Ch. 73 Exchange Rate Determination

Question 1

Define exchange controls?

Answer 1

Controls on the purchase and sale of foreign currency by a country.

Question 2

Define foreign exchange markets?

Answer 2

The markets, organised in major financial centres such as London and New York, where currencies are bought and sold.

Question 3

Three reasons for buying or selling foreign exchange?

Answer 3

• finance for international trade
• long term capital movements
• large amounts of speculation

Question 4

Four reasons for changes in the exchange rate?

Answer 4

• Purchasing power parities theory
• Other factors affecting competitiveness (quality, reliability etc.)
• Long term capital movements?
• Speculation

Question 5

Define purchasing power parities theory?

Answer 5

The hypothesis that long run changes in exchange rates are caused by differences in inflation rates between countries.

Question 6

Define effective exchange rate/trade weighted exchange rate index?

Answer 6

Measures of the exchange rate of a country’s currency against a basket of currencies of the countries major trading partners.