2.6 Exchange rates

Question 1

Define exchange rate

Answer 1

the price of one currency in terms of another

Question 2

Define a fixed exchange rate system

Answer 2

A system in which the government of a country agrees to fix the value of its currency in terms of that of another country

Question 3

Define foreign exchange reserves

Answer 3

stocks of foreign currency and gold owned by the central bank of a country to enable it to meet any mismatch between the demand and supply of the country’s currency

Question 4

Define devaluation

Answer 4

process whereby a government reduces the price of its currency relative to an agreed rate in terms of foreign currency

Question 5

Define revaluation

Answer 5

process whereby a government raises the prices of domestic currency in terms of foreign currency

Question 6

Define floating exchange rate system

Answer 6

a system in which the exchange rate is permitted to find it’s own level in the market