AQA A2 Economics Unit 4 - June 20th

How would you describe the difference between a fixed and floating exchange rate?

a floating exchange rate is one that is left to be determined by the free market mechanism.

A fixed exchange rate is one that is fixed against another currency, and the government will influence there currency to make sure it stays fixed. Not 100% sure how they manage to influence the exchange rate though. I'd guess through interest rates and changes in the money supply

Guys, for the essay, what features do we mention to get the "application" marks in the mark scheme. I understand that analysis is talking about effects, etc., evaluation is general bull but unsure where application comes in.

Thanks.

They influence it by buying and selling reserves of their own currency and foreign currencies, to keep adjust supply and demand accordingly. If they buy other currencies using their own currency, it boosts supply of their own currency, meaning price will fall. If the buy their own currency with reserves they have of dollars for example, then demand for their own currency will rise and so price will rise. Hope that makes sense?? I think they also do it using gold reserves, but yeah...!! currencies is hard enough!!

Guys, for the essay, what features do we mention to get the "application" marks in the mark scheme. I understand that analysis is talking about effects, etc., evaluation is general bull but unsure where application comes in.

Thanks.

Can anyone tell me why an increase in government borrowing leads to an increase in interest rates? Is it because it's a component of AD and could lead to demand pull inflation so to compensate the interest raises to reduce consumption?

Where did you get this from? The government would only increase borrowing in order to finance more govt spending (increasing deficit/reducing surplus) in order to reflate RNO, the govt would not spend with the aim of increasing inflation/the price level.

Interest rates aren't affected by fiscal policy directly, instead the interest rates are controlled by monetary policy, so why would the government increase its fiscal deficit (against the aim of 2% inf) to then counteract this by the BoE using monetary policy to control C+I+(X-M)?

Can anyone tell me why an increase in government borrowing leads to an increase in interest rates? Is it because it's a component of AD and could lead to demand pull inflation so to compensate the interest raises to reduce consumption?

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If the government borrows money it has to issue IOUs (bonds). If it borrows more money it has to issue more IOUs. This increases the supply of IOUs. This decreases the price people are willing to pay for said IOUs as there is more supply. Thus the interest rate (the price) people pay on said IOUs rises.

This is showing how monetary and fiscal policy is interlinked.

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Can someone explain determinants of exchange rate?

Can someone explain determinants of exchange rate?

I don't think you need to know it in this much depth (althought it's probably good !)
You could just say that an increase in government borrowing increases the demand for loanable funds (think about it, they need to finance their spending somehow!). Draw a demand curve for loanable funds shifting out, with rate of interest on the y axis. So this increases interest rates, causing investment levels to decline. It's called the crowding out effect.

Hope this helps

Ah I see how it was meant, now.

Yes to fund the deficit the government borrows by selling bonds or gilts, these gilts are sold to financial institutions such as pension funds and insurance companies etc. To persuade these institutions to buy these gilts and ultimately fund the deficit, the government (MPC) will have to raise the interest rates offered on these gilts to make them attractive.

However these higher interest rates discourage investment in capital by private sector firms and combined with the inc in public spending can lead to crowding out

My teacher said that Globalisation is VERY likely to come up since in hasn't in a few years and he said to revise exchange rates thoroughly too.

Oh and he's almost always right...