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Question 19M.3.HL.TZ0.g

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Date May 2019 Marks available [Maximum mark: 4] Reference code 19M.3.HL.TZ0.g
Level HL Paper 3 Time zone TZ0
Command term Explain Question number g Adapted from N/A
g.
[Maximum mark: 4]
19M.3.HL.TZ0.g

Tanya is a currency speculator. She buys and sells currencies with the intention of making gains as a result of changes in the exchange values of currencies. Currently, she is holding US$300 000, but she expects that in the next few months the euro (EU€) (the currency of the eurozone) will appreciate against the US dollar (US$).

At present, EU€1 = US$1.20.

Explain two possible economic consequences for the eurozone if the euro appreciates.

[4]

Markscheme

Consequences may include:

  • a stronger currency may reduce the export competitiveness of the eurozone, thus worsening the current account balance/increasing imports and reducing exports
  • a currency appreciation will reduce the domestic price of imports so cost of living will decrease and cost of imported raw materials will decrease, lowering production costs of domestic firms and reducing inflationary pressure
  • a stronger currency may reduce export competitiveness, causing aggregate demand to decrease, thus reducing inflationary pressure
  • a stronger currency may reduce the export competitiveness of the eurozone, causing aggregate demand to decrease, thus causing slower growth/higher unemployment
  • the value of any foreign debt may be reduced as a smaller amount of euros will be needed to repay/service the debt (if denominated in foreign currency)
  • foreign direct investment inflows may decrease as it becomes more expensive to purchase assets in the eurozone (also reward greater outflows of FDI or changes in flows of financial capital).

Any other reasonable response should be rewarded.

Examiners report

The majority of candidates were able to explain the possible effect on exports, imports and thus the current balance. Lower achieving responses treated the effects on imports/exports as two separate points – but were awarded Level 1. Stronger responses referred to effects on aggregate demand (stated) and therefore on growth/unemployment. It was common for candidates to confuse the balance of trade with the terms of trade and to suggest that an appreciation might cause a depreciation, or even an increased demand for the currency.

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