Question 21M.1.SL.TZ1.4a
| Date | May 2021 | Marks available | [Maximum mark: 10] | Reference code | 21M.1.SL.TZ1.4a |
| Level | SL | Paper | 1 | Time zone | TZ1 |
| Command term | Explain | Question number | a | Adapted from | N/A |
Explain how aggregate demand is likely to be affected by an increase in the wealth of consumers and an increase in business confidence.
[10]
Marks should be allocated according to the paper 1 markbands for May 2013 forward, part A.
Answers may include:
- definitions of aggregate demand, wealth, business confidence
- diagram to show the AD curve shifting to the right
- explanation that an increase in the wealth of consumers may have a positive wealth effect whereby consumption increases as consumers feel richer and are more willing to spend, or can borrow more on the basis of their greater wealth; that an increase in business confidence in relation to being more optimistic about future sales and profits is likely to increase investment; and that the increase in C and I will increase AD
- examples of an increase in consumers’ wealth and/or business confidence increasing AD in practice.
Award a maximum of [6] if only wealth or only business confidence is addressed.
Most responses to this question were disappointing in the sense that a certain level of understanding was usually shown but not to the level required to achieve a high mark. The main problem was that, while most candidates understood the concept of aggregate demand and its components, the concepts of wealth and business confidence were usually not well understood. Wealth was commonly equated with income and so an increase in wealth was often simply seen as an increase in disposable income, which would increase AD. Only in relatively few cases was the increase in consumption and thus AD explained in terms of the wealth effect. Business confidence was not well-understood and was often confused with consumers' confidence in business, but candidates did usually make the connection with increased investment and AD, although the reasons given were not always correct and, invariably, no examples were provided.
