Economics 9708/21 May/June 2019: question paper and mark scheme

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1(a) Describe, using Fig. 1.1, how the value of the yuan against the 2 Accept an answer between 14% and 16%. US dollar has changed between 2014 and 2017. There has been a depreciation/fall in value. (1 mark) The depreciation was from about 6.0 yuan per US dollar at the beginning of 2014 to about 6.9 yuan per US dollar in 2017. This is a change of 0.9/6.0 = 15%. (1 mark) 1(b) The US President threatened to increase protectionism of the 4 US economy. Explain, using a diagram, how one of the methods of protectionism mentioned in the article can work. TARIFF For an explanation of how a tariff can work, stressing that it is a tax/duty on imported goods. (2 marks) For a diagram of a tariff. (2 marks) (1 mark for PQDS, 1 mark for showing distinction between supply without tariff and supply with tariff). OR QUOTA For an explanation of how an import quota can work, stressing that it relates to a limit in terms of the value of imported goods, or the volume of imported goods, or the market share of imported goods (2 marks) For a diagram of an import quota. (2 marks) (1 mark for PQDS, 1 mark for showing vertical quota line). 1(c) Explain two effects of the fall in China’s current account 4 A disadvantage of having a persistent current account surplus for China’s economy. surplus is that one country’s surplus is another country’s deficit. The country with the deficit may decide For example: to introduce protectionist methods, potentially damaging • If there is a decline in the demand for exports, resources could the extent of international trade. be diverted to produce goods for domestic consumption. • There could be a reduction in inflationary pressure if there is a fall in aggregate demand. • If the fall in the surplus is due to an increase in imports, it could lead to a higher standard of living. • A lower demand for exports could lead to an increase in unemployment. • There could be a decrease in GDP and economic growth. (Up to 2 marks for each effect) 4 marks maximum 1(d) Explain two likely reasons why China has opted for a managed 4 A free floating exchange rate system will be self- float exchange rate system. adjusting, but freely floating exchange rates tend to be rather volatile and unstable. For example: • The government will still have some influence. A pegged (fixed) exchange rate system will provide • The central bank will be able to influence exchange rate by stability and therefore confidence, but the maintenance intervention, e.g. buying/selling currencies or by changes in of this exchange rate could require extensive support interest rates. through the use of reserves. • Extent of float will be within certain limits. • The government will be able to influence an economy through Some reserves will be needed (US $2 trillion in the demand management. case of China), but given that there is limited floating, • A managed float will allow an economy to have the best of both not as much reserves as in the case of a pegged (fixed) worlds (floating/fixed). (Up to 2 marks for each reason) exchange rate system; there is greater stability than in a freely floating system, but not as much as in a pegged 4 marks maximum (fixed) exchange rate system. 1(e) Discuss who would be the winners and the losers from a 6 The case for a protectionist ‘trade war’: ‘trade war’ between the US and China. • Infant/sunrise industry argument • Declining/sunset industry argument Consideration of who would be the winners from a protectionist • Strategic industry argument ‘trade war’ between the US and China. (Up to 3 marks) • Anti-dumping argument • Revenue-raising argument (through tariffs) Consideration of who would be the losers from a protectionist ‘trade • To help in the removal/decrease of a BOP deficit war’ between the US and China. (Up to 3 marks) The case against a protectionist ‘trade war’/in favour of 5 marks maximum free trade: • A higher level of output Reserve 1 mark for a conclusion/evaluative judgement • Countries can consume outside of their PPCs • Greater efficiency of production

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2(a) Explain, with the help of diagrams, how (i) constant and (ii) 8 Constant opportunity costs will lead to a straight line increasing opportunity costs determine the shape of an PPC being drawn, whereas increasing opportunity economy’s production possibility curve. costs will lead to a curved PPC being drawn. Knowledge and Understanding: Explanation of opportunity (1 mark) Explanation of production possibility curve (1 mark) (KU: up to 2 marks) Application: Explanation of the distinction between constant and increasing opportunity costs: • constant opportunity costs involves a movement from one point on the PPC to another with an equal sacrifice of resources; this will be shown by a straight line PPC Up to 3 marks • increasing opportunity costs involves a movement from one point on the PPC to another where ever increasing amounts of one good will need to be sacrificed to produce more of the other; this will be shown by a curved PPC Up to 3 marks (APP: Up to 6 marks) 2(b) Discuss what the most significant issues of transition are that 12 The issues of transition: a country will face as it moves from a planned economy to a • In a planned economy, the state can play a key role mixed economy. in keeping prices stable, but in a mixed economy at least some of the prices are determined by the Analysis: forces of demand and supply, so there is more The issues of transition: price instability and possibly inflation • Inflation • In a planned economy, the state can support • Output relatively inefficient firms and industries, but in a • Employment/Unemployment mixed economy, these firms and industries, if • Industrial unrest inefficient, may not survive and so there may be a • International trade fall in output • Welfare • Private sector firms will aim to maximise profits, but • Specialised support markets and services this could lead to them laying off some workers, Allow up to 4 marks for each issue analysed increasing the level of unemployment • There may be a greater likelihood of industrial (AN: up to 8 marks) unrest in a mixed economy than in a planned economy Evaluation: • Possibly new international trading relationships will For exercising some judgement on the extent to which the issues of need to be established transition will make a change from a planned economy to a mixed • In a planned economy, the state can provide economy extremely difficult for a country to achieve welfare support for everybody; in a mixed Up to 3 marks plus 1 mark for a conclusion. economy, there may be a reduction in the level of welfare provision (EV: up to 4 marks) • The specialised markets and services that will be required, e.g. banking and legal services, may take a long time to become sufficiently established

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3(a) Explain, with the help of a diagram, the disadvantages to 8 Disadvantages to consumers: consumers of introducing a maximum price in a market for an • A maximum price will lead to a situation of excess essential food item. demand in the market • This could lead to a queue or waiting list Knowledge and Understanding: • A secondary, informal or black market could 1 mark for correct diagram: emerge with prices well above the maximum price • Vertical axis correctly labelled: P/Price; • Horizontal axis correctly labelled: Q/Quantity • Equilibrium price shown. 1 mark for maximum price shown below the equilibrium price. (KU: up to 2 marks) Application: Application to a situation of excess demand. Up to 2 marks Explanation of two possible disadvantages to consumers, such as: queuing, black market, rationing or seller preferences. Up to 2 marks each (APP: up to 6 marks) 3(b) Discuss whether the advantages of privatising an industry will 12 Advantages of privatising an industry: always outweigh the disadvantages. • Efficiency will be improved because of aim of profit maximisation Analysis: • Greater competition gives an incentive to be more Up to 4 marks for analysis of advantages of privatisation productive Up to 4 marks for analysis of disadvantages of privatisation • May increase the number of shareholders, (AN: up to 8 marks ) encouraging enterprise culture • Greater efficiency could lead to lower prices for Evaluation: customers For exercising some judgement on whether the privatising of an industry will always have a positive effect. This could include a consideration of a positive effect for whom – firms, government, Disadvantages of privatising an industry: workers and consumers. • Strive for efficiency could lead to higher Up to 3 marks plus 1 mark for a conclusion unemployment (EV: up to 4 marks) • There may not be greater competition; could be a natural monopoly • Aim of satisfying shareholders may mean that prices are not reduced

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4(a) Explain, with the help of a diagram(s), how changes in 8 Demand-pull inflation: aggregate demand and aggregate supply can cause inflation • reflationary policies by a government in an economy. • increased consumer spending, e.g. as a result of greater consumer confidence Knowledge and Understanding: 1 mark for diagram showing change in aggregate demand. Cost-push inflation: 1 mark for diagram showing change in aggregate supply. • wage increases to employees which are not linked to higher productivity (KU: up to 2 marks) • an increase in the cost of imported raw materials, e.g. because of a fall in the value of a currency Application: • an increase in input prices, e.g. because of the Up to 3 marks for an explanation in relation to changes in AD and monopoly power of suppliers or higher energy the cause of inflation in an economy. prices Up to 3 marks for an explanation in relation to changes in AS and the cause of inflation in an economy. (APP: up to 6 marks) 4(b) Discuss whether deflation is more of a problem in an economy 12 Problems of inflation: than inflation. • redistribution of income • investment planning difficulties for firms Analysis: • uncompetitiveness of exports (depending on Up to 4 marks for analysis of the problems of inflation. relative inflation rates in different countries) • menu costs Up to 4 marks for analysis of the problems of deflation. • shoe leather costs (AN: up to 8 marks) Problems of deflation: • fall in economic activity/output Evaluation: • rise in unemployment For exercising some judgement on whether deflation is more of a problem in an economy than inflation . Up to 3 marks plus 1 mark for a conclusion (EV: up to 4 marks)