Economics 9708/21 October/November 2021: question paper and mark scheme
Cambridge AS & A Level Economics (9708), Paper 2 Data Response and Essay, October/November 2021. Read both free below, or download them. Done the paper? Get it marked by AI against this mark scheme.
What is the ‘right’ level of inflation?
Central banks aim to keep inflation under control, but what does ‘under control’ mean? How much inflation is too much? And, a question only an economist could ask, how much inflation is too little?
Hyperinflation, where the rate of inflation is extremely high, is an economic catastrophe for a country. Table 1.1 below gives details of four cases of hyperinflation.
Table 1.1
Country Date Highest monthly Time taken for inflation rate (%) prices to double
(hours)
Hungary 1945 to 1946 41900000000000000 15
Zimbabwe 2007 to 2008 79600000000 25
Germany 1922 to 1923 29500 89
Venezuela 2016 to 2018 219 430
Source: www.cato.org/research/world-inflation-and-hyperinflation-table, accessed October 2019
The consequences of hyperinflation are far-reaching. Inflation undermines the functions of money.
Rapid price rises encourage panic-buying by consumers, creating shortages that further increase inflation. In the most extreme cases countries stop using money completely, and resort to barter.
In Zimbabwe, hyperinflation led to the abandonment of its currency in 2008 and the use of the
US dollar as an alternative. More recently, Venezuelan restaurants and supermarkets stopped displaying prices and consumers only found out the value of their purchases at the checkout.
To avoid the consequences of high inflation, central banks often set a low ‘target’ rate of inflation, typically around 2% a year. But this policy has also been criticised by some people. If central banks follow such a target the outcome would be to erode the real value of money over time.
Central banks have often been instructed by governments to have an inflation target, and yet even a 2% inflation rate will halve the real value of money in 36 years.
Central banks can use high interest rates as a tool of monetary policy to keep down the rate of inflation, but very often monetary policy requires low interest rates to stimulate consumption spending and investment in an economy.
It should not be forgotten that there are potential benefits of relatively low levels of inflation and this is why some countries have an inflation target of, say, 2%. A former chief economist of the
International Monetary Fund even suggested that many countries’ inflation target should be 4% rather than 2%.
Source: Adapted from The Times and The Financial Times, both 9 February 2019.
(a) Explain how inflation can halve the ‘real value’ of money. [2]
(b) With the aid of a diagram, explain why ‘rapid price rises encourage panic-buying by consumers, creating shortages that further increase inflation’. [4]
(c) With reference to one function of money explain why hyperinflation in Zimbabwe caused the country to abandon its currency in 2008. [2]
(d) Using aggregate demand and aggregate supply analysis, discuss whether it is possible to use monetary policy to achieve both a high level of investment and a low rate of inflation. [6]
(e) Discuss whether everybody in an economy such as Venezuela would be worse off as a result of hyperinflation. [6]
Section B
Answer one question.
Mark scheme
1(a) Explain how inflation can halve the ‘real value’ of money. 2
• The real value is the quantity of products that can be bought for a certain
amount of money (1 mark)
• If prices double, the quantity that can be bought will be halved (1 mark)
1(b) With the aid of a diagram, explain why ‘rapid price rises encourage 4 Candidates can adopt a micro or a macro
panic-buying by consumers, creating shortages that further increase approach:
inflation’. • increase in demand
• excess demand created in short run
For an appropriate diagram that shows a further increase in inflation • price increases
(up to 2 marks) • causes expectation of further price
increases
For an explanation of why rapid price rises encourage panic-buying by • so more purchases
consumers, creating shortages that further increase inflation • leading to a price spiral
(up to 2 marks)
1(c) With reference to one function of money explain why hyperinflation in 2 Hyperinflation can prevent money serving
Zimbabwe caused the country to abandon its currency in 2008. as a medium of exchange when people lose
confidence in money
For an explanation of the potential impact of hyperinflation on one function of
money: Hyperinflation, as in Zimbabwe, can prevent
• a medium of exchange (up to 2 marks) money serving as a unit of account/a
• a unit of account/a measure of value (up to 2 marks) measure of value in an economy
• a store of value/a store of wealth (up to 2 marks)
• a standard for deferred payment (up to 2 marks) Hyperinflation is likely to prevent money
serving effectively as a store of value/a
2 marks maximum store of wealth because its real value, i.e. its
purchasing power, will be reduced
1 mark for the identification of one function of money
Hyperinflation is likely to prevent money
1 mark for the explanation of how hyperinflation might impact on this function serving effectively as a standard for
and cause the country to abandon its currency deferred payment because people will be
reluctant to exchange anything on a credit
basis if the value of money is rapidly falling
1(d) Using aggregate demand and aggregate supply analysis, discuss 6 Monetary policy involves the use of changes
whether it is possible to use monetary policy to achieve both a high in interest rates and/or changes in the
level of investment and a low rate of inflation. money supply and/or changes in the
exchange rate
For an explanation of the use of monetary policy to achieve both a high level
of investment and a low rate of inflation, using AD/AS analysis If an expansionary policy is used to
(up to 3 marks) encourage a high level of investment,
interest rates could be lowered
For an explanation of the limitations of monetary policy in achieving both a
high level of investment and a low rate of inflation, using AD/AS analysis Such an approach is likely to increase the
(up to 3 marks) level of aggregate demand in an economy
and this could lead to an increase in
5 marks maximum inflation if AD exceeds AS
Reserve 1 mark for a conclusion However, investment could increase AS in
the economy and contribute to a lower rate
6 marks maximum of inflation
The timeframe is important; AD increases
will occur before the investment can
increase AS and so it is likely that the short-
run effect would be inflationary, but the
long-run effect may not be
It may be possible to lower the interest rate
without causing inflation if an economy has
spare capacity; if the LRAS curve is
horizontal, investment could be encouraged
(AD shifting right) without inflation
1(e) Discuss whether everybody in an economy such as Venezuela would 6 Possible negative consequences of a high
be worse off as a result of hyperinflation. rate of inflation/hyperinflation:
• it erodes the real value of money
For an explanation that some people in an economy could be worse off as a • it reduces individuals’ purchasing power
result of a high rate of inflation (up to 3 marks) • it makes a country’s exports
uncompetitive
For an explanation that some people in an economy could be better off as a • it creates a redistribution of income,
result of a high rate of inflation (up to 3 marks) with those on fixed incomes badly
affected
5 marks maximum • menu costs
• shoe leather costs
Reserve 1 mark for a conclusion • it creates uncertainty in an economy
6 marks maximum Possible positive consequences of a high
rate of inflation/hyperinflation:
• if prices rise by more than costs, it can
increase firms’ profits
• this can encourage firms to expand,
leading to a reduction in the level of
unemployment in an economy
• borrowers will gain from inflation
because the debt will be less in real
terms
(a) With the aid of a diagram, compare what happens to an economy’s resources to cause a movement along its production possibility curve with what happens to an economy’s resources to cause a shift of its production possibility curve. [8]
(b) Discuss whether the advantages of a transition from a planned economy to a market economy always outweigh the disadvantages. [12]
Mark scheme
2(a) With the aid of a diagram, compare what happens to an economy’s 8 The shift of the PPC can be to the right or to
resources to cause a movement along its production possibility curve the left or both
with what happens to an economy’s resources to cause a shift of its
production possibility curve. A movement along a PPC shows different
combinations of outputs that can be
For correct diagram: produced from the given resources; this
Axes correctly labelled: Good A and Good B or equivalent (e.g. capital goods movement along a PPC from one point to
and consumer goods or agricultural products and manufactured products) another will involve a re-allocation of those
(1 mark) resources
PPC correctly drawn, touching both axes (1 mark) A shift of a PPC, say to the right, comes
about as a result of an increase in the
KU: 2 marks maximum quantity and/or quality of resource/s, leading
to an expansion in the productive capacity
Application of PPC in terms of a movement along a curve (up to 3 marks) or potential output of an economy, allowing
more of one/both goods to be produced
Application of PPC in terms of a shift of a curve (up to 3 marks)
APP: 6 marks maximum
2(b) Discuss whether the advantages of a transition from a planned 12 Advantages of a transition from a planned
economy to a market economy always outweigh the disadvantages. economy to a market economy:
• existence of price mechanism
For Analysis • prices operate as signals to indicate
consumer preferences
Analysis of the advantages of a transition from a planned economy to a • private sector ownership/decision-
market economy (up to 4 marks) making with no or very little government
intervention
Analysis of the disadvantages of a transition from a planned economy to a • competition between firms can lead to
market economy (up to 4 marks) greater efficiency
AN: 8 marks maximum Disadvantages of a transition from a
planned economy to a market economy:
For Evaluation • some products will be under-provided
and under-consumed
For exercising some judgement on whether the advantages of a transition • some products will be over-provided
from a planned economy to a market economy always outweigh the and over-consumed
disadvantages (up to 4 marks) • some products will not be provided or
consumed at all
Reserve 1 mark for a conclusion
• there will be consequences of
information failure
EV: 4 marks maximum
In addition to the market failures outlined
above, there could also be negative
consequences of a market economy,
including:
• a higher level of unemployment
• a higher level of inflation
(a) With the aid of a diagram, explain the consequences for consumers and producers of introducing a minimum price in the market for a product. [8]
(b) Discuss whether decisions made by a business are more likely to be influenced by knowledge of the price elasticity of demand for its product or by knowledge of the price elasticity of supply of its product. [12]
Mark scheme
3(a) With the aid of a diagram, explain the consequences for consumers 8 Consequences for consumers of introducing
and producers of introducing a minimum price in the market for a an effective minimum price in the market for
product. a product:
• consumers will need to pay a higher
For Knowledge and Understanding price compared to the price that would
have been charged where demand and
For correct diagram: supply in a market were in equilibrium
Axes correctly labelled: P/Q (1 mark) • this will discourage the consumption of
the product by consumers
Minimum price shown above equilibrium in diagram (demand and supply • this will be beneficial for consumers if
curves need to be correctly labelled) (1 mark) the product is a demerit good
KU: 2 marks maximum Consequences for producers of introducing
an effective minimum price in the market for
For Application a product:
• the minimum price will help producers
Consequences for consumers of the establishment of a minimum price in a to increase their incomes
market (up to 3 marks) • there will be an excess supply that
consumers do not buy at the higher
Consequences for producers of the establishment of a minimum price in a minimum price
market (up to 3 marks) • government action may be required to
buy up this excess supply or to restrict
APP: 6 marks maximum production
3(b) Discuss whether decisions made by a business are more likely to be 12 Potential usefulness of PED:
influenced by knowledge of the price elasticity of demand for its • it can be helpful in giving a business an
product or by knowledge of the price elasticity of supply of its product. indication of the extent to which a
change in price may affect revenue
Analysis of the usefulness of knowledge of price elasticity of demand to a • this will show that to increase revenue,
business (up to 4 marks) the price of an elastic good should be
reduced and the price of an inelastic
Analysis of the usefulness of knowledge of price elasticity of supply to a good should be increased
business (up to 4 marks) • however, to be able to make
appropriate calculations, a
AN: 8 marks maximum businessman will need to take into
account the availability of substitutes,
For exercising some judgement on whether decisions made by a business the width of the definition of the
are more likely to be influenced by knowledge of the price elasticity of product, the amount spent on the
demand for its product or by knowledge of the price elasticity of supply of its product and the time period under
product (up to 4 marks) consideration
Reserve 1 mark for a conclusion Potential usefulness of PES:
• it can be helpful in giving a business an
EV: 4 marks maximum indication of the extent to which a
change in the price of a product can
lead to a change in the quantity
supplied of a product
• it can help a business to make
decisions about how much stock to hold
• it can help a business decide on the
extent of spare capacity to provide for
• it can help a business decide on the
factors of production it is going to need
Note: No marks for KU of PED and PES
(a) With the aid of a diagram, explain how a central bank intervenes to maintain a fixed exchange rate when the economy is experiencing a current account deficit on its balance of payments.
[8]
(b) Discuss whether expenditure-reducing policies are likely to reduce the current account deficit on the balance of payments for an economy with a floating exchange rate. [12]
Mark scheme
4(a) With the aid of a diagram, explain how a central bank intervenes to 8 CA deficit means that demand for imports
maintain a fixed exchange rate when the economy is experiencing a exceeds foreign demand for exports, so
current account deficit on its balance of payments. domestic demand for foreign currency
exceeds foreign demand for the domestic
For correct diagram: currency. This will put downward pressure
Axes correctly labelled: Exchange rate or price of one currency in terms of on the exchange rate
another/Q of currency (1 mark)
If the value of a currency is about to fall, a
Demand and supply curves correctly labelled (1 mark) central bank will increase demand by:
• buying the domestic currency, using
KU: 2 marks maximum their foreign currency reserves
• and/or increasing interest rates
Explanation that a CA deficit causes downward pressure on the exchange
rate (up to 3 marks)
Explanation of the intervention of a central bank to maintain the exchange
rate (up to 3 marks)
APP: 6 marks maximum
4(b) Discuss whether expenditure-reducing policies are likely to reduce the 12 Expenditure-reducing policies are actions
current account deficit on the balance of payments for an economy taken by a government to reduce the total
with a floating exchange rate. level of spending in an economy
Analysis of potential success of expenditure-reducing policies in reducing the They are designed to lead to:
current account deficit on the balance of payments for an economy with a • a fall in imports
floating exchange rate (up to 4 marks) • and/or a rise in exports
Analysis of the limitations of expenditure-reducing policies in reducing the Examples can include:
current account on the balance of payments for an economy with a floating • raising interest rates
exchange rate (up to 4 marks) • reducing money supply
• increasing taxes
AN: 8 marks maximum • reducing public spending
For exercising some judgement on whether expenditure-reducing policies Possible limitations can include:
are likely to reduce the current account deficit on the balance of payments • there may still be a strong demand for
for an economy with a floating exchange rate (up to 4 marks) imports
• resources may not be released for
Reserve 1 mark for a conclusion
exports
EV: 4 marks maximum
Checked your answers against these? Let AI mark the whole paper, on your own working.
Examiners follow the generic marking principles at the front of the scheme, then each question's points: method (M), accuracy (A) and independent (B) marks, error carried forward where the scheme allows it, and positive marking, so you're credited for what you got right.
Check your answers against it
Done this paper? Upload your script and CIE Buddy's AI marker marks it question by question against this exact scheme, puts the ticks on your own working and says what each lost mark needed.
Where can I find the 9708/21 October/November 2021 mark scheme?+
On this page, free: the mark scheme for AS & A Level Economics 9708/21, October/November 2021 (9708_w21_ms_21), and the question paper (9708_w21_qp_21), to read or download, with each question's marking points written out underneath.
How many marks is 9708/21 out of?+
Economics 9708/21 for October/November 2021 is out of 40 marks, with 1 hour 30 minutes to answer it.
Can I get my 9708/21 answers marked?+
Yes. Upload your answers to 9708/21/O/N/21 as a PDF or photos, and CIE Buddy marks every question against this paper's official mark scheme, using Cambridge's marking rules. You get your score, each lost mark explained on your own script, and the topics to revise. It's a guide, not an official Cambridge grade.