A2 Practice Questions

Welcome! To make the most of your revision, start by carefully reading the questions related to the topic you're revising. 

Before clicking on the answers, try to answer the questions on your own. This will help you assess your knowledge and identify areas you need to focus on.

After attempting the questions, review your answers and compare them to the correct ones later.

If you're unsure about any answer, go ahead and click on the provided answers to check your understanding.

If you made any mistakes, don't worry! Take note of the areas where you need improvement and revisit the related content.

Practice makes perfect! Repeat the process with different questions to reinforce your understanding.

Remember, the key to effective revision is active learning. Try to answer the questions first before checking the answers to maximize your learning experience. Happy revising!

Critical Thinking

Answer the following short answer questions, using the provided hint as the foundation for your response

1. How does inflation impact the purchasing power of money within a domestic economy? Hint: Think about how rising prices affect the value of currency within a country.

2. Explain how a country's current account deficit might influence its external value of currency. Hint: Consider the relationship between imports, exports, and demand for the country's currency on the international market.

3. Can a country experience economic stagflation while maintaining a strong external value of its currency? Hint: Reflect on the conflicting effects of high inflation and stagnant economic growth on both internal and external values of money.

4. Discuss the role of interest rates in influencing both the internal and external value of a country's currency. Hint: Consider how changes in interest rates affect capital flows and exchange rates.

5. How might a central bank's intervention in the foreign exchange market impact the external value of its currency? Hint: Think about how central banks can directly influence exchange rates through their actions.

6. Analyze the potential effects of high unemployment on both the internal and external value of money. Hint: Consider the relationship between unemployment, demand, and inflation/deflation, and their implications for currency values.

7. Can political instability in a country have contrasting effects on its internal and external value of currency? Explain. Hint: Think about how investors' perceptions and reactions to political events might impact currency values.

8. Contrast the impact of a current account surplus and a current account deficit on the external value of a country's currency. Hint: Consider the implications of trade imbalances for demand and supply of the country's currency.

9. Evaluate the statement: "Low inflation and strong economic growth always lead to a stronger external value of a currency." Hint: Consider the role of economic indicators, market sentiment, and other factors in determining currency values.

10. Can a country experience a decrease in its internal value of money while simultaneously observing an appreciation in its external value of currency? Hint: Think about how different economic conditions can impact the domestic economy and the international currency market differently.