In June 2015 the value of the Swiss franc rose by 30% against the euro. The countries that Switzerland exports to are changing. Exports to the USA, UK, India and South Korea are growing in importance, while exports to Germany, Italy and France are declining. A possible effect of an appreciation of the exchange rate is a fall in the inflation rate.

Mark scheme

Marking points from the official mark scheme (May/June 2017). The mark or mark type is shown in brackets.

1. [2] A rise in the price level/rise in average prices (2). A rise in prices (1). A change in the price of a good (1).
2. [4] Exports to one country may increase because incomes in that country increase (1) increasing demand for products including imports (1) while incomes in the other country may fall (1) decreasing demand for products including imports (1). Exports to one country may increase because the country's exchange rate may fall against that country (1) making exports cheaper (1) while the exchange rate may increase against another country (1) making exports more expensive (1). Exports to one country may increase because trade restrictions imposed on them may be reduced (1) e.g. tariffs lowered (1) while trade restrictions may be increased by the other country (1) to protect its industries (1).
3. [6] An appreciation in the exchange rate means a rise in the value of the currency (1) higher export prices (1) lower import prices (1) less competitive (1) may reduce net exports (1) may increase imports (1) lower total demand (1) reduce demand-pull inflation (1). Lower import prices will reduce the price of some of the products people in the country buy (1) may lower price of raw materials (1) lower costs of production (1) reduce cost-push inflation (1). Lower import prices and higher export prices will put pressure on domestic firms to keep prices low (1).
4. [8] Up to 5 marks for why it might: It may mean that domestic products may become more internationally competitive (1) exports may increase (1) current account position may improve (1) output may increase (1) employment may increase (1) resulting in higher economic growth/rise in GDP. A low inflation rate which is also stable (1) may create greater confidence (1) may promote investment/attract MNCs to set up in the country (1) may encourage production (1). It will mean menu and shoe leather costs will be low (1) keeping firms' costs low (1). It may benefit savers (1) if the interest rate is above the inflation rate (1). It will mean that inflationary noise will not be significant (1) so firms and households can make efficient choices (1). Fiscal drag is unlikely to be a problem (1) people may not be dragged into higher tax brackets (1). Up to 5 marks for why it might not: It may be too low which may discourage production (1). There may be a risk of deflation (1) which may discourage consumption (1). Less tax revenue for the government (1) to spend on objectives such as better education and healthcare (1) It may still be higher than rival countries (1) leading to a current account deficit (1). It may harm certain groups including borrowers (1) who had expected debt to fall at a more rapid rate (1). To achieve low inflation a government may have used deflationary policy measures (1) which could reduce output (1) increase unemployment (1).