Determination of exchange rates

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  • Created by: Jess
  • Created on: 19-04-14 10:28

Determination of exchange rates:

  • Exchange rate: the price of one currency in terms of another currency or currencies 
  • Monetary Policy Committee: a committee of the Bank of England with responsibility for setting the interest rate in order to meet the government's inflation target
  • International Monetary Fund (IMF): an international organisation that helps co-ordinate the international monetary system
  • World Trade Organisation (WTO): an international organisation that promotes free international trade and rules on international trade disputes 

Factors that influence demand for and supply of a currency:

  • If UK products are internationally competitive then the demand for £s is likely to be high and supply of is likely to be low. This is due to the fact that foreigners will want to buy the £ to buy UK products, but UK citizens will not be selling £s to buy imports 
  • Changes in income abroad: if incomes are rising abroad then foreugners are likely to buy more UK exports - increase demand for £s and cause a rise in the value of £s
  • Rising income at home: likely to put downward pressure on the £, as the supply of £s on foreign exchange markets will increase as £s are sold to purchase foreign goods/services
  • Rise in UK interest rate relative to other countries' interest rate will cause hot money flows will want to buy £s in order to open accounts in UK financial institutions 
  • Foreign

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