Cambridge A Level Economics 9708 — 2011 May/June Paper 4 · Variant 1

This document consists of 3 printed pages and 1 blank page. DC (SM/CGW) 35979/3 © UCLES 2011 [Turn over UNIVERSITY OF CAMBRIDGE INTERNATIONAL EXAMINATIONS General Certificate of Education Advanced Level * 5 6 2 3 6 1 1 9 2 2 * ECONOMICS 9708/41 Paper 4 Data Response and Essay (Supplement) May/June 2011 2 hours 15 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 Question 1. Section B Answer any two questions. 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 9708/41/M/J/11 © UCLES 2011 Section A Answer this question. 1 High taxes do not help in a recession In 2009, there was an economic recession in many countries. One aspect of the recession was that unemployment rose. Governments paid large subsidies to a number of industries to try to stop the rise in unemployment. This increased the governments’ debt and affected its other expenditure. In an attempt to recover part of the extra expenditure, some governments had a policy of increased income tax rates on people who had high salaries. However, critics of this policy argue that higher tax rates do not work. They say that the proportion of revenue received from top taxpayers falls and does not rise as taxes increase and the higher taxes cause damaging effects on the economy. It is better they say to decrease taxes. The decrease in taxes brings the government more revenue, not less revenue. Their opinion is supported by evidence from the past as is seen in the effect on tax receipts of changing tax rates in the US as shown in Fig. 1. FIG. 1 CUTTING TAXES RAISES REVENUE Top-rate income tax cuts What the top 1% paid in tax Ronald Reagan 28% 30% Proportion of total tax revenue 17.6% 27.5% 25 20 15 1988 1981 70% US President: 1981–1989 (Source: The Times, May 7 2009 p. 28.) It is suggested that this opposite policy of reducing tax rates is better. Lower tax rates actually boost both the economy and tax revenues. For example, Russia, Latvia and Estonia reduced their highest tax rate and replaced a complicated system of taxes with a single income tax rate of 10%. They enjoyed a huge economic boost as a result. Another aspect of the recession was that businesses found it difficult to borrow money from the commercial banks. In order to try and make borrowing easier and help businesses, some central banks lowered their interest rates. The central banks also bought government bonds in an attempt to increase the supply of money in the economy. (a) Explain what is meant by a recession. [3] (b) The article states that ‘higher tax rates do not work’. (i) What does the article mean by this statement? [3] (ii) Is there enough evidence in the article to justify this statement? [6] (c) Discuss why the actions of the central banks mentioned in the article might have been expected to ease the recession. [8]

3 9708/41/M/J/11 © UCLES 2011 Section B Answer two questions. 2 Discuss whether economic efficiency can be improved if governments are involved in the regulation and provision of goods and services when there is market failure. [25] 3 (a) Analyse, with the aid of a diagram, whether there is a link between diminishing marginal returns and economies of scale. [12] (b) Discuss whether the objectives of a firm in a perfectly competitive market are likely to be different from the objectives of a firm in an imperfect market structure. [13] 4 Do you agree that the wage of labour is determined by the market like any other price? [25] 5 (a) Explain what is meant by GDP and describe the alternative methods by which it is calculated. [12] (b) ‘GDP figures tell us many things except that which makes life worthwhile. They tell us nothing about education, health and quality of life. They are, therefore, of little value.’ Discuss the extent to which you agree with this argument. [13] 6 (a) Explain how the impact of the Keynesian multiplier process will change if a free-market closed economy becomes a mixed economy with foreign trade. [12] (b) Analyse how a change to the equilibrium level of income resulting from the multiplier process might lead to unemployment or inflation. [13] 7 The main way a developing country could become a developed country is for government policy to concentrate on the protection of domestic industry and investment in infrastructure. Do you agree that this is the best policy? [25]

4 9708/41/M/J/11 © UCLES 2011 BLANK PAGE Copyright Acknowledgments: Question 1 © adapted from Eamonn Butler; It’s GCSE economics: high taxes don’t work ; The Times; 7 May 2009. 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.

UNIVERSITY OF CAMBRIDGE INTERNATIONAL EXAMINATIONS GCE Advanced Subsidiary Level and GCE Advanced Level MARK SCHEME for the May/June 2011 question paper for the guidance of teachers 9708 ECONOMICS 9708/41 Paper 4 (Data Response and Essays – Supplement), maximum raw mark 70 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, which would have considered the acceptability of alternative answers. Mark schemes must be read in conjunction with the question papers and the report on the examination. • Cambridge will not enter into discussions or correspondence in connection with these mark schemes. Cambridge is publishing the mark schemes for the May/June 2011 question papers for most IGCSE, GCE Advanced Level and Advanced Subsidiary Level syllabuses and some Ordinary Level syllabuses.

Page 2 Mark Scheme: Teachers’ version Syllabus Paper GCE AS/A LEVEL – May/June 2011 9708 41 © University of Cambridge International Examinations 2011 Section A 1 (a) Do not need a formal definition to gain 3 marks. Explanation of a recession in terms of a decline in output, a reduction in GDP, an increase in unemployment, decline in spending, decline in investment. [3] (b) (i) The statement means that the rise in taxes does not increase the government’s revenue as is anticipated and does not, therefore, increase the government’s funds for expenditure. The distribution of the tax burden is not directed more to the higher income earners. [3] (ii) Evidence in the charts: In the US during the 1980s the top rate was cut from 70% to 28% and the share of taxes paid by the top 1% rose from 17.6% to 27.5%. – However, there is no evidence about what happened when tax rates were increased. – there is also no statement about what the higher tax rates were intended to achieve. – there is no statement about what happened to production and employment when taxes were high. Up to 4 marks for evidence giving one side only. [6] (c) The bank lowered interest rates. Lower interest rates would mean a reduction in the cost of borrowing with a potential increase in investment which would stimulate the economy. Candidates can explain the effect of investment/injection increases. Lower rates are also hoped to encourage spending maybe by an increase in credit. Buying bonds also puts more money into the economy with the hope that this would stimulate demand. [8]

Page 3 Mark Scheme: Teachers’ version Syllabus Paper GCE AS/A LEVEL – May/June 2011 9708 41 © University of Cambridge International Examinations 2011 Section B General Comments for Section B: The essay questions carry a maximum mark of 25. Try not to 'bunch' marks, but use the whole mark range. If there is any doubt in your mind, give the benefit of doubt to the candidate. The difference in grades should be assessed on the ability of the candidate to demonstrate the various objectives of the examination listed in the syllabus and not purely on the ability to itemise further facts from the content of the syllabus. Marks should be awarded for the ability to demonstrate that aim b) of the syllabus has been achieved as well as aim a) – which refers to content knowledge. It is the objective of the examination, as listed in the syllabus, to assess both these aims. An overall guide for marks for individual questions is given below; these are from a total of 25. They may be applied proportionally of course to parts of questions where the total is less than 25: Mark 1–9 (Linked to level one in individual question notes). 1–5 where the answer is mostly irrelevant and only contains a few valid points made incidentally in an irrelevant context. There will also be substantial omissions of analysis. 6–9 where the answer shows some knowledge but does not indicate that the meaning of the question has been properly grasped. Basic errors of theory, or an inadequate development of analysis may be evident. Mark 10–13 (Linked to level two in individual question notes). 10–11 where there is evidence of an ability to identify facts or some ability at graphs and/or a fair ability to apply known laws to new situations. There should be an accurate although undeveloped explanation of the facts relating to the question together with an explanation of the theory, and evidence of some ability to discriminate and form elementary judgements. Do not expect a clear logical presentation. There will not be much evidence of the ability to recognise unstated assumptions, nor to examine the implications of a hypothesis, nor of the ability to organize ideas into a new unity. 12–13 where the answer has a more thorough relevance to the question but where the theory is incompletely explained. 14–17 (Linked to level 3 in individual question notes). 14–15 where there is a good knowledge of the facts and theory of the question, clear evidence of the ability to use the facts and theory with accurate reference to the question that may have presented the candidate with a novel application. There should also be evidence, where appropriate, of the ability to examine the implications of the question and an attempt to distinguish between facts and value judgements. Clear statements, supported by reasoned arguments should be given and there should be some attempt at a conclusion to the question. There should be a reasoned structure to the whole answer. Do not expect too many extra Illustrative points which are not explicitly referred to in the question, do not expect too much critical comment on unstated assumptions. 16–17 for an answer showing a well reasoned understanding of the question's requirements and of the relevant theory: the analysis should be sound though the illustration and development may not be very full.

Page 4 Mark Scheme: Teachers’ version Syllabus Paper GCE AS/A LEVEL – May/June 2011 9708 41 © University of Cambridge International Examinations 2011 18–25 (Linked to level 4 in individual question notes). 18–20 where there is a thorough knowledge of the facts and theory with an excellent ability to describe, explain or analyse this in a precise, logical, reasoned manner. There should be an ability to query some of the assumptions in the question and clear evidence of an ability to distinguish between fact and value judgements and to draw some conclusions on the matter being discussed. Conclusions should be formed and expressed within a sound structured answer so that the whole is well presented. New illustrations and apposite examples should be introduced as further evidence of an ability to recognise the principles of the question and their application to relevant current situations. 21–25 for an answer which, given the time constraint, could not be improved significantly: it will have clear analysis, ample illustration and a good attempt at considered evaluation. Be positive in your marking awarding marks for what is there without being too much influenced by omissions. Marks should not be deleted for inaccuracies. Corresponding marks for sub-sections. 1 2 3 4 Total Mark 10 1–3 4–5 6–7 8–10 Total Mark 12 1–4 5–6 7–8 9–12 Total Mark 13 1–4+ 5–6+ 7–8+ 9–13 Total Mark 15 1–5 6–8 9–11 12–15 2 (a) There should be an attempt to explain the meaning of economic efficiency and of market failure. Economic efficiency should be explained in terms of productive and allocative efficiency, market failure can be explained by reference to possible excessive profits, the need for very large investments, the existence of externalities, merit goods and of the need for public goods. There should then be an attempt to discuss whether governments can overcome these market failures in order to increase efficiency. [25] L4 For a thorough discussion of both efficiency and market failure and a competent discussion of the role of the government in promoting efficiency overcoming market failure. A reasoned conclusion should be presented. (18–25) L3 For a competent explanation with either a more limited comment on both efficiency and market failure (perhaps concentrating on productive efficiency) or a full explanation of one but little comment on the other. The role of the government will be discussed in a more limited way but a conclusion should still be presented. (14–17) L2 For an undeveloped explanation of efficiency/market failure with very little discussion of the role of the government. Mention of the government will be descriptive rather than in the form of a discussion related to efficiency/market failure. It is likely there will be no conclusion. (10–13) L1 For an answer which shows some knowledge but does not indicate that the question has been fully grasped, or where the answer contains irrelevancies and errors of theory. (1–9)

Page 5 Mark Scheme: Teachers’ version Syllabus Paper GCE AS/A LEVEL – May/June 2011 9708 41 © University of Cambridge International Examinations 2011 3 (a) Explanation of the two terms and an analysis of the link between the short run average cost curves reflecting diminishing returns, and the long run average cost curves reflecting economies of scale. [12] L4 For a good explanation of both the terms with examples and a clear link between the short and long run. The diagram will be clear and accurate. Must provide a diagram to gain Level 4. (9–12) L3 For a competent analysis of the terms maybe concentrating on economies of scale with a weaker link between the short run and long run, or no diagram of the link. (7–8) L2 For a more limited analysis with no link or no diagram. (5–6) L1 For an answer which has some basic correct facts but includes irrelevancies. There will be errors of theory or omissions of analysis. (1–4) (b) Discussion of the aims which are assumed for perfect competition, profit maximisation, and the aims which are possible for imperfect competition. One of these is profit maximisation but there are also other behavioural and managerial aims. [13] L4 For a good discussion and comparison of the aims between the different market structures with a range of aims in imperfect markets. (9–13) L3 For a competent explanation with either an undeveloped comment on a range of aims in imperfect markets or a fuller explanation of two aims. (7–8) L2 For a limited discussion and only a brief comparison. (5–6) L1 For an answer which has some basic correct facts but includes irrelevancies. There will be errors of theory or omissions of analysis. (1–4) 4 Discussion of determinants of wages. Candidates should discuss the theoretical analysis and how it is moderated by the existence of unions and government regulations. Theoretical analysis without marginal revenue productivity approach has, in the past, not merited the full range of marks. [25] L4 For a thorough analysis of theoretical wage determination with a clear discussion of the role of unions and/or government policy. (14–17 for demand and supply only with institutional factors and government policy) (18–25) L3 For a competent explanation but with limited discussion of unions and/or government factors. (10–13 for demand and supply) (14–17) L2 For a correct but undeveloped theoretical analysis with no institutional factors or only very brief mention of these factors. (6–9 for demand and supply) (10–13) L1 For an answer which contains inaccuracies and only a few correct points. (1–5 for demand and supply only) (1–9)

Page 6 Mark Scheme: Teachers’ version Syllabus Paper GCE AS/A LEVEL – May/June 2011 9708 41 © University of Cambridge International Examinations 2011 5 (a) Explanation of meaning of GDP and description of methods of calculation. [12] L4 For a sound explanation with good application and a clear understanding of the principles involved in the three methods of calculation. (9–12) L3 For an accurate reference to the question but with a more limited explanation or minor errors in the analysis of three methods or a full account of two methods of calculation. (7–8) L2 For an explanation of two methods perhaps with minor errors not necessarily logically presented. (5–6) L1 For an answer which has some basic correct facts but includes irrelevancies and errors of theory. (1–4) (b) Evaluation of comment. Consideration of the value of GDP but also of other factors which might be important but which are not included directly in GDP – health, housing, education, crime, income distribution etc. [13] L4 For a reasoned and clear discussion, logically presented. (9–13) L3 For a fair but undeveloped discussion but with accurate reference to the question. (7–8) L2 For a limited discussion with little comment. (5–6) L1 For an answer which has some basic correct facts but includes irrelevancies and errors of theory. (1–4)

Page 7 Mark Scheme: Teachers’ version Syllabus Paper GCE AS/A LEVEL – May/June 2011 9708 41 © University of Cambridge International Examinations 2011 6 (a) Explanation of the multiplier. [12] L4 For a sound explanation with good application and a clear understanding of the principles involved. An explanation of G and T and I and E should be given and a comment on the overall balance on the multiplier should be mentioned. (9–12) L3 For an accurate explanation of the multiplier but with a more limited comment on the possible overall balance once G, T, X, M are included. (7–8) L2 For a weaker explanation of the multiplier or with either G (but not T) or X (but not M) and no comment on the overall change. (5–6) L1 For an answer which has some basic correct facts but includes irrelevancies and errors of theory. (1–4) (b) Discussion of the effect of a change in the equilibrium through an injection. An increased injection could increase demand and put pressure on the use of resources which could cause inflation. A decrease in injections could reduce demand resulting in fall in sales and a possibility of increased unemployment. [13] L4 For a reasoned and clear discussion with the analysis logically presented and a conclusion drawn. (9–13) L3 For a fair but undeveloped discussion (possibly concentrating in one direction only). (7–8) L2 For a limited discussion with little comment and no conclusion. (5–6) L1 For an answer which has some basic correct facts but includes irrelevancies and errors of theory. (1–4) 7 The candidates should present an argument which considers the criteria which distinguish developed from developing countries; which discusses the significance of the protection of domestic industry and the role of investment; and which comments on the proposition that governments should place an emphasis on protection and investment. [25] L4 For a thorough discussion of the range of distinguishing criteria, a competent discussion of the role of protection and investment and a reasoned conclusion. (18–25) L3 For a competent discussion but with a more limited comment on the relative importance of protection and investment (to other alternatives). A conclusion should still be presented. (14–17) L2 For an accurate though undeveloped discussion, limited attempt to mention the relative importance of protection and investment and no conclusion. (10–13) L1 For an answer which shows some knowledge but does not indicate that the question has been fully grasped, or where the answer contains irrelevancies and errors of theory. (1–9)