Cambridge A Level Economics 9708 — 2012 May/June Paper 2 · Variant 2

This document consists of 3 printed pages and 1 blank page. DC (RCL (JDA)) 48860/2 © UCLES 2012 [Turn over UNIVERSITY OF CAMBRIDGE INTERNATIONAL EXAMINATIONS General Certificate of Education Advanced Subsidiary Level and Advanced Level * 4 9 1 2 5 3 7 7 9 3 * ECONOMICS 9708/22 Paper 2 Data Response and Essay (Core) May/June 2012 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 9708/22/M/J/12 © UCLES 2012 Section A Answer this question. 1 Current Account Balances 2006–2010 The International Monetary Fund (IMF) supplies data on the balance of payments, particularly the current account balances, of its member countries. Table 1 was produced in October 2009 and shows balances for 2006 to 2008 and a forecast for the balances for 2009 and 2010 of several member countries. Table 1: Current account balances in billions of US dollars (US$) 2006–2010 2006 2007 2008 2009 2010 Brazil 13.6 1.6 –28.2 –18.8 –33.3 China 253.3 371.8 426.1 361.5 451.2 India –9.3 –11.3 –26.6 –27.5 –33.6 Japan 170.4 211.0 157.1 96.9 105.6 Mexico – 4.4 –8.3 –15.7 –10.8 –12.6 Russia 94.3 77.0 102.4 45.4 62.0 United States –803.5 –726.6 –706.1 –369.8 –324.7 The start of a worldwide recession in 2009 had a major impact upon the level of international trade and affected different countries in different ways. A country’s current account balance is a key macroeconomic indicator. In some countries a current account surplus is an important economic objective. Other countries, however, need to decrease a current account deficit. One of the possible actions by a government facing such a deficit is to introduce an expenditure-reducing policy. (a) Compare the changes shown in the current account balance of Russia and the United States between 2006 and 2010. [2] (b) Explain two possible economic reasons why China’s international trade performance was stronger than that of India. [4] (c) Explain two likely economic effects of the 2009 recession on international trade. [4] (d) Why might a current account surplus be an important economic objective for some countries? [4] (e) Discuss the desirability of using an expenditure-reducing policy to decrease a current account deficit. [6]

3 9708/22/M/J/12 © UCLES 2012 Section B Answer one question. 2 (a) Explain why all types of economic system benefit from the existence and use of money. [8] (b) Discuss whether an economy’s production possibility curve is more likely to move inward or outward over time. [12] 3 (a) Explain, using elasticity of demand, why a train company might introduce a policy of raising fares at busy travel times and lowering fares at less busy travel times. [8] (b) Discuss why some governments decide that it is undesirable to leave the provision of private goods, such as train travel, to the private sector. [12] 4 (a) Explain, with the help of a diagram, how a government can maintain a stable foreign exchange rate. [8] (b) Discuss whether a government should be more concerned by an unstable foreign exchange rate or by an unstable domestic price level. [12]

4 9708/22/M/J/12 © UCLES 2012 BLANK PAGE Copyright Acknowledgements: Question 1 © IMF Staff Writers; Sustaining the Recovery; World Economic Outlook; www.imf.org/extermal/pubs/ft/web/2009/02/index.htm; October 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 2012 question paper for the guidance of teachers 9708 ECONOMICS 9708/22 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, 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 2012 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 2012 9708 22 © University of Cambridge International Examinations 2012 1 (a) Compare the changes shown in the current account balance of Russia and the United States between 2006 and 2010. [2] For recognition that Russia had a surplus and that the United States had a deficit (1 mark). For the second mark we require some statement about the ‘change’ in each country’s balance. E.g. Russia’s surplus was fluctuating, United States deficit was reducing. (1 mark) (b) Explain two possible economic reasons why China’s international trade performance was stronger than that of India. [4] Up to three marks for any one reason well explained. E.g. Productivity may have been higher in China (1 mark) because of higher levels of capital in the production process (1 mark) making Chinese goods more competitive on world markets (1 mark). E.g. China may have an undervalued exchange rate (1 mark) because of the Chinese authorities actions in the foreign exchange market (1 mark) which reduces the price of China’s exports, (or increases the price of China’s imports) (1 mark). Four marks maximum. Notes: The answer could also be explained from the perspective of India. (c) Explain two likely economic effects of the 2009 recession on international trade. [4] Up to three marks for any one effect well explained. E.g. 1 During a recession incomes fall (1 mark), as a result purchasing power falls so that less imports can be afforded (1 mark), as a result the volume of world trade falls (1 mark). E.g. 2 During a recession incomes fall (1 mark*), as a result the demand for those goods with positive income elasticity falls and the demand for those goods with negative income elasticity rises (1 mark), so some countries will gain and some countries will lose as the pattern of world trade changes (1 mark). Four marks maximum. Notes: * Credit this point only once. (d) Why might a current account surplus be an important economic objective for some countries? [4] For a clear understanding of ‘current account surplus’ (1 mark). and For the benefits that result from a ‘current account surplus’. E.g.’s include: • It creates employment via net exports. (Up to 3 marks) • It avoids the problems that result from a current account deficit. (Up to 3 marks) • It boosts confidence amongst foreign investors and promotes investment inflows. (Up to 3 marks) • It results in an inflow of foreign currency that strengthens the exchange rate and foreign currency reserves. (Up to 3 marks) Notes: The suggested benefit must be fully explained for 3 marks. (e) Discuss the desirability of using an expenditure-reducing policy to decrease a current account deficit. [6] For an understanding of ‘expenditure-reducing policy’. (1 mark) and For the advantages of this approach. (up to 4 marks) For the disadvantages of this approach. (Credit comment that ‘expenditure-switching’ policy is an alternative that avoids these disadvantages). (up to 4 marks) Six marks maximum.

Page 3 Mark Scheme: Teachers’ version Syllabus Paper GCE AS/A LEVEL – May/June 2012 9708 22 © University of Cambridge International Examinations 2012 2 (a) Explain why all types of economic system benefit from the existence and use of money. [8] For knowledge and understanding of ‘types of economic system’ and ‘money’. Up to 4 marks For application showing the benefits of using money in different types of economic system. Up to 4 marks (b) Discuss whether an economy’s production possibility curve is more likely to move inward or outward over time. [12] For a knowledge and understanding of the ‘production possibility curve’. Up to 2 marks For analysis explaining the causes of inward and outward shifts of the production possibility curve. Up to 8 marks (up to 6 marks for analysis of each direction of shift) For evaluative comment on whether the production possibility curve is more likely to move inward or outward. Up to 2 marks 3 (a) Explain, using elasticity of demand, why a train company might introduce a policy of raising fares at busy travel times and lowering fares at less busy travel times. [8] For knowledge and understanding of relevant ‘elasticity of demand’ in this context. Up to 4 marks For application of price elasticity of demand showing the link between the effect of raising fares at busy times and changes in total revenue and the effect of lowering fares at less busy times and changes in total revenue. Up to 4 marks (b) Discuss why some governments decide that it is undesirable to leave the provision of private goods such as train travel, to the private sector. [12] For a knowledge and understanding of characteristics of a ‘private good’. Up to 2 marks For analysis explaining how leaving the provision of private goods to the private sector can result in various types of economic problem. Up to 8 marks For evaluative comment; for example on why private sector provision remains despite these disadvantages. Up to 2 marks 4 (a) Explain, with the help of a diagram, how a government can maintain a stable foreign exchange rate. [8] For a knowledge and understanding of the influence of supply and demand in setting the foreign exchange rate. Up to 4 marks For application showing how a government can maintain a foreign exchange rate through intervention in the foreign exchange market. Up to 4 marks (6 marks maximum if no diagram provided) (b) Discuss whether a government should be more concerned by an unstable foreign exchange rate or by an unstable domestic price level. [12] For knowledge and understanding of an ‘unstable exchange rate’ and an ‘unstable domestic price level’. Up to 2 marks For analysis of the disadvantages of an unstable exchange rate and an unstable domestic price level. (up to 6 marks for an analysis of each economic problem) Up to 8 marks For evaluative comment on whether the government should be more concerned about an unstable foreign exchange rate or by an unstable domestic price level. Up to 2 marks