In February 2016, share prices on stock exchanges fell throughout the world. There were a number of reasons for this; including concerns about the slowdown in world growth, the possibility of deflation and unemployment, and fears that some commercial banks could go out of business.

Mark scheme

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

1. [2] (a) Two marks from: A financial institution (1) that offers services to people/households/firms (1) examples of services (1) that is profit orientated (1) (usually) in the private sector (1).
2. [4] (b) A stock exchange enables firms to raise finance by issuing shares (1) by providing a market for shares / enables shares to be bought and sold (1) finance allows firms to invest (1) which increases their ability to produce more (1). A stock exchange helps firms merge (1) enabling firms to take greater advantage of economies of scale (1) reducing costs of production (1) increasing international competitiveness (1) capturing more market share (1). If stock exchange is doing well (1) wealth/dividends may rise (1) causing higher spending (1). Allows sales of government bonds/securities (1) money raised can be spent on e.g. infrastructure (1).
3. [6] (c) A fall in the price level could be caused by a fall in total (aggregate) demand (1). This may be due to a fall in consumer expenditure / rise in saving (1) a fall in borrowing (1) a fall in investment (1) due to e.g. a lack of confidence (1) spending may be delayed due to the expectation that prices may be lower in the future (1) deflationary demand-side policy measures (1) e.g. a rise in the rate of interest (1) rise in direct taxation (1). Exports may fall (1) due to e.g. fall in incomes abroad (1) a rise in exchange rate (1). A rise in total (aggregate) supply (1) due to e.g. advances in technology (1) increased investment (1) reduced costs of production (1) increase in productivity (1) supply-side policy measures (1) resulting from e.g. improvements in education and training (1).
4. [8] (d) Up to 5 marks for why they might: Increased government spending and/or lower taxes / expansionary fiscal policy (1) lower interest rates and/or increased money supply / expansionary monetary policy (1) will increase total (aggregate) demand/spending (1) may reduce cyclical unemployment / more workers may be employed to meet the higher demand (1) but may cause demand-pull inflation (1). Higher demand may also cause cost-push inflation (1) as demand for workers rises (1) firms may compete for workers (1) causing wage rates to rise (1). Up to 5 marks for why they might not: An increase in demand may not push up prices if unemployment is initially high (1) firms will be able to attract more workers by just offering jobs (1) they will not have to raise wages (1). The government may use supply side policy measures to reduce unemployment (1) e.g. improved education and training/privatisation/deregulation (1) such policy measures may reduce costs (1) may increase total (aggregate) supply by as much as total (aggregate) demand (1). The government may use price controls (1).