4.3 Exchange rates

Question 1

Define exchange rate

Answer 1

The price of one currency in terms of another currency

Question 2

Factors affecting the demand for pounds

Answer 2

• to buy UK exports of goods and services
• to save in UK bank accounts
• to invest in the UK
• to speculate on the pound

Question 3

Factors affecting the supply of pounds

Answer 3

• to buy imports of EU goods and services
• to save in eurozone bank accounts
• to invest in the eurozone
• to speculate on the euro

Question 4

Effect of a rise in the exchange rate on consumers

Answer 4

• Import prices fall: domestic consumers are more willing and able to buy imported goods
• Improved standard of living: domestic consumers may enjoy a better standard of living as their incomes can buy more imported goods
• Increased tourism overseas: more domestic consumers may go overseas for holidays as their British pound will buy more foreign currency

Question 5

Effect of a rise in the exchange rate on producers

Answer 5

• A fall in import prices: this is a benefit for producers who import raw materials or capital goods, as now their average costs will be lower and there is a chance of increased profits
• Increased tourism overseas: producers involved in the provision of holidays overseas (e.g. travel agents, airlines) should benefit from the increased demand from British consumers.
• A rise in export prices: If overseas consumers have inelastic PED for these British goods, they will not be responsive to the rise in price and mat still continue to demand a similar quantity