Question 23M.3.HL.TZ0.vi
| Date | May 2023 | Marks available | [Maximum mark: 4] | Reference code | 23M.3.HL.TZ0.vi |
| Level | HL | Paper | 3 | Time zone | TZ0 |
| Command term | Explain | Question number | vi | Adapted from | N/A |
Using an exchange rate diagram, explain how the Central Bank of Nigeria might attempt to maintain a fixed exchange rate.
[4]
An alternative approach which suggests that the central bank may increase the interest rate, which may increase the demand for naira, may be fully rewarded.
Alternatively, the increase in interest rates may decrease the supply of naira, as investors may be discouraged from selling naira in the foreign exchange market in order to invest overseas, OR the central bank reduces its sales of naira, which shifts supply to the left. Therefore, a diagram which shows a shift of supply of naira to the left should be rewarded.
Another valid approach would be to show that, at the fixed exchange rate, a surplus of naira would need to be offset by the central bank purchasing naira, thus increasing demand for the naira.
For an exchange rate diagram, the vertical axis may be exchange rate, price/value of the naira in US$, US$/Naira or US$ per naira. The horizontal axis should be quantity, or quantity of naira. A title is not necessary.
Candidates who incorrectly label diagrams can be awarded a maximum of [3].
Well-prepared candidates explained clearly that a central bank may buy or sell its currency (or use interest rate policy) on the foreign exchange market in order to maintain a fixed exchange rate. However, a significant number of scripts revealed confusion between intervention in the domestic money market and in the foreign exchange market. "Reducing the supply of money" was often equated to action taken to decrease the supply of naira in the foreign exchange market. Furthermore, a significant number of candidates drew a static diagram with no shift in supply of or demand for naira. Labelling the vertical axis was also an issue for many candidates. ₦/$ is not accepted but $/₦ is accurate.
