OCR A Level Economics: Exchange rate determination, measures and systems (H460) – 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 the first part of the OCR A Level Economics (H460) topic Exchange rates (specification Version 3.0, June 2026, for first assessment in 2021). Country X uses the tala and Country Y uses the dirn. All figures are invented. Revise with the study guide and revision notes, and use the OCR Economics hub and checklist.

Questions

1. The rate moves from 8.00 to 10.00 tala per dirn.

(a) Distinguish between a depreciation and a devaluation. [2] (b) Calculate the percentage change in the value of the tala in dirn. [2] (c) Calculate the price in tala of a 60-dirn good before and after the move. [2]

2. Country X trades with three partners. Trade values are 90, 70 and 40. The tala’s bilateral indices (base year 100) against them are 108, 96 and 85.

(a) Calculate the trade weights. [1] (b) Calculate the effective exchange rate index. [2] (c) Explain one reason why the effective rate is more useful than a single bilateral rate. [2]

3. In the base year the tala is worth 0.125 dirn and price levels in X and Y are both 100. Later the nominal rate falls by 5%, the price level in X is 104 and in Y is 100.

(a) Calculate the real exchange rate index (base year = 100). [3] (b) Interpret your answer. [2]

4. Country X’s nominal effective rate index and its relative price index (X compared with partners) are:

Year	1	2	3	4	5	6
Nominal index	100	103	108	112	104	101
Relative prices	100	102	104	107	108	109

(a) Calculate the percentage change in the nominal index from Year 4 to Year 5. [2] (b) Describe two features of the nominal trend. [2] (c) Calculate the real index in Year 4 (nominal index × relative prices ÷ 100) and explain why it differs from the nominal index. [2]

5. The market for tala is Qd = 1500 − 8000p and Qs = 8000p − 500 (millions of tala per month, p in dirn per tala), under a floating system.

(a) Find the equilibrium rate and quantity. [2] (b) Foreign investors withdraw, so demand falls by 160 at every price. Find the new rate and the percentage change. [3] (c) Describe the diagram that shows this. [2]

6. Use the market in question 5, but suppose the central bank holds a peg at 0.125 dirn per tala when demand falls by 160.

(a) Calculate the excess at the peg. [2] (b) Calculate the reserves used, in dirn. [1] (c) The bank holds 90 dirn of reserves. How many whole months can it keep doing this? [1] (d) Explain one other way to defend the peg and one cost. [2]

7. Evaluate the view that differences in interest rates are the main cause of changes in a floating exchange rate. [8]

8. A firm in Country X imports an input costing 80 dirn per batch. Total batch cost is 2,000 tala when the rate is 8.00 tala per dirn. The rate rises to 10.00.

(a) Calculate the new input cost, the percentage rise in it, and the percentage rise in total batch cost. [3] (b) Evaluate the consequences of the depreciation for the wider economy. [6]

9. (a) Explain what is meant by a hybrid exchange rate system. [2] (b) Describe one type of hybrid system. [2] (c) Name one country that has been classified as having a managed arrangement. [1]

10. A small open economy imports most of its food and fuel. Evaluate whether a fixed or a floating system suits it better. [10]

Answers

1. (a) Depreciation is a fall in the market value of a floating currency [1]. Devaluation is a deliberate lowering of a fixed or pegged rate by the authorities [1]. (b) Dirn per tala falls from 1 ÷ 8 = 0.125 to 1 ÷ 10 = 0.100 [1]. Change = (0.100 − 0.125) ÷ 0.125 = −20% [1]. (c) Before: 60 × 8 = 480 tala [1]. After: 60 × 10 = 600 tala [1]. [6] Examiner insight: Part (b) is easy to answer as +25% by measuring the dirn. State the currency you are measuring.

2. (a) Total 200, so weights are 0.45, 0.35 and 0.20 [1]. (b) 0.45 × 108 = 48.6, 0.35 × 96 = 33.6, 0.20 × 85 = 17.0 [1]. Sum = 99.2 [1]. (c) It weights each partner by its importance in trade [1], so it shows the overall movement when the tala rises against one partner and falls against another [1]. [5] Examiner insight: Show each weight times index before summing so your method is clear. Context-specific reasons score better than the statement “it is more accurate”.

3. (a) New nominal rate = 0.125 × 0.95 = 0.11875 [1]. Real rate = 0.11875 × 104 ÷ 100 = 0.1235 [1]. Index = 0.1235 ÷ 0.125 × 100 = 98.8 [1]. (b) There was a real depreciation of 1.2% [1], much smaller than the 5% nominal fall because prices rose faster in X than in Y [1]. [5] Examiner insight: A good interpretation says what the number means for competitiveness, not only whether it is above or below 100.

4. (a) (104 − 112) ÷ 112 [1] = −7.1% [1] (b) Rose from 100 to a peak of 112 in Year 4 [1]. Then fell in two successive years to 101, so the movement is volatile and ends only 1% above the start [1]. (c) Real index = 112 × 107 ÷ 100 = 119.8 [1]. It is higher because prices in X rose 7% relative to partners, so the appreciation is larger in real terms [1]. [6] Examiner insight: Quote figures when describing a trend. Phrases such as “it went up then down” tend to gain little.

5. (a) 1500 − 8000p = 8000p − 500, so 2000 = 16000p and p = 0.125 [1]. Q = 1500 − 1000 = 500 [1]. (b) New demand is 1340 − 8000p [1]. 1340 − 8000p = 8000p − 500, so p = 1840 ÷ 16000 = 0.115 [1]. Change = (0.115 − 0.125) ÷ 0.125 = −8% [1]. (c) Axes: dirn per tala (vertical) and quantity of tala (horizontal), with D, S and the original equilibrium (0.125, 500) [1]. D shifts left to D1, giving a new equilibrium at a lower rate and quantity (0.115, 420) [1]. [7] Examiner insight: A shift in demand is shown by moving the curve, not by moving along it. Label both equilibria.

6. (a) At 0.125: Qd = 1340 − 1000 = 340 and Qs = 8000 × 0.125 − 500 = 500 [1]. Excess supply of 160 (million tala) [1]. (b) The bank buys 160 tala: 160 × 0.125 = 20 dirn [1]. (c) 90 ÷ 20 = 4.5, so 4 whole months [1]. (d) Raise interest rates to attract capital and increase demand for tala [1]. Cost: higher borrowing costs slow growth and investment [1]. [6] Examiner insight: A cost must be attached to the policy. Naming the tool alone is description.

7. Interest rates are an important cause:

• A higher rate relative to other countries raises returns on the currency’s assets [1], so “hot money” flows in and demand shifts right, causing appreciation [1].
• The effect is strong in the short run because financial flows are large and fast [1].

Limits and other causes:

• Real returns matter: if inflation is higher, the nominal gain is eroded [1].
• Relative inflation and trade flows govern the longer-run rate [1].
• Speculation, confidence and investment decisions can swamp interest rate effects [1].
• The effect depends on whether the change is expected to last [1].

Judgement: interest rates are likely the main short-run cause but not the sole or the long-run cause [1]. [8] Examiner insight: A conclusion that separates short run from long run, using the evidence given, shows evaluation. A list of causes alone does not.

8. (a) New input cost = 80 × 10 = 800 tala [1], up from 640, a rise of 160 ÷ 640 = 25% [1]. Total batch cost = 2,000 − 640 + 800 = 2,160, a rise of 8.0% [1]. (b) For the wider economy:

• Exports become cheaper abroad and imports dearer, which may raise net exports [1], although the effect depends on elasticities [1].
• Imported inflation rises as input and consumer prices increase [1].
• Aggregate demand rises through net exports but short-run aggregate supply falls as costs rise [1].
• Foreign-currency debts rise in tala terms [1].
• Judgement: the net effect depends on how open the economy is, spare capacity and how long the change lasts [1]. [9] Examiner insight: Weigh the costs and benefits against each other. Stating that a depreciation “helps exporters” without limits stays at description.

9. (a) A system combining features of fixed and floating rates [1]: the market sets the rate in the main, but the authorities intervene or guide it [1]. (b) A managed float: the rate moves with demand and supply [1], but the central bank buys or sells to smooth or steer movements [1]. Band or crawling peg answers also earn credit. (c) For example Singapore or China, which the International Monetary Fund’s 2023 report classed as a crawl-like arrangement and an other managed arrangement respectively [1]. Check the latest classification. [5] Examiner insight: A hybrid example needs a statement of how it combines fixed and floating features, not just a country name.

10. For fixed:

• A peg reduces uncertainty for importers of essential goods [1].
• It stops a depreciation raising food and fuel prices [1].
• It can import credibility on inflation [1].

Against fixed:

• It needs large reserves, and defending the peg is costly [1].
• Interest rates are tied to the anchor [1].
• The rate may become misaligned [1].

For floating:

• It adjusts automatically and gives policy freedom [1], but a fall would raise import prices sharply, since demand for food and fuel is inelastic [1].

Judgement: with high import dependence and inelastic demand, stability is likely to matter most, so a peg or tightly managed rate is better if reserves and credibility are sufficient [1]. Otherwise a managed float is a compromise [1]. [10] Examiner insight: Apply the context. Answers that use the stated imports of food and fuel tend to gain more than general lists of merits.

Where marks are usually lost

• Taking a percentage change in the wrong currency.
• Missing units, or reporting a rate without saying which currency is the price.
• Unlabelled diagrams or a single equilibrium shown.
• Treating nominal and real rates as the same.
• Describing intervention without saying what it costs.
• Writing about depreciation helping trade without noting elasticities and time lags.
• Offering a list of merits and drawbacks with no judgement.
• Using a hybrid example without explaining what is managed.

Next steps

• Review the revision notes and the study guide.
• See the OCR Economics hub and the printable checklist.
• Take the free 10-minute diagnostics.
• Book a free trial class.

Official syllabus

OCR, A Level in Economics (H460), Version 3.0 (June 2026), for first assessment in 2021, published by Oxford Cambridge and RSA Examinations.