Flashcards
Exchange rates
Cards in this deck (29)
- 1What is the exchange rate ?The price of one currency in terms of another. The external value of a currency.
- 2In a floating exchange rate system, the price is determined by .....market forces of supply and demand
- 3In a fixed system, the government ....intervenes to maintain the external value of the currency
- 4What is the equilibrium exchange rate ?Where the supply of the currency = the demand for the currency
- 5In a floating exchange rate system, an increase in the exchange rate is an ..... a fall is aappreciation
depreciation - 6In a fixed exchange rate system, if the rate at which it is fixed is increased, this is called a .. A lower rate is aRevaluation
Devaluation - 7Define real exchange rateTakes inflation into account
- 8The demand for pounds refers tothe desire to change other currencies into pounds
- 9The pound is demanded to1. Spend on UK goods and services
2. Save in UK banks and other financial institutions
3. Speculate on the currency in the hope that the pound will become more valuable in the future (hot money) - 10The demand for the pound will increase if: (3 marks)1. UK goods and services are demanded more e.g. quality improves, incomes increase, relatively cheaper, tourism.
2. UK interest rates increase - Hot money effect, greater desire to save in UK to earn higher rates of interest
3. People think the value of the £ will rise in the future so buy now - 11If the pound falls, the price of UK goods and services in foreign currency ... causing demand tofalls
causing demand to increase - 12The more price elastic the demand for UK goods and services, the more ..... the demand for poundselastic
- 13The supply of pounds (sterling) refers to the desire toChange pounds into other currencies
- 14There may be a desire to change £ into other currencies in order to ... ( 3 marks )1. Buy overseas goods and services; travel abroad
2. Save in overseas institutions
3. Speculate on a foreign currency in the hope that it will increase in value - 15If the UK exchange rate falls, then the price of imports in UK currency ..... This will ..... the amount of imports which are boughtincreases
reduce - 16The supply of pounds will increase (shift outwards) when : ( 3 marks )1. Overseas interest rates increase so saving abroad becomes more attractive
2. Overseas goods are demanded more e.g. better quality, UK incomes rise, foreign goods are relatively cheaper, increased tourism abroad
3. People think the pound will fall in the future so they sell it now. - 17What are the main advantages of a floating exchange rate system ? ( 5 marks )1. Exchange rate automatically adjusts so that supply of currency equals demand - automatically eliminating BOP deficits or surpluses.
2. No need for central bank to keep foreign reserves
3. Government can pursue its own domestic policies e.g. adjust interest rates more easily.
4. Prevents imported inflation - one country has a higher inflation rate, then, under fixed ER system, another country will import those via higher import prices.
5. Possibly reduces speculation because speculators might lose and so do not take risks. - 18What are the main disadvantages of a floating exchange rate system ? ( 2 marks )1. Causes instability, deterring investment and trade
2. Leads to cost-push inflation. e.g. relatively high inflation in UK causes goods to be un-competitive, leads to fall in demand for currency and fall in exchange rate. Makes goods competitive again but makes imports more expensive, leading to cost-push inflation in long-term. - 19How might the government influence the exchange rate ? ( 2 MARKS )1. Buying and selling currency
2. Changing interest rates to influence capital inflows and outflows from the economy - 20To decrease the exchange rate for the currency a government may : (2 marks)1. Buy the currency
2. Raise interest rates to attract investors - 21With a fixed exchange rate, the government intervenes to maintain the exchange rate. If the price of the currency is about to fall, the government may ....... by buying its own currency using ......, or increasing ......increase demand
foreign currency reserves
interest rates - 22If the price of the currency is about to increase, the government may ..... its own currency or ..... interest ratessell
lower - 23What are the main advantages of fixed exchange rates ? ( 2 marks )1. Provide stability for firms and households , encouraging investment and trade
2. Act as a constraint on domestic inflation - 24Disadvantages of fixed exchange rates 2 marks1. Government must have sufficient reserves to intervene to maintain the price of its currency
2. A country's firms may be uncompetitive if the exchange rate is fixed at too high a rate - 25If the exchange rate is fixed above the equilibrium rate, there will be ..... supply of the currency, causing a balance of payments .....excess
Deficit - 26If the price is fixed below the equilibrium, there is ....... demand for the currency, meaning that there is a balance of payments ......excess
Surplus - 27If there is a current account deficit, there must be a ..... on the capital and financial accounts Why ?surplus.
To fund the current account deficit caused by money leaving the country, assets must be sold to bring money in. - 28What may be done to reduce a balance of payments current account surplus ? ( 3 marks )1. Reflate to boost demand and so increase imports
2. Remove import controls
3. Revalue the currency - 29How can the government improve the UK's international competitiveness ? ( 5 marks )1. Lower interest rates to stimulate investment
2. Tax incentives for R&D and investment
3. Help Entrepreneurs start up by reducing regulatory burden and bureaucracy
4. Encourage the sharing of ideas and 'best practice'
5. Reduce protectionist barriers to stimulate competition.
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- A2 Economics (MACROECONOMICS) Flashcards on Exchange rates, created by callum_j.smith on 21/01/2015.
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