Discuss whether a decrease in income tax would reduce deflation. Up to 4 marks for why it might: |A reduction in income tax will increase disposable income (1) may raise consumer expenditure (1) may raise investment (1) increase total demand (1) higher demand may encourage firms to raise prices / demand-pull inflation (1). ‘Up to. 4 marks for why it might not: Consumers may not spend more / may save more (1) if concerned about the future (1) if expect prices to be lower in the future (1). |A decrease in income tax may not reduce deflation caused by lower costs of production (1) e.g. advances in technology / investment may continue pushing down the price level (1) |A decrease in income tax may reduce government spending (1) higher consumer spending may be offset by lower government spending (1). May act as incentive to work (1) may increase productivity / efficiency (1) lower costs of production / increase total (aggregate) supply (1). Consumers may spend on imports (1). Discuss whether the supply of workers for unskilled jobs will be high in a country. [Up to 3 marks for why it might: [Levels of education and training may be low (1) in some developing countries there is a relatively high ititeracy rate (1) workers may lack skills/qualifications (1). [Unskilled jobs may provide good non-wage benefits (1) example e.g. short working hours (1). The supply may be high due to immigration of unskilled workers / high population (1) attracted by wages. hat are higher than the countries they come from (1). Most workers may be employed in the primary sector (1) which may offer largely unskilled jobs (1). May be high unemployment (1) 50 some skilled workers may have to apply for unskilled jobs (1). [May be high unemployment benefit (1) discourages incentive to work (1). [Up to 3 marks for why it might not: |Unskilled jobs are likely to be relatively poorty paid (1) wage rate is a key influence on jobs workers select (1). [Unskilled jobs may offer poor working conditions (1) example e.g. hard manual work (1). [Unskilled workers may emigrate to other countries (1) if wagesiworking conditions are better in other lcountries (1). Work may be capital-intensive (1) requiring high skills (1).[Analyse why an increase in unemployment might cause an increase in government spending. It may increase government spending on unemployment benefits (1) the unemployed may suffer worse health (1) this may increase government spending on healthcare (1) if crime rises, the government may spend more on law and order (1). To reduce unemployment, the government may adopt expansionary fiscal policy / policy to stimulate the leconomy / policy to increase economic growth (1) to increase total demand (1) to create more jobs (1). Government may provide subsidies to firms (1) to encourage them to increase output and employment (4). Government may spend more on education (1) to increase skills of workers (1) reduce structural Junemployment (1). [Unemployment may increase poverty (1) leading to more spending on other benefits (1). |Government may employ more workers in the public sector (1) to reduce unemployment / will increase wage bill (1). |Government may spend on infrastructure (1) to raise labour mobility (1). Discuss whether demand for cars is likely to increase in the future. [Up to 5 marks for why it might: Rising incomes (1) people may switch from other forms of transport e.g. bus travel / can afford to buy ears (1). Price may fall (1) cars become more affordable (1). |Advances in technology (1) increasing availability of hybrid / electric cars / raise quality (1) any other relevant cause of a fall m price (1). Population is increasing (1) creating more potential buyers (1). [Greater availability of bank loans / credit (1) cars may be purchased using bank loans (1). |More effective advertisements (1) persuading people to buy more cars (1). [Up to 5 marks for why it might not: [Other forms of transport may become cheaper (1) example of a substitute (1). [Concern for the environment may increase (1) causing people to walk or cycle (1). Prices of complements may rise (1) ¢.g. petrol / car parking charges / road tolls / inner city charges (1). Governments may increase taxes on car travel / impose restrictions on car use (1) to reduce external costs (1). There may be a global recession / higher unemployment (1) reducing people's confidence in buying cars (1).[Discuss whether producing more food will increase living standards. [Up to 5 marks for why it might: [Producing more food may lower the price of food (1) due to economies of scale (1) making it more affordable (1) increasing the availabilty/quality of food people can consume (1) reducing poverty (1) increasing life expectancy (1). [Providing more food may create jobs (1) increase exports / reduce imports (1) increasing output / GDP (1) increasing incomes / GDP per head (1) allowing people to buy more goods and services (1). lUp to 5 marks for why it might not: |May lead to over-consumption of food (1) obesity (1) healthcare problems caused (1). intensive farming methods may create external costs (1) e.g. river pollution arising from fertilisers |spread on the land (1). Agricultural jobs may be low skilled (1) low paid (1). Those producing more food may lack the appropriate resources to produce it (1) and as a result may [produce low quality food (1) high priced food (1). Increased food production may lead to an over-supply of food (1) with the extra output remaining unsold (1) may cause diseconomies of scale (1). There may be an opportunity cost involved (1) relevant example (1) fewer capital goods may be produced (1) which could lower potential economic growth (1) and so living standards in the future (1). |Crops may be destroyed / damaged (1) by climate conditions / disease (1). Explain two reasons why governments aim for low and stable inflation. [4] ‘| mark each for two reasons identified: ¢ to promote investment + to:promote intemational competitiveness ‘* toavoid lenders, workers with low bargaining power and other groups experiencing a fall in purchasing power © toprotect savers ‘+ to prevent people losing confidence in using the currency as money ‘* to prevent inflation causing unemployment. 1 mark each for two reasons Tow and stable inflaton creates certaintymakes it easier to plan if inflation rate is below that of rival countries, it can increase exports/reduce imports if incomes rise by less than inflation, the amount that can be purchased will fall savers will lose if inflation rate is higher than interest rate may result in people resorting to barter/especially if there is hyperinflation inflation can result in a loss in international competitivenessireduce spending on domestic products. Tete.[Discuss whether there could be a conflict between the government aims of low inflation and low unemployment. (61 Up to 4 marks on the possibility of a conflict: Up to 3 marks: a government expansionary policy measure e.g. increase in its expenditure, in order to reduce the rate of unemployment or, for example, there may be a consumer boom (1), higher total demand (1) and this leads to a situation of demand-pull inflation (1). Up to 3 marks: a fallin the rate of unemployment, making labour scarceritrade unions stronger (1), this will push up the wages of labour (1) and this could contribute to cost-push inflation (1). Note: may alternatively examine how a government contractionary policy measure to reduce inflation or other cause of a fall in total demand may affect unemployment. [Up to 4 marks on the possibility that there might not be a conflict: Up to 3 marks: supply side measures (1), examples (1) there may be increases in e.g. investment (1) could allow both to be achieved (1). Up to 2 marks: reducing inflation could increase the competitiveness of exports (1) and this [could lead to an increase in employment to supply those exports (1). Up to 2 marks: reducing inflation could provide greater certainty (1) which may stimulate investment (1). Maximum of 3 marks for a list or list-ike answer. (b) Explain three factors of production that are involved in the operation of an airport. @ Three from the following: J+ land. e.g. where the terminals and runways are constructed }* labour, e.g. the skilled and unskilled labour involved in the various activities [+ capital. e.g. the equipment and machinery used at the airport J+ enterprise, e.g. the role of the entrepreneur in various airport operations. [Allow construction (as opposed to operation) of an airport. A list of three factors of production can gain 1 mark. A good explanation of these three factors, with no application to an airport, can get a Jmaximum of 5 marks, (6) Explain two reasons why someone may be of working-age but not in the labour force. 4) ‘+ Aperson may be a homemaker (1) deciding to stay at home to e.g. look afer children (1). ‘+ Aperson may be a student (1) staying in education to improve qualifications/increase employment prospects/increase earning potential (1). ‘+ Aperson may have taken early retirement (1) as may not need to worklmay be unfit to work (1). ‘+ Aperson may be sick/disabled (1) and so not able to work (1).. '* Some people who have been unemployed for a long time may give up the search for ‘employment and so exit the labour force (1). These people are sometimes called discouraged workers (1). ‘+ Aperson may be working in the informal economy (1) not in official figures (1).Discuss whether consumers would benefit from an increase in imports. 18] Up to 5 marks tor why they might: ‘+ Imports may make available products not produced in the country (1) due to e.g. differences in climatelresources (1) ‘+ Imports may increase choice (1) provide differentiated products (1) provide good quality products (1) ‘+ Imports may be cheaper (1) this may also put pressure on domestic tirms to improve the quality of their products (1). ‘+The price of imported raw materials may be cheaper (1) this could lower costs of, production (1) lowering prices (1). Up to 5 marks for why they might not: ‘+ Imports may drive domestic firms out of business may be created and this may increaee prices in the long run (2) ‘A monopoly may be created which may reduce quality in the long run (2) ‘+ Foreign firms may be engaging in dumping (1). ‘+ Imports may be of harmful products/demerit goods (1) example (1) such products would harm people's health (1). Discuss whether an increase in taxes will reduce inflation. [8] Ut 6 mei for why ea Increases in income tax (1) will reduce disposable income (1) spending may fal (1) lower demand will reduce demand-pull inflation (1). ‘+ Increases in corporation tax (1) reduces profits firms can keep (1) reduces demand for capital goods/investment (1). ‘* Increases in indirect taxes (1) will reduce spending (1) lowering demand-pull inflation OF Up to 5 marks for why it might not: ‘* Consumers and firms may respond by reducing saving (1) rather than spending (1). ‘* Higher indirect taxes and corporation tax (1) increase costs of production / higher prices (1) may cause cost-push inflation (1). ‘* Higher income tax may encourage workers to press for wage rises (1) increasing costs ‘of production (1) causing cost-push inflation (1). Explain two reasons why the supply of a product may be price-inelastic. (4) 1 mark for each reason identified and 1 mark for explanation: ‘+ Itmay take time to produce the product (1) this means that it will take time to adjust Supply in response toa change in pice / example of produc that takes time to produce (1). ‘* Itmay not be possible to store the product (1) this means that it cannot be taken out of storage when price rises / products cannot be put into storage when price falls (1). ‘* Itmay be costly to adjust supply (1) e.g. it might be necessary to build new factories and this may discourage firms from adjusting supply (1). ‘+The supply of a natural resource may become limited (1) e.g. gold maybe close to depletion (1)Explain how government regulation may reduce market failure. 4 ‘* Regulation involves rules and laws (1). ‘+ Firms may be banned (1) from producing products that create external costs (1) example such as water pollution (1). ‘© Firms may be fined (1) if they create external costs (1) example e.g. air pollution (1). ‘+ Consumers may be banned from consuming products that create external costs (1) or where there are high private costs (1) some of which people are unaware of (1) example eg. cigarettes (1) ‘+ Consumption of some products that have external benefits (1) and/or high private benefits (1) some of which people are unaware of (1) may be made compulsory (1) e.g. primary school education (1). [Discuss whether an increase in a country’s labour force will increase income per head. (8) Upto marks for why it ight A larger labour force may enable greater advantage to be taken of division of Tabout/specialisation/ economies of scale (1 this can reduce average costs of production (1) as workers can concentrate on what they are best at (1) can be trained more quickly (1) reduces the amount of capital equipment needed (1) lower costs may increase sales at home and abroad (1) increasing output and raising incomes (1). |+ Alarger labour force may reduce the dependency ratio (1) a higher proportion of workers to non-workers will increase income per head (1). J+ Alarger labour force will enable successful firms to expand (1) this will increase GDP (1). }¢ — Multinational companies may be attracted to set up in the country by a larger labour force (1) this may result in a rise in wages (1). psa smar for sty Mrlght not Population may increase by more than the labour force (1) this will increase the dependency ratio (1). . The labour force may increase but demand for labour may not (1) so the unemployment rate may increase (1) so income divided by population may fall (1 . The quartly ef the ibour foros ray icrecse butte quay of Ww abou force may fal (1) productivity may decline (1) reducing output and incomes per head (1). J+ An increase in the labour force may increase competition in the labour market (1) lowering wages (1).[Discuss whether the social benefits of building flood defences will exceed the social |costs involved. [8] Up to.S marks fr a discussion of why social benefits maybe greater: Social benefits are private benefits plus external benofits (1). J+ Explain private benefits (1) e.g. greater employment, greater revenue for firms, protection of homes / reduction in high risk of flooding (up to 3) J+ Explain external benefits (1) e.g. increase in house prices in the area, greater tourism, reduced cost to emergency services and benefit payments (up to 3) Wp so ees fr iy sta cooks mano great Social costs are private costs and external costs (1).. }+ Explain private costs (1) e.g. cost of land, raw material labour and buildings, may only be a low risk of flooding (up to 3) |+ Explain external costs (1) €.g. pollution, destruction of wildlife habitats, opportunity cost of resources (up to 3). [Discuss whether or not a government should encourage people to save more. lUp to 3 marks for why it should: |More savings can fund investment / enable people to set up a business (1) higher investment can increase economic growth (1) higher economic growth can increase living standards (1). |A government may make use of money in government-run saving schemes (1) e.g. to fund infrastructure projects (1) |More savings can reduce consumer spending (1) which will lower total (aggregate) demand (1) which can reduce inflation (1). |More savings can reduce demand for imports (1) improve the current account position (1). |More savings can help people cope with emergencies / increase wealth / for future use (1) lprepare for retirement (1) in case of unemployment (1) spend on education (1) reduce need {for government expenditure e.g. pensions/education (1) enabling the government to spend on lother named area (1). |Up to 3 marks for why it should not: |More saving may reduce output / cause recession (1) increase unemployment (1) cause Ideflation (1). |More saving will increase deposits at banks (1) this may encourage them to lend to un- lcreditworthy customers (1) causing banks to collapse (1).Discuss whether or not a government should subsidise bus transport. lUp to 5 marks for why it should: |A subsidy will lower costs. (1) it may encourage a rise in bus travel (1) reducing bus fares (1). It may reduce poverty / redistribute income (1) the poor tend to use buses more than the rich (1) better quality travel (1). Bus travel creates fewer external costs than car travel (1) reduce pollution (1) reduce traffic congestion (1) increase employment / reduce unemployment (1) increase labour mobility (1). lUp to 5 marks for why it should not: It will involve an opportunity cost (1) the govemment might instead spend more on e.g. leducation / raise taxes (1). Bus companies may not pass on the subsidy to passengers (1) subsidies may make bus lcompanies complacent (1) not try to keep their costs low (1) may not improve quality (1). Rail transport may be more efficient (1) may provide more social benefits (1) generate lower social costs (1). |Analyse what can cause deflation. [A fallin the price level could be caused by a fallin total (aggregate) demand (1). This may be ldue to a fallin consumer expenditure / rise in saving (1) a fall in borrowing (1) a fall in linvestment (1) due to e.g. a lack of confidence (1) spending may be delayed due to the lexpectation that prices may be lower in the future (1) deflationary demand-side policy measures (1) e.g. a rise in the rate of interest (1) rise in direct taxation (1). |Exports may fall (1) due to e.g. fall in incomes abroad (1) a rise in exchange rate (1). [A rise in total (aggregate) supply (1) due to e.g. advances in technology (1) increased investment (1) reduced costs of production (1) increase in productivity (1) supply-side policy measures (1) resulting from e.g. improvements in education and training (1). [Analyse how a recession may reduce a country’s imports. |A recession is a decrease in GDP (1) over 6 months or more / two consecutive quarters (1). |A recession is likely to reduce incomes (1) increase unemployment (1) reduce confidence levels (1) consumer spending is likely to fall (1). |As output is falling (1) firms are likely to buy less raw materials from abroad (1) buy fewer [capital goods from abroad (1). During recessions governments may impose trade restrictions which will reduce imports (1). |A recession may cause a depreciation of the currency (1) making imports more expensive (1).[Discuss whether or not a developing country will benefit from the removal of trade restrictions. lUp to 5 marks for why it might: [Developing countries tend to have more trade restrictions on their products (1). {The removal of trade restrictions on the country's products can enable a country to specialise lin the products it is best at producing (1) they can be sold at a lower price which may increase |demand in foreign markets (1). |The removal of trade restrictions that the country imposes may mean it can purchase raw materials (1) and capital equipment (1) at a lower price (1) reducing costs of production (1). |Consumers may enjoy a greater variety of products (1) greater availabilty of products (1) lower lprices (1) higher quality (1). |Domestic firms may respond to greater competition by becoming more efficient (1). HThe removal of trade restrictions may increase inward investment / attract MNCs (1).. lUp to 5 marks for why it might not: infant indveti (1) may not be able to eurvive without protectin (1) because they cannot take ladvantage of economies of scale (1), Dectring nde (1) may go oo business move aici (1) caaing usempojnedt (1) Strategic industries (1) may go out of business disrupting the rest of the economy (1 There may be dumping (1) wth foreign fms seling proguct a below cot pie (1 to cive |domestic firms out of business (1) and then raising price (1). [Demerit goods may be imported (1). |May result in imports exceeding exports. (1) causing a current account deficit (1). {Tax revenue may fall (1) revenue from tariffs may account for a relatively high proportion of a |developing country’s tax revenue (1). [Analyse why a country could have lower production costs for a particular good than lanother country. ‘+ Itmay have a more educated/skilled labour force (1) higher productivity/areater efficiency (1) lower wastage (1). + Itmay have more capital goods (1) may use more advanced technology (1) lower capital costs (1). ‘+ Its firms may be producing on a larger scale (1) taking greater advantages of economies of scale (1) example (1). ‘+The government may subsidise the product (1) or tax the product less (1). ‘+ Itmay specialise in the product (1). It may have easier access to raw materials / natural resources (1) and so raw materials/natural resources may be cheaper (1). It may have a large supply of labour (1) with low wage rates (1). It may have low transport costs (1) due to good infrastructure (1). It may have a more favourable climate (1). Itmay nave a lower infiation rate than other countries (1). It may have lower minimum wage (1) lowering wages cost (1). tmay have weaker trade unions (1) reducing bargaining power (1). !tmay have a stronger currency (1) causing lower cost of importing raw materials (1).|Identify two ways a commercial bank differs from a central bank. Features of a central bank include: ‘owned by the government objective is to create price stability only one in a country issues note and coins operates monetary policy/sets the rate of interest (base rate) intervenes in foreign exchange markets to influence the exchange rate lender of last resort to governments ‘owned by the government supervises and regulates the financial system Features of a commercial bank include: ‘owned by shareholders/privately owned objective is to make a profit there are usually many commercial banks in a country ‘exchanges foreign currency accepts deposits from households and firms lends to households and firms provides insurance services to households and firms [Analyse the causes of unemployment. A lack of total demand (1) low output (1) cyclical unemployment (1) Lack of skills/qualifications/training (1) resulting in occupational immobility (1) Alack of geographical mobility (1) caused by e.g. differences in house prices (1) resulting in regional unemployment (1) Decline of domestic industries (1) resulting in structural unemployment (1) ‘Workers being replaced by machines (1) resulting in technological unemployment (1) A time delay between workers changing jobs (1) lack of information about job vacancies (1) frictional unemployment (1) High unemployment benefits discouraging people from seeking employment (1) voluntary unemployment (1) Demand for labour may fall at certain times of ihe year (1) resulting in seasonal ‘unemployment (1) example (1)Discuss the economic arguments for and against a government raising the school- leaving age. Up to 5 marks for why it should: * Itmay increase educational standards (1) increase skills (1) raise labour productivity (1) increase innovation/technology (1) lower costs of production (1) raise output (1) Improve the current account position (1). * More educated workers are likely to be in higher demand from employers (1) more ‘occupationally mobile (1) lower unemployment (1) create jobs for teachers (1) raise ‘wages (1) improve living standards (1) may reduce income inequality (1). + Itmay attract more MNCs to set up in the country (1) a8 they will expect a more skilled labour force (1) which may increase GDP(1). lUp to 5 marks for why it should not: © Itwill increase government spending (1) opportunity cost (1) example (1) may lead to higher taxes (1). * Workers may be sufficiently qualified/there may not be vacancies for more-skilled ‘workers (1) inappropriate use of resources (1) workers may become over-qualified for the jobs they do (1). * In the short run will reduce the size of the labour force (1) lower outpu/productive potential (1). [Discuss whether increasing government spending will reduce poverty tp bo 6 mack for wy mys Increased govemment spending on benefits (1) will enable the poor to purchase basic necessities (1) + Increased goverment spending on education (1) will increase skills (1) increasing ‘employment (1) raising wages (1) ‘* Increased government spending may increase total demand (1) may raise GDP per head (1) * Increased goverment spending on healthcare (1) may keep people healthier (1) increasing their ability to earn income (1) ‘+ Increased government spending on infrastructure (1) will create jobs (1) increase income (1) Upto to 5 marks for why it may not: Increased govemment spending may cause inflation (1) reduce ability of poor to purchase basic necessities (1) ‘* Increased goverment spending on benefits may increase reliance on benefits (1) which in the long term may reduce a person's earning potential (1) ‘+ Increased government spending may be financed by higher taxation (1) not increasing total demand (1) ‘* Increased government spending on education may not improve the quality of ‘education (1) may be in wrong areas (1)