The Saudi Arabian government is encouraging the growth of the private sector. It is a low-cost oil producer, but its exports to South Africa have fallen recently. South Africa has a floating foreign exchange rate, but its central bank has recently tried to prevent a large fall in its foreign exchange rate.

Mark scheme

Marking points from the official mark scheme (May/June 2019). The mark or mark type is shown in brackets.

1. The price of a currency (1) determined by market forces (1).
2. Higher tax revenue (1) private sector may be more efficient / private sector may earn higher profits / higher tax revenue may be spent on e.g. education (1).
3. Lower government spending on supporting state-owned enterprises (1) spending could rise on other areas e.g. healthcare (1).
4. Increases employment / reduces unemployment (1) which is a government objective / reduces government payments on unemployment benefits (1).
5. The foreign exchange rate may increase (1) leading to higher export prices (1).
6. The quality of the products produced may fall (1) reducing demand (1).
7. Incomes abroad may have fallen (1) reducing foreigners' ability to buy exports (1).
8. There may be a rise in competition (1) with foreign firms having even lower costs (1).
9. Producers may charge higher prices (1) leading to a fall in demand (1).
10. Foreign countries may implement protection measures (1) e.g. tariffs (1).
11. Up to 5 marks for why it should:
12. A fall in the exchange rate would increase the price of imports (1) this will increase the price of imported raw materials (1) this will increase costs of production (1) inflation may occur (1).
13. A rise in the price of finished products (1) will reduce the goods and services people can buy (1) reduce living standards (1).
14. A fall in the exchange rate may reduce confidence in the country (1) this may reduce investment (1).
15. A lower exchange rate may increase debt repayments (1) making it more difficult for firms and the government to pay back loans (1).
16. Higher government spending on e.g. state benefits (1) will increase disposable income (1) some of this might be spent on imports (1).
17. Up to 5 marks for why it should not:
18. A lower exchange rate will reduce the price of exports (1) more exports may be sold (1) this combined with lower imports may improve the current account balance (1).
19. Demand for domestic products may rise (1) this may increase output (1) so cause economic growth (1) reduce unemployment (1).