Cambridge A Level Economics 9708 — 2016 Feb/March Paper 2 · Variant 2

This document consists of 4 printed pages and 1 Insert. DC (ST/FD) 135354 © UCLES 2016 [Turn over Cambridge International Examinations Cambridge International Advanced Subsidiary and Advanced Level * 2 8 5 6 0 7 1 7 9 9 * ECONOMICS 9708/22 Paper 2 Data Response and Essay February/March 2016 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 9708/22/F/M/16 © UCLES 2016 Section A Answer this question. 1 The impact of changes in the world energy market Extract 1: The growth of solar power As technology continues to improve rapidly, solar power is now so cheap that it competes with oil. Around 29% of electricity generating capacity added in the United States (US) in 2013 came from solar power. The average price of solar power in the US has dropped from US$6 per unit in 2010 to US$2.59 per unit in 2014. It is expected that this fall will continue to US$2.30 per unit by 2015 and US$1.60 per unit by 2020. We have now entered an era of falling energy prices that must damage the producers of oil, gas and other fossil fuels. Source: Daily Telegraph, 9 April 2014 Fig. 1: Crude Oil Prices, 2014 120 115 110 105 US$ per barrel 100 95 90 Feb Mar Apr May June Jul Aug Sept Source: Highcharts.com

3 9708/22/F/M/16 © UCLES 2016 [Turn over Extract 2: Venezuela vulnerable to falling oil prices 1 (a) Compare the trend in the price of crude oil between April 2014 and June 2014 with that between June 2014 and September 2014. [2] (b) Use a demand and supply diagram to show the change in the average price of a unit of solar power referred to in the article. [2] (c) (i) What formula would you use to measure the relationship between the change in the price of solar power and the change in the demand for oil? [1] (ii) What would you expect this measure to show in this case? Explain your answer. [3] (d) In Venezuela the state-owned industry sells gasoline (petrol) at a price below the market price. Explain the likely economic effects if the price mechanism were allowed to operate without government interference in Venezuela. [6] (e) Venezuela was facing a recession, high inflation and the government had problems in balancing its budget. Controls on foreign exchange and imports have been used to keep the exchange rate of Venezuela’s currency, the bolivar, stable. Discuss whether a devaluation of the bolivar might be considered a ‘dangerous step’ or the solution to Venezuela’s economic problems. [6] Content removed due to copyright restrictions.

4 9708/22/F/M/16 © UCLES 2016 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. Section B Answer one question. 2 (a) Explain, using examples, why the prices charged for merit goods and demerit goods in a free market do not reflect the value to consumers. [8] (b) Discuss the effectiveness of subsidies and indirect taxes in ensuring that the correct prices for merit and demerit goods are charged in the market. [12] 3 (a) Explain two factors that are likely to make the supply of a product relatively price-inelastic. [8] (b) Discuss the policies that governments might use to increase the price elasticity of supply of essential goods, and assess the likely effectiveness of such policies. [12] 4 (a) Outline the components of aggregate demand and explain one cause of an increase and one cause of a decrease in aggregate demand in an economy. [8] (b) Compare two policies that may be considered to solve the problem of demand-pull inflation and evaluate which is likely to be the more effective. [12]

® IGCSE is the registered trademark of Cambridge International Examinations. CAMBRIDGE INTERNATIONAL EXAMINATIONS Cambridge International Advanced Subsidiary and Advanced Level MARK SCHEME for the March 2016 series 9708 ECONOMICS 9708/22 Paper 2 (AS Level Data Response and Essay), 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 March 2016 series for most Cambridge IGCSE® and Cambridge International A and AS Level components.

Page 2 Mark Scheme Syllabus Paper Cambridge International AS/A Level – March 2016 9708 22 © Cambridge International Examinations 2016 Data Response 1 (a) Compare the trend in the price of crude oil between April 2014 and June 2014 with that between June 2014 and September 2014. [2] The trend is upward from April 2014 to June 2014 (1 mark) and downward from June 2014 until September 2014 (1 mark) (b) Use a demand and supply diagram to show the change in the average price of a unit of solar power referred to in the article. [2] For an accurate demand and supply diagram with correctly labelled axes that shows a shift of the supply curve to the right (1 mark) and a decline in price (1 mark) (c) (i) What formula would you use to measure the relationship between the change in the price of solar power and the change in the demand for oil? [1] For an accurate formula that shows the calculation of cross elasticity of demand. (1 mark) (ii) What would you expect this measure to show in this case? Explain your answer. [3] • For a statement that the goods are substitutes (1 mark) • and therefore will have a coefficient that is positive or that the relationship will be direct (1 mark) • an explanation that this comes about because a rise in the price of one product will lead to a rise in the demand for the other product or that a fall in the price of one product will lead to a fall in the demand for the other. (1 mark) • for evidence of understanding that the size of the coefficient expresses the extent of the relationship between the two goods. (1 mark) (3 marks maximum)

Page 3 Mark Scheme Syllabus Paper Cambridge International AS/A Level – March 2016 9708 22 © Cambridge International Examinations 2016 (d) Using the information and your own knowledge, explain the likely economic effects if the price mechanism were allowed to operate without government interference in Venezuela. [6] It is clear from the extract that price is not allowed to work freely in Venezuela because gasoline is underpriced and there are shortages caused by restrictions on imports. The outcome of allowing price to work freely would be that prices of petrol would rise to ration the scarce goods. Removing controls on imports would increase the quantity of goods, shortages would be alleviated and prices of imported goods would fall. Allowing the price mechanism to work may create other problems however, such as higher inflation, an increased current account deficit and increased inequality of access to essential goods and services. • For recognition of the ways in which the price mechanism is prevented from working (Up to 2 marks) Petrol is sold at a fixed price below market equilibrium (1 mark) Controls prevent imported goods from entering the country in response to demand, so prices of imported goods will be higher than free market equilibrium. (1 mark) • For an explanation of the impact on prices if the price mechanism was allowed to operate without government interference. (Up to 2 marks) The price of petrol would rise (1 mark) and the price of imports would fall (1 mark) • For explaining the possible disadvantages of allowing price to work freely e.g. an increased current account deficit, inequality of access to some basic goods (Up to 2 marks) (e) Discuss whether a devaluation of the bolivar might be considered a ‘dangerous step’ or the solution to Venezuela’s economic problems. [6] • For a clear understanding of what is meant by devaluation and the impact upon import prices and export prices (Up to 2 marks) • For an explanation of the possible problems that might arise from devaluation such as cost-push inflation (Up to 3 marks) • For an explanation of the benefits that devaluation might bring to Venezuela’s economy. (Up to 3 marks) For a conclusion (1 mark) (6 marks maximum)

Page 4 Mark Scheme Syllabus Paper Cambridge International AS/A Level – March 2016 9708 22 © Cambridge International Examinations 2016 Essays 2 (a) Explain, using examples, why the prices charged for merit goods and demerit goods in a free market do not reflect the value to consumers. [8] For knowledge and understanding of merit and demerit goods (award appropriate examples). (Up to 4 marks) For application, using the examples, to show how the prices charged for merit goods and demerit goods do not reflect the true value to consumers as a result of imperfect information. (Up to 4 marks) If no examples are included 6 marks maximum. (b) Discuss the effectiveness of subsidies and indirect taxes in ensuring that the correct price for merit and demerit goods is charged in the market. [12] For analysis of the effects of subsidies applied to merit goods. (Up to 4 marks) • What is meant by a subsidy (1 mark) • The impact of a subsidy upon costs (1 mark) • The impact upon the supply (1 mark) • The impact upon equilibrium price (1 mark) For analysis of the effects of indirect taxes applied to demerit goods. (Up to 4 marks) • What is meant by an indirect tax (1 mark) • The impact of an indirect tax upon costs (1 mark) • The impact upon supply (1 mark) • The impact upon equilibrium price (1 mark) For evaluative comment on the effectiveness of each method in achieving the correct price. The application of a subsidy will reduce the price of a merit good and the application of an indirect tax will increase the price of a demerit good. If there was perfect information the price of a merit good would rise and the price of a demerit good would fall. In this sense, the price of each good after government intervention is not the correct price. The correct price would be attained through improving information. The demand for merit goods would rise, increasing their price and the demand for demerit goods would fall, reducing their price. (Up to 4 marks)

Page 5 Mark Scheme Syllabus Paper Cambridge International AS/A Level – March 2016 9708 22 © Cambridge International Examinations 2016 3 (a) Explain two factors that are likely to make the supply of a product relatively price- inelastic. [8] For knowledge and understanding of the concept of elasticity of supply and the meaning of ‘relatively price inelastic’ (Up to 4 marks) • For what the concept measures i.e. the response of supply to a change in price (1 mark) • For an accurate formula (Up to 2 marks) • For an accurate understanding of what is meant by ‘relatively price inelastic’ (1 mark) For application referring to two factors that might make supply relatively price inelastic e.g. Lack of stocks, time period, nature of the product, availability of factors. (Up to 4 marks) • Up to 3 marks for each of two factors considered (4 marks maximum) (b) Discuss the policies that governments might use to increase the price elasticity of supply of essential goods, and assess the likely effectiveness of such policies. [12] For analysis of the ways in which governments might attempt to increase the elasticity of supply of a product for example training programmes to increase the availability of labour with appropriate skills, providing loans for capital investment, etc. Candidates might place these in the context of broad supply side policies. (Up to 8 marks) Two policies are required for full marks. Up to 6 marks for each policy analysed. For evaluation of the likely effectiveness of such policies (Up to 4 marks) The effectiveness of the policies would be affected by a range of factors. These include the cost of training, the time period before the policies take effect and the opportunity cost of implementing the policy. 4 (a) Outline the components of aggregate demand and explain one cause of an increase and one cause of a decrease in aggregate demand in an economy. [8] For knowledge and understanding of each of the four components of the aggregate demand curve (Up to 4 marks) For application with one cause of an increase (Up to 3 marks) and one cause of a decrease (Up to 3 marks) explained. (4 marks maximum)

Page 6 Mark Scheme Syllabus Paper Cambridge International AS/A Level – March 2016 9708 22 © Cambridge International Examinations 2016 (b) Compare two policies that may be considered to solve the problem of demand-pull inflation and evaluate which is likely to be the more effective. [12] The policies chosen may be set in the context of the interaction of the aggregate demand and aggregate supply curve. Any approach that considers policies that reduce aggregate demand or increase aggregate supply are acceptable. Accept approaches that focus upon increases in the money supply as the cause of demand- pull inflation. For analysis of any two policies that might be adopted to solve demand-pull inflation. Fiscal, monetary and supply-side policies to correct inflation are acceptable. (Up to 8 marks) Allow up to 6 marks for each policy analysed. (8 marks maximum) For evaluative comment on the most effective policy. (Up to 4 marks) The effectiveness of the policies chosen are varied. Fiscal policy might be difficult to apply because it requires cuts to government spending and increases in tax rates that might be difficult to implement. Monetary policy might prove difficult because the money supply might be difficult to control and supply side policies might be expensive and require increases in government spending that offsets restrictive fiscal policy.