Theme 4: Exchange rates Flashcards
What happens if the pound appreciates?
Stronger
Pound
Imports
Cheaper
Exports
Expensive
Draw a diagram to show the impact of a decrease in the supply of pounds on the exchange rate.
Draw a diagram to show the impact of a decrease in the supply of pounds on the exchange rate.
How do imports and exports impact the exchange rate?
A decrease in imports leads to an appreciation of the pound
A decrease in exports leads to a depreciation of the pound.
What will happen to the exchange rate as a result of an increase in the number of UK consumers travelling abroad in the summer?
The supply of pounds will increase which will lead to a depreciation
What will happen to the exchange rate as a result of an increase in the number of Chinese consumers travelling to the UK?
The demand for pounds will increase causing an appreciation
What is speculation?
When investors predict changes in a currency’s exchange rate to make a profit.
If Argentina increased its base interest rate what would happen?
There would be an outward shift of the demand curve for Argentine Pesos
There would be an increase in hot money flows in to the country
There would be an increase in the price of Pesos relative to other currencies
What are the factors influencing a countries exchange rate?
- Imports and exports
- Speculation
- Relative interest rates
- Relative inflation rates
- FDI
- Quantitative easing
Why will quantitative easing depreciate the currency?
As the supply of money in an economy will increase.
What is a floating exchange rate?
Where the values of a currency are determined by free market forces and where the value of a currency changes from day to day.
What are fixed exchange rates? and what are the closest examples of when they are used currently?
Where a country’s currency has a fixed value against another currency or commodity.
- Using another currency often the dollar
- Set up a common currency eg the euro
What is a managed exchange rate?
An exchange rate system where free markets determine the value of a currency but where central banks intervene from time to time to change the value of their currency.
What is an example of a form of fixed exchange rate that is no longer used?
Gold standard
How does a central bank influence the exchange rate?
Directly- By buying and selling currency using gold and foreign reserves held in its central bank.
Indirectly- raising or lowering interest rates.
Draw an adjustable peg exchange rate diagram
What is an adjustable peg system?
An exchange rate system where currencies are fixed in value in the short term but can be devalued or revalued in the long run
What is a crawling peg system?
An adjustable peg system of exchange rates where there is an inbuilt mechanism for regular changes in the currencies central value of the currency.
What is a managed or dirty float?
Where the exchange rate is determined by free market forced but governments intervene from time to time to alter the free market price of a currency.
What is a strength and a weakness of fixed exchange rates?
+ no volatility which encourages international trade and long term investment
+financial discipline on governments not to overspend.
-Less robust as speculation can force a devaluation of the currency.
-
What are the advantages and disadvantages of the floating or free exchange rate system?
-High volatility which is a barrier to international investment and trade
+No need for government intervention which means it is unlikely to collapse.
