Explain why the value of a currency may fall in a floating exchange rate system. (15)
Assess the view that a depreciation of the pound against other currencies is likely to improve the
UK’s macroeconomic performance. (25)
Intro
Depreciation of the pound makes the pound more attractive to foreign investors as the
pound has a lower value
Affects inflation, unemployment, balance of payments and economic growth
Pros – economic growth, improve deficit, lower unemployment
Cons – higher inflation
Inflation
Higher inflation
Decreased imports = increased exports
Domestic goods cheaper
Encourages spending
Creates inflationary pressures on domestically predicted goods
Decreased purchasing power – lower standard of living
Unemployment
Lowers unemployment
Increase in AD for domestic goods = increase in profits = increase supply = more labour = less
unemployment
Creates jobs in export sector – manufacturing
Balance of payments
Assess the view that a depreciation of the pound against other currencies is likely to improve the
UK’s macroeconomic performance. (25)
Intro
Depreciation of the pound makes the pound more attractive to foreign investors as the
pound has a lower value
Affects inflation, unemployment, balance of payments and economic growth
Pros – economic growth, improve deficit, lower unemployment
Cons – higher inflation
Inflation
Higher inflation
Decreased imports = increased exports
Domestic goods cheaper
Encourages spending
Creates inflationary pressures on domestically predicted goods
Decreased purchasing power – lower standard of living
Unemployment
Lowers unemployment
Increase in AD for domestic goods = increase in profits = increase supply = more labour = less
unemployment
Creates jobs in export sector – manufacturing
Balance of payments
