Exchange Rate

Question 1

Exchange rate definition

Answer 1

The external price of currency compared to another currency

Question 2

Freely Floating Exchange Rates

Answer 2

X rate determined purely by the forces of d and s

Free from govt intervention

Question 3

Advantages of floating exchange rate (4)

Answer 3

BOP auto adjustment
Flexibly for govt
No need for large exchange reserves
Freedom for macroeconomic objectives

Question 4

Fixed Exchange Rate

Answer 4

A govt ties it’s x rate tot he price of another country’s (US$)
Used to promote exports

Question 5

Managed exchange rate

Answer 5

Determined by d and the govt may intervene to influence occasional

Question 6

Disadvantages of floating exchange rate (4)

Answer 6

Uncertainty- as to exact price of currency
Speculation
Inflation
Damage to investment- discourage due to above

Question 7

Fixed exchange rate advantages

3

Answer 7

Reduces uncertainty
Economic growth
Low inflation

Question 8

Fixed disadvantages

3

Answer 8

Needs maintaining
Speculation
Conflict with objectives

Question 9

How govt can intervene?

Answer 9

1. Change interest rates- increase to strengthen £
2. Use foreign currency reserves
3. Borrowing
4. Inflation- reducing inflation= competitive exports= increase in demand= increase in x rate

Question 10

How to increase the x rate via inflation

Answer 10

reducing inflation= competitive exports= increase in demand= increase in x rate

Question 11

How to increase the exchange rate with interest rates?

Answer 11

Increase the interest rate so demand increases for the pound, investors look for high IR