CHAPTER 18 TEXTBOOK CARDS

Exchange Rate?

Price of one currency in terms of another EG. If price of $ is 50p the rate of exchange is £1=$2

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5 reasons for the demand of another countries currency?

1.To purchase each others goods 2.To purchase each others services 3.To invest in each others firms 4.To speculate-buy currencies in hop they will rise in value 5.To put funds in each others banks when interest rates increase

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3 advantages of floating exchange rates?

1.Continuous & automatic adjustment as foreign exchange market changes rates automatically to reflect purchasing power 2.Reduced speculative pressure 3.Reduce need for governments to holdlarge foreign exchange reserves

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4 disadvantages of a floating exchenge rate?

1.No guarantee allowing rate to float will solve the B of P problem 2.Effect on domestic inflation 3.Uncertainty 4.Foreign currency reserves have not become redundant

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4 factors likely to affect exchange rates?

1.Relative interest rates 2.Inflation 3.Foreign direct investment 4.Trade & current account deficits

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4 effects of inflation regarding exports & imports?

1.Less revenue from sale of exports 2.Foreign demand is elastic so fall in price of UK exports should benefit B of P 3.Depreciation = increasing inflationary pressure in UK 4.If foreign demand increases spare capacity is needed to produce exports

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3 factors to explain fixed exchange rate misalignment?

1.Different rates of inflation in different countries 2.Differential growth rates 3.Fixed rates were vulnerable t o speculation which could influence market sentiment

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2 actions authorities could take to solve imbalance?

1.Abandon fixed rate & allow sterling to find its own level according to market forces 2.Take steps to restrict the demand for $'s in UK by following a deflationary domestic policy

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2 measures the authorities could take to relieve the situation of devaluation?

1.May rise interest rates in hop of increasing demand for currency 2.May decide to raise a loan

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3 advantages of fixed exchange rates?

1.Increased certainty for businesses as they know price likely to get for goods sold 2.Way of controlling inflation as government had to follow eco policies that would maintain rate 3.Create orderly international currencies = price stability

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3 disadvantages of fixed exchange rates?

1.Need periodic revision as countries grow at different rates 2.To maintain fixed rate government need to run perpetual deflationary policy, will reduce eco growth 3.Speculation-countries with constant B of P deficits will see speculation take place

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CHAPTER 18 TEXTBOOK CARDS

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