Practise reading currency quotations, calculating appreciation or depreciation and explaining floating-rate demand and supply before evaluating trade, inflation and output effects.
The following exchange rates were recorded in the foreign exchange market.
Within which range of values should £ 1 exchange for $ ?
£ 1= less than $ 0.50
£1=between $0.50 and $1
£ 1= between $ 1 and $ 1.50
£ 1= more than $ 1.50
What is a disadvantage of operating a floating exchange rate system?
It makes it difficult to prioritise domestic economic policy aims.
It makes the prices of internationally traded goods less predictable.
It means that the government must keep significant foreign currency reserves.
It requires continuous government intervention in currency markets.
The graphs show the changes in the exchange rates of the pound sterling ( £ ) against the US dollar (US$) and the euro (€) between the years 2001 and 2003.
US\$ per £
What happened to the value of the £ between the years 2001 and 2003?
The £ appreciated against the US $ and depreciated against the €.
The £ appreciated against the US $ and the €.
The £ depreciated against the US $ and appreciated against the €.
The £ depreciated against the US $ and the €.
Turkey's unconventional way of managing its economy
The relationship between interest rates and the general price level is one that is central to macroeconomic theory; namely that an increase in the rate of interest produces a reduction in the rate of inflation in an economy. Most economists agree on this relationship. Not so, according to President Erdoğan of Turkey, who has defied conventional economic theory in tackling his country's fundamental economic challenges.
Two economic challenges stand out. There is spiralling inflation and a collapse in the external value of Turkey's currency (the lira) in the foreign exchange market, as shown in Fig. 1.1.
Turkish lira per US\$
Fig. 1.1 Inflation and the exchange rate of Turkey, January 2020 to February 2022
In January 2022, the year-on-year rise in consumer prices was 48.7 %, against a 36.1 % year-on-year increase for December 2021. Much higher food prices and transport and energy costs accounted for most of the increase. Despite this rise, the country's Monetary Policy Committee (MPC) held the short-term interest rate at 14 %. This was the rate set in September 2021 when the MPC cut the rate substantially from 19%. In short, the President had used his influence over the MPC to reduce interest rates in an attempt to reduce the increasing rate of inflation.
The President's unconventional approach has had a dramatic effect on the external value of the lira. The rapid depreciation in the value of the lira from September 2021 has had serious repercussions for Turkey's economy as Mr Erdoğan has sought to prioritise exports over currency stability. Consumer and producer confidence are low; many who can, have converted their lira deposits into US dollars or euros, fearing a collapse of the banking system.
Despite these problems, the President remains adamant that his economics is right for Turkey. Moreover, he is convinced that when exports increase and international tourists return after the COVID-19 pandemic, employment will increase and the current account deficit on the balance of payments will be reduced. If true, this unconventional approach to Turkey's economic problems will be proved to be a success.
Explain why the Turkish lira depreciated from September 2021.
The diagram shows the aggregate demand (AD) and aggregate supply (AS) for a country. The initial equilibrium is at point E.
The sum of the price elasticities of demand for imports and exports for this country exceeds one. A devaluation of the country's exchange rate will cause aggregate demand to change.
What will be the new equilibrium?
Option B as shown in the official source
Option C as shown in the official source
Option D as shown in the official source