"What are the causes of an appreciation (outward shift of demand) for a floating exchange rate?"
- Increase in incomes abroad: Increased incomes abroad increases their MPM. This increases demand for UK exports and thus demadn for the pound shifts. 2. A relative rise in UK interest rates: As UK IR increase and are relatively higher, investors looking for the best interst ratefor their money are likely to go to a UK bank, attracting hot money inflows into the UK economy, increasing the demand for the pound. 3. An increase in FDI in Britain: As more FDI enters Britain there will be higher demand for the poudn as capital (machinery, vehicles, factories, buildings) will need to be bought by foreign businesses in pounds to operate in the UK. Furthermore, staff will need to be paid in pounds forcing an exchange of foreign currency into pounds. (increasing demand). 4. Speculators anticipating a rise in the pound: If specualtors anticipate a rise in the pound, they buy more pounds, increasing demand for it and sell it when it rises. 5. Improvements in international competitiveness (labour productivity, investment and lower relative inflation): If exports become more price and non-price competitive, the demand for them will increase. As UK goods need to be bought in pounds, demand for the pound rises. 6. High investor confidence in the economy: If there is high confidence in the long term state of the economy with little volatility, investors will see the UK as a safe place ot store/invest their money for a good rate of return. This will increase demand for the pound as more UK assets (both financial and non-financial) are bought up leading to an outward shift in demand.
