RI Y5 H2 Promotion Examination - Examiner's Report 2018

ECONOMICS Higher 2 Syllabus 9757 Examiner’s Report Year 5 Promotion Examination 2018 R a f f l e sI n s t i t u t i o n N u r t u r i n g t h e T h i n k e r , L e a d e r & P i o n e e r TEL: 65 6419 9888 ● FAX: 65 6419 9898 http://www.ri.edu.sg ● One Raffles Institution Lane, SINGAPORE 575954

Y5/9757/Promos/18 2 © RI 2018 [Turn Over ECONOMICS Y5 H2 Promotion Examination 2018 Paper 9757/01 Paper 1 Case Study (a)(i) Define Consumer Price Index. [1] Suggested Answer: The Consumer Price Index (CPI) measures the weighted price of a fixed basket of goods and services commonly purchased by a typical household relative to a base year. Mark Scheme - For accurate definition of CPI – 1m Examiners’ Comments ­ Relatively straight forward q uestion on the definition of CPI but most students did not know the precise definition. ­ Some incorrectly expressed definition in their own words and used: ‘total value placed on’, ‘measure of the basket of g/s’, ‘expenditure’, ‘fixed quantity of g/s’ instead of the price of a fixed basket of goods and services ­ Some incorrectly stated that CPI measure s the change in price of the basket of g/s  that is known as the inflation rate (a)(ii) With reference to Figure 1, explain the relationship between rental prices in the UK and the consumer price index between 2006 and 2014. [2] Suggested Answer:  There is a positive relationship between rental prices in the UK and CPI  From Figure 1, a rise in rental prices correlated to a positive inflation rate  an increase in CPI  As rent forms a component of the basket of goods considered in the CPI  Rental Prices and CPI are positively related Mark Scheme - State relationship (Positive/Direct) with supporting evidence from Figure 1 – 1m - Link rental to basket of goods and service in CPI – 1m Examiners’ Comments - Poorly attempted question: many incorrectly interpreted the data and stated that both CPI and rental prices fell when they increased. Take note that the data shows rate of change – when rate of change is positive, both values are increasing. - Many students did not explicitly state the relationship between the 2 variables and merely described the trend. Students are reminded that there is a need to clearly answer the question: direct/positive relationship

Y5/9757/Promos/18 3 © RI 2018 [Turn Over - Some were confu sed between cause and effect. i. e. an increase in CPI leads to an increase in rental prices. That is incorrect. (b) Explain 1 possible reason for each of the following: (i) why rental prices are rising. [2] Suggested Answer:  “The global financial crisis brought about tightened credit conditions, particularly affecting deposits, forcing people to rent for longer.” (Extract 1)  decrease availability of credit for purchasing houses. As rental service and housing are substitutes  increase in DD for rental  “default option for the increasing number of people who could not afford to buy nor qualify for social housing.” (Extract 1)  as rental service and social housing are substitutes  increase in DD  “renting may be a desirable ch oice for its flexibility” (Extract 1)  changes in taste & pref erences  increase in DD  “Pressure on housing stock… affected more by population” (Extract 3)  Increase in population  increase in DD  “rising popularity of homesharing websites such as Airbnb” which “removes housing units from the overall supply – units that might otherwise be available for rent.” (Extract 1)  competitive SS  fall in SS  The increase in DD for rental OR fall in SS of rental housing will cause prices to increase. Mark Scheme: - Quote from CSQ + link to correct determinant of DD/SS – 1m - Link to change in DD/SS and rise in equilibrium price - 1m - Max 1m if didn’t use case material/did not explain quote fully Examiners’ Comments - Unnecessarily detailed response given the mark allocation e.g. diagram/full-adjustment process not necessary for 2m - Incorrectly used the quote “the number of households in the private rented sector has more than doubled… from 2.3 million to 5.4 million”  this does not represent an increase in demand but an increase in equilibrium quantity, and a result of the increase in DD and not the cause of it. - Applied elasticity concepts unnecessarily to account for an increase in rent  elasticity is not very relevant in this case as they isn’t a need to comment on the magnitude of change in P and/or Q (ii) why “soaring rents” is a cause for concern. [2] Suggested Answer:  From Extract 2, “soaring rents, particularly in London, can swallow salaries." The average private renter in the U.K. capital spent 40 percent of their income on housing between 2013 and 2015, compared with 28 percent in the rest of Britain, according to the Institute for Fiscal Studies.  This increase in rent will reduce the ability to r ent housing especially the lower -income families, and because housing is essential  inequitable outcomes  This increase in rent will lead to lower real income and fall in ability to consume other goods and services  lowered material standard of living Mark Scheme: - Identify correct quote in CSQ + linked to rising proportion of income - 1m - Analyse ‘concern’ in terms of macro/micro economic aims  focus on affordability – 1m

Y5/9757/Promos/18 4 © RI 2018 [Turn Over - 1m if only linked to CS/TE but not affordability Examiners’ Comments - Many correctly identified the quote from the CSQ but did not explain it fully - Many linked the concern to a fall in consumer surplus, which isn’t the most pressing concern of the government - Some failed to link to economic effects and focused too much on social effects such as being homeless (c) Discuss whether rent control is more desirable than supply side measures in addressing the challenges faced in the housing rental market. [10] Students are expected to discuss the 2 measures in response to the challenges faced, and to compare its desirability against each other. Suggested Answer: Introduction:  The challenges faced in the housing rental market include ‘soaring rents’ and limited quantities of rental units  Rent controls refer to “capping of rent rises ”, a maximum price/price ceiling imposed on rental services  Supply side measures refer to ways to increase the supply of rentals through “ converting old offices into flats” Body: Discuss the possible responses and its limitations 1. Rent Controls Thesis – Rent controls are desirable to address the challenges  Maximum Rent  legally established to prevent rent from rising above a certain level  Set below equilibrium rent (P0) to be effective  Overall, result in lowered rent and consumers “would see a big fall in their rent and that would be a really good thing for those struggling to afford their rent”  fall in eqm Price from P0 to Pmax  Improves equity and affordability

Y5/9757/Promos/18 5 © RI 2018 [Turn Over Anti-Thesis: Limitations of Rent Controls  Primary issue  However, max rent creates shortage as Qd > Qs hence undesirable for certain individuals who are unable to obtain units  Secondary issues/limitations: o Creates even larger shortage in the long run: If landlords decide that they cannot make a satisfactory rate of return by selling rented properties in the mar ket because of the maximum price, they might decide to withdraw some properties from the market.  “a reduction in housing supply caused by buy -to-let landlords selling their properties or struggling to get mortgages” o Landlords get a smaller return from upg rading and maintaining their houses - they spend less on their properties  deterioration in the quality of the rented