Economics Paper 2 8 Markers

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Table of Contents
Using information from the text/data and your knowledge of economics, discuss the possible
consequences on the Mexican economy of an undervalued Mexican peso..................................2
Using information from the text/data and your knowledge of economics, discuss the
implications of Turkey’s persistent current account deficit..........................................................3
Using information from the text/data and your knowledge of economics, evaluate the effect of
the tariff on drywall on different stakeholders.............................................................................4
Using information from the text/data and your knowledge of economics, discuss the effects of
the increasing current account deficit on Pakistan’s economy.....................................................5
Using information from the text/data and your knowledge of economics, evaluate the claim
that protection measures will support economic growth in Kenya. [8]........................................6
effects of the fall in Australia’s terms of trade on the Australian economy..................................6
Using information from the text/data and your knowledge of economics, discuss the view that
the US should impose tariffs on the imported shrimp..................................................................7
Using information from the text/data and your knowledge of economics, discuss possible
consequences of the appreciation of the British pound...............................................................8
Using information from the text/data and your knowledge of economics, discuss the view that
the South Korean authorities should intervene in the foreign exchange market..........................8
implications for Indonesia of a persistent current account deficit................................................9
consequences of a rising current account surplus........................................................................9
Using information from the text/data and your knowledge of economics, evaluate the possible
impact of Latvia joining the eurozone........................................................................................10
Using information from the text/data and your knowledge of economics, evaluate the policies
that India might use to reduce the current account deficit. [8]..................................................10
economic consequences of the fall in the value of the rupee on the Indian economy. [8 marks]
...................................................................................................................................................11
policies that the Turkish authorities might use to reduce the current account deficit................12
Using information from the text/data and your knowledge of economics, evaluate the change in
Bolivia’s exchange rate policy in moving from a fixed exchange rate to a managed float in late
2010 (paragraph ). [8 marks]....................................................................................................12
Using information from the text/data and your knowledge of economics, discuss the likely
consequences of intervention in the yen market. [8 marks].......................................................13
consequences of the trade agreement between Japan and the EU (JEEPA)................................13
effects on the Canadian economy of the strengthening of the Canadian dollar against the US
dollar. [8]...................................................................................................................................14
Using information from the text/data and your knowledge of economics, discuss possible
economic impacts of the tariff on tinplate steel. [8]...................................................................15
economic consequences of the increasing value of the rupee for India’s inflation rate,
employment, economic growth and current account balance. [8]..............................................15
Evaluate the economic impacts of trade protection in the South African corn market...............16
Evaluate the likely effects of Nigeria’s change from a fixed exchange rate system to a managed
exchange rate system.................................................................................................................17
Using information from the text/data and your knowledge of economics, evaluate the decision
to maintain the fixed value of the Danish krone against the euro. [8]........................................17
Using information from the text/data and your knowledge of economics, evaluate the use of
trade protection in Indonesia.....................................................................................................18
consequences for the Australian economy of the fall in the value of the Australian dollar........19
economic consequences of an overvalued New Zealand dollar on the New Zealand economy.. 20
effects of the appreciating Australian dollar on the Australian economy...................................20
Using information from the text/data and your own knowledge of economics, evaluate the
possible effects on the Chinese economy of increased trade protection imposed by its trading
partners.....................................................................................................................................21
economic effects of the appreciation of the Mexican peso........................................................21
economic implications of making a policy decision to adopt trade protection as a response to an
economic downturn. [8 marks]..................................................................................................22
consequences of the appreciation of the Japanese yen (paragraph ).......................................22
Using information from the text/data and your knowledge of economics, discuss the effects of
“global economic uncertainty” (paragraph ), “low trade barriers” (paragraph ) and a “carbon
tax” (paragraph ) on Australia’s car industry............................................................................23
consequences of the strong Australian dollar. [8 marks]............................................................23
possible consequences on the Mexican economy of an undervalued Mexican peso.
Economic analysis may include:

• AD/AS
• Marshall Lerner
• J-curve
• Elasticities.
To explore the impact on:

Inflation rate:
• The peso has been undervalued, making imported factors of production more expensive,
which results in a fall in SRAS and increases cost-push inflationary pressure.
• The undervalued currency makes exports more competitive and may result in an increase
in AD, which results in an increase in demand-pull inflationary pressure.
• The inflation rate has been above 4% since January (2017; Figure 2), which is higher than
its 3% target (paragraph ).
• Due to inflation concerns (Figure 2), interest rates rose from 3% in December 2015 to 7%
in June 2017 (Figure 3) – this may strengthen the currency and make it less undervalued,
possibly reducing the inflationary pressure.
• The central bank’s governor is optimistic that the inflation rate will fall towards the 3%
target (paragraph ), but if the currency remains weak then this is unlikely to happen.
Economic growth:
• The Mexican economy is slowing down. Its annual GDP growth slowed to 2.3% in 2016,
down from 2.6% in 2015 (paragraph ) and the undervalued peso might lead to an increase
in net exports, thus increasing AD and reviving growth.
Employment:
• The undervalued currency makes exports more competitive, therefore possibly raising
employment in export industries.
• Imports become more expensive due to the undervalued currency, which may increase
employment in industries that compete with imports.
• The unemployment rate fell, in comparison to figures from last year (Figure 1).
Balance of payments:
• Increased international competitiveness from currency depreciation has not yet led to an
effective expansion of exports (paragraph ) and has not (yet) had a positive impact on the
trade balance, suggesting that demand for exports is price inelastic.
• The undervalued currency increases the value of workers’ remittances, which helps the
current account (paragraph ).
• The effect on net exports depends on the price elasticity of demand for both exports and
imports. Any reasonable discussion.
implications of Turkey’s persistent current account deficit.
Responses may include:
• Definition of current account deficit.
Economic analysis may include:

• AD/AS theory.
• Exchange rate market.
• Elasticities.
To explore the impact on:

• Current account is expected to grow to 5.6% of GDP and is seen to be Turkey’s biggest
economic problem (paragraph ).
• Could become even worse if the current security and political problems continue and the
tourism industry continues to suffer, affecting net exports negatively.
• Causing a depreciation of the lira (paragraph ), which could worsen cost-push inflationary
pressures (Figure 1).
• The deficit has to be financed on the financial account of the balance of payments
(paragraph ).
• If the current account deficit is financed through FDI, it means greater foreign ownership of
Turkish assets, which may be a threat to sovereignty.
• Turkey is vulnerable to outflows of investment (paragraph ).
• Turkey may need to increase interest rates to attract foreign savings (paragraph ) but this
may further damage the economy through a possible fall in AD.
• Turkey may need to borrow money to finance the current account deficit, leading to
increased indebtedness.
• The current account deficit may have contributed to the worsening in the credit rating
(paragraph ), which will make it more difficult for Turkey to attract investment, and make it
more costly to borrow.
• Falling currency due to current account deficit will make it more expensive to repay debts.
Any reasonable discussion.
Using information from the text/data and your knowledge of economics, evaluate the
effect of the tariff on drywall on different stakeholders.

 definition of stakeholders
 definition of tariff.
Consumers of drywall (Canadian building firms):

 will face higher costs, and thus reduced profits (paragraph )
 fall in the production of buildings (paragraph )
 may cause unemployment.
Domestic producers of drywall:

 will receive higher prices (paragraph ) and thus more profits
 increase in output and sales
 increase in employment (paragraph )
 supporting monopoly power (paragraph ).
US producers of drywall:
 higher costs
 reduced sales
 lower profits and possibly a decrease in employment.
The Canadian government:

 increased revenue (paragraph )
 possible retaliation from the US.
Canadian economy:
 reduction in competition (paragraph ), leading to inefficiency
 inflationary pressure in the housing market (paragraph ).
Any reasonable evaluation. To reach level 3, students must be aware of the particular
situation in the Canadian drywall market on specific stakeholders, not just present an
evaluation of tariffs in general.
effects of the increasing current account deficit on Pakistan’s economy.

 definition of current account deficit (paragraph ) / reference to (c).
Positive effects:
 imports of capital can lead to increased economic growth in the long run (paragraph )
 high imports of non-essential goods may indicate development and higher living standards
(paragraph ) suggests consuming outside of PPC
 Pakistan may have to depreciate the currency as advised by central bank. This will reduce
the relative price of exports and may allow to improve Pakistan's export competitiveness
(paragraph ).
Negative effects:
 may require “new IMF” loan and conditions that are attached regarding austerity (paragraph
)
 persistent trade deficit may compromise “decade high” economic growth (paragraph )
 inflows on financial account increase, meaning foreign debt payments will increase and
worsen current account deficit
 downward pressure on the exchange rate requiring use of foreign exchange reserves to
maintain managed float (paragraph )
 may be forced to “depreciate” the rupee which will:
 increase import prices and may cause cost-push inflation
 reduce export revenues – Marshall-Lerner condition
 IMF loans to finance current account deficit (paragraph ) will require interest payments
that may worsen the budget deficit (paragraph )
 foreign investors may be purchasing Pakistan assets to finance the deficit which could
threaten sovereignty
 current account deficit may worsen Pakistan’s credit rating
 it may be unsustainable to finance the current account deficit by borrowing. If foreign
investors lose confidence, there may be a rapid outflow of financial capital resulting in a
rapid fall in the value of the rupee
 fiscal policy (paragraph ) decisions may have to be addressed to help with the deficit. In
this case, moving from expansionary to contractionary. This may reduce economic growth.
Any reasonable discussion. To reach level 3, students must be aware of the particular
situation in Pakistan, not just present an evaluation of a current account deficit in general.
claim that protection measures will support economic growth in Kenya. [8]

• definition of economic growth
• definition of protectionist measures.
Strengths of protectionist measures:

• infant industry argument – allows steel and iron industry time to become internationally
competitive, which can bring about growth
• helps diversify economy away from over reliance on primary exports, which is necessary
for sustained growth (paragraph )
• create more jobs thus increase consumption, AD and growth (+ diagram) (paragraph )
• raises government revenue (paragraph ) that can be invested by the government in ways
that will promote growth
• if imports are being unfairly subsidized, protectionism will level the playing field
(paragraph )
• can help correct the persistent current account deficit, which is hindering growth (paragraph
).
Limitations of protectionist measures:

• does not encourage long term efficiency, which may be better achieved through
deregulation (paragraph )
• inefficient allocation of resources argument
• protected industries can become over-reliant on government support and so may not
contribute to economic growth
• politically difficult to remove protectionist measure once in place
• revenue from tariffs can be subject to corruption
• potential problems of retaliatory tariffs from trading partners, which could damage Kenya’s
exports and thus threaten future growth
• removing barriers and deregulation (administrative barriers) rather than protectionism could
encourage domestic entrepreneurship and FDI which will support growth
• tariffs increase “cost of doing business” (paragraph ) for those producers reliant on
imported components
• higher prices on steel and iron which will increase input costs for construction and
infrastructure projects – necessary for economic growth
• higher input costs may reduce SRAS, causing a reduction in real GDP, threatening growth
• to achieve growth, Kenya should be producing goods in which they have a comparative
advantage, not in which they need protectionism.
possible effects of the fall in Australia’s terms of trade on the Australian economy.

• definition of terms of trade
• it may harm the current account balance (paragraph ), depending upon PED
• Australia's reliance on export income of energy (paragraph )
• fall in purchasing power for households and businesses (paragraph )
• pressure on real GDP growth (paragraph )
• effects upon government revenue (paragraph )
• the effect on revenues of domestic producers and thus a fall in investment – “may lead to a
recession” (paragraph )
• the pressure to improve productivity (supply side policies?) (paragraph )
• the need to sell more exports to cover imports and the overuse of resources, resulting in
negative externalities
• problems of being dependent on commodity exports and price volatility
view that the US should impose tariffs on the imported shrimp.

• definition and diagram illustrating the effect of a tariff
• reasons to support the view that tariffs should be imposed:
- higher costs of oil as a result of the oil spill have led to higher costs of production for US
shrimp farmers and so higher prices for US shrimp (diagram possible) (paragraph )
- if they are unable to cover their variable costs, many may go out of business leading to
structural unemployment (may refer to part (c)) (paragraph )
- there may be significant damage to the standard of living of shrimp farmers and their
communities (paragraph )
- foreign shrimp producers may have been given subsidies that are illegal under WTO rules,
enabling them to lower prices to the point where US producers cannot cover their costs
(paragraph )
• reasons against the view that tariffs should be imposed:

- there will not be tariffs on shrimp from Thailand and Indonesia which are the largest
producers of imported shrimp, and so the tariffs on the producers in the other five countries
may not have that much of an effect on the level of imports (paragraph )
- the tariff will be damaging to the shrimp producers in the five countries that are affected, all
of which are developing countries; the tariff could hinder their development (paragraph )
- the ruling was made by the US Commerce Department (not the WTO) and so the conclusion
are likely to be in favour of the US producers
- there may be insufficient evidence to support the claims (paragraph ) and so tariffs will
violate WTO rules
- there may be retaliation from the countries affected, which could damage other US
producers
- the US producers are already getting financial support from BP (paragraph ) - higher costs
for food retailers and distributors
- distortion of comparative advantage
- misallocation of scarce resources
- reduced consumer surplus
Using information from the text/data and your knowledge of economics, discuss
possible consequences of the appreciation of the British pound.

• a strong British pound will lower the cost of imported raw materials, semi-finished goods,
and finished goods, reducing inflationary pressure; whether or not this is beneficial depends
on the level of inflation
• in the short run, export prices will rise and import prices will fall, possibly leading to
reduced employment in both export industries, as demand for exports falls, and domestic
industries, as people buy more imports
• the extent of the impact, and the effect on net exports and the current account depends on
the elasticities of demand for exports and imports.
• reference to the (reverse) Marshall-Lerner condition
• negative impact on tourist sector in the UK (paragraph )
• positive impact on British tourists going overseas (paragraph )
• in markets where demand is inelastic, export revenue may not fall (part (c)) (paragraph )
• British firms are losing out to foreign competitors (paragraph ) as goods and services are
relatively more expensive
• a fall in net exports would lead to lower AD and so a fall in growth rates
• impact on British firms’ profits
• the impact of cheaper fuel on household budgets (paragraph )
• prices of imports may not change immediately, as there are contracts that prevent price
movements (paragraph ).
view that the South Korean authorities should intervene in the foreign exchange
market.

Reasons to support intervention:
• growth is slowing (weak domestic consumption and weak growth in China, paragraph ),
and is below potential growth (paragraph ) so help is needed to stimulate net exports
(diagram to show increase in AD)
• a lower value of the won would make exporters such as Hyundai Motor Company and
Samsung Electronics Limited more competitive, helping their profits and maintaining
employment (paragraph )
• the extent to which export revenues and import expenditure will change depends on the
price elasticities of demand for exports and imports
• an increase in AD may increase inflation, but inflation is below target and is not a threat •
the Japanese authorities have been intervening to bring about a fall in the value of the yen,
and so South Korean authorities need to intervene so that the South Korean producers do not
lose competitiveness (paragraph )
• the authorities maintain that they are intervening only to stabilize the currency not to bring
it down (paragraph )
• the importance of exchange rate stability for business confidence • the importance of
exchange rate stability for consumer confidence, which “has been damaged by a ferry
accident” (paragraph ).
Reasons against intervention:

• IMF says that the won is actually undervalued and so the appreciation that has occurred
may simply be the won moving towards its appropriate level (paragraph )
• as a free market economy, South Korea should not be interfering with market forces
(paragraph )
• according to analysts, producers are not actually suffering that much (paragraph )
• strong won makes imported factors of production less expensive, so can reduce costs of
production. This can make the producers more competitive in world markets
• strong won is good as it forces South Korean producers to become more efficient (not in
text)
• intervention by South Korea may result in competitive devaluations with other countries
such as Japan and China
• given that South Korean authorities have often intervened in currency market, South Korea
may be labelled as a currency manipulator and this may bring about retaliation (paragraph )
• increases in import prices would be inflationary but this is not a problem as the inflation is
low
• a lower value of the won would make imports more expensive, hurting firms that rely on
imported inputs
• government wants to reduce reliance on trade (paragraph ) and lowering the value of the
won may not encourage this
• selling won leads to ever increasing reserves of foreign currencies.
implications for Indonesia of a persistent current account deficit.
Responses may include: • definition of current account (paragraph ) • definition of current

account deficit (paragraph ). • cannot lower interest rates to support the slowing economy
(paragraph ) • foreign debt payments (paragraph ) will be more expensive and a greater
drain on the economy • downward pressure on the exchange rate; mid-2013 rupiah decreased
by 21 % (paragraph ) • there may be a drain on reserves to finance the current account
deficit • foreign investors may be purchasing Indonesian assets to finance the deficit which
could threaten sovereignty • increased debt levels to finance the current account deficit may
worsen Indonesia’s credit rating • it may be unsustainable to finance the current account
deficit by borrowing • if foreign investors lose confidence, there may be a rapid outflow of
financial capital resulting in a rapid fall in the value of the rupiah • difficulty in financing the
current account deficit if there is increased capital outflow due to change in US interest rate •
current account deficit may worsen further if fuel prices increase (paragraph ) as the value
of imports will rise
consequences of a rising current account surplus.
Responses may include: • definition of a current account surplus • reference to current

account surplus of 11% (paragraph ) • implications of the increase from 9% (paragraph ) •
record current account surplus linked to strong investment income (paragraph ) • investment
income may be valuable to economy, increasing AD • an appreciation of the Swiss franc
(paragraph ) • strong Swiss franc may lead to reduced export competitiveness • surplus on
balance of trade in goods and services is falling (paragraph ) may be due to strong Swiss
franc • increased attraction of imports due to strong currency (3% increase in expenditure on
imports (paragraph ) • large purchases of foreign exchange/selling of Swiss francs needed
(paragraph ) to reduce pressure on Swiss franc • implications for employment • current
account surplus in Switzerland means trading partners have current account deficits. This
may damage trade relations/employment in other countries.
possible impact of Latvia joining the eurozone.

 definition of monetary union.
Arguments for:
 elimination of exchange rate uncertainty
 easier for future planning by firms
 increased investment and trade
 increased investor confidence
 reduction in transaction costs in trade with the eurozone
 increased foreign investment (paragraph )
 increased economic growth (paragraph )
 greater integration with the eurozone helps reduce dependence on Russia (paragraph )
 renewed confidence in the eurozone will bring benefits to all members (paragraph )
 may help to bring down unemployment, which is high (paragraph )
 Latvia had to exercise discipline to meet the criteria to join the eurozone which built a good
economic foundation for moving forward (paragraph ).
Arguments against:
 loss of sovereignty over monetary policy
 possible high changeover costs
 problems of supporting other eurozone members (paragraph )
 Latvia loses the power to control its own currency to improve competitiveness
 threat of inflation as well as deflation (paragraph )
 short term – lower consumer confidence (paragraph ). Any reasonable evaluation that
offers a considered and balanced review of the strengths and limitations of Latvia joining the
eurozone.
policies that India might use to reduce the current account deficit. [8]
Command term “Evaluate” requires candidates to make an appraisal by weighing up the

strengths and limitations. Responses may include: Expenditure switching policies:  an
explanation of expenditure switching policies (trade protection and devaluation/depreciation)
as a means of reducing spending on imports  government has shown a willingness to use
trade protection – gold tariffs (paragraph ) (but trade protection may go against international
trade agreements)  falling rupee may help with expenditure switching (paragraph ),
depending on the PED for exports and imports (Marshall-Lerner condition)  to encourage
the “switch” from imports to domestic goods government should let the rupee continue to
fall, not support it (paragraph ), (but the falling rupee causes other problems). Expenditure
reducing policies:  an explanation of expenditure reducing policies as a means of reducing
spending on imports  economic growth has dropped to 5 % so little room for expenditure
reducing (paragraph )  however, India has high inflation and large budget deficit and so
expenditure reducing could help solve those problems (paragraph ). – 11 –
M15/3/ECONO/HP2/ENG/TZ0/XX/M Supply-side policies:  an explanation of supply side
policies as a means of increasing the competitiveness of exports  need to speed up reforms
to help India reach its potential (paragraph )  market-oriented policies, eg reducing the
regulatory burden may encourage investment and increase productivity (paragraph ) 
interventionist policies, eg increase investment in education and policies to support industry
may help increase growth (paragraph ). To reach Level 3, students must be aware of the
particular situation in the Indian economy, not just present an evaluation of policies to reduce
a current account deficit in general.
possible economic consequences of the fall in the value of the rupee on the Indian
economy. [8 marks]
Responses may include: Effect(s) on:

 Inflation
- the price of imports will increase, leading to a decrease in SRAS and creating cost-push
inflationary pressure (paragraph )
- prices of exports will fall, leading to an increase in AD and creating demand-pull
inflationary pressure (paragraph )
- consumers will suffer from higher prices
 Employment/unemployment
- the price of imports will increase, making domestic goods more attractive and so increasing
employment in domestic industries
- the price of imports will increase causing problems for producers who use imported inputs
and possibly damaging employment (paragraph )
- the price of exports will fall, leading to an increase in net exports and thus an increase in
AD and so an increase in employment in export industries (depending on PED)
 Economic growth
- if net exports rise, this will result in an increase in AD and economic growth
- the falling exchange rate and increasing inflation may cause the government to raise interest
rates (paragraph ) leading to a contraction of the economy
- it may encourage greater FDI (if the rupee remains low) as costs of investment fall,
eventually leading to growth
 Balance of payments
- improvement in the current account balance which is badly needed (paragraphs  and )
- the effect on the current account depends on the price elasticity of demand for imports and
exports.
- In the SR, demand for exports and imports likely to be inelastic, thus leading to a worsening
of the current account
- In the LR, demand for imports and exports likely to become more elastic, thus leading to an
improvement in the current account (Marshall-Lerner condition and J-curve).
possible policies that the Turkish authorities might use to reduce the current account
deficit.
Responses may include: • an explanation of a current account deficit • expenditure–switching

policies: - depreciating the currency to make exports more competitive and imports more
expensive – might worsen the deficit if PED for oil is inelastic and Turkey is a “large net oil
importer” (paragraph ); will only be successful if the combined price elasticity of demand
for exports and imports is greater than 1 (Marshall-Lerner condition) - protectionist measures
such as tariffs, quotas or subsides to reduce spending on imports – might lead to retaliation
harming the “boom in foreign investment and trade” (paragraph ) • expenditure-reducing
policies: - use contractionary monetary and/or fiscal policies to reduce overall AD in order to
reduce spending on imports - would also serve to reduce the “inflationary gap” (paragraph )
- contractionary monetary policy could lead to appreciation of the lira, which may help to
reduce inflationary pressure; this could also reduce cost of imported capital which would
increase LRAS - would reduce “rapidly rising domestic demand” (paragraph ), however, it
would be difficult to assess the correct amount of deflation needed. May overshoot and cause
recession – 6 – M14/3/ECONO/HP2/ENG/TZ0/XX/M - contractionary monetary policies,
increasing interest rates, should reduce the fear of financial account outflows (paragraph ) -
time lag involved • supply-side policies - supply side policies may be used to improve the
competitiveness of exports and increase the competitiveness of goods that compete with
imports, but this is a long term solution.
change in Bolivia’s exchange rate policy in moving from a fixed exchange rate to a
managed float in late 2010 (paragraph ). [8 marks]

Arguments in favour of a fixed Bolivian Boliviano:
(the opposite of these arguments could also used to explain the disadvantages of a managed
float)
 high degree of certainty for stakeholders, allowing planning of investment and consumption
spending; since 80% of imports are used by the manufacturing sector, a fixed exchange rate
gives more certainty to manufacturers – (paragraph )
 reduced uncertainty associated with currency fluctuations encourages trade
 avoidance of exchange rate fluctuations with trading partners that are also fixed to the
dollar
 the Bolivian central bank has large amounts of international reserves with which to support
the Boliviano (paragraph )
 as long as there are current account surpluses, there is no fear of running out of
international reserves
 reduced risk of inflation from a depreciation of the Boliviano.
Arguments in favour of a managed float: (the opposite of these arguments could also used to
explain the disadvantages of a fixed exchange rate)
 easier to adjust to external shocks
 ease of adjustment may be especially important to a country like Bolivia, which is highly
dependent on a few commodity exports subject to high price volatility
 greater flexibility offered to policy makers to carry out independent monetary and fiscal
policy, as interest rates and government spending do not have to respond to the needs of
maintaining the fixed exchange rate
 an appreciation of the Boliviano is needed to reverse inflation, which was over 10 % in
mid-2011
 reduced inflationary pressures will reduce costs of imported inputs for manufacturers
(paragraph )
 as the Boliviano appreciates, the current account surplus is likely to be reduced, due to
lower imports and greater exports, helping to achieve a reasonable balance in the current
account
 reference to the M-L condition (or inverse M-L condition)
 the achievement of a reasonable balance in the current account over the longer term will
help avoid problems resulting from persistent current account surpluses (lower consumption
and investment spending, reduced export competitiveness).
likely consequences of intervention in the yen market. [8 marks]
Responses may include:  an explanation of how Japan might intervene in the yen market to
bring about a depreciation. (paragraph ) Arguments in favour of intervention:  Net exports
may rise as exports become more competitive and imports become more expensive 
Reference to the ML condition; the effect on net exports depends on the price elasticity of
demand for exports and imports;  an increase in net exports results in an increase in AD,
which may help to bring Japan out of recession (paragraph ), raise business confidence
(paragraph ) and help to bring about some inflation, which would be positive in Japan’s
deflationary environment (paragraph )  increased revenue for exporters (paragraph ) 
may offset the effect of the trade protection in export markets (paragraph )  may be seen as
a better option than trade protection.  Japan has little alternative, at least in the short run, to
stimulate economic growth considering its economic situation  If intervention successfully
brings about depreciation, it may create some desirable inflation – 11 –
N13/3/ECONO/HP2/ENG/TZ0/XX/M Arguments against intervention  possibility of a
currency war (paragraph )  prevents the economy from re-structuring away from a
dependence on exports (paragraph )  Japan may be accused of currency manipulation 
may spark increased protection in export markets  can only do this by accumulating
reserves, since interest rates have fallen to zero (paragraph ).
possible consequences of the trade agreement between Japan and the EU (JEEPA).
Responses may include: A definition of: • tariffs • quota • trade protection • trade agreement.
Strengths of the trade agreement: • The trade agreement could raise the EU’s exports to Japan
by 34% and Japan’s to the EU by 29%, increasing AD and thus creating economic growth
and jobs in all economies involved (paragraph ) (candidates may argue that the impact on
growth is indeterminate since net exports may fall with downward pressure on growth in the
short run). • The trade agreement marks a determined effort to overcome problems associated
with trade protection (paragraph  – combat rising trade protectionism) such as higher prices.
• Will make Japanese car producers more competitive with European and Korean producers,
increasing employment in the Japanese car industry (paragraph ). • Lower prices for
Japanese consumers of meat, dairy products and wine (paragraph ). • The loss of trade
protection for producers, eg Japanese farmers, will force them to become more efficient
(paragraph ) if they are to remain competitive. • The deal will also resolve non-tariff
barriers, such as technical requirements and regulations, which will increase trade (paragraph
). • The proposed deal also addresses sustainability (paragraph ). • It would be easier to
sell to European/Japanese consumers, which creates a larger market, resulting in expansion of
production. • Consumers in both countries will have access to a wider variety of goods at
lower prices as a result of freer trade. Limitations of the trade agreement: • Trade agreement
still allows for some tariff barriers and some non-tariff barriers (paragraph ). • JEEPA faces
challenges, as it will have to be passed by the Japanese Parliament, the European Parliament
and European national governments (paragraph ), so there is no guarantee that it will
happen. • The agreement will disadvantage some producers in all economies. • Possible
unemployment in industries where trade protection is reduced, eg the EU car industry
(paragraph ) and farmers in Japan (paragraph ). • Korean car manufacturers may lose
market share in the EU market to the Japanese producers (paragraph ). • US beef and pork
producers might lose market share in Japan because EU producers would have better access
to the Japanese market (paragraph ). • Governments will have their tariff revenues reduced.
• Possible infant industries, such as the cheddar cheese industry in Japan, may not be able to
compete (paragraph ).
possible effects on the Canadian economy of the strengthening of the Canadian dollar
against the US dollar. [8]
Responses may include: A definition/explanation of a “stronger currency”. – 12 –

N19/3/ECONO/SP2/ENG/TZ0/XX/M Economic growth: • The strong Canadian dollar may
cause a decrease in demand for exports and an increase in demand for imports, resulting in a
fall in net exports and a decrease in AD. This may hinder economic growth, which has been
increasing (paragraph ). Low unemployment: • The stronger Canadian dollar may result in a
decrease in demand for exports and an increase in demand for imports, thus raising
unemployment in export industries and industries that compete with imports. • The need to
cut costs may result in structural unemployment. • If demand for exports is relatively
inelastic, as in the case for commodities (with reference to Table 1), there may be little effect
on unemployment. • If demand for exports is relatively elastic, as in the case for
manufactured goods (with reference to Table 1), there could be an increase in unemployment
in this sector. • A stronger Canadian dollar makes it more attractive for Canadians to travel to
the US, rather than travel in Canada, which may damage the Canadian tourism sector
(paragraph ) and may lead to unemployment. Low and stable inflation: • The stronger
Canadian dollar will make imported factors of production less expensive, resulting in an
increase in SRAS and a fall in possible inflationary pressure • The stronger Canadian dollar
may also present a risk of increased deflationary pressure from lower priced imports and
reduction in net exports (paragraph ). • The strong Canadian dollar may cause a decrease in
demand for exports and an increase in demand for imports, resulting in a fall in net exports
and a decrease in AD, thus a reduction in demand-pull inflationary pressure (paragraph ). •
The effects depend on the PED for exports and imports. Current account: • The current
account deficit is a concern at 3.6% of GDP (paragraph ), and a stronger Canadian dollar
could lead to an increase in the deficit on the current account balance. • The effect depends
on the PED for exports and imports. • The vast majority of Canada’s exports go to the US
(Table 2), so the effect of the appreciation of the Canadian dollar against the US dollar is
likely to be significant. Standard of living • Consumers will gain from lower prices of
imports, including effectively cheaper holidays in the US (paragraph ).
Using information from the text/data and your knowledge of economics, discuss
possible economic impacts of the tariff on tinplate steel. [8]
Responses may include:  definition of tariff  international trade diagram to explain impact
of the requested tariff on consumers, producers, government, importers and efficiency
(paragraph ). Possible impacts:  some candidates may question the claims of the CMI,
noting that they have a vested interest in tinplate steel being exempted from a tariff
(paragraph )  severe economic impacts on the tin can manufacturing industry (paragraph )
 job losses and potential structural unemployment in the tin can industry (paragraphs  and
)  inefficient domestic tinplate steel producers are supported (paragraph ), causing a
misallocation of resources  the inferior “quality of domestically-produced tinplate steel”
(paragraph ) may result in a decline in quality and higher price of final products  tariff
allows domestic steel tinplate producers to maintain higher revenues / incomes to allow them
to compete with higher quality imports (paragraph )  higher input prices for can
manufacturers may force closures of some can producers and a consolidation within the tin
can industry (paragraph )  tariff will increase input costs for can manufacturers requiring
tinplate steel as an input (paragraph )  tin can producers disadvantaged when substitute
packaging is not exposed to a tariff (paragraph )  impact on economic growth in
communities dependent on tin can manufacturing (paragraph )  impact on low-income
households as tariffs are regressive taxes and food is a staple; low income households spend a
higher proportion of their income on canned food (paragraph )  trading partners might
retaliate by imposing their own protectionist measures  tariffs provide a source of tax
revenue that can be reinvested  as domestic production can only meet 57% of domestic
demand, it might take a substantial increase in price to resolve the shortage (paragraph ) 
may affect the competitiveness of US exports, which require tin-plate steel as a factor input.
possible economic consequences of the increasing value of the rupee for India’s
inflation rate, employment, economic growth and current account balance. [8]
Responses may include:  definitions of appreciation, inflation, employment, economic

growth, current account. Inflation rate:  the inflation rate may decrease due to cost-push
deflation caused by lower prices of imported goods (paragraph )  the inflation rate may
decrease due to cost-push deflation caused by lower prices of imported raw materials and
semi-finished goods (paragraph )  the central bank may reduce interest rates to lower the
value of the rupee (paragraph ), causing an expansion of AD and demand-pull inflation  the
above points may have an off-setting effect on the level of inflation  excess liquidity in the
financial markets (paragraph ) may also be inflationary  demand-pull inflation falls due to
lower AD since net exports fall. Employment:  increased export prices (paragraph ) may
lead to falling demand for exports (paragraph  and paragraph ) and so an increase in
unemployment in export industries and in industries that compete with imports (due to lower
import prices)  decreased import prices (paragraph ) may lower costs for firms using
imported raw materials and semi-finished goods, thus lowering prices, increasing demand,
and leading to higher employment. Economic growth:  the overall effect of higher export
prices and lower import prices (paragraph ) might lead to a fall in net exports, as explained
in (b), causing a fall in growth  strong capital inflows (paragraph ) might offset the above if
the funds are used for investment in capital goods as increased investment shifts AD to the
right, causing growth  a slowdown in exports has slowed economic expansion and real GDP
growth has fallen to 5.7%, the lowest for more than three years (paragraph ). Current
account balance:  purchase of reserve assets might be necessary to compensate for the
current account deficit (paragraph )  higher export prices may lead to reduced export
revenue and lower import prices to increased import expenditure harming the current account
balance  if the central bank reduces the value of the rupee (paragraph ), then the US may
retaliate with protectionist measures that would harm the current account balance (and
employment/economic growth)  the capital inflows that caused the appreciation (paragraph
) will lead to future debits under the current account (income flows). To reach level 3,
students must be aware of the particular situation in the Indian economy, not just present an
evaluation of a high exchange rate in general.
Evaluate the economic impacts of trade protection in the South African corn market.
Responses may include: • a definition of trade protection • an international trade diagram to

explain impact of requested tariff on consumers, producers and importers (paragraph ).
Advantages: • US subsidies distort the functioning of the free market and can result in an
inefficient allocation of resources. • Helps to protect South African corn farmers from unfair
practices since US subsidies artificially lower the price of US corn imported into South
Africa (paragraph ). • It would prevent a deterioration of South Africa’s current account
balance since import expenditure falls as the result of decreased corn imports and the
depreciation of currency (paragraph ). • Tariff allows domestic corn farmers to maintain
higher revenues / incomes to help them to survive the drought (paragraph ). • Corn farmers
can compete with subsidized US corn that has caused the global glut and subsequent low
prices. • May only be a short-term measure. • A source of tax revenue for the South African
government. • Agriculture is a strategic industry. Disadvantages: • Domestic supply of corn in
South Africa is likely very price inelastic so the tariff would not increase domestic production
significantly. • Tariff will increase input costs for millers and food-related businesses
requiring corn as an input (paragraph ). – 7 – N18/3/ECONO/SP2/ENG/TZ0/XX/M •
Impact of rising corn prices on low income households when corn is an essential food
(paragraph ). • Tariff will cause rising input costs for livestock producers further increasing
food prices (paragraph ). • Corn is likely to be a major input to food manufacturing hence
tariff could cause decrease in SRAS due to rising input costs and thus cause cost-push
inflation and lower real GDP. • Price of South African food exported to other countries will
rise in trading partner countries. • Trading partners might retaliate by imposing their own
protectionist measures. • The corn industry is not an infant industry (paragraph ). • The
depreciation of Rand is already reversing the low price of imports.
Evaluate the likely effects of Nigeria’s change from a fixed exchange rate system to a
managed exchange rate system.
Responses may include: • definitions of fixed and managed exchange rate systems. Strengths:
• Will not need to use foreign currency reserves as much, which have fallen, to control the
exchange rate (paragraph ). • The lower exchange rate should improve the balance of trade
and so increase aggregate demand, helping to combat the negative economic growth
(paragraph ). • The lower exchange rate may attract foreign investment. • Interest rates will
be free for use in other policies. • Could reduce levels of speculation. • Lower export prices
and higher import prices may increase AD and cause economic growth (paragraph ). •
Could encourage import substitution (paragraph ) and help to diversify the Nigerian
economy. Limitations: • There may still be some need to use reserves to maintain the
“managed float” (paragraph ). • The fall in the value of the naira will raise the prices of
imported necessity goods, negatively affecting poverty. • Increased uncertainty and harder to
plan ahead which may limit the inflow of FDI. • The falling value of the naira may cause
cost-push inflation/imported inflation (paragraph ). • There may be a need for a tighter
monetary policy to deal with the higher inflation. This would increase the exchange rate and
undo many of the benefits (paragraph ).
decision to maintain the fixed value of the Danish krone against the euro. [8]
Arguments for maintaining the fixed value may include:

• greater certainty
• businesses able to plan ahead with certainty about predicted costs of imported factors of
production
• exporters benefit from the fixed (low) value of the Danish krone (paragraph ); letting it
float would lead to a higher value (paragraph ) and would harm exporters by making their
products less competitive. This may lead to unemployment since exports are very important
to the Danish economy. It could be an “economic catastrophe”. (paragraph )
• high level of confidence from outside investors and international credit rating agencies will
make it easier to attract foreign investment (paragraph )
• if the central bank continues to be able to defend the Danish krone, speculators may decide
to stop buying it up, thereby stopping the upward pressure (paragraph ).
• according to the central bank, there will be no difficulty in maintaining the peg (paragraph
)
• belief that the ability to print krone will enable the government/central bank to continue to
intervene to defend the peg (paragraph ).
Arguments against the fixed value may include:

• the arrangement might fail, and the central bank may have to break the peg, despite what it
says (paragraph )
• the speculators may continue to buy up the Danish krone, assuming that at some point the
central bank will be unable to maintain the peg (paragraph )
• if the central bank does keep printing money to maintain the peg (paragraph ), it may lead
to demand-pull inflation (monetarist explanation of inflation) • the central bank may be
sacrificing domestic monetary policy options to maintain the peg (paragraph ) • perhaps the
peg no longer represents the best value for the Danish krone and that it is now under-valued
against the euro • other countries could argue that the value of the Danish krone is at an
artificially low level, making their exports more competitive than they should be, and leading
to retaliation • accumulating foreign reserves is a waste of financial assets (paragraph ). Any
reasonable evaluation.
use of trade protection in Indonesia.
Responses may include: • an explanation of trade protection (tariffs, quotas and other non-
tariff barriers to support domestic producers) • reference to diagram in part (c). Justification
for trade protection: • may reverse the effects of the slowdown in economic growth
(paragraph ) by reducing demand for imports (net export component of AD will increase) •
reduced imports will reduce the current account deficit (paragraph ) and prevent the
Indonesian rupiah from falling further • may act as a way to practice import substitution and
diversify its economy away from the dependence on commodity exports (paragraph ) • trade
protection will prevent imports of “low-quality imported goods” but not imports of raw
materials, so that domestic manufacturers who use imported raw materials will not be
damaged and may become more competitive (paragraph ) • level playing field argument –
Indonesia’s average tariff in the past was well below others. “Indonesia had been too open to
imports of consumer goods in the past” and it is simply a correction (paragraph ). – 12 –
N17/3/ECONO/SP2/ENG/TZ0/XX/M Arguments against trade protection: • higher prices
hurting consumers (paragraph ) • welfare loss, loss of efficiency (paragraph ) • may invite
retaliation from trading partners, such as China • may be seen as hypocritical that Indonesia is
seeking freer trade (eg with the UK) while also increasing trade protection (paragraph ) •
may be difficult to attract foreign direct investment (paragraph ) if the government is
pursuing interventionist policies such as higher levels of protection (paragraph ) • allows
Indonesian firms to remain uncompetitive (paragraphs  and ) • will not solve the
underlying problem of “crumbling infrastructure and excessive
claim that trade protection measures will support economic growth in Kenya. [8]
Responses may include: • definition of economic growth • definition of trade protection

measures. Strengths of protectionist measures: • infant industry argument – allows steel and
iron industry time to become internationally competitive, which can bring about growth •
helps diversify economy away from over reliance on primary exports, which is necessary for
sustained growth (paragraph ) • create more jobs thus increase consumption, AD and growth
(+ diagram) (paragraph ) • raises government revenue (paragraph ) that can be invested by
the government in ways that will promote growth • if imports are being unfairly subsidized,
protectionism will level the playing field (paragraph ) • can help correct the persistent
current account deficit, which is hindering growth (paragraph ).
Limitations of protectionist measures: • does not encourage long term efficiency, which may
be better achieved through deregulation (paragraph ) • inefficient allocation of resources
argument • protected industries can become over-reliant on government support and so may
not contribute to economic growth • politically difficult to remove protectionist measure once
in place • revenue from tariffs can be subject to corruption • potential problems of retaliatory
tariffs from trading partners, which could damage Kenya’s exports and thus threaten future
growth • removing barriers and deregulation (administrative barriers) rather than
protectionism could encourage domestic entrepreneurship and FDI which will support growth
• tariffs increase “cost of doing business” (paragraph ) for those producers reliant on
imported components • higher prices on steel and iron which will increase input costs for
construction and infrastructure projects – necessary for economic growth • higher input costs
may reduce SRAS, causing a reduction in real GDP, threatening growth. Any reasonable
discussion.
possible consequences for the Australian economy of the fall in the value of the
Australian dollar.
Possible negative consequences include: • “Australian mining companies are losing

significant revenue” due to the fall in demand for exports (paragraph ) • “falling iron ore
prices create downward pressure on economic growth” because mining profits fall, forcing
mining companies to cut back on hiring and growth-oriented investment (paragraph ) •
possibility of imported inflation through higher priced imports leading to higher input costs
for manufacturers • weak economy makes it difficult for central bank to raise interest rates to
support the dollar (paragraph ) • falling value of currency can lead to low business
confidence and uncertainty • cutting interest rates will further depreciate the Australian dollar
exacerbating a deterioration in the balance of trade and current account (paragraph ) •
depreciating currency increases outflows on income line of current account as more dollars
required to exchange for foreign currencies with which to pay income obligations – worsens
current account deficit • may lead to speculative outflows due to concerns that the Australian
dollar is likely to depreciate further, leading to further downward pressure. – 14 –
M17/3/ECONO/SP2/ENG/TZ0/XX/M Possible positive consequences include: • “persistent
weakness in non-mining sectors” – depreciating currency likely to reduce relative price of
service exports (tourism and education) thus improve balance of trade in services (paragraph
) • can encourage inflows on financial account as Australian assets are cheaper. Possible
mixed consequences include: • Australian commodity exports should be more competitive
but “slowing growth in China” likely to offset any gains from fall in relative price of
commodity exports • mixed impact on balance of trade – likely to improve services but less
likely to improve goods because of dependency on commodity exports “Iron ore is
Australia’s largest export” (paragraph ). Any reasonable discussion that offers a considered
and balanced review of the possible effect of a depreciating currency on Australia’s economic
growth.
possible economic consequences of an overvalued New Zealand dollar on the New
Zealand economy.

Inflation rate:
• the current inflation rate seems to be reasonable near 2 % target (paragraph )
• a strong dollar will lower the cost of imported raw materials, semi-finished goods, and
finished goods, reducing inflationary pressure.
Employment:
• in the short run, export prices will rise and import prices will fall, leading to reduced
employment in both export industries, as demand for exports falls, and domestic industries, as
people buy more imports
• the export sector is used to high exchange rates and remains competitive, so employment
rates may not be as badly affected in export industries (paragraph ).
Economic growth:
• the expected growth rate is 3.7 % (paragraph ) – reasonably high for a developed country
• a fall in net exports would lead to lower AD and so a fall in growth rates
• firms are efficient and competitive (paragraph ), so economic growth may not be so badly
affected
• possible intervention by the central bank to depreciate the currency (paragraph ) to prevent
net exports from decreasing and slowing economic growth.
Current account balance:

• a high exchange rate could lead to a fall in net exports and so a movement towards a current
account deficit
• exporters seem to be coping with a high exchange rate (paragraph ) and so net exports may
not be affected greatly on the export side
• the effect may be greater on the import side
• there is a present trade in goods balance surplus of $1.2 billion (paragraph )
• overvalued NZD may begin to harm New Zealand dairy products which is a key export
(paragraph ).
possible effects of the appreciating Australian dollar on the Australian economy.
Responses may include: Possible positive effects: • Australian tourists overseas benefitting
from cheaper holidays (paragraph ) • imported manufactured goods become cheaper
boosting consumers’ living standards • imported capital goods become cheaper encouraging
domestic investment and potentially increasing productivity • inflationary pressure is reduced
through lower import prices (paragraph ) • helps slow down interest rate rises (paragraph )
• may permit the government to lower interest rates, which is likely to have an expansionary
effect on the economy. Possible negative effects: • local exporters in the manufacturing and
services sectors suffer because Australian exports become less competitive (paragraph ) •
increase in unemployment in export sector as demand for exports falls • fewer foreign
students study in Australia (paragraph ) causing a fall in revenue for some Australian
schools and universities • greater dependence on a narrow range of commodity exports which
may lead to vulnerability to external shocks (paragraph ) • fewer tourists coming to
Australia (paragraph ) • foreign investment may be discouraged as the cost of investment
measured in foreign currency increases.
Using information from the text/data and your own knowledge of economics, evaluate
the possible effects on the Chinese economy of increased trade protection imposed by
its trading partners.
Responses may include: • a definition of trade protection • examples of trade protection

measures such as tariffs and quotas • price of Chinese goods exported to other countries will
rise in trading partner countries as a result of imposition of trade protection measures such as
tariffs and quotas (tariff diagram) • imposition of trade protection measures such as tariffs
and quotas in trading partner countries may reduce demand for Chinese exports, resulting in a
fall in a fall in revenue for Chinese firms and reduced income and employment for Chinese
workers • fall in Chinese production in export industries • possibility of reduced inflationary
pressure on China (paragraph ) • reduced pressure on Chinese producers to increase
domestic wages (paragraph ) • slowing down of China’s economic growth rate • Chinese
current account balance is likely to deteriorate • Chinese government might retaliate by
taking steps to weaken its exchange rate further (paragraph ) or by imposing its own
protectionist measures • a reduction in stock shortages of Chinese products in overseas
markets (paragraph ) • possible shift of production priorities to meet domestic demand
(paragraph ).
possible economic effects of the appreciation of the Mexican peso.
Responses may include:  benefits of a currency appreciation: - reduced costs of imported

inputs (paragraph ) - domestic industry could be more competitive due to cheaper inputs
(paragraph  and ) eg car companies - domestic exporters must be more price competitive
(paragraph ) - domestic producers must be more price competitive to be able to compete
with cheaper imports. Forced firms such as Hernandez’s to be more competitive. As a result
his “company’s hard-won competitiveness” means that he can survive the stronger peso for
some time. (paragraph ) - less pressure on inflation - possible improvement in living
standards from cheaper imports  costs of a currency appreciation: - exporters find it more
difficult to compete because of higher export prices (paragraph ) - domestic firms struggle
to compete with foreign imports (paragraph ) - balance of payment current account deficit -
domestic tourist industry struggles - a decrease in employment in export industries - a
decrease in unemployment in domestic industries competing with imports - reduced
economic growth – 7 – N13/3/ECONO/SP2/ENG/TZ0/XX/M  exports did not fall despite
appreciation of the peso (paragraph ).  Mexico is part of NAFTA - world’s largest FTA
(paragraph ) – trade creation – exports still relatively competitive despite appreciation of
currency  appreciation has not hurt Mexico as much as it could have as China (Mexico’s
main competitor (paragraph ) has experienced rising wage rates  the appreciation may be
self-correcting in a floating exchange rate system, so will not have a large impact in the long
run  the value of the peso has risen less fast than other Latin American currencies and so
there is less impact
possible economic implications of making a policy decision to adopt trade protection
as a response to an economic downturn. [8 marks]
Responses may include:  a major characteristic of a downturn is the increase in the level of
unemployment experienced in an economy  the expected benefits of trade protection: -
lower unemployment in domestic industry (paragraphs  and ) - higher output of domestic
firms (paragraph ) - reduced imports - protection of infant industries - protection of
declining industries - source of government revenue - communities survive (paragraph ) 
the costs of trade protection: - retaliation - higher costs (paragraph ) - less competition - less
choice (paragraph ) - misallocation of resources - protection of inefficient firms/industries -
higher prices for consumers (paragraph ) - reduced export competitiveness because of
higher imported input prices - time, effort and cost of taking issue to WTO – 11 –
N13/3/ECONO/SP2/ENG/TZ0/XX/M - negative impact on LDCs that rely on export revenue
- “Governments have started to give domestic firms an advantage over their foreign
competitors” (paragraph ) - e.g. – subsidies - opportunity cost involved - protectionism may
expand to include capital/financial controls - deadweight loss associated with protectionism 
the short-term benefits of trade protection could be outweighed by the long-term loss of
competitiveness (paragraph ) and misallocation of resources.
possible consequences of the appreciation of the Japanese yen (paragraph ).
Responses may include:  definition of appreciation  an increasing trade in goods deficit and
falling current account surplus (paragraph )  an eventual current account deficit (paragraph
)  slowing economic growth (paragraph )  the impact of outward foreign direct
investment (paragraph )  the impact on employment of firms moving their production
abroad (paragraph )  the short-run and long-run impacts on the balance of payments
accounts of FDI and increased (property) income from abroad (paragraph )  “Japanese
firms are also acquiring shares in natural resource companies” (paragraph ) advantages of
diversification  the pressures on the government to intervene in the value of the Japanese
yen (paragraph )  downward pressure on inflation  cheaper imports, with benefits for
consumers and lower costs of imported raw materials and energy for Japanese companies 
the impact on export industries (paragraph )  self-correcting nature of currency if it is
allowed to float – 6 – M14/3/ECONO/SP2/ENG/TZ0/XX/M  reaction from the international
community of the manipulation of the currency by the government. Others may follow suit 
PEDx = .34 (paragraph ) export revenue should increase despite currency appreciation
(trade in services inelastic)  Japan has an underlying problem of an aging and decreasing
population that should be addressed beyond currency value  the concern that the
appreciation is partly due to the yen being viewed as a “safe haven” (paragraph ) and
therefore the financial inflows may suddenly be reversed.
effects of “global economic uncertainty” (paragraph ), “low trade barriers”
(paragraph ) and a “carbon tax” (paragraph ) on Australia’s car industry.
Responses may include: “Global economic uncertainty”  reduced demand for cars on a
global scale hence reduced demand for Australian cars or supply of car parts (including
exports)  likely to require government assistance resulting in opportunity cost issues for
government (paragraph )  lack of “policy certainty” (paragraph ) further reduces
investment in the car industry during time of global economic uncertainty. “Low trade
barriers”  “most open car market in the world” (paragraph ), facing increasing competition
from cheaper imports  intense competition from imports (paragraph ), which may stimulate
innovation and cost reductions  decision to “reduce the funding of the Green Car Innovation
Fund by hundreds of millions of dollars” (paragraph ) reduces incentive to produce cars to
compete with cheaper imports  Australian producers not competing on equal terms with
foreign producers (paragraph ). In light of this, Australian government not giving enough
support to domestic producers according to Mr Devereux (paragraph ) – 11 –
M14/3/ECONO/SP2/ENG/TZ0/XX/M  Australian innovations have been developed by
foreign car manufacturers (paragraph ) vs developing domestically. “Carbon Tax” 
increases production costs at a time when the industry is already suffering from increasingly
competitive imports (paragraph ) and other problems such as a high dollar, low trade
barriers, less government financial support and lower demand due to global economic
uncertainty  encourages industry to pursue cleaner production methods which are likely to
make them more internationally competitive in long run and possibly increase car exports.
Other countries may copy this Australian innovation  if car makers in other countries don’t
have the same carbon taxes, this will make the Australian car makers less competitive.
possible consequences of the strong Australian dollar. [8 marks]
Responses may include: • an explanation of a strong Australian dollar • increase in export

prices and the effect on export revenue of natural resource producers and thus AD • increase
in export prices and the effect on non-resource producers and tourism (paragraph ) • the
importance of price elasticity of demand for exports in determining revenue changes • the
effect of the high exchange rates on inflation (paragraph  and ) • the effect of high
exchange rates on consumers (paragraph ) • the effect of high exchange rates on businesses
(paragraph ) • the effect on employment • the effect on economic growth (paragraph ) • the
likely impact on the current account balance

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Economic analysis may include:

To explore the impact on:

Economic analysis may include:

To explore the impact on:

Responses may include:

Consumers of drywall (Canadian building firms):

Domestic producers of drywall:

The Canadian government:

Responses may include:

Responses may include:

Strengths of protectionist measures:

Limitations of protectionist measures:

Responses may include:

Responses may include:

• reasons against the view that tariffs should be imposed:

Responses may include:

Responses may include:

Reasons against intervention:

Responses may include: • definition of current account (paragraph ) • definition of current

Responses may include: • definition of a current account surplus • reference to current

Responses may include:

Command term “Evaluate” requires candidates to make an appraisal by weighing up the

Responses may include: Effect(s) on:

Responses may include: • an explanation of a current account deficit • expenditure–switching

Responses may include:

Responses may include: A definition/explanation of a “stronger currency”. – 12 –

Responses may include:  definitions of appreciation, inflation, employment, economic

Responses may include: • a definition of trade protection • an international trade diagram to

Arguments for maintaining the fixed value may include:

Arguments against the fixed value may include:

Responses may include: • definition of economic growth • definition of trade protection

Possible negative consequences include: • “Australian mining companies are losing

Responses may include:

Current account balance:

Responses may include: • a definition of trade protection • examples of trade protection

Responses may include:  benefits of a currency appreciation: - reduced costs of imported

Responses may include: • an explanation of a strong Australian dollar • increase in export

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