Exchange Rates | A-Level Economics Notes
These revision notes cover everything you need to know about Exchange Rates for A-Level Economics. They're designed for students studying AQA A-Level Economics, Edexcel A-Level Economics, and Edexcel International A-Level Economics. Written by Jaisul Naik, UCL Economics graduate and A-Level Economics tutor since 2017.
What are exchange rates?
Exchange rates are the price of one currency in terms of another currency.
What is a fixed exchange rate?
A fixed exchange rate is when the value of the currency is determined by the central bank.
They central bank can buy or sell their currency reserves in exchange for each other; they keep reserves of the domestic currency and a foreign currency.
What is a floating exchange rate?
A floating exchange rate is when the value of the currency is determined by market forces (supply and demand).
What are three factors that affect the value of a floating exchange rate?
- interest rates
- a change in the demand for exports
- a change in the demand for imports
How does a central bank devalue a currency?
A central bank can devalue a currency by selling domestic reserves and buying foreign reserves.
How does a central bank revalue a currency?
A central bank can revalue a currency by selling foreign reserves and buying domestic reserves.
What are two possible impacts of a currency appreciation?
Two possible impacts of a currency appreciation are:
- a decrease in exports
- a fall in cost-push inflationary pressure