Between 1995 and 1997 the effective exchange rate of the pound sterling :: Economics

surrounded by 1995 and 1997 the sound exchange rate of the tucker sterling appreciated by 20%. What factors might explain this increase in the rate of the quid?5. Between 1995 and 1997 the effective exchange rate of the poundsterling appreciated by 20%.(a) What factors might explain this increase in the value of the pound?There are several reasons that contribute to the appreciation of thepound.INTEREST gradeInterest rates have a large effect in a world where financial capitalcan move freely between countries.If for example the UK engross rates are proud relation back to elsewherethis attracts inf downhearteds of money into the UK seeking to maneuver advantageof the high interest rates. This interest differential boosts thedemand for the up-to-dateness and can cause its value to rise.ECONOMIC GROWTHCountries experiencing a rapid scotch growth much find that theirexchange rate is streng becauseing. Traders in the currency markets maytake the rapid growth to be a sign of general economic growth andmark up the value of the currency as a result.Also economies with strong export-led growth may see theircurrencys rise in value. Japan is a good example of this in recentyears. The Euro was decrepit during the first six months of its existencein part because the financial markets were disordered about the slowgrowth of the European economy and the persistently high level ofunemployment.INFLATIONAs with the UK, as there are low levels of ostentatiousness, this has meantthat our goods have become cheaper and demand for our exports hasincreased. Foreigners have bought pounds to finance our goods. Thishas meant that the value of the pound has increased. However this islike a cobweb with many downsides such as a rise in inflation asexports are a component of aggregate demand.In the long run, those countries with higher than average inflationsee their exchange rate fall. When inflation is high, a countrybecomes less(prenominal) competitive in international m arkets causing a fall inexports (a demand for a currency) and a rise in imports (a supply ofcurrency overseas). A fall in the exchange rate may be needed torestore a countrys competitiveness in overseas markets.THE agreement OF PAYMENTSWhen we operate at a current account surplus i.e. when ourexportsImports, then foreigners get out need pounds in order to financethe exports we sell them. They will steal pounds. This will result inthe value of the pound to increase.merchandising exports represents a demand for the domestic currency fromforeign importers. When US consumers buy British Whisky they supplydollars and this is eventually translated into a demand for pounds.