Economics 9708/21 May/June 2022: question paper and mark scheme

Mark scheme

1(a) Describe the trend in the annual inflation rate of Bangladesh between 2 No mark to be given to answers that just 2009 and 2019. state the eleven figures without any recognition of the overall trend. Although the inflation rate is virtually the same in 2009 and 2019, the trend has been up and down during this period, i.e., the trend is fluctuating. (1 mark) Within this overall trend, it rose between 2009 and 2011 and then fell between 2012 and 2019, although within those years it both rose and fell. (1 mark) The inflation rate was not lower than 5.4% in any of the years between 2009 and 2019 but was significantly higher in four of the years: 11.4% in 2011, 8.1% in 2010, 7.5% in 2013 and 7.0% in 2014. (1 mark) 2 marks maximum 1(b) Explain why price changes in the food and non-food sectors in 2 Bangladesh: Bangladesh are treated differently when calculating the CPI. There have been significant price rises in the food sector, including: A basic recognition that price changes in the food and the non-food sectors vegetables, particularly onions in Bangladesh may be different, possibly including some appropriate fish examples chicken (1 mark) There have also been significant price rises A clear recognition of the importance of weights in the construction of a in the non-food sector, including: CPI/a specific reference to, and explanation of, weightings in the calculation healthcare of the CPI for a country. There needs to be a clear reference to transport weights/weightings by a candidate to award the second mark energy resources such as gas (1 mark) Weighting: the situation where certain products are given larger weights to reflect the greater proportion of income spent on them takes into account the relative importance of the components of a CPI 1(c) Explain one domestic consequence and one external consequence for 4 The domestic consequences for Bangladesh of having ‘a relatively high rate of inflation’. Bangladesh of a relatively high rate of inflation could include: For an identification of one possible domestic consequence. (1 mark) redistribution of income as the real For an explanation of one possible domestic consequence. (1 mark) earnings of some workers in Bangladesh rise and the real For an identification of one possible external consequence (1 mark) earnings of others in Bangladesh For an explanation of one possible external consequence (1 mark) fall borrowers in Bangladesh will gain and lenders in Bangladesh will lose menu costs in Bangladesh, e.g., the cost of changing prices shoe leather costs in Bangladesh, e.g., the search for good returns greater uncertainty – could discourage investment in Bangladesh purchasing power of money for people in Bangladesh weaker The external consequences for Bangladesh of a relatively high rate of inflation could include: if the rate of inflation in Bangladesh is higher than in other countries (it states it is one of the highest in Asia), this will make the country’s exports less competitive (the effect will depend on PED) this may worsen the current account position of Bangladesh. 1(d) Analyse, with the help of aggregate demand and aggregate supply 6 Demand-pull inflation: diagrams, how increasing wages can cause both demand-pull and it is stated that there has been an cost-push inflation in Bangladesh. annual increase in the Wage Rate Index (WRI) of 6.6% in the last For an analysis of demand-pull inflation in relation to wage increases. month of 2019 (1 mark) increased consumer spending, e.g., through greater consumer For an AD/AS diagram to show demand-pull inflation. confidence resulting from an (Up to 2 marks) increase in income the AD curve will shift to the right 1 mark for correct labelling of the diagram causing an increase in the general 1 mark for the shift to the right of AD, showing increase in price level price level For an analysis of cost-push inflation in relation to wage increases. Cost-push inflation: (1 mark) wage increases to employees that are not linked to higher productivity For an AD/AS diagram to show cost-push inflation. (Up to 2 marks) the AS curve will shift to the left causing an increase in the general 1 mark for correct labelling of the diagram price level 1 mark for the shift to the left of AS, showing increase in price level The diagrams need to be accurately labelled, with the vertical axis labelled ‘general price level’ or ‘price level’ and the horizontal axis labelled ‘real output’ or ‘real GDP’. 1(e) ‘However, there is always the possibility that tough monetary policies 6 Potential advantages of monetary policy: could do more harm than good to an economy, compared with the a rise in interest rates can be possible use of fiscal policy.’ effective in reducing the level of aggregate demand, especially if Discuss whether monetary policy or fiscal policy is more likely to be demand is interest-elastic; can be effective in controlling inflation. effective reducing demand-pull inflation For an explanation of the potential advantages and potential disadvantages other monetary policies to control of monetary policy in controlling inflation. (Up to 3 marks) inflation can include a reduction of (A maximum of 2 marks if only advantages or disadvantages are explained) the money supply and a rise in the exchange rate For an explanation of the potential advantages and potential disadvantages of fiscal policy in controlling inflation. (Up to 3 marks) Potential disadvantages of monetary (A maximum of 2 marks if only advantages or disadvantages are explained) policy: an increase in interest rates may 5 marks maximum not be significant enough to have an effect, i.e., demand is relatively Reserve 1 mark for a conclusion inelastic the impact of an increase in interest rates can take a relatively long time to take effect it will be less useful in controlling cost-push inflation a rise in the exchange rate will not be useful if the PED for imports and exports is inelastic a reduction of the money supply may sometimes be difficult to bring about 1(e) Potential advantages of fiscal policy: a reduction in public expenditure can help to reduce the level of aggregate demand in an economy an increase in the level of taxes can also have such an effect Potential disadvantages of fiscal policy: it may not always be easy for a government to change its expenditure/revenue plans increased taxes can have a disincentive effect less useful controlling cost-push inflation

Mark scheme

2(a) When a planned economy introduces the price mechanism to allocate 8 Private goods: some resources, a mixed economy arises. economic goods that are consumed by an individual for their Explain, using examples, why merit goods are classified as private own benefit goods rather than public goods. there is rivalry in consumption, i.e., when a product is consumed by Knowledge and Understanding: one person, it cannot be consumed For knowledge and understanding of private goods. (1 mark) by another there is excludability in For knowledge and understanding of public goods. (1 mark) consumption, i.e., when a product is consumed by one person, all 2 marks maximum others are excluded from it. Application: Public goods: The use of appropriate examples to aid the explanation of why merit goods are non-rival are classified as private goods. are non-excludable (Up to 3 marks) are non-rejectable The use of appropriate examples to aid the explanation of why merit goods Examples of merit goods: are not classified as public goods education (Up to 3 marks) healthcare 6 marks maximum Examples of public goods: street lighting defence police 2(b) Discuss the advantages of a mixed economy and whether it is always 12 Advantages of a mixed economy: preferable to a planned economy. the price mechanism is allowed to operate in many areas, facilitating Analysis: its functions of rationing, signalling Analysis of the advantages and disadvantages of a mixed economy. and the transmission of (Up to 4 marks) preferences a government is able to intervene Analysis of the advantages and disadvantages of a planned economy. in a market, e.g., through a (Up to 4 marks) maximum price or a minimum price some industries may be 8 marks maximum nationalised by the government Evaluation: Disadvantages of a mixed economy: For exercising some judgement on whether a mixed economy is always the workings of the price preferable to a planned economy. (Up to 4 marks) mechanism may be adversely affected by a government, e.g., Reserve 1 mark for a conclusion taxes and subsidies possibility of market failure 4 marks maximum Advantages of a planned economy: a government may decide to directly provide certain goods and services Disadvantages of a planned economy: greater role for a government leads to more bureaucracy and less efficiency the lack of competition could lead to poorer quality and restricted choice There are no KU marks awarded in (b) for merely defining/explaining terms used within the question.

Mark scheme

3(a) Explain two factors that determine the price elasticity of supply of a 8 Definition of price elasticity of supply: manufactured product. percentage change in the quantity supplied of a product divided by the Knowledge and Understanding: percentage change in the price of a For a correct definition/formula of price elasticity of supply. product (Up to 2 marks) Factors affecting the price elasticity of Candidates need to refer to the percentage/proportionate change in both Q supply of a manufactured product: and P to be awarded the second mark. the number of producers: many such products will be produced in a 2 marks maximum market with many producers, but Application: this is not always be the case, e.g., Application of one factor determining the price elasticity of supply of a a monopoly manufactured product. (Up to 3 marks) the existence of spare capacity: if (1 mark for identification of the factor and up to 2 marks for explanation) there is spare capacity, PES will be more elastic than would otherwise Application of another factor determining the price elasticity of supply of a be the case manufactured product. (Up to 3 marks) the ease of storing stocks: this (1 mark for identification of the factor and up to 2 marks for explanation) should be easier with manufactured products than 6 marks maximum perishable products, so PES will be relatively elastic the time period: if more firms join the industry over time, PES will be relatively elastic the factor mobility: the easier it is to move resources into the production of manufactured goods, the more elastic PES will be the time taken to produce a product: the shorter the time, the more elastic supply will be 3(b) Taxes are often placed on manufactured products, even those that are 12 The incidence of a tax: necessities with few substitutes. the incidence of a tax refers to the extent to which the burden of a tax Discuss whether the incidence of a tax on a manufactured product is borne by the producer and the always falls mainly on the producer. consumer this will depend on the price Analysis: elasticity of demand for the product Analysis of the incidence of a tax on a manufactured product on the depends on the elasticity of the producer (Up to 4 marks) supply curve. Analysis of the incidence of a tax on a manufactured product on the The producer: consumer (Up to 4 marks) if the demand for the product is relatively price elastic, then the 8 marks maximum producer will have to pay a greater part of the tax Evaluation: For exercising some judgement on whether the incidence of a tax on a The consumer: manufactured product always falls mainly on the producer. if the demand for the product is (Up to 4 marks) relatively price inelastic, then the consumer will have to pay a Reserve 1 mark for a conclusion greater part of the tax 4 marks maximum Necessities and substitutes: the degree to which a manufactured product is a necessity with few substitutes will influence the PED for the product. in this situation, the PED for the product is likely to be relatively price inelastic There are no KU marks awarded in (b) for merely defining/explaining terms used within the question.

Mark scheme

4(a) Explain why fixed exchange rates could cause difficulties for a country 8 A fixed exchange rate: that has one. a rate of a currency that is not determined by demand and supply Knowledge and Understanding: the rate is determined by For knowledge and understanding of a fixed exchange rate. government, e.g., through the (Up to 2 marks) intervention of a country’s central (1 mark for the fact that the rate is determined by a government/central bank in the foreign exchange bank. 1 mark for the fact that it is therefore not determined by demand and market by buying (to raise the supply) exchange rate) or selling (to lower the exchange rate) the currency or 2 marks maximum through increasing interest rates (to raise the exchange rate) or Application: lowering interest rates (to lower the Application of one difficulty of a fixed exchange rate to a country that has exchange rate) one (Up to 3 marks) (1 mark for identification of the difficulty and up to 2 marks for explanation) Potential difficulties for a country: a government will need to have Application of another difficulty of a fixed exchange rate to a country that sufficient reserves to intervene in has one (Up to 3 marks) the foreign exchange market to (1 mark for identification of the difficulty and up to 2 marks for explanation) maintain the rate of the currency a government may be reluctant to 6 marks maximum change interest rates if this conflicts with other economic policies, e.g., a government might want to increase the interest rate to raise the exchange rate, but this may not be appropriate at a time of high unemployment 4(b) Protectionism can take different forms in different countries. 12 Advantages of export subsidies: subsidies to domestic producers Discuss whether export subsidies are always a better method of will allow firms to lower cost and protectionism than tariffs. price and undercut foreign competition Analysis: difficult for the WTO to deal with as Analysis of the advantages and disadvantages of export subsidies as a they are not an overt method of method of protectionism. (Up to 4 marks) protectionism Analysis of the advantages and disadvantages of tariffs as a method of Disadvantages of export subsidies: protectionism. (Up to 4 marks) they involve an opportunity cost in terms of other areas that a 8 marks maximum government could have spent the money on Evaluation: industries become too dependent For exercising some judgement on whether export subsidies are always a on the subsidy rather than trying to better method of protectionism than tariffs. (Up to 4 marks) become more competitive Reserve 1 mark for a conclusion Advantages of tariffs: a tariff is a tax or duty on import 4 marks maximum goods making them more expensive and less competitive if the demand for imports is elastic, demand should fall the government can use tariffs as a source of revenue Disadvantages of tariffs: they will not be successful if demand for imports is price inelastic they may lead to retaliation There are no KU marks awarded in (b) for merely defining/explaining terms used within the question.