XRs And XR Systems 2

Question 1

Where does the demand for a nation’s currency comes from

Answer 1

• same of exports to other countries
• inflows of financial capital into a country such as FDI
• speculative demand for a currency including inflows of hot money into the baking system
• inflows of remittance incomes

Question 2

Causes of changes in the XR

Answer 2

• floating XR- determined by market demand for and supply
• much currency dealing is speculative
• trade and investment flows
• factors mentioned in the graphic will usually lead to a currency appreciation

Question 3

What factors determine a currency’s value

Answer 3

• trade balances
• FDI
• portfolio investment
• interest rate differentials

Question 4

How does the trade balance determine a currency’s value

Answer 4

Countries that have a strong trade and current account surplus tend to see their currencies appreciate as money flows into the circular flow from exports of goods and services and from investment income

Question 5

How does FDI determine a currency’s value

Answer 5

High net inflows of capital investment from overseas will see an increase in the currency demand and a rising XR

Question 6

How does portfolio investment determine a currency’s value

Answer 6

Strong inflows of portfolio investment into equities and bonds from overseas can cause a currency to appreciate

Question 7

How do interest rate differentials determine a currency’s value

Answer 7

Countries with relatively high interest rates can expect to see ‘hot money’ flowing in and causing an appreciation of the XR

Question 8

Impact of a rise in policy interest rates by a central bank

Answer 8

More attractive for investors = inflows of money = outward shift in demand for currency = appreciation

Question 9

Impact of a recession in a trading partner

Answer 9

Fall in exports = worsened trade balance = inward shift of currency demand = depreciation

Question 10

Impact of the UK Brexit Vote

Answer 10

Fears of recession = expectation that the Bank of England will cut interest rates = currency traders uncertain = get rid of pounds in currency market = outward shift of market supply = depreciation

Question 11

Economic effects of a currency depreciation (UK context)

Answer 11

• import prices rise

- export prices fall

Question 12

Impact of a currency depreciation (UK context) on inflation

Answer 12

Higher import prices = may help avoid deflation, lower real interest rates

Question 13

Impact of a currency depreciation (UK context) on economic growth

Answer 13

Lower £ is a stimulus to growth e.g. from higher net exports

Question 14

Impact of a currency depreciation (UK context) on unemployment

Answer 14

Competitive currency will help to increase domestic production, export multiplier effect, upturn tourism / overseas students

Question 15

Impact of a currency depreciation (UK context) on investment

Answer 15

Should help to improve profitability

Question 16

Impact of a currency depreciation (UK context) wider effects

Answer 16

Depreciation is similar to a cut in interest rates but there are disks too - higher costs of importing components, raw materials and capital technologies

Question 17

What does the main effects of s currency depreciation depend on

Answer 17

• time lags of response
• scale of change
• PED
• size of an multiplier / accelerator effects
• type of economy