Question 21M.1.SL.TZ1.a
| Date | May 2021 | Marks available | [Maximum mark: 10] | Reference code | 21M.1.SL.TZ1.a |
| Level | SL | Paper | 1 | Time zone | TZ1 |
| Command term | Explain | Question number | a | Adapted from | N/A |
Explain how the size of the circular flow of income in an economy is likely to be affected by a decrease in the rate of interest.
[10]
Marks should be allocated according to the paper 1 markbands for May 2013 forward, part A.
Answers may include:
- definitions of circular flow of income, rate of interest
- diagram of the circular flow of income, showing a decrease in saving and an increase in investment or use of an AD/AS diagram to explain the impact of the decrease in the rate of interest on the circular flow of income
- explanation that a decrease in the rate of interest is likely to reduce saving, and increase business investment; hence a decrease in a leakage and an increase in an injection will exert an upward impact on income and output and increase the size of the circular flow of income
- examples of changes in the rate of interest affecting the circular flow of income in practice, such as the reduction of interest rates to near 0% in many countries at present.
This proved to be a difficult question for candidates and was certainly the least popular. Most were unable to provide an accurate circular flow diagram and to explain the circular flow model and, all too often, the key concepts of injections and leakages were completely ignored or simply glossed over. Thus, usually, candidates did not link the lowering of interest rates to a decrease in a leakage (saving) and an increase of an injection (investment). Many briefly mentioned that the size of the circular flow would increase but were not able to properly explain why. Examples were almost never provided. Many candidates appeared to be much more at ease with the AD/AS model, which they often launched into at an early stage of their answer to this question. Some credit was given for this where appropriate, but this approach was often not explicitly related to leakages and injections.
