IB Economics SL 3.2 Aggregate Demand and Aggregate Supply Question Bank

Study the following extract and answer the questions that follow.
China's trade reforms

(1) The Chinese government has announced a set of free trade measures, including lower import tariffs on cars, soybeans and pharmaceuticals, in an attempt to end a trade war with the United States (US).

(2) The US government has long accused China of engaging in unfair trade practices to maintain their current account surplus. The trade dispute between the two largest economies intensified when the US said it would impose anti-dumping tariffs on Chinese steel and aluminium.

(3) The trade war with the US comes at a bad time given the slowdown in China's domestic demand. In recent years, China's economic growth has relied less on investment and exports and more on consumption expenditure.

(4) Producers of many Chinese manufactured goods currently benefit from protectionist measures. In particular, imports of industrial equipment, medical devices, tractors and vehicles are subject to high tariffs.
5 Automobile production capacity in China is growing. However, the domestic market is becoming oversupplied, with more cars being offered for sale than Chinese consumers want to buy. For this reason, Chinese car manufacturers are seeking to export their cars to other markets. They are therefore eager to see reduced trade tensions as increased US tariffs would make it harder to export Chinese cars to the US.

(6) Some Chinese car manufacturers are already focusing on adding advanced capabilities to their cars in order to be more competitive in global markets. China is increasing its efforts to become a world leader in self-driving cars. These will be intelligent cars that will improve transport efficiency and meet energy-saving and emission-reduction targets. Many believe that Chinese companies are so innovative that they no longer require protection from international enterprises.

(7) However, many Chinese firms remain dependent on imported factors of production. Approximately 30 % of Chinese exports are manufactured using imported equipment and components. The reduction of tariffs would therefore lower prices not only for producers but also for consumers of Chinese goods.

Define the term consumption indicated in bold in the text (paragraph (3).

Explain how a rise in consumer confidence and business confidence might affect economic growth.

Study the following extract and answer the questions that follow.
Burundi

(1) Burundi is a small landlocked African country. Densely populated, it has a population of approximately 10.6 million inhabitants. The economy is dominated by subsistence agriculture, which employs 90 % of the population, though cultivatable land is extremely scarce. More than a decade of conflict led to the destruction of much of the country's physical, social and human capital. However, substantial improvements have occurred since the conflict ended in 2006, thanks largely to the success of measures implemented to reduce the excessive control of the military.

(2) Even though Burundi is enjoying its first decade of sustained economic growth, poverty remains widespread. Burundi's ranking on the Human Development Index (HDI) increased by 2.5 % per year between 2005 and 2013 as education and health outcomes have significantly improved over the period, yet the country still ranks low at 180th out of 187 countries in 2013. Per capita gross national income more than doubled between 2005 (US$130) and 2013 (US$280).

(3) Burundi is making the transition from a post-conflict economy to a stable and growing economy. Economic reforms and institution building are ongoing. After significant improvements to achieve peace and security, the country's development program is shifting gradually towards modernizing public finance. However, the government has limited "fiscal space" because tax collection is very hard to carry out and tax receipts are low.

(4) With its limited resources, the government is attempting to strengthen basic social services and upgrade infrastructure and institutions, particularly in the energy, mining, and agricultural sectors. This has been accompanied by increasing participation of the private sector. The goal now is to grow a more stable, competitive and diversified economy with enhanced opportunities for employment and improved standards of living.

(5) Over the last decade, annual economic growth in Burundi has been between 4 % and 5 %. Inflation continues to decline reaching 3.9 \% in July 2016, down from 24 \% in March 2012, reflecting a careful monetary policy helped by a recent decrease in the prices of imports, especially oil, which is an essential commodity.

(6) Burundi's main exports are agricultural; coffee and tea account for 90 % of foreign exchange earnings, and exports are a relatively small share of Gross Domestic Product (GDP). overview. Licensed under a Creative Commons Attribution-ShareAlike 3.0 Unported license.
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Using an AD/AS diagram, explain why the "decrease in the prices of imports, especially oil" might reduce inflationary pressure (paragraph (5).