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Running head: STERLING POUND 1

Sterling Pound

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STERLING POUND 2

Excerpt B

Reason as to why a rise in the pound sterling exchange rate is likely to affect the rate of inflation

in the UK.

A rise in the pound sterling exchange rate has a likelihood to influence the inflation rate

in the country positively. An increase in exchange rate implies that the sterling pound gains

strength and value in the European market thus become more competitive. It, therefore, improves

the demand for UK exports leading to a surplus balance of trade. The economy of the country

will enjoy exporting its commodities in the exchange market, thus reducing the amount of

sterling pound in the domestic market. It diminishes circulation of sterling pound within the local

economy due to higher demand in the European market. Consequently reduces the rate of

inflation in the country. Appreciation of the sterling pound value in the exchange markets leads

to a reduction of the imports hence reduces inflation. Furthermore, a rise in the pound sterling

exchange rate facilitates higher demand on import products. Domestic consumers find it

relatively cheap to purchase imports thus reduces overcrowding for domestic commodities. A

shift to import commodities for consumption reduces aggregate demand thus reduces demand

pull inflation. Also, the need to offer incentives for manufactures and producers increases, this

improves the level of exportation. A situation that facilitates cost cutting hence in the long run

diminishes inflation in the country.

Extract C

Likely Impact of the fall in World Commodity Prices on the Performance of the UK

Economy.

STERLING POUND 3

Fall in the prices of oil has the following impact to the economy; cheap transport cost for

both goods and people, lower costs for heating, increased profit margins for businesses and more

purchasing power for citizens. However, it negatively pushes the consumer price levels down;

this leads to long lower wage growth. It also decreases investment in the oil sector. The falling

behavior of oil prices favors oil importers but negatively affects economies of oil producers. It

helps in reducing living costs in the country thus a reduction in inflation rates. Consequently, it

offers consumers a more discretionary income that reciprocates to a higher spending on both

goods and services and increased real GDP.

PL SRAS 1 SRAS 2

Y1 Y2 Real GDP

The diagram above demonstrates macroeconomic impact of a fall in oil prices. In the

diagram, a fall in oil prices that triggers a fall in all firms’ costs shifts the aggregate short-run

supply curve (SRAS) to right leading to a reduction of inflation rate and increased real GDP.

Importers of oil benefits from the scenario due to a drop in the value of oil imports. The

current account deficit of oil importers reduces but exporters suffer due to a lower trade surplus.

STERLING POUND 4

However, considering the trade component of UK for being a slightly importer and producer of

oil, a fall in oil prices will slightly impact its current account.

The diagram below demonstrates the behavior of economy after a long run period. The

real national output will increase with an increase in price levels of oil prices, however, the

aggregate demand decreases.

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