Economics · Oct / Nov 2022 · Paper 21 · Question 3
0455
As printed in the paper
The question as text
Jordan has a fixed foreign exchange rate with the US dollar. The monetary policy of Jordan, therefore, follows the monetary policy of the US very closely. Due to low confidence in the global economy in 2019, central banks around the world, including Jordan and the US, cut interest rates to stimulate growth. However, this may have conflicted with the macroeconomic aim of low inflation.
Read automatically from the paper; the printed page above is exact.
Show the answer and mark scheme
3(a)[2]
Define inflation. Increase (1)
in price level (1)
over time / persistent (1)
Rise in price (1)
3(b)[4]
Explain the effects of low confidence on both spending and borrowing. Logical explanation which might include: Low confidence will reduce spending (1)
as consumers will save instead (1)
e.g. lack of job security / risk of firms failing / asset prices falling (1). Falling confidence will reduce borrowing (1)
risk of borrowing and investing is too high (1). 4 Maximum 2 marks for spending and maximum 2 marks for borrowing
3(c)[6]
Analyse how a cut in interest rates could create conflicts between macroeconomic aims. Coherent analysis which might include: Cut in interest rates could lead to conflicts between full employment versus stable prices (1)
because cut in interest rates lead to increase borrowing (1)
decreased savings (1)
and increased spending (1)
this will lead to an increase in demand-pull (1)
inflation (1). Cut in interest rates could lead to conflicts between economic growth versus balance of payments stability (1)
because if people may also buy more imports (1)
and therefore current account deficit will increase / current account surplus will decrease (1). Cut in interest rates could lead to conflicts between full employment versus balance of payments stability (1)
because a cut in interest rates could lead to more investments (1)
more firms starting up (1)
increasing demand for workers (1)
increased wages (1)
which would lead to increase in spending (1)
including imports (1)
which will increase current account deficit / decrease current account surplus (1). 6 Maximum 4 marks if only 1 conflict analysed Also accept conflict between economic growth and redistribution of income i.e. Cut in interest rates could lead to conflicts between economic growth and redistribution of income (1)
because a cut in interest rates could lead to more spending and investment (1)
leading to more economic growth (1)
and higher incomes for entrepreneurs (1)
but savers could get lower returns from savings (1)
profits may rise more than wages (1)
leading to an increase in inequality (1).
3(d)[8]
Discuss whether or not a country will benefit from having a fixed foreign exchange rate system. In assessing each answer, use the table opposite. Why it might be an advantage
Certainty - with a fixed exchange rate, firms will always know the exchange rate and this makes trade and investment less risky.Absence of speculation - with a fixed exchange rate, there will be no speculation if people believe that the rate will stay fixed with no revaluation or devaluation.Constraint on government policy - if the exchange rate is fixed, then the government may be unable to pursue extreme or irresponsible macro- economic policies as these would cause a run on the foreign exchange reserves and this would be unsustainable in the medium-term.Keep inflation low. Firms have an incentive to keep cutting costs to remain competitive. Governments who allow their exchange rate to depreciate may cause inflationary pressures to occur. Depreciation can cause inflation because total demand increases, import prices increase and firms have less incentive to cut costs.Maintain competitiveness - a fixed exchange rate can ensure that exports remain price competitive. A rapid appreciation in a floating exchange rate system will badly affect manufacturing firms who export;this may also cause a worsening of the current account. Why it might be a disadvantage
The economy may be unable to respond to shocks - a fixed exchange rate means that there may be no mechanism for the government to respond rapidly to balance of payments crises.Problems with reserves - fixed exchange rate systems require large foreign exchange reserves and there can be international liquidity problems as a result. Level Description A reasoned discussion which accurately examines both sides of the economic argument, making use of economic information and clear and logical analysis to evaluate economic issues and situations. One side of the argument may have more depth than the other, but overall both sides of the argument are considered and developed. There is thoughtful evaluation of economic concepts, terminology, information and/or data appropriate to the question. The discussion may also point out the possible uncertainties of alternative decisions and outcomes. 6–8 GuidanceSpeculation – if foreign exchange markets believe that there may be a revaluation or devaluation, then there may be a run of speculation. Fighting this may cost the government significantly in terms of their foreign exchange reserves.Policy conflicts - the fixed exchange rate may not be compatible with other economic targets for growth, inflation and unemployment and this may cause conflicts of policies. This is especially true if the exchange rate is fixed at a level that is either too high or too low. Level Description A reasoned discussion which makes use of economic information and clear analysis to evaluate economic issues and situations. The answer may lack some depth and development may be one-sided. There is relevant use of economic concepts, terminology, information and data appropriate to the question. 3–5 There is a simple attempt at using economic definitions and terminology. Some reference may be made to economic theory, with occasional understanding. 1–2 A mark of zero should be awarded for no creditable content.
Make a free account to save your answers and see your weak topics and ask the AI why a wrong answer is wrong.