Economics 9708/42 — May/June 2016
Cambridge A-Level · A Level Data Response and Essays · worked solutions for every part, with the mark scheme
Topics Components of Aggregate Demand · Economic Growth and Sustainability · Equity, Poverty and Redistribution · Money and Banking · Macroeconomic Objectives and Policy Conflicts · Balance of Payments and Policies to Correct Disequilibrium · +11 more
Housing and Economic Growth in the UK
In 2013 a press article reported that ‘there has been a marked improvement in the housing market’. Potential buyers of housing had been encouraged because the central bank had fixed interest rates at an all-time low and also by a government scheme designed to give help to people wishing to buy property. The scheme meant that buyers did not have to find such a large deposit.
This caused a positive outcome for the construction industry, with investment and employment rising. However, it pushed up property prices.
In 2013 the average price of a house was seven times the average wage. A study recommended that the central bank should take steps to prevent house prices rising by more than 5% a year and should limit the amount people could borrow relative to their incomes. There should be regional variations to this limit, as property prices do not increase at the same rate in every region.
However, a deputy governor of the central bank said that limiting price rises would not solve the cause of the problem, which was the lack of new property development. He found it surprising that the study chose to focus exclusively on the demand side when the underlying problem was one of supply.
An economist said that the most effective intervention a government can make in the housing market is to relax the planning system and make it easier and cheaper to build more homes. Increased supply, leading to lower prices, would encourage demand. Others said that ‘although there is talk of a large rise in the price of houses, it is not uniform throughout the country and trying to influence the basic laws of supply and demand is not the right way of tackling the problem.’
The buying of housing gives rise to increased consumer spending and some argue that this helps the economy. Although policies by the government and the central bank had increased consumer demand and spending, such expenditure is quite different from the export-led growth model preferred by the government. Analysts suggested that the demand and supply conditions causing the current situation cannot last forever. When they end, the effect on the housing market (which by then will have many people with very high debts) will be very bad for the economy. This can be seen in countries such as Spain and the Netherlands, where property values are in decline.
Source: The Times, 14 September 2013
Identify two government policies in the article that could encourage an increase in aggregate demand.
The article states that there has been a ‘marked improvement in the housing market’.
Using the article and your own knowledge, explain how an economy might benefit from an ‘improvement in the housing market’.
Using the evidence in the article, assess whether it contradicts the view that an increase in house prices is an improvement for an economy.
The article contrasts a model of an increase in growth through consumer spending with a model of an increase in growth through exports.
Choose two macroeconomic aims of a government and discuss how the two growth models might have different effects on those aims.
The rest of this paper
6 more questions- Q2Efficiency and Market Failure · Externalities, Social Costs and Benefits25M
- Q3Indifference Curves and Budget Lines25M
- Q4Demand for and Supply of Labour · Wage Determination and Labour Market Intervention25M
- Q5Objectives and Pricing Policies of Firms · Revenue and Profit · Market Structures25M
- Q6Economic Development and Living Standards25M
- Q7Characteristics of Countries at Different Levels of Development · Employment and Unemployment25M