4.1.8 - Exchange rates Flashcards

1
Q

What’s an exchange rate?

A

he exchange rate is the rate at which one currency trades against another.

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2
Q

What’s a floating exchange rate?

A

Demand and supply determine the exchange rate between currencies (GBP to USD).

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3
Q

What’s a Fixed Exchange Rate?

A

The value between two currencies remains at a static level over time (USD to Saudi Riyal). The monetary authority ties its official exchange rate to another nation’s currency but it doesn’t mean that it will be fixed all the time.

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4
Q

What’s a managed exchanged rate?

A

Allows central bank to intervene (buying and selling currency) in FX markets in order to change the direction of the currency (to minimise fluctuations and keep the currency close to its target)

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5
Q

What’s a managed exchanged rate?

A

Allows central bank to intervene (buying and selling currency) in FX markets in order to change the direction of the currency (to minimise fluctuations and keep the currency close to its target)

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6
Q

Name 2 methods on how the exchange rates can be measured

A
  • Real exchange rate
  • Bi-lateral exchange rate
  • Spot exchange rate
  • Forward exchange rate
  • Trade weight index
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7
Q

What’s the spot exchange rate?

A

Exchange rate for transactions that took place immediately.

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8
Q

What is the bilateral exchange rate?

A

Rate at which one currency can be traded against another.

Example:

include £/$ (1GBP = 1.23 Dollar as of Jan 2023)

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9
Q

Name 2 factors that influence exchange rates

A
  • Relative interest rates
  • Relative inflation rates
  • Current account deficit/surplus
  • Speculation
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10
Q

What’s a current account deficit?

A

When

Imports > Exports

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11
Q

What’s a current account surplus?

A

When

Imports < Exports

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12
Q

Why do relative inflation rates affect the exchange rate?

A

If inflation is lower in the UK than anywhere else, UK exports become more competitive (cheaper) which means an increase in demand for the £ to buy UK goods.

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13
Q

How does speculation affect the exchange rate?

A

If people speculate that the value of £ will fall, they will sell their £ for another currency with a higher value. As demand for £ decreases, it depreciates leading to a self-fulfilling prophecy.

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14
Q

What’s the exchange rate mechanism (ERM) ?

A

A system introduced by the European Economic Community to reduce exchange rate variability and achieve monetary stability in Europe.

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15
Q

When was the UK part of the ERM?

A

1990

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16
Q

Why did the UK join the ERM?

A

Attempt to stabilize their currency

17
Q

Why did the UK leave the ERM?

A

They were unable to keep the pound above he specified level

18
Q

Name 2 pros of a floating exchange rate

A
  • Useful monetary policy tool to stimulate growth
  • Reduced need for currency reserves
19
Q

Name 2 cons of floating exchange rates

A
  • Investment volatility
  • Can attract speculation
20
Q

Name 2 pros of a fixed exchanged rate

A
  • Removes currency fluctuations
  • Exports and imports remain stable
21
Q

Name 2 cons of a fixed exchange rate

A
  • Clashes with other macroeconomic objectives
  • Non-maneuverable
22
Q

What are Robert Mundell’s 3 impossibles?

A
  • Free traded currency
  • Independant monetary policy
  • Fixed exchange rate
23
Q

How many of Robert Mun dell’s impossibles can occur at one time?

A

2 out of the 3

24
Q

What’s monetary policy?

A

Monetary policy involves the use of interest rates and changes to the money supply to achieve relevant economic objectives

25
Q

What’s monetary policy?

A

Monetary policy involves the use of interest rates and changes to the money supply to achieve relevant economic objectives