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UFP Paper 3 Macro Economics July 2012 Mark Scheme Section A

Question 1 a. Define inflation rate (3 marks) Percentage (1) rise (1) in the general price level (1)

b. Refer to Extract 1, explain how the Monetary Policy Committee uses interest rate to achieve price stability in the UK. (10 marks) Definition of monetary policy (1) Referring to Extract 1: 2% +- 1% (1) Monetary Transmission Mechanism: Explanation of Reflationary Monetary policy by increasing IR if inflation decreases below MPCs target (3); explanation of Deflationary Monetary policy by increasing IR if inflation increases above MPCs target (3) AD & AS diagram (2)

c. Apart from the information mentioned in extract 2, examine two items of information that would help the Monetary Policy Committee (MPC) decide whether to change interest rates. (10 marks) 2 analysis x 3 marks 2 evaluation x 2 marks Analysis: - Property prices - unemployment figures - price of commodidites - changes in income figures - changes in RGDP in the UK - phase of the business cycle All the points above need to be related to AD & AS analysis to explain how these can affect the general price level Possible evaluations: Time lag Significance Magnitude Other things are not constant

c. Refer to Extract 2, examine the effects of the tight credit conditions on UKs price level and real output. Use an AD & AS diagram to support your answer. (12 marks) 2 analysis x 3 marks 2 evaluation x 2 marks Analysis: Tight credit conditions affect C & I (1) AD shifts to the left (1) AD & AS diagram (2) Slowdown in economic growth; real output decreases (1) Fall in general price level (1)

Possible evaluations: Significance Magnitude Positive Multiplier effect Elasticity of the AS curve Other things are not constant Depreciation of the pound (extract 2)

Section B Choose one question

2a. Explain two causes for the growing current account deficit in the UK (10) 2 analysis x 4 marks - Definition of CA deficit (2) Possible causes: - Strong pound - Economic boom - Housing boom - Decline in UKs manufacturing sector - High rate of inflation in the UK or low rate of inflation in foreign countries- poor quality of UK goods Possible evaluations:

3 Significance Magnitude Other things are not constant Cyclical factors are temporary Strong pound makes M of capital goods cheaper- short term deficit but can help in improving the CA in the long run.

b. Examine the policies that can be used to correct such deficit (15) 3 analysis x 3 marks 3 evaluations x 2 marks

Analysis: Demand Side policies: Tight Fiscal & Monetary policy; to reduce price so that UK goods can be more price competitive; fall in RO so that demand for M decreases (3) Supply side policies: education & training; reduction in corporation tax; subsidies; reduction in unemployment benefits and income tax; deregulation Exchange rate policy: depreciation of the pound Can also accept three supply side policies

Possible evaluations: Time lag Conflicting macro economic objectives Elasticity of demand for X & M Magnitude Significance Short run vs Long run

3a. Explain two reasons for measuring Gross Domestic Product (GDP) (10) 2x 4 analysis Define GDP (2) To measure economic growth rate To measure economic performance To compare living standard To help government for policy measures

b. Examine the benefits of economic growth (15) 3 Analysis/ benefits x 3 marks 3 evaluations x 2 marks

4 Possible benefits: More revenue for government Reduction in poverty / inequality More export earnings Reduction in unemployment Low inflation if economic growth arises because of a rightward shift in AS

Possible evaluations: -Conflicting macro economic objectives - negative externalities - inflationary - problems on current account - Magnitude - Significance - Other things are not constant - rise in inequality gap if RGDP per head is unequally distributed

4a. Explain two constraints to economic growth in a country of your choice (10) 2 x 4 analysis Possible points: Define economic growth (2) Corruption Low savings High illiteracy rate Diseases Political instability Over dependence on primary products Land locked

b. Examine how government spending on education and training can help to achieve macroeconomic objectives (15) 3 analysis x 3 marks 3 evaluations x 2 marks

5 Analysis: Students should be able to explain the following impact by using the AD & AS analysis in full detail to score the full 3 marks:

Economic growth Price stability (AS shifts right) Improvement in the CA Reduction in inequality gap Reduction in unemployment

Possible valuations: Conflicting macro economic objectives Time lag Short run vs long run Other things are not constant Price stability will not be achieved if AD shifts to the right