A-LevelEconomicsInternational economic issues9708/12 · Oct/Nov 2021 · Q301 Mark

Country X is an open economy with a floating exchange rate. It changes to a fixed exchange rate. Which combination of policy changes would be most effective in reducing inflation?

Afiscal policy: higher direct taxes; new fixed exchange rate: above purchasing power parity

Bfiscal policy: higher direct taxes; new fixed exchange rate: below purchasing power parity

Cfiscal policy: higher indirect taxes; new fixed exchange rate: above purchasing power parity

Dfiscal policy: higher indirect taxes; new fixed exchange rate: below purchasing power parity

✓ Correct answer

A: fiscal policy: higher direct taxes; new fixed exchange rate: above purchasing power parity

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Topic: International economic issues, A-Level Economics (syllabus 9708). Multiple choice, 1 mark.
Source: A-Level Economics, Oct/Nov 2021 Paper 1 Variant 2, question 30.

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