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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) Extract A European Central Bank disappoints markets with weaker than expected stimulus Mario Draghi, president of the European Central Bank (ECB), surprised financial markets in November 2015 with a less ambitious package of monetary stimulus than many had anticipated - 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 Index (C... 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) Extract A European Central Bank disappoints markets with weaker than expected stimulus Mario Draghi, president of the European Central Bank (ECB), surprised financial markets in November 2015 with a less ambitious package of monetary stimulus than many had anticipated - Edexcel - A-Level Economics A - Question 6 - 2017 - Paper 2
Step 1
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.
Answer
To calculate the percentage change in the value of the euro in pounds, we can use the formula:
[ \text{Percentage Change} = \frac{\text{Final Value} - \text{Initial Value}}{\text{Initial Value}} \times 100 ]
From the graph, at the start of 2009, the exchange rate is approximately 0.79, and at the end of 2015, it is about 0.75.
So, substituting these values, we have:
[ \text{Percentage Change} = \frac{0.75 - 0.79}{0.79} \times 100 = -5.06% ]
Thus, the euro depreciated by approximately 5.06% against the pound during this period.
Step 2
With reference to the information provided and your own knowledge, examine two factors which might explain the change in the rate of Eurozone inflation as shown in Figure 2.
Answer
Two primary factors that might explain the change in the rate of Eurozone inflation are:
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Monetary Policy Actions: The ECB's monetary policies, particularly the quantitative easing program, aimed to increase the money supply and stimulate economic activity. However, the program's impact has been limited, leading to lower inflation rates as seen in Figure 2.
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External Economic Conditions: Global economic downturns and slow recoveries can affect inflation. For instance, low oil prices can directly lead to lower inflation rates as energy costs decrease, impacting overall consumer prices.
Step 3
Since mid-2015 the euro has appreciated. Assess the likely impact of an appreciation of the euro on the current account of the balance of payments for Eurozone countries.
Answer
The appreciation of the euro affects the current account by making Eurozone exports more expensive and imports cheaper.
- Decrease in Exports: European goods and services become pricier for foreign consumers, potentially reducing demand and harming export-driven economic sectors.
- Increase in Imports: Conversely, cheaper imports may lead to increased consumption of foreign goods, widening the trade deficit.
Overall, an appreciated euro is likely to worsen the current account balance for Eurozone countries.
Step 4
Discuss the likely success of the ECB's quantitative easing programme in moving Eurozone inflation closer to their target that may be used by governments of Eurozone countries to increase economic growth.
Answer
The success of the ECB's quantitative easing (QE) programme has been mixed.
- Success Factors: The QE programme has injected liquidity into the economy, supporting asset prices and stimulating investment in the short term.
- Challenges: However, inflation rates have remained below target due to factors such as lack of consumption demand and structural inefficiencies.
The overall effectiveness of QE in achieving sustained inflation closer to the target is still in question, requiring complementary fiscal policies to enhance its impact.