IGCSE Economics Paper-2: Specimen Questions with Answers 95 - 96 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 95 (4 of 5 Based on Passage)

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Short Answer▾

What do you understand by purchasing power parity?

Explanation

  • The way of determining the value of a product after adjustment of price differences and exchange rate is known as purchasing power parity. Concept of purchasing power parity helps in understanding the models of equilibrium rates. Two currencies are said to be in equilibrium or at par when basket of goods is priced at the same level in both the countries considering the exchange rate.
  • Example- It does not make sense to say that a book costs $ 30 in the US and £ 20 in UK. The comparison is not appropriate. If the exchange rate is £ 2/ $ , the book in UK is selling for $ 30, so the book is actually more expensive in UK.

Question 96 (5 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.

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