Economics · 2011 · May · Paper 2 · SL · Question paper

M11/3/ECONO/SP2/ENG/TZ0/XX ECONOMICS STANDARD lE vEl PAPER 2 Tuesday 17 May 2011 (morning) INSTRUCTIONS TO CaNdIda TES  d o not open this examination paper until instructed to do so.  a nswer three questions.  Use fully labelled diagrams and references to the text / data where appropriate. 2 hours 2211-5113 11 pages © International Baccalaureate Organization 2011 2211511 3 M11/3/ECONO/SP2/ENG/TZ0/XX 2211-5113 – 2 – 1. Study the extract below and answer the questions that follow. Price controls on food  In 1985, the Peruvian president ordered controls on the price of rice, sugar and other goods to keep basic foods affordable for the poor. However, when shortages and a black market arose, Peruvians were forced to queue (stand in line) for hours for basic foods, and later the presidency dissolved in a spiral of hyperinflation. As Peru again faces rising food prices, the re-elected president has rejected price controls and is focusing this time on tighter monetary policy to control inflation.  From Argentina and Venezuela to Russia, China and Thailand, governments are meeting the challenge of rising food prices by imposing price controls – fixing prices below market level – hoping to ease the burden on their populations and avoid social unrest.  However, evidence shows that such measures do not reverse price trends and can end up having the opposite effect. Some economists prefer income transfers or food assistance for the poor instead and warn that price controls lead to market distortions such as reduced supplies because they discourage domestic production. By reducing the underlying causes of inflation, price controls prevent market solutions.  According to experts, price controls are only likely to work where basic foods are a small share of total household spending, or when controls are implemented for a very short time, such as in Morocco during Ramadan. If price controls remain in place for too long, large price increases are more likely to occur when price controls are removed.  While price controls may be seen as a quick solution, there is little proof that they have worked to reduce inflation. Government officials in China, and