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GCE JUN 2008 : (A2 3) Economic Development and the Environment and Module 6: Financial Economics

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ADVANCED General Certificate of Education 2008 Economics assessing Module 5: Economic Development and the Environment and Module 6: Financial Economics A2E31 Assessment Unit A2 3 [A2E31] WEDNESDAY 4 JUNE, AFTERNOON TIME 1 hour 20 minutes. INSTRUCTIONS TO CANDIDATES Write your Centre Number and Candidate Number on the Answer Booklet provided. Answer either Section A on Module 5 or Section B on Module 6. From the Section which you select answer Question 1 and either Question 2 or Question 3. Indicate clearly on your Answer Booklet which Section you have answered. INFORMATION FOR CANDIDATES The total mark for this paper is 60. Section A: Quality of written communication will be assessed in parts (b), (d) and (e) of Question 1 and all parts of Questions 2 or 3. Section B: Quality of written communication will be assessed in parts (c), (d) and (e) of Question 1 and all parts of Questions 2 or 3. 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. A2E3S8 4175 Section A: Module 5 Economic Development and the Environment You must answer this question. 1 Study the information below and answer the questions which follow. The economics of climate change In 2005 the then Chancellor of the Exchequer, Gordon Brown, announced a review into the economic impact of climate change. The 578 page report, known as the Stern Review, was published in 2007 and may become the basis for a wide range of government policies. Its recommendations have generated widespread political and economic debate. In the summary of its conclusions the report stated: If we don t act, the overall costs and risks of climate change will be equivalent to losing at least 5% of global GDP each year. In contrast the costs of action reducing greenhouse gas emissions to avoid the worst impacts of climate change can be limited to 1% of global GDP each year. The world does not need to choose between averting climate change and promoting growth and development. Action now will create significant business opportunities, as new markets are created in low-carbon energy technologies and other low-carbon goods and services. The range of options to cut carbon dioxide emissions will require international frameworks. This should enable countries to trade permits to release carbon into the atmosphere eg developing countries could sell their rights to developed countries which need them more. Large scale international programmes could be set up to prevent further deforestation which contributes to more global levels of carbon than all transport in the world. International cooperation will lead to a five-fold increase in the development of new low-carbon technologies. The poorest countries, those most vulnerable to climate change, should fully integrate environmental protection measures into their development policies. Aid should be made available to help them do so. However, little can be done to change the likely adverse effects that some developing countries will face in the next few decades and so some adaptation will be essential. Climate change is the greatest market failure the world has ever seen and it interacts with other market imperfections. Three elements of policy are required. First, making the polluter pay the true cost of carbon emissions through tax, trading of permits and regulation; second, support for new technologies and third, information, education and persuasion to increase efficient use of energy. Adapted from the Stern report, 2007, Crown copyright. Crown copyright material is reproduced with the permission of the Controller of HMSO and the Queen's Printer for Scotland A2E3S8 4175 2 (a) Explain the term market failure . [3] (b) Explain how making the polluter pay can help address the problem of market failure. [6] (c) The Stern report claims that dealing with climate change could actually promote growth. Explain how this could happen. [4] (d) Some economists and politicians have claimed that the hidden message in the Stern report is that the burden of dealing with climate change will fall on the poorest countries. With reference to the passage, analyse whether this is likely to be the case. [8] (e) Irrelevant to the real problems facing less developed countries today . Discuss this view of the Stern report. [9] A2E3S8 4175 3 [Turn over Answer either Question 2 or Question 3. 2 (a) Distinguish between economic development and economic growth. [6] (b) Explain why national income statistics might not provide an accurate comparison of living standards between developed and less developed countries. [12] (c) Marks and Spencer have recently announced that they will charge customers for plastic bags in an effort to reduce their use. Discuss the view that supermarkets generally only pay lip service to environmental concerns. [12] 3 (a) Describe some of the characteristics of a developed economy. [6] (b) Analyse the impact which trade may have on the economies of less developed countries. [12] (c) Recently environmentalists have been campaigning to persuade supermarkets to reduce the number of miles our food travels. Discuss the view that a policy of relying more on locally grown produce, while environmentally sound, is economically undesirable. A2E3S8 4175 4 [12] Section B: Module 6 Financial Economics You must answer this question. 1 Study the information below and answer the questions which follow. Rate rise sparks distress signals Interest rates up; property prices down FTSE/RE 6,000 5,500 5,000 4,500 Feb Mar Apr 2007 May Jun Jul FTSE/RE Financial Times Index of Prices of Shares in Property and Real Estate Companies In summer 2007, there were cries of pain all over the country after the Bank of England lifted base rates to 5.75%. Further moves to 6% or more were widely expected. Higher rates had already left a trail of blood along the High Street and built ominous clouds over the property market. Economist David Kern said, We are very concerned over the long term effects on British business of the increasingly aggressive policy stance that seems to be emerging. A poll of small businesses found that 34% of them expected a recession within two years. Some believed rates had already risen too far. They pointed out that the economy was slowing, pay pressures were muted, and inflation was falling back. However, other economists argued that Britain was more under threat from inflation than at any time in the previous ten years. One more rise would have taken rates back to the level Labour inherited in 1997. Much of the prosperity of the intervening ten years was due to low interest rates. This increasing prosperity enabled the Labour party to increase tax revenue without derailing overall improvements in living standards. Rising interest rates and their effects create constraints for fiscal policy. One effect is to make it more difficult to increase tax revenue. With a rise in average share prices of 5% in the first half of 2007, the stock market appeared to be casting off interest rate worries, but appearances were deceiving. Property, builders and others exposed to debt were savaged. Shares in property development companies slumped. British Land plc saw its market value crash by 1.5bn and the stock market value of Land Securities plc fell by 1.8bn. However the higher interest rates were good news for those taking holidays in USA as the pound breached the $2 mark. This is one of the few beneficial effects of the fight against inflation a battle which some would argue is not worth fighting because of the damage which high interest rates do to employment, growth and incomes. Source: Adapted from the Daily Mail 6th July 2007. A2E3S8 4175 5 [Turn over (a) Describe what happened to prices of shares in property companies between January and July 2007. [4] (b) Analyse how rising UK interest rates could account for the changes in (i) the value of the pound against the dollar and [3] (ii) share prices of property companies. [3] (c) Explain some of the factors that the Bank of England might take into account before raising the base rate of interest. [6] (d) Explain why it might be difficult to increase the revenue obtained from taxes in the future if the Bank of England were to go on raising interest rates. [6] (e) Evaluate the view that the Bank of England should allow inflation to rise in order to protect employment, growth and incomes. [8] A2E3S8 4175 6 Answer either Question 2 or Question 3. 2 (a) Distinguish between bonds and shares. [6] (b) Analyse the role of the Stock Exchange in the UK economy. [12] (c) Between May 1997 and July 2007 the average price of UK shares rose by 47% whilst property prices trebled. Critically examine the view that the relatively poor performance of shares is the result of government policy. [12] 3 (a) Explain what is meant by the money supply. (b) Analyse how banks can use the cash deposits of customers to create money. [6] [12] (c) Many large firms have recently introduced additional charges for customers who pay by cash, whilst others have started to refuse payment by cheque. Discuss the view that these moves towards a cashless society are not only unfair to lowincome groups, but also a threat to individual liberty. [12] THIS IS THE END OF THE QUESTION PAPER A2E3S8 4175 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. SP (SC/CGW) T59948/2

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Additional Info : Gce Economics June 2008 Assessment Unit A2 3 Module 5: Economic Development and the Environment and Module 6: Financial Economics
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