Money and banking — Paper 2 — IGCSE Economics 0455 topical questions

Question 1

The actions of the Government of Georgia to reduce inflation and unemployment had an impact on the business organisations operating in the …

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2(a) Identify two goals that business organisations may have. 1 mark each for each of two goals: • profit maximisation • growth • survival • sales revenue maximisation • profit satisficing • social responsibility • improving the environment 2 for profit maximisation. 2(b) Explain two functions of a commercial bank. 1 mark each for each of two functions identified e.g.: • accepting deposits/allow people to save • lending • allowing customers to make payments • providing a range of other financial services e.g. insurance 1 mark each for each of two explanations given: • customers can open current accounts or deposit accounts/earn interest on savings • customers may keep e.g. documents at the bank. • customers can borrow money to e.g. purchase a home/pay interest on loans. • customers can make payments through e.g. direct debits • customers may be able to get e.g. a guarantee of compensation for theft from a bank. 4 Question Answer Marks Guidance 2(c) Analyse how the price mechanism influences the allocation of resources in a market economy. An increase in demand (1) will increase price (1) this will provide a financial incentive (1) profit motive (1) to supply more of the product (1) resources will move away from less popular products (1). An increase in supply (1) will reduce price (1) this will lead to a rise in demand (1) resulting in more resources being devoted to the product (1). Makes use of demand and supply (1) consumers make the decisions/consumer sovereignty (1). Will encourage firms to use the most cost efficient methods of production (1) e.g. will use labour intensive method of production (1) if ready supply of labour (1). Award up to 3 marks for a correctly labelled demand & supply diagram, showing 3 elements of the above e.g. shift (1) change in price (1) and new equilibrium quantity (1). 6 If a diagram is included, avoid double credit e.g. only 1 mark can be awarded for an increase in demand whether written or drawn. 2(d) Discuss whether an increase in output will increase the profits that firms receive. Up to 5 marks for why it might: The higher output may be the response to higher demand (1) raise revenue (1) may widen the gap between revenue and cost (1). If to sell the higher output a firm has lowered price, revenue would increase if demand is elastic (1) fall in price will cause a greater percentage rise in demand (1). A higher output may enable a firm to take greater advantage of economies of scale (1) lower average costs (1) example (1). Up to 5 marks for why it might not: If demand is inelastic (1) a fall in price will cause a smaller percentage rise in demand (1) revenue will fall (1). May result in the firm experiencing diseconomies of scale (1) raise average costs (1) example (1). May occur when demand is falling (1) revenue will fall (1) may make a loss (1). 8

Question 2

Money and banking are closely linked. Money performs a number of functions, including being a standard for deferred payments, and it is use…

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3(a) Define a ‘standard for deferred payments’. A function of money that enables people to borrow (1) pay back at a later date (1) and to lend (1). The function of money that enables a price/interest rate to be set on the amount a borrower will pay (1) that a lender will earn (1). 2 3(b) Explain two reasons why agricultural workers may be paid less than manufacturing workers. 1 mark each for each of two reasons identified: • may be in less demand • may be in higher supply • may have less bargaining power • may benefit less from government policies 1 mark each for each of two explanations given: • may be in less demand as less productive/product they produce can be sold for less/replaced by capital good e.g. tractors • may be in higher supply as work may require fewer qualifications/less skill • may have less bargaining power as they may not belong to a trade union • may not be covered by minimum wage legislation 4 3(c) Analyse why private sector banks may earn higher profits than public sector banks. May have different goals (1) private sector banks may aim for profit maximisation (1) while public sector banks may seek to e.g. provide a service/keep employment high (1). Private sector banks may have lower costs of production (1) due to greater size (economies of scale) or lower size (less experience of diseconomies of scale (1) or due to more efficient production (1). Private sector banks may earn more revenue (1) may be better at attracting consumers through e.g. higher quality products (1) may respond quicker to changes in consumer demand (1). 6 Maximum of 3 marks for a list-like approach. Question Answer Marks Guidance 3(d) Discuss whether an increase in bank lending will benefit an economy. Up to 5 marks for why it might: It may enable households to borrow more (1) increasing their spending (1) to increase their living standards (1) be able to buy housing or other basic necessities (1) educate their children (1) reduce poverty (1). It may enable firms to borrow more to expand output (1) raise employment (1) increase economic growth (1). It may enable firms to buy better capital equipment (1) lower costs of production (1) lower prices (1) increase exports (1). Up to 5 marks for why it might not: It may increase consumer expenditure/total demand (1) this may cause inflation (1) total demand exceeding total supply (1) demand-pull inflation (1). Households and firms may spend more on imports (1) increasing a current account deficit (1) and may result in imported inflation (1). It may encourage households to get into debt (1) borrowing more than they can repay (1). It may encourage inefficient firms to expand (1) rising costs (1) increasing prices (1). 8 A response may develop a mixture of relevant points to achieve up to 5 marks on either side. Maximum of 2 marks on each side of the discussion for a list-like approach.

Question 3

In 2015 some German commercial banks reduced their already very low interest rates on deposit accounts. The German Government was hoping th…

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3(a) Identify two ways a commercial bank differs from a central bank. Features of a central bank include: • owned by the government • objective is to create price stability • only one in a country • issues note and coins • operates monetary policy/sets the rate of interest (base rate) • intervenes in foreign exchange markets to influence the exchange rate • lender of last resort to governments • owned by the government • supervises and regulates the financial system Features of a commercial bank include: • owned by shareholders/privately owned • objective is to make a profit • there are usually many commercial banks in a country • exchanges foreign currency • accepts deposits from households and firms • lends to households and firms • provides insurance services to households and firms 2 Up to 2 marks for two features of a central bank, or of a commercial bank, or a combination of both. 3(b) Explain the connection between opportunity cost and the purchase of shares. The (next) best alternative (1) forgone/sacrificed (1). Instead of buying shares people may buy something else (1) example of what the money may be used for instead e.g. putting money in a bank/buying other goods and services (1). 4 Question Answer Marks Guidance 3(c) Analyse how a fall in the rate of interest may affect a country’s exchange rate. A fall in the rate of interest may increase demand/spending (1) increasing the demand for imports (1) the higher demand may result in products being diverted from the export market to the domestic market (1) increased spending on imports will increase the supply of the domestic currency (1) lower revenue from exports will reduce the demand for the domestic currency (1) price of currency will fall (1). A fall in the rate of interest may discourage foreigners from putting money into the country’s banks (1) this will reduce demand for currency (1) some domestic residents may decide to move funds abroad (1) this will increase the supply of the currency (1) the price of the currency will fall (1). A fall in the rate of interest may encourage firms to invest/attract foreign firms to invest in the country (1) spend more on capital goods (1) increase efficiency (1) increase exports (1) increase demand for the currency (1) raise exchange rate (1). 6 The focus is on how the exchange rate is affected, not the effects of a change in the exchange rate. Question Answer Marks Guidance 3(d) Discuss whether an increase in spending on capital goods will help to achieve the aims of government policies. Up to 5 marks for why it might: Higher spending on capital goods/investment: • may increase total demand (1) raise productivity (1) and increase total supply/productive potential/output (1) resulting in economic growth (1) • may reduce costs of production (1) introduce new technology (1) may improve the quality of products (1) may make products more internationally competitive (1) increasing exports (1) improving the current account position (1) • may mean firms will need more workers e.g. to operate machinery (1) reducing unemployment (1) • may raise productivity (1) reducing unit costs of production (1) which may lead to a reduction in the average price level (1) leading to lower inflation (1) • may increase tax revenue (1) which could enable the government to re-distribute income from the rich to the poor (1) Up to 5 marks for why it might not: • Capital goods may not be used (1) leaving output unchanged (1) • Capital goods may replace workers (1) causing unemployment (1) • Other countries may spend more on capital goods (1) making the country less internationally competitive (1) increasing a current account deficit (1) • In the short run, higher spending on capital goods may increase total demand (1) causing inflation (1) • In the short run, producing more capital goods may be achieved with an opportunity cost (1) of fewer consumer goods (1) 8 A response may develop a mixture of relevant points to achieve up to 5 marks on either side. Maximum of 2 marks on each side of the discussion for a list- like approach.

Question 4

In 2015 the world saw many changes in demand and advances in technology. People were using new ways to transfer money and there was an incr…

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6(a) What is sold on a stock exchange? Shares/stocks (1) in public limited companies (1) government bonds/securities (1). 2 6(b) Explain how money helps specialisation and trade to occur. • If workers and firms specialise they have to sell what they produce (1) to get the products they want/to buy other products (1) • Money helps trade as it avoids the need for barter (1) overcomes the double coincidence of wants (1) • Any functions of money e.g. medium of exchange or store of value (max 2) 4 6(c) Analyse how advances in technology can affect demand and supply. • Advances in technology reduce costs of production (1) increases the speed of production (1) increases supply (1) lower price (1) increases quality/efficiency/reduces waste (1) lower price causes an extension in demand (1) • Advances in technology create new products and newer versions of products (1) higher demand will increase price (1) higher prices will cause supply to extend (1) • Advances in technology decreases demand for some products (1) example (1) • Advances in technology may reduce demand for labour (1) as machines may replace workers (1) example (1) • Advances in technology may enable firms to extract raw materials more easily (1) increasing the supply of raw materials (1) example (1) 6 Maximum of 4 marks if there is only reference to demand or supply. Question Answer Marks Guidance 6(d) Discuss the economic arguments for and against a government raising the school- leaving age. Up to 5 marks for why it should: • It may increase educational standards (1) increase skills (1) raise labour productivity (1) increase innovation/technology (1) lower costs of production (1) raise output (1) improve the current account position (1). • More educated workers are likely to be in higher demand from employers (1) more occupationally mobile (1) lower unemployment (1) create jobs for teachers (1) raise wages (1) improve living standards (1) may reduce income inequality (1). • It may attract more MNCs to set up in the country (1) as they will expect a more skilled labour force (1) which may increase GDP(1). Up to 5 marks for why it should not: • It will increase government spending (1) opportunity cost (1) example (1) may lead to higher taxes (1). • Workers may be sufficiently qualified/there may not be vacancies for more-skilled workers (1) inappropriate use of resources (1) workers may become over-qualified for the jobs they do (1). • In the short run will reduce the size of the labour force (1) lower output/productive potential (1). 8 A response may develop a mixture of relevant points to achieve up to 5 marks on either side. Reward but do not expect education being a merit good. Maximum of 2 marks on each side of the discussion for a list- like approach.

Question 5

The Central Bank of Nigeria has set a limit for inflation of 9%, but in August 2015 the country’s inflation rate reached 9.2%. The Governor…

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5(a) Define ‘Central Bank’. A government owned bank (1) acts as bank to government (1) acts as bank to commercial banks (1) operates monetary policy (1) lender of last resort (1) sets inflation target(s)/sets rate of interest (1). 2 5(b) Explain the difference between a fixed exchange rate and a floating exchange rate. • The value of a fixed exchange rate is set by the government (1) using purchases and sales of foreign currency/changes in interest rates (1) • The value of a floating exchange rate is determined by market forces (1) changes in demand and supply (1) e.g. a rise in demand causes currency to appreciate (1) 4 5(c) Analyse how fiscal policy could reduce the inflation rate. • Contractionary/deflationary fiscal policy could be used (1). • A reduction in government spending (1) may reduce total demand (1) reducing demand-pull inflation (1) • An increase in income tax (1) would reduce disposable income (1) this may lower consumer spending (1) reducing total demand (1) lowering demand-pull inflation (1) • Increased in spending on education/healthcare (1) may raise productivity (1) lower costs (1) and reduce cost-push inflation (1) 6 Increase in tax without type is acceptable. Maximum of 3 marks for a list-like approach. Question Answer Marks Guidance 5(d) Discuss whether inflation causes more problems than deflation. Up to 5 marks for disadvantages of inflation or advantages of deflation: • Inflation is a general rise in the price level, whereas deflation is a persistent fall (1) • Inflation reduces the value of money/spending power (1) increasing the cost of living (1) it may be of a high rate/hyperinflation (1) reducing the value of money significantly (1) • It may be fluctuating (1) creating uncertainty (1) • Savers are adversely affected (1) by the fall in the real value of their savings (1) • Living standards will fall (1) if price inflation exceeds wage inflation (1) • It may reduce international competitiveness (1) worsening the current account position (1) • Other costs e.g. menu costs, shoe leather costs (up to 2) • Deflation may be beneficial if it is caused by advances in technology (1) lower costs of production (1) can increase output (1) raise employment (1) improve the current account (1) Up to 5 marks for disadvantages of deflation or advantages of inflation: • Borrowers gain from inflation (1) which reduces the burden of debts (1) if inflation rate is higher than the interest rate (1) • Deflation may be caused by a decrease in total demand (1) consumers delay purchases (1) firms may reduce/delay output/(1) profits may fall (1) unemployment may increase (1) • Inflation at a low rate may stimulate production (1) producers encouraged by rising prices (1) 8 A response may develop a mixture of relevant points to achieve up to 5 marks on either side. Maximum of 2 marks on each side of the discussion for a list- like approach.

Question 6

Despite encouragement from central banks, in 2015 some commercial banks were still reluctant to lend, especially to the poor. Attracting mo…

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7(a) Identify two ways in which the expenditure patterns of the poor and 2 the rich are different. The rich spend more / the poor spend less (1). Poor spend a higher proportion on basic necessities / needs e.g. food (1) rich spend a higher proportion on luxuries / wants (1). Poor spend a higher proportion (1) of their income than the rich (1) or the reverse argument. 7(b) Explain two reasons why a commercial bank may prefer to lend to the 4 rich rather than to the poor. 1 mark each for each of two reasons identified: • greater expectation that they will repay • greater collateral • rich may borrow more / more profitable • it takes a longer time for the poor to repay loans. 1 mark each for each of two explanations of the reasons: • rich will have more income/wealth to repay • rich will have more assets to sell if necessary • more interest can be earned from lending large sums • the poor have less income with which to repay. 7(c) Analyse the effects that an increase in the labour force will have on an 6 economy. An increase in the labour force will increase the quantity of resources (1) increase productive potential (1) enable more products to be produced (1) raise economic growth (1). An increase in the labour force may reduce inflation pressure (1) enable supply to increase to match higher demand (1). An increase in the labour force may increase total wages paid (1) increasing total spending/demand (1) causing demand-pull inflation (1). An increase in the labour force available may reduce wages (1) reducing cost-push inflation (1). An increase in the labour force may increase employment (1) if the number of jobs available increases (1) increasing income tax revenue for the government (1). If not employed, will increase unemployment rate (1) higher spending on benefits (1). 7(d) Discuss whether providing loans to the poor will reduce poverty. 8 Up to 5 marks for why it might: Loans will enable the poor to buy more basic necessities (1) e.g. housing, food, clothing (1) reduces absolute poverty (1). Loans will enable the poor to spend more on education/training (1) increase their skills (1) increase the chances of them gaining a job (1) increase wage rate (1) increase education of children (1) reduce poverty in the future (1). Loans will enable the poor to set up small businesses (1) become entrepreneurs (1) receive income/profit (1) may employ other previously poor people (1) reduce unemployment (1). Loans may enable the poor to spend more on healthcare (1) raising living standards (1). Up to 5 marks for why it might not: Loans may be spent on items that do not increase earning potential (1) e.g. cigarettes (1). The poor may get into debt / may be unable to repay the loan (1) lose their collateral/home (1). Paying interest (1) may reduce the ability to buy basic necessities (1) high interest rates (1) may be charged to the poor (1). Loans may not be large enough (1) to pay for e.g. education/training (1). Loans may not be a long-term solution to poverty (1) only improving living standards in the short-term.

Question 7

In August 2015, China devalued its currency, the yuan. The Chinese Government was trying to increase output, including the output of food. …

Accepted Answer

4(a) Define ‘devaluation’. A fall in the value (1) of the currency (1) in the case of a fixed exchange rate/caused by government decision / against other currencies (1). 2 Question Answer Marks Guidance 4(b) Explain two disadvantages of a decrease in a country’s output. 1 mark each for each of two benefits identified: • rise in unemployment / recession / less exports • reduction in living standards • reduction in tax revenue. 1 mark each for each of two explanations given: • fewer workers will be needed if output falls/cyclical unemployment • negative impact on balance of payments • there will be fewer goods and services for people to consume • lower incomes and spending to tax • lower GDP. 4 4(c) Analyse the effect on the market for food of an increase in population combined with a prolonged period of bad weather. There will be more people to buy food (1) demand would increase – written or shown by a shift to the right of a demand curve (1). Bad weather will reduce crop yields (1) supply will decrease – written or shown by a shift to the left of the supply curve (1). Price will increase (1) but the effect on quantity is unclear (1) – can both be shown by change in equilibrium price and quantity on a diagram. 6 Question Answer Marks Guidance 4(d) Discuss whether a central bank should lend to commercial banks which get into financial difficulties. Up to 5 marks for why it should: A central bank is a lender of last resort (1) one of its functions is to lend to commercial banks when they cannot borrow elsewhere (1) example of another function (1). If a central bank does not lend, the commercial banks may collapse (1) holders of bank accounts will lose money (1) they may get into difficulties (1) there may be a ‘run’ on other banks (1) with people withdrawing their money (1) putting other banks at risk (1). Fewer banks would reduce the funds for firms to borrow (1) investment would be reduced (1) economic growth would decline (1) makes it more difficult for commercial banks to carry out their function (1) example of another function (1). Up to 5 marks for why it should not: May encourage banks to take risks (1) lend to creditworthy customers (1) they may think they are too big to fail (1). It would involve an opportunity cost (1) could use funds to lend to new, expanding banks (1). 8

Question 8

Banking and unemployment in Morocco Morocco’s banking industry has been described as one of the best in Africa. It has some of Africa’s lar…

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1(a) Identify, using information from the extract, TWO functions of a commercial bank. Providing savings accounts (1) lending (1) setting interest rates on loans (1). 2 just look at the first three. 1(b) Explain, using information from the extract, TWO reasons why the banking market in Morocco is NOT an example of perfect competition. Three banks control more than two-thirds of the market (1) implies high % of market/dominance/not large number of small firms/ price maker (1). The banks use brand names (1) there is no advertising/no brand loyalty in perfect competition (1). Set own interest rates (1) in perfect competition, firms are price takers/prices determined by the market (1). Provide different services (1) the product is homogeneous in perfect competition (1). 4 1(c) Analyse why a commercial bank may prefer to sell its services in foreign countries rather than its home country. It may make more profit (1) demand for banking services may be higher (1) demand may be falling in home country but rising abroad (1) due to e.g. higher incomes/larger population (1) less competition (1). Costs of production may be lower abroad/efficiency higher (1) due to e.g. lower rents/lower wages (1). There may be a greater availability of skilled labour abroad (1) due to better education (1). Foreign governments may provide subsidies (1) have lower rates of tax (1). Unfavourable domestic policies (1) e.g. restrictions on the money supply (1) limits the bank’s ability to make profits domestically (1). Selling services abroad may help to reduce risks (1). 5 1(d)(i) Analyse whether the information in Fig.1 supports the view that: (i) countries with high population growth rates have a high unemployment rate Generally no (1) supporting evidence e.g. countries with the highest population growth rate, Uganda and Benin, had the lowest unemployment rates (1). 2 Accept any relevant country evidence. Question Answer Marks Guidance 1(d)(ii) Analyse whether the information in Fig.1 supports the view that: (ii) the youth unemployment rate is usually twice that of the overall unemployment rate. Generally yes (1) Supporting example (1) Egypt is the exception (youth unemployment rate almost four times as high) (1). Morocco is exactly twice (1) no other country is exactly twice (1). 2 1(e) Discuss whether or not older workers are always paid more than younger workers. Up to 3 marks for why older workers may be paid more: Older workers may have been with a firm for a long time (1) may have gained promotion (1) developed skills (1) gained experience (1) may have undertaken training (1) may be in managerial jobs (1) may be more productive (1). Up to 3 marks for why older workers may not be paid more: May be less productive (1) less fit for physical work (1) may be out of date with new technology (1) lack new ideas (1) may have had less education in the past (1). May be less occupationally mobile (1) less willing/able switch jobs (1). May be less geographically mobile (1) less willing/able to move in search of higher paid employment (1). 5 Accept skills or efficiency on either side. One mark if given on both sides. More marks can only be awarded if a reason for better skills is given. 1(f) Explain, using information from the extract, ONE reason why a relatively poor country may have a low unemployment rate. A large proportion of its population is employed in agriculture (1) in subsistence farming (will employ family members) (1) labour-intensive (1) would employ a high proportion of labour (1) relative to capital (1) Lack finance to invest in new (labour-saving) technology (1). No specific skills required for (subsistence) agriculture / low entry requirements for unskilled (1). 4 Question Answer Marks Guidance 1(g) Discuss whether or not commercial banks in Morocco would benefit from further mergers. Up to 4 marks for why they might: The merger would give the banks / firms more market power (1) a relatively quick way to grow (1) may be able to raise price (1) without losing too many customers (1). It could be a horizontal merger (1) which may enable greater advantage to be taken of economies of scale (1) example (1) lower (average) costs (1) lower prices / increased demand (1) higher profit (1). Up to 4 marks for why it might not: The reduction in competition may make the banks / firms complacent (1) may not try to keep costs down (1). The firms may experience diseconomies of scale (1) example (1) higher (average) costs (1) higher prices / reduced demand (1) lower profit (1). Costs of integrating firms such as redundancies/loss of morale (1). Large firms may lose customers due to lack of personal touch (1). 6 Accept profits and/or costs on either side. One mark if given on both sides. More marks can only be awarded if a reason for change in profits is given.

Question 9

In February 2016, share prices on stock exchanges fell throughout the world. There were a number of reasons for this; including concerns ab…

Accepted Answer

6(a) Define commercial bank. Two marks from: A financial institution (1) that offers services to people/households/firms (1) examples of services (1) that is profit orientated (1) (usually) in the private sector (1). 2 6(b) Explain how a stock exchange could encourage economic growth. A stock exchange enables firms to raise finance by issuing shares (1) by providing a market for shares / enables shares to be bought and sold (1) finance allows firms to invest (1) which increases their ability to produce more (1). A stock exchange helps firms merge (1) enabling firms to take greater advantage of economies of scale (1) reducing costs of production (1) increasing international competitiveness (1) capturing more market share (1). If stock exchange is doing well (1) wealth/dividends may rise (1) causing higher spending (1). Allows sales of government bonds/securities (1) money raised can be spent on e.g. infrastructure (1). 4 6(c) Analyse what can cause deflation. A fall in the price level could be caused by a fall in total (aggregate) demand (1). This may be due to a fall in consumer expenditure / rise in saving (1) a fall in borrowing (1) a fall in investment (1) due to e.g. a lack of confidence (1) spending may be delayed due to the expectation that prices may be lower in the future (1) deflationary demand-side policy measures (1) e.g. a rise in the rate of interest (1) rise in direct taxation (1). Exports may fall (1) due to e.g. fall in incomes abroad (1) a rise in exchange rate (1). A rise in total (aggregate) supply (1) due to e.g. advances in technology (1) increased investment (1) reduced costs of production (1) increase in productivity (1) supply-side policy measures (1) resulting from e.g. improvements in education and training (1). 6 6(d) Discuss whether or not government policy measures to reduce unemployment will cause inflation. Up to 5 marks for why they might: Increased government spending and/or lower taxes / expansionary fiscal policy (1) lower interest rates and/or increased money supply / expansionary monetary policy (1) will increase total (aggregate) demand/spending (1) may reduce cyclical unemployment / more workers may be employed to meet the higher demand (1) but may cause demand-pull inflation (1). Higher demand may also cause cost-push inflation (1) as demand for workers rises (1) firms may compete for workers (1) causing wage rates to rise (1). Up to 5 marks for why they might not: An increase in demand may not push up prices if unemployment is initially high (1) firms will be able to attract more workers by just offering jobs (1) they will not have to raise wages (1). The government may use supply side policy measures to reduce unemployment (1) e.g. improved education and training/privatisation/deregulation (1) such policy measures may reduce costs (1) may increase total (aggregate) supply by as much as total (aggregate) demand (1). The government may use price controls (1). 8

Question 10

In early 2016, the central bank of the Republic of Turkey cut interest rates five times. This was despite an inflation rate of 7.6%. The ec…

Accepted Answer

4(a) Identify two functions of a central bank. • Control money supply • Issue notes • Set interest rates • Maintain price stability / low inflation • Act as a lender of last resort / lend money to government / lends to commercial banks • Ensure stability of financial system • Manage foreign exchange reserves 2 4(b) Explain how the Consumer Prices Index (CPI) is calculated. A representative basket of most commonly purchased goods and services is constructed (1) the price of these goods and services is monitored over time (1) the goods and services are ‘weighted’ (1) according to the proportion of disposable income they account for (1) annual price changes are measured (1) and multiplied by weights (1) weighted price changes are measured against a base year (1). 4 Up to 2 marks for correct numerical examples. 4(c) Analyse the impact of a cut in interest rates on saving and investment. Saving is expected to fall (1) as the return from saving falls (1), reducing opportunity cost of spending (1), causing individuals to spend more (1) and borrow more (1). Investment will rise (1) as it becomes cheaper for firms to borrow (1), reducing the cost of investment (1) and making investment more profitable (1). 6 Question Answer Mark Guidance 4(d) Discuss the impact of supply-side policy measures on government expenditure and on government revenue. Up to 5 marks for why it might increase government expenditure and decrease tax revenue: Policies such as subsidies may be expensive (1) if funded through borrowing government spending on interest payments will increase (1) gains from supply side policies take a long time to materialise (1) meaning in the short run there may be no increase in tax revenue (1). Cut in income tax (1) may decrease income tax revenue in short run (1). Cut in corporation tax (1) may decrease corporation tax revenue in short run (1). Privatisation in the long run may reduce government revenue (1) if privatised firms have been profitable (1) Up to 5 marks for why it might decrease government expenditure and increase tax revenue: Supply side policies will increase the productive capacity of the economy (1) which will enable long run growth to be achieved (1) and more tax revenue from sales of goods and services (1) and from higher income (1). Income tax receipts may increase in the long run if more people are working (1) and corporation tax receipts may increase is firms are making bigger profits (1). Spending on education and training (1) is likely to increase employment (1) reducing spending on welfare benefits (1) increasing income tax revenue (1). Deregulation may not alter government spending and tax revenue in the short run (1) but may increase tax revenue in the long run if efficiency increases (1). Privatisation in the short run may increase government revenue (1) from the sale of shares (1). 8

Question 11

Mexico has recently experienced relatively low inflation and the Mexican government wants to maintain this price stability. Despite this it…

Accepted Answer

2(a) Define private cost. Private costs are costs borne by those producing the product (1) consuming the product (1) example of such a cost (1) social costs – external costs (1). 2 2(b) Explain two ways a government could reduce external costs. Up to 2 marks for two explanations from: Impose a tax (1) to discourage production / discourage consumption / turn external into private cost (1). Regulation (1) ban or restrict production / ban or restrict consumption / may be enforced by fines (1). Provide information (1) to discourage consumption / discourage production (1). Government subsidies (1) to encourage cleaner production methods / the consumption of healthier food e.g. fruit instead of high fat foods (1). 4 Reward but do not expect explanation of tradeable / pollution permits / property rights. 2(c) Analyse how a high rate of inflation affects the functions of money. People may not want to save money (1) as it may lose value (1) stop acting as a store of value (1). People may not accept money as a payment (1) as it may lose value / people may not know what its value is (1) stop acting as a medium of exchange (1). People may not be willing to lend money (1) inflation rate may be higher than interest rate (1) stop acting as a standard of deferred payments (1). People may stop valuing products in monetary terms (1) due to instability of prices (1) stop acting as a unit of account / measure of value (1). 6 Maximum 2 marks for a list-like approach applied to high inflation. Maximum 1 mark for a list of three or more functions of money. Question Answer Marks Guidance 2(d) Discuss whether or not a fall in its foreign exchange rate will benefit an economy. Up to 5 marks for why it might: A lower exchange rate will reduce the price of exports (1) raise the price of imports (1) net exports may rise / exports may rise / imports may fall (1) current account of the balance of payments may improve (1) total (aggregate) demand may increase (1) real GDP may increase economic growth (1) employment may rise (1). Up to 5 marks for why it might not: Higher import prices may not reduce spending on imports if demand for imports is inelastic (1) export revenue may not rise if demand for exports is inelastic (1) import restrictions imposed on other countries may make it difficult to sell more exports (1). Higher import prices may cause inflation (1) imported raw material costs may rise (1) causing cost-push inflation (1) imported finished products may not be replaced by domestic products (1) rise in net exports may cause demand – pull inflation (1). Domestic citizens may be able to purchase fewer imports (1) lower living standards (1). If the country is in debt (1) it may increase the cost of repaying the debt (1). If the country is operating at full employment (1) it may not be possible to produce more exports / substitutes for imports (1). Demand for the country’s exports may be low (1) if quality is poor / incomes abroad are falling abroad (1). If the fall is used as a way to capture markets abroad / protect domestic industries (1) there may be retaliation (1). 8 Each point may be credited only once, on either side of an argument, but separate development as to how/why the outcome may differ is expected.

Question 12

In February 2017, China’s central bank raised the rate of interest. It wanted to reduce borrowing and the growth of the money supply, but i…

Accepted Answer

5(a) Identify two functions of money. • Medium of exchange • Store of value • Unit of account (measure of value) • Standard of deferred payments 2 5(b) Explain two reasons why a central bank may want to reduce borrowing. It may want to reduce the inflation rate (1) caused by too much demand arising from borrowing (1). To reduce disposable income (1) and reduce (demand-pull) inflation (1). it may want to reduce a current account deficit (1) people may be spending too much on imports (1). Over lending by commercial banks (1) puts banking system at risk (1). 4 Allow explanation of why a high level of borrowing is bad for the economy, e.g. implication that the central bank intervenes to correct this. 5(c) Analyse why skilled workers are usually paid more than unskilled workers. The demand for skilled workers is likely to be higher (1) due to their higher productivity / education (1) expectation of a higher rate of return / sales (1) better quality goods and services (1) resulting in greater profits (1). The supply of skilled workers is likely to be lower / more inelastic (1) due to the shortage of people with skills / qualifications (1). Skilled workers may have more bargaining power (1) harder to replace / may cause more disruption by taking industrial action (1). 6 2 marks could be awarded for an accurately drawn demand and supply diagram showing higher demand and lower supply. Question Answer Marks Guidance 5(d) Discuss whether or not a rise in the rate of interest will reduce economic growth. Up to 5 marks for why it might: It may discourage spending (1) as it would be more expensive to borrow (1) more rewarding to save (1) this will lower total (aggregate) demand (1) which could reduce firms’ output (1). It may discourage investment (1) as more expensive to borrow (1) firms decide to save the money (1). Higher interest rate may cause exchange rate to rise (1) discouraging exports / encouraging imports (1). Up to 5 marks for why it might not: People / firms may still be prepared to borrow if they are optimistic about the future (1) thinking they will be able to repay (1) because they expect e.g. higher income in the future (1). The rate of interest may still be low (1) and may be below the inflation rate (1). A higher rate of interest may reduce inflation (1) this could make domestic products more price-competitive (1) and so increase exports (1). Government spending (1) increased exports (1) may offset reductions in consumption and investment resulting in higher economic growth (1). 8

Question 13

Iceland’s Economic Structure The people of Iceland once depended on farming and fishing as their main source of income. By 2008, the Icelan…

Accepted Answer

1(a) Identify, using information from the extract, two industries that are in the primary sector of the Icelandic economy. • farming • fishing 2 1(b) Explain, using information from the extract, two reasons for government regulation of the fishing industry in Iceland. Protect domestic fishermen (1) to ensure they have a stable income (1) to ensure that jobs are preserved (1) can compete with foreign fishermen (1). Protect the stock of fish (1) to ensure sustainability of fish stocks (1) for future generations (1). 4 1(c) Explain, using information from the extract, two reasons, apart from changes in employment, for Iceland’s high growth rate from 2002–2007. • increased availability of bank loans (1) more borrowing (1) to fund consumption (1) and to fund investments (1). • increasing income of its major trading partners, including the European Union and Norway (1) Iceland can now export more to their trading partners (1) increase net exports / external demand / aggregate demand (1) 4 1(d) Calculate, using information from the extract, Iceland’s GDP in 2007. $18.53 billion (2) 18.53 or working e.g. $17bn × 0.09 = $1.53bn (1) 2 Question Answer Marks Guidance 1(e) Analyse, using Fig 1.1, the relationship between changes in the economic growth rate and the unemployment rate over the period shown. They both rose over the period (1) showing a positive relationship (1) unexpected (1) evidence from the data e.g. the unemployment rose from approx. 3.4 to 5% (1) the economic growth rate rose from 0.5 to 1.8% (1) Unemployment rate was relatively constant from 2002 to 2008 (1) while economic growth fluctuated (1). Unemployment was relatively stable from 2009 to 2014 (1). Between 2007 and 2009 the fall in the economic growth rate (1) to a negative value / recession (1) while there was a rise in the rate of unemployment (1). From 2009 to 2014 economic growth increased (1) and unemployment fell (1) the trends are moving in opposite directions (1) as would be expected (1) high economic growth rate should create more jobs (1). Between 2002 and 2004 there’s a significant increase in the economic growth rate (1) while there was only a slight fall in the unemployment rate (1). 5 No marks for a descriptive approach e.g. identifying the growth rate or the unemployment rate for specific years. 1(f) Explain, using information from the extract, whether the supply of Iceland’s fish is price-elastic or price-inelastic. It is price-inelastic (1) because the quantity of fish supplied tends to change by a smaller percentage than the change in its price (1). 2 Question Answer Marks Guidance 1(g) Discuss the advantages and disadvantages of the activities of commercial banks to an economy. Up to 3 marks for advantages to an economy: Lending (1) to consumers (1) enabling them to increase consumption (1) raising their living standards (1) and to firms (1) allowing them to invest (1) increase employment (1) increase output (1) expand into international markets (1) improve the current account of the balance of payments (1). Attract MNCs (1) by providing a range of services to these companies (1). Banks employ many people (1) keeping unemployment low (1) Up to 3 marks for disadvantages to an economy: May encourage saving (1) decreasing consumption/total demand (1) Banks may fail (1) losing customers’ money (1) risking damage to the economy / recession (1). May lend to risky businesses (1) which may cause fluctuations in output (1). May lend to individuals who cannot repay (1) pushing them into debt (1). May charge high interest rates (1) to gain high profits (1) which will increase firms’ costs of production (1) and make it difficult for individuals to repay (1). May lend for purchase of imports (1) worsening the current account (1) Risk of inflation (1) if banks lend too much (1). 5 Question Answer Marks Guidance 1(h) Discuss whether or not a growth in tourism is an advantage to a country such as Iceland. Up to 4 marks for why it might be: Tourism is an export of services (1) bringing in foreign currency (1) improving the current account balance (1). Tourism may increase government tax revenue (1) this could be spent on e.g. education (1). Tourism increases the demand for goods and services (1) creating employment/reducing unemployment (1) e.g. in hotels/restaurants/shops (1) increases output / contributes to economic growth (1). Tourism may attract MNCs/foreign investment (1) e.g. foreign hotel chains may set up in the country (1). More revenue from tourism may result in a rise in the exchange rate (1) this may reduce the price of imports (1) Less reliance on primary / secondary sector (1) benefits of diversification (1). Up to 4 marks for why it might not be: Tourism may create external costs (1) example e.g. pollution (1). Tourism may deplete resources (1) e.g. water (1). Tourism may place a strain on infrastructure, e.g. transport systems (1) Tourism jobs may be low-paid (1) low skilled (1) seasonal (1). Foreign firms may send profits home (1) foreign hotels may bring own employees (1). A high exchange rate may reduce exports / international competitiveness (1). Tourism may increase demand in the economy (1) pushing up the prices the local population have to pay / creating inflation (1). 6

Question 14

Confidence in the government’s reform agenda led to very strong growth of India’s stock exchange index in 2017. Firms liked the supply-side…

Accepted Answer

3(a) Define supply-side policy. Policy which is designed to increase the total (aggregate) output / supply / productive capacity of an economy (2). Policy aimed at making markets work more efficiently (1) to encourage economic growth (1). 2 3(b) Explain two functions of the stock exchange. • raising capital for businesses (1) by selling shares to the investing public (1) • mobilising savings for investment (1) through purchase of shares (1) • funds are put into productive activities (1) in the hope of generating high returns (1) • government finance raising (1) for development projects (1) • share prices as a general indicator (1) of the performance of the economy (1) 4 3(c) Analyse two possible conflicts between government aims. Lower unemployment vs. price stability (1) lower unemployment means higher incomes (1) increasing total demand (1) creating demand-pull inflation (1) lower unemployment means less spare capacity (1) wage demands increase (1) wage- price spiral (1). Economic growth vs. price stability (1) production increases (1) faster than the increase in resources (1) increase in total demand leads to higher prices rather than increased output and employment (1). Economic growth vs. environmental protection (1) output increases (1) consumption increases (1) causing a rise in external costs (1) example e.g. pollution, destruction of habitats (1). 6 Maximum of 4 marks if only one conflict analysed. Question Answer Marks Guidance 3(d) Discuss whether or not infrastructure projects will benefit the economy. Up to 5 marks for why they might: Infrastructure projects will employ workers directly (1) May help reduce firms’ production costs (1) example (1) increasing profits (1) increasing output (1) increasing employment (1) encouraging investment (1) increasing total (aggregate) demand (1) Creates external economies of scale (1) reducing costs for firms within an industry e.g. better transport servicing an industry (1) improving efficiency (1) May attract MNCs to the country (1) Up to 5 marks for why they might not: High cost of infrastructure projects (1) may need to raise taxes (1) or borrow large amounts (1) opportunity costs (1) funds could have been spent on e.g. health care (1). External costs (1) e.g. pollution, habitat destruction (1) Risk of inflation (1) due to increased government spending (1) Short run costs may occur e.g. congestion (1) but long run benefits may arise e.g. faster travel times (1) 8

Question 15

The Monetary Authority of Singapore (MAS), the government body which controls the monetary policy of the country, has allowed the Singapore…

Accepted Answer

5(a) Define monetary policy Policy to control the supply of money / demand-side policy (1) by changing interest rates / influencing the price of money (1) exchange rates / Quantitative Easing (1). 2 5(b) Explain two functions of money • medium of exchange (1) avoids double coincidence of wants needed in barter/enables people to buy and sell products (1) • unit of account / measure of value (1) easy to compare value of products / putting a value on products (1) • store of value (1) for savings / future consumption / will not lose value (1) • standard of deferred payment (1) credit / instalments/enable people to borrow and lend (1) 4 5(c) Analyse the consequences of an appreciating currency on the current account of the balance of payments of a country. An appreciation in the exchange rate means a rise in the value of the currency (1) higher export prices (1) lower import prices (1) increase quantity demand for imports (1) decrease quantity demand for exports (1) increase value of imports (1) decrease value of exports (1) may reduce net exports (1) current account deficit increases / current account surplus decreases (1). 6 Reward but do not expect reference to outcome will be influenced by PED. Question Answer Marks Guidance 5(d) Discuss whether or not a reduction in taxes is beneficial for an economy. Up to 5 marks for why it is: Reduction in taxes will attract investments (1) this creates new jobs (1) this could also improve the productivity of the economy (1) as there might be investments in R&D / technology (1) creating economic growth (1) Cut in income tax will increase disposable income (1) increase total demand (1) lower unemployment (1) Cut in corporation tax/indirect tax (1) may reduce costs of production (1) inflation decreases (1). Cut in tariffs will increase competition (1) improve e.g. product quality (1). Up to 5 marks for why it is not: Decreased government revenue (1) budget deficit (1) government can’t spend on e.g. infrastructure (1) opportunity cost (1) foreign investment might increase the value of the currency further (1) exports become uncompetitive (1). Reduction in indirect tax (1) may increase consumption of harmful products/example (1) may reduce people’s health (1). Reduction in tariffs may e.g. cause infant industries to go out of business (1) increasing unemployment (1). An increase in total (aggregate) demand may cause inflation (1) 8 2 marks could be awarded for an accurately drawn Demand and Supply Diagram showing tax reduction

Question 16

Angola is an African country without a stock exchange. In contrast, South Africa has the most active stock exchange in Africa. Firms in Sou…

Accepted Answer

5(a) Define saving. • Income (1) not spent / minus spending (1). • Putting money in the bank (1) for future use (1). 2 5(b) Explain two benefits a country can gain from having a stock exchange. • Provides a market for the sale of shares and bonds (1) encourages saving and investment (1). • Makes it easier for firms to grow / source of finance for firms (1) makes people more willing to buy shares / facilitates mergers (1). • Government able to raise funding through bonds (1) to support expenditure in economy (1). • May encourage MNCs to set up in the country (1) which can increase economic growth / exports / employment (1). • May encourage the setting up of other financial institutions (1) creating high- skilled/well-paid jobs (1). 4 5(c) Analyse how firms may be affected by a rise in the rate of interest. • It will increase the cost of borrowing (1) this may discourage firms from investing (1) reducing their growth (1) may put up their prices (1). • Firms may decide to save more (1) as the return will increase (1) the opportunity cost of investment will rise (1). • It may increase the cost of past loans (1) reducing firms’ profits (1). • Demand for consumer goods may fall (1) as consumers will be discouraged from borrowing (1) be encouraged to save (1) so lower demand will reduce firms’ revenue (1). 6 Question Answer Marks Guidance 5(d) Discuss whether or not an economy will benefit from its firms getting larger. Up to 5 marks for why it might: • To produce more (1) more workers may be employed (1) which may reduce unemployment (1). • Larger firms may be more price competitive/produce at lower average cost (1) due to economies of scale (1) example (1) this may increase output (1) causing economic growth (1) lower prices (1) it may also increase exports (1) improving the current account position (1). Up to 5 marks for why it might not: • More imported raw materials/capital goods may be purchased (1) worsening the current account position (1). • Larger firms may have more market power (1) may be less efficient (1) may experience diseconomies of scale (1) example (1) average costs may rise (1) cause cost-push inflation (1) reducing exports (1) worsening the current account position (1). 8

Question 17

A number of countries are withdrawing high value banknotes. For instance, Singapore plans to stop issuing its $10 000 note. High value note…

Accepted Answer

3(a) State two functions of money, other than a store of value. 2 One mark each for two from: medium of exchange, measure of value (unit of account) and standard of deferred payments. 3(b) Explain two advantages banknotes have as a form of money. 4 Logical explanation which might include: Generally acceptable (1) people are prepared to accept them in exchange for products and to settle debts (1). Portable (1) banknotes are light to carry around (1). Divisible (1) notes of different denominations (1). Recognisable (1) notes have distinct features on them known to the population (1). Limited in supply (1) the central bank prints a set number of notes (1). Homogeneous (1) all banknotes of the same value are identical (1). 3(c) Analyse the influences on the mobility of workers. 6 Coherent analysis which might include: Occupational mobility is influenced by education (1) the more qualifications workers have (1) the more choice of jobs they will have (1). Occupational mobility is influenced by training (1) the more skills workers have (1) the easier they will find it to switch jobs (1). Geographical mobility is influenced by the price/availability of housing (1) The cheaper/more available housing is (1) the easier will workers find it to work in other areas (1). Geographical mobility is influenced by family ties (1) people may be reluctant to move because children are at school/partners have job in a particular area (1). Mobility between countries will be influenced by immigration controls (1). 3(d) Discuss whether or not a central bank should raise the rate of interest. 8 In assessing each answer, use the table below. Level Description Marks 3 A reasoned discussion which accurately examines both 6–8 sides of the economic argument, making use of economic information and clear and logical analysis to evaluate economic issues and situations. One side of the argument may have more depth than the other but, overall, both sides of the argument are considered and developed. There is thoughtful evaluation of economic concepts, terminology, information and/or data appropriate to the question. The discussion may also point out the possible uncertainties of alternative decisions and outcomes. 2 A reasoned discussion which makes use of economic 3–5 information and clear analysis to evaluate economic issues and situations. The answer may lack some depth and development may be one-sided. There is relevant use of economic concepts, terminology, information and data appropriate to the question. 1 There is a simple attempt at using economic definitions 1–2 and terminology. Some reference may be made to economic theory, with occasional understanding. 0 A mark of zero should be awarded for no creditable 0 content. Why it should: • to reduce demand-pull inflation as a higher interest rate may encourage to spend less as it may discourage borrowing and encourage saving • to reduce borrowing if people and firms are building up unsustainable debt • to raise the exchange rate if there is downward pressure on a fixed exchange rate • to reduce a current account deficit if it is thought that lower spending will reduce imports and may discourage exports. Why it should not: • it may increase cyclical unemployment by reducing total (aggregate) demand • it may reduce the economic growth rate as it may discourage investment due to the higher cost of borrowing to purchase capital goods • it may raise the exchange rate and make exports less price competitive.

Question 18

(a) Calculate Turkey’s total output. [1] (b) Identify two factors that affect borrowing in an economy. [2] (c) Explain the relationship bet…

Accepted Answer

1(a) Calculate Turkey’s total output. $320 billion 1 1(b) Identify two factors that affect borrowing in an economy. • interest rates • confidence levels • wages / incomes 2 1(c) Explain the relationship between the growth of Istanbul’s service sector and its growth in total output. Logical explanation which might include: Higher growth in service sector leads to higher total economic growth (1). This is expected as countries become more developed, the share of services increases (1) and the share of primary sector decreases (1). For example, in 2011, the service industry grew most rapidly at 28.16% and the total economic growth was 21.9% (1). However, although growth of service sector was lowest in 2010 at 11.9%, total growth was 14.38% (1), higher than in 2014 where growth of service sector was higher (1). 3 1(d) Explain two reasons for Istanbul’s increased population. Logical explanation which might include: People moving from rural areas to the city centre (1) e.g. for higher wages / more employment opportunities / better housing / low cost of living / good transport links (1). Improved healthcare (1) longer life expectancy / lower infant mortality / higher quality of life (1). 4 One mark for each of two reasons identified and one mark for each of two explanations. Question Answer Marks Guidance 1(e) Analyse how good transport links have contributed to Istanbul’s economic growth. Coherent analysis which might include: Good roads could lead to reduction in commute time (1) good roads / air transport leads to faster transport of goods and services (1). Workers can move easily / higher labour mobility (1) reduce unemployment (1). More competition in the labour market (1) more competition in the product market (1) could lead to fall in cost of production (1) increase in productivity (1). Easy to conduct business internationally due to good air transport links (1) access to huge international market (1) e.g. 1.5 billion people within a flight time of 4 hours (1) may have attracted MNCs (1). Contributed to the growth of the transport industry (1) allowing transport firms to take greater advantage of economies of scale (1). 4 1(f) Draw a demand and supply diagram to show the effects on flights to Turkey of greater worries about safety for tourists. Up to 4 marks for the diagram: Axes correctly labelled – price and quantity or p and q (1) Original demand and supply curves correctly labelled (1) Demand curve shifts to the left (1) Equilibriums – shown by lines P1 and Q1 and P2 and Q2, or by labelling equilibrium points as E1 and E2 (1). 4 O Question Answer Marks Guidance 1(g) Discuss whether or not Istanbul benefits from investment by MNCs. Up to 4 marks for why it may be beneficial: Increased investment leads to increased total demand (1) leads to economic growth (1). Increase demand for workers in Istanbul (1) decreasing unemployment rates (1) increasing incomes (1) and increasing standards of living (1). Bring new / better technology (1) increase productive capacity / productivity (1) Increase variety of products on sale (1) produce new products (1) Increase tax revenue (1) allowing local government to spend more on e.g. roads (1). Up to 4 marks for why it may not be beneficial: Replace domestically owned firms in Istanbul / decrease demand for domestic firms (1) MNCs may be more efficient than domestic firms (1) leading to failure of domestic firms / decrease demand for domestic firms (1) monopoly of MNCs (1). Profits leave the country (1) not reinvested domestically (1). MNCs may exploit workers (1) such as low wages (1) poor working conditions (1). MNCs may exploit environment (1) e.g. pollution (1). 6 Apply this example to all questions with the command word DISCUSS (1(g), 1(h), 2(d), 3(d), 4(d) and 5(d)) Each point may be credited only once, on either side of an argument, but separate development as to how/why the outcome may differ is rewarded. Generic example mark Tax revenue may decrease … 1 ... because of reason e.g. incomes may be lower. 1 Tax revenue may increase because incomes may be higher i.e. reverse of a previous argument. 0 Tax revenue may increase because of a different reason i.e. not the reverse of a previous argument e.g. government spending on subsidies may stimulate the economy more than spending on education. 1 Question Answer Marks Guidance 1(h) Discuss whether or not competition is beneficial for airlines. Up to 4 marks why it is beneficial: Competition will lead to airline being forced to be more efficient (1) productivity increase (1) use latest technology (1) reduce wasteful spending (1) quality increases (1) cost of production goes down (1) prices become more affordable (1) increase in quantity demanded (1) total revenue and profit increases (1). Up to 4 marks why it is not beneficial: Too much competition means less market share for each airline (1) less quantity demanded (1) airlines may have to advertise more (1) increase cost of production (1) total revenue and profit decreases (1) airlines who can’t compete may go bankrupt / leave the market (1). Too much competition may result in the airline being small (1) cannot take advantage of economies of scale (1). An airline may not benefit from becoming more competitive (1) because of brand loyalty (1) lower demand for air travel (1). 6

Question 19

Italy is home to the world’s oldest bank and some of the world’s oldest car producers. Internationally, both industries are facing a number…

Accepted Answer

4(a) State two functions of a commercial bank. Two from: • lending • accepting deposits • allowing customers to make payments • looking after valuables • giving financial advice • providing insurance • exchanging foreign currency 2 Internet banking alone is too vague. 4(b) Explain two reasons why emigration from a country may increase. Logical explanation which might include: Rise in unemployment (1) people move abroad in search of jobs (1). Fall in income (1) seek higher wages abroad (1). Lower living standards (1) e.g. healthcare may be better abroad / less pollution (1). Relaxation on immigration controls (1) making it easier to move abroad (1). Greater social unrest / outbreak of war (1) seek greater security (1). High inflation at home (1) seek lower cost of living (1). 4 One mark for each of two reasons identified and one mark for each of two explanations. Reward answers that give an argument from the opposite perspective but do not double award. Accept ‘static approach’ e.g. unemployment. Question Answer Marks Guidance 4(c) Analyse the possible causes of a rise in the wages of bank workers. Coherent analysis which might include: Demand for bank workers may increase (1) due to higher demand for banking / this may result from more people opening bank accounts/using the services of banks (1) may also result from a rise in the productivity of workers (1) more banks competing for the services of bank workers / more competition for workers (1) higher wages paid to retain bank workers (1). Supply of bank workers may fall (1) qualifications may have been increased (1) skills may have increased / may need to be more skilled as working with more advanced technology (1). Bank workers may use trade union power (1) collective bargaining and/or industrial action (1). Banks may have earned large profits (1) may have rewarded workers with bonuses (1) bonuses / high pay may be used to motivate workers (1). A higher national minimum wage (1) forcing banks to pay some of their staff more (1). Bank workers may work longer hours / may work overtime (1). Bank workers may be more experienced (1) more productive / more skilled (1). Inflation / higher income tax (1) purchasing power will fall unless wages increased (1). 6 Question Answer Marks Guidance 4(d) Discuss whether or not demand for cars will become more price-elastic in the future. In assessing each answer, use the table opposite. Why it might: • may be closer substitutes. Price of public transport and /or quality of public transport may fall making them closer substitutes • may take up a larger proportion of income. Incomes may fall • price may rise. Demand becomes more price elastic as price rises • the number of firms producing certain types of cars may increase • time will give consumers more opportunity to search out lower prices. Why it might not: • may become more of a necessity. People may work further from where they live • may become easier to postpone purchase. If cars last longer, consumers may be able to delay buying replacements • people may have become used to driving – habit forming. May be reluctant not to own and drive a car • price of complements may rise, so that even if price of cars fall, people may not buy more cars. 8 Level Descriptors Mark 3 A reasoned discussion which accurately examines both sides of the economic argument, making use of economic information and clear and logical analysis to evaluate economic issues and situations. One side of the argument may have more depth than the other, but overall both sides of the argument are considered and developed. There is thoughtful evaluation of economic concepts, terminology, information and/or data appropriate to the question. The discussion may also point out the possible uncertainties of alternative decisions and outcomes. 6–8 2 A reasoned discussion which makes use of economic information and clear analysis to evaluate economic issues and situations. The answer may lack some depth and development or may be one-sided. There is relevant use of economic concepts, terminology, information and data appropriate to the question. 3–5 1 There is a simple attempt at using economic definitions and terminology. Some reference may be made to economic theory, with occasional understanding. 1–2 0 A mark of zero should be awarded for no creditable content. 0 Question Answer Marks Guidance 4(d) Example of an L2 answer: Demand for cars may become more price-elastic. People may be more willing to switch to substitutes. If bus transportation reduced market prices, people may use buses rather than buying cars when prices of cars rise. On the other hand, cars may be price-inelastic in the future. They may become more of a necessity if people find buses and trains inconvenient. Cars also show a better standard of living and many jobs require a car which makes having a car a necessity therefore it becomes price-inelastic. Principal Examiner comment: Reasonable on both sides. Reward answers that give an argument from the opposite perspective but do not double award.

Question 20

It was announced in November 2016 that 500 and 1000 rupee banknotes could no longer be used in shops in India. These were replaced by the c…

Accepted Answer

5(a) State two functions, other than issuing banknotes and coins, of a central bank. Two from: • manages monetary policy / sets the rate of interest • manages the national debt • controls the banking system • banker to commercial banks • banker to the government • lender of last resort • looks after reserves of gold and foreign currency 2 Allow banker to the banks Question Answer Marks Guidance 5(b) Explain two reasons why workers in the tertiary sector may be paid more than workers in the primary sector. Logical explanation which might include: Higher demand (1) due to e.g. higher productivity / more profitable / expansion of tertiary industries (1). Lower supply (1) due to e.g. higher qualifications/skills/education needed (1). Stronger bargaining power (1) due to stronger trade unions / professional organisations (1). Primary sector workers can be replaced by capital equipment (1) so bargaining strength is weak (1). More favoured by government policy (1) e.g. increased government spending on education/healthcare (1). Tertiary sector workers are mainly found in developed countries where wages / cost of living is generally high (1) whereas primary sector workers are mainly found in undeveloped countries were wages / cost of living are generally low (1). Lower value of goods and services being provided in primary sector (1) lower pay for primary sector workers (1). 4 One mark for each of two reasons identified and one mark for each of two explanations. 5(c) Analyse the advantages for firms of using division of labour. Coherent analysis which might include: Division of labour involves workers specialising (1) this can increase output / increase productivity (1) costs of production may be reduced (1) e.g. lower costs of training (1) e.g. less equipment needed (1). Specialisation can increase quality (1) lower costs can enable to charge lower prices (1) demand may rise (1) revenue/profits may increase (1). 6 Question Answer Marks Guidance 5(d) Discuss whether or not deflation will benefit an economy. In assessing each answer, use the table opposite. Why it might: • if due to lower costs of production, may be more internationally competitive • improve the current account position • may increase purchasing power if incomes do not fall • may raise living standards • may increase economic growth and employment Why it might not: • if due to lower total demand may result in a recession • consumers may postpone purchases • investment may fall • firms may reduce output, reducing demand for raw materials • unemployment may rise Example of Level 3 answer: When an economy undergoes deflation, the general price level in the economy falls resulting in goods and services in the country becoming cheaper. This results in a higher demand for the country’s goods and services from both those living in the country and abroad. The revenue from exports will increase due to greater international demand resulting in a current account surplus. Lower prices may improve standard of living for consumers as more can be bought than before. 8 Level Descriptors Mark 3 A reasoned discussion which accurately examines both sides of the economic argument, making use of economic information and clear and logical analysis to evaluate economic issues and situations. One side of the argument may have more depth than the other, but overall, both sides of the argument are considered and developed. There is thoughtful evaluation of economic concepts, terminology, information and/or data appropriate to the question. The discussion may also point out the possible uncertainties of alternative decisions and outcomes. 6–8 2 A reasoned discussion which makes use of economic information and clear analysis to evaluate economic issues and situations. The answer may lack some depth and development or may be one-sided. There is relevant use of economic concepts, terminology, information, and data appropriate to the question. 3–5 1 There is a simple attempt at using economic definitions and terminology. Some reference may be made to economic theory, with occasional understanding. 1–2 0 A mark of zero should be awarded for no creditable content. 0 Question Answer Marks Guidance 5(d) However, an economy may not benefit from deflation as a prolonged deflation may result in unemployment. Firms may lose confidence in future sales as consumers wait for prices to fall further. Lower output may result in less employment further reducing demand and causing a recession. The government may have to intervene by cutting taxes and interest rates to encourage increased consumption. Principal Examiner comment: This is a concise answer with reasonable argument for the benefits and a strong answer for why there may not be benefits. Example of Level 1 answer: Deflation makes prices of goods and services to be low which will entice consumers to buy more as prices are cheaper than before. Principal Examiner comment: A basic understanding of deflation without any discussion of whether or not it is beneficial to the economy.

Question 21

The money supply in Bangladesh increased every year from 2010 to 2018. Changes in the money supply and the foreign exchange rate can affect…

Accepted Answer

5(a) Identify two functions of money. Two from: Medium of exchange, store of value, standard of deferred payments, unit of account / measure of value. 2 Note: a description of the function gets the mark e.g. money can be used to buy and sell products, may be used to trade. Nothing for characteristics of money, 5(b) Explain two reasons why commercial banks may want to merge. Logical explanation which might include: Greater market power/share (1) eliminating a competitor / providing a greater range of services (1). More opportunity to take advantage of economies of scale (1) lower costs of production / higher profit / example e.g. share ATMs (1). May enable the merged bank to operate in more than one country / become a multinational company (1) access to new market (1). Become better known (1) large banks may be more likely to have a brand image (1). May enable rationalisation (1) eliminate duplication / rase efficiency (1). Survival (1) may have been loss making / at risk of going out of business (1). 4 One mark each for each of two reasons identified and one mark each for each of two explanations. Nothing for increase revenue. Question Answer Marks Guidance 5(c) Analyse how a fall in a country’s foreign exchange rate could increase employment. Coherent analysis which might include: A fall in a country’s foreign exchange rate will lower the price of exports (1) raise the price of imports (1) make domestically produced products more price competitive (1) reduce demand for imports (1) increase demand for exports (1) increase total demand (1) raise firms’ revenue and/or profits (1) encourage firms to increase output (1) take on more workers (1). 6 Question Answer Marks Guidance 5(d) Discuss whether or not it is an advantage to keep a firm small. In assessing each answer, use the table opposite. Why it might: • flexible, less people to consult, more in touch with consumers • may be able to provide more personal attention • may receive government subsidies • may be able to concentrate on a niche market • may have good labour relations • may avoid diseconomies of scale Why it might not: • may not be able to take advantage of economies of scale • may be driven out of business by larger competitors • may be difficult to raise finance • risk of being taken over by a larger firm • may have difficulty recruiting highly skilled workers • may not have the resources to survive a fall in demand 8 Accept an answer based on the advantages that large firms have over small firms. Level Description Marks 3 A reasoned discussion which accurately examines both sides of the economic argument, making use of economic information and clear and logical analysis to evaluate economic issues and situations. One side of the argument may have more depth than the other, but overall both sides of the argument are considered and developed. There is thoughtful evaluation of economic concepts, terminology, information and/or data appropriate to the question. The discussion may also point out the possible uncertainties of alternative decisions and outcomes. 6–8 2 A reasoned discussion which makes use of economic information and clear analysis to evaluate economic issues and situations. The answer may lack some depth and development may be one-sided. There is relevant use of economic concepts, terminology, information and data appropriate to the question. 3–5 1 There is a simple attempt at using economic definitions and terminology. Some reference may be made to economic theory, with occasional understanding. 1–2 0 A mark of zero should be awarded for no creditable content. 0

Question 22

(a) Calculate, in $, the total exports of Laos to China in 2017. [1] (b) Identify two roles of commercial banks. [2] (c) Explain how access…

Accepted Answer

1(a) Calculate, in $, the total exports of Laos to China in 2017. 1.1832 billion / 1 183 200 000. 1 Accept 1.18 or 1.2 billion. 1(b) Identify two roles of commercial banks. Helps local entrepreneurs to borrow money (1). Encourages households to save / enables households to save (1). 2 Accept loan / lending 1(c) Explain how access to seaports may benefit an economy. Enables an economy to take full advantage of international trade / take greater advantage of international trading opportunities (1) enables immigration of skilled workers (1) Can export and import goods (1) goods can be transported more cheaply (than by rail or air / over longer distances) / may encourage specialisation (1) increases consumer choice (1). May encourage investment (1) attract MNCs (1) create economic growth (1) 2 1(d) Explain two benefits of the free market reforms introduced by the government of Laos. The free market reforms have enabled Laos to sell their abundant raw materials internationally (1) increases export revenue / improves current account balance / creates employment / encourages firms to expand / increases GDP (1). Encourages foreign investment (1) may lower costs of production / increases total demand / improves current account balance / creates employment / increase tax revenue (1). 4 One mark each for each of two benefits identified and one mark each for each of two explanations. Accept improved infrastructure. Question Answer Marks Guidance 1(e) Analyse the impact of improved education on the economy of Laos. Increased adult literacy rate (1) better skills/qualifications (1) increase productivity (1) / increase productive capacity / total supply (1) increase demand for labour (1) reduce unemployment / raise employment (1) raise wages (1) reduce poverty (1). More attractive for entrepreneurs / new businesses / investment (1) increase output / GDP (1) leading to higher living standards (1). Improvements in technology (1) due to workers having higher IT skills (1) Increase the consumption of merit goods / decrease the consumption of demerit goods (1) 4 1(f) Analyse the relationship between a country’s Ease of Doing Business ranking and its GDP per head. Expected relationship: Positive / direct (1) if ease of doing business (EDB) rank is high, GDP per capita is high (1). Supporting evidence: Singapore has the highest EDB rank and GDP per capita is highest (1) Timor-Leste has the lowest EDB rank and GDP per capita is the lowest (1). Exception: Brunei / Malaysia (1) has lower EDB rank than Malaysia but higher GDP per head (1). Alternatively South Korea / Brunei (1) Brunel has lower EDB rank but higher GDP per head (1). Analysis: The greater the ease of doing business, the more investment there is likely to be (1) higher investment is likely to increase GDP (1). 5 Question Answer Marks Guidance 1(g) Discuss whether or not strict rules and regulations benefit an economy. Award up to 4 marks for logical reasons why they might, which could include: • Environmental rules (1) e.g. cap on carbon emission, tax on polluting industries (1) reduce market failure (1) reduce external costs (1) e.g. could decrease pollution / protect natural resources (1) less health problems for the society (1) better standards of living (1). • Anti-competition rules (1) e.g. restrictions on monopoly power (1) improved consumer choice / lower prices / better quality (1) foreign companies will not dominate the market (1) opportunities for domestic firms to develop (1) increased future economic growth (1). • Restrictions on imports (1) may protect domestic industries / allow growth of domestic industries (1). • Bans e.g. prohibiting smoking in public places (1) may reduce market failure / reduce external costs (1). • Labour market legislation (1) protecting workers’ rights (1). Award up to 4 marks for logical reasons why they might not, which could include: • Strict regulation discourages business (1) Laos ranks one of the lowest in the World Bank’s Ease of Doing Business index (1) lack of investment / MNCs discouraged (1) lower productivity (1) lack of competition (1) lack of employment opportunities (1) decreased total demand (1) decreased economic growth / lower GDP (1) lower standards of living (1). 6 Apply this example to all questions with the command word Discuss (1(g), 1(h), 2(d), 3(d), 4(d) and 5(d)) Each point may be credited only once, on either side of an argument, but separate development as to how/why the outcome may differ is rewarded. Generic example mark Tax revenue may decrease… 1 ...because of reason e.g. incomes may be lower. 1 Tax revenue may increase because incomes may be higher i.e. reverse of a previous argument. 0 Tax revenue may increase because of a different reason i.e. not the reverse of a previous argument e.g. government spending on subsidies may stimulate the economy more than spending on education. 1 Question Answer Marks Guidance 1(g) • Bureaucracy / red tape increases the time and effort of doing business (1) increases cost of production (1) lowers profit (1). • Rules and regulations may lack clarity (1) causing them to be implemented incorrectly (1) • Takes time for the government to administer rules and regulations (1) opportunity cost of government spending (1). • Import restrictions reduce competition (1) may result in higher prices (1) lower quality (1) 1(h) Discuss whether or not a slowdown of China’s economy will be harmful to the economy of Laos. Award up to 4 marks for logical reasons why it might, which might include: • China is Laos’s largest trading partner / 58% of Laos’s exports are sold to China (1) China slowing down will lead to less demand for Laos’s exports (1) less export revenue / worsen current account (1) less total demand (1) less economic growth (1) may not be able to buy more, irreplaceable imports (1). • China is the largest source of foreign investment into Laos (1) less foreign investments will lead to less job creation (1) less employment / higher unemployment (1) lower standards of living (1). Award up to 4 marks for logical reasons why it might not, which might include: • Reduce dependence on China (1) find new markets and investors (1) other countries’ economies could be expanding (1) which could generate more exports (1) and jobs (1). • May lead to fewer environmental problems (1) less pollution (1) higher standard of living (1). • Domestic investors and firms could fill the gap (1) more employment (1) higher GDP (1). 6

Question 23

(a) Calculate the number of Bermudian workers who were unemployed in 2018. [1] (b) Identify two reasons why demand for holidays in Bermuda …

Accepted Answer

1(a) Calculate the number of Bermudian workers who were unemployed in 2018. 2345 (1). 1 1(b) Identify two reasons why demand for holidays in Bermuda may be price-elastic. Luxury (not a necessity) (1) expensive / high price (1). 2 If more than two reasons are given, consider the first three, 1(c) State two reasons why a foreign MNC may want to operate in Bermuda. Any two from: Tax haven / no corporation tax (1) High GDP per head (1) High import tariffs (1) High literacy rate / skilled workers / educated workers (1) Low inflation (1). 2 If more than two reasons are given, consider the first three, Question Answer Marks Guidance 1(d) Explain two reasons why Bermuda has higher level of economic development than many other countries. Logical explanation which might include: Large tertiary sector (1) jobs in the tertiary sector tend to be better paid / have better working conditions (1). High literacy rate (1) a higher literacy rate will tend to increase employability / provide more choices / increase quality of jobs obtained / increase pay / increase skills / produce better quality products / may suggest a good level of education / raise productivity / increase output (1). Low population growth (1) a lower population growth may mean that dependency ratio may be low / less stress on resources / more resources can be devoted to e.g. investment (1). High GDP per head (1) a higher GDP per head can increase living standards / result in high consumer expenditure (1). High life expectancy (1) which can reflect good health care / may mean high quality labour (1). 4 One mark each for each of two reasons identified and one mark for each of two explanations. If more than two relevant reasons are identified, consider the first three and take the two which gain the highest marks. Note: no mark for high GDP, low unemployment or just e.g. population growth. 1(e) Analyse the role of the Bermudian Monetary Authority (BMA). Coherent analysis which might include: Carries out (most) of the functions of a central bank (1). Acts as banker to the government (1) receives tax payments / enables government to make payments / manages national debt / allows government to borrow and lend (1). Holds the country’s reserves of foreign currency (1) may use reserves to influence the value of Bermuda’s currency / buy / sell currency (1). Carries out the government’s monetary policy / keeps inflation low (1) by changing interest rate / money supply (1). 4 Maximum of 2 marks for recognising functions (including carrying out the functions of a central bank) from the source material. Question Answer Marks Guidance 1(f) Analyse the relationship between GDP per head and life expectancy. Coherent analysis which might include: Overview Generally, a positive relationship / the higher the GDP per head, the longer the life expectancy (1). Supporting evidence Evidence in terms of an individual country or group of countries e.g. Monaco has the highest GDP per head and the longest life expectancy or e.g. the three countries with the highest GDP per head have the longest life expectancy (1) evidence in terms of another country or group of countries e.g. Eswatini has the lowest GDP per head and the lowest life expectancy or e.g. Argentina, Bahamas and Eswatini have the lowest GDP per head and the lowest life expectancy (1). Exception Argentina or Bahamas (1) not in same order / reason for why difference may exist (1). Comments Higher income allows more to be spent on healthcare (1) better healthcare reduces illness / reduces death rate (1). 5 No marks for just stating the figures e.g. Monaco has a GDP per head of approximately $185 000 and a life expectancy of 90 years and Eswatini has a GDP per head of approximately $4000 and a life expectancy of 58. Question Answer Marks Guidance 1(g) Discuss whether or not Bermudian government policy measures designed to reduce unemployment would increase the inflation rate. Award up to 4 marks for logical reasons why they might, which may include: Expansionary fiscal and/or monetary policy measures (1) example of a measure (1) could increase total demand / increase spending (1) higher total demand could cause demand-pull inflation (1) if total (aggregate) demand exceeds total (aggregate) supply / there is limited or no spare capacity (1). Shortage of unemployed workers / lower unemployment could push up wage rates / incomes (1) higher output could push up costs of raw materials (1) and cost of capital goods (1) higher costs of production (1) could cause cost-push inflation (1). Award up to 4 marks for logical reasons why they might not, which may include: Supply-side policy measures (1) could raise productivity (1) example of a measure (1) higher productivity could reduce costs of production (1) total supply could increase to match higher total demand / productive potential/capacity could increase (1) avoid / reduce cost-push inflation (1). Expectations of future inflation could be low (1) resulting in e.g. lower wage claims (1). Unemployment rate is at 7% (1) not at full employment (1) unemployed workers may be willing to work at existing wage rates (1) there is some spare capacity (1). Inflation rate is low (1) and so expectations of inflation may be low (1). Expansionary demand-side policy measures may just result in higher savings (1). 6 Apply this example to all questions with the command word DISCUSS (1g, 1h, 2d, 3d, 4d and 5d) Each point may be credited only once, on either side of an argument, but separate development as to how/why the outcome may differ is rewarded. Generic example Mark Tax revenue may decrease… 1 ...because of reason e.g. incomes may be lower. 1 Tax revenue may increase because incomes may be higher i.e. reverse of a previous argument. 0 Tax revenue may increase because of a different reason i.e. not the reverse of a previous argument e.g. government spending on subsidies may stimulate the economy more than spending on education. 1 Question Answer Marks Guidance 1(h) Discuss whether or not higher indirect taxes can reduce the market failure caused by demerit goods. Award up to 4 marks for logical reasons why they might, which may include: Demerit goods are more harmful than consumers realise / are harmful / consuming less would make people healthier (1) they usually have negative external costs (1) examples include fast food, alcohol and tobacco (1). Demerit goods are overconsumed (1) and overproduced (1) higher indirect taxes will impose an extra cost / raise cost of production (1) which may lower output / supply (1) be likely to raise price (1) which is likely to reduce consumption (1) lower consumption/lower output/lower supply may move output to a point where social costs equal social benefits (1). May raise tax revenue (1) which can be spent on campaigns to reduce e.g. smoking (1). Award up to 4 marks for logical reasons why it might not, which may include: It may be difficult to change consumers’ behaviour / spending patterns (1) some demerit goods are addictive (1) those with high incomes may not be affected by a rise in price (1) demand for demerit goods may be inelastic (1). Producers may not pass on price rise to consumers / products may be sold on an illegal market (1) to avoid fall in demand (1). It can be difficult to determine the output of demerit goods which will avoid market failure. (1) the output where social cost will equal social benefit (1). 6 Examples of demerit goods may be rewarded in why might or why might not.

Question 24

There was a significant increase in the money supply in Angola in 2019. The National Bank of Angola was concerned that this would keep infl…

Accepted Answer

2(a) Identify two forms of money. Two from: coins (1) bank notes / paper money (1) bank deposits / accounts (1) digital money (1). 2 Do not accept credit cards, debit cards or cheques. If more than two forms are given, consider the first three. Accept cash instead of coins and/or bank notes/paper money for 1 mark. Also accept commodity money, fiat money/legal tender and fiduciary money. Reward but do not expect identification of reserves at the central bank. Also accept examples of items that have been used as money e.g., salt, gold. Accept a currency as alternative to either coins or paper money. 2(b) Explain two functions a central bank performs for its government. Logical explanation which might include: The central bank acts as a banker for the government (1) it accepts tax payments to the government / provides facilities for the government to make payments / manages the national debt / lends to the government (1). It operates the government’s monetary policy (1) e.g. changing interest rates / to influence inflation (1). It holds reserves of foreign currency (1) to influence the foreign exchange rate (1). It manages the government’s debt (1) issuing government securities / paying interest on government securities (1). It issues bank notes (1) influencing the money supply (1). It may regulate commercial banks / banking system (1) to ensure they act responsibly (1). It acts as a lender of last resort (1) lending to commercial banks / to prevent banks going out of business / a financial collapse (1). 4 One mark for each of two functions identified and one mark for each explanation. Question Answer Marks Guidance 2(c) Analyse why a government may have lower unemployment as its main aim. Coherent analysis which might include: Unemployment may be at a high level (1) unemployment is an inefficient use of resources / waste of resources (1) not working at full capacity (1). Lower unemployment would increase output / economic growth (1) raise incomes / GDP per head (1) increase living standards (1) reduce poverty / more able to buy basic necessities (1) may reduce the crime rate (1) may increase exports (1). Lower unemployment will increase total demand / increase consumer spending / increase spending (1) increase tax revenue (1) lower government spending on unemployment benefits (1) increase the government’s ability to spend on (e.g. education) / reduce budget deficit / government spending on unemployment benefits involves an opportunity cost (1). Lower unemployment may reduce the chances of workers losing skills (1) being in work keeps workers up to date with e.g. advances in technology (1). 6 Accept an answer from the viewpoint of why unemployment may be harmful e.g., a government may want lower unemployment as unemployment reduces economic growth. Question Answer Marks Guidance 2(d) Discuss whether or not inflation will harm producers. In assessing each answer, use the table opposite. Why it might:  may increase costs of production – cost-push inflation – reducing profit  may reduce international competitiveness  may cause menu costs  may cause shoe leather costs  may make it difficult to plan ahead. Why it might not:  may be demand-pull inflation, increasing firms’ revenue  may be low and stable  may be lower than other countries’ inflation rates, increasing price competitiveness  may enable them to reduce real wages  may increase tax revenue, some of which may be spent on e.g. subsidies  cost of debt may fall / may be cheaper to borrow (in real terms)  some producers may be making products with inelastic demand. 8 Level Description Marks 3 A reasoned discussion which accurately examines both sides of the economic argument, making use of economic information and clear and logical analysis to evaluate economic issues and situations. One side of the argument may have more depth than the other, but overall, both sides of the argument are considered and developed. There is thoughtful evaluation of economic concepts, terminology, information and/or data appropriate to the question. The discussion may also point out the possible uncertainties of alternative decisions and outcomes. 68 Question Answer Marks Guidance 2(d) 2 A reasoned discussion which makes use of economic information and clear analysis to evaluate economic issues and situations. The answer may lack some depth and development may be one- sided. There is relevant use of economic concepts, terminology, information and data appropriate to the question. 35 1 There is a simple attempt at using economic definitions and terminology. Some reference may be made to economic theory, with occasional understanding. 12 0 A mark of zero should be awarded for no creditable content. 0

Question 25

(a) Calculate how many dollars 6400 Nigerian naira would have bought in 2019. [1] (b) Identify two ways a bank could increase demand for it…

Accepted Answer

Question Answer Marks Guidance 1(a) Calculate how many dollars 6400 Nigerian naira would 1 have bought in 2019. 16 (1). 1(b) Identify two ways a bank could increase demand for its 2 services. Open more branches (1) carry out an advertising campaign (1) improve online / mobile banking (1). 1(c) State why a merger between two commercial banks is a 2 horizontal merger. Same stage of production / both in the tertiary (service) sector / same sector (1) same industry / same product / same service (1) can increase market share (1). 1(d) Explain two reasons why a large US commercial bank 4 One mark for each of two reasons identified and one mark may charge a high price for its services. for each explanation. Logical explanation which might include: High spending on opening new branches / advertising campaigns / developing online banking (1) need to get back costs / make a profit / may experience diseconomies of scale (1). May offer high quality services (1) have high demand / customers willing to pay a high price (1). High degree of monopoly / market power / control 32% of market (1) customers may have brand loyalty / reluctant to switch banks / lack of substitutes / inelastic demand / can charge high prices to earn high profits/raise total revenue / be a price maker (1). High incomes in the US (1) many customers have the ability to pay a high price (1). Employ skilled / well educated workers (1) so may pay high wages / may have high costs of production (1). 1(e) Analyse how an increase in unemployment may affect 4 the Nigerian government’s budget. Coherent analysis which might include: Likely to increase a deficit / reduce a surplus / may result in a budget deficit (1). Tax revenue likely to fall / budget likely to fall (1) due to lower incomes (1) less income tax revenue (1) lower profits (1) less corporation tax revenue (1) lower spending (1) less indirect tax revenue (1) government may cut taxes to reduce unemployment (1). Government spending likely to rise (1) more spending on e.g. benefits / subsidies to the poor / law and order/ healthcare (1) may be more spending on measures to reduce unemployment / expansionary fiscal policy (1) may spend less on other areas e.g. education (1). 1(f) Analyse the relationship between countries’ average 5 No marks for just stating what the figures are e.g. Germany years of schooling and birth rates. has 15 years of schooling and a birth rate of approximately 8. US has 14 years of schooling and a birth rate of Coherent analysis which might include: approximately 12. Argentina has 11 years of schooling and Overview a birth rate of approximately 16 etc. Generally, an inverse relationship / the more years of schooling, the lower the birth rate / the fewer years of schooling, the higher the birth rate (1). Supporting evidence Up to 2 marks maximum for two pieces of relevant supporting evidence e.g.: • Germany has the highest years of schooling and lowest birth rate (1) • Chad has lowest years of schooling and highest birth rate (1) • US has more years of schooling than Argentina and so a lower birth rate (1) • the three countries with three highest years of schooling have the three lowest birth rates (1). Exception Nigeria / Eritrea (1) Nigeria has more years of schooling than Eritrea but a higher birth rate (1). Comments More years of schooling is likely to cause people to form partnerships / have children later / focus on careers / increase awareness of contraception/family planning / increase health / reduce size of families (1) increase cost of raising children / having more children may reduce the ability of families to keep their children in education for many years / exception may be result of other influences e.g. differences in fertility rates / differences in social attitudes (1). 1(g) Discuss whether or not a subsidy, given to farmers by 6 Apply this example to all questions with the command the Nigerian government, would reduce the deficit on word DISCUSS the current account of its balance of payments. (1g, 1h, 2d, 3d, 4d and 5d) Award up to 4 marks for logical reasons why it might, which Each point may be credited only once, on either side of an may include: argument, but separate development as to how/why the It should raise supply / increase output (1) equivalent to outcome may differ is rewarded. lower cost (1) lower price (1) increasing international competitiveness (1). Generic example mark There may be more funds available to invest (1) raise quality (1) increase exports / reduce imports (1). Tax revenue may decrease… 1 Award up to 4 marks for logical reasons why it might not, ...because of reason e.g. incomes may be 1 which may include: lower. It may increase inefficiency (1) as firms rely on the subsidy (1) may not pass on the benefit of the subsidy to consumers Tax revenue may increase because incomes 0 (1). may be higher i.e. reverse of a previous Nigeria may have a high inflation rate (1) which may offset argument. the cost advantage of the subsidy (1). There may an increase in incomes at home (1) which may Tax revenue may increase because of a 1 increase imports / divert exports to the home market (1). different reason i.e. not the reverse of a There may be a recession abroad / decrease in incomes of previous argument e.g. government spending trading partners (1) which reduces exports (1). on subsidies may stimulate the economy more Lower export prices will not raise export revenue if demand than spending on education. is inelastic (1). The exchange rate may rise (1) increasing export prices / lowering import prices (1). Farmers may import e.g. more machinery (1). There may be adverse weather conditions / disease (1) which reduces quality / quality may remain poor (1). There may be import restrictions / increase in import restrictions imposed by other countries (1). 1(h) Discuss whether or not the US government should 6 A minimum price diagram without explanation can get a impose a minimum price on chocolate. maximum of 2 marks. These marks may be the equivalent of a combination of two of higher price, demand extending, Award up to 4 marks for logical reasons why it should, supply extending or a surplus being created. which may include: It will raise price (1) reduce demand / demand contracts / quantity demand falls / consumption falls. (1) reduce obesity (1). Social cost of eating chocolate may exceed social benefit (1) due to external costs (1) example e.g. cost on health service / may reduce need for government spending on healthcare (1) overconsumption of chocolate (1) move market closer to where social benefit equals social cost (1) increase welfare (1). May raise health of the population / eating chocolate may be unhealthy (1) raise labour productivity (1). There may be information failure (1) some chocolate is a demerit good (1). Award up to 4 marks for logical reasons why it should not, which may include: Poor may not be able to afford chocolate (1) regressive measure (1). Not everyone overweight / some may consume chocolate in quantities that are not harmful (1) may cause demand to switch to other high sugar products / discriminate against other high sugar products (1). It will encourage supply to extend (1) a surplus may develop (1). There may be an illegal market in chocolate (1). There may be a cost to the government (1) it may have to pay to monitor that the price is being charged (1) lower tax revenue from chocolate (1) may be an increase in unemployment (1). 1(h) Demand may be inelastic (1) resulting in a relatively small fall in demand / chocolate may be addictive (1). It depends on how high the minimum price is (1) may have no effect if set below the market equilibrium (1).

Question 26

Living standards, including education, have improved for most people in South Africa in recent years. Most households have more money and t…

Accepted Answer

2(a) Identify two functions of money. Two from:  Medium of exchange  Unit of account / measure of value  Store of value  Standard of deferred payments 2 Note: a description of the function, without the term, gets a mark e.g. money can be used to buy and sell products, may be used to trade. Nothing for characteristics of money. If more than two functions are given, consider the first three. 2(b) Explain how improved education may affect the demand for cigarettes and for fresh fruit. Logical explanation which might include: It may reduce demand for cigarettes (1) people may be better informed about harmful effects / cigarettes are a demerit good (1). It may increase demand for fresh fruit (1) people may be better informed about beneficial effects / fresh fruit is a merit good / may gain better paid jobs and so able to afford fresh food (1). 4 Only accept demand for cigarettes may increase if linked to higher income (resulting from improved education). One mark for each of two reasons identified and one for each of two explanations. Question Answer Marks Guidance 2(c) Analyse the causes of an increase in a government’s tax revenue. Coherent analysis which might include: Tax revenue is government income / part of government fiscal policy (1) which can be spent on government objectives e.g. education (1) Increase in employment (1) increase in income (1) More convenient (1) easier to pay (1) and collect the tax (1) higher income tax revenue (1) Increase in spending (1) higher indirect tax revenue (1) Increase in profits (1) higher corporation tax (1) Increase in population (1) more people to pay taxes (1) Change in tax rates (1) higher tax rates can increase revenue without a change in income / spending / profits (1) lower tax rates may reduce tax avoidance / evasion (1) increase incentives (1) Greater efficiency in tax collection (1) reduction in corruption / simpler forms (1) Wider tax base (1) more products / more people taxed (1) Increase in imports (1) higher revenue from tariffs (1). 6 Question Answer Marks Guidance 2(d) Discuss whether or not an increase in unemployment benefit payments would reduce poverty. In assessing each answer, use the table opposite. Why it might:  raise incomes of those on low incomes  may enable them to buy more basic necessities  may reduce absolute poverty  may increase total demand  higher total demand may reduce unemployment  Also enable them to seek education / become more employable Why it might not:  may be a disincentive to find employment  people may become dependent on benefits  will not help all those on low incomes e.g. the retired and the sick  may not reduce relative poverty  some of the unemployed may not claim benefits  opportunity cost – government could spend on e.g. education which might be more effective.  Size of unemployment benefit may be small and may be less than inflation 8 Level Description Marks 3 A reasoned discussion which accurately examines both sides of the economic argument, making use of economic information and clear and logical analysis to evaluate economic issues and situations. One side of the argument may have more depth than the other, but overall, both sides of the argument are considered and developed. There is thoughtful evaluation of economic concepts, terminology, information and / or data appropriate to the question. The discussion may also point out the possible uncertainties of alternative decisions and outcomes. 6–8 2 A reasoned discussion which makes use of economic information and clear analysis to evaluate economic issues and situations. The answer may lack some depth and development may be one-sided. There is relevant use of economic concepts, terminology, information and data appropriate to the question. 3–5 1 There is a simple attempt at using economic definitions and terminology. Some reference may be made to economic theory, with occasional understanding. 1–2 0 A mark of zero should be awarded for no creditable content. 0

Question 27

In 2020, the largest Thai commercial bank merged with a smaller commercial Thai bank. It was expected that the merger would affect the pric…

Accepted Answer

2(a) Identify two influences, other than price, on a customer’s choice of bank. Two from:  services provided  amount willing to lend  size of bank  online facilities  location  interest paid or charged  where family banks  advertising  green investments  community involvement  reputation  confidence in the bank / reliability / safety  relationship with staff  whether foreign currency can be exchanged 2 If more than two influences given, consider the first three. Not accepting brand loyalty. Accept whether the bank offers Islamic banking. Also accept interest on its own. 2(b) Explain two reasons why a merger may result in higher prices for consumers. Logical explanation which might include: More market power / less competition / monopoly power / may become a monopoly (1) can raise price as consumers will not be able to switch to other firms / demand may become more inelastic / can control price / become a price maker (1). May experience diseconomies of scale / example of a diseconomy of scale that may be experienced (1) raise prices due to higher (average) costs (1). Carrying out the merger may be expensive (1) price raised to cover the cost of e.g. retraining staff / making some staff redundant (1). 4 One mark each for each of two reasons identified and one mark each for each of two explanations. If more than two reasons given, consider the first three. Can accept higher cost if linked to diseconomies of scale or carrying out the merger. Not accepting the idea of higher costs because the firm will be larger (idea of higher total costs). Question Answer Marks Guidance 2(c) Analyse how an increase in bank lending can benefit an economy. Coherent analysis which might include: It could increase consumer expenditure (1) increase total demand (1) raise employment /reduce unemployment (1) reduce deflation (1). It could increase investment / increase spending on capital goods (1) benefit from advances in technology / innovation / better quality capital goods (1) increase productivity (1) raise the quality of products (1) lower price (1) increase exports (1) lower imports (1) improve the current account balance (1) cause economic growth / increase GDP / increase output / encourage firms to expand / new firms to set up (1). May enable the people to improve skills / to set up small business / buy basic necessities / reduce poverty (1). Lend to firms in financial difficulties (1) stop them going out of business (1). 6 Question Answer Marks Guidance 2(d) Discuss whether or not a market economy allocates resources in the best possible way. In assessing each answer, use the table opposite. Why it might:  price moves to reflect changes in demand and supply  resources move from products falling in demand towards those rising in demand  profit incentive for firms to produce what consumers demand / consumer sovereignty  competition results in efficiency which drives down costs and prices  changes in wages move labour to those jobs most in demand Why it might not:  merit goods are under-consumed so not enough resources are devoted to their production  demerit goods are overconsumed so too many resources are devoted to their production  no resources are devoted to public goods as there is no incentive to produce them  there may be factor immobility  monopolies may restrict output  external costs and benefits will not be taken into account when deciding on the allocation of resources. 8 Level Description Marks 3 A reasoned discussion which accurately examines both sides of the economic argument, making use of economic information and clear and logical analysis to evaluate economic issues and situations. One side of the argument may have more depth than the other, but overall, both sides of the argument are considered and developed. There is thoughtful evaluation of economic concepts, terminology, information and/or data appropriate to the question. The discussion may also point out the possible uncertainties of alternative decisions and outcomes. 6–8 2 A reasoned discussion which makes use of economic information and clear analysis to evaluate economic issues and situations. The answer may lack some depth and development may be one-sided. There is relevant use of economic concepts, terminology, information and data appropriate to the question. 3–5 1 There is a simple attempt at using economic definitions and terminology. Some reference may be made to economic theory, with occasional understanding. 1–2 0 A mark of zero should be awarded for no creditable content. 0

Question 28

Liechtenstein is a high‑income economy in the middle of Europe. The country’s low tax rates and low levels of regulation make it an attract…

Accepted Answer

2(a) Identify two types of cost to a firm. total cost (1) average total cost (1) fixed cost (1) variable cost (1) average fixed cost (1) average variable cost (1) 2 Accept any relevant costs e.g. labour cost Accept abbreviations e.g. TC If more than two costs given, consider the first three. 2(b) Explain two roles of commercial banks for firms. Logical explanation which might include: Provide loans / overdrafts to banks / source of finance (1) to fund investments / expansion / start−up / day to day operations (1). Help process payments (1) internet banking / fund transfers / credit card / debit card payments (1). Issuing bank drafts / bank cheques (1) to help firms make payments (1). Safe place to store money / savings (1) firms making deposits / earn interest (1). Safekeeping of documents and other items (1) in safe deposit boxes (1). Currency exchange (1) to facilitate transfers between firms / international transactions (1). Provides insurance (1) to reduce various risks to the firm (1). 4 One mark each for each of two roles identified and one mark each for each of two explanations. If more than two roles given, consider the first three. Question Answer Mark Guidance 2(c) Analyse the causes of differences in the level of income between countries. Coherent analysis which might include:  difference in productivity (1) countries with higher productivity have higher incomes (1) as workers can produce more (1) and earn more money from their production (1)  difference in availability of natural resources (1) e.g. valuable commodities such as oil or gold (1).  difference in population growth (1) countries with higher population growth have higher incomes (1) as there are more people to produce goods and services (1) lower labour costs (1) encourage more investments (1)  differences in distribution of primary, secondary and tertiary sectors / level of development (1) those with higher secondary and tertiary sectors have higher incomes (1) more value added (1) less dependent on weather (1) higher productivity (1)  difference in specialisation / diversification (1) level of exports (1).  difference in minimum wage level (1) affects the level of total demand in a country (1)  difference in level of saving and investment (1) higher savings leads to higher investment (1) and higher productivity growth (1) and therefore higher income growth (1)  difference in education levels (1) higher education levels lead to higher incomes (1) workers have more qualification / skills / experience (1) leading to higher productivity / higher output (1) 6 Alternatively, accept arguments which describes reasons for lower incomes. Question Answer Mark Guidance 2(c)  difference in health / healthcare standards (1) higher health / healthcare standards lead to higher incomes (1) less sick / healthier / stronger (1) produce more / higher productivity leading to higher income (1).  difference in unemployment rates (1) the more unemployed resources a country has, the less income is likely to be earned (1).  differences in birth rates / proportion of elderly people (1) high birth rate and ageing population may place high demands on a country's resources (1)  difference in frequency of war / natural disasters (1) reducing a country’s ability to produce goods and services (1) Question Answer Mark Guidance 2(d) Discuss whether or not low tax rates benefit an economy. In assessing each answer, use the table opposite. Why it might:  low corporation tax rates encourage more investments and therefore higher productivity growth which encourages economic growth  low corporation tax rates encourage more investments which increases demand for labour and reduces unemployment  low income tax rates encourage more people to enter the labour force  low income tax rates increase disposable income which can encourage higher consumer expenditure and, as a result, higher output  low indirect tax rates reduce cost of production which reduces cost−push inflation  low indirect tax rates reduce cost of production which increases competitiveness of exports which reduces current account deficit / increases current account surplus Why it might not:  low tax rates reduce government revenues which could reduce spending on public goods / infrastructure, reducing investments / productivity growth  low tax rates increase production which increases pollution and environmental degradation  low direct tax rates may be inflationary 8 Level Description Marks 3 A reasoned discussion which accurately examines both sides of the economic argument, making use of economic information and clear and logical analysis to evaluate economic issues and situations. One side of the argument may have more depth than the other, but overall both sides of the argument are considered and developed. There is thoughtful evaluation of economic concepts, terminology, information and/or data appropriate to the question. The discussion may also point out the possible uncertainties of alternative decisions and outcomes. 6−8 2 A reasoned discussion which makes use of economic information and clear analysis to evaluate economic issues and situations. The answer may lack some depth and development may be one−sided. There is relevant use of economic concepts, terminology, information and data appropriate to the question. 3−5 1 There is a simple attempt at using economic definitions and terminology. Some reference may be made to economic theory, with occasional understanding. 1−2 0 A mark of zero should be awarded for no creditable content. 0 Question Answer Mark Guidance 2(d)  low tax rates increase trade which increases need for international transport such as ships and planes which increases pollution  low direct tax rates increase inequality  low tax rates on demerit goods may worsen health / result in market failure.  low tax rates on imports (tariffs) may worsen the current account of the balance of payments

Question 29

Digital money, such as cryptocurrencies, is increasingly being used. Digital money transactions take place on electronic devices such as co…

Accepted Answer

3(a) Identify two types of tax. 2 Accept any relevant examples of taxes e.g. income tax, tariffs. Accept, but do not expect, specific and ad Direct (1) Indirect (1) valorem taxes. Progressive (1) Proportional (1) Regressive (1) 3(b) Explain two functions of money. 4 One mark each for each of two functions identified and one mark each for each of two explanations. Logical explanation which might include: • a medium of exchange (1) to buy goods and services / to trade (1) • a measure of value / unit of account (1) to measure how much a product is worth (1) • a store of value (1) to allow people to save (1) • a method of deferred payment (1) for borrowing and lending (1). 3(c) Analyse the consequences of market failure. 6 i.e. labour market failure. Coherent analysis which might include: • market failure exists when the production or consumption of goods and services in a market is not efficient (1) • overconsumption of demerit goods (1) and goods with external costs (1) leading to an overall misallocation of resources (1) e.g. overconsumption of cigarettes, fossil fuels (1) • underconsumption of merit goods (1) and goods with external benefits (1) e.g. education, healthcare (1) • non-supply (1) of public goods (1) e.g. defence (1) • abuse of monopoly power (1) resulting in higher prices (1) reducing affordability / choice (1) • factor immobility (1) resulting in shortages and surpluses (1) causing unemployment (1) resulting in lower income / poverty (1). 3(d) Discuss whether or not a tax on a product can reduce 8 Level Description Marks external costs. 3 A reasoned discussion which 6–8 In assessing each answer, use the table opposite. accurately examines both sides of the economic argument, making use of Why it might: economic information and clear and logical analysis to evaluate economic • tax will increase price, reducing the quantity demanded issues and situations. One side of the • if demand for the product is elastic, quantity demanded will argument may have more depth than be responsive to the price increase, quantity demanded will the other, but overall both sides of the change significantly argument are considered and • tax will increase the cost of production, therefore decreasing developed. There is thoughtful supply evaluation of economic concepts, • tax will decrease the profits of firms terminology, information and / or data • tax will provide governments additional revenue to help with appropriate to the question. The subsidising less-polluting products. discussion may also point out the possible uncertainties of alternative Why it might not: decisions and outcomes. • tax is insignificant compared to the final price of the product 2 A reasoned discussion which makes 3–5 • tax avoidance / evasion / unofficial or illegal markets use of economic information and clear • if demand for the product is inelastic, quantity demanded analysis to evaluate economic issues will be unresponsive to the price increase, quantity and situations. The answer may lack demanded will not change significantly, e.g. addictive some depth and development may be products. one-sided. There is relevant use of economic concepts, terminology, information and data appropriate to the question. 3(d) Level Description Marks 1 There is a simple attempt at using 1–2 economic definitions and terminology. Some reference may be made to economic theory, with occasional understanding. 0 A mark of zero should be awarded for 0 no creditable content.

Question 30

Saudi Arabia’s economic system may change in the future. The country’s central bank is dealing with more private sector banks. In 2020, the…

Accepted Answer

3(a) Identify two types of economic system. 2 Also accept but do not expect: planned / command. No marks for free market system or controlled market Market (1) mixed (1). system. 3(b) Explain two functions of a central bank. 4 One mark each for each of two functions identified and one mark each for each of two explanations. Logical explanation which might include: If more than two functions are given, consider the first three. Operates monetary policy / controls inflation (1) e.g. sets the rate of interest / manages the money supply (1). Carries out quantitative easing (1) to stimulate economic activity during a financial crisis (1). Issues notes and coins (1) often the only bank allowed to do so (1). Acts as bank to the government (1) receives payments to the government and makes payments on behalf of the government / manages the national debt (1). Acts as lender of last resort (1) lends to commercial banks in difficulties (1). Holds reserves of foreign currency (1) to influence the exchange rate (1). May regulate banking system (1) ensuring banks do not take too many risks (1). 3(c) Analyse the advantages of a young population. 6 Coherent analysis which might include: A young population may: be more up to date with modern technology (1) may have received more education / training / are more skillful (1) be more productive (1) increase output (1). add to the labour force (1) increasing productive capacity (1) greater tax revenue (1) government can spend more e.g. to improve infrastructure (1). lead to lower government expenditure on pensions (1) and health services for the elderly (1) so can spend more on factors leading to economic growth e.g. education / infrastructure (1). be more geographically mobile (1) e.g. have fewer family ties (1). be more occupationally mobile (1) less attached to particular jobs / broader range of skills (1). spend more of their income than older people (1) be more innovative (1) able to start their own businesses (1) increasing output / wealth (1). be physically fit / stronger (1) less likely to be off sick (1). be a more skilled labour force (1) will attract investment from abroad / FDI (1). 3(d) Discuss whether or not a ban on cars in a city will 8 Level Description Marks benefit the city’s households and firms. 3 A reasoned discussion which accurately 6–8 In assessing each answer, use the table opposite. examines both sides of the economic argument, making use of economic Why it might: information and clear and logical analysis • may reduce air and noise pollution to evaluate economic issues and • avoid traffic congestion situations. One side of the argument may • reduce staff absence through illness have more depth than the other, but • avoid accidents overall, both sides of the argument are • greater demand for public transport considered and developed. There is • greater employment in public transport thoughtful evaluation of economic • pedestrianised shopping centres may attract more concepts, terminology, information and/or customers data appropriate to the question. The • free up police and court time discussion may also point out the possible • raise quality of life uncertainties of alternative decisions and • frees up funds to spend on better education / health / outcomes. housing. 2 A reasoned discussion which makes use 3–5 Why it might not: of economic information and clear analysis • journey times by e.g. bikes may take longer to evaluate economic issues and situations. The answer may lack some • people can enjoy driving depth and development may be one-sided. • may reduce visitors to the area, lowering demand for There is relevant use of economic shops concepts, terminology, information and • may lower house prices data appropriate to the question. • car sales firms will move out of the area • reduces labour mobility. 1 There is a simple attempt at using 1–2 economic definitions and terminology. Note: level 1 would be knowledge and understanding of Some reference may be made to terms such as ban, city, household or firms or just economic theory, with occasional identification of points. understanding. 0 A mark of zero should be awarded for no 0 creditable content.

Question 31

People in Ecuador buy products using a variety of forms of money. The Ecuadorian government pays public sector workers’ wages directly into…

Accepted Answer

4(a) Identify two characteristics of money. 2 If more than two characteristics of money are given, consider the first three. Two from: • generally acceptable Accept an explanation of a characteristic e.g. money is easy • portable to carry rather than using the word portable. • recognisible • divisible • durable • limited in supply / scarce • uniformity 4(b) Explain two reasons why a reduction in their working 4 Also accept approach from the point of view of why workers hours may not cause public sector workers to move to would not want to work in the private sector. working in the private sector. Logical explanation which might include: One mark each for each of two reasons identified and one Wages may still be higher in the public sector (1) enabling mark each for each of two explanations. workers to buy more goods and services (1). If more than two reasons are given, consider the first three. Fringe benefits may be better in the public sector (1) e.g. more generous state pensions (1). Reduction in working hours results in more leisure time (1) improving work life balance (1). Job security may be better in the public sector (1) less worry about losing jobs / few job opportunities in the private sector (1). Skills are not transferable to the private sector (1) e.g. occupational immobility (1). Working conditions may be better in the public sector (1) e.g. better health and safety standards (1). Reduction in working hours may not result in less pay (1) making working in the public sector more attractive / may benefit from more leisure time / reduction in stress at work (1). 4(c) Analyse how advances in technology could affect firms’ 6 Note: Only reward lower cost of production once. profits. Coherent analysis which might include: Advances in technology: will improve the quality of capital goods (1) this could raise productivity / efficiency (1) higher output / lower costs of production (1) increase profits (1). could raise the quality of products (1) create new products (1) increase demand / revenue (1). could lead to new products / innovation (1) which may lead to lower demand for related products leading to loss of profits (1) example e.g. development of electric cars has led to fall in demand for diesel cars (1). can enable online training of new skills (1) improving productivity / speeding up training / increases number that can be trained (1). can improve internet and social media links (1) able to contact more potential customers in other countries (1) thereby increasing revenue / profit (1). due to the initial high cost of buying / developing advanced technological equipment (1) can reduce profits in the short run (1). could lead to small firms being forced out of business (1) due to the cost of new technology / and its maintenance (1) reducing profits / making a loss (1). 4(d) Discuss whether or not a decrease in government 8 Level Description Marks spending will increase unemployment. 3 A reasoned discussion which accurately 6–8 In assessing each answer, use the table opposite. examines both sides of the economic Why it might: argument, making use of economic • a cut in government spending could on education / information and clear and logical analysis to training could reduce skills / qualifications and labour evaluate economic issues and situations. productivity One side of the argument may have more • reduction in skills /qualifications could increase depth than the other, but overall, both sides structural unemployment of the argument are considered and • cut in government spending on public sector workers’ developed. There is thoughtful evaluation of wages could reduce, their motivation, may resign economic concepts, terminology, • lower government spending on providing information information and/or data appropriate to the about job vacancies could increase frictional question. The discussion may also point out unemployment the possible uncertainties of alternative • lower government spending could reduce total demand decisions and outcomes. which could cause cyclical unemployment. 2 A reasoned discussion which makes use of 3–5 Why it might not: economic information and clear analysis to • may reduce inflation, making products more evaluate economic issues and situations. internationally competitive, raising net exports The answer may lack some depth and • cut in government spending on unemployment benefits development may be one-sided. There is may reduce frictional unemployment relevant use of economic concepts, • may enable taxes to be cut which could increase terminology, information and data consumer spending and investment, leaving total appropriate to the question. demand and unemployment unchanged • amount of government spending may fall but it may be 1 There is a simple attempt at using economic 1–2 definitions and terminology. Some reference spent more effectively e.g. training may be more directed at skills required to fill vacancies. may be made to economic theory, with occasional understanding. Note: Level 1 would be knowledge and understanding of 0 A mark of zero should be awarded for no 0 unemployment and government spending or just creditable content. identification of points.

Question 32

(a) Calculate the price elasticity of demand for coffee. [1] (b) Identify two rewards to factors of production in Nicaragua. [2] (c) Explai…

Accepted Answer

1(a) Calculate the price elasticity of demand for coffee. () 0.3 (1) 1(b) Identify two rewards to factors of production in Nicaragua. Wages (1) profits (1) 2 Only accept these answers if within the first three listed. 1(c) Explain one way in which unemployment is measured. Claimant count (1) based on workers claiming unemployment benefits (1). OR Labour force survey (1) asking people if they are out of work and looking for employment (1). 2 One mark for a way identified and one mark for an explanation. 1(d) Explain two functions of money in Nicaragua. Medium of exchange (1) used to buy and sell products / used to trade (1). Store of value (1) used to save / keeps its value over a period of time (1). 4 One mark each for each of two functions identified and one mark for each of two explanations. Only accept these answers if within the first three listed. Question Answer Mark Guidance 1(e) Analyse the relationship between the percentage of the labour force employed in agriculture and GDP per head. Coherent analysis which might include: Relationship: Inverse or negative relationship / move in opposite directions (1). Countries with a high percentage of their labour force employed in agriculture tend to have a low GDP per head (1). Supporting evidence: The four countries with the lowest % of the labour force employed in agriculture had the highest GDP per head (1) Specific reference to one or more countries e.g. Bahamas had the lowest % employed in agriculture and the highest GDP per head (1). Use of GDP per head data to show comparison between country with high employment in agriculture and one with low percentage employment in agriculture (1). Analysis of expected relationship: Wages may be low in agriculture (1) wages / value added tends to be higher in the secondary and / or tertiary sector (1). Exception: Nicaragua / Dominica (1) Nicaragua has the second highest % of labour force employed in agriculture but the lowest GDP per head / Dominica had the highest % of labour force employed in agriculture but the second to lowest GDP (1). Analysis of exception: Explanation of another influence on GDP per head (1). 4 Responses do not have to be in the format suggested but they should address the expected/normal relationship, offer supporting evidence of that, highlight any exceptions to that, and analyse the overall data. Note the four are: Bahamas Barbados Costa Rica Saint Lucia Question Answer Mark Guidance 1(f) Analyse, using a demand and supply diagram, how a drought could affect the market for coffee. Coherent analysis which might include: D&S diagram: Axes correctly labelled – price and quantity or p and q (1). Original demand and supply curves correctly labelled (1). New supply curve shifted to the left (1). Equilibriums – shown by lines P1 and Q1 and P2 and Q2 or equilibrium points marked as E1 and E2 (1). Written analysis: A drought will lead to a shortage / will increase costs of production (1). OR The lower supply will push up price / reduce quantity (traded) (1). 5 Question Answer Mark Guidance 1(g) Discuss whether or not small firms benefit Nicaraguan consumers. Award up to 4 marks for logical reasons why they might, which may include:  know customers’ requirements (1) provide a personal service / see them often (1) may be flexible (1)  may be many small firms / competitive markets (1) prices may be low (1) quality may be high (1) may offer wider choice collectively than a few large firms (1)  may provide products for which there is only a low demand (1) niche market (1)  makes goods more accessible in rural areas (1). Award up to 4 marks for logical reasons why it might not, which may include:  may not be able to take advantage of economies of scale (1) examples (1) higher average cost of production (1) higher price (1)  small firms may have lower profits (1) may limit investment / funds available (1) fail to raise quality (1)  may limit choice (1) individual small firms may have a limited range of products (1) cannot provide all that consumers may want (1). 6 Apply this example to all questions with the command word DISCUSS  1(g), 1(h), 2(d), 3(d), 4(d) and 5(d) Each point may be credited only once, on either side of an argument, but separate development as to how/why the outcome may differ is rewarded. Generic example Mark Tax revenue may decrease… 1 ...because of reason e.g. incomes may be lower. 1 Tax revenue may increase because incomes may be higher i.e. reverse of a previous argument. 0 Tax revenue may increase because of a different reason i.e. not the reverse of a previous argument e.g. government spending on subsidies may stimulate the economy more than spending on education. 1 Only reward reference to quality or prices once. Question Answer Mark Guidance 1(h) Discuss whether or not Nicaragua should devote more of its resources to coffee production. Award up to 4 marks for logical reasons why it should, which may include:  global demand for coffee is increasing (1) demand for coffee is price inelastic (1) revenue / profits may increase (1) more tax revenue for government (1)  firms grow in size (1) greater specialisation / economies of scale may reduce average costs (1) raise quality (1) increase profits (1) more competitive (1)  exports may increase (1) improve the current account of its balance of payments (1) lead to economic growth/higher standard of living (1)  may lead to more job opportunities (1) less poverty / less government payments to unemployed (1)  already twelfth biggest world producer (1) growth will give them more monopoly power (1) more power to raise price of coffee (1). Award up to 4 marks for logical reasons why it should not, which may include:  other countries produce coffee (1) these may be more competitive (1)  output may be affected by changes in weather (1) natural disasters (1) overproduction can exhaust land (1) leading to lower yields in future (1)  opportunity cost (1) resources could be used to produce other products (1) example (1) coffee workers only receive low pay (1)  world market for coffee may fall / demand is unpredictable (1) resulting in surplus capacity / wasted resources (1)  bmore dependent on other countries for imports of other (agricultural) products (1)  firms may suffer from diseconomies of scale (1) reduce profits (1). 6 Do not expect, but reward reference to absolute or comparative advantage.

Question 33

In recent years, the mobility of labour, the number of women in the labour force and GDP have increased in Bangladesh. In 2019, the central…

Accepted Answer

2(a) Identify two influences on the mobility of labour. Two from:  age  skills / training  qualifications / level of education  price / availability of housing  cost of living /level of income  family ties  information on vacancies  disabilities / access  quality / cost of transport  distance to place of work  discrimination 2 Only accept these answers if within the first three influences mentioned. 2(b) Explain two benefits that consumers may gain from having more commercial banks. Logical explanation which might include: More choice / competition (1) greater range of services / better quality of services / lower bank charges (1). Lower interest rate charged on loans / higher interest paid on savings (1) due to higher competition (1). May be easier to obtain a loan (1) which may increase the products consumes can buy (1). May be more convenient (1) closer to home / less time travelling / more likely to be able to speak to a person (1). 4 One mark each for each of two benefits identified and one mark for each of two explanations. Question Answer Mark Guidance 2(c) Analyse why women may be paid less than men. Coherent analysis which might include: Women may be less skilled (1) have fewer qualifications (1) and so be less productive (1) if they have received less education / training (1) may have less bargaining strength than men (1). Fewer women may be in promoted posts (1) if they have taken time off to raise children / maternity leave / may have less experience (1). Women may be concentrated in low paying occupations / industries (1) example e.g. clothes manufacture (1) may only want part-time jobs (1) because of family commitments (1). Discrimination (1) some employers may underestimate / undervalue the productivity of women (1) there may be no law or an ineffective law against discrimination (1) example e.g. tv presenters / football (1). Lower demand / higher supply in some occupations (1) due to lower revenue / value of product (1). 6 Allow the counter argument on why men may be paid more than women. Question Answer Mark Guidance 2(d) Discuss whether or not people living in countries with a high GDP enjoy higher living standards than people in countries with a low GDP. In assessing each answer, use the table opposite. Why they might:  may be able to afford better standard of housing  may be able to afford better nutrition and healthcare which can increase life expectancy  higher incomes enable more and greater quality of products to be purchased  may be able to afford better education which may enable them to gain more interesting jobs with better working conditions. Why they might not:  high GDP does not necessarily mean that GDP per head is high and so incomes could be low  income may be unevenly distributed, and some people may be living in poverty  may have a large informal sector so GDP under-records income  countries with higher GDP may also have higher price levels  people may work long hours and so enjoy little leisure and may be stressed  there may be pollution and traffic congestion  people’s wants for goods and services may grow at a faster rate than their income – the more people have, the more they may want. 8 See Guidance table at the end of the mark scheme.

Question 34

Tajikistan is one of Asia’s low-income countries. Its currency, the somoni, has the key characteristics of money. More than one million Taj…

Accepted Answer

4(a) Identify two reasons why tax revenue is likely to fall during a recession. Two from:  lower spending / lower demand  lower incomes / lower wages / higher unemployment / lower employment  lower profits  lower tax rates  lower imports  fewer tax payers  lower output  lower revenue 2 If more than 2 reasons are given, consider the first 3. 4(b) Explain two characteristics of money. Logical explanation which might include: Generally acceptable (1) people willing to accept it as a payment / reward / in settlement of a debt (1). Portable (1) easy to carry (1). Recognisable (1) easy to see it is the country’s currency (1). Durable (1) will last some time / can be saved (1). Limited in supply (1) so maintains value (1). Divisible (1) there should be units of different value (1). Homogeneous / uniform (1) people not preferring e.g. one note of a certain value other another note of the same value (1). 4 One mark each for each of two characteristics identified and one mark for each of two explanations. If more than 2 characteristics are given, consider the first 3. Accepting ‘breakable’ for ‘divisible’. Explanation marks e.g. maintain value or accept as a payment can be given without identification up to a maximum of 2 marks. Question Answer Marks Guidance 4(c) Analyse the advantages an economy may gain from having some of its people working in other countries. Coherent analysis which might include: The workers may send money home to (support) their families staying at home (1) reduce poverty / raise living standards (1). Will improve the current account position of the balance of payments / bring in foreign currency (1) secondary income (1). The workers may receive training (1) gain skills (1) ideas / knowledge / awareness of new technology (1) experience (1) higher productivity / efficiency (1) which they can bring back to the country (1) increase quality of output (1). Start their own firms in the country when they return (1) increase output / economic growth / increase GDP (1). May reduce unemployment (1) if lack of jobs at home (1) and so may reduce government spending on unemployment benefits / may reduce government spending on dependents (1). 6 No marks for general benefits of emigration. Question Answer Marks Guidance 4(d) Discuss whether or not consumers would benefit from firms buying new capital equipment. In assessing each answer, use the table opposite. Why they might:  may embody new technology  more innovation / new products  may increase efficiency / lower costs of production  may lower prices  may reduce mistakes  increase quality of output  may increase output and so availability. Why they might not:  may raise prices in the short run to cover the cost of the purchase  may reduce quality / output in the short run as workers get used to the new capital equipment  firms may switch from producing consumer to capital goods  products may become more standardised. 8 Focus should be on consumers and not workers. Level Description Marks 3 A reasoned discussion which accurately examines both sides of the economic argument, making use of economic information and clear and logical analysis to evaluate economic issues and situations. One side of the argument may have more depth than the other, but overall both sides of the argument are considered and developed. There is thoughtful evaluation of economic concepts, terminology, information and/or data appropriate to the question. The discussion may also point out the possible uncertainties of alternative decisions and outcomes. 6–8 2 A reasoned discussion which makes use of economic information and clear analysis to evaluate economic issues and situations. The answer may lack some depth and development may be one-sided. There is relevant use of economic concepts, terminology, information and data appropriate to the question. 3–5 Question Answer Marks Guidance 4(d) Level Description Marks 1 There is a simple attempt at using economic definitions and terminology. Some reference may be made to economic theory, with occasional understanding. 1–2 0 A mark of zero should be awarded for no creditable content. 0

Question 35

In 2021, the central bank of Turkey cut the interest rate on four occasions. This was despite the country’s inflation rate rising from 15% …

Accepted Answer

5(a) Define a central bank. 2 • A government owned bank (1). • Operates monetary policy / sets interest rates /manages foreign exchange rates(1). • Provides banking services to the government / commercial banks (1). 5(b) Explain two ways a commercial bank could attract more 4 One mark each for each of two reasons identified and one customers. mark for each of two explanations. Logical explanation which might include: • lower interest rate on loans (1) attracts new customers for loans (1) • higher interest rates on savings (1) attracts more customers to save (1) • make loan conditions easier (1) e.g. lend to people with lower incomes / give longer to repay (1) • improve / increase range of services (1) e.g. offer insurance / bank cards with added benefits (1) • increase accessibility (1) e.g. by opening more branches or increasing range of internet banking (1) • advertising (1) may increase brand awareness (1). 5(c) Analyse the possible causes of a fall in a country’s 6 foreign exchange rate. Coherent analysis which might include: • a central bank / government may reduce a fixed exchange rate (1) leading to devaluation of a currency (1) in order to correct a balance of payments deficit (1) • a central bank/government may try to reduce a floating exchange rate (1) by decreasing the interest rate (1) or selling the domestic currency (1) • increase in the supply of the currency (1) due to increase in imports (1) increased investment in other countries / higher interest rates abroad (1) expectation that the exchange rate will fall (1) • reduction in demand for the currency (1) due to a decrease in exports (1) fall in the rate of interest (1) decrease in money sent home by country’s people working in other countries (1). 5(d) Discuss whether or not a cut in the interest rate will 8 Level Description Marks reduce inflation. 3 A reasoned discussion which accurately 6–8 In assessing each answer, use the table opposite. examines both sides of the economic argument, making use of economic Why it will reduce inflation: information and clear and logical analysis to evaluate economic issues and • may reduce firms’ costs of production situations. One side of the argument may • may increase investment have more depth than the other, but • may result in total (aggregate) supply increasing more overall both sided of the argument are rapidly than total (aggregate) demand considered and developed. There is • reduce cost-push inflation thoughtful evaluation of economic • increased imports lowering total (aggregate) demand concepts, terminology, information and/or • reduce demand-pull inflation. data appropriate to the question. The discussion may also point out the Why it will not reduce inflation: possible uncertainties of alternative decisions and outcomes. • may increase consumer spending • reduced return from saving / less saving 2 A reasoned discussion which makes use 3–5 • reduced cost of borrowing / more borrowing of economic information and clear • increase total (aggregate) demand analysis to evaluate economic issues and • increase demand-pull inflation. situations. The answer may lack some depth and development may be one- sided. There is relevant use of economic concepts, terminology, information and data appropriate to the question. 1 There is a simple attempt at using 1–2 economic definitions and terminology. Some reference may be made to economic theory, with occasional understanding. 0 A mark of zero should be awarded for no 0 creditable content.

Question 36

Finland is a high-income country that usually has a higher value of exports than imports. It has a strong commercial banking sector which h…

Accepted Answer

5(a) Identify a difference between an export and an import. 2 Export is a good or service that leaves the country / sold to another country (1), import is a good or service that enters the country / bought from another country (1). Export is a credit item in the current account of the balance of payments (1) imports are a debit item (1). Foreigners spend on exports (1) the home country’s population spend on imports (1). Exports lead to money coming into an economy (1), while imports lead to money going out of an economy (1). 5(b) Explain why commercial banks may increase their lending. 4 Reward but do not expect reference to reduced required liquidity ratio and quantitative easing. Logical explanation which might include: To increase profits / revenue (1) earn more interest / high interest rates (1) as most commercial banks are in the private sector (1) main aim is likely to be profit maximisation (1). Increase in demand for loans (1) due to low interest rates (1) increase One mark in total for either high or low interest optimism about the future (1) higher demand for bank loans may increase rates but explanation marks can be given. profits (1). Increased confidence loans will be repaid (1) due to e.g. rise in incomes (1). Increase in bank deposits (1) more money to lend (1). Take advantage of economies of scale (1) lower average costs (1). Central bank / government encouragement / (expansionary) monetary policy / instructions (1) to increase total demand / increase consumer spending / increase investment (1). To promote social welfare (1) by reducing poverty (1). To keep up with competitors (1) attract more customers / gain more market share (1). 5(c) Analyse how an ageing population may affect a country’s economic 6 1 mark for either increase and / or decrease growth rate. economic growth. Similarly, 1 mark for either more productive and Coherent analysis which might include: / or less productive labour force, more or less • May increase economic growth / GDP / output (1) as an ageing saving etc. population may have experience (1) more productive / more efficient / more skilled (1). Not crediting comments on the change in the • May have more spending power (1) increase total demand (1). pattern of consumer spending e.g. spending • May train young workers to be more reliable / older workers may be less on toys and more on teeth implants. more reliable (1). • May reduce economic growth / GDP / output (1) as may have out-of- date skills / not able to operate new technology (1) lack mobility (1). • More retired people / more economically inactive people (1) may mean a decrease in size of the labour force (1) increase dependency ratio / more dependents (1). • May save more (1) reducing total demand (1). • May be less healthy workers (1) more days absent from work due to sickness (1). • The government may have to spend more on state benefits / pensions / healthcare (1) lower tax revenue (1) reducing spending on items that could increase economic growth e.g. education, infrastructure / opportunity cost (1). 5(d) Discuss whether supply-side policy measures will reduce a 8 Only accept a lower interest rate if linked to government’s budget deficit. encouraging a rise in investment. In assessing each answer, use the table opposite. Answers that show an awareness of supply- side policy measures but which confuse a Why they might: budget deficit with a bop deficit will not be • education and training may raise productivity analysing the question, so will be in Level 1. • increase economic growth and employment • raise direct and indirect tax revenue Level Description Marks • privatisation may reduce government spending to support state- owned firms 3 A reasoned discussion 6–8 • revenue will be raised from the sale of privatised firms which accurately • privatised firms may earn high profits which may raise tax revenue examines both sides of the • subsidies may encourage firms to expand and earn higher profits economic argument, • unemployment benefit may be cut to increase incentive to work. making use of economic • budget deficit may be increased in short term but reduced in the long information and clear and term. logical analysis to evaluate economic issues and Why they might not: situations. One side of the • education and training will increase government spending and may argument may have more not be successful depth than the other, but • lower tax rates may reduce tax revenue overall both sided of the • regulation will involve costs to enforce argument are considered and developed. There is • spending on infrastructure projects may involve high government thoughtful evaluation of spending. economic concepts, • sale of profitable government-owned firms to the private sector may terminology, information reduce government revenue from profits and/or data appropriate to the question. The discussion may also point out the possible uncertainties of alternative decisions and outcomes. 5(d) Level Description Marks 2 A reasoned discussion 3–5 which makes use of economic information and clear analysis to evaluate economic issues and situations. The answer may lack some depth and development may be one- sided. There is relevant use of economic concepts, terminology, information and data appropriate to the question. 1 There is a simple attempt 1–2 at using economic definitions and terminology. Some reference may be made to economic theory, with occasional understanding. 0 A mark of zero should be 0 awarded for no creditable content.

Question 37

(a) Calculate St. Kitts and Nevis’s government budget deficit in 2022. [1] (b) Identify two examples of the factor of production ‘land’ in …

Accepted Answer

Question Answer Mark Guidance 1(a) Calculate St. Kitts and Nevis’s Government budget 1 Accept 18m. deficit in 2022. ($)18 000 000 / – ($)18 000 000. $18 m / – $18 m (1). 1(b) Identify two examples of the factor of production land in 2 If more than two examples given, consider the first three. St. Kitts and Nevis. Two from: beaches (1), (coral) reefs (1), marine life / fish (1) rainforests (1) and soil (1). 1(c) Explain how tourism causes external costs in St. Kitts 2 One mark for explanation of external costs. and Nevis. One mark for example based on tourism. • Social costs are greater than private costs / social costs include private costs and external costs / harmful effects on third parties / those not directly involved in producing or consuming the product (1). • Example of an external cost caused by tourism in St Kitts and Nevis e.g. pollution / environmental damage / death of wildlife / death of marine life / overcrowding (1). 1(d) Explain two reasons why a foreign bank may open a 4 One mark each for each of two reasons identified and one branch in St. Kitts and Nevis. mark each for each of two explanations. Logical explanation which might include: If more than two reasons given, consider the first three. • High incomes in the country (1) high demand for Most of the explanation points e.g. high profit could be banking services / high demand for loans / may save linked to any of the three identification points except high more / borrowers likely to be able to repay loans / high disposable income should be linked to absence of personal profit / high revenue (1). income tax. • Absence (low) of personal income tax (1) workers would be able to keep all of their income / more disposable Do not give two explanation marks for one identification. income / firms may be able to pay lower wages / increase workers’ motivation (1). Explanation marks here are dependent on the • Relatively high literacy rates (1) awareness of benefits identifications. of having a bank account / saving / skilled workers / high productivity (1). 1(e) Draw a demand and supply diagram to show the effect 4 of an increase in the productivity of onion farmers on the market for onions. D&S diagram: Axes correctly labelled – price and quantity or p and q (1). Original demand and supply curves correctly labelled (1). New supply curve shifted to the right (1). Equilibriums – shown by lines P1 and Q1 and P2 and Q2 or equilibrium points marked as E1 and E2 (1). 1(f) Analyse the relationship between healthcare spending 5 Responses do not have to be in the format suggested but as a percentage of GDP and life expectancy. they should address the expected/normal relationship, offer supporting evidence of that, highlight any exceptions to that, Expected relationship: and analyse the overall data. Direct / positive relationship (1). Generally, the higher healthcare spending, the higher the life expectancy (1). Supporting evidence should involve interpretation, not just description. Supporting evidence: E.g.: Haiti has the second lowest % healthcare spending and the shortest life expectancy (1) Canada spends a higher % on healthcare than Egypt and has a longer life expectancy / Canada spends the highest percentage on health care and has the second highest longest life expectancy / Canada and Sweden spend a high % on healthcare and have long life expectancy (1). Analysis of the supporting information: Higher spending on healthcare would be expected to raise the health of the population / provide better quality healthcare (1) increase awareness of need for healthy living / provide more check-ups / preventative medical care / reduce the death rate (1). Exception: Monaco (1) spends the lowest % on healthcare but has the longest life expectancy (1). Analysis of exception: 1.9% of a very high GDP can mean higher spending than e.g. 12.9% of a lower GDP / Monaco may have a high GDP (1). There are other influences on life expectancy e.g. nutrition / education/housing/war (1). 1(g) Discuss whether or not an increase in the size of its 6 Award one mark in total for higher / lower average costs, fishing industry would benefit St. Kitts and Nevis. one mark for lower / higher fish prices, one mark for higher / lower profits (1). Award up to 4 marks for logical reasons why it might, which may include: Higher / lower profits should be linked to the fishing industry. • may reduce imports of fish (1) reduce risk of supply-side shocks / imports being cut off (1) enable fish to be Apply this example to all questions with the command exported (1) may improve the current account word DISCUSS balance / improve the balance of payments (1) (1(g), 1(h), 2(d), 3(d), 4(d) and 5(d)) • may increase employment / increase job opportunities / reduce unemployment (1) raise incomes Each point may be credited only once, on either side of an (1) increase living standards (1) increase argument, but separate development as to how/why the GDP / increase output / cause economic growth (1) outcome may differ is rewarded. higher tax revenue (1) • may enable greater advantage to be taken of Generic example Mark economies of scale (1) example (1) lower average cost (1) lower fish prices (1) Tax revenue may decrease … 1 • (larger boats) may be more efficient / more productive (1) make the industry more profitable / increase profits ... because of reason e.g. incomes may be 1 from fishing (1). lower. Tax revenue may increase because incomes 0 may be higher i.e. reverse of a previous argument. Tax revenue may increase because of a different 1 reason i.e. not the reverse of a previous argument e.g. government spending on subsidies may stimulate the economy more than spending on education. 1(g) Award up to 4 marks for logical reasons why it might not, which may include: • opportunity cost (1) could use resources in other industries / government can spend more on e.g. education / increase budget deficit (1) • over-fishing (1) deplete fish stocks / lose marine life / deplete resources (1) raise fish prices in the long run (1) • may experience diseconomies of scale (1) example (1) higher average cost (1) reduce profit (1) • may cause external costs / environmental harm (1) may damage coral reefs / cause pollution (1) harm tourism (1) • may be a dangerous occupation (1) may be low-paid (1) low-skilled (1) may experience seasonal unemployment (1) • risk of over specialisation / too great a dependency on the industry (1) may be harmed by a fall in demand for fish / rise in competition from other countries (1). 1(h) Discuss whether or not deflation is likely to have 6 Award one mark for malign (bad) deflation is harmful harmed St. Kitts and Nevis. whereas benign (good) deflation is beneficial. Award up to 4 marks for logical reasons why it might, which Mark for higher employment and mark for higher GDP can may include: only be awarded if come from higher total supply. • may have increased real value of debt (1) may default (1) may have decreased investment (1) ‘save more’ may be credited on either side but only once. • may have resulted in a deflationary spiral (1) may have resulted from lower total demand (1) lower GDP / lower output / reduce economic growth / may cause a recession (1) lower employment / increased unemployment (1) lowered wages / income (1) • may reduce confidence (1) may discourage MNCs (1) • may reduce consumer expenditure / save more / create uncertainty (1) delay buying goods and services (until price is lower) (1). Award up to 4 marks for logical reasons why it might not, which may include: • may have increased purchasing power / real income / with the same income more goods and services can be purchased (1) (some) people may spend / consume more (1) • value of saving may have increased (1) increasing wealth (1) • may be the result of higher total supply (1) due to advances in technology / lower costs of production (1) higher output / economic growth (1) higher employment (1) • may have increased international competitiveness of its products / lower export prices (1) increased exports / export revenue (1) reduced imports / import expenditure (1) improve current account balance (1).

Question 38

One of the world’s more expensive roads opened in Montenegro in 2022. To build the road, the Montenegro Government was helped by a foreign …

Accepted Answer

2(a) Define international trade. 2 Movement / exchange of goods and services / products (1) between countries (1). Exports and imports (1) of goods and services / products (1). 2(b) Explain the importance of commercial banks to 4 Accept the role of commercial banks in helping implement governments. monetary policy (1) they are likely to change their interest rates in line with that of the central bank (1). Logical explanation which might include: • facilitating transactions for the government (1) e.g. managing government payments to suppliers / workers / receive tax payments (1) • financing government borrowing (1) commercial banks may also lend money to the government / buy bonds from government (1) • lending to the private sector (1) enables investment (1) facilitating economic growth (1) may increase employment (1) • may help to maintain financial stability (1) by helping other commercial banks in trouble (1) • they influence the money supply (1) by lending / creating credit (1). 2(c) Analyse how building roads can help a government 6 achieve its macroeconomic aims. Coherent analysis which might include: Building roads may involve government spending (1) creates jobs / requires labour (1) such as road builders (1) reducing unemployment (1) increase income (1) increase consumption (1) support other industries (1) such as raw material suppliers / private contractors (1) which increases total demand in the economy (1). Building roads may lead to reduced transport costs / cheaper transport (1) due to greater efficiency / productivity / time saving (1) reducing overall costs of production (1) increasing investment / attracting MNCs (1) causing economic growth (1) increased exports (1) improving the current account balance (1) reducing cost-push inflation (1). Building roads could lead to better quality transportation / easier access to places of work (1) reducing unemployment (1) may reduce poverty (1). 2(d) Discuss whether or not multinational corporations 8 Level Description Marks (MNCs) benefit host countries. 3 A reasoned discussion which 6–8 In assessing each answer, use the table opposite. accurately examines both sides of the economic argument, making use of Why MNCs might benefit host countries: economic information and clear and • bring in new capital and technology logical analysis to evaluate economic • bring in investment issues and situations. One side of the • create jobs argument may have more depth than • may provide high quality training the other, but overall both sides of the • pay taxes argument are considered and • may increase competition developed. There is thoughtful • may buy raw materials from the country evaluation of economic concepts, terminology, information and/or data Why MNCs might not benefit host countries: appropriate to the question. The • may exploit domestic labour by poor work conditions discussion may also point out the • may take profits out of the country and not reinvest possible uncertainties of alternative domestically decisions and outcomes. • may avoid taxes • may dominate domestic market and drive local firms out 2 A reasoned discussion which makes 3–5 use of economic information and clear of the market • are footloose and may leave anytime – more instability analysis to evaluate economic issues and situations. The answer may lack • may deplete natural resources some depth and development may be • may damage the environment one-sided. There is relevant use of economic concepts, terminology, information and data appropriate to the question. 2(d) 8 Level Description Marks 1 There is a simple attempt at using 1–2 economic definitions and terminology. Some reference may be made to economic theory, with occasional understanding. 0 A mark of zero should be awarded for no 0 creditable content.

Question 39

Japan has faced significant periods of deflation in recent decades. Despite efforts to stimulate the economy through fiscal policy measures…

Accepted Answer

3(a) Identify two fiscal policy measures. 2 If more than two measures are given, consider the first three. • government spending (1) • taxation (1) Accept two types of spending, or two types of taxes. Allow contractionary (1) expansionary (1) measures. 3(b) Explain two influences on productivity. 4 One mark each for two influences identified and one mark each for two explanations. Logical explanation which might include the following. If more than two influences are given, consider the first Quality of factors of production (1) better quality improves three. efficiency / poor quality reduces efficiency (1). Working conditions / wages (1) influencing worker motivation (1) technology (1) machine speed / effects on capital productivity (1) education (1) skilled workers / effects on labour productivity (1). Healthcare (1) healthier workers capable of producing higher output / sick workers take time off work (1). Effectiveness of institutions (1) amount of bureaucracy affects efficiency (1) use of resources (1) whether wasted or used efficiently (1). 3(c) Analyse reasons why central banks are important for an 6 economy. Coherent analysis which might include: • control inflation (1) by implementing monetary policy (1) such as changes in interest rates (1) prevent prices from rising too much (1) prevents deterioration of purchasing power / affordability of goods and services (1) prevent deflation (1) • maintain financial stability (1) monitoring health of banks (1) preventing collapse of banks (1) assuring savings are protected (1) ensuring consumers have access to credit (1) ensuring liquidity of the economy (1) • provision of economic information (1) which can help decision-makers (1) • buying / selling currency (1) to influence exchange rates (1) • lenders of last resort (1) providing liquidity to commercial banks (1). 3(d) Discuss whether or not deflation is a problem for an 8 economy. Level Description Marks In assessing each answer, use the table opposite. 3 A reasoned discussion which 6–8 accurately examines both sides of Why it might be a problem: the economic argument, making use of economic information and clear • decreases confidence in the economy and logical analysis to evaluate • deflationary cycle economic issues and situations. One • loss of jobs side of the argument may have more • delays in spending reduce demand depth than the other, but overall, • lower profits for firms from lower prices. both sides of the argument are considered and developed. There is thoughtful evaluation of economic concepts, terminology, information and/or data appropriate to the question. The discussion may also point out the possible uncertainties of alternative decisions and outcomes. 2 A reasoned discussion which makes 3–5 use of economic information and clear analysis to evaluate economic issues and situations. The answer may lack some depth and development may be one-sided. There is relevant use of economic concepts, terminology, information and data appropriate to the question. 3(d) Why it might not be a problem: Level Description Marks • decreases prices, increasing affordability for consumers 1 There is a simple attempt at using 1–2 • if it is caused by decreases in cost, problems for the economic definitions and economy are less significant terminology. Some reference may be • increase in international competitiveness made to economic theory, with • it depends on the extent and duration of the deflation. occasional understanding. 0 A mark of zero should be awarded 0 for no creditable content.

Question 40

Central banks influence their countries’ money supply. Central banks also regulate commercial banks. Households benefit from these commerci…

Accepted Answer

3(a) Identify two ways central banks differ from commercial 2 If more than two ways are given, consider the first three. banks. The second mark must be a linked difference and not a Award one mark for a characteristic of the central bank such negative comment e.g. central bank controls money supply, as: but commercial banks do not, only gets one mark. • in the public sector / owned by the government • operate monetary policy • main objective is usually price stability • hold the accounts of the government • lend to governments and sometimes commercial banks • manage foreign exchange rate. Award one mark for a characteristic of a commercial bank such as: • usually in the private sector / owned by individuals • provide services for consumers • main objective is profiting maximization or growth • hold the accounts of firms and households • lend to households and firms • buy and sell foreign currency to firms and households. 3(b) Explain two characteristics that coins possess which 4 One mark each for two characteristics identified and one mean they can perform the functions of money. mark each for two developments. Logical explanation which might include: If more than two characteristics are given, consider the first three. • generally acceptable (1) can be used to buy and sell products / acts as medium of exchange (1) Only accept functions of money when used as a • limited in supply (1) minted by the government (1) development of an identified characteristic of money. • durable (1) last some time / does not perish / hard to break / made of metal / acts as store of wealth / store of value (1) • portable (1) coins can be carried in pockets / bags (1) • homogeneous (1) all coins of the same value are the same (1) • divisible (1) coins have different values / acts as medium of exchange (1). 3(c) Analyse the services provided to households by 6 Do not reward more than three services as the main commercial banks. assessment objective is analysis, not knowledge and understanding. Coherent analysis which might include: • enable households to save their money (1) provide deposit / time accounts / deposit boxes (1) earn interest (1) • enable households to make and receive payments (1) provide current / sight accounts (1) credit cards (1) • lend to households (1) by providing a loan / overdraft / mortgage (1) to e.g. buy a house / a car (1) pay interest (1) • give financial advice (1) e.g. on how to manage debt / retirement plans / buy stocks and shares (1) • arrange insurance (1) e.g. for house / car (1) • Convert foreign currency (1) buying / selling goods and service abroad / travelling abroad (1) charge commission (1). 3(d) Discuss whether or not division of labour will benefit 8 Level Description Marks workers. 3 A reasoned discussion which accurately 6–8 In assessing each answer, use the table opposite. examines both sides of the economic argument, making use of economic Why they might: information and clear and logical analysis • can be trained quickly to evaluate economic issues and • rise in productivity might be linked to a rise in income situations. One side of the argument may • can become skilled at a particular task – practice makes have more depth than the other, but perfect overall, both sides of the argument are • can concentrate on what they are most interested in considered and developed. • can gain confidence in the task they undertake – less stressful. There is thoughtful evaluation of economic concepts, terminology, Why they might not: information and/or data appropriate to • can be boring the question. The discussion may also • occupational mobility is limited point out the possible uncertainties of • may not make full use of their skills alternative decisions and outcomes. • may be replaced by machinery • work may be disrupted by absence of other staff. 2 A reasoned discussion which makes use 3–5 of economic information and clear analysis to evaluate economic issues and situations. The answer may lack some depth and development may be one-sided. There is relevant use of economic concepts, terminology, information and data appropriate to the question. 3(d) Level Description Marks 1 There is a simple attempt at using 1–2 economic definitions and terminology. Some reference may be made to economic theory, with occasional understanding. 0 A mark of zero should be awarded for no 0 creditable content. Note: do not reward answers that state benefits to the firm. L1 and up to 2 marks for an understanding of what division of labour means.

Question	Answer	Marks	From
1	see sheet	20	0455/22 Feb/March 2017
2	see sheet	20	0455/21 May/June 2017
3	see sheet	20	0455/22 May/June 2017
4	see sheet	20	0455/22 May/June 2017
5	see sheet	20	0455/23 May/June 2017
6	see sheet	20	0455/21 Oct/Nov 2017
7	see sheet	20	0455/23 Oct/Nov 2017
8	see sheet	30	0455/21 May/June 2018
9	see sheet	20	0455/22 May/June 2018
10	see sheet	20	0455/23 May/June 2018
11	see sheet	20	0455/22 Oct/Nov 2018
12	see sheet	20	0455/21 May/June 2019
13	see sheet	30	0455/23 May/June 2019
14	see sheet	20	0455/23 May/June 2019
15	see sheet	20	0455/21 Oct/Nov 2019
16	see sheet	20	0455/23 Oct/Nov 2019
17	see sheet	20	0455/22 May/June 2020
18	see sheet	30	0455/21 Oct/Nov 2020
19	see sheet	20	0455/22 Oct/Nov 2020
20	see sheet	20	0455/23 Oct/Nov 2020
21	see sheet	20	0455/22 May/June 2021
22	see sheet	30	0455/21 Oct/Nov 2021
23	see sheet	30	0455/22 Feb/March 2022
24	see sheet	20	0455/22 May/June 2022
25	see sheet	30	0455/22 Oct/Nov 2022
26	see sheet	20	0455/21 May/June 2023
27	see sheet	20	0455/22 May/June 2023
28	see sheet	20	0455/23 May/June 2023
29	see sheet	20	0455/21 Oct/Nov 2023
30	see sheet	20	0455/23 Oct/Nov 2023
31	see sheet	20	0455/23 Oct/Nov 2023
32	see sheet	30	0455/21 May/June 2024
33	see sheet	20	0455/21 May/June 2024
34	see sheet	20	0455/22 May/June 2024
35	see sheet	20	0455/23 Oct/Nov 2024
36	see sheet	20	0455/22 Feb/March 2025
37	see sheet	30	0455/22 May/June 2025
38	see sheet	20	0455/23 May/June 2025
39	see sheet	20	0455/21 Oct/Nov 2025
40	see sheet	20	0455/23 Oct/Nov 2025

Questions15 pages

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Questions as text

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Q2 · Money and banking are closely linked 0455/21 May/June 2017

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Q4 · In 2015 the world saw many changes in demand and advances in technology 0455/22 May/June 2017

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Q7 · In August 2015, China devalued its currency, the yuan 0455/23 Oct/Nov 2017

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Q11 · Mexico has recently experienced relatively low inflation and the Mexican government wants… 0455/22 Oct/Nov 2018

Q12 · In February 2017, China’s central bank raised the rate of interest 0455/21 May/June 2019

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Q14 · Confidence in the government’s reform agenda led to very strong growth of India’s stock… 0455/23 May/June 2019

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Q28 · Liechtenstein is a high‑income economy in the middle of Europe 0455/23 May/June 2023

Q29 · Digital money, such as cryptocurrencies, is increasingly being used 0455/21 Oct/Nov 2023

Q30 · Saudi Arabia’s economic system may change in the future 0455/23 Oct/Nov 2023

Q31 · People in Ecuador buy products using a variety of forms of money 0455/23 Oct/Nov 2023

Q32 · Calculate the price elasticity of demand for coffee 0455/21 May/June 2024

Q33 · In recent years, the mobility of labour, the number of women in the labour force and GDP… 0455/21 May/June 2024

Q34 · Tajikistan is one of Asia’s low-income countries 0455/22 May/June 2024

Q35 · In 2021, the central bank of Turkey cut the interest rate on four occasions 0455/23 Oct/Nov 2024

Q36 · Finland is a high-income country that usually has a higher value of exports than imports 0455/22 Feb/March 2025

Question 37 0455/22 May/June 2025

Q38 · One of the world’s more expensive roads opened in Montenegro in 2022 0455/23 May/June 2025

Q39 · Japan has faced significant periods of deflation in recent decades 0455/21 Oct/Nov 2025

Q40 · Central banks influence their countries’ money supply 0455/23 Oct/Nov 2025