Cambridge A Level Economics 9708 — 2025 May/June Paper 4 · Variant 1

1 The influence of governments People often talk as if governments can easily control economic outcomes. Content removed due to copyright restrictions. High-income countries decided to focus on economic growth realising that it was essential to generate revenues and taxes needed to pay for costly investments, for example, the storage of renewable energy, required to reduce the use of fossil fuels. Sources: Irwin Stelzer, The Sunday Times, 29 January 2023 Ray Bourne, The Times, 9 February 2023 (a) The article refers to structural unemployment. Explain what this means and whether it is the same as the natural rate of unemployment. [3] (b) To keep unemployment low, one government used fiscal policy. Analyse how this policy can affect unemployment rates. [6] (c) Explain how the policies of high-income economies towards ‘green energy’ changed between 2015 and 2022. [3] (d) Assess whether the article provides sufficient evidence to justify its conclusion that the intervention of governments has little effect on economic outcomes. [8]

Mark scheme: Question Answer Marks Follow the point-based marking guidance at the top of this mark scheme. 1(a) The article refers to structural unemployment. Explain what this means 3 and whether it is the same as the natural rate of unemployment. Structural unemployment occurs when the skills of the labour force are not equal to the jobs available. There are individuals seeking a job, but are not able to find one because they don't have the skills required or the number of jobs opened in an economy is lower than the number of people looking for a job. (2) Natural rate of unemployment includes structural and frictional so they are not the same. (1) 1(b) To keep unemployment low, one government used fiscal policy. Analyse 6 how this policy can affect unemployment rates. Explanation of meaning of fiscal policy (Government spending and Taxation). (2). Up to 4 marks for a correct diagram explained. Comment on how it could affect output and unemployment – up to 2 for comment on each example. Fully developed point up to 4 marks. 1(c) Explain how the policies of high-income economies towards ‘green 3 energy’ changed between 2015 and 2022. Initially at the Paris Agreement willing to increase green energy outputs (1) or reduce the uses of fossil fuels in energy production. (1) By 2022 want more emphasis on economic growth (1) or helped by a continuation of energy production using fossils fuels. (1) Promise of funds from ‘rich’ to ‘poor’ countries did not materialise (1) or poor countries less effective in reducing CO2 emissions.(1) 1(d) Assess whether the article provides sufficient evidence to justify its 8 conclusion that the intervention of governments has little effect on economic outcomes. Evidence. – War in Ukraine disrupted supplies, but the Russian government was responsible for the war and they stopped the flow of natural gas. So, some evidence against the conclusion that governments have little effect on outcomes. • banks raised interest rates to stop rise in inflation.(1) Some evidence against the conclusion. (1) • governments decided to concentrate on growth and did not direct finances to encourage ‘green energy’. (1) This is some evidence against the conclusion as this did affect the economic outcome. (1) • article mentions billions of private transactions. (1) Not clear whether this supports or contradicts the conclusion. (1) • Article does not give evidence that supply-side policies were the reason for low unemployment in Germany. (1) Some evidence supports the conclusion. (1) • evidence about link between unemployment and fiscal policy does support the conclusion. (1) • No clear conclusion (1) Up to 2 marks for explanation of any of above points, maximum 7 Reserve a mark for conclusion.

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2 With the help of a diagram, evaluate the use of indifference curve analysis to explain the relationship between a change in the price of a product and the change in an individual consumer’s demand for this product. [20] OR

Mark scheme: 2 With the help of a diagram, evaluate the use of indifference curve 20 analysis to explain the relationship between a change in the price of a product and the change in an individual consumer’s demand for this product. Use Table A: AO1 Knowledge and understanding and AO2 Analysis and Table B: AO3 Evaluation to mark candidate responses to this question. AO1 and AO2 out of 14 marks. AO3 out of 6 marks. Indicative content Responses may include: AO1 Knowledge and understanding and AO2 Analysis • An explanation of what is meant by an indifference curve and an indifference curve map. • Explanation of a budget line and understanding of how a change in price or how a change in real income will affect a budget line • Demonstration of an understanding of consumer equilibrium. • Use of a diagram to analyse the links between indifference curves, budget lines and consumer equilibrium. • Analysis of how a change in price might affect consumer equilibrium. This can be supported by a clear, accurately labelled diagram. • Analysis of each element of the price effect on individual consumer demand. Both substitution effects and real income effects should be considered to attain Level 3 No diagram-highest mark is L2 – 8 AO3 Evaluation • Recognise that the key assumptions regarding human behaviour will determine the shape of the indifference curve. For example, it is assumed that all consumers attempt to maximise satisfaction. • Although the analysis only considers ‘bundles’ of two good consumed, it still assumes the consumer can correctly distinguish between different levels of satisfaction between different ‘bundles’. • The analysis only considers a choice between two goods. Consumers have the opportunity to consider alternative prices of a wide range of goods before choosing what to purchase. • Other factors such as advertising might change consumer taste, which in turn, will change the shape of the indifference curve and, ultimately the final impact of a price change on consumer demand. • A conclusion should be attempted which examines the effectiveness of the use of indifference curve analysis to predict the impact of a price change on individual consumer demand. Accept all valid responses 2 AO1 Knowledge and understanding and AO2 Analysis 14 AO3 Evaluation 6

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3 The growth of a firm using a takeover is desirable because it enables consumers to benefit from lower prices and the firm to gain additional profits. Evaluate this statement. [20] Section C Answer one question. EITHER

Mark scheme: 3 The growth of a firm using a takeover is desirable because it enables 20 consumers to benefit from lower prices and the firm to gain additional profits. Evaluate this statement. Use Table A: AO1 Knowledge and understanding and AO2 Analysis and Table B: AO3 Evaluation to mark candidate responses to this question. AO1 and AO2 out of 14 marks. AO3 out of 6 marks. Indicative content Responses may include: AO1 Knowledge and understanding and AO2 Analysis • Recognition that a takeover can be classified as a factor determining the external growth of a firm • Differentiates between a takeover, which occurs when one firm buys another firm and a merger which takes place when two firms unite to form one new company • Takeovers can relate to different stages of production. For example, horizontal, vertical integration. • Analysis should refer to the benefits associate with gaining economies of scale via horizontal integration. For example, lower costs and lower prices for the consumer • Analysis could also be used by referring to backward/forward vertical integration which might lead to further cost savings which can be passed on to the consumer. • Firms might also increase profits by increasing their market share and increasing their total revenue 3 AO3 Evaluation • The cost benefits of economies of scale might not be passed on to the consumer through lower prices • An increase in market share might increase monopoly power and allow the firm to control output and charge higher prices to the consumer. • Some takeovers can be very costly in the long run and this may decrease profits in the long run. • A takeover will create a much larger organization which may have to deal with unexpected communication problems which increase costs and reduce profits • Some takeovers might lead to intervention by the competition authorities which might result in price regulation • Culture clashes may arise within firms involved which may lead to diseconomies of scale and rising consumer prices • A conclusion should attempt to address each element of the statement. The key words ‘low consumer prices and ’increased profits’ should be considered in the light of the preceding argument. Accept all valid responses. AO1 Knowledge and understanding and AO2 Analysis 14 AO3 Evaluation 6 Section C Macroeconomics essay

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4 A country is experiencing stagflation, when there is a high rate of inflation at the same time as a negative output gap. With the help of a diagram, evaluate the effectiveness of using fiscal policy to solve this problem. [20] OR

Mark scheme: 4 A country is experiencing stagflation, when there is a high rate of 20 inflation at the same time as a negative output gap. With the help of a diagram, evaluate the effectiveness of using fiscal policy to solve this problem. Use Table A: AO1 Knowledge and understanding and AO2 Analysis and Table B: AO3 Evaluation to mark candidate responses to this question. AO1 and AO2 out of 14 marks. AO3 out of 6 marks. Indicative content Responses may include: AO1 Knowledge and understanding and AO2 Analysis • A clear definition of inflation and why inflation might cause problems. • A detailed explanation of what is meant by a ‘negative output gap’. • An accurate, clearly labelled aggregate supply and aggregate demand diagram to identify a ‘negative output gap’. • An explanation of what is meant by fiscal policy and how it is used to control inflation or close an output gap. • Analysis might use a diagram to indicate how fiscal policy might be used to close a negative output gap. • Analysis might use a diagram to indicate how fiscal policy might be used to reduce the level of inflation. • Analysis using aggregate demand and aggregate supply curves could be used to show why it is possible to have high inflation and a negative output gap at the same time. Accept Keynesian Cross diagram Maximum 8 marks if no relevant diagram 4 AO3 Evaluation • The use of fiscal policy to reduce aggregate demand might help to reduce the level of inflation, it will simultaneously increase the negative output gap and vice versa. • An alternative approach to fiscal might be the use of supply side measures which would increase aggregate supply, reduce the rate of inflation and help to close the negative output gap in the long run. • Long run supply-side policies are likely to focus on attempts to increase productivity. This frequently involves significant investment in new technology which might lead to a rise in unemployment in the short run. • Fiscal policy may be inappropriate or ineffective unless paired with supply-side reforms. More suitable policies might include reducing regulation, cutting production costs, or encouraging productivity. • May lead to crowding out A conclusion should attempt to assess the relative effectiveness of each type of policy approach and consider which approach is likely to be the most effective in the short run and then compare this with possible outcomes that might be achieved in the long run. AO1 Knowledge and understanding and AO2 Analysis 14 AO3 Evaluation 6

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5 A free trade area gains all the benefits associated with being a member of a customs union while avoiding all the costs associated with being a member of a customs union. Evaluate this statement. [20]

Mark scheme: 5 A free trade area gains all the benefits associated with joining a customs 20 union while avoiding all the costs associated with being a member of a customs union. Evaluate this statement. Use Table A: AO1 Knowledge and understanding and AO2 Analysis and Table B: AO3 Evaluation to mark candidate responses to this question. AO1 and AO2 out of 14 marks. AO3 out of 6 marks. Indicative content Responses may include: AO1 Knowledge and understanding and AO2 Analysis • A free trade area should be defined and the emphasis be upon the removal of tariffs/quotas on products from one country entering another • Key characteristics of a customs union should be identified which include recognizing abolishing tariffs between member nations while adopting a common external tariff on non-member countries. • Analysis might recognize that a country in a free trade area can achieve faster economic growth through specialization and a global market • The absence of import tariffs will reduce costs to firms operating in free trade areas, will increase incomes, economic competition and potentially an increase in labour productivity. • Analysis of a customs union should identify a key difference in relation to the use of common external tariffs. Therefore, although members of a customs union might achieve similar benefits to members of a free trade area. Members of a custom union share protection from competitors outside the union while benefiting from access to a large single market. • Analysis might also be used to show how members within the customs union might gain from the benefits of trade creation when internal tariffs are removed. 5 AO3 Evaluation • One cost of associated with membership of a customs union might be the loss of economic and political sovereignty. • Although there will be trade creation for a new member of a customs union it is likely that trade diversion will take place when a new member has to adopt a common external tariff. This would lead to a misallocation of the world’s resources. • Higher economic growth can take place because of a closely integrated customs union -benefits from comparative advantage. • It could however be argued that a closely integrated customs union will encourage greater political stability and integration. • It has also been argued that due to the combined large market size of a customs union, there may be a further stimulus to inward foreign investment. • Customs unions frequently use non-tariff barriers which can have a negative impact on both trade within a customs union and between a customs union and the rest of the world. • A conclusion should attempt to form an overall judgement regarding the extent to which a free trade area can avoid the costs of membership of a customs union while achieving the same benefits. Accept all valid responses. AO1 Knowledge and understanding and AO2 Analysis 14 AO3 Evaluation 6

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