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PRE-LEAVING CERTIFICATE EXAMINATION, 2015

MARKING SCHEME

ECONOMICS

HIGHER AND ORDINARY LEVEL

*WMS16*

35 Finglas Business Park, Tolka Valley Road, Finglas, Dublin 11T: 01 808 1494, F: 01 836 2739, E: info@examcraft.ie, W: www.examcraft.ie

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HIGHER LEVELSECTION A (100 marks)

Answer six of the nine short response type questions in the spaces provided.

1. The 2011 Census shows that Ireland’s population is now over 4.5m – its highest level for over 150 years. State three economic consequences of an increasing population. (16m) Any 3: (6m + 5m + 5m) • Larger domestic market. • Increased pressure on government services. • Increased pressure on infrastructure. • Dependency ratio increase. • Better utilisation of state services in currently under-populated areas of the country. • Increase in land / property prices. • More transfer payments (State benefi ts). • Potential for higher government revenue.

2. “It is estimated that the ‘Black Economy’ cost the Irish economy over €6bn in 2014.” (The Small Firms Association) Explain what is meant by the term the ‘Black Economy’. State one method by which the Government could discourage this activity. (16m) Explanation (8m) – All economic activity that goes unrecorded in national income accounts. Method: Any 1: (8m) Reduce direct taxation / indirect taxation / alterations to tax system. • Better enforcement by Revenue Commissioners. • Simplifi cation of the tax system. • Make good use of tax revenue and educate public about same. • Higher penalties for tax / social welfare fraud. • Advertising campaign promoting adherence to tax laws.

3. Defi ne the term ‘economic development’. State two policies by which governments in Less Developed Countries (LDCs) might promote economic development. (16m) Defi nition (8m) • An increase in the GNP per person, accompanied by a change in the fundamental structure of society. Policy: Any 2: (2 × 4m) • Promote population control. • Improve infrastructure. • Promote land / agriculture reform. • Improve education / literacy skills. • Incentives for development of enterprise. • State bureaucracy / corruption / spending on arms.

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4. In January 2014 the Government introduced domestic water charges for Irish consumers. Outline two positive and two negative consequences of domestic water charges. (16m) Positive: Any 2: (2 × 4m) • Less pressure to increase taxes / borrowing. • More effi cient use of resources. • Targeting use of resources economically. • Pressure to improve quality of services. • Lower tax base. • Use of revenue collected. • Meeting the terms of our agreement with the Troika. • Cutting wastage of water by encouraging the identifi cation and repair of leaks. • Discouraging wasteful practices such as running water 24 hours a day in winter to prevent freezing of pipes. • Greater ability to manage shortages, e.g. in periods of drought, by using pricing to manage scarcity without cutting off or rationing supply. • Reducing the need to waste scarce capital by investing prematurely in water supply and waste treatment plants. Negative: Any 2: (2 × 4m) • Increased cost of living. • Increased infl ation. • Affects lower income groups most. • Inequality / fairness. • Services may not improve. • Revenue not spent productively. • People can’t afford it on top of Local Property Tax.

5. A consumer in equilibrium buys 10 cups of coffee at €2 each and 10 books at €6 each. The marginal utility of the cups of coffee is 5 utils. What is the marginal utility of the books? (Show all your workings.) (16m) – Marginal utility of books / Price of books = Marginal utility of coffee / Price of coffee (4m) – 5 / €2 = MU books/ €6 (8m) – So MU books = 15 utils (4m)

6. Explain, with the aid of a labelled diagram, the relationship between average costs and marginal costs. (17m) Diagram (4 × 2m) • Cost axis • Quantity axis • AC • MC Explanation (3 × 3m) When MC > AC, then AC is rising When MC < AC, then AC is falling When MC = AC, then AC is at a minimum / constant

C

Q

MC

AC

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7. Outline two circumstances under which a factor of production can earn ‘economic rent’. (17m) Any 2: (9m + 8m) • Shortage in the supply of any factor of production. • If land / labour is in short supply its price will increase. • Possession of a rare skill or talent. • If a person has a skill that is in great demand, e.g. professional soccer player, then they can command high fees. • Rent of ability. • An entrepreneur who invents a much sought after commodity may command high income, e.g. Bill Gates, who invented the ‘Windows’ operating systems. • Completely specifi c factors of production. • There is no opportunity cost in the use of an existing factor of production which is completely specifi c (not adaptable to other uses, e.g. a peat bog), if a payment is made for the use of this specifi c factor then the entire payment would be economic rent as the opportunity cost is zero. • Super-normal profi ts earned in the short run. • These will be eliminated with the entry of new fi rms but long run if barriers to entry exist, e.g. in monopoly.

8. Defi ne the term ‘price discrimination’. State two conditions which must exist to enable a fi rm to pursue a policy of price discrimination. (17m) Defi nition (9m) • When goods or services are sold to different consumers in different markets at varying ratios between marginal cost and price – the price difference is not due to difference in the cost of production. Conditions Any 2: (2 × 4m) • Monopoly power. • If freedom of entry to the industry existed, competitors would enter where the fi rm was charging the higher price and earning SNP and this would continue until only normal profi t was earned. • Separation of markets. • This ensures that goods bought in the low-priced market cannot be offered for resale in the higher-priced market – if it was not possible to separate the markets then price discrimination would occur until no price difference existed. • Different consumer elasticities of demand – consumers with the greater price elasticity of demand are charged the lower prices for their goods, e.g. students are assumed to have lower incomes and so are not in the position to pay the full price for certain goods and services. • Consumer indifference – the difference in price may be so small that consumers are indifferent and so do not mind paying the slightly higher price. • Consumer attitudes to the goods – a consumer may be willing to pay a higher price for a good which they consider to be in fashion / provide status, e.g. young people and their desire for branded products.

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9. Outline three key ideas which John Maynard Keynes contributed to economic thought. (17m) Any 3: (6m + 6m + 5m) • National income could reach equilibrium without reaching full employment. • The level of national output is demand determined. • He favoured government intervention in the economy. • The job of Government is to manage the economy. • The Government can use fi scal policy to create full employment. • The size of national income depends on expenditure and hence employment depends on expenditure. • Investment by entrepreneurs depends more on business people’s expectations than on the rate of interest. • Investment could be less than savings and cause a leakage in spending, which decreases national income and employment. • He created new economic tools to explain his theories – the multiplier, MPC, MPM, etc. • The multiplier – any initial increase in spending will cause a greater increase in GNP. • The liquidity preference theory. • People desire to hold their wealth in money form for three reasons: transactionary, speculative and precautionary. • He favoured a managed system of foreign exchange rates rather than the gold standard.

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SECTION B (300 marks)

1. (a) (i) State and explain the assumptions underlying the theory of perfect competition. Any 4 : (5m + 5m + 4m + 4m) 1. There are many small fi rms / sellers in the industry. 2. There are many buyers in the industry. 3. All fi rms aim to maximise profi ts. 4. There is freedom of entry and exit. 5. There is widespread knowledge. 6. Products are homogeneous. 7. Each fi rm has a perfectly elastic supply of factors of production. 8. All fi rms produce at the lowest point on the average cost curve. 9. Individual buyers and sellers act independently.

(ii) Outline two advantages and two disadvantages of perfect competition as a market structure. Advantages Any 2: (2 x 3m) 1. The product is produced and sold at the lowest point on the average cost curve. Hence the consumer gets it at the lowest possible price. 2. Because costs are at a minimum there is no waste of resources. 3. Consumers are not exploited as only normal profi ts are earned in the long run. 4. Consumers are guaranteed the same quality and price everywhere. 5. Perfect competition encourages effi ciency. Disadvantages Any 2: (2 x 3m) 1. Lack of choice for consumers as all products are homogeneous. 2. Because most fi rms are small, they do not benefi t from economies of scale. 3. Prices may be high as the lowest possible AC may be relatively high. 4. Lack of super normal profi ts may discourage new fi rms from entering the industry. 5. Consumers do not benefi t from price or non-price competition. (30 marks)

(b) Using suitably labelled diagrams, compare the short-run equilibrium position with the long-run equilibrium position of a fi rm operating under conditions of perfect competition. Refer to the assumptions in your answer in (a) (i) above. Short run: Diagram (5m) • Demand = Average Revenue = Marginal Revenue / D1 = AR1 = MR1 (1m) • Average cost / AC (1m) • Marginal cost / MC (1m) • P1 (1m) • Q1 (1m) Explanation (7m) • Firm produces where MC = MR (2m) • This gives P1 and Q1 (1m) • Firm is earning super normal profi t where AR > AC (2m) • The existence of SNP encourages new fi rms to enter the market (2m)

Q

P

P1

D1 / AR1 / MR1

MCAC

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Long run: Diagram (5m) • D2 = AR2 = MR2 (1m) • Average Cost / AC (1m) • Marginal Cost / MC (1m) • P2 (1m) • Q2 (1m) Explanation (8m) • Because of the entry of new fi rms, market supply has risen and price has fallen (2m) • The fi rm’s demand curve shifts down to D2 (1m) • The fi rm produces where MC = MR (2m) • This gives P2 and Q2 (1m) • The fi rm produces where AC = AR (1m) • Only normal profi ts are earned (1m) (25 marks)

(c) Explain, with the aid of a diagram in each case, the short-run supply curve and the long-run supply curve of a fi rm in perfect competition. Short run: Diagram (4m) • MC (1m) • AVC (1m) • Line indicated above minimum point of AVC (2m) Explanation (6m) • The short-run supply curve is that part of the marginal cost curve (3m) • Above the AVC (3m)

Long run: Diagram (5m) • MC (1m) • AC (1m) • AVC (1m) • Line indicated above minimum point of AC (2m) Explanation (5m) • The long-run supply curve is that part of the marginal cost curve (2m) • Above the AC (3m)

(20 marks)

P

P2

Q2

Q

MCAC

D2 / AR2 / MR2

P

P1

Q

MCAVC

D1 = AR1 = MR1

P

P2

Q

MC AC

AVC

D2 = AR2 = MR2

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2. (a) For analytical purposes economists make certain assumptions about consumer behaviour. State and explain four principal assumptions. Any 4: (4m + 4m + 4m + 3m) Stated (2m + 2m + 2m + 1m), Explained (2m + 2m + 2m + 2m). 1. The consumer has limited income – the consumer’s income is not large enough to satisfy his / her needs and wants, therefore the consumer must choose between those goods he / she wishes to buy. 2. The consumer aims to get maximum satisfaction / utility from that income – consumer will spend his / her limited income in such a way that he / she will achieve the most satisfaction / best value for money. The consumer will obey the Equi-Marginal Principle of Consumer Behaviour. 3. The consumer acts rationally – the consumer acts in that manner consistent with his / her preferences. If the person sees an identical commodity priced differently in two adjoining shops, they will buy it at the lower price. 4. The consumer is subject to the Law of Diminishing Marginal Utility – as a consumer consumes additional units of a good his / her marginal utility for this good will eventually decline. (15 marks)

(b) (i) Show, by means of a labelled diagram, the market demand and supply curves for Apple iPads. Identify and explain the market equilibrium position. Diagram (7m) • Price (1m) • Quantity (1m) • Supply curve (1m) • Demand curve (1m) • P1 (1m) • Q1 (1m) • E1 (1m) Explanation (2m) • The fi rm is in equilibrium where the market supply curve equals the market demand curve and there is no tendency for price to change.

(ii) Explain, with the aid of a separate diagram in each case, the effect which each of the following is most likely to have on the above equilibrium position: Introduction of a new tablet by Samsung: Diagram (4m) • D2 (1m) • P2 (1m) • Q2 (1m) • E2 (1m) Explanation (3m) • Demand curve moves to the left (D2) because of the increase in competition (1m) • Lower price P2 (1m) • Lower quantity Q2 (1m)

Q

D

SP

P1

Q1

E1

Q

P

P1

P2

Q1Q2

E1

E2

D2

D1

S1

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Increase in costs of production: Diagram (4m) • S2 (1m) • P2 (1m) • Q2 (1m) • E2 (1m) Explanation (3m) • Supply curve shifts to the left because supply falls (1m) • Higher price P2 (1m) • Lower quantity (1m)

Government lowers income tax by 2%: Diagram (4m) • D2 (1m) • P2 (1m) • Q2 (1m) • E2 (1m) Explanation (3m) • Demand curve shifts to the right (D2) because consumer income has risen (1m) • Higher price P2 (1m) • Higher quantity Q2 (1m)

(30 marks)

(c) (i) State and explain four factors which affect Price Elasticity of Demand (PED). Any 4: (4 × 5m) Stated (2m), Explained (3m). 1. Availability of close substitutes. 2. Complementary goods. 3. Is the good a luxury product or a necessity. 4. The proportion of income spent on the good. 5. The durability of the good. 6. Expectations of future price changes. 7. Length of time allowed for adjustment to price changes. 8. Consumer habits / brand loyalty. 9. Number of alternative uses the good has.

(ii) The PED for the Apple iPad has been calculated as –2.9. Using your knowledge of PED, explain the economic meaning of this fi gure. Sign is minus (5m) • As price increases, demand will fall / obeys the law of demand. Value is –2.9 Any 1: (5m) • The percentage change in quantity demanded will be 2.9 times greater than the percentage change in price. • This is a price-elastic good – the percentage change in quantity demanded is greater than the percentage change in price. • This is a luxury good – when price rises, the demand will fall by a greater percentage, indicating that the good is not a necessity. (30 marks)

Q

P

P1

P2

Q1Q2

E1

E2

D1

S2

S1

Q

P

P2

P1

Q2Q1

E2

E1

D1

D2

S1

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3. (a) ‘‘The Government must encourage, incentivise and reward small businesses in the upcoming budget.’’ (The Irish Small and Medium Enterprises Association) (i) Outline three measures the Government could take to improve the competitiveness of small Irish fi rms. Any 3: (3 × 5m) Stated (2m), Explained (3m). 1. Reduce the minimum wage / wage restraint. 2. Reduce utility charges. 3. Reduce taxation. 4. Reduce bureaucracy. 5. Give subsidies / grants to fi rms. 6. Develop infrastructure. 7. Ease credit availability. 8. Fund skills development.

(ii) Explain two reasons why small fi rms survive in the Irish economy. Any 2: (2 × 5m) Stated (2m), Explained (3m). 1. Small size of market / scale of operation. 2. Personal service. 3. Consumer loyalty. 4. Desire of citizens to maintain a viable community. 5. Traditional / niche markets. 6. Exclusive nature of commodity being provided. 7. Transport costs. 8. Availability of capital. 9. Membership of voluntary groups. (25 marks)

(b) It is generally agreed that the long-run average cost curve slopes downward due to economies of scale and then slopes upward due to diseconomies of scale. These economies and diseconomies of scale can be both internal and external. (i) Defi ne the underlined terms. (2 × 4m) Economies of scale • Reduction in the long-run average cost of production as a fi rm / industry increases its size of operation. Diseconomies of scale • Increase in the long-run average cost of production as a fi rm / industry increases its size of operation.

(ii) Distinguish between internal economies of scale and external economies of scale. Give two examples in each case and explain how each arises. Internal economies of scale (3m) • Forces within a fi rm which decrease its costs as the fi rm grows in size. Examples Any 2: (2 × 4m) 1. Increased use of specialised machinery – a fi rm may be able to buy or use more specialised equipment/machinery, resulting in a decrease in unit costs. 2. Labour economies and greater specialisation of workers – if a particular job can be separated into separate and distinct components it may result in a reduction of costs.

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3. Construction economies – large plants cost less per cubic metre than smaller ones. 4. Buying economies – large quantities bought result in bigger discounts. 5. Economies of distribution – lower unit cost of delivery. 6. Financial economies – larger fi rms can avail of the possibility of lower interest rates. 7. Managerial economies – as a fi rm grows, management costs may not grow in proportion to the growth in the fi rm. 8. Production process economies – a large fi rm may be able to run one process into the next without costly discontinuities. 9. Indivisibility problem reduced – if the volume of production increases, the unit cost may be lower, e.g. glass-making furnaces may operate around the clock to save costs of cooling and re-heating. 10. Marketing economies – savings in the cost of advertising, e.g. Nike advertising globally. 11. Reduction in waste – large fi rms with more lines may reduce waste. External economies of scale (3m) • Forces outside a fi rm which decrease its costs as the industry grows in size. Examples Any 2: (2 × 4m) 1. Better infrastructure – as roads / communications, etc. improve, these will benefi t all fi rms. 2. Bulk purchasing of raw materials by the industry – as the industry expands, fi rms require more materials / components, which may become cheaper as suppliers expand to meet increasing demand. 3. Development of specialist fi rms / disintegration of the production process – some of the jobs which a fi rm once performed may be contracted out to specialist fi rms at reduced costs, e.g. the supply of linen to hotels. 4. Development of separate R&D units – as industry becomes very large, R&D agencies may be set up to provide facilities for individual fi rms and the cost of this research may be shared between fi rms or with a public body, e.g. Teagasc. 5. Supplies of machinery – manufacturers of machinery will be encouraged to design, develop and produce machines for expanding industry and these advanced machines will help reduce costs. 6. Development of training courses – workers in expanding industries may be provided with training courses by VECs / FÁS (SOLAS), helping them become more effi cient. 7. Support from public bodies – some public bodies help particular industries in general, e.g. Fáilte Ireland / FÁS (SOLAS) may help fi rms in the tourism industry. 8. Subsidiary trades may develop – as an industry grows, subsidiary trades may develop to service the expanding industry, e.g. hotels, B&Bs locating close to airports or seaports. (30 marks)

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(c) An entrepreneur producing a maximum output of 100 units per week has the following total costs of production: • Rent €800. • Wages (paid weekly) €1,500. • Raw materials €2,000. • Normal profi t €1,000 (€10 per unit).

What is the minimum price at which each unit can be sold if production is to continue: (i) In the short run • The fi rm needs to cover only its variable costs (2m) • These are: wages €1,500 (2m) raw materials €2,000 (2m) €3,500 (1m) • Normal profi t does not have to be earned in the short run (2m) • Minimum price must be €3,500 / 100 = €35 (2m)

(ii) In the long run • The fi rm needs to cover all its costs, including normal profi t, or it will be forced to close (2m) • These are: rent €800 (1m) wages €1,500 (1m) raw materials €2,000 (1m) normal profi t €1,000 (1m) €5,300 (1m) • Minimum price must be €5,300 / 100 = €53 (2m) (20 marks)

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4. (a) (i) Defi ne enterprise as a factor of production. (5m) Enterprise is the factor of production which takes the initiative in organising land, labour and capital, and which bears the risk involved in production.

(ii) Outline the risks that an enterprise faces in business activity. Any 4: (4 x 5m) Named (2m), Explained (3m) 1. Loss of profi ts / capital invested. 2. Rise in production costs. 3. Change in taste or fashion away from the product. 4. Unplanned events, e.g. bad weather. 5. Strikes / industrial relations disputes. 6. Theft of stock or cash. 7. Fire to premises / damage to stock due to fi re. 8. Accidents to members of staff / public. 9. Bad decision making. 10. Changes to competitive conditions, e.g. new legislation. (25 marks) (b) Discuss the importance of each of the following to a free market (enterprise) economic system: (i) Entrepreneurs Any 3: (5m + 4m + 4m) Named (2m), Explained (3m + 2m + 2m) 1. Organises all the other factors to produce the goods / services. 2. Decides what goods are to be produced and at what price they are charged. 3. Provides an outlet for investors. 4. Relieves pressure on the Government to get involved in the production of goods and services. 5. Puts skill and capital into a business in the hope of making a profi t. 6. Creates wealth for the country. 7. Funds for expansion can be provided out of existing profi ts. 8. Creates employment. 9. Helps growth of national income. 10. Helps balance of payments.

(ii) Profi ts Any 3 (3 x 4m) Named (2m), Explained (2m) 1. Encourages the entry of new fi rms. 2. Provides funds for expansion. 3. Encourages effi ciency. 4. Normal profi t encourages production. 5. SNP can be a reward for reducing costs or developing new ideas. 6. SNP signals the desires of consumers. 7. Profi ts fund research and development. 8. Encourages risk taking. (25 marks)

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(c) In 2014 the European Central Bank (ECB) decreased interest rates to the lowest rate (0.15%) in history. Discuss the economic consequences of low interest rates on the Irish economy. Any 5: (5 x 5m) Named (2m) Explained (3m) 1. Reduces the incentive to save. 2. Less saving means less DIRT revenue for the Government. 3. Cheaper borrowing costs. 4. Lower mortgage interest repayments. 5. Rising asset prices. 6. Depreciation in the exchange rate. 7. May lift an economy out of recession. 8. Increases demand for houses and hence house prices. 9. May encourage borrowing for investment, which creates jobs. 10. More jobs means higher direct tax revenue (income tax) and higher indirect tax revenue (VAT) for the Government as well as stamp duty through rising house sales. 11. Demand for credit increases – credit cards, loans, overdrafts. (25 marks)

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5. (a) (i) Explain the terms ‘Terms of Trade’ and ‘Balance of Trade’. Terms of Trade: Any 1: (8m) • The ratio between the average price of exports and the average price of imports. • The amount of imports that can be bought per unit of exports. • index of export prices x 100 index of import prices 1 Balance of Trade: Any 1: (8m) • The difference between visible export and visible imports of goods. • The total value of exports minus the total value of imports.

(ii) Discuss the effects which an improvement in a country’s terms of trade would have on a country’s balance of trade. (5m + 4m) • Price of exports may rise ∴ exports may fall ∴ earning less revenue, but this depends on the price elasticity of demand for exports. • Price of imports may fall ∴ imports may rise ∴ resulting in higher import bill, but this depends on the price elasticity of demand for imports. (25 marks)

(b) (i) State and explain three factors which affect the foreign exchange value of the euro against other currencies such as the dollar ($) and sterling (£). Any 3: (3 x 5m) Stated (2m), Explained (3m) 1. Supply of euro. 2. Demand for euro. 3. Interest rates. 4. Speculation. 5. Policy of European Central Bank.

(ii) Discuss two economic consequences of a decrease in the value of sterling relative to the euro for the Irish economy. Any 2: (2 x 5m) Stated (2m), Explained (3m) 1. Imports cheaper. 2. Increase in unemployment. 3. Slowdown in rate of economic growth. 4. Balance of Payments worsens. 5. Increase in cross-border shopping. 6. Fall in exports. (25 marks)

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(c) Ireland’s trade surplus is the third highest in the EU but Ireland still relies heavily on imports. (i) Discuss the importance of imports to the Irish economy. Any 3: (3 x 5m) Stated (2m), Explained (3m) 1. Goods are imported that Ireland can’t produce. 2. Some goods are only economical to produce on a mass scale, e.g. cars. Ireland can’t do this. 3. We need to import vital raw materials. 4. Exports increase due to more resources available due to imports. 5. Improved trade links with other countries. 6. Wider choice of commodities for consumers. 7. Increased competition in the marketplace. 8. Imports provide employment in the distribution sector. 9. Import duties provide tax revenue for the Government.

(ii) Is the level of imports likely to vary with changes in the level of economic activity in Ireland? Explain your answer. (4m + 3m + 3m) • Yes the level of imports is likely to vary with changes in the level of economic activity in Ireland. As economic activity increases people will have more money to spend and because we have a high MPM, we will spend some of the increased income on consumer goods. • When economic activity increases, more is produced and more raw materials are needed. This means some of these raw materials will have to be imported and this increases our import bill. • As economic activity decreases, consumers buy fewer imported goods. However, a lot of our imports are necessities such as oil, fruit, etc. and so imports do not decrease that much. (25 marks)

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6. (a) Defi ne each of the following terms: (i) Current Budget Defi cit (5m) Current government expenditure exceeds current government revenue. (ii) Exchequer Borrowing Requirement (5m) The amount borrowed by a government to fund a current budget defi cit and any borrowing for capital purposes. (iii) Public Sector Borrowing Requirement (5m) The Exchequer Borrowing Requirement plus borrowing for semi-state / state- sponsored bodies and local authorities. (iv) National Debt (5m) This is the total amount of outstanding borrowing by the Government. (20 marks)

(b) ‘‘Ireland has the fourth-highest government debt in Europe.’’ (Irish Independent, 2014) (i) Outline the major reasons for the National Debt in recent years. Any 2 x 5m Stated (2m), Explained (3m) 1. Increased current budget defi cits. 2. Borrowing for capital purposes / self-liquidating debt. 3. Social Investment.

(ii) Describe the economic consequences (positive and negative) of an increasing National Debt. Any 5 x 5m Stated (2m), Explained (3m) Must have a minimum of two points under one heading. Positive Consequences: 1. Improved public services. 2. Increased spending on infrastructure. 3. Future economic growth. 4. Employment. 5. Self-liquidating debt. Negative Consequences: 1. Opportunity cost involved. 2. Increased burden on taxpayers 3. Increased annual interest repayments. 4. Diminished international credit rating. 5. Outside euro stability pact requirements. 6. Poor government management of the economy. 7. Risk in provision of public services. (35 marks)

(c) Ireland has experienced a Current Budget Defi cit since 2008. Describe four possible economic consequences of a Current Budget Defi cit on the Irish economy. Any 4 x 5m Stated (2m), Explained (3m) 1. Austerity budgets. 2. Additional taxation. 3. Cuts in public expenditure. 4. Reduction in provision of state services. 5. Troika intervention. 6. Public sector pay. 7. Reduction in aggregate demand / job losses. 8. Loss of confi dence / emigration. 9. Moderation in citizens’ expectations. (20 marks)

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7. (a) The main components of National Income are Consumption, Investment, Government Expenditure, Exports and Imports. (i) Show the equation which links all these components with the level of National Income in the economy. (5m) • Y = C + I + G + X – M (ii) Explain what determines / infl uences the size of each of these components of National Income. Consumption Any 2: (2 x 3m graded) • Levels of income. • MPC. • Availability of credit. • Rate of interest. • Rates of Income Tax. Investment Any 2: (2 x 2m graded) • Rate of interest. • Expectations of business people. • Availability of credit. Government expenditure (2m graded) • Political decisions / type of fi scal policy of the Government shown through the budget. Exports Any 2: (2 x 2m graded) • Income levels from export markets. • Competitiveness of Irish exports. • Value of the euro. Imports Any 2: (2 x 2m graded) • Levels of income. • MPM. • Value of the euro. (25 marks)

(b) The table below shows the level of National Income, Consumption, Investment, Exports and Imports at the end of period 1 and period 2. (For the purposes of this question you may ignore the Government sector.) Use this data to calculate the following: (Show all your workings.) (i) The level of National Income in period 2. • Y = C + I + X – M • Y = 5,250 = 1.300 + 1,200 – 1,350 (4m) • Y = 6,400 (1m) (ii) The Marginal Propensity to Save. • MPS + MPC =1 • MPC = change in consumption / change in income = 450 / 600 = .75 (4m) • MPC = .75 • MPS + .75 = 1 • MPS = .25 (1m) (iii) The Marginal Propensity to Import. • MPM = change in imports / change in income = 150 / 600 = .25 (4m) • MPM = .25 (1m) (iv) The size of the multiplier. • 1 / 1 – MPC + MPM • 1 / 1 – .75 + .25 = 1 / .5 = 2 (3m + 2m) (20 marks)

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(c) ‘‘Economic growth is set to accelerate to 3.4% in 2015.’’ (Bank of Ireland Outlook) (i) Discuss two factors which infl uence the rate of economic growth in the Irish economy. Any 2: (2 x 5m) Stated (2m), Explained (3m) 1. The stock of factors of production. 2. The quality of factors of production. 3. The state of technology in the economy. 4. The productive capacity of the country. 5. The national economic climate. 6. The international economic climate. 7. The level of aggregate demand. 8. The availability of credit. 9. Government policy. (ii) Discuss the economic consequences (positive and negative) of a faster rate of economic growth for Ireland. Positive consequences Any 2: (2 x 5m) Stated (2m), Explained (3m) 1. Increased employment. 2. Improved government fi nances. 3. Improved Balance of Payments. 4. Improvement in standard of living. 5. Less emigration. 6. Investment opportunities. Negative consequences Any 2: (2 x 5m) Stated (2m), Explained (3m) 1. Infl ationary pressure. 2. Labour shortages. 3. Demand for wage increases. 4. Increased demand for imports. 5. Displacement of population. 6. Pressure on state services and infrastructure. (30 marks)

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8. (a) ‘‘Ireland’s unemployment rate has dropped to its lowest level in fi ve years of 11.7%’’ (CSO June 2014) (i) Name the two main sources for unemployment statistics in Ireland. (2 x 3m) 1. Live Register. 2. Quarterly National Household Survey. (ii) State, with reasons, which of the measurements gives the most accurate estimate of Irish unemployment. Most accurate measurement (2m) Quarterly National Household Survey. Reasons: Any 3: (3 x 4m) Stated (2m), Explained (2m) (20 marks)

(b) Discuss economic policies which the Irish Government might pursue in order to reduce the level of unemployment. Any 5: (5 x 5m) Stated (2m), Explained (3m) 1. Reduce taxation. 2. Subsidise additional labour employed. 3. Reduce costs for businesses. 4. Prudent management of the economy / improved regulatory framework. 5. Infrastructural development. 6. Maintain low corporation tax. 7. Investment in education / training 8. Credit creation. (25 marks) (c) ‘‘Over 243 people emigrate from Ireland every day.’’ (CSO 2014) (i) Describe two economic ‘push’ factors or two economic ‘pull’ factors currently affecting emigration from Ireland. Any two push or pull factors at 5m each Stated (2m), Explained (3m) Push factors: 1. High levels of unemployment. 2. Low wage rates. 3. Lack of promotion opportunities. 4. Poor social infrastructure. 5. Economic recession. 6. High tax rates. 7. Prospects for economic recovery. Pull factors: 1. Job opportunities abroad. 2. Develop skills abroad. 3. Better standard of living. 4. More optimistic outlook / Existence of Irish networks abroad. 5. Higher wages. 6. Better climate. (ii) State and explain the positive and negative consequences of emigration for the Irish economy. Positive consequences: 2 x 5m 1. Unemployment reduced. 2. Emigrants return to Ireland. 3. Contacts / export opportunities 4. Fall in demand for state services. Negative consequences: 2 x 5m 1. Higher dependency ratio. 2. Opportunity costs. 3. Loss of skills within the economy. 4. Smaller domestic market. 5. Loss of tax revenue. 6. Upward pressure on Irish wage levels. (30 marks)

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Ordinary LEVELSECTION A (100 marks)

Answer six of the nine short response type questions in the spaces provided.

1. Many Irish citizens donate fi nancial aid to organisations that assist citizens in Less Developed Countries (LDCs). Name one organisation involved in this activity. State one economic measure, other than fi nancial donations, that Irish citizens can take to improve economic activity in LDCs. Organisation Any 1: (8m) • Goal • Concern • Trócaire • Red Cross • World Vision • Bóthar Measure Any 1: (8m) • Buy goods produced in LDCs (trade not aid) – this could result in more money fl owing into LDCs, thereby increasing their wealth. • Put pressure on governments in the developed world to change trading practices / policies, ensuring fairer treatment of LDCs. • Campaign for debt reduction and change in public opinion and government policy. • Encourage multinationals to adopt fair trade and fair employment practices – measures such as boycotts of products, etc. help ensure that multinational companies do not exploit the people or resources of LDCs. • Volunteer to work in an LDC – provide a necessary service, e.g. teaching, construction work, healthcare etc. • Buy Fair Trade products – this ensures higher prices for producers and a better standard of living for citizens in LDCs. • Donations other than fi nancial aid, e.g. food, clothes, livestock, IT equipment, etc. (16 marks)2. Net emigration of Irish citizens is increasing. Explain the underlined term and state one economic reason for this development. Explanation (8m) • Irish citizens leaving Ireland to live elsewhere. Reason Any 1: (8m) • Rising levels of unemployment in Ireland. • Rising levels of taxation in Ireland. • Prospects for economic recovery poor in the short term / pessimistic outlook. • Reduced standard of living. • Better prospects of employment abroad, e.g. Canada, Australia. (16 marks)

3. ‘Economic development’ is defi ned as: Explanation (2 x 8m) • An increase in the level of income / standard of living / output / GNP / GNP per head of population. • Accompanied by a fundamental change in the structure of society. (16 marks)

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4. What economic institutions do the following initials stand for? (2 x 8m) (i) NAMA: National (2m) Asset (2m) Management (2m) Agency (2m). (ii) WTO: World (4m) Trade (2m) Organisation (2m). (16 marks)

5. State one economic advantage and one economic disadvantage of the introduction of the new water charges for domestic consumers. Advantage (8m) • Encourages people to become more water conscious. • The Government can use the revenue for other productive purposes. • Equitable – pay for what you use. Disadvantage (8m) • More administration / Billing. • Not all people can pay. • Not equitable – will affect those on the lowest income most. • Allowances for people with specifi c needs (e.g. children) may not be adequate. • Highest water charges in Europe. (16 marks)

6. State two reasons why the Irish economy needs entrepreneurs. Any 2: (9m + 8m) • To create employment. • To organise production. • To decide what goods to be produced and what prices to be charged. • To encourage future investment. • Provides an outlet for savers. • Creates tax revenue for savers. • May increase exports. (17 marks)

7. A fi rm produces 10 units each week. It receives €3,000 in total from the sale of these 10 units. The fi rm pays the following costs: Raw Materials €800; Rent of premises €1,000; Wages €600. Calculate the following: (Show all your workings). (i) The total cost of producing all 10 units: Total Cost: Raw materials €800 + rent of premises €1,000 + wages €600 = €2,400.00 (8m) (ii) The Profi t • Sales revenue €3,000 – Total costs €2,400 = €600 (5m) (iii) Cost of producing one unit • Total costs €2,400 / 10 = €240.00 (4m) (17 marks)

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8. (a) A consumer buys 100 units of a product when the price is €1.00. When the price is increased to €1.25, the consumer buys 80 units. Calculate the Price Elasticity of Demand (PED) for this consumer. (Show all your workings.) • PED = ΔQ P1 + P2 (2m) ΔP Q1 + Q2

P1 = €1.00 P2 = €1.25 ΔP = 0.25 Q1 = 100 Q2 = 80 ΔQ = –20

• PED = –20 €1.00 + €1.25 (2m) 0.25 100 + 80

= –20 2.25 (2m) 0.25 180

= –1 (3m) (9m graded)

(b) Is demand for this good elastic, inelastic or unitary elastic? Explain your answer. Answer: Demand is unitary (4m) Explanation: as PED = –1 (4m) (17 marks) 9. Explain the term ‘marginal utility’. (9m) • The extra utility / satisfaction gained when you consume one extra unit of a good. If a consumer’s total utility from 10 units of a product is 80 utils, and is 85 utils when 11 units are consumed, what is the marginal utility of the 11th unit (in utils)? (8m) • 85 utils less 80 utils = 5 utils (17 marks)

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SECTION B (300 marks)

1. The diagram below represents the long-run equilibrium of a fi rm in Perfect Competition. (a) Copy the diagram into your answer book. (i) Clearly label each of the lines numbered 1 to 4. 1 – Price / Cost axis / P / C axis (4m) 2 – Quantity axis / Q (4m) 3 – Average cost / AC (4m) 4 – D = AR = MR (4m) (ii) Equilibrium occurs at point A on the diagram. Show on your diagram: • The output the fi rm will produce in equilibrium (use label Q1) (4m) • The price charged for this output (use label P1) (4m) • The average cost of producing this output (use label C1) (4m) (iii) Perfect competition is described as being effi cient. Explain the meaning of this sentence. You may refer to your diagram in your explanation. Any 1: (2m) • The fi rm produces at the lowest point on the average cost curve – Point A. • The fi rm does not waste any scarce resources. (30 marks)

(b) The fi rm’s average cost curve is U-shaped on the above diagram. (i) Explain one reason why this curve slopes downwards initially. Explanation (6m) • Infl uence of economies of scale. These are factors which cause cost per unit to fall in the fi rm or industry as that fi rm or industry expands in size. Example Any 1: (4m) • Availability of better machines. • Saving in building costs. • Specialisation of labour. • Lower rate of interest on loans. • Bulk buying discounts. • Advertising economies. • Specialist training courses set up etc. (ii) Explain one reason why it eventually slopes upwards. Explanation (6m) • Infl uence of diseconomies of scale. These are factors which cause cost per unit to rise in the fi rm or industry as that fi rm or industry expands in size. Example Any 1: (4m) • Loss of managerial control. • Industrial relations problems. • Increased supervision costs. • Scarcity of raw materials. • Increased demands on infrastructure etc. (20 marks)

1

2

4P1 / C1

Q1

3

Marginal cost

Price /Cost

D = AR = MR

AverageCost

Quantity

A

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(c) One of the assumptions / characteristics of perfect competition is that all goods sold are homogeneous goods. (i) Explain the underlined term. Any 1: (9m) • Homogeneous goods are goods which are identical. • Consumers are unable to distinguish between the output of one fi rm and that of another fi rm. (ii) Should a fi rm in perfect competition advertise its goods? Explain your answer. Answer (2m) • No Explanation Any 1: (6m) • Because all goods are identical and by advertising its goods the fi rm is also advertising for all other producers. • Advertising increases costs and the fi rm would be ineffi cient and not producing at the lowest point on the average cost curve. Eventually it would have to shut down as it could not sustain losses in the long run. (iii) State and explain one advantage of perfect competition for the consumer. Any 1: (8m) • Minimum prices. • No advertising. (25 marks)

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2. The diagram below shows the demand and supply of new cars in Ireland. (a) (i) Copy the diagram into your answer book. Clearly label each of the lines numbered 1 to 3. (3 × 4m) 1 – price 2 – quantity 3 – supply (ii) Show on your diagram: (2 × 4m) • Equilibrium price. (use label P1) • Equilibrium quantity. (use label Q1) (20 marks)

(b) Suppose the demand curve for new cars shifts to the right, as shown below. Copy the diagram into your answer book. (i) State and explain two possible reasons why the demand curve for new cars has shifted to the right. Any 2: (2 × 5m) Stated (2m), Explained (3m) • Increase in consumer income. • Fall in petrol prices. • Decrease in motor tax. • Decrease in insurance costs. • Fall in income tax rates. • Introduction of a government scrappage scheme. • Increase in population. (ii) Show on your diagram: (3m + 2m) • The new equilibrium price. (use label P2) • The new equilibrium quantity. (use label Q2)

(iii) Suggest a complementary good for a new car and explain the effect on the demand for this complementary good if the demand for new cars continues to increase. Any 1: (10m) Named (4m), Effect (3m), Reason (3m). • Petrol / tyres will increase as demand for new cars increases; there will be an increasing demand for goods which complement them etc. Accept other appropriate answers. (25 marks)

2

1 3

Demand 1

Supply

Quantity

Price

P1

Q1

Price

Quantity

P1

Q1 Q2

P2

2

1S

D1

D2

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(c) “Over eight million tourists visited Ireland in 2013.” (Tourism Ireland, 2014) (i) State and explain two possible reasons for this development. Any 2: (2 × 5m) Stated (2m), Explained (3m) • The Gathering This has brought people from all over the world. • The weather Ireland had a particularly good summer in 2013. • Marketing Fáilte Ireland / Tourism Ireland / visits abroad by TDs / visits to Dublin by Michelle Obama have all helped promote Ireland. • Value Hotels / B&Bs etc. have become more competitive, lower prices attract more visitors. • Currency Changes in the value of the euro against sterling and dollars have increased number of tourists. (ii) State and explain two economic effects of this development for the hotel industry. Any 2: (2 × 5m) Stated (2m), Explained (3m) • Increased revenues / profi ts More visitors mean higher profi ts. • New business Rising tourist numbers means the opening of new hotels, guest houses and B&Bs. • Job creation More tourists means more jobs directly and indirectly, e.g. in hotels and suppliers. • Hotels remain open Hotels that may have been on verge of closure remain open. (iii) Suggest two measures the Irish Government could take to encourage tourism in Ireland. Any 2: (2 x 5m) Stated (2m), Explained (3m) • Indirect tax Lowering indirect tax, e.g. VAT, lowers prices (hotels, food, drink, etc.) and may encourage tourists. • Promotion Through agencies such as Tourism Ireland, tourism can be promoted. • Events Organise further events like the Gathering, Wild Atlantic Way etc. • Improve infrastructure Better motorways, dual carriageways, public transport etc. would make it easier for tourists to get around. (30 marks)

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3. (a) (i) Defi ne Land as a factor of production. (10 m graded 5 + 5) Land is anything supplied by nature which helps in the production of goods and services. (ii) State and explain one way in which land differs from the other factors of production. Any 1: (1 × 8m) Stated (4m), Explained (4m) • Land is fi xed in supply. • Its earnings are economic rent / it has no cost of production. • The price of land does not affect the quantity available. (iii) The price of houses in urban areas, particularly Dublin, has risen in the last twelve months. State and explain two reasons for this development. Any 2: (2 × 6m) Stated (3m), Explained (3m) • Rise in demand. • Profi le of population – large young house-buying age population. • Banks easing up on credit availability – more mortgages. • Panic effect – prices start to rise, people afraid if they don’t buy now they won’t be able to. Demand rises, prices rise. • Cash buyers – people have saved over the years and have deposits and collateral. • Rising rents – better value to buy rather than rent. (30 marks)

(b) “Ireland has attracted and continues to attract well-known global companies as well as emerging companies from a wide variety of sectors.” (IDA Ireland) (i) State and explain two economic reasons why foreign fi rms choose to locate in Ireland. Any 2: (2 × 5m) Stated (2m), Explained (3m) • Availability of skilled workforce. • Low rate of corporation tax. • Access to EU market / Member of the euro currency. • Availability of state incentives. • Good industrial relations. • Attractive rates of return on investments. • Availability of an English-speaking workforce. • Signs of recovery in economy. (ii) State and explain one way these foreign fi rms affect each of the following: Any 3: (3 × 5m) Stated (2m), Explained (3m) • The level of employment in Ireland – employment should increase. • The level of exports from Ireland – exports will increase. • The revenue collected from taxation in Ireland – taxation revenue will increase. (25 marks)

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(c) “There are 230,000 small fi rms in Ireland, employing 900,000 people.” (Enterprise Europe Network) Discuss three reasons why small fi rms survive in the Irish economy. Any 3: (7m + 7m + 6m) Stated (3m + 3m + 3m), Explained (4m + 4m + 3m) • Small size of market / Scale of operation. • Personal services. • Consumer loyalty. • Support the community. • Traditional / Niche markets. • Exclusive nature of the commodity. • Availability of capital. • Membership of voluntary groups. (20 marks)

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4. (a) Currency is one form of money. One function of money is a store of wealth. (i) Explain each of the underlined terms. Currency: (3m) Notes and coins used to buy goods and services. Store of wealth: (3m) Allows people to save for their future. (ii) State and explain two other functions of money. Any 2: (2 x 5m) Stated (2m), Explained (3m) • Medium of exchange. • Measure of value. • Standard for deferred value. (iii) State one example of money, other than currency. Any 1: (1 x 4m) • Cheques. • Credit cards. • Debit cards. (20 marks)

(b) (i) Name two commercial banks operating in Ireland. Any 2: (2 x 3m) • Allied Irish Bank. • Bank of Ireland. • Ulster Bank. • Permanent TSB. (ii) Describe two main functions of commercial banks. Any 2: (2 x 5m) Stated (2m), Explained (3m) • Saving facilities. • Lending. • Current Accounts. • 24-hour banking. • Computerised Transfer of Money. • Foreign Exchange. (iii) Outline one economic reason why commercial banks should be regulated. Any 1: (1 x 4m) Stated (2m), Explained (2m) • Protect consumers. • Proper lending policies. • Banking system stability. • Economic stability / confi dence. • Less need for government intervention. (20 marks)

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(c) The ECB decides the main interest rate within the euro zone. (i) What do the initials ECB represent? (10m) European Central Bank. (ii) If the ECB starts to increase interest rates, state and explain the effects this development could have on each of the following: Any 3: (3 x 5m) Stated (2m), Explained (3m) • Borrowers – higher cost of borrowing. • Savers – higher returns. • Irish Economy: – cost of servicing national debt increases. – fall in economic growth. – Demand for wage increases. (iii) State and explain two functions of the Central Bank of Ireland. Any 2 (2 x 5m) Stated (2m), Explained (3m) • Prints / Issues legal tender. • Government’s Bank. • Bankers’ Bank. • Regulator of fi nancial sector. • Offi cial external reserves. • Maintains price stability. • Central Bank Reports. • Implements EU Monetary Policy. (35 marks)

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5. (a) (i) Distinguish between a Balance of Trade Surplus and a Balance of Trade Defi cit. (2 x 5m) Balance of Trade Surplus: Visible exports are greater than visible imports. Balance of Trade Defi cit: Visible imports are greater than visible exports.

The table below shows Ireland’s exports and imports with other countries / regions.

Countries / Regions

Visible exports€ million

Visible imports€ million

Balance of trade€ million

Surplus or Defi cit

A France 7,750 9,000 –1,250 Defi cit

B USA 20,000 7,500 12,500 Surplus

C China 8,250 4,000 4,250 Surplus

D Australia 8,000 8,250 – 250 Defi cit

Using the partially completed table above, calculate Ireland’s Balance of Trade with each country / region (A, B, C above) and state whether it is a surplus or a defi cit in each case. Balance of Trade fi gures: 3 x 3m Surplus or Defi cit: 3 x 2m (25 marks)

(b) Ireland is a small open economy. (i) Explain the underlined term. (5m) • A country which imports and exports. (ii) State and explain two reasons why exports are important for the Irish economy. Any 2: (2 x 5m) Stated (2m), Explained (3m) • Job creation. • Increased GNP / Economic growth. • Increased sales / profi ts. • Earn foreign currencies. • Attract investment. (iii) State and explain two reasons why imports are important for the Irish economy. Any 2: (2 x 5m) Stated (2m), Explained (3m) • More choice for consumers. • Higher standard of living. • Raw materials needed for production. • Employment in distribution sector. • Tax revenue for the state. • Small domestic market. (25 marks)

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(c) Sometimes governments decide to restrict free international trade. (i) Explain the underlined term. (5m) • No barriers exist in the movement of goods and services between countries. (ii) State two methods which governments could use to restrict free trade. Any 2: (2 x 4m) • Tariffs. • Quotas. • Embargoes. • Administrative barriers. (iii) State and explain two reasons why governments may wish to restrict free trade. Any 2: (2 x 6m) Stated (3m), Explained (3m) • Protect domestic industries. • Protect domestic employment. • Protect against cheap labour economies. • National security. • Revenue for the Government. • Production of strategic goods. • Protect the balance of payments. (25 marks)

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6. (a) A government budget can have one of the following outcomes: SURPLUS BALANCED DEFICIT State and explain which one of the above outcomes applies to the Irish Government’s current budget. Stated (5m) • Defi cit. Explained Any 1: (10m) • In recent years the Irish Government’s expenditure has exceeded its revenue, resulting in a signifi cant defi cit. • The Government plans to spend more than it expects to receive in revenue. • The Government intends to put more money into circulation than it plans to withdraw. (15 marks)

(b) The Government may consider reducing tax rates in next year’s budget. (i) Explain the terms ‘direct tax’ and ‘indirect tax’. Direct tax (5m) • Taxes on income and wealth Indirect tax (5m) • Taxes on transactions / spending (ii) State and explain two economic benefi ts of lower rates of income tax to the Irish economy. Any 2: (2 × 5m) Stated (2m), Explained (3m). • Maintain standards of living during rising infl ation. • Increase participation in the workforce / incentivise the workforce. • Encourage continuation of Social Partnership. • Maintain / improve competitiveness. • Attract foreign industry / encourage investment. • Stimulate economic activity. • Discourages the black economy. (iii) State and explain two economic disadvantages of lower rates of income tax to the Irish economy. Any 2: (2 × 5m) Stated (2m), Explained (3m). • Infl ation. • Increased imports. • Reduction in tax revenue. • Need to increase rates of indirect taxation. • Increase in immigration. (30 marks)

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(c) Keeping infl ation stable is one of the economic aims of the Government. (i) State two other economic aims of the Irish Government. Any 2: (2 x 5m) • Improve balance of payments. • Economic growth. • Control of public fi nances / National Debt. • Improve infrastructure. • Regional Development. • Protection of the environment. • Just social policy. (ii) State and explain two measures which the Irish Government could take to achieve these aims. Any 2: (2 x 10m) Named (2m), Described (4m), Example (4m) • Fiscal policy. • Monetary policy. • Direct intervention. • Prices and incomes policy. • Regional policy. (30 marks)

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7. (a) Explain any three of the following in relation to National Income: (9m + 8m + 8m) • Transfer payment; – is a payment to someone who does not supply any factor of production in return. • Income-in-kind; – non-monetary income – refers to fringe benefi ts or ‘perks’, e.g. company cars, meal vouchers etc. • Real income; – real income is the amount of goods and services you can buy with your money income. • Money income – money income is income measured in monetary terms. (25 marks)

(b) Explain how any three of the following factors can affect the size of National Income: Any 3 (3 × 10m) Relationship (5m), Explained (5m) • The stock of factors of production; – The greater the stock of factors of production, the greater the size of national income. – More resources are available for goods and services to be produced. • The level of technology available; – The more advanced the level of technology, the greater the size of national income. – Productivity is enhanced by the use of good quality technology in the production process. • The performance of the domestic economy; – If the economy is experiencing an economic recession, national income tends to decrease. – As employment and investment levels decrease the demand for goods and services falls. • The performance of other economies. – If a recession is evident in other countries, this can have a negative effect on the size of national income in the domestic economy. – Less inward investment and/or a reduction in demand from other countries for goods produced by the domestic economy. (30 marks)

(c) (i) Investment is an injection into the economy and raises National Income. Name two other factors that would produce an injection into an economy. Any 2: (2 × 3m) • A rise in exports. • A rise in government expenditure. (ii) National Income will fall if there is a leakage (withdrawal) from the circular fl ow of income such as a rise in imports. Name two other sources of leakages. Any 2: (2 × 3m) • An increase in the level of savings. • A rise in taxation. (iii) How would the level of National Income in an economy be affected if the total injections were equal to the total leakages? (4m) • National income is stabilised / is at equilibrium. What effect would this have on the economy? Any 1: (4m) • It has no tendency to change. • Will tend to remain constant. • Aggregate demand is equal to aggregate supply. (20 marks)

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8. (a) According to the CSO, Irish price infl ation is expected to remain low during 2015. (i) What do the initials CSO stand for? (5m) • Central Statistics Offi ce. (ii) Explain the term ‘price infl ation’. (5m) • An increase in the level of prices over a period of time. (iii) State and explain the possible uses of information on price infl ation to each of the following: Consumers; Any 1: (5m) • Cost of living changes / changes to standard of living. • Return on level of savings. • Price comparisons / shop around. Employees; Any 1: (5m) • Changes to standard of living. • Need for a wage increase. The Government: Any 1: (5m) • Price competitiveness. • Economic indicator. • Pay negotiations. • EU stability pact. • Budget outcomes. (25 marks)

(b) State the effect which each of the following developments may have on the rate of infl ation: An increase in world oil prices (9m) • Infl ation would increase because: – The cost in fuel will rise. – The cost of home heating oil will rise. – The cost of distribution rises. – The cost of production will rise. A decrease in the rates of indirect taxes (8m) • Infl ation would decrease because: – The price of goods and services will fall. – Producers will now have to pay lower input prices, resulting in lower prices for fi nished goods and services. An increase in lending by banks (8m) • Infl ation will increase because: – This increases the level of spending within the economy, putting upward pressure on prices, e.g. housing sector. (25 marks)

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(c) To reduce the number of accidents and deaths on Irish roads, new drivers will now have to display a special ‘N’ plate indicating they are novices (newly qualifi ed drivers), for two years after they get a licence. (i) State and explain two other measures which the Government could introduce to reduce the number of accidents and deaths on Irish roads. Any 2: (2 x 6m) • Stricter legislation / more severe penalties. • Stricter enforcement of penalties. • Increased public awareness of road safety / advertising campaign. (ii) If successful and the number of deaths is reduced, discuss the economic effects which this development may have on each of the following: (2 x 7m + 6m graded) Hospital accident and emergency admissions: • Fewer admissions. • More effi cient use of resources. Motor insurance costs. • Reduced. (25 marks)