Exchange Rate Flashcards
SPICED
Strengthing Pound Imports Cheaper Exports Dearer
WPIDEC
Weakening Pound Imports Dearer Exports Cheaper
Exchange rate and the interest rate
A reduction in the interest rate will tend to reduce the exchange rate
This is because it will reduce the interest received on monies in UK bank accounts
There will be an outflow of money as from the UK as investors seek to gain better interests elsewhere
This means more of the currency is being sold which will increase the supply of the currency= reduced exchange rate
HOT MONEY
Money in bank accounts that is liable to rapid removal to other countries if the holders suspect that the urgency will depreciate
Exchange rates and net exports
A fall in the exchange rate, depreciation will lead to EXPORTS becoming CHEAPER and imports becoming dearer
This leads to an increase in net exports having a positive impact on aggregate demand
A ride in the exchange rate, appreciation, will lead to EXPORTS becoming DEARER and imports cheaper.
This leads to a decrease in net exports and will have a negative impact on aggregate demand
UK products are internationally competitive
Demand- high
Supply- low
Incomes are rising in other countries
Demand- high
Supply-low
Incomes are rising in the UK
Demand-low
Supply-high
Foreign companies want to invest in the UK (FDI)
Demand-high
Supply-low
Speculators want to take advantage of low £
Demand-high
Supply-low
Exchange rate
The price of one currency in term of another currency or currencies
Most countries exchange rates are determined by demand and supply; these are known as “floating” exchange rates
If demand for the currency increased, the exchange rate will increase
A rise in the exchange rate of a currency means that each unit of currency will buy more units if another currency
It also means that more units of the other currency will need to be paid to but the currency