• tastes and preferences for both US / UK goods and services
• average price level
• income level (disposable income)
• interest rates

If US products were less popular in both nations then we would expect demand for $s (from the UK) to fall and the supply of £s to fall.  This is because more UK citizens would wish to purchase American imports.

Over time goods and services in the UK would become increasingly more expensive, relative to US products.  This means that demand for £s would fall and the supply would rise, meaning a depreciation in value.

If US interest rates rise, relative to those offered in the UK, then we would expect demand for $s (from the UK) to rise and the supply of £s to rise, as more UK citizens would wish to purchase US$ to take advantage of the higher rates.

A rise in the demand for Єs                                                                            A fall in the demand for Єs

A fall in the demand for Є                                                                                A rise in the supply of Єs

A fall in the supply of Єs                                                                                   A fall in demand for Єs.

Cheaper exports may cause an increase in AD through a rise in net exports.  Though this may also lead to falls in real wages as inflation rises, causing a fall in AD.  This in turn may reduce cyclical unemployment levels.

This depends, China would expect to see a rise in net exports but a fall in consumption as cost push inflation eats into real wage levels.

The table would appear to support this view.  In the year after the referendum decision a number of UK products have been reduced in size to reduce costs (a term known as shrink-flation).  At the same time inflation crept up to 3%, above the Bank of England target rate, forcing the bank to raise interest rates for the first time in ten years, following its October meeting.

At the same time UK manufacturers have enjoyed the weaker sterling value with the sector growing and the has helped Britain reduce its current account deficit.  This sector will also have contributed to the UKs growth figures and compensated, in part, for the fall in consumer sales in 2017 and 2018. Though it is noticeable that economics growth rates were lower following the result, suggesting that any gains from an improvement in net exports is not sufficient to compensate for the rise in import costs.

Economic growth % base year = (0.1% + 0.2% + 15.5% + 1.4%) = 17.47%

Currency devaluation % (100.2 – 37.69) / 37.69 x 100 = 165.8%

Mark as 2+2 (maximum marks 3)

Demand for a nation's currency is derived from a combination of the following:

• the popularity of a country’s exports (including tourist revenues)
• the level of investment by overseas citizens in a nation
• foreign currency derived from remittances from abroad
• speculators looking to make a profit on changes in currency values. 

Mark as 1 for each factor identified

Mark as 2 (diagram) + 2 (explanation).  Incorrectly labelled diagrams can be rewarded with a maximum of 1.  Suitable labels include: P and Q; Price of Peso relative to $; Peso / $ and the X index should be labelled quantity of Peso; Quantity or Q.

Mark as 2 (diagram) + 2 (explanation).  Incorrectly labelled diagrams can be rewarded with a maximum of 1.  Suitable labels include: Average price or AP and real GDP, Y, real national income or real Y.

Mark as 2 (diagram) + 2 (explanation).  Incorrectly labelled diagrams can be rewarded with a maximum of 1.  Suitable labels include: Price; P; price of Peso or Price of Peso / US$.  The X axis should be labelled Q; quantity or quantity of Peso.

Command term: Evaluate

This command term asks candidates to reflect on both the positive and negative impacts of a depreciating currency on the performance of the economy and reach a plausible conclusion supported by appropriate evidence.

Positive impacts of a depreciating currency on the economy:

• A weaker currency improves the competitiveness of a nation's products, making exports cheaper and imports more expensive. This should increase the level of net exports, which will increase real GDP in the economy.  This in turn can improve employment levels.  This may be particularly true for the nation's tourist sector which is very labour intensive.
• a recognition that the exact impact on export revenues and import expenditure will ultimately depend on the price elasticities of demand for traded products.

Negative impacts of a depreciating currency on the economy:

• a depreciating currency value increases the price of imported goods, including raw materials that the nation depends upon, increasing the costs of production and leading to cost push inflationary pressures.
• a depreciated currency may also encourage complacency and reduced inefficiency among domestic producers.
• rising inflation, unless accompanied by higher rates of GDP, will reduce real income levels and this will be noticed particularly by citizens travelling overseas or those consuming imported products

Responses for question (g) should be graded according to the following mark bands: