Question 22N.1.SL.TZ0.3
| Date | November 2022 | Marks available | [Maximum mark: 25] | Reference code | 22N.1.SL.TZ0.3 |
| Level | SL | Paper | 1 | Time zone | TZ0 |
| Command term | Discuss, Explain | Question number | 3 | Adapted from | N/A |
Explain two factors that might cause an appreciation of a currency.
[10]
Marks should be allocated according to the paper 1 markbands for May 2022 forward, part A.
Answers may include:
- Terminology: appreciation.
- Theory: explanation of any two of the following factors: foreign demand for exports, domestic demand for imports, inward foreign direct investment, inward portfolio investment, remittances, speculation, relative inflation rates, relative interest rates, relative growth rates and central bank intervention.
- Diagram: exchange rate diagram showing appreciation of a currency.
A maximum of [6] should be awarded if only one cause of an appreciation is explained.
Where students just answer with an increase in demand or a decrease in supply without explaining the underlying causes of these changes then a maximum of [6] is rewarded.
This was the least popular question on the paper, but it did produce some good responses from the candidates that chose it. The strongest answers clearly explained the reasons why a country's currency might appreciate by covering causes such as rising demand for a country's exports, greater investment inflows into a country because of its increasing interest rates and a rise in speculative demand for a country's currency. It was good to see students supporting their two factors by accurately using diagrams and terminology.
Using real-world examples, discuss the consequences for an economy of an appreciation of its currency.
[15]
Marks should be allocated according to the paper 1 markbands for May 2022 forward, part B.
Answers may include:
- Terminology: appreciation.
- Theory: explanation of consequences such as changes in the inflation rate, economic growth, unemployment, the current account balance (exports and imports) and/or living standards.
- Diagram: AD/AS to show potential consequences of an appreciation on the economy.
- Synthesis (discuss): the positive or negative impact of the appreciation on inflation, unemployment, economic growth, the current account balance (exports and imports) and living standards, the effect on different sectors of the economy and the importance of the magnitude of the appreciation.
- Example(s): real-world examples of countries that have experienced an appreciation of the currency or that have tried to avoid an appreciation.
N.B. It should be noted that theory and diagrams that have already been given in part (a), and then referred to in part (b), should be rewarded.
Examiners should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
This question produced some good responses from candidates. The strongest answers explained how an appreciation in a country's currency can lead to lower import prices, which benefit businesses that import inputs and finished goods, leading to lower prices for consumers. This in turn can lead to lower inflation. Good responses also explained how an appreciation in a country's currency increases export prices and makes a country's goods less competitive in international markets. To reach the highest marks students needed to evaluate the consequences of an appreciation in its currency by, for example, considering the scale of the appreciation and how long the currency is at an elevated level. Candidates also needed to support their responses with real-world examples.