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Date November 2020 Marks available 15 Reference code 20N.1.SL.TZ0.3
Level Standard level Paper Paper 1 Time zone Time zone 0
Command term Evaluate Question number 3 Adapted from N/A

Question

Explain how a decrease in business confidence can affect the real GDP of an economy that is producing below the full employment level of output.

[10]
a.

Evaluate the view that a decrease in aggregate demand would always be deflationary.

[15]
b.

Markscheme

Marks should be allocated according to the paper 1 markbands for May 2013 forward, part A.

Answers may include:

a.

Marks should be allocated according to the paper 1 markbands for May 2013 forward, part B.

Answers may include:

Evaluation may include: When AD falls in the Keynesian model and the economy is below full employment the average price level does not fall because wages and costs tend not to fall.

NB Candidates can approach this question in terms of deflationary conditions in the economy or as deflation.

b.

Examiners report

This question was well answered by many candidates. The key terms of business confidence, real GDP and full employment were mostly well defined and the impact of a fall in business confidence on real GDP was clearly explained with an effective AD/AS diagram. Weaker answers tended to be imprecise in the explanation of business confidence and needed to be clearer on the meaning of full employment.  

a.

This question proved to be quite challenging for students because the term "deflationary" can be answered as falling prices or falling output when there is a deflationary gap. Most candidates chose to focus on falling prices and there were some very good answers to this with students focusing on the Keynesian AS where falling aggregate demand will cause deflation if output is at or near full employment. When, however, output is below full employment, falling aggregate demand will not cause deflation because wages are 'sticky' downwards. Some students were drawn onto the Neo-classical LRAS which has another approach that could be used effectively to explain how falling aggregate demand will always cause deflation. Some students used real world examples here, but many found it difficult to build one into their answer.   

b.

Syllabus sections

Last exams 2021 » Section 2: Macroeconomics » 2.2 Aggregate demand and aggregate supply » Equilibrium » Equilibrium in the monetarist/new classical model
Last exams 2021 » Section 2: Macroeconomics » 2.2 Aggregate demand and aggregate supply » Equilibrium » Equilibrium in the Keynesian model
Last exams 2021 » Section 2: Macroeconomics » 2.2 Aggregate demand and aggregate supply » Equilibrium
First exams 2022 » Unit 3: Macroeconomics » 3.2 Variations in economic activity—aggregate demand and aggregate supply » 3.2.7 Alternative views of aggregate supply (AS)
Last exams 2021 » Section 2: Macroeconomics » 2.2 Aggregate demand and aggregate supply
First exams 2022 » Unit 3: Macroeconomics » 3.2 Variations in economic activity—aggregate demand and aggregate supply
Last exams 2021 » Section 2: Macroeconomics
First exams 2022 » Unit 3: Macroeconomics
First exams 2022
Last exams 2021

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