IGCSE Economics Paper-2: Specimen Questions with Answers 92 - 93 of 100

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Passage

“As budget deficits reached an estimated $ 1.6 trillion for 2009 and the government printed money to finance its financial rescue programs, other countries and investors started to get nervous. China, which holds the most dollar reserves, raised concerns about rising American debt, and some of its top officials floated proposals that would replace the dollar as the world՚s reserve currency.”

Question 92 (1 of 5 Based on Passage)

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Short Answer▾

How the foreign exchange market works.

Explanation

  • Different buying and selling rate will be quoted by the dealers in the retail currency market. Mostly trades are done in the local currency. The rate of buying is the rate at which the foreign currency is purchased by the money dealers and the selling rate is the rate at which the money dealers will sell the currency.
  • In trading the quoted rates will be incorporated by allowing an allowance for a dealer՚s margin or profit, or else margin can be recovered from a commission or some other way.
  • Different rates are quoted for different kinds of exchanges, like for cash mostly notes only, a traveler՚s check in a documentary form, or electronic transfers in the form of a credit card purchase. Exchange rate on documentary transactions is generally higher (such as for traveler՚s checks) because of the additional time and cost involved in clearing the document, while cash is available for resale immediately.

Question 93 (2 of 5 Based on Passage)

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Short Answer▾

Explain exchange rate and its types.

Explanation

Exchange rate is the price of one currency in terms of another currency. Exchange rates are the rates that are used across all over the world in the international markets, finance, and investment. These rates are used to compare the purchasing power in comparison to other countries.

Exchange Rates Are of Two Types- Fixed or Floating

  • Floating exchange rate: It is the exchange rate where the currency value fluctuates according to the foreign exchange market. Example- Dollar. According to many economists floating exchange rate are the best exchange rate as the rate automatically adjusts itself according to the circumstances.
  • Fixed exchange rate: It is a currency system where the governments try to maintain a currency value that is constant against a specific commodity. The rate of the currency is determined against a fixed asset or basket of other currencies.
Fixed and Floating Exchange Rate

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