Economics 9708/21 October/November 2019: question paper and mark scheme
Cambridge AS & A Level Economics (9708), Paper 2 Data Response and Essay, October/November 2019. Read both free below, or download them. Done the paper? Get it marked by AI against this mark scheme.
The impact of demonetisation in India
India has a vast informal economy, where products and labour are exchanged for cash without official records, so that the authorities cannot easily trace the transactions. In November 2016, this informal economy was affected by a government decision to adopt a policy of ‘demonetisation’.
This involved the withdrawal from circulation of India’s two most used bank notes, the 500 and
1000 rupee notes. This policy removed 14 trillion rupees of cash from the most cash-dependent major economy in the world. There were long queues outside banks as people tried to open bank accounts to deposit these notes before they were no longer valid.
The policy was intended to remove cash hoarded by the very rich elite, criminals and the large number of people who did not pay tax. The government later said that demonetisation was also the first step in a ‘cashless’ revolution to move the billions of transactions undertaken each day in
India through the banking system so that the tax authorities could trace them. In 2016, only 1% of workers paid income tax.
India’s Labour Minister announced that it would become compulsory for employers to pay their employees through bank accounts, a hugely ambitious step in a country where as many as 90% of workers were paid in cash. Many business owners were dreading the prospect of paying their employees through bank accounts. One factory owner in Delhi commented: “How do you think I can pay the workers with a cheque if they don’t have a bank account? It takes three days to clear a cheque. What will they eat during those days?”
The Indian government’s vision of a cashless economy does not seem to correspond to the reality of working life in India. Another factory owner stated that this would affect the production process:
“Rickshaw pullers transfer goods from my factory to the shops. For one trip I pay a rickshaw puller
100 rupees. Does the government expect me to give them a cheque for such a small amount?
How do I pay them if I am not allowed to use cash? If I have to write a cheque for every payment this will increase my costs considerably.”
The workers are also concerned about the change to the law that will force them to have their wages paid directly into banks. Money performs a number of important functions in an economy and cash has an acceptability that still matters for many workers. One worker commented: “I am a daily wage worker and I am not sure if I will have a job tomorrow. If I receive cash in hand, I know
I have the money”.
If demonetisation is to succeed, the Indian government will need to introduce incentives to persuade millions of people to open bank accounts. However, this will not be easy to achieve because around 30% of people in India still do not have bank accounts.
Fig. 1.1 shows India’s money supply as measured by M1, which consists of notes and coins in circulation and balances in bank deposits that can be spent immediately e.g. through withdrawals, cheques or debit cards.
Source: Adapted from The Guardian, 21 December 2016
Fig. 1.1: India’s M1 money supply, 2014–2017
30
28
India’s M1 26 money supply
(trillions of 24 rupees)
22
20
2014 2015 2016 2017
Source: Trading Economics
(a) (i) Describe, using Fig. 1.1, the immediate impact of demonetisation on India’s M1 money supply. [2]
(ii) Explain a possible reason why India’s M1 money supply increased early in 2017, as shown in Fig. 1.1, after the most used bank notes were withdrawn from circulation. [2]
(b) Explain whether a cheque should be regarded as money. [2]
(c) Explain how the Indian government’s decision to withdraw the two most used bank notes is likely to affect the use of cash as a store of value in India over time. [4]
(d) Explain the possible impact of demonetisation on the Indian government’s fiscal policy. [4]
(e) Discuss whether demonetisation in India is likely to be inflationary. [6]
Section B
Answer one question.
Mark scheme
1(a)(i) Describe, using Fig. 1.1, the immediate impact of demonetisation 2 Candidates can either write that it has fallen from
on India’s M1 money supply. about 28 to about 20 or that it has fallen by 8 to
gain the second mark, but with either answer
• it fell (1 mark) there must be an explicit reference to trillion
• from about 28 trillion rupees to about 20 trillion rupees OR by rupees as this is how the vertical axis is labelled
about 8 trillions of rupees (1 mark) in Fig. 1.1.
1(a)(ii) Explain a possible reason why India’s M1 money supply 2 The question asks for the explanation of ‘A
increased early in 2017, as shown in Fig. 1.1, after the most used possible reason’. The marks cannot be split
bank notes were withdrawn from circulation. across more than one possible reason.
• Many of the Indian population may have opened bank accounts The information given to candidates says that
(1 mark); to deposit the 500 and 1000 rupee notes before they this is the total supply of notes and coins in
were no longer valid (1 mark). circulation plus deposits in bank accounts. Hence
OR the explanation must be for an increase in either
• The Indian monetary authorities may have increased the supply cash or bank account balances.
of smaller denomination notes (1 mark); to offset the fall in the
money supply (1 mark).
1(b) Explain whether a cheque should be regarded as money. 2 A cheque can be used as a means of payment
for goods and services, but it is not the same as
• a cheque is a method of payment / a means of facilitating a money because a cheque is not always
transaction / transfers money from one account to another (1 acceptable. It is an instrument instructing a
mark) financial institution to pay a specific amount of
• however, it is not a form of money as it is not always money from a particular transactional account
acceptable (1 mark) held in a person’s name with that institution.
‘No’ by itself does not gain a mark as the
question requires an explanation.
If a candidate states that a cheque should be
regarded as money – 0 marks.
1(c) Explain how the Indian government’s decision to withdraw the 4 Quantities of cash can be held over a period of
two most used bank notes is likely to affect the use of cash as a time and stores value by transferring purchasing
store of value in India over time. power from the present to the future.
• explanation of the function of money as a store of value or The function of money as a store of value is likely
wealth (up to 2 marks) to reduce at first, given that the two most used
• explanation of how the Indian government’s decision is likely notes were withdrawn from circulation, but over
to affect the use of cash as a store of value in India over time time it will have less of an effect.
(up to 2 marks)
The store of value depends upon the banknotes
retaining their real worth.
The short-notice removal of large denomination
banknotes will have reduced peoples’ confidence
in holding them as a store of value since they
may lose value almost instantly if not cashed in
within the deadline.
Smaller banknotes would be unlikely to be
withdrawn so could continue as a store of value.
However, these would be much less convenient
(too bulky and harder to store) so would not be a
perfect substitute.
This use of banknotes as a store of value is liable
to decline, although in the long-run people may
forget or downgrade the risk.
1(d) Explain the possible impact of demonetisation on the Indian 4
government’s fiscal policy.
Explanation of the possible impact of demonetisation on India’s fiscal
policy (up to 4 marks)
• a smaller informal economy and a larger formal economy
• would enable the authorities to better understand the fiscal
situation
• currently only 1% of workers pay income tax
• more people are likely to be brought within the tax structure
• tax revenue may increase
• the Indian government will be able to increase public expenditure
1(e) Discuss whether demonetisation in India is likely to be 6 It could be inflationary if the government’s
inflationary. increased tax revenue is used to stimulate
aggregate demand in the Indian economy, but it
• for an explanation that it is likely to be inflationary (up to 3 depends on whether the government spends the
marks) tax revenue.
• for an explanation that it is not likely to be inflationary (up to 3
marks) However, if the wages of employees are paid
5 marks maximum for the explanation directly into bank accounts, it may reduce the
extent of liquidity in the economy, reducing any
Plus 1 mark for a conclusion inflationary threat. Also, if some people are more
fearful of the future of the economy, they may be
more cautious in their spending patterns, again
dampening down inflation.
Credit reference to Quantity Theory of Money
(although not on AS syllabus): the immediate
impact is that the money supply goes down,
when it will not be inflationary, but there will be
an eventual increase in the money supply as
people open bank accounts (as shown in Fig.
1.1), which could be inflationary.
(a) Explain, with the help of a diagram, how a free market would react if a minimum price which had been set above the equilibrium is removed. [8]
(b) Discuss, with the use of examples, the extent to which a supermarket could make use of the concept of income elasticity of demand in relation to the different types of goods being sold when there was an increase in consumer incomes. [12]
Mark scheme
2(a) Explain, with the help of a diagram, how a free market would • The guaranteed minimum price or price floor,
react if a minimum price which had been set above the set above the equilibrium, would be removed
equilibrium is removed. • This would lead to the excess supply
disappearing
For correct diagram: • The market would revert to an equilibrium
• axes correctly labelled: P/Q (1 mark) position, leading to a fall in price with an
• market equilibrium shown (1 mark) increased quantity traded
(KU: up to 2 marks) • There would neither be an excess supply nor
an excess demand in the free market: the
• minimum price shown above equilibrium in diagram (1 mark) quantity demanded will increase and the
• reference to the existence of excess supply (1 mark) quantity supplied will reduce, so eliminating
• explanation in terms of the process whereby a minimum price the excess
set above the equilibrium is removed. (up to 4 marks) • A market clearing position would be
(APP: up to 6 marks) established
• The impact on the producer revenue will
depend on the elasticities of demand and
supply
• Consumer surplus will increase
2(b) Discuss, with the use of examples, the extent to which a YED is the percentage change in the quantity
supermarket could make use of the concept of income elasticity demanded of a product divided by the
of demand in relation to the different types of goods being sold percentage change in incomes.
when there was an increase in consumer incomes.
For a normal good, the YED will be positive for
• analysis in relation to normal goods, using appropriate normal goods, i.e. as consumer incomes rise, the
examples (up to 3 marks) demand for products will rise.
• analysis in relation to inferior goods, using appropriate
examples (up to 3 marks) For an inferior good, the YED will be negative for
• analysis in relation to necessity goods, using appropriate inferior goods, i.e. as consumer incomes rise, the
examples (up to 3 marks) demand for products will fall.
(AN: up to 8 marks)
If there is an increase in consumer incomes, a
• assessing the extent to which a supermarket could make use supermarket is likely to stock more normal goods
of the concept of income elasticity of demand in relation to the and fewer inferior goods.
different types of goods being sold when there was an
increase in consumer incomes (up to 3 marks); plus a Necessity goods have a positive YED, but it is
concluding comment (1 mark) rather low, e.g. less than one (inelastic).
(EV: up to 4 marks)
If there is an increase in incomes, there is
unlikely to be very much of an effect on
supermarkets in terms of the stocking of
necessity goods.
(a) Explain, with the help of a diagram, the effect and incidence of a subsidy in a market for essential transport. [8]
(b) Discuss, with the use of examples, whether a government should directly provide certain goods and services in an economy. [12]
Mark scheme
3(a) Explain, with the help of a diagram, the effect and incidence of a 8 The effect of introducing a subsidy in a market for
subsidy in a market for essential transport. essential transport is that the lower price is likely
to increase the demand for the transport, making
For correct diagram: it more affordable, especially for those on lower
• axes correctly labelled: P/Q (1 mark) incomes. The extent of this increase will depend
• market equilibrium shown (1 mark) on the price elasticity of demand for transport, as
(KU: up to 2 marks) will the incidence of the subsidy, i.e. the eventual
distribution of the advantage of a subsidy. The
• shift of supply curve to the right (1 mark) demand for essential transport is likely to be
• lower price and higher quantity shown (1 mark) relatively price inelastic.
• explanation in terms of incidence in relation to the impact of
different elasticities (up to 2 marks)
• explanation in terms of incidence in a market for essential
transport where demand is likely to be relatively inelastic (up
to 2 marks)
(APP: up to 6 marks)
3(b) Discuss, with the use of examples, whether a government 12 Reasons for:
should directly provide certain goods and services in an • To enable benefits in terms of economies of
economy. scale if a large firm is created, lowering cost
and possibly price
• analysis of reasons for a government to directly provide • Justifiable where the goods and services are
certain goods and services in an economy, using appropriate public goods
examples (up to 4 marks) • To encourage consumption of merit goods
• analysis of reasons for a government not to directly provide • To take account of externalities, both positive
certain goods and services in an economy, using appropriate and negative
examples (up to 4 marks) • Justifiable if high levels of capital expenditure
(AN: up to 8 marks) are required
• Justifiable in the case of a natural monopoly,
• assessing whether a government is justified in directly avoiding a wasteful duplication of resources
providing certain goods and services in an economy – public • Possible strategic argument
goods have to be provided by the government as these • Prevention of private sector monopoly power
otherwise would not be provided at all (up to 3 marks); and a
concluding comment (1 mark) Reasons against:
(EV: up to 4 marks) • Lack of incentive to be efficient and
innovative
• There may be an absence of competitive
pressure
• Political, not economic, decision
(a) Explain, with the help of a diagram, the difference between what causes (i) a movement along an aggregate supply curve and (ii) a shift in an aggregate supply curve. [8]
(b) Discuss whether supply-side policies are likely to be effective in increasing employment in an economy. [12]
Mark scheme
4(a) Explain, with the help of a diagram, the difference between what 8
causes (i) a movement along an aggregate supply curve and (ii)
a shift in an aggregate supply curve.
For correct diagram:
• axes correctly labelled: price level, GDP/real output (1 mark)
• AS/AD correctly labelled (1 mark)
(KU: up to 2 marks)
• explanation of a movement along an AS curve (up to 3 Movement along an AS curve:
marks) • this is caused by a change in the price level;
• explanation of a shift in an AS curve (up to 3 marks) it could also be caused by a change in the
(APP up to 6 marks) AD curve and there is then a movement
along an AS curve to restore the equilibrium
position
Shift in an AS curve:
• this is caused by any reason other than a
change in the price level, e.g. a change in
the costs of factors of production, a change
in the taxes on firms, a change in the
productivity/quality of inputs or a change in
the quantity of resources
4(b) Discuss whether supply-side policies are likely to be effective in 12 Possible benefits of supply-side policies:
increasing employment in an economy. • Privatisation of firms to make them more
efficient, leading to an increase in
• analysis of potential benefits of supply-side policies to employment
increase employment in an economy, using appropriate • Increased spending on education and
examples (up to 4 marks) training to increase labour productivity and
• analysis of potential limitations of supply-side policies to so increase employment
increase employment in an economy, using appropriate • Lower corporate taxes can leave firms with
examples (up to 4 marks) more money to spend on employing more
(AN: up to 8 marks) workers
• Subsidies may be provided, encouraging
• assessing whether supply-side policies are likely to be firms to increase employees
effective in increasing employment in an economy – it is • Policies to make the labour market more
possible that such policies might actually increase flexible may lead to an increase in
unemployment (up to 3 marks); and a concluding comment (1 employment
mark) • Policies to encourage competition, leading to
(EV: up to 4 marks) an increase in employment
• Financial support to encourage spending on
R&D, leading to an increase in employment
Possible limitations of supply-side policies:
• May be expensive to implement
• Can take a long time to take effect, e.g.
policies on education and training
• Privatisation could actually lead to an
increase in unemployment.
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Economics 9708/21 for October/November 2019 is out of 40 marks, with 1 hour 30 minutes to answer it.
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