exchange rates

exchange rates

the price of one currency in terms of another

appreciation

increase in value of a currency

depreciation

decrease in value of a currency

what causes appreciation

increase in demand, decrease in supply

what causes depreciation

decrease in demand, increase in supply

appreciation graph

depreciation graph

What is a floating exchange rate?

A currency's value determined by market forces of supply and demand, with no government interference

How do UK exports affect the demand for GBP?

If UK exports become more desirable, demand for GBP rises

How do overseas incomes affect the demand for GBP?

If overseas incomes rise, demand for UK goods increases, leading to a right shift in demand for GBP

How do UK interest rates affect the demand for GBP?

Higher UK interest rates attract foreign investors as they make more profit from interest, increasing demand for GBP

What impact do speculators have on the demand for GBP?

If speculators expect the pound value to rise, they will buy GBP, increasing demand

How do UK imports affect the supply of GBP?

if foreign goods become less desirable, people will want to supply less pounds to the market

How do domestic incomes affect the supply of GBP?

If domestic incomes rise, people may buy more foreign goods, increasing the supply of GBP

How do interest rates affect the supply of GBP?

Lower UK interest rates can lead people to buy foreign currency to reap benefits of increased interest, increasing the supply of GBP

What impact do speculators have on the supply of GBP?

If speculators expect the pound to fall, they will buy foreign currency and sell GBP, increasing supply

What are the effects of an appreciating exchange rate on consumers?

Consumers benefit from cheaper imports

cheaper foreign travel,

lower inflation as its more expensive for foreigners to buy UK goods, decreasing AD

What are the effects of an appreciating exchange rate on producers?

Producers benefit from cheaper imported materials

producers involved in travel holidays overseas benefit from increased demand, domestic holiday firms suffer due to decreased demand

lower inflation - less pressure on wage rises

what can lower inflation due to appreciating exchange rate cause

lower interest rates as governments try to increase demand