OxfordAQA International AS and A-level Economics: Exchange rates (9640) – 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 3.4.2.2 (exchange rates) of the OxfordAQA International AS and A-level Economics specification (version 1.2). Section 3.4 is extra International A2 content. Country C uses the cor and Country D uses the dun. Both are made up, as are all figures. Revise first with the study guide and the revision notes. The course hub is OxfordAQA A-level Economics and the printable list is the checklist. The free diagnostics help you find weak areas.

Questions

1. Distinguish between a depreciation and a devaluation of a currency. [2]

2. The exchange rate moves from 1 cor = 5.00 dun to 1 cor = 4.50 dun.

(a) Find the percentage change in the cor’s value. [2] (b) Find the percentage change in the dun’s value, expressed in cor. [2]

3. Explain two factors that could cause the cor to appreciate in a freely floating system. [4]

4. The table gives demand and supply for the cor, in millions of cor per month.

Rate (dun per cor)	4.0	4.5	5.0	5.5	6.0
Demand	110	95	80	65	50
Supply	50	65	80	95	110

(a) State the equilibrium exchange rate. [1] (b) Demand falls by 30 million cor at every rate. Find the new equilibrium rate. [2] (c) Calculate the percentage change in the rate. [2]

5. (a) A speculator spends 600,000 dun buying cor at 5.00, then sells them when the rate reaches 5.40. Calculate the profit in dun. [3] (b) Explain how herding behaviour can make an exchange rate more volatile. [3]

6. Country C’s central bank holds the cor at 5.00 dun. At that rate, supply of the cor exceeds demand by 40 million cor.

(a) Calculate the reserves of dun the bank must use to hold the rate. [2] (b) Its reserves are 1,000 million dun. How many such periods can it defend the rate? [1] (c) Explain two reasons why the intervention may eventually fail. [2]

7. Explain a benefit and a drawback of a fixed rate for firms in a small trading country. [4]

8. The cor falls from 5.00 to 4.00 dun.

(a) An exporter sells a machine for 2,000 cor. Calculate its price in dun before and after. [2] (b) An import costs 600 dun. Calculate its price in cor before and after, and the percentage rise. [2] (c) Exports are worth 200 million cor and imports 100 million cor. Export prices in cor are unchanged. Export PED is -1.2 and import PED is -0.8. Calculate the new value of exports and of imports in cor. [4] (d) State the change in the trade balance. [1]

9. A bakery’s costs are 50,000 cor a month, of which 40% is imported flour and equipment. Import prices in cor rise 20% after a depreciation.

(a) Calculate the increase in costs in cor and as a percentage of total costs. [3] (b) Explain one other way a depreciation could affect the bakery. [2]

10. Explain two roles of the International Monetary Fund (IMF). [4]

11. Evaluate the view that a depreciation will always improve a country’s economic performance. [9]

Answers

1. A depreciation is a fall in value of a floating currency caused by market forces [1]. A devaluation is a deliberate official reduction of the rate under a fixed or managed system [1]. [2] Examiner insight: Name who causes the change in each term, because the definitions differ only in market versus official action.

2. (a) (4.50 - 5.00) / 5.00 [1] = -10% [1]. (b) The dun was worth 1 / 5.00 = 0.2000 cor and is now 1 / 4.50 = 0.2222 cor [1]. The change is (0.2222 - 0.2000) / 0.2000 = +11.1% [1]. [4] Examiner insight: The two currencies change by different percentages because they have different bases, so state which currency you are measuring.

3. Any two of the following, each explained. Higher interest rates in C than abroad [1] raise returns on assets, so more portfolio inflows raise demand for the cor and the rate rises [1]. Lower inflation in C than in competitors [1] makes exports more competitive, so demand for the cor rises [1]. A rise in FDI inflows would also work, because foreign firms must buy cor. [4] Examiner insight: A named factor on its own tends to gain less credit than one linked through a shift of the demand or supply curve to a higher rate.

4. (a) 5.0 dun per cor [1]. (b) New demand is 80, 65, 50, 35, 20 [1]. It equals supply (65) at 4.5 [1]. (c) (4.5 - 5.0) / 5.0 [1] = -10%, a depreciation [1]. [5] Examiner insight: Show the shifted demand figures so your reasoning is visible, and say whether the change is an appreciation or a depreciation.

5. (a) 600,000 / 5.00 = 120,000 cor [1]. 120,000 × 5.40 = 648,000 dun [1]. Profit 48,000 dun (8%) [1]. (b) Traders copy each other rather than assess fundamentals [1]. If many buy, demand rises and the rate overshoots [1]. When confidence turns, they sell together, causing a sharp fall [1]. [6] Examiner insight: Describe the mechanism of copying and overshooting, and avoid defining herding as speculation in general.

6. (a) The bank must buy 40 million cor [1]. Cost is 40 × 5.00 = 200 million dun [1]. (b) 1,000 / 200 = 5 periods [1]. (c) Reserves are finite and run out [1]. Speculators may sell more cor than the bank can buy, or raising interest rates to defend the rate may harm growth [1]. [5] Examiner insight: Convert the currency amount at the defended rate, and state the unit of the reserves.

7. Advantage: stability [1], so firms can price contracts and plan investment with less exchange rate risk [1]. Disadvantage: the rate cannot adjust to shocks [1], so if the peg is set too high, exporters may become uncompetitive, and defending it may need high interest rates [1]. [4] Examiner insight: Tie each point to firms, not only to the government, as the question asks about firms.

8. (a) Before: 2,000 × 5.00 = 10,000 dun; after: 2,000 × 4.00 = 8,000 dun [1] [1]. (b) Before: 600 / 5.00 = 120 cor; after: 600 / 4.00 = 150 cor [1]. Rise = 30 / 120 = 25% [1]. (c) Foreign price falls 20%, so quantity rises 1.2 × 20 = 24% [1]. Exports = 200 × 1.24 = 248 million cor [1]. Import price rises 25%, so quantity falls 0.8 × 25 = 20% [1]. Import spending = 100 × 1.25 × 0.80 = 100 million cor [1]. (d) Balance moves from +100 to +148, an improvement of 48 million cor [1]. [9] Examiner insight: Show the quantity change before the value change, and remember that import prices rise when the home currency falls.

9. (a) Imported costs are 0.40 × 50,000 = 20,000 [1]. The rise is 20% × 20,000 = 4,000 cor [1], which is 4,000 / 50,000 = 8% [1]. (b) If the bakery exports, its goods are cheaper abroad [1], so it may sell more or earn higher margins [1]. [5] Examiner insight: Use the data given for part (a), and in part (b) give a different effect from the one already calculated.

10. Any two, each developed: it lends to members with balance of payments difficulties [1], often with policy conditions [1]; it monitors members’ economies and advises on policy [1], helping to spot problems early [1]; or it promotes monetary cooperation and exchange rate stability. [4] Examiner insight: State each role and then add what it achieves; a bare list of functions does not develop either point.

11. Points for credit: lower export prices abroad and higher import prices at home [1]. The trade balance improves only if demand for exports and imports is elastic enough [1]. Elasticities are often low soon after the change, so the balance can get worse at first [1]. If net exports rise, AD, output and employment rise [1], especially with spare capacity and a multiplier [1]. Near full capacity, extra demand mainly raises prices [1]. Dearer imported inputs raise firms’ costs and inflation [1]. Exporters may keep the extra profit rather than cut prices, limiting volume gains [1]. Judgement: a depreciation does not always help; the result depends on elasticities, time, spare capacity and import dependence [1]. [9] Examiner insight: The word “always” invites you to find a counter-case; a supported judgement that names the conditions usually reads better than a list of effects.

Where marks are usually lost

• Confusing depreciation with devaluation, or appreciation with revaluation.
• Using the wrong base for a percentage change in a rate.
• Inverting the exchange rate in a calculation.
• Naming a factor with no step to a shift in demand or supply.
• Stating that depreciation improves the trade balance with no elasticity.
• Forgetting that import prices rise after a depreciation.
• Leaving out the unit of reserves or the rate used.
• Ending an evaluation with no judgement.

Next steps

• Review the revision notes and the study guide.
• Check the course hub and tick off the checklist.
• Take the free 10-minute diagnostics.
• Book a free trial class.

Official syllabus

OxfordAQA International AS and A-level Economics (9640), specification version 1.2, first teaching September 2020, published by OxfordAQA: section 3.4.2.2.