2025 H2 Economics Paper 2 Essay 6: Suggested Answers
How to use these essay answers. The responses below, including the part (a) answer, are structured guides to the requirements of the question, the content, analysis and evaluation a strong answer must cover, rather than full essay prose with a written introduction and conclusion. Use them to see what to include and how to build the argument, then write it up in your own continuous prose, adding your own introduction and conclusion.
This essay explains how a depreciation in a country's exchange rate might lead to demand-pull inflation and to cost-push inflation, then asks whether depreciation is the most appropriate policy to improve the balance of trade of an economy hit by the global pandemic.
An AI guided TYS coach, on every question.
Every ETG student gets access to our AI guided Ten Year Series coach on the ETG learning management system. It walks you through exactly how to approach every single essay question and every single case study question from the last ten years, step by step. TYS Crashcourse students get the same access.
Explain how a depreciation in a country's exchange rate might lead to demand-pull inflation and to cost-push inflation.
A depreciation of a country's exchange rate is a fall in the value of its currency relative to others under a floating exchange rate system. Demand pull inflation occurs when aggregate demand rises faster than the economy's productive capacity, raising the general price level. Cost push inflation arises when firms' costs of production rise, reducing aggregate supply and raising prices.
Demand pull inflation. A depreciation makes exports cheaper to foreign buyers and imports more expensive to domestic consumers, so foreign demand for exports rises while domestic demand for imports falls. Net exports (X minus M) therefore increase. Since AD = C + I + G + (X minus M), the rise in net exports shifts the AD curve rightward from AD0 to AD1, raising real national income and exerting upward pressure on prices. If the economy is operating at or near full employment, where spare capacity is limited, firms cannot expand output sufficiently to meet the higher demand, so the increase in AD feeds mainly into a higher general price level from P0 to P1, giving rise to demand pull inflation.
Cost push inflation. A depreciation also makes imported goods more expensive in domestic currency terms, including not only final consumer goods but also imported raw materials, capital goods and intermediate inputs used in domestic production. As firms face higher input costs, their costs of production rise, and to maintain profit margins they raise prices, leading to an economy wide increase in the price level. In AD and AS analysis this is a leftward, upward shift of the short run aggregate supply curve from AS0 to AS1, which raises the general price level from P0 to P1 even if aggregate demand is unchanged. Because it originates in dearer imported inputs, this is known as imported cost push inflation.
In summary, a depreciation can cause inflation through both channels: higher net exports raise aggregate demand and cause demand pull inflation, particularly near full capacity, while higher import prices raise production costs and cause cost push inflation. The overall impact depends on factors such as the elasticity of trade flows and the level of spare capacity.
Use the net exports channel into AD for demand-pull (with a near full capacity qualifier) and the imported input cost channel into SRAS for cost-push.
Discuss whether the depreciation of its exchange rate is the most appropriate policy to improve the balance of trade of an economy that has suffered as a result of the global pandemic.
- Define the balance of trade and the pandemic context, and frame depreciation as one candidate policy.
- Set out the condition under which depreciation can improve the trade balance, then the short run lag that delays it.
- Develop why depreciation may be inappropriate for an import dependent economy and why it misses non price, supply side causes.
- Introduce a supply side alternative and the channel through which it improves competitiveness without the inflation cost.
- Note the limitations of the alternative, including fiscal strain and time lags.
- Reach an evaluative conclusion on the most appropriate approach, framed as a policy mix.
This part is gated. The full model answer with the worked balance of trade analysis and the policy evaluation, with the diagrams and the full evaluation, is in the ETG TYS Answers book from SAP and is worked live in the TYS Crashcourse. ETG students also get the AI TYS coach that guides them through this exact question. Message the team to find out more.
Questions students ask
Where can I get the full worked answers to the 2025 H2 Economics paper 2 essay 6?
The full model answers, with the diagrams and the higher mark evaluation, are in the ETG TYS Answers book published by SAP and sold at Popular, and are worked live in the TYS Crashcourse. Every ETG student also gets the AI TYS coach on our learning management system, which guides you through how to tackle every essay and every case study question from the last ten years.
Are these the official 2025 A Level Economics answers?
No. SEAB sets and marks the A Level paper. These are suggested answers by Mr Eugene Toh, author of the H1 and H2 A Level Economics TYS answer keys, published by SAP and sold at Popular.
How should I use these suggested essay answers?
Treat them as a guide to the requirements of the question, the content, analysis and evaluation a strong answer must cover, not as full essay prose. Write the essay up in your own continuous prose, with your own introduction and conclusion.
Get the printable Summary and Diagrams pack.
The notes are free to read because the concepts should be. Join the mailing list for the 112 page Summary and Diagrams pack, drawn the way ETG teaches them, plus new chapters and worked answers as we publish. You can also follow along on Telegram.
Form not loading? Open the sign-up form.