Policies to Correct Disequilibrium in the Balance of Payments: three questions to try now
Real past-paper questions, the answer key from the mark scheme, and the explanation that goes with it. No account needed to answer them.
Question 1
What is not a function of the International Monetary Fund (IMF)?
Answer: C.
The correct answer is C: to provide funds for a water purifying plant in a developing country.
This is the division of labour between the two Bretton Woods institutions. Financing long-term development projects, infrastructure, water treatment, power, transport, is the role of the World Bank. The IMF's remit is monetary and financial stability: it lends to countries facing balance of payments crises and monitors exchange rate arrangements, not individual capital projects.
Why the other options are IMF functions:
This is the division of labour between the two Bretton Woods institutions. Financing long-term development projects, infrastructure, water treatment, power, transport, is the role of the World Bank. The IMF's remit is monetary and financial stability: it lends to countries facing balance of payments crises and monitors exchange rate arrangements, not individual capital projects.
Why the other options are IMF functions:
- A, encouraging exchange rate stability, was the IMF's founding purpose under Bretton Woods and remains central to its surveillance work.
- B, providing financial assistance to a country whose economic policies have failed, is exactly what IMF lending does, usually with policy conditions attached.
- D, lending after a natural disaster, falls under the IMF's rapid financing facilities, which help countries meet urgent external payment needs.
Question 2
What is the role of the International Monetary Fund (IMF)?
Answer: C.
C to offer short-term assistance to countries with balance of payments problems
Explanation:
The correct answer is C - the role of the International Monetary Fund (IMF) is to offer short-term assistance to countries facing balance of payments problems. The IMF provides loans and financial assistance to member countries in need of stabilisation programs to help them overcome economic difficulties and restore stability. Countries with imbalances in their balance of payments, such as trade deficits or currency crises, can turn to the IMF for financial support and policy advice to address these challenges.
A, advising countries that are experiencing trade disagreements, is not the primary role of the IMF. Trade disagreements are typically addressed through negotiations and agreements between countries, such as through the World Trade Organisation.
B, helping charities providing emergency assistance to countries in need, is also not within the mandate of the IMF. Emergency assistance is usually provided by humanitarian organisations, governments, or specialised aid agencies, rather than by the IMF.
D, providing interest-free credit to developing countries for infrastructure purposes, is not a core function of the IMF. While the IMF may provide financial assistance to developing countries for various purposes, such as economic reforms or macroeconomic stabilisation, it does not typically offer interest-free credit specifically for infrastructure projects.
Explanation:
The correct answer is C - the role of the International Monetary Fund (IMF) is to offer short-term assistance to countries facing balance of payments problems. The IMF provides loans and financial assistance to member countries in need of stabilisation programs to help them overcome economic difficulties and restore stability. Countries with imbalances in their balance of payments, such as trade deficits or currency crises, can turn to the IMF for financial support and policy advice to address these challenges.
A, advising countries that are experiencing trade disagreements, is not the primary role of the IMF. Trade disagreements are typically addressed through negotiations and agreements between countries, such as through the World Trade Organisation.
B, helping charities providing emergency assistance to countries in need, is also not within the mandate of the IMF. Emergency assistance is usually provided by humanitarian organisations, governments, or specialised aid agencies, rather than by the IMF.
D, providing interest-free credit to developing countries for infrastructure purposes, is not a core function of the IMF. While the IMF may provide financial assistance to developing countries for various purposes, such as economic reforms or macroeconomic stabilisation, it does not typically offer interest-free credit specifically for infrastructure projects.
Question 3
What is not an aim of macroeconomic policy?
Answer: C.
The correct answer is C: Pareto optimality.
Pareto optimality is a microeconomic efficiency concept: an allocation from which no one can be made better off without making someone else worse off. It is used to judge the efficiency of resource allocation within and between markets, not to steer the economy as a whole. Macroeconomic policy objectives are stated in terms of economy-wide aggregates, output, prices, employment and the external balance.
Why the other options are macroeconomic aims:
Pareto optimality is a microeconomic efficiency concept: an allocation from which no one can be made better off without making someone else worse off. It is used to judge the efficiency of resource allocation within and between markets, not to steer the economy as a whole. Macroeconomic policy objectives are stated in terms of economy-wide aggregates, output, prices, employment and the external balance.
Why the other options are macroeconomic aims:
- A, economic development, concerns rising living standards, health and education across the population, and is a standard long-run macroeconomic goal.
- B, exchange rate stability, is an external objective, since a volatile currency disrupts trade and investment decisions.
- D, a satisfactory balance of payments, is the other external objective, avoiding persistent deficits that require borrowing or reserve depletion.
What this practice covers
These questions are drawn from past CIE 9708 papers. You answer, you find out immediately whether you were right, and you get the reasoning for the correct option and for each distractor. Wrong answers go to a mistakes locker so you can come back to exactly those.
Practice is free. You need an account only so your progress and your mistakes are still there next time.
What examiners see students get wrong here
These are the errors that cost marks on policies to correct disequilibrium in the balance of payments, taken from our own topic notes. Read them before you practise and you will recognise the traps in the questions.
- Saying the balance of payments is in deficit without specifying the current account.
- Asserting a depreciation improves the current account without stating Marshall-Lerner.
- Getting the condition wrong, for example requiring each elasticity to exceed 1 rather than their sum.
- Describing the J-curve without explaining why short run elasticities are low.
- Forgetting that expenditure reducing policies work through income and therefore cost employment.
- Treating a current account deficit as automatically bad, without asking what it funded and how it is financed.
- Forgetting that a current account deficit is matched by a financial account surplus.
Revise it first
If any of the above is unfamiliar, work through the notes before practising: Policies to Correct Disequilibrium in the Balance of Payments revision notes.