Exchange rates

Question 1

What ways can governments appreciate the exchange rate?

Answer 1

Increase interest rates

Question 2

What are hot money flows?

Answer 2

• Free flowing capital that needs to be invested in one place
• Investors want their money to increase in value
• 92% of the FOREX market is made up of hot money flows

Question 3

What factors do exchange rates depend on?

Answer 3

• Other countries interest rates
• Speculation of other currencies
• Other countries inflation rates
• Other currencies policies

Question 4

Why is the inflation rate at 9% in the UK?

Answer 4

• Cost push inflation caused by the war in Ukraine has driven up prices of energy and oil
• Production costs have risen
  -2% demand pull inflation, the rest of the 8% represents cost push inflation

Question 5

How do you reduce cost push inflation?

Answer 5

• Supply side policies such as subsidizing renewable energy sources to reduce the dependency on Ukraine this would reduce the costs of production
• This takes a lot of time and money

Question 6

What is a fixed exchange rate system?

Answer 6

• The government sets the exchange rate at a specific target

Question 7

What is a floating exchange rate system?

Answer 7

• The price of the currency is set by supply and demand forces

Question 8

What is a managed managed exchange rate system?

Answer 8

• Exchange rate is floating but the government intervenes to influence the exchange rate

Question 9

What is a semi fixed system?

Answer 9

• Allows the exchange rate to fluctuate within a set limit

Question 10

What is a pegged exchange rate?

Answer 10

• The value of the currency is fixed to another currency

Question 11

What is monetary policy?

Answer 11

• Policy by the central bank
• Involves using interest rates and other monetary tools to influence consumer spending and thus reduce aggregate demand

Question 12

What is fiscal policy?

Answer 12

• Government policy
• Involves the use of government spending, taxation and borrowing to affect the level and growth of aggregate demand

Question 13

What is devaluation in a fixed exchange rate system?

Answer 13

• Decreasing the value of the currency
• Lowering the exchange rate, exports become cheaper, increase exports, improve balance of payments
• WIDEC

Question 14

How has China’s economy changed over the last few years?

Answer 14

• After the great financial crisis of 2008, US consumption fell, this affected the Chinese economy
• China created a middle class
• This was done to increase the domestic consumption, wages rose, they became less dependent on exports
• Consumption component of AD has increased
• 60 million people are set to join the middle class this year

Question 15

What are the advantages of a free floating exchange rate system?

Answer 15

• You do not need significant foreign currency reserves to defend the currency

Question 16

What is the J curve effect ?

Answer 16

The J curve shows that the balance of payments worsens before it improves
This is because consumers take time to change their consumptions patterns and firms take time to get out of contracts

Question 17

What is the Marshall Lerner condition?

Answer 17

The price elasticity of imports and exports must be more than 1 if a currency devaluation is going to have significant impact