Exchange Rates Flashcards

1
Q

Both types of exchange rates and the difference between them

A

Floating- when the value of the currency is determined by market forces

Fixed- The value of the currency is set at a certain peg, compared to other countries

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2
Q

What is real exchange rate?

A

The exchange rate has been adjusted for inflation

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3
Q

Factors influencing the exchange rate (5)

A
  1. Interest rates
  2. Inflation
  3. Speculation
  4. Economic growth
  5. Current account
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4
Q

How do INTEREST RATES influence the exchange rates?

A

An increase in interest rates increases the value of the pound
Whereas a decrease in interest rates decreases the value of the pound
This is because of people investing in our currency

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5
Q

How does INFLATION influence the exchange rate

A

A lower inflation than other countries makes our goods look more attractive so foreign firms invest. This increases the value of the pound

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6
Q

How does SPECULATION influence the exchange rates

A

If people believe the economy will improve the pound increases as demand for it has also increased

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7
Q

How does the CURRENT ACCOUNT influence the exchange rates?

A

If there is a deficit it will cause a depreciation of the pound

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8
Q

How does the government intervene with exchange rates? (4)

A
  1. Use foreign currency reserves
  2. Change interest rates
  3. Change money supply
  4. Fiscal/Monetary policies
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9
Q

What affect does the government have on using foreign currency reserves on the exchange rate?

A

If they want to increase the value of the pound, they would buy Pound Sterlings from reserves

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10
Q

What effect does the government changing interest rates have on the exchange rates?

A

Increasing interest rates can be used to attract foreign investment to increase the value of the pound

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11
Q

What effect does the government changing the money supply have on the exchange rates?

A

If they want to depreciate the pound, they could print more money which would lead to inflation

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12
Q

What effect does the government using fiscal and monetary policies have on the exchange rate?

A

If they increased taxation it would decrease inflation and make the pound more attractive.

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13
Q

Evaluation for the government intervening on the exchange rates?(3)

A
  1. If they used reserves they only have a limited amount of those
  2. Using terser rates affects growth growth and unemployment
  3. Long term managing needs to tackle long term competitiveness
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14
Q

Effects of an appreciation of the pound. (5)

A
  1. Exports are more expensive and imports are cheaper
  2. Lower AD- assuming demand is elastic
  3. Worsening of the current account-imports cheaper=deficit bigger
  4. FDI may fall- exchange rate worsen makes it more expensive
  5. Lower inflation- import prices decrease
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