The article below is an economic briefing from The Times, published to support the Bank of England’s Target 2.0 competition. It considers the importance of the exchange rate in determining the demand for imports and exports and therefore the impact that exchange rate changes are likely to have on aggregate demand.
Economic briefing: exchange rate is crucial to export demand and influences inflation Times Online (20/10/08)
|1.||Explain how import prices and export prices change in response to a fall in the value of sterling.|
|2.||Define the terms (a) price elasticity of demand for imports and (b) price elasticity of demand for exports.|
|3.||With reference to your answers to questions 1 and 2, assess how the balance of payments will change in response to a fall in the value of sterling. What is the relevance of the Marshall-Lerner condition to these changes?|