Th4.1: Government Intervention

Question 1

What are the two main methods the government can use to influence the value of their country?

Answer 1

use interest rates

gold and foreign currency reserves

Question 2

What can a government use interest rates for?

Answer 2

to increase or decrease demand for their currency

Question 3

What will an increase in interest rates do?

Answer 3

strengthen the pound as people will convert their money to pounds to put them in English banks, so demand for pounds will increase

Question 4

What will a decrease in interest rates do?

Answer 4

will decrease demand for the pound so weaken the currency

Question 5

What else can governments use to manipulate the value of their currency?

Answer 5

gold and foreign currency reserves

Question 6

If the value of the pound is too high and the government want to weaken it, what will they do?

Answer 6

increase supply by buying foreign currency or gold with pounds

Question 7

What can the government do to strengthen the pound via gold/foreign currency reserves?

Answer 7

increase demand by selling their foreign currency or gold in exchange for pounds - however central banks have found this has little impact in the long term

Question 8

How can the government also limit supply of currency?

Answer 8

by introducing currency controls, and by doing so can fix the value of their currency