4.1.8 Exchange Rates Flashcards
What is the exchange rate
The price of one currency in terms of another
What is a floating exchange rate
The value of the currency is determined by market forces of demand and supply
What is a managed exchange rate
The value of the currency is officially determined by market forces (demand and supply) however governments and central banks may manipulate the exchange rate by buying and selling their currency in the FX market
What is a fixed exchange rate
The government or central bank pegs their currency to the value of another currency
It may be fully fixed or allowed to fluctuate within a target band
What is appreciation
When the value of currency increases due to market forces
What is depreciation
When the value of currency decreases due to market forces
What is revaluation
When the government or central bank artificially increase the value of its currency
What is devaluation
When the government or central bank artificially decreases the value of its currency
What currency is the worlds reserve currency
The US dollar $
What causes demand for £s on the Forex market
Speculation - market speculators decide to purchase £s
Interest Rates - hot money flows is attracted to the UK due to high relative interest rates
UK exports - foreign consumers want to buy £s to purchase UK goods and services
FDI flows into the UK - businesses who want to invest need £s to do so
Intervention by the government and central banks - official buying of the £ to appreciate the value of the £
What creates supply of £s on the Forex market
Speculation - people sell their £s to buy other currencies
Relative interest rates - hot money flows out of the UK to economies with relatively higher interest rates
UK Imports - importers sell GBP to buy foreign currencies to purchase their goods and services
FDI flows from the UK - UK firms sell £ to buy foreign currencies to invest abroad
Intervention by the government and central banks - official selling of the £s to devalue the £
