Exchange Rates 2.0

Question 1

Factors influencing exchange rates

Answer 1

• imports and exports
• speculation
• relative interest rates
• relative inflation rates
• FDI
• quantitative easing

Question 2

Impact of changes in exchange rate on growth and employment (depreciation)

Answer 2

• increased growth and employment
• due to outward shift in AD (exports>imports)
• increases raw material costs (imports) - bad for firms (SRAS shifts in, decrease derived demand and Y)

Question 3

Impact of changes in exchange rate on inflation (depreciation)

Answer 3

• increase AD, increase price level (exports>imports) = demand pull inflation
• increase import (raw material) prices - decrease SRAS - cost push inflation

Question 4

Impact of changes in exchange rate on FDI flows (depreciation)

Answer 4

• more FDI FROM country that didn’t depreciate (as cheaper)
• however may not if they think exchange rate would depreciate further (earnings from I would decrease)

Question 5

Impact of changes in exchange rate on current account (appreciation)

Answer 5

• more imports, less exports
• worsened current account as outflows increase

Question 6

J curve

Answer 6

• import demand inelastic in short run
• signed to contracts and cannot respond to depreciation
• worsened current account and increase cost for firms

Question 7

J curve axis and labels

Answer 7

• y-axis - current account surplus and deficit
• x-axis - time (and 0 on the left)

Question 8

Marshall-Lerner condition

Answer 8

• has been satisfied when current account deficit begins to improve
• PED exports + PED imports > 1
  ^^ short run < 1, long run > 1

Question 9

Ways to manage exchange rates

Answer 9

• interest rates
• foreign currency transactions

Question 10

Effects of competitive depreciation

Answer 10

• exports cheap and competitive
• can lead to currency war (lower living standards as very expensive imports)