Cambridge A Level Economics 9708 — 2015 May/June Paper 2 · Variant 3

This document consists of 3 printed pages, 1 blank page and 1 Insert. DC (LK) 97170/2 © UCLES 2015 [Turn over Cambridge International Examinations Cambridge International Advanced Subsidiary and Advanced Level * 3 7 3 8 2 5 6 9 0 0 * ECONOMICS 9708/23 Paper 2 Data Response and Essay (Core) May/June 2015 1 hour 30 minutes No Additional Materials are required. READ THESE INSTRUCTIONS FIRST An answer booklet is provided inside this question paper. You should follow the instructions on the front cover of the answer booklet. If you need additional answer paper ask the invigilator for a continuation booklet. 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. The number of marks is given in brackets [ ] at the end of each question or part question.

2 9708/23/M/J/15 © UCLES 2015 Section A Answer this question. 1 Kwacha goes down in value by 10%, but inflation drops A Government official has attributed the fall in the value of the Kwacha, Malawi’s currency, to the end of the tobacco-selling season and the continued imports of farming equipment as a result of the Malawian Government’s farm subsidy programme. A market analyst has commented that there is a need for Malawi to increase exports as a solution to the weak currency. On a positive note, the National Statistics Institute of Malawi has announced that the inflation rate dropped 2.7 percentage points to 25.2% in July 2013. This is still the highest rate for the whole of the southern African region. Encouragingly, the rate of inflation is forecast to fall further to around 17% in December 2013. Source: Adapted from the National Statistics Institute of Malawi National Consumer Price Index of Malawi Table 1: Selected CPI weights Category of spending Food and non-alcoholic drinks Alcoholic drinks and tobacco Recreation and culture Restaurants and hotels Weights 50.2 2.5 2.2 1.3 Source: Adapted from the National Statistics Institute of Malawi Table 2: Malawi selected price indices and the annual rate of inflation Food and non-alcoholic drinks Alcoholic drinks and tobacco Recreation and culture Restaurants and hotels Annual CPI inflation rate 2013 Jan 122.5 114.1 123.6 186.9 35.1 April 127.9 126.0 134.6 191.0 35.8 July 107.7 130.1 140.3 193.4 25.2 Sept 117.1 130.5 144.7 197.9 21.7 Source: Adapted from the National Statistics Institute of Malawi

3 9708/23/M/J/15 © UCLES 2015 Malawi targets tourism for foreign exchange says Government minister The Government says that tourism is Malawi’s next potential source of significant foreign exchange earnings now that demand for tobacco has fallen, following the success of the anti-smoking campaign. The Minister of Tourism and Culture stated that ‘tourism has the potential to become a multi-billion Kwacha industry that can change the lives of many communities around the country’. Source: Adapted from the Nyasa Times October 2013 (a) (i) Showing your calculation, determine the category of spending that has shown the biggest rise in price from January to September 2013. [2] (ii) Why do the categories of spending have different weights in Table 1? [2] (b) (i) Explain how the fact that Malawi has the highest inflation rate in the southern African region might be expected to affect Malawi’s terms of trade. [2] (ii) With the help of a diagram, explain how increasing exports could provide a solution to Malawi’s weak currency. [3] (c) (i) Draw a diagram to show the choice that Malawi faces when allocating its scarce resources between the production of tobacco and tourism. [2] (ii) Explain one difficulty that Malawi might face in reallocating resources from the production of tobacco to tourism. [3] (d) Discuss the factors that should be considered by the Malawian Government in deciding if it should develop its tourist industry and allow its tobacco industry to decline. [6] Section B Answer one question. 2 (a) With the help of diagrams, explain how economists use the concept of income elasticity of demand to distinguish between inferior goods and necessity goods. [8] (b) Discuss how, during a worldwide recession when incomes in most countries are falling, economists might use the concept of income elasticity of demand to assess the impact of this recession. [12] 3 (a) Explain what economists mean when they describe a good as a ‘demerit good’ and, using a diagram, show why such goods will be overconsumed in a free market. [8] (b) Discuss any two policies that might be used to deal with the problems caused by the consumption of demerit goods and consider which might be the more effective policy. [12] 4 (a) Define each component of aggregate demand and, using a diagram, show how a reduction in one of these components might reduce inflationary pressure in an economy. [8] (b) Discuss the impact of a high rate of inflation on the consumers and producers in an economy and assess whether consumers or producers would suffer more. [12]

4 9708/23/M/J/15 © UCLES 2015 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. To avoid the issue of disclosure of answer-related information to candidates, all copyright acknowledgements are reproduced online in the Cambridge International Examinations Copyright Acknowledgements Booklet. This is produced for each series of examinations and is freely available to download at www.cie.org.uk after the live examination series. 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. BLANK PAGE

® IGCSE is the registered trademark of Cambridge International Examinations. CAMBRIDGE INTERNATIONAL EXAMINATIONS Cambridge International Advanced Subsidiary and Advanced Level MARK SCHEME for the May/June 2015 series 9708 ECONOMICS 9708/23 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 should be read in conjunction with the question paper and the Principal Examiner Report for Teachers. Cambridge will not enter into discussions about these mark schemes. Cambridge is publishing the mark schemes for the May/June 2015 series for most Cambridge IGCSE®, Cambridge International A and AS Level components and some Cambridge O Level components.

Page 2 Mark Scheme Syllabus Paper Cambridge International AS/A Level – May/June 2015 9708 23 © Cambridge International Examinations 2015 1 (a) (i) Showing your calculation, determine the category of spending that has shown the biggest rise in price from January to September 2013 [2] Recreation and Culture (1 mark), for calculation showing biggest rise in price of 17.1%. (1 mark) (ii) Why do the categories of spending have different weights in Table 1? [2] The categories have different weights to reflect the importance or proportion of expenditure on different categories (1 mark) in the household budget (1 mark). (b) (i) Explain how the fact that Malawi has the highest inflation rate in the southern African region might be expected to affect Malawi’s terms of trade [2] For knowledge of the meaning of ‘terms of trade’ (1 mark). For application to show that the highest inflation in Southern Africa might be expected to cause a rise in the terms of trade through the impact on the price of exports and imports. (1 mark). (ii) With the help of a diagram, explain how increasing exports could provide a solution to Malawi’s weak currency [3] For a diagram of the foreign currency market showing an increase in the demand for the kwacha (1 mark) and a rise in the exchange rate of the kwacha (1 mark). Accompanying explanation (1 mark). (c) (i) Draw a diagram to show the choice that Malawi faces when allocating its scarce resources between the production of tobacco and tourism [2] For a diagram of a production possibility curve showing the choice between tobacco and tourism services. (up to 2 marks) For full marks the axes must be correctly labelled. Accept either constant or increasing opportunity costs. (ii) Explain one difficulty that Malawi might face in reallocating resources from the production of tobacco to tourism [3] Difficulties include lack of skilled labour, lack of available resources such as hotels, lack of infrastructure etc. Explanation might refer to the geographic and occupational immobility of factors, the cost of re-training etc. For identifying one difficulty (1 mark) and for explaining that difficulty (up to 2 marks).

Page 3 Mark Scheme Syllabus Paper Cambridge International AS/A Level – May/June 2015 9708 23 © Cambridge International Examinations 2015 (d) Discuss the factors that should be considered by the Malawian Government in deciding if it should develop its tourist industry and allow its tobacco industry to decline [6] A range of factors may be considered. These include the impact upon employment, the cost of developing resources required for a successful tourism industry, whether the decline in tobacco use is temporary or permanent etc. Credit should be awarded to those candidates who include a consideration of Malawi’s comparative advantage. For explanation of the factors that should be considered. (Up to 4 marks) For evaluative comment on the importance of the explained factors. (Up to 2 marks) 2 (a) With the help of diagrams, explain how economists use the concept of income elasticity of demand to distinguish between inferior goods and necessity goods [8] For knowledge and understanding of the concept of income elasticity of demand (Up to 4 marks) Definition of income elasticity: (1 mark) Formula: Up to 2 marks (Some inaccuracy e.g. no reference to % change: 1 mark) For some development of the concept e.g. explanation of elastic/inelastic. (1 mark) For application of the concept of income elasticity to distinguish necessary goods from inferior goods using appropriate diagrams. (Up to 4 marks) For explanation of classification of goods as normal using an appropriate diagram. (Up to 2 marks) For explanation of classification of goods as inferior using an appropriate diagram. (Up to 2 marks)

Page 4 Mark Scheme Syllabus Paper Cambridge International AS/A Level – May/June 2015 9708 23 © Cambridge International Examinations 2015 (b) Discuss how, during a world-wide recession when incomes in most countries are falling, economists might use the concept of income elasticity of demand to assess the impact of this recession [12] A world-wide recession will affect countries through the fall in income and this will lead to falling aggregate demand as consumption, investment, government spending and net exports fall. This will cause falling employment. The concept of income elasticity can be used to assess the effects of this upon various industries as those businesses producing normal goods see a fall in sales. On the other hand, those industries that produce inferior goods will see a rise in sales. If countries export normal goods they will see a fall in export revenue, whereas if they produce a large quantity of inferior goods they may see a rise in export revenue. The concept of income elasticity by assessing the extent of any fall in employment could indicate the fall in income tax revenues. Whether the information is useful largely depends upon the accuracy of the calculations and whether the ceteris paribus condition holds. For analysis of the impact of falling incomes with reference to the concept of income elasticity. (Up to 8 marks) For evaluation of the extent to which the concept can be used to assess the impact. (Up to 4 marks) 3 (a) Explain what economists mean when they describe a good as a ‘demerit good’ and, using a diagram, show why such goods will be overconsumed in a free market [8] For knowledge and understanding of a demerit good. (Up to 4 marks) For application showing a diagram that shows why demerit goods are overconsumed. (Up to 4 marks) (b) Discuss any two policies that might be used to deal with the problems caused by the consumption of demerit goods and consider which might be the more effective policy [12] Demerit goods are over-consumed in a market because of incomplete information about their ill-effects. Policies that might be applied include indirect taxation, legislation to prohibit or restrict consumption or education campaigns. Each has problems that limit effectiveness. For example, indirect taxes have the problem that it is difficult to measure the extent of the overconsumption. Education campaigns are costly and take time to take effect and so on. For analysis of the problems caused by the consumption of demerit goods and two policies to deal with these problems. (Up to 8 marks) For evaluation of the effectiveness of each policy analysed. (Up to 4 marks)

Page 5 Mark Scheme Syllabus Paper Cambridge International AS/A Level – May/June 2015 9708 23 © Cambridge International Examinations 2015 4 (a) Define each component of aggregate demand and, using a diagram, show how a reduction in one of these components might reduce inflationary pressure in an economy [8] For knowledge and understanding of the meaning of aggregate demand with each component defined. (Up to 4 marks) If the components of AMD are listed, but not defined, 2 maximum. For application showing a diagram with a fall in aggregate demand and the impact upon the general price level. (Up to 4 marks) (b) Discuss the impact of a high rate of inflation on the consumers and producers in an economy and assess whether consumers or producers would suffer more [12] A high rate of inflation has both internal and external effects on an economy. The internal effects include the re-distributive impact on incomes and the reduction in productive investment together with shoe-leather and menu costs. The external effects are largely through the impact upon exports and imports. Consumers and producers are affected as these effects have an impact upon them. Which is affected most depends upon factors such as whether the rate of inflation in an economy is higher than the rate in a competing economy. For analysis of the impact of inflation upon consumers. (Up to 6 marks) For analysis of the impact of inflation upon producers. (Up to 6 marks) 8 marks maximum For evaluation of whether consumers or producers are likely to suffer more. (Up to 4 marks)