Question 19N.3.HL.TZ0.f.ii
| Date | November 2019 | Marks available | [Maximum mark: 2] | Reference code | 19N.3.HL.TZ0.f.ii |
| Level | HL | Paper | 3 | Time zone | TZ0 |
| Command term | State | Question number | f.ii | 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
State two reasons that could have caused an increase in the supply of US$.
[2]
Reasons may include:
- US increasing its imports OR Gardia increasing its exports of goods and services to the US
- Gardia’s interest rates rising OR US rates falling
- Gardia’s inflation rate falling OR the inflation rate in the US rising
- US incomes rising at a faster rate than incomes in Gardia
- more investment (financial and/or direct) flowing from the US to Gardia
- US government/central bank using dollars to buy gamma/foreign currencies
- speculative selling of dollars (because of expectation of depreciation)
- any other valid reason.
NB Acceptable answers do not require an explicit reference to Gardia.
Award [1] for each valid reason.
