E Comprehension. Now read the text again and answer these questions in your own words in the space provided.

Now read the text again and answer these questions in your own words in the space provided.

How marry countries currently use the euro?

What must you do if you want to buy something from another country?

How is the exchange rate between currencies set?

W'hat two things can make the demand for a currency increase?

Hut what makes the exchange rate changeV 'Го understand this, just think ol the exchange rate as the price of the currency. Just like any other commodity, the price of a currency is decided by supply and demand in the market. The rate set will 1ч.' the equilibrium point where supply and demand meet.

What happens to exports when a currency gets stronger?

Before you listen

Discuss the following with your partner.

A change in the exchange rate will make a currency stronger or weaker against other currencies. How will this affect the rest of the economy? Try to put the effects under the correct heading.

economy grows

economy shrinks

-> exports fall

exports grow

imports are cheaper

rate of inflation falls

Notes:

rate of inflation increases

Effects of a weak currency

f

F Listening H))) Now listen and check your answers.

workers demand higher wages

Effects of a strong currency

G Speaking

Discuss these questions with your partner.

Do you think we could have one currency for the whole world? Why Why not?

What 'would it be like to live in. a closed economy?

Task

Give a two-minute talk about closed and open economies. First, read text 1 again and the listening summary on page 94 and make notes below on the following.

what is.in open economy and what ш a closed economy

closed and open economies in history

the advantages and the disadvantages of each type of economy

Notes:

Answer this essay question:'What is the exchange rate and how does it affect the economy?'

Essay about exchange rates

First, read text 2 again and the notes from the listening exercise on page 96 and make notes. Use tins essay plan to help you. and include those words and phrases:

Organising ideas: first of all, next, furthermore, in addition, in a number of ways

Describing cause and effect: as a result, consequently, this leads to. due to

PARAGRAPH 1

What are currencies?

How do countries trade with one another?

PARAGRAPH 2

What is the exchange rate? How is the exchange rate set?

PARAGRAPH 3

What is the balance of payments?

How does the exchange rate affect imports

and expons?

PARAGRAPH 4

What other effects does a change in the exchange rate have or the economy?

Write 200-250 words

Pronunciation guide

Insurance т^ог.иь Phoenicians i.m:: Deficit ik'liMt Autarchy nek Mediterranean пкчкшенп.т Euro 'j. ЛЛ,. Sterling >1:i.i: Import in nupvt

HirmilliP Б«||«to |C0»0M»(> Ualt II 97

Before you read

Discuss the following with your partner.

Do you remember how the exchange rate affects the rest of the economy? Toll your partner what you remember about these things:

-* the exchange rate and interest rates

the exchange rate and the balance of trade

A Vocabulary

98 y,-' «r, (.. й _v, i,.. • *v

Match the words and phrases with the definitions.

exchange unchanging mechanism

variations different types of the same

thing

floating С stay

fixed D system for buying money

exchange rate

> extreme E supplies

reserves ■ free

constant ■ stable currency price fixed by

the government

remain most absolute

peg keep iwo currencies at same level

fi^ Reading 1

Exchange rate mechanisms

If you're planning a holiday abroad, one of the things you won t forget to do is to buy.some of the local currency. You'll probably visit a few banks to see which one offers the best exchange rate. Hut holiday makers aren't the only om s who are interested ill exchange rates, (iovernments are watching them all the time This is Keausc a change in the exchange rate of the national currency ean affect the whole economy. Interest rates, balance of payments and economic growth will all feel the effects of a change ill exchange rates.

Hut can governments do anything about exchange rates apart from watch them? Well, yes. they can. They ean use something called cxchung< rate mechanisms. These are ways to control the value of the national currency against other currencies. There are different tyjx's of mechanism, but they are all variations on two extra>n mechanisms freeJliHttimi exchange rate and/»//v Д\чч/ exchange rate.

When a currency's exchange rate is free floating, the government doesn't try to control the/>>/<•< of the currency Kememlvr that, just like any other price, the exchange rate changes when demand and supply change. When governments allow the с ur re i icy to be tree Лол ting, they are saying, 'let the market decide the price of our currency'. In contrast, a fully fixed exchange rate is strictly controlled by the government. For example, the I К government might decide that they want sterling to remain at a constant exchange rate against the euro of V 1 €l.50. This is sometimes called pcggini;. In this example, sterling is pegged against the euro at that rate, although in actual fact sterling is a free floating currency.

However, there is a problem. If demand on (lie money market rises for sterling, then the exchange rate will rise also. How can the government maintain the exchange rate they want V The only way is to change the level of supply of sterling on the money market. The government can increase the amount of sterling on the international market by selling it. This means they buy foreign currencies and sell sterling. Alternatively, if they want to increase demand foi sterling, the government needs to reduce the supply on the money market. To do this, they sell their reserves of foreign currencies and buy sterling. This way. they keep tin' exchange rate (the price) of sterling at a constant rate.

So which system is best - fixed or lloatingV It depends on lots of things. Kaeli system has its InMictits and drawbacks. A free floating mechanism often makes it easier to keep a steady balance of payments Also, the government can make any changes it wants fo interest rates without worrying about the exchange rate (the market looks after (hat). On the other hand, a fixed rale mechanism makes industry feel more secure. They know what the value of their exports will be, ami so they can plan for the future more easily. This is good for the local economy anil for international trade

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