Macroeconomic Questions, 2009 - 2011
Syllabus
Level
Year ,
Paper
Question
Mark Scheme
Aggregate
Demand
SL
May 2010,
P1
2. (a) Aggregate demand consists of
consumption, investment,
government spending and net
exports (exports minus imports).
Explain two factors that may
influence investment and two
factors that may influence net
exports. [10 marks]
Aggregate
Demand
SL
May 2010,
P1
2 (b) Evaluate the effectiveness of
an increase in investment
expenditure on the performance of
an economy. [15 marks]
Answers should include:
• a definition of investment
• a definition of net exports
• an explanation of any two factors which may influence investment such
as
the interest rate, business expectations, increased consumer demand,
cost, economic stability and efficiency of capital equipment
• an explanation of any two factors which may influence net exports such
as
increases in foreign incomes increases a country’s exports, increases in a
country’s national income leads to an increase in imports, decreases in
foreign incomes results in less exports from a country, decreases in a
country’s national income results in a decrease in imports, a fall in relative
prices (if a country’s goods and services fall in price relative to those of
other countries) will result in a country selling more exports and buying
less
imports and improvements in the relative quality of a country’s goods in
comparison to other countries will result in it selling more exports and
buying less imports.
(b) Evaluate the effectiveness of an increase in investment
expenditure on the
performance of an economy. [15 marks]
Answers may include:
• a definition of investment
• an explanation of the “performance of an economy” in terms of growth,
employment, price stability and the balance of payments
• consideration of an increase in investment leading to an increase in
real GDP (economic growth)
• diagrams showing a movement from a point within to a point on the PPF
or
a shift of the AD to the right
• the supply-side effects of increasing investment on price and real output
levels
• diagram to show shift in LRAS
• the possibility of demand-pull inflation, depending on where the economy
is
operating
• an explanation that it could adversely affect the current account of the
balance of payments if investment expenditure is on imports
• impact of different types of investment in terms of sustainable
development
• a comparison with potential growth
• the supply-side effects of increasing investment on price and real output
levels
• short-run versus long-run effects
• an overall assessment of the impact.
1
Syllabus
Level
Year ,
Paper
Question
Mark Scheme
Examiners should be aware that candidates may take a different approach
which if appropriate, should be rewarded.
Effective evaluation may be to:
• consider short-term versus long-term consequences
• examine the impact on different stakeholders
• discuss advantages and disadvantages
• prioritize the arguments.
An explanation that it is the total demand for all goods and services
produced in an economy OR This comprises C+I+G+(X–M) is also
sufficient.
For drawing a correctly labelled AD/AS diagram showing a shift to the
right (increase) in the AD curve and for explaining that I (private
investment) and M (imports) are components of aggregate demand
(C+ Ι +G + X−M) and an increase in spending on I and a decrease in
spending on M will increase AD. (Diagram + 1 component = [3 marks])
Aggregate
demand
SL
May 2009,
P2
3a(ii) aggregate demand (paragraph
Aggregate
demand &
aggregate
supply
SL
May 2010,
P2
1(c) Using an AD/AS diagram,
explain how increased private
domestic investment and a
decreased need to import oil from
overseas are likely to contribute to
economic growth in the US economy
(paragraph ). [4 marks]
2 (b) Evaluate the possible impact
on economic performance that may
result from a government decision to
bring inflation under control. [15
marks]
Aggregate
demand &
aggregate
supply Inflation
Aggregate
demand &
aggregate
supply unemployment
Aggregate
demand &
supply –
supply-side
policies
Aggregate
demand &
unemployment
May 2009,
P1
Answers may include: explanation of “economic performance” different
types of inflation according to the rate, e.g. hyperinflation importance of
the distinction between demand-pull and cost-push inflation implications of
the use of demand-side policies implications of the use of supply-side
policies impact on employment use of Phillips curve impact on balance of
payments impact on growth use of AD/AS diagrams.
Effective evaluation may be to: consider short-term versus long-term
consequences examine the impact on different stakeholders prioritize the
arguments.
For drawing a correctly labelled AD/AS diagram showing a shift to the left
(decrease) in AD and for explaining that as domestic demand falls, output
will fall contributing to unemployment in the economy.
SL
May 2010,
P2
3(b) Using an appropriate diagram,
explain how falling domestic demand
is likely to contribute to higher levels
of unemployment. [4 marks]
HL
May 2009,
P3
3(b) Using an AD/AS diagram,
explain how supply-side policies
could affect real output in the longrun. [4 marks]
For drawing a correctly labelled AD/AS diagram with a movement of the
LRAS showing an increase in real output and an explanation of how
supply-side policies can increase real output in the long run such as by
increasing the quantity and/or increasing the quality of factors of
production.
SL
May 2009,
P1
2 (b) Evaluate the view that the
unemployment rate can be most
effectively reduced through the use
of measures designed to increase
aggregate demand in an economy.
[15 marks]
Answers may include: explanation of measures designed to increase AD in
terms of fiscal and monetary policy use of lower interest rates to increase
AD and to combat demand deficient unemployment use of higher
government spending/lower taxation to increase AD and to combat
demand deficient unemployment illustration of demand-side policies using
AD/AS diagrams discussion of ineffectiveness of demand-side measures for
structural, real wage, frictional and seasonal unemployment discussion of
problems of demand-side measures, e.g. may lead to a rise in inflation,
financing expansionary fiscal policy, time lags associated with monetary
policy, etc. explanation of supply-side measures to deal with non-demand
2
Syllabus
Level
Year ,
Paper
Question
Mark Scheme
deficient unemployment discussion of problems of supply-side measures,
e.g. it may lead to the exploitation of workers, the cost and effectiveness
of government managed training, the time lags associated with the
application of supply-side policies.
Examiners should be aware that candidates may take a different approach
which if appropriate, should be rewarded.
Effective evaluation may be to: consider short-term versus long-term
consequences examine the impact on different stakeholders discuss
advantages and disadvantages prioritize the arguments.
For drawing a business cycle diagram indicating the phases of the cycle and for
explaining that Germany was in recession in 2008 as it recorded negative growth in
successive quarters. (If only recession is mentioned then [1 mark] may be awarded
for the explanation.)
Business Cycle
SL
May 2011,
P2
2 (b) Using a business cycle
diagram, explain Germany’s
economic position in 2008
in relation to the business cycle. [4
marks]
Definitions
SL
May 2011,
P2
2(a) Define the following terms
indicated in bold in the text:
(i) deflation (paragraph )
(ii) savings (paragraph ).
An explanation that it is a sustained decrease in the average level of prices
(general price level) in an economy.
3(a) Define the following terms
indicated in bold in the text:
(i) unemployment rate (paragraph
)
(ii) Gross Domestic Product (GDP)
(paragraph ).
An explanation that it is the number of unemployed expressed as a
percentage of the workforce. (If this is expressed as an equation, then
full marks should be awarded if the equation is correct).
3(d) Using information from the
text/data and your knowledge of
economics, evaluate whether
demand-side policies or supply-side
policies should be used to reduce the
current level of unemployment in
Ireland. [8 marks]
Responses may include:
Evaluation of the demand-side policies:
• a definition of demand-side policies
• an AD/AS diagram showing a rightward shift of the AD function
• a connection between the shape of the AS function and the likelihood
that
demand-side policies may or may not succeed (i.e. given the economic
slowdown in Ireland it is likely that the AD function may intersect the AS
function on a point close to its horizontal range so that an increase in AD
may result in an increase in output with negligible inflationary costs.
Otherwise, on a steeper range of AS, the demand-side policies may have a
heavy inflationary cost)
• the role of increased government spending which can create additional
employment opportunities, for example, through infrastructural investment
that would stimulate the economy (paragraph )
Definitions
Demand-side
and supplyside policies
SL
SL
May 2010,
P2
May 2010,
P2
An explanation that it is any of:
income that is not spent
present consumption foregone
a withdrawal from the circular flow of income
money stored in financial institutions.
An explanation that it is the value of all goods and services produced
in an economy in a given time period.
3
Syllabus
Level
Year ,
Paper
Question
Mark Scheme
• reduced indirect and direct taxation may successfully increase consumer
expenditure and stimulate the economy
• however, if not carefully targeted, increased government spending may
leak
from the circular flow of income through increased savings and/or import
spending
• the large budget deficit in Ireland may prevent further government
borrowing and reduce the scope for aggregate demand stimulation
(paragraph )
• reduced interest rates may allow businesses to invest more and employ
more people
• reduced interest rates may not stimulate increased investment by
businesses because of pessimistic expectations during a crisis.
Evaluation of supply-side policies:
• a definition of supply-side policies
• an AD/AS diagram showing a rightward shift of the LRAS function
• wage restraint through reduction of union power may add flexibility to
the
labour market (paragraph )
• wage restraint may be conducive to social instability (industrial action)
that
may further worsen the economic slowdown
• reducing unemployment benefits
• social consequences of reducing benefits (poverty, inequality)
• decrease in income tax may provide incentives for workers to work more
• decrease in income tax has a limited effect on highly-paid workers as
they
opt for an increase in leisure
• labour market flexibility will allow market forces to set wages and lower
costs for businesses
• deregulation may have severe safety or environmental consequences
• interventionist policies, such as increased training/education,
encouraging
R+D, the provision of infrastructure, and improved information flows may
be high cost and involve serious opportunity costs.
Overall evaluation:
• demand-side polices have a macroeconomic focus
• demand-side policies may be more effective in times of cyclical
downturns
• demand-side policies are flexible in timing and focus
• demand-side policies are difficult to implement with limited fiscal
resources
• supply-side policies have a microeconomic focus
• time lags may reduce the impact of any supply-side policy in the short
term
• in the long run, supply-side policies may improve efficiency and assist
international competitiveness.
Examiners should be aware that candidates may take a different approach
which if appropriate, should be rewarded.
If there is no direct reference to the text/data, then candidates may not be
4
Syllabus
Level
Year ,
Paper
Question
Mark Scheme
rewarded beyond level 2.
Effective evaluation may be to:
• consider short-term versus long-term consequences
• examine the impact on different stakeholders
• discuss advantages and disadvantages
• prioritize the arguments.
Fiscal policy
HL
May 2010,
P3
2(d) Using information from the
text/data and your knowledge of
economics, evaluate the role of fiscal
policy in stimulating the USA
economy. [8 marks]
Responses may include:
an explanation/definition of fiscal policy
an AD/AS diagram showing a rightward shift of AD
a reference to Keynesian policies.
Positive role that fiscal policy may have:
the effect direct investment may have on business investment (paragraph
)
the possible effect on consumer spending (paragraph )
lower production costs as a result of tax cuts in indirect taxes (paragraph
)
direct tax cuts increase disposable income (paragraph )
supply side benefits of increased government spending on infrastructure
possible increase in business confidence (paragraph )
multiplier and accelerator effects
impact on employment.
Negative role fiscal policy may have:
inflationary pressures conflicting with growth and the desire to stimulate
the economy (paragraph )
is the package powerful enough to convince investors?
inflexibility in that it cannot be changed easily and quickly
time lags for policy measures to have an effect
financing a budget deficit
“crowding out” effect of increased borrowing
could add to the trade deficit.
Examiners should be aware that candidates may take a different approach
which if appropriate, should be rewarded.
If there is no direct reference to the text/data, then candidates may not be
rewarded beyond level 2.
Effective evaluation may be to:
consider short-term versus long-term consequences
examine the impact on different stakeholders
discuss advantages and disadvantages
prioritize the arguments.
Fiscal Policy
SL
May 2011,
P1
2. (a) Using appropriate diagrams,
explain how an increase in
government spending could affect
both aggregate demand and
Answers should include:
a definition of government spending
a definition of aggregate demand
a definition of aggregate supply
an explanation of an increase in government spending influencing AD
5
Syllabus
Fiscal Policy
Level
SL
Year ,
Paper
May 2011,
P1
Question
Mark Scheme
aggregate supply in an economy. [10
marks]
use of an AD/AS diagram showing shift of AD to the right
an explanation of the possible linkage between an increase in government
spending affecting the supply-side of the economy, e.g. education and
training, government spending on infrastructure
use of an AD/AS diagram showing shift of LRAS to the right.
2(b) “The lower the level of
government spending, the better.”
Evaluate this view. [15 marks]
Answers may include:
Arguments in favour of lower government spending:
lower government spending and greater use of market forces to allocate
resources leading to greater economic efficiency
lower government spending leading to lower taxation
lower government spending reduces government borrowing
the importance of reduced government spending as a means of reducing
AD, to reduce inflation and a current account deficit.
Arguments against lower government spending:
the importance of government spending for the supply-side of the
economy
the importance of government spending on merit goods, public goods and
infrastructure
the importance of government spending as a means of influencing the
distribution of income through public services and state benefits
the importance of government spending as a means of regulating AD, e.g.
use of higher government spending to increase AD to encourage growth
and to reduce unemployment.
Effective evaluation may be to:
consider short-term versus long-term consequences
examine the impact on different stakeholders
discuss advantages and disadvantages
prioritize the arguments.
Fiscal Policy
SL
May 2011,
P2
2(d) Using information from the
text/data and your knowledge of
economics, evaluate the likely
effectiveness of the German
government’s fiscal policies
designed to boost the economy and
reduce unemployment. [8 marks]
Responses may include:
nsionary fiscal policy.
Possible strengths of the policy responses by the German government:
increased government spending should increase aggregate demand
stimulus spending should increase consumer and business confidence (paragraph )
stimulus payments will reduce tax payments by consumers and businesses
increased social welfare spending should allow more people in Germany to maintain
an adequate standard of living
increased demand for goods and services may require more people to be employed
and reduce the level of unemployment
supply side policies leading to an increase in LRAS and a lower natural rate of
unemployment (paragraph )
cuts in personal income tax and corporate tax may produce a positive effect on AS
(paragraph ).
Possible weaknesses of the policy responses by the German government:
the government response has been hesitant, slow and not large enough to outweigh
6
Syllabus
Level
Year ,
Paper
Question
Mark Scheme
the impact of the global economic crisis (figures for the first stimulus package of 12
billion euros are proportionally small) (paragraphs and )
many of the measures will not have an impact until 2010 (paragraph )
increased saving by consumers may reduce the impact of increased government
spending
increased demand for goods may be satisfied by using existing stocks of produced
goods
the export sector may not be assisted by the spending
the planned deficit budgets will require increased government borrowing which will
increase public debt
the increased government spending may cause a sharp increase in inflation when
recovery begins in 2010 (paragraph ).
Effective evaluation may be to:
consider short-term versus long-term consequences
examine the impact on different stakeholders
discuss advantages and disadvantages
prioritize the arguments.
Fiscal policy multiplier
HL
November
2010, P2
4. A government decides to increase
its spending on new roads,
recognizing that there will be a
multiplier effect on national income.
Using a numerical example, explain
what may determine the size of the
multiplier.
Candidates may include the following:
a definition of the multiplier
a definition of national income
an explanation of the multiplier and its effect on national income
an identification of leakages/withdrawals and injections/additions as
factors that determine the size of the multiplier
an explanation that the size of the multiplier depends on the marginal
propensity to consume or on the marginal propensity to inject or add
income to the circular flow e.g. the higher the MPC the higher the value of
the multiplier
an explanation that the size of the multiplier depends on the marginal
propensity to save or, generally, on the marginal propensity to withdraw or
leak out of income from the circular flow, e.g. the higher the MPS the
lower the value of the multiplier
a numerical example using one of the formulae for the multiplier
an explanation of the numerical example.
Fiscal policy
and monetary
policy
HL
May 2010,
P1
2(b) Evaluate the likely effects on
the economy of relying on demandside policies to reduce the
unemployment rate. [15 marks]
Answers may include:
an explanation of the use of interest rates to reduce the unemployment
rate
an explanation of the use of increased government spending/lower
taxation levels to reduce the unemployment rate
an explanation of the linkage between lower interest rates and AD
an explanation of the “crowding out” effect resulting from government
borrowing to increase government spending
an explanation of the linkage between increased government spending and
lower taxation and AD
a consideration of the suitability of demand-side policies for different types
of unemployment
the impact on output, growth, inflation and the balance of payments
use of AD/AS diagrams
AD moving to the right causes inflation on the vertical part of the AS curve
7
Syllabus
Level
Year ,
Paper
Question
Mark Scheme
the inappropriateness of lower interest rates/higher government spending/
lower taxation in dealing with real-wage or natural unemployment
demand-side measures effective against demand-deficient unemployment
supply-side measures to deal with unemployment
the problems associated with increased government spending (running a
budget deficit)
the problem of inelastic response of consumption and investment to lower
interest rates
the problem of time lags.
Examiners should be aware that candidates may take a different approach
which if appropriate, should be rewarded.
Effective evaluation may be to:
consider short-term versus long-term consequences
examine the impact on different stakeholders
discuss advantages and disadvantages
prioritize the arguments.
Fiscal policy
and Supplyside policy
SL
November
2010, P1
2. (a) Using appropriate diagrams,
explain the difference between
demand-side and supply-side
economic policies. [10 marks]
Answers should include:
a definition of monetary policy
a definition of fiscal policy
an explanation of demand-side policies
an explanation of fiscal policy as a demand-side instrument
an explanation of monetary policy as a demand-side instrument
use of an AD/AS diagram to illustrate the likely impact on AD
an explanation of supply-side policies
an explanation of the impact of supply-side policies
use of an AD/AS diagram to illustrate the likely impact on AS
examples of supply-side policies.
Fiscal Policy
Crowding out
HL
May 2011,
P2,
3. A government decides to
introduce a major increase in its
spending programmes. Explain
how this may lead to “crowding
out” effects.
Candidates may include:
a definition of “crowding out”
an explanation of financial “crowding out”; i.e. that by running a budget deficit
government increases demand for loanable funds, leading to increased interest rates
and thus reduced private investment and private consumption
an explanation of physical (resource) “crowding out”; i.e. that increased government
spending reallocates factors of production away from the private and towards the
public sector, particularly when the economy is at or near full employment
an explanation of “crowding out” in terms of it being a criticism of the use of
Keynesian demand management economics by neo-classical or monetarist
economists
a diagram showing the demand for, and supply of, loanable funds with increased
demand leading to raised interest rates
an AD/AS diagram showing the impact of government spending on AD and the
subsequent decline due to “crowding out”
May 2009,
P2
4. Explain the possible impact on the
distribution of income of a
government shifting its main source
of tax revenue from progressive
4. Explain the possible impact on the distribution of income of a
government shifting its main source of tax revenue from progressive direct
taxes to regressive indirect taxes.
Candidates may include any of the following: explanation of progressive
direct taxes explanation of regressive indirect taxes examples of direct and
Income
inequalities
8
Syllabus
Income
Inequality
Level
HL
Year ,
Paper
May 2011,
P1
Question
Mark Scheme
direct taxes to regressive indirect
taxes.
indirect taxes impact of a reduction in direct taxes on the distribution of
income impact of a rise in indirect taxes on the distribution of income in
terms of equality and equity use of the Lorenz curve.
Answers should include:
a definition of income distribution, as one of the goals of macroeconomic policy.
2. (a) Explain two policies a
government might use to
redistribute income. [10 marks]
Plus any two of the following:
progressive, regressive and proportional taxation (a diagram may be used)
switching the burden of taxation between direct and indirect (more regressive) taxes
transfer payments, minimum wage
use of property or wealth taxes for redistributive purposes.
Answers may include:
a method of describing or measuring income equality or inequality such as the Lorenz
curve and/or Gini coefficient
the redistributive effects of merit goods in an economy which provides them
extensively
reference to the redistributive effects of government subsidies.
Answers should include:
a definition of income distribution, as one of the goals of macroeconomic policy.
Income
Inequality
Income
inequality
HL
HL
May 2011,
P1
May 2010,
P2
2(b) “Measures to promote greater
income equality should be a key
feature of government economic
policy.” Evaluate this proposition.
[15 marks]
4. With the aid of a diagram, explain
how an increase in transfer
Answers may include:
a definition of income equality
reference to the difficulty and disagreement over “fair” distribution
consideration of benefits of greater income equality such as reduction of poverty,
increase in consumption of the poor, greater incentives for low income groups,
attainment of economic development
definitions of the four objectives of government economic policy, with an explanation
that income equality is a fifth and not always considered as important
consideration of the Laffer curve
consideration of the presumed disincentive effects of taxation
reference to the positive externalities of merit goods such as education and health
care for lower income groups
consideration of the normative nature of the statement in the question
the positive multiplier effects resulting from transferring income from sectors with high
MPS to sectors with high MPC
a reference to where the economy is in the business cycle, as an influence on
whether greater income equality would be a key feature of government economic
policy.
N.B. Some candidates may mention the balanced-budget multiplier in connection with
the last bullet point.
In attempting evaluation candidates might point to the fact that arguments for greater
or less equality coexist within economics and that notions of income equality and
fairness are not the same.
Effective evaluation may be to:
consider short-term versus long-term consequences
examine the impact on different stakeholders
discuss advantages and disadvantages
prioritize the arguments.
Candidates may include:
a definition of transfer payments
a definition of the Lorenz curve
9
Syllabus
Level
Inflation
Inflation
HL
Year ,
Paper
Question
Mark Scheme
payments to the poorest households
in a nation is likely to affect the
Lorenz curve and the Gini coefficient
of that nation.
a definition of the Gini coefficient
a diagram illustrating a Lorenz curve and the Gini coefficient
an explanation that an increase in transfer payments to the poorest
households can lead to an improvement in income distribution, by
increasing the incomes of lower income groups
an explanation that an improvement in income distribution will cause the
Lorenz curve to move towards the line of absolute equality
an explanation that the Gini coefficient (index) will become lower
indicating a more equitable distribution of income.
May 2009,
P1
2. (a) Explain the possible causes of
a rise in the rate of inflation in an
economy. [10 marks]
May 2010,
P2
3. Explain how inflation can be
measured and explain three
problems associated with the
measurement of inflation.
Answers should include: definition of inflation explanation of a rise in the
rate of inflation explanation of the rise in terms of an increase in aggregate
demand (AD) explanation of the rise in terms of an increase in costs (AS).
Answers may include: explanation of the rise in terms of an increase in the
money supply (accept reference to MV = PT) use of an AD/AS diagram to
illustrate the rise in AD use of an AD/AS diagram to illustrate the rise in
costs factors which may cause AD to rise, e.g. lower taxation, higher
government spending factors which may cause AS to rise, e.g. lower
productivity, wage increases the impact of external shocks such as a rise
in oil prices reference to other relevant factors such as expectations and a
depreciating exchange rate.
Candidates may include:
a definition of inflation
measures of inflation such as a price index, retail price index, deflator,
price deflator discussion of basket of goods (regimen), weighting, base
year, regional issues (country and city).
Problems associated with the measurement of inflation:
price index based on purchasing preferences of “typical” household
errors in the collection of data
changes in consumption habits over time
quality and types of goods and services change over time
changes in producer prices are excluded
one-off events such as seasonal variations, oil price shocks
international comparisons.
Inflation
SL
May 2009
3(d) Using information from the
text/data and your knowledge of
economics, evaluate factors that
could have caused China’s inflation
to increase recently.
[8 marks]
Responses may include: a definition of inflation
an explanation of the difference between demand-pull and cost-push
inflation. Diagrams illustrating these two causes of inflation may be
included evaluation may be in terms of short-term and long-term impacts
on inflation.
An evaluation of factors which could have caused rising inflation such as:
rising aggregate demand (consumption, investment, government
spending, net exports) excess demand above potential growth external
shocks, such as increased oil prices increased costs of electricity, water,
bro
costs, now exceeding
10
Syllabus
Level
Year ,
Paper
Question
Inflation – cost
push
SL
November
2010, P2
© Using an AD/AS diagram, explain
how wage increases create cost push
inflation (paragraph ). [4 marks]
Macroeconomic
performance
HL
May 2009,
P3
3(d) Using information from the
text/data and your knowledge of
economics, evaluate the economic
performance of Russia and Poland
since the 1990s. [8 marks]
Mark Scheme
Candidates who incorrectly label diagrams cannot be rewarded with full
marks.
Examiners must be aware that candidates may take a different approach
which if appropriate, should be rewarded.
If there is no direct reference to the data, then candidates may not be
rewarded beyond level 2.
Effective evaluation may be to: consider short-term versus long-term
consequences examine the impact on different stakeholders discuss
advantages and disadvantages prioritize the arguments.
For drawing a correctly labelled AD/AS diagram, which shows a leftward
shift of SRAS and higher price level and for explaining that wages are a
cost of production and that higher wages will lead to higher production
costs which will be passed on in the form of higher prices leading to cost
push inflation.
Responses may include:
Positives for Russia: Russia has exhibited rising growth rates throughout
the period 2002–2006 ranging between 5 % in 2002 to above 10 % in
2005–2006 unemployment in Russia is hovering around 7 % and dropping,
significantly below Poland’s.
corruption may result in less economic growth high degree of commodity
dependence (gas/oil etc.) (“Russia has come to depend on a small number
of companies in the na
revenues from these sectors may have contributed to its growth but also
to a high current account surplus (between 8 % and 12 % of GDP) which
has exerted pressure on the ruble to appreciate and thus eroded the
competitiveness of other export oriented industries this type of growth is
not sustainable and is risky as any downturn in the world economy will
immediately lower Russian growth inflation has also been high (higher
than Poland’s but dropping from a high of 16 % in 2002 down to slightly
less than 12 % in 2006 which could undermine growth in the long run as
non-oil investments may be hurt.
Positives for Poland: growth rates are rising to around 4 % per annum
which is satisfactory for a transition economy and may be more
sustainable than Russia strengthened property rights and monetary
controls, privatized and modernized its private sector which encouraged
economic growth, employment and income generation inflation has been
kept a good levels between 1 % and 4 % even though the drop in 2006 to
less than 1 % may warn of the risk of deflation.
Negatives for Poland: unemployment has been very high (above 12 %
throughout the period) but at least seems to be decreasing the high
unemployment may be the result of both tight policies as inflation has
been kept low but also of rigidities in the labour market (data and
component the current account deficit has ranged between 2 and 4 % of
GDP so it is not a problem.
Candidates could make a judgment on the importance of factors
contributing to the strong/weak economic performance of Russia and
Poland or they could compare the two economies and make a judgment as
11
Syllabus
Level
Year ,
Paper
Question
Monetary
Policy
HL
November
2010, P3
3 (d) Using information from the
text/data and your knowledge of
economics, evaluate the
consequences for the UK economy if
the Bank of England were
to raise interest rates from 5 % as
suggested in paragraph . [8
marks]
Monetary
policy
SL
November
2010, P2
(d) Using information from the
text/data and your knowledge of
economics, evaluate the
consequences for Iceland’s economy
if it maintains tight monetary
policies. [8 marks]
Mark Scheme
to which economy has performed better, justifying their judgment.
Responses may include:
Negative consequences:
may move to a recession (paragraph )
consumer confidence will fall further (paragraph )
C and I will fall, affecting AD (paragraph )
unemployment will increase further (paragraph )
household spending will fall as debt repayments increase
the exchange rate may increase, harming export competitiveness
rise in business costs, which may cause cost push inflation
negative wealth effects.
Positive consequences:
inflation may fall
an increase in the exchange rate may lead to cheaper imports of raw
materials, semi-finished goods, and finished goods, further reducing
inflation
savings may increase.
Effective evaluation may be to:
consider short-term versus long-term consequences
examine the impact on different stakeholders
discuss advantages and disadvantages
prioritize the arguments.
Responses should include:
an explanation of tight monetary policy.
Possible positive consequences include:
a reduction in the inflation rate (Figure 2)
an appreciation of the currency, making imports cheaper.
Possible negative consequences include:
a lower rate of economic growth (Figure 1)
a worsening of the current account deficit as the exchange rate increases
(Figure 3)
increased unemployment (Figure 4)
a fall in the growth rate of per capita income (paragraph )
a reduction in the rising entrepreneurship (paragraph )
changes in the distribution of income.
Effective evaluation may be to:
consider short-term versus long-term consequences
examine the impact on different stakeholders
discuss advantages and disadvantages
prioritize the arguments.
Neo-classical
economics
HL
November
2010, P2
3. Using a diagram, and assuming a
neo-classical aggregate
Examiners should be aware that candidates may take a different approach
which if appropriate, should be rewarded.
If there is no direct reference to the text/data, then candidates
may not be rewarded beyond level 2.
Candidates may include the following:
a definition of aggregate demand
12
Syllabus
Level
Year ,
Paper
Question
Mark Scheme
demand/aggregate supply model,
explain the short-term and longterm effects of a rise in aggregate
demand when a country is at full
employment.
a definition of full employment
an explanation of neo-classical aggregate demand/aggregate supply model
a diagram showing a neo-classical LRAS with AD and SRAS intersecting at
the LRAS and a subsequent shift of AD to the right
an explanation that in the short-term there will be an increase in output
and the price level, producing an inflationary gap
an identification of the inflationary gap on the x-axis
an explanation that the higher price level means that costs of production
rise as workers negotiate higher wages to compensate for inflation
an explanation that in the long-term the SRAS curve will shift to the left
a conclusion that the long-term effect is an increase in the price level with
no change in real output.
Neo-classical
economics
SL
November
2010, P2
3(b) Using an appropriate diagram,
explain the likely effect of aggregate
demand increasing “beyond potential
output” (paragraph ). [4 marks]
For drawing a correctly labelled AD/AS diagram which shows AD and SRAS
intersecting to the right of LRAS and for explaining that if AD increases
beyond potential output, the effect would be inflation.
Teacher note: once the capacity of the economy is reached further
increases in aggregate demand cannot be met by increases in aggregate
supply. Consequently inflation occurs – firms raise their prices across the
economy and the price level thus increases.
Supply-side
Policies
HL
May 2011,
P2
4. Explain two policies that a
government may use to attempt
to lower levels of equilibrium
unemployment.
Candidates may include:
a definition of equilibrium unemployment or unemployment
types of equilibrium unemployment or unemployment
an explanation of any two of the following supply-side policies:
– education and training
– reduction of trade union power
– abolition of minimum wage laws
– reduction of unemployment benefits
– reduction of personal income taxes
– any of the appropriate supply-side policies
an explanation of appropriate demand-side policies
use of a diagram to illustrate possible effects of policies
use of a diagram to illustrate equilibrium unemployment or unemployment.
Supply-side
Policies
Supply-side
HL
HL
November
2010, P1
November
2. (a) Explain how supply-side
improvements to an economy may
be achieved through the use of taxes
and government spending. [10
marks]
Answers should include:
an explanation of “supply-side improvements”
use of AD/AS diagrams
an explanation of how taxes and government spending may be used to
affect AS, e.g. through:
2(b) Evaluate the use of supply-side
Answers may include:
– greater government spending on healthcare, education and training
– less government spending on benefits
– a reduction in income tax to increase work incentives
– lower corporation tax to encourage investment
– lower indirect taxes to reduce business costs.
Answers may include:
distinction between SRAS and LRAS.
13
Syllabus
Level
Policies
Year ,
Paper
Question
Mark Scheme
2010, P1
policies to reduce unemployment.
[15 marks]
a definition of unemployment
a definition of supply-side policies
examples of supply-side policies
the concept of a natural rate of unemployment
the importance of the different types of unemployment, e.g. demand
deficient, frictional and structural
an explanation of how supply-side policies may work to reduce
unemployment in the longer term
use of AD/AS analysis, showing LRAS shifting to the right
an assessment of the effectiveness of such measures
unemployment beyond the control of national governments, e.g. arising
from demand-side shocks or international recession
consideration of the use and effectiveness of alternative short-term
demand-side measures to reduce unemployment, i.e. fiscal and monetary
policies
an evaluation of the effectiveness of particular supply-side policies, e.g.:
– tax cuts
– cuts in welfare benefits
– education and training/retraining
– privatization/deregulation
– trade union policies.
Effective evaluation may be to:
consider short-term versus long-term consequences
examine the impact on different stakeholders
discuss advantages and disadvantages
prioritize the arguments.
Supply-side
policies
SL
November
2010, P1
2 (b) Evaluate the use of supply-side
policies to improve the performance
of an economy. [15 marks]
Answers may include:
a distinction between market-oriented and interventionist supply-side
policies
advantages of supply-side policies in terms of their impact on:
– productivity
– economic growth
– employment
– inflation
– current account
– distribution of income
use of AD/AS diagrams to illustrate the above
Disadvantages of supply-side policies in terms of:
– welfare benefits
– cost of funding them
– public services
– exploitation of labour
– time it takes them to work.
Effective evaluation may be to:
consider short-term versus long-term consequences
examine the impact on different stakeholders
14
Syllabus
Level
Year ,
Paper
Question
Mark Scheme
discuss advantages and disadvantages
prioritize the arguments.
Unemployment
HL
May 2010,
P1
2. (a) Explain why a country may
wish to reduce its unemployment
rate. [10 marks]
Answers should include:
an explanation of the unemployment rate
an explanation of the types or components of unemployment
an explanation for wishing to reduce unemployment in terms of the
various costs of unemployment. This may include the impact on:
– the unemployed themselves e.g. reduced income, stress levels, selfesteem
– society e.g. poverty, crime, vandalism
– economy as a whole e.g. actual output is less than potential output (to
the left of the LRAS curve); or economy is at a point inside the PPC
– opportunity cost of government spending on unemployment benefits,
less tax revenues available for other purposes
a government might wish to reduce unemployment in order to raise tax
revenue.
Unemployment
HL
May 2009,
P3
3(a) Define the following terms
indicated in bold in the text:
(i) structural unemployment
(paragraph )
Unemployment
SL
May 2011,
P2
2(c) Using an AD/AS diagram,
explain one type of unemployment
experienced in Germany in 2009. [4
marks]
Unemployment
SL
May 2009,
P1
Unemployment
SL
May 2009,
P2
2. (a) There are various types of
unemployment. Explain how any
three types of unemployment may
cause a rise in the unemployment
rate of an economy. [10 marks]
1a(ii) unemployment
(paragraph ).
Unemployment
SL
May 2009,
P2
2 a(i) structural unemployment
Any one of the following would be appropriate: long-term unemployment
that is caused as a result of a fall in the demand for a particular type of
labour unemployment that occurs as a result of the changing structure of
an economy resulting from changes in demand/supply and/or technology
and/or trade patterns unemployment that occurs when there is a
mismatch between the skills of unemployed workers and the jobs available
unemployment that exists as a result of rigidities in the labour market.
For drawing an AD/AS (or ADL/ASL) diagram showing a shift of AD (or
ADL) to the left and for explaining that unemployment is demand
deficient/cyclical because of the falling aggregate demand and the
resultant fall in the demand for workers.
Answers should include: definition of unemployment an explanation of
three of structural, frictional, seasonal, demand deficient (cyclical), real
wage unemployment (classical) explanation of the term “unemployment
rate” and how the three types of unemployment explained could increase
the unemployment rate.
Answers may include: diagrammatic illustration of the above.
An explanation that it is: people of working age (those in the labour force)
willing and able to work actively seeking work at the current wage rate
who are without work.
Any two of the above points would be sufficient.
Any one of the following would be appropriate: long-term unemployment
that is caused as a result of a fall in the demand for a particular type of
labour unemployment that occurs as a result of the changing structure of
an economy resulting from changes in demand/supply and/or technology
unemployment that occurs when there is a mismatch between the skills of
unemployed workers and the jobs available unemployment that exists as a
result of rigidities in the labour market.
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