Review 10.1 Exchange RATES

The value of once currency expressed in terms of another currency e.g. £1= $1.50 How are they determined? By the forces of supply and demand

Where is the demand of supply for £? DEMAND SUPPLY 1. Exports Imports 2. Tourism Tourism 3. Interest Rates Interest Rates 4. Speculation Speculation 5. Investment Investment Floating rates = left to market forces Fixed rate= fixed by the central bank, it doesn’t change.

Exchange RATES, Interest & trade Review 10.2 Exchange RATES, Interest & trade

Interest rates and exchange rates UK rates up= £ up in value UK rates down = £ down in value If £ goes down in value- exports are cheaper and imports more expensive Therefore good for B.O.P and bad for inflation If £ goes up in value- exports more expensive and imports cheaper. Therefore bad for B.O.P and good for inflation.