Economics paper 2 past papers

Which of the following pairs of policy changes is the most appropriate response to the box problem of high inflation? [1 mark] Interest rates Tax rates A Increase Increase B Decrease Decrease C Increase Decrease D Decrease Increase

A Increase Increase

Production of output causes pollution and leads to market failure. Which of the following is the most appropriate policy to deal with this type of market failure? [1 mark] A Introduction of laws restricting production B Lower taxes on output C Removal of regulations that limit production of output D Subsidies for producers of output

A Introduction of laws restricting production

Which of the following is an example of a supply-side policy? [1 mark] A Reduced taxes on company profits B Increased government spending on unemployment benefits C Reduced government spending on education D Increased taxes on expenditure

A Reduced taxes on company profits

Which of the following policies is most likely to reduce cyclical unemployment? box [1 mark] A Increase in direct taxes B Increase in interest rates C Increase in money supply D Increase in taxes on business profits

C Increase in money supply

Which pair of policies is most likely to lead to a reduction in income inequality? A Less progressive income taxes and higher unemployment benefits B Less progressive income taxes and lower unemployment benefits C More progressive income taxes and higher unemployment benefits D More progressive income taxes and lower unemployment benefits

C More progressive income taxes and higher unemployment benefits

Fiscal policy would involve changes in which of the following? [1 mark] A Interest rates B Money supply C Taxation D Trade union reform

C Taxation

Explain what is meant by a regressive tax. [2 marks]

• a tax that means someone with a lower income pays a higher proportion of their income in tax • a tax that means someone with a higher income pays a lower proportion of their income in tax.

Explain one function of the Bank of England. [2 marks]

• achieving financial stability • achieving economic stability • lender of last resort • controlling money supply • setting interest rates/monetary policy.

Explain what is meant by monetary policy. [2 marks]

• changes in interest rates to affect economic performance • changes in the money supply to affect economic objectives • changes in the price and quantity of money in the economy.

State two agents in the UK financial sector. [2 marks]

• commercial banks • building societies • investment banks • central bank.

Analyse the impact of the change in the inflation rate as shown in Figure 1 on the economy. [6 marks]

• decrease in real wages if wages are fixed/increases do not match inflation • menu costs - this will force higher costs of business especially if inflation continues to rise as shown on Figure 1 • search/shoe-leather costs • uncompetitive exports • uncertainty - Figure 1 shows that inflation is not stable and this makes it harder for businesses and creates uncertainty • likely rise in interest rates - most countries have a target of around 2% for inflation and on Figure 1 it rises above this which may prompt higher interest rates.

analyse the possible reasons for the UK's large current account deficit. [6 marks]

• high exchange rate making exports less price competitive • rapid growth in UK GDP leading to higher volumes of imports • protectionist measures taken by UK trading partners • low growth in countries UK trades with - which means fewer export sales • uncompetitive export industries • higher inflation in UK relative to trading partners • lower productivity in UK relative to trading partners.

explain two benefits of falling unemployment for the UK population. [6 marks]

• higher standard of living • less physical and mental health issues • potentially less crime (in theory) • lower taxes.

State two examples of supply-side policies. [2 marks]

• investment in education and training • lower direct taxes • lower taxes on business profits • trade union reform • privatisation/de-regulation.

Explain one benefit of globalisation for UK producers. [2 marks]

• lower priced inputs • access to wider markets • economies of scale • access to larger pool of labour • ability to outsource.

discuss whether the UK economy performed well in 2017. Justify your answer. [15 marks]

• lower unemployment levels compared with both previous years and many other countries • likely higher living standards due to low unemployment • economic growth is steady but lower than historic standards - this will have knock on effects on unemployment and tax revenue • current account deficit meaning likely low exports relative to imports • budget deficit is still large measured as a percentage of GDP - which means that government spending is likely to but lowered and taxes cannot be cut • less money available for government to spend on improvements to public services. • inflation is high by standard of recent years but still within target band • low levels of investment in technology. Possible issues for evaluation include: • need more information to make a clear judgement - wage increases, job security, etc. • depends on which objective is viewed as more important • picture is unclear - performing well on some measures, but not as well on other measures. • overall judgement will depend on from whose perspective is being considered • may be preforming relatively well compared with some countries but not overall • current performance is not necessarily a guide to future performance • uncertainty over Brexit will make it harder to judge.

Explain one effect of increases in interest rates on UK households. [2 marks]

• might borrow less to finance consumption due to higher interest costs • greater incentive to save • greater income from savings • more spent servicing existing debt.

Define the term budget deficit. [2 marks]

• where government spending is greater than revenue from taxation • taxation is less than government expenditure.

Which of the following correctly indicates the overall effects that an increase in income tax is likely to have on unemployment and inflation? Effect on unemployment Effect on inflation A Increase Increase B Increase Reduction C Reduction Increase D Reduction Reduction

B Increase Reduction

Which of the following pairs of policy changes is the most appropriate response to reduce a large budget deficit? [1 mark]

B Increased taxation and lower government spending

Which of the following identifies the most likely effects of a significant increase in economic growth? [1 mark] Effect on unemployment Effect on budget deficit A Decrease Increased deficit B Increase Reduced deficit C Increase Increased deficit D Decrease Reduced deficit

D Decrease Reduced deficit

Which of the following is the least likely reason for increased globalisation? [1 mark] A Faster methods of communication B More efficient means of transport C Growth of multinational corporations (MNCs) D Increase in use of tariffs and quotas

D Increase in use of tariffs and quotas

Which of the following is most likely to increase the quantity of UK's exports? [1 mark] A Higher UK national income B Increased Pound sterling (£) exchange rate C Increased trade barriers between UK and other countries D Rapid economic growth in trading partners of UK

D Rapid economic growth in trading partners of UK

Which of the following best describes the type of unemployment caused by workers being unwilling to move around the country for the jobs that are available? [1 mark] A Cyclical B Frictional C Seasonal D Structural

D Structural

Using Figure 5, assess whether the decision to install the machine will be beneficial for the business and the workers. [9 marks]

For- business • The machine would enable further specialisation to take place which would lead to increased productivity. This would enable the business to become more competitive. • The machine will allow for further job role designations which will address the issue of waiting times and poor customer service. This will result in fewer customer complaints which could lead to a higher demand for burgers which will increase profits • The machine will allow the business to take advantage of technological economies of scale which will reduce their average costs and therefore result in lower prices for their products. This will mean they may be able to increase revenues through selling more whilst at the same time reducing their costs and increasing profits. • The machine will allow the business to grow or expand which could lead to opening more stores and hence greater profit potential. For-workers • The machine will result in fewer complaints which will create a nicer working environment and possibly increase the motivation and quality of service that workers can provide. • The machine could result in the business surviving in the long- term due to increased competitiveness and productivity, saving workers' jobs. • The machine could lead to the growth of the business in the long-term which could result in jobs being created and opportunities for further training and promotion. Against-business • The machine would be an expensive investment and may not lead to a high enough change in demand to cover the costs, which could lead to the failure of the business. • The machine may not improve productivity and competitiveness sufficiently to stave off competition from the large chains. • The machine may not improve productivity and competitiveness sufficiently to stave off competition from the large chains. • The machine could lead to the workers' demotivation which may lead to decreased productivity of workers which could affect waiting times and quality of customer service, impacting on profitability Against-workers • The machine could lead to job losses in the short-term due to the machine taking over some existing work. • The machine could result in deskilling due to workers only being required to take on one stage of the process. • The machine could lead to quality of work deteriorating as a consequence of workers become bored and demotivated. • The machine could lead to a decrease in wages as the jobs required would be less skilled.

assess whether free trade is good for all in the UK. [9 marks]

Free trade is good for the population of the UK: • allows greater choice for UK consumers - goods that cannot be easily made in the UK (e.g. seasonal agricultural products) and a greater variety • allows consumers to access goods which might be lower priced - through global competition, especially if purchased from economies with lower costs of production • allows consumers to access products of greater quality • allows businesses to purchase cheaper inputs which means lower costs and lower prices for consumers • free trade and specialisation may mean higher output and higher incomes. Free trade is not good for the population of the UK: • jobs may be lost in local economy as local businesses lose out to cheaper foreign competition • possible reverse multiplier effects on local economy if jobs are lost • lower growth if imports rise and less tax collected by government.

Assess whether a government should always aim for low unemployment (9)

Governments should always aim for lower unemployment: • Unemployment imposes costs on the individual - in terms of lower living standards, more likely to face poverty, ill-health, deskilling and spiral of joblessness. • Unemployment imposes costs on the economy - in terms of higher welfare expenditure, lost potential output, lower tax revenue and deskilling of working population (where unemployment may become locked in as workers are more likely to become long-term unemployed) • Maintaining full employment is one of the principal economic objectives of the government and is one way in which the government's success is judged. • Tax revenue will be boosted with positive effects elsewhere - lower tax rates, ability to fund higher government expenditure, reduce budget deficit • Inequality can be reduced as unemployment increases inequality and poverty within an economy Should not always aim for lower unemployment: • Difficult to reduce unemployment unless the correct cause(s) can be identified • May conflict with objective of achieving price stability (or low inflation) • Difficult to reduce unemployment once already low (as it is in 2017 onwards). • May be other priorities considered more important - balancing budget, reducing deficit on current account, reducing inequality (though this is linked to unemployment)

Assess whether the impact of UK economic growth is always positive for individuals in the UK.(9)

Positive • GDP growth enables average incomes to increase and so average living standards will increase. • Individuals will be able to afford more consumer goods, which may also be more luxurious/sophisticated. • The HDI has risen since 1990 showing an increase in life expectancy and improvements in education standards. • Individuals with money to invest have more choice and opportunities to increase their wealth. • Economic growth will enable the use of modern technologies that could reduce pollution and carbon emissions, improving the health and well-being of individuals. Negative • While average incomes and living standards increase, growth may worsen inequality, with the main beneficiaries being those that are already relatively rich. • Growth may lead to depletion of resources such as non- renewables (oil, gas, coal). • Increased production can lead to increased pollution causing health problems for individuals. • The towns and cities that grow could become congested and make it harder for individuals to get around. • Towns and cities that attract more residents from other parts of the UK and abroad will experience an increase in property prices so that some individuals have to move out of the popular areas. • Regional disparity can occur as shown by the differences in life expectancy throughout the UK resulting in growing inequality, the difference between South East and Scotland being 3.3 years.

Explain why a rise in GDP will lead to a rise in the standard of living.(2)

• A rise in GDP would lead to a rise in consumption which will enable consumers to satisfy some of their wants and therefore increase their standard of living. • A rise in GDP would lead to a reduction in unemployment creating jobs which will provide consumers with increased income and purchasing power and therefore increase their standard of living.

Give a definition of demand-pull inflation.(2)

• An increase in the general price level caused by aggregate demand growing faster than aggregate supply. • Where total spending in the economy grows faster than output, causing prices to be pulled up.

State two causes of inflation.

• Any factor that would lead to an increase in demand/spending in the economy • Any factor that would lead to a rise in the cost of production • Excessive growth in money supply (needs to have notion of excessive or fast increases)

Analyse the impact that an increase in interest rates would have on employment in the UK.(6)

• As shown in the first graph there is a strong correlation between interest rates and consumer spending. If interest rates increase, consumers' real disposable income will decrease which will lead to a reduction in spending in the economy. Businesses will generate fewer sales and less revenue which will result in their having to take on fewer staff or lay off existing staff. This will lead to a decrease in employment. • As shown in the second graph there is a strong correlation between interest rates and business investment. If interest rates increased business investment could decline as borrowing becomes more expensive. This will result in higher costs for businesses which will impact on their profits and growth potential. This will lead to fewer people being employed. • International trade would be affected as higher interest rates will lead to an increase in the value of the pound. A stronger pound makes UK exports less competitive - reducing exports and increasing imports. This has the effect of reducing aggregate demand in the economy, leading to a fall in employment. • Higher interest rates would lead to a contraction in spending and investment. This would directly impact employment as less spending/investment will lead to a fall in GDP which in turn will result in less employment.

Explain one reason why interest rates on mortgages are normally lower than interest rates on credit cards. [2 marks]

• Banks can repossess property if mortgage payments are not met, thus mortgage is less risky for banks. • Credit cards are unsecured which means they carry a higher rate to protect banks against the bigger risk they involve.

The government can use supply-side policies or direct government intervention to address regional inequalities in the UK. Which of these do you think would be most effective? (15)

• Business investment - Should the government try to stimulate business investment by cutting business taxes for firms located in those areas, or would it be better to offer direct subsidies to encourage existing businesses to stay or to attract new businesses to the area? • Consumer spending - Should the government try to stimulate consumer spending through establishing a higher minimum/living wage in affected areas or would this be counter to increasing business investment, as businesses would now have higher costs. • Business start-ups - Should the government try to increase the number of new businesses starting up in affected areas through actions like encouraging entrepreneurial activity, removing red tape and barriers for business start-ups, and reforming employment laws? Or would offering grants to new businesses as well as subsidising some overheads be a more effective strategy? • The labour market - increased mobility of labour. The government could invest in transport infrastructure or subsidise transport and/or rented accommodation costs for workers who have to travel long distances to work in the area. To try and increase employment they could also increase incentives to firms taking on additional labour and/or offering apprenticeships. • Structural unemployment - supply-side policies are unlikely to be effective when a major industry has gone into decline. The resulting long term, structural employment can be counteracted most effectively by direct government intervention. This could be direct subsidies to affected businesses, or providing benefits to the unemployed, or nationalising the affected industries. • Interest rates - These are currently at a record low, and in the medium to long term are likely to go up. The data demonstrates the link between interest rates and business investment and consumer spending, implying that increases in the interest rate will have a detrimental effect on the level of economic activity. Will regional inequality increase as a consequence of this? • Supply-side policies are a long term strategy, whereas in the case of regional disparities immediate action is required. • Does government intervention simply result in a large public sector debt and prop up inefficient industries?

explain two factors that have contributed to increased globalisation. [6 marks]

• Cheaper or quicker transport e.g. containerisation has reduced the costs of production making international trade much more viable/made it easier to trade in goods that were not practical to send to other countries (e.g.foodstuffs). • Improvements in technology have made it much easier to reach wider audiences, such as through miniaturisation or technology has made it more cost effective to transport goods to other countries or use of ecommerce makes it possible to sell goods easily. • Better communication has made it easier/cheaper/quicker to reach customers and suppliers making it easier to access cheaper inputs into the production process or to allow customers to find alternatives to buying domestically. • More free trade agreements have reduced trade protection which has made it more worthwhile to buy and sell goods with other countries by allowing countries to use their natural advantages in production.

State two economic objectives of the UK government. [2 marks]

• Full employment/low unemployment • High rate of economic growth • Price stability • Stable balance on current account of balance of payments • Reducing inequality • Managing environmental change.

Explain why a government budget deficit is likely to stimulate economic growth. (2)

• Government spending will be greater than government revenue, the overspend can be used to invest in the economy, creating jobs. • The increased government spending can be used to invest in infrastructure and transport leading to an increase in economic activity.

Explain why rapid economic growth may be harmful for individuals in an economy. [2 marks]

• Increased negative externalities (e.g. pollution or congestion) which result from higher economic activity as more output leads to more pollution/more output leads to more cars/vans on road. • Depletion of natural resources as growth leads to using up of resources which may be non-renewable leading to higher prices or shortages. • Higher inflation may result if growth is excessive or prolonged. • Increased inequality as the growth may come from those earning high incomes whilst those on lower incomes or benefits see no/little change in their income levels.

Define globalisation.

• Increasing economic integration or interdependence between national economies. (2)

State two supply-side policies. [2 marks]

• Investment in education/training • Lower direct taxes • Lower taxes on business profits • Trade union reform • Privatisation • Deregulation.

Explain one benefit of the UK developing free-trade agreements with non-EU countries.[2 marks]

• It would increase free trade flows and develop strong one-to-one trading partnerships which could improve the balance of payments. • It would eliminate barriers to trade which will encourage UK investment abroad which could make UK exports more competitive. • It would enable developing countries to grow their economies by having easier access to UK capital and markets, giving UK consumers more choice and lower priced goods.

Explain two ways that low interest rates have affected the level of consumer spending or business investment in the UK economy. [6 marks]

• Low interest rates have made saving less attractive and so consumer spending becomes more attractive and the volume of spending increases • Low interest rates have made borrowing more affordable and so this has increased consumer spending • Low interest rates have made the cost of borrowing cheaper and so spending on business investment has increased • Low interest rates act as a disincentive for businesses to hold their profits in a savings account as the rate of return will be low, this has led businesses to reinvest profits or expand the business

Explain one benefit of international trade for UK consumers. [2 marks]

• Lower priced goods likely to be available - from countries with lower costs (such as goods that cannot be easily produced in the UK). • Greater choice - can buy from more than one country increases choice on offer (may be goods that are not available in the home market). • Higher quality should be available as consumer has more choice from a variety of countries - some countries may be 'better' at making certain products.

Explain one reason why the UK government aims for a low inflation rate. [2 marks]

• Menu costs which costs businesses in terms of updating menus, vending machines, price lists, etc. • Shoe leather costs add to the search costs for individual and businesses looking for price comparisons. • Uncompetitive exports which result if UK prices rise faster than foreign price levels. • Uncertainty • High interest rates needed to lower inflation which affects borrowers - which account for most people in the economy. • There are other problems caused by higher inflation which should be credited. • In addition, problems of deflation can also be used to explain why low inflation is preferred, e.g. deflation can lead to postponement of purchases as people wait for prices to fall further. • Impact on cost of living.

Explain one reason why a government may aim for balance on the current account. [2 marks]

• Might have to borrow money to finance deficit (if in deficit) as deficit means outflow of currency reserves. • Might lead to downward pressure on exchange rate (if in deficit) due to outflow of pounds to buy imports. • May indicate weakness of export performance (if in deficit) which could be harmful for output and/or employment in certain industries. • Might indicate economic growth is too high (if in deficit) and could lead to inflation. • Might indicate economic growth is too low (if in surplus) and could lead to higher unemployment. • Might lead to rising exchange rate (if in surplus) which may lead to unemployment in export industries.

Analyse the possible consequences of increased globalisation for producers in less-developed economies such as India (6)

• More competition for workers from MNCs which means there will be a shortage of labour/skilled labour and output will be restricted or wages rise pushing up costs of production. • Difficulties in competing with larger MNCs (economies of scale) as larger firms can outcompete smaller businesses due to economies of scale caused by, say, the ability to utilise expensive technology, or hire better managers. • Need to offer higher wages. • Job opportunities may exist as the producers may be able to sell to other countries allowing them to expand as they will have a larger market to aim for. • Ability to use technology or learn from MNCs - either formally or informally, local businesses may be able to copy better management techniques or use 'copycat' technology which increases their own efficiency. • Multiplier effects (possibly) via supply chain as MNCS may demand intermediate output from local producers and the spending of those employed by MNCS will generate demand for local businesses.

Explain one reason why the UK government may want to reduce a budget deficit. [2 marks]

• To avoid further borrowing by government as borrowing will mean more interest has to be paid. • To avoid inflationary consequences of deficit as too much government spending/taxes being too low may result in inflation. • To prevent national debt rising as the debt interest will mean future tax rises or spending cuts in later years. • To maintain credit rating which means lower interest rates on national debt. • To prevent future tax rises which will be needed to pay off the deficit in future years.

State two functions of money (2)

• Unit of account/Measure of value • Store of value • Standard of deferred payment • Medium of exchange (or anything relating to buying items)

Discuss whether increasing globalisation is harmful for developed economies, such as the UK. Use your own economic knowledge to justify your answer. [15 marks]

• Outsourcing leading to job losses as firms will seek countries with lower wages to outsource production to enable them to profit from the savings but generating unemployment in the home country. • Lower GDP as countries move to cheaper locations - if countries cannot hold on to their domestic businesses (often due to outsourcing or lower tax rates elsewhere) then there will be a negative effect on GDP and possible multiplier effects on the economy. • Lower tax revenue as firms will look to move operations to countries with lower tax rates thus the tax base of the home country will be reduced due to legal tax avoidance. • Wage pressure downwards due to inflow of labour - especially from low wage economies and this will mean the extra labour supply sees wages falling in the economy • Cheaper goods and services for consumers as consumers can buy from a global market and this increased competition will mean consumers can demand lower prices (or simply buy from low-cost producing countries). • Lower cost for business producers if they utilise cheaper imports or cheaper wages and this will enable them to expand profitably. • Allows countries to specialise in their natural advantages - with lower trade barriers and easier trade due to transport/communication improvement, countries can specialise in their comparative advantages. • Larger markets for businesses - exports contribute an increasing proportion to the UK's GDP. Possible issues for evaluation include: • There are always winners and losers in most changes - consumers often win but workers in 'threatened' industries may lose. • People can win and lose at the same time - e.g. good for consumers but bad for workers. • What's good for the economy is difficult to judge as there are lots of differently affected groups • It may help achieve some but not all the principal economic objectives, eg leads to lower inflation but higher unemployment. • It is difficult to turn back the clock - restricting globalisation would be difficult • Attempt to protect an economy from globalisation may just result in retaliatory measures, thus cancelling out the benefits

Explain one reason why income inequality occurs.

• Regressive taxes mean that those on higher incomes pay less tax and their incomes don't fall as much once taxes are deducted. • Taxes not progressive enough to counteract the differences in earnings which means that the taxes taken off higher income earners are not high enough to counteract rising incomes. • Low levels of welfare benefits for low income earnings and unemployed which means that rises in income by higher earners outpace those on lower incomes. • Education level inadequate/inconsistent which means that those unsuccessful in education cannot access high paying jobs. • Differences in types of job or skills of workers.

Analyse the impact of the change in this exchange rate on UK producers. [6 marks]

• Rising pound may lead to exports becoming uncompetitive and this leads to decline in volume of exports and rising unemployment/downward multiplier effects on export industries. • Rising pound may lead to lower costs of production for firms that import which means that they can produce more for same cost/produce same amount for lower cost which may help them compete against firms that don't import. • UK businesses may struggle to compete with cheaper imports as import prices fall making it hard for UK firms. • Volatility of exchange rate may make business planning difficult as producers are unsure of prices they can purchase imports for or sell exports for which means lower business activity.

Analyse the impact of the change in this exchange rate on UK producers.(6)

• Rising pound may lead to exports becoming uncompetitive and this leads to decline in volume of exports and rising unemployment/downward multiplier effects on export industries. • Rising pound may lead to lower costs of production for firms that import which means that they can produce more for same cost/produce same amount for lower cost which may help them compete against firms that don't import. • UK businesses may struggle to compete with cheaper imports as import prices fall making it hard for UK firms. • Volatility of exchange rate may make business planning difficult as producers are unsure of prices they can purchase imports for or sell exports for which means lower business activity.

Analyse the likely consequences of Henwoods moving their production to Bangladesh. [6 marks]

• Scope for recruiting plenty of labour given that the Bangladesh population is more than double the size of the UK population. • Growth over the recent ten years (2004-2014) is high compared to the UK which may indicate the economy is becoming more developed and may be easier to operate within. • Income per head is low compared to the UK which may make it harder to find skilled workers who have attended education to a higher level (which may be needed for the management of the enterprise). • Cost advantages (hourly wage rate of £0.42) gained by comparative saving in wage costs which would boost the profitability of the business. • A large population and sustained rapid economic growth may indicate a future market for sales. • Depending on where Henwoods sells their goods transport costs from Bangladesh could have an impact on potential profits. • As Henwoods is located in the UK it will gain the benefits of being able to sell in European markets without facing tariffs giving them a greater opportunity to make profits from the lower production costs in Bangladesh.

Explain one benefit to the UK government of a lower unemployment rate.[2 marks]

• Tax revenue will be higher as more people will be in employment (and paying income tax and spending more leading to greater VAT receipts). • Expenditure on welfare benefits is likely to be lower as fewer claiming benefits. • Skills will not be lost due to workers not being economically inactive. • Social problems are likely to be lower as a result of people's average standard of living being higher in work.

Explain the relationship between the Pound/Euro exchange rate and the UK's balance of trade with those countries using the Euro.(3)

• The pound is strengthening against the Euro. This means that exports are now more expensive and imports are cheaper. • The UK is importing more goods from those countries using the Euro than it is exporting to them. • A strong pound will result in a declining balance of trade.

Explain why income tax in the UK is an example of progressive taxation. [2 marks]

• The rate of tax rises for those on higher incomes • The average rate of tax rises as incomes increase.

Explain what is meant by seasonal unemployment. [2 marks]

• Where workers are employed in jobs that only require output at certain times of year : tourist related employment and are not required in employment in 'off-seasons'.

An individual places £2500 into a savings account. Interest is paid on savings at a rate of 1.4% per year. Calculate the interest earned if savings are left in the account for nine months. [2 marks]

• £26.25 (2) • £2500 x 0.014% = £35 (1) x 9/12 = £26.25 (1) • £26 (1)