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Date November 2021 Marks available 1 Reference code 21N.3.HL.TZ0.2
Level Higher level Paper Paper 3 Time zone Time zone 0
Command term Describe Question number 2 Adapted from N/A

Question

The data in Table 2 refer to Kanyaland, a small, open, developing economy in 2019. All data are in billions of Kanyaland dollars (K$).

Table 2

Assume that the level of GDP in Kanyaland in 2009 was K$455 billion and government expenditures were K$205 billion. For each additional Kanyaland dollar earned as income, it had been estimated that K$0.60 was spent on domestic goods and services, K$0.10 was saved, K$0.21 was paid in taxes and K$0.09 was spent on imported goods and services.

Table 3 shows the values of the consumer price index (CPI) between 2016 and 2020 in Kanyaland.

Table 3

Table 4 shows the income tax rates in Kanyaland.

Table 4

Rufus and Sammy are citizens of Kanyaland. Rufus earns K$23 000 annually whereas Sammy earns K$46 000 annually.

Using the data in Table 2, calculate factor income sent (paid) abroad in 2019.

[2]
a.

If the government increased expenditures by K$21 billion, calculate the new level of GDP achieved.

[3]
b.

Explain two possible positive consequences of economic growth in Kanyaland.

[4]
c.

In many developing countries GNI figures are lower than GDP figures. Outline how this may be due to the high levels of foreign direct investment (FDI) in developing countries.

[2]
d.

Kanyaland specializes in and exports a narrow range of agricultural products. Outline one negative consequence of this strategy in achieving economic growth.

[2]
e.

Explain how unemployment benefits and progressive taxation may help decrease economic fluctuations in Kanyaland.

[4]
f.

Using Table 3, calculate the rate of inflation in 2017 and in 2018.

[2]
g.

With reference to the CPI data in Table 3, describe the most likely monetary policy response adopted at the end of 2018 by the central bank of Kanyaland.

[1]
h.

Using Table 4, identify the marginal tax rate for Rufus.

[1]
i.

Using Table 4, calculate the average tax rate for Sammy.

[2]
j.

The Gini coefficient in Kanyaland changed from 0.35 in 2010 to 0.52 in 2020. Outline what this change indicates for the economy.

[2]
k.

Markscheme

Factor income sent (paid) abroad = 1098 + 68 − 982

Any valid working is sufficient for [1].

= $184 billion

An answer of $184 billion or 184 without any valid working is sufficient for [1].

a.

multiplier = 11-0.6=10.1+0.21+0.09=2.5

Identification of the value of the multiplier = 2.5 is sufficient for [1].

= 2.5 × 21 = 52.5

Any valid working is sufficient for [1].

= 455 + 52.5

= $507.5 billion

An answer of $507.5 without any valid working is sufficient for [1].

OFR applies if the multiplier is calculated incorrectly and the resulting incorrect number is applied correctly to calculate the new level of GDP.

b.

c.

d.

e.

f.

2017: 174.2176.3176.3 × 100 = −1.19 %

2018: 172.9174.2174.2 × 100 = −0.75 %

Award [1] for each correct answer.

No workings are necessary. The % sign is not necessary.

g.

Any answer which refers to easy (expansionary) monetary policy or an increase in the money supply or a decrease in interest rates is sufficient for [1].

h.

For an answer of 0.26 or 26 % award [1].

i.

0.22 × 20 000+0.26 × 10 000+0.30 × 8000+0.34 × 8000= 12 120

Valid working (i.e. three of the four in parentheses correct) is sufficient for [1].

ATR = 12 12046 000× 100 = 26.35 %

OR

ATR =12 12046 000= 0.26

An answer of 26.35 or 0.26 without any valid working is sufficient for [1].

j.

k.

Examiners report

A common error was to add income from abroad to GNI and subtract from GDP — giving a result of $48 billion. Candidates also forfeited a mark for omitting “billions” or “K$”.

a.

This part was done quite poorly. Lower-achieving responses appeared confused by the wordy nature of the question and hence were not able to calculate the multiplier. A significant number were able to benefit from the Own Figure Rule although many incorrectly multiplied both the initial and the increase in government spending by the multiplier.

b.

Generally well-answered. Lower-achieving responses stated rather than explained, providing responses such as “unemployment will fall”. Also, a minority of candidates suggested that an increase in output would be a consequence (rather than a cause/condition).

c.

The question was generally well-answered. Lower-achieving responses did not refer to the repatriation of profits or explained that some output “did not belong to the host country” — resulting in a Level 1 mark awarded.

d.

Although the question was generally well-answered, some responses did not refer to a consequence for growth but simply explained over-specialization.

e.

A significant number of candidates found difficulty with this question. Lower-achieving responses understood “economic fluctuations” to mean “inequality”. Of those who understood the question and the appropriate learning outcome, a large number referred to the idea that unemployment benefits would allow consumers to spend more, without explaining how this would slow down a decline in real GDP. For full marks, candidates were expected to refer to expansionary and contractionary periods — and some did not do this.

f.

There was a surprising number of rounding errors presented here.

g.

Very well-answered.

h.

Lower-achieving responses took an average of 22 % and 26 % - or gave an answer of 4 % as the increase in the marginal rate.

i.

After successfully calculating the total tax paid through each band, quite a few students did not complete the calculation of the average tax rate (i.e. total tax divided by income).

j.

Well-answered.

k.

Syllabus sections

First exams 2022 » Unit 3: Macroeconomics » 3.5 Demand management (demand side policies)—monetary policy » 3.5.1 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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