Costara’s fixed exchange rate

Read the extracts and answer the questions that follow.

Text A — Pressure on the costa

1. Costara maintains a fixed exchange rate against the sol. Lower tourism receipts and increased food imports have reduced demand for the costa and increased its supply.

2. At the official rate, there is excess supply of costas. The central bank has been using foreign-currency reserves to maintain the peg, but its reserves are falling.

Text B — Policy choices

1. The central bank raised interest rates to attract portfolio investment. This has reduced borrowing and investment during a period of high unemployment.

2. Some economists recommend a devaluation. Exporters support the proposal, while households are concerned about the prices of imported food and fuel and the domestic cost of foreign-currency debt.

Table 1 — Costara’s official exchange rate

Costara’s official exchange rate before and after the proposed change.

Table 2 — Foreign-currency debt repayment

Foreign-currency debt repayment due by Costara.

Estavia’s appreciating currency

Read the extracts and answer the questions that follow.

Text A — Capital inflows

1. Estavia discovered a large lithium deposit. Overseas companies announced new foreign direct investment in mines and battery plants, increasing demand for the esta.

2. The esta appreciated. Imported machinery and fuel became cheaper, but exporters of clothing and agricultural goods reported declining orders.

Text B — Effects on households and firms

1. Lower import prices have reduced inflation and increased households’ purchasing power. Foreign travel has also become cheaper, improving some measures of living standards.

2. However, export firms are reducing employment. The government is concerned that slower export growth will reduce aggregate demand and real GDP.

Table 1 — Exchange rate of the esta

Exchange rate of the esta before and after appreciation.

Table 2 — Foreign price of mining equipment

Foreign price of mining equipment

Faron’s undervalued far

Read the extracts and answer the questions that follow.

Text A — Export strategy

1. Faron’s central bank manages the far below its estimated free-market equilibrium. The far is therefore an undervalued currency. The policy is intended to support textile exports and employment.

2. At the managed rate, demand for fars exceeds supply. The central bank sells fars and purchases foreign currency, accumulating reserves.

Text B — Domestic effects

1. Imported fuel, fertilizer and medicines are expensive in fars. Inflation has increased, reducing household purchasing power.

2. Trading partners claim that Faron has an artificial competitive advantage. The government is considering a revaluation of the far, but exporters fear declining sales.

Table 1 — Managed exchange rate

Managed exchange rate of the far

Table 2 — Imported fuel price

Imported fuel shipment price in foreign currency.

Galena’s commodity currency

Read the extracts and answer the questions that follow.

Text A — Copper exports

1. Galena exports copper, which is priced in foreign dollars. A rise in world copper demand increased foreign demand for the gal, causing an appreciation.

2. Mining companies expanded production, but agricultural and tourism businesses reported that their exports had become less competitive.

Text B — Portfolio flows

1. The central bank reduced interest rates as economic growth slowed. Investors then increased outward portfolio investment, purchasing foreign shares and bonds.

2. These transactions placed downward pressure on the gal. The central bank does not target a fixed value but occasionally intervenes to reduce sharp fluctuations.

Table 1 — Exchange rate of the gal

Exchange rate of the gal before and after appreciation.

Table 2 — Price of a Galenian tourism package

Price of a Galenian tourism package.

Hesper’s overvalued currency

Read the extracts and answer the questions that follow.

Text A — Maintaining the hes

1. Hesper fixes the hes against the euro. The official rate is above the rate that unrestricted demand and supply would determine, making the hes an overvalued currency.

2. Imports are cheap, but fruit and manufactured exports are expensive overseas. At the official rate, there is excess supply of hes, and reserve assets are declining.

Text B — Exchange controls

1. The government introduced exchange controls, limiting the amount of foreign currency households and firms may purchase. A parallel foreign-exchange market has emerged.

2. Businesses report shortages of imported inputs. Some economists recommend lowering the official exchange rate, while others fear inflation and higher foreign-debt repayments.

Table 1 — Official and proposed rates

Official and proposed exchange rates for the hes.

Table 2 — Imported component price

Table 2 — Price of imported components

Juno’s oil-price shock

Read the extracts and answer the questions that follow.

Text A — Falling export revenue

1. Oil provides most of Juno’s export revenue. A fall in the world oil price reduced foreign demand for the jun, leading to a depreciation.

2. Juno also imports food, machinery and refined fuel. The weaker currency has increased firms’ costs and household prices.

Text B — Policy response

1. The central bank used central bank intervention, buying juns with foreign reserves. It also considered increasing interest rates to attract financial inflows.

2. Manufacturers argue that the weaker jun could help diversify exports. However, businesses with foreign-currency loans face larger repayments in juns.

Table 1 — Exchange rate of the jun

Exchange rate of the jun before and after the fall in oil export revenue.

Table 2 — Foreign-currency loan repayment

Foreign-currency loan repayment before conversion into juns.

Kalmia’s rapid growth and exchange rate

Read the extracts and answer the questions that follow.

Text A — Competing pressures

1. Kalmia’s rapid economic growth raised household income and demand for imports, increasing the supply of kalms in the foreign-exchange market.

2. At the same time, technology firms attracted inward investment. Foreign purchases of shares and bonds created substantial portfolio investment inflows and increased demand for kalms.

Text B — Managing volatility

1. The central bank operates a managed exchange rate within an unpublished range. It sells kalms when appreciation is rapid and buys kalms when depreciation is rapid.

2. Exporters favour a weaker currency, while households and firms using imported computers and machinery favour a stronger currency.

Table 1 — Exchange rate of the kalm

Exchange rate of the kalm

Table 2 — Imported computer price in foreign currency and exchange rate after appreciation.

Imported computer price in foreign currency and exchange rate after appreciation.

For comparisons involving prices, assume that the foreign-currency price of the computer and other imported capital goods remains unchanged before and after the appreciation.

Depreciation of the sol

The sol is the floating currency of Soland. During 2025, Soland experienced higher inflation than its main trading partners. It also imports most of its oil and industrial machinery. Table 1 provides exchange-rate and trade information.

Table 1: Exchange-rate and trade information for Soland, 2025.

Manufacturers have warned that the weaker sol is increasing their costs. Exporters, however, report rising foreign demand. Soland's government wants to reduce inflation without causing a large rise in unemployment.

Pressure on Arinia's fixed exchange rate

Arinia fixes the arin against the US dollar. Falling export demand and capital outflows have created downward pressure on the arin. The central bank has been using its foreign-currency reserves to maintain the peg.

Arinia’s fixed exchange-rate information

Several Arinian firms and the government have debts denominated in US dollars. The economy is experiencing low growth, but the central bank is considering higher interest rates to support the peg.

Appreciation of the dinar

Dinara has experienced large inflows of foreign direct investment into its mineral sector. These inflows have contributed to an appreciation of its floating currency, the dinar. Export manufacturers outside the mineral sector report declining sales, while firms importing machinery have benefited.

Table 1: Information about Dinara

The government wants to diversify production and is concerned that continued appreciation will increase unemployment in manufacturing.

Lydora’s tourism recovery

Read the extracts and answer the questions that follow.

Text A — Demand for the lyd

1. Lydora’s tourism industry recovered rapidly after international travel restrictions ended. Foreign visitors purchased lyds to pay for accommodation and services, causing the currency to appreciate.

2. The stronger lyd reduced the domestic price of imported energy. However, tourism businesses fear that further appreciation will make holidays in Lydora too expensive.

Text B — Policy and living standards

1. The central bank is considering selling lyds to purchase foreign currency. Such central bank intervention would increase the supply of lyds and limit appreciation.

2. The government must consider exporters, importers, workers and consumers. The effects on living standards may depend on employment, inflation, purchasing power and access to imported goods.

Table 1 — Exchange rate of the lyd

Exchange rate of the lyd before and after tourism recovery.

Table 2 — Price of a Lydoran holiday

Price of a Lydoran holiday

Capital flows and the nor

Norland has a floating exchange rate. Its central bank increased interest rates to reduce inflation. Foreign investors initially purchased Norland's government bonds, but political uncertainty then led traders to expect a depreciation of the nor.

Table 1: Financial and exchange-rate information for Norland

Norland also receives substantial remittances from citizens working abroad. The central bank is concerned that exchange-rate volatility may discourage investment and intensify inflation.

Choosing an exchange-rate system for Islar

Islar is a small, highly trade-dependent economy. It fixes the isle against the crown, the currency of its largest trading partner. Domestic inflation has recently exceeded inflation in the trading partner, leaving the isle overvalued and creating persistent pressure on the peg.

Table 1: Selected economic information for Islar

The central bank is considering devaluation or a move to a floating exchange rate. Food and fuel are mainly imported, and much of Islar's public debt is denominated in crowns.