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IB ECONOMICS 2018 Examinations May and November examination sessions

May and Nov 2018 IB Economics Examinations Interactive Click or tap to jump The May and November 2018 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 Not released by the IB due to issues with copyright Nov

M18 3 ECONO HP1 ENG TZ1 XX Economics Higher level Paper 1 Tuesday 1 May 2018 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 2218 5102 International Baccalaureate Organization 2018

2 M18 3 ECONO HP1 ENG TZ1 XX Section A Answer one question from this section Microeconomics 1 a With reference to the concept of excess demand explain how a decrease in supply of a good would lead to a new market equilibrium 10 b A government decides to impose an indirect tax on unhealthy drinks Discuss the consequences for the stakeholders in these markets 15 2 a Explain two factors that might give rise to economies of scale for a firm b Discuss the view that legislation is the best way of dealing with the problem of monopoly power 10 15

3 M18 3 ECONO HP1 ENG TZ1 XX Section B Answer one question from this section Macroeconomics 3 a Explain the possible impact of an increase in wealth and consumer confidence on aggregate demand 10 b Examine why in contrast to the monetarist new classical model the economy will not automatically return to the full employment level of output in the Keynesian model 15 4 a Explain how expansionary fiscal policy could be used to close a deflationary recessionary gap 10 b Evaluate the view that fiscal policy is the most effective way of achieving long term economic growth 15

M18 3 ECONO HP1 ENG TZ1 XX M Markscheme May 2018 Economics Higher level Paper 1 17 pages

2 M18 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 Global Centre Cardiff

3 M18 3 ECONO HP1 ENG TZ1 XX M The following are the annotations available to use when marking responses Annotation Explanation Attempts Evaluation Answers the Question Benefit of Doubt Clear Knowledge Shown Cross Incorrect Point Effective Evaluation Good Analysis Good Definition Good Diagram Good Example Good Explanation Highlight tool Incorrect Labelling Irrelevant Inappropriate Use Lacks Depth Lacks Logical Structure L0 Level 0 L1 Level 1

4 L2 Level 2 L3 Level 3 L4 Level 4 M18 3 ECONO HP1 ENG TZ1 XX M

5 M18 3 ECONO HP1 ENG TZ1 XX M Not Answered Question No Definition No Examples On page comment text box for adding specific comments Poor Diagram Poorly Expressed Question mark unclear Apply to blank pages Theory is Clearly Explained Theory is Not Clearly Explained Tick correct point colourable Too Vague Underline tool Unbalanced Response You must make sure you have looked at all pages Please put the page to indicate that you have seen it annotation on any blank

6 M18 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 With reference to the concept of excess demand explain how a decrease in supply of a good would lead to a new market equilibrium Answers may include definitions of demand supply excess demand market equilibrium diagrams to show a leftward shift of supply with excess demand and an increase in price explanation of adjustments to a new market equilibrium in the case of a leftward shift of supply examples of decreases in supply affecting market equilibrium Assessment Criteria Part a 10 marks Level Marks 0 The work does not meet a standard described by the descriptors below 0 1 There is little understanding of the specific demands of the question 1 3 Relevant economic terms are not defined There is very little knowledge of relevant economic theory There are significant errors 2 There is some understanding of the specific demands of the ques 4 6 tion Some relevant economic terms are defined There is some knowledge of relevant economic theory There are some errors 3 There is understanding of the specific demands of the question 7 8 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 4 There is 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 10

7 b M18 3 ECONO HP1 ENG TZ1 XX M A government decides to impose an indirect tax on unhealthy drinks Discuss the consequences for the stakeholders in these markets 15 Answers may include definitions of indirect tax and stakeholders diagram to show the impact of an indirect tax explanation of how an indirect tax might affect consumers producers and the government examples of unhealthy drinks and taxes on such products synthesis or evaluation discussion of the consequences for the different stakeholders Discussion may include the importance of price and cross elasticities of demand equity issues micro and macro economic consequences Some responses may approach unhealthy food as a demerit good leading to market failure negative externalities of consumption This can be credited equally if it leads to a valid discussion 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

8 M18 3 ECONO HP1 ENG TZ1 XX M Assessment Criteria Part b 15 marks Level Marks 0 The work does not meet a standard described by the descriptors below 0 1 There is little understanding of the specific demands of the question 1 5 Relevant economic terms are not defined There is very little knowledge of relevant economic theory There are significant errors 2 There is some understanding of the specific demands of the ques 6 9 tion Some relevant economic terms are defined There is some knowledge of relevant economic theory There are some errors 3 There is understanding of the specific demands of the question 10 12 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 4 There is 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 2 a M18 3 ECONO HP1 ENG TZ1 XX M Explain two factors that might give rise to economies of scale for a firm 10 Answers may include definition of economies of scale diagram to show the impact of economies of scale on the shape of the long run average cost curve an explanation of two factors that give rise to economies of scale like specialisation financial technical bulk buying etc example s of economies of scale Assessment Criteria Part a 10 marks Level Marks 0 The work does not meet a standard described by the descriptors below 0 1 There is little understanding of the specific demands of the question 1 3 Relevant economic terms are not defined There is very little knowledge of relevant economic theory There are significant errors 2 There is some understanding of the specific demands of the ques 4 6 tion Some relevant economic terms are defined There is some knowledge of relevant economic theory There are some errors 3 There is understanding of the specific demands of the question 7 8 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 4 There is 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

10 b M18 3 ECONO HP1 ENG TZ1 XX M Discuss the view that legislation is the best way of dealing with the problem of monopoly power Answers may include definition of monopoly monopoly power oligopoly legislation diagram to show equilibrium in situation of monopoly power monopoly oligopoly an explanation of the features of monopoly and government responses example s of industries that are or have been able to exercise monopoly power government responses synthesis or evaluation discuss Discussion may include the advantages and disadvantages of government responses including legislation regulation nationalization and trade liberalization to the problem of monopoly power N B It should be noted that definitions theory and examples that have already been given in part a and then referred to in part b should be rewarded 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

11 M18 3 ECONO HP1 ENG TZ1 XX M Assessment Criteria Part b 15 marks Level Marks 0 The work does not meet a standard described by the descriptors below 0 1 There is little understanding of the specific demands of the question 1 5 Relevant economic terms are not defined There is very little knowledge of relevant economic theory There are significant errors 2 There is some understanding of the specific demands of the ques 6 9 tion Some relevant economic terms are defined There is some knowledge of relevant economic theory There are some errors 3 There is understanding of the specific demands of the question 10 12 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 4 There is 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

12 M18 3 ECONO HP1 ENG TZ1 XX M Section B Macroeconomics 3 a Explain the possible impact of an increase in wealth and consumer confidence on aggregate demand Answers may include definitions of wealth consumer confidence aggregate demand AD diagram s to show AD shifting to the right explanation of the possible impact of an increase in wealth and consumer confidence on AD examples of increases in wealth and consumer confidence Assessment Criteria Part a 10 marks Level Marks 0 The work does not meet a standard described by the descriptors below 0 1 There is little understanding of the specific demands of the question 1 3 Relevant economic terms are not defined There is very little knowledge of relevant economic theory There are significant errors 2 There is some understanding of the specific demands of the ques 4 6 tion Some relevant economic terms are defined There is some knowledge of relevant economic theory There are some errors 3 There is understanding of the specific demands of the question 7 8 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 4 There is 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 10

13 M18 3 ECONO HP1 ENG TZ1 XX M b Examine why in contrast to the monetarist new classical model the economy will not automatically return to the full employment level of output in the Keynesian model 15 Answers may include definitions of full employment level of output Keynesian model monetarist new classical model diagram s to show equilibrium in the two models explanation of the mechanisms through which an economy may remain stuck in a deflationary gap in the Keynesian system but will always return to full employment equilibrium in the monetarist new classical model in the long run examples of the two models applying in practice synthesis or evaluation examine Evaluation may include the importance of the type of unemployment the degree to which both models represent extreme theoretical ends of a spectrum the degree to which reality deviates from the models the difficulty of establishing what is full employment policy implications 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

14 M18 3 ECONO HP1 ENG TZ1 XX M Assessment Criteria Part b 15 marks Level Marks 0 The work does not meet a standard described by the descriptors below 0 1 There is little understanding of the specific demands of the question 1 5 Relevant economic terms are not defined There is very little knowledge of relevant economic theory There are significant errors 2 There is some understanding of the specific demands of the ques 6 9 tion Some relevant economic terms are defined There is some knowledge of relevant economic theory There are some errors 3 There is understanding of the specific demands of the question 10 12 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 4 There is 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

15 4 a M18 3 ECONO HP1 ENG TZ1 XX M Explain how expansionary fiscal policy could be used to close a deflationary recessionary gap Answers may include definitions of fiscal policy expansionary fiscal policy deflationary recessionary gap diagram to show the potential effects of expansionary fiscal policy explanation of how an expansionary fiscal policy will boost aggregate demand and increase output thereby closing a deflationary gap examples of countries that have used expansionary fiscal policy Assessment Criteria Part a 10 marks Level Marks 0 The work does not meet a standard described by the descriptors below 0 1 There is little understanding of the specific demands of the question 1 3 Relevant economic terms are not defined There is very little knowledge of relevant economic theory There are significant errors 2 There is some understanding of the specific demands of the ques 4 6 tion Some relevant economic terms are defined There is some knowledge of relevant economic theory There are some errors 3 There is understanding of the specific demands of the question 7 8 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 4 There is 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 10

16 b M18 3 ECONO HP1 ENG TZ1 XX M Evaluate the view that fiscal policy is the most effective way of achieving long term economic growth Answers may include definition of long term economic growth fiscal policy diagram to show a shift in the PPC and potential output Explanation of how fiscal policy leads to long term economic growth indirectly by creating an economic environment that is favourable to private investment and directly through government spending on physical capital goods and human capital formation as well as provision of incentives for firms to invest all of which are expected to have the effect of increasing potential output examples of fiscal policy that has had this effect synthesis or evaluation N B It should be noted that definitions theory and examples that have already been given in part a and then referred to in part b should be rewarded Evaluation may include the type of fiscal policy and how it is financed advantages and disadvantages of fiscal policy consideration of alternative policies such as monetary and supply side policies 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

17 M18 3 ECONO HP1 ENG TZ1 XX M Assessment Criteria Part b 15 marks Level Marks 0 The work does not meet a standard described by the descriptors below 0 1 There is little understanding of the specific demands of the question 1 5 Relevant economic terms are not defined There is very little knowledge of relevant economic theory There are significant errors 2 There is some understanding of the specific demands of the ques 6 9 tion Some relevant economic terms are defined There is some knowledge of relevant economic theory There are some errors 3 There is understanding of the specific demands of the question 10 12 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 4 There is 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

M18 3 ECONO SP1 ENG TZ1 XX Economics Standard level Paper 1 Tuesday 1 May 2018 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 2218 5111 International Baccalaureate Organization 2018

2 M18 3 ECONO SP1 ENG TZ1 XX Section A Answer one question from this section Microeconomics 1 a Explain how the value of the cross price elasticity of demand XED for a particular good is determined by its relationship to other goods 10 b Examine the significance of both cross price elasticity of demand and income elasticity of demand for a firm 15 2 a Explain two factors that would lead to an increase in the demand for a product 10 15 b Discuss the view that competitive markets will always achieve allocative efficiency

3 M18 3 ECONO SP1 ENG TZ1 XX Section B Answer one question from this section Macroeconomics 3 a Explain how income inequality might be measured in a country b Evaluate the view that the best way to reduce income inequality in a country is by using progressive taxation 15 4 a Explain how expansionary fiscal policy could be used to close a deflationary recessionary gap 10 b Evaluate the view that fiscal policy is the most effective way of achieving long term economic growth 15 10

M18 3 ECONO SP1 ENG TZ1 XX M Markscheme May 2018 Economics Standard level Paper 1 16 pages

2 M18 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 Global Centre Cardiff

3 M18 3 ECONO SP1 ENG TZ1 XX M The following are the annotations available to use when marking responses Annotation Explanation Attempts Evaluation Answers the Question Benefit of Doubt Clear Knowledge Shown Cross Incorrect Point Effective Evaluation Good Analysis Good Definition Good Diagram Good Example Good Explanation Highlight tool Incorrect Labelling Irrelevant Inappropriate Use Lacks Depth Lacks Logical Structure L0 Level 0 L1 Level 1 L2 Level 2 L3 Level 3 L4 Level 4

4 M18 3 ECONO SP1 ENG TZ1 XX M Not Answered Question No Definition No Examples On page comment text box for adding specific comments Poor Diagram Poorly Expressed Question mark unclear Apply to blank pages Theory is Clearly Explained Theory is Not Clearly Explained Tick correct point colourable Too Vague Underline tool Unbalanced Response You must make sure you have looked at all pages Please put the page to indicate that you have seen it annotation on any blank

5 M18 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 how the value of the cross price elasticity of demand XED for a particular good is determined by its relationship to other goods 10 Answers may include definition of XED diagram s to show the impact of XED eg using shifts of demand when there is a change in price of another good or price of X quantity of Y type diagrams to show substitutes and complements explanation in terms substitutes positive XED complements negative XED and no relationship a weak relationship a strong relationship ie magnitude examples of goods which are substitutes complements NB Candidates can only be awarded Level 4 if they consider both positive negative and make at least some brief reference to magnitude ie a maximum of Level 3 for consideration of just one or the other Assessment Criteria Part a 10 marks Level 0 1 2 3 4 The work does not meet a standard described by the descriptors below There is little understanding of the specific demands of the question Relevant economic terms are not defined There is very little knowledge of relevant economic theory There are significant errors There is some understanding of the specific demands of the question Some relevant economic terms are defined There is some knowledge of relevant economic theory There are some errors There is understanding of the specific demands of the question Relevant economic terms are defined Relevant economic theory is explained and applied Where appropriate diagrams are included and applied Where appropriate examples are used There are few errors There is 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 Marks 0 1 3 4 6 7 8 9 10

6 b M18 3 ECONO SP1 ENG TZ1 XX M Examine the significance of both cross price elasticity of demand and income elasticity of demand for a firm Answers may include definitions of XED and YED diagrams to show the significance of XED and YED for a firm explanation of the significance of XED and YED for a firm examples of the significance in practice synthesis or evaluation examine Examination may include relative importance of other factors which may affect firms eg PED the importance of the business cycle for YED the degree to which XED and YED can be measured in reality the tendency of YED and XED to change over time the possibility of mergers between firms that produce substitute goods the possibility of collaboration between firms that produce complementary goods 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

7 M18 3 ECONO SP1 ENG TZ1 XX M Assessment Criteria Part b 15 marks Level 0 1 2 3 4 The work does not meet a standard described by the descriptors below There is little understanding of the specific demands of the question Relevant economic terms are not defined There is very little knowledge of relevant economic theory There are significant errors There is some understanding of the specific demands of the question Some relevant economic terms are defined There is some knowledge of relevant economic theory There are some errors There is understanding of the specific demands of the question Relevant economic terms are defined Relevant economic theory is explained and applied Where appropriate diagrams are included and applied Where appropriate examples are used There is an attempt at synthesis or evaluation There are few errors There is 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 Marks 0 1 5 6 9 10 12 13 15

8 2 a M18 3 ECONO SP1 ENG TZ1 XX M Explain two factors that would lead to an increase in the demand for a product Answers may include definition of demand diagram to show a supply and demand with a shift of the demand curve to the right explanation of how changes to the non price determinants of demand produce shifts in demand examples of specific products with reference to determinants of demand NB If only one non price factor is explained a maximum of Level 2 can be achieved Also be aware of confusion between price and non price factors and the difference between an increase in demand and an increase in the quantity demanded Assessment Criteria Part a 10 marks Level 0 1 2 3 4 The work does not meet a standard described by the descriptors below There is little understanding of the specific demands of the question Relevant economic terms are not defined There is very little knowledge of relevant economic theory There are significant errors There is some understanding of the specific demands of the question Some relevant economic terms are defined There is some knowledge of relevant economic theory There are some errors There is understanding of the specific demands of the question Relevant economic terms are defined Relevant economic theory is explained and applied Where appropriate diagrams are included and applied Where appropriate examples are used There are few errors There is 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 Marks 0 1 3 4 6 7 8 9 10 10

9 b M18 3 ECONO SP1 ENG TZ1 XX M Discuss the view that competitive markets will always achieve allocative efficiency Answers may include definitions of allocative efficiency competitive market diagram to illustrate the principle of allocative efficiency eg demand supply marginal benefit marginal cost explanation that allocative efficiency occurs where market equilibrium occurs where social community surplus is maximized with respect to producer and consumer surplus marginal benefit equals marginal cost example s of competitive markets or markets where there is market failure synthesis or evaluation discuss Discussion may include the difference between private and social optimality challenges to the view expressed in the question in terms of such market failures as positive and negative externalities merit goods and demerit goods lack of provision of public goods lack of information NB If candidates go straight into an evaluation of the view without sufficient explanation of how competitive markets achieve allocative efficiency a maximum of mid L3 should be awarded N B It should be noted that definitions theory and examples that have already been given in part a and then referred to in part b should be rewarded 15

10 M18 3 ECONO SP1 ENG TZ1 XX M Assessment Criteria Part b 15 marks Level 0 1 2 3 4 The work does not meet a standard described by the descriptors below There is little understanding of the specific demands of the question Relevant economic terms are not defined There is very little knowledge of relevant economic theory There are significant errors There is some understanding of the specific demands of the question Some relevant economic terms are defined There is some knowledge of relevant economic theory There are some errors There is understanding of the specific demands of the question Relevant economic terms are defined Relevant economic theory is explained and applied Where appropriate diagrams are included and applied Where appropriate examples are used There is an attempt at synthesis or evaluation There are few errors There is 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 Marks 0 1 5 6 9 10 12 13 15

11 M18 3 ECONO SP1 ENG TZ1 XX M Section B Macroeconomics 3 a Explain how income inequality might be measured in a country 10 Answers may include definition of income inequality diagram to show a Lorenz curve and how the Gini co efficient is derived explanation of the methods used to measure income inequality Lorenz curve Gini co efficient examples of countries with income inequality Assessment Criteria Part a 10 marks Level 0 1 2 3 4 The work does not meet a standard described by the descriptors below There is little understanding of the specific demands of the question Relevant economic terms are not defined There is very little knowledge of relevant economic theory There are significant errors There is some understanding of the specific demands of the question Some relevant economic terms are defined There is some knowledge of relevant economic theory There are some errors There is understanding of the specific demands of the question Relevant economic terms are defined Relevant economic theory is explained and applied Where appropriate diagrams are included and applied Where appropriate examples are used There are few errors There is 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 Marks 0 1 3 4 6 7 8 9 10

12 b M18 3 ECONO SP1 ENG TZ1 XX M Evaluate the view that the best way to reduce income inequality in a country is by using progressive taxation Answers may include definition of progressive taxation income inequality diagram to show how progressive taxation could decrease income inequality inward shift of the Lorenz Curve or a progressive tax diagram explanation of how progressive taxation reduces the disposable income gap between people of lower and higher incomes examples of where or how progressive taxation has been used synthesis or evaluation Evaluation may include the impact of progressive taxation in reducing income inequality including tax avoidance tax evasion disincentive effects effects on efficiency consideration of alternative approaches such as government spending on merit goods transfer payments minimum wage consideration of best 15

13 M18 3 ECONO SP1 ENG TZ1 XX M NB If only progressive taxation is considered with explanation and evaluation of its impact but no alternative policy is considered a maximum of mid Level 3 should be awarded as the question would not have been fully answered in terms of best way Assessment Criteria Part b 15 marks Level 0 1 2 3 4 The work does not meet a standard described by the descriptors below There is little understanding of the specific demands of the question Relevant economic terms are not defined There is very little knowledge of relevant economic theory There are significant errors There is some understanding of the specific demands of the question Some relevant economic terms are defined There is some knowledge of relevant economic theory There are some errors There is understanding of the specific demands of the question Relevant economic terms are defined Relevant economic theory is explained and applied Where appropriate diagrams are included and applied Where appropriate examples are used There is an attempt at synthesis or evaluation There are few errors There is 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 Marks 0 1 5 6 9 10 12 13 15

14 4 a M18 3 ECONO SP1 ENG TZ1 XX M Explain how expansionary fiscal policy could be used to close a deflationary recessionary gap Answers may include definitions of fiscal policy expansionary fiscal policy deflationary recessionary gap diagram to show the potential effects of expansionary fiscal policy in terms of an outward shift of AD explanation of how an expansionary fiscal policy will boost aggregate demand and increase output thereby closing a deflationary gap examples of countries that have used expansionary fiscal policy Assessment Criteria Part a 10 marks Level 0 1 2 3 4 The work does not meet a standard described by the descriptors below There is little understanding of the specific demands of the question Relevant economic terms are not defined There is very little knowledge of relevant economic theory There are significant errors There is some understanding of the specific demands of the question Some relevant economic terms are defined There is some knowledge of relevant economic theory There are some errors There is understanding of the specific demands of the question Relevant economic terms are defined Relevant economic theory is explained and applied Where appropriate diagrams are included and applied Where appropriate examples are used There are few errors There is 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 Marks 0 1 3 4 6 7 8 9 10 10

15 b M18 3 ECONO SP1 ENG TZ1 XX M Evaluate the view that fiscal policy is the most effective way of achieving long term economic growth Answers may include definitions of long term economic growth short term economic growth fiscal policy diagram to show an outward shift of the PPC or a rightward shift of LRAS explanation of how fiscal policy leads to long term economic growth indirectly by creating an economic environment that is favourable to private investment and directly through government spending on physical capital goods and human capital formation as well as provision of incentives for firms to invest examples of fiscal policy that has led to long term economic growth synthesis or evaluation Evaluation may include the type of fiscal policy and how it is financed advantages and disadvantages of fiscal policy consideration of alternative policies such as monetary and supply side policies consideration of best NB Candidates who only consider the effects of fiscal policy on AD and do not consider the supply side effects on long term economic growth cannot be awarded above Level 2 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 M18 3 ECONO SP1 ENG TZ1 XX M Assessment Criteria Part b 15 marks Level 0 1 2 3 4 The work does not meet a standard described by the descriptors below There is little understanding of the specific demands of the question Relevant economic terms are not defined There is very little knowledge of relevant economic theory There are significant errors There is some understanding of the specific demands of the question Some relevant economic terms are defined There is some knowledge of relevant economic theory There are some errors There is understanding of the specific demands of the question Relevant economic terms are defined Relevant economic theory is explained and applied Where appropriate diagrams are included and applied Where appropriate examples are used There is an attempt at synthesis or evaluation There are few errors There is 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 Marks 0 1 5 6 9 10 12 13 15

M18 3 ECONO HP3 ENG TZ0 XX Economics Higher level Paper 3 Wednesday 2 May 2018 morning Candidate session number 1 hour 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 Answers must be written within the answer 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 2218 5107 International Baccalaureate Organization 2018 20 pages 20EP01

2 M18 3 ECONO HP3 ENG TZ0 XX Answer two questions Each question is worth 25 marks Answers must be written within the answer boxes provided 1 Note that widgets and pidgets are imaginary products In the country of Burbia the demand and supply of widgets are given by the functions Qd 249 4P Qs 150 14P where Qd is the quantity demanded per month Qs is the quantity supplied per month and P is the price per widget in dollars a b c Calculate the equilibrium price and quantity per month Calculate the excess demand excess supply state which of these at a price of 8 50 Calculate the price at which excess demand of 18 widgets would result This question continues on the following page 20EP02 2 2 2

3 M18 3 ECONO HP3 ENG TZ0 XX Question 1 continued A demand curve is drawn under the assumption of ceteris paribus d Using an example outline why the assumption of ceteris paribus is necessary when analysing the effect of a change in price on the quantity demanded of a product e Widgets and Pidgets have negative cross price elasticity of demand XED Explain how the demand function for Widgets Qd 249 4P is likely to change as a result of an increase in the price of Pidgets 2 2 The demand for widgets is considered to be unit elastic at the current price f Outline the meaning of the term unit elastic demand 2 This question continues on page 5 Turn over 20EP03

4 Please do not write on this page Answers written on this page will not be marked 20EP04 M18 3 ECONO HP3 ENG TZ0 XX

5 M18 3 ECONO HP3 ENG TZ0 XX Question 1 continued from page 3 g Explain two determinants of the price elasticity of demand PED h 4 Two products are in competitive supply Using an example outline how the supply for one of them is likely to be affected by an increase in the price of the other 2 This question continues on the following page Turn over 20EP05

6 M18 3 ECONO HP3 ENG TZ0 XX Question 1 continued The final of the 2018 Football World Cup is expected to be held in the Luzhniki stadium Moscow The capacity of the stadium is 80 000 The expected cost of holding the final is US 12 million which is not dependent on the number of people attending the match All tickets will be sold for the same price 1800 1600 1400 Price per ticket 1200 1000 800 600 400 D 200 20 40 60 80 100 120 200 400 Quantity of tickets 000 i State the value of the price elasticity of supply PES for tickets to the 2018 Football World Cup final This question continues on the following page 20EP06 1

7 M18 3 ECONO HP3 ENG TZ0 XX Question 1 continued j In the diagram on page 6 draw and label the supply curve for tickets at the 2018 Football World Cup final 1 k Draw and label the marginal revenue MR curve for the 2018 Football World Cup final 1 l Using the diagram on page 6 and your answers to parts j and k explain how the organizers could achieve their goal of profit maximisation 4 Turn over 20EP07

8 Please do not write on this page Answers written on this page will not be marked 20EP08 M18 3 ECONO HP3 ENG TZ0 XX

9 2 M18 3 ECONO HP3 ENG TZ0 XX The following information in parts a to d refers to the economy of Country Alpha Table 1 Population aged over 16 years 20 45 million Employed 13 72 million Unemployed 1 12 million a Using Table 1 above calculate the unemployment rate 2 This question continues on the following page Turn over 20EP09

10 M18 3 ECONO HP3 ENG TZ0 XX Question 2 continued The graph below shows the short run Phillips curve SRPC for Country Alpha 10 9 8 Inflation rate 7 6 5 4 3 2 1 SRPC 0 1 2 3 5 4 6 7 8 9 10 Unemployment rate b i Using the graph above determine short run values for the unemployment rate in 2016 and the inflation rate in 2018 Enter your answers in Table 2 below Table 2 Year 2016 2017 2018 Unemployment rate Inflation rate 3 2 5 7 This question continues on the following page 20EP10 1

11 M18 3 ECONO HP3 ENG TZ0 XX Question 2 continued ii The government in Country Alpha reduces income taxes in 2019 Using information from the graph on page 10 to support your answer explain the likely effect on the inflation rate and the unemployment rate c The natural rate of unemployment in Country Alpha is 5 On the diagram on page 10 draw and label the long run Phillips curve LRPC 1 The price of oil is expected to rise significantly causing a sustained increase in energy costs d 4 i ii Describe the likely effect of this sustained cost increase on the short run Phillips curve SRPC Explain the reason for your answer to part d i above 1 2 This question continues on the following page Turn over 20EP11

12 M18 3 ECONO HP3 ENG TZ0 XX Question 2 continued The following data relate to Country Beta all figures are in billions Table 3 Item Consumption Savings Taxation Government expenditures on goods and services Exports Imports Nominal GDP i billion 71 8 30 32 12 15 109 Using the data in Table 3 above calculate the level of investment e 2 In Country Beta investment by firms increases in the first quarter of 2019 ii State two possible reasons for the increase in investment by firms This question continues on the following page 20EP12 2

13 M18 3 ECONO HP3 ENG TZ0 XX Question 2 continued The following diagram illustrates the long run aggregate supply curve LRAS short run aggregate supply curve SRAS and aggregate demand curve AD for Country Beta before the increase in investment LRAS Average price level SRAS AD Real output iii The increase in investment results in both short run and long run effects on the economy On the diagram above draw and label the two curves that illustrate these effects 2 This question continues on the following page Turn over 20EP13

14 M18 3 ECONO HP3 ENG TZ0 XX Question 2 continued f Calculate the real growth rate in 2018 using the figures in Table 4 below Table 4 Year 2017 2018 Nominal GDP billion 107 109 GDP deflator 101 2 99 4 This question continues on the following page 20EP14 2

15 M18 3 ECONO HP3 ENG TZ0 XX Question 2 continued Country Beta is assumed to be a closed economy with no government sector Consumption in Beta increases by 0 80 for every 1 increase in national income In the first quarter of 2019 investment rises by 2 billion g i ii Calculate the maximum possible increase in gross domestic product GDP that could result from the rise in investment Country Delta is an open economy with a government sector Investment rises by 2 billion in both Delta and Beta Explain how the size of the multiplier and the resulting effect on gross domestic product GDP might be different in the two countries 2 4 Turn over 20EP15

16 3 M18 3 ECONO HP3 ENG TZ0 XX The following diagram illustrates the production possibilities of two countries Country A and Country B in the production of cotton and bananas 400 350 Quantity of cotton tonnes 300 250 200 150 100 Country B Country A 50 0 0 100 200 300 400 500 600 700 800 900 Quantity of bananas tonnes a Using the diagram calculate the opportunity cost of producing one tonne of bananas in Country A This question continues on the following page 20EP16 1

17 M18 3 ECONO HP3 ENG TZ0 XX Question 3 continued b Using information provided in the diagram to support your answer determine which country should specialise in the production of cotton c d Explain two reasons why specialisation in a narrow range of primary products according to the theory of comparative advantage might not benefit an economically less developed country Distinguish between the terms absolute advantage and comparative advantage 2 2 4 This question continues on the following page Turn over 20EP17

18 M18 3 ECONO HP3 ENG TZ0 XX Question 3 continued Table 5 provides information relating to the Balance of Payments for Urbania for 2017 Table 5 Item Exports of goods Imports of goods Exports of services Imports of services Net income Net current transfers Net capital transfers Net transactions in non produced non financial assets Net direct investment Net portfolio investment Reserve assets million 1527 1393 V 954 35 49 11 6 196 285 W Urbania has a current account deficit of 125 million in 2017 Calculate the value of V exports of services for Urbania in 2017 e f Distinguish between direct investment and portfolio investment This question continues on the following page 20EP18 2 2

19 M18 3 ECONO HP3 ENG TZ0 XX Question 3 continued g i Using the information in Table 5 calculate the financial account balance ii 2 Using your answer to part g i calculate the value of W reserve assets in Table 5 1 h Using your answer to part g ii describe how the level of reserve assets in Urbania changed by the end of 2017 1 The government of Urbania is concerned that the rate of inflation is significantly higher than in its close trading partners i Outline how Urbania s relatively high rate of inflation might affect its current account balance 2 This question continues on the following page Turn over 20EP19

20 M18 3 ECONO HP3 ENG TZ0 XX Question 3 continued j Outline one method other than attempting to reduce the value of its currency which may be used by the government of Urbania to reduce its current account deficit k Explain how a depreciation of the Urbanian dollar might result in a J curve effect 20EP20 2 4

M18 3 ECONO HP3 ENG TZ0 XX M Markscheme May 2018 Economics Higher level Paper 3 21 pages

2 M18 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 Global Centre Cardiff

3 M18 3 ECONO HP3 ENG TZ0 XX M The following are the annotations available to use when marking responses The definitive comments in text boxes will be in the lower right hand corner Therefore please place your comments in another corner or space so that you re able to read the definitive comments when viewing Quality Feedback in the Closed Responses Annotation AEr Explanation Mark Value if applicable Arithmetic error Benefit of the doubt Cross incorrect point Does not follow Error carried forward Good analysis Good definition Good diagram Good explanation GP Good point Highlight tool Incorrect labelling Irrelevant L0 Level 0 L1 Level 1 L2 Level 2 N0 No working shown awards 0 marks 0 N1 No working shown awards 1 mark 1 Not answered question Not enough Shortcut key

4 0 1 Num 0 plus 1 awards 1 mark 1 1 0 Num 1 plus 0 awards 1 mark 1 0 2 Num 0 plus 2 awards 2 marks 2 2 0 Num 2 plus 0 awards 2 marks 2 Num 1 plus 1 awards 2 marks 2 Num 1 plus 2 awards 3 marks 3 Num 2 plus 1 awards 3 marks 3 Num 2 plus 2 awards 4 marks 4 Num 0 awards 0 marks 0 NW No working shown Own figure rule On page comment text box Poor diagram Poorly expressed Question mark unclear Rounding error Repetition Seen Theory is clearly explained Theory is not clearly explained M18 3 ECONO HP3 ENG TZ0 XX M

5 M18 3 ECONO HP3 ENG TZ0 XX M Tick 1 awards 1 mark 1 Alt 1 Tick 2 awards 2 marks 2 Alt 2 Tick 3 awards 3 marks 3 Alt 3 Tick 4 awards 4 marks 4 Alt 4 Tick colourable Alt 5 Too vague Underline tool Valid alternative method You must make sure you have looked at all pages Please put the to indicate that you have seen it annotation on any blank page

6 M18 3 ECONO HP3 ENG TZ0 XX M Notes for examiners 1 Whenever relevant carry over marks must be awarded If a candidate makes an error in calculation but then uses the incorrect figure appropriately and accurately in later question parts then the candidate may be fully rewarded This is the own figure rule and you should put OFR on the script where you are rewarding this 2 Alternative approaches may be taken in responses to the 4 questions that use A02 command terms If this is the case and the alternative approaches are valid then full credit should be given 1 a Calculate the equilibrium price and quantity per month 2 249 4P 150 14P 99 18P 1 Any valid working is sufficient for 1 P 5 50 Q 227 1 An answer of 5 50 227 without working is sufficient for 1 b Calculate the excess demand excess supply state which of these at a price of 8 50 2 Qd 249 4 x 8 50 215 Qs 150 14 x 8 50 269 1 Any valid working is sufficient for 1 There will be excess supply or a surplus of 54 1 An answer of 54 without working is sufficient for 1 c Calculate the price at which excess demand of 18 widgets would result 2 249 4P 150 14P 18 81 18P 1 Any valid working is sufficient for 1 P 4 50 An answer of 4 50 without working is sufficient for 1 1

7 M18 3 ECONO HP3 ENG TZ0 XX M d Using an example outline why the assumption of ceteris paribus is necessary when analysing the effect of a change in price on the quantity demanded of a product Level 0 1 2 e The idea that some things might change or to understand the impact of change in one independent variable price at a time Accurate response An outline that a change in any of the non price determinants such as income and tastes and preferences may distort the effect of the change in price meaning that the impact of the change in price alone cannot be determined Marks 0 1 2 Widgets and Pidgets have negative cross price elasticity of demand XED Explain how the demand function for Widgets Qd 249 4P is likely to change as a result of an increase in the price of Pidgets Level 0 1 2 f The work does not meet a standard described by the descriptors below Vague response The work does not meet a standard described by the descriptors below The written response is limited The idea that demand for widgets will decrease or demand shifts to the left The written response is accurate For explaining that demand for widgets will decrease and hence the a term intercept or horizontal intercept or Q intercept will decrease 1 2 The work does not meet a standard described by the descriptors below Vague understanding The idea that the change in demand is equal to the change in price or there is no change in revenue when the price changes or that it shows when revenue is at its maximum Clear understanding A change in the price of a product results in a proportionate equal percentage change in the quantity demanded 2 Marks 0 1 2 Outline the meaning of the term unit elastic demand Level 0 2 2 Marks 0 1 2

8 g M18 3 ECONO HP3 ENG TZ0 XX M Explain two determinants of the price elasticity of demand PED Level 0 1 2 The work does not meet a standard described by the descriptors below The written response is limited For providing one determinant without explanation award a maximum of 1 For providing two determinants without explanation or for providing one condition with explanation award a maximum of 2 The written response is accurate For providing one determinant without explanation and one determinant with explanation award a maximum of 3 For providing two determinants with explanation award a maximum of 4 4 Marks 0 1 2 3 4 Accurate explanations may include degree of necessity if a good is a necessity then demand will be price inelastic as consumers will attempt to avoid reducing consumption while any reduction is likely to be proportionately smaller than the change in price availability of close substitutes if close substitutes are available demand will be price elastic as an increase in the price of the product is likely to lead to consumers switching to alternatives causing the quantity demanded of the good to decrease significantly proportion of income spent on the good if the price represents a small proportion of income demand will be price inelastic as a change in price will have little impact on the ability of the consumer to purchase the product time consumers are more able to react to changes in price if they have more time so demand is likely to be more price elastic in a longer time period any other reasonable response provided it does not repeat the idea i e if luxuries and necessities are both explained treat this as one point Same rule applies for number of substitutes and availability of close substitutes h Two products are in competitive supply Using an example outline how the supply for one of them is likely to be affected by an increase in the price of the other Level 0 1 2 The work does not meet a standard described by the descriptors below Vague response The idea that an increase in the price of one will lead to a decrease in supply of the other Accurate response An increase in the price of one good eg wheat will cause a decrease in supply of the other eg barley as the two products compete for resources needed to grow them Marks 0 1 2 2

9 i j k M18 3 ECONO HP3 ENG TZ0 XX M State the value of the price elasticity of supply PES for tickets to the 2018 Football World Cup final 1 Price elasticity of supply 0 1 In the diagram on page 6 draw and label the supply curve for tickets at the 2018 Football World Cup final 1 For a vertical supply curve labelled at 80 000 tickets 1 Draw and label the marginal revenue MR curve for the 2018 Football World Cup final 1 For an accurate labelled MR curve 1

10 l M18 3 ECONO HP3 ENG TZ0 XX M Using the diagram on page 6 and your answers to parts j and k explain how the organizers could achieve their goal of profit maximization Level 0 1 2 The work does not meet a standard described by the descriptors below The written response is limited For explaining that profits will be maximised where MR MC or that TR TC is maximised 1 and that MC 0 in this case OR for explaining that since there are no variable costs or only fixed costs maximum profit will occur at the same quantity as maximum revenue which is when MR 0 1 The written response is accurate And for explaining that profits will therefore be maximised when Q is 60 000 1 At a price of 800 1 Marks 0 1 2 3 4 4

11 2 a M18 3 ECONO HP3 ENG TZ0 XX M Using Table 1 above calculate the unemployment rate 2 1 12 100 13 72 1 12 1 Any valid working is sufficient for 1 7 55 1 An answer of 7 55 without workings is sufficient for 1 b i Using the graph above determine short run values for the unemployment rate in 2016 and the inflation rate in 2018 Enter your answers in Table 2 below Year 2016 2017 2018 Unemployment rate 4 5 7 1 Inflation rate 3 2 1 Both cells must have the correct numbers entered for 1 ii The government in Country Alpha reduces income taxes in 2019 Using information from the graph on page 10 to support your answer explain the likely effect on the inflation rate and the unemployment rate Level 0 1 2 The work does not meet a standard described by the descriptors below The written response is limited The tax cut increases AD which causes the inflation rate to rise and the unemployment rate to fall or that there will be a movement along the SRPC to the left as unemployment falls and inflation rises or suggest figures that are still on the SRPC The written response is accurate For explaining that the tax cut will raise disposable incomes which leads to more consumption and an increase in AD so unemployment will fall and the inflation rate will increase and that there will be a movement along the SRPC to the left or suggest figures that are still on the SRPC N B A response which does not refer to AD or to consumption may be awarded a maximum of 2 4 Marks 0 1 2 3 4

12 c M18 3 ECONO HP3 ENG TZ0 XX M The natural rate of unemployment in Country Alpha is 5 On the diagram on page 10 draw and label the long run Phillips curve LRPC 1 A correctly drawn LRPC earns 1 d i Describe the likely effect of this sustained cost increase on the short run Phillips curve SRPC A shift to the right or vertical upward shift or an outward shift of SRPC is sufficient for 1 1

13 ii Explain the reason for your answer to part d i above Level 0 1 2 e i M18 3 ECONO HP3 ENG TZ0 XX M The work does not meet a standard described by the descriptors below The response is limited For a response that an increase in energy costs will raise the rate of inflation or expected rate of inflation which shifts the SRPC curve right upwards or that SRAS shifts left a supply shock The response is accurate For a response that an increase in energy costs will raise the rate of inflation At each level of unemployment the rate of inflation will be higher because of the rise in production costs or SRAS has shifted left Thus the SRPC curve will shift to the right upwards 2 Marks 0 1 2 Using the data in Table 3 above calculate the level of investment 2 71 I 32 12 15 109 Any valid working is sufficient for 1 I 9 billion 1 An answer of 9 billion or 9 billion without workings is sufficient for 1 ii State two possible reasons for the increase in investment by firms Level 0 1 Marks The work does not meet a standard described by the descriptors 0 below Responses may include 2 fiscal policy incentives eg lower corporate taxes or investment tax credits for firms to invest an increase in business confidence higher business confidence better economic environment forecasts for growth a decrease in the rate of interest lower interest rates an increase in access to loans and other forms of borrowing better infrastructure communications freight transport etc more price stability higher corporate profits inventions or innovations or improvement in technology Any other reasonable response should be rewarded Award 1 for each appropriate response up to a maximum of 2 2

14 iii M18 3 ECONO HP3 ENG TZ0 XX M The increase in investment results in both short run and long run effects on the economy On the diagram above draw and label the two curves that illustrate these effects 2 For each correctly drawn and labelled shift 1 as shown below If candidates show a left shift or vertical upward shift of SRAS instead of the right shift in LRAS focusing on theory of high wages and input costs after AD shifts right and price level rises they may be awarded full marks N B The new short run equilibrium could be to the left or right or on the intersection of the new LRAS and AD curve N B A shift to the right of SRAS may also be shown but to earn two marks both AD and LRAS must shift N B The new curves should be appropriately labelled

15 f M18 3 ECONO HP3 ENG TZ0 XX M Calculate the real growth rate in 2018 using the figures in Table 4 below 2 109 99 4 100 109 66 107 101 2 100 105 73 109 66 1 03717 105 73 1 1 03717 1 100 Any valid working is sufficient for 1 3 72 1 An answer of 3 71 due to no early rounding should also be accepted An answer without working is sufficient for 1 g i Calculate the maximum possible increase in gross domestic product GDP that could result from the rise in investment 1 2 5 2 1 0 8 Any valid working is sufficient for 1 10 billion An answer of 10 billion or 10 billion is sufficient for 1 2

16 ii M18 3 ECONO HP3 ENG TZ0 XX M Country Delta is an open economy with a government sector Investment rises by 2 billion in both Delta and Beta Explain how the size of the multiplier and the resulting effect on gross domestic product GDP might be different in the two countries Level 0 1 2 The work does not meet a standard described by the descriptors below The written response is limited For an explanation that the multiplier will be smaller in Delta since there are more leakages than in Beta The written response is accurate For an explanation that the multiplier will be smaller in Delta since there are more leakages than in Beta due to imports and income taxes The reference to the formula to calculate Multiplier could be OR Therefore an increase in investment will increase real GDP by smaller successive amounts as a greater proportion is withdrawn before additional spending takes place As a result the effect on real GDP in Delta will be smaller than in Beta 4 Marks 0 1 2 3 4

17 3 a M18 3 ECONO HP3 ENG TZ0 XX M Using the diagram calculate the opportunity cost of producing one tonne of bananas in Country A 1 3 of a tonne of cotton 0 375 tonne cotton or 375 kilograms of cotton or 0 38 tonne cotton 8 1 b Using information provided in the diagram to support your answer determine which country should specialise in the production of cotton Level 0 1 2 Marks The work does not meet a standard described by the descriptors 0 below Country B should specialise in the production of cotton 1 2 8 as the opportunity cost of producing a tonne of cotton is 3 tonnes of bananas in Country A and one tonne of bananas in Country B 1 or as the slope of the PPC is steeper for Country B An explanation in terms of the opportunity cost of producing bananas is also acceptable c Distinguish between the terms absolute advantage and comparative advantage Level 0 1 2 Marks The work does not meet a standard described by the descriptors 0 below Vague understanding 1 The idea that absolute advantage means that more of a good can be produced while comparative advantage means that relatively more of a good can be produced Clear understanding 2 The idea that absolute advantage means that one country can produce more of a product than another country with a given level of resources or that production of one product requires fewer resources than production of the other product in the case of absolute advantage while comparative advantage means that the opportunity cost of producing a good is lower for one country than for another 2

18 d M18 3 ECONO HP3 ENG TZ0 XX M Explain two reasons why specialisation in a narrow range of primary products according to the theory of comparative advantage might not benefit an economically less developed country Level 0 1 2 The work does not meet a standard described by the descriptors below The written response is limited For providing one reason without explanation 1 For providing two reasons without explanation or for providing one reason with explanation 2 The written response is accurate For providing one reason without explanation and one reason with explanation 3 For providing two reasons with explanation 4 4 Marks 0 1 2 3 4 specialisation according to comparative advantage might lead to over specialisation which would make the economy vulnerable to changes in the market for exported products specialisation may result in the economy relying on the export of primary commodities which may be income inelastic and therefore unlikely to lead to sustained growth specialisation may result in the economy relying on the export of primary commodities which earn little value added for the exporting economy it may not be possible for the ELDC to gain access to international markets as a result of Trade protection primary products are often subject to supply shocks resulting in volatile prices and difficulty or unwillingness in planning ahead demand for primary products may be price inelastic which leads to revenue falling when output increases Any other reasonable response e Calculate the value of V exports of services for Urbania in 2017 2 1527 V 1393 954 35 49 125 1 Any valid working is sufficient for 1 V 779 million An answer of 779 without working is sufficient for 1 1

19 f Distinguish between direct investment and portfolio investment Level 0 1 2 g M18 3 ECONO HP3 ENG TZ0 XX M i 2 Marks The work does not meet a standard described by the descriptors 0 below Vague understanding 1 The idea that one is to do with investment in physical capital while the other is not Clear understanding 2 The idea that direct investment is to do with investment in physical capital FDI while portfolio investment refers to financial investment such as in shares and bonds or that direct investment confers some significant degree of ownership control of the investment while portfolio investment does not Using the information in Table 5 calculate the financial account balance 2 Current account capital account financial account 1 125 6 11 financial account 0 Any valid working is sufficient for 1 Financial account 108 million ii Using your answer to part g i calculate the value of W reserve assets in Table 5 1 Net portfolio net direct W financial account 285 196 W 108 W 19 million 1 OFR applies h Using your answer to part g ii describe how the level of reserve assets in Urbania has changed in 2017 1 The level of reserve assets in Urbania has decreased 1 OFR applies

20 i Outline how Urbania s relatively high rate of inflation might affect its current account balance Level 0 1 2 j M18 3 ECONO HP3 ENG TZ0 XX M The work does not meet a standard described by the descriptors below Vague response The idea that exports will become less competitive imports will become relatively cheaper than domestic goods Clear response The idea that exports will become less competitive imports will become relatively cheaper than domestic goods and that as a result export revenue is likely to decrease import expenditure is likely to increase worsening OR increasing the deficit in the current account balance Marks 0 1 2 Outline one method other than attempting to reduce the value of its currency which may be used by the government of Urbania to reduce its current account deficit Level 0 1 2 The work does not meet a standard described by the descriptors below Vague response For stating one method Clear response For outlining one method Possible responses include contractionary demand management policy ies to reduce disposable income and so the demand for imports supply side policies to make the goods and services produced by the economy more competitive internationally protectionism to reduce the demand for imports and or stimulate exports 2 Marks 0 1 2 2

21 k M18 3 ECONO HP3 ENG TZ0 XX M Explain how a depreciation of the Urbanian dollar might result in a J curve effect Level 0 1 2 The work does not meet a standard described by the descriptors below The written response is limited For explaining that a depreciation would make exports more competitive imports relatively more expensive 1 and that as a result the current account balance should improve 1 OR for an explanation that as demand for exports imports may be inelastic in the short term The Marshall Lerner condition may not hold 1 and the current account balance may worsen then improve 1 The written response is accurate For explaining that a depreciation would make exports more competitive imports relatively more expensive 1 and that as a result the current account balance should improve 1 and for an explanation that as demand for exports imports may be inelastic in the short term The Marshall Lerner condition may not hold 1 and the current account balance may worsen then improve 1 4 Marks 0 1 2 3 4 N B A sketch of a J curve without any explanation would only be sufficient for 1 mark only if it is properly labelled

N18 3 ECONO HP1 ENG TZ0 XX Economics Higher level Paper 1 Wednesday 31 October 2018 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 8818 5101 International Baccalaureate Organization 2018

2 N18 3 ECONO HP1 ENG TZ0 XX Section A Answer one question from this section Microeconomics 1 a Explain how the price mechanism reallocates resources when there is an increase in demand for a good or service 10 b To what extent is advertising the most effective way of increasing the consumption of merit goods 15 2 a Explain why prices tend to be relatively rigid in oligopolistic markets 10 b Discuss whether an oligopolistic firm should collude rather than compete 15

3 N18 3 ECONO HP1 ENG TZ0 XX Section B Answer one question from this section Macroeconomics 3 a Using the concept of the multiplier explain how an increase in investment might affect aggregate demand 10 b Discuss the effectiveness of supply side policies in reducing unemployment 15 4 a Explain the potential effects on the economic growth rate from a substantial increase in the number of skilled people of working age entering a country 10 b Discuss the view that apart from indicating economic growth rates over time national income statistics are of little use 15

N18 3 ECONO HP1 ENG TZ0 XX M Markscheme November 2018 Economics Higher level Paper 1 12 pages

2 N18 3 ECONO HP1 ENG TZ0 XX M This markscheme is the property of the International Baccalaureate and must not be reproduced or distributed to any other person without the authorization of the IB Global Centre Cardiff

3 N18 3 ECONO HP1 ENG TZ0 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 the price mechanism reallocates resources when there is an increase in demand for a good or service 10 Answers may include definitions of resources demand diagram to show how an increase in demand leads to a reallocation of resources explanation of how the signalling and incentive functions of price lead to a reallocation of resources when demand increases for a good or service examples of goods and services where the price mechanism has reallocated resources because of an increase in demand Assessment Criteria Part a 10 marks Level 0 1 2 3 4 The work does not meet a standard described by the descriptors below There is little understanding of the specific demands of the question Relevant economic terms are not defined There is very little knowledge of relevant economic theory There are significant errors There is some understanding of the specific demands of the question Some relevant economic terms are defined There is some knowledge of relevant economic theory There are some errors There is understanding of the specific demands of the question Relevant economic terms are defined Relevant economic theory is explained and applied Where appropriate diagrams are included and applied Where appropriate examples are used There are few errors There is clear understanding of the specific demands of the question Relevant economic terms are clearly defined Relevant economic theory is clearly explained and applied Where appropriate diagrams are included and applied effectively Where appropriate examples are used effectively There are no significant errors Marks 0 1 3 4 6 7 8 9 10

4 b N18 3 ECONO HP1 ENG TZ0 XX M To what extent is advertising the most effective way of increasing the consumption of merit goods 15 Answers may include definition of merit good diagram showing positive externalities to illustrate how advertising can be used to deal with the market failure associated with merit goods explanation of the positive externalities associated with merit goods and how advertising can increase the demand and consumption of merit goods examples of the advertising of merit goods to increase consumption synthesis or evaluation to what extent Evaluation may include the cost of advertising the effectiveness of advertising and reference to alternative ways to increase the consumption of merit goods Examiners should be aware that candidates may take a different approach which if appropriate should be rewarded Assessment Criteria Part b 15 marks Level 0 1 2 3 4 The work does not meet a standard described by the descriptors below There is little understanding of the specific demands of the question Relevant economic terms are not defined There is very little knowledge of relevant economic theory There are significant errors There is some understanding of the specific demands of the question Some relevant economic terms are defined There is some knowledge of relevant economic theory There are some errors There is understanding of the specific demands of the question Relevant economic terms are defined Relevant economic theory is explained and applied Where appropriate diagrams are included and applied Where appropriate examples are used There is an attempt at synthesis or evaluation There are few errors There is clear understanding of the specific demands of the question Relevant economic terms are clearly defined Relevant economic theory is clearly explained and applied Where appropriate diagrams are included and applied effectively Where appropriate examples are used effectively There is evidence of appropriate synthesis or evaluation There are no significant errors Marks 0 1 5 6 9 10 12 13 15

5 2 a N18 3 ECONO HP1 ENG TZ0 XX M 10 Explain why prices tend to be relatively rigid in oligopolistic markets Answers may include definition of oligopoly diagram to show the kinked demand curve with price inelastic demand below the market price and price elastic demand above the market price explanation of price rigidities with reference to the risk of price wars and or with reference to the effect that a change in price would have on the total revenue of the oligopolistic firm examples of industries where there are rigid prices non price competition strategic interdependence Assessment Criteria Part a 10 marks Level 0 1 2 3 4 The work does not meet a standard described by the descriptors below There is little understanding of the specific demands of the question Relevant economic terms are not defined There is very little knowledge of relevant economic theory There are significant errors There is some understanding of the specific demands of the question Some relevant economic terms are defined There is some knowledge of relevant economic theory There are some errors There is understanding of the specific demands of the question Relevant economic terms are defined Relevant economic theory is explained and applied Where appropriate diagrams are included and applied Where appropriate examples are used There are few errors There is clear understanding of the specific demands of the question Relevant economic terms are clearly defined Relevant economic theory is clearly explained and applied Where appropriate diagrams are included and applied effectively Where appropriate examples are used effectively There are no significant errors Marks 0 1 3 4 6 7 8 9 10

6 b N18 3 ECONO HP1 ENG TZ0 XX M Discuss whether an oligopolistic firm should collude rather than compete Answers may include definitions of oligopoly collusion diagram to show open formal collusion single downward sloping demand curve as in monopoly diagram explanation of how open formal collusion would limit competition between member firms and maximize joint profits as if the firms were collectively a monopoly and or the term tacit collusion including reference to price leadership by a dominant firm examples of where firms have colluded synthesis or evaluation discuss Discussion may include consideration of the arguments in favour of collusion economic abnormal profits which can be re invested in research and development and or distributed to the shareholders consideration of the arguments in favour of competition lower prices and higher quantity for consumers improved product quality variety increased market share for the competing firm s improved allocative and or productive efficiency difficulties of maintaining cartel structures due to the incentive of cartel members to cheat Examiners should be aware that candidates may take a different approach which if appropriate should be rewarded NB Definitions theory and examples that have already been given in part a and then referred to in part b should be rewarded 15

7 N18 3 ECONO HP1 ENG TZ0 XX M Assessment Criteria Part b 15 marks Level 0 1 2 3 4 The work does not meet a standard described by the descriptors below There is little understanding of the specific demands of the question Relevant economic terms are not defined There is very little knowledge of relevant economic theory There are significant errors There is some understanding of the specific demands of the question Some relevant economic terms are defined There is some knowledge of relevant economic theory There are some errors There is understanding of the specific demands of the question Relevant economic terms are defined Relevant economic theory is explained and applied Where appropriate diagrams are included and applied Where appropriate examples are used There is an attempt at synthesis or evaluation There are few errors There is clear understanding of the specific demands of the question Relevant economic terms are clearly defined Relevant economic theory is clearly explained and applied Where appropriate diagrams are included and applied effectively Where appropriate examples are used effectively There is evidence of appropriate synthesis or evaluation There are no significant errors Marks 0 1 5 6 9 10 12 13 15

8 N18 3 ECONO HP1 ENG TZ0 XX M Section B Macroeconomics 3 a Using the concept of the multiplier explain how an increase in investment might affect aggregate demand 10 Answers may include definitions of investment aggregate demand multiplier diagram to show the impact of the multiplier on AD explanations that investment is one of the components of the aggregate demand and of the multiplier effect example s of where an increase in investment has affected AD through the multiplier effect NB Candidates who do not refer to the concept of the multiplier should not be awarded marks beyond level 2 Assessment Criteria Part a 10 marks Level 0 1 2 3 4 The work does not meet a standard described by the descriptors below There is little understanding of the specific demands of the question Relevant economic terms are not defined There is very little knowledge of relevant economic theory There are significant errors There is some understanding of the specific demands of the question Some relevant economic terms are defined There is some knowledge of relevant economic theory There are some errors There is understanding of the specific demands of the question Relevant economic terms are defined Relevant economic theory is explained and applied Where appropriate diagrams are included and applied Where appropriate examples are used There are few errors There is clear understanding of the specific demands of the question Relevant economic terms are clearly defined Relevant economic theory is clearly explained and applied Where appropriate diagrams are included and applied effectively Where appropriate examples are used effectively There are no significant errors Marks 0 1 3 4 6 7 8 9 10

9 b N18 3 ECONO HP1 ENG TZ0 XX M 15 Discuss the effectiveness of supply side policies in reducing unemployment Answers may include definitions of supply side policies unemployment diagram s to show how supply side polices may have a short term impact on AD but more importantly will increase LRAS and or how supply side policies will affect the market for labour explanation of how supply side policies market based and interventionist could reduce different types of unemployment example s of where supply side polices have been introduced to tackle unemployment synthesis or evaluation discuss Discussion may include consideration of the disadvantages of supply side policies political opposition opportunity cost for the government budget time lag increased inequality in income distribution in reducing unemployment consideration of alternative demand side policies Examiners should be aware that candidates may take a different approach which if appropriate should be rewarded Assessment Criteria Part b 15 marks Level 0 1 2 3 4 The work does not meet a standard described by the descriptors below There is little understanding of the specific demands of the question Relevant economic terms are not defined There is very little knowledge of relevant economic theory There are significant errors There is some understanding of the specific demands of the question Some relevant economic terms are defined There is some knowledge of relevant economic theory There are some errors There is understanding of the specific demands of the question Relevant economic terms are defined Relevant economic theory is explained and applied Where appropriate diagrams are included and applied Where appropriate examples are used There is an attempt at synthesis or evaluation There are few errors There is clear understanding of the specific demands of the question Relevant economic terms are clearly defined Relevant economic theory is clearly explained and applied Where appropriate diagrams are included and applied effectively Where appropriate examples are used effectively There is evidence of appropriate synthesis or evaluation There are no significant errors Marks 0 1 5 6 9 10 12 13 15

10 4 a N18 3 ECONO HP1 ENG TZ0 XX M Explain the potential effects on the economic growth rate from a substantial increase in the number of skilled people of working age entering a country Answers may include definitions of economic growth growth rate diagram s to show how an outward shift of the AD curve and or an outward shift of the LRAS production possibility curve would lead to economic growth explanation of how an increase in the population leads to an increase in AD in the short term resulting in short term economic growth and or how an increase in the number and qualification of the workforce leads to an increase in the quality and quantity of labour resulting in long term economic growth examples of immigration affecting economic growth rates of countries Assessment Criteria Part a 10 marks Level 0 1 2 3 4 The work does not meet a standard described by the descriptors below There is little understanding of the specific demands of the question Relevant economic terms are not defined There is very little knowledge of relevant economic theory There are significant errors There is some understanding of the specific demands of the question Some relevant economic terms are defined There is some knowledge of relevant economic theory There are some errors There is understanding of the specific demands of the question Relevant economic terms are defined Relevant economic theory is explained and applied Where appropriate diagrams are included and applied Where appropriate examples are used There are few errors There is clear understanding of the specific demands of the question Relevant economic terms are clearly defined Relevant economic theory is clearly explained and applied Where appropriate diagrams are included and applied effectively Where appropriate examples are used effectively There are no significant errors Marks 0 1 3 4 6 7 8 9 10 10

11 b N18 3 ECONO HP1 ENG TZ0 XX M Discuss the view that apart from indicating economic growth rates over time national income statistics are of little use Answers may include definitions of economic growth growth rate real GNI GNP per capita real GDP per capita a diagram is not required but candidates may use diagram s to show economic growth inequality in the distribution of income explanation of the uses of national income statistics for making comparisons over time for making comparisons between countries and for making conclusions about the standards of living examples of such uses in practice synthesis or evaluation discuss Discussion may include consideration of little use the drawbacks of using national income statistics to make conclusions about the standards of living practical difficulties of measurement and calculation the narrowness of such statistics economic growth versus economic development Examiners should be aware that candidates may take a different approach which if appropriate should be rewarded Opinions or conclusions should be presented clearly and should be supported by appropriate examples NB Definitions theory and examples that have already been given in part a and then referred to in part b should be rewarded 15

12 N18 3 ECONO HP1 ENG TZ0 XX M Assessment Criteria Part b 15 marks Level 0 1 2 3 4 The work does not meet a standard described by the descriptors below There is little understanding of the specific demands of the question Relevant economic terms are not defined There is very little knowledge of relevant economic theory There are significant errors There is some understanding of the specific demands of the question Some relevant economic terms are defined There is some knowledge of relevant economic theory There are some errors There is understanding of the specific demands of the question Relevant economic terms are defined Relevant economic theory is explained and applied Where appropriate diagrams are included and applied Where appropriate examples are used There is an attempt at synthesis or evaluation There are few errors There is clear understanding of the specific demands of the question Relevant economic terms are clearly defined Relevant economic theory is clearly explained and applied Where appropriate diagrams are included and applied effectively Where appropriate examples are used effectively There is evidence of appropriate synthesis or evaluation There are no significant errors Marks 0 1 5 6 9 10 12 13 15

N18 3 ECONO SP1 ENG TZ0 XX Economics Standard level Paper 1 Wednesday 31 October 2018 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 8818 5110 International Baccalaureate Organization 2018

2 N18 3 ECONO SP1 ENG TZ0 XX Section A Answer one question from this section Microeconomics 1 a Explain how the price mechanism reallocates resources when there is an increase in demand for a good or service 10 b To what extent is advertising the most effective way of increasing the consumption of merit goods 15 2 a Explain two reasons why a government might impose an indirect tax on a good b Evaluate the impact that an increase in indirect tax might have on consumers and producers 10 15

3 N18 3 ECONO SP1 ENG TZ0 XX Section B Answer one question from this section Macroeconomics 3 a Explain how an economic recession can lead to an increase in absolute poverty 10 b Evaluate the view that government policies to promote equity will always have a negative effect on efficiency 15 4 a Explain how an increase in leakages can affect the size of the circular flow of income 10 b To what extent is the use of national income statistics an effective way of comparing the standard of living between countries 15

N18 3 ECONO SP1 ENG TZ0 XX M Markscheme November 2018 Economics Standard level Paper 1 11 pages

2 N18 3 ECONO SP1 ENG TZ0 XX M This markscheme is the property of the International Baccalaureate and must not be reproduced or distributed to any other person without the authorization of the IB Global Centre Cardiff

3 N18 3 ECONO SP1 ENG TZ0 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 the price mechanism reallocates resources when there is an increase in demand for a good or service Answers may include definitions of price mechanism resources demand diagram to show how an increase in demand leads to a reallocation of resources explanation of how the signalling and incentive functions of price lead to a reallocation of resources when demand increases for a good or service examples of goods and services where the price mechanism has reallocated resources because of an increase in demand Assessment Criteria Part a 10 marks Level 0 1 2 3 4 The work does not meet a standard described by the descriptors below There is little understanding of the specific demands of the question Relevant economic terms are not defined There is very little knowledge of relevant economic theory There are significant errors There is some understanding of the specific demands of the question Some relevant economic terms are defined There is some knowledge of relevant economic theory There are some errors There is understanding of the specific demands of the question Relevant economic terms are defined Relevant economic theory is explained and applied Where appropriate diagrams are included and applied Where appropriate examples are used There are few errors There is clear understanding of the specific demands of the question Relevant economic terms are clearly defined Relevant economic theory is clearly explained and applied Where appropriate diagrams are included and applied effectively Where appropriate examples are used effectively There are no significant errors Marks 0 1 3 4 6 7 8 9 10 10

4 b N18 3 ECONO SP1 ENG TZ0 XX M To what extent is advertising the most effective way of increasing the consumption of merit goods Answers may include definition of merit good diagram showing positive externalities to illustrate how advertising can be used to deal with the market failure associated with merit goods explanation of the positive externalities associated with merit goods and how advertising can increase the demand and consumption of merit goods examples of the advertising of merit goods to increase consumption synthesis or evaluation to what extent Evaluation may include the cost of advertising the effectiveness of advertising and reference to alternative ways to increase the consumption of merit goods Examiners should be aware that candidates may take a different approach which if appropriate should be rewarded Assessment Criteria Part b 15 marks Level 0 1 2 3 4 The work does not meet a standard described by the descriptors below There is little understanding of the specific demands of the question Relevant economic terms are not defined There is very little knowledge of relevant economic theory There are significant errors There is some understanding of the specific demands of the question Some relevant economic terms are defined There is some knowledge of relevant economic theory There are some errors There is understanding of the specific demands of the question Relevant economic terms are defined Relevant economic theory is explained and applied Where appropriate diagrams are included and applied Where appropriate examples are used There is an attempt at synthesis or evaluation There are few errors There is clear understanding of the specific demands of the question Relevant economic terms are clearly defined Relevant economic theory is clearly explained and applied Where appropriate diagrams are included and applied effectively Where appropriate examples are used effectively There is evidence of appropriate synthesis or evaluation There are no significant errors Marks 0 1 5 6 9 10 12 13 15 15

5 2 a N18 3 ECONO SP1 ENG TZ0 XX M Explain two reasons why a government might impose an indirect tax on a good Answers may include definition of indirect tax diagram to show the impact of an indirect tax on a good explanation that governments impose indirect taxes on goods to raise revenue reduce consumption of demerit goods and reduce the negative externalities of production examples of situations where governments impose indirect tax NB Candidates who only explain one reason should not be awarded marks beyond level 2 Assessment Criteria Part a 10 marks Level 0 1 2 3 4 The work does not meet a standard described by the descriptors below There is little understanding of the specific demands of the question Relevant economic terms are not defined There is very little knowledge of relevant economic theory There are significant errors There is some understanding of the specific demands of the question Some relevant economic terms are defined There is some knowledge of relevant economic theory There are some errors There is understanding of the specific demands of the question Relevant economic terms are defined Relevant economic theory is explained and applied Where appropriate diagrams are included and applied Where appropriate examples are used There are few errors There is clear understanding of the specific demands of the question Relevant economic terms are clearly defined Relevant economic theory is clearly explained and applied Where appropriate diagrams are included and applied effectively Where appropriate examples are used effectively There are no significant errors Marks 0 1 3 4 6 7 8 9 10 10

6 b N18 3 ECONO SP1 ENG TZ0 XX M Evaluate the impact that an increase in indirect tax might have on consumers and producers 15 Answers may include definition of indirect tax diagram to show the impact of an indirect tax on consumers and producers explanation that indirect tax increases the price consumers have to pay for goods and services and reduces the revenue producers receive from selling goods and services examples of how indirect taxes affect consumers and producers synthesis or evaluation Evaluation may include the relative impact may depend on PED and PES indirect tax might benefit consumers if it is imposed on demerit goods tax revenue raised can be used to benefit consumers and producers through government spending Assessment Criteria Part b 15 marks Level 0 1 2 3 4 The work does not meet a standard described by the descriptors below There is little understanding of the specific demands of the question Relevant economic terms are not defined There is very little knowledge of relevant economic theory There are significant errors There is some understanding of the specific demands of the question Some relevant economic terms are defined There is some knowledge of relevant economic theory There are some errors There is understanding of the specific demands of the question Relevant economic terms are defined Relevant economic theory is explained and applied Where appropriate diagrams are included and applied Where appropriate examples are used There is an attempt at synthesis or evaluation There are few errors There is clear understanding of the specific demands of the question Relevant economic terms are clearly defined Relevant economic theory is clearly explained and applied Where appropriate diagrams are included and applied effectively Where appropriate examples are used effectively There is evidence of appropriate synthesis or evaluation There are no significant errors Marks 0 1 5 6 9 10 12 13 15

7 N18 3 ECONO SP1 ENG TZ0 XX M Section B Macroeconomics 3 a Explain how an economic recession can lead to an increase in absolute poverty Answers may include definitions of economic recession absolute poverty diagram to show a fall in AD explanation that a recession can lead to a fall in GDP an increase in unemployment and falling incomes leading to a rise in absolute poverty examples of how a recession has increased absolute poverty Assessment Criteria Part a 10 marks Level 0 1 2 3 4 The work does not meet a standard described by the descriptors below There is little understanding of the specific demands of the question Relevant economic terms are not defined There is very little knowledge of relevant economic theory There are significant errors There is some understanding of the specific demands of the question Some relevant economic terms are defined There is some knowledge of relevant economic theory There are some errors There is understanding of the specific demands of the question Relevant economic terms are defined Relevant economic theory is explained and applied Where appropriate diagrams are included and applied Where appropriate examples are used There are few errors There is clear understanding of the specific demands of the question Relevant economic terms are clearly defined Relevant economic theory is clearly explained and applied Where appropriate diagrams are included and applied effectively Where appropriate examples are used effectively There are no significant errors Marks 0 1 3 4 6 7 8 9 10 10

8 b N18 3 ECONO SP1 ENG TZ0 XX M Evaluate the view that government policies to promote equity will always have a negative effect on efficiency Answers may include definitions of equity and efficiency diagrams to show the government policies used to improve equity explanation of how the government policies used to promote equity might have a negative effect on economic efficiency examples of where governments have used policies to promote equity and reduced efficiency synthesis or evaluation Evaluation may include The advantages of government policies used to promote efficiency For example government expenditure on health and education might improve the efficiency of the labour force and reducing tax on low income households might improve their incentive to work Assessment Criteria Part b 15 marks Level 0 1 2 3 4 The work does not meet a standard described by the descriptors below There is little understanding of the specific demands of the question Relevant economic terms are not defined There is very little knowledge of relevant economic theory There are significant errors There is some understanding of the specific demands of the question Some relevant economic terms are defined There is some knowledge of relevant economic theory There are some errors There is understanding of the specific demands of the question Relevant economic terms are defined Relevant economic theory is explained and applied Where appropriate diagrams are included and applied Where appropriate examples are used There is an attempt at synthesis or evaluation There are few errors There is clear understanding of the specific demands of the question Relevant economic terms are clearly defined Relevant economic theory is clearly explained and applied Where appropriate diagrams are included and applied effectively Where appropriate examples are used effectively There is evidence of appropriate synthesis or evaluation There are no significant errors Marks 0 1 5 6 9 10 12 13 15 15

9 4 a N18 3 ECONO SP1 ENG TZ0 XX M Explain how an increase in leakages can affect the size of the circular flow of income 10 Answers may include definitions of leakages circular flow of income diagram of the circular flow of income explanation that when leakages increase money flows in the circular flow of income will fall and reduce the size of the circular flow of income examples of where an increase in leakages have reduced national income Assessment Criteria Part a 10 marks Level 0 1 2 3 4 The work does not meet a standard described by the descriptors below There is little understanding of the specific demands of the question Relevant economic terms are not defined There is very little knowledge of relevant economic theory There are significant errors There is some understanding of the specific demands of the question Some relevant economic terms are defined There is some knowledge of relevant economic theory There are some errors There is understanding of the specific demands of the question Relevant economic terms are defined Relevant economic theory is explained and applied Where appropriate diagrams are included and applied Where appropriate examples are used There are few errors There is clear understanding of the specific demands of the question Relevant economic terms are clearly defined Relevant economic theory is clearly explained and applied Where appropriate diagrams are included and applied effectively Where appropriate examples are used effectively There are no significant errors Marks 0 1 3 4 6 7 8 9 10

10 b N18 3 ECONO SP1 ENG TZ0 XX M To what extent is the use of national income statistics an effective way of comparing the standard of living between countries Answers may include definitions of national income and standard of living diagram a diagram is not required for this question explanation of how national income statistics are an effective way of making comparisons between countries examples of how national income statistics have been used to compare countries synthesis or evaluation to what extent Evaluation may include consideration of the limitations of national income statistics to compare living standards such as different methods of calculation the impact of different types of output on living standards environmental factors crime levels political instability the exchange rate and income distribution NB Definitions theory and examples that have already been given in part a and then referred to in part b should be rewarded 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

11 N18 3 ECONO SP1 ENG TZ0 XX M Assessment Criteria Part b 15 marks Level 0 1 2 3 4 The work does not meet a standard described by the descriptors below There is little understanding of the specific demands of the question Relevant economic terms are not defined There is very little knowledge of relevant economic theory There are significant errors There is some understanding of the specific demands of the question Some relevant economic terms are defined There is some knowledge of relevant economic theory There are some errors There is understanding of the specific demands of the question Relevant economic terms are defined Relevant economic theory is explained and applied Where appropriate diagrams are included and applied Where appropriate examples are used There is an attempt at synthesis or evaluation There are few errors There is clear understanding of the specific demands of the question Relevant economic terms are clearly defined Relevant economic theory is clearly explained and applied Where appropriate diagrams are included and applied effectively Where appropriate examples are used effectively There is evidence of appropriate synthesis or evaluation There are no significant errors Marks 0 1 5 6 9 10 12 13 15

N18 3 ECONO HP2 ENG TZ0 XX Economics Higher level Paper 2 Thursday 1 November 2018 morning 1 hour 30 minutes Instructions to candidates yy yy yy yy yy yy 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 8818 5104 International Baccalaureate Organization 2018

2 N18 3 ECONO HP2 ENG TZ0 XX Section A Answer one question from this section 1 Study the following extract and data and answer the questions that follow South Sudan joins the East African Community The East African Community EAC is the most integrated trading bloc in Africa In 2005 the members established a customs union and then in 2010 it became a common market There are ambitious plans to establish a monetary union by 2024 According to a recent report the region is wealthier and more peaceful as a result of the increased integration Economic models suggest that bilateral trade between member countries was 213 higher in 2011 than it would have been without the integration This is despite the fact that progress on fully eliminating trade barriers has been rather slow and there are still a large number of non tariff barriers Until recently the customs union was made up of Burundi Kenya Rwanda Tanzania and Uganda Very recently South Sudan joined the bloc This presents a tremendous opportunity for South Sudan which was recently recognized as an independent country South Sudan is one of many developing countries that are dependent on oil exports for the majority of its export revenues and oil prices have been falling due to increased supply of oil in the market The deteriorating terms of trade have resulted in a worsening of the current account and lower government revenues Regional economic integration might help South Sudan to diversify its economy Agriculture is one potential area that South Sudan could focus on to diversify its economy According to some estimates 70 of land is suitable for agriculture but less than 4 is currently being cultivated The large flood plains in the country are suitable for rice production and the hope is that South Sudan can develop a comparative advantage in this essential food South Sudan is landlocked and most of its road network is unpaved This is just one example of its poor infrastructure Since infrastructure is an expensive investment regional cooperation will be vital for improving its road systems Furthermore effective transport links to sea ports in Kenya and Tanzania will allow for greater trade and therefore economies of scale In the short term there will be challenges for South Sudan associated with joining the common market For example before Rwanda joined the EAC in 2007 there were lower tariffs on many imported inputs However the cost of living for the poor population rose because of trade diversion that occurred after joining the EAC South Sudan is likely to face the same problem Labour costs in South Sudan are higher than those of other member countries and years of conflict have left the population with low levels of education and skills This may present a barrier for South Sudan in attracting foreign direct investment despite being part of the common market This question continues on the following page

3 N18 3 ECONO HP2 ENG TZ0 XX Question 1 continued Figure 1 Intra East African Community trade in goods USD bn Ever closer union 2 5 USD bn 2 0 1 5 1 0 0 5 1995 2000 2005 2010 2015 0 Burundi Kenya Rwanda Tanzania and Uganda Not including South Sudan which acceded to the treaty in 2016 Source Text Paragraphs 1 3 adapted from Trade in East Africa Worth Celebrating The Economist Newspaper Limited London June 9 2016 paragraphs 4 8 adapted from a paper article written by Astrid R N Haas and co authors with funding from the International Growth Centre Graph IMF www eacgermany org accessed 3 May 2018 a i Define the term monetary union indicated in bold in the text paragraph 2 ii Define the term comparative advantage indicated in bold in the text paragraph 2 b Explain why deteriorating terms of trade have resulted in a worsening of the current account in South Sudan paragraph 4 c Using a cost diagram explain how membership in the common market may allow producers in South Sudan to gain economies of scale paragraph 4 d Using information from the text data and your knowledge of economics evaluate the likely impact on South Sudan of its membership of the EAC common market 8 Turn over

4 2 N18 3 ECONO HP2 ENG TZ0 XX Study the following extract and answer the questions that follow Removed for copyright reasons This question continues on the following page

5 N18 3 ECONO HP2 ENG TZ0 XX Question 2 continued a i Define the term inflation indicated in bold in the text paragraph 2 ii Define the term devaluation indicated in bold in the text paragraph 2 b Using an exchange rate diagram explain how the central bank could use its foreign reserves to restore the value of the Nigerian naira paragraph 4 c Using an AD AS diagram explain how a decision to tighten monetary policy might be harmful to the economy paragraph 4 d Using information from the text data and your knowledge of economics evaluate the likely effects of Nigeria s change from a fixed exchange rate system to a managed exchange rate system 8 Turn over

6 N18 3 ECONO HP2 ENG TZ0 XX Section B Answer one question from this section 3 Study the following extract and answer the questions that follow Solar power in Kenya Kenyan shopkeepers are able to use mobile phones and a small deposit to buy solar panels This gives them 24 hour access to electricity and also lowers their fuel bills Before this the shopkeepers struggled to get a connection to electricity M Kopa is the company that provides these solar panels M Kopa estimates that 80 of its customers live on less than US 2 a day and without access to credit are caught in a poverty trap poverty cycle Many of them rely on subsistence farming or run a small business as their source of income Energy accounts for a significant amount of their spending Kopa means to borrow in Swahili and each panel the company sells is in effect a loan of about US 165 M Kopa s solar panels cost US 200 Clients pay US 35 upfront and agree to make a daily payment of 45 for a year after which the solar panel is theirs When M Kopa s customers are reaching the end of their loan terms an M Kopa representative calls to offer another product in exchange for reopening the account and making payments for another few months M Kopa has sold around 325 000 solar panels so far and 50 000 of their buyers who have already paid off their loans have extended their credit to buy other products offered by M Kopa Ideally these new products will also save customers money over time They include fuel efficient stoves that save charcoal a bicycle that cuts transportation costs and water tanks to store rainwater M Kopa also sells Samsung smartphones and offers loans to pay for school fees M Kopa is replacing kerosene lamps with solar power technology Kerosene lamps emit a dangerous smoke that burns the eyes irritates the throat and slowly turns walls and ceilings black They are also expensive According to a 2014 survey an average household in Kenya without access to electricity spends about US 164 a year on kerosene M Kopa estimates that a customer saves about US 750 over the first four years by switching to solar panels Given Kenya s climate solar power is an obvious source of energy Since its commercial launch in October 2012 the company s total revenue has risen rapidly from US 15 million in 2014 to US 30 million in 2015 and the company says it will double this in 2016 Every day about 600 new customers are purchasing solar panels meaning that the company is extending loans of almost US 100 000 a day to people who might otherwise not have access to credit According to a company representative If you take the long term view and if you treat low income people as customers not charity cases you can change the world In our view it is one of the advantages that foreign direct investment can bring to a country Our customers lives are improved as our lives are improved Source adapted from Special Report On the Move The Economist Newspaper Limited London 14 April 2016 https www economist com special report 2016 04 16 on the move and The Solar Company Making a Profit on Poor Africans By Stephan Faris 2 December 2015 http www bloomberg com features 2015 mkopa solar in africa Used with permission of Bloomberg L P Copyright 2017 All rights reserved This question continues on the following page

7 N18 3 ECONO HP2 ENG TZ0 XX Question 3 continued a i Define the term poverty trap indicated in bold in the text paragraph 2 ii Define the term total revenue indicated in bold in the text paragraph 2 b Using an externalities diagram explain how the widespread use of solar panels will decrease the negative externalities of consumption caused by the use of kerosene lamps paragraph 4 c Using a theory of the firm diagram explain the output and pricing decision of M Kopa if it chooses to pursue the goal of revenue maximization paragraph 4 d Using information from the text data and your knowledge of economics examine the extent to which access to credit and appropriate technology can contribute to economic development in Kenya 8 Turn over

8 4 N18 3 ECONO HP2 ENG TZ0 XX Study the following extract and answer the questions that follow Removed for copyright reasons This question continues on the following page

9 N18 3 ECONO HP2 ENG TZ0 XX Question 4 continued a i Define the term infrastructure indicated in bold in the text paragraph 2 ii Define the term sustainability indicated in bold in the text paragraph 2 b Using a production possibilities curve PPC diagram explain how public investment in infrastructure can affect the production possibilities in Myanmar paragraph 4 c Using an externalities diagram explain how the construction of a copper mine might lead to market failure paragraph 4 d Using information from the text data and your knowledge of economics evaluate the likely impact of foreign direct investment on Myanmar s economic development 8

N18 3 ECONO HP2 ENG TZ0 XX M Markscheme November 2018 Economics Higher level Paper 2 20 pages

2 N18 3 ECONO HP2 ENG TZ0 XX M This markscheme is the property of the International Baccalaureate and must not be reproduced or distributed to any other person without the authorization of the IB Global Centre Cardiff

3 N18 3 ECONO HP2 ENG TZ0 XX M Use the paper specific markscheme together with the mark bands Award up to the maximum marks as indicated Section A 1 a i Define the term monetary union indicated in bold in the text paragraph Level 0 1 2 ii Marks 0 1 2 Define the term comparative advantage indicated in bold in the text paragraph 2 Level 0 1 2 b The work does not meet a standard described by the descriptors below Vague definition The idea that it is a type of economic integration Accurate definition Where countries share a common currency plus one of the following member of a common market have a common central bank The work does not meet a standard described by the descriptors below Vague definition The idea that one country can produce more efficiently than another country Accurate definition An explanation that it is when a country can produce a product at a lower opportunity cost than another country Marks 0 1 2 Explain why deteriorating terms of trade have resulted in a worsening of the current account in South Sudan paragraph 2 definition explanation of terms of trade fall in the price of oil leads to a worsening of the terms of trade in South Sudan demand for oil is price inelastic thus a fall in the terms of trade leads to a fall in export revenue resulting in a worsening on the current account on the balance of payments Level 0 1 2 The work does not meet a standard described by the descriptors below Vague explanation Award 1 for one of the points above Award 2 for two of the points above Accurate explanation Award 3 for three of the points above Award 4 for all of the four points above Marks 0 1 2 3 4 4

4 c N18 3 ECONO HP2 ENG TZ0 XX M Using a cost diagram explain how membership in the common market may allow producers in South Sudan to gain economies of scale paragraph Level 0 1 2 The work does not meet a standard described by the descriptors below There is a correct diagram OR an accurate written response For drawing a cost diagram showing a LRAC with two points indicating a fall in average costs at a higher level of output OR For an explanation that as South Sudan has access to a larger market it will allow its producers to operate at a higher level of output resulting in economies of scale and a fall in LRAC AC There is a correct diagram AND an accurate written response For drawing a cost diagram showing a LRAC with two points indicating a fall in average costs at a higher level of output AND For an explanation that as South Sudan has access to a larger market it will allow its producers to operate at a higher level of output resulting in economies of scale and a fall in LRAC AC Marks 0 1 2 3 4 Candidates who incorrectly label diagrams can be awarded a maximum of 3 For a cost diagram the vertical axis may be labelled Cost C or Average cost AC or Long run average cost LRAC The horizontal axis may be labelled Quantity Q or Output A title is not necessary 4

5 d N18 3 ECONO HP2 ENG TZ0 XX M Evaluate the likely impact on South Sudan of its membership of the EAC common market 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 1 2 3 The work does not meet a standard described by the descriptors below Few relevant concepts are recognized There is basic knowledge understanding Relevant concepts are recognized and developed in reasonable depth There is clear knowledge understanding There is some attempt at application analysis Relevant concepts are recognized and developed in reasonable depth There is clear knowledge understanding There is effective application analysis There is synthesis evaluation supported by appropriate theory and evidence Marks 0 1 2 3 5 6 8 Command term Evaluate requires candidates to make an appraisal by weighing up the strengths and limitations Opinions and conclusions should be presented clearly and supported with appropriate evidence and sound argument Answers may include definition of economic integration definition of common market Advantages opportunities of economic integration larger export markets may allow South Sudan producers to gain economies of scale as noted in part c In the market for rice this may allow South Sudan to develop a comparative advantage paragraph larger market may encourage diversification and reduce South Sudan s reliance on oil further stimulus for foreign direct investment as foreign companies will benefit from the larger market size however this may be limited by the low levels of human capital and high production costs paragraph opportunities to South Sudan workers who with free movement of labour may work in other East African countries advantages to South Sudan companies who with free movement of capital may invest in other East African countries cost of imported factors of production may decrease South Sudan can gain from the rapidly growing trade within the trading bloc graph greater political stability and cooperation paragraph may also result in higher levels of investment leading to economic growth trade creation will benefit producers who can import inputs without tariffs paragraph

6 N18 3 ECONO HP2 ENG TZ0 XX M greater efficiency as domestic producers will have to compete with lower priced imports from other member countries consumers may have access to less expensive imported goods and services However this might be limited if trade diversion takes place and the new common external tariff makes some imported products more expensive bargaining power of South Sudan in multilateral trade negotiations can improve if it is part of the larger trading bloc economic integration can result in greater peace Disadvantages challenges of economic integration trade diversion paragraph the role of the WTO might be undermined since it allows East African Countries to look inwards trade becomes more complicated with a series of intra trading bloc agreements unemployment as less efficient South Sudan companies with higher labour costs paragraph can t compete with lower priced imports from other member countries any potential new trade agreements with non members may be restricted by common external tariffs the larger the group the more difficult it is to come to agreements Any reasonable evaluation

7 2 a i N18 3 ECONO HP2 ENG TZ0 XX M Define the term inflation indicated in bold in the text paragraph Level 0 1 2 ii The work does not meet a standard described by the descriptors below Vague definition The idea that it is an increase in prices in the economy Accurate definition An explanation that it is a sustained increase in the price level in the economy For 2 there must be some indication of time eg sustained persistent continuous Marks 0 1 2 Define the term devaluation indicated in bold in the text paragraph Level 0 The work does not meet a standard described by the descriptors below 1 Vague definition The idea that a currency is worth less OR the idea that the exchange rate falls 2 Accurate definition An explanation that it is a decrease in the value price of one currency in terms of another currency plus one of the following in a fixed exchange rate system as a result of government or central bank intervention b 2 2 Marks 0 1 2 Using an exchange rate diagram explain how the central bank could use its foreign reserves to restore the value of the naira paragraph Level 0 1 2 The work does not meet a standard described by the descriptors below There is a correct diagram OR an accurate written response An exchange rate diagram showing a shift in the demand curve to the right and an increase in the value of the naira OR An explanation that the central bank uses its reserves to buy the naira increasing the demand for the currency thus bringing about an appreciation of its currency to restore its minimum initial original value There is a correct diagram and an accurate written response An exchange rate diagram showing a shift in the demand curve to the right and an increase in the value of the naira AND An explanation that the central bank uses its reserves to buy the naira increasing the demand for the currency thus bringing about an appreciation of its currency to restore its minimum initial original value Marks 0 1 2 3 4 Candidates who incorrectly label diagrams can be awarded a maximum of 3 For an exchange rate diagram the vertical axis may be exchange rate price of naira in dollars or US dollars per naira or USD naira The horizontal axis should be quantity or quantity of naira A title is not necessary 4

8 c N18 3 ECONO HP2 ENG TZ0 XX M Using an AD AS diagram explain how a decision to tighten monetary policy might be harmful to the economy paragraph Level 0 1 2 The work does not meet a standard described by the descriptors below There is a correct diagram OR an accurate written response AD AS diagram showing a shift of the AD curve to the left and a decrease in real GDP OR An explanation that higher interest rates would reduce consumption and or investment causing a fall in AD and a fall in real GDP economic growth or an increase in unemployment There is a correct diagram AND an accurate written response AD AS diagram showing a shift of the AD curve to the left and a decrease in real GDP AND An explanation that higher interest rates would reduce consumption and or investment causing a fall in AD and a fall in real GDP economic growth or an increase in unemployment Marks 0 1 2 3 4 Candidates who incorrectly label diagrams can be awarded a maximum of 3 For AD AS the vertical axis may be average general price level APL or price level For the horizontal axis real output real national output real income real national income real GDP or real Y Any abbreviations are acceptable A title is not necessary AS is a valid label for the SRAS curve 4

9 d N18 3 ECONO HP2 ENG TZ0 XX M Evaluate the likely effects of Nigeria s change from a fixed exchange rate system to a managed exchange rate system Examiners should be aware that candidates may take a different approach which if appropriate should be rewarded Do not award beyond Level 2 if the answer does not contain reference to the information provided Level 0 1 2 3 The work does not meet a standard described by the descriptors below Few relevant concepts are recognized There is basic knowledge understanding Relevant concepts are recognized and developed in reasonable depth There is clear knowledge understanding There is some attempt at application analysis Relevant concepts are recognized and developed in reasonable depth There is clear knowledge understanding There is effective application analysis There is synthesis evaluation supported by appropriate theory and evidence Marks 0 1 2 3 5 6 8 Command term Evaluate requires candidates to make an appraisal by weighing up the strengths and limitations Opinions and conclusions should be presented clearly and supported with appropriate evidence and sound argument 8

10 N18 3 ECONO HP2 ENG TZ0 XX M Responses may include Strengths will not need to use foreign currency reserves as much which have fallen to control the exchange rate paragraph the lower exchange rate should improve the balance of trade and so increase aggregate demand helping to combat the negative economic growth paragraph the lower exchange rate may attract foreign investment interest rates will be freer for use in other policies could reduce levels of speculation lower export prices and higher import prices may increase AD and cause economic growth paragraph depending on the Marshall Lerner condition could encourage import substitution paragraph and help to diversify the Nigerian economy Limitations there may still be some need to use reserves to maintain the managed float paragraph the fall in the value of the naira will raise the prices of imported necessity goods negatively affecting poverty increased uncertainty and harder to plan ahead which may limit the inflow of FDI speculation may increase the falling value of the naira may cause cost push inflation imported inflation paragraph may increase the cost of imported raw materials increased cost of production to Nigerian firms loss of competitiveness and possibly unemployment there may be a need for tighter monetary policy to deal with the higher inflation This would increase the exchange rate and undo many of the benefits paragraph Any reasonably balanced evaluation To reach level 3 candidates must be aware of the particular situation in the Nigerian economy not just present a discussion of changing from a fixed exchange rate to a floating exchange rate in general

11 N18 3 ECONO HP2 ENG TZ0 XX M Section B 3 a i Define the term poverty trap indicated in bold in the text paragraph Level 0 1 2 The work does not meet a standard described by the descriptors below Vague definition The idea that people cannot escape from poverty Accurate definition An explanation that it is any one of the following any linked combination of factors which causes poverty to be self perpetuating with low income as the cause low incomes lead to low saving which leads to low investment which leads to low growth which leads to low income low incomes lead to low levels of human capital that leads to low productivity that leads to low incomes 2 Marks 0 1 2 NB drawing the poverty cycle without comment 1 Needs further explanation for 2 ii Define the term total revenue indicated in bold in the text paragraph Level 0 1 2 The work does not meet a standard described by the descriptors below Vague definition Vague idea that total revenue is the money that a firm gets for its products Accurate definition An explanation that it is one of the following total revenue is the income that a firm generates in a given time period by selling goods or providing services to its customers OR total revenue equals the price multiplied by the quantity of the product sold for a given time period OR price output or equivalent formula 2 Marks 0 1 2

12 b N18 3 ECONO HP2 ENG TZ0 XX M Using an externalities diagram explain how the widespread use of solar panels will decrease the negative externalities of consumption caused by the use of kerosene lamps paragraph Level 0 1 2 The work does not meet a standard described by the descriptors below There is a correct diagram OR an accurate written response An externalities diagram with MPB MSB and showing a decrease in the MPB moving closer to the MSB reducing output towards the socially efficient level of output OR An externalities diagram with MPB MSB with an explanation of a decrease of MPB to MSB OR As the demand for solar panels increases the MPB for kerosene lamps decreases substitutes As a result the output of kerosene lamps decreases towards the socially efficient level of output OR the externalities caused by kerosene lamps are reduced There is a correct diagram AND an accurate written response An externalities diagram with MPB MSB and showing a decrease in the MPB moving closer to the MSB reducing output towards the socially efficient level of output OR An externalities diagram with MPB MSB with an explanation of a decrease of MPB to MSB AND As the demand for solar panels increases the MPB for kerosene lamps decreases substitutes As a result the output of kerosene lamps decreases towards the socially efficient level of output OR the externalities caused by kerosene lamps are reduced Marks 0 1 2 3 4 NB Sketching the welfare loss is not required for candidates to achieve full marks Candidates who incorrectly label diagrams can be awarded a maximum of 3 The horizontal axis can be labelled output quantity OR Q The vertical axis can be labelled cost benefit OR price P A title is not necessary 4

13 c N18 3 ECONO HP2 ENG TZ0 XX M Using a theory of the firm diagram explain the output and pricing decision of M Kopa if it chooses to pursue the goal of revenue maximization paragraph Level 0 1 2 The work does not meet a standard described by the descriptors below There is a correct diagram OR an accurate written response For drawing a correctly labelled diagram of the market for solar panels with the revenue maximizing level of output set at MR 0 and price P OR Revenue maximization is when MR 0 M Kopa will continue to increase output as long as selling any extra panel will increase its total revenue MR is positive until the point where selling an extra panel will decrease total revenue There is a correct diagram AND an accurate written response For drawing a correctly labelled diagram of the market for solar panels with the revenue maximizing level of output set at MR 0 and price P AND Revenue maximization is when MR 0 M Kopa will continue to increase output as long as selling any extra panel will increase its total revenue MR is positive until the point where selling an extra panel will decrease total revenue Marks 0 1 2 3 4 NB Both the revenue maximizing level of output and the corresponding price must be indicated on the diagram Candidates who incorrectly label diagrams can be rewarded with a maximum of 3 The use of P C R and Q quantity output on the axes is sufficient for a theory of the firm diagram A title is not necessary 4

14 d N18 3 ECONO HP2 ENG TZ0 XX M Using information from the text data and your knowledge of economics examine the extent to which access to credit and appropriate technology can contribute to economic development in Kenya Examiners should be aware that candidates may take a different approach which if appropriate should be rewarded Do not award beyond Level 2 if the answer does not contain reference to the information provided Level 0 1 2 3 The work does not meet a standard described by the descriptors below Few relevant concepts are recognized There is basic knowledge understanding Relevant concepts are recognized and developed in reasonable depth There is clear knowledge understanding There is some attempt at application analysis Relevant concepts are recognized and developed in reasonable depth There is clear knowledge understanding There is effective application analysis There is synthesis evaluation supported by appropriate theory and evidence Marks 0 1 2 3 5 6 8 Command term Examine requires candidates to consider an argument or concept in a way that uncovers the assumptions and interrelationships of the issue 8

15 N18 3 ECONO HP2 ENG TZ0 XX M Responses may include definition of economic development definition of appropriate technology definition of access to credit including micro credit a way to break out of the poverty trap paragraph access to credit allows farmers to move away from subsistence farming paragraph examples of access to M Kopa solar panels allows shopkeepers to have access to electricity keep shops open and earn more income which contributes to economic development paragraph customers can save US 750 over four years paragraph solar power as an alternative to dirty electricity causing negative externalities M Kopa offers loans for other equipment paragraph which would improve the standards of living that customers otherwise weren t able to afford due to a lack of collateral paragraph buying a water tank would improve sanitation paragraph the company is offering loans to pay for school fees improving education paragraph better health due to the reduction of kerosene use paragraph increasing access to credit of US 100 000 per day to people who might otherwise not have access to credit paragraph M Kopa potentially employs locals Any reasonable examination To reach level 3 candidates must make reference to economic development and both access to credit and appropriate technology should be addressed in reasonable depth If a candidate only examines credit or appropriate technology a maximum of 5 should be awarded

16 4 a i N18 3 ECONO HP2 ENG TZ0 XX M Define the term infrastructure indicated in bold in the text paragraph Level 0 1 2 The work does not meet a standard described by the descriptors below Vague definition The idea that it is any one of the following is sufficient large scale public systems services and facilities of a country necessary for economic activity adding to the capital stock of a nation usually supplied by the government Accurate definition An explanation that it is any two of the following is sufficient large scale public systems services and facilities of a country necessary for economic activity adding to the capital stock of a nation usually supplied by the government 2 Marks 0 1 2 Define the term sustainability indicated in bold in the text paragraph ii Level 0 1 2 The work does not meet a standard described by the descriptors below Vague definition The idea that it deals with the long term use of resources Accurate definition An explanation that it is development economic growth consumption that meets the needs of the present generation without compromising the ability of future generations to meet their needs 2 Marks 0 1 2

17 b N18 3 ECONO HP2 ENG TZ0 XX M Using a production possibility curve PPC diagram explain how public investment in infrastructure can affect the production possibilities in Myanmar paragraph Level 0 1 2 The work does not meet a standard described by the descriptors below There is a correct diagram OR an accurate written response For drawing a PPC diagram showing an increase in production possibilities outward shift of the PPC OR For an explanation that an increase in infrastructure will increase the quality and or quantity and or efficiency productivity of capital resources leading to an increase in the production possibilities potential output of the economy There is a correct diagram AND an accurate written response For drawing a PPC diagram showing an increase in production possibilities outward shift of the PPC AND For an explanation that an increase in infrastructure will increase the quality and or quantity and or efficiency productivity of capital resources leading to an increase in the production possibilities potential output of the economy Candidates who incorrectly label diagrams can be rewarded with a maximum of 3 For a PPC the axes could be two alternative products one on each axis eg Good A Good B or Schools Motor Cars or two groups of products eg Consumer Goods and Producer Goods Marks 0 1 2 3 4 4

18 c N18 3 ECONO HP2 ENG TZ0 XX M Using an externalities diagram explain how the construction of a copper mine might lead to market failure paragraph Level 0 1 2 The work does not meet a standard described by the descriptors below There is a correct diagram OR an accurate written response For drawing a market failure diagram where MSC is greater than MPC and a socially efficient level of output lower than the free market equilibrium level of output OR For explaining that the construction of a copper mine is operating where MSC MPC socially inefficient level of output the copper mine imposes external costs on third parties not reflected in the market price leading to market failure There is a correct diagram AND an accurate written response For drawing a market failure diagram where MSC is greater than MPC and a socially efficient level of output lower than the free market equilibrium level of output AND For explaining that the construction of a copper mine is operating where MSC MPC socially inefficient level of output the copper mine imposes external costs on third parties not reflected in the market price leading to market failure Marks 0 1 2 3 4 Candidates who incorrectly label diagrams can be rewarded with a maximum of 3 The vertical axis may be labelled price but could be costs and benefits and the horizontal axis labelled quantity output 4

19 d N18 3 ECONO HP2 ENG TZ0 XX M Using information from the text data and your knowledge of economics evaluate the likely impact of foreign direct investment on Myanmar s economic development Examiners should be aware that candidates may take a different approach which if appropriate should be rewarded Do not award beyond Level 2 if the answer does not contain reference to the information provided Level 0 1 2 3 The work does not meet a standard described by the descriptors below Few relevant concepts are recognized There is basic knowledge understanding Relevant concepts are recognized and developed in reasonable depth There is clear knowledge understanding There is some attempt at application analysis Relevant concepts are recognized and developed in reasonable depth There is clear knowledge understanding There is effective application analysis There is synthesis evaluation supported by appropriate theory and evidence Marks 0 1 2 3 5 6 8 Command term Evaluate requires candidates to make an appraisal by weighing up the strengths and limitations Opinions and conclusions should be presented clearly and supported with appropriate evidence and sound argument Responses may include definition of economic development definition of FDI 8

20 N18 3 ECONO HP2 ENG TZ0 XX M Consideration of potential benefits of FDI for development provision of infrastructure may lead to economic growth which may lead to economic development paragraph FDI directly helps to boost economic growth rates and job opportunities in Myanmar thereby improving the real income earned per person foreign firms facilitate the transfer of knowledge which can help to improve the quality of the local labour human capital thereby enabling domestic workers to gain higher paying jobs to attract more FDI the government will have to invest more in infrastructure paragraph with increased access to infrastructure and electricity more households could enjoy a higher standard of living and greater access to merit goods eg healthcare and education services to attract more FDI the government will have to invest in human capital potentially raising the living standards if Myanmar attracts Japanese and South Korean manufacturing MNCs there might be increased access to consumer goods paragraph other possible benefits include filling the domestic savings gap improving the country s infrastructure increasing exports bringing in more foreign exchange greater tax revenues may be used to finance development objectives Consideration of potential costs of FDI for development unsustainable development paragraph MNCs may not necessarily create jobs for locals Even if there are domestic workers may be limited to low end paying jobs or subjected to unfair employment conditions paragraph negative externalities generated from production could have detrimental effects on nearby communities affecting their livelihood paragraph MNCs may not lead to diversification and the need for higher value added production paragraph to attract MNCs Myanmar may pursue regulatory incentives which may be harmful paragraph although MNCs may contribute to tax revenues the tax incentives offered to attract MNCs may diminish this paragraph some FDI exploit a country s scarce resources and are mainly beneficial the MNC Any reasonable evaluation

N18 3 ECONO SP2 ENG TZ0 XX Economics Standard level Paper 2 Thursday 1 November 2018 morning 1 hour 30 minutes Instructions to candidates yy yy yy yy yy yy 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 8818 5113 International Baccalaureate Organization 2018

2 N18 3 ECONO SP2 ENG TZ0 XX Section A Answer one question from this section 1 Study the following extract and answer the questions that follow South Africa s grain millers oppose corn tariff A battle is taking place between South African corn farmers and the corn millers who process corn Grain South Africa Grain SA is the organization that represents the interests of corn farmers It has asked the country s International Trade Administration Commission ITAC to protect local corn farmers from low global corn prices by imposing a tariff on corn imports South Africa s corn millers are opposing the request by Grain SA to implement the tariff on corn imports The corn millers argue that a tariff will cause a burden for consumers and cattle farmers In South Africa corn is an essential food and also a source of feed for livestock According to Reuters news service South Africa is Africa s largest corn producer and is relied upon by neighboring Sub Saharan nations to reinforce their own corn supplies and feed their people A drought in South Africa has dramatically increased the price of corn In addition the reduced supply has prompted the need for imports South Africa has traditionally been a net exporter of corn but for the second year in a row the economy will become a net importer of corn The need to import corn has shocked both the corn farmers and the government The United States US is the world s largest corn producer An unusually large harvest has increased US supply and more than halved the price of US corn to its current price of US 145 a ton However in South Africa because of the drought prices for domestically produced corn have more than doubled to reach an all time high of US 348 a ton The low import prices of US corn have made it very difficult for South African corn farmers to earn sufficient income to survive the drought which is why they have asked ITAC for protection However a spokesperson for the corn millers said we are strongly opposed to any attempt to apply a tariff Why do we need protection for a commodity in which we are so self sufficient However Grain SA have claimed that corn farmers cannot compete with the big corn exporting countries such as the US and Mexico because their governments are subsidizing corn farmers According to Grain SA South African farmers get almost no assistance This is why they have requested that ITAC implement the tariff to protect corn farmers from these unfair trade practices According to economists South Africa will probably need to import about 970 000 tons of corn this year and a further 3 8 million tons in the following 12 months To make matters worse the rand South Africa s currency has experienced a sharp depreciation against the US dollar Combined the need to import corn and the depreciation are likely to negatively impact South Africa s current account Source adapted from Grain Millers Oppose South African Corn Import Tariff Review by Tshepiso Mokhema and Andre Janse Van Vuuren http www bloomberg com news articles 2016 02 21 grain millers oppose south african corn import tariff review accessed 28 August 2016 used with permission of Bloomberg L P Copyright 2017 All rights reserved and South Africa s corn crop dilemma and the likely fixes Braun by Karen Braun 8 April 2016 reuters com 2016 reuters com http www reuters com article us safrica maize braun corn idUSKCN0X51QY All rights reserved This question continues on the following page

3 N18 3 ECONO SP2 ENG TZ0 XX Question 1 continued a i Define the term depreciation indicated in bold in the text paragraph 2 ii Define the term current account indicated in bold in the text paragraph 2 b Using an exchange rate diagram explain how the need to import corn will affect the value of the South African rand paragraph 4 c Using a demand and supply diagram explain the effect of government subsidies on the US corn market paragraph 4 d Using information from the text data and your knowledge of economics evaluate the economic impacts of trade protection in the South African corn market 8 Turn over

4 2 Study the following extract and answer the questions that follow Removed for copyright reasons This question continues on the following page N18 3 ECONO SP2 ENG TZ0 XX

5 N18 3 ECONO SP2 ENG TZ0 XX Question 2 continued a i Define the term inflation indicated in bold in the text paragraph 2 ii Define the term devaluation indicated in bold in the text paragraph 2 b Using an exchange rate diagram explain how the central bank could use its foreign reserves to restore the value of the Nigerian naira paragraph 4 c Using an AD AS diagram explain how a decision to tighten monetary policy might be harmful to the economy paragraph 4 d Using information from the text data and your knowledge of economics evaluate the likely effects of Nigeria s change from a fixed exchange rate system to a managed exchange rate system 8 Turn over

6 Section B Answer one question from this section 3 Study the following extract and answer the questions that follow Removed for copyright reasons This question continues on the following page N18 3 ECONO SP2 ENG TZ0 XX

7 N18 3 ECONO SP2 ENG TZ0 XX Question 3 continued a i Define the term entrepreneurship indicated in bold in the text paragraph 2 ii Define the term economic growth indicated in bold in the text paragraph 2 b Using an externalities diagram explain how deforestation caused by harvesting timber has caused a market failure in Guatemala paragraph 4 c Using a production possibilities curve PPC diagram explain the likely effect of the Feed the Future project on Guatemala s economy paragraph 4 d Using information from the text data and your knowledge of economics discuss the extent to which domestic factors such as education and health the use of appropriate technology access to micro credit and the empowerment of women may contribute to economic development in Guatemala 8 Turn over

8 4 N18 3 ECONO SP2 ENG TZ0 XX Study the following extract and answer the questions that follow Burundi Burundi is a small landlocked African country Densely populated it has a population of approximately 10 6 million inhabitants The economy is dominated by subsistence agriculture which employs 90 of the population though cultivatable land is extremely scarce More than a decade of conflict led to the destruction of much of the country s physical social and human capital However substantial improvements have occurred since the conflict ended in 2006 thanks largely to the success of measures implemented to reduce the excessive control of the military Even though Burundi is enjoying its first decade of sustained economic growth poverty remains widespread Burundi s ranking on the Human Development Index HDI increased by 2 5 per year between 2005 and 2013 as education and health outcomes have significantly improved over the period yet the country still ranks low at 180th out of 187 countries in 2013 Per capita gross national income more than doubled between 2005 US 130 and 2013 US 280 Burundi is making the transition from a post conflict economy to a stable and growing economy Economic reforms and institution building are ongoing After significant improvements to achieve peace and security the country s development program is shifting gradually towards modernizing public finance However the government has limited fiscal space because tax collection is very hard to carry out and tax receipts are low With its limited resources the government is attempting to strengthen basic social services and upgrade infrastructure and institutions particularly in the energy mining and agricultural sectors This has been accompanied by increasing participation of the private sector The goal now is to grow a more stable competitive and diversified economy with enhanced opportunities for employment and improved standards of living Over the last decade annual economic growth in Burundi has been between 4 and 5 Inflation continues to decline reaching 3 9 in July 2016 down from 24 in March 2012 reflecting a careful monetary policy helped by a recent decrease in the prices of imports especially oil which is an essential commodity Burundi s main exports are agricultural coffee and tea account for 90 of foreign exchange earnings and exports are a relatively small share of Gross Domestic Product GDP Source adapted from The World Bank in Burundi Overview The World Bank http www worldbank org en country burundi overview Licensed under a Creative Commons Attribution ShareAlike 3 0 Unported license https creativecommons org licenses by sa 3 0 This question continues on the following page

9 N18 3 ECONO SP2 ENG TZ0 XX Question 4 continued a i List two components of the Human Development Index HDI paragraph 2 ii Define the term monetary policy indicated in bold in the text paragraph 2 b Using a production possibilities curve PPC diagram explain the effect on economic growth of the destruction of much of the country s physical social and human capital paragraph 4 c Using an AD AS diagram explain why the decrease in the prices of imports especially oil might reduce inflationary pressure paragraph 4 d Using information from the text data and your knowledge of economics evaluate the challenges to economic growth and economic development faced by Burundi 8

N18 3 ECONO SP2 ENG TZ0 XX M Markscheme November 2018 Economics Standard level Paper 2 21 pages

2 N18 3 ECONO SP2 ENG TZ0 XX M This markscheme is the property of the International Baccalaureate and must not be reproduced or distributed to any other person without the authorization of the IB Global Centre Cardiff

3 N18 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 depreciation indicated in bold in the text paragraph Level 0 1 2 ii 2 Marks 0 1 2 Define the term current account indicated in bold in the text paragraph Level 0 1 The work does not meet a standard described by the descriptors below Vague definition The idea that a currency is worth less or the idea that the exchange rate falls Accurate definition An explanation that it is a decrease in the value price of one currency in terms of another currency plus one of the following in a floating exchange rate system as a result of a movement in market forces The work does not meet a standard described by the descriptors below Vague definition The idea that it is a measure of money coming into and going out of a country from international trade Accurate definition An explanation that it is a measure of the net flow of funds from trade in goods and services exports and imports income and transfers 2 Marks 0 1 2 2

4 b N18 3 ECONO SP2 ENG TZ0 XX M Using an exchange rate diagram explain how the need to import corn will affect the value of the South African rand paragraph Level 0 1 2 The work does not meet a standard described by the descriptors below There is a correct diagram or an accurate written response For drawing an exchange rate diagram showing an increase in supply of the rand and a fall in the exchange rate or for an explanation that the increase in imports of corn would result in selling the rand to buy US dollars thus increasing the supply of the rand and lowering its exchange rate There is a correct diagram and an accurate written response For drawing an exchange rate diagram showing an increase in supply of the rand and a fall in the exchange rate and for an explanation that the increase in imports of corn would result in selling the rand to buy US dollars thus increasing the supply of the rand and lowering its exchange rate Marks 0 1 2 3 4 Candidates who incorrectly label diagrams can be awarded a maximum of 3 For an exchange rate diagram the vertical axis may be exchange rate price of rand in dollars or US dollars per rand or USD rand or rand USD The horizontal axis should be quantity or quantity of rand or quantity of rand traded A title is not necessary Price of rand in US SSrand SS rand Xr1 Xr2 DDnaira Quantity of rand 4

5 c N18 3 ECONO SP2 ENG TZ0 XX M Using a demand and supply diagram explain the effect of government subsidies on the US corn market paragraph Level 0 1 2 The work does not meet a standard described by the descriptors below There is a correct diagram or an accurate written response For drawing a D S diagram showing a shift of supply to the right with a decrease in price and an increase in quantity or an explanation that a subsidy will cause a decrease in the costs of production of US corn farmers therefore leading to an increase in supply resulting in a lower price and an increased quantity There is a correct diagram and an accurate written response For drawing a D S diagram showing a shift of supply to the right with a decrease in price and an increase in quantity and an explanation that a subsidy will cause a decrease in the costs of production of US corn farmers therefore leading to an increase in supply resulting in a lower price and an increased quantity Marks 0 1 2 3 4 Candidates may include a World Supply Curve Line and should not be penalized for doing so It may be positioned in such a way as to impede imports or to promote exports Both are valid approaches So long as the explanation and diagram explain why the domestic supply line shifts right and the correct effects on the price and the quantity of corn produced in the USA the answer can receive full marks Candidates who incorrectly label diagrams can be awarded 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 Price SS SS P1 P2 DD Q1 Q2 Quantity 4

6 d N18 3 ECONO SP2 ENG TZ0 XX M Evaluate the economic impacts of trade protection in the South African corn market Examiners should be aware that candidates may take a different approach which if appropriate should be rewarded Do not award beyond Level 2 if the answer does not contain reference to the information provided Level 0 1 2 3 The work does not meet a standard described by the descriptors below Few relevant concepts are recognized There is basic knowledge understanding Relevant concepts are recognized and developed in reasonable depth There is clear knowledge understanding There is some attempt at application analysis Relevant concepts are recognized and developed in reasonable depth There is clear knowledge understanding There is effective application analysis There is synthesis evaluation supported by appropriate theory and evidence Marks 0 1 2 3 5 6 8 Command term Evaluate requires candidates to make an appraisal by weighing up the strengths and limitations Opinions and conclusions should be presented clearly and supported with appropriate evidence and sound argument Responses may include a definition of trade protection an international trade diagram to explain impact of requested tariff on consumers producers and importers paragraph Advantages US subsidies distort the functioning of the free market and can result in an inefficient allocation of resources Helps to protect South African corn farmers from unfair practices since US subsidies artificially lower the price of US corn imported into South Africa paragraph It would prevent a deterioration of South Africa s current account balance since import expenditure falls as the result of decreased corn imports and the depreciation of currency paragraph Tariff allows domestic corn farmers to maintain higher revenues incomes to help them to survive the drought paragraph Corn farmers can compete with subsidized US corn that has caused the global glut and subsequent low prices May only be a short term measure A source of tax revenue for the South African government Agriculture is a strategic industry Disadvantages Domestic supply of corn in South Africa is likely very price inelastic so the tariff would not increase domestic production significantly Tariff will increase input costs for millers and food related businesses requiring corn as an input paragraph 8

7 N18 3 ECONO SP2 ENG TZ0 XX M Impact of rising corn prices on low income households when corn is an essential food paragraph Tariff will cause rising input costs for livestock producers further increasing food prices paragraph Corn is likely to be a major input to food manufacturing hence tariff could cause decrease in SRAS due to rising input costs and thus cause cost push inflation and lower real GDP Price of South African food exported to other countries will rise in trading partner countries Trading partners might retaliate by imposing their own protectionist measures The corn industry is not an infant industry paragraph The depreciation of Rand is already reversing the low price of imports

8 2 a i 1 2 The work does not meet a standard described by the descriptors below Vague definition The idea that it is an increase in prices in the economy Accurate definition An explanation that it is a sustained increase in the average general price level in the economy For 2 marks there must be some indication of time eg sustained persistent continuous Marks 0 1 2 2 Define devaluation indicated in bold in the text paragraph Level 0 1 2 b 2 Define the term inflation indicated in bold in the text paragraph Level 0 ii N18 3 ECONO SP2 ENG TZ0 XX M The work does not meet a standard described by the descriptors below Vague definition The idea that a currency is worth less or the idea that the exchange rate falls Accurate definition An explanation that it is a decrease in the value price of one currency in terms of another currency plus one of the following in a fixed exchange rate system as a result of government or central bank intervention Marks 0 1 2 Using an exchange rate diagram explain how the central bank could use its foreign reserves to restore the value of the naira paragraph Level 0 1 2 The work does not meet a standard described by the descriptors below There is a correct diagram or an accurate written response An exchange rate diagram showing a shift in the demand curve to the right and an increase in the value of the naira or an explanation that the central bank uses its reserves to buy the naira thus bringing about an appreciation of its currency to restore its minimum value There is a correct diagram and an accurate written response An exchange rate diagram showing a shift in the demand curve to the right and an increase in the value of the naira and an explanation that the central bank uses its reserves to buy the naira thus bringing about an appreciation of its currency to restore its minimum value 4 Marks 0 1 2 3 4 Candidates who incorrectly label diagrams can be awarded a maximum of 3 For an exchange rate diagram the vertical axis may be exchange rate price of naira in dollars or US dollars per naira or USD naira or naira USD The horizontal axis should be quantity or quantity of naira or quantity of naira traded A title is not necessary

9 Price of naira in US N18 3 ECONO SP2 ENG TZ0 XX M SSnaira Xr2 Xr1 DD naira DDnaira c Quantity of naira Using an AD AS diagram explain how a decision to tighten monetary policy might be harmful to the economy paragraph Level 0 1 2 The work does not meet a standard described by the descriptors below There is a correct diagram or an accurate written response AD AS diagram showing a shift of the AD curve to the left and a decrease in real GDP or an explanation that higher interest rates or a reduced rate of growth of the money supply would reduce consumption and or investment therefore causing a fall in AD and a fall in real GDP increase in unemployment There is a correct diagram and an accurate written response AD AS diagram showing a shift of the AD curve to the left and a decrease in real GDP and an explanation that higher interest rates or a reduced rate of growth of the money supply would reduce consumption and or investment therefore causing a fall in AD and a fall in real GDP increase in unemployment 4 Marks 0 1 2 3 4 Candidates who incorrectly label diagrams can be awarded a maximum of 3 For AD AS the vertical axis may be average general price level APL or price level For the horizontal axis real output real national output real income real national income real GDP or real Y Any abbreviations are acceptable A title is not necessary AS is a valid label for the SRAS curve Price Level SRAS PL1 PL2 AD1 AD2 d Real GDP Y2 Y1 Evaluate the likely effects of Nigeria s change from a fixed exchange rate system to a managed exchange rate system 8

10 N18 3 ECONO SP2 ENG TZ0 XX M Examiners should be aware that candidates may take a different approach which if appropriate should be rewarded Do not award beyond Level 2 if the answer does not contain reference to the information provided Level 0 1 2 3 The work does not meet a standard described by the descriptors below Few relevant concepts are recognized There is basic knowledge understanding Relevant concepts are recognized and developed in reasonable depth There is clear knowledge understanding There is some attempt at application analysis Relevant concepts are recognized and developed in reasonable depth There is clear knowledge understanding There is effective application analysis There is synthesis evaluation supported by appropriate theory and evidence Marks 0 1 2 3 5 6 8 Command term Evaluate requires candidates to make an appraisal by weighing up the strengths and limitations Opinions and conclusions should be presented clearly and supported with appropriate evidence and sound argument Responses may include definitions of fixed and managed exchange rate systems Strengths Will not need to use foreign currency reserves as much which have fallen to control the exchange rate paragraph The lower exchange rate should improve the balance of trade and so increase aggregate demand helping to combat the negative economic growth paragraph The lower exchange rate may attract foreign investment Interest rates will be free for use in other policies Could reduce levels of speculation Lower export prices and higher import prices may increase AD and cause economic growth paragraph Could encourage import substitution paragraph and help to diversify the Nigerian economy Limitations There may still be some need to use reserves to maintain the managed float paragraph The fall in the value of the naira will raise the prices of imported necessity goods negatively affecting poverty Increased uncertainty and harder to plan ahead which may limit the inflow of FDI The falling value of the naira may cause cost push inflation imported inflation paragraph There may be a need for a tighter monetary policy to deal with the higher inflation This would increase the exchange rate and undo many of the benefits paragraph

11 N18 3 ECONO SP2 ENG TZ0 XX M To reach level 3 students must be aware of the particular situation in the Nigerian economy not just present a discussion of changing from a fixed exchange rate to a floating exchange rate in general

12 N18 3 ECONO SP2 ENG TZ0 XX M Section B 3 a i Define the term entrepreneurship indicated in bold in the text paragraph Level 0 1 2 ii 2 Marks 0 1 2 Define the term economic growth indicated in bold in the text paragraph Level 0 1 The work does not meet a standard described by the descriptors below Vague definition For stating one activity function characteristic of an entrepreneur starting up a business employing organizing managing resources or factors of production one of the resources or factors of production profit driven taking risks introduces innovation Accurate definition For stating two activities function characteristics of an entrepreneur starting up a business employing organizing managing resources or factors of production one of the resources or factors of production profit driven taking risks introduces innovation The work does not meet a standard described by the descriptors below Vague definition The idea that it is a growing economy or an increase in GDP Accurate definition An explanation that it is one of the following an increase in output over time an increase in real GDP an increase in potential output 2 Marks 0 1 2 2

13 b N18 3 ECONO SP2 ENG TZ0 XX M Using an externalities diagram explain how Deforestation caused by harvesting timber has caused a market failure in Guatemala paragraph Level 0 1 2 The work does not meet a standard described by the descriptors below There is a correct diagram or an accurate written response For drawing a market failure diagram showing negative externalities of production with MSC greater than MPC and a socially efficient optimum level of output lower than the equilibrium level of output or for explaining that harvesting of timber might impose costs on third parties soil erosion which are not reflected in the market price thus creating a market failure or leading to over allocation of resources results in a welfare loss There is a correct diagram and an accurate written response For drawing a market failure diagram showing negative externalities of production with MSC greater than MPC and a socially efficient optimum level of output lower than the equilibrium level of output and for explaining that harvesting of timber might impose costs on third parties soil erosion which are not reflected in the market price thus creating a market failure or leading to over allocation of resources results in a welfare loss Marks 0 1 2 3 4 Candidates who incorrectly label diagrams can be awarded a maximum of 3 The y axis may be labelled price or P or costs or benefits and the x axis labelled quantity or Q Price MSC MPC Pe PM MPB MSB Qe QM Quantity 4

14 c N18 3 ECONO SP2 ENG TZ0 XX M Using a production possibilities curve PPC diagram explain the likely effect of the Feed the Future project on Guatemala s economy paragraph Level 0 1 2 The work does not meet a standard described by the descriptors below There is a correct diagram or an accurate written response For drawing a PPC diagram showing an outward shift of the PPC curve or for explaining that the Feed the Future project would increase the quantity and or quality of factors of production resources or lead to an improvement in productivity in the economy thus increasing production possibilities potential output There is a correct diagram and an accurate written response For drawing a PPC diagram showing an outward shift of the PPC curve and for explaining that the Feed the Future project would increase the quantity and or quality of factors of production resources or lead to an improvement in productivity in the economy thus increasing production possibilities potential output Marks 0 1 2 3 4 Candidates who incorrectly label diagrams can be awarded a maximum of 3 For a PPC the axes could be two alternative products one on each axis eg Good A Good B or agricultural goods and industrial goods or two groups of products eg Consumer Goods and Producer Goods Capital goods Consumption goods 4

15 d N18 3 ECONO SP2 ENG TZ0 XX M Discuss the extent to which domestic factors such as education and health the use of appropriate technology access to micro credit and the empowerment of women can contribute to economic development in Guatemala Examiners should be aware that candidates may take a different approach which if appropriate should be rewarded Do not award beyond Level 2 if the answer does not contain reference to the information provided Level 0 1 2 3 The work does not meet a standard described by the descriptors below Few relevant concepts are recognized There is basic knowledge understanding Relevant concepts are recognized and developed in reasonable depth There is clear knowledge understanding There is some attempt at application analysis Relevant concepts are recognized and developed in reasonable depth There is clear knowledge understanding There is effective application analysis There is synthesis evaluation supported by appropriate theory and evidence Marks 0 1 2 3 5 6 8 Command term Discuss requires candidates to offer a considered and balanced review that includes a range of arguments factors or hypotheses Opinions or conclusions should be presented clearly and supported by appropriate evidence Responses may include a definition of economic development a diagram and explanation of the poverty trap poverty cycle Education and health Increased employment opportunities for young people paragraph Improvements in health and education lead to more productive workforce raising incomes and increasing the standard of living of the people Micro credit is often accompanied by provision of basic skills that enable the borrowers to make better use of the loans Feed the Future project provides training in land management paragraph Training for indigenous farmers to help them adopt better water management practices to promote food security and help break the poverty trap paragraph The project team will be working with local agricultural schools and youth groups to provide students with a better understanding of water management and conservation practices in order to prepare them for jobs in commercial agriculture paragraph The use of appropriate technology Use of agriculture strategies provide rainwater tanks improve irrigation systems spread fertilizer and practice crop rotation paragraph to reduce impacts of future droughts and reduce malnutrition Use of appropriate technology to overcome the problems caused by deforestation paragraph Micro credit 8

16 N18 3 ECONO SP2 ENG TZ0 XX M A definition of micro credit paragraph Micro credit provides a means of escaping the poverty trap paragraph Micro credit gives access to poor and indigenous farmers to obtain loans that they are unable to access from financial institutions as a result of having no security to offer paragraph Micro credit fosters self reliance and entrepreneurship skills through selfemployment paragraph Gives farmers the finance necessary to purchase the technology needed to deal with climate change paragraph The empowerment of women Micro credit given to women allows them to improve their physical and social well being and gives them the opportunity to raise the standards of living for their children paragraph Micro credit gives borrowers the opportunity to earn more income from their land paragraph To reach level 3 candidates must be aware of the particular situation in the economy of Guatemala not just present a discussion of policies to achieve development in general Candidates need not address all domestic factors mentioned in the question to be awarded a high L2 or L3 mark

17 4 a i List two components of the Human Development Index HDI paragraph Level 0 1 2 ii 2 The work does not meet a standard described by the descriptors below The written response is limited 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 The written response is accurate 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 The work does not meet a standard described by the descriptors below Vague definition The idea that it is to do with interest rates or money supply Accurate definition An explanation that it is any two of the following demand side policy enacted by the Central Bank changes in interest rates changes in money supply 2 Marks 0 1 2 Define the term monetary policy indicated in bold in the text paragraph Level 0 1 N18 3 ECONO SP2 ENG TZ0 XX M Marks 0 1 2 2

18 b N18 3 ECONO SP2 ENG TZ0 XX M Using a production possibilities curve PPC diagram explain the effect on economic growth of the destruction of much of the country s physical social and human capital paragraph Level 0 1 2 The work does not meet a standard described by the descriptors below There is a correct diagram or an accurate written response A PPC diagram showing an inward shift of the PPC or an explanation that the destruction of capital represents a fall in the quantity of factors of production resources and that this will then lead to a fall in production possibilities potential output There is a correct diagram and an accurate written response A PPC diagram showing an inward shift of the PPC and an explanation that the destruction of capital represents a fall in the quantity of factors of production resources and that this will then lead to a fall in production possibilities potential output Marks 0 1 2 3 4 Candidates who incorrectly label diagrams can be rewarded with a maximum of 3 For a PPC the axes could be two alternative products one on each axis eg Good A and Good B or Schools and Motor Cars or two groups of products eg Consumer Goods and Producer Goods Capital goods Consumption goods 4

19 c N18 3 ECONO SP2 ENG TZ0 XX M Using an AD AS diagram explain why the decrease in the prices of imports especially oil might reduce inflationary pressure paragraph Level 0 1 The work does not meet a standard described by the descriptors below There is a correct diagram or an accurate written response An AD AS diagram showing a shift of the SRAS curve to the right and a fall in the average price level or an explanation that a fall in the price of imported factors of production will reduce costs for firms reducing inflationary pressure in the economy 4 Marks 0 1 2 Candidates may also approach this question in this way 2 An AD AS diagram showing a shift of the AD curve to the left and a fall in the average price level or an explanation that a fall in the price of imports would increase spending on imports a component of AD and hence reduce inflationary pressure in the economy There is a correct diagram and an accurate written response An AD AS diagram showing a shift of the SRAS curve to the right and a fall in the average price level and an explanation that a fall in the price of imported factors of production will reduce costs for firms reducing inflationary pressure in the economy 3 4 Candidates may also approach this question in this way An AD AS diagram showing a shift of the AD curve to the left and a fall in the average price level and an explanation that a fall in the price of imports would increase spending on imports a component of AD and hence reduce inflationary pressure in the economy Candidates who incorrectly label diagrams can be rewarded with a maximum of 3 For AD AS the vertical axis may be average general price level APL or price level For the horizontal axis real output real national output real income real national income real GDP or real Y Any abbreviations are acceptable A title is not necessary AS is a valid label for the SRAS curve Price Level SRAS1 SRAS2 PL1 PL2 AD 0 Y1 Y2 Real GDP

20 d N18 3 ECONO SP2 ENG TZ0 XX M Using information from the text data and your knowledge of economics evaluate the challenges to economic growth and economic development faced by Burundi 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 1 2 3 The work does not meet a standard described by the descriptors below Few relevant concepts are recognized There is basic knowledge understanding Relevant concepts are recognized and developed in reasonable depth There is clear knowledge understanding There is some attempt at application analysis Relevant concepts are recognized and developed in reasonable depth There is clear knowledge understanding There is effective application analysis There is synthesis evaluation supported by appropriate theory and evidence Marks 0 1 2 3 5 6 8 Command term Evaluate requires candidates to make an appraisal by weighing up the strengths and limitations Opinions and conclusions should be presented clearly and supported with appropriate evidence and sound argument Responses may include definition of economic growth definition of economic development Discussion of factors affecting growth and or development Landlocked country paragraph making access to markets difficult and difficult to access resources High population density paragraph affecting the quality of life Dependence on subsistence agriculture paragraph leads to low incomes Scarcity of cultivatable land paragraph limiting production of agricultural goods Destruction of capital paragraph during conflict expensive to rebuild from limited public funding Widespread poverty paragraph and existence of the poverty trap Per capita gross national income is still very low paragraph despite doubling over eight years Low tax receipts paragraph limit the ability of the government to finance development objectives Over specialization paragraph on a narrow range of agricultural exports makes Burundi vulnerable to international price changes Low agricultural export revenue paragraph with low income elasticities and high levels of global competition implies lower prospects for growth Possibility of debt increasing due to public spending and a narrow tax base paragraph It is likely that inequality is high because poverty is widespread which makes development more difficult to achieve paragraph

21 N18 3 ECONO SP2 ENG TZ0 XX M However better prospects for growth because of lower import prices and use of government monetary and other policies paragraphs and Any reasonable discussion

N18 3 ECONO HP3 ENG TZ0 XX Economics Higher level Paper 3 Thursday 1 November 2018 morning Candidate session number 1 hour 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 Answers must be written within the answer 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 8818 5107 International Baccalaureate Organization 2018 17 pages 20EP01

2 N18 3 ECONO HP3 ENG TZ0 XX Answer two questions Each question is worth 25 marks Answers must be written within the answer boxes provided 1 Firm A produces cartons of coffee Figure 1 illustrates the firm s total cost TC and variable cost VC at different output levels per month Figure 1 2000 Costs revenue per carton 1800 TC 1600 1400 VC 1200 1000 800 600 400 200 0 0 10 20 30 40 50 60 70 80 90 100 110 120 130 140 150 Quantity of cartons of coffee per month a i Calculate Firm A s average fixed costs when it is producing 125 cartons of coffee per month This question continues on the following page 20EP02 2

3 N18 3 ECONO HP3 ENG TZ0 XX Question 1 continued ii Calculate Firm A s average variable costs when it is producing 125 cartons of coffee per month 2 This question continues on the following page Turn over 20EP03

4 N18 3 ECONO HP3 ENG TZ0 XX Question 1 continued Figure 2 illustrates the average total cost ATC average variable cost AVC and marginal cost MC at different output levels for Firm B which produces cans of tea Figure 2 Costs revenue per can 40 30 MC 25 ATC AVC 20 15 10 5 0 0 10 20 30 40 50 60 70 80 90 100 110 120 130 140 150 160 170 Quantity of cans of tea per month b i Using Figure 2 calculate the average fixed costs when 80 cans per month are produced 1 ii Using Figure 2 calculate the total costs when 55 cans per month are produced This question continues on the following page 20EP04 2

5 N18 3 ECONO HP3 ENG TZ0 XX Question 1 continued iii Explain why in the short run as output increases marginal costs typically decrease and then increase 4 The price of tea in the perfectly competitive tea market is presently 21 per can c i Using this information draw and label the average revenue curve on Figure 2 1 ii Using Figure 2 identify the quantity of cans per month Firm B must produce in order to maximize profits 1 iii Calculate the economic profit when Firm B is producing at the output level identified in part c ii 2 This question continues on the following page Turn over 20EP05

6 N18 3 ECONO HP3 ENG TZ0 XX Question 1 continued d Sometimes a firm continues to produce in the short run even when it is making an economic loss Explain why the firm might choose to do this 2 e Outline why a perfectly competitive firm is a price taker 2 f Firm B and all the other firms in the tea market begin to sell their tea in distinctive packages and many differentiate their product with organic tea or fruit flavours Explain how the demand curve faced by Firm B will change as a result This question continues on the following page 20EP06 2

7 N18 3 ECONO HP3 ENG TZ0 XX Question 1 continued g Firm B conducted a market survey and found out that the price elasticity of demand for its brand of tea is 0 8 among urban customers whereas it is 1 2 among customers in rural areas The sales director said This information could help Firm B to raise its revenue by trying to separate the two markets provided that certain conditions are satisfied Explain this statement 4 Turn over 20EP07

8 2 N18 3 ECONO HP3 ENG TZ0 XX Figure 3 illustrates the market for cotton in the country of San Marcus a small closed economy Cotton is used as an input in the San Marcus textile industry Quantity is in thousands of kilograms kg Figure 3 20 18 Demand D Supply S 16 Price per kg 14 12 10 8 6 4 2 0 a 0 20 40 60 80 100 Quantity per period thousands of kg 120 140 i Define the term social community surplus 2 This question continues on the following page 20EP08

9 N18 3 ECONO HP3 ENG TZ0 XX Question 2 continued ii Calculate the social community surplus in the market for cotton in San Marcus 2 The Government of San Marcus decides to provide a subsidy equal to 8 per kilogram to its producers of cotton b i Draw and label the new supply curve following the granting of the subsidy to domestic cotton producers on Figure 3 2 ii Calculate the cost to the government of San Marcus of providing this subsidy to domestic cotton producers 2 iii Calculate the resulting change in producer surplus following the introduction of the subsidy to cotton producers in San Marcus 2 iv Calculate the change in the consumer surplus resulting from the subsidy 2 This question continues on the following page Turn over 20EP09

10 N18 3 ECONO HP3 ENG TZ0 XX Question 2 continued c Explain two reasons why the government of San Marcus may have decided to grant a subsidy to its cotton producers 4 San Marcus now joins the World Trade Organization WTO and agrees to slowly liberalize trade becoming an open economy d State two functions of the WTO 2 This question continues on the following page 20EP10

11 N18 3 ECONO HP3 ENG TZ0 XX Question 2 continued The world price for cotton is 2 per kg The WTO permits the government of San Marcus to maintain the 8 subsidy e i Plot and label the world cotton supply curve that San Marcus now faces on Figure 3 1 ii With reference to your answer in part b ii calculate the change in the cost of financing the 8 per kg subsidy to the government of San Marcus following the decision to import cotton from the world market 2 iii Explain one possible advantage and one possible disadvantage for the San Marcus economy of the decision to join the WTO and slowly liberalize trade 4 Turn over 20EP11

12 3 N18 3 ECONO HP3 ENG TZ0 XX The information provided in Table 1 represents data for Country X in 2015 Table 1 Item billion Imports 289 Transfer payments 253 Saving 82 Exports 234 Income from employment 1160 Taxation 396 Consumer spending 745 Investment 229 Net factor income from abroad 111 Government spending on goods and services a 437 Calculate gross domestic product GDP for Country X in 2015 2 b Calculate gross national income GNI for Country X in 2015 This question continues on the following page 20EP12 1

13 N18 3 ECONO HP3 ENG TZ0 XX Question 3 continued The information provided in Table 2 relates to Country Y Table 2 Year Consumer price index CPI GDP deflator GDP million 2014 100 100 4465 2015 105 35 105 11 4814 2016 109 21 108 92 5026 c Calculate the rate of consumer price inflation in 2016 1 d Using the GDP deflator calculate the percentage change in real GDP between 2014 and 2015 2 This question continues on the following page Turn over 20EP13

14 N18 3 ECONO HP3 ENG TZ0 XX Question 3 continued Figure 4 represents the circular flow of income in Country A with values in billions of dollars Figure 4 FIRMS Investment I Government Spending G 35 bn 25 bn V 200 bn Exports X 30 bn Banks etc Government Abroad Net saving S 40 bn Net taxes T 30 bn M 20 bn HOUSEHOLDS e i Identify the term represented in Figure 4 by the letter V 1 ii Identify the term represented in Figure 4 by the letter M 1 f State the four factor payments which constitute the income flow in the circular flow of income model This question continues on the following page 20EP14 2

15 N18 3 ECONO HP3 ENG TZ0 XX Question 3 continued g Define the term leakages 2 h Determine the size of the budget surplus deficit and state which using Figure 4 1 The government of Country A decides to increase the level of taxation to 34 billion i Using an AD AS diagram explain how this may affect the level of unemployment 4 This question continues on the following page Turn over 20EP15

16 N18 3 ECONO HP3 ENG TZ0 XX Question 3 continued Table 3 provides information on the rates of direct tax in Country A Table 3 Annual income j Rate of direct tax 0 12 000 5 12 001 27 500 12 27 501 60 000 21 5 60 001 32 Calculate the average tax rate for an individual who earns 64 000 per year Table 4 provides information on the household distribution of income in Country A Table 4 Household quintiles Percentage of total household income earned by each quintile Lowest 20 5 2nd lowest 20 10 3rd lowest 20 15 2nd highest 20 20 Highest 20 50 This question continues on the following page 20EP16 2

17 N18 3 ECONO HP3 ENG TZ0 XX Question 3 continued k Draw and label the Lorenz curve diagram for Country A on Figure 5 2 Figure 5 100 90 80 70 60 50 40 30 20 10 0 l 0 10 20 30 40 50 60 70 80 90 100 Explain how an increase in the top rate of direct tax from 32 to 36 might affect equity and efficiency in Country A 20EP17 4

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

N18 3 ECONO HP3 ENG TZ0 XX M Markscheme November 2018 Economics Higher level Paper 3 19 pages

2 N18 3 ECONO HP3 ENG TZ0 XX M This markscheme is the property of the International Baccalaureate and must not be reproduced or distributed to any other person without the authorization of the IB Global Centre Cardiff

3 N18 3 ECONO HP3 ENG TZ0 XX M Notes for examiners 1 Whenever relevant carry over marks must be awarded If a candidate makes an error in calculation but then uses the incorrect figure appropriately and accurately in later question parts then the candidate may be fully rewarded This is the own figure rule and you should put OFR on the script where you are rewarding this 2 Alternative approaches may be taken in responses to the 4 questions that use A02 command terms If this is the case and the alternative approaches are valid then full credit should be given 1 a i Calculate Firm A s average fixed costs when it is producing 125 cartons of coffee per month 2 500 125 Identification of FC at 500 or any valid working is sufficient for 1 4 An answer of 4 or 4 without working is sufficient for 1 ii Calculate Firm A s average variable costs when it is producing 125 cartons of coffee per month 2 1500 125 Identification of VC at 1 500 or any valid working is sufficient for 1 12 An answer of 12 or 12 without working is sufficient for 1 b i Using Figure 2 calculate the average fixed costs when 80 cans per month are produced 25 20 5 An answer of 5 is sufficient for 1 1

4 ii N18 3 ECONO HP3 ENG TZ0 XX M Using Figure 2 calculate the total costs when 55 cans per month are produced 2 30 55 Identification of ATC at 30 or any valid working is sufficient for 1 1650 An answer of 1650 or 1650 without working is sufficient for 1 NB If the candidate identifies ATC as 29 or 31 with a final answer of 1595 or 1705 this should be fully rewarded iii Level 0 1 Explain why in the short run as output increases marginal costs typically decrease and then increase The work does not meet a standard described by the descriptors below The written response is limited For a limited explanation that marginal product initially tends to increase but then because of a fixed input factor diminishing returns cause MP to fall Marks 0 1 2 OR MP falls because of a fixed input which increases the additional costs of one more unit and so MC increases Allow 1 mark only if productivity used instead of MP or if fixed input not mentioned 2 An algebraic response see below without any reference to The Law of Diminishing Marginal Returns may be awarded a maximum of 2 marks The written response is accurate For explaining that marginal product initially tends to increase due to specialization but then because of a fixed input factor that has to be shared diminishing returns cause MP to fall AND EITHER as MP falls the additional costs of one more unit of output will begin to increase and so MC increases OR VC wL L 1 w w MP Q Q Q so if MP increases then MC will decrease and when MP decreases as a result of the LoDMRs then MC will increase MC 4 3 4

5 c i N18 3 ECONO HP3 ENG TZ0 XX M Using this information draw and label the average revenue curve on Figure 2 1 A correctly labelled AR or P MR D line is sufficient for 1 ii Using Figure 2 identify the quantity of cans per month Firm B must produce in order to maximize profits 1 Where marginal revenue equals marginal cost An answer of 105 is sufficient for 1 If the candidate identifies the quantity as 104 or 106 this should be fully rewarded OFR may apply iii Calculate the economic profit when Firm B is producing at the output level identified in part c ii 105 21 23 Any valid working is sufficient for 1 210 or a loss of 210 An answer of 210 or a loss of 210 without working is sufficient for 1 OFR may apply eg 208 if 104 cans identified in c ii OR 212 if 106 cans identified in c ii 2

6 d Sometimes a firm continues to produce in the short run even when it is making an economic loss Explain why the firm might choose to do this Level 0 1 2 e The work does not meet a standard described by the descriptors below There is limited understanding For a response that the price is above the shut down price minimum AVC OR the firm is covering its variable costs There is clear understanding For a response that in the short run the firm should continue to produce provided price covers average variable costs since it is making a contribution to fixed costs OR the firm s losses are less than its fixed costs so its losses would be greater if it shut down 2 Marks 0 1 2 Outline why a perfectly competitive firm is a price taker Level 0 1 2 f N18 3 ECONO HP3 ENG TZ0 XX M The work does not meet a standard described by the descriptors below There is limited understanding For a response that it does not have market power and so must accept the market price There is clear understanding If the firm raises the price both its quantity sold and revenue will drop to zero there is also no benefit from lowering its price since it can sell any amount at the market price 2 Marks 0 1 2 Firm B and all the other firms in the tea market begin to sell their tea in distinctive packages and many differentiate their product with organic tea or fruit flavours Explain how the demand curve faced by Firm B will change as a result Level 0 1 2 The work does not meet a standard described by the descriptors below There is limited understanding For a response that the demand curve will now slope down There is clear understanding For a response that the demand curve will slope down because the firm now has the market monopoly power or the ability to be a price maker OR that the demand curve will slope down because it is now a monopolistic competitor OR the firm s demand curve is no longer perfectly elastic because it now has the market power to change its price Marks 0 1 2 2

7 g N18 3 ECONO HP3 ENG TZ0 XX M Firm B conducted a market survey and found out that the price elasticity of demand for its brand of tea is 0 8 among urban customers whereas it is 1 2 among customers in rural areas The sales director said This information could help Firm B to raise its revenue by trying to separate the two markets provided that certain conditions are satisfied Explain this statement 4 Firm B could price discriminate in two separate markets charge different prices in different separate markets charge a higher price to urban customers or a lower price to rural when demand is inelastic a higher price yields more revenue or when elastic demand a lower price yields more revenue Firm B needs to separate the two markets so no opportunity for resale or Firm B needs to have some monopoly price setting power Level 0 1 2 The work does not meet a standard described by the descriptors below There is limited understanding Award 1 for one of the points above Award 2 for two of the points above There is clear understanding Award 3 for three of the points above Award 4 for all of the four points above Marks 0 1 2 3 4

8 2 a i Define the term social community surplus Level 0 1 2 ii N18 3 ECONO HP3 ENG TZ0 XX M The work does not meet a standard described by the descriptors below Vague definition The surplus that consumers and producers receive enjoy Accurate definition The sum of the consumer surplus and producer surplus received enjoyed Calculate social community surplus in the market for cotton consumer surplus 10 50 1000 250 000 2 producer surplus 6 50 1000 150 000 2 social surplus 250 000 150 000 Any valid working is sufficient for 1 400 000 OR 16 50 1000 2 Any valid working is sufficient for 1 400 000 An answer of 400 000 or 400 000 without working is sufficient for 1 2 Marks 0 1 2 2

9 b i N18 3 ECONO HP3 ENG TZ0 XX M Draw and label the new supply curve following the granting of the subsidy to domestic cotton producers on Figure 3 2 Drawing a new supply curve parallel and below to the right of the original supply curve is sufficient for 1 ii Calculate the cost to the government of San Marcus of providing this subsidy to domestic cotton producers 8 75 1000 Any valid working is sufficient for 1 600 000 An answer of 600 000 or 600 000 without working is sufficient for 1 OFR may apply 2

10 iii N18 3 ECONO HP3 ENG TZ0 XX M Calculate the resulting change in producer surplus following the introduction of the subsidy to cotton producers in San Marcus 2 50 75 13 10 1000 2 OR 0 5 75 9 0 5 50 6 337 5 150 Valid working may include correct workings for initial PS 0 5 50 6 correct workings for final PS 0 5 75 9 correct workings for the trapezium 50 75 13 10 1000 2 Any valid working is sufficient for 1 187 500 An answer of 187 500 or 187 500 without working is sufficient for 1 OFR may apply iv Calculate the change in the consumer surplus resulting from the subsidy 50 75 10 5 1000 2 OR 0 5 75 15 0 5 50 10 562 5 250 Any valid working is sufficient for 1 Valid working may be correct workings for initial CS 0 5 50 10 correct workings for final CS 0 5 75 15 correct workings for the trapezium 50 75 10 5 1000 2 312 500 An answer of 312 500 or 312 500 without working is sufficient for 1 OFR may apply 2

11 c N18 3 ECONO HP3 ENG TZ0 XX M Explain two reasons why the government of San Marcus may have decided to grant a subsidy to its cotton producers Level 0 1 The work does not meet a standard described by the descriptors below The written response is limited For a limited explanation of one reason award a maximum of 1 4 Marks 0 1 2 For an accurate explanation of one reason or a limited explanation of two reasons award a maximum of 2 Reasons may include to assist buyers of cotton to assist producers farmers of cotton to assist the textile industry to increase employment lower unemployment to decrease urbanization to promote exports reduce imports 2 Any other valid response The written response is accurate For providing an accurate explanation of one reason and a limited explanation of a second reason award a maximum of 3 For providing two accurate reasons award a maximum of 4 Accurate explanations may include to assist buyers of cotton the cotton subsidy will decrease production costs increase supply and thus decrease price to assist producers farmers of cotton as the price per unit earned following the subsidy as well as the amount produced and sold will be greater leading to higher revenues to assist the textile industry as cotton is as stated an input and thus costs of production will decrease making textiles cheaper and increasing profitability to increase employment lower unemployment as more output in the cotton and textile markets will require more workers to increase exports and or reduce imports by making the cotton produced in San Marcus more competitive in the international market Any valid response 3 4

12 d N18 3 ECONO HP3 ENG TZ0 XX M State two functions of the WTO 2 Allocate 1 for each valid function Functions may include promotes trade liberalization sets trade rules ensures that trade rules are adhered to settles trade related disputes trade related technical assistance a forum for trade negotiations NB Describing trade liberalization in two ways eg removal of barriers lowering of tariffs only counts as one function Any other valid function s e i Plot and label the world cotton supply curve that San Marcus now faces on Figure 3 Award 1 for an accurate and labelled world cotton supply curve 1

13 ii N18 3 ECONO HP3 ENG TZ0 XX M With reference to your answer in part b ii calculate the change in the cost of financing the 8 per kg subsidy to the government of San Marcus following the decision to import cotton from the world market initial cost 600 000 Calculated earlier on b ii OFR applies new cost of subsidy 8 50 1000 400 000 new cost of subsidy minus initial cost 400 000 600 000 Any valid working is sufficient for 1 200 000 or a decrease of 200 000 An answer of 200 000 or 200 000 is sufficient for 1 OFR applies 2

14 iii Level 0 1 N18 3 ECONO HP3 ENG TZ0 XX M Explain one possible advantage and one possible disadvantage for the San Marcus economy of the decision to join the WTO and slowly liberalize trade The work does not meet a standard described by the descriptors below The written response is limited Award a maximum of 1 for a limited explanation of one advantage or disadvantage Award a maximum of 2 for an accurate explanation of one advantage or one disadvantage or a limited explanation of both 4 Marks 0 1 2 Advantages may include cheaper imports for consumers cheaper imported inputs for producers greater scope for exports more competition for exporting and importing sectors exporting domestic firms enjoy EOS Disadvantages may include overspecialization possibility of job losses greater import penetration difficulty for infant industries to grow loss of tariff revenue 2 Any valid response The written response is accurate Award a maximum of 3 for providing an accurate explanation of one advantage or one disadvantage and a limited explanation of a disadvantage or advantage Award a maximum of 4 for providing two accurate explanations 3 4 Accurate explanations of advantages may include since tariffs and other trade restrictions will be removed consumers will enjoy cheaper and a greater variety of imports since tariffs and other trade restrictions will be removed production costs for domestic firms using imported inputs will be lower domestic firms will have easier access to foreign markets increasing their exports domestic firms that grow may face lower average costs Accurate explanations of disadvantages may include overspecialization may render the economy vulnerable to changes in the prices of exports and imports domestic industries unable to compete with foreign producers may suffer job losses harder to establish new industries due to the competitive advantage of foreign producers loss of tariff revenues which could be used for public investment Any valid response NB Responses should refer to the economy of San Marcus not just one industry such as the consumers or producers of cotton

15 3 a N18 3 ECONO HP3 ENG TZ0 XX M Calculate gross domestic product GDP for Country X in 2015 2 GDP C I G X M 745 229 437 234 289 Any valid working is sufficient for 1 1356 billion An answer of 1356 billion or 1356 without working is sufficient for 1 b Calculate gross national income GNI for Country X in 2015 1 GDP net factor income GNI 1356 111 1245 billion An answer of 1245 without working is sufficient for 1 OFR applies c Calculate the rate of consumer price inflation in 2016 1 109 21 105 35 100 3 66 105 35 An answer of 3 66 without working is sufficient for 1 d Using the GDP deflator calculate the percentage change in real GDP between 2014 and 2015 real GDP in 2015 4814 100 4579 96 105 11 rate of change 4579 96 4465 100 4465 Any valid working is sufficient for 1 2 57 An answer of 2 57 without working is sufficient for 1 2

16 e N18 3 ECONO HP3 ENG TZ0 XX M Identify the term represented in Figure 4 by the letter V i 1 Income OR factor income OR household income OR factor payments Award 1 for identifying the term correctly ii Identify the term represented in Figure 4 by the letter M 1 imports Award 1 for identifying the term correctly f State the four factor payments which constitute the income flow in the circular flow or income model 2 rent wages interest and profit Award 1 for three payments provided Award 2 for four payments provided g Define the term leakages Level 0 1 2 h The work does not meet a standard described by the descriptors below Vague definition The idea that it is money leaving the circular flow or listing the three leakages Accurate definition An explanation that a leakage represents the portion of national income which is not spent on domestic output domestic consumption 2 Marks 0 Determine the size of the budget surplus deficit and state which in Figure 4 budget surplus of 5 billion Award 1 for determining the size of the budget correctly 1 2 1

17 i N18 3 ECONO HP3 ENG TZ0 XX M Using an AD AS diagram explain how this may affect the level of unemployment Level 0 1 2 The work does not meet a standard described by the descriptors below The written response is limited For an AD AS diagram showing a shift of AD to the left and a decrease in the equilibrium level of real output OR for explaining that an increase in taxation will reduce consumption and or investment which lowers AD This leads to a decrease in the level of output and therefore an increase in the level of unemployment The written response is accurate For an AD AS diagram showing a shift of AD to the left and a decrease in the equilibrium level of real output AND for explaining that an increase in taxation will reduce consumption and or investment which lowers AD This leads to a decrease in the level of output and therefore an increase in the level of unemployment 4 Marks 0 1 2 3 4 NB A response in which the AS curve shifts to the left on the basis that the increase in taxation may be indirect taxation should be rewarded j Calculate the average tax rate for an individual who earns 64 000 per year 12 000 5 15 500 12 32 500 21 5 4 000 32 10 727 50 Working is not required average tax rate 10727 5 100 64000 Any valid working is sufficient for 1 16 76 An answer of 16 76 or 0 17 without working is sufficient for 1 2

18 k N18 3 ECONO HP3 ENG TZ0 XX M Draw and label the Lorenz curve diagram for Country A in Figure 5 Award 1 for an accurate Lorenz curve OR Award 1 for a Lorenz curve which is inaccurate but which goes from 0 0 to 100 100 and which lies below the line of perfect equality AND axes labelled accurately Award 2 for an accurate Lorenz curve with axes correctly labelled NB The term cumulative is not necessary for labelling of axes 2

19 l N18 3 ECONO HP3 ENG TZ0 XX M Explain how an increase in the top rate of direct tax from 32 to 36 might affect equity and efficiency in Country A Level 0 1 2 The work does not meet a standard described by the descriptors below The written response is limited For explaining that an increase in the top rate of tax will make the tax system more progressive which will make the distribution of income less unequal and may be seen as more fair equitable OR for explaining that an increase in the top rate of tax could reduce efficiency in Country A as it might act as a disincentive for work and investment OR for explaining that an increase in the top rate of tax could increase efficiency because higher tax revenue could permit more investment in human capital and infrastructure The written response is accurate For explaining that an increase in the top rate of tax will make the tax system more progressive which will make the distribution of income less unequal and may be seen as more fair equitable AND for explaining that an increase in the top rate of tax could reduce efficiency in Country A as it might act as a disincentive for work and investment OR for explaining that an increase in the top rate of tax could increase efficiency because higher tax revenue could permit more investment in human capital and infrastructure 4 Marks 0 1 2 3 4 NB A response which explains that inequality will be reduced without explicitly using the term equality inequality should be rewarded