Economics · Oct / Nov 2021 · Paper 21 · Question 4
0455
As printed in the paper
The question as text
Uruguay’s inflation rate reached 8.4% in July 2018. The central bank considered increasing the interest rate to reduce the inflation rate. An increase in interest rates might influence total demand in an economy and lead to an appreciation of its currency. This might influence Uruguay’s exports, especially soybean exports. The total revenue of Uruguay’s soybean firms might change if there is an appreciation of the Uruguayan peso.
Read automatically from the paper; the printed page above is exact.
Show the answer and mark scheme
4(a)[2]
Define total revenue. Total amount of money earned by firms (1)
for selling their products (1). Price times quantity (2), P × Q (2)
Total costs plus profit (2). 2 No mark for producing their products
4(b)[4]
Explain two causes of inflation. Logical explanation which might include: Demand-pull inflation (1)
increase in total demand (1)
e.g. increase in consumption / increase in investment / government spending / net exports (1)
e.g. cut in income tax / decrease interest rate / increase employment / increase in the money supply (1). Cost-push inflation (1)
increase in costs of production (1)
e.g. increase in wages / raw material cost / profit margin / tariffs (1)
e.g. wages may rise more than productivity / fall in exchange rate would increase raw material costs (1). 4 One mark each for each of two causes identified and one mark each for each of two explanations. Full marks may be awarded for a detailed explanation of two causes of one type of inflation.
4(c)[6]
Analyse how an increase in interest rate could reduce total demand in an economy. Coherent analysis which might include: Increase in interest rate will lead to an increase in the cost of borrowing (1)
there will be less borrowing (1)
less consumption / spending (1)
less investments (1)
An increase in interest rate will lead to an increase in the returns from savings (1)
there will be more savings (1)
less consumption / less spending (1)
An increase in interest rate may attract an inflow of money from other countries into the country’s banks (1)
leading to an appreciation of the currency (1)
leading to increase in price of exports / decrease in price of imports (1)
increase exports / decrease imports (1)
decrease net exports (1)
4(d)[8]
Discuss whether or not an appreciation of a country’s domestic currency will have negative effects on its economy.
In assessing each answer, use the table opposite.
Why appreciation will have a negative impact:
Price of exports will be higher – decrease export revenue.Price of imports will be lower – increase import spending.Decrease demand for domestic products – decrease demand for labour.Decrease current account surplus / increase current account deficit.Lower economic growth.Why appreciation will not have a negative impact:
Price of imports cheaper – increase affordability of imports – increase standards of living.Price of imported raw materials / machinery lower – lower cost of production – lower final price.PED for exports and imports might be inelastic.May encourage foreign investment as there may be increased confidence in the country’s future economic prospects
Make a free account to save your answers and see your weak topics and ask the AI why a wrong answer is wrong.