Embedded Files
--THINK AHEAD--
--THINK AHEAD--
⚠️ "Dad joke warning!!!" ⚠️
↓
↓
↓
↓
↓
↓
↓
↓
"Because it was feeling 'under pressure,' 'weak,' 'not appreciated,' and less valuable relative to its partner!" 🤣
"Hilarious, right?"
"What pressure?" "Why is it weak?" "What's the opposite of appreciated", "...why exactly does it have a partner?"
↓
↓
↓
↓
↓
↓
↓
↓
"Let's define an exchange rate to find out."
↓
↓
↓
↓
--DEFINITION--
--DEFINITION--
The 'EXCHANGE RATE' refers to 'The price of one currency (HKD) in terms of another currency (USD); in other words, it's the 'value' of one currency relative to a 'partner' currency ('a currency pair'), such as the HKD/USD exchange rate. And like any price, it can experience upward 'pressure' to rise (AKA 'appreciate' or 'strengthen') and become more expensive or downward pressure to fall (AKA 'depreciate' or 'weaken') and become cheaper.
↓
↓
↓
↓
↓
↓
--TASK 1--
Refer to the widget below and copy and complete these sentences into your notes (You may change the currency pairs)
"How much is one HKD worth in terms of USD?", "How much is one USD worth in terms of HKD?" "If one HKD is worth __ USD, then to work out how much 1 USD is worth in terms of HKD, we simply..."
--TASK 2--
"Choose your own currency pair and type it into Google like this..."
"...you should immediately get a line chart of the current month's rates."
"Next, screenshot it and describe what you see, like this:"
"Over the past month, the USD has become more expensive in terms of HKD, it has faced upward pressure and appreciated (strengthened) from ≈$7.78 to around $7.81."
"...and enter it into the Padlet below."
--FLOATING SYSTEM--
--FLOATING SYSTEM--
--DEFINITION--
--DEFINITION--
In a 'FLOATING EXCHANGE RATE SYSTEM' the exchange rates are DETERMINED BY MARKET FORCES (or THE FORCES OF DEMAND and SUPPLY).
When forces 'RAISE' the price of SGD in terms of USD ('The price of 1 SGD has increased in USD terms'), we say that the SGD is 'APPRECIATING' or 'STRENGTHENING' AGAINST the USD, and
When forces 'LOWER' the price of SGD in terms of USD ('The price of 1 SGD has decreased in USD terms'), we say that the SGD is DEPRECIATING or 'WEAKENING' AGAINST the USD.
--DEMAND CREATES SUPPLY--
--DEMAND CREATES SUPPLY--
WHEN SGD HOLDERS WISH TO PURCHASE SOMETHING PRICED IN USD, they will need to exchange it in the foreign exchange market.
In doing so they simultaneously INCREASE THE SUPPLY OF SGD (Causing a RIGHTWARD SHIFT in the SGD SUPPLY CURVE, resulting in a DEPRECIATION OF THE SGD),...
...and an INCREASE IN THE DEMAND FOR USD, (Causing a RIGHTWARD SHIFT in the USD DEMAND CURVE resulting in an APPRECIATION OF THE USD)
⚠️"Below you will find a lot of factors and consequences related to appreciations and depreciations, so use the graphic organiser designs below!"⚠️
--DEMAND FACTORS--
"Why do people demand HKD?"
--1) to buy EXPORTS---
Clearly when you wish to buy something from the UK, the seller requires GBP. Which inevitably creates an INCREASE IN THE DEMAND FOR GBP, and an INCREASE IN THE SUPPLY OF HKD. This results in the GBP APPRECIATING against the HKD, while the HKD DEPRECIATES against the GBP.
"But why would a Hongkonger desire 'made in Korea' instead of 'made in Hong Kong'? Well, ignoring fashion trends, etc., it's usually due to two differences: firstly,...
--RELATIVE INFLATION RATES (PRICES)--
--TASK--
--TASK--
"Look at the real-world example below related the China and Korea, then complete the cloze activity"
"A higher price level in ____ relative to ____ should result in an increase/decrease in the demand for 'made in ____' exports, leading to an increase/decrease in demand for ____, putting upward/downward pressure on the currency, causing an appreciation/depreciation."
--RELATIVE GROWTH RATES (INCOMES)--
...and the differences in the incomes (purchasing power)."
When an economy grows and average income rises, the proportion spent on imports inevitably grows too (do you remember 'Marginal propensity to import'?), so if one of HONG KONG'S REGULAR TRADING PARTNERS' (China) EXPERIENCES RELATIVELY HIGHER LEVELS OF ECONOMIC GROWTH, then it is likely to LEAD TO A GREATER DEMAND FOR HONG KONG'S EXPORTS (RELATIVE TO INCREASED IMPORT DEMAND).
Hence there would be an overall INCREASE IN DEMAND FOR HKD (And an APPRECIATION of the HKD) and a subsequent INCREASE IN THE SUPPLY OF RMB. (Causing a DEPRECIATION of the RMB), and vice versa if China suffered a recession.
--TASK--
"Look at the real-world example below related the China and Australia, then complete the cloze activity"
"An increase in economic growth in ____ relative to ____ should result in an increase/decrease in the demand for 'made in ____' exports, leading to an increase/decrease in demand for ____, putting upward/downward pressure on the currency, causing an appreciation/depreciation."
--2) INVESTMENT-RELATED--
--INWARD FDI/PORTFOLIO INVESTMENT--
"...I need to use the currency of the host country I invest in!"
If a US MNC WISHES TO INVEST IN PRODUCTION FACILITIES IN SINGAPORE [FDI], or indeed IF FOREIGNERS WISH TO BUY FINANCIAL INVESTMENTS SUCH AS BONDS AND SHARES IN SINGAPORE COMPANIES then they will require SGD.
Hence greater levels of FDI and investment in Singapore, will result in an INCREASE IN DEMAND FOR SGD (And an APPRECIATION of the SGD) and a subsequent INCREASE IN THE SUPPLY OF USD. (Causing a DEPRECIATION of the USD), and vice versa.
--TASK--
"Look at the real-world example below related to 'foreign ownership of football clubs in England,' then write a brief sentence explaining how this impacts the demand for GBP, include at least one example club."
--⚠️RELATIVE INTEREST RATES⚠️--
"...my savings are in the currency of the bank that gives me the highest, safest returns!"
BONDS and SAVINGS are some of the MAIN FINANCIAL INSTRUMENTS used by investors to GAIN A RETURN ON THEIR MONEY
Therefore, IF SAVINGS AND BONDS IN SINGAPORE YIELD A GREATER REWARD IN TERMS OF INTEREST EARNED RELATIVE TO THE US, then there will likely be an INCREASE IN DEMAND FOR SGD (And an APPRECIATION of the SGD) and a subsequent INCREASE IN THE SUPPLY OF USD causing a DEPRECIATION of the USD), and vice versa.
"Despite having an interest rate of 59.36%, do you think it would be wise to buy the Venezualan Bolívar and stick your savings there?"
--3) OTHER FACTORS--
--LEVEL OF INWARD REMITTANCES--
TRANSFERS refer to PAYMENTS FROM ONE COUNTRY, THAT DO NOT RECEIVE A GOOD OR SERVICE IN RETURN.
In most cases, these come in the form of REMITTANCES, which are EARNINGS SENT BY FOREIGN WORKERS TO FAMILY MEMBERS BACK IN THEIR HOME COUNTRIES.
If REMITTANCES FROM THE US TO SINGAPORE INCREASED then there would be an INCREASE IN DEMAND FOR SGD (and an APPRECIATION of the SGD) as would the SUPPLY OF USD (leading to a DEPRECIATION of the USD).
--TASK--
"Look at the real-world example below related to 'remittances received,' then write a brief sentence explaining how this impacts the demand for on of the currencies of, say, India, mexico or the Phillippines."
--SPECULATION (APPRECIATION)--
If CURRENCY SPECULATORS EXPECT THE SGD TO APPRECIATE, THEY WILL SEEK TO BUY SGD NOW, in the hope of SELLING IT LATER AFTER ITS VALUE INCREASES, thereby MAKING A PROFIT. However, as they buy the currency THE DEMAND FOR SGD INCREASES causing it to appreciate; there is, therefore, a self-fulfilling prophecy at work.
--CENTRAL BANK INTERVENTION--
EVERY CENTRAL BANK HOLDS FOREIGN EXCHANGE RESERVES that they sometimes buy or sell in order to INFLUENCE THE VALUE OF THE DOMESTIC CURRENCY.
IF THE CENTRAL BANK WISHES TO INCREASE THE DEMAND FOR ITS CURRENCY, IT WILL SELL SOME OF ITS FOREIGN CURRENCY.
In doing so THE DEMAND FOR SGD INCREASES causing it to APPRECIATE.
--SUPPLY FACTORS--
--1) IMPORT-RELATED--
--DEMAND FOR IMPORTS OF G & S--
WHEN SINGAPOREANS (SGD HOLDERS) WANT TO BUY MORE 'MADE IN THE USA' GOODS & SERVICES, they will need to DEMAND MORE USD AND EXCHANGE MORE SGD.
This inevitably creates an INCREASE IN THE SUPPLY OF SGD and an INCREASE IN THE DEMAND FOR USD.
This results in the SGD DEPRECIATING against the USD, while the USD APPRECIATES against the SGD.
And vice versa..
--RELATIVE RATE OF INFLATION--
IF THE INFLATION RATE IN SINGAPORE IS HIGHER THAN THE INFLATION RATE IN THE US, it would imply that SUBSTITUTABLE GOODS & SERVICES 'MADE IN SINGAPORE', ARE RELATIVELY MORE EXPENSIVE THAN THEIR 'MADE IN THE US' ALTERNATIVES.
Thus SINGAPORE GOODS & SERVICES WILL BE LESS COMPETITIVELY PRICED, meaning LESS will be DEMANDED leading to an INCREASE IN THE SUPPLY OF SGD (And a DEPRECIATION of the SGD) and a subsequent INCREASE IN THE DEMAND FOR USD. (Causing an APPRECIATION of the USD)
--RELATIVE GROWTH RATE--
If one of SINGAPORE'S REGULAR TRADING PARTNERS' (THE US) EXPERIENCES RELATIVELY LOWER LEVELS OF ECONOMIC GROWTH, then it is likely to LEAD TO A RISE IN DEMAND FOR US IMPORTS (RELATIVE TO ANY INCREASE IN DEMAND FOR SINGAPORE EXPORTS TO THE US)
Hence there would be an overall INCREASE IN SUPPLY OF SGD (And a DEPRECIATION of the SGD) and a subsequent INCREASE IN THE DEMAND FOR THE USD. (Causing an APPRECIATION of the USD),
--2) INVESTMENT-RELATED--
--OUTWARD FDI/PORTFOLIO INVESTMENT--
If a SINGAPOREAN MNC WISHES TO INVEST IN PRODUCTION FACILITIES IN THE US[FDI], or indeed SINGAPOREANS WISH TO BUY FINANCIAL INVESTMENTS SUCH AS BONDS AND SHARES IN US COMPANIES then they will require USD.
Hence greater levels of FDI and investment in the US, will result in an INCREASE IN THE SUPPLY OF SGD (And a DEPRECIATION of the SGD) and a subsequent INCREASE IN THE DEMAND FOR THE USD. (Causing an APPRECIATION of the USD), and vice versa.
--RELATIVE INTEREST RATES--
BONDS and SAVINGS are one of the MAIN FINANCIAL INSTRUMENTS used by investors to GAIN A RETURN ON THEIR MONEY
Therefore IF SAVING AND BONDS IN THE US YIELD A GREATER REWARD IN TERMS OF INTEREST EARNED RELATIVE TO SINGAPORE, then there will likely be an INCREASE IN THE SUPPLY OF SGD (And a DEPRECIATION of the SGD) and a subsequent INCREASE IN THE DEMAND FOR USD causing an APPRECIATION of the USD), and vice versa.
--3) OTHER FACTORS--
--LEVEL OF OUTWARD REMITTANCES--
TRANSFERS refer to PAYMENTS FROM ONE COUNTRY, THAT DO NOT RECEIVE A GOOD OR SERVICE IN RETURN.
In most cases, these come in the form of REMITTANCES which are EARNINGS SENT BY FOREIGN WORKERS TO FAMILY MEMBERS BACK IN THEIR HOME COUNTRIES.
If REMITTANCES FROM SINGAPORE TO THE US INCREASED then there would be an INCREASE IN THE SUPPLY OF SGD (And a DEPRECIATION of the SGD) as would the DEMAND FOR USD (Leading to an APPRECIATION of the USD).
--SPECULATION (DEPRECIATION)--
TO DEPRECIATE, THEY WILL SEEK TO SELL SGD NOW, in the hope of BUYING IT LATER AFTER ITS VALUE DECREASES, thereby MAKING A PROFIT. However, as they SELL the currency THE SUPPLY OF SGD INCREASES causing it to DEPRECIATE; there is, therefore, a self-fulfilling prophecy at work.
--CENTRAL BANK INTERVENTION--
EVERY CENTRAL BANK HOLDS IT OWN DOMESTIC CURRENCY RESERVES that they sometimes buy or sell in order to INFLUENCE THE VALUE OF THE CURRENCY.
IF THE CENTRAL BANK WISHES TO DECREASE THE DEMAND FOR ITS CURRENCY, IT WILL SELL SOME OF ITS OWN CURRENCY IN EXCHANGE FOR SOME FOREX
In doing so THE SUPPLY OF SGD INCREASES causing it to DEPRECIATE.
--THINK AHEAD--
"If wages rise in HK, do you think Hong Kongers will supply more or less of their labour overseas? And at the same time, do you think more or fewer foreigners will demand jobs in HK?"
↓
↓
↓
"The likelihood is that Hong Kongers will supply less of their labour overseas, and at the same time, more foreigners will demand jobs in HK."
↓
↓
↓
"Now, what do you think will happen if 'Made in HK' or 'Saved in HK' becomes relatively more appealing (lower prices & higher rates)? "What will happen to the demand for HKD from GBP holders, and what will happen to the supply of HKD by HKD holders?"
↓
↓
↓
"The likelihood is that Hong Kongers will now supply less of their HKD to buy imports, and at the same time, more foreigners will demand HKD to buy exports."
--DEMAND & SUPPLY FACTORS--
--RELATIVE INFLATION RATES--
A lower relative price level in Hong Kong compared to the UK will result in demand for HKD rising as HK exports will be more competitive while, at the same time, imports from the UK will be more expensive, resulting in a reduction in the previous level of supply of HKD for imports as they have become less competitive. As a result, there are 'TWO HKD shifts', a rightward shift in demand and a leftward shift in the supply."
--RELATIVE INTEREST RATES--
A higher relative interest rate in Hong Kong compared to the UK will result in demand for HKD rising as saving in HK becomes more rewarding than in the UK, while, at the same time, saving in the UK will become less attractive due to the relatively lower rate, resulting in a reduction in the level of supply of HKD for GBP. As a result, there are 'TWO HKD shifts,' a rightward shift in demand and a leftward shift in the supply."
--TASK--
"Now that you are familiar with the main factors that impact demand and supply, let's sketch some exchange rate diagrams for 4-mark paper 2 questions."
"HIGHER RELATIVE INFLATION"
"HIGHER RELATIVE INFLATION"
"Sketch the diagram first and add an explanation, then scroll down to see the mark scheme."
↓
↓
↓
"INCREASE IN DEMAND FOR EXPORTS"
"Sketch the diagram first and add an explanation, then scroll down to see the mark scheme."
↓
↓
↓
"FALL IN DEMAND FOR EXPORTS"
"FALL IN DEMAND FOR EXPORTS"
"Sketch the diagram first and add an explanation, then scroll down to see the mark scheme."
↓
↓
↓
"WIDENING TRADE DEFICIT"
"Sketch the diagram first and add an explanation, then scroll down to see the mark scheme."
"Note that this situation could be due to two reasons!!!"
↓
↓
↓
"INCREASE IN TARIFFS"
"Sketch the diagram first and add an explanation, then scroll down to see the mark scheme."
↓
↓
↓
"INTEREST RATE CHANGES"
"INTEREST RATE CHANGES"
--10-MARKER PAST PAPER--
--CONSEQUENCES--
--TASK--
"Explain how the appreciation of the GBP against the USD impacts the UK in terms of the seven criteria below."
Write a full paper-one style answer:
"The consequences of the GBP hitting a near 4-year high against the dollar, in other words, an appreciation against the dollar' has many potential consequences...."
--COST PUSH INFLATION--
--COST PUSH INFLATION--
--DEPRECIATION--
--DEPRECIATION--
A DEPRECIATION, causes IMPORTS to become MORE EXPENSIVE.
IF DOMESTIC PRODUCERS ARE HEAVILY DEPENDENT ON IMPORTED FOPs, their COSTS OF PRODUCTION will INCREASE.
This will CREATE COST-PUSH INFLATION and SHIFT THE SRAS LEFTWARDS.
The MORE INELASTIC the demand for the imported input (such as the demand for oil), the GREATER is the COST-PUSH INFLATION
--APPRECIATION--
--APPRECIATION--
AN APPRECIATION will cause IMPORTS to become CHEAPER.
As such DOMESTIC PRODUCERS which use IMPORTED FOPs, will see their COSTS OF PRODUCTION DECREASE.
This will REDUCE INFLATIONARY PRESSURE and SHIFT THE SRAS RIGHTWARDS.
--DEMAND PULL INFLATION--
--DEMAND PULL INFLATION--
--DEPRECIATION--
--DEPRECIATION--
A DEPRECIATION makes EXPORTS CHEAPER and IMPORTS MORE EXPENSIVE.
Therefore there is an INCREASE in THE NUMBER of EXPORTS and a DECREASE in THE NUMBER OF IMPORTS, thus INCREASING NET EXPORTS 'NX' (X−M)
This in turn INCREASES AD, causing a RIGHTWARD SHIFT of the aggregate demand curve.
If the economy is AT FULL EMPLOYMENT, this will likely LEAD TO DEMAND-PULL INFLATION.
--APPRECIATION--
--APPRECIATION--
An APPRECIATION makes EXPORTS MORE EXPENSIVE and IMPORTS CHEAPER.
Therefore there is a DECREASE in THE NUMBER of EXPORTS and an INCREASE in THE NUMBER OF IMPORTS, thus DECREASING NET EXPORTS 'NX' (X−M).
This in turn DECREASES AD, causing a LEFTWARD SHIFT of the aggregate demand curve.
This will LEAD TO DOWNWARD PRESSURE ON PRICES and REDUCED INFLATION.
"...in terms of its impact on inflation, an appreciation will increase the price of UK exports whilst making US imports cheaper; therefore, cheaper imported raw materials and finished goods from the US should lower costs of production as well as the fall in net exports due to lower exports to the US should reduce aggregate demand and reduce both cost-push and demand-pull inflationary pressures..."
--BALANCE OF PAYMENTS--
--BALANCE OF PAYMENTS--
--DEPRECIATION--
--DEPRECIATION--
A DEPRECIATION causes the PRICE of IMPORTED GOODS to become more EXPENSIVE and EXPORTS to become CHEAPER, hence the TRADE BALANCE is LIKELY to IMPROVE.
--APPRECIATION--
--APPRECIATION--
AN APPRECIATION causes the PRICE of IMPORTED GOODS to become CHEAPER and EXPORTS to become MORE EXPENSIVE, hence the TRADE BALANCE is LIKELY to WORSEN.
"...furthermore the stronger pound should see the trade deficit worsen as imports rise while exports fall...",
--LIVING STANDARDS--
--LIVING STANDARDS--
--DEPRECIATION--
--DEPRECIATION--
A DEPRECIATION causes the PRICE of IMPORTED GOODS to become more EXPENSIVE and if this leads to COST-PUSH INFLATION, the COST OF LIVING will RISE, and REAL INCOMES will FALL.
--APPRECIATION--
--APPRECIATION--
AN APPRECIATION causes the PRICE of IMPORTED GOODS to become CHEAPER and if this leads to DOWNWARD PRESSURE ON PRICES, the COST OF LIVING will FALL, and REAL INCOMES will RISE.
"...the stronger pound leds to cheaper imported inputs lowering the costs of production, which should lead to lower consumer prices, helping lower the cost of living and improving purchasing power,...",
--FOREIGN DEBT--
--FOREIGN DEBT--
--DEPRECIATION--
--DEPRECIATION--
A DEPRECIATION causes the VALUE OF FOREIGN DEBT to RISE as the country now needs to EXCHANGE MORE OF ITS CURRENCY for the same level of foreign debt.
--APPRECIATION--
--APPRECIATION--
AN APPRECIATION causes the VALUE OF FOREIGN DEBT to FALL as the country now needs to EXCHANGE LESS OF ITS CURRENCY for the same level of foreign debt.
"...the stronger pound means the UK can buy more FOREX to pay off its foreign currency denomoninated debt...",
--ECONOMIC GROWTH--
--DEPRECIATION--
--DEPRECIATION--
A DEPRECIATION means that EXPORTS are CHEAPER, while IMPORTS become MORE EXPENSIVE, so NET EXPORTS INCREASE leading to an INCREASE in AD and REAL GDP.
As EXPORTS INCREASE, EXPORT-ORIENTATED FIRMS will INVEST in MORE INFRASTRUCTURE and CAPITAL GOODS => POTENTIAL OUTPUT LEVELS INCREASING => LRAS INCREASES => INCREASES IN LRAS and REAL GDP.
HOWEVER if the IMPORTS are ESSENTIAL and the country is UNABLE TO FIND ALTERNATIVE SOURCES, this can LEAD TO COST-PUSH INFLATION => DECREASE IN SRAS and REAL GDP.
--APPRECIATION--
--APPRECIATION--
An APPRECIATION means that EXPORTS are MORE EXPENSIVE, while IMPORTS become CHEAPER, so NET EXPORTS DECREASE leading to a DECREASE in AD and REAL GDP.
However, if the IMPORTS are ESSENTIAL and major inputs, this can LEAD TO A FALL IN THE COSTS OF PRODUCTION => INCREASE IN SRAS and REAL GDP.
If this allows a country to import ESSENTIAL CAPITAL GOODS CHEAPLY, then this may FACILITATE GROWTH and INCREASES IN PRODUCTIVITY leading to INCREASES IN LRAS and REAL GDP.
"...the stronger pound may mean net exports falls due to more expensive exports; however, if the cheaper imports are vital capital goods that can be used to spur productivity, then economc growth can occur."
--UNEMPLOYMENT--
--UNEMPLOYMENT--
--DEPRECIATION--
--DEPRECIATION--
A DEPRECIATION leads to GREATER NET EXPORTS and as AD INCREASES CYCLICAL UNEMPLOYMENT FALLS (If in RECESSION), in addition, there is MORE EMPLOYMENT IN THE EXPORT INDUSTRY.
Moreover, the export-orientated sector will invest in MORE INFRASTRUCTURE & CAPITAL GOODS => POTENTIAL OUTPUT LEVELS INCREASING => LRAS IN CREASES =. INCREASES IN REAL GDP=> MORE EMPLOYMENT => LOWER NRU.
HOWEVER If the DEPRECIATION leads to COST-PUSH INFLATION, UNEMPLOYMENT RISES.
--APPRECIATION--
--APPRECIATION--
An APPRECIATION leads to LOWER NET EXPORTS and as AD DECREASES CYCLICAL UNEMPLOYMENT RISES, in addition, there is LESS EMPLOYMENT IN THE EXPORT INDUSTRY.
Moreover, the export-orientated sector will HAVE LESS TO INVEST in MORE INFRASTRUCTURE & CAPITAL GOODS => POTENTIAL OUTPUT LEVELS DECREASING => LRAS DECREASES =. DECREASES IN REAL GDP=> LESS EMPLOYMENT => HIGHER NRU.
However, If this allows a country to import ESSENTIAL CAPITAL GOODS CHEAPLY, then this may FACILITATE GROWTH and INCREASES IN PRODUCTIVITY leading to INCREASES IN LRAS and REAL GDP and subsequently HIGHER EMPLOYMENT.
"...the stronger pound may lead to cyclical unemployment in the export-oriented industries due to the fall in the net-exports component of aggregate demand; however, cheaper imports of capital goods could create new industries and led to employment in new developing sectors."
--15-MARKER PAST PAPER--
--THINK AHEAD--
"Why do think trade with
"When a financial transaction is denominated in a currency other than the domestic currency of the company, there is alwyts risk of an unfavorable change in the exchange rate between the domestic currency and the denominated currency before the date when the transaction is completed."
--FIXED-RATE SYSTEM--
--DEFINITION--
--DEFINITION--
In a 'FIXED EXCHANGE RATE SYSTEM', exchange rates are FIXED BY THE CENTRAL BANK OF EACH COUNTRY and are NOT PERMITTED TO CHANGE in response to changes in currency supply and demand.
MAINTAINING THE FIXED RATE REQUIRES CONSTANT INTERVENTION BY THE CENTRAL BANK.
When the RATE IS FIXED HIGHER it is called a 'REVALUATION', and when the RATE IS FIXED LOWER it is called a 'DEVALUATION'
--HOW IS IT MAINTAINED?--
--FOLLOWING ↑UPWARD PRESSURE?--
"...by increasing the supply of HKD!", "How?"
--SELL HKD & BUY GBP--
--SELL HKD & BUY GBP--
"If there is upward pressure on the fixed rate, the CB can counter this by selling its reserves of HKD, which will lead to an increase in the supply of HKD and put ↓downward pressure↓ on the fixed rate."
--TASK--
"Sketch the appropriate exchange rate diagram to represent the type of intervention made by the Chinese CB to counter the upward pressure on the RMB in 2021."
--FOLLOWING DOWNWARD PRESSURE--
"...by increasing demand for HKD!", "How?"
--'SELL GBP & BUY HKD'--
--'SELL GBP & BUY HKD'--
"If there is ↓ downward pressure↓ on the fixed rate, the CB can counter this by selling its reserves of GBP, which will lead to an increase in the demand for HKD and put ↑upward pressure↑ on the fixed rate."
⚠️"How sustainable is this situation?"⚠️
Don't have enough FOREX reserves
--TASK--
"Sketch the appropriate exchange rate diagram to represent the type of intervention made by the HKMA to 'defend its peg with the USD' following downward pressure in June 2025."
--'BORROW FOREX'--
--'BORROW FOREX'--
"Don't have any FOREX left?" "No problem, you can just borrow it, though don't forget about those pesky repayments."
If there is an INCREASE IN THE SUPPLY OF SGD it puts DOWNWARD PRESSURE ON THE FIXED RATE, therefore IN ORDER TO COUNTER THIS the government can BORROW FOREX and then SELL IT IN EXCHANGE FOR SGD, thus INCREASING THE DEMAND FOR SGD and eliminating the downward pressure.
--'RAISE INTEREST RATES'--
--'RAISE INTEREST RATES'--
"If there is ↓ downward pressure↓ on the fixed rate, the CB can counter this by raising interest rates, which will lead to an increase in the demand for HKD and put ↑upward pressure↑ on the fixed rate."
--TASK--
"Sketch the appropriate exchange rate diagram to represent the type of intervention made by the BOE to counter the downward pressure on the GBP in Sept 2022."
"..by decreasing the supply of HKD!", "How?"
--'LIMIT IMPORTS'--
--'LIMIT IMPORTS'--
"Spending on imports is heavily linked to their relative price compared to domestic substitutes as well as the level of income of residents; therefore, reducing the supply of HKD to counter downward pressure could be accomplished by..."
1) CONTRACTIONARY POLICY (FISCAL & MONETARY) LOWERS AD and INCOMES, which REDUCES THE DEMAND FOR IMPORTS, and REDUCES the SUPPLY OF SGD, however, these policies may conflict with other economic objectives such as low unemployment and economic growth.
2) TRADE PROTECTIONIST POLICIES such as TARIFFS etc.., MAKE IMPORTS MORE EXPENSIVE which REDUCES THE DEMAND FOR IMPORTS and hence REDUCE THE SUPPLY OF SGD, however, this can have an adverse impact on relationships with trading partners who may retaliate.
--TASK--
"Sketch the appropriate exchange rate diagram to represent the type of intervention made by the CBN to counter the downward pressure on the Nairu in Feb 2024."
--'USE EXCHANGE CONTROLS'--
--'USE EXCHANGE CONTROLS'--
If there is an increase in the supply of SGD it puts DOWNWARD PRESSURE on the fixed-rate, therefore in order to counter this the government can IMPOSE A MAXIMUM LIMIT ON THE AMOUNT OF FOREX THAT CAN BE BOUGHT, thus controlling the supply of SGD.
--TASK--
"Sketch the appropriate exchange rate diagram to represent the type of intervention made by the Argentinian Gov't to counter the downward pressure on the Peso in Nov 2011."
--PAST PAPER TASK--
--MANAGED-RATE SYSTEM--
--DEFINITION--
--DEFINITION--
In a 'MANAGED-RATE SYSTEM,' exchange rates are for the most part free to float to their market levels (i.e. their equilibrium levels) OVER LONG PERIODS OF TIME; however, CENTRAL BANKS PERIODICALLY INTERVENE to STABILISE them in the SHORT-TERM and allow time for markets to adjust.
--RATIONALE--
--RATIONALE--
The objective of central bank intervention is to PREVENT LARGE AND ABRUPT FLUCTUATIONS IN EXCHANGE RATES which disrupt the orderly flow of international trade and CREATE UNCERTAINTIES that UNDERMINE INVESTMENT and ECONOMIC ACTIVITY.
--PEGGED RATE SYSTEM--
--PEGGED RATE SYSTEM--
--DEFINITION--
--DEFINITION--
A PEGGED CURRENCY is allowed TO FLUCTUATE WITHIN A NARROW RANGE ABOVE and BELOW the TARGET EXCHANGE RATE.
pegged currency is allowed to fluctuate only within a narrow range above and below a target exchange rate relative to the dollar or the euro, so that if the actual exchange rate hits the upper or lower limit of the range, the central bank intervenes to keep it within the limits. This implies that when the USD depreciates (appreciates) against a currency then it must also be true that the pegged currency also depreciates (appreciates).
E.G If 1USD = 2GBP and IUSD = 5SGD and the
--EXAMPLE--
--EXAMPLE--
IMAGINE THAT SINGAPORE'S BIGGEST TRADING PARTNER WAS THE UK
AS SUCH IT HAS PEGGED ITS EXCHANGE. RATE @ 1 GBP : 6 SGD
AT THE SAME TIME 1 GBP : 2 HKD MEANING THAT 1 HKD : 3 SGD
IF THE GBP DEPRECIATES AGAINST THE HKD TO 1 GBP : 1 HKD, THEN. IN A FREE-FLOATING SYSTEM 1 GBP : 3 SGD.
AS SUCH IN ORDER TO MAINTAIN THE 1 GBP : 6 SGD PEG THE SGD MUST ALSO DEPRECIATE AGAINST THE HKD TO 1 HKD : 6 SGD
OVERVALUED
OVERVALUED
An OVERVALUED currency is one that has a value that is SET TOO HIGH RELATIVE TO ITS FREE MARKET VALUE, hence there exists DOWNWARD PRESSURE.
UNDERVALUED
UNDERVALUED
An UNDERVALUED currency is one whose value is SET TOO LOW RELATIVE TO ITS FREE MARKET VALUE; hence there exists UPWARD PRESSURE.
--CONSEQUENCES--
OVERVALUED
OVERVALUED
IMPORTS CHEAPER:
(+) IMPORTS OF CAPITAL GOODS, RAW-MATERIALS and other INPUTS for use in manufacturing industries help to SPEED UP INDUSTRIALISATION in developing countries.
(-) GREATER COMPETITION for domestic producers from cheaper imports => UNEMPLOYMENT.
EXPORTS MORE EXPENSIVE:
(-) Makes domestic EXPORTS UNCOMPETITIVE, leading to UNEMPLOYMENT in exporting industry.
UNDERVALUED
UNDERVALUED
IMPORTS MORE EXPENSIVE:
(-) IMPORTS OF CAPITAL GOODS, RAW-MATERIALS, and other INPUTS can lead to COST-PUSH INFLATION.
(+) LESS COMPETITION for domestic producers from cheaper imports.
EXPORTS LESS EXPENSIVE:
(+) MAKES DOMESTIC EXPORTS competitive, leading to EMPLOYMENT in exporting industry as it expands *
* Some developing countries have used undervaluation as a method to expand their export industries, expand their economies and therefore also increase their employment levels. Achieving these objectives by means of an undervalued currency is considered to involve the creation of an unfair competitive advantage. Currency undervaluation is therefore considered to be a kind of ‘cheating’. In the context of a managed float, undervalued currencies are sometimes referred to as a ‘DIRTY FLOAT’. Correction of the undervalued currency would involve revaluation or appreciation of the currency.
--FIXED vs FLOATING--
--HL CALCULATIONS--
--HL CALCULATIONS--
Use actual past papers to work through simultaneously
--THE VALUE OF A CURRENCY IN TERMS OF ANOTHER--
--THE VALUE OF A CURRENCY IN TERMS OF ANOTHER--
Q. 1 CAD = 0.99 USD, what is the value of 1 USD in terms of CAD?
I USD = 1/0.99 = 1.01 CAD
Q. 1 INR = 1..84 YEN, what is the value of 1 YEN in terms of INR?
I YEN = 1/1.84 = 0.54 INR
Q. 1 GBP = 1.62 CAD, what is the value of 1 CAD in terms of GBR?
I CAD = 1/1.62 = 0.62 GBP
--INTERPRETING EXCHANGE RATE DATA--
--INTERPRETING EXCHANGE RATE DATA--
--HAS THE USD APPRECIATED or DEPRECIATED?--
Ask yourself: Has the USD become MORE or LESS EXPENSIVE in terms of the SGD? Do you give up MORE or LESS SGD to purchase a single USD?
--PERCENTAGE CHANGES IN CURRENCY VALUES--
--PERCENTAGE CHANGES IN CURRENCY VALUES--
--WORK OUT APPRECIATION as a %, using DATA--
The SGD has APPRECIATED AGAINST THE USD, between January and December, but by how much as a %?
In other words how much more USD must be exchanged for an SGD?
We can see that the price of an SGD (in terms of USD) increased (Appreciated) from 1.22 to 1.69 USD, which is a % increase of (1.69-1.22)/1.22 = +38.52%
--WORK OUT DEPRECIATION as a %, using DATA--
The USD has DEPRECIATED AGAINST THE SGD, between January and December, but by how much as a %?
In other words how much more SGD must be exchanged for a USD?
In order to work this out we need to convert the exchange rates into SGD per USD values, so:
in JAN 1/1.22 I USD = 0.81 SGD
in Dec 1/1.69 1 USD = 0.59 SGD
We can see that the price of a USD (in terms of SGD) decreased (Depreciated) from 0.81 to 0.59 SGD, which is a % decrease of (0.81-0.59)/0.81 = -27.1%
--DEMAND FOR SGD CREATES A SUPPLY OF USD--
--DEMAND FOR SGD CREATES A SUPPLY OF USD--
WHEN USD HOLDERS WISH TO PURCHASE SOMETHING PRICED IN SGD, they will need to exchange it in the foreign exchange market.
In doing so they simultaneously INCREASE IN THE SUPPLY OF USD (Causing a RIGHTWARD SHIFT in the USD SUPPLY CURVE curve, resulting in a DEPRECIATION OF THE USD),...
...and an INCREASE IN THE DEMAND FOR SGD, (Causing a RIGHTWARD SHIFT in the SGD demand curve resulting in an APPRECIATION OF THE SGD)
--PRINT UNIT MCQ--
"Over the past month the HKD has become cheaper in terms of USD; in other words, it has faced downward pressure and depreciated (weakened) slightly from $0.264 to around $0.1280.
"Over the past month the HKD has become cheaper in terms of USD; in other words, it has faced downward pressure and depreciated (weakened) slightly from $0.264 to around $0.1280.
Move into Beaumont, pay off 1m, get mortgage down to 8k?, earn extra 14k per month? is this illegal will nord fine me...? Leave rest in banks ta 4% jon earning will be 6ok per month
Move into Beaumont, pay off 1m, get mortgage down to 8k, earn extra 14k per month? is this illegal will nord fine me...? use rest for uk home, get 1m mortgage at 8kp/m, pay 200k for refurbish. must pay 200000 stamp duty in uk.
Move into Beaumont apartment that I own, pay 13k per month on the mortgage, receive 22k from the job as rent assistance, and earn 46k wages per month, use 2 million cash I have at present to buy a home in the UK to be close to my mum, which will mean a 200,000 stamp duty and a small mortgage of 4k per month and property tax of 2,000 per month. The beaumount will require a one-off refurbish of 150000.
Move into Beaumont apartment that I own, pay off 1 million of the outstanding mortgage and get repayments down to pay 8k per month on the mortgage, still receive 22k from the job as rent assistance, and earn 46k wages per month, using the remaining 1 million cash I have at present to buy a home in the UK to be close to my mum, which will mean a 200,000 stamp duty and a larger mortgage with repayments of 12k per month and property tax of 2,000 per month. Also The beaumount will require a one-off refurbish of 150000.
Use all my 2million cash savings to pay off the Beaumont apartment mortgage, still receive 22k from the job as rent assistance, and earn 46k wages per month, Also The beaumount will require a one-off refurbish of 150000.
Sell the Beaumont apartment for 6.2 million pay of outstanding mortgage of 2.2 million and net 4000000. use this and the 2 million cash to put in bank and earn 4%, and have a wage of 46000 per month. Then just us ethe housing allowance to rent a 22k home.
Sell the Beaumont apartment for 6.2 million pay of outstanding mortgage of 2.2 million and net 4000000. This will give ma 6 million, which I will use 2.5 million to buy home in uk to be near Mum at 2000 hkd prop tax monthly, but a small 50000 stamp duty needed but no need for mortgage, leaving about 3.5 million to put in bank at 4%. the 22k is now going to rent a house in hk.
Page updated
Google Sites
Report abuse