Economics 2025 Paper I 50 marks Explain

Q4

(a) (i) Explain the effects of public spending on national income, if it is financed through government borrowings. (ii) Why do some believe that it is important to restrict the growth of public expenditure ? Suggest how public expenditure might be controlled. 10+(5+5)=20 (b) (i) Suppose that the market demand and supply functions are given by : Qd = – 500P + 5000 and Qs = 400P – 400 Find out the effects of imposition of specific sales tax of 18% on equilibrium price and quantity. (ii) In a monopoly market, the demand and cost curves are given by : p = 200 – 8q and c = 25 + 10q Suppose that the government imposes a tax of ₹ 10 per unit. How will equilibrium price and quantity be affected ? 8+7=15 (c) Define money multiplier and discuss its determinants. Explain in terms of money multiplier, how the banking system of an economy can control money supply. 15

हिंदी में प्रश्न पढ़ें

(a) (i) राष्ट्रीय आय पर सार्वजनिक व्यय के प्रभावों की व्याख्या कीजिए, यदि इसे सरकारी उधार के माध्यम से वित्तपोषित किया जाता है। (ii) कुछ लोग क्यों मानते हैं कि सार्वजनिक व्यय की वृद्धि को सीमित करना महत्वपूर्ण है? सुझाव दीजिए कि सार्वजनिक व्यय को कैसे नियंत्रित किया जा सकता है। 10+(5+5)=20 (b) (i) मान लीजिए कि बाजार की मांग और आपूर्ति फलन इस प्रकार दिए गए हैं : Qd = – 500P + 5000 एवं Qs = 400P – 400 18% के विशिष्ट बिक्री कर के लागू होने से, संतुलन मूल्य एवं मात्रा पर पड़ने वाले प्रभावों का पता लगाइए। (ii) एकाधिकार बाजार में, मांग और लागत वक्र इस प्रकार दिए गए हैं : p = 200 – 8q एवं c = 25 + 10q मान लीजिए कि सरकार ₹ 10 प्रति इकाई का कर लगाती है। संतुलन मूल्य एवं मात्रा पर इसका क्या प्रभाव पड़ेगा? 8+7=15 (c) मुद्रा गुणक को परिभाषित कीजिए एवं इसके निर्धारकों की विवेचना कीजिए । मुद्रा गुणक के संदर्भ में समझाइए कि अर्थव्यवस्था की बैंकिंग व्यवस्था मुद्रा आपूर्ति को कैसे नियंत्रित कर सकती है । 15

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Directive word: Explain

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How this answer will be evaluated

Approach

The question demands explanation across theoretical, mathematical and policy dimensions. Spend ~40% time on part (a) given its 20 marks weightage, covering both the income effects of debt-financed spending and expenditure control arguments with Indian fiscal examples. Allocate ~30% each to parts (b) and (c), ensuring precise calculations for tax incidence in competitive and monopoly markets, followed by clear exposition of money multiplier mechanics with RBI operational framework. Structure: brief introduction on fiscal-monetary interlinkages → systematic part-wise treatment with diagrams and calculations → conclusion on macroeconomic stability.

Key points expected

  • (a)(i) Ricardian equivalence vs. Keynesian multiplier effects; crowding-out through interest rates; debt sustainability and intergenerational burden
  • (a)(ii) Wagner's Law, Peacock-Wiseman displacement effect; fiscal responsibility legislation; zero-based budgeting and outcome-based expenditure control
  • (b)(i) Pre-tax equilibrium calculation; tax wedge derivation; consumer and producer burden distribution; new equilibrium price and quantity post-18% tax
  • (b)(ii) Monopoly pre-tax profit-maximizing output and price; post-tax marginal cost shift; comparison of tax pass-through between perfect competition and monopoly
  • (c) Money multiplier formula (1/CRR+SLR+ER); currency drain ratio; RBI's role through CRR, SLR, repo rate; open market operations impact on monetary base

Evaluation rubric

DimensionWeightMax marksExcellentAveragePoor
Concept correctness22%11Accurately distinguishes between income-expenditure approach and loanable funds approach for (a)(i); correctly applies Wagner's Law and Peacock-Wiseman thesis for (a)(ii); properly identifies tax incidence formulas and monopoly markup pricing for (b); precisely defines money multiplier with all leakages for (c)Basic understanding of multiplier effects and expenditure theories; correct equilibrium calculations but confused tax burden analysis; generic money multiplier definition without leakagesConfuses debt financing with money financing; misapplies tax formulas; defines money multiplier as simple reciprocal of CRR only
Diagram / model18%9Draws IS-LM showing crowding-out for (a)(i); Peacock-Wiseman ratchet effect diagram for (a)(ii); standard supply-demand with tax wedge for (b)(i); monopoly MR-MC with tax shift for (b)(ii); money supply process flowchart for (c)Basic IS-LM or supply-demand diagrams with partial labeling; missing monopoly diagram or money multiplier visualizationNo diagrams or fundamentally incorrect curves (e.g., upward-sloping demand)
Quantitative reasoning22%11Precise calculations: (b)(i) equilibrium P=6, Q=2000; post-tax P=6.89, Q=1556; consumer burden ₹0.89, producer ₹0.11; (b)(ii) pre-tax q=11.875, p=105; post-tax q=10.625, p=115; full ₹10 pass-through in monopolyCorrect method but arithmetic errors; identifies tax burden direction but miscalculates magnitudeIncorrect equilibrium derivation; confuses specific and ad valorem tax calculations; no mathematical working shown
Indian / empirical examples18%9Cites FRBM Act 2003 and NK Singh Committee recommendations for (a)(ii); references GST implementation and revenue-neutral rate debates for (b); discusses RBI's liquidity adjustment facility and CRR cuts during COVID-19 for (c)Mentions FRBM or RBI in passing without specific provisions; generic reference to Indian fiscal deficit without dataNo Indian examples; uses only hypothetical or developed country illustrations
Policy implication20%10Evaluates debt sustainability through debt-GDP ratio; assesses expenditure control mechanisms against welfare needs; analyzes GST efficiency vs. equity trade-offs; recommends calibrated monetary policy transmission through multiple instrumentsLists policy options without evaluation; states obvious conclusions without trade-off analysisNo policy discussion; purely descriptive treatment without normative implications

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