What is a floating exchange rate?

A floating exchange rate is one determined by the demand for and supply of the currency on the foreign exchange market, with no target set by the government.

What is a fixed exchange rate?

A fixed exchange rate is one the authorities hold at a declared value against another currency or a basket, using reserves and interest rates to defend it.

State two disadvantages of a floating exchange rate.

Its movements are unpredictable, which creates uncertainty for exporters and importers, and a depreciation raises import prices and can be inflationary.

What is a managed float?

A managed float is a broadly floating rate in which the central bank intervenes occasionally, buying or selling its own currency to smooth movements it regards as excessive.

Edexcel A-Level Economics B 9EB0

Scarcity, Choice and Potential Conflicts

Topic overview Scarcity and the economic problem Choice, trade-offs and opportunity cost Profit maximisation, sales maximisation and satisficing Survival, market share and other business objectives Stakeholders and their objectives Stakeholder conflicts and corporate social responsibility

Enterprise, Business and the Economy

Topic overview The entrepreneur and creative destruction Adding value Entrepreneurial motives Factors of production Division of labour and specialisation The wider economic environment and the firm

Introducing the Market

Topic overview Consumer objectives and the demand curve Movements along and shifts of the demand curve Producer objectives and the supply curve Movements along and shifts of the supply curve Equilibrium price and quantity Excess demand, excess supply and market forces Shifts in demand and supply in real markets Limitations of the supply and demand model Functions of the price mechanism Mass markets, niche markets and market growth Market research and consumer insight Market segmentation Market mapping and competitive advantage Adding value, pricing decisions and dynamic markets

The Role of Credit in the Economy

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Market Failure and Government Intervention

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Revenue, Costs, Profits and Cash

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Business Growth and Competitive Advantage

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The Economic Cycle

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Introduction to Macroeconomic Policy

Topic overview The main macroeconomic objectives Fiscal policy Monetary policy and interest rates Supply-side policies Exchange rate policy under a floating rate Conflicts between macroeconomic objectives Choosing policy instruments and their unintended consequences

Globalisation

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Impact of Globalisation on Global Companies

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Impact of Globalisation on Local and National Economies

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Competition and Market Power

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Market Power and Market Failure

Topic overview Cartels, collusion and restrictive practices Monopsony, natural monopoly and power in the labour market The implications of market failure for firms, consumers and government Promoting competition: anti-competitive practices, mergers and privatisation Regulating natural monopolies and protecting consumers and employees The Competition and Markets Authority and EU competition policy The benefits and costs of regulation

Market Failure Across the Economy

Topic overview Merit and demerit goods Factor immobility and information failure Externalities and social costs and benefits Environmental externalities and environmental change Policies to correct market failure

Macroeconomic Policies and Impact on Firms and Individuals

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Risk and the Financial Sector

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Introduction to Macroeconomic Policy

Exchange rate policy under a floating rate

3 things to know
Papers 2 and 3

Overview

Floating and fixed exchange rates, the advantages and disadvantages of floating, automatic correction of a current account deficit, managed floats and intervention without interest rates, foreign exchange reserves, conflict between exchange rate and inflation goals, price inelastic exports, transmission of rate cuts, and exporters' preference for stability.

What you need to know

Answer each one before you reveal it.

Your recallNot started

Key term

Explain how a floating rate helps correct a current account deficit automatically.

Evaluation

State two advantages of a floating exchange rate.

Key term

Why does a depreciation not help a country whose exports are price inelastic?

Questions from this subtopic

Each one with the model answer underneath.

1
What is a floating exchange rate?
Model answer
A floating exchange rate is one determined by the demand for and supply of the currency on the foreign exchange market, with no target set by the government.
2
What is a fixed exchange rate?
Model answer
A fixed exchange rate is one the authorities hold at a declared value against another currency or a basket, using reserves and interest rates to defend it.
3
State two advantages of a floating exchange rate.
Model answer
The currency adjusts automatically to help correct a trade imbalance, and the central bank is free to set interest rates for domestic objectives rather than to defend a peg.
4
State two disadvantages of a floating exchange rate.
Model answer
Its movements are unpredictable, which creates uncertainty for exporters and importers, and a depreciation raises import prices and can be inflationary.
5
Explain how a floating rate helps correct a current account deficit automatically.
Model answer
A deficit means more currency is sold to buy imports than is bought to pay for exports, so the currency depreciates, exports become cheaper and imports dearer, and the imbalance narrows.
6
What is a managed float?
Model answer
A managed float is a broadly floating rate in which the central bank intervenes occasionally, buying or selling its own currency to smooth movements it regards as excessive.

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Scarcity, Choice and Potential Conflicts

Enterprise, Business and the Economy

Introducing the Market

The Role of Credit in the Economy

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