Cambridge A Level Economics 9708 — 2016 Oct/Nov Paper 2 · Variant 3

This document consists of 3 printed pages, 1 blank page and 1 Insert. DC (NF) 118048/3 © UCLES 2016 [Turn over Cambridge International Examinations Cambridge International Advanced Subsidiary and Advanced Level * 9 8 0 3 4 8 1 1 3 9 * ECONOMICS 9708/23 Paper 2 Data Response and Essay October/November 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 9708/23/O/N/16 © UCLES 2016 Section A Answer this question. 1 Economic problems in Kyrgyzstan Rouble decline affects Kyrgyzstan Kyrgyzstan is a developing economy which has a border with Russia. At the local market in the capital, Bishkek, the price of meat increased by 9% in six weeks in 2014. A local butcher said that as a result sales had fallen. ‘I usually sell 400 kilos of meat every month, but in September I sold only 250 kilos,’ she complained. In Bishkek, food prices increased by up to 25% over 12 months. Another shopkeeper increased what he charged for flour by 15%, but sales did not decline by very much. ‘We all need flour because we all need to eat bread, macaroni, dough,’ he said. ‘It’s not something people can cut back even if it becomes very expensive.’ Meanwhile, a sharp decline in the value of Russia’s currency, the rouble, since early September is having an impact upon countries across Central Asia, where economies are dependent on remittances (transfers of income) from workers in Russia. By October 2014 the value of the rouble had fallen 20% against the US dollar since the start of the year. The fall had accelerated in September as the price of oil – Russia’s main export – dropped to a four-year low. As local currencies followed the value of the rouble downward, the costs of imported essentials rose. In Kyrgyzstan, remittances from the millions of workers in Russia have started to fall. In recent years, these cash transfers have contributed the equivalent of about 30% of national income to Kyrgyzstan’s economy. As the rouble depreciates, however, it purchases fewer US dollars to send home. Any further drop may significantly reduce consumer demand. This month the International Monetary Fund said it expects consumer prices in Kyrgyzstan to increase by 8.0% in 2014 and 8.9% in 2015, compared with 6.6% last year. One factor that could have an effect is a policy shift at Russia’s central bank, which has already spent over US$50 billion this year attempting to protect the value of the rouble. Some people have condemned efforts to support the currency, arguing that a weaker rouble is good for exports. In Kyrgyzstan the central bank has used some of its limited reserves to reduce the fall in the currency. Nevertheless, Kyrgyzstan’s currency, the som, has fallen in value by 12% against the US dollar this year. Source: Adapted from Asia Times Online, October 2014 (a) (i) Calculate the price elasticity of demand for meat in Bishkek. [2] (ii) How does the price elasticity of demand for meat differ from the price elasticity of demand for flour in Bishkek? [2] (iii) How might an economist explain this difference? [2] (b) With the help of a supply and demand diagram, explain how the Russian central bank is ‘attempting to protect the value of the rouble’. [3] (c) Consider the extent to which the economic performance of Kyrgyzstan would be affected by the fall in remittances from Russia. [5] (d) Discuss whether the actions of the Russian and Kyrgyzstan governments in protecting the value of their currencies are likely, on balance, to have benefited their economies. [6]

3 9708/23/O/N/16 © UCLES 2016 Section B Answer any one question. 2 (a) Distinguish between the concepts of market equilibrium and disequilibrium and show what happens in a free market for a good when disequilibrium exists. [8] (b) Discuss whether subsidies or improved information is the more effective policy to deal with the problems raised by the under-consumption of merit goods. [12] 3 (a) Explain with the help of a diagram why production possibility curves are usually drawn with increasing opportunity costs, and show how they can be used to illustrate scarcity. [8] (b) Discuss whether it is likely that economies that have an increase in labour and a high rate of technological innovation will come nearer to solving the economic problem. [12] 4 (a) Using diagrams, explain how rising raw material prices and a fall in the rate of interest might cause different types of inflation. [8] (b) Discuss how the policy chosen to reduce the rate of inflation will be influenced by the cause of the inflation. Consider which type of inflation is most difficult to reduce and why. [12]

4 9708/23/O/N/16 © UCLES 2016 BLANK PAGE 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.

® IGCSE is the registered trademark of Cambridge International Examinations. This document consists of 6 printed pages. © UCLES 2016 [Turn over Cambridge International Examinations Cambridge International Advanced Subsidiary and Advanced Level ECONOMICS 9708/23 Paper 2 Data Response and Essay October/November 2016 MARK SCHEME Maximum Mark: 40 Published 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 October/November 2016 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 – October/November 2016 9708 23 © UCLES 2016 1 (a) (i) Calculate the price elasticity of demand for meat in Bishkek. [2] For evidence of correct formula (1 mark) and correct calculation = (−) 4.16 (1 mark) Accept answers within the range 4.1 to 4.2. Correct calculation with no formula shown (2 marks), correct formula with incorrect calculation (1 mark). (ii) How does the price elasticity of demand for meat differ from the price elasticity of demand for flour in Bishkek? [2] Price elasticity of demand for meat exceeds 1 and so is elastic (1 mark), the data indicates that there is an inelastic demand for flour. (1 mark) (iii) How might an economist explain this difference? [2] For any explanation that is valid in terms of the factors that influence elasticity For identification of a valid factor (1 mark) for explanation of this factor (1 mark). For example, the candidate might explain that the data indicates that meat has many substitutes whereas flour has few substitutes. Or that meat is more expensive and therefore takes up a higher proportion of consumer spending. One factor explained can gain both marks. (b) With the help of a supply and demand diagram, explain how the Russian central bank is ‘attempting to protect the value of the rouble’. [3] For an explanation of how the sale of foreign exchange reserves by the Russian central bank can increase the demand for the rouble and support its value. (up to 2 marks) For an accurate supply and demand diagram of the foreign exchange market. (1 mark) If the candidate only explains an action to support the value of the rouble that does not involve the sale of foreign exchange reserves, for example an increase in interest rate. (1 mark maximum) (c) Consider the extent to which the economic performance of Kyrgyzstan would be affected by the fall in remittances from Russia. [5] The data indicates that the fall in remittances from Russia will have serious consequences for the Kyrgystan economy. This is because of the scale of these remittances and the extent of the fall. In addition the remitted roubles will purchase fewer US dollars. The outcome would be reduced aggregate demand and possibly cost-push inflation. For analysis of the effects of the fall in remittances upon other macro indicators such as the national income, employment and prices. (up to 4 marks) For evaluative comment on the scale of the impact. (1 mark) Allow approaches that focus on a narrow range of indicators, but also those that consider a wider range of indicators in less detail as long as there is explanation of the effects.

Page 3 Mark Scheme Syllabus Paper Cambridge International AS/A Level – October/November 2016 9708 23 © UCLES 2016 (d) Discuss whether the actions of the Russian and Kyrgyzstan governments in protecting the value of their currencies are likely, on balance, to have benefited their economies. [6] Protecting the value of a currency has advantages and disadvantages. Advantages include the fact that importers and exporters will be more sure of the value of their transactions and this will enhance trading conditions, there is less opportunity for speculators to create a run on the currency and so on. The disadvantages include the cost of the intervention in terms of foreign exchange reserves and the fact that changes in the exchange rate that are determined by market forces cannot offset differences in inflation rates between trading nations. For explaining the negative effects of protecting the value of their currencies. (up to 3 marks) For explaining the positive effects of protecting the value of their currencies. (up to 3 marks) (up to 5 maximum) For a conclusion based upon the evidence offered. (1 mark)

Page 4 Mark Scheme Syllabus Paper Cambridge International AS/A Level – October/November 2016 9708 23 © UCLES 2016 2 (a) Distinguish between the concepts of market equilibrium and disequilibrium and show what happens in a free market for a good when disequilibrium exists. [8] Market equilibrium means that there is no tendency for price and quantity to change. Dis equilibrium means that excess demand or excess supply exists and as a result price and quantity will change as a result of market forces. For clear knowledge and understanding of the terms equilibrium and disequilibrium. (up to 4 marks) For knowledge and understanding of the meaning of equilibrium in a free market. (up to 2 marks) For knowledge and understanding of the meaning of disequilibrium in a free market. (up to 2 marks) If the candidate shows where equilibrium and/or disequilibrium occurs, but does not explain what this means. (1 mark maximum) For application showing how equilibrium is re-established in a free market when disequilibrium exists. (up to 4 marks) For showing how market forces operate to re-establish equilibrium when an excess demand exists. (up to 3 marks) For showing how market forces operate to re-establish equilibrium when an excess supply exists (up to 3 marks) (4 marks maximum) (b) Discuss whether subsidies or improved information is the more effective policy to deal with the problems raised by the under-consumption of merit goods. [12] For analysis of the problems associated with the under-consumption of merit goods and the two policies designed to reduce the problem. (up to 8 marks) For an explanation of the problems of merit goods in terms of under-consumption (1 mark) that results from imperfect information (1 mark) (up to 2 marks) For an explanation of how a subsidy can deal with the problem of merit goods. (up to 4 marks) For an explanation of how a policy of improving information can deal with the problem of under-consumption of merit goods. (up to 4 marks) (8 marks maximum) For evaluative comment on the policies in terms of reducing the problems. A concluding comment on which policy is likely to be most effective is essential for full marks. (up to 4 marks)

Page 5 Mark Scheme Syllabus Paper Cambridge International AS/A Level – October/November 2016 9708 23 © UCLES 2016 3 (a) Explain with the help of a diagram why production possibility curves are usually drawn with increasing opportunity costs, and show how they can be used to illustrate scarcity. [8] For knowledge and understanding of production possibility curves and why they are usually drawn with increasing costs. (up to 4 marks) For a production possibility curve accurately drawn with appropriate axes (1 mark) and displaying increasing opportunity costs (1 mark) (up to 2 marks) For an explanation of why increasing opportunity costs arise as a movement along the opportunity cost curve takes place. (up to 2 marks) For application showing how production possibility curves can be used to illustrate scarcity with due reference to choice and opportunity cost and that points outside the curve are unattainable. (up to 4 marks) (b) Discuss whether it is likely that economies that have an increase in labour and a high rate of technological innovation will come nearer to solving the economic problem. [12] For analysis of the impact of an increase in the labour supply and a high rate of technological innovation upon the goods and services produced. This could be illustrated with a diagram showing an outward shift in the production possibility curve. (up to 8 marks) For explanation of the ‘economic problem’ in terms of unlimited wants and scarce resources. (up to 2 marks) For explanation of the impact of an increase in the labour supply on the capacity of an economy to produce goods and services. (up to 4 marks) For explanation of the impact of a high rate of technological innovation on the capacity of an economy to produce goods and services. (up to 4 marks) For evaluative comment on whether the economic problem can be solved. (up to 4 marks) (8 marks maximum) 4 (a) Using diagrams, explain how rising raw material prices and a fall in the rate of interest might cause different types of inflation. [8] For knowledge and unbderstanding and application of how rising raw material prices can cause cost-push inflation. (No diagram 3 max) (up to 4 marks) For knowledge and understanding and application of how a fall in the rate of interest can cause demand-pull inflation. (No diagram 3 max) (up to 4 marks) (Allow 2 marks maximum for answers that show understanding of the way in which a fall in the rate of interest could cause cost-push inflation through the impact upon the exchange rate)

Page 6 Mark Scheme Syllabus Paper Cambridge International AS/A Level – October/November 2016 9708 23 © UCLES 2016 (b) Discuss how the policy chosen to reduce the rate of inflation will be influenced by the cause of the inflation. Consider which type of inflation is most difficult to reduce and why. [12] The most appropriate policy to reduce inflation depends upon the type of inflation that exists. Demand-pull inflation is best approached through contractionary monetary or fiscal policy or through supply side policies. The most appropriate policy to reduce cost-push inflation depends upon the source of the rise in costs. For example, a rise in raw material costs might be off-set by new sources of supply. Increasing costs through a declining exchange rate can be offset by support for the exchange rate and so on. Which type of inflation is most difficult to reduce depends upon a number of factors. For example, if the inflation is demand-pull then policy might have a considerable time lag. If inflation is caused by a shortage of raw materials, it might take a long time before new sources of supply are found. For analysis that explains how demand-pull inflation can be reduced through: • Contractionary monetary policy i.e. through a decrease in the quantity of money and a rise in the rate of interest • Contractionary fiscal policy i.e. through a decrease in government spending and a rise in taxation. • Supply side policies i.e. through an increase in aggregate supply that offsets the excess aggregate demand. (up to 6 marks) For analysis that explains cost-push inflation can be reduced through: • Support for the exchange rate • A range of supply-side policies aiming to reduce costs etc. (up to 6 marks) (8 marks maximum) For evaluative comment on the most ‘difficult to reduce’ aspect of the question. A concluding comment on which policy is likely to be most effective is essential for full marks. (up to 4 marks)