Q31 April 2014 (d) and (e)

[rlsrachaellouisesmith]

(d)
Why does speculation that the exchange rate will fall only result in an increase in supply. I would have expected that there would also be a decrease in demand as speculators sell what currency they do have and other speculators do not demand the currency as they had previously? Would we have got the marks for saying demand decreased as well?

(e)
Income in UK falls relative to incomes abroad.
This will result in a fall in consumption, imports decrease, supply of the currency on fx market decreases.
But additionally domestic consumption also falls, so prices may fall and so exports become more competitive and so exports increase, therefore demand for currency increases as well.
Would we have been marked down for saying demand increases as well?

Thank you

 

[Richie Holway]

Hi Rachel,

For d), I agree that speculation that the exchange rate will fall will also deter potential investors from purchasing sterling, hence reducing demand too.

For e), your point regarding consumption and prices falling, and hence exports increasing, is a much longer term possible consequence. The question was really testing the shorter term (almost immediate) effects of each scenario. You would, however, had scored the credit anyway, if you had of stated S1 (fall in supply) and D3 (rise in demand), as this question actually required no explanation for the movements of the curves given it asked students to only state the relevant demand and supply lines. S1 & D3 was one of the possible correct answers.

Thanks,
Richie

 

[rlsrachaellouisesmith]

Thank you, that makes sense.