Exchange rates [50 marks]
1. [Maximum mark: 25] 20N.3.HL.TZ0.3
Table 3 illustrates the exchange rates between the US dollar (US$) and the
Mexican peso (MX$) between 2013 and 2017.
(a.i) Calculate the value of the Mexican peso (US$ per MX$) in 2015.
Enter your result in Table 3. [1]
(a.ii) Using Table 3, state one possible effect on Mexican consumers
and one possible effect on Mexican producers from the change
in the value of the Mexican peso (US$ per MX$) between 2014
and 2016. [2]
Figure 5 illustrates the year-on-year changes in Mexico’s spending on imports of
goods and services between 2008 and 2017.
[Source: The World Bank 2019: World Development Indicators Licenced under CC
BY 4.0
https://creativecommons.org/licenses/by/4.0/.]
(b.i) Using Figure 5, state two likely causes for the change in
Mexico’s spending on imports of goods and services in 2009. [2]
(b.ii) Using information from Figure 5, sketch an exchange rate
diagram to show how the change in Mexico’s spending on
imports in 2010 would have affected its exchange rate (US$ per
MX$), ceteris paribus.
[2]
(c) Explain two factors that may cause the Mexican peso to
appreciate against the US dollar in the future without any
official intervention. [4]
Figure 6 illustrates the demand and supply conditions for rice in Country B,
where Dd is domestic demand, Sd is domestic supply and Sw is world supply.
(d.i) Using Figure 6, identify the equilibrium price when Country B
engages in free trade. [1]
(d.ii) Using Figure 6, calculate the consumer surplus and the
producer surplus when Country B engages in free trade. [2]
Country B imposes a tariff on rice imports, which is illustrated on Figure 7.
(e.i) Using Figure 7, identify the equilibrium quantity being
consumed following the imposition of the tariff. [1]
(e.ii) Using Figure 7, calculate the revenue received by the
government as a result of the imposition of the tariff in Country
B. [2]
(e.iii) Using Figure 7, calculate the change in consumer surplus as a
result of Country B imposing the tariff. [2]
(e.iv) Using Figure 7, calculate the welfare loss as a result of Country
B imposing the tariff. [2]
(f ) Explain two methods that a government could use to correct a
persistent current account deficit.
[4]
2. [Maximum mark: 25] 19N.3.HL.TZ0.3
In the country of Gardia, the currency is the gamma. The exchange rate of the
United States dollar (US$) to the gamma is US$ 1 = 6.20 gamma.
(a.i) If a visitor to Gardia from the US buys a towel that costs 23
gamma, calculate the cost in US$. [1]
(a.ii) More foreign tourists are visiting Gardia. Outline the effect on
the value of the gamma. You must give a reason for your
answer. [2]
(a.iii) State two factors that could cause Gardia’s current account to
be in deficit, even though its balance of trade in goods is in
surplus. [2]
(a.iv) Determine the size of Gardia’s current account surplus/deficit
when the sum of the financial and capital accounts is US$ 2
billion. [1]
(b) Gardia is aiming to increase its economic growth rate. Explain
two sources of economic growth for economically less
developed countries. [4]
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.
(c) Calculate the additional cost of paying back the loan in gamma
in 2019, due to the interest and the change in the exchange
rate. [2]
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
Qs = −2 + g
Qd = 10 − 2g
where g is the exchange rate of the US$ in terms of the gamma, Qs is the
quantity of US$ supplied per month and Qd is the quantity of US$ demanded
per month.
(d) Calculate the equilibrium exchange rate for the US$ in terms of
the gamma. [2]
The demand (D) function is represented in Figure 2.
Assume that the monthly supply of US$ changes to the function
Qs = − 0. 5 + g
(e) Plot and label the new supply curve on Figure 2. [2]
(f.i) Using Figure 2, calculate how many US$ are needed to buy one
gamma at the new exchange rate. [1]
(f.ii) State two reasons that could have caused an increase in the
supply of US$. [2]
(g) 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. [2]
(h) 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.
[4]
© International Baccalaureate Organization, 2023
