Economics · 2015 · May · Paper 2 · HL · Question paper

M15/3/ECONO/HP2/ENG/TZ0/XX Economics Higher level Paper 2 © International Baccalaureate Organization 2015 9 pages 2215 – 5104 Tuesday 5 May 2015 (morning) Instructions to candidates • Do not open this examination paper until instructed to do so. • You are not permitted access to any calculator for this paper. • Section A: answer one question. • Section B: answer one question. • Use fully labelled diagrams and references to the text/data where appropriate. • The maximum mark for this examination paper is [40 marks]. 1 hour 30 minutes – 2 – Section A Answer one question from this section. 1. Study the extract below and answer the questions that follow. Latvia to join the eurozone monetary union  Latvia will become the 18th country to adopt the euro after being approved for membership by the European Commission. The country has met the criteria for eurozone membership, including low inflation, low long-term interest rates, a stable exchange rate, low public debt and low budget deficits.  Latvia joined the European Union (EU) customs union in 2004. This resulted in a large increase in the availability of credit and strong economic growth in Latvia. However, the 2008 global financial crisis resulted in the collapse of one of its leading banks and massive economic instability. Economic output fell by about 20 % and Latvia had to accept a bailout (loans) from the International Monetary Fund (IMF) and the EU.  Latvia kept the lat (the Latvian currency) pegged to the euro throughout the crisis. At the time, some economists argued that devaluation would have been a better way to improve the economy. However, Latvia followed the path of other countries such as Greece and Ireland, and chose to improve competitiveness through austerity measures. This involved increasing direct taxes and cutting government spending and public sector wages.  By late 2010, the economy was growing again and Latvia had repaid the loans to the IMF and the EU. In 2012, the economy expanded by 5.6 %, the fastest of any country in the EU, although output was still 12 % below its pre-crisis peak. In addition unemployment was falling, but it remained high at 12.4 %.  For Latvia,