Show how exchange rates are determined in a freely floating system. Explain how a high rate of inflation in an economy can lead to depreciation in that economy's exchange rate. Use a diagram to support your answer.

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2017). The mark or mark type is shown in brackets.

1. [2] For Knowledge and Understanding: For an explanation of how the exchange rate is determined in a freely floating exchange rate system.
2. [2] For a diagram showing a depreciation of the currency as the demand falls and/or the supply rises as a result of the inflation.
3. [4] For Application: For an explanation of the causes of a fall in the demand and/or a rise in the supply of a currency due to high inflation
4. [4] For Analysis: That explains the advantages of a freely floating exchange rate system
5. [4] That explains the disadvantages of a freely floating exchange rate system
6. [4] For Evaluation: That exercises judgement in considering the circumstances under which a freely floating rate (or fixed rate) would be preferable. This must include a conclusion.