4.1.8 Exchange Rates

Question 1

what is a free- floating currency?

Answer 1

• where the external value of a currency depends on market forces of supply and demand

Question 2

what is a manged- floating exchange rate?

Answer 2

• when the central bank may choose to intervene in the foreign exchange markets to affect the value of a currency to meet specific macroeconomic objectives

Question 3

how does a fixed exchange rate work?

Answer 3

• government / central bank fixed currency value : external value is pegged to one+ currencies
• can either be devalued or revalued

Question 4

What is devaluation?

Answer 4

• means that the value of the currency officially falls - in relation to a foreign currency

Question 5

What is revaluation?

Answer 5

• means the value of the currency officially falls - in relation to foreign currency

Question 6

What is depreciation?

Answer 6

• currency falls in value because of the market or central bank intervention

Question 7

What is appreciation?

Answer 7

• currency rises in value because of buying and selling in the market

Question 8

Tools for managing floating exchange rates

Answer 8

• changes in monetary policy interest rates
• QE
• direct buying/selling in the currency market
• tax of overseas currency deposits and capital control

Question 9

What are impacts of a rising currency?

Answer 9

• current account deficit
• inward investment inflows and portfolio flows
• high policy interest rates

Question 10

What are factors influencing floating exchange rates?

Answer 10

• inflation
• interest rates
• speculation
• BOP
• changes in competitiveness

Question 11

What is competitive devaluation

Answer 11

• when a currency is intentionally devalued/depreciated by a government = makes X cheaper

Question 12

What are impacts to changes in exchange rates? Link to Marshall Lerner condition

Answer 12

• Marshall Lerner condition = argues that depreciation / devaluation of the exchange rate leads to = net improvement in the trade balance provided that the sum of price elasticity of demand for X and M are greater than one

Question 13

What is J-curve effect?

Answer 13

• earnings from selling more X may be insufficient to compensate for higher spending on M = trade balance may worsen