4.3 Exchange rates

Question 1

Currency

Answer 1

The system of money used in a country or a group of countries

Question 2

Exchange rate

Answer 2

The price of one currency in terms of another

Question 3

How are exchange rates set

Answer 3

Through the interactions of demand and supply

Question 4

What goes on the axes of a diagram showing euro to pound exchange rate

Answer 4

Y- Price in pound in terms of Euro
X- Quantity of pounds

Question 5

What is a rise in exchange rates
Give two reasons

Answer 5

When the price of a currency increases in terms of another.
This could be because of an increase in demand
Or a decrease in supply

Question 6

What is a fall in exchange rates
Give two reasons

Answer 6

When the price of a currency decreases in terms of another.
This could be because of an decrease in demand
Or an increase in supply

Question 7

Why do people demand pounds

Answer 7

To buy UK exports
To speculate
To save
To invest in uk firms

Question 8

Why do people supply pounds

Answer 8

To buy Eurozone products
To save in eurozone accounts
To invest in eurozone businesses
To speculate- Hope it goes up

Question 9

Give 2 facts about the pound to dollar
All time
Current

Answer 9

Highest rate was $2
Right now rate is $1.25

Question 10

What are the effects of a fall in the exchnge rate (6)

Answer 10

• Increase in total demand
• Increased output (Increased GDP)
• Decrease in unemployment
• Current account surplus
• Rise in inflation (demand push)
• Decrease in total supply (depletion of resources)W

Question 11

What are the effects of a rise in the exchange rate for consumers

Answer 11

• Increased tourism overseas- as pound buys more euros
• Inflation falls
• Import prices fall
• Quality of life increases as the people can import more
• Interest rates fall- so businesses can borrow more to supply more to be more competitive

Question 12

What are the effects of a fall in interest rates for consumers (3)

Answer 12

• Inflation rises- Lower QOL
• Imports rise- Lower QOL
  Interest rates rise

Question 13

What are the effects of a rise in the exchange rates for producers (5)

Answer 13

• Fall in imports- benefit if they get raw materials from overseas
• Export prices rise- Lower demand, unless inelastic PED
• Increased tourism overseas- Travel agancies
• Fall in interest rate- SO firms can borrow and invest in capital to become competitive internationally
• Fall in inflation- Because total demand falls

Question 14

What are effectsof a fall in interest rates for producers (3)

Answer 14

-Rise in demand from overseas
- Higher cost of production for producers who import raw materials
- Increased tourism into the UK