3.6 Fiscal policy questions for IB Economics

Using the circular flow of income model, explain how changes in leakages and injections affect the level of national income.

Using real-world examples, discuss the effectiveness of expansionary fiscal policy in reducing unemployment.

Define the term injection indicated in bold in the text (Text A, paragraph 2).

Using information from Table 1, calculate the difference between total leakages and total injections in Tarvesh in 2025.

Using your answer to (b)(i), state whether Tarvesh's national income is likely to rise or fall.

Using a circular flow of income diagram, explain how the recession in Holvenia is likely to affect household incomes in Tarvesh (Text A, paragraphs 1 and 2).

Explain two measures the government of Tarvesh could use to bring leakages and injections back into balance at a higher level of national income (Text A, paragraph 3).

Using Table 1, calculate government spending on health as a percentage of GDP in 2023.

Using Table 1, calculate Saldova's government debt as a percentage of GDP in 2023.

Using Table 1, calculate the number of people aged 65 and over who were not vaccinated against flu in 2023.

Using an externalities diagram and the information provided, explain why flu vaccination among people aged 65 and over is underconsumed in Saldova.

Saldova normally sends people aged 65 and over a letter asking them to telephone their clinic to book a vaccination. In a trial, 20 000 people instead received a letter giving them an appointment with a date and time already booked, which they could change or cancel. The vaccination rate was 55 % among those who received the pre-booked appointment and 42 % among 20 000 people who received the standard letter.

Identify the form of choice architecture used in the pre-booked appointment letter.

Using the information in part (a)(v), calculate the additional number of people vaccinated as a result of sending the pre-booked appointment letter to 20 000 people.

Outline why the pre-booked appointment letter is an example of a nudge.

Explain two reasons, other than cost, why many people aged 65 and over in Saldova do not get vaccinated even though the vaccine is free.

Each flu-related hospital admission of a person aged 65 and over costs the health service SDL 9 500. Health economists estimate that every 100 additional vaccinations of people in this age group prevent 2 hospital admissions. Each vaccination costs the health service SDL 30.

Using your answer to part (a)(vi), calculate the net saving to the health service from the additional vaccinations in the trial. Ignore the cost of sending the letters.

The following options to raise flu vaccination among people aged 65 and over are being considered:

• sending pre-booked appointment letters to all 3.2 million people aged 65 and over, at a cost of SDL 1.20 per letter;

• a payment of SDL 20 to each person who is vaccinated; critics argue that it would mostly reward people who would have been vaccinated anyway;

• allowing pharmacies to give vaccinations, which would require training and payments to pharmacists;

• a public information campaign on television and radio costing SDL 6 million;

• making vaccination compulsory for residents of care homes, which some groups argue would breach individual rights.

The government has said that any new spending must be “affordable given the budget deficit”.

Using the information provided and your knowledge of economics, recommend a policy the government of Saldova could introduce to increase the flu vaccination rate among people aged 65 and over.

Using an AD/AS diagram, explain Keynes's argument that insufficient aggregate demand can cause persistent unemployment.

Using real-world examples, evaluate the effectiveness of expansionary fiscal policy in closing a deflationary (recessionary) gap.

Define the term scarcity indicated in bold in the text (Text A, paragraph 1).

Using information from Text A, paragraph 2, calculate the opportunity cost, in rural clinics, of buying the three aircraft requested by the defence ministry.

Using information from Text A, determine the maximum number of rural clinics that could be built if no aircraft were bought.

Using a production possibilities curve (PPC) diagram, explain the choice faced by Mirelland's government (Text A, paragraphs 1 and 2).

Explain two reasons why national security may be provided by the government rather than by the market (Text A, paragraph 3).

Calculate the amount of VAT included in the price of a typical meal before the tax cut.

Calculate the amount of VAT included in the price of a typical meal after the tax cut.

Using your answers to parts (a)(i) and (a)(ii), calculate the percentage of the cut in VAT per meal that was passed on to consumers as a lower price.

Calculate the change in the government's annual VAT revenue from restaurant meals.

Sketch a demand and supply diagram to show the effect of the VAT cut on the market for restaurant meals.

Explain two reasons why the government of Country U may have chosen to cut VAT on restaurant meals.