Interest rate and balance of payment

How could a rise in interest rates in the US affect Indonesia’s balance of payments?[2]（w15—22）
1.capital flows out of Indonesia to seek better returns in the US (1 mark) this leads to an outflow from Indonesia’s
Financial Account. (1 mark)
A rise in interest rates in the US would be likely to lead to a capital outflow from Indonesia as those with funds in
Indonesia transferred them to the US where they would get a better return than formerly. This would lead to an
outflow from the financial Account of Indonesia’s balance of payments.
2.Higher interest rates would reduce consumption in the US (1 mark) so there would be a fall in Indonesia’s
exports and the balance on Indonesia’s current account would reduce. (1 mark)
higher interest rates in the US would encourage households in the US to save more and that this would reduce
Indonesia’s exports and have a negative effect upon Indonesia’s current account of the balance of payments.

3. The rise in interest rates in the US increases the value of the dollar making imports from Indonesia less
expensive (1 mark) and this will cause a fall (or rise?) in Indonesia’s current account balance. (1 mark)
A higher interest rate would lead to a higher value of the dollar leading to increased US export prices and lower
US import prices. This might improve the competitiveness of Indonesia’s goods in foreign trade and improve
Indonesia’s current account.

(d) Consider whether the outcome of the interest rate changes in the US was likely to be ‘harmful for Turkey’s
economy’. [4]
The rise in interest rates in the US and the rise in the US dollar might be harmful for Turkey’s economy for a
number of reasons. There might be an outflow of investment funds from Turkey to the US creating a deficit on
Turkey’s Financial Account of the Balance of Payments.
In addition, the rise in the US dollar would affect the price of Turkey’s exports to and imports from the US
affecting the current account. This might create a deficit on the current account.
In addition, there might be an impact upon employment and the rate of inflation in Turkey.
It could be argued however that the rise in interest rates in the US would have a beneficial effect upon Turkey’s
economy. The rise in interest rates in the US and the appreciation of the dollar would mean that Turkey’s exports
to the US are cheaper and Turkey’s imports from the US are more expensive. If the Marshall-Lerner condition is
satisfied this will lead to an improvement in Turkey’s balance of payments on current account and possibly a fall in
unemployment in Turkey.

Interest rate and exchange rate

With the help of a diagram, explain how this rise in US interest rates would be expected to cause a fall in the
value of the Indonesian rupiah. [4]
For an accurate diagram showing an increased supply of rupiah as capital flows from
Indonesia to the US and a fall in the exchange rate of the rupiah. (Up to 2 marks)
Or
For an accurate diagram showing a fall in the demand for the rupiah as US imports from Indonesia decline. (Up to
2 marks)
For an accompanying explanation. (Up to 2 marks)

(c) With the help of a demand and supply diagram, show how the expected change in US interest rates was likely
to cause the US dollar ‘to continue to rise’. [2]
The demand for US$ on the foreign exchange market is likely to increase as foreign investors seek dollars to
deposit in US banks as the returns rise. In addition, the supply of dollars might fall as those with investment funds
in the US decline to move them abroad because of the higher US interest rates.
For an accurate diagram showing the supply and demand for the US$ in the foreign exchange market and a shift
in the demand curve to the right or a shift in the supply of the US$ to the left and the resulting appreciation of
the dollar. (1 mark)
For a brief explanation of one underlying cause of an increased demand for or reduced
supply of US dollars on the foreign exchange market based upon the higher return on
investment funds in the US (1 mark)

Factors influencing the impact of inflation on export

(e) Explain two factors that determine how the increase in consumer prices between 2013 and 2014 shown in
Figure 1 might affect the total value of Turkey’s exports. [4]
This question requires an explanation of the factors that determine the outcome, not an explanation of how an
increase in consumer prices will affect exports.
A range of factors might be explained. One factor, for example is the price elasticity of
demand for Turkey’s exports. If the demand is price inelastic then the total value of Turkey’s
exports will rise. If the demand is price elastic then the total value will fall. The demand is
likely to become more elastic in the long run. A second factor is the Turkey’s rate of inflation
compared to the rate of inflation of Turkey’s competitors in international trade. Although
Turkey’s rate of inflation has increased in 2014 compared to 2013, whether this makes
Turkey’s goods and services uncompetitive in international trade depends upon the rate of
inflation of Turkey’s competitors. Other factors include whether there have been off-setting
changes in Turkey’s exchange rate and whether the rate of inflation has affected both the
prices of internationally traded goods or goods that Turkey consumes domestically.

Exchange rate and current account

(ii) Use a supply and demand diagram to show how the trend in Australia’s trade balance over this period would
be expected to influence the value of Australia’s exchange rate. [2]
For an accurate diagram showing a fall in the demand (or an increase in the supply) for
Au$ (1 mark) which would result in a decline in the exchange rate (1 mark)

Impact of change in exchange rate

(c) Explain who in China would lose and who in China would benefit if China’s exchange rate were allowed to rise.
[6]
If China’s exchange rate were allowed to rise those who would lose include Chinese
exporters, those employed in Chinese firms facing increased competition from abroad and
those employed in export-orientated firms in China. Those who would benefit would include
Chinese consumers and Chinese producers who import raw materials from overseas. The
impact however is heavily dependent on the elasticity of demand for Chinese imports and
exports.
For identifying and explaining who might lose, for example Chinese exporters, and those
employed in Chinese export orientated firms. (Up to 4 marks)
For identifying and explaining who might benefit, for example Chinese consumers and
Chinese importers of raw materials. (Up to 4 marks)
Reward those answers that recognise the importance of price elasticity in influencing who
would lose and who would benefit from the rise of the exchange rate in the short-run and the
long-run.

AD&AS
(分析 factor 对 AD&AS 的影响，并进一步分析对 price level 和 output 的影响）
Discuss how any two changes described in the data might be expected to affect aggregate demand and aggregate
supply in Indonesia and assess how prices and output might be affected. [6] （w15—22）
For an explanation of how any one change described in the data would impact upon aggregate demand (up to 3
marks) and how this change might affect prices and output in Indonesia. (1 mark)
1.A fall in the value of the rupiah would reduce the price of Indonesia’s exports and increase the price of
Indonesia’s imports. This might lead to an increase in net exports and a rise in aggregate demand. This could lead
to a rise in output and/or prices depending upon the availability of spare resources. (4 marks)
2.The reduction in fuel subsidies would increase the cost of fuel and would increase industry costs. This would
lead to a fall in aggregate supply and a fall in output together with a rise in prices. (4 marks)

(d) Using aggregate demand and aggregate supply analysis, explain why inflationary pressures remained subdued
in Fiji despite higher growth. [3]
For aggregate demand analysis that explains the potential impact of economic growth upon
prices through increasing aggregate demand. [Up to 2 marks]
For aggregate supply analysis that explains how declining international commodity prices
would increase aggregate supply to prevent price rises. [Up to 2 marks] [3 marks maximum]

XED
(b) Explain how an economist would decide whether cereals and dairy products are substitutes. [3]
For an accurate formula of cross elasticity of demand. (1 mark)
For stating that if cereals and dairy products are substitutes the cross elasticity of demand
will be positive. (1 mark)
For explanation of this value in terms of an increase in the price of one product will lead to a
rise in demand for its substitute. (1 mark)
For explanation that the higher the value of the coefficient the closer the two products are as
substitutes. (1 mark)
(3 marks maximum)

PED
(c) Explain what the changes in sugar’s contribution to visible export earnings and in the price of sugar might
suggest about the price elasticity of demand for sugar. [3]
For a clear understanding of the concept of price elasticity of demand [1 mark].
The price elasticity of demand for sugar must be elastic [1 mark] because a fall in price has
resulted in an increase in demand by a greater % resulting in a rise in expenditure [1 mark].
Price mechanism
With the help of a diagram, explain how a cut in fuel subsidies would have contributed to the rise
in the price of fuel by 44%. [4](w15-22)
For an accurate diagram showing the shift to the left of the supply curve and the rise in
equilibrium price that results. (Up to 2 marks)
For an accompanying explanation of the diagram e.g. the reason for the shift in the supply curve
in terms of increased costs. (1 mark)
Shift of the supply curve to the left would occur because the removal of the subsidy meant that
effectively the firm’s costs had increased.
For reference to the elasticity of demand to explain the extent of the price rise resulting from the
shift. (1 mark)
This reason for this particularly sharp rise was the price inelasticity of the demand for oil.
(ii) Explain one possible reason for the difference in the price of sugar in the US and the world
price of sugar shown in Table 1. [2]
Accept responses that relate to relative factor endowments in the U.S. compared to
other countries (Up to 2 marks)
Other valid responses can be accepted for example government policy in the U.S. that
might cause prices in the U.S. to be higher. The higher US price might result from higher
costs of production, e.g. resulting from higher labour costs (without a corresponding
increase in productivity) or from less fertile growing areas. The higher prices in the US
could also be the result of import tariffs which push up prices.

Dumping(definition; reasons for dumping;how to justify dumping )

(i) What is meant by ‘dumping’? [2]
Dumping is selling in overseas markets at a price below the (marginal) cost of production
(candidates do not need to refer to the marginal cost of production).
Accept the WTO definition of dumping as also applying to a situation when goods are
being sold in a market at a price that is lower than the price charged in the producer’s
domestic market.
Accept any response that states that dumping is selling below costs. (2 marks)
Selling at low prices in an overseas market without elaboration. (1 mark maximum)
(ii) Explain why Mexican producers might choose to dump their sugar in the US market. [2]
The intention is to undercut rivals with low prices in the short-term and prices will then be
increased in the long-run once domestic producers have been forced out of the market
and competition has been removed (idea of predatory dumping). (Up to 2 marks)
Accept other feasible explanations of the aims of dumping, e.g. to keep prices higher in
Mexico.
(iii) Consider how an economist would decide whether the accusation that Mexican producers
were dumping sugar in the US was justified. [2]
For an explanation that low prices are because of relative factor endowments, i.e.Mexico is better
at producing sugar than the US (Up to 2 marks)
For an explanation that suggests that the costs of production would need to be examined and
whether the price is below cost or whether the low prices are a reflection of factor endowment
(Up to 2 marks)

Minimum price and its impact

(c) With the help of a diagram, explain the likely impact on the US market for raw sugar if
a minimum price higher than US$0.21 had been imposed in 2013. [3]
For a diagram showing the imposition of a minimum price above the market price of
US$0.21, showing that the quantity supplied exceeds the quantity demanded. (1 mark)
For an explanation of the effects of a minimum price imposed above equilibrium in terms of a
lower quantity demanded and a greater quantity supplied, resulting in an excess supply of
sugar

Tariff(用图像解释增加或者取消关税以后进口商品的价格和数量变化)
With the help of a diagram, explain how the removal of tariffs on EU goods imported into Canada
would affect their price and quantity. [4]（w15-23）
For an appropriate diagram showing the removal of a tariff (up to 1 mark) and the fall in price (1
mark) and the rise in quantity that results. (1 mark)
For an accompanying explanation. (1 mark)

Protection or free trade

How would you decide whether Canada’s cheese producers should be protected from
competition from EU cheese producers? [4]
display an understanding of the arguments in favour of protectionism in the context of trade
between Canada and the EU and the impending CETA agreement. Some candidates argued that
protection for Canada’s cheese makers could be justified on the grounds that one of the
disadvantages of imports from the EU would be a large rise in unemployment amongst those
employed in the cheese industry.
There are many arguments in favour of protecting Canada’s cheese makers from competition
from EU cheese producers. Some would argue that the cheese is being dumped, others that the
costs of the unemployment that would arise would be too high. On the other hand, continuing to
protect Canada’s cheese makers reduces choice for Canada’s cheese consumers. There are other
arguments both for and against continuing protection.
For an explanation of any argument(s) that might be used to justify the continuing protection of
Canada’s cheese industry. (Up to 3 marks)
For an explanation of any argument(s) that might be used against the continuing protection of
Canada’s cheese industry. (Up to 3 marks)

(d) Consider who, if anybody, in the US and Mexico might benefit from a trade war despite the
advantages of free trade. [6]
For an explanation of the benefits of free trade based upon comparative advantage. (Up to 2
marks)
For a consideration of those who might benefit from a trade war for example domestic
producers, workers and consumers in the short-run. (Up to 3 marks)
Reserve 1 mark for a conclusion.

PPC
(b) Use a production possibility curve diagram to show the intended outcome of the structural
reforms in Turkey. [2]
For a diagram showing a movement of a ppc outward from the origin (Up to 2 marks)
Shift outward of the curve (1 mark)
Appropriate axes that show that suggest that a ppc represents choice in production e.g.
consumer or capital goods, guns or butter, good A or good B (1 mark

Current account component

How and where would revenue from tourist arrivals in Fiji be recorded in Fiji’s balance of
payments? [2]
A credit [1 mark] in the services section of invisibles/the trade in services/the current account
(accept any one of these) [1 mark].

(iii) What other information would be required to measure the change in Australia’s current
account on the balance of payments over this period? [2]
The two other components are net income flows (1 mark) and current transfers (1 mark)
Note that some candidates might use the latest terms for these entries i.e. primary and
secondary incomes. This is acceptable.

Terms of trade (causes and consequences of change in terms of trade )

(b) Suggest a change in the prices of exports and imports that might account for the change in
the Australian terms of trade between 2011 quarter 3 and 2014 quarter 2 [2]
Any combination of price changes that would cause a fall in the terms of trade is acceptable.
Reference must be made to the price of exports and the price of imports.
For example, export prices may have fallen (1 mark) and import prices may have risen.
(1 mark)

Factors influencing export or import

(f) Discuss any economic factors that would help to explain the changes in visitor arrivals to Fiji
from Australia and Japan. [6]
At least two factors must be identified and discussed. For example:
• differences in relative exchange rates
• differences in income changes
• differences in price of related goods, for example travel.
For full marks some evaluative comment is required on the likely impact of each factor
identified. For example the impact of income changes depends upon the income elasticity of
demand.Up to 4 marks for each factor discussed. If no evaluative comment, 2 marks maximum
on each factor discussed. [6 marks maximum]

Supply-side policy
(e) Explain how increased investment could address supply-side capacity constraints in the Fiji
economy. [4]
For a clear understanding of the meaning of the supply-side of the economy [1 mark].
For explanation of the link between investment and an increase in supply-side capacity
[1 mark] with appropriate examples of supply-side policies [1 mark].

Fiscal policy and its effectiveness

(f) Discuss how ‘tight fiscal policy’ could be expected to help Turkey achieve the first priority of
the MTP, and consider how effective this is likely to be. [6]
The term ‘tight fiscal policy’ refers to policies that aim for a budget surplus or a reduction in
the budget deficit through either tax rises and/or government spending cuts. The first priority
of the MTP is solving the problem of inflation. A tight fiscal policy will do this through a
reduction in spending on consumption and investment that will reduce aggregate demand.
The effectiveness of the policy depends upon factors such as the ability of the Turkish
government to implement the policy and whether there are other factors that cause inflation
such as cost-push pressures.
For understanding of ‘fiscal policy’ (1 mark)
For an example of what is meant by a ‘tight fiscal policy’ e.g. an increase in taxation or a
decrease in government expenditure or a budget surplus or reduced budget deficit (1 mark)
For a clear explanation of the way in which a tight fiscal policy might control inflation.
(Up to 3 marks)
For evaluative judgement on how effective a tight fiscal policy is likely to be. (Up to 2 marks)

Comparative advantage
Explain,using the theory of comparative advantage,how it is possible for consumers in both the EU and the
Canadian economy to benefit from the movement towards free trade. [4]
For knowledge and understanding of the law of comparative advantage. (Up to 3 marks) For application of the law
of comparative advantage in the context of CETA. (Up to 1 mark)

Evaluate any further information that would help you to assess the economic impact of Canada’s trade agreement
with the EU. [6]
A range of factors might be relevant such as the rate of exchange between European and the Canadian currency,
transport costs, trends in Canadian: US trade, the resources available in each economy and so on.
For identification and explanation of the factors that would be useful in assessing the impact of the trade
agreement. (Up to 4 marks)
For evaluative comment on the factors identified. (Up to 2 marks)