Economics 9708/22 May/June 2019: question paper and mark scheme

Mark scheme

1(a)(i) What happened to Egypt’s current account balance between 1 We need the correct economic term, so ‘deficit’ in this 2014 and 2016? context is essential. The deficit increased 1 mark If the candidate uses a subjective term such as ‘worsened’ it must be supported by figures that make it clear that the deficit has increased. If the candidate simply lists increasingly negative balances without the term ‘deficit’ then no marks are awarded. 1(a)(ii) With reference to Table 1.1 calculate the percentage rate of 1 inflation in Egypt between 2016 and 2017 that was estimated by the IMF. 22.1% 1 mark Accept any value up to 22.0–22.2% 1(b) Identify two Canons of Taxation satisfied by Egypt’s new VAT. 2 The acceptable ‘canons of taxation’ are For each Canon identified 1 mark Smith’s canons Certainty The timing and amount to be paid must be 2 marks maximum certain and open Convenience The means and timing of payment must be convenient Economy The cost of collection must be low relative to the yield Equity The tax must be ‘fair’. Others acceptable responses developed by other economists include, simplicity, productivity and elasticity, diversity and that the tax should automatically adjust to changes in inflation All the above are acceptable. ‘Equality’ is not acceptable. 1(c) Explain how the decline in the value of the Egyptian pound 4 The decline in the value will make imports more could cause demand-pull and cost-push inflation in Egypt. expensive. This will increase the cost of imported raw materials and increase business costs. This will cause For an explanation of how the decline in the Egyptian pound could cost-push inflation. It will also make exports cheaper cause cost-push inflation. The decline in the value of the Egyptian and this will increase net exports leading to demand pound makes imports more expensive (1 mark) This increases the pull inflation. price of imported raw materials and as a result business costs. This causes cost-push inflation (1 mark) Up to 2 marks For an explanation of how the decline in the Egyptian pound could cause demand-pull inflation. The decline in the value of the Egyptian pound makes exports cheaper (1 mark) and this is expected to increase the net exports and as a result aggregate demand. This causes demand-pull inflation (1 mark) Up to 2 marks 1(d) Explain how the estimated changes in unemployment in Table 6 The unemployment rate is expected to fall from 2016. 1.1 might be expected to affect the current account balance of As a result, incomes will rise and it would be expected Egypt after 2016 that imports would also rise. In addition, goods formerly exported would be diverted to satisfy rising demand in Two approaches are acceptable: the home market. Net exports would decrease as a For linking a fall in unemployment and rising incomes (1 mark) result and the current account balance become an increasing deficit. For explaining that the rise in incomes is likely to lead to rising imports (1) and falling exports (1) and an increasing deficit (1) Alternatively, it could be argued that those who enter employment will boost production and this could offset Up to 3 marks imports or boost exports. Explanations developed along these lines are equally acceptable. And/or Some candidates might offer the view that either For explaining that the fall in unemployment means that more outcome is possible. These approaches should also be people are in work and that national production will rise (1 mark) credited. For explaining that this would lead to a rise in exports (1) and a fall Up to 4 marks are available for explaining the link in imports (1 mark) and a reducing deficit (1) between the changes in unemployment and the current account balance. Up to 3 marks Two further marks are reserved for elaboration that For elaboration that considers any factors that the identified change considers any factors that the outcome of the change i.e. the increasing and/or reducing deficit relies upon. depends upon e.gs include the imposition of import controls, the income elasticity of demand for imports, Up to 2 marks exchange rate changes, the availability of other factors in the production process such as capital goods and the If a candidate adopts both approaches without elaboration of time period under consideration. either then 4 marks maximum 1(e) Discuss whether the Egyptian government’s fiscal and 6 The fiscal and monetary changes referred to in the text monetary policies in the article are likely to succeed in curing include reducing the budget deficit, levying a new the inflation problem indirect tax, cutting subsidies on energy, raising interest rates and floating the Egyptian pound. Some of these For recognition of any fiscal policy measures in the data (1 mark) changes will help to cure inflation, but others will and for an explanation of how this measure might (or might not) exacerbate the problem. cure the problem of inflation (1 mark) For example: As far as fiscal policy measures are For an evaluative comment that explains why this measure might concerned the data refers to a reduction in the budget not (or might) succeed in curing the inflation problem (1 mark) deficit. This might help to cure inflation. On the other hand the rise in VAT and the cut in subsidies will cause (Up to 3 marks) a rise in prices. So these fiscal policy measures work in opposing directions. For recognition of any monetary policy measures in the data (1 mark) and for an explanation of how this measure might (or might As far as monetary policy measures are concerned, a not) cure the problem of inflation (1 mark) rise in interest rates might help to cure inflation, but the fall in the value of the Egyptian pound might cause For an evaluative comment that explains why this measure might cost-push inflation. Again these monetary measures not (or might) succeed in curing the inflation problem (1 mark) work in opposing directions. (Up to 3 marks) Some candidates might explain how a policy is expected to work (1 mark) they then need to consider why it might not work (1 mark). Other candidates might explain why a measure might not work (1 mark). These candidates then need to consider why it might work (1 mark)

Mark scheme

2(a) Explain how economists use the concept of elasticity to 8 Clear understanding of the concept of YED and its distinguish between inferior goods and necessary goods application to inferior and necessary goods. when consumer incomes change. Knowledge and Understanding of income elasticity of demand: What it measures 1 mark For accurate formula 1 mark (KU: up to 2 marks) Application: Income elasticity for inferior goods: • For recognition that the coefficient is negative 1 mark • For an explanation of why a negative coefficient arises when incomes change Up to 2 marks Income elasticity for necessary goods: • For recognition that the coefficient is positive (accept zero) 1 mark • For an explanation linking the extent of necessity to the size of the coefficient. Up to 2 marks (APP: up to 6 marks) 2(b) Discuss how businesses might attempt to change the price 12 Businesses can attempt to change the price elasticity of elasticity of demand for their products and consider which demand by changing the factors that make the product approach is most likely to be successful. elastic or inelastic. For example they might attempt to make demand more price inelastic by creating more Analysis: brand awareness and reducing the extent to which Explains any methods that might be used to change the price other products are seen as substitutes. elasticity of demand for a product with due reference to any difficulties that might arise with each method explained. Accept approaches that explain how businesses might Up to 4 marks for each method explained attempt to make the demand for their product more elastic. (AN: up to 8 marks) Candidates might choose to explain only one method. Evaluation: This can be awarded up to 4 marks, but will score no Compares the likely success of the methods explained (3 marks) marks for evaluation. and reaches a conclusion on which is most likely to be successful (1 mark) (EV: up to 4 marks)

Mark scheme

3(a) Distinguish between regressive and progressive taxes and 8 Candidates need to have a clear understanding of the explain whether you would use an income tax or a specific difference between a regressive and progressive tax indirect tax to make post-tax incomes more equal. and that specific indirect taxes will be regressive and income taxes can be designed to be progressive. Knowledge and understanding: • For a definition of a regressive tax 1 mark • For a definition of a progressive tax 1 mark (KU: up to 2 marks) Application: Explains that specific indirect taxes are regressive (Up to 2 marks) and their impact upon the equality of post-tax incomes (1 mark) Explains that income taxes can be progressive (Up to 2 marks) and their impact upon the equality of post-tax incomes (1 mark) (APP: up to 6 marks) 3(b) Discuss whether subsidies on production of all types of goods 12 Candidates need to recognise that subsidies can will lead to an improved allocation of resources. improve the allocation of resources if they are imposed upon merit goods. They will go some way to improving Analysis: the under-consumption of the good. If subsidies are Explaining that merit goods are under-consumed because of imposed upon demerit goods however they will information failure and that subsidies will reduce price and increase exacerbate the over-consumption of these goods. their consumption improving resource allocation. Subsidies will not improve resource allocation if applied Up to 4 marks to public goods because they still need to be provided by the public sector. In the case of other goods that Explaining the impact of subsidies on other types of goods for e.g. cannot be classified as merit, demerit or public goods demerit goods, public goods or private goods where resource subsidies will reduce the price below the equilibrium allocation will not be improved. determined in a free market. Up to 4 marks for each case explained (AN: up to 8 marks) Evaluation: Comparing the impact of providing subsidies on different types of goods (Up to 3 marks) and for a conclusion on whether they will improve the allocation of all types of good (1 mark) (EV: up to 4 marks)

Mark scheme

4(a) Explain, using examples, what is meant by ‘protectionism’ and 8 Candidates often explain what is meant by show with the help of a diagram how export subsidies can be protectionism by providing examples. A more general considered as a form of protectionism. explanation is required. This could focus upon protectionism being any policy that interferes with Knowledge and understanding: market forces in international trade with the aim of • Protectionism is adopting policies to assist domestic industries giving an advantage to domestic producers. facing competition from foreign industries 1 mark • through interference with market forces or the relative prices of imports and exports. 1 mark (KU: up to 2 marks) Application: One example of a method of protectionism other than an export subsidy e.g. a tariff or a quota (1 mark) and explaining how this could be considered a method of protectionism (1 mark) For explaining why export subsidies can be considered as a Diagram: method of protectionism: Correctly labelled axes and curves (1 mark) For an accurate diagram showing the impact of the export subsidy Correct shift in the supply curve (1 mark) on costs and the price of exports (Up to 3 marks) and explaining Correct change in equilibrium price and quantity how this could be considered a method of protectionism (1 mark) (1 mark) (APP: up to 6 marks) 4(b) Discuss the arguments that are used to justify protectionism 12 Candidates may consider a range of arguments used to and consider whether these arguments can ever be justified. justify protectionism such as to protect domestic employment, to correct a balance of payments deficit, Analysis: the anti-dumping argument and the infant industry Considering any argument in favour of protectionism with a argument. They need to examine each in terms of consideration of whether it can be justified with due reference to underlying economic theory to reach a conclusion. economic theory. Up to 4 marks per justification Candidates might choose to explain more than two justifications for protectionism. Each can be awarded up (AN: up to 8 marks) to 4 marks, but explanation is essential. Only 8 marks are available for this analysis. Evaluation: Summarises the arguments in favour of protectionism and considers whether this can be justified when compared to the benefits of free trade. Up to 3 marks plus 1 mark for a reasoned conclusion (EV: up to 4 marks)