Exchange Rates and Interest Rates

Question 1

Define what is meant by exchange rate

Answer 1

The value of one currency in terms of another

Question 2

What does depreciate mean?

Answer 2

The weakening of the pound

Question 3

What does appreciate mean?

Answer 3

The strengthening of the pound

Question 4

Define an import

Answer 4

A sale which leads to money exiting an economy

Question 5

Define an export

Answer 5

A sale which leads to money entering an economy

Question 6

What does SPICED mean?

Answer 6

Strong Pound Imports Cheap Exports Dear (expensive)

Question 7

What are the impacts of a weakening pound?

Answer 7

Rise of raw material costs AND exports very buoyant

Question 8

Why is volatility of the pound bad for business?

Answer 8

The business is put under pressure making it difficult to predict profit. May have to turn customers away because they cannot afford raw materials to produce products

Question 9

What are the long term changes of a weak pound?

Answer 9

Businesses will use domestic suppliers, increase suppliers. Businesses will also focus on exports:selling to EU customers.

Question 10

What are the short term effects of a weakening pound?

Answer 10

Cutting overheads such as WiFi and electricity

Question 11

How is the exchange rate established?

Answer 11

Through demand and supply, when demand for the pound increases the strength increases and vice versa

Question 12

Which factors effect the strength of the pound? STATE 3

Answer 12

Interest rates, foreign investment and desire for foreign customers to buy from the UK

Question 13

Define an interest rate.

Answer 13

The cost of borrowing and the reward for saving

Question 14

Who sets interest rates?

Answer 14

The Monetry Policy Committee (MPC)

Question 15

Which political factor effected the strength of the pound?

Answer 15

Brexit because of uncertainty decreasing demand for the pound

Question 16

What would happen to a business interest rates were low?

Answer 16

More revenue as customers are spending and mortgages are low

Question 17

What would happen to a business if interest rates were high?

Answer 17

Less money as customers would be spending less and mortgage payments are higher

Question 18

What would happen to the pound of interest rates were high?

Answer 18

If interest rates are high the pound will be strong because sterling is in high demand due to increased foreign investment and more hot money

Question 19

What would happen to the pound if interest rates are low?

Answer 19

If interest rates are low the pound will be weak due to less demand and lack of foreign investment and decreased hot money