IGCSE Economics Paper-2: Specimen Questions with Answers 95 - 96 of 100

Passage

“As budget deficits reached an estimated $ 1. 6 trillion for 2,009 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 95 (4 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 96 (5 of 5 Based on Passage)

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Short Answer▾

What is the impact of depreciation in the value of currency?

Explanation

Depreciation in the value of currency means a fall in the rate of exchange. It is also known as devaluation in a fixed exchange rate system. Depreciation means that the value of currency is less as compared to other countries currency.

When There is a Depreciation, and the Exchange Rate Goes Down

  • Exports will become cheaper
  • Imports will be more costly

  • Depreciation in the value of currency will lead to the increase in domestic sales which will lead to creation of new jobs.

  • The increase in difference between exports and imports will increase the Aggregate Demand (AD) and will lead to acceleration in the economic growth.

  • It increases the rate of economic growth and reduces unemployment.

It tends to cause inflation because:

  • imports more expensive

  • higher domestic demand

  • Firms have less incentive to cut costs.

Improves the deficit in the current account.

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