IB · ECON SL

Economics SL

Exchange rates and the balance of payments — Unit 4

Name: ____________________Date: October 2, 2026

1.
The exchange rate between the British pound (GBP) and the US dollar (USD) moves from £1 = $1.25 to £1 = $1.35. (a) Calculate the percentage change in the value of the pound. (b) State whether the pound has appreciated or depreciated against the dollar.
[3 marks]
Marking points
- Calculates the percentage change as (1.35 − 1.25)/1.25 × 100.
- Obtains a percentage change of 8%.
- States that the pound has appreciated against the dollar, since one pound now buys more dollars than before.
Examiner tip: A currency appreciates when it buys more of another currency than before, and depreciates when it buys less — always check which currency's value is being expressed in terms of the other before deciding the direction.
2.
Marking analysis: A learner attempts the following task: “The exchange rate between the British pound (GBP) and the US dollar (USD) moves from £1 = $1.25 to £1 = $1.35. (a) Calculate the percentage change in the value of the pound. (b) State whether the pound has appreciated or depreciated against the dollar.” Their response addresses only this point: “Calculates the percentage change as (1.35 − 1.25)/1.25 × 100.” Evaluate the response against the complete 3-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[3 marks]
Marking points
- Recognises credit for the stated point: Calculates the percentage change as (1.35 − 1.25)/1.25 × 100.
- Identifies the missing requirement: Obtains a percentage change of 8%.
- Identifies the missing requirement: States that the pound has appreciated against the dollar, since one pound now buys more dollars than before.
Examiner tip: Treat each marking point as a separate requirement. Do not award the same idea twice, and do not infer work the learner did not show.
3.
Explain, using a demand and supply diagram for a currency in words, how an increase in a country's interest rate relative to other countries is likely to affect the value of its currency under a floating exchange rate system.
[4 marks] · no calculator
Marking points
- States that a higher interest rate makes financial assets denominated in that currency (e.g., bonds, savings accounts) more attractive to foreign investors seeking higher returns.
- Explains that this increases demand for the currency, as foreign investors need to buy it to purchase these assets, shifting the demand curve for the currency to the right.
- States that this increased demand raises the equilibrium exchange rate, causing the currency to appreciate.
- Notes this relationship is a key reason central bank interest rate decisions are closely watched for their expected effect on the exchange rate.
Examiner tip: Higher relative interest rates attract 'hot money' capital flows seeking the best return — this capital flow channel is often a faster and larger driver of short-run exchange rate movements than trade flows.
4.
Marking analysis: A learner attempts the following task: “Explain, using a demand and supply diagram for a currency in words, how an increase in a country's interest rate relative to other countries is likely to affect the value of its currency under a floating exchange rate system.” Their response addresses only this point: “States that a higher interest rate makes financial assets denominated in that currency (e.g., bonds, savings accounts) more attractive to foreign investors seeking higher returns.” Evaluate the response against the complete 4-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[4 marks] · no calculator
Marking points
- Recognises credit for the stated point: States that a higher interest rate makes financial assets denominated in that currency (e.g., bonds, savings accounts) more attractive to foreign investors seeking higher returns.
- Identifies the missing requirement: Explains that this increases demand for the currency, as foreign investors need to buy it to purchase these assets, shifting the demand curve for the currency to the right.
- Identifies the missing requirement: States that this increased demand raises the equilibrium exchange rate, causing the currency to appreciate.
- Identifies the missing requirement: Notes this relationship is a key reason central bank interest rate decisions are closely watched for their expected effect on the exchange rate.
Examiner tip: Treat each marking point as a separate requirement. Do not award the same idea twice, and do not infer work the learner did not show.
5.
Explain how a government operating a fixed exchange rate system could intervene in the foreign exchange market to prevent its currency from depreciating below the fixed rate.
[3 marks] · no calculator
Marking points
- States that the central bank would need to increase demand for its own currency to support its value.
- Explains that the central bank can do this by using its foreign currency reserves to buy its own currency on the foreign exchange market.
- Notes that this strategy is limited by the size of the country's foreign currency reserves, and sustained pressure could eventually force a devaluation if reserves run low.
Examiner tip: Defending a fixed exchange rate against depreciation pressure always draws down foreign reserves — this is why fixed exchange rate regimes are vulnerable to speculative attacks when markets doubt a central bank has enough reserves to hold the line.
6.
Marking analysis: A learner attempts the following task: “Explain how a government operating a fixed exchange rate system could intervene in the foreign exchange market to prevent its currency from depreciating below the fixed rate.” Their response addresses only this point: “States that the central bank would need to increase demand for its own currency to support its value.” Evaluate the response against the complete 3-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[3 marks] · no calculator
Marking points
- Recognises credit for the stated point: States that the central bank would need to increase demand for its own currency to support its value.
- Identifies the missing requirement: Explains that the central bank can do this by using its foreign currency reserves to buy its own currency on the foreign exchange market.
- Identifies the missing requirement: Notes that this strategy is limited by the size of the country's foreign currency reserves, and sustained pressure could eventually force a devaluation if reserves run low.
Examiner tip: Treat each marking point as a separate requirement. Do not award the same idea twice, and do not infer work the learner did not show.
7.
Classify each of the following transactions into the correct component of the balance of payments (current account or financial account): (a) A domestic company exports machinery to a foreign buyer. (b) A foreign company buys a 30% ownership stake in a domestic firm. (c) A resident receives dividend income from shares held in a foreign company. (d) A domestic bank deposits funds in a foreign bank account.
[4 marks] · no calculator
Marking points
- Classifies the machinery export as part of the current account (trade in goods).
- Classifies the 30% ownership stake purchase as part of the financial account (foreign direct investment).
- Classifies the dividend income as part of the current account (primary income).
- Classifies the bank deposit abroad as part of the financial account (portfolio/other investment).
Examiner tip: A useful rule of thumb: the current account records flows of goods, services, income, and transfers, while the financial account records changes in ownership of financial assets and liabilities between residents and non-residents.
8.
Marking analysis: A learner attempts the following task: “Classify each of the following transactions into the correct component of the balance of payments (current account or financial account): (a) A domestic company exports machinery to a foreign buyer. (b) A foreign company buys a 30% ownership stake in a domestic firm. (c) A resident receives dividend income from shares held in a foreign company. (d) A domestic bank deposits funds in a foreign bank account.” Their response addresses only this point: “Classifies the machinery export as part of the current account (trade in goods).” Evaluate the response against the complete 4-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[4 marks] · no calculator
Marking points
- Recognises credit for the stated point: Classifies the machinery export as part of the current account (trade in goods).
- Identifies the missing requirement: Classifies the 30% ownership stake purchase as part of the financial account (foreign direct investment).
- Identifies the missing requirement: Classifies the dividend income as part of the current account (primary income).
- Identifies the missing requirement: Classifies the bank deposit abroad as part of the financial account (portfolio/other investment).
Examiner tip: Treat each marking point as a separate requirement. Do not award the same idea twice, and do not infer work the learner did not show.
9.
A country has been running a persistent current account deficit for several years. Explain two possible consequences of a persistent current account deficit for this country's economy.
[2 marks] · no calculator
Marking points
- Explains that a persistent current account deficit must be financed by a corresponding financial account surplus, often meaning the country is increasingly borrowing from or selling assets to foreigners, building up external debt or foreign ownership of domestic assets over time.
- Explains a second valid consequence, such as putting downward pressure on the currency's exchange rate over time, or the country becoming vulnerable to a sudden loss of foreign investor confidence ('sudden stop') that could force a sharp, disruptive economic adjustment.
Examiner tip: A current account deficit is not automatically bad — it depends on what is financing it (e.g., productive investment inflows versus unsustainable borrowing) and how long it persists, so always frame the consequence as a risk rather than an automatic crisis.
10.
Marking analysis: A learner attempts the following task: “A country has been running a persistent current account deficit for several years. Explain two possible consequences of a persistent current account deficit for this country's economy.” Their response addresses only this point: “Explains that a persistent current account deficit must be financed by a corresponding financial account surplus, often meaning the country is increasingly borrowing from or selling assets to foreigners, building up external debt or foreign ownership of domestic assets over time.” Evaluate the response against the complete 2-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[2 marks] · no calculator
Marking points
- Recognises credit for the stated point: Explains that a persistent current account deficit must be financed by a corresponding financial account surplus, often meaning the country is increasingly borrowing from or selling assets to foreigners, building up external debt or foreign ownership of domestic assets over time.
- Identifies the missing requirement: Explains a second valid consequence, such as putting downward pressure on the currency's exchange rate over time, or the country becoming vulnerable to a sudden loss of foreign investor confidence ('sudden stop') that could force a sharp, disruptive economic adjustment.
Examiner tip: Treat each marking point as a separate requirement. Do not award the same idea twice, and do not infer work the learner did not show.
11.
Explain how a real depreciation of a country's currency could help correct a current account deficit, and state one condition needed for this to actually improve the trade balance (the Marshall-Lerner condition).
[3 marks] · no calculator
Marking points
- Explains that a depreciation makes the country's exports cheaper for foreign buyers (in foreign currency terms) and imports more expensive for domestic buyers (in domestic currency terms).
- Explains that this should increase the quantity of exports sold and decrease the quantity of imports bought, improving the trade balance if the volume effect is large enough.
- States the Marshall-Lerner condition: the sum of the price elasticities of demand for exports and imports must exceed 1 for a depreciation to improve the trade balance.
Examiner tip: If combined demand for exports and imports is sufficiently inelastic (sum of elasticities less than 1), a depreciation can actually worsen the trade balance in value terms, even though volumes move in the expected direction.
12.
Marking analysis: A learner attempts the following task: “Explain how a real depreciation of a country's currency could help correct a current account deficit, and state one condition needed for this to actually improve the trade balance (the Marshall-Lerner condition).” Their response addresses only this point: “Explains that a depreciation makes the country's exports cheaper for foreign buyers (in foreign currency terms) and imports more expensive for domestic buyers (in domestic currency terms).” Evaluate the response against the complete 3-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[3 marks] · no calculator
Marking points
- Recognises credit for the stated point: Explains that a depreciation makes the country's exports cheaper for foreign buyers (in foreign currency terms) and imports more expensive for domestic buyers (in domestic currency terms).
- Identifies the missing requirement: Explains that this should increase the quantity of exports sold and decrease the quantity of imports bought, improving the trade balance if the volume effect is large enough.
- Identifies the missing requirement: States the Marshall-Lerner condition: the sum of the price elasticities of demand for exports and imports must exceed 1 for a depreciation to improve the trade balance.
Examiner tip: Treat each marking point as a separate requirement. Do not award the same idea twice, and do not infer work the learner did not show.
13.
Explain the 'J-curve effect' that can occur following a currency depreciation, describing why the trade balance might initially worsen before it improves.
[3 marks] · no calculator
Marking points
- States that in the short run, the quantities of exports and imports are relatively unresponsive to the price change (demand is inelastic), since existing trade contracts and consumer habits take time to adjust.
- Explains that since import prices (in domestic currency) rise immediately while import volumes fall only slowly, the value of imports initially increases, worsening the trade balance.
- Explains that over time, as quantities adjust (becoming more elastic in the long run), export volumes rise and import volumes fall enough to improve the trade balance, tracing out a 'J' shape over time on a graph of the trade balance.
Examiner tip: The J-curve is really just the Marshall-Lerner condition viewed over time: elasticities are typically low in the short run (worsening the balance) but become high enough in the long run (improving it), tracing the characteristic J shape.
14.
Marking analysis: A learner attempts the following task: “Explain the 'J-curve effect' that can occur following a currency depreciation, describing why the trade balance might initially worsen before it improves.” Their response addresses only this point: “States that in the short run, the quantities of exports and imports are relatively unresponsive to the price change (demand is inelastic), since existing trade contracts and consumer habits take time to adjust.” Evaluate the response against the complete 3-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[3 marks] · no calculator
Marking points
- Recognises credit for the stated point: States that in the short run, the quantities of exports and imports are relatively unresponsive to the price change (demand is inelastic), since existing trade contracts and consumer habits take time to adjust.
- Identifies the missing requirement: Explains that since import prices (in domestic currency) rise immediately while import volumes fall only slowly, the value of imports initially increases, worsening the trade balance.
- Identifies the missing requirement: Explains that over time, as quantities adjust (becoming more elastic in the long run), export volumes rise and import volumes fall enough to improve the trade balance, tracing out a 'J' shape over time on a graph of the trade balance.
Examiner tip: Treat each marking point as a separate requirement. Do not award the same idea twice, and do not infer work the learner did not show.
15.
The theory of purchasing power parity (PPP) suggests that a Big Mac costs $5 in the United States and £4 in the United Kingdom. (a) Calculate the PPP-implied exchange rate between the pound and the dollar. (b) If the actual market exchange rate is £1 = $1.35, state whether the pound is overvalued or undervalued according to this comparison, and by approximately what percentage.
[4 marks]
Marking points
- Calculates the PPP-implied exchange rate as the ratio of the two prices: $5/£4 = $1.25 per pound.
- Compares this to the actual market rate of $1.35 per pound, noting that $1.35 is higher than the PPP-implied $1.25.
- States that the pound is overvalued relative to its PPP-implied rate, since it buys more dollars in the market than the price comparison suggests it should.
- Calculates the approximate overvaluation as (1.35 − 1.25)/1.25 × 100 ≈ 8%.
Examiner tip: The 'Big Mac Index' is a simplified, widely cited real-world application of purchasing power parity — it compares the price of an identical good across countries to estimate whether a currency's market value is over- or under-valued.
16.
Marking analysis: A learner attempts the following task: “The theory of purchasing power parity (PPP) suggests that a Big Mac costs $5 in the United States and £4 in the United Kingdom. (a) Calculate the PPP-implied exchange rate between the pound and the dollar. (b) If the actual market exchange rate is £1 = $1.35, state whether the pound is overvalued or undervalued according to this comparison, and by approximately what percentage.” Their response addresses only this point: “Calculates the PPP-implied exchange rate as the ratio of the two prices: $5/£4 = $1.25 per pound.” Evaluate the response against the complete 4-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[4 marks]
Marking points
- Recognises credit for the stated point: Calculates the PPP-implied exchange rate as the ratio of the two prices: $5/£4 = $1.25 per pound.
- Identifies the missing requirement: Compares this to the actual market rate of $1.35 per pound, noting that $1.35 is higher than the PPP-implied $1.25.
- Identifies the missing requirement: States that the pound is overvalued relative to its PPP-implied rate, since it buys more dollars in the market than the price comparison suggests it should.
- Identifies the missing requirement: Calculates the approximate overvaluation as (1.35 − 1.25)/1.25 × 100 ≈ 8%.
Examiner tip: Treat each marking point as a separate requirement. Do not award the same idea twice, and do not infer work the learner did not show.
17.
Distinguish between a fixed exchange rate system and a floating exchange rate system, and state one advantage of a floating exchange rate for a country's macroeconomic policy.
[3 marks] · no calculator
Marking points
- States that under a fixed exchange rate, the government or central bank sets and maintains the exchange rate at a specific value, intervening in the market as needed.
- States that under a floating exchange rate, the exchange rate is determined freely by the forces of supply and demand in the foreign exchange market, without direct government intervention.
- States a valid advantage of floating rates, such as automatic adjustment to correct trade imbalances without requiring active central bank intervention, or the central bank retaining full independence to set interest rates based on domestic objectives rather than defending a fixed rate.
Examiner tip: A classic trade-off in international macroeconomics: fixed rates offer certainty for trade and investment but sacrifice independent monetary policy, while floating rates preserve monetary policy independence but introduce exchange rate uncertainty.
18.
Marking analysis: A learner attempts the following task: “Distinguish between a fixed exchange rate system and a floating exchange rate system, and state one advantage of a floating exchange rate for a country's macroeconomic policy.” Their response addresses only this point: “States that under a fixed exchange rate, the government or central bank sets and maintains the exchange rate at a specific value, intervening in the market as needed.” Evaluate the response against the complete 3-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[3 marks] · no calculator
Marking points
- Recognises credit for the stated point: States that under a fixed exchange rate, the government or central bank sets and maintains the exchange rate at a specific value, intervening in the market as needed.
- Identifies the missing requirement: States that under a floating exchange rate, the exchange rate is determined freely by the forces of supply and demand in the foreign exchange market, without direct government intervention.
- Identifies the missing requirement: States a valid advantage of floating rates, such as automatic adjustment to correct trade imbalances without requiring active central bank intervention, or the central bank retaining full independence to set interest rates based on domestic objectives rather than defending a fixed rate.
Examiner tip: Treat each marking point as a separate requirement. Do not award the same idea twice, and do not infer work the learner did not show.
19.
Explain how an increase in a country's inflation rate relative to its trading partners, with a floating exchange rate, is likely to affect its currency's value over time.
[3 marks] · no calculator
Marking points
- Explains that higher relative inflation makes the country's exports relatively more expensive and imports relatively cheaper, reducing demand for the country's goods (and therefore its currency) abroad while increasing demand for foreign goods (and foreign currency) domestically.
- Explains that this combination (lower demand for the currency, higher supply of the currency as residents buy more foreign currency to purchase imports) puts downward pressure on the exchange rate.
- Concludes that the currency is likely to depreciate over time relative to the currencies of lower-inflation trading partners.
Examiner tip: This long-run relationship between relative inflation and exchange rate movements is essentially a dynamic version of purchasing power parity — a country with persistently higher inflation should expect its currency to persistently depreciate.
20.
Marking analysis: A learner attempts the following task: “Explain how an increase in a country's inflation rate relative to its trading partners, with a floating exchange rate, is likely to affect its currency's value over time.” Their response addresses only this point: “Explains that higher relative inflation makes the country's exports relatively more expensive and imports relatively cheaper, reducing demand for the country's goods (and therefore its currency) abroad while increasing demand for foreign goods (and foreign currency) domestically.” Evaluate the response against the complete 3-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[3 marks] · no calculator
Marking points
- Recognises credit for the stated point: Explains that higher relative inflation makes the country's exports relatively more expensive and imports relatively cheaper, reducing demand for the country's goods (and therefore its currency) abroad while increasing demand for foreign goods (and foreign currency) domestically.
- Identifies the missing requirement: Explains that this combination (lower demand for the currency, higher supply of the currency as residents buy more foreign currency to purchase imports) puts downward pressure on the exchange rate.
- Identifies the missing requirement: Concludes that the currency is likely to depreciate over time relative to the currencies of lower-inflation trading partners.
Examiner tip: Treat each marking point as a separate requirement. Do not award the same idea twice, and do not infer work the learner did not show.
21.
Explain why a current account deficit does not necessarily indicate a weak or poorly performing economy, using the example of a developing country attracting significant foreign direct investment.
[3 marks] · no calculator
Marking points
- Explains that a current account deficit is always matched by a financial account surplus of equal size, meaning net capital is flowing into the country.
- Explains that if this inflow consists largely of foreign direct investment used to build productive capacity (factories, infrastructure), it can support future economic growth and export capacity, rather than reflecting unsustainable borrowing for consumption.
- Concludes that the quality and use of the financing matters more than the simple existence of a current account deficit when judging an economy's health.
Examiner tip: Always evaluate a current account deficit by asking what is financing it — productive investment inflows are a very different situation from a deficit financed by short-term speculative borrowing or depleting foreign reserves.
22.
Marking analysis: A learner attempts the following task: “Explain why a current account deficit does not necessarily indicate a weak or poorly performing economy, using the example of a developing country attracting significant foreign direct investment.” Their response addresses only this point: “Explains that a current account deficit is always matched by a financial account surplus of equal size, meaning net capital is flowing into the country.” Evaluate the response against the complete 3-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[3 marks] · no calculator
Marking points
- Recognises credit for the stated point: Explains that a current account deficit is always matched by a financial account surplus of equal size, meaning net capital is flowing into the country.
- Identifies the missing requirement: Explains that if this inflow consists largely of foreign direct investment used to build productive capacity (factories, infrastructure), it can support future economic growth and export capacity, rather than reflecting unsustainable borrowing for consumption.
- Identifies the missing requirement: Concludes that the quality and use of the financing matters more than the simple existence of a current account deficit when judging an economy's health.
Examiner tip: Treat each marking point as a separate requirement. Do not award the same idea twice, and do not infer work the learner did not show.
23.
State and explain two expenditure-switching policies a government could use to reduce a current account deficit (other than exchange rate depreciation).
[2 marks] · no calculator
Marking points
- States and explains protectionist measures (tariffs or quotas) on imports: these directly raise the price or restrict the quantity of imported goods, encouraging consumers to switch to domestically produced substitutes.
- States and explains subsidies for domestic import-competing or export industries: these lower the relative price of domestic goods compared to imports, or make exports more price-competitive abroad, switching expenditure toward domestic production.
Examiner tip: Expenditure-switching policies aim to change the relative price of domestic versus foreign goods to shift spending patterns, in contrast to expenditure-reducing policies (like contractionary fiscal/monetary policy) that simply shrink total demand, including demand for imports.
24.
Marking analysis: A learner attempts the following task: “State and explain two expenditure-switching policies a government could use to reduce a current account deficit (other than exchange rate depreciation).” Their response addresses only this point: “States and explains protectionist measures (tariffs or quotas) on imports: these directly raise the price or restrict the quantity of imported goods, encouraging consumers to switch to domestically produced substitutes.” Evaluate the response against the complete 2-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[2 marks] · no calculator
Marking points
- Recognises credit for the stated point: States and explains protectionist measures (tariffs or quotas) on imports: these directly raise the price or restrict the quantity of imported goods, encouraging consumers to switch to domestically produced substitutes.
- Identifies the missing requirement: States and explains subsidies for domestic import-competing or export industries: these lower the relative price of domestic goods compared to imports, or make exports more price-competitive abroad, switching expenditure toward domestic production.
Examiner tip: Treat each marking point as a separate requirement. Do not award the same idea twice, and do not infer work the learner did not show.
25.
Explain two likely effects of a significant depreciation of a country's currency on its domestic economy.
[3 marks] · no calculator
Marking points
- Explains that exports become cheaper in foreign currency terms and imports dearer in domestic currency terms, which can raise export volumes and reduce import volumes, increasing aggregate demand.
- Explains that more expensive imported goods and raw materials raise costs of production and consumer prices, creating cost-push (imported) inflation.
- Links the two effects by noting the net outcome depends on how price elastic demand for exports and imports is and on how reliant the economy is on imported inputs.
Examiner tip: A depreciation helps competitiveness but also raises import prices — a strong answer states both sides rather than only the export benefit.
26.
Marking analysis: A learner attempts the following task: “Explain two likely effects of a significant depreciation of a country's currency on its domestic economy.” Their response addresses only this point: “Explains that exports become cheaper in foreign currency terms and imports dearer in domestic currency terms, which can raise export volumes and reduce import volumes, increasing aggregate demand.” Evaluate the response against the complete 3-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[3 marks] · no calculator
Marking points
- Recognises credit for the stated point: Explains that exports become cheaper in foreign currency terms and imports dearer in domestic currency terms, which can raise export volumes and reduce import volumes, increasing aggregate demand.
- Identifies the missing requirement: Explains that more expensive imported goods and raw materials raise costs of production and consumer prices, creating cost-push (imported) inflation.
- Identifies the missing requirement: Links the two effects by noting the net outcome depends on how price elastic demand for exports and imports is and on how reliant the economy is on imported inputs.
Examiner tip: Treat each marking point as a separate requirement. Do not award the same idea twice, and do not infer work the learner did not show.
27.
A US firm sells a machine for $200. The exchange rate is $1 = 3.67 AED. (a) Calculate the price in AED. (b) The US dollar depreciates to $1 = 3.50 AED. Calculate the new AED price and the percentage change in the AED price, to 1 decimal place. (c) State what this implies for the machine's price competitiveness in the UAE.
[4 marks]
Marking points
- Calculates the original AED price as 200 × 3.67 = 734 AED.
- Calculates the new AED price as 200 × 3.50 = 700 AED.
- Calculates the percentage change as (700 − 734)/734 × 100 = −4.6%.
- States that the machine becomes cheaper for UAE buyers, improving its price competitiveness there.
Examiner tip: Convert by multiplying the foreign price by the exchange rate quoted as units of local currency per dollar; always compute the percentage change against the original price.
28.
Marking analysis: A learner attempts the following task: “A US firm sells a machine for $200. The exchange rate is $1 = 3.67 AED. (a) Calculate the price in AED. (b) The US dollar depreciates to $1 = 3.50 AED. Calculate the new AED price and the percentage change in the AED price, to 1 decimal place. (c) State what this implies for the machine's price competitiveness in the UAE.” Their response addresses only this point: “Calculates the original AED price as 200 × 3.67 = 734 AED.” Evaluate the response against the complete 4-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[4 marks]
Marking points
- Recognises credit for the stated point: Calculates the original AED price as 200 × 3.67 = 734 AED.
- Identifies the missing requirement: Calculates the new AED price as 200 × 3.50 = 700 AED.
- Identifies the missing requirement: Calculates the percentage change as (700 − 734)/734 × 100 = −4.6%.
- Identifies the missing requirement: States that the machine becomes cheaper for UAE buyers, improving its price competitiveness there.
Examiner tip: Treat each marking point as a separate requirement. Do not award the same idea twice, and do not infer work the learner did not show.
29.
Distinguish between a freely floating exchange rate and a managed float, and explain one reason a central bank might manage its currency's value.
[3 marks] · no calculator
Marking points
- States that in a free float the exchange rate is set purely by market demand and supply with no central bank intervention.
- States that in a managed float the market largely sets the rate but the central bank intervenes (buying/selling currency or changing interest rates) to smooth or limit movements.
- Explains a valid reason, such as reducing exchange rate volatility that discourages trade and investment, or preventing a sharp appreciation that harms exporters.
Examiner tip: Most currencies today are managed floats in practice — the distinction is about how much and how often authorities intervene.
30.
Marking analysis: A learner attempts the following task: “Distinguish between a freely floating exchange rate and a managed float, and explain one reason a central bank might manage its currency's value.” Their response addresses only this point: “States that in a free float the exchange rate is set purely by market demand and supply with no central bank intervention.” Evaluate the response against the complete 3-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[3 marks] · no calculator
Marking points
- Recognises credit for the stated point: States that in a free float the exchange rate is set purely by market demand and supply with no central bank intervention.
- Identifies the missing requirement: States that in a managed float the market largely sets the rate but the central bank intervenes (buying/selling currency or changing interest rates) to smooth or limit movements.
- Identifies the missing requirement: Explains a valid reason, such as reducing exchange rate volatility that discourages trade and investment, or preventing a sharp appreciation that harms exporters.
Examiner tip: Treat each marking point as a separate requirement. Do not award the same idea twice, and do not infer work the learner did not show.