4.1.8 Exchange rates

Question 1

3 type of exchange rate systems

Answer 1

1. Free floating
2. Managed floating
3. Fixed

Question 2

What is free floating exchange rate system

Answer 2

Value of currency determined by supply and demand of currency( no gov intervention). This is used by most economies like the UK

Question 3

What is Managed flaoting exhchange rate system

Answer 3

Value determinde by demand and supply BUT the central bank will try nad stop big flucuations by buying and selling (Reserve currency) currencies or managing exchange rates. Usually allowed to flucuate between 2 points

Question 4

What is a fixed exchange rate system

Answer 4

Gov agree on a set exhchange rate like £1=$1.6 so it doesnt float over a period of time

Question 5

What is reserve currency

Answer 5

Currency held by the central bank to provide help for a economt during an external shock

Question 6

Appreciation vs depriciation

Answer 6

When the value changes in a floating exchange rate, App increases, Dep decreases

Question 7

Revaluation

Answer 7

Currency is increased under a fixed exchange rate system

Question 8

Devaluation

Answer 8

Currency is decreased under a fixed exchange rate system

Question 9

Factors affecting floating exchange rates

Answer 9

1. Demand for currency
2. Supply for currency
   Bothe affected by (X-M), investment, torism and speculation. Essentially just momney in and out.

Question 10

2 ways gov can interveen to control exchnage rates

Answer 10

1. Intrest rates -> increase pound= stronger pound -> increase demand
2. Buy foreign currency reserves using new money= increase money supply= decrease value of pound

Question 11

What is the Marshall-Lerner condition

Answer 11

Price elasticity to import + price elasticity to export MUST be more than 1 for a currency devaluation to have a positive impact on the balance if payments