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1.
(i) Calculate the monetary change and percentage increase in economic growth 2012 to 2013. [3]

Monetary change :1 317 656 - 1 294 103 = 23 553 Monetary increase is $ 23 553

Percentage Change: (23 553 / 1 294 103) x 100 = 1.82%

Answer: increase of $23 553 millions and 1.82%

(ii) Calculate the increase in government spending from 2012 to 2013. [1]

Government spending: 338 620 - 337 586 = 1034 Increase of $1 034 million

(iii) The marginal propensity to consume domestically produced goods in Canada is 0.3, using the
answer calculated in part (ii) calculate the effect of government spending 2012-13 on GDP. [3]

Increase in GDP = 1 034 x (1 / (1- 0.3)) when o.3 is MPCdom => 1 034 x 1.43

Increase in GDP is $1 478.62 million

(iv) Explain why the answer calculated in part (iii) is not the same as the change calculated in part (i). [2]

Level Descriptor Marks

0 The work does not reach a standard described by the descriptors below. 0

1 Limited understanding. 1

For explaining that government spending is only one component of GDP or the
multiplier assumes ceteris paribus, so a change in one of the other components
explains the difference in the actual change in GDP (part (i)) and that calculated
as a result of the change in government spending (part (iii)).

2 Clear understanding. 2

For explaining that government spending is only one component of GDP and the
multiplier assumes ceteris paribus, so a change in one of the other components
explains the difference in the actual change in GDP (part (i)) and that calculated
as a result of the change in government spending (part (iii)).
 -2-
(v) Describe the macro-economic relationship that is illustrated by the Phillips Curve. [2]

Level Descriptor Marks

0 The work does not reach a standard described by the descriptors below. 0

1 Vague explanation. 1

For explaining that the Phillips Curve has some relationship between inflation,
unemployment and/or some other macro-economic indicator

2 Precise explanation. 2

For explaining that the Phillips Curve illustrates the trade-off between inflation
and unemployment that is found in the short run

(vii) Sketch a diagram of the Phillips Curve, labelling the axis, on the graph below. [3]

(viii) With reference to the table, explain to what degree the figures follow the relationship suggested
by the Phillips Curve. [3]

Level Descriptor Marks

0 The work does not reach a standard described by the descriptors below. 0

1 Vague explanation and/or no reference to the figures. 1

For explaining that the figures only once follow the trade-off suggested by the
Phillips curve and in all other periods the level of inflation either falls or rises with
unemployment

2 Precise explanation and reference to the figures. 2

For explaining that the figures only once follow the trade-off suggested by the
Phillips curve, in the period 2013-2014, and in all other periods the level of
inflation either falls or rises with unemployment, 2011-13 and 1014-2015
N.B. only one mark is available if there is no reference to the figures
 -3-
(ix) Explain why the Phillips Curve may shift in the long run. [3]

Level Descriptor Marks

0 The work does not reach a standard described by the descriptors below. 0

1 Vague explanation. 1

For explaining that the Phillips curve assumes that aggregate supply remains
constant or any shift in Aggregate supply will shift the Phillips curve or this will
break the trade off (so the Phillips Curve becomes vertical in the long run)

2 Limited explanation. 2

For explaining that the Phillips curve assumes that aggregate supply remains
constant or any shift in Aggregate supply will shift the Phillips curve or this will
break the trade off (so the Phillips Curve becomes vertical in the long run)
Any two points of the three

3 Precise explanation 3

For explaining that the Phillips curve assumes that aggregate supply remains
constant and any shift in Aggregate supply will shift the Phillips curve and this
will break the trade off (so the Phillips Curve becomes vertical in the long run)

(b) Using the data provided and your knowledge of economics, recommend a policy which the Canadian
government could introduce to reduce unemployment and stimulate economic growth. [10]

Possible policies may include (but are not restricted to):

● Fiscal policy (increased government spending or reduced taxation)

● Monetary policy (increased money supply and reduced interest rates)
● Market-based supply-side policy (incentive related policy to increase investment)
● Interventionist supply-side policy (infrastructure projects or investment in R & D)
 -4-

.
 -5-
2. The table below shows data for an organic dairy Finnish farm of 50 dairy cows with 175 hectares in
2020. The farm produces only milk and each cow produces, on average, 45 litres per day. The farm is
a price taker with the average price paid for organic milk to farmers in 2020 was €35/100 litres.

(i) Explain the term price taker: [2]

Level Descriptor Marks

0 The work does not reach a standard described by the descriptors below. 0

1 Limited explanation. 1

For explaining that the firm is so small that it has no control over the price (taking
the price from market equilibrium) or faces a perfectly elastic demand and/or
average revenue curve (function)

2 Clear explanation. 2

For explaining that the firm is so small that it has no control over the price (taking
the price from market equilibrium) and faces a perfectly elastic demand and/or
average revenue curve (function)

(ii) Calculate the total annual production of milk and the total revenue of the farm received from
sales of milk: [2]

Total annual milk production is: 50 x 45 x 365 = 821 250

Total Revenue is 821 250 x 0.35 = 287 437.5

Answer: Milk production is 821 250 litres and revenue is €287 437.5

The farm receives an annual subsidy from the government (both national and EU) of €320/hectare while
the fixed cost of capital is €135 000 per annum and the variable cost of land and labour is €0.25/litre .

(iii) Calculate the total subsidy received by the farm and the value of the subsidy per litre
produced: [3]

Subsidy: 175 x 320 =56 000 Answer: €56 000

(iv) Calculate the total cost of milk production for the farm: [2]

Total cost: 135 000 + (821 250 x 0.25) = 340 321.5 Answer: €340 321.5

(v) Calculate the total annual profit/loss of the farm: [2]

Total profit = Total revenue + subsidy - total cost

343 437.5 - 340 321.5 = 3 116

Answer: Profit of €3 116

 -6-
(vi) Explain the term normal profit: [2]

Level Descriptor Marks

0 The work does not reach a standard described by the descriptors below. 0

1 Vague explanation. 1

A very small amount of profit or zero profit.

2 Clear explanation. 2

For explaining that the normal profit is the minimum amount of profit required to
keep the entrepreneur’s firm operating or the opportunity cost of the capital
involved in production.

(vii) Sketch a diagram in the space below illustrating a firm operating under perfect competition
making normal profit: [3]
 -7-

(vii) Explain two possible reasons why the milk farm, despite being a price taker and making normal
profit may not be operating under perfect competition: [4]

Level Descriptor Marks

0 The work does not reach a standard described by the descriptors below. 0

1 Limited explanation. 1-2

One reason and explanation or two reasons without explanation.

2 Clear explanation. 3-4

Two reasons and explanation

Reasons may include:
● Lack of perfect knowledge
● Existence of negative externalities (unsustainable)
● Some firms benefit from economies of scale
● Good is not homogenous (milk has different quality and price)

(b) Using the data provided and your knowledge of economics, recommend a policy which the
government could introduce to improve the efficiency of the dairy market. [10]

Possible policies may include (but are not restricted to):

● Removing all subsidies (allowing the free market to operate).

● Increasing subsidies to promote sustainable farming (reducing negative externalities).
● Intervene with legal restrictions to promote sustainable farming (reducing negative
externalities)
● Remove legal restrictions to promote free market
-8-