Exchange rates

edwinesosa's version from 2015-06-14 10:06


Question Answer
things that increase supply of currencymore imports + expansionary monetary policy (relatively hiigh return on interests overseas) + speculators believe pound will fall in value
things that increase demand for currencyhigher interest rates + speculators believe pound will rise in value + FDI as you need to buy the capital + more exports
negative of weak exchange rateimported inflation
positives of weak poundmore exports + more FDI and investment IPDs
evaluation for weak pounds affect on exportsUK goods non price competitive so maybe not that price elastic + depends on incomes abroad + J curve - inelastic in short term as firms stuck in contracts so current account may worsen initially + depends if it's short term change in pound
Benefits of floating exchange ratesBOP problems solved naturally and easily
Benefits of fixed exchange ratescountries very financially disciplined as very important to keep inflation low to avoid BOP problems + stable exchange rates
negatives of fixed exchange ratecostly adjustment for BOP issues which can only be solved by deflating domestic economy eg high tax low G + have historically broken down due to speculative pressure so less robust
negatives of floating exchange ratevolatile exchange rates which disrupt trade as traders unsure what prices will be in future + imported inflation + less financial discipline +

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