floating exchange rate changes

• What determines an exchange rate?

  The forces of demand and supply
• What happens to the exchange rate when demand for a currency increases?

  The exchange rate appreciates or gets stronger
• If initially £1 buys $1.60, and then demand for the pound increases, potentially leading to £1 buying $1.80, what has happened to the pound?

  The pound has gotten stronger
• What is the effect of increased relative interest rates in the UK compared to the rest of the world on the demand for the pound?

  Increases demand for the pound
• Why do higher relative interest rates attract foreign investment?

  They offer a better rate of return
• How do speculators who anticipate a rise in the pound affect its demand?

  They increase the demand for the pound
• How does foreign direct investment (FDI) in the UK affect the demand for the pound?

  It increases the demand for the pound
• If a foreign firm sets up a factory in the UK, what currency will they need to pay their workers?


  Pounds
• What happens to demand for UK exports if incomes rise abroad?

  Demand for UK exports increases
• What must foreign consumers do to buy UK goods?

  Buy in pounds
• How does increased international competitiveness of UK goods affect the demand for the pound?

  It increases the demand
• What factors can lead to increased international competitiveness of UK goods?

  Fallen unit labor costs and rising productivity
• What causes a currency to depreciate?

  Supply shifts to the right
• What does it mean if a currency depreciates from £1 buying $1.60 to £1 buying $1.40?

  It can buy less of another currency
• How do falling relative interest rates affect the supply of the pound?

  They increase the supply
• Why do investors move their money away from the UK when interest rates fall?

  To get a better return elsewhere
• What happens to the supply of the pound when firms move their operations away from Britain?

  The supply increases
• How do increasing incomes at home affect the demand for imports?

  The demand for imports increases
• If UK residents want to buy goods from the USA, what currency do they need?

  Dollars
• How does buying goods from the USA affect the supply of the pound?

  It increases the supply
• What is the main difference between the factors that cause a currency to appreciate versus depreciate?

  Appreciation: foreigners want the currency, depreciation: domestic residents sell
• Why is the term "relative" important when discussing interest rates and exchange rates?

  It compares interest rates to the rest of the world
• What is the relationship between exchange rates and the price of UK exports?

  Exchange rates influence the price of exports
• How do fallen unit labor costs, rising investment, and rising productivity contribute to international competitiveness?

  They make exports cheaper and more attractive