IB DP Economics: Supply-side policies – Practice Questions

These are original questions written for Marlbridge, for revision and practice on this content. They are not reproduced past-paper questions, and they do not replicate the exam’s exact structure, question count or mark tariffs – the IB holds copyright in its own papers. Use these alongside the official past papers available through your school or the IB store.

These questions follow the IB Diploma Programme Economics guide (first assessment 2022, published February 2020), the course examined from the 2022 session onwards. They cover sub-topic 3.7, Supply-side policies, for SL and HL; the guide marks no part of 3.7 as HL only, so no question here is labelled HL. The study guide and revision notes cover the content. See also the Economics hub, the printable checklist and the free diagnostics.

All countries, firms and figures are invented. The mark scheme style used in the answers is a revision aid. Your teacher will mark extended answers against the criteria the IB sets, so treat the points in questions 10 and 11 as indicative.

Questions

1. (a) Define supply-side policies. [2] (b) Outline two goals of supply-side policies. [2]

2. Distinguish between market-based and interventionist supply-side policies, giving one example of each. [4]

3. In the fictional country of Tarvan, a package of competition policies raises potential output from 800 to 860 billion crowns. Aggregate demand is given by P = 300 − 0.1Y, where P is the price level and Y is real output in billions of crowns. (a) Calculate the percentage increase in potential output. [2] (b) Draw an AD/AS diagram with an LRAS curve to show the effect, and state the new price level. [4]

4. In the fictional town of Ashgrove, the market for care workers has labour demand Qd = 1,000 − 40W and labour supply Qs = 200 + 60W, where Q is the number of workers and W is the hourly wage in crowns. (a) Find the market-clearing wage and the employment level. [2] (b) A minimum wage of 10 crowns is introduced. Calculate the number of workers unemployed. [2] (c) Calculate the percentage fall in employment compared with equilibrium. Give your answer to one decimal place. [2]

5. Using a minimum wage diagram, explain how abolishing a minimum wage could reduce unemployment, and state one equity concern. [4]

6. In the fictional country of Brennar, firms earn total profits of 200 million crowns. The business tax rate falls from 30% to 24%. Assume profits stay the same. (a) Calculate after-tax profits before and after the cut. [2] (b) Calculate the percentage change in business tax revenue. [2]

7. Explain two demand-side effects of supply-side policies. [4]

8. A government in the fictional country of Cordel spends 90 million crowns on a new road and rail link. It estimates that the link saves firms 18 million crowns a year. (a) Calculate how many years it takes for the savings to equal the cost. [2] (b) Calculate the net gain after 8 years. [2] (c) Explain one reason why the real return might differ from this estimate. [2]

9. Explain two constraints on market-based supply-side policies. [4]

10. Explain how an income tax cut could have both supply-side and demand-side effects, and comment on what this means for the inflation objective. [6]

11. Evaluate the use of market-based policies to reduce unemployment and inflation. [10]

Answers

1. (a) Supply-side policies are government actions to increase the productive capacity of the economy or the efficiency of markets [1], rather than changing total spending [1]. [2] (b) Any two of: long-term growth by raising productive capacity; better competition and efficiency; lower labour costs and unemployment through labour market flexibility; lower inflation for competitiveness; stronger incentives to invest in innovation. One mark for each goal stated clearly [1] [1]. [2] Examiner insight: The command term “outline” calls for a short summary, so name each goal and add a few words; a full paragraph per goal costs time you need elsewhere.

2. Market-based policies free markets or change incentives so that private decisions raise efficiency or output [1]. Example: privatization, deregulation or a tax cut [1]. Interventionist policies involve the government directly providing or funding something that raises capacity [1]. Example: education and training, infrastructure or research and development [1]. [4] Examiner insight: “Distinguish” needs the difference stated clearly, not two separate definitions; use a linking word such as “whereas”.

3. (a) Increase = (860 − 800) / 800 × 100 [1] = 7.5% [1]. [2] (b) Axes labelled price level and real output [1]. Original LRAS1 at 800, AD downward sloping, equilibrium labelled at 800 [1]. LRAS2 drawn to the right at 860 with the new equilibrium labelled [1]. New price level: P = 300 − 0.1 × 860 = 214 (down from 220) [1]. [4] Examiner insight: A diagram earns credit when every axis, curve and equilibrium is labelled; a correct shape with missing labels is easy to lose marks on.

4. (a) 1,000 − 40W = 200 + 60W, so 800 = 100W [1]. W = 8 crowns and Q = 1,000 − 320 = 680 workers [1]. [2] (b) At W = 10, Qd = 1,000 − 400 = 600 and Qs = 200 + 600 = 800 [1]. Unemployment = 800 − 600 = 200 workers [1]. [2] (c) Jobs lost = 680 − 600 = 80 [1]. 80 / 680 × 100 = 11.8% [1]. [2] Examiner insight: For “calculate”, show the relevant stages in the working; a bare number gives the reader nothing to credit if it is wrong, and the base for a percentage should be the original figure.

5. Diagram: wage against quantity of labour with a minimum wage line above the equilibrium wage, Qd below Qs and the gap labelled unemployment [1]. Abolishing the minimum wage lets the wage fall to the equilibrium level [1]. As the wage drops, employers want more workers and fewer people offer labour, until the two match and the surplus vanishes [1]. Equity concern: workers who keep jobs may earn less, so low-paid households could be worse off [1]. [4] Examiner insight: Explain the movement along both curves; saying “unemployment falls” without the mechanism leaves the analysis incomplete.

6. (a) Before: 200 × (1 − 0.30) = 140 million crowns [1]. After: 200 × (1 − 0.24) = 152 million crowns [1]. [2] (b) Revenue before = 200 × 0.30 = 60 and after = 200 × 0.24 = 48 [1]. Change = (48 − 60) / 60 × 100 = −20% [1]. [2] Examiner insight: A fall in tax revenue is a cost to the government budget; link it back to the claim that market-based policies are cheap.

7. Any two, each with explanation. Income tax cut: disposable income rises [1], so consumption, a component of AD, increases and AD shifts right [1]. Spending on infrastructure or education: it is government spending [1], so AD rises in the short run before capacity grows [1]. Also acceptable: business tax cuts raising investment, or lower costs improving net exports. [4] Examiner insight: Name the AD component each effect works through; “AD goes up” alone does not show the chain.

8. (a) 90 / 18 [1] = 5 years [1]. [2] (b) 8 × 18 = 144 [1]. 144 − 90 = 54 million crowns [1]. [2] (c) One reason with explanation, for example: construction takes years, so benefits start late [1], which lowers the value of the savings in the early years [1]. A cost overrun making the payback longer is also acceptable. [2] Examiner insight: Relate the reason to the guide’s constraints of costs and time lags and to the numbers in the question.

9. Any two of: equity issues, time lags, vested interests, environmental impact. For each, one mark for the constraint and one for the explanation. For example, equity: tax cuts mostly help high earners and lower benefits hit the poor [1][1]. Time lags: competition and incentives take time to change behaviour, so effects on growth come late [1][1]. Vested interests (unions or protected firms blocking reform) and environmental impact (more pollution from deregulation and growth) are equally acceptable. [4] Examiner insight: Tie each constraint to a named policy and a consequence; a single word is easy to leave undeveloped.

10. Supply side: lower tax raises the reward for work, so labour supply or hours may rise [1], which increases productive capacity and shifts LRAS right [1]. Demand side: higher take-home pay raises consumption, so AD shifts right [1]. If AD rises more than LRAS, price level pressure increases [1]. If LRAS rises as much or more, prices may stay stable or fall [1]. Comment: inflation turns on how large each shift is and when it arrives [1]. [6] Examiner insight: “Explain” needs the chain on both sides, and a comment should reach a judgement, not repeat the explanation.

11. Indicative points; a real answer is judged on the quality of the argument, not on counting points.

• Define market-based policies and identify those relevant, for example labour market flexibility and competition policies [1].
• Unemployment: abolishing minimum wages or cutting benefits lowers labour costs and encourages hiring [1], using the minimum wage diagram [1].
• Inflation: deregulation, privatization or trade liberalization raises competition and cuts costs, shifting LRAS right and lowering the price level [1].
• Strength: improved resource allocation [1], and no burden on the government budget [1].
• Constraint: equity issues, as low-paid or unemployed households lose income [1].
• Constraint: time lags and vested interests, so effects may be slow [1].
• Limit: they do little for cyclical (demand deficient) unemployment [1].
• Judgement that depends on the type of unemployment and the time horizon [1]. [10] Examiner insight: Set the strengths beside the limitations and finish with a judgement you can defend; a one-sided list of benefits reads as description rather than appraisal.

Where marks are usually lost

• Not labelling axes, curves and equilibrium points on a diagram.
• Setting the minimum wage line at or below equilibrium.
• Shifting AD instead of LRAS for a supply-side policy.
• Using the wrong base for a percentage change.
• Giving a calculated number with no working.
• Describing a policy without explaining how it reaches growth, unemployment or inflation.
• Listing constraints without tying them to the policy named.
• Ending an evaluation with no judgement.

Next steps

• Revise with the revision notes and re-read the study guide.
• Check the Economics hub and the printable checklist.
• Try all free 10-minute diagnostics at diagnostics.
• Book a free trial class.

Official syllabus

IB Diploma Programme Economics guide, first assessment 2022, published February 2020 by the International Baccalaureate Organization. Sub-topic 3.7, Supply-side policies, in Unit 3 Macroeconomics.