_______________________

Name:
_
2.6.4 Exchange rate
systems _______________________
Class:
_

_______________________
Date:
_

Time: 883 min.

Marks: 597 marks

Comments:

Page 1 of 51
Q1.
Using the data in Extract A (Figure 1), calculate the change in the effective exchange
rate index, as a percentage, between November 2015 (point A) and November 2016
(point B). Give your answer to two decimal places.
[2 marks]

Q2.
Extract B describes the trade figures as ‘disappointing’.

Explain how the data in Extract A (Figure 2) show that the UK’s trade performance has
been ‘disappointing’ given the fall in the value of the pound since November 2015.
[4 marks]

Q3.
Extract C (lines 8–9) states ‘Trade deficits and surpluses may be self-correcting in a
floating exchange rate system.’

With the help of a diagram showing the supply of and demand for a currency, explain how
a floating exchange rate may help to correct a trade surplus.
[9 marks]

Q4.
Extract B (lines 21) states ‘Although some argue that a current account deficit is not a
problem, others point to the worryingly large and persistent nature of the deficit.’

Using the data in the extracts and your knowledge of economics, assess the impact of a
persistent current account deficit on the macroeconomic performance of the UK economy.
[25 marks]

Q5.
The table below shows the average exchange rate and currency valuation estimates for
four nations in comparison to the US Dollar in January 2016.

Average exchange rate Currency valuation

to US $1 estimate
Australian Dollar 1.46 Undervalued by 24%
Brazilian Real 4.05 Undervalued by 32%
Chinese Yuan 6.57 Undervalued by 46%
Danish Krone 6.84 Undervalued by 12%

Which one of the following can be concluded from the data?

A The Australian Dollar has appreciated by 24%

against the US Dollar.
B The Brazilian Real has been devalued by 32%
against the US Dollar.
C The Chinese Yuan has depreciated the most

Page 2 of 51
 against the US Dollar.
D The Danish Krone has the closest purchasing
power parity to the US Dollar.
[1 mark]

Q6.
The diagram below shows two aggregate demand (AD) curves, two short-run aggregate
supply (SRAS) curves, and the long-run aggregate supply (LRAS) curve for an economy.

The increase in the price level from P1 to P2 raises the rate of inflation above the target
rate set by the government. In an attempt to bring inflation back to its target rate, the
central bank announces a change in interest rates. Other things being equal, this is most
likely to

A create upward pressure on the exchange rate.

B increase bond prices.
C make business loans more affordable.
D reduce the cost of servicing the national debt.
[1 mark]

Q7.
Extract F (lines 19–20) states ‘What is not clear is what should be done if low inflation
turns to bad deflation.’

Using the data in the extracts and your knowledge of economics, evaluate the view that
monetary policy is the most effective way of tackling deflation in developed economies
such as the UK and Japan.
[25 marks]

Page 3 of 51
Q8.
The UK has seen significant changes in its pattern of trade with the rest of the world in
terms of what we trade and with whom. The UK’s current account deficit widened from
£29.1bn in 2011 to £100.2bn in 2015. The deficit in 2015 was 5.4% of GDP, the largest
annual deficit as a percentage of GDP since records began in 1948.

Explain the possible reasons for changes in the pattern of trade between the UK and the
rest of the world.
[15 marks]

Q9.
The UK has seen significant changes in its pattern of trade with the rest of the world in
terms of what we trade and with whom. The UK’s current account deficit widened from
£29.1bn in 2011 to £100.2bn in 2015. The deficit in 2015 was 5.4% of GDP, the largest
annual deficit as a percentage of GDP since records began in 1948.

Evaluate the measures that might be taken to reduce a deficit on the current account of
the UK’s balance of payments.
[25 marks]

Q10.
In January 2009, £1 could buy approximately 1.04 euros on the foreign exchange market.
By July 2015, £1 could buy approximately 1.44 euros.

Explain the factors that may lead to a rise in the exchange rate of a currency.
[15 marks]

Q11.
In January 2009, £1 could buy approximately 1.04 euros on the foreign exchange market.
By July 2015, £1 could buy approximately 1.44 euros.

Evaluate the impact on the UK’s macroeconomic performance of a sustained rise in the
value of the pound sterling against the euro.
[25 marks]

Q12.
Using the data in Extract A, calculate (to one decimal place) the percentage change in
the exchange rate between the US dollar and the Chinese yuan between 1 August 2015
and 13 August 2015.
[2 marks]

Q13.
Explain the phrase ‘devaluation of the exchange rate’ (Extract B, line 12) and, with the
help of a diagram, analyse how a devaluation of the Chinese currency (the yuan) may
affect economic growth in the UK.
[9 marks]

Q14.
Extract C (lines 2 – 4) asks: ‘Is it time the UK considered manipulating its currency

Page 4 of 51
 directly and managing its exchange rate in order to reduce the ever-increasing trade
deficit and to help improve its performance?’

Using the data and your knowledge of economics, evaluate the view that the UK should
focus its monetary policy on managing the exchange rate in order to improve
macroeconomic performance.
[25 marks]

Q15.
‘George Osborne talks about boosting exports and rebalancing the economy, but the
Chancellor is not nearly as worried about the trade deficit as he is about the budget
deficit.’

To what extent do you agree that a persistent trade deficit is more damaging to the UK’s
macroeconomic performance than a persistent budget deficit? Justify your answer.
[25 marks]

Q16.
In 2014, the UK’s contributions to the European Union (EU) budget rose by £2.7bn,
making it the second largest net contributor. However, it is argued that the UK benefits
much more from the trade and the job creation that EU membership brings.

Explain how membership of a customs union, such as the EU, affects the pattern and
volume of trade between countries.
[15 marks]

Q17.
In 2014, the UK’s contributions to the European Union (EU) budget rose by £2.7bn,
making it the second largest net contributor. However, it is argued that the UK benefits
much more from the trade and the job creation that EU membership brings.

Evaluate the extent to which individuals and firms in the UK benefit from membership of
the EU.
[25 marks]

Q18.
Government policy

Extract F: Austerity remains

The Chancellor, George Osborne, has ruled out the possibility that the UK's improving 1
economy will lead to immediate tax cuts or spending increases when he said reducing the
budget deficit would be the priority of his Autumn Statement. The Chancellor said that the UK
was still borrowing too much and that any increase in tax revenues generated from faster
growth would be used to reduce the budget deficit and the national debt. 5

The move comes as no surprise, with the Chancellor stating, "I would just remind everyone
that I still sit down at the table at the G20 with one of the highest budget deficits. The UK still
continues to have some very serious public finance challenges that need to be addressed."

This week, the IMF revised up its forecasts for UK growth in both 2013 and 2014, six months
after its chief economist, Olivier Blanchard, warned Osborne that he might cause more 10
damage with his austerity plan. However, Osborne responded, “We have a clear plan and we
are sticking to that plan."

Page 5 of 51
 The Chancellor's announcement may not be good for UK firms. It is common for business
investment to lead the way when emerging from recession, but not this time. Investment
forecasts are being revised downward and, on top of speculation of interest rate rises and
criticism of the UK's quantitative easing programme, the outlook is not as good as forecasts
first indicated. 15

In explaining its forecast downgrades for net investment over the last three years, the Office
for Budget Responsibility (OBR) cites two main factors. Firstly, problems in credit markets
have made it difficult for firms to borrow to invest. This may have particularly affected small
and medium-sized firms that tend to be more reliant on bank financing. This will only be
made worse if interest rates rise. Secondly, the uncertainty generated by the eurozone crisis 20
and other events has stifled investment.
Source: News reports, 2013

Q19.
Government policy Extract F (lines 14−17) states ‘Investment forecasts are being
revised downward and on top of speculation of interest rate rises and criticism of the UK’s
quantitative easing programme, the outlook is not looking as good as forecasts first
indicated.’

Using the data in the extracts and your economic knowledge, evaluate the effectiveness
of monetary policy in achieving macroeconomic stability in the UK.
[25 marks]

Q20.
Over a period of time, the value of the pound against the US dollar changes from £1 =
$2.00 to £1 = $1.50. All other things being equal, this is most likely to result in

A UK products becoming more expensive in the

US.

B a downturn in the UK’s economic cycle.

C a higher inflation rate in the UK.

D an increase in the UK’s budget deficit.

[1 mark]

Q21.
The table below shows the effective exchange rate index for Country X in 2010 and 2012
(2012 = 100).

Year Effective exchange rate index

2010 125

2012 100

All other things being equal, which one of the following options provides both the correct
percentage change in the index from 2010 to 2012 and a valid reason why this change
may have occurred?

Page 6 of 51
 Change in
Reason
exchange rate

An increase in interest rates

A 20%
in Country X

An increase in interest rates

B 20%
in other countries

An increase in interest rate

C 25%
in Country X

An increase in interest rates

D 25%
in other countries
[1 mark]

Q22.
Economic growth and development in Africa

Extract A: Macroeconomic indicators for UK and selected African economies, 2012

Rural
Real GDP
population
growth Real GDP Life
access to
Economy (% change per capita expectancy
improved
on previous ($) (years)
water source
year)
(%)

UK 0.7 36 617 82 100

Central
African 4.1 932 50 76
Republic

Egypt 2.2 10 686 70 99

Ethiopia 8.6 1 240 63 42

Zambia 6.7 3 678 57 49

Source: official statistics, accessed on 29 June 2014

Q23.
Using the data in Economic Growth and Development in Africa Extract A, calculate, to
the nearest £, the real GDP per capita of the UK in 2012 in pounds, assuming the pound
to dollar exchange rate was £1 = $1.70.
[2 marks]

Q24.
In May 2014, the European Central Bank (ECB) President, Mario Draghi, warned that
there was a risk of deflation across economies in Europe.

Page 7 of 51
 Explain why deflation may occur in an economy.
[15 marks]

Q25.
Many people were surprised when UK unemployment fell during 2013. The government’s
policy of deficit reduction was expected to prevent significant falls in unemployment and
some called for the government to reverse its policy of planned cuts in expenditure.

Evaluate the view that a policy of budget deficit reduction will make it harder to reduce
unemployment further.
[25 marks]

Q26.
Although international trade has benefited UK consumers greatly over the last century,
improvements in transport mean it is becoming more difficult for UK firms to compete
against low-cost foreign producers.

Explain why international trade has benefited UK consumers.

[15 marks]

Q27.
Although international trade has benefited UK consumers greatly over the last century,
improvements in transport mean it is becoming more difficult for UK firms to compete
against low-cost foreign producers.

Discuss the view that protectionist policies should be introduced to protect UK firms.
[25 marks]

Q28.
THE EUROPEAN UNION CONTEXT

Extract E: Sweden’s economic fortunes

Only a few years ago, the Riksbank (the central bank of Sweden) was the envy of 1
the world. The Swedish economy was a star performer early in the global recovery
following the 2008 economic crisis. Sweden’s economy grew three times faster than the
Eurozone’s in 2010. Even better, the Riksbank felt confident enough in recovery to start
raising interest rates. Its main interest rate reached 2% by July 2011, while rates in most 5
other rich economies stayed nearer to zero.

However, some economists argue that, from the beginning, Sweden’s interest rate
increases looked premature. When the first rate increase came, unemployment stood at
8.2%, while the inflation rate was 1.1%, well below the central bank’s target. Concerns
about financial stability influenced the decision to maintain higher interest rates, even 10
though economic conditions deteriorated. The Riksbank was worried that rising
household borrowing and soaring house prices could lead to adverse consequences in
the long run. Yet the strategy did not go as planned and no doubt contributed to deflation
in 2013.

Unemployment in Sweden has remained high and private sector debt as a share of GDP 15
is higher now than it was in 2010 but, at the same time, house prices have continued to
climb. In October 2014, the Riksbank announced it was cutting its main interest rate to
zero in an effort to stimulate the economy.

Page 8 of 51
 However, the effectiveness of the central bank’s ability to respond to avoid deflation is a
concern because it becomes very difficult to further stimulate domestic demand as real
interest rates approach zero. On the other hand, low interest rates contributed to the 20
Swedish currency, the Krona, falling sharply in value, which helped exports and provided
some cushion against weak global demand and further deflation.
Source: news reports, 2014

Q29.
The European Union Context Extract E (lines 20−22) states: ‘…it becomes very difficult
to further stimulate domestic demand as real interest rates approach zero. On the other
hand, low interest rates contributed to the Swedish currency, the Krona, falling sharply in
value...’.

Explain the term ‘real interest rates’ and analyse why low interest rates may lead to a fall
in the value of a currency on the foreign exchange market.
[9 marks]

Q30.
Globalisation and outsourcing of manufacturing provides several potential benefits to
economies.
However, some countries, such as the UK, continue to suffer persistent trade deficits but
are unable to resort to import controls.

Explain how the UK Government could reduce a balance of payments deficit on the
current account, other than through the use of import controls.
[15 marks]

Q31.
‘When the exchange rate of a country’s currency causes problems, it may be down to free
market forces, but government intervention might be to blame.’

Explain three possible determinants of a country’s exchange rate against other

currencies.
[15 marks]

Q32.
‘When the exchange rate of a country’s currency causes problems, it may be down to free
market orces, but government intervention might be to blame.’

Assess the importance of a floating exchange rate to a country trying to achieve

macroeconomic stability.
[25 marks]

Q33.
THE EUROPEAN UNION CONTEXT

Extract C: The US$/euro exchange rate, 1999 to 2011

Page 9 of 51
 Source: European Central Bank, 2012

Q34.
THE EUROPEAN UNION CONTEXT

Extract D: Can the eurozone survive?

Before the global recession of 2008, the euro had emerged as a successful major 1
currency, making travel and trade for member countries much easier. Those countries
traditionally with weaker currencies, such as Italy, Greece and Spain, were given a degree
of stability which fostered economic growth. Some leading economists and politicians
were urging the UK to adopt the euro, seeing it as a major step towards the full integration 5
of the UK into the European Union (EU).

The global recession changed everything. By 2011, there were many in the UK relieved
that we were still outside the eurozone. The growing debt crisis in the eurozone has
inevitably had repercussions for the euro. Stronger members found themselves being
called upon to offer financial support to those economies in trouble. Media reports began 10
to suggest that the ultimate outcome of the debt crisis would be the break-up of the
eurozone, with some of the weaker members such as Spain, Italy and Greece re-adopting
their former national currencies.

The UK Government has adopted a policy of fiscal restraint in order to reduce annual
borrowing and to try to limit the growth of the National Debt (the total outstanding debt of 15
the government). It urged the weaker members of the eurozone in particular to adopt a
similar policy if they were to retain membership.

However, the potential benefits of leaving the eurozone are not lost on some politicians
and economists within the weaker economies. One such benefit is the absence of the
same ‘one-size-fits-all’ interest rate. For example, some countries still in recession in the 20
eurozone saw their interest rates, as set by the European Central Bank, rise to 1.25% in
July 2011. This was at a time when the Bank of England kept the UK Bank Rate at 0.5%.
Countries could also restore an exchange rate for their own currencies which would give
them a competitive edge, rather than being forced to cut wages and jobs. They would also
not be obliged to follow such a strict policy of fiscal restraint which remaining members 25
would have to follow.

There are others, however, both within these countries and beyond, who warn against
departure from the eurozone. It is difficult to predict what the economic impact on the
UK might be should there be a break-up of the eurozone. The impact would depend on

Page 10 of 51
 a number of factors, including how many countries left and which countries these were. 30
It might also depend on the degree of economic instability which departure from the
eurozone might cause in those countries as they restored their national currencies, and
the impact on the stability of the remaining members of the eurozone. It has to be borne in
mind, however, that the EU would still exist.

The UK might expect disruption to trade, at least in the short term, with consequences for 35
the balance of payments. Another banking crisis could also emerge. International money,
seeking a safe haven, might favour the pound sterling and thus strengthen its external
value. These potential developments have implications for UK growth and employment
and pose yet another threat to the current recovery. The UK might be relieved to be
outside the eurozone. However, the UK is certainly not immune from the possible 40
consequences of its break-up.
Source: European Central Bank, 2012

Q35.
Using The European Union Context Extract C, calculate the price in dollars of a good
exported from the eurozone to the US at the start of 1999 priced at 20 euros and identify
one significant feature of the dollar/euro exchange rate for the period 1999 to 2011.
[2 marks]

Q36.
The European Union Context Extract D (lines 28–29) states that it ‘is difficult to predict
what the economic impact on the UK might be should there be a break-up of the
eurozone’.

Using the data and your economic knowledge, assess the possible impact on the UK
economy if a number of countries leave the eurozone.
[25 marks]

Q37.
Weaknesses in the UK balance of trade in goods persist, with a deficit of £27.6 bn in the
third quarter of 2011, compared, for example, to £23.3 bn in the same quarter in 2010.

Explain three reasons for a country such as the UK experiencing persistent deficits in the
balance of trade in goods.
[15 marks]

Q38.
UK exports of goods which, in 2002, were valued at £187 billion, had risen to £228 billion
in 2009.
The deficit on the UK balance of trade in goods rose from £48 billion in 2002 to £82 billion
in 2009.

Explain three possible reasons for growth in the value of an economy’s exports of goods.
[15 marks]

Q39.
The deficit on the UK balance of trade in goods and services rose from £26 billion in 2003
to £44 billion in 2008.

Page 11 of 51
 Explain the main factors which might help determine the volume of UK exports and
imports.
[15 marks]

Q40.
The deficit on the UK balance of trade in goods and services rose from £26 billion in 2003
to £44 billion in 2008.

Evaluate government policies which might bring about a reduction in the UK deficit on the
balance of trade in goods and services.
[25 marks]

Q41.
An economy which is enjoying rapid economic growth experiences a significant rise in the
external value of its currency within a floating exchange rate system.

Explain the factors which may lead to a rise in the exchange rate of a currency within a
floating exchange rate system.
[15 marks]

Q42.
An economy which is enjoying rapid economic growth experiences a significant rise in the
external value of its currency within a floating exchange rate system.

Evaluate the possible macroeconomic consequences for an economy of a rise in the

exchange rate of its currency.
[25 marks]

Q43.
The European Union Context Extract D (lines 13–14) argues that it ‘is not difficult to
understand why the pound has fallen against the euro and other currencies’.

Explain what is meant by ‘the pound has fallen against the euro and other currencies’ and
analyse two determinants of such a fall.
[9 marks]

Q44.
‘Failure to get a new trade deal would put another dark cloud over the world economy.’
Source: PETER MANDELSON, EU Trade Commissioner, July 2008

Explain the main economic determinants of a country’s demand for imports.

[15 marks]

Q45.
‘Failure to get a new trade deal would put another dark cloud over the world economy.’
Source: PETER MANDELSON, EU Trade Commissioner, July 2008

Evaluate the significance for the UK balance of payments on current account of increased
use of protectionist policies around the world.
[25 marks]

Page 12 of 51
Mark schemes

Q1.

Calculation: 93.13 − 74.10 × 100 = 20.43380 = −20.43% to two decimal places

93.13

Note: The candidate must include the ‘minus’ (−) sign or state that this is a ‘fall’ or
‘depreciation’ for the full 2 marks.

Response Marks

For the correct answer (−20.43%) with the % sign and to two
2 marks
decimal places.

For a correct answer (−20.43%) but without the % sign and/or 1 mark
not to two decimal places. Also, for an answer of 20.43% but
without an indication of a minus (−), fall or depreciation.
[2]

Q2.

Max 4
Response
marks

• includes evidence that shows that the UK’s trade 4 marks

performance has been disappointing given the fall in the
value of the pound
• clearly explains how this data is evidence that the UK’s trade
performance has been disappointing given the fall in the
value of the pound.

• includes evidence that shows that the UK’s trade 3 marks

performance has been disappointing given the fall in the
value of the pound
• unclear explanation of how this data is evidence that the
UK’s trade performance has been disappointing given the
fall in the value of the pound.

• includes some limited evidence that shows that the UK’s 2 marks
trade performance has been disappointing given the fall in
the value of the pound
• limited explanation of how this data is evidence that the UK’s
trade performance has been disappointing given the fall in
the value of the pound.

• includes evidence that does not clearly show that the UK’s 1 mark
trade performance has been disappointing given the fall in
the value of the pound
• no explanation of how this data is evidence that the UK’s
trade performance has been disappointing given the fall in
the value of the pound.

Page 13 of 51
 Relevant issues include:

• explanation of relevant terms/phrases such as ‘fall in the value of the pound’,

‘disappointing trade performance’
• explaining that a fall in the exchange rate should make the UK more internationally
competitive, increasing exports, decreasing imports and reducing the trade deficit
• the balance of total trade is in deficit throughout the whole of the period from
November 2015 to November 2016, indicating the value of exports has not
overtaken the value of imports
• the total trade deficit ranges from £0.3bn in December 2015 to £5.3bn in September
2016, indicating either a falling value of exports or rising value of imports
• the total trade deficit ends larger than it started. In November 2015, the deficit was
£2.5bn whereas in November 2016 it was £4.8bn
• the goods balance is in deficit throughout the whole period from November 2015 to
November 2016 indicating the value of exports of goods has not overtaken the value
of imports of goods
• the goods deficits range from £8bn in December 2015 to £13.8bn in September
2016
• the deficit in goods ends larger than it started. In November 2015, the deficit in
goods was £9.5bn whereas in November 2016 it was £12.1bn
• the balance in services did not improve over the whole period. It started at £8bn in
November 2015 and ended at £8bn in November 2016.

Note: Accept figures that are within a range of + or − £0.5bn.

[4]

Q3.

Level of Max 9
An answer that:
response marks
• is well organised and develops one or more of the key
issues that are relevant to the question 7–9
• shows sound knowledge and understanding of relevant marks
economic terminology, concepts and principles
• includes good application of relevant economic principles
3
and/or good use of data to support the response
• includes well-focused analysis with a clear, logical chain
of reasoning
• includes a relevant diagram that will, at the top of this
level, be accurate and used appropriately.
• includes one or more issues that are relevant to the
question 4–6
• shows reasonable knowledge and understanding of marks
economic terminology, concepts and principles but some
weaknesses may be present
2
• includes reasonable application of relevant economic
principles and/or data to the question
• includes some reasonable analysis but it might not be
adequately developed and may be confused in places
• may include a relevant diagram.
1 • is very brief and/or lacks coherence
• shows some limited knowledge and understanding of 1–3
economic terminology, concepts and principles but some marks
errors are likely
• demonstrates very limited ability to apply relevant

Page 14 of 51
 economic principles and/or data to the question
• may include some very limited analysis but the analysis
lacks focus and/or becomes confused
• may include a relevant diagram but the diagram is not
used and/or is inaccurate in some respects.

A demand and supply diagram is expected showing a rise in demand and/or a fall in
supply of the currency. Axes vary on the Y axes of this diagram. Accept anything suitable
that indicates the exchange rate but not “price” on its own.

Relevant issues include

• definitions/explanations: exchange rate, floating exchange rate, correcting a trade

surplus
• explaining how a trade surplus puts upward pressure on the exchange rate
• describing effects on the supply and demand for the currency
• describing an appreciation of the currency leading to a rise in export prices and a fall
in the price of imports and explaining the subsequent impact on the volume and/or
value of exports and imports
• considering the elasticity of demand for imports and exports and the (inverse) J
curve effect
• linking the falling value of exports and/or rising value of imports to a reduction in the
trade surplus.
[9]

Q4.
Areas for discussion include:

• definitions/explanations: trade or current account deficit, trade, balance of

payments, macroeconomic performance
• explaining how a trade or current account deficit may impact upon:
◦ economic growth
◦ unemployment
◦ inflation
◦ other measures of performance
• considering the causes of the trade or current account deficit
• explaining the difference between trade in goods and services
• considering other parts of the current account of the balance of payments, ie
primary and secondary income flows, and their significance
• the role of the capital and financial accounts
• the significance of having a floating exchange rate
• possible government responses to the deficit and their impact on macroeconomic
performance
• the UK’s past experiences with current account deficits
• the relative importance of the current account deficit in comparison to the other
economic goals
• the “persistent” nature of the deficit
• the potential costs and benefits of surpluses on the financial account
• possible structural problems in the UK economy causing the imbalance.

The use of relevant diagrams to support the analysis should be taken into account when
assessing the quality of the student’s response to the question.

Level of Max
Response
response 25 marks

Page 15 of 51
 Sound, focused analysis and well-supported evaluation
that: 21 – 25
• is well organised, showing sound knowledge and marks
understanding of economic terminology, concepts and
principles with few, if any, errors
• includes good application of relevant economic principles to
5
the given context and, where appropriate, good use of data
to support the response
• includes well-focused analysis with clear, logical chains of
reasoning
• includes supported evaluation throughout the response and
in a final conclusion.
Sound, focused analysis and some supported evaluation
that: 16 – 20
• is well organised, showing sound knowledge and marks
understanding of economic terminology, concepts and
principles with few, if any, errors
4 • includes some good application of relevant economic
principles to the given context and, where appropriate, some
good use of data to support the response
• includes some well-focused analysis with clear, logical
chains of reasoning
• includes some reasonable, supported evaluation.
Some reasonable analysis but generally unsupported
evaluation that: 11 – 15
• focuses on issues that are relevant to the question, showing marks
satisfactory knowledge and understanding of economic
terminology, concepts and principles but some weaknesses
may be present
• includes reasonable application of relevant economic
3
principles to the given context and, where appropriate, some
use of data to support the response
• includes some reasonable analysis but which might not be
adequately developed or becomes confused in places
• includes fairly superficial evaluation; there is likely to be
some attempt to make relevant judgements but these are
not well-supported by arguments and/or data.
A fairly weak response with some understanding that:
• includes some limited knowledge and understanding of 6 – 10
economic terminology, concepts and principles but some marks
errors are likely
2 • includes some limited application of relevant economic
principles to the given context and/or data to the question
• includes some limited analysis but it may lack focus and/or
become confused
• includes some evaluation which is weak and unsupported.
A very weak response that:
• includes little relevant knowledge and understanding of 1–5
economic terminology, concepts and principles marks
1
• includes application to the given context which, at best, is
very weak
• includes attempted analysis which is weak and unsupported.
[25]

Q5.

Page 16 of 51
 D
[1]

Q6.
A
[1]

Q7.
Areas for discussion include:
• definitions/explanations: monetary policy, deflation, developed economies
• deflation and the different types (malign v benign)
• the effects of deflation
• the nature of developed economies and different experiences of deflation
• the role of interest rates and the transmission mechanism
• the effects of interest rates on investment, employment, saving and consumption
• the link between long-term saving and long-term investment
• the effectiveness of interest rates at very low levels including negative interest rates
• consideration of the MPC’s role, primarily in targeting inflation but also in targeting
growth
• consideration of differences in the two economies which may determine the
effectiveness of monetary policy
• the use of quantitative easing and consideration of its success
• the possible role of the exchange rate in stimulating the economy
• the use of fiscal policy and fiscal stimulus
• considering how government debt may affect the ability to use fiscal policy
• considering how private-sector debt may influence the effectiveness of policies
designed to combat deflation
• consideration of the potential conflicts in policy
• the significance of economic shocks and their impact on policies to tackle deflation.

The use of relevant diagrams to support the analysis should be taken into account when
assessing the quality of the candidate’s response to the question.

Level of Response Max 25

response marks

5 Sound, focused analysis and well-supported evaluation 21 – 25

that: marks
• is well organised, showing sound knowledge and
understanding of economic terminology, concepts and
principles with few, if any, errors
• includes good application of relevant economic principles
to the given context and, where appropriate, good use of
data to support the response
• includes well-focused analysis with clear, logical chains
of reasoning
• includes supported evaluation throughout the response
and in a final conclusion.
4 Sound, focused analysis and some supported evaluation 16 – 20
that: marks
• is well organised, showing sound knowledge and
understanding of economic terminology, concepts and
principles with few, if any, errors
• includes some good application of relevant economic

Page 17 of 51
 principles to the given context and, where appropriate,
some good use of data to support the response
• includes some well-focused analysis with clear, logical
chains of reasoning
• includes some reasonable, supported evaluation.
3 Some reasonable analysis but generally unsupported 11 – 15
evaluation that: marks
• focuses on issues that are relevant to the question,
showing satisfactory knowledge and understanding of
economic terminology, concepts and principles but some
weaknesses may be present
• includes reasonable application of relevant economic
principles to the given context and, where appropriate,
some use of data to support the response
• includes some reasonable analysis but which might not
be adequately developed or becomes confused in places
• includes fairly superficial evaluation; there is likely to be
some attempt to make relevant judgements but these are
not well-supported by arguments and/or data.
2 A fairly weak response with some understanding that: 6 – 10
• includes some limited knowledge and understanding of marks
economic terminology, concepts and principles but some
errors are likely
• includes some limited application of relevant economic
principles to the given context and/or data to the
question
• includes some limited analysis but it may lack focus
and/or become confused
• includes some evaluation which is weak and
unsupported.
1 A very weak response that: 1–5
• includes little relevant knowledge and understanding of marks
economic terminology, concepts and principles
• includes application to the given context which, at best, is
very weak
• includes attempted analysis which is weak and
unsupported.
[25]

Q8.
Relevant issues include:
• definitions/explanations: trade, pattern of trade
• explaining the pattern in terms of the geographical distribution of UK exports and
imports
• explaining the significance of trade to the UK economy
• explaining the pattern in terms of different goods and services traded
• using relevant examples to illustrate the changes in the pattern of trade
• explaining comparative advantage and how changes in comparative advantage
might be significant
• giving a numerical example of comparative advantage
• explaining other possible reasons for changes in the pattern of trade, eg:
○ changes in absolute advantage
○ changes in protectionist/free trade policies in other countries
○ joining/changing membership of trading blocs
○ consideration of trade diversion/trade creation due to trading blocs

Page 18 of 51
 ○ exchange rate changes
○ changing quality/reputation
○ government intervention distorting markets
○ de-industrialisation
○ causes and changes in globalisation
○ external shocks
○ economic development
○ factor endowment and exploitation of resources
○ innovation and invention (both product and process)
○ any other valid argument.

The use of relevant diagrams, such as a tariff diagram, to support the analysis should be
taken into account when assessing the quality of the candidate’s response to the
question.

Level of Response Max 15

response marks

3 A good response provides an answer that: 11 – 15

• is well organised and develops a selection of the key marks
issues that are relevant to the question
• shows sound knowledge and understanding of economic
terminology, concepts and principles with few, if any,
errors
• includes good application of relevant economic principles
to the given context and, where appropriate, good use of
data to support the response
• includes well-focused analysis with clear, logical chains
of reasoning.
2 A reasonable response provides an answer that: 6 – 10
• focuses on issues that are relevant to the question marks
• shows satisfactory knowledge and understanding of
economic terminology, concepts and principles but some
weaknesses may be present
• includes reasonable application of relevant economic
principles to the given context and, where appropriate,
some use of data to support the response
• includes some reasonable analysis but which might not
be adequately developed or becomes confused in
places.
1 A weak response provides an answer that: 1–5
• has identified one or more relevant issues marks
• has some limited knowledge and understanding of
economic terminology, concepts and principles but some
errors are likely
• has very limited application of relevant economic
principles to the given context and/or data to the
question
• might have some limited analysis but it may lack focus
and/or become confused.
[15]

Q9.
Areas for discussion include:
• definitions/explanations: the balance of payments, the current account, current
account deficit

Page 19 of 51
• explaining the difference between a surplus or deficit on current account
• explaining the composition of the current account of the balance of payments
• explaining the historical experience of the UK’s current account
• explaining the causes of deficits
• explain possible measures to reduce the deficit such as:
○ exchange rate manipulation
○ changes in interest rates potentially affecting the exchange rate
○ expenditure-reducing policies
○ expenditure-switching policies
○ the role of protectionism
○ government role in export promotion/trade deals
○ the role of fiscal and monetary policy
○ supply-side improvements which might begin to provide a solution to the
weakness, such as:
– competitiveness/unit labour costs
– investment (human and physical capital)
– technology, R&D and productivity
– infrastructure
• consideration of the UK’s membership of the WTO and EU restricting its ability to
use protectionism
• consideration of whether the deficit is a problem if the capital account is in surplus
• consideration of the impact on other macroeconomic goals of trying to reduce the
deficit on the current account of the balance of payments.

The use of relevant diagrams such as AD/AS diagrams to support the analysis should be
taken into account when assessing the quality of the student’s response to the question.

Level of Response Max 25

response marks

5 Sound, focused analysis and well-supported evaluation 21 – 25

that: marks
• is well organised, showing sound knowledge and
understanding of economic terminology, concepts and
principles with few, if any, errors
• includes good application of relevant economic principles
to the given context and, where appropriate, good use of
data to support the response
• includes well-focused analysis with clear, logical chains
of reasoning
• includes supported evaluation throughout the response
and in a final conclusion.
4 Sound, focused analysis and some supported evaluation 16 – 20
that: marks
• is well organised, showing sound knowledge and
understanding of economic terminology, concepts and
principles with few, if any, errors
• includes some good application of relevant economic
principles to the given context and, where appropriate,
some good use of data to support the response
• includes some well-focused analysis with clear, logical
chains of reasoning
• includes some reasonable, supported evaluation.
3 Some reasonable analysis but generally unsupported 11 – 15
evaluation that: marks
• focuses on issues that are relevant to the question,
showing satisfactory knowledge and understanding of

Page 20 of 51
 economic terminology, concepts and principles but some
weaknesses may be present
• includes reasonable application of relevant economic
principles to the given context and, where appropriate,
some use of data to support the response
• includes some reasonable analysis but which might not
be adequately developed or becomes confused in places
• includes fairly superficial evaluation; there is likely to be
some attempt to make relevant judgements but these are
not well-supported by arguments and/or data.
2 A fairly weak response with some understanding that: 6 – 10
• includes some limited knowledge and understanding of marks
economic terminology, concepts and principles but some
errors are likely
• includes some limited application of relevant economic
principles to the given context and/or data to the
question
• includes some limited analysis but it may lack focus
and/or become confused
• includes some evaluation which is weak and
unsupported.
1 A very weak response that: 1–5
• includes little relevant knowledge and understanding of marks
economic terminology, concepts and principles
• includes application to the given context which, at best, is
very weak
• includes attempted analysis which is weak and
unsupported.
[25]

Q10.

For defining / explaining Up to 2 marks per

• Exchange rates definition or
• Appreciation explanation to a
• Different exchange rate systems maximum of 4 marks

Award 1 mark for each logical link in the chain of reasoning

For example Up to 15 marks

A free floating exchange rate is determined by
the supply and demand of currency on FOREX
(1 mark). Speculative activity (1 mark) may
occur if it is thought there will be a rise in the
interest rate (1 mark) of a particular economy
which will increase the demand of that currency
(1 mark) as the returns to saving rise (1 mark) if
money is placed in an economy’s financial
institutions (1 mark). As the flow of ‘hot money’
increases (1 mark) this may lead to an
appreciation (1 mark but not to be awarded in
addition to definition marks) such as £1 =
$1.46 goes to £1 = $1.50 (1 mark for examples

Page 21 of 51
 but not use of the example in the preamble).
Other examples include: trade flows, productivity
rates, inward investment, other speculative
activities and government intervention.

Up to 2 marks per
diagram (1 mark for
Use of diagrams to help support explanations,
labelling, 1 mark for
currency diagrams, trade cycles and AD/AS
correct information
diagrams
shown) to a maximum
of 4 marks.

1 mark per reference

Reference to the UK and/or other economies. to a maximum of 2
marks
[15]

Q11.
In this part of the question, candidates will need to demonstrate that they are able to
evaluate issues and arguments to support a conclusion if they are to be awarded more
than 15 marks.

Level 5 Good analysis and good evaluation 22 to 25 marks

Mid-Point 24
marks

Level 4 Good analysis but limited evaluation

17 to 21
OR
Mid-Point 19
Reasonable analysis and reasonable marks
evaluation

Level 3 Reasonable including some correct 10 to 16

analysis but very limited evaluation
Mid-Point 13
marks

Level 2 Weak with some understanding 4 to 9

Mid-Point 7
marks

Level 1 Very weak 0 to 3

Mid-Point 2
marks

Issues and areas for discussion include

Introduction • Balance of payments

• Current account and capital account
• Exchange rates
• Macroeconomic performance indicators

Page 22 of 51
Developing the Arguments why an appreciation of the pound
response to the against the Euro may be beneficial to the UK’s
question: macroeconomic performance
(application and • The effects of cheaper raw materials from Europe
analysis) on inflation
• The effects on competitiveness with the rest of the
world if costs are lower
• Impacts on UK manufacturing employment of
cheaper European raw materials
• Potential improvements to productivity in response
to more expensive exports
• Impacts of non-price competitiveness in response
to more expensive exports
• Could reduce inflationary pressure if the economy
is in a boom
• May act as a stabiliser to UK growth
Arguments why an appreciation of the pound
against the Euro may be detrimental to the UK’s
macroeconomic performance
• The effects of cheaper raw materials from Europe
on unemployment
• Outsourcing to Europe affecting employment and
growth
• The loss of export competitiveness against Europe
• Potential falls in FDI from Europe due to increased
costs and its effects on growth

Evaluation • Depends upon the duration of the change, self-

correction may occur
• Other issues other than exchange rate may have
greater potential impacts on the economy such as
domestic fiscal and monetary policy
• The Marshall-Lerner condition (not in specification)
and the effects of changing exchange rates upon
the current account of the balance of payments
• Changes to the patterns of trade and the
importance of the exchange rate multilaterally
rather than bilaterally.
Examiners should note that, for some of the weaker or
average candidates, parts of the above represent quite
sophisticated evaluation and so it is important to
ensure that more basic evaluation is adequately
rewarded where a genuine effort has been made to
display that skill.

Also give credit • Reference to the UK / other economies

for • Diagrams
• An overall judgement on the issues raised

It will only be possible for candidates to consider a few of the above. They may also
discuss other issues not mentioned above.
[25]

Page 23 of 51
Q12.

Max 2
Response
marks

For the correct answer 3.1% or any answer between 2.9% to

2 marks
3.2% The ‘unit’, (%) must be shown and to one decimal place.

For the correct answer without a unit shown or not to one 1 mark
decimal place.
[2]

Q13.
The anticipated diagram would make appropriate use of diagrams, e.g. AD/AS,
currency diagrams.

Relevant issues include:

• For a relevant explanation of a devaluation of the exchange rate: An exchange rate
is the value of one currency in terms of another and a devaluation is when a
currency is lowered in value against another. This usually occurs in a fixed
exchange rate system unlike a depreciation which is in a floating exchange rate
system.
• Numerical example of a devaluation.
• As China devalues its currency, the value of the yuan falls in relation to the pound,
therefore one pound buys more yuan. This makes imports from China relatively
cheaper and exports from the UK to China relatively more expensive, thus the value
of imports rises and the value of exports fall which are both components of
aggregate demand causing aggregate demand to fall therefore reducing real
national output and creating negative short-run economic growth.
• Effects on investment.
• Effects on business confidence.
[9]

Q14.
In this part of the question, candidates will need to demonstrate that they are able to
evaluate issues and arguments to support a conclusion if they are to be awarded more
than 15 marks.

Where there is no explicit reference to the data, award a maximum of 21 marks.

Level 5 Good analysis and good evaluation 22 to 25 marks

Mid-Point 24
marks

Level 4 Good analysis but limited evaluation

17 to 21
OR
Mid-Point 19
Reasonable analysis and reasonable marks
evaluation

Level 3 Reasonable including some correct 10 to 16

analysis but very limited evaluation

Page 24 of 51
 Mid-Point 13
marks

Level 2 Weak with some understanding 4 to 9

Mid-Point 7
marks

Level 1 Very weak 0 to 3

Mid-Point 2
marks

Introduction • Monetary policy

• Exchange rates
• Macroeconomic performance

Developing the Drawing on the information in the extracts:

response to
the question: • Currency wars and potential retaliation (Extract B)
• Investor confidence (Extract B)
(Application) • Threats to economic growth in the UK and USA (Extract B)
• Effects of interest rates on exchange rates (Extract B)
• Methods of reducing trade deficits (Extract C)
• Effects on other Monetary Policy instruments and targets
(Extract C)
• Problems that Switzerland faced in a fixed system (Extract
C)
• Effects on trade and stability due to stable exchange rates
(Extract C)

(Analysis) Arguments why managing the exchange rate may be

beneficial:
• Stability leading to investment
• More certainty regarding export revenue for firms
• More certainty regarding import prices for firms
• Consumers benefitting from stable prices
• Possible avoidance of deflationary pressure if revalued
• Improving competitiveness of firms if devalued
• Increased trade flows with the EU due to increased
transparency in prices if fixed to Euro.
Arguments why managing the exchange rate may not be
beneficial:
• Loss of ability to use interest rates effectively
• May be expensive for government
• Loss of BoE’s independence and use of policy instruments
• Conflicts and trade-offs with other macroeconomic
objectives
• Potential of choosing "the wrong rate" to fix at
• The UK’s historical experience with the ERM
• Loss of automatic adjustment or stabilisation

Evaluation • The relative success or lack of success in the use of interest

rates in the past
• The possible success or lack of success in the use of
quantitative easing in the past

Page 25 of 51
 • The relative importance of the trade deficit in terms of other
macroeconomic goals, is it more important to focus on
domestic consumption?
• Can the government afford to prop up the currency if needed
or does this contradict aims to reduce the budget deficit?
• Is the currency the major problem with the UK’s export
competitiveness or is it due to structural problems and a lack
of productivity?
• Would fixing the exchange rate low lead to a "race to the
bottom" with other currencies?
Examiners should note that, for some of the weaker or average
candidates, parts of the above represent quite sophisticated
evaluation and so it is important to ensure that more basic
evaluation is adequately rewarded where a genuine effort has
been made to display that skill.

Also give • Reference to the UK / other economies

credit for • Diagrams
• An overall judgement on the issues raised.

It will only be possible for candidates to consider a few of the above. They may also
discuss issues not not mentioned above.
[25]

Q15.
In this part of the question, candidates will need to demonstrate that they are able to
evaluate issues and arguments to support a conclusion if they are to be awarded more
than 15 marks.

Level 5 Good analysis and good evaluation 22 to 25 marks

Mid-Point 24
marks

Level 4 Good analysis but limited evaluation

17 to 21
OR
Mid-Point 19
Reasonable analysis and reasonable marks
evaluation

Level 3 Reasonable including some correct 10 to 16

analysis but very limited evaluation
Mid-Point 13
marks

Level 2 Weak with some understanding 4 to 9

Mid-Point 7
marks

Level 1 Very weak 0 to 3

Mid-Point 2
marks

Page 26 of 51
Introduction • Budget deficit
• Trade deficit
• The Balance of Payments

Developing the Arguments why a trade deficit is more damaging

response to the than a budget deficit:
question:
• Could indicate lack of productivity
(application and • Could cause depreciation of currency
analysis) • Could cause problems for a country’s reserves
• A surplus on the financing section of the balance of
payments increasing international indebtedness
• Deflationary pressure
• Could indicate structural weaknesses
• Effects on jobs such as structural unemployment
Arguments why a budget deficit is more damaging
than a trade deficit:
• Crowding out
• Loss of credit status leading to increased costs of
government borrowing
• Future generations footing the bill (vertically
inequitable)
• Possibility of tax rises / cuts in spending
• Adds to national debt
• Could be inflationary

Evaluation • Both issues are not mutually exclusive, an

improved supply-side performance could help
both.
• The UK’s ability to attract FDI will help finance the
capital account and may off-set any problems on
the trade deficit, however this may also benefit the
UK’s budget deficit in terms of job creation and
generating tax revenue.
• Deficits on both may be necessary and
advantageous, they may both benefit living
standards in terms of more goods being consumed
or boosting AD.
• Consideration that trade-offs may take place with
the other macroeconomic goals, for example
reducing the budget deficit may reduce the trade
deficit but at the same time harm unemployment or
create deflation.
Examiners should note that, for some of the weaker or
average candidates, parts of the above represent quite
sophisticated evaluation and so it is important to
ensure that more basic evaluation is adequately
rewarded where a genuine effort has been made to
display that skill.

Also give credit • Reference to the UK / other economies

for • Diagrams
• An overall judgement on the issues raised.

It will only be possible for candidates to consider a few of the above. They may also
discuss other issues not mentioned above.

Page 27 of 51
 [25]

Q16.
Explanation
For defining / explaining
Up to 2 marks per
• Customs union / free trade area definition or
• Pattern of trade explanation to a
• Volume of trade maximum of 4 marks
• Trade or exports / imports

Award 1 mark for each step in a logical chain of reasoning:

For example:
Due to the membership of the EU, there are no
internal tariffs (1 mark) between the UK and the
other 27 member states (1 mark) so when
trading with another country for example France
(1 mark for example) the cost of doing so is
lower (1 mark) and firms will experience lower
prices if France has exploited its comparative
advantage (1 mark) as France has a lower
opportunity cost than the UK (1 mark) in for
example the production of wine (1 mark for Up to 15 marks
example) which leads to trade creation (1 mark)
which increases the volume of imports (1 mark)
from other members of the EU which affects the
pattern of trade in terms of who trades what with
who (1 mark).
Other examples include: Potential for exporting
products in which the UK holds a comparative
advantage in, economies of scale, potential
trade diversion due to common external tariff,
retaliation, enforced embargoes.

Up to 2 marks per
diagram (1 mark for
Use of diagrams to help support explanations,
labelling, 1 mark for
e.g. tariff diagram, quota diagram, AD/AS,
correct information
Economies of scale
shown) to a maximum
of 4 marks

1 mark per reference

Reference to the UK and/or other economies. to a maximum of 2
marks

Award a maximum of 10 marks if both parts of the question are not attempted i.e. the
pattern of trade and the volume of trade.
[15]

Q17.
In this part of the question, candidates will need to demonstrate that they are able to

Page 28 of 51
evaluate issues and arguments to support a conclusion if they are to be awarded more
than 15 marks.

Level 5 Good analysis and good evaluation 22 to 25 marks

Mid-Point 24
marks

Level 4 Good analysis but limited evaluation

17 to 21
OR
Mid-Point 19
Reasonable analysis and reasonable marks
evaluation

Level 3 Reasonable including some correct 10 to 16

analysis but very limited evaluation
Mid-Point 13
marks

Level 2 Weak with some understanding 4 to 9

Mid-Point 7
marks

Level 1 Very weak 0 to 3

Mid-Point 2
marks

Introduction • The EU
• How benefits to individuals and firms can be measured
• Consumer welfare

Developing the Benefits of EU membership on individuals and firms:

response to
the question: • Job creation in export industries
• Increased supply of labour potentially reduces costs for firms
(application • Lower cost labour reduces cost of living therefore improved
and analysis) consumer welfare
• Firm’s costs are reduced for raw materials from within EU
• Economies of scale
• Competition drives efficiency in firms
• Other benefits e.g. maternity / paternity benefits (Individuals)
• Microeconomic effects and effects on individual markets e.g.
CAP
• Potentially larger markets for firms
• Employment opportunities accessible in other countries
Costs of EU membership on individuals and firms:
• Structural unemployment in certain regions due to free trade
• Pressure on public services due to increased population as
a result of immigration from other EU countries
• Higher taxes on individuals to pay for public services
• Increased supply of labour could lower wages for individuals
• Higher taxes as a result of EU contributions
• Microeconomic effects such as higher agricultural prices due
to common external tariff and CAP
• EU regulations increasing costs

Page 29 of 51
 • Competition causing firms to go bust

Evaluation • Benefits to some people such as lower cost for wages for
firms may be a problem for others for example low-paid
workers
• Difficulty of estimating what would have happened had the
UK not been in the EU
• Different experiences in different regions of the UK,
structural unemployment may be exacerbated in some
areas
• How do we measure benefits? The issues are somewhat
subjective
• What is the alternative? Potential of “Brexit”
Examiners should note that, for some of the weaker or average
candidates, parts of the above represent quite sophisticated
evaluation and so it is important to ensure that more basic
evaluation is adequately rewarded where a genuine effort has
been made to display that skill.

Also give • Reference to the UK / other economies

credit for • Diagrams
• An overall judgement on the issues raised.

It will only be possible for candidates to consider a few of the above. They may also
discuss other issues not mentioned above.
[25]

Q19.
Areas for discussion include:
• nature of monetary policy
• the Bank of England/MPC and the operation of monetary policy in the UK
• what is meant by macroeconomic stability and the indicators of
macroeconomic performance
• how monetary policy affects macroeconomic performance, eg by influencing
aggregate demand, influencing expectations, impacts on financial markets
• monetary policy transmission mechanisms
• role of interest rates in affecting aggregate demand
• limitations of changes in bank rate, eg likely to be less effective when
confidence is low, may not be reflected in market interest rates, the lower
pound problem
• quantitative easing, Funding for Lending, Forward Guidance and other less
conventional monetary measures
• monetary policy as a means of fine-tuning the economy and responding to
economic shocks
• monetary policy and long-run growth
• monetary policy, debt and asset prices
• monetary policy and the exchange rate
• monetary policy in a world of floating exchange rates and ‘unrestricted’ capital
flows
• the contribution, or otherwise, of monetary policy to the period of stability (eg
1993-2006)
• the contribution of monetary policy to the credit crunch
• the impact of monetary policy since the credit crunch.

The use of relevant diagrams to support the analysis should be taken into account

Page 30 of 51
 when assessing the quality of the candidate’s response to the question.
[25]

Q20.
C
[1]

Q21.
B
[1]

Q23.
Calculation:

$36 617/1.7 = £21 539

Response Marks

For the correct answer with the £ sign and to nearest £ 2 marks

For a correct answer but without the £ sign and/or not to nearest £ 1 mark
[2]

Q24.
Relevant issues include:
• lower AD leading to a fall in the price level
• reduction in consumer confidence and spending
• lower business confidence and investment
• price cutting by firms in a period of recession
• recession/deflation in the rest of the world
• falling world commodity prices
• strengthening exchange rate
• technological breakthroughs lowering costs of production
• impact of cheaper imports from low waged economies
• malign v benign deflation

The use of relevant diagrams to support the analysis should be taken into account
when assessing the quality of the student’s response to the question.
[15]

Q25.
Areas for discussion include:
• definitions of unemployment and deficit reduction
• different types of unemployment
• policies that can be used to reduce unemployment
• methods by which deficit can be reduced, eg tax increases and/or spending
cuts by the government
• reasons for current deficit-reduction policy
• effects of deficit reduction on aggregate demand, output and employment

Page 31 of 51
 • multiplier effects
• how different methods of reducing the deficit will affect unemployment, e.g. tax
increases, cuts in welfare, cuts in direct government spending on goods and
services
• recent changes in unemployment in the UK
• supply-side policies can help to reduce unemployment
• how a reduction in the deficit can affect different types of unemployment
• how other components of AD may rise as the government’s contribution to AD
falls
• factors that may boost AD to replace the effect of lost government expenditure,
eg crowding-in effects
• size and pace of any planned deficit reduction
• cuts in government expenditure may or may not fall on areas that affect
employment significantly
• time lag between the deficit-reduction policy and the effect on employment
• the impact of events in the rest of the world
• the impact of changes in the sterling exchange rate
• monetary policy may help to offset policy of deficit reduction, eg low UK
interest rates and unconventional monetary policy measures have supported
the expansion of AD since 2008/9

The use of relevant diagrams to support the analysis should be taken into account
when assessing the quality of the student’s response to the question.
[25]

Q26.
Relevant issues include:
• definition of international trade
• absolute and comparative advantage
• benefits of comparative advantage as long as trade occurs at a mutually
beneficial terms of trade
• numerical example to illustrate the principle of comparative advantage
• international trade allows specialisation so countries can benefit from more
efficient production which should mean more jobs and cheaper prices for
consumers
• availability of consumer goods that cannot be easily produced in UK
• increased choice for consumers which should lead to lower prices and higher
quality products
• helps to prevent domestic firms with monopoly power exploiting consumers
• the dynamic effects of international trade on domestic producers, eg through
increased competition stimulating improvements in productivity and innovation

The use of relevant diagrams to support the analysis should be taken into account
when assessing the quality of the student’s response to the question.
[15]

Q27.
Areas for discussion include:
• definitions of free trade and protectionist policy in context of international trade
• types of protectionist policy
• potential benefits gained through protectionist policies e.g in relation to growth,
jobs the current account of the balance of payments
• the growing UK current account deficit; has been at record levels as a
percentage of GDP

Page 32 of 51
 • businesses may find it hard to compete against low-cost foreign competition
• improvements in technology, transport etc. make it easier for consumers to
buy from abroad
• impact of international trade on government objectives for jobs and the current
account balance
• cheaper labour overseas makes it hard for UK businesses to compete on price
• cheap labour is just another form of comparative advantage and should not be
seen as unfair
• arguments to justify protection, e.g. infant industry, job protection, prevention
of dumping
• membership of the WTO makes it very difficult for the UK to adopt protectionist
policies
• EU membership means severe limitations on what protectionist measures can
be introduced
• protectionist policies are likely to lead to retaliation from other countries no real
evidence that protectionist policies work in long-run – countries with highly
protected industries have not outperformed those with more open economies
• discussion of alternatives to protectionism, eg allowing the exchange rate to
fall international trade may make it easier to achieve some government
objectives, e.g. low inflation and high productivity

The use of relevant diagrams to support the analysis should be taken into account
when assessing the quality of the student’s response to the question.
[25]

Q29.

Explanation:

Definition: Interest rates are the returns to saving or the cost of borrowing
whereas figures have been adjusted to take into account inflation so the
real interest rate is the nominal interest rate minus the inflation rate.

Analysis:

For example: as interest rates fall as part of a loose monetary policy

speculators will decide there is little return from holding money in the
currency in question and will move money to where rates of return are
better this will lead to a capital flight from that currency to more profitable
currencies which increases supply and also a decreasing demand for the
original currency and as a result will depreciate the original currency.

Use of appropriate diagrams, eg supply and demand of

currency/exchange rates.

Reference to the UK or other economies.

[9]

Q30.
For defining/explaining
• Globalisation

Page 33 of 51
 • Balance of payments on current account
• Trade deficit
• Import controls.

For example: By carrying out supply-side policies such as training and

education this would hopefully improve productivity in the domestic
market which should improve the potential output per worker which
increases the long run productive potential of the economy. This could
reduce the general price level which makes domestic goods and services
more competitive abroad which may lead to other countries increasing
demand for the UK’s exports such as financial services in which the UK
holds a comparative advantage and if the value of imports remains the
same this may reduce the balance of payments on the current account.
Other examples could include: issues such as exchange rate
depreciation, expenditure reducing policies or export subsidies.

Use of diagrams to help support explanations, eg LRAS increasing or

exchange rate depreciation.

Reference to the UK and/or other economies.

[15]

Q31.
Relevant issues/logical chains of analysis include:
• defining exchange rate/appreciation/depreciation/revaluation/devaluation
• the distinction between various exchange rate systems
• trade flows will affect an exchange rate. If exports increase so too will the demand
for the currency of the exporting country by overseas buyers. This will cause the
exchange rate to appreciate. Equally, if imports into a country increase, so too will
the supply of that country’s currency, causing the exchange rate to depreciate
• Investment flows, competitiveness government involvement in FOREX, interest
rates and hot-money flows, expectations, confidence
• External factors such as strong US or Eurozone recovery or an economic shock
such as an international banking crisis
• diagrams to help support explanations, eg supply of, and demand for, a currency or
for exports and/or imports
[15]

Q32.
• Exchange rate
Introduction
• Floating exchange rate
• Other exchange rate systems
• Macroeconomic stability.
• Automatic adjustment under a floating exchange rate
Developing the
• The significance of automatic adjustment for macroeconomic
response to the
stability
question
• Interest rates determined by domestic conditions but nevertheless
(application and
impacting on the exchange rate
analysis)
• Speculation and its impact
• Global economic shocks
• Economic growth and stability

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 • The exchange rate and prices
• The exchange rate and the balance of payments on current
account
• The exchange rate and employment
• A floating exchange rate and business confidence
• The possible significance of intervention by the authorities in an era
of managed flexibility
• Other factors which are more effective in achieving stability
• The likelihood of automatic adjustment occurring efficiently or at all
Evaluation
• Whether other conditions potentially able to secure stability can
counteract any destabilising effect of a floating exchange rate or
will it be vice versa?
• The extent of changes to an exchange rate under a floating system
• The impact of economic shocks making it very unlikely that stability
can be achieved whatever the exchange rate system in operation
• The preparedness of a government to intervene to influence an
exchange rate in order that macroeconomic stability can be
achieved
• In reality, how long is ‘a period of macroeconomic stability’ expected
to be?
• Are changes in an exchange rate, within reason, really relevant to
achieving macroeconomic stability?
• The need to recognise that a floating exchange rate may help to
stabilise one aspect of the macroeconomy, eg prices, but not do a
great deal for another aspect, eg economic growth.
Examiners should note that, for some of the weaker or average
candidates, parts of the above represent quite sophisticated evaluation
and so it is important to ensure that more basic evaluation is
adequately rewarded where a genuine effort has been made to display
that skill.
• Reference to the UK/other economies
Also give credit
• Diagrams
for:
• An overall judgement on the issues raised.

It will only be possible for candidates to consider a few of the above. They may also
discuss other issues not mentioned above.
[25]

Q35.
The Value: In 1999, a euro was worth $1.20, causing the
calculation: American price of the good exported from the Eurozone
and priced at €20 to be (20 × $1.20) $24.00.

For the correct answer (working need not be shown) with $ sign 2 marks
shown, ie $24

For the correct answer without the $ sign shown, ie 24. 1 mark
[2]

Q36.
Issues and areas for discussion include:

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 • the Eurozone and the EU
Introduction
• UK status
• economic criteria for measuring impact
• the likely nature of Eurozone break-up.
• the degree of stability that had existed before the global financial crisis
Developing the
especially for the weaker members (lines 3–4)
response to the
• the significance of the debt crisis (lines 8–13)
question
• the importance of eurozone stability for the UK (lines 35–39)
(Application)
• the inability of the UK to be immune from the eurozone problems even
though it lies outside the eurozone (lines 39–41)
• GDP
• injections/withdrawals from the circular flow
• cyclical/structural unemployment.
• economic instability in the eurozone or more widely in the EU
Analysis
• the impact on the £
• the impact on the euro
• the status and stability of the restored national currencies of those
economies leaving the eurozone
• UK economic growth
• UK employment.
• UK balance of payments, current and capital accounts, especially the
impact othe world economy UK exports
• the impact on the UK banking/financial sector
• the scale of any UK commitment to ‘bail-outs’
• diagrams to help the analysis
• reference to the real world.
• the significance of which countries actually leave the eurozone
Evaluation
• how many countries decide to leave
• the policies those countries decide to pursue following their exit
• whether or not the exit of some countries leaves the eurozone as a much
stronger economic entity with which the UK establishes even stronger
economic ties
• the relative value of the £ in relation to the newly restored national
currencies
• if there is a continuing crisis whether or not the UK can compensate by
developing stronger economic ties elsewhere in the world
• whether the UK and the remaining members of the eurozone pursue
policies intended to support the economies exiting from the eurozone
• the exit of countries in the context of the state of the world economy
at that point and the EU economy in particular
• the potential significance of the EU still remaining as an economic
entity with, for example, the SEM still intact
• reference to what actually happens when this paper is sat by candidates
and what is suggested in the data
• a final judgment on the issue of countries leaving the eurozone.
Examiners should note that, for some of the weaker or average candidates,
parts of the above represent quite sophisticated evaluation and so it is
important to ensure that more basic evaluation is adequately rewarded where a
genuine effort has been made to display that skill.

It will only be possible for candidates to consider a few of the above. They may also
discuss other issues not mentioned above.
[25]

Page 36 of 51
Q37.
Relevant issues/logical chains of analysis include:
• defining/explaining the balance of trade, visibles/invisibles, the balance of payments
on current account,(persistent) deficit/surplus
• high exchange rate which has perhaps appreciated steadily over time. It has made
the price of exported goods more expensive and the price of imported goods
cheaper. If the price elasticity of demand for exports and imports is elastic less
export revenue can be expected. Expenditure on imports will show an increase and
hence a balance of trade deficit emerges, all other things being equal
• persistent inflation which compares unfavourably to that of trading partners
• high income elasticity of demand for imports
• supply-side weaknesses such as low productivity
• limited structural changes in the economy so that it no longer produces what world
markets want
• deindustrialisation making increased imports of imported goods inevitable
• quality of goods compared to other countries
• economic downturns amongst our trading partners not experienced within the UK so
that export sales become more difficult while imports of goods stay buoyant or even
increase especially if overseas suppliers are desperate to sell and reduce their
overseas prices
• comparative advantage
• protectionism in trading partners not replicated in the UK
• diagrams to help support explanations, eg AD/AS, comparative advantage,
tariffs/quotas
[15]

Q38.

For
• defining exports or export of goods
• value v volume
• placing exports into the context of trade in goods and services
• placing exports into the context of the balance of payments on current
account.

Comparative advantage is established or strengthened where an

economy can produce a good at a lower opportunity cost than another
country and therefore has a greater likelihood of improved
competitiveness and more efficient use of resources, so that sales should
rise in foreign markets. In the UK the financial services sector has
developed this advantage. Reward an illustrative numerical example of
comparative advantage.

Rising incomes overseas.

Improved productivity in the exporting economy.

A lower rate of inflation compared to trading partners or perhaps deflation

in contrast to competitors’ inflation.

Government support for the export sector.

Page 37 of 51
 Exchange rate depreciation.

Changes in export prices.

Any other valid cause.

Use of diagrams to help support explanations, e.g. comparative

advantage, exchange rates.

Reward references to the UK economy.

Award a maximum of 12 marks if 3 reasons are not considered.

If more than 3 reasons are considered, reward the best 3.

[15]

Q39.
For candidates who:

Define/explain
• exports/imports
• balance of trade in goods and services
• define / explain the term global investment, eg expenditure to generate future
income; spending on capital equipment to increase output, perhaps to displace
labour; human capital
• the balance of trade in goods and services in the context of the current account or
the balance of payments as a whole
• the possible nature of a country’s exports and imports given its own stage of
development
• the UK may adopt a strategy of export-led growth. This may be because it is
perceived as the most rapid way of achieving economic growth and/or because it
feels itself to be very competitive in world markets. It may recognise that a good
export performance will initiate a multiplier effect which should benefit the economy
beyond the export sector and that exports may well encourage supply-side
improvements such as innovation and higher productivity to sustain good external
performance
• favourable terms of trade (examiners note that this term is not included in the
specification but candidates may well discuss relative export/import prices even if
the term is not used)
• the need for imports of raw materials, energy and/or finished goods, e.g. because
the UK has lost so much of its industrial base
• a sustained favourable exchange rate motivates an export drive
• absolute/comparative advantage, e.g. UK comparative advantage in financial
services
• the impact on UK exports of overseas recession, especially the US and the EU as
far as the UK is concerned
• exchange rate movements
• relative inflation rates
• relative rates of productivity (traditionally unfavourable for the UK) and impact on
competitiveness
• the ability of the UK to impose protectionist policies
[15]

Q40.

Page 38 of 51
The issues identified below are intended to provide an indication of some of the areas
which might be discussed. Candidates can only be expected to consider a few of these
and/or other issues in the time available.

Issues and areas for discussion include:

Introduction: • the balance of trade in goods and services

• the balance of payments accounts
• surplus/deficit.

Developing a • supply-side policies

response to
the question: • exchange rate manipulation
• protectionist policies
• controlling aggregate demand in order to constrain
import growth and release more output to the export
sector
• adoption of an export-led growth strategy
• control of inflation if this is perceived to be the cause
of the problem
• expenditure-switching policies compared to
expenditure-dampening policies.

Evaluation: • the need to distinguish between those policies which

offer a possible short-term improvement and those
which offer a potential cure for the problem in the long
term (e.g. a reference to expenditure-dampening v
expenditure switching).
• the need to distinguish policies which can be regarded
as realistic in the current climate, e.g. supply-side
policies, from those which might be politically
unacceptable, e.g. protectionism
• some policies may not bring immediate improvement,
eg the long-term nature of supply-side policies;
exchange rate manipulation and the J-curve effect
• there may be less significance attached to the deficit if
it is seen as part-and-parcel of a maturing economy
which, although successful in the trade in services,
has lost much of its industrial base, thus needing to
import more finished goods
• the underlying issue of whether or not a deficit really
matters if it does not impede economic growth and job
creation and does not damage investor and business
confidence.

Also give • relevant use of evidence and examples from the UK /

credit for: other economies
[25]

Page 39 of 51
Q41.
For candidates who:
Define / explain
• exchange rate
• exchange rate system
• appreciation of exchange rate
• the concept of the ‘average family’
• floating exchange rate system, perhaps with comparative reference to
fixed exchange rate systems.
Explain how the exchange rate of a currency may be caused to rise within
a floating exchange rate system, e.g:
• trade flows. As exports are demanded there will be a greater demand
for the currency of the exporting country by those overseas customers
buying those exports and being required to pay with the foreign
currency in question. The country concerned will be importing goods
and services. This will require buyers to sell the domestic currency in
order to buy foreign currencies with which to buy imports. The
increase in demand for the currency arising from higher export sales
may be greater than the increase in supply of the currency arising
from increased imports, all other things being equal, the exchange
rate will rise.
• net inward investment
• speculative movements resulting in increased purchases of the
currency
• ‘dirty floating’, i.e. official intervention in the foreign currency market in
a floating exchange rate system in order to buy the currency
• higher interest rates relative to other comparable countries
• external economic stimuli, eg a strong and sustained US recovery
which can be related to trade and / or investment flows
• external shocks, eg a banking crisis
• any other relevant factor.

For those candidates who adopt a basic supply and demand approach to
the question without citing specific determining factors such as trade,
award a maximum of 10 marks for the answer as a whole.
Make use of diagrams in the analysis.
[15]

Q42.
It is hoped that candidates will briefly explain the macroeconomic criteria by which
consequences can be measured, before providing some discussion of the potential impact
of appreciation and arriving at a final judgement.

Page 40 of 51
The issues identified below are intended to provide an indication of some of the areas
which might be discussed. Candidates can only be expected to consider a few of these
and / or other issues in the time available.

Issues and areas for discussion include:

Introduction • appreciation versus depreciation of currency

• criteria for measuring macroeconomic consequences
• exchange rate systems.

Developing the • the potential impact on economic growth as exports

response to perhaps become more difficult to sell overseas
the question:
• the possible stimulus to growth as imports of raw
materials and energy become cheaper
• the possible benefits to inflation as lower demand for
exports reduces pressure on domestic production and
resources and imports of goods and services are
cheaper
• the impact on employment as cheap imports threaten
domestic production and hence jobs and as the
overseas demand for exports falls away
• the impact on a significant tourist industry in the
economy concerned and hence on growth and jobs in
an expanding sector of an increasingly service
economy
• the impact on the balance of payments on current
account given relative changes in exports and imports
of goods and services
• the strong currency making inward investment less
attractive, perhaps affecting growth and jobs.

Evaluation • the extent of the rise in the exchange rate

• the external value of the currency from which the rise
begins to take place
• the significance of the exchange rate factor compared
to other influences on the macro-economy
• whether or not exports have been an important, or
sole, cause of growth for an economy
• elasticity conditions for exports and imports
• the period of time in which the appreciation lasts
• the role of speculators in terminating the rise
• the effectiveness / speed of a corrective market
mechanism or a decision to ‘dirty float’
• the state of the world economy as the appreciation
takes place, eg might a prosperous world merely
absorb higher prices arising from a country’s

Page 41 of 51
 exchange rate appreciation?
Examiners should note that it may be possible to award
some marks for basic evaluation such as for a general
account of the pros and cons of appreciation, but with
minimal reference to the macro-economy. However, this
must be considered as low-level evaluation and awarded
accordingly.

Also give • reference to the UK / other economies

credit for:
• diagrams
• an overall judgement on the issues raised

[25]

Q43.
Define any relevant term
• Explain “the pound has fallen against the euro and other currencies”,
perhaps by defining and comparing various exchange rates;
◦ use the term depreciation and/or devaluation and compare to
appreciation/revaluation;
◦ use recent real world values to help illustrate the phrase; the
impact on export/import prices; the potential impact on the
economy
analyse two determinants of such a fall, e.g.
• Overseas investors become less confident about an economy
because it may be showing signs of entering a recession, so they
begin to withdraw their funds and sell the currency of that economy
while potential new investors, deciding not to invest, bring about a
reduction in demand for pounds, causing the currency to depreciate.
◦ Relative interest rates
◦ Government policies, e.g. increased borrowing
◦ Speculation against a currency
◦ Capital flows
◦ Trade flows
◦ Loss of business and consumer confidence as economic
forecasts worsen
◦ Any other valid determinant
Reward references to the UK/other economies
[9]

Q44.
• define imports;
• relate import performance to export performance, perhaps with an

Page 42 of 51
 invisible/visible
• reference;
• explain imports in the context of the balance of payments on current
account, perhaps referring to imports explicitly as a debit item;
• put imports into the context of the circular flow of income
explain determinants of a country’s demand for imports, eg
• income which allows consumers to demand more goods and services,
assuming disposable income also increases with gross income. Some
will be purchased from overseas sources, given that UK consumers
traditionally display a high propensity to import. This may be for
reasons such as consumer preference, as characteristics such as
quality and after-sales service are seen to be stronger in imports or
because the goods or services in question are no longer
produced/supplied in the domestic economy.
• relative prices (terms of trade)
• protectionist policies
• cheaper credit helping to finance purchases
• deindustrialisation
• raw material, component and energy requirements
• the impact of the Single European Market
• exchange rate trends
• cyclical factors, e.g. recession
• a change in comparative advantage
Reward references to the UK economy
[15]

Q45.
Issues and areas for discussion include

Introduction • protectionism v free trade

• the UK balance of payments on current account
• the work of GATT/WTO
• the Doha Round of talks
• types of protectionism

Developing the • an overview of UK exports/imports; manufactures v

response to services
the question:
• competitiveness of exports, e.g. productivity trends,
innovation, design, other non-price factors which
might compensate for increased protectionism or

Page 43 of 51
 mean that we are at a greater disadvantage if these
factors remain weak
• the potential significance of the exchange rate
• supply and demand elasticity conditions as far as
exports and imports are concerned
• the danger of further deindustrialisation and the
consequent impact on the balance of payments on
current account
• the potential significance of the EU trade bloc and
whether even more of our trade is with the EU as
protectionism elsewhere increases
• account in the context of impediments to trade of
various kinds
• any other valid issue

Evaluation • the impact on the balance of payments may depend

on the extent of the increased protectionist policies
• the impact may depend on the level of protectionism
which existed before the further increase in trade
barriers
• the degree of impact may depend on the flexibility of
the supply-side of the UK economy to take
appropriate action given the specific nature of
increased protectionism
• the economic conditions in which the strengthening
takes place around the world will be significant
• given that the UK may be part of the process of
strengthening, it will have to consider the impact on
import flows compared to the impact on export
performance
• of some importance will be the particular elasticity
conditions for exports and imports
• the different parts of the current account might be
affected in different ways
Examiners should note that it may be possible to award
some marks for basic evaluation such as a consideration
of the advantages and disadvantages of protectionism.
However, this must be considered as low-level evaluation
and awarded accordingly.

Also give • relevant use of evidence and examples from other

credit for: economies
• diagrams
• an overall judgement on the issues raised
[25]

Page 44 of 51
Examiner reports

Q1.
This question appeared to be quite straightforward in calculating a percentage change
between two points in a chart. Most students were able to do this, to 2 decimal places, as
asked in the question, however many failed to realise this was a fall or depreciation. The
majority of students gained 2 marks, however many missed out by not indicating it was a
fall or placing a negative sign on the calculation. It is important that students look out for
the requirements of the question when formulating their answers.

Q2.
Here, students were asked to explain why the data was disappointing given the fall in the
value of the pound. The data included information on goods, services and the overall
goods balance. Students could often quote bits of data, but some failed to relate this back
to why the depreciation led these figures to be disappointing. Many students were also
confused over what constitutes a smaller or larger deficit. It is worthwhile getting students
to focus on the “why” aspect of the question and match the data to the proposition.

Q3.
This question required students to explain why a trade surplus could be self-correcting in
a floating exchange rate system. Better students described what a floating exchange rate
was, described a surplus and then successfully used a currency diagram to explain the
possible upward pressure on the exchange rate, followed by the effects on imports and
exports. Where this was done well it had clear chains of logical analysis with a step by
step approach. However, some students were unable to link the surplus to the effect on
the currency or were unable to use currency diagrams and instead reverted to AD/AS
analysis which was largely irrelevant.

Q4.
This question required students to explain the impact of the current account deficit on the
macroeconomic performance of the UK. Many students automatically treated the current
account deficit in isolation which of course, was credited. As a result, some said that the
current account deficit was likely to cause recession. However, the students with better
evaluation skills often identified that this may slow down growth rather send it negative.
Stronger students not only used data from the extract but also their wider knowledge of
trade and also considered solutions to it. Some students at the higher end also considered
the capital and financial accounts as well as primary and secondary incomes and their
effects on performance. Too many students tried to bring in issues such as “Brexit” despite
it being somewhat inappropriate in this question.

Q5.
The key, D, was only selected by 34% of students. Distractors B and C were each chosen
by 27% of students. Distractor A was chosen by 12% of students. This pattern of
responses suggests that the majority of students had a poor knowledge and
understanding of exchange rate concepts and currency relationships and were guessing
the answer. Students need to be well taught that MCQ data interpretation questions
require careful consideration of all the information needed to reach a particular conclusion
and not just the information given.

All four currencies in the table are stated to be undervalues against the US Dollar. The

Page 45 of 51
 question contains no information on each countries exchange rate policy or movements in
its exchange rate against the US Dollar.

• Response A. The question contains no data making it possible to conclude that the
Australian Dollar has appreciated against the US Dollar. The fact that this was the
least popular distractor seems to suggest that the majority of students thought
appreciation was inconsistent with currency undervaluation. This is incorrect
because an undervalued currency can still remain undervalued, albeit by less, if it
appreciates against the other currency.

• Response B cannot be concluded from the data in the question. It contains no data
to link the undervaluation of the Brazilian Real with a possible equivalent
devaluation against the US Dollar. The students selecting this distractor based their
choice on the apparent, but unsupported, connection between the use of the term
‘devalued by 32%’ in the response and ‘undervalued by 32%’ in the table.

• Response C cannot be concluded from the data in the question. It contains no data
to link the undervaluation of the Chinese Yuan with a possible equivalent
depreciation against the US Dollar. The students selecting this distractor based their
choice on the apparent, but unsupported, connection between the statement that the
‘Chinese Yuan has depreciated the most against the US Dollar’ and the data
showing the Chinese Yuan to be the most undervalued of the four currencies
against the US Dollar.

• Response D can be concluded from the data in the table. The comparison of a pair
of currencies to determine whether one is under or overvalued against the other
involves the concept of purchasing power parity. The Danish Krone is the least
undervalued against the US Dollar of the four currencies and therefore has the
closest purchasing power parity with the US Dollar.

Q7.
Most students started this question well, correctly explaining the various tools of monetary
policy and considering that alternatives such as fiscal policy. Students used the contexts
well and many with recent knowledge quoted the current rate of inflation (released on the
morning of the exam – 2.9%) as being nowhere near deflation and as a result evaluating
that under the current climate, from the UK’s perspective, deflation would not be seen as a
priority to avoid. Some answers did fail to fully understand the monetary policy tools
though. Many concentrated their answers on interest rates with little consideration of the
exchange rate or Q.E. Some students also focussed on supplyside policy without
considering this may worsen the problem. Stronger students correctly identified the type of
inflation (malign or benign) and the differences in the UK and Japan’s experiences as
being key to the policy prescription. Almost 15% of students provided level 5 answers for
this question.

Q8.
This question, although appearing seemingly straightforward when set, was the worst
answered of all the 15-mark questions. Although some students gave logical answers to
the determinants of patterns of trade, some focussed on the causes of the trade deficit
which was not being asked. Many considered trade volumes rather than who trades what
with which nations. Good answers here included “tariff” diagrams to consider either the
imposition or removal of tariffs affecting trade flows and trade diversion/creation
arguments. An issue which was detected here which was slightly worrying was that some
students are incorrectly labelling diagrams so that the axes often had price level and real
national output/income instead of price and quantity. A minority of students attempted to
evaluate this question which simply is not required in a 15-mark question where no AO4

Page 46 of 51
 marks are awarded.

Q9.
Here students performed the best of all the essay questions. Most students were awarded
a level 4 answer or above and were accurately able to give either suitable expenditure
reducing, expenditure switching or supply-side possibilities to reduce the trade deficit.
Most students accurately used diagrams and fully analysed the issues. One issue that
was detected was that some students, when describing depreciation of currency was that
some students do not understand how this can be done other than through interest rate
manipulation. Often, students (correctly) identified the fact that lower interest rates could
cause depreciation, however they failed to consider the full impacts of an interest rate fall
on consumption and the possibility that imports may rise. Stronger students considered
the UK’s position within the EU and the possibility that protectionism may be used in the
future. Sadly, a very small minority of students still do not understand the difference
between the balance of payments and the budget deficit which led to some very confused
responses.

Q14.
The answers to this question were sometimes quite disappointing. The question asked if
the UK should switch its monetary policy to focus on management of the exchange rate.
Most students could identify the potential benefits to the UK's net trade if a devaluation
was to occur and some focussed on the potential benefits to employment, growth etc.
However, only stronger students were able to understand the limitations of focussing on
the exchange rate in terms of potential loss of other monetary policy tools. More able
students brought in explanation of the UK’s historical monetary policy, such as experience
of the ERM or current targets of the MPC, however, it was disappointing to see that some
students could only link managing currency to the flow of hot money.

Q15.
Students generally answered this question quite well by explaining the difference between
the two types of deficit and their effects. It was encouraging that many students clearly
understood the problems of persistent budget deficits and the accumulation of national
debt. Students were less adept at explaining the effects of persistent trade deficits with
many just considering short term effects on aggregate demand. More able students
considered the reasons why these deficits occur and their implications on macroeconomic
performance, whilst weaker students just considered policy responses to both deficits and
nothing else.

Q16.
The third essay combination was by far the preferred set of questions although question
11 was also the worst answered out of all the 15 mark questions. At the top end, students
effectively used tariff diagrams and protectionism diagrams to illustrate trade creation and
trade diversion and related this to the joining of a trading bloc. At the lower end, students
simply did not understand what the question was asking and just trawled through how
changing trade patterns affect a countries macroeconomic performance.

Q17.
Many students answered this question with a clear focus on how membership of the EU
had benefitted both firms and individuals. It was good to see that centres had clearly
made use of the EU referendum to highlight the benefits (and possible problems).
However, the referendum had also clouded some students' minds when it came to

Page 47 of 51
 answering this question and some students did not fully relate their answer to firms or
individuals and just talked about the economy in general. Some students also failed to
develop their economic analysis by simply making political statements taken from the
news that were not backed up by economic reasoning.

Q29.
Most students were able to explain the term ‘real interest rate’ with two clear definitions or
explanations of interest rates and real figures allowing students to gain 4 marks for
explanation. Equally, many were then able to link the change in interest rates to hot
money flows and speculative demand and supply of currency. Most students used
diagrams successfully, however, on occasions labelling on these diagrams was poor.
Some students opted for a different, more complex route which included consumption and
inflation which was equally valid (but slightly more confusing). The mean mark for this
question was 7.64.

Q30.
This essay was the most popular with students scoring highly and the majority gaining the
full 15 marks. Students focused on three broad areas: supply-side policy, currency
depreciation and expenditure reducing policies. A minority opted to explain protectionist
policies which the question precluded; this demonstrates the need for students to read the
questions carefully. Diagrams were used to analyse further the issues (both micro and
macro diagrams) and in general there were less answers which made the mistake of
confusing a balance of payments deficit and a budget deficit than in previous years. The
mean mark for this question was 11.43.

Q31.
Those who attempted this question tended to pick up marks quite quickly. Most students
successfully explained various issues such as trade flows, investment or speculative hot-
money flows as reasons for currency appreciation or depreciation. Many students were
able to draw diagrams which illustrated the effects and causes. It was clear that some
centres have used past examination questions to their advantage by preparing students
with similar questions. It was also good to see that most students are now splitting their
issues into separate arguments and using “firstly, secondly, etc, finally” to clearly define
where issues start and end. The mean for this question was 11.8.

Q32.
This question had quite a varied response. Many successfully used their knowledge to
analyse the advantages of having free floating exchange rates in obtaining stability.
Equally, stronger answers were able to assess the relative merits of fixed or managed
systems and recent world, and particularly UK experiences. Students were also able to
evaluate the relative importance of exchange rates in terms of stability. Weaker answers
often made large assumptions regarding exchange rates and often failed to consider the
stability part of the question. In terms of diagrams, there was some appreciation of the J-
curve and knowledge of the Marshall-Lerner condition which was encouraging. It is also
apparent that students in some centres still confuse balance of payments and government
budgets, which led to some very low marks being awarded on occasions. The mean for
this question was 14.21.

Q35.
Students who show their working can be awarded one mark even if their answer is
incorrect. Unfortunately, some students divided 20 euros by 1.2 to arrive at their answer.

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 The second part of the question was well answered, but some students failed to identify a
particular currency and simply stated what had happened to “the exchange rate” without
specifying whether this referred to the euro in relation to the dollar, or the dollar in relation
to the euro.

Q36.
Unfortunately, some students interpreted this question as countries exiting the EU, rather
than exiting the Eurozone, and digressed into immigration issues, the opportunity to avoid
EU regulations and so on. The media coverage of the proposed in-out referendum on UK
membership of the EU may have led students to interpret the question incorrectly, but
students should always read the question carefully.

Evaluation was often superficial, with some students repeating the Extract, but failing to
explain and analyse the issues being raised. A typical example of this was where a
student restated that “the impact of a country exiting from the euro would depend on a
number of factors, such as how many countries left and which countries these were”, but
then failing to offer any development of these issues. Most answers picked up on the
possibility of sterling acting as a “safe haven”, but weaker students conflated FDI and “hot
money” into their analysis. The mean mark for this question was 13.6.

Q37.
Fortunately, there were few examples of students confusing the trade deficit with the
budget deficit. A few students digressed into the consequences of trade deficits, another
example of students' failure to read the question carefully. Some students continue to take
an extreme view of deindustrialisation, believing that the UK has little or no manufacturing
and unfortunately citing the car industry as an example. Well informed students had little
difficulty in identifying three clear reasons and achieving maximum marks. Some students
adopted a “write everything I know” approach with a limited explanation of each. This left it
to the examiner to select the best three reasons and these students invariably failed to
achieve high marks. The mean mark for this question was 10.73.

Q38.
Explaining three reasons for the growth of exports should not be beyond A2 students.
However, while it was relatively easy for some students to score full marks, others
struggled even to find one sound reason. Some cited inflation and an appreciation in the
exchange rate, forgetting that the question was about growth in value and not simply
achieving a higher price for an export. Only occasionally did students who gave one or
other of these reasons link it, for example, to the need for price inelasticity of demand if
the country in question was to witness a higher value of exports.

Q39.
Given that this was a question with an international flavour, it was good to see that it
proved quite popular among candidates and well-answered by some. Because of the
context questions, it may be that more attention is being given by centres to international
topics. Essay responses can only benefit from this.

For this question, candidates seemed quite clear about the determining factors, leaving
answers to be distinguished by the quality of the explanation of each. Pleasingly, some
responses were put strongly into the context of UK export performance and the high
propensity to import.

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Q40.
This question offered the opportunity to analyse and evaluate two or three policies. There
were a good number of competent answers, again with the UK weaknesses uppermost in
candidates’ minds. Comments are, of course, encouraged on the feasibility of chosen
policies. For example, candidates might wish to discuss protectionism but do need to
convey an understanding that EU membership and WTO treaties are major obstacles.
Some of the best answers distinguished explicitly between expenditure-reducing and
expenditureswitching policies, which had the added advantage of giving answers a strong
sense of direction.

Unfortunately, there is still, at times, confusion between the Budget and the Balance of
Payments. This inevitably led to confused analysis.

Q41.
Traditionally, questions on exchange rates and the balance of payments prove to be the
least popular on any question paper. This was not the case here. There were some
excellent responses, with even the weaker answers often able to earn a reasonable mark.
It is a topic which encourages the use of diagrams and the mark scheme reflected this in
the marks available for this aspect of answers.

For this question, students needed to identify specific factors, such as increased demand
for exports and higher interest rates, and explain these in a coherent way. The mark
scheme did cater for those who just adopted a general supply and demand approach but
this approach could not earn the level of marks available to more detailed answers.
Confusion persists on some aspects of exchange rates, notably the distinction between
investment and ‘hot-money’ flows.

Q42.
Traditionally, questions on exchange rates and the balance of payments prove to be the
least popular on any question paper. This was not the case here. There were some
excellent responses, with even the weaker answers often able to earn a reasonable mark.
It is a topic which encourages the use of diagrams and the mark scheme reflected this in
the marks available for this aspect of answers.

For this question, more students now recognise the importance of specifying the possible
nature of macroeconomic consequences if this seems to be required, before putting them
into the context of the question. There seemed to be no serious weaknesses identified
except to say that students cannot devise their own question and expect to be well
rewarded. Importantly here, a question on the consequences of a rise in the exchange
rate cannot become a question on a fall in the exchange rate simply because the student
is more confident with the latter. Overall, some pleasing analysis and evaluation were
seen.

Q43.
No significant problems emerged in the responses but candidates did need to ensure that
they were identifying two distinct determinants of the fall in the external value of the
pound. There continues to be confusion for some between investment flows and ‘hot
money’ flows and this distinction would be worth devoting some time to in teaching.

Q44.
Candidates found it reasonably easy to include a number of relevant determinants of the
demand for imports, commonly touching upon price and exchange rates. A few concerned

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 themselves with the fact that deindustrialisation in the UK had forced consumers to
become reliant on imports and linked this to the changing structure of the UK economy
towards a service-orientated economy.

Q45.
The most obvious problem in this question was that it was misread by some candidates.
In these cases, the responses developed by addressing the issue of the UK becoming
more protectionist with little reference to the world at large. Obviously, this severely limited
the marks which could be awarded. Others ignored the fact that the question was
concerned with the impact on the UK balance of payments. In some responses, too much
time was devoted to analysing the types of protection without going on to answer the
question. In the latter responses, it seemed to be the case that the material had been
revised and it was going to be used in considerable depth, however much the actual
question might suffer.

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