UNIVERSITY OF CAMBRIDGE INTERNATIONAL EXAMINATIONS General Certificate of Education Advanced Level
ECONOMICS Paper 4 Data Response and Essays (Supplement) Additional Materials:
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October/November 2013 2 hours 15 minutes Answer Booklet/Paper
READ THESE INSTRUCTIONS FIRST If you have been given an Answer Booklet, follow the instructions on the front cover of the Booklet. Write your Centre number, candidate number and name on all the work you hand in. Write in dark blue or black pen. You may use a soft pencil for any diagrams, graphs or rough working. Do not use staples, paper clips, highlighters, glue or correction fluid. Section A Answer Question 1. ...view middle of the document...
• oil prices were an important item used in the construction of the consumer price index. • oil producers and suppliers would not necessarily spend their increased revenues. Table 1 below shows the rate of inflation in the UK in the 1970s. Table 1: UK inflation rates in the 1970s Year Inflation rate % 1970 6.40 1971 9.40 1972 7.10 1973 9.20 1974 16.00 1975 24.20 1976 16.50 1977 15.80 1978 8.30 1979 13.40
(Source for Table 1: http://www.whatsthecost.com) In 2011, oil prices increased again. The question then was whether the outcome would be the same as in the 1970s. Again some said there would be deflationary effects, while others predicted inflationary effects. In addition to the points that were made about the 1970s price increase, these further points connected with the economic context of 2011 were considered. In 2011 • oil prices rose by 50% compared with 240% in the early 1970s. consumers faced potential unemployment in the private sector from low growth rates as • economies tried to recover from a world banking crisis and recession. • consumer spending on oil as a percentage of GDP was about 40% lower than its 1970s level. • economies were less dependent on oil than in the 1970s. workers in the public sector were worried about possible unemployment as the public • sector was reduced in size. • reduced government spending had a downward effect on employment in all sectors. (Source: The Daily Telegraph)
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3 (a) The information mentions that some thought the effect of oil price increases would be deflationary. Explain what economists mean by ‘deflationary’.  (b) Refer to what actually happened to the rate of inflation in the UK as shown in Table 1: (i) Explain which, if any, of the points made about the 1970s could have caused what is shown in Table 1.  In the 1970s the UK government had a macroeconomic policy of increasing the budget deficit. Explain how this policy might have contributed to what is shown in Table 1. 
(c) From the information given consider whether the effect of the rise in oil prices in 2011 was more likely or less likely to have been inflationary compared with the 1970s. 
Section B Answer two questions.
(a) Explain how, according to marginal utility theory, consumers reallocate their expenditure between different products as prices change.  (b) In reality perfect competition is seldom found, and firms use advertising to persuade consumers to buy their products. Discuss whether imperfect competition means that markets are controlled only by producers and the traditional idea that the consumer determines what...