Exchange rates

Question 1

Currency

Answer 1

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

Question 2

Exchange rate

Answer 2

The price of one currency in terms of another currency

Question 3

A rise in exchange rate

Eg : Pounds (£)

Answer 3

• Price of currency increases in terms of another currency.
• Each pound will be able to buy more units of another currency
• Currency becomes stronger / Appreciation of the currency
• Rise in the exchange rate = increase demand for a currency or decrease supply of a currency

Question 4

A fall in exchange rate

Eg : Pounds (£)

Answer 4

• Price of a currency decreases in terms of another currency
• Each pound will be able to buy fewer units of another currency
• Currency becomes weaker / Depreciation of a currency
• Fall in exchange rate = decrease demand for a currency or increase supply of a currency

Question 5

Why do economic groups in the eurozone need the pound?

Answer 5

• To buy UK exports of goods and services
• To save in UK bank accounts
• To speculate the pound, hope the pounds will be worth more in the future by buying the pound
• To invest in the UK

Question 6

Factors affecting demand for pounds

Demand for pound increase because…

Answer 6

• UK goods become more desirable, fall in prices
• Incomes rises in the eurozone so Eurozone consumers can now afford to buy more goods and this will include UK exports
• Eurozone speculators think the value of the pound will rise in the future
• UK becomes more attractive for foreign investments, reduce in corporation tax or an increase in productivity

Question 7

Why do British economic groups need euros?

Answer 7

• To buy imports of good and services
• To save in eurozone bank accounts
• To speculate on the euro, think the value of the euro will rise in the future
• To invest in the eurozone

Question 8

Factors affecting supply for the pound

Answer 8

• Eurozone goods become more desirable, fall in prices
• Income rises in the UK, so British consumer can afford this is likely to include eurozone exports
• Interest rates in the eurozone rise relative to other countries’ interest rate, British savers would want to save more in eurozone
• British speculator think the value of the euro will rise in the future
• Eurozone becomes more attractive for foreign investment, reduction in regulation or increase in productivity

Question 9

Effect of exchange rate falling

Answer 9

• Increase in total demand, demand for exports increase and demand for imports decrease due to relatively more competitive domestic prices
• Increase in GDP and economic growth, increase in output needed to meet the increased demand
• Decrease in unemployment, need more workers to make the extra output
• Current account surplus, if export revenue becomes greater than import spending
• Rise in inflation, increase in total demand, upwards pressure on prices
• Decrease in total supply, buy less raw materials or capital goods due to it being more expensive

Question 10

Effects of exchange rate on consumers

Rise in exchange rate may cause…

Answer 10

• Import prices fall - domestic consumers may be more willing and able to buy imported goods
• Improved standard of living - better standard of living as their income can buy more goods
• Increased tourism overseas - more domestic consumers go overseas as their British pound will buy more foreign currency
• Fall in interest rate - BofE may lower interest rates to enable British producers to borrow more money at a lower cost so they can invest in production to become more internationally competitive. However consumer benefit from lower interest rates as lower repayments on mortgages and credit cards
• A fall in inflation rate - total demand falling as imports grow and export fall, downwards pressure on price

Question 11

Effect of exchange rate on producers

Rise in exchange rate may cause…

Answer 11

• Import prices fall - producers will be able to buy more imported goods such as raw materials and capital goods, so average costs will be lower
• Rise in export prices - if overseas consumer have inelastic price elasticity of demand for these British goods. Not responsiveness to the rise in price
• Increased tourism overseas - producers involved in provision of holidays would benefits from the increase demand from British consumers
• Fall in interest rate - enable British producers to borrow more money at lower cost so they can invest in production and become more internationally competitive
• Fall in inflation rate - total demand falling as imports grow and export fall, downwards pressure on price