Question

(___________) is considered a sign of economic recovery and stabilization but makes the currency of a country more expensive compared to other currencies, having a direct inverse effect on exports and imports.

Answer 1

Answer:

A strong exchange rate

Explanation:

strong exchange rate is often considered to be a sign of economic strength. It can become a symbol of national pride. Often politicians are worried if they see a ‘weakening’ in the exchange rate. They will point to a strong exchange rate as a symbol of economic success.  In the long-term, a strong (appreciating) exchange rate tends to occur in countries with low inflation, improving competitiveness and a strong economic performance. For example, Japan and Germany saw a sustained rise in their exchange rates in the post-war period because they had a good economic performance. Often a devaluation (fall in the value of the exchange rate) can cause a boost to economic growth. A lower exchange rate makes exports cheaper and increases demand for UK goods. This can provide additional demand which increases economic growth. A devaluation may cause inflation:

• Imports more expensive

• Higher domestic demand

But, if demand for exports and imports is relatively elastic and there is some spare capacity in the economy, then there should be an increase in economic growth. Exchange rates are determined by factors, such as interest rates, confidence, the current account on balance of payments, economic growth and relative inflation rates. In general terms, a weaker currency will stimulate exports and make imports more expensive, thereby decreasing a nation’s trade deficit (or increasing surplus) over time.