ECONOMICS FOR THE IB DIPLOMA: IMPORTANT DIAGRAMS

Name Date

Important diagrams practice

16 Exchange rates and the balance of payments
99 Figure 16.1a: Exchange rate determination in a floating exchange rate system:
The market for US dollars
a With diagram:
Explain what is happening in the diagram when the value on the Y-axis rises from
0.67 to 0.8 and when the value falls from 0.67 to 0.57.
b Without diagram:
Draw two exchange rate diagrams for the US Dollar ($) in terms of Euro. One should
show how excess supply of dollars can come about through an overvalued dollar while
the other should show how excess demand for dollars can come about through an
undervalued dollar.
Note: More detail related to this question can be found in section 16.1 of the coursebook.

100 Figure 16.2a: Exchange rate changes in a floating exchange rate system: $ appreciation due to
increase in demand for $
a With diagram:
Using an example of a cause of change in an exchange rate, explain what is happening in
the diagram.
b Without diagram:
Draw an exchange rate diagram for the US Dollar ($) in terms of the Euro (€) showing
what happens if income in euro zone countries increases relative to incomes in the
United States.
Note: More detail related to this question can be found in section 16.1 of the coursebook.

101 Figure 16.2b: Exchange rate changes in a floating exchange rate system: $ appreciation due to
decrease in supply of $
a With diagram:
Using an example of a cause of change in an exchange rate, explain what is happening in
the diagram.

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 ECONOMICS FOR THE IB DIPLOMA: IMPORTANT DIAGRAMS

b Without diagram:
Draw an exchange rate diagram for the US Dollar ($) in terms of the Euro (€) showing
what happens if there is a decrease in American citizens traveling to euro zone countries.
Note: More detail related to this question can be found in section 16.1 of the coursebook.

102 Figure 16.2c: Exchange rate changes in a floating exchange rate system:
$ depreciation due to decrease in demand for $
a With diagram:
Using an example of a cause of change in an exchange rate, explain what is happening in
the diagram.
b Without diagram:
Draw an exchange rate diagram for the US Dollar ($) in terms of the Euro (€) showing
what happens if US interest rates fall relative to interest rates in the euro zone.
Note: More detail related to this question can be found in section 16.1 of the coursebook.

103 Figure 16.2d: Exchange rate changes in a floating exchange rate system:
$ depreciation due to increase in supply of $
a With diagram:
Using an example of a cause of change in an exchange rate, explain what is happening in
the diagram.
b Without diagram:
Draw an exchange rate diagram for the US Dollar ($) in terms of the Euro (€) showing
what happens if US citizens increase their demand for euro zone goods.
Note: More detail related to this question can be found in section 16.1 of the coursebook.

104 Figure 9.4: Impacts of changes in short-run macroeconomic equilibrium:

Changes in aggregate demand
a With diagram:
Using your knowledge of causes of changes to exchange rates, explain how these changes
can cause a shift of AD1 to AD2 and how they can cause a shift of AD1 to AD3.
b Without diagram:
Draw two AD-AS diagrams to illustrate what could happen to aggregate demand when
a country’s exchange rate changes. One diagram should illustrate the effects on AD of
an appreciation of the currency and the other the effects on AD of a depreciation of
the currency.

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 ECONOMICS FOR THE IB DIPLOMA: IMPORTANT DIAGRAMS

Note: More detail related to this question can be found in section 16.2 of the coursebook
and section 9.2 for the diagrams.

105 Figure 9.4b: Impacts of changes in short-run macroeconomic equilibrium:

Changes in short-run aggregate supply
a With diagram:
Using your knowledge of causes of changes to exchange rates, explain how these changes
can cause a shift of SRAS1 to SRAS2 and how they can cause a shift of SRAS1 to SRAS3.
b Without diagram:
Draw two SRAS/AD diagrams to illustrate what could happen to short-run aggregate
supply when a country’s exchange rate changes. One should illustrate the effects on
SRAS of an appreciation of the currency and the other the effects on SRAS of a
depreciation of the currency.
Note: More detail related to this question can be found in section 16.2 of the coursebook
and section 9.2 for the diagrams.

106 Figure 16.4a: Fixed exchange rates: maintaining the value of the bople at 1 bople = $2.00:
Shifting the currency demand curve
Figure 16.4b: Fixed exchange rates: maintaining the value of the bople at 1 bople = $2.00:
Shifting the currency supply curve
a With diagram:
The diagrams show the country of Bopland maintaining a fixed exchange rate for their
currency after a fall in demand for the bople. Use the two diagrams and your knowledge
of fixed exchange rates to explain how Bopland does this.
b Without diagram:
Draw two diagrams showing a country maintaining a fixed exchange rate after a fall in
demand for their currency. One should show how they influence currency demand to
maintain a fixed rate and the other should show how they influence currency supply to
maintain a fixed rate.
Note: More detail related to this question can be found in section 16.3 of the coursebook.

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