2019

SINGAPORE#l HOME TUITION AGENCY EVERY STUDENT IN 000DHANDS ** fanilylnr.llll COLLATED av: FamilyTutor.sg� 2019 HL ECONOMICS TEST QUESTIONS AND ANSWER KEYS Lookiug to sl'.orc au 'A'? Hiro a private home tutor ,....,/'\ with FomilyTutor today! A htt p__:;;lljQ!!!il_ytutor.sg�� 1-y/ � M19/3/ECONO/HP1/ENG/TZ1/XX Economics Higher level Paper 1 Wednesday 15 May 2019 (afternoon) 1 hour 30 minutes Instructions to candidates yyDo not open this examination paper until instructed to do so. yyYou are not permitted access to any calculator for this paper. yySection A: a nswer one question. yySection B: a nswer one question. yyUse fully labelled diagrams and references to examples where appropriate. yyThe maximum mark for this examination paper is [50 marks]. 3 pages –2– M19/3/ECONO/HP1/ENG/TZ1/XX Section A Answer one question from this section. Microeconomics 1. 2. (a) xplain the relationship between the law of diminishing returns and a firm’s short-run E cost curves. [10] (b) Evaluate the view that monopoly is an undesirable market structure as it fails to achieve productive and allocative efficiency. [15] (a)Explain why price elasticity of demand varies along the length of a straight-line demand curve. (b) Examine the significance of price elasticity of demand for the decision-making of firms and governments. [10] [15] –3– M19/3/ECONO/HP1/ENG/TZ1/XX Section B Answer one question from this section. Macroeconomics 3. 4. (a)Explain how a deflationary gap might occur. [10] (b) Using the monetarist/new classical model and the Keynesian model, discuss the view that increases in aggregate demand will inevitably be inflationary. [15] (a) Explain how government spending might promote greater equity in an economy. [10] (b) Evaluate the view that government policies to promote greater equity will always have a negative effect on efficiency. [15] M19/3/ECONO/HP1/ENG/TZ1/XX/M Markscheme May 2019 Economics Higher level Paper 1 13 pages –3– M19/3/ECONO/HP1/ENG/TZ1/XX/M Use the question-specific markscheme together with the markbands. Award up to the maximum marks as indicated. Section A Microeconomics 1. (a) Explain the relationship between the law of diminishing returns and a firm’s short-run cost curves. [10] Answers may include:  definitions of the law of diminishing returns, short run, costs of production, cost curves  diagrams to show the effect of decreasing and then increasing marginal cost on the average total cost and on the average variable cost; marginal product increasing (total product rising at increasing rate) then decreasing (total product rising at decreasing rate)  explanation of the relationship between (diminishing) marginal product, (increasing) marginal cost, average variable costs and average total costs  examples of diminishing returns and their effect on short-run costs. Assessment Criteria Part (a) 10 marks Level 0 1 2 3 4 Marks The work does not meet a standard described by the descriptors below. There is little understanding of the specific demands of the question. Relevant economic terms are not defined. There is very little knowledge of relevant economic theory. There are significant errors. There is some understanding of the specific demands of the question. Some relevant economic terms are defined. There is some knowledge of relevant economic theory. There are some errors. There is understanding of the specific demands of the question. Relevant economic terms are defined. Relevant economic theory is explained and applied. Where appropriate, diagrams are included and applied. Where appropriate, examples are used. There are few errors. There is clear understanding of the specific demands of the question. Relevant economic terms are clearly defined. Relevant economic theory is clearly explained and applied. Where appropriate, diagrams are included and applied effectively. Where appropriate, examples are used effectively. There are no significant errors. 0 1–3 4–6 7–8 9–10 –4– (b) M19/3/ECONO/HP1/ENG/TZ1/XX/M Evaluate the view that monopoly is an undesirable market structure as it fails to achieve productive and allocative efficiency. [15] Answers may include:  definitions of monopoly, productive efficiency, allocative efficiency  diagrams to show productive and allocative inefficiency under profit-maximizing monopoly firm, economies of scale leading to lower prices and higher output  explanation of why the profit maximizing choices of a monopoly firm lead to productive and allocative inefficiency  examples of inefficiencies in monopoly markets in practice  synthesis or evaluation (evaluate). Evaluation may include: reasons why monopoly might be desirable (eg possibilities of economies of scale and the case of natural monopoly, the need to innovate to maintain economic profit, ability to finance research and development). Other reasons why monopoly may be undesirable (eg low quality of the products and services, x-inefficiency). Examiners should be aware that candidates may take a different approach which, if appropriate, should be rewarded. Assessment Criteria Part (b) 15 marks Level 0 1 2 3 4 Marks The work does not meet a standard described by the descriptors below. There is little understanding of the specific demands of the question. Relevant economic terms are not defined. There is very little knowledge of relevant economic theory. There are significant errors. There is some understanding of the specific demands of the question. Some relevant economic terms are defined. There is some knowledge of relevant economic theory. There are some errors. There is understanding of the specific demands of the question. Relevant economic terms are defined. Relevant economic theory is explained and applied. Where appropriate, diagrams are included and applied. Where appropriate, examples are used. There is an attempt at synthesis or evaluation. There are few errors. There is clear understanding of the specific demands of the question. Relevant economic terms are clearly defined. Relevant economic theory is clearly explained and applied. Where appropriate, diagrams are included and applied effectively. Where appropriate, examples are used effectively. There is evidence of appropriate synthesis or evaluation. There are no significant errors. 0 1–5 6–9 10–12 13–15 –5– 2. (a) M19/3/ECONO/HP1/ENG/TZ1/XX/M Explain why price elasticity of demand varies along the length of a straight-line demand curve. [10] Answers may include:  definitions of demand curve, price elasticity of demand  diagram to show differing price elasticities of demand along a straight-line demand curve  explanation why the price elasticity of demand varies along the length of the demand curve, using the diagram, the elasticity formula and an economic rationale (eg when the price is higher the proportion of income spent on the good is higher)  examples (hypothetical numerical example to support the explanation or a hypothetical example of a single good or service sold at different prices and having different price elasticities of demand). Assessment Criteria Part (a) 10 marks Level 0 1 2 3 4 Marks The work does not meet a standard described by the descriptors below. There is little understanding of the specific demands of the question. Relevant economic terms are not defined. There is very little knowledge of relevant economic theory. There are significant errors. There is some understanding of the specific demands of the question. Some relevant economic terms are defined. There is some knowledge of relevant economic theory. There are some errors. There is understanding of the specific demands of the question. Relevant economic terms are defined. Relevant economic theory is explained and applied. Where appropriate, diagrams are included and applied. Where appropriate, examples are used. There are few errors. There is clear understanding of the specific demands of the question. Relevant economic terms are clearly defined. Relevant economic theory is clearly explained and applied. Where appropriate, diagrams are included and applied effectively. Where appropriate, examples are used effectively. There are no significant errors. 0 1–3 4–6 7–8 9–10 –6– (b) M19/3/ECONO/HP1/ENG/TZ1/XX/M Examine the significance of price elasticity of demand for the decision-making of firms and governments. [15] Answers may include:  definition of price elasticity of demand (PED)  diagrams to show the relationship between PED, price changes and the total revenue of firms; the relationships between PED, the size of an indirect tax, tax incidence, quantity produced/consumed and government tax revenue  explanations of the relationship between: PED, price changes and total revenue of firms; how PED affects government tax revenue, production/consumption and tax incidence  examples of PED proving significant for firms and governments in practice  synthesis and evaluation (examine). Examination may include: the differing incidence of indirect tax on consumers and firms due to differing price elasticities, the impact of PED on the uses of tax/subsidy to address market failure, the impact of time on PED (and total revenue) when price changes, the difficulty of estimating PED values for firms, other factors affecting demand that cause a change in total revenue/tax revenue. Award a maximum of level 2 if the response considers either the significance of PED for firms or for governments (but not both). Examiners should be aware that candidates may take a different approach which, if appropriate, should be rewarded. NB It should be noted that definitions, theory, and examples that have already been given in part (a), and then referred to in part (b) should be rewarded. –7– M19/3/ECONO/HP1/ENG/TZ1/XX/M Assessment Criteria Part (b) 15 marks Level 0 1 2 3 4 Marks The work does not meet a standard described by the descriptors below. There is little understanding of the specific demands of the question. Relevant economic terms are not defined. There is very little knowledge of relevant economic theory. There are significant errors. There is some understanding of the specific demands of the question. Some relevant economic terms are defined. There is some knowledge of relevant economic theory. There are some errors. There is understanding of the specific demands of the question. Relevant economic terms are defined. Relevant economic theory is explained and applied. Where appropriate, diagrams are included and applied. Where appropriate, examples are used. There is an attempt at synthesis or evaluation. There are few errors. There is clear understanding of the specific demands of the question. Relevant economic terms are clearly defined. Relevant economic theory is clearly explained and applied. Where appropriate, diagrams are included and applied effectively. Where appropriate, examples are used effectively. There is evidence of appropriate synthesis or evaluation. There are no significant errors. 0 1–5 6–9 10–12 13–15 –8– M19/3/ECONO/HP1/ENG/TZ1/XX/M Section B Macroeconomics 3. (a) Explain how a deflationary gap might occur. [10] Answers may include:  definition of deflationary gap  Keynesian or monetarist/new classical diagram to show a macroeconomic equilibrium at a level of real output below the full employment level  explanation of factors (events) that may depress the aggregate demand and lead to a macroeconomic equilibrium at a level of real output below the full employment level  examples of countries that have experienced a deflationary gap. Assessment Criteria Part (a) 10 marks Level 0 1 2 3 4 Marks The work does not meet a standard described by the descriptors below. There is little understanding of the specific demands of the question. Relevant economic terms are not defined. There is very little knowledge of relevant economic theory. There are significant errors. There is some understanding of the specific demands of the question. Some relevant economic terms are defined. There is some knowledge of relevant economic theory. There are some errors. There is understanding of the specific demands of the question. Relevant economic terms are defined. Relevant economic theory is explained and applied. Where appropriate, diagrams are included and applied. Where appropriate, examples are used. There are few errors. There is clear understanding of the specific demands of the question. Relevant economic terms are clearly defined. Relevant economic theory is clearly explained and applied. Where appropriate, diagrams are included and applied effectively. Where appropriate, examples are used effectively. There are no significant errors. 0 1–3 4–6 7–8 9–10 –9– (b) M19/3/ECONO/HP1/ENG/TZ1/XX/M Using the monetarist/new classical model and the Keynesian model, discuss the view that increases in aggregate demand will inevitably be inflationary. [15] Answers may include:  definitions of inflation, inflationary, aggregate demand (AD), monetarist/new classical model, Keynesian model  diagrams to show the impact of an increase in AD in the two different models  explanation why in the monetarist/new classical model an increase in AD will be inflationary  examples of cases where an increase in AD either has or has not been inflationary  synthesis and evaluation (discuss). Discussion may include: consideration of an increase in AD not being inflationary in the Keynesian model if the economy is operating with spare capacity, consideration of an increase in AD not being inflationary in the monetarist/new classical model if the economy is recovering from equilibrium below the full employment level of output, consideration of the impact of simultaneous improvements on the supply side of the economy as AD increases, a consideration of the word “inevitably”, a consideration of the word “inflationary” in the context of the AD/AS model. Award a maximum of level 2 if the response considers either the monetarist/new classical model or the Keynesian model (but not both). Opinions or conclusions should be presented clearly and should be supported by appropriate examples. Examiners should be aware that candidates may take a different approach which, if appropriate, should be rewarded. – 10 – M19/3/ECONO/HP1/ENG/TZ1/XX/M Assessment Criteria Part (b) 15 marks Level 0 1 2 3 4 Marks The work does not meet a standard described by the descriptors below. There is little understanding of the specific demands of the question. Relevant economic terms are not defined. There is very little knowledge of relevant economic theory. There are significant errors. There is some understanding of the specific demands of the question. Some relevant economic terms are defined. There is some knowledge of relevant economic theory. There are some errors. There is understanding of the specific demands of the question. Relevant economic terms are defined. Relevant economic theory is explained and applied. Where appropriate, diagrams are included and applied. Where appropriate, examples are used. There is an attempt at synthesis or evaluation. There are few errors. There is clear understanding of the specific demands of the question. Relevant economic terms are clearly defined. Relevant economic theory is clearly explained and applied. Where appropriate, diagrams are included and applied effectively. Where appropriate, examples are used effectively. There is evidence of appropriate synthesis or evaluation. There are no significant errors. 0 1–5 6–9 10–12 13–15 – 11 – 4. (a) M19/3/ECONO/HP1/ENG/TZ1/XX/M Explain how government spending might promote greater equity in an economy. [10] Answers may include:  definitions of government spending, equity  Lorenz curve diagram showing a Lorenz curve shifting closer to the line of perfect income equality because of government spending to promote equity (or a subsidy diagram or an AD/AS diagram showing increasing AD and real GDP and therefore implying increased employment)  explanation of the linkages between government spending (eg on merit and public goods, transfer payments and subsidies), taxation and equity  examples of actual government spending measures (eg healthcare services, education, sanitation, water supplies, public parks, public transportation, old age pensions, unemployment benefits, child allowances) that have promoted equity. Assessment Criteria Part (a) 10 marks Level 0 1 2 3 4 Marks The work does not meet a standard described by the descriptors below. There is little understanding of the specific demands of the question. Relevant economic terms are not defined. There is very little knowledge of relevant economic theory. There are significant errors. There is some understanding of the specific demands of the question. Some relevant economic terms are defined. There is some knowledge of relevant economic theory. There are some errors. There is understanding of the specific demands of the question. Relevant economic terms are defined. Relevant economic theory is explained and applied. Where appropriate, diagrams are included and applied. Where appropriate, examples are used. There are few errors. There is clear understanding of the specific demands of the question. Relevant economic terms are clearly defined. Relevant economic theory is clearly explained and applied. Where appropriate, diagrams are included and applied effectively. Where appropriate, examples are used effectively. There are no significant errors. 0 1–3 4–6 7–8 9–10 – 12 – (b) M19/3/ECONO/HP1/ENG/TZ1/XX/M Evaluate the view that government policies to promote greater equity will always have a negative effect on efficiency. [15] Answers may include:  definitions of efficiency, equity  an AD/AS diagram to show LRAS shifting to the left (less efficiency) or to the right (greater efficiency), an externalities diagram to show government policies improving allocative efficiency, a supply and demand diagram to show welfare loss due to government policies to promote equity  explanation of how government spending and taxation might adversely impact efficiency (eg through the disincentive effects of progressive taxation, transfer payments, subsidized goods and services, through the decrease in social surplus due to taxes and price ceilings)  examples of government policies having either a negative or positive impact on efficiency  synthesis and evaluation (evaluate). Evaluation may include: consideration of the hypothetical trade-off between equity and efficiency, consideration of how government spending on socially desirable goods and services (eg health care services, education, sanitation, clean water supplies) might positively impact efficiency in the utilization of the economy’s resources in the long run (eg through poverty reduction and human capital formation) and in the short run (eg through the positive impact of government spending on AD), consideration of how automatic stabilizers might improve efficiency in the utilization of the economy’s resources in the short run (eg through the positive impact on AD during recessions), consideration of how certain kinds of government spending and taxation may increase allocative efficiency (eg through the increased consumption of merit goods and decreased consumption of demerit goods), government provision of merit goods may be less efficient than private provision, consideration of the word “always”, consideration of the meaning of the word “equity” (eg the difference between equity in the distribution of income and equality in the distribution of income, equity as equality of opportunity), consideration of the meaning of the word “efficiency” (eg productive and allocative efficiency in microeconomics, efficiency in the utilization of the economy’s factors of production in macroeconomics). Examiners should be aware that candidates may take a different approach which, if appropriate, should be rewarded. Opinions or conclusions should be presented clearly and should be supported by appropriate examples. NB It should be noted that definitions, theory, and examples that have already been given in part (a), and then referred to in part (b) should be rewarded. – 13 – M19/3/ECONO/HP1/ENG/TZ1/XX/M Assessment Criteria Part (b) 15 marks Level 0 1 2 3 4 Marks The work does not meet a standard described by the descriptors below. There is little understanding of the specific demands of the question. Relevant economic terms are not defined. There is very little knowledge of relevant economic theory. There are significant errors. There is some understanding of the specific demands of the question. Some relevant economic terms are defined. There is some knowledge of relevant economic theory. There are some errors. There is understanding of the specific demands of the question. Relevant economic terms are defined. Relevant economic theory is explained and applied. Where appropriate, diagrams are included and applied. Where appropriate, examples are used. There is an attempt at synthesis or evaluation. There are few errors. There is clear understanding of the specific demands of the question. Relevant economic terms are clearly defined. Relevant economic theory is clearly explained and applied. Where appropriate, diagrams are included and applied effectively. Where appropriate, examples are used effectively. There is evidence of appropriate synthesis or evaluation. There are no significant errors. 0 1–5 6–9 10–12 13–15 M19/3/ECONO/HP2/ENG/TZ0/XX Economics Higher level Paper 2 Thursday 16 May 2019 (morning) 1 hour 30 minutes Instructions to candidates yyDo not open this examination paper until instructed to do so. yyYou are not permitted access to any calculator for this paper. yySection A: a nswer one question. yySection B: a nswer one question. yyUse fully labelled diagrams and references to the text/data where appropriate. yyThe maximum mark for this examination paper is [40 marks]. 9 pages –2– M19/3/ECONO/HP2/ENG/TZ0/XX Section A Answer one question from this section. 1. Study the following extract and answer the questions that follow. Canadian drywall tariffs will continue  Recently imposed Canadian tariffs on drywall imports have pushed up the cost of building a new home by thousands of Canadian dollars (CA$) in the last four months. Drywall is a pre-made wall section that is used in the construction industry for building houses. Doubt as to whether the tariffs will remain is causing uncertainty for building firms, drywall manufacturers and homeowners.  For now, higher prices will continue following a ruling by the Canadian International Trade Tribunal (CITT) this week. The tribunal found that United States (US) firms had been dumping drywall products into Western Canada over the past few years, harming the Canadian drywall industry.  The ruling will end preliminary tariffs of up to 276 % imposed by Canada on imports of drywall from the US. However, they will be replaced by permanent, variable tariffs that would be imposed on imported drywall products whose prices fall below the minimum prices determined by the CITT.  “The preliminary tariff was very damaging to homebuilding,” said a building industry spokesperson. “Not just homebuilding, but hospitals, commercial buildings, indeed any new construction,” he said. “It’s a cost that someone had to pay for. It lowered the profits of house builders.” It has been estimated that the immediate sharp increase in variable costs, following the imposition of the preliminary tariff, resulted in an extra CA$3000 to CA$5000 on the cost of building some homes.  The preliminary tariffs were imposed after a dumping complaint by CertainTeed Gypsum Canada (CTGC), the last drywall manufacturer in Western Canada. CTGC has three major production sites and two gypsum quarries. Gypsum is a main component of drywall.  A CTGC spokesperson had said previously that its plants and quarries could be closed, at the cost of 200 jobs, if the dumping of US drywall products continued. However, since the preliminary tariffs were imposed, the firm has announced that it has hired 30 new employees.  In a separate report, the CITT found that the preliminary tariffs had been “substantially reducing competition” in Western Canada, to the detriment of Canada’s homebuilders. In response, supporters of the tariff have suggested that revenue from the tariffs may be used to help areas that lost large numbers of homes and other structures in devastating forest fires. [Source: adapted from Drywall tariffs will continue, www.kamloopsthisweek.com, 5 January 2017] (This question continues on the following page) –3– M19/3/ECONO/HP2/ENG/TZ0/XX (Question 1 continued) (a) (i)Define the term dumping indicated in bold in the text (paragraph ). [2] (ii) [2] Define the term variable costs indicated in bold in the text (paragraph ). (b) Using a tariff diagram, explain the effect of the “preliminary tariffs” on Canadian consumers of drywall (paragraph ). [4] (c) Using a demand and supply diagram, explain how the “imposition of the preliminary tariff” may have affected the market for new homes built in Canada (paragraph ). [4] (d) Using information from the text/data and your knowledge of economics, evaluate the effect of the tariff on drywall on different stakeholders. [8] Turn over –4– 2. M19/3/ECONO/HP2/ENG/TZ0/XX Study the following extract and answer the questions that follow. Current account deficit poses a challenge to Pakistan’s economy  The president of Pakistan has expressed his concern at the significant increase in Pakistan’s current account deficit. The current account deficit grew to US$12.12 billion in the fiscal year of 2016/17 compared to US$4.86 billion in 2015/16. The deficit was caused by rising imports and falling exports. The increasing current account deficit may result in Pakistan having to request a new International Monetary Fund (IMF) loan to fund the deficit. To avoid this, the president is proposing that the importing of luxury, non-essential items needs to be reduced.  The governor of Pakistan’s central bank agreed with the president’s concern. He said that the “rapidly growing current account deficit is the biggest challenge facing the country’s economy”. He agreed that the problem is made worse because many non-essential imports are being purchased, which requires borrowing from abroad. However, he stressed that while rising non-essential imports are a problem, “32 % of imports are capital goods” and are necessary for the continued growth of small to medium enterprises (SMEs), agriculture, housing and construction.  Central bank advisors have also recommended depreciating the rupee (Pakistan’s currency) to reduce the trade deficit. The value of the rupee is currently controlled through a managed exchange rate system. It has been suggested that the rupee is overvalued by as much as 20 %. However, the central bank governor claims that a “depreciation has a number of negative effects”.  In 2016, Pakistan’s economic growth reached 5.3 %, its highest point for 10 years. The government has estimated that it will be 6 % in 2017. According to the central bank governor, loans to SMEs are currently only 7 to 8 % of all loans to businesses in Pakistan. He believes that if loans to SMEs were increased to 15 to 17 % of all loans to businesses in Pakistan, there would be even higher economic growth.  Along with the current account deficit, fiscal policy decisions have also led to a significant budget deficit. The budget deficit increased in 2016, resulting in greater public debt. The central bank recommends the government’s debt to be limited to 60 % of gross domestic product (GDP). [Source: adapted from Current account deficit may lead to IMF loan: FPCCI chairperson, https://www.thenews.com.pk/ print/226102-Current-account-deficit-may-lead-to-IMF-loan-FPCCI-chairperson and Current account deficit poses biggest challenge to economy: SBP, https://www.thenews.com.pk/print/225481-Current-account-deficit-poses-biggest-challenge-toeconomy-SBP. Copyright © The News International, Karachi, Pakistan.] (This question continues on the following page) –5– M19/3/ECONO/HP2/ENG/TZ0/XX (Question 2 continued) (i)List two functions of the central bank (paragraph ). [2] (ii) Define the term fiscal policy indicated in bold in the text (paragraph ). [2] (b) Using an exchange rate diagram, explain how the central bank might depreciate the value of the rupee (paragraph ). [4] (c) Explain the difference between a current account deficit and a budget deficit (paragraph ). [4] (d) Using information from the text/data and your knowledge of economics, discuss the effects of the increasing current account deficit on Pakistan’s economy. [8] (a) Turn over –6– M19/3/ECONO/HP2/ENG/TZ0/XX Section B Answer one question from this section. 3. Study the following extract and answer the questions that follow. China’s increasing presence in Bolivia  Between 2000 and 2014, annual bilateral trade between China and Bolivia increased dramatically from US$75.3 million to US$2.25 billion. China has become the fifth-largest market for Bolivian exports, which mostly consist of raw materials such as minerals, hydrocarbons, wood and soybeans.  At the same time, China has become Bolivia’s main source of imports. China now supplies half of Bolivia’s clothing, cars, motorcycles, cell phones, computers and other electronics. Bolivia’s expenditure on Chinese imports significantly exceeds the revenue that is received from its exports to China. Since 2014, Bolivia has experienced significant current account deficits with China.  In recent years, the Bolivian government has taken loans from Chinese banks to support the purchase of Chinese imports of goods and services, along with Chinese-built roads, bridges, railways, hydroelectric power plants and mining facilities. In 2015, the Bolivian government owed more than US$600 million to Chinese banks.  The socialist Bolivian government wants to implement an ambitious Five-Year National Development Plan from 2016 to 2020. Faced with sharply declining export revenues and commodity prices, it will rely increasingly on foreign capital to fund its projects.  All projects financed by Chinese loans must be awarded to Chinese companies, which come with their own materials, equipment and technology, and often their own labour. The new loans will have a combination of commercial interest rates, between 2.5 % and 4 %, and concessional interest rates, up to 1 %. The Bolivian government is expecting to be able to repay the loans through continued growth of the economy.  China’s foreign direct investment (FDI) is mostly being aimed at energy and infrastructure development. Chinese firms are currently involved in major road-building projects, hydroelectric power station projects, expanding airports and developing a steel-producing plant. These projects have created problems for local communities in terms of water contamination and the overuse of Bolivia’s scarce water supply.  This FDI strategy generates profits for Chinese firms in the short term, as they build and improve the infrastructure. Since Bolivia is a resource-rich country, Chinese firms will be looking to invest in profitable mining projects in the future, once the infrastructure is in place. [Source: adapted from Financial sovereignty or a new dependency? How China is remaking Bolivia, http://nacla.org/blog/2017/08/11/financial-sovereignty-or-new-dependency-how-china-remaking-bolivia, 10 August 2017, this article was originally published by NACLA; and Trading Economics, Bolivia Current Account, https://tradingeconomics.com/bolivia/current-account, accessed 9 October 2017] (This question continues on the following page) –7– M19/3/ECONO/HP2/ENG/TZ0/XX (Question 3 continued) (a) (i)Define the term interest rates indicated in bold in the text (paragraph ). [2] (ii) [2] Describe the nature of foreign direct investment (paragraph ). (b) Using information from the text, explain two reasons why Chinese multinational corporations (MNCs) are investing in Bolivia. [4] (c) Using an externalities diagram, explain how the Chinese infrastructure projects have caused negative externalities (paragraph ). [4] (d) Using information from the text/data and your knowledge of economics, discuss the possible effects of Chinese involvement on economic growth and development in the Bolivian economy. [8] Turn over –8– 4. M19/3/ECONO/HP2/ENG/TZ0/XX Study the following extract and answer the questions that follow. The World Bank reports on economic growth in Kenya  The World Bank’s recent overview of Kenya has given a positive assessment of Kenya’s growth prospects, based on domestic and international factors. The East African nation of Kenya has a population of approximately 46.1 million, which increases by an estimated one million per year. The World Bank projected 5.9 % economic growth in 2016, rising to 6 % in 2017. This positive outlook is based on continued low oil prices, growth in the agricultural sector, expansionary monetary policy and ongoing infrastructure investments.  The World Bank has identified other key contributing factors to Kenya’s short-term growth. These include an expanding services sector, higher levels of construction, currency stability, low inflation, a growing middle-class and rising incomes, a surge in remittances (money sent by a foreign worker to their home country) and increased public investment in energy and transportation.  Tourism, information and communications and public administration are among the sectors that have registered the highest growth. Inflation has been at an average of 6.3 %, which is within the Kenyan central bank’s target range.  The World Bank also predicted that, of 82 countries investigated, Kenya would have the highest long-term growth and that its real gross domestic product (GDP) in 2050 should be seven times larger than it is today. Fast population growth, a modest improvement in the business environment, urbanization and fast-growing neighbouring countries are all contributing factors to the positive prediction.  While the growing Kenyan economy is creating more jobs now than in the past, these are mainly in the informal services sector and are low productivity jobs. 9 million young people will join the labour market in the next 10 years. Given the scarcity of formal sector jobs, they will continue to find jobs in the informal sector. These jobs are usually in very small businesses, often run from homes.  The World Bank suggests that there is a need to increase the productivity of jobs in the informal sector. It says that this could be achieved by increasing work-related skills through training schemes, increasing communication and learning between formal and informal firms, and helping small-scale firms to become suppliers for firms in the formal sector. To create more and higher-skilled jobs, it is also essential to reduce the cost of doing business.  According to the World Bank, Kenya has made significant structural and economic reforms that have contributed to sustained economic growth in the past decade. However, economic growth does not always mean economic development. The main development challenges facing Kenya include poverty, inequality, climate change, low commodity prices and the vulnerability of the economy to internal and external shocks. [Source: adapted from The World Bank Country Overview, http://www.worldbank.org/en/country/kenya/overview, 7 March 2017; Kenya in 2050, The Economist Intelligence Unit, https://www.eiu.com/public/topical_report. aspx?campaignid=ForecastingTo2050, 13 July 2017, data reused by permission of The Economist Intelligence Unit; and World Bank economic updates, Kenya’s Economy Strong in a Challenging Global Environment, http://www.worldbank.org/en/country/ kenya/publication/kenya-economic-update-economy-strong-challenging-global-environment, March 2016.] (This question continues on the following page) –9– M19/3/ECONO/HP2/ENG/TZ0/XX (Question 4 continued) (a) (i) Define the term investment indicated in bold in the text (paragraph ). [2] (ii) Define the term productivity indicated in bold in the text (paragraph ). [2] (b) Using an AD/AS diagram, explain how expansionary monetary policy might lead to economic growth (paragraph ). [4] (c) Explain the difference between economic growth and economic development (paragraph ). [4] (d) Using information from the text/data and your knowledge of economics, discuss the extent to which continued economic growth may lead to economic development in Kenya. [8] M19/3/ECONO/HP2/ENG/TZ0/XX/M Markscheme May 2019 Economics Higher level Paper 2 21 pages –3– M19/3/ECONO/HP2/ENG/TZ0/XX/M Use the paper-specific markscheme together with the markbands. Award up to the maximum marks as indicated. Section A 1. (a) (i) Level 0 1 2 (ii) Level 0 1 2 Define the term dumping indicated in bold in the text (paragraph ). The work does not meet a standard described by the descriptors below. Vague definition. The idea that it is selling goods in another country at very low prices. Accurate definition. An explanation that it is the selling of goods in another country:  at a price below the cost of production, OR  below the price charged in the home market. [2] Marks 0 1 2 Define the term variable costs indicated in bold in the text (paragraph ). The work does not meet a standard described by the descriptors below. Vague definition. The idea that these are costs (of production) that change. Accurate definition. The idea that these are costs (of production) that change when output changes. Marks 0 1 2 [2] –4– (b) M19/3/ECONO/HP2/ENG/TZ0/XX/M Using a tariff diagram, explain the effect of the “preliminary tariffs” on Canadian consumers of drywall (paragraph ). Level 0 1 2 The work does not meet a standard described by the descriptors below. There is a correct diagram OR an accurate written response. A tariff diagram showing a shift of the world supply curve upwards which leads to an increase in the price of drywall and a fall in the quantity of drywall demanded OR an explanation that includes at least two of the following;  tariff raises prices/costs of production for consumers of drywall  decrease in quantity demanded  decrease choice for consumers  decrease quality due to inefficient domestic producers  decrease consumer surplus. There is a correct diagram AND an accurate written response. A tariff diagram showing a shift of the world supply curve upwards which leads to an increase in the price of drywall and a fall in the quantity of drywall demanded AND an explanation that includes at least two of the following;  tariff raises prices/costs of production for consumers of drywall  decrease in quantity demanded  decrease choice for consumers  decrease quality due to inefficient domestic producers  decrease consumer surplus. Marks 0 1–2 3–4 Candidates who incorrectly label diagrams can receive a maximum of [3]. The use of P and Q on the axes is sufficient for a demand and supply diagram. The world supply curve must be labelled Sw, or Sworld. A title is not necessary. [4] –5– (c) M19/3/ECONO/HP2/ENG/TZ0/XX/M Using a demand and supply diagram, explain how the “imposition of the preliminary tariff” may have affected the market for new homes built in Canada (paragraph ). [4] Level 0 1 2 The work does not meet a standard described by the descriptors below. There is a correct diagram OR an accurate written response. A demand and supply diagram showing a shift of the supply curve to the left which leads to an increase in the price of new homes, and a fall of the quantity of new homes built in Canada OR An explanation that tariffs increased input costs of production of houses, decreasing the supply curve. This results in a decrease in quantity and an increase in the price of new homes. There is a correct diagram AND an accurate written response. A demand and supply diagram showing a shift of the supply curve to the left which leads to an increase in the price of new homes, and a fall of the quantity of new homes built in Canada AND An explanation that tariffs increased input costs of production of houses, decreasing the supply curve. This results in a decrease in quantity and an increase in the price of new homes. Marks 0 1–2 3–4 Candidates who incorrectly label diagrams can be awarded a maximum of [3]. For a demand and supply diagram, the vertical axis should be price or p. The horizontal axis should be quantity or q. A title is not necessary. –6– (d) M19/3/ECONO/HP2/ENG/TZ0/XX/M Using information from the text/data and your knowledge of economics, evaluate the effect of the tariff on drywall on different stakeholders. Examiners should be aware that candidates may take a different approach which, if appropriate, should be rewarded. Do not award beyond level 2 if the answer does not contain reference to the information provided. Level 0 1 2 3 The work does not meet a standard described by the descriptors below. Few relevant concepts are recognized. There is basic knowledge/understanding. Relevant concepts are recognized and developed in reasonable depth. There is clear knowledge/understanding. There is some attempt at application/analysis. Relevant concepts are recognized and developed in reasonable depth. There is clear knowledge/understanding. There is effective application/analysis. There is synthesis/evaluation, supported by appropriate theory and evidence. Marks 0 1–2 3–5 6–8 Command term “Evaluate” requires candidates to make an appraisal by weighing up the strengths and limitations. Opinions and conclusions should be presented clearly and supported with appropriate evidence and sound argument. Responses may include:  definition of stakeholders  definition of tariff. Consumers of drywall (Canadian building firms):  will face higher costs, and thus reduced profits (paragraph )  fall in the production of buildings (paragraph )  may cause unemployment. Domestic producers of drywall:  will receive higher prices (paragraph ) and thus more profits  increase in output and sales  increase in employment (paragraph )  supporting monopoly power (paragraph ). US producers of drywall:  higher costs  reduced sales  lower profits and possibly a decrease in employment. The Canadian government:  increased revenue (paragraph )  possible retaliation from the US. [8] –7– M19/3/ECONO/HP2/ENG/TZ0/XX/M Canadian economy:  reduction in competition (paragraph ), leading to inefficiency  inflationary pressure in the housing market (paragraph ). Any reasonable evaluation. To reach level 3, students must be aware of the particular situation in the Canadian drywall market on specific stakeholders, not just present an evaluation of tariffs in general. –8– 2. (a) (i) Level 0 1 2 (ii) Level 0 1 2 M19/3/ECONO/HP2/ENG/TZ0/XX/M List two functions of the central bank (paragraph ). The work does not meet a standard described by the descriptors below. Vague list. For listing any one of the following:  regulator of commercial banks/lender of last resort  banker to the government  control of interest rates  control of money supply  implementing monetary policies  maintenance of price stability  control of exchange rate policy  holder of foreign exchange reserves  provider and printer of notes and coins  maintain low rate of unemployment. Accurate list. For listing any two of the following:  regulator of commercial banks/lender of last resort  banker to the government  control of interest rates  control of money supply  implementing monetary policies  maintenance of price stability  control of exchange rate policy  holder of foreign exchange reserves  provider and printer of notes and coins  maintain low rate of unemployment. [2] Marks 0 1 2 Define the term fiscal policy indicated in bold in the text (paragraph ). The work does not meet a standard described by the descriptors below. Vague definition. For any one of the following:  a demand-side policy (conducted by the government)  using changes in government expenditure (spending)  using changes in taxation  used to achieve economic objectives relating to inflation, unemployment and long-term economic growth. Accurate definition. For any two of the following:  a demand-side policy (conducted by the government)  using changes in government expenditure (spending)  using changes in taxation  used to achieve economic objectives relating to inflation, unemployment and long-term economic growth. Marks 0 1 2 [2] –9– (b) M19/3/ECONO/HP2/ENG/TZ0/XX/M Using an exchange rate diagram, explain how the central bank might depreciate the value of the rupee (paragraph ). Level 0 1 2 The work does not meet a standard described by the descriptors below. There is a correct diagram OR an accurate written response. For drawing a correctly labelled exchange rate diagram showing a rightward shift of the supply curve (leftward shift of the demand curve) and a fall in the exchange rate OR for an explanation of one of the following:  the central bank may reduce (domestic) interest rates, inducing domestic (financial) investors to increase the supply of the rupee (as they demand more foreign currency) in order to save abroad, and so lowering its value  the central bank may reduce (domestic) interest rates, inducing foreign (financial) investors to decrease the demand for the rupee (as they demand less domestic currency) in order to save in Pakistan, and so lowering its value  the central bank may purchase foreign currencies in the foreign exchange market, increasing the supply of the rupee and so lowering its value. There is a correct diagram AND an accurate written response. For drawing a correctly labelled exchange rate diagram showing a rightward shift of the supply curve (leftward shift of the demand curve) and a fall in the exchange rate AND for an explanation of one of the following:  the central bank may reduce (domestic) interest rates, inducing domestic (financial) investors to increase the supply of the rupee (as they demand more foreign currency) in order to save abroad, and so lowering its value  the central bank may reduce (domestic) interest rates, inducing foreign (financial) investors to decrease the demand for the rupee (as they demand less domestic currency) in order to save in Pakistan, and so lowering its value  the central bank may purchase foreign currencies in the foreign exchange market, increasing the supply of the rupee and so lowering its value. Marks 0 1–2 3–4 Candidates who incorrectly label diagrams can be awarded a maximum of [3]. Candidates whose explanation does not correspond to the diagram (eg the candidate explains increase of supply, but the diagram shows decrease of demand) can be awarded a maximum of [2]. For an exchange rate diagram, the vertical axis may be labelled exchange rate, price of rupee in terms of another currency, another currency per rupee, another currency/rupee. The horizontal axis should be labelled quantity (of rupees). A title is not necessary. [4] – 10 – M19/3/ECONO/HP2/ENG/TZ0/XX/M – 11 – (c) Explain the difference between a current account deficit and a budget deficit (paragraph ). Level 0 1 2 (d) M19/3/ECONO/HP2/ENG/TZ0/XX/M The work does not meet a standard described by the descriptors below. There is a correct diagram OR an accurate written response. For an explanation that a current account deficit is when the net flow of money/value from trade in goods and services and income flows and/or transfers is negative OR an explanation that a budget deficit occurs when government spending is greater than government revenues. There is a correct diagram AND an accurate written response. For an explanation that a current account deficit is when the net flow of money/value from trade in goods and services and income flows and/or transfers is negative AND an explanation that a budget deficit occurs when government spending is greater than government revenues. Marks 0 1–2 3–4 Using information from the text/data and your knowledge of economics, discuss the effects of the increasing current account deficit on Pakistan’s economy. Examiners should be aware that candidates may take a different approach which, if appropriate, should be rewarded. Do not award beyond level 2 if the answer does not contain reference to the information provided. Level 0 1 2 3 The work does not meet a standard described by the descriptors below. Few relevant concepts are recognized. There is basic knowledge/understanding. Relevant concepts are recognized and developed in reasonable depth. There is clear knowledge/understanding. There is some attempt at application/analysis. Relevant concepts are recognized and developed in reasonable depth. There is clear knowledge/understanding. There is effective application/analysis. There is synthesis/evaluation, supported by appropriate theory and evidence. [4] Marks 0 1–2 3–5 6–8 [8] – 12 – M19/3/ECONO/HP2/ENG/TZ0/XX/M Command term “Discuss” requires candidates to offer a considered and balanced review that includes a range of arguments, factors, or hypotheses. Opinions or conclusions should be presented clearly and supported by appropriate evidence. Responses may include:  definition of current account deficit (paragraph ) / reference to (c). Positive effects:  imports of capital can lead to increased economic growth in the long run (paragraph )  high imports of non-essential goods may indicate development and higher living standards (paragraph ) suggests consuming outside of PPC  Pakistan may have to depreciate the currency as advised by central bank. This will reduce the relative price of exports and may allow to improve Pakistan's export competitiveness (paragraph ). Negative effects:  may require “new IMF” loan and conditions that are attached regarding austerity (paragraph )  persistent trade deficit may compromise “decade high” economic growth (paragraph )  inflows on financial account increase, meaning foreign debt payments will increase and worsen current account deficit  downward pressure on the exchange rate requiring use of foreign exchange reserves to maintain managed float (paragraph )  may be forced to “depreciate” the rupee which will:  increase import prices and may cause cost-push inflation  reduce export revenues – Marshall-Lerner condition  IMF loans to finance current account deficit (paragraph ) will require interest payments that may worsen the budget deficit (paragraph )  foreign investors may be purchasing Pakistan assets to finance the deficit which could threaten sovereignty  current account deficit may worsen Pakistan’s credit rating  it may be unsustainable to finance the current account deficit by borrowing. If foreign investors lose confidence, there may be a rapid outflow of financial capital resulting in a rapid fall in the value of the rupee  fiscal policy (paragraph ) decisions may have to be addressed to help with the deficit. In this case, moving from expansionary to contractionary. This may reduce economic growth. Any reasonable discussion. To reach level 3, students must be aware of the particular situation in Pakistan, not just present an evaluation of a current account deficit in general. – 13 – M19/3/ECONO/HP2/ENG/TZ0/XX/M Section B 3. (a) (i) Level 0 1 2 (ii) Level 0 1 2 Define the term interest rates indicated in bold in the text (paragraph ). The work does not meet a standard described by the descriptors below. Vague definition. The idea that it is a payment to (or from) the bank. Accurate definition. An explanation that it is one of the following:  the price or cost of borrowed money (credit)  the reward for saving  the percentage paid on borrowed (or saved) money. Marks 0 1 2 [2] Describe the nature of foreign direct investment (paragraph ). The work does not meet a standard described by the descriptors below. Vague definition. The idea that it is investment between countries. Accurate definition. An explanation that it is any two of the following:  long-term investment in another country  investment by a multinational corporation (MNC)  investment in another country representing at least 10 % ownership  investment in productive facilities  any reasonable answer that describes the nature of FDI. [2] Marks 0 1 2 – 14 – (b) M19/3/ECONO/HP2/ENG/TZ0/XX/M Using information from the text, explain two reasons why Chinese multinational corporations (MNCs) are investing in Bolivia. Level 0 1 2 The work does not meet a standard described by the descriptors below. Referencing text without explanation. The written response is limited. For explaining one reason with reference to the text OR for providing two possible reasons with no reference to the text. Reasons may include:  expanding market/gain economies of scale as bilateral trade has increased (paragraph ) and China provides a significant portion of Bolivia’s imports (paragraph )  creates lending opportunities for Chinese banks (paragraphs  and ) to gain profits from interest payments  increased business opportunities for Chinese firms, as the loans from Chinese banks are spent on Chinese imports (paragraph )  access to exploit resources (paragraph ) to use for their own production/profit purposes  profits (paragraph ) generated from investments in energy/infrastructure. The written response is accurate. For explaining two reasons with reference to the text. Reasons may include:  expanding market/gain economies of scale as bilateral trade has increased (paragraph ) and China provides a significant portion of Bolivia’s imports (paragraph )  creates lending opportunities for Chinese banks (paragraphs  and ) to gain profits from interest payments  Increased business opportunities for Chinese firms, as the loans from Chinese banks are spent on Chinese imports (paragraph )  access to exploit resources (paragraph ) to use for their own production/profit purposes  profits (paragraph ) generated from investments in energy/infrastructure. Marks 0 1–2 3–4 [4] – 15 – (c) M19/3/ECONO/HP2/ENG/TZ0/XX/M Using an externalities diagram, explain how the Chinese infrastructure projects have caused negative externalities (paragraph ). Level 0 1 2 The work does not meet a standard described by the descriptors below. There is a correct diagram OR an accurate written response. For drawing a correctly labelled externalities diagram, showing:  MSC > MPC and identifying both the socially optimal quantity of output and the quantity of output determined by the market forces  The vertical distance between MSC and MPC labelled externality/external costs or the shaded welfare loss due to the negative externality of production. OR For explaining that Chinese infrastructure projects cause water contamination/overuse, creating costs to third parties/local communities/society. There is a correct diagram AND an accurate written response. For drawing a correctly labelled externalities diagram, showing:  MSC > MPC and identifying both the socially optimal quantity of output and the quantity of output determined by the market forces  The vertical distance between MSC and MPC labelled externality/external costs or the shaded welfare loss due to the negative externality of production. AND For explaining that Chinese infrastructure projects cause water contamination/overuse, creating costs to third parties/local communities/society. Marks 0 1–2 3–4 Candidates who incorrectly label diagrams can be awarded a maximum of [3]. The y axis may be labelled price but could be costs or benefits and the x axis labelled quantity. [4] – 16 – (d) M19/3/ECONO/HP2/ENG/TZ0/XX/M Using information from the text/data and your knowledge of economics, discuss the possible effects of Chinese involvement on economic growth and development in the Bolivian economy. Examiners should be aware that candidates may take a different approach which, if appropriate, should be rewarded. Do not award beyond level 2 if the answer does not contain reference to the information provided. Level 0 1 2 3 The work does not meet a standard described by the descriptors below. Few relevant concepts are recognized. There is basic knowledge/understanding. Relevant concepts are recognized and developed in reasonable depth. There is clear knowledge/understanding. There is some attempt at application/analysis. Relevant concepts are recognized and developed in reasonable depth. There is clear knowledge/understanding. There is effective application/analysis. There is synthesis/evaluation, supported by appropriate theory and evidence. Marks 0 1–2 3–5 6–8 Command term “Discuss” requires candidates to offer a considered and balanced review that includes a range of arguments, factors, or hypotheses. Opinions or conclusions should be presented clearly and supported by appropriate evidence. Responses may include:  definitions of economic growth and economic development  definition of FDI. Positive outcomes for growth and/or development:  increased export markets (paragraph )  lower prices and choice for domestic consumers from Chinese imports  improvements in infrastructure (paragraph )  continued growth in the economy (paragraph )  improvements in infrastructure lowering input costs (paragraph )  possibility of increased domestic employment  filling of the savings gap  breaking the poverty cycle  technology transfer. [8] – 17 – M19/3/ECONO/HP2/ENG/TZ0/XX/M Negative outcomes for growth and/or development:  dependency on China (throughout)  worsening current account deficit (paragraph )  problems of indebtedness (paragraph )  minimal opportunity for increasing local employment as Chinese bring their own labour (paragraph )  problems associated with commercial loans (paragraph )  problems associated with tied aid – contracts only to Chinese companies (paragraph )  opportunity cost of interest payments (paragraph )  Chinese interests are advanced before Bolivian growth and development (paragraph )  negative externalities (paragraph )  overexploitation of Bolivia’s natural resources (paragraph )  possible loss of control of assets and infrastructure. Any reasonable discussion. To reach level 3, students must be aware of the particular situation in the Bolivian economy, not just present a discussion of growth and development factors in general. They must also present a balanced evaluative approach between both growth and development. – 18 – 4. (a) (i) Level 0 1 2 (ii) Level 0 1 2 M19/3/ECONO/HP2/ENG/TZ0/XX/M Define the term investment indicated in bold in the text (paragraph ). The work does not meet a standard described by the descriptors below. Vague definition. The idea that it is buying some form of capital. Accurate definition. An explanation that it is:  any addition to the capital stock of the economy OR  expenditure by firms on capital OR  public investment (context of paragraph ) is expenditure by government on capital. Marks 0 1 2 Define the term productivity indicated in bold in the text (paragraph ). The work does not meet a standard described by the descriptors below. Vague definition. The idea that it is a measure of efficiency. Accurate definition. An explanation that it is a measure of (the rate of) output per unit of input/time/labour. [2] Marks 0 1 2 [2] – 19 – (b) M19/3/ECONO/HP2/ENG/TZ0/XX/M Using an AD/AS diagram, explain how expansionary monetary policy might lead to economic growth (paragraph ). Level 0 1 2 The work does not meet a standard described by the descriptors below. There is a correct diagram OR an accurate written response. An AD/AS diagram showing a shift of the AD curve to the right and an increase in the level of real national income OR an explanation that an expansionary monetary policy (reduction in interest rates) will increase consumption/investment increasing AD. This leads to an increase in real GDP, and thus economic growth. There is a correct diagram AND an accurate written response. An AD/AS diagram showing a shift of the AD curve to the right and an increase in the level of national income AND an explanation that an expansionary monetary policy (reduction in interest rates) will increase consumption/investment increasing AD. This leads to an increase in real GDP, and thus economic growth. Marks 0 1–2 3–4 Candidates who incorrectly label diagrams can be awarded a maximum of [3]. For AD/AS, the vertical axis may be price level or average price level. The horizontal axis may be real output, real national output, real national income, real Y, or real GDP. A title is not necessary. [4] – 20 – (c) M19/3/ECONO/HP2/ENG/TZ0/XX/M Explain the difference between economic growth and economic development (paragraph ). [4] Responses may include:  growth is increase in real GDP  development is measure of well-being/standard of living/welfare  GDP single indicator/measures only income (quantitative)  development is composite (qualitative) / made up of multiple measures such as literacy rates, access to clean water, life expectancy, years of schooling, level of gender equality. Level 0 1 2 (d) The work does not meet a standard described by the descriptors below. The written response is limited. Award [1] for one point above. Award [2] for two points above. The written response is accurate. Award [3] for three points above. Award [4] for four points above. Marks 0 1–2 3–4 Using information from the text/data and your knowledge of economics, discuss the extent to which continued economic growth may lead to economic development in Kenya. Examiners should be aware that candidates may take a different approach which, if appropriate, should be rewarded. Do not award beyond level 2 if the answer does not contain reference to the information provided. Level 0 1 2 3 The work does not meet a standard described by the descriptors below. Few relevant concepts are recognized. There is basic knowledge/understanding. Relevant concepts are recognized and developed in reasonable depth. There is clear knowledge/understanding. There is some attempt at application/analysis. Relevant concepts are recognized and developed in reasonable depth. There is clear knowledge/understanding. There is effective application/analysis. There is synthesis/evaluation, supported by appropriate theory and evidence. Marks 0 1–2 3–5 6–8 [8] – 21 – M19/3/ECONO/HP2/ENG/TZ0/XX/M Command term “Discuss” requires candidates to offer a considered and balanced review that includes a range of arguments, factors, or hypotheses. Opinions or conclusions should be presented clearly and supported by appropriate evidence. Responses may include:  definition of economic growth  definition of economic development. Economic growth and economic development:  good agricultural performance (paragraph ) may increase growth through exports, however dependence on primary products is dangerous because of fluctuating commodity prices (paragraph )  expansionary monetary policy (paragraph ) leads to growth but might be difficult to maintain if it causes inflation, however, Kenya is within the central bank’s inflation targets at the moment (paragraph )  infrastructure developments (paragraph ), enhanced construction (paragraph ) and investment in energy and transportation (paragraph ) will all lead to long-term growth, however, there are cost considerations for any developing country  low inflation (paragraph ) enables expansionary policies to continue to be implemented (paragraph )  moderate improvement in the business environment (paragraph ) but need to reduce the cost of doing business (paragraph )  low oil prices (paragraph ) reduce costs in the economy, thus leading to increased SRAS and growth, however, these may not be sustained and are out of Kenya’s control (external shocks) (paragraph )  currency stability (paragraph ) is a factor, but often beyond the control of developing countries (external shocks) (paragraph )  fast-growing neighbouring countries (paragraph ) is beyond the control of Kenya (external shocks) (paragraph )  surge in remittances (paragraph ) allows increased consumption on necessities and merit goods which support development, but this will be dependent upon continued world economy growth (external shocks) (paragrap )  “a growing middle-class and rising incomes” (paragraph ) are signs that economic development is occurring  PPF to show how economic growth can lead to development (development goods such as merit goods on one axis with PPF increasing)  Kenya faces development challenges in spite of strong economic growth (inequality, climate change, poverty) that may compromise economic development (paragraph ). Any reasonable discussion. To reach level 3, students must show awareness of the ways and to what extent (evaluating) economic growth may or may not lead to economic development – making a very clear link between the two (not just an analysis on economic growth or/and economic development). They must present a balanced evaluative approach on how growth might or might not impact on economic development. M19/3/ECONO/HP3/ENG/TZ0/XX Economics Higher level Paper 3 Thursday 16 May 2019 (morning) Candidate session number 1 hour Instructions to candidates yyWrite your session number in the boxes above. yyYou are permitted access to a calculator for this paper. yyDo not open this examination paper until instructed to do so. yyAnswer two questions. yyAnswers must be written within the answer boxes provided. yyUnless otherwise stated in the question, all numerical answers must be given exactly or correct to two decimal places. yyYou must show all your working. yyThe maximum mark for this examination paper is [50 marks]. 18 pages –2– M19/3/ECONO/HP3/ENG/TZ0/XX Answer two questions. Each question is worth [25 marks]. Answers must be written within the answer boxes provided. 1. Note that widgets are an imaginary product. In Country X, the supply and demand for widgets are given by the functions Qs = - 45 + 4.5P Qd = 180 - 3P where P is the price per widget in dollars ($), Qs is the quantity of widgets supplied (thousands per year) and Qd is the quantity of widgets demanded (thousands per year). The supply (S) and demand (D) functions are represented in Figure 1. Figure 1 90 80 Price ($ per widget) 70 60 S 50 40 30 20 D 10 0 0 20 40 60 80 100 120 140 160 180 200 Quantity of widgets (thousands per year) (a) Identify the slope of the supply curve. �� (This question continues on the following page) 20EP02 [1] –3– M19/3/ECONO/HP3/ENG/TZ0/XX (Question 1 continued) (b) Outline the reason why the quantity supplied increases as the price rises. [2] �� An increase in costs of production has resulted in a new supply function: Qs1 = - 60 + 3P (c) Draw and label the new supply curve on Figure 1.[1] (d) Using your answer to part (c), outline the reason why an increase in costs of production has resulted in a new supply function. [2] �� (e) Calculate the change in producer surplus resulting from the increase in costs of production. [2] �� (This question continues on the following page) Turn over 20EP03 –4– M19/3/ECONO/HP3/ENG/TZ0/XX (Question 1 continued) (f) Define the term price elasticity of supply.[2] �� The time taken to produce goods is an important determinant of the price elasticity of supply. (g) Apart from time, explain two factors which influence the price elasticity of supply. �� (This question continues on the following page) 20EP04 [4] –5– M19/3/ECONO/HP3/ENG/TZ0/XX (Question 1 continued) Figure 2 shows the demand for and supply of widgets in Country Y. Figure 2 80 S 70 Price ($ per widget) 60 50 40 30 20 10 D 0 0 20 40 60 80 100 120 140 160 180 200 Quantity of widgets (thousands per year) The government of Country Y decides to impose an indirect tax of $10 per widget. (h) With reference to Figure 2, explain how the incidence of taxation on consumers and/or producers will be influenced by the price elasticity of supply. [4] �� (This question continues on the following page) Turn over 20EP05 –6– M19/3/ECONO/HP3/ENG/TZ0/XX (Question 1 continued) A music concert is to take place in Country Z. 40 000 tickets are available for the concert. Figure 3 shows the demand (D) for tickets at this concert. Figure 3 Price ($ per ticket) 300 200 100 D 0 0 10 20 30 40 50 60 70 80 90 100 Quantity of tickets (thousands) (i) Draw and label the marginal revenue (MR) curve for the concert on Figure 3.[1] (j) Calculate the maximum revenue that could be earned from selling tickets for the concert. [2] �� (This question continues on the following page) 20EP06 –7– M19/3/ECONO/HP3/ENG/TZ0/XX (Question 1 continued) The fixed costs for the concert have been calculated as $3 million, while it is expected that there will be no variable costs. (k) (i)Calculate the average fixed cost per ticket if all tickets are sold. [1] �� (ii) Assuming the event organizers aim to maximize profit, calculate the profit that will be made from the concert. [3] �� Turn over 20EP07 –8– 2. M19/3/ECONO/HP3/ENG/TZ0/XX Country X and Country Y are capable of producing both apples and bananas. Assume a two-country, two-product model. Country Y has absolute advantage in the production of both apples and bananas, and comparative advantage in the production of bananas. (a) Sketch and label a diagram to illustrate comparative advantage between Country X and Country Y on Figure 4.[2] Apples Figure 4 Bananas (This question continues on the following page) 20EP08 –9– M19/3/ECONO/HP3/ENG/TZ0/XX (Question 2 continued) (b) Outline the reason why Country X should specialize in the production of apples and Country Y should specialize in the production of bananas. [2] �� (c) Outline one reason why it might not be in a country’s best interests to specialize according to the principle of comparative advantage. [2] �� (This question continues on the following page) Turn over 20EP09 – 10 – M19/3/ECONO/HP3/ENG/TZ0/XX (Question 2 continued) The market for oranges in Country Z is illustrated on Figure 5. Figure 5 6 S Price of oranges ($ per kg) 5 4 3 2 1 D 0 0 50 100 150 200 250 300 Quantity of oranges (thousands of kg per month) The domestic demand and supply for oranges are given by the functions Qd = 300 - 100P Qs = - 60 + 60P where P is the price of oranges in dollars per kilogram ($ per kg), Qd is the quantity of oranges demanded (thousands of kg per month) and Qs is the quantity of oranges supplied (thousands of kg per month). The world price of oranges is $2 per kg. Due to increased awareness of the possible health benefits of vitamin C, the demand for oranges in Country Z increases by 60 000 per month at each price. (This question continues on the following page) 20EP10 – 11 – M19/3/ECONO/HP3/ENG/TZ0/XX (Question 2 continued) (d) Calculate the change in expenditure on imported oranges as a result of the increase in demand. [2] �� (e) (i)Calculate the change in consumer surplus in Country Z as a result of the increase in demand for oranges. [2] �� (ii) Calculate the change in social (community) surplus as a result of the increase in demand for oranges. [2] �� (f) State one administrative barrier that Country Z could use in order to restrict imports. [1] �� (This question continues on the following page) Turn over 20EP11 – 12 – M19/3/ECONO/HP3/ENG/TZ0/XX (Question 2 continued) Tanya is a currency speculator. She buys and sells currencies with the intention of making gains as a result of changes in the exchange values of currencies. Currently, she is holding US$300 000, but she expects that in the next few months the euro (EU€) (the currency of the eurozone) will appreciate against the US dollar (US$). At present, EU€1 = US$1.20. (g) Explain two possible economic consequences for the eurozone if the euro appreciates. [4] �� Tanya exchanges her US$ for EU€. (h) Calculate the quantity of EU€ she will receive for her US$300 000. [1] �� The EU€ depreciates by 10 % against the US$. Fearing further depreciation of the EU€, Tanya exchanges her EU€ for US$. (i) Calculate, in US$, the loss made by Tanya as a result of these transactions. �� (This question continues on the following page) 20EP12 [3] – 13 – M19/3/ECONO/HP3/ENG/TZ0/XX (Question 2 continued) (j) Explain two reasons why a government might prefer a floating exchange rate system for its currency. [4] �� Turn over 20EP13 – 14 – 3. M19/3/ECONO/HP3/ENG/TZ0/XX Table 1 provides information about Fairland. Table 1 Population of working age (million) Population of working age that is either employed or unemployed (%) Employed (million) 231 62 105 (a) Calculate the unemployment rate in Fairland using Table 1.[2] �� (b) Outline two difficulties in measuring unemployment. �� (This question continues on the following page) 20EP14 [4] – 15 – M19/3/ECONO/HP3/ENG/TZ0/XX (Question 3 continued) Figure 6 illustrates Fairland’s demand (D) for and supply (S) of low-wage labour. Figure 6 Wage rate (Fairland $ per hour) 20 15 D S 10 5 0 0 10 20 30 40 50 Quantity of low-wage labour (millions of workers) In order to raise the living standards of low-wage workers, the government of Fairland has decided to impose a minimum wage of $10 per hour. (c) Draw and label a curve that illustrates Fairland’s minimum wage on Figure 6.[1] (d) Calculate the resulting unemployment among the low-wage workers. [2] �� (This question continues on the following page) Turn over 20EP15 – 16 – M19/3/ECONO/HP3/ENG/TZ0/XX (Question 3 continued) The marginal rates of income tax in Fairland are given in Table 2. Table 2 Income ($ per year) (e) Rate of income tax 1 – 10 000 5% 10 001 – 18 000 10 % 18 001 – 30 000 20 % 30 001 and over 30 % (i)Define the term marginal rate of tax.[2] �� Fred is a low-wage worker in Fairland. As a result of the minimum wage his income will increase from $15 000 per year to $19 000 per year. (ii) Calculate how much additional income tax Fred will need to pay. �� (This question continues on the following page) 20EP16 [2] – 17 – M19/3/ECONO/HP3/ENG/TZ0/XX (Question 3 continued) (f) Using an AD/AS diagram to support your answer, explain the mechanism through which monetary policy can help an economy reduce the level of unemployment. [4] �� (g) State two interventionist supply-side policies that are likely to increase the demand for low-wage labour in Fairland. [2] �� (This question continues on the following page) Turn over 20EP17 – 18 – M19/3/ECONO/HP3/ENG/TZ0/XX (Question 3 continued) (h) State two market-based supply-side policies that are likely to increase the supply of labour in Fairland. [2] �� Government economists have estimated that citizens of Fairland spend 10 % of any additional income on imported goods and pay a tax rate of 20 % on every extra dollar of income. The marginal propensity to save for Fairland’s citizens is 10 %. (i) Using this information, calculate the value of the Keynesian multiplier. [2] �� (j) Using your answer to part (i), calculate the increase in government spending necessary to increase nominal GDP by $100 billion. �� 20EP18 [2] M19/3/ECONO/HP3/ENG/TZ0/XX/M Markscheme May 2019 Economics Higher level Paper 3 20 pages –3– M19/3/ECONO/HP3/ENG/TZ0/XX/M Notes for examiners: 1. Whenever relevant, carry over marks must be awarded. If a candidate makes an error in calculation, but then uses the incorrect figure appropriately and accurately in later question parts, then the candidate may be fully rewarded. This is the “own-figure rule” and you should put OFR on the script where you are rewarding this. 2. Alternative approaches may be taken in responses to the [4] questions that use A02 command terms. If this is the case and the alternative approaches are valid, then full credit should be given. 1. (a) Identify the slope of the supply curve. [1] Slope  4.5 OR  4.5 (or 1/4.5 or 2/9) An answer of 4.5 or  4.5 (or 1/4.5 or 2/9) without any working is sufficient for [1]. (b) Outline the reason why the quantity supplied increases as the price rises. Level 0 1 2 [2] Marks The work does not meet a standard described by the descriptors below. Vague outline. The idea that it becomes more profitable to supply / because of the law of supply / to earn more revenue / because the coefficient is positive / because producers are more willing to supply. Accurate outline. An outline that as it becomes more profitable to supply, including one of the following:  At a higher price, the profit margin is greater, so there is an incentive to produce and offer more units. OR  As price increases, profit will be maximized at a higher level of output given an upward-sloping MC curve. OR  Since marginal costs rise, a firm will be willing to offer more units per period only at a higher price. 0 1 2 NB Responses which outline only that producers are “more able to afford” to produce more should not be rewarded. –4– (c) Draw and label the new supply curve on Figure 1. Award [1] for an accurate, labelled supply curve. M19/3/ECONO/HP3/ENG/TZ0/XX/M [1] –5– (d) M19/3/ECONO/HP3/ENG/TZ0/XX/M Using your answer to part (c), outline the reason why an increase in costs of production has resulted in a new supply function. Level 0 1 2 [2] Marks The work does not meet a standard described by the descriptors below. Vague outline.  an increase in costs of production will reduce profitability. OR  an increase in costs of production may require an increase in price. Accurate outline. For outlining that:  an increase in costs of production will reduce profitability, causing producers to be less willing to supply. OR  an increase in costs of production will increase the price at which producers will be willing to supply the same quantity. 0 1 2 NB Responses which make reference to producers being “less able to afford” resources should not be rewarded. Reference to the need to cut costs may be rewarded at level 1, but if the candidate refers to producers being unable to afford to supply, this should not be rewarded. An accurate numerical example, referring explicitly to data in the graph, should be rewarded. (e) Calculate the change in producer surplus resulting from the increase in costs of production. (0.5  20  60 000)  (0.5  20  90 000) Any valid working is sufficient for [1].   $300 000 (or a decrease of $300 000) An answer of  $300 000 or  300 000 without any working is sufficient for [1]. [2] –6– (f) M19/3/ECONO/HP3/ENG/TZ0/XX/M Define the term price elasticity of supply. Level 0 1 2 [2] Marks The work does not meet a standard described by the descriptors below. Vague definition. The idea that price elasticity of supply relates to changes in quantity following a change in price. OR The proportional/percentage change in quantity supplied in response to (divided by) a (proportional/percentage) change in price. OR Percentage change in quantity supplied/percentage change in price. Accurate definition. An explanation that price elasticity of supply is the responsiveness of supply (or, of quantity supplied) to a change in price. 0 1 2 The time taken to produce goods is an important determinant of the price elasticity of supply. (g) Apart from time, explain two factors which influence the price elasticity of supply. Marks Level 0 1 2 The work does not meet a standard described by the descriptors below. The written response is limited. Any one factor expressed in a vague manner [1]. Any two factors expressed in a vague manner OR one factor explained clearly [2]. The written response is accurate. Any one factor explained clearly AND one factor expressed in a vague manner [3]. Any two factors explained clearly [4]. 0 1-2 3-4 Factors may include:  whether the firm has excess (or unused, or spare) capacity available: if it does, then increasing output will be easier so supply will be more price elastic  possibility of storage: the greater the ability to store stocks, the more price elastic supply will be as firms can draw from stocks to increase the quantity supplied  mobility of factors of production: the easier it is for a producer to switch resources from one use to another, the easier it will be to increase the quantity supplied in response to an increase in the price of the product, so supply will be more elastic (the ease with which technology can be implemented/applied could be an example of this)  the rate at which costs rise as output increases – the faster/higher the rate, the lower the PES (NB “costs of production” should not be rewarded)  the nature of the product eg for agricultural products, the time lag between planting and harvest is relatively long, so supply would be relatively price inelastic in the short term. Any other reasonable response should be rewarded. [4] –7– (h) M19/3/ECONO/HP3/ENG/TZ0/XX/M With reference to Figure 2, explain how the incidence of taxation on consumers and/or producers will be influenced by the price elasticity of supply. Level 0 1 2 Marks The work does not meet a standard described by the descriptors below. The written response is limited. For stating that supply is perfectly inelastic [1] and that producers will bear the full burden (incidence) of the tax [1]. OR % of tax incidence on Consumers PES [1]  % of tax incidence on producers PED So, given PED, the more price inelastic supply is, the smaller the incidence on consumers and the greater on producers [1]. The written response is accurate. For stating that supply is perfectly inelastic [1] and that producers will bear the full burden (incidence) of the tax [1] AND for an explanation that equilibrium price [1] and quantity will not change (so that consumers are not affected but producers bear the full burden/incidence) [1]. OR % of tax incidence on Consumers PES [1].  % of tax incidence on producers PED So, given PED, the more price inelastic supply is, the smaller the incidence on consumers and the greater on producers [1]. If PES is zero as it is here [1], then 100% of tax incidence (the full $10.00) will be paid by producers [1] (and 0% by consumers). 0 1–2 3–4 [4] –8– (i) M19/3/ECONO/HP3/ENG/TZ0/XX/M Draw and label the marginal revenue (MR) curve for the concert on Figure 3. [1] Award [1] for an accurate, labelled marginal revenue (MR) curve. (j) Calculate the maximum revenue that could be earned from selling tickets for the concert. [2] 150  30 000 Any valid working is sufficient for [1].  $4 500 000 An answer of $4 500 000, 4 500 000, $4.5 million or 4.5 million without any working is sufficient for [1]. OFR applies from part (i), depending on where the MR curve cuts the x axis. (k) (i) Calculate the average fixed cost per ticket if all tickets are sold. $3 million / 40 000  $75 An answer of $75 or 75 is sufficient for [1]. [1] –9– (ii) M19/3/ECONO/HP3/ENG/TZ0/XX/M Assuming the event organizers aim to maximize profit, calculate the profit that will be made from the concert. [3] Award [1] if the candidate identifies that profit will be maximized where: MC  MR OR MC  0 OR TR  TC is maximized ie at 30 000 tickets and a price of $150. TR  30 000  $150  $4.5 million TC  $3 million Profit  4.5 million  3 million Any valid working is sufficient for [1].  $1.5 million An answer of $1.5 million or 1.5 million or 1 500 000 without any working is sufficient for [1]. OFR applies, provided either TR or TC is calculated correctly. – 10 – 2. (a) M19/3/ECONO/HP3/ENG/TZ0/XX/M Sketch and label a diagram to illustrate comparative advantage between Country X and Country Y on Figure 4. Award [1] for a sketch showing the PPC of Country Y above/further out than for Country X. Award [1] for a sketch showing the PPC of Country X with a steeper gradient than for Country Y. NB There is no set position for each of the curves. However, no marks may be awarded unless both curves are downward-sloping. [2] – 11 – (b) M19/3/ECONO/HP3/ENG/TZ0/XX/M Outline the reason why Country X should specialize in the production of apples and Country Y should specialize in the production of bananas. Level 0 1 2 [2] Marks The work does not meet a standard described by the descriptors below. Vague outline. The idea that Country X should specialize (in apples) because the opportunity cost is lower OR because specialization should increase output OR that this will increase its consumption possibilities. Accurate outline. The idea that Country X should specialize (in apples) because the opportunity cost is lower AND because specialization should increase output AND/OR that this will increase its consumption possibilities/increase (global) efficiency/may result in lower prices. 0 1 2 OFR applies. (c) Outline one reason why it might not be in a country’s best interests to specialize according to the principle of comparative advantage. Marks Level 0 1 2 The work does not meet a standard described by the descriptors below. One valid reason, with limited detail. One valid reason, with clear summary. 0 1 2 Reasons may include:  unemployment in industries where trading partners enjoy comparative advantage because workers are unable to move to those industries where there is a comparative advantage  over-specialization resulting in vulnerability to changes in market conditions or as a barrier to economic development  risk will be reduced by the avoidance of over-reliance on trading partners for essential products or resources which might compromise national security or diminish negotiating power  specialization may make it difficult for the economy to diversify, thus maintaining the risk of vulnerability to market conditions  safety and environmental standards may be compromised by low-quality imports  specialization may not result in beneficial trade if export markets are protected by barriers to trade  if demand conditions for the export good suffer a long-term decrease then the resulting deterioration of the country's terms of trade may harm the economy  over-specialization may result in an economy continuing to produce a good with low income elasticity of demand, causing economic growth to be slow relative to other economies. Any other reasonable response should be rewarded. [2] – 12 – (d) M19/3/ECONO/HP3/ENG/TZ0/XX/M Calculate the change in expenditure on imported oranges as a result of the increase in demand. [2] 100 000  2  40 000  2 Any valid working is sufficient for [1]. NB Workings which measure market demand, rather than the demand for imports (so the calculation is 160 000  2 – 100 000  2 are not valid.  $120 000 An answer of $120 000 or 120 000 without any working or with invalid working as exemplified above is sufficient for [1]. (e) (i) Calculate the change in consumer surplus in Country Z as a result of the increase in demand for oranges. [2] (0.5  160 000  1.6)  (0.5  100 000  1.0) Any valid working is sufficient for [1] (eg correct calculation of either initial or final consumer surplus).  $78 000 An answer of $78 000 or 78 000 without any working is sufficient for [1]. (ii) Calculate the change in social (community) surplus as a result of the increase in demand for oranges. [2] Change in producer surplus  0 Change in community surplus  78 000  0 Any valid working is sufficient for [1].  $78 000 An answer of $78 000 or 78 000 without any working is sufficient for [1]. OFR applies. (f) State one administrative barrier that Country Z could use in order to restrict imports. Administrative barriers may include:  requirements for packaging/labelling  health/safety/inspection procedures  changes in permitted specifications for a product  increased bureaucracy. Award [1] for stating one administrative barrier. Any other reasonable response should be rewarded. [1] – 13 – (g) M19/3/ECONO/HP3/ENG/TZ0/XX/M Explain two possible economic consequences for the eurozone if the euro appreciates. Level 0 1 2 [4] Marks The work does not meet a standard described by the descriptors below. The written response is limited. For stating one consequence [1]. For explaining one consequence OR for stating two consequences [2]. The written response is accurate. For stating one consequence AND explaining one consequence [3]. For explaining two consequences [4]. 0 1–2 3–4 Consequences may include:  a stronger currency may reduce the export competitiveness of the eurozone, thus worsening the current account balance/increasing imports and reducing exports  a currency appreciation will reduce the domestic price of imports so cost of living will decrease and cost of imported raw materials will decrease, lowering production costs of domestic firms and reducing inflationary pressure  a stronger currency may reduce export competitiveness, causing aggregate demand to decrease, thus reducing inflationary pressure  a stronger currency may reduce the export competitiveness of the eurozone, causing aggregate demand to decrease, thus causing slower growth/higher unemployment  the value of any foreign debt may be reduced as a smaller amount of euros will be needed to repay/service the debt (if denominated in foreign currency)  foreign direct investment inflows may decrease as it becomes more expensive to purchase assets in the eurozone (also reward greater outflows of FDI or changes in flows of financial capital). Any other reasonable response should be rewarded. (h) Calculate the quantity of EU€ she will receive for her US$300 000. 300 000  250 000 1.2 An answer of 250 000 without any working is sufficient for [1]. [1] – 14 – (i) M19/3/ECONO/HP3/ENG/TZ0/XX/M Calculate, in US$, the loss made by Tanya as a result of these transactions. [3] The new exchange rate  €1  US$1.20  0.9  US$1.08 Any valid working is sufficient for [1]. €250 000 can be exchanged for 250 000  1.08  US$270 000 Any valid working is sufficient for [1] (eg if an incorrectly calculated exchange rate is correctly applied to exchanging €250 000. Loss  270 000  300 000  US$30 000 An answer of US$30 000 or 30 000 without any working is sufficient for [1]. OFR applies. NB A simple but accurate calculation, such as “10%  300 000 = $30 000, may be fully rewarded. (j) Explain two reasons why a government might prefer a floating exchange rate system for its currency. Level 0 1 2 Marks The work does not meet a standard described by the descriptors below. The written response is limited. For stating one reason [1]. For explaining one reason OR for stating two reasons [2]. The written response is accurate. For stating one reason AND explaining one reason [3]. For explaining two reasons [4]. 0 1–2 3–4 Reasons may include:  a floating exchange rate system allows for independent monetary policy. Interest rates can be set in order to influence AD without fear of disrupting the (fixed) exchange rate  the economy can use exchange rate policy to affect macroeconomic variables, such as the growth rate; inflation)  if an economy has a current account deficit/surplus, the exchange rate will act as a self-regulating mechanism to restore the balance  the central bank does not need to maintain foreign reserves: (involving an opportunity cost) to be able to intervene in the foreign exchange market. Any other reasonable response should be rewarded. [4] – 15 – 3. (a) M19/3/ECONO/HP3/ENG/TZ0/XX/M Calculate the unemployment rate in Fairland using Table 1. [2] Unemployment rate  Unemployed  100  Labour force-Em ployed  100  Labour force Labour force 0.62  231  105 143  105  100   100 0.62  231 143 Any valid working (such as the correct calculation of the labour force) is sufficient for [1].  26.57 % or 26.69 % (this depends on when rounding has taken place) An answer of 26.57 or 26.69 without working is sufficient for [1]. (b) Outline two difficulties in measuring unemployment. Level 0 1 2 [4] Marks The work does not meet a standard described by the descriptors below. The written response is limited. One difficulty stated or outlined in a vague manner [1]. Two difficulties stated or outlined in a vague manner OR one difficulty outlined clearly [2]. The written response is accurate. One difficulty stated or outlined in a vague manner AND one difficulty outlined clearly [3]. Two difficulties outlined clearly [4]. 0 1–2 3–4 Possible difficulties may include:  some of the unemployment is hidden, because some people who are able and willing to work have become discouraged and have given up looking for a job  some of the employed are underemployed and, while officially working, do not fully utilize their time (involuntary part-timer workers) or skills/experience  there may be false claims by those who seek to obtain unemployment benefits, or those in the informal labour market seeking to avoid income tax) thus distorting the official statistics  the unemployment figure is an average and ignores regional, ethnic, age and gender disparities. Any other reasonable response should be rewarded. – 16 – (c) M19/3/ECONO/HP3/ENG/TZ0/XX/M Draw and label a curve that illustrates Fairland’s minimum wage on Figure 6. [1] Award [1] for an accurate, labelled minimum wage line. (d) Calculate the resulting unemployment among the low-wage workers. [2] Unemployment  number of workers willing to supply their labour  number of workers demanded by firms  40 million  14 million Any valid working is sufficient for [1].  26 million An answer of 26 million or 26 without working is sufficient for [1]. (e) (i) Define the term marginal rate of tax. Level 0 1 2 [2] Marks The work does not meet a standard described by the descriptors below. Vague definition. For the idea that it is tax paid when income increases. Accurate definition. For an explanation that it is the proportion of any additional income which must be paid as tax. OR For an explanation that it is the proportion of the last dollar (or any currency) earned which must be paid as tax. OR the change in tax (ΔT) as a result of a change in income ௱் (ΔY)  MTR = ௱௒ 0 1 2 – 17 – (ii) M19/3/ECONO/HP3/ENG/TZ0/XX/M Calculate how much additional income tax Fred will need to pay. 3000  10 %  1000  20 % Any valid working is sufficient for [1].  $500 An answer of $500 or 500 without any working is sufficient for [1]. OR Initial tax paid  10 000  5 %  5000  10 %  1000 New tax paid  10 000  5 %  8000  10 %  1000  20 %  1500 Any valid working is sufficient for [1]. Change in tax paid  1500  1000  $500 An answer of $500 or 500 without any working is sufficient for [1]. NB Responses which apply the bands such that, for example, 10% is charged on $7 999 rather than $8 000 may be fully rewarded. [2] – 18 – (f) M19/3/ECONO/HP3/ENG/TZ0/XX/M Using an AD/AS diagram to support your answer, explain the mechanism through which monetary policy can help an economy reduce the level of unemployment. Level 0 1 2 Marks The work does not meet a standard described by the descriptors below. The written response is limited. An AD/AS diagram showing a shift of the AD curve to the right OR an explanation that lower interest rates will lead to increased investment and/or consumer spending and/or lower saving, causing AD to shift to the right therefore causing an increase in output and a reduction in unemployment. The written response is accurate. An AD/AS diagram showing a shift of the AD curve to the right AND an explanation that lower interest rates will lead to increased investment and/or consumer spending and/or lower saving, causing AD to shift to the right therefore causing an increase in output and a reduction in unemployment. 0 1–2 3–4 Any form of aggregate supply curve (SRAS, LRAS or Keynesian AS) is acceptable. Candidates who incorrectly label diagrams can receive a maximum of [3]. [4] – 19 – M19/3/ECONO/HP3/ENG/TZ0/XX/M For AD/AS, the vertical axis may be price level or average price level. The horizontal axis may be output, real output, national output, real national output, national income, or GDP. A title is not necessary. Any other reasonable response should be rewarded. For example, a diagram showing the labour market, with axes labelled “wage rate” and “employment” or “quantity of labour”, with accurate explanation may be fully rewarded. (g) State two interventionist supply-side policies that are likely to increase the demand for low-wage labour in Fairland. [2] Award [1] for each appropriate policy stated. Policies may include:  investment in infrastructure  tax cuts or tax allowances in industries that hire low-wage labour  subsidies for firms that hire low-wage labour  Investment in education and training/human capital  Investment in health. Examiners should be aware that some candidates may take alternative approaches, which, if appropriate, should be fully rewarded. (h) State two market-based supply-side policies that are likely to increase the supply of labour in Fairland. Level 0 1 2 [2] Marks The work does not meet a standard described by the descriptors below. The written response is limited. For stating one of the following:  personal income tax cuts  reducing unemployment benefits. The written response is accurate. For stating two of the following:  personal income tax cuts  reducing unemployment benefits. 0 1 2 Examiners should be aware that some candidates may take alternative approaches, which, if appropriate, should be fully rewarded eg cuts in employee social security contributions. (i) Using this information, calculate the value of the Keynesian multiplier. Multiplier  1 1  MPS  MPT  MPM 0.1  0.2  0.1 Any valid working is sufficient for [1].  2.5 An answer of 2.5 without any working is sufficient for [1]. [2] – 20 – (j) M19/3/ECONO/HP3/ENG/TZ0/XX/M Using your answer to part (i), calculate the increase in government spending necessary to increase nominal GDP by $100 billion. Change in government spending  100  2.5 Any valid working is sufficient for [1].  $40 billion An answer of 40 billion or 40 or $40 billion without any working is sufficient for [1]. OFR applies. [2]

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