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economics exam > exchange rates > Flashcards

exchange rates Flashcards

1
Q

what is an exchange rate

A

the exchange rate is the rate at which on currency trades against another on the foreign exchange market

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2
Q

factors affecting demand and supply for exchange rates (2)

A

exchange rates will fall if there is a fall in demand or a rise in supply

exchange rates will rise if there is a rise in demand or fall in supply

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3
Q

interest rates effect on exchange rates (2)

A

is UK interest rates rise relative to elsewhere it will become more attractive to deposit money in the UK and demand for sterling will rise leading to hot money inflows

a lower interest rate causes a fall and results in hot money outflows

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4
Q

effects of inflation on exchange rates (3)

A

if inflation is lower than elsewhere then UK exports will become more competitive and there will be an increase in demand for the pound to buy UK goods

foreign goods will be less competitive and so UK citizens will buy less imports

countries with low inflation rates tend to see and appreciation in the value of their currency

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5
Q

effects of speculation on exchange rates

A

if speculators believe the pound willi rise in future they willi demand more now to be able to make profit this increase demand and will cause it to rise

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6
Q

effect of imports and exports on exchange rates (2)

A

an increase in demand for UK goods and services abroad will increase demand for £

an increase in demand for foreign goods and services will increase the supply of pound sterling

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7
Q

effect of tourism on exchange rates (2)

A

an increase in tourism will increase demand for the £

a increase in UK citizens travelling abroad willi increase supply of £

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8
Q

effects of rising exchange rate on balance of payment (3)

A

if exporters raise prices then demand will fall however this demand on price elasticity, if inelastic then earnings will rise

if imports fall in price and UK demand is inelastic then total payments for imports will fall

a combination of elastic demand for exports and elastic demand for imports would worsen the balance of trade

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9
Q

how are exchange rates determined

A

on the foreign exchange market by demand and supply forces

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10
Q

how is the demand for sterling determined (3)

A
  • demand from foreign earners who wish to buy British goods and services
  • demand from foreign companies wishing to invest in the UK
  • demand from speculators, foreign companies and governments wishing to hold surplus funds in sterling
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11
Q

how is the supply of sterling determined (3)

A
  • supply of £ from UK firms converting into foreign currencies in order to buy foreign goods and services
  • supply of £ from UK firms converting into foreign currencies to invest overseas
  • supply o f£ from speculators and companies wishing to hold a surplus funds in foreign currencies
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12
Q

main factors that influence exchange rates (8)

A
  • inflation: if its lower than elsewhere UK exports will be more competitive
  • interest rates: if they are high people will wish to deposit money in the UK so £ rises
  • speculation: if speculators believe the £ will rise then it increases demand and it will rise
  • change in competitiveness: British goods are more competitive then £ will rise
  • relative strength of other currencies: if other countries are at risk then UK is more stable
  • balance of payments: deficit means import is greater than exports leading to depreciation
  • government debt: investors sell bonds so £ falls
  • economic growth/recession
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13
Q

what are floating exchange rates (2)

A

when there is a free market with no government intervention and the exchange reate is allowed to find its equilibrium level

the exchange rate willi alter if there is a change in either demand or supply of sterling

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14
Q

how does a currency depreciate in value (5)

A

price of exports fall so more exports

price of imports rises so less imports

higher inflation due to higher import prices

higher growth due to improved balance of trade

more hot money outflow

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15
Q

how does a currency appreciate in value (5)

A

price of export rises so less exports

price of imports falls so more imports

low inflation due to low imports prices

low growth due to poor balance of trade

more hot money inflows

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16
Q

what are fixed exchange rates

A

when the exchange rate with another country stays the same with the government ensuring this happens

17
Q

advantages of fixed exchange rates (3)

A
  • promotes international trade as there is more certainty over the exchange rate
  • could help to keep inflation stable: no fluctuations in imported raw material prices
  • currency less vulnerable to speculation
18
Q

disadvantages of fixed exchange rates (3)

A
  • unable to set interest rates freely as must adjust them to keep exchange rate fixed
  • government need to hold large reserves of gold and foreign currency which is expensive
  • the rate which is fixed may be inappropriate and cause trade deficit, less growth and more unemployment
19
Q

advantages of floating exchange rates (3)

A
  • balance of trade can be helped since currency can freely fall which helps increase employment
  • no need to hold lots of foreign currency reserves
  • control over interest rates and monetary policy for other economic objectives like controlling inflation
20
Q

disadvantages of floating exchange rates (2)

A
  • currency fluctuations cause uncertainty for international trade and business and encourages speculation
  • possibility of protectionist measures and trade barriers being used to correct exchange rate movements
21
Q

what is managed exchange rate (dirty float)

A

these allow a currency to float but within specified limits. when currency nears the upper or lower limit the government intervenes

22
Q

impact of a weak exchange rate on the UK firms (5)

A

UK exports will appear relatively cheap which will increase to quantity sold therefore UK firms will find the value of their profits have increased

Uk firms should see a rise in domestic/sales demands as foreign goods become more expensive for UK citizens/UK goods become more compensative in the domestic market

UK firms who earn profits aboard will find the value of their profits have increased

Foreign investors will find it cheaper to invest in UK firms which may help them expand.

Foreign tourists will gain more £s for their currency so UK firms in particular sectors e.g. tourism and transport may see a boost to business.

23
Q

impact of a strong exchange rate on firms (6)

A
  • reduced competitiveness so less exports. market share may be lost to foreign firms
  • imports are cheaper which can be passed down as lower prices
  • energy and fuel costs are reduced
  • foreign FDI is cheaper meaning more firms will relocate
  • easier to pay off debts
  • reduced tourism can impact firms who are based on tourism attractions
24
Q

effect of rising exchange rates on the current account (3)

A
  • goods and services become more expensive for foreign buyers which reduces competitiveness of products leading to less exports
  • strong currency makes foreign goods and services cheaper for domestic consumers and business leading to an increase in import volumes
  • reduced exports and increased imports worsens the trade balance
25
Q

effect of rising exchange rates on individuals (9)

A
  • purchasing power of imports is greater so more can be bought
  • domestic goods may also be cheaper due to lower inflation
  • travel to foreign countries will be cheaper meaning money is saved
  • tourism can be deterred as costs are high
  • workers in export driven sectors may face job insecurity due to less sales
  • import work may grow leading to more employment
  • investments made abroad will give a lower currency when converted
  • strong currency leads to low inflation and lower interest rates so savers are worse off
  • energy and fuel costs may be lowered as they are imported
26
Q

effect of weakening exchange rates on individuals (7)

A
  • imported goods are more expensive so those who rely on importing goods will face job insecurity. higher prices will be charged which can lead to inflation
  • exports are cheaper for foreign buyers so workers will see growth = more employment
  • travelling will become more expensive
  • increased tourism boosting business
  • investments abroad will give a higher return when converted
  • increased costs of fuel and energy as they are imported
  • debts in foreign countries will be harder to pay off

economics exam (14 decks)

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