EXCHANGE RATES

EXCHANGE RATES

1. currency

   • A system of money used in a country or group of countries

2. The price of one currency in terms of another currency

   • Stronger
   • Weaker

3. CAUSES

   • A decrease in supply of a currency
   • An increase in the demand for an economy

4. Why might you need pounds?

   • To buy UK goods and services
   • To save in UK bank accounts
   • Speculation
   • To invest in the UK

5. Why might demand for the pound increase?

   • UK goods become more desirable
   • Interest rates rise in the UK so people from other countries would want to save here
   • Corporation tax falls so companies may want to use the UK as a base
   • Speculators thinking the value of the pound may rise in the future

6. Factors affecting the supply of pounds

   • Reasons for trade in pounds
     • To buy imports of UK goods and services
     • To save in Eurozone bank accounts
     • To speculate on the euro
     • to invest in the eurozone
   • Eurozone goods may become more employable
   • Incomes rise in the UK
   • IRs in the eurozone rise
   • British speculators think the value of the euro will rise in the future
   • Productivity rises in the eurozone, using the UK as a base
   • Eurozone becomes more attractive for foreign investment due to regulations

7. Currency conversions

   • multiply one currency value by the exchange rate

8. Effect of exchange rate

   • Consumers
     • Import prices fall so they can buy more
     • Better standard of living
     • More tourism
     • Less inflation - downward pressure on price level - can buy more
   • Producers
     • A fall in import prices
     • Increased tourism over seas- travel agencies and airlines benefit but services providers may suffer
     • A rise in export prices - depends on elasticity of PED
     • A fall in the inflation rate - downward force on the price level, less wages to pay
   • Rise in ER