Consequences of Exchange Rate Changes
Exchange Rates
AO3·AO4·Diagram required
Syllabus requirement
Effect of currency appreciation or depreciation on inflation, unemployment, economic growth, trade balance, and living standards.
Assessment objectives
AO3 Synthesis and EvaluationAO4 Use of Appropriate Skills
Required diagram: AD/AS diagram showing the impact of exchange rate appreciation or depreciation on the economy (e.g. inflation, output).
Summary
This topic explains how changes in a country's exchange rate — appreciation or depreciation — affect macroeconomic indicators through their impact on export and import prices, net exports and aggregate demand. It shows how exchange rate movements can cause demand-pull or cost-push inflation, influence real GDP and unemployment, alter the current account balance, and change living standards. Understanding these links is necessary to analyse and evaluate the broader economic consequences of currency movements using AD–AS diagrams.