In July 2018, Uruguay’s inflation rate stood at 8.4%. The central bank was considering raising the interest rate to bring inflation down. A higher interest rate may affect aggregate demand in an economy and cause the currency to appreciate. That could affect Uruguay’s exports, especially soybean exports. Uruguay’s soybean firms’ total revenue could change if the Uruguayan peso appreciates.
(a)[2]
Define total revenue as the income earned from selling output.
(b)[4]
Explain two causes of inflation.
(c)[6]
Analyse how an increase in the interest rate could lower total demand in an economy.
(d)[8]
Discuss whether an appreciation of a country’s domestic currency will have adverse effects on its economy.
Worked solution & mark scheme
This 20-mark question has a full step-by-step worked solution and mark scheme. One marking point: “The amount firms earn from selling output” …