Foreign Exchange Rates (Cambridge (CIE) IGCSE Economics)

Exam Questions

2 hours31 questions
11 mark

What is meant by a depreciation in the foreign exchange rate?

  • The government intervenes to reduce the exchange rate of the country’s currency.

  • The rate of exchange of exports for imports for a country deteriorates.

  • The rate of inflation in a country continues to rise.

  • The value of a country’s currency falls on the international exchange market.

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21 mark

What is the most accurate definition of a foreign exchange rate?

  • a rate at which exports are exchanged for imports

  • a rate determined by the demand and supply of the currency

  • a value of a currency as fixed by the government

  • a value of a currency expressed in terms of another currency

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31 mark

A country has experienced a devaluation of its currency.

What are the likely results of the devaluation?

 

imports

exports

A

B

C

D

price decreases

price decreases

price increases

price increases

value decreases

value increases

quantity decreases

quantity increases

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    1 mark

    What happens when a country's currency appreciates?

    • Imports become more expensive, while exports become cheaper

    • Imports become cheaper, while exports become more expensive

    • Both imports and exports become cheaper

    • Both imports and exports become more expensive

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    1 mark

    What is a floating exchange rate?

    • An exchange rate that is fixed by the government 

    • An exchange rate that is determined solely by market forces

    • An exchange rate used in bartering between countries

    • An exchange rate that is set by international organisations

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    11 mark

    What would increase the demand for a country’s currency on the foreign exchange market?

    • a decrease in its inward investment

    • a decrease in its rate of interest

    • an increase in its exports

    • an increase in its imports

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    21 mark

    What usually decreases when there is a depreciation of a country’s foreign exchange rate?

    • the level of national debt

    • the level of trade protection

    • the price of exports

    • the price of imports

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    31 mark

    Changes in the foreign exchange rate of a country resulted in a depreciation of its currency.

    What is not likely to happen?

    • The costs of imported raw materials will fall.

    • The country’s export trading position will become more competitive.

    • The country’s residents will find it more expensive to take holidays abroad.

    • The current account deficit will be unchanged.

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    41 mark

    The Mexican currency (the peso) has fallen in value against the US dollar. 

    What will be the effect of this on the Mexican economy?

    • a decrease in tariffs on imports

    • a decrease in the price of exports

    • a decrease in the price of imports

    • a decrease in the volume of exports

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    1 mark

    In a floating exchange rate system, what happens when a country's currency appreciates?

    • Imports become more expensive, while exports become cheaper

    • Imports become cheaper, while exports become more expensive

    • Both imports and exports become cheaper

    • Both imports and exports become more expensive

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    11 mark

    The world demand for oil is price-inelastic and oil is paid for in US dollars. If the price of oil falls rapidly, how might it affect the exchange rate of the US dollar?

     

    market for US dollar

    exchange rate for US dollar

    A

    B

    C

    D

    greater demand for US$

    greater supply of US$

    less demand for US$

    less supply of US$

    value increases

    value falls

    value falls

    value increases

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      21 mark

      The table shows the current account balance for four countries in 2016. It also shows each country’s exchange rate against the US dollar for 2015 and 2016.

      Which country had a trade surplus and a strengthened currency against the US dollar?

       

      country

      current account balance US$ billion 2016

      number of units of currency against US dollar

      2015

      2016

      A

      B

      C

      D

      Australia

      Belgium

      China

      Taiwan

      –47.9

      +4.8

      +266.6

      +74.7

      1.39

      0.92

      6.48

      32.90

      1.38

      0.96

      6.95

      32.00

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        1 mark

        Which of the following is not a disadvantage of a a Fixed Exchange Rate Mechanism?

        • In order to maintain the fixed exchange rate, the Central Bank has to regularly intervene in the currency market 

        • Changing the interest rate to influence the exchange rate can reduce consumption

        •  Even with increasing demand, the price of its exports will remain fixed as the currency will not appreciate with more demand

        • Intervening in the currency market can be an expensive policy

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        1 mark

        Relative inflation rates influence exchange rates.

        If a country's inflation rate is significantly lower than that of its trading partners, what effect might this have on its exchange rate?

        • The exchange rate will appreciate

        • The exchange rate will depreciate

        • The exchange rate will remain unchanged

        • The exchange rate will be fixed by international agreements

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        1 mark

        What is the main goal of currency speculation?

        • To stabilise exchange rates between countries

        • To maintain a fixed exchange rate regime

        • To make a profit in the short and medium term

        • To stop exchange rate fluctuations

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