What might cause an appreciation of a floating exchange rate? Essay

What might cause an appreciation of a drifting supersede roam? Discuss whether an appreciation of a countrys exchange rate will always be beneficial to that country.a) what might cause an appreciation of a undirected exchange rate?b) Discuss whether an appreciation of a countrys exchange rate will always be beneficial to that country. (15)A free, fluctuating or floating exchange rate means the existence of afree or competitive foreign exchange market where the price of one silver in terms of another is determined by the forces of supply anddemand operating without any official interference.======================================================================A rise in the price of a currency in terms of another currency iscalled an appreciation.=================================================================The following figure shows the equilibrium price of pounds in terms ofU.S dollars.Short and long-term movements in the exchange rate, same(p) any price,are caused by chang es in market demand and supply conditions. Theappreciation of a countrys currency will occur due to either an improver in demand or fall in supply of that currency.The demand for sterling (pounds) in the FOREX markets comes from manysourcesUK goods and services are exported overseas - . if there is an adjoin in exports this will create an inflow of currency into to theUK which needs to be turned into sterling this will increase demandfor the sterling . When US consumers except British Whisky they supplydollars and this is eventually translated into a demand for pounds.This will cause an outward shift in the demand curve for sterling,thus cause the currency to appreciate.Foreign long te... ...viously cause a serious fall in livingstandards.Exchange rate and inflationAn appreciation of the exchange rate helps to control cost and priceinflation in the economy.A fall in import prices means that it is cheaper to import rawmaterials, components, finished manufactured products starring (p) to anoutward shift in Short Run Aggregate Supply shown in diagram - thishas a direct impact on the Retail charge IndexTougher for domestic companies to compete with cheaper imports - lowerprofit margins as businesses have to adjust (less pricing power in their markets)Slower growth of exports (leading to a deceleration in aggregate demand -possibly the emergence of a negative output gap where actual GDP A bigger trade famine represents a net outflow of demand from thecircular flow of income and spending - leading to less demand-pull inflation.