6.4 Exchange Rates Flashcards
What is an exchange rate?
The price of one currency in terms of another.
What is a floating exchange rate system?
One where the value of the currency is determined by market forces—demand and supply.
What causes the demand for a currency?
Exports, foreign investment in domestic assets, tourism, and speculation.
What causes the supply of a currency?
Imports, domestic investment abroad, travel, and currency speculation.
What happens if demand for a currency rises?
The currency appreciates.
What happens if supply of a currency rises?
The currency depreciates.
What is currency appreciation?
When the value of a currency rises in a floating exchange rate system.
What is currency depreciation?
When the value of a currency falls in a floating exchange rate system.
Does appreciation make exports cheaper or more expensive?
More expensive, which may reduce demand for exports.
How does depreciation affect imports?
Makes them more expensive, reducing demand for them.
How do increased interest rates influence exchange rates?
Higher rates attract foreign investment, increasing demand for that currency.
How can a current account surplus affect exchange rates?
Increases demand for domestic currency, leading to appreciation.
How can a current account deficit affect exchange rates?
Increases supply of domestic currency, leading to depreciation.
How does currency appreciation affect aggregate demand (AD)?
Reduces net exports, leading to lower AD.
How does currency depreciation affect AD?
Increases net exports, leading to higher AD.
