gcse economics - international trade - exchange rate systems
FIXED EXCHANGE RATE SYSTEM
An exchange rate that is kept within a certain value. It is prevented from changing too much
e.g. the £ may have to stay within a certain value against the $
£1 = no less than $1.4 but no more than $1.6
WHY?
? Avoid wide ranging changes in the value of the £
? Firms can plan ahead with confidence
? Exporters shouldn’t suffer too much
? Should encourage trade
HOW DOES IT WORK?
If the £ is falling in value then the Government will intervene and buy £ from foreign countries …… this will increase the value of the £
If the £ is increasing in value then the Government will intervene and sell £ at a lower price to foreign countries …… the £ will fall in value
FLOATING EXCHANGE RATE
The £ can change in value freely against the $. It could end up at any exchange rate. the government will not intervene to influence its rate.
A FALL IN THE VALUE OF THE £
This could happen in 2 ways
a) DEVALUATION
This is when the government deliberately engineers a fall in the £. It may do this by selling £ at lower prices in order to reduce their value. It might do this to make UK firms more competitive.
b) DEPRECIATION
This is when the £ falls naturally to a lower level. There is no influence from the government.
ACTION
Why might a government want to have a lower exchange rate?
These GCSE Economics revision notes have been kindly provided by Peter Davies of Mill Hill School, Ripley Keep Up-todate with your GCSE Economics - Subscribe Free to Economics in the News by Email
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