Exchange Rates Flashcards
Freely floating exchange rate system
Able to change according to levels of demand
Who buys sterling
Foreign firms importing from uk
Foreign tourists coming to uk
Uk tourists returning home
Currency speculators
Foreign investors in uk finanacial system
Central banks
Who sells sterling ?
Uk firms importing abroad
Foreign financial system
Foreign tourists returning home
Central banks
Marginal propensity to import
Proportion of an increase in income that’s spent on imports
Causes of current account positions
Country’s exchange rates
Productivity change
Inflation
Freeley floating exchange rates
Determined entirely by the market forces of supply and demand with no government intervention
Fixed exchange rates
Government maintain a fixed exchange rate either through common value or through intensive intervention
Arguments for floating exchange rates
Offer flexibility can adjust
E.g depreciating of pound after Brexit referendum allowed for boost in exports
Automatic correction of current account
Reduces scope for damaging speculation (avoid shocks)
Monetary policy allowed to focus on other targets e.g inflation/ Intrest rates
Arguments against floating exchange rates
Create uncertainty speculations ,damages economy
Those affected
Tourists
Government
Investors
Firms that trade
FDI
Arguments for fixed change rates
Reduces uncertainity over currency flunctuations. Promotes long term investment
Reduce inflation and expectations of inflation as less likely countries ‘imports’ inflation
Trade balance more stable
Arguments against fixed exchange rates
Requires large foreign currency reserves comes with large opp cost
Cause conflict with other macroeconomic objectives , inflation , cheaper exports , increasing net exports
Difficulty determining what rate they should be fixed , can be problem if too high
