Homework answers / question archive /  The United Kingdom (UK) has a floating exchange rate regime

 The United Kingdom (UK) has a floating exchange rate regime

Economics

Share With

 The United Kingdom (UK) has a floating exchange rate regime. As a result, the pound sterling floats against the Euro. Moreover, there is perfect capital mobility between the UK and the Eurozone countries. (a) Sketch the IS-LM-BP diagram for the UK, assuming internal and external balance. Explain briefly what these terms mean. Explain the shape of the BP curve. [7 marks] (b) As a result of Brexit (the departure of the United Kingdom from the European Union), the United Kingdom's imports and exports to eurozone countries have become volatile as the countries adjust to new trade rules. How do shocks to trade flows affect internal and external balance in the United Kingdom? Which exchange rate regime insulates the United Kingdom's output more effectively from Brexit? [15 marks] (c) Explain why when there is perfect capital mobility, the United Kingdom can fix only one of the following three: the interest rate, the exchange rate and the money supply.