Exchange rates Flashcards
UK consumers stop purchasing pork from several countries following a swine flu scare. Which of the following shows a possible impact of this?
Pork purchased from other countries is an import. When imports fall, UK consumers supply fewer pounds as they purchase less of the foreign currencies needed to buy the imports. A reduction in the supply of pounds will lead to an increase (appreciation) in the exchange rate.
The UK government imposes regulations to stop UK arms producers from selling guns and fighter jets abroad. Which of the following shows a possible impact of this?
The regulations will reduce the number of UK exports. This means that fewer foreign consumers will need to buy UK pounds and so the demand for pounds will fall. This will in turn decrease the exchange rate.
What will happen to the exchange rate as a result of an increase in the number of UK consumers travelling abroad in the summer?
When UK consumers travel abroad they will need to purchase a foreign currency. In order to do this they will need to sell (or supply) their pounds. This means that an increase in foreign travel by UK consumers will lead to an increase in the supply of pounds. An increase in the supply of pounds will in turn lead to a decrease in the exchange rate, causing a depreciation
What will happen to the exchange rate as a result of an increase in the number of Chinese consumers travelling to the UK?
When Chinese consumers travel to the UK they will need to purchase pounds meaning that the demand for pounds will increase. This will lead to an increase in the value of the exchange rate, also known as an appreciation.
the impact of a decrease in the demand for imports on currency
A decrease in the demand for imports means that UK consumers will be supplying fewer pounds. This is because they will purchase less of the foreign currency needed to buy the imports. As shown below, a reduction in the supply of pounds will lead to an increase (appreciation) in the exchange rate.
Which of the following is most likely to occur following an increase in the demand for UK pharmaceutical exports?
An increase in the demand for UK exports means that foreign consumers will demand more pounds. An increase in the demand for pounds will shift the demand curve to the right. This will cause an appreciation in the exchange rate as the pound increases in value.
Which of the following shows the likely impact of a decrease in the Australian interest rate?
If the Australian interest rate decreases, Australian investors will look to other countries for a higher interest rate in order to get a higher rate of return. This means that they will sell (supply) their Australian dollars in order to buy (demand) other currencies. The supply of Australian dollars will increase causing a depreciation of Australia’s exchange rate.
If a country’s interest rate is high relative to other countries…
hot money will flow into that country. This will increase the demand for that country’s currency and cause its value to appriciate
How is the exchange rate for pounds determined?
In the UK, the exchange rate is determined by the equilibrium between the supply and demand for pounds as shown below.
What is an increase in the number of American tourists visiting other countries gonna do to the dollar?
When American tourists travel abroad they will need to purchase a foreign currency. In order to do so they must sell (or supply) dollars. This means that an increase in foreign travel by American tourists will lead to an increase in the supply of dollars. This will in turn lead to a decrease in the exchange rate, causing a depreciation.
What effect will A reduction in imports to Eurozone countries from the rest of the world have on the euro?
If imports fall, Eurozone consumers will supply fewer Euros. This is because they will be purchasing less foreign currencies to buy imported goods. A reduction in supply will lead to an increase (appreciation) in the exchange rate.
Assuming the U.S. unemployment rate continues to fall and inflation rises, the Federal Reserve will probably need to raise interest rates in December and then three or four times “over the course of next year,” Boston Fed President Eric Rosengren said.
Source: https://www.cnbc.com/2017/10/16/feds-rosengren-sees-three-to-four-rate-hikes-next-year.html
If speculative investors believe that the interest rate is likely to rise in May, what are they most likely to do?
An increase in the interest rate will encourage hot money to flow into the US in order to profit from a high rate of return. This will increase demand for the dollar and cause it to appreciate. Speculative investors therefore predict that there will be an appreciation of the exchange rate in May when the interest rate increases.
However, in order to make a profit from this, they will have to buy dollars whilst they are cheap and sell them when the value has increased. This means that investors are likely to buy dollars straight after the announcement in December and sell them at a higher price in May
How does an increase in the demand for a currency affect the exchange rate?
As shown below, an increase in demand will lead to an increase (appreciation) in the exchange rate.
Foreign Direct Investment into the UK falls. What is the likely impact of this on the UK exchange rate?
If Foreign Direct Investment into the UK falls, fewer foreign businesses will be demanding pounds. This will shift the demand curve to the left which will cause a depreciation in the exchange rate as the pound decreases in value.
What is quantitative easing an extreme type of?
Quantitative easing is an extreme type of monetary policy. It is used when the central bank wants to grow the economy but can’t decrease the interest rate further as it is already very low.
Quantitative Easing
The central bank buys financial assets from high street banks in order to increase their money supply and encourage lending
How does quantitative easing affect the exchange rate?
Quantitative easing involves the central bank creating new money. This increases the supply of the currency being produced causing the exchange rate to depreciate.
Net investment flows from foreign investors into the UK were at £21.6 billion in 2015 having increased from £15 billion in 2014.
Source: Foreign Direct Investment into the UK, 2016/17 - Parliament UK
What impact is this change in foreign investment likely to have had on the value of the pound?
Net Foreign Investment increased from £15 billion to £21.6 billion. If FDI increases, more foreign businesses are demanding pounds to pay for their investments. This shifts the demand for pounds to the right which causes an appreciation in the exchange rate.
It is important to remember that there are lots of different things happening at once which can affect the exchange rate. Even though an increase in the demand for pounds due to increased FDI will put upward pressure on the exchange rate, there may be other factors outweighing this effect which could cause the exchange rate to go down.
