4.1.8 Exchange rates

Question 1

Exchange rate

Answer 1

One currency in terms of another

Question 2

Free floating system

Answer 2

Is where the value of the currency is determined purely by market demand and supply of the currency, with no target set by the government and
no official intervention in the currency markets.
-> Both trade flows and capital flows
affect the exchange rate under a floating system.

Question 3

Managed floating system

Answer 3

is where the value of the currency is determined by demand and supply but the Central Bank will try to prevent large changes in the exchange rate on a day to day basis.
-> This is done by buying and selling currency and by changing
interest rates.

Question 4

Fixed system

Answer 4

Is when a government sets their currency against another and that exchange rate does not change.
-> The country can decide to devalue its currency
overnight to improve international competitiveness of its industry.

Question 5

Appreciation/Depreciation

Answer 5

An increase in the value of the currency under a floating exchange rate - vice-versa (depreciation).

Question 6

Revaluation/Devaluation

Answer 6

Is when the currency is increased against the value of
another under a fixed system - vice-versa (devaluation).