Exchange rate changes

Question 1

What does the current account do?

Answer 1

The current account records all payments for imports and exports, plus inflows and outflows of income from investment

Question 2

What is the balance of payments?

Answer 2

The balance of payments records all transactions between the UK and other countries

Question 3

If a currency depreciates what happens to exports?

Answer 3

It makes exports more competitive which can lead to a current account surplus (exporting more than importing)

Question 4

If a currency appreciates what will happen to exports?

Answer 4

makes exports less competitive and that can lead to a current account deficit (importing more than exporting)

Question 5

If the economy is growing what can happen to imports and exports?

Answer 5

Increase in demand for imports.
AD will be strong and exporters may be able to sell most of their output in their home market -> lower exports and a current account deficit

Question 6

How can a current account deficit be balanced out?

Answer 6

Foreign direct investment

Question 7

What will happen if the economy is slowing down or if output is declining ?

Answer 7

Incomes will fall -> decrease in demand for imports -> businesses try to sell more abroad -> current account surplus develops -> Exchange rate appreciates

Question 8

If exports are growing what does that mean for employment?

Answer 8

It will create jobs so an increase in employment

Question 9

If imports are growing what does that mean for employment?

Answer 9

This reduces demand for domestic products which reduces employment.

Question 10

What happens in an open economy that facilitates trade?

Answer 10

Consumers get many opportunities to buy from producers who have a strong competitive advantage and lower prices.

This causes consumers to have more disposable income and allows them to spend on other things which can create employment.

Question 11

Explain what can happen if businesses have chances to buy inputs from cheaper sources?

Answer 11

This lowers production costs -> increases cost competitiveness -> more demand for there products -> and creates more employment.

Question 12

What do changes in exchange rates do to competitiveness?

Answer 12

They alter levels of competitiveness and shift patterns of demand which effects unemployment

Question 13

Explain how the rate of inflation can affect imports and exports?

Answer 13

rising prices lead to loss of competitiveness.

exchange rate will fall and this will restore export competitiveness but raise import prices.

Question 14

How do FDI flows affect exchange rates?

Answer 14

FDI creates demand for the currency of the destination economy. This will push up its exchange rate in the short term.

If FDI is being invested in facilities to produce goods for exports, in the long run exchange rate of the host country may rise further.

Question 15

Appreciation due to FDI may make producers less competitive but…?

Answer 15

FDI has the potential to increase employment and incomes in the destination economy.

Question 16

How has the Eurozone benefited businesses and consumers?

Answer 16

A single currency is being used in multiple countries. It reduces the cost of financial transactions between individual countries and saves time and trouble.

Eurozone members have a fixed exchange rate for all trade with each other

Question 17

If a member of the Eurozone loses competitiveness with the rest of the eurozone countries due to inflation what will happen?

Answer 17

its export sales will fall and its trade deficit with the rest of the eurozone will increase over time.

Question 18

If a member of the Eurozone loses competitiveness with the rest of the eurozone countries, what 2 solutions can help it?

Answer 18

1. businesses that export cut costs which may mean cutting pay
2. Governments can implement contractionary policies such as raising interest rates or taxes.