Students must start practicing the questions from CBSE Sample Papers for Class 12 Economics with Solutions Set 10 are designed as per the revised syllabus.
CBSE Sample Papers for Class 12 Economics Set 10 with Solutions
Time Allowed: 3 Hours
Maximum Marks: 80
General Instructions:
- This question paper contains two sections
Section A – Macroeconomics
Section B – Indian Economic Development - This paper contains 20 Multiple Choice Questions of 1 Mark each.
- This paper contains 4 Short Answer Questions of 3 Marks each to be answered in 60 to 80 words.
- This paper contains 6 Short Answer Questions of 4 Marks each to be answered in 80 to 100 words.
- This paper contains 4 Long Answer Questions of 6 Marks each to be answered in 100 to 150 words.
Section A
(Macroeconomics)
Question 1.
Choose the correct statement from given below (1)
(a) Balance of trade is a component of capital account of balance of payments
(b) Floating exchange rate is used to stabilise price of foreign currency
(c) Increase in the supply of foreign exchange rate leads to fall in its price
(d) Rise in exchange rate leads to revaluation of currency
Answer:
(c) Increase in the supply of foreign exchange rate leads to fall in its price
Question 2.
The Cash Reserve Ratio (CRR) refers to (1)
(a) the liquid cash that banks have to maintain with the Reserve Bank of India as a certain percentage of their demand and time deposits
(b) the cash that banks have to keep in their vaults in order to meet sudden demand from depositors in times of crisis
(c) the cash that households have to keep in reserve to meet sudden increases in the price of essential goods and services
(d) the cash that the government keeps in reserve so as to be ready to meet unexpected contingencies
Answer:
(a) Cash Reserve Ratio (CRR) refers to the liquid dash that banks have to maintain with Reserve Bank of India as a percentage of their demand and time deposits.
Question 3.
Statement I Flow of factor services rendered by the households to the producers are real flows.
Statement II Depreciation reserve fund refers to the fund which the producers keep to cope with depreciation losses in the process of production. (1)
Alternatives
(a) Statement I is true and Statement II is false
(b) Statement I is false and Statement II is true
(c) Both the statements are true
(d) Both the statements are false
Answer:
(c) Flow of factor services rendered by the households to the producers are real flows because these flow involve the movement of goods and services from one sector to the other.
Question 4.
“Under this method, the government tries to stabilise the exchange rate by fixing the exchange rate at a particular level”.
This represents exchange rate system. (1)
(a) fixed
(b) flexible
(c) managed floating
(d) manipulated
Answer:
(a) fixed
Question 5.
Find the missing figure and choose the correct alternative. (1)
Alternatives
(a) -0.4, 0, 0.034, 400
(b) -0.2, 0, 0.067, 400
(c) 0.2, 0, 0.067, 2
(d) 0.4, 0, 0.34, 400
Answer:
(b) APS = \(\frac{S}{Y}\)
(i) APS = (-) \(\frac{200}{1000}\) ; APS = (-) 0.2
(ii) APS = \(\frac{0}{2,000}\) ; APS = 0
(iii) APS = \(\frac{200}{3,000}\) ; APS = 0.067
(iv) 0.1 = \(\frac{S}{4,000}\) ; S = 400
Question 6.
If MPC = 0.5, the value of multiplier equals (1)
(a) 2
(b) 1
(c) 5
(d) infinity
Answer:
(a) K = \(\frac{1}{MPC}\) = \(\frac{1}{0.5}\) = 2
Question 7.
Observe the image given below carefully.
Which of the following about the money is indicated above? (1)
(a) Money demand
(b) Components of money supply
(c) Evolution of money
(d) Modes of money supply
Answer:
(c) The picture indicates the evolution of money from barter system of exchange to the present modes of money used in an economy.
Question 8.
The estimated income receipts of the government in the budget of 2019-20 is ? 25,000 crore. The estimated expenditure of the government in the same budget is ? 30,000 crore. The budget of the government is ……… . (1)
(a) balanced
(b) deficit
(c) surplus
(d) None of these
Answer:
(b) As expenditures exceeds receipts, there is a deficit.
Question 9.
Which of the following items are excluded in balance of trade, but included in balance of payment? (1)
(i) Visible items
(ii) Invisible items
(iii) Private capital
Codes
(a) (i) and (ii)
(b) (i) and (iii)
(c) (ii) and (iii)
(d) (i), (ii) and (iii)
Answer:
(c) (ii) and (iii)
Question 10.
“Budget is used as an important policy instrument to combat fluctuations in an economy”.
In the light of above lines, identify the related objective of government budget.
(a) Allocation of resources
(b) Stabilisation of price
(c) Growth of the economy
(d) Redistribution of income
Answer:
(b) Stabilisation of price
Question 11.
Calculate the value of “rent” from the following data (3)
S.NO | Items | ₹ (in crores) |
i. | Gross domestic product at market price | 18,000 |
ii. | Mixed income of self-employed | 7,000 |
iii. | Subsidies | 250 |
iv. | Interest | 800 |
v. | Rent | ? |
vi. | Profit | 975 |
vii. | Compensation of employees | 6,000 |
viii. | Consumption of fixed capital | 1,000 |
ix. | Indirect tax | 2,000 |
Or
State some of the precautions which are necessary while using value added method for measuring national income.
Answer:
By Income method
NDPFC = COE + Operating Surplus* + Mixed Income …(i)
*Operating Surplus = Rent + Interest + Profits and NDPFC = GDPMP – Depreciation – NIT
= 18,000 – 1,000 – (2,000 – 250)
= ₹ 15,250 crore
Now, putting values in equation (i)
15,250 = 6,000 + Rent + 800 + 975 + 7,000
15,250 = 14,775 + Rent
Rent = ₹ 475 crore
Or
Following are some of the precautions that are necessary while calculating national income using value added method
(i) Purchase and sale of second hand goods should be excluded from the calculation.
(ii) Commission earned on account of sale and purchase of second hand goods should be included.
(iii) Value of self-consumed services should not be included in the estimation of national income.
Question 12.
“Current account deficit is a cause of alarm.” Comment.
Answer:
A current account deficit means that the value of imports of goods and services are greater than the value of imports.
It leads to several ill-effects which are
(i) Economic growth is not favourable
(ii) Inflation and borrowing become major problems.
(iii) It also increases dependence on foreign country for borrowings, creating debt trap.
Thus, we can say that current account deficit is a cause for alarm because of the above stated ill-effects on the country.
Question 13.
Explain the following functions of the central bank.
(i) Banker to the government.
(ii) Controller of money supply using the instrument of open market operations.
Answer:
(i) Banker to the Government The Central Bank acts as a banker to the Central Government and State Governments. It carries out all the banking business of the government. It accepts receipts and makes payments on behalf of the government. It provides short-term credit to the government. It also advises the government on banking and financial matters. (2)
(ii) Controller of Money Supply Using the Instrument of Open Market Operations Buying and selling of government securities in the open market by the central bank is called open market operations. When central bank buys securities, it makes payments to the sellers who deposit the same in commercial banks.
This raises deposits with them and thus, directly increases banks’ ability to give credit. When central bank sells securities, the buyers make payments by cheques. As a result, the deposits with the commercial banks decline, reducing banks’ ability to give credit. (2)
Question 14.
Answer the following questions based on the data given below (4)
Planned investment = ₹ 100 crore
C = 50 + 0.5 Y
(i) Determine the equilibrium level of income.
(ii) Calculate the saving and consumption expenditure at equilibrium level of national income.
Answer:
(i) At equilibrium level of income,
Y = C + 1
Here, Y = Equilibrium level of income
C = Consumption expenditure at equilibrium level of income
I = Investment expenditure at equilibrium level of income
Y = (50 + 0.5 Y) + 100
Y – 0.5 Y = 150
0.5 Y = 150
Equilibrium level of income = ₹ 300 crores
(ii) C = 50 + 0.5 Y
Substituting the value of Y in the above equation
C = 50 + 0.5 × 300
C = 50 + 150
C = 200
Consumption expenditure at equilibrium level of income = ? 200 crores.
Y = C + S
300 = 200 + S
S = 300-200
S = 100
Saving at equilibrium level of income
= ₹ 100 crore.
Question 15.
Given excerpt has been taken from the article “Why is it important for the government to have a budget?” as published by the economic times on 30th December, 2020.
Any political party which forms government at the Centre has certain social, political and economic responsibilities. When it comes to butgeting, identifying areas of weakness helps the government to allocate resources in a useful and sustainable manner. This is one of the most fundamental objectives behind framing a government budget. It’s important for the government to ensure that funds reach where they are required the most. On the basis of the given excerpt and your understanding, explain the importance of having a government budget. (4)
Or
“A fiscal deficit necessarily leads to inflation.” Comment.
Answer:
Importance of government budget can be explained as follows
(i) It shows revenue deficit, fiscal deficit and primary deficit of the government budget which reflects the status of fiscal discipline in the country.
(ii) It reflects how the government is going to influence the allocation of resources in the country.
(iii) It points to the efforts of the government to achieve equality in the distribution of income and wealth.
(iv) It is used to correct the situations of inflationary/deflationary gap in the economy.
Or
No, a fiscal deficit does not necessarily leads to inflation.
Fiscal deficit is difference between total government receipts (taxes and non-debt capital) and total expenditure. Fiscal deficit can lead to cost-push inflation.
The government being a major player in the market for borrowings and doing away with the practice of getting currency notes printed (since 1991) exerts an upward pressure on interest rates. Higher interest rates increase production cost, which is passed on to consumers, thereby leading to higher prices.
Fiscal deficit, due to productive investment may have less impact as it takes care of both the rise in demand and supply in comparison to expenditure where productive activities do not occur.
Question 16.
(i) From the following data, calculate
(a) gross domestic product at market price (3)
(b) factor income from abroad (2)
S.NO | Items | ₹ (in crores) |
i. | Gross national product at factor cost | 6,150 |
ii. | Net exports | (-) 50 |
iii. | Compensation of employees | 3,000 |
iv. | Rent | 800 |
v. | Interest | 900 |
vi. | Profit | 1,300 |
vii. | Net indirect taxes | 300 |
viii. | Net domestic capital formation | 800 |
ix. | Gross fixed capital formation | 850 |
x. | Change in stock | 50 |
xi. | Dividend | 300 |
xii. | Factor income to abroad | 80 |
(ii) When is value of output equal to value added?
Or
(i) Distinguish between stocks and flows. Give two examples of each. (3)
(ii) “Management of a water polluting oil refinery says that (oil refinery) ensures welfare through its contribution to gross domestic product”.
Defend or refute the argument of management with respect to GDP as a welfare of the economy. (3)
Answer:
(i) (a) GDPMP = Compensation of Employees + Rent + Interest + Profit + Net Indirect
Taxes + Consumption of Fixed Capital
= 3,000+(800 + 900 + 1,300) + 300 + (850 + 50 – 800) = ₹ 6,400 crore
Note Depreciation = Gross Domestic Fixed Capital Formation + Change in Stock – Net Domestic Capital Formation
(b) GNPFC = GDPMP – Net Indirect Taxes + Factor Income from Abroad – Factor Income to Abroad
6,150 = 6,400 – 300 + Factor Income from Abroad – 80
6,150 = 6,020 + Factor Income form Abroad
Factor Income from Abroad
= 6,150 – 6,020 = ? 130 crore
(ii) Value of output is equal to value added if there are no intermediate costs.
Or
(i) Difference between stock and flows are as follows (any three)
Basis | Stocks | Flows |
Meaning | Stocks that quantity of an economic variable which is measured at a particular point of time. | Flow is that quantity of an economic variable which is measured during the period of time. |
Time Dimension | Stock has no time dimension. | flow has a time dimension as per hor, per day, per month. |
Concept | Stock is a static concept. | Flow is a dynamic concept. |
Examples | Quantity of money wealth. | Consumption, investment. |
(ii) The given argument is refuted. GDP is not considered a good measure of welfare as it fails to take into effect externalities.
Increase in gross domestic product is due to increase in economic activities like industrialisation. With increased industrialisation, certain problems also increase like pollution of air, water, soil and deforestation.
Urbanisation also results in housing problems, increase in road accidents, etc. on the whole, welfare decreases and this decrease in welfare is ignored, while calculation of GDP. So, we can say i that externalities can be a limitation of using GDP as an index of welfare.
Question 17.
(i) Explain the concept of inflationary gap. Explain the role of repo rate in reducing this gap.
(ii) What is the difference between planned investment and actual investment? (3)
Answer:
(i) Inflationary gap is the excess of aggregate demand over and above its level required to maintain full employment equilibrium in the economy. It causes excess demand in the economy.
Owing to excess demand, price levels tends to rise without any rise in the level of income or employment in the economy.
Repo rate is the rate at which the central bank lends money to the commercial banks.
To correct the situation of inflationary gap, repo rate is increased.
As a follow-up action, the commercial banks raise the market rate of interest (the rate at which the commercial banks lend money to the consumers and the investors). This reduces demand for credit. Consequently, consumption expenditure and investment expenditure are reduced implying a reduction in aggregate demand, as required to correct inflationary gap.
(ii) Difference between planned investment and actual investment are
Basis | Planned Investment | Actual Investment |
Meaning | Planned (or ex-ante) investment refers to the desired level of investment: | Actual (or ex-post) investment refers to the realised level of investment. |
Accounting Equality | In an accounting year, planned investment may or may not be equal to planned savings. | In an accounting year, actual investment always equals actual savings. (This is according to the principle of national income accounting) |
Determinati on of Equilibrium Income | Equilibrium level of income is determined where planned investment is equal to planned savings. | Actual investment has no relevance in the determination of equilibrium level of income. |
Section B
(Indian Economic Development)
Question 18.
“The Human Development Index (HDI) is a widely used measure to compare the development levels of different countries”.
Which of the following statements is correct regarding the Human Development Index (HDI)? (1)
(a) HDI only considers economic factors
(b) HDI is based on a single indicator
(c) HDI includes indicators of education, health and income
(d) HDI is applicable only to developed countries
Answer:
(c) HDI includes indicators of education, health and income
Question 19.
When the consumption of natural resource is equal to the nature’s ability to replenish, then sustainability is called ……….. . (1)
(a) not sustainable
(b) steady state economy
(c) environmentally sustainable
(d) None of the above
Answer:
(b) steady state economy
Question 20.
Due to introduction of new technology, workers may be replaced by machines leading to … type of unemployment. (1)
(a) disguised unemployment
(b) frictional unemployment
(c) seasonal unemployment
(d) structural unemployment
Answer:
(d) structural unemployment
Question 21.
What does picture indicate about the movement of labour? (1)
(a) Informalisation of workforce
(b) Casualisation of workforce
(c) Jobless growth
(d) Either (a) or (b)
Answer:
(d) Either (a) or (b)
Question 22.
State the correct combination between the following columns explaining the status of the following sectors during the colonial rule. (1)
Column I | Column II |
A. Agricultural sector | (i) Need for expansion and upgaradation |
B. Industrial sector | (ii) Need for enhanced public investment and diversification |
C. Service sector | (iii) Saddled with surplus labour |
D. Infrastructural | (iv) Export surplus which was used to meet the war expenses |
Codes
(a) (ii) (iv) (iii) (i)
(b) (iii) (iv) (i) (ii)
(c) (ii) (iv) (i) (iii)
(d) (iii) (ii) (iv) (i)
Answer:
(d) (iii), (ii), (iv), (i)
Question 23.
Statement I Investment in education by parents is the same as investment in capital goods by industries.
Statement II Life expectancy is not an indicator which measures the education status of the country. (1)
Alternatives
(a) Statement I is true and Statement II is false
(b) Statement I is false and Statement II is true
(c) Both the statements are true
(d) Both the statements are false
Answer:
(c) Both the statements are true
Question 24.
Which of the following are not the features of informal sector? (1)
(i) Workers in informal sector get regular incomes.
(ii) Workers in informal sector do not have any protection from the government.
(iii) Workers in informal sector get compensation when they are dismissed from the job.
Codes
(a) (i) and (ii)
(b) (i) and (iii)
(c) (ii) and (iii)
(d) (i), (ii) and (iii)
Answer:
(b) (i) and (iii)
Question 25.
Continuous borrowing from the informal sources will result farmers often getting caught under the ………. . (1)
(a) debt trap
(b) poverty trap
(c) poor farm trap
(d) None of these
Answer:
(a) Debt trap is a situation in which a debt is difficult or impossible to repay, typically because high interest payments prevent revenue repayment of the principal.
Question 26.
Assertion (A) India developed a sound industrial base during the colonial rule.
Reason (R) The industrial sector was crying for modernisation, diversification, capacity building and increased public investment. (1)
Alternatives
(a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A)
(b) Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of Assertion (A)
(c) Assertion (A) is true, but Reason (R) is false
(d) Assertion (A) is false, but Reason (R) is true
Answer:
(d) The industrial sector was in dismal state with hardly any capital goods industry and lack of support from the government.
Question 27.
Which of the following factors contribute to human capital formation in India? (1)
(i) Investment in education
(ii) Health and nutrition
(iii) Migration of skilled workers
(iv) Increase in Foreign Direct Investment (FDI)
Codes
(a) (i) and (ii)
(b) (ii) and (iii)
(c) (iii) and (iv)
(d) (i) and (iv)
Answer:
(a) Human capital formation in India is influenced by investment in education and ensuring health and nutrition. These factors contribute to the development of skilled individual and their active participation in the economy.
Question 28.
“Investing in healthcare and promoting access to information are essential for the formation of human capital”.
Explain why investment in healthcare and access to information crucial for the formation of human capital?
Answer:
(i) Health as a Source of Human Capital Formation Health is an important source of human capital formation because only a healthy worker can contribute towards increasing the capital stock of the country.
A sick worker, without access to medical facilities is compelled to abstain from work, and there is loss of productivity.
(ii) Expenditure on Information as a Source of Human Capital Formation People spend money to acquire information relating to the labour market, education and health institution, etc. Information relating to job opportunities and educational institutes enables people to increase their earning potential. Therefore, it is also a determinant of human capital formation.
Question 29.
Defend or refute the following statement with valid explanation ‘There are various means by which countries are trying to strengthen their own domestic economies.’ (3)
Or
‘The introduction of the ‘One Child Norm’ in China had far-reaching consequences for population control and social policies”.
What are some important implication of the ‘One Child Norm’ in China?
Answer:
I defend the given statement. The following are the various means through which the nations are trying to strengthen their own domestic economies (any three)
(i) Nations are forming various regional and economic groupings like SAARC, European Union, G-8, G-20, ASEAN, etc. in order to strengthen their economies through economic cooperation among the countries in the group to safeguard their common interests.
(ii) They are also trying to know and analyse the developmental process adopted by their neighbouring nations, so as to evaluate their strengths and weaknesses and formulate policies accordingly,
(iii) Nations have also resorted to liberalise their economies by minimising government interference in economic activities.
The economy is governed by market forces which promote efficiency and strengthen the economy.
(iv) Nations have also adopted the process of globalisation to integrate their economies with other economies of the world in order to provide wide international market for their domestic producers and attract foreign investment.
Or
The important implications of the ‘One Child Norm’ are (any three)
(i) Low population growth.
(ii) Decline in the sex ratio.
(iii) After a few decades, there will be more elderly people in proportion to young people.
(iv) In the long-run China will have to provide more. social security measures with fewer workers.
Question 30.
The figure given below highlights the ‘Human population and carrying capacity of the environment’.
In the light of the given figure, give the meaning of carrying capacity and explain how population explosion has resulted in depletion of natural resources. (4)
Sources https://www.mrgscience.com /ess-topic-84-human-population-carrying -capacity.himl
Answer:
Carrying capacity of the environment may be defined as the amount of natural resources which can be drawn from it and the maximum amount of pollutants that can be discharged without damaging it seriously. Population growth is the cause of depletion of natural resources. More the number of people, more the demand for goods and services needed to satisfy wants. As the population increases, more natural resources are required to produce goods and services and also the demand for land for housing and agriculture increases. Increasing population has led to more extraction of natural resources from the environment thus resulting in depleting these resources.
Question 31.
“India, China and Pakistan have travelled more than seven decades of developmental path with varied results.” Explain the given statement with valid arguments.
Answer:
“India, China and Pakistan have travelled more than seven decades of developmental path with varied results.” This statement can be explained with the help of following arguments
(i) Till the late 1970s, all of them were maintaining the same level of low development. The last three decades have taken these countries to different levels.
(ii) Indian economy performed moderately, but majority of the population depends on agriculture and 1/4 th of the population lives below poverty line. Infrastructure is also lacking in many parts of the country.
(iii) Pakistan economy was slowdown because of political instability, over dependence on remittances and foreign aid along with volatile performance of agriculture sector.
(iv) China used the market system without losing political commitment and succeeded in raising the level of growth along with alleviation of poverty. Public intervention in providing social infrastructure bought positive results in human development ndicators in China.
Question 32.
State whether the following statements are true or false, with valid arguments
(i) Economic reforms achieved the planning objective of growth with equity.
(ii) The structural transformation process is peculiar in context of the Indian economy.
Or
“The objective of new economic policy was privatisation.” Discuss.
Answer:
(i) The given statement is false. Economic reforms increased the income and quality of consumption of higher income groups with a slow growth of important sectors like agriculture and industry.
(ii) The given statement is true. The ‘structural change’ theory argues that with development, the share of agriculture sector declines and that of industry becomes dominant and at higher levels of development, the service sector contributes more than the other two sectors. However in context of India, there has been a jump directly from agriculture to services in context of GDP contribution:
Or
The new economic policy was introduced with the objective to deregulate the economy and ensure economic development. So, privatisation was crucial for the success of this policy as it insures high productivity, a competitive environment which promotes innovation and efficiency, diversification of activities and consumer sovereignty.
In order to encourage private sector, following measures have been adopted
(i) The government through its economic policy reduced the number of industries reserved for public sector.
(ii) It has now been planned to reduce the share of public sector investment to $45 \%$. It increases the share of private sector to 55%.
(iii) Financial corporations cannot force the industries for conversion of their loans into equity shares.
(iv) It has now been decided to increase the participation of general public and workers by selling them the shares of public enterprises.
Question 33.
(i) “India has abundant natural resources”. Substantiate the statement. (3)
(ii) “Multinational companies played a crucial role in rural development”. Explain.
Or
(i) “It is necessary to create employment in the formal sector rather than in the informal sector.” Defend or refute the given statement with valid arguments.
(ii) There is a mismatch between ‘GDP growth’ and ‘Employment growth’ in India. Do you agree with the given statement? Justify.
Answer:
(i) India has abundant natural resources in the terms of rich quality of soil, hundreds of rivers and tributaries, lush green forests, plenty of mineral deposits, vast stretch of Indian ocean, ranges of mountains, etc.
The black soil of the Deccan plateau is suitable for cultivation of cotton. The indo-gangetic plains are the most fertile regions in the world. India’s forests provide green cover for its population and wildlife. Large deposits of iron-ore, coal and natural gas are found in the country.
(ii) Economic reforms offered the opportunities to multinational companies to expand their functions all around country. Many multinational companies are entering in the rural marketing. They are doing well for the sake of farmers as stated below
(a) They are making contracts with farmers.
(b) They are motivating farmers to grow desirable food, fruits and vegetables of the desired quality.
(c) They are providing them seeds and other inputs.
(d) They are offering them pre-decided prices.
Or
(i) “It is necessary to create employment in the formal sector rather than in the informal sector.” The statement is defended because workers of the formal sector enjoys social security benefits and job security which remain protected by the labour laws. On the other hand, people engaged in the informal sector do not enjoy any social security benefits and do not have job security. As a result, informal workers are generally very poor and live in slums.
(ii) GDP growth in India is faster than the employment growth. In other words, even when production activity is expanding, job opportunities continue to be low. This is situation of ‘jobless growth’.
This occurs when we rely more and more on labour-saving western technology. Such a technology (using more of capital and less of labour) does not suit the needs and means of a country where unemployment is an alarming social challenge. But, given the fact that the country lacks investment capital, we are forced to depend more and more on Foreign Direct Investment (FDI).
Foreign investment in India is linked with foreign technology which is efficient but the one which uses less and less of labour.
Reliance on FDI cannot be minimised implying that the reliance on labour-saving western technology cannot be minimised. Accordingly, a mismatch between ‘GDP growth’ and ’employment growth’ cannot be so easily corrected.
Question 34.
Read the following text carefully and answer the given questions on the basis of the same and common understanding.
On 8 th November 2016, the Prime Minister of India, Narendra Modi, took the nation by surprise by announcing that the government was demonetising currency with denominations of ₹ 500 or ₹ 1,000 with immediate effect. This amounted to the demonetisation of 86% of the Indian currency in circulation. Holders of the demonetised currency were given till 31st, December 2016 to exchange their demonetised bills for newly issued currency, which would be in denominations of ₹ 500 and ₹ 2,000.
Demonetisation as a tool for fighting crime, tax evasion, and activities in the underground economy has been advocated in the past.
The argument rests on the premise that, in an international context, many underground economy activities are financed using large-denomination currency notes. A unique aspect of the Indian measure was that it was carried out during a period of economic stability, but with very little time given to the public to exchange their demonetised bills. This created the potential for a lot of disruption and inconvenience since the demonetised bills, especially the ₹ 500 bill (worth about US 14 at prevailing exchange rates), were heavily in use for daily transactions.
(i) What do you understand by the term ‘demonetisation’? Enlist some reasons for the introduction of demonetisation by PM in 2016?
(ii) On the basis of knowledge and understanding, briefly discuss any four adverse effects of demonetisation. (4)
Answer:
(i) Demonetisation implies stripping the legal tender status of a currency. The major reasons for demonetisation of currency bills include (any two)
(a) Seize the wealth that was accumulated through undeclared income.
(b) Eliminate the scourge the counterfeit currency circulating in an economy.
(c) Pushing a nation towards digitalisation.
(ii) The following are the adverse effects of demonetisation
(a) The whole economic system comes to a standstill.
(b) People had to queue up for long hours in front of banks and ATMs to get their money converted into new currency notes. Many people died of exhaustion because of standing for long hours.
(c) The level aggregate demand fell in the country.
(d) The economic growth rate fell.