Economics 9708/23 October/November 2021: question paper and mark scheme

Mark scheme

1(a) Use the data in Fig. 1.1 to describe how the contribution to real 2 It is not enough to simply quote figures – some output growth of the different components of aggregate demand measure of change in contribution is needed, i.e. in China has changed from 2010 to 2017. increase, decrease, no discernible change, etc. Award 1 mark for any two of the following: • Lower contribution of investment expenditure over the period • Relatively stable contribution in consumption expenditure • In 2010, net exports were negative but by 2017 they were positive / however, over the period they have fluctuated between positive and negative (2 marks) 1(b)(i) What relationship might you expect between the rate of growth in 1 real output and sales of new cars in an economy? There is likely to be a positive correlation / would be expected to be a similar pattern / trend between the rise in GDP growth and the change in private car sales (1 mark) 1(b)(ii) Consider whether the evidence in Fig. 1.1 and Table 1.1 supports 2 1 mark to be awarded for each accurate this relationship. statement up to a maximum of 2 marks It is broadly consistent (1) Highest and lowest rates of growth correspond (2010 and 2017 respectively) (1) There is positive growth in all years for both real output and sales of new cars, but rates of growth do not always match (1) Growth rate is more consistent than growth in car sales throughout (1) (2 marks) 1(c) State one protectionist measure that may be adopted by the US 3 Accept any other valid impacts on consumers and in a trade war with China and explain what effect this would have producers, but 1 mark max. for each and both on consumers and producers in the US. must be considered for full marks Various possibilities including: • Tariff, quota, regulations (maximum of 1 mark for identifying one measure) • Increases prices of imported goods for consumers (1) and raises costs of production for producers due to higher imported raw material costs (1) increases demand for domestic producers (1) (3 marks) 1(d) Discuss whether cuts in direct taxes would increase the demand 6 Alternative ways of expressing disposable income for all types of consumer goods in China. are acceptable and should be rewarded, e.g. more spending power, more money in the pockets Award 1 mark for recognising that a cut in direct taxes may increase of consumers, etc. demand for consumer goods due to a rise in disposable income (1) Up to 2 marks for explanation of why a cut in direct taxes would increase demand for normal/luxury with a positive YED value consumer goods Up to 2 marks for an explanation of why a cut in direct taxes will not lead to an increase in demand for inferior/negative value consumer goods Up to a maximum mark of 5 for analysis Reserve 1 mark for a reasoned conclusion 1(e) Discuss whether increasing domestic consumption is the best 6 Increasing domestic consumption will increase way for China to maintain the growth in real output at the current AD and output. This can be done through rate ‘over the next few years’. reducing direct or indirect taxes. The increased spending benefits the Chinese economy through Analysis of the advantages and disadvantages of increasing domestic increased employment and can be more certain consumption to maintain the growth in real output (up to 3 marks) than having to rely on external factors such as the Max. 2 if only advantages or disadvantages are considered global economy or US trade policy to generate growth. Care must be taken to not increase the Analysis of the advantages and disadvantages of an alternative way/ rate of inflation as AD increases ways, i.e. increased I or X (up to 3 marks). Max. 2 if only advantages or disadvantages are considered Alternative policies could be increasing investment or export-led growth Up to a maximum mark of 5 for analysis Reserve 1 mark for a reasoned conclusion

Mark scheme

2(a) Explain how the fundamental economic problem is addressed in 8 The fundamental economic problem is tackled by a planned economy and in a market economy. means of market forces in a market economy. In a planned economy it is in the hands of For knowledge and understanding of fundamental economic government to ensure that resource allocation is problem, scarce resources (1) but unlimited wants (1) (up to 2 marks) equitable and possible And application that explains how this problem is addressed in a planned economy. Central planning, government allocation of resources, welfare, etc. may be discussed (up to 3 marks) And further application how this problem is addressed in a market economy. The role of the price mechanism, e.g. rationing, signalling, interaction of demand and supply, etc., may be discussed (up to 3 marks) 2(b) Discuss the view that in a mixed economy the only role of 12 Merit goods such as health provision, education government should be to provide public goods and the supply of and childcare are usually provided by both private merit goods should be left to the private sector. and public sectors in a mixed economy. When provided by the private sector, a charge is usually Analysis of the reasons why public goods are provided by the but not always made at the point of use government and not the private sector (up to 4 marks) Government provision is funded through taxation; Analysis of the reasons why merit goods may be provided by consumers will be charged a subsidised price or the private sector and/or the government (up to 4 marks) no charge at all. Much depends upon efficiency and how governments view the benefits of merit 8 marks maximum goods provision For an evaluation of whether the only role of government in a mixed Without the involvement of government, some economy is to provide public goods and that merit goods should be merit goods may be underprovided – may be left to the private sector (up to 4 marks) used as an evaluative comment Reserve 1 mark for a valid conclusion Note: there are no KU marks awarded in part (b) for merely explaining/defining terms or phrases used within the question

Mark scheme

3(a) Using the concept of price elasticity of demand, explain why 8 increasing the price of the product is: Where PED is elastic, an increase in price will lead to less revenue (i) a bad idea for a firm producing a product that constitutes a large proportion of household income, and A firm with an inelastic PED will experience an increase in its revenue if it increases the price of (ii) a good idea for a firm producing a product that constitutes a its product small proportion of household income. Note: simple explanations of the impact of For knowledge and understanding, meaning of PED (1) plus an elasticity should not be credited, e.g. an increase accurate formula (1) (up to 2 marks) in price leads to a large fall in demand/no change in demand. The answer must refer to % or And application: proportional changes For explanation of the effects on revenue where PED is elastic (i). For a product that constitutes a large proportion of household income this means that the PED will most likely be elastic (1) which means (1) so revenue is likely to fall (1) (up to 3 marks) For explanation of the effects on revenue where PED is inelastic (ii). For a product that constitutes a small proportion of household income this means that the PED is likely to be inelastic (1) which means (1) so revenue is likely to rise (1) (up to 3 marks) 3(b) Discuss whether cross elasticity of demand or income elasticity 12 XED and YED should only be analysed in the of demand is likely to be more useful in assisting a firm in its context of their usefulness in assisting a firm in its pricing decisions. pricing decisions For an analysis of price changes on the market for substitutes and Note: there are no KU marks awarded in part (b) complements (up to 4 marks but a max. of 3 if only complements for merely explaining/defining terms or phrases or substitutes are considered) used within the question For an analysis of price changes on normal/luxury goods and inferior goods when incomes change (up to 4 marks but a max. of 3 if only normal/luxury or inferior goods are considered) 8 marks maximum For an evaluation of which of the two measures is likely to be most useful to the firm in its pricing decisions (up to 4 marks) Reserve 1 mark for a conclusion

Mark scheme

4(a) Explain how inflation is measured and why a rising rate of 8 Inflation occurs when there is a rise in the general inflation may be of concern to consumers and producers. price level in an economy. It is usually measured by the annual change in a Consumer Prices Index For knowledge and understanding of what is meant by inflation and (CPI). A rising rate of inflation is of concern how it is measured. Inflation is a sustained increase in the (general) depending on its extent and how this compares price level (1) and is normally measured by the CPI or equivalent with any stated target index (1) (up to 2 marks) Reference to fixed income earners, menu costs, And application that explains the problems for consumers (e.g. loss shoe leather costs, export competitiveness and of purchasing power if on fixed income, erosion of real value of business confidence are relevant savings). 1 mark per explained problem (up to 3 marks) At least two problems for each should be And further application that explains the problems for producers (e.g. explained and one problem well explained can menu costs, difficulty in making long-term decisions such as gain 2 marks. investment). 1 mark per explained problem (up to 3 marks) 4(b) Discuss whether a policy of increasing interest rates is the best 12 There are various policies for controlling a rising way of controlling a rising rate of inflation in an economy. rate of inflation, one of which is increasing interest rates. This policy is expected to reduce For analysis of the advantages and disadvantages of a policy of consumption and investment by firms whilst increasing interest rates to control inflation. (Up to 4 marks but 3 increasing savings. The effectiveness though marks max. if only advantages or disadvantages are considered) depends upon the rate of inflation and the time it takes for increased interest rates to have an For analysis of the advantages and disadvantages of at least one impact. Fiscal and supply-side policies are other policy used to control inflation. (Up to 4 marks but 3 marks alternative methods of control max. if only advantages or disadvantages are considered) Note: there are no KU marks awarded in part (b) 8 marks maximum for merely explaining/defining terms or phrases used within the question For an evaluation as to which is likely to be the best policy to control inflation (up to 4 marks) Reserve 1 mark for a valid conclusion