ISC Class 12 Sample Paper 2027 Economics

FOR ISC CLASS 12 EXAM PREPARATION

ISC Class 12 2027
Sample Paper ·
Economics
EXAM YEAR TYPE SUBJECT

ISC Class 12 2027 Sample Paper Economics

Notes · Sample Papers · Previous Year Papers · Mock Tests

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ECONOMICS

Maximum Marks: 80
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Time Allotted: Three Hours
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Reading Time: Additional Fifteen Minutes
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Instructions
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to Candidates
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1. aYou are allowed additional fifteen minutes for only reading the
question paper.
2. You must NOT start writing during reading time.
3. This question paper has 12 printed pages.
4. It is divided into three sections and has thirteen questions in all.
5. All questions are compulsory. Answer all questions.
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6. Section A has sixteen subparts which are objective / very short answer
questions. Each question carries 1 mark.
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7. While attempting Multiple Choice Questions in Section A, you are
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required to write only ONE option as the answer.
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8. Section B has eight questions which are short answer questions.
Each question carries 4 marks.
9. Section C has four questions which are long answer questions.
Each question carries 8 marks.
10. Internal choices have been provided in three questions in Section B
and in two questions in Section C.
11. The intended marks for questions are given in brackets [ ].
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c. oInstruction to Supervising Examiner m .co
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s em Kindly read aloud the Instructions given above to all thegcandidates
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Note: The Specimen Question Paper in the subject provides a realistic format of the
Board Examination Question Paper and should be used as a practice tool. The questions
for the Board Examination can be set from any part of the syllabus, though the format of
the Board Examination Question Paper will remain the same as that of the Specimen
Question Paper. The weightage allocated to various topics, as given in the syllabus, will be
strictly adhered to.

SECTION A – 16 MARKS

Question 1
(i) Study the diagram given below and choose the correct option. [1]
Income

B
A
C

D
D1
Demand

With an increase in income, the demand for an inferior good will move
from point: (Understand)
(a) A to B.
(b) B to C.
(c) C to B.
(d) B to A.
(ii) The supply of a commodity will be relatively inelastic when: (Recall) [1]
(a) the producer is a risk averter.
(b) the product is durable in nature.
(c) modern technology is used in production.
(d) the product is supplied over a long period.
(iii) Sometimes a firm can sell its product at different prices to different buyers
at the same time.
Which of the following market forms supports this practice? (Recall) [1]
(a) Oligopoly
(b) Monopoly
(c) Monopsony
(d) Monopolistic competition

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(iv)
when: a
A perfectly competitive firm must close its production
(Understand)
[1]

(a) marginal revenue is less than average cost.
(b) marginal revenue is less than marginal cost.
(c) average variable cost is less than average cost.
(d) average revenue is less than average variable cost.

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(v) Which of the following statements is correct in the context of Keynesian [1]
break-even point?
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APC < 1
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(b)

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(d) APC = 0
(vi) ‘The RBI delivered its first rate cut since Feb. 2025 on Friday, lowering the
policy repo rate by 25 basis points to 5·25%.’
(Source: The Times of India, Saturday, December 6, 2025)
Which one of the following will MOST LIKELY be the impact of this [1]
move on Indian economy? (Evaluate)
(a) Economic growth will accelerate.
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(b) Loanable fund will become cheap.. c
(c) Fixed deposit interest ratea s em
l will fall.
(d) Consumers’ purchasingagpower will increase.
(vii) The table given below shows the Total Utility (TU) that a consumer derives
by consuming slices of pizza:
No. of slices of
1 2 3 4 5 6
Pizza
TU (Utils) 12 22 30 36 40 38
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m At which level of consumption does the marginal utility begin to diminish?
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(a) 1st slice
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a (c) 5th slice
(d) 6th slice

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(viii) Given below are two statements marked Assertion and Reason. Read the [1]
statements carefully and choose the correct option.
Assertion: The standard of living of a country may fall even if
its nominal per capita income rises.
Reason: Nominal per capita income does not adjust for inflation.
(Analyse)
(a) Both Assertion and Reason are true, and Reason is the correct
explanation of Assertion.
(b) Both Assertion and Reason are true, but Reason is not the correct
explanation of Assertion.
(c) Assertion is true but Reason is false.
(d) Both Assertion and Reason are false.
(ix) Given below are two statements marked Assertion and Reason. Read the [1]
statements carefully and choose the correct option.
Assertion: The demand curve under oligopoly is indeterminate.
Reason: MR curve is always discontinuous in oligopoly. (Analyse)
(a) Both Assertion and Reason are true, and Reason is the correct
explanation of Assertion.
(b) Both Assertion and Reason are true, but Reason is not the correct
explanation of Assertion.
(c) Assertion is true but Reason is false.
(d) Both Assertion and Reason are false.
(x) ‘The Summary of Union Budget 2026-27 confirms the absolute fiscal
deficit is projected at ₹16·96 lakh crore.’
(Source: Government of India, Ministry of Finance (2026) Budget at a
glance 2026-27)
Which of the following steps may be adopted by the government to meet [1]
the deficit? (Apply)
(a) Sale of Treasury Bills to the RBI
(b) Repurchase of bonds from the public
(c) Salary hike for government employees
(d) Reduction of income tax rate on the high-income group
(xi) What will be the value of MPS if the change in income is twice the change [1]
in investment expenditure? (Apply)
(xii) What is sinking fund? (Recall) [1]

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(xiii) Study the data given below and answer the question that

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a (Source: website.rbi.org.in)
Compare the trend of CRR and SLR over the period shown above. [1]
(Analyse)
(xiv) ‘Under Indira Gandhi National Old Age Pension Scheme, a monthly
pension of ₹ 200/- is given to elderly aged 60-79 years belonging to BPL
category.’
(Source: pib.gov.in)

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This monthly pension scheme contributes to the growth of GDP in India.

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Defend or refute the statement by giving a valid reason.
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(Evaluate) [1]
(xv)
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State the Law of Diminishing Marginal Utility. (Recall) [1]
(xvi)
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s e g l a
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Briefly discuss whether the image shown above depicts Returns to Scale or [1]
a Returns to a Factor.

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SECTION B – 32 MARKS
Question 2
(i) Aman compares two consumption bundles:
• Bundle A: 2 burgers + 1 pack of juice
• Bundle B: 4 burgers + 2 packs of juices
He claims that Bundle B lies on a higher indifference curve.
Explain with an appropriate reason whether Aman’s claim is correct or not. [2]
(Understand)
(ii) Agro Gold Wheat Traders supplies wheat in the market. The firm
purchases advanced grain storage technology, which reduces wastage and
lowers its cost of handling wheat. As a result, Agro Gold is able to supply
more wheat at the same price as before.
Later, due to a sudden rise in international wheat prices, the market price
of wheat increases, leading Agro Gold to supply more wheat.
Illustrate these two types of changes in the supply of wheat in separate [2]
diagrams. (Understand)

Question 3
(i) Compare the demand curve faced by a perfectly competitive firm with the [2]
one faced by a monopolist. Substantiate your comparison with suitable
reasons. (Analyse)
(ii) Briefly explain the meaning of the following terminologies in the context
of market structure: (Recall)
(a) Product differentiation in monopolistic competition [1]
(b) Intense competition in oligopoly [1]

Question 4
Attempt either subparts (i) and (ii) or (iii) and (iv).
(i) ‘Uber and Ola Cabs are two major app-based taxi services that operate in
major cities in India. Each closely monitors the pricing strategy of the
other. During peak hours, a surge in demand triggers an automatic increase
in fares through surge pricing.’
(Source (edited): Economic Research Centre, CUHK, 31 May 2022)
Identify the market form in the above context. Outline two features of this [2]
market form evident in the scenario. (Understand)
(ii) If the state government imposes ceiling price on cab fares, it may cause a
deficit in the supply of the cab services.
As owner of an app-based cab service company, formulate a measure that [2]
you would take to overcome this problem. Illustrate the suggested measure
with the help of a diagram. (Create)
OR

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(iii)
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The Indian government significantly reduced GST
fast-moving consumer goods with effect from September 2025. One of
these products was soap. Indian Soap and Detergent market have 700
companies including ITC Limited, Procter & Gamble and Hindustan
Unilever Limited. These companies try to make their products different
from those of other companies by adding various features to the existing
product and promoting their products. What distinguishes them from one
another are their marketing strategies and production.
With the help of a diagram, explain the effect of government’s initiative on [2]
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the price of the said product given that demand for this product is relatively
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elastic. (Understand)

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(iv) You have decided to start a soap manufacturing business. As a new [2]
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entrepreneur in soap industry, devise a strategy to secure the market share
of lyour
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Question 5
(i) Selling cost remains absent in a perfectly competitive market. Discuss. [2]
(Understand)
(ii) What is meant by supernormal profit? Show it with the help of a diagram. [2]
(Understand)

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emusing the expenditure method.
Question 6 [4]
(i)
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Calculate GNPmp and National Income

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S.No. Items ₹ (in crore)
(a) Private final consumption expenditure 2750
(b) Government final consumption 300
expenditure
(c) Gross domestic fixed capital formation 250
(d) Net factor income from abroad (-)25
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(g) Decrease in stock
g a 45
a (h) Export of goods and services
(i) Consumption of fixed capital 100
(j) Net indirect taxes 100
OR

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(ii) Calculate the Income from Entrepreneurship from the following data:
(Apply)
S.No. Items ₹ (in crore)
(a) Net Indirect Taxes 40
(b) Gross domestic product at factor cost 500
(c) Consumption of fixed capital 100
(d) Wages and salaries 90
(e) Mixed income of self-employed 105
(f) Rent 30
(g) Interest 20
(h) Employer’s contribution to ESI fund 50
(i) Interest free loan given to the staff 35
(j) Contribution to provident fund by the 20
employer

Question 7
(i) The pie chart below presents a scenario depicting the distribution of public
expenditure. Study it carefully and answer the question that follows.

Defence Equipment Purchase
10%
Salaries and Pensions
35% Construction of Highways
12%

Subsidies
15%

Interest Payments Building Government Schools
8%
20%

Comment on the distribution of public expenditure as revenue expenditure [2]
and capital expenditure shown in the above pie chart. (Analyse)

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(ii)
a
Observe the bar chart of deficit indicators and answer
follow.

Deficit Indicators reflect prudent fiscal management -
April to November
90 78·9
80 68·2
As proportion of BE

70 62·3
60
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50
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40
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10
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a Fiscal deficit Primary deficit
B.E. - Budget Estimates FY24 FY25 FY26

(Source: Economic Survey, 2025-26)
(a) Compare the revenue deficit and fiscal deficit for the financial year [1]
2024 (FY24). (Analyse)
(b) What is the implication of the trend in primary deficit over the [1]
period depicted in the graph? (Analyse)

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Question 8
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Attempt either subparts (i) and (ii) or (iii) and (iv).
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‘In its Monetary Policy Statement dated February 8, 2024, the Reserve

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Bank of India (RBI) observed that retail inflation stood at 5·1% in January
2024. The RBI further noted that a significant portion of bank credit was
being directed towards speculative activities in the stock market and real
estate sector, leading to artificial price increase.’
(Source: Ministry of Statistics and Programme Implementation (MOSPI),
Government of India; RBI Monetary Policy Statement, February 2024)
To control this situation, the measure Margin Money would be more [2]
appropriate than repo rate in a developing country like India. Justify the

m [2]
statement. (Evaluate)

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(ii) The process of credit creation comes to an end when the required reserves
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become equal to the initial deposit. Defend or refute the statement with a

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valid reason. (Evaluate)
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(iii) In different border areas of India, currency of neighbouring country is used [2]
as money, but not as legal tender. Justify the statement. (Evaluate)
(iv) ‘Digital payments have become deeply embedded in India’s everyday life.
As of early 2026, UPI is the dominant payment method in India,
accounting for 57% of transaction and surpassing cash.’
(Source: PIB and Ministry of Finance (India))
This development propels people to hold less cash which ultimately leads [2]
to the reduction of money supply in the economy. Defend or refute the

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statement with a valid reason. (Evaluate)

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Question 9 [4]
India’s nominal GDP is projected to grow by 8·6% over the previous year in
FY 2025-26.
Does this indicate the economic welfare of the country? Justify your answer with
four reasons. (Evaluate)

SECTION C – 32 MARKS
Question 10
(i) Explain how the following factors affect the price elasticity of demand for [6]
a product: (Recall)
(a) Availability of substitutes
(b) Proportion of income spent
(c) Necessity versus Luxury
(d) Short run versus long run
(ii) Explain two reasons for the upward slope of the supply curve. (Recall) [2]

Question 11
Attempt either subparts (i) and (ii) or (iii) and (iv).
(i) Compare repo rate and reverse repo rate in the context of the [2]
Indian monetary policy. (Analyse)
(ii) With the help of a diagram, explain the concept of Deficient Demand. [6]
Discuss one fiscal measure and one monetary measure to correct it.
(Understand)
OR
(iii) How is High Powered Money different from Broad Money? (Analyse) [2]
(iv) National output or real national income is said to be at equilibrium level
when aggregate supply becomes equal to the aggregate demand.
Explain this phenomenon with the help of a diagram.
Does this equilibrium always take place at full employment level? [6]
Explain. (Understand)

Question 12
Attempt either subparts (i) and (ii) or (iii) and (iv).
(i) Green Field Farm, located on the outskirts of a city, owns a fixed area of
10 acres of land. The farm manager decided to increase the number of
workers to boost output.
Initially, the hiring of additional workers led to a rapid increase in total
crop production. The workers were able to divide tasks such as ploughing,
sowing, watering, and harvesting more efficiently, leading to better
utilisation of resources.
However, the increase in total output began to slow down after a certain
point, despite the employment of more workers which eventually led to a
decline in the farm's total output.
(a) With the help of a diagram, explain the law applicable to this [4]
situation. (Analyse)

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lfarm's
a
Briefly explain the reasons behind this phenomenon. (Understand)
[2]

(ii) Explain the total cost curve. (Understand) [2]
OR
(iii) A potato farmer sells his produce at ₹ 850 per quintal, like other potato
farmers.
Consider the following data:
• For 6 quintals of potato, MR = ₹ 850 & MC = ₹ 850
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• For 7 quintals of potato, MR = ₹ 850 & MC = ₹ 845
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• For 8 quintals of potato, MR = ₹ 850 & MC = ₹ 850
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• For 9 quintals of potato, MR = ₹ 850 & MC = ₹ 856
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(a) What amount of potato will he produce to maximise his profit?
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motivate his decision. (Analyse)
(b) Represent the profit maximising level of output diagrammatically. [2]
(Understand)
(iv) Explain the total revenue curve under the imperfectly competitive market. [2]
(Understand)

Question 13
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questions based on the information provided.
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Study the graph given below and read the excerpt that follows. Answer the

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Exchange Rate Value -
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Indian Rupee against US Dollar

90·28
88·75
87·06

Aug 25 Sep 25 Oct 25 Nov 25 Dec 25 Jan 26

1. India’s total exports during April-December 2025 are estimated at
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US$634·26 billion registering a positive growth of 4·33 percent.
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Total imports during April-December 2025 are estimated at US$730·84
billion registering a growth of 4·95 percent.
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las the highest on record.
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ag 3. Foreign investors started December on a sharply negative note, pulling out
₹11,820 crore from the Indian equities in the first week. This offloading
by the foreign portfolio investors was majorly driven by the steep decline
of the rupee.
(Sources (edited): Economics Times; Times of India; https://www.pib.gov.in and:
https://www.xe.com/)
(i) Analyse the trend in exchange rate of rupee in terms of US dollar over the [2]
period depicted in the graph. (Analyse)

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(ii) The present trend of Indian rupee is associated with the flexible exchange [2]
rate system. Discuss whether this trend would be possible in fixed exchange
rate system. (Analyse)
(iii) Categorise the transactions mentioned in the passage into different [2]
components of Balance of Payments. (Understand)
(iv) Predict the impact of change in exchange rate of rupee against US dollar, on [2]
the national income of India. (Create)

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ECONOMICS
ANSWER KEY

SECTION A – 16 MARKS

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Question 1
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In answering Multiple Choice Questions, candidates have to write either the
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correct option number or the explanation against it.

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Please note that only ONE correct answer should be written.

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(i) (c) Clato B. [1]
a the producer is a risk averter.
(ii) (a) [1]
(iii) (b) Monopoly [1]
(iv) (d) average revenue is less than average variable cost. [1]
(v) (c) APS = 0 [1]
(vi) (b) Loanable fund will become cheap. [1]
(vii) (b) 2nd slice
m [1]
(viii) (a) Both Assertion and Reason are true, c. o and Reason is the correct [1]
explanation of Assertion.
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(ix) (c) Assertion is true but Reason islfalse. [1]
a RBI
(x) (a) Sale of Treasury Bills to the [1]
(xi) ∆Y = 2 ∆I [1]
1
∆Y/∆I = 2 = k = 𝑀𝑃𝑆
1 1
𝑀𝑃𝑆
= 2 or MPS =
2
(xii) Sinking Fund is a debt redemption method in which the government [1]
deposits a fixed equal amount every year into a separate fund.
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c. o(xiii) CRR falls whereas SLR remains unchanged.
be used to repay public loan.
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a contribute to the GDP as it is a transfer payment.
Or
This statement is defended. Monthly Pension Scheme may cause increase in
demand for goods and services which will stimulate the production and
hence growth in GDP. Therefore, it indirectly contributes to the growth of
GDP.
(Candidates may defend or refute the statement. They must write a valid
reason to substantiate their stance.)

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(xv) With a continuous increase in the consumption of a commodity, total utility [1]
increases at a diminishing rate, i.e., marginal utility diminishes.
(xvi) The image depicts the law of Returns to a Factor. [1]
Here production (number of saree) has increased due to increase in labour
(L) from one labourer to two labourers, but the number of handlooms, i.e.,
the capital (K) remains unaltered. Here K/L is variable.

SECTION B – 32 MARKS
Question 2
(i) Bundle B contains both the commodities more than Bundle A. Following [2]
the axioms of non-satiety and monotonicity, Bundle B is preferred to
Bundle A, i.e., Bundle B provides higher level of utility. It lies on the higher
indifference curve because higher indifference curve represents higher level
of utility.
(ii) The first situation indicates increase in supply of wheat which is illustrated [2]
as follow:
Price S
S1

P*

Quantity
O Q1 Q2
The second situation indicates expansion of supply which is shown below:
S
P2
Price
P1

O Q1 Q2 Quantity

Question 3
(i) A perfectly competitive firm faces a horizontal or perfectly elastic demand [2]
curve because a firm can sell any amount of the product at the market
determined price as it is a price taker. A monopolist, on the other hand,
faces a negatively sloped demand curve because if it wants to sell more,
price is to be lowered to induce the consumer to demand the increased
quantity.

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(ii) a
(a) Product differentiation under monopolistic competition [1]
Each firm under monopolistic competition sells non-homogeneous
product. They are close substitutes but not similar as their
advertisement, packaging, after sales service, quality of inputs used
in production differs.
(b) Intense competition in oligopoly [1]
As there are a few big firms under oligopoly market, each firm is
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aware of the strategy of the rival firms and uses appropriate strategy
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to deal with the competitors for increasing its own market share.

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For this, they follow price competition and different types of
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non-price competitions.
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ag form of market evident here is oligopoly.
(i) The [2]
The features of this market form are given below.
• This market form is characterised by few sellers. In the given
situation, there are only two big app-based cab service companies in
the market.
• Intense competition and interdependence is another feature evident
in this scenario. The two companies always closely monitor the
strategy of each other while fixing their own price.
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(ii)
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Candidates have to devise a measure that they would use, as the owner of [2]

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the cab service company, to tackle the mentioned problem. The measure
must be relevant to the given situation.
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Suggested possible measure:
a
Declaration of bonus or incentives to the drivers in peak time of the day to
encourage them to operate on the road at that time. It will lead to an increase
in the supply of cab services and stabilise the fares at lower level as shown
in the diagram below.

S1
S2

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Cab Fare
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P2

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D
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O Q1 Q2 Cab Services
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OR

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(iii) Reduction in GST rate will enable the firm to supply the same quantity at a [2]
lower price or higher quantity at the given price. It will lead to a rightward
shift in supply curve to S2 and new equilibrium price will be P2 as shown in
the diagram below, that is, price will fall.
S1
S2
P1
Price of Soap
P2

D
D
O Q1 Q2 Quantity of Soap
O
Q
(iv) As a new entrepreneur of soap, candidates have to create a strategy that [2]
would help them increase their market share. The strategy must be
relevant to the given situation.
Suggested possible strategies:
• New features can be added to the product such as the use of new
fragrance or extract of any medicinal herb required for bodily care.
• Packaging of soap can be done by reusable material.
These will make the product different and attractive to the consumer.
Through this type of product differentiation, market share can be secured.
(Any other creative and logical measure appropriate for monopolistic
competition will be accepted.)

Question 5
(i) Any firm under perfect competition does not require selling cost to raise its [2]
market share as every firm sells homogeneous product and faces a perfectly
elastic demand curve. It can sell any amount of its product at the given
price. Moreover, the buyers have perfect knowledge about the market.
(ii) The profit over and above the normal profit is called supernormal profit. [2]
Normal profit remains included in the total cost of production.
So, supernormal profit arises when total revenue of the firm exceeds total
cost of production.

The area P0EAB indicates supernormal profit.

4 ISC SPECIMEN ANSWER KEY 2027

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Question 6 a [4]
(i) GNPmp = (a) + (b) + [(c) - (g)] + (d) + (h) – (e)
= 2750 + 300 + [250 – 30] + (-25) + 45 – 50
= ₹3240 Cr.
NI or NNPfc = GNPmp – (i) - (j)
= 3240 – 100 – 100
= ₹3040 Cr.
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OR
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(ii)
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NDPfc = (b) – (c)
= 500 – 100 = 400 s e m
s e l a
NDP a= (d) + (e) + (f) + (g) + income from entrepreneurship (profit) + (h) +
g l (j)
fc
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a
Income from Entrepreneurship = NDPfc – (d) – (e) – (f) – (g) – (h) – (j)
= 400 – 90 – 105 – 30 – 20 – 50 – 20
= ₹85 Cr.

Question 7

om
(i) In the given pie chart, revenue expenditures are Salaries and Pensions, [2]

. c
Subsidies and Interest payments which constitute 70% of the total budgetary
expenditure.
e m
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The expenses on the purchase of Defence Equipment and, Construction of

ag
Highways and Government School Buildings are Capital expenditures. It is
altogether 30% of the government expenditure. Hence, the pie chart depicts
that there is more provision for revenue expenditure than the capital
expenditure in the budget.
(ii) (a) In the Financial Year 2024, revenue deficit was estimated as 40% of [1]
the B.E. (Budget Estimates) whereas fiscal deficit was around 50% of
the B.E. It shows fiscal deficit was estimated more than the revenue
deficit.
(b) In the Financial Year 2025, primary deficit has been reduced [1]
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insignificantly in comparison with 2024. However, it depicts an
m alarming increase in the Financial Year 2026. It implies that

m .co government borrowing was made in huge amount to meet current
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s e
expenditure other than interest payment.
g l a
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a Question 8
(i) In the given situation, RBI can raise the margin money only for the loan [2]
provided for speculative activities in the stock market which will discourage
the borrowing for this purpose. But if repo rate is raised, it will make all
types of loans costlier along with this speculative loan and hence credit flows
will be less even in the priority sectors. This would not be desirable in a
developing country like India.

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(ii) The statement is defended. [2]
Commercial bank lends from every deposit over and above its required
reserve in the process of credit creation. But if the required reserve is same as
initial deposit, that is, if CRR is 100%, then the entire amount of the deposit
would be kept as required reserve and bank will not be able to lend.
Thus, the process of credit creation will cease to operate.
OR
(iii) People in different border areas use currency of neighbouring country in their [2]
daily life to purchase and sell different goods and services. This currency is
used as a medium of exchange in these areas and regarded as money.
However, it is not backed by the legal order of the government of the country
concerned. Thus, it is not the legal tender money.
(iv) This statement is refuted. [2]
This practice implies more money in the demand deposits which increases
loan giving capacity of the bank and through credit creation process, money
supply eventually increases in the economy.
Or
This practice leads to less notes and coins with public (C) but more demand
deposits with commercial bank (DD) in the form of primary and derivative
deposits through the process of credit creation. Therefore, money supply, as
M1, will be more in the economy.
(Candidates have to write a valid reason to substantiate their stance.)

Question 9 [4]
No, it does not lead to economic welfare of the country for the following reasons:
• Increase in nominal GDP may be the reflection of inflation.
• It may not lead to the increase in per capita GDP for high population
growth.
• Increase in nominal GDP may not ensure equality.
• Environmental degradation is not reflected through increase in nominal
GDP.
(Candidates are required to support their stance by expanding on the
above-mentioned points. Any other relevant reason(s) will be accepted.)

SECTION C – 32 MARKS

Question 10
(i) Factors affecting the price elasticity of demand for a product: [6]
(a) Availability of substitutes: The demand for the product with a greater
number of substitutes is relatively elastic than the product with less
number of substitutes. This is so because with rise in price of the
product, consumer can shift to other substitutes and as a result demand
for the commodity concerned will fall more. But the consumer cannot
reduce the demand much for the product in the same situation which
has less number of substitutes or no substitute. Hence, demand
becomes relatively inelastic.

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a
(b) Proportion of income spent: If a very small proportion of income is
spent on a particular commodity, consumer will not be impacted by a
change in price of the commodity and demand for this commodity will
become inelastic. Whereas, if already a noticeable proportion of
income is spent on any good, consumer will respond more to change in
price of such good, i.e., demand will be elastic.
(c) Necessity versus Luxury: The demand for any necessary good is
inelastic as its demand does not change much with change in its price,
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whereas demand for luxury good is elastic because its demand changes

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much with change in its price as consumer can do without it if its price
rises.
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(d) Short run versus long run: Demand for any product in the short run is

g lgenerally inelastic as consumer is unable to change their habit and find
a the substitutes of the product within a short time. In the long run, as
more substitutes can be made available and consumer can also change
habit, demand for a commodity responds more to change in its price,
i.e., demand becomes elastic.
(ii) Reasons for upward slope of the supply curve: [2]
• Profit motive: Higher price raises profit margin which attracts the
producer to produce and supply a larger quantity to enjoy this excess
profit, i.e., supply of the commodity varies directly with the price.
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• Increase in the number of firms: Higher prices attract new firms that
were unable to produce and supply the good at lower prices.
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Hence, quantity of supply increases with increase in price.

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• Increase in marginal cost of production: Producing additional units

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often becomes more expensive due to diminishing returns. In this
situation, higher market price is needed to cover this rising marginal
cost.
(Candidates have to write any two reasons for the upward slope of the
supply curve.)

Question 11
(i) Similarity:
o m [2]

m
Repo rate and reverse repo rate are short term monetary instruments used by
. c
c. o central bank to control inflation and recession in the same way. Both of them
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are raised to curb inflation and are reduced to tackle recession.
s g l a
la Repo rate is the rate of interest charged by central bank onathe commercial
Dissimilarities:

ag bank while short-term loan is given by central bank to the commercial bank.
On the other hand, reverse repo rate is the rate of interest offered by central
bank to the commercial bank when former takes short term loan from the
latter.

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(ii) If the aggregate desired expenditure or aggregate demand falls short of the [6]
aggregate supply available at the full employment level of output, it is
considered as a situation of deficient demand.

Y
M ADF

Aggregate
expenditure ADP
N

450
O Income
YF
We observe that at the full employment level of output represented by YF,
the present aggregate demand, i.e., ADP, falls short of aggregate demand
required to maintain full employment, i.e., ADF or YF by an amount of MN.
This MN represents the deficiency of demand / deficient demand.
Fiscal measure:
Taxation: Government can reduce the direct tax rate which will raise the
disposable income of the people. This will lead to an increase in the
consumption expenditure and hence the aggregate demand.
Monetary measure:
Bank rate: Central bank can reduce the bank rate which will lead the
commercial banks to lend at lower rate of interest. It will cause more
borrowing by the people and ultimately raise the consumption expenditure.
Moreover, lower lending rate of interest will encourage more investment.
Thus, present aggregate demand will rise.
OR
(iii) • High Powered Money (M0) is the monetary base of the country, [2]
whereas Broad Money (M4) is the total money supply in the
economy.
• The components of High Powered Money are currency held by the
public, cash reserve with commercial bank, required reserve of the
commercial banks with the central bank and other deposits with the
RBI. Broad Money, on the contrary, consists of currency held by the
public, demand and time deposits with the commercial bank, postal
savings bank deposits and other deposits with the RBI.
• High Powered Money contains highest level of liquidity of money,
but Broad Money contains least liquid money.

8 ISC SPECIMEN ANSWER KEY 2027

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(iv) a [6]
C AS = Y

AD = C + I
A D
E
Aggregate Expenditure &
Income
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B

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Y 1 Y Income 2

a
Equilibrium level of income
this level of income AD = AS.
has been determined at the level Ye because at

At Y1 level of income, AD > AS. Excess demand, AB, induces the producers
to produce more and hence income increases until Y = C + I.
If Y = Y2, AD < AS and for this excess supply, CD, producers will reduce
production and hence income will fall to the level of Ye. That is the income
will be stable only when AD =AS.
Equilibrium does not always take place at the full employment level.
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Equilibrium takes place when aggregate demand is equal to aggregate
supply. It is not necessary that this aggregate supply will always be the
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maximum potential supply generated at the full employment level. If the

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desired aggregate expenditure of the economy becomes equal with the given

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output which is produced even without utilising the entire resources of the
economy, equilibrium will take place.

Question 12
(i) (a) The phenomenon indicates the operation of the Law of Variable [4]
Proportions which is explained in the following diagram:

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a
Stage I (Increasing return): Initially Total Product (TP) increases at
an increasing rate up to point M, and increases at a diminishing rate
between M and A. The point M, at which the TP curve changes its
curvature, i.e., TP starts increasing at diminishing rate, is known as
the point of inflexion.

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MP rises first, reaches its maximum at L1 level of employment and
then starts decreasing but remains positive throughout. AP rises
throughout. This stage ends when the AP reaches maximum at the
level of employment, L2.
Stage II (Diminishing return): Total Product increases at a
decreasing rate and reaches its maximum at T.
Marginal Product diminishes. When Total Product reaches the
maximum, marginal product becomes zero at L3 level of employment.
AP begins to decrease from the maximum but remains positive.
Stage III (Negative return): Total Product diminishes with further
increase in labour. MP becomes negative. AP continues to decrease
but remains positive.
(b) The causes are as follow: [2]
• Machine breakdown and overcrowding: The employment of
more and more labour on the same machine causes its
breakdown. Moreover, lesser availability of machines per labour
reduces labour efficiency.
• Inefficient labour management: Too many workers may cause
inefficient labour management and a tendency of neglecting
duties among the workers and hence decline in production.
(ii) Total Cost (TC) curve is a positively sloped ‘inverted S’ shaped curve with [2]
positive intercept. Due to the operation of the law of increasing return,
TC curve is initially concave to the output axis as TC increases at a
diminishing rate with increase in output. Later, it increases at increasing rate
due to the operation of the law of diminishing return and the curve becomes
convex to the output axis.
OR
(iii) (a) The farmer will produce 8 quintals of potato. [4]
Every producer takes decision regarding the profit maximising level
of output to be produced for which both necessary and sufficient
conditions get satisfied.
For both 6 quintals and 8 quintals, MR = MC = 850. The necessary
condition has been satisfied for both these quantities. But the
sufficient condition has been satisfied only for 8 quintals of output.
The sufficient condition implies that the slope of the MC curve will
be greater that the slope of MR curve. In other words, if a firm
produces a slightly higher level of output than the level for which
MR = MC, its additional cost will be greater than the additional
revenue or simply MC > MR and if it produces a slight lower level of
output, its additional cost will be lesser than that of revenue, i.e., MC
< MR.
Here at 7 quintals, MC (₹ 845) < MR (₹ 850)
And at 9 quintals, MC (₹ 856) > MR (₹ 850)
Therefore, the producer would follow the principles of MR = MC
and slope of MC curve > slope of MR curve while determining the
level of output (8 quintals) for maximisation of its profit.

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(b)
MR & MC
a [2]
MC

E1
P0 MR
E2

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O Q1 Q2 Output / Potato
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E2 is the equilibrium point as both necessary and sufficient
conditions have been satisfied here, and farmer will produce OQ2
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s e m
level of output (8 quintals of potato).
[2]gl
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(iv)
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TR curve under imperfect competition is positively sloped concave to the
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a
horizontal axis and passing through origin. As firm under imperfect
competition has to lower the price of its product to sale more, TR increases
at a diminishing rate and for this TR curve slopes positively and concave to
the quantity axis.

Question 13
(i) In the month of August 2025, $1 = ₹87·06 which changed to $1= ₹90·28 in [2]
the month of January 2026. It shows that more and more Rupee had been
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exchanged for 1 USD. Over the period of six months, the value of Rupee in
terms of US dollar had continuously declined. It shows the depreciation of
Rupee.
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(ii)
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Under fixed exchange rate system, exchange rate is determined and [2]
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maintained by the central bank of the country. Naturally, value of rupee
cannot fall by the market forces. But the central bank can deliberately reduce
the value of rupee against USD through devaluation for the purpose of
correcting adverse BOP. Therefore, this trend is possible in the fixed
exchange rate system also.
(iii) The passage mentions three different components of Balance of Payment: [2]
• Point 1 mentions total exports and total imports which are the
components of current account.
• Point 2 refers to unilateral receipts under current account.
m
m • Point 3 indicates capital payment under capital account.
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m .co (iv) Depreciation of Rupee would make Indian product cheaper in the foreign
s em [2]

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market and foreign product will be expensive in the Indian market.

las Consequently, export (X) from India would increase and import (M) would
ag
ag fall.
We know that,
National Income = Consumption expenditure (C) + Private investment
expenditure (I) + Government expenditure (G) + Net export (X-M) +
Net factor income earned from abroad – Depreciation – Net indirect tax.
For higher export and less import, net export would not only be positive but
also increase which would cause a rise in national income.

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