ECONOMICS FOR THE IB DIPLOMA: EXAM PRACTICE PAPER

Paper 1 (SL and HL)

1 The foundations of economics
Core (SL and HL)
Chapter 1 has only Part (a) questions.
1.4 a Analyse the following statement. ‘Whereas the production possibilities model can illustrate
scarcity, choice and opportunity cost, it is quite useless because an economy can never
produce on its production possibilities curve.’ [10 marks]
HL only
Chapter 1 has no HL only questions that are examined in Paper 1.

2 Competitive markets: Demand and supply

Core (SL and HL)
Chapter 2 has only Part (a) questions at SL, but both Part (a) and Part (b) questions at HL only.
2.4 a ‘Quantity demanded increases as price falls. Yet as demand falls, price falls.’ Explain
whether these two statements contradict each other. [10 marks]
2.5 a You observe that over time the number of computers produced and sold increases,
and the price of computers falls. Explain whether this violates the law of supply. [10 marks]
2.6 a Growing populations and rising incomes in economically less developed countries have
affected the price of meat, which is a normal good. Referring to the concept of excess
demand, analyse the effects on the price of meat. [10 marks]
2.7 a Referring to the concept of excess supply, analyse the effects of falling costs of agricultural
inputs and technological improvements in agriculture on the affordability of food. [10 marks]
2.8 a Explain how allocative efficiency is related to the concepts of consumer surplus and
producer surplus. [10 marks]
HL only
2.9 a Explain the relevance of (i) the income and substitution effects and (ii) the law of
diminishing marginal utility to the law of demand. [10 marks]
2.10 a Explain the relationship between the law of diminishing marginal returns and a firm’s
marginal costs. [10 marks]
2.10 b ‘The key objective of firms is to maximise profit.’ Using real-world examples, evaluate
this statement. [15 marks]

3 Elasticities
Core (SL and HL)
3.3 a Suggest likely values for the price elasticity of supply of (i) Picasso’s paintings and
(ii) copies of Picasso’s paintings. [10 marks]
3.3 b A government interested in increasing its tax revenues favours the imposition of an
indirect tax on yachts rather than on cigarettes. Using real-world examples, examine
whether its preference for taxing yachts can be justified on economic grounds. [15 marks]

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 ECONOMICS FOR THE IB DIPLOMA: EXAM PRACTICE PAPER

HL only
3.4 a It is often observed that the price elasticity of demand for primary commodities is relatively
low, while that of manufactured goods is relatively high. Using diagrams, explain why. [10 marks]
3.4 b Using real-world examples and the concept of YED, examine why agriculture is often
referred to as a ‘declining industry’. [15 marks]

4 Government intervention in microeconomics

Core (SL and HL)
4.3 a Using diagrams, explain how price ceilings and price floors lead to over- or under-
production of a good and allocative inefficiency. [10 marks]
4.4 a ‘Price controls, like indirect taxes and subsidies, are a form of government intervention
in the market, yet they differ in that price controls give rise to disequilibrium market
outcomes.’ Explain. [10 marks]
4.5 a The government decides to impose an indirect tax on wine of €0.15 per litre.
Using a diagram, analyse the effects on market outcomes. [10 marks]
4.5 b Using real-world examples, discuss the consequences of an indirect tax on some good
for stakeholders. [15 marks]
HL only
Chapter 4 has no HL only questions that are examined in Paper 1.

5 Market failure and socially undesirable outcomes I: Common pool

resources and negative externalities
Core (SL and HL)
5.3 a Explain how the concept of negative production externalities can be used to analyse
the problem of pollution caused by fossil fuels. [10 marks]
5.3 b Using real-world examples, evaluate two possible policy responses to the problem of
emissions from use of fossil fuels. [15 marks]
5.4 a In many poor countries, very poor farmers use wood and other biomass fuels for
heating and cooking purposes in their homes, often with very poor ventilation.
Explain how this leads to market failure. [10 marks]
5.4 b Using real-world examples, evaluate two policy measures that can be used to reduce
externalities created by demerit goods. [15 marks]
5.5 a Explain how tradable permits can lead to an improvement in the allocation of resources. [10 marks]
5.5 b ‘Tradable permits are the most effective method that governments can use to deal with the
problem of fossil fuel emissions.’ Using real-world examples, discuss this view. [15 marks]
5.6 a Referring to the difference between common pool resources and resources purchased by
firms, explain why common pool resources pose a threat to sustainability. [10 marks]
5.6 b Using real-world examples, evaluate collective self-governance as a method to deal with
unsustainable use of common pool resources. [15 marks]
HL only
Chapter 5 has no HL only questions that are examined in Paper 1.

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 ECONOMICS FOR THE IB DIPLOMA: EXAM PRACTICE PAPER

6 Market failure and socially undesirable outcomes II: Positive externalities,

public goods, asymmetric information and inability to achieve equity
Core (SL and HL)
6.3 a Explain the effects on resource allocation and social welfare in the event that a firm’s
discovery of a new robot technology is widely adopted by other firms. [10 marks]
6.3 b Using real-world examples, evaluate alternative government responses to the problem of
positive production externalities. [15 marks]
6.4 a Explain the effects on resource allocation and social welfare of the possible discovery of
a cure for HIV/AIDS. [10 marks]
6.4 b Using real-world examples, compare and contrast alternative policies that might be used
by government in an effort to correct positive consumption externalities. [15 marks]
6.5 a Using the concepts of rivalry and excludability, explain why merit goods and public goods
are two types of market failure. [10 marks]
6.5 b Using real-world examples, discuss the implications of direct government provision of
merit goods and public goods. [15 marks]
HL only
6.6 a Explain why the free market results in an unequal distribution of income and wealth. [10 marks]
6.6 b Using real-world examples, evaluate the view that signalling and screening are the best
ways to respond to the problem of information asymmetries. [15 marks]

7 Market failure and socially undesirable outcomes III: Market power

HL only
7.3 a Explain two ways that economists may use to study profit maximisation by a firm.  [10 marks]
7.4 a Using examples, explain the role of ‘barriers to entry’ in determining types of
market structures. [10 marks]
7.4 b Using real-world examples, evaluate the view that producers are the only stakeholders that
can benefit from a monopoly market structure. [15 marks]
7.5 a Explain the relationship between price, the demand curve, average revenue and marginal
revenue for firms in perfect and in imperfect competition. [10 marks]
7.5 b Using real-world examples, discuss potential advantages and risks in markets dominated
by a small number of large firms. [15 marks]
7.6 a Explain why a firm in perfect competition that earns abnormal profit in the short run is
unable to maintain the same profit levels in the long run. [10 marks]
7.6 b Using real-world examples, compare and contrast perfect competition with
monopolistic competition. [15 marks]
7.7 a Explain the role of product differentiation in making the demand and revenue curves facing
the monopolistically competitive firm similar to those of a monopolist. [10 marks]
7.7 b Using real-world examples, discuss the role of non-price competition for firms in
monopolistic competition and oligopoly. [15 marks]
7.8 a Distinguish between collusive and non-collusive oligopoly. [10 marks]
7.8 b Using real-world examples, examine oligopolistic firms’ interdependence and conflicting
incentives to compete or to collude, which are shown by the prisoner’s dilemma payoff
matrix in the figure. [15 marks]

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 ECONOMICS FOR THE IB DIPLOMA: EXAM PRACTICE PAPER

Alpha
high price low price
1 $20 2 $35
million million
price
high
$20 $5
million million
Beta

3 $5 4 $10
million million
price
low

$35 $10
million million

7.9 a Using the concept of price elasticity of demand, explain how the demand curves
faced by firms in perfect competition, monopolistic competition and monopoly differ
from each other. [10 marks]
7.9 b Using real-world examples, evaluate the view that natural monopolies should be broken
up by the government into two or more firms in the best interests of society. [15 marks]

8 The level of overall economic activity

Core (SL and HL)
8.3 a Using a business cycle diagram, explain the phases of the business cycle and the
long-term growth trend. [10 marks]
8.4 a Using the circular flow model, explain what might happen to the level of income of an
economy if it experiences an increase in exports and an increase in taxes. [10 marks]
HL only
Chapter 8 has no HL only questions that are examined in Paper 1.

9 Aggregate demand and aggregate supply

Core (SL and HL)
9.3 a Referring to two factors that can cause an increase in short-run aggregate supply, analyse
the impacts on the economy in the short run. [10 marks]
9.4 a Referring to two factors that can cause an increase in aggregate demand, analyse the
impacts on the economy in the short run and in the long run. [10 marks]
9.5 a Explain the factors that can cause shifts in the long-run aggregate supply (LRAS) and
Keynesian AS curves over the long term. [10 marks]
9.6 a Explain how inflationary and recessionary (deflationary) gaps relate to the business cycle. [10 marks]
9.6 b ‘The monetarist/new classical and Keynesian models of the macroeconomy are based on
widely differing assumptions that determine whether or not an economy can automatically
reach full employment output.’ Using real-world examples, discuss this statement. [15 marks]
HL only
Chapter 9 has no HL only questions that are examined in Paper 1.

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 ECONOMICS FOR THE IB DIPLOMA: EXAM PRACTICE PAPER

10 Macroeconomic objectives I: Low unemployment, low and

stable rate of inflation
Core (SL and HL)
10.4 a Explain the possible causes of structural unemployment. [10 marks]
10.5 a ‘Regardless of the causes, deflation often poses great risks for the economy.’
Explain this statement. [10 marks]
10.6 a Explain the difficulties involved in measuring unemployment. [10 marks]
10.6 b Using real-world examples, discuss the consequences and costs of unemployment. [15 marks]
10.7 a Using diagrams, distinguish between cost-push and demand-pull inflation. [10 marks]
10.7 b Using real-world examples, examine possible consequences for an economy of a
high rate of inflation. [15 marks]
HL only
10.8 a Using the concept of the natural rate of unemployment, explain the relationship between
the long-run aggregate supply curve and the long-run Phillips curve. [10 marks]
10.8 b Using real-world examples, discuss the following statement: ‘If the priority of policy-makers
is to lower the economy’s unemployment, they must be prepared to accept a higher
rate of inflation.’ [15 marks]

11 Macroeconomic objectives II: Economic growth, sustainable

level of debt
Core (SL and HL)
11.3 a Explain the possible impact on economic growth of a government programme to significantly
increase spending on education. [10 marks]
11.4 a Using the PPC and AD-AS models, distinguish between the causes of short-term and
long-term economic growth.  [10 marks]
11.4 b Using real-world examples, discuss the possible trade-off between economic growth and
an economy’s rate of inflation. [15 marks]
11.5 a Oceanland produces two types of goods: civilian goods and military goods. Using the
production possibilities model, describe the factors that can cause economic growth
in Oceanland. [10 marks]
11.5 b ‘There is an inevitable trade-off between economic growth and sustainability.’
Using real-world examples, evaluate this statement. [15 marks]
HL only
Chapter 11 has no Part (b) HL only questions.
11.6 a Explain the potential importance of maintaining a sustainable level of government debt. [10 marks]

12 Economics of inequality and poverty

Core (SL and HL)
12.3 a Explain the following statement. ‘The Lorenz curve and the Gini coefficient are two
different ways to show the same thing.’ [10 marks]
12.3 b Some countries make their direct taxes more progressive, using the additional tax revenues
to increase transfer payments. Referring to the likely effects on income distribution and
using real-world examples, evaluate the use of these policies. [10 marks]
12.4 a Explain some of the difficulties in measuring poverty. [10 marks]

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 ECONOMICS FOR THE IB DIPLOMA: EXAM PRACTICE PAPER

12.4 b Using real-world examples, evaluate two methods that governments can use to reduce
poverty and economic inequality. [15 marks]
12.5 a Explain three causes of economic inequality and poverty. [10 marks]
12.5 b Using real-world examples, discuss the effects of increasing wealth and income inequalities
on economic growth, standards of living and social stability. [15 marks]
HL only
Chapter 12 has no HL only questions that are examined in Paper 1.

13 Demand-side and supply-side policies

Core (SL and HL)
13.3 a Explain one demand-side effect of a supply-side policy and one supply-side effect of a
demand-side policy. [10 marks]
13.4 a Explain the following statement: ‘The shape of the aggregate supply curve may be an
important factor influencing the effects of demand-side policies.’ [10 marks]
13.5 a Explain the following statement. ‘Whereas fiscal and monetary policies can be used to
close inflationary and recessionary (deflationary) gaps, they cannot address supply-side
causes of economic contractions (stagflation).’ [10 marks]
13.5 b ‘Economic growth can only be achieved through the use of supply-side policies.’
Using real-world examples, evaluate this statement. [15 marks]
13.6 a Distinguish between the policy of inflation targeting and policies that aim to balance the
objectives of full employment and low inflation. [10 marks]
13.6 b Using real-world examples, evaluate the use of demand-side policies as a method to
reduce inflation. [15 marks]
13.7 a Comment on the following statement. ‘Demand-side policies can only deal with reducing
short-term fluctuations (achieving price stability and low unemployment), whereas
supply-side policies can only promote long-term economic growth.’ [10 marks]
13.7 b Using real-world examples, evaluate the use of demand-side policies to lower an economy’s
rate of unemployment. [15 marks]
13.8 a Explain how labour market reforms intended to make the labour market more flexible
might contribute to growth in potential output. [10 marks]
13.8 b Using real-world examples, evaluate the policy of labour market reforms by considering
their impacts on employment, economic growth and equity. [15 marks]
HL only
Chapter 13 has no Part (b) HL only questions that are examined in Paper 1 (except automatic stabilisers;
see question 13.2 b in the digital coursebook).
13.9 a Referring to the role of central banks in the economy, and using a demand and supply of
money diagram, explain how interest rates are determined. [10 marks]
13.10 a Suppose the economy is in an inflationary gap. Explain two tools that the central bank can
use in an effort to close this gap. [10 marks]
13.11 a An economy that is in a recessionary gap has an unemployment rate of 10%.
The government decides to pursue demand-side policies to lower the rate of unemployment.
It estimates that the economy’s natural rate of unemployment is 5%, whereas in fact this is
actually 7%. Explain the possible consequences of its policies. [10 marks]

14 International trade: Part I

Core (SL and HL)
14.3 a Explain how accessing larger markets through an increase in trade can bring potential
benefits to both exporting countries and importing countries. [10 marks]
14.3 b Considering trade protection and its potential effects on stakeholders, use real-world
examples to compare and contrast export subsidies with production subsidies. [15 marks]
14.4 a Using diagrams, analyse the different market outcomes of quotas and export subsidies. [10 marks]

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 ECONOMICS FOR THE IB DIPLOMA: EXAM PRACTICE PAPER

14.4 b ‘When facing low cost imports, tariffs are preferable to other forms of trade protection
because they generate government revenue.’ Using real-world examples, examine the
strength of this argument. [15 marks]
HL only
14.5 a Explain how a country that has the absolute advantage over another country in the
production of two particular goods could still gain through trade. [10 marks]
14.5 b Using real-world examples, discuss circumstances where countries with differing factor
endowments and opportunity costs could gain from mutually beneficial trade. [15 marks]
14.6 b Using real-world examples, discuss circumstances where the theory of comparative
advantage may bring benefits to some countries while limiting others. [15 marks]

15 International trade: Part II

Core (SL and HL)
15.4 a Explain circumstances under which countries might defend their use of trade
protection policies. [10 marks]
15.4 b Using real-world examples, discuss the strengths and weaknesses of trade protection. [15 marks]
15.5 a Explain what type of trading bloc a group of neighbouring countries are most likely to
form initially. [10 marks]
15.5 b Using real-world examples, discuss the potential benefits and drawbacks of increasing
economic integration. [15 marks]
HL only
Chapter 15 has no HL only questions that are examined on Paper 1.

16 Exchange rates and the balance of payments

Core (SL and HL)
16.3 a Explain how a managed exchange rate can result in overvaluation or undervaluation of
a currency. [10 marks]
16.4 a Using diagrams, explain how changes in demand for net exports can affect a country’s
exchange rate. [10 marks]
16.4 b Using real-world examples, discuss the consequences for a country’s balance of payments
if the quantity of goods and services consumed lies beyond its production possibilities. [15 marks]
16.5 a Using diagrams, explain the differences between exchange rate determination in floating and
fixed exchange rate systems. [10 marks]
16.5 b Using real-world examples, examine the impact on the current account balance when
countries experience a change in their currency’s exchange rate. [15 marks]
16.6 a Explain three factors that may lead to an appreciation of a country’s exchange rate. [10 marks]
16.6 b Using real-world examples, compare and contrast the possible consequences on an
economy of (a) a currency appreciation and (b) a currency depreciation, on unemployment,
the rate of inflation and economic growth. [15 marks]
HL only
Chapter 16 has no HL only questions that are examined on Paper 1.

17 Further topics on exchange rates and the balance of payments

HL only
17.3 a Explain how imbalances in a country’s current account can cause changes in its exchange rate. [10 marks]
17.3 b ‘A current account deficit can be corrected through a policy of currency depreciation.’
Using real-world examples, discuss this view. [15 marks]
17.4 b Using real-world examples, evaluate the desirability of a fixed versus floating exchange
rate system. [15 marks]
17.5 b Using real-world examples, discuss the consequences of a persistent current account surplus. [15 marks]

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 ECONOMICS FOR THE IB DIPLOMA: EXAM PRACTICE PAPER

18 Understanding economic development

Core (SL and HL)
18.3 a Explain how achieving the Sustainable Development Goals (SDGs) is necessary to achieve
lasting economic development. [10 marks]
18.3 b ‘For economic development to occur, economic growth is required.’ Using real-world
examples, discuss to what extent you agree with this statement. [15 marks]
18.4 a Explain why economic development is ‘multidimensional’ and therefore requires many
different kinds of measures. [10 marks]
18.4 b Using real-world examples, examine the extent to which indicators can accurately measure
economic development. [15 marks]
HL only
Chapter 18 has no HL only questions that are examined on Paper 1.

19 Barriers to economic growth and economic development

Core (SL and HL)
19.3 a Explain how communities can become trapped in poverty that lasts for generations. [10 marks]
19.3 b Using real-world examples, compare and contrast the impact on economic growth and
economic development when countries experience different climates and geographies. [15 marks]
19.4 a Analyse three barriers that countries might face when trying to achieve economic growth
and economic development. [10 marks]
19.4 b Using real-world examples, examine the role of low levels of human capital as a barrier to
economic growth and economic development. [15 marks]
19.5 a Explain how rising economic inequalities and a large informal economy can act as barriers
to economic growth and economic development. [10 marks]
19.5 b Using real-world examples, examine the role of discrimination as a barrier to economic
growth and economic development. [15 marks]
HL only
Chapter 19 has no HL only questions that are examined on Paper 1.

20 Strategies to promote economic growth and economic development

Core (SL and HL)
20.3 a Explain three redistribution policies and how they can promote economic growth and
economic development. [10 marks]
20.3 b Using real-world examples, evaluate the effectiveness of using market-based supply-side
policies to achieve economic growth and economic development. [15 marks]
20.4 a Explain the challenges and benefits of providing education, health care and infrastructure
to increase economic development. [10 marks]
20.4 b Using real-world examples, evaluate the consequences of liberalising trade for a
developing country. [15 marks]
HL only
Chapter 20 has no HL only questions that are examined on Paper 1.

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