exchange rates
- 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
- increased deficit means supply > demand so falling value
- relative inflation rates
- 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
- change in price of imported goods
- 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
- for the current account to improve the sum of the price elasticities of demand for M and X must be greater than 1
- J curve effect
- time lag of effects of depreciation
- short term inelastic - long term elastic
- time lag of effects of depreciation
- causes of changes
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