Economics · Oct / Nov 2016 · Paper 23 · Question 6

Define ‘the rate of interest’. [2]

A charge / cost (1)

for borrowing money (1). Or: The reward (1)

for saving (1). Or A monetary policy measure (1)

set by the central bank (1).

Explain two reasons why the poor may find it difficult to get loans from commercial banks. [4]

Banks may be worried that the poor will not be able to repay loans (1)

due to low income (1)

The poor may not be able to offer collateral (1)

due to lack of wealth (1)

poor have low credit rating (1). The poor may not have a record of saving (1)

as they may not have bank accounts (1). Small loans are less profitable for banks (1)

therefore poor often charged higher interest rates (1). Banks may be less accessible to the poor (1)

due to e.g. greater distance to travel (1). Note. max of 2 marks for one reason.

Analyse how an increase in spending on education could increase inflation in the short run but decrease it in the long run. [6]

In the short run an increase in spending on education will increase total (aggregate) demand (1)

higher total (aggregate) demand may cause inflation (1)

demand-pull inflation (1)

if close to or at full capacity (1). In the long run an increase in education spending may improve the quality/quantity of education (1)

this may increase the skills of workers (1)

this will increase labour productivity (1)

output can increase by more than costs (1)

this will reduce costs of production (1)

reduce cost-push inflation (1). Note. max of 4 marks for short run or long run.

Discuss whether an increase in consumer expenditure will be beneficial for an economy. [8]

Up to 5 marks for why it might: May increase living standards (1)

as people will be enjoying more goods and services (1). Firms increase output (1)

may increase economic growth (1)

if spare capacity (1)

without causing inflation (1). May increase employment (1)

firms may take on more workers to expand production (1). May increase government income through indirect taxes (1)

enabling expenditure on e.g. infrastructure/education/health (1). Up to 5 marks for why it might not: The spending may go on imports (1)

may divert production from the export market to the home market (1)

worsen the current account position (1). GDP may fall (1). Demand may increase faster than output (1)

causing demand-pull inflation (1). Increased consumer spending through borrowing (1)

may increase debt (1).