Th4.1: Factors Affecting Floating Exchange Rates

Question 1

What are floating exchange rates determined by?

Answer 1

the interaction of demand and supply, and so are affected by changes in demand and supply

Question 2

What is the demand for pounds determined by?

Answer 2

the amount of British goods that foreigners want to buy - the number of foreigners wanting to invest in the UK, visit, or place their money in British banks - and the amount of speculation on the pound

Question 3

What is the supply of pounds determined by?

Answer 3

the amount of foreign goods people in the UK want to buy - the number of British firms that want to invest abroad, wanting to go on holiday or place their money in foreign banks - the amount of speculation on the pound

Question 4

Therefore, in general, the currency is affected by the…

Answer 4

level of exports and imports, the level of investment, those going on holiday and speculation

Question 5

How is speculation the single most important determinant of the short-term price?

Answer 5

if speculators fear a fall in the pound, the pound will fall as they will sell their pounds and buy another currency

Question 6

What is the currency determined by in the long term?

Answer 6

economic fundamentals - exports, imports and long-term capital flows

Question 7

What does the purchasing power parity argue about exchange rates in the long run?

Answer 7

in the long run exchange rates will change in line with changes in prices between countries - inflation makes exports less competitive and imports more competitive, causing a fall in trade balance and therefore the pound