Cambridge International AS and A Level Economics: Floating exchange rates (9708) – Revision Notes

Condensed notes for syllabus section 6.4 (Exchange rates), outcomes 6.4.1 to 6.4.5, in the Cambridge International AS and A Level Economics 9708 syllabus for examination in 2026, 2027 and 2028. This is AS Level content (topic 6). The syllabus says AS content is assumed knowledge for A Level Paper 3 and Paper 4.

For full explanations, read the study guide. Then try the practice set, tick off the checklist, see the course hub and take a free 10-minute diagnostic.

Every country, currency and number below is invented for illustration. Country C uses the senn and Country D uses the tarn.

Key definitions

Term	Meaning (6.4.1 to 6.4.3)
Exchange rate	How many units of one currency buy one unit of another
Floating exchange rate	A rate determined by demand and supply in the foreign exchange market
Depreciation	A fall in the value of a floating currency against another
Appreciation	A rise in the value of a floating currency against another

Always name the unit: “tarns per senn”.

Method in steps: finding and moving the equilibrium

1. Write demand and supply for the currency in terms of the rate r (tarns per senn).
2. Set demand equal to supply and solve for r.
3. Substitute back to find the quantity traded.
4. For a shift, add or subtract the shift from the right curve and solve again.
5. Calculate the percentage change: (new − old) ÷ old × 100.
6. State depreciation or appreciation, and name the curve that shifted.

Worked reminder. Demand for senns is D = 400 − 50r and supply is S = 100r − 200 (millions of senns).

• Equilibrium: 400 − 50r = 100r − 200, so 150r = 600 and r = 4.00. Quantity = 400 − 200 = 200.
• At r = 5.00: demand 150, supply 300, so excess supply of 150. The rate falls.
• At r = 3.00: demand 250, supply 100, so excess demand of 150. The rate rises.
• Demand falls by 60 at every rate: D′ = 340 − 50r. Then 340 − 50r = 100r − 200, so r = 3.60 and quantity = 160. The senn depreciates by (3.60 − 4.00) ÷ 4.00 = −10%.

Converting and percentage changes

Task	Method	Example
Price abroad in the home currency	Divide by the rate (tarns per senn)	1,200 tarns ÷ 4.00 = 300 senns
Home price in the foreign currency	Multiply by the rate	300 senns × 4.00 = 1,200 tarns
Percentage change in the senn	(new − old) ÷ old	4.00 to 4.40: +10%
Partner’s change	Use the inverse rate	Senns per tarn: 0.25 to 0.2273, which is -9.09%

The partner’s change: the tarn price of a senn rises from 4.00 to 4.40, so senns per tarn go from 0.25 to 0.2273. That is a fall of 9.09%. The tarn has depreciated by 9.09% while the senn has appreciated by 10%.

Opposite direction: 4.00 to 3.00 tarns per senn is −25% for the senn. Senns per tarn rise from 0.25 to 0.3333, which is +33.3% for the tarn.

Causes of change (6.4.4)

Shifts demand for the currency right (appreciation)	Shifts supply of the currency right (depreciation)
Rising foreign demand for exports	Rising home demand for imports
Inward investment	Outward investment
Higher relative interest rates	Lower relative interest rates
Speculation that the currency will rise	Speculation that the currency will fall

Leftward shifts reverse these. A change in the rate itself causes a movement along the curves, not a shift.

AD/AS effects (6.4.5)

Depreciation chain: exports cheaper abroad, imports dearer at home, net exports rise, AD shifts right, so real output, price level and employment tend to rise. Higher income also raises imports, which offsets part of the gain.

Appreciation chain: exports dearer abroad, imports cheaper at home, net exports fall, AD shifts left, so real output, price level and employment tend to fall.

Cost side: imported raw materials cost more after a depreciation. A firm using materials priced at 80 tarns per unit pays 80 ÷ 4.00 = 20 senns at 4.00 and 80 ÷ 3.00 = 26.67 senns at 3.00. That is a rise of 33.3%. Higher costs can shift SRAS left.

Worked reminder. Country C has C 480 + I 150 + G 200 + X 260 − M 300 = AD of 790. After an appreciation, X = 230 and M = 330. AD = 480 + 150 + 200 + 230 − 330 = 730. AD falls by 60. With a multiplier of 2, national income falls by 120.

Method in steps: an AD/AS explanation

1. State the change in the exchange rate and which way it moves.
2. Say what happens to export prices abroad and import prices at home.
3. State the effect on net exports, then on AD, naming the direction of the shift.
4. Read off the new equilibrium on the SRAS curve: real output, price level.
5. Link output to employment through the derived demand for labour.
6. Add a cost-side point if imported inputs matter, and one limit on the result.

Worked reminder: a supply-side shift of the currency

Demand for senns is D = 400 − 50r. Suppose supply rises by 60 at every rate, so S′ = 100r − 140. Then 400 − 50r = 100r − 140, so 150r = 540 and r = 3.60. Quantity = 400 − 180 = 220. The senn falls by 10% while the quantity traded rises. A shift of demand left and a shift of supply right can give the same rate but different quantities, so check quantity as well as price.

Must-know distinctions

• Depreciation (floating rate, market forces) is not the same as devaluation (fixed rate, government decision).
• Movement along a currency curve (price changes) differs from a shift (other causes).
• Net exports enter AD. Imported input costs enter SRAS.
• Output effect and price effect depend on spare capacity.

Evaluation prompts

A good evaluation names the factor that matters most for the case in the question and says why. Use these prompts to find it.

• How much spare capacity is there?
• How responsive are exports and imports to the price change, and how fast?
• How much of the production relies on imported inputs?
• What happens to foreign incomes and foreign responses?
• Short run or long run?

Quick self-test

1. Define an exchange rate.
2. 1 senn = 4.00 tarns. A good costs 1,200 tarns. What is the price in senns?
3. The rate moves from 4.00 to 4.40 tarns per senn. State the change in the senn and its percentage.
4. The rate moves from 4.00 to 3.00. What is the percentage change for the tarn?
5. Demand: D = 400 − 50r, supply: S = 100r − 200. Find the equilibrium rate and quantity.
6. At 5.00 tarns per senn in question 5, describe the market and the likely rate movement.
7. Name two causes that would shift the demand curve for a currency to the right.
8. Name two causes that would shift the supply curve for a currency to the right.
9. Why can a depreciation reduce short-run aggregate supply?
10. Country C: C 480, I 150, G 200, X 260, M 300. Find AD.
11. State one reason why a depreciation might not raise employment.
12. Why is “weak currency” not the same as “bad for the economy”?

Answers

1. How many units of one currency are needed to buy one unit of another.
2. 1,200 ÷ 4.00 = 300 senns.
3. Appreciation of the senn by 10%.
4. Senns per tarn go from 0.25 to 0.3333, so the tarn appreciates by 33.3%.
5. r = 4.00 tarns per senn and quantity 200 million senns.
6. Demand 150 and supply 300, so excess supply of 150. The senn depreciates until the market clears.
7. For example: rising foreign demand for exports; inward investment; higher relative interest rates; speculation about a rise.
8. For example: rising demand for imports; outward investment; lower relative interest rates; speculation about a fall.
9. Imported raw materials and components become dearer in the home currency, raising production costs.
10. 480 + 150 + 200 + 260 − 300 = 790.
11. There may be little spare capacity, or demand for exports and imports may respond slowly or weakly.
12. The effect depends on spare capacity, price responsiveness, imported inputs and timing. A lower rate also raises import prices.

Where marks are usually lost

• Quoting the rate without saying which currency is the price.
• Mixing up a shift of the curve with a movement along it.
• Dividing when you should multiply when converting prices.
• Giving the same percentage for both currencies.
• Stating that AD shifts without linking it to net exports.
• Writing “appreciation” or “depreciation” for a fixed rate change.
• Assuming a depreciation always raises output.
• Evaluation that lists points without a judgement.

Official syllabus

Cambridge International AS & A Level Economics 9708, syllabus for examination in 2026, 2027 and 2028, published by Cambridge University Press & Assessment (Cambridge International), section 6.4 Exchange rates.