Cambridge IGCSE Economics: Foreign exchange rates (0455) – Practice Questions

These are original questions written for Marlbridge, for revision and practice on this content. They are not reproduced past-paper questions, and they do not replicate the exam’s exact structure, question count or mark tariffs – examination boards hold copyright in their own papers. Use these alongside the official past papers from your board or school.

This set covers sections 6.3.1 to 6.3.5 of the Cambridge IGCSE Economics 0455 syllabus for examination in 2026. The syllabus is not tiered. All countries, currencies and figures are invented, and the marks shown are Marlbridge’s own. Teaching is in the study guide and the revision notes. Other links: the Cambridge IGCSE Economics hub, the printable checklist and the free diagnostics.

Setting for most questions: Country T uses the tarn and Country V uses the vesk. Unless told otherwise, 1 tarn = 0.80 vesk.

Questions

1. Convert 560 vesk into tarns, and 1,200 tarns into vesk. [2]

2. Distinguish between a floating and a fixed foreign exchange rate system. [3]

3. The table shows the market for tarns, in millions of tarns per week.

Rate (vesk per tarn)	Demand	Supply
0.60	100	50
0.70	90	65
0.80	80	80
0.90	70	95
1.00	60	110

(a) State the equilibrium rate and the quantity of tarns traded. [2] (b) Describe the position at a rate of 1.00 and what is likely to happen next. [2]

4. Foreign demand for Country T’s exports rises by 25 million tarns at every rate in question 3. (a) State the new equilibrium rate and quantity. [2] (b) Calculate the percentage change in the rate and state whether it is an appreciation or a depreciation. [2]

5. Explain two reasons why a country’s currency might depreciate. [4]

6. Country T raises its rate of interest while other countries leave theirs unchanged. Explain the likely effect on the value of the tarn. [4]

7. Explain how speculation could cause the tarn to fall in value. [3]

8. A multinational company (MNC) is considering Country T. (a) Explain the effect on the tarn if it opens a large factory there. [2] (b) Explain the effect on the tarn if it later closes the factory and sends the proceeds home. [2]

9. The rate rises from 1 tarn = 0.80 vesk to 1 tarn = 1.00 vesk. (a) A bag made in Country T sells for 50 tarns. Calculate its price in vesk before and after the change. [2] (b) A machine made in Country V costs 60 vesk. Calculate its price in tarns before and after. [2] (c) Calculate the percentage change in the tarn price of the machine. [1]

10. Following the change in question 9, the bag’s price in Country V rises from 40 to 50 vesk. Before the change, Country V bought 8,000 bags. (a) Calculate the percentage rise in price. [1] (b) PED of the bags is −0.6. Calculate the new quantity bought. [2] (c) Calculate spending on the bags before and after. [2] (d) If PED were −1.8, state whether spending would rise or fall and why. [1]

11. Country W is a small economy that sends most of its trade to one large partner. Its government is deciding between a fixed and a floating exchange rate. Evaluate which is better for Country W. [8]

12. Country T fixes 1 tarn = 0.80 vesk. At this rate supply of tarns exceeds demand by 15 million tarns each month. The central bank holds 96 million vesk in reserves. (a) State two ways in which the central bank could defend the rate. [2] (b) Calculate how many months the reserves would last if used to buy the surplus tarns. [3] (c) Instead the government lowers the fixed rate to 1 tarn = 0.64 vesk. A good costs 40 vesk abroad. Calculate its price in tarns before and after. [2] (d) Country T buys 600 of the good before the change and PED is −0.4. Calculate the new quantity and the change in spending in tarns, and explain the result. [3]

Answers

1. Tarns: 560 ÷ 0.80 = 700 tarns [1]. Vesk: 1,200 × 0.80 = 960 vesk [1]. [2] Examiner insight: Check the direction before calculating: converting from the quoted currency multiplies, and a sensible answer for vesk into tarns is a larger number, which gives you a quick test.

2. In a floating system the rate is determined by demand and supply in the foreign exchange market [1]. In a fixed system the government or central bank sets the rate [1] and must act, for example by buying or selling currency or changing interest rates, to keep it there [1]. [3] Examiner insight: “Distinguish” needs both systems in the same answer with a contrast, not two separate definitions with no link between them.

3. (a) Demand equals supply at 80 million, so the equilibrium rate is 0.80 vesk per tarn [1] and 80 million tarns are traded [1]. (b) At 1.00 supply is 110 and demand is 60, a surplus of 50 million tarns [1]. Sellers compete to get rid of tarns, so the rate falls towards 0.80 [1]. [4] Examiner insight: Quote figures from the table, such as the size of the surplus, and not only the word “surplus”; a read-off shows you used the data.

4. (a) New demand is 125, 115, 105, 95, 85 [1]. It equals supply (95) at 0.90 vesk per tarn, where 95 million tarns are traded [1]. (b) (0.90 − 0.80) ÷ 0.80 × 100 = 12.5% [1]. The tarn has appreciated [1]. [4] Examiner insight: Work the new demand figures out for every row before looking for the crossing point; spotting the new equilibrium by eye often lands on the wrong row.

5. First reason: Country T’s households and firms buy more imports [1], so more tarns are supplied to buy foreign currency and the rate falls [1]. Second reason: foreign demand for its exports falls [1], so demand for tarns shifts left and the rate falls [1]. Other valid pairs include lower interest rates or speculators selling. [4] Examiner insight: Each reason needs a link to the demand or supply curve of the currency; “people buy more imports” alone stops one step short of the exchange rate.

6. Higher interest rates give a better return on savings held in tarns [1]. Foreign savers buy tarns to deposit them, so demand for tarns shifts right [1]. Residents of Country T also keep more savings at home, so supply of tarns shifts left [1]. The tarn appreciates [1]. [4] Examiner insight: Mention that the comparison is with other countries’ rates; a rise in rates that is matched abroad gives investors no reason to switch.

7. If speculators expect the tarn to fall, they sell tarns now to avoid a loss [1]. This increases the supply of tarns [1], which pushes the rate down, so the expected fall happens [1]. [3] Examiner insight: The strongest answers show the expectation causing the movement; saying that speculators “cause instability” without the sell-now step gives little to credit.

8. (a) The MNC must buy tarns to pay wages, land and local suppliers [1]. Demand for tarns rises, so the tarn appreciates [1]. (b) On closing, the MNC sells its assets and exchanges the proceeds for foreign currency [1]. Supply of tarns rises, so the tarn depreciates [1]. [4] Examiner insight: Say what the MNC does with the currency, such as buying tarns or selling them; entering and leaving are mirror images, and showing that matters more than the label.

9. (a) Before: 50 × 0.80 = 40 vesk [1]. After: 50 × 1.00 = 50 vesk [1]. (b) Before: 60 ÷ 0.80 = 75 tarns [1]. After: 60 ÷ 1.00 = 60 tarns [1]. (c) (60 − 75) ÷ 75 × 100 = −20% [1]. [5] Examiner insight: Multiply for the home-made export and divide for the foreign-made import; stating which operation you are using makes your working easy to follow and easier to check.

10. (a) (50 − 40) ÷ 40 × 100 = 25% [1]. (b) Quantity falls by 0.6 × 25 = 15% [1]. New quantity = 8,000 × 0.85 = 6,800 bags [1]. (c) Before: 8,000 × 40 = 320,000 vesk [1]. After: 6,800 × 50 = 340,000 vesk [1]. (d) Spending would fall, because demand would be elastic and a price rise cuts quantity by a larger percentage than the price rises [1]. [6] Examiner insight: Finish the calculation to a spending figure and then say what it shows; a quantity alone does not answer a question about spending.

11. A fixed rate gives traders certainty about prices when most trade is with one partner, which can encourage trade and investment [2]. Tying to a stable currency can also steady import prices and restrain inflation [1]. Against this, a small economy may have limited reserves to defend the rate [1], and its interest rates may have to be set to protect the rate, not to suit its own economy [1]. A floating rate adjusts automatically and leaves interest rates free, but brings uncertainty and swings that harm a small trading country [1]. Judgement: a fixed rate is likely to suit Country W if it holds large reserves and its partner’s economy is stable and moves with its own; with small reserves, a floating system is safer [2]. [8] Examiner insight: A judgement that depends on a stated condition, such as the size of reserves, shows evaluation; an answer that lists points and then says “it depends” without saying on what does not.

12. (a) Buy surplus tarns using foreign exchange reserves [1]. Raise interest rates to attract demand for tarns [1]. (b) Cost per month = 15 × 0.80 = 12 million vesk [1]. Months = 96 ÷ 12 [1] = 8 months [1]. (c) Before: 40 ÷ 0.80 = 50 tarns [1]. After: 40 ÷ 0.64 = 62.5 tarns [1]. (d) Price rises 25%, so quantity falls 0.4 × 25 = 10%, to 540 [1]. Spending rises from 600 × 50 = 30,000 tarns to 540 × 62.5 = 33,750 tarns, a rise of 3,750 [1]. Demand is inelastic, so the fall in quantity is smaller than the rise in price [1]. [10] Examiner insight: In a multi-part question each part usually builds on the last, so label your figures clearly; the price you find in one part is the starting point for the next.

Where marks are usually lost

• Dividing when you should multiply, and the reverse, in currency conversions.
• Stating the percentage change for one currency and applying it to the other.
• Describing an effect on the exchange rate without naming the curve and its direction.
• Treating higher interest rates as a reason for a fall in the currency’s value.
• Stopping at the quantity change in a PED question instead of reaching spending.
• Giving only advantages of one system when the question asks you to evaluate.
• Giving a conclusion that never says what the answer depends on.
• Leaving figures unlabelled so that the currency of each number is unclear.

Next steps

• Review the revision notes and the study guide.
• Visit the Cambridge IGCSE Economics hub and tick off outcomes on the printable checklist.
• Try the free 10-minute diagnostics.
• Book a free trial class at /trial/.

Official syllabus

Source: Cambridge IGCSE Economics 0455 syllabus for examination in 2026, version 2, Cambridge University Press & Assessment, section 6.3 Foreign exchange rates (6.3.1 to 6.3.5).