A floating exchange rate is set by demand and supply of the currency, with no government intervention.
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.
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When demand or supply changes, so does the exchange rate.
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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.
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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
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When supply shifts, demand keeps its plain name, D, and supply becomes S1 and S2.
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Paper 2 asked this in May 2025, for 2 marks: one for working, one for the answer.
In 2025, US$1 bought 24 pesos. A bottle of olive oil sells for 1,560 pesos.
Calculate the price of the bottle in US dollars.
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Where marks are lost
Upside down
Multiplying by 24 gives 37,440: far too big. Check the answer makes sense.
No units
65 alone loses the second mark: write $65.00.