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Chapter 6

3.3 Impact of different factors on the exchange rate

 High inflation will weaken a currency as it makes goods more
expensive thus dampening export demand and
reducing the demand for the currency

 Increase in interest "hot money" will be attracted to UK deposits,
rates – short term increasing demand for £ and a corresponding rise in
the exchange rate

 Increase in interest high interest rates will erode the competitiveness of UK
rates – longer term businesses > reduces demand for UK goods > reduces
demand for £, reducing the exchange rate.

 A trade deficit demand for sterling to buy exports being lower than the
supply of sterling to buy imports. This will result in
downward pressure on the exchange rate

 Speculation Could go either way. Usually short term.

3.4 Exchange rate systems – dirty floating

 Government intervention in markets in order to maintain or achieve an
exchange rate target.

 E.g. lowering the exchange rate to make a country’s exports more competitive.

Illustrations and further practice

Now try TYUs 1 to 10 from Chapter 6

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