3.4 Exchange Rates Flashcards
What is an exchange rate?
Price of one currency in terms of another.
In an exchange rate graph what is on the Y axis?
ER (exchange rates)
In an exchange rate graph what is on the X axis?
£ (or focussed currency)
In an exchange rate graph what is on the S curve?
S£ (supply of pounds)
In an exchange rate graph what is on the D curve?
D£ (demand of pounds)
In an exchange rate graph what is the equilibrium?
ERe to £e
What will cause the currency to change?
Shifts in D or S
What are the macro impacts for a change in ER?
Economic growth
Inflation
Unemployment
Trade/Balance of payments (X-M)
What are the determinants of demand?
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
What is FDI?
Buying capital goods in another country.
What are the determinants of supply?
Import Demand
Speculative selling
Government selling
Outflows of foreign direct investment.
What is the A - B - C- D of strengthening currency?
Increase in Demand for Pound
economic growth
more exports
Stronger £
What is the A - B - C- D of weakening currency?
Increase in Supply for pound
economic crash
speculative selling
Weakening £
Why did the UK pound crash?
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
What are the macro impacts of a rising ER?
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
Three types of ER systems?
Floating ER
Managed ER
Fixed ER
What is a floating ER?
Government didn’t intervene.
Only affected by D and S
Why wouldn’t a government intervene in ER?
Costly
Free market
better for exporters
What is a managed ER?
Government tries to slow down the fall by
Government buying to ^D
^ rate of interest
to make it stronger or weaker
What is a fixed ER?
ER vary from a central party and market cannot influence. (D and S can’t influence) fixed at certain point.
Why would an economy want a fixed ER?
Maximum AD growth
X > M = ^ ER
RWE of Floating ER
UK people not confident with Liz Truss
causes speculative selling
Supply increases
Pound Depreciated
REW of Managed Exchange Rate
Turkey decides to keep it low for growth
RWE of Fixed Exchange Rate
China keep it fixed low for cheap exports
Here is a graph of a pound falling, what will this cause in Macro?
Inflation
ER is strengthened by…
Increase Demand
Decrease Supply
ER is weakened by…
Increase Supply
Decrease Demand
