Question

1) Consider the following, all of which will affect the demand for pounds on foreign exchange markets or the supply of pounds on foreign exchange markets (either one or the other – never both)

State what the effect of each of them will be (will it increase it or reduce it?)

Say whether the transaction will be recorded on the Current Account or the Capital Account of the Balance of Payments.

a) There is an increase in demand in Britain for Renault motor cars
b) French consumers start to buy British beef again.
c) LEB (the London Electricity Board) is purchased by EDF (Electricité de France)
d) Large numbers of Russian students come to Britain to study.
e) EDF pays a large dividend to shareholders. Some shares in EDF are owned by a British pension fund.

2) Explain the effect on the business sector of the economy of a rise in the exchange rate for the country’s currency.

3) A substantial fall in the price of the pound in foreign currencies (e.g., the price of the pound in euros) could be expected to affect physical quantities of exports from the UK and imports into the UK as follows:

(a)    Increase both export and imports.
(b)   Increase exports, decrease imports.
(c)    Decrease both exports and exports
(d)   Decrease exports, increase imports.
(e)   Have no perceptible effect on either imports or exports.

Answer 1

ans 1 =

BOP	-a documentation of all funds going in & out of a nation
current account (CA)	-a documentation of international transactions which don’t create liabilities
capital financial account (CFA)	-a documentation of international transactions which do create liabilities; the capital account & the financial account comprises private & official sales & procurements of financial assets, like bonds.

a)Current account

b)current account

c)capital account

d)current account

e)current account

ans 2=

Advantages of a currency appreciation-

• Imports Are inexpensive-

Goods manufactured abroad & imported to the U.S will Be inexpensive if the producer's currency falls in value in comparison to the dollar. Luxury vehicles from Europe would for instance, decline in dollar price. Other lesser-cost imports will also decline in price, leaving more disposable income in the hands of American customers. U.S. firms which import raw materials from overseas will have a lower overall cost of production and enjoy bigger profit margins as an outcome.

• Multinationals which conduct Business in the U.S. Benefit-

Foreign firms which do a lot of business in the U.S.A & their investors will gain. MNCs that have a big number of sales in the U.S.A, & thus earn income in $, will witness gains in the dollar translate to gains on their BS.

Disadvantages of Dollar depreciation-

• Tourism to the U.S.A Is More Expensive-

Visitors from overseas will find the prices of commodities in America more expensive with a dollar appreciation. Corporate travellers & foreigners living in the USA but holding on to foreign-denominated bank a/cs, or who’re paid in their home currency, will be at a loss & their cost of living augmented.

• Exporters Suffer-

Just as imports become inexpensive at home, locally produced products become comparatively costlier abroad. Some have stated that expensive exports can lead to American job loss.

• US firms Conducting Business overseas Are Hurt-

Companies based in the U.S which conduct a big portion of their business globally will suffer as the income they get from foreign sales will fall in value on their BS. Investors in such firms are also likely to see an adverse impact.

ans 3=option b