May and November 2012 Exams IB Economics

IB ECONOMICS
2012 Examinations: May and November examination sessions
The May and November 2012 examinations
May
Nov
HL Paper 1 examination
HL Paper 1 mark scheme
HL Paper 2 examination
HL Paper 2 mark scheme
SL Paper 1 examination
SL Paper 1 mark scheme
SL Paper 2 examination
SL Paper 2 mark scheme
HL Paper 3 examination
HL Paper 3 mark scheme
May and Nov 2012 IB Economics Examinations
M12/3/ECONO/HP1/ENG/TZ1/XX
ECONOMICS
HIgHEr lEvEl
PAPEr 1
Tuesday 15 May 2012 (afternoon)
INSTRUCTIONS TO CANDIDATES
Do not turn over this examination paper until instructed to do so.
Answer one question.
Use fully labelled diagrams and references to examples where appropriate.
The maximum mark for this examination paper is [25 marks].
1 hour
2212-5102 2 pages
© International Baccalaureate Organization 2012
22125102
M12/3/ECONO/HP1/ENG/TZ1/XX
2212-5102
– 2 –
Answer one question. Each question is worth [25 marks].
1. (a) Explain the economic factors which may encourage the formation of a monopoly.
[10 marks]
(b) Evaluate the view that natural monopoly is a more desirable market structure
than perfect competition.
[15 marks]
2. (a) Explainwhygovernmentsmayviewdeationasathreat.
[10 marks]
(b) Evaluate the view that a low and stable rate of ination is benecial for
an economy.
[15 marks]
3. (a) Explain the differences in the operation of xed and oating exchange
rate systems.
[10 marks]
(b) Evaluate the view that any imbalance in the current account will be corrected
automaticallyunderafreelyoatingexchangeratesystem.
[15 marks]
4. (a) Explain how three of the following factors may act as barriers to development
in a less developed country:
capitalight
income inequality
ineffective taxation structure
lack of infrastructure.
[10 marks]
(b) Evaluate the view that foreign direct investment (FDI) is the key factor in
determining whether a developing country will be able to achieve economic
growth and development.
[15 marks]
M12/3/ECONO/HP1/ENG/TZ1/XX/M
17 pages
MARKSCHEME
May 2012
ECONOMICS
Higher Level
Paper 1
– 2 – M12/3/ECONO/HP1/ENG/TZ1/XX/M
This markscheme is confidential and for the exclusive use of
examiners in this examination session.
It is the property of the International Baccalaureate and must
not be reproduced or distributed to any other person without
the authorization of IB Cardiff.
– 3 – M12/3/ECONO/HP1/ENG/TZ1/XX/M
In addition to the assessment criteria, use the paper-specific markscheme below. Award up to the
maximum marks indicated.
1. (a) Explain the economic factors which may encourage the formation of a
monopoly. [10 marks]
Answers should include:
! a definition of monopoly
! an explanation of economies of scale
! an explanation of barriers to entry
! the possibility of product differentiation and/or branding
! the non-availability of close substitutes.
Answers may include:
! use of a diagram to illustrate monopoly
! consideration of the theory of contestable markets: the presence of sunk
costs prevents “hit and run” and allows potential monopolists to focus on
supernormal (abnormal) profits
! mention of a legal framework in which merger and acquisition is
permissible, or where government may grant exclusive rights, patents and
privileges
! exclusive control of necessary resources/factor endowment
! presence of significant price making power
! the market will sustain only one firm
! the presence of abnormal profit may encourage firms in an oligopoly to seek
to form a monopoly.
Examiners should be aware that candidates may take a different approach
which if appropriate, should be rewarded.
Assessment Criteria
Part (a) 10 marks
Level Marks
0 Completely inappropriate answer. 0
1 Little understanding of the specific demands of the question.
Very little recognition of relevant economic theory.
Relevant terms not defined.
Significant errors. 1–3
2 Some understanding of the specific demands of the question.
Some recognition of relevant economic theory.
Some relevant terms defined.
Some errors. 4–6
3 Understanding of the specific demands of the question.
Relevant economic theory explained and developed.
Relevant economic terms defined.
Few errors.
Where appropriate, diagrams included. 7–8
4 Clear understanding of the specific demands of the question.
Relevant economic theory clearly explained and developed.
Relevant economic terms clearly defined.
No major errors.
Where appropriate, diagrams included and explained.
Where appropriate, examples used. 9–10
– 4 – M12/3/ECONO/HP1/ENG/TZ1/XX/M
(b) Evaluate the view that natural monopoly is a more desirable market
structure than perfect competition. [15 marks]
Answers may include:
! a definition of natural monopoly
! a definition of perfect competition
! an explanation of natural monopoly in terms of economies of scale and/or a
market sufficient to support only one firm
! an explanation of perfect competition in terms of a large number of small
firms, freedom of entry, perfect knowledge, homogenous product
! use of diagram to illustrate natural monopoly
! use of diagrams to illustrate perfect competition
! natural monopoly analysed in terms of economies of scale/falling long-run
average costs over the relevant range of output
! perfect competition analysed in terms of efficiency
! natural monopoly analysed in terms of efficiency
! possibility of greater R&D expenditure under monopoly leading to lower
costs and possible long-run benefit to consumers
! possibility of anti-competitive behaviour by monopolists against the
interests of consumers
! reference to cases where a natural monopoly can be broken by privatization
with the introduction of competition in the market (e.g. privatization of
public utilities such as telephones, electricity, gas supply etc.)
! local examples of natural monopolies, e.g. electricity distribution
! evaluation of above arguments.
Candidates who respond solely in terms of monopoly rather than natural
monopoly should be awarded no more than Level 2.
Effective evaluation may be to:
! consider short-term versus long-term consequences
! examine the impact on different stakeholders
! discuss advantages and disadvantages
! prioritize the arguments.
Examiners should be aware that candidates may take a different approach
which if appropriate, should be rewarded.
– 5 – M12/3/ECONO/HP1/ENG/TZ1/XX/M
Assessment Criteria
Part (b) 15 marks
Level Marks
0 Completely inappropriate answer. 0
1 Little understanding of the specific demands of the question.
Very little recognition of relevant economic theory.
Relevant terms not defined.
Significant errors. 1–5
2 Some understanding of the specific demands of the question.
Some recognition of relevant economic theory.
Some relevant terms defined.
Some errors. 6–9
3 Understanding of the specific demands of the question.
Relevant economic theory explained and developed.
Relevant economic terms defined.
Few errors.
Where appropriate, diagrams included.
An attempt at evaluation. 10–12
4 Clear understanding of the specific demands of the question.
Relevant economic theory clearly explained and developed.
Relevant economic terms clearly defined.
No major errors.
Where appropriate, diagrams included and explained.
Where appropriate, examples used.
Evidence of appropriate evaluation. 13–15
– 6 – M12/3/ECONO/HP1/ENG/TZ1/XX/M
2. (a) Explain why governments may view deflation as a threat. [10 marks]
Answers should include:
! a definition of deflation
! use of an AD/AS diagram to illustrate “good” and “bad” deflation
depending on whether real output increases or decreases
! costs associated with deflation:
price reductions squeeze profits and force layoffs leading to
unemployment
postponed consumption in the expectation of price falls causes further
price falls
debt may appear to increase in real terms as the value of money increases
low investment leading to lower economic growth.
Answers may include:
! reference to the vicious circle of falling prices/falling AD e.g. “lost decade”
in Japan, deflation in the 1930s in the US
! decreased effectiveness of monetary and fiscal policy as interest rates
cannot fall below zero and households prefer to save/postpone spending
! threat to the banking system as loans are not repaid
! reference to a negative multiplier effect
! deflation may cause government debt to be greater in real terms.
Examiners should be aware that candidates may take a different approach
which if appropriate, should be rewarded.
– 7 – M12/3/ECONO/HP1/ENG/TZ1/XX/M
Assessment Criteria
Part (a) 10 marks
Level Marks
0 Completely inappropriate answer. 0
1 Little understanding of the specific demands of the question.
Very little recognition of relevant economic theory.
Relevant terms not defined.
Significant errors. 1–3
2 Some understanding of the specific demands of the question.
Some recognition of relevant economic theory.
Some relevant terms defined.
Some errors. 4–6
3 Understanding of the specific demands of the question.
Relevant economic theory explained and developed.
Relevant economic terms defined.
Few errors.
Where appropriate, diagrams included. 7–8
4 Clear understanding of the specific demands of the question.
Relevant economic theory clearly explained and developed.
Relevant economic terms clearly defined.
No major errors.
Where appropriate, diagrams included and explained.
Where appropriate, examples used. 9–10
– 8 – M12/3/ECONO/HP1/ENG/TZ1/XX/M
(b) Evaluate the view that a low and stable rate of inflation is beneficial for an
economy. [15 marks]
Answers may include:
! a definition of a low and stable rate of inflation
! lower inflation and stability increases business certainty, as wage-price
expectations become more predictable, boosting investment and economic
growth
! impact on resource allocation
! the lower the relative rate of inflation the greater the chance of competitive
gain in international markets
! the losses of fixed income earners are reduced as the inflation rate falls
! saving is encouraged as lower inflation makes money a better store of value
! labour unrest may decline because a low inflation rate makes it easier to
preserve real wages, thus avoiding wage/price spiral
! interrelationships between low inflation rates and real interest rates
! may only be achieved at the expense of higher unemployment
! implications for government policy
! evaluation of above arguments.
Effective evaluation may be to:
! consider short-term versus long-term consequences
! examine the impact on different stakeholders
! discuss advantages and disadvantages
! prioritize the arguments.
Examiners should be aware that candidates may take a different approach
which if appropriate, should be rewarded.
– 9 – M12/3/ECONO/HP1/ENG/TZ1/XX/M
Assessment Criteria
Part (b) 15 marks
Level Marks
0 Completely inappropriate answer. 0
1 Little understanding of the specific demands of the question.
Very little recognition of relevant economic theory.
Relevant terms not defined.
Significant errors. 1–5
2 Some understanding of the specific demands of the question.
Some recognition of relevant economic theory.
Some relevant terms defined.
Some errors. 6–9
3 Understanding of the specific demands of the question.
Relevant economic theory explained and developed.
Relevant economic terms defined.
Few errors.
Where appropriate, diagrams included.
An attempt at evaluation. 10–12
4 Clear understanding of the specific demands of the question.
Relevant economic theory clearly explained and developed.
Relevant economic terms clearly defined.
No major errors.
Where appropriate, diagrams included and explained.
Where appropriate, examples used.
Evidence of appropriate evaluation. 13–15
– 10 – M12/3/ECONO/HP1/ENG/TZ1/XX/M
3. (a) Explain the differences in the operation of fixed and floating exchange rate
systems. [10 marks]
Answers should include:
! a definition of a fixed exchange rate system
! a definition of a floating exchange rate system
! an explanation of a fixed exchange rate system
! an explanation of a floating exchange rate system
! under a floating exchange rate system the exchange rate is determined by
the forces of demand and supply
! under a fixed exchange rate system the exchange rate is determined by a
central authority
! under a fixed exchange rate system the exchange rate is maintained by the
sale or purchase of the currency on the foreign exchange market.
Answers may include:
! reference to recent experience and examples in foreign exchange markets
! explanation of factors which affect the demand for, and supply of, a
currency
! use of a diagram to illustrate a floating exchange rate system
! use of a diagram to illustrate a fixed exchange rate system
! fixed exchange rate systems can cause speculation prior to devaluation or
revaluation, floating rates allow constant adjustment
! fixed exchange rate systems require large foreign exchange reserves to
maintain parities, floating exchange rate systems do not
! trade surpluses and deficits may be persistent under fixed exchange rate
systems, but can be corrected continually by appreciation or depreciation
under floating exchange
! floating exchange rate systems free domestic monetary policy from concern
over the external account, but interest rates may have to be raised to defend
a fixed exchange rate
! reference to managed/dirty floating.
Examiners should be aware that candidates may take a different approach
which if appropriate, should be rewarded.
– 11 – M12/3/ECONO/HP1/ENG/TZ1/XX/M
Assessment Criteria
Part (a) 10 marks
Level Marks
0 Completely inappropriate answer. 0
1 Little understanding of the specific demands of the question.
Very little recognition of relevant economic theory.
Relevant terms not defined.
Significant errors. 1–3
2 Some understanding of the specific demands of the question.
Some recognition of relevant economic theory.
Some relevant terms defined.
Some errors. 4–6
3 Understanding of the specific demands of the question.
Relevant economic theory explained and developed.
Relevant economic terms defined.
Few errors.
Where appropriate, diagrams included. 7–8
4 Clear understanding of the specific demands of the question.
Relevant economic theory clearly explained and developed.
Relevant economic terms clearly defined.
No major errors.
Where appropriate, diagrams included and explained.
Where appropriate, examples used. 9–10
– 12 – M12/3/ECONO/HP1/ENG/TZ1/XX/M
(b) Evaluate the view that any imbalance in the current account will be
corrected automatically under a freely floating exchange rate system. [15 marks]
Answers may include:
! a definition of current account imbalance, positive and negative
! a definition of freely floating exchange rate system determined solely by
demand for, and supply of, currency, appreciation and depreciation
! theoretically, the exchange rate will adjust itself to keep the current account
balanced
! explanation of self-correcting mechanism:
under a deficit, export sales lag so demand for the currency is low while
supply is greater as imports boom, thus the currency depreciates: this
causes increased demand for exports and lower demand for imports
correcting the balance of payment deficit
in a surplus, exports boom so demand for the currency is high while
supply is less as imports are weak, thus the currency appreciates: this
causes decreased demand for exports and higher demand for imports
correcting the balance of payment surplus
! in reality the adjustment depends on the Marshall-Lerner condition which
introduces relative import and export price elasticities, and the J-Curve
effect which notes lags in responsiveness to price changes
! freely floating exchange rate systems respond to factors other than supply
and demand (e.g. speculation, political uncertainty) and volatility may itself
provoke uncertainty, preventing correction
! depreciation in currencies of trading partners may prevent automatic
correction
! there is seldom a case of an absolutely free floating exchange rate system as
governments tend to interfere either by controlling interest rates or by
buying or selling their currencies in the international financial market
! evaluation of above arguments.
Effective evaluation may be to:
! consider short-term versus long-term consequences
! examine the impact on different stakeholders
! discuss advantages and disadvantages
! prioritize the arguments.
Examiners should be aware that candidates may take a different approach
which if appropriate, should be rewarded.
– 13 – M12/3/ECONO/HP1/ENG/TZ1/XX/M
Assessment Criteria
Part (b) 15 marks
Level Marks
0 Completely inappropriate answer. 0
1 Little understanding of the specific demands of the question.
Very little recognition of relevant economic theory.
Relevant terms not defined.
Significant errors. 1–5
2 Some understanding of the specific demands of the question.
Some recognition of relevant economic theory.
Some relevant terms defined.
Some errors. 6–9
3 Understanding of the specific demands of the question.
Relevant economic theory explained and developed.
Relevant economic terms defined.
Few errors.
Where appropriate, diagrams included.
An attempt at evaluation. 10–12
4 Clear understanding of the specific demands of the question.
Relevant economic theory clearly explained and developed.
Relevant economic terms clearly defined.
No major errors.
Where appropriate, diagrams included and explained.
Where appropriate, examples used.
Evidence of appropriate evaluation. 13–15
– 14 – M12/3/ECONO/HP1/ENG/TZ1/XX/M
4. (a) Explain how three of the following factors may act as barriers to
development in a less developed country:
! capital flight
! income inequality
! ineffective taxation structure
! lack of infrastructure. [10 marks]
Answers should include:
! a definition of development
! a definition of a less developed country
! a definition of each of the three economic factors selected
! an explanation of how the three chosen economic factors act as barriers:
capital flight: reduces the amount of aid/FDI that remains in the less
developed country, reducing investment
income inequality: adversely affects the purchasing power and prevents
the less affluent from saving and realising their economic potential
ineffective taxation structure: prevents the government from maximising
its potential tax revenue thus limiting the funds available for public
spending
lack of infrastructure raises the costs, and limits the extent of, all forms
of economic activity.
Answers may include:
! interrelationships between the barriers may reinforce them
! diagrams such as the Lorenz curve to illustrate income inequality
! mention of human as well as physical capital under infrastructure.
Examiners should be aware that candidates may take a different approach
which if appropriate, should be rewarded.
– 15 – M12/3/ECONO/HP1/ENG/TZ1/XX/M
Assessment Criteria
Part (a) 10 marks
Level Marks
0 Completely inappropriate answer. 0
1 Little understanding of the specific demands of the question.
Very little recognition of relevant economic theory.
Relevant terms not defined.
Significant errors. 1–3
2 Some understanding of the specific demands of the question.
Some recognition of relevant economic theory.
Some relevant terms defined.
Some errors. 4–6
3 Understanding of the specific demands of the question.
Relevant economic theory explained and developed.
Relevant economic terms defined.
Few errors.
Where appropriate, diagrams included. 7–8
4 Clear understanding of the specific demands of the question.
Relevant economic theory clearly explained and developed.
Relevant economic terms clearly defined.
No major errors.
Where appropriate, diagrams included and explained.
Where appropriate, examples used. 9–10
– 16 – M12/3/ECONO/HP1/ENG/TZ1/XX/M
(b) Evaluate the view that foreign direct investment (FDI) is the key factor in
determining whether a developing country will be able to achieve
economic growth and development. [15 marks]
Answers may include:
! a definition of foreign direct investment (FDI)
! a definition of economic growth
! a definition of economic development
! arguments for FDI: MNCs can fill the savings gap through local investment,
can generate export revenues, can generate tax revenues, can boost
employment, can improve education and training, but all to a variable extent
! arguments against FDI: MNC profits may be repatriated elsewhere, tax
concessions may have to be made (reducing revenues), inappropriate
technology may generate little local employment, employment may be for
the unskilled only, pressure may be put on government to allow policies
favourable to development such as environmental shortcuts
! alternative paths to development, e.g. inward-oriented growth,
micro-finance
! case studies of particular FDI show it is not always successful in promoting
economic growth and development
! evaluation of above arguments.
Effective evaluation may be to:
! consider short-term versus long-term consequences
! examine the impact on different stakeholders
! discuss advantages and disadvantages
! prioritize the arguments.
Examiners should be aware that candidates may take a different approach
which if appropriate, should be rewarded.
– 17 – M12/3/ECONO/HP1/ENG/TZ1/XX/M
Assessment Criteria
Part (b) 15 marks
Level Marks
0 Completely inappropriate answer. 0
1 Little understanding of the specific demands of the question.
Very little recognition of relevant economic theory.
Relevant terms not defined.
Significant errors. 1–5
2 Some understanding of the specific demands of the question.
Some recognition of relevant economic theory.
Some relevant terms defined.
Some errors. 6–9
3 Understanding of the specific demands of the question.
Relevant economic theory explained and developed.
Relevant economic terms defined.
Few errors.
Where appropriate, diagrams included.
An attempt at evaluation. 10–12
4 Clear understanding of the specific demands of the question.
Relevant economic theory clearly explained and developed.
Relevant economic terms clearly defined.
No major errors.
Where appropriate, diagrams included and explained.
Where appropriate, examples used.
Evidence of appropriate evaluation. 13–15
M12/3/ECONO/HP2/ENG/TZ1/XX
ECONOMICS
HIgHEr lEvEl
PAPEr 2
Tuesday 15 May 2012 (afternoon)
INSTRUCTIONS TO CANDIDATES
Do not turn over this examination paper until instructed to do so.
Answer three questions.
Use fully labelled diagrams and references to examples where appropriate.
The maximum mark for this examination paper is [30 marks].
1 hour
2212-5105 2 pages
© International Baccalaureate Organization 2012
22125105
M12/3/ECONO/HP2/ENG/TZ1/XX
2212-5105
– 2 –
Answer three questions. Each question is worth [10 marks].
1. Using the concept of market failure, explain why a government may try to decrease the use
of motor vehicles in city centres.
2. Using a diagram, explain how a rm in perfect competition can be making losses whilst still producing
at the level of output where marginal costs equal marginal revenue.
3. With the aid of at least one diagram, explain how cost push and demand pull ination may occur in
an economy.
4. With the aid of a diagram, explain the potential trade gains and trade losses arising from the formation
of a customs union.
5. Explain how scal policy can be used to reduce the level of unemployment.
6. Explain three factors which may limit the effectiveness of aid as a means of promoting economic
development.
M12/3/ECONO/HP2/ENG/TZ1/XX/M
11 pages
MARKSCHEME
May 2012
ECONOMICS
Higher Level
Paper 2
2 M12/3/ECONO/HP2/ENG/TZ1/XX/M
This markscheme is confidential and for the exclusive use of
examiners in this examination session.
It is the property of the International Baccalaureate and must
not be reproduced or distributed to any other person without
the authorization of IB Cardiff.
3 M12/3/ECONO/HP2/ENG/TZ1/XX/M
In addition to the assessment criteria, use the paper-specific markscheme below. Award up to the
maximum marks indicated. Each question is worth [10 marks].
1. Using the concept of market failure, explain why a government may try to decrease the use of
motor vehicles in city centres.
Candidates may include:
a definition of market failure
a definition of negative externalities, consumption or production
an explanation that this is a case of a negative consumption externality (private use of vehicles)
or production externality (commercial use of vehicles) leading to over-use of motor-vehicles
MSB less than MPB for consumption externality or MSC greater than MPC for production
externality
an explanation of the external costs, e.g. effects on third parties due to congestion or pollution,
increase in business costs
use of a diagram to illustrate the MSB curve lying below the MPB curve or the MPC curve lying
below the MSC curve
an explanation of the impact of negative externalities in terms of inefficient use of scarce
resources/over-allocation of resources.
References to methods of reducing use of motor vehicles may be rewarded.
Candidates may be awarded full marks through either the MSB/MPB approach or the MSC/MPC
approach.
Candidates who incorrectly label diagrams cannot be rewarded with full marks.
Examiners should be aware that candidates may take a different approach which if appropriate,
should be rewarded.
Assessment Criteria
Level Marks
0 Completely inappropriate answer. 0
1 Little understanding of the specific demands of the question.
Very little recognition of relevant economic theory.
Relevant terms not defined.
Significant errors. 13
2 Some understanding of the specific demands of the question.
Some recognition of relevant economic theory.
Some relevant terms defined.
Some errors. 46
3 Understanding of the specific demands of the question.
Relevant economic theory explained and developed.
Relevant economic terms defined.
Few errors.
Where appropriate, diagrams included. 78
4 Clear understanding of the specific demands of the question.
Relevant economic theory clearly explained and developed.
Relevant economic terms clearly defined.
No major errors.
Where appropriate, diagrams included and explained.
Where appropriate, examples used. 910
4 M12/3/ECONO/HP2/ENG/TZ1/XX/M
2. Using a diagram, explain how a firm in perfect competition can be making losses whilst still
producing at the level of output where marginal costs equal marginal revenue.
Candidates may include:
a definition of perfect competition
a definition of losses
a definition of marginal cost, marginal revenue
an explanation that profit maximization/loss minimization occurs at the level of output where
MC equals MR
an explanation that the firm makes a loss where ATC exceeds AR (P) at the profit
maximizing/loss minimizing level of output
use of a diagram of perfect competition to illustrate short-run losses at the level of output where
MC equals MR
reference to the condition that AR must be greater than or equal to AVC at the profit
maximizing/loss minimizing level of output if the firm is to produce in the short run.
Candidates who incorrectly label diagrams cannot be rewarded with full marks.
Examiners should be aware that candidates may take a different approach which if appropriate,
should be rewarded.
Assessment Criteria
Level Marks
0 Completely inappropriate answer. 0
1 Little understanding of the specific demands of the question.
Very little recognition of relevant economic theory.
Relevant terms not defined.
Significant errors. 13
2 Some understanding of the specific demands of the question.
Some recognition of relevant economic theory.
Some relevant terms defined.
Some errors. 46
3 Understanding of the specific demands of the question.
Relevant economic theory explained and developed.
Relevant economic terms defined.
Few errors.
Where appropriate, diagrams included. 78
4 Clear understanding of the specific demands of the question.
Relevant economic theory clearly explained and developed.
Relevant economic terms clearly defined.
No major errors.
Where appropriate, diagrams included and explained.
Where appropriate, examples used. 910
5 M12/3/ECONO/HP2/ENG/TZ1/XX/M
3. With the aid of at least one diagram, explain how cost push and demand pull inflation may
occur in an economy.
Candidates may include:
a definition of inflation
a definition of cost push inflation
a definition of demand pull inflation
an explanation of cost push inflation
an explanation of demand pull inflation
use of a diagram to illustrate cost push inflation showing SRAS curve shifting to the left
the possible causes of cost push inflation, e.g. increase in wages, imported inflation, profit push
inflation
use of a diagram to illustrate demand pull inflation showing AD curve shifting to the right
the possible causes of demand pull inflation, e.g. increase in consumption, government spending,
investment or net exports.
Candidates who only address cost push or demand pull inflation cannot earn marks beyond level 2.
Candidates who incorrectly label diagrams cannot be rewarded with full marks.
Examiners should be aware that candidates may take a different approach which if appropriate,
should be rewarded.
Assessment Criteria
Level Marks
0 Completely inappropriate answer. 0
1 Little understanding of the specific demands of the question.
Very little recognition of relevant economic theory.
Relevant terms not defined.
Significant errors. 13
2 Some understanding of the specific demands of the question.
Some recognition of relevant economic theory.
Some relevant terms defined.
Some errors. 46
3 Understanding of the specific demands of the question.
Relevant economic theory explained and developed.
Relevant economic terms defined.
Few errors.
Where appropriate, diagrams included. 78
4 Clear understanding of the specific demands of the question.
Relevant economic theory clearly explained and developed.
Relevant economic terms clearly defined.
No major errors.
Where appropriate, diagrams included and explained.
Where appropriate, examples used. 910
6 M12/3/ECONO/HP2/ENG/TZ1/XX/M
4. With the aid of a diagram, explain the potential trade gains and trade losses arising from the
formation of a customs union.
Candidates may include:
a definition of a customs union
explanation of potential gains:
benefits of specialization according to comparative advantage
more competition
economies of scale
lower prices
improved product quality
increased efficiency
trade creation
increased output and economic growth
impact on resource allocation
explanation of potential losses
unequal distribution of gains
inferior to global free trade
lower output and increases in unemployment due to closure of inefficient producers
trade diversion
diagram showing elimination of protectionist measures (tariff, quota or subsidy) leading to
increased imports
diagram showing increased protectionist measures (tariff, quota or subsidy) toward non-member
countries, leading to a fall in imports
AD/AS diagram illustrating economic growth arising from trade gains and reflected in an
increase in AD
diagram showing comparative advantage.
Examiners should be aware of the limited time available to candidates when marking responses to
this question.
Candidates who incorrectly label diagrams cannot be rewarded with full marks.
Examiners should be aware that candidates may take a different approach which if appropriate,
should be rewarded.
7 M12/3/ECONO/HP2/ENG/TZ1/XX/M
Assessment Criteria
Level Marks
0 Completely inappropriate answer. 0
1 Little understanding of the specific demands of the question.
Very little recognition of relevant economic theory.
Relevant terms not defined.
Significant errors. 13
2 Some understanding of the specific demands of the question.
Some recognition of relevant economic theory.
Some relevant terms defined.
Some errors. 46
3 Understanding of the specific demands of the question.
Relevant economic theory explained and developed.
Relevant economic terms defined.
Few errors.
Where appropriate, diagrams included. 78
4 Clear understanding of the specific demands of the question.
Relevant economic theory clearly explained and developed.
Relevant economic terms clearly defined.
No major errors.
Where appropriate, diagrams included and explained.
Where appropriate, examples used. 910
8 M12/3/ECONO/HP2/ENG/TZ1/XX/M
5. Explain how fiscal policy can be used to reduce the level of unemployment.
Candidates may include:
a definition of fiscal policy
a definition of unemployment
fiscal policy is mainly used to tackle cyclical/demand-deficient unemployment
an explanation of expansionary/reflationary fiscal policy
an explanation that lower direct and indirect taxes will increase aggregate demand
an explanation of the impact of higher government spending
possible multiplier effects
use of an AD/AS diagram to illustrate the effect of increased aggregate demand on the level of
output and employment.
Candidates who refer to the supply-side effects of fiscal policy should be rewarded.
It is possible for full marks to be earned if a diagram is not used, provided the explanation is
sufficiently detailed along the lines shown in the markscheme.
Candidates who incorrectly label diagrams cannot be rewarded with full marks.
Examiners should be aware that candidates may take a different approach which if appropriate,
should be rewarded.
9 M12/3/ECONO/HP2/ENG/TZ1/XX/M
Assessment Criteria
Level Marks
0 Completely inappropriate answer. 0
1 Little understanding of the specific demands of the question.
Very little recognition of relevant economic theory.
Relevant terms not defined.
Significant errors. 13
2 Some understanding of the specific demands of the question.
Some recognition of relevant economic theory.
Some relevant terms defined.
Some errors. 46
3 Understanding of the specific demands of the question.
Relevant economic theory explained and developed.
Relevant economic terms defined.
Few errors.
Where appropriate, diagrams included. 78
4 Clear understanding of the specific demands of the question.
Relevant economic theory clearly explained and developed.
Relevant economic terms clearly defined.
No major errors.
Where appropriate, diagrams included and explained.
Where appropriate, examples used. 910
10 M12/3/ECONO/HP2/ENG/TZ1/XX/M
6. Explain three factors which may limit the effectiveness of aid as a means of promoting
economic development.
Candidates may include:
a definition of aid
a definition of economic development
examples of types of aid
an explanation of factors:
problems associated with tied aid
misuse of aid revenues
much aid is in the form of soft loans which have to be repaid giving rise to indebtedness
conditionality and influence on the policies of the recipient government
aid which discourages self-reliance
food aid which discourages domestic production
aid motivated by political interests of donors.
If only one factor is explained candidates cannot be awarded more than [4 marks]. If only two
factors are explained candidates cannot be awarded more than [7 marks].
Candidates who argue that the effectives of aid will be limited by those factors which limit
development in general, e.g. poor infrastructure, unequal distribution of income should be
rewarded.
Examiners should be aware that candidates may take a different approach which if appropriate,
should be rewarded.
11 M12/3/ECONO/HP2/ENG/TZ1/XX/M
Assessment Criteria
Level Marks
0 Completely inappropriate answer. 0
1 Little understanding of the specific demands of the question.
Very little recognition of relevant economic theory.
Relevant terms not defined.
Significant errors. 13
2 Some understanding of the specific demands of the question.
Some recognition of relevant economic theory.
Some relevant terms defined.
Some errors. 46
3 Understanding of the specific demands of the question.
Relevant economic theory explained and developed.
Relevant economic terms defined.
Few errors.
Where appropriate, diagrams included. 78
4 Clear understanding of the specific demands of the question.
Relevant economic theory clearly explained and developed.
Relevant economic terms clearly defined.
No major errors.
Where appropriate, diagrams included and explained.
Where appropriate, examples used. 910
M12/3/ECONO/SP1/ENG/TZ1/XX
ECONOMICS
STANDARD lEvEl
PAPER 1
Tuesday 15 May 2012 (afternoon)
INSTRUCTIONS TO CANDIDATES
Do not turn over this examination paper until instructed to do so.
Answer one question.
Use fully labelled diagrams and references to examples where appropriate.
The maximum mark for this examination paper is [25 marks].
1 hour
2212-5111 2 pages
© International Baccalaureate Organization 2012
22125111
M12/3/ECONO/SP1/ENG/TZ1/XX
2212-5111
– 2 –
Answer one question. Each question is worth [25 marks].
1. (a) Explain the possible economic advantages to consumers that arise from living in
a free market economy.
[10 marks]
(b) Evaluate the economic implications of a government policy to provide merit
goods free of charge.
[15 marks]
2. (a) Explain why countries measure national income.
[10 marks]
(b) Evaluate the view that demand-side policies are the most effective method of
increasing the level of national income.
[15 marks]
3. (a) Explain the difference between expenditure-switching and expenditure-reducing
policies for a government facing a current account decit.
[10 marks]
(b) Evaluate the view that it is never desirable for countries to resort to protectionism.
[15 marks]
4. (a) Explain how three of the following factors may act as barriers to development
in a less developed country:
capital ight
income inequality
ineffective taxation structure
lack of infrastructure.
[10 marks]
(b) Evaluate the view that foreign direct investment (FDI) is the key factor in
determining whether a developing country will be able to achieve economic
growth and development.
[15 marks]
M12/3/ECONO/SP1/ENG/TZ1/XX/M
17 pages
MARKSCHEME
May 2012
ECONOMICS
Standard Level
Paper 1
2 M12/3/ECONO/SP1/ENG/TZ1/XX/M
This markscheme is confidential and for the exclusive use of
examiners in this examination session.
It is the property of the International Baccalaureate and must
not be reproduced or distributed to any other person without
the authorization of IB Cardiff.
3 M12/3/ECONO/SP1/ENG/TZ1/XX/M
In addition to the assessment criteria, use the paper-specific markscheme below. Award up to the
maximum marks indicated.
1. (a) Explain the possible economic advantages to consumers that arise from
living in a free market economy. [10 marks]
Answers should include:
a definition of a free market economy
an explanation of reliance on price to allocate goods and services
an explanation of reliance on supply and demand to set prices and wages
consumers enjoy an absence of shortages and surpluses in markets
consumers enjoy choice and a wide range of goods and services
producers respond to the wishes of consumers via price signals
consumers enjoy lower prices due to competition.
Answers may include:
use of a demand/supply diagram indicating a change in resource allocation
profit motive allows producers to respond quickly to changes in consumer
tastes
reference to Adam Smith and the self-regulating nature of markets
consumers can participate in private ownership of the means of production
consumers may benefit from competition between firms
consumers enjoy relative efficiency.
Examiners should be aware that candidates may take a different approach
which if appropriate, should be rewarded.
Assessment Criteria
Part (a) 10 marks
Level Marks
0 Completely inappropriate answer. 0
1 Little understanding of the specific demands of the question.
Very little recognition of relevant economic theory.
Relevant terms not defined.
Significant errors. 13
2 Some understanding of the specific demands of the question.
Some recognition of relevant economic theory.
Some relevant terms defined.
Some errors. 46
3 Understanding of the specific demands of the question.
Relevant economic theory explained and developed.
Relevant economic terms defined.
Few errors.
Where appropriate, diagrams included. 78
4 Clear understanding of the specific demands of the question.
Relevant economic theory clearly explained and developed.
Relevant economic terms clearly defined.
No major errors.
Where appropriate, diagrams included and explained.
Where appropriate, examples used. 910
4 M12/3/ECONO/SP1/ENG/TZ1/XX/M
(b) Evaluate the economic implications of a government policy to provide
merit goods free of charge. [15 marks]
Answers may include:
a definition of merit goods
a definition of merit goods as a form of market failure
a definition of merit goods as those under-consumed at market price
an explanation of achievement of the socially optimum level of output
use of an MSC/MSB diagram
existence of strong positive externalities in merit goods
private benefits may be underestimated leading to under-consumption
discussion of benefits of merit goods, e.g. impact on economic growth
costs of merit goods are borne by taxpayers
opportunity costs of providing merit goods
relative costs and benefits of direct provision or subsidy to supply merit
goods
advantages and disadvantages of state provision
physical/psychological crowding out of the private sector by labour
intensive merit good provision
promotion of greater equality as the less affluent have access to merit goods
examples of particular merit goods provided free in particular countries
evaluation of above arguments.
Effective evaluation may be to:
consider short-term versus long-term consequences
examine the impact on different stakeholders
discuss advantages and disadvantages
prioritize the arguments.
Examiners should be aware that candidates may take a different approach
which if appropriate, should be rewarded.
5 M12/3/ECONO/SP1/ENG/TZ1/XX/M
Assessment Criteria
Part (b) 15 marks
Level Marks
0 Completely inappropriate answer. 0
1 Little understanding of the specific demands of the question.
Very little recognition of relevant economic theory.
Relevant terms not defined.
Significant errors. 15
2 Some understanding of the specific demands of the question.
Some recognition of relevant economic theory.
Some relevant terms defined.
Some errors. 69
3 Understanding of the specific demands of the question.
Relevant economic theory explained and developed.
Relevant economic terms defined.
Few errors.
Where appropriate, diagrams included.
An attempt at evaluation. 1012
4 Clear understanding of the specific demands of the question.
Relevant economic theory clearly explained and developed.
Relevant economic terms clearly defined.
No major errors.
Where appropriate, diagrams included and explained.
Where appropriate, examples used.
Evidence of appropriate evaluation. 1315
6 M12/3/ECONO/SP1/ENG/TZ1/XX/M
2. (a) Explain why countries measure national income. [10 marks]
Answers should include:
a definition of national income
an explanation of a measure of national income, e.g. GDP
an explanation that it is an indicator of living standards
an explanation that it helps to assess whether growth or recession has
occurred
an explanation that it helps to measure economic performance over time
an explanation that it helps to compare economic performance between
countries.
Answers may include:
a basis for forecasting for economists, businesses and governments
a basis for judging success of economic policies and formulating future
policies
a means of identifying changes in consumption, investment etc.
examples of statistics from particular countries
illustration using a PPF or PPC shifting to the right or moving towards
potential output and/or AD/AS diagram.
Examiners should be aware that candidates may take a different approach
which if appropriate, should be rewarded.
7 M12/3/ECONO/SP1/ENG/TZ1/XX/M
Assessment Criteria
Part (a) 10 marks
Level Marks
0 Completely inappropriate answer. 0
1 Little understanding of the specific demands of the question.
Very little recognition of relevant economic theory.
Relevant terms not defined.
Significant errors. 13
2 Some understanding of the specific demands of the question.
Some recognition of relevant economic theory.
Some relevant terms defined.
Some errors. 46
3 Understanding of the specific demands of the question.
Relevant economic theory explained and developed.
Relevant economic terms defined.
Few errors.
Where appropriate, diagrams included. 78
4 Clear understanding of the specific demands of the question.
Relevant economic theory clearly explained and developed.
Relevant economic terms clearly defined.
No major errors.
Where appropriate, diagrams included and explained.
Where appropriate, examples used. 910
8 M12/3/ECONO/SP1/ENG/TZ1/XX/M
(b) Evaluate the view that demand-side policies are the most effective method
of increasing the level of national income. [15 marks]
Answers may include:
a definition of demand-side policies
an explanation of demand-side policies in relation to increasing the level of
national income/economic growth
examples of monetary and fiscal demand-side policies
use of an AD/AS diagram to illustrate expansionary demand-side policies
disadvantages of demand-side policies, e.g. time-lags, inflationary pressure,
increased government debt, increased imports
alternatives to demand-side policies, e.g. supply-side policies
explanation of how supply-side policies might increase the level of national
income
use of AD/AS or PPC diagram to illustrate supply-side policies
disadvantages of supply-side policies, e.g. time-lags, inequality, uncertain
effectiveness of lowering taxes
evaluation of above arguments.
Effective evaluation may be to:
consider short-term versus long-term consequences
examine the impact on different stakeholders
discuss advantages and disadvantages
prioritize the arguments.
Examiners should be aware that candidates may take a different approach
which if appropriate, should be rewarded.
9 M12/3/ECONO/SP1/ENG/TZ1/XX/M
Assessment Criteria
Part (b) 15 marks
Level Marks
0 Completely inappropriate answer. 0
1 Little understanding of the specific demands of the question.
Very little recognition of relevant economic theory.
Relevant terms not defined.
Significant errors. 15
2 Some understanding of the specific demands of the question.
Some recognition of relevant economic theory.
Some relevant terms defined.
Some errors. 69
3 Understanding of the specific demands of the question.
Relevant economic theory explained and developed.
Relevant economic terms defined.
Few errors.
Where appropriate, diagrams included.
An attempt at evaluation. 1012
4 Clear understanding of the specific demands of the question.
Relevant economic theory clearly explained and developed.
Relevant economic terms clearly defined.
No major errors.
Where appropriate, diagrams included and explained.
Where appropriate, examples used.
Evidence of appropriate evaluation. 1315
10 M12/3/ECONO/SP1/ENG/TZ1/XX/M
3. (a) Explain the difference between expenditure-switching and expenditure-
reducing policies for a government facing a current account deficit. [10 marks]
Answers should include:
a definition of expenditure-switching policies
a definition of expenditure-reducing policies
an explanation of a current account deficit
an explanation of expenditure-switching policies, e.g. depreciation
/devaluation, protectionism
an explanation of expenditure-reducing policies, e.g. deflationary fiscal and
monetary policies.
Answers may include:
use of AD/AS diagram to illustrate expenditure reducing
use of tariff diagram to illustrate expenditure switching
expenditure-switching policies may reduce imports only but expenditure-
reducing policies may affect demand for all goods and services,
reducing AD
expenditure-switching policies may cause conflict with trade blocs and
international organisations
expenditure-switching policies may cause imported inflation and trade wars
expenditure-reducing policies may damage growth and employment and
may lead towards a recession
expenditure-reducing policies may improve export competitiveness due to
their deflationary nature.
Examiners should be aware that candidates may take a different approach
which if appropriate, should be rewarded.
11 M12/3/ECONO/SP1/ENG/TZ1/XX/M
Assessment Criteria
Part (a) 10 marks
Level Marks
0 Completely inappropriate answer. 0
1 Little understanding of the specific demands of the question.
Very little recognition of relevant economic theory.
Relevant terms not defined.
Significant errors. 13
2 Some understanding of the specific demands of the question.
Some recognition of relevant economic theory.
Some relevant terms defined.
Some errors. 46
3 Understanding of the specific demands of the question.
Relevant economic theory explained and developed.
Relevant economic terms defined.
Few errors.
Where appropriate, diagrams included. 78
4 Clear understanding of the specific demands of the question.
Relevant economic theory clearly explained and developed.
Relevant economic terms clearly defined.
No major errors.
Where appropriate, diagrams included and explained.
Where appropriate, examples used. 910
12 M12/3/ECONO/SP1/ENG/TZ1/XX/M
(b) Evaluate the view that it is never desirable for countries to resort to
protectionism. [15 marks]
Answers may include:
a definition of protectionism
an explanation of types of protectionism
arguments in support of the view in terms of the case for free trade
greater volume of trade
benefits of specialisation (specific reference to absolute and comparative
advantage is not required in SL)
more efficiency in the allocation of resources
greater employment
greater choice
lower prices for consumers
arguments in support of the view in terms of the case against protectionism
the possibility of retaliation
misallocation of resources
higher prices
use of a tariff diagram to illustrate the costs of protectionism
arguments against the view in terms of the drawbacks of free trade
the problem of free trade between unequal partners
impact on LDCs’ efforts to diversify
arguments against the view in terms of specific justifications of
protectionism
infant industry argument
employment arguments
protection of the balance of payments
source of government revenue
anti-dumping
strategic arguments
reference to short-term/long-term effects of protectionism
evaluation of above arguments.
Effective evaluation may be to:
consider short-term versus long-term consequences
examine the impact on different stakeholders
discuss advantages and disadvantages
prioritize the arguments.
Examiners should be aware that candidates may take a different approach
which if appropriate, should be rewarded.
13 M12/3/ECONO/SP1/ENG/TZ1/XX/M
Assessment Criteria
Part (b) 15 marks
Level Marks
0 Completely inappropriate answer. 0
1 Little understanding of the specific demands of the question.
Very little recognition of relevant economic theory.
Relevant terms not defined.
Significant errors. 15
2 Some understanding of the specific demands of the question.
Some recognition of relevant economic theory.
Some relevant terms defined.
Some errors. 69
3 Understanding of the specific demands of the question.
Relevant economic theory explained and developed.
Relevant economic terms defined.
Few errors.
Where appropriate, diagrams included.
An attempt at evaluation. 1012
4 Clear understanding of the specific demands of the question.
Relevant economic theory clearly explained and developed.
Relevant economic terms clearly defined.
No major errors.
Where appropriate, diagrams included and explained.
Where appropriate, examples used.
Evidence of appropriate evaluation. 1315
14 M12/3/ECONO/SP1/ENG/TZ1/XX/M
4. (a) Explain how three of the following factors may act as barriers to
development in a less developed country:
capital flight
income inequality
ineffective taxation structure
lack of infrastructure. [10 marks]
Answers should include:
a definition of development
a definition of a less developed country
a definition of each of the three economic factors selected
an explanation of how the three chosen economic factors act as barriers:
capital flight: reduces the amount of aid/FDI that remains in the less
developed country, reducing investment
income inequality: adversely affects the purchasing power and prevents
the less affluent from saving and realising their economic potential
ineffective taxation structure: prevents the government from maximising
its potential tax revenue thus limiting the funds available for public
spending
lack of infrastructure raises the costs, and limits the extent of, all forms
of economic activity.
Answers may include:
interrelationships between the barriers may reinforce them
diagrams such as the Lorenz curve to illustrate income inequality
mention of human as well as physical capital under infrastructure.
Examiners should be aware that candidates may take a different approach
which if appropriate, should be rewarded.
15 M12/3/ECONO/SP1/ENG/TZ1/XX/M
Assessment Criteria
Part (a) 10 marks
Level Marks
0 Completely inappropriate answer. 0
1 Little understanding of the specific demands of the question.
Very little recognition of relevant economic theory.
Relevant terms not defined.
Significant errors. 13
2 Some understanding of the specific demands of the question.
Some recognition of relevant economic theory.
Some relevant terms defined.
Some errors. 46
3 Understanding of the specific demands of the question.
Relevant economic theory explained and developed.
Relevant economic terms defined.
Few errors.
Where appropriate, diagrams included. 78
4 Clear understanding of the specific demands of the question.
Relevant economic theory clearly explained and developed.
Relevant economic terms clearly defined.
No major errors.
Where appropriate, diagrams included and explained.
Where appropriate, examples used. 910
16 M12/3/ECONO/SP1/ENG/TZ1/XX/M
(b) Evaluate the view that foreign direct investment (FDI) is the key factor in
determining whether a developing country will be able to achieve
economic growth and development. [15 marks]
Answers may include:
a definition of foreign direct investment (FDI)
a definition of economic growth
a definition of economic development
arguments for FDI: MNCs can fill the savings gap through local investment,
can generate export revenues, can generate tax revenues, can boost
employment, can improve education and training, but all to a variable extent
arguments against FDI: MNC profits may be repatriated elsewhere, tax
concessions may have to be made (reducing revenues), inappropriate
technology may generate little local employment, employment may be for
the unskilled only, pressure may be put on government to allow policies
favourable to development such as environmental shortcuts
alternative paths to development, e.g. inward-oriented growth,
micro-finance
case studies of particular FDI show it is not always successful in promoting
economic growth and development
evaluation of above arguments.
Effective evaluation may be to:
consider short-term versus long-term consequences
examine the impact on different stakeholders
discuss advantages and disadvantages
prioritize the arguments.
Examiners should be aware that candidates may take a different approach
which if appropriate, should be rewarded.
17 M12/3/ECONO/SP1/ENG/TZ1/XX/M
Assessment Criteria
Part (b) 15 marks
Level Marks
0 Completely inappropriate answer. 0
1 Little understanding of the specific demands of the question.
Very little recognition of relevant economic theory.
Relevant terms not defined.
Significant errors. 15
2 Some understanding of the specific demands of the question.
Some recognition of relevant economic theory.
Some relevant terms defined.
Some errors. 69
3 Understanding of the specific demands of the question.
Relevant economic theory explained and developed.
Relevant economic terms defined.
Few errors.
Where appropriate, diagrams included.
An attempt at evaluation. 1012
4 Clear understanding of the specific demands of the question.
Relevant economic theory clearly explained and developed.
Relevant economic terms clearly defined.
No major errors.
Where appropriate, diagrams included and explained.
Where appropriate, examples used.
Evidence of appropriate evaluation. 1315
M12/3/ECONO/SP2/ENG/TZ0/XX
ECONOMICS
STANDARD lEvEl
PAPER 2
Wednesday 16 May 2012 (morning)
INSTRUCTIONS TO CANDIDATES
Do not open this examination paper until instructed to do so.
Answer three questions. Each question is worth [20 marks].
Use fully labelled diagrams and references to the text / data where appropriate.
The maximum mark for this examination paper is [60 marks].
2 hours
2212-5113 11 pages
© International Baccalaureate Organization 2012
22125113
M12/3/ECONO/SP2/ENG/TZ0/XX
2212-5113
– 2 –
1. Study the extract below and answer the questions that follow.
EU court rules minimum price for cigarettes illegal
The European Court of Justice has ruled that Ireland cannot impose a minimum price
on cigarettes. It said that member countries would have to nd other ways to combat smoking.
This could be achieved by increasing indirect tax on tobacco, but imposing a minimum price
would distort fair competition in the market. The ruling is designed to maintain the freedom of
manufacturers and importers to benet from lower costs and greater efciency.
The judgment said the aim of ensuring that tobacco prices are high can be “adequately” achieved
by increasing tax, since any indirect tax rises are, sooner or later, reected in an increased
retail price, without removing the freedom of manufacturers to set prices.
The Irish government had claimed that it needed to x a high minimum price to discourage
smoking. This followed government legislation to ban tobacco advertising and promotion
in July 2009. According to a spokesperson from the anti-smoking group ASH (Action on
Smoking and Health), this measure helped to prevent retail outlets from making young people
feel attracted to buying cigarettes. “Close to 30 % of our population still smoke and 7000 die
from tobacco-related disease each year,” he said.
It has been argued that increasing the price of cigarettes is one of the most effective ways of
curbing harmful smoking and there is a need to make cigarettes less appealing, particularly to
young people. The evidence is that banning advertising, introducing minimum pricing and
increasing health warnings can all work.
The head of a major retail organization has attacked the idea of minimum pricing
for cigarettes. He argued that articially xing a minimum price would not be effective.
Also, since the demand for tobacco is inelastic, raising the price would not work.
Moreover, it was against the free market for a government to set prices for any product available
to consumers, limiting their freedom to choose.
(This question continues on the following page)
M12/3/ECONO/SP2/ENG/TZ0/XX
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– 3 –
Turn over
(Question 1 continued)
(a) Dene the following terms indicated in bold in the text:
(i) minimum price (paragraph )
(ii) free market (paragraph ).
[2 marks]
[2 marks]
(b) Using an appropriate diagram, explain the possible effect on the market for
cigarettes of the ban on tobacco advertising in Ireland.
[4 marks]
(c) Using an appropriate diagram, explain why, if the demand for cigarettes is
inelastic, raising the price may not be effective.
[4 marks]
(d) Using information from the text/data and your knowledge of economics,
evaluate the economic effects of the imposition of a minimum price
for cigarettes.
[8 marks]
M12/3/ECONO/SP2/ENG/TZ0/XX
2212-5113
– 4 –
2. Study the extract and data below and answer the questions that follow.
Content removed for copyright reasons.
(This question continues on the following page)
M12/3/ECONO/SP2/ENG/TZ0/XX
2212-5113
– 5 –
Turn over
(Question 2 continued)
Content removed for copyright reasons.
M12/3/ECONO/SP2/ENG/TZ0/XX
2212-5113
– 6 –
3. Study the extract below and answer the questions that follow.
Eurozone debt crisis
A debt crisis in Europe has caused nancial markets to watch government plans to deal with
the issue of rising government debt.
Governments have borrowed heavily to bring the 16 nation eurozone* out of its rst recession
and debt levels are expected to be well above the European Union (EU) limit of 60 % of
gross domestic product (GDP). Average eurozone government debt could reach 84 % of GDP
in 2010. Germany, long considered a model of scal discipline, forecasts government debt at
around 78 % of GDP in 2010 while, in Greece, government debt of 120 % of GDP is expected.
The combination of larger budget decits, low economic growth and support for the banking
sector has caused higher public debt levels. Eurozone governments have been urged to
reduce debt. The increase in debt is raising the cost of borrowing for many countries and adding
to the cost of repayments in future budgets.
With unemployment rising and weak growth expected in 2010, ofcials cannot count
on increased tax revenues for much help in paying off debt, much of which is owed to
other countries. Possible policy solutions include cutting welfare spending or raising the
retirement age to reduce future government costs. Alternatively, the member countries
of the EU and the International Monetary Fund (IMF) may need to give money to the countries
in danger of default.
The debt crisis is limiting government nances and potential growth. Government revenue
will be further limited by an aging population that will need expensive health care in the
years to come. Many countries have pledged to tighten scal and monetary policies.
However, this may damage an economic recovery.
Failing to act on the decits and debt may, however, spark a negative reaction from nancial
markets that will demand higher interest payments on loans. The Prime Minister of Greece
has warned: “Either we eradicate the debt, or the debt will eliminate the country”.
*
eurozone: the group of countries which use the euro as their common currency
[Source: adapted from: ‘Eurozone debt crisis looms’, by William Ickes, 4th January 2010, http://www.businessday.com.au/business/
eurozone-debt-crisis-looms-20100103-lnap.html]
(This question continues on the following page)
M12/3/ECONO/SP2/ENG/TZ0/XX
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– 7 –
Turn over
(Question 3 continued)
(a) Dene the following terms indicated in bold in the text:
(i) recession (paragraph )
(ii) budget decits (paragraph ).
[2 marks]
[2 marks]
(b) Using an appropriate diagram, explain the likely effect on potential output of an
aging population.
[4 marks]
(c) Using an AD/AS diagram, explain how tightening scal policies could damage
an economic recovery.
[4 marks]
(d) Using information from the text/data and your knowledge of economics,
evaluate possible policy options for addressing the debt crisis facing many
economies in Europe.
[8 marks]
M12/3/ECONO/SP2/ENG/TZ0/XX
2212-5113
– 8 –
4. Study the extract below and answer the questions that follow.
Content removed for copyright reasons.
[Please refer to www.bbc.co.uk/news/10358146]
(This question continues on the following page)
M12/3/ECONO/SP2/ENG/TZ0/XX
2212-5113
– 9 –
Turn over
(Question 4 continued)
(a) Dene the following terms indicated in bold in the text:
(i) protectionism (paragraph )
(ii) exchange rate (paragraph ).
[2 marks]
[2 marks]
(b) Explain how the xed value of the yuan may have adversely affected
US producers.
[4 marks]
(c) Using an appropriate diagram, explain how China has prevented its currency
from rising in value.
[4 marks]
(d) Using information from the text/data and your knowledge of economics,
evaluate the possible effects of a currency appreciation on the Chinese economy.
[8 marks]
M12/3/ECONO/SP2/ENG/TZ0/XX
2212-5113
– 10 –
5. Study the extract below and answer the questions that follow.
Micro-credit conict of interest
The idea of giving small loans to poor people, especially women, was hailed as the key to
achieving economic development for even the poorest citizens. Muhammad Yunus,
the economist who pioneered the practice by lending small amounts to basket weavers
in Bangladesh, won a Nobel Peace Prize in 2006.
The practice has grown so popular, helping establish small businesses such as tailors and
hairdressers, that some are now concerned over the direction it has taken. Attracted by the
prospect of prots from even the smallest of loans, some banks now dominate micro-credit,
with some charging interest rates of over 100 %.
The key question facing the industry remains how much money investors should make from
lending to poor people, mostly women, often at hidden interest rates. “Micro-credit should
be seen as an opportunity to help people out of poverty, not as an opportunity to make money
out of poor people,” Yunus said. “Interest rates should be 10 to 15 % above the cost of raising
the money and anything beyond that is exploitation. Most micro-credit lenders would fail
this test.”
How much interest and prot are acceptable and what constitutes exploitation? The interest
rates that draw the most concern include those in Nigeria and Mexico, where the demand for
small loans from a large population cannot be met by existing lenders. One Mexican lender
charges an annual rate of 125 %. The average in Mexico is about 70 %, compared with a global
average of about 37 % in interest and fees.
There is debate over whether micro-credit loans actually lift people out of poverty.
Some researchers conclude that not every poor person is an entrepreneur in waiting but the
loans do help relieve some of the worst aspects of poverty.
The micro-credit industry has outgrown its charitable beginning. Despite a promise to put the
money back into development, analysts say the high interest rates and healthy prots of the
largest micro-credit institutions pushed up interest rates across Mexico.
[Source: ‘Micro-credit conict of interest’
Adapted from http://www.theage.com.au/world/conict-of-interest-20100415-shjj.html, 16 April 2010]
(This question continues on the following page)
M12/3/ECONO/SP2/ENG/TZ0/XX
2212-5113
– 11 –
(Question 5 continued)
(a) Dene the following terms indicated in bold in the text:
(i) economic development (paragraph )
(ii) interest rates (paragraph ).
[2 marks]
[2 marks]
(b) Using a circular ow diagram, explain how micro-credit increases economic
activity in a developing economy.
[4 marks]
(c) Using a poverty cycle diagram, explain how micro-credit can “help relieve some
of the worst aspects of poverty” (paragraph ).
[4 marks]
(d) Using information from the text/data and your knowledge of economics,
evaluate micro-nance as a means of promoting economic development.
[8 marks]
M12/3/ECONO/SP2/ENG/TZ0/XX/M
24 pages
MARKSCHEME
May 2012
ECONOMICS
Standard Level
Paper 2
2 M12/3/ECONO/SP2/ENG/TZ0/XX/M
This markscheme is confidential and for the exclusive use of
examiners in this examination session.
It is the property of the International Baccalaureate and must
not be reproduced or distributed to any other person without
the authorization of IB Cardiff.
3 M12/3/ECONO/SP2/ENG/TZ0/XX/M
In addition to the assessment criteria use the paper-specific markscheme below. Award up to the
maximum marks as indicated.
1. (a) Define the following terms indicated in bold in the text:
(i) minimum price (paragraph ) [2 marks]
level
0 Wrong definition 0
1 Vague definition 1
The idea that it is a price set by the government (or an authority).
2 Precise definition 2
An explanation that it is any two of the following:
imposed by the government ( or an authority)
set above the equilibrium (market) price
price cannot fall below this price.
(ii) free market (paragraph ). [2 marks]
level
0 Wrong definition 0
1 Vague definition 1
The idea that it is a market without government intervention.
2 Precise definition 2
An explanation that it is a market in which resource allocation
(or price and/or output) is determined by one of the following:
demand and supply
price mechanism
producers and consumers.
4 M12/3/ECONO/SP2/ENG/TZ0/XX/M
(b) Using an appropriate diagram, explain the possible effect on the market for
cigarettes of the ban on tobacco advertising in Ireland. [4 marks]
level
0 Inappropriate answer 0
1 Identification of appropriate theory 12
For drawing a demand/supply diagram of the cigarette market showing a
decrease in demand and a resulting decrease in price and fall in the
equilibrium quantity or for providing an explanation that a ban on
advertising would lead to a decrease in demand, leading to a decrease in
price and fall in the equilibrium quantity.
2 Correct application of appropriate theory 34
For drawing a demand/supply diagram of the cigarette market showing a
decrease in demand and a resulting decrease in price and fall in the
equilibrium quantity and for providing an explanation that a ban on
advertising would lead to a decrease in demand, leading to a decrease in
price and fall in the equilibrium quantity.
Candidates who incorrectly label diagrams can be rewarded with a maximum of
[3 marks].
Candidates who interpret this as a market failure question may use MSB/MSC
analysis. MPB shifts left towards MSB as a result of the ban on advertising.
The effect on the market could be a reduction in the welfare loss. A candidate
who selects this approach and does not refer to the change in price may
nevertheless be fully rewarded.
The use of P and Q on the axes is sufficient for a demand and supply diagram.
A title is not necessary.
For a market failure diagram, the vertical axis may be price, but could be costs or
benefits. The horizontal axis is quantity. A title is not necessary.
5 M12/3/ECONO/SP2/ENG/TZ0/XX/M
(c) Using an appropriate diagram, explain why, if the demand for cigarettes is
inelastic, raising the price may not be effective. [4 marks] [4 marks]
level
0 Inappropriate answer 0
1 Identification of appropriate theory 12
For drawing a demand diagram of the cigarette market showing an inelastic
demand curve so that an increase in price has a proportionately small effect
on the quantity demanded or for an explanation that with inelastic demand
an increase in price will cause a proportionately lower change in quantity
demanded, thus not working to effectively discourage smoking.
2 Correct application of appropriate theory 34
For drawing a demand diagram of the cigarette market showing an inelastic
demand curve so that an increase in price has a proportionately small effect
on the quantity demanded and for an explanation that with inelastic demand
an increase in price will cause a proportionately lower change in quantity
demanded, thus not working to effectively discourage smoking.
Candidates who incorrectly label diagrams can be rewarded with a maximum of
[3 marks].
The use of P and Q on the axes is sufficient for a demand and supply diagram.
A title is not necessary.
For full marks, candidates must make it clear that the change in quantity
demanded is relatively (proportionately) smaller than the change in price. It is not
enough to explain in terms of small changes in quantity demanded with no
comparison to the change in price.
A maximum of [2 marks] may be awarded for an answer which rests on the
assumption that the demand for cigarettes is perfectly inelastic.
If a candidate has incorrectly labelled the diagram in part (b) and been awarded a
maximum of [3 marks], then they may achieve full marks in this part of the
question, if the labelling mistake has been repeated.
6 M12/3/ECONO/SP2/ENG/TZ0/XX/M
(d) Using information from the text/data and your knowledge of economics,
evaluate the economic effects of the imposition of a minimum price for
cigarettes. [8 marks]
Responses may include:
an explanation and/or a diagram of minimum prices
an observation that minimum prices are usually set to protect producers, but in
this case it is being used to solve a market failure.
Arguments for:
cigarettes are a demerit good and so their consumption should be reduced
a higher price could discourage people from smoking (paragraph )
the imposition of a minimum price could save lives (paragraph )
the costs of health care could be reduced
negative externalities such as passive smoking will be reduced
a higher price will particularly discourage young people (paragraph ), whose
demand is likely to be more elastic because they earn lower incomes.
Arguments against:
informal (parallel/underground/black) markets may appear, reducing the
effectiveness of the minimum price
demand for cigarettes is inelastic, so relatively few consumers will be
discouraged from smoking (paragraph )
retailers may suffer through fewer sales
a minimum price may be difficult to enforce
the option of increasing indirect tax on tobacco may be more effective and adds
to state resources for implementing alternative policies (paragraph )
state financing of education campaigns, persuasion through further advertising,
provision of medical advice and counselling support may be better than
minimum price
price controls reduce freedom of choice for consumers and producers
the cost of living will increase for consumers who buy cigarettes
distributional effects because lower income households’ real incomes will fall
more.
Effective evaluation may be to:
consider short-term versus long-term consequences
examine the impact on different stakeholders
discuss advantages and disadvantages
prioritize the arguments.
Examiners should be aware that candidates may take a different approach which if
appropriate, should be rewarded.
If there is no direct reference to the text/data, then candidates may not be
rewarded beyond level 2.
7 M12/3/ECONO/SP2/ENG/TZ0/XX/M
Level
0 No valid discussion. 0
1 Few relevant concepts recognized.
Little discussion or only basic understanding. 12
2 Relevant concepts recognized and developed in reasonable depth.
Some attempt at application and analysis. 35
3 Relevant concepts developed in reasonable depth, demonstrating effective
evaluation, supported by appropriate evidence or theory. 68
2. (a) Define the following terms indicated in bold in the text:
(i) appreciation (paragraph ) [2 marks]
level
0 Wrong definition 0
1 Vague definition 1
The idea that it is an increase in the value (or price) of a currency.
2 Precise definition 2
An explanation that it is an increase in the value (or price) of one
currency in terms of another in a floating exchange rate system (due to
the forces of supply and demand).
(ii) unemployment (Table 2). [2 marks]
level
0 Wrong definition 0
1 Vague definition 1
The idea that it is the number of people out of work.
2 Precise definition 2
An explanation that it is any two of the following:
the number of people without a job
who are actively seeking work
who are able and willing to work.
8 M12/3/ECONO/SP2/ENG/TZ0/XX/M
(b) Using an appropriate diagram, explain how a decrease in exports may have
affected the level of employment in Mexico. [4 marks]
level
0 Inappropriate answer 0
1 Identification of appropriate theory 12
For drawing a correctly labelled AD/AS diagram showing a shift in AD to
the left/decrease or for an explanation that a decrease in exports will reduce
AD, output and consequently the numbers employed.
2 Correct application of appropriate theory 34
For drawing a correctly labelled AD/AS diagram showing a shift in AD to
the left/decrease and for an explanation that a decrease in exports will
reduce AD, output and consequently the numbers employed.
Candidates who incorrectly label diagrams can receive a maximum of
[3 marks].
For AD/AS, the vertical axis may be price level or average price level. The
horizontal axis may be output, real output, national output, real national output,
national income, or GDP. A title is not necessary.
Candidates may show a labour market diagram, with demand deficient
unemployment, caused by the fall in exports and, if properly drawn and explained,
full marks should be awarded.
For a labour market diagram, the vertical axis may be wages, wage rate, or the
price of labour. The horizontal axis should be quantity of labour, employment,
number of workers, or simply labour or workers.
9 M12/3/ECONO/SP2/ENG/TZ0/XX/M
(c) Using an appropriate diagram, explain the possible effect on Mexico’s
inflation of an appreciation of the peso. [4 marks]
level
0 Inappropriate answer 0
1 Identification of appropriate theory 12
For drawing a correctly labelled AD/AS diagram showing a shift in AD to
the left inducing a lower price level or for explaining that a higher currency
value will make imports cheaper/exports more expensive and consequently
reduce AD and so inflation.
2 Correct application of appropriate theory 34
For drawing a correctly labelled AD/AS diagram showing a shift in AD to
the left inducing a lower price level and for explaining that a higher
currency value will make imports cheaper/exports more expensive and
consequently reduce AD and so inflation.
Candidates who incorrectly label diagrams can receive a maximum of
[3 marks].
For AD/AS, the vertical axis may be price level or average price level. The
horizontal axis may be output, real output, national output, real national output,
national income, or GDP. A title is not necessary.
Candidates may draw a diagram showing a shift of AS to the right, explaining this
by a fall in the price of imported raw materials and finished goods. This response
should be fully rewarded.
If a candidate has incorrectly labelled the diagram in part (b) and been awarded a
maximum of [3 marks], then they may achieve full marks in this part of the
question, if the labelling mistake has been repeated.
10 M12/3/ECONO/SP2/ENG/TZ0/XX/M
(d) Using information from the text/data and your knowledge of economics,
evaluate the possible effects on the Mexican economy of a continuing current
account deficit. [8 marks]
Responses may include:
a definition of current account deficit
a need to attract sufficient surplus in capital/financial account to balance the
CAD
the impact a surplus on the financial/capital account will have on the net
foreign debt
a need to pay interest on the net foreign debt
the impact this interest payment will have on the incomes section of the current
account
the consequent impact of this for future current account balances
a continued CAD is likely to deplete a country’s currency reserves
negative net exports may reduce aggregate demand and therefore hinder
growth and increase unemployment
the CAD as a percentage of GDP is low and hence it may be argued that the
continuing CAD is not a problem (Table 1 and 2)
it may be argued that many imports are needed for later stages of production
and not current consumption (Table 1)
it may be argued that the CAD represents a failure to export enough to cover
the cost of imports
it may be argued that the continuing CAD may weaken the currency thus
offsetting the effects of the appreciation of the peso (Para 5)
it may be argued that the continuing CAD may require the government to
impose a contractionary fiscal or monetary policy therefore lowering GDP
further (fallen by 6.6 % in 2009 Table 1)
Effective evaluation may be to:
consider short-term versus long-term consequences
examine the impact on different stakeholders
discuss advantages and disadvantages
prioritize the arguments.
Examiners should be aware that candidates may take a different approach which if
appropriate, should be rewarded.
If there is no direct reference to the text/data, then candidates may not be
rewarded beyond level 2.
11 M12/3/ECONO/SP2/ENG/TZ0/XX/M
Level
0 No valid discussion. 0
1 Few relevant concepts recognized.
Little discussion or only basic understanding. 12
2 Relevant concepts recognized and developed in reasonable depth.
Some attempt at application and analysis. 35
3 Relevant concepts developed in reasonable depth, demonstrating effective
evaluation, supported by appropriate evidence or theory. 68
3. (a) Define the following terms indicated in bold in the text:
(i) recession (paragraph ) [2 marks]
level
0 Wrong definition 0
1 Vague definition 1
The idea that it is when an economy experiences negative economic
growth.
2 Precise definition 2
An explanation that it is when an economy experiences negative
economic growth (a fall in GDP) for at least two quarters
consecutively.
(ii) budget deficits (paragraph ). [2 marks]
level
0 Wrong definition 0
1 Vague definition 1
The idea that they are related to government spending and revenue.
2 Precise definition 2
An explanation that they are when government expenditure exceeds
government revenue (taxation).
12 M12/3/ECONO/SP2/ENG/TZ0/XX/M
(b) Using an appropriate diagram, explain the likely effect on potential output of
an aging population. [4 marks]
level
0 Inappropriate answer 0
1 Identification of appropriate theory 12
For drawing a correctly labelled LRAS or PPC diagram showing a shift to
the left/decrease in potential output of an economy or for explaining that as
the average age of the population increases the proportion of the population
participating in the labour force will decline hence reducing the potential
output of an economy.
2 Correct application of appropriate theory 34
For drawing a correctly labelled LRAS or PPC diagram showing a shift to
the left/decrease in potential output of an economy and for explaining that
as the average age of the population increases the proportion of the
population participating in the labour force will decline hence reducing the
potential output of an economy.
Candidates who incorrectly label diagrams can receive a maximum of
[3 marks].
For AD/AS, the vertical axis may be price level or average price level.
The horizontal axis may be output, real output, national output, real national
output, national income, or GDP. A title is not necessary.
For a PPC, the axes could be two alternative products, one on each axis,
e.g. Good A and Good B or Schools and Motor Cars; or two groups of products,
e.g. Consumer Goods and Producer Goods. A title is not necessary.
13 M12/3/ECONO/SP2/ENG/TZ0/XX/M
(c) Using an AD/AS diagram, explain how tightening fiscal policies could
damage an economic recovery. [4 marks]
level
0 Inappropriate answer 0
1 Identification of appropriate theory 12
For drawing a correctly labelled AD/AS diagram showing a shift to the
left/decrease in AD or for explaining that tighter fiscal policy will involve
increased taxation and/or decreased government spending leading to
reduced aggregate demand and thus slowing a recovery.
2 Correct application of appropriate theory 34
For drawing a correctly labelled AD/AS diagram showing a shift to the
left/decrease in AD and for explaining that tighter fiscal policy will involve
increased taxation and/or decreased government spending leading to
reduced aggregate demand and thus slowing a recovery.
Candidates who incorrectly label diagrams can receive a maximum of
[3 marks].
For AD/AS, the vertical axis may be price level or average price level.
The horizontal axis may be output, real output, national output, real national
output, national income, or GDP. A title is not necessary.
If a candidate has incorrectly labelled the diagram in part (b) and been awarded a
maximum of [3 marks], then they may achieve full marks in this part of the
question, if the labelling mistake has been repeated.
14 M12/3/ECONO/SP2/ENG/TZ0/XX/M
(d) Using information from the text/data and your knowledge of economics,
evaluate possible policy options for addressing the debt crisis facing many
economies in Europe. [8 marks]
Responses may include:
a definition of debt crisis
Possible policies:
tighter fiscal discipline which may include cuts to welfare spending
(paragraph ):
will reduce the budget deficit
may reduce the need to borrow funds
may increase the incentive to work to maintain the same standard of living
will reduce aggregate demand and further increase unemployment
is likely to worsen the distribution of income and wealth
may bring debt level closer to EU limit of 60 % (paragraph
)
increased taxation (paragraph ):
will reduce the budget deficit
may reduce incentives to work
may reduce the need to borrow funds
may reduce disposable incomes of consumers
may reduce consumer spending, business investment and hence aggregate
demand
may reduce economic growth
raising the retirement age (paragraph ):
will reduce government spending on the old age pension
may reduce the budget deficit
may reduce the need for government to borrow
is likely to increase the number in the labour force
may impact on wage rates and the numbers unemployed
may increase government revenue from taxation as workers working longer
financial assistance from other European countries or the EU or IMF
(paragraph ):
may provide a short term solution to the debt crisis
may allow the countries in crisis some time in which to readjust their fiscal
and monetary policies
may lead to higher taxation in the donor countries
may discourage fiscal discipline as other countries or the EU are taking
responsibility for solving the crisis
may lead to strict conditions being imposed with regard to budget deficits
and liberalization of markets etc. (similar to Structural Adjustment
Programs)
tighten monetary policies (paragraph ):
likely to involve higher interest rates
likely to discourage borrowing with consequent negative effects on
consumption spending and investment spending
may reduce economic growth.
15 M12/3/ECONO/SP2/ENG/TZ0/XX/M
Effective evaluation may be to:
consider short-term versus long-term consequences
examine the impact on different stakeholders
discuss advantages and disadvantages
prioritize the arguments.
Examiners should be aware that candidates may take a different approach which if
appropriate, should be rewarded.
If there is no direct reference to the text/data, then candidates may not be
rewarded beyond level 2.
Level
0 No valid discussion. 0
1 Few relevant concepts recognized.
Little discussion or only basic understanding. 12
2 Relevant concepts recognized and developed in reasonable depth.
Some attempt at application and analysis. 35
3 Relevant concepts developed in reasonable depth, demonstrating effective
evaluation, supported by appropriate evidence or theory. 68
16 M12/3/ECONO/SP2/ENG/TZ0/XX/M
4. (a) Define the following terms indicated in bold in the text:
(i) protectionism (paragraph ) [2 marks]
level
0 Wrong definition 0
1 Vague definition 1
The idea that it is to do with restricting trade.
2 Precise definition 2
An explanation that it involves government intervention in order to
restrict trade between countries.
(ii) exchange rate (paragraph ). [2 marks]
level
0 Wrong definition 0
1 Vague definition 1
The idea that it is to do with the value (price) of a currency.
2 Precise definition 2
An explanation that it is the value (price) of one currency expressed in
terms of another (e.g. US$1 = 6.83¥).
17 M12/3/ECONO/SP2/ENG/TZ0/XX/M
(b) Explain how the fixed value of the yuan may have adversely affected US
producers. [4 marks]
level
0 Inappropriate answer 0
1 Identification of appropriate theory 12
For explaining that the value of the Chinese currency has been kept
artificially low or for explaining that this has depressed the price of Chinese
exports to the USA and made US domestic products less competitive in
the USA.
2 Correct application of appropriate theory 34
For explaining that the value of the Chinese currency has been kept
artificially low and for explaining that this has depressed the price of
Chinese exports to the USA and made US domestic products less
competitive in the USA.
18 M12/3/ECONO/SP2/ENG/TZ0/XX/M
(c) Using an appropriate diagram, explain how China has prevented its currency
from rising in value. [4 marks]
level
0 Inappropriate answer 0
1 Identification of appropriate theory 12
For drawing a correctly labelled exchange rate diagram showing a shift to
the right/increase in supply of the Chinese currency maintaining downward
pressure on the yuan or for explaining that sales of the yuan will lead to a
rightward shift of the supply curve causing downward pressure on the value
of the yuan.
2 Correct application of appropriate theory 34
For drawing a correctly labelled exchange rate diagram showing a shift to
the right/increase in supply of the Chinese currency maintaining downward
pressure on the yuan and for explaining that sales of the yuan will lead to a
rightward shift of the supply curve causing downward pressure on the value
of the yuan.
Candidates may take an alternative approach by indicating the fixed exchange
rate below the free market equilibrium and for explaining that the Chinese
government will sell yuan at that fixed exchange rate. Examiners should be aware
that if candidates take this approach it should be rewarded.
Candidates who incorrectly label diagrams can receive a maximum of
[3 marks].
For an exchange rate diagram, the vertical axis may be exchange rate, price of
yuan in $US, price of yuan, $/yuan or $US. The horizontal axis should be
quantity, or quantity of yuan. A title is not necessary.
19 M12/3/ECONO/SP2/ENG/TZ0/XX/M
(d) Using information from the text/data and your knowledge of economics,
evaluate the possible effects of a currency appreciation on the Chinese
economy. [8 marks]
Responses may include:
reduced prices for imports to China
increased demand for imports to China (goods and services) (paragraph )
improved standard of living as a result of increased purchasing power
domestically produced goods become less price competitive in China
higher prices for exports from China
reduced demand for Chinese exports (goods and services)
reduced employment/increased unemployment in China as a consequence of
increased imports/reduced exports
reduced current account surplus in the balance of payments (paragraph )
reduced inflationary pressures, which may offset the effects of a loss in
competitiveness for Chinese exports
improved economic relations with the USA.
Effective evaluation may be to:
consider short-term versus long-term consequences
examine the impact on different stakeholders
discuss advantages and disadvantages
prioritize the arguments.
Examiners should be aware that candidates may take a different approach which if
appropriate, should be rewarded.
If there is no direct reference to the text/data, then candidates may not be
rewarded beyond level 2.
Level
0 No valid discussion. 0
1 Few relevant concepts recognized.
Little discussion or only basic understanding. 12
2 Relevant concepts recognized and developed in reasonable depth.
Some attempt at application and analysis. 35
3 Relevant concepts developed in reasonable depth, demonstrating effective
evaluation, supported by appropriate evidence or theory. 68
20 M12/3/ECONO/SP2/ENG/TZ0/XX/M
5. (a) Define the following terms indicated in bold in the text:
(i) economic development (paragraph ) [2 marks]
level
0 Wrong definition 0
1 Vague definition 1
The idea that it involves better living standards.
2 Precise definition 2
An explanation that it is an improvement in welfare measured from a
number of viewpoints, such as an increase in GDP per capita,
improvements in health, improvements in education, or any other
appropriate indicators.
(ii) interest rates (paragraph ). [2 marks]
level
0 Wrong definition 0
1 Vague definition 1
The idea that they are the costs of a loan.
2 Precise definition 2
An explanation that they are the cost of borrowing and/or the reward
for lending (saving) money.
21 M12/3/ECONO/SP2/ENG/TZ0/XX/M
(b) Using a circular flow diagram, explain how micro-credit increases economic
activity in a developing economy. [4 marks]
level
0 Inappropriate answer 0
1 Identification of appropriate theory 12
For drawing a correctly labelled circular flow diagram showing that the
investment due to the borrowed micro-credit funds is an injection into the
circular flow of income or for explaining that micro-credit schemes will
increase investment, which is an injection into the circular flow. This will
increase AD and so there will be increased economic activity.
2 Correct application of appropriate theory 34
For drawing a correctly labelled circular flow diagram showing that the
investment due to the borrowed micro-credit funds is an injection into the
circular flow of income and for explaining that micro-credit schemes will
increase investment, which is an injection into the circular flow. This will
increase AD and so there will be increased economic activity.
Candidates who incorrectly label diagrams can receive a maximum of
[3 marks].
22 M12/3/ECONO/SP2/ENG/TZ0/XX/M
(c) Using a poverty cycle diagram, explain how micro-credit can “help relieve
some of the worst aspects of poverty” (paragraph ). [4 marks]
level
0 Inappropriate answer 0
1 Identification of appropriate theory 12
For drawing a correctly labelled poverty cycle diagram including investment
or for explaining that micro-credit loans fill the savings/investment gap and
allow the poverty cycle to be broken, increasing incomes and therefore
reducing the worst aspects of poverty.
2 Correct application of appropriate theory 34
For drawing a correctly labelled poverty cycle diagram including investment
and for explaining that micro-credit loans fill the savings/investment gap
and allow the poverty cycle to be broken, increasing incomes and therefore
reducing the worst aspects of poverty.
There may be different poverty cycle diagrams used to show the above, and any
appropriate diagram, which must include investment, may be fully rewarded,
if explained correctly.
Candidates who incorrectly label diagrams can receive a maximum of
[3 marks].
23 M12/3/ECONO/SP2/ENG/TZ0/XX/M
(d) Using information from the text/data and your knowledge of economics,
evaluate micro-finance as a means of promoting economic development. [8 marks]
Responses may include:
Possible advantages:
allows even those in poverty to borrow funds (paragraph )
has allowed many women to borrow funds (paragraph and )
allows individuals to establish businesses such as tailors and hairdressers
(paragraph )
allows more people to be employed
allows higher incomes
allows more savings to occur fills the savings gap and breaks the cycle
increased incomes allow the purchase of more goods and services and hence
improved standards of living
releases potential entrepreneurship.
Possible disadvantages:
some lenders are very focused on making profits for themselves
(paragraph )
some large firms have moved into the business of micro-finance
small loans may not assist some to escape poverty as some do not have the
necessary entrepreneurial skills (paragraph )
in some cases high rates of interest of up to 125 % (paragraph ) are charged
some loans involve exploitation of borrowers (paragraph )
some of the loan costs are hidden from borrowers
increasing micro-finance rates has pushed up interest rates across Mexico
(paragraph )
micro-finance banks are not putting their profits into development, which is
restricting the process of economic development (paragraph )
micro-finance on its own may not be sufficient as a means to promote
economic development other policies will also be needed.
Effective evaluation may be to:
consider short-term versus long-term consequences
examine the impact on different stakeholders
discuss advantages and disadvantages
prioritize the arguments.
Examiners should be aware that candidates may take a different approach which if
appropriate, should be rewarded.
If there is no direct reference to the text/data, then candidates may not be
rewarded beyond level 2.
24 M12/3/ECONO/SP2/ENG/TZ0/XX/M
Level
0 No valid discussion. 0
1 Few relevant concepts recognized.
Little discussion or only basic understanding. 12
2 Relevant concepts recognized and developed in reasonable depth.
Some attempt at application and analysis. 35
3 Relevant concepts developed in reasonable depth, demonstrating effective
evaluation, supported by appropriate evidence or theory. 68
M12/3/ECONO/HP3/ENG/TZ0/XX
ECONOMICS
HIgHEr lEvEl
PAPEr 3
Wednesday 16 May 2012 (morning)
INSTRUCTIONS TO CANDIDATES
Do not open this examination paper until instructed to do so.
Answer three questions. Each question is worth [20 marks].
Use fully labelled diagrams and references to the text / data where appropriate.
The maximum mark for this examination paper is [60 marks].
2 hours
2212-5107 11 pages
© International Baccalaureate Organization 2012
22125107
M12/3/ECONO/HP3/ENG/TZ0/XX
2212-5107
– 2 –
1. Study the extract below and answer the questions that follow.
EU court rules minimum price for cigarettes illegal
The European Court of Justice has ruled that Ireland cannot impose a minimum price
on cigarettes. It said that member countries would have to nd other ways to combat smoking.
This could be achieved by increasing indirect tax on tobacco, but imposing a minimum price
would distort fair competition in the market. The ruling is designed to maintain the freedom of
manufacturers and importers to benet from lower costs and greater efciency.
The judgment said the aim of ensuring that tobacco prices are high can be “adequately” achieved
by increasing tax, since any indirect tax rises are, sooner or later, reected in an increased
retail price, without removing the freedom of manufacturers to set prices.
The Irish government had claimed that it needed to x a high minimum price to discourage
smoking. This followed government legislation to ban tobacco advertising and promotion
in July 2009. According to a spokesperson from the anti-smoking group ASH (Action on
Smoking and Health), this measure helped to prevent retail outlets from making young people
feel attracted to buying cigarettes. “Close to 30 % of our population still smoke and 7000 die
from tobacco-related disease each year,” he said.
It has been argued that increasing the price of cigarettes is one of the most effective ways of
curbing harmful smoking and there is a need to make cigarettes less appealing, particularly to
young people. The evidence is that banning advertising, introducing minimum pricing and
increasing health warnings can all work.
The head of a major retail organization has attacked the idea of minimum pricing
for cigarettes. He argued that articially xing a minimum price would not be effective.
Also, since the demand for tobacco is inelastic, raising the price would not work. Moreover,
it was against the free market for a government to set prices for any product available to
consumers, limiting their freedom to choose.
(This question continues on the following page)
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Turn over
(Question 1 continued)
(a) Dene the following terms indicated in bold in the text:
(i) minimum price (paragraph )
(ii) free market (paragraph ).
[2 marks]
[2 marks]
(b) Using an appropriate diagram, explain the possible effect on the market for
cigarettes of the ban on tobacco advertising in Ireland.
[4 marks]
(c) Using an appropriate diagram, explain why, if the demand for cigarettes is
inelastic, raising the price may not be effective.
[4 marks]
(d) Using information from the text/data and your knowledge of economics,
evaluate the economic effects of the imposition of a minimum price
for cigarettes.
[8 marks]
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2. Study the extract below and answer the questions that follow.
Content removed for copyright reasons.
(This question continues on the following page)
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Turn over
(Question 2 continued)
Content removed for copyright reasons.
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3. Study the extract and data below and answer the questions that follow.
A new age dawns for Greece
In a proposed deal aimed at rescuing Greece from near bankruptcy, European Union (EU) and
International Monetary Fund (IMF) loans of €120 billion should replace the need for Greece
to borrow at extremely high interest rates. This would be the biggest rescue package for any
EU country.
In return, the Greek government has agreed to reduce its budget decit from nearly 14 % to
8.1 % of gross domestic product (GDP) by imposing even steeper cuts in public sector wages,
lower pensions and an additional 2 % rise in VAT, the main indirect tax, to 23 %. Other taxes
are liable to rise. In one of the biggest changes of all, there will be a change in pensions policy.
The average age of retirement in Greece is 53 and this could now move to 67.
The change in circumstances in Greece has been rapid. Greece’s once booming economy
was based on consumption. Joining the eurozone* in 2001 brought interest rates down, and
people rushed to get cheap loans. Huge budget decits and government debt have taken Greece
into a deep crisis, shaking international markets and the euro. It ran up debts equal to 115 %
of GDP. In effect, it cannot easily borrow more money because investors fear that they may
not be repaid. Analysts now think the country’s €240 billion economy is likely to contract in
2010 by more than last years 2 %, as the spending cuts and rising unemployment take effect.
The IMF said it expects Greece will take 10 years to overcome its nancial crisis.
Many economists warn that the medicine is so strong that it could kill the patient and push
Greece into a deep economic depression. There have been demonstrations in the streets to
protest at the measures. A spokesman for a trade union representing the interests of workers,
said: “These measures are tough and unfair. They will lead workers into misery and the country
deeper into recession”.
Economic indicators for 2009
Greece eurozone
GDP growth 1.96 % 4.09 %
Ination
1.35 % 0.29 %
Government net borrowing
(% of GDP)
12.87 % 6.28 %
Current account balance
(% of GDP)
11.22 % 0.35 %
*
eurozone: the group of countries which use the euro as their common currency
[Source: Adapted from ‘Europe hopes Greek bailout will calm market’, The Independent, 3 May 2010; ‘Greece: A new age of austerity and
anger dawns’, The Independent, 2 May 2010 http://www.independent.co.uk/news/world/europe/greece-a-new-age-of-austerity-and-anger-
dawns-1960388.html; http://www.economywatch.com/economic-statistics/country/Greece/year-2009/, accessed 26 September 2011.]
(This question continues on the following page)
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Turn over
(Question 3 continued)
(a) Dene the following terms indicated in bold in the text:
(i) indirect tax (paragraph )
(ii) ination (table).
[2 marks]
[2 marks]
(b) Using an appropriate diagram, explain how an increase in VAT is likely to affect
the market for consumer goods.
[4 marks]
(c) With the aid of an AD/AS diagram, explain the possible effect on the economic
growth of Greece of the decision to reduce its budget decit.
[4 marks]
(d) Using information from the text/data and your knowledge of economics,
evaluate the effects of the measures taken by the Greek government to address
its debt problem.
[8 marks]
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4. Study the extract below and answer the questions that follow.
Venezuela takes steps to end currency speculation
Venezuela’s government has approved new legislation in order to curb speculation after its
currency, the bolivar fuerte (VEF) fell further in the informal market. The reform would give
the Central Bank of Venezuela (BCV) exclusive power to authorize the purchase and sale of
foreign currencies.
Venezuela has a two-tiered ofcial exchange rate of VEF 4.3 per US$, for most imports,
and VEF 2.6 per US$ for transactions identied as priorities such as food and medicine.
However, in the informal market the bolivar fuerte is currently nearly twice as weak as the
ofcial rate, trading at VEF 8.5 per US$.
Venezuela’s economy contracted 3.3 % in 2009, and fell into recession for the rst time
since 2003 after oil production and exports plunged. The economy will probably shrink for
a second consecutive year in 2010. In Venezuela, monthly ination has quickened to a
seven-year high and the bolivar fuerte has reached a record low. Venezuelans turn to the
informal market when they cannot get government approval to buy US dollars at the ofcial
rates of VEF 2.6 and 4.3 per US$.
The legislation is aimed at slowing the rapidly falling value of the bolivar fuerte against the
US dollar in the informal market in hopes of curbing worsening ination and reducing
capital ight. “We cannot allow businessmen to take money out of the country and exchange
it abroad for their own benet,” said a congressman. The price of US dollars on the informal
market heavily inuences ination. The BCV said consumer prices jumped 5.2 % in
April alone, driving the annual ination rate to 30.4 %.
An economics professor said the law would not put an end to informal market trading and
he warned that it could push ination higher. “More and more control is going to make the
situation worse,” he said.
[Source: Adapted from ‘Venezuela Takes Steps to “Smash” Currency Speculation’, by Kiraz Janicke in venezuelanalysis.com, 12 May 2010
http://venezuelanalysis.com/news/5356, and ‘Pro-Chavez lawmakers tighten currency controls’, Associated Press, 16 May 2010]
(This question continues on the following page)
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Turn over
(Question 4 continued)
(a) Dene the following terms indicated in bold in the text:
(i) informal market (paragraph )
(ii) exchange rate (paragraph ).
[2 marks]
[2 marks]
(b) Explain why Venezuela operates a “two-tiered ofcial exchange rate”
(paragraph ).
[4 marks]
(c) With the aid of an appropriate diagram, explain how the “rapidly falling value of
the bolivar fuerte” (paragraph ) is likely to inuence ination.
[4 marks]
(d) Using information from the text/data and your knowledge of economics,
evaluate the policy of the Venezuelan government of maintaining a xed
exchange rate.
[8 marks]
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5. Study the extract below and answer the questions that follow.
Reliance on unprocessed exports damages African development
The poor performance of the textile industry in Africa is caused by its reliance on exports of
raw cotton. “The heavy dependence on production and export of primary products and the
weakness of regional markets are the two major causes of Africa’s high vulnerability to external
shocks,” said an African economist.
He said that the world economic crisis hit African economies badly, adding that export prices
and earnings have fallen, resulting in declines in government revenue and national incomes as
well as rising unemployment and poverty.
The Kenyan Prime Minister has challenged African rms to focus on the African market before
exporting the surplus in order to promote intra-African trade. He said the population in Africa
offered a valuable market for local products but urged African nations to eliminate existing
barriers to trade, such as tariffs and quotas, to allow trade between African nations. “It is a pity
that we do not import African goods directly,” he said. “Instead, we export our goods to other
continents and also purchase African goods from there, due to the high barriers to trade between
African countries.”
“African countries have generally purchased fabrics from Asia and designs from Europe
and the United States. We must help change that to ensure that fabric, design and fashion
(the entire value chain) stems directly from the African continent.” Africa currently
produces 12 % of the world’s cotton but 90 % of this is sold to other countries for processing.
The Prime Minister said that Africa, like some European and Asian countries, can use the
textile industry to promote economic development.
Opponents argue that the African economy has been very weak in recent years,
discouraging trade between African nations. Moreover, political differences have led to
the tariffs and quotas which restrict such trade. They have pointed out that Europe and the
United States are wealthy, stable markets with demand for commodities increasing as the
recession ends.
[Source: Used with permission from NewsTime Africa]
(This question continues on the following page)
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(Question 5 continued)
(a) Dene the following terms indicated in bold in the text:
(i) quotas (paragraph )
(ii) economic development (paragraph ).
[2 marks]
[2 marks]
(b) Explain one reason why a dependence on exports of primary products may be
considered a barrier to economic development.
[4 marks]
(c) With the aid of a diagram, explain how the reduction of tariffs is likely to affect
the level of trade between African nations.
[4 marks]
(d) Using information from the text/data and your knowledge of economics,
discuss the view that African countries should increase their focus on trade
within Africa in order to increase economic development.
[8 marks]
M12/3/ECONO/HP3/ENG/TZ0/XX/M
27 pages
MARKSCHEME
May 2012
ECONOMICS
Higher Level
Paper 3
2 M12/3/ECONO/HP3/ENG/TZ0/XX/M
This markscheme is confidential and for the exclusive use of
examiners in this examination session.
It is the property of the International Baccalaureate and must
not be reproduced or distributed to any other person without
the authorization of IB Cardiff.
3 M12/3/ECONO/HP3/ENG/TZ0/XX/M
In addition to the assessment criteria use the paper-specific markscheme below. Award up to the
maximum marks as indicated.
1. (a) Define the following terms indicated in bold in the text:
(i) minimum price (paragraph ) [2 marks]
level
0 Wrong definition 0
1 Vague definition 1
The idea that it is a price set by the government (or an authority).
2 Precise definition 2
An explanation that it is any two of the following:
imposed by the government ( or an authority)
set above the equilibrium (market) price
price cannot fall below this price.
(ii) free market (paragraph ). [2 marks]
level
0 Wrong definition 0
1 Vague definition 1
The idea that it is a market without government intervention.
2 Precise definition 2
An explanation that it is a market in which resource allocation
(or price and/or output) is determined by one of the following:
demand and supply
price mechanism
producers and consumers.
4 M12/3/ECONO/HP3/ENG/TZ0/XX/M
(b) Using an appropriate diagram, explain the possible effect on the market for
cigarettes of the ban on tobacco advertising in Ireland. [4 marks]
level
0 Inappropriate answer 0
1 Identification of appropriate theory 12
For drawing a demand/supply diagram of the cigarette market showing a
decrease in demand and a resulting decrease in price and fall in the
equilibrium quantity or for providing an explanation that a ban on
advertising would lead to a decrease in demand, leading to a decrease in
price and fall in the equilibrium quantity.
2 Correct application of appropriate theory 34
For drawing a demand/supply diagram of the cigarette market showing a
decrease in demand and a resulting decrease in price and fall in the
equilibrium quantity and for providing an explanation that a ban on
advertising would lead to a decrease in demand, leading to a decrease in
price and fall in the equilibrium quantity.
Candidates who incorrectly label diagrams can be rewarded with a maximum of
[3 marks].
Candidates who interpret this as a market failure question may use MSB/MSC
analysis. MPB shifts left towards MSB as a result of the ban on advertising.
The effect on the market could be a reduction in the welfare loss. A candidate
who selects this approach and does not refer to the change in price may
nevertheless be fully rewarded.
The use of P and Q on the axes is sufficient for a demand and supply diagram.
A title is not necessary.
For a market failure diagram, the vertical axis may be price, but could be costs or
benefits. The horizontal axis is quantity. A title is not necessary.
5 M12/3/ECONO/HP3/ENG/TZ0/XX/M
(c) Using an appropriate diagram, explain why, if the demand for cigarettes is
inelastic, raising the price may not be effective. [4 marks] [4 marks]
level
0 Inappropriate answer 0
1 Identification of appropriate theory 12
For drawing a demand diagram of the cigarette market showing that an
increase in price has a proportionately small effect on the quantity
demanded or for an explanation that with inelastic demand an increase in
price will cause a proportionately lower change in quantity demanded, thus
not working to effectively discourage smoking.
2 Correct application of appropriate theory 34
For drawing a demand diagram of the cigarette market showing that an
increase in price has a proportionately small effect on the quantity
demanded and for an explanation that with inelastic demand an increase in
price will cause a proportionately lower change in quantity demanded, thus
not working to effectively discourage smoking.
Candidates who incorrectly label diagrams can be rewarded with a maximum of
[3 marks].
The use of P and Q on the axes is sufficient for a demand and supply diagram.
A title is not necessary.
For full marks, candidates must make it clear that the change in quantity
demanded is relatively (proportionately) smaller than the change in price. It is not
enough to explain in terms of small changes in quantity demanded with no
comparison to the change in price.
A maximum of [2 marks] may be awarded for an answer which rests on the
assumption that the demand for cigarettes is perfectly inelastic.
If a candidate has incorrectly labelled the diagram in part (b) and been awarded a
maximum of [3 marks], then they may achieve full marks in this part of the
question, if the labelling mistake has been repeated.
6 M12/3/ECONO/HP3/ENG/TZ0/XX/M
(d) Using information from the text/data and your knowledge of economics,
evaluate the economic effects of the imposition of a minimum price for
cigarettes. [8 marks]
Responses may include:
an explanation and/or a diagram of minimum prices
an observation that minimum prices are usually set to protect producers, but in
this case it is being used to solve a market failure.
Arguments for:
cigarettes are a demerit good and so their consumption should be reduced
a higher price could discourage people from smoking (paragraph )
the imposition of a minimum price could save lives (paragraph )
the costs of health care could be reduced
negative externalities such as passive smoking will be reduced
a higher price will particularly discourage young people (paragraph ), whose
demand is likely to be more elastic because they earn lower incomes.
Arguments against:
informal (parallel/underground/black) markets may appear, reducing the
effectiveness of the minimum price
demand for cigarettes is inelastic, so relatively few consumers will be
discouraged from smoking (paragraph )
retailers may suffer through fewer sales
a minimum price may be difficult to enforce
the option of increasing indirect tax on tobacco may be more effective and adds
to state resources for implementing alternative policies (paragraph )
state financing of education campaigns, persuasion through further advertising,
provision of medical advice and counselling support may be better than
minimum price
price controls reduce freedom of choice for consumers and producers
the cost of living will increase for consumers who buy cigarettes
distributional effects because lower income households’ real incomes will fall
more.
Effective evaluation may be to:
consider short-term versus long-term consequences
examine the impact on different stakeholders
discuss advantages and disadvantages
prioritize the arguments.
Examiners should be aware that candidates may take a different approach which if
appropriate, should be rewarded.
If there is no direct reference to the text/data, then candidates may not be
rewarded beyond level 2.
7 M12/3/ECONO/HP3/ENG/TZ0/XX/M
Level
0 No valid discussion. 0
1 Few relevant concepts recognized.
Little discussion or only basic understanding. 12
2 Relevant concepts recognized and developed in reasonable depth.
Some attempt at application and analysis. 35
3 Relevant concepts developed in reasonable depth, demonstrating effective
evaluation, supported by appropriate evidence or theory. 68
8 M12/3/ECONO/HP3/ENG/TZ0/XX/M
2. (a) Define the following terms indicated in bold in the text:
(i) negative externalities (paragraph ) [2 marks]
level
0 Wrong definition 0
1 Vague definition 1
The idea that they are “bad” effects of an economic transaction.
2 Precise definition 2
An explanation that they are costs that are suffered by third parties
when a product is produced (or consumed.
OR
An explanation that they are the spillover costs when a product is
produced (or consumed).
OR
An explanation that they are the external costs of production (or
consumption) that are not reflected in the market price.
(ii) structural unemployment (paragraph ). [2 marks]
level
0 Wrong definition 0
1 Vague definition 1
The idea that it is unemployment due to a change in the structure of
the economy.
2 Precise definition 2
Any one of the following would be appropriate:
unemployment that is caused as a result of a fall in the demand for
a particular type of labour
unemployment that occurs as a result of the changing structure of
an economy resulting from changes in demand/supply and/or
technology
unemployment that occurs when there is a mismatch between the
skills of unemployed workers and the jobs available
unemployment that exists as a result of rigidities in the labour
market.
9 M12/3/ECONO/HP3/ENG/TZ0/XX/M
(b) Using an appropriate diagram, explain why the Emissions Trading
Scheme (ETS) could lead to higher prices for electricity. [4 marks]
level
0 Inappropriate answer 0
1 Identification of appropriate theory 12
For drawing a demand/supply diagram for the electricity market showing
a decrease in supply and a resulting increase in price and fall in the
equilibrium quantity or for providing an explanation that the ETS will
increase costs for a polluting firm, causing the supply of electricity to
decrease, leading to an increase in price and fall in the equilibrium
quantity.
2 Correct application of appropriate theory 34
For drawing a demand/supply diagram for the electricity market showing
a decrease in supply and a resulting increase in price and fall in the
equilibrium quantity and for providing an explanation that the ETS will
increase costs for a polluting firm, causing the supply of electricity to
decrease, leading to an increase in price and fall in the equilibrium
quantity.
Candidates may draw the market for carbon permits (perfectly inelastic supply
curve) with either a leftward shift of supply or an increase in the demand for
permits and therefore an increase in the price of permits, leading to an increase
in the costs of production and higher prices for electricity.
Candidates who incorrectly label diagrams can be rewarded with a maximum
of [3 marks].
The use of P and Q on the axes is sufficient for a demand and supply diagram.
A title is not necessary.
10 M12/3/ECONO/HP3/ENG/TZ0/XX/M
(c) With the aid of a diagram, explain how carbon emissions are a form of
market failure. [4 marks]
level
0 Inappropriate answer 0
1 Identification of appropriate theory 12
For drawing a MSB/MSC diagram with MSC above MPC and a market
equilibrium above a socially efficient level of output or for providing an
explanation that carbon emissions produced by firms create external costs
to third parties and are therefore a market failure where the market fails
to produce at the socially efficient level of output.
2 Correct application of appropriate theory 34
For drawing a MSB/MSC diagram with MSC above MPC and a market
equilibrium above a socially efficient level of output and for providing
an explanation that carbon emissions produced by firms create external
costs to third parties and are therefore a market failure where the market
fails to produce at the socially efficient level of output.
Candidates may approach this question by using a negative externality of
consumption model. If the explanation matches the diagram, and is correctly
explained, this may be rewarded full marks.
Candidates may use a supply and demand model to illustrate the market failure.
The labels on the curves should be S
private
, S
private + external
and D (or D
private
,
D
private + external
and S. If correctly explained, this may be rewarded full marks.
Candidates who incorrectly label diagrams can be rewarded with a maximum
of [3 marks].
For a market failure diagram, the vertical axis may be price, but could be costs
or benefits. The horizontal axis is quantity. A title is not necessary.
11 M12/3/ECONO/HP3/ENG/TZ0/XX/M
(d) Using information from the text/data and your knowledge of economics,
evaluate the possible economic effects on the Australian economy of the
Emissions Trading Scheme (ETS). [8 marks]
Responses may include:
since there is a significant market failure with implications for sustainable
development, some solution to “the great moral and economic challenge” is
needed (paragraph )
Australia is the third largest per capita polluter, necessitating a
solution/approach (paragraph )
the ETS will increase costs for heavy polluters and decrease costs for low
polluters. This should incentivise firms to reduce emissions and internalise the
externality (paragraph )
carbon permits will increase the marginal private costs to firms moving the
market closer to the socially efficient level of output
additional costs to heavy polluters are likely to be passed on to consumers
(paragraph ), resulting in higher energy prices and inflation in the economy
as a result of higher costs faced by firms, supply will fall with the possible
result that jobs are lost in the heavy polluting industries (paragraph ).
(Diagram from (b) could be referred to showing that the increased costs could
cause inflation and unemployment.)
loss in profits may reduce investment, and therefore productivity (paragraph
), having long term implications for economic growth
Australian firms will be at a disadvantage to international competitions, if
foreign firms do not face the same requirements (paragraph ), resulting in
higher unemployment and possible worsening of the current account
it is difficult for the government to correctly identify the level of pollution that
would make an emission trading scheme successful
if there is no appropriate technology available to firms to reduce their
emissions, then the incentive function of the permits will not work (paragraph
)
if the government issues too many permits, emissions will not be reduced or
the price of emissions would be too low to make a difference
if it issues too few permits, the price will be too high, damaging the economy
with higher inflation, higher unemployment, lower economic growth and a
worsening in the current account balance.
12 M12/3/ECONO/HP3/ENG/TZ0/XX/M
Effective evaluation may be to:
consider short-term versus long-term consequences
examine the impact on different stakeholders
discuss advantages and disadvantages
prioritize the arguments.
Examiners should be aware that candidates may take a different approach
which if appropriate, should be rewarded.
If there is no direct reference to the text/data, then candidates may not be
rewarded beyond level 2.
Level
0 No valid discussion. 0
1 Few relevant concepts recognized.
Little discussion or only basic understanding. 12
2 Relevant concepts recognized and developed in reasonable depth.
Some attempt at application and analysis. 35
3 Relevant concepts developed in reasonable depth, demonstrating effective
evaluation, supported by appropriate evidence or theory. 68
13 M12/3/ECONO/HP3/ENG/TZ0/XX/M
3. (a) Define the following terms indicated in bold in the text:
(i) indirect tax (paragraph ) [2 marks]
level
0 Wrong definition 0
1 Vague definition 1
The idea that it is when the government increases the price.
2 Precise definition 2
An explanation that it is tax on a good or service or an expenditure
tax.
(ii) inflation (table). [2 marks]
level
0 Wrong definition 0
1 Vague definition 1
The idea that it is rising prices.
2 Precise definition 2
An explanation that it is a sustained increase in the average (or
general) level of prices or an increase in the average price level over
time or a fall in the purchasing power of money.
14 M12/3/ECONO/HP3/ENG/TZ0/XX/M
(b) Using an appropriate diagram, explain how an increase in VAT is likely to
affect the market for consumer goods. [4 marks]
level
0 Inappropriate answer 0
1 Identification of appropriate theory 12
For drawing a demand/supply diagram for the market for a consumer
good showing a decrease in supply (with divergent supply curves) and a
resulting increase in price and decrease in quantity or for providing an
explanation that an increase in indirect taxes means an increase in costs
of production for producers causing a decrease in supply, leading to an
increase in the price and a fall in the quantity.
2 Correct application of appropriate theory 34
For drawing a demand/supply diagram for the market for a consumer
good showing a decrease in supply (with divergent supply curves) and a
resulting increase in price and decrease in quantity and for providing an
explanation that an increase in indirect taxes means an increase in costs
of production for producers causing a decrease in supply, leading to an
increase in the price and a fall in the quantity.
Candidates who illustrate a parallel shift of the supply curve may be rewarded
with a maximum of [3 marks].
Candidates who incorrectly label diagrams can be rewarded with a maximum
of [3 marks].
The use of P and Q on the axes is sufficient for a demand and supply diagram.
A title is not necessary.
Candidates may approach this question using a macroeconomic model. An
increase in indirect taxes will lead to an increase in the costs of production for
firms, and therefore a decrease in short run aggregate supply, an increase in
the price level and a decrease in real GDP.
For AD/AS, the vertical axis may be price level or average price level. The
horizontal axis may be output, real output, national output, real national output,
national income or real GDP. Any appropriate abbreviations of the labels are
acceptable.
15 M12/3/ECONO/HP3/ENG/TZ0/XX/M
(c) With the aid of an AD/AS diagram, explain the possible effect on the
economic growth of Greece of the decision to reduce its budget deficit. [4 marks]
level
0 Inappropriate answer 0
1 Identification of appropriate theory 12
For drawing an AD/AS diagram which shows a shift of the AD curve to
the left, resulting in a fall in real GDP or an explanation that reducing the
budget deficit means that government spending will be cut (or higher
direct taxes will result in less consumption and/or investment) so that AD
will decrease, leading to a fall in real GDP.
2 Correct application of appropriate theory 34
For drawing an AD/AS diagram which shows a shift of the AD curve to
the left, resulting in a fall in real GDP and an explanation that reducing
the budget deficit means that government spending will be cut (or higher
direct taxes will result in less consumption and/or investment) so that AD
will decrease, leading to a fall in real GDP.
Candidates may use either a Keynesian AS curve or an upward-sloping short
run aggregate supply.
An alternate approach would be to shift SRAS to the left as a result of
increased taxes, and therefore increased costs of production, on firms. If this is
correctly explained, it may be fully rewarded.
Candidates who incorrectly label diagrams can be rewarded with a maximum
of [3 marks].
For AD/AS, the vertical axis may be price level or average price level. The
horizontal axis may be output, real output, national output, real national output,
national income or real GDP. Any appropriate abbreviations of the labels are
acceptable.
16 M12/3/ECONO/HP3/ENG/TZ0/XX/M
(d) Using information from the text/data and your knowledge of economics,
evaluate the effects of the measures taken by the Greek government to
address its debt problem. [8 marks]
Responses may include:
a definition of debt
the proposed cut in the budget is an extremely large one
steep cuts in public sector wages may result in less consumption by public
sector workers, further affecting AD
lower pensions may reduce living standards for retired people (and may lower
consumption, further affecting AD (paragraph )
raising the retirement age may increase the size of the working population and
might actually increase unemployment in the short run
reductions in public sector wages may affect the quality of services such as
health care and education (paragraph ); this may reduce the productivity of
labour, further worsening economic growth in the future
a reduction in the budget deficit (paragraph ) may restrict growth and lead
the country further into recession (may refer to diagram and analysis in part (c)
an increase in indirect taxation will increase prices (paragraph ) (may refer to
diagram in part (b)
an increase in indirect taxes will be regressive, therefore resulting in greater
income inequality
with a low level of inflation, the measures may push Greece into deflation
(table)
a reduction in the budget deficit acts as an expenditure-reducing policy which
may lead to lower imports and an improvement in the current account balance
(table)
lower wage rates and falling inflation could reduce production costs and
contribute towards an improvement in the current account balance (table) and
(paragraph )
reducing the deficit will reduce the need for government borrowing, which is
very high (table)
the measures may allow the government to borrow at lower rates (paragraph
)
Greece’s GDP growth indicator was not as bad as the average in the eurozone
(table)
the deficit reducing measures may worsen growth to the extent that the deficit
will actually grow (higher unemployment will reduce government’s tax
revenues)
Greece has to prove that it can repay its debts, but the measures adopted may
make the debt worse
a Keynesian approach would be opposite to the approach taken government
should actively adopt measures to increase AD to promote growth in order to
be able to reduce the deficit over the longer term.
17 M12/3/ECONO/HP3/ENG/TZ0/XX/M
Effective evaluation may be to:
consider short-term versus long-term consequences
examine the impact on different stakeholders
discuss advantages and disadvantages
prioritize the arguments.
Examiners should be aware that candidates may take a different approach
which if appropriate, should be rewarded.
If there is no direct reference to the text/data, then candidates may not be
rewarded beyond level 2.
Level
0 No valid discussion. 0
1 Few relevant concepts recognized.
Little discussion or only basic understanding. 12
2 Relevant concepts recognized and developed in reasonable depth.
Some attempt at application and analysis. 35
3 Relevant concepts developed in reasonable depth, demonstrating effective
evaluation, supported by appropriate evidence or theory. 68
18 M12/3/ECONO/HP3/ENG/TZ0/XX/M
4. (a) Define the following terms indicated in bold in the text:
(i) informal market (paragraph ) [2 marks]
level
0 Wrong definition 0
1 Vague definition 1
The idea that informal markets are black markets.
2 Precise definition 2
An explanation that informal markets refer to markets in which
economic activity is not officially measured/recorded. Candidates
may explain an informal currency market which, if accurate may be
fully rewarded.
(ii) exchange rate (paragraph ). [2 marks]
level
0 Wrong definition 0
1 Vague definition 1
The idea that it is the value (or price) of a currency.
2 Precise definition 2
An explanation that it is the value (or price) of one currency
expressed in terms of another currency.
19 M12/3/ECONO/HP3/ENG/TZ0/XX/M
(b) Explain why Venezuela operates a “two-tiered official exchange rate”
(paragraph ). [4 marks]
level
0 Inappropriate answer 0
1 Identification of appropriate theory 12
For explaining that two different official exchange rates allow
Venezuelans to pay less for imported food and medicine or for
explaining that food and medicine are necessary imports and so a more
favourable exchange rate will ensure the affordability of these products
to low income Venezuelans.
2 Correct application of appropriate theory 34
For explaining that two different official exchange rates allow
Venezuelans to pay less for imported food and medicine and for
explaining that food and medicine are necessary imports and so a more
favourable exchange rate will ensure the affordability of these products
to low income Venezuelans.
Candidates may also explain that the weaker exchange rate that is used for
purchasing foreign exchange to buy “most” imports discourages imports and
encourages the consumption of domestic products. This is a valid
interpretation and, if correctly explained, may be fully rewarded.
20 M12/3/ECONO/HP3/ENG/TZ0/XX/M
(c) With the aid of an appropriate diagram, explain how the “rapidly falling
value of the bolivar fuerte (paragraph ) is likely to influence inflation. [4 marks]
level
0 Inappropriate answer 0
1 Identification of appropriate theory 12
For drawing an AD/AS diagram showing a shift of AS to the left,
resulting in a higher price level and therefore an increase in the price
level or an explanation that a weaker currency will increase the price of
imported raw materials and finished goods, placing upward pressure on
prices.
2 Correct application of appropriate theory 34
For drawing an AD/AS diagram showing a shift of AS to the left,
resulting in a higher price level and therefore an increase in the price
level and an explanation that a weaker currency will increase the price of
imported raw materials and finished goods, placing upward pressure on
prices.
N.B. It is also acceptable for candidates to answer the question by showing a
shift of AD to the right and an explanation that a weaker currency will make
exports more competitive, causing an increase in exports and an increase in AD
which will lead to a higher price level and therefore upward pressure on
inflation.
Since the question does not specify a diagram, candidates may also choose to
draw a diagram to illustrate the fall in the value of the VEF, and then explain
how this will lead to increased costs of production and therefore result in
inflation. If the exchange rate diagram is correctly explained and labelled
(vertical axis price of VEF in USD or USD/VEF), and then appropriately
linked to inflation, then this may be fully rewarded.
Candidates who incorrectly label diagrams can be rewarded with a maximum
of [3 marks].
For AD/AS, the vertical axis may be price level or average price level. The
horizontal axis may be output, real output, national output, real national output,
national income or real GDP. Any appropriate abbreviations of the labels are
acceptable.
21 M12/3/ECONO/HP3/ENG/TZ0/XX/M
(d) Using information from the text/data and your knowledge of economics,
evaluate the policy of the Venezuelan government of maintaining a fixed
exchange rate. [8 marks]
Responses may include:
an explanation of what fixed exchange rates are and a diagram to show an
exchange rate is fixed.
Advantages of a fixed exchange rate:
a fixed exchange rate may discourage currency speculation (paragraph )
a fixed exchange rate may reduce business uncertainty, improving the
attractiveness of domestic and foreign direct investment
currency depreciation, causing inflation, may be prevented (paragraph )
capital flight may be discouraged as fears of devaluation are lowered
economic problems such as recession and inflation have to be tackled without
allowing the exchange rate to solve the problems the economy
the double-tiered fixed-exchange rate system is designed to produce a more
equal distribution of income as food and medicine are imported at lower prices
compared to other imports.
Disadvantages of a fixed exchange rate:
the official rate does not correspond to the “real” value of the currency as
proven by the low value on the informal market
the formal banking system is unlikely to attract savings when there is such a
divergence between the official rate and the informal rate. Thus there may be
less money available for investment
the VEF seems to be fixed at too strong a value, which damages exporters and
adversely affects the current account balance
a fixed VEF may actually encourage currency speculation (paragraph ) if
people believe that the central bank will not be able to support the value
a fixed exchange rate may mean that the central bank will have to buy its own
currency in the foreign exchange market. This means that it will have to
maintain large reserves of foreign currencies this may be unsustainable
inflation may be imported via a fixed exchange rate system
it encourages a destabilising informal market managing the informal market
may make the situation worse (paragraph )
it introduces a distortion to the market where prices do not reflect their costs.
Answers that discuss the standard advantages and disadvantages of fixed
exchange rates, without showing awareness of the Venezuelan context may not
be rewarded beyond Level 2.
Effective evaluation may be to:
consider short-term versus long-term consequences
examine the impact on different stakeholders
discuss advantages and disadvantages
prioritize the arguments.
22 M12/3/ECONO/HP3/ENG/TZ0/XX/M
Examiners should be aware that candidates may take a different approach
which if appropriate, should be rewarded.
If there is no direct reference to the text/data, then candidates may not be
rewarded beyond level 2.
Level
0 No valid discussion. 0
1 Few relevant concepts recognized.
Little discussion or only basic understanding. 12
2 Relevant concepts recognized and developed in reasonable depth.
Some attempt at application and analysis. 35
3 Relevant concepts developed in reasonable depth, demonstrating effective
evaluation, supported by appropriate evidence or theory. 68
23 M12/3/ECONO/HP3/ENG/TZ0/XX/M
5. (a) Define the following terms indicated in bold in the text:
(i) quotas (paragraph ) [2 marks]
level
0 Wrong definition 0
1 Vague definition 1
The idea that they are a limit on trade.
2 Precise definition 2
An explanation that they are import barriers that set limits on the
quantity (or value) of imports that may be imported into a country.
(ii) economic development (paragraph ). [2 marks]
level
0 Wrong definition 0
1 Vague definition 1
The idea that living standards improve.
2 Precise definition 2
An explanation that it is a broad concept involving any two of the
following:
improvement in standards of living
reduction in poverty
improved health and education
reduction in unemployment
greater equality in income distribution
environmental protection
increased freedom and economic choice.
24 M12/3/ECONO/HP3/ENG/TZ0/XX/M
(b) Explain one reason why a dependence on exports of primary products
may be considered a barrier to economic development. [4 marks]
level
0 Inappropriate answer 0
1 Identification of appropriate theory 12
For explaining an appropriate reason why exports of primary product
may result in low and fluctuating incomes for producers and/or revenues
for governments.
The explanations might refer to:
low PED, PES or YED
primary products are of low value on the production chain (in
comparison with processed products) and so the producers earn low
incomes even in good economic times
increased supply of primary products due to technological improvements
vulnerability to forces outside producer control (e.g. weather,
international shocks).
2 Correct application of appropriate theory 34
For explaining how low incomes/revenues may act as a barrier to
economic development. The explanations might refer to:
unstable revenues for governments make it difficult to allocate funds to
development objectives
low incomes for producers mean that producers may be stuck in a
poverty cycle.
Examiners should be aware that candidates may take a different approach
which if appropriate, should be rewarded.
25 M12/3/ECONO/HP3/ENG/TZ0/XX/M
(c) With the aid of a diagram, explain how the reduction of tariffs is likely to
affect the level of trade between African nations. [4 marks]
level
0 Inappropriate answer 0
1 Identification of appropriate theory 12
For drawing a tariff diagram (trade creation diagram) showing how fall in
a tariff causes a fall in the price and an increase in imports or for
explaining how a reduction in the tariff results will reduce the price
leading to increased imports and therefore increased trade.
2 Correct application of appropriate theory 34
For drawing a tariff diagram (trade creation diagram) showing how fall in
a tariff causes a fall in the price and an increase in imports and for
explaining how a reduction in the tariff results will reduce the price
leading to increased imports and therefore increased trade.
Candidates who incorrectly label diagrams can be rewarded with a maximum
of [3 marks].
For a demand and supply diagram, P and Q are sufficient. The perfectly elastic
supply curve must be labelled as S
world
or S
Africa
.
26 M12/3/ECONO/HP3/ENG/TZ0/XX/M
(d) Using information from the text/data and your knowledge of economics,
discuss the view that African countries should increase their focus on
trade within Africa in order to increase economic development. [8 marks]
Responses may include:
Opportunities associated with increased trade:
reliance on exports of raw cotton makes African nations vulnerable to market
fluctuations (paragraph ) resulting in wide fluctuations in export revenues
and preventing governments from achieving development objectives
greater intra-Africa trade allows African countries to enjoy the advantages of
trade creation
greater processing of raw materials in African countries would allow other
African countries to buy the processed goods at lower prices. (Ins