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

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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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.

Question 93 (2 of 5 Based on Passage)

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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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