Economics Section D Part 3

HideShow resource information
What is an exchange rate?
The price of one currency in terms of another.
1 of 8
How are exchange rates determined?
By market forces- supply and demans. Currencies can be bought and sold like commodities on foreign exchange markets.
2 of 8
What factors affect the demand for a currency?
Demand for exports and inward FDI; interest rates (higher IRs, more savers, more demand for £); speculation (if in favour, higher demand).
3 of 8
What factors affect the supply of a currency?
Demand for imports and outward FDI; IRs in other countries (money in other banks, must buy currency with £, supply increases); speculation (decide to sell- higher supply).
4 of 8
Why do exchange rates change?
Because they are determined by market forces, and at any time supply and demand can change.
5 of 8
What occurs when exchange rates fall/rise?
Fall- depreciation; lower export prices and so increased demand; higher import prices and so lower demand. Rise- has appreciated; higher export prices and so lower demand; lower import prices and so higher demand.
6 of 8
How can the government reduce a BoP deficit using exchange rates?
Devaluation- price of exports will fall and price of imports will rise. Change interest rates- however gov may not have control over the rate; may cause inflation if reduced.
7 of 8
Examine the effect of price elasticity on the effectiveness of the government's exchange rate policy.
Effectiveness of ER policy depends on PED for imports and exports. A BoP deficit will only be reduced if the demand for imports AND exports is elastic.
8 of 8

Other cards in this set

Card 2

Front

How are exchange rates determined?

Back

By market forces- supply and demans. Currencies can be bought and sold like commodities on foreign exchange markets.

Card 3

Front

What factors affect the demand for a currency?

Back

Preview of the front of card 3

Card 4

Front

What factors affect the supply of a currency?

Back

Preview of the front of card 4

Card 5

Front

Why do exchange rates change?

Back

Preview of the front of card 5
View more cards

Comments

No comments have yet been made

Similar Economics resources:

See all Economics resources »See all Section D Part 3 resources »