Ansky

September Exam [1400 marks]
1. [Maximum mark: 25] SPM.1.SL.TZ0.2

(a) Explain two possible causes of deflation. [10]
Markscheme
Answers may include:
Definition: deflation.
Explanation: any determinant of AD that could shift it to the left, eg
falling consumer or business confidence, falling consumption, falling
investment, falling government spending, or any determinant that
shifts AS to the right, eg falling costs of raw materials or labour,
increased productivity, rising exchange rate.
Diagram: AD/AS diagram to show falling AD or increasing AS in such a
way that the average price level falls.
(b) Using real-world examples, evaluate the effectiveness of

monetary policy to achieve low inflation. [15]
Markscheme
Definition: inflation, monetary policy.

Explanation: that it is incremental, easily changed, flexible, fast to
implement, does not burden the government’s budget. That there are
limitations: it is less effective when business/consumer confidence is
low; effectiveness may depend on the type of inflation.
Diagram: AD/AS diagram to illustrate contractionary monetary policy.
Synthesis (evaluate): strengths and limitations of monetary policy in
achieving low inflation. Fiscal policy might be considered as an
alternative, but the emphasis of the response should be on monetary
policy.
Examples: real-world examples of where governments have attempted
to lower inflation using monetary policy.
N.B. 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.
2. [Maximum mark: 25] SPM.1.HL.TZ0.2
(a) Explain two tools open to a central bank to conduct
expansionary monetary policy. [10]
Markscheme
Definition: expansionary monetary policy.

Explanation: of any two of the following instruments—open market
operations, minimum reserve requirement, base rate changes and
quantitative easing.
Diagram: money market diagram to show interest rates falling or
AD/AS diagram.
(b) Using real-world examples, evaluate the effectiveness of

monetary policy to achieve low unemployment. [15]
Markscheme
Definition: monetary policy, low unemployment.

Explanation: of the impacts that might occur on the economy as a
result of its use on employment, growth, inflation and trade.
Diagram: AD/AS diagram.
Synthesis (evaluate): strengths and limitations of monetary policy in
achieving low unemployment. Monetary policy is incremental, easily
changed, flexible, fast to implement, does not burden the
government’s budget; it is less effective with close to zero interest rates,
and ineffective when business/consumer confidence is low;
effectiveness may depend on the type of unemployment.
Examples: real-world examples where governments have attempted to
lower unemployment using monetary policy.
then referred to in part (b), should be rewarded
3. [Maximum mark: 25] 22N.1.SL.TZ0.2
(a) Explain two goals of fiscal policy. [10]
Markscheme
Marks should be allocated according to the paper 1 markbands for May 2022 forward, part A.
Terminology: fiscal policy.

Theory: explanation of any two of the following goals: low and stable
inflation, low unemployment, increase short run economic growth,
promote a stable economic environment for long-term growth, reduce
business cycle fluctuations, equitable distribution of income and/or
external balance.
Diagram: Appropriate diagram(s) to show attainment of the two goals
chosen.
A maximum of [6] should be awarded if only one goal of fiscal policy is explained.
Candidates who explain and diagram the supply-side effects of fiscal policy should also be fully rewarded.
The goals of fiscal policy can be explained either through why it is used (e.g. stable inflation) or how it is
used (e.g. cutting tax). Both approaches should be equally rewarded.
Examiners report
This question was generally well answered by students. Effective responses

considered how fiscal policy can be used to address macroeconomic goals
such as economic growth, low inflation and full employment. The strongest
answers considered how government expenditure and taxation can be
used to affect aggregate demand to achieve the two goals their answer
covered. It was pleasing to see clear and accurate AS/AD diagrams used to
illustrate the answers given.
(b) Using real-world examples, evaluate the use of fiscal policy to
close a deflationary/recessionary gap. [15]
Markscheme
Marks should be allocated according to the paper 1 markbands for May 2022 forward, part B.
Terminology: fiscal policy, deflationary/recessionary gap.

Theory: explanation of how expansionary fiscal policy will increase AD
moving the economy closer to its full employment level, closing a
deflationary/recessionary gap.
Diagram: AD/AS diagram to illustrate expansionary fiscal policy to
close a deflationary/recessionary gap.
Synthesis (evaluate): effectiveness depends on the shape of the
aggregate supply curve and where the economy is operating;
potential strengths of fiscal policy such as targeting of specific sectors
and effectiveness in a deep recession; potential constraints on fiscal
policy such as political pressures, time lags and sustainable debt;
possible conflicts with other macroeconomic objectives, monetary
and/or supply-side policies might be considered as alternatives, but
the emphasis of the response should be on fiscal policy.
Example(s): real-world examples of where governments have
attempted to close a deflationary/recessionary gap using fiscal policy.
N.B. It should be noted that theory and diagrams that have already been given in part (a), and then referred
to in part (b), should be rewarded.
Examiners should be aware that candidates may take a different approach which, if appropriate, should be
rewarded.
Examiners report
This question part was also well answered by candidates. The strongest
answers showed a clear understanding of a deflationary gap where the
equilibrium national income is below full employment national income.
Good responses would go on the say how expansionary fiscal can close a
deflationary gap as a decrease in tax and an increase in government
expenditure leads to a rise in aggregate demand and this was supported by
an accurate AD/AS diagram. The highest-achieving responses fully
evaluated the use of expansionary policy by considering its strengths and
weaknesses to close a deflationary gap, such as the cost of financing the
policy and this was supported by effective real-world examples.
4. [Maximum mark: 25] 22N.1.HL.TZ0.2
(a) Explain why a sustainable level of government (national) debt
is an important macroeconomic objective. [10]
Markscheme
Terminology: Government (national) debt, sustainable government

(national) debt.
Diagrams: Candidates might use an AD/AS diagram to illustrate
changes in government spending, but the question can be answered
without the use of a diagram.
Theory: An explanation of how government debt might be measured
as a percentage of GDP. Candidates may also explain how a budget
deficit is related to government (national) debt. Candidates might
explain sustainable debt in terms of servicing costs, credit ratings and
how future taxation and government spending might be impacted by
debt and whether these are sustainable.
Examiners report
A significant number of candidates did not know what the national debt
was. It was confused with a budget deficit in many cases and with a trade
deficit in extreme cases. The highest-achieving responses were able to
explain the link between budget deficits and national debt. From that point
they could go on to explain why a sustainable national debt is an important
macroeconomic objective, for example, in order to avoid excessive impacts
on future spending plans by governments and to keep down the costs of
debt servicing.
(b) Using real-world examples, discuss the potential trade-off
between unemployment and inflation. [15]
Markscheme
Terminology: Unemployment, inflation.

Diagrams: AD/AS diagrams, Phillips curve diagram.
Theory: An explanation of the potential trade-off between
unemployment and inflation in the long run and in the short run.
Synthesis (discuss): Discussion of the relationship between inflation
and unemployment in the short run and in the long run. A
consideration of the trade-off revealed by the short-run Phillips curve
and the lack of a trade-off indicated by the long run Phillips curve in
which the economy is assumed to be operating at the natural rate of
unemployment.
Example(s): A relevant real-world example(s) in which a potential
trade-off between unemployment and inflation is claimed to exist.
Examiners report
This question offered candidates the opportunity to take an expansive

approach in their response. The question leans towards use of the Phillips
curve, but some candidates opted to approach the question using only AS
and AD analysis, using a stagflation versus demand-pull inflation approach.
This was done well in some cases but a response that developed the long-
run and short-run Phillips curve arguments was likely to be more
substantial and obtain higher marks. The use of real-world examples was
very good in some cases but many candidates find it a challenge to apply
them to macroeconomic responses effectively.
5. [Maximum mark: 25] 22M.1.SL.TZ0.2
(a) Explain how the use of supply-side policies might encourage
greater domestic competition and improve the international
competitiveness of a country. [10]
Markscheme
Terminology: supply-side policies, international competitiveness,

competition
Explanation: of how the use of market-based supply-side policies such
as privatization, deregulation, trade liberalization and anti-monopoly
legislation and interventionist supply-side policies such as
government spending on education and training, R&D and
infrastructure might encourage greater competition; an explanation
that international competitiveness may be improved as a result of the
LRAS increasing and lowering the rate of inflation/the price level,
hence making exports relatively cheaper
Diagram: an AD/AS diagram showing a rightward shift of LRAS.
A maximum of [6] should be awarded if only one of the two goals in the question item is addressed.
Examiners report
This question had many good answers, with the best responses looking at
how interventionist supply-side policies, such as subsidies and grants to
support research and development, along with education and training,
could increase competition within domestic markets and make a country
more internationally competitive. Some candidates approached this
question from a market-based supply-side approach and looked at policy
options like tax cuts, deregulation and privatization. It was important
for students to focus their chosen supply-side policies on greater domestic
competition and international competitiveness and the best answers did
this effectively.
(b) Using real-world examples, evaluate the view that the use of
interventionist supply-side policies is the most effective way of
reducing a country’s rate of unemployment. [15]
Markscheme
Terminology: interventionist supply-side policies, unemployment

Explanation: of the view in terms of the successful implementation of
interventionist supply-side policies increasing the productive capacity
of the economy, increasing the demand for labour in the long run and
thus lowering the level of unemployment; such policies are also likely
to increase AD
Diagram: an AD/AS diagram to show LRAS being shifted to the right
and/or AD shifting right
Synthesis (evaluate): the supply-side policy applied depends on the
type of unemployment, the limitations of using interventionist supply-
side policy in reducing unemployment; interventionist policies
compared with market-based supply-side policies; the potential
benefits of alternative policies such as monetary and fiscal policies;
consideration of “most effective”; overall assessment
Examples: real-world examples of where governments have attempted
to reduce unemployment using interventionist supply-side policies
and/or other policies.
rewarded.
then referred to in part (b), should be rewarded.
As the question requires an evaluation of the “most effective way”, a maximum of [12] should be awarded
where no other policies are considered, as the question wouldn’t be fully addressed. For [13] or more the
synthesis and evaluation must be effective and balanced and there must at least be some mention of
alternative policies.
Examiners report
This question was generally well answered by students, with many

considering interventionist supply-side policies such as education and
training, employment subsidies, and direct state employment. Good
answers considered interventionist supply-side policies in terms of the
types of unemployment (frictional, structural, and demand deficient
unemployment) and illustrated their response with an increase in LRAS
and/or demand and supply for labour diagram. Similar to question 1, most
students tried to support their answer with a real-world example. The very
best answers effectively evaluated the use of interventionist supply-side
policies but considered aspects such as the financial cost of the measures
and how effectively they work.
(a) Explain how in the Keynesian AD/AS model an economy can be
in equilibrium while producing below the full employment
level of output. [10]
Markscheme
definitions of equilibrium, full employment level of output

diagram to show the Keynesian model of an economy at equilibrium
income below the full employment level of output
explanation of how an economy can be in equilibrium income below
full employment when AD falls, leading to a deflationary gap when
wage and price rigidity keep the economy below the full employment
level of output
examples of when economies have experienced equilibrium income
below the full employment level of output.
Examiners report
The responses to this question were mixed in terms in terms of the standard.
The best answers clearly focused on the reason why equilibrium national
income can exist below full employment in the Keynesian model by
focusing on the argument that wages and costs do not fall when the
economy is operating below full employment. A common mistake was for
students to simply explain equilibrium income below full employment
without explaining why the equilibrium would stay at this level and not
adjust back to full employment. Very good answers were supported by an
effective real-world example.
(b) Evaluate the view that fiscal policy is the best way to reduce
unemployment. [15]
Markscheme
definitions of fiscal policy, unemployment

diagram to show how fiscal policy leads to a fall in unemployment
explanation of how expansionary fiscal policy leads to a rise in AD and
real GDP, leading to a fall in unemployment as more workers are
needed in production
examples of where fiscal policy has been used to reduce
unemployment
synthesis or evaluation.
Evaluation may include: consideration of the problems of using fiscal policy to

reduce unemployment such as; budget deficit, inflation and it is not as
effective at reducing unemployment that is not demand-deficient
(structural, frictional). There could also be coverage of alternative policies
such as monetary and supply side.
A maximum of [12] should be awarded if a candidate has not considered an alternative policy.
Examiners report
There were some very good answers to this question. The best responses
focused on how expansionary fiscal policy reduces demand deficient
unemployment as aggregate demand increases when tax is reduced, and
government expenditure is increased. Good responses would go on to
evaluate the use of fiscal policy by discussing issues such as increasing
inflation, the cost of financing the policy, and fiscal policy is not particularly
effective at reducing frictional and structural unemployment. The highest-
level responses would use effective real-world examples to support the
points being made.
(a) Explain how economic growth might reduce the level of
absolute poverty in a country. [10]
Markscheme
PLEASE NOTE: This question part is not on the syllabus for first teaching
2020/first exams 2022.
definitions of economic growth, absolute poverty

diagram to show how economic growth leads to a rise in income
which could reduce poverty
explanation of how economic growth might lead to a rise in
household income, which reduces absolute poverty
examples of countries where economic growth has reduced absolute
poverty.
NB Where a money value is given for absolute poverty there is flexibility on the value. Anything around $2 a
day is acceptable.
Examiners report
This question was generally well answered by students who showed a clear
understanding of the relationship between economic growth and absolute
poverty. The strongest answers explained how rising incomes and
employment that result from economic growth reduce poverty levels as
households are better able to afford the goods and services needed to
support a basic standard of living. It was good to see some well-developed
real-world examples from ELDCs to support this.
(b) Evaluate the view that progressive income tax is the best way to
increase equity in an economy. [15]
Markscheme
definitions of progressive income tax, equity

diagram to show the impact of progressive income tax on equity
explanation of how progressive income tax increases equity by taxing
high-income people at a higher rate, which provides more funds for
public services that can increase equity, such as education and
healthcare
examples of progressive taxation to increase equity
Evaluation may include: consideration of the problems of applying progressive

taxation if high-income people avoid paying or people do not expand their
businesses and how this can reduce opportunities for people of low
incomes. Answers might also include consideration of alternative policies
to increase equity such as increased transfer payments and improvements
to the functioning of the labour market.
A maximum of [12] should be awarded if a candidate has not considered an alternative policy.
Examiners report
This question proved to be challenging for students. Progressive income

tax was quite well understood by students, but many struggled to clearly
make the connection to equity. The strongest responses explained how
progressive tax means the richest in society make the biggest contribution
to government tax revenue and the revenue raised can be used to improve
opportunities for the households on the lowest incomes. The best students
evaluated their argument by considering the impact progressive taxation
might have on the motivation of high-income individuals and how some
individuals might try to avoid high taxes.
(a) Explain how rising commodity prices and wages might lead to
cost-push inflation. [10]
Markscheme
definitions of inflation, cost-push inflation, (primary) commodity

AD/AS diagram showing a shift of the short-run aggregate supply
curve to the left and higher average price level
an explanation of how cost-push inflation is caused by the increase in
the costs of production due to the rising commodity prices and wages
examples of countries where cost-push inflation has taken place.
NB A maximum of [6] should be awarded if a candidate has only explained the effect of rising commodity
prices OR rising wages.
Examiners report
Most candidates were able to draw an AD/AS model and explain that cost-
push inflation is caused by an increase in the cost of production but their
answers would be improved if they could further support their
explanations by an appropriate historical example.
(b) Discuss the possible consequences of deflation for an economy. [15]
Markscheme
definition of deflation
AD/AS diagram(s) showing either AD or AS shifting and a lower
average price level
an explanation of possible consequences of deflation such as
deflationary spiral with high levels of cyclical unemployment and/or
bankruptcies due to rising real value of debt
examples of countries that have experienced deflation
synthesis or evaluation (discuss).
Discussion may include: consideration of the extent to which the consequences of

deflation depend on its causes; consideration of the effect of deflation on
different stakeholders.
rewarded.
Examiners report
The great majority of candidates understood the concept of deflation but

too many candidates focused their answers on the causes of deflation
instead of on the consequences of deflation. Also, candidates often spent a
lot of time discussing the consequences of expansionary fiscal and
monetary policies. Their answers could be significantly improved if they
had focused on discussing negative consequences that can be directly
attributed to the falling average price level.
(a) Explain how a better trained and educated labour force might
affect economic growth. [10]
Markscheme
definition of economic growth, labour (force)

AD/AS diagram with LRAS shifting to the right or PPC diagram with
the production possibilities curve shifting to the right
an explanation of how improved education and training might lead to
increasing productivity and hence economic growth
examples of countries where improved education and training have
possibly affected economic growth.
Examiners report
Some answers were focused on the effect of increased training and

education on aggregate demand and could be significantly improved by
addressing the more important effects on short-term and long-term
aggregate supply.
(b) Discuss the view that economic growth always leads to rising
living standards. [15]
Markscheme
definition of economic growth

AD/AS diagram showing increasing real GDP, negative externality
diagram, PPC diagram, poverty cycle diagram or Lorenz curve diagram
an explanation of the impacts economic growth might have on living
standards through changes in employment, tax revenue used to
finance government spending, sustainability in resource use and the
distribution of income
examples of cases where economic growth has led to changes in the
standard of living
Discussion may include: the advantages and disadvantages of economic growth,

the extent to which economic growth affects different stakeholders and
material and non-material aspects of the standard of living, consideration
of the word “always”.
NB It should be noted that definitions, diagrams, theory and examples that have already been given in part
(a), and then referred to in part (b), should be rewarded.
rewarded.
Examiners report
A generally well answered question with some excellent examples and

discussion that considered a range of positive and negative effects of
economic growth on living standards.
(a) Explain how the size of the circular flow of income in an
economy is likely to be affected by a decrease in the rate of
interest. [10]
Markscheme
definitions of circular flow of income, rate of interest

diagram of the circular flow of income, showing a decrease in saving
and an increase in investment or use of an AD/AS diagram to explain
the impact of the decrease in the rate of interest on the circular flow of
income
explanation that a decrease in the rate of interest is likely to reduce
saving, and increase business investment; hence a decrease in a
leakage and an increase in an injection will exert an upward impact on
income and output and increase the size of the circular flow of income
examples of changes in the rate of interest affecting the circular flow of
income in practice, such as the reduction of interest rates to near 0% in
many countries at present.
Examiners report
This proved to be a difficult question for candidates and was certainly the
least popular. Most were unable to provide an accurate circular flow
diagram and to explain the circular flow model and, all too often, the key
concepts of injections and leakages were completely ignored or simply
glossed over. Thus, usually, candidates did not link the lowering of interest
rates to a decrease in a leakage (saving) and an increase of an injection
(investment). Many briefly mentioned that the size of the circular flow
would increase but were not able to properly explain why. Examples were
almost never provided. Many candidates appeared to be much more at
ease with the AD/AS model, which they often launched into at an early
stage of their answer to this question. Some credit was given for this where
appropriate, but this approach was often not explicitly related to leakages
and injections.
(b) Evaluate the effectiveness of fiscal policy as a means of

achieving long-term economic growth. [15]
Markscheme
definitions of long-term economic growth, fiscal policy

diagram to show LRAS and/or the production possibility curve shifting
to the right/outwards
explanation of how fiscal policy can promote long-term economic
growth through government spending on infrastructure, technology,
R&D and human capital, tax reductions/incentives for firms to invest
examples of the use of fiscal policy to promote long-term economic
growth
Evaluation may include: the various advantages and disadvantages of fiscal

policy, including both the demand- and supply-side effects on the
economy, consideration of alternative (supply-side and monetary) policies.
Examiners report
Although some candidates confused fiscal policy with monetary policy,

many displayed a good understanding of what fiscal policy is and how
expansionary fiscal policy is achieved. However, few candidates were able
to explain what long-term economic growth is in comparison to short-term
economic growth and to specifically explain how it might be achieved.
Thus, typically, answers tended to be more general nature in relation to
fiscal policy and economic growth, with diagrams showing how AD shifts
rightwards, causing SR economic growth, without the shift rightwards of
LRAS on account of the supply-side effects of fiscal policy. Many could
evaluate fiscal policy in general, but not specifically as it relates to
increasing long-term economic growth. A few candidates did compare
fiscal policy to supply-side policies but often failed to recognise that certain
aspects of fiscal policy are in effect supply-side policies.
(a) Explain how aggregate demand is likely to be affected by an
increase in the wealth of consumers and an increase in business
confidence. [10]
Markscheme
definitions of aggregate demand, wealth, business confidence

diagram to show the AD curve shifting to the right
explanation that an increase in the wealth of consumers may have a
positive wealth effect whereby consumption increases as consumers
feel richer and are more willing to spend, or can borrow more on the
basis of their greater wealth; that an increase in business confidence in
relation to being more optimistic about future sales and profits is likely
to increase investment; and that the increase in C and I will increase AD
examples of an increase in consumers’ wealth and/or business
confidence increasing AD in practice.
Award a maximum of [6] if only wealth or only business confidence is addressed.
Examiners report
Most responses to this question were disappointing in the sense that a

certain level of understanding was usually shown but not to the level
required to achieve a high mark. The main problem was that, while most
candidates understood the concept of aggregate demand and its
components, the concepts of wealth and business confidence were usually
not well understood. Wealth was commonly equated with income and so
an increase in wealth was often simply seen as an increase in disposable
income, which would increase AD. Only in relatively few cases was the
increase in consumption and thus AD explained in terms of the wealth
effect. Business confidence was not well-understood and was often
confused with consumers' confidence in business, but candidates did
usually make the connection with increased investment and AD, although
the reasons given were not always correct and, invariably, no examples
were provided.
(b) Evaluate the effectiveness of monetary policy in reducing an

economy’s rate of unemployment. [15]
Markscheme
definitions of monetary policy, rate of unemployment

diagram to show AD shifting to the right as a result of expansionary
monetary policy
explanation of how expansionary monetary policy may help to reduce
cyclical (demand-deficient) unemployment in terms of the
mechanisms by which lower interest rates increase AD via the effect on
consumption, investment and/or net exports
examples of expansionary monetary policy being used in practice
Evaluation may include: the implications of monetary policy in terms of the ability
to implement changes in interest rates relatively quickly and incrementally,
the limited political constraints, the possible conflicts with other objectives
of economic policy, time lags, the independence of the central bank, the
ineffectiveness of monetary policy in relation to structural unemployment /
the natural rate of unemployment, its possible ineffectiveness during a
recession, the possibility that alternative policies (e.g. supply-side policy)
may be more effective.
Examiners report
Candidates were reasonably successful in explaining the nature of
expansionary monetary policy, which seemed to be a concept that is well-
understood. Many were able to explain that it involves the lowering of
interest rates and other devices as well. However, the mechanisms by which
these different aspects of monetary policy would lead to an increase in
aggregate demand, greater economic growth and eventually a decrease in
the rate of unemployment were often not fully developed. Monetary policy
was sometimes evaluated on its own, drawing on a standard set of pre-
learned points, but not usually in terms of its effectiveness in specifically
lowering the rate of unemployment. Thus, answers given were often too
general and generic, without sufficient focus on reducing unemployment.
(a) Explain how expansionary monetary policy could be used to
close a deflationary (recessionary) gap. [10]
Markscheme
definitions of monetary policy, expansionary monetary policy,

deflationary gap
diagrams to show a deflationary gap and how it would be closed by a
shift of AD to the right and/or increasing money supply that leads to
decrease in the interest rates
explanation that by increasing the money supply/decreasing the
interest rate the central bank stimulates consumption, investment
and/or net export, leading to an increase in AD and return of the real
GDP to its potential level
examples of countries that have used expansionary monetary policy to
close a deflationary gap.
Examiners report
Many students showed a good understanding of expansionary monetary

policy and the deflationary gap and clearly explained how reducing
interest rates can lead to an increase in aggregate demand and close a
deflationary gap. These answers were illustrated by effective aggregate
demand and supply diagrams and in some cases real-world examples.
Although, as was said earlier, students do find using examples with
macroeconomic questions challenging.
(b) Evaluate the effectiveness of monetary policy in reducing an

economy’s rate of inflation. [15]
Markscheme
definitions of monetary policy, inflation

diagram to show AD shifting left as a result of contractionary
monetary policy
explanation of how contractionary monetary policy may help to
reduce demand-pull inflation in terms of the mechanisms by which
higher interest rates reduce AD via the effect on consumption,
investment and/or net exports
examples of contractionary monetary policy being used in practice or
examples of inflation targeting
Evaluation may include: the implications of monetary policy in terms of the ability
to implement changes in interest rates relatively quickly through the
banking system, the possible conflicts with other objectives of economic
policy, such as growth / unemployment, time lags, the independence of the
central bank; the ineffectiveness of monetary policy in relation to cost-push
inflation; the possibility that alternative policies (e.g. supply-side policies)
may be more effective.
Examiners report
This question also produced many good responses from candidates. The
best answers showed a clear understanding of how contractionary
monetary policy reduces aggregate demand and leads to a fall in demand-
pull inflation. These responses were well illustrated by aggregate demand
and supply diagrams. Finding a real-world example to support their
answers proved quite challenging for students, although there were some
effective points about countries using monetary policy to control
inflationary pressures. It was good to see candidates evaluating their
answers by considering the deflationary threat of increasing interest rates
and a possible rise in unemployment, along with the problem of using
contractionary monetary policy to deal with cost-push inflation. The best
answers often included discussion of other policy options to reduce
inflation such as fiscal policy and supply-side policies.
(a) Explain why cyclical (demand-deficient) unemployment may
occur in an economy. [10]
Markscheme
definition of unemployment, cyclical (demand-deficient)

unemployment
diagram to show cyclical (demand-deficient) unemployment
explanation of how cyclical (demand-deficient) unemployment is
caused by a fall in AD, which may arise from a fall in any or all of the
components of AD (C + I + G + X − M)
examples of cyclical (demand-deficient) unemployment occurring in
practice.
Examiners report
There were some very strong answers to this question, with many students
explaining how cyclical unemployment occurs during a recession when
aggregate demand falls, and unemployment rises. These answers were
effectively illustrated with aggregate demand and supply diagrams. Real-
world examples often prove more difficult for students in macroeconomic
questions, but there were still some effective examples from different
countries where unemployment has increased because the current
pandemic (at the time of writing) caused recession and a fall in aggregate
demand.
(b) Evaluate the effectiveness of interventionist supply-side

policies in reducing the level of unemployment in an economy. [15]
Markscheme
definitions of unemployment, interventionist supply-side policies

diagram showing LRAS shifting right and/or supply of labour
increasing in a labour market diagram; candidates may also show AD
shifting right as a short-term effect of supply-side policies
explanation that interventionist supply-side policies increase the
quantity and quality of factors of production and thus increase the
productive capacity of the economy and can be targeted at particular
sectors of the economy; this may help to reduce structural
unemployment in the long term and also contribute to the reduction
of demand-deficient unemployment in the short term through the
impact on AD
examples of interventionist supply-side policies helping to reduce
unemployment in practice
Evaluation may include: the importance of the type of unemployment (e.g.

demand-deficient unemployment may be more directly reduced through
expansionary monetary and fiscal policies); consideration of the
effectiveness of supply-side policies (e.g. in terms of time lags, the ability to
create employment, the impact on the government’s budget deficit,
opportunity cost); government investment in new technologies (e.g.
robotics/artificial intelligence) may lead to displacement of labour.
Examiners report
This question also produced some effective responses, with candidates

showing a good understanding of the way interventionist supply-side
policies can reduce unemployment. The strongest answers considered how
state-provided education and training, employment subsidies and
government-financed employment exchanges can reduce different types
of unemployment. The answers were illustrated by showing an increase in
the long-run aggregate supply curve, along with real-world examples of
the use of interventionist supply-side policies. Large numbers of students
evaluated their answers by considering the costs and relative effectiveness
of the interventionist supply-side approach. The best responses also
discussed the relative merits of alternative policy options such as monetary
and fiscal policy, along with a market-based supply-side approach.
14. [Maximum mark: 25] 21M.1.HL.TZ1.4
(a) Explain two causes of structural unemployment. [10]
Markscheme
definition of unemployment, structural unemployment

diagram(s) that show the demand curve for labour shifting to the left
and/or surplus of labour due to minimum wage legislation/labour
unions
explanation that a (permanent) decrease in demand for particular
labour skills, changes in the geographical location of industries and
labour market rigidities, would lead to a surplus of workers (and
therefore unemployment)
examples of industries that have experienced structural
unemployment due to relevant causes (e.g. coal miners losing their job
due to foreign competition or the advent of alternative sources of
energy, workers in the newspaper and retailing businesses losing their
jobs due to online competition and new technologies, low-skilled
workers remaining unemployed due to minimum wage legislation,
etc.).
rewarded.
Examiners report
Even though many candidates could not precisely define structural

unemployment, most of them were able to demonstrate good
understanding by the use of appropriate examples.
(b) Discuss the consequences of different types of unemployment. [15]

Markscheme
definitions of unemployment, frictional unemployment, structural

unemployment, seasonal unemployment, cyclical unemployment
diagram(s) showing decreasing GDP due to falling AD or LRAS
explanation of the economic consequences of different types of
unemployment in terms of effects on government budget, personal
incomes and real GDP, and personal or social consequences such as
increased inequality in the distribution of income, the possibility of
increased crime rates, increased stress levels, increased indebtedness,
homelessness and family breakdown
examples of specific cases where unemployment has led to economic,
personal and social consequences (e.g. geographical areas with
declining industries, the Great Depression)
Discussion may include: comparison of the extent of the negative consequences

for the government budget, personal incomes and the real GDP of the
different types of unemployment; comparison of the extent of the negative
personal and social consequences of the different types of unemployment
for individuals who have lost their jobs; consideration that unemployment
is part of the adjustment process of a dynamic economy; consideration of
the desirability of some types of unemployment (e.g. frictional) in
comparison to others (e.g. cyclical); consideration of the duration of
different types of unemployment from the point of view of individuals and
the economy as a whole.
rewarded.
Examiners report
Some less-prepared students had difficulties distinguishing between the

different types of unemployment as well as distinguishing between the
causes of unemployment and the consequences of unemployment.
(a) Explain two causes of demand-pull inflation. [10]
Markscheme
definition of inflation, demand-pull inflation

diagram showing rising average price level due to an increase in AD
explanation that AD may increase because of a change in any of the
determinants affecting component(s) of AD
examples of economies that have experienced demand-pull inflation.
Examiners report
Many students did not make it clear that they understand that the inflation
is a process and not a one-off increase in the average price level. Another
common weakness was using the new classical AD/AS diagrams that shows
an economy that recovers from recession (closes a deflationary gap) to
illustrate demand-pull inflation.
(b) Evaluate the effectiveness of interventionist supply-side

policies in reducing demand-pull inflation. [15]
Markscheme
definitions of inflation, demand-pull inflation, supply-side policies,

interventionist supply-side policies
AD/AS diagram showing an increase in AD in the short run (increasing
the inflationary gap) and an increase in the LRAS (full employment
level of output) in the long run (decreasing the inflationary gap)
explanation that, in the short run, interventionist supply-side policies
may increase the inflationary pressure due to their effect on AD, but
the inflationary pressure will be reduced in the long run due to the
increased productive capacity of the economy
examples of interventionist supply-side policies in practice
Evaluation may include: consideration of the tension between the inflationary

short-run effects and disinflationary long-run effects of interventionist
supply-side policies; spending on healthcare, education and infrastructure
may improve equality in the distribution of income/equity; interventionist
supply-side policies may be expensive and lead to high budget deficits and
increased indebtedness; considerable time lags; negative effects on the
environment; consideration of the strengths and limitations of alternative
policies (e.g. contractionary monetary policy, contractionary fiscal policy,
market-based supply-side policies).
rewarded.
Examiners report
There were many students who did not show any awareness of the short-
run effects of interventionist supply-side policies on AD. There were also
candidates who completely ignored the crucial long-term effects of
interventionist supply-side policies in their diagrams and explanations.
(a) Explain the causes of cost-push inflation. [10]
Markscheme
definitions of inflation, cost-push inflation

diagram showing cost-push inflation (increase in the price level due to
decrease in SRAS)
explanation that cost-push inflation is caused by an increase in the
costs of factors of production
example(s) of specific policies/events that may cause cost-push
inflation, examples of economies that have experienced cost-push
inflation (e.g. USA in the 1970s).
Examiners report
This question was usually well done, most candidates were pretty clear
about what cost-push inflation is. The question asks for causes, so more
than one was advisable. In general, appropriate diagrams were drawn and
labelled to show the impact of cost-push inflation. A minority of candidates
confused cost-push inflation with demand-pull inflation. That of course,
seriously undermined their response. Real-world examples were used but
were often very generic in nature.
(b) Discuss the view that deflation is more harmful than inflation. [15]
Markscheme

definitions of inflation, deflation
diagrams showing deflation and inflation
explanation of the possible consequences of high inflation rates
(increased uncertainty and more difficult planning, wealth/income
redistribution and social tensions, lower savings rate/higher
consumption, lower export competitiveness) and the possible
consequences of deflation (increased debt burden, bankruptcies and
cyclical unemployment, wealth/income redistribution and social
tensions, higher savings rate/lower consumption)
examples of economies that have experienced high inflation rates (e.g.
Weimar Republic, Zimbabwe, Venezuela), examples of economies that
have experienced deflation (e.g. USA during the Great Depression,
Japan), examples of specific cases of negative and/or positive
consequences
Discussion may include: in a progressive taxation system the inflation pushes

individuals and businesses into higher income brackets, leading to higher
tax revenue for the government and higher tax burden for individuals and
businesses; the effect of inflation/deflation on groups with fixed incomes
versus the effect on groups with incomes that change with the price level;
the importance of the magnitude of price changes (low inflation rates of
about 2 % or less may be beneficial for the economy); the importance of
how prolonged the inflation/deflation is, whether the inflation/deflation is
anticipated or not anticipated, whether the deflation is caused by supply-
side or demand-side factors, whether the inflation is demand-pull or cost-
push (mild demand-pull inflation may stimulate employment and
economic growth, increase profits); the possibility that inflation may get out
of control and inflation rates may reach astronomical levels.
(a), and then referred to in part (b) should be rewarded.
rewarded.
Examiners report
To approach this question well, candidates needed to clearly consider

deflation and inflation. It was necessary to consider something of the
potential issues of each one before arriving at a reasoned conclusion. For
some reason many candidates felt that they had to consider policies to
moderate either situation. This was not asked for and simply cost these
candidates valuable time. Japan's prior experience with deflation was a
popular example used by many candidates.
(a) Explain how the Lorenz curve and the Gini coefficient are used
to measure differences in income inequality between countries. [10]
Markscheme
definitions of income inequality, Lorenz curve, Gini coefficient

Lorenz curve diagram(s) with one Lorenz curve that is closer to the line
of perfect income equality and another Lorenz curve that is further
away from the line of perfect income equality
explanation of why a Lorenz curve closer to the line of perfect income
equality (Gini coefficient closer to zero) indicates higher income
equality and/or explanation of why a Lorenz curve further away from
the line of perfect income equality (Gini coefficient closer to 1)
indicates lower income equality
examples of countries with a relatively equal (e.g. Sweden, Denmark)
and relatively unequal (e.g. Brazil) distribution of income.
Examiners report
A large number of candidates were unable to correctly label the axes of the
diagram showing the Lorenz curve. Often they were labelled back to front,
meaning that the Lorenz curve was then incorrectly drawn. Many
candidates struggled to clearly explain how the Gini coefficient is derived
from the information illustrated in the diagram. However, there were also
candidates who were very clear in their explanations and who were also
able to draw on actual Gini coefficient values for countries. Such responses
were often, very well explained.
(b) Discuss the view that taxation is the most effective means of
achieving equity in the distribution of income. [15]
Markscheme
definitions of taxation, equity, distribution of income

diagram(s) showing the Lorenz curve shifting closer to the line of
perfect income equality and/or the effect of imposing taxes on a
market
explanation of why progressive taxation may increase the income
equality in a country; explanation of why other government policies
may also increase the income equality in a country
examples of progressive taxes in practice, examples of alternative
policies that will make the distribution of income in a country more
equal (e.g. subsidized health care services, subsidized education,
subsidized utilities, old age pensions, unemployment benefits, child
allowances)
Discussion may include: consideration of the meaning of the word “equity”; the
difference between equity in the distribution of income and equality in the
distribution of income; a consideration of whether it is the most effective
means of achieving equity; the effect on equity/equality depends on the
type of taxation – progressive (direct) taxation tends to decrease
equality/equity while regressive (indirect) taxation may decrease
equality/equity; taxation is a major source of government revenue; taxation
may be used to discourage the consumption and production of goods with
negative externalities; too much taxation may discourage hard work and
entrepreneurship; government expenditures on human and physical
capital formation may have positive effects on economic growth in the
long run; transfer payments may improve the quantity and quality of
human capital but may also decrease the incentives to look for
employment and to work hard or study; government expenditures and
transfer payments may lead to budget deficits and high levels of
indebtedness.
rewarded.
Examiners report
It was important for candidates to clearly identify what was being asked for
in this question. The question required candidates to consider what equity
might mean. A lot of responses seemed to feel that this meant equality and
framed their responses accordingly. The question was also asking
candidates whether they thought taxation was "the most effective means"
to achieve equity. To do that, candidates should have explored alternatives
to taxation. Many candidates confined their responses to the relative merits
of direct and indirect taxes and therefore struggled to generate a
convincing level of synthesis. Once again, the highest-achieving responses
were able to structure a well-reasoned argument supported by alternative
policies and relevant use of real-word examples.
(a) Explain the causes of cost-push inflation. [10]
Markscheme
definitions of inflation, cost-push inflation

diagram showing cost-push inflation (increase in the price level due to
decrease in SRAS)
explanation that cost-push inflation is caused by an increase in the
costs of factors of production
example(s) of specific policies/events that may cause cost-push
inflation, examples of economies that have experienced cost-push
inflation (e.g. USA in the 1970s).
Examiners report
This question was usually well done, most candidates were pretty clear
about what cost-push inflation is. The question asks for causes, so more
than one was advisable. In general, appropriate diagrams were drawn and
labelled to show the impact of cost-push inflation. A minority of candidates
confused cost-push inflation with demand-pull inflation. That of course,
seriously undermined their response. Real-world examples were used but
were often very generic in nature.
(b) Discuss the view that deflation is more harmful than inflation. [15]
Markscheme

definitions of inflation, deflation
diagrams showing deflation and inflation
explanation of the possible consequences of high inflation rates
(increased uncertainty and more difficult planning, wealth/income
redistribution and social tensions, lower savings rate/higher
consumption, lower export competitiveness) and the possible
consequences of deflation (increased debt burden, bankruptcies and
cyclical unemployment, wealth/income redistribution and social
tensions, higher savings rate/lower consumption)
examples of economies that have experienced high inflation rates (e.g.
Weimar Republic, Zimbabwe, Venezuela), examples of economies that
have experienced deflation (e.g. USA during the Great Depression,
Japan), examples of specific cases of negative and/or positive
consequences
Discussion may include: in a progressive taxation system the inflation pushes

individuals and businesses into higher income brackets, leading to higher
tax revenue for the government and higher tax burden for individuals and
businesses; the effect of inflation/deflation on groups with fixed incomes
versus the effect on groups with incomes that change with the price level;
the importance of the magnitude of price changes (low inflation rates of
about 2 % or less may be beneficial for the economy); the importance of
how prolonged the inflation/deflation is, whether the inflation/deflation is
anticipated or not anticipated, whether the deflation is caused by supply-
side or demand-side factors, whether the inflation is demand-pull or cost-
push (mild demand-pull inflation may stimulate employment and
economic growth, increase profits); the possibility that inflation may get out
of control and inflation rates may reach astronomical levels.
rewarded.
Examiners report
To approach this question well, candidates needed to clearly consider

deflation and inflation. It was necessary to consider something of the
potential issues of each one before arriving at a reasoned conclusion. For
some reason many candidates felt that they had to consider policies to
moderate either situation. This was not asked for and simply cost these
candidates valuable time. Japan's prior experience with deflation was a
popular example used by many candidates.
(a) Explain how government expenditures are used to promote
equity in the distribution of income. [10]
Markscheme
definitions of government expenditure, equity, distribution of income

diagram to show two Lorenz curves showing different degrees of
inequality
explanation that governments can provide or subsidize merit goods
such as education and health care to benefit those on low incomes
and also increase transfer payments
examples of government expenditure measures to promote equity.
Examiners report
There were some good answers to this question with many candidates
showing a clear understanding of equity in terms of opportunity and
fairness and explaining how government spending on welfare payments,
education and healthcare can improve equity. Many students used the
Lorenz curve diagram and Gini coefficient to illustrate how equity could be
improved by reducing income inequality.
(b) Evaluate the impact on efficiency in the allocation of resources

when the government uses taxation to promote equity. [15]
Markscheme

definitions of allocative efficiency, taxation, equity
a diagram is not required for this question
explanation that using taxation can promote equity in the distribution
of income but this can lead to negative effects on efficiency. An
increase in progressive tax may reduce the incentive to work, reduce
FDI in a country and if firms’ costs increase because of higher tax their
prices might rise
examples of where taxation has been used to promote equity
Evaluation may include: consideration of the extent to which there is a trade-off

between equity and efficiency and why an attempt to improve equity can
have positive and negative effects on efficiency. Evaluation can consider
the impact on incentives to work and whether higher taxation does
actually lead to disincentives.
Examiners report
This was quite a challenging question for students and this was reflected in
the answers of candidates. The strongest responses considered how
progressive taxation could improve equity, but how it may have a negative
impact on worker and entrepreneur incentives which could reduce
economic efficiency. It was also good to see students considering how
indirect taxation on luxury goods could be used to improve equity but
might cause unemployment in those industries which could lead to
inefficiency. Too many answers got rather tied up in the way progressive
taxation works or drifted onto other areas of taxation that would not really
be effective at improving equity.
(a) Explain how a decrease in business confidence can affect the
real GDP of an economy that is producing below the full
employment level of output. [10]
Markscheme
definitions of real GDP, business confidence, full employment level of

output
diagram to show how a decrease in business confidence will shift AD
to the left, resulting in a decrease in real GDP
explanation that business confidence is a determinant of investment
and a decrease in confidence will lead to a decrease in AD and a
decrease in real GDP
examples of situations where business confidence has fallen.
Examiners report
This question was well answered by many candidates. The key terms of
business confidence, real GDP and full employment were mostly well
defined and the impact of a fall in business confidence on real GDP was
clearly explained with an effective AD/AS diagram. Weaker answers tended
to be imprecise in the explanation of business confidence and needed to be
clearer on the meaning of full employment.
(b) Evaluate the view that a decrease in aggregate demand would

always be deflationary. [15]
Markscheme
definitions of aggregate demand, deflationary

diagram to show a fall in AD leading to a fall in the average price level
in the neo classical/monetarist model
explanation that in the neo classical/monetarist model a fall in AD
would be deflationary because a fall in AD leads to a new equilibrium
income at a lower average price level and real GDP
examples of economies that have experienced a decrease in AD, which
is deflationary
Evaluation may include: When AD falls in the Keynesian model and the economy
is below full employment the average price level does not fall because
wages and costs tend not to fall.
NB Candidates can approach this question in terms of deflationary

conditions in the economy or as deflation.
Examiners report
This question proved to be quite challenging for students because the term
"deflationary" can be answered as falling prices or falling output when
there is a deflationary gap. Most candidates chose to focus on falling prices
and there were some very good answers to this with students focusing on
the Keynesian AS where falling aggregate demand will cause deflation if
output is at or near full employment. When, however, output is below full
employment, falling aggregate demand will not cause deflation because
wages are 'sticky' downwards. Some students were drawn onto the Neo-
classical LRAS which has another approach that could be used effectively to
explain how falling aggregate demand will always cause deflation. Some
students used real world examples here, but many found it difficult to build
one into their answer.
(a) Explain why there is a possible trade-off between the
unemployment rate and the inflation rate in the short run. [10]
Markscheme
definitions of unemployment (rate), inflation (rate)

diagram of the short-run Phillips curve to illustrate the trade-off
between inflation and unemployment and AD/AS diagram to support
the explanation
explanation that, in the short-run, if aggregate demand in the
economy increases, this would lead to increase in national output,
forcing firms to hire more workers and decreasing the unemployment
rate, while simultaneously increasing the inflationary pressures in the
economy, and/or vice versa
examples of countries that have possibly experienced a trade-off
between inflation and unemployment.
Examiners report
Candidates were expected to focus their answers on the negative short run
relationship between inflation and unemployment and explain it with the
help of the AD/AS model. The best answers used both the short-run Phillips
curve diagram (to show the alleged negative relationship, and therefore
trade-off, between the inflation rate and the unemployment (rate) in the
short run) and AD/AS diagram (to explain why there may be a negative
relationship between inflation and unemployment in the short run). Both
diagrams were usually done well but many candidates found it difficult to
use both diagrams to support a coherent and complete explanation. A
common mistake for candidates when trying to link the two diagrams was
to incorrectly connect points on the two vertical axes with a dashed line as
if both axes measure inflation.
(b) Discuss the view that the redistribution of income is the most
important impact that inflation has on an economy. [15]
Markscheme
definition of inflation
AD/AS diagram to show the increase in the price level or a Lorenz
curve to show changed distribution of income
explanation that (unexpectedly) high inflation affects positively the
real income/wealth of borrowers and the groups in society with
variable income while affecting negatively the real income/wealth of
lenders and the groups in society with fixed income
examples of countries that have experienced inflation with attempt to
identify consequences of inflation
Discussion may include: consideration of alternative impacts of inflation (such as a

loss of export competitiveness, increases in short-run economic growth,
decreases in savings and increases in uncertainty resulting in lower
investment and hence lower long-run economic growth, “menu costs”)
with the candidate making judgment with regard to what might be the
most important impact and whether or not the candidate feels the
potential redistributive effect is the most significant impact of inflation, the
importance of how high the inflation rate is, the difference between
expected and unexpected inflation.
rewarded.
NB It should be noted that definitions, diagrams, theory and examples that
have already been given in part (a), and then referred to in part (b), should
be rewarded.
Examiners report
Candidates were expected to focus on the impacts of inflation in their

answers, but many candidates choose to elaborate on the types and causes
of inflation instead. A common mistake was to confuse the impacts of
inflation with the impacts of increasing aggregate demand (without
explaining why inflation may lead to increasing aggregate demand in the
short run in order to make their answer relevant to the specific demands of
the question).
(a) Explain why measuring unemployment in a country is difficult. [10]
Markscheme
definition of unemployment
a diagram is not required for full marks, but candidates may use a
labour market diagram, AD/AS diagram or Phillips curve diagram
explanation of the challenges in measuring the exact number of
people of working age who are without work, available for work and
actively seeking work, resulting in inability to assess the
underemployment/the hidden unemployment and the unreported
employment in the informal(underground) economy
examples of specific cases or countries where there is unemployment
that may be difficult to measure.
Examiners report
Candidates were generally able to explain the problems with measuring

unemployment but had difficulties explaining these problems in economic
terms and categorizing them according to whether they lead to
underestimation or overestimation of the unemployment rate. Some
candidates pointed out that the average unemployment rate for an
economy ignores regional, ethnic, age and gender disparities but this was
not considered relevant and candidates received no credit for this part of
their answer since this is a problem of using the average rate to make
judgements about the state of the economy and not a problem of
measuring unemployment (government statisticians do use the surveys of
the labour force to measure and provide data about the unemployment
rates for different regions, age groups, genders and levels of education).
(b) Discuss whether the most important consequence of
unemployment is a loss of income for individuals. [15]
Markscheme
definition of unemployment
appropriate diagram(s) to show the loss of income due to
unemployment and/or other consequences of unemployment
explanation of the different economic (loss of income), social and
political consequences of unemployment
examples of the consequences of unemployment for individuals,
communities and/or countries
Discussion may include: whether or not a loss of income is the most

important consequence of unemployment that may be set in the context of
other impacts of unemployment, such as reduced economic growth,
reduced government revenues, increased government expenditures on
unemployment benefits, personal and social problems, political instability,
with judgment being made with regard to whether a loss of income is the
most important impact of unemployment.
rewarded.
NB It should be noted that definitions, diagrams, theory and examples that

have already been given in part (a), and then referred to in part (b), should
be rewarded.
Examiners report
Candidates used many acceptable diagrams to show unemployment and
the various economic consequences of unemployment. However, many
otherwise well-prepared candidates focused on the economic
consequences of unemployment and ignored the personal and social
consequences.
(a) Explain, using a production possibilities curve (PPC) diagram,
an increase in the actual output of an economy. [10]
Markscheme
definitions of production possibilities curve, actual output

PPC diagram to show an increase in actual output
explanation that an increase in actual output results from increased
utilization of resources, showing a movement towards the production
possibility curve
example of actual growth in specific countries.
(b) Discuss the view that economic growth always leads to a rise in
living standards. [15]
Markscheme
definitions of economic growth, living standards

PPC diagram or AD/AS diagram to depict economic growth
explanation of why economic growth leads to a rise in living standards
because, for example, of rising incomes and employment
example of economic growth leading to changes in living standards
Discussion may include: consideration that economic growth may not always lead
to a rise in living standards because of factors such as environmental costs,
the distribution of income, inflation and how the increased use of capital
intensive technology may lead to unemployment.
(a) Explain why a reduction in interest rates might lead to an
increase in aggregate demand. [10]
Markscheme
definitions of aggregate demand, interest rates

diagram to show how a reduction in interest rates increases aggregate
demand
explanation that a reduction in interest rates increases consumption
and investment, leading to an increase in aggregate demand
examples of how a reduction in interest rates increases aggregate
demand in practice and/or of countries where reduced interest rates
have increased aggregate demand.
(b) Evaluate the view that expansionary monetary policy is the

most effective way to achieve economic growth. [15]
Markscheme
definitions of monetary policy, economic growth

diagram to show the effect of expansionary monetary policy on
economic growth
explanation of expansionary monetary policy by reducing interest
rates will increase consumption and investment, leading to a rise in
aggregate demand and therefore economic growth
examples of the impact of expansionary monetary policy on economic
growth
synthesis and evaluation.
Evaluation may include: consideration of the problems of expansionary monetary

policy, such as inflation, that consumption and investment may not
increase if business and consumer confidence are low, and the time lags
associated with interest rate changes. Responses could also cover
alternative policies to achieve economic growth, such as fiscal policy or
supply-side policy.
(a) Explain the impact that a cut in taxation and an increase in
government spending might have on the circular flow of
income. [10]
Markscheme
definitions of the circular flow of income (model), (indirect/direct)

taxation, government spending
diagram of the circular flow of income showing injections and
leakages
explanation of the impact a cut in taxation and an increase in
government spending will have on the circular flow of income, with
leakages being reduced and injections being increased, resulting in an
increased (flow of ) income, ceteris paribus
example(s) of expansionary fiscal policy in practice.
Award a maximum of level 2 marks if a candidate only refers to either a cut in taxation or an increase in
government spending (but not both).
(b) Discuss whether the real gross national income (GNI) per capita
of a country is a good indicator of its standard of living. [15]
Markscheme
definition of real GNI(GNP) per capita

a diagram is not required for full marks, but candidates may use
diagram(s) to show inequality in the distribution of income, negative
externalities in production/consumption,economic growth
explanation why the real GNI per capita might be regarded as a good
indicator of the standard of living, such as higher average income
leading to higher consumption, greater tax revenue for public services,
less poverty
examples of countries with different GNI per capita resulting in
different standards of living and/or countries where there is
discrepancy between the standard of living and the level of real GNI
per capita
Discussion may include: consideration of the limitations of using real GNI per
capita to measure the standard of living such as the lack of information
about the distribution of income and the composition of output,
measurement problems and non-income factors (leisure time, quality of
environment) affecting the well-being of the population; consideration of
alternative measures such as HDI and “green GDP” per capita; consideration
of the meaning of “standard of living”.
rewarded.
(a) Explain the effect an increase in investment might have on real
gross domestic product (GDP) using the Keynesian multiplier. [10]
Markscheme
definitions of real GDP, investment, Keynesian multiplier

Keynesian AD/AS diagram to show the multiplier effect (successive
increases in AD and real GDP)
explanation of how an initial increase in investment, a component of
AD, leads to multiple successive increases in AD and real GDP
hypothetical numerical example(s) to support the explanation or a
historical example of specific situations where an increase in
investment has possibly led to a multiplier effect.
Award a maximum of level 2 marks if a candidate does not use the concept of the Keynesian multiplier.
(b) Discuss the view that interventionist supply-side policies are

the most effective way for a government to achieve economic
growth. [15]
Markscheme
definitions of interventionist supply-side policies, economic growth

diagram to show an increase in both AD and LRAS (resulting in
increasing real GDP) or a production possibilities frontier diagram
explanation that interventionist supply-side policies, such as
investment in human capital, investment in new technology,
investment in infrastructure or industrial policies, are conducted by the
government and aim to improve the economy’s capacity to produce
(the quality and/or the quantity of the economy’s factors of
production)
examples of specific interventionist supply-side polices in practice
and/or countries where interventionist supply-side policies might
have led to economic growth
Discussion may include: consideration of alternative policies (market-based

supply-side policies, expansionary monetary policies, expansionary fiscal
policies) with regard to factors such as time lags, the ability to create
employment, the impact on the government budget, the short-run effect
on the AD, the administrative requirements and the political support
required for their implementation, social effects and effects on the
environment.
rewarded.
(a) Explain how aggregate demand in an economy might be
affected by a rise in the exchange rate and a decrease in the
income of major trading partners. [10]
Markscheme
definition of aggregate demand (AD), exchange rate

diagram to show AD shifting to the left
explanation of the linkages between a rise in the exchange rate and a
decrease in the income of major trading partners on a country’s AD
examples of economies which have experienced a rise in the exchange
rate and/or a decrease in the income of major trading partners.
NB if only one factor of the two factors mentioned above are considered, a maximum of Level 2 should be
awarded.
Examiners report
Most candidates seemed to be familiar with AD/AS analysis and could use a
diagram with relative ease. Most understood how a rise in the exchange
rate caused exports to be more expensive, but few related it to an increase
in the demand for imports, both of which would decrease AD. Few
candidates were able to provide specific examples of economies that had
experienced the situations mentioned in the question.
(b) To what extent is expansionary fiscal policy the best policy to

achieve a reduction in the rate of unemployment? [15]
Markscheme
definition of fiscal policy, expansionary fiscal policy, rate of

unemployment
diagram to show aggregate demand (AD) being shifted to the right
and/or a labour market diagram
explanation of the use of expansionary fiscal policy, higher
government spending/lower taxation, which may increase GDP,
increase the demand for labour and reduce demand-deficient
unemployment
examples of fiscal policy being used to increase AD in relation to a
particular economy
synthesis and evaluation (to what extent?).
Evaluation may include: inappropriateness of using policies to increase AD

against structural, frictional and seasonal unemployment, consideration of
the use of supply-side policies to tackle structural, frictional and seasonal
unemployment, consideration of the use of monetary policy, problems
associated with the use of expansionary fiscal
policy, consideration of the words “best”.
NB where no alternative policies are considered a maximum of Level 3 should be awarded.
Examiners report
Most candidates had a fairly good understanding of what fiscal policy is

and how expansionary fiscal policy is achieved, but many were unable to
explain specifically how it reduces unemployment. Many could diagram
how AD shifts rightwards, causing economic growth, but were not able to
explain how this growth leads to a decline in unemployment. Many could
evaluate fiscal policy in general, but not specifically as it relates to a
reduction in unemployment. Often there was no comparison between fiscal
policy and other policies to determine which was the best policy to reduce
unemployment. In a minority of cases, there was confusion between fiscal
policy and monetary policy.
(a) Explain the role of improved productivity in achieving
economic growth. [10]
Markscheme
definition of productivity, improved productivity, economic growth

diagram to show a shift of short-run aggregate supply (SRAS) to the
right and/or long-run aggregate supply (LRAS) to the right or use of a
production possibility diagram
explanation that improved productivity will reduce unit costs of
production in the SR and shift the SRAS to the right, leading to an
increase in gross domestic product (GDP) and short-run economic
growth; and/or an explanation that improved productivity will
increase the productive capacity of the economy in the LR, thus
shifting LRAS to the right and causing long-run economic growth
examples of improved productivity in relation to a particular economy.
NB if no explicit and precise understanding of productivity is demonstrated, a maximum of Level 2 should

be awarded.
Examiners report
A majority of candidates did not understand the term ‘productivity’. Some

were able to explain how it is achieved through technological advances,
but few were able to accurately define the term. Some were able to diagram
the LRAS curve or PPC curve shifting outwards but could not accurately
explain why they were shifting outwards. Examples of improved
productivity in relation to a particular economy were almost never given.
There was also much confusion between the terms ‘production’ and
‘productivity’.
(b) Discuss the view that economic growth can only be achieved at
the expense of other macroeconomic objectives such as a low
and stable rate of inflation and equity in the distribution of
income. [15]
Markscheme
definition of economic growth, inflation, low and stable inflation,

equity in the distribution of income
diagram to show growth through either an increase in aggregate
demand (AD) or a shift of LRAS to the right, or any other relevant
diagram
explanation of how economic growth might conflict with other
macroeconomic objectives, such as low and stable prices and a more
equitable distribution of income and/or low unemployment, a
satisfactory balance of payments (external balance) and
environmental objectives
examples of instances where growth has improved or worsened one or
more of the above macroeconomic objectives
synthesis and evaluation (discuss).
Discussion may include: circumstances in which growth might positively impact

on price stability and the distribution of income and/or unemployment and
the balance of payments, the different impacts of short term and long-term
growth, consideration of the word “only”.
NB At least two macroeconomic objectives need to be considered. Where only one is considered, without
any evaluation, a maximum of Level 2 should be awarded. Where only one is considered, with evaluation, a
maximum of Level 3 should be awarded. Thus, Level 4 requires two objectives and some evaluation.
Examiners report
This question was not answered well by most of the candidates who
attempted it. The concept of economic growth seems to have been
reasonably well understood, but few were able to relate economic growth
to the other macroeconomic objectives. Often the question was answered
as if it were, “What are the causes of economic growth,” but not directly
answering the question posed. Some could analyse the statement and
explain why the achievement of economic growth does conflict with other
objectives, but most could not evaluate why economic growth can be
achieved without conflicting with the other objectives.
(a) Explain how increased investment by the government in
education and training can affect both aggregate demand and
aggregate supply. [10]
Markscheme
definition of investment, aggregate demand, aggregate supply

diagrams to show aggregate demand (AD) shifting right and LRAS
shifting right
explanation of how increased investment by the government in
education and training can increase AD in the short term by increasing
the G component of C+I+G+X-M and increase LRAS in the long term as
labour productivity increases
examples of countries in which the government has increased
investment in education and training.
Examiners report
This question was generally well answered by students. The highest

achieving responses focused on how increasing the government
expenditure on education and training directly increases the G component
of aggregate demand. They then went on to explain how higher
expenditure on education and training increases aggregate supply as
workers become more productive. Some candidates explained how more
productive employees may earn higher incomes, which could lead to a rise
in aggregate demand. This point has some logic but the focus on the direct
impact of a rise in G on aggregate demand is the stronger argument.
Explanations supported by a real-world example included countries that
fund workplace training schemes.
(b) Evaluate the view that inflationary pressures in an economy are
best reduced using supply-side policies. [15]
Markscheme
definition of inflation, inflationary pressures, supply-side policies

diagram to show the impact of supply-side policies on inflation via the
shift of long-run aggregate supply (LRAS) to the right
explanation of how market based (eg deregulation, anti-monopoly
policy, etc) and/or interventionist supply-side policies (eg price controls,
subsidies, etc) may reduce inflationary pressures in an economy
examples of situations where supply-side policies have helped to
reduce inflationary pressures
Evaluation may include: the disadvantages of using particular supply-side

policies, such as: the impact of market-based polices on equity, not as
effective with demand-pull inflation, the impact of interventionist policies
on the government budget and the time lags associated with supply-side
policies. The advantages of supply-side policies, such as: increased real GDP,
increased employment, more effective with cost-push inflation and
possible improvement in economic efficiency. Consideration of
deflationary monetary and fiscal policies as alternative policies to reduce
inflation.
Examiners report
Candidates found this question quite challenging because questions on

policies to reduce inflation normally consider monetary and fiscal
approaches rather than supply-side policies. High achieving responses to
this question explained how interventionist supply-side policies such as
price controls and subsidies in key markets might reduce inflationary
pressure. These points were then evaluated by considering the opportunity
costs of policies such as wide scale subsidies and shortages that might be
created by price controls. The highest achieving responses also considered
how market-based supply-side policies such as strong competition policy
and reducing the power of trade unions might reduce inflationary
pressures and these policies were evaluated by considering the long-term
nature of this approach and how, for example, reducing trade union power
might negatively affect employee welfare. The highest achieving responses
used real-world examples to illustrate such countries that use fuel subsidies
to reduce energy prices.
(a) Explain the various phases of the business cycle. [10]
Markscheme
definition of business cycle

diagram to show the different phases of the business cycle and
possible trend line
explanation of the business cycle in terms of the different short-run
phases ie boom, recession, depression/slump and recovery, and long-
term trend
examples of specific countries being in different phases of the business
cycle.
NB Examiners should be aware of variations in the business cycle diagrams candidates might draw and
should be flexible in crediting the diagrams drawn by candidates.
Examiners report
This question was generally well answered by students who explained how
the economy changes during different phases of the business cycle. It was
interesting to see the variety of approaches to the business cycle used by
students but the overall theme of how real GDP/economic growth changes
over time was clearly understood in many answers. In the highest achieving
responses students were able to explain how real GDP changes overtime
and how this affected inflation and unemployment. The highest achieving
responses supported this with real-world examples of how the business
cycle has affected particular countries.
(b) Discuss the view that economies will always return to the full
employment level of output in the long run. [15]
Markscheme
definition of full employment, full employment level of output

diagrams to show the two different views of the economy
explanation of the monetarist/new classical view that the economy
will always return to the full employment level of output in the long
run
examples of situations where economies either have or have not
returned to full employment in the long run
Discussion may include: consideration of the Keynesian view that an economy

can remain stuck in a deflationary gap, consideration of the role of
government, consideration of the word “always”.
Examiners report
There were a mixed set of responses to this question. Effective answers

involved students showing a good understanding of the theory involved
by explaining how an economy might return to full employment in the
long run using the Monetarist/Neo Classical model where short-run
aggregate supply changes when the economy is in either an inflationary or
deflationary gap situation. This was supported with clear aggregate
demand and supply diagrams. Some candidates who did not have a sound
grasp of this theory really struggled to answer the question. The highest
achieving responses went on to evaluate the view that economies always
return to full employment by, for example, putting forward the Keynesian
view that an economy can get stuck in a deflationary situation because
wages do not adjust downwards. Well-developed real-world examples
allowed students to access the very highest marks.
(a) Explain how government spending might promote greater
equity in an economy. [10]
Markscheme
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.
Examiners report
Surprisingly, many candidates focused completely on government

spending and its effect on gross domestic product (and the economy at
large) while ignoring the “equity” component of the question. Since there
are different possible valid interpretations of the meaning of equity, a very
specific and particular definition of the term was not expected. However,
candidates were expected to provide some working definition at the
beginning of their answers and to use this definition consistently to answer
the question. With that being said, there were some interpretations of the
meaning of equity which were considered unacceptable in the context of
the IB economics syllabus. For example, some candidates made references
to equity in the sense of “owner’s equity” in a business and this particular
interpretation of the meaning of equity led those candidates astray. Quite a
few candidates considered “government spending to promote equity” in
the economy to be the same as “government subsidies to help small firms
(without economies of scale) compete with larger firms (with considerable
economies of scale)”, and this approach was also deemed unacceptable.
(b) Evaluate the view that government policies to promote greater

equity will always have a negative effect on efficiency. [15]
Markscheme
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).
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.
Examiners report
This was a rather broad question and allowed for various valid approaches.
There are different possible valid interpretations of the meaning of equity
and efficiency in the context of the IB economics syllabus. There are also
many government policies and all of them may be reasonably considered
to affect equity and/or efficiency in one way or another. Therefore, neither
particular definitions of the relevant economic terms nor a particular
example of government policy (or set of policies) were required for top
marks. However, it was expected that candidates should provide acceptable
working definitions of equity and efficiency in the beginning of their
responses, then use these definitions to link equity and efficiency to
particular government policies and to evaluate these policies. Candidates
who ignored efficiency and equity (or only mentioned them in a vague
manner) and proceeded to evaluate government policies in general got
little credit for their responses to this question item. The best candidates
were able to give acceptable definitions of efficiency and equity at the
beginning, to use these definitions consistently throughout the response,
to identify appropriate government policies to promote equity, and to
evaluate both the positive and negative effects of those policies on
efficiency.
(a) Explain how a deflationary gap might occur. [10]
Markscheme
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.
Examiners report
The majority of candidates were able to define deflationary gap and

explain how a decrease in aggregate demand would lead to equilibrium at
a level of real output below the full employment level of output. The
candidates which provided better answers were able to link their answer to
the components of aggregate demand but often could not give plausible
reasons why any of the components would decrease. In the best answers
the candidates were able to give such reasons due to their knowledge of
historical episodes where aggregate demand has decreased because of
specific events in the economy. Unfortunately, some candidates focused on
explaining deflation and their explanations, even though they were correct,
were considered only marginally relevant given the specific demands of
the question.
(b) Using the monetarist/new classical model and the Keynesian
model, discuss the view that increases in aggregate demand
will inevitably be inflationary. [15]
Markscheme
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
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).
rewarded.
Examiners report
This question part provided candidates with excellent opportunity to

explore the assumptions and the world views behind the two major
macroeconomic models – the Keynesian and the monetarist/new classical
models. While the great majority of candidates were able to draw diagrams
to illustrate both models, many candidates struggled to explain the
diagrams in detail and apply them to answer the question. Even in cases
where the diagrams were dynamic in nature, and seemed promising at first
sight, the explanations were either vague or superficial. Some candidates
tried to combine both paradigms in a single diagram but the result was
either an incomplete answer or a complete but rather complex diagram
that was confusing for both candidate and examiner. Combining the two
models in a single diagram to answer this question is, generally, not a good
idea because of the subtle differences between the meaning of “full
employment” in the monetarist/new classical and the traditional Keynesian
world view.
(a) Explain how government spending might promote greater
equity in an economy. [10]
Markscheme
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.
Examiners report
Surprisingly, many candidates focused completely on government

spending and its effect on gross domestic product (and the economy at
large) while ignoring the “equity” component of the question. Since there
are different possible valid interpretations of the meaning of equity, a very
specific and particular definition of the term was not expected. However,
candidates were expected to provide some working definition at the
beginning of their answers and to use this definition consistently to answer
the question. With that being said, there were some interpretations of the
meaning of equity which were considered unacceptable in the context of
the IB economics syllabus. For example, some candidates made references
to equity in the sense of “owner’s equity” in a business and this particular
interpretation of the meaning of equity led those candidates astray. Quite a
few candidates considered “government spending to promote equity” in
the economy to be the same as “government subsidies to help small firms
(without economies of scale) compete with larger firms (with considerable
economies of scale)”, and this approach was also deemed unacceptable.
(b) Evaluate the view that government policies to promote greater

equity will always have a negative effect on efficiency. [15]
Markscheme
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).
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.
Examiners report
This was a rather broad question and allowed for various valid approaches.
There are different possible valid interpretations of the meaning of equity
and efficiency in the context of the IB economics syllabus. There are also
many government policies and all of them may be reasonably considered
to affect equity and/or efficiency in one way or another. Therefore, neither
particular definitions of the relevant economic terms nor a particular
example of government policy (or set of policies) were required for top
marks. However, it was expected that candidates should provide acceptable
working definitions of equity and efficiency in the beginning of their
responses, then use these definitions to link equity and efficiency to
particular government policies and to evaluate these policies. Candidates
who ignored efficiency and equity (or only mentioned them in a vague
manner) and proceeded to evaluate government policies in general got
little credit for their responses to this question item. The best candidates
were able to give acceptable definitions of efficiency and equity at the
beginning, to use these definitions consistently throughout the response,
to identify appropriate government policies to promote equity, and to
evaluate both the positive and negative effects of those policies on
efficiency.
(a) Explain how an increase in unemployment might lead to a loss
of gross domestic product (GDP) and a budget deficit. [10]
Markscheme
definition of unemployment, GDP, budget deficit

diagram to show aggregate demand (AD) and/or aggregate supply
(AS) shifting to the left
explanation of how higher unemployment might lead to a loss of GDP
and a budget deficit, via the loss of tax revenue and increase in
government spending
examples of instances where rising unemployment has caused a loss
of GDP and/or a budget deficit.
Examiners report
Although there were many very good responses to this question there was
a significant minority who confused a budget deficit with a trade deficit.
However, good responses were able to produce very precise and well
explained argumentsin which the links were clearly explained. Good real-
life examples were also used by higher achieving responses here.
(b) Discuss the view that there will always be a trade-off between
the unemployment rate and the inflation rate. [15]
Markscheme

definition of trade-off, unemployment rate, inflation rate
diagrams to show the short-run and long-run Phillips curves
explanation of the view in terms of the short-run Phillips curve
relationship
examples of such a trade-off and/or absence of such a trade-off
Discussion may include: the view that there is no trade-off in the long-run (the
long-run Phillips curve), the importance of supply-side improvements to
the economy in achieving lower unemployment and inflation, criticisms of
the statistical Phillips curve relationship, and discussion of the word
“always”.
Examiners report
In this part candidates often tended to describe the inverse relationship

illustrated by the short-run Phillips curve rather than consider the trade-off
referred to by the question and explain what that meant. Good responses
embarked on a sophisticated review of relevant theory. Frequently
Neoclassical and Keynesian concepts and perspectives were utilized to
support responses. There was potentially a lot of theory that could be used
and not all candidates achieved an appropriate balance of theory and
synthesis.
(a) Explain how an increase in leakages can affect the size of the
circular flow of income. [10]
Markscheme
definitions of leakages, circular flow of income

diagram of the circular flow of income
explanation that when leakages increase money flows in the circular
flow of income will fall and reduce the size of the circular flow of
income
examples of where an increase in leakages have reduced national
income.
(b) To what extent is the use of national income statistics an

effective way of comparing the standard of living between
countries? [15]
Markscheme
definitions of national income and standard of living

diagram: a diagram is not required for this question
explanation of how national income statistics are an effective way of
making comparisons between countries
examples of how national income statistics have been used to
compare countries
synthesis or evaluation (to what extent).
Evaluation may include: consideration of the limitations of national income

statistics to compare living standards such as: different methods of
calculation, the impact of different types of output on living standards,
environmental factors, crime levels, political instability, the exchange rate
and income distribution.
NB Definitions, theory, and examples that have already been given in part (a), and then referred to in part
(b), should be rewarded.
rewarded.
(a) Explain how an economic recession can lead to an increase in
absolute poverty. [10]
Markscheme
definitions of economic recession, absolute poverty

diagram to show a fall in AD
explanation that a recession can lead to a fall in GDP, an increase in
unemployment and falling incomes leading to a rise in absolute
poverty
examples of how a recession has increased absolute poverty.
(b) Evaluate the view that government policies to promote equity

will always have a negative effect on efficiency. [15]
Markscheme
definitions of equity and efficiency

diagrams to show the government policies used to improve equity
explanation of how the government policies used to promote equity
might have a negative effect on economic efficiency
examples of where governments have used policies to promote equity
and reduced efficiency
Evaluation may include: The advantages of government policies used to promote

efficiency. For example, government expenditure on health and education
might improve the efficiency of the labour force and reducing tax on low
income households might improve their incentive to work.
(a) Using the concept of the multiplier, explain how an increase in
investment might affect aggregate demand. [10]
Markscheme
definitions of investment, aggregate demand, multiplier

diagram to show the impact of the multiplier on AD
explanations that investment is one of the components of the
aggregate demand and of the multiplier effect
example(s) of where an increase in investment has affected AD
through the multiplier effect.
NB Candidates who do not refer to the concept of the multiplier should not be awarded marks beyond level
2.
(b) Discuss the effectiveness of supply-side policies in reducing

unemployment. [15]
Markscheme
definitions of supply-side policies, unemployment

diagram(s) to show how supply-side polices may have a short-term
impact on AD, but more importantly will increase LRAS and/or how
supply-side policies will affect the market for labour
explanation of how supply-side policies (market-based and
interventionist) could reduce different types of unemployment
example(s) of where supply-side polices have been introduced to
tackle unemployment
Discussion may include: consideration of the disadvantages of supply-side policies (political opposition,
opportunity cost for the government budget, time lag, increased inequality in income distribution) in
reducing unemployment, consideration of alternative (demand-side) policies.
rewarded.
(a) Explain the potential effects on the economic growth rate from
a substantial increase in the number of skilled people of
working age entering a country. [10]
Markscheme
definitions of economic growth, growth rate

diagram(s) to show how an outward shift of the AD curve and/or an
outward shift of the LRAS/production possibility curve would lead to
economic growth
explanation of how an increase in the population leads to an increase
in AD in the short term (resulting in short-term economic growth)
and/or how an increase in the number and qualification of the
workforce leads to an increase in the quality and quantity of labour
(resulting in long-term economic growth)
examples of immigration affecting economic growth rates of
countries.
(b) Discuss the view that, apart from indicating economic growth
rates over time, national income statistics are of little use. [15]
Markscheme
definitions of economic growth, growth rate, (real) GNI/GNP (per

capita), (real) GDP (per capita)
a diagram is not required but candidates may use diagram(s) to show
economic growth, inequality in the distribution of income
explanation of the uses of national income statistics for making
comparisons over time, for making comparisons between countries
and for making conclusions about the standards of living
examples of such uses in practice
Discussion may include: consideration of “little use”, the drawbacks of using

national income statistics to make conclusions about the standards of
living, practical difficulties of measurement and calculation, the narrowness
of such statistics, economic growth versus economic development.
rewarded.
NB Definitions, theory, and examples that have already been given in part (a), and then referred to in part
(b), should be rewarded.
(a) Explain how income inequality might be measured in a country. [10]
Markscheme
definition of income inequality

diagram to show a Lorenz curve and how the Gini co-efficient is
derived
explanation of the methods used to measure income inequality:
Lorenz curve, Gini co-efficient
examples of countries with income inequality.
Marks should be allocated according to the Paper 1 markbands for May 2013 forward, part A.
(b) Evaluate the view that the best way to reduce income
inequality in a country is by using progressive taxation. [15]
Markscheme
definition of progressive taxation, income inequality

diagram to show how progressive taxation could decrease income
inequality (inward shift of the Lorenz Curve), or a progressive tax
diagram
explanation of how progressive taxation reduces the disposable
income gap between people of lower and higher incomes
examples of where or how progressive taxation has been used
Evaluation may include: the impact of progressive taxation in reducing income inequality including:
tax avoidance/tax evasion; disincentive effects; effects on efficiency;
consideration of alternative approaches such as government spending on
merit goods/transfer payments, minimum wage, consideration of `best’.
NB If only progressive taxation is considered, with explanation and
evaluation of its impact, but no alternative policy is considered, a maximum
of mid-Level 3 should be awarded, as the question would not have been
fully answered in terms of `best way’.
Marks should be allocated according to the Paper 1 markbands for May 2013 forward, part B.
(a) Explain how expansionary fiscal policy could be used to close a
deflationary (recessionary) gap. [10]
Markscheme
definitions of fiscal policy, expansionary fiscal policy, deflationary

(recessionary) gap
diagram to show the potential effects of expansionary fiscal policy in
terms of an outward shift of AD
explanation of how an expansionary fiscal policy will boost aggregate
demand and increase output, thereby closing a deflationary gap
examples of countries that have used expansionary fiscal policy.
(b) Evaluate the view that fiscal policy is the most effective way of
Markscheme
definitions of long-term economic growth, short-term economic

growth, fiscal policy
diagram to show an outward shift of the PPC or a rightward shift of
LRAS
explanation of how fiscal policy leads to long-term economic growth
indirectly by creating an economic environment that is favourable to
private investment, and directly through government spending on
physical capital goods and human capital formation, as well as
provision of incentives for firms to invest
examples of fiscal policy that has led to long-term economic growth
Evaluation may include: the type of fiscal policy and how it is financed,
advantages and disadvantages of fiscal policy, consideration of alternative
policies, such as monetary and supply-side policies, consideration of `best’
NB Candidates who only consider the effects of fiscal policy on AD, and do
not consider the supply-side effects on long-term economic growth, cannot
be awarded above Level 2.
rewarded.
(a) Explain how an increase in investment might lead to economic
growth. [10]
Markscheme
definitions of investment and economic growth

diagrams might include AD/AS/LRAS or PPC to show the impact of
investment on economic growth
explanation of how investment in physical capital, human capital and
natural capital can lead to increases in the quantity and quality of
resources and subsequently an increase in productivity and/or how
investment might increase aggregate demand (AD)
examples of types of investment that have caused this or countries
that have grown as a result of increased investment.
(b) Discuss the possible consequences of economic growth on

living standards, unemployment and inflation. [15]
Markscheme
definitions of economic growth, living standards, unemployment and

inflation
diagrams might include AD/LRAS showing an increase in AD or LRAS
and impact on real GDP/living standards and inflation and/or labour
market diagram showing an increase in AD, and accept ADL
explain how an increase in economic growth potentially raises living
standards and decreases unemployment due to an increase in real
output. Incomes are raised and due to the increase in demand for
goods and services more workers are employed. In addition, the
impact on inflation could be positive or negative depending on the
cause of the economic growth
examples of countries that have experienced economic growth and
the subsequent effect on living standards, unemployment and
inflation
Discussion may include: the impact on different stakeholders. Workers may

benefit due to there being more jobs available but consumers may not
benefit because of the increase in prices. Or living standards may not
increase equitably. In addition, the discussion may focus on the cause of the
economic growth. If it is caused by an increase in AD then it is more likely to
lead to inflationary pressure than if it was caused by an increase in LRAS.
However, in the Keynesian range of the LRAS curve any increase in AD may
not necessarily lead to an increase in inflation.
rewarded.
(a) Explain how expansionary fiscal policy could be used to close a
deflationary (recessionary) gap. [10]
Markscheme
definitions of fiscal policy, expansionary fiscal policy, deflationary

(recessionary) gap
diagram to show the potential effects of expansionary fiscal policy in
terms of an outward shift of AD
explanation of how an expansionary fiscal policy will boost aggregate
demand and increase output, thereby closing a deflationary gap
examples of countries that have used expansionary fiscal policy.
(b) Evaluate the view that fiscal policy is the most effective way of
Markscheme
definition of long-term economic growth, short-term economic

growth, fiscal policy
diagram to show an outward shift in the PPC or a rightward shift of
LRAS
explanation of how fiscal policy leads to long-term economic growth
indirectly by creating an economic environment that is favourable to
private investment, and directly through government spending on
physical capital goods and human capital formation, as well as
provision of incentives for firms to invest
examples of fiscal policy that has led to long-term economic growth
Evaluation may include: the type of fiscal policy and how it is financed,
advantages and disadvantages of fiscal policy, consideration of alternative
policies, such as monetary and supply-side policies, consideration of ‘best.’
NB Candidates who only consider the effects of fiscal policy on AD, and do
not consider the supply side effects on long-term economic growth cannot
be awarded above Level 2.
rewarded.
(a) Explain the possible impact of an increase in wealth and
consumer confidence on aggregate demand. [10]
Markscheme
definitions of wealth, consumer confidence, aggregate demand (AD)

diagram(s) to show AD shifting to the right
explanation of the possible impact of an increase in wealth and
consumer confidence on AD
examples of increases in wealth and consumer confidence.
(b) Examine why, in contrast to the monetarist/new classical model,

the economy will not automatically return to the full
employment level of output in the Keynesian model. [15]
Markscheme
definitions of full employment level of output, Keynesian model,

monetarist/new classical model
diagram(s) to show equilibrium in the two models
explanation of the mechanisms through which an economy may
remain stuck in a deflationary gap in the Keynesian system but will
always return to full employment equilibrium in the monetarist/new
classical model in the long run
examples of the two models applying in practice
synthesis or evaluation (examine).
Evaluation may include: the importance of the type of unemployment, the

degree to which both models represent extreme theoretical ends of a
spectrum, the degree to which reality deviates from the models, the
difficulty of establishing what is full employment, policy implications.
rewarded.
(a) Explain why structural unemployment might occur in an
economy. [10]
Markscheme
definitions of unemployment and structural unemployment

diagram to show structural unemployment
explanation of how structural unemployment might occur
examples of situations when structural unemployment has occurred.
(b) Evaluate government policies to deal with the different types of

unemployment. [15]
Markscheme
definitions of government policies and frictional, structural, seasonal

and cyclical (demand-deficient) unemployment
diagrams might include AD/AS showing how government policies can
increase AD leading to an increase in real GDP and/or a diagram to
show how an increase in AD can reduce structural unemployment and
the natural rate of unemployment
explanation that fiscal, monetary or supply-side policies can all be
used to reduce the different types of unemployment. Outlining the
transmission mechanism involved
examples of situations where a country has reduced a type of
unemployment
Examination may include: the effectiveness of fiscal, monetary and supply-
side policies in terms of dealing with the different types of unemployment
including the limitations of using demand management to deal with
anything other than cyclical unemployment and the suitability of various
supply-side policies. In addition, the short-run/long-run implications of
using demand management and supply-side policies may be evaluated.
rewarded.
(a) Explain how aggregate demand might be affected by an
increase in interest rates. [10]
Markscheme
definitions of AD, interest rates

diagram(s) showing the decrease in AD due to the increase in interest
rates
explanation of how an increase in interest rates will decrease
consumption and investment as borrowing decreases or any other
transmission mechanism
examples of countries that have increased interest rates.
Award a maximum of level 2 if the response fails to link the increase in interest rates to at least two
components of AD.
(b) Discuss whether the use of fiscal policy is the most effective way
to bring an economy out of a recession. [15]
Markscheme
definitions of fiscal policy, recession

diagram to show how an increase in AD will increase real GDP
explanation of how fiscal policy involves an increase in government
spending or a decrease in taxes or both; how an increase in
government spending might create a multiplier effect on the economy
leading to an increase in real GDP
examples of the use of fiscal policy
Discussion may include: the limitations of fiscal policy like the effect on the
government budget, time lags, the difficulty of promoting economic
activity in a recession and the significance of the multiplier effect. There
may also be reference to alternative policies like monetary and supply-side.
(a) Explain the factors that cause demand-pull and cost-push
inflation. [10]
Markscheme
definitions of inflation, demand-pull inflation, cost-push inflation

diagrams to show demand-pull inflation (increase in AD) and cost-
push inflation (decrease in SRAS)
explanation of demand-pull in terms of factors which increase AD,
particularly at or near to full employment, and cost-push in terms of
rising costs of factors of production
examples of inflation in different countries.
(b) Discuss the view that deflation will always be bad for an
economy. [15]
Markscheme
definition of deflation
diagram to show deflation (shift of AD to the left and/or shift of AS to
the right)
explanation of the negative effects of deflation, eg delayed
consumption, investment, downward deflationary spiral, possibility of
financial crisis, worse position for debtors/borrowers
examples of deflation in different countries
Discussion may include: consideration of the possible benefits of deflation,

eg increased export competitiveness, caused by increases in AS and benefits
to savers. Consideration of the word “always”.
(a) Explain the causes of economic growth in terms of an increase
in actual output and an increase in potential output. [10]
Markscheme
definitions of economic growth, actual output and potential output

diagram(s) to show an increase in actual output (a movement from a
point within to a point closer to the PPC or an increase in AD); and an
increase in potential output (shift of the PPC outwards or an increase
in LRAS)
explanation of an increase in actual output through changes in AD
and an increase in potential output through changes in LRAS
examples of the two different types of growth.
(b) Discuss the view that the consequences of economic growth

are always beneficial. [15]
Markscheme

diagram(s) to show the show the consequences of growth could
include AD/AS and negative externality diagrams
explanation of the different consequences of growth including the
impact on living standards, unemployment, inflation, the distribution
of income, the current account of the balance of payments,
environmental consequences and sustainability
examples of such consequences in practice
Discussion may include: a consideration that growth is “always” beneficial,
the overall costs of growth in relation to its overall benefits, the costs and
benefits of growth in terms of the nature of goods produced, how growth
might widen the distribution of income, short-term versus long-term
consequences of growth and the link between growth and development.
(a) Explain what effect a reduction in interest rates might have on
consumption and investment. [10]
Markscheme
definitions of interest rates, consumption and investment

diagram(s) to show the changes in consumption and investment
explanation of the impact that a reduction in interest rates might have
on consumption and investment
examples of where reduced interest rates have been introduced and it
has affected consumption and investment.
(b) Evaluate the effectiveness of using monetary policy to reduce

the rate of inflation. [15]
Markscheme
definitions of monetary policy, rate of inflation

diagram(s) to show the impact of monetary policy on AD
explanation of how monetary policy can be used to reduce inflation
by reducing AD by affecting consumption and investment
examples of where monetary policy has been used to reduce inflation
Evaluation may include: the importance of the type of inflation, the ability
to adjust interest rates incrementally and relatively quickly, the significance
of time lags, possible conflicts with other objectives of economic policy,
such as inflation and growth.
(a) Explain the causes of economic growth in terms of an increase
in actual output and an increase in potential output. [10]
Markscheme
definitions of economic growth, actual output and potential output

diagram(s) to show an increase in actual output (a movement from a
point within to a point closer to the PPC or an increase in AD); and an
increase in potential output (shift of the PPC outwards or an increase
in LRAS)
explanation of an increase in actual output through changes in AD
and an increase in potential output through changes in LRAS
examples of the two different types of growth.
(b) Discuss the view that the consequences of economic growth

are always beneficial. [15]
Markscheme

diagram(s) to show the show the consequences of growth could
include AD/AS and negative externality diagrams
explanation of the different consequences of growth including the
impact on living standards, unemployment, inflation, the distribution
of income, the current account of the balance of payments,
environmental consequences and sustainability
examples of such consequences in practice
Discussion may include: a consideration that growth is “always” beneficial,
the overall costs of growth in relation to its overall benefits, the costs and
benefits of growth in terms of the nature of goods produced, how growth
might widen the distribution of income, short-term versus long-term
consequences of growth and the link between growth and development.
(a) Explain the impact that a fall in the world price of oil might
have on aggregate supply and gross domestic product (GDP) in
an economy. [10]
Markscheme
definitions of aggregate supply and GDP

diagram to show AS/SRAS shifting to right and GDP increasing
explanation that in an oil importing country a fall in the price of oil
reduces production costs to industry and causes the aggregate supply
to increase and GDP to rise
example of economies where fall in oil prices has increased aggregate
supply and GDP in an economy.
Explanation may include: the perspective of an oil exporting country as an

alternative to an oil importing country. In this case, a fall in the world price
of oil would mean reduced export revenues, and as net exports are a
component of aggregate demand, this would cause aggregate demand
and GDP to decrease.
(b) Evaluate the view that economic growth is best achieved

through improvements in technology. [15]
Markscheme

diagram to show LRAS increasing and real output increasing
explanation of how technological improvements cause LRAS to
increase in the long term as industry becomes more productive
examples of technological improvements increasing LRAS in an
economy
Evaluation may include: the effect of advances in technology being

dependent on the skill level of the labour force and whether the
technology is appropriate for the development level of the economy. The
response may also consider how factors other than technology might affect
LRAS such as the discovery of new natural resources and the importance of
aggregate demand in affecting growth in the short term. A PPF diagram
may be rewarded equally if used to explain economic growth effectively.
(a) Explain why a high rate of inflation may negatively affect both
a country’s export competitiveness and the level of capital
investment by firms. [10]
Markscheme
definitions of inflation, export competitiveness and investment

diagram to show the impact of inflation on the price level and output
eg AD/AS
explanation of why inflation might produce adverse effects
example(s) of where inflation has affected a country’s export
competitiveness and/or the level of capital investment.
(b) Discuss the view that the use of monetary policy is always the
best way to reduce inflation. [15]
Markscheme
definition of monetary policy

diagram(s) to show the application of policy to deal with inflation,
AD/AS
explanation of the way in which policy impacts the rate of inflation
examples of where such policy has been used
Discussion may include: the impacts of monetary policy on the economy,

trade, employment, households, savings, investment, confidence, etc. It may
also consider the merits of monetary policy in comparison with alternative
policies to control inflation. It may consider the merits of policy options in
relation to cost-push versus demand-pull inflation.
(a) Explain how equilibrium interest rates are determined in an
economy. [10]
Markscheme
definition of interest rates

diagram to show the demand and supply of money
explanation of the interaction of supply and demand in determining
interest rates. An explanation of the role of the central bank in
determining interest rates
examples of changes in interest rates.
(b) Discuss whether an increase in interest rates is the most

effective way of reducing the rate of inflation in an economy. [15]
Markscheme
definitions of interest rates and rate of inflation

diagram to show how an increase in interest rates will reduce AD,
leading to a decrease in the price level
explanation of how an increase in interest rates will reduce borrowing
and spending, leading to a reduction in C and I
examples of interest rate policy
Discussion may include: the limitations of monetary policy like time lags
and the independence of the central bank. Also, the effectiveness of
monetary policy may be reduced if inflation and interest rates are already
very high. In addition there may be reference to alternative policies like
fiscal policy and supply-side policies.
(a) Explain the cause of cyclical (demand-deficient)
unemployment. [10]
Markscheme
definition of cyclical (demand-deficient) unemployment

diagram(s) to show cyclical (demand-deficient) unemployment
explanation of how cyclical (demand-deficient) unemployment is
caused by a fall in aggregate demand
examples of cyclical (demand-deficient) unemployment.
(b) Discuss the view that the most significant consequence of

unemployment is the loss of tax revenue for the government. [15]
Markscheme
definitions of unemployment and tax revenue

diagram to show possible consequence on AD of decreases in
government tax revenue and therefore government spending
explanation of how increased unemployment will decrease tax
revenue and may lead to a budget deficit and/or a reduction in
government spending
examples of consequences of unemployment
Discussion may include: the other economic and personal and social
consequences of unemployment, eg loss of GDP, increased cost of
unemployment benefits, greater disparities in the distribution of income or
an increase in government spending due to falling tax revenues and
increased unemployment benefits acting as an automatic stabilizer.
(a) Explain what effect an increase in interest rates might have on
unemployment. [10]
Markscheme
definitions of interest rates, unemployment and types of

unemployment
an AD/AS diagram or labour market diagram to show the impact of an
increase in interest rates on unemployment
an explanation of how increased interest rates raise the cost of
borrowing causing a fall in investment and consumption spending,
and therefore leading to lower aggregate demand and higher
unemployment
examples of where this may have occurred.
Examiners report
This was the most popular question in the paper and it produced some very
effective answers. The highest achieving responses had accurate definitions
of interest rates and unemployment and clearly explained how a rise in
interest rates often leads to a fall in aggregate demand and economic
growth which in turn causes demand-deficient unemployment. Good
answers were supported with an aggregate demand and supply diagram
and a real-world example.
(b) Evaluate the effectiveness of fiscal policy as a tool to reduce

unemployment. [15]
Markscheme
definitions of fiscal policy, unemployment

diagrams to show the impact of fiscal policy using the AD/AS model,
different views of AS (Keynesian AS or LRAS)
explanation of the possible impacts of fiscal policy on unemployment.
An explanation of the Keynesian and monetarist/new classical
perspectives
examples of where such policies have been applied
N.B. 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.
Evaluation may include: the relative merits of fiscal policy. The emphasis
should be on fiscal policy though it is valid to consider alternatives in a
manner that identifies the relative merits or demerits of fiscal policy.
rewarded.
Examiners report
This question seemed to produce the highest achieving responses in the

paper. Candidates seemed comfortable with the clear direction of the
question and the way it lends itself to synthesis and evaluation. The highest
achieving answers clearly explained how an expansionary fiscal policy
leads to a rise in aggregate which in turn creates jobs and supported this
with an effective aggregate demand and supply diagram. High achieving
responses used effective synthesis and evaluation on this question by
considering some of the issues relating to expansionary fiscal policy to
reduce unemployment such as financing the policy, inflationary pressures
and the problems of increasing aggregate demand in a recession.
(a) Explain how the Lorenz curve and the Gini coefficient are used
to measure income inequality. [10]
Markscheme
definitions of income inequality, Lorenz curve and Gini coefficient

diagram to show the Lorenz curve and Gini coefficient
explanation of how the Lorenz curve and Gini coefficient are used to
measure income inequality
examples of income inequality.
Examiners report
The highest achieving responses to this question clearly defined income

inequality and explained the Lorenz curve and Gini coefficient using an
effective diagram. Income inequality for a country was shown through the
shape of the Lorenz curve and size of the Gini coefficient. It was also
important to support this with a real-world example.
(b) Discuss the view that the best way to achieve greater equity in
the distribution of income in a country is to use a progressive
tax system. [15]
Markscheme
definitions of equity and progressive taxation

diagram (Lorenz curve) to show a progressive tax redistributing
income with greater equity
explanation of how a progressive tax system can redistribute with
greater equity
examples of where a progressive tax can redistribute income more
equitably
synthesis and evaluation (discuss) of the use of a progressive tax to
redistribute income.
N.B. Definitions, theory and examples that have already been given in part
(a) and then referred to in part (b) should be rewarded.
Discussion may include: the problems of applying a progressive tax

because of tax avoidance, the impact of a progressive tax on incentives and
a consideration of other ways of redistributing of income such as spending
on public services and transfer payments.
rewarded.
Examiners report
This question proved challenging to candidates and it may well have been
the reason relatively few candidates chose to answer it. Effective answers
focused on the concept of equity and how the use of progressive tax can
achieve greater equity. This could be done, for example, by taxing those on
high incomes at a higher rate and using the money raised to fund public
services, like further education, which give people on lower incomes
greater working opportunities. Responses with effective synthesis and
evaluation involved, for example, looking at the problems collecting tax
from the very richest people and making sure spending by governments is
done efficiently.
(a) Explain how expansionary monetary policy might lead to a rise
in inflation. [10]
Markscheme
definitions of inflation and monetary policy

diagram to show how rising AD leads to demand-pull inflation
explanation that expansionary monetary policy means a reduction in
interest rates which increases AD and leads to demand-pull inflation
diagram to show how rising AD leads to demand-pull inflation
examples of where expansionary monetary policy has led to inflation.
Examiners report
This was the least popular of the two Section B questions. The use of
diagrams in this question was generally good. However, the labels used
were not always precise. It is better to indicate that the horizontal axes
refers to the spending and output of the whole economy, many candidates
just record quantity. Valid real-world examples were rare and, where they
were offered they tended not to be adequately developed. In general
candidates were aware of what monetary policy was and of the links its use
might have to inflation.
(b) Discuss the view that the most significant impact of high
inflation in a country is a loss of export competitiveness. [15]
Markscheme

definition of export competiveness
diagram to show how higher relative prices might impact on an AD/AS
diagram
explanation of how high inflation in a country may reduce the
competiveness of its domestic firms in export and import markets if its
inflation is higher than its competitors
examples of where inflation has led to a fall in export competitiveness
synthesis and evaluation (to what extent) of loss of export
competitiveness as the most significant consequence of inflation.
Evaluation may include: other factors that could have caused a fall in a
country’s export competitiveness, other consequences of inflation that
could be more significant like redistribution of income, uncertainty leading
to lower investment and the impact changes in the exchange rate could
have on a country’s export competitiveness.
rewarded.
Examiners report
Candidates were generally able to explain the impact of inflation on export

competitiveness. However, it proved more challenging to decide whether it
was the most significant impact. High achieving responses considered other
impacts of a high rate of inflation and then considered which would likely
be the more significant. Examples help to tackle a question like this, so
considering countries that are more export dependent or less export
dependent might serve as appropriate cases in point.
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September Exam [1400 marks]

1. [Maximum mark: 25] SPM.1.SL.TZ0.2

Answers may include:

(b) Using real-world examples, evaluate the effectiveness of

Answers may include:

Definition: inflation, monetary policy.

Answers may include:

Definition: expansionary monetary policy.

(b) Using real-world examples, evaluate the effectiveness of

Answers may include:

Definition: monetary policy, low unemployment.

Answers may include:

Terminology: fiscal policy.

This question was generally well answered by students. Effective responses

Answers may include:

Terminology: fiscal policy, deflationary/recessionary gap.

Answers may include:

Terminology: Government (national) debt, sustainable government

Answers may include:

Terminology: Unemployment, inflation.

This question offered candidates the opportunity to take an expansive

Answers may include:

Terminology: supply-side policies, international competitiveness,

Answers may include:

Terminology: interventionist supply-side policies, unemployment

This question was generally well answered by students, with many

Answers may include:

definitions of equilibrium, full employment level of output

Answers may include:

definitions of fiscal policy, unemployment

Evaluation may include: consideration of the problems of using fiscal policy to

Answers may include:

definitions of economic growth, absolute poverty

Answers may include:

definitions of progressive income tax, equity

Evaluation may include: consideration of the problems of applying progressive

This question proved to be challenging for students. Progressive income

Answers may include:

definitions of inflation, cost-push inflation, (primary) commodity

(b) Discuss the possible consequences of deflation for an economy. [15]

Answers may include:

Discussion may include: consideration of the extent to which the consequences of

The great majority of candidates understood the concept of deflation but

Answers may include:

definition of economic growth, labour (force)

Some answers were focused on the effect of increased training and

Answers may include:

definition of economic growth

Discussion may include: the advantages and disadvantages of economic growth,

A generally well answered question with some excellent examples and

Answers may include:

definitions of circular flow of income, rate of interest

(b) Evaluate the effectiveness of fiscal policy as a means of

Answers may include:

definitions of long-term economic growth, fiscal policy

Evaluation may include: the various advantages and disadvantages of fiscal

Although some candidates confused fiscal policy with monetary policy,

Answers may include:

definitions of aggregate demand, wealth, business confidence

Award a maximum of [6] if only wealth or only business confidence is addressed.

Most responses to this question were disappointing in the sense that a

(b) Evaluate the effectiveness of monetary policy in reducing an

Answers may include: