Year 11 Exam > Year 11 Notes > Economics for GCSE/IGCSE > Exchange Rate Fluctuations
Exchange Rate Fluctuations | Economics for GCSE/IGCSE - Year 11 PDF Download
Causes of Exchange Rate Fluctuations
- Numerous factors influence floating exchange rates, leading to currency appreciation or depreciation.
Factors influencing floating exchange rates
- Changes in Relative Interest Rates: When the UK increases its interest rate, demand for £ by foreign investors rises, leading to £ appreciation. Conversely, a decrease in UK interest rates increases £ supply, causing depreciation.
- Changes in Relative Inflation Rates: Rising inflation in the UK compared to other countries makes UK exports costlier, decreasing foreign demand for UK products and causing £ depreciation.
- Impact of Net Investment: Foreign Direct Investment (FDI) boosts £ demand, resulting in £ appreciation. Conversely, UK firms' FDI abroad increases £ supply, leading to £ depreciation.
- Influence of the Current Account: UK exports require payments in £, while imports are paid in local currencies, necessitating £ supply in the forex market. Rising net exports appreciate £, while falling net exports depreciate £.
- Effect of Changes in Tastes/Preferences: For instance, as global demand for quinoa surged, Bolivia's quinoa exports increased significantly, strengthening their currency due to heightened demand.
- Role of Speculation: Currency trades based on predictions for short-to-medium-term value fluctuations influence exchange rates significantly.
- Impact of Quantitative Easing: By expanding the money supply, quantitative easing leads to £ depreciation as foreign investors exchange received £ for their own currencies.
- Influence of Multinational Corporations (MNCs): Increased MNC activities globally enhance cross-border money flows, impacting exchange rates.
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Consequences of Fluctuating Foreign Exchange Rates
- Changes in exchange rates can significantly impact an economy.
The impact of changes to exchange rates on an economy
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Apr 15, 2025
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