A-LevelEconomicsThe macroeconomy9708/42 · Feb/Mar 2018 · Q625 Marks

Explain the difference between autonomous investment and induced investment. Consider whether there is a link between these two types of investment.

(a)Explain the difference between autonomous investment and induced investment. Consider whether there is a link between these two types of investment.[12]
(b)'Governments should concentrate upon providing favourable conditions for investment by firms in the private sector. This would allow all investment in an economy to be carried out by firms in the private sector.' How far would you support this view?[13]

Mark scheme

Marking points from the official mark scheme (Feb/Mar 2018). The mark or mark type is shown in brackets.

Responses should distinguish clearly between autonomous investment and induced investment, recognising that the former will come from outside the circular flow of income while the latter will depend upon changes in the level of income. There should be some discussion whether a link can be established between the two types of investment. This link should rely upon the relationship between the multiplier effect on income and the accelerator effect on investment.
L4 (9-12) responses attempt to show how the multiplier and accelerator might interact and to evaluate key factors which will determine the extent of the interaction. For example the level of autonomous investment's impact on the level of income will depend upon the multiplier which, in turn will be influenced by leakages from the circular flow. This in turn will determine the level of induced investment which will also depend upon the capital/output ratio.
Answers should identify and explain the key conditions introduced by governments which might promote investment in the private sector. These might include low interest rate policy, favourable taxation, direct government support. Discussion should then focus upon whether the private sector should be solely responsible for investment. This might look at circumstances in which public sector investment might be needed, for example providing public/merit goods. A conclusion should then be provided based on the preceding discussion
L4 (9-13) for an evaluative answer which discusses whether ALL investment should be carried out by firms in the private sector. Candidates to recognise that some investment, for example relating to merit/public goods or in natural monopolies should be left to governments. A conclusion addressing both parts of the statement should be provided.