exchange rates

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  • Created by: Fi Alade
  • Created on: 20-04-14 11:11
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  • Exchange Rates
    • causes of changes
      • relative inflation rates
        • higher inflation leads to falling currency (PPP)
      • relative interest rates
        • higher interest rates = increased demand = rising value
      • state of the economy
        • good performance = increased confidence = increased demand = rising value
        • political instability causes loss of confidence
      • balance of payments
        • increased deficit means supply > demand so falling value
          • not significant in comparison with hot money flows (speculative money movement)
        • speculation
          • e.g. if recovery is on the horizon, value will rise
    • effect of exchange rates
      • change in price of imported goods
        • effect on AS and AD
      • change in value of exported goods
      • competitiveness
      • dependent on elasticities
    • Marshall Lerner Condition
      • for the current account to improve the sum of the price elasticities of demand for M and X must be greater than 1
        • if less than 1, policy = revaluation
    • J curve effect
      • time lag of effects of depreciation
        • short term inelastic - long term elastic

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