Macro 1.2 Flashcards
Define: Exchange rate
The price of one currency in terms of another
What does the exchange rate diagram look like
Normal supply and diagram however the axis are labeled Price of Pounds and Quantity of Pounds
Factors that affect exchange rates
Imports Export Speculation Relative interest rates Relative inflation rates FDI Quantitative easing
Why is currency supplied
Imports
Tourism abroad - To use other currencies
Why is currency demanded
Exports
Domestic tourism
Fall in supply = _____________
Appreciation
Fall in demand =
Depreciation
If investors predict an appreciation in the future, they will ______ pounds, causing an ____________ now
Buy pounds
Appreciation
Affect of high interest rates on currency value
High interest rates - More saving in UK - Appreciation
Which supply curve do exchange rates affect
SRAS
How does an appreciation effect imports and exports
Cheaper imports and more expensive exports
Causes a decrease in (X-M)
How does FDI affect exchange rates
Increase in FDI = Appreciation
How does quantitative easing affect exchange rates
Increased supply of currency = Depreciation
Impact of changes in exchange rates
Growth and employment
Inflation
FDI flows
Current account
Effect of appreciation on growth
Exports more expensive, Imports cheaper
CAUSES
Fewer exports and More imports
Effect of appreciation on inflation
Appreciation -> Fall in price level
Imports cheaper - Lower costs - SRAS shifts out - Deflation
Exports more expensive - Fall in export revenue - Decrease in AD - Deflation
Effect of appreciation on FDI
Appreciation = Less FDI as its more expensive
OR
More FDI if investors think currency will continue to appreciate
Effect of appreciation on current account
Exports expensive, Cheaper imports = Decrease in X, Increase in M = Current account worsen
Overall appreciation leads to
Decreased growth and employment - Decrease in inflation
Explain the J Curve
- In the short-run, import demand is inelastic
- Importers can’t immediately respond to changes in exchange rates
- So in the short run firms have to pay more, but in the long run they can substitute and buy less
Explain the Marshall-Lerner Condition
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