The exchange rate of Country Y's currency changes from 1 unit of Y=2.5 units of Z1 \text{ unit of Y} = 2.5 \text{ units of Z}1 unit of Y=2.5 units of Z to 1 unit of Y=2.0 units of Z1 \text{ unit of Y} = 2.0 \text{ units of Z}1 unit of Y=2.0 units of Z. Country Y imports a significant proportion of its industrial raw materials from Country Z.
Assuming all other factors remain constant, what is the most likely consequence of this exchange rate movement for Country Y's economy?
An improvement in Country Y's terms of trade as its import prices fall.
An increase in the volume of imports from Country Z as they become cheaper in Country Y's currency.
An increase in the domestic price of imported raw materials, leading to cost-push inflation.
A decrease in cost-push inflation due to cheaper raw material imports from Country Z.
30 exam-style questions on OCR A Level Economics Exchange rates. Each one has a worked solution and a mark scheme showing where the marks go.