MYTUTOR SUBJECT ANSWERS

310 views

What are the Macroeconomic Effects of Currency Fluctuations?

Currency and the Exchange rate can be a difficult topic to get your head around. I found a little cheat for remembering the different impacts of weaker or stronger currencies : SPICED which stands for Strong Pound Imports Cheaper, Exports Dear. If you can remember this it becomes easier to understand the impacts of currency fluctuations.

Fluctuations will firstly affect the rate of inflation. Changes in the prices of imported goods and services has a direct impact on the consumer price index. For example a depreciation of the exchange rate will increase the price of imported consumer goods and services. Similarly a lower exchange rate makes it easier to sell overseas because of a fall in relative prices (relative to the price elasticity of demand).

A change in exchange rate can also have large impacts on levels of unemplyment in an economy. An exchange rate appreciation causes lower levels of real GDP growth because of a fall in net exports and an increase in demand for imports. (This can be shown on a circular flow diagram). Export reliant industries are  significantly more affected by currency fluctuations while businesses that operate domestically will be less affected.

A fall in currency can however create large benefits to a economy. A drop in the pound for example, is an example of expansionary monetary policy and can be used to stimulate demand and output when a country is in a recession or slump. Economists have estimated that a 1% fall in the exchange rate has the same effect as a 0.2% point cut in interest rates. 

....

Georgia C. GCSE Economics tutor, IB Economics tutor, A Level Economic...

8 months ago

Answered by Georgia, an A Level Economics tutor with MyTutor


Still stuck? Get one-to-one help from a personally interviewed subject specialist

58 SUBJECT SPECIALISTS

£30 /hr

Joel G.

Degree: Economics with a year in industry (Bachelors) - Liverpool University

Subjects offered:Economics, Geography

Economics
Geography

“I am an economics student at the University of Liverpool. I am really interested in economics and mathematics and I would love to share this intererest with yourselves. I I have taught children from year 7 to year 11 how to debate thr...”

£30 /hr

Anne H.

Degree: History (Bachelors) - Durham University

Subjects offered:Economics, History+ 2 more

Economics
History
English
-Personal Statements-

“Hi, my name is Anne and I'm a second year at Durham university specializing in economic history.”

£36 /hr

Adam B.

Degree: Economics and Mathematics (Bachelors) - Bristol University

Subjects offered:Economics, Maths+ 1 more

Economics
Maths
Further Mathematics

“Hi!  I'm an enthuthiastic and motivated tutor with a commitment to developing my student's understanding of concepts within their chosen subjects.  As an Economics and Mathematics undergraduate I am committed to delivering a tailored...”

About the author

Georgia C.

Currently unavailable: for new students

Degree: Economics and Geography (Bachelors) - Exeter University

Subjects offered:Economics, Maths+ 2 more

Economics
Maths
Geography
Art

“I am a student at The University of Exeter and I am studying Economics and Geography. I have been told that i have a great ability to simplify difficult maths and Economics questions to help give clear, step by step solutions. Therefo...”

You may also like...

Other A Level Economics questions

Does it help developing countries to be rich in resources?

What is fiscal policy?

Why might the equilibrium market price of a good change?

Describe the long run aggregate supply curve.

View A Level Economics tutors

We use cookies to improve your site experience. By continuing to use this website, we'll assume that you're OK with this. Dismiss

mtw:mercury1:status:ok