Exchange rates
An exchange rate is the price of one currency in terms of another (e.g., £1 = $1.25). Exchange rates are determined by supply and demand for currencies in foreign exchange markets and affect the price of exports and imports.
Real World
After the Brexit referendum in June 2016, the pound fell sharply against the dollar and euro as uncertainty reduced demand for sterling, making UK holidays abroad more expensive and pushing up supermarket import costs.
Exam Focus
For 'explain' questions, always link exchange rate changes to both exports and imports with a transmission mechanism.
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