Example 15 mark essay in style of IB Economics Paper 1

How should you structure a 15 mark question? 

Because of multiple requests from students, I have created a 15 mark model answer in style of IB Economics paper 1. 

This is based on the new IBDP Economics syllabus.

For 24 model answers to 15 mark paper 1 questions, check out the links below:

For more exam tips for IB Economics HL, check out the links below:

Question for model answer

Here is a practice question I have created:

Using real world examples, evaluate the effectiveness of contractionary monetary policy in reducing inflation (15 marks)

Brief essay plan

Here is a quick plan:

• Point 1: Effect of higher interest rates on consumption, investment and AD and hence inflation.
• Evaluation 1: But this depends on the importance of interest rate decisions for (consumption /) investment decisions.

• Point 2: Effect on exchange rates and net exports 
• Evaluation 2: But depends on what happens to other interest rates around the world e.g. US rising rates.

• Point 3 (optional): Effect of quantitative tightening (opposite of quantitative easing) on investment and AD and hence inflation.
• Evaluation 3 (optional): But this depends on the level of spare capacity.

• Examples: UK interest rate rises / inflation, US interest rate rises, UK quantitative tightening.

Example model answer

Contractionary monetary policy includes raising interest rates and reversing quantitative easing. Interest rates are the cost of borrowing and the reward from saving. Interest rates are currently rising in the UK in response to high inflation.

Point 1

Higher interest rates are likely to reduce aggregate demand. Interest rates increased from 0.25% to 3% in the UK over 2022. Higher interest rates increase the reward for saving, increasing the incentive to save. So saving increases and consumption falls. Higher interest rates increase the cost of borrowing, so consumers who borrow e.g. with a mortgage face higher bills and so are more likely to cut consumption. As a result of higher borrowing costs, firms are less likely to borrow to invest, which reduces investment. As consumption and investment are components of aggregate demand (AD=C+I+G+X-M), AD falls and shifts left from AD to AD1. There could also be a negative multiplier effect, where a one off fall in AD leads to a further fall in AD and real GDP, as shown by the shift left in AD from AD1 to AD2. This is because, for example, reduced investment means reduced profits for other firms, who cut workers’ wages. Workers then go on to cut their own consumer spending, reducing the incomes for local shop owners and so on. This means real GDP falls from Y to Y2 and there is a decrease in the price level from PL to PL2. This is likely to reduce the rate of inflation.

But this depends on the importance of interest rate changes for consumption and investment decisions. For example most mortgages in the UK are fixed rate mortgages rather than variable rate mortgages, with 82%  of mortgage borrowing on fixed rates in the UK. Those on fixed rate mortgages may face less of an immediate increase in mortgage borrowing costs as interest rates rise, as the rates are likely to have been fixed in advance of the rate rise. Though many fixed rate mortgages may be short term, so these fixed rate mortgages are likely to be renewed with updated rates, with most mortgages expected to be renewed before 2025. While some mortgage holders may be protected in the short run, higher interest rates are likely to have a significant effect through mortgage costs.

Point 2

A higher interest rate, relative to rates in other economies, leads to a higher rate of return on assets or savings in the UK. This leads to hot money flows into the UK economy. To buy UK assets or to put money in a UK bank, international investors are likely to need to convert currency into pounds. This increases demand for the currency, which shifts right from D to D1 leading to an appreciation of the pound from P to P1. This makes exports more expensive and imports cheaper, reducing export demand and increasing import demand. Provided the Marshall-Lerner condition holds, that the PED of exports and the PED of imports sum to 1 or more, this will result in reduced net exports, leading to lower AD as net exports is a component of AD. This will cause reduced real GDP and reduced employment because demand for workers is derived from demand for goods and services. Employment is most likely to fall particularly in industries that export heavily, such as gold, cars, airplanes, pharmaceuticals and oil – these exports account for nearly 28% of UK exports.

But this depends on what happens to other interest rates around the world. At the same time, we have also seen rising interest rates in the US, as the Federal Reserve central bank also tries to control inflation. This means there may be less of a difference in the US and UK rates of return, reducing the likelihood of significant hot money flows to the UK as a result of higher interest rates. Indeed we have seen increased strength of the US dollar relative to the pound in September 2022, which may have resulted from hot money flows into the US. So higher interest rates in the UK are unlikely to have a significant  positive effect on net exports.

Point 3

Quantitative tightening is the reverse of quantitative easing. Quantitative tightening means the central bank, for example the Bank of England, sells government bonds  (that it had previously purchased with digitally created money). This increases the supply of government bonds, reducing their price and increasing their quantity. Reducing the bond price raises interest rates on government bonds. Bondholders such as commercial banks now receive a higher return on holding bonds relative to giving out loans. This means banks buy more bonds, leaving reduced cash available for lending, and so commercial banks reduce the supply of loanable funds, reducing the amount of total investment in the economy. This will reduce aggregate demand and hence inflation.The total value of assets under the quantitative easing scheme in the U.K. reached £895 billion. The Bank of England plans to engage in quantitative tightening of about £80 billion in 2023.

But this depends on the position of the economy on the Keynesian LRAS. If the economy has high spare capacity, then the economy is on the horizontal part of the Keynesian LRAS curve. This means a shift left in AD leads to a significant fall in real GDP and little change in inflation. The Bank of England currently judges there is little spare capacity in November 2022 but over the medium term weak demand is likely to mean higher spare capacity. So in the medium term quantitative tightening may have less of an effect on reducing inflation.

Conclusion

Overall contractionary monetary policy is likely to reduce inflation, reduce real GDP and reduce employment. While the direction of the effects is mostly clear, the magnitude is less clear. The most important effect is through the mortgage market, which is likely to be larger in the medium term rather than the short run as consumers renew their fixed mortgages. The effects of contractionary monetary policy also depend on the stance of fiscal policy. If fiscal policy is expansionary, e.g. increased government spending without higher taxes, then this may negate the effect of contractionary monetary policy on inflation. As interest rates rise in the UK, fiscal policy was briefly expansionary with announcements of tax cuts and spending on the energy support scheme, yet the fiscal policy has become less expansionary under Chancellor Jeremy Hunt, with tax rises for example on middle and higher earners announced. This means monetary policy is likely to be more effective in reducing inflation.

Commentary

This answer features detailed analysis, with use of graphs.

There are real world examples throughout. Here I have mainly focussed on the UK example. But you can tailor your answer to another country.

For data on the UK economy, I recommend two sources: Trading Economics and the Bank of England’s monetary policy reports.

There is also  evaluation and a solid conclusion.

There are also some definitions of key terms where relevant.

This answer would likely score full marks or close to it.

Other questions

How many words / how much time for a 15 mark question in IB Economics paper 1?

The word count is somewhat arbitrary – it depends on how succinctly you can express ideas.

Given the time limits in the exam, most top 15 mark answers I observe reach a word count between 700 and 1100 words.. 

I recommend spending 45 minutes on the 15 mark question. I also recommend a quick plan in this time (just so you know the points, evaluation and example(s) you will use.

Note the timing and requirements may be different for questions in papers 2 and 3.

How should I structure a 15 marker for paper 1 IB?

• Introduction
• Point 1 (analysis and example) 
• Evaluation 1 
• Point 2 (analysis and example)
• Evaluation 2
• [Optional: third point and evaluation, depending on length of first two points].
• Conclusion

How do you write conclusions in IB Economics?

There are a few key steps for conclusions:

• Pick a side / answer the question!
• Justify your decision.
• Bring in context.
• Bring in  one other evaluative point on which your answer may depend.

What are the most common mistakes to avoid?

• Forgetting application – make sure to revise your real-world examples. Include your real world examples in your plan.
• Forgetting evaluation or not knowing the evaluation points to write. Practise the most common evaluation points. Here for example, spare capacity is a key evaluation point you can use for any AD shift. 
• Analysis issues in particular graph sketching. Practise graphs so that you have the key graphs memorised. This includes supply and demand, cost and benefit, cost and revenue, AS-AD and tariff diagrams. Analysis issues are harder to solve – you have to understand the content well and practise key chains of analysis for each key area of the course.
• Poor conclusion. A poor conclusion may just summarise the arguments already made (adding no value). Alternatively it may not answer the question given. Remember to start with a decision on the question and justify it. I recommend practising using the conclusion framework above.

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