Flashcards in Exchange Rates Deck (14)
Both types of exchange rates and the difference between them
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
What is real exchange rate?
The exchange rate has been adjusted for inflation
Factors influencing the exchange rate (5)
1. Interest rates
4. Economic growth
5. Current account
How do INTEREST RATES influence the exchange rates?
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
How does INFLATION influence the exchange rate
A lower inflation than other countries makes our goods look more attractive so foreign firms invest. This increases the value of the pound
How does SPECULATION influence the exchange rates
If people believe the economy will improve the pound increases as demand for it has also increased
How does the CURRENT ACCOUNT influence the exchange rates?
If there is a deficit it will cause a depreciation of the pound
How does the government intervene with exchange rates? (4)
1. Use foreign currency reserves
2. Change interest rates
3. Change money supply
4. Fiscal/Monetary policies
What affect does the government have on using foreign currency reserves on the exchange rate?
If they want to increase the value of the pound, they would buy Pound Sterlings from reserves
What effect does the government changing interest rates have on the exchange rates?
Increasing interest rates can be used to attract foreign investment to increase the value of the pound
What effect does the government changing the money supply have on the exchange rates?
If they want to depreciate the pound, they could print more money which would lead to inflation
What effect does the government using fiscal and monetary policies have on the exchange rate?
If they increased taxation it would decrease inflation and make the pound more attractive.
Evaluation for the government intervening on the exchange rates?(3)
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