Cambridge International AS & A Level

ECONOMICS 9708/42
Paper 4 Data Response and Essays February/March 2020

2 hours 15 minutes

You must answer on the enclosed answer booklet.

* 3 2 9 1 6 9 4 9 7 7 *

You will need: Answer booklet (enclosed)

INSTRUCTIONS
● Answer three questions in total:
Section A: answer Question 1.
Section B: answer two questions.
● Follow the instructions on the front cover of the answer booklet. If you need additional answer paper,
ask the invigilator for a continuation booklet.
● You may use a calculator.
● You may answer with reference to any economy you have studied where relevant to the question.

INFORMATION
● The total mark for this paper is 70.
● The number of marks for each question or part question is shown in brackets [ ].

This document has 4 pages. Blank pages are indicated.

DC (LEG) 183727/1
© UCLES 2020 [Turn over
 2

Section A

Answer this question.

1 Well-being and economic growth

For many years governments have sought to deal with economic performance with policies and
tools based on the assumption that consumers would act rationally in response to incentives or
sanctions. They have also operated public sector services assuming that the best outcome is
achieved through the power of government to regulate, tax and spend.

The tools the government uses are designed to influence consumer demand, often with the aim of
increasing economic growth and GDP. But economic growth does not guarantee rising prosperity
and well-being, as illustrated by Table 1.1 that compares HDI and GDP of selected countries.

Ideally, all major investment projects in the public sector should require a cost-benefit analysis.
This assesses the wider effects of projects. The project may have different effects on a poorer
group than on a wealthy group. For example, a poorer group may gain considerably more benefit,
or well-being, from a government grant than a richer group.
↑ MS . I✓
Some economies have tried to influence economic growth by using an expansionary monetary
policy. In some countries this has meant that bank interest rates have been kept very low. It was
hoped that this would encourage investment and borrowing and increase spending. Recently
there has been some pressure to raise interest rates. But raising interest rates is not always wise.
MAD ,
insure economic growth and employment

Higher interest rates could be justified in an economy experiencing economic growth, falling
unemployment and an increase in business investment with the result that there are fewer unused
resources in the economy.

Against that, higher interest rates could decrease consumer spending and also result in a decrease
in investment. This may mean no increase in real wages. It could suggest interest rates should
stay low.

Table 1.1 HDI and GDP of selected countries by HDI rank order

HDI Rank GDP Rank

(US$ millions)
Norway 0.89 1 370 449 31
Australia 0.86 3 1 258 978 13
Germany 0.85 5 3 466 000 4
UK 0.83 13 2 629 000 5
Thailand 0.58 70 406 949 26
Botswana 0.43 103 15 018 116
Pakistan 0.38 117 284 185 42
Eswatini 0.36 121 3 770 157

Sources: RSA Issue 1, 2017; RSA Issue 3, 2016; hdr.undp.org; World Bank

© UCLES 2020 9708/42/F/M/20

 3
-
supply side policy
(a) Identify from the article one example, other than expansionary monetary policy, of a
macroeconomic policy tool that a government could use and analyse how it might affect the
economy. it deregulation
* / restrictions
rules ↓ and WSJ t tops
- ↑ output
time growth -
,
[4]
- - evonomiu
ii ) tax
Ab ↑ AD ↑ GDP
A disposable in Wme - - -

(b) Explain two merits of using a cost-benefit analysis before starting a major investment project
of externalities It 11 I
in the public sector. take into of effects of investment project
auu
[4]
-
-

-
distribution diff on
groups
✓
UDP f- NDI
(c) Consider whether there is any evidence in the information that a high GDP means that the
used to Guess well being better
well-being of the population is also higher. NDI higher UDI
Table gives GDP not HDP peu capacitor
r

-
difficult judge
[5] ,

, so
,

to

✓ On basis of rank order , apart from Germany , there is seem no correlation

(d) Use the article to consider the reasons why there are different opinions about the level at
which central bank interest rates should be fixed. [7]

© UCLES 2020 9708/42/F/M/20 [Turn over

⑤ Ia) individual firm whole market individual worker
✓ ate
wage rate wage ↑ workers
wage rate ↑ wages ,

A ^ Sail workers n
in firm Sir

4
✓ can hire as many
workers
pevfetly elastin
pevfetly elastic - can work as many
" Wm
Wm Wm -
i Dr hours at this wage

!
- -
- -
-

! ! Dan firms in Section B

I D= MRP 1
Market I
' '
>
'
O
0 > O g
☒' QV Qty of labour
of Qty of labour
Answer two questions.
Qty labour
I

not directly invented in production and consumption

✓

= spillover lost and benefits that bring a third parties

2 ‘The existence of externalities implies market failure and therefore that the good should necessarily
be provided by the government.’ efficiency alternatives ① Tax
of
not
wstly
sorry ✗ :

amt tax shd

✓

u
news

① negative production externalities

-

correspond to ME " ~
dk What quantities to provide
MPU )
lost / benefit INISU >

✗ PE
Discuss this assertion. A cop output
[25]
n Msu
,

i deadweight , overconsumption
POM - - - - -

-9,1/1 ,
loss consumption ② Regulations
limit
,

,,p ,
Pe - - - - - i - - % = waste resources
-
set rules / laws to

! amt of production
I MSB ✗ AE
Max utility
,
> ☒ +4 ✓
Yuri ye

3 (a) Explain the link between a consumer’s rational behaviour, marginal utility, prices of different
goods and the demand for a good. claw of diminishing marginal utility 7 [12]

(b) To what extent may the demand theory based on indifference curves be considered superior
to that derived from marginal utility? [13]

4 (a) Explain what determines the size of a firm. [12]

-
availability of labour ✓ market sire -
management of business

-
nature of business IVEOS ? ) -
entevprenuev aims

(b) Consider the view that in the absence of government regulation there are no limits on the
ability of a monopolist to charge whatever price it wishes. [13]
✓ Max Tv - restricted by host and demands

5 (a) How does economic analysis explain the level of wage rates in a perfectly competitive labour
many firms homogeneous
market? [12]
-

wage rate
Mor ✓

h labour
Ah :S , Ibid up wages
-

to attract workers ) - firms are wage take ✓

'
Pʰ✓fᵈ4
Knowle da

Wo
p
i
f Min (b) Discuss, with the aid of a diagram, the possible effects on the operation of an imperfectly
competitive labour market of a government fixing a wage rate in this market. Mono psony [13]
wage
wu - - - -
-

f i

1
I

I Mrn
www.itnufnrmtatlonntmwanswnstanf _
single buyer
I →
>
hmitatios : ✓ ( min wage ,
° dominant em Phone ✓ has
,

demand of month hard to buying

-
a. ☒u
, changes in
employment and wage
:
µ, , , , aww ~ increase in
power over their potential employees
wntwl of Money 1mV
Quantity Thurn PTI
'

1 wage setter )
:
✓

6 ‘Monetarists insist that control of the money supply is the key to solving the problem of inflation,
Keynesians argue that inflation can only be controlled by controlling expenditure.’
/
wsn push demand pull vwntvautionaryfisualpotiuyth.TT - ti disposable income - til -
HAD

To what extent do you agree that both these approaches are only partially correct? [25]

7 (a) With the help of a diagram explain the Laffer Curve analysis and consider its link to supply-
side policies. Market red ↑ competitiveness s efficiency ( Privatisation deregulation tinvome tax )
-
[12] -

, ,

'
Intervention -
www.t mkt failure / ↑ trout spending on infrastructure )

(b) ‘Supply-side policies do not work when economies are in recession.’

limitation : time lag ✓ persistent ouvonomiu decline

it high VE
How far do you agree with this statement? low c and I
[13]
Taxvevenne iil
A fax ✓ ate ↑ but tax revenue
iii ) Falling incomes
work
ppl discourage from
.

bevanse

:
:
:
I
0 > Tax rate 1° / o )

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© UCLES 2020 9708/42/F/M/20