Exchange Rates

Question 1

Both types of exchange rates and the difference between them

Answer 1

Floating- when the value of the currency is determined by market forces

Fixed- The value of the currency is set at a certain peg, compared to other countries

Question 2

What is real exchange rate?

Answer 2

The exchange rate has been adjusted for inflation

Question 3

Factors influencing the exchange rate (5)

Answer 3

1. Interest rates
2. Inflation
3. Speculation
4. Economic growth
5. Current account

Question 4

How do INTEREST RATES influence the exchange rates?

Answer 4

An increase in interest rates increases the value of the pound
Whereas a decrease in interest rates decreases the value of the pound
This is because of people investing in our currency

Question 5

How does INFLATION influence the exchange rate

Answer 5

A lower inflation than other countries makes our goods look more attractive so foreign firms invest. This increases the value of the pound

Question 6

How does SPECULATION influence the exchange rates

Answer 6

If people believe the economy will improve the pound increases as demand for it has also increased

Question 7

How does the CURRENT ACCOUNT influence the exchange rates?

Answer 7

If there is a deficit it will cause a depreciation of the pound

Question 8

How does the government intervene with exchange rates? (4)

Answer 8

1. Use foreign currency reserves
2. Change interest rates
3. Change money supply
4. Fiscal/Monetary policies

Question 9

What affect does the government have on using foreign currency reserves on the exchange rate?

Answer 9

If they want to increase the value of the pound, they would buy Pound Sterlings from reserves

Question 10

What effect does the government changing interest rates have on the exchange rates?

Answer 10

Increasing interest rates can be used to attract foreign investment to increase the value of the pound

Question 11

What effect does the government changing the money supply have on the exchange rates?

Answer 11

If they want to depreciate the pound, they could print more money which would lead to inflation

Question 12

What effect does the government using fiscal and monetary policies have on the exchange rate?

Answer 12

If they increased taxation it would decrease inflation and make the pound more attractive.

Question 13

Evaluation for the government intervening on the exchange rates?(3)

Answer 13

1. If they used reserves they only have a limited amount of those
2. Using terser rates affects growth growth and unemployment
3. Long term managing needs to tackle long term competitiveness

Question 14

Effects of an appreciation of the pound. (5)

Answer 14

1. Exports are more expensive and imports are cheaper
2. Lower AD- assuming demand is elastic
3. Worsening of the current account-imports cheaper=deficit bigger
4. FDI may fall- exchange rate worsen makes it more expensive
5. Lower inflation- import prices decrease