Cambridge O Level Economics: Foreign exchange rates (2281) – 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.

These questions cover section 6.3 (6.3.1 to 6.3.5, foreign exchange rates) of the Cambridge O Level Economics (2281) syllabus for examination in 2026, version 2, which has no tiers. The countries, currencies and numbers are fictional teaching examples. Country Z uses the zeph and Country W uses the wint. Revise first with the study guide and the revision notes. Other links: the Cambridge O Level Economics hub, the printable checklist and the free diagnostics. Attempt each question on paper before checking the worked answer.

Questions

1. Define a foreign exchange rate. [2]

2. The rate is 1 zeph = 2.50 wint. Calculate:

(a) the number of wint received for 72 zeph [1] (b) the price in zeph of a coat that costs 195 wint in Country W [1] (c) the value of 1 wint in zeph [1]

3. The rate rises from 1 zeph = 2.50 wint to 1 zeph = 3.00 wint.

(a) State what has happened to the zeph and calculate the percentage change. [2] (b) Work out the percentage change in what one wint is worth, measured in zeph. [2]

4. The table shows the market for zeph (millions per month) in a floating system.

Rate (wint per zeph)	1.0	1.5	2.0	2.5	3.0
Demand for zeph	130	105	80	55	30
Supply of zeph	30	55	80	105	130

(a) State the equilibrium rate and the quantity of zeph traded. [2] (b) Explain what happens if the rate is 3.0. [2]

5. Households in Country Z increase their spending on imported goods. Explain the effect on the value of the zeph in a floating system. [4]

6. Country Z’s central bank raises its interest rate while rates elsewhere stay the same. Explain why the zeph is likely to appreciate, and give one reason why the effect might be limited. [4]

7. A speculator expects the zeph to rise from 2.50 to 2.80 wint.

(a) She converts 1,000,000 wint into zeph at 2.50 and sells the zeph back when the rate is 2.80. Calculate her profit in wint. [3] (b) Explain how many speculators acting together could make the expectation come true. [2]

8. A multinational company closes its plant in Country Z and returns home.

(a) It sells 60 million zeph at 2.50. Calculate the wint received. [1] (b) Explain the likely effect of the closure on the exchange rate. [3]

9. A firm in Country Z sells scooters for 4,000 zeph each. Foreign buyers take 800 a year. The rate rises from 2.50 to 3.00 wint per zeph.

(a) Calculate the price in wint before and after the change, and the percentage change. [2] (b) If PED is −2.0, calculate the new quantity and the change in foreign spending in wint. [3] (c) Now suppose PED is −0.4. Find the new quantity and the change in foreign spending. [2]

10. Country Z imports tractors costing 20,000 wint each. It buys 300 a year. The rate falls from 2.50 to 2.00 wint per zeph.

(a) Calculate the price in zeph before and after the change, and the percentage change. [2] (b) If PED is −0.6, calculate the new quantity and the change in spending on tractors in zeph. [2] (c) If PED is −1.6, repeat the calculation. [2]

11. Country Z fixes its rate at 1 zeph = 2.50 wint. Use the schedule in question 4.

(a) Calculate the excess supply of zeph at the fixed rate. [1] (b) The central bank buys the excess. Calculate the wint it spends. [2] (c) Explain one other way it could defend the rate. [2] (d) Explain why it cannot continue this way for ever. [1]

12. Country Z earns most of its income from exporting farm goods. The government is deciding whether to float or fix the zeph. Evaluate which system is better for Country Z. [8]

Answers

1. How many units of one currency [1] are swapped for one unit of another, for example how many wint buy one zeph [1]. [2] Examiner insight: A definition reads best when it names two currencies and links their amounts; “the value of money” alone is too vague.

2. (a) 72 × 2.50 = 180 wint [1] [1] (b) 195 ÷ 2.50 = 78 zeph [1] [1] (c) 1 ÷ 2.50 = 0.40 zeph [1] [1] Examiner insight: Show the operation in each part and label the parts. Conversions go wrong most often by multiplying when the rate should divide, as in part (b).

3. (a) The zeph has appreciated [1]. (3.00 − 2.50) ÷ 2.50 × 100 = 20% [1] [2] (b) 1 wint was 0.40 zeph and is now 1 ÷ 3.00 = 0.3333 zeph [1]. (0.3333 − 0.40) ÷ 0.40 × 100 = −16.7% [1] [2] Examiner insight: Candidates often give 20% for both currencies. Invert the rate first, then calculate the change.

4. (a) Demand equals supply at 80 [1], so the equilibrium rate is 2.0 wint per zeph and 80 million zeph [1] [2] (b) At 3.0 supply is 130 and demand is 30, a surplus of 100 million zeph [1]. Sellers compete to sell, so the rate falls towards 2.0 [1] [2] Examiner insight: Use numbers from the table when explaining a surplus, and say which way the rate moves.

5. Importers need wint to pay for the goods, so they sell zeph to buy wint [1]. Supply of zeph shifts to the right [1]. At the old rate there is now a surplus of zeph [1], so the equilibrium rate falls: the zeph depreciates [1]. [4] Examiner insight: A full chain names the currency being bought and sold and the curve that moves. “Imports rise so the currency falls” skips the middle steps.

6. Foreign savers can earn more in Country Z, so they buy zeph first and demand for zeph rises [1]. Residents keep more savings at home, so fewer zeph are sold and supply falls [1]. The equilibrium rate rises: appreciation [1]. Limit: other countries may also raise rates, or speculators may expect the zeph to fall for another reason [1]. [4] Examiner insight: A limitation gains credit when it is specific to this situation, not a general “other factors”.

7. (a) 1,000,000 ÷ 2.50 = 400,000 zeph [1]. 400,000 × 2.80 = 1,120,000 wint [1]. Profit = 1,120,000 − 1,000,000 = 120,000 wint [1] [3] (b) If many speculators buy zeph now, demand for zeph rises [1], so the rate rises towards 2.80 and their expectation is met [1] [2] Examiner insight: Profit means final amount minus the starting amount, in the same currency.

8. (a) 60 × 2.50 = 150 million wint [1] [1] (b) The company sells zeph to buy wint [1]. Supply of zeph shifts to the right [1], and the equilibrium rate falls: the zeph depreciates [1] [3] Examiner insight: State the direction of the currency flow. Saying the plant “leaves so the economy weakens” does not explain the exchange rate.

9. (a) Before: 4,000 × 2.50 = 10,000 wint [1]. After: 4,000 × 3.00 = 12,000 wint, a rise of 20% [1] [2] (b) Quantity falls 2.0 × 20 = 40%, so new quantity = 800 × 0.60 = 480 [1]. Spending before = 800 × 10,000 = 8,000,000 wint; after = 480 × 12,000 = 5,760,000 wint [1]. Spending falls by 28% [1] [3] (c) Quantity falls 0.4 × 20 = 8%, so new quantity = 736 [1]. Spending = 736 × 12,000 = 8,832,000 wint, which rises by 10.4% [1] [2] Examiner insight: Compare new spending with the old, and link the result to elastic or inelastic demand.

10. (a) Before: 20,000 ÷ 2.50 = 8,000 zeph [1]. After: 20,000 ÷ 2.00 = 10,000 zeph, a rise of 25% [1] [2] (b) Quantity falls 0.6 × 25 = 15%, so new quantity = 255 [1]. Spending: 300 × 8,000 = 2,400,000; 255 × 10,000 = 2,550,000 zeph, a rise of 6.25% [1] [2] (c) Quantity falls 1.6 × 25 = 40%, so new quantity = 180 [1]. Spending = 180 × 10,000 = 1,800,000 zeph, a fall of 25% [1] [2] Examiner insight: Import prices are measured in the importing country’s currency, so divide by the rate rather than multiply.

11. (a) At 2.50, supply is 105 and demand is 55: excess supply = 50 million zeph [1] [1] (b) The bank buys 50 million zeph [1]. Cost = 50 × 2.50 = 125 million wint [1] [2] (c) It could raise interest rates [1] to attract foreign savers, who must buy zeph, so demand rises [1] [2] (d) Its reserves of wint and other foreign currency are limited and would run out [1] [1] Examiner insight: Say which currency the bank spends, and why the cost is in wint.

12. Fixed: stable prices of exports in foreign currency, which helps planning and attracts investment [1]. Fixed also gives certainty about the price of imported inputs [1]. Cost of fixed: the bank needs large reserves to defend the rate [1], and interest rates must follow the peg rather than the economy [1]. Floating: the rate adjusts to changes in export demand, and a fall in the rate lowers export prices abroad, helping farm exporters [1]. If the farm goods have inelastic demand abroad, though, a lower price may not raise sales much [1]. Floating also brings uncertainty about revenue when rates swing [1]. Judgement: given a narrow export base and probably limited reserves, floating may be safer, unless the government can show enough reserves and a stable partner to peg to [1]. [8] Examiner insight: The strongest answers weigh both systems for this country and reach a supported judgement, rather than listing textbook points.

Where marks are usually lost

• Multiplying by the rate when the question needs dividing by it.
• Quoting the same percentage for the appreciation of one currency and the depreciation of the other.
• Shifting the wrong curve, or not saying which currency is being bought or sold.
• Writing “the currency goes down” without using the word depreciation or the rate.
• Giving a spending result without comparing it with the starting figure.
• Stating that a lower exchange rate always helps exports without referring to PED.
• Treating floating and fixed as lists of facts with no judgement for the country described.
• Forgetting that defending a fixed rate uses reserves.

Next steps

• Re-read the study guide for any question you missed.
• Use the revision notes for quick recall.
• Check the Cambridge O Level Economics hub and the printable checklist.
• Take the free 10-minute diagnostics to see where you are weakest.
• Book a free trial class.

Official syllabus

These questions follow the Cambridge O Level Economics (2281) syllabus for examination in 2026, version 2, published by Cambridge University Press & Assessment: section 6.3 Foreign exchange rates.