Notesale: Turn your study into money

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A decrease in exports will cause a decrease in
demand for the currency
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Changes in the value of imports – An increase in imports will result in an increase
in the supply of a country’s currency and vice versa
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Changes in long term capital flows – A capital outflow (caused perhaps by a loss of
confidence in the economy or better opportunities to invest overseas) will cause an
increase in the supply of a currency and vice versa
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Changes in interest rates – A rise in interest rates will attract an inflow of short term
capital, resulting in an increase in demand for the currency
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Changes in Floating Exchange Rates
An increase in demand is shown by a rightward shift of the demand curve (and vice versa)
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Diagrams showing an appreciation in the floating exchange rates:
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An increase in demand or decrease in supply will push the exchange rate up
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What causes the fluctuation in currency value? /causes of changes in the exchange
rates/causes of appreciation or depreciation of a currency
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Changes in Interest rate: Higher interest rate will attract more foreign investors to invest in
the country and thus the demand for currency will rise, resulting in appreciation in value of
the currency
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The exports will fall resulting in decreased demand for the currency and
hence lower value
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Investment opportunities: if bright lead to appreciation
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This is quiet like investing in stock exchange
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This fuels
the demand for that particular currency and it appreciates further
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Changes in relative inflation rates: high inflation rate leads to exports becoming less
competitive in international market
Exchange rate change effects
You need to know how a change in the value of a currency will affect:
Exchange rate change effect on inflation rate
Explain the impact of exchange rate changes on the rate of inflation/price level (10)
IT DEPENDS
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Currency appreciation
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Exports become less competitive internationally because their price seems higher to
foreigners
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Otherwise, changes in
exports arising from changes in exchange rate will not affect inflation much
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That means every
firm which uses imports in their production process as inputs will face lower costs of
production
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However, producers
might keep the same prices and just increase their profits

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