ACJC_H1_ECONS_P1_Qn2

1 ©ACJC2017PreliminaryExam8819/01 H1 Economics 8819 Paper 1 Question 2: Suggested Mark Scheme (a) (i) With reference to Table 2, which component of GDP contributed the most for UK and for China in 2015? [2]  Consumer expenditure contributed the most to GDP for UK. [1]  Investment expenditure contributed the most to GDP for China. [1] (ii) With reference to Extract 5 and 6, account for your answer in a(i). [4]  Extract 6: Growing economic confidence in the UK economy [1]   Causes a “national spending spree” because consumers have higher expectations of future income [1]  OR higher household income leading to greater purchasing power OR low interest rates leading to lower cost of borrowing to purchase consumer goods  Extract 5: Chinese government decided to encourage more investments to sustain economic growth rates [1]   Increase accessibility to loans  Increase in lending  large increase in investment expenditure [1]  OR low interest rate / ease of credit for firms 2 marks each for identifying and explaining for each country (b) Explain what determines the impact of a devaluation in Yuan on a Chinese exporting firm’s revenue. [4]  Impact is determined by the price elasticity of demand for the goods [1]  Devaluation of Yuan causes Chinese goods to be cheaper in terms of other currencies [1]  If PED>1 such as for goods with many substitutes, a fall in price causes a greater than proportionate increase in quantity demanded, thus total revenue increases. Opposite is true for goods with PED<1 such as necessities [2] 1 mark for identifying the determinant 1 mark to explain change in price of goods 2 marks to explain how changes in price and quantity affect revenue (c) With reference to Extract 5, explain how an interest rate cut could have helped to revive China’s economy and suggest one possible reason why it did not work. [4] Explain interest rate cut  Decrease in i/r  lower cost of borrowing and increase returns to savings [1]  Increase C and I [1]  Increase AD  economic growth [1] Possible reasons why it did not work [1 mark for any one reason well explained]  Poor confidence in the economy  increase in I will not encourage C and I as consumers and firms are more cautious in their spending  Saving culture in China  consumers unwilling to spend even with lower interest rate.  Private firms already have a high level of debt from past investments  may not want to borrow and further increase debt even if interest rates are low.

2 ©ACJC2017PreliminaryExam8819/01 (d) With the help of an AD/AS diagram, explain why attempting to increase consumption in China would “threaten their export-driven model”. [6]  To encourage increase in C, government would have to raise wage shares of national income, so that consumers would have greater ability to consumer goods.  However, rising wages would result in increase in cost of production f