Cambridge A Level Economics 9708 — 2016 Oct/Nov Paper 4 · Variant 1

This document consists of 3 printed pages, 1 blank page and 1 Insert. DC (CW) 119593/1 © UCLES 2016 [Turn over Cambridge International Examinations Cambridge International Advanced Subsidiary and Advanced Level * 2 6 5 6 0 4 2 9 7 9 * ECONOMICS 9708/41 Paper 4 Data Response and Essays October/November 2016 2 hours 15 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 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. The number of marks is given in brackets [ ] at the end of each question or part question.

2 9708/41/O/N/16 © UCLES 2016 Section A Answer this question. 1 Unemployment and Government Policy When considering alternative government policies in time of recession, it is worth remembering that in the 1930s US recession it was feared that what Keynes called ‘equilibrium at less than full employment’ might become permanent. Moreover, technological unemployment could also remain a permanent feature of the labour market, especially among the less skilled and the elderly. In 2013 there was another recession in the US. Unemployment stood at 6.7% of the workforce rather than above 20% as it had been in the 1930s. However, the economic recession was far from over in 2014. The US economy was 8% smaller than had been forecast for it. This led to a repeat of the question of whether stagnation is inevitable and whether unemployment would be a permanent feature. The policies of the US government to solve the recession of 2013–14 included raising the minimum wage to US$10.10 an hour, increasing benefits to the unemployed and increasing the money supply. There was, however, little enthusiasm from some economists for more government action in the form of government spending. They did not support a programme of creating public sector jobs to combat unemployment, saying it was bureaucratic. Even if the right investment could be decided, they feared the new jobs would demand skills that the unemployed simply did not have. However, not everybody agreed. Others gave the example that in 2009, 39 states used US$1.3 billion to create more than 260 000 jobs by subsidising private employers. Many of these jobs went to people who were difficult to employ, including those who had been unemployed for a long time. When the programme ended in 2010, 37% of the workers covered by the subsidy kept their jobs. Those who favoured such public expenditure said that the private sector, if left to its own devices, would not have hired such workers. Supporters of public expenditure also said there were great benefits from government investment in public works in a time of recession; in previous recessions, roads, bridges and public buildings were built. And, if such investments took place again, it was argued, they would not be very expensive. The cost of government borrowing was below the rate of inflation and the investment would help reduce the nation’s debt. To them it seemed foolish for the US central bank to stimulate the economy by encouraging increased lending with low interest rates: that would be similar to the credit expansion that had led to a financial crisis a few years before. They thought it would be better to rely on fiscal policy. Source: New York Herald Tribune, 30 January 2014 (a) Briefly explain the difference between monetary policy and fiscal policy, and identify an example of each policy from the article. [4] (b) Explain what is meant by ‘technological unemployment’ and suggest why it could be permanent among the less skilled and elderly. [3] (c) The article refers to ‘equilibrium at less than full employment’. Explain with the help of an aggregate demand and aggregate supply diagram how an economy can be in equilibrium at less than full employment. [5] (d) Contrast the opposing views in the article about the policies a government should adopt in a time of recession and consider what evidence is given to support each policy. [8]

3 9708/41/O/N/16 © UCLES 2016 Section B Answer any two questions. 2 Adam Smith’s eighteenth century idea of an ‘invisible hand’ where the free market allocates resources effectively and efficiently is false because the ‘invisible hand’ cannot work in a complex modern economy. Do you agree with this argument? [25] 3 (a) Explain the meaning of an indifference curve and show to what extent indifference curves can be used to determine a consumer’s demand curve for a product. [12] (b) Consider whether indifference curves can be used to analyse the effects of a fall in the price of a good on the demand for both a normal good and a Giffen good. [13] 4 In 2014, the average monthly salary in South Africa for an executive business manager in the private sector was 60 000 rand; for a public sector nurse, 13 700 rand; for a cleaner, 3 600 rand. These differences in wage rates can be entirely explained by the economic theory of the labour market. Discuss whether you agree with this conclusion. [25] 5 (a) Explain how an equilibrium position is determined for a firm and for an industry in perfect competition in the short run and in the long run. [12] (b) Outline the conditions that make price discrimination in a monopoly market possible and discuss whether such discrimination is ever beneficial. [13] 6 (a) Explain three major government macroeconomic policy aims and describe why there may be a conflict in trying to achieve them at the same time. [12] (b) Governments are sometimes concerned with microeconomic issues, for example, planning applications for large projects such as airports which have environmental implications. Discuss how a government’s decision on a microeconomic issue might have macroeconomic implications. [13] 7 (a) Explain what is most in need of development in a developing economy. [12] (b) Discuss how easy it is to compare the standard of living between developing and developed countries. [13]

4 9708/41/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 8 printed pages. © UCLES 2016 [Turn over Cambridge International Examinations Cambridge International Advanced Subsidiary and Advanced Level ECONOMICS 9708/41 Paper 4 Data Response and Essays October/November 2016 MARK SCHEME Maximum Mark: 70 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 41 © UCLES 2016 Section A 1 (a) explanation (2), fiscal: subsidies, investment, government expenditure; (1) monetary: low interest rates; increased bank lending, increased money supply (1) [4] (b) unemployment caused by technological change or new methods of production (technological). (1) Technological change usually requires new training or possibly occupational or geographical mobility. Presumably it was thought that the training could not be achieved by the less skilled and elderly. (2) [3] (c) Short run equilibrium may not coincide with the sustainable full-employment level of real output – the level at which the economy is achieving its economic potential. Aggregate demand may be insufficient. Diagram, 1 for labels, 1 for equilibrium, 1 for potential equilibrium, explanation 2 [5] (d) policies included raising the minimum wage, increasing unemployment benefits, increasing money supply, increasing public sector jobs. Some thought the new jobs would not be able to be taken by the unemployed because of lack of skills. Others thought the creation of new jobs was a good policy and resulted in a long term increase in employment. They also supported government investment, particularly as investment could be financed by relatively cheap borrowing. They opposed credit expansion in the private sector. Evidence was given about long-term job creation but not much else. [8]

Page 3 Mark Scheme Syllabus Paper Cambridge International AS/A Level – October/November 2016 9708 41 © UCLES 2016 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 organise 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. Mark 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 Syllabus Paper Cambridge International AS/A Level – October/November 2016 9708 41 © UCLES 2016 Mark 18–25 (Linked to level 4 in individual question notes). 18–22 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. 23–25 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. Level 1 2 3 4 Total Mark 12 1–4 5–6 7–8 9–12 Total Mark 13 1–4+ 5–6+ 7–8+ 9–13

Page 5 Mark Scheme Syllabus Paper Cambridge International AS/A Level – October/November 2016 9708 41 © UCLES 2016 2 The answer should consider the initial proposition and comment on its validity. It should then identify and describe the necessary conditions for efficient resource allocation and consider whether it can be achieved by the ‘invisible hand’ of the market and whether this is because of the complexities of a modern economy. [25] L4 For a reasoned and clear discussion with accurate development of theory and good links to the statement together with a reasoned conclusion. [18–25] L3 For a competent comment together with limited elaboration of the analysis or imprecise links to the statement. There will be some discussion but the evaluation will not be fully developed or extensive. There should still be a conclusion. [14–17] L2 For a brief explanation but weak or ill-explained links to the statement. The explanation will be undeveloped with some attempt at analysis but only limited evaluation. [10–13] L1 For an answer which shows some knowledge but does not indicate that the question has been fully grasped. The answer will have some correct facts but include irrelevancies. Errors of theory or omissions of analysis will be substantial. [1–9] 3 (a) Explanation of the construction of an indifference curve and determination of equilibrium with given income and given prices using budget lines. Derivation of a point on the demand curve from the equilibrium point. [12] L4 For a sound explanation of indifference curves and a clear link to the demand curve with accurate clear diagrams and a clear understanding of the principles involved [9–12] L3 For an accurate reference to the question but with a more limited explanation, perhaps omitting a clear link to the demand curve, or with minor errors in the analysis or in the diagrams [7–8] L2 For a briefer explanation of indifference curves and equilibrium position but with no link to the demand curve; or with inaccurate diagrams and weak explanation. [5–6] L1 For an answer which has some basic correct facts but includes irrelevancies and errors of theory [1–4]

Page 6 Mark Scheme Syllabus Paper Cambridge International AS/A Level – October/November 2016 9708 41 © UCLES 2016 (b) A price fall is reflected in a change in the budget line (pivot from point on axis of good with no price change) with a subsequent change in equilibrium. The equilibrium change involves substitution and income effects. Substitution effect would be in the opposite direction to the price change. The income effect represented by a parallel shift of the budget line is in the same direction as the substitution effect for the normal good but in the opposite direction, and greater than, the substitution effect for the Giffen good. [13] L4 For a reasoned and clear discussion, logically presented dealing with income, substitution, normal, Giffen and linked to demand. [9–13] L3 For a fair but undeveloped discussion probably concentrating on income, substitution without mentioning different types of goods with either a brief comment about the individual demand curve or no discussion about the demand curve [7–8] L2 For a limited explanation with a lack of development of both income/substitution and normal/Giffen goods [5–6] L1 For an answer which has some basic correct facts but includes irrelevancies and errors of theory [1–4] 4 The question presents an assertion. Candidates should discuss whether the theory does explain differentials in wage rates, and comment on the conclusion presented. The examples given can be used to illustrate the answer, reference may be made to the private/public sector examples and possible political issues in fixing wage rates. [25] L4 For a thorough analysis of theoretical wage determination together with a comment on the conclusion of the argument. 18–25 (14–17 for demand and supply only although the answer contains a full discussion of the argument) L3 For a competent explanation of wage theory but with a more limited discussion of the conclusion. 14–17 (10–13 for demand and supply) L2 For a correct but undeveloped theoretical analysis with no comment on the conclusion in the statement. 10–13 (6–9 for demand and supply) L1 For an answer which contains inaccuracies and only a few correct points 1–9 (1–5 for demand and supply only

Page 7 Mark Scheme Syllabus Paper Cambridge International AS/A Level – October/November 2016 9708 41 © UCLES 2016 5 (a) Comment on the link between the firm and industry, the importance of mc = mr, the possibility of abnormal profit in the short run and the changes in demand or supply resulting in normal profit in the long run. [12] L4 For a sound comment with good explanation of the analysis and a clear understanding of the link between the firm and industry and the possible change between the short run and the long run. [9–12] L3 For a competent comment but with more limited explanation of the link between the firm and industry or a limited explanation of the change between the short run and long run [7–8] L2 For a brief explanation and with a weak discussion of the links [5–6] L1 For an answer which has some basic correct facts but includes irrelevancies. Errors of theory or omissions of analysis will be substantial. [1–4] (b) An outline of the main conditions necessary for effective price discrimination. Should include, separate markets, different elasticities and possible benefits for the firm – and maybe consumer – if price discrimination allows costs to be covered. [13] L4 For a sound explanation of price discrimination and a clear understanding with a conclusion [9–13] L3 For a competent comment but with limited discussion and a weaker conclusion. [7–8 ] L2 For a brief explanation of the concept and a weak comment on the possible advantages and no conclusion [5–6 ] L1 For an answer which has some basic correct facts but includes irrelevancies. Errors of theory or omissions of analysis will be substantial. [1–4] 6 (a) Candidates can chose any three major macroeconomic aims and comment how achieving them might cause conflicting results. L4 For a sound explanation of the aims and a clear understanding of possible conflicts between them [9–12] L3 For a competent comment but with limited development of the analysis and a weaker conclusion. [7–8] L2 For a brief explanation of the aims and a weak comment on the possibilities of conflict. [5–6] L1 For an answer which has some basic correct facts but includes irrelevancies. Errors of theory or omissions of analysis will be substantial. [1–4]

Page 8 Mark Scheme Syllabus Paper Cambridge International AS/A Level – October/November 2016 9708 41 © UCLES 2016 (b) Approval for major projects may affect employment, incomes, demand, revenues, compensation, resource use, trade balances, investment decisions with consequent implications for national income, growth and standards of living. L4 For a reasoned discussion and clearly structured answer dealing with the application of policies and a judgemental comment on their influence. [9–13] L3 For a discussion, but without such a full development or without a clear indication of the link between the micro policy and the macro implications and with a weaker conclusion. [7–8] L2 For a limited but acceptable attempt to discuss policies in general terms with only a weak judgement on the links. [5–6] L1 For an answer which has some basic correct facts but includes irrelevancies. Errors of theory or omissions of analysis will be substantial. [1–4] 7 (a) Description of the nature of a developing economy in terms of its GDP, GDP per capita, productive capacity, standards of living, health, education, sanitation, occupational structure of the population, age structure of the population with a comment on the key elements which need to be developed. [12] L4 For a sound description with clear understanding of the characteristics and a clear conclusion [9–12] L3 For a competent description but with limited development and no comment about which elements need to be developed. [7–8] L2 For a general description of only some of the factors and no conclusion. [5–6] L1 For an answer which has some basic correct facts but includes irrelevancies. Errors of theory or omissions of analysis will be substantial. [1–4] (b) Candidates may write about the use of GDP, GDP per capita, HDI, MEW but they should comment on the reason why they have chosen the indicator they use. They should also comment on the effectiveness of the indicator. [13] L4 For a sound comment with clear understanding of the effectiveness of the indicator and a clear conclusion [9–13] L3 For a competent comment with limited development but still with a conclusion [7–8] L2 For a general description with little comparison of merits and no conclusion. [5–6] L1 For an answer which has some basic correct facts but includes irrelevancies. Errors of theory or omissions of analysis will be substantial. [1–4]