In 2020, Paraguay's Consumer Prices Index rose by 3% and its foreign exchange rate fluctuated. Each year Paraguay experiences net emigration. People leave a country for a number of reasons. These include a low rate of economic growth and high level of market failure. The Paraguayan government does intervene in the economy in an attempt to reduce market failure.

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2023). The mark or mark type is shown in brackets.

1. [2] 5(a) A measure of inflation / cost of living (1) using weights / basket of goods and services (1).
2. [4] 5(b) Logical explanation which might include: Subsidise merit goods (goods with positive externalities) (1) to encourage consumption / production (1). Tax on demerit goods (goods with negative externalities) (1) to discourage consumption / production (1). Apply maximum price on merit goods (1) to increase consumption (1) OR apply minimum price on demerit goods (1) to reduce consumption (1) Finance / produce public goods (1) as private sector firms will have no incentive to produce them (1). Regulate monopolies (1) to restrict exploitation of market power (1). Provide education / training / public information campaign (1) to raise awareness of benefits of a merit good / drawbacks of a demerit good (1) Provide education / training (1) to increase labour mobility (1). One mark each for each of two ways identified and one mark each for each of two explanations. If more than two ways of government intervention are given, consider the first three.
3. [6] 5(c) Coherent analysis which might include: A rise in the exchange rate / appreciation of a currency (1) can increase export prices (1) lower import prices (1). Net exports may fall (1) exports form part of total demand (1) reducing demand-pull inflation (1). Lower import prices will increase pressure for firms to keep price rises low (1) lower imported raw material prices (1) reduce costs of production (1) reduce cost-push inflation (1).
4. [8] 5(d) Why it might: employment may increase; people will not have to seek jobs abroad; incomes may rise / poverty may decrease; tax revenue may be higher, allowing the government to spend more on e.g. education and healthcare. Why it might not: incomes may still be low; income can be unevenly distributed; may not expect rise in growth rate to last; there may be higher economic growth and job opportunities in other countries; pollution levels may increase; may lead to higher external costs e.g. pollution; economic growth comes at cost of worse working conditions; there are other reasons for emigrating. Note: level 1 would be knowledge and understanding of economic growth and emigration or just identification of points.