Th4.1: Impacts of Changes in Exchange Rates

Question 1

What are the four possible impacts of change in exchange rate?

Answer 1

current account of balance of payments
economic growth and unemployment
rate of inflation
FDI

Question 2

Economic growth and unemployment

Answer 2

a weaker exchange rate is likely to increase exports, since they become cheaper, and decrease imports so lead to an increase in AD, increasing employment and economic growth

Question 3

Rate of inflation

Answer 3

falls in the exchange rate will increase inflation as imports become more expensive, causing a rise in prices and a fall in SRAS. also, the net exports section of AD will increase and so inflation will rise further

Question 4

FDI

Answer 4

a fall in the currency may increase FDI because it becomes cheaper to invest. however, if the currency is continuing to fall then this is an indication that an economy has serious economic difficulties which will encourage investment

Question 5

What might companies decide to do following a depreciation of a currency?

Answer 5

keep the price it charges its customers at the same e.g pound may fall but UK company selling goods in US will charge same price in dollars as different currency