IB Economics HL 3.2 Aggregate Demand and Aggregate Supply Question Bank

Study the extract below and answer the questions that follow.
South Korea quietly intervenes on the won to support economy

(1) South Korea's foreign exchange authorities have been engaged in a quiet war in the foreign exchange market in recent months. This has been in order to hold down the value of the country's currency, the won, against the US dollar to support exports and help keep the economy on its fragile recovery track.

(2) The government has been keen to stimulate domestic consumption and reduce the country's reliance on trade. However, domestic demand has been damaged by a ferry accident that killed more than 200 passengers earlier this year. The accident damaged consumer confidence and harmed economic activity in a number of sectors, including retail and travel. Exports have also suffered from slow growth in China, South Korea's biggest export market.

(3) South Korea's central bank reduced its growth forecast for the coming year noting that economic growth is below the economy's potential rate. The finance minister has said that the country needs to implement fresh policies to stimulate the economy. He promised to look into "all possible steps" across fiscal and monetary policies. Low inflation gives the central bank room to support the economy. Consumer prices rose 1.7 % in June from a year earlier, below the central bank's target range of 2.5 % to 3.5 %.

(4) The rapid increase in the value of the won is a concern to producers in the country. Both Hyundai Motor Company and Samsung Electronics Limited blame the stronger currency for threatening their profits in the last year. They also complain that many countries, including China and Japan, have engineered weaker currencies to help make their goods more competitive. A spokesperson from Hyundai Motor Company said that Japanese rivals had benefited from a 30 % depreciation of the Japanese yen over the past two years.

(5) Many analysts have downplayed manufacturers' concerns about the strengthening won arguing that Hyundai Motor Company and Samsung Electronics Limited both manufacture most of their products outside South Korea. They also note the positive impact on South Korea's steel and chemical manufacturers of cheaper raw material imports in a country that has almost no oil and iron ore.

(6) Despite a commitment to free markets, South Korean authorities have often intervened in currency markets, which has caused tension with the United States (US) and the International Monetary Fund (IMF). The IMF has warned against excessive intervention. It said that the won is still undervalued after falling sharply following the global financial crisis. The IMF argues that movements in the won should be determined by the market and that South Korea holds enough reserves of US dollars. www.ft.com, 24 July 2014 and www.bloomberg.com, 10 July 2014]

Define the term consumption indicated in bold in the text (paragraph (2)).

Read the extracts and answer the questions that follow.
Text D — Overview of Cambodia

(1) Between 2010 and 2019 Cambodia had one of the fastest growing economies in Southeast Asia. Most of the growth was driven by tourism, exports of garments and improved consumer confidence.

(2) However, despite high economic growth, rural poverty has persisted, and inequality has grown within rural populations. Approximately 90 % of workers are employed in the informal sector and access to quality healthcare and education remain a challenge for Cambodia. Youth (under 25 years old) make up a large proportion of the labour force, but many do not complete secondary school. As a result, those entering work are under-skilled and human capital is low. Access to clean water and sanitation facilities is still lacking. Export-driven growth is being threatened as the European Union (EU), which accounts for 30 % of Cambodia's export market, recently ended a preferential trade agreement and will now impose tariffs on Cambodian products, such as garments.

(3) Experts state that the focus on growth through garment manufacturing is unsustainable. The garment industry, which is the largest informal employment sector, has been criticised for poor working conditions and pay. Even workers who are formally employed can barely meet basic needs, despite the recent minimum wage increase and introduction of a price ceiling on rents for housing in cities. Additionally, there are reports of pollution and water waste generated by garment factories, damaging the health of those who live nearby.

(4) To help solve the market failure in the garment industry, economists recommend that the government should support projects that encourage garment factories to adopt a circular economy approach, either in partnership with worldwide clothing brands or by forming social enterprises (SEs) locally. The circular economy approach can help reduce environmental waste that occurs during production by encouraging the recycling and reusing of materials. Developing ecotourism has also been recommended to support sustainability and provide new job opportunities for the youth and the rural population. Furthermore, ecotourism could help Cambodia benefit from growing world income levels.

(5) Reforms in the garment and tourism industries are needed, along with improvements in infrastructure, to maintain sustainable growth and competitiveness. Promoting entrepreneurship, developing new skills and increasing the use of technology would help solve current labour market needs.
Text E - Social Enterprise (SE) in Cambodia

(1) When Cambodia's status changed from low income to lower middle-income in 2015, the inflow of foreign aid decreased dramatically. As a result, SEs became increasingly more important in promoting Cambodia's economic development. Furthermore, SEs were seen as a key factor in breaking the poverty cycle and providing opportunities for its young labour force. SEs may also encourage local investment, which has experienced very slow growth compared to foreign direct investment (FDI).

(2) Many SEs focus on addressing issues of poverty, child rights, education, disability, health and environmental concerns. The main beneficiaries are children, youth, women and people with disabilities. Successful Cambodian examples include Phare Performing Social Enterprise (PPSE), which is a performing arts school targeting underprivileged children. Most graduates become full time workers at PPSE. Another example is Hydrologic, which provides affordable safe water options to rural households. New SEs are currently being established to ensure sustainability within the growing ecotourism industry.

(3) However, challenges exist within the SE sector. Less than 8 % of SEs are formally registered due to bureaucracy and high taxes. This limits access to potential investors and markets and encourages businesses to stay in the informal sector. New SE start-ups often fail due to lack of sufficient funding and the inability to attract skilled labour.
Text F - Microfinance in Cambodia
Since 1991, Cambodia has had one of the fastest growing microfinance sectors in the world. Microfinance has helped decrease poverty in rural areas and solve asymmetric information in the market for loans. However, key issues have persisted, including low success rates of some businesses due to inadequate financial literacy and expertise. Additionally, microfinance has become increasingly dependent on funding from international banks and investors, resulting in higher interest rates. Some borrowers have been forced to sell their land as they could not meet their debt repayment obligations. Recently the government implemented a price ceiling on the interest rate for loans in rural areas to help prevent increasing household indebtedness.

*2016 figure

*estimate

Sketch an AD/AS diagram to show the possible impact on Cambodia's economy of the change in consumer confidence (Text D, paragraph 1).

Study the following extract and data and answer the questions that follow.
Filipino rice farmers prepare for trade liberalization

(1) To meet its obligations under World Trade Organization (WTO) rules, the president of the Philippines has asked the government to eliminate the current quota system for rice imports. As an important part of food security measures, the government wants to achieve self-sufficiency in the production of rice. To support this goal, the WTO allowed the Philippines to extend its rice quota until June 2017 to allow more time for local farmers to prepare for free trade.

(2) The current quota system for rice imports makes domestic prices rise dramatically during periods of low domestic supply.

(3) Eliminating the quota on rice aims to make the rice market more competitive, which could reduce the price of rice by as much as 7 Philippine pesos $\left(\mathrm{PH}^{\mathrm{P}}\right)$ per kilogram (kg). The National Economic and Development Authority has estimated that lower rice prices could save Filipino households as much as PH 2362 per year. However, if the rice quota is eliminated, economists have warned that the government must prepare local rice producers so that they can either compete with rice imports or move to producing other crops. "Currently Filipino farmers cannot compete with Vietnamese farmers who may enjoy economies of scale" declared one economist. "The solution is to bring down the cost of production of rice."

(4) To help Filipino farmers to adjust to competition from lower-priced rice imports, the government has allocated funds to the Rice Competitiveness Enhancement Fund. This fund will provide support to farmers in order to increase productivity by supplying high-yield seeds and fertilizer. It will also provide subsidies to encourage the use of agricultural machinery and will offer support services and training to farmers.

(5) Apart from being an essential food for many Filipinos, rice is also an important input for the food industry. The plan to remove the import quota will reduce the inflation rate in the Philippines by up to 0.4 %. In July 2018, the central bank governor reported that inflation had reached 5.7 %, well above the government's target range of 2 % to 4 %. He stated that "supply-side factors are the main drivers of the present inflation. These factors include rising international oil prices, higher indirect taxes and poor weather conditions that have affected food supply". The president stated that the removal of the rice quota was one solution to ease the rising inflation.

Using an AD/AS diagram, explain how removing "the import quota will reduce the inflation rate in the Philippines" (paragraph (5).