Practise 4.5.3 Consequences of exchange rate changes in IB Economics HL by reviewing the concepts and applying them to marked questions.
Country X and Country Y are capable of producing both apples and bananas. Assume a two-country, two-product model.
Country Y has absolute advantage in the production of both apples and bananas, and comparative advantage in the production of bananas.
Explain two possible economic consequences for the eurozone if the euro appreciates.
Tanya exchanges her US$ for EU€.
Level
Marks
0
The work does not meet a standard described by the descriptors below.
1
The written response is limited.
1-2
For stating one consequence [1].
For explaining one consequence OR for stating two consequences [2].
2
The written response is accurate.
3-4
For stating one consequence AND explaining one consequence [3].
For explaining two consequences [4].
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.