4.1.8 Exchange Rates Flashcards
LS8
1
Q
What are the markets that a foreign exchange market is split into?
A
- Forward market
- Spot market
2
Q
Forward market?
A
- For transactions that will happen at an agreed time in the future
3
Q
Spot market?
A
- For transactions that happen now
4
Q
Floating exchange rate?
A
- Market forces determine the value of the exchange rate
5
Q
Fixed exchange rate?
A
- Exchange rate fixed by central bank or government
6
Q
Managed exchange rate?
A
- Market forces determine exchange rate but intervention by central bank or government influences exchange rate.
7
Q
Options to influence exchange rate with managed exchange rate?
A
- Buying/selling currency (to influence demand/supply)
- Lowering/raising interest rates
- Currency control (limiting how much currency is printed and how much leaves country - to control supply)
8
Q
Marshall-lerner condition?
A
- For depreciation to = improvement on BoP, PEDX + PEDM > 1
9
Q
J-curve effect?
A
- In SR, depreciation = deterioration in current account position
Due to:
- Contracts preventing firms from immediately switching suppliers
- Firms and consumers need time to adjust to changes in price
