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

Between 1995 and 1997 the effective central rate of the overcome superior appreciated by 20%. What factors might explain this annex in the night club of the pound?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 provide to the appreciation of thepound.INTEREST RATESInterest grade waste a large effect in a world where financial bullycan move freely between countries.If for practice session the UK interest rates are high relative to elsewherethis attracts inflows of money into the UK seeking to resign advantageof the high interest rates. This interest differential boosts thedemand for the bullion and can cause its value to dress up.ECONOMIC GROWTHCountries experiencing a rapid economic growth often find that theirexchange rate is strengthening. Traders in the cash markets whitethorntake the rapid growth to be a sign of gener al 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 weak during the first six months of its existencein part because the financial markets were worried about the slowgrowth of the European economy and the persistently high level ofunemployment.INFLATIONAs with the UK, as there are low levels of flash, 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 pretentiousness asexports are a component of aggregate demand.In the pertinacious run, those countries with higher than average inflationsee their exchange rate fall. When inflation is high, a countrybecomes less competitive in international markets do a fall ine xports (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 scrap in overseas markets.THE BALANCE OF PAYMENTSWhen we operate at a menstruation account surplus i.e. when ourexportsImports, then foreigners will need pounds in order to financethe exports we sell them. They will buy pounds. This will result inthe value of the pound to increase.Selling exports represents a demand for the domestic currency fromforeign importers. When US consumers buy British Whisky they supplydollars and this is at last translated into a demand for pounds.