4.3 Exchange rates

• What is an exchange rate?

  The value of one currency in terms of another
• What does depreciation mean in terms of currency?

  When the value of a currency falls relative to another
• What is appreciation in currency terms?

  When the value of a currency increases
• If the value of the pound increases, what can be purchased with one pound?

  More dollars can be purchased
• What influences the floating exchange rate system?

  • Market forces of supply and demand
  • Changes in supply and demand for the currency
• How does depreciation affect costs for businesses?

  It may trigger unanticipated costs
• What happens to exports when the currency appreciates?

  Exporters may lose competitiveness
• What does appreciation mean for imports?

  Imports become more expensive
• How does appreciation affect consumer behavior regarding domestic products?

  Consumers will seek domestic substitutes
• What happens to UK exports when incomes in the Eurozone increase?

  Consumers can buy more UK exports
• How do interest rates in the UK affect foreign investment?

  Higher rates make UK attractive for investment
• What factors affect the supply of pounds in the market?

  Incomes in the UK and interest rates
• What happens when interest rates in Europe increase?

  British savers would want to save more
• How does speculation about the euro's value affect foreign investment?

  It makes Eurozone attractive for investment
• What is a floating exchange rate system?

  A system where market forces determine rates
• How do supply and demand affect exchange rates?

  They cause rates to fluctuate
• How do currency fluctuations impact international trade?

  They affect pricing and competitiveness
• What is the relationship between currency value and consumer behavior?

  Higher currency value can lead to more imports
• What role do speculators play in currency valuation?

  They influence currency value expectations
• What does depreciation of currency mean for imports?

  Imports become more expensive for consumers
• How does appreciation of currency affect exporters?

  Exporters lose competitiveness and struggle to sell
• What happens to consumer behavior when imports become dearer?

  Consumers seek domestic substitutes for imports
• What types of goods become more expensive due to depreciation?

  Luxury goods like vehicles and jewelry
• How do rising incomes in consumers affect UK exports?

  Consumers can buy more UK exports
• What effect do interest rates in the UK have on currency value?

  Higher interest rates attract foreign investment
• What do speculators believe when they think the pound will rise?

  They expect the pound's value to increase
• What happens when incomes in the UK rise?

  More imports are bought by consumers
• How do interest rates in the Eurozone affect British savers?

  Higher rates encourage British savers to save more
• Why does the Eurozone become attractive for foreign investment?

  Higher interest rates attract foreign investors
• What is the exchange rate?

  Price of one currency in terms of another
• What happens when firms import goods?

  They pay the price in the foreign currency
• What is the foreign exchange market?

  Market where currencies are traded based on supply and demand
• What does it mean when a currency's value falls?

  It indicates depreciation of that currency
• What is a managed exchange rate?

  When governments intervene to control currency value
• What is the purpose of governments intervening in the foreign exchange market?

  To stabilize or control the value of their currency
• What is the formula for exchange rate calculations?

  Amount in currency x exchange rate
• How is the exchange rate expressed for pounds to euros?

  € amount per pound at exchange rate
• How is the exchange rate expressed for euros to pounds?

  £ amount per euro at exchange rate