4.2 Exchange Rates Flashcards by Charlie Maunder

Q

What is a nominal exchange rate

A

This is the weight of one currency relative to another, without being adjusted for inflation

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Q

What is a real exchange rate

A

This is when the exchange rate is adjusted for inflation to give a more accurate reflection of purchasing power

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Q

What is a trade-weighted exchange rate

A

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Q

What determines a floating exchange rate

A

The value of the exchange rate in a floating system is determined by the force of supply and demand

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Q

Explain this floating exchange rate diagram

A

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Q

What determines a fixed exchange rate

A

A fixed exchange rate had a value determined by the government compared to other currencies

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Q

Explain this fixed exchange rate diagram

A

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Q

What is meant by a bilateral measure of exchange rates

A

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Q

What is meant by an effective measure of exchange rates

A

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Q

What is meant by a nominal measure of exchange rates

A

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Q

What is meant by a real measure of exchange rates

A

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Q

What is meant by a depreciation

A

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Q

What is meant by an appreciation

A

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Q

What is meant by a devaluation

A

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Q

What is meant by a revaluation

A

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Q

How does inflation impact the exchange rates

A

Q

How do interest rates impact the exchange rates

A

Q

How does speculation impact the exchange rates

A

Q

How do other currencies impact the exchange rates

A

Q

How does government finance impact the exchange rates

A

Q

How does the balance of payments impact the exchange rates

A

Q

How does international competitiveness impact the exchange rates

A

Q

How does government intervention impact the exchange rates

A

Q

What are the effects of exchange rates on AD

A

What is a hybrid exchange rate system

Advantages of a fixed exchange rate system

Advantages of a floating exchange rate system

Advantages of a hybrid exchange rate system

Can make fluctuations in currency more predictable, so business investment is not hindered significantly with economic shocks Can bring the benefits of both fixed and floating exchange rate systems together

Disadvantages of a fixed exchange rate system

Disadvantages of a floating exchange rate system

Disadvantages of a hybrid exchange rate system

Protection against fluctuations is only temporary and it could make monetary policy inflexible

What is the effectiveness of changing the value of a currency to achieve macroeconomic policy objectives

What is the purchasing power parity (PPP) theory