How Exchange Rates Are Determined
What an exchange rate is, how the demand for and supply of a currency set it, and how a rise or a fall changes the price of imports and exports for consumers and producers.
Use it, the way the marks are given
Free interactive practice at using the material, which is what the marks are for.
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The price of one money in another
When people trade or travel between countries they must swap one currency for another, and there is a price for doing so. That price is the exchange rate. Like any price it is set by demand and supply, and when it moves it changes the cost of imports and exports. This module shows how the rate is set and what its changes do.
Exchange words to know
Learn these before you trace the effects.
Strong against weak
A rate change pulls imports and exports in opposite directions.
Decide the direction, then trace it
In the exam, first decide whether the rate has risen or fallen. A rise means a stronger pound, a fall means a weaker one. Then trace both sides: a stronger pound makes imports cheaper and exports dearer, a weaker one does the reverse. Finally say who gains, such as shoppers buying imports or firms selling exports.
Match the term
- exchange rate
- a strong pound
- a weak pound
- demand and supply
- the price of one currency in another
- the pound buys more abroad
- the pound buys less abroad
- what sets the rate
Match the effect
- a strong pound and imports
- a strong pound and exports
- a weak pound and imports
- a weak pound and exports
- imports become cheaper
- exports become dearer
- imports become dearer
- exports become cheaper
What sets the rate?
What mainly determines the exchange rate of a currency?
- The demand for and supply of the currency.
- It is a fixed number that never changes.
- The weight of the coins.
- Pure random chance.
A stronger pound
Select the TWO effects of the pound getting stronger.
- Imports become cheaper for UK shoppers
- UK exports become dearer for foreign buyers
- Imports become dearer
- Exports become cheaper
Convert the money
The exchange rate is 1 pound to 2 units of another currency. Multiply to find how many units you get for 5 pounds. What is the answer?
Order the reasoning
Put the steps of working out an exchange-rate effect in order, earliest first.
- Note the rate has risen or fallen
- Decide if the pound is stronger or weaker
- Trace what happens to imports and exports
- Say who gains or loses
Complete the summary
The exchange rate is the price of one currency in terms of another, set by _____ and supply. When the pound is _____, imports become cheaper but exports become dearer. When the pound is weak, imports become _____. This matters to shoppers buying imports and to firms selling _____.
Spot the weak-pound effects
Tap the TWO things that happen when the pound gets weaker.
- imports become dearer
- exports become cheaper
- imports become cheaper
- exports become dearer
Trace the effect
Read each case and choose the best answer.
- The pound rises so it now buys more of other currencies. For a UK shopper buying imported goods, what happens?
- The pound falls so it buys less abroad. For a UK firm selling exports, what happens?
- More people around the world want to buy the pound. What is likely to happen to its exchange rate?
Explain exchange rates
Explain what determines an exchange rate and how a change in it affects imports and exports.
- Say what an exchange rate is and what sets it
- Explain what a stronger pound does to imports and exports
- Explain what a weaker pound does to imports and exports