lesson 6: exchange rates Flashcards
what happens to the exchange rate if there is an decrease in demand of imports? a decrease in demand for exports?
decrease in demand of imports —> a fall in a countries currency —> decrease supply of pounds —> decrease in exchange rate (depreciate)
decrease in demand for exports —> decrease demand for the countries currency —> increase in exchange rate (appreciate)
what is speculation? why is speculation important to exchange rates
when investors predict changes in a currency’s exchange rate to make a profit
when speculators predict an appreciate of a currency in the future the demand/buying of the currency increases NOW with the lower interest rates so they can sell them when they have a higher interest rate before it starts to depreciate so they make a larger profit
what are the factors that effect the exchange rate?
imports and exports
speculation
relative interest rates
relative inflation rates
FDI
QE
when is the likely impact of a decrease in a countries interest rate?
country’s interest rate decreases —> investors will look to other countries for a higher interest rate —> higher rate of return —> they will sell (supply) their currency in order to buy (demand) other currencies —> The supply of the countries currency will increase causing a depreciation of its exchange rate
what happens if a countries interest rates is higher relative to other countries?
hot money will flow into that country —> This will increase the demand for that country’s currency —> increasing supply —> appreciate
what happens if a countries interest rates is lower relative to other countries?
hot money will flow out that country —> This will increase the supply for that country’s currency —> decreasing demand —> depreciate
what is an interest rate?
the cost of borrowing or the reward for saving
How is the exchange rate for pounds determined?
The exchange rate is determined by the equilibrium between the supply and demand for pounds
what happens if a country’s inflation rate is low relative to competitors
inflation rate is low relative to its competitors —> prices go up by less than competitors —> country’s exports will become relatively cheaper —> foreign consumers demand for their exports will increase —> increasing the demand for the country’s currency —> appreciation
what does a ___ do to the exchange rate?
decrease in imports
decrease in exports
increase in imports
increase in exports
decrease in imports —> decrease in supply of the currency —> appreciating exchange rate
decrease in exports —> decreases demand for the currency —> depreciate exchange rate
increase in imports —> increases supply of the currency —> depreciating the exchange rate
increase in exports —> increases demand for the currency —> appreciating the exchange rate
what is FDI?
investment made by one country into a foreign firm to gain control of it
how does an increase in FDI effect the currency?
An increase in FDI going into a country —> increases the demand for its currency —> exchange rate will appreciate.
what type of policy is QE?
extreme type of monetary policy that’s a last resort for economic growth when interest rate is at a low level
what is QE?
Quantitative easing is when the central bank buys financial assets such as bonds from high street banks. This increases the money supply of high street banks which increases the amount of money that these can lend.
how does QE effect exchange rates?
Quantitative easing involves the central bank creating new money. This increases the supply of the currency being produced causing the exchange rate to depreciate.
what factors are impacted by a change in exchange rates?
growth and employment
inflation
FDI flows
current account
