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Economic Effects of an Exchange Rate Appreciation Inflation: a rise in the exchange rate makes imported goods and services cheaper. As a result, UK producers may pass on these lower costs of imported raw materials onto consumers as lower prices. This will lower inflation. Exports, imports and the balance of payments: importers should benefit from an appreciation in the currency, even allowing for the inevitable time lags. In theory, the following will happen: - Export prices increase - Export demand decreases - Import prices decrease - Import demand increases The demand for exports should fall as export prices increase. However, some exports are more necessary to other countries, and therefore have inelastic demand. As a result, we end up receiving more on these when the exchange rate increases in value. This can cause the balance of payments to greaten in the short term. Higher imports and falling exports will lead to a decrease in net export earnings. As...

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