N15/3/ECONO/HP2/ENG/TZ0/XX/M

Markscheme

November 2015

Economics

Higher level

Paper 2

20 pages
 –2– N15/3/ECONO/HP2/ENG/TZ0/XX/M

This markscheme is confidential and for the exclusive use

of examiners in this examination session.

It is the property of the International Baccalaureate and

must not be reproduced or distributed to any other person
without the authorization of the IB Assessment Centre.
 –3– N15/3/ECONO/HP2/ENG/TZ0/XX/M

Use the paper-specific markscheme together with the markbands. Award up to the maximum
marks as indicated.

Section A
1. (a) (i) List two components of the financial account (paragraph ). [2]

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

1 Vague response. 1
Any one of the following components:
• direct investment (net)
• portfolio investment (net)
• reserve assets (funding).

2 Accurate response. 2
Any two of the following components:
• direct investment (net)
• portfolio investment (net)
• reserve assets (funding).

(ii) Define the term consumption indicated in bold in the text (paragraph ). [2]

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

1 Vague definition. 1
The idea that it is a component of AD, or that it is consumer spending.

2 Accurate definition. 2
An explanation that it is spending by households (consumers) on
goods and services.
 –4– N15/3/ECONO/HP2/ENG/TZ0/XX/M

(b) Explain the difference between direct/portfolio investment and income from
investment in the balance of payments. [4]

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

1 There is a partially correct explanation. 1–2

For an explanation that direct/portfolio investment is a component of
the financial account involving the purchase of assets in another
country or for an explanation that income from investment is a
component of the current account involving the return gained from
investments such as profit (or dividends or interest) in another
country.

2 There is a correct explanation. 3–4

For an explanation that direct/portfolio investment is a component of the
financial account involving the purchase of assets in another country and
for an explanation that income from investment is a component of the
current account involving the return gained from investments such as profit
(or dividends or interest) in another country.

(c) Using an exchange rate diagram, explain how the problems in the eurozone
impacted the Swiss franc (paragraph ). [4]

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

1 There is a correct diagram or an accurate written response. 1–2

For drawing a correctly labelled exchange rate diagram showing a shift of
the demand curve of the Swiss franc to the right and an increase in the
exchange rate or for an explanation that people wanted a safe haven, so
demanded more Swiss francs, increasing the price (exchange rate) of the
Swiss franc.

2 There is a correct diagram and an accurate written response. 3–4

For drawing a correctly labelled exchange rate diagram showing a shift of
the demand curve of the Swiss franc to the right and an increase in the
exchange rate and for an explanation that people wanted a safe haven, so
demanded more Swiss francs, increasing the price (exchange rate) of the
Swiss franc.

Candidates who incorrectly label diagrams can be rewarded with a maximum of

[3].
 –5– N15/3/ECONO/HP2/ENG/TZ0/XX/M

For an exchange rate diagram, the vertical axis may be exchange rate, price of
Swiss francs in euro, euro/Swiss franc, Swiss franc/euro or euros per Swiss
franc. The horizontal axis should be quantity, or quantity of Swiss francs. A title
is not necessary.
 –6– N15/3/ECONO/HP2/ENG/TZ0/XX/M

(d) Using information from the text/data and your knowledge of economics, discuss
the consequences of a rising current account surplus. [8]

Examiners should be aware that candidates may take a different approach which,
if appropriate, should be rewarded.

Do not award beyond Level 2 if the answer does not contain reference to the
information provided.

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

1 Few relevant concepts are recognized. 1–2

There is basic knowledge/understanding.

2 Relevant concepts are recognized and developed in reasonable depth. 3–5

There is clear knowledge/understanding.
There is some attempt at application/analysis.

3 Relevant concepts are recognized and developed in reasonable depth. 6–8

There is clear knowledge/understanding.
There is effective application/analysis.
There is synthesis/evaluation, supported by appropriate theory and
evidence.

Command term
“Discuss” requires candidates to offer a considered and balanced review that
includes a range of arguments, factors or hypotheses. Opinions or conclusions
should be presented clearly and supported by appropriate evidence.

Responses may include:

• definition of a current account surplus
• reference to current account surplus of 11 % (paragraph )
• implications of the increase from 9 % (paragraph )
• record current account surplus linked to strong investment income (paragraph )
• investment income may be valuable to economy, increasing AD
• an appreciation of the Swiss franc (paragraph )
• strong Swiss franc may lead to reduced export competitiveness
• surplus on balance of trade in goods and services is falling (paragraph ) may be due to
strong Swiss franc
• increased attraction of imports due to strong currency (3% increase in expenditure on
imports (paragraph )
• large purchases of foreign exchange/selling of Swiss francs needed (paragraph ) to
reduce pressure on Swiss franc
• implications for employment
• current account surplus in Switzerland means trading partners have current account
deficits. This may damage trade relations/employment in other countries.

Any reasonable discussion.

 –7– N15/3/ECONO/HP2/ENG/TZ0/XX/M

2. (a) (i) Define the term fixed exchange rate indicated in bold in the text
(paragraph ). [2]

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

1 Vague definition. 1
The idea that a country's currency is fixed by the government (central
bank).

2 Accurate definition. 2
An explanation that a currency’s value is fixed against any one of the
following:
• the value of another currency
• a basket of other currencies
• gold.

(ii) Define the term economic growth indicated in bold in the text
(paragraph ). [2]

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

1 Vague definition. 1
The idea that it is an increase in GDP (output).

2 Accurate definition. 2
An explanation that it is the growth in the value of real output (over
time) or an explanation that it is growth in real GDP (real output).
 –8– N15/3/ECONO/HP2/ENG/TZ0/XX/M

(b) Using an exchange rate diagram, explain how the United Arab Emirates (UAE)
could maintain a fixed value of its dirham to the US dollar if there were upward
pressure on the dirham. [4]

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

1 There is a correct diagram or an accurate written response. 1–2

For drawing a correctly labelled currency diagram showing a fixed
exchange rate value, an equilibrium above the fixed value and an
increase in the supply curve to return the currency to the fixed value or
for explaining that if the currency goes above its fixed value, the central
bank (government/UAE) will have to intervene and sell its currency
(buy foreign currency) to restore the fixed value of the currency.

2 There is a correct diagram and an accurate written response. 3–4

For drawing a correctly labelled currency diagram showing a fixed
exchange rate value, an equilibrium above the fixed value and an
increase in the supply curve to return the currency to the fixed value
and for explaining that if the currency goes above its fixed value, the
central bank (government/UAE) will have to intervene and sell its
currency (buy foreign currency) to restore the fixed value of the
currency.

An alternative correct answer is for the diagram to show a decrease in demand

for the dirham to return the currency to its fixed value, with an explanation that
the central bank can lower interest rates, making financial investments in the
UAE less attractive, thus causing a fall in the demand for the dirham. If correctly
explained a diagram showing a decrease in demand should be fully rewarded
with a maximum of [4].

Candidates who incorrectly label diagrams can be rewarded with a maximum of

[3].

For an exchange rate diagram, the vertical axis may be exchange rate, price of
dirham in US$, US$/dirham, dirham/US$, or US dollars per dirham. The
horizontal axis should be quantity, or quantity of dirham. A title is not necessary.

N.B. The cause of the increase in the dirham’s value may or may not be shown.
 –9– N15/3/ECONO/HP2/ENG/TZ0/XX/M

(c) Distinguish between a devaluation and a depreciation of a currency. [4]

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

1 There is limited understanding. 1–2

A devaluation is the deliberate downward adjustment of the official
exchange rate by the central bank (government) to reduce the
currency's value in a fixed exchange rate system or in contrast, a
depreciation is a fall in the value of a currency due to market forces in
a floating exchange rate system.

2 There is clear understanding. 3–4

A devaluation is the deliberate downward adjustment of the official
exchange rate by the central bank (government) to reduce the
currency's value in a fixed exchange rate system and in contrast, a
depreciation is a fall in the value of a currency due to market forces in
a floating exchange rate system.

(d) Using information from the text/data and your knowledge of economics, discuss
the view that some Gulf States “should consider moving from a fixed exchange
rate” to “a floating exchange rate system” (paragraph ). [8]

Examiners should be aware that candidates may take a different approach which,
if appropriate, should be rewarded.

Do not award beyond Level 2 if the answer does not contain reference to the
information provided.

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

1 Few relevant concepts are recognized. 1–2

There is basic knowledge/understanding.

2 Relevant concepts are recognized and developed in reasonable depth. 3–5

There is clear knowledge/understanding.
There is some attempt at application/analysis.

3 Relevant concepts are recognized and developed in reasonable depth. 6–8

There is clear knowledge/understanding.
There is effective application/analysis.
There is synthesis/evaluation, supported by appropriate theory and
evidence.

Command term
“Discuss” requires candidates to offer a considered and balanced review that
includes a range of arguments, factors or hypotheses. Opinions or conclusions
should be presented clearly and supported by appropriate evidence.
 – 10 – N15/3/ECONO/HP2/ENG/TZ0/XX/M

Responses may include:

• definition of floating exchange rate.

Arguments for fixed exchange rate:

• provide greater predictability and certainty for exporters and importers to
calculate earnings (paragraph )
• creates a stable environment for firms to invest and households to consume
due to greater exchange rate certainty
• encourages government policies to maintain low inflation which can be caused
by fixing the currency – “inflation rates have been low and stable” (paragraph
)
• can discourage speculation – assuming sufficient foreign currency reserves to
protect the currency.

Arguments against fixed exchange rates:

• loss of domestic monetary policy freedom – if priority is to keep exchange rate
fixed then little room to set interest rates to manage AD; was a problem for
UAE in 2007 (paragraph ) when it had to lower interest rates to maintain peg
to US dollar
• when the exchange rate is fixed to a currency that is weak, it can lead to
imported inflation when the costs of imported resources rise
• low value of US dollar causes relatively cheaper exports and expensive
imports hence potential inflationary gap for UAE (paragraph )
• central bank needs large amounts of foreign reserves to maintain the fixed
currency and discourage speculators (paragraph ) but this is not a problem
(currently) for Saudi Arabia and UAE (paragraph )
• fixing the currency at the most appropriate level is difficult
• can create conflict with trading partners if fixed too low.

Arguments for floating exchange rates:

• allows current account to be self-correcting
• more freedom to set interest rates and domestic monetary policy
• large amounts of foreign reserves are not required (paragraph ).

Arguments against floating exchange rates:

• instability and lack of predictability for firms, consumers, importers and
exporters – difficult to plan (paragraph )
• governments not required to keep exchange rate fixed, hence there is less
incentive for governments to keep inflation in check
• speculative activity can greatly influence the exchange rate.

Any reasonable discussion.

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Section B
3. (a) (i) List two Millennium Development Goals other than universal primary
education (paragraph ). [2]

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

1 Vague response. 1
Any one of the following reasons:
• eradicate extreme poverty and hunger
• promote gender equality and empower women
• reduce child mortality
• improve maternal health
• combat HIV/AIDS, malaria, and other diseases
• ensure environmental sustainability
• develop a Global Partnership for Development.

2 Accurate response. 2
Any two of the following reasons:
• eradicate extreme poverty and hunger
• promote gender equality and empower women
• reduce child mortality
• improve maternal health
• combat HIV/AIDS, malaria, and other diseases
• ensure environmental sustainability
• develop a Global Partnership for Development.

(ii) Define the term sustainability indicated in bold in the text (paragraph ). [2]

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

1 Vague definition. 1
The idea that it is deals with the long-term use of resources.

2 Accurate definition. 2
An explanation that it is development that meets the needs of the
present generation without compromising the ability of future
generations to meet their needs.
 – 12 – N15/3/ECONO/HP2/ENG/TZ0/XX/M

(b) Using a production possibilities curve (PPC) diagram, explain the likely effect of
the high HIV/AIDS rate on production possibilities in Botswana. [4]

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

1 There is a correct diagram or an accurate written response. 1–2

For drawing a clearly labelled PPC diagram showing an inward shift of the
PPC or an explanation that a high rate of HIV/AIDS affects the quality
and/or quantity of the workforce, reducing production possibilities (potential
output) in the economy (and leading to negative potential growth).

2 There is a correct diagram and an accurate written response. 3–4

For drawing a clearly labelled PPC diagram showing an inward shift of the
PPC and an explanation that a high rate of HIV/AIDS affects the quality
and/or quantity of the workforce, reducing production possibilities (potential
output) in the economy (and leading to negative potential growth).

Candidates who incorrectly label diagrams can be rewarded with a maximum of

[3].

For a PPC, the axes could be two alternative products, one on each axis,
eg Good A & Good B or Schools & Motor Cars; or two groups of products,
eg Consumer Goods and Producer Goods. A title is not necessary.
 – 13 – N15/3/ECONO/HP2/ENG/TZ0/XX/M

(c) Using an AD/AS diagram, explain why inflation may fall as a result of “lower
demand-side pressures” (paragraph ). [4]

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

1 There is a correct diagram or an accurate written response. 1–2

For drawing a clearly labelled AD/AS diagram with a shift of the AD
curve to the left and a lower price level or for explaining that lower demand-
side pressures will reduce aggregate demand in the economy, thus
reducing inflationary pressures in the economy.

2 There is a correct diagram and an accurate written response. 3–4

For drawing a clearly labelled AD/AS diagram with a shift of the AD
curve to the left and a lower price level and for explaining that lower
demand-side pressures will reduce aggregate demand in the economy,
thus reducing inflationary pressures in the economy.

Candidates who incorrectly label diagrams can be rewarded with 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.
 – 14 – N15/3/ECONO/HP2/ENG/TZ0/XX/M

(d) Using information from the text/data and your knowledge of economics,
discuss the possible outcomes of a move away from government intervention and
towards more market-oriented strategies in Botswana (paragraph ). [8]

Examiners should be aware that candidates may take a different approach which,
if appropriate, should be rewarded.

Do not award beyond Level 2 if the answer does not contain reference to the
information provided.

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

1 Few relevant concepts are recognized. 1–2

There is basic knowledge/understanding.

2 Relevant concepts are recognized and developed in reasonable depth. 3–5

There is clear knowledge/understanding.
There is some attempt at application/analysis.

3 Relevant concepts are recognized and developed in reasonable depth. 6–8

There is clear knowledge/understanding.
There is effective application/analysis.
There is synthesis/evaluation, supported by appropriate theory and
evidence.

Command term
“Discuss” requires candidates to offer a considered and balanced review that
includes a range of arguments, factors or hypotheses. Opinions or conclusions
should be presented clearly and supported by appropriate evidence.

Responses may include:

• definition of market-oriented strategies
• examples of market-oriented strategies
• explanation and examples of government intervention.

Benefits of moving towards market-oriented strategies:

• may lead to higher levels of economic growth
• may lead to higher employment (paragraph )
• with higher growth, there may be higher tax revenues to meet development
objectives
• trade liberalization could promote economic growth
• more efficient allocation of resources
• privatization results in government revenues
• smaller public sector (paragraph ) frees up resources
• Botswana’s good governance might allow for effective implementation of
economic policy (paragraph ).

Possible negative outcomes of moving towards market-oriented strategies:

• market-oriented strategies may lead to worsened income inequality, Gini
coefficient already high (paragraph  and Figure 1)
• may concentrate attention on the urban sectors, increasing relative poverty in
rural areas (paragraph )
• infrastructure is unlikely to be created through a market-based approach
 – 15 – N15/3/ECONO/HP2/ENG/TZ0/XX/M

• there may be short-run costs to the poorest people if unemployment rises

(paragraph )
• there may be market failure and the exhaustion of natural resources
(paragraph )
• prices of essential products may increase
• the provision of public services may fall
• protectionism in developed countries may make it difficult to achieve growth
through trade
• may result in lower expenditure on education (paragraph  and )
• diversification may require government intervention (paragraph ).

Any reasonable discussion.

 – 16 – N15/3/ECONO/HP2/ENG/TZ0/XX/M

4. (a) (i) Define the term investment indicated in bold in the text (paragraph ). [2]

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

1 Vague definition. 1
The idea that it is buying machinery.

2 Accurate definition. 2
An explanation that it is any addition to the capital stock of the
economy or expenditure by firms on capital.

(ii) Define the term price floor indicated in bold in the text (paragraph ). [2]

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

1 Vague definition. 1
The idea that is a price set by the government or a type of
intervention to help poor producers.

2 Accurate definition. 2
An explanation that it is a price (set by the government) above the
equilibrium price or a price (set by the government) below which the
price may not fall.
 – 17 – N15/3/ECONO/HP2/ENG/TZ0/XX/M

(b) Using a demand and supply diagram explain, referring to the concept of price
elasticity of demand, why there has been such a sharp drop in the price of coffee
beans (paragraph ). [4]

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

1 There is a correct diagram or an accurate written response. 1–2

For drawing a clearly labelled demand and supply diagram showing a shift
of the supply curve to the right and a significant fall in price or for an
explanation that the increase in supply, accompanied by relatively inelastic
demand, will lead to a sharp fall in the coffee prices.

2 There is a correct diagram and an accurate written response. 3–4

For drawing a clearly labelled demand and supply diagram showing a shift
of the supply curve to the right and a significant fall in price and for an
explanation that the increase in supply, accompanied by relatively inelastic
demand, will lead to a sharp fall in the coffee prices.

Candidates who incorrectly label diagrams can be rewarded with a maximum of

[3].

The use of P and Q on the axes is sufficient for a demand and supply diagram.
A title is not necessary.
 – 18 – N15/3/ECONO/HP2/ENG/TZ0/XX/M

(c) Using a diagram that shows a firm’s short-run costs of production, explain why
some farmers may still be able to produce even though they are in a situation
where coffee bean prices are below their total costs of production (paragraph ). [4]

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

1 There is a correct diagram or an accurate written response. 1–2

For drawing a clearly labelled SR costs diagram, where price is below ATC,
but above AVC or for explaining that the farmers will continue to produce in
the short run as long as they are covering their variable costs.

2 There is a correct diagram and an accurate written response. 3–4

For drawing a clearly labelled SR costs diagram, where price is below ATC,
but above AVC and for explaining that the farmers will continue to produce
in the short run as long as they are covering their variable costs.

Candidates who incorrectly label diagrams can be rewarded with a maximum

of [3].

The use of P and C on the vertical axis and Q on the horizontal axis is sufficient.
A title is not necessary.
 – 19 – N15/3/ECONO/HP2/ENG/TZ0/XX/M

(d) Using information from the text/data and your knowledge of economics,
discuss the likely impact of the Brazilian government’s intervention in the
coffee market on economic development in Brazil. [8]

Examiners should be aware that candidates may take a different approach which,
if appropriate, should be rewarded.

Do not award beyond Level 2 if the answer does not contain reference to the
information provided.

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

1 Few relevant concepts are recognized. 1–2

There is basic knowledge/understanding.

2 Relevant concepts are recognized and developed in reasonable depth. 3–5

There is clear knowledge/understanding.
There is some attempt at application/analysis.

3 Relevant concepts are recognized and developed in reasonable depth. 6–8

There is clear knowledge/understanding.
There is effective application/analysis.
There is synthesis/evaluation, supported by appropriate theory and
evidence.

Command term
“Discuss” requires candidates to offer a considered and balanced review that
includes a range of arguments, factors or hypotheses. Opinions or conclusions
should be presented clearly and supported by appropriate evidence.

Responses may include:

• a definition of economic development
• a diagram showing a price floor (paragraph )

Benefits of government intervention

• supports an important sector of the economy (paragraph )
• may guarantee a minimum income for farmers with resulting benefits for health care,
education, poverty cycle
• offers protection against volatile prices, which harm producers’ incomes
• may prevent coffee producers who would not be covering costs from going out of
business (paragraph )
• it supports rural employment and may prevent rural urban migration (paragraph )
 – 20 – N15/3/ECONO/HP2/ENG/TZ0/XX/M

Concerns
• only “temporary relief to farmers” (paragraph )
• large government stocks (paragraph ) will eventually have to be sold
• may discourage coffee farmers from diversifying
• may encourage over-supply, which will further lower the price
• opportunity cost of government spending eg on merit goods (paragraph )
• price floor may simply be a short-term political strategy (paragraph )
• allocatively inefficient.

Any reasonable discussion.