Essay Plans Unit 4 ECON4 - Economics: Exchange Rates and Financial Markets

Exchange Rates and Financial Markets



Assess 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