Exchange rates · AS Level Economics

Why may a government introduce a floating exchange rate?

• Ait allows government more independence in policy making
• Bit eliminates the instability of free markets
• Cit gives firms more confidence in future costs and prices
• Dit increases foreign exchange reserves

The US dollar ($) has appreciated by 12% against an average of other major trading currencies.

What is likely to have caused this?

• Aan increase in the US imports
• Ban increase in the US interest rate
• Can increase in the US money supply
• Dan increase in the US employment rate

What is the consequence of an appreciation of the exchange rate on the current account of the balance of payments and the price level?

current account of the balance price level of payments

• Aimproves decreases
• Bimproves increases
• Cworsens decreases
• Dworsens increases

There is a floating exchange rate between country M and country N.

Which changes will definitely cause an appreciation of country M’s currency?

value of exports value of imports from M to N from N to M

• Adecreases decreases
• Bdecreases increases
• Cincreases decreases
• Dincreases increases

To what is a depreciation of a currency’s exchange rate most likely to lead?

• Aa decrease in inflationary pressures
• Ba decrease in the relative price of imports
• Can increase in cyclical unemployment
• Dan increase in real GDP

A country’s currency depreciates in terms of other currencies.

What would be a consequence of this depreciation?

• AThere would be a decrease in structural unemployment.
• BThere would be a decrease in the volume of exports.
• CThere would be an increase in cost-push inflationary pressure.
• DThere would be an increase in the budget deficit.

A country with a floating exchange rate has a large deficit on the current account of the balance of payments.

What is most likely to decrease as a consequence of this deficit?

• Acompetitiveness of the country’s products
• Blevel of employment in the country
• Cprices of exports from the country
• Drate of inflation in the country

The table shows the change in the value of UK sterling over a three-month period.

June Sept

£1 = $1.38 £1 = $1.32

What is likely to be the short-term impact of the change in the value of UK sterling on the UK economy?

• Aincreased disinflation
• Bincrease in cost-push inflation
• Cmore purchasing power of money
• Dreduced demand-pull inflation

When is a country’s exchange rate most likely to fall?

• AWhen its current account surplus exceeds that of its trading partners.
• BWhen its inflation rate exceeds that of its trading partners.
• CWhen its interest rate exceeds that of its trading partners.
• DWhen its unemployment rate exceeds that of its trading partners.

With the help of a diagram, explain how a decrease in the interest rate in Japan could lead to the depreciation in the value of the yen and consider whether only Japan’s interest rate determines the value of the yen. [4]

Explain how depreciation of a currency affects the terms of trade in an economy and consider why this depreciation is not always beneficial. [8]

‘Argentina’s currency, the peso, would be allowed to depreciate’.

Describe the meaning of depreciation of a currency and state one consequence for Argentina’s exporters of a depreciation of the peso. [2]

With the help of a diagram(s), explain two causes of an appreciation of an exchange rate and consider whether an appreciation of a country’s exchange rate is likely to reduce its real output. [8]

Explain three components of the current account of the balance of payments and consider the extent to which a depreciation in the exchange rate will always lead to a surplus on the current account. [8]

Consider whether continued falls in the value of the South African rand may lead to a reduction in the current account deficit of the balance of payments. [4]

With the help of a diagram, explain two ways in which a fall in the balance of trade in goods may affect the value of a floating exchange rate and consider the extent to which a change in the relative rate of interest between two countries may have a greater impact on the exchange rate. [8]

Assess whether the depreciation of an exchange rate is always beneficial to an economy. [12]

Assess the extent to which a fall in the value of the US dollar against the euro is likely to affect US imports of olive oil from the EU. [6]