Cambridge A Level Economics 9708 — 2008 May/June Paper 2 · Variant 1

This document consists of 3 printed pages and 1 blank page. IB08 06_9708_02/2RP © UCLES 2008 [Turn over *8518745778* UNIVERSITY OF CAMBRIDGE INTERNATIONAL EXAMINATIONS General Certificate of Education Advanced Subsidiary Level and Advanced Level ECONOMICS 9708/02 Paper 2 Data Response and Essay (Core) May/June 2008 1 hour 30 minutes Additional Materials: Answer Booklet/Paper READ THESE INSTRUCTIONS FIRST If you have been given an Answer Booklet, follow the instructions on the front cover of the Booklet. Write your Centre number, candidate number and name on all the work you hand in. Write in dark blue or black pen. You may use a soft pencil for any diagrams, graphs or rough working. Do not use staples, paper clips, highlighters, glue or correction fluid. Section A Answer this question. Brief answers only are required. Section B Answer any one question. You may answer with reference to your own economy or other economies that you have studied where relevant to the question. At the end of the examination, fasten all your work securely together. The number of marks is given in brackets [ ] at the end of each question or part question.

2 © UCLES 2008 9708/02/M/J/08 Section A Answer this question. 1 The appreciation of the Zambian Kwacha Zambia’s currency, the Kwacha, experienced a significant appreciation in the year up to March 2006. This is shown in Fig.1. Factors that influenced the exchange rate at this time were an improvement in Zambia’s export performance, a reduction in the foreign debt owed by Zambia, an increase in foreign aid received by Zambia and an inflow of foreign investment. The exchange rate is vitally important for Zambia because its exports of copper, tobacco, maize and cotton are priced in US$ but its costs are paid in Zambian Kwacha. Fig.1 Zambian exchange rate (Kwacha per US$), April 2005 to March 2006 Apr 05 May 05 Jun 05 Jul 05 Aug 05 Sep 05 Oct 05 Nov 05 Dec 05 Jan 06 Feb 06 Mar 06 4800 4600 4400 4200 4000 3800 3600 3400 3200 3000 Kwacha per US$ (a) Identify from Fig.1 the greatest monthly appreciation of the Kwacha. (i) In which month did this take place? [1] (ii) By how much did it appreciate? [1] (b) Explain what Fig.1 suggests about the type of exchange rate system used by Zambia. [3] (c) Explain how the change in the value of the Kwacha between September 2005 and January 2006 might have been influenced by (i) the improved export performance and (ii) the reduction in foreign debt. [6] (d) How would the appreciation of the Kwacha affect Zambia’s terms of trade? [3] (e) Discuss whether an appreciation of its exchange rate always benefits a country. [6]

3 © UCLES 2008 9708/02/M/J/08 Section B Answer one question. 2 (a) Explain the three economic questions that all economies face because of the basic economic problem. [8] (b) Discuss whether the price mechanism is an effective way to solve the basic economic problem. [12] 3 (a) Explain what determines the size of a country’s labour force. [8] (b) Discuss whether a widespread shortage of labour might be a major cause of inflation. [12] 4 (a) Explain what is meant by a current account deficit. [8] (b) Discuss the effectiveness and desirability of imposing tariffs to correct a current account deficit. [12]

4 BLANK PAGE Copyright Acknowledgements: Question 1 Fig. 1 © 2007 by Prof. Werner Antweiler, University of British Columbia, Vancouver BC, Canada. http://fx.sauder.ubc.ca/cgi/fxplot?b=USD&c=ZMK&rd=365&fd=1R Permission to reproduce items where third-party owned material protected by copyright is included has been sought and cleared where possible. Every reasonable effort has been made by the publisher (UCLES) to trace copyright holders, but if any items requiring clearance have unwittingly been included, the publisher will be pleased to make amends at the earliest possible opportunity. University of Cambridge International Examinations is part of the Cambridge Assessment Group. Cambridge Assessment is the brand name of University of Cambridge Local Examinations Syndicate (UCLES), which is itself a department of the University of Cambridge. 9708/02/M/J/08

UNIVERSITY OF CAMBRIDGE INTERNATIONAL EXAMINATIONS GCE Advanced Subsidiary Level and GCE Advanced Level MARK SCHEME for the May/June 2008 question paper 9708 ECONOMICS 9708/02 Paper 2 (Data Response and Essay – Core), maximum raw mark 40 This mark scheme is published as an aid to teachers and candidates, to indicate the requirements of the examination. It shows the basis on which Examiners were instructed to award marks. It does not indicate the details of the discussions that took place at an Examiners’ meeting before marking began. All Examiners are instructed that alternative correct answers and unexpected approaches in candidates’ scripts must be given marks that fairly reflect the relevant knowledge and skills demonstrated. Mark schemes must be read in conjunction with the question papers and the report on the examination. • CIE will not enter into discussions or correspondence in connection with these mark schemes. CIE is publishing the mark schemes for the May/June 2008 question papers for most IGCSE, GCE Advanced Level and Advanced Subsidiary Level syllabuses and some Ordinary Level syllabuses.

Page 2 Mark Scheme Syllabus Paper GCE A/AS LEVEL – May/June 2008 9708 02 © UCLES 2008 1 (a) Identify from Fig.1 the greatest monthly appreciation of the Kwacha. (i) In which month did this take place? November [1] (ii) By how much did it appreciate? 20–25% or 900–1100 Kwacha [1] (b) Explain what Fig.1 suggests about the type of exchange rate system used by Zambia. Floating/free (1), meaning of floating (1), fluctuations in rate (1) [3] (c) Explain how the change in the value of the Kwacha between September 2005 and January 2006 might have been influenced by (i) the improved export performance and Buyers use foreign currency to pay for exports (1), more demand for Kwachas (1), pushes up price (1), diagram (1), up to 3 marks (ii) the reduction in foreign debt. Less need for Zambia to repay debt or interest in foreign currency (1), reduced supply of Kwachas (1), pushes up price (1), diagram (1), up to 3 marks [6] (d) How would the appreciation of the Kwacha affect Zambia’s terms of trade? T of T improve (1) plus two from: terms of trade = price of exports /price of imports (1), export prices rise (1), import prices fall (1) [3] (e) Discuss whether an appreciation of its exchange rate always benefits a country. Benefits: greater confidence, lower inflation, higher purchasing power, more financial inflows (confidence), lower debt burden etc (up to 4 marks) Disadvantages: worsening trade performance, higher unemployment, lower growth, reduced FDI (costs) etc (up to 4 marks) Credit consideration of elasticity relevance [max of 6]

Page 3 Mark Scheme Syllabus Paper GCE A/AS LEVEL – May/June 2008 9708 02 © UCLES 2008 2 (a) Explain the three economic questions that all economies face because of the basic economic problem. The basic economic questions are what to produce (the selection), how to produce (the methods) and how to distribute (the consumers). These are the result of scarce resources and unlimited wants. Scarcity exists and makes choices necessary and this is found in all types of economy. Understanding of the prevalence of scarcity up to 2 marks Explanation of the basic economic questions up to 6 marks [8] (b) Discuss whether the price mechanism is an effective way to solve the basic economic problem. The price mechanism is a feature of the free market and operates through demand and supply and the self interest of individuals, government action is minimised. This has the benefits of incentive, efficiency, innovation, choice and consumer sovereignty. Against this there may be market failure including inequality, lack of public and merit goods, externalities and instability. Depending upon the degree of failure the mechanism may be more or less effective. The price mechanism does not solve the basic economic problem but is thought to be effective when operating efficiently. Understanding of the price mechanism up to 4 marks Analysis of its effectiveness up to 6 marks] to max Discussion of its limitations up to 6 marks] 10 marks [12] 3 (a) Explain what determines the size of a country’s labour force. The labour force is the part of the population employed or available for work. It includes the unemployed. Its level is influenced by total population (birth rate, death rate, migration), age distribution, school leaving age, retirement age, attitudes towards women working, higher education opportunities, post retirement employment, part time opportunities, etc. Understanding of the labour force up to 2 marks Explanation of the influences on the labour force up to 6 marks [8] (b) Discuss whether a widespread shortage of labour might be a major cause of inflation. Inflation is a sustained rise in the general price level and is caused by cost push, demand pull and monetary influences. A shortage of workers might mean rising wages, which would push up costs over a large number of industries and generate more spending power. Both could contribute to inflation. The impact will be less where there is the ability to use machinery or migrant labour. However, other factors such as money supply increases, raw material price rises, increases in aggregate demand, overheating in the economy etc might be more important. Understanding of inflation and its types up to 4 marks Analysis of the inflationary effect of labour shortage up to 6 marks] max of Discussion of limits to its impact on inflation up to 6 marks] 10 marks [12]

Page 4 Mark Scheme Syllabus Paper GCE A/AS LEVEL – May/June 2008 9708 02 © UCLES 2008 4 (a) Explain what is meant by a current account deficit. The current account involves the trade in goods (visible) and services (invisible), flows of income and current transfers. A deficit results when total outflows exceed total inflows. Understanding of deficit up to 2 marks Explanation of the elements of the current account up to 6 marks [8] (b) Discuss the effectiveness and desirability of imposing tariffs to correct a current account deficit. Tariffs are a tax, specific or ad valorem on imported goods and may be targeted. They push up the price of the good and reduce the quantity demanded of imports, so helping domestic producers and reducing the outflow of currency. They allow a breathing space for structural adjustment. Dumping can be prevented. They raise revenue for the government. Tariffs might not be effective in reducing quantity demanded when demand is inelastic and they will not be relevant to dealing with a deficit resulting from income and transfer flows. They interfere with the operation of the market, reduce the benefits of trade, may breach international obligations and may provoke retaliation. The impact of a tariff can be shown in a diagram. Understanding of a tariff up to 4 marks Analysis of the benefits of a tariff up to 6 marks] max of Discussion of the problems of a tariff up to 6 marks] 10 marks [12]