Exchnage Rates

Question 1

Definition

Answer 1

Price of one currency in terms of another

Question 2

Methods of calculations (3)

Answer 2

Floating
Fixed
Managed

Question 3

What is floating ER determined by

Answer 3

Market forces of supply and demand

Question 4

Why is supply for pound upward sloping and demand downward (2)

Answer 4

Supply up = when price falls demand increases = negative coefficient
Demand down = coneeumers are price sensitive

Question 5

What effects value of ER - inflation (4)

Answer 5

If inflation is low:
Exports are more competitive = demand for £ rises
Foreign goods less competitive = Less imports
Therefore countries with low inflation = appreciation in currency

Question 6

What effects value of ER - interest rates (3)

Answer 6

If higher in UK than elsewhere = attractive to spectators
Demand increases for £
Hot money flows = short term factor is raising ER

Question 7

What effects ER - speculators (4)

Answer 7

If speculators believe £ will rise in future = demand more now to be able to make a profit
Increase in demand = value to rise
Rises due to anticipation
Gov doesn’t like speculators = things chnage day by day

Question 8

What effects ER - competitiveness (4)

Answer 8

If the UK has long-term improvements in labour market relations + higher productivity = internationally competitive and in long-run cause an appreciation in the Pound
Lead to an increase demand for Sterling
Therefore the £ exchange rate will rise

Question 9

What effects floating ER - economic growth

Answer 9

A boom/sustained period of economics growth may cause an appreciation in ER because there is likely to be a significant demand for UK exports

Question 10

Why does demand for FLOATING £ chnage not supply ever (2)

Answer 10

Money supply in UK is exogenous = doesn’t chnage
MS = perfectly inelastic

Question 11

What is fixed ER determined by

Answer 11

Determined by the government compared to other currencies

Question 12

What - fixed exchange rate (3)

Answer 12

Supply is determined by central bank
If supply increases then by selling more the ER depreciates = devalued currency
WPIDEC = exports become cheaper

Question 13

What managed exchange rate (3)

Answer 13

System combines the characteristics of fixed and floating exchange rate systems
The ER floats on the market but the central bank of the country buys and sells currencies to try and influence their exchange rate

Question 14

Examples of managed (2+j

Answer 14

The Japanese central bank = attempted to make exports more competitive by manipulating the Yen even though the Yen floats on the market
The Indian rupee fluctuates on the market but the central bank intervenes when it falls outside a set range

Question 15

What was black Wednesday (5)

Answer 15

Prior to EU = UK had managed ER
On Black wed = £ kept falling
UK spent millions on £
Became freely floating
IR base rate at end = 17.5%

Question 16

Key term - revaluation (2)

Answer 16

When the currency’s value is adjusted relative to a baseline
Such as the price of another currency

Question 17

Appreciation key terms (2)

Answer 17

When the value of a currency increases
Each pound will buy more dollars

Question 18

Devaluation key terms

Answer 18

When the value of a currency is officially lowered in a fixed exchange rate system

Question 19

Depreciation key terms

Answer 19

When the value of a currency falls relative to another currency in a floating exchange rate system