3.4 Exchange Rates

Question 1

What is an exchange rate?

Answer 1

Price of one currency in terms of another.

Question 2

In an exchange rate graph what is on the Y axis?

Answer 2

ER (exchange rates)

Question 3

In an exchange rate graph what is on the X axis?

Answer 3

£ (or focussed currency)

Question 4

In an exchange rate graph what is on the S curve?

Answer 4

S£ (supply of pounds)

Question 5

In an exchange rate graph what is on the D curve?

Answer 5

D£ (demand of pounds)

Question 6

In an exchange rate graph what is the equilibrium?

Answer 6

ERe to £e

Question 7

What will cause the currency to change?

Answer 7

Shifts in D or S

Question 8

What are the macro impacts for a change in ER?

Answer 8

Economic growth
Inflation
Unemployment
Trade/Balance of payments (X-M)

Question 9

What are the determinants of demand?

Answer 9

Export Demand (people wanting to buy stuff from UK will want more pounds)
Speculative buying (think pound might increase so purchase)
Government buying
Inflows of Foreign direct investment FDI

Question 10

What is FDI?

Answer 10

Buying capital goods in another country.

Question 11

What are the determinants of supply?

Answer 11

Import Demand
Speculative selling
Government selling
Outflows of foreign direct investment.

Question 12

What is the A - B - C- D of strengthening currency?

Answer 12

Increase in Demand for Pound
economic growth
more exports
Stronger £

Question 13

What is the A - B - C- D of weakening currency?

Answer 13

Increase in Supply for pound
economic crash
speculative selling
Weakening £

Question 14

Why did the UK pound crash?

Answer 14

Government Tax cuts
Investors lost faith so started speculative selling
Government borrowing increased to cover tax cuts
Interest rates increased because tax cuts persuaded people to purchase more
Rising gas and energy prices caused inflation

Question 15

What are the macro impacts of a rising ER?

Answer 15

Abroad things are more expensive
Cost of living increases
Boost exporters to other countries because UK goods seem cheaper.
Less economic growth
Higher inflation (cost push)
Unemployment increases
Cheaper exports = (X-M) decreases

Question 16

Three types of ER systems?

Answer 16

Floating ER
Managed ER
Fixed ER

Question 17

What is a floating ER?

Answer 17

Government didn’t intervene.
Only affected by D and S

Question 18

Why wouldn’t a government intervene in ER?

Answer 18

Costly
Free market
better for exporters

Question 19

What is a managed ER?

Answer 19

Government tries to slow down the fall by
Government buying to ^D
^ rate of interest
to make it stronger or weaker

Question 20

What is a fixed ER?

Answer 20

ER vary from a central party and market cannot influence. (D and S can’t influence) fixed at certain point.

Question 21

Why would an economy want a fixed ER?

Answer 21

Maximum AD growth
X > M = ^ ER

Question 22

RWE of Floating ER

Answer 22

UK people not confident with Liz Truss
causes speculative selling
Supply increases
Pound Depreciated

Question 23

REW of Managed Exchange Rate

Answer 23

Turkey decides to keep it low for growth

Question 24

RWE of Fixed Exchange Rate

Answer 24

China keep it fixed low for cheap exports

Question 25

Here is a graph of a pound falling, what will this cause in Macro?

Answer 25

Inflation

Question 26

ER is strengthened by…

Answer 26

Increase Demand
Decrease Supply

Question 27

ER is weakened by…

Answer 27

Increase Supply
Decrease Demand