Exchange Rates

Question 1

What factors effect supply of a currency?

Answer 1

Imports of goods and services, investments made abroad, and official selling of a currency
E.G an increase in supply of pounds will cause a decrease to the value of the pounding

Question 2

What factors effect demand of currency?

Answer 2

Same as supply, but exports not imports

eg an increase in demand of pounds will cause an increase in the value of pound

Question 3

How does exchange rate effect the four macroeconomic policy objectives?

Answer 3

Unemployment - low value = increased exports= lead to economic growth and provide more jobs

Inflation - increase in value of pound can help control inflation - imports become cheaper, so UK producers need to keep prices down in order to compete.

Balance of payments - if it decreases, imports price increase - deficit as more is spent on essentials.

Question 4

What are the two main types of exchange rates?

Answer 4

Fixed exchange rate - it doesn’t change with changing demand - a countries bank such as Bank of England would buy and sell currencies to keep the rate close to its fixed rate

Floating exchange rate - free to move with changing demand