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    Hi guys, I was just reading over my notes and was just unsure on a few things.

    1) How does interest rates influence exchange rates ?
    2) How is capital mobility linked in with globalisation ?
    3) What is the transmission mechanism ?



    Hope you guys can help. Thanks in advance
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    1) Interest rates are the rewards for saving and the cost of borrowing. So say interest rates were high in the UK, there would be higher rewards for saving money in UK banks. For this reason, there would be a greater incentive for people for example foreign investors to move their money to British banks. However, they can only use pounds to do this. Therefore, they will change their domestic currency to the £. This will increase demand for the £ and lead to an appreciation in the £. So this is how interest rates ,in theory have an influence on exchange rates.

    Not sure about question 2 and 3
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    (Original post by Erd)
    1) Interest rates are the rewards for saving and the cost of borrowing. So say interest rates were high in the UK, there would be higher rewards for saving money in UK banks. For this reason, there would be a greater incentive for people for example foreign investors to move their money to British banks. However, they can only use pounds to do this. Therefore, they will change their domestic currency to the £. This will increase demand for the £ and lead to an appreciation in the £. So this is how interest rates ,in theory have an influence on exchange rates.

    Not sure about question 2 and 3
    Ahh thanks. Do you know how inflation affects the Exchange rate as well ??
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    In an economy there may be high inflation, so to reduce inflation the government might increase interest rates to reduce inflation. And what I explain before about interest rates will happen. Therefore, inflation indirectly will affect exchange rates through interest rates.
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    Ahh I see thank you
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    It's ok!
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    2. So capital mobility is related to how easy it is to move your assets from one country to another. Globalisation has removed many capital controls - this means it's much easier to move money from one country to another. So reduced capital controls is more likely to encourage FDI.

    3. The transmission mechanism is all about how a change in the base interest rate of a central bank, like the Bank of England, affects the inflation rate. It goes through several stages - all we really need to know is that the mechanism means it can take a long time (about two years) for a change in the interest rate to stimulate demand or control inflation. If you Google image it, you can find a diagram which helps explain it.
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    Ahh thanks
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    Guys how did you find the economics unit 3 paper? I chose the second question from section B... however im veryy unsure of my answer to the 14 mark question!
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    (Original post by RMunro)
    2. So capital mobility is related to how easy it is to move your assets from one country to another. Globalisation has removed many capital controls - this means it's much easier to move money from one country to another. So reduced capital controls is more likely to encourage FDI.
    Just adding to this, capital mobility can also influence how well a country adapts to changes in comparative advantage. If physical capital (machinery, etc) and human capital (labour) is flexible, then a country can specialise in several other industries should they ever lose their comparative advantage to a foreign competitor
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    (Original post by silentriver)
    Guys how did you find the economics unit 3 paper? I chose the second question from section B... however im veryy unsure of my answer to the 14 mark question!
    I did the 2nd one too (gas + electricity) but there was no 14 marker? Do you mean the 12 or 16 marker?
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    (Original post by Sienne)
    I did the 2nd one too (gas + electricity) but there was no 14 marker? Do you mean the 12 or 16 marker?
    I meant the 12 mark question.. How did you answer that? What i got from the question was that they wanted points on whether there is a POSSIBLITY of tacit collusion or not. however im not sure of my answer!
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    (Original post by silentriver)
    I meant the 12 mark question.. How did you answer that? What i got from the question was that they wanted points on whether there is a POSSIBLITY of tacit collusion or not. however im not sure of my answer!
    Hmm...you might have a point, though I answered it differently...I think they wanted to know why the regulators would find it hard to get evidence/catch the energy companies when they investigated tacit collusion. My 2 points were:

    - Hundreds of tariffs, lack of price transparency, so it's hard to see whether collusion is happening or not
    - Tacit collusion is hard to get evidence for because there are no agreements made

    That's how I interpreted as anyway, they did make the questions quite tricky. Sorry I hope I haven't worried you lol
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    (Original post by Sienne)
    Hmm...you might have a point, though I answered it differently...I think they wanted to know why the regulators would find it hard to get evidence/catch the energy companies when they investigated tacit collusion. My 2 points were:

    - Hundreds of tariffs, lack of price transparency, so it's hard to see whether collusion is happening or not
    - Tacit collusion is hard to get evidence for because there are no agreements made

    That's how I interpreted as anyway, they did make the questions quite tricky. Sorry I hope I haven't worried you lol
    haha. Nope! Thanks though! i think there were several ways to answer that question.. One of my point was: even though prices have been cut at the same time, and by the same amount, it is not a sufficient evidence for regulators, as there maybe be factors such as increase in demand ( external shocks) that are affecting the industry. lets just hope all goes well
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    I also have a question about this unit but more about exam technique. How would you strucure your answers for each question (5 mark, 8 mark, 12, 15, 20 and 30) in terms of how many arguments/evaluations you provide?
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    1) How does interest rates influence exchange rates ?
    High interests means more incentive to invest so more FDI so more people need to exchange foreign currency for pounds (because they want to invest in UK) so pound rises in value
    2) How is capital mobility linked in with globalisation ?
    Easier to move capital from one country to another is greater capital mobility so economies are more "connected" because you can move capital more easily
    3) What is the transmission mechanism ?
    The fact that the interest rate set by the central bank takes a long time to affect inflation or demand
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    How can a country devalue its currency? and what other measures can countries do to become more competitive? Thanks
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    (Original post by murtz14)
    How can a country devalue its currency? and what other measures can countries do to become more competitive? Thanks
    If a country lowers its interest rates, borrowing becomes cheaper and so the supply of money increases, causing the value to fall. Similarly, QE can have the effect of lowering the value of a currency because it's a huge injection into the economy, increasing supply and therefore causing a depreciation. Alternatively, countries such as China do not have a free floating exchange rate and so fix the value of their currency, preventing it from increasing,

    To become more competitive a country can:

    1. Make it easier for firms to hire/fire workers
    2. Increase spending on health and education, improving productivity and the level of human capital
    3. Depreciate its the exchange rate, making goods more attractive (however imports cost more)
    4. Decrease health and safety regulations
    5. Then just loads of supply side policies such as improvement in infrastructure, increasing mobility of labour, privatisation, deregulation ect ect
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    Thanks so much! Any ideas what you think the exam will be on?
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    (Original post by murtz14)
    Thanks so much! Any ideas what you think the exam will be on?
    Well there has to be a poverty/development question
    I think international competitveness might come up as a 20/30 marker in section A
    No idea for section B
 
 
 
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