Economics (AS & A Level) · May / June 2026 · Paper 42 · Question 1

US Foreign Trade and Interest Rate Policy The United States (US) balance of trade deficit increased to US$69.4 billion in March 2024. The deficit is considered to be undesirable and has caused discussion within the US on how to decrease it. Current and previous US governments have decided that import tariffs are their preferred solution. Following the COVID-19 pandemic, there was a period in 2022 when the annual rate of inflation was over 10%. Intervention by the Federal Reserve (the US central bank) helped to reduce the annual rate of inflation to 2.9% by December 2023. This was still above its target rate of 2%. There was uncertainty about whether government policy objectives concerning inflation, economic growth and employment were all moving in the right direction. This uncertainty and above-target inflation meant the Federal Reserve decided to leave interest rates unchanged at 5.5%. It also decided to continue its policy of reversing quantitative easing by selling securities to remove money from money markets. A secondary effect of this high-interest rate policy was that the US foreign exchange rate had appreciated by 6.25% during the previous 5 years. This meant that low-income countries (LICs) had to pay more for their imports priced in US$, such as raw materials, foodstuffs and oil. These LICs often have an underdeveloped market economy with limited ability to raise tax revenue. They also have large external debts in US$, the repayment of which restricts their ability to increase economic development. Sources: Adapted from; March 2024 Trade Gap is $69.4 Billion, bea.gov, 2 May 2024 Transcript of Chair Powell’s press conference, federalreserve.gov, 1 May 2024 Consumer prices up 2.9 percent, bls.gov, 21 August 2024

Read automatically from the paper; the printed page above is exact.