4.7.4 Exchange Rates and Trade

• Exchange rates facilitate international trade and investment by determining the price of one currency in terms of another
• Fixed exchange rates reduce uncertainty for businesses

  True
• A weaker exchange rate makes exports cheaper and imports more expensive


  True
• If the UK pound weakens against the Euro, British goods become more competitive in Europe
• What is a key advantage of fixed exchange rates?

  Provides stability
• A weaker exchange rate improves the trade balance by reducing imports


  True
• Higher interest rates attract investment and strengthen a currency

  True
• Match the exchange rate change with its impact on exports and imports:

  Weaker Exchange Rate ↔️ Exports become cheaper

  Stronger Exchange Rate ↔️ Imports become cheaper
• What happens to imports when a country's exchange rate strengthens?

  Increase
• A fixed exchange rate is determined by market forces.

  False
• Match the exchange rate function with its impact on trade:

  Facilitating Transactions ↔️ Enables international payments

  Influencing Trade Balance ↔️ Affects export competitiveness
• Higher inflation rates in a country tend to weaken its currency.
• What happens to imports when a country's exchange rate weakens?

  Decrease
• A trade deficit in a country weakens its currency.


  True
• What is an exchange rate?

  Price of one currency
• Match the exchange rate type with its characteristics:

  Fixed Exchange Rate ↔️ Maintained by government intervention

  Floating Exchange Rate ↔️ Determined by supply and demand
• Exchange rates facilitate international trade by allowing seamless conversion of currencies
• How does a stronger currency affect inflation?

  Reduces inflationary pressures
• Order the impacts of a weaker exchange rate on trade:

  1️⃣ Exports become cheaper

  2️⃣ Demand for exports increases

  3️⃣ Exports rise

  4️⃣ Imports become more expensive

  5️⃣ Imports fall
• Floating exchange rates are determined by supply and demand
• How do higher inflation rates affect a country's currency?

  Weakens the currency
• Stronger economic growth boosts confidence in a currency, causing it to appreciate
• What happens to British exports if the pound weakens against the US dollar?

  Increase
• Exchange rates determine the price of one currency in terms of another
• What is the main disadvantage of a floating exchange rate?

  Volatility
• How does a stronger exchange rate affect inflation?

  Reduces inflationary pressures
• Higher interest rates in a country strengthen its currency.


  True
• A trade surplus in a country strengthens its currency.