The following is a practice paper not created by the IB. The answer key can be found below but a variety of answers amy be deemed acceptable.

 Instructions to candidates 

  •  Do not open this exam until instructed to do so. 

  • A calculator is NOT permitted for this paper. 

  • Select one question to answer. 

  • Use fully labelled diagrams where appropriate. 

  • The maximum mark for this exam is [25 marks].


Answer one of the following questions below. Each question is worth 25 marks. 


1.     

(a)  Explain the causes associated with an increase in inflation in an economy.  [10 marks]


(b)  Evaluate the view that deflation and the consequences associated with deflation are more harmful to an economy than inflation. [15 marks]


2.     

(a)  Explain how different types of unemployment create a rise in unemployment in a country. [10 marks]


(b)  Evaluate the view that high unemployment is a greater economic concern than high inflation. [15 marks]











Key

1.     


(a)  Explain the causes associated with an increase in inflation in an economy.  [10 marks]

The Response may include:

  • Definition of inflation

  • An AS/AD diagram displaying an increase in Average Price Level. 

  • An explanation using sound economic theory outlining the costs of inflation such as rate—uncertainty, redistributive effects, effects on saving, damage to export competitiveness, impact on economic growth, inefficient resource allocation, etc.


(b)  Evaluate the view that deflation and the consequences associated with deflation are more harmful to an economy than inflation. [15 marks]


The Response may include:

  • Definition of deflation and inflation

  • An AS/AD diagram displaying a decrease in Average Price Level. 

  • An explanation using sound economic theory outlining the costs of inflation such as rate—uncertainty, redistributive effects, effects on saving, damage to export competitiveness, impact on economic growth, inefficient resource allocation, etc.

  • An explanation using sound economic theory outlining the costs of deflation such as uncertainty, redistributive effects, deferred consumption, association with high levels of cyclical unemployment and bankruptcies, increase in the real value of debt, inefficient resource allocation, policy ineffectiveness, etc.

  • An evaluation deflation impacts on stakeholders.

  • Full evaluation and balanced reasoning. 

  • A relevant real-world example is used to support the argument


2.     

(a)  Explain how different types of unemployment create a rise in unemployment in a country. [10 marks]


The Response may include:

  • Definition of unemployment (potential definition of frictional, structural, and cyclical unemployment)

  • A fully labeled AD/AS diagram displaying an increase in unemployment. 

  • An accurate and relevant explanation of the diagram and how the types of unemployment (frictional, structural, cyclical) create unemployment. 


(b)  Evaluate the view that high unemployment is a greater economic concern than high inflation. [15 marks]


The Response may include:

  • Definition of unemployment and inflation

  • If applicable, a fully labeled AD/AS diagram illustrating an increase in unemployment and/or inflation.

  • An explanation of the general costs of unemployment vs. inflation.

  • An evaluation of unemployment and inflation  impacts on stakeholders.

  • Full evaluation and balanced reasoning. 

  • A relevant real-world example is used to support the argument