Economics as-Level Aqa Anwer June 2010 Essay

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AS ECONOMICS UNIT 2 INVESTMENT SPENDING MODEL ANSWERS JUNE 2010 a) Using extract A identify two main features of the change in business investment that occurred during the period 1990 to 2008 (8 marks) * Investment growth is positive for most of the time and negative for a short period of time (2). It is negative between 1990 and 1994 and in 2004, and positive for all other years (2) * Investment growth is very volatile (2) – at its highest, investment grew by over20% in 1999 and aits lowest investment fell by 10% in 1991 (2) * Investment growth was most volatile between 1990 and 2000 ranging from -10% to + 22% (2), but between 2000 and 2008 volatility feel with negative growth of -5% in 2002 and a growth of 12% in 2007 * The largest continuous growth in investment was between 1994 and 2000 where investment grew from 0% to 22% (2) whereas after 2002 investment growth was both positive and negative (2) b) Explain two factors that are likely to cause a fall in investment spending (12 marks) * When a recession occurs (2) – the economy is spending less, so firms will have less need to increase capacity (2) and with profits falling (2) will cut back on investment spending to ensure survival (2) * The cost of borrowing (2) – if interest rise, the cost of borrowing increases (2) meaning the firms will have to make bigger repayments (2) so will cut back on investment spending if the think they will not make enough profit to fund the repayments (2) * Cost of capital equipment (2) – if the price of capital goods goes up they become more expensive to buy (2), so firms will be rationed out of purchasing capital goods (2) since they may not have sufficient funds to purchase them (2) * Spare capacity (2) – if there is spare capacity in the economy, maybe due to recession (2), firms will not invest in new machines

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