4.3 Exchange Rates

Question 1

What does currency mean?

Answer 1

The system of money used in a country or countries.

Question 2

What is meant by the term exchange rate?

Answer 2

The price of one currency in terms of another.

Question 3

How is an exchange rate diagram different to a demand and supply diagram?

Answer 3

Instead of the y axis being price, it is the exchange rate. For example, it could be ‘price of £ in $’.

Question 4

What does a rise in the exchange rate mean?

Answer 4

The price of a currency increases in terms of another currency. It becomes stronger.

Question 5

What is a rise in the value of a currency referred to as?

Answer 5

Appreciation.

Question 6

What are two possible changes that lead to a rise in the exchange rate?

Answer 6

• increase in demand for the currency
• decrease in supply for the currency

Question 7

What does a fall in the exchange rate mean?

Answer 7

The price of a currency decreases in terms of another currency. It becomes weaker.

Question 8

What is a fall in the value of a currency referred to as?

Answer 8

Depreciation.

Question 9

What are two possible changes that lead to a fall in the exchange rate?

Answer 9

• a decrease in the demand for the currency
• increase in the supply of the currency

Question 10

What are factors that affect the demand for pounds?

BITE

Answer 10

• Foreign banking
• Foreign investment
• Tourists coming to the UK
• Foreign firms buying exports

Question 11

What are factors that affect the supply of the pound?

TIBI

Answer 11

• British tourism abroad
• Buying imports from foreign countries
• Saving money in foreign banks
• British firms investing abroad

Question 12

How do you calculate currency conversion?

Answer 12

To convert euros into pounds, you can multiply pounds by the exchange rate to get euros.

Question 13

What is the effect of a rise in the exchange rate on consumers?

Answer 13

• Import prices fall, so more domestic consumers are willing able to buy more imported goods
• More UK consumers may go overseas for holidays as the British pound buys more foreign currency
• A fall in the inflation rate of the domestic country if imports rise and exports fall

Question 14

What is the effect of a rise in the exchange rate on producers?

Answer 14

• Import prices fall, so those who buy raw materials abroad will benefit from lower average costs
• There will be a rise in export prices, so there could be a fall in demand for UK goods
• If imports grow and exports fall, the inflation rate will drop. This means that producers will not need to increase wages - lowering costs

Question 15

What acronym is useful for remembering the effect of a rise in exchange rates on producers and consumers?

SPICED

Answer 15

Strong
Pound
Imports
Cheaper
Exports
Dearer (more expensive)

Question 16

What acronym is useful for remembering the effect of a fall in exchange rates on producers and consumers?

WPIDEC

Answer 16

Weak
Pound
Imports
Dearer (more expensive)
Exports
Cheaper