ECONOMICS FOR THE IB DIPLOMA: MARKSCHEMES

Paper 3 (HL only)

markscheme
* Note that Questions 1 and 2 appear in the Digital Coursebook.

Question 3
a i Reserve assets = 14.4 − (4.5 + 1.7 + 4.7) = 14.4 − 10.9 = 3.5 billion Rvl
Marks allocation
for some valid workings [1 mark]
for the correct answer [1 mark]
ii −17.0 − 7.5 + 2.5 + 5.7 = −16.3, or deficit of 16.3 billion Rvl
Marks allocation
for the correct calculation [1 mark]
for stating it is a deficit [1 mark]
iii Marks allocation
For explaining that debits are outflows of money while credits are inflows;
when the debits and credits are added up they are equal to zero, since in
the balance of payments the inflows must be equal to the outflows. [2 marks]
For explaining that, therefore, if one or more accounts are in deficit the
other account or accounts must be in surplus; since the capital account is
as a rule relatively small in relation to the others, this means that a deficit
in the current account must be roughly matched by a surplus in the
financial account and vice versa. [2 marks]
iv Marks allocation
For explaining that Income in the balance of payments refers to inflows
from abroad minus outflows of rents, interest and profits; since income is
positive, this means that the inflows are greater than outflows, while
Current transfers refer to inflows arising from gifts, foreign aid, pensions
or remittances; since Current transfers are also positive, this also means
inflows are greater than outflows. [1 mark]
For explaining that GNI = GDP + factor income received from abroad
minus factor income sent abroad; the most important items included
here in factor income are profits and remittances, therefore GNI must
be greater than GDP. [1 mark]

1 Economics for the IB Diploma - Tragakes: Rock-Lacroix © Cambridge University Press 2021
 ECONOMICS FOR THE IB DIPLOMA: MARKSCHEMES

v Marks allocation
For drawing a correctly labelled foreign exchange diagram for the Rvl where
there is an increase in demand for Rvl leading to an increase in its value. [2 marks]
For explaining that the positive value of Reserve assets indicates an inflow
into Riverland of 3.5 billion Rvl, according to question a i, meaning the central
bank sold foreign exchange and bought Rvl, causing the demand curve to shift
to the right, leading to an appreciation of the Rvl (alternatively it prevents
a depreciation that may have occurred in the absence of central bank intervention). [2 marks]
vi Marks allocation
For describing that if Riverland switched to a floating exchange rate system,
there would be an excess of debits over credits in the overall balance of payments
of 3.5 billion Rvl due to lack of central bank intervention, resulting in a
depreciation of the Rvl. [2 marks]
1
vii Multiplier= = 5
1
5 1.5
1.5 billion Rvl = 5 × G, therefore G = = 0.30 billion Rvl
5
Marks allocation
for correctly calculating the multiplier [1 mark]
for correctly calculating the increase in G [1 mark]
viii a 225 000 + 1 900 000 + 375 000 = 2 500 000
Marks allocation
for some valid workings [1 mark]
for the correct answer [1 mark]
b Answers may include:
•• Riverland must find ways to increase the demand for Rvl or reduce supply
of Rvl in order to maintain its exchange rate in view of its large current
account deficit.
•• Policies to increase demand for Rvl:
•• The central bank can buy Rvl by selling reserve assets, but at some
point it will run out of reserve assets to sell.
•• The central bank may raise interest rates, but this will have contractionary
effects on the economy.
•• The government can borrow from abroad, but this must be repaid with
interest with possible negative effects on the economy.
•• Policies to decrease supply of Rvl:
•• contractionary fiscal and monetary policies to reduce imports
•• exchange controls.
•• A combination of policies.
Marks allocation
for full marks, the response must:
•• identify and fully explain a policy
•• use economic theory effectively to back up the recommended policy
•• use economic terms correctly
•• use information from the text or data appropriately to support the arguments
•• contain effective synthesis of evaluation [10 marks]

2 Economics for the IB Diploma - Tragakes: Rock-Lacroix © Cambridge University Press 2021