Economics 25 Marker

The performance of the UK economy depends very much on the level of Aggregate demand within the economy. AD=C+I+G+(X-M). The UK economy can be judged by a number of key indicators mainly sustainable economic growth, low inflation (target 2%), a surplus on the

When the domestic currency goes up against a foreign currency, it makes imports of goods cheaper and exports more expensive. So domestic businesses that import a lot (i.e. retailers such as Debenhams) would be happy and exporters (i.e. coal miners) would be unhappy. As it will cost cheaper for domestic imports. This will not be a loss of profit for

When the UK economy is doing well, its pound sterling is strong. However, having a strong pound actually discourage visitors from overseas because when they exchange their money in pound they will be getting less money, so it make visiting UK expensive and it deter inbound visitor from visiting UK.

Since reduced interest rate made it unattractive to save money, currencies were less demanded thereby causing fall in the currency values. This therefore had a multiplier effect on export and import. This explains why during post crisis period, UK exports became more competitive.

The Bank of England could purchase pounds by selling dollars in order to shift the demand curve for pounds and the Fed could shift the demand curve by buying the pounds. If the British choose to purchase more of U.S. goods and services, the supply curve for pounds increases, and the equilibrium exchange rate for the pound (in terms of dollars) falls to, say, $3. Under the terms of the Bretton Woods Agreement, Britain and the United States would be required to intervene in the market to bring the exchange rate back to the rate fixed in the agreement, $4. The fixed exchange rate systems offer the advantage of predictable currency values—when they are working. In order for the fixed exchange rates to work, the countries participating in them must maintain domestic economic conditions that will keep equilibrium currency values close to the fixed rates.

Outline at least six possible benefits to the UK economy of the strong British pound

Due to Brexit London Stock Exchange crashed and it saw trillions of pounds wiped off from UK’s share market. The share market became volatile. The investors of UK’s share market decided to move their funds to other European share market in Germany and Ireland and France. As a result pound lost its exchange value for the first time in last 15

. If the United Kingdom leaves the British EU will push capital away from the region and toward a safe haven market including Japan and the United States Treasuries. This will raise relative currency values and interest rates which will further lower the market. A higher Japanese Yen and United States dollar are negative to both economies export sectors. This will be unhelpful in the case of Japan because it will reinvigorate decades of deflation in the economy. China will receive pressure from the higher U.S. dollar it will be caught in between its two largest export markets the United States and the European Union. The strong inflation services on tradable goods for the United States will negatively impact domestic demand trends on

It would weaken the U.K. economy, one of Europe’s strongest. The E.U. absorbs 44 percent of Britain’s exports; these might suffer because trade barriers, now virtually nonexistent between the U.K. and other E.U. members, would probably rise. Meanwhile, Britain would become less attractive as a production platform for the rest of Europe, so that new foreign direct investment in the U.K. — now $1.5 trillion — would fall.

Exchange Rate is the rate at which one currency may be converted into another. The exchange rate is used when simply converting one currency to another (such as for the purposes of travel to another country), or for engaging in speculation or trading in the foreign exchange market. There are a wide variety of factors which influence the exchange rate, such as interest rates, inflation, and the state of politics and the economy in each country.

If white goods companies are importing or exporting goods or resources trade fees and exchange rates are important. Inside the European Union trade is free and no barriers are present. When the pound is strong businesses are able to get more for their money, this is of benefit to large companies like the white goods because not only does it encourage others abroad to invest in the country therefore increasing the strength of the pound it also encourages people to invest into companies therefore increasing revenues. Where the Euro is concerned the value of the pound is much stronger,

Ergo, the investors will require higher returns in order to compensate for the higher risk. As the British companies cannot match the required return rate, they will take their funds out of the UK and invest in something safer (such as: gold, US treasuries, etc.). Thus, this will make the investments go down; and this will decrease the overall UK’s GDP. In addition, we will have another effect under the Mundell-Fleming model. The UK economy has the floating exchange rate, and the rise in risk premium will decrease the exchange rate. This represents a self-fulfilling prophecy. As investors believe that UK currency will lose value in the future, they will place larger risk premiums on UK assets. This expectation will finally drive down the value of the sterling. In the end, this will decrease the investments and the GDP.

‘The fiscal and monetary squeeze, combined with increased revenues from the North Sea oil led to an appreciation in the exchange rate’ (Hoskins, M. 2015), for

After November the European debt crisis again spread the market, the worries of British government cutting the government spending may affect the British economic recovery process were heating up, as a result, sterling against the dollar dropped. At the year end, sterling against the dollar closed at 1.5599, a 3.4%decrease compared to last year.

Because there is upward pressure on the pound some investors may anticipate an appreciation. This may discourage British investors from attempting to capitalize on US higher interest rates. If the uncertainty about future exchange rates discourages British capital flows to US, there would be no reason to anticipate the pound to depreciate.