Exam (elaborations)
AS Level Economics Paper 22 2020 M/J solutions
This PDF provides a complete solution to all the questions of summer 2020 P22 of CAIE AS Level Economics 9708.
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1(a) State what the upward trend shown in Fig. 1.1 means has happened to the value of
the peso between 2016 and 2018. [1]
The upward trend shown in Fig. 1.1 means that the Argentine Peso has depreciated
against the US dollar between 2016 and 2018. It simply means the the value of the
Peso has decreased.
1(b) The central bank of Argentina sold US dollars from its foreign exchange reserves to
a value of US$1.5 billion on one day in May 2018.
With the help of a supply and demand diagram, explain what effect you would expect
this intervention to have on the value of the Argentine peso. [3]
If the central bank of Argentina sells its foreign exchange reserves to buy its own
currency, then it will increase the demand for the Argentine peso. This will shift the
demand curve for the Argentine peso to the right. As a result, it will increase the value of
the Argentine peso against the US dollar.
1(c) In the extract it is stated that risks to the peso have been developing for some time
and that large budget and current account deficits are some of these risks.
(i) Distinguish between a budget deficit and a current account deficit. [2]
Budget deficit is when the government expenditure exceeds the government revenue.
, A current account deficit means that the value of exports and inflows are less than the
value of imports and outflows of the current account items such as goods, services,
income and transfers.
(ii) Explain one way in which persistent high inflation represents a risk to the peso. [2]
Persistent high inflation decreases the confidence of investors and speculators in the
peso. Hence, the current investors may relocate their businesses in other countries and
the speculators will sell the peso. This will increase the supply of the peso and it will
further decrease the value of the peso.
1(d) Use aggregate demand and aggregate supply analysis to explain how the recent
interest rate rises might help Argentina to reduce its annual rate of inflation and achieve
its target. [6]
An interest rate rise might help to reduce the inflation caused by demand-pull factors.
For instance, it makes borrowing more expensive, leading to higher costs for
credit-dependent consumer spending. This, in turn, reduces the overall demand for
goods and services. As consumer spending decreases, the aggregate demand falls,
creating a dampening effect on inflation caused by excess demand.
Likewise, higher interest rates also affect investment decisions. Increased costs of
financing discourage businesses from borrowing for expansion, resulting in lower
investment spending. This reduction in business investment contributes to a decrease in
aggregate demand, mitigating the demand-pull inflationary pressures.
Similarly, a high interest rate might also help reduce the inflation caused by cost-push
factors. Higher interest rates can attract a hot money inflow, leading to an
appreciation of the national currency. This, in turn, reduces the cost of imported goods
and commodities, and raw materials, alleviating inflationary pressures arising from
increased production costs due to expensive imports. In this way, interest rate rises
might help Argentina to reduce its annual rate of inflation and achieve its target.
1(d) Discuss whether the potential advantages outweigh the disadvantages to the
Argentine economy if the president is successful in reversing protectionism. [6]
Protectionism, a strategy aimed at protecting domestic industries from foreign
competition, often involves implementing measures such as tariffs, quotas, and
subsidies. If the president of Argentina successfully reverses protectionism, there could
be significant advantages for the economy. For instance, eliminating subsidies to
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