Exchange Rates

Question 1

Floating Exchange Rate

Answer 1

A currency exchange rate that changes according to supply and demand, without government.

Question 2

Fixed Exchange Rate

Answer 2

A currency that is fixed at a particular rate through government intervention.

Question 3

Factors that Affect Currency Exchange (5 FACTORS)

Answer 3

1. An increase in Demand for the Currency Traded.
2. An increase in Supply for the Currency Traded.
3. A depreciation of Currency, due to an increase in interest rates.
4. An appreciation of Currency, caused by lower prices.
5. A depreciation of Currency, caused by high relative incomes.

Question 4

What does a depreciation in Currency relate to?

Answer 4

Exports become more competitively overpriced.
- Imports become more expensive.

Question 5

Effect on Net Exports

Answer 5

A depreciation in currency, means the imports/exports become more competitively priced. Exporting firms will benefit from a lower- valued currency - leads to more production + selling.

Question 6

Who benefits from this?

Answer 6

Exports - Sell more due to the increase in price
Imports - More expensive for them to sell.

Question 7

Effect on Cost of Production

Answer 7

As the price of imports increase, imports of resources used to the production process increases.

• Foreign inputs = higher C.O.P