Studied by 0 people
Looks like no one added any tags here yet for you.
What is depreciation in the context of exchange rates?
Depreciation occurs when the value of a currency falls relative to another currency in a floating exchange rate system.
What is appreciation in the context of exchange rates?
Appreciation happens when the value of a currency increases relative to another currency, meaning each unit of currency can buy more of the other currency.
What is devaluation?
Devaluation refers to the official lowering of a currency’s value in a fixed exchange rate system, typically decided by the government.
What is revaluation?
Revaluation is when the value of a currency is adjusted upwards relative to a baseline, such as gold or another currency.
What is the key difference between a floating and fixed exchange rate system?
In a floating exchange rate system, the value of a currency is determined by supply and demand forces in the market. In a fixed exchange rate system, the government sets the currency's value and can intervene in the market to maintain it.
How does a depreciation in the pound affect UK exports?
A depreciation in the pound makes UK exports more price-competitive, which could either increase sales if the price of goods is reduced or increase profit margins if prices remain the same.
When will a depreciation in the pound have little effect on export sales?
If UK goods are price inelastic (i.e., demand doesn’t change much with price changes), or if the economic growth in the export market is low, a depreciation in the pound may not significantly increase export sales.
How does depreciation affect firms that import raw materials?
Firms that import raw materials may face higher production costs because imports become more expensive when the currency depreciates, making them less competitive internationally. However, if firms have fixed contracts for imports, exchange rate changes won’t affect their costs.
How might firms respond to a depreciation of the pound?
Firms might keep their prices the same to increase profit margins without having to improve efficiency or reduce costs. This can be beneficial if costs remain the same or are not impacted by the depreciation.
What is the effective exchange rate (EER)?
The effective exchange rate (EER) index measures the strength of a currency relative to a basket of other currencies, with the weight of each currency depending on the importance of trade between the country and its partners.
How does a change in the pattern of trade affect the EER?
A change in the pattern of trade alters the relative weight of each currency in the EER index, as it reflects the changing importance of trade with different countries.
