1. 10.1Exchange Rates What is meant by exchange rate
Understand how EX are determined through the interaction of demand and supply.

2. Get key terms down page 117
What is meant by exchange rates?
Complete both apply it questions.
Hand out word doc re info

3. How are exchange rates determined:
Diagram on notes.
ER- one currency’s expense in terms of another currency.
Demand Factors which influence exchange rate of £:
Trade (exports)- When we export goods to USA (any country) we will want payment in sterling. Therefore the American consumer will need to demand the £ to pay for the good. By doing this they will need to sell the $
Tourism- Likewise when going on holiday to the UK the £ will need to be demanded.

4. Investments - A foreign person/company wanting to set up in the UK, will need to demand the £ in order to pay for the resources they need.
Speculation - This makes up 85% on all foreign exchange deals. Here currency is bought and sold simply to make a profit.
EG – Investor has £100. Exchange rate = £1-$2
Investor thinks pound will weaken and so sells £100 for $200.
Investor is correct as $ strengthens against £ to £1 - $1
Investor then sells his $200 for £200 making him a profit of £100!

5. Supply Factors which influence £
These are the exact same and demand just in reverse:
Trade (Imports) – Sell £ to buy $ etc..

6. Looking at diagram
If we are increase demand, we can say that the pound is strengthening against the dollar as we are getting more dollars for the pound.
At certain times, such as 9/11 when Americans refused to fly, tourism dwindled and thus we see the demand curve D2.
If we are going on holiday more we can see the supply curve shift to the right as the pound goes down in value $1.30

7. Free floating – Floating
We call all of the previous changes ‘free floating’. However it is known as Floating exchange rate as the government can get involved.
For instance should the dollar strengthen to $1.30 it will get more expensive to buy from the USA which could lead to inflation in the UK as we pass on the cost to our customers here. (We pay extra for raw materials from USA they need to be absorbed somewhere).
So the BOE can buy £ and sell $ which will push the price back up again.
Of course this can be done the opposite way. If exchange rate goes to $1.75, exports become more expensive so BOE and sell £.

8. Fixed exchange rate
Here countries such as China will buy and sell its own currency the Yuan in order to keep the rate at 9.5.
Other countries such as India only allow you to buy the currency in the country itself.