EXCHANGE RATES

Question 1

define exchange rates

Answer 1

a relative price of one currency expressed in terms of another currency

Question 2

define appreciation

Answer 2

an increase in the external value of one currency in relation to another currency

Question 3

define depreciation

Answer 3

a fall in the value of a currency in terms of its exchange rate versus other currencies

Question 4

impact of cheaper imports

Answer 4

• firms that import raw materials to produce in an economy are going to benefit= cheaper commodity prices= decrease COP= shift SRAS outwards and decrease P1 to P2
  = decrease cost-push inflation

Question 5

disadvantage of appreciation (lower import prices)

Answer 5

• low growth= less exports= cause current account deficit
• increase unemployment in export industries= exports more expensive= less demand for goods
• increase unemployment in domestic industries= domestic firms have to compete with cheaper imports from abroad= if they can’t compete must decrease costs= less workers

Question 6

adv of appreciation

Answer 6

• lower demand pull and cost push inflation= good for economy
• cheaper imports are goods for consumers= better SOL
• potential efficiency gains for domestic producers= must compete w cheaper imports= may cut costs elsewhere to increase competitiveness= more efficiency= lower prices

Question 7

effect of depreciation

Answer 7

• AD may increase due to more X-M= imports more expensive= demand for imports decrease= less expenditure on imports
• exports cheaper= more demand= more exports revenue= increase AD= shift right
• imports more expensive= shift SRAS left= firms that need to import raw materials will have higher costs= high COP

Question 8

adv of depreciation

Answer 8

• increase employment= export industries will have higher demand= more reason to produce more= requires more labour to increase output
• higher employment in domestic industries= lower competition= imports become more expensive= consumers may switch to buying imports deem domestic goods and services= cheaper= domestic firm’s AD rise= need more labour

Question 9

disadvantage of depreciation

Answer 9

• high demand pull and cost push inflation

Question 10

Evaluate effects of depreciation

Answer 10

• must consider extent of change in exchange rate
• consider how must ER has increased of decreased
• consider PED for imports and exports= determines whether revenue made will increase or decrease= change in expenditure
• depends on restrictions on trade eg protectionism