May and November 2015 exams IB Economics

IB ECONOMICS
2015 Examinations: May and November examination sessions
The May and November 2015 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 2015 IB Economics Examinations
M15/3/ECONO/HP1/ENG/TZ1/XX
Economics
Higher level
Paper 1
© International Baccalaureate Organization 20153 pages
2215 – 5102
Monday 4 May 2015 (afternoon)
Instructions to candidates
Do not open this examination paper until instructed to do so.
You are not permitted access to any calculator for this paper.
Section A: answer one question.
Section B: answer one question.
Use fully labelled diagrams and references to examples where appropriate.
The maximum mark for this examination paper is [50 marks].
1 hour 30 minutes
– 2 –
Section A
Answer one question from this section.
Microeconomics
1. (a) Explain how changes in price work to reallocate resources in a market. [10]
(b) Discuss the view that the overuse of common access resources is best addressed by
government. [15]
2. (a) Explain why prices tend to be stable in oligopolistic markets. [10]
(b) Oligopolists often possess too much monopoly power. Evaluate whether governments
should intervene in oligopolistic markets. [15]
M15/3/ECONO/HP1/ENG/TZ1/XX
– 3 –
Section B
Answer one question from this section.
Macroeconomics
3. (a) Explain what is meant by the natural rate of unemployment. [10]
(b) Discusstheviewthatthereisnotrade-offbetweeninationandunemployment. [15]
4. (a) Explain how business spending on research and development and government
expenditure on infrastructure might shift the long-run aggregate supply curve. [10]
(b) Evaluate the effectiveness of interventionist supply-side policies to achieve economic
growth. [15]
M15/3/ECONO/HP1/ENG/TZ1/XX
M15/3/ECONO/HP1/ENG/TZ1/XX/M
17 pages
Markscheme
May 2015
Economics
Higher level
Paper 1
– 2 – M15/3/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 the IB Assessment Centre.
– 3 – M15/3/ECONO/HP1/ENG/TZ1/XX/M
Use the question-specific markscheme together with the markbands. Award up to the maximum
marks as indicated.
Section A
Microeconomics
1. (a) Explain how changes in price work to reallocate resources in a market. [10]
Answers may include:
definition of reallocation of resources
diagrams to show how changes in price alter the equilibrium quantity and
therefore reallocate resources
theory to explain the signalling and incentive functions of the price
mechanism
examples of markets where price change has led to a reallocation of
resources, such as through government intervention.
Assessment Criteria
Part (a) 10 marks
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 There is little understanding of the specific demands of the question.
Relevant economic terms are not defined.
There is very little knowledge of relevant economic theory.
There are significant errors. 1–3
2 There is some understanding of the specific demands of the question.
Some relevant economic terms are defined.
There is some knowledge of relevant economic theory.
There are some errors. 4–6
3 There is understanding of the specific demands of the question.
Relevant economic terms are defined.
Relevant economic theory is explained and applied.
Where appropriate, diagrams are included and applied.
Where appropriate, examples are used.
There are few errors. 7–8
4 There is clear understanding of the specific demands of the question.
Relevant economic terms are clearly defined.
Relevant economic theory is clearly explained and applied.
Where appropriate, diagrams are included and applied effectively.
Where appropriate, examples are used effectively.
There are no significant errors. 9–10
– 4 – M15/3/ECONO/HP1/ENG/TZ1/XX/M
(b) Discuss the view that the overuse of common access resources is best
addressed by government. [15]
Answers may include:
definition of common access resources
diagrams to show negative production or consumption externalities
associated with overuse of common access resources. PPC diagram to
show the reduction of production possibilities
theory to explain the overuse of common access resources due to the lack
of ownership and a price mechanism
examples of existing government responses such as licensing, international
agreement, allocation of property rights
synthesis or evaluation (discuss).
Discussion may include: whether the price mechanism is compatible with
sustainability and consider the merits and limitations of government
responses.
Examiners should be aware that candidates may take a different approach
which, if appropriate, should be rewarded.
Opinions or conclusions should be presented clearly and should be supported
by appropriate examples.
– 5 – M15/3/ECONO/HP1/ENG/TZ1/XX/M
Assessment Criteria
Part (b) 15 marks
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 There is little understanding of the specific demands of the question.
Relevant economic terms are not defined.
There is very little knowledge of relevant economic theory.
There are significant errors. 1–5
2 There is some understanding of the specific demands of the question.
Some relevant economic terms are defined.
There is some knowledge of relevant economic theory.
There are some errors. 6–9
3 There is understanding of the specific demands of the question.
Relevant economic terms are defined.
Relevant economic theory is explained and applied.
Where appropriate, diagrams are included and applied.
Where appropriate, examples are used.
There is an attempt at synthesis or evaluation.
There are few errors. 10–12
4 There is clear understanding of the specific demands of the question.
Relevant economic terms are clearly defined.
Relevant economic theory is clearly explained and applied.
Where appropriate, diagrams are included and applied effectively.
Where appropriate, examples are used effectively.
There is evidence of appropriate synthesis or evaluation.
There are no significant errors. 13–15
– 6 – M15/3/ECONO/HP1/ENG/TZ1/XX/M
2. (a) Explain why prices tend to be stable in oligopolistic markets. [10]
Answers may include:
definition of oligopoly, price stability
diagram to show the kinked demand curve. Candidates might utilize a
collusive oligopoly diagram
theory to explain why price tends to be stable under conditions of
non-collusive/collusive oligopoly
example of where this has happened or might happen.
– 7 – M15/3/ECONO/HP1/ENG/TZ1/XX/M
Assessment Criteria
Part (a) 10 marks
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 There is little understanding of the specific demands of the question.
Relevant economic terms are not defined.
There is very little knowledge of relevant economic theory.
There are significant errors. 1–3
2 There is some understanding of the specific demands of the question.
Some relevant economic terms are defined.
There is some knowledge of relevant economic theory.
There are some errors. 4–6
3 There is understanding of the specific demands of the question.
Relevant economic terms are defined.
Relevant economic theory is explained and applied.
Where appropriate, diagrams are included and applied.
Where appropriate, examples are used.
There are few errors. 7–8
4 There is clear understanding of the specific demands of the question.
Relevant economic terms are clearly defined.
Relevant economic theory is clearly explained and applied.
Where appropriate, diagrams are included and applied effectively.
Where appropriate, examples are used effectively.
There are no significant errors. 9–10
– 8 – M15/3/ECONO/HP1/ENG/TZ1/XX/M
(b) Oligopolists often possess too much monopoly power. Evaluate whether
governments should intervene in oligopolistic markets. [15]
Answers may include:
definition of monopoly power, oligopoly or oligopolistic market
diagram to show equilibrium under conditions of oligopoly, either collusive
or non-collusive
theory to explain higher prices, lower output, and productive and allocative
inefficiency due to monopoly power. An explanation of the actions a
government might engage in to control such power such as competition
policy, price control, regulation, nationalization and trade liberalization
example of industries that might illustrate such characteristics and of
policies a government may have employed
synthesis or evaluation.
Evaluation may include: consideration of the merits of intervention such as
difficulties of identifying where such power may be excessive and whether
intervention is justified over free markets, etc. Examples may be given of
industries where despite economic inefficiency the consumer benefits from
inherent economies of scale and therefore there is no need for government
intervention.
Examiners should be aware that candidates may take a different approach
which, if appropriate, should be rewarded.
Opinions or conclusions should be presented clearly and should be supported
by appropriate examples.
– 9 – M15/3/ECONO/HP1/ENG/TZ1/XX/M
Assessment Criteria
Part (b) 15 marks
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 There is little understanding of the specific demands of the question.
Relevant economic terms are not defined.
There is very little knowledge of relevant economic theory.
There are significant errors. 1–5
2 There is some understanding of the specific demands of the question.
Some relevant economic terms are defined.
There is some knowledge of relevant economic theory.
There are some errors. 6–9
3 There is understanding of the specific demands of the question.
Relevant economic terms are defined.
Relevant economic theory is explained and applied.
Where appropriate, diagrams are included and applied.
Where appropriate, examples are used.
There is an attempt at synthesis or evaluation.
There are few errors. 10–12
4 There is clear understanding of the specific demands of the question.
Relevant economic terms are clearly defined.
Relevant economic theory is clearly explained and applied.
Where appropriate, diagrams are included and applied effectively.
Where appropriate, examples are used effectively.
There is evidence of appropriate synthesis or evaluation.
There are no significant errors. 13–15
– 10 – M15/3/ECONO/HP1/ENG/TZ1/XX/M
Section B
Macroeconomics
3. (a) Explain what is meant by the natural rate of unemployment [10]
Answers may include:
definition of the natural rate of unemployment
diagram to show the labour market at full employment with residual
structural, seasonal and frictional unemployment
theory to explain how the natural rate of unemployment occurs where the
economy is producing at the full employment level of output
examples of unemployment that could be considered illustrative of the
natural rate.
– 11 – M15/3/ECONO/HP1/ENG/TZ1/XX/M
Assessment Criteria
Part (a) 10 marks
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 There is little understanding of the specific demands of the question.
Relevant economic terms are not defined.
There is very little knowledge of relevant economic theory.
There are significant errors. 1–3
2 There is some understanding of the specific demands of the question.
Some relevant economic terms are defined.
There is some knowledge of relevant economic theory.
There are some errors. 4–6
3 There is understanding of the specific demands of the question.
Relevant economic terms are defined.
Relevant economic theory is explained and applied.
Where appropriate, diagrams are included and applied.
Where appropriate, examples are used.
There are few errors. 7–8
4 There is clear understanding of the specific demands of the question.
Relevant economic terms are clearly defined.
Relevant economic theory is clearly explained and applied.
Where appropriate, diagrams are included and applied effectively.
Where appropriate, examples are used effectively.
There are no significant errors. 9–10
– 12 – M15/3/ECONO/HP1/ENG/TZ1/XX/M
(b) Discuss the view that there is no trade-off between inflation and
unemployment. [15]
Answers may include:
definition of inflation and unemployment
diagram showing a Phillips curve and/or AD/LRAS
theory to explain why there might/might not be a trade-off between inflation
and unemployment. Possible use of short-run and long-run Phillips curve.
Possible use of AD/LRAS
examples of such a trade-off
synthesis or evaluation (discuss).
Discussion may include: arguments relating to the trade-off between inflation
and unemployment.
Responses may rely on different views regarding the shape of LRAS.
This question might be answered using AD/AS alone.
Examiners should be aware that candidates may take a different approach
which, if appropriate, should be rewarded.
Opinions or conclusions should be presented clearly and should be supported
by appropriate examples.
– 13 – M15/3/ECONO/HP1/ENG/TZ1/XX/M
Assessment Criteria
Part (b) 15 marks
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 There is little understanding of the specific demands of the question.
Relevant economic terms are not defined.
There is very little knowledge of relevant economic theory.
There are significant errors. 1–5
2 There is some understanding of the specific demands of the question.
Some relevant economic terms are defined.
There is some knowledge of relevant economic theory.
There are some errors. 6–9
3 There is understanding of the specific demands of the question.
Relevant economic terms are defined.
Relevant economic theory is explained and applied.
Where appropriate, diagrams are included and applied.
Where appropriate, examples are used.
There is an attempt at synthesis or evaluation.
There are few errors. 10–12
4 There is clear understanding of the specific demands of the question.
Relevant economic terms are clearly defined.
Relevant economic theory is clearly explained and applied.
Where appropriate, diagrams are included and applied effectively.
Where appropriate, examples are used effectively.
There is evidence of appropriate synthesis or evaluation.
There are no significant errors. 13–15
– 14 – M15/3/ECONO/HP1/ENG/TZ1/XX/M
4. (a) Explain how business spending on research and development and
government expenditure on infrastructure might shift the long-run aggregate
supply curve. [10]
Answers may include:
definitions of research and development, infrastructure, long-run aggregate
supply
diagram to show a shift in the LRAS
explanation of how research and development in new technology will
improve the quality of physical capital, hence increasing productive
capacity and shifting the LRAS to the right. Explanation of how increased
government expenditure in infrastructure will increase productive capacity
and shift the LRAS to the right
examples of research and development and infrastructure.
– 15 – M15/3/ECONO/HP1/ENG/TZ1/XX/M
Assessment Criteria
Part (a) 10 marks
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 There is little understanding of the specific demands of the question.
Relevant economic terms are not defined.
There is very little knowledge of relevant economic theory.
There are significant errors. 1–3
2 There is some understanding of the specific demands of the question.
Some relevant economic terms are defined.
There is some knowledge of relevant economic theory.
There are some errors. 4–6
3 There is understanding of the specific demands of the question.
Relevant economic terms are defined.
Relevant economic theory is explained and applied.
Where appropriate, diagrams are included and applied.
Where appropriate, examples are used.
There are few errors. 7–8
4 There is clear understanding of the specific demands of the question.
Relevant economic terms are clearly defined.
Relevant economic theory is clearly explained and applied.
Where appropriate, diagrams are included and applied effectively.
Where appropriate, examples are used effectively.
There are no significant errors. 9–10
– 16 – M15/3/ECONO/HP1/ENG/TZ1/XX/M
(b) Evaluate the effectiveness of interventionist supply-side policies to achieve
economic growth. [15]
Answers may include:
definition of interventionist supply-side policies and economic growth
diagram to show the impact of interventionist supply-side policies on
economic growth
explanation of the interventionist supply-side policies that could be used to
increase the rate of economic growth through:
- education and training
- research and development
- infrastructure
- industrial policy
examples of the application of interventionist supply-side policies
synthesis or evaluation.
Evaluation may include: the use of interventionist supply-side policies used to
increase economic growth including:
cost and effectiveness of the interventionist supply-side policies
time it takes for the policy to increase economic growth
implications for different stakeholders
suggestion of alternatives to interventionist supply-side policies.
Examiners should be aware that candidates may take a different approach
which, if appropriate, should be rewarded.
Opinions or conclusions should be presented clearly and should be supported
by appropriate examples.
– 17 – M15/3/ECONO/HP1/ENG/TZ1/XX/M
Assessment Criteria
Part (b) 15 marks
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 There is little understanding of the specific demands of the question.
Relevant economic terms are not defined.
There is very little knowledge of relevant economic theory.
There are significant errors. 1–5
2 There is some understanding of the specific demands of the question.
Some relevant economic terms are defined.
There is some knowledge of relevant economic theory.
There are some errors. 6–9
3 There is understanding of the specific demands of the question.
Relevant economic terms are defined.
Relevant economic theory is explained and applied.
Where appropriate, diagrams are included and applied.
Where appropriate, examples are used.
There is an attempt at synthesis or evaluation.
There are few errors. 10–12
4 There is clear understanding of the specific demands of the question.
Relevant economic terms are clearly defined.
Relevant economic theory is clearly explained and applied.
Where appropriate, diagrams are included and applied effectively.
Where appropriate, examples are used effectively.
There is evidence of appropriate synthesis or evaluation.
There are no significant errors. 13–15
M15/3/ECONO/HP2/ENG/TZ0/XX
Economics
Higher level
Paper 2
© International Baccalaureate Organization 20159 pages
2215 – 5104
Tuesday 5 May 2015 (morning)
Instructions to candidates
Do not open this examination paper until instructed to do so.
You are not permitted access to any calculator for this paper.
Section A: answer one question.
Section B: answer one question.
Use fully labelled diagrams and references to the text/data where appropriate.
The maximum mark for this examination paper is [40 marks].
1 hour 30 minutes
– 2 –
Section A
Answer one question from this section.
1. Study the extract below and answer the questions that follow.
Latvia to join the eurozone monetary union
Latvia will become the 18th country to adopt the euro after being approved for membership
by the European Commission. The country has met the criteria for eurozone membership,
including low ination, low long-term interest rates, a stable exchange rate, low public debt
and low budget decits.
Latvia joined the European Union (EU) customs union in 2004. This resulted in a large
increase in the availability of credit and strong economic growth in Latvia. However, the
2008 global nancial crisis resulted in the collapse of one of its leading banks and massive
economic instability. Economic output fell by about 20 % and Latvia had to accept a bailout
(loans) from the International Monetary Fund (IMF) and the EU.
Latvia kept the lat (the Latvian currency) pegged to the euro throughout the crisis. At the
time, some economists argued that devaluation would have been a better way to improve the
economy. However, Latvia followed the path of other countries such as Greece and Ireland,
and chose to improve competitiveness through austerity measures. This involved increasing
direct taxes and cutting government spending and public sector wages.
 By late 2010, the economy was growing again and Latvia had repaid the loans to the IMF
and the EU. In 2012, the economy expanded by 5.6 %, the fastest of any country in the
EU, although output was still 12 % below its pre-crisis peak. In addition unemployment was
falling, but it remained high at 12.4 %.
 For Latvia, which shares a border with Russia, the attraction of the euro is about economics
and security. Entering the eurozone in January 2014 is part of a process of shifting away
from the influence of Russia, and following its northern neighbour Estonia which joined the
eurozone in 2011. Lithuania hopes to join the eurozone in 2015.
 Public support for joining the eurozone has been low. Evidence from one survey suggests
that a small majority of Latvia’s population opposes membership, fearing that prices will rise
and Latvians will be drawn into the problems facing Europe’s struggling economies.
 Nonetheless, there are signs that support is growing. The Latvian prime minister said that
“switching to the euro will help economic growth and bring increased foreign investment.
Unlike countries that can afford to ignore the euro and additional integration, Latvia cannot
easily stand on its own. This is good news, not only for Latvia, but also for the eurozone.
It shows that there is still condence in the single currency”.
[Source: adapted from www.reuters.com, 5 June 2013; http://online.wsj.com, 9 July 2013 and
www.theguardian.com, 16 July 2013]
(This question continues on the following page)
M15/3/ECONO/HP2/ENG/TZ0/XX
– 3 –
Turn over
(Question 1 continued)
(a) (i) Dene the term customs union indicated in bold in the text (paragraph ).
[2]
(ii) Dene the term direct taxes indicated in bold in the text (paragraph ).
[2]
(b) Using an AD/AS diagram, explain how devaluation of the lat (the Latvian currency)
might have been used to improve the Latvian economy during the nancial crisis
(paragraph ). [4]
(c) Using a production possibilities curve (PPC) diagram, explain the change in Latvia’s
economy from 2008 to 2012 (paragraphs and ). [4]
(d) Using information from the text/data and your knowledge of economics, evaluate the
possible impact of Latvia joining the eurozone. [8]
M15/3/ECONO/HP2/ENG/TZ0/XX
– 4 –
2. Study the extract below and answer the questions that follow.
Is India in danger of another crisis?
The Indian prime minister has tried to reduce concerns that the country is headed for a
balance of payments crisis, similar to the one that the country experienced in 1991. At that
time, India was on the verge of defaulting on its foreign debt and had to be rescued by the
International Monetary Fund (IMF).
There are a few key similarities between the situation in 2013 and the situation in 1991.
India still has a persistent current account decit and its weak currency, the rupee, makes it
more difcult to nance the decit. Ofcials are worried because the current account decit
is larger, and the rupee is weaker than it was in 1991.
The rupee has declined by more than 15 % between May and August this year (2013), and
has hit a record low against the US dollar. This is largely to do with the expectation that the
Federal Reserve (US central bank) may not continue to use monetary policy to stimulate the
US economy. As a result, there is speculation that the US interest rate might rise at some
point in the future. The consequence of this is that money is leaving developing economies
such as India.
The countries that are most at risk are those with large current account decits, and India has
one of the largest. The current account decit hit a record high of 6.7 % of gross domestic
product (GDP) in 2012. Domestic issues make the situation even worse: India has a large
budget decit as well as a high rate of ination. Both are reasons why portfolio investors
would like to take their money out of India. Furthermore, economic growth has also dropped
to 5 %, the slowest growth since 2003.
In a recent speech, the prime minister noted that the current account decit was high, and
blamed increased imports of gold as a key factor. In recent months, the government has
sharply raised tariffs on gold. Surprisingly, the Indian government and the central bank have
also proposed measures to support the rupee.
After the crisis in 1991, there were many reforms and the country became more globally
integrated. This led to a period of strong growth. However, reforms have slowed down and
analysts say that this has prevented India from reaching its tremendous potential.
The threat of a crisis may be just what is needed for the government to speed up the
supply-side reforms necessary to increase growth and reduce the current account decit.
These reforms would include policies to promote industry, reduce the regulatory burdens and
importantly increase investment in education.
[Source: adapted from www.bbc.co.uk, 8 August 2013; www.businessweek.com, 19 August 2013 and
http://online.wsj.com, 17 August 2013]
(This question continues on the following page)
M15/3/ECONO/HP2/ENG/TZ0/XX
– 5 –
Turn over
(Question 2 continued)
(a) (i) Dene the term interest rate indicated in bold in the text (paragraph ).
[2]
(ii) Dene the term tariffs indicated in bold in the text (paragraph ).
[2]
(b) Distinguish between a current account decit and a budget decit (paragraph ).
[4]
(c) Using an exchange rate diagram for the rupee (India’s currency), explain how the value
of the rupee has been affected by the expectation that the US central bank may change
its monetary policy (paragraph ). [4]
(d) Using information from the text/data and your knowledge of economics, evaluate the
policies that India might use to reduce the current account decit. [8]
M15/3/ECONO/HP2/ENG/TZ0/XX
– 6 –
Section B
Answer one question from this section.
3. Study the extract and data below and answer the questions that follow.
Figure 1 – Export commodities of China and three African countries
(This question continues on the following page)
Text removed for copyright reasons
Figure removed for copyright reasons
M15/3/ECONO/HP2/ENG/TZ0/XX
– 7 –
Turn over
(Question 3 continued)
Figure 2 – Aid provided by China to various African countries
(a) (i) Dene the term bilateral trade agreements indicated in bold in the text
(paragraph ). [2]
(ii) Dene the term infrastructure indicated in bold in the text (paragraph ).
[2]
(b) Using a comparative advantage diagram, explain why “China’s exports tend to be
concentrated in manufactured goods and the African countries mostly export primary
goods” (paragraph ). [4]
(c) Using a production possibilities curve (PPC) diagram, explain how the provision of
“free training to 53 700 people from Africa” will increase potential economic output
(paragraph ). [4]
(d) Using information from the text/data and your knowledge of economics, discuss the
extent to which trade between China and African countries is a more effective way of
achieving economic development than Chinese aid to African countries. [8]
Figure removed for copyright reasons
M15/3/ECONO/HP2/ENG/TZ0/XX
– 8 –
4. Study the extract and data below and answer the questions that follow.
Economic growth in Peru
The Peruvian economy has been growing by an average of 6.4 % per year since 2002 with
a slightly appreciating exchange rate and low ination. Growth was in the 6–9 % range
for 2010–2013, due partly to a leap in private investment. This was especially in the raw
materials extraction sector, which accounts for more than 60 % of Peru’s total exports.
Rising Asian demand for copper and gold has been a large contributor to Peru’s growth.
Despite Peru’s strong macroeconomic performance, dependence on mineral and metal
exports and imported food makes the economy vulnerable to uctuations in world prices.
This is reected in its volatile terms of trade (Figure 1).
The Peruvian president has pursued moderate, pro-market policies while adding new
government programmes in order to provide additional social support for the poor. Peru’s
rapid expansion coupled with transfer payments and other benets have helped to reduce
the poverty rate. The percentage of people living on less than US$2 a day has halved to
about 28 % since 2003, but inequality persists (Figure 2) and continues to present a threat
to the new government. The president has pledged to further cut the poverty rate to 15 %
through increased transfer payments, an increase in the minimum wage, and pensions.
There has also been deregulation in business practices, making it much easier to start and
run a private rm. Changes in employment regulations have created more exibility in the
labour market.
Peru’s free trade policy has continued under the president’s administration.
The United States-Peru Trade Promotion Agreement was signed on 12 April 2006, opening
the way to greater trade and investment between the two economies. Peru signed trade
agreements with South Korea, Japan and Mexico in 2011.
Peru has continued to attract foreign investment. However, political disputes and protests
may harm some projects, particularly in mining. Poor infrastructure hinders the spread of
growth to Peru’s inland areas. Much of the economy remains informal and untaxed. The
strengthening of the sol (Peru’s currency) could hurt the economy. In 2013, the central bank
purchased a record US$13 billion in the foreign exchange market in an attempt to keep the
national currency from rapid appreciation.
(This question continues on the following page)
M15/3/ECONO/HP2/ENG/TZ0/XX
– 9 –
(Question 4 continued)
Figure 1 – Peru terms of trade
Figure 2 – Peru income distribution
2005 2010
Gini coefcient 0.51 0.46
[Source: adapted from “A middle class emerges from Peru growth”, Financial Times, 9 January 2013;
www.heritage.org and www.indexmundi.com, accessed 17 August 2013]
(a) (i) Dene the term ination indicated in bold in the text (paragraph ).
[2]
(ii) Dene the term appreciation indicated in bold in the text (paragraph ).
[2]
(b) Using an accurate denition of the terms of trade, explain one reason for the change in
Peru’s terms of trade index from January 2008 to January 2009 (Figure 1). [4]
(c) Using a Lorenz curve diagram, explain the change in Peru’s income distribution from
2005 to 2010 (Figure 2). [4]
(d) Using information from the text/data and your knowledge of economics, discuss the
view that economic development may best be achieved through a balance of
market-oriented policies and government intervention. [8]
Graph removed for copyright reasons
Please go to http://www.tradingeconomics.com/peru/terms-of-trade and
click on the ‘2002’ option to display the graph.
M15/3/ECONO/HP2/ENG/TZ0/XX
M15/3/ECONO/HP2/ENG/TZ0/XX/M
21 pages
Markscheme
May 2015
Economics
Higher level
Paper 2
– 2 – M15/3/ECONO/HP2/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 the IB Assessment Centre.
– 3 – M15/3/ECONO/HP2/ENG/TZ0/XX/M
Use the paper-specific markscheme together with the markbands. Award up to the maximum
marks as indicated.
Section A
1. (a) (i) Define the term customs union indicated in bold in the text (paragraph ). [2]
Level Marks
0 The work does not reach a standard described by the descriptors
below. 0
1 Vague definition. 1
The idea that it is where countries agree to trade freely.
2 Accurate definition. 2
An explanation that it is a form of economic integration where
member countries agree to liberalize trade (trade freely amongst
themselves) and adopt a common external tariff (or common trade
policies towards non members).
(ii) Define the term direct taxes indicated in bold in the text (paragraph ). [2]
Level Marks
0 The work does not reach a standard described by the descriptors
below. 0
1 Vague definition. 1
The idea that taxes are paid to the government or tax paid by an
individual (household).
2 Accurate definition. 2
An explanation that they are taxes (paid to the government) on
income (households and firms).
– 4 – M15/3/ECONO/HP2/ENG/TZ0/XX/M
(b) Using an AD/AS diagram, explain how devaluation of the lat (the Latvian
currency) might have been used to improve the Latvian economy during the
financial crisis (paragraph ). [4]
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 There is a correct diagram or an accurate written response. 1–2
For drawing a correctly labelled AD/AS diagram showing a shift of AD to
the right and an increase in real GDP or for an explanation that devaluation
of the lat may have caused an increase in aggregate demand through an
increase in exports and/or a decrease in imports, thus bringing about an
increase in real GDP.
2 There is a correct diagram and an accurate written response. 3–4
For drawing a correctly labelled AD/AS diagram showing a shift of AD to
the right and an increase in real GDP and for an explanation that
devaluation of the lat may have caused an increase in aggregate demand
through an increase in exports and/or a decrease in imports, thus bringing
about an increase in real GDP.
Candidates who incorrectly label diagrams can be rewarded with a maximum
of [3].
For AD/AS, the vertical axis may be price level, average price level, PL or APL.
The horizontal axis may be output, real output, national output, real national
output, national income, or GDP. A title is not necessary.
– 5 – M15/3/ECONO/HP2/ENG/TZ0/XX/M
(c) Using a production possibilities curve (PPC) diagram, explain the change in
Latvia’s economy from 2008 to 2012 (paragraphs and ). [4]
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 There is a correct diagram or an accurate written response. 1–2
For drawing a correctly labelled PPC diagram showing a movement from
one point within the curve to a new point closer to the curve or for an
explanation that Latvia experienced economic growth from 2008 to 2012,
which means that there was an increase in output shown as a movement to
a new point, closer to the PPC.
2 There is a correct diagram and an accurate written response. 3–4
For drawing a correctly labelled PPC diagram showing a movement from
one point within the curve to a new point closer to the curve and for an
explanation that Latvia experienced economic growth from 2008 to 2012,
which means that there was an increase in output shown as a movement
to a new point, closer to the PPC.
Candidates who incorrectly label diagrams can be rewarded with a maximum
of [3].
Candidates might show a different combination of points within the PPC on the
diagram. There might be an initial movement from one point inside the curve to a
further point inside the curve to reflect the 20
% drop in output in 2008. To show
the change from 2008 to 2012, there must be a new point closer to the PPC.
For a PPC, the axes could be two alternative products, one on each axis,
eg Good A and Good B or Schools and Cars; or two groups of products or two
sectors, eg Consumer Goods and Producer Goods. A title is not necessary.
– 6 – M15/3/ECONO/HP2/ENG/TZ0/XX/M
(d) Using information from the text/data and your knowledge of economics, evaluate
the possible impact of Latvia joining the eurozone. [8]
Examiners should be aware that candidates may take a different approach which,
if appropriate, should be rewarded.
Do not award beyond Level 2 if the answer does not contain reference to the
information provided.
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 Few relevant concepts are recognized. 1–2
There is basic knowledge/understanding.
2 Relevant concepts are recognized and developed in reasonable depth. 3–5
There is clear knowledge/understanding.
There is some attempt at application/analysis.
3 Relevant concepts are recognized and developed in reasonable depth. 6–8
There is clear knowledge/understanding.
There is effective application/analysis.
There is synthesis/evaluation, supported by appropriate theory and
evidence.
Command term
“Evaluate” requires candidates to make an appraisal by weighing up the
strengths and limitations.
Responses may include:
definition of monetary union.
Arguments for:
elimination of exchange rate uncertainty
easier for future planning by firms
increased investment and trade
increased investor confidence
reduction in transaction costs in trade with the eurozone
increased foreign investment (paragraph )
increased economic growth (paragraph )
greater integration with the eurozone helps reduce dependence on Russia
(paragraph )
renewed confidence in the eurozone will bring benefits to all members
(paragraph )
may help to bring down unemployment, which is high (paragraph )
Latvia had to exercise discipline to meet the criteria to join the eurozone which
built a good economic foundation for moving forward (paragraph ).
– 7 – M15/3/ECONO/HP2/ENG/TZ0/XX/M
Arguments against:
loss of sovereignty over monetary policy
possible high changeover costs
problems of supporting other eurozone members (paragraph )
Latvia loses the power to control its own currency to improve competitiveness
threat of inflation as well as deflation (paragraph )
short term – lower consumer confidence (paragraph ).
Any reasonable evaluation that offers a considered and balanced review of the
strengths and limitations of Latvia joining the eurozone.
– 8 – M15/3/ECONO/HP2/ENG/TZ0/XX/M
2. (a) (i) Define the term interest rate indicated in bold in the text (paragraph ). [2]
Level Marks
0 The work does not reach a standard described by the descriptors
below. 0
1 Vague definition. 1
The idea that it is a payment to the bank.
2 Accurate definition. 2
An explanation that it is one of the following:
the price or cost of borrowed money (credit)
the reward for saving
the percentage paid on borrowed money.
(ii) Define the term tariffs indicated in bold in the text (paragraph ). [2]
Level Marks
0 The work does not reach a standard described by the descriptors
below. 0
1 Vague definition. 1
The idea that it is a form of tax.
2 Accurate definition. 2
An explanation that it is a tax on imports.
(b) Distinguish between a current account deficit and a budget deficit (paragraph ). [4]
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 There is a partially correct explanation. 1–2
For explaining that a current account deficit occurs when the outflow of
money for imports of goods and services plus investment income and/or
transfers is greater than the revenue gained from exports of goods and
services plus investment income and/or transfers or for explaining that a
budget deficit exists where government domestic revenue is less than
government expenditure.
2 There is a correct explanation. 3–4
For explaining that a current account deficit occurs when the outflow of
money for imports of goods and services plus investment income and/or
transfers is greater than the revenue gained from exports of goods and
services plus investment income and/or transfer and for explaining that a
budget deficit exists where government domestic revenue is less than
government expenditure.
To achieve full marks for the definition of current account deficit, students must
refer to more than simply “trade in goods and service”. That is, there must be
reference to at least one of “investment income” or “transfers”.
– 9 – M15/3/ECONO/HP2/ENG/TZ0/XX/M
(c) Using an exchange rate diagram for the rupee (India’s currency), explain how the
value of the rupee has been affected by the expectation that the US central bank
may change its monetary policy (paragraph ). [4]
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 There is a correct diagram or an accurate written response. 1–2
For drawing a correctly labelled exchange rate diagram with a shift of the
supply curve of the rupee to the right and a fall in the exchange rate or for
explaining that higher interest rates in the US will make it more attractive for
people to save in the US rather than in India, and to do so they will have to
exchange (sell) their rupees for dollars thus increasing the supply of
rupees, and lowering the value of the rupee.
2 There is a correct diagram and an accurate written response. 3–4
For drawing a correctly labelled exchange rate diagram with a shift of the
supply curve of the rupee to the right and a fall in the exchange rate and for
explaining that higher interest rates in the US will make it more attractive for
people to save in the US rather than in India, and to do so they will have to
exchange (sell) their rupees for dollars thus increasing the supply of
rupees, and lowering the value of the rupee.
Candidates who incorrectly label diagrams can be rewarded with a maximum
of [3].
For an exchange rate diagram, the vertical axis may be exchange rate, price of
rupee in US$, US$/rupee, or dollars per rupee. The horizontal axis should be
quantity, or quantity of rupees. A title is not necessary.
– 10 – M15/3/ECONO/HP2/ENG/TZ0/XX/M
(d) Using information from the text/data and your knowledge of economics, evaluate
the policies that India might use to reduce the current account deficit. [8]
Examiners should be aware that candidates may take a different approach which,
if appropriate, should be rewarded.
Do not award beyond Level 2 if the answer does not contain reference to the
information provided.
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 Few relevant concepts are recognized. 1–2
There is basic knowledge/understanding.
2 Relevant concepts are recognized and developed in reasonable depth. 3–5
There is clear knowledge/understanding.
There is some attempt at application/analysis.
3 Relevant concepts are recognized and developed in reasonable depth. 6–8
There is clear knowledge/understanding.
There is effective application/analysis.
There is synthesis/evaluation, supported by appropriate theory and
evidence.
Command term
“Evaluate” requires candidates to make an appraisal by weighing up the
strengths and limitations.
Responses may include:
Expenditure switching policies:
an explanation of expenditure switching policies (trade protection and
devaluation/depreciation) as a means of reducing spending on imports
government has shown a willingness to use trade protection – gold tariffs
(paragraph ) (but trade protection may go against international trade
agreements)
falling rupee may help with expenditure switching (paragraph ), depending
on the PED for exports and imports (Marshall-Lerner condition)
to encourage the “switch” from imports to domestic goods government should
let the rupee continue to fall, not support it (paragraph ), (but the falling
rupee causes other problems).
Expenditure reducing policies:
an explanation of expenditure reducing policies as a means of reducing
spending on imports
economic growth has dropped to 5
% so little room for expenditure reducing
(paragraph )
however, India has high inflation and large budget deficit and so expenditure
reducing could help solve those problems (paragraph ).
– 11 – M15/3/ECONO/HP2/ENG/TZ0/XX/M
Supply-side policies:
an explanation of supply side policies as a means of increasing the
competitiveness of exports
need to speed up reforms to help India reach its potential (paragraph )
market-oriented policies, eg reducing the regulatory burden may encourage
investment and increase productivity (paragraph )
interventionist policies, eg increase investment in education and policies to
support industry may help increase growth (paragraph ).
To reach Level 3, students must be aware of the particular situation in the Indian
economy, not just present an evaluation of policies to reduce a current account
deficit in general.
Any reasonable evaluation.
– 12 – M15/3/ECONO/HP2/ENG/TZ0/XX/M
Section B
3. (a) (i) Define the term bilateral trade agreements indicated in bold in the text
(paragraph ). [2]
Level Marks
0 The work does not reach a standard described by the descriptors
below. 0
1 Vague definition. 1
The idea that it is a trade agreement between two countries.
2 Accurate definition. 2
An explanation that it is a trade agreement between two countries
which aims to lower trade barriers, or to increase trade.
(ii) Define the term infrastructure indicated in bold in the text (paragraph ). [2]
Level Marks
0 The work does not reach a standard described by the descriptors
below. 0
1 Vague definition. 1
The idea that it (any one of the following is sufficient):
is essential facilities (capital) and services such as roads, airports,
sewage treatment, water systems, railways, telephone and utilities
reduces the cost / increases efficiency of economic activity
is usually supplied by the government
is necessary for economic activity.
2 Accurate definition. 2
An explanation that it (any two of the following is sufficient):
is essential facilities (capital) and services such as roads, airports,
sewage treatment, water systems, railways, telephone and utilities
reduces the cost / increases efficiency of economic activity
is usually supplied by the government
is necessary for economic activity.
– 13 – M15/3/ECONO/HP2/ENG/TZ0/XX/M
(b) Using a comparative advantage diagram, explain why “China’s exports tend to be
concentrated in manufactured goods and the African countries mostly export
primary goods” (paragraph ). [4]
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 There is a correct diagram or an accurate written response. 1–2
For drawing a correctly labelled comparative advantage diagram showing
that China has a comparative advantage in manufactured goods and
African countries have a comparative advantage in primary goods or an
explanation that China has a lower opportunity cost in producing
manufactured goods while African countries have a lower opportunity cost
in producing primary goods.
2 There is a correct diagram and an accurate written response. 3–4
For drawing a correctly labelled comparative advantage diagram showing
that China has a comparative advantage in manufactured goods and
African countries have a comparative advantage in primary goods and an
explanation that China has a lower opportunity cost in producing
manufactured goods while African countries have a lower opportunity cost
in producing primary goods.
It is possible that students might show Africa with the absolute advantage. If
accurately explained, this may be fully awarded.
Candidates who incorrectly label diagrams can be rewarded with a maximum
of [3].
The axes should indicate manufactured goods (or an example of a
manufactured good listed in the text) and primary goods (or an example listed in
the text).
The straight PPCs must indicate the correct country.
An alternative diagram would be to show reciprocal absolute advantage, with
crossing PPCs (see below).
– 14 – M15/3/ECONO/HP2/ENG/TZ0/XX/M
(c) Using a production possibilities curve (PPC) diagram, explain how the provision
of “free training to 53
700 people from Africa” will increase potential economic
output (paragraph ). [4]
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 There is a correct diagram or an accurate written response. 1–2
For drawing a PPC (outward shift) showing an increase in the potential
output in African countries, or for explaining that “free training” would likely
improve the quality of the factor of production labour and therefore may
increase potential economic output.
2 There is a correct diagram and an accurate written response. 3–4
For drawing a PPC (outward shift) showing an increase in the potential
output in African countries, and for explaining that “free training” would
likely improve the quality of the factor of production labour and therefore
may increase potential economic output.
Candidates who incorrectly label diagrams can be rewarded with a maximum
of [3].
PPC: there must be two contrasting goods on the axes.
– 15 – M15/3/ECONO/HP2/ENG/TZ0/XX/M
(d) Using information from the text/data and your knowledge of economics, discuss
the extent to which trade between China and African countries is a more effective
way of achieving economic development than Chinese aid to African countries. [8]
Examiners should be aware that candidates may take a different approach which,
if appropriate, should be rewarded.
Do not award beyond Level 2 if the answer does not contain reference to the
information provided.
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 Few relevant concepts are recognized. 1–2
There is basic knowledge/understanding.
2 Relevant concepts are recognized and developed in reasonable depth. 3–5
There is clear knowledge/understanding.
There is some attempt at application/analysis.
3 Relevant concepts are recognized and developed in reasonable depth. 6–8
There is clear knowledge/understanding.
There is effective application/analysis.
There is synthesis/evaluation, supported by appropriate theory and
evidence.
Command term
“Discuss” requires candidates to offer a considered and balanced review that
includes a range of arguments, factors or hypotheses. Opinions or conclusions
should be presented clearly and supported by appropriate evidence.
Responses may include:
definition of trade, aid, economic development.
Benefits of trade for economic development:
access to export markets (paragraph ) and revenue (paragraph )
increased employment
access to imports from China (paragraph )
import new technologies (paragraph )
exploit comparative advantage
economies of scale
improvements in efficiencies
greater choice
all of the above could result in higher economic growth, which might lead to
economic development through higher incomes.
Limitations of trade for economic development:
overdependence on a narrow range of commodity exports (Figure 1) leads to
the inability to expand in value-added sectors
vulnerability to price fluctuations and economic conditions in China results in
fluctuations in government and business revenues
overexploitation of resources in African countries may be a threat to
sustainable development
diagram to show negative externalities.
– 16 – M15/3/ECONO/HP2/ENG/TZ0/XX/M
Benefits of aid for economic development:
target specific sectors, eg agriculture, housing, education, healthcare
(paragraph )
targets development of human capital through education and training
(paragraphs and )
break the poverty cycle, filling gaps
building key infrastructure (paragraphs , and Figure 2).
Limitations of aid:
overdependence
potential for abuse through corruption
poorly targeted aid
politically motivated aid targeted at inappropriate sectors
tied aid.
To reach level 3, students must show awareness of the ways in which aid and
trade impact upon economic development (not simply discuss the advantages
and disadvantages of aid and trade in general).
Any reasonable discussion.
– 17 – M15/3/ECONO/HP2/ENG/TZ0/XX/M
4. (a) (i) Define the term inflation indicated in bold in the text (paragraph ). [2]
Level Marks
0 The work does not reach a standard described by the descriptors
below. 0
1 Vague definition. 1
The idea that prices increase.
2 Accurate definition. 2
An explanation that it is a sustained increase in the average (general)
price level.
(ii) Define the term appreciation indicated in bold in the text (paragraph ). [2]
Level Marks
0 The work does not reach a standard described by the descriptors
below. 0
1 Vague definition. 1
The idea that the exchange rate rises.
2 Accurate definition. 2
An explanation that it is an increase in the value (price) of a currency
plus one of the following:
in terms of a another currency
in a floating exchange rate system.
– 18 – M15/3/ECONO/HP2/ENG/TZ0/XX/M
(b) Using an accurate definition of the terms of trade, explain one reason for the
change in Peru’s terms of trade index from January 2008 to January 2009
(Figure 1). [4]
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 There is an accurate definition or a correct written response. 1–2
For defining the terms of trade as the ratio of a country’s average export
prices to their import prices (or for giving the equation
Terms of trade
Average export prices
100
Average import prices

) or for explaining that there
was a fall in the terms of trade index that could have been caused by either
a fall in the average prices of Peru’s exports, or an increase in the average
prices of Peru’s imports.
2 There is an accurate definition and a correct written response. 3–4
For defining the terms of trade as the ratio of a country’s average export
prices to their import prices (or for giving the equation
Terms of trade
Average export prices
100
Average import prices
)
and for explaining that there
was a fall in the terms of trade index that could have been caused by either
a fall in the average prices of Peru’s exports, or an increase in the average
prices of Peru’s imports.
It is not necessary for students to explain a reason for the change in export (or
import) prices.
– 19 – M15/3/ECONO/HP2/ENG/TZ0/XX/M
(c) Using a Lorenz curve diagram, explain the change in Peru’s income distribution
from 2005 to 2010 (Figure 2).
[4]
Level Marks
0
The work does not reach a standard described by the descriptors below. 0
1
There is a correct diagram or an accurate written response. 1–2
For drawing a correctly labelled Lorenz curve diagram with a shift of the
curve inwards towards the line of equality
or for an explanation that the
smaller figure for the Gini coefficient means that the income distribution has
become more equal as shown by the inward movement of the curve (or a
reduction in the area below the line of equality).
2
There is a correct diagram and an accurate written response. 3–4
For drawing a correctly labelled Lorenz curve diagram with a shift of the
curve inwards towards the line of equality
and for an explanation that the
smaller figure for the Gini coefficient means that the income distribution has
become more equal as shown by the inward movement of the curve (or a
reduction in the area below the line of equality).
Candidates who incorrectly label diagrams can be rewarded with a maximum
of [3].
The vertical axis should be labelled cumulative % of income or % of income and
the horizontal axis should be cumulative % of population or % of population.
There should be some indication on the diagram that the curve is moving inwards
(either with an arrow, or with two dates on the curves. It is not necessary to
provide a label on the “line of absolute equality”.
A title is not necessary.
– 20 – M15/3/ECONO/HP2/ENG/TZ0/XX/M
(d) Using information from the text/data and your knowledge of economics, discuss
the view that economic development may best be achieved through a balance of
market-oriented policies and government intervention.
[8]
Examiners should be aware that candidates may take a different approach which,
if appropriate, should be rewarded.
Do not award beyond Level 2 if the answer does not contain reference to the
information provided.
Level Marks
0
The work does not reach a standard described by the descriptors below. 0
1 Few relevant concepts are recognized. 1–2
There is basic knowledge/understanding.
2 Relevant concepts are recognized and developed in reasonable depth. 3–5
There is clear knowledge/understanding.
There is some attempt at application/analysis.
3 Relevant concepts are recognized and developed in reasonable depth. 6–8
There is clear knowledge/understanding.
There is effective application/analysis.
There is synthesis/evaluation, supported by appropriate theory and
evidence.
Command term
“Discuss” requires candidates to offer a considered and balanced review that
includes a range of arguments, factors or hypotheses. Opinions or conclusions
should be presented clearly and supported by appropriate evidence.
Responses may include:
definition of economic development
identification and explanation of market-oriented policies:
- deregulation (paragraph )
- increased flexibility in the labour market (paragraph )
- free trade policy (paragraph )
identification and explanation of interventionist policies:
- new social programmes for the poor (paragraph )
- transfer payments (cash transfers, pensions) (paragraph )
- increased minimum wage (paragraph )
market-oriented policies may lead to:
- higher private investment (paragraphs and ) will lead to economic
growth, which may or may not translate into economic development
- lower or higher unemployment, depending on the type of policy
- benefits of free trade (greater choice, lower prices, higher consumer
surplus) that may enhance peoples’ standards of living
- efficient allocation of resources
- higher economic growth, which may or may not translate into economic
development
- more inequality which hinders economic development
- externalities associated with mining which worsen the standards of living of
workers and third parties
- insufficient provision of infrastructure and other merit goods
– 21 – M15/3/ECONO/HP2/ENG/TZ0/XX/M
Interventionist policies may lead to:
- increased equality (lower Gini coefficient)
- reduction in the poverty rate (paragraph )
- opportunity cost issues
- provision of infrastructure
- reduction in the informal and untaxed sectors.
To reach Level 3, students must show awareness of the ways in which
market-oriented policies and government intervention impact upon economic
development (not simply discuss the advantages and disadvantages of the two
strategies).
Any reasonable discussion.
M15/3/ECONO/SP1/ENG/TZ1/XX
Economics
Standard level
Paper 1
© International Baccalaureate Organization 20153 pages
2215 5111
Monday 4 May 2015 (afternoon)
Instructions to candidates
Do not open this examination paper until instructed to do so.
You are not permitted access to any calculator for this paper.
Section A: answer one question.
Section B: answer one question.
Use fully labelled diagrams and references to examples where appropriate.
The maximum mark for this examination paper is [50 marks].
1 hour 30 minutes
– 2 –
Section A
Answer one question from this section.
Microeconomics
1. (a) Explainwhygovernmentsimposepriceoors(minimumprices). [10]
(b) Discuss the consequences for producers, consumers and the government of imposing
apriceoor(minimumprice)onagood. [15]
2. (a) Explain the view that an increase in price will lead to a decrease in the quantity
demanded whilst an increase in demand will lead to an increase in price. [10]
(b) Discussthesignicanceofpriceelasticityofdemandforgovernmentinterventionin
markets. [15]
M15/3/ECONO/SP1/ENG/TZ1/XX
– 3 –
Section B
Answer one question from this section.
Macroeconomics
3. (a) Explain the effect of a rise in taxation and a fall in government expenditure on the
circularowofincomeofaneconomy. [10]
(b) Evaluatetheeffectivenessofscalpolicytoreducetherateofination. [15]
4. (a) Explain how business spending on research and development and government
expenditure on infrastructure might shift the long-run aggregate supply curve. [10]
(b) Evaluate the effectiveness of interventionist supply-side policies to achieve economic
growth. [15]
M15/3/ECONO/SP1/ENG/TZ1/XX
M15/3/ECONO/SP1/ENG/TZ1/XX/M
17 pages
Markscheme
May 2015
Economics
Standard level
Paper 1
– 2 – M15/3/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 the IB Assessment Centre.
– 3 – M15/3/ECONO/SP1/ENG/TZ1/XX/M
Use the question-specific markscheme together with the markbands. Award up to the maximum
marks as indicated.
Section A
Microeconomics
1. (a) Explain why governments impose price floors (minimum prices). [10]
Answers may include:
definition of price floor
diagram of the application of a price floor
explanation of possible reasons for a price floor, for example regarding
equity (minimum wage), to support the income of producers (agricultural
price supports) or to discourage the consumption of demerit goods
examples of where a price floor has been applied.
Award a maximum of level 2 if only one reason is given.
Level 4 can be awarded if two reasons are given.
Assessment Criteria
Part (a) 10 marks
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 There is little understanding of the specific demands of the question.
Relevant economic terms are not defined.
There is very little knowledge of relevant economic theory.
There are significant errors. 1–3
2 There is some understanding of the specific demands of the question.
Some relevant economic terms are defined.
There is some knowledge of relevant economic theory.
There are some errors. 4–6
3 There is understanding of the specific demands of the question.
Relevant economic terms are defined.
Relevant economic theory is explained and applied.
Where appropriate, diagrams are included and applied.
Where appropriate, examples are used.
There are few errors. 7–8
4 There is clear understanding of the specific demands of the question.
Relevant economic terms are clearly defined.
Relevant economic theory is clearly explained and applied.
Where appropriate, diagrams are included and applied effectively.
Where appropriate, examples are used effectively.
There are no significant errors. 9–10
– 4 – M15/3/ECONO/SP1/ENG/TZ1/XX/M
(b) Discuss the consequences for producers, consumers and the government of
imposing a price floor (minimum price) on a good. [15]
Answers may include:
definition of price floor
diagram to illustrate possible impacts (eg to show a change in business
revenues)
explanation of the consequences for producers (change in revenues),
consumers (higher prices) and government (cost of implementation)
examples of consequences when a price floor has been introduced
synthesis or evaluation (discuss).
Discussion may include: the consequences of introducing a price floor on the
different stakeholders.
Award a maximum of level 2 if only minimum wage is discussed.
Award a maximum of level 2 if only one stakeholder is discussed.
Award a maximum of level 3 if only two stakeholders are discussed.
Level 4 can be awarded if three stakeholders have been discussed.
Examiners should be aware that candidates may take a different approach
which, if appropriate, should be rewarded.
Opinions or conclusions should be presented clearly and should be supported
by appropriate examples.
– 5 – M15/3/ECONO/SP1/ENG/TZ1/XX/M
Assessment Criteria
Part (b) 15 marks
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 There is little understanding of the specific demands of the question.
Relevant economic terms are not defined.
There is very little knowledge of relevant economic theory.
There are significant errors. 1–5
2 There is some understanding of the specific demands of the question.
Some relevant economic terms are defined.
There is some knowledge of relevant economic theory.
There are some errors. 6–9
3 There is understanding of the specific demands of the question.
Relevant economic terms are defined.
Relevant economic theory is explained and applied.
Where appropriate, diagrams are included and applied.
Where appropriate, examples are used.
There is an attempt at synthesis or evaluation.
There are few errors. 10–12
4 There is clear understanding of the specific demands of the question.
Relevant economic terms are clearly defined.
Relevant economic theory is clearly explained and applied.
Where appropriate, diagrams are included and applied effectively.
Where appropriate, examples are used effectively.
There is evidence of appropriate synthesis or evaluation.
There are no significant errors. 13–15
– 6 – M15/3/ECONO/SP1/ENG/TZ1/XX/M
2. (a) Explain the view that an increase in price will lead to a decrease in the
quantity demanded whilst an increase in demand will lead to an increase in
price. [10]
Answers may include:
definition of demand
diagrams to illustrate the difference between movements along the demand
curve and shifts of the demand curve
theory to explain an increase in price leading to a decrease in the quantity
demanded, due to the law of demand, through a movement along the
demand curve, and an increase in demand due to a change in non-price
determinants, leading to an increase in price through a shift to the right of
the demand curve
examples of instances to which this might be, or has been, applied.
– 7 – M15/3/ECONO/SP1/ENG/TZ1/XX/M
Assessment Criteria
Part (a) 10 marks
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 There is little understanding of the specific demands of the question.
Relevant economic terms are not defined.
There is very little knowledge of relevant economic theory.
There are significant errors. 1–3
2 There is some understanding of the specific demands of the question.
Some relevant economic terms are defined.
There is some knowledge of relevant economic theory.
There are some errors. 4–6
3 There is understanding of the specific demands of the question.
Relevant economic terms are defined.
Relevant economic theory is explained and applied.
Where appropriate, diagrams are included and applied.
Where appropriate, examples are used.
There are few errors. 7–8
4 There is clear understanding of the specific demands of the question.
Relevant economic terms are clearly defined.
Relevant economic theory is clearly explained and applied.
Where appropriate, diagrams are included and applied effectively.
Where appropriate, examples are used effectively.
There are no significant errors. 9–10
– 8 – M15/3/ECONO/SP1/ENG/TZ1/XX/M
(b) Discuss the significance of price elasticity of demand for government
intervention in markets. [15]
Answers may include:
definition of PED
diagram to illustrate the impact of PED on government intervention
theory to explain the relevance of PED for government in terms of decision
making regarding taxes, subsidies and price controls
examples of use of the concept of PED in practice
synthesis or evaluation (discuss) to show the implications.
Discussion may include: the relative importance of PED and the difficulties of
obtaining an accurate measure in reality; a consideration of the impact on
different stakeholders, producers, consumers, taxpayers, etc.
Level 4 can be awarded if there has been a consideration of just one of taxes,
subsidies or price controls providing there is a comparison of elastic and
inelastic demand.
Examiners should be aware that candidates may take a different approach
which, if appropriate, should be rewarded.
Opinions or conclusions should be presented clearly and should be supported
by appropriate examples.
– 9 – M15/3/ECONO/SP1/ENG/TZ1/XX/M
Assessment Criteria
Part (b) 15 marks
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 There is little understanding of the specific demands of the question.
Relevant economic terms are not defined.
There is very little knowledge of relevant economic theory.
There are significant errors. 1–5
2 There is some understanding of the specific demands of the question.
Some relevant economic terms are defined.
There is some knowledge of relevant economic theory.
There are some errors. 6–9
3 There is understanding of the specific demands of the question.
Relevant economic terms are defined.
Relevant economic theory is explained and applied.
Where appropriate, diagrams are included and applied.
Where appropriate, examples are used.
There is an attempt at synthesis or evaluation.
There are few errors. 10–12
4 There is clear understanding of the specific demands of the question.
Relevant economic terms are clearly defined.
Relevant economic theory is clearly explained and applied.
Where appropriate, diagrams are included and applied effectively.
Where appropriate, examples are used effectively.
There is evidence of appropriate synthesis or evaluation.
There are no significant errors. 13–15
– 10 – M15/3/ECONO/SP1/ENG/TZ1/XX/M
Section B
Macroeconomics
3. (a) Explain the effect of a rise in taxation and a fall in government expenditure on
the circular flow of income of an economy. [10]
Answers may include:
definition of taxation and government expenditure
diagram to show the circular flow of income or diagram to show AS/AD
diagram but needs to explain the link to the circular flow
explanation of how taxation affects the circular flow of income as a
withdrawal and an explanation of how government expenditure affects the
circular flow of income as an injection
examples of where governments have raised taxation and reduced
government expenditure.
– 11 – M15/3/ECONO/SP1/ENG/TZ1/XX/M
Assessment Criteria
Part (a) 10 marks
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 There is little understanding of the specific demands of the question.
Relevant economic terms are not defined.
There is very little knowledge of relevant economic theory.
There are significant errors. 1–3
2 There is some understanding of the specific demands of the question.
Some relevant economic terms are defined.
There is some knowledge of relevant economic theory.
There are some errors. 4–6
3 There is understanding of the specific demands of the question.
Relevant economic terms are defined.
Relevant economic theory is explained and applied.
Where appropriate, diagrams are included and applied.
Where appropriate, examples are used.
There are few errors. 7–8
4 There is clear understanding of the specific demands of the question.
Relevant economic terms are clearly defined.
Relevant economic theory is clearly explained and applied.
Where appropriate, diagrams are included and applied effectively.
Where appropriate, examples are used effectively.
There are no significant errors. 9–10
– 12 – M15/3/ECONO/SP1/ENG/TZ1/XX/M
(b) Evaluate the effectiveness of fiscal policy to reduce the rate of inflation. [15]
Answers may include:
definition of inflation and fiscal policy
AD/AS diagram to show how contractionary fiscal policy leads to a fall in
inflation
explanation of how a tight fiscal policy leads to a fall in inflation
examples of a tight fiscal policy reducing inflation
synthesis or evaluation.
Evaluation may include: the effectiveness of a contractionary fiscal policy to
reduce inflation in terms of the: negative impact on economic growth; the
impact of increasing taxation on worker and business incentives and the
impact of reduced government expenditure on the quality of public services,
time lags, political constraints, etc. Comparison of effectiveness of alternative
solutions such as supply-side and monetary policy may be given.
Examiners should be aware that candidates may take a different approach
which, if appropriate, should be rewarded.
Opinions or conclusions should be presented clearly and should be supported
by appropriate examples.
– 13 – M15/3/ECONO/SP1/ENG/TZ1/XX/M
Assessment Criteria
Part (b) 15 marks
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 There is little understanding of the specific demands of the question.
Relevant economic terms are not defined.
There is very little knowledge of relevant economic theory.
There are significant errors. 1–5
2 There is some understanding of the specific demands of the question.
Some relevant economic terms are defined.
There is some knowledge of relevant economic theory.
There are some errors. 6–9
3 There is understanding of the specific demands of the question.
Relevant economic terms are defined.
Relevant economic theory is explained and applied.
Where appropriate, diagrams are included and applied.
Where appropriate, examples are used.
There is an attempt at synthesis or evaluation.
There are few errors. 10–12
4 There is clear understanding of the specific demands of the question.
Relevant economic terms are clearly defined.
Relevant economic theory is clearly explained and applied.
Where appropriate, diagrams are included and applied effectively.
Where appropriate, examples are used effectively.
There is evidence of appropriate synthesis or evaluation.
There are no significant errors. 13–15
– 14 – M15/3/ECONO/SP1/ENG/TZ1/XX/M
4. (a) Explain how business spending on research and development and
government expenditure on infrastructure might shift the long-run aggregate
supply curve. [10]
Answers may include:
definitions of research and development, infrastructure, long-run aggregate
supply
diagram to show a shift in the LRAS
explanation of how research and development in new technology will
improve the quality of physical capital, hence increasing productive
capacity and shifting the LRAS to the right. Explanation of how increased
government expenditure in infrastructure will increase productive capacity
and shift the LRAS to the right
examples of research and development and infrastructure.
– 15 – M15/3/ECONO/SP1/ENG/TZ1/XX/M
Assessment Criteria
Part (a) 10 marks
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 There is little understanding of the specific demands of the question.
Relevant economic terms are not defined.
There is very little knowledge of relevant economic theory.
There are significant errors. 1–3
2 There is some understanding of the specific demands of the question.
Some relevant economic terms are defined.
There is some knowledge of relevant economic theory.
There are some errors. 4–6
3 There is understanding of the specific demands of the question.
Relevant economic terms are defined.
Relevant economic theory is explained and applied.
Where appropriate, diagrams are included and applied.
Where appropriate, examples are used.
There are few errors. 7–8
4 There is clear understanding of the specific demands of the question.
Relevant economic terms are clearly defined.
Relevant economic theory is clearly explained and applied.
Where appropriate, diagrams are included and applied effectively.
Where appropriate, examples are used effectively.
There are no significant errors. 9–10
– 16 – M15/3/ECONO/SP1/ENG/TZ1/XX/M
(b) Evaluate the effectiveness of interventionist supply-side policies to achieve
economic growth. [15]
Answers may include:
definition of interventionist supply-side policies and economic growth
diagram to show the impact of interventionist supply-side policies on
economic growth
explanation of the interventionist supply-side policies that could be used to
increase the rate of economic growth through:
- education and training
- research and development
- infrastructure
- industrial policy
examples of the application of interventionist supply-side policies
synthesis or evaluation.
Evaluation may include: the use of interventionist supply-side policies used to
increase economic growth including:
cost and effectiveness of the interventionist supply-side policies
time it takes for the policy to increase economic growth
implications for different stakeholders
suggestion of alternatives to interventionist supply-side policies.
Examiners should be aware that candidates may take a different approach
which, if appropriate, should be rewarded.
Opinions or conclusions should be presented clearly and should be supported
by appropriate examples.
– 17 – M15/3/ECONO/SP1/ENG/TZ1/XX/M
Assessment Criteria
Part (b) 15 marks
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 There is little understanding of the specific demands of the question.
Relevant economic terms are not defined.
There is very little knowledge of relevant economic theory.
There are significant errors. 1–5
2 There is some understanding of the specific demands of the question.
Some relevant economic terms are defined.
There is some knowledge of relevant economic theory.
There are some errors. 6–9
3 There is understanding of the specific demands of the question.
Relevant economic terms are defined.
Relevant economic theory is explained and applied.
Where appropriate, diagrams are included and applied.
Where appropriate, examples are used.
There is an attempt at synthesis or evaluation.
There are few errors. 10–12
4 There is clear understanding of the specific demands of the question.
Relevant economic terms are clearly defined.
Relevant economic theory is clearly explained and applied.
Where appropriate, diagrams are included and applied effectively.
Where appropriate, examples are used effectively.
There is evidence of appropriate synthesis or evaluation.
There are no significant errors. 13–15
M15/3/ECONO/SP2/ENG/TZ0/XX
Economics
Standard level
Paper 2
© International Baccalaureate Organization 20159 pages
2215 – 5113
Tuesday 5 May 2015 (morning)
Instructions to candidates
Do not open this examination paper until instructed to do so.
You are not permitted access to any calculator for this paper.
Section A: answer one question.
Section B: answer one question.
Use fully labelled diagrams and references to the text/data where appropriate.
The maximum mark for this examination paper is [40 marks].
1 hour 30 minutes
– 2 –
Section A
Answer one question from this section.
1. Study the extract below and answer the questions that follow.
Latvia to join the eurozone monetary union
Latvia will become the 18th country to adopt the euro after being approved for membership
by the European Commission. The country has met the criteria for eurozone membership,
including low ination, low long-term interest rates, a stable exchange rate, low public debt
and low budget decits.
Latvia joined the European Union (EU) customs union in 2004. This resulted in a large
increase in the availability of credit and strong economic growth in Latvia. However, the
2008 global nancial crisis resulted in the collapse of one of its leading banks and massive
economic instability. Economic output fell by about 20 % and Latvia had to accept a bailout
(loans) from the International Monetary Fund (IMF) and the EU.
Latvia kept the lat (the Latvian currency) pegged to the euro throughout the crisis. At the
time, some economists argued that devaluation would have been a better way to improve the
economy. However, Latvia followed the path of other countries such as Greece and Ireland,
and chose to improve competitiveness through austerity measures. This involved increasing
direct taxes and cutting government spending and public sector wages.
 By late 2010, the economy was growing again and Latvia had repaid the loans to the IMF
and the EU. In 2012, the economy expanded by 5.6 %, the fastest of any country in the
EU, although output was still 12 % below its pre-crisis peak. In addition unemployment was
falling, but it remained high at 12.4 %.
 For Latvia, which shares a border with Russia, the attraction of the euro is about economics
and security. Entering the eurozone in January 2014 is part of a process of shifting away
from the influence of Russia, and following its northern neighbour Estonia which joined the
eurozone in 2011. Lithuania hopes to join the eurozone in 2015.
 Public support for joining the eurozone has been low. Evidence from one survey suggests
that a small majority of Latvia’s population opposes membership, fearing that prices will rise
and Latvians will be drawn into the problems facing Europe’s struggling economies.
 Nonetheless, there are signs that support is growing. The Latvian prime minister said that
“switching to the euro will help economic growth and bring increased foreign investment.
Unlike countries that can afford to ignore the euro and additional integration, Latvia cannot
easily stand on its own. This is good news, not only for Latvia, but also for the eurozone.
It shows that there is still condence in the single currency”.
[Source: adapted from www.reuters.com, 5 June 2013; http://online.wsj.com, 9 July 2013 and
www.theguardian.com, 16 July 2013]
(This question continues on the following page)
M15/3/ECONO/SP2/ENG/TZ0/XX
– 3 –
Turn over
(Question 1 continued)
(a) (i) Dene the term customs union indicated in bold in the text (paragraph ).
[2]
(ii) Dene the term direct taxes indicated in bold in the text (paragraph ).
[2]
(b) Using an AD/AS diagram, explain how devaluation of the lat (the Latvian currency)
might have been used to improve the Latvian economy during the nancial crisis
(paragraph ). [4]
(c) Using a production possibilities curve (PPC) diagram, explain the change in Latvia’s
economy from 2008 to 2012 (paragraphs and ). [4]
(d) Using information from the text/data and your knowledge of economics, evaluate the
possible impact of Latvia joining the eurozone. [8]
M15/3/ECONO/SP2/ENG/TZ0/XX
– 4 –
2. Study the extract below and answer the questions that follow.
Brazil’s currency slides to new low
In August 2013, the exchange rate of Brazil’s currency, the real, fell to its lowest level
against the United States dollar (US$) since February 2009 because of the poor performance
of its economy. This fall is expected to continue, at least in the short term.
Much of the weakness of the real is due to the possibility that the US central bank may soon
start to reverse its easy monetary policy as a result of increased growth in the US. There is
speculation that the US interest rate might rise at some point in the future. The consequence
of this is that money is leaving developing economies such as Brazil.
Brazil’s central bank tried to ght the outows by raising interest rates three times in 2013
to a high of 9 % and injecting US$7.6 billion into the foreign exchange market in one week.
Even with such interventions, the value of the real was down by more than 10 %. The central
bank defends its actions, saying that its interventions prevented even larger falls in the value
of the currency.
A weaker currency poses additional problems for the central bank in the form of imported
ination. The speed of the real’s decline creates problems for companies, which struggle to
make plans when they do not know where the currency will be in the future.
In contrast, the nance minister sees a possible advantage to a weaker currency. “The new
exchange rate makes Brazil more competitive,” the minister told reporters after meeting
with leading business people. He acknowledged, however, that the sudden swings in the
currency “are not positive for the economy”.
Analysts say that the value of the real is unlikely to increase until the economic outlook
improves. Forecasters expect economic growth to remain low at 2.2 % in 2013. This is
slightly up from the previous year, but much lower than the 7.5 % growth in 2010. Brazil is
also concerned about ination, which is at an annual rate of 6.3 %. This is near the top of the
government’s target range and is another reason why the central bank has raised interest
rates.
Brazil also moved from a US$9.9 billion trade surplus in 2012 to a US$5 billion trade
decit in 2013, contributing to the economy’s problems. Brazil’s current account decit
has increased signicantly. The combination of these economic events presents difcult
problems for policy makers.
[Source: adapted from http://online.wsj.com, 16 and 19 August 2013 and
http://en.mercopress.com, 20 August 2013]
(This question continues on the following page)
M15/3/ECONO/SP2/ENG/TZ0/XX
– 5 –
Turn over
(Question 2 continued)
(a) (i) Dene the term exchange rate indicated in bold in the text (paragraph ).
[2]
(ii) Dene the term current account decit indicated in bold in the text (paragraph ).
[2]
(b) Using an exchange rate diagram, explain how the speculation that the US central bank
may change its monetary policy has affected the value of the Brazilian real
(paragraph ). [4]
(c) Using an AD/AS diagram, explain how the move from a trade surplus to a trade decit
could harm the Brazilian economy (paragraph ). [4]
(d) Using information from the text/data and your knowledge of economics, evaluate the
possible consequences for the Brazilian economy of the fall in the value of the
Brazilian real. [8]
M15/3/ECONO/SP2/ENG/TZ0/XX
– 6 –
Section B
Answer one question from this section.
3. Study the extract and data below and answer the questions that follow.
Extract 1
(This question continues on the following page)
Text removed for copyright reasons
M15/3/ECONO/SP2/ENG/TZ0/XX
– 7 –
Turn over
(Question 3 continued)
Extract 2
Figure 1Selected economic data for Ivory Coast
(a) (i) Dene the term entrepreneurship indicated in bold in the text (paragraph ).
[2]
(ii) Dene the term gross domestic product (GDP) indicated in bold in the text
(paragraph ). [2]
(b) Using a demand and supply diagram, explain the impact of a price oor on the market
for cocoa in Ivory Coast (paragraph ). [4]
(c) Using information from Extract 2, explain how the servicing of debt has an opportunity
cost that may affect development in Ivory Coast. [4]
(d) Using information from the text/data and your knowledge of economics, evaluate
government intervention in promoting economic development in Ivory Coast. [8]
Text removed for copyright reasons
Figure removed for copyright reasons
M15/3/ECONO/SP2/ENG/TZ0/XX
– 8 –
4. Study the extract and data below and answer the questions that follow.
Equatorial Guinea
Equatorial Guinea has the third largest reserve of oil in Africa, discovered in 2006. However,
the country does not have a single oil renery that can convert the oil into gasoline (petrol).
The government has made agreements with multinational corporations (MNCs) from China
and the United States (US) for unrened oil to be exported in exchange for cash payments
and loans. Other natural resources that have not yet been exploited include gold, zinc and
diamonds. Beyond the oil sector, subsistence farming still dominates. The oil boom has
led to inationary pressures, with an average annual ination rate of 6.1 % in the period
2003–2013.
Equatorial Guinea is now the richest country in Africa in terms of per capita income.
The World Bank estimate for gross national income (GNI) per capita at purchasing power
parity (PPP) for 2012 was US$21 715; while a current estimate puts income per capita as
high as US$33 600. When last proled in 1995, income per capita was just US$330.
Very little of the income goes towards economic development. It is true that roads now run
deep into the interior of the country, and that there has been a recent surge in infrastructure
investment, following the rst phase of Horizon 2020, the government’s National
Development Plan. Nonetheless, the majority of Guineans still live without clean drinking
water and sanitation, with continual power cuts, while average life expectancy stands at just
51 years – the eighth lowest in the world. Inequality is growing day by day.
As the country moves into the second phase of the National Development Plan, the
government is planning to redirect public investment from infrastructure towards the
development of new economic sectors, such as sheries, agriculture, tourism and nance.
There is a lack of accurate economic data that makes it difcult to track progress on
socioeconomic indicators. A World Bank public expenditure review carried out in 2010
recommended a reallocation of resources towards human development, especially education
and health.
Figure 1 – Selected economic data for Equatorial Guinea – 2009 to 2012
[Source: Text: “Equatorial Guinea, Country Prole”, New Internationalist, July/August 2013 and The World Bank Country Report,
http://www.worldbank.org/en/country/equatorialguinea/overview]
(This question continues on the following page)
Figure removed for copyright reasons
M15/3/ECONO/SP2/ENG/TZ0/XX
– 9 –
(Question 4 continued)
(a) (i) Dene the term gross national income (GNI) indicated in bold in the text
(paragraph ). [2]
(ii) List two of the measures that make up the Human Development Index (Figure 1). [2]
(b) Using an AD/AS diagram, explain why “the oil boom has led to inationary pressures”
(paragraph ). [4]
(c) With reference to the text/data, explain two possible barriers to economic development
in Equatorial Guinea. [4]
(d) Using information from the text/data and your knowledge of economics, evaluate the
likely contribution of the oil export revenues as a means toward achieving economic
growth and development in Equatorial Guinea. [8]
M15/3/ECONO/SP2/ENG/TZ0/XX
M15/3/ECONO/SP2/ENG/TZ0/XX/M
20 pages
Markscheme
May 2015
Economics
Standard level
Paper 2
– 2 – M15/3/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 the IB Assessment Centre.
– 3 – M15/3/ECONO/SP2/ENG/TZ0/XX/M
Use the question-specific markscheme together with the markbands. Award up to the maximum
marks as indicated.
Section A
1. (a) (i) Define the term customs union indicated in bold in the text (paragraph ). [2]
Level Marks
0 The work does not reach a standard described by the descriptors
below. 0
1 Vague definition. 1
The idea that it is where countries agree to trade freely.
2 Accurate definition. 2
An explanation that it is a form of economic integration where
member countries agree to liberalize trade (trade freely amongst
themselves) and adopt a common external tariff (or common trade
policies towards non members).
(ii) Define the term direct taxes indicated in bold in the text (paragraph ). [2]
Level Marks
0 The work does not reach a standard described by the descriptors
below. 0
1 Vague definition. 1
The idea that taxes are paid to the government or tax paid by an
individual (household).
2 Accurate definition. 2
An explanation that they are taxes (paid to the government) on
income (household and firms).
– 4 – M15/3/ECONO/SP2/ENG/TZ0/XX/M
(b) Using an AD/AS diagram, explain how devaluation of the lat (the Latvian
currency) might have been used to improve the Latvian economy during the
financial crisis (paragraph ). [4]
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 There is a correct diagram or an accurate written response. 1–2
For drawing a correctly labelled AD/AS diagram showing a shift of AD to
the right and an increase in real GDP or for an explanation that devaluation
of the lat may have caused an increase in aggregate demand through an
increase in exports and/or a decrease in imports, thus bringing about an
increase in real GDP.
2 There is a correct diagram and an accurate written response. 3–4
For drawing a correctly labelled AD/AS diagram showing a shift of AD to
the right and an increase in real GDP and for an explanation that
devaluation of the lat may have caused an increase in aggregate demand
through an increase in exports and/or a decrease in imports, thus bringing
about an increase in real GDP.
Candidates who incorrectly label diagrams can be rewarded with a maximum
of [3].
For AD/AS, the vertical axis may be price level, average price level, PL or APL.
The horizontal axis may be output, real output, national output, real national
output, national income, or GDP. A title is not necessary.
– 5 – M15/3/ECONO/SP2/ENG/TZ0/XX/M
(c) Using a production possibilities curve (PPC) diagram, explain the change in
Latvia’s economy from 2008 to 2012 (paragraphs and ). [4]
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 There is a correct diagram or an accurate written response. 1–2
For drawing a correctly labelled PPC diagram showing a movement from
one point within the curve to a new point closer to the curve or for an
explanation that Latvia experienced economic growth from 2008 to 2012,
which means that there was an increase in output shown as a movement to
a new point, closer to the PPC.
2 There is a correct diagram and an accurate written response. 3–4
For drawing a correctly labelled PPC diagram showing a movement from
one point within the curve to a new point closer to the curve and for an
explanation that Latvia experienced economic growth from 2008 to 2012,
which means that there was an increase in output shown as a movement to
a new point, closer to the PPC.
Candidates who incorrectly label diagrams can be rewarded with a maximum
of [3].
Candidates might show a different combination of points within the PPC on the
diagram. There might be an initial movement from one point inside the curve to a
further point inside the curve to reflect the 20
% drop in output in 2008. To show
the change from 2008 to 2012, there must be a new point closer to the PPC.
For a PPC, the axes could be two alternative products, one on each axis,
eg Good A and Good B or Schools and Cars; or two groups of products or two
sectors, eg Consumer Goods and Producer Goods. A title is not necessary.
– 6 – M15/3/ECONO/SP2/ENG/TZ0/XX/M
(d) Using information from the text/data and your knowledge of economics, evaluate
the possible impact of Latvia joining the eurozone. [8]
Examiners should be aware that candidates may take a different approach which,
if appropriate, should be rewarded.
Do not award beyond Level 2 if the answer does not contain reference to the
information provided.
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 Few relevant concepts are recognized. 1–2
There is basic knowledge/understanding.
2 Relevant concepts are recognized and developed in reasonable depth. 3–5
There is clear knowledge/understanding.
There is some attempt at application/analysis.
3 Relevant concepts are recognized and developed in reasonable depth. 6–8
There is clear knowledge/understanding.
There is effective application/analysis.
There is synthesis/evaluation, supported by appropriate theory and
evidence.
Command term
“Evaluate” requires candidates to make an appraisal by weighing up the
strengths and limitations.
Responses may include:
definition of monetary union.
Arguments for:
elimination of exchange rate uncertainty
easier for future planning by firms
increased investment and trade
increased investor confidence
reduction in transaction costs in trade with the eurozone
increased foreign investment (paragraph )
increased economic growth (paragraph )
greater integration with the eurozone helps reduce dependence on Russia
(paragraph )
renewed confidence in the eurozone will bring benefits to all members
(paragraph )
may help to bring down unemployment, which is high (paragraph )
Latvia had to exercise discipline to meet the criteria to join the eurozone which
built a good economic foundation for moving forward (paragraph ).
– 7 – M15/3/ECONO/SP2/ENG/TZ0/XX/M
Arguments against:
loss of sovereignty over monetary policy
possible high changeover costs
problems of supporting other eurozone members (paragraph )
Latvia loses the power to control its own currency to improve competitiveness
threat of inflation as well as deflation (paragraph )
short term – lower consumer confidence (paragraph ).
Any reasonable evaluation that offers a considered and balanced review of the
strengths and limitations of Latvia joining the eurozone.
– 8 – M15/3/ECONO/SP2/ENG/TZ0/XX/M
2.
(a) (i)
Define the term
exchange rate
indicated in bold in the text (paragraph
).
[2]
Level Marks
0 The work does not reach a standard described by the descriptors
below. 0
1 Vague definition. 1
The idea that it is to do with the price of a currency.
2 Accurate definition. 2
An explanation that it is the price/value of one currency expressed in
terms of another currency.
(ii)
Define the term
current account deficit
indicated in bold in the text
(paragraph
).
[2]
Level Marks
0 The work does not reach a standard described by the descriptors
below. 0
1 Vague definition. 1
The idea that imports exceed exports.
2 Accurate definition. 2
An explanation that the outflows of money from trade in goods and
services, income flows and transfers are larger than the inflows of
money.
– 9 – M15/3/ECONO/SP2/ENG/TZ0/XX/M
(b) Using an exchange rate diagram, explain how the speculation that the US central
bank may change its monetary policy has affected the value of the Brazilian real
(paragraph ). [4]
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 There is a correct diagram or an accurate written response. 1–2
For drawing a correctly labelled exchange rate diagram with a shift of the
supply curve of the real to the right and a fall in the exchange rate or for
explaining that higher interest rates in the US will lead to an increase in
Brazilian deposits (Brazilians saving) in US financial institutions and so an
increase in the supply of the real, lowering the value of the real.
2 There is a correct diagram and an accurate written response. 3–4
For drawing a correctly labelled exchange rate diagram with a shift of the
supply curve of the real to the right and a fall in the exchange rate and for
explaining that higher interest rates in the US will lead to an increase in
Brazilian deposits (Brazilians saving) in US financial institutions and so an
increase in the supply of the real, lowering the value of the real.
Candidates who incorrectly label diagrams can be rewarded with a maximum
of [3].
For an exchange rate diagram, the vertical axis may be exchange rate, price of
real in US$, US$/real, or dollars per real. The horizontal axis should be quantity,
or quantity of reals. A title is not necessary.
– 10 – M15/3/ECONO/SP2/ENG/TZ0/XX/M
(c)
Using an AD/AS diagram, explain how the move from a trade surplus to a trade
deficit could harm the Brazilian economy (paragraph
).
[4]
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 There is a correct diagram or an accurate written response. 1–2
For drawing a correctly labelled AD/AS diagram with a shift of the AD curve
to the left and a fall in real GDP or for explaining that moving to a trade
deficit will reduce aggregate demand in the economy, because (X–M)
becomes negative, creating a decrease in real GDP (or negative growth)
and/or increased unemployment.
2 There is a correct diagram and an accurate written response. 3–4
For drawing a correctly labelled AD/AS diagram with a shift of the AD curve
to the left and a fall in real GDP and for explaining that moving to a trade
deficit will reduce aggregate demand in the economy, because (X–M)
becomes negative, creating a decrease in real GDP (or negative growth)
and/or increased unemployment.
Candidates who incorrectly label diagrams can be rewarded with a maximum
of [3].
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.
– 11 – M15/3/ECONO/SP2/ENG/TZ0/XX/M
(d)
Using information from the text/data and your knowledge of economics, evaluate
the possible consequences for the Brazilian economy of the fall in the value of
the Brazilian real.
[8]
Examiners should be aware that candidates may take a different approach which,
if appropriate, should be rewarded.
Do not award beyond Level 2 if the answer does not contain reference to the
information provided.
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 Few relevant concepts are recognized. 1–2
There is basic knowledge/understanding.
2 Relevant concepts are recognized and developed in reasonable depth. 3–5
There is clear knowledge/understanding.
There is some attempt at application/analysis.
3 Relevant concepts are recognized and developed in reasonable depth. 6–8
There is clear knowledge/understanding.
There is effective application/analysis.
There is synthesis/evaluation, supported by appropriate theory and
evidence.
Command term
“Evaluate” requires candidates to make an appraisal by weighing up the
strengths and limitations.
Responses may include:
interest rates may be raised to support the currency, having contractionary
effects on the economy (paragraph ); however, increased interest rates can
help keep an already high inflation rate in check (paragraph )
the central bank may have to use foreign reserves to support the currency
(paragraph ); to date, attempts have been futile as real depreciated a further
10
% (paragraph )
there is a danger of imported inflation (paragraph ); inflation is already at
6.3
% which is at the top end of the target range (paragraph )
companies have problems planning for the future with the changing exchange
rate (paragraph )
Brazilian exports should be more competitive (paragraph )
lower export prices may improve the current account deficit (paragraph )
which currently stands at $5
bn
employment in export industries may increase with exports
employment in domestic industries may increase as people move away from
more expensive imports
reduced consumer and investor confidence as real is expected to continue to
fall in the short – run (paragraph ).
Any reasonable evaluation that offers a considered and balanced review of the
possible consequences for the Brazilian economy of the falling value of the
Brazilian real.
– 12 – M15/3/ECONO/SP2/ENG/TZ0/XX/M
Section B
3. (a) (i) Define the term entrepreneurship indicated in bold in the text
(paragraph ). [2]
Level Marks
0 The work does not reach a standard described by the descriptors
below. 0
1 Vague definition. 1
For stating that an entrepreneur carries out any one of the following
tasks:
starting up a business
employing/organizing/managing resources or factors of production
risk taking.
2 Accurate definition. 2
For stating that an entrepreneur carries out any two of the following
tasks:
starting up a business
employing/organizing/managing resources or factors of production
risk taking.
(ii)
Define the term
gross domestic product
(GDP)
indicated in bold in the text
(paragraph
).
[2]
Level Marks
0 The work does not reach a standard described by the descriptors
below. 0
1 Vague definition. 1
The idea that it is the output produced in an economy.
2 Accurate definition. 2
An explanation that it is the total value of all goods and services
produced in an economy (in a given time period).
– 13 – M15/3/ECONO/SP2/ENG/TZ0/XX/M
(b) Using a demand and supply diagram, explain the impact of a price floor on the
market for cocoa in Ivory Coast (paragraph ). [4]
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 There is a correct diagram or an accurate written response. 1–2
For drawing an accurate and labelled demand and supply diagram clearly
showing a price set above the equilibrium price and a surplus or for
providing an explanation that a price floor is set above the market
equilibrium price causing supply to exceed demand, excess supply/surplus.
2 There is a correct diagram and an accurate written response. 3–4
For drawing an accurate, labelled demand and supply diagram clearly
showing a price set above the equilibrium price and a surplus and for
providing an explanation that a price floor is set above the market
equilibrium price causing supply to exceed demand, excess supply/surplus.
Candidates who incorrectly label diagrams can be rewarded with a maximum
of [3].
The use of P and Q on the axes is sufficient for a demand and supply diagram.
A title is not necessary.
– 14 – M15/3/ECONO/SP2/ENG/TZ0/XX/M
(c)
Using information from
Extract 2
, explain how the servicing of debt has an
opportunity cost that may affect development in Ivory Coast.
[4]
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 The written response is limited. 1–2
For a definition of opportunity cost (explicit or implied) and an explanation
that money spent on debt servicing means that there is less spending on
development objectives, such as health care or education or for identifying
information from the extract, such as one-third of government revenue was
spent on debt servicing in the 80’s and 90’s, or since 2008, debt servicing
accounts for 15
% of government revenue.
2 The written response is accurate. 3–4
For a definition of opportunity cost (explicit or implied) and an explanation
that money spent on debt servicing means that there is less spending on
development objectives, such as health care or education and for
identifying information from the extract, such as one-third of government
revenue was spent on debt servicing in the 80’s and 90’s, or since 2008,
debt servicing accounts for 15
% of government revenue.
(d)
Using information from the text/data and your knowledge of economics, evaluate
government intervention in promoting economic development in Ivory Coast.
[8]
Examiners should be aware that candidates may take a different approach which,
if appropriate, should be rewarded.
Do not award beyond Level 2 if the answer does not contain reference to the
information provided.
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 Few relevant concepts are recognized. 1–2
There is basic knowledge/understanding.
2 Relevant concepts are recognized and developed in reasonable depth. 3–5
There is clear knowledge/understanding.
There is some attempt at application/analysis.
3 Relevant concepts are recognized and developed in reasonable depth. 6–8
There is clear knowledge/understanding.
There is effective application/analysis.
There is synthesis/evaluation, supported by appropriate theory and
evidence.
Command term
“Evaluate” requires candidates to make an appraisal by weighing up the
strengths and limitations.
Responses may include:
explanation of government intervention policies
definition of economic development.
– 15 – M15/3/ECONO/SP2/ENG/TZ0/XX/M
Advantages of government intervention policies:
price floor increases farmers’ incomes however, floor not as high as Ghana
which may promote smuggling of cocoa into Ghana (paragraph )
inelas
tic supply and demand reduces problems of surplus supply usually
caused by price floors
government investment will help improve crop yields thus increasing net X and
AD and employment possibilities (paragraph )
investment will also promote diversification into the production of rice as well
government provides necessary infrastructure – increase PPC (paragraph )
government can provide merit goods (paragraph )
investment in human capital – improved life expectancy and literacy rate
(Figure 1 and paragraph )
possibility of income redistribution through taxation
possibility to correct market failures – improvement in literacy rate
(paragraph )
capacity to reduce corruption (paragraph )
Ivory Coast has seen improvement in literacy rates (paragraph )
market-oriented policy of reducing business regulations (paragraph ) may
attract MNC’s which may provide jobs therefore possibly breaking the poverty
cycle for some.
Disadvantages of government intervention policies:
increased government expenditures could exacerbate the existing debt
problems for heavily indebted poor countries (Extract 2)
corruption remains a problem
lack of incentive to become more efficient with price floor in place
price floor may encourage over-supply
can lead to excessive bureaucracy and hence red tape and inefficiency plus
increased demands on the budget
policies not helping women – women under-represented in new businesses
(paragraph )
reduced government expenditure on health care will negatively impact
development which may lead to lower life expectancy leading to a lower HDI
rank. On the positive side, free health care to mothers and children would limit
the negative impact of the cut. As such Ivory Coast may not continue to see a
steady improvement in life expectancy (Figure 1)
if citizens now have to pay for health care, they may forego expenditure in
other areas, such as education.
Any reasonable evaluation that offers a considered and balanced review of the
strengths and limitations of government interventionist policies in promoting
economic development in Ivory Coast.
– 16 – M15/3/ECONO/SP2/ENG/TZ0/XX/M
4. (a) (i) Define the term gross national income (GNI) indicated in bold in the text
(paragraph ). [2]
Level Marks
0 The work does not reach a standard described by the descriptors
below. 0
1 Vague definition. 1
The idea that it is a measure of national income.
2 Accurate definition. 2
An explanation that it is the total value of incomes (or output or
expenditure) earned by a nation’s factors of production regardless of
where the assets are located (plus net property income from abroad).
An alternative definition of Gross Domestic Product + net property income
from abroad is acceptable for full marks.
(ii)
List
two
of the measures that make up the Human Development Index
(Figure 1).
[2]
Level Marks
0 The work does not reach a standard described by the descriptors
below. 0
1 There is limited understanding. 1
Any one of the following measures:
life expectancy at birth
mean years of schooling (for those aged 25 years and above)
expected years of schooling (for a child of school entrance age,
capped at 18 years of age)
GNI per capita (or GDP per capita).
2 There is clear understanding. 2
Any two of the following measures:
life expectancy at birth
mean years of schooling (for those aged 25 years and above)
expected years of schooling (for a child of school entrance age,
capped at 18 years of age)
GNI per capita (or GDP per capita).
– 17 – M15/3/ECONO/SP2/ENG/TZ0/XX/M
(b) Using an AD/AS diagram, explain why “the oil boom has led to inflationary
pressures” (paragraph ). [4]
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 There is a correct diagram or an accurate written response. 1–2
For drawing a correctly labelled AD/AS diagram showing a shift to the right
of AD and an increase in the price level or for an explanation that increased
oil exports will increase the net exports (X–M), thus leading to greater
aggregate demand and more inflationary pressure.
2 There is a correct diagram and an accurate written response. 3–4
For drawing a correctly labelled AD/AS diagram showing a shift to the right
of AD and an increase in the price level and for an explanation that
increased oil exports will increase the net exports (X–M), thus leading to
greater aggregate demand and more inflationary pressure.
Candidates who incorrectly label diagrams can be rewarded with a maximum
of [3].
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.
– 18 – M15/3/ECONO/SP2/ENG/TZ0/XX/M
(c) With reference to the text/data, explain two possible barriers to economic
development in Equatorial Guinea. [4]
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 The written response is limited. 1–2
For explaining any one of the following in terms of possible barriers to
economic development:
lack of ability to export refined products (paragraph
)
dependence on subsistence farming (paragraph
)
lack of clean drinking water, stable power, and sanitation (paragraph
)
low life expectancy (paragraph
)
growing inequality (paragraph
)
lack of resources in education and health (paragraph
)
relatively high population growth rate (Figure 1)
primary school enrolment below 100
% (Figure 1).
2 The written response is accurate. 3–4
For explaining any two of the following in terms of possible barriers to
economic development:
lack of ability to export refined products (paragraph )
dependence on subsistence farming (paragraph )
lack of clean drinking water, stable power, and sanitation (paragraph )
low life expectancy (paragraph )
growing inequality (paragraph )
lack of resources in education and health (paragraph )
relatively high population growth rate (Figure 1)
primary school enrolment below 100
% (Figure 1).
– 19 – M15/3/ECONO/SP2/ENG/TZ0/XX/M
(d)
Using information from the text/data and your knowledge of economics, evaluate
the likely contribution of the oil export revenues as a means toward achieving
economic growth and development in Equatorial Guinea.
[8]
Examiners should be aware that candidates may take a different approach which,
if appropriate, should be rewarded.
Do not award beyond Level 2 if the answer does not contain reference to the
information provided.
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 Few relevant concepts are recognized. 1–2
There is basic knowledge/understanding.
2 Relevant concepts are recognized and developed in reasonable depth. 3–5
There is clear knowledge/understanding.
There is some attempt at application/analysis.
3 Relevant concepts are recognized and developed in reasonable depth. 6–8
There is clear knowledge/understanding.
There is effective application/analysis.
There is synthesis/evaluation, supported by appropriate theory and
evidence.
Command term
“Evaluate” requires candidates to make an appraisal by weighing up the
strengths and limitations.
Responses may include:
a definition of economic growth
a definition of economic development
the increased export revenue (paragraph ) will lead to economic growth, but
not necessarily development
loans (paragraph ) may lead to growth and/or development, depending upon
their type
inflationary pressures (paragraph )
income per capita will increase (paragraph ), but this is not necessarily
economic growth
little of the wealth leads to development (paragraph )
the influence of MNCs (paragraph )
likelihood of growing inequality (paragraph )
long-run problems when the oil reserves run out
diversification – redirection of funds to new economic sectors (paragraph )
surge in infrastructure
oil revenue may facilitate exploration of other natural resources such as gold,
zinc and diamonds (paragraph ) which will lead to growth but not necessarily
development
World Bank recommended a reallocation of resources towards education and
health (paragraph ) – oil revenues may be directed at implementing the
recommendation
at the very least the government does have a National Development Plan and
they are into Phase 2 of this plan (paragraph ).
– 20 – M15/3/ECONO/SP2/ENG/TZ0/XX/M
Any reasonable evaluation that offers a considered and balanced review of the
possible contribution of oil export revenues towards achieving economic growth
and development in Equatorial Guinea.
Candidate session number
M15/3/ECONO/HP3/ENG/TZ0/XX
Economics
Higher level
Paper 3
© International Baccalaureate Organization 201517 pages
2215 – 5107
Tuesday 5 May 2015 (morning)
Instructions to candidates
Write your session number in the boxes above.
You are permitted access to a calculator for this paper.
Do not open this examination paper until instructed to do so.
Answer two questions in the boxes provided.
Unless otherwise stated in the question, all numerical answers must be given exactly or correct to
two decimal places.
You must show all your working.
The maximum mark for this examination paper is [50 marks].
1 hour
20EP01
– 2 –
Answer two questions. Each question is worth [25 marks]. Write your answers in the boxes provided.
1. The following diagram illustrates the average cost (AC) and marginal cost (MC) curves for
Firm A, which operates in a perfectly competitive market. As a price taker, Firm A charges
the market price of $18 per unit.
Revenue, costs ($ per unit)
44
40
36
32
28
24
20
16
12
8
4
0
MC
AC
0 20 40 60 80 100 120 140 160 180 200 220 240 260 280 300
Quantity per month (000)
(a) (i) On the diagram, draw and label the average revenue curve for Firm A. [2]
(ii) Calculate Firm A’s total revenue if it produces 180 000 units per month. [2]
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(This question continues on the following page)
20EP02
M 15 /3/ECONO/HP3/ ENG /TZ0/XX
– 3 –
Turn over
(Question 1 continued)
(iii) Identify Firm A’s short-run prot maximizing level of output. [1]
.................................................................
.................................................................
(iv) Calculate Firm A’s short-run abnormal prot/loss at the level of output identied
in part (iii). [2]
.................................................................
.................................................................
.................................................................
.................................................................
(b) With reference to the diagram, identify the long-run equilibrium price and level of output
for Firm A. [2]
.....................................................................
.....................................................................
.....................................................................
.....................................................................
(c) Explain, using the diagram, how Firm A will move from short-run equilibrium to long-run
equilibrium. [4]
.....................................................................
.....................................................................
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.....................................................................
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.....................................................................
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(This question continues on the following page)
20EP03
M15/3/ECONO/HP3/ENG/TZ0/XX
– 4 –
(Question 1 continued)
Although the rms in this industry aim to maximize prot, it has been observed that in the real
world there are some rms which engage in satiscing behaviour.
(d) Dene the term satiscing. [2]
.....................................................................
.....................................................................
.....................................................................
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(This question continues on page 6)
20EP04
M15/3/ECONO/HP3/ENG/TZ0/XX
– 5 –
Turn over
Please do not write on this page.
Answers written on this page
will not be marked.
20EP05
M15/3/ECONO/HP3/ENG/TZ0/XX
– 6 –
(Question 1 continued)
The following diagram illustrates the demand conditions faced by Firm B, which operates in a
non-collusive oligopolistic market structure. It currently charges a price of $10 per unit.
Price ($ per unit)
20
18
16
14
12
10
8
6
4
2
0
D
0 5 10 15 20 25 30 35 40 45 50
Quantity per month (000)
(e) Dene the term non-collusive. [2]
.....................................................................
.....................................................................
.....................................................................
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(This question continues on the following page)
20EP06
M15/3/ECONO/HP3/ENG/TZ0/XX
– 7 –
Turn over
(Question 1 continued)
(f) Calculate the price elasticity of demand if
(i) price increases to $12; [2]
.................................................................
.................................................................
.................................................................
.................................................................
(ii) price decreases to $4. [2]
.................................................................
.................................................................
.................................................................
.................................................................
(g) Using the diagram and your answers to part (f), explain why price rigidities exist in
non-collusive oligopolistic markets. [4]
.....................................................................
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20EP07
M15/3/ECONO/HP3/ENG/TZ0/XX
– 8 –
2. The following diagram illustrates the aggregate demand and short-run aggregate supply
curves for Country A according to the monetarist/new classical model.
Average price level / CPI
260
240
220
200
180
160
140
120
100
80
60
40
20
0
SRAS
1
AD
1
0 5 10 15 20 25 30 35 40 45
Real output ($ billion/year)
The full employment level of output for Country A is identied as $18 billion per year.
A decrease in consumer expenditure has led to a decrease in aggregate demand of
$9 billion.
(a) (i) Identify two possible reasons for a decrease in consumer expenditure. [2]
.................................................................
.................................................................
.................................................................
.................................................................
(This question continues on the following page)
20EP08
M15/3/ECONO/HP3/ENG/TZ0/XX
– 9 –
Turn over
(Question 2 continued)
(ii) On the diagram, draw and label the new aggregate demand curve following the
decrease in consumer expenditure. [1]
(iii) State the amount (in $ billion) by which the full employment level of output
exceeds the short-run equilibrium level of output. [1]
.................................................................
.................................................................
(iv) On the diagram, draw and label the long-run aggregate supply curve for
Country A. [1]
(v) Identify the average price level and level of real output when Country A has
returned to long-run equilibrium as a result of the interaction of market forces. [1]
.................................................................
.................................................................
(b) Explain, giving two reasons, why the aggregate demand curve has a negative slope. [4]
.....................................................................
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(This question continues on the following page)
20EP09
M15/3/ECONO/HP3/ENG/TZ0/XX
– 10 –
(Question 2 continued)
(c) The government of Country A has decided to implement an expansionary scal policy.
Direct income tax will be reduced in 2016 as illustrated in the following table.
Income
($ per year)
Rate of income tax
(2015)
Rate of income tax
(2016)
1–8000 0 % 0 %
8001–22 000 10 % 8 %
22 001–38 000 20 % 16 %
38 001 and over 32 % 25 %
(i) Calculate the income tax paid in 2015 by an individual earning $65000 per year. [2]
.................................................................
.................................................................
.................................................................
.................................................................
(ii) Calculate the average rate of tax paid by the individual in 2016 (assuming the
individual’s income remains the same as in 2015). [3]
.................................................................
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.................................................................
.................................................................
.................................................................
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(iii) Explain why a decrease in the rate of direct tax would affect the value of the
multiplier in Country A. [2]
.................................................................
.................................................................
.................................................................
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(This question continues on the following page)
20EP10
M15/3/ECONO/HP3/ENG/TZ0/XX
– 11 –
Turn over
(Question 2 continued)
In Country A an indirect tax of 15% is imposed on all goods and services purchased.
Some economists have argued that reducing the indirect tax would be preferable to reducing
income tax, due to the likely effects on the distribution of income.
(d) (i) In the following box, sketch and label a Lorenz curve for Country A to show the
likely effects on the distribution of income if the rate of indirect tax is reduced. [2]
(ii) With reference to your diagram in part (d)(i), explain how the Gini coefcient
would be derived. [2]
.................................................................
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(This question continues on the following page)
20EP11
M15/3/ECONO/HP3/ENG/TZ0/XX
– 12 –
(Question 2 continued)
(e) Explain how the reductions in the rates of income tax in 2016 specied in part (c) may
affect equity in the distribution of income in Country A. [4]
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20EP12
M15/3/ECONO/HP3/ENG/TZ0/XX
– 13 –
Turn over
3. A Thai student decides to study at a university in Australia. The current market exchange
rate is AU$1.00= THB30.61 where AU$ is the Australian dollar and THB is the Thai baht.
Assume that the annual tuition fees are AU$18450 and that the student expects annual living
expenses to be AU$950.
(a) Calculate the annual expected total expenses measured in Thai baht. [2]
.....................................................................
.....................................................................
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.....................................................................
When arriving in Australia, the student discovers that the Australian dollar has appreciated
against the Thai baht by 6.25%.
(b) Calculate the new exchange rate. [2]
.....................................................................
.....................................................................
.....................................................................
.....................................................................
(c) Calculate the increase in Thai baht needed to pay for tuition and living expenses during
the rst year of studies as a result of the currency appreciation. [2]
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(This question continues on the following page)
20EP13
M15/3/ECONO/HP3/ENG/TZ0/XX
– 14 –
(Question 3 continued)
(d) Sketch on the following axes a fully-labelled diagram illustrating the appreciation of the
Australian dollar. [2]
(e) Using the diagram you have drawn in part (d), explain two reasons for which the
Australian dollar may have appreciated against the Thai baht. [4]
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(This question continues on the following page)
20EP14
M15/3/ECONO/HP3/ENG/TZ0/XX
– 15 –
Turn over
(Question 3 continued)
Assume that the Reserve Bank of Australia (The Central Bank of Australia) operated a
managed oat.
(f) Dene the term managed oat. [2]
.....................................................................
.....................................................................
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(g) State one action the Reserve Bank of Australia could take to prevent a further
appreciation of the Australian dollar. [1]
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(This question continues on the following page)
20EP15
M15/3/ECONO/HP3/ENG/TZ0/XX
– 16 –
(Question 3 continued)
Now consider another country, Sweden. The following table illustrates the indices of average
export and import prices between 2009 and 2011.
Index of export prices Index of import prices Terms of trade
2009 100 100 100
2010 93.80 98.91
2011 83.56 98.23
(h) Using 2009 as the base year, calculate Sweden’s terms of trade for 2010 and 2011.
Enter your results in the table. [2]
.....................................................................
.....................................................................
.....................................................................
.....................................................................
(i) Describe the meaning of the change in Sweden’s terms of trade between 2009
and 2011. [2]
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.....................................................................
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(j) State two possible reasons for a change in the terms of trade of a country such as
Sweden. [2]
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(This question continues on the following page)
20EP16
M15/3/ECONO/HP3/ENG/TZ0/XX
– 17 –
(Question 3 continued)
(k) Explain how the change in Sweden’s terms of trade, described in part (i), might improve
its current account balance. [4]
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20EP17
M15/3/ECONO/HP3/ENG/TZ0/XX
Please do not write on this page.
Answers written on this page
will not be marked.
20EP18
Please do not write on this page.
Answers written on this page
will not be marked.
20EP19
Please do not write on this page.
Answers written on this page
will not be marked.
20EP20
M15/3/ECONO/HP3/ENG/TZ0/XX/M
17 pages
Markscheme
May 2015
Economics
Higher level
Paper 3
– 2 – M15/3/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 the IB Assessment Centre.
– 3 – M15/3/ECONO/HP3/ENG/TZ0/XX/M
Notes for examiners:
1. Whenever relevant, carry over marks must be awarded. If a candidate makes an error in
calculation, but then uses the incorrect figure appropriately and accurately in later question
parts, then the candidate may be fully rewarded. This is the “own-figure rule” and you should
put OFR on the script where you are rewarding this. To do this you will need to use the
on-page comment annotation tool
(
).
2. Alternative approaches may be taken in responses to the [4] questions that use A02 command
terms. If this is the case and the alternative approaches are valid, then full credit should be
given.
1. (a) (i) On the diagram, draw and label the average revenue curve for Firm A. [2]
For an accurate average revenue curve. [1]
For an accurate, labelled average revenue curve. [1]
4 – M15/3/ECONO/HP3/ENG/TZ0/XX/M
(ii) Calculate Firm A’s total revenue if it produces 180
000 units per month. [2]
Total revenue
180 000 18=×
[1]
Any valid working is sufficient for [1].
$3 240 000=
[1]
An answer of $3
240
000 or 3
240
000 without any valid working is sufficient
for [1] only.
Since both AR and quantity are given, OFR does not apply.
(iii) Identify Firm A’s short-run profit maximizing level of output. [1]
Profit-maximizing level of output
140 000=
(the term unitsis not
necessary)
OR
120
000 units (the term unitsis not necessary) to allow for maximum profit
if measured using the diagram provided [1]
OFR applies if AR (=MR) curve has been drawn in the wrong position.
(iv) Calculate Firm A’s short-run abnormal profit/loss at the level of output
identified in part (iii). [2]
At output 140
000
Total revenue
AR Q 18 140 000 2 520 000=×=× =
Total cost
AC Q 14 140 000 1960 000=×=× =
[1]
Any valid working is sufficient for [1].
Profit
==2520000 1960000 $560000
[1]
OFR from part (iii) applies; no OFR applies within part (iv).
(b) With reference to the diagram, identify the long-run equilibrium price and level of
output for Firm A. [2]
P$12=
[1]
Q 120000=
(the term “units” is not necessary) [1]
(c) Explain, using the diagram, how Firm A will move from short-run equilibrium to
long-run equilibrium. [4]
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 The written response is limited. 1–2
For an explanation that the existence of abnormal profits (of $560
000) in
the short run will attract new firms into the industry.
2 The written response is accurate. 3–4
For an explanation that the existence of abnormal profits (of $560
000) in
the short run will attract new firms into the industry and that this will
increase market supply and consequently cause price to decrease until
abnormal profits are competed away (at a price of $12).
A response which makes no direct reference to the diagram may be
awarded a maximum of [3].
– 5 – M15/3/ECONO/HP3/ENG/TZ0/XX/M
(d) Define the term satisficing. [2]
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 Vague definition. 1
The idea that a firm tries to make enough profit.
2 Accurate definition. 2
The idea that a firm tries to make enough profit…
in order to satisfy different stakeholders
OR
in order to pursue other objectives
OR
because decision makers do not have the necessary information in order
to maximize profits.
(e) Define the term non-collusive. [2]
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 Vague definition. 1
The idea that firms act independently.
2 Accurate definition. 2
The idea that firms do not come together to set agreements on price and/or
output.
– 6 – M15/3/ECONO/HP3/ENG/TZ0/XX/M
(f) Calculate the price elasticity of demand if
(i) price increases to $12; [2]
%Q 59.09
PED
%P 20

[1]
Any valid working is sufficient for [1].
2.95 (or –2.95) [1]
An answer of 2.95 (or –2.95) without any valid working is sufficient for [1]
only.
Correct use of negative sign for
Q
and PED may be present but is not
necessary.
N.B. Candidates who use an accurate midpoint formula may be fully
rewarded.
13 11
15.5 2
4.61 or –4.61
An answer of 4.61 (or –4.61) without any valid working is sufficient for [1]
only.
(ii) price decreases to $4. [2]
% Q 27.27
PED
%P 60

[1]
Any valid working is sufficient for [1].
0.45 or –0.45 [1]
An answer of 0.45 (or –0.45) without any valid working is sufficient for [1]
only.
Correct use of negative sign for
P
and PED may be present but is not
necessary.
N.B. Candidates who use an accurate midpoint formula may be fully
rewarded.
67
25 6
0.28 or –0.28
An answer of 0.28 (or –0.28) without any valid working is sufficient for [1]
only.
– 7 – M15/3/ECONO/HP3/ENG/TZ0/XX/M
(g) Using the diagram and your answers to part (f), explain why price rigidities exist
in non-collusive oligopolistic markets. [4]
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 The written response is limited. 1–2
For an explanation that the firms may be unwilling to increase or reduce
price because they will be worse off in either case.
2 The written response is accurate. 3–4
For an explanation that if they increase price they may expect rivals not to
follow so that demand is elastic and revenue would decrease. On the other
hand, if they cut price they may expect rivals to follow so that demand is
relatively inelastic and the firm will be again worse off. Therefore it is not in
the firm’s interest to change price.
OR
An explanation that, for the profit-maximizing oligopolist who predicts that
rival(s) will not follow a price increase but will follow a price cut so there is a
range of cost conditions (possible positions of the MC curve) which would
intersect the MR curve within the resulting discontinuity at the current level
of output. It is therefore relatively likely that the oligopolist will choose to
leave price/output unchanged.
2. (a) (i) Identify two possible reasons for a decrease in consumer expenditure. [2]
Possible responses include:
a decrease in consumer confidence / low consumer confidence
an increase in the rate of interest / high interest rates
an increase in household indebtedness / high indebtedness
an increase in direct taxation / high taxation
a decrease in wealth.
Any other reasonable response should be rewarded.
N.B. A decrease in income or a causal factor such as a decrease in wages
can be rewarded as the question does not ask for a reason for a shift in AD.
Award [1] for each appropriate response, up to a maximum of [2].
– 8 – M15/3/ECONO/HP3/ENG/TZ0/XX/M
(ii) On the diagram, draw and label the new aggregate demand curve following
the decrease in consumer expenditure. [1]
Award [1] for an accurate, labelled AD curve.
(iii) State the amount (in $ billion) by which the full employment level of output
exceeds the short-run equilibrium level of output. [1]
$18 billion – $14 billion = $4 billion
An answer of $4 billion is sufficient for [1].
OFR applies
(iv) On the diagram, draw and label the long-run aggregate supply curve for
Country A. [1]
For drawing a vertical, labelled LRAS at $18 billion.
(v) Identify the average price level and level of real output when Country A has
returned to long-run equilibrium as a result of the interaction of market
forces. [1]
Real output = $18 billion, APL (measured by CPI) = 75
Accept answers between 70 and 80 inclusive.
Both answers must be correct for the award of [1].
OFR applies
– 9 – M15/3/ECONO/HP3/ENG/TZ0/XX/M
(b) Explain, giving two reasons, why the aggregate demand curve has a negative
slope. [4]
Level Marks
0 The work does not reach a standard described by the descriptors below. 0
1 The written response is limited.
For providing one reason with limited explanation. 1
For providing one accurate reason or two reasons with limited explanation. 2
2 The written response is accurate.
For providing one accurate reason and one reason with limited
explanation. 3
For providing two accurate reasons. 4
Reasons may include:
if the average price level increases, then real wealth decreases, so people will
spend less (N.B. real income is not acceptable)
if the average price level increases, interest rates are likely to rise,
discouraging investment and consumer spending
if the average price level increases, the economy’s exports become less
competitive, reducing demand for exports (or (but not in addition to the
“export” argument) imports become relatively cheaper, so imports increase).
(c) (i) Calculate the income tax paid in 2015 by an individual earning $65
000 per
year. [2]
14000 10% 16000 20% 27000 32%
1400 3200 8640
[1]
Any valid working is sufficient for [1].
$13240
[1]
(ii) Calculate the average rate of tax paid by the individual in 2016 (assuming
the individual’s income remains the same as in 2015). [3]
14000 8% 16000 16% 27000 25%
1120 2560 6750 [1]
Any valid working is sufficient for [1].
= 10430 [1]
Average rate of tax
10430
100 16.05%
65000

or 0.16 [1]
OFR applies if the tax paid is calculated incorrectly.
– 10 – M15/3/ECONO/HP3/ENG/TZ0/XX/M
(iii) Explain why a decrease in the rate of direct tax would affect the value of the
multiplier in Country A.
[2]
The value of the multiplier is given by the equation
1
s+t+m
[1]
OR
the idea that consumption will increase
If the rate of direct tax decreases, then, in the equation, t decreases and so
the value of the multiplier increases.
[1]
N.B. A response which explains that, if the rate of direct taxation falls, then
the marginal rate of withdrawal decreases / marginal propensity to
consume increases and so the multiplier increases should be fully
rewarded.
– 11 – M15/3/ECONO/HP3/ENG/TZ0/XX/M
(d) (i) In the following box, sketch and label a Lorenz curve for Country A to show
the likely effects on the distribution of income if the rate of indirect tax is
reduced.
[2]
Level Marks
0
The work does not reach a standard described by the descriptors
below. 0
1
There is a correct Lorenz curve diagram. 1
2
There is a correct Lorenz curve diagram showing a movement
towards the line of perfect equality. 2
N.B. Full marks cannot be awarded if axes are not labelled appropriately.
Vertical axis may be % income, or cumulative income.
Horizontal axis may be % households/population or cumulative
households/population.
If correct labels are on the wrong axes or wealth is used instead of income
then a maximum of [1] may be awarded.
Incorrect labels (eg P and Q) should result in no marks being awarded.
– 12 – M15/3/ECONO/HP3/ENG/TZ0/XX/M
(ii) With reference to your diagram in part (d)(i), explain how the Gini
coefficient would be derived.
[2]
Gini coefficient
ab
abc

or appropriate explanation using the diagram
provided.
Level Marks
0
The work does not reach a standard described by the descriptors
below. 0
1
There is a partially accurate attempt to use the areas in the diagram
to derive the Gini coefficient. 1
2
There is an accurate demonstration, using the diagram, of how the
Gini coefficient is derived. 2
Any response indicating clear understanding (eg area between diagonal
and Lorenz curve over half-square area before or after the change) should
be fully rewarded.
(e) Explain how the reductions in the rates of income tax in 2016 specified in part (c)
may affect equity in the distribution of income in Country A.
[4]
Level Marks
0
The work does not reach a standard described by the descriptors below. 0
1
The written response is limited. 1–2
For an explanation that reducing the rates of income tax according to the
data given will make the tax system less progressive, as those on higher
incomes will benefit proportionately more.
2
The written response is accurate. 3–4
For an explanation that reducing the rates of income tax according to the
data given will make the tax system less progressive, as those on higher
incomes will benefit proportionately more and that reducing the rates of
income tax may be seen as inequitable, as the tax burden is reduced
relatively more for those who can afford to pay more tax.
An appropriate alternative view should, if explained clearly, be fully
rewarded. Eg less revenue is available to the government to assist those
on lower incomes.
– 13 – M15/3/ECONO/HP3/ENG/TZ0/XX/M
3. (a) Calculate the annual expected total expenses measured in Thai baht. [2]
30.61 18450 950
[1]
Any valid working is sufficient for [1].
THB 593834 [1]
An answer of THB 593
834 without any valid working is sufficient for [1] only.
(b) Calculate the new exchange rate.
[2]
30.61 1.0625
[1]
THB 32.52
AU$1.00 = THB32.52
[1]
An answer of THB32.52 without any valid working is sufficient for [1] only.
(c) Calculate the increase in Thai baht needed to pay for tuition and living expenses
during the first year of studies as a result of the currency appreciation.
[2]
19400 32.52 THB 630888 [1]
630888 593834
Any valid working is sufficient for [1].
= THB37 054
OFR applies
A valid alternative is to multiply the initial expenditure in Thai baht by the
percentage increase in the exchange rate and find the difference.
A candidate who has used an unrounded figure from part (b) and correctly given
an answer of THB37
114.63 should be fully rewarded.
– 14 – M15/3/ECONO/HP3/ENG/TZ0/XX/M
(d) Sketch on the following axes a fully-labelled diagram illustrating the appreciation
of the Australian dollar.
[2]
THB/AU$
S(AU$)
D
2
(AU$)
D
1
(AU$)
THB 32.52
THB 30.61
AU$/period
For an accurate diagram showing a new demand for AU$ to the right of the
original.
[1]
For an accurate and fully labelled diagram.
[1]
Vertical axis may be labelled Price of AU$ (in THB), or THB/AU$ or exchange
rate.
Horizontal axis may be labelled quantity of AU$, quantity or AU$ per period.
Candidates may have instead shown the appreciation by shifting S(AU$) to the
left.
Actual THB figures on the vertical axis are not necessary.
– 15 – M15/3/ECONO/HP3/ENG/TZ0/XX/M
(e) Using the diagram you have drawn in part (d), explain two reasons for which the
Australian dollar may have appreciated against the Thai baht.
[4]
Level Marks
0
The work does not reach a standard described by the descriptors below. 0
1
The written response is limited. 1–2
For a limited explanation of two reasons or for an accurate explanation of
only one.
2
The written response is accurate. 3–4
For accurately explaining any two reasons; including:
increased Thai demand for Australia’s exports as the demand for AU$
would increase
lower Australian demand for Thai imports as the supply of AU$ would
decrease
an increase in Australia’s interest rate compared to Thai interest rates as
this would create an inflow of investment funds shifting the demand for
AU$ to the right
relatively higher Thai inflation which will make Thai products less
competitive and Australian goods more attractive, thus increasing the
demand for AU$
increased foreign direct and portfolio investment into Australia causing
the demand for AU$ to increase
speculation that the AU$ will appreciate or that Australia’s interest rates
will increase.
Any other valid reason.
The explanation provided should match the diagram in part (d) for at least
one of the two reasons provided in order to gain full marks; if it does not the
candidate may earn up to [3].
To gain full marks candidates must specify a change in the causal factors.
(f) Define the term managed float. [2]
Level Marks
0
The work does not reach a standard described by the descriptors below. 0
1
Vague definition. 1
For the idea that in a managed float the government/the Central Bank
intervenes in the currency market or that the currency is allowed to float
within a band
2
Accurate definition. 2
For explaining that a managed float implies periodic intervention by a
Central Bank in order to influence the exchange rate.
– 16 – M15/3/ECONO/HP3/ENG/TZ0/XX/M
(g) State one action the Reserve Bank of Australia could take to prevent a further
appreciation of the Australian dollar.
[1]
The RBA could:
sell more AU$s in the foreign exchange market to increase the supply of AU$s
reduce interest rates.
Any other reasonable response.
(h) Using 2009 as the base year, calculate Sweden’s terms of trade for 2010 and
2011. Enter your results in the table. [2]
Index of export
prices
Index of import
prices
Terms of trade
2009
100 100 100
2010
93.80 98.91
94.83
2011
83.56 98.23
85.07
93.80
2010: 100 94.83
98.91




[1]
83.56
2011: 100 85.07
98.23




[1]
Workings are not necessary.
(i) Describe the meaning of the change in Sweden’s terms of trade between 2009
and 2011.
[2]
Level Marks
0
The work does not reach a standard described by the descriptors below. 0
1
Vague response. 1
For the idea that the average price of exports has decreased relative to the
average price of imports (or, that the terms of trade have deteriorated)
2
Accurate response. 2
For providing a description that a greater quantity of exports is required to
purchase a unit of imports.
OFR applies
– 17 – M15/3/ECONO/HP3/ENG/TZ0/XX/M
(j) State two possible reasons for a change in the terms of trade of a country such
as Sweden.
[2]
For stating any two of the following:
changes in demand conditions for exports and imports
changes in global supply of key inputs (such as oil)
changes in / high relative inflation rates
changes in relative exchange rates
changes in world income levels
changes in productivity within the country
technological developments.
Any other reasonable response
Award [1] for each valid response.
(k) Explain how the change in Sweden’s terms of trade, described in part (i), might
improve its current account balance.
[4]
Level Marks
0
The work does not reach a standard described by the descriptors below. 0
1
The explanation provided is limited. 1–2
The idea that a deterioration in a country’s terms of trade makes its
products more competitive thus improving its current account balance.
2
The explanation provided is accurate. 3–4
For an explanation that a deterioration in a country’s terms of trade makes
its products more competitive causing exports to increase and/ or imports
to decrease
and that given appropriate price elasticities of demand for
imports and exports the current balance will improve
Other valid explanations may be fully rewarded.
OFR applies
IB ECONOMICS 2015 Examinations May and November examination sessions
IB ECONOMICS 2015 Examinations  May and November examination sessions
May and Nov 2015 IB Economics Examinations Interactive Click or tap to jump The May and November 2015 examinations May 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 Nov
May and Nov 2015 IB Economics     Examinations Interactive  Click or tap to jump  The May and November 2015 examinations M...
M15 3 ECONO HP1 ENG TZ1 XX Economics Higher level Paper 1 Monday 4 May 2015 afternoon 1 hour 30 minutes Instructions to candidates Do not open this examination paper until instructed to do so You are not permitted access to any calculator for this paper Section A answer one question Section B answer one question Use fully labelled diagrams and references to examples where appropriate The maximum mark for this examination paper is 50 marks 3 pages 2215 5102 International Baccalaureate Organization 2015
M15 3 ECONO HP1 ENG TZ1 XX  Economics Higher level Paper 1 Monday 4 May 2015  afternoon  1 hour 30 minutes Instructions to...
2 M15 3 ECONO HP1 ENG TZ1 XX Section A Answer one question from this section Microeconomics 1 a Explain how changes in price work to reallocate resources in a market 10 b Discuss the view that the overuse of common access resources is best addressed by government 15 2 a Explain why prices tend to be stable in oligopolistic markets 10 b Oligopolists often possess too much monopoly power Evaluate whether governments should intervene in oligopolistic markets 15
   2     M15 3 ECONO HP1 ENG TZ1 XX  Section A Answer one question from this section. Microeconomics 1.    a    Explain ho...
3 M15 3 ECONO HP1 ENG TZ1 XX Section B Answer one question from this section Macroeconomics 3 a Explain what is meant by the natural rate of unemployment 10 b Discuss the view that there is no trade off between inflation and unemployment 15 4 a Explain how business spending on research and development and government expenditure on infrastructure might shift the long run aggregate supply curve 10 b Evaluate the effectiveness of interventionist supply side policies to achieve economic growth 15
   3     M15 3 ECONO HP1 ENG TZ1 XX  Section B Answer one question from this section. Macroeconomics 3.    a    Explain wh...
M15 3 ECONO HP1 ENG TZ1 XX M Markscheme May 2015 Economics Higher level Paper 1 17 pages
M15 3 ECONO HP1 ENG TZ1 XX M  Markscheme May 2015  Economics  Higher level  Paper 1  17 pages
2 M15 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 the IB Assessment Centre
   2     M15 3 ECONO HP1 ENG TZ1 XX M  This markscheme is confidential and for the exclusive use of examiners in this exam...
3 M15 3 ECONO HP1 ENG TZ1 XX M Use the question specific markscheme together with the markbands Award up to the maximum marks as indicated Section A Microeconomics 1 a Explain how changes in price work to reallocate resources in a market 10 Answers may include definition of reallocation of resources diagrams to show how changes in price alter the equilibrium quantity and therefore reallocate resources theory to explain the signalling and incentive functions of the price mechanism examples of markets where price change has led to a reallocation of resources such as through government intervention Assessment Criteria Part a 10 marks Level Marks 0 The work does not reach a standard described by the descriptors below 1 There is little understanding of the specific demands of the question Relevant economic terms are not defined There is very little knowledge of relevant economic theory There are significant errors 1 3 There is some understanding of the specific demands of the question Some relevant economic terms are defined There is some knowledge of relevant economic theory There are some errors 4 6 There is understanding of the specific demands of the question Relevant economic terms are defined Relevant economic theory is explained and applied Where appropriate diagrams are included and applied Where appropriate examples are used There are few errors 7 8 There is clear understanding of the specific demands of the question Relevant economic terms are clearly defined Relevant economic theory is clearly explained and applied Where appropriate diagrams are included and applied effectively Where appropriate examples are used effectively There are no significant errors 9 10 2 3 4 0
   3     M15 3 ECONO HP1 ENG TZ1 XX M  Use the question-specific markscheme together with the markbands. Award up to the m...
4 b M15 3 ECONO HP1 ENG TZ1 XX M Discuss the view that the overuse of common access resources is best addressed by government Answers may include definition of common access resources diagrams to show negative production or consumption externalities associated with overuse of common access resources PPC diagram to show the reduction of production possibilities theory to explain the overuse of common access resources due to the lack of ownership and a price mechanism examples of existing government responses such as licensing international agreement allocation of property rights synthesis or evaluation discuss Discussion may include whether the price mechanism is compatible with sustainability and consider the merits and limitations of government responses Examiners should be aware that candidates may take a different approach which if appropriate should be rewarded Opinions or conclusions should be presented clearly and should be supported by appropriate examples 15
   4      b   M15 3 ECONO HP1 ENG TZ1 XX M  Discuss the view that the overuse of common access resources is best addressed...
5 M15 3 ECONO HP1 ENG TZ1 XX M Assessment Criteria Part b 15 marks Level Marks 0 The work does not reach a standard described by the descriptors below 1 There is little understanding of the specific demands of the question Relevant economic terms are not defined There is very little knowledge of relevant economic theory There are significant errors 1 5 There is some understanding of the specific demands of the question Some relevant economic terms are defined There is some knowledge of relevant economic theory There are some errors 6 9 2 3 4 0 There is understanding of the specific demands of the question Relevant economic terms are defined Relevant economic theory is explained and applied Where appropriate diagrams are included and applied Where appropriate examples are used There is an attempt at synthesis or evaluation There are few errors 10 12 There is clear understanding of the specific demands of the question Relevant economic terms are clearly defined Relevant economic theory is clearly explained and applied Where appropriate diagrams are included and applied effectively Where appropriate examples are used effectively There is evidence of appropriate synthesis or evaluation There are no significant errors 13 15
   5     M15 3 ECONO HP1 ENG TZ1 XX M  Assessment Criteria Part  b  15 marks Level  Marks  0  The work does not reach a st...
6 2 a M15 3 ECONO HP1 ENG TZ1 XX M Explain why prices tend to be stable in oligopolistic markets Answers may include definition of oligopoly price stability diagram to show the kinked demand curve Candidates might utilize a collusive oligopoly diagram theory to explain why price tends to be stable under conditions of non collusive collusive oligopoly example of where this has happened or might happen 10
   6     2.   a   M15 3 ECONO HP1 ENG TZ1 XX M  Explain why prices tend to be stable in oligopolistic markets. Answers may...
7 M15 3 ECONO HP1 ENG TZ1 XX M Assessment Criteria Part a 10 marks Level Marks 0 The work does not reach a standard described by the descriptors below 1 There is little understanding of the specific demands of the question Relevant economic terms are not defined There is very little knowledge of relevant economic theory There are significant errors 1 3 There is some understanding of the specific demands of the question Some relevant economic terms are defined There is some knowledge of relevant economic theory There are some errors 4 6 There is understanding of the specific demands of the question Relevant economic terms are defined Relevant economic theory is explained and applied Where appropriate diagrams are included and applied Where appropriate examples are used There are few errors 7 8 There is clear understanding of the specific demands of the question Relevant economic terms are clearly defined Relevant economic theory is clearly explained and applied Where appropriate diagrams are included and applied effectively Where appropriate examples are used effectively There are no significant errors 9 10 2 3 4 0
   7     M15 3 ECONO HP1 ENG TZ1 XX M  Assessment Criteria Part  a  10 marks Level  Marks  0  The work does not reach a st...
8 b M15 3 ECONO HP1 ENG TZ1 XX M Oligopolists often possess too much monopoly power Evaluate whether governments should intervene in oligopolistic markets Answers may include definition of monopoly power oligopoly or oligopolistic market diagram to show equilibrium under conditions of oligopoly either collusive or non collusive theory to explain higher prices lower output and productive and allocative inefficiency due to monopoly power An explanation of the actions a government might engage in to control such power such as competition policy price control regulation nationalization and trade liberalization example of industries that might illustrate such characteristics and of policies a government may have employed synthesis or evaluation Evaluation may include consideration of the merits of intervention such as difficulties of identifying where such power may be excessive and whether intervention is justified over free markets etc Examples may be given of industries where despite economic inefficiency the consumer benefits from inherent economies of scale and therefore there is no need for government intervention Examiners should be aware that candidates may take a different approach which if appropriate should be rewarded Opinions or conclusions should be presented clearly and should be supported by appropriate examples 15
   8      b   M15 3 ECONO HP1 ENG TZ1 XX M  Oligopolists often possess too much monopoly power. Evaluate whether governmen...
9 M15 3 ECONO HP1 ENG TZ1 XX M Assessment Criteria Part b 15 marks Level Marks 0 The work does not reach a standard described by the descriptors below 1 There is little understanding of the specific demands of the question Relevant economic terms are not defined There is very little knowledge of relevant economic theory There are significant errors 1 5 There is some understanding of the specific demands of the question Some relevant economic terms are defined There is some knowledge of relevant economic theory There are some errors 6 9 2 3 4 0 There is understanding of the specific demands of the question Relevant economic terms are defined Relevant economic theory is explained and applied Where appropriate diagrams are included and applied Where appropriate examples are used There is an attempt at synthesis or evaluation There are few errors 10 12 There is clear understanding of the specific demands of the question Relevant economic terms are clearly defined Relevant economic theory is clearly explained and applied Where appropriate diagrams are included and applied effectively Where appropriate examples are used effectively There is evidence of appropriate synthesis or evaluation There are no significant errors 13 15
   9     M15 3 ECONO HP1 ENG TZ1 XX M  Assessment Criteria Part  b  15 marks Level  Marks  0  The work does not reach a st...
10 M15 3 ECONO HP1 ENG TZ1 XX M Section B Macroeconomics 3 a Explain what is meant by the natural rate of unemployment Answers may include definition of the natural rate of unemployment diagram to show the labour market at full employment with residual structural seasonal and frictional unemployment theory to explain how the natural rate of unemployment occurs where the economy is producing at the full employment level of output examples of unemployment that could be considered illustrative of the natural rate 10
    10      M15 3 ECONO HP1 ENG TZ1 XX M  Section B Macroeconomics 3.   a   Explain what is meant by the natural rate of u...
11 M15 3 ECONO HP1 ENG TZ1 XX M Assessment Criteria Part a 10 marks Level Marks 0 The work does not reach a standard described by the descriptors below 1 There is little understanding of the specific demands of the question Relevant economic terms are not defined There is very little knowledge of relevant economic theory There are significant errors 1 3 There is some understanding of the specific demands of the question Some relevant economic terms are defined There is some knowledge of relevant economic theory There are some errors 4 6 There is understanding of the specific demands of the question Relevant economic terms are defined Relevant economic theory is explained and applied Where appropriate diagrams are included and applied Where appropriate examples are used There are few errors 7 8 There is clear understanding of the specific demands of the question Relevant economic terms are clearly defined Relevant economic theory is clearly explained and applied Where appropriate diagrams are included and applied effectively Where appropriate examples are used effectively There are no significant errors 9 10 2 3 4 0
    11      M15 3 ECONO HP1 ENG TZ1 XX M  Assessment Criteria Part  a  10 marks Level  Marks  0  The work does not reach a...
12 b M15 3 ECONO HP1 ENG TZ1 XX M Discuss the view that there is no trade off between inflation and unemployment Answers may include definition of inflation and unemployment diagram showing a Phillips curve and or AD LRAS theory to explain why there might might not be a trade off between inflation and unemployment Possible use of short run and long run Phillips curve Possible use of AD LRAS examples of such a trade off synthesis or evaluation discuss Discussion may include arguments relating to the trade off between inflation and unemployment Responses may rely on different views regarding the shape of LRAS This question might be answered using AD AS alone Examiners should be aware that candidates may take a different approach which if appropriate should be rewarded Opinions or conclusions should be presented clearly and should be supported by appropriate examples 15
    12       b   M15 3 ECONO HP1 ENG TZ1 XX M  Discuss the view that there is no trade-off between inflation and unemploym...
13 M15 3 ECONO HP1 ENG TZ1 XX M Assessment Criteria Part b 15 marks Level Marks 0 The work does not reach a standard described by the descriptors below 1 There is little understanding of the specific demands of the question Relevant economic terms are not defined There is very little knowledge of relevant economic theory There are significant errors 1 5 There is some understanding of the specific demands of the question Some relevant economic terms are defined There is some knowledge of relevant economic theory There are some errors 6 9 2 3 4 0 There is understanding of the specific demands of the question Relevant economic terms are defined Relevant economic theory is explained and applied Where appropriate diagrams are included and applied Where appropriate examples are used There is an attempt at synthesis or evaluation There are few errors 10 12 There is clear understanding of the specific demands of the question Relevant economic terms are clearly defined Relevant economic theory is clearly explained and applied Where appropriate diagrams are included and applied effectively Where appropriate examples are used effectively There is evidence of appropriate synthesis or evaluation There are no significant errors 13 15
    13      M15 3 ECONO HP1 ENG TZ1 XX M  Assessment Criteria Part  b  15 marks Level  Marks  0  The work does not reach a...
14 4 a M15 3 ECONO HP1 ENG TZ1 XX M Explain how business spending on research and development and government expenditure on infrastructure might shift the long run aggregate supply curve Answers may include definitions of research and development infrastructure long run aggregate supply diagram to show a shift in the LRAS explanation of how research and development in new technology will improve the quality of physical capital hence increasing productive capacity and shifting the LRAS to the right Explanation of how increased government expenditure in infrastructure will increase productive capacity and shift the LRAS to the right examples of research and development and infrastructure 10
    14      4.   a   M15 3 ECONO HP1 ENG TZ1 XX M  Explain how business spending on research and development and governmen...
15 M15 3 ECONO HP1 ENG TZ1 XX M Assessment Criteria Part a 10 marks Level Marks 0 The work does not reach a standard described by the descriptors below 1 There is little understanding of the specific demands of the question Relevant economic terms are not defined There is very little knowledge of relevant economic theory There are significant errors 1 3 There is some understanding of the specific demands of the question Some relevant economic terms are defined There is some knowledge of relevant economic theory There are some errors 4 6 There is understanding of the specific demands of the question Relevant economic terms are defined Relevant economic theory is explained and applied Where appropriate diagrams are included and applied Where appropriate examples are used There are few errors 7 8 There is clear understanding of the specific demands of the question Relevant economic terms are clearly defined Relevant economic theory is clearly explained and applied Where appropriate diagrams are included and applied effectively Where appropriate examples are used effectively There are no significant errors 9 10 2 3 4 0
    15      M15 3 ECONO HP1 ENG TZ1 XX M  Assessment Criteria Part  a  10 marks Level  Marks  0  The work does not reach a...
16 b M15 3 ECONO HP1 ENG TZ1 XX M Evaluate the effectiveness of interventionist supply side policies to achieve economic growth Answers may include definition of interventionist supply side policies and economic growth diagram to show the impact of interventionist supply side policies on economic growth explanation of the interventionist supply side policies that could be used to increase the rate of economic growth through education and training research and development infrastructure industrial policy examples of the application of interventionist supply side policies synthesis or evaluation Evaluation may include the use of interventionist supply side policies used to increase economic growth including cost and effectiveness of the interventionist supply side policies time it takes for the policy to increase economic growth implications for different stakeholders suggestion of alternatives to interventionist supply side policies Examiners should be aware that candidates may take a different approach which if appropriate should be rewarded Opinions or conclusions should be presented clearly and should be supported by appropriate examples 15
    16       b   M15 3 ECONO HP1 ENG TZ1 XX M  Evaluate the effectiveness of interventionist supply-side policies to achie...
17 M15 3 ECONO HP1 ENG TZ1 XX M Assessment Criteria Part b 15 marks Level Marks 0 The work does not reach a standard described by the descriptors below 1 There is little understanding of the specific demands of the question Relevant economic terms are not defined There is very little knowledge of relevant economic theory There are significant errors 1 5 There is some understanding of the specific demands of the question Some relevant economic terms are defined There is some knowledge of relevant economic theory There are some errors 6 9 2 3 4 0 There is understanding of the specific demands of the question Relevant economic terms are defined Relevant economic theory is explained and applied Where appropriate diagrams are included and applied Where appropriate examples are used There is an attempt at synthesis or evaluation There are few errors 10 12 There is clear understanding of the specific demands of the question Relevant economic terms are clearly defined Relevant economic theory is clearly explained and applied Where appropriate diagrams are included and applied effectively Where appropriate examples are used effectively There is evidence of appropriate synthesis or evaluation There are no significant errors 13 15
    17      M15 3 ECONO HP1 ENG TZ1 XX M  Assessment Criteria Part  b  15 marks Level  Marks  0  The work does not reach a...
M15 3 ECONO HP2 ENG TZ0 XX Economics Higher level Paper 2 Tuesday 5 May 2015 morning 1 hour 30 minutes Instructions to candidates Do not open this examination paper until instructed to do so You are not permitted access to any calculator for this paper Section A answer one question Section B answer one question Use fully labelled diagrams and references to the text data where appropriate The maximum mark for this examination paper is 40 marks 9 pages 2215 5104 International Baccalaureate Organization 2015
M15 3 ECONO HP2 ENG TZ0 XX  Economics Higher level Paper 2 Tuesday 5 May 2015  morning  1 hour 30 minutes Instructions to ...
2 M15 3 ECONO HP2 ENG TZ0 XX Section A Answer one question from this section 1 Study the extract below and answer the questions that follow Latvia to join the eurozone monetary union Latvia will become the 18th country to adopt the euro after being approved for membership by the European Commission The country has met the criteria for eurozone membership including low inflation low long term interest rates a stable exchange rate low public debt and low budget deficits Latvia joined the European Union EU customs union in 2004 This resulted in a large increase in the availability of credit and strong economic growth in Latvia However the 2008 global financial crisis resulted in the collapse of one of its leading banks and massive economic instability Economic output fell by about 20 and Latvia had to accept a bailout loans from the International Monetary Fund IMF and the EU Latvia kept the lat the Latvian currency pegged to the euro throughout the crisis At the time some economists argued that devaluation would have been a better way to improve the economy However Latvia followed the path of other countries such as Greece and Ireland and chose to improve competitiveness through austerity measures This involved increasing direct taxes and cutting government spending and public sector wages By late 2010 the economy was growing again and Latvia had repaid the loans to the IMF and the EU In 2012 the economy expanded by 5 6 the fastest of any country in the EU although output was still 12 below its pre crisis peak In addition unemployment was falling but it remained high at 12 4 For Latvia which shares a border with Russia the attraction of the euro is about economics and security Entering the eurozone in January 2014 is part of a process of shifting away from the influence of Russia and following its northern neighbour Estonia which joined the eurozone in 2011 Lithuania hopes to join the eurozone in 2015 Public support for joining the eurozone has been low Evidence from one survey suggests that a small majority of Latvia s population opposes membership fearing that prices will rise and Latvians will be drawn into the problems facing Europe s struggling economies Nonetheless there are signs that support is growing The Latvian prime minister said that switching to the euro will help economic growth and bring increased foreign investment Unlike countries that can afford to ignore the euro and additional integration Latvia cannot easily stand on its own This is good news not only for Latvia but also for the eurozone It shows that there is still confidence in the single currency Source adapted from www reuters com 5 June 2013 http online wsj com 9 July 2013 and www theguardian com 16 July 2013 This question continues on the following page
   2     M15 3 ECONO HP2 ENG TZ0 XX  Section A Answer one question from this section. 1.   Study the extract below and ans...
3 M15 3 ECONO HP2 ENG TZ0 XX Question 1 continued i Define the term customs union indicated in bold in the text paragraph 2 ii Define the term direct taxes indicated in bold in the text paragraph 2 Using an AD AS diagram explain how devaluation of the lat the Latvian currency might have been used to improve the Latvian economy during the financial crisis paragraph 4 a b c Using a production possibilities curve PPC diagram explain the change in Latvia s economy from 2008 to 2012 paragraphs and 4 d Using information from the text data and your knowledge of economics evaluate the possible impact of Latvia joining the eurozone 8 Turn over
   3     M15 3 ECONO HP2 ENG TZ0 XX   Question 1 continued   i    Define the term customs union indicated in bold in the t...
4 2 M15 3 ECONO HP2 ENG TZ0 XX Study the extract below and answer the questions that follow Is India in danger of another crisis The Indian prime minister has tried to reduce concerns that the country is headed for a balance of payments crisis similar to the one that the country experienced in 1991 At that time India was on the verge of defaulting on its foreign debt and had to be rescued by the International Monetary Fund IMF There are a few key similarities between the situation in 2013 and the situation in 1991 India still has a persistent current account deficit and its weak currency the rupee makes it more difficult to finance the deficit Officials are worried because the current account deficit is larger and the rupee is weaker than it was in 1991 The rupee has declined by more than 15 between May and August this year 2013 and has hit a record low against the US dollar This is largely to do with the expectation that the Federal Reserve US central bank may not continue to use monetary policy to stimulate the US economy As a result there is speculation that the US interest rate might rise at some point in the future The consequence of this is that money is leaving developing economies such as India The countries that are most at risk are those with large current account deficits and India has one of the largest The current account deficit hit a record high of 6 7 of gross domestic product GDP in 2012 Domestic issues make the situation even worse India has a large budget deficit as well as a high rate of inflation Both are reasons why portfolio investors would like to take their money out of India Furthermore economic growth has also dropped to 5 the slowest growth since 2003 In a recent speech the prime minister noted that the current account deficit was high and blamed increased imports of gold as a key factor In recent months the government has sharply raised tariffs on gold Surprisingly the Indian government and the central bank have also proposed measures to support the rupee After the crisis in 1991 there were many reforms and the country became more globally integrated This led to a period of strong growth However reforms have slowed down and analysts say that this has prevented India from reaching its tremendous potential The threat of a crisis may be just what is needed for the government to speed up the supply side reforms necessary to increase growth and reduce the current account deficit These reforms would include policies to promote industry reduce the regulatory burdens and importantly increase investment in education Source adapted from www bbc co uk 8 August 2013 www businessweek com 19 August 2013 and http online wsj com 17 August 2013 This question continues on the following page
   4    2.    M15 3 ECONO HP2 ENG TZ0 XX  Study the extract below and answer the questions that follow. Is India in danger...
5 M15 3 ECONO HP2 ENG TZ0 XX Question 2 continued i Define the term interest rate indicated in bold in the text paragraph 2 ii Define the term tariffs indicated in bold in the text paragraph 2 b Distinguish between a current account deficit and a budget deficit paragraph 4 c Using an exchange rate diagram for the rupee India s currency explain how the value of the rupee has been affected by the expectation that the US central bank may change its monetary policy paragraph 4 Using information from the text data and your knowledge of economics evaluate the policies that India might use to reduce the current account deficit 8 a d Turn over
   5     M15 3 ECONO HP2 ENG TZ0 XX   Question 2 continued   i    Define the term interest rate indicated in bold in the t...
6 M15 3 ECONO HP2 ENG TZ0 XX Section B Answer one question from this section 3 Study the extract and data below and answer the questions that follow Text removed for copyright reasons Figure 1 Export commodities of China and three African countries Figure removed for copyright reasons This question continues on the following page
   6     M15 3 ECONO HP2 ENG TZ0 XX  Section B Answer one question from this section. 3.   Study the extract and data belo...
7 M15 3 ECONO HP2 ENG TZ0 XX Question 3 continued Figure 2 Aid provided by China to various African countries Figure removed for copyright reasons i Define the term bilateral trade agreements indicated in bold in the text paragraph 2 ii Define the term infrastructure indicated in bold in the text paragraph 2 Using a comparative advantage diagram explain why China s exports tend to be concentrated in manufactured goods and the African countries mostly export primary goods paragraph 4 Using a production possibilities curve PPC diagram explain how the provision of free training to 53 700 people from Africa will increase potential economic output paragraph 4 Using information from the text data and your knowledge of economics discuss the extent to which trade between China and African countries is a more effective way of achieving economic development than Chinese aid to African countries 8 a b c d Turn over
   7     M15 3 ECONO HP2 ENG TZ0 XX   Question 3 continued  Figure 2     Aid provided by China to various African countrie...
8 4 M15 3 ECONO HP2 ENG TZ0 XX Study the extract and data below and answer the questions that follow Economic growth in Peru The Peruvian economy has been growing by an average of 6 4 per year since 2002 with a slightly appreciating exchange rate and low inflation Growth was in the 6 9 range for 2010 2013 due partly to a leap in private investment This was especially in the raw materials extraction sector which accounts for more than 60 of Peru s total exports Rising Asian demand for copper and gold has been a large contributor to Peru s growth Despite Peru s strong macroeconomic performance dependence on mineral and metal exports and imported food makes the economy vulnerable to fluctuations in world prices This is reflected in its volatile terms of trade Figure 1 The Peruvian president has pursued moderate pro market policies while adding new government programmes in order to provide additional social support for the poor Peru s rapid expansion coupled with transfer payments and other benefits have helped to reduce the poverty rate The percentage of people living on less than US 2 a day has halved to about 28 since 2003 but inequality persists Figure 2 and continues to present a threat to the new government The president has pledged to further cut the poverty rate to 15 through increased transfer payments an increase in the minimum wage and pensions There has also been deregulation in business practices making it much easier to start and run a private firm Changes in employment regulations have created more flexibility in the labour market Peru s free trade policy has continued under the president s administration The United States Peru Trade Promotion Agreement was signed on 12 April 2006 opening the way to greater trade and investment between the two economies Peru signed trade agreements with South Korea Japan and Mexico in 2011 Peru has continued to attract foreign investment However political disputes and protests may harm some projects particularly in mining Poor infrastructure hinders the spread of growth to Peru s inland areas Much of the economy remains informal and untaxed The strengthening of the sol Peru s currency could hurt the economy In 2013 the central bank purchased a record US 13 billion in the foreign exchange market in an attempt to keep the national currency from rapid appreciation This question continues on the following page
   8    4.   M15 3 ECONO HP2 ENG TZ0 XX  Study the extract and data below and answer the questions that follow. Economic g...
M15 3 ECONO HP2 ENG TZ0 XX 9 Question 4 continued Figure 1 Peru terms of trade Graph removed for copyright reasons Please go to http www tradingeconomics com peru terms of trade and click on the 2002 option to display the graph Figure 2 Peru income distribution Gini coefficient 2005 0 51 2010 0 46 Source adapted from A middle class emerges from Peru growth Financial Times 9 January 2013 www heritage org and www indexmundi com accessed 17 August 2013 i Define the term inflation indicated in bold in the text paragraph 2 ii Define the term appreciation indicated in bold in the text paragraph 2 b Using an accurate definition of the terms of trade explain one reason for the change in Peru s terms of trade index from January 2008 to January 2009 Figure 1 4 c Using a Lorenz curve diagram explain the change in Peru s income distribution from 2005 to 2010 Figure 2 4 d Using information from the text data and your knowledge of economics discuss the view that economic development may best be achieved through a balance of market oriented policies and government intervention 8 a
M15 3 ECONO HP2 ENG TZ0 XX     9     Question 4 continued  Figure 1     Peru terms of trade  Graph removed for copyright r...
M15 3 ECONO HP2 ENG TZ0 XX M Markscheme May 2015 Economics Higher level Paper 2 21 pages
M15 3 ECONO HP2 ENG TZ0 XX M  Markscheme May 2015  Economics  Higher level  Paper 2  21 pages
2 M15 3 ECONO HP2 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 the IB Assessment Centre
   2     M15 3 ECONO HP2 ENG TZ0 XX M  This markscheme is confidential and for the exclusive use of examiners in this exam...
3 M15 3 ECONO HP2 ENG TZ0 XX M Use the paper specific markscheme together with the markbands Award up to the maximum marks as indicated Section A 1 a i Define the term customs union indicated in bold in the text paragraph Level 0 The work does not reach a standard described by the descriptors below ii 2 Marks 0 1 Vague definition The idea that it is where countries agree to trade freely 1 2 Accurate definition An explanation that it is a form of economic integration where member countries agree to liberalize trade trade freely amongst themselves and adopt a common external tariff or common trade policies towards non members 2 Define the term direct taxes indicated in bold in the text paragraph 2 Level 0 The work does not reach a standard described by the descriptors below Marks 0 1 Vague definition The idea that taxes are paid to the government or tax paid by an individual household 1 2 Accurate definition An explanation that they are taxes paid to the government on income households and firms 2
   3     M15 3 ECONO HP2 ENG TZ0 XX M  Use the paper-specific markscheme together with the markbands. Award up to the maxi...
4 b M15 3 ECONO HP2 ENG TZ0 XX M Using an AD AS diagram explain how devaluation of the lat the Latvian currency might have been used to improve the Latvian economy during the financial crisis paragraph Level 0 The work does not reach a standard described by the descriptors below 4 Marks 0 1 There is a correct diagram or an accurate written response For drawing a correctly labelled AD AS diagram showing a shift of AD to the right and an increase in real GDP or for an explanation that devaluation of the lat may have caused an increase in aggregate demand through an increase in exports and or a decrease in imports thus bringing about an increase in real GDP 1 2 2 There is a correct diagram and an accurate written response For drawing a correctly labelled AD AS diagram showing a shift of AD to the right and an increase in real GDP and for an explanation that devaluation of the lat may have caused an increase in aggregate demand through an increase in exports and or a decrease in imports thus bringing about an increase in real GDP 3 4 Candidates who incorrectly label diagrams can be rewarded with a maximum of 3 For AD AS the vertical axis may be price level average price level PL or APL The horizontal axis may be output real output national output real national output national income or GDP A title is not necessary
   4      b   M15 3 ECONO HP2 ENG TZ0 XX M  Using an AD AS diagram, explain how devaluation of the lat  the Latvian curren...
5 c M15 3 ECONO HP2 ENG TZ0 XX M Using a production possibilities curve PPC diagram explain the change in Latvia s economy from 2008 to 2012 paragraphs and Level 0 The work does not reach a standard described by the descriptors below 4 Marks 0 1 There is a correct diagram or an accurate written response For drawing a correctly labelled PPC diagram showing a movement from one point within the curve to a new point closer to the curve or for an explanation that Latvia experienced economic growth from 2008 to 2012 which means that there was an increase in output shown as a movement to a new point closer to the PPC 1 2 2 There is a correct diagram and an accurate written response For drawing a correctly labelled PPC diagram showing a movement from one point within the curve to a new point closer to the curve and for an explanation that Latvia experienced economic growth from 2008 to 2012 which means that there was an increase in output shown as a movement to a new point closer to the PPC 3 4 Candidates who incorrectly label diagrams can be rewarded with a maximum of 3 Candidates might show a different combination of points within the PPC on the diagram There might be an initial movement from one point inside the curve to a further point inside the curve to reflect the 20 drop in output in 2008 To show the change from 2008 to 2012 there must be a new point closer to the PPC For a PPC the axes could be two alternative products one on each axis eg Good A and Good B or Schools and Cars or two groups of products or two sectors eg Consumer Goods and Producer Goods A title is not necessary
   5      c   M15 3 ECONO HP2 ENG TZ0 XX M  Using a production possibilities curve  PPC  diagram, explain the change in La...
6 d M15 3 ECONO HP2 ENG TZ0 XX M Using information from the text data and your knowledge of economics evaluate the possible impact of Latvia joining the eurozone 8 Examiners should be aware that candidates may take a different approach which if appropriate should be rewarded Do not award beyond Level 2 if the answer does not contain reference to the information provided Level 0 The work does not reach a standard described by the descriptors below Marks 0 1 Few relevant concepts are recognized There is basic knowledge understanding 1 2 2 Relevant concepts are recognized and developed in reasonable depth There is clear knowledge understanding There is some attempt at application analysis 3 5 3 Relevant concepts are recognized and developed in reasonable depth There is clear knowledge understanding There is effective application analysis There is synthesis evaluation supported by appropriate theory and evidence 6 8 Command term Evaluate requires candidates to make an appraisal by weighing up the strengths and limitations Responses may include definition of monetary union Arguments for elimination of exchange rate uncertainty easier for future planning by firms increased investment and trade increased investor confidence reduction in transaction costs in trade with the eurozone increased foreign investment paragraph increased economic growth paragraph greater integration with the eurozone helps reduce dependence on Russia paragraph renewed confidence in the eurozone will bring benefits to all members paragraph may help to bring down unemployment which is high paragraph Latvia had to exercise discipline to meet the criteria to join the eurozone which built a good economic foundation for moving forward paragraph
   6      d   M15 3 ECONO HP2 ENG TZ0 XX M  Using information from the text data and your knowledge of economics, evaluate...
7 M15 3 ECONO HP2 ENG TZ0 XX M Arguments against loss of sovereignty over monetary policy possible high changeover costs problems of supporting other eurozone members paragraph Latvia loses the power to control its own currency to improve competitiveness threat of inflation as well as deflation paragraph short term lower consumer confidence paragraph Any reasonable evaluation that offers a considered and balanced review of the strengths and limitations of Latvia joining the eurozone
   7     M15 3 ECONO HP2 ENG TZ0 XX M  Arguments against      loss of sovereignty over monetary policy     possible high c...
8 2 a i ii M15 3 ECONO HP2 ENG TZ0 XX M Define the term interest rate indicated in bold in the text paragraph 2 Level 0 The work does not reach a standard described by the descriptors below Marks 1 Vague definition The idea that it is a payment to the bank 1 2 Accurate definition An explanation that it is one of the following the price or cost of borrowed money credit the reward for saving the percentage paid on borrowed money 2 Define the term tariffs indicated in bold in the text paragraph Level 0 The work does not reach a standard described by the descriptors below b 0 2 Marks 0 1 Vague definition The idea that it is a form of tax 1 2 Accurate definition An explanation that it is a tax on imports 2 Distinguish between a current account deficit and a budget deficit paragraph Level 0 The work does not reach a standard described by the descriptors below 4 Marks 0 1 There is a partially correct explanation For explaining that a current account deficit occurs when the outflow of money for imports of goods and services plus investment income and or transfers is greater than the revenue gained from exports of goods and services plus investment income and or transfers or for explaining that a budget deficit exists where government domestic revenue is less than government expenditure 1 2 2 There is a correct explanation For explaining that a current account deficit occurs when the outflow of money for imports of goods and services plus investment income and or transfers is greater than the revenue gained from exports of goods and services plus investment income and or transfer and for explaining that a budget deficit exists where government domestic revenue is less than government expenditure 3 4 To achieve full marks for the definition of current account deficit students must refer to more than simply trade in goods and service That is there must be reference to at least one of investment income or transfers
   8     2.   a    i    ii   M15 3 ECONO HP2 ENG TZ0 XX M  Define the term interest rate indicated in bold in the text  pa...
9 c M15 3 ECONO HP2 ENG TZ0 XX M Using an exchange rate diagram for the rupee India s currency explain how the value of the rupee has been affected by the expectation that the US central bank may change its monetary policy paragraph Level 0 The work does not reach a standard described by the descriptors below 4 Marks 0 1 There is a correct diagram or an accurate written response For drawing a correctly labelled exchange rate diagram with a shift of the supply curve of the rupee to the right and a fall in the exchange rate or for explaining that higher interest rates in the US will make it more attractive for people to save in the US rather than in India and to do so they will have to exchange sell their rupees for dollars thus increasing the supply of rupees and lowering the value of the rupee 1 2 2 There is a correct diagram and an accurate written response For drawing a correctly labelled exchange rate diagram with a shift of the supply curve of the rupee to the right and a fall in the exchange rate and for explaining that higher interest rates in the US will make it more attractive for people to save in the US rather than in India and to do so they will have to exchange sell their rupees for dollars thus increasing the supply of rupees and lowering the value of the rupee 3 4 Candidates who incorrectly label diagrams can be rewarded with a maximum of 3 For an exchange rate diagram the vertical axis may be exchange rate price of rupee in US US rupee or dollars per rupee The horizontal axis should be quantity or quantity of rupees A title is not necessary
   9      c   M15 3 ECONO HP2 ENG TZ0 XX M  Using an exchange rate diagram for the rupee  India   s currency , explain how...
10 d M15 3 ECONO HP2 ENG TZ0 XX M Using information from the text data and your knowledge of economics evaluate the policies that India might use to reduce the current account deficit 8 Examiners should be aware that candidates may take a different approach which if appropriate should be rewarded Do not award beyond Level 2 if the answer does not contain reference to the information provided Level 0 The work does not reach a standard described by the descriptors below Marks 0 1 Few relevant concepts are recognized There is basic knowledge understanding 1 2 2 Relevant concepts are recognized and developed in reasonable depth There is clear knowledge understanding There is some attempt at application analysis 3 5 3 Relevant concepts are recognized and developed in reasonable depth There is clear knowledge understanding There is effective application analysis There is synthesis evaluation supported by appropriate theory and evidence 6 8 Command term Evaluate requires candidates to make an appraisal by weighing up the strengths and limitations Responses may include Expenditure switching policies an explanation of expenditure switching policies trade protection and devaluation depreciation as a means of reducing spending on imports government has shown a willingness to use trade protection gold tariffs paragraph but trade protection may go against international trade agreements falling rupee may help with expenditure switching paragraph depending on the PED for exports and imports Marshall Lerner condition to encourage the switch from imports to domestic goods government should let the rupee continue to fall not support it paragraph but the falling rupee causes other problems Expenditure reducing policies an explanation of expenditure reducing policies as a means of reducing spending on imports economic growth has dropped to 5 so little room for expenditure reducing paragraph however India has high inflation and large budget deficit and so expenditure reducing could help solve those problems paragraph
    10       d   M15 3 ECONO HP2 ENG TZ0 XX M  Using information from the text data and your knowledge of economics, evalu...
11 M15 3 ECONO HP2 ENG TZ0 XX M Supply side policies an explanation of supply side policies as a means of increasing the competitiveness of exports need to speed up reforms to help India reach its potential paragraph market oriented policies eg reducing the regulatory burden may encourage investment and increase productivity paragraph interventionist policies eg increase investment in education and policies to support industry may help increase growth paragraph To reach Level 3 students must be aware of the particular situation in the Indian economy not just present an evaluation of policies to reduce a current account deficit in general Any reasonable evaluation
    11      M15 3 ECONO HP2 ENG TZ0 XX M  Supply-side policies      an explanation of supply side policies as a means of i...
12 M15 3 ECONO HP2 ENG TZ0 XX M Section B 3 a i Define the term bilateral trade agreements indicated in bold in the text paragraph Level 0 The work does not reach a standard described by the descriptors below ii 2 Marks 0 1 Vague definition The idea that it is a trade agreement between two countries 1 2 Accurate definition An explanation that it is a trade agreement between two countries which aims to lower trade barriers or to increase trade 2 Define the term infrastructure indicated in bold in the text paragraph Level 0 The work does not reach a standard described by the descriptors below 2 Marks 0 1 Vague definition The idea that it any one of the following is sufficient is essential facilities capital and services such as roads airports sewage treatment water systems railways telephone and utilities reduces the cost increases efficiency of economic activity is usually supplied by the government is necessary for economic activity 1 2 Accurate definition An explanation that it any two of the following is sufficient is essential facilities capital and services such as roads airports sewage treatment water systems railways telephone and utilities reduces the cost increases efficiency of economic activity is usually supplied by the government is necessary for economic activity 2
    12      M15 3 ECONO HP2 ENG TZ0 XX M  Section B 3.   a    i   Define the term bilateral trade agreements indicated in ...
13 b M15 3 ECONO HP2 ENG TZ0 XX M Using a comparative advantage diagram explain why China s exports tend to be concentrated in manufactured goods and the African countries mostly export primary goods paragraph Level 0 The work does not reach a standard described by the descriptors below 4 Marks 0 1 There is a correct diagram or an accurate written response For drawing a correctly labelled comparative advantage diagram showing that China has a comparative advantage in manufactured goods and African countries have a comparative advantage in primary goods or an explanation that China has a lower opportunity cost in producing manufactured goods while African countries have a lower opportunity cost in producing primary goods 1 2 2 There is a correct diagram and an accurate written response For drawing a correctly labelled comparative advantage diagram showing that China has a comparative advantage in manufactured goods and African countries have a comparative advantage in primary goods and an explanation that China has a lower opportunity cost in producing manufactured goods while African countries have a lower opportunity cost in producing primary goods 3 4 It is possible that students might show Africa with the absolute advantage If accurately explained this may be fully awarded Candidates who incorrectly label diagrams can be rewarded with a maximum of 3 The axes should indicate manufactured goods or an example of a manufactured good listed in the text and primary goods or an example listed in the text The straight PPCs must indicate the correct country An alternative diagram would be to show reciprocal absolute advantage with crossing PPCs see below
    13       b   M15 3 ECONO HP2 ENG TZ0 XX M  Using a comparative advantage diagram, explain why    China   s exports ten...
14 c M15 3 ECONO HP2 ENG TZ0 XX M Using a production possibilities curve PPC diagram explain how the provision of free training to 53 700 people from Africa will increase potential economic output paragraph Level 0 The work does not reach a standard described by the descriptors below 4 Marks 0 1 There is a correct diagram or an accurate written response For drawing a PPC outward shift showing an increase in the potential output in African countries or for explaining that free training would likely improve the quality of the factor of production labour and therefore may increase potential economic output 1 2 2 There is a correct diagram and an accurate written response For drawing a PPC outward shift showing an increase in the potential output in African countries and for explaining that free training would likely improve the quality of the factor of production labour and therefore may increase potential economic output 3 4 Candidates who incorrectly label diagrams can be rewarded with a maximum of 3 PPC there must be two contrasting goods on the axes
    14       c   M15 3 ECONO HP2 ENG TZ0 XX M  Using a production possibilities curve  PPC  diagram, explain how the provi...
15 d M15 3 ECONO HP2 ENG TZ0 XX M Using information from the text data and your knowledge of economics discuss the extent to which trade between China and African countries is a more effective way of achieving economic development than Chinese aid to African countries 8 Examiners should be aware that candidates may take a different approach which if appropriate should be rewarded Do not award beyond Level 2 if the answer does not contain reference to the information provided Level 0 The work does not reach a standard described by the descriptors below Marks 0 1 Few relevant concepts are recognized There is basic knowledge understanding 1 2 2 Relevant concepts are recognized and developed in reasonable depth There is clear knowledge understanding There is some attempt at application analysis 3 5 3 Relevant concepts are recognized and developed in reasonable depth There is clear knowledge understanding There is effective application analysis There is synthesis evaluation supported by appropriate theory and evidence 6 8 Command term Discuss requires candidates to offer a considered and balanced review that includes a range of arguments factors or hypotheses Opinions or conclusions should be presented clearly and supported by appropriate evidence Responses may include definition of trade aid economic development Benefits of trade for economic development access to export markets paragraph and revenue paragraph increased employment access to imports from China paragraph import new technologies paragraph exploit comparative advantage economies of scale improvements in efficiencies greater choice all of the above could result in higher economic growth which might lead to economic development through higher incomes Limitations of trade for economic development overdependence on a narrow range of commodity exports Figure 1 leads to the inability to expand in value added sectors vulnerability to price fluctuations and economic conditions in China results in fluctuations in government and business revenues overexploitation of resources in African countries may be a threat to sustainable development diagram to show negative externalities
    15       d   M15 3 ECONO HP2 ENG TZ0 XX M  Using information from the text data and your knowledge of economics, discu...
16 M15 3 ECONO HP2 ENG TZ0 XX M Benefits of aid for economic development target specific sectors eg agriculture housing education healthcare paragraph targets development of human capital through education and training paragraphs and break the poverty cycle filling gaps building key infrastructure paragraphs and Figure 2 Limitations of aid overdependence potential for abuse through corruption poorly targeted aid politically motivated aid targeted at inappropriate sectors tied aid To reach level 3 students must show awareness of the ways in which aid and trade impact upon economic development not simply discuss the advantages and disadvantages of aid and trade in general Any reasonable discussion
    16      M15 3 ECONO HP2 ENG TZ0 XX M  Benefits of aid for economic development      target specific sectors, eg agricu...
17 4 a i M15 3 ECONO HP2 ENG TZ0 XX M Define the term inflation indicated in bold in the text paragraph Level 0 The work does not reach a standard described by the descriptors below ii 2 Marks 0 1 Vague definition The idea that prices increase 1 2 Accurate definition An explanation that it is a sustained increase in the average general price level 2 Define the term appreciation indicated in bold in the text paragraph 2 Level 0 The work does not reach a standard described by the descriptors below Marks 0 1 Vague definition The idea that the exchange rate rises 1 2 Accurate definition An explanation that it is an increase in the value price of a currency plus one of the following in terms of a another currency in a floating exchange rate system 2
    17      4.   a    i   M15 3 ECONO HP2 ENG TZ0 XX M  Define the term inflation indicated in bold in the text  paragraph...
18 b M15 3 ECONO HP2 ENG TZ0 XX M Using an accurate definition of the terms of trade explain one reason