Cambridge A Level Economics 9708 — 2022 May/June Paper 2 · Variant 2

1 Economic growth in Russia has slowed to well below the global average In 2019, Russia set an aim to quicken its economic expansion – to grow faster than the world as a whole. So far, the plan is off to an uncertain start. Content removed due to copyright restrictions. This has also led to a fall in the value of the exchange rate for the Russian currency, the rouble. Source: Andrew E. Kramer, The New York Times 18 February 2020 Table 1.1: Russia: Government budget balance as % of national output 2015 2016 2017 2018 2019 –2.4 –3.4 –1.5 2.9 1.8 18 16 14 12 Inflation 10rate (%) 8 6 4 2 0 2015 2016 2017 2018 2019 2020 Fig. 1.1: Russia’s annual inflation rate, March 2015 to March 2020 Source: Trading Economics/Ministry of Finance of the Russian Federation (a) Using Fig. 1.1 (i) Compare the rate of inflation in Russia in March 2015 with that in March 2020. [1] (ii) What has happened to the price level over this period? [1] (iii) Explain what could have caused real wages in Russia to decline between 2016 and 2018. [2] (b) Explain whether school lunches provided free-of-charge by the Russian government would be classified as private goods or public goods. [4] (c) Assess, using aggregate demand and aggregate supply analysis, the likely impact of the changes shown in Table 1.1 upon the rate of inflation in Russia. [6] (d) Discuss whether the ‘huge decrease in the price of oil’ and the fall in the value of the rouble might bring more opportunities than threats to the Russian economy. [6]

Mark scheme: 1(a)(i) Compare the rate of inflation in Russia in March 2015 with that in March 2020 The rate is higher in March 2015 / is lower in March 2020 / it has fallen over the time period / disinflation. (1 mark) 1 Figures are not required A reference to ‘the rate of inflation’ is not necessary as this is within the question. Note: do not allow ‘improved’, ‘become better’, ‘it is lower’ etc. 1(a)(ii) What has happened to the price level over this period? It / The price level has risen / prices have risen (1 mark) 1 Specific references to ‘price level’ is not necessary as this is within the question. 1(a)(iii) Explain what could have caused real wages in Russia to decline between 2016 and 2018. For an understanding that a decline in real wages means that prices must be rising more than the rise in wages (1 mark) For any explanation of a possible valid cause of this decline in real wages (1 mark) 2 Accept answers that merely state that prices must be rising faster than wages Valid causes may refer to e.g., high rates of inflation, a surplus of labour leading to a fall in wages etc but must make it clear why real wages have declined. Note: No marks should be awarded if there is no understanding at all of what is meant by a decline in real wages. 1(b) Explain whether school lunches provided free of charge by the Russian government would be classified as private goods or public goods. For clear and accurate understanding of what is meant by the term excludable / non excludable (1 mark) For clear and accurate understanding of what is meant by the term rivalry / non rivalry in consumption (1 mark) For a correct application of both terms to free school meals (1 mark) Leading to a conclusion that free school meals must be private and not public goods (1 mark) 4 Candidates should demonstrate clear understanding of how public and private goods are distinguished by reference to the terms (non)excludability and (non) rivalry but for the first two marks this does not need to be correctly applied to free school meals. The final two marks may only be awarded if the terms are correctly applied to free school meals. The conclusion must be based on fully accurate application. Question Answer Marks Guidance 1(c) Assess, using aggregate demand and aggregate supply analysis, the likely impact of the changes shown in Table 1.1 upon the rate of inflation in Russia. For analysis of how the move to a budget surplus will affect aggregate demand through its impact on at least one component of AD and the likely consequence of this on the rate of inflation. (Up to 3 marks) For analysis of the likelihood of the rate of inflation being controlled that considers the possible impact on AS resulting from the change from a budget deficit to a surplus. (Up to 2 marks) 1 mark for a valid conclusion 6 The data in table 1.1 shows that the government budget has moved from a deficit to a surplus and the most likely cause will be a cut in government spending and/ or an increase in taxes. Analysis should consider how this is likely to impact at least one component of AD and therefore reduce AD and control the rate of inflation. However, this move may also affect AS and analysis should consider e.g., how reduced subsidies due to a fall in government spending, possible reduced investment due to a rise in taxes etc. may cause AS to shift to the left. Other government policies such as a cut in interest rates may also have a counter effect and may be accepted. Question Answer Marks Guidance 1(d) Discuss whether the ‘huge decrease in the price of oil’ and the fall in the value of the rouble might bring more opportunities than threats to the Russian economy. For analysis explaining why ‘the huge oil price slump and the fall in the value of the rouble’ will bring opportunities to the Russian economy (Up to 3 marks) Maximum of 2 marks if only the oil price slump or the fall in the value of the rouble is considered. For analysis explaining why ‘the huge oil price slump and the fall in the value of the rouble’ will bring threats to the Russian economy (Up to 3 marks) Maximum of 2 marks if only the oil price slump or the fall in the value of the rouble is considered. Maximum of 5 marks in total for analysis Leading to a well-reasoned conclusion whether or not there will be more opportunities than threats to the Russian economy (1 mark) 6 The fall in the price of oil is likely to reduce the value of Russia’s exports and have a negative effect on the current account of the balance of payments, but this is only the case if the PeD is inelastic. A possible opportunity is that costs of production will fall for domestic firms that use oil and this may impact the Russian economy by making its exports more price competitive, The impact of the fall in the value of the rouble could be positive or negative depending upon the PED of Russia’s imports and exports. There is a threat however that will result from the possible imported inflation and this may impact the Russian economy by lowering living standards.

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2 (a) With the help of a production possibility curve diagram(s) compare growth in the productive capacity of an economy and growth that results from a reduction in the quantity of unused resources in an economy. Explain one reason that might cause each to occur. [8] (b) Discuss the disadvantages of a planned economy and consider whether the transition to an economy in which many resources are allocated by market forces is likely to be of overall benefit. [12]

Mark scheme: 2(a) With the help of a production possibility curve diagram(s) compare growth in the productive capacity of an economy and growth that results from a reduction in the quantity of unused resources in an economy. Explain one reason that might cause each to occur. For knowledge and understanding of a PPC shown through an accurate diagram i.e., a concave or straight-line curve that meets both axes (1mark) with appropriate and correctly labelled axes (1 mark). For application, identification of a reason why there may be a growth in the productive capacity of an economy (1 mark) clearly explained (1 mark) using a fully accurate diagram to correctly illustrate a growth in the productive capacity of an economy shown by a shift outward in the PPC (1 mark) (3 marks maximum) For application, identification of a reason why there might be a reduction in the quantity of unused resources in an economy (1 mark) clearly explained (1 mark) using a fully accurate diagram to correctly illustrate a reduction in the quantity of unused resources in an economy shown by a movement from within the curve to a point nearer the curve or onto the curve. (1 mark) (3 marks maximum) be given for an accurate diagram and not a written explanation. Axes must be labelled correctly for the second KU mark i.e., not P and Q and not X and Y although good X and good Y are acceptable. A growth in the productive capacity of an economy is represented by a shift outward in the PPC. It can be caused by an improvement of technology or an increase in productive resources. A reduction in the quantity of unused resources in an economy is represented by a movement from within the PPC towards the curve. It can be caused for example by increased aggregate demand or by an improvement in the aggregate supply that makes the labour market more efficient. This may be illustrated on one diagram or more. Question Answer Marks Guidance 2(b) Discuss the disadvantages of a planned economy and consider whether the transition to an economy in which many resources are allocated by market forces is likely to be of overall benefit. For analysis of the disadvantages of a centrally planned economy (Up to 4 marks) For analysis of the impact of a change to an economy in which many resources are allocated by market forces with due reference to both the advantages and the disadvantages (maximum mark of 3 if only advantages or disadvantages are analysed) (Up to 4 marks) For evaluation that considers whether transition is likely to be of overall benefit (Up to 3 marks) to arrive at a reasoned conclusion (1 mark) 12 Disadvantages of a planned economy may include a lack of consumer sovereignty. A lack of profit motive which may lead to less efficiency. It may therefore lead to surpluses and / or shortages. It may lack incentives e.g., to invest which may lead to a lack of innovation and a reduction in consumer choice. The transition to an economy in which many resources are allocated by market forces may counter the disadvantages of a planned economy through market forces but it may also lead to the overproduction of demerit goods and the underproduction of merit goods together with a lack of public goods. It may lead to greater inequality. Evaluation may include a consideration of the time period. There are no KU marks awarded in part b for merely explaining / defining terms or phrases within the question.

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3 (a) With the help of diagrams, use the concept of income elasticity of demand to explain the impact of a fall in incomes on the equilibrium price and equilibrium quantity of a normal good and an inferior good. [8] (b) Discuss the difficulties that businesses might have when they try to control the factors that determine the price elasticity of demand for a product and consider whether attempts to control these factors are likely to be successful. [12]

Mark scheme: 3(a) With the help of diagrams, use the concept of income elasticity of demand to explain the impact of a fall in incomes on the equilibrium price and equilibrium quantity of a normal good and an inferior good For knowledge and understanding of the meaning of income elasticity of demand (1 mark) together with an accurate formula (1 mark) Note: the correct KU of the meaning of income elasticity may be rewarded with 1 mark if it is clear within the application even if it was initially incorrect within an opening statement / definition. For application that explains the meaning of a normal good (1 mark) and uses a diagram to illustrate that the demand curve will shift to the left (1 mark) leading to a fall in equilibrium price and quantity demanded which is clearly shown on the diagram (1 mark). For application that explains the meaning of an inferior good (1 mark) and uses a separate diagram to illustrate that the demand curve will shift to the right (1 mark) leading to a rise in equilibrium price and quantity demanded which is clearly shown on the diagram (1 mark). are falling, demand will be expected to fall resulting in a shift to the left of the demand curve. For an inferior good, at a time when incomes are falling, demand will be expected to rise resulting in a shift to the right of the demand curve. This will result in a fall and rise respectively in the equilibrium price and quantity demanded which should be clearly shown on two separate diagrams as required by the question Do not reward application where one diagram is used to illustrate the effects on both types of goods. The maximum mark that this type of response could score is [2+3+1] Diagrams showing the relationship between income and q demanded for normal and inferior goods must not be rewarded (unless solely used as part of the explanation of the meaning of what normal and inferior goods are) as they clearly do not show the changes in equilibrium price and quantity. The only diagrams that may be accepted here are normal supply and demand diagrams that clearly show the appropriate shifts in demand and the resulting changes in equilibrium price and quantity demanded. Question Answer Marks Guidance 3(b) Discuss the difficulties that businesses might have when they try to control the factors that determine the price elasticity of demand for a product and consider whether attempts to control these factors are likely to be successful. For analysis that considers the difficulties a business might have in attempting to control a factor that influences the price elasticity of demand. (Up to 4 marks per factor analysed) (8 marks maximum) For evaluation that considers whether the difficulties in controlling the factors can be overcome (3 marks) and arriving at a reasoned conclusion (1 mark) 12 Factors include whether the good is a necessity, whether it is habit forming, the availability, attractiveness of substitutes, the proportion of income taken in the purchase of the good, and the time period. Responses that simply explain the factors that determine PeD without any references to the difficulties that business might have in controlling these factors should not be rewarded. Candidates must consider at least two factors to score full marks for analysis or they can consider more than two factors and their difficulties in less depth. There are no KU marks awarded in part b for merely explaining / defining terms or phrases within the question.

More questions on Price elasticity, income elasticity and cross elasticity of demand

4 (a) An economy moves from a deficit to a surplus on the current account of the balance of payments. Explain what is meant by a surplus on the current account of the balance of payments and consider the possible impact on the level of employment and prices when there is a change from a deficit to a surplus current account balance in an economy. [8] (b) Discuss whether expenditure-reducing or expenditure-switching policies are more likely to be of greater overall benefit if adopted to remove a persistent deficit on the current account of the balance of payments. [12]

Mark scheme: 4(a) An economy moves from a deficit to a surplus on the current account of the balance of payments. Explain what is meant by a surplus on the current account of the balance of payments and consider the possible impact on the level of employment and prices when there is a change from a deficit to a surplus current account balance in an economy. For knowledge and understanding of what the current account of the balance of payments measures (1 mark) and what is meant by a surplus (1 mark) For application that explains the impact of the emerging surplus upon employment. (Up to 3 marks) For application that explains the impact of the emerging surplus upon domestic prices. (Up to 3 marks) trade in goods, services plus other income. For the second mark, a surplus is where payments received by a country exceed payments made by a country / where income from exports exceeds expenditure on imports. The cause of the surplus will clearly be an increase in exports and / or a decrease in imports. However, there are several reasons why this might occur e.g., increased popularity of Russian exports, government policy to dampen domestic demand etc. Give 1 mark for identifying a valid cause / reason and then up to 2 marks for a developed explanation of the impact on employment and use the same criteria to award marks for the impact on domestic prices. Question Answer Marks Guidance 4(b) Discuss whether expenditure-reducing or expenditure-switching policies are more likely to be of greater overall benefit if adopted to remove a persistent deficit on the current account of the balance of payments. For analysis that considers the advantages and disadvantages of using expenditure-reducing policies to remove a persistent deficit on the current account of the balance of payments. (a maximum of 3 marks if only advantages or disadvantages are analysed) (Up to 4 marks) For analysis that considers the advantages and disadvantages of using expenditure-switching policies to remove a persistent deficit on the current account of the balance of payments (a maximum of 3 marks if only advantages or disadvantages are analysed) (Up to 4 marks) For evaluation that compares the advantages and disadvantages of the two approaches (3 marks) to arrive at a reasoned conclusion on which is to be of greater overall benefit in reducing a persistent deficit on the current account of the balance of payments (1 mark) 12 Candidates need to have a clear understanding of expenditure reducing and expenditure switching policies together with an understanding of the advantages and disadvantages of each. Examples of expenditure reducing policies which are designed to reduce domestic aggregate demand to reduce imports and increase goods for export may include:  raising taxes  reducing government spending etc. Examples of expenditure switching policies which are designed to encourage people to switch from buying imported goods to buying domestically produced goods may include:  protectionist policies  supply side policies  exchange rate policies etc. Analysis and evaluation should focus on how a persistent deficit on the current account may be removed using these policies but may also consider other impacts on the wider economy. There are no KU marks awarded in part b for merely explaining / defining terms or phrases within the question.

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