Exchange Rates 4.1.8

Question 1

6 Factors influencing Exchange Rates

Answer 1

Imports and exports
Speculation
Relative interest rates
Relative inflation rates
FDI
Quantitative easing

Question 2

How do imports and exports influence exchange rates

Answer 2

Decrease in imports decreases supply of £ appreciates exchange rates

Increase in exports increases demand for £ appreciates exchange rates

Question 3

How does speculation influence exchange rates

Answer 3

If investors speculate the £ will increase they will buy £ appreciating the current exchange rate

Question 4

How do interest rates influence exchange rates

Answer 4

If a country has high interest rates investors will put money into banks increasing demand for that currency appreciating the exchange rate

Question 5

How do inflation rates influence exchange rates

Answer 5

Lower inflation rates leads to cheaper exports increasing demand for £ appreciating the exchange rate

Question 6

How does FDI influence exchange rates

Answer 6

An increase in FDI increases the demand for £ appreciating the exchange rate

Question 7

How does quantative easing influence exchange rates

Answer 7

Quantitative easing is when a central bank creates new money to purchase financial assets from high street banks increasing the supply of £ depreciating the exchange rate

Question 8

What do changes in exchange rates impact

Answer 8

Growth and employment
Inflation
FDI Flows
Current account

Question 9

In the short run import demand is

Answer 9

Inelastic

Question 10

In the long run import demand is

Answer 10

elastic

Question 11

What is the J curve effect

Answer 11

In the short run import demand is inelastic to price changes causing an increase in import expenditure but in the long run its elastic causing a decrease in import expenditure but an increase in demand for domestic goods

Question 12

What is the Marshall learner condition

Answer 12

In the long run import demand is elastic so PEDx + PEDm > 1
In the short run export demand is inelastic so PEDx+ PEDm < 1

Question 13

What 2 ways are used to manage exchange rates

Answer 13

Interest rates
Foreign currency transaction

Question 14

How are interest rates used to manage exchange rates

Answer 14

Increased Interest rates leads to an increased demand for £ appreciating the exchange rates

Question 15

How are Forex transactions used to manage exchange rates

Answer 15

Selling £ will increase the supply of £ depreciating the exchange rates

Question 16

What is a currency War

Answer 16

When countries depreciate their exchange rate in order to make their exports more competitive than other countries can lead to decreased living standards

Question 17

What is a fixed exchange rate

Answer 17

The value of a currency is fixed to the value of another

Question 18

Define Revaluation

Answer 18

When countries increase the value of their fixed exchange rate

Question 19

Define Devaluation

Answer 19

When countries decrease the value of their fixed exchange rate

Question 20

What is a managed exchange rate

Answer 20

The government or central bank will only intervene to keep the exchange rate within a certain range

Question 21

What is a floating exchange rate

Answer 21

The exchange rate is simply determined by the supply and demand for the domestic currency