Changes in Exchange Rates

Question 1

What is an exchange rate?

Answer 1

The value of one curreny against another.

Question 2

How is a depreciation in the £ inflationary?

Answer 2

More expensive imports can cause cost-push inflation as the price of foreign commodities rise.

Question 3

How does a depreciation in the £ cause the UK current account deficit to improve?

Answer 3

As exports will be cheaper, the competetiveness will increase as will sales, but imports will become more expensive and will begin to decrease. This means there will be more exports than before and less imports than before which moves further toward a surplus.