Super199
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I need some help with the following question, we were set it as homework for the first lesson back. But I don't really understand how exchange rates and inflation rates are linked - that is what I need explaining.

'Discuss whether a rise in a country's exchange rate will always reduce its inflation rate' (18 marks).

Also this is my second 18 marker I've done, anyone know how to structure the essay out?
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Gladiatorsword
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(Original post by Super199)
I need some help with the following question, we were set it as homework for the first lesson back. But I don't really understand how exchange rates and inflation rates are linked - that is what I need explaining.

'Discuss whether a rise in a country's exchange rate will always reduce its inflation rate' (18 marks).

Also this is my second 18 marker I've done, anyone know how to structure the essay out?
If this is ocr economics as I can help with structure

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lilixxx1000
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If the exchange rate appreciates, imports will appear cheaper and exports more expensive (SPICED - Strong Pound, Imports Cheap, Exports Dear). Therefore in the long run imports should rise and exports should fall. As few goods will be bought from that country (say the UK), demand-pull inflation should fall.
However, in the short run contracts are fixed, so the same amount of imports/exports should be bought. The cost of imports overall will fall, and the cost of exports will rise. More money is being spent in the UK (due to exports) so there may be inflation.
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Super199
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(Original post by Gladiatorsword)
If this is ocr economics as I can help with structure

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It is
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Super199
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(Original post by lilixxx1000)
If the exchange rate appreciates, imports will appear cheaper and exports more expensive (SPICED - Strong Pound, Imports Cheap, Exports Dear). Therefore in the long run imports should rise and exports should fall. As few goods will be bought from that country (say the UK), demand-pull inflation should fall.
However, in the short run contracts are fixed, so the same amount of imports/exports should be bought. The cost of imports overall will fall, and the cost of exports will rise. More money is being spent in the UK (due to exports) so there may be inflation.
I somewhat get it now. I will give it a go. Cheers
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Gladiatorsword
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(Original post by Super199)
I need some help with the following question, we were set it as homework for the first lesson back. But I don't really understand how exchange rates and inflation rates are linked - that is what I need explaining.

'Discuss whether a rise in a country's exchange rate will always reduce its inflation rate' (18 marks).

Also this is my second 18 marker I've done, anyone know how to structure the essay out?
Paragraph 1 - define all key terms. So define exchange rate and inflation rate
Paragraph 2 -draw AD graph to showw how Ad shifts left and explain this
Paragraph 3 - give alternative - why this may not happen
Paragraph 4 - conclusion

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Super199
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Right I need some help on this again. I honestly don't know what to write for 18 marks. I have so far done definitions of both which is probably 2 marks.
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Super199
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(Original post by Gladiatorsword)
xx
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(Original post by lilixxx1000)
..
So I was looking at the mark scheme for this question and there is something I don't understand. 'The multiplier effect of lower net exports may be analysed'. What does this mean? Can someone explain how the multiplier effect works in this case?
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lilixxx1000
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(Original post by Super199)
So I was looking at the mark scheme for this question and there is something I don't understand. 'The multiplier effect of lower net exports may be analysed'. What does this mean? Can someone explain how the multiplier effect works in this case?
Exports are an injection, so if net exports increase, the injection into the economy is greater so there will be a larger multiplier effect.
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Super199
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(Original post by lilixxx1000)
Exports are an injection, so if net exports increase, the injection into the economy is greater so there will be a larger multiplier effect.
Got it! It also said that if the exchange rate increases it will reduce prices in the "shopping basket of goods" which measures inflation. I somewhat get that but what impact does that have on inflation?
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lilixxx1000
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(Original post by Super199)
Got it! It also said that if the exchange rate increases it will reduce prices in the "shopping basket of goods" which measures inflation. I somewhat get that but what impact does that have on inflation?
If the prices go down then inflation will be lower.
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Super199
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(Original post by lilixxx1000)
If the prices go down then inflation will be lower.
Wouldn't it increase demand-pull inflation though?
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lilixxx1000
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(Original post by Super199)
Wouldn't it increase demand-pull inflation though?
no....the basket of goods is just the way to measure inflation. so if the prices in the basket are lower, it means inflation is lower. could be demand-pull or cost push.
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Yousf
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(Original post by lilixxx1000)
If the exchange rate appreciates, imports will appear cheaper and exports more expensive (SPICED - Strong Pound, Imports Cheap, Exports Dear). Therefore in the long run imports should rise and exports should fall. As few goods will be bought from that country (say the UK), demand-pull inflation should fall.
However, in the short run contracts are fixed, so the same amount of imports/exports should be bought. The cost of imports overall will fall, and the cost of exports will rise. More money is being spent in the UK (due to exports) so there may be inflation.
nice, so how would you expand on that to get 18marks
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Super199
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(Original post by lilixxx1000)
no....the basket of goods is just the way to measure inflation. so if the prices in the basket are lower, it means inflation is lower. could be demand-pull or cost push.
Care to check what I have written, any feed back is appreciated. It isn't fully finished yet.
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