IB Economics HL 4.5.4 Fixed exchange rates Question Bank

Level ..... Marks
0 The work does not reach a standard described by the descriptors below. ..... 0
1 Vague definition. ..... 1
The idea that a country's currency is fixed by the government (central bank).
2 Accurate definition. ..... 2
An explanation that a currency's value is fixed against any one of the following:

- the value of another currency
- a basket of other currencies

- gold.

Level

0 The work does not reach a standard described by the descriptors below.

1 There is a correct diagram or an accurate written response.

For drawing a correctly labelled currency diagram showing a fixed exchange rate value, an equilibrium above the fixed value and an increase in the supply curve to return the currency to the fixed value or for explaining that if the currency goes above its fixed value, the central bank (government/UAE) will have to intervene and sell its currency (buy foreign currency) to restore the fixed value of the currency.

2 There is a correct diagram and an accurate written response.

For drawing a correctly labelled currency diagram showing a fixed exchange rate value, an equilibrium above the fixed value and an increase in the supply curve to return the currency to the fixed value and for explaining that if the currency goes above its fixed value, the central bank (government/UAE) will have to intervene and sell its currency (buy foreign currency) to restore the fixed value of the currency.

An alternative correct answer is for the diagram to show a decrease in demand for the dirham to return the currency to its fixed value, with an explanation that the central bank can lower interest rates, making financial investments in the UAE less attractive, thus causing a fall in the demand for the dirham. If correctly explained a diagram showing a decrease in demand should be fully rewarded with a maximum of [4].

Candidates who incorrectly label diagrams can be rewarded with a maximum of [3].

For an exchange rate diagram, the vertical axis may be exchange rate, price of dirham in US$, US$/dirham, dirham/US$, or US dollars per dirham. The horizontal axis should be quantity, or quantity of dirham. A title is not necessary.

N . B. The cause of the increase in the dirham's value may or may not be shown.

0 The work does not reach a standard described by the descriptors below.

1 There is limited understanding.

A devaluation is the deliberate downward adjustment of the official exchange rate by the central bank (government) to reduce the currency's value in a fixed exchange rate system or in contrast, a depreciation is a fall in the value of a currency due to market forces in a floating exchange rate system.

2 There is clear understanding.

A devaluation is the deliberate downward adjustment of the official exchange rate by the central bank (government) to reduce the currency's value in a fixed exchange rate system and in contrast, a depreciation is a fall in the value of a currency due to market forces in a floating exchange rate system.