Question 23M.3.HL.TZ0.b
| Date | May 2023 | Marks available | [Maximum mark: 10] | Reference code | 23M.3.HL.TZ0.b |
| Level | HL | Paper | 3 | Time zone | TZ0 |
| Command term | Recommend | Question number | b | Adapted from | N/A |
Using the text/data provided and your knowledge of economics, recommend a policy which could be introduced in Nigeria to stabilize the value of the naira.
[10]
Refer to Paper 3 markbands for May 2022 forward, available under the "My tests" tab > supplemental materials.
Possible policies may include (but are not restricted to):
- Policies to increase the export of manufactured goods (supply-side policies)
- Interest rate increase
- Exchange controls – limiting access to foreign currency
- Adopting a floating exchange rate
- Demand-management policies to limit imports (expenditure reducing)
- Trade barriers to reduce import spending (expenditure switching)
- Borrowing from overseas
- Attempt to persuade fellow OPEC members to increase the world price of oil
- Tax and other incentives to encourage inward foreign direct investment and portfolio investment
- Since most rice is imported, incentives to agricultural sector to grow rice
- Any other valid policy.
A wide range of policies was suggested for this question.
Weaker responses treated the prompt as similar to part (vi) rather than using the information provided. As a result, they suggested a fixed/pegged exchange rate, similar to the existing system.
Common recommendations were:
- Supply-side policies to increase export of manufactured goods — but often without specifying what type of supply-side policies.
- Import substitution — often without explaining how this might be achieved.
- Interest rate policy — although there was significant confusion between the foreign exchange and the domestic money market. Also, it was common to see the incorrect argument that higher interest rates would attract FDI.
- Contractionary fiscal/monetary policies — expenditure-reducing policies were often quoted although the link to decreased demand for imports and the impact on the foreign exchange market were often overlooked.
- Adopting a floating exchange rate system — but only a small number of candidates were able to explain accurately why a floating system might result in a more stable currency — many just quoted the IMF advice without support.
- Trade protection was often recommended. Stronger responses established a clear link to the value of the currency while weaker responses focused more on a generic explanation of a tariff, with the standard tariff diagram and description.
A common approach was to focus almost completely on policies to address inflation and then write "and thus stabilise the naira" without showing the link between the two concepts. Thus the policy might be appropriate but the explanation/use of theory would be somewhat weak.
