CIE IGCSE Topical Past Paper 2
6.3 Foreign exchange rates
0455/22/M/J/23
In 2020, Australia had a high national minimum wage (NMW). The NMW is received by some people who work on Australian dairy farms. Australia produces milk and soft drinks. Milk is purchased by some people as an alternative to soft drinks. Some dairy farms and some small firms went out of business in 2020. The year saw an increase in the value of the country’s floating foreign exchange rate.
b) Explain two causes of an increase in the value of a country’s floating foreign exchange rate. [4]
0455/21/M/J/23
Many people from the Philippines work in another country, often in industries that provide merit goods and public goods. In 2020, the Philippine government raised more tax revenue. Some was spent on policy measures to increase life expectancy and some on policy measures to reduce unemployment. The country’s unemployment rate was also affected by a rise in the country’s foreign exchange rate.
d) Discuss whether or not a rise in a country’s foreign exchange rate would benefit its economy. [8]
0455/22/O/N/22
While 15% of US exports go to Mexico, 80% of Mexico’s exports go to the US. In 2019, the US government imposed some methods of protection to reduce imports from Mexico. This US action caused a fall in Mexico’s foreign exchange rate. Despite a rise in its inflation rate, Mexico’s central bank reduced the rate of interest from 7.75% at the end of 2019 to 6.5% in March 2020.
c) Analyse how a fall in a country’s foreign exchange rate could increase its inflation rate. [6]
0455/21/O/N/22
Jordan has a fixed foreign exchange rate with the US dollar. The monetary policy of Jordan, therefore, follows the monetary policy of the US very closely. Due to low confidence in the global economy in 2019, central banks around the world, including Jordan and the US, cut interest rates to stimulate growth. However, this may have conflicted with the macroeconomic aim of low inflation.
d) Discuss whether or not a country will benefit from having a fixed foreign exchange rate system. [8]
0455/22/M/J/21
The money supply in Bangladesh increased every year from 2010 to 2018. Changes in the money supply and the foreign exchange rate can affect a government’s macroeconomic policy aims, including full employment. There have been few mergers between commercial banks in Bangladesh, although its banks are larger than many of its other firms.
c) Analyse how a fall in a country’s foreign exchange rate could increase employment. [6]
0455/22/O/N/20
Wage rate growth has increased recently in Kazakhstan, but its economic growth rate has slowed. This is, in part, due to a fall in exports. To try to increase the economic growth rate, the government has increased its spending on investment. In August 2015, it adopted a floating foreign exchange rate system in an attempt to improve the country’s macroeconomic performance.
d) Discuss whether or not a country should switch from a fixed foreign exchange rate system to a floating foreign exchange rate system. [8]
0455/21/M/J/22
Australia’s foreign exchange rate fluctuates. The value of Australia’s exports is regularly greater than the value of its imports. Australia is Papua New Guinea’s main trading partner. In 2019, the government of Papua New Guinea increased income tax to reduce its inflation rate. It used other policy measures to increase its economic growth rate.
a) Define foreign exchange rate. [2]
0455/23/M/J/18
In 2016, there were fears that the Singaporean economy could enter a recession because of falling demand from China, its biggest export market. One of the results of a recession is likely to be a fall in consumer spending. A previous recession in 2008 had led to unemployment increasing from 1.6% to 3.4%. Singapore’s central bank therefore decided to intervene in the foreign exchange market to influence the value of the currency.
d) Discuss whether or not an exchange rate depreciation will prevent an economy from experiencing a recession. [8]
0455/21/M/J/18
In 2014, the government of Kazakhstan devalued its currency, the tenge. A year later the country still had a current account deficit. Therefore, in 2016 it considered adopting a floating exchange rate which might help to remove the deficit. However, it had concerns that this might affect the country’s inflation rate which was already high at 17%.
a) Define devaluation. [2]
b) Explain two advantages of a floating exchange rate. [4]
0455/22/F/M/18
The effects of a depreciation of a currency are influenced by the price elasticity of demand of exports and imports. Worldwide there has been a reduction in trade barriers including tariffs. There has also been an increase in the movement of goods and services between countries and, to a lesser extent, the movement of people. Some countries experience net emigration with more people leaving the country than entering it.
a) Define depreciation of a currency. [2]
b) Explain two reasons why demand for a country’s exports may be price-inelastic. [4]