You're viewing 3 free preview questions for Economics SL — subscribe to unlock 87 more, plus the Full Question Bank, Mock Papers & Worksheets.Upgrade
Balance of Payments · Paper 2 — Free Economics SL Practice Questions
1MasteryLAQCurrent account, capital account and financial account10 marksPaper 2~15 min
Data
In 2023, the country of Andoria reported the following economic data (in billions of dollars):
- Exports of goods and services:
- Imports of goods and services:
- Net primary income (income flows from abroad):
- Net secondary income (current transfers):
- Capital account balance:
- Financial account balance (net lending/borrowing with the rest of the world):
Andoria's government is concerned about its current account deficit. The Minister of Finance proposes a tariff on all imported manufactured goods. An economic advisor argues that this policy might improve the current account balance in the short run but could worsen the financial account balance.
(a)
Calculate Andoria's current account balance. [2 marks]
(b)
Using the balance of payments identity and the data above, explain how Andoria's current account deficit is financed through the financial account. [3 marks]
(c)
Evaluate the advisor's argument that a tariff on imported manufactured goods might improve the current account balance in the short run but could worsen the financial account balance. Refer to economic theory and a named real-world example. [5 marks]
Solutions
2ChallengeLAQForeign direct investment and portfolio investment12 marksPaper 2~18 min
Country X is a lower-middle-income economy in Southeast Asia. In 2020, it received USD 2.5 billion in Foreign Direct Investment (FDI) inflows, primarily in garment manufacturing and food processing. In the same year, it experienced USD 4 billion in net outflows of portfolio investment (equities and bonds) as international investors sold domestic assets amid global financial uncertainty.
The government of Country X is considering two policy options to attract more foreign capital:
- Option A: Offering ten-year corporate tax holidays to multinational corporations establishing factories
- Option B: Deregulating its stock market to allow easier purchase and sale of shares by foreign investors
(a)
State two characteristics of FDI, providing one example relevant to Country X for each. [2 marks]
(b)
Using the data, explain two factors that influence a multinational corporation's decision to undertake FDI in Country X. [4 marks]
(c)
Evaluate the likely economic consequences for Country X of implementing Option A compared to Option B. In your answer, refer to the balance of payments, economic growth, and the impact on at least one stakeholder group. [6 marks]
Solutions
3ChallengeLAQCurrent account, capital account and financial account8 marksPaper 2~12 min
A country, Meridia, recorded a current account deficit of USD 45 billion in 2023. The capital account recorded a surplus of USD 3 billion. Meridia's central bank sold USD 12 billion of foreign exchange reserves during the year. Economists noted that Meridia's net international investment position (NIIP) worsened by USD 30 billion over the same period. All figures are in nominal terms.
(a)
Using the balance of payments identity, calculate the financial account balance for Meridia in 2023. [2 marks]
(b)
(i) Explain how the central bank's sale of foreign exchange reserves affects the exchange rate of the Meridian Crown. [2]
(ii) Explain how the sale of foreign exchange reserves affects Meridia's domestic money supply, distinguishing between sterilised and unsterilised intervention. [2 marks]
(ii) Explain how the sale of foreign exchange reserves affects Meridia's domestic money supply, distinguishing between sterilised and unsterilised intervention. [2 marks]
(c)
Evaluate the view that a persistent current account deficit is always harmful for an economy such as Meridia. In your answer, refer to the data provided, apply relevant economic theory, and consider the perspectives of at least two different stakeholders. [4 marks]
Solutions
That's every free question here — 3 of 90.
+87 more questions, plus Mock Papers & Worksheets, are waiting in Premium.