Question 19M.1.SL.TZ2.3b
| Date | May 2019 | Marks available | [Maximum mark: 15] | Reference code | 19M.1.SL.TZ2.3b |
| Level | SL | Paper | 1 | Time zone | TZ2 |
| Command term | Evaluate | Question number | b | Adapted from | N/A |
Evaluate the view that inflationary pressures in an economy are best reduced using supply-side policies.
[15]
Marks should be allocated according to the paper 1 markbands for May 2013 forward, part B.
Answers may include:
- definition of inflation, inflationary pressures, supply-side policies
- diagram to show the impact of supply-side policies on inflation via the shift of long-run aggregate supply (LRAS) to the right
- explanation of how market based (eg deregulation, anti-monopoly policy, etc) and/or interventionist supply-side policies (eg price controls, subsidies, etc) may reduce inflationary pressures in an economy
- examples of situations where supply-side policies have helped to reduce inflationary pressures
- synthesis and evaluation.
Evaluation may include: the disadvantages of using particular supply-side policies, such as: the impact of market-based polices on equity, not as effective with demand-pull inflation, the impact of interventionist policies on the government budget and the time lags associated with supply-side policies. The advantages of supply-side policies, such as: increased real GDP, increased employment, more effective with cost-push inflation and possible improvement in economic efficiency. Consideration of deflationary monetary and fiscal policies as alternative policies to reduce inflation.
Candidates found this question quite challenging because questions on policies to reduce inflation normally consider monetary and fiscal approaches rather than supply-side policies. High achieving responses to this question explained how interventionist supply-side policies such as price controls and subsidies in key markets might reduce inflationary pressure. These points were then evaluated by considering the opportunity costs of policies such as wide scale subsidies and shortages that might be created by price controls. The highest achieving responses also considered how market-based supply-side policies such as strong competition policy and reducing the power of trade unions might reduce inflationary pressures and these policies were evaluated by considering the long-term nature of this approach and how, for example, reducing trade union power might negatively affect employee welfare. The highest achieving responses used real-world examples to illustrate such countries that use fuel subsidies to reduce energy prices.
