was set too low. At the same time, banks offered
relative to others, resulting in currency appreciation. subsidized loans, encouraging more investments in
Government intervention is not automatic, as the rate is farming technology. This scenario illustrates the interplay
largely market-determined. of supply enhancement measures, market intermediaries,
39. Balance of Payments (BoP) records: and policy interventions that can affect prices, production
(A) Only visible trade, excluding services incentives, and income distribution in the agricultural
(B) A country’s economic transactions with the rest of sector.
the world 41. Which economic concept best explains the government’s
(C) Internal distribution of income among different fear of setting a low price ceiling?
regions (A) Inelastic demand
(D) Government budget allocation to various (B) Shortage creation
departments (C) Excess supply


Ans (D) Optimal taxation
(B) A country’s economic transactions with the rest of

Ans
the world (B) Shortage creation
The BoP systematically captures all economic exchanges A low price ceiling often pushes demand above supply,
between residents of a country and non-residents, leading to shortages. Farmers might have lower
including trade in goods, services, financial assets, and incentives to sell at artificially controlled prices, while
transfer payments. It is divided into the current account consumers demand more. This mismatch can cause
(goods, services, income, and transfers) and the capital scarcity in the market, exactly the government’s concern
and financial account (investments and other flows). about controlling grain prices too strictly.

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42. How might subsidized loans for farming technology gradually

affect crop output? (B) Consumer prices will always fall
(A) Decrease in total production (C) Consumer prices become irrelevant
(B) No effect on production (D) Consumer prices become negative
(C) Increase in total production

Ans
(D) All production replaced by imports
(A) Consumer prices might remain stable or rise


Ans gradually
(C) Increase in total production Without a price ceiling, prices may adjust based on
Subsidized loans reduce the cost of capital, enabling market forces. If supply continues to expand and
farmers to invest in better equipment and technology. intermediaries remain, consumer prices could stabilize
Enhanced productivity and efficiency typically lead to or rise at a slower rate, influenced by competition, costs,
higher yields. With easier access to credit, farmers can and demand. However, the absence of artificial price
adopt modern methods, thereby boosting total crop caps removes the risk of enforced shortages.
output and contributing to economic development.


Direction :Carefully read the case study provided and then
43. Which factor reduces the farmers’ share of the higher thoroughly answer the subsequent five questions.
crop price in this scenario? A rural banking initiative was launched to provide
(A) Direct marketing between producers and affordable credit and savings facilities in regions with
consumers limited financial infrastructure. Over a year, deposits
(B) Absence of any middlemen increased significantly as more individuals entrusted
(C) Presence of intermediaries taking commissions their savings to these banks. Lending activity also grew,
(D) Very high government taxes funding small-scale enterprises, agriculture, and local


Ans trade. However, some economists raised concerns about
inadequate risk assessment, potentially leading to higher
(C) Presence of intermediaries taking commissions default rates. The central bank supervised these rural
Middlemen or intermediaries often charge fees or banks, ensuring adherence to reserve requirements
markups, absorbing part of the price gain that might and offering periodic financial literacy programs. This
otherwise go to farmers. This reduces the farmers’ share initiative aimed to stimulate local employment and
of the final price received from consumers, which can income. In response, local entrepreneurs expanded
dampen farmers’ overall earnings despite increases in production to meet growing demand, while depositors
output or market prices. enjoyed safer avenues for storing money. The outcome
44. Which term describes the additional investment in depended on balancing the need for expansion with
farming, triggered by subsidized loans? prudent lending practices.
(A) Marginal Cost of Labor 46. Which banking function is highlighted by the increase
(B) Gross Domestic Product at Market Price in deposits?
(C) Induced Investment (A) Issuance of currency notes
(D) Consumer Surplus (B) Facilitating government’s budget drafting


Ans (C) Accepting public deposits for safekeeping
(C) Induced Investment (D) Enforcing direct price controls
Induced investment occurs when favorable market or

Ans
policy conditions encourage more capital spending. (C) Accepting public deposits for safekeeping
Here, subsidized loans lower financing costs, prompting One of the primary functions of banks is to accept
farmers to purchase new technology or equipment. deposits from the public, ensuring the security of
This extra expenditure, spurred by policy incentives, those funds and offering a return, such as interest.
exemplifies investment responding to changes in By increasing trust and accessibility, rural banking
economic conditions and policy measures. initiatives attract depositors who previously lacked
45. What might happen to consumer prices if the formal financial services, encouraging saving and
government does not impose a price ceiling? financial stability.
(A) Consumer prices might remain stable or rise

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 PRACTICE PAPER 13

47. What potential risk do economists warn about regarding regions where financial institutions and borrowers may
these rural banks? have limited experience.
(A) Excessive reserve accumulation
50. Which statement best explains the dual outcomes of this
(B) Unrestricted foreign direct investment
(C) High loan default rates rural banking initiative?
(D) Persistent trade deficits (A) More savings yet zero local trade
(B) Larger bank profits but no impact on borrowers


Ans (C) Economic expansion balanced with credit risk
(C) High loan default rates (D) Bank closures due to lack of deposits
As lending expands, banks must carefully assess

Ans
borrowers’ creditworthiness. Inadequate or relaxed
evaluation can lead to higher default rates if clients (C) Economic expansion balanced with credit risk
fail to repay loans. This risk is particularly acute in The initiative fosters regional development by channeling
newly established rural banks, where financial literacy savings into productive ventures, stimulating local
and borrower histories may be limited, increasing growth and job creation. However, without robust risk
vulnerability to nonpayment. assessment, rising default rates can threaten stability.
Thus, the scheme’s success depends on enhancing
48. Which factor likely increases local employment in this financial inclusion while maintaining safeguards against
scenario? excessive credit and unsound lending.
(A) Decrease in local banking activity
(B) Hoarding money at home

*************

(C) Expansion of small-scale businesses funded by

loans
(D) Limiting access to credit


Ans
(C) Expansion of small-scale businesses funded by loans
When entrepreneurs and small enterprises gain access
to affordable credit, they can invest in equipment,
materials, and labor, expanding their productive
capacity. This growth often leads to new job opportunities
and increased local employment, positively impacting
incomes and community development, a primary aim
of rural banking initiatives.

49. Why might central bank supervision be crucial in these

rural banking schemes?
(A) To abolish all forms of lending
(B) To eliminate local enterprises
(C) To ensure adherence to reserve norms and prudent
practices
(D) To increase unregulated loan approvals


Ans
(C) To ensure adherence to reserve norms and prudent
practices
Central bank oversight helps maintain the stability
and solvency of rural banks. By enforcing reserve
requirements and promoting sound risk management,
supervision reduces the likelihood of bank failures and
systemic crises. This guidance is particularly essential in

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page 140 CUET UG Economics

PRACTICE PAPER 14

1. “Opportunity cost” refers to: fundamental central problem akin to the allocation
(A) The money cost of any commodity questions that define economic activity.
(B) The value of the next best alternative forgone
4. Increasing opportunity cost along a PPC can be
(C) The revenue earned from all alternatives
(D) The future benefits of current spending attributed to:
(A) Resources being perfectly adaptable to all uses


Ans (B) Resources shifted from one product to another
(B) The value of the next best alternative forgone with no loss
Opportunity cost measures what is sacrificed when a (C) Specialization of resources in certain uses
choice is made. If resources are used for one activity, the (D) Infinite resource availability
next best alternative is foregone. This concept highlights

Ans
trade-offs in decision-making, ensuring we recognize
the cost of unchosen options and guiding more efficient (C) Specialization of resources in certain uses
resource allocation. As specialized resources are diverted from producing
one good to another, they become progressively less
2. On a Production Possibility Curve, a point inside the efficient in their new use, resulting in rising opportunity
curve indicates: costs. This principle underlies the typical outward-
(A) Maximum productive efficiency bowed shape of the PPC, reflecting that resources aren’t
(B) Overutilization of resources equally adept at producing every good.
(C) Underutilization of resources
5. Comparing individual demand to market demand:
(D) Full employment of resources
market demand is found by:


Ans (A) Multiplying each individual demand by total
(C) Underutilization of resources population
Points inside the PPC signify that the economy’s (B) Averaging individual demand curves
resources are not being used to their fullest potential, (C) Horizontally summing all individual demand
resulting in less total output than possible. The curve curves
itself depicts the limit of feasible production with (D) Summing consumer utility
existing resources and technology. Points on the curve

Ans
are fully efficient; inside points are inefficient.
(C) Horizontally summing all individual demand curves
3. Which does not represent a central problem for every Market demand is the total quantity demanded by all
economy? consumers at each price level, obtained by adding each
(A) How to produce individual’s demand horizontally. This ensures that at
(B) When to produce any given price, the market demand curve reflects the
(C) What to produce aggregate quantity demanded, distinguishing it from a
(D) For whom to produce single individual’s quantity demanded.


Ans 6. When the price of a good falls, the substitution effect
(B) When to produce and income effect both contribute to:
Economic systems grapple with what goods to produce, (A) A reduction in consumption of the good
how to produce them using available resources, and for (B) No change in consumption
whom they are produced to satisfy needs. While timing (C) An increase in consumption of the good
can be important operationally, it is not considered a (D) A temporary market disequilibrium


Ans

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(C) An increase in consumption of the good (D) 4 → 3 → 2 → 1

A price drop makes the good relatively cheaper than its

Ans
substitutes (substitution effect), and it also effectively
increases consumers’ real income, allowing them to (B) 1 → 2 → 3 → 4
buy more (income effect). Both effects usually raise First, find each individual’s quantity demanded at a
the quantity demanded, except in certain inferior or certain price. Second, sum those quantities. Third,
Giffen goods, where the income effect may reduce repeat at different prices to get total demand at each
consumption. possible price. Finally, plot the combined total demand
to form the market demand curve, reflecting aggregate
7. Match these demand elasticity concepts (Column I) consumer behavior.
with their descriptions (Column II):
9. If marginal product becomes negative, then total
Column I Column II product will:
1 Elastic Demand A Quantity demanded (A) Remain constant
changes by the same (B) Increase at a decreasing rate
percentage as price (C) Start falling
2 Inelastic B Quantity demanded (D) Become zero immediately
Demand changes more than price

Ans
percentage
(C) Start falling
3 Unit Elastic C Quantity demanded A negative marginal product means each additional
Deman remains unchanged unit of input reduces total output. Once the marginal
regardless of price product dips below zero, total product begins to decline
4 Perfectly D Quantity demanded rather than simply rising more slowly. This marks the
Inelastic changes less than price range in which adding more inputs is counterproductive
Demand percentage to overall output.
Options:
10. Which statements about returns to scale are correct?
(A) 1–B, 2–D, 3–A, 4–C
1. Increasing returns to scale indicate a more-than-
(B) 1–D, 2–B, 3–C, 4–A
proportionate rise in output.
(C) 1–A, 2–C, 3–B, 4–D
2. Decreasing returns to scale imply inefficiencies
(D) 1–C, 2–A, 3–D, 4–B
only in the short run.


Ans 3. Constant returns to scale mean output changes
(A) 1–B, 2–D, 3–A, 4–C proportionately with inputs.
Elastic demand means a relatively larger percentage 4. Returns to scale are a long-run concept.
change in quantity for a given price change. Inelastic (A) 1, 3, and 4 only
demand exhibits a smaller percentage change in (B) 2, 3, and 4 only
quantity than price. Unit elastic demand occurs when (C) 1, 2, and 4 only
both change by the same percentage. Perfectly inelastic (D) 1 and 3 only
demand implies no change in quantity demanded

Ans
despite price variations.
(A) 1, 3, and 4 only
8. Put these steps to derive market demand from individual Returns to scale analyze long-run production, where
demands in order: all factors are variable. Increasing returns mean output
1. Obtain each person’s quantity demanded at a given grows faster than input usage. Constant returns reflect a
price proportionate increase. Decreasing returns imply a less-
2. Add up all individual quantities at that price than-proportional output rise. Statement 2 incorrectly
3. Repeat for various prices restricts decreasing returns to scale to short-run
4. Plot total demand for all prices inefficiencies, which is not accurate.
(A) 2 → 1 → 3 → 4
11. Total variable cost (TVC) typically:
(B) 1 → 2 → 3 → 4
(A) Remains constant across all output levels
(C) 3 → 2 → 1 → 4
(B) Varies with the level of output

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(C) Equals total fixed cost 1 Monopoly A Few large firms control
(D) Is irrelevant for short-run decisions most of the market


Ans 2 Oligopoly B One seller controls price
(B) Varies with the level of output and output
TVC changes based on production volume—higher 3 Monopolistic C Large number of
output generally means using more variable inputs and Competition firms selling slightly
thus higher variable costs. Fixed costs, in contrast, do differentiated products
not vary with output in the short run. Firms carefully 4 Perfect D Many buyers and sellers
manage variable costs since these directly affect Competition dealing in identical
profitability when changing output. products
12. Assertion (A) : Average fixed cost (AFC) declines Options:
continuously as output increases. (A) 1–B, 2–A, 3–C, 4–D
Reason (R) : Fixed cost is spread over more units with (B) 1–A, 2–B, 3–D, 4–C
higher output. (C) 1–C, 2–D, 3–B, 4–A
(A) Both (A) and (R) are true, and (R) is the correct (D) 1–D, 2–C, 3–A, 4–B
explanation.

Ans
(B) Both (A) and (R) are true, but (R) is not the correct
(A) 1–B, 2–A, 3–C, 4–D
explanation.
In a monopoly, a single seller dominates. Oligopoly
(C) (A) is true, (R) is false.
consists of a few large firms, often interdependent.
(D) Both (A) and (R) are false.
Monopolistic competition has many firms offering


Ans differentiated (but substitutable) products. Perfect
(A) Both (A) and (R) are true, and (R) is the correct competition comprises numerous buyers and sellers
explanation. trading identical products, with no single participant
AFC is calculated by dividing total fixed cost by output. able to affect market price significantly.
As production grows, the fixed cost is spread across more
15. Identify accurate statements about price determination
units, causing AFC to decline. Because the numerator
under perfect competition:
(fixed cost) remains constant while the denominator
1. Firms face a horizontal demand curve.
(units of output) increases, the average fixed cost curve
2. Price is determined by industry-wide supply and
keeps decreasing.
demand.
13. In perfect competition, a firm’s demand curve is: 3. Individual firms can set higher prices without
(A) Downward sloping losing customers.
(B) Perfectly inelastic 4. Changes in market supply or demand shift
(C) Perfectly elastic equilibrium price.
(D) U-shaped (A) 1, 2, and 4 only
(B) 2, 3, and 4 only


Ans
(C) 1 and 3 only
(C) Perfectly elastic (D) 1, 2, and 3 only
Under perfect competition, the individual firm faces a


Ans
horizontal demand curve at the market price. Because
each firm is a price taker, it can sell any quantity at that (A) 1, 2, and 4 only
price, meaning the demand curve is perfectly elastic. In perfect competition, firms are price takers, each
The market demand curve, however, slopes downward facing a perfectly elastic demand at the market price set
for the entire industry. by total demand and supply. Any shift in overall supply
or demand changes equilibrium price. If a single firm
14. Match the types of market structure (Column I) with tries to charge more, customers switch to competitors,
their features (Column II): contradicting statement 3.
Column I Column II 16. Under perfect competition, if market demand increases:
(A) Price will fall

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(B) Price will remain the same FAD theory contends that famines occur mainly due to
(C) Price will rise until new firms enter a stark reduction in total food supply, making it difficult
(D) Firms must leave the industry immediately for populations to secure adequate nourishment.


Ans Though various socio-economic factors contribute
to famine, FAD specifically points to aggregate supply
(C) Price will rise until new firms enter shortfalls as a principal driver of widespread hunger.
In the short run, a demand increase pushes the
equilibrium price up, raising profits. Over time, new 20. Assertion (A) : A binding price ceiling can help
firms are attracted by these supernormal profits and consumers access cheaper goods.
enter the market, increasing supply. This entry process Reason (R) : Price ceilings always eliminate shortages
continues until price returns to a level where firms earn and ensure unlimited supply.
only normal profit. (A) Both (A) and (R) are true, and (R) is the correct
explanation.
17. A price floor above the equilibrium price in a market for (B) Both (A) and (R) are true, but (R) is not the correct
wheat often leads to: explanation.
(A) Excess demand for wheat (C) (A) is true, (R) is false.
(B) Equilibrium (D) Both (A) and (R) are false.
(C) Excess supply of wheat
(D) Decreased output of wheat

Ans

Ans (C) (A) is true, (R) is false.

A binding price ceiling set below equilibrium can indeed
(C) Excess supply of wheat lower prices for consumers, but it typically creates
A price floor set above the free-market equilibrium shortages, not unlimited supply. Producers may supply
leads to a surplus because farmers produce more at the less due to decreased profitability, while consumers
higher guaranteed price. However, consumers buy less demand more, resulting in excess demand and potential
due to higher prices. This results in unsold stock unless rationing or black markets, contradicting the reason
the government intervenes by purchasing or otherwise statement.
supporting the surplus.
21. Match the following (Column I) with (Column II):
18. Rationing is usually introduced when:
(A) Price is set above equilibrium Column I Column II
(B) Output surpasses consumption needs 1 NDP at Factor Cost A. Gross value of all final
(C) Quantity demanded equals quantity supplied goods by residents of
(D) A shortage arises in the market a country (including


Ans
abroad) at market
prices
(D) A shortage arises in the market
2 GNP at Market B. Net domestic product
Rationing allocates scarce resources or commodities
Price minus indirect taxes
to avoid severe inequities or uncontrolled price
plus subsidies
spikes. When a price ceiling or limited supply results
in a shortage, governments may impose rationing to 3 Private Income C. Income accruing to
distribute goods fairly, though it can still create queues the private sector from
and potential black-market activities. all sources (national +
foreign)
19. In the context of Food Availability Decline (FAD), 4. Personal D. Income left with
famine primarily results from: Disposable Income individuals after
(A) Demand rising too fast personal tax and non-
(B) Extremely high wages in agriculture tax payments
(C) Overall drop in aggregate food supply
Options:
(D) Eliminating international trade barriers
(A) 1–B, 2–A, 3–C, 4–D


Ans (B) 1–A, 2–B, 3–D, 4–C
(C) Overall drop in aggregate food supply (C) 1–D, 2–A, 3–C, 4–B

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(D) 1–B, 2–C, 3–A, 4–D (B) Includes transfers and excludes retained earnings


Ans of corporations
(C) Equals GDP minus depreciation
(A) 1–B, 2–A, 3–C, 4–D (D) Equals only wages and salaries
Net Domestic Product (NDP) at factor cost adjusts
domestic output by subtracting depreciation and

Ans
indirect taxes, adding subsidies. Gross National Product (B) Includes transfers and excludes retained earnings of
(GNP) at market price sums final goods/services by corporations
residents worldwide at market prices. Private income Personal income accounts for income actually received
covers earnings of private entities, while personal by individuals, adding transfers (like social security or
disposable income is after personal taxes. unemployment benefits), while excluding undistributed
corporate profits. National income measures total factor
22. Arrange the expenditure method steps for measuring earnings within an economy, but personal income
National Income in order: focuses on what households actually obtain to spend or
1. Identify total consumption (C) save.
2. Identify investment spending (I)
3. Add government spending (G) 25. Choose correct statements about the multiplier concept:
4. Include net exports (X−M) 1. The multiplier shows how an initial spending
(A) 4 → 3 → 2 → 1 injection affects total income.
(B) 2 → 1 → 3 → 4 2. It is irrelevant in a two-sector model of income
(C) 1 → 2 → 3 → 4 determination.
(D) 3 → 4 → 1 → 2 3. A higher marginal propensity to consume (MPC)


Ans increases the multiplier value.
4. The multiplier works instantaneously without time
(C) 1 → 2 → 3 → 4 lags.
In the expenditure method, national income is the sum (A) 1, 3, and 4 are correct
of consumption, investment, government purchases, and (B) 1 and 3 only
net exports. Typically, we tally household consumption (C) 2 and 4 only
(C), then investment (I), add government spending (G), (D) 1, 2, and 3 are correct
and finally net exports (X − M) to determine GDP from
the demand side.

Ans
(B) 1 and 3 only
23. If Net Factor Income from Abroad is positive, it implies: The investment (or spending) multiplier captures
(A) The country earns less from abroad than what how initial spending circulates through the economy,
foreigners earn domestically magnifying total income. A higher MPC increases the
(B) The country imports more than it exports multiplier since each round of spending is larger. It is
(C) Residents earn more abroad than non-residents relevant in simple two-sector models and does not
earn in the domestic territory happen instantaneously; there are real-world time lags.
(D) Government budget is in surplus
26. Assertion (A) : When aggregate demand is deficient,


Ans
governments might increase their own spending.
(C) Residents earn more abroad than non-residents Reason (R) : Government expenditure forms part of
earn in the domestic territory aggregate demand, thereby stimulating overall demand
Net Factor Income from Abroad (NFIA) adds incomes when the private sector is weak.
residents earn abroad minus incomes paid to foreign (A) Both (A) and (R) are true, and (R) is the correct
factors at home. A positive NFIA means the country’s explanation.
residents are receiving higher factor incomes from (B) Both (A) and (R) are true, but (R) is not the correct
overseas than foreign residents are earning domestically, explanation.
boosting its GNP compared to its GDP. (C) (A) is true, (R) is false.
24. “Personal income” differs from “national income” (D) Both (A) and (R) are false.
primarily because it:

Ans
(A) Excludes government transfers

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(A) Both (A) and (R) are true, and (R) is the correct Full employment is the level of output where everyone
explanation. willing and able to work finds employment. Autonomous
Government purchases contribute directly to aggregate consumption describes a base level of spending not
demand (AD). In times of recession or low private dependent on current income. Excess demand arises
demand, increased public spending can offset weak when aggregate demand exceeds potential output.
consumption and investment, boosting AD. This Involuntary unemployment occurs when individuals
countercyclical strategy helps stabilize output and can’t secure jobs despite willingness.
employment, aligning with Keynesian economic
29. Credit creation by commercial banks primarily relies
principles of stimulating demand during economic
downturns. on:
(A) Unlimited reserves
27. Marginal Propensity to Save (MPS) is defined as: (B) Fractional reserve banking system
(A) Change in savings divided by change in (C) Printing currency notes
consumption (D) Government tax revenue
(B) Change in income divided by change in savings

Ans
(C) Change in income divided by change in
consumption (B) Fractional reserve banking system
(D) Change in savings divided by change in income Through fractional reserve banking, banks only
keep a portion of deposits as reserves. They lend out


Ans the remainder, which is redeposited and lent again,
(D) Change in savings divided by change in income expanding the money supply. This cyclical lending
MPS measures how much additional income is saved, multiplies the original deposit, though it is constrained
rather than consumed. It is calculated by dividing the by reserve requirements and prudent lending standards.
change in savings by the change in income. If MPS is
30. Identify correct statements regarding central banks:
high, individuals save a larger portion of new income,
which generally reduces the spending multiplier effect. 1. They act as bankers to commercial banks.
2. They accept deposits from the public.
28. Match the concepts (Column I) with their definitions 3. They conduct monetary policy.
(Column II): 4. They ensure unlimited credit for all borrowers.
(A) 1 and 3 only
Column I Column II
(B) 1, 2, and 4 only
1 Full Employment A Consumption that (C) 2 and 4 only
Level occurs even when (D) 1, 3, and 4 only
income is zero


Ans
2 Autonomous B Situation where AD > AS
Consumption at full employment (A) 1 and 3 only
3 Excess Demand C People willing to work Central banks serve as a bank to other banks (e.g.,
at prevailing wage but holding reserves, lending in emergencies) and conduct
unable to find jobs monetary policy (e.g., setting interest rates). They
typically do not accept general public deposits nor
4 Involuntary D Level at which there
guarantee unlimited credit. Those functions remain the
Unemployment is no involuntary
domain of commercial banks and market operations.
unemployment
Options: 31. Which is not a function of money?
(A) 1–A, 2–D, 3–C, 4–B (A) Medium of exchange
(B) 1–D, 2–A, 3–B, 4–C (B) Unit of account
(C) 1–C, 2–B, 3–A, 4–D (C) Store of value
(D) 1–B, 2–A, 3–D, 4–C (D) Unlimited source of credit


Ans

Ans
(B) 1–D, 2–A, 3–B, 4–C (D) Unlimited source of credit
Money’s primary functions include facilitating
transactions as a medium of exchange, measuring value

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as a unit of account, and preserving wealth as a store of payments. Development expenditure promotes growth
value. It does not inherently provide unlimited credit; (e.g., infrastructure, education, and health projects).
credit availability depends on banking systems, interest
34. A fiscal deficit arises when:
rates, and regulatory environments.
(A) Revenue receipts exceed revenue expenditure
32. A commercial bank can influence the money supply by: (B) Total expenditure exceeds total receipts (excluding
(A) Destroying currency notes borrowings)
(B) Increasing reserve requirements for all banks (C) Primary deficit plus total interest payments is zero
(C) Providing loans from its excess reserves (D) Government maintains a balanced budget
(D) Printing new currency

Ans


Ans (B) Total expenditure exceeds total receipts (excluding
(C) Providing loans from its excess reserves borrowings)
Commercial banks expand money supply when they Fiscal deficit measures the shortfall between the
lend out excess reserves. Through the deposit-loan government’s overall expenditure (revenue plus capital)
cycle, each loan re-enters the banking system, allowing and its total non-borrowed receipts. This gap indicates
repeated lending and creating additional deposit money. how much the government needs to borrow to finance
Reserve requirements are set by the central bank, its spending. It is a key indicator of the government’s
and only the central authority can print and destroy financial health and borrowing requirements.
currency notes.
35. Which statements about deficit financing are correct?
33. Match the budget terms (Column I) with their meanings 1. It can boost demand in the economy.
(Column II): 2. It always leads to hyperinflation.
3. It may be used to fund development projects.
Column I Column II
4. It never involves borrowing from external sources.
1 Capital A Difference between (A) 1, 3, and 4 only
Receipts fiscal deficit and interest (B) 2 and 3 only
payments (C) 1 and 3 only
2 Revenue B Receipts leading to a (D) 1, 2, and 4 only
Expenditure reduction in government


Ans
assets or increase in
liabilities (C) 1 and 3 only
3 Primary Deficit C Spending that does not Deficit financing, such as borrowing or printing
create assets, e.g., salaries money, can raise aggregate demand, potentially
and subsidies stimulating growth. It may finance infrastructure or
other developmental expenditures. However, it does
4 Development D Spending aimed at
not always produce hyperinflation. Governments can
Expenditure economic and social
also borrow externally, so statement 4 is incorrect, as
progress
external sources can be tapped.
Options:
(A) 1–B, 2–C, 3–A, 4–D 36. List the typical steps in passing a government budget:
(B) 1–C, 2–B, 3–D, 4–A 1. Budget drafted by Finance Ministry
(C) 1–A, 2–D, 3–B, 4–C 2. Legislative debate and amendments
(D) 1–D, 2–A, 3–C, 4–B 3. Final approval by head of state or official authority
4. Implementation of approved budget


Ans
(A) 1 → 2 → 3 → 4
(A) 1–B, 2–C, 3–A, 4–D (B) 2 → 1 → 4 → 3
Capital receipts occur through borrowings or (C) 3 → 2 → 1 → 4
disinvestment, adjusting government assets or liabilities. (D) 4 → 1 → 2 → 3
Revenue expenditure covers daily operational costs


Ans
(e.g., salaries, subsidies) which do not produce new
assets. Primary deficit is the fiscal deficit minus interest (A) 1 → 2 → 3 → 4

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 PRACTICE PAPER 14

Usually, the Finance Ministry prepares the budget draft. government borrowings feature in the capital or
The legislature then reviews, debates, and amends it financial account. Thus, the current account’s primary
before voting. Once passed, it goes for official assent focus is on trade balance and flows of earnings and
(head of state or equivalent). After authorization, transfer payments.
the government implements it, allocating resources
40. A favorable current account balance indicates:
according to the approved provisions.
(A) Imports exceed exports of goods
37. Under a flexible exchange rate system, which factor (B) Exports of goods exceed imports, possibly with net
directly affects the exchange rate? service inflows
(A) Domestic government decree fixing the rate (C) Surplus capital inflows
(B) Collective bargaining agreements (D) High exchange rate depreciation
(C) Market demand and supply of currency

Ans
(D) Central bank printing more notes
(B) Exports of goods exceed imports, possibly with net


Ans service inflows
(C) Market demand and supply of currency A surplus on the current account means the country’s
In a flexible (floating) exchange rate framework, receipts from exports of goods, services, and income
currency values fluctuate based on foreign exchange (plus net transfers) exceed its payments for imports
markets, reacting to trade balances, capital flows, interest and income outflows. It suggests the nation sells more
rates, and investor sentiments. Authorities do not set the abroad than it buys, improving its net foreign exchange
rate; instead, it changes as traders and investors buy or earnings.
sell currencies daily.


Direction :Carefully read the case study provided and then
38. A fixed exchange rate might face pressure if: thoroughly answer the subsequent five questions.
(A) The central bank never intervenes in currency A new employment guarantee scheme was introduced,
markets ensuring that rural workers receive at least 100 days of paid
(B) There is no trade deficit or surplus work annually. This measure aimed to reduce seasonal
(C) Demand for foreign currency exceeds the pegged unemployment and boost rural incomes. Over the first
supply level year, some villages saw improved living standards, with
(D) Exports and imports are balanced household consumption rising. However, critics argued


Ans that certain regions lacked productive projects, leading to
“dig-and-fill” activities that created minimal long-term
(C) Demand for foreign currency exceeds the pegged assets. Economists noted an uptick in aggregate demand
supply level for essential goods, but also cautioned about potential
Under fixed exchange rates, authorities commit to inflationary pressure if supply failed to keep pace. Local
maintaining a specific rate. If market forces push producers saw an opportunity to scale up output. In
demand for foreign currency beyond the central bank’s parallel, micro finance initiatives offered low-interest
capacity or willingness to supply, the peg may become loans, enabling small businesses to invest in equipment.
unsustainable. The bank must intervene using its Overall, the scheme’s success depended on meaningful
reserves to uphold the fixed rate. project selection and balanced supply responses.
39. The current account in the Balance of Payments typically 41. Which type of unemployment does this scheme
includes: primarily target?
(A) FDI inflows (A) Seasonal unemployment
(B) Portfolio investment (B) Frictional unemployment
(C) Exports and imports of goods (C) Structural unemployment
(D) Government external borrowings (D) Voluntary unemployment


Ans

Ans
(C) Exports and imports of goods (A) Seasonal unemployment
The current account records transactions in goods, The scheme guarantees rural workers paid employment
services, income (wages, interest, dividends), and for a set period, aiming to address seasonal
current transfers. FDI, portfolio investments, and

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unemployment common in agriculture-based areas When demand grows but supply remains stagnant,
where work is unavailable year-round. By providing off- prices tend to rise as consumers compete for limited
season jobs, it attempts to stabilize incomes and reduce goods. This scenario can lead to demand-pull inflation,
labor idle time due to seasonal fluctuations in farming where too much money chases too few goods. Ensuring
activities. supply responsiveness helps moderate price hikes and
maintain stable economic growth.
42. How might guaranteed wages influence aggregate
demand? 45. Micro finance loans enabling small businesses to buy
(A) They lower total spending equipment likely:
(B) They have no effect on spending (A) Reduce the marginal propensity to consume
(C) They increase total disposable income and boost drastically
demand (B) Discourage any additional production
(D) They entirely replace private consumption with (C) Stimulate entrepreneurial activity and increase
public spending productive capacity


Ans (D) Have no effect on rural output

(C) They increase total disposable income and boost

Ans

demand (C) Stimulate entrepreneurial activity and increase
Guaranteed wages raise rural households’ purchasing productive capacity
power, thus fueling higher consumption of essential and Access to affordable credit allows small businesses to
non-essential goods. When more disposable income invest in machinery or technology, raising efficiency
circulates, aggregate demand grows. This can stimulate and output. This fosters entrepreneurial opportunities,
local markets, encouraging businesses to expand if expands production, and potentially meets the
they can respond effectively to rising demand without heightened demand generated by rising rural incomes.
causing inflationary pressures. Consequently, local economic development is bolstered,
enhancing both supply and overall welfare.
43. A major criticism was a lack of productive projects
leading to minimal asset creation. This concern relates

Direction :Carefully read the case study provided and then
to: thoroughly answer the subsequent five questions.
(A) Inadequate labor supply A small open economy experienced sharp currency
(B) Limited money supply depreciation after global investors withdrew funds during
(C) Ineffective allocation of resources a period of financial uncertainty. Exports became cheaper
(D) Full employment levels abroad, boosting foreign demand. Conversely, the cost


Ans of importing essential inputs and consumer goods rose,
increasing the general price level. Domestic producers
(C) Ineffective allocation of resources complained of higher production expenses, but some
Resource allocation refers to how labor and capital industries capitalized on greater export revenues. Policy
are used to produce goods or services. If employment makers debated whether to introduce measures to stabilize
schemes fund non-productive tasks, the outcome is the exchange rate or let it float, hoping that market
minimal in long-term asset creation or economic value. adjustments would correct imbalances. Meanwhile,
This raises questions about the efficiency of public local businesses sought to diversify their supply chains
expenditure and long-term developmental benefits. to mitigate import cost spikes. Households faced a rise in
44. If supply does not expand alongside rising demand, the cost of living, prompting calls for government relief
which economic issue might arise? programs. The long-term outcome depended on balancing
(A) No change in price levels export gains against import inflation.
(B) Higher unemployment 46. Which immediate effect did currency depreciation have
(C) Inflationary pressures on exports?
(D) Permanent surpluses (A) Exports became more expensive abroad


Ans (B) Exports became cheaper abroad
(C) Inflationary pressures (C) Exports disappeared entirely
(D) Exports remained unaffected

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 PRACTICE PAPER 14

Ans (B) Calls for wage increases or government support

(B) Exports became cheaper abroad As prices climb, real incomes shrink, burdening
When a country’s currency depreciates, its goods and consumers—especially those with fixed or low wages.
services appear less expensive to foreign buyers. This Workers and households often demand higher pay or
typically boosts demand for exports, as international government assistance (like subsidies or social security
consumers can purchase more with their stronger measures) to cope with rising expenses, reflecting the
currencies, potentially increasing export revenue for social and political pressures unleashed by inflation.
domestic firms.
50. Which long-term outcome might materialize if export
47. Why might domestic producers complain despite gains outweigh import cost spikes?
potential export gains? (A) Chronic trade deficits
(A) All domestic producers switch to 100% exports (B) Net economic benefit through improved trade
(B) Currency appreciation raises input costs balance
(C) Imported inputs become more expensive, (C) Permanent recession
increasing production costs (D) Immediate currency appreciation to previous levels
(D) Foreign markets refuse cheaper goods

Ans


Ans (B) Net economic benefit through improved trade
(C) Imported inputs become more expensive, increasing balance
production costs If the boost in export revenue surpasses the higher
Though depreciation enhances export competitiveness, import costs, the country’s overall trade balance might
firms relying on imported raw materials or components improve, strengthening domestic industries and
face higher costs. The currency’s reduced value means possibly leading to economic growth. However, this
paying more in local currency to buy essential foreign requires careful management of inflation, exchange
inputs, eroding profits and possibly negating some rates, and supply-chain challenges to ensure the benefits
benefits of higher export revenues. of depreciation outweigh its drawbacks.

48. What potential policy debate arises from such currency

*************
depreciation?
(A) Whether to impose a strict command economy
(B) Whether to establish large-scale bartering
(C) Whether to stabilize the exchange rate or let it float
(D) Whether to ban all foreign trade


Ans
(C) Whether to stabilize the exchange rate or let it float
Policy makers face the dilemma of intervening to
reduce exchange-rate volatility—often by using foreign
reserves—or allowing market forces to set the currency
value. Stabilization can ease import cost pressures but
may reduce competitiveness. Floating may help correct
external imbalances but exposes domestic agents to
currency fluctuations.

49. Households facing a rise in the cost of living might lead

to:
(A) No change in consumer expenditure patterns
(B) Calls for wage increases or government support
(C) Instant reduction in export volumes
(D) An improvement in trade balance without
consequences


Ans

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PRACTICE PAPER 15

1. What are the central problems of an economy? the returns from the next best available alternative.
(A) Stabilizing exports only This helps individuals and societies decide which
(B) Deciding political leadership options yield the highest benefit while minimizing lost
(C) Determining immigration policy opportunities, guiding efficient decision-making in
(D) What, how, and for whom to produce resource allocation.


Ans 4. Which of the following is NOT a central problem under
(D) What, how, and for whom to produce microeconomics?
Every economy decides what goods and services to (A) How to produce goods with limited factors
produce, how to produce them using available resources, (B) Whom to produce goods for
and for whom they are intended. These questions guide (C) Determining the aggregate level of national savings
resource allocation. By resolving them, societies address (D) What goods to produce
scarcity and ensure the optimal distribution of output,

Ans
balancing efficiency, equity, and growth objectives.
(C) Determining the aggregate level of national savings
2. Which concept is illustrated by a Production Possibility Microeconomics focuses on individual economic units
Curve (PPC)? and their decision-making. Central problems involve
(A) Possible levels of equilibrium price what goods to produce, how to produce them, and
(B) Combinations of two goods using scarce resources whom to produce for. Aggregate savings, however, is a
(C) Relationship between marginal cost and marginal macroeconomic concern focusing on overall economy-
revenue wide variables rather than the level of individual firms
(D) The effects of inflation on national income or households.


Ans 5. How does a movement along the demand curve differ
(B) Combinations of two goods using scarce resources from a shift in the demand curve?
A Production Possibility Curve reflects the various (A) Both involve changes in consumer preferences
output combinations an economy can achieve using (B) Movement is due to non-price factors; shift is due
its limited resources. By depicting trade-offs, it visually to price changes
demonstrates opportunity costs. Shifting the curve (C) Movement is caused by price changes; shift is due
indicates changes in resources or technology, illustrating to non-price factors
the economy’s maximum feasible production levels for (D) Both are caused solely by supply variations
two goods.

Ans
3. Opportunity cost refers to: (C) Movement is caused by price changes; shift is due to
(A) Cost of producing goods with unlimited resources non-price factors
(B) The gain from all possible production activities A movement along the demand curve results from a
(C) The next best alternative forgone when choosing price change, altering the quantity demanded. A shift,
one option however, stems from non-price factors such as consumer
(D) The total monetary cost of all produced goods tastes, income, or related goods’ prices. Consequently,


Ans the entire demand curve moves to reflect a change in
overall demand conditions.
(C) The next best alternative forgone when choosing
one option 6. In a two-commodity consumer equilibrium (under the
Opportunity cost arises because resources are scarce. utility approach), the consumer:
When we select one productive activity, we sacrifice (A) Maximizes total utility subject only to price ratios

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 PRACTICE PAPER 15

(B) Equalizes the marginal utilities per rupee of both additional input yields smaller increases. Eventually, it
goods may reach negative returns if further input additions
(C) Minimizes total expenditure regardless of marginal cause overall production to decrease.
utilities
9. Which sequence shows how a perfect competition
(D) Considers fixed proportions for consuming both
goods market reaches equilibrium?
1. Market price adjusts


Ans 2. Individual firms take price as given
(B) Equalizes the marginal utilities per rupee of both 3. Supply equals demand
goods 4. Firms change output to match marginal cost and
Under the utility approach, consumer equilibrium is price
attained when the ratio of marginal utility to the price (A) 2 → 1 → 4 → 3
of one good equals that of the other. This ensures that (B) 2 → 4 → 1 → 3
each rupee spent yields the same additional satisfaction, (C) 4 → 2 → 1 → 3
preventing any gain from reallocating expenditure (D) 2 → 3 → 1 → 4
between the goods.

Ans
7. Arrange these steps in calculating Price Elasticity of (B) 2 → 4 → 1 → 3
Demand (PED) in correct order: In perfect competition, firms accept the market price
1. Calculate the percentage change in quantity (step 2), adjust their output so that marginal cost equals
demanded that price (step 4), price then fluctuates based on supply
2. Identify the initial quantity demanded decisions (step 1), and the market settles where quantity
3. Calculate the percentage change in price supplied matches quantity demanded (step 3).
4. Divide percentage change in quantity by percentage
10. Match the following cost concepts (Column I) with
change in price
(A) 2 → 3 → 1 → 4 their definitions (Column II):
(B) 2 → 1 → 3 → 4 Column I Column II
(C) 4 → 1 → 3 → 2 1 Fixed Cost (FC) a Cost per unit of output
(D) 2 → 3 → 4 → 1
2 Variable Cost (VC) b Does not vary with


Ans output level
(B) 2 → 1 → 3 → 4 3 Average Cost (AC) c Sum of fixed and
To compute PED, start by identifying the initial quantity variable costs
demanded (step 2), then measure the change in quantity 4 Total Cost (TC) d Changes with output
demanded to get the percentage change (step 1). Next, level
determine the percentage change in price (step 3).
Options:
Finally, divide the two percentages to find PED (step 4).
(A) 1-b, 2-d, 3-a, 4-c
8. Put these stages of short-run production in order: (B) 1-a, 2-d, 3-c, 4-b
1. Diminishing returns (C) 1-c, 2-b, 3-a, 4-d
2. Negative returns (D) 1-d, 2-a, 3-b, 4-c
3. Increasing returns

Ans
(A) 3 → 1 → 2
(A) 1-b, 2-d, 3-a, 4-c
(B) 1 → 3 → 2
Fixed Cost (FC) remains the same regardless of output,
(C) 2 → 1 → 3
Variable Cost (VC) changes with production, Average
(D) 1 → 2 → 3
Cost (AC) is cost per unit (total cost divided by output),


Ans and Total Cost (TC) is the sum of fixed and variable
(A) 3 → 1 → 2 costs.
In the short run, production typically experiences
11. Match the following revenue concepts (Column I) with
increasing returns first as marginal output rises with
their characteristics (Column II):
each input. It then enters diminishing returns, where

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Column I Column II 1 Law of Demand a Decrease in output

1 Total Revenue (TR) a TR ÷ Quantity when there are too many
2 Average Revenue b Additional revenue workers
(AR) from one more unit 2 Diminishing b Demand rises when price
3 Marginal Revenue c Price × Quantity Returns falls, ceteris paribus
3 Price Elasticity of c Bus fares unchanged
Options:
Supply despite input cost increase
(A) 1-c, 2-a, 3-b
(B) 1-a, 2-c, 3-b 4 Fixed Cost d Unaffected by production
(C) 1-b, 2-c, 3-a fluctuations
(D) 1-c, 2-b, 3-a Options:


Ans (A) 1-b, 2-a, 3-c, 4-d
(B) 1-b, 2-a, 3-d, 4-c
(A) 1-c, 2-a, 3-b (C) 1-c, 2-d, 3-a, 4-b
Total Revenue (TR) equals Price × Quantity sold, (D) 1-d, 2-c, 3-b, 4-a
Average Revenue (AR) is total revenue per unit of output
(TR ÷ Q), and Marginal Revenue (MR) is the additional

Ans
revenue from selling one more unit of output. (A) 1-b, 2-a, 3-c, 4-d
Demand typically rises when prices decrease (Law
12. Match forms of market (Column I) with their features of Demand), excessive labor can lower productivity
(Column II): (Diminishing Returns), elasticity of supply is illustrated
Column I Column II when bus operators keep fares constant despite changes
1 Perfect a One seller dominates (Price Elasticity of Supply), and fixed costs remain the
Competition same regardless of output.
2 Monopoly b Many buyers and sellers, 14. Match the following statements (Column I) with correct
no barriers micro economic terms (Column II):
3 Oligopoly c Few large firms dominate
Column I Column II
4 Monopolistic d Many firms with
1 MC = MR for profit a Consumer surplus
Competition differentiated products
maximization
Options: 2 Difference between b Producer’s
(A) 1-b, 2-a, 3-c, 4-d willingness to pay equilibrium
(B) 1-a, 2-b, 3-d, 4-c and actual price
(C) 1-c, 2-d, 3-a, 4-b
3 Responsiveness of c Price elasticity of
(D) 1-d, 2-c, 3-b, 4-a
quantity demanded demand


Ans to price
(A) 1-b, 2-a, 3-c, 4-d 4 Sum of TFC and TVC d Total cost
Perfect competition has many buyers and sellers with | d. Total cost
free entry and exit. A monopoly has only one producer. Options:
Oligopoly has a few dominant firms. Monopolistic (A) 1-b, 2-a, 3-c, 4-d
competition features many firms offering similar but (B) 1-c, 2-b, 3-a, 4-d
slightly differentiated products. These traits distinguish (C) 1-a, 2-c, 3-b, 4-d
market structures. (D) 1-b, 2-d, 3-a, 4-c
13. Match the following microeconomic concepts (Column

Ans
I) with examples (Column II): (A) 1-b, 2-a, 3-c, 4-d
Column I Column II Producer’s equilibrium occurs where marginal cost
(MC) equals marginal revenue (MR). Consumer surplus
is the difference between willingness to pay and the
market price. The price elasticity of demand measures

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 PRACTICE PAPER 15

responsiveness of quantity demanded to price changes. increasing rate

Total cost is fixed cost plus variable cost. 4. It’s zero at zero output
(A) 1, 3, and 4
15. Which statements about price elasticity of demand are (B) 2 and 3 only
true? (C) 1 and 4 only
1. It measures how quantity demanded changes with (D) 1, 2, 3, and 4
price
2. It’s always equal to one

Ans
3. It can be zero or infinite (A) 1, 3, and 4
4. Unitary elasticity implies percentage change in TVC begins at zero when output is zero. As production
price equals percentage change in quantity starts, variable costs rise slowly (diminishing returns not
(A) 1, 3, and 4 yet significant), then increase rapidly once diminishing
(B) 1, 2, and 4 returns take hold. TVC always depends on output level,
(C) 2 and 3 only so it is not constant.
(D) 1 and 4 only
18. In perfect competition:


Ans 1. Each firm is a price maker
(A) 1, 3, and 4 2. Entry and exit are free
Price elasticity of demand gauges the responsiveness of 3. Products are homogeneous
demand to price changes. It can range from perfectly 4. Firms face perfectly elastic demand
inelastic (zero) to perfectly elastic (infinite). Unitary (A) 2, 3, and 4
elasticity means the percentage change in demand (B) 1, 2, and 4
equals the percentage change in price. It’s not always (C) 1 and 3 only
exactly one. (D) 2 and 4 only

16. Regarding consumer equilibrium under the one-

Ans

commodity case: (A) 2, 3, and 4
1. MU must exceed price always Perfectly competitive markets have free entry and exit,
2. MU and price are compared for optimum uniform products, and an individual firm’s demand
consumption curve is perfectly elastic. No single firm can influence
3. Consumer stops buying when MU = price price, making each firm a price taker, not a price
4. MU declines with each additional unit consumed maker. This competition fosters efficiency in resource
(A) 1, 2, and 3 allocation.
(B) 2, 3, and 4
19. About equilibrium price determination in a perfectly
(C) 1 and 4 only
(D) 1, 2, 3, and 4 competitive market:
1. Demand intersects supply


Ans 2. Firms individually adjust price to maximize profit
(B) 2, 3, and 4 3. Market forces set the price
Consumer equilibrium occurs when marginal utility 4. Excess demand drives price up, excess supply pulls
(MU) equals the price. As consumption increases, MU price down
diminishes. The consumer continues purchasing until (A) 1, 3, and 4
MU matches price. MU generally does not permanently (B) 2 and 3 only
exceed price, because diminishing marginal utility (C) 1 and 2 only
causes additional satisfaction per unit to fall as (D) 1, 2, 3, and 4
consumption grows.

Ans
17. Which statements apply to the Total Variable Cost (A) 1, 3, and 4
(TVC) curve in short-run production? Equilibrium arises where overall demand meets overall
1. It starts from the origin supply, and market forces collectively determine the
2. It remains constant regardless of output price. Individual firms cannot set prices; they accept the
3. It increases initially at a decreasing rate, then at an prevailing market rate. When demand exceeds supply,

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the price rises; when supply exceeds demand, the price

Ans
falls, ensuring equilibrium. (C) A is true, R is false
A price floor set above equilibrium typically leads to
20. Assertion (A) : Supply increases when production
excess supply (surplus), as producers supply more but
technology improves.
demand falls. The reason given is incorrect because
Reason (R) : Better technology can lower production
a price floor below equilibrium has no effect, and it
costs, encouraging producers to supply more.
certainly does not increase demand.
(A) Both A and R are true, and R is the correct
explanation of A 23. Macroeconomics studies:
(B) Both A and R are true, but R is not the correct (A) Individual consumer preferences
explanation of A (B) Price determination in a local market
(C) A is true, R is false (C) Economic aggregates like national income
(D) A is false, R is true (D) A single firm’s revenue and cost


Ans

Ans
(A) Both A and R are true, and R is the correct (C) Economic aggregates like national income
explanation of A Macroeconomics examines broad indicators such as
Technological improvements typically reduce per-unit GDP, inflation, unemployment, and national income. It
costs, making it profitable to produce more at the same focuses on the performance, structure, and behavior of
price. This shifts the supply curve rightward. Thus, the the entire economy, rather than individual markets or
statement that supply increases with better technology firms. This perspective assesses overall economic health
is correct, and the reason accurately explains why. and guides policy-making decisions.
21. Assertion (A) : In monopoly, the firm faces a perfectly 24. National Disposable Income (NDI) includes:
elastic demand curve. (A) NDP at market price + net indirect taxes
Reason (R) : A monopolist is the sole seller with no (B) NNP at factor cost + depreciation
close substitutes for its product. (C) National Income + current transfers from abroad
(A) Both A and R are true, and R is the correct (D) Personal income – personal taxes
explanation of A


Ans
(B) Both A and R are true, but R is not the correct
explanation of A (C) National Income + current transfers from abroad
(C) A is true, R is false National Disposable Income (NDI) is calculated by
(D) A is false, R is true adding current transfers from the rest of the world to
the national income. This captures the total income


Ans
available to residents for consumption or saving,
(D) A is false, R is true reflecting resources inclusive of unilateral transfers
A monopoly’s demand curve is downward sloping from foreign sources.
and not perfectly elastic. However, the reason is true:
the monopolist is the exclusive seller with no close 25. The circular flow of income in a two-sector model
substitutes. This situation gives the monopolist market excludes:
power to set prices within certain limits. (A) Households and firms
(B) Government spending
22. Assertion (A) : Price floors can create surpluses in the (C) Factor payments
market. (D) Consumption expenditure
Reason (R) : A price floor is set below the equilibrium


Ans
price, increasing demand.
(A) Both A and R are true, and R is the correct (B) Government spending
explanation of A In a simple two-sector model, only households and firms
(B) Both A and R are true, but R is not the correct exist. Households provide factors of production, while
explanation of A firms produce goods and services. Factor payments flow
(C) A is true, R is false from firms to households, and consumption expenditure
(D) A is false, R is true

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 PRACTICE PAPER 15

flows from households to firms. Government activities (A) Consumption, investment, government spending,
appear in expanded models. and net exports
(B) Money supply and currency in circulation
26. The Expenditure Method of measuring national income (C) Factor incomes like wages, interest, rent, and profit
sums: (D) Export receipts minus import payments
(A) All corporate profits only
(B) Consumption, investment, government purchases,

Ans
and net exports (C) Factor incomes like wages, interest, rent, and profit
(C) Wages, rent, interest, and profit Under the Income Method, national income aggregates
(D) Value added at each production stage the payments made to factors of production—


Ans compensation of employees, rental income, interest, and
profits. This approach tracks the flow of income from
(B) Consumption, investment, government purchases, firms to households and reveals how total economic
and net exports output is distributed among different factors.
In the Expenditure Method, total spending on final
goods and services within a country is tallied: household 30. Aggregate Demand (AD) primarily consists of:
consumption (C), business investment (I), government (A) Government tax policies
spending (G), and net exports (X – M). Summing (B) Consumer spending, investment, government
these components yields the economy’s aggregate purchases, and net exports
expenditure, equivalent to national income. (C) The entire money supply
(D) The sum of disposable incomes of all households
27. GDP at market price vs. GDP at factor cost differs
because:

Ans
(A) Factor cost always exceeds market price (B) Consumer spending, investment, government
(B) Market price excludes all taxes purchases, and net exports
(C) Factor cost includes net indirect taxes Aggregate Demand represents the total planned
(D) Market price includes net indirect taxes expenditure on a nation’s output at different price levels.


Ans It is computed by adding consumption (C), investment
(I), government spending (G), and net exports (X – M).
(D) Market price includes net indirect taxes This captures overall demand in the macroeconomy.
GDP at market price accounts for indirect taxes and
subsidies embedded in prices. GDP at factor cost, 31. What is the investment multiplier?
meanwhile, measures the income earned by factors (A) A formula linking foreign exchange rates
of production before indirect taxes and subsidies are (B) The ratio of a change in income to the change in
added or subtracted. The difference stems from tax and investment
subsidy adjustments. (C) The difference between final and initial GDP
(D) A measure of national disposable income
28. Which does NOT form a part of Domestic Income?
(A) Wages paid to resident workers

Ans
(B) Rent on property located domestically (B) The ratio of a change in income to the change in
(C) Net factor income from abroad investment
(D) Profit earned by local firms within national borders The investment multiplier indicates how an initial


Ans injection of investment triggers multiple rounds of
spending. Each round generates further income and
(C) Net factor income from abroad consumption, raising national income by a multiple
Domestic Income (or Domestic Product) considers all of the initial investment. This effect depends on the
income generated within a nation’s physical borders. marginal propensity to consume.
Net factor income from abroad reflects earnings outside
these borders, thus belonging to National Income 32. Which is NOT a cause of deficient demand in an
calculations, not solely to the domestic component. economy?
(A) High propensity to save
29. In the Income Method, National Income is computed (B) Reduced government spending
by summing: (C) Decrease in investment activity

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(D) Increased consumer spending

Ans

Ans (B) A medium of exchange, unit of account, store of

value
(D) Increased consumer spending
Money fulfills multiple roles in an economy: it serves as
Deficient demand refers to a situation where aggregate
a medium of exchange to facilitate transactions, a unit of
demand is insufficient to maintain full employment.
account to express prices, and a store of value to transfer
Causes include a high saving rate, contractionary fiscal
purchasing power over time. These functions underpin
policy, or falling investment. Rising consumer spending
modern monetary systems.
instead boosts aggregate demand, helping avert any
deficiency in overall expenditure. 36. Assertion (A) : A central bank acts as a banker’s bank.
Reason (R) : Commercial banks are privately owned
33. Involuntary unemployment occurs when:
and do not require financial regulation.
(A) People voluntarily leave the job market
(A) Both A and R are true, and R is the correct
(B) Government restricts immigration
explanation of A
(C) Workers are willing to work at prevailing wages but
(B) Both A and R are true, but R is not the correct
cannot find jobs
explanation of A
(D) Employers pay above equilibrium wages to reduce
(C) A is true, R is false
turnover
(D) A is false, R is true


Ans


Ans
(C) Workers are willing to work at prevailing wages but
(C) A is true, R is false
cannot find jobs
Central banks provide reserves, set monetary policy,
Involuntary unemployment is the condition where
and oversee the banking system, acting as a “banker’s
workers seek employment at existing wage levels yet
bank.” Commercial banks do require oversight. The
remain jobless. This situation typically emerges during
reason claiming they do not need regulation is incorrect;
recessions or insufficient aggregate demand. It contrasts
regulation ensures stability and prevents systemic risks.
with voluntary unemployment, where individuals
choose not to work at the prevailing wage rate. 37. Which is NOT typically a function of commercial
banks?
34. Excess demand vs. deficient demand differ mainly by:
(A) Accepting deposits
(A) The extent of price elasticity of demand
(B) Granting loans
(B) Whether aggregate demand exceeds or falls short
(C) Issuing currency notes
of full-employment output
(D) Providing payment services
(C) Whether the government lowers or raises taxes
(D) Only the level of consumer confidence

Ans

Ans (C) Issuing currency notes

Commercial banks accept deposits, offer credit
(B) Whether aggregate demand exceeds or falls short of
facilities, and provide payment mechanisms like checks
full-employment output
and electronic transfers. Only central banks hold the
Excess demand arises when total spending surpasses the
authority to issue currency notes. Commercial banks
economy’s full-employment output, fueling inflationary
merely distribute central bank-issued notes to the
pressures. Deficient demand occurs when spending
public.
is insufficient to maintain full employment, causing
unemployment and idle capacity. These distinctions 38. What is meant by “privatization” in the context of
hinge on aggregate demand relative to potential output. banking reforms?
(A) Nationalization of privately owned banks
35. Money primarily serves as:
(B) Government ownership expansion
(A) Only a store of raw materials
(C) Transfer of public-sector banks into private
(B) A medium of exchange, unit of account, store of
ownership
value
(D) Complete abolition of profit motives
(C) Solely a means for barter
(D) A measure exclusive to government spending

Ans

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 PRACTICE PAPER 15

(C) Transfer of public-sector banks into private guaranteed returns. Critics argued that the measure
ownership hurt consumers, particularly low-income groups. The
Privatization involves moving state-owned enterprises administration then considered subsidized distribution
into private hands, aiming to improve efficiency, to manage the surplus. This intervention cycle sparked
competition, and market discipline. In banking, it often debate on whether the policy truly benefited producers or
means selling government equity in public-sector banks, created inefficiencies. Economists recommended targeted
allowing private shareholders to influence governance, income support rather than universal price floors,
potentially enhancing operational performance and emphasizing that artificially high prices could distort
service quality. resource allocation and harm overall welfare.

39. Government budget primarily aims to: 41. What economic tool did the local government
(A) Provide unlimited subsidies introduce?
(B) Set foreign exchange policies (A) Price ceiling
(C) Balance public revenue and expenditure for (B) Price floor
development (C) Production quota
(D) Directly fix private sector wages (D) Market deregulation


Ans

Ans
(C) Balance public revenue and expenditure for (B) Price floor
development A price floor sets a minimum selling price above the
A government budget outlines expected revenues and equilibrium. In this scenario, the local government
expenditures over a fiscal period. Its key objectives aimed to boost farmers’ incomes by ensuring they
include resource allocation, economic stability, and receive no less than this regulated rate. Although it
social welfare. By managing taxes, spending, and deficit may help some producers temporarily, surpluses and
or surplus levels, governments guide development inefficiencies often arise.
priorities and influence macroeconomic performance.
42. Why did a surplus occur under this policy?
40. Which is NOT a deficit measure in a government (A) Farmers stopped production
budget? (B) Consumers bought more due to lower prices
(A) Revenue deficit (C) The set price was above equilibrium, reducing
(B) Fiscal deficit quantity demanded
(C) Primary deficit (D) Producers colluded with retailers
(D) Trade deficit

Ans


Ans (C) The set price was above equilibrium, reducing
(D) Trade deficit quantity demanded
Revenue deficit, fiscal deficit, and primary deficit When the minimum price is fixed above the natural
measure shortfalls within a government’s budget. A market equilibrium, consumers reduce their purchases.
trade deficit, however, pertains to a nation’s external Producers, motivated by higher potential revenues,
trade (imports exceeding exports) and is not considered produce more. This mismatch creates an excess supply
a budgetary deficit category within government financial or surplus. Consequently, the government must manage
statements. and store the unsold quantity, increasing public costs.

Direction :Carefully read the case study provided and then 43. How did this policy potentially distort resource
thoroughly answer the subsequent five questions. allocation?
A local government introduced a minimum price on (A) Farmers diversified crop production
a staple crop to protect farmers’ incomes. Initially, (B) Farmers shifted to other staples
producers were pleased, anticipating higher revenues. (C) Farmers limited output due to low returns
However, consumers reduced their purchases due to the (D) Farmers focused heavily on the supported crop for
higher cost, causing a surplus. The government stored assured prices
the excess, incurring additional costs. Meanwhile, some

Ans
farmers shifted from diverse crops to this staple, expecting

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page 158 CUET UG Economics

(D) Farmers focused heavily on the supported crop for aiming to create employment. Critics argued that without
assured prices stronger consumer demand, business expansions might
With the government’s price floor guaranteeing not yield full returns. Supporters claimed these strategies
higher returns, many farmers chose to cultivate the would eventually boost aggregate demand through the
staple instead of potentially more efficient or needed investment multiplier. With more capital stock, the
alternatives. This shift can misallocate resources, as economy could recover from underutilized capacity.
it moves production away from possibly profitable or The debate continued over whether direct consumer tax
diverse crops, undermining overall economic efficiency. rebates or stronger employment guarantees would have
provided a faster route to higher spending.
44. One argument in favor of targeted income support
(instead of universal price floors) is that it: 46. What policy did the government implement to combat
(A) Raises costs for consumers the recession?
(B) Minimizes distortions by helping specific needy (A) Corporate tax hikes
groups (B) Lowered corporate taxes and subsidies
(C) Always reduces government expenditure (C) Reduced consumer purchasing power
(D) Increases hoarding of crops (D) Trade embargos


Ans

Ans
(B) Minimizes distortions by helping specific needy (B) Lowered corporate taxes and subsidies
groups Facing a downturn, the government offered corporations
Targeted income support directs financial assistance to tax relief and subsidies to stimulate investments. These
eligible farmers without altering market prices. Unlike incentives reduce production costs and encourage firms
universal price floors, it avoids broad distortions in to expand operations or update equipment. In theory,
resource allocation and doesn’t burden consumers higher capital spending can lead to greater output,
with higher prices. This selective approach can help the job creation, and eventual boosts in overall economic
truly needy while maintaining an efficient commodity activity.
market.
47. Why did consumers hesitate to borrow despite lower
45. Which negative effect was highlighted for consumers? interest rates?
(A) Decrease in surplus crops (A) High consumer confidence
(B) Lower demand for labor (B) Fear of inflation
(C) Higher purchase cost for the staple (C) Job insecurity in recessionary conditions
(D) Elimination of government roles in agriculture (D) Government-imposed credit restrictions


Ans

Ans
(C) Higher purchase cost for the staple (C) Job insecurity in recessionary conditions
Because the minimum price exceeded the equilibrium Even with lower borrowing costs, households fear
price, consumers faced elevated costs for the staple crop. unemployment or reduced income during a recession.
This burden disproportionately affects lower-income This uncertainty discourages them from taking on debt
groups, who spend a greater share of their income on for major purchases. Lower rates alone cannot spark
food. The policy can exacerbate inequality while failing spending if consumers remain wary about their future
to address deeper agricultural issues. earnings, limiting the policy’s impact on aggregate
demand.


Direction :Carefully read the case study provided and then
thoroughly answer the subsequent five questions. 48. The government also increased public infrastructure
In an effort to tackle recessionary pressures, a government spending primarily to:
lowered corporate tax rates and offered subsidies to (A) Raise prices of essential goods
boost private investment. While firms initially increased (B) Limit aggregate supply
spending on machinery, consumer spending lagged due to (C) Foster employment and stimulate aggregate
weak confidence. Banks had reduced lending interest rates, demand
but households hesitated to borrow amid job insecurity. (D) Privatize public services
Meanwhile, public expenditures on infrastructure rose,

Ans

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(C) Foster employment and stimulate aggregate demand

By funding infrastructure projects, the government
creates job opportunities and injects income into
the economy. Employed workers then spend their
wages, amplifying demand for goods and services.
This multiplier effect can help lift the economy from
recession, bridging the shortfall in private consumption
and investment.

49. Supporters argued that higher investment spending

would eventually boost aggregate demand through the:
(A) Marginal cost principle
(B) Ricardian equivalence
(C) Crowding-out effect
(D) Investment multiplier


Ans
(D) Investment multiplier
The investment multiplier concept states that an initial
rise in investment triggers successive rounds of spending
and re-spending, magnifying the ultimate impact on
national income. As firms buy machinery, incomes
grow, consumer purchases rise, and more output is
demanded, supporting broader economic recovery.

50. One debated alternative policy was:

(A) Raising interest rates to curb borrowing
(B) Imposing price floors on luxury goods
(C) Direct tax rebates to consumers or stronger
employment guarantees
(D) Eliminating the minimum wage


Ans
(C) Direct tax rebates to consumers or stronger
employment guarantees
Critics suggested stimulating consumer demand directly
via tax rebates or employment programs, ensuring
households have disposable income to spend. This
approach contrasts with business-focused measures,
aiming to spur immediate consumption. In a recession,
robust consumer spending can swiftly boost aggregate
demand and accelerate economic recovery.

*************

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PRACTICE PAPER 16

1. Which phrase best describes microeconomics? increase total utility. Equilibrium occurs when these
(A) Study of aggregates like national output ratios are equal, and no further gain is possible by
(B) Examination of economy-wide inflation shifting spending between the commodities.
(C) Analysis of individual consumer and firm decisions
4. Which of the following factors does NOT generally
(D) Comprehensive review of government budgets
cause a shift in the demand curve?


Ans (A) Changes in consumer tastes
(C) Analysis of individual consumer and firm decisions (B) Changes in consumer income
Microeconomics focuses on how individual units— (C) Changes in the good’s own price
households and firms—make decisions about resource (D) Changes in prices of related goods
allocation. It investigates price determination in specific

Ans
markets, consumer preferences, and production
choices. Aggregates and broader measures are typically (C) Changes in the good’s own price
studied under macroeconomics. A good’s own price change causes movement along its
demand curve, altering quantity demanded. Shifts in
2. The term “production possibility curve” represents: the entire curve typically result from external factors
(A) Income distribution among wealthy individuals such as tastes, incomes, and prices of substitutes or
(B) A random assortment of product combinations complements, signaling a new relationship between
(C) Potential maximum output of two goods with given price and quantity demanded.
resources
5. How is price elasticity of demand different from price
(D) Perfectly elastic supply in a single market
elasticity of supply?


Ans (A) Both measure producers’ responsiveness
(C) Potential maximum output of two goods with given (B) One measures consumer responsiveness, the other
resources measures producer responsiveness
A production possibility curve (PPC) demonstrates (C) They are identical concepts without distinction
the different maximum combinations of two goods (D) Only elasticity of demand uses percentage changes
an economy can produce, given finite resources and

Ans
available technology. Points on the curve illustrate
efficient production; points inside indicate underutilized (B) One measures consumer responsiveness, the other
resources, and points outside are unattainable under measures producer responsiveness
current constraints. Price elasticity of demand assesses how quantity
demanded responds to a price change, reflecting
3. Consumer’s equilibrium under the two-commodity consumer behavior. Price elasticity of supply measures
approach is reached when: how quantity supplied reacts to price variations,
(A) The product with higher price is always chosen reflecting producer behavior. Both are calculated
(B) MUx/Px = MUy/Py similarly, but they focus on different market sides.
(C) Consumption focuses solely on inferior goods
6. Which concept explains declining extra satisfaction
(D) Total utility is minimized
from additional units consumed?


Ans (A) Total revenue
(B) MUx/Px = MUy/Py (B) Marginal cost
In two-commodity equilibrium, the consumer balances (C) Diminishing marginal utility
marginal utility per rupee across both goods. If MUx/ (D) Negative externalities
Px differs from MUy/Py, reallocating expenditure can

Ans

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(C) Diminishing marginal utility (B) 2 → 1 → 4 → 3

Diminishing marginal utility indicates that each (C) 1 → 2 → 3 → 4
successive unit of a good generally yields less additional (D) 2 → 3 → 4 → 1
satisfaction than the previous one. Consumers

Ans
eventually reduce incremental consumption as utility
gains decline, influencing purchasing decisions and (A) 2 → 3 → 1 → 4
helping define demand curves. Under perfect competition, firms accept the market
price (step 2), produce at the point where marginal cost
7. Arrange the steps for measuring price elasticity of equals that price (step 3), the market price subsequently
supply correctly: adjusts (step 1), and equilibrium is reached when overall
1. Calculate the original quantity supplied supply matches overall demand (step 4).
2. Calculate percentage change in quantity supplied
10. Match cost concepts (Column I) with definitions
3. Calculate percentage change in price
4. Divide the percentage change in quantity supplied (Column II):
by the percentage change in price Column I Column II
(A) 1 → 2 → 3 → 4 1 TFC (Total Fixed a Cost per unit (TC ÷
(B) 2 → 1 → 4 → 3 Cost) Q)
(C) 1 → 3 → 2 → 4
2 TVC (Total Variable b Cost that remains
(D) 3 → 2 → 1 → 4
Cost) constant regardless of


Ans output
(C) 1 → 3 → 2 → 4 3 AFC (Average Fixed c TFC ÷ Q
First identify the original quantity supplied (step 1). Cost)
Next, measure the percentage change in price (step 3) 4 AC (Average Cost) d Cost that changes with
and then the percentage change in quantity supplied output
(step 2). Finally, compute elasticity by dividing the latter
Options:
by the former (step 4).
(A) 1-b, 2-d, 3-c, 4-a
8. In the short-run production process, place these stages (B) 1-a, 2-c, 3-d, 4-b
in order: (C) 1-d, 2-c, 3-b, 4-a
1. Negative returns (D) 1-b, 2-a, 3-d, 4-c
2. Increasing returns

Ans
3. Diminishing returns
(A) 1-b, 2-d, 3-c, 4-a
(A) 3 → 2 → 1
Total Fixed Cost (TFC) is constant, Total Variable Cost
(B) 2 → 3 → 1
(TVC) changes with output, Average Fixed Cost (AFC)
(C) 2 → 1 → 3
is TFC per unit, and Average Cost (AC) is total cost per
(D) 1 → 2 → 3
unit (TC ÷ Q).


Ans
11. Match the following market structures (Column I) with
(B) 2 → 3 → 1
their characteristics (Column II):
Production typically starts with increasing returns,
where output grows rapidly as inputs rise, then moves Column I Column II
to diminishing returns, where additional inputs yield 1 Monopolistic a One dominant producer,
smaller increments, and may finally reach negative Competition unique product
returns if too many inputs reduce overall output. 2 Monopoly b Few large firms control
9. How does perfect competition achieve equilibrium? market
1. Price adjusts to clear the market 3 Perfect c Many sellers, product
2. Firms take price as given Competition differentiation
3. Output is chosen where MC = price 4 Oligopoly d Many buyers and sellers,
4. Demand equals supply homogeneous product
(A) 2 → 3 → 1 → 4 Options:

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(A) 1-a, 2-c, 3-d, 4-b 3 TR (Total c Total revenue ÷ quantity

(B) 1-c, 2-a, 3-d, 4-b Revenue) sold
(C) 1-d, 2-b, 3-c, 4-a
4 AVC (Average d TVC ÷ quantity
(D) 1-b, 2-d, 3-a, 4-c
Variable Cost)


Ans
Options:
(B) 1-c, 2-a, 3-d, 4-b (A) 1-c, 2-a, 3-b, 4-d
Monopolistic competition has many sellers producing (B) 1-c, 2-b, 3-a, 4-d
differentiated goods, a monopoly has a single dominant (C) 1-b, 2-c, 3-d, 4-a
producer, perfect competition consists of numerous (D) 1-a, 2-d, 3-b, 4-c
buyers and sellers dealing in identical goods, and


Ans
oligopoly sees a few firms dominating the market.
(B) 1-c, 2-b, 3-a, 4-d
12. Match these microeconomic concepts (Column I) with Average revenue is total revenue divided by quantity,
statements (Column II): marginal revenue is the extra revenue from one
Column I Column II additional sale, total revenue is price multiplied by
quantity, and average variable cost is the total variable
1 Market Supply a Sum of all individual
cost per unit.
producers’ supply
2 Price Floor b Legally established 14. Match the following statements (Column I) with correct
minimum price above terms (Column II):
equilibrium
Column I Column II
3 Consumer’s Surplus c Maximum willingness
1. Sum of TFC and TVC a. Total Cost (TC)
to pay minus market
price 2. Change in TC when b. Marginal Cost (MC)
one extra unit is
4 Producer’s d MC = MR for profit
produced
Equilibrium maximization
3. Maximum c. Consumer’s
Options: satisfaction point for Equilibrium
(A) 1-a, 2-c, 3-d, 4-b consumers
(B) 1-a, 2-b, 3-c, 4-d
4. Supply curve moves d. Increase in Supply
(C) 1-c, 2-a, 3-b, 4-d
right if input prices
(D) 1-d, 2-b, 3-a, 4-c
fall


Ans
Options:
(B) 1-a, 2-b, 3-c, 4-d (A) 1-a, 2-b, 3-c, 4-d
Market supply is the total quantity supplied by all (B) 1-c, 2-d, 3-a, 4-b
producers, a price floor sets a minimum legal price (C) 1-d, 2-b, 3-a, 4-c
above equilibrium, consumer’s surplus is the difference (D) 1-b, 2-c, 3-d, 4-a
between maximum willingness to pay and the actual


Ans
price, and producer’s equilibrium is achieved where MC
equals MR. (A) 1-a, 2-b, 3-c, 4-d
Total cost (TC) is the sum of fixed and variable costs,
13. Match each term (Column I) with its description marginal cost (MC) is the change in total cost for
(Column II): producing one additional unit, consumer’s equilibrium
Column I Column II is the satisfaction maximization point, and a decrease
in input costs shifts the supply curve right, increasing
1 AR (Average a Output × Price
supply.
Revenue)
2 MR (Marginal b Increase in total revenue 15. Which statements about consumer surplus are correct?
Revenue) by selling one more unit 1. It’s the difference between willingness to pay and
actual price
2. It disappears if willingness to pay equals price

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 PRACTICE PAPER 16

3. It measures producer benefits directly from a movement along the curve, which is driven by
4. Higher market prices reduce consumer surplus price changes only.
(A) 1, 2, and 4
18. Which statements are correct for price determination
(B) 1, 2, and 3
(C) 2, 3, and 4 under perfect competition?
(D) 1 and 3 only 1. The market sets a uniform price
2. Individual firms are price makers


Ans 3. Demand and supply interaction fixes the price
(A) 1, 2, and 4 4. Firms can earn long-run supernormal profits
Consumer surplus equals how much more a consumer is (A) 1 and 3
willing to pay than they actually do. If willingness to pay (B) 1, 2, and 4
equals the price, surplus becomes zero. Rising market (C) 2, 3, and 4
prices shrink surplus. Producer benefits are measured (D) 1, 3, and 4
differently, not via consumer surplus.

Ans
16. Identify true statements about producers’ equilibrium (A) 1 and 3
(MC=MR approach): In perfect competition, a single market price arises from
1. Occurs where MC intersects MR from below aggregate demand and supply. Firms are price takers,
2. Firm produces until total revenue equals total cost not makers, and cannot sustain supernormal profits in
3. No incentive to expand or reduce output at the long run because free entry drives economic profit
equilibrium to normal levels.
4. Achieved only if MC > MR
19. Which statements about minimum price or price floor
(A) 1, 2, and 3
(B) 1 and 3 only are valid?
(C) 2 and 4 only 1. It is set below equilibrium
(D) 1, 2, 3, and 4 2. It can result in surplus
3. It aims to protect producer interests


Ans 4. It guarantees equilibrium quantity
(B) 1 and 3 only (A) 2 and 3 only
Producer’s equilibrium is reached when marginal cost (B) 1 and 4 only
equals marginal revenue and MC rises at that point (C) 1, 2, and 4
(intersecting from below). There is no further incentive (D) 2, 3, and 4
to change output. It’s not defined by total revenue

Ans
equaling total cost, nor by MC exceeding MR.
(A) 2 and 3 only
17. Regarding supply curve shifts: A price floor is typically set above equilibrium, leading
1. If input costs decline, supply shifts right to surplus if quantity supplied exceeds quantity
2. Higher taxes cause leftward shifts demanded. It protects certain producers’ incomes but
3. Technological improvements can shift supply right does not guarantee the equilibrium quantity. Instead, it
4. An increase in supply is shown by movement along often distorts the market outcome.
the curve
20. Assertion (A) : Opportunity cost measures the desired
(A) 1, 2, and 3
(B) 2, 3, and 4 next best alternative.
(C) 1, 3, and 4 Reason (R) : Production does not require prioritizing
(D) 1, 2, 3, and 4 one choice over another.
(A) Both A and R are true, and R is the correct


Ans explanation of A
(A) 1, 2, and 3 (B) Both A and R are true, but R is not the correct
A decrease in input costs or better technology causes a explanation of A
rightward shift in supply, and higher taxes usually shift (C) A is true, R is false
it left. An increase in supply represented by a shift differs (D) A is false, R is true


Ans

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(C) A is true, R is false Macroeconomics studies overall economic phenomena,

Opportunity cost tracks the cost of the next best focusing on broad measures such as national income,
alternative forgone. Whenever resources are allocated, price levels, total employment, and growth rates. It
something else is sacrificed. Production decisions contrasts with microeconomics, which examines
necessarily involve prioritizing some uses over others, decisions of individual consumers or firms.
making the reason statement incorrect.
24. Gross National Product (GNP) measures:
21. Assertion (A) : In monopoly, there are many close (A) Output produced within domestic borders only
substitutes for the product. (B) Output produced by nationals, whether at home or
Reason (R) : A monopolist has substantial control over abroad
market price. (C) Government’s budget balance
(A) Both A and R are true, and R is the correct (D) Disposable income after tax
explanation of A

Ans
(B) Both A and R are true, but R is not the correct
explanation of A (B) Output produced by nationals, whether at home or
(C) A is true, R is false abroad
(D) A is false, R is true Gross National Product includes the value of all final
goods and services produced by a country’s residents,


Ans regardless of where production occurs. In contrast, GDP
(D) A is false, R is true measures output within domestic territory, including
A monopolist’s product typically has no close substitutes, foreign producers operating locally.
giving the firm price-setting power. The reason is
25. The circular flow model in a three-sector economy adds
correct: because it’s the sole supplier, a monopolist
can significantly influence price. Thus, having many which sector?
substitutes contradicts the essence of monopoly. (A) Foreign sector
(B) Household sector
22. Assertion (A) : A binding price ceiling can create (C) Government sector
shortages. (D) Banking sector
Reason (R) : A price ceiling is set above the equilibrium

Ans
price, increasing supply.
(A) Both A and R are true, and R is the correct (C) Government sector
explanation of A A three-sector model incorporates households, firms,
(B) Both A and R are true, but R is not the correct and government. The government collects taxes and
explanation of A makes expenditures, influencing overall economic
(C) A is true, R is false flows. A four-sector model additionally includes the
(D) A is false, R is true foreign sector (external trade and payments).

Ans 26. Which item is subtracted when computing Net

(C) A is true, R is false Domestic Product (NDP)?
A price ceiling set below equilibrium usually leads (A) Consumption
to excess demand and shortages, since consumers (B) Depreciation
demand more at the artificially lowered price but (C) Subsidies
suppliers produce less. The statement that it’s set above (D) Factor income from abroad
equilibrium is incorrect, so the reason is false.

Ans

23. Macroeconomics deals with: (B) Depreciation

(A) A single market’s supply curve Net Domestic Product equals GDP minus depreciation
(B) Aggregates like GDP, inflation, and unemployment of capital. Depreciation accounts for the wear and tear
(C) One firm’s profit-maximization problem of physical assets used in production. Subtracting it
(D) Individual consumer choices exclusively reflects the net addition to the economy’s productive
capacity within domestic territory.


Ans
(B) Aggregates like GDP, inflation, and unemployment

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27. GDP at factor cost vs. GDP at market price differ (A) The economy’s total output at various price levels
primarily in: Aggregate Supply captures the total quantity of goods
(A) The time period measured and services producers are willing to supply at varying
(B) Inclusion of net indirect taxes price levels. It depends on factor costs, technology, and
(C) Methods of summation available resources, shaping overall macroeconomic
(D) Adjustments for foreign direct investment equilibrium with Aggregate Demand.


Ans 31. What is the Marginal Propensity to Consume (MPC)?
(B) Inclusion of net indirect taxes (A) Ratio of change in consumption to change in
GDP at factor cost focuses on the income paid to factors income
of production. GDP at market price adds net indirect (B) The proportion of total income saved
taxes (taxes minus subsidies). The key distinction is (C) National savings minus national consumption
whether the value includes or excludes the impact of (D) A measure of price elasticity of demand
indirect taxes and subsidies on final prices.

Ans
28. Which is NOT part of the Income Method for national (A) Ratio of change in consumption to change in income
income computation? The marginal propensity to consume indicates how
(A) Wages much additional consumption results from an extra unit
(B) Profits of income. For instance, an MPC of 0.8 means that out
(C) Rent of every additional rupee earned, 80 paise goes toward
(D) Depreciation of currency value consumption.


Ans 32. Which of these factors does NOT cause excess demand?
(D) Depreciation of currency value (A) Increased government expenditure
The Income Method sums factor payments—wages (B) Decreased taxes
for labor, interest on capital, rent for land, and profits (C) High marginal propensity to consume
for entrepreneurship. Currency depreciation in forex (D) Significant unemployment in the economy
markets does not directly figure into factor payments

Ans
for producing goods and services.
(D) Significant unemployment in the economy
29. In national accounting, personal disposable income is: Excess demand occurs when the aggregate spending
(A) National income minus net indirect taxes surpasses the economy’s ability to produce at full
(B) Personal income minus personal taxes and non-tax employment, potentially driving inflation. Factors like
payments higher government spending, tax cuts, or high MPC
(C) Transfer payments plus corporate profits elevate demand. Substantial unemployment typically
(D) Government expenditure minus consumer signifies underutilized capacity, reducing demand
expenditure pressure rather than causing excess demand.


Ans 33. Full employment refers to:
(B) Personal income minus personal taxes and non-tax (A) Zero unemployment in an economy
payments (B) Absence of frictional or voluntary unemployment
Personal disposable income is the portion of personal (C) Equilibrium where only frictional and structural
income households can spend or save after deducting unemployment exist
personal income taxes and any non-tax obligations. It (D) Government controlling all hiring decisions
directly influences consumers’ spending capacity.

Ans
30. Aggregate Supply (AS) generally represents: (C) Equilibrium where only frictional and structural
(A) The economy’s total output at various price levels unemployment exist
(B) Only consumer spending Full employment doesn’t mean a 0% unemployment rate,
(C) Government purchases minus taxes but rather no cyclical or involuntary unemployment.
(D) Net exports Some frictional or structural unemployment persists as


Ans workers switch jobs or retrain. Thus, full employment

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is the economy’s maximum sustainable level of as reserves if they operate under a fractional reserve
employment. system.

34. Excess demand differs from deficient demand in that: 37. A central bank typically does NOT:
(A) Excess demand involves actual GDP below (A) Issue currency
potential GDP (B) Act as the government’s banker
(B) Deficient demand triggers inflationary gaps (C) Manage monetary policy
(C) Excess demand arises when aggregate demand (D) Provide personal loans to the general public
exceeds full-employment output

Ans
(D) Both reflect stable equilibrium positions
(D) Provide personal loans to the general public


Ans Central banks issue currency, regulate the money
(C) Excess demand arises when aggregate demand supply, and act as bankers to the government and
exceeds full-employment output commercial banks. They do not offer direct personal
Excess demand leads to an inflationary gap, where total lending services to individuals; this function belongs
spending surpasses the economy’s productive capacity primarily to commercial banks.
at full employment. Deficient demand, conversely,
38. In recent banking reforms, “modernization” often refers
means the economy underproduces relative to its full-
employment potential, resulting in unemployment and to:
output loss. (A) Using outdated manual ledger systems
(B) Limited online banking presence
35. Money is defined as: (C) Adoption of digital services, electronic payments,
(A) Any commodity used in barter trade and improved technology
(B) Government bonds only (D) Eliminating all private banks
(C) A commonly accepted medium of exchange

Ans
(D) Corporate shares in the stock market
(C) Adoption of digital services, electronic payments,


Ans and improved technology
(C) A commonly accepted medium of exchange Modernization in banking involves integrating
Money is a medium of exchange that people accept technological solutions such as internet banking, mobile
for goods, services, or settling debts. It also functions apps, electronic fund transfers, and secure digital
as a unit of account and store of value, streamlining transactions. These innovations enhance efficiency,
transactions and facilitating economic activity beyond broaden financial access, and streamline banking
barter. operations for customers.

36. Assertion (A) : Commercial banks can create money 39. A government budget includes:
through lending. (A) Commercial banks’ balance sheets
Reason (R) : Every rupee deposited in a bank is fully (B) Plans for government revenue and expenditure
held as reserves and never lent out. (C) Private household savings details
(A) Both A and R are true, and R is the correct (D) All international business contracts
explanation of A

Ans
(B) Both A and R are true, but R is not the correct
explanation of A (B) Plans for government revenue and expenditure
(C) A is true, R is false A government budget outlines projected revenues
(D) A is false, R is true (taxes, fees, and other inflows) and planned spending
(defense, welfare, infrastructure, etc.) over a fiscal


Ans period. It does not detail commercial banks’ operations,
(C) A is true, R is false private savings specifics, or international contracts in
Commercial banks multiply deposits by holding only that direct manner.
a fraction in reserves and lending the remainder. This
40. Which of these is NOT a government deficit concept?
process expands the total money supply. The reason is
incorrect because banks do not hold the entire deposit (A) Fiscal deficit
(B) Primary deficit

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 PRACTICE PAPER 16

(C) Revenue deficit When the regulated price is set below equilibrium,
(D) Current account deficit producers cannot recover their usual costs or profit


Ans margins. This reduced incentive leads them to cut back
production, resulting in shortages. Such unintended
(D) Current account deficit consequences often emerge from price ceilings meant to
Fiscal, primary, and revenue deficits relate to government protect consumers.
budgets, measuring different gaps in public finances.
The current account deficit arises in a country’s balance 43. A black market emerged because:
of payments, reflecting external trade and income flows (A) Official price was raised above equilibrium
rather than internal government budgeting. (B) There was an oversupply at the new price
(C) Ration shops provided ample surplus


Direction :Carefully read the case study provided and then (D) Consumers sought the scarce product at prices
thoroughly answer the subsequent five questions. above the ceiling
A state authority introduced a price ceiling on essential
cooking oil to make it more affordable. Initially, consumers

Ans
applauded the initiative, buying large quantities at the (D) Consumers sought the scarce product at prices
low regulated price. However, producers scaled back above the ceiling
production because profits dropped. Supermarkets and Demand remained high, but legally sold supply
local shops reported empty shelves, leading to queues and diminished. Some consumers, unable to obtain enough
rationing. Meanwhile, a black market emerged where at the low official price, were willing to pay more. This
the oil was sold at higher prices. Low-income families demand spurred unofficial sellers to supply at higher
still struggled, as supply shortages forced them to pay rates, creating a black market where prices exceed the
inflated rates on the illicit market. Policymakers pondered legal ceiling.
alternatives, like targeted cash subsidies for vulnerable
44. Which alternative policy did analysts suggest?
households, to avoid misallocation and ensure adequate
supply. Analysts warned that prolonged price ceilings (A) Complete abandonment of price regulation, no
risked discouraging producers from investing, ultimately safety net
harming the very people the policy aimed to help. (B) Targeted cash transfers to support low-income
households
41. What policy measure did the state authority implement? (C) Further reducing the official price
(A) Price floor on cooking oil (D) Introducing a price floor to aid producers
(B) Price ceiling on cooking oil

Ans
(C) Balanced budget approach
(D) Elimination of taxes on cooking oil (B) Targeted cash transfers to support low-income
households


Ans Analysts recommend focused subsidies or direct
(B) Price ceiling on cooking oil income support for needy families rather than broad
The government capped the maximum selling price of price ceilings. By delivering funds directly, policymakers
cooking oil below the market equilibrium. Although maintain market-driven prices, encouraging adequate
intended to make the item affordable, such ceilings often supply. Vulnerable consumers benefit from the added
lead to shortages because producers earn less profit, purchasing power without distorting production
reducing supply. Consumers initially benefit from lower incentives or creating artificial shortages.
prices but may face rationing or black markets.
45. How can prolonged price ceilings harm consumers in
42. Why did producers reduce supply under the new policy? the long run?
(A) Higher profit incentives (A) They guarantee high-quality goods
(B) Reduced production costs (B) They always eliminate black markets
(C) Lower profit margins due to the controlled price (C) They may dissuade producers from investing,
(D) Subsidies provided by the government reducing future supply


Ans (D) They permanently lower the cost of production

(C) Lower profit margins due to the controlled price

Ans

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(C) They may dissuade producers from investing, investment

reducing future supply

Ans
Persistent price ceilings undermine producers’
profitability, discouraging investment and expansion. (B) They anticipated future returns from improved
Over time, this can shrink production capacity or connectivity
impair quality, leading to chronic shortages. Consumers By positioning themselves where infrastructure
face either long queues or inflated black-market rates, upgrades occur, private enterprises can leverage better
defeating the policy’s goal of providing affordable, transport networks, reduced logistics costs, and growing
readily available goods. local demand. Such foresight often yields higher profits
once projects become operational, validating their


Direction :Carefully read the case study provided and then initial capital outlays.
thoroughly answer the subsequent five questions.
To spur economic growth, a central government unveiled 48. How might this project initially affect the fiscal deficit?
a massive infrastructure project, including building roads (A) It reduces public spending
and railways in underdeveloped regions. Public spending (B) It immediately balances the budget
surged, creating new jobs in construction and related (C) It potentially widens the fiscal deficit
industries. However, tax revenues initially lagged behind, (D) It leads to zero taxation
increasing the fiscal deficit. Private investment was

Ans
mixed; some firms invested near project sites, anticipating (C) It potentially widens the fiscal deficit
future returns, while others worried about potential Large infrastructure spending often outpaces any short-
cost overruns and political changes. Proponents argued term rise in tax revenue, causing the government to
that the investment multiplier would eventually bolster run a higher deficit. Over time, increased employment
aggregate demand, reducing unemployment. Critics and business activity might boost revenue, but initially,
warned that if productivity gains were slow, debt servicing spending obligations can exceed government receipts,
might burden future budgets. Despite disagreements, the expanding the fiscal gap.
government proceeded, hoping that better connectivity
and employment gains would justify the higher deficit in 49. Critics expressed concern that:
the long run. (A) Infrastructure projects never generate employment
(B) Productivity gains might be slow, straining debt
46. What was the government’s primary policy action in repayment
this scenario? (C) Private firms never benefit from public
(A) Imposing higher tax rates infrastructure
(B) Launching a large infrastructure project (D) Construction spending immediately eliminates
(C) Reducing public expenditure deficits
(D) Privatizing existing railways


Ans


Ans
(B) Productivity gains might be slow, straining debt
(B) Launching a large infrastructure project repayment
The government boosted spending on roads and Infrastructure benefits often unfold gradually, with
railways to stimulate growth. Infrastructure investment improved productivity and tax revenues accruing over
can create jobs, enhance connectivity, and attract private years. If the government must service debts during
firms. While immediate costs swell the fiscal deficit, this interim, slow returns can increase fiscal pressure,
policymakers expect long-term economic benefits potentially requiring higher taxes or spending cuts
through increased productivity and improved market elsewhere to manage the obligation.
access.
50. Proponents argued that the infrastructure project
47. Why did some private firms invest near the project sites? would:
(A) They expected immediate taxation benefits (A) Halt aggregate demand growth
(B) They anticipated future returns from improved (B) Reduce construction jobs
connectivity (C) Generate a multiplier effect, stimulating demand
(C) They aimed to reduce employment opportunities and employment
(D) They feared government penalties for non- (D) Suppress private sector activity

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Ans
(C) Generate a multiplier effect, stimulating demand
and employment
Supporters believe that government investment
in infrastructure triggers secondary spending, as
workers spend their new wages and related industries
expand. This multiplier effect boosts overall demand,
encouraging businesses to hire more labor, fueling a
virtuous cycle of growth, rising incomes, and higher tax
revenues.

*************

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PRACTICE PAPER 17

1. Which of the following best defines microeconomics? (D) Where to produce?

(A) It deals with economy-wide phenomena, like The central problems of an economy revolve around
inflation, national income, and unemployment. deciding what goods and services to produce, how
(B) It studies individual economic agents, such as to organize production processes efficiently, and
consumers and firms, and how they make decisions. determining the target consumers for final output.
(C) It focuses exclusively on government policies and “Where to produce?” is not considered among these
fiscal deficit management. fundamental questions.
(D) It examines only international trade between
4. Which of the following is not included in the concept of
countries.
opportunity cost?


Ans (A) The next best alternative foregone.
(B) It studies individual economic agents, such as (B) Implicit costs of inputs already owned.
consumers and firms, and how they make decisions. (C) Monetary payment for labor.
Microeconomics analyzes how individuals and firms (D) Value of trade-offs in production choices.
allocate limited resources. It focuses on specific

Ans
markets, consumer demand, and producer supply,
unlike macroeconomics, which examines the entire (C) Monetary payment for labor.
economy. By understanding how prices and outputs are Opportunity cost primarily concerns the value of the
determined at a micro level, economists gain insight next best alternative foregone, which includes implicit
into overall economic functioning. and explicit considerations. Direct monetary payment
for labor is a straightforward accounting cost, not
2. In a production possibility curve (PPC), a point lying specifically representing the opportunity foregone in
inside the curve indicates: choosing one option over another.
(A) Efficient utilization of all resources.
5. In the utility approach, total utility (TU) continues
(B) Underutilization or unemployment of resources.
(C) Full use of labor but partial use of capital. to increase until marginal utility (MU) becomes
(D) An impossible level of production. zero. Which statement best contrasts total utility and
marginal utility?


Ans (A) Total utility measures additional satisfaction from
(B) Underutilization or unemployment of resources. one extra unit, whereas marginal utility measures
Points inside the PPC depict that the economy is not overall satisfaction.
fully employing its resources or using them efficiently. A (B) Total utility accumulates satisfaction from all units
point on the curve represents maximum feasible output, consumed, whereas marginal utility measures the
and a point outside is unattainable with the current change in satisfaction from each additional unit.
resources and technology. Thus, being inside signifies (C) Total utility measures dissatisfaction, whereas
underutilization. marginal utility measures profit from selling goods.
(D) Total utility and marginal utility are identical
3. Which one of the following is not a central problem of measures of satisfaction.
an economy?
(A) What to produce?

Ans
(B) How to produce? (B) Total utility accumulates satisfaction from all units
(C) For whom to produce? consumed, whereas marginal utility measures the
(D) Where to produce? change in satisfaction from each additional unit.


Ans Total utility is the aggregate satisfaction from consuming
multiple units, while marginal utility indicates how each

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 PRACTICE PAPER 17

additional unit consumed affects that overall satisfaction. 9. In a two-commodity consumer equilibrium under the
When MU becomes zero, TU is at a maximum, marking utility approach, the consumer attains equilibrium
the point beyond which extra consumption yields no where the ratio of marginal utilities equals the ratio of
added total satisfaction. their prices. Mathematically, it is expressed as:
(A) MUx/MUy = Px/Py
6. What is meant by price elasticity of demand? (B) MUx/MUy = Py/Px
(A) The rate at which supply responds to price changes. (C) Px/Py = TUx/TUy
(B) The degree of responsiveness of quantity demanded (D) MUx + MUy = Px + Py
to changes in price.
(C) The ratio of average revenue to marginal revenue of

Ans
a commodity. (A) MUx/MUy = Px/Py
(D) The slope of the demand curve at a particular point. Under the utility approach, the consumer distributes


Ans expenditures between two goods until the last rupee
spent on each yields the same marginal utility. Hence,
(B) The degree of responsiveness of quantity demanded MUx/Px = MUy/Py, which rearranges to MUx/MUy =
to changes in price. Px/Py at equilibrium.
Price elasticity of demand measures how much quantity
demanded changes in response to a change in price. It 10. Which factor does not directly affect market demand for
reflects consumers’ sensitivity and is computed as the a commodity?
percentage change in quantity demanded divided by the (A) Consumer income
percentage change in price. (B) Prices of related goods
(C) Tastes and preferences
7. If a 10% fall in the price of tea leads to a 5% increase in (D) Marginal cost of production
quantity demanded, the price elasticity of demand for
tea is:

Ans
(A) 0.5 (inelastic). (D) Marginal cost of production
(B) 1 (unit elastic). Market demand for a commodity is primarily influenced
(C) 2 (elastic). by factors like consumer income, tastes, and the prices
(D) 5 (highly elastic). of related goods. The marginal cost of production affects


Ans supply decisions rather than consumers’ demand.
Hence, it is not a direct determinant of demand.
(A) 0.5 (inelastic).
Price elasticity of demand is calculated as the percentage 11. Which statement best describes returns to scale?
change in quantity demanded divided by the percentage (A) They reflect how output changes when all factors of
change in price. Here, 5% ÷ 10% = 0.5. Since the production change in the same proportion.
coefficient is less than 1, demand is considered relatively (B) They measure how labor productivity changes with
inelastic. additional labor input.
(C) They compare the percentage change in output to
8. Which of the following can cause a shift of the demand the percentage change in variable cost alone.
curve to the right? (D) They apply only to short-run production analysis.
(A) A decrease in consumer income for a normal good.
(B) A fall in the price of the good itself.

Ans
(C) An increase in consumer preferences for the good. (A) They reflect how output changes when all factors of
(D) A technological improvement in production. production change in the same proportion.


Ans Returns to scale examine how a firm’s output responds
when all inputs are varied in the same ratio, typically in
(C) An increase in consumer preferences for the good. the long run. They differ from returns to a factor, which
A rightward shift in the demand curve occurs when, at deal with changing only one input while others remain
every price, consumers demand more. This can arise fixed.
from higher incomes (for normal goods) or a favorable
change in tastes. A price change moves the consumer 12. In the short run, which cost remains constant
along the existing curve rather than shifting it. irrespective of output level?
(A) Average Variable Cost (AVC)

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(B) Marginal Cost (MC) (D) Significant control over price by individual firms
(C) Total Fixed Cost (TFC) In a perfectly competitive market, individual firms
(D) Total Variable Cost (TVC) have no control over price because the product is


Ans homogeneous and there are many sellers. They accept
the market price. Hence, having significant price
(C) Total Fixed Cost (TFC) control contradicts the essential condition of perfect
In the short run, certain costs do not change with output, competition.
referred to as fixed costs. Total Fixed Cost stays the
same even if production is zero or at capacity, whereas 16. Price floor is defined as:
variable costs fluctuate with the level of production. (A) A legally established minimum price that can be
charged for a good or service.
13. Which of the following statements best compares (B) A market equilibrium price determined by the
average revenue (AR) and marginal revenue (MR) intersection of demand and supply.
under perfect competition? (C) A temporary discount offered by producers for
(A) AR and MR both diminish with each additional promotional sales.
unit. (D) A price level set below the equilibrium point.
(B) AR is constant while MR declines steadily.
(C) AR equals MR and both remain constant at the

Ans
prevailing market price. (A) A legally established minimum price that can be
(D) AR is always greater than MR in perfect competition. charged for a good or service.


Ans A price floor is set by the government above the
equilibrium price to ensure certain products or labor
(C) AR equals MR and both remain constant at the services are not sold below a socially or politically
prevailing market price. acceptable level. If the floor is binding, it can lead to
In perfect competition, a firm is a price taker. The price is surpluses.
constant and equals average revenue as well as marginal
revenue, since each additional unit is sold at the same 17. Arrange the following steps in measuring National
market price, making AR = MR = Price. Income using the Value Added method in the correct
chronological order:
14. Which formula correctly represents the producer’s (I) Summation of value added across all sectors
equilibrium condition using the MC and MR approach (II) Identifying and classifying producing units
in perfect competition? (III) Calculating net value added by deducting
(A) MR = MC and MC is decreasing. intermediate consumption
(B) MR = MC and MC is constant. (IV) Excluding depreciation costs
(C) MR = MC and MC is rising after equality. (A) II → III → I → IV
(D) MR = MC and MC is falling before equality. (B) II → III → IV → I


Ans (C) II → I → III → IV
(C) MR = MC and MC is rising after equality. (D) II → III → I → IV
Producer’s equilibrium requires MR = MC, and to

Ans
ensure that the equality signifies maximum profit rather (D) II → III → I → IV
than minimum, MC must be upward sloping after the The steps begin with identifying producing units (II),
intersection. This condition prevents taking the output computing net value added for each by subtracting
level where MC is falling and could result in suboptimal intermediate consumption (III), summing these across
production. sectors (I), and then adjusting for depreciation to get
15. Which is not a feature of perfect competition? net measures (IV). This sequence provides an accurate
(A) Large number of buyers and sellers value-added measurement.
(B) Homogeneous products 18. GDP at market prices includes:
(C) Free entry and exit of firms (A) Factor cost plus subsidies minus taxes
(D) Significant control over price by individual firms (B) Factor cost plus indirect taxes minus subsidies


Ans (C) Factor cost minus indirect taxes minus subsidies

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 PRACTICE PAPER 17

(D) Factor cost minus subsidies plus direct taxes

Ans

Ans (B) Consumption, investment, government expenditure,

and net exports.
(B) Factor cost plus indirect taxes minus subsidies
Aggregate demand measures the total planned
GDP at market prices is derived by adding indirect taxes
expenditure on goods and services produced in an
to factor cost and then subtracting any subsidies. This
economy. Its principal components in an open economy
transformation accounts for taxes that elevate market
are consumption (C), investment (I), government
prices and subsidies that reduce them, thus aligning
expenditure (G), and net exports (X - M).
output valuation with market price terms.
22. Which scenario does not lead to an increase in aggregate
19. Which item is not included in Private Income?
demand?
(A) Factor income from the private sector
(A) A decrease in personal income tax.
(B) Factor income from abroad
(B) A rise in government spending.
(C) Interest on National Debt
(C) A fall in interest rates stimulating investment.
(D) Undistributed corporate profits
(D) A reduction in exports while imports remain


Ans constant.
(C) Interest on National Debt

Ans
Private Income encompasses all incomes received
(D) A reduction in exports while imports remain
by the private sector, including factor incomes from
constant.
domestic and foreign sources, as well as undistributed
Aggregate demand rises when consumption,
corporate profits. Interest on National Debt is paid by
investment, government spending, or net exports
the government and does not accrue to the private
increase. A fall in exports without a change in imports
sector’s factor income.
reduces net exports, lowering aggregate demand. Thus,
20. Which of the following best describes the circular flow it counteracts an expansionary effect.
of income in a two-sector model without government
23. Average Propensity to Consume (APC) vs. Marginal
and foreign trade?
Propensity to Consume (MPC) can be distinguished by
(A) Households buy goods from firms but save all their
which statement?
income, causing no revenue for firms.
(A) APC measures additional consumption out of
(B) Firms pay wages and profits to households, who
additional income, whereas MPC measures total
spend their entire income on goods from firms.
consumption divided by total income.
(C) Firms and households operate independently with
(B) APC is always greater than 1, whereas MPC is
no interaction.
always less than 1.
(D) Households produce goods for themselves
(C) APC is total consumption divided by total income,
while firms purchase consumption goods from
whereas MPC is the change in consumption divided
households.
by the change in income.


Ans (D) APC and MPC are identical concepts with different
(B) Firms pay wages and profits to households, who names.
spend their entire income on goods from firms.

Ans
In a simple two-sector economy, firms provide factor
(C) APC is total consumption divided by total income,
payments (wages, rent, interest, profit) to households,
whereas MPC is the change in consumption divided by
who in turn spend that income on goods and services
the change in income.
produced by firms. This creates a continuous circular
The key difference is that APC measures the fraction
flow of income and expenditures.
of total income spent, while MPC tracks how much
21. Aggregate demand (AD) can be defined as the sum of: additional spending arises from an increment in
(A) Consumption, saving, and taxes in an economy. income. APC can vary above or below 1, whereas MPC
(B) Consumption, investment, government generally lies between 0 and 1.
expenditure, and net exports.
(C) All factor payments plus government subsidies.
(D) All money supply and total government spending.

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24. Assertion (A) : Involuntary unemployment means amplifies spending, resulting in a bigger multiplier and
people are willing to work at the going wage rate but an increased final impact on income.
cannot find jobs.
27. Which of the following does not help correct an
Reason (R) : In voluntary unemployment, individuals
choose not to work at the prevailing wage. inflationary gap (excess demand)?
(A) Both (A) and (R) are true, and (R) is the correct (A) Reducing government spending
explanation of (A). (B) Increasing taxes
(B) Both (A) and (R) are true, but (R) is not the correct (C) Raising interest rates
explanation of (A). (D) Boosting public expenditure on infrastructure
(C) (A) is true, but (R) is false.

Ans
(D) (A) is false, but (R) is true. (D) Boosting public expenditure on infrastructure


Ans An inflationary gap occurs when aggregate demand
(A) Both (A) and (R) are true, and (R) is the correct exceeds the economy’s capacity. Contractionary
explanation of (A). measures such as higher taxes, reduced government
Involuntary unemployment arises when workers are spending, or increased interest rates curb excess
actively willing to work at the existing wage but cannot demand. Contrarily, boosting government expenditure
secure employment. Voluntary unemployment is the further raises AD, exacerbating the inflationary gap.
opposite, where workers opt not to work for personal 28. Assertion (A) : Deficient demand can lead to
reasons. Thus, the reason correctly explains the unemployment in an economy.
assertion. Reason (R) : Increasing the bank rate and restricting
25. What is the basic two-sector formula for equilibrium credit can eliminate deficiency in demand.
income (Y) in a closed economy without government (A) Both (A) and (R) are true, and (R) is the correct
intervention? explanation of (A).
(A) Y = C + S (B) Both (A) and (R) are true, but (R) is not the correct
(B) Y = C + I explanation of (A).
(C) Y = S + I + T (C) (A) is true, but (R) is false.
(D) Y = C + G + I (D) (A) is false, but (R) is true.

Ans

Ans

(B) Y = C + I (C) (A) is true, but (R) is false.

In a simple closed economy with no government, Deficient demand implies insufficient aggregate
national income (Y) is the sum of consumption (C) and spending, potentially causing unemployment.
investment (I). Equilibrium occurs when total output However, raising the bank rate and restricting credit are
equals total planned expenditures: Y = C + I. contractionary monetary policies aimed at controlling
excess demand, not alleviating deficiency. Hence, the
26. Which statement is true about the investment multiplier? reason contradicts the required policy for correcting
(A) It decreases total income when investment rises. deficient demand.
(B) It is the reciprocal of the marginal propensity to
29. Money is generally defined by its:
consume.
(C) It is always negative in a full-employment economy. (A) Exchange rate with foreign currencies
(D) It measures how changes in investment lead to (B) Ability to serve as a medium of exchange, unit of
proportionate changes in equilibrium income. account, store of value, and standard of deferred
payments


Ans (C) Physical form, such as coins or notes
(D) It measures how changes in investment lead to (D) Scarcity in the market
proportionate changes in equilibrium income.

Ans
The investment multiplier quantifies the effect of a
change in investment on aggregate income, calculated as (B) Ability to serve as a medium of exchange, unit
1 / (1 - MPC). A higher marginal propensity to consume of account, store of value, and standard of deferred
payments

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Money is characterized by its four primary functions. It (C) Complete restriction on foreign investments in
facilitates transactions, serves as a measure for pricing Indian banks
goods, preserves purchasing power over time, and Indian banking reforms encouraged modernization,
allows settlement of future obligations. Physical form or privatization, and technological upgrades, including
scarcity alone does not fully define money. digital services. Foreign direct investment and
institutional participation have also been permitted with
30. Which of the following is not a function of a central varying regulatory limits. There is no policy enforcing
bank? complete prohibition on foreign investments in Indian
(A) Acting as the government’s bank banks.
(B) Controlling the nation’s money supply
(C) Maintaining foreign exchange reserves 33. In government budget terminology, revenue expenditure
(D) Maximizing the profits of commercial banks refers to:


Ans (A) Expenditures that do not lead to creation of assets
(B) Investments in building new highways
(D) Maximizing the profits of commercial banks (C) Purchases of machinery and equipment for public
A central bank’s role includes serving as the government’s enterprises
banker, regulating money supply, and managing foreign (D) Loans granted by the government to other nations
exchange. It ensures monetary stability rather than
seeking to maximize the profits of commercial banks,

Ans
which operate as separate entities. (A) Expenditures that do not lead to creation of assets
Revenue expenditures typically cover routine
31. Arrange these stages in the evolution of money in operational costs such as salaries, subsidies, and
chronological order: administrative expenses that do not result in new assets.
(I) Metallic money Capital expenditures, conversely, involve spending on
(II) Commodity money long-term investments that expand the government’s
(III) Fiat money asset base, such as constructing roads or purchasing
(IV) Paper money machinery.
(A) II → I → IV → III
(B) I → II → IV → III 34. Match the following government budget components in
(C) II → IV → I → III Column I with their definitions in Column II:
(D) I → IV → II → III
Column I Column II


Ans i Revenue A Refers to government
(A) II → I → IV → III Receipt outlays that do not create
Early societies used commodity money (II), evolving assets
to metallic coins (I). Later, paper money (IV) was ii Capital B Inflows that neither create
introduced as a more convenient representation of Receipt liabilities nor reduce assets
value, eventually replaced or supplemented by fiat iii Revenue C Outlays that lead to asset
money (III), which has no intrinsic value but is backed Expenditure creation or reduction in
by government decree. liabilities
32. Which is not a significant recent reform in Indian iv Capital D Inflows that create liabilities
banking? Expenditure or reduce assets
(A) Privatization of certain public sector banks Options:
(B) Adoption of modern technology like digital (A) (i) – B, (ii) – D, (iii) – A, (iv) – C
payments (B) (i) – D, (ii) – B, (iii) – C, (iv) – A
(C) Complete restriction on foreign investments in (C) (i) – C, (ii) – A, (iii) – D, (iv) – B
Indian banks (D) (i) – A, (ii) – C, (iii) – B, (iv) – D
(D) Mergers of public sector banks to consolidate


Ans
operations
(A) (i) – B, (ii) – D, (iii) – A, (iv) – C


Ans

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Revenue receipts (B) neither create liabilities nor reduce (B) II → I → IV → III
assets, capital receipts (D) create liabilities or reduce (C) I → III → II → IV
assets, revenue expenditure (A) doesn’t create assets, (D) III → I → IV → II
and capital expenditure (C) leads to asset creation or

Ans
reduces liabilities for the government.
(A) I → II → III → IV
35. Which of the following does not directly fall under the First, exporters receive foreign currency (I), which adds
category of capital receipts? to the supply (II). Simultaneously, importers demand
(A) Disinvestment proceeds from public sector units that foreign currency (III). The exchange rate ultimately
(B) Borrowings from international organizations shifts to a new equilibrium based on the interplay of
(C) Interest received on government loans to states demand and supply (IV).
(D) Recovery of loans granted by the government
38. Which of the following best defines a flexible exchange


Ans rate system?
(C) Interest received on government loans to states (A) A system where the central bank strictly fixes the
Capital receipts are those that either create liability or currency’s value against gold
reduce assets, such as borrowings or disinvestment. (B) A system where exchange rates are set by
Interest received is classified as revenue receipt, since government decree without any market influence
it represents earnings on an existing asset and does not (C) A system where market forces of demand and
alter the government’s liabilities or asset holdings. supply freely determine the exchange rate
(D) A barter system replacing currency with goods
36. Identify the correct statements about deficits in a
government budget:

Ans
1. Revenue deficit occurs when total revenue (C) A system where market forces of demand and supply
expenditure exceeds total revenue receipts. freely determine the exchange rate
2. Fiscal deficit equals total expenditure minus total Under a flexible or floating exchange rate regime,
receipts (excluding borrowings). currencies adjust according to market demand and
3. Primary deficit is fiscal deficit plus interest supply conditions, with minimal direct government
payments. intervention. This contrasts with fixed exchange rate
4. Reducing fiscal deficit can help lower inflationary systems, where authorities attempt to maintain a
pressures. predetermined peg.
(A) 1 and 2 only
39. Assertion (A) : A depreciating domestic currency can
(B) 1, 2, and 4 only
(C) 1, 3, and 4 only boost a country’s exports.
(D) 2 and 3 only Reason (R) : Depreciation raises the price of domestic
goods for foreign buyers, reducing global demand.


Ans (A) Both (A) and (R) are true, and (R) is the correct
(B) 1, 2, and 4 only explanation of (A).
Statements 1 and 2 correctly define revenue and fiscal (B) Both (A) and (R) are true, but (R) is not the correct
deficits. Statement 4 is valid as reducing fiscal deficit can explanation of (A).
reduce inflationary pressures. Primary deficit is actually (C) (A) is true, but (R) is false.
fiscal deficit minus interest payments, so statement 3 is (D) (A) is false, but (R) is true.
incorrect.

Ans
37. Arrange the following steps in the functioning of the (C) (A) is true, but (R) is false.
foreign exchange market in chronological order: Depreciation of a currency lowers the relative price
(I) Exporters receive foreign currency from abroad of domestic goods in foreign markets, making them
(II) Supply of foreign currency increases in the domestic more attractive and potentially boosting exports. The
market provided reason contradicts that logic by suggesting it
(III) Domestic importers demand foreign currency raises prices, hence it is incorrect.
(IV) Exchange rate adjusts based on demand and supply
(A) I → II → III → IV 40. Which of the following statements best describes the
balance of payments (BoP)?

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(A) It records only visible trade of goods between 42. The minimum support price (MSP) is an example of
nations. which type of price intervention?
(B) It is a systematic record of all economic transactions (A) Price floor
between one country and the rest of the world. (B) Price ceiling
(C) It exclusively measures the amount of foreign (C) Equilibrium price
currency held by the central bank. (D) Market-determined price
(D) It focuses on unilateral transfers from foreign

Ans
governments to domestic entities.
(A) Price floor


Ans An MSP sets a legally imposed minimum price at which
(B) It is a systematic record of all economic transactions the good must be purchased from farmers. Because it is
between one country and the rest of the world. set above the free-market equilibrium, it is classified as
The BoP includes both visible (goods) and invisible a price floor, potentially generating surplus if demand
(services, income flows) transactions, as well as capital stays unchanged.
flows and unilateral transfers. It systematically tracks
43. One potential problem mentioned in the passage
payments and receipts of a country with foreign entities,
indicating economic interaction. regarding an MSP is:
(A) Increased supply shortage in the market


Direction :Carefully read the case study provided and then (B) Excess government revenues due to lower costs
thoroughly answer the subsequent five questions. (C) Unsold surplus leading to resource misallocation
“In the village of Surajpur, wheat farming is the primary (D) Immediate collapse of wheat production
occupation. Farmers face a perfectly competitive market

Ans
structure, where no single farmer can influence the
prevailing price. A government policy recently introduced (C) Unsold surplus leading to resource misallocation
a minimum support price (MSP) for wheat. Although The passage mentions that surplus arises when the
the MSP is set above the equilibrium price, farmers MSP is above equilibrium and demand remains
benefit from a guaranteed price, but many experience unchanged, leaving extra produce unsold. This can
unsold surplus if market demand remains unchanged. lead to inefficiencies and misallocation of resources, as
Consumers pay higher prices, prompting some to switch government may have to purchase excess stocks.
to substitute grains. Meanwhile, local authorities discuss 44. Why might consumers switch to substitute grains?
either purchasing the surplus at the MSP or eliminating (A) Government mandates them to avoid wheat
the price floor. Policy analysts worry about rising (B) MSP sets a low price, making wheat less profitable
government costs, resource misallocation, and market for farmers
distortions. Still, farmers advocate for the continued MSP, (C) Higher wheat prices encourage consumers to look
citing income stability and prevention of distress sales.” for cheaper alternatives
41. What market structure do wheat farmers in Surajpur (D) Wheat becomes unavailable in the market
face according to the passage?

Ans
(A) Monopoly (C) Higher wheat prices encourage consumers to look
(B) Perfect competition for cheaper alternatives
(C) Monopolistic competition When the MSP is above equilibrium, it raises wheat’s
(D) Oligopoly price, discouraging some consumers who might find


Ans cheaper grains. This substitution effect is common when
(B) Perfect competition a price floor increases the cost of a good relative to other
The passage highlights that no single farmer can alternatives.
influence price, a defining feature of perfect competition. 45. Which of the following best explains the farmers’
Each farmer is a price taker, producing a homogeneous perspective on the MSP?
good with free entry and exit, aligning with typical (A) It prevents income stability and forces them into
conditions of a perfectly competitive market. distress sales
(B) They worry about rising government costs
(C) They seek to eliminate the MSP to encourage

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competition changing prices

(D) They favor it for stable incomes and to avoid distress (B) Increased taxes on inputs and goods may raise
sales costs, which businesses pass on to consumers


Ans (C) Wages automatically adjust downward when taxes
increase
(D) They favor it for stable incomes and to avoid distress (D) The fiscal deficit is likely to expand further
sales
Farmers support the MSP as it guarantees a minimum

Ans
return and helps them avert selling at very low prices. (B) Increased taxes on inputs and goods may raise costs,
This protects them against market fluctuations, which businesses pass on to consumers
ensuring stability even though it may create surpluses Higher indirect taxes on luxury or imported goods often
and increased government costs. raise production or retail costs. Firms then transfer these
additional costs to consumers through higher prices,


Direction :Carefully read the case study provided and then potentially contributing to inflationary pressures.
thoroughly answer the subsequent five questions.
“In the country of Mehtalia, the government faces
escalating public spending on healthcare and education. 48. Which policy approach might reduce the fiscal deficit
To finance these expenditures, it proposes raising but could negatively impact long-run economic growth?
indirect taxes on luxury goods and introducing higher (A) Cutting capital expenditure on infrastructure
import duties. Economists caution that while higher tax (B) Investing in additional educational programs
receipts might reduce the fiscal deficit, it could also spur (C) Lowering indirect taxes on luxury goods
inflation if businesses pass on these costs to consumers. (D) Increasing government spending on public health
Meanwhile, a section of policymakers suggests cutting

Ans
capital expenditure on infrastructure to limit the deficit.
Opponents argue that reducing capital investments might (A) Cutting capital expenditure on infrastructure
hamper economic growth in the long run. With national Capital expenditure typically contributes to productive
elections approaching, policymakers seek a balanced capacity. Reducing it can ease immediate budgetary
approach that maintains essential public services, controls pressures but undermines potential future growth
the deficit, and avoids excessive inflation. The debate by slowing improvements in roads, power, and other
underscores the trade-offs inherent in budgetary policies.” critical infrastructure needed for a more productive
economy.
46. What is the government’s main reason for raising
49. What concern do opponents of cutting capital
indirect taxes in Mehtalia?
(A) To discourage imports and promote domestic investments raise?
production (A) Government surpluses will grow uncontrollably
(B) To fund increasing public expenditure on healthcare (B) Reduced infrastructure spending might hamper
and education long-term economic development
(C) To reduce overall consumer spending on necessities (C) Healthcare and education budgets will be depleted
(D) To lower prices of luxury goods (D) Imports will increase, causing an unfavorable
balance of payments


Ans


Ans
(B) To fund increasing public expenditure on healthcare
and education (B) Reduced infrastructure spending might hamper
The case describes how government spending has risen long-term economic development
for healthcare and education, prompting a proposal Opponents believe that slashing capital investments
to raise indirect taxes on luxury goods. This measure compromises future growth by limiting enhancements
aims to generate revenue to meet higher budgetary in productive capacity. Infrastructure plays a
obligations. foundational role in enabling business operations and
attracting investments, so cutting back can have adverse
47. Economists caution that raising indirect taxes can long-term implications.
potentially lead to inflation because:
50. Which statement summarizes the core budgetary debate
(A) Producers might absorb all new taxes without
in Mehtalia?

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 PRACTICE PAPER 17

(A) Whether to abolish all taxes for boosting consumer

spending
(B) Balancing public service funding, deficit control,
and inflation management
(C) Eliminating education budgets to focus solely on
infrastructure
(D) Promoting short-run deficits to stimulate
immediate economic growth


Ans
(B) Balancing public service funding, deficit control,
and inflation management
The policymakers in Mehtalia must weigh higher
spending on social services against limiting the fiscal
deficit while mitigating inflation. This underscores the
intricate trade-offs in designing a balanced budgetary
policy that addresses competing economic objectives.

*************

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PRACTICE PAPER 18

1. Microeconomics helps in understanding how individual choice is made.

consumers and firms make decisions. Which statement (D) Total cost divided by quantity produced.
correctly highlights its scope?

Ans
(A) It focuses on aggregate demand, inflation, and
overall unemployment. (C) Value of the next best alternative sacrificed when a
(B) It studies price determination in different market choice is made.
structures and consumer behavior at an individual Opportunity cost reflects the trade-offs inherent in every
level. decision. It represents the benefit lost by choosing one
(C) It only examines government intervention in option over another, often incorporating both explicit
export strategies. and implicit costs linked to the forgone opportunity.
(D) It deals with macro indicators like GDP growth 4. Which of the following is not a basic question every
rates. economy must answer?


Ans (A) How to produce goods and services?
(B) It studies price determination in different market (B) What to produce in terms of goods and services?
structures and consumer behavior at an individual level. (C) When to produce goods and services?
Microeconomics focuses on the smaller units in the (D) For whom to produce goods and services?
economy, such as consumers, producers, and specific

Ans
markets, analyzing how prices and quantities of goods (C) When to produce goods and services?
and services are determined at a micro level. Every economy grapples with deciding what goods
2. Which of the following is a correct statement about a and services to produce, how to produce them, and for
Production Possibility Frontier (PPF)? whom they should be produced. The timing (when)
(A) Points on the curve depict unattainable production is typically secondary to these core allocation and
levels given existing resources and technology. distribution concerns.
(B) It is upward sloping due to the law of increasing 5. In utility analysis, Marginal Utility (MU) is defined as:
opportunity cost. (A) Total satisfaction from consuming n units of a
(C) Points outside the curve represent more efficient good.
allocation of resources. (B) Change in total utility when one additional unit of
(D) Points on the curve show efficient production a good is consumed.
combinations using all available resources. (C) Total expenditure on a good divided by total


Ans income.
(D) Points on the curve show efficient production (D) Sum of fixed and variable utilities for all goods.
combinations using all available resources.

Ans
A PPF (or PPC) shows various possible combinations (B) Change in total utility when one additional unit of a
of goods produced using all resources efficiently. Points good is consumed.
on the curve reflect feasible and efficient output levels, MU measures the incremental satisfaction gained from
whereas points inside indicate inefficiency and points consuming an extra unit of a product. This concept
outside remain unattainable under current conditions. underlies consumer decisions on how many units to
3. Opportunity cost is best understood as: purchase to maximize overall utility, subject to budget
(A) Direct payment made to hired labor. constraints.
(B) Implicit cost of using an already owned resource.
(C) Value of the next best alternative sacrificed when a

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 PRACTICE PAPER 18

6. Which best compares movement along a demand curve (C) The quantity of a good or service that producers are
with a shift of the demand curve? willing and able to sell at various prices over a period
(A) A movement occurs due to a change in price, while of time.
a shift results from changes in other factors like Supply in economics refers to the willingness and
income or preferences. capacity of producers to offer goods at various price
(B) Both movement and shift occur exclusively due to points, reflecting how production decisions respond
changes in the commodity’s price. to potential revenue. Demand, conversely, centers on
(C) Shifts only occur if consumers exit the market consumer willingness and ability to buy.
entirely.
9. Which factor is not a determinant of supply?
(D) Movement along the curve and shifts cannot
happen simultaneously. (A) Technology
(B) Prices of inputs


Ans (C) Consumer tastes
(A) A movement occurs due to a change in price, while (D) Number of firms in the industry
a shift results from changes in other factors like income

Ans
or preferences.
When price changes, consumers move along the (C) Consumer tastes
existing demand curve. If any non-price determinant Consumer tastes and preferences affect demand rather
like consumer income or preference changes, the entire than supply. Supply determinants typically include
demand curve either shifts to the left or right. production technology, input costs, the number of
producers, and expectations about future market
7. A perfectly inelastic demand curve indicates: conditions.
(A) The quantity demanded changes infinitely with
10. The law of diminishing returns to a factor states that:
price changes.
(B) Quantity demanded remains constant regardless of (A) When more and more units of a variable factor are
price changes. used with a fixed factor, total product eventually
(C) Demand remains unit elastic over every price decreases at an increasing rate.
range. (B) Increasing all factors in the same proportion leads
(D) Total revenue remains constant as price changes. to a constant return.
(C) Each additional unit of a variable factor first raises


Ans marginal product but eventually lowers it.
(B) Quantity demanded remains constant regardless of (D) Average product always remains constant,
price changes. irrespective of how many variable factors are used.
Perfectly inelastic demand has a zero elasticity

Ans
coefficient, implying that consumers purchase the
same quantity even if the price changes, often due to a (C) Each additional unit of a variable factor first raises
necessity or no available substitutes. marginal product but eventually lowers it.
Under diminishing returns to a factor, beyond a certain
8. Supply can be defined as: point, the marginal product of that factor declines.
(A) The total quantity of a product consumers are Initially, output may rise more than proportionately, but
willing and able to buy. eventually constraints of the fixed factor lead to lower
(B) The entire relationship between price and quantity additional output.
demanded.
11. Which comparison between fixed cost and variable cost
(C) The quantity of a good or service that producers
are willing and able to sell at various prices over a in the short run is accurate?
period of time. (A) Both fixed and variable costs change with output
(D) The government’s plan for distributing resources level.
among different sectors. (B) Fixed cost changes only when output crosses a
certain threshold, whereas variable cost remains


Ans constant.
(C) Fixed cost remains the same regardless of output,
while variable cost increases with output.

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(D) Fixed cost is always higher than variable cost. (C) High barriers to entry


Ans Perfect competition presupposes minimal to no barriers
for firms to enter or exit the market. High barriers occur
(C) Fixed cost remains the same regardless of output, in markets like monopolies or oligopolies, contradicting
while variable cost increases with output. the assumption of numerous competing firms in a free-
In the short run, some costs (e.g., rent, salaries of entry environment.
permanent staff) remain fixed irrespective of production
level, while variable costs (e.g., raw materials, hourly 15. A price ceiling is set by the government to ensure:
wages) change in direct proportion to the quantity (A) Producers earn higher profits.
produced. (B) The market price is above the equilibrium price,
creating surplus.
12. If total revenue (TR) = Price (P) × Quantity (Q), (C) Essential commodities remain affordable by
and average revenue (AR) = TR/Q, then in perfect capping their price below equilibrium.
competition, AR is equal to: (D) Taxes on producers can be increased.
(A) Price (P)
(B) Marginal Revenue (MR)

Ans
(C) Total Fixed Cost (TFC) (C) Essential commodities remain affordable by capping
(D) Total Variable Cost (TVC) their price below equilibrium.


Ans A price ceiling is a legal maximum price that can be
charged for a good or service, typically imposed below
(A) Price (P) the market equilibrium to protect consumers. It can
Under perfect competition, the firm is a price taker, create shortages if suppliers reduce output at the lower
so Price = Average Revenue = Marginal Revenue. By price.
definition, AR = TR/Q, which simplifies to (P×Q)/Q =
P, indicating AR is the same as the market price. 16. Which of these best defines national income at factor
cost?
13. In a perfectly competitive market, the equilibrium price (A) Sum of wages, rent, interest, and profit earned by
is determined by: factors of production within a nation’s boundary,
(A) The government setting a legal ceiling price. excluding taxes and including subsidies.
(B) The intersection of market demand and market (B) Total personal income received by households after
supply. direct tax deductions.
(C) One large firm deciding the profit-maximizing (C) Value of final goods at market prices, ignoring
price. intermediate consumption.
(D) Bilateral negotiations between each buyer and (D) Aggregate demand plus net exports.
seller.


Ans


Ans
(A) Sum of wages, rent, interest, and profit earned
(B) The intersection of market demand and market by factors of production within a nation’s boundary,
supply. excluding taxes and including subsidies.
In perfect competition, the market as a whole establishes National income at factor cost includes payments to
the equilibrium price through combined demand and factors (labor, capital, land, entrepreneurship) for their
supply forces. Individual firms and consumers act as contribution in production, net of indirect taxes, plus
price takers, with no single participant able to alter the subsidies. It reflects the cost of production from the
market price. producers’ perspective.
14. Which of the following is not a characteristic of perfect 17. Personal Disposable Income (PDI) is obtained by
competition? deductingfrom Personal Income.
(A) Free entry and exit of firms (A) Indirect taxes and corporate tax
(B) Homogeneous products (B) Interest on national debt
(C) High barriers to entry (C) Direct taxes and other obligatory payments like
(D) Large number of buyers and sellers fines


Ans (D) Government transfer payments

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 PRACTICE PAPER 18

Ans National disposable income includes net current

(C) Direct taxes and other obligatory payments like fines transfers from abroad and consumption of fixed capital
Personal Disposable Income represents the amount (depreciation) to measure the total resources available.
individuals can spend or save after paying direct taxes Corporate tax payments are typically accounted for
(income tax) and any additional compulsory charges. before arriving at disposable measures, so they are not
Transfer payments, such as pensions or subsidies, are directly added to national disposable income.
included in personal income rather than deducted from
20. Which concept refers to the total money value of all
it.
final goods and services produced within a country’s
18. Match the following concepts in Column I with their domestic territory in a given year?
descriptions in Column II: (A) GDP at factor cost
(B) GDP at market price
Column I Column II (C) GNP at factor cost
i. GDP at A. National Income – (D) Personal Income
market price (Income from property and


Ans
entrepreneurship accruing
to government) + Transfer (B) GDP at market price
payments GDP at market price measures the overall market value
ii. NNP at factor B. GNP at factor cost – of final goods and services produced within a nation’s
cost Depreciation boundaries in a specified period, evaluated at prevailing
market prices including indirect taxes and excluding
iii. Private C. GDP at factor cost +
subsidies.
Income (Indirect taxes – Subsidies)
iv. Personal D. Income from domestic 21. Which of the following captures the idea of aggregate
Income product + Income from supply (AS) in an economy?
abroad + Transfer from (A) Total output producers are willing to supply at each
government and rest of possible price level.
world (B) Sum of all consumer incomes in the economy.
Options: (C) Value of imports exceeding exports.
(A) (i) – C, (ii) – B, (iii) – D, (iv) – A (D) The maximum consumption a household can
(B) (i) – A, (ii) – C, (iii) – D, (iv) – B afford at a given wage rate.
(C) (i) – D, (ii) – A, (iii) – C, (iv) – B

Ans
(D) (i) – B, (ii) – D, (iii) – A, (iv) – C
(A) Total output producers are willing to supply at each


Ans possible price level.
(A) (i) – C, (ii) – B, (iii) – D, (iv) – A Aggregate supply is the overall quantity of goods and
GDP at market price = GDP at factor cost + (Indirect services firms plan to produce and sell at varying price
taxes – Subsidies). NNP at factor cost = GNP at factor levels in an economy, factoring in production costs,
cost – Depreciation. Private Income = Income from technology, and resource availability.
domestic/abroad + Transfer from government/world.
22. Which best differentiates between involuntary
Personal Income = National Income – (Income from
unemployment and voluntary unemployment?
government property/entrepreneurship) + Transfer.
(A) Involuntary: individuals choose not to work;
19. Which of the following is not included in national Voluntary: individuals are forced out of jobs.
disposable income? (B) Involuntary: individuals cannot find work at the
(A) Net current transfers from abroad prevailing wage; Voluntary: individuals opt to
(B) Consumption of fixed capital remain unemployed despite available jobs.
(C) Personal disposable income (C) Involuntary: arises only in rural areas; Voluntary:
(D) Corporate tax payments arises only in urban areas.
(D) Involuntary: result of government job policies;


Ans
Voluntary: result of technological obsolescence.
(D) Corporate tax payments

Ans

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(B) Involuntary: individuals cannot find work at the influences the overall level of national income.
prevailing wage; Voluntary: individuals opt to remain (C) It calculates the difference between actual output
unemployed despite available jobs. and potential output.
Involuntary unemployment occurs when able and (D) It is the proportion of a bank’s deposits held as
willing workers fail to secure employment at existing reserves.
wage rates, whereas voluntary unemployment reflects a

Ans
deliberate choice not to work under offered conditions.
This distinction underlies labor market analysis. (B) It indicates how a change in autonomous spending
influences the overall level of national income.
23. Assertion (A) : When Aggregate Demand exceeds The multiplier reflects how initial injections of
Aggregate Supply at full employment, it causes autonomous expenditures (like investment or
inflationary pressure. government spending) result in multiple rounds of
Reason (R) : Excess demand leads to rising prices as spending, magnifying the ultimate impact on national
competition for scarce resources intensifies. income, given the marginal propensity to consume.
(A) Both (A) and (R) are true, and (R) is the correct
26. Arrange the following steps in the calculation of
explanation of (A).
(B) Both (A) and (R) are true, but (R) is not the correct equilibrium income in the correct chronological
explanation of (A). sequence:
(C) (A) is true, (R) is false. (I) Determine aggregate demand (AD) = C + I + G (+
(D) (A) is false, (R) is true. X - M if open economy)
(II) Equate AD with aggregate supply (Y)


Ans (III) Solve for Y
(A) Both (A) and (R) are true, and (R) is the correct (IV) Identify marginal propensity to consume (MPC) to
explanation of (A). find induced consumption
If total demand outstrips the economy’s capacity at (A) IV → I → II → III
full employment, prices rise, creating inflationary (B) I → IV → II → III
conditions. The reason clearly supports the assertion by (C) IV → II → I → III
explaining how limited resources drive price hikes when (D) I → II → III → IV
demand is excessive.

Ans
24. Which policy is not appropriate to correct deficient (A) IV → I → II → III
demand? First, we assess MPC to determine consumption
(A) Cutting taxes to increase disposable income function (IV), next specify AD components (I), set AD
(B) Lowering interest rates to stimulate investment = Y (II), and solve for equilibrium income (III). This
(C) Reducing government spending significantly sequence captures how consumption function helps
(D) Purchasing securities in the open market to shape AD, which must match AS.
increase money supply
27. Assertion (A) : Money is demanded primarily for


Ans transactions and speculative purposes.
(C) Reducing government spending significantly Reason (R) : A speculative demand for money arises
To address deficient demand, expansionary fiscal and due to the interest-earning potential of bonds and risk
monetary policies are typically employed, including considerations.
tax reductions, lower interest rates, and open market (A) Both (A) and (R) are true, and (R) is the correct
purchases. Reducing government spending is a explanation.
contractionary measure, which worsens deficient (B) Both (A) and (R) are true, but (R) is not the correct
demand by further lowering aggregate demand. explanation.
(C) (A) is true, (R) is false.
25. Which of the following statements best defines the (D) (A) is false, (R) is true.
concept of the multiplier?
(A) It measures the ratio of total tax revenue to

Ans
government spending. (A) Both (A) and (R) are true, and (R) is the correct
(B) It indicates how a change in autonomous spending explanation.

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 PRACTICE PAPER 18

Individuals hold money for everyday transactions Money primarily functions as a medium of exchange,
(transaction motive) and also for speculative motives, unit of account, store of value, and standard of deferred
influenced by fluctuations in bond prices. The payments. Regulating external trade tariffs is a policy
opportunity cost of holding money is the interest or administrative mechanism, unrelated to money’s
forgone from bonds, shaping speculative demand. fundamental functions.

28. Which function of a central bank involves ‘lender of last 31. Match the following banking reforms in Column I with
resort’? their descriptions in Column II:
(A) Controlling the government’s expenditures
Column I Column II
(B) Extending credit to commercial banks during
financial crises i Modernization A Consolidating multiple
(C) Providing direct credit to corporations for banks into fewer, larger
investment entities
(D) Taxing imports to regulate foreign trade ii Privatization B Shifting state-owned banks
to private ownership


Ans
iii Mergers C Promoting access to
(B) Extending credit to commercial banks during banking services in
financial crises underbanked regions
As the lender of last resort, the central bank supplies
iv Financial D Adoption of technology-
funds to banks facing liquidity shortages, preventing
Inclusion driven services like online
panic and maintaining confidence in the financial
banking
system. It does not typically lend directly to private
corporations. Options:
(A) (i) – D, (ii) – B, (iii) – A, (iv) – C
29. Which best distinguishes between commercial banks (B) (i) – B, (ii) – D, (iii) – C, (iv) – A
and central bank? (C) (i) – C, (ii) – A, (iii) – D, (iv) – B
(A) Commercial banks issue currency, while the central (D) (i) – A, (ii) – C, (iii) – B, (iv) – D
bank handles deposits from the public.


Ans
(B) The central bank handles monetary policy and
regulation, whereas commercial banks deal with the (A) (i) – D, (ii) – B, (iii) – A, (iv) – C
public’s deposits, lending, and daily transactions. Modernization (D) involves introducing new
(C) Commercial banks are government-owned, central technologies, privatization (B) denotes transferring
bank is private. government-owned institutions to private hands,
(D) Both accept deposits and create monetary policy. mergers (A) combine banks into consolidated entities,
and financial inclusion (C) expands coverage to the


Ans
unbaked population.
(B) The central bank handles monetary policy and
regulation, whereas commercial banks deal with the 32. Arrange the following budgetary steps in chronological
public’s deposits, lending, and daily transactions. order for a typical government:
Commercial banks are financial intermediaries serving (I) Estimating expenditures for various sectors
everyday banking needs of consumers and businesses. (II) Forecasting expected tax and non-tax revenues
The central bank oversees monetary policy, issues (III) Presenting the budget to the legislature for approval
currency, and regulates the banking system, ensuring (IV) Outlining deficit or surplus and financing strategies
stability and liquidity. (A) I → II → III → IV
(B) II → I → IV → III
30. Which of the following is not a function of money? (C) I → II → IV → III
(A) Medium of exchange (D) IV → I → II → III
(B) Unit of account


Ans
(C) Store of value
(D) Measure to regulate external trade tariffs (C) I → II → IV → III
First, the government calculates planned expenditures


Ans
(I), then forecasts revenue (II). Next, it identifies
(D) Measure to regulate external trade tariffs

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potential deficits or surpluses and funding methods (B) Revenue deficit pertains to revenue account items,
(IV). Finally, the comprehensive budget is presented to while fiscal deficit covers total budgetary deficits
the legislature for debate and approval (III). (expenditure – non-borrowed receipts).
A revenue deficit reflects the shortfall in revenue
33. Which of the following is a component of capital receipts compared to revenue expenditures. Fiscal
expenditure in a government budget? deficit includes revenue and capital account imbalances,
(A) Interest payments on public debt measuring how much the government must borrow
(B) Salaries to government employees to cover total expenditure beyond its non-borrowed
(C) Building new highways and bridges resources.
(D) Subsidies on essential commodities
36. Which of the following is not a merit of flexible exchange


Ans
rate?
(C) Building new highways and bridges (A) Automatic correction of BoP disequilibrium
Capital expenditure refers to spending that creates long- (B) No need for large foreign exchange reserves
term assets or reduces liabilities, such as constructing (C) Exchange rate stability over long periods
infrastructure. Recurrent payments like salaries, (D) Reflects true market conditions of currency
interest, and subsidies are revenue expenditures, which demand and supply
do not result in new government assets.


Ans
34. Which statement best defines a balanced budget? (C) Exchange rate stability over long periods
(A) Expenditures exceed receipts, creating no deficit or Flexible exchange rates can fluctuate, reflecting market
surplus. conditions. While they can correct balance of payments
(B) Receipts equal expenditures, resulting in neither imbalances and reduce the need for extensive reserves,
deficit nor surplus. they do not guarantee long-term stability, which is
(C) Government spends nothing on capital formation. better associated with fixed or managed exchange rates.
(D) Government only spends on revenue items,
ignoring capital items. 37. Identify the correct statements about a fixed exchange


Ans rate system:
1. It provides greater certainty in international trade.
(B) Receipts equal expenditures, resulting in neither 2. The central bank intervenes to maintain the set
deficit nor surplus. rate.
A balanced budget is achieved when government 3. It automatically adjusts to supply-demand
revenues match total expenditures. This stands in conditions with no official action.
contrast to surplus budgets, where revenues exceed 4. It can require significant foreign exchange reserves
expenditures, and deficit budgets, where expenditures to defend the peg.
exceed revenues. (A) 1 and 2 only
35. Revenue Deficit vs. Fiscal Deficit can be differentiated (B) 1, 2, and 4 only
as follows: (C) 2, 3, and 4 only
(A) Revenue deficit is total expenditure minus total (D) 1 and 3 only
receipts, while fiscal deficit is only short-term

Ans
borrowings. (B) 1, 2, and 4 only
(B) Revenue deficit pertains to revenue account items, Fixed exchange rates offer stability (1) but require central
while fiscal deficit covers total budgetary deficits bank intervention (2) and substantial reserves (4). They
(expenditure – non-borrowed receipts). do not automatically adjust to market conditions; that
(C) They represent the same concept, used characteristic belongs to flexible exchange rate regimes.
interchangeably. Thus statement 3 is incorrect.
(D) Fiscal deficit arises solely from capital expenditure
overruns, while revenue deficit arises solely from 38. Assertion (A) : A country’s balance of payments must
capital receipts shortfall. always balance.


Ans Reason (R) : The current account surplus or deficit is
exactly offset by the capital account flows and changes

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 PRACTICE PAPER 18

in reserves.

Direction :Carefully read the case study provided and then
(A) Both (A) and (R) are true, and (R) is the correct thoroughly answer the subsequent five questions.
explanation. “In a small town, the local government introduced a
(B) Both (A) and (R) are true, but (R) is not the correct rationing system for cooking oil after a severe supply
explanation. disruption caused by poor harvests. Under the system,
(C) (A) is true, (R) is false. each household receives coupons entitling them to a
(D) (A) is false, (R) is true. fixed quantity at a below-market price, aiming to ensure


Ans equitable distribution. The supply shortage pushed up
the market price for cooking oil, making it unaffordable
(A) Both (A) and (R) are true, and (R) is the correct for some families. Consequently, black-market activities
explanation. emerged where coupons are sold, and cooking oil is
The balance of payments is a double-entry record. resold at higher prices. Critics argue that rationing leads
Any current account imbalance is compensated by to inefficiencies, encourages illegal trade, and fails to
corresponding capital flows or official reserve changes, eliminate the shortage. Others believe it has protected
ensuring that overall payments and receipts tally, so the vulnerable households from excessive price spikes. The
BoP always balances. debate continues on whether the rationing system should
39. In the balance of payments, unilateral transfers refer to: remain or be replaced by other policy interventions.”
(A) Transactions involving tangible goods 41. What is the primary reason behind introducing the
(B) Inflow or outflow of capital that must be repaid rationing system for cooking oil?
(C) One-way transactions such as gifts, remittances, (A) To promote exports of cooking oil
and grants (B) To ensure each household can access cooking oil
(D) Imports of goods with deferred payment despite supply shortages
arrangements (C) To discourage consumption of cooking oil entirely


Ans (D) To introduce new government taxes on oil
(C) One-way transactions such as gifts, remittances, and purchases
grants

Ans
Unilateral transfers include unrequited receipts or (B) To ensure each household can access cooking oil
payments, like personal remittances, foreign aid, or despite supply shortages
grants. They do not involve a quid pro quo transaction The case explicitly states that the rationing system aims
and thus do not require repayment or reciprocal flow in to distribute limited cooking oil fairly at below-market
goods or services. prices, ensuring that even families with lower incomes
40. Which of the following statements accurately describes can afford the essential commodity during shortage. (47
disequilibrium in the balance of payments? words)
(A) It only arises from fluctuations in foreign exchange 42. Which unintended outcome emerged due to the
rates. rationing system?
(B) It indicates that the sum of current account and (A) All consumers purchased cooking oil legally at
capital account is not zero. equilibrium price
(C) It is permanent and cannot be corrected by any (B) Increased production of cooking oil domestically
policy measures. (C) Black-market activities where coupons and oil are
(D) It is synonymous with cyclical unemployment. traded at higher prices


Ans (D) Complete elimination of the shortage problem
(B) It indicates that the sum of current account and

Ans
capital account is not zero. (C) Black-market activities where coupons and oil are
Disequilibrium in the BoP occurs when total outflows traded at higher prices
and inflows across the current and capital accounts The passage describes illegal sales of both the ration
don’t balance. This can be remedied by policy measures, coupons and cooking oil at elevated prices, highlighting
exchange rate adjustments, or changes in foreign the black market as an unintended consequence of price
reserves.

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control and coupon distribution under rationing. (46 might be priced out due to rising cooking oil costs. (44
words) words)

43. The fundamental market problem prompting rationing

Direction :Carefully read the case study provided and then
in the town is: thoroughly answer the subsequent five questions.
(A) Overproduction leading to surplus stocks “The central bank of Darvista, concerned about rising
(B) Supply disruption leading to higher prices and inflation rates, decides to pursue a contractionary
potential scarcity monetary policy. It increases the policy rate and conducts
(C) High consumer incomes driving artificial scarcity open market operations to reduce the money supply.
(D) Excess government supply overshadowing demand Commercial banks, facing higher borrowing costs, become


Ans cautious in extending loans to businesses and households.
Consumer spending and investment activities start to
(B) Supply disruption leading to higher prices and slow, leading to concerns about reduced economic growth.
potential scarcity Exports, however, become slightly more competitive if
The case notes a poor harvest caused supply disruptions, the currency depreciates due to lower capital inflows.
raising cooking oil prices and putting financial strain Some critics argue that the contractionary stance may
on households. This shortage scenario led the local overshoot, dragging the economy toward a recession. The
government to implement rationing to prevent severe central bank insists that controlling inflation is essential
inequitable distribution. (45 words) for long-term stability, even if it temporarily curbs growth.
44. Critics argue that rationing fails to eliminate shortages The policy’s success depends on balancing price stability
primarily because: with sustainable output.”
(A) It permanently lowers the market price 46. What is the main objective behind Darvista’s
(B) It ensures wealthier families pay more taxes contractionary monetary policy?
(C) It creates inefficiencies and black markets without (A) To expand consumer demand and raise inflation
increasing actual supply further
(D) It entirely erodes consumer demand (B) To lower inflation by reducing money supply and


Ans curbing credit growth
(C) It creates inefficiencies and black markets without (C) To encourage banks to lend more to businesses
increasing actual supply (D) To increase household purchasing power through
Rationing allocates limited quantities but does not subsidized loans
address the root cause of insufficient supply. Imposing

Ans
a below-market price can encourage black markets, (B) To lower inflation by reducing money supply and
distort incentives, and perpetuate shortages rather than curbing credit growth
fostering an increase in production or imports. (48 The text explicitly states the central bank is worried
words) about inflation, prompting higher policy rates and open
45. What do supporters of the rationing system emphasize? market operations to restrain credit availability, thereby
(A) It allows higher market prices to ration demand aiming to stabilize prices. (41 words)
automatically 47. Which side effect might arise from the contractionary
(B) It has prevented vulnerable groups from bearing policy?
the brunt of price spikes (A) Increased inflation and overheated economic
(C) It prohibits all sales of cooking oil growth
(D) It encourages overconsumption and abundance (B) Enhanced consumer spending and investment


Ans (C) Possible slowdown in economic growth
(B) It has prevented vulnerable groups from bearing the (D) Unlimited availability of cheap credit to borrowers
brunt of price spikes

Ans
Despite its drawbacks, proponents highlight that by (C) Possible slowdown in economic growth
setting a below-market price and allocating coupons, By tightening the money supply and raising borrowing
the system protects low-income families who otherwise costs, businesses and households reduce expenditure,

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 PRACTICE PAPER 18

possibly slowing economic activity and risking lower The passage clearly states that the central bank prioritizes
GDP growth. This trade-off is commonly associated controlling inflation for the sake of long-term stability,
with contractionary measures. (43 words) acknowledging that short-term slowdown in growth
may be a necessary trade-off for achieving stable prices.
48. How might currency depreciation occur during this (42 words)
policy?
(A) Lower interest rates in Darvista attract massive

*************
capital inflows
(B) Exporters purchase foreign currency to invest
abroad
(C) High policy rates and reduced capital inflows can
weaken the currency’s value
(D) Government imposes heavy import tariffs


Ans
(C) High policy rates and reduced capital inflows can
weaken the currency’s value
Contractionary monetary policy can deter some
foreign investments, as higher rates reduce domestic
demand and perceived returns might shift capital flows.
Consequently, reduced capital inflows can pressure
the domestic currency downward in foreign exchange
markets. (50 words)

49. Critics fear ‘overshooting’ of the policy, implying:

(A) It may not lower inflation at all
(B) Prices may drop to zero overnight
(C) Tightening might be excessive, driving the economy
into a recession
(D) The central bank will drastically expand the money
supply


Ans
(C) Tightening might be excessive, driving the economy
into a recession
Overshooting refers to concerns that the contractionary
stance could become too restrictive, reducing spending
and investment so significantly that it results in negative
growth or recession, beyond merely cooling inflationary
pressures. (42 words)

50. What does the central bank consider crucial for long-
term economic stability?
(A) Persistent double-digit inflation
(B) Allowing unlimited credit expansion
(C) Maintaining price stability, even at the cost of
temporarily reduced growth
(D) Abandoning all forms of monetary control


Ans
(C) Maintaining price stability, even at the cost of
temporarily reduced growth

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page 190 CUET UG Economics

PRACTICE PAPER 19

1. What is the most accurate definition of Microeconomics? (D) Why to produce

(A) It deals with aggregate economic variables of a The central problems of an economy concern deciding
nation what to produce, how to produce, and for whom to
(B) It studies the behavior of individual units and produce using scarce resources. “Why to produce” is not
markets conventionally identified as part of these fundamental
(C) It addresses governmental policies for all resource allocation issues.
households
4. Which statement accurately contrasts Microeconomics
(D) It focuses solely on unemployment and inflation
with Macroeconomics?


Ans (A) Only microeconomics uses abstract models
(B) It studies the behavior of individual units and (B) Macroeconomics is unconcerned with
markets unemployment levels
Microeconomics studies how individual consumers or (C) Microeconomics focuses on individual markets,
firms make decisions about allocating limited resources. whereas macroeconomics looks at aggregate
It deals with price-output determination of a single variables
firm or an individual consumer’s choices, rather than (D) Microeconomics exclusively analyzes government
large-scale economic variables like national income spending
or inflation. Hence, it focuses on individual units and

Ans
markets.
(C) Microeconomics focuses on individual markets,
2. Under which condition does a consumer reach whereas macroeconomics looks at aggregate variables
equilibrium using the Utility Approach with a single Microeconomics examines decision-making by
commodity? individuals, households, and firms in specific markets,
(A) When MU is zero while macroeconomics studies broader economic
(B) When MU is rising aggregates such as national income, overall price levels,
(C) When MU equals price and total employment. Both fields use models, but differ
(D) When TU is diminishing in scale and scope.


Ans 5. Which of the following is NOT an assumption of the
(C) When MU equals price Production Possibility Curve (PPC)?
In the single-commodity utility approach, consumer (A) Resources are fully employed
equilibrium occurs where the marginal utility (MU) (B) Technology remains constant
of the commodity equals its price. At that point, the (C) Resources have the same efficiency in producing all
consumer attains maximum satisfaction given the goods
budget constraint, having no incentive to either increase (D) Resources are limited
or reduce the quantity of that commodity.

Ans
3. Which of the following is NOT one of the central (C) Resources have the same efficiency in producing all
problems of an economy? goods
(A) What to produce The PPC assumes full employment of limited resources
(B) How to produce and constant technology. However, it does not assume
(C) For whom to produce that resources are equally efficient in all uses. Typically,
(D) Why to produce as one good’s production expands, opportunity costs


Ans increase because resources differ in suitability.

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 PRACTICE PAPER 19

6. Which scenario best illustrates the concept of 9. Match the following concepts (Column I) with their
opportunity cost? descriptions (Column II):
(A) A producer sets a product’s price above cost
Column I Column II
(B) A student must choose between studying or playing
a sport A Cardinal utility 1 Utility that can be measured
(C) A government issues new currency notes in numbers
(D) A factory invests in advanced machinery with no B Ordinal utility 2 Utility ranked by preference
alternatives C TU 3 Sum of marginal utilities


Ans D MU 4 Additional utility from one
more unit
(B) A student must choose between studying or playing
a sport Options:
Opportunity cost is the highest-valued alternative (A) A-2, B-1, C-3, D-4
forgone when making a decision. By choosing to study (B) A-1, B-2, C-4, D-3
over playing sports, the student sacrifices leisure time (C) A-1, B-2, C-3, D-4
and potential enjoyment, demonstrating the trade-off in (D) A-2, B-3, C-1, D-4
allocating limited time resources.

Ans
7. Which method measures price elasticity of demand by (C) A-1, B-2, C-3, D-4
examining total spending on the product at different Cardinal utility (A) is utility measured in numbers (1).
prices? Ordinal utility (B) is utility ranking (2). Total utility (C)
(A) Percentage method is the sum of marginal utilities (3). Marginal utility (D)
(B) Total expenditure method is the additional utility from one extra unit (4).
(C) Revenue ratio method
10. Match the concept of demand elasticity (Column I) with
(D) Geometric method
its characteristic (Column II):


Ans
Column I Column II
(B) Total expenditure method
A. Elastic demand 1. Percentage change in
The total expenditure (or outlay) method evaluates how
quantity is less than price
total spending changes as price changes. If price and
change
total expenditure move inversely, demand is elastic; if
they move together, demand is inelastic; if there is no B. Inelastic 2. Price and total expenditure
change, demand is unitary elastic. demand move in opposite
directions
8. Arrange these steps of consumer equilibrium under the C. Unitary elastic 3. Percentage change in
two-commodity utility approach in chronological order: quantity equals price
1. Equalizing MUx/Px and MUy/Py change
2. Calculating marginal utilities D. Perfectly elastic 4. Horizontal demand curve
3. Choosing the optimal combination
4. Checking budget constraint Options:
(A) 2 – 4 – 1 – 3 (A) A-2, B-1, C-3, D-4
(B) 4 – 2 – 3 – 1 (B) A-1, B-2, C-3, D-4
(C) 2 – 1 – 4 – 3 (C) A-3, B-1, C-2, D-4
(D) 1 – 2 – 3 – 4 (D) A-1, B-4, C-2, D-3


Ans


Ans
(A) 2 – 4 – 1 – 3 (A) A-2, B-1, C-3, D-4
First, the consumer calculates marginal utilities for Elastic demand (A) makes price and total expenditure
both goods (2), checks the budget constraint (4), then move inversely (2). Inelastic demand (B) has a smaller
ensures MUx/Px = MUy/Py (1), and finally chooses the quantity change than price change (1). Unitary elasticity
combination that maximizes satisfaction (3). (C) means equal percentage changes (3). Perfectly
elastic (D) is a horizontal demand curve (4).

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11. Match the following regarding supply concepts (Column Column I Column II
I) with their definitions (Column II):
A Total revenue 1 Revenue per unit of
Column I Column II (TR) output
A Market supply 1 Summation of B Average revenue 2 Change in total revenue
individual firm supplies from one more unit sold
B Shift in supply 2 Supply curve moves due C Marginal revenue 3 Marginal revenue (MR)
to non-price factor D AR = Price in 4 AR = Price in which?
C Movement along 3 Change in quantity which?
supplied due to price Options:
D Price elasticity 4 Responsiveness of (A) A-4, B-1, C-2, D-3
supply to price changes (B) A-1, B-2, C-3, D-4
Options: (C) A-2, B-4, C-3, D-1
(A) A-1, B-2, C-4, D-3 (D) A-3, B-4, C-2, D-1
(B) A-1, B-2, C-3, D-4

Ans
(C) A-4, B-3, C-1, D-2
(A) A-4, B-1, C-2, D-3
(D) A-2, B-1, C-3, D-4
Total revenue = price × quantity (A-4). Average


Ans revenue = TR ÷ quantity (B-1). Marginal revenue is the
(B) A-1, B-2, C-3, D-4 increment in total revenue from selling one additional
Market supply (A) is the sum of all firms’ supplies (1). A unit (C-2). In perfect competition, AR = price (D-3).
shift in supply (B) occurs due to non-price determinants
14. Which combination of the following statements is
(2). Movement along the supply curve (C) reflects
correct regarding returns to scale?
changes in price (3). Price elasticity (D) measures
1. Refers to changes in output when all inputs change
supply’s responsiveness to price (4).
2. Short-run concept
12. Match the following costs (Column I) with their nature 3. Includes increasing, constant, and decreasing
(Column II): returns
4. Involves only labor as a variable factor
Column I Column II (A) 1 and 3
A Fixed cost 1 Does not vary with output (B) 2 and 4
B Variable cost 2 Rises with increased (C) 1, 2, and 3
production (D) 1, 3, and 4
C Average cost 3 Total cost ÷ quantity

Ans
D Marginal cost 4 Additional cost for one (A) 1 and 3
more unit Returns to scale analyze how output changes when
Options: all factors are varied proportionally (1). They can be
(A) A-2, B-1, C-4, D-3 increasing, constant, or decreasing (3). Returns to
(B) A-1, B-2, C-3, D-4 scale is a long-run concept, not a short-run one, and it
(C) A-2, B-4, C-1, D-3 involves more than one variable input.
(D) A-1, B-4, C-2, D-3
15. Regarding the supply curve, which statements are true?


Ans 1. It is upward sloping in perfect competition
(B) A-1, B-2, C-3, D-4 2. It is vertical in a perfectly inelastic supply situation
Fixed cost remains constant regardless of output (1). 3. It shifts with technological changes
Variable cost changes with output (2). Average cost 4. It shows price elasticity of demand
equals total cost divided by quantity (3). Marginal cost (A) 1, 2, and 3
is the added cost for producing one more unit (4). (B) 2, 3, and 4
(C) 1 and 4
13. Match the revenue concepts (Column I) with their (D) 1, 2, 3, and 4
definitions (Column II):

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 PRACTICE PAPER 19

Ans (A) 1, 2, and 3

(A) 1, 2, and 3 (B) 2, 3, and 4
The supply curve generally slopes upward (1). If supply (C) 1 and 4
is perfectly inelastic, it becomes vertical (2). Non-price (D) 1, 2, 3, and 4
determinants like technology can shift it (3). Price

Ans
elasticity of demand (4) relates to demand, not supply.
(A) 1, 2, and 3
16. Which set of statements about Perfect Competition is Price floors are government-imposed minimum
correct? prices aimed at protecting producers (3). If set above
1. Large number of buyers and sellers equilibrium, they can create surpluses (2). They do not
2. Differentiated products necessarily eliminate shortages but often lead to excess
3. Free entry and exit supply.
4. Firms are price makers
19. Assertion (A) : In the short run, at least one factor of
(A) 1 and 4
production is fixed.
(B) 2 and 3
Reason (R) : The firm can vary all inputs proportionately
(C) 1 and 3
in the short run.
(D) 2 and 4
(A) Both (A) and (R) are true, and (R) is the correct


Ans explanation
(C) 1 and 3 (B) Both (A) and (R) are true, but (R) is not the correct
Perfect competition features many buyers and sellers (1) explanation
with free entry and exit (3). Products are homogeneous, (C) (A) is true, but (R) is false
not differentiated, and firms are price takers rather than (D) (A) is false, but (R) is true
price makers in such a market structure.

Ans
17. Regarding Price Determination under Perfect (C) (A) is true, but (R) is false
Competition, which statements hold true? In the short run, there is at least one fixed input.
1. Market demand and supply set the equilibrium The reason is incorrect because varying all factors
price proportionately applies to the long run, not the short
2. Individual firm’s demand is perfectly elastic run. Hence, (A) is true, (R) is false.
3. A single firm can significantly influence price
20. Assertion (A) : The average product (AP) initially
4. Equilibrium price equals average revenue for each
increases and then decreases.
firm
Reason (R) : Diminishing marginal returns set in
(A) 1, 2, and 4
eventually.
(B) 1 and 3
(A) Both (A) and (R) are true, and (R) is the correct
(C) 2 and 4
explanation
(D) 1, 2, 3, and 4
(B) Both (A) and (R) are true, but (R) is not the correct


Ans explanation
(A) 1, 2, and 4 (C) (A) is true, (R) is false
Perfectly competitive markets determine price by the (D) (A) is false, (R) is true
intersection of overall demand and supply (1). Each

Ans
firm faces a perfectly elastic demand curve (2). Firms
(A) Both (A) and (R) are true, and (R) is the correct
cannot influence price individually, and the equilibrium
explanation
price also equals AR (4).
Average product rises initially because of more efficient
18. Which statements about the concept of price floors are factor use, but then diminishes as the law of diminishing
correct? marginal returns takes effect. Hence, the assertion and
1. They set a legal minimum price the reason are both correct and logically connected.
2. They can lead to excess supply
21. Assertion (A) : If a perfectly competitive firm sells
3. They aim to protect producers
additional units, its total revenue will rise.
4. They always eliminate shortages
Reason (R) : Under perfect competition, price remains

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page 194 CUET UG Economics

constant regardless of the quantity sold. 24. What is the meaning of Marginal Propensity to
(A) Both (A) and (R) are true, and (R) is the correct Consume (MPC)?
explanation (A) The ratio of total consumption to total income
(B) Both (A) and (R) are true, but (R) is not the correct (B) The proportion of an additional unit of income
explanation spent on consumption
(C) (A) is true, (R) is false (C) The fraction of income saved after taxes
(D) (A) is false, (R) is true (D) The accumulated consumer expenditure over time


Ans

Ans
(A) Both (A) and (R) are true, and (R) is the correct (B) The proportion of an additional unit of income
explanation spent on consumption
In perfect competition, each firm is a price taker. As MPC measures the change in consumption when income
more units are sold at a constant price, total revenue changes by one unit. It is the fraction of additional
increases proportionally. Thus, the assertion is accurate, income that is used for consumption, distinguishing it
and the reason correctly explains it. from total or average consumption measures.

22. Arrange these steps for calculating National Income by 25. What is the formula for the investment multiplier in a
the Value Added method in chronological sequence: two-sector economy?
1. Identify value of output (A) 1 / (1 - MPC)
2. Subtract intermediate consumption (B) MPC / MPS
3. Sum across all producing units (C) MPS / MPC
4. Classify production sectors (D) 1 - MPC
(A) 4 – 1 – 2 – 3

Ans
(B) 1 – 2 – 4 – 3
(C) 1 – 4 – 3 – 2 (A) 1 / (1 - MPC)
(D) 4 – 1 – 3 – 2 The investment multiplier is the reciprocal of the
marginal propensity to save (MPS), or 1 / (1 – MPC).


Ans This indicates how an initial change in investment
(A) 4 – 1 – 2 – 3 spending can lead to a magnified change in aggregate
First, classify producing sectors (4), determine the value income.
of output in each (1), subtract intermediate consumption
26. Why does an economy experience deficient demand?
to find value added (2), and sum the values added across
all units (3). (A) Because supply curves shift rightward
(B) Because aggregate demand falls short of aggregate
23. Arrange these steps in the two-sector model of income supply at full employment
determination in chronological order: (C) Because price level drops too steeply
1. Determine equilibrium where S = I (D) Because government runs a budget surplus
2. Identify consumption and saving functions

Ans
3. Determine aggregate demand
4. Compute the level of national income (B) Because aggregate demand falls short of aggregate
(A) 2 – 3 – 1 – 4 supply at full employment
(B) 3 – 2 – 4 – 1 Deficient demand occurs when the total spending in the
(C) 2 – 1 – 3 – 4 economy is insufficient to purchase its full-employment
(D) 1 – 4 – 3 – 2 level of output, leading to underutilized resources and
potential unemployment.


Ans
27. In which way does a central bank differ from a
(A) 2 – 3 – 1 – 4
Start by identifying consumption and saving functions commercial bank?
(2), determine aggregate demand (3), establish (A) Both issue currency for public use
equilibrium where saving equals investment (1), and (B) Central bank holds the cash reserves of commercial
finally find the corresponding level of national income banks
(4). (C) Both aim strictly for profit maximization
(D) Commercial banks supervise monetary policy

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 PRACTICE PAPER 19

Ans borrowing requirement to finance expenditures beyond

(B) Central bank holds the cash reserves of commercial what can be met through normal revenue.
banks
31. Which of the following is a component of the Capital
A central bank regulates the banking system, holds cash
Account in Balance of Payments?
reserves of commercial banks, and issues currency.
(A) Exports of goods
Commercial banks focus on deposit-taking and lending.
(B) Net unilateral transfers
Monetary policy is set and supervised by the central
(C) Foreign direct investment
bank, not commercial banks.
(D) Travel and tourism receipts
28. Which of the following is NOT a function of money?

Ans
(A) Medium of exchange
(C) Foreign direct investment
(B) Measure of value
FDI is recorded in the capital account as it involves
(C) Store of value
cross-border investments. Exports and travel receipts
(D) Replaces real production
belong to the current account, and unilateral transfers


Ans (e.g., remittances) also appear in the current account.
(D) Replaces real production
32. Why might a country adopt a flexible exchange rate
Money serves as a medium of exchange, unit of account
system?
(measure of value), and store of value. It does not replace
(A) To maintain a fixed official rate
the actual production of goods and services but rather
(B) To eliminate currency fluctuations
facilitates trade and valuation in the economy.
(C) To allow market forces of demand and supply to
29. Which objective best describes why a government determine exchange rate
presents a budget each fiscal year? (D) To forbid currency from being traded globally
(A) To showcase the deficit only

Ans
(B) To restrict aggregate expenditure
(C) To allow market forces of demand and supply to
(C) To provide a detailed financial plan of revenue and
determine exchange rate
expenditure
In a flexible (floating) exchange rate regime, the
(D) To determine the foreign exchange rate
currency’s value is set primarily by supply and demand


Ans in the foreign exchange market, reducing the need for
(C) To provide a detailed financial plan of revenue and government intervention and large reserve holdings.
expenditure
33. Which statement differentiates a revenue receipt from a
A government budget outlines planned revenue sources
capital receipt in the government budget?
and proposed expenditures (e.g., infrastructure, social
(A) Revenue receipt always creates liability
programs) for the upcoming fiscal year. It is a key
(B) Capital receipt never involves borrowings
policy tool for allocating funds and guiding economic
(C) Revenue receipt neither creates liabilities nor
priorities.
reduces assets
30. Which deficit refers to the shortfall in government’s total (D) Capital receipt neither creates liabilities nor reduces
expenditure over total receipts excluding borrowing? assets
(A) Budget deficit

Ans
(B) Revenue deficit
(C) Revenue receipt neither creates liabilities nor
(C) Fiscal deficit
reduces assets
(D) Primary deficit
Revenue receipts (taxes, fees) do not increase


Ans government liabilities or decrease assets. Capital receipts
(C) Fiscal deficit include borrowings, loans, or disinvestment proceeds,
The fiscal deficit is the gap between the government’s altering the government’s asset or liability position.
total expenditure (including capital outlays) and
34. Which of the following is NOT a monetary policy
total receipts (excluding borrowings). It indicates the
instrument of the central bank?
(A) Bank rate

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(B) Open market operations

Ans

(C) Credit creation by commercial banks (C) A fixed system pegs currency to another or to gold
(D) Reserve ratio requirement In a fixed exchange rate regime, the government or


Ans central bank ties the currency to another currency or
gold, intervening as needed to maintain the peg. A
(C) Credit creation by commercial banks
flexible system leaves the rate to market forces.
Central bank instruments include the bank rate,
open market operations, and reserve requirements. 38. Which of the following is NOT typically included in the
Commercial banks are the entities that directly create Current Account of the BoP?
credit via lending; the central bank influences but does (A) Merchandise exports
not itself conduct standard loan creation. (B) Income from investments abroad
(C) Transfer payments
35. Which of these refers to the situation when government
(D) Foreign direct investment flows
spending exceeds government revenue?
(A) Surplus budget

Ans
(B) Deficit budget (D) Foreign direct investment flows
(C) Balanced budget The Current Account consists of trade in goods and
(D) Zero-based budget services, investment income, and unilateral transfers.


Ans Foreign direct investment is recorded in the Capital
Account, reflecting cross-border ownership of assets.
(B) Deficit budget
A deficit budget arises when government expenditure 39. What does a surplus in the Balance of Payments
exceeds revenue collections, resulting in insufficient indicate?
funds to cover spending. The government may borrow (A) The country’s outflow of foreign exchange exceeds
or adjust taxation. By contrast, a surplus budget has inflow
higher revenue than expenditure, and a balanced budget (B) The country’s inflow of foreign exchange exceeds
equates revenues and expenditures exactly. outflow
(C) No change in the country’s foreign exchange
36. What is a ‘Balance of Payments’ (BoP)?
reserves
(A) A record of only a nation’s visible trade
(D) Excessive borrowing from overseas
(B) A statement recording economic transactions
between a country and the rest of the world

Ans
(C) A ledger for domestic market transactions (B) The country’s inflow of foreign exchange exceeds
(D) A measure of purely financial flows within a nation outflow


Ans A BoP surplus means the economy’s receipts from
abroad—via exports, transfers, or other inflows—are
(B) A statement recording economic transactions
larger than its payments, often increasing official foreign
between a country and the rest of the world
exchange reserves.
The BoP details all international transactions—
both current (goods, services, transfers) and capital 40. Which best explains a ‘deficit’ in the current account of
(investments, loans)—between residents of a country the Balance of Payments?
and the rest of the world, providing a comprehensive (A) Higher earnings from exports than payments for
external account. imports
(B) Larger outflow of unilateral transfers
37. Which statement differentiates a fixed exchange rate
(C) More total imports of goods and services than total
from a flexible exchange rate?
exports
(A) Under a fixed system, market forces dictate the
(D) Increased foreign investment in domestic stocks
exchange rate
(B) Under a flexible system, the central bank determines

Ans
the exact rate (C) More total imports of goods and services than total
(C) A fixed system pegs currency to another or to gold exports
(D) A flexible system eliminates currency trading

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 PRACTICE PAPER 19

A current account deficit arises when imports of goods reduce purchases at higher prices, leading to stock
and services, plus net transfers and net income paid, accumulation.
exceed export and other current inflows, resulting in
43. What does the unsold wheat stock primarily indicate in
net outflow.
this scenario?


Direction :Carefully read the case study provided and then (A) Clear evidence of stable demand
thoroughly answer the subsequent five questions. (B) A shortage of wheat for consumers
In a small farming community, the local government (C) Inefficiency resulting from a price floor
introduced a price floor on wheat to protect farmers’ (D) Successful rationing system
incomes. Over the last year, wheat production rose from

Ans
500 to 800 tonnes due to favorable weather and increased
seed subsidies. However, market demand remained at 500 (C) Inefficiency resulting from a price floor
tonnes. As a result, unsold wheat stocks accumulated in The surplus stock reveals that a minimum price
farmers’ warehouses. The administration attempted to above equilibrium can cause oversupply and resource
purchase surplus stocks, but budget constraints limited misallocation. Farmers produce more than consumers
procurement. Despite the price floor ensuring a higher will buy at that inflated price, leading to potential
minimum selling price, many farmers felt the policy led wastage and storage issues.
to waste and inefficiency. Some economists argued that 44. Why did crop diversification not occur significantly,
resources could have been diverted to alternative crops according to the passage?
or livestock, but local traditions and limited knowledge (A) The government banned diversified crops
hindered crop diversification. Food security concerns were (B) Price floors applied to all crops equally
not addressed by the policy. Furthermore, consumer prices (C) Local traditions and limited knowledge hindered
for wheat increased, affecting low-income households’ shifts
ability to purchase essential staples. (D) Lack of consumer interest in alternative food items
41. Which primary objective did the local government aim

Ans
to achieve with the price floor? (C) Local traditions and limited knowledge hindered
(A) Reduce wheat production shifts
(B) Protect farmers’ incomes Despite economists advocating alternative crops or
(C) Encourage crop diversification livestock, cultural practices and insufficient know-how
(D) Lower consumer prices made farmers stick to wheat. Without support for new


Ans crops, diversification remained minimal even amidst
(B) Protect farmers’ incomes surpluses.
Price floors often aim to safeguard producers when 45. Which stakeholder group might be adversely affected by
market prices are too low. By imposing a minimum higher wheat prices under a price floor?
selling price above the equilibrium, the government (A) Middle-income farmers
ensures farmers receive higher earnings per unit, though (B) Government officials
this may create surpluses. (C) Low-income consumers
42. Which direct effect did the price floor likely have on the (D) Agricultural equipment manufacturers
wheat market?

Ans
(A) Market equilibrium quantity increased (C) Low-income consumers
(B) Surplus of wheat emerged A price floor raises the market price, causing low-
(C) Demand exceeded supply income consumers to face costlier staple foods. Because
(D) Government deregulated the wheat sector wheat is a basic necessity, vulnerable households bear


Ans higher financial burdens and potential food insecurity.
(B) Surplus of wheat emerged

Direction :Carefully read the case study provided and then
With a price floor above the equilibrium, quantity thoroughly answer the subsequent five questions.
supplied exceeds quantity demanded, creating an unsold In Country X, the domestic currency’s value steadily
surplus. Farmers boost production, but consumers depreciated against major world currencies over one

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fiscal year. Exports of textile goods surged, buoyed by costs

competitive prices abroad, but the cost of importing (D) Stable exchange rates under all conditions
essential machinery spiked. Local manufacturers struggled

Ans
to finance new equipment, slowing industrial growth.
Meanwhile, foreign investors found assets cheaper, raising (C) Pressure on BoP due to continued high import costs
direct investments in select sectors. Domestic inflation If exports fail to offset costly imports, the balance of
rose as imported consumer goods and raw materials payments could deteriorate, draining foreign exchange
became costlier. Policy analysts argued that a moderately reserves. Persistent trade deficits, driven by expensive
flexible exchange rate let market forces guide currency imports, can destabilize the currency further.
movements, but warned of possible balance of payments 49. Which factor contributed to increased foreign direct
pressure if exports failed to keep pace. The central bank investment as mentioned?
considered partial intervention to stabilize the currency (A) Cheaper domestic assets due to depreciation
while retaining trade advantages. Moreover, consumers (B) Strict controls on capital flows
faced higher prices for imported electronics, sparking (C) Rising domestic interest rates
debates over living costs. (D) Stable currency pegged to gold
46. Which immediate effect of currency depreciation is

Ans
highlighted in the passage? (A) Cheaper domestic assets due to depreciation
(A) Decrease in export revenues When the domestic currency loses value, foreign
(B) Lower foreign direct investment investors can acquire local assets at lower relative prices.
(C) Surge in textile exports due to price competitiveness This incentivizes higher FDI inflows, especially in
(D) Reduced domestic inflation sectors showing growth potential.


Ans
50. Which sector of consumers likely suffered from the
(C) Surge in textile exports due to price competitiveness depreciation, based on the passage?
Depreciation makes exports cheaper in foreign markets, (A) Textile exporters
boosting demand. As the domestic currency weakens, (B) Local farmers
foreign buyers can purchase textiles at relatively lower (C) Importers of electronic goods
costs, increasing export volumes and revenues. (D) Foreign investors
47. Why did local manufacturers struggle to acquire new

Ans
machinery? (C) Importers of electronic goods
(A) Import tariffs were eliminated Depreciation raises the domestic cost of imported items,
(B) Machinery became cheaper after depreciation including electronics. Consumers reliant on foreign-
(C) The central bank prohibited equipment imports made products thus pay higher prices, contributing
(D) The cost of importing machinery rose due to to inflationary pressure and debates over rising living
currency depreciation expenses.


Ans


*************
(D) The cost of importing machinery rose due to
currency depreciation
A weaker domestic currency raises the domestic price
of imports, making machinery from abroad more
expensive. Manufacturers thus face higher input costs
and financing challenges, delaying technological
upgrades.

48. What potential challenge might the balance of payments

face if exports do not keep increasing?
(A) A buildup of foreign currency reserves
(B) Excessive tax revenues
(C) Pressure on BoP due to continued high import

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 PRACTICE PAPER 20

PRACTICE PAPER 20

1. What does ‘opportunity cost’ specifically refer to in 4. How does the Utility Approach differ from the
economic decision-making? Indifference Curve Approach to consumer equilibrium?
(A) The cost of all goods produced (A) Utility approach uses ordinal measurement
(B) The next best alternative forgone (B) Indifference curve approach uses cardinal
(C) The total money spent on production measurement
(D) The sum of consumer and producer surplus (C) Utility approach uses cardinal measurement of


Ans satisfaction
(D) Neither approach considers marginal utility
(B) The next best alternative forgone
Opportunity cost is the value of the second-best choice

Ans
that one sacrifices when choosing the most preferred (C) Utility approach uses cardinal measurement of
option. It underscores the trade-offs entailed by limited satisfaction
resources and competing uses. The Utility (cardinal) Approach assumes numerical
units of satisfaction (utils), whereas the Indifference
2. Which curve demonstrates the various combinations of Curve Approach uses ordinal rankings, reflecting
two goods that an economy can produce with available preferences without assigning absolute utility values.
resources and technology?
(A) Demand curve 5. Which of the following is NOT a determinant of market
(B) Laffer curve demand?
(C) Production Possibility Curve (A) Consumer’s income
(D) Supply curve (B) Price of related goods


Ans (C) Tastes and preferences
(D) Producer’s average cost
(C) Production Possibility Curve
The PPC shows the maximum possible production

Ans
bundles of two goods that an economy can create using (D) Producer’s average cost
its resources and technology efficiently. It illustrates Market demand is driven by consumer factors such as
trade-offs and opportunity costs. incomes, tastes, and prices of substitutes/complements.
Producer costs primarily affect supply rather than
3. What shape does the typical Production Possibility demand.
Curve take when resources are not equally efficient in
producing all goods? 6. Which best describes ‘price elasticity of demand’?
(A) Straight line (A) The ratio of percentage change in quantity
(B) Convex to the origin demanded to percentage change in price
(C) Backward bending (B) The difference between total utility and marginal
(D) Concave to the origin utility


Ans (C) The responsiveness of marginal utility to changes in
price
(D) Concave to the origin (D) The total revenue of the producer
A concave PPC arises because resources tend to be more
suitable for producing one good than another, leading

Ans
to increasing opportunity costs as production shifts (A) The ratio of percentage change in quantity demanded
between goods. to percentage change in price
Price elasticity of demand measures the sensitivity of
quantity demanded to price changes, computed by

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dividing the percentage change in quantity demanded (D) A-3, B-4, C-1, D-2
by the percentage change in price.

Ans
7. In the Total Outlay method, if an increase in price (B) A-2, B-1, C-3, D-4
leads to an increase in total expenditure, demand is Perfect competition involves many sellers with identical
considered . goods (A-2). A monopoly has a single seller (B-1).
(A) Price inelastic An oligopoly features a few dominant firms (C-3).
(B) Price elastic Monopolistic competition has many sellers with slightly
(C) Unit elastic differentiated products (D-4).
(D) Perfectly elastic
10. Match these cost concepts (Column I) with their


Ans definitions (Column II):
(A) Price inelastic
Column I Column II
Under the total outlay method, if total expenditure (price
× quantity) rises when price increases, it indicates that A Total Fixed Cost 1 Cost incurred even if
the percentage drop in quantity demanded is relatively output is zero
small, hence inelastic demand. B Total Variable 2 Cost that changes with
Cost output
8. Arrange in chronological order the steps for deriving C Average Total 3 Sum of TFC and TVC ÷
the supply curve from the Producer’s Equilibrium Cost output
(MC=MR) approach:
D Marginal Cost 4 Extra cost for producing
1. Identify MC and MR
one additional unit
2. Determine the profit-maximizing output
3. Plot MC above AVC as the supply curve Options:
4. Locate equilibrium where MC=MR (A) A-1, B-2, C-3, D-4
(A) 1 – 4 – 2 – 3 (B) A-4, B-1, C-2, D-3
(B) 4 – 1 – 2 – 3 (C) A-3, B-2, C-1, D-4
(C) 3 – 2 – 1 – 4 (D) A-2, B-1, C-4, D-3
(D) 1 – 2 – 4 – 3

Ans


Ans (A) A-1, B-2, C-3, D-4
(A) 1 – 4 – 2 – 3 TFC remains constant regardless of output (1). TVC
First, identify MC and MR (1). Next, find the point changes with output (2). Average total cost equals total
where MC=MR (4), which gives the profit-maximizing cost per unit (3). Marginal cost is the additional cost
output (2). Finally, the segment of MC above AVC forms incurred by producing one more unit (4).
the supply curve (3).
11. Match the following revenue terms (Column I) with
9. Match the following market structures (Column I) with their aspects (Column II):
one key feature (Column II): Column I Column II
Column I Column II A Average revenue (AR) 1 TR ÷ Q
A Perfect 1 Single seller B Marginal revenue (MR) 2 ∆TR ÷ ∆Q
competition C Total revenue (TR) 3 P×Q
B Monopoly 2 Many buyers and sellers, D Price in perfect 4 AR = MR = P
homogeneous product competition
C Oligopoly 3 Few large firms Options:
D Monopolistic 4 Many sellers, (A) A-3, B-2, C-1, D-4
comp differentiated product (B) A-1, B-4, C-3, D-2
Options: (C) A-1, B-2, C-3, D-4
(A) A-1, B-2, C-3, D-4 (D) A-2, B-1, C-4, D-3
(B) A-2, B-1, C-3, D-4

Ans
(C) A-4, B-3, C-2, D-1

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 PRACTICE PAPER 20

(C) A-1, B-2, C-3, D-4 output (2). Full employment (C) implies no involuntary
AR = TR/Q (1). MR = ∆TR/∆Q (2). TR = P × Q (3). unemployment (3). Involuntary unemployment (D)
Under perfect competition, AR = MR = Price (4). indicates people willing to work at existing wages
cannot find jobs (4).
12. Match the forms of market (Column I) with the nature
of demand curve faced by a firm (Column II): 14. Which combination of statements is true for Consumer
Equilibrium under the Indifference Curve Approach?
Column I Column II
1. MU is measured cardinally
A Perfect 1 Downward sloping, 2. Slope of indifference curve equals slope of budget
competition relatively inelastic line at equilibrium
B Monopoly 2 Perfectly elastic demand 3. Utility is measured ordinally
C Oligopoly 3 Kinked demand curve 4. Satisfaction is maximized when MRS = Price ratio
D Monopolistic 4 Downward sloping, (A) 1 and 2
comp relatively elastic (B) 2, 3, and 4
(C) 1, 3, and 4
Options:
(D) 1, 2, and 4
(A) A-2, B-1, C-3, D-4
(B) A-1, B-2, C-3, D-4

Ans
(C) A-3, B-4, C-1, D-2 (B) 2, 3, and 4
(D) A-4, B-3, C-2, D-1 The indifference curve approach measures utility


Ans ordinally (3). Consumer equilibrium is reached where
the marginal rate of substitution (MRS), or slope of the
(A) A-2, B-1, C-3, D-4
indifference curve, equals the price ratio (2,4). Cardinal
In perfect competition, the firm’s demand curve is
utility (1) is used in the utility approach.
perfectly elastic (2). A monopoly faces a downward-
sloping, relatively inelastic curve (1). Oligopoly often 15. Which statements about Producer’s Equilibrium under
exhibits a kinked demand (3). Monopolistic competition MC=MR are correct?
has a downward-sloping but more elastic demand curve 1. MC and MR intersect
(4). 2. MC curve is rising at equilibrium
3. AVC must be above MC
13. Match each concept (Column I) with its correct
4. The output is profit-maximizing
statement (Column II):
(A) 1, 2, and 4
Column I Column II (B) 2, 3, and 4
A Excess demand 1 Actual AD > potential (C) 1 and 3
output (D) 1, 2, 3, and 4
B Excess supply 2 Actual AD < potential

Ans
output (A) 1, 2, and 4
C Full employment 3 No involuntary Producer’s Equilibrium occurs where MC=MR (1),
unemployment with MC rising beyond that point (2), yielding profit-
D Involuntary 4 Willing workers can’t find maximizing output (4). Statement 3 is incorrect because
unemployment jobs at prevailing wage we typically look for MC to be above AVC in short-run
Options: supply, not AVC above MC.
(A) A-2, B-1, C-4, D-3 16. Which combination of statements about Perfect
(B) A-1, B-2, C-3, D-4 Competition is accurate?
(C) A-1, B-2, C-4, D-3 1. Firms sell identical products
(D) A-2, B-3, C-1, D-4 2. Firms have significant pricing power


Ans 3. There is freedom of entry and exit
(B) A-1, B-2, C-3, D-4 4. Demand curve for an individual firm is perfectly
Excess demand (A) means actual AD > potential elastic
output (1). Excess supply (B) arises if AD < potential (A) 1, 2, and 3

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(B) 1, 3, and 4 (B) Both (A) and (R) are true, but (R) is not the correct
(C) 2 and 4 explanation
(D) 1, 2, 3, and 4 (C) (A) is true, (R) is false


Ans (D) (A) is false, (R) is true

(B) 1, 3, and 4

Ans

Perfect competition entails identical (homogeneous) (C) (A) is true, (R) is false
products (1), free entry and exit (3), and a perfectly MC does intersect AC at its minimum. However, the
elastic demand curve for each firm (4). Firms have no explanation is reversed. If MC > AC, AC rises, and if
significant pricing power; they are price takers (2 is MC < AC, AC falls. Therefore, (A) is correct, but (R) is
false). incorrect.

17. Which statements about Monopoly are correct? 20. Assertion (A) : In perfect competition, a firm can sell
1. Single seller controls market any quantity at the market price.
2. Large number of buyers and sellers Reason (R) : The demand curve faced by a competitive
3. Firm is price taker firm is perfectly elastic.
4. Downward sloping demand curve (A) Both (A) and (R) are true, and (R) is the correct
(A) 1 and 4 explanation
(B) 2 and 3 (B) Both (A) and (R) are true, but (R) is not the correct
(C) 1, 2, and 4 explanation
(D) 1 and 2 (C) (A) is true, (R) is false


Ans (D) (A) is false, (R) is true

(A) 1 and 4

Ans

Monopoly features a single seller (1) with a downward (A) Both (A) and (R) are true, and (R) is the correct
sloping market demand curve (4). It does not have explanation
many sellers (2) nor is it a price taker (3) because it can In a perfectly competitive market, individual firms
set the price. are price takers, facing a perfectly elastic demand at
the prevailing market price. Hence, they can sell any
18. Which statements about price ceilings are valid? amount without influencing that price.
1. Set below equilibrium price
2. Aim to protect consumers 21. Assertion (A) : The law of diminishing returns applies
3. May cause shortages only in the short run.
4. Eliminate black markets entirely Reason (R) : In the short run, at least one factor of
(A) 1, 2, and 3 production is fixed.
(B) 2, 3, and 4 (A) Both (A) and (R) are true, and (R) is the correct
(C) 1, 3, and 4 explanation
(D) 1, 2, 3, and 4 (B) Both (A) and (R) are true, but (R) is not the correct


Ans explanation
(C) (A) is true, (R) is false
(A) 1, 2, and 3 (D) (A) is false, (R) is true
Price ceilings are established below the market
equilibrium to keep prices affordable, often leading to

Ans
shortages when quantity demanded exceeds quantity (A) Both (A) and (R) are true, and (R) is the correct
supplied. They do not eliminate black markets; in many explanation
cases, they can encourage them. Diminishing returns occur when more units of a
variable factor are added to a fixed factor. This is a short-
19. Assertion (A) : Marginal Cost always intersects Average run phenomenon because in the long run all factors can
Cost at its lowest point. vary.
Reason (R) : When MC is above AC, AC decreases, and
when MC is below AC, AC increases. 22. Order these steps to calculate National Disposable
(A) Both (A) and (R) are true, and (R) is the correct Income:
explanation 1. Calculate Net National Product at factor cost

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 PRACTICE PAPER 20

2. Add net current transfers from abroad (B) The difference between total income and total
3. Add consumption of fixed capital consumption
4. Add indirect taxes to get NNP at market price (C) The additional saving from an extra unit of income
(A) 1–4–3–2 (D) The ratio of consumption to income
(B) 4–3–1–2

Ans
(C) 1–2–3–4
(D) 1–4–2–3 (A) The ratio of total saving to total income
APS measures how much of total income is saved rather


Ans than spent. It differs from marginal propensity to save,
(A) 1 – 4 – 3 – 2 which is based on changes in income and saving.
First, find NNP at factor cost (1). Then add indirect
26. If the Marginal Propensity to Consume is 0.8, how large
taxes to convert it to market price (4). Add consumption
of fixed capital if moving from net to gross (3). Finally, is the investment multiplier in a two-sector model?
add net current transfers (2) to get National Disposable (A) 0.8
Income. (B) 1.25
(C) 2
23. Arrange these steps in measuring national income using (D) 5
the Income method:

Ans
1. Sum all factor incomes (wages, rent, interest, profit)
2. Identify relevant income components (D) 5
3. Make adjustments for depreciation and net factor The multiplier formula is 1 ÷ (1 – MPC). Here, 1 ÷ (1 –
income from abroad 0.8) = 1 ÷ 0.2 = 5. A given increment in investment thus
4. Arrive at Net National Income causes income to rise by five times that amount.
(A) 2 – 1 – 3 – 4 27. Which statement distinguishes ‘voluntary’ from
(B) 1 – 2 – 4 – 3 ‘involuntary’ unemployment?
(C) 2 – 3 – 1 – 4 (A) Voluntary unemployment arises from lack of jobs
(D) 4 – 3 – 2 – 1 (B) Involuntary unemployment occurs when


Ans individuals choose leisure over work
(A) 2 – 1 – 3 – 4 (C) Voluntary unemployment occurs when individuals
Identify which incomes to include (2), sum them up are unwilling to work at the prevailing wage
(1), make necessary adjustments for depreciation and (D) Involuntary unemployment indicates workers have
net factor income (3), and finally arrive at net national full control of wage setting
income (4).

Ans

24. What is ‘Aggregate Demand’ (AD) in macroeconomics? (C) Voluntary unemployment occurs when individuals
(A) The total demand of only households for consumer are unwilling to work at the prevailing wage
goods Voluntary unemployment happens when people opt out
(B) The sum of all individual demands in one market of employment at the current wage rate. Involuntary
(C) The total demand for all final goods and services in unemployment means individuals want to work at the
an economy going wage but cannot find jobs.
(D) The quantity demanded at a single price 28. Which of the following is NOT a goal of monetary


Ans policy?
(C) The total demand for all final goods and services in (A) Controlling inflation
an economy (B) Generating government revenue directly through
Aggregate Demand represents the entire planned taxes
expenditure on an economy’s output at different price (C) Ensuring financial stability
levels covering consumption, investment, government (D) Achieving moderate interest rates to support
purchases, and net exports. growth


Ans
25. What is the average propensity to save (APS)?
(A) The ratio of total saving to total income

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(B) Generating government revenue directly through (A) To accumulate foreign exchange reserves
taxes (B) To stimulate economic growth during recessionary
Monetary policy, conducted by the central bank, conditions
focuses on controlling inflation, maintaining stability, (C) To eliminate all forms of taxation
and influencing interest rates. Generating tax revenue is (D) To prevent any spending on public goods
the domain of fiscal policy, not monetary policy.

Ans
29. Which best describes the role of a central bank in the (B) To stimulate economic growth during recessionary
banking system? conditions
(A) Solely issuing private loans A deficit budget can serve as expansionary fiscal policy:
(B) Supervising and regulating commercial banks, and government spending exceeds revenues to boost
formulating monetary policy aggregate demand, potentially reducing unemployment
(C) Matching depositors with borrowers for maximum and reviving growth during an economic slump.
profit
(D) Removing all government influence on financial 33. Which statement distinguishes a revenue deficit from a
institutions fiscal deficit?
(A) Revenue deficit counts capital receipts


Ans (B) Fiscal deficit covers total expenditure minus total
(B) Supervising and regulating commercial banks, and receipts excluding borrowings
formulating monetary policy (C) Revenue deficit includes entire government
A central bank ensures financial stability by overseeing borrowing
commercial banks, setting reserve requirements, and (D) Fiscal deficit only measures revenue accounts
using policy tools (e.g., open market operations) to

Ans
manage credit conditions and inflation.
(B) Fiscal deficit covers total expenditure minus total
30. What does ‘CRR’ stand for in banking terminology? receipts excluding borrowings
(A) Capital Reserve Requirement Revenue deficit is the excess of revenue expenditure
(B) Cash Reserve Ratio over revenue receipts. Fiscal deficit is the shortfall of
(C) Current Regulatory Rule total government expenditure (revenue + capital) over
(D) Centralized Refinancing Rate total receipts (excluding borrowing), reflecting overall


Ans borrowing needs.

(B) Cash Reserve Ratio 34. Which of the following is NOT a component of the
CRR is the fraction of total deposits that commercial current account in the Balance of Payments?
banks must hold as reserves with the central bank. (A) Trade in goods
Adjusting CRR influences banks’ lending capacity and (B) Unilateral transfers
overall liquidity in the economy. (C) Factor income
(D) Capital transfers
31. Which component of the government budget includes
grants, gifts, and donations received by the government?

Ans
(A) Capital receipts (D) Capital transfers
(B) Revenue receipts The current account includes goods, services, unilateral
(C) Capital expenditure transfers, and income from abroad (e.g., wages,
(D) Revenue expenditure dividends). Capital transfers belong to the capital


Ans account, which records cross-border asset transactions.

(B) Revenue receipts 35. Which of these transactions would be recorded on the
Grants and donations are considered revenue receipts capital account of the Balance of Payments?
because they do not create liabilities or reduce assets. (A) Import of petroleum
They form part of the government’s routine or non- (B) Foreign tourist spending
repayable income, distinct from borrowings. (C) Foreign direct investment inflow
(D) Remittances from citizens working abroad
32. Why might a government run a deficit budget?

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Ans While flexible exchange rates can help correct balance

(C) Foreign direct investment inflow of payments imbalances and lessen the need for huge
Foreign direct investment affects the ownership of reserves, they do not completely insulate an economy
domestic assets, thus recorded under the capital from global shocks or external economic fluctuations.
account. Imports of goods, remittances, and tourist
39. What does a deficit in the Balance of Payments suggest?
spending generally appear in the current account.
(A) Foreign exchange inflows exceed outflows
36. What is the official reserve transaction in the Balance of (B) The central bank is pegging the currency too high
Payments? (C) The overall payments to the rest of the world exceed
(A) The export of official goods receipts
(B) A change in the central bank’s foreign exchange (D) There is an unexpected surplus of exported
holdings commodities
(C) The difference between net exports and net imports

Ans
(D) Income from direct investment abroad
(C) The overall payments to the rest of the world exceed


Ans receipts
(B) A change in the central bank’s foreign exchange A BoP deficit arises when a country’s expenditures
holdings abroad (imports, interest payments, etc.) surpass the
Official reserve transactions involve central bank foreign exchange earned (exports, remittances), leading
interventions that alter the country’s foreign exchange to potential reserve depletion or currency pressures.
and gold reserves, helping manage balance of payments
40. Which option best characterizes a fixed exchange rate
surpluses or deficits.
system?
37. How does a flexible exchange rate system differ from a (A) Exchange rate set purely by market demand and
managed float? supply
(A) Under flexible exchange rates, the government fixes (B) Government or central bank pegs the currency to
the exchange rate another currency or basket
(B) A managed float allows no market influence (C) No official intervention in the foreign exchange
(C) Flexible exchange rates are entirely market-driven, market
while managed floats involve limited central bank (D) Instant revaluation every day
intervention

Ans
(D) Managed floats do not permit any currency trading
(B) Government or central bank pegs the currency to


Ans another currency or basket
(C) Flexible exchange rates are entirely market-driven, Under a fixed exchange rate system, authorities commit
while managed floats involve limited central bank to maintain the domestic currency’s value at a target rate
intervention relative to another currency (or group of currencies),
In a purely flexible system, exchange rates adjust freely often requiring direct market intervention.
according to demand and supply. A managed float


Direction :Carefully read the case study provided and then
system sees occasional central bank action to moderate
thoroughly answer the subsequent five questions.
excessive volatility without strictly pegging the currency.
In an urban neighborhood, the local government
38. Which of the following is NOT an advantage of a flexible introduced a rationing system for subsidized cooking
exchange rate? gas cylinders to ensure equitable distribution. Each
(A) Automatic correction of BoP disequilibria household was allocated three cylinders per month at half
(B) Full insulation from external shocks the market price. Families with greater needs either had
(C) Avoiding large reserve requirements to purchase additional cylinders at the regular price or
(D) Freedom for domestic monetary policy resort to biomass fuels. This policy aimed to protect low-
income households from price volatility while preventing


Ans
black market sales. However, some households found
(B) Full insulation from external shocks their ration insufficient due to larger family sizes. Others
criticized the administrative inefficiencies in distributing

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the subsidized cylinders. Demand for gas rose steadily, (A) Industrial manufacturers
but the supply remained constrained, prompting officials (B) Environmental groups
to consider an expansion of the program. Meanwhile, (C) Automobile companies
environmental groups supported reduced reliance on (D) Tourism agencies
biomass for health and ecological reasons. Still, budget

Ans
limitations threatened the viability of broader distribution
efforts overall. (B) Environmental groups
Environmental advocates favored reducing the reliance
41. What was the primary goal of the rationing system for on biomass. Burning wood or dung indoors increases
cooking gas cylinders? pollution, deforestation, and health risks. Encouraging
(A) To promote biomass fuel usage cleaner cooking fuels like LPG helps mitigate these
(B) To ensure equitable distribution of subsidized gas issues.
(C) To encourage households to reduce consumption
(D) To remove all government subsidies 45. Which challenge might undermine the expansion of
this subsidized gas distribution?


Ans (A) Surplus government funds
(B) To ensure equitable distribution of subsidized gas (B) Inflexible consumer demand
The government introduced the rationing system so (C) Budget limitations
that each household could access cooking gas at a lower (D) Decline in demand for gas
price without allowing certain users to hoard or exploit

Ans
the subsidy.
(C) Budget limitations
42. Which problem arose for larger families under this The passage notes that extending the rationing program
system? would strain government finances, especially if more
(A) Abundance of unused cylinders households or larger allocations are to be covered.
(B) Lower total fuel expenditure Insufficient budgetary resources thus pose a key
(C) Insufficient quantity of subsidized cylinders obstacle.
(D) Mandatory shift to solar energy


Direction :Carefully read the case study provided and then


Ans thoroughly answer the subsequent five questions.
(C) Insufficient quantity of subsidized cylinders In a mid-sized nation, the government proposed a
Larger families exceeded the standard allocation, stimulus budget designed to combat rising unemployment.
forcing them to either purchase additional cylinders Public expenditure on infrastructure projects increased
at a higher price or resort to alternative fuels. Thus, drastically, aiming to create new jobs in construction and
the “one-size-fits-all” approach proved inadequate for ancillary industries. However, tax revenues had slumped
bigger households. amid an ongoing economic slowdown, leading to a
growing fiscal deficit. Critics argued that heavy borrowing
43. What was one criticism related to the administrative to finance the stimulus could push interest rates higher
aspect of the policy? and crowd out private investment. Supporters contended
(A) Overabundance of supply that short-term deficits were justified to boost aggregate
(B) Streamlined distribution procedures demand and restore economic stability. The central bank
(C) Inefficiencies in distributing subsidized cylinders signaled it might keep interest rates low to accommodate
(D) Lack of any system to monitor usage expansionary fiscal policy. Over time, the outcome would


Ans hinge on the productivity of infrastructure projects and
(C) Inefficiencies in distributing subsidized cylinders the government’s ability to revert to sustainable spending
Some residents complained about bureaucratic delays or levels once growth revived. Additionally, public sentiment
disorganized procedures when claiming their allocated remained divided, reflecting contrasting views on deficit
cylinders. These inefficiencies undermine the intended financing.
fairness and timeliness of the scheme. 46. Which key objective did the government hope to
44. Which sector appeared to support this rationing policy, achieve by increasing infrastructure spending?
based on environmental concerns? (A) Reduce private sector activity

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(B) Lower aggregate demand debts

(C) Generate employment in related industries

Ans
(D) Eliminate the need for taxation altogether
(C) Maintain low interest rates


Ans The central bank adopted an accommodating stance,
(C) Generate employment in related industries keeping rates low to complement fiscal expansion. This
Boosting infrastructure projects can employ construction policy helps reduce borrowing costs, allowing both
workers and spur demand for raw materials, thereby government and private entities easier access to credit.
creating jobs across various connected industries—key
50. Upon which factor does the long-term success of the
to fighting unemployment.
stimulus most depend?
47. What concern did critics express about financing the (A) The government’s immediate decision to cut taxes
stimulus through heavy borrowing? (B) Public sentiment in favor of unlimited deficits
(A) Tax cuts might become excessive (C) Productivity outcomes from infrastructure projects
(B) Prices of goods would drop substantially (D) The elimination of all future borrowing
(C) Private investment could be crowded out by higher

Ans
interest rates
(D) The central bank would lose control of monetary (C) Productivity outcomes from infrastructure projects
policy If infrastructure upgrades effectively boost productivity
and foster sustainable growth, the economy can absorb


Ans short-term deficits. If these projects fail to raise output
(C) Private investment could be crowded out by higher significantly, persistent deficits may lead to mounting
interest rates debt, undermining fiscal stability.
Critics fear that extensive government borrowing may
increase interest rates, making funds more expensive for

*************

businesses. This potential crowding out dampens private

sector investment and can slow long-term growth.

48. Why did supporters consider short-term deficits

acceptable?
(A) They believed deficits were harmless in the long
run
(B) They wanted to devalue the currency
(C) They saw it as a method to boost aggregate demand
and stabilize the economy
(D) They aimed to discourage consumers from
spending


Ans
(C) They saw it as a method to boost aggregate demand
and stabilize the economy
Proponents of expansionary fiscal policy argue that
government spending in excess of revenue can stimulate
a sluggish economy, raise employment levels, and
lay a foundation for subsequent growth—justifying
temporary deficits.

49. Which role did the central bank play to support the
stimulus?
(A) Strictly increase interest rates
(B) Eliminate commercial banks
(C) Maintain low interest rates
(D) Demand immediate repayment of government

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