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Exchange Rates · Paper 1 — Free Economics HL Practice Questions
1FoundationSAQ-SDetermination of exchange rates8 marksPaper 1~12 min
India's inflation rate has risen to , while the inflation rate in the United Kingdom has remained at . Assume a floating exchange rate between the Indian rupee (INR) and the British pound (GBP).
(a)
Define the term "depreciation of a currency". [1 mark]
(b)
Explain how the higher inflation rate in India is likely to affect the value of the INR against the GBP. [3 marks]
(c)
Evaluate the extent to which purchasing power parity (PPP) theory can fully explain movements in the INR/GBP exchange rate. [4 marks]
Solutions
2FoundationSAQ-SDetermination of exchange rates4 marksPaper 1~6 min
The Swiss National Bank (SNB) has historically intervened to prevent the Swiss franc (CHF) from appreciating too much against the euro (EUR). In 2023, the SNB sold Swiss francs and bought euros on the foreign exchange market.
(a)
Define the term 'managed exchange rate'. [1 mark]
(b)
Explain how the SNB selling Swiss francs and buying euros would affect the external value of the Swiss franc against the euro. [3 marks]
Solutions
3MasterySAQ-STypes of exchange rate systems: Floating vs fixed4 marksPaper 1~6 min
The Central African CFA franc is pegged to the euro at CFA francs per euro. In 2024, a sharp fall in global demand for cotton — a major export of CFA franc countries — causes a large decrease in export revenues.
(a)
Draw a fully labelled exchange rate for the CFA franc, showing the effect of the fall in export revenues on the market for CFA francs. [2 marks]
(b)
Using your , explain the pressure this places on the fixed exchange rate and the central bank's response to maintain the peg. [2 marks]
Solutions
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