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The Eurozone economy **Figure 1:** Exchange rate of the euro (€) to the British pound (£) **Figure 2:** Eurozone inflation rate as measured by the Consumer Prices Index (CPI) (a) With reference to Figure 1, calculate the percentage change in the value of the euro in pounds from the start of 2009 to the end of 2015 - Edexcel - A-Level Economics A - Question 6 - 2017 - Paper 2
Question 6
The Eurozone economy **Figure 1:** Exchange rate of the euro (€) to the British pound (£) **Figure 2:** Eurozone inflation rate as measured by the Consumer Prices ... show full transcript
Worked Solution & Example Answer:The Eurozone economy **Figure 1:** Exchange rate of the euro (€) to the British pound (£) **Figure 2:** Eurozone inflation rate as measured by the Consumer Prices Index (CPI) (a) With reference to Figure 1, calculate the percentage change in the value of the euro in pounds from the start of 2009 to the end of 2015 - Edexcel - A-Level Economics A - Question 6 - 2017 - Paper 2
Step 1
Calculate the percentage change in the value of the euro in pounds
Answer
To calculate the percentage change in the value of the euro from the start of 2009 to the end of 2015, use the formula:
Assuming the exchange rate at the start of 2009 was approximately 0.75 and at the end of 2015 was around 0.85, we can calculate:
This indicates that the euro appreciated by approximately 13.33% against the British pound.
Step 2
Examine two factors which may explain the change in the rate of Eurozone inflation as shown in Figure 2
Answer
Two key factors that may explain the change in the rate of Eurozone inflation include:
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Consumer Demand:
Increased consumer confidence and spending can lead to higher demand for goods and services, causing inflation to rise. In the years leading up to 2015, various economic stimuli may have encouraged spending, driving prices upward. -
External Economic Conditions:
Global economic conditions, such as fluctuating oil prices, can significantly affect inflation rates. For example, rising oil prices lead to increased transportation costs, which can contribute to overall price increases.
Step 3
Assess the likely impact of an appreciation of the euro on the current account of the balance of payments for Eurozone countries
Answer
An appreciation of the euro typically impacts the current account negatively for Eurozone countries. As the euro strengthens, exports become more expensive for foreign buyers, potentially leading to a decrease in export volumes. On the other hand, imports become cheaper, which might increase the value of imports. This shift can lead to a widening trade deficit, negatively affecting the current account balance.
Step 4
Discuss the likely success of the ECB’s quantitative easing programme
Answer
The success of the ECB’s quantitative easing (QE) programme in boosting Eurozone inflation towards the target of 2% can be evaluated through several aspects:
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Liquidity in the Market:
By injecting money into the economy, the ECB aims to increase liquidity, encouraging lending and spending. Increased liquidity can stimulate economic activity and raise inflation rates over time. -
Long-Term Effects:
However, the effectiveness may be limited if inflation expectations remain low or consumers and businesses become cautious in spending. Additionally, other external factors like global economic slowdowns can hinder the QE's desired outcomes.
Overall, while the intention is to achieve higher inflation, various external and internal factors will determine the long-term success of the programme.