<6.3 EXCHANGE RATES> 

• When FOREIGNERS (USD holders) want to BUY MADE IN SINGAPORE GOODS & SERVICES (EXPORTS), the Singaporean producers require SGD, hence they will need to DEMAND the SGD in exchange for USD. 

• This inevitably creates an INCREASE IN DEMAND FOR SGD which causes the SGD TO APPRECIATE against the USD and an INCREASE IN THE SUPPLY OF USD which causes the USD TO DEPRECIATE against the SGD.

• When FOREIGNERS (USD holders) wish to SAVE in SINGAPOREAN BANKS, the banks will require SGD, therefore they will need to DEMAND SGD IN EXCHANGE FOR USD. 

• Note: The willingness to save is often related to the RATE OF INTEREST ('REWARD FOR SAVING') available, hence IF THE RATE INCREASES the DEMAND for SGD INCREASES and vice versa.

• When FOREIGNERS (USD holders) want to BUY A SHARE IN A SINGAPOREAN COMPANY, the company will require SGD, hence they will need to DEMAND SGD IN EXCHANGE FOR USD. 

• For example,. if Mr. B's mum wants to buy a share in RAZOR (Singaporean firm) she will need to sell GBP and buy SGD.

• US MNCs which want to operate in Singapore will need to purchase SGD, to pay for the local factors of production, for example, purchase price of any property or wages for local staff.

• Singaporeans who have saved in foreign banks receive interest from the bank who has to convert the interest into SGD to pay them.

• Singaporeans who HAVE BOUGHT SHARES IN FOREIGN FIRMS will receive their DIVIDENDS in SGD, hence the foreign firms will need to demand SGD.

• In order to maintain a fixed rate, following downward pressure, the government will buy SGD and supply FOREX RESERVES to increase demand and increase the value

• If Singaporean expats wish to send money back to Singapore, they will need to exchange for SGD creating a demand.

• Singaporean MNCs based in the US will likely EARN USD from their operations, so when they wish to send profits back to Singapore, they will need to DEMAND SGD in exchange for their USD.

• SPECULATORS are investors who seek to predict movements in exchange-rates so that they can make profits for example If you think the SGD will appreciate against the USD, that is the SGD will be worth more (can be exchanged for more) USD in the future, then a speculator will likely INCREASE THEIR DEMAND FOR SGD now in exchange for USD.

• When Singaporeans (SGD holders) want to BUY MADE IN THE US GOODS & SERVICES (IMPORTS), the US producers require USD, hence Singaporeans will need to SUPPLY their SGD in exchange for USD. 

• This inevitably creates both an INCREASE in the SUPPLY of SGD which causes it to DEPRECIATE in value against the USD, as well as an INCREASE in the DEMAND for USD, which causes it to APPRECIATE in value against the SGD.

Clearly, if an MNC wishes to invest in production facilities in Singapore [FDI], or indeed foreigners wish to buy financial investments such as bonds and shares in Singaporean 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.

• When SINGAPOREANS (SGD holders) want to BUY A SHARE IN A US COMPANY (E.g. Apple Inc), the company will require USD, hence the SGD holder will need to SUPPLY their SGD in EXCHANGE for USD.

• Singaporean MNCs that want to operate in the US will need to purchase USD, to pay for the local factors of production, for example, purchase price of any US property or wages for US-based staff.

• Clearly if IMPORT SPENDING RISES relative to EXPORT REVENUE, then the Δ SUPPLY OF SGD to BUY IMPORTS > the Δ DEMAND FOR SGD to BUY EXPORTS and this will create a SURPLUS of SGD which will cause the PRICE of SGD to FALL (DEPRECIATE)

• TASK: SKETCH THE APPROPRIATE DIAGRAM.

A GOVERNMENT can use policies to LOWER the exchange rate, it can...

1) INCREASE the SUPPLY of SGD, 

by SELLING its SGD RESERVES & BUYING FOREX, in doing so the supply of SGD curve shifts to the RIGHT and the SGD DEPRECIATES.

by REMOVING 'EXPENDITURE SWITCHING POLICIES' such as TARIFFS, it makes IMPORTS CHEAPER, so Singaporeans will demand more USD in exchange for SGD, and thus the supply curve shifts to the RIGHT and the SGD DEPRECIATES.

TASK: SKETCH THE APPROPRIATE DIAGRAM

2) DECREASE the DEMAND for SGD 

by LOWERING the INTEREST RATE it REDUCES THE REWARD FOR SAVING IN SINGAPOREAN BANKS, hence FOREIGNERS WILL BE LESS WILLING TO SAVE, thus they will DEMAND LESS SGD, which will shift the demand for SGD curve to the LEFT and the SGD DEPRECITATES.

TASK: SKETCH THE APPROPRIATE DIAGRAM

• If, for whatever reason there is A DECREASE in FOREIGN INVESTMENT in the country resulting in say FOREIGN MNCs LEAVING, then there will be AN INCREASE IN THE SUPPLY of domestic currency as MNCs seek to repatriate their earnings, thus SGD depreciates.

• If it is generally believed ('SPECULATED') that the currency will FALL ('DEPRECIATE') in price against another currency in the near future, speculators will act in a way which will help in bringing about their expectation by SELLING THE CURRENCY NOW so they can PREVENT LOSES AND/OR REBUY MORE OF THE CURRENCY IN TEH FUTURE which, in the case of a floating exchange rate, will push DOWN its price and thus the SGD DEPRECIATES

• If EXPORT REVENUE rises relative to IMPORT SPENDING, 

• ...DEMAND FOR SGD to buy exports > the SUPPLY OF SGD to buy imports

• this will create a SHORTAGE of SGD

• which will cause the PRICE of SGD to RISE (APPRECIATE)

A Gov't can use policies to RAISE the exchange rate by...

1) INCREASING the DEMAND for SGD, by SELLING its FOREX RESERVES & BUYING SGD

2) INCREASING the DEMAND for SGD by RAISING the INTEREST RATE to ATTRACT 'HOT MONEY'

3) DECREASING the SUPPLY of SGD by IMPOSING 'EXPENDITURE SWITCHING POLICIES' such as TARIFFS, to make IMPORTS more EXPENSIVE...

• An increase in investment in the country arising from a foreign multinational company setting up a production plant can also cause the price of the currency to rise. 

• If it is generally believed that the currency will RISE in price, speculators will act in a way which will help in bringing about their expectation. They will BUY the currency which, in the case of a floating exchange rate, will push UP its price.

• In each case draw a diagram to show the effect on the market for SGD if the following occurs:

  • • • TESLA opens up a branch in Singapore.

      • More tourists from Singapore going to India on holiday.

      • Singapore banks lending to Ghanaian firms.

      • A reduction in demand for Singapore exports.

• INCORRECT: A decrease in its inward investment would not increase the demand for a country's currency on the foreign exchange market. Inward investment refers to foreign investment flowing into a country, which requires local currency, thus a fall in FDI will decrease demand.

• INCORRECT: A decrease in its rate of interest would not increase the demand for a country's currency on the foreign exchange market. Lower interest rates might discourage foreign investment in the country, potentially decreasing demand for its currency. Conversely, higher interest rates often attract foreign investment, leading to increased demand for the currency.

• CORRECT: An increase in its exports would increase the demand for a country's currency on the foreign exchange market. When a country's exports rise, there is a greater demand for its currency as foreign entities need to purchase the domestic currency to buy the exported goods and services. This increased demand for the currency typically leads to an appreciation of its value relative to other currencies.

• INCORRECT: An increase in its imports would not increase the demand for a country's currency on the foreign exchange market. Importing goods and services requires the use of foreign currency, which leads to an increased supply of the domestic currency in exchange for foreign currencies. This increased supply tends to depreciate the value of the domestic currency rather than increasing its demand.

• EXPORTS become CHEAPER, leading to INCREASE in DEMAND for EXPORTS by foreigners

• DEMAND for DOM. WORKERS in EXPORT-ORIENTATED FIRMS will INCREASE.

• IMPORTS become EXPENSIVE, leading to a DECREASE in DEMAND by Singaporeans for IMPORTS & an INCREASE in the DEMAND by Singaporeans for domestically made goods

• DEMAND for DOM. WORKERS to satisfy domestic demand will INCREASE.

• EXPORTS become EXPENSIVE, leading to a DECREASE in DEMAND for EXPORTS by foreigners

• DEMAND for DOM. WORKERS in EXPORT-ORIENTATED FIRMS will DECREASE.

• IMPORTS become CHEAPER, leading to an INCREASE in DEMAND by Singaporeans for IMPORTS & a DECREASE in the DEMAND by Singaporeans for domestically made goods.

• DEMAND for DOM. WORKERS will DECREASE.

Discuss whether a country’s exchange rate should be determined by market forces or by the government. 8

Explain two reasons why an economy may have a high foreign exchange rate.4

Discuss whether a fall in the international value of its currency will always benefit an economy. 8

Explain two factors that could cause an increase in foreign tourists to a country.4

Discuss whether an increase in exports will increase the exchange rate. 8

Analyse how an increase in exports could increase a country’s employment rate and inflation

rate. 6

What is meant by a ‘depreciation’ of a currency?  2

Explain how a depreciation of a currency can cause a rise in the inflation rate of a country. 4

Analyse how a fall in the rate of interest may affect a country’s exchange rate. 6