How long did it take for you to write your answer? This is because I have trouble including lots of diagrams and explaining them fully without being conscious of time!
Fantastic video. I dd this essay, and my teacher gave mr 10/15. Do you disagree?- it is a 15 marktr for AQA - so apparently no neeed fo rany evaluation points. ------- also any eco stduents help if possoible. Explain why the value of a currency may fall in a floating Exchange rate system: ( 15): Exchange rates: Are the value OF a currency in terms of another:
Depreciation: This is where the value of a currency falls compared to another currency. Ie the uk pound if it wad to depreciate, it means that 1 pound can buy less of another currency than before.
Floating ER: - Where the exchange rate is determined by market forces ie supply and demand for that particular currency. The Uk has had a floating exchange rate since 1992.
One reason why the value of a currency ie the pound may fall in a floating Exchange rate system because the supply of the pound might rise due to a fall in the level of relative interest rates compared to other countries. This therefore means that people who have previously put their money IN uk bank accounts from foreign countries where the iR in the uk were higher, then take money out of thr UK. In the process they sell the pound to put there savings in another country with higher interest rates, thus increasing the supply of the pound, and thus leading to a depreciation of the pound where the value of the pound is less compared ot another currency and where the pound can buy less of another currency. This can be seen according to figue 1, where due to an increase in the supply of the pound as foreigners take money OUT of UK bank accounts, it causes the supply curve of the pound to shift ot the right / increase from S1 tro S2, as they sell the pound on the FOREX market to buy Japanese Yen* where Japanese banks offer consumers higher IR. This therefore deceases the Exchange rate and depreciates the pound where now 1 pound =1.25 yen but before for instance the pound used to equal to 1.50 yen ( showing that the value of the pound compared to the yen has decreases. And so 1 pound can buy less Japanese yen.
Another reason why the value of a currency might fall is due to outward FDI, thus again increasing the supply of the pound further decreasing the value of the ER. For instance if firms want to move out of the UK and move to India for instance, because costs of production ie labour in india tend to be cheaper it means that Firms in the UK might leave the uk, sell the pound ( which they used to buy factories in England, labour etc..) on the FOREX to buy Indian rupees,, increasing the supply of the Pound from S1 to S2, and thus causing the value of the pound to depreciate from 1pound=1.50 yen to 1 pound = 1.25 Rupees- for instance.( Im referring to figure 1, but just a change in currency from Yen to rupees now). Another reason why the pound might depreciate compared to another currency, is due to increased incomes domestically. If people in the UK have higher Income domestically i.e. during a economic boom, this could mean that people have a higher marginal propensity to import, and therefore import more goods and services from abroad. This therefore means that people have to sell the pound to buy the g/s ie from China ( an issue which affects the UK today). Therefore this means that when British people sell their pounds on the FOREX market to buy the Chinese Yuan, it increases the supply of the pound once again shifting the supply curve to the right from S1 to S2, thus causing the pound to depreciate, compared to the Yuan. In this case according to figure 2, assume the ER are the same figures just think that the currency is the Chinese Yuan instead of the Japanese Yen. This therefore depreciates the pound, making the pound weaker compared to the Chinese Yuan, so now 1 pound can buy less of another currency thus it is weaker /it has depreciated. As seen by the fall in the pound by 20% according to extract a from 2014-2018 against the dollar and the euro: In tetrms of the didagram drawn: i just drew the Supply of currency shifting right- s1 to s2, casuing deprecaition from p1 to p2. thankss!!!!!!!!
Strange how you’re saying no eval needdd but I’d write another paragraph using the short term/ long term. Demand for the pound could be high in the short run as firms could be tied into trade contracts so won’t be able to switch gc suppliers so would still demand the same amount of pounds causing the value of the exchange rate to increase, in the long run when trade contracts have expired and firms can switch suppliers or renegotiate new contracts, this could then lead to decrease in demand for the pound causing the pound to fall
This is a really good answer and your analysis is amazing, but I think your teacher gave you 10 because all your points were supply focused, I think you needed at-least one talking about how a change in demand can depreciate the currency👍🏾
How long did it take for you to write your answer? This is because I have trouble including lots of diagrams and explaining them fully without being conscious of time!
Fantastic video. I dd this essay, and my teacher gave mr 10/15. Do you disagree?- it is a 15 marktr for AQA - so apparently no neeed fo rany evaluation points. ------- also any eco stduents help if possoible.
Explain why the value of a currency may fall in a floating Exchange rate system: ( 15):
Exchange rates: Are the value OF a currency in terms of another:
Depreciation: This is where the value of a currency falls compared to another currency. Ie the uk pound if it wad to depreciate, it means that 1 pound can buy less of another currency than before.
Floating ER: - Where the exchange rate is determined by market forces ie supply and demand for that particular currency. The Uk has had a floating exchange rate since 1992.
One reason why the value of a currency ie the pound may fall in a floating Exchange rate system because the supply of the pound might rise due to a fall in the level of relative interest rates compared to other countries. This therefore means that people who have previously put their money IN uk bank accounts from foreign countries where the iR in the uk were higher, then take money out of thr UK. In the process they sell the pound to put there savings in another country with higher interest rates, thus increasing the supply of the pound, and thus leading to a depreciation of the pound where the value of the pound is less compared ot another currency and where the pound can buy less of another currency. This can be seen according to figue 1, where due to an increase in the supply of the pound as foreigners take money OUT of UK bank accounts, it causes the supply curve of the pound to shift ot the right / increase from S1 tro S2, as they sell the pound on the FOREX market to buy Japanese Yen* where Japanese banks offer consumers higher IR. This therefore deceases the Exchange rate and depreciates the pound where now 1 pound =1.25 yen but before for instance the pound used to equal to 1.50 yen ( showing that the value of the pound compared to the yen has decreases. And so 1 pound can buy less Japanese yen.
Another reason why the value of a currency might fall is due to outward FDI, thus again increasing the supply of the pound further decreasing the value of the ER. For instance if firms want to move out of the UK and move to India for instance, because costs of production ie labour in india tend to be cheaper it means that Firms in the UK might leave the uk, sell the pound ( which they used to buy factories in England, labour etc..) on the FOREX to buy Indian rupees,, increasing the supply of the Pound from S1 to S2, and thus causing the value of the pound to depreciate from 1pound=1.50 yen to 1 pound = 1.25 Rupees- for instance.( Im referring to figure 1, but just a change in currency from Yen to rupees now).
Another reason why the pound might depreciate compared to another currency, is due to increased incomes domestically. If people in the UK have higher Income domestically i.e. during a economic boom, this could mean that people have a higher marginal propensity to import, and therefore import more goods and services from abroad. This therefore means that people have to sell the pound to buy the g/s ie from China ( an issue which affects the UK today). Therefore this means that when British people sell their pounds on the FOREX market to buy the Chinese Yuan, it increases the supply of the pound once again shifting the supply curve to the right from S1 to S2, thus causing the pound to depreciate, compared to the Yuan. In this case according to figure 2, assume the ER are the same figures just think that the currency is the Chinese Yuan instead of the Japanese Yen. This therefore depreciates the pound, making the pound weaker compared to the Chinese Yuan, so now 1 pound can buy less of another currency thus it is weaker /it has depreciated. As seen by the fall in the pound by 20% according to extract a from 2014-2018 against the dollar and the euro:
In tetrms of the didagram drawn: i just drew the Supply of currency shifting right- s1 to s2, casuing deprecaition from p1 to p2.
thankss!!!!!!!!
13/15 definitely top mark band
Strange how you’re saying no eval needdd but I’d write another paragraph using the short term/ long term. Demand for the pound could be high in the short run as firms could be tied into trade contracts so won’t be able to switch gc suppliers so would still demand the same amount of pounds causing the value of the exchange rate to increase, in the long run when trade contracts have expired and firms can switch suppliers or renegotiate new contracts, this could then lead to decrease in demand for the pound causing the pound to fall
This is a really good answer and your analysis is amazing, but I think your teacher gave you 10 because all your points were supply focused, I think you needed at-least one talking about how a change in demand can depreciate the currency👍🏾
ggmu!!