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Cambridge International AS & A Level

ECONOMICS 9708/22
Paper 2 AS Level Data Response and Essays May/June 2024

2 hours

You must answer on the enclosed answer booklet.

* 5 0 9 6 4 1 5 5 4 9 *

You will need: Answer booklet (enclosed)

INSTRUCTIONS
● Answer three questions in total:
Section A: answer Question 1.
Section B: answer one question.
Section C: answer one question.
● Follow the instructions on the front cover of the answer booklet. If you need additional answer paper,
ask the invigilator for a continuation booklet.
● You may use a calculator.
● You may answer with reference to any economy you have studied where relevant to the question.

INFORMATION
● The total mark for this paper is 60.
● The number of marks for each question or part question is shown in brackets [ ].

This document has 4 pages.

DC (SL/CB) 329559/1
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2

Section A

Answer all parts of this question.

1 Dilemma for the European Central Bank (ECB)

The Eurozone consists of 19 European Union (EU) states that have agreed to use a common
currency (the euro) and monetary policy, both of which are governed by the ECB. The ECB sets
interest rates for all 19 members of the Eurozone and since July 2021 has aimed to maintain the
rate of inflation at 2% in the medium term. Interest rates have been held at 0% since March 2016.

112 111.74

110.70
110.37
110 109.90
109.41
consumer
price index 108.49
107.98
108 107.70 107.60
107.42
107.14
106.53
106
Apr 2021 Jul 2021 Oct 2021 Jan 2022
source: Tradingeconomics.com

Fig 1.1: Eurozone Consumer Prices Index (CPI) March 2021 – February 2022

In March 2022, the annual rate of inflation hit a record high for the Eurozone of 7.5% and is
forecast to continue to rise throughout 2022. Additionally, according to the ECB vice president,
annual economic growth is expected to fall from 4.6% at the end of 2021 to around 0% at the
end of 2022. Most of the impact of these changes is expected to fall on consumers. Much higher
energy costs and rising food prices tend to have a more severe effect on poorer households and
those on fixed incomes.

The main causes of the rapid increase in the inflation rate are supply-side factors. The rise in
energy prices result from a combination of the Covid-19 pandemic and the conflict between
Russia and Ukraine which have reduced supplies of oil and gas. Additionally, the Eurozone labour
market is increasingly suffering from a shortage of supply as unemployment has fallen to a record
low of 6.8% in February 2022 with further falls predicted. Because the rise in the rate of inflation is
almost exclusively supply-side driven, the ECB fears that this will lead to further falls in economic
growth leading to a period of ‘stagflation’, where an economy experiences high inflation and low
economic growth at the same time.

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8.2 8.1 8.2

8.0
8.0 7.9
7.8 7.7
7.6 7.5
7.4
% 7.4 7.3
7.2 7.1
7.0
7.0 6.9
6.8
6.8
6.6
Apr 2021 Jul 2021 Oct 2021 Jan 2022
source: Tradingeconomics.com

Fig 1.2: Eurozone % unemployment rate March 2021 – February 2022

All this leaves the ECB with a dilemma. Should it:

• increase interest rates substantially now to control the increasing rate of inflation and risk
weakening economic growth even further, or
• increase them slightly in the hope that supply pressure will ease soon (this runs the risk of
making high inflation more permanent if the pressure does not ease), or
• leave interest rates unchanged?

Sources, adapted from: reuters.com 31 March 2022

and reporting by Balazs Koranyi 1 April 2022

(a) Describe what has happened to consumer prices in the Eurozone between March 2021 and
February 2022. [2]

(b) With the help of an aggregate demand and aggregate supply diagram, identify the main type
of inflation in the Eurozone. [2]

(c) Consider the extent to which the shortage of supply of labour in the Eurozone may have
contributed towards the increasing rate of inflation. [4]

(d) Using the concept of price elasticity of demand, assess the relative impact on poorer
households, including those on fixed incomes, of rising prices of food and energy. [6]

(e) Assess the advantages and disadvantages of the ECB ‘substantially’ increasing the interest
rate to control rising inflation. [6]

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Section B

Answer one question.

EITHER

2 (a) Explain how the Gini coefficient is used to measure income inequality and consider the
relative strength of two economic reasons suggested for such inequality in a low-income
country. [8]

(b) Assess the extent to which government policies to redistribute income and wealth are likely to
be successful. [12]

OR

3 (a) With the help of an example of each, explain the difference between a merit good and a
demerit good and consider whether a subsidy given to a merit good will always be effective in
increasing its consumption. [8]

(b) Assess whether fixing a minimum price is likely to be the best policy to reduce the consumption
of a demerit good. [12]

Section C

Answer one question.

EITHER

4 (a) With the help of a diagram, explain what is meant by the circular flow of income in an open
economy and consider the extent to which it can explain economic growth in such an
economy. [8]

(b) Assess whether supply-side policy is the most effective way to achieve long-run economic
growth. [12]

OR

5 (a) Explain what is meant by protectionism and consider the effectiveness of using tariffs as a
method of protectionism. [8]

(b) Assess whether free trade is always better than a policy of protectionism for a developing
economy that wishes to trade internationally. [12]

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