Exchange rates MCQ 1

Study Notes

Implications of a Weakening Sterling on the Irish Economy

A weakening sterling leads to a decline in eurozone exports to the UK, as they become more expensive, resulting in reduced demand.
Conversely, UK imports to the eurozone increase, as goods from the UK become cheaper, leading to higher demand.

Impact on Tourism

The weakening sterling makes it more expensive for British tourists to visit Ireland and other European countries, resulting in a decrease in British tourists visiting Ireland.
In contrast, it becomes cheaper for Irish and other eurozone tourists to visit the UK, leading to an increase in tourism to the UK.

Cross-Border Shopping

A weakening sterling creates a financial incentive for those living in the South of Ireland to travel to the North of Ireland to purchase items.

Foreign Exchange and Exchange Rates

The exchange rate is the price of one currency in terms of another.
In early 2019, the exchange rate for an Irish tourist traveling to the UK was €1.00 = 90 pence.
In early 2019, the exchange rate for a British tourist traveling to the eurozone was 1 British pound = €1.11.

Factors Affecting Exchange Rates

Currency speculation contributes to changes in exchange rates as speculators buy and sell currencies to make a profit, influencing demand and supply.

Interest Rates and Exchange Rates

Higher interest rates in a country, such as the US, compared to another, like the eurozone, attract money flows from the latter to the former, impacting exchange rates.
Hot Money: Capital that moves between financial institutions to take advantage of higher interest rates.

Quantitative Easing and Exchange Rates

Quantitative easing by a central bank, such as the ECB, increases the money supply, making the currency (e.g., EUR) cheaper and affecting exchange rates.

Description

This quiz assesses the effects of a weakening British sterling on the Irish economy, including its influence on exports, imports, and tourism. It covers the consequences of a devalued sterling on trade and travel between Ireland and the UK.