Economics 9708/42 February/March 2019: question paper and mark scheme
Cambridge AS & A Level Economics (9708), Paper 4 Data Response and Essays, February/March 2019. Read both free below, or download them. Done the paper? Get it marked by AI against this mark scheme.
Downturn in the growth of the world’s leading economies
In February 2016 there were dramatic changes in both financial and commodity markets across the world. Central bank interest rates in some countries were at their lowest recorded level, prices of banking shares fell heavily and oil prices in New York fell to US$26.34 a barrel, the lowest in
13 years.
Economists warned that the falls in share prices could indicate a downturn for economies with a possible collapse of banks, as happened in the financial crash of 2008. A healthy banking system is needed to promote economic growth. Very low interest rates undermine the profitability of commercial banks.
Overproduction of oil by Saudi Arabia, the leader of the oil cartel OPEC, created price falls and deficits in the budgets of its OPEC partners that resulted in contractions in the economies of oil- exporting countries. On the other hand, oil-importing countries benefited from lower production costs although their governments claimed that revenues from sales taxes on oil products fell.
Also in 2016, China’s demand for oil fell because of a downturn in its economy. In 2010 China’s economy grew by 10%. By 2015 the rate had fallen to 6.9%. Some critics said that China’s high economic growth was enabled by the excessive borrowing of the central government to build massive infrastructure projects – such as roads, offices and factories. This meant that the government owed huge amounts to banks driving them towards bankruptcy. These debts were linked to excess capacity in the construction and manufacturing industries.
The Organisation for Economic Co-operation and Development (OECD) expressed concern at the state of the global economy in 2016. It criticised the over-reliance by some of the world’s major economies on monetary policies based on low interest rates and quantitative easing. It argued that monetary policy cannot work alone to boost an economy and that fiscal expansion was needed to increase aggregate demand and aggregate supply. By 2016, many economies had reduced government spending and aimed at cutting budget deficits. As a result the OECD reduced its GDP growth forecasts in 2016. For example, the world average forecast growth rate was cut from 3.3% to 3.0%.
Sources:
1 The Guardian, 12 February 2016
2 Reuters, February 2016
3 The Times, 13 February 2016
4 The Guardian, 19 February 2016
Table 1.1: OECD reduction in GDP growth forecasts, 2016
Country Reduction (%)
World average −0.3
France −0.1
United Kingdom (UK) −0.3
Italy −0.4
United States (US) −0.5
Germany −0.5
Canada −0.6
Source: OECD
(a) What is meant by ‘quantitative easing’? [3]
(b) Explain why ‘a healthy banking system is needed to promote economic growth’. [4]
(c) Explain what caused the fall in the price of oil and analyse whether the evidence in the article indicates that the only cause of the economic downturn in various economies was the fall in the price of oil. [6]
(d) Consider the concerns and recommendations of the OECD about the state of the global economy. [7]
Section B
Answer two questions from this section.
Mark scheme
1(a) The central bank creates money through its open-market operations. It 3
involves the purchase of bonds with cash which increases the stock of
money held by banks and financial institutions. This would have an effect on
interest rate and increases the potential for lending in the economy.
1(b) Central bank controls credit creation and hence money supply to control 4
inflation.
Commercial banks create credit to finance consumption and investment by
households and enterprises and thus provide liquidity in an economy.
If bank customers lose faith in the banking system there could be a run on
the banks leading to collapse in banking services.
1(c) Cause of oil price fall – increased oil supplies (Saudi Arabia/OPEC cartel) 6
– declining demand (China) (up to 2 marks)
Direct effects on oil producing economies – lower export revenues and
budget deficits – reverse multiplier effects. Could lead to economic
downturn.
Oil importing countries benefit from lower production costs but loss of
revenue from taxes on oil products can lead to budget deficits also.
(up to 2 marks)
However China’s downturn has been caused by over-investment on
infrastructure based on excessive borrowing rather than by the fall in the
price of oil. Article says reduced government spending and government
fiscal policy also could cause economic downturn.
(up to 2 marks)
1(d) Must discuss OECD criticism. 7
Monetary policy based on low/negative interest rates plus quantitative
easing has increased money supply but has not necessarily led to increased
growth. Investors may lack confidence in future markets and banks have
been over-cautious lending to enterprises.
(up to 4 marks)
Fiscal expansion was advocated by OECD to encourage governments to
reduce taxation and increase spending on infrastructure. However care is
needed as shown by China’s example of overspending, over borrowing on
projects leading to excess capacity.
(up to 4 marks)
Max 7
‘Governments should use whatever methods they can to regulate monopolies because they are inefficient.’
Consider whether monopolies are always inefficient and what methods might be used by governments to regulate them. [25]
Mark scheme
2 Explanation of the analysis of efficiency and an analysis of why monopoly 25
might not achieve efficiency. Consideration of whether all monopolies
necessarily cause inefficient production and what policy might be used by a
government to deal with the inefficiency if it occurs.
L4 (18–25 marks): for a good analysis of productive and allocative
efficiency; a comment on the possibility of benefits of monopoly through
economies of scale, and a discussion of the likelihood of achieving this
allocation through government policies.
L3 (14–17 marks): for a competent explanation of efficiency probably
concentrating on productive efficiency and a more limited discussion of the
possibility of achieving efficiency through government policies. Little mention
of benefits of monopoly.
L2 (10–13 marks): for a limited account without a full analysis of efficiency
and with a general comment on government policies.
L1 (1–9 marks): for an answer that has some basic correct facts but includes
irrelevancies and errors of theory.
(a) Explain why indifference curves are usually drawn convex to the origin, are downward sloping and do not cross each other. [12]
(b) Consider, for an inferior good, the relationship between indifference curves, budget lines, price changes and demand curves. [13]
Mark scheme
3(a) Explanation of diminishing marginal utility, and how more of a good is 12
preferred to less of a good so the curves cannot cross; they have an
‘indifferent’ response along them representing a constant level of utility.
L4 (9–12 marks): for a clear analysis of ICs and all three parts of the
question.
L3 (7–8 marks): for a less competent explanation of at least two of the parts
of the question or a weaker explanation of all three parts.
L2 (5–6 marks): for a competent explanation of one part or a weak
explanation of two elements of the question.
L1 (1–4 marks): for an answer that has some basic correct facts but includes
irrelevancies and errors of theory.
3(b) Theory states that consumers maximise satisfaction and determine demand 13
by relating utility to price; this is shown by indifference curves and budget
lines. Income changes shift budget lines parallel, price change of one good
cause budget line to pivot. Equilibrium is changed – the extent and direction
depending on the type of good. Explanation of income and substitution
effects for an inferior good.
L4 (9–13 marks): for a clear explanation of the links and correct analysis of
income and substitution effects of price change.
L3 (7–8 marks): for a briefer explanation; no clear link to the demand curve,
or link to demand but some confusion over income and substitution.
L2 (5–6 marks): for a poor explanation of the terms or a weak comment on
the links.
L1 (1–4 marks): for an answer that has some basic correct facts but includes
irrelevancies and errors of theory.
(a) Analyse whether there is a link between the marginal cost of a firm and
(i) its variable cost;
(ii) the supply curve of the industry to which the firm belongs. [12]
(b) Discuss how the objective of a firm in an oligopolistic market might differ from the objective of a firm in a perfectly competitive market. [13]
Mark scheme
4(a) Marginal cost changes with the variable cost change; MC is firm’s supply 12
curve in perfect competition, sum of firm’s supply curves gives industry
supply. Does not apply with imperfect competition.
L4 (9–12 marks): for a clear explanation of the links and correct analysis of
both parts.
L3 (7–8 marks): for a clear analysis of one part – probably the link to
variable cost – with confusion over the second part.
L2 (5–6 marks): for a briefer explanation of one part and omission of the
second part.
L1 (1–4 marks): for an answer that has some basic correct facts but
includes irrelevancies and errors of theory.
4(b) Perfect competition assumes profit maximising. Oligopoly usually assumes 13
collusion and a less volatile price. It still can assume profit maximising.
However, with collusion the profit maximising output/price can be for the
industry and each firm is given an output quota which is not necessarily the
profit maximising output for that firm. A firm can compete by non-price
competition or break the agreement.
L4 (9–13 marks): for a clear analysis with a good structure on the oligopoly
section.
L3 (7–8 marks): for a clear analysis of perfect competition but less
competent analysis and development of oligopoly. Profit maximising stated,
but collusion not fully developed.
L2 (5–6 marks): for a weaker answer of the differences and links.
L1 (1–4 marks): for an answer that has some basic correct facts but
includes irrelevancies and errors of theory.
(a) According to economic theory, what is the significance for a firm in a perfectly competitive labour market of a worker’s marginal product and average product? [12]
(b) Discuss the economic conditions that might make it possible for a trade union to increase the wages of its members without reducing the number of workers employed. [13]
Mark scheme
5(a) Candidates need to explain the MRP theory and the equilibrium position of 12
the firm comparing MRP with supply. Question specifies marginal product so
the answer should not just mention demand with no reference to MRP. MRP
and supply determine wage; AP is used to construct the ARP which is
significant in determining level of profit for the firm.
L4 (9–12 marks): for a clear analysis of the MRP theory; an explanation of
the equilibrium position and a comment on relevance of ARP for profit.
L3 (7–8 marks): for a weaker but correct analysis of the theory probably
with a poor attempt to deal with the ARP and profit levels.
L2 (5–6 marks): for a limited attempt at both the MRP and ARP/profit
element of the answer.
L1 (1–4 marks): For an answer that has some basic correct facts but
includes irrelevancies and errors of theory.
5(b) Not possible for a trade union to increase wages in perfect competition. 13
Discussion of imperfectly competitive market; of monopsony (can increase
wage up to point where MC=MR); or possible increase in productivity; or
when labour is a small element of cost; or when there is an increase in
demand for the product; or when there is an increase in price (and thus MR)
of product.
L4 (9–13 marks): for recognition of the difference between perfect and
imperfect competition and a clear analysis of the imperfectly competitive
case recognising different possible outcomes.
L3 (7–8 marks): for a competent analysis, without a clear distinction
between the two types of market structure and without recognising the
different possible outcomes in imperfect competition.
L2 (5–6 marks): for an answer that concentrates on one of the market
structures or considers both structures but with poor analysis.
L1 (1–4 marks): for an answer that has some basic correct facts but
includes irrelevancies and errors of theory.
(a) Distinguish between leakages and injections in the circular flow of income and consider how they might be related. [12]
(b) Critically evaluate a central bank’s use of interest rates to increase injections into an economy.
[13]
Mark scheme
6(a) Answers should identify each of three leakages and each of three injections 12
into the circular flow of income. The key distinction should focus on the
autonomous nature of the injections and the endogenous nature of
withdrawals. A diagram might be used to demonstrate this distinction. Some
attempt should be made to show how an injection might affect a leakage or
vice versa. For example, an increase in investment (injection) might lead to an
increase in income, which might lead to an increase in savings (withdrawal).
L4 (9–12 marks): for a detailed explanation of the differences between
leakages and injections and a clear attempt to discuss whether, or in what
circumstances, changes in one might cause changes in the other. Good
answers will refer to at least two examples of situations which might arise
which support the idea that leakages and injections are related.
L3 (7–8 marks): for an answer which clearly identifies leakages and injections
and makes some attempt to establish differences. A diagram might be
provided. A limited attempt might be made to show how these might be
related.
L2 (5–6 marks): for an answer which identifies each leakage and each
injection but does not fully explain the key distinction between the two.
L1 (1–4 marks): for an answer that shows some knowledge but does not
indicate that the question has been fully grasped or where the answer is
mostly irrelevant.
6(b) Candidates should be able to link interest rate changes to each of the three 13
injections. A diagram might be used to demonstrate this understanding.
Answers should focus on why injections might rise. For example, a
decrease in interest rates might lead to a fall in exchange rates which in turn
might lead to a rise in exports (injection). Good responses will attempt to
critically evaluate this policy. For example, discussing why a fall in exchange
rates might not affect exports in the short run. A similar approach can be
adopted for each of the three injections.
L4 (9–13 marks): for an answer that recognises that the impact of interest
rate changes on injections will depend upon a number of related variables
and that the potential changes will differ in the short run compared with the
long run. Good responses will attempt to critically evaluate the impact. For
example, a reduction in interest rates might have a limited effect on
investment if in a recession investor confidence is low. There should be at
least two examples of similar critiques.
L3 (7–8 marks): for an answer that attempts to analyse the links between a
fall in interest rates and changes in each injection. A positive impact should
be identified. The analysis might be supported by a diagram and some
comment might be made on the impact of these changes on income, output
and employment.
L2 (5–6 marks): for an answer that is limited to a descriptive explanation of
the relation between interest rate changes and changes in each injection.
L1 (1–4 marks): for an answer that has some basic correct facts but
includes irrelevancies and errors of theory.
‘Keynesian policies to solve the problem of unemployment will not work because they will conflict with the attainment of other key macroeconomic aims.’
Assess the accuracy of this statement. [25]
Mark scheme
7 A detailed explanation of Keynesian demand management theory and how 18
associated policies might be used to solve the problem of unemployment.
Evaluative comment should be provided to consider whether such policies
are likely to work. Candidates should ensure that they discuss the extent to
which these polices will conflict with the attainment of other key
macroeconomic goals. For example, deficit spending might cause inflation, it
might lead to higher interest rates and lower growth, it might increase
balance of payments deficits.
L4 (18–25): for a response which combines detailed analysis with clear
examples of evaluative comment. Good responses will identify at least two
potential conflicts and use economic theory to assess the accuracy of the
statement under consideration.
L3 (14–17): for a clearly set out analysis of the links between budget deficits,
the multiplier and the final effects on income, output and employment with
some attempt to examine why this might make the achievement of alternative
economic goals more difficult.
L2 (10–13): for an answer that demonstrates some limited understanding of
how Keynesian policies might be used to solve the problem of unemployment.
Answers are likely to be descriptive rather than analytical.
L1 (1–9): for an answer that shows some knowledge but does not indicate that
the question has been fully grasped. The answer will have some correct facts
but include irrelevancies.
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Economics 9708/42 for February/March 2019 is out of 70 marks, with 2 hours 15 minutes to answer it.
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