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Date November 2021 Marks available 15 Reference code 21N.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 in the Keynesian AD/AS model an economy can be in equilibrium while producing below the full employment level of output.

[10]
a.

Evaluate the view that fiscal policy is the best way to reduce unemployment.

[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: consideration of the problems of using fiscal policy to reduce unemployment such as; budget deficit, inflation and it is not as effective at reducing unemployment that is not demand-deficient (structural, frictional). There could also be coverage of alternative policies such as monetary and supply side.

A maximum of [12] should be awarded if a candidate has not considered an alternative policy.

b.

Examiners report

The responses to this question were mixed in terms in terms of the standard. The best answers clearly focused on the reason why equilibrium national income can exist below full employment in the Keynesian model by focusing on the argument that wages and costs do not fall when the economy is operating below full employment. A common mistake was for students to simply explain equilibrium income below full employment without explaining why the equilibrium would stay at this level and not adjust back to full employment. Very good answers were supported by an effective real-world example.

a.

There were some very good answers to this question. The best responses focused on how expansionary fiscal policy reduces demand deficient unemployment as aggregate demand increases when tax is reduced, and government expenditure is increased. Good responses would go on to evaluate the use of fiscal policy by discussing issues such as increasing inflation, the cost of financing the policy, and fiscal policy is not particularly effective at reducing frictional and structural unemployment. The highest-level responses would use effective real-world examples to support the points being made.

b.

Syllabus sections

First exams 2022 » Unit 3: Macroeconomics » 3.5 Demand management (demand side policies)—monetary policy » 3.5.8 Effectiveness of monetary policy
First exams 2022 » Unit 3: Macroeconomics » 3.5 Demand management (demand side policies)—monetary policy
First exams 2022 » Unit 3: Macroeconomics
First exams 2022

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