lesson 15- currencies and exchange rates

Question 1

what is a currency

Answer 1

the accepted standard means of exchange in a country or region

Question 2

what is a exchange rate

Answer 2

the value or price of one currency in comparison to another
-£1->$1.23

Question 3

how are currencies measured

Answer 3

on a trade weighted exchange rate index
- measures the strength of a currency weighted by the amount of trade with other countries
-influenced by the degree of trade carried out by one country with another
-the greater the amount of trade, the larger the effect of a change in relative value of either currency

Question 4

what happens to exports and imports with strong and weak pounds

Answer 4

Strong
Pound
Imports
Cheap
Exports
Dear

Weak
Pound
Imports
Dear
Exports
Cheap

Question 5

what is appreciation

Answer 5

a rise in the value of the exchange rate/currency
-cheaper imports, as consumers can buy more foreign currency in exchange with their own
-Exports more expensive. so its harder to export

Question 6

what is depreciation

Answer 6

a fall in the value or price of a currency
-imports seem expensive as less foreign currency can be bought
-exports are cheaper, so its easy to export

Question 7

why are currencies bought and sold

Answer 7

international trade in goods and services
-long term capital movements e.g. investment
-speculation in foreign exchange markets (to make a profit)

Question 8

why do currencies change in value

Answer 8

increase/decrease in X or M
-interest rates
-inflow/outflow of capital funds for long term investment
-speculation
-government/bank intervention
-economic performance of the economy

Question 9

what is the effect of UK interest rates rising on the value of the pound

Answer 9

higher return for foreign investors -> need to buy pounds -> increase in demand for pounds -> value of the pound increases

Question 10

what effect does exchange rate have on unemployment

Answer 10

increase in exchange rate means more unemployment as less exports, as they are expensive, so AD decreases, so firms dont need workers

Question 11

what effect does exchange rate have on GDP

Answer 11

increase in exchange rate , so less exports, more imports, so AD decreases, and GDP decreases

Question 12

what effect does exchange rate have on inflation

Answer 12

increase in exchange rate, so exports decrease, so AD decreases, so less demand push inflation, so less inflation