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Essay Plans Unit 4 ECON4 - Economics: Exchange Rates and Financial Markets
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Exchange Rates and Financial MarketsAssess the view that a rise in the exchange rate of the pound will help to
improve the performance of the UK economy.
Intro
The exchange rate is the price of one currency in terms of another
A rise in the exchange rate of the pound will make the pound less
attractive to foreign investors as the pound has a higher value
Means the pound has appreciated
Macroeconomic indicators measure macroeconomic performance
o Inflation
o Unemployment
o Balance of payments
o Economic growth
Could help to achieve low inflation
Inflation
Lowers inflation
Decreased exports = decreased AD
Causes lower inflation increases purchasing power for consumers
Domestic goods more expensive
Encourages saving not spending
Increased standard of living
Less need for higher interest rates
Unemployment
Increased unemployment
Decrease in AD for domestic goods = decrease in profits = decrease
in supply = less labour = more unemployment = less economic
growth
Some sectors more vulnerable to job losses
Balance of payments
, Worsens current account deficit
Value of pound appreciates against other currencies
Causes UK exports to be more expensive for other countries
Exports are less competitive
Decrease in exports from the UK
Decrease in profitability for firms especially in manufacturing and
export orientated sector
Increases current account deficit as UK imports more and exports
less because imports are cheaper than domestically made goods
Dependency on imports can cause worsening macroeconomic
performance in long run – war in Ukraine
Economic growth
Worsens economic growth
Exports more expensive and demand for UK goods decreases
Decrease in AD for domestic goods = decrease in profits = decrease
in supply = less labour = more unemployment = less economic
growth
Boosts economic growth if it makes UK assets more attractive to
foreign investors
o Hot flows of FDI
o Capital investment can cause long term economic growth
Cheaper imports can increase consumer purchasing power and
lower business costs
o Increases growth
Evaluation
Depends on most important macroeconomic objective
UK is a prospering economy so not as dependent on exports
increasing GDP
Depends on the size of the rise of the exchange rate
If effectively decreases inflation could improve economic growth in
long run
Discuss the effects of a rise in the UK exchange rate on financial markets,
considering factors such as interest rates, inflation, and global economic
conditions.
Intro
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