IB Economics SL 3.2.5 Long-run shifts in aggregate supply Question Bank
Practise IB Economics SL/HL 3.2.5 by applying long-run shifts in aggregate supply concepts to exam-style questions.
- Syllabus
- First assessment 2022
- Course
- Economics SL
- Level
- SL
Exam points
- identify the relevant model, concept or evidence
- apply the correct subject framework to the question
- evaluate the result using clear evidence and subject terminology
3.2.5—Long-run shifts in aggregate supply question 1
[Maximum number: 4]
Study the extract below and answer the questions that follow.
Eurozone debt crisis
(1) A debt crisis in Europe has caused financial markets to watch government plans to deal with the issue of rising government debt.
(2) Governments have borrowed heavily to bring the 16 nation eurozone* out of its first recession and debt levels are expected to be well above the European Union (EU) limit of 60 % of gross domestic product (GDP). Average eurozone government debt could reach 84 % of GDP in 2010. Germany, long considered a model of fiscal discipline, forecasts government debt at around 78 % of GDP in 2010 while, in Greece, government debt of 120 % of GDP is expected.
(3) The combination of larger budget deficits, low economic growth and support for the banking sector has caused higher public debt levels. Eurozone governments have been urged to reduce debt. The increase in debt is raising the cost of borrowing for many countries and adding to the cost of repayments in future budgets.
(4) With unemployment rising and weak growth expected in 2010, officials cannot count on increased tax revenues for much help in paying off debt, much of which is owed to other countries. Possible policy solutions include cutting welfare spending or raising the retirement age to reduce future government costs. Alternatively, the member countries of the EU and the International Monetary Fund (IMF) may need to give money to the countries in danger of default.
(5) The debt crisis is limiting government finances and potential growth. Government revenue will be further limited by an aging population that will need expensive health care in the years to come. Many countries have pledged to tighten fiscal and monetary policies. However, this may damage an economic recovery.
(6) Failing to act on the deficits and debt may, however, spark a negative reaction from financial markets that will demand higher interest payments on loans. The Prime Minister of Greece has warned: "Either we eradicate the debt, or the debt will eliminate the country".
* eurozone: the group of countries which use the euro as their common currency eurozone-debt-crisis-looms-20100103-lnap.html]
Using an appropriate diagram, explain the likely effect on potential output of an aging population.
level
0 Inappropriate answer ..... 0
1 Identification of appropriate theory ..... 1-2
For drawing a correctly labelled LRAS or PPC diagram showing a shift to the left/decrease in potential output of an economy or for explaining that as the average age of the population increases the proportion of the population participating in the labour force will decline hence reducing the potential output of an economy.
2 Correct application of appropriate theory ..... 3-4
For drawing a correctly labelled LRAS or PPC diagram showing a shift to the left/decrease in potential output of an economy and for explaining that as the average age of the population increases the proportion of the population participating in the labour force will decline hence reducing the potential output of an economy.
Candidates who incorrectly label diagrams can receive a maximum of
Marking guidance:
[3 marks].
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.
For a PPC, the axes could be two alternative products, one on each axis,
e.g. Good A and Good B or Schools and Motor Cars; or two groups of products,
e.g. Consumer Goods and Producer Goods. A title is not necessary.
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