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IB Economics HL 4.5.6 Hl Fixed Versus Floating Exchange Rate Systems Questions

Practise 4.5.6 (HL) Fixed versus floating exchange rate systems in IB Economics HL by reviewing the concepts and applying them to marked questions.

Syllabus
First assessment 2022
Course
Economics HL
Level
HL

Exam points

  • HL evaluation compares advantages and disadvantages of fixed and floating exchange rate systems
  • Evaluation considers stability, flexibility, policy independence, and external balance

IB Economics HL 4.5.6 Hl Fixed Versus Floating Exchange Rate Systems Questions question 1

[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.

The market for oranges in Country Z is illustrated on Figure 5.

Figure 5

Figure 5

The domestic demand and supply for oranges are given by the functions

Qd=300−100PQs=−60+60P\begin{aligned} & Q d=300-100 P \\ & Q s=-60+60 P \end{aligned}

where P is the price of oranges in dollars per kilogram ( $\$ per kg ), Q d is the quantity of oranges demanded (thousands of kg per month) and Qs is the quantity of oranges supplied (thousands of kg per month). The world price of oranges is $2\$ 2 per kg.

Due to increased awareness of the possible health benefits of vitamin C , the demand for oranges in Country Z increases by 60000 per month at each price.

Explain two reasons why a government might prefer a floating exchange rate system for its currency.

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