Economics 3c [127 marks]

1a. [2 marks]
Table 1 provides information about Fairland.
Table 1

Calculate the unemployment rate in Fairland using Table 1.

Markscheme
Unemployed Labourfor ce−Employed
Unemployment rate = × 100 = × 100 =
Labourforce Labourforce
0.62× 231−105 143−105
× 100 = × 100
0.62× 231 143
Any valid working (such as the correct calculation of the labour force) is sufficient for [1].
= 26.57 % or 26.69 %
(this depends on when rounding has taken place)
An answer of 26.57 or 26.69 without working is sufficient for [1].

1b. [4 marks]
Outline two difficulties in measuring unemployment.
Markscheme

Possible difficulties may include:

• some of the unemployment is hidden, because some people who are able and willing
to work have become discouraged and have given up looking for a job
• some of the employed are underemployed and, while officially working, do not fully
utilize their time (involuntary part-timer workers) or skills/experience
• there may be false claims by those who seek to obtain unemployment benefits, or
those in the informal labour market seeking to avoid income tax) thus distorting the
official statistics
• the unemployment figure is an average and ignores regional, ethnic, age and gender
disparities.
Any other reasonable response should be rewarded.
1c. [1 mark]
Figure 6 illustrates Fairland’s demand (D) for and supply (S) of low-wage labour.
Figure 6
In order to raise the living standards of low-wage workers, the government of Fairland has
decided to impose a minimum wage of $10 per hour.
Draw and label a curve that illustrates Fairland’s minimum wage on Figure 6.
Markscheme

Award [1] for an accurate, labelled minimum wage line.

1d. [2 marks]
Calculate the resulting unemployment among the low-wage workers.

Markscheme
Unemployment = number of workers willing to supply their labour − number of workers
demanded by firms = 40 million − 14 million
Any valid working is sufficient for [1].
= 26 million
An answer of 26 million or 26 without working is sufficient for [1].
1e. [2 marks]
The marginal rates of income tax in Fairland are given in Table 2.
Table 2

Define the term marginal rate of tax.

Markscheme

1f. [2 marks]
Fred is a low-wage worker in Fairland. As a result of the minimum wage his income will
increase from $15 000 per year to $19 000 per year.
Calculate how much additional income tax Fred will need to pay.

Markscheme
3000 × 10 % + 1000 × 20 %
Any valid working is sufficient for [1].
= $500
An answer of $500 or 500 without any working is sufficient for [1].
OR
Initial tax paid = 10 000 × 5 % + 5000 × 10 % = 1000
New tax paid = 10 000 × 5 % + 8000 × 10 % + 1000 × 20 % = 1500
Any valid working is sufficient for [1].
Change in tax paid = 1500 − 1000
= $500
An answer of $500 or 500 without any working is sufficient for [1].
NB Responses which apply the bands such that, for example, 10% is charged on $7 999 rather
than $8 000 may be fully rewarded.

1g. [4 marks]
Using an AD/AS diagram to support your answer, explain the mechanism through which
monetary policy can help an economy reduce the level of unemployment.
Markscheme
Any form of aggregate supply curve (SRAS, LRAS or Keynesian AS) is acceptable.
Candidates who incorrectly label diagrams can receive a maximum of [3].
For AD/AS, the vertical axis may be price level or average price level. The horizontal axis may
be output, real output, national output, real national output, national income, or GDP. A title
is not necessary.

Any other reasonable response should be rewarded. For example, a diagram showing the
labour market, with axes labelled “wage rate” and “employment” or “quantity of labour”, with
accurate explanation may be fully rewarded.
1h. [2 marks]
State two interventionist supply-side policies that are likely to increase the demand for
low-wage labour in Fairland.

Markscheme
Award [1] for each appropriate policy stated.
Policies may include:
• investment in infrastructure
• tax cuts or tax allowances in industries that hire low-wage labour
• subsidies for firms that hire low-wage labour
• Investment in education and training/human capital
• Investment in health.
Examiners should be aware that some candidates may take alternative approaches, which, if
appropriate, should be fully rewarded.
1i. [2 marks]
State two market-based supply-side policies that are likely to increase the supply of labour
in Fairland.

Markscheme

Examiners should be aware that some candidates may take alternative approaches, which, if
appropriate, should be fully rewarded eg cuts in employee social security contributions.
1j. [2 marks]
Government economists have estimated that citizens of Fairland spend 10 % of any
additional income on imported goods and pay a tax rate of 20 % on every extra dollar of
income. The marginal propensity to save for Fairland’s citizens is 10 %.
Using this information, calculate the value of the Keynesian multiplier.

Markscheme
1 1
Multiplier= =
MPS+ MPT + MPM 0.1+0.2+0.1
Any valid working is sufficient for [1].
= 2.5
An answer of 2.5 without any working is sufficient for [1].
1k. [2 marks]
Using your answer to part (i), calculate the increase in government spending necessary to
increase nominal GDP by $100 billion.
Markscheme
100
Change in government spending =
2.5

Any valid working is sufficient for [1].

= $40 billion
An answer of 40 billion or 40 or $40 billion without any working is sufficient for [1].
OFR applies.
2a. [2 marks]
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).

Define the term social (community) surplus.

Markscheme

2b. [2 marks]
Calculate the social (community) surplus in the market for cotton in San Marcus.

Markscheme
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].
2c. [2 marks]
The Government of San Marcus decides to provide a subsidy equal to $8 per kilogram to its
producers of cotton.
Draw and label the new supply curve following the granting of the subsidy to domestic
cotton producers on Figure 3.

Markscheme

Drawing a new supply curve parallel and below / to the right of the original supply curve is
sufficient for [1].
2d. [2 marks]
Calculate the cost to the government of San Marcus of providing this subsidy to domestic
cotton producers.

Markscheme
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.
2e. [2 marks]
Calculate the resulting change in producer surplus following the introduction of the
subsidy to cotton producers in San Marcus.

Markscheme
( 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)
( 50+75 )
• correct workings for the trapezium × ( 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.
2f. [2 marks]
Calculate the change in the consumer surplus resulting from the subsidy.

Markscheme
( 50+75 )
× ( 10−5 ) +1000 OR
2
(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)
( 50+75 )
• correct workings for the trapezium × ( 10−5 ) +1000
2
= $312 500
An answer of 312 500 or $312 500 (without working) is sufficient for [1].
OFR may apply.
2g. [4 marks]
Explain two reasons why the government of San Marcus may have decided to grant a
subsidy to its cotton producers.
Markscheme

2h. [2 marks]
San Marcus now joins the World Trade Organization (WTO) and agrees to slowly liberalize
trade, becoming an open economy.
State two functions of the WTO.

Markscheme
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).
2i. [1 mark]
The world price for cotton is $2 per kg. The WTO permits the government of San Marcus to
maintain the $8 subsidy.
Plot and label the world cotton supply curve that San Marcus now faces on Figure 3.
Markscheme

Award [1] for an accurate and labelled world cotton supply curve.
2j. [2 marks]
With reference to your answer to question (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.

Markscheme
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.
2k. [4 marks]
Explain one possible advantage and one possible disadvantage for the San Marcus
economy of the decision to join the WTO and slowly liberalize trade.
Markscheme

NB Responses should refer to the economy of San Marcus, not just one industry such as the
consumers or producers of cotton.
3a. [2 marks]
The information provided in Table 1 represents data for Country X in 2015.
Table 1

Calculate gross domestic product (GDP) for Country X in 2015.

Markscheme
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].
3b. [1 mark]
Calculate gross national income (GNI) for Country X in 2015.

Markscheme
GDP + net factor income = GNI
1356 − 111 = $1245 billion
An answer of 1245 (without working) is sufficient for [1].
OFR applies.
3c. [1 mark]
The information provided in Table 2 relates to Country Y.
Table 2

Calculate the rate of consumer price inflation in 2016.

Markscheme

[ ( 109.21−105.35 )
105.35 ]× 100=3.66 %

An answer of 3.66 (without working) is sufficient for [1].

3d. [2 marks]
Using the GDP deflator, calculate the percentage change in real GDP between 2014 and
2015.

Markscheme
real GDP in 2015
4814
× 100=4579.96
105.11
rate of change

[ ( 4579.96−4465 )
4465 ]
× 100Any valid working is sufficient for [1].

= 2.57 %
An answer of 2.57 (without working) is sufficient for [1].
3e. [1 mark]
Figure 4 represents the circular flow of income in Country A, with values in billions of
dollars ($).
Figure 4

Identify the term represented in Figure 4 by the letter V.

Markscheme
Income OR factor income OR household income OR factor payments.
Award [1] for identifying the term correctly.
3f. [1 mark]
Identify the term represented in Figure 4 by the letter M.

Markscheme
imports
Award [1] for identifying the term correctly.
3g. [2 marks]
State the four factor payments which constitute the income flow in the circular flow of
income model.

Markscheme
rent, wages, interest and profit
Award [1] for three payments provided.
Award [2] for four payments provided.
3h. [2 marks]
Define the term leakages.
Markscheme

3i. [1 mark]
Determine the size of the budget surplus/deficit and state which using Figure 4.

Markscheme
budget surplus of $5 billion
Award [1] for determining the size of the budget correctly.
3j. [4 marks]
The government of Country A decides to increase the level of taxation to $34 billion.
Using an AD/AS diagram, explain how this may affect the level of unemployment.

Markscheme
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.
3k. [2 marks]
Table 3 provides information on the rates of direct tax in Country A.
Table 3

Calculate the average tax rate for an individual who earns $64 000 per year.

Markscheme
12 000 × 5 % + 15 500 × 12 % + 32 500 × 21.5 % + 4 000 × 32 %
= $10 727.50
Working is not required.
average tax rate

( 1064727.5
000 )
×100

Any valid working is sufficient for [1].

= 16.76 %
An answer of 16.76 or 0.17 (without working) is sufficient for [1].
3l. [2 marks]
Table 4 provides information on the household distribution of income in Country A.
Table 4
Draw and label the Lorenz curve diagram for Country A on Figure 5.
Markscheme

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.
3m. [4 marks]
Explain how an increase in the top rate of direct tax from 32 % to 36 % might affect equity
and efficiency in Country A.
Markscheme

NB A response which explains that inequality will be reduced, without explicitly using the
term equality/inequality, should be rewarded.
4a. [2 marks]
The following information in parts (a) to (d) refers to the economy of Country Alpha.
Table 1

Using Table 1, calculate the unemployment rate.

Markscheme
1.12
×100
( 13.72+ 1.12 )
Any valid working is sufficient for [1]
= 7.55 %
An answer of 7.55 (without workings) is sufficient for [1].
4b. [1 mark]
The graph below shows the short-run Phillips curve (SRPC) for Country Alpha.

Using the graph, 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

Markscheme
Both cells must have the correct numbers entered for [1].
4c. [4 marks]
The government in Country Alpha reduces income taxes in 2019.
Using information from the graph to support your answer, explain the likely effect on the
inflation rate and the unemployment rate.

Markscheme

N.B.: A response which does not refer to AD (or to consumption) may be awarded a maximum
of [2].
4d. [1 mark]
The natural rate of unemployment in Country Alpha is 5 %.
On the diagram draw and label the long-run Phillips curve (LRPC).

Markscheme
A correctly drawn LRPC earns [1].
4e. [1 mark]
The price of oil is expected to rise significantly, causing a sustained increase in energy
costs.
Describe the likely effect of this sustained cost increase on the short-run Phillips curve
(SRPC).

Markscheme
A shift to the right or vertical upward shift or an outward shift of SRPC is sufficient for [1].
4f. [2 marks]
Explain the reason for your answer to part (d) (i).
Markscheme

4g. [2 marks]
The following data relate to Country Beta (all figures are in $ billions).
Table 3

Using the data in Table 3, calculate the level of investment.

Markscheme
71 + l + 32 + 12 − 15 = 109
Any valid working is sufficient for [1].
l = $9 billion
An answer of $9 billion or 9 billion (without workings) is sufficient for [1].
4h. [2 marks]
In Country Beta, investment by firms increases in the first quarter of 2019.
State two possible reasons for the increase in investment by firms.

Markscheme

4i. [2 marks]
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.
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.

Markscheme
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.
4j. [2 marks]
In Country Beta, investment by firms increases in the first quarter of 2019.
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.

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.

Markscheme
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.
4k. [2 marks]
Calculate the real growth rate in 2018 using the figures in Table 4 below.
Table 4
Markscheme

( 99.4
109
)× 100=109.66
( 101.2
107
) ×100=105.73
( 109.66
105.73 )
=1.03717

( 1.03717−1 ) × 100
Any valid working is sufficient for [1].
= 3.72 %
An answer of 3.71 % (due to no early rounding) should also be accepted.
An answer without working is sufficient for [1].

4l. [2 marks]
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.
Calculate the maximum possible increase in gross domestic product (GDP) that could result
from the rise in investment.

Markscheme
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].
4m. [4 marks]
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.
Markscheme

5a. [1 mark]
The following diagram illustrates the production possibilities of two countries, Country A
and Country B, in the production of cotton and bananas.
Using the diagram, calculate the opportunity cost of producing one tonne of bananas in
Country A.

Markscheme
3
of a tonne of cotton (0.375 tonne cotton or 375 kilograms of cotton or 0.38 tonne cotton).
8
5b. [2 marks]
Using information provided in the diagram to support your answer, determine which
country should specialise in the production of cotton.
Markscheme

5c. [2 marks]
Distinguish between the terms absolute advantage and comparative advantage.

Markscheme

5d. [4 marks]
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.
Markscheme

5e. [2 marks]
Table 5 provides information relating to the Balance of Payments for Urbania for 2017.
Table 5
Urbania has a current account deficit of $125 million in 2017.
Calculate the value of V (exports of services) for Urbania in 2017.

Markscheme
1527 + V − 1393 − 954 − 35 − 49 = −125
Any valid working is sufficient for [1].
V = $779 million
An answer of 779 without working is sufficient for [1].
5f. [2 marks]
Distinguish between direct investment and portfolio investment.
Markscheme

5g. [2 marks]
Using the information in Table 5, calculate the financial account balance.

Markscheme
Current account + capital account + financial account = 0
− 125 + (6 + 11) + financial account = 0
Any valid working is sufficient for [1].
Financial account = $108 million
5h. [1 mark]
Using your answer to part (g)(i), calculate the value of W (reserve assets) in Table 5.

Markscheme
Net portfolio + net direct + W = financial account
285 − 196 + W = 108
W = $19 million
OFR applies.
5i. [1 mark]
Using your answer to part (g)(ii), describe how the level of reserve assets in Urbania
changed by the end of 2017.

Markscheme
The level of reserve assets in Urbania has decreased.
OFR applies.
5j. [2 marks]
The government of Urbania is concerned that the rate of inflation is significantly higher
than in its close trading partners.
Outline how Urbania’s relatively high rate of inflation might affect its current account
balance.

Markscheme

5k. [2 marks]
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.

Markscheme

5l. [4 marks]
Explain how a depreciation of the Urbanian dollar ($) might result in a J-curve effect.

Markscheme

N.B.: A sketch of a J curve, without any explanation, would only be sufficient for 1 mark
(only if it is properly labelled).

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