2.1.4 Exchange Rates Flashcards
How does an increase in the exchange rate effect the rate of inflation?
Strong exchange rate means it is cheaper for firms to import raw materials to produce things. Would shift AS to the left as firms may use the reduction in their production costs in the form of cheaper prices for consumers.
How does an increase in the exchange rate lead to an increase in the rate of unemployment?
A strong exchange rates makes U.K. good and services more expensive abroad. The reduces exports and therefore reduces AD. It will shift AD to the left. Cyclical unemployment. Firms may seek to reduce their cost of production by making workers redundant
How does an increase in the exchange rate lead to a reduction in economic growth?
A strong exchange rate reduces exports. As exports are an injection into the circular flow of income, it will lead to a negative multiplier. This is because a fall in exports leads a fall in demand for labour meaning redundancies.
Shift AD to the left leading to a fall in economic growth.
How does a decrease in the exchange rate affect the Balance of Payments?
Lower exchange rate increases exports. As they are relatively cheaper. Exports are also an injection into the circular flow of income.
