(b) Evaluate the likely result of a change in currency prices on the UK economy
Price Level

A change in the price of currency will have many impacts upon the economy such as upon Balance of Payments, a change in real GDP, employment and inflation. rGDP AD2
AD1
AS

Assuming demand is relatively elastic, an appreciation of the currency results in a lower AD, shown by AD1 decreasing to AD2, as lower export demand and greater spending on imports causing a fall in domestic AD. This reduces economic growth, shown by a decrease of Y1 to Y2. Furthermore we would see lower inflation, shown by P1 decreasing to P2 as import prices are cheaper, as well as lower AD leading to lower demand pull inflation and manufacturers having greater incentives to cut costs to remain competitive. This is assuming demand is relatively elastic - if the demand was more inelastic, the result will be vastly different - there will be less of a decrease in economic growth and inflation.
Assuming demand is elastic, an appreciation of the currency price would worsen the current account position. As exports are more expensive and imports are cheaper, we see a decrease and an increase in both respectively. This will cause a bigger deficit on the current account, having negative implications upon the economy such as becoming uncompetitive and leading to a further decrease in export led economic growth. However, the impact on the current account isn't certain - an appreciation will tend to reduce inflation, making UK goods more competitive and leading to stronger exports in the long term and benefiting the current account. Furthermore the overall impact on the current account depends on the elasticity of demand as stated at the start of the paragraph. If demand for imports and exports is inelastic instead of elastic, the current account could actually improve. Exports are more expensive but as demand is