YJC H2 ECONS P1 Q2 answers

Question 2: Brexit and its impact Suggested Answers (a) With reference to Extract 6, explain the consequences of Brexit on UK’s internal economy. [6] E4P1: “businesses defer whatever spending they can as investors hate uncertainty” and “US economy has been sluggish of late” E4P2: “spending on big-ticket items is likely to slump” Brexit  Increase in uncertainty / Fall in business (or investors’) confidence in the UK  Fall in investment expenditure (I) as firms delay / shelf investment projects [2m] Sluggish US economy  American households consume less goods and services, including imports from UK  Demand for imports fall  UK’s export revenue (X) falls [2m] Brexit  Bleak economic outlook  UK households spend less  Consumption expenditure (C) falls [2m] I, X and C fall  AD falls  Unplanned accumulation of stocks / inventories  Firms cut back on production, hiring less factors of production, including labour  Cyclical unemployment rises  Factor incomes fall  Induced consumption falls  Real national income falls by multiplies  Negative economic growth; General price level falls [2m] Expect 2 main consequences on UK’s internal economy – real national income and employment should come together Max 4m on how Brexit impacts the components of AD and/or AS. Max 2m on how AD and/or AS changes impacts the internal macro goals. (b) Explain how the following would be affected when interest rates are cut in UK. (i) Consumption expenditure [2] Cut in interest rates  Cost of borrowing falls [1m]  Households borrow to buy big-ticket items  Consumption expenditure (C) rises [1m] Or Cut in interest rates  returns to savings falls [1m]  household cut down on saving and allocate more disposable income to consumption  C rises. [1m] (ii) Investment expenditure [2]

Cut in interest rates  Cost of borrowing falls  Previously unprofitable projects now become profitable [1m]  Investment expenditure (I) rises [1m] (c) Discuss whether the data is useful to assess changes in living standards in the UK from 2015 to 2017. [8] Data provided suggest that living standards in UK has fallen Material standard of living has fallen Extract 4: “Some jobs will go, and wage growth will fall.” Extract 5: “overall inflation up to 3.1 per cent last month, with wage inflation stuck at just over 2 per cent… “; “so real pay levels have been flat.” Table 2: Nominal GDP per capita; trade in goods and services; average annual hours worked per worker Overall inflation at 3.1% while wage inflation stuck at 2%  rise in general price level faster than increase in wages; Nominal GDP per capita falling  Real purchasing power reduced, negatively affecting households’ ability to consume goods and services  Less goods and services consumed Current account deficit falling / Current account balance improving could be due to falling M  Spending on imports fall Non-material standard of living has fallen Table 2: Average annual hours worked per worker Rise in average annual hours worked implies a fall in leisure hours Data provided suggest that living standards in UK may not have fallen Table 2: Annual GDP growth rate still positive; Gini coefficient: 0.50  0.489; Unemployment rate falling Material standard of living rose Real GDP growth rate still positive implies that real national income is still increasing; Falling unemployment rate implies more resources are employed  Rise in factor income  Rise in purchasing power  More goods and services consumed Gini coefficient falling implies a more equitable distribution of income as economy expands at a slower rate  Inclusive growth achieved Overall conclusion Even though the data provide information on how material and non- material aspects of standard of living UK may have changed from 2015 to 2017, it seems to be sending mixed signals. Thus, data provided is useful to a certain extent. More information is required, for instance, data showing changes in negative externalities, literacy rates, life expectancy would be useful to ascertain whether overall living standards in the UK has risen or fallen.

Mark scheme Levels Descriptors Marks L3 For a well-developed, balanced answer that explained whether data provided is useful to access changes in living standards in UK. 5 - 6 L2 For a developed but 1-sided answer on how the data is OR is not useful to access changes in living standards in UK. For an under-developed (have gaps) but somewhat balanced (2-sided) answer on whether data provided is useful to access changes in living standards in UK. 3 – 4 L1 For a descriptive / generic account (lifting of evidence from case material) of whether data provided can or cannot suggest that living standards may or may not have fallen 1 – 2 E For an overall judgement on the overall usefulness of the data in accessing changes in living standards in UK. 1 – 2 (d) (i) Explain the likely reason for the change observed in the value of yuan and China’s foreign exchange reserves in Figures 2 and 3. [2] The value of yuan was weakening, and the level of foreign exchange reserves was also falling. [1m] China’s central bank, PBOC, could be intervening to support the yuan by selling foreign reserves to buy Chinese yuan to prevent the value of yuan from falling / depreciating further, thus resulting in the fall in the foreign exchange reserves. [2m] Full 2m may be awarded if answers are similar to the 2nd bullet as the relationship between the value of yuan and foreign exchange reserves can be inferred from the answer. (ii) With reference to the data, assess whether PBOC should ‘step in to slow yuan depreciation’. [10] Whether PBOC will ‘step in to slow yuan depreciation’ depends on the benefits and costs of intervention. (Decision-making framework) Thesis: Benefits of stepping in to slow yuan depreciation Evidence E6P4: “Faster declines of the yuan risk reigniting a vicious cycle where expectations for further weakness quicken capital outflows.” Positive impact on China’s internal economy - PBOC’s intervention to slow yuan depreciation will prevent further capital outflow due to increased uncertainty  prevents further fall

in the value of the yuan  prevents Chinese economy from suffering from imported inflation which may raise the cost of living  worsening material standard of living in the country Positive impact on China’s external economy - Value of yuan is stabilised, prevents confidence of yuan from falling further, prevents domestic firms and households from sending earnings overseas  prevent 3rd round of capital outflow and further worsening of China’s capital and financial account and balance of payments, ceteris paribus. Anti-thesis: Costs of stepping in to slow yuan depreciation Evidence E6P1: “mounting economic uncertainty in Europe” E6P4: “Based on historical relations, a one percentage point drop in the EU’s GDP growth could take 0.2 percentage points off China’s GDP growth.” Negative impact on China’s internal economy - Brexit brought about increasing economic uncertainty in Europe, which would most likely impact China’s economy. Stepping in to slow yuan depreciation will make Chinese exports less competitive. Coupled with the rising economic uncertainty in Europe, households and firms in the UK and EU may hold back spending as a result of a fall in confidence  Export demand of China may fall  (X - M) fall  AD falls  Cyclical unemployment rises, and real national income falls by multiples (negative growth) Negative impact on China’s internal economy - Stepping in to slow yuan depreciation may worsen China’s balance of trade as X falls, leading to a worsening current account, ceteris paribus. - To slow yuan depreciation, PBOC has to buy up yuan in the foreign ex