Floating exchange rate: a price of the currency set by market forces alone.
Who demands pesos
- Foreigners buying the country's exports.
- Foreign tourists visiting it.
- Foreign firms and savers investing in it.
- Workers abroad sending money home.
Who supplies pesos
- Residents buying imports.
- Residents travelling abroad.
- Residents investing abroad.
The points to remember
- Define it like this: "A floating exchange rate is determined by the demand for and supply of a currency, without government intervention."
- "It fluctuates" alone is only half the marks.
Free preview
This is the free notes preview
You're reading the free notes. Aimnova Pro unlocks the full study experience — and you can try it with your first topic free to keep:
- FlashcardsLock in vocabulary and key terms with spaced repetition.
- Practice questionsAnswer exam-style questions and get instant AI marking.
- Mock exams & past-paper vaultSit full mocks and see exactly how examiners award marks.
- Personalised study planA daily plan built around your exam date and weak areas.
When demand or supply changes, so does the exchange rate.
Animated graph
Watch the graph build step by step in study mode.
The points to remember
- Appreciation: a rise in the value of a currency in a floating system.
- Depreciation: a fall in its value in a floating system.
Know your predicted grade
Take timed mock exams and get detailed feedback on every answer. See exactly where you're losing marks.
Paper 2 asks a short calculation almost every year, for 1 or 2 marks.
Calculations with exchange rates
One unit in dollars
The table says $1 = 20 pesos. One peso = 1 ÷ 20 = $0.05.
A price in dollars
A machine costs 45,000 pesos: 45,000 ÷ 20 = $2,250.
A price in pesos
A $300 phone costs 300 × 20 = 6,000 pesos.
Percentage change
The peso falls from $0.05 to $0.04: (0.04 − 0.05) ÷ 0.05 × 100 = −20%.
The points to remember
- Write the working, then the answer with the currency.
- A rise in the number of pesos per dollar means the peso depreciated.
Quick reminder
- Axes: Exchange rate up the side, Q of currency along the bottom
- Curves: D1, D2 and S when demand shifts; D, S1 and S2 when supply shifts
- Marks: ER1, ER2, Q1 and Q2
- Dots with dashed lines to the axes, an arrow for the shift
- No numbers, no title
Animated graph
Watch the graph build step by step in study mode.
When supply shifts, demand keeps its plain name, D, and supply becomes S1 and S2.
Animated graph
Watch the graph build step by step in study mode.
Get feedback like a real examiner
Submit your answers and get instant feedback — what you did well, what's missing, and exactly what to write to score full marks.
Paper 1 asked this in November 2023, as part (a) for 10 marks.
Explain how a floating exchange rate is determined.
Model answer plan
See the answer broken into clear points, with guidance on how each point earns marks.
Animated graph
Watch the graph build step by step in study mode.
How the 10 marks are given
| Marks | What your answer needs |
|---|---|
| 9–10 | Theory fully explained, terms used correctly all the way through, the diagram included and fully explained |
| 7–8 | Theory explained, terms mostly right, the diagram included and explained |
| 5–6 | Theory partly explained, some terms, the diagram included |
| 1–4 | Theory only described or stated; few relevant terms |