Mark Scheme

Section A — Module 1

Question 1

(a) (6) — 2 marks for each correct distinction plus 1 mark each for a valid Caribbean example. Positive: statements of fact, testable against evidence, value-free — e.g. "An increase in Trinidad's fuel subsidy raised petrol consumption in 2023." Normative: statements of opinion involving value judgements, cannot be tested — e.g. "The government ought to spend more on public health than on stadium construction." Award marks for the key discriminator: testability, not merely "fact vs opinion". Do not credit an example that is simply a restatement of the definition.

(b) (9) — Up to 4 marks for a correct, fully labelled diagram (axes labelled with two goods, concave-to-origin curve, at least one point marked on the curve). Up to 5 marks for explanation:

• Scarcity — points beyond the curve (e.g. point X) are unattainable with existing resources and technology (1–2).
• Choice — every point on the curve represents a different combination society must select between (1–2).
• Opportunity cost — movement along the curve requires giving up units of one good to gain the other; the concave shape shows increasing opportunity cost as resources are imperfectly substitutable (2–3). Full marks require the diagram to be referred to in the prose, not merely drawn.

(c) (10) — Levels-marked. Three measures × (identification 1 + development 1 + limitation 1) with 1 mark reserved for overall evaluative quality. Indicative: investment in education/training to reduce structural unemployment (limitation: long time lag, emigration of trained workers); expansionary fiscal policy to raise AD (limitation: debt burden, high import leakage in small open economies); attracting FDI through tax incentives (limitation: profit repatriation, erosion of tax base); improved infrastructure/energy reliability (limitation: high capital cost); labour-market reform (limitation: political resistance). Reward candidates who recognise that a point inside the PPC implies unemployed or inefficiently allocated resources rather than insufficient resources.

Question 2

(a) (6) — 2 marks each: What to produce; How to produce it (factor combination/technique); For whom to produce (distribution). Credit brief elaboration; bare listing caps at 4.

(b) (9) — Up to 5 marks for the free market (price mechanism; signalling, incentive and rationing functions; profit motive; consumer sovereignty; private ownership) and up to 5 for the planned economy (central planning authority; targets and quotas; state ownership; allocation by directive rather than price), capped at 9. A genuine comparison — explicit contrast rather than two separate descriptions — is required for the top band.

(c) (10) — Levels-marked evaluation. For greater state role: correction of market failure (public goods, externalities such as coastal degradation from unregulated development); provision of merit goods (health, education); redistribution in highly unequal societies; strategic direction where the private sector is thin; buffering external shocks and natural disasters. Against: limited fiscal capacity and high existing debt in most CARICOM states; government failure, bureaucracy and rent-seeking; poor record of loss-making state enterprises; crowding out of private investment; small domestic markets meaning state provision may not reach efficient scale. The top band requires a justified conclusion that engages with the specific constraints of a small, open economy rather than a generic answer.

Section B — Module 2

Question 3

(a) (5) — 3 marks for a correct definition: the responsiveness of quantity demanded to a change in price, measured as %ΔQd ÷ %ΔP. 1 mark each for any two determinants: availability and closeness of substitutes; proportion of income spent on the good; whether the good is a necessity or luxury; time period under consideration; habit-forming nature of the good.

(b) (8) — Method marks are available even where the final figure is wrong.

• %ΔQd = (75 − 90)/90 × 100 = −16.67% (2)
• %ΔP = (2.50 − 2.00)/2.00 × 100 = +25% (2)
• PED = −16.67 ÷ 25 = −0.67 (1)
• Interpretation: |PED| < 1, so demand is price inelastic over this range (1)
• Revenue comment: quantity falls proportionately less than price rises, so total revenue increases (2). Verification (90,000 × $2.00 = $180,000 → 75,000 × $2.50 = $187,500) earns the marks outright. Accept the midpoint (arc) method with correct working. Penalise omission of the negative sign once only across the paper.

(c) (12) — Up to 4 marks per diagram (two diagrams: elastic and inelastic demand, each showing D, S, S+tax, original and new equilibrium, and the tax incidence split shaded or clearly labelled). Up to 4 marks for explanation and implications.

• Elastic demand: producers bear the greater share of the tax; the consumer price rises only slightly; quantity falls substantially (2).
• Inelastic demand: consumers bear the greater share; consumer price rises close to the full tax; quantity falls little (2).
• Implication: revenue = tax per unit × quantity sold, so a government seeking revenue should tax goods with inelastic demand (fuel, tobacco, alcohol) because the tax base contracts least. Reward candidates who note the tension with a government seeking to discourage consumption, where an elastic good produces the larger behavioural response but less revenue (up to 4).

Question 4

(a) (6) — 2 marks per criterion, awarded for the contrast rather than one side alone. Perfect competition: many small firms, no barriers, homogeneous product, price taker. Monopoly: single firm, high/absolute barriers, unique product with no close substitutes, price maker constrained only by demand.

(b) (9) — Up to 5 marks for a correct diagram: AR (=D) downward sloping, MR below AR with twice the gradient, MC and ATC drawn conventionally, output Qm at MC = MR, price Pm read from the AR curve (a common error is reading price off MR — cap at 3 if so), supernormal profit shaded between AR and ATC at Qm. Up to 4 for explanation: below Qm, MR > MC so an extra unit adds more to revenue than to cost and profit rises; above Qm, MC > MR so profit falls; profit is therefore maximised where they are equal.

(c) (10) — Levels-marked. Against the public interest: allocative inefficiency (P > MC, deadweight loss); productive inefficiency (not at minimum ATC); X-inefficiency from absent competitive pressure; restricted output and higher prices; poorer service quality where consumers cannot switch. In the public interest: economies of scale in networked utilities such as electricity, water and telecommunications, where duplicating a grid across a small island would be wasteful — the natural monopoly argument; supernormal profits funding R&D and infrastructure investment; regulatory oversight (e.g. by a public utilities commission) capable of capping prices and setting service standards; ability to cross-subsidise universal service to remote rural or outlying-island consumers. Top band requires explicit application to Caribbean utilities and a justified conclusion, typically that the natural-monopoly case is strong but conditional on effective independent regulation.

Section C — Module 3

Question 5

(a) (5) — 3 marks for GDP: the total market value of all final goods and services produced within a country's borders in a given period. 2 marks for the distinction: GNP (GNI) measures output by a country's nationals/factors of production wherever located, i.e. GDP plus net factor income from abroad. Credit candidates who note that for Caribbean economies with heavy foreign ownership of hotels and mining, GNP is typically below GDP because profits are repatriated.

(b) (9) — 3 marks each for three developed limitations. Indicative: ignores income distribution (an average conceals inequality); excludes non-marketed activity (subsistence farming, household labour) and the informal economy, both significant regionally; makes no allowance for externalities and resource depletion (environmental degradation from tourism or mining raises GDP while lowering welfare); ignores leisure and working conditions; says nothing about the composition of output (military or disaster reconstruction spending counts equally with health and education); exchange-rate/PPP distortions in international comparisons. One mark for identification, two for development. Bare lists cap at 3 overall.

(c) (11) — Levels-marked. Yes, welfare improves: higher incomes and employment in hotels, transport and construction; multiplier effects into agriculture and services; foreign exchange earnings easing the import bill; tax revenue funding public services; infrastructure improvements shared with residents. Not necessarily: much tourism income leaks abroad through foreign ownership, imported food and imported capital; jobs are often seasonal, low-wage and low-skilled; environmental costs (reef damage, coastal erosion, waste, water stress) are not deducted from GDP; land-price and cost-of-living inflation in tourist zones harms residents; benefits may be concentrated geographically and among a narrow group; heavy dependence on a single sector increases vulnerability to external shocks such as recession in source markets, pandemics or hurricanes. Top band demands a judgement — typically that real GDP growth is a necessary but insufficient condition, and that distribution, leakage and sustainability determine whether welfare actually rises.

Question 6

(a) (6) — 3 marks each. Demand-pull: inflation caused by aggregate demand growing faster than the economy's capacity to supply, typically near full employment; shown as a rightward shift of AD. Cost-push: inflation caused by rising costs of production (imported fuel and food, wage settlements above productivity, currency depreciation, indirect taxes); shown as a leftward shift of SRAS. Credit the observation that Caribbean inflation is predominantly imported cost-push, given high import dependence.

(b) (9) — Up to 5 marks for the diagram: axes labelled Price Level and Real National Output, AD downward sloping, SRAS upward sloping (or AS with a curved/vertical section), AD shifting right to AD₁, new equilibrium with both price level and output higher. Up to 4 for explanation: government expenditure is a component of AD (AD = C + I + G + (X − M)); the initial injection is magnified by the multiplier; the size of the effect on output versus prices depends on the amount of spare capacity — near the vertical section of AS the effect is almost entirely inflationary. Reward explicit use of the multiplier.

(c) (10) — Levels-marked. Effective: under a fixed exchange rate, monetary policy is largely subordinated to defending the peg, so fiscal policy is the principal available instrument (a strong candidate will make this point explicitly); targeted public investment can raise AD and reduce demand-deficient unemployment; capital projects have relatively high domestic labour content; training expenditure addresses structural unemployment. Limitations: high marginal propensity to import in small open economies means much of the stimulus leaks abroad, shrinking the multiplier; existing high public debt and IMF or lender conditionality constrain borrowing; a widening deficit may pressure reserves and threaten the peg itself; time lags in recognition, implementation and impact; crowding out; ineffective against unemployment that is structural or frictional rather than cyclical. Top band requires the candidate to connect the fixed exchange rate to the constraint on both monetary policy and the sustainable size of the deficit, and to reach a supported conclusion.

Level descriptors (extended-response parts)

• Level 4 (top band): Thorough, accurate economic knowledge; correct and fully integrated diagrams or calculations; sustained two-sided analysis with developed chains of reasoning; well-chosen Caribbean application; a justified conclusion that follows from the argument.
• Level 3: Sound knowledge with some development; diagrams broadly correct; analysis present but one side is thinner; some application; conclusion asserted rather than argued.
• Level 2: Limited or largely descriptive; diagram absent, incorrect or unused; little application; assertion in place of reasoning.
• Level 1: Fragmentary, with isolated correct terms and no developed argument.

Sample Answers with Examiner Commentary

Question 3(c) — Sample Answers

Grade I (Distinction) answer (extract)

"A specific tax of $t per unit raises the cost of supplying every unit, shifting supply vertically upwards from S to S+t. Where the two cases differ is not in the size of the shift, which is identical, but in how the burden is divided — and that is determined by the relative slopes of demand and supply.

Where demand is relatively elastic — the first of my two sketches — consumers have close substitutes and will switch away rather than absorb a higher price. Equilibrium price rises only from P₀ to P₁, a fraction of the tax, while the price the producer actually retains falls from P₀ to P₁ − t. The producer therefore bears the larger share of the incidence, and quantity contracts sharply from Q₀ to Q₁.

Where demand is relatively inelastic — my second sketch — consumers have few alternatives. Price rises from P₀ almost to P₀ + t; producers pass on nearly the whole tax and quantity falls only marginally.

The implication for a revenue-seeking government is direct. Revenue equals t × Q, and in the inelastic case Q barely falls, so the tax base is preserved — which is precisely why fuel, alcohol and tobacco are taxed so heavily across the region. There is, however, a genuine tension in policy design. A government whose objective is to discourage consumption rather than raise money faces the opposite calculus: the elastic good delivers the large fall in quantity that changes behaviour, but yields little revenue. The two objectives cannot generally be maximised with the same tax, and a government that justifies a fuel levy on health or environmental grounds while relying on its yield to fund the budget has an incentive it may not wish to examine too closely."

Mark: 12/12. Examiner commentary: Both diagrams are correct, fully labelled and — crucially — genuinely integrated into the prose, with the candidate reading the incidence split off the diagram rather than merely appending it. The insight that the vertical shift is identical in both cases and only the division of burden differs is precisely the discriminator between a Level 3 and Level 4 response here. The final paragraph goes beyond the question's demands to identify the revenue/behaviour trade-off, with apt regional application. Full marks.

Grade III (Pass) answer (extract)

"A tax makes the supply curve shift to the left because it costs more to produce. This means the price goes up and the quantity goes down. If demand is elastic the price goes up a bit and if demand is inelastic the price goes up a lot. So the government should tax inelastic goods to get more money."

Mark: 5/12. Examiner commentary: The direction of every effect is correct and the concluding revenue point is valid, so the response is securely in Level 2. But no diagram is offered, and without one the incidence split cannot be demonstrated — this alone caps the answer well below the top band. The statements are also asserted rather than explained: the candidate says price rises more when demand is inelastic but never says why (consumers lack substitutes and so absorb the increase), and the producer's retained price is never mentioned, so incidence is only half-analysed. Two labelled diagrams and one sentence of causal reasoning per case would roughly double the mark.

Question 6(c) — Sample Answers

Grade I (Distinction) answer (extract)

"The fixed exchange rate is not incidental to this question; it is the reason fiscal policy is being asked about at all. Under a peg with open capital markets, the central bank must direct interest rates towards defending the parity and holding reserves, which leaves monetary policy largely unavailable for domestic stabilisation. Fiscal policy is, by elimination, the principal instrument remaining.

Its potential is real. An increase in G raises AD directly, and public investment in roads, drainage or school construction has a high domestic labour content, so the first-round employment effect is concentrated at home. Where unemployment is demand-deficient, this is the textbook remedy.

Two constraints, however, bite hard in a small open economy. The first is leakage: with a marginal propensity to import that may approach 0.5, half of every additional dollar of income is spent on foreign goods, so the multiplier is small and much of the stimulus creates employment in the exporting country rather than at home. The second is the peg itself. A widening deficit financed by borrowing raises import demand, drains foreign reserves and, if sustained, invites speculation against the parity — so the very instrument being used to fight unemployment can undermine the exchange-rate regime that made it necessary. Add high existing debt stocks and lender conditionality across much of CARICOM, and the room for manoeuvre narrows further.

Fiscal policy is therefore best judged as necessary but sharply bounded. It is the right tool for cyclical unemployment, provided the stimulus is directed towards import-light, employment-intensive activity and is credibly time-limited. Against structural unemployment — the mismatch between the skills of school leavers and the needs of employers — it is close to useless as a demand instrument, and the case for spending on training rests on supply-side rather than multiplier grounds."

Mark: 10/10. Examiner commentary: This is a model Level 4 response. The candidate does what most do not: makes the fixed exchange rate do analytical work in both directions, first to establish why fiscal policy is the available instrument and then to show why it is self-limiting. The leakage argument is quantified rather than merely named, and the closing distinction between cyclical and structural unemployment reframes the evaluation instead of restating it. The conclusion is genuinely argued from the preceding analysis.

Grade II (Merit) answer (extract)

"Fiscal policy means the government changing its spending and taxation. If the government spends more on things like building roads this increases aggregate demand and firms will need to hire more workers, so unemployment falls. It can also cut income tax so people have more disposable income to spend, which also raises AD.

However there are problems. The government may not have the money to spend because Caribbean countries have a lot of debt already. There are also time lags, because it takes a long time to plan and build a road. Also some of the extra spending goes on imports so it does not help the local economy as much.

In conclusion fiscal policy can reduce unemployment but it has limitations, so the government should use it carefully alongside other policies."

Mark: 7/10. Examiner commentary: A competent, well-organised two-sided answer with correct mechanisms on both sides, including the leakage point — this is solid Level 3. What holds it out of the top band is the treatment of the fixed exchange rate, which the question supplies as its central condition and which this response never mentions. The candidate consequently misses both the reason fiscal policy is the primary instrument and the reserve/parity constraint on deficit financing. The conclusion is also generic and could be attached to almost any policy question. Engaging with the peg and distinguishing cyclical from structural unemployment would lift this to Level 4.

Grade IV (Weak pass) answer (extract)

"Fiscal policy is when the government spends money to help the economy. If they spend more money then there will be more jobs and unemployment will go down. But the government might not have enough money and might have to borrow it which causes debt."

Mark: 3/10. Examiner commentary: The core mechanism is correctly identified and one limitation is offered, so the response earns Level 1/2 credit. But nothing is developed: there is no reference to aggregate demand or the multiplier, no economic terminology, no diagram, no Caribbean application, and no engagement with the exchange-rate condition. At this length the response cannot access the analytical marks that make up the majority of the tariff.

How Unit 1 is assessed

Paper 02 carries 75 marks and contributes 50% of the Unit 1 external assessment mark, alongside Paper 01 (multiple choice, 30%) and the Internal Assessment (20%). Because you must answer one question from each section, no Module can be neglected — a candidate who prepares only Microeconomics and Macroeconomics has no viable route through Section A. Grades are reported Grade I – Grade VII, with Grade I the highest.

Three habits separate the top band from the middle. First, draw and use the diagram: in this paper, parts 3(c), 4(b) and 6(b) together carry 30 marks and each reserves roughly half its tariff for diagrammatic work that must be labelled and referred to in the prose. Second, answer the question that was set — where a question supplies a condition such as "with a fixed exchange rate" or "dependent on tourism", that condition is the discriminator, and an otherwise sound answer that ignores it will not reach Level 4. Third, conclude with a judgement, not a summary: evaluative parts reserve marks for a conclusion that follows from the argument you have actually made.