| Date | November 2019 | Marks available | 1 | Reference code | 19N.3.HL.TZ0.3 |
| Level | Higher level | Paper | Paper 3 | Time zone | Time zone 0 |
| Command term | Determine | Question number | 3 | Adapted from | N/A |
Question
In the country of Gardia, the currency is the gamma. The exchange rate of the United States dollar (US$) to the gamma is US$ 1 = 6.20 gamma.
Gardia received a loan of US$ 4 million from a foreign bank in 2018 when the exchange rate was US$ 1 = 5.3 gamma. It must pay back US$ 4.2 million (original amount borrowed plus interest) in 2019 when the exchange rate is US$ 1 = 6.2 gamma.
Both the gamma and the US$ are fully convertible currencies, which float freely in foreign exchange markets. The supply and demand for US$ (in billions) are given by the functions
where g is the exchange rate of the US$ in terms of the gamma, is the quantity of US$ supplied per month and is the quantity of US$ demanded per month.
The demand (D) function is represented in Figure 2.
Assume that the monthly supply of US$ changes to the function
If a visitor to Gardia from the US buys a towel that costs 23 gamma, calculate the cost in US$.
More foreign tourists are visiting Gardia. Outline the effect on the value of the gamma. You must give a reason for your answer.
State two factors that could cause Gardia’s current account to be in deficit, even though its balance of trade in goods is in surplus.
Determine the size of Gardia’s current account surplus/deficit when the sum of the financial and capital accounts is US$ 2 billion.
Gardia is aiming to increase its economic growth rate. Explain two sources of economic growth for economically less developed countries.
Calculate the additional cost of paying back the loan in gamma in 2019, due to the interest and the change in the exchange rate.
Calculate the equilibrium exchange rate for the US$ in terms of the gamma.
Plot and label the new supply curve on Figure 2.
Using Figure 2, calculate how many US$ are needed to buy one gamma at the new exchange rate.
State two reasons that could have caused an increase in the supply of US$.
Gardia’s investment (in plant and equipment) increased by 11 million gamma in the last month. In the same month, its government spending decreased by 8 million gamma. It has been estimated that the marginal propensity to consume (MPC) on domestic goods and services in Gardia is 0.75.
Calculate the maximum possible increase in real gross domestic product (GDP) in Gardia that could result from the changes in investment and government spending.
Using a fully labelled monetarist/new classical diagram, explain why, while there may be short-term fluctuations in output, the economy will always return to the full employment level of output in the long run.
Markscheme
= 3.71
No workings are required.
US$3.71 or 3.71 is sufficient for [1].
Possible factors may include:
- Gardia could have a (greater) deficit on its services account, eg in transport or insurance or tourism.
- Gardia could have a (greater) deficit on its income account, eg in profits, interest or dividends on its overseas assets or in salaries paid from overseas (remittances might be included here).
- Gardia could have a (greater) deficit on its current transfers/transfer payments, eg in overseas aid or income remittances or pensions paid overseas.
NB Using examples is sufficient (though not required) but for [2] the examples must be from different accounts (bullet points).
NB A response that provides at least one account but does not refer to it having a (greater) deficit should be awarded [1].
Award [1] for each valid factor.
A deficit of US$2 billion or − $2billion is sufficient for [1].
For a limited explanation of one source, award a maximum of [1].
For an accurate explanation of one source or a limited explanation of two sources, award a maximum of [2].
For providing an accurate explanation of one source and a limited explanation of a second source, award a maximum of [3].
For providing two accurate sources, award a maximum of [4].
2018: 4 × 5.3 = 21.2
2019: 4.2 × 6.2 = 26.04
Any valid working is sufficient for [1].
26.04 − 21.2
= 4.84 million gamma or 4.84 million
An answer of 4.84 million or 4.84 or 4.84 million gamma without workings is sufficient for [1].
g − 2 = 10 − 2g
3g = 12
Any valid working is sufficient for [1].
g = 4 or $1 = 4 gamma
An answer of 4g or 4 without workings is sufficient for [1].
Award [1] for a correctly plotted supply curve.
Award [1] for a correctly labelled supply curve.
NB If the supply curve is incorrectly plotted with a label, then no marks should be awarded.
US$ = US$ 0.29 or 0.29 or 29 cents
Either of the above equivalent answers is sufficient for [1].
OFR applies.
For OFR divide 1 by the equilibrium value that appears on the plot or whatever is indicated on the vertical axis that is given by the intersection of demand and supply.
Reasons may include:
- US increasing its imports OR Gardia increasing its exports of goods and services to the US
- Gardia’s interest rates rising OR US rates falling
- Gardia’s inflation rate falling OR the inflation rate in the US rising
- US incomes rising at a faster rate than incomes in Gardia
- more investment (financial and/or direct) flowing from the US to Gardia
- US government/central bank using dollars to buy gamma/foreign currencies
- speculative selling of dollars (because of expectation of depreciation)
- any other valid reason.
NB Acceptable answers do not require an explicit reference to Gardia.
Award [1] for each valid reason.
× (11 − 8) = 4 × 3
Any valid working (eg the multiplier being calculated correctly) is sufficient for [1].
= 12 million gamma
An answer of 12 million gamma or 12 without workings is sufficient for [1].
If investment is ignored and so the answer provided is 11 × 4 = 44 then [1] may be awarded.
For full marks to be awarded the response must provide valid working and include correct units.
NB An alternative response which illustrates and explains how the economy would adjust to a decrease in aggregate demand should also be fully rewarded.
