Economics - HL+SL paper

Paper 2 Wednesday 20 September (morning)

50 minutes
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Instructions to candidates
● Do not open this examination paper until instructed to do so.
● You are not permitted access to any calculator for this paper.
● Answer all the questions.
● Use fully labelled diagrams and references to examples where appropriate.
● The maximum mark for this examination paper is [20 marks].

Study the extract below and answer the questions that follow:

1.The Central Bank of Argentina has played a pivotal role in guiding the nation's monetary
policies during this period. Argentina has returned to the international borrowing markets with a
sale of government bonds that ends 15 years of exile since its 2001 default. The country is rising
up to $15bn, but demand for the bond issue was strong and attracted orders worth $65bn. Some
of the money will go to repaying bondholders who for years opposed the terms of Argentina's
debt restructuring after the default 15 years ago. "Argentina is back," said Finance Minister
Alfonso Prat-Gay.

2. The money will be repaid over between three to 30 years, depending on the type of bond, with
Argentina paying an interest rate of between 6.4% and 8%. Final details of the fundraising were
due to be announced on Tuesday, but investors welcomed Argentina's return from years of
isolation from the international bond markets. "It is fantastic that Argentina is accessing the
market," said John Baur, a portfolio manager at Eaton Vance. "This is certainly a very important
step in the direction of improving the future of Argentina economically."

3. The bulk of the funds raised will be used to bolster Argentina's struggling economy. The bond
sale "is a major step forward," said Agustin Carstens, head of the International Monetary Fund's
Monetary and Financial Committee. "It is very good to have a country as important as Argentina
putting the house in order." The IMF forecasts that Argentina's economy will contract by 1% this
year and grow by 2.8% in 2017. Credit rating agency Moody's raised Argentina's sovereign rating
on Friday ahead of the bond sale. The country still ranks as a speculative investment with a "high
credit risk".
(a) (i) Define the term interest rate, indicated in bold in the text (paragraph 2) [2]

(ii) Explain the main functions of central bank, indicated in bold in the text. (paragraph 3)
[2]

(b) Using an appropriate diagram, give one possible explanation for the increase in inflation
shown in table 2. [4]

(c) Using an appropriate diagram explain the change in the Gini index shown in table 3.
[4]

(d) Using information from the text/data and your knowledge of economics, evaluate the
effectiveness of change in interest rate on the economic growth of Argentina during the period
shown. [8]