IB Economics – International Economics

3.6: Exchange Rates

IB Economics: www.IBDeconomics.com

3.6 EXCHANGE RATES: STUDENT LEARNING ACTIVITY

Answer the questions that follow.

1. DEFINITIONS

Define the following terms:

▪ International trade ▪ Fixed exchange rate
▪ Foreign direct investment ▪ Managed exchange rate
▪ Portfolio investment ▪ Currency peg
▪ Foreign reserves ▪ Price inelastic
▪ Productivity ▪ Price elastic
▪ Current account deficit ▪ Purchasing power
▪ Current account surplus ▪ Foreign exchange market
▪ Capital goods ▪ Equilibrium exchange rate
▪ Exchange rate ▪ Excess demand
▪ Currency appreciation ▪ Excess supply
▪ Currency depreciation ▪ Foreign direct investment
▪ Floating exchange rate
[10 marks]

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 IB Economics – International Economics
3.6: Exchange Rates

2. SHORT-ANSWER QUESTIONS

1. Explain why an exchange rate measures one currency in terms of another currency. [2 marks]

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2. In a floating exchange rate system, explain how an exchange rate is determined. [6 marks]
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 IB Economics – International Economics
3.6: Exchange Rates

3. Outline whether it is supply or demand for the US dollar that is affected by each of the following
events: [8 marks]
i. A US investor buys shares in the Japanese share market.

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ii. A German firm imports US goods.
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 IB Economics – International Economics
3.6: Exchange Rates

iii. A US tourist travels to South Korea.

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iv. The US provides foreign aid to Nigeria. _________________________________________________________

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 IB Economics – International Economics
3.6: Exchange Rates

4. Distinguish between an appreciation of a currency and a depreciation of a currency.

[4 marks]

CV CV

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 IB Economics – International Economics
3.6: Exchange Rates

5. Explain the effects in the foreign exchange market for both the US dollar and the euro when the US
increases imports from the Eurozone. [6 marks]

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 IB Economics – International Economics
3.6: Exchange Rates

6. Outline factors that can influence the value of exchange rates. [10 marks]

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 IB Economics – International Economics
3.6: Exchange Rates

7. Use diagrams and explain how an increase in interest rates in the US relative to the UK affects the
foreign exchange market for the US dollar and the British pound. [5 marks]

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 IB Economics – International Economics
3.6: Exchange Rates

8. Use diagrams and explain how an increase in inflation rates in the US relative to the Eurozone affects
the foreign exchange market for the US dollar and the euro. [5 marks]

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 IB Economics – International Economics
3.6: Exchange Rates

9. Use diagrams and explain how a recession in the US affects the foreign exchange market for the
US dollar. [5 marks]

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10. Use diagrams and explain how an increase in tourism to New Zealand affects the foreign exchange
market for the NZ dollar. [5 marks]
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 IB Economics – International Economics
3.6: Exchange Rates

11. Use diagrams and explain how increased exports from Japan to the US affects the foreign
exchange market for the US dollar and the Japanese yen. [5 marks]

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 IB Economics – International Economics
3.6: Exchange Rates

12. Explain the effects of exchange rate changes on a country’s inflation rate and unemployment.
[6 marks]

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 IB Economics – International Economics
3.6: Exchange Rates

13. Explain the effects of exchange rate changes on a country’s economic growth and current
account balance. [6 marks]

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 IB Economics – International Economics
3.6: Exchange Rates

14. Explain the effects of exchange rate changes on a country’s foreign debt. [4 marks]

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15. Outline how a fixed exchange rate system operates. [4 marks]

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 IB Economics – International Economics
3.6: Exchange Rates

16. Outline methods a central bank or government can use to maintain a fixed exchange rate and
problems associated with each method. [6 marks]

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 IB Economics – International Economics
3.6: Exchange Rates

17. Distinguish between a currency revaluation and devaluation. [4 marks]

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18. Distinguish between a currency depreciation and devaluation. [4 marks]

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 IB Economics – International Economics
3.6: Exchange Rates

19. Distinguish between a currency appreciation and revaluation. [4 marks]

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20. Explain why a fixed exchange rate system is easier_________________________________________________________

to maintain when there is upward pressure rather
than downward pressure on the currency. [6 marks]
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 IB Economics – International Economics
3.6: Exchange Rates

21. Explain why a managed float is closer to a floating exchange rate system than a fixed exchange
rate system. [6 marks]

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 IB Economics – International Economics
3.6: Exchange Rates

22. Explain why a government or central bank would intervene in a managed float. [4 marks]

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23. Outline a currency peg in the managed float exchange rate system. [4 marks]
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 IB Economics – International Economics
3.6: Exchange Rates

24. Distinguish between undervalued and overvalued exchange rates. [4 marks]

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25. Outline the disadvantages of undervalued and overvalued exchange rates. [4 marks]
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 IB Economics – International Economics
3.6: Exchange Rates

26. Explain why currencies cannot be undervalued or overvalued in a freely floating exchange rate
system. [6 marks]

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 IB Economics – International Economics
3.6: Exchange Rates

3. HL SHORT-ANSWER QUESTIONS

1. $1.00 Australian dollar = $0.92 US dollars. Calculate the value of US$1.00 in terms of the Australian
dollar. [2 marks]

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2. ₹1.00 Indian rupee = ¥1.54 Japanese yen. Calculate the value of ¥1.00 in terms of the Indian rupee.
[2 marks]
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3. ¥1.00 Japanese yen = $0.0091 US dollars. Calculate the value of US$1.00 in terms of the Japanese
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yen. [2 marks]
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4. £1.00 British pound = $1.75 Canadian dollars. Calculate the value of CAD$1.00 in terms of the British
pound. [2 marks]
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5. The price of a Hello Kitty Doll is ¥4000 in Japan, at a US dollar/Japanese yen exchange rate of
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US$1.00 = ¥109.4 calculate the US dollar price. [2 marks]
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 IB Economics – International Economics
3.6: Exchange Rates

6. The price of a Hello Kitty Doll is ¥4000 in Japan. A US importer is importing 1200 of the dolls. At a US
dollar/Japanese yen exchange rate of US$1.00 = ¥109.4 calculate the total cost in US dollars.
[2 marks]

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Selected exchange rates
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US dollar/Japanese yen USD$1.00 = ¥121.00
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USD$1.00 = £0.716
US dollar/British pound
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£1.00 = NZD$1.91
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British pound/New Zealand dollar

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Australian dollar/euro AUD$1.00 = €0.634

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Euro/US dollar €1.00 = USD$1.24
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Mexican peso/US dollar MXN1.00 = 0.0537

7. A US resident is travelling to Japan, using the appropriate exchange rate above, calculate how
much Japanese yen she would receive by exchanging US$2000. [2 marks]

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 IB Economics – International Economics
3.6: Exchange Rates

8. A Eurozone resident is travelling to the US, using the appropriate exchange rate above, calculate
how many US dollars she would receive by exchanging €5000. [2 marks]

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9. The price of a Land Rover SUV is £55,000 in the UK. A US importer is planning on importing 40 cars.
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Using the appropriate exchange rate above, calculate how much the SUVs would cost in US dollars.
[2 marks]
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10. An Australian apple farmer has sold 10,000 kilograms of apples at €1.20 kg. Using the appropriate
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exchange rate above, calculate the sales revenues in Australian dollars. [2 marks]
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11. A Mexican manufacturer has sold 10,000 automotive components to a US car manufacturer at
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US$19.00 each. Using the appropriate exchange rate above, calculate the sales revenues in
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Mexican pesos. [2 marks]
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 IB Economics – International Economics
3.6: Exchange Rates

12. A US domestic flight between New York City and New Orleans is priced at US$165.00, using the
appropriate exchange rates above, calculate the value of this flight in Japanese yen, British
pounds, euros and Mexican pesos. [4 marks]

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13. On 1 August 2017, £1.00 British pound = $1.55 US dollars, and on 31 August 2017, £1.00 British pound
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= $1.80 US dollars.
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a. Identify which currency appreciated. [1mark]
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b. Calculate the percentage appreciation of the currency that appreciated. [1 mark]
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c. Calculate the percentage depreciation of the currency that depreciated. [1 mark]
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 IB Economics – International Economics
3.6: Exchange Rates

Euro/dollar exchange rate (US$1.00 per €)

1st April, 2018 USD$1.00 = €1.2800

8th April, 2018 USD$1.00 = €1.2697

16th April, 2018 USD$1.00 = €1.2989

23rd April, 2018 USD$1.00 = €1.3364

30th April, 2018 USD$1.00 = €1.3611

14. Use information from the table above to determine which of the two currencies appreciated and
which depreciated in the month of April 2018. [1 mark]

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15. Use information from the table above to calculate the percentage appreciation of the currency
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that appreciated in the month of April 2018. [1 mark]
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16. Use information from the table above to calculate the percentage depreciation of the currency
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that depreciated in the month of April 2018. [1 mark]
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 IB Economics – International Economics
3.6: Exchange Rates

17. The US dollar and euro are feely floating exchange rate systems. Consider the following equations:
QD = 7 – 3P and QS = -5 +3P, where QD = quantity demanded of US$ per day and QS = quantity
supplied of US$ per day, and P is the value of the US$ in terms of the euro.

a. Calculate the equilibrium exchange rate. [2 marks]

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b. Plot the demand and supply curves. [2 marks]

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US$ per €= price of € in terms of $US

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Quantity of € (billions)

Source: www.IBDeconomics.com
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