In August 2015, the Chinese Government devalued its currency, the yuan, by around 5%.

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2018). The mark or mark type is shown in brackets.

1. [1] Define exchange rate as the price of one currency in terms of another or a basket of currencies.
2. [1] Explain that the exchange rate is determined by the interaction of demand and supply in the foreign exchange market.
3. [Up to 3] Explain how a government can influence the demand for its currency (e.g., raising interest rates to attract foreign investment, buying its own currency using foreign reserves).
4. [Up to 3] Explain how a government can influence the supply of its currency (e.g., selling its own currency to increase supply, implementing exchange control regulations).
5. [Up to 4] Analysis of the likely effects of a devaluation on the Chinese economy (e.g., makes exports cheaper and imports dearer, improves trade balance if Marshall-Lerner condition met, boosts domestic industries, inflation, foreign debt burden).
6. [Up to 4] Analysis of the likely effects of a devaluation on countries that trade with China (e.g., makes Chinese imports into these countries cheaper, their exports to China dearer, negative impact on their domestic industries, potential for retaliatory measures).
7. [Up to 4] Evaluative judgement of the likely relative impact on the Chinese economy compared to other trading partners (e.g., magnitude, short-run vs. long-run effects, J-curve).
8. [1] A reasoned conclusion on the overall impact on each economy.