IBDP1 STANDARD LEVEL ECON EXAM PRACTICE QUESTIONS

10 MARK QUESTIONS

A1 - Governments intervene in markets to support firms and to promote equity. Explain one
policy that could be used to support firms and one policy that could be used to promote
equity.
A2 - Explain the impact on consumers, producers and the government of a price floor being
introduced in an agricultural market.
A3 - Explain why the exploitation of common access resources, such as uncontrolled
fishing, might pose a threat to sustainability.
A4 - Explain why, in the case of healthcare and education, positive externalities might cause
market failure.
A5 - Explain how an increase in leakages can affect the size of the circular flow of income.
A6 - Explain the various phases of the business cycle
A7 - Explain how the size of the circular flow of income in an economy is likely to be
affected by a decrease in the rate of interest.
A8 - Explain how aggregate demand in an economy might be affected by a rise in the
exchange rate and a decrease in the income of major trading partners.
A9 - Explain why a reduction in interest rates might lead to an increase in aggregate
demand.
A10 - Explain how a decrease in business confidence can affect the real GDP of an
economy that is producing below the full employment level of output.
A11 - Explain how in the Keynesian AD/AS model an economy can be in equilibrium while
producing below the full employment level of output.
15 MARK QUESTIONS

B1 - Discuss the view that imposing an indirect tax on gasoline (petrol) is the most effective
way of reducing the market failure caused by cars.
B2 - Using real-world examples, evaluate different approaches to managing common
access resources.
B3 - Discuss whether government regulation is the most effective way to deal with negative
externalities of consumption.
B4 - To what extent is the use of national income statistics an effective way of comparing
the standard of living between countries?
B5 - Discuss the view that economies will always return to the full employment level of
output in the long run.
B6 - Evaluate the view that a decrease in aggregate demand would always be deflationary.
MARKSCHEME

Section A

A1

● Terminology: government intervention, market, equity

● Explanation: of any one policy to support firms, such as a subsidy, a minimum price
(price floor) or trade protection and any one policy to promote equity, such as a
maximum price (price ceiling), direct government provision of services or subsidy,
progressive taxation (labour market)
● Diagram: any relevant diagram illustrating the particular policy being explained.

A maximum of [6] should be awarded if only one policy/objective is addressed.

Examiners report: There were many good answers to this question with effective responses
focusing on government intervention through policies like trade protectionism (such as
tariffs) and minimum prices to support producers and maximum prices and subsidies to
promote equity. The strongest responses used economic terms effectively and had
effective diagrams to support the economic theory applied to answer the question. One
weakness in student responses was when they did not clearly distinguish between support
for firms and the promotion of equity. It is important for students to clearly distinguish
between equity and equality in their answers to questions on this topic.

A2

Answers may include:

● definition of price floor

● diagram to show the impact of a price floor on an agricultural market
● explanation of how a price floor leads to a higher price and lower quantity demanded
from consumers, and a higher price to producers increases quantity supplied
because it increases revenues and an opportunity cost to governments because of
the expense of buying surplus production
● examples of agricultural markets.
A maximum of [6] should be awarded if a candidate has only considered one stakeholder. A
maximum of [8] should be awarded if a candidate has only considered two stakeholders. All
three stakeholders are needed to reach level 4.
Examiners report: This question was generally well answered by students with a clear
explanation of how producers gain from a minimum price and consumers and the
government lose out. The best answers used clear, accurate diagrams, showing changes in
consumer and producer surpluses. Effective answers also showed the cost to governments
of intervention buying and surplus stock management. The very best answer used effective
real-world examples such as intervention buying in agricultural markets.

A3

Answers may include:

● definitions of common access resources and sustainability

● diagram to show the negative externality associated with common access resources
and/or demand and supply diagram
● explanation of why the exploitation of common access resources, such as
uncontrolled fishing, might pose a threat to sustainability
● examples of the over-exploitation of common access resources.

Marks should be allocated according to the Paper 1 markbands for May 2013 forward, part A.

A4

Answers may include:

● Terminology: positive externalities, market failure.

● Explanation: of healthcare and education as merit goods which generate external
benefits, as well as private benefits, and whose consumption is therefore likely to be
less than the socially optimal level if left to the free market to provide; explanation of
positive externalities in the case of healthcare, eg control the spread of contagious
diseases and healthy workers being more productive; and an explanation of the
 positive externalities in the case of education, eg the positive relationship between
education, productivity, employment, innovation and economic growth.
● Diagram: positive externalities of consumption diagram showing MSB above MPB,
MSB not equalling MSC and welfare loss.

A maximum of [6] should be awarded if only one of healthcare or education is explained and
developed.

Examiners report: This was the most popular question and the one for which candidates
were well prepared, in general. Most candidates recognized health care and education as
merit goods but were unable to fully explain the external benefits of these two goods. There
were proper diagrams illustrating the positive externalities, but the welfare loss was often
not correctly labelled. Some candidates incorrectly explained these two merit goods as
producing positive externalities of production. Many candidates understood why positive
externalities cause market failure and could explain it using the diagram, but it was evident
that market failure is a concept that is not understood by all candidates.

A5

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.

A6

Answers may include:

● definition of business cycle

● diagram to show the different phases of the business cycle and possible trend line
● explanation of the business cycle in terms of the different short-run phases ie boom,
recession, depression/slump and recovery, and long-term trend
 ● examples of specific countries being in different phases of the business cycle.

NB Examiners should be aware of variations in the business cycle diagrams candidates

might draw and should be flexible in crediting the diagrams drawn by candidates.
Examiners report: This question was generally well answered by students who explained
how the economy changes during different phases of the business cycle. It was interesting
to see the variety of approaches to the business cycle used by students but the overall
theme of how real GDP/economic growth changes over time was clearly understood in
many answers. In the highest achieving responses students were able to explain how real
GDP changes overtime and how this affected inflation and unemployment. The highest
achieving responses supported this with real-world examples of how the business cycle has
affected particular countries.

A7

Answers may include:

● definitions of circular flow of income, rate of interest

● diagram of the circular flow of income, showing a decrease in saving and an
increase in investment or use of an AD/AS diagram to explain the impact of the
decrease in the rate of interest on the circular flow of income
● explanation that a decrease in the rate of interest is likely to reduce saving, and
increase business investment; hence a decrease in a leakage and an increase in an
injection will exert an upward impact on income and output and increase the size of
the circular flow of income
● examples of changes in the rate of interest affecting the circular flow of income in
practice, such as the reduction of interest rates to near 0% in many countries at
present.

Examiners report: This proved to be a difficult question for candidates and was certainly the
least popular. Most were unable to provide an accurate circular flow diagram and to explain
the circular flow model and, all too often, the key concepts of injections and leakages were
completely ignored or simply glossed over. Thus, usually, candidates did not link the
lowering of interest rates to a decrease in a leakage (saving) and an increase of an injection
(investment). Many briefly mentioned that the size of the circular flow would increase but
were not able to properly explain why. Examples were almost never provided. Many
candidates appeared to be much more at ease with the AD/AS model, which they often
launched into at an early stage of their answer to this question. Some credit was given for
this where appropriate, but this approach was often not explicitly related to leakages and
injections.

A8

Answers may include:

● definition of aggregate demand (AD), exchange rate

● diagram to show AD shifting to the left
● explanation of the linkages between a rise in the exchange rate and a decrease in
the income of major trading partners on a country’s AD
● examples of economies which have experienced a rise in the exchange rate and/or a
decrease in the income of major trading partners.

NB if only one factor of the two factors mentioned above are considered, a maximum of
Level 2 should be awarded.
Examiners report: Most candidates seemed to be familiar with AD/AS analysis and could
use a diagram with relative ease. Most understood how a rise in the exchange rate caused
exports to be more expensive, but few related it to an increase in the demand for imports,
both of which would decrease AD. Few candidates were able to provide specific examples
of economies that had experienced the situations mentioned in the question.

A9

Answers may include:

● definitions of aggregate demand, interest rates

● diagram to show how a reduction in interest rates increases aggregate demand
● explanation that a reduction in interest rates increases consumption and investment,
leading to an increase in aggregate demand
● examples of how a reduction in interest rates increases aggregate demand in
practice and/or of countries where reduced interest rates have increased aggregate
demand.

A10
Answers may include:

● definitions of real GDP, business confidence, full employment level of output

● diagram to show how a decrease in business confidence will shift AD to the left,
resulting in a decrease in real GDP
● explanation that business confidence is a determinant of investment and a decrease
in confidence will lead to a decrease in AD and a decrease in real GDP
● examples of situations where business confidence has fallen.

Examiners report: This question was well answered by many candidates. The key terms of
business confidence, real GDP and full employment were mostly well defined and the
impact of a fall in business confidence on real GDP was clearly explained with an effective
AD/AS diagram. Weaker answers tended to be imprecise in the explanation of business
confidence and needed to be clearer on the meaning of full employment.

A11

Answers may include:

● definitions of equilibrium, full employment level of output

● diagram to show the Keynesian model of an economy at equilibrium income below
the full employment level of output
● explanation of how an economy can be in equilibrium income below full employment
when AD falls, leading to a deflationary gap when wage and price rigidity keep the
economy below the full employment level of output
● examples of when economies have experienced equilibrium income below the full
employment level of output.

Examiners report
The responses to this question were mixed in terms in terms of the standard. The best
answers clearly focused on the reason why equilibrium national income can exist below full
employment in the Keynesian model by focusing on the argument that wages and costs do
not fall when the economy is operating below full employment. A common mistake was for
students to simply explain equilibrium income below full employment without explaining why
the equilibrium would stay at this level and not adjust back to full employment. Very good
answers were supported by an effective real-world example.

Section B

B1

Answers may include:

● definition of indirect tax, market failure

● diagram to illustrate the imposition of an indirect tax
● explanation of how taxation can be used to reduce the demand for gasoline/cars
● examples of where a government has applied such taxes
● synthesis or evaluation (discuss).

Discussion may include: the disadvantages of indirect tax on gasoline, such as: effects on
the rate of inflation, equity (some stakeholders affected more than others) and the
importance of price elasticity of demand (PED) in affecting the incidence of the tax.
Consideration of other policies that can be used, such as: subsidies to public transport,
subsidies for electric car producers, government providing infrastructure for the use of
electric cars (eg charging points), advertising (eg encourage the use of public transport)
and government regulations to reduce car use.
Examiners report: Students performed better on part (b) compared to part (a) of this
question where they were more comfortable explaining how indirect taxation on
petrol/gasoline can be used to deal with the market failure associated with car use. Many
analysed the impact indirect taxation has on the market for petrol/gasoline and in turn the
use of cars. This was often supported by effective cost and benefit diagrams. The highest
achieving responses went on the evaluate the issues associated with using indirect taxation
such as the inequitable impact on low income households and the negative consequences
on the car manufactures along with the associated consequences for employment. It was
good to see some candidates using effective real-world examples of the impact of indirect
tax on petrol/gasoline such as countries that have suffered protests because of their
imposition.
B2

Answers may include:

● Definition: common access resources.

● Explanation: of different government approaches to this problem, legislation and
regulation, collective self-governance, tradable permits, carbon taxes and
international agreements.
● Diagram: showing negative production externalities.
● Synthesis (evaluate): the strengths and limitations of the above policies in
addressing the problems of managing common access resources.
● Examples: a real-world common access resource and policies used by governments
eg Antarctic Treaty System, Nile Agreement etc.

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.

B3
marks should be allocated according to the paper 1 markbands for May 2013 forward, part B.

Answers may include:

● definition of government regulation, negative externalities of consumption

● diagram to show how government regulation reduces the problem of negative
consumption externalities
● explanation that government regulation can reduce the demand for the product,
shifting the MPB curve closer towards the MSB curve and the socially optimum
output or decrease in supply if a government regulation leads to a fall in output
● examples of where government regulations have been used to control negative
externalities of consumption
● synthesis or evaluation (discuss).
Discussion may include: the effectiveness of government regulation including the policing
of regulation, consideration of alternative policies like taxation, where the tax revenue raised
can be used to pay for some of the of the consequences of the negative externality.

NB To reach level 4, students need to consider an alternative approach to regulation.

Examiners report: Students produced accurate explanations of the market failure
associated with the negative externalities of consumption using demerit goods such as
cigarettes and alcohol and illustrated this with an effective diagram. The use of regulation
as a policy option to deal with the negative externality was often poorly developed. Many
answers confused taxation and advertising to reduce consumption as methods of
regulation. This lost candidates marks because they failed to clearly answer the question.
The best answers considered regulations on cigarettes and alcohol such as age
restrictions, bans on consumption in public places and limits on promotion and evaluated
these methods effectively. Top level answers used relevant real-world examples to support
their answers.

B4
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.

B5
Answers may include:

● definition of full employment, full employment level of output

● diagrams to show the two different views of the economy
● explanation of the monetarist/new classical view that the economy will always return
to the full employment level of output in the long run
● examples of situations where economies either have or have not returned to full
employment in the long run
● synthesis and evaluation (discuss).

Discussion may include: consideration of the Keynesian view that an economy can remain
stuck in a deflationary gap, consideration of the role of government, consideration of the
word “always”.
Examiners report: There were a mixed set of responses to this question. Effective answers
involved students showing a good understanding of the theory involved by explaining how
an economy might return to full employment in the long run using the Monetarist/Neo
Classical model where short-run aggregate supply changes when the economy is in either
an inflationary or deflationary gap situation. This was supported with clear aggregate
demand and supply diagrams. Some candidates who did not have a sound grasp of this
theory really struggled to answer the question. The highest achieving responses went on to
evaluate the view that economies always return to full employment by, for example, putting
forward the Keynesian view that an economy can get stuck in a deflationary situation
because wages do not adjust downwards. Well-developed real-world examples allowed
students to access the very highest marks.

B6
Answers may include:
 ● definitions of aggregate demand, deflationary
● diagram to show a fall in AD leading to a fall in the average price level in the
neoclassical/monetarist model
● explanation that in the neoclassical/monetarist model a fall in AD would be
deflationary because a fall in AD leads to a new equilibrium income at a lower
average price level and real GDP
● examples of economies that have experienced a decrease in AD, which is
deflationary
● synthesis or evaluation.

Evaluation may include: When AD falls in the Keynesian model and the economy is below
full employment the average price level does not fall because wages and costs tend not to
fall.

NB Candidates can approach this question in terms of deflationary conditions in the

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