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A Level H2 Economics International Economics Quiz
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Questions
A-Level Economics H2 Quiz - International Economics
Name: _________________________ Class: _________________________ Date: _________________________ Score: ______ / 50
Duration: 1 hour 15 minutes Total Marks: 50
Instructions:
- Answer ALL questions in the spaces provided.
- Where appropriate, support your answers with relevant economic diagrams.
- Marks for each question are indicated in brackets.
- Read each question carefully before attempting.
Section A: Short Answer Questions (10 marks)
Answer all questions in this section.
1. Define the term "comparative advantage" as used in international trade theory. [2 marks]
2. State two benefits that a country may gain from engaging in free trade. [2 marks]
3. Explain the difference between a tariff and a quota as forms of protectionism. [2 marks]
4. Identify two components of a country's balance of payments current account. [2 marks]
5. State one reason why a country might experience a persistent current account deficit. [2 marks]
Section B: Structured Response Questions (20 marks)
Answer all questions in this section.
6. With the aid of a diagram, explain how the imposition of a tariff on imported steel affects the domestic market for steel in a country. [6 marks]
(You may use the space below for your diagram)
7. Explain how a depreciation of a country's currency may affect its current account balance. [4 marks]
8. Using the concept of comparative advantage, explain why two countries can both benefit from specialisation and trade, even if one country has an absolute advantage in producing all goods. [6 marks]
9. Explain two reasons why governments may choose to adopt protectionist trade policies despite the theoretical benefits of free trade. [4 marks]
10. With the aid of a diagram, explain the difference between a current account deficit and a current account surplus. [4 marks]
Section C: Data Response Questions (20 marks)
Study the following extracts and answer the questions that follow.
Extract 1: Singapore's Trade Patterns (2020-2024)
| Year | Total Merchandise Trade (S$ billion) | Exports (S$ billion) | Imports (S$ billion) | Current Account Balance (% of GDP) |
|---|---|---|---|---|
| 2020 | 969.1 | 515.6 | 453.5 | 17.6 |
| 2021 | 1,162.0 | 613.5 | 548.5 | 19.5 |
| 2022 | 1,365.4 | 710.2 | 655.2 | 19.3 |
| 2023 | 1,211.8 | 634.8 | 577.0 | 18.1 |
| 2024 | 1,298.5 | 678.3 | 620.2 | 17.8 |
Source: Adapted from Enterprise Singapore and Department of Statistics Singapore
Extract 2: Global Trade Tensions and Supply Chain Shifts
Recent years have witnessed increasing trade tensions between major economies, with the imposition of tariffs and export controls on strategic goods such as semiconductors and critical minerals. These developments have prompted many multinational corporations to diversify their supply chains away from single-country dependence. Singapore, as a major trading hub and semiconductor manufacturing base, has been affected by these shifts. Some firms have relocated parts of their production to neighbouring ASEAN countries, while others have increased investment in Singapore due to its stable business environment and extensive free trade agreements.
Adapted from various news sources, 2024
11. With reference to Extract 1, describe the trend in Singapore's total merchandise trade between 2020 and 2024. [2 marks]
12. With reference to Extract 1, compare the trend in Singapore's exports and imports from 2020 to 2024. [3 marks]
13. With reference to Extract 1, explain one possible reason for the change in Singapore's current account balance as a percentage of GDP between 2021 and 2024. [3 marks]
14. With reference to Extract 2, explain how global trade tensions and supply chain diversification may affect Singapore's pattern of trade. [4 marks]
15. Using Extract 2 and your own knowledge, discuss the extent to which Singapore's extensive network of free trade agreements can help mitigate the negative effects of global trade tensions on its economy. [8 marks]
Section D: Essay Question (10 marks)
Answer the following question.
16. Discuss the view that free trade always leads to an improvement in the standard of living for all participating countries. [10 marks]
17. Explain the concept of the terms of trade and how an improvement in the terms of trade may affect a country's current account balance. [4 marks]
18. With reference to the concept of protectionism, explain how a government subsidy to domestic producers can affect the domestic market for an imported good. [4 marks]
19. Explain how a current account surplus can be both beneficial and problematic for an economy. [4 marks]
20. Discuss the extent to which a small and open economy like Singapore should rely on exchange rate policy to manage its current account balance. [8 marks]
END OF QUIZ
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Answers
A-Level Economics H2 Quiz - International Economics - ANSWER KEY
Total Marks: 50
Section A: Short Answer Questions (10 marks)
1. Define the term "comparative advantage" as used in international trade theory. [2 marks]
Answer: Comparative advantage refers to the ability of a country to produce a good or service at a lower opportunity cost than another country. [1 mark] This means the country sacrifices less of other goods when producing that particular good compared to its trading partner. [1 mark]
Marking notes: Award 1 mark for "lower opportunity cost" and 1 mark for elaboration or example. Accept: "a country has comparative advantage when it can produce a good more efficiently relative to other goods compared to another country."
2. State two benefits that a country may gain from engaging in free trade. [2 marks]
Answer: Any two of the following (1 mark each):
- Increased consumer choice and access to a wider variety of goods and services.
- Lower prices for consumers due to competition and specialisation.
- Access to larger markets for domestic producers, enabling economies of scale.
- Increased efficiency through specialisation according to comparative advantage.
- Transfer of technology and knowledge between countries.
- Greater competition leading to improved productivity and innovation.
Marking notes: Award 1 mark per valid benefit. Must be distinct points. Accept other valid economic benefits.
3. Explain the difference between a tariff and a quota as forms of protectionism. [2 marks]
Answer: A tariff is a tax imposed on imported goods, which raises the price of imports and generates government revenue. [1 mark] A quota is a quantitative restriction that limits the physical quantity or value of a good that can be imported, without directly generating government revenue (unless quota licences are auctioned). [1 mark]
Marking notes: Award 1 mark for correctly defining tariff (tax on imports) and 1 mark for correctly defining quota (quantity/value limit). Must highlight the key distinction: tariff = price-based/tax; quota = quantity-based/limit.
4. Identify two components of a country's balance of payments current account. [2 marks]
Answer: Any two of the following (1 mark each):
- Trade in goods (visible trade/merchandise trade balance).
- Trade in services (invisible trade balance).
- Primary income (investment income, compensation of employees).
- Secondary income (current transfers, e.g., remittances, foreign aid).
Marking notes: Award 1 mark per valid component. Must be current account components, not capital/financial account.
5. State one reason why a country might experience a persistent current account deficit. [2 marks]
Answer: Any one of the following with explanation (2 marks):
- Low international competitiveness due to high production costs or low productivity, leading to exports being less attractive and imports being more attractive. [2 marks]
- Strong domestic demand and economic growth, leading to high levels of imports. [2 marks]
- An overvalued exchange rate making exports expensive and imports cheap. [2 marks]
- Structural dependence on imported goods (e.g., energy, raw materials) that cannot be produced domestically. [2 marks]
Marking notes: Award 1 mark for identifying a valid reason and 1 mark for a brief explanation. Do not award marks for simply stating "more imports than exports" without explaining why.
Section B: Structured Response Questions (20 marks)
6. With the aid of a diagram, explain how the imposition of a tariff on imported steel affects the domestic market for steel in a country. [6 marks]
Answer: Diagram (3 marks):
- Correctly labelled axes: Price (vertical) and Quantity (horizontal). [0.5 marks]
- Domestic demand curve (DD) and domestic supply curve (SD) drawn and labelled. [0.5 marks]
- World supply curve shown as perfectly elastic (horizontal line) at world price (Pw). [0.5 marks]
- Tariff-inclusive price shown as a higher horizontal line (Pw + t). [0.5 marks]
- Domestic production, domestic consumption, and imports clearly labelled at both world price and tariff price. [0.5 marks]
- Areas of government revenue, change in consumer surplus, change in producer surplus, and deadweight loss identified (at least two of these). [0.5 marks]
Explanation (3 marks):
- At the free trade world price (Pw), domestic consumption is Qd1, domestic production is Qs1, and imports fill the gap (Qd1 - Qs1). [1 mark]
- The tariff raises the domestic price to Pw + t. At this higher price, domestic quantity demanded falls to Qd2, and domestic quantity supplied rises to Qs2. [1 mark]
- Imports fall to (Qd2 - Qs2). The tariff generates government revenue equal to the tariff rate multiplied by the new import quantity. There is a deadweight loss to society due to inefficient domestic production and reduced consumption. [1 mark]
Marking notes: Diagram must be accurate and clearly labelled. Explanation must link diagram to tariff effects. Accept variations in notation.
7. Explain how a depreciation of a country's currency may affect its current account balance. [4 marks]
Answer: A depreciation means the domestic currency becomes cheaper relative to foreign currencies. [1 mark]
This affects the current account through two main channels:
- Exports become cheaper for foreign buyers, which should increase the quantity of exports demanded (assuming demand is price elastic). [1 mark]
- Imports become more expensive for domestic consumers, which should reduce the quantity of imports demanded (assuming demand is price elastic). [1 mark]
If the Marshall-Lerner condition holds (sum of price elasticities of demand for exports and imports > 1), the current account balance should improve following a depreciation. However, in the short run, the current account may worsen before improving (J-curve effect) due to existing contracts and adjustment lags. [1 mark]
Marking notes: Award marks for: definition of depreciation (1), export effect (1), import effect (1), and Marshall-Lerner condition/J-curve qualification (1).
8. Using the concept of comparative advantage, explain why two countries can both benefit from specialisation and trade, even if one country has an absolute advantage in producing all goods. [6 marks]
Answer: Comparative advantage exists when a country can produce a good at a lower opportunity cost than another country, even if it does not have an absolute advantage. [1 mark]
Explanation using a numerical example or clear reasoning (4 marks):
- Even if Country A is more efficient (has absolute advantage) in producing both goods X and Y, it still faces opportunity costs. [1 mark]
- Country A should specialise in the good where its comparative advantage is greatest (lowest opportunity cost relative to Country B). Country B should specialise in the good where its comparative disadvantage is smallest (also its lowest opportunity cost). [1 mark]
- Through specialisation according to comparative advantage, total world output of both goods increases. [1 mark]
- Both countries can then trade and consume beyond their individual production possibility frontiers, achieving higher consumption of both goods than under autarky. [1 mark]
Conclusion (1 mark): The gains from trade arise from comparative advantage, not absolute advantage. As long as opportunity costs differ between countries, there are mutual gains from specialisation and trade. [1 mark]
Marking notes: Award marks for clear explanation of opportunity cost, specialisation logic, gains from trade, and the distinction from absolute advantage. A numerical example is not required but strengthens the answer.
9. Explain two reasons why governments may choose to adopt protectionist trade policies despite the theoretical benefits of free trade. [4 marks]
Answer: Any two of the following with explanation (2 marks each):
- Protecting infant industries: New domestic industries may not be able to compete with established foreign firms. Temporary protection allows them to grow, achieve economies of scale, and become internationally competitive. [2 marks]
- Protecting domestic employment: Import competition may cause job losses in certain sectors. Protectionism can help preserve jobs and prevent structural unemployment. [2 marks]
- National security concerns: Some industries (e.g., defence, food security, critical technology) are considered strategically important. Governments may protect them to ensure self-sufficiency. [2 marks]
- Anti-dumping measures: Foreign firms may sell goods below cost (dumping) to drive out domestic competition. Tariffs can be used to counter unfair trade practices. [2 marks]
- Revenue generation: Tariffs provide a source of government revenue, which can be important for developing countries. [2 marks]
- Correcting balance of payments deficits: Reducing imports through protectionism can help improve a current account deficit. [2 marks]
Marking notes: Award 1 mark for identifying a valid reason and 1 mark for explanation. Must provide two distinct reasons with explanations.
10. With the aid of a diagram, explain the difference between a current account deficit and a current account surplus. [4 marks]
Answer: Diagram (2 marks):
- Correctly labelled axes: Exchange Rate (Price of domestic currency in foreign currency) and Quantity of domestic currency. [0.5 marks]
- Demand curve for domestic currency (derived from exports and capital inflows) and Supply curve of domestic currency (derived from imports and capital outflows) drawn and labelled. [0.5 marks]
- Equilibrium exchange rate shown. [0.5 marks]
- Current account deficit shown where supply of currency exceeds demand at a given exchange rate; current account surplus shown where demand exceeds supply. [0.5 marks]
Explanation (2 marks):
- A current account deficit occurs when a country's total imports of goods, services, and transfers exceed its total exports. This means the country is spending more on foreign goods and services than it is earning from abroad. [1 mark]
- A current account surplus occurs when a country's total exports exceed its total imports. This means the country is earning more from abroad than it is spending on foreign goods and services. [1 mark]
Marking notes: Diagram should clearly illustrate the difference. Explanation must distinguish between deficit and surplus. Accept alternative diagrammatic representations (e.g., circular flow).
Section C: Data Response Questions (20 marks)
11. With reference to Extract 1, describe the trend in Singapore's total merchandise trade between 2020 and 2024. [2 marks]
Answer: Singapore's total merchandise trade increased from S1,365.4 billion in 2022. [1 mark] It then declined to S1,298.5 billion in 2024. Overall, there was a general upward trend with fluctuations. [1 mark]
Marking notes: Award 1 mark for identifying the overall increase and 1 mark for noting the peak in 2022 and subsequent fluctuation. Must use data from the extract.
12. With reference to Extract 1, compare the trend in Singapore's exports and imports from 2020 to 2024. [3 marks]
Answer: Both exports and imports followed a similar trend, rising from 2020 to a peak in 2022 (exports: S710.2 billion; imports: S655.2 billion). [1 mark] Both declined in 2023 before recovering in 2024. [1 mark] Throughout the period, exports consistently exceeded imports, indicating a positive merchandise trade balance. The gap between exports and imports widened from S58.1 billion in 2024, with the largest gap of S$57.8 billion in 2023. [1 mark]
Marking notes: Award 1 mark for similar directional trend, 1 mark for noting the peak and decline, and 1 mark for comparing the trade balance (exports > imports). Must use data.
13. With reference to Extract 1, explain one possible reason for the change in Singapore's current account balance as a percentage of GDP between 2021 and 2024. [3 marks]
Answer: Singapore's current account balance as a percentage of GDP declined from 19.5% in 2021 to 17.8% in 2024. [1 mark] One possible reason is the narrowing of the merchandise trade surplus relative to GDP. While both exports and imports grew, the rate of import growth may have outpaced export growth in certain years, or the trade surplus may have grown more slowly than GDP. [1 mark] Additionally, global economic uncertainties and trade tensions (as mentioned in Extract 2) may have dampened export demand while import demand remained relatively strong, contributing to the decline in the current account surplus as a share of GDP. [1 mark]
Marking notes: Award 1 mark for identifying the decline, 1 mark for linking to trade balance or GDP growth, and 1 mark for a plausible explanation. Accept other valid reasons (e.g., changes in services balance, primary income outflows).
14. With reference to Extract 2, explain how global trade tensions and supply chain diversification may affect Singapore's pattern of trade. [4 marks]
Answer: Global trade tensions, such as tariffs and export controls on strategic goods, may reduce the overall volume of global trade, negatively affecting Singapore's role as a major trading hub. [1 mark] Specifically, restrictions on semiconductor trade could directly impact Singapore's exports, given its significant semiconductor manufacturing base. [1 mark]
Supply chain diversification may have mixed effects. Some firms relocating production to neighbouring ASEAN countries could reduce Singapore's direct exports of those goods, but may increase Singapore's exports of intermediate goods and services to those countries. [1 mark] Conversely, increased investment in Singapore due to its stable business environment and free trade agreements could boost exports of high-value goods and services, partially offsetting negative effects. Singapore's pattern of trade may shift towards higher-value-added activities and greater regional integration. [1 mark]
Marking notes: Award 1 mark for each well-explained point linking Extract 2 to Singapore's trade patterns. Must demonstrate understanding of both trade tensions and supply chain diversification.
15. Using Extract 2 and your own knowledge, discuss the extent to which Singapore's extensive network of free trade agreements can help mitigate the negative effects of global trade tensions on its economy. [8 marks]
Answer: Introduction (1 mark): Singapore's extensive network of Free Trade Agreements (FTAs) provides preferential market access and reduces trade barriers with partner countries. However, their effectiveness in mitigating global trade tensions depends on the nature and scope of those tensions.
How FTAs can help mitigate negative effects (3 marks):
- FTAs provide guaranteed market access and tariff reductions, which can help Singaporean exporters maintain competitiveness even as global tariffs rise between other countries. This is particularly important for key sectors like electronics and pharmaceuticals. [1 mark]
- FTAs can attract foreign direct investment (FDI) as multinational corporations seek to use Singapore as a base to access FTA partner markets, as suggested in Extract 2 where firms increased investment due to Singapore's stable environment and FTAs. [1 mark]
- FTAs often include provisions on services, investment, and intellectual property, which can help Singapore diversify its trade beyond goods and strengthen its position as a regional hub for services and finance. [1 mark]
Limitations of FTAs (3 marks):
- FTAs cannot fully insulate Singapore from global trade tensions if major economies impose broad-based tariffs or if global demand slows significantly. Singapore's high trade-to-GDP ratio makes it vulnerable to global economic cycles. [1 mark]
- If trade tensions involve strategic goods like semiconductors (as mentioned in Extract 2), FTAs may not override national security-based export controls imposed by major powers. [1 mark]
- Supply chain diversification away from Singapore to other ASEAN countries, as noted in Extract 2, may not be prevented by FTAs, as firms seek lower-cost production locations regardless of trade agreements. [1 mark]
Conclusion (1 mark): While Singapore's FTAs provide significant advantages in maintaining market access and attracting investment, they are not a panacea. Their effectiveness is limited by the scale of global trade disruptions and geopolitical factors. A diversified strategy including domestic competitiveness enhancement and regional cooperation is also necessary.
Marking notes: Award marks for a balanced discussion with reference to Extract 2. Level 3 (6-8 marks): Well-developed arguments on both sides with clear evaluation. Level 2 (4-5 marks): Some arguments on both sides but limited evaluation. Level 1 (1-3 marks): Descriptive or one-sided answer.
Section D: Essay Question (10 marks)
16. Discuss the view that free trade always leads to an improvement in the standard of living for all participating countries. [10 marks]
Answer: Introduction (1 mark): Free trade, based on the theory of comparative advantage, is widely argued to increase global output and consumption possibilities. However, the view that it "always" improves living standards for "all" participating countries is overly simplistic and requires critical examination.
Arguments supporting the view (4 marks):
- Comparative advantage and efficiency gains: Specialisation according to comparative advantage increases total world output, allowing countries to consume beyond their PPFs, raising material living standards. [1 mark]
- Consumer benefits: Free trade increases consumer choice, lowers prices through competition, and provides access to goods not produced domestically, improving real incomes and welfare. [1 mark]
- Dynamic gains: Free trade promotes economies of scale, technology transfer, and innovation, leading to higher productivity and long-term economic growth. [1 mark]
- Evidence: Many East Asian economies, including Singapore, have achieved rapid improvements in living standards through outward-oriented trade policies. [1 mark]
Arguments against the view (4 marks):
- Unequal distribution of gains: The benefits of free trade are not evenly distributed within countries. Workers in import-competing industries may lose jobs and suffer long-term unemployment, reducing their standard of living. Structural unemployment and regional decline can occur. [1 mark]
- Infant industry argument: Developing countries may not benefit if they cannot compete with established industries in developed countries. Free trade may lock them into low-value-added production and hinder industrialisation. [1 mark]
- Exploitation and environmental concerns: Free trade can lead to a "race to the bottom" in labour and environmental standards as countries compete for investment, potentially worsening quality of life. [1 mark]
- Terms of trade effects: Countries specialising in primary commodities may face declining terms of trade over time, meaning they must export more to afford the same imports, reducing real income gains. [1 mark]
Conclusion (1 mark): While free trade has significant potential to raise average living standards through efficiency and dynamic gains, it does not "always" benefit "all" countries or all groups within countries. Complementary policies such as social safety nets, retraining programmes, and appropriate sequencing of liberalisation are necessary to ensure that the gains from trade are broadly shared and sustainable.
Marking notes: Level 3 (8-10 marks): Balanced, well-argued discussion with clear evaluation and examples. Level 2 (5-7 marks): Good arguments on both sides but limited evaluation. Level 1 (1-4 marks): Descriptive or one-sided answer.
17. Explain the concept of the terms of trade and how an improvement in the terms of trade may affect a country's current account balance. [4 marks]
Answer: The terms of trade (TOT) is the ratio of a country's export prices to its import prices, usually expressed as an index: TOT = (Index of export prices / Index of import prices) × 100. [1 mark] An improvement in the terms of trade means export prices have risen relative to import prices, so the country can buy more imports with a given quantity of exports. [1 mark]
An improvement in the terms of trade may affect the current account balance in two ways:
- Positive effect: The country earns more revenue from each unit of exports, which could improve the trade balance if export volumes do not fall significantly. [1 mark]
- Negative effect: Higher export prices may reduce the quantity of exports demanded (if demand is price elastic), while cheaper imports may increase import volumes. This could worsen the current account balance. The net effect depends on the price elasticities of demand for exports and imports. [1 mark]
Marking notes: Award 1 mark for definition, 1 mark for explanation of improvement, and 2 marks for explaining the potential effects on the current account.
18. With reference to the concept of protectionism, explain how a government subsidy to domestic producers can affect the domestic market for an imported good. [4 marks]
Answer: A government subsidy to domestic producers is a form of protectionism that provides financial assistance to local firms, lowering their production costs. [1 mark] This shifts the domestic supply curve to the right (downwards), as producers are willing to supply more at each price level. [1 mark]
The effects on the domestic market are:
- Domestic production increases, as the subsidy makes it more profitable for domestic firms to produce the good. [1 mark]
- The domestic price may fall (depending on market structure), but the key effect is that imports decrease because domestic production displaces some imports. Unlike a tariff, a subsidy does not raise the domestic price for consumers and does not generate government revenue; instead, it represents a cost to the government budget. [1 mark]
Marking notes: Award 1 mark for definition, 1 mark for supply curve shift, and 2 marks for explaining effects on production, imports, and prices.
19. Explain how a current account surplus can be both beneficial and problematic for an economy. [4 marks]
Answer: Benefits (2 marks):
- A current account surplus indicates that a country is earning more from its exports than it is spending on imports, which can contribute to higher GDP and employment. [1 mark]
- It allows the country to accumulate foreign exchange reserves or invest abroad, building up national wealth and providing a buffer against external shocks. [1 mark]
Problems (2 marks):
- A persistent surplus may indicate an imbalance, such as excessive saving and insufficient domestic consumption or investment, which can limit long-term growth potential. [1 mark]
- It can lead to upward pressure on the exchange rate, making exports less competitive over time, and may provoke protectionist responses from trading partners with corresponding deficits. [1 mark]
Marking notes: Award 1 mark for each valid benefit and 1 mark for each valid problem. Must explain both sides.
20. Discuss the extent to which a small and open economy like Singapore should rely on exchange rate policy to manage its current account balance. [8 marks]
Answer: Introduction (1 mark): Singapore uses exchange rate policy (managing the Singapore Dollar Nominal Effective Exchange Rate, S$NEER) as its primary monetary policy tool. Given its high trade-to-GDP ratio, exchange rate policy can significantly influence the current account, but reliance on it has both strengths and limitations.
Arguments for relying on exchange rate policy (3 marks):
- In a small, open economy, the exchange rate has a direct and powerful impact on export competitiveness and import prices. An appreciation can dampen import demand and moderate imported inflation, while a depreciation can boost exports. [1 mark]
- Singapore's managed float system allows for gradual adjustments to maintain price stability and competitiveness, which is crucial for a trade-dependent economy. [1 mark]
- Exchange rate policy is more effective than interest rate policy in an economy with high capital mobility, as it directly targets the external sector. [1 mark]
Limitations and alternative considerations (3 marks):
- The Marshall-Lerner condition may not always hold in the short run, meaning exchange rate changes may not immediately improve the current account (J-curve effect). [1 mark]
- The current account is also influenced by structural factors such as productivity, domestic savings rates, and global demand conditions, which exchange rate policy alone cannot address. [1 mark]
- Over-reliance on exchange rate policy may conflict with other objectives, such as controlling imported inflation or maintaining investor confidence. A strong currency may hurt export competitiveness in the long run. [1 mark]
Conclusion (1 mark): While exchange rate policy is a vital and appropriate tool for Singapore given its economic structure, it should not be the sole instrument for managing the current account. Complementary policies such as productivity enhancement, skills upgrading, and diversification of export markets are essential for sustainable current account management.
Marking notes: Level 3 (6-8 marks): Well-developed arguments on both sides with clear evaluation and application to Singapore's context. Level 2 (4-5 marks): Some arguments on both sides but limited evaluation. Level 1 (1-3 marks): Descriptive or one-sided answer.
END OF ANSWER KEY