Impact of changing exchange rates

Appreciation is where the value of a currency rises to owe to market forces - the exchange rate increases as a result

Revalued is when a government fixes a new higher exchange rate

Depreciation is where the value of a currency falls owing to market forces - the exchange rate falls

Devalued is when a government fixes a new lower exchange rate

Impact on Exports

Appreciation lowers demand

Impact on Imports

Appreciation increases demand

Impact on the Current Account

Appreciation negatively affects the current account

Impact on Exports

Demands for exports rise

Impact on Imports

Demand falls

Impact on the Current Account

Impact on current account is likely to be positive

Problems with this policy of changing interest rates

• Government might not have complete control over it
• May conflict with other policies
• Devaluation only works if the demand for exports and imports is responsive to price changes

Price Elasticity

• If the demand were price inelastic, the fall in the price of exports would have little effect on demand and wouldn't affect the current balance deficit