IB Economics 3.5 Demand Management - Monetary Policy Questionbank

(c) Using information from Table 2, calculate the price elasticity of demand for trekking permits in Nepal when the average permit price increases from US$50 to US$60.

(d) Using information from Table 2, calculate the change in total revenue from trekking permit sales between 2021 and 2022.

(e) Define the term “Keynesian multiplier.”

(f) Using an AD/AS diagram, explain how an increase in foreign direct investment might affect real output in Nepal in the short run.

(g) Using information from Table 1, calculate the labour force participation rate in Nepal for 2021.

(h) Using information from the text, explain how income inequality could act as a constraint on Nepal’s economic growth.

(i) Using the text/data provided and your knowledge of economics, recommend a policy which could be implemented by the government of Nepal in order to promote sustainable economic growth.

Recent Economic Trends in Chile

Chile, located along the western coast of South America, is widely regarded as one of the region’s most stable and prosperous nations. With a population of around 19 million, the country boasts a successful track record in macroeconomic management, marked by consistent economic growth and relatively low government debt levels. However, ongoing shifts in global trade, fluctuating copper prices, and recent policy reforms have brought new challenges to Chile’s economy.

In 2022, Chile recorded an average monthly wage of approximately US$600, though the cost of living in major urban centers such as Santiago continues to rise. To maintain price stability, the Central Bank of Chile has long operated an inflation-targeting regime, typically aiming for annual inflation close to 3%. Yet external pressures—like disruptions to global supply chains—pushed the inflation rate up to 7.2% in 2022. Unemployment remains a pressing issue; following a peak of 10.7% in 2020 when economic activity contracted, joblessness has gradually declined as the economy recovers.

Chile’s economic identity is strongly tied to mining, particularly copper, which accounts for a significant proportion of export revenues. In 2022, approximately 45% of total exports came from copper and other minerals. While copper has been a major driver of economic growth, economists and policymakers increasingly emphasize diversification to protect against commodity price volatility. The government has also expanded support for agricultural and service industries, promoting increased global competitiveness through various trade agreements with North American and Asian partners.

On the fiscal side, Chile historically prided itself on low government debt, yet debt levels have slowly risen to 37% of GDP by 2022. This reflects higher spending on social programs, including public healthcare and education subsidies. Policymakers are attempting to strike a balance between prudent fiscal management and ensuring equitable access to basic services. In the microeconomic arena, Chile introduced an excise tax on sugar-sweetened beverages to discourage unhealthy consumption and reduce negative externalities tied to rising obesity rates.

Foreign direct investment (FDI) flows remain relatively stable in non-mining ventures, particularly in renewable energy sectors such as solar and wind. The government has enacted regulatory changes that encourage private-sector participation in green investments, hoping to lessen reliance on fossil fuels. Analysts predict that over the next decade, renewable energy might comprise up to 30% of Chile’s energy mix, helping the country manage environmental externalities while sustaining long-term economic growth.

Despite Chile’s liberalized trade regime, some domestic industries face competitiveness hurdles from global market fluctuations. The peso’s exchange rate is influenced by copper prices. Therefore, this has spurred officials to pursue greater diversification.

Income distribution remains a topic of debate. Chile has recorded improvements in its Gini coefficient over the past decade, yet inequalities persist—especially in rural areas where access to education and healthcare lags behind that in urban regions. Government initiatives to raise the minimum wage and invest in vocational training signal attempts to address income disparities, which some critics argue need more comprehensive policies.

Private enterprise plays a central role in Chile’s leading export industries. In the mining sector, large multinational firms partner with domestic companies, creating jobs and contributing to government revenue. Nevertheless, critics point to environmental costs from mining activities and the need for stricter regulations to ensure sustainable resource use. Many also question whether enough investments are being channeled into non-traditional sectors like technology and advanced manufacturing—areas widely seen as key to sustainable future growth.

Moving forward, Chile’s policy landscape continues to evolve. Discussions about strengthening social safety nets, investing further in green energy, and maintaining a competitive exchange rate occupy center stage. The government’s approach to promoting inclusive development includes balancing social spending with structural reforms that attract both domestic and foreign investors. Ultimately, Chile’s ability to diversify its economy beyond copper and ensure equity across various regions will determine its long-term path to stable and inclusive growth.

Table 1: Chile’s Macroeconomic Indicators (2019–2022)

Table 2: Chile’s Export Composition (2022)

(a) Define the term “inflation-targeting” as mentioned in the text (Paragraph 1).

(b) Define the term “taxes” as described in the text (Paragraph 4).

(c) Using information from Table 1, calculate the percentage point change in Chile’s unemployment rate from 2019 to 2020.

(d) Sketch an AD/AS diagram to show how a decrease in real GDP growth might initially affect the level of unemployment.

Recent Economic Developments and Policy Initiatives in the United Kingdom

Over the past few years, the United Kingdom has experienced profound structural changes and economic challenges. The combined effects of global shocks and post-Brexit transitions have resulted in fluctuating economic growth rates. Between 2019 and 2020, growth fell sharply from 1.5% to –9.8%, rebounding to 7.4% in 2021 as consumer demand recovered. However, inflation accelerated in 2022, surpassing 9% according to official statistics, driven partly by higher energy costs and supply chain disruptions. In response, the Bank of England pursued a more restrictive approach to its monetary policy, raising interest rates multiple times in an effort to contain inflation. While these measures helped temper price pressures, they also increased borrowing costs, posing potential risks to investment and household spending.

In the microeconomic arena, government interventions have focused on mitigating the impact of rising energy costs on households. A temporary energy price guarantee scheme was introduced in late 2022, aimed at capping per-unit gas and electricity fees. This measure, designed to protect consumers, has substantial fiscal implications, as it expands government expenditure. Meanwhile, the government has also debated altering the structure of income taxes, exploring higher income tax thresholds to offset some cost-of-living pressures. Critics argue that such policies may not sufficiently protect marginalized households, especially those affected by wage stagnation and increasing rent costs.

International trade policies have been another focal point of debate. As the UK seeks new markets beyond Europe, the government has been negotiating deals with countries like Australia, Japan, and the United States. One contentious aspect is whether the UK should maintain or eliminate an agricultural quota on poultry imports from certain trading partners. Businesses in the food sector expect that removing such quotas will reduce input costs. However, domestic producers worry about intensified foreign competition. Britain’s trade balance remains in deficit despite recovering exports in advanced manufacturing, pharmaceuticals, and financial services. In 2022, net exports improved slightly due to a weaker pound, but overall trade volumes remain below pre-2019 levels.

Labour market dynamics have also evolved. The national unemployment rate rose from 4.0% in 2019 to 6.3% in 2020, declining again to 4.6% by 2022. Yet there are mounting concerns over structural unemployment in regions once reliant on manufacturing, as well as skill shortages in high-tech industries. Government initiatives to improve training and apprenticeships have begun to address these gaps, but businesses still report persistent challenges in recruiting skilled workers. Additionally, some economists highlight rising levels of underemployment, suggesting that headline unemployment figures may understate the true slack in the labour market.

Income inequality and sustainable development continue to shape policy objectives. The UK government has pledged to reduce carbon emissions by 68% by 2030 (compared to 1990 levels), with significant investments in offshore wind and nuclear energy. It is also expanding green bond issuance to finance public infrastructure that supports climate goals. However, critics argue that regional disparities remain stark, as wealth and employment opportunities often concentrate in London and the Southeast. A new focus on “levelling up” includes spending on public transport connectivity, digital infrastructure, and housing in economically disadvantaged areas, aiming to improve both social equity and economic resilience.

Policymakers face the difficult task of balancing inflation control, economic growth, and social welfare. The Bank of England’s main policy rate stands at its highest level in over a decade, curtailing inflation but cooling investment. Meanwhile, government debt surpassed 95% of GDP in 2022, raising questions about the sustainability of large-scale fiscal interventions such as the energy price guarantee. Nonetheless, optimism persists in certain sectors: foreign direct investment is slowly recovering in tech and green industries, albeit at lower levels than before 2019. The UK’s long-term prospects may hinge on effectively managing new trade relationships, tackling regional inequalities, and implementing consistent climate-related policies to ensure inclusive, sustainable growth.

Table 1: UK’s Selected Macroeconomic Indicators (2019–2022)

Table 2: UK Exports by Sector (2021–2022)

(a) Define the term monetary policy indicated in bold (paragraph 1).

(b) Define the term income taxes indicated in bold (paragraph 2).

(c) Using information from Table 1, calculate the UK’s real GDP in 2022 (in £ trillion), using 2019 as the base year.

(d) Sketch an AD/AS diagram to illustrate how the increase in the Bank of England’s policy rate (paragraph 1) could affect real output and the price level.

Explain how the central bank can change the central bank minimum lending rate to decrease interest rates.

Solana is an emerging agricultural economy in Southeast Asia with a population of approximately $35$ million. While the country has successfully industrialized its urban centers, the rural regions remain heavily dependent on rice cultivation, which provides employment for nearly $40\%$ of the labor force. Rice is not only a dietary staple but also a culturally significant commodity. However, Solana's domestic rice farmers face significant pressure from large-scale exporters in neighboring countries, where production costs are lower due to favorable climates and advanced irrigation technologies.

In recent years, the Solanian government has prioritised food security and the protection of rural livelihoods. To achieve this, they have moved away from free trade in the rice sector. In $2023$, following a period of high import volumes that depressed local prices, the Ministry of Agriculture introduced a strict import quota on rice. This policy aimed to stabilize domestic prices and encourage local production, though it sparked debates regarding its impact on urban poverty and international trade relations.

The following tables provide data on Solana’s macroeconomic indicators and the domestic rice market.

Table 1: Selected Economic Data for Solana ($2022$–$2023$)

Table 2: Quarterly Domestic Rice Market Data in Solana

Table 3: Solana Rice Trade Policy Data ($2023$)

Note: Assume Solana is a small open economy and a price-taker in the global rice market.

Use the diagram below for the relevant part.

(a) Using the data in Table 2 and Table 3, calculate the percentage change in the domestic price of rice in Solana resulting from the implementation of the import quota.

(b) Using the data provided, calculate the total value of the quota rents generated by this policy. Show your working.

(d) Calculate the change in total quarterly consumer expenditure on rice in Solana after the quota is implemented. Show your working.

(c) Using the information in Table 2, calculate the price elasticity of supply (PES) for Solana’s domestic rice when the price increases from $120$ to $150$ per tonne.