Economics 9708/22 October/November 2021: question paper and mark scheme

Mark scheme

1(a) Calculate import expenditure as a percentage of total demand in India 1 Method of calculation is not required, only in quarter 1 2019. the final answer. Accept 18.5 18.5% (1 mark) 1(b)(i) The Indian government promised that it would cut income tax to ensure 2 For the first mark, all that is required is greater purchasing power for consumers. identification of the measure Explain how economists would measure the impact of a cut in income For the second mark, this must explain what tax upon the demand for different goods such as scooters and is being measured and/or provide a formula smartphones. For recognition that they would use the income elasticity of demand (1 mark) because this measures the response of demand for a good to a change in income (1 mark) 1(b)(ii) With reference to the data, explain whether the impact of the income 2 Candidates need to explain that the impact tax cut is likely to be the same on the demand for scooters and the will vary according to the nature of each demand for smartphones. type of good and apply it to the case of scooters and smartphones. The data For an explanation that, according to the data, scooters show a decline in suggest that there is ‘continuing growth of demand as incomes are rising, meaning they are inferior goods (1 mark) incomes’. The data also state that scooter sales are down, yet sales of smartphones Whereas smartphones show a rise in demand as incomes are rising, have been growing faster than incomes are meaning they are normal or luxury goods (1 mark) growing It can be concluded from the data that scooters are inferior goods and smartphones are normal or luxury goods (This would be sufficient for both marks) 1(c) Using the information, identify one policy that could be considered a 3 Supply-side measures mentioned in the supply-side measure and explain how this policy could make Indian extract include cutting income taxes, cutting businesses more competitive. business taxes and improving infrastructure. However, any valid supply-side measure For an identification of a valid supply-side measure that could make Indian that might make Indian businesses more businesses more competitive (1 mark) competitive is acceptable For an explanation of how this will make businesses more competitive Any policy chosen as a supply-side (up to 2 marks) measure should be explained as a supply- side tool rather than demand-side to gain The 3rd mark must refer specifically to ‘more competitive’. For example, one any credit at all, even for identification. For policy is to reduce business taxes (1) which will provide more available example, cutting income taxes should not money to invest in new technology (1) which will in turn improve quality of be credited if it is discussed in terms of a goods/services and/or allow prices to be reduced, therefore making the boost to consumption/demand, but only if business more competitive (1) discussed, for example, as increasing/ improving the labour force 1(d) Discuss whether the advantages of cutting interest rates in the Indian 6 Cutting interest rates will have a number of economy would outweigh the disadvantages. effects. There should be an increase in consumption and investment expenditure, For an identification of the impact of the cut in interest rates upon any and this will increase aggregate demand. In component of aggregate demand (1 mark) addition, the impact will be an outflow of foreign currency and a fall in the exchange For an explanation of how this will create possible advantages for India’s rate. This should stimulate net exports and economy (up to 2 marks) again aggregate demand will increase. The increase in aggregate demand will stimulate For an explanation of how this will create possible disadvantages for India’s output and employment economy (up to 2 marks) However, a disadvantage is that demand- For an evaluative comment on whether the advantages will outweigh the pull inflation will occur, and this has internal disadvantages (1 mark) and external consequences for India’s economy In evaluation, candidates may refer to the possible impact on LRAS due to possible additional investment. This may, of course, obviously offset any inflationary pressure 1(e) Consider whether roads and other items of infrastructure in India 6 Reasons why some infrastructure may be would be better provided by the private sector or by the government in better provided by the government may India. include accurate explanation of: • provision of public goods, i.e. those with For an explanation of why some infrastructure either could only or may be characteristics of non-rivalry and non- better provided by the government (up to 3 marks) excludability, e.g. street lighting • quasi-public goods, e.g. roads and For an explanation of why some infrastructure may be better provided by the bridges private sector (up to 3 marks) • free rider problem • merit goods 5 marks maximum • scale of investment needed Reserve 1 mark for a reasoned conclusion Reasons for private sector provision may include: • they are private goods and why, therefore, profit motive applies leading to better efficiency • government budget restrictions • opportunity cost Note: explanations must be accurate, and credit must not be given to answers that simply assert all government funded infrastructure refers to public goods

Mark scheme

2(a) Use a diagram(s) to explain how a production possibility curve can be 8 Clearly the candidate only needs to draw used to show opportunity cost and why such a curve is usually drawn one diagram to answer this question with increasing opportunity costs. However, if the only diagram used shows a For knowledge and understanding showing a diagram of a production straight line PPC, then the maximum mark possibility curve with correctly labelled axes (up to 2 marks) must be 5 as it cannot be used to answer the final part of the question And application that explains how a movement along the curve illustrates opportunity cost. What opportunity cost is with reference to the products in Note: candidates may not follow the the diagram(1), for showing a movement along the curve and the impacts on sequence described in this mark scheme, the output of the different products on the diagram (1) and explaining how e.g. opportunity cost may be explained in this demonstrates opportunity cost (1) (up to 3 marks) the context of increasing opportunity cost, i.e. not separately. However, provided this is And an explanation of why increasing opportunity costs are expected, curve explained using a valid diagram, i.e. a must be concave and the significance explained (1), increasing opportunity concave PPC, then both marks must be costs clearly demonstrated on the diagram (1) and explained, e.g. because awarded resources cannot be easily switched between products (1) (up to 3 marks) 2(b) Discuss whether the principle of comparative advantage concludes 12 The analysis here needs to show how free that a movement to free trade will always result in an overall benefit for trade can lead to overall benefit for an an economy. economy but also that this might not be the case For analysis that explains how the principle of comparative advantage justifies free trade in terms of an increase in overall output/consumption Several approaches are acceptable: some possibilities that will benefit an economy/ies (up to 4 marks) might argue that transport costs might negate the benefits of trade or that the For analysis that suggests why the shortcomings of the principle of exchange rate is not favourable. Others comparative advantage might make it less useful and therefore free trade might argue that a movement to free trade might not be beneficial for an economy/ies (up to 4 marks) might lead to structural adjustments that bring costs to the economy. Some might 8 marks maximum argue that as specialisation takes place resources are re-allocated and opportunity For evaluative comment that assesses the relative strengths of each costs might rise approach (up to 3 marks) Candidates may suggest reasons for And leads to a reasoned conclusion whether the principle of comparative protectionism as a counter argument – this advantage does suggest that a movement to free trade will always result in is also acceptable an overall benefit for an economy (1 mark) Note: there are no KU marks awarded in 4 marks maximum part (b) for merely explaining/defining terms or phrases used within the question

Mark scheme

3(a) Explain what is meant by consumer surplus and use diagrams to 8 The comparison could be reversed, i.e. the assess the impact on consumer surplus when an indirect tax is candidate may first consider the price- imposed on a good with price-elastic demand compared with the inelastic good with the price-elastic good. impact when the demand is price-inelastic. This should be equally rewarded For knowledge and understanding of consumer surplus, the difference (1) between the price a consumer is willing to pay for a product and its market price/price actually paid (1) (up to 2 marks) And application using a diagram to show the impact of an indirect tax on the consumer surplus when the demand for a good is price-elastic. An accurately labelled diagram that clearly shows a flatter/elastic demand curve and the shift to the left of the supply curve (1), the impact on the price and quantity (1), and the fall in consumer surplus (1) (up to 3 marks) And application using a diagram to show the impact of an indirect tax on the consumer surplus when the demand for a good is price-inelastic. An accurately labelled diagram that clearly shows a steeper/inelastic demand curve and a shift to the left of the supply curve, and the impact on price and quantity (1). The impact on consumer surplus should be clearly shown and compared with that of a price-elastic good (1) and possible reasons for the difference, e.g. degree of substitutability, addictive nature of the good, etc. (1) (up to 3 marks) 3(b) A government is considering whether to adopt a policy of maximum 12 Maximum price legislation is imposed to price legislation in the market for food or to provide food subsidies to keep the price of food low so that those on alleviate hunger in a period of food shortages. low incomes can afford to buy food. The impact, however, is to reduce the supply of Discuss whether maximum price legislation or food subsidies are more food and create excess demand. Informal likely to alleviate hunger under these circumstances. markets and queuing are likely to follow, and rationing might be necessary For analysis that explains the advantages and disadvantages of maximum price legislation (up to 4 marks) Food subsidies will reduce the price of food (3 marks maximum for an analysis that just considers either the advantages and increase the supply of food, but the or the disadvantages) impact depends upon the elasticity of demand of food. The effects might only be For analysis that explains the advantages and disadvantages of food felt in the long term. The low prices might subsidies (up to 4 marks) encourage hoarding of food. There are also (3 marks maximum for an analysis that just considers either the advantages possible opportunity costs involved as well or the disadvantages) as overall pressure on the government budget 8 marks maximum Subsidies may be ineffective in times of For evaluative comment that compares the relative strengths and famine/supply chain crises, etc. weaknesses of each approach in alleviating hunger under these circumstances (up to 3 marks) Note: there are no KU marks awarded in part (b) for merely explaining/defining terms And leads to a reasoned conclusion whether maximum price legislation or or phrases used within the question food subsidies are more likely to alleviate hunger under these circumstances (1 mark) 4 marks maximum

Mark scheme

4(a) Explain what is meant by inflation and, using diagrams, show how it 8 Do not reward ‘micro’ diagrams showing can arise both as a result of a shift in the aggregate demand curve and S/D or P/Q a shift in the aggregate supply curve. Axes should show general/average price For knowledge and understanding of inflation defined as a continuous/ level and output/GDP, etc. However, if it is sustained rise (1) in the general/average level of prices – a simple reference clear from the written response that the to price level is acceptable if it is clear from the rest of the answer that this candidate understands that it is an impact refers to all prices and not just the price level of one product (1) on general or average prices, then benefit of (up to 2 marks) doubt can be given if the Y axis simply refers to P or prices and everything else on And application that uses a diagram to show that inflation can be caused by the diagram is accurate a shift to the right of the aggregate demand curve. For an explanation why AD might increase (1), an accurately labelled diagram that shows the Reasons why AD may increase include a rightwards shift in AD and resulting increase in the general price level (1), rise in C, I, G, X or a fall in M and clearly explains that inflation occurs due to this excess in aggregate demand (1) (up to 3 marks) Reasons why AS may fall include a rise in costs, tax, etc. And application that uses a diagram to show that inflation can be caused by a shift to the left of the aggregate supply curve. For an explanation why AS may fall (1), an accurately labelled diagram that shows the leftwards shift in AS and resulting increase in the general price level (1), and clearly explains that inflation occurs due to this decrease in aggregate supply (1) (up to 3 marks) 4(b) Discuss whether the domestic effects of inflation are more serious than 12 The domestic effects include a haphazard the external effects for an economy. redistribution of income, a fall in savings and productive investment, menu and shoe For analysis of the domestic effects of inflation (up to 4 marks) leather costs For analysis of the external effects of inflation (up to 4 marks) The external effects include a rise in the price of exports and a fall in the relative 8 marks maximum price of imports with implications for the current account of the balance of payments, For evaluative comment that assesses the relative seriousness of the the exchange rate and capital flows internal and external effects (up to 3 marks) If any part of the answer confuses domestic And leads to a reasoned conclusion as to which effect is likely to be the most effects with external effects, then this part serious for an economy (1 mark) should not be rewarded. However, parts that are accurate should be rewarded 4 marks maximum Note: there are no KU marks awarded in part (b) for merely explaining/defining terms or phrases used within the question