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GCE JUN 2007 : (AS 1) The Market Mechanism, Market Failure and Government Response

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ADVANCED SUBSIDIARY (AS) General Certificate of Education 2007 Economics assessing Module 1: The Market Mechanism, Market Failure and Government Response ASE11 Assessment Unit AS 1 (Data Response) [ASE11] FRIDAY 8 JUNE, AFTERNOON TIME 45 minutes. INSTRUCTIONS TO CANDIDATES Write your Centre Number and Candidate Number on the Answer Booklet provided. Answer all five questions. INFORMATION FOR CANDIDATES The total mark for this paper is 40. Quality of written communication will be assessed in questions 1, 2, 3 and 5. Figures in brackets printed down the right-hand side of pages indicate the marks awarded to each question or part question. ADVICE TO CANDIDATES You are advised to take account of the marks for each part question in allocating the available examination time. ASE1S7 3168 Study the information below and answer the questions which follow. HOUSE PRICES KEEP ON SOARING Figures for the second quarter of 2006 show house prices rising at their fastest rate since the beginning of 2005. The Land Registry reported prices up by 7.7% from a year ago and 3.3% from the first quarter. The number of houses sold rose by 25%. All regions of the UK saw a rise in house prices but the pattern was very uneven as shown in the table below: Table 1 Annual Percentage Change in House Prices, Mid 2005/Mid 2006 Annual Percentage Rise in House Prices Region Northern Ireland 25.4 Scotland 11.1 North 11.0 North West 11.0 Yorkshire and Humberside 10.1 Greater London 8.3 Wales 7.8 South East 6.1 West Midlands 6.1 South West 5.3 East Midlands 4.4 East Anglia 4.0 Financial analysts believe that house prices are certain to continue their upward path. Demand is rising due to low unemployment, immigration and low interest rates. Supply is inelastic due to planning restrictions and generous subsidy payments to farmers. Hence prices are being constantly driven upwards. Whilst the spiralling housing market is good news for existing home owners, it is very bad news for key public sector workers, seeking to get on the housing ladder. The Halifax Bank reported that the average asking price for a house was unaffordable for police officers, ambulance staff, firefighters, nurses and teachers in 339 of the 519 towns which it surveyed. In 2001 the figure was 124. ASE1S7 3168 2 Martin Ellis, chief economist at the Halifax Bank, said, It is now difficult for key workers to buy the average house, not only in the south of England but also in significant parts of the Midlands, the north of England, Wales and Scotland. The group which has suffered the most is nurses who are priced out of the average house in 97% of the towns surveyed, up from 43% in 2001. Beverley Malone, General Secretary of the Royal College of Nursing, said: I have been deeply concerned to hear of cases of nurses quitting the profession for better-paid jobs so they can afford to buy their own homes. The increase in house price inflation is thought by economists to be a significant reason behind the Bank of England s interest rate rise last week (August 3rd 2006). Milan Khatri, Chief Economist at the Royal Institution of Chartered Surveyors, expects the Bank to add to this rise with a further 0.25% this year (2006) and to see a slow down in the housing market next year (2007). Many economists view the house price boom as a distortion brought about by government restrictions on the supply of building land. An independent analyst stated, planning restrictions, generous farm subsidies and the power of the environmental lobby prevent the development of prime house building sites on agricultural land. These supply restrictions should be removed in order to bring stability to the housing market. A spokesperson from the Department of Communities and Local Government agreed, stating: Over the last 30 years the number of households has gone up by 30%, but the level of new house building has dropped by 40%. Source: Adapted from The Guardian July 29th 2006, author Larry Elliott and The Guardian August 8th 2006, author Ashley Seager ASE1S7 3168 3 [Turn over Answer all five questions. 1 With the assistance of a demand and supply diagram, explain the recent increase in house prices. [10] 2 Explain why there are significant regional variations in the rate of house price rises. [6] 3 Examine some of the impacts of the housing market upon the labour market. [6] 4 (i) Explain why a rise in interest rates is expected to cause a slow down in the rate at which house prices are rising. [3] (ii) Using the concept of cross-price elasticity explain the relationship between the housing market and the market for mortgage finance. [5] 5 Evaluate the proposal of the independent analyst who called for a massive increase in house building on what is now agricultural land. [10] THIS IS THE END OF THE QUESTION PAPER Permission to reproduce all copyright material has been applied for. In some cases, efforts to contact copyright holders may have been unsuccessful and CCEA will be happy to rectify any omissions of acknowledgement in future if notified. ASE1S7 3168 SP (NF) T46225/1

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Additional Info : Gce Economics June 2007 Assessment Unit AS 1 Module 1: The Market Mechanism, Market Failure and Government Response
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