UNIVERSITY OF CAMBRIDGE INTERNATIONAL EXAMINATIONS General Certificate of Education Advanced Level
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ECONOMICS Paper 4 Data Response and Essays (Supplement) Additional Materials: * 3 2 7 9 8 8 3 0 9 5 *
October/November 2012 2 hours 15 minutes
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. Section B Answer any two questions. You may answer with reference to your own economy or other economies that you have studied where relevant to the question. At the end of the examination, fasten all your work securely together. The number of marks is given in brackets [ ] at the end of each question or part question.
This document consists of 4 printed pages.
DC (NF/CGW) 52329/5 © UCLES 2012
2 Section A Answer this question.
Budget deficits The recent world recession has resulted in an increased government budget deficit in many European countries. Fig. 1 shows budget deficits and economic growth rates for 2010 together with expected economic growth for 2011 for selected countries. Fig. 1 UK budget deficit % of GDP economic growth rates 2.1% 10.4% 1.2% 5.0% 2011 2010 1.2% 2010 1.6% budget deficit % of GDP Germany economic growth rates
budget deficit % of GDP
Portugal economic growth rates
Hungary economic budget growth rates deficit % of GDP
2.8% 8.0% 0.5% 2010 2010 0.7% 2011 2010 4.1% 0% 2010 2011
Below are two opinions about budget deficits. First opinion Budget deficits should be reduced quickly by immediate reductions in public spending. An economy needs to grow and reductions in public spending encourage growth in the private sector. If the economy grows, wages will rise. Consumers feel safe to borrow and consume more. Investors will expect better returns if growth increases and they will also know that the deficit has been reduced by cuts in public spending and not by tax increases. Second opinion In 2009 there was a massive reduction in demand by the private sector in some countries. To offset the reduction in private spending, some governments believed they should increase public spending. This would cause a larger budget deficit and provide a stimulus to demand. Businesses need increased demand to invest and innovate. Increased demand causes a multiplier effect on national income. Demand is central to the debate about budget deficits. © UCLES 2012 9708/41/O/N/12
3 Below is a newspaper comment on these two opinions. By 2010 the falling value of some countries’ currencies stimulated international demand for their tradable goods, resulting in manufacturing growth. Some argued that this growth in exports meant it was possible for the government to decrease its spending to reduce the budget deficit. Others argued that this growth in exports would be insufficient and raised the question ‘where would demand for the economy’s output then come from?’ They said it would not come from the public sector because the decrease in government spending would put people out of work, ruin small businesses and damage some larger ones. It would not come from the private sector because interest rates on borrowing in some countries had been at record low levels for some time but this had failed to stimulate demand. They believe it is better to wait until an economy grows and repay the deficit by reducing public spending gradually. (Source: The Observer 13/06/10)
(a) The data refers to a ‘government ..... budget deficit’. Explain what this means.
(b) Use Fig. 1 to consider whether there is a link between the size of the budget...