Question 21N.1.SL.TZ0.a
| Date | November 2021 | Marks available | [Maximum mark: 10] | Reference code | 21N.1.SL.TZ0.a |
| Level | SL | Paper | 1 | Time zone | TZ0 |
| Command term | Explain | Question number | a | Adapted from | N/A |
Explain how in the Keynesian AD/AS model an economy can be in equilibrium while producing below the full employment level of output.
[10]
Marks should be allocated according to the paper 1 markbands for May 2013 forward, part A.
Answers may include:
- definitions of equilibrium, full employment level of output
- diagram to show the Keynesian model of an economy at equilibrium income below the full employment level of output
- explanation of how an economy can be in equilibrium income below full employment when AD falls, leading to a deflationary gap when wage and price rigidity keep the economy below the full employment level of output
- examples of when economies have experienced equilibrium income below the full employment level of output.
The responses to this question were mixed in terms in terms of the standard. The best answers clearly focused on the reason why equilibrium national income can exist below full employment in the Keynesian model by focusing on the argument that wages and costs do not fall when the economy is operating below full employment. A common mistake was for students to simply explain equilibrium income below full employment without explaining why the equilibrium would stay at this level and not adjust back to full employment. Very good answers were supported by an effective real-world example.
