Supply-side policies Paper 2

IBDP Economics  SL – Macroeconomics – Supply-side policies -Paper 2  Exam Style Practice Questions

IBDP Physics
IBDP Biology
IBDP Chemistry
IBDP Maths
IBDP - All Courses

Supply-side policies Paper 2? 

Exam Style Questions..

Subject Guide IBDP Economic IBO

IBDP Economic SL- All Topics

Exam Style Question for Supply-side policies -Paper 2

Trade strategies in the Philippines

  1. For more than 20 years the Philippines has been limiting the volume of rice it imports. However, the agreement with the World Trade Organization (WTO) that permitted these restrictions expired in 2017. In early 2019, the government replaced the quantity restrictions with tariff protection. A 35% tariff on imported rice from the Association of Southeast Asian Nations (ASEAN)* was imposed to protect the domestic rice industry in the Philippines. Following the replacement of the quota with a tariff, rice prices are expected to fall significantly. However, urban households want the president to allow rice to be imported without any tariffs to reduce food bills even further.
  2. The poorest quintile of households in the Philippines consumes nearly twice as much ordinary rice and 20 times more National Food Authority (NFA) rice compared to the richest quintile. Rising food prices are pushing up inflation as a result of increasing salaries in urban areas. The daily minimum wage in Manila, the Philippine capital, will increase by 4.9 %, the highest hike in six years, to the equivalent of US$10.11. Farming and fishing provide the livelihoods for around one-third of the labour force in the Philippines. Land reform programmes are slowly being implemented to change the current situation of unfair ownership of land and resources by a few individuals. However, uncertainty continues to discourage investment in adequate irrigation systems in the countryside. As an agricultural country, irrigation in the Philippines is very important. Improvements in the quality of infrastructure services will help cut the cost of doing business, attract more investment, and enhance productivity around the country. Food manufacturing, including food and beverage processing, remains the most dominant primary industry in the Philippines. This has become a focus in the hope of increasing farm incomes, because this part of the economy is currently dominated by big international companies. Major exports of processed fruits and nuts include mangos, pineapples, bananas and peanuts.
  3. The Philippine Export Development Plan (PEDP) 2018–2022 calls for boosting the export of services, increasing export competitiveness, and exploring new markets. Efforts have already been made to harmonize the country’s standards, testing, certification and quality accreditation of products to improve trade and comply with standards in the European Union. The PEDP aims to increase the volume and value of exports by encouraging investment in production processes and supply chains. Another strategy to achieve the plan’s objective is to exploit existing and new opportunities from trade agreements.
  4. The Philippines lacks the infrastructure needed to attract export-oriented manufacturing. To support the PEDP, the government needs to increase its spending on new airports, roads and bridges. These public works are critical to boosting the incomes of people in poorer areas by connecting them better to Manila. To allow for this extra spending, a series of tax reforms was started: the income tax for the highest income earners has been raised from 30 % to 35 %, and indirect taxes have been increased.

Question

Using an AD/AS diagram, explain the impact on the potential output of the Philippines of the government increasing its “spending on new airports, roads and bridges” (paragraph [4]).

▶️Answer/Explanation

An AD/AS diagram showing an increase in LRAS AND for
explaining that increasing spending on infrastructure means that
it

  • increases (the quantity and quality of) factors of production

OR

  • increases efficiency/productivity

shifting LRAS to the right, thereby increasing potential output.

Angola’s economic reforms

  1. Following an oil price crash in 2014, Angola has endured a recession, a dramatic rise in inflation and empty supermarket shelves caused by severe shortages of foreign currency. Angola is highly dependent on export revenues from oil production, a major source of United States dollars. The foreign currency is needed to import manufactured goods because the country’s manufacturing sector is small.
  2. To respond to these challenges, the president of Angola has presented a plan with desperately needed reforms to promote economic development. The plan proposes tax incentives to attract foreign investment and privatization of the telecommunication and railway sectors. It also aims to expand infrastructure projects with private sector involvement. In addition, reforms are recommended to make the banking sector stronger. This is important if the government wants to reduce the borrowing costs experienced by Angolan businesses.
  3. The recent 20 % devaluation of the kwanza (Angola’s currency) is another sign that the government is serious about making Angola attractive to foreign direct investment (FDI). Angola has a fixed exchange rate. As the kwanza has been overvalued, this has caused a reduction in foreign currency reserves.
  4. Angola’s future economic growth is likely to be low. The business environment for firms remains difficult. High borrowing costs, corruption and poor infrastructure remain challenges. The government has failed to exploit Angola’s vast agricultural potential. The country depends heavily on oil revenues, which are falling.
  5. Living conditions for households are also poor as inflation is expected to remain above 25 %. Approximately 40 % of Angolans live in absolute poverty and unemployment is high, especially in rural areas. Aware of the urgent need to reduce regional inequality, the government has announced plans to encourage investment in rural areas. However, there are also proposals to reduce public debt by removing some subsidies on food and by introducing ad valorem taxes.
  6. Although Angola’s economic growth has been slow, it remains the third-largest economy in sub-Saharan Africa and the government is the second-largest public spender in the region.

Question

Define the term privatization indicated in bold in the text (paragraph [2])

▶️Answer/Explanation

An explanation that the government sells state- owned /public enterprises/firms/assets to the private sector

Text A — Overview of North Macedonia

  1. North Macedonia is a small, landlocked nation that shares borders with five countries, including Bulgaria and Greece. Bulgaria and Greece are members of the European Union (EU) common market, which North Macedonia hopes to join soon. Since the country began negotiating for EU membership, trade with the EU has increased rapidly and now accounts for 75 % of North Macedonia’s exports and 62 % of its imports.
  2. Despite its small market, with a population of approximately 2 million, North Macedonia’s proximity to the EU, low wages and expected entry into the common market have attracted foreign investors. Greece, its richest neighbour, was its third highest source of foreign investment in 2019. The lower cost of living also appeals to Greek tourists.
  3. EU companies have invested in the financial, telecommunication, energy and food processing industries in North Macedonia. Many of the most profitable companies are from the EU. If EU membership is granted, foreign direct investment (FDI) inflows may increase as firms located in North Macedonia will be allowed to bypass all custom checks and enjoy tariff-free trade within the common market. One particular challenge for North Macedonia, however, is that most of the profits of foreign companies are likely to be repatriated (sent back to the companies’ home countries).
  4. In 2018, North Macedonia’s export revenue was US$7.57 billion and its import expenditure was US$9.56 billion. The country’s main exports are iron and steel, clothing and accessories, and food products. Food, livestock and consumer goods account for 33 % of imports while the remainder are machinery, petroleum and other materials needed for the industrial production process.
  5. The manufacturing sector, which now employs 31 % of the labour force, has gained more importance. The agricultural sector remains strong, contributes over 10 % of North Macedonia’s gross domestic product (GDP) and employs about 16 % of the country’s workforce.
  6. The unemployment rate decreased from over 30 % in 2010 to 17.3 % in 2019. However, youth unemployment is almost 40 %. Over 20 % of the population lives below the poverty line. Unemployment and poverty contribute to high rates of emigration. More than 20 % of the North Macedonian population have emigrated since 1994, mostly to the EU. As a member of the EU, North Macedonia will enjoy free movement of labour which will make it easy for its citizens to live and work in other EU countries.

 Text B — North Macedonia’s economic reforms

  1. To be considered for EU membership, North Macedonia implemented a series of supply-side policies to reform its economy. The EU imposes strict requirements for membership but provides financial assistance to countries preparing for membership. North Macedonia has received 633 million euros (the currency of the EU) to help with the reforms.
  2. Most of the supply-side policies seek to improve the international competitiveness of North Macedonia’s industries. The authorities are increasing access to education and training for workers. The expansion of the transport network and other infrastructure is also expected to increase efficiency.
  3. Protection of the environment is also on the list of requirements for EU membership. North Macedonia aims to reduce its dependence on coal and to instead promote the use of solar, wind and hydropower technologies. These low-carbon energy sources would help decrease its air pollution, which is among the worst in Europe.
  4. The reforms, which started in 2014, have shown progress. Exports and manufacturing output are more diversified and more concentrated on high-value products. To attract FDI, North Macedonia maintains one of the lowest tax rates on corporate income in the region. The central bank also prevents the denar (North Macedonia’s currency) from appreciating against the euro through managing foreign reserves. However, skill shortages and a mismatch of skills with those required by companies discourage foreign firms from investing. Important investment gaps in public infrastructure also remain.

Text C — North Macedonia’s trade agreements

North Macedonia participates in five free trade agreements (FTAs), that together cover 95 % of its exports and 78 % of its imports. Most of its trade with the EU is already free but imports of wine, beef and fish products are still subject to quotas. North Macedonia is currently a net importer of agricultural and food products. All protectionist measures on EU products would be removed upon entry into the common market.

Question

Using an AD/AS diagram, explain the likely impact of North Macedonia’s supply-side policies on its full employment level of output (Text B, paragraph [2]).

▶️Answer/Explanation

For an AD/AS diagram with a LRAS (no AD or SRAS required) shifting to the right and an increase in full employment level of output AND for explaining that North Macedonia’s supply-side policies would lead to an increase in efficiency (productivity) and/or increase in the quantity/quality of resources/factors of production. This would lead to an increase in full employment level of output (potential output).

Question

Define the term infrastructure indicated in bold in the text (Text E, paragraph 1).

▶️Answer/Explanation

The idea that it is (any two of the following is sufficient):

  • large scale public systems (services and facilities) of a country
  • necessary for economic activity
  • adding to the capital stock of a nation
  • usually supplied by the government
  • generates significant positive externalities.

Question

Using an appropriate diagram, illustrate the unemployment which may arise from the imposition of a minimum wage (Text E, paragraph 3).

▶️Answer/Explanation

Scroll to Top