IB Economics Mock Paper — Paper 1 and Paper 2 with Model Answers, Marking Notes and an IA Guide

Question 1 (price ceiling), 25 marks

(a) 10 marks: define a maximum price — a legal ceiling set below the equilibrium price (2); draw the demand and supply curves with equilibrium Pe, Qe (2); draw the ceiling at Pmax below equilibrium (2); show that quantity demanded exceeds quantity supplied, creating a shortage, and label Qs and Qd (3); explain that the shortage forces non-price rationing — queues, quotas, black markets (1).
Common losses: omitting Qs/Qd labels, or drawing the ceiling above equilibrium — the latter is a conceptual error and loses marks heavily.

(b) 15 marks: take a real market (rent controls, fuel price caps, bread price controls) and analyse each stakeholder:
(1) consumers: affordability improves in the short run (+), but supply shrinks and quality falls over time (−); (2) producers: margins squeezed, some exit the market; (3) government: rationing and enforcement costs, and black markets may emerge; (4) overall welfare: deadweight loss and misallocation.
Evaluation (essential): compare short-run and long-run effects, use elasticity (the more inelastic demand is, the larger the shortage), consider enforcement capacity and market structure, and weigh alternatives (subsidies, cash transfers, expanding supply).
Top-band features: diagram + elasticities + a specific example + a conditional conclusion (“it is justified only when…”).

Question 3 (expansionary fiscal policy), 25 marks (outline)

(a) 10 marks: AD/AS diagram with AD shifting right (higher government spending or lower taxes raising consumption); output rises Y1→Y2 and the price level PL1→PL2; explain the multiplier and the role of spare capacity; if the economy is near full employment (Yf), most of the effect is inflationary.
(b) 15 marks: for monetary policy — central bank independence, speed of implementation, less political resistance, direct effect on interest rates and investment; for fiscal policy — investment may be interest-insensitive in a deep recession (liquidity trap), it can create demand and jobs directly and can be targeted; practical considerations — recognition and implementation lags, debt sustainability, the exchange-rate regime (fixed rates constrain monetary policy) and leakage through imports in an open economy.
Evaluation frame: define the cause and severity of the recession, then compare the tools on speed, scale and side-effects, finishing with a conditional judgement.

Question 5, 30 marks

(a) 4 marks: 90,000 − 30,000 = a shortage of 60,000 units (2); the unit (“thousands of units”) must be stated (2).
(b) 8 marks: diagram (4): axes, equilibrium (12,000, 60,000), ceiling at 8,000, Qd and Qs labelled; explanation (4): the more inelastic demand and the more elastic supply, the smaller the short-run shortage — and because rental supply is constrained by construction cycles, supply is inelastic in the short run, so the shortage persists.
(c) 8 marks: tenants (+ affordability, − queues, lower quality, key money and black-market rents); landlords (− lower yields, reduced maintenance, exit from the market); government (+ short-run social stability, − enforcement and administrative costs, long-run erosion of supply).
(d) 10 marks: advantages of cash transfers — they preserve the price signal, do not distort supply, can be targeted and cost less to administer; disadvantages — they may push rents up when supply is inelastic, require tax revenue, create eligibility and fraud issues, and do not address the underlying shortage; the alternative of expanding land and public housing supply tackles the supply side.
Top-band features: each effect labelled by “for whom, for how long, how large”, with a conclusion on when transfers beat controls.

Question 6, 30 marks

(a) 4 marks: real growth ≈ 5.2% − 4.6% = 0.6% (setup 2, answer to 1 d.p. 2).
(b) 6 marks: the AD/AS diagram shows AD shifting right so output and the price level both rise; nominal GDP is measured at current prices and so includes the price increase; if AS is inelastic near full employment, prices rise even more.
(c) 8 marks: higher unemployment reduces tax revenue (income tax, sales tax) while raising welfare spending, widening the deficit, pushing up the debt-to-GDP ratio and crowding out other spending through interest costs; automatic stabilisers cushion the fall but do not prevent it.
(d) 12 marks: the trade-offs given the situation (stagflation risk with debt at 78% and a current account deficit): fiscal space is limited and expansion may worsen inflation; tighter monetary policy can reduce inflation and attract capital, improving the current account, but it dampens investment and growth and raises debt-servicing costs; supply-side policy (productivity, competition) is the long-run answer.
Top-band features: naming the policy conflict (inflation vs unemployment vs debt) and evaluating along time, scale and sustainability.

Marking notes (28-mark example): (a) negative externality diagram (MPC against MSC, the gap being the external cost), tax set equal to the marginal external cost, output falling from Qm to Qopt (4 + 4). (b) cost-push inflationary pressure, job losses in energy-intensive sectors, offset by jobs created through subsidies and public transport investment (4 + 4). (c) efficiency: a tax lets firms find the cheapest abatement, unlike direct regulation; equity: carbon taxes are regressive (energy is a larger share of low-income budgets) so transfers are needed; sustainability: long-run emissions cuts and green investment (6 + 6). Top-band features: naming the trade-offs and the implementation risks (carbon leakage, relocation of firms).