Contextual Information
The Democratic Republic of Devland is a developing economy characterized by low levels of human capital and a weak banking sector. Less than half of the working-age population has a bank account, making access to credit and savings facilities limited. The economy is primarily agrarian, with a significant portion of exports being agricultural products. However, unpredictable weather patterns and outdated farming techniques have led to fluctuating yields. The government, recognizing the need for modern infrastructure and better education, plans to borrow a significant amount of money to invest in these areas. However, with a weak banking sector, the government’s borrowing might crowd out private investment.
Table of Data:
SL Questions:
(a) Using a Keynesian AS/AD diagram, explain how expansionary fiscal policy could stimulate economic growth in Devland. [4 marks]
(b) Using a Keynesian AS/AD diagram, explain why a reduction in the interest rate might not significantly boost aggregate demand given the weak banking sector. [4 marks]
(c) Using information from the text/data and your knowledge of economics, evaluate the effectiveness of Devland’s plan to borrow and invest in infrastructure and education. [15 marks]
HL Questions:
(a) Using a money supply diagram, illustrate the potential impact of the government’s significant borrowing on private investment. [4 marks]
(b) The Marginal propensity to tax is 0.15, the marginal propensity to save is 0.1, and the marginal propensity to import is 0.1. Calculate the size of the multiplier and then comment on how much Real GDP should increase by with a $55 billion infrastructure and education spending plan.
(c) Using information from the text/data and your knowledge of economics, evaluate the effectiveness of Devland’s plan to borrow and invest in infrastructure and education. [15 marks]