In 2012, Mexico's monetary policy was successful in keeping the country's inflation rate low and stable. Fiscal policy measures, including a rise in government spending, contributed to a relatively high economic growth rate of 3.5% and a reduction in the country's unemployment rate.

Mark scheme

Marking points from the official mark scheme (May/June 2014). The mark or mark type is shown in brackets.

1. [2] 2 marks for reference to decisions on any two from interest rates, money supply and the exchange rate.
2. 1 mark for reference to decisions on any one of the above.
3. [4] 1 mark each for two reasons identified:
4. • to promote investment
5. • to promote international competitiveness
6. • to avoid lenders, workers with low bargaining power and other groups experiencing a fall in purchasing power
7. • to protect savers
8. • to prevent people losing confidence in using the currency as money
9. • to prevent inflation causing unemployment.
10. 1 mark each for two reasons explained:
11. • low and stable inflation creates certainty/makes it easier to plan
12. • if inflation rate is below that of rival countries, it can increase exports/reduce imports
13. • if incomes rise by less than inflation, the amount that can be purchased will fall
14. • savers will lose if inflation rate is higher than interest rate
15. • may result in people resorting to barter/especially if there is hyperinflation
16. • inflation can result in a loss in international competitiveness/reduce spending on domestic products.
17. [6] An increase in government spending may result in:
18. • higher demand [1] which will encourage firms to expand their output [1]
19. • higher government spending on education (1) may raise labour productivity [1] and so increase productive potential [1]
20. • higher government spending on investment [1] will increase productive potential [1]
21. • government subsidies to firms [1] reduces costs of production [1] encourages firms to produce more [1].
22. Maximum of 2 marks for a list-like approach.
23. [8] Up to 6 marks for why it should:
24. Up to 3 marks for: a reduction in unemployment is likely to increase output [1] higher output should raise living standards [1] may reduce poverty [1].
25. Up to 3 marks for: may improve the current account position [1] if the rise in output is due to a rise in exports [1] and exports rise by more than imports [1].
26. Up to 3 marks for: lower unemployment may raise tax revenue [1] e.g. from income tax [1] higher tax revenue can enable a government to spend more on education and health care [1].
27. Up to 3 marks for: lower unemployment may reduce spending on unemployment benefits [1] money saved may be spent on other items [1] or tax rates reduced [1].
28. Up to 2 marks for: will move production point closer to the PPC [1] and reduce inefficiency [1].
29. Up to 6 marks for why it might not:
30. Up to 5 marks for: lower unemployment may cause a shortage of workers [1] this shortage may push up wage rates [1] higher wages may increase costs of production [1] higher costs can cause cost-push inflation [1] more likely to occur if the economy is operating close to full employment [1].
31. Up to 4 marks for: lower unemployment may increase total (aggregate) demand [1] higher demand may push up prices [1] causing demand-pull inflation [1] more likely to occur if the economy is operating close to full employment [1].
32. Up to 3 marks for: lower unemployment may increase a current account deficit [1] higher incomes may increase demand for imports [1] higher demand may divert products from the export to the domestic market [1].
33. Up to 3 marks for: a reduction in the unemployment rate does not necessarily mean fewer people are unemployed [1] unemployment may have risen if the labour force has risen [1] by more than employment [1].
34. Maximum of 4 marks for a list-like approach.
35. Note: accept answers which discuss the possible effects of high unemployment will always harm an economy.