Factors influencing the exchange rate Flashcards

1
Q

Inflation

A

Low inflation = exports more competitive, imports less competitive = increase demand for domestic currency = appreciation in currency

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2
Q

Interest rates

A

Higher interest rates cause an appreciation. Cutting interest rates tends to cause a depreciation Higher interest rates = more attractive to deposit money in that country = demand for currency rises = appreciation

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3
Q

Speculation

A

If speculators believe the sterling will rise in the future, they will demand more now to be able to make a profit. This increase in demand will cause the value to rise. Speculation = demand increases = appreciation

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4
Q

Change in competitiveness

A

More competitive = more demand = exchange rate to rise

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5
Q

Diagram

A

Exchange rate, supply and demand of the pound

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