Figure 1 shows the exchange rate for Country P's currency (the 'Pound') against the US Dollar.

Mark scheme

Marking points from the official mark scheme. The mark or mark type is shown in brackets.

1. (a) B1 for exchange rate determined by market forces / supply and demand
2. (a) B1 for without government intervention
3. (b) B1 for identifying a depreciation/fall in value
4. (b) B1 for specific data reference from Figure 1 (e.g., from $1.30 to $1.15)
5. (c) M1 for identifying a factor (e.g., higher inflation in Country P, lower interest rates in Country P, falling demand for Country P's exports)
6. (c) A1 for explaining how this factor leads to increased supply of Pound / decreased demand for Pound
7. (c) A1 for linkage to depreciation
8. (c) M1 for identifying a second factor (e.g., negative economic outlook in Country P, speculation)
9. (c) A1 for explaining how this factor leads to increased supply of Pound / decreased demand for Pound
10. (c) A1 for linkage to depreciation
11. (d) M1 for identifying a positive impact (e.g., exports cheaper, imports more expensive, improved current account, increased AD)
12. (d) A1 for explaining the impact (e.g., greater competitiveness of exports leading to higher demand for them)
13. (d) M1 for identifying a negative impact (e.g., imported inflation, higher cost of raw materials, reduced purchasing power)
14. (d) A1 for explaining the impact (e.g., firms face higher costs, which are passed onto consumers)
15. (d) M1 for evaluative point (e.g., depends on Marshall-Lerner condition, PED of imports/exports, size of depreciation, stage of business cycle)
16. (d) A1 for developed evaluation (e.g., J-curve effect, long-term vs. short-term impacts)