An exam answer on the exchange rate is a chain of cause and effect: something happens, the demand for or supply of New Zealand dollars changes, the NZ$ appreciates or depreciates, and that works its way through to exporters, importers, consumers and other groups. Each link needs its reason.
How to use it. Choose a trigger on the left; the graph shows how it shifts the market for NZ$. Then choose a chain: How the NZ$ moves (where the trigger isn't the exchange rate itself), then a group. Drag each link into the chain in order (on a phone, tap a link and then a slot), and choose whether it rises or falls. Some links are plausible but don't belong. Check marks each link and says what's wrong; when the chain is right you see it written out as a full explanation, and a guide to what Achieved, Merit and Excellence-style reasoning adds. Model answer, in the title bar, shows every chain built.
The key ideas
- Demand for NZ$ comes from overseas: buyers of NZ exports (goods and services such as tourism and education) and investors putting money into New Zealand. Supply of NZ$ comes from New Zealanders selling NZ$ for foreign currency to pay for imports, travel overseas and investment overseas.
- More demand or less supply: the NZ$ appreciates. Less demand or more supply: it depreciates.
- An appreciation makes NZ exports dearer in overseas currencies and imports cheaper in NZ$. Exporters selling at world prices in US$ (as price takers) get fewer NZ$ for each US$. A depreciation does the opposite.
- The balance on goods and services is export receipts minus import payments: it is the part of the current account that 91223 names.
Common exam mistakes
- Shifting the wrong curve: buying NZ$ to pay for NZ exports or to invest here is demand for NZ$; selling NZ$ to pay for imports or invest overseas is supply.
- Saying an appreciation makes exports dearer "in NZ$": the NZ$ price doesn't change; it's the price in overseas currency that rises.
- Saying a change in the NZ$ changes the world price: New Zealand is a price taker.
- Stopping after one link ("exporters are worse off") without the reason, or not following the chain to revenue, profit and jobs.
- Repeating the resource material, or saying "as seen on the graph", instead of naming the change on the graph (D to D1, ER0 to ER1).
The figures in the triggers are made up for practice.
Objective: NCEA Level 2 Economics 91223 — explain the causes of a change in the exchange rate using the supply and demand model for the $NZ, and explain, compare and contrast the impacts on various groups in New Zealand society.
Where this fits
- AP: AP Macroeconomics
- AQA: AQA A Level Economics (7136)
- Cambridge: Cambridge IGCSE Economics (0455); Cambridge A Level Economics (9708); Cambridge AS Level Economics (9708)
- IB: IB Economics HL; IB Economics SL
- NCEA Level 2 Economics: 91223 Analyse international trade using economic concepts and models
- NCEA Level 3 Economics: 91403 Demonstrate understanding of macro-economic influences on the New Zealand economy
- Pearson Edexcel International: Edexcel International GCSE Economics (4EC1); Edexcel International A Level Economics
- USDP: USDP Economics
