Recap sheet 6

Question 1

What causes demand for the £

Answer 1

1. Demand for exports
2. Currency speculators buying
3. Inward hot money flows

Question 2

Where does demand for the £ come from

Answer 2

1. Demand for exports
2. Hot money flows
3. Currency speculators buying

Question 3

Where does supply of the £ come from

Answer 3

1. Demand for imports
2. outward hot money flows
3. Currency speculators selling

Question 4

What causes changes in the exchange rate

Answer 4

1. Relative interest rates -> increase in interest rates -> encourages hot money flows-> increased demand for £ -> therefore a decrease in supply -> Currency appreciates
2. Relative inflation rates-> Increase in the prices -> makes UK goods more expensive -> less competitive -> Demand for goods decrease -> supply increases -> currency depreciates
3. Currency speculators -> self fulfilling prophecy -> will sell their currency thinking its going to depreciate, by them selling it causes the currency to depreciate
4. Balance of payments -> Import more than export -> greater supply of the currency on the market -> currency depreciates

Question 5

Where does supply of the £ come from

Answer 5

1. Demand for imports
2. Currency speculators selling
3. Outward hot money flows

Question 6

What causes the exchange rate to fluctuate

Answer 6

1. Interest rates increasing -> increase hot money flows -> increase D for £ -> Currency appreciates
2. Inflation-> increases the price level -> UK exports less competitive -> Decreased demand for £ -> excess supply -> Depreciation of the £
3. Current account balance -> deficit -> import more -> supply of £ increases -> £ depreciates
   4.