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

What might cause an appreciation of a floating exchange target? Discuss whether an appreciation of a countrys exchange rate pass on always be beneficial to that country.a) what might cause an appreciation of a floating exchange rate?b) Discuss whether an appreciation of a countrys exchange rate entrust 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 onecurrency in terms of another is determined by the forces of affix and imply direct 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 counterpoise price of pounds in terms ofU.S dollars.Short and long-term movements in the exchange rate, like any price,are caused by chan ges in market demand and supply conditions. Theappreciation of a countrys currency will occur due to either anincrease in demand or give ear 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 anincrease 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 but 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 causing the currency to appreciate.Foreign long te... ...viously cause a serious attain 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 lea ding to anoutward shift in Short Run Aggregate tote up shown in diagram - thishas a direct impact on the Retail Price IndexTougher for domestic companies to compete with cheaper imports - lowerprofit margins as businesses energise to adjust (less pricing power in their markets)Slower growth of exports (leading to a slowdown in aggregate demand -possibly the emergence of a invalidating output gap where actual GDP A bigger trade deficit represents a net outflow of demand from thecircular flow of income and outlay - leading to less demand-pull inflation.