1. Explain two reasons why a government may subsidise food production.

[4]

- To ensure food security: Subsidies help farmers produce enough food to meet domestic
demand, reducing dependence on imports.
- To lower food prices: Subsidizing food production can lead to lower prices for consumers,
making essential goods like food more affordable, especially for low-income households.

2. Identify two reasons why a government may set an NMW (National Minimum Wage). [2]

- To reduce poverty: A minimum wage ensures that workers earn a living wage, helping to lift
people out of poverty.
- To reduce exploitation: It protects workers from being paid very low wages, especially in
industries where employers might take advantage of workers.

3. Discuss whether or not a government should reduce the amount of money it gives to
each state pensioner. [8]

Why it might:
- Reducing pension payments could help the government manage its budget deficit by
reducing public spending.
- If there are more pensioners than workers, the tax base is shrinking, meaning there are
fewer taxpayers to fund the pension system.
- A cut in pension payments could push the elderly to re-enter the workforce, potentially
increasing labor supply.

Why it might not:

- Many pensioners rely on this money for their basic living needs. Reducing the amount
could lower their living standards.
- Pensioners often spend their income on goods and services, so cutting pensions might
reduce consumer spending, harming economic growth.
- It could lead to higher poverty rates among the elderly, increasing the need for other forms
of welfare support, offsetting the intended savings.

Here are the answers in a marking scheme style:

1. Discuss whether or not private sector firms are likely to charge lower prices than public
sector firms. [8]

Why private sector firms might charge lower prices:

- Competition: Private sector firms may face more competition, pushing them to lower prices
to attract customers.
- Efficiency: Private sector firms often aim to minimize costs and improve productivity to
maintain profitability, which can lead to lower prices.
- Innovation: Investment in technology and innovation can reduce costs of production,
allowing private firms to offer lower prices.
- Economies of scale: Larger private firms, such as MNCs, may benefit from economies of
scale, reducing per-unit costs and enabling lower prices.

Why private sector firms might not charge lower prices:

- Profit motive: Private firms aim to maximize profits, which may lead to higher prices.
- Monopolies: If private firms dominate a market, they may have less incentive to lower
prices due to limited competition.
- Subsidies in the public sector: Public sector firms may receive government subsidies,
allowing them to charge lower prices.
- Public interest: Public sector firms may prioritize social welfare over profit, providing goods
and services at lower prices to increase accessibility.

2. Analyse the consequences of market failure. [6]

- Under-provision of public goods: Market failure leads to a lack of provision for public goods
like street lighting or national defense since private firms cannot profit from them.
- Negative externalities: Market failure can result in negative externalities, such as pollution,
where third parties suffer the consequences of economic activity.
- Inefficiency: Resources may not be allocated optimally, leading to inefficiency and a
reduction in overall social welfare.
- Wealth inequality: Market failure can exacerbate income inequality, as essential goods may
become inaccessible to low-income individuals.
- Over-consumption of demerit goods: Goods like tobacco and alcohol may be
over-consumed, leading to social costs like healthcare burdens.

3. Discuss whether or not a tax on a product can reduce external costs. [8]

Why a tax might reduce external costs:

- Internalizes external costs: A tax forces producers and consumers to consider the negative
externalities, leading to reduced consumption.
- Revenue for public goods: The government can use the tax revenue to fund public goods
or environmentally friendly projects.
- Incentives for cleaner alternatives: Taxes may encourage firms to invest in cleaner
technologies to avoid higher costs.
- Price increase reduces demand: Higher prices due to the tax may lead to a reduction in
demand for harmful products.

Why a tax might not reduce external costs:

- Inelastic demand: If the product has inelastic demand, consumers may continue
purchasing it despite the tax, limiting its effectiveness.
- Ineffective tax rate: The tax might not be high enough to cover the full external costs or
change behavior.
- Tax evasion: Firms or consumers may find ways to avoid the tax, undermining its impact.
- Disproportionate impact on low-income consumers: A tax on essential goods might
disproportionately affect poorer consumers, causing inequality.

4. Explain, with examples, the difference between a merit good and a public good. [4]

- Merit goods: Goods that are under-consumed because individuals do not recognize their
full benefits, such as healthcare and education. These goods have positive externalities, and
governments often subsidize them to increase consumption.
- Public goods: Goods that are non-excludable and non-rivalrous, meaning one person’s use
does not reduce availability for others, and people cannot be excluded from using them.
Examples include street lighting and national defense.

5. Discuss whether or not a market economy allocates resources in the best possible way.
[8]

Why a market economy might allocate resources efficiently:

- Price mechanism: Supply and demand determine prices, which helps allocate resources to
where they are most valued.
- Incentives for innovation: Firms in a market economy are incentivized to innovate and
improve efficiency to gain a competitive edge.
- Consumer sovereignty: Consumers dictate production through their choices, ensuring that
resources are allocated to meet their preferences.
- Efficiency of competition: Competition forces firms to use resources efficiently to remain
profitable.

Why a market economy might not allocate resources efficiently:

- Market failures: Public goods, externalities, and monopolies can lead to inefficient resource
allocation.
- Income inequality: A market economy can lead to significant income disparities, where
essential goods may not be accessible to low-income groups.
- Under-provision of merit goods: Private firms may under-provide goods with positive
externalities, like education and healthcare, leading to long-term inefficiency.
- Short-term focus: Market economies may prioritize short-term profits over long-term social
welfare, such as environmental sustainability.

6. Explain why public goods would not be supplied in a market economic system. [4]

- Non-excludability: Public goods cannot be confined to paying customers; people can use
them without paying, leading to a free-rider problem.
- Non-rivalry: One person’s use of a public good does not reduce its availability for others,
making it unprofitable for private firms to supply.
- No profit incentive: Since private firms cannot charge for the use of public goods, there is
no financial incentive to produce them in a market system.

7. Identify two industries, other than agriculture, that operate in the primary sector. [2]

- Fishing: Involves the extraction of marine resources.

- Mining: Involves the extraction of minerals and other natural resources from the earth.

8. Explain two possible disadvantages to an economy of a fall in agricultural output. [4]

- Reduced export earnings: A fall in agricultural output could reduce the country's export
revenue, particularly if the country relies heavily on agricultural exports.
- Rising food prices: A reduction in supply could lead to higher food prices, contributing to
inflation and affecting low-income households disproportionately.

Here are responses to the questions in a marking scheme style:

1. Define elastic supply. [2]

- Elastic supply refers to a situation where the quantity supplied of a product responds
significantly to a change in price. When the price elasticity of supply (PES) is greater than 1,
supply is said to be elastic.
- For example, if the price of emu meat rises and producers can easily increase production,
the supply of emu meat is elastic.

2. Analyse the key determinants of price elasticity of supply of a product. [6]

- Time period: In the short run, it may be difficult for firms to adjust production, leading to
inelastic supply. In the long run, firms can adapt by increasing resources or changing
production processes, making supply more elastic.
- Availability of factors of production: If factors like labor, land, and capital are readily
available, firms can increase production easily, making supply more elastic. If these
resources are scarce, supply will be inelastic.
- Spare capacity: Firms with unused or under-utilized resources can increase production
more easily when prices rise, leading to elastic supply. Firms operating at full capacity may
struggle to increase supply, making it more inelastic.
- Mobility of factors of production: If labor and capital can be easily transferred from
producing one product to another, supply tends to be more elastic.
- Production complexity: The more complex a product is to produce, the harder it is to
increase supply quickly in response to price changes, making supply inelastic.
3. Analyse the advantages of selling a product which is price-inelastic in demand. [6]

- Higher revenue: Since demand is inelastic, firms can raise prices without seeing a
significant drop in quantity demanded, leading to increased revenue.
- Less impact of price changes: Inelastic demand means that external factors like changes in
raw material prices can be passed on to consumers without a substantial reduction in sales.
- Greater market stability: Firms with price-inelastic products face less volatility in sales, as
consumers are less responsive to price changes, providing more predictable revenues.
- Pricing power: Firms have greater control over pricing, as consumers prioritize the
product’s necessity or uniqueness over its price, reducing the need to compete on price.

4. Explain two reasons why demand for a product may be price-inelastic. [4]

- Necessity: If a product is essential, like healthcare or basic food items, consumers will
continue to buy it even if prices rise, making demand price-inelastic.
- Lack of substitutes: When there are few or no close substitutes available for a product,
consumers have no alternative but to continue purchasing it even if the price increases,
leading to price-inelastic demand.

5. Discuss whether or not demand for cars will become more price-elastic in the future. [8]

Why demand for cars may become more price-elastic:

- Increased availability of substitutes: As public transportation improves and electric cars
become more widespread, consumers may have more options, making them more
responsive to changes in car prices.
- Technological advancements: Improvements in car-sharing services and autonomous
vehicles could increase consumer choice, making the demand for traditional cars more
elastic.
- Increased environmental awareness: Growing concerns about climate change may shift
consumer preferences toward more sustainable transportation options, increasing the
elasticity of demand for conventional cars.

Why demand for cars may remain price-inelastic:

- Necessity for personal mobility: In many areas, especially rural regions, cars are still a
necessity due to the lack of public transportation options, keeping demand price-inelastic.
- Brand loyalty and status: For some consumers, cars are status symbols, and they may
remain less responsive to price changes due to brand loyalty.
- Lack of infrastructure for alternatives: In countries where public transport or electric vehicle
infrastructure is still underdeveloped, demand for conventional cars may remain inelastic.
 6. Explain two influences on whether demand for a product is price-elastic or price-inelastic.
[4]

- Availability of substitutes: The more substitutes available for a product, the more elastic the
demand will be, as consumers can easily switch to alternatives if prices rise. If few
substitutes exist, demand will be inelastic.
- Proportion of income spent on the product: If a product takes up a small portion of a
consumer's income, demand is likely to be inelastic, as price changes have little impact on
overall spending. For expensive items, demand is more elastic because price changes
significantly affect a consumer’s budget.

Let me know if you need further explanation or more examples!

Here are detailed responses in the form of marking scheme-style answers for each question:

1. Discuss whether or not trade unions benefit workers. [8]

Arguments for trade unions benefiting workers:

- Improved wages and working conditions: Trade unions use collective bargaining to
negotiate higher wages and better working conditions for their members.
- Protection against unfair treatment: Unions help protect workers from unfair dismissal,
discrimination, and unsafe work environments by providing legal support and representation.
- Job security: Unions can negotiate terms that promote job security, such as longer
contracts or better redundancy terms.
- Voice in decision-making: Trade unions give workers a collective voice, ensuring they can
influence decisions made by employers.

Arguments against trade unions benefiting workers:

- Potential for job losses: High wage demands could lead to higher costs for firms, resulting
in reduced hiring or even layoffs.
- Restriction of flexibility: Trade unions may resist changes such as flexible working practices
or automation, which could be beneficial for the firm and workers in the long run.
- Risk of strikes: Industrial action like strikes can lead to lost wages for workers and can
harm a company’s financial health, potentially resulting in job cuts.
- Non-union workers excluded: Benefits negotiated by unions may not apply to non-union
workers, potentially leading to division within the workforce.

2. Analyse why workers decide not to join a trade union. [6]

- Cost of membership: Union membership usually requires paying fees, which some workers
may see as too high, especially if they don’t perceive enough benefits in return.
- Fear of employer retaliation: Some workers may avoid joining a union due to fear that their
employer might retaliate, possibly through dismissal or reduced promotion opportunities.
- Lack of perceived benefits: Workers in sectors with already high wages or good working
conditions may not see much benefit from joining a union.
- Nature of the job: In certain industries, such as temporary or gig work, workers may feel
that union membership is less relevant due to the lack of long-term employment contracts.
- Government or employer policies: In some cases, strong labor laws or employer-driven
initiatives may make unions seem redundant, as workers already have legal protections.

3. Analyse why workers may join a trade union. [6]

- Collective bargaining: Workers may join a union to have stronger collective bargaining
power, ensuring that they can negotiate for better wages, benefits, and working conditions.
- Job security: Trade unions provide protection from unfair dismissal, offering workers job
security, which is especially important in industries with high turnover.
- Protection against exploitation: Workers in sectors where exploitation is more common may
join unions to protect themselves from poor treatment, low wages, or unsafe working
conditions.
- Representation and support: Workers join unions to gain access to legal representation in
case of disputes with employers and to receive support during industrial actions like strikes.
- Voice in workplace decisions: Being part of a union allows workers to influence decisions
related to company policies, working hours, and safety standards.

4. Identify two influences on the strength of a trade union’s collective bargaining power. [2]

1. Number of union members: A larger membership base gives a union greater bargaining
power, as the employer has to consider the impact of potential strikes or disruptions.
2. State of the economy: During periods of low unemployment, unions may have stronger
bargaining power because employers are more reliant on workers and want to avoid losing
them.

5. Explain the likely impact of trade unions on the welfare of their members. [4]

- Improved wages and benefits: Trade unions typically negotiate higher wages, pensions,
and other benefits, directly improving the financial welfare of their members.
- Better working conditions: Unions often push for better health and safety standards,
enhancing the physical welfare of workers by ensuring safer work environments.
- Increased job security: Through collective bargaining, unions can secure better
employment contracts, reducing the risk of unfair dismissals or layoffs, thus providing more
stable incomes for their members.
- Reduced exploitation: Unions help protect workers from being overworked or underpaid,
ensuring their welfare through fair labor practices.
 6. Discuss whether or not increasing the strength of trade unions will benefit an economy.
[8]

Arguments for trade unions benefiting an economy:

- Higher wages lead to increased consumption: As unions secure higher wages for workers,
disposable incomes rise, boosting consumer spending and overall economic demand.
- Better working conditions: Improved health and safety standards can lead to higher
productivity, as workers are healthier and less likely to be absent.
- Reduced inequality: Trade unions help reduce income inequality by negotiating better pay
for low-income workers, contributing to social stability and economic fairness.
- Social stability: Strong unions may reduce the likelihood of social unrest by addressing
worker grievances and preventing widespread discontent.

Arguments against stronger trade unions benefiting an economy:

- Increased costs for firms: Higher wage demands may lead to increased production costs,
potentially causing inflation or forcing firms to reduce hiring or lay off workers.
- Reduced competitiveness: Firms facing higher labor costs may struggle to compete with
international companies, leading to a loss of market share and slower economic growth.
- Inflexibility in labor markets: Unions may resist necessary changes such as automation or
flexible working conditions, reducing the overall efficiency of labor markets.
- Risk of industrial action: Strong unions may lead to more strikes, disrupting economic
activity and harming both employers and workers in the long run.

Let me know if you need further explanation or examples!

0455/23/M/J/23

Discuss whether or not competition is harmful to a firm. [8]

Competition can have both positive and negative impacts on a firm.

- Benefits of Competition:
- Efficiency: Competition forces firms to operate efficiently to reduce costs and remain
competitive.
- Innovation: To differentiate themselves, firms may innovate, offering better products or
services.
- Customer Satisfaction: Competition leads to firms focusing on improving quality and
customer service to maintain their market share.

- Harms of Competition:
- Profit Reduction: In highly competitive markets, firms may lower prices to attract
customers, which can lead to reduced profit margins.
 - Market Share: Intense competition may result in loss of market share, particularly for
smaller firms unable to keep up with larger competitors.
- Investment Reluctance: Firms may hesitate to invest in new technologies or expansion
due to the uncertainty brought by strong competition.

Evaluation: Whether competition is harmful or beneficial depends on the firm's size, market
conditions, and ability to adapt. In highly competitive markets, larger firms may thrive due to
economies of scale, while smaller firms may struggle.

0455/22/M/J/23

Discuss whether or not small firms are more likely to go out of business than large firms. [8]

- Reasons Small Firms Are More Vulnerable:

- Economies of Scale: Large firms benefit from lower average costs due to economies of
scale, giving them a cost advantage.
- Access to Capital: Larger firms have easier access to funding and can survive during
economic downturns, whereas small firms may face liquidity constraints.
- Market Power: Large firms often have more market power, allowing them to influence
prices, negotiate better deals with suppliers, and sustain profitability.

- Reasons Small Firms Can Survive:

- Niche Markets: Small firms may serve niche markets, where customer loyalty is higher,
and competition from larger firms is lower.
- Flexibility: Small firms can be more agile in adapting to changing market conditions and
consumer preferences.
- Innovation: Small firms are often more innovative, bringing unique products or services to
the market.

Evaluation: While small firms face more challenges, especially in competitive markets or
during economic downturns, their ability to specialize and innovate can help them survive.
However, large firms generally have a higher chance of surviving due to their resources and
market power.

0455/23/O/N/22

Discuss whether or not consumers benefit from a competitive market. [8]

- Benefits of a Competitive Market:

- Lower Prices: Competition tends to drive prices down, benefiting consumers who have
more purchasing power.
- Better Quality: Firms in competitive markets must improve the quality of their products or
services to attract and retain customers.
 - Greater Choice: Competition leads to more product variety, providing consumers with
more options to meet their preferences.

- Disadvantages of a Competitive Market:

- Inconsistent Quality: Some firms may lower costs by sacrificing quality, leading to
inconsistent product standards.
- Unsustainable Low Prices: In some cases, price wars can lead to firms going out of
business, reducing long-term competition and choices for consumers.

Evaluation: Consumers generally benefit from competitive markets due to lower prices,
better quality, and more choices. However, excessive competition can sometimes lead to
lower product standards or market consolidation if weaker firms exit the market.

0455/22/F/M/22

Discuss whether or not consumers would benefit from a firm becoming a monopoly. [8]

- Potential Benefits of a Monopoly:

- Economies of Scale: Monopolies can achieve lower average costs by operating on a
larger scale, potentially passing these savings on to consumers in the form of lower prices.
- Innovation: Monopolies may have the financial resources to invest in research and
development, leading to innovation and improved products.

- Drawbacks of a Monopoly:
- Higher Prices: Without competition, monopolies can set higher prices, reducing consumer
surplus.
- Reduced Choice: Monopolies limit consumer choice as there is only one firm providing the
product or service.
- Lower Quality: Monopolies may lack the incentive to maintain high quality or customer
service due to the absence of competitive pressure.

Evaluation: While monopolies may offer benefits like economies of scale and innovation, the
potential for higher prices, reduced choice, and lower quality often outweighs these
advantages. Consumers typically benefit more from competitive markets.

0455/22/F/M/21

Discuss whether all monopolies have low costs of production. [8]

- Reasons Some Monopolies Have Low Costs:

- Economies of Scale: Monopolies can produce on a large scale, spreading fixed costs over
a greater number of units and reducing average costs.
- Market Power: Monopolies may negotiate better terms with suppliers due to their size,
further lowering costs.
- Reasons Some Monopolies Have High Costs:
- Lack of Competition: Without competitive pressure, monopolies may become inefficient,
leading to higher production costs.
- Diseconomies of Scale: Very large monopolies may face rising costs due to coordination
difficulties and bureaucratic inefficiencies.

Evaluation: While some monopolies benefit from low costs due to economies of scale, others
may suffer from inefficiencies that increase production costs. Not all monopolies have
uniformly low costs.

Let me know if you'd like to expand on any specific points!

0455/23/O/N/20

Discuss whether or not a government should allow monopolies. [8]

Arguments for Allowing Monopolies:

1. Economies of Scale: Monopolies can achieve lower average costs through economies of
scale, which can lead to lower prices for consumers if these savings are passed on.
2. Innovation: Large firms may have more resources to invest in research and development,
potentially leading to technological advancements and improved products.
3. Stable Supply: A single large firm can provide a consistent and reliable supply of goods or
services, which is important in sectors like utilities.

Arguments Against Allowing Monopolies:

1. Higher Prices: Monopolies can set higher prices due to the lack of competition, which
reduces consumer surplus and can make essential goods and services less affordable.
2. Reduced Choice: Consumers face fewer options when there is only one provider, which
can limit their ability to find products or services that meet their needs.
3. Inefficiency: Without competitive pressure, monopolies may become complacent, leading
to inefficiencies, lower quality, and slower innovation.

Evaluation: While monopolies can bring benefits like economies of scale and stability, the
potential for higher prices, reduced choice, and inefficiency often outweigh these
advantages. Governments typically regulate or break up monopolies to enhance competition
and protect consumers.

0455/22/F/M/19

Explain two ways monopoly differs from perfect competition. [4]

1. Price Setting:
 - Monopoly: A monopoly is a price maker and can set prices higher than marginal cost,
leading to higher prices for consumers.
- Perfect Competition: Firms are price takers and must accept the market price determined
by supply and demand. Prices equal marginal cost in perfect competition.

2. Number of Firms:
- Monopoly: There is only one firm in the market, which dominates the supply of the
product or service.
- Perfect Competition: The market consists of many small firms, none of which can
influence the market price significantly.

0455/23/M/J/18

Discuss whether or not removing a firm’s monopoly power will benefit consumers. [8]

Benefits of Removing Monopoly Power:

1. Lower Prices: Increased competition generally leads to lower prices as firms compete to
attract consumers.
2. Increased Choice: With more firms in the market, consumers have more options to
choose from, leading to a better match between consumer preferences and available
products.
3. Improved Quality: Competition encourages firms to improve their products and services to
maintain or grow their market share.

Drawbacks of Removing Monopoly Power:

1. Potential for Instability: Rapid changes in market structure can lead to short-term
disruptions in supply and quality.
2. Loss of Economies of Scale: Smaller firms may not achieve the same cost efficiencies as
a large monopoly, potentially leading to higher prices or reduced output.

Evaluation: Removing monopoly power often benefits consumers through lower prices,
increased choice, and improved quality, but the transition must be managed carefully to
avoid market instability and ensure that the benefits outweigh any potential drawbacks.

0455/22/M/J/18

Explain two advantages a firm may gain from being a monopoly. [4]

1. Higher Profits:
- A monopoly can set prices above marginal cost, leading to higher profit margins. With no
competition, the firm can maximize profits without concern for market entry by competitors.

2. Economies of Scale:
 - Monopolies often benefit from economies of scale, which allow them to produce at lower
average costs due to their large scale of operations. This can lead to cost savings and
higher profitability.

0455/22/F/M/22

Analyse, using a diagram, the effect of an increase in output on average fixed cost (AFC)
and total fixed cost (TFC). [6]

Diagram Description:

- Average Fixed Cost (AFC): AFC decreases as output increases. This is because AFC is
calculated as TFC divided by the quantity of output. As output increases, the TFC is spread
over a larger number of units, reducing the AFC.

- Total Fixed Cost (TFC): TFC remains constant regardless of the level of output. Fixed costs
do not change with output levels.

Analysis:

- Increase in Output:
- AFC: As output increases, AFC declines because the same total fixed cost is spread over
more units of output.
- TFC: TFC remains unchanged because it is not affected by the level of output.

Diagram:

- The AFC curve slopes downward as output increases, while the TFC curve is a horizontal
line indicating its constancy.

0455/21/M/J/21

Discuss whether or not a firm should have growth as its main objective. [8]

Arguments for Growth as Main Objective:

1. Increased Market Share: Growth can lead to a larger market share, enhancing the firm’s
influence and bargaining power in the market.
2. Economies of Scale: Larger firms can benefit from economies of scale, reducing average
costs and potentially increasing profitability.
3. Enhanced Competitive Position: Growth can help firms achieve a competitive edge,
making it harder for rivals to enter the market.

Arguments Against Growth as Main Objective:

1. Risk of Overextension: Rapid growth can lead to overextension, where the firm may
struggle with increased operational complexities and financial pressures.
2. Short-Term Focus: Prioritizing growth might divert attention from important factors like
profitability, customer satisfaction, and long-term sustainability.
3. Potential for Lower Efficiency: Large firms might face inefficiencies due to bureaucratic
issues and management challenges.

Evaluation: While growth can provide advantages such as increased market share and
economies of scale, it can also introduce risks like overextension and inefficiency. The main
objective should balance growth with other factors like profitability and operational efficiency.

0455/22/F/M/20

Define total revenue. [2]

Total Revenue: Total revenue is the total amount of money a firm receives from selling its
goods or services. It is calculated as the price per unit multiplied by the quantity of units sold.

0455/22/F/M/19

Identify two fixed costs. [2]

1. Rent: Payments made for the use of buildings or facilities.

2. Salaries: Regular payments to employees that do not change with the level of production.

Discuss whether or not a merger will increase profits. [8]

Arguments for Increased Profits:

1. Increased Market Power: A merger can lead to greater market power, allowing the firm to
raise prices and increase profits.
2. Cost Synergies: Mergers often result in cost savings due to economies of scale and the
elimination of duplicate functions.
3. Enhanced Efficiency: Combined firms may achieve greater operational efficiencies and
better utilize resources.

Arguments Against Increased Profits:

1. Integration Costs: Mergers can involve significant costs related to integrating systems,
cultures, and operations.
2. Reduced Competition: While this can lead to higher prices and profits, it might also attract
regulatory scrutiny and lead to potential market distortions.
3. Customer Backlash: Higher prices resulting from reduced competition can lead to
customer dissatisfaction and loss of market share.
Evaluation: Mergers often aim to increase profits through cost synergies and enhanced
market power, but the success depends on effective integration and managing potential
drawbacks such as increased costs and regulatory challenges.

0455/21/M/J/18

Explain two reasons why a firm may not aim to earn maximum profit. [4]

1. Growth Objectives: Firms may prioritize growth over maximum profit, aiming to expand
market share, enter new markets, or achieve economies of scale.
2. Social Responsibility: Firms may focus on social and environmental goals, such as
reducing their carbon footprint or improving worker conditions, even if these actions lead to
lower profits.

Feel free to ask if you need further details or explanations!

0455/22/F/M/23

Explain two advantages of capital intensive production. [4]

1. Increased Efficiency and Output:

- Capital-intensive production often leads to higher efficiency as machines and technology
can produce goods at a faster rate and with greater precision compared to manual labor.
This increased efficiency can lead to higher output levels.

2. Lower Average Costs:

- As production scales up, capital-intensive firms benefit from economies of scale. The
fixed costs of machinery and equipment are spread over a larger number of units, reducing
the average cost per unit produced. This can enhance profitability and competitive pricing.

0455/22/F/M/23

Identify two causes of an increase in labour productivity. [2]

1. Technological Advancements:
- The introduction of new technologies and machinery can increase labor productivity by
allowing workers to perform tasks more efficiently and with greater precision.

2. Improved Training and Skills Development:

- Providing workers with better training and opportunities for skills development can
enhance their productivity, as they become more proficient and effective in their roles.
0455/23/M/J/21

Explain two causes of low productivity. [4]

1. Outdated Technology:
- Firms using outdated or inefficient technology may struggle with lower productivity as
their processes are less effective compared to those employing modern technology.

2. Lack of Skills and Training:

- If workers do not have the necessary skills or training, their productivity can be adversely
affected. Inadequate training can lead to inefficient work practices and lower output.

0455/22/M/J/21

Analyse why a firm may become more capital-intensive. [6]

Analysis:

1. Technological Advancements:
- Advances in technology often require significant capital investment. Firms may adopt
more capital-intensive production methods to benefit from improved efficiency, precision, and
production capacity. For instance, automation and advanced machinery can enhance
productivity and reduce long-term costs.

2. Rising Costs of Labour:

- If labor costs increase, firms may shift towards capital-intensive methods to reduce
reliance on human labor and manage costs more effectively. By investing in machinery and
automation, firms can control labor expenses and potentially increase output.

3. Increased Production Scale:

- As firms expand their production scale, they may invest in capital-intensive processes to
achieve economies of scale. Larger production volumes can justify the high initial investment
in machinery, which can lower the average cost per unit produced.

Diagram Description:

- Capital-Intensive Production: Firms with higher capital intensity use more machinery and
equipment relative to labor. This can be illustrated with a production function showing the
relationship between capital and output, indicating a shift towards higher capital use.

0455/21/M/J/21
Explain two ways a firm could increase the productivity of its workers. [4]

1. Investment in Training:
- Providing comprehensive training programs can enhance workers' skills and knowledge,
leading to increased productivity as employees become more capable and efficient in their
tasks.

2. Improving Working Conditions:

- Enhancing the work environment, such as by ensuring adequate tools and resources,
reducing workplace stress, and fostering a positive culture, can lead to higher productivity by
boosting employee morale and job satisfaction.

0455/22/F/M/24

Analyse the economies of scale a school may gain from an increase in its size. [6]

Analysis:

1. Reduced Costs per Student:

- As a school increases in size, it can spread fixed costs (e.g., administration, facility
maintenance) over a larger number of students, reducing the cost per student. This can lead
to lower average costs and more efficient use of resources.

2. Specialized Staff and Facilities:

- Larger schools can afford to employ specialized staff and develop more diverse facilities,
such as laboratories, libraries, and sports facilities. This specialization can enhance
educational quality and efficiency, benefiting a larger student body.

3. Greater Bargaining Power:

- Bigger schools may have increased bargaining power when negotiating with suppliers
and service providers, leading to cost savings on resources and materials due to bulk
purchasing.

Diagram Description:

- Economies of Scale in Schools: Illustrate how average cost per student decreases as the
size of the school increases, while total costs might rise due to expanded facilities and staff.

0455/22/O/N/23

Discuss whether or not having fewer firms in a market will benefit consumers. [8]

Arguments For Fewer Firms Benefiting Consumers:

1. Increased Efficiency:
- Fewer firms can lead to economies of scale, which may reduce costs and potentially
lower prices if the cost savings are passed on to consumers.

2. Improved Quality:
- Larger firms may have more resources to invest in quality improvements and customer
service, potentially offering better products and services to consumers.

Arguments Against Fewer Firms Benefiting Consumers:

1. Higher Prices:
- Reduced competition can lead to higher prices as firms with less competitive pressure
may increase prices to maximize profits, reducing consumer surplus.

2. Reduced Choice:
- Fewer firms mean fewer choices for consumers, which can limit their ability to find
products that meet their needs and preferences.

Evaluation: The impact of having fewer firms in a market on consumers depends on how
well the remaining firms manage their efficiencies and pricing. While there can be benefits
like reduced costs and improved quality, the risks of higher prices and reduced choice often
need to be carefully managed.

0455/21/O/N/23

Explain two advantages of a large firm. [4]

1. Economies of Scale:
- Large firms benefit from economies of scale, which allow them to reduce average costs
by spreading fixed costs over a larger volume of output. This can lead to lower prices and
increased profitability.

2. Market Power:
- Large firms often have greater market power, which can enhance their ability to negotiate
with suppliers and influence market prices. This can improve their competitive position and
profitability.

0455/21/M/J/23

Discuss whether or not a government should encourage firms to merge. [8]

Arguments for Encouraging Mergers:

1. Increased Efficiency:
- Mergers can lead to cost efficiencies and economies of scale, which can lower prices for
consumers and improve overall market efficiency.

2. Enhanced Global Competitiveness:

- Mergers can help firms expand their market reach and improve their competitive position
on a global scale, which can benefit the national economy.

Arguments Against Encouraging Mergers:

1. Reduced Competition:
- Mergers can reduce competition in the market, leading to higher prices and less choice
for consumers. This can also lead to monopolistic or oligopolistic market structures.

2. Potential Job Losses:

- Mergers often result in redundancies and job losses as firms streamline operations and
eliminate duplicate roles. This can negatively impact employees and local economies.

Evaluation: Encouraging mergers can bring benefits like increased efficiency and global
competitiveness, but it is crucial to consider the potential drawbacks, such as reduced
competition and job losses. Government policy should balance these factors to ensure that
consumer interests are protected while fostering a competitive and efficient market
environment.

0455/22/M/J/23

Explain two reasons why a merger may result in higher prices for consumers. [4]

1. Reduced Competition:
- A merger often results in fewer firms in the market, reducing competition. With less
competition, the merged entity can increase prices without losing customers, leading to
higher prices for consumers.

2. Increased Market Power:

- The combined firm may gain greater market power and pricing influence. This increased
market power allows the firm to set higher prices, which can be passed on to consumers.

0455/21/O/N/22

Explain two types of merger. [4]

1. Horizontal Merger:
 - A horizontal merger occurs when two firms in the same industry and at the same stage of
production combine. This type of merger can reduce competition and achieve economies of
scale. Example: Two competing coffee producers merging.

2. Vertical Merger:
- A vertical merger involves firms at different stages of production combining. This can lead
to increased control over the supply chain and cost savings. Example: A car manufacturer
merging with a parts supplier.

Discuss whether or not a merger can help a firm survive. [8]

Arguments for Mergers Helping Firms Survive:

1. Increased Market Share:

- Mergers can enhance a firm's market share and competitiveness, helping it survive in a
challenging market environment by increasing its influence and negotiating power.

2. Cost Reductions:
- Mergers can lead to cost efficiencies through economies of scale, reducing operational
costs and improving financial stability, which can help the firm remain competitive and
financially viable.

Arguments Against Mergers Helping Firms Survive:

1. Integration Challenges:
- Mergers can be complex and costly to integrate. If not managed effectively, the
challenges of combining operations, systems, and cultures can negatively impact the firm's
performance and survival.

2. Regulatory Scrutiny:
- Large mergers may attract regulatory scrutiny, which can delay or complicate the merger
process. Regulatory hurdles can also lead to increased compliance costs and potential
restrictions on business operations.

Evaluation: Mergers can help firms survive by increasing market share and achieving cost
reductions, but the success of a merger depends on effective integration and management
of potential challenges. Careful planning and execution are essential to ensure that the
benefits outweigh the risks.

0455/

22/F/M/22

Discuss whether or not it is an advantage to keep a firm small. [8]

Arguments for Keeping a Firm Small:

1. Flexibility and Adaptability:
- Smaller firms can be more flexible and adaptable to market changes. They can quickly
respond to new opportunities or challenges without the bureaucratic constraints that larger
firms might face.

2. Closer Customer Relationships:

- Small firms often have closer relationships with their customers, allowing for personalized
service and better understanding of customer needs, which can enhance customer loyalty
and satisfaction.

Arguments Against Keeping a Firm Small:

1. Limited Economies of Scale:

- Smaller firms may not achieve the same economies of scale as larger firms, leading to
higher average costs per unit and potentially higher prices for consumers.

2. Resource Constraints:
- Small firms may face limitations in terms of resources, such as capital, technology, and
skilled labor, which can hinder their growth and competitiveness in the market.

Evaluation: Keeping a firm small has advantages such as flexibility and closer customer
relationships, but it also comes with challenges like limited economies of scale and resource
constraints. The decision to remain small should be based on the firm's strategic goals and
market conditions.

0455/22/M/J/24

Discuss whether or not an economy with a high inflation rate will have a low economic
growth rate. [8]

Arguments for High Inflation Leading to Low Economic Growth:

1. Reduced Consumer Spending:

- High inflation erodes the purchasing power of consumers, leading to reduced real income
and lower consumer spending. This can decrease overall demand for goods and services,
slowing economic growth.

2. Increased Uncertainty:
- High inflation creates uncertainty in the economy, making it difficult for businesses to plan
and invest. This uncertainty can deter investment and economic expansion, contributing to
slower growth.

Arguments Against High Inflation Leading to Low Economic Growth:

1. Short-Term Stimulus:
 - In some cases, moderate inflation can stimulate economic activity by encouraging
spending and investment. If people expect prices to rise, they might spend more now rather
than wait, boosting short-term economic growth.

2. Wage Adjustments:
- Inflation can allow for nominal wage adjustments without real wage cuts, which can help
firms adjust to economic conditions and maintain employment levels. This flexibility might
support growth in the short run.

Evaluation:
The relationship between high inflation and economic growth is complex. While high inflation
can negatively impact economic growth through reduced consumer spending and increased
uncertainty, moderate inflation may provide short-term benefits by stimulating spending and
allowing for flexible wage adjustments. The overall effect depends on the magnitude of
inflation and the economy's ability to adapt to changing conditions.

0455/21/M/J/23

Discuss why some countries may experience lower inflation in the future and some may not.
[8]

Arguments for Lower Future Inflation:

1. Improved Monetary Policy:

- Countries with effective and credible monetary policies may manage inflation better in the
future. Central banks that implement sound monetary policies and maintain low inflation
targets can help keep inflation rates down.

2. Technological Advancements:
- Advances in technology can increase productivity and reduce costs for businesses,
leading to lower prices for goods and services. This can contribute to lower inflation rates
over time.

Arguments Against Lower Future Inflation:

1. Demand-Pull Inflation:
- In economies experiencing strong economic growth and rising consumer demand,
demand-pull inflation might persist or increase. High consumer spending and investment can
drive prices up if supply cannot keep pace.

2. Supply Chain Disruptions:

- Ongoing or future supply chain disruptions, such as those caused by geopolitical events
or natural disasters, can lead to higher production costs and persistent inflation. These
disruptions can prevent inflation from falling.

Evaluation:
The future trajectory of inflation depends on various factors, including the effectiveness of
monetary policy, technological advancements, economic growth, and potential supply chain
disruptions. While some countries may successfully manage inflation through improved
policies and productivity gains, others might face ongoing inflationary pressures due to
strong demand or external shocks.

0455/23/M/J/21

Explain how a decrease in borrowing could reduce the chance of high inflation. [4]

1. Reduced Money Supply:

- When borrowing decreases, the amount of money circulating in the economy typically
reduces. With less money available, the overall demand for goods and services may
decrease, which can help lower inflationary pressures.

2. Lower Demand for Credit:

- A decrease in borrowing means that businesses and consumers have less access to
credit for spending and investment. This reduction in demand for credit can lead to lower
spending and investment, contributing to lower inflation.

0455/22/M/J/21

Discuss whether inflation harms a country’s industries. [8]

Arguments for Inflation Harmful to Industries:

1. Increased Costs:
- Inflation can lead to higher costs for raw materials, wages, and other inputs. Industries
may face increased production costs, which can squeeze profit margins and reduce overall
profitability.

2. Uncertainty and Reduced Investment:

- High inflation creates economic uncertainty, which can deter investment. Firms may be
reluctant to invest in new projects or expand operations if they are unsure about future cost
and price levels.

Arguments Against Inflation Being Harmful:

1. Higher Prices:
- If inflation is moderate, it can allow firms to increase prices for their products, potentially
leading to higher revenues and profits if demand remains strong.

2. Debt Relief:
 - Inflation can reduce the real value of debt. For firms with significant debt, inflation can
make it easier to service and repay loans, as the real burden of debt decreases over time.

Evaluation:
While inflation can harm industries by increasing costs and creating uncertainty, it may also
offer benefits such as higher prices and debt relief. The overall impact of inflation on
industries depends on its severity and the ability of firms to adapt to changing economic
conditions.

0455/21/M/J/21

Analyse how a central bank could avoid deflation. [6]

Analysis:

1. Lowering Interest Rates:

- A central bank can reduce interest rates to encourage borrowing and spending. Lower
interest rates make credit cheaper, which can stimulate economic activity and prevent
deflation by increasing demand.

2. Increasing Money Supply:

- By engaging in open market operations and purchasing government securities, a central
bank can increase the money supply in the economy. This increased liquidity can boost
spending and investment, helping to counteract deflationary pressures.

3. Quantitative Easing:
- Central banks may use quantitative easing to inject money directly into the economy by
buying assets. This strategy can lower long-term interest rates and increase the money
supply, which helps prevent deflation.

Diagram Description:

- Central Bank Measures to Avoid Deflation: Illustrate how lowering interest rates and
increasing money supply can shift the aggregate demand curve to the right, helping to
counteract deflationary pressures and stimulate economic activity.

0455/21/M/J/21

Analyse the advantages of a low rate of inflation. [6]

Analysis:

1. Stable Purchasing Power:

 - Low inflation maintains the purchasing power of money, ensuring that consumers can buy
a consistent amount of goods and services over time. This stability supports consumer
confidence and spending.

2. Predictability for Businesses:

- Low inflation creates a stable economic environment, making it easier for businesses to
plan and budget. Predictable prices help firms make investment decisions and set prices
without the risk of sudden cost increases.

3. Encourages Investment:
- Low inflation reduces the risk of eroding returns on investment. Investors are more likely
to commit capital to projects if they are confident that their returns will not be diminished by
high inflation.

Diagram Description:

- Benefits of Low Inflation: Show how low inflation leads to a stable purchasing power and a
predictable business environment, supporting economic growth and investment.

0455/22/M/J/24

Analyse how the introduction of a minimum wage could affect unemployment. [6]

Analysis:

1. Potential Increase in Unemployment:

- If the minimum wage is set above the market equilibrium wage, it can lead to higher labor
costs for employers. This may result in reduced hiring, layoffs, or automation, potentially
increasing unemployment among low-wage workers.

2. Increased Labor Supply:

- A higher minimum wage might attract more people into the labor market, increasing the
supply of labor. If businesses cannot absorb the increased supply, it could lead to higher
unemployment among those seeking work at the new wage level.

3. Potential for Higher Productivity:

- Alternatively, a higher minimum wage can incentivize employers to invest in worker
productivity and efficiency. If workers are paid more, they may be more motivated, and firms
might adopt practices that improve overall productivity and reduce turnover, which can
mitigate the negative impact on employment.

Diagram Description:

- Minimum Wage Impact on Employment: Illustrate how setting a minimum wage above the
equilibrium level can create a surplus of labor (unemployment) by shifting the supply curve to
the right while potentially reducing the quantity of labor demanded by firms.
0455/22/O/N/23

Explain two types of unemployment. [4]

1. Frictional Unemployment:
- Frictional unemployment occurs when individuals are temporarily unemployed while
transitioning between jobs or entering the labor market. It reflects the time it takes for people
to find a job that matches their skills and preferences.

2. Structural Unemployment:
- Structural unemployment arises when there is a mismatch between the skills of workers
and the requirements of available jobs. This type of unemployment is often caused by
changes in the economy, such as technological advancements or shifts in industry demand.

0455/22/M/J/23

Analyse how supply-side policy measures could reduce unemployment. [6]

Analysis:

1. Investment in Education and Training:

- Supply-side policies that focus on improving education and training can enhance workers'
skills and employability. By aligning skills with job market needs, these policies can reduce
structural unemployment and improve job matching.

2. Incentives for Businesses:

- Policies that provide tax incentives or subsidies for businesses to invest and expand can
create new job opportunities. By encouraging investment in various sectors, supply-side
policies can stimulate job creation and reduce unemployment.

3. Labor Market Reforms:

- Reforms such as reducing labor market rigidity, improving labor mobility, and simplifying
employment regulations can make it easier for firms to hire and manage workers. These
changes can reduce frictional unemployment and facilitate job creation.

Diagram Description:

- Supply-Side Policies and Unemployment: Show how improvements in education, business

incentives, and labor market reforms can shift the aggregate supply curve to the right,
potentially reducing unemployment and increasing economic output.
0455/21/M/J/23

Discuss whether or not a government should try to prevent a rise in unemployment. [8]

Arguments for Preventing a Rise in Unemployment:

1. Economic Stability:
- High unemployment can lead to economic instability, lower consumer spending, and
reduced economic growth. By preventing unemployment, the government can maintain
economic stability and ensure consistent growth.

2. Social and Psychological Benefits:

- Reducing unemployment can have positive social and psychological effects. Lower
unemployment rates can improve individuals' well-being and reduce the negative impacts of
job loss, such as mental health issues and social exclusion.

Arguments Against Preventing a Rise in Unemployment:

1. Economic Inefficiencies:
- Interventions to prevent unemployment might lead to market distortions or inefficiencies.
For example, overly aggressive policies might support unproductive industries or firms,
leading to resource misallocation.

2. Government Budget Constraints:

- Efforts to prevent unemployment, such as increased public spending or subsidies, can
strain government budgets and lead to higher public debt. This can limit the government's
ability to invest in other important areas.

Evaluation:
The decision to prevent a rise in unemployment involves balancing economic stability and
social welfare against potential inefficiencies and budget constraints. While reducing
unemployment can support economic and social stability, the approach must be carefully
managed to avoid unintended consequences.

0455/21/O/N/22

Discuss whether or not a reduction in the unemployment rate benefits an economy. [8]

Arguments for Reduction in Unemployment Benefiting an Economy:

1. Increased Consumer Spending:

- Lower unemployment means more people are employed and earning income, which can
lead to increased consumer spending and stimulate economic growth.
2. Higher Productivity:
- A reduction in unemployment can lead to a more productive workforce. As more people
find jobs, the economy can operate closer to its potential output, improving overall
productivity and economic performance.

Arguments Against Reduction in Unemployment Benefiting an Economy:

1. Potential for Wage Inflation:

- Very low unemployment rates can lead to wage inflation as firms compete for a limited
pool of workers. This can increase production costs and potentially lead to higher prices for
consumers.

2. Possible Skills Mismatch:

- If unemployment falls too quickly, it may lead to a situation where available jobs do not
match the skills of the unemployed. This can result in inefficiencies and reduced productivity
if workers are not effectively matched to suitable roles.

Evaluation:
While reducing unemployment generally benefits an economy by increasing consumer
spending and productivity, it is important to manage the process to avoid wage inflation and
skills mismatches. The overall impact depends on how well the labor market adjusts to
changes in employment levels.

0455/21/O/N/23

Discuss whether or not an increase in commercial bank lending will increase economic
growth. [8]

Arguments for Increased Commercial Bank Lending Boosting Economic Growth:

1. Stimulated Investment:
- Increased lending provides businesses and consumers with more access to credit. This
can stimulate investment in new projects, expansion, and consumption, leading to higher
economic growth.

2. Boosted Consumer Spending:

- With more credit available, consumers can finance major purchases and investments,
increasing overall demand for goods and services and driving economic growth.

Arguments Against Increased Commercial Bank Lending Boosting Economic Growth:

1. Risk of Over-Leverage:
- Excessive lending can lead to over-leverage and increased debt levels. If borrowers
cannot repay their debts, it can lead to financial instability and negatively impact economic
growth.
2. Potential for Asset Bubbles:
- Increased lending may contribute to asset bubbles if credit is used to inflate prices of
assets such as real estate. When these bubbles burst, it can lead to economic downturns
and reduced growth.

Evaluation:
While increased commercial bank lending can stimulate economic growth by enhancing
investment and consumer spending, it must be managed carefully to avoid risks such as
over-leverage and asset bubbles. The overall impact on growth depends on the balance
between stimulating demand and maintaining financial stability.

0455/21/O/N/22

Discuss whether or not labour‑intensive production will harm an economy. [8]

Arguments for Labour-Intensive Production Being Harmful:

1. Lower Productivity:
- Labour-intensive production often relies on a larger workforce and can result in lower
overall productivity compared to capital-intensive methods. This can reduce economic
efficiency and growth.

2. Higher Labor Costs:

- As wages increase, labor-intensive industries might face higher costs, which can lead to
reduced competitiveness and potential harm to the economy.

Arguments Against Labour-Intensive Production Being Harmful:

1. Employment Creation:
- Labour-intensive production can create more jobs and reduce unemployment. This can
be beneficial for the economy, particularly in regions with high unemployment rates.

2. Economic Diversification:
- Labour-intensive industries can contribute to economic diversification and development.
They can support the growth of small and medium-sized enterprises and stimulate economic
activity in various sectors.

Evaluation:
Labour-intensive production has both potential benefits and drawbacks. While it may lower
productivity and increase labor costs, it can also create jobs and support economic
diversification. The impact on the economy depends on how these factors balance out in the
context of overall economic conditions and development goals.

0455/23/O/N/22
Discuss whether or not a decrease in a country’s economic growth rate will harm its
economy. [8]

Arguments for Decreased Economic Growth Rate Being Harmful:

1. Lower Living Standards:

- A decrease in economic growth can lead to slower increases in living standards. With
reduced growth, there may be less income and wealth creation, impacting overall quality of
life.

2. Higher Unemployment:
- Slower economic growth often results in reduced job creation and higher unemployment
rates. This can increase social and economic challenges and reduce consumer spending.

Arguments Against Decreased Economic Growth Rate Being Harmful:

1. Sustainability:
- Lower economic growth might reflect a transition to more sustainable economic practices.
If growth slows due to more sustainable and balanced development, it may ultimately benefit
the economy in the long term.

2. Reduced Inflationary Pressures:

- Slower economic growth can help reduce inflationary pressures, as decreased demand
can lead to lower price increases. This can help maintain economic stability.

Evaluation:
A decrease in economic growth rate can have negative effects, such as lower living
standards and higher unemployment, but it may also bring benefits like reduced inflationary
pressures and a focus on sustainability. The overall impact depends on the reasons for the
slowdown and the economy's ability to adapt to changing conditions.

0455/21/M/J/22

Discuss whether or not a government should try to prevent a rise in unemployment. [8]

Arguments for Preventing a Rise in Unemployment:

1. Economic Stability:
- Preventing a rise in unemployment helps maintain economic stability. High
unemployment can lead to lower consumer spending and reduced economic growth,
affecting overall economic health.

2. Social Well-Being:
 - Reducing unemployment supports social well-being by decreasing poverty and improving
quality of life. Lower unemployment can lead to better mental health and reduced social
issues related to joblessness.

Arguments Against Preventing a Rise in Unemployment:

1. Market Efficiency:
- Interventions to prevent unemployment may lead to market distortions and inefficiencies.
For example, supporting declining industries might divert resources from more productive
sectors.

2. Budget Constraints:
- Efforts to prevent unemployment may require significant public spending, which can
strain government budgets and lead to higher public debt. This can limit the government's
ability to invest in other crucial areas.

Evaluation:
While preventing a rise in unemployment can support economic stability and social
well-being, it must be balanced against potential market inefficiencies and budget
constraints. The approach to managing unemployment should consider both short-term
impacts and long-term economic sustainability.

0455/21/M/J/23

Analyse how an increase in investment may affect unemployment. [6]

Analysis:

1. Job Creation:
- Increased investment often leads to the creation of new jobs. As businesses invest in
new projects and expand operations, they require more workers, which can reduce
unemployment.

2. Higher Productivity:
- Investment in technology and capital can improve productivity. Higher productivity can
lead to higher wages and better employment opportunities, contributing to lower
unemployment.

Diagram Description:

- Investment and Unemployment: Show how increased investment shifts the aggregate
demand curve to the right, leading to higher output and reduced unemployment.

0455/21/M/J/21
Discuss whether or not a government should try to prevent a rise in unemployment. [8]

Arguments for Preventing a Rise in Unemployment:

1. Economic Stability:
- High unemployment can lead to lower consumer spending and reduced economic
growth. Preventing a rise in unemployment helps maintain economic stability and promotes
sustainable growth.

2. Social Benefits:
- Reducing unemployment supports social stability and well-being. Lower unemployment
rates can decrease poverty, improve mental health, and reduce social issues related to
joblessness.

Arguments Against Preventing a Rise in Unemployment:

1. Market Efficiency:
- Interventions to prevent unemployment may lead to market distortions. For example,
supporting failing industries might divert resources from more productive sectors and hinder
economic efficiency.

2. Fiscal Constraints:
- Efforts to prevent unemployment often require significant public spending or subsidies,
which can strain government budgets and lead to higher public debt. This may limit the
government's ability to address other important issues.

Evaluation:
Preventing a rise in unemployment generally supports economic and social stability, but it
must be balanced against potential market ineff

iciencies and fiscal constraints. Effective policies should aim to mitigate unemployment while
maintaining economic efficiency and sustainability.

0455/22/F/M/24

Analyse how fiscal policy can increase employment. [6]

Analysis:

1. Government Spending on Public Projects:

- Mechanism: Increased government spending on infrastructure, education, and public
services creates job opportunities directly within these sectors.
- Impact: As the government invests in these areas, it generates demand for labor, which
can reduce unemployment rates.

2. Tax Incentives for Businesses:

 - Mechanism: Fiscal policy can include tax cuts or incentives for businesses to encourage
them to invest and expand.
- Impact: This can lead to job creation as businesses hire more workers to support their
growth and increased production capacity.

Diagram Description:

- Fiscal Policy and Employment: Illustrate how increased government spending or tax
incentives shift the aggregate demand curve to the right, leading to higher output and
reduced unemployment.

0455/21/M/J/22

Analyse how an increase in income tax can affect a country’s inflation rate. [6]

Analysis:

1. Decrease in Consumer Spending:

- Mechanism: Higher income tax reduces disposable income, leading to lower consumer
spending.
- Impact: Reduced demand for goods and services can help decrease inflationary
pressures as there is less upward pressure on prices.

2. Government Revenue and Spending:

- Mechanism: Increased income tax boosts government revenue, which can be used to
reduce budget deficits or fund projects that may not immediately affect inflation.
- Impact: If government spending is reduced or redirected away from inflationary
pressures, it can contribute to lower inflation.

Diagram Description:

- Income Tax and Inflation: Show how an increase in income tax shifts the aggregate
demand curve leftward, reducing demand-pull inflation.

0455/22/F/M/22

Discuss whether or not a reduction in income tax will end a recession. [8]

Arguments for Reduction in Income Tax Ending a Recession:

1. Increased Consumer Spending:

- Mechanism: Lower income tax increases disposable income for consumers.
- Impact: This can boost consumer spending, stimulate demand for goods and services,
and support economic growth.
2. Enhanced Business Investment:
- Mechanism: Reduced income tax can increase after-tax profits for businesses.
- Impact: This can lead to higher business investment and expansion, potentially creating
jobs and reducing unemployment.

Arguments Against Reduction in Income Tax Ending a Recession:

1. Insufficient Demand Increase:

- Mechanism: If the reduction in income tax is not large enough or if consumers save the
additional income rather than spending it.
- Impact: The increase in demand might be insufficient to significantly end the recession.

2. Structural Issues:
- Mechanism: A recession might be due to structural problems in the economy rather than
just low demand.
- Impact: A reduction in income tax alone may not address underlying issues such as low
productivity or industry-specific challenges.

Evaluation:
While reducing income tax can help stimulate economic activity and potentially support
recovery from a recession, its effectiveness depends on the scale of the tax cut, consumer
behavior, and the broader economic context. It may not fully resolve a recession without
complementary policies.

0455/22/O/N/20

Analyse the effects on income distribution and tax revenue of an increase in indirect taxes.
[6]

Analysis:

1. Income Distribution:
- Mechanism: Indirect taxes (e.g., VAT) are typically regressive, impacting lower-income
individuals more heavily as they spend a larger proportion of their income on taxed goods.
- Impact: This can widen income inequality by disproportionately burdening lower-income
households compared to higher-income households.

2. Tax Revenue:
- Mechanism: An increase in indirect taxes can boost government revenue from the
consumption of taxed goods and services.
- Impact: This additional revenue can be used for public services or reducing budget
deficits, though the regressive nature of indirect taxes may create equity concerns.

Diagram Description:
- Indirect Taxes and Income Distribution: Show how an increase in indirect taxes shifts the
supply curve upward, leading to higher prices and a greater burden on consumers,
particularly affecting lower-income groups more.

0455/22/O/N/20

Discuss whether or not an increase in the rate of income tax will reduce inflation. [8]

Arguments for Increased Income Tax Reducing Inflation:

1. Decrease in Consumer Spending:

- Mechanism: Higher income tax reduces disposable income.
- Impact: This can lead to lower consumer spending, reducing demand-pull inflation as
there is less upward pressure on prices.

2. Reduced Budget Deficits:

- Mechanism: Increased income tax raises government revenue.
- Impact: If used to reduce budget deficits, it can lessen inflationary pressures related to
government borrowing.

Arguments Against Increased Income Tax Reducing Inflation:

1. Potential Supply-Side Effects:

- Mechanism: Higher income tax can reduce incentives for work and investment.
- Impact: This can negatively impact productivity and potentially offset some of the
inflationary benefits by reducing economic efficiency.

2. Limited Effectiveness:
- Mechanism: If inflation is driven by factors other than excessive demand (e.g., supply
chain issues), an increase in income tax might have limited impact on reducing inflation.
- Impact: The effectiveness of income tax changes in controlling inflation depends on the
broader economic context and other contributing factors.

Evaluation:
An increase in the rate of income tax can contribute to reducing inflation by lowering
consumer spending and reducing budget deficits. However, its impact may be limited by
supply-side effects and the nature of the inflationary pressures in the economy.

0455/21/O/N/20

Discuss whether or not lower taxes on firms will be beneficial for an economy. [8]

Arguments for Lower Taxes on Firms Being Beneficial:

1. Increased Investment:
- Mechanism: Lower taxes increase after-tax profits for firms.
- Impact: This can lead to higher investment in expansion, technology, and hiring,
potentially stimulating economic growth and job creation.

2. Enhanced Competitiveness:
- Mechanism: Reduced tax burdens can improve the competitiveness of domestic firms.
- Impact: Firms may become more competitive internationally, improving the trade balance
and reducing the current account deficit.

Arguments Against Lower Taxes on Firms Being Beneficial:

1. Reduced Government Revenue:

- Mechanism: Lower taxes on firms decrease government revenue.
- Impact: This can lead to reduced funding for public services and infrastructure, which
may negatively impact overall economic well-being.

2. Potential for Inequality:

- Mechanism: Tax cuts may disproportionately benefit larger firms or higher-income
individuals.
- Impact: This can contribute to income inequality and create social and economic
disparities.

Evaluation:
Lowering taxes on firms can boost investment and competitiveness, potentially benefiting the
economy. However, it is important to balance these benefits against potential reductions in
government revenue and issues of inequality. The overall impact depends on how effectively
the tax cuts stimulate economic activity and how they are balanced with other fiscal
considerations.

0455/22/F/M/23

Analyse how a government could encourage the consumption of merit goods. [6]

Analysis:

1. Subsidies for Merit Goods:

- Mechanism: Governments can provide subsidies to reduce the price of merit goods such
as education or healthcare.
- Impact: Lower prices can increase consumption and accessibility, improving overall
societal welfare.

2. Public Provision of Merit Goods:

- Mechanism: Governments can directly provide merit goods (e.g., public education or
health services).
 - Impact: This ensures that all citizens have access to essential services, regardless of
their ability to pay.

Diagram Description:

- Government Encouragement and Merit Goods Consumption: Show how subsidies or public
provision can shift the supply curve of merit goods to the right, leading to increased
consumption.

0455/22/F/M/23

Discuss whether or not government subsidy on the export of sugar will help it achieve its
macroeconomic aims. [8]

Arguments for Subsidy on Export of Sugar Helping Macroeconomic Aims:

1. Boost to Export Revenue:

- Mechanism: Subsidies can make sugar exports more competitive internationally.
- Impact: This can increase export revenue and improve the balance of payments,
contributing to economic growth.

2. Support for Domestic Farmers:

- Mechanism: Subsidies help stabilize the income of sugar cane farmers.
- Impact: This can enhance their financial stability and support rural economies.

Arguments Against Subsidy on Export of Sugar Helping Macroeconomic Aims:

1. Distortion of Market Prices:

- Mechanism: Export subsidies can distort market prices and lead to inefficiencies.
- Impact: This may result in overproduction and potential trade disputes with other
countries.

2. Budgetary Constraints:
- Mechanism: Subsidies require government spending.
- Impact: This can strain the budget and potentially divert resources from other important
areas.

Evaluation:
While government subsidies on the export of sugar can support domestic farmers and
improve export revenue, they may also lead to market distortions and budgetary pressures.
The overall effectiveness of the subsidy depends on how well it balances these factors with
the country’s macroeconomic goals.

0455/21/O/N/22
Analyse how a cut in interest rates might create conflicts between macroeconomic aims. [6]

Analysis:

1.

Stimulation of Economic Growth vs. Inflation:

- Mechanism: Lower interest rates can stimulate economic growth by making borrowing
cheaper.
- Impact: This can lead to increased demand, which may fuel inflation if the economy is
already operating near full capacity.

2. Support for Employment vs. Exchange Rate Stability:

- Mechanism: Lower interest rates can support job creation by encouraging investment.
- Impact: However, it may lead to a depreciation of the currency, potentially impacting
exchange rate stability and increasing import prices.

Diagram Description:

- Interest Rates and Macroeconomic Aims: Show how a cut in interest rates can shift
aggregate demand to the right, potentially leading to higher inflation and impacting currency
value.

0455/23/M/J/21

Analyse how economic growth conflicts with balance of payments stability. [6]

Analysis:

1. Increased Domestic Consumption vs. Trade Balance:

- Mechanism: Economic growth often leads to higher incomes and increased consumption.
- Impact: This can boost imports, potentially worsening the trade balance if exports do not
grow at the same rate.

2. Investment and Capital Flows vs. Balance of Payments:

- Mechanism: Economic growth can attract foreign investment.
- Impact: While this can improve the financial account, it might also lead to capital outflows
if domestic investments are less attractive compared to foreign opportunities.

Diagram Description:

- Economic Growth and Balance of Payments: Show how increased domestic consumption
can shift the current account balance negatively, while foreign investment impacts the
financial account positively.
0455/22/F/M/21

Discuss whether or not a government can reduce unemployment without increasing inflation.
[8]

Arguments for Reducing Unemployment Without Increasing Inflation:

1. Effective Use of Monetary Policy:

- Mechanism: Targeted monetary policies can stimulate employment without causing
significant inflation.
- Impact: Measures such as interest rate adjustments or quantitative easing can support
job creation while keeping inflation in check.

2. Productivity Improvements:
- Mechanism: Enhancing productivity through investment in technology and skills
development.
- Impact: This can increase output and employment without putting upward pressure on
prices.

Arguments Against Reducing Unemployment Without Increasing Inflation:

1. Phillips Curve Trade-off:

- Mechanism: The Phillips Curve suggests an inverse relationship between unemployment
and inflation.
- Impact: Reducing unemployment may lead to higher inflation if the economy is near its
productive capacity.

2. Demand-Pull Inflation:
- Mechanism: Stimulating demand to reduce unemployment can lead to demand-pull
inflation.
- Impact: Higher demand may push up prices, especially if supply cannot keep pace.

Evaluation:
Reducing unemployment without increasing inflation is challenging due to the inherent
trade-off described by the Phillips Curve. While effective policies and productivity
improvements can help, achieving this balance depends on the broader economic context
and the specific measures implemented.