4.3 Exchange rates

currency

system of money used in a country or group of countries

exchange rate

the price of one country’s currency in terms of another

appreciation

value of currency increasing in an exchange rate

depreciation

value of currency decreasing in an exchange rate

What is the graph for appreciation?

Demand for £ increases

Rightward shift in demand

Exchange rate increases as its higher in demand

What is the graph for depreciation?

Supply for £ increases

Exchange rate value now decreases as there is a higher supply of it

What causes demand for pound?

If there is an increase in demand for UK exports there will also be an increase in demand for pounds to buy that with

S

P

I

C

E

D

Strong

Pound

Imports

Cheaper

Exports

Dearer

Effect of rise in exchange rate for consumers

• import prices fall - domestic consumers may be more willing to buy imported goods

• improved standard of living as domestic customers’ income can buy more goods

• makes imports cheaper reducing inflation

Effect of rise in exchange rate for producers

• fall in import prices - benefits producers that import raw materials

• rise in export prices for foreign investors

• fall in inflation rate due to total demand falling