| Date | November 2016 | Marks available | 4 | Reference code | 16N.2.SL.TZ0.4 |
| Level | Standard level | Paper | Paper 2 | Time zone | Time zone 0 |
| Command term | Explain | Question number | 4 | Adapted from | N/A |
Question
Ghana to seek help from International Monetary Fund
- Ghana has said it will seek financial aid in the form of a loan from the International Monetary Fund (IMF) to help stop the rapid decline in the value of the cedi, Ghana’s currency, and close a large budget deficit. Ghana’s transformation from one of Africa’s fastest growing economies to the home of the world’s worst-performing currency has become a concern. The exchange rate depreciated by 40 % against the US dollar in 2014. The fall in the currency has led to increases in the price of consumer goods such as sugar and fuel;
inflation is at an unacceptable 15 %. - Despite being a major exporter of gold, oil and cocoa, Ghana’s current account deficit has risen sharply to 12 % of its gross domestic product (GDP). This is partly due to a rapid increase in demand for imports and falling gold prices. Additionally, oil revenues have not been as strong as expected.
- The government is also struggling with a wide budget deficit, which stood at 10 % of GDP last year. Ghana’s good reputation for fiscal responsibility has worsened considerably as the government tripled salaries for police officers and soldiers.
- It is expected that the news of talks with the IMF will be positively received in international financial markets. The finance minister has said the step would help to stabilize the currency, to bring domestic prices under control, and also to restore investors’ confidence in Ghana’s economy.
- A Ghanaian spokesperson noted that the IMF would insist on the government introducing measures to tackle inflation and reduce its budget deficit. The IMF says that Ghana needs to tighten its budget immediately, by reducing public sector wages, lowering subsidies and increasing taxes. The IMF is likely to demand a limit on borrowing and perhaps some privatization of power and water companies.
- Earlier this year, problems in the economy had led to nationwide protests, with thousands of workers across the country protesting in the streets about the rise in the cost of living. The country’s largest trade union says the government has been mismanaging the economy. In response to the protests, a government minister said that the government would work very hard to achieve economic development to make life easier for the working people of Ghana but that all Ghanaians would have to make “some sacrifices for the economy to recover”.
Define the term budget deficit indicated in bold in the text (paragraph [1]).
Define the term economic development indicated in bold in the text (paragraph [6]).
Using an exchange rate diagram, explain how the large current account deficit may have affected the value of the Ghanaian cedi.
Using an AD/AS diagram, explain how the falling value of the Ghanaian cedi may have contributed to inflation.
Using information from the text/data and your knowledge of economics, discuss possible consequences of International Monetary Fund (IMF) financial aid on Ghana’s economic growth and development.
Markscheme
Level
0 The work does not reach a standard described by the descriptors below. [0]
1 Vague definition. [1]
The idea that it is to do with government revenue or spending.
2 Accurate definition. [2]
An explanation that it is when (planned) government spending is greater than government revenues.
Level
0 The work does not reach a standard described by the descriptors below. [0]
1 Vague definition. [1]
The idea that living standards improve.
2 Accurate definition. [2]
An explanation that it is a broad concept involving any two of the following:
- improvement in standards of living
- reduction in poverty
- improved health
- improved education
- reduction in unemployment
- greater equality in income distribution
- environmental protection
- increased freedom and economic choice.
Level
0 The work does not reach a standard described by the descriptors below. [0]
1 There is a correct diagram or an accurate written response. [1–2]
For drawing a correctly labelled exchange rate diagram for the Ghanaian cedi with the supply curve shifting to the right and a fall in the exchange rate or for providing an explanation that outflows of money on the current account exceed inflows and hence there is increased selling of the Ghanaian cedi that will result in downward pressure on the currency (depreciation of the currency).
2 There is a correct diagram and an accurate written response. [3–4]
For drawing a correctly labelled exchange rate diagram for the Ghanaian cedi with the supply curve shifting to the right and a fall in the exchange rate and for providing an explanation that outflows of money on the current account exceed inflows and hence there is increased selling of the Ghanaian cedi that will result in downward pressure on the currency (depreciation of the currency).
Candidates who incorrectly label diagrams can be awarded a maximum of [3].
For an exchange rate diagram, the vertical axis may be exchange rate, price of cedi in other currencies, or other currency per cedi. The horizontal axis should be quantity or quantity of cedi. A title is not necessary.
Level
0 The work does not reach a standard described by the descriptors below. [0]
1 There is a correct diagram or an accurate written response. [1–2]
For drawing a correctly labelled AD/AS diagram showing a fall in short-run aggregate supply and an increase in the average price level or for explaining that a fall in the value of the cedi will result in an increase in the cost of imported factors of production and therefore a fall in short-run aggregate supply, resulting in (cost-push) inflation.
2 There is a correct diagram and an accurate written response. [3–4]
For drawing a correctly labelled AD/AS diagram showing a fall in short-run aggregate supply and an increase in the average price level and for explaining that a fall in the value of the cedi will result in an increase in the cost of imported factors of production and therefore a fall in short-run aggregate supply, resulting in (cost-push) inflation.
Candidates might explain that the falling cedi results in increasing net exports (X-M) due to cheaper exports and more expensive imports, which increases AD causing demand-pull inflation. This alternative approach should be fully rewarded.
Candidates who incorrectly label diagrams can be awarded with a maximum of [3].
For AD/AS, the vertical axis may be Average (General) Price Level, APL or Price level. The horizontal axis may be real output, real national output, real income, real national income, real GDP or real Y. A title is not necessary.
Examiners should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
Do not award beyond Level 2 if the answer does not contain reference to the information provided.
Level
0 The work does not reach a standard described by the descriptors below. [0]
1 Few relevant concepts are recognized. [1–2]
There is basic knowledge/understanding.
2 Relevant concepts are recognized and developed in reasonable depth. [3–5]
There is clear knowledge/understanding.
There is some attempt at application/analysis.
3 Relevant concepts are recognized and developed in reasonable depth. [6–8]
There is clear knowledge/understanding.
There is effective application/analysis.
There is synthesis/evaluation, supported by appropriate theory and evidence.
Command term
Discuss requires candidates to offer a considered and balanced review that includes a range of arguments, factors, or hypotheses. Opinions or conclusions should be presented clearly and supported by appropriate evidence.
Responses may include:
- an explanation of the differences between economic growth and economic development
- an explanation of the links between growth and development
- an explanation of the sources of economic growth (eg improvements in the quality and quantity of physical and human capital, institutional reform).
Possible positive consequences:
- falling cedi may be limiting economic growth; financial aid from the IMF may be necessary to stop the cedi from falling further (paragraph [1])
- if the cedi appreciates, it may reduce inflation
- any improvements in the economy may improve investor confidence, which will lead to more investment (FDI and portfolio investment) which will contribute to economic growth (paragraph [4])
- the financial aid will force the government to reduce the budget deficit which is acting as a deterrent to investment (paragraph [3])
- the financial aid will force the government to fight inflation which will help economic growth (paragraph [5])
- if investment and growth pick up, there will be more leeway for the government to be able to afford to finance spending on development objectives, although this may only be possible over the longer term.
Possible negative consequences:
- the impact of IMF conditions of reduced government spending, a reduction in subsidies, privatization and a wage freeze on development (paragraph [5])
- opportunity costs of servicing the debt
- IMF aid may be mismanaged (paragraph [6]) which will have no impact on development
- the “sacrifices” (paragraph [6]) Ghanaians have to make will be anti-developmental.
Any reasonable discussion.
Discussion may include more general consideration of the nature of aid, growth and development and relationships between them.
Examiners report
Although this is an easy term to define, a considerable number of candidates defined a current account or trade deficit rather than a budget deficit.
This is quite a common question, and was answered well by the vast majority of candidates.
Most candidates were able to earn at least two marks for this question, by drawing a demand and supply diagram with an increase in supply of the Ghanaian cedi, and explaining that a current account deficit implies an increase in the supply of the Ghanaian cedi. Many were able to earn full marks for an accurate explanation of the reason for the increase in the supply. Many went off topic in the explanation. As always, there were examples of imprecise labelling on the y-axis.
This was a very straightforward question, and the majority of candidates performed well. Inaccuracies included incorrect labelling (lower achieving responses not distinguishing between microeconomic and macroeconomic labels). Teachers should note that there were two approaches to this question (cost-push and demand-pull inflation), both of which were acceptable.
“Discuss” requires candidates to offer a considered and balanced review that includes a range of arguments, factors or hypotheses. Opinions or conclusions should be presented clearly and supported by appropriate evidence.
A large number of candidates defined aid, economic growth and economic development and then wrote quite generic essays on the advantages and disadvantages of aid in general. In order to earn more than four marks, candidates needed to be familiar with the particular nature of financial aid from the IMF. Higher achieving responses recognised the consequences of the conditions imposed as part of an IMF package, and the implications of these conditions on economic growth and development. Many candidates failed to distinguish between economic growth and development.
