Anything that makes foreigners want more pesos shifts demand right: the peso appreciates.
More demand for the peso: it appreciates
Exports rise
Foreign buyers need pesos to pay for the country's goods.
Investment flows in
Foreign firms building factories (FDI) or buying shares need pesos.
Remittances and tourists
Workers abroad send money home; tourists buy pesos to spend.
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Anything that makes residents sell more pesos shifts supply right: the peso depreciates.
More supply of the peso: it depreciates
Imports rise
Residents sell pesos to buy dollars for foreign goods.
Money flows out
Residents invest abroad or move savings out.
Inflation at home
Exports cost more abroad (D falls) and imports look cheaper (S rises).
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Interest rates, growth, speculation and the central bank move the rate too.
Four more factors
| Factor | What happens | Effect on the peso |
|---|---|---|
| Higher interest rates at home | Savers abroad buy pesos to earn more | Appreciates |
| Faster growth than partners | More imports, but investors are drawn in | Usually appreciates |
| Speculators expect a fall | They sell pesos now | Depreciates |
| Central bank buys pesos | It uses its dollar reserves | Appreciates |
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Paper 2 asked a question in this shape in every sitting since 2022, for 4 marks.
Text B reports strong foreign demand for the country's exports of minerals.
Using an exchange rate diagram, explain the likely effect on the value of the peso.
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How the 4 marks are given
| Marks | What your answer needs |
|---|---|
| 3–4 | A correct diagram and a correct explanation |
| 1–2 | A correct diagram or a correct explanation, not both |
| 3 at most | A diagram with a wrong or missing label |