IB Economics HL Paper 1 May 2025

IB Economics May 2025 Paper 1 HL Topic by Topic

This is my personal analysis of every topic area tested in the IB Economics May 2025 HL Paper 1 - what the examiner was in my opinion really looking for, the content you need to master, and step-by-step instructions on how to structure a high-scoring response.

Lawrence's note 1: I don't reproduce IB copyrighted exam papers or materials, as this would be unauthorised use, reproduction, distribution, or display of copyrighted material, and therefore, would violate the exclusive rights of the IB Institution. I just make a summary from a teacher's point of view, of everything you actually need to prepare in order to be successful at a paper 1 similar to this one.

1 hour 15 minutes - 25 marks total - Choose One question and answer - Three sets of questions available each containing 1 (10 marks) + 1 (15 marks) questions.

Lawrence's Note 2:

What follows is not a set of predicted questions or a likely topics list. This would not be realistic and be wary of websites and sources that sell "predicted questions" for IB Economics. This is a topic-by-topic breakdown of what the IB Economics Board actually tested in May 2025 for Paper 1 HL, written to help my students understand the depth of knowledge required in each area of the IB Economics paper, and teach them how to approach this particular paper and papers similar to this one.

Unlike other exam boards, the IB rarely / never rewards memory reproduction / memorising alone.

Every topic here was examined in a way that required genuine economic reasoning, and that is what this page prepares you for IB Economics Evaluation + reasoning + Critical thinking.

Lawrence's Note 3:

HL students answer different questions from SL students in the same session. The November 2024 HL paper drew on HL-only content: market structures (monopoly and monopolistic competition), the monetarist/new classical model with flexible wages, and exchange rate theory linked to inflation differentials. None of these topics appeared on the SL paper.

The November 2024 HL paper was theoretically demanding across all three questions. Question 1 required precise diagram work on two market structures simultaneously - and then a sophisticated and extensive evaluation of firm objectives that went well beyond textbook profit maximisation. Question 2 went deep into the monetarist / new classical model, where the diagram and the mechanism had to work together precisely. Question 3 linked macroeconomic theory (inflation differentials) to currency markets, then required a balanced assessment of monetary union - one of the IB Economics' most consistently tested HL evaluation topics.

Question 1 - Microeconomics - Elasticities

Price Elasticity of Demand

1A- Explain [10 marks] Why PED for primary commodities is generally lower than for manufactured goods

Explain - present a clear, logical causal account. Each point needs a mechanism, not just a statement. No evaluation required in Part (a).

Topics Needed: Price Elasticity of Demand (PED), Elasticities, Module 2 Microeconomics

What did this question ask for?

The question asks you to contrast the price elasticity of demand for two categories of goods and explain the economic reasons for the difference. Three determinants of PED provide the framework: the number and closeness of substitutes, the degree of necessity, and the proportion of income spent on the good. You get credit for:

• Terminology: PED defined accurately; primary commodities and manufactured products clearly defined.

• Theory: explanation of relatively inelastic demand for primary commodities and elastic demand for manufactured goods, using the determinants of PED - applied to both product types, not just one.

• Diagram(s): demand curve diagrams illustrating inelastic demand (primary commodity) and elastic demand (manufactured good), fully labelled and explained.

Model Answer Framework - 5 steps to 9–10 marks

1. Define PED precisely. The responsiveness of quantity demanded to a change in price, measured as % change in Qd ÷ % change in P. PED between 0 and −1 (ignoring sign) = price inelastic. PED above 1 in absolute value = price elastic.

2. Define both product categories. Primary commodities: raw or semi-processed goods derived directly from natural resources (oil, wheat, copper, coffee). Manufactured goods: processed products with design and branding content - smartphones, cars, branded clothing - that have identifiable close substitutes.

3. Apply the substitutes determinant. Primary commodities are largely homogeneous - one producer's crude oil is functionally identical to another's. There are few close substitutes for the commodity category as a whole (oil cannot easily be replaced in petrochemical production). Manufactured goods face intense competition from rival branded alternatives, giving consumers choices and making demand elastic.

4. Apply the necessity determinant. Many primary commodities underpin essential goods and services. Energy, food inputs, and raw materials are purchased regardless of price changes. Most manufactured goods are less essential - consumers can postpone or switch brands when prices rise.

5. Apply the income proportion determinant. Individual primary commodities (salt, sugar, basic metals per unit) often represent a tiny share of household expenditure, so price changes create little incentive to seek alternatives. Expensive manufactured goods absorb a larger budget share, motivating consumers to shop around or delay purchase.

Diagrams You Must be Able to Draw

• Draw two side-by-side demand diagrams. Left: steep (inelastic) curve labelled "Crude oil / primary commodity" - a price rise P₁→P₂ produces a small fall in quantity Q₁→Q₂. Right: shallow (elastic) curve labelled "Smartphones / manufactured good" - same price rise produces a large fall in quantity. The visual contrast between a small ΔQ and a large ΔQ for the same ΔP is your argument in diagram form. Label axes Price (£) and Quantity on both. Annotate the diagrams - this is what "fully explained" means to the examiner.

What Examiners Are Looking For

• 9–10 All three determinants applied to both product types; fully labelled and explained diagram(s); PED, commodity and manufactured good defined appropriately throughout.

• 7–8 At least two determinants developed; relevant diagram included and explained; mostly correct terminology.

• 5–6 Partial - one determinant developed, or diagram present but unexplained.

• 3–4 Theory described rather than explained; limited terminology; diagram absent or unlabelled.

Master These topics at the IB Trainer:

IB Economics Price Elasticity of Demand (PED)

IB Economics Elasticities Hub Page

IB Economics Diagrams Page Check Unit 8 for All Price Elasticity of Demand (PED) diagrams with explanations

IB Economics Activity book Page Module 2 Microeconomics Unit 2.4 for Price Elasticity of Demand (PED) exam practice, activities, model answers and IB Economics Marking schemes

IB economics Calculations Book make sure you check unit 5 for Price Elasticity of Demand (PED) calculations exercises, IB model answers, and IB marking schemes

1B- Discuss - 15 [Marks] - The importance of PED for the decision-making of firms and governments

Discuss - present arguments on both sides, weigh them against each other, and reach a supported judgement. Real-world examples must be developed in context, not just named.

A maximum of 9/15 awarded if only the importance for firms OR only the importance for government is discussed. Both must be addressed.

What You Get Credit For

• For firms: PED determines the impact of a price change on total revenue. Inelastic demand → price rise increases TR. Elastic demand → price rise reduces TR. This informs pricing strategy directly.

• For government: PED determines tax incidence (how the burden of indirect tax splits between producer and consumer); how much revenue an indirect tax raises; whether a tax on a demerit good reduces consumption effectively; and whether a subsidy on a merit good increases consumption efficiently.

• Diagrams: a total revenue analysis diagram; and/or an indirect tax incidence diagram with the tax wedge linked to PED; and/or a subsidy diagram.

• Synthesis: the difficulty of accurately estimating PED in practice (ceteris paribus rarely holds); firms pursue multiple objectives (profit maximisation, CSR, satisficing); governments have political and equity objectives; the Marshall-Lerner condition extends PED analysis to exchange rate policy.

• Real-world examples: UK tobacco duty; petrol pricing; pharmaceutical pricing; airline dynamic pricing; luxury goods price positioning.

How to Structure Your 15 Mark Answer

1. Introduction. Brief recap of PED; state that both firms and governments use PED data for decisions; flag the key limitation - analytically powerful but hard to measure precisely.

2. Firms - the total revenue test. If demand is inelastic, raising price increases TR (ΔP% exceeds ΔQ%). If elastic, raising price reduces TR. Draw and explain the TR diagram or the inelastic vs elastic demand comparison. Apply to a real example: pharmaceutical companies exploit inelastic demand for patented drugs; EasyJet uses dynamic pricing to extract more from time-sensitive last-minute buyers; OPEC benefits from supply restriction because demand for oil is inelastic.

3. Firms - evaluation. Firms rarely know PED with precision - market research is costly and ceteris paribus rarely holds. Competitors may react to price changes in oligopoly markets. Firms pursue objectives beyond TR: profit maximisation depends on costs as well as revenue; CSR and brand reputation may override revenue-maximising pricing decisions.

4. Government - indirect taxation. More inelastic demand = greater consumer tax burden = more revenue raised per unit tax. Draw the tax incidence diagram - a steep demand curve pushes the wedge heavily onto consumers. Apply: UK tobacco duty, EU alcohol excise, fuel duty. Note the tension: a tax on a demerit good with very inelastic demand collects revenue well but changes behaviour very little - the market failure is not corrected efficiently.

5. Government - subsidies and resource allocation. For a merit good with elastic demand, a subsidy substantially raises quantity consumed - efficient use of public money. For inelastic demand, the quantity effect is modest relative to expenditure. PED is therefore central to assessing whether a subsidy achieves its policy objective.

6. Government - evaluation. Taxing inelastic necessities (food, fuel) is regressive - it burdens lower-income households disproportionately, creating equity concerns that override the revenue case. Political pressures mean PED-based tax decisions are rarely made in isolation. The Marshall-Lerner condition extends PED analysis to government exchange rate policy.

7. Conclusion. PED is a powerful analytical tool for both firms and governments, but its real-world application is constrained by measurement difficulties and the complexity of objectives on both sides. Its importance is high in principle; its practical application requires judgement and caution.

What Did Students Scoring 13-15 Do?

Candidates in the 13–15 band drew and explained a tax incidence diagram showing the PED-linked split of the consumer and producer burden - not just a generic supply and demand diagram. They also developed real-world examples in the context of the argument (explaining why tobacco's inelastic demand produces a specific revenue and behaviour outcome), and evaluated limitations for both firms and government. One-sided answers - even excellent ones - cannot reach the top band on a "discuss" question.

Master These topics at the IB Trainer:

IB Economics Price Elasticity of Demand (PED)

IB Economics Elasticities Hub Page

Question 2 - Macroeconomics

Supply-Side Policies & Unemployment

2A- Explain [10 Marks] How interventionist supply-side policies produce both demand-side and supply-side effects

Explain - construct a clear causal chain. No evaluation required. The challenge is demonstrating that the same policy works on two sides of the macroeconomic model simultaneously.

A maximum of 6/10 is awarded if only the demand-side effects OR only the supply-side effects are explained. Both must be covered.

What You Get Credit For

• Terminology: interventionist supply-side policies defined and distinguished from market-based SSPs.

• Examples: government spending on education and training, healthcare, R&D, infrastructure (roads, ports, broadband), and industrial policy.

• Demand-side effect: government expenditure is a component of AD (G in C+I+G+(X−M)). Increased G shifts AD right → short-run increase in real GDP, fall in unemployment, possible rise in price level.

• Supply-side effect: the same spending raises quality and quantity of factors of production and increases productive capacity → LRAS shifts right → economy can produce more at every price level without generating sustained inflation.

• Diagram: AD/AS showing both AD₁→AD₂ and LRAS₁→LRAS₂, with both shifts annotated and their separate effects explained.

Diagram Support

A single AD/AS diagram showing both shifts is the most efficient approach and is what the mark scheme rewarded. Show AD shifting right first ("short-run demand-side effect"), then LRAS shifting right ("long-run supply-side effect"). Use labelled arrows and annotate what each shift represents. Many candidates drew only one shift - and this meant that a maximum of 6/10 marks were awarded.

How to Structure Your Answer

1. Define interventionist SSPs. Policies in which the government directly intervenes to raise productive capacity, rather than relying on market forces. Examples: education, training, healthcare investment, infrastructure, R&D funding.

2. Give two or three concrete examples with brief mechanisms. Government university funding increases human capital quality; road and rail investment reduces transport costs and raises productive efficiency; public healthcare spending keeps the labour force healthy and productive.

3. Explain the demand-side effect. Government expenditure on these programmes injects spending into the circular flow. AD = C + I + G + (X−M). An increase in G shifts AD right → real GDP rises, unemployment falls in the short run, price level rises slightly.

4. Explain the supply-side effect. Over time, the same spending raises human capital, improves infrastructure, and fosters innovation → productive capacity of the economy increases → LRAS shifts right. The economy can sustain higher output without inflationary pressure.

5. Draw and fully annotate the AD/AS diagram. Show initial equilibrium Y₁, P₁. Illustrate AD₁→AD₂ (demand-side, label "short-run effect"). Then illustrate LRAS₁→LRAS₂ (supply-side, label "long-run effect"). Label all curves and equilibrium points. Note that the AD shift raises price level initially; the LRAS shift brings it back towards its original level.

Master These topics at the IB Trainer:

IB Economics Supply-side Policies

IB Economics The Goals of Supply-side Policies

IB Economics Diagrams Page Check Unit 24 for All Supply-side Policies diagrams with explanations

IB Economics Activity book Page Module 3 Macroeconomics Unit 3.16 for Supply-side Policies exam practice, activities, model answers and IB Economics Marking schemes

2B- Evaluate [15 marks] Evaluating the effectiveness of market-based supply-side policies in reducing unemployment

Evaluate - assess strengths and weaknesses and reach a justified conclusion. The word effectiveness against unemployment means each policy must be linked to its mechanism for reducing unemployment, then assessed on how well that mechanism actually works.

What You Got Credit For

• Terminology: market-based SSPs defined accurately; types of unemployment identified and used analytically.

• Policies and mechanisms: reducing trade union power → greater labour flexibility → lower structural unemployment; cutting income tax → incentive to work → lower frictional unemployment; reducing unemployment benefits → lower reservation wage → increased job-seeking; deregulation and privatisation → entrepreneurship, FDI, job creation; reducing trade barriers → export-led job growth.

• Diagrams: AD/AS showing LRAS shifting right; and/or a labour market or minimum wage diagram.

• Evaluation: effectiveness depends heavily on type of unemployment (market-based SSPs largely ineffective against cyclical unemployment); equity concerns from cutting union power and minimum wages; privatisation may reduce short-run employment; long time lags; trickle-down effects contested; comparison with interventionist SSPs and demand management warranted.

• Real-world examples: UK Thatcher-era labour market reforms; Ireland's corporate tax rate attracting FDI; New Zealand's economic liberalisation; 2017 US Tax Cuts and Jobs Act.

How to Structure Your 15 Mark Answer

1. Introduction. Define market-based SSPs (policies that reduce government intervention and allow market forces to allocate resources more efficiently). State that effectiveness varies by type of unemployment and specific policy - this is the evaluative thread of the essay.

2. How market-based SSPs can reduce unemployment. Work through 3–4 policies: (a) reducing trade union power → increases labour market flexibility → reduces structural unemployment caused by wage rigidity; (b) cutting income tax → increases the incentive to supply labour → reduces voluntary frictional unemployment; (c) deregulation → reduces barriers to entry, stimulates entrepreneurship and investment → job creation; (d) trade liberalisation → increases export competitiveness → export demand growth creates jobs.

3. Diagram. LRAS shifting right as market-based SSPs increase productive capacity. Or a labour market diagram showing how removal of a minimum wage floor allows the market to clear at lower unemployment.

4. Evaluation - limitations. Market-based SSPs address structural and frictional unemployment but are largely ineffective against cyclical unemployment, which dominates during recessions and requires demand management. Cutting union power and minimum wages may increase employment marginally but widens income inequality significantly - an equity cost the mark scheme explicitly rewards evaluating. Privatisation has reduced short-run employment in several cases (UK Steel, British Telecom). Time lags of years or decades make these policies unsuitable for immediate crisis response. The "trickle-down" assumption that benefits flow to all workers is empirically contested.

5. Real-world example(s). Ireland's 12.5% corporate tax rate attracted major multinational investment - unemployment fell from above 15% in the early 1990s to below 5% by 2000. The UK Thatcher-era reforms reduced structural unemployment over the long run but caused sharp short-run employment losses in manufacturing regions. Both examples illustrate the time-lag problem and the distributional tensions.

6. Conclusion. Market-based SSPs can effectively reduce structural and frictional unemployment over the long run, particularly in economies with significant labour market rigidities. They are insufficient against cyclical unemployment, carry equity risks, and involve long time lags. The most effective approach combines market-based SSPs with interventionist SSPs and, where appropriate, demand-side policy.

Where Did Some Of My students Lose Marks?

The single most discriminating evaluation point in this question was explicitly distinguishing between types of unemployment. Candidates who linked specific policies to structural or frictional unemployment - and then stated clearly that market-based SSPs are largely irrelevant to cyclical unemployment - demonstrated the depth the 13–15 band requires. Candidates who wrote about "unemployment" as a single undifferentiated concept rarely exceeded the 9–12 band.

Master These topics at the IB Trainer:

IB Economics Low Unemployment

IB Economics Supply-side policies

IB Economics Minimum Wage

Question 3 - Exchange Rate Systems & Depreciation

Module 4 Global Trade

3A- Explain [10 marks] The difference between floating and fixed exchange rate systems

Explain - cover both systems in enough depth to contrast them meaningfully. Listing differences without explaining the mechanism behind each will not reach the 7–10 band.

What This Question Required.

A maximum of 6/10 if only one exchange rate system - floating or fixed - is explained. Both must be covered.

What You Got Credit For

• Terminology: exchange rate, floating exchange rate, fixed exchange rate, depreciation, appreciation, devaluation, revaluation - all used accurately.

• Floating: determined by demand and supply of the currency in the foreign exchange market; no government intervention. Changes in interest rates, inflation, trade balances, and speculation cause automatic depreciation or appreciation.

• Fixed: central bank commits to a predetermined rate (the peg); intervenes by buying or selling foreign reserves. Devaluation = deliberate official reduction of the peg; revaluation = deliberate official increase.

• Contrast: floating → more uncertainty for businesses, no reserve requirement, greater monetary policy independence; fixed → greater certainty for trade, requires large foreign reserve holdings, constrains monetary policy.

• Diagram: foreign exchange market diagram showing equilibrium and shifts for floating; and/or a fixed rate diagram showing central bank intervention to defend the peg.

How to Structure Your Response

1. Define exchange rate. The price of one currency expressed in terms of another.

2. Explain floating exchange rates. Determined entirely by market forces - demand for the currency (from exports, capital inflows, speculation) and supply (from imports, capital outflows). When demand falls the currency depreciates automatically; no government action is required. Draw the FX market: axes show Price of £ (in $) vs Quantity of £. Illustrate a leftward shift in demand reducing the rate - a depreciation.

3. Explain fixed exchange rates. The central bank sets a target rate. If market forces push the rate below the peg, the central bank buys domestic currency using foreign reserves, supporting demand and restoring the rate. If the rate rises above the peg, the central bank sells domestic currency. Devaluation: the peg is deliberately lowered. Revaluation: deliberately raised.

4. Draw the fixed rate diagram. Show the peg as a horizontal line. Illustrate supply of the currency increasing (rightward shift), pushing the rate below the peg. Annotate the central bank buying domestic currency to shift demand right and restore the peg.

5. Contrast the two systems. Certainty vs uncertainty for traders; foreign reserve requirements (none for floating, essential for fixed); monetary policy independence (greater under floating; constrained under fixed - the central bank must prioritise maintaining the peg over setting interest rates for domestic objectives); vulnerability to speculative attack (UK ERM exit 1992 is the classic example - reserves exhausted defending an overvalued peg).

Master These topics at the IB Trainer:

IB Economics Fixed Exchange Rates

IB Economics Exchange Rates Hub Page

IB Economics Monetary Policy Hub Page

3B- Discuss [15 Marks] The consequences for an economy of a depreciation of its exchange rate

Discuss - consider multiple consequences (positive and negative), evaluate their significance with evidence and economic theory, and reach a balanced judgement. Real-world examples must be present and developed in context.

What You Got Credit For

• Terminology: depreciation, current account, Marshall-Lerner condition, J-curve, terms of trade - used accurately.

• Positive consequences: cheaper exports in foreign currency → export demand rises; more expensive imports → expenditure-switching toward domestic goods → net exports (X−M) improve → AD rises → real GDP grows, unemployment falls.

• Negative consequences: import prices rise → cost-push inflation → real wages fall; consumers reliant on imported goods lose purchasing power; firms using imported inputs face higher costs; foreign-currency-denominated debt becomes more burdensome.

• Marshall-Lerner condition HL: current account only improves if PED(X) + PED(M) > 1. If combined elasticity below 1, depreciation worsens the current account.

• J-curve effect HL: in the short run, existing contracts mean import prices rise before volumes fall - current account initially worsens before improving. Illustrated by a J-curve diagram.

• Diagrams: AD/AS showing AD shifting right; J-curve diagram; exchange rate diagram showing the depreciation.

• Synthesis: size of depreciation; degree of import dependence; state of the economic cycle; short-run vs long-run impacts; distributional effects (lower-income households most exposed to import price inflation).

• Real-world examples: UK sterling post-2016 Brexit referendum; Turkish lira 2021–22; Egyptian pound 2022–23; Japanese yen weakness 2022–24.

Diagrams That Strengthen Your Response

• Two diagrams are most effective: (1) an AD/AS diagram showing AD shifting right as net exports improve, with the depreciation as the stated cause; (2) a J-curve diagram - time on the X-axis, current account balance on the Y-axis, showing initial deterioration below the horizontal axis then recovery and improvement above it. Label the short-run trough and the long-run improvement. If you draw only one, the J-curve is the higher-value choice at HL because it integrates the Marshall-Lerner and time-lag arguments visually in a single diagram.

How to Structure Your 15 Mark Answer

1. Introduction. Define depreciation (a fall in the exchange rate under a floating system, driven by market forces). State that consequences span trade, inflation, growth, and living standards - and that outcomes depend critically on the price elasticity of export and import demand.

2. Positive consequences - trade and growth. Cheaper exports in foreign currency → foreign demand rises (assuming elastic demand). More expensive imports → expenditure-switching to domestically produced goods. Both improve net exports → AD shifts right → real GDP rises → unemployment may fall. Export-oriented industries and import-competing sectors gain competitive advantage.

3. Marshall-Lerner condition and J-curve HL. The current account improvement only materialises if PED(X) + PED(M) > 1. Below 1, the value of imports rises faster than export earnings - current account worsens. In the short run, this condition often fails: contracts are pre-set, consumers take time to adjust. The J-curve illustrates the typical pattern - current account initially deteriorates, then improves as elasticities increase over time. Apply to UK sterling post-2016: the Brexit depreciation improved export competitiveness but the current account deficit persisted in the short term before beginning to narrow.

4. Negative consequences. Import prices rise → cost-push inflation. If wages respond, the initial competitiveness gain erodes. Real purchasing power falls for households reliant on imported goods. Firms using imported inputs face higher costs, squeezing margins. Economies with large foreign-currency debt face a rising repayment burden: Turkish firms with dollar-denominated loans found repayments sharply more expensive during the 2021–22 lira collapse.

5. Evaluation. The net effect depends on: the size of the depreciation; the economy's degree of import dependence; whether it operates below full employment (more scope to expand output if spare capacity exists); how quickly inflation responds; and whether trading partners also depreciate. A small commodity-importing developing economy may experience predominantly negative consequences; a large diversified economy with elastic export demand may benefit substantially.

6. Conclusion. Depreciation is neither uniformly positive nor negative. For economies below full employment with elastic export demand and manageable import dependence, it can stimulate growth and improve the current account over the long run. The J-curve effect, cost-push inflation, and the burden on import-dependent households mean context - particularly the elasticity conditions and the state of the economic cycle - is decisive.

Where Did Some Of My students Lose Marks?

The Marshall-Lerner condition and J-curve are regarded as content to reward. Candidates who omitted both were leaving evaluation marks on the table. State the ML condition precisely (PEDX + PEDM > 1 for the current account to improve), explain the J-curve mechanism, draw the J-curve diagram, and link it to a real example. This combination, done cleanly, is what separates the 13–15 band from the 10–12 band on Q3(b).

Master These topics at the IB Trainer:

IB Economics Balance of Payments Page (for Marshall-Lerner condition and J-curve)

IB Economics Exchange Rate Hub Page

IB Economics Inflation Hub Page

A Quick Look At The Exam

• Paper: Paper 1 HL

• Date: May 2025

• Duration: 1h 15m

• Total marks: 25

• Structure: Choose 1 question out of 3

• Part (a) 10 marks

• Part (b) 15 marks

Hard Caps

• Q1(b): Maximum 9/15 if only firms OR only government discussed.

• Q2(a): Maximum 6/10 if only demand-side OR only supply-side effects explained.

• Q3(a): Maximum 6/10 if only floating OR only fixed exchange rate system explained.

Frequently Asked Questions About Paper 1 HL May 2025

These were some of the questions my students asked about the May 2025 HL exam.

What were the three questions on the IB Economics HL Paper 1 May 2025?

The May 2025 HL Paper 1 covered three topic areas: (1) Price Elasticity of Demand - explaining why PED differs between primary commodities and manufactured goods, then discussing PED's importance for firm and government decision-making; (2) Supply-Side Policies - explaining how interventionist supply-side policies produce both demand-side and supply-side macroeconomic effects, then evaluating the effectiveness of market-based supply-side policies in reducing unemployment; (3) Exchange Rate Systems - explaining the difference between floating and fixed exchange rate systems, then discussing the consequences of a currency depreciation for an economy.

What diagrams are needed for IB Economics HL Paper 1 May 2025?

Q1(a) requires demand curve diagrams showing inelastic and elastic demand. Q1(b) benefits from a tax incidence diagram and a total revenue diagram. Q2(a) requires an AD/AS diagram showing both AD and LRAS shifting right. Q2(b) suits an AD/AS diagram (LRAS shift) or a minimum wage labour market diagram. Q3(a) requires a foreign exchange market diagram (and optionally a fixed rate intervention diagram). Q3(b) is best answered with a J-curve diagram and an AD/AS diagram - the J-curve is particularly important at HL because it integrates the Marshall-Lerner condition and time-lag arguments visually.

What is the Marshall-Lerner condition and why does it matter for HL Paper 1?

The Marshall-Lerner condition states that a currency depreciation will improve a country's current account balance only if the sum of the price elasticity of demand for exports and the price elasticity of demand for imports is greater than 1 (PEDX + PEDM > 1). If the combined elasticity is below 1, the rising cost of imports outweighs any increase in export earnings and the current account worsens. This is an HL-specific concept and was explicitly listed in the May 2025 mark scheme as content to reward in Q3(b).

Why do market-based supply-side policies struggle to reduce unemployment?

Market-based supply-side policies - cutting income tax, reducing trade union power, deregulating labour markets - can reduce structural and frictional unemployment by making markets more flexible and improving work incentives. However, they are largely ineffective against cyclical unemployment (caused by a fall in aggregate demand during recessions), which requires demand-side intervention. They also carry equity risks, involve long time lags of years or decades, and may temporarily increase unemployment if privatisation leads to corporate restructuring and short-run redundancies.

What is the J-curve effect in IB Economics?

The J-curve describes the typical time path of a country's current account following a currency depreciation. In the short run, the current account initially worsens - import prices rise immediately but import volumes do not fall straight away because contracts are pre-set and consumers take time to adjust. Over the medium to long run, as consumers and firms respond to the changed prices, import volumes fall and export volumes rise - the current account improves, tracing the upward stroke of the J. The J-curve is linked to the Marshall-Lerner condition: the ML condition tends to fail in the short run but be satisfied over the long run as elasticities increase.

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