IFYEC002 Economics

THE NCUK INTERNATIONAL FOUNDATION YEAR

IFYEC002 Economics

2018-19

MARK SCHEME

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This mark scheme should be used in conjunction with the NCUK Marking Guidelines,
available from the secure area (Web File Manager) of the NCUK website
(http://www.ncuk.ac.uk). Contact your Principal/ Academic Manager if you do not have
login details.

NB – Credit should be awarded for any pertinent answers not included in the mark scheme,
not exceeding the total mark allowed for the question.

Notice to markers.

If a student has answered more than the required number of questions, credit should only
be given for the first n answers, in the order that they are written in the student’s answer
booklet (n being the number of questions required for the examination). Markers should
not select answers based on the combination that will give the student the highest mark.
If a student has crossed out an answer, it should be disregarded.

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Section A

Answer ALL questions. This section carries 40 marks.

Questions A1 – A20

Answer Grid

A1. D
A2. A
A3. C
A4. C
A5. B
A6. B
A7. B
A8. A
A9. D
A10. C
A11. D
A12. C
A13. A
A14. C
A15. C
A16. B
A17. B
A18. D
A19. A
A20. A

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Question A21

a) 1 mark for full understanding only

Negative externality – Social cost > private cost, spill over effects to 3rd
parties.

A distinction between consumption and production externalities is NOT

[1]
required.

b)  2 marks for correct diagram including labelling, 1 mark for supporting
explanation

Anticipated diagram

S + TAX 
Price  
S 

P2 
P1 

D 

Q2  Q1  Quantity 

The explanation should explain that a tax on sugary drinks will lead to a rise
in the costs of production for a firm, and as such shift the S curve to left,
leading to a contraction of the demand curve, and a change in equilibrium
price and quantity as a consequence. [3]

c)  1 mark for identification + 2 for development.

Possible negative externalities that might be created by the over-consumption

of sugary drinks may include
- Obesity and associated healthcare issues
- Tooth decay and associated healthcare issues
- Impacts on NHS
[3]
- Impacts on productivity

d) 1 mark for identification + 2 for development.

Possible methods that could be used to reduce the problems caused by the
over-consumption of sugary drinks in Malaysia may include
 Subsidies to substitute products
 Regulation
 Education and information
 Minimum prices
[3]

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Question A22

a) 1 mark for full understanding only

A trade deficit is when the sum of exports of goods and services is less than
imports. [1]

b)  2 marks for correct diagram including labelling, 1 for supporting explanation

Anticipated diagram (long run aggregate supply diagram should also be

rewarded)

Price 
 
Level  SRAS 

P1 
P2 

AD1 

AD2 

Q2  Q1  Real National Output 

Supporting explanation should highlight that a trade deficit implies net

exports as a component of aggregate demand are negative, and therefore
might shift the AD curve to the left, thus weakening inflationary pressure but
slowing the rate of growth of real national output and potentially harming
employment. [3]

c)  1 mark for identification + 2 for development.

Possible reasons why Japan may have experienced a fall in exports may
include
- Overvalued exchange rate
- Poor domestic productivity
- High domestic inflation hampering competitiveness of exports  

- Weak economic growth/recession in export markets  

- Poorer relative quality of Japanese goods/services [3]

d) 1 mark for identification + 2 for development.

Possible methods of improving trade position may include

- Weakening exchange rate
- Improve productivity
- Supply side policies
- Encourage innovation
- Reduce tariff barriers
- Subsidise Japanese manufacturers to improve competitive position
- Constrain demand for imports via constraining domestic consumption [3]

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Section B

Use the following grid as guidance

Section B – Part a)

Marks Quality of response

0 Candidate demonstrates no understanding of terms or question.
1-4 Candidate shows some understanding of the term or question. Points
have been weakly developed and there is likely to be some inaccuracy
in their use of economic terminology.
5-7 Candidate demonstrates good understanding of the term or question.
They develop most of their points coherently and their answer will be
generally fluent and predominantly show an accurate use of economic
terminology.
8-10 Candidate displays a sound and accurate understanding of the term or
question. Their answer is fluent, logical, concise and precise. The
candidate’s use of economic terminology will be consistently accurate
and confidently applied.

Section B – Part b)

Marks Quality of response

0 Candidate demonstrates no understanding of terms or question.
1-7 Candidate makes some valid points, but they have been weakly
analysed and are not confident in their use of economic theory or
application to the question. The answer is likely to be poorly structured
and show poor fluency and a basic level of written communication.
Evaluative comment is likely to be minimal or missing.
8-14 Candidate demonstrates good understanding of the question, making
valid points which are generally analysed coherently. Written
communication will be sound, although the answer maybe unbalanced.
The candidate will show a broadly confident use of economic
terminology and their answer will address the fundamentals of the
question leading to a conclusion or judgement, which may be weakly
supported or based on limited evidence.
15-20 Candidate displays a sound and accurate understanding of the question.
The answer is well structured and the quality of written communication
is accurate and fluid throughout, with a strong and confident use of
economic terminology. Arguments are expressed clearly and supported
with relevant theory or examples. The best candidates will provide fully
supported judgements and evaluative comment that critically analyses
the question and may explore issues beyond the immediate nature of
the question (where relevant).
 

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Question B1

a) Explain the characteristics of a monopoly AND with the aid of a

diagram, explain the long-run equilibrium position for a firm that
enjoys monopoly power. [ 10 ]

Key characteristics

 Price makers
 Barriers to entry
 Profit maximising assumption
 Perfect knowledge
 Sole seller

The following diagram would be expected with clear explanations given

Costs / 
Revenue  MC 

P 
LRAC 

AR 
MR 
0  Q  Output 

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b) “I don't think it's good in any business for anyone to have a

monopoly. On the other hand, you need to have size to get costs
down” – Rick Scott, Former Governor of Florida, USA.

To what extent do you agree that governments should always

intervene to reduce monopoly power in every industry. [ 20 ]

Candidates should break this down into two clear parts. They should assess the view that
monopolies may harm the consumer and therefore require some intervention, and also
consider that they may provide some benefits in some instances and thus any
intervention may not be warranted.

Monopolies can be harmful because

 Higher prices
 Lower output
 Restricted choice
 Less incentive to innovate
 Productively and allocatively inefficient
 Creation of barriers to entry
 Price discrimination and appropriation of consumer surplus

However, they are not always because

 Profits may be put into R&D

 Natural monopoly argument
 Services could be provided to consumers that they otherwise would not have
access to
 May not be a problem if effectively regulated

Evaluation should come from judgement on the phrase “always intervene” and stronger
candidates will recognise that a monopoly might be desirable in some industry’s (e.g.
natural monopoly)

 Normative decision on how harmful monopolies are

 Depends on industry
 Depends on barriers to entry e.g. lowering them may be more costly than
allowing monopoly to operate
 Regulatory costs

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Question B2

a) Explain clearly and accurately the different steps a cost-benefit

analysis will go through AND how it can be used in the evaluation
of any economic activity. [ 10 ]

Candidates would be expected to provide a sound definition of cost benefit analysis and
demonstrate a solid understanding of the technique and how it might be used to guide
economic decisions. The most relevant lines of explanation are likely to cover: -

 Understanding that the technique attempts to evaluate the social costs and social
benefits of an economic decision;
 Social costs and benefits are likely to be different from private costs and benefits;
 The process of identifying all the different costs and benefits of a decision;
 The process of placing a monetary value on all costs and benefits;
 The process of judging these across time/into the future;
 Its frequency of use by governments to judge investment projects.

Given the wording of the question, it is also expected that candidates provide some
possible examples as to when and how cost-benefit analysis might be used to evaluate
any economic activity.
 
b) Lester Lave, an economist at the Brookings Institution, said that
cost-benefit analysis ''is a delightful tool for economists because
it is complete, flexible and allows you to look at everything.''

Considering the quote above, to what extent do you agree that

cost-benefit analysis is complete, flexible and allows you to look
at everything when considering any economic decision. [ 20 ]

Candidates would be expected to structure their answer so that it leads to a judgment on

the overall of effectiveness of cost benefit analysis. The answer should be geared
towards the quote provided in the question and points should be developed with this in
mind.

It is expected that students will be able to identify different costs and benefits of such a
scheme, but the most able students will be able to identify weaknesses in the process
and note that the decision may be made on other factors, such as the relative influence
of different stakeholder groups/political factors.

Stronger students should also be able to critically asses the notion of CBA’s
appropriateness in “any economic decision” and recognise that there may be occasions
when it is not the necessarily a benefit exercise. E.g. small projects, individual consumer
behaviour.

Benefits of CBA include:

 Provides rationality to decision making
 Provides quantitative assessment of alternatives to allow for comparisons
 Adjusted for inflation/time value of money

Limitations of CBA include:

 Difficulty in identifying all benefits and costs or projects;
 Difficulty in placing monetary values (e.g. value of loss of environment);
 Difficulty in assessing costs and benefits over time;
 Problems of assumptions.

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Question B3

a) Explain carefully, with examples the term market failure AND

explain with the use of a diagram how maximum and minimum
prices can be used to correct market failure [ 10 ]

Market failure – misallocation of scarce resources

Examples must be provided to ensure a clear and precise working knowledge of market
failure is evident.

It is expected that candidates can accurately describe the rationale for implementing a
price control policy and using the diagram be able explain how a maximum or minimum
price might correct market failure.

Anticipated diagram

Price 
S 

Minimum Price 

P1 

Maximum Price 

D 

0  Q1 
Quantity 

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b) Evaluate the effectiveness of price controls, such as a maximum

or minimum price in correcting market failure. [ 20 ]

Candidates should discuss not only the case for and against price controls, but also the
extent to which alternative policies might be successful. E.g. regulation, tax, subsidy

Candidates who only assess price controls will be limited to Level 2. Evaluation is likely
to come from a clear judgement as to how a government may intervene and if it should
be best policy and its likely effectiveness.

Price controls may be effective because

 Minimum prices may reduce demand for de-merit goods

 Maximum prices may lead to lower prices for consumers
 Maximum prices can counteract monopoly power

Price controls may be ineffective because

 Minimum price may encourage over supply

 Minimum prices often inefficient
 Minimum prices typically higher prices for customers
 Maximum prices may create a shortage / excess demand
 Maximum prices may lead to emergence of black market or waiting lists
 Minimum and maximum prices distort the market mechanism,

Evaluation may include

 Effectiveness and comparison of alternatives

 Depends upon the nature and severity of the market failure in question
 Free market v intervention arguments

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Question B4

a) Identify and explain the main causes of a recession AND with the
aid of a diagram explain the term negative output gap. [ 10 ]

Candidates should recognise that economic growth is typically measured by real GDP per
capita and that a recession is two consecutive quarters of negative growth. Recessions
may arise from

 Insufficient demand
 High interest rates
 Over-valued currency
 Credit crunch
 Falling house prices
 Falling business and consumer confidence
 Supply side shock
 Weaker expectations

Negative output gap – Where the actual level of GDP is below the potential level of GDP

Anticipated diagram with the negative output gap clearly marked/labelled (between X
and Y in the example below)

Actual GDP 
Real 
GDP 
Trend GDP 
X 

Y 

Time 

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b) Evaluate the extent to which you agree that the growth of GDP
per capita is desirable?
[ 20 ]

Candidates should recognise that GDP per capita can be a useful measure of living
standards and may bring certain benefits. Candidates are also expected the notion that
the sole growth of GDP per capita has its limitations, and there are issues pertaining to
its desirability.

Evaluation is likely to come from a clear judgement on how desirable growth in GDP per
capita is and how governments might balance GDP per capita with other macroeconomic
indicators.

High GDP per capita may be desirable because

 Typically indicates higher levels of employment
 Higher standards of living
 Lower absolute poverty
 Rising incomes
 Multiplier/accelerator benefits

However, arguments against may include

 Potentially inflationary
 Impact on balance of payments (rising imports through rising consumption)
 Environmental impacts
 Reducing leisure time
 Sustainability
 Stress on labour force

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Question B5

a) Identify and explain the main causes of unemployment in an

economy AND with aid of a diagram, explain the original Phillips
curve concept. [ 10 ]

Candidates should have a clear understanding of what unemployment is (those willing

and able to work, but unable to find a job) and that its main determinants include

 Demand-deficiency (stemming from a number of causes e.g. higher interest

rates)
 Structural changes
 Regional multipliers
 Technological factors
 Improved capital substituting labour

Phillips curve – A model to illustrate and describe the inverse relationship between
unemployment and inflation. Candidates should be able to explain that there would be
an increase in the demand for labour as government spending generates growth and the
pool of unemployed workers will fall. As a result, firms must compete for fewer workers
by raising nominal wage and workers have greater bargaining power to seek out
increases in nominal wages so wage costs will rise. Faced with rising wage costs, firms
pass on these cost increases in higher prices.

Anticipated diagram

Inflation 
(%) 

Unemployment (%) 

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b) Evaluate the extent to which supply-side policy is the most

effective approach to reducing unemployment in an economy. [ 20 ]

Candidates should be able to examine the different supply side measures that might be
used to reduce unemployment and judge their overall impact in terms of reducing
unemployment. Candidates must also recognise limitations of supply side polices in
reducing unemployment and may extend the debate to the impact on other
macroeconomic objectives.

To move beyond Level 2, candidates should be able to compare other economic policies
(fiscal & monetary) and draw a comparison with supply side policy in terms of achieving
a lower rate of unemployment. Evaluative comment should focus upon the idea of “most
effective” when assessing the usefulness of supply side policies. Stronger candidates will
note that the effectiveness of supply side policies may depend on the nature of the cause
of unemployment and external factors at a given point in time.

Supply side policies to reduce unemployment might include

 Education/training to improve occupational mobility and reduce skill gaps
 Polices to improve labour market participation
 Polices to improve geographical mobility
 Policies to increase productivity and build multiplier benefits
 Trade union reforms

Limitations of supply side polices

 Time lags
 Cost
 Increased capacity not matched with increase AD
 Impacts upon other macroeconomic objectives

Relevant AD/AS analysis should be rewarded.

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Question B6

a) Explain carefully the difference between Monetarist and

Keynesian long run aggregate supply curves AND with the aid of
diagrams as appropriate explain how the long-run macroeconomic
equilibrium of a country can differ according to Monetarists and
[ 10 ]
Keynesians.

Candidates should be clearly able to explain the differences in theory between the two
curves. It would be expected that candidates are able to support their explanations with
an appropriate diagram.

Anticipated diagram to illustrate the differences in curves

Price 
LRAS 
level  LRAS 
Keynesian 
Monetarist 

0  Real National Output 

Candidates should then explore the notion of long-run equilibrium. The Monetarist view
is that Long Run Aggregate Supply (LRAS) is inelastic and suggests that real GDP is
determined by supply-side factors – the level of investment, the level of capital and the
productivity of labour. Classical economists suggest that in the long-term, an increase in
aggregate demand (faster than growth in LRAS), will just cause inflation and will not
increase real GDP. As such, an economy will settle at full employment in the long-run.

The Keynesian view of long-run aggregate supply is different, and they argue that the
economy can be below full capacity in the long term.

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b) Evaluate the extent to which you agree that falling aggregate

demand is never harmful for an economy. [ 20 ]

Candidates here should address the potential benefits from falling aggregate demand
and consumer expenditure but also consider the potential drawbacks to an economy.
Stronger students will question the notion of “never harmful.”

Falling AD may bring certain benefits such as

 Lower inflationary pressures
 Lower wage demands
 Balance of payments improvement through lower imports
 Better long term sustainability of economic growth

However, AD may be considered harmful because

 Reduction in standard of living/happiness
 Unemployment effects
 Reduction in economic growth/output
 Multiplier effects making general situation worse
 Loss of business investment
 Reducing confidence

Evaluation may follow the line of argument that it depends how much aggregate demand
falls by, whether it is sustained the prevailing economic conditions, the policies used by
government to correct the position and wider macroeconomic considerations. It is
unlikely that candidates will consider falling AD to provide a net benefit, but they must
recognise that there may be gains from falling AD and depending upon the stage of the
economic cycle that a country is in, may indeed be beneficial for periods of time.

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