While 15% of US exports go to Mexico, 80% of Mexico's exports go to the US. In 2019, the US government imposed some methods of protection to reduce imports from Mexico. This US action caused a fall in Mexico's foreign exchange rate. Despite a rise in its inflation rate, Mexico's central bank reduced the rate of interest from 7.75% at the end of 2019 to 6.5% in March 2020.

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2022). The mark or mark type is shown in brackets.

1. [2] Tariffs (1); quotas (1); subsidies (1); embargo (1).
2. [4] Logical explanation which might include: To improve the current account of the balance of payments (1) reduce a current account deficit (1) move from a deficit to a surplus / move to a balance / achieve balance of payments stability (1) increase net exports (1).
3. [4] Logical explanation which might include: To increase GDP / economic growth (1) switch demand from imports to domestically produced products / increase demand for domestically produced goods / protect domestic firms (1) allow infant industries to grow (1); Prevent dumping (1) the sale of goods from abroad at below cost / predatory prices (1); To increase employment / reduce unemployment (1) to raise living standards (1); To reduce dependence on other countries / make the country more independent (1) as risk of supplies being cut off / price being increased (1); To stop / reduce a fall in the exchange rate (1) less of the currency will be sold to buy imports (1).
4. [6] Coherent analysis which might include: Raise import prices (1) increase price of imported raw materials / capital goods (1) increase costs of production (1) if demand is inelastic (1) cause cost-push inflation / imported inflation (1); Reduce export prices (1) increase demand for exports (1) increase export revenue if demand is elastic (1) switch demand for imports to domestic products (1) increase total demand (1) cause demand-pull inflation (1).
5. [8] Why it might: • reduce saving; • increase borrowing; • increase consumer spending; • raise total demand; • encourage firms to produce more; • increase investment; • raise ability of firms to produce more.
6. [8] Why it might not: • households and firms may be worried about the future and so may not spend more; • there may be a culture of saving; • households and firms may think the cut is only temporary; • the rate may initially have been low; • may spend more on imports, increasing other countries' GDP; • an economy may initially have been at full employment.