Cambridge A Level Economics 9708 — 2017 Feb/March Paper 4 · Variant 2

1 Finance Ministers and Economic Power The power of Finance Ministers to make a difference to an economy is exaggerated. Political parties would argue that Finance Ministers have the ability to form policies that lead to the creation of jobs, the building of houses, and the encouragement of economic growth. The reality is that Finance Ministers are usually at the mercy of the economy rather than in control of it. The Finance Minister has a limited macroeconomic range of policy measures. Interest rates, bond markets, international trade markets, company investment policies and changes in consumer spending are far more important than Finance Ministers in shaping the economy and determining tax revenues. Consider monetary policy. This is often controlled by central banks. In 2015, there were low interest rates across much of the world. These lower borrowing costs could encourage firms to invest and this may result in increased employment. Statistics for unemployment and the level of interest rates for India from 2010 to 2014 are given below in Fig. 1. Fig. 1 India: unemployment rate and interest rate (2010–2014) 10 16 Key (%) 9.4 9.4 unemployment rate rate 9 14(%) interest rate 8 rate 12 7 6.3 10interest 6 unemployment 5.2 4.9 8 India 5 India 4 6 Jan Jan Jan Jan Jan 10 11 12 13 14 In international trade markets some economies improved in 2015 because of the halving of the crude oil price – a benefit for companies and households with an effect on inflation that allowed interest rates to stay low. However, part of the benefit of such a change in the general price level would be short-term if oil prices recovered. Another influence on the economy can be a high level of immigration which could increase the working population and possibly increase employment and production. Immigration is not controlled by the Finance Minister. Some consider that the best hope for improving an economy is on the supply side. But supply-side policies are also often the responsibility of ministers other than the Finance Minister and take a long time to become effective. A further economic boost could be a rise in house prices. House price rises encourage consumer confidence and stimulate retail sales. Moving house often results in re-decoration, modernisation and the purchase of household items. However, house price rises, or the corresponding rent increases, can sometimes be out of proportion to wage rates and make it impossible for many people to purchase property or to move. Source: The Times, 18 April 2015 (a) The information refers to supply-side policies. Explain, with two examples, what is meant by supply-side policies. [4] (b) Explain briefly the link between the rate of interest, investment and employment. Consider whether this is supported by the information in Fig. 1. [4] (c) The information refers to rising house prices and politicians sometimes say such a rise is a sign of an improvement in the economy. Analyse how the economy is claimed to benefit from rising house prices but can also benefit from falling oil prices. [6] (d) Summarise the main argument of the information. Discuss whether there is sufficient evidence in the information to support it. [6]

Mark scheme: Question Answer Marks 1(a) Supply-side policies are mainly micro-economic policies aimed at making 2 markets and industries operate more efficiently. Examples: education/training, reducing planning regulations, changing 2 labour/employment rules, encouraging research 1(b) Low interest, encourages borrowing/investment, may encourage employment 4 – depends on capital/labour ratios, chart is equivocal about this – e.g. rates rose in 2011 but unemployment fell, fairly constant rates 2012–14 but unemployment still falling. 1(c) House price rises raise household wealth, may extend mortgages increases 3 willingness to spend. Expenditure increases on modernisation of houses. Oil prices affected costs of production, encourages investment. Lower costs 3 for household bills, more money to spend on other items. 1(d) Argument: finance minister has little power. Gives examples of other 3 influences, firms investment, central banks, consumer spending, immigration, international trade. However although article mentions lack of power it does not mention what 3 influence the Finance Minister might have in terms of tax changes, both direct and indirect, on revenue and expenditure policies, on effect of tax changes on consumer spending – maybe on house purchases, durable consumer goods. Tax changes affect consumer and producer spending and investment, affect government revenue and public spending. Conclusion.

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2 (a) Explain what is meant in economic theory by consumer equilibrium. [12] (b) Discuss the conditions that would cause the demand for a good to (i) increase and (ii) fall as a result of a fall in the price of the good. Use indifference curve analysis to support your answer. [13]

Mark scheme: 2(a) Explanation of utility, assumption of given tastes, income, condition of 12 equilibrium for one product, and for a number of products with different prices. Alternatively the equilibrium can be explained with indifference curves. L4 For a clear explanation, logically presented dealing with each point. 9–12 L3 For a fair but undeveloped explanation either dealing with a single product or dealing with a number of products but not explaining the equation properly. With indifference curves the reasons for the slopes of the curves will probably not be given. 7–8 L2 For a briefer explanation, probably not fully explaining the equilibrium in relation to price, or not explaining more than one product. Or with indifference curves just baldly mentioning the tangent without an explanation. 5–6 L1 For an answer that has some basic correct facts but includes irrelevancies and errors of theory 1–4 2(b) Giffen goods would result in a different outcome when prices change from the 13 outcome of a normal good. Indifference theory can show more precisely why the difference occurs using income and substitution effects. Normal good, substitution increases demand, income increases demand, overall increase. Giffen good, substitution increases, income decreases to a greater extent, overall decrease in demand. L4 For a reasoned and clear discussion, logically presented dealing with income, substitution, normal, Giffen. 9–13 L3 For a fair but undeveloped discussion probably with correct normal good but errors on Giffen good. 7–8 L2 For a briefer discussion with minor errors either in income/substitution or in Giffen good. 5–6 L1 For an answer that has some basic correct facts but includes irrelevancies and errors of theory. 1–4

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3 (a) Some firms have power over their market. Explain what this means and consider why this power might change in a contestable market. [12] (b) Discuss the different aims a firm might have in order to continue with production. [13]

Mark scheme: 3(a) Market power enables firm to fix price, rather than take market price. Occurs 12 in imperfect competition. It is possible to maintain price above competitive levels for a period, usually above cost. Market power can also have an influence on quality of product, service, extent of innovation. Usually occurs when firm has dominance of market or is fairly large or there are few substitutes for product. Contestable market means a potential threat of competition because of limited barriers to entry which might prevent firm charging excessive prices if they wish to stay in the market. Buyers would then be able to switch suppliers with consequent effect on firm’s revenue. L4 For a sound explanation with good illustrations and a clear understanding of the economic principles involved. 9–12 L3 For a competent comment with limited development probably with weak reference to contestable market. 7–8 L2 For a brief explanation with very little development. 5–6 L1 For an answer that has some basic correct facts but includes irrelevancies and errors of theory. 1–4 3(b) Discussion of the various aims of the firm, profit maximising, behavioural, 13 managerial, satisficing, following a price leader, pricing to ensure at least average variable cost is covered, sales maximising, revenue maximising. L4 For a reasoned and well-argued discussion with clear explanation of different aims. 9–13 L3 For a clear but undeveloped discussion of a range of aims or a concentration on profit maximising with brief mention of alternatives. 7–8 L2 For a limited attempt to consider the question but without a balanced approach. 5–6 L1 For an answer that has some basic correct facts but includes irrelevancies and errors of theory. 1–4

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4 A politician remarked that the absence of trades unions would necessarily lead to an improvement in all labour markets. To what extent does economic analysis support this remark? [25]

Mark scheme: 4 Analysis of wage determination and employment levels. Consideration of 25 perfect and imperfect markets. Discussion of meaning of ‘improvement’. In what? (Employment levels, wages, productivity, efficiency of firm, safety issues?) For whom? (worker, employer, general public – no strikes) L4 For a thorough critique of the statement and an explanation of the analysis of wage determination with a clear comparison of perfect and imperfect markets. There should be a conclusion and a well-structured answer. 18–25 (14–17 D&S) L3 For a weaker critique of the statement but a competent explanation of imperfect market wage determination. Max 15 no conclusion. 14–17 (10–13 D&S) L2 For a correct but undeveloped analysis with only a brief comment and recognition of the range of relevant issues to consider. No real conclusion. 10–13 (6–9 D&S) L1 For an answer that shows some knowledge but does not indicate that the question has been fully grasped or where the answer is mostly irrelevant. 1–9 (1–5 D&S)

More questions on Labour market forces and government intervention

5 (a) How might the employment composition and age structure of a developing country differ from those of a developed country? [12] (b) Apart from the employment composition and age structure, discuss what changes are likely to occur in a developing country if it progresses towards developed status. Consider whether these changes are always beneficial. [13]

Mark scheme: 5(a) Comment on differing importance of agriculture/industry/services. Balance or 12 rural/urban occupations. Comment on birth rates, death rates, infant mortality, migration. L4 For a sound explanation with good illustrations and a clear understanding of the principles involved. 9–12 L3 For a competent explanation of the principles but with fewer illustrations or a concentration on either employment or on age structure and only brief mention of the alternative aspect of the question. 7–8 L2 For a correct but brief explanation with undeveloped comment on both aspects, or an explanation of one aspect only. 5–6 L1 For an answer that has some basic correct facts but includes irrelevancies and errors of theory. 1–4 5(b) Discussion of changes in social factors, health, education, housing, incomes, 13 sanitation, environmental change, resource use, distribution of income, L4 For a reasoned and clear evaluative comment with a conclusion about desirability. 9–13 L3 For a comment on a limited range of changes or a wider range with less development – max 7 without a conclusion on whether beneficial. 7–8 L2 For a limited but acceptable attempt to consider the possible results of development but with no conclusion. 5–6 L1 For an answer that has some basic correct facts but includes irrelevancies and errors of theory. 1–4

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6 (a) Consider how significant the level of income is in determining people’s demand for money, according to liquidity preference theory. [12] (b) Discuss whether an increase in the national income of a country is a reliable indication of an improvement in the standard of living for the people in that country. [13] 7 A society that says it cares about efficiency needs to abandon the notion of a market system to allocate resources. Markets only serve self-interest, they are never efficient.

Mark scheme: 6(a) Description of transactions, precautionary and speculative with comment on 12 the significance of income. Determining factor in transactions, less so in precautionary, residual only in speculative. L4 For a sound description and a clear understanding of the principles involved together with a reasoned comment on significance of income. 9–12 L3 For a competent comment with limited development, brief mention of the significance of income. 7–8 L2 For a correct description but undeveloped comment with no attempt to decide on significance of income. 5–6 L1 For an answer that has some basic correct facts but includes irrelevancies and errors of theory. 1–4 6(b) Discussion of the weakness of using GDP as a measure of standard of living. 13 Partly overcome by using real GDP per capita but it omits social issues – education, health, sanitation, working hours – doesn’t include unpaid work, informal economy, quality of goods, types of goods, long run v. short run, environmental issues, distribution of income, sustainability. These qualitative factors are considered with other indicators L4 For a sound explanation and discussion with good illustrations and a clear understanding of the principles involved and a reasoned conclusion. 9–13 L3 For a competent comment with limited development and discussion, brief recognition of importance of social factors; max 7 without a conclusion. 7–8 L2 For a correct explanation but undeveloped comment or elaboration. 5–6 L1 For an answer that has some basic correct facts but includes irrelevancies and errors of theory. 1–4

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7 A society that says it cares about efficiency needs to abandon the notion of a market system to allocate resources. Markets only serve self-interest, they are never efficient.

Mark scheme: Question Answer Marks 7 Explanation of meaning of efficient allocation and explanation of the analysis 25 which ensures an efficient optimum may be reached. Distinction between productive and allocative efficiency. Discussion of reasons for market failure and necessity/desirability of government intervention to achieve efficiency. This could be by persuasion (nudge theory) rather than by enforcement. Nudge theory, originally an ethical idea not a government manipulative tool, involves designing choices to encourage decision making in wider positive interests of society. But it can be used in government context. Conclusion about efficacy of relying on market system. L4 For a thorough explanation and a reasoned discussion dealing with both aspects of efficiency and possible reasons for government intervention. A conclusion should be drawn. 18–25 L3 For a competent explanation of the terms with accurate but limited discussion. Maximum 15 without a conclusion. 14–17 L2 For a correct but undeveloped explanation with some attempt at analysis but only brief discussion with no conclusion. 10–13 L1 For an answer that shows some knowledge but does not indicate that the question has been fully grasped or where the answer is mostly irrelevant. 1–9

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