Economics Theme 2.4.4

Question 1

What are exchange rates

Answer 1

Exchange rates are the cost of one currency in terms of another currenc

Question 2

how are exchange rates determined

Answer 2

Exchange rates are determined by supply and demand

Question 3

what happens if the demand for a currency goes up

Answer 3

As demand for one currency goes up its price (exchange rate) will go up, just like a good or service

Question 4

if supply goes up what happens goes up what happens to the currency

Answer 4

If supply goes up price (exchange rate) will go down

Question 5

if someone changes a currency

Answer 5

If you are visiting France you will supply £ and demand Euro

Question 6

what happens to trade if the pound is strong

Answer 6

Strong
Pound
Imports
Cheaper
Exports
Dearer

Question 7

what happens to trade if the pound is weak

Answer 7

Weak
Pound
Imports
Dearer
Exports
Cheaper

Question 8

what is the effect of demand of the pound going up

Answer 8

As demand for £s rises the exchange rate rises
e.g. £1 = $1.45 increases to £1 = $1.55
The pound has become stronger

Question 9

what effects the demand for the pound

Answer 9

Factors influencing demand:
Demand for UK products
Interest rates attracting or pushing away foreign investment
Rate of Foreign Direct Investment (FDI)

Question 10

what is transactional demand

Answer 10

Demand for the currency derives from people wishing to buy goods and services from that country
For example, this may come about as companies produce products that are in high demand on the world stage e.g. petrol

Question 11

What is speculative demand

Answer 11

Higher interest rates attract speculators to UK banks in order to achieve a higher return
Foreign currency dealers will speculate whether a currency will appreciate or depreciate in the future

Question 12

As the supply of the pound increases what is the effect

Answer 12

As supply £s rises the exchange rate falls
e.g. £1 = $1.45 falls to £1 = $1.35
The pound has become weaker

Question 13

what factors influence supply

Answer 13

factors influencing supply:
Demand for imported products
Interest rates attracting or pushing away foreign investment
A fall in UK interest rates

Question 14

what does increase in supply do

Answer 14

Increases in supply of a currency will cause it to depreciate.

A depreciation in the exchange rate will make exports cheaper so, over time, there should be an increase in exports.

WPIDEC = Weak pound, imports dearer, exports cheaper.