Exchange rates

What increases strength of pound

Decrease in supply of £ or increase demand for £

What factors influence supply and demand of currency

1. Imports and exports

2. Speculation

3. Relative interest rares

4. Relative inflation rate

5. FDI

6. Quantitive easing

When is tourism export and when is it import

Tourism abroad - import

Tourism to uk - exports

Increase import affect on £

Increase import

Increase supply of £

Depreciation £

Increase export affect on £

Increase export

Increase demand for £

Appreciation of £

What is speculation

When investors predict change in an currency exchange rate to make profit

How does speculation affect £

Investors speculate that demand for £ will increase , they will demand for £ now , increase demand now , appreciation for £

How does relative interest rate affect exchange rate

Low interest rates , hot money flow out to other countries with high rewards for saving higher interest rates , increase supply for £ , depreciation for £

How does relative inflation rate affect exchange rate

Lower inflation rate , increase exports , increase demand for £ , appreciation

How does FDI affect exchange rate

Increase FDI , increase demand for £ , appreciation for £

How does quantitative easing affect exchange rate

Increase quantitive easing , increase supply , depreciation for £

Impact of high exchange rate on economic growth and employment

Stronger pound , imports cheaper , increase import expenditure, exports more expensive, decrease export revenue, decrease net exports, decrease AD , reduce economic growth, reduce drived demand for labor , decrease employment

Evaluation for impact of strong exchange rate on AD and employment

Imports cheaper, decrease orice for factors of production, decrease SRAS , increase real GDPnm economic trowth and drevideed demamd fro labour , increase employment

impact of strong exchange on inflation

increase AD , demand pull inflation

increase cost of raw materials , cost push inflation ,

impact and evaluation of strong exchange rate on FDI

FDI more expensive , less FDI

However

if investors thought currency continues apricating might be persuaded to invest , increase FDI , as earnings worth more back in the own currency

impact of strong exchange rate on current account

Strong pound

SPICED

Increase import expenditure

decrease export revenue

increase leakages and decrease injections

worsen current account

import demand in the short run

inelastic

imports cannot immediately respond to changes in exchange rate because companies might be tied to contracts

In short run what happens to current account with weaker £

weaker £ , imports more expensive , increase import expenditure , worsening current account

what is demand elasticity of imports in the long run

elastic

In short run what happens to current account with stronger £

weaker pound , imports more expensive , decrease import expenditure , improving current account

What is J curve look like

In Short run , PED x + PED m < or > 1

PED x + PED m < 1

In long run PED x + PED m < or > 1

PED x + PED m > 1

When Marshall Lerner condition satisfied

When PED x + PED m > 1

How to manage exchange rate

1. Interest Rates

2. Foreign currency transactions

how can interests be used to manage exchange rates

increase interest rates , increase hot money flow to domestic banks , increase demand for £ , increase strength of £

how can foreign currency transactions be used to manage exchange rates

Central bank sell local currency , increase supply , depreciation

central bank , buy local currencies back , decrease supply , depreciation

what is competitive depreciation

purposely depreciating currency to make exports cheaper and and prices more competitive

what can competitive depreciation lead to

a currency war

what is a currency war

when countries depreciate the exchange rate in order more export more competitive the other countries

cons of competitive depreciation

imports will be very high , standards of livings