Micro/Macro effects of a weak exchange rate

Question 1

Name 3 Micro effects of a weak exchange rate (WPIDEC)

Answer 1

1. Higher prices
2. Higher cost of production
3. Higher debt-serving costs
   4.Productive/X-Inefficiency

Question 2

Why is Higher debt serving cost an effects of WPIDEC

Answer 2

It is an effect due to some firms having debts in overseas countries, a weak exchange rate means servicing this debt is more expensive increasing costs for firms

Question 3

Name 3 Macro effects of a weak exchange rate (WPIDEC)

Answer 3

1.Current account balance(potential surplus)
2. Growth increase due to exports being more competitive
3. Unemployment (cyclical) could increase due to higher costs of production for firms
4.Inflation
5. FDI

Question 4

How is inflation an effect on a (WPIDEC)

Answer 4

Due to less demand pull inflation and sucking in of imports due to higher import prices (Expenditure switching policy)

Question 5

How can inflation increase due to a WPIDEC

Answer 5

It could increase due to firm’s costs of production rising those import raw materials. This could lead to cost-push inflation

Question 6

How is FDI an effect of a WPIDEC

Answer 6

Due to lower start-up costs, which makes it easier to set up in a country.

Question 7

What can deter a business from setting up in another country despite a WPIDEC.

Answer 7

Bureaucracy in starting up. (Regulation)
Poor infrastructure
Low urbanization