Exchange Rates

    OCR
    GCSE

    Examination of the external value of currency, encompassing determination mechanisms within floating, fixed, and managed systems. Candidates must evaluate the transmission mechanisms through which exchange rate fluctuations impact macroeconomic objectives, specifically inflation, economic growth, and the current account of the balance of payments. Mastery requires application of elasticity theory, specifically the Marshall-Lerner condition and J-curve effect, to assess the efficacy of currency depreciation as a policy instrument.

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    Objectives
    4
    Exam Tips
    3
    Pitfalls
    3
    Key Terms
    4
    Mark Points

    What You Need to Demonstrate

    Key skills and knowledge for this topic

    • Award marks for accurate definition of exchange rates as the price of one currency expressed in terms of another.
    • Credit application of the SPICED (Strong Pound Imports Cheaper Exports Dearer) or WPIDEC acronyms to explain trade flows.
    • Candidates must analyse the link between interest rates and exchange rates (hot money flows) to access higher analysis marks.
    • Reward evaluation that considers the price elasticity of demand for exports and imports when assessing the impact of currency fluctuations.

    Marking Points

    Key points examiners look for in your answers

    • Award marks for accurate definition of exchange rates as the price of one currency expressed in terms of another.
    • Credit application of the SPICED (Strong Pound Imports Cheaper Exports Dearer) or WPIDEC acronyms to explain trade flows.
    • Candidates must analyse the link between interest rates and exchange rates (hot money flows) to access higher analysis marks.
    • Reward evaluation that considers the price elasticity of demand for exports and imports when assessing the impact of currency fluctuations.

    Examiner Tips

    Expert advice for maximising your marks

    • 💡Always draw a supply and demand diagram to visualise appreciation or depreciation before writing your answer.
    • 💡When evaluating, use the 'It depends on' approach: consider the magnitude of the change and the duration.
    • 💡Explicitly link exchange rate changes to specific macroeconomic objectives (e.g., cost-push inflation via expensive imports).
    • 💡Use the data provided in the case study; quote specific figures when calculating or describing trends.

    Common Mistakes

    Pitfalls to avoid in your exam answers

    • Confusing a 'strong' currency with a universally positive economic outcome (ignoring export competitiveness).
    • Inverting the relationship between interest rates and exchange rates (failing to link higher rates to increased demand for currency).
    • Asserting that currency depreciation immediately improves the balance of payments without considering time lags or elasticity.

    Study Guide Available

    Comprehensive revision notes & examples

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    Key Terminology

    Essential terms to know

    Likely Command Words

    How questions on this topic are typically asked

    Calculate
    Explain
    Analyse
    Discuss
    Evaluate
    Using the data

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