16 : Exchange Rates Simple Changes Flashcards
What are the factors that effect the exchange rates
• exports
• imports
• interest rates
• speculation
• inflation
• government debt
What happens to the pound when there is un increase in demand for uk exports. Due to a rise in incomes abroad
As incomes abroad increase. foreigners are more able to buy uk goods and services and the UK increases and sells more exports. The demand for pounds increases, the pound appreciates in value (and demand is shifted to the right)
Note: at the same time the price of the foreign currency will depreciate
What happens he the pound as uk interest rate rise
As the uk interest rate rises the demand for pounds increases because the interest rate is higher compared to any other counties interest rate so investors will save their money in uk banks (since they are always looking for the best interest rates). One pound appretients in value and the demand for pounds rise(shifting demand to the rate)
What happens to the pound when speculators anticipate a rise in the pound
Speculators are gamblers who bet on changes in exchange rates in order to make more money ,if speculators anticipate a rise in the pound they buy more pounds increasing its demand and then sell it when it does increase making a profit
What happens he the pound when there is an increase in foreign direct investment (FDI)
As more FDI enters Britain there will be higher demand for the pound since capital (factories, buildings ,machinery) will need to be bought by foreign businesses in pounds To operate in the UK (staff will also need Te be paid in pounds)
The price of Tomas will rise the pound will appreciate in value, demand for for pounds will rise
What will happen to the pound when there is low inflation in the economy
As the uk economy experiences low inflation the demand for pounds increases because UK products appear cheaper so demand for uk exports rise and since pounds will be needed to purchase the UK products it will appreciate the pounds value
What will happen to the pound when there is worry about uk government Net being oblate pay back National debt
AS speculators worry that the UK cannot pay back its government debt the supply of pounds increases because investors want to buy the currencies instead. The price of pounds fall, the pound depreciates in value and the quantity of pounds supplied rises
What will happen to the pound when imports from the USA increases
As the uk increases imports of USA goods. the supply for pouts increases because the uk needs to buy dollars he buy the imports. The price of pounds full, pound depreciates in value and the quantity of pounds supplied rises.
What will happen to pounds when there is outflow of UK funds for long term investments in the USA
As the UK buys US companies, The supply for pounds increases because UK investors need to buy US dollars to pay for them. The price of pounds fall, the pound depreciates and the supply for pounds rises
