Exchange Rates · Paper 2 — Free Economics SL Practice Questions

Japan is a major exporter of automobiles and electronics and imports large quantities of oil, natural gas, and raw materials. In 2023, the Japanese yen depreciated against the US dollar, falling from $\yen130$ per dollar to $\yen150$ per dollar. The Bank of Japan maintained an ultra-loose monetary policy during this period, while the US Federal Reserve raised interest rates aggressively to combat inflation. Japanese consumers reported sharp increases in the price of imported food and fuel, while Toyota and Sony reported record profits from overseas sales.

Nigeria's fixed exchange rate and parallel market, 2022 In 2022, the Central Bank of Nigeria (CBN) maintained a fixed exchange rate of $410$ naira per US dollar. On the parallel ("black") market, the naira traded at approximately $700$ naira per dollar. Nigeria is Africa's largest oil exporter but imports most manufactured goods, food, and fuel. Official foreign exchange reserves fell from USD 40 billion in 2018 to USD 35 billion in 2022. The CBN restricted access to foreign currency for importing certain goods, including rice and textiles, to protect domestic industries.

In 2022, the Central Bank of Country X, a small open economy heavily reliant on tourism exports, abandoned its long-standing fixed exchange rate against the US dollar (pegged at $1\,\text{USD} = 2.50$ X-dollars) and adopted a floating exchange rate system. In the first six months after the float, the X-dollar depreciated by $15\%$ against the USD. The government had previously argued that the fixed rate provided stability for international trade and investment. However, tourism industry revenues fell by $8\%$ in the year following the float, while foreign direct investment (FDI) inflows decreased by $12\%$. Simultaneously, the domestic inflation rate rose from $2\%$ to $5.5\%$. The Minister of Finance now claims the float was a mistake and is considering re-pegging the currency.