ECONOMICS
FOREIGN CURRENCY MARKETS
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Inflationary expectations are higher in the UK than in the eurozone.
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The euro is a weaker currency than sterling.
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Unemployment is higher in the eurozone than in the UK.
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British markets are offshore from mainland Europe.
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Detailed explanation-1: -Which of the following best explains the fact that interest rates on the euro are lower than those on the pound? Unemployment is higher in the eurozone than in the UK.
Detailed explanation-2: -An increase in U.S. interest rates will result in a decrease in the $/£ exchange rate (i.e., an appreciation of the U.S. dollar and a depreciation of the British pound).
Detailed explanation-3: -Which of the following accurately explains how producers can be affected by exchange rate changes? A manufacturing firm relocating to a country with a weak currency can make a cheap initial investment.
Detailed explanation-4: -Higher interest rates offer lenders in an economy a higher return relative to other countries. Therefore, higher interest rates attract foreign capital and cause the exchange rate to rise.
Detailed explanation-5: -When inflation is higher, this tends to have a depressing affect on the value of a country’s currency. This is because increased inflation reduces the currency’s buying power, which weakens it against other currencies. The impact of increasing inflation on currency conversion rates is usually downwards.