Question 19N.3.HL.TZ0.3h
| Date | November 2019 | Marks available | [Maximum mark: 4] | Reference code | 19N.3.HL.TZ0.3h |
| Level | HL | Paper | 3 | Time zone | TZ0 |
| Command term | Explain | Question number | h | Adapted from | N/A |
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
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]
NB An alternative response which illustrates and explains how the economy would adjust to a decrease in aggregate demand should also be fully rewarded.
