Questions as text
Q1 · Living standards have risen in a variety of ways in recent decades 0455/23 May/June 2017
6 Living standards have risen in a variety of ways in recent decades. Between 1990 and 2015, more than 2.5 billion people in the world gained access to improved water and the proportion of undernourished people declined from 24% to 13%. Countries have made different rates of progress and these have been reflected in their Human Development Index (HDI) rankings. (a) Define the ‘Human Development Index’. [2] (b) Explain why the concept of opportunity cost is important in deciding how to allocate resources. [4] (c) Analyse how a reduction in the rate of interest could reduce poverty. [6] (d) Discuss whether rapid economic growth always increases living standards. [8]
20 marks
Mark scheme: 6(a) Define the ‘Human Development Index’. A measure of living standards/quality of life (1) includes income per head, education and life expectancy (two of these three) (1) calculated by the UN (1). 2 6(b) Explain why the concept of opportunity cost is important in deciding how to allocate resources. Opportunity cost is the (next) best alternative (1) forgone (1) in deciding to use resources to produce one product (1) not able to produce another product (1) example (1) have to use resources to produce products in high demand (1) in the most efficient way (1). 4 6(c) Analyse how a reduction in the rate of interest could reduce poverty. • A lower cost of borrowing (1) may encourage people to take loans (1) increase consumer spending (1) increase total demand (1) encouraging firms to expand (1) • It may increase employment (1) raise people’s incomes (1) • May lower the burden of debt/make it easier to repay loans (1) may enable the poor to borrow (1) to educate their children (1) set up a business (1) which can provide an income (1). 6 Maximum of 3 marks for a list-like approach. Question Answer Marks Guidance 6(d) Discuss whether rapid economic growth always increases living standards. Up to 5 marks for why it might: • Higher income (1) will enable people to enjoy more goods and services (1) may reduce absolute poverty (1) with people having access to basic necessities (1) • Likely to increase tax revenue (1) enable the government to spend more on healthcare (1) raise life expectancy (1) • spend more on education (1) raise job prospects (1) • may spend more on the environment (1) reduce pollution (1) Up to 5 marks for why it might not: • There are other influences on living standards (1) example (1) • Growth may be unevenly distributed (1) not everyone may benefit (1) • Average living standards may rise but some people may suffer a fall in living standards (1) if income is unevenly distributed (1) it may not benefit those living in poverty (1) • The extra products provided e.g. defence (1) may not provide satisfaction to consumers (1) • Producing more may involve longer working hours (1) reducing leisure hours (1) working longer hours/working more intensely may increase stress (1) endangering people’s health (1) • Increases in output may damage the environment (1) e.g. forests being cut down/pollution created (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.
This question in 0455/23 May/June 2017
Q2 · Moldova has a population of 3.5 million 0455/22 Oct/Nov 2017
6 Moldova has a population of 3.5 million. It is one of the poorest countries in Europe, with relatively low living standards. In 2015, the country experienced a recession and a doubling of its inflation rate. Moldova’s central bank increased its interest rate from 8.5% to 15.5%. (a) Identify two influences on the size of a country’s population. [2] (b) Explain two causes of an increase in living standards. [4] (c) Analyse how an increase in the rate of interest could increase unemployment. [6] (d) Discuss whether a government should increase tax rates during a recession. [8]
20 marks
Mark scheme: 6(a) Identify two influences on the size of a country’s population. 1 mark each for each of two influences identified: • birth rate • death rate • migration. 2 influences, factors that would affect size of population. 6(b) Explain two causes of an increase in living standards. 1 mark each for each of two causes identified: • rise in income / fall in poverty / fall in unemployment / rise in employment • improvements in education • improvements in healthcare • increase in leisure time. 1 mark each for each of two causes explained: • higher incomes will enable people to buy more goods and services • improvements in education will enable people to earn higher incomes / make more efficient life choices • improvements in healthcare will increase life expectancy • increase in leisure time will give people the opportunity of follow leisure activities / suffer less pressure. 4 Question Answer Marks Guidance 6(c) Analyse how an increase in the rate of interest could increase unemployment. Rise in the rate of interest may discourage borrowing / increase cost of borrowing (1) increase saving (1) decrease spending (1) decrease total demand (1) lower demand may decrease output (1) encourage firms to make workers redundant (1). Rise in the rate of interest may increase firms’ costs of production (1) this may encourage firms to reduce their output (1). Rise in the rate of interest may increase the exchange rate (1) higher exchange rate may decrease exports and increase imports (1) decrease domestic production (1). 6 Question Answer Marks Guidance 6(d) Discuss whether a government should increase tax rates during a recession. Up to 5 marks for why it should: To prevent tax revenue falling (1) lower output may reduce profits (1) lower revenue from corporation tax (1) a recession will lower incomes (1) reduce income tax revenue (1) reduce revenue from indirect taxes (1). Higher tax revenue could be used to implement policies to stop the recession (1) government may be able to spend on supply-side policy measures (1) example (1). A higher tax on imports / import tariff (1) may encourage some consumers to switch to buying domestic products (1) reverse fall in output/employment (1). May want to redistribute income (1) progressive taxes could be increased (1) and tax revenue used to help the poor (1) who may be particularly harmed by a recession (1). Up to 5 marks for why it should not: Higher tax rates may reduce disposable income (1) reduce consumer expenditure (1) may reduce investment (1) lower consumer expenditure and investment would lower total demand (1) this may reduce output further (1). Higher tax rates may discourage MNCs from setting up in the country (1) this may mean it will take longer to get out of a recession (1). Higher tariffs may provoke retaliation (1) reduce both imports and exports (1). 8 Accept a counterargument i.e. the government should instead reduce tax rates during a recession.
This question in 0455/22 Oct/Nov 2017
Q3 · Changes in the global balance of economic power In 2014, global Gross Domestic Product… 0455/23 Oct/Nov 2017
1 Changes in the global balance of economic power In 2014, global Gross Domestic Product (GDP) stood at US$78 000 billion. A year later it had increased to US$80 730 billion. In the past, countries such as the USA and Germany might have been expected to have made the largest contribution to the increase in GDP. China accounted for 20% of the increase in world output in 2015. China is set to become the largest economy. It is becoming a stronger competitor in a number of markets. This increased price competitiveness is the result of a number of factors including maintaining a low exchange rate, providing subsidies to a number of industries and increased labour productivity. However, in 2015 the Chinese Government was considering whether to reduce the size of the country’s steel industry, possibly by cutting the subsidy it received. Fig. 1 shows how the market for steel might be affected by such a change. price of steel S2 S1 P2 P1 D1 O Q2 Q1 quantity of steel Fig. 1 The market for steel in China in 2015 Some developed countries have been struggling recently. For example, Australia has seen its economic growth rate declining. To try to increase domestic economic activity the Reserve Bank of Australia has cut interest rates. Developing and emerging economies’ economic growth rates are increasing. In Africa, this is in part because of the discovery and exploitation of oil and mineral resources. These countries have different exchange rate systems and have different records of success in attracting multinational companies. Many African countries use protectionist measures but some are moving towards free trade. In most developing and emerging economies the birth rate is falling. The impact of this change is influenced by the relative size of the fall. For instance, Nauru is one of the smallest countries in the world having a population of only 10 000. Its birth rate fell from 26 to 25 in 2015. (a) Identify, from the extract, two monetary policy measures. [2] (b) Explain two causes of a fall in the birth rate. [4] (c) Calculate, using information from the extract: (i) the value in US$ of China’s contribution to global GDP growth in 2015 [2] (ii) the number of children born in Nauru in 2015. [2] (d) Analyse, using a production possibility curve diagram, how the discovery of new oil reserves would affect an economy. [5] (e) Discuss whether a firm would benefit from a fall in its country’s exchange rate. [5] (f) Explain, using information from the extract and Fig. 1, what might have happened to the market for steel in China in 2015. [4] (g) Discuss whether engaging in free trade increases living standards in a country. [6]
30 marks
Mark scheme: 1(a) Identify from the extract, two monetary policy measures. interest rates (1) exchange rates (1) 2 expansionary monetary policy 1(b) Explain two causes of a fall in the birth rate. 1 mark each for each of two causes identified: • rise in incomes / standard of living • Increase in education • more women working • improved family planning • women marrying later • improved social provision / more affordable healthcare • higher cost of raising children / cut in government child benefits • fall in infant mortality rates • government discourages births. 1 mark each for each of two explanations: • richer people tend to have fewer children – tend to spend more on their education, do not rely on children to support them • increased education raises people’s expectations of living standards for themselves and for their children • more educated women tend to marry later • more knowledge and availability of ways to limit families will reduce the number of unwanted births • more children surviving to adulthood so fewer births • working women tend to limit their families to avoid too many career breaks • provision of state pensions and healthcare reduces parents, need to have children to look after them • reduces incentives to have children. 4 Question Answer Marks Guidance 1(c)(i) Calculate, using information from the extract: the value in US$ of China’s contribution to global GDP growth in 2015 $546 billion (2) Correct method, i.e. 20% of US$2.730 billion or $546/546 billion (1) 2 1(c)(ii) Calculate, using information from the extract: the number of children born in Nauru in 2015. 250 (2) Correct method, i.e. 25 × 10 (1) 2500 (1) 2 1(d) Analyse, using a production possibility curve diagram, how the discovery of new oil reserves would affect an economy. Up to 4 marks for the diagram: • 1 mark for axes correctly labelled • 1 mark for original curve/straight downward sloping line drawn to the axes. • 1 mark for new production possibility curve • 1 mark for indicating curve will shift to the right – either by arrows or labels. Up to 1 mark for explanation: A discovery of new oil reserves will increase productive potential / capacity / be able to produce more / results in economic growth (1) 5 Accept any reasonable label of axis. If labelled with oil / petrol accept parallel PPCs. Do not reward output / production increases O e.g. capital goods e.g. consumer goods B B A A O other products oil / petrol B1 A B Question Answer Marks Guidance 1(e) Discuss whether a firm would benefit from a fall in its country’s exchange rate. Up to 3 marks for why it might: Lower prices of exports (1) increase demand for its products (1) raise sales / revenue (1) increase profits (1). Increase size of market (1) enabling it to take greater advantage of economies of scale (1) lower average costs of production (1). Domestic producers can produce goods cheaper than overseas goods (1) resulting in higher home sales (1). Up to 3 marks for why it might not: Increase price of imports (1) raise a firm’s costs of production (1) lower profits (1). If demand for exports is price-inelastic (1) a fall in price of exports will cause a fall in revenue (1). A fall in the exchange rate (1) may create uncertainty making it difficult for a firm to plan (1) Maybe recession in other countries (1) will not result in increased sales (1). Quality of goods may be poor compared with other competitors (1) sales do not rise (1). 5 To achieve full marks, benefits to a firm must be discussed. 1(f) Explain, using information from the extract and Fig. 1, what might have happened to the market for steel in China in 2015. The diagram shows: supply decreasing (1). price rising (1). demand contracting / less steel / fall in quantity (1). if the subsidy to steel industry was cut (1). demand and supply are inelastic (1). 4 Question Answer Marks Guidance 1(g) Discuss whether engaging in free trade increases living standards in a country. Up to 4 marks for why it might: Free trade may increase competition / removal of tariffs and quotas (1) encourages multinational corporations (MNCs) to set up in country (1) specialise (1) drives down prices (1) promotes efficiency (1) encourages innovation (1) increases quality (1) increase the range of products available (1) reduce unemployment (1) raise income/GDP (1). May increase the size of firms’ markets (1) allowing them to take advantage of economies of scale (1). Up to 4 marks for why it might not: Free trade may cause some industries to go out of business (1) increasing unemployment (1) reducing incomes / GDP falls (1) may cause higher pollution (1). Unsafe products/low quality products may be imported (1). Dumping may occur (1) driving out domestic producers (1) which can raise prices (1) lower quality in the long run (1). 6
This question in 0455/23 Oct/Nov 2017
Q4 · In 2015, the UK economy experienced an increase in production and relatively low… 0455/23 Oct/Nov 2017
7 In 2015, the UK economy experienced an increase in production and relatively low unemployment. There was, however, little growth in labour productivity and earnings. The government continued to spend more than it was receiving in tax revenue and considered changing some of its monetary policy measures. (a) Identify two causes of inflation. [2] (b) Explain two reasons why government spending may be greater than tax revenue. [4] (c) Analyse how an increase in labour productivity can increase living standards. [6] (d) Discuss whether monetary policy measures can increase economic growth. [8]
20 marks
Mark scheme: 7(a) Identify two causes of inflation. Demand-pull/consumer boom/higher government spending/increase in net exports/ increase in aggregate demand (1). Cost-push inflation/higher wages/higher raw material costs / depreciation or devaluation of domestic currency / imported inflation (1). 2 Question Answer Marks Guidance 7(b) Explain two reasons why government spending may be greater than tax revenue. 1 mark each for each of two causes identified: • low level of economic activity • government desire to increase economic activity • actual government expenditure higher than planned expenditure • ageing population. 1 mark each for each of two explanations of the causes: • if economic activity is low, spending on benefits may be high while, due to low incomes with low spending, tax revenue will be low • a government may be engaging in expansionary fiscal policy to increase total demand and raise revenue • planned expenditure and forecast tax revenue may not be achieved • more pressure on pensions and healthcare, while tax revenues may fall due to fewer workers. 4 Maximum of 2 marks if explanation is restricted to either why there may be high government expenditure, or low tax revenue. 7(c) Analyse how an increase in labour productivity can increase living standards. Higher productivity will lower costs of production (1) may lower prices (1) enabling people to consume more goods and services (1) greater supply (1). It may increase output (1) raise employment (1) increase incomes (1) greater purchasing power (1) e.g. greater access to healthcare / education / leisure (1) live longer (1) higher HDI (1). Increase in government revenue (1) higher spending on education/healthcare (1). 6 Question Answer Marks Guidance 7(d) Discuss whether monetary policy measures can increase economic growth. Up to 5 marks for why they might: A cut in interest rates (1) may discourage saving (1) increase borrowing (1) raise consumer spending (1) raise investment (1) increase total demand (1) increase output (1) higher investment will increase productive capacity (1). A reduction in the value of the exchange rate (1) will lower export prices and raise import prices (1) increasing demand for domestic products (1) increase output (1). An increase in the money supply (1) may stimulate higher spending (1) increasing output (1). Up to 5 marks for why they might not: Lower interest rates may not increase consumer spending and investment if confidence is low (1) households and firms may not spend extra disposable income if they think that incomes will fall in the future (1). A lower exchange rate will not lead to a rise in export revenue and a fall in import expenditure if demand is price-inelastic (1) there is an increase in import restrictions imposed by other countries/fall in incomes abroad (1). An increase in the money supply or other measure may lead to demand-pull inflation (1) the economy may not have the resources to produce more goods and services despite the rise in total demand (1). 8 Accept an argument that contractionary monetary policy leading to higher interest rates and lower domestic demand would reduce economic growth. Do not reward the same argument on both sides (mirror image) without additional relevant analysis.
This question in 0455/23 Oct/Nov 2017
Q5 · In early 2016, the central bank of the Republic of Turkey cut interest rates five times 0455/23 May/June 2018
4 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 economy had a combination of a low saving rate and weak investment. To stimulate economic growth the Turkish government announced a package of reforms including subsidies for research and investment. (a) Identify two functions of a central bank. [2] (b) Explain how the Consumer Prices Index (CPI) is calculated. [4] (c) Analyse the impact of a cut in interest rates on saving and investment. [6] (d) Discuss the impact of supply-side policy measures on government expenditure and on government revenue. [8]
20 marks
Mark scheme: 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
This question in 0455/23 May/June 2018
Q6 · In 2016, the world shortage of peanuts increased their price 0455/23 Oct/Nov 2018
5 In 2016, the world shortage of peanuts increased their price. China, which has traditionally been a net exporter of peanuts, was about to become a net importer. South Africa, which is an exporter of high-quality, high-cost peanuts used in chocolate confectionery, experienced the worst drought on record. A higher number of South African farmers applied for bank loans in the same year. (a) What is the difference between the price of a product and the cost of a product? [2] (b) Explain two influences on a country’s demand for food. [4] (c) Analyse why a country may change from a net exporter of a product into a net importer of the product. [6] (d) Discuss whether or not a central bank should limit the amount that a commercial bank can lend to its customers. [8]
20 marks
Mark scheme: 5(a) What is the difference between the price of a product and the cost of a product? The price is the amount the customer pays for the product/average revenue/how much the product is sold for (1). The cost is the expenditure involved in producing product e.g. labour costs (1). 2 5(b) Explain two influences on a country’s demand for food. Increase in population size (1) would increase demand as more people consume food (1). Increase in prices (1) will reduce demand and vice versa (1). Increase in income (1) increase demand for food as people have more purchasing power (1). Health awareness (1) in some countries if people become more aware of the health problems of obesity, demand for food may decrease (1). Increase in proportion of young people (1) consume more than old people so demand will rise/patterns of consumption are different (1). The opening of fast food chains (1) may increase demand for meat (1). Advertising (1) may persuade people to eat more (1). 4 . 5(c) Analyse why a country may change from a net exporter of a product into a net importer of the product. Internal demand for the product may increase (1) due to a rise in income (1). There may be a change in tastes from domestic to foreign produced versions (1). There may be supply problems at home (1) due to bad weather/diseases (1). Imports may become relatively cheaper (1) better quality (1). Import restrictions may be removed (1) and foreign producers may be more efficient (1). Higher inflation at home (1) may reduce exports as more expensive/increase imports which are cheaper than before (1). Maybe a change in climate (1) making it difficult to grow a particular crop (1). 6 5(d) Discuss whether or not a central bank should limit the amount commercial banks can lend to its customers. Up to 5 marks for why it should: A function of a central bank maybe to control commercial bank lending (1). Unlimited loans could encourage people to borrow too much (1) they may get into debt (1). Some of the borrowers may not be able to pay back the loans (1) this could result in the banks collapsing (1) this could stop the economy working effectively (1). A limit on the amount lent could control total (aggregate) demand (1) and reduce inflation (1). A limit on bank lending could reduce spending on imports (1) this could improve the current account position on the balance of payments (1). Up to 5 marks for why it should not: Some people who cannot borrow may not have sufficient purchasing power to afford e.g. an adequate amount of food/education for their children (1) move into poverty (1). Limiting loans to firms may cause some to close (1) causing unemployment (1). Some firms may not be able to expand (1) restricting economic growth (1). The limit may discourage MNCs from setting up in the country (1) foregoing the benefits MNCs may bring (1). State of economy (1) if in recession (1) limiting lending by banks could lead to loss of jobs (1). Unlimited loans could reduce the interest rate (1) this could increase economic growth/lower unemployment (1) May force some of the poor to borrow from unregulated lenders (1) causing them to get into further debt (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 to be rewarded.
This question in 0455/23 Oct/Nov 2018
Q7 · The United Nations (UN) has set out development goals for countries to achieve by 2050 0455/23 Oct/Nov 2018
6 The United Nations (UN) has set out development goals for countries to achieve by 2050. These goals include: • conserve natural resources • ensure education for all • end poverty everywhere • promote sustained economic growth (a) Identify two ways a government could conserve its country’s resources. [2] (b) Explain two external benefits that can arise from education. [4] (c) Analyse how a cut in the rate of interest could reduce poverty. [6] (d) Discuss whether or not economic growth always increases living standards. [8]
20 marks
Mark scheme: 6(a) Identify two ways a government could conserve its country’s resources. One mark for each appropriate action identified. Examples include: Ban/place a limit on the amount of resource consumed. Import resources to reduce consumption of country’s own resources. Reduce exports to reduce consumption of limited resources. Put tax/increase tax on resources to reduce demand. Educate consumers to reduce consumption/conserve resources. Control immigration to reduce consumption of resources. Encourage recycling of resources e.g. metals/plastic. Subsidise firms that conserve natural resources. 2 6(b) Explain two external benefits that can arise from education. Higher output (1) due to more skilled workers (1). Better quality output (1) due to more efficient workers (1). More advanced technology (1) due to ideas/ability to operate new technology (1). Improved health/reduction in spread of diseases (1) more informed population (1). Less pollution (1) if population educated on environmental issues (1). Firms may have to spend less on training (1) due to greater supply of skilled workers (1). 4 6(c) Analyse how a cut in the rate of interest could reduce poverty. A lower interest rate will increase the purchasing power of the poor who have borrowed before (1) will make it easier/cheaper to borrow (1) enabling them to buy more necessities (1) spend on education (1) enabling them to get a job / better paid job (1). A lower rate of interest may encourage a rise in consumer expenditure (1) encouraging firms to expand (1) providing cheaper finance for the expansion (1) increase output (1) raise employment (1) raise income (1). Higher output and spending may increase tax revenue (1) enabling the government to increase its spending to reduce poverty (1). 6 6(d) Discuss whether or not economic growth always increases living standards. Up to 5 marks for why it might: Higher output (1) may enable people to enjoy more goods and services (1) especially if GDP per head rises (1) may increase employment (1) raise incomes (1) Higher output may increase tax revenue (1) more resources/higher quality of resources (1) may enable there to be better healthcare (1) increasing life expectancy (1) more/better education (1). Higher output may enable more resources to be devoted to improving environmental conditions (1) e.g. reduce pollution (1). Up to 5 marks for why it might not: The benefits may not be evenly spread (1) income and wealth may be unevenly distributed (1) there may still be high levels of poverty (1). Higher output may have been achieved by increasing working hours (1) working conditions may have declined (1) there may be greater stress (1) quality of output may be lower (1). Expansion of heavy industries (1) may have created pollution (1) reduce health/life expectancy (1). Non-renewable resources may have been depleted (1) reducing the opportunity to achieve sustainable development (1). Economic growth may not be sustainable (1) increase in supply may not match increase in demand (1) causing inflation (1). Economic growth achieved by exporting goods and services (1) economy producing more investment goods at expense of consumer goods (1) resulting in fewer goods available in domestic market (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 to be rewarded.
This question in 0455/23 Oct/Nov 2018
Q8 · In February 2017, China’s central bank raised the rate of interest 0455/21 May/June 2019
5 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 it was worried that the rise in the interest rate might reduce the country’s economic growth rate. The change in interest rate is likely to have increased the workload of skilled commercial bank workers. (a) Identify two functions of money. [2] (b) Explain two reasons why a central bank may want to reduce borrowing. [4] (c) Analyse why skilled workers are usually paid more than unskilled workers. [6] (d) Discuss whether or not a rise in the rate of interest will reduce economic growth. [8]
20 marks
Mark scheme: 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
This question in 0455/21 May/June 2019
Q9 · After the UK’s decision to leave the European Union (EU) in June 2016, the value of the… 0455/23 May/June 2019
4 After the UK’s decision to leave the European Union (EU) in June 2016, the value of the British currency, the pound (£), depreciated. However, in August 2016, despite the fall in the value of the £, the Bank of England reduced interest rates from 0.5% to 0.25%. This was to encourage further spending and borrowing to avoid a lower economic growth rate. (a) Identify two motives for consumer spending. [2] (b) Explain two benefits a firm can gain by borrowing. [4] (c) Analyse two consequences of a depreciating foreign exchange rate. [6] (d) Discuss whether or not a fall in interest rates will benefit an economy. [8]
20 marks
Mark scheme: 4(a) Identify two motives for consumer spending. • to satisfy needs e.g food, shelter • to satisfy wants e.g. luxury goods • fear of future price rises • to gain satisfaction from that consumption 2 4(b) Explain two benefits a firm can gain by borrowing. • it can pay running costs / unexpected expenses (1) to enable the firm to stay in business (1) • it can invest/purchase capital (1) to lower costs/improve efficiency (1) to increase profits (1) • it can improve products/add new products (1) by spending on R&D (1) • it can spend on advertising (1) to increase demand/market share (1) • in a recession, it can help to cover its costs (1) in order to stay in business, e.g. paying wages, covering debts (1) 4 4(c) Analyse two consequences of a depreciating foreign exchange rate. • price of exports decreases (1) quantity of exports demanded increases (1) value of exports increases (1) net exports increase (1) • price of imports increases (1) quantity demanded for imports decreases (1) value of imports decreases (1) • current account deficit decreases / surplus increases (1) total (aggregate) demand increases (1) inflation increases (1) • price of imported raw materials / semi-finished goods increases (1) cost of production increases (1) price level increases / inflation (1) • discourages savers from overseas (1) who fear losing money (1) 6 Maximum of 4 marks if only one consequence analysed. Question Answer Marks Guidance 4(d) Discuss whether or not a fall in interest rates will benefit an economy. Up to 5 marks for why it might: Cost of borrowing decreases / borrowing increases (1) may cause increase in consumption (1) investment (1) decrease in savings (1) total (aggregate) demand increases (1) economic growth (1) reduces unemployment (1). May increase spending on research and development (1) increase productivity (1) increase potential growth (1). Value of currency will fall (1) decrease price of exports (1) increase price of imports (1) net exports increases (1). Up to 5 marks for why it might not: May cause inflation (1) due to increased levels of borrowing / consumption / demand (1) Returns from savings decreases (1) those who rely on savings will suffer (1) e.g. pensioners (1). Value of currency will fall, increasing price of imports (1) decreases choice / reduce purchasing power (1) decrease standards of living (1) cost-push inflation (1). Could result in firms/individuals borrowing who would not be able to repay if the interest rate rises (1) unsustainable economic growth (1). 8
This question in 0455/23 May/June 2019
Q10 · The Monetary Authority of Singapore (MAS), the government body which controls the… 0455/21 Oct/Nov 2019
5 The Monetary Authority of Singapore (MAS), the government body which controls the monetary policy of the country, has allowed the Singapore dollar to appreciate. However, the high cost of the Singapore dollar has created a need for new incentives for firms, such as a reduction in taxes and granting subsidies. (a) Define monetary policy. [2] (b) Explain two functions of money. [4] (c) Analyse the consequences of an appreciating currency on the current account of the balance of payments of a country. [6] (d) Discuss whether or not a reduction in taxes is beneficial for an economy. [8]
20 marks
Mark scheme: 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
This question in 0455/21 Oct/Nov 2019
Q11 · In 2015, the Malaysian government set out its objectives to increase productivity and… 0455/22 Oct/Nov 2019
3 In 2015, the Malaysian government set out its objectives to increase productivity and savings. There has been higher consumer expenditure, driven in part by higher wages received mainly by older workers. However, low levels of savings remain a concern. Savings provide funds for investment (spending on capital goods) which contributes to economic growth and can influence inflation. (a) Identify two ways a government could encourage saving. [2] (b) Explain two reasons why productivity may increase. [4] (c) Analyse how an increase in investment could influence inflation. [6] (d) Discuss whether or not older workers are paid more than young workers. [8]
20 marks
Mark scheme: 3(a) Identify two ways a government could encourage saving. • raise the rate of interest • introduce tax-free saving schemes • provide information / education about the benefits of saving • introduce compulsory saving schemes • government measure that can increase income e.g. lower taxes 2 3(b) Explain two reasons why productivity may increase. Improvements in education and training (1) would increase the skills of workers (1). More capital equipment / investment (1) which may increase the speed / accuracy at which workers work / more efficient machinery (1). Increase in wages (1) which will motivate workers (1). Lower working hours (1) workers less tired (1). Better working conditions (1) less stressed (1). Better weather / improvements in the type of crops grown / better feed for animals (1) which can increase agricultural output / which may result from research and development (1). Immigration of workers (1) with better skills (1). Better healthcare (1) workers fitter (1). Successful supply-side policy measure (1) e.g. spending on infrastructure (1). Specialisation (1) workers concentrating on particular tasks may produce products more quickly / efficiently (1). 4 Question Answer Marks Guidance 3(c) Analyse how an increase in investment could influence inflation. Higher investment will mean higher spending on capital goods (1) it could increase total (aggregate) demand (1) this could increase demand- pull inflation (1) if total (aggregate) demand exceeds total (aggregate) supply (1). May increase demand for imported capital goods / raw materials (1) causing imported / cost-push inflation (1). Higher total (aggregate) demand could increase employment / decrease unemployment (1) which could increase total (aggregate) demand further (1). In short run may raise costs of production (purchase of machines) (1) causing cost-push inflation (1). In the long run it could increase output (1) may introduce advances in technology (1) increase efficiency / productivity (1) it could reduce costs of production (1) reducing cost-push inflation (1). Investment in human capital (1) raising workers’ skills (1). 6 Question Answer Marks Guidance 3(d) Discuss whether or not older workers are paid more than young workers. Up to 5 marks for why they might be: They have more experience (1) they are likely to have received more training (1) they may have higher productivity (1) more skilled (1) more reliable / make fewer mistakes (1) in higher demand (1) lower supply (1). They may have been with the same employer for some time (1) and may have been promoted (1). Some older workers may be rewarded for staying with the same employer / young workers may be at start of career (1) be paid a loyalty bonus (1). In some countries, the minimum wage may rise with age (1). Up to 5 marks for why they might not be: Some older workers in jobs requiring physical strength (1) may be less fit / young workers may be fitter (1). Older workers may be less occupationally mobile (1) geographically immobile (1) and so may not move to gain higher wages (1). Young workers may be more up to date with advances in technology / new methods / new ideas (1) their skills may be in higher demand (1). Young workers may be in expanding industries (1). Young workers may work more hours (1) may be better educated / more qualified (1). 8
This question in 0455/22 Oct/Nov 2019
Q12 · A new capital for Zambia? 0455/23 Oct/Nov 2019
1 A new capital for Zambia? Zambia is a middle-income country but one with 60% of its population of 15 million living below the poverty line. In 2017, the Zambian government announced that it was planning to move the country’s capital from Lusaka in the south of the country to Ngabwe, a village in the centre of the country. Ngabwe currently lacks good roads and other infrastructure. A move to Ngabwe, however, may help the country to cope with its high rate of population growth and encourage entrepreneurs to set up new businesses in that area. In 2017, the country had a zero net migration rate, a birth rate of 41.8, a death rate of 12.4, and a life expectancy of 52.5 years. Zambia’s economic growth rate averaged 6.8% between 2004 and 2014. This rate fell after 2014 due, in part, to a depreciation in the kwacha, Zambia’s currency. The reduction in the foreign exchange rate of the kwacha contributed to the rise in the country’s inflation rate from 10.1% in 2015 to 20.6% in 2016. In 2017, the labour force of 7.2 million accounted for 48% of the country’s population. Workers are employed in a range of industries including agriculture, banking, building, copper mining, and emerald mining. Fig. 1.1 shows the relationship between copper output and revenue from the sale of copper, the index for 2010 is 100. 140 130 120 110 index 100 90 80 70 60 2010 2011 2012 2013 2014 2015 2016 2017 Copper output Revenue from the sale of copper Fig. 1.1 Copper output and revenue from the sale of copper 2010—17 (index numbers) In 2017, Zambia’s central bank reduced commercial bank lending. This lowered investment and household borrowing. Government spending rose more slowly and some cuts were made to the government’s spending on training. (a) Identify, from the extract, two primary sector industries. [2] (b) Calculate, using information from the extract, how many people in Zambia lived in poverty in 2017. [2] (c) Explain, using information from the extract, why Zambia had a high rate of population growth in 2017. [2] (d) Explain, using information from the extract, why a depreciation of the kwacha harmed the Zambian economy. [4] (e) Analyse, using Fig. 1.1, the relationship between copper output and revenue from the sale of copper. [5] (f) Discuss whether or not a central bank should reduce commercial bank lending. [5] (g) Explain, using information from the extract, two reasons why productivity may have been low in Zambia. [4] (h) Discuss whether or not building a new city will benefit an economy. [6]
30 marks
Mark scheme: 1(a) Identify, from the extract, two primary sector industries. • agriculture • copper mining • emerald mining 2 1(b) Calculate, using information from the extract, how many people in Zambia lived in poverty in 2017. • 9m (2). • Correct working: 15 m × 60% (1). 2 1(c) Explain, using information from the extract, why Zambia had a high rate of population growth in 2017. • Birth rate exceed death rate / more people being born than dying (2). • High birth rate / high natural increase (1). • Birth rate 41.8 and death rate 12.4 (1). 2 1(d) Explain, using information from the extract, why a depreciation of the kwacha harmed the Zambian economy. • Inflation rate rose (1) from 10.1% in 2015 to 20.6% in 2016 (1). • Growth rate fell (1) from 6.8% after 2014 (1). • Depreciation is a fall in the value of the currency (1) import prices would have been higher (1) increasing costs of production (1) leads to higher prices (1) demand for higher wages (1) creating a wage-price spiral (1). • Higher inflation may have reduced international competitiveness (1) reducing output / economic growth rate (1) leading to lower employment (1) and reduction in living standards (1). 4 Question Answer Marks Guidance 1(e) Analyse, using Fig.1.1, the relationship between copper output and revenue from the sale of copper. Expected relationship - a direct relationship would have been expected / moved in same direction / as copper output rose, revenue should have risen (1). Evidence in support of unexpected relationship • Does not support expected relationship / shows an inverse relationship (1). • Between 2010–14 revenue rose (from 100 to 128) but output fell (from 100 to 90) so prices rose (1). • Between 2014–17 revenue fell (from128 to 90) but output rose (from 90 to 108) which meant that prices fell (1). • In 2014 copper revenue was highest 128 and output at its lowest 90, while in 2017 copper revenue was at its lowest 90 and output at its highest 108, so changes in revenue were greater than changes in output of copper (1). Analysis of inverse relationship: • When output fell, price per unit may have risen more than fall in output, due to loss of economies of scale causing average costs to rise (1). • Price for Zambian copper affected by world market prices (1). • Copper is likely to be inelastic in demand so prices rise by more than fall in output increasing revenue (1). 5 A pattern of analysis is expected in response to this type of question. Do not reward simple statements (repetition) of the figures given in the table. Question Answer Marks Guidance 1(f) Discuss whether or not a central bank should reduce commercial bank lending. Up to 3 marks for why it should: • Lowering consumer expenditure / investment by firms (1) may reduce demand-pull inflation (1) making exports more competitive (1). • May prevent households and firms getting into debt (1) that they cannot repay banks (1) may avoid a financial crisis in the future (1). • May reduce spending on imports (1) improve the current account position (1). Up to 3 marks for why it should not: • It may reduce consumer expenditure (1) investment (1) this will lower total (aggregate) demand (1) which may reduce economic growth (1). • Some firms may go out of business (1) causing unemployment (1) results in poverty (1). • Firms may not keep up with advances in technology (1) reduce international competitiveness (1) harm the current account position (1). • Households may not be able to borrow to pay for their everyday living / their children’s education / their higher education (1) lower their career prospects (1). 5 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(g) Explain, using information from the extract, two reasons why productivity may have been low in Zambia. • Low investment (1) e.g. fewer workers might be working with new advanced capital equipment (1). • Cut in the government spending on training (1) workers may be less skilled (1). • People living in poverty / poor health (1) more time off work (1). • Lack of infrastructure e.g. lack of roads / lack of school buildings (1) means greater difficulty getting to work / gaining adequate education (1). • Only 48% of the population work (1) less people in work (1). • Life expectancy of only 52.5 years (1) lack of skills / experience (1). 4 1(h) Discuss whether or not building a new city will benefit an economy. Up to 4 marks for why it might: • Jobs will be created (1) reduce unemployment (1) higher total demand / economic growth (1) creating higher income / less poverty (1). • Better housing may be constructed (1) overcrowding may be reduced / less homelessness (1) living standards may rise (1). • MNCs may be attracted into the country (1) by improved facilities (1). • Results in higher tax revenue (1) which government can spend on other objectives e.g. education and health (1). Up to 4 marks for why it might not: • It will involve an opportunity cost (1) money spent/resources used could have been used to e.g. improve education and healthcare (1) may cause a budget deficit (1). • It may cause external costs (1) e.g. damage the environment (1). • People and firms may not want to move (1) new facilities will be wasted (1). • Causes inflation (1) if already at or close to full employment (1). • Pushes up prices (1) causing cost-push inflation (1). • Depletes natural resources / raw materials (1) more dependent on imports (1). 6
This question in 0455/23 Oct/Nov 2019
Q13 · African countries are expected to experience growth in their output 0455/22 Feb/March 2020
4 African countries are expected to experience growth in their output. It is also predicted that Africa’s population will increase from 1.1 bn in 2017 to 4.2 bn by 2100, when Nigeria will account for one in twelve of the world’s births. Nigeria and South Africa are expected to experience the greatest rise in investment (spending on capital goods) over this period, and a change in their gender distribution. (a) Define gender distribution. [2] (b) Explain two benefits of a higher economic growth rate. [4] (c) Analyse the disadvantages of a rapidly growing population. [6] (d) Discuss whether or not a cut in the rate of interest will increase investment. [8]
20 marks
Mark scheme: 4(a) Define gender distribution. The number of males compared to the number of females in the population / the ratio of males to females in the population (2). The sex distribution / sex ratio (1). 2 4(b) Explain two benefits of a higher economic growth rate. Logical explanation which might include: Higher incomes / output (GDP) / spending (1) better living standards (1) Reduced poverty (1) able to afford basic necessities / more goods and services available (1) Reduced unemployment (1) more jobs created (1) Increased tax revenue (1) providing more funds to spend on education/healthcare (1) Higher confidence (1) increase investment (1). Attract MNCs (1) due to higher total (aggregate) demand (1). Higher exports (1) may exceed higher imports / may improve the current account position (1). Increase the country’s economic power (1) e.g. in trade negotiations (1). 4 One mark for each of two benefits identified and one mark for each explanation. Question Answer Marks Guidance 4(c) Analyse the disadvantages of a rapidly growing population. Coherent analysis which might include: A rapidly growing population may deplete resources more quickly (1) reducing the country’s ability to grow in the future / reduce the sustainability of growth (1) A rapidly growing population may take the population beyond the optimum level / overpopulated (1) reducing income / GDP per head (1) may cause overcrowding (1). May be pressure on food supplies (1) pollution may increase (1) may put pressure for government spending to rise (1). A rapidly growing population will increase dependents (1) if due to a rise in the birth rate (1) more resources will have to be devoted to providing e.g. primary education (1) some parents may leave the labour force (1). If the rise in population is due to a fall in the death rate (1) more pensions may have to be provided (1) increased cost of healthcare (1) taxes may have to be raised (1) If the rise is due to net immigration (1) there may be an increased burden on housing and healthcare (1). 6 Question Answer Marks Guidance 4(d) Discuss whether or not a cut in the rate of interest will increase investment. In assessing each answer, use the table opposite. Why it might: • it may increase consumer spending as there will be less reward from saving, which may encourage firms to increase their output • it will reduce the cost of borrowing to purchase capital goods • firms may be encouraged to invest rather than save • MNCs may be attracted into the country as investment will be cheaper. Why it might not: • the rate of interest may still be high / may be expected to rise in the future • firms may be pessimistic about the future • firms may be working with spare capacity • the cost of capital equipment may rise • lower saving may reduce funds available for investment • banks may be reluctant to lend. Example of a Level 2 answer: A cut in the rate of interest will decrease the cost of taking out loans. This will enable firms to borrow more and lead to them buying more capital goods which will increase investment. The return on saving would also reduce, encouraging firms to spend their money rather than save it as the opportunity cost of spending would be lower. Lower interest rates might also mean that consumer spending is greater so firms’ profits may increase enabling them to expand. Principal Examiner comment: This answer provides strong and relevant links, but it is clearly only one- sided so can only achieve a maximum of L2. 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 4(d) Level Description Marks 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
This question in 0455/22 Feb/March 2020
Q14 · A number of countries are withdrawing high value banknotes 0455/22 May/June 2020
3 A number of countries are withdrawing high value banknotes. For instance, Singapore plans to stop issuing its $10 000 note. High value notes were originally intended to act as a convenient store of value. Central banks are concerned some notes are now being used illegally. The Singapore Police Force and the Monetary Authority of Singapore (its central bank) were trying to recruit more workers in 2017. It was expected that the central bank would raise the rate of interest in 2018. (a) State two functions of money, other than a store of value. [2] (b) Explain two advantages banknotes have as a form of money. [4] (c) Analyse the influences on the mobility of workers. [6] (d) Discuss whether or not a central bank should raise the rate of interest. [8]
20 marks
Mark scheme: 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.
This question in 0455/22 May/June 2020
Q15 · Changes in tobacco production and consumption can have both microeconomic and… 0455/23 Oct/Nov 2020
2 Changes in tobacco production and consumption can have both microeconomic and macroeconomic effects. Tobacco plants are grown in at least 124 countries with different levels of development. A higher proportion of the poor than of the rich consume tobacco products. The market for cigarettes, produced using tobacco, is changing. Demand for cigarettes and some other demerit goods is declining in a number of countries. (a) Define microeconomics. [2] (b) Explain two causes of differences in economic development between countries. [4] (c) Analyse how a cut in the interest rate could reduce poverty. [6] (d) Discuss whether or not government intervention will correct the market failure caused by a demerit good. [8]
20 marks
Mark scheme: 2(a) Define microeconomics. Study/analysis of or focus on individual markets / economic agents e.g. individuals, households, and firms (2). Study of economics on a small scale, e.g. demand for cars (1). Demand and supply for individual products/markets (1). 2(b) Explain two causes of differences in economic development between countries. Logical explanation which might include: Resources – land/labour/capital/enterprise (1) affect productive capacity of a country (1). Income (1) enabling people to consume more goods and services (1). Productivity (1) making better use of resources (1). Higher international trade / exports (1) results in higher output (1) Size of primary sector (1) larger primary sectors may mean lower incomes / hard working conditions (1). Saving (1) which can influence the proportion of capital goods produced/the extent to which people have a safety net (1). Investment (1) which may influence economic growth / make work less physically demanding (1). Education / literacy rates (1) which influence choices/income/health (1). Healthcare (1) which affects life expectancy / quality of life (1). 4 One mark for each of two causes identified and one mark for each of two explanations. Allow reference to political instability and social unrest if linked to economic development. Question Answer Marks Guidance 2(c) Analyse how a cut in the interest rate could reduce poverty. Coherent analysis which might include: Cost of borrowing will fall / reward from saving will decline (1) increase borrowing / demand for loans (1) consumer spending will increase (1) firms may invest more (1) output may rise (1) unemployed gain jobs / employment may increase (1) incomes may rise / reduction in absolute poverty (1). The poor who have borrowed in the past (1) will have more money to spend on basic necessities (1) spend on education (1) improve skills (1) get better paid jobs (1) reducing relative poverty (1). Housing may be cheaper (1) making shelter more accessible (1). May enable some of the poor to borrow to start up small businesses (1) and earn a higher income (1). Cheaper for government to borrow (1) enabling it to spend more on education/healthcare (1). 6 Question Answer Marks Guidance 2(d) Discuss whether or not government intervention will correct the market failure caused by a demerit good. In assessing each answer, use the table opposite. Why it might: • tax can be imposed/increased • this will raise price • consumers better informed about negative impact • demand would be expected to contract • a minimum price could be imposed • this again would be expected to reduce demand • restrictions could be imposed on the imports of demerit goods Why it might not: • demand may be price inelastic, some demerit goods are addictive • the government may set a tax too high or too low • the rich may not be dissuaded by the tax • producers may not pass on the tax to consumers • a minimum price set below the equilibrium level would have no effect • a minimum price could result in a surplus which may put downward pressure on price, encourage producers to charge less than the minimum price Example of Level 2 answer: Government’s job is to keep the economy going in a healthy way. Therefore, they try eliminating demerit goods to increase the benefits for society as a whole. If there is market failure caused by a demerit good it will be because too many people are consuming them and causing total benefit for society to fall. 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 Reward but do not expect provision of information. Question Answer Marks Guidance 2(d) Government intervention such as increasing taxes for merit goods will lower consumption and also with the money collected from taxes they can make merit goods instead of demerit goods. For example, if too many people consume cigarettes and tobacco, the government can raise taxes for tobacco and prices will rise. They can use the taxes collected to make additional videos and tell people the bad things that comes from smoking. Therefore, people will consume less of these demerit goods. However, demerit goods especially addictive things like cigarettes will have a lot of people producing them since its easy to make money. An increase in tax may cause unemployment if they cannot sell as much as before so the fixing of one market failure may cause another one to appear. Principal Examiner comment: This is reasonable on one side but limited on the second side. Example of a Level 1 answer: Government intervention can cause a huge change in the market of a demerit good. Increase in taxes for a demerit good will reduce demand. Principal Examiner comment: One method of government intervention identified.
This question in 0455/23 Oct/Nov 2020
Q16 · It is estimated that half of Egyptian men smoke 0455/22 Feb/March 2021
4 It is estimated that half of Egyptian men smoke. This is one of the highest rates in the world. In recent years the Egyptian government has increased the tax on cigarettes. The government and central bank have also tried to reduce inflation and improve Egypt’s international trade performance. The Egyptian government could use subsidies to reduce its deficit on the current account of its balance of payments. (a) Identify two qualities of a good tax. [2] (b) Explain two reasons why governments tax cigarettes. [4] (c) Analyse how a central bank could reduce inflation. [6] (d) Discuss whether or not an increase in government subsidies will reduce a deficit on the current account of the balance of payments. [8]
20 marks
Mark scheme: 4(a) Identify two qualities of a good tax. Two from: • certainty / easy to understand / people know how much to pay • convenience / easy to pay • economy / cheap to collect • efficiency / not harm performance of markets • equity / fair / based on ability to pay • flexibility / easy to change 2 4(b) Explain two reasons why governments tax cigarettes. Logical explanation which might include: To raise revenue (1) demand for cigarettes is price-inelastic / smoking is addictive / to spend on e.g. education (1). To discourage consumption / to discourage production (1) they are a demerit good / cigarettes are more harmful than smokers realise / they cause health problems (1). To reduce external costs / they create external costs (1) impose a cost on third parties / cause pollution / health problems for non-smokers (1). To improve the current account position (1) cigarettes may be imported (1). 4 One mark each for each of two reasons identified and one mark each for each of two explanations. Question Answer Marks Guidance 4(c) Analyse how a central bank could reduce inflation. Coherent analysis which might include: A central bank could use contractionary monetary policy (1). A central bank could increase the rate of interest (1) increase saving (1) reduce borrowing (1) reduce consumer expenditure (1) reduce total (aggregate) demand (1) reduce demand-pull inflation (1). A central bank could reduce the money supply (1) print less money / sell government bonds (1) restrict bank lending (1) fewer loans may reduce investment (1) reduce consumer expenditure (1). Raising the exchange rate (1) may reduce the price of imports (1) lowering cost-push inflation (1). One effect of a lower interest rate might be to lower costs of production (1) reduce cost-push inflation (1). 6 Accept but do not expect reference to increasing reserve / liquidity ratio (1). Maximum of 3 marks for a list-like approach. Question Answer Marks Guidance 4(d) Discuss whether or not an increase in government subsidies will reduce a deficit on the current account of the balance of payments. In assessing each answer, use the table opposite. Why it might: • reduce costs of production • lower prices, making products more internationally competitive • export revenue may rise • import expenditure may fall Why it might not: • firms may not lower prices • firms may be encouraged to be inefficient • demand for exports may not rise if quality is poor • demand for exports and imports may be price- inelastic • other countries may retaliate by imposing trade restrictions / giving subsidies • subsidies to consumers can increase demand for imports and divert exports to the home market • subsidies to producers may increase demand for imports of raw materials and capital goods Example of an L3 answer An increase in government subsidies would reduce a deficit in the current account of the balance of payments as domestic firms could use the subsidy to lower the price of its goods, improve quality and hence make its products more internationally competitive. This would increase exports of the country’s products. It would also reduce imports as citizens would substitute the imported products with the more competitive domestically made goods. 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 Question Answer Marks Guidance 4(d) The increased government subsidies may also allow firms to make more profits and households to save more. The profits and extra savings may be invested abroad. This would increase the primary income on return on investments would come from abroad back to the home country. This would also reduce a current account deficit. On the other hand, government subsidies may not reduce the current account deficit if domestic industries become dependent on them and don’t actually improve their methods of production and lower costs. This would not make their products more internationally competitive and demand for exports would not increase. It may not also improve the deficit in the short run if firms use the subsidies to import raw materials and capital goods from abroad. However, on the long run it would lead to better products and lower pricing, making the products of domestic firms more internationally competitive. Example of an L2 answer Current account deficit means import expenditure is more than export revenue. This happens when export prices are higher than import prices. Providing subsidies to producers can cause them to lower prices and export more. It can also increase firms’ confidence and they may invest more. However, sometimes subsidy may increase imports. A subsidy may make firms more inefficient and produce lower quality products. The subsidy may also be given to firms making products not in demand and so the firms will not have the potential to grow. Example of an L1 answer Government subsidy refers to an incentive provided by the government to producers. Governments can reduce deficit on the current account of the balance of payments by increasing the total supply, it will also result in an increase in GDP and promote economic growth. 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
This question in 0455/22 Feb/March 2021
Q17 · Australia experienced a drought in 2018 which caused its agricultural output to fall 0455/21 May/June 2021
5 Australia experienced a drought in 2018 which caused its agricultural output to fall. Australia’s secondary and tertiary sectors performed better in 2018 than its primary sector. All three sectors were affected by the measures taken by the central bank to avoid deflation. Some firms benefited from these measures and increased their output. (a) Identify two industries, other than agriculture, that operate in the primary sector. [2] (b) Explain two possible disadvantages to an economy of a fall in agricultural output. [4] (c) Analyse how a central bank could avoid deflation. [6] (d) Discuss whether or not a firm should have growth as its main objective. [8]
20 marks
Mark scheme: 5(a) Identify two industries, other than agriculture, that operate in the primary sector. Two from e.g.: Mining, fishing, forestry, oil extraction 2 5(b) Explain two possible disadvantages to an economy of a fall in its agricultural output. Logical explanation which might include: • Shortage of food / famine (1) may have to import more food (1) export less food (1) worsen the current account position (1). • Price of food may rise (1) may increase poverty / might worsen health (1). • Less food production (1) unemployment may increase (1) if lack of labour mobility / structural unemployment (1). • May result in migration from rural to urban areas (1) putting pressure on resources in urban areas (1). • Economic growth / GDP will fall (1) if lower agricultural output is not offset by rise in output of secondary and tertiary sectors (1). 4 One mark each for each of two disadvantages identified and one mark each for each of two explanations. 5(c) Analyse how a central bank could avoid deflation. • Deflation is a fall in the price level (1). • The central bank could lower the rate of interest (1) reduce return from saving (1) encourage borrowing (1) encourage a rise in consumer expenditure (1) encouraging firms to raise their prices (1). • It could increase the money supply (1) increasing bank lending (1) increasing investment (1). • Expansionary monetary policy (1) increases total (aggregate) demand (1) causing prices to rise (1). 6 Question Answer Marks Guidance 5(d) Discuss whether or not a firm should have growth as its main objective. In assessing each answer, use the table opposite. Why it should: • may increase market share • may increase market power • may increase profits / keep shareholders happy • may enable the firm to take greater advantage of economies of scale • may increase pay and job security of managers / directors • may make it more difficult for another firm to take it over as will involve a greater cost Why it might not: • if demand is falling, survival may be a more appropriate main objective • if demand is limited e.g. a niche market, growth may be an unlikely objective • profit maximisation as an objective, if successful, will provide the funds for growth in the longer run • state-owned enterprise may have social welfare as an objective • growth may result in diseconomies of scale • growth may put pressure on workers which could lower productivity / result in higher labour turnover • may make it more attractive for a firm to take it over 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 Question Answer Marks Guidance 5(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
This question in 0455/21 May/June 2021
Q18 · Turkey’s birth rate is falling which is likely to reduce its supply of labour 0455/22 May/June 2021
4 Turkey’s birth rate is falling which is likely to reduce its supply of labour. However, improvements in the quality of labour and the increase in foreign multinational companies (MNCs) operating in Turkey (the host country to the MNCs) may help the economy avoid a recession. One reason why economists are worried that a recession may occur is an expected rise in the interest rate. (a) Define birth rate. [2] (b) Explain two causes of an increase in the quality of labour in a country. [4] (c) Analyse how a rise in the interest rate could cause a recession. [6] (d) Discuss whether or not MNCs improve the economic performance of the host countries in which they operate. [8]
20 marks
Mark scheme: 4(a) Define birth rate. The number of births per thousand of the population (1) in a year (1) live births (1) 2 Not sufficient to have just number of births. 4(b) Explain two causes of an increase in the quality of labour in a country. Logical explanation which might include: Improvements in education (1) qualifications / knowledge (1). Improvements in training (1) increasing skills (1). Improvements in healthcare (1) making workers physically/mentally stronger (1). Increases in pay (1) raising motivation (1). Improvements in nutrition (1) enabling workers to work harder / concentrate more (1). Reduction in working hours / length of working day (1) keeping workers fresher / enabling them to concentrate more (1). Improvements in working conditions (1) raising motivation / enabling workers to work harder / concentrate more (1) Immigration (1) of skilled workers (1). Experience (1) becoming more familiar with tasks (1). Specialisation (1) become more familiar with one task / ‘practice makes perfect’ (1). 4 One mark each for each of two causes identified and one mark each for each of two explanations. Question Answer Marks Guidance 4(c) Analyse how a rise in the interest rate could cause a recession. Coherent analysis which might include: A higher interest rate would increase the cost of borrowing (1) reduce borrowing (1) reduce the spending power of people who have borrowed in the past (1) increase saving (1) consumer expenditure / spending may fall (1) investment may fall / may discourage MNCs (1) unemployment may increase / employment may fall (1) total demand may fall (1) the output of goods and services / GDP may fall (1) if output falls over a period of two quarters / six months there will be a recession (1). A higher interest rate may encourage more people to buy the currency (1) to put money into the country’s financial institutions (1) raising the value of the foreign exchange rate (1) raising the price of exports (1) lowering demand for exports (1) reducing the price of imports (1) increasing demand for imports (1). 6 Question Answer Marks Guidance 4(d) Discuss whether or not MNCs improve the economic performance of the host countries in which they operate. In assessing each answer, use the table opposite. Why they might: • may bring in new technology and methods of production, increasing economic growth • may create new jobs, may reduce unemployment • may add to exports, reducing a current account deficit / increasing a current account surplus • may create more competition / have greater efficiency, lowering inflation • may increase tax revenue, enabling the government to spend more on e.g. education and healthcare Why they might not: • may drive out domestic producers, leaving the country’s output unchanged • may employ workers from their home country • may import capital equipment and raw materials from their home countries • may deplete non-renewable resources, reducing sustainable economic growth • may provide only low-skilled, low-paid jobs to locals • send profits back to home country • may cause external costs e.g. pollution 8 Help avoid a recession = one relevant identification. 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
This question in 0455/22 May/June 2021
Q19 · Uruguay’s inflation rate reached 8.4% in July 2018 0455/21 Oct/Nov 2021
4 Uruguay’s inflation rate reached 8.4% in July 2018. The central bank considered increasing the interest rate to reduce the inflation rate. An increase in interest rates might influence total demand in an economy and lead to an appreciation of its currency. This might influence Uruguay’s exports, especially soybean exports. The total revenue of Uruguay’s soybean firms might change if there is an appreciation of the Uruguayan peso. (a) Define total revenue. [2] (b) Explain two causes of inflation. [4] (c) Analyse how an increase in the interest rate could reduce total demand in an economy. [6] (d) Discuss whether or not an appreciation of a country’s domestic currency will have negative effects on its economy. [8]
20 marks
Mark scheme: 4(a) Define total revenue. Total amount of money earned by firms (1) for selling their products (1). Price times quantity (2), P × Q (2) Total costs plus profit (2). 4(b) Explain two causes of inflation. Logical explanation which might include: Demand-pull inflation (1) increase in total demand (1) e.g. increase in consumption / increase in investment / government spending / net exports (1) e.g. cut in income tax / decrease interest rate / increase employment / increase in the money supply (1). Cost-push inflation (1) increase in costs of production (1) e.g. increase in wages / raw material cost / profit margin / tariffs (1) e.g. wages may rise more than productivity / fall in exchange rate would increase raw material costs (1). 4 One mark each for each of two causes identified and one mark each for each of two explanations. Full marks may be awarded for a detailed explanation of two causes of one type of inflation. 4(c) Analyse how an increase in interest rate could reduce total demand in an economy. Coherent analysis which might include: Increase in interest rate will lead to an increase in the cost of borrowing (1) there will be less borrowing (1) less consumption / spending (1) less investments (1) An increase in interest rate will lead to an increase in the returns from savings (1) there will be more savings (1) less consumption / less spending (1) An increase in interest rate may attract an inflow of money from other countries into the country’s banks (1) leading to an appreciation of the currency (1) leading to increase in price of exports / decrease in price of imports (1) increase exports / decrease imports (1) decrease net exports (1) 6 Question Answer Marks Guidance 4(d) Discuss whether or not an appreciation of a country’s domestic currency will have negative effects on its economy. In assessing each answer, use the table opposite. Why appreciation will have a negative impact: • Price of exports will be higher – decrease export revenue. • Price of imports will be lower – increase import spending. • Decrease demand for domestic products – decrease demand for labour. • Decrease current account surplus / increase current account deficit. • Lower economic growth. Why appreciation will not have a negative impact: • Price of imports cheaper – increase affordability of imports – increase standards of living. • Price of imported raw materials / machinery lower – lower cost of production – lower final price. • PED for exports and imports might be inelastic. • May encourage foreign investment as there may be increased confidence in the country’s future economic prospects 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 sided 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 4(d) Level Description Marks 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 u sing 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
This question in 0455/21 Oct/Nov 2021
Q20 · More government spending creates opportunity costs 0455/23 May/June 2022
5 More government spending creates opportunity costs. This was one of the problems that the president of France faced in 2017. Since he came to power, he has focused on using supply-side policy measures, rather than monetary policy. Trade union membership has reduced in France in recent years. (a) Define monetary policy. [2] (b) Explain, using an example, the influence of opportunity cost on government decision-making. [4] (c) Analyse the reasons why trade union membership has reduced in some countries. [6] (d) Discuss whether or not supply-side policy measures always promote economic growth. [8]
20 marks
Mark scheme: 5(a) Define monetary policy. Supply of money (1) interest rates / foreign exchange rates (1) affecting total demand / inflation (1) 5(b) Explain, using an example, the influence of opportunity cost on government decision-making. Logical explanation which might include: Opportunity cost is the (next) best alternative (1) forgone / given up / sacrificed (1) Governments (always) consider opportunity cost when making a decision on spending money (1) to maximise the welfare of society (1). Governments have to make a choice as they have a limited income/budget (1). For example, if the government spends on building a new hospital (1) the opportunity cost may be a new school (1) as the government thinks that the opportunity cost of building a new a new hospital is lower than building a new school (1). 4 Don't reward examples using personal consumption e.g. tea / coffee Question Answer Marks Guidance 5(c) Analyse the reasons why trade union membership has reduced in some countries. Coherent analysis which might include: Improved working conditions (1) improved wages (1) in a country may have reduced the need for trade unions to negotiate them / have made unions more reluctant to take industrial action (1). High unemployment (1) fear of losing jobs (1). Capital intensive production (1) fewer workers available to join trade unions (1) Government measures against trade unions (1) have reduced the ability of trade unions (1) to influence wages (1) and working conditions (1). Changes in the pattern of employment (1) more self-employed / part-time employed / gig economy / zero hours contract (1) more people working in the private sector (1) where trade union membership has traditionally been low (1). Globalisation (1) and growth of MNCs (1) has increase competition amongst labour (1). Dissatisfaction over trade unions (1) the high fees for joining trade unions (1) not wanting to take strike action (1) different political views (1) disincentivises people from joining (1). Government introduction of health and safety regulations (1) and minimum wages (1) reduced the key reasons for the existence of trade unions (1). Removal of mandatory trade union membership (closed shops) (1) means that membership is reduced because it is now voluntary (1) 6 Question Answer Marks Guidance 5(d) Discuss whether or not supply-side policy measures always promote economic growth In assessing each answer, use the table opposite. Why supply-side policy measures are effective in promoting economic growth: education and training – increase productivity of labour lower direct taxes – increase incentive to work (reduction in income tax) and increase incentive to invest (reduction in corporation tax) subsidies - reduce business costs and encourage investment deregulation – reducing red tape / barriers to entry which could lead to an increase in number of firms and increase competition privatisation – put in profit-maximisation incentive for private firms to invest and innovate and be more productive reducing trade union power – increases incentive to work harder. Why supply-side policy measures are not effective in promoting economic growth: takes a long time for it to have an impact on the economy reduces the revenues for government (e.g. cutting taxes) opportunity cost for government subsidies can lead to over-reliance on them could lower the quality of goods and services (race to the bottom) and welfare of society lack of total 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 5(d) Level Description Marks 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
This question in 0455/23 May/June 2022
Q21 · Jordan has a fixed foreign exchange rate with the US dollar 0455/21 Oct/Nov 2022
3 Jordan has a fixed foreign exchange rate with the US dollar. The monetary policy of Jordan, therefore, follows the monetary policy of the US very closely. Due to low confidence in the global economy in 2019, central banks around the world, including Jordan and the US, cut interest rates to stimulate growth. However, this may have conflicted with the macroeconomic aim of low inflation. (a) Define inflation. [2] (b) Explain the effects of low confidence on both spending and borrowing. [4] (c) Analyse how a cut in interest rates might create conflicts between macroeconomic aims. [6] (d) Discuss whether or not a country will benefit from having a fixed foreign exchange rate system. [8]
20 marks
Mark scheme: 3(a) Define inflation. 2 Increase (1) in price level (1) over time / persistent (1) Rise in price (1) 3(b) Explain the effects of low confidence on both spending and borrowing. 4 Maximum 2 marks for spending and maximum 2 marks for borrowing Logical explanation which might include: Low confidence will reduce spending (1) as consumers will save instead (1) e.g. lack of job security / risk of firms failing / asset prices falling (1). Falling confidence will reduce borrowing (1) risk of borrowing and investing is too high (1). 3(c) Analyse how a cut in interest rates could create conflicts between 6 Maximum 4 marks if only 1 conflict analysed macroeconomic aims. Also accept conflict between economic Coherent analysis which might include: growth and redistribution of income i.e. Cut Cut in interest rates could lead to conflicts between full employment versus in interest rates could lead to conflicts stable prices (1) because cut in interest rates lead to increase borrowing (1) between economic growth and redistribution decreased savings (1) and increased spending (1) this will lead to an of income (1) because a cut in interest rates increase in demand-pull (1) inflation (1). could lead to more spending and investment Cut in interest rates could lead to conflicts between economic growth versus (1) leading to more economic growth (1) balance of payments stability (1) because if people may also buy more and higher incomes for entrepreneurs (1) imports (1) and therefore current account deficit will increase / current but savers could get lower returns from account surplus will decrease (1). savings (1) profits may rise more than Cut in interest rates could lead to conflicts between full employment versus wages (1) leading to an increase in balance of payments stability (1) because a cut in interest rates could lead inequality (1). to more investments (1) more firms starting up (1) increasing demand for workers (1) increased wages (1) which would lead to increase in spending (1) including imports (1) which will increase current account deficit / decrease current account surplus (1). 3(d) Discuss whether or not a country will benefit from having a fixed 8 Level Description Marks foreign exchange rate system. 3 A reasoned 6–8 In assessing each answer, use the table opposite. discussion which accurately examines Why it might be an advantage both sides of the • Certainty - with a fixed exchange rate, firms will always know the economic argument, exchange rate and this makes trade and investment less risky. making use of • Absence of speculation - with a fixed exchange rate, there will be no economic speculation if people believe that the rate will stay fixed with no information and revaluation or devaluation. clear and logical • Constraint on government policy - if the exchange rate is fixed, then the analysis to evaluate government may be unable to pursue extreme or irresponsible macro- economic issues economic policies as these would cause a run on the foreign exchange and situations. One reserves and this would be unsustainable in the medium-term. side of the argument • Keep inflation low. Firms have an incentive to keep cutting costs to may have more remain competitive. Governments who allow their exchange rate to depth than the other, depreciate may cause inflationary pressures to occur. Depreciation can but overall both cause inflation because total demand increases, import prices increase sides of the and firms have less incentive to cut costs. argument are • Maintain competitiveness - a fixed exchange rate can ensure that considered and exports remain price competitive. A rapid appreciation in a floating developed. There is exchange rate system will badly affect manufacturing firms who export; thoughtful evaluation this may also cause a worsening of the current account. of economic concepts, Why it might be a disadvantage terminology, • The economy may be unable to respond to shocks - a fixed exchange information and/or rate means that there may be no mechanism for the government to data appropriate to respond rapidly to balance of payments crises. the question. The • Problems with reserves - fixed exchange rate systems require large discussion may also foreign exchange reserves and there can be international liquidity point out the problems as a result. possible uncertainties of alternative decisions and outcomes. 3(d) • Speculation – if foreign exchange markets believe that there may be a Level Description Marks revaluation or devaluation, then there may be a run of speculation. 2 A reasoned 3–5 Fighting this may cost the government significantly in terms of their discussion which foreign exchange reserves. makes use of • Policy conflicts - the fixed exchange rate may not be compatible with economic other economic targets for growth, inflation and unemployment and this information and may cause conflicts of policies. This is especially true if the exchange clear analysis to rate is fixed at a level that is either too high or too low. 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 1–2 attempt at using economic definitions and terminology. Some reference may be made to economic theory, with occasional understanding. 0 A mark of zero 0 should be awarded for no creditable content.
This question in 0455/21 Oct/Nov 2022
Q22 · While 15% of US exports go to Mexico, 80% of Mexico’s exports go to the US 0455/22 Oct/Nov 2022
5 While 15% of US exports go to Mexico, 80% of Mexico’s exports go to the US. In 2019, the US government imposed some methods of protection to reduce imports from Mexico. This US action caused a fall in Mexico’s foreign exchange rate. Despite a rise in its inflation rate, Mexico’s central bank reduced the rate of interest from 7.75% at the end of 2019 to 6.5% in March 2020. (a) Identify two methods of protection. [2] (b) Explain two reasons why a government may want to reduce imports. [4] (c) Analyse how a fall in a country’s foreign exchange rate could increase its inflation rate. [6] (d) Discuss whether or not a decrease in the rate of interest will increase a country’s GDP. [8]
20 marks
Mark scheme: 5(a) Identify two methods of protection. 2 Tariffs (1) quotas (1) subsidies (1) embargo (1). 5(b) Explain two reasons why a government may want to 4 One mark for each of two reasons identified and one mark reduce imports. for each explanation. So, for improve balance of payments reason, there is a maximum of 2 marks. Logical explanation which might include: To improve the current account of the balance of payments (1) reduce a current account deficit (1) move from a deficit to a surplus / move to a balance / achieve balance of payments stability (1) increase net exports (1). To increase GDP / economic growth (1) switch demand from imports to domestically produced products / increase demand for domestically produced goods / protect domestic firms (1) allow infant industries to grow (1) Prevent dumping (1) the sale of goods from abroad at below cost / predatory prices (1). To increase employment / reduce unemployment (1) to raise living standards (1). To reduce dependence on other countries / make the country more independent (1) as risk of supplies being cut off / price being increased (1). To stop / reduce a fall in the exchange rate (1) less of the currency will be sold to buy imports (1). 5(c) Analyse how a fall in a country’s foreign exchange rate 6 could increase its inflation rate. Coherent analysis which might include: Raise import prices (1) increase price of imported raw materials / capital goods (1) increase costs of production (1) if demand is inelastic (1) cause cost-push inflation / imported inflation (1). Reduce export prices (1) increase demand for exports (1) increase export revenue if demand is elastic (1) switch demand for imports to domestic products (1) increase total demand (1) cause demand-pull inflation (1). 5(d) Discuss whether or not a decrease in the rate of interest 8 Level Description Marks will increase a country’s GDP. 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 • reduce saving logical analysis to evaluate economic • increase borrowing issues and situations. One side of the argument may have more depth than • increase consumer spending the other, but overall both sided of the • raise total demand argument are considered and • encourage firms to produce more developed. There is thoughtful • increase investment evaluation of economic concepts, • raise ability of firms to produce more terminology, information and/or data appropriate to the question. The Why it might not: discussion may also point out the • households and firms may be worried about the future possible uncertainties of alternative and so may not spend more decisions and outcomes. • there may be a culture of saving • households and firms may think the cut is only 2 A reasoned discussion which makes 3–5 use of economic information and clear temporary • the rate may initially have been low analysis to evaluate economic issues and situations. The answer may lack • may spend more on imports, increasing other countries’ some depth and development may be GDP one-sided. There is relevant use of • an economy may initially have been at full employment. 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 0 no creditable content. 5(d) For an answer which shows awareness of how a change in the rate of interest may affect GDP but writes about an increase in the rate of interest = maximum of 2 marks.
This question in 0455/22 Oct/Nov 2022
Q23 · Calculate the value of US imports from China in 2020 0455/22 Feb/March 2023
1 (a) Calculate the value of US imports from China in 2020. [1] (b) Identify two causes of the increase in the quantity of US factors of production. [2] (c) Explain one way that import tariffs could improve the US economy. [2] (d) Explain two reasons why the US inflation rate fell in 2020. [4] (e) Draw a demand and supply diagram to show the effect of an increase in the price of a complement on the market for ice cream. [4] (f) Analyse the relationship between government spending and unemployment. [5] (g) Discuss whether or not a central bank should aim for a low inflation rate. [6] (h) Discuss whether or not economic growth benefits everyone in the US. [6]
30 marks
Mark scheme: Question Answer Marks Guidance 1(a) Calculate the value of US imports from China in 1 Accept the correct figure without the $ sign. 2020. 560 000 000 000. 5.6 10^11 $560bn (1). 1(b) Identify two causes of the increase in the quantity 2 If more than two causes given, consider the first three. of US factors of production. Accept increase in labour for increase in the labour force. Land reclamation (1) increase in the labour force (1). 1(c) Explain one way that import tariffs could improve 2 One mark for a way identified and one mark for an explanation. the US economy. If more than one way identified, consider the first two. Could improve the current account / trade in goods / To gain two marks, one mark must come from improving the trade in goods and services / balance of payments (1) current account, increase output or raise tax revenue. by reducing imports / making domestic goods more competitive with imports / raising the price of imports Could raise more revenue is not sufficient – need more tax (1) revenue or more government revenue / income. Could increase output / cause economic growth (1) by increasing demand for US goods / raise employment (1). Could raise tax revenue (1) allowing the government to spend more on (e.g. education) / improve the (government budget position) (1). 1(d) Explain two reasons why the US inflation rate fell 4 One mark each for each of two reasons identified and one mark in 2020. each for each of two explanations. Logical explanation which might include: If more than two reasons given, consider the first three. Fall in consumer expenditure (1) lower total demand / reduce demand-pull inflation (1). Reduction in bargaining power may also be linked to lower total Reduction in workers’ bargaining power (1) fall in demand. wage rises / wages / fall in rise in costs / fall in costs / reduce cost-push inflation (1). Higher unemployment (1) reduces confidence / lower total demand / fall in consumer spending (1). Fall in (real) GDP (1) lower incomes / purchasing power / lower total demand (1). Current account deficit (1) lower total demand / reduce demand-pull inflation (1). 1(e) Draw a demand and supply diagram to show the 4 effect of an increase in the price of a complement on the market for ice cream. Demand and supply diagram: Axes correctly labelled – price and quantity or p and q (1). Original demand and supply curves correctly labelled (1). Demand 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). 1(f) Analyse the relationship between government 5 Alternatively, some candidates may argue that changes in spending and unemployment. unemployment, could lead to changes in government spending. Credit both responses. Coherent analysis which might include: Overview: Inverse relationship / negative relationship (1) generally, the higher government spending, the lower the unemployment rate (1). Supporting evidence: E.g. 2015 to 2019, government spending increased and unemployment fell / 2015 to 2017 government spending increased and unemployment fell (1) processing / interpreting of data e.g. between 2015 to 2019, government spending rose by $700bn and unemployment fell by 1.6% (points) (1). Analysis of the expected relationship: • higher government spending will increase total demand (encouraging firms to expand and employ more workers) (1) • higher government spending may be on e.g. education, training, infrastructure, subsidies which could increase workers’ chances of gaining jobs (1) • higher employment will provide more tax revenue for the government to spend / lower employment will reduce tax revenue for the government to spend (1). Exception: 2020 (1) both government spending and unemployment rose / government spending and unemployment both at their highest (1). 1(f) Analysis of the exception: • government spending on unemployment benefits may have increased / rise in government spending not enough to stop GDP / consumer expenditure falling / GDP fell / there may be a time delay before higher government spending reduces unemployment (1). 1(g) Discuss whether or not a central bank should aim 6 May approach the answer from the point of view of the for a low inflation rate. disadvantages of high inflation. 2nd side should examine either the possible negative effects of Award up to 4 marks for logical reasons why it should, what the central bank may do to reduce the inflation rate or the which may include: possible loss of any beneficial effects of high inflation. • can increase international price competitiveness (1) improve the current account balance / No marks for possible effects on the exchange rate. increase exports (1) increase employment / reduce unemployment (1) Apply this example to all questions with the • can create certainty (1) which may increase command word DISCUSS confidence (1) which may encourage investment / (1g, 1h, 2d, 3d, 4d and 5d) attract MNCs (1) which may increase output / result in economic growth (1) Each point may be credited only once, on either side of an • can prevent a random redistribution of income (1) argument, but separate development as to how / why the outcome e.g. protect savers (1) may differ is rewarded. • may protect purchasing power (1) by promoting price stability (1) Generic example Mark • maintain / increase living standards (1) if wages rise by more than the price level (1) Tax revenue may decrease… 1 • can avoid fiscal drag (1) prevent people being put in higher tax brackets (1) ...because of reason e.g. incomes may be lower. 1 • can reduce menu / shoe leather costs (1) reduce firms’ costs of production (1). Tax revenue may increase because incomes may be 0 higher i.e. reverse of a previous argument. Award up to 4 marks for logical reasons why it should not, which may include: Tax revenue may increase because of a different 1 • increases in the rate of interest (1) contractionary reason i.e. not the reverse of a previous argument e.g. government spending on subsidies may monetary policy (1) can reduce consumer stimulate the economy more than spending on expenditure / can reduce investment (1) can education. reduce total demand (1) 1(g) • lower total demand can increase unemployment (1) cyclical unemployment (1) reduce economic growth (1) • low inflation can turn into deflation (1) leading to a recession (1) • makes it harder to pay off debt (1) increasing the risk of firms going out of business / households getting into difficulties (1) • central bank may aim for economic growth / low unemployment (1) higher demand-pull inflation may provide more encouragement to firms to expand (1). 1(h) Discuss whether or not economic growth benefits 6 everyone in the US. Award up to 4 marks for logical reasons why it might, which may include: • economic growth increases output / GDP (1) increases income per head / higher incomes / higher wages (1) enables more purchasing power / people to enjoy more goods and services (1) • economic growth can increase employment (1) raise living standards (1) may reduce poverty (1) • economic growth can increase tax revenue (1) enabling the government to spend more on e.g. education and healthcare (1) • economic growth may introduce better working conditions (1). Award up to 4 marks for logical reasons why it might not, which may include: • there may be an increase in unemployment due to lack of skills / some industries declining / greater use of capital / capital-intensive production (1) structural unemployment may occur (1) • income is unevenly distributed (1) those on low incomes e.g. the sick may not benefit (1) • higher output may result in external costs (1) e.g. pollution (1) people living near factories may suffer (1) • higher output may be the result of more resources being devoted to capital goods (1) may take time for consumers to benefit from more consumer goods (1) 1(h) • higher output may reduce natural resources (1) reducing future generations’ ability to benefit from them / reduce sustainability (1) • higher output may be the result of workers working longer hours (1) in poor working conditions (1) • may cause inflation (1) adversely affecting the poor / savers (1).
This question in 0455/22 Feb/March 2023
Q24 · One reason why the price of houses in cities such as Hong Kong, London, and New York is… 0455/21 Oct/Nov 2023
5 One reason why the price of houses in cities such as Hong Kong, London, and New York is very high, is the low price elasticity of supply of houses. Trade unions in some of these cities are calling for more affordable housing for workers. Governments are also trying to implement various microeconomic policy measures to reduce the price of houses. In addition, the stability of the housing market can impact upon the effectiveness of monetary policy. (a) Identify two monetary policy measures. [2] (b) Explain two microeconomic policy measures that can be taken by a government to reduce the price of a product. [4] (c) Analyse the key determinants of price elasticity of supply of a product. [6] (d) Discuss whether or not trade unions benefit workers. [8]
20 marks
Mark scheme: 5(a) Identify two monetary policy measures. 2 Accept, but do not expect, quantitative easing as an alternative to money supply. If more than two measures Changes in: interest rates (1) money supply (1) foreign are given, consider the first three. exchange rates (1). 5(b) Explain two microeconomic policy measures that can be 4 Examples could be related to any market – does not taken by a government to reduce the price of a product. have to be housing market. Logical explanation which might include: If more than two policy measures are given, consider the first three. • maximum prices (1) e.g. maximum rents / rent controls (1) • subsidies (1) reduce cost of production (1) e.g. housing subsidies (1) • nationalisation (1) government sets lower prices (1) • direct provision of goods (1) increase supply of goods (1) e.g. government providing public housing (1) • regulation (1) e.g. prohibiting foreign house buying (1) reduce demand (1) • deregulation (1) allowing more firms in the market / more competition (1) • lower (sales) taxes (1) if sellers reduce prices as a result (1). 5(c) Analyse the key determinants of price elasticity of supply of 6 Also accept an approach based on why PES may be a product. inelastic as shown in third bullet point. Coherent analysis which might include: • availability of stocks (1) finished goods which are unsold (1) with a high level of stocks, supply will be elastic (1) • level of spare capacity (1) factors of production available but unused (1) e.g. workers not working full time (1) supply will be more elastic if levels of spare capacity are high (1) • time period under consideration (1) short run / long run (1) short run has inelastic supply (1) with at least one fixed factor of production (1) which makes it more difficult to produce (1) long run has elastic supply (1) when all factors of production are variable (1) making it easier to produce more (1) • difficulty of production process / length of production time (1) produce that is easy to produce will be more elastic (1) e.g. bread is easier to produce compared to a smartphone (1). 5(d) Discuss whether or not trade unions benefit workers. 8 Level Description Marks In assessing each answer, use the table opposite. 3 A reasoned discussion which 6–8 accurately examines both sides of the Why they might: economic argument, making use of economic information and clear and • collective bargaining can result in higher wages logical analysis to evaluate economic • better working hours and working conditions can be issues and situations. One side of the negotiated argument may have more depth than • trade unions may protect employment giving more job the other, but overall both sided of the security argument are considered and • trade unions may influence governments to give favourable developed. There is thoughtful policies for workers, e.g. maternity pay evaluation of economic concepts, • trade unions may provide services for workers e.g. training. terminology, information and / or data appropriate to the question. The Why they might not: discussion may also point out the possible uncertainties of alternative • higher wages negotiated by trade unions may increase decisions and outcomes. costs of production, firms may reduce number of workers to cut costs 2 A reasoned discussion which makes 3–5 • may promote industrial actions / strikes, reducing use of economic information and clear productivity, reducing wages of workers analysis to evaluate economic issues • may reduce competitiveness of the economy, reducing and situations. The answer may lack investment and therefore reducing the demand for workers. some depth and development may be • workers may not agree with the objectives of a trade union one-sided. There is relevant use of • workers may feel that the fees to join a trade union are too economic concepts, terminology, high compared to the benefits they could receive from information and data appropriate to the membership. question. 5(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.
This question in 0455/21 Oct/Nov 2023
Q25 · Calculate the percentage of the Jordanian labour force employed in the secondary sector 0455/22 Oct/Nov 2024
1 (a) Calculate the percentage of the Jordanian labour force employed in the secondary sector. [1] (b) Identify two components of the current account of Jordan’s balance of payments. [2] (c) Explain the main type of unemployment experienced by Jordan in 2020. [2] (d) Explain two advantages the Jordanian economy may gain from the mergers between its tourism firms. [4] (e) Analyse the relationship between birth rate and average age. [4] (f) Analyse, using a demand and supply diagram, how an increase in population size will affect the market for clothing. [5] (g) Discuss whether or not the Jordanian government should spend more on renewable energy. [6] (h) Discuss whether or not the Jordanian central bank should have raised the rate of interest in 2021. [6]
30 marks
Mark scheme: Question Answer Marks Guidance 1(a) Calculate the percentage of the Jordanian labour force 1 Accept 19. employed in the secondary sector. 19% (1). 1(b) Identify two components of the current account of 2 If more than two suggested components are given, consider Jordan’s balance of payments. the first three. Trade in services (1) primary income (1). Accept invisibles for trade in services. 1(c) Explain the main type of unemployment experienced by 2 Faill in demand is not sufficient here for fall in total demand Jordan in 2020. as total demand is given in the source material – must be macro. Cyclical unemployment (1) lower total demand / fall in employment in most industries / number of workers greater Accept ‘demand deficient unemployment for cyclical than the number of jobs available (1). unemployment. 1(d) Explain two advantages the Jordanian economy may 4 One mark each for each of two advantages identified and gain from the mergers between its tourism firms. one mark for each of two explanations. Logical explanation which might include: Lower prices may be linked to either ‘raise output’ etc. or Lower prices (1) may raise output/GDP/employment/living ‘raise exports’ etc. standards / may be the result of taking advantage of Similarly higher quality may be linked to ‘raise exports etc.’ economies of scale (1). or ‘raise output etc.’. Higher quality (1) may raise exports / reduce current account deficit / increase international competitiveness / increase tourism revenue / more foreign currency / may be the result of sharing ideas (1). 1(e) Analyse the relationship between birth rate and average 4 Responses do not have to be in the format suggested but age. they should address the expected/normal relationship, offer supporting evidence of that, highlight any exceptions to that, Coherent analysis which might include: and analyse the overall data. Expected relationship (up to 2 marks): Accept analysis based on how differences in the average of Countries with a low birth rate are likely to have a high population may affect the birth rate. average age (1) an inverse relationship / negative relationship / move in opposite directions (1). For supporting evidence and the second ‘exception’ mark, comparisons must be made. No marks for just stating the Supporting evidence (up to 2 marks): birth rate and average age figures. Four countries with the lowest birth rates had the highest average age (1) Monaco had the lowest birth rate and the highest average age (1) Niger with the highest birth rate has the lowest average age (1) e.g. Germany has a lower birth rate and a higher average age than Jordan (1). Analysis of expected relationship (up to 2 marks): A low birth rate would mean that children would form a small proportion of the population / a high birth rate may mean children would form a high proportion of the population / it would increase the proportion of people aged over 65 (1). A high birth rate may indicate low living standards / lower income which may be associated with low life expectancy (1). A high average age may mean that there are fewer people of child-bearing age (1). Exception (up to 2 marks): Venezuela or Maldives (1) Maldives had a lower birth rate than Venezuela but the same average age (1). Analysis of exception (up to 1 mark): The average age of a country’s population is also influenced by the death rate and net migration (1). 1(f) Analyse, using a demand and supply diagram, how an 5 increase in population size will affect the market for clothing. 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 demand 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). Written analysis: An increase in population size will increase the number of consumers / increase demand for clothes / price increases (1). 1(g) Discuss whether or not the Jordanian government 6 Apply this example to all questions with the command should spend more on renewable energy. word DISCUSS (1g, 1h, 2d, 3d, 4d and 5d) Award up to 4 marks for logical reasons why it should, which may include: Each point may be credited only once, on either side of an • need for more energy due to an increase in population argument, but separate development as to how/why the (1) non-renewable sources of energy will run out / outcome may differ is rewarded. reduced dependency on fossil fuels (1) may reduce import bills (1) Generic example mark • would reduce environmental damage (1) reduce external costs (1) lower pollution (1) reduce extent of Tax revenue may decrease… 1 climate change / global warming / promote sustainable development (1) improve health (1). ...because of reason e.g. incomes may be 1 • cheaper in the longer run (1) solar and wind power are lower. free goods (1) lower costs of production (1) reduce household bills (1). Tax revenue may increase because incomes 0 may be higher i.e. reverse of a previous Award up to 4 marks for logical reasons why it should not, argument. which may include: • expensive to build (1) opportunity cost (1) example (1) Tax revenue may increase because of a 1 • relies on weather (1) supplies may be disrupted / different reason i.e. not the reverse of a insufficient / unreliable (1) previous argument e.g. government spending • cost of renewable energy projects may increase with on subsidies may stimulate the economy more high interest than spending on education. • rates (1) may be funded by borrowing (1) may increase taxes (1) • may cause visual pollution (1) e.g. wind turbines (1). 1(h) Discuss whether or not the Jordanian central bank 6 Some points e.g. discouraged spending may be considered should have raised the rate of interest in 2021. from either side but see guidance table on 1f. Award up to 4 marks for logical reasons why it should have, which may include: • total demand predicted to increase / may have reduced total demand (1) encouraged saving (1) discouraged spending / borrowing (1) lowered demand-pull (1) inflation (1) reduced imports (1) • may have attracted more funds for the Jordanian government to borrow / use (1) for e.g. renewable energy projects (1). Award up to 4 marks for logical reasons why it should not have, which may include: • cost of government borrowing would have increased / may have difficulty paying off government debt (1) • investment may have been discouraged (1) lowered economic growth (1) reduced growth in employment / caused unemployment (1) • may have increased the exchange rate (1) foreigners depositing money in the country’s banks / attracted hot money flow (1) raised export prices / lowered import prices / decreased exports / increased imports (1) reduced tourism (1) increased the current account deficit (1).
This question in 0455/22 Oct/Nov 2024
Q26 · In 2021, the central bank of Turkey cut the interest rate on four occasions 0455/23 Oct/Nov 2024
5 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% at the start of the year to 36% at the end of the year. Turkish commercial banks attracted more customers which led to a 10% rise in bank deposits. The country’s currency, the Turkish lira, fell to a record low against the US dollar later that year. (a) Define a central bank. [2] (b) Explain two ways a commercial bank could attract more customers. [4] (c) Analyse the possible causes of a fall in a country’s foreign exchange rate. [6] (d) Discuss whether or not a cut in the interest rate will reduce inflation. [8]
20 marks
Mark scheme: 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.
This question in 0455/23 Oct/Nov 2024
Q27 · Estonia’s factors of production are employed in a range of industries including education 0455/22 Feb/March 2025
3 Estonia’s factors of production are employed in a range of industries including education. In 2022, the country experienced a shortage of teachers. The government increased teachers’ wages to attract workers from other industries. Two of Estonia’s other industries are building and clothing. Estonia’s clothing industry has firms of different sizes. Estonia’s firms were affected in 2022 by the government increasing the money supply. (a) Define factor of production. [2] (b) Explain two reasons why building workers may not become teachers. [4] (c) Analyse how a small firm can compete successfully with a large firm in the same industry. [6] (d) Discuss whether or not an increase in the money supply will benefit an economy. [8]
20 marks
Mark scheme: 3(a) Define factor of production. 2 No marks for examples. A resource / input (1) used to produce goods and services / used in the production process (1). 3(b) Explain two reasons why building workers may not become 4 One mark each for each of two reasons teachers. identified and one mark each for each of two explanations. Logical explanation which might include: If more than two reasons given, consider the May lack skills (1) occupationally immobile (1). first three. May not have the necessary qualifications / may not have sufficient education / may lack training / may lack willingness or ability to undertake training (1). May be paid more as building workers (1) a more physically demanding / more dangerous job (1) enjoy a higher standard of living as building workers may be in more demand than teachers (1). May be geographically immobile (1) unable to move to where the teaching jobs are (1). May not like the working conditions experienced by teachers (1) e.g. may want flexible working hours / less stress (1). May be unaware of job vacancies (1) information failure (1). May lack job vacancies (1) demand for teachers may fall (1). May enjoy working outside / gain more job satisfaction from working as a builder (1) benefit of fresh air (1). 3(c) Analyse how a small firm can compete successfully with a large 6 Two relatively easy marks to gain are ‘lower firm in the same industry. prices’ and ‘higher quality’. Coherent analysis which might include: It may provide a personal service / customised service (1) specialist product / unique product (1) catering for a niche part of the market (1). It may build up a relationship with customers / develop consumer loyalty / have a good reputation (1) more aware of their customers’ requirements (1) good location (1) may be easy to manage (1). It may be subsidised by the government / given a government grant (1) may be charged a lower rate of (corporate income) tax (1) more revenue / lower cost (1) this could enable it to charge a low / competitive price (1). It may have a good relationship with workers / good communication with staff (1) increase their motivation (1) May be innovative (1) produce a high quality product (1). It may be more flexible (1) responding quickly to changes in market conditions (1). A large firm may experience diseconomies of scale (1) example of a diseconomy of scale (1) higher average cost / higher cost of production (1) higher prices (1). 3(d) Discuss whether or not an increase in the money supply will benefit 8 Level Description Marks an economy. 3 A reasoned discussion 6–8 In assessing each answer, use the table opposite. which accurately examines both sides of the Why it might: economic argument, • raise consumer expenditure / government spending / investment making use of economic • reduce interest rate information and clear and • increase total demand logical analysis to evaluate • increase economic growth and employment economic issues and • increase bank lending situations. One side of the • provide finance for firms to expand. argument may have more depth than the other, but Why it might not: overall both sides of the • cause demand-pull inflation / fall in internal value of money argument are considered • increase imports and developed. There is • current account deficit may increase / current account surplus may thoughtful evaluation of fall economic concepts, • may cause a fall in the rate of interest terminology, information • increase in bank lending may result in some households and firms and/or data appropriate to getting into debt. the question. The discussion may also point out the possible uncertainties of alternative decisions and outcomes. 3(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.
This question in 0455/22 Feb/March 2025
Q28 · Calculate the total financial sector contribution (in $) to Switzerland’s GDP 0455/21 Oct/Nov 2025
1 (a) Calculate the total financial sector contribution (in $) to Switzerland’s GDP. [1] (b) Identify two microeconomic policy measures. [2] (c) Explain one reason why overdependence on foreign markets is a disadvantage to the Swiss economy. [2] (d) Draw a demand and supply diagram to show how a subsidy to solar energy producers would affect the market for solar energy. [4] (e) Explain two reasons why Switzerland had a current account surplus. [4] (f) Analyse the relationship between the global GDP growth rate and the change in the value of the Swiss franc. [5] (g) Discuss whether or not an increase in interest rates will harm the Swiss economy. [6] (h) Discuss whether or not a bank merger will benefit Swiss consumers and workers. [6]
30 marks
Mark scheme: Question Answer Marks Guidance 1(a) Calculate the total financial sector contribution (in $) to 1 Accept $73 billion or 73 billion. Switzerland’s GDP. $72 720 000 000. 7.27 1010 $72.7 billion 1(b) Identify two microeconomic policy measures. 2 Accept organising mergers. maximum prices (1) If more than two suggested measures are given, consider subsidies (1) the first three. 1(c) Explain one reason why overdependence on foreign 2 One mark for the reason and one mark for an explanation. markets is a disadvantage to the Swiss economy. Makes it more exposed to external shocks (1) as anything that happens in other countries could also affect the Swiss economy, for example reduced exports / increased import prices / potential shortages (1). 1(d) Draw a demand and supply diagram to show how a 4 subsidy to solar energy producers would affect the market for solar energy. 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(e) Explain two reasons why Switzerland had a current 4 One mark each for each of two reasons identified and one account surplus. mark each for each of two explanations. Logical explanation which might include: If more than two reasons are given, consider the first three. • low inflation (1) price of Swiss exports relatively lower, leading to increased exports / price of domestically produced goods relatively lower leading to decreased imports (1) • high-quality products (1) demand for Swiss exports higher, leading to increased exports / demand for domestically produced goods higher, leading to decreased imports (1) • strong currency (1) has kept cost of imported raw materials in Switzerland low, reducing costs of production (1). 1(f) Analyse the relationship between the global GDP 5 Responses do not have to be in the format suggested but growth rate and the change in the value of the Swiss they should address the expected / normal relationship, offer Franc. supporting evidence of that, highlight any exceptions to that, and analyse the overall data. Coherent analysis which might include the following. Expected relationship: generally negative / inverse relationship (1) as the global growth rate falls, the value of the Swiss Franc rises / as the global growth rate rises, the value of the Swiss Franc falls (1). Supporting evidence: fall in global growth rate led to rise in the value of Swiss Franc from 2018–2019 or 2019–2020 (1), rise in global growth rate led to fall in the value of Swiss Franc from 2020–2021 (1). Analysis: Swiss Franc’s status as a “safe haven” currency (1) when investors are unsure about the economy, they usually keep their money in Swiss francs (1). Exception: 2021–2022 (1) where global growth was falling but Swiss Franc was stable / rising only slightly (1). Analysis for exception: Other reasons could affect the value of Swiss Franc (1), for example Switzerland was also affected by the Covid–19 pandemic (1). 1(g) Discuss whether or not an increase in interest rates will 6 Falling profits can only be rewarded once. harm the Swiss economy. Apply this example to all questions with the command Award up to 4 marks for logical reasons why it might, which word DISCUSS (1g, 1h, 2d, 3d, 4d and 5d). may include: Each point may be credited only once, on either side of an • cost of borrowing increases for firms (1) increasing total argument, but separate development as to how / why the costs (1) reducing profits (1) outcome may differ is rewarded. • firms may invest less (1) may have to shut down (1) • unemployment rises (1) decreasing incomes Generic example Mark (1)decreasing total demand (1) decreasing economic growth (1) Tax revenue may decrease… 1 • consumers may borrow less (1) save more (1) less spending (1) demand for goods and services decreases ...because of reason e.g. incomes may be 1 (1) as returns from savings increase (1) decreasing lower. revenues of firms (1) decreasing profits (1) • Government borrowing costs more (1) leaving less Tax revenue may increase because 0 funding available for e.g. education / health (1). incomes may be higher i.e. reverse of a previous argument. Award up to 4 marks for logical reasons why it might not, which may include: Tax revenue may increase because of a 1 different reason i.e. not the reverse of a • hot money inflows strengthen the Swiss Franc (1) previous argument e.g. government reduce cost of e.g. imported raw materials (1) reducing spending on subsidies may stimulate the inflation (1) increasing export competitiveness (1) economy more than spending on education. • reduced demand-pull inflationary pressures (1) as cost of borrowing increases (1) decreasing demand for loans (1) increasing saving / decreasing consumption (1) investment (1) decreasing total demand (1) firms may reduce prices (1) increasing affordability of goods and services for consumers (1). • costs of production may decrease (1) reducing cost- push inflationary pressures (1). 1(h) Discuss whether or not a bank merger will benefit Swiss 6 Award a maximum of 4 marks if candidates only mention consumers and workers. one of consumers or workers. Award up to 4 marks for logical reasons why it might, which Reward, but do not expect reference to inelasticity of may include: demand in monopoly. • to avoid one of them collapsing (1) reducing confidence in the whole banking system (1) greater job security (1) less chance of bank customers losing their savings (1) • economies of scale (1) as output increases (average) costs fall (1) prices may decrease (1) goods and services more affordable for consumers (1) • the merged firm may make higher profits (1) able to pay higher wages to workers who remain employed (1) • workers in merged firm can share skills (1) improving efficiency (1). Award up to 4 marks for logical reasons why it might not, which may include: • monopoly power may increase (1) restricting supply (1) decreasing consumer choice (1) increasing prices (1) decreasing quality (1) • workers may lose their jobs (1) as the bank might shut down some operations / reduce duplication (1) increasing unemployment (1) • the merged firm may be too large / experience diseconomies of scale (1) example (1) reducing efficiency (1).
This question in 0455/21 Oct/Nov 2025
Q29 · There are several policy measures a central bank or government can use to reduce… 0455/22 Oct/Nov 2025
4 There are several policy measures a central bank or government can use to reduce unemployment. One policy measure a government could use to reduce unemployment is to increase its spending on building houses. The Federal Reserve, the central bank of the US, has two main aims. One is to maintain price stability and the other is to achieve full employment. Some central banks also have economic growth as a target, but none have HDI value as a target. (a) Identify two policy measures a central bank could use to maintain price stability. [2] (b) Explain two benefits to an economy of full employment. [4] (c) Analyse how an increase in government spending on building houses could reduce unemployment. [6] (d) Discuss whether or not an increase in a country’s economic growth rate will increase its HDI value. [8]
20 marks
Mark scheme: 4(a) Identify two policy measures a central bank could use to 2 If more than two measures are given, consider the first maintain price stability. three. Two from: the rate of interest (1) the money supply (1) the exchange rate (1) quantitative easing / tightening (1). 4(b) Explain two benefits to an economy of full employment. 4 One mark each for two benefits identified and one mark each for two explanations. Logical explanation which might include the following. • High output / GDP (1) maximum use of labour resource. • High tax revenue (1) government could spend on e.g. education / healthcare (1). • Low spending on state benefits (1) can keep taxes low / money saved can be spent on other things (1). • Low poverty / increase incomes (1) enable people to purchase basic necessities / which could increase living standards (1). 4(c) Analyse how an increase in government spending on 6 Reward, but do not expect reference to multiplier / multiplier building houses could reduce unemployment. effects. Coherent analysis which might include the following. An increase in government spending on building homes may increase demand for building workers (1) may increase demand for building materials (1) demand for building materials workers / other workers related to building industry (1) labour is a derived demand (1) reduce structural unemployment (1) increase incomes (1) increase consumer expenditure (1) increase total demand (1) reduce cyclical unemployment (1) increase GDP / economic growth (1) may increase quality of homes (1) improve health (1) fewer workers may lose their jobs because of illness (1) increase labour productivity which may increase demand for labour (1) increase supply of houses (1) reduce price of houses (1) improve mobility of labour (1). 4(d) Discuss whether or not an increase in a country’s 8 Level Description Marks economic growth rate will increase its HDI value. 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 • increase in GDP may increase GDP per head if analysis to evaluate economic issues increase in GDP is greater than any rise in population and situations. One side of the • higher GDP per head may increase spending on good argument may have more depth than nutrition / good housing and as a result increase life the other, but overall, both sides of the expectancy argument are considered and • higher GDP per head may increase tax revenue, developed. There is thoughtful enabling a government to spend on education and evaluation of economic concepts, healthcare terminology, information and/or data • higher GDP per head may enable families to keep their appropriate to the question. The children in education for longer. discussion may also point out the possible uncertainties of alternative Why it might not: decisions and outcomes. • higher GDP per head may result in more spending on demerit goods, lowering life expectancy 2 A reasoned discussion which makes 3–5 • may lead to inflation hindering access to healthcare and use of economic information and clear education and increase inequality in the distribution of analysis to evaluate economic issues income and situations. The answer may lack • may be the result of higher military expenditure which some depth and development may be will not increase HDI one-sided. There is relevant use of • income may become more unevenly distributed, economic concepts, terminology, meaning life expectancy and years of education of the information and data appropriate to the poor may fall question. • more pollution may be created, lowering life expectancy • working hours and stress may increase, lowering life expectancy. 4(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.
This question in 0455/22 Oct/Nov 2025
Q30 · Some countries engage in dumping by selling their products at less than cost price in… 0455/22 Oct/Nov 2025
5 Some countries engage in dumping by selling their products at less than cost price in Cambodia. The Cambodian Government wants the country to become a high-income economy by 2050. It uses fiscal, monetary and supply-side policies to increase its economic growth rate. Cambodia subsidises some infant industries. The country has one of the world’s largest deficits on the current account of its balance of payments (as a percentage of GDP). Some economists suggest cutting taxes would reduce this deficit. (a) Identify two motives for a firm dumping some of its products in a foreign market. [2] (b) Explain two differences between monetary policy and supply-side policy. [4] (c) Analyse how a government subsidy could help to protect an infant industry against foreign competition. [6] (d) Discuss whether or not cuts in taxes will reduce a deficit on the current account of a country’s balance of payments. [8]
20 marks
Mark scheme: 5(a) Identify two motives for a firm dumping some of its 2 If more than two motives are given, consider the first three. products in a foreign market. • Drive domestic firms out of the market / increase market share / gain monopoly power in (overseas) market (1). • Clear away surplus stock (1) keep price high on the domestic market (1) increase exports / sales / revenue (1). 5(b) Explain two differences between monetary policy and 4 If more than two differences are given, consider the first supply-side policy. three. Logical explanation which might include the following. • Monetary policy is usually implemented by the central bank (1) supply-side policy by the government (1). • Monetary policy may be used to increase or reduce economic activity (1) supply-side policy is only used to increase economic activity (1). • They have different policy measures (1) e.g. monetary policy has the rate of interest whereas supply side policy has privatisation (1). • Monetary policy aims to influence total demand (1) supply-side policy aims to increase total supply (1). • Supply side policies tend to take longer to implement and have an impact (1) than monetary policy which tends to have a more short -term impact (1). 5(c) Analyse how a government subsidy could help to 6 protect an infant industry against foreign competition. Coherent analysis which might include: An infant industry’s costs may initially be high (1) government subsidy is an extra payment to an industry (1) some of the subsidy could be used to buy more capital goods / technological innovation (1) employ skilled workers (1) enable an infant industry to grow in size / increase output (1) obtain economies of scale (1) lower (average) cost / improve productivity (1) lower their prices (1) making their products more (internationally) competitive (1) increase demand for their goods (1) increase exports (1) raise quality (1) increase quality competitiveness (1). 5(d) Discuss whether or not cuts in taxes will reduce a 8 Level Description Marks deficit on the current account of a country’s balance of payments. 3 A reasoned discussion which accurately 6–8 examines both sides of the economic In assessing each answer, use the table opposite. argument, making use of economic information and clear and logical Why it might: analysis to evaluate economic issues • cut in corporation (corporate income) tax may increase and situations. One side of the willingness and ability to invest argument may have more depth than • higher investment may raise quality and reduce costs the other, but overall, both sides of the • increase exports and lower imports argument are considered and • cut in personal income tax may increase workers’ developed. There is thoughtful motivation, raise productivity and cut costs evaluation of economic concepts, • lower corporation (corporate income) tax could be terminology, information and/or data imposed on infant industries appropriate to the question. The • attract MNCs which can increase exports and reduce discussion may also point out the imports possible uncertainties of alternative • cuts in indirect taxes may lead to lower prices which decisions and outcomes. may increase the demand for domestic goods and reduce the demand for imported substitutes 2 A reasoned discussion which makes 3–5 • cuts in tariffs may make it easier for firms to import use of economic information and clear cheaper raw materials from abroad which may enable analysis to evaluate economic issues them to reduce prices increasing export and situations. The answer may lack competitiveness. some depth and development may be one-sided. There is relevant use of Why it might not: economic concepts, terminology, • cut in personal income tax may increase spending information and data appropriate to the which may increase total demand leading to inflation question. reducing international competitiveness • more imports may be purchased • exports may be diverted to the home market • reduce tax revenue and lower government spending • lower government spending on education, healthcare, transport could reduce productivity • lower taxes on imports (tariffs) may increase imports. 5(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.
This question in 0455/22 Oct/Nov 2025
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