6) Consequences of Exchange Rate Changes - MMT Flashcards
how can floating rates be greatly impacted by changes in the interest rate, there is a … link between interest rates and exchange rates
positive
as x rates are ultimately a price…
like all prices they will fluctuate with changes in demand and supply of the currency. Often this is determined by the confidence/faith/trust that speculators have in the economic performance of the country
anything … will tend to lower the value of the x rate
negative
what is the link between growth and devaluation of fixed rates/sustained depreciation of floating rates?
with help to drive growth in the economy
why is the link between an increase in growth and devaluation of fixed rates/sustained depreciation of floating rates?
due to their impact on x and m
how can a lower x rate improve international competitiveness?
as it makes exports more attractive relative to imports and therefore increasing growth (however this may depend on the type of economy)
what can a higher/lower x rate in order to improve international competitiveness depend on?
depend on the type of economy
a higher/lower x rate in order to improve international competitiveness depending on type of economy example
eg a developed economy like the UK relies greatly on strategic imports eg oil, may find that higher import prices could harm growth
countries for whom exports are the main drivers of their economy eg China, may prefer low x rates to continuously drive growth
why is a stable x rate preferable to a highly volatile one?
due to uncertainty undermining confidence
why is it bad if the x-rate is changing all the time?
it becomes very difficult for firms to maintain the prices at a stable level
what is a major problem for countries with fixed rates?
the concept of imported inflation, if prices increase in countries that they trade with then they will tend to import those price increases into their economy
in countries with floating rates, how can imported inflation be avoided?
by adjustments in the x rate, however, it is generally the case that a strong currency can help to limit the effects of inflation, a weak currency exposes the economy to more inflationary risk
what does a strong currency mean for employment?
a strong currency may harm the export sector costing jobs
what does a weak currency mean for employment?
a weak pound may benefit exporting businesses creating jobs (however this depends on the nature of the industry)
why might a weak currency possibly not generate many jobs?
- it depends on the nature of the industry, eg capital intensive industries like car manufacture may benefit from a weak currency but not necessarily create too many new jobs
- it also depends on the duration of x-rate changes, eg if the x-rate increases one week but declines the next then businesses are unlikely to make any changes in investment or employment as a result
- long term changes in x-rate may have more of an impact