IGCSE Development Studies: Specimen Questions with Answers 56 - 57 of 98

Passage

Balance of Trade

Question 56 (6 of 7 Based on Passage)

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What are the problems associated with current account deficit?

Explanation

Problems of Current Account Deficit Are

  • Foreigners have greater claim on domestic assets.
  • Large deficit could be unsustainable, if financed from abroad.
  • It may indicate unbalanced economy- focused on short term consumption rather than longer investment in export sector.
  • Large deficit could cause depreciation in the exchange rate and cost push inflation.
  • For countries with fixed exchange rate it may indicate they have become uncompetitive due to higher inflation and if exports over-priced reduce domestic demand.

Question 57 (7 of 7 Based on Passage)

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Explain three ways in which company earns foreign exchange

Explanation

Two Types of Foreign Exchange Rate System Are

  • Fixed exchange rate: Fixed exchange rate is the standard exchange rate set by the monetary authorities for one or more currencies. It provides stability that helps to control inflation and keeps the unit labor cost low. There are chances of less speculation if fixed exchange rate is prevailing in the market.
  • Floating Exchange rate: Under the floating exchange rate, factors of supply and demand decide the value of currency. It gives freedom to set policy interest rates to meet the domestic objectives. It may also help to prevent imported inflation.