Exchange-rate diagrams: which curve moves, and why
The diagram in most IB Economics Paper 2 questions, built from one question: who is buying the currency, and who is selling it?
On an exchange-rate diagram, demand for a currency comes from foreigners who need it to buy that country's goods and assets. Supply comes from residents selling it to buy foreign goods and assets. So a tariff that cuts UK imports means fewer pounds are sold, supply shifts left and the pound appreciates.
Why this one is hard
Students learn demand and supply for goods, then meet a market where the good is money and the price is another money. The exchange-rate diagram appeared in 24 of the 30 Paper 2 questions since 2022, and in all 12 from May 2025 and May 2026. The examiners have flagged the topic in every report year since 2022, and one 2024 report called a part on it the worst attempted on the paper. A diagram alone, or an explanation alone, is capped at 2 of 4 marks in all 118 four-mark diagram parts (our count).
The idea: ask who is selling
Take the market for pounds. Demand comes from foreigners, who need pounds to pay for UK goods and assets. Supply comes from the UK, where people and firms sell pounds to pay for foreign goods and assets. Every event moves whichever group changes what it does.
How to build the diagram
- Label the vertical axis as the price of the currency in the other currency, such as US$ per £. Plain "Price" loses the mark, and so does the pair reversed.
- Label the horizontal axis Quantity of £.
- Ask who changed what they do. Foreigners move demand, and residents move supply.
- Shift that one curve, and mark the old and new equilibrium with dotted lines to both axes.
- Write the reason in words: what changed, what that does to pounds bought or sold, which curve moves.
Which curve moves
| What happens in the UK example | Curve | Pound |
|---|---|---|
| UK exports rise | Demand shifts right | rises |
| UK imports rise | Supply shifts right | falls |
| A tariff cuts UK imports | Supply shifts left | rises |
| Higher UK interest rates attract portfolio money | Demand shifts right | rises |
| Portfolio money leaves the UK | Supply shifts right | falls |
| The central bank buys pounds with its reserves | Demand shifts right | rises |
| The central bank sells pounds | Supply shifts right | falls |
The mistakes to stop making
Moving the wrong curve. The reports flag a tariff on imports drawn as a demand shift. Imports are paid for by selling pounds, so they sit on the supply side.
Using the money market. Interest rates and the money supply belong on a different diagram. Here the market is foreign exchange.
Saying FDI when you mean portfolio flows. Higher interest rates attract portfolio investment, and the reports flag FDI as the slip.
Drawing without explaining. The shift without the reason for it costs marks. Say who is buying or selling more or less.
Check yourself
Foreign tourists spend less in the UK. Which curve moves, which way, and what happens to the pound?
Show the answer
Fewer foreigners need pounds, so demand for pounds shifts left and the pound depreciates.
Go through it with us, free
We run a free 45-minute live session on exchange rates and the balance of payments, for SL and HL: which curve moves, central bank intervention, and one original Paper 2 part worked to full marks.
See the free session dates Practise 4.5 questions Book a free 30-minute session
Sources
Examiner evidence: Economics subject reports, 2022 to 2025, in our words. Counts: our own, from the 30 Paper 2 questions since May 2022. Syllabus: units 4.5 and 4.6. This page was developed independently from and is not endorsed by the International Baccalaureate Organization. Examples and wording are ours.