Readers Question: What are the effects of the exchange rate on UK businesses? The exchange rate will play an important role for firms who export goods and import raw materials. Essentially: A depreciation (devaluation) will make exports cheaper and exporting firms will benefit. However, firms importing raw materials will face higher costs of imports. An …
A fixed exchange rate occurs when a country keeps the value of its currency at a certain level against another currency. Often countries join a semi-fixed exchange rate, where the currency can fluctuate within a small target level. For example, the European Exchange Rate Mechanism ERM was a semi-fixed exchange rate system. Summary The idea …
An exchange rate index is a way of measuring the performance of a currency against a basket of other currencies. An exchange rate index shows the percentage change in the value of the currency against its main competitors. It sets the index to 100 for a particular base year. This enables users to make percentage …
Definition adjustable peg An adjustable peg exchange rate is a system where a currency is fixed to a certain level against another strong currency such as the Dollar or Euro. Usually, the peg involves a degree of flexibility of 2% against a certain level. However, if the exchange rate fluctuates by more than the agreed …
A floating exchange rate occurs when governments allow the exchange rate to be determined by market forces and there is no attempt to influence the exchange rate. Value of the Pound Sterling. The Pound devalued 25% in 2009, but the Central Bank/government made no attempt to intervene – interest rates were kept at 0.5% A …
Readers Question: Can you please discuss the nature of the current account deficit and the exchange rate in the UK along with the theory that would suggest there is a relationship between the exchange rate and the current account. A current account deficit implies the value of imports of (goods/services/investment incomes) is greater than the …
Readers Question: Does expansionary monetary policy, where money supply is increased, also cause a depreciation in the currency? – Since there is a surplus of the currency in the foreign exchange market. Expansionary monetary policy means policies to increase demand in the economy. Expansionary monetary policy typically will involve: Lower interest rates – to make …
Readers Question: I would like your help in answering a query of mine………Is foreign exchange rate an indicator of economic growth? No. The foreign exchange rate is determined independently to the economic growth rate. The exchange rate can have an influence on economic growth. And the economic growth rate can influence the exchange rate. But, …