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Economics · May / June 2016 · Paper 21 · Question 3

2281

As printed in the paper

The question as text

The Canadian economy in 2014 was generally doing well. Money was largely retaining its value and unemployment was falling. The country did, however, have rising household debt and a deficit on the current account of its balance of payments. The Canadian Government in 2014 was seeking to increase exports whilst recognising that such an increase may have an impact on the exchange rate.

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Show the answer and mark scheme

  • 3(a)[2]

    Identify two functions of money. [2]

    1 mark each for any two of the following:

    medium of exchange / means of payment
    store of value
    unit of account/measure of value
    standard of deferred payment.

  • 3(b)[4]

    Explain two reasons why household borrowing may increase. [4]

    1 mark for identifying a reason and 1 mark for explaining:

    The rate of interest may fall (1)

    making it cheaper to borrow (1).

    Incomes may fall / prices may rise / inflation (1)

    so people may borrow to purchase basic necessities (1).

    People may become more optimistic about the future (1)

    more confident that they will repay loans (1).

    The price of housing may fall (1)

    encouraging people to take out mortgages (1).

    Increase in family size (1)

    creates a greater need to borrow to support more children (1)

    The cost of health care/education may increase (1)

    requiring people to pay more for the services (1).

  • 3(c)[6]

    Analyse three ways in which international trade differs from internal trade. [6]

    1 mark for identification of a difference and 1 mark for analysis:

    International trade usually covers greater distances (1)

    which increases the cost of transport (1)

    may take longer for delivery (1).

    International trade means a bigger market than the internal market (1)

    and more competitive (1)

    enabling firms to gain economies of scale (1)

    Internal trade involves using the same currency (1)

    international trade may involve two or more currencies (1)

    increasing transaction costs (1).

    International trade means a wider range of goods & services (1)

    this gives consumers greater choice (1)

    Trade restrictions may be imposed on products traded internationally (1)

    raising costs of production (1).

    Tastes and cultures may differ (1)

    requiring differences in products offered (1).

    Regulations may differ (1)

    requiring adjustments in products (1).

    Languages may differ (1)

    e.g. incurring costs of translation (1).

  • 3(d)[8]

    Discuss whether an increase in exports will increase the exchange rate. [8]

    The exchange rate is the price of a currency (1)

    Up to 5 marks for why it might:

    An increase in exports may increase export revenue (1)

    this will increase demand for the currency (1)

    higher demand pushes up the price of the currency (1)

    raising the value of a floating exchange rate (1)

    which is determined by market forces (1). Up to 5 marks for why it might not:

    Exports may increase but export revenue may not (1)

    more exports may be bought for a lower price (1)

    and so demand for the currency will not rise (1). (1)

    An increase in exports may be offset by an increase in imports / lower interest rate (1)

    or government intervention by selling domestic currency (1)

    so demand and supply of the currency will increase (1)

    which may leave the exchange rate unchanged (1).

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