4.1.8 - Exchange rates Flashcards
What are the three types of exchange rate systems ?
- Floating
- Fixed
- Managed
What is a floating exchange rate ?
An exchange rate determined by supply and demand in the foreign exchange market for that currency.
- Use the terms appreciation and depreciation
What is a fixed exchange rate ?
An exchange rate where the government or central bank sets a specific exchange rate (their currency value against another is fixed).
- The central bank must hold enough foreign exchange reserves to intervene in currency markets when needed to maintain the fixed peg.
What is a managed exchange rate ?
Central bank occasionally intervenes to influence the exchange rate.
How would the central bank intervene to influence the exchange rate ?
They can either change the interest rate to shift the supply and Demand of the currency, or they can use Foreign reserves to buy its currency in the forex market
Diagram for increasing supply of currency
Diagram for increasing demand of currency
Bank must have foreign exchange reserves to increase demand/buy more currency
The Chinese currency is managed exchange rate system explain everything you know about this
Define what is meant by :
- Appreciation
- Revaluation
- Depreciation
- Devaluation
What will happen to the exchange rate as a result of an increase in the number of UK consumers travelling abroad in the summer?
Tip
Importing affects supply of currency
- Exporting affects demand of currency
Factors influencing exchange rates
Speculation : In order to make a profit, the investor should buy pounds when they are cheaper and sell them in 4 months when they are more expensive.
A currency speculator predicts that the pound will depreciate in seven months time. What should the currency speculator do in order to make a profit?
Which of the following is the likely impact of a decrease in the Australian interest rate?
Ask if you can show a decrease in demand e.g capital flights. ?
What are the consequences with devaluing a currency ?
Consequences can include trade tensions, protectionism, and potential disruptions in the global economy.
What is the Marshall-Lerner condition ?
States that when a currency depreciates, the current account balance will only improve if the sum of the PEDs for exports & imports is greater than 1 (elastic)
What is the J-curve effect
In the short-run, a depreciation of currency will initially lead to a worsening of the current account balance, before it begins to improve. This is due to price inelastic demand
(Importers can’t respond to charges in prices due to things like contracts) in the short-term & price elastic demand in the long term(they can respond to changes in prices as contracts end).
Draw the j curve
Name and explain all the impacts of exchange rates to remember
