10.2 Exchange rates, the rate of interest and trade Understand how ER may be influenced by interest rates Explain and evaluate the impact of changes in ER on trade and international competitiveness

10.2 The Interest Rate can certainly affect the exchange rate. Simply the IR goes up so does the exchange rate The IR goes does and so does the exchange rate Presently if Barclays had interest rate of 5% we would move to that account. However if HSBC were to introduce a 6% interest rate we would switch to get the higher rate of interest. Therefore same with currency- people with a dollar account will move to a sterling account (demand for £ increases) if the interest rate in UK increased.

Recap issues for exports and imports in relation to trade. Exchange rate – can be problem for exports as they become more expensive, although our imports become cheaper (don’t want to flood market with imports though) However particularly raw materials become cheaper so it can lower the affect on inflation at home.

https://www.youtube.com/watch?v=yCjwXz7ZXwU