Cambridge A Level Economics 9708 — 2022 Oct/Nov Paper 2 · Variant 2

1 Variations in the price of maize Malawi Zimbabwe Kwacha per kg Zimbabwe Dollar per kg 350 10 9 300 8 250 7 6 200 5 150 4 100 3 2 50 1 0 0 Mar-18 May-18 Jul-18 Sep-18 Nov-18 Jan-19 Mar-19 May-19 Jul-19 Sep-19 Nov-19 Jan-20 Mar-18 May-18 Jul-18 Sep-18 Nov-18 Jan-19 Mar-19 May-19 Jul-19 Sep-19 Nov-19 Jan-20 Source: FAO/GIEWS Food Price Monitoring and Analysis Tool. Fig. 1.1: The price of maize in Malawi and Zimbabwe, March 2018 to January 2020 Table 1.1: Maize production in Malawi and Zimbabwe 2015–2019 2019 2020 forecast Change average (000 tonnes) (000 tonnes) 2019–2020 % (000 tonnes) Malawi 2959 3392 3600 6.1 Zimbabwe 1313 1701 777 –54.3 Source: Adapted from Food and Agriculture Organisation of the UN. Country Briefs: Malawi and Zimbabwe 01/06/20 Extract 1: World export prices of maize fall sharply Export prices of maize declined further in April 2020, with the United States (US) maize price nearly 10% down from April 2019. It is now at the lowest value in more than ten years. Large global supplies and good harvest prospects in South America continue to reduce prices. In addition, lower demand for maize from the biofuel and animal feed industries is depressing the price further. Source: Food and Agriculture Organization of the United Nations 12/05/2020 Extract 2: Zimbabwe takes steps to curb the rise in maize prices Despite a falling world price for maize, the price of this staple food in Zimbabwe has continued to increase and is now at an exceptionally high level. The increased price mostly results from continued weakness in Zimbabwe’s currency that has damaged the country’s ability to import maize. In addition, the sharply reduced harvest of maize in Zimbabwe resulted in low domestic supplies. In an effort to tackle the soaring prices, the government has implemented several policies. To increase market supplies, the government removed a ban on imports of certain types of maize. It also increased producer subsidies on maize by 40%. Poorer households should benefit from access to this subsidised maize. Source: Food and Agriculture Organization of the United Nations 17/02/2020 Extract 3: Malawi raises guaranteed minimum price for maize Malawi’s Ministry of Agriculture has released updated guaranteed prices for cereals produced on Malawi’s farms in 2020. These are the minimum prices that farmers will receive for their crops. The guaranteed price for the food staple, maize, was raised by just over 10%. The government has begun purchasing maize at this increased price. This change in the minimum price is expected to increase the production of maize in 2020 and in the future to an average level of 3.7 million tonnes per year. Source: Food and Agriculture Organization of the United Nations 10/04/2020 (a) Identify one possible cause of the decline in world export prices of maize. [1] (b) Explain one change in a factor of demand that would lead to maize prices rising in Malawi despite the increase in domestic production. [2] (c) With reference to Extract 2 explain two reasons why maize prices are rising in Zimbabwe despite the fall in the world export price of maize. [4] (d) Explain, with the help of a diagram, how a rise in the minimum price of maize in Malawi will encourage production. [3] (e) Consider, with the help of a diagram, whether a subsidy on maize production will benefit both the producers of maize and poorer households in Zimbabwe equally. [4] (f) Discuss whether maximum prices on staple foods such as maize are likely to be effective in providing food for poorer households in Zimbabwe. [6]

Mark scheme: Question Answer Marks Guidance 1(a) Identify one possible cause of the decline in world export prices of 1 Extract 1 contains possible causes. These maize. include supply factors such as large global supplies and good harvest prospects from For the identification of one possible cause (1 mark) South America and demand factors such as lower demand for maize from the biofuel and animal feed industries. The cause identified does not have to be confined to the data. Any valid demand or supply factor is acceptable provided it identifies why demand or supply may change. 1(b) Explain one change in a factor of demand that would lead to maize 2 Any appropriate demand factor can be prices rising in Malawi despite the increase in domestic production. accepted. Change in tastes, rise in income, rise in the price of a substitute etc. For identification of any appropriate demand factor (1 mark) The explanation may be supported by a And for an explanation of why this could lead to a rise in maize prices in diagram but do not reward an unexplained Malawi, i.e., this may lead to demand (shifting to the right and therefore) diagram for the second mark. exceeding supply / a shortage. (1 mark) 1(c) With reference to extract 2 explain two reasons why maize prices are 4 Extract 2 states that the two reasons are rising in Zimbabwe despite the fall in the world export price of maize. ‘sustained weakness in Zimbabwe’s currency’ and the ‘sharply reduced For identification of a reason (1 mark) and for explanation of how this will harvest’. These need to be identified and cause prices of maize to rise (1 mark) explained. Only accept valid reasons contained in extract 2 that explicitly refer to Zimbabwe. The explanation should develop into why this reason will cause the price of maize to rise in Zimbabwe. Relevant diagrams should only be rewarded if used as part of the explanation. 1(d) Explain, with the help of a diagram, how a rise in the minimum price of 3 Two marks are available for an accurate maize in Malawi will encourage production. diagram showing a movement upward (rise) of the guaranteed price and the For a fully accurate S and D diagram that clearly shows a rise in the minimum extension in supply. The diagram must be price of maize and the increase in supply (2 marks) accurately labelled. OR There must be an explanation that accompanies the diagram that clearly For a fully accurate S and D diagram that clearly shows the introduction of a explains this is a rise in the minimum price minimum price of maize and the increase in supply (1 mark max) rather than the introduction of a minimum price for full marks. For an accompanying explanation that clearly explains that there has been a rise in the minimum price of maize and that this should increase its production If the diagram does not make it clear that because it will encourage farmers to produce more maize. (1 mark) this is a rise in the minimum price then a maximum of one mark should be awarded overall. 1(e) Discuss, with the help of a diagram, whether a subsidy on maize 4 The diagram should show a shift to the production will always benefit both the producers of maize and poorer right of the supply curve and a fall in price- households in Zimbabwe equally. benefitting consumers and the payment to producers shown as the vertical distance For an accurately labelled diagram that shows the shift to the right of the between the new supply curve and the old supply curve and the fall in equilibrium price that benefits the consumer supply curve at the new price. (1 mark) For both marks for the diagram, the impact on the price paid by the consumer and the and the rise in price received by the producer (plus 1 mark) effective price received by the producer must be clearly shown. and for an evaluative comment that refers to and accurately explains the significance of at least one measure of elasticity on the benefit to the producer The answer just requires a brief and / or the consumer. (1 mark) explanation that the extent of the benefit to producers and consumers depends mainly and reaches a justified conclusion that benefit may / may not be enjoyed on PED e.g. if it is elastic then producers equally. (1 mark) will gain more and if inelastic, consumers will. May also depend on PES and consumers gain more when PES is more elastic and vice versa. Justified conclusion needed for final mark 1(f) Discuss whether maximum prices on staple foods such as maize are 6 The imposition of the maximum price will likely to be effective in providing food for poorer households in lead to a shortage of maize in the market. Zimbabwe. In the absence of equilibrium price another method of distributing maize will need to For an explanation that a maximum price on the market for maize is intended be found. This might lead to queuing, first to keep the price low / affordable for poorer households (1 mark) come first served or illegal markets. A rationing system might alleviate the For an explanation of the problems/ consequences caused in the market by problems. the introduction of a maximum price for maize (up to 3 marks) Although a diagram is likely to be used, For an evaluation as to whether such problems/ consequences can be this is not a requirement of the question overcome leading to a reasoned conclusion (reserve 1 mark for the and marks cannot be allocated conclusion) (up to 2 marks) specifically. The use of a diagram if accurate and correctly explained may be used in the explanation and rewarded accordingly.

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2 In many economies, the use of cash is declining as people use contactless payments that transfer funds directly between bank deposits. (a) Explain what represents money in a modern economy and how the use of contactless payments without the use of cash will affect the functions of money. [8] (b) Discuss whether an expansionary monetary policy will be successful in correcting deflation. [12]

Mark scheme: 2(a) In many economies, the use of cash is declining as people use 8 Money is made up of cash and the contactless payments that transfer funds directly between bank deposits of various types in financial deposits. institutions. Whether these deposits can fulfil all of the functions of money depends Explain what represents money in a modern economy and how the use upon the extent of the liquidity of the of contactless payments without the use of cash will affect the functions deposit. of money. Candidates need to identify at least two of For knowledge and understanding of what represents money in a modern the functions of money from means of economy: narrow measure/ cash (1 mark) and broad measure/ bank exchange, store of value, unit of account deposits/ savings (1 mark) up to 2 marks and standard of deferred payment. For application to explain how contactless payments may be included within in The application must discuss whether or the definition of money e.g. it is just another method of moving bank deposits not the functions are affected by the use of and / or replaces cash in exchange for goods / services (1) and relies on e.g. contactless payments and why. For mobile phone technology / apps /use of debit / credit cards without use of a example, the means of exchange function personal identification number (PIN) (1) up to 2 marks may be affected by access to technology, the store of value function may be affected For further application of how this affects the functions of a minimum of two if people need to keep more money on functions of money (maximum of 3 marks per function discussed). deposit, the standard of deferred payments up to 4 marks function may be affected by credit cards and the use of bank overdrafts. Accept any reasonably well-argued response. 2(b) Discuss whether an expansionary monetary policy will be successful in 12 Candidates need to refer to appropriate correcting deflation expansionary monetary policies such as reducing the rate of interest, increasing the For analysis of how expansionary monetary policy may be used to stimulate money supply and may also refer to a the components of aggregate demand to correct deflation / increase the price devaluation of the exchange rate. The level. N.B if only one component of AD is addressed then maximum mark of impact on any one or more components of 3 (Up to 4 marks) aggregate demand should also be referred to. For analysis of the reasons why expansionary monetary policy may not be successful in correcting deflation / increasing the price level. N.B if only one Problems may include a lack of consumer reason is explained then maximum mark of 3 (Up to 4 marks) and business confidence, the overall situation of the economy including the For evaluation that clearly considers whether or not expansionary monetary existing level of interest rates etc. policy will be successful in correcting deflation by taking into account how it may be used and the circumstances in which it may not be successful (up to Evaluation could take into account the 3 marks) that leads to a reasoned conclusion on whether such a policy is PED of exports and imports. likely to be successful (1 mark) (Up to 4 marks) 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) Explain how a production possibility curve can be used to demonstrate scarcity, choice and opportunity cost. [8] (b) Discuss the difficulties that might be encountered when adopting supply side policies to expand the productive capacity of an economy and consider whether these difficulties can be overcome. [12]

Mark scheme: 3(a) Explain how a production possibility curve can be used to demonstrate 8 Candidates are likely to provide a diagram scarcity, choice and opportunity cost. although this is not essential if it is clear that the basis of a PPC is understood. For knowledge and understanding of a production possibility curve (Up to 2 marks) If a diagram is used to demonstrate e.g. a curve that shows the maximum level of output that an economy can knowledge and understanding without an achieve (1) given its current level of resources / technology (1) accompanying explanation then this is For application that demonstrates a clear understanding of what is meant by acceptable BUT it must be correctly scarcity (1) and explains how this would be shown on a PPC (1) labelled as 2 different goods (i.e., not X and Y or P and Q) and the curve itself For application that demonstrates a clear understanding of what is meant by must touch both axes for both marks. choice (1) and explains how this would be shown on a PPC (1) For application that demonstrates a clear understanding of what is meant by Scarcity is shown through the PPC as a opportunity cost (1) and explains how this would be shown on a PPC (1) production frontier and not a position outside the curve. Choice must be shown as a movement along the curve. Opportunity cost is shown as the next best alternative foregone as one product is sacrificed to produce the alternative. A diagram may be used to demonstrate scarcity, choice and opportunity cost but must be accompanied by appropriate explanation to gain marks. However, a diagram is not essential. The application for scarcity, choice and opportunity cost must be clearly separated. 3(b) Discuss the difficulties that might be encountered when adopting supply 12 Candidates need to show good side policies to expand the productive capacity of an economy and understanding of a range of supply side consider whether these difficulties can be overcome. policies that may expand the productive capacity of an economy and specifically, For an analysis of how supply side policies may be used to expand the they should be aware of the difficulties productive capacity of an economy and the difficulties encountered in associated with such policies including the adopting them. N.B. if only one policy and one difficulty is discussed then cost and the potentially long time period maximum of 3 marks. (up to 4 marks) before they come into effect. For an analysis of possible methods of overcoming these difficulties in It is essential that candidates consider adopting supply side policies to expand the productive capacity of an whether these difficulties can be economy N.B. if only one method is discussed then maximum of 3 marks. overcome. For example, in developing (up to 4 marks) economies there may be a shortage of funds that might be overcome through For an evaluation of the likely success of adopting supply side policies to inward investment from abroad. expand the productive capacity of an economy taking into account the difficulties encountered (up to 3 marks) that leads to a reasoned conclusion There are no KU marks awarded in part (1 mark) (up to 4 marks) (b) for merely explaining / defining terms or phrases within the question.

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4 An economy adopts a freely floating exchange rate. (a) Explain how this economy’s exchange rate is likely to be affected when its inflation rate is much higher than inflation rates in its trading partners. [8] (b) Discuss the advantages and disadvantages that result from a rise in an economy’s terms of trade and consider whether a rise is likely to be of overall benefit to an economy. [12]

Mark scheme: 4(a) An economy adopts a freely floating exchange rate. 8 Candidates need to demonstrate knowledge of the impact of varying Explain how this economy’s exchange rate is likely to be affected when inflation on exports and imports and the its inflation rate is much higher than inflation rates in its trading effect on the foreign exchange market. partners. Allow the first KU mark if the answer gives For knowledge and understanding of the meaning an exchange rate i.e., an example of the price of one currency the price of one currency in terms of another currency (1) and of a freely quoted against another one floating exchange rate i.e. it is determined by market forces of demand and supply for the currency (1), is not fixed by the government (1). (Maximum of 2 marks) For application that explains the effect of the lower overseas inflation rates as a rise in demand for imports (1) which will increase the supply of the domestic currency (1 ) and will lead to a fall / depreciation in the exchange rate (1) (Up to 3 marks) For application that explains the effect of the lower overseas inflation rates as a fall in demand for exports (1) which will reduce the demand for the domestic currency (1) and will also lead to a fall/ depreciation in the exchange rate (1). (Up to 3 marks) 4(b) Discuss the advantages and disadvantages that result from a rise in an 12 Candidates will need to provide sound economy’s terms of trade and consider whether a rise is likely to be of analysis of the impact of a rise in the terms overall benefit to an economy. of trade. For analysis that explains the advantages of a rise in the terms of trade N.B if Advantages include the fall in the relative only one advantage is discussed then maximum mark of 3 (Up to 4 marks) price of imports means that the standard of living will rise. Also, the lower price of For analysis that explains the disadvantages of a rise in the terms of trade imports mean that imported raw materials N.B. if only one disadvantage is discussed then maximum mark of 3 will fall in price and this will result in lower (Up to 4 marks) input costs. For evaluative comment on whether the advantages are likely to overcome Disadvantages include a loss of the disadvantages and be of overall benefit to an economy (Up to 3 marks) competitiveness in international trade that that leads to a reasoned conclusion on whether the rise is likely to be of might lead to unemployment in the overall benefit. (1 mark). domestic economy both from a fall in the demand for exports but also as a result in the increased demand for imports. Evaluative comment might refer to the significance of elasticities in determining the outcome. If the candidate is clearly confusing the terms of trade with the balance of trade or the budget balance throughout the answer, then 0 marks must be awarded. There are no KU marks awarded in part (b) for merely explaining / defining terms or phrases within the question.

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