IB Economics HL 4.5.1 Floating exchange rates Question Bank

Practise IB Economics SL/HL 4.5.1 by applying floating exchange rates concepts to exam-style questions.

[Maximum number: 4]

Country X and Country Y are capable of producing both apples and bananas. Assume a two-country, two-product model.

Country Y has absolute advantage in the production of both apples and bananas, and comparative advantage in the production of bananas.

(a)

Calculate the quantity of EU€ she will receive for her US $\$ 300000$ .

The EU€ depreciates by 10 % against the US$. Fearing further depreciation of the EU€, Tanya exchanges her EU€ for US$.

[ 1 ]

Calculate the quantity of EU€ she will receive for her US $\$ 300000$ .
$\frac{300000}{1.2}=250000$
An answer of 250000 without any working is sufficient for [1].

(b)

Calculate, in US$, the loss made by Tanya as a result of these transactions.

[ 3 ]

New exchange rate:
€1 = US $\$ 1.20$ x 0.9 = US $\$ 1.08$ .

€250000 can be exchanged for 250000 x 1.08 = US $\$ 270000$ .

Loss = 270000 - 300000 = US $\$ 30000$ .

\begin{aligned}€1&=\mathrm{US}\$1.20\times0.9=\mathrm{US}\$1.08\\250000\times1.08&=\mathrm{US}\$270000\\\text{Loss}&=270000-300000=\mathrm{US}\$30000\end{aligned}

Any valid working is sufficient for [1] for the exchange rate.
Any valid working is sufficient for [1] if an incorrectly calculated exchange rate is correctly applied to exchanging €250000.
An answer of US $\$ 30000$ or 30000 without any working is sufficient for [1].
OFR applies.
NB: A simple but accurate calculation, such as 10% x 300000 = $\$ 30000$ , may be fully rewarded.

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4.5.1—Floating exchange rates question 1

Question (a)

Question (b)