Thursday, October 11, 2018

Highly Likely Essay Questions for Section B of Paper 2 Economics CIE (CAIE)

Highly anticipated essay questions for 9708/22 this coming Wednesday (17th October):

1. How a production possibility curve can be used to illustrate economic ideas like opportunity cost, rising opportunity cost (these two are different and the latter is becoming more popular in the recent), unemployment, economic growth and unattainable position
2. Whether market economy or planned economy is more desirable/ likely to improve consumer well-being/ better in making decisions/ better in allocating resources
3.  Functions of money and whether money is able to perform all the four functions in an economy that is experiencing high rate of inflation
4. What is meant by equilibrium price and quantity and how a change in demand/ supply would alter both equilibrium

5. The right type of elasticity to determine whether two goods are substitutes or complements/ normal goods or inferior goods

6. Whether PED/ XED/ YED would be useful for firms and governments (I won't do these essays if I were you!)

7. Whether the problem of demerit goods can be dealt with an indirect tax and banning/ better information/ minimum price

8. Whether the problem of merit goods can be dealt with subsidies and maximum price

9. Whether the imposition of maximum price would be able to help low income families 

10. Using AD/ AS diagrams, explain how a fall in exchange rate/ depreciation can cause both demand-pull and cost-push inflation

11. Inter-relationships between the inflation rate, exchange rate and balance of payments

12. Whether floating or fixed exchange rate system is more desirable

13. Terms of trade and whether a fall/ increase in terms of trade is beneficial to an economy

14. Comparative advantage and how an economy can consume outside its own PPC. Illustrate with trading possibility curve

15. Fiscal/ monetary/ supply-side policies to achieve macroeconomic objectives like higher growth, lower unemployment and lower inflation

16. Expenditure-dampening vs. expenditure-switching policies in reducing current account deficit

Several important observations:
a) There is somewhat an observable trend in Paper 2. When the examination board found a new method/ technique or even question to ask, they will 'toy around' with the new concept for several exams/ years before moving on to other new techniques or questions. For instance 'increasing opportunity cost' makes its first appearance in W16 (V3). Then it was asked again in W17 (V3) and now in Feb/ March 2018 (V2)

(b) There is also an indicator that questions may no longer be asked according to chapter/ cluster. This may pose some challenges for candidates that tend to specialise in micro/ macro (which I strongly forbid!!) In W17 (V3), part (a) was about PPC (Chapter 1). However its part (b) was about supply-side policies (Chapter 5). Another one is the recent Feb/ March 2018 paper. Part (a) was about price elasticity of supply (Chapter 2) but its part (b) was regarding supply-side policies (Chapter 5)

(c) Effectiveness of fiscal/ monetary/ supply-side policies to achieve price stability is extremely popular in recent years (let's hope that the trend stays until your exam)

Popular Questions in Section A of Paper 2 Economics CIE (CAIE)

Important updates:
1. Do not evaluate/ provide conclusion just because the question is an 8-marker (Section B, part (a) of each essay). High marks do not automatically indicate that the question is evaluative in nature. By contrast, low marks also do not necessarily imply that there won't be any evaluation. In A2, there were instances where a question is a 5-marker and yet evaluation and conclusion are expected from students. Instead, interpret/ watch out the keywords that they use such as:
(i) Discuss (most common one) ....
(ii) Explain whether ....
(iii) How far ....
(iv) To what extent ....
(v) Do you agree ....
(vi) Is this the most important feature ....

2. Evaluations and conclusion come in a package. You can only have something to conclude or weigh upon after considering both advantages and disadvantages/ pros and cons. It is somewhat illogical to provide conclusion where no arguments/ discussions prior take place (to conclude against what?)
After a 'chronic' two hours, this is what I found:

Microeconomic questions
a) Calculating percentage of change. You may be asked to find the new price or the original price

b) Identify one demand reason and one supply reason which may explain for the rise/ fall in the price of a particular commodity

c) Using demand and supply diagram to show how equilibrium price and quantity will be affected when an indirect tax/ subsidy is being introduced. It can also be applied to show how an exchange rate has risen or fallen in value. Please take note of the keyword 'show'. It means that you do not have to provide analysis/ explanation. The diagram on its own is suffice to earn you a full 2 marks. Only provide analysis when the instruction is 'explain'. Alternatively, watch out for the marks allocated. If it is a 4-marker, then you have to explain

d) Maximum/ minimum price. Normally, you will be asked to draw a diagram. Then you need to include analysis e.g. expansion in demand but contraction in supply which leads to shortage. Likely to be a 4-marker

e) Production possibility curve e.g. whether it will shift inward or outward based on the information provided e.g. recession, peace talk with rebels, economic recovery and others. There will be analysis marks for this. Usually, it would be a 4-marker

Macroeconomic questions
a) Current account balance. Compare between two given years of whether it has improved or worsened. Likely to have minor calculations here

b) What other information would be needed to determine the current account balance e.g. you may be given 'balance of trade in goods' and so, you have to state the others like 'net trade in services', ' net investment income' and 'net transfers'

c) How a depreciation may cause demand-pull and cost-push inflation

d) Conditions necessary for a depreciation to turn a current account deficit into surplus e.g. PEDx > 1 or/ and PEDm > 1, there is no parallel devaluation, inflation rates must not increase by the full extent as depreciation, trading partners do not impose protectionist measures and others (very, very, very popular!)

e) Whether protectionism is justified. To some extent e.g. protect sunrise industries, safeguard sunset industries, ensuring survival of strategic industries and prevent dumping. No since it will promote complacency, lead to trade war and cause cost-push inflation

f) How components of the aggregate demand are affected when there is a rise/ fall in the price of a particular commodity. Consider the case of falling oil prices. Oil typically has low PED. So, when the price of oil falls, total revenue from oil exports will also decline. Ceteris paribus, (X-M) will fall and so there will be a decline in AD. Second, oil firms will reduce their investment e.g. oil exploration activities. That will also reduce the AD. Then, government revenue from oil exports will also be adversely affected. Spending into the economy e.g. schools, hospitals, roads and bridges is likely to be cut. Again this is a fall in AD. What about C? In an oil-dependent economy, it is safe to assume that many people are employed in the oil and gas sector. In this case, employment will be axed and so C will fall. Alternatively, the government may raise taxes or introduce new ones to cover up shortfall in revenue. This will again reduce C into the economy. All these reflect a fall/ leftward shift of AD

g) Whether currency appreciation/ depreciation is more desirable

h) Whether fixed exchange rate system is reliable. Yes as this may promote international trade, encourage investment and avoid speculation which may destabilise local financial market. No, as it requires huge amount of foreign reserves, speculations will always be there and interest rates can no longer be altered to achieve certain macroeconomic aims  

i) Which category of spending that has the greatest impact onto price index. Here you need to watch out for largest price change or/ and component with biggest weighting assigned

Easy-to-follow tips which may increase your ability to score:
a) If you cannot finish the 'discuss' question in Section A, list out all the points and evaluations. You may still gain 2 marks for listing. Obviously, this is better than nothing

b) Before you hand up your paper, please check all the diagrams and ensure that they are in satisfactory condition e.g. label of axes, label of curves, whether you accidentally put price and quantity instead of price level and real output (most common mistake). Ignoring this may cause you to lose up to 4 marks, depending on how many diagram questions are there in the paper

c) Write concisely. Do not provide evaluations or/ and conclusion for an 8-marker. It is a pure waste of time as the instruction is 'EXPLAIN'. There is no provision of marks for these two, no matter how well you have written them. While it is not wrong to do so, do bear in mind that they will certainly take away some precious time from other sections/ parts. Inability to finish the paper = lower marks

d) Use lots of paragraph to distinguish your ideas/ evaluations, one from another (especially for candidates whose writing skills are still in the development/ formation stage). It also gives the examiner a pleasant marking experience which may translate into higher marks (how significant I wouldn't know, but it does bear some weight. More so in A2 essays)

e) Use diagrams wherever possible in case if you do not know how to explain a particular concept. Perhaps, the diagram may do some 'talking' on behalf of you

Saturday, October 6, 2018

Basic Techniques To Elevate Your Marks For Paper 2 CIE (CAIE) Economics

1) Regarding diagrams. This is one of the most overlooked areas. Most candidates would just proceed into explanations without having a second look/ thought about the diagram they drew. When I go through my students' work, I often find that the diagrams are either wrongly labelled or unlabelled. For instance, there is a tendency to label 'Price' vs. 'Quantity' instead of 'Price level' vs. 'Real output' for an aggregate demand-aggregate supply analysis. Another problem is the tendency to label 'Price' vs. 'Quantity' instead of 'Price of USD1 (in MYR)' vs. 'Quantity of USD' for an exchange rate diagram. Such mistakes can cost candidates up to 2 marks

2) Regarding the 'Discuss' question under data response. I personally find that this is the most poorly-answered question in Section A. The most obvious reason is poor time management. Candidates may feel that they have spent too much time in the first couple of questions and as a result, this particular question has to be rushed through to make way for Section B. Sometimes, they are even being left out. My suggestion is, in the worst case scenario, list out the answers (in a proper sentence). You would still qualify up to 2 marks provided if the points and arguments are sound and relevant. In case if you do not know how to argue/ evaluate, you could still earn up to 4 marks for one-sided answer

3) Always remember to ask yourself a question. 'Am I answering the question?'. According to the examiner reports (it's not the first time), very frequently, candidates tend to write very generally about a particular economic theory without even considering whether it answers the question or not. For instance, if a question asks candidates to discuss whether the knowledge of PED would be useful for the government, then by all means, PED must be written with the theme 'government' in mind. Unfortunately, in a large account, many would write 'everything-they-know-about-PED' e.g. when a firm should increase or decrease prices (not even relevant in the first place), factors that influence the value of PED etc. Marks could be significantly increased if one keeps this simple rule in mind

If these three are strictly adhered to, it is possible to easily raise your overall Paper 2 marks to as much as 8 (consider 22/40 to 30/40). That could be a three-grades jump!! (assuming your Paper 1 is doing fairly well) 

Monday, October 1, 2018

Interrelationships Between Inflation Rate, Exchange Rate, Interest Rate and Current Account Balance (AS Economics)

Question from a student of mine: Can you please explain the interrelationships between inflation rate, exchange rate, interest rate and current account balance?

a) Inflation rate and exchange rate
A country has relatively higher rates of inflation --> home-made goods become less price competitive in both domestic and international markets --> rise in imports and fall in exports --> increase in the supply of local currency & fall in the demand for local currency to facilitate transactions --> excess supply --> currency depreciation

b)  Exchange rate and inflation rate
Currency depreciation --> imported raw materials, semi-finished goods and finished goods become artificially more expensive --> increase in the costs of production --> leftward shift of SRAS --> an increase in general price level --> rise in cost-push inflation

Currency depreciation --> local goods become artificially cheaper in international market and foreign goods become artificially more expensive for domestic market --> assuming PEDx > 1 and PEDm > 1, export value would increase while import value fall --> rise in net exports --> rightward shift of AD --> increase in general price level --> higher demand-pull inflation

c) Inflation rate and interest rate
An increase in the rates of inflation --> exceeded the targeted level --> monetary authority would have to intervene pre-emptively --> raise interest rates to slow down economic activities

d) Interest rate and inflation rate
Higher interest rates --> cost of borrowing will increase --> households and firms will reduce spending into the economy --> fall in AD --> decline in price level --> reduce demand-pull inflation

e) inflation rate and current account balance
Relatively higher inflation rates --> home-made goods become less price competitive in both domestic and international markets --> assuming that PEDx > 1 and PEDm > 1, value of exports would fall while value of imports rise --> worsening of current account balance

f) Current account balance and inflation rate 
Say, if a country has current account deficit --> value of imports is greater than the value of exports --> a decline in net exports --> lower AD --> fall in average prices --> lower demand-pull inflation

g) Exchange rate and interest rate
Currency depreciation --> imported raw materials, semi-finished goods and finished goods would become artificially more expensive --> an increase in costs of production --> fall in SRAS --> rise in general price level --> triggers cost-push inflation --> if this exceeds the targeted inflation rate, then monetary authority may have to intervene by raising interest rates

Currency depreciation --> local goods would become artificially cheaper in international markets while foreign goods would become artificially more expensive in domestic market --> assuming PEDx > 1 and PEDm > 1, value of exports would increase while imports fall --> higher net exports --> rise in AD --> higher price level --> triggers demand-pull inflation --> if this exceeds targeted rate of inflation, then the central bank may have to raise interest rates

h) Interest rate and exchange rate
An increase in interest rates --> commercial banks and financial institutions offer higher rates of return on savings --> attract very wealthy foreigners and pension funds to deposit/ save money in this said country while at the same time there will be lesser outflows of hot money --> demand for local currency would increase while supply of local currency in money market would fall --> excess demand causes appreciation

i) Exchange rate and current account balance
Currency depreciation --> foreign goods become artificially pricier in domestic market while local goods cheaper in international markets --> assuming that the both exports and imports are price elastic in demand --> value of exports would increase while imports fall --> net inflows of money --> improvement in current account balance

j) Current account balance and exchange rate
Say, a country has current account deficit --> imports are greater than exports --> supply of local currency would increase while demand for local currency to facilitate transactions would fall --> excess supply causes depreciation

k) Interest rate and current account balance (has two possibilities where one can become the evaluation of the other)
Rise in interest rates --> higher cost of borrowing --> spending by households and firms into the economy would fall including buying imports --> lesser outflows of money --> improvement in current account balance

Rise in interest rates --> rise in inflows of hot money while a fall in outflows of hot money --> demand for local currency increases while its supply falls --> excess demand leads to appreciation --> foreign goods eventually become more price competitive --> buy more imports --> worsening of current account balance (assuming imports are price elastic in demand)

l) Current account balance and interest rate
Say, a country has large and persistent current account deficit --> value of imports is greater than value of exports --> fall in net exports --> leftward shift of AD --> fall in general price level --> lower demand-pull inflation --> may fall below targeted rate of inflation --> monetary authority may be forced to cut interest rates pre-emptively

This should be a comprehensive guide. Do use it wisely and please refrain yourself from memorising them at all costs! Think logically :)