Economics 2025 Paper I 50 marks 150 words Compulsory Prove

Q1

Answer the following questions in about 150 words each : 10×5=50 (a) Show that when prices and income increase in the same proportion, there will be no change in quantity demanded for a commodity in Marshallian approach. 10 (b) Interpret the slope of the IS curve. Why is IS curve normally negatively sloped ? 10 (c) What is classical dichotomy ? Is it the same as neutrality of money ? Explain. 10 (d) What are the major reasons for market failure ? Explain the role of the government in this context. 10 (e) What are the determinants of velocity of money in Fisher's equation ? How does it differ from the Cambridge version of velocity of money ? 10

हिंदी में प्रश्न पढ़ें

निम्नलिखित प्रत्येक प्रश्न का उत्तर लगभग 150 शब्दों में दीजिए : (a) दर्शाइए कि जब कीमतें और आय समान अनुपात में बढ़ती हैं, तो मार्शलियन दृष्टिकोण में, किसी वस्तु की माँग की मात्रा में कोई परिवर्तन नहीं होगा। 10 (b) IS वक्र की ढलान की व्याख्या कीजिए। IS वक्र सामान्यतः ऋणात्मक ढलान वाला क्यों होता है ? 10 (c) प्रतिष्ठित द्विभाजन क्या है ? क्या यह मुद्रा की तटस्थता के समान है ? समझाइए। 10 (d) बाजार की विफलता के प्रमुख कारण क्या हैं ? इस संदर्भ में सरकार की भूमिका की व्याख्या कीजिए। 10 (e) फिशर के समीकरण में मुद्रा संचलन-वेग के निर्धारक क्या हैं ? यह कैम्ब्रिज दृष्टिकोण के मुद्रा संचलन-वेग से किस प्रकार भिन्न है ? 10

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Directive word: Prove

This question asks you to prove. The directive word signals the depth of analysis expected, the structure of your answer, and the weight of evidence you must bring.

See our UPSC directive words guide for a full breakdown of how to respond to each command word.

How this answer will be evaluated

Approach

Prove the mathematical relationship in (a) using Marshallian demand function; for (b)-(e), explain concepts with diagrams where applicable. Allocate ~30 words per sub-part (150 words each), ensuring (a) shows homogeneity proof, (b) includes IS-LM diagram, (c) distinguishes dichotomy from neutrality, (d) covers market failures with government remedies, and (e) contrasts Fisher's transaction approach with Cambridge's cash-balance approach.

Key points expected

  • (a) Marshallian demand homogeneity: prove ∂Q/∂P·P + ∂Q/∂M·M = 0 when prices and income change proportionally, showing demand unchanged
  • (b) IS curve slope: dy/di = -1/[(1-c)dY/di + di/di] < 0; negative slope due to inverse investment-interest rate relationship
  • (c) Classical dichotomy: real variables determined by real factors, nominal by money supply; neutrality is outcome, dichotomy is methodological separation
  • (d) Market failures: externalities, public goods, asymmetric information, monopoly; government role via taxes, subsidies, regulation, public provision
  • (e) Fisher's velocity determinants: payment habits, financial innovations, transport; Cambridge k is reciprocal of V, focuses on money demand not transactions

Evaluation rubric

DimensionWeightMax marksExcellentAveragePoor
Concept correctness25%12.5Precise definitions across all parts: Marshallian homogeneity property correctly derived; IS slope formula accurate; classical dichotomy distinguished from neutrality; complete market failure taxonomy; Fisher vs. Cambridge distinction clearGenerally correct definitions with minor errors: homogeneity intuition stated without proof; IS slope explained descriptively; dichotomy and neutrality conflated; some market failures omitted; velocity determinants listed without contrastFundamental conceptual errors: confuses Marshallian with Hicksian; wrong IS slope sign; treats dichotomy and neutrality as identical; misses key market failures; fails to distinguish Fisher from Cambridge approach
Diagram / model20%10Appropriate diagrams for (b) IS-LM framework showing interest-income relationship; (d) market failure diagrams (externalities with MSC/MSB); clear labeling and correct slopesBasic IS curve sketched without LM reference; generic market failure diagram; diagrams present but poorly labeled or with minor errorsMissing diagrams where required; incorrect diagrams (e.g., AD-AS for IS curve); diagrams drawn but not explained or completely mislabeled
Quantitative reasoning20%10Rigorous mathematical proof for (a): Q(P,M) = Q(λP,λM) showing ∂Q/∂λ = 0; explicit derivative for IS slope; numerical illustration of velocity differences if applicablePartial proof for (a) with correct intuition but incomplete derivation; qualitative explanation of IS slope; mentions mathematical relationship without workingNo mathematical treatment where required; purely verbal explanations for (a); incorrect formulas or calculations; confuses partial and total derivatives
Indian / empirical examples15%7.5Relevant Indian illustrations: (d) pollution control in Delhi (CNG mandate), MNREGA as public good response; (e) demonetization's impact on velocity; RBI's liquidity management affecting kGeneric or dated Indian examples: broad reference to government schemes without specificity; international examples where Indian ones availableNo Indian examples; irrelevant or incorrect examples (e.g., using US Fed policy for Indian context); purely theoretical treatment throughout
Policy implication20%10Clear policy links: (d) specific government interventions—Pigouvian taxes for externalities, asymmetric information regulation (SEBI, IRDAI); (e) monetary policy implications of velocity stability for RBI's inflation targetingGeneral policy statements without specificity; mentions government role without concrete mechanisms; monetary policy mentioned without RBI contextMissing policy dimension entirely; vague 'government should intervene' without how; no connection between theory and contemporary Indian economic policy

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