Economics Department
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Economics Department |
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Worksheet on exchange rates For a revision sheet on this topic, click here. To return to this worksheet, use the “Back” button on your internet browser.
4) Use Supply and Demand analysis to explain the pattern shown above for the £/euro exchange rate between 1996 and 2000. (3 marks) The pound has continued to gain ground in the international currency markets in recent weeks. The chart above tracks the monthly average values for sterling against the euro since 1992. The pound fell over 14% against the mark when sterling crashed out of the European exchange rate mechanism in September 1992. And, it continued to depreciate in value during the mid 1990s. However since 1996 there has been a sustained and significant appreciation in the pound's value on the global currency exchanges. . By the end of 2000, one pound was worth over 1.7 Euros - the highest the pound has been against European currencies for over 14 years.
5) Explain the effects that 'sterling crashing out of the European Exchange rate mechanism' might have had on UK Exporters and Importers. (6 marks) The sterling effective exchange rate index measures the value of the pound against a basket of currencies. Each currency is weighted against the proportion of trade that the UK does with each country. The chart below tracks the monthly value for the sterling index in recent years.
A similar pattern is apparent. The pound has been a currency in demand between 1997 and 2005. There has been a very strong investment demand for pounds as foreign investors look to take advantage of higher relative interest rates in Britain and excellent rates of return on financial assets in Britain (including property and share values). The high pound has caused numerous problems for British exporting firms. This is because a rise in the pound makes British goods more expensive when priced in a foreign currency. Exporters then struggle to sell their products in overseas markets unless they are prepared to cut their prices and accept a much lower profit margin on export sales. The strong currency also makes imports into the UK cheaper when priced in pounds - domestic firms may find it difficult to compete with a flow of lower priced imported goods and services. 6) Use numerical examples to explain why the last two paragraphs might be true. (6 marks) Sterling gained ground against the Euro in the early years after its formal establishment in January 1999, rising by over 20% in the first two years. Since late 2002, however, the pound has weakened sharply against the euro.
7) Explain 2 possible reasons that the pound might have fallen against the euro in 2003 (6 marks)
8) Explain why the UK Government might want the exchange rate:
In terms of its impact on the four key macroeconomic objectives. (10 marks)
9) Comparing the Interest rate chart with the £/euro exchange rate, evaluate the extent to which the graphs confirm the relationship that you would expect from economic theory (7 marks)
10) Explain possible reasons for any differences (5 marks) |
