Exchange Rates and Interest Rates Flashcards
Define what is meant by exchange rate
The value of one currency in terms of another
What does depreciate mean?
The weakening of the pound
What does appreciate mean?
The strengthening of the pound
Define an import
A sale which leads to money exiting an economy
Define an export
A sale which leads to money entering an economy
What does SPICED mean?
Strong Pound Imports Cheap Exports Dear (expensive)
What are the impacts of a weakening pound?
Rise of raw material costs AND exports very buoyant
Why is volatility of the pound bad for business?
The business is put under pressure making it difficult to predict profit. May have to turn customers away because they cannot afford raw materials to produce products
What are the long term changes of a weak pound?
Businesses will use domestic suppliers, increase suppliers. Businesses will also focus on exports:selling to EU customers.
What are the short term effects of a weakening pound?
Cutting overheads such as WiFi and electricity
How is the exchange rate established?
Through demand and supply, when demand for the pound increases the strength increases and vice versa
Which factors effect the strength of the pound? STATE 3
Interest rates, foreign investment and desire for foreign customers to buy from the UK
Define an interest rate.
The cost of borrowing and the reward for saving
Who sets interest rates?
The Monetry Policy Committee (MPC)
Which political factor effected the strength of the pound?
Brexit because of uncertainty decreasing demand for the pound
What would happen to a business interest rates were low?
More revenue as customers are spending and mortgages are low
What would happen to a business if interest rates were high?
Less money as customers would be spending less and mortgage payments are higher
What would happen to the pound of interest rates were high?
If interest rates are high the pound will be strong because sterling is in high demand due to increased foreign investment and more hot money
What would happen to the pound if interest rates are low?
If interest rates are low the pound will be weak due to less demand and lack of foreign investment and decreased hot money
