Economics Theme 2.4.4

Question 1

What are exchange rates

Answer 1

Exchange rates are the cost of one currency in terms of another currenc

Question 2

how are exchange rates determined

Answer 2

Exchange rates are determined by supply and demand

Question 3

what happens if the demand for a currency goes up

Answer 3

As demand for one currency goes up its price (exchange rate) will go up, just like a good or service

Question 4

if supply goes up what happens goes up what happens to the currency

Answer 4

If supply goes up price (exchange rate) will go down

Question 5

if someone changes a currency

Answer 5

If you are visiting France you will supply £ and demand Euro

Question 6

what happens to trade if the pound is strong

Answer 6

Strong
Pound
Imports
Cheaper
Exports
Dearer

Question 7

what happens to trade if the pound is weak

Answer 7

Weak
Pound
Imports
Dearer
Exports
Cheaper

Question 8

what is the effect of demand of the pound going up

Answer 8

As demand for £s rises the exchange rate rises
e.g. £1 = $1.45 increases to £1 = $1.55
The pound has become stronger

Question 9

what effects the demand for the pound

Answer 9

Factors influencing demand:
Demand for UK products
Interest rates attracting or pushing away foreign investment
Rate of Foreign Direct Investment (FDI)

Question 10

what is transactional demand

Answer 10

Demand for the currency derives from people wishing to buy goods and services from that country
For example, this may come about as companies produce products that are in high demand on the world stage e.g. petrol

Question 11

What is speculative demand

Answer 11

Higher interest rates attract speculators to UK banks in order to achieve a higher return
Foreign currency dealers will speculate whether a currency will appreciate or depreciate in the future

Question 12

As the supply of the pound increases what is the effect

Answer 12

As supply £s rises the exchange rate falls
e.g. £1 = $1.45 falls to £1 = $1.35
The pound has become weaker

Question 13

what factors influence supply

Answer 13

factors influencing supply:
Demand for imported products
Interest rates attracting or pushing away foreign investment
A fall in UK interest rates

Question 14

what does increase in supply do

Answer 14

Increases in supply of a currency will cause it to depreciate.

A depreciation in the exchange rate will make exports cheaper so, over time, there should be an increase in exports.

WPIDEC = Weak pound, imports dearer, exports cheaper.

Question 15

what does depilacion do to trade

Answer 15

in the short run an exchange rate depreciation will make imports more expensive

Question 16

what is the effect of inelastic imports

Answer 16

if the import is price inelastic e.g. petrol then total spending on the import will increase

Question 17

why is the total spending on imports negative

Answer 17

This can cause serious problems for an economy and actually worsen the current account
In particular, there will be inflationary pressure in the economy due to the rise in prices
It is very difficult for a government to control this as it causes cost push inflation

Question 18

why is it long run it is easier in to substitute domestic products for imported ones

Answer 18

As consumers, firms and government become more aware of the increased prices of imports they will try to change their spending habits
For example, around the globe we are seeing a movement of people away from the use of petrol for cars to alternative forms of transport such as electric cars or cycling

Question 19

what is Aggregate demand

Answer 19

the total demand for goods and services within a particular market.

Question 20

What is The effect of exchange aggregate demand

Answer 20

Encourages imports and discourages exports leading to a fall in AD, affecting firms as a whole in the UK

Question 21

What is the impact of exchange rate on employment

Answer 21

Reduced output leading to lower employment as firms lay off workers

Question 22

What is the impact of exchange rates on inflation

Answer 22

Cheaper imports and falling AD leading to lower inflation, reducing costs for firms

Question 23

What is the impact of exchange rates on current accounts

Answer 23

Fall in exports and rise in imports leading to a worsening of the balance of payments

Question 24

where will global investors invest the most

Answer 24

Global investors who have significant sums of money to deposit in banks will seek to place it in the country where they get the best return i.e. where the interest rate is highest

Question 25

What will investors do if uk raises its interest rates

Answer 25

If the UK raises interest rates, then investors will move their money to the UK in order to get the best return This means they will have to sell their dollars, and buy pounds to deposit in the UK This increased demand for UK pounds increases the exchange rate This then feeds through to exports, making them relatively less price competitive, and making imports more attractive his will have the effect of making it harder for UK firms to export their goods and services At the same time, firms that import goods and services will find that their costs have reduced, making them more competitive

Question 26

What is the effective exchange rate

Answer 26

The effective exchange rate is a measure of the value of currency e.g. the Pound against a basket of other currencies e.g. the Dollar, the Euro, the Yen

Question 27

what is taxation

Answer 27

taxation is the process of imposing mandatory charges on a buisness and individuals by the government to finance gov operations

Question 28

what is the effecxt of taxation on buisnesses

Answer 28

buisnesses are charged a corporation tax however if there is a cut in income tax this gives consumers more disposable income which rises consumption but if income tax is increased spending is discouraged if corporation tax is reduced this will increase profits and incourage investment but if VAT changes this effects the pricde to customers and will cost the buisness

Question 29

what is direct tax

Answer 29

income tax, corporation tax, capital gains tax, inheritance tax, council tax mainly taxes of income or wealth taxes are taken directly from individual to gov progressive, so more money the higher tax can be avoided through planning ] not everyone pays (unemployed)

Question 30

what is indirect tax

Answer 30

indirect tax is VAT, road tax, alcohol/cigarette tax, stamp duty on house purchase taxes on all spending collected via third party e.g shopkeepers collect VAT regressive and are paid at a flat rate - everyone pays the same amount regardless of wealth a firm can pass this onto customers very difficult to avoid affects everyone

Question 31

Why does the government need taxation

Answer 31

to fund public services like NHS and education (public and merit goods) to afford investment in infrastructure which boosts efficency need to help poorest in society via benefit system tax rich more and poorer less used to help with behaviours and negative exterbnalities with de-merit goods (sugar tax and pollution)

Question 32

What is unemployment

Answer 32

someone who is able and willing and actively seeking employment but hasnt got a job

Question 33

what is the unemployment rate

Answer 33

percentage of the workforce who are registered as unemployed

Question 34

what is the labour force

Answer 34

the labour force is the number of people in employment and registered unemployed

Question 35

what does economically active mean

Answer 35

those in the workforce who are eployed or unemployed but actively seeking work

Question 36

what does economically inactive mean

Answer 36

those of working age who are not actively seeking employment e.g full time students, carers

Question 37

what does full employment mean

Answer 37

virtually all who are able and willing to work are employed it is the level of unemployment where only frictional employment exists negative because wages start to rise and inflation happens and labour is in short supply

Question 38

how can unemployment be measured

Answer 38

claimant count or labour force survey