Chapter 16.1 Flashcards
Foreign exchange
International transactions involving the use of different national currencies
How does the foreign exchange market work?
The demand for a foreign currency creates a supply of domestic currency; the demand for the domestic currency creates a supply of foreign currency
Exchange rate
The value of one currency expressed in terms of another
Floating exchange rate system
A system in which exchange rates are determined by market forces with no government or central bank intervention in the foreign exchange market
Appreciation
An increase in the value of a currency in a floating exchange rate system
Depreciation
A fall in the value of a currency in a floating exchange rate system
What causes appreciation and depreciation in a floating exchange rate system?
Changes in supply and demand for a currency in the absence of any government or central bank intervention
Causes of changes in exchange rates
Changes in currency demand
Exports and factors affecting exports
Investment and factors affecting investment
Other factors affecting currency demand
Changes in currency supply
Imports and factors affecting imports
Other factors affecting currency supply
When currency demand and supply change at the same time
Factors affecting exports
Foreign demand for exports of goods
Foreign demand for exports of services
The rate of inflation relative to other countries
Relative growth rates
Factors affecting investment
Inward foreign investment and portfolio investment
Relative interest rates
Outward foreign investment and portfolio investment
Foreign direct investment
Investment by multinational corporations in productive facilities
Portfolio investment
Financial investments such as the purchase of stocks and bonds
Factors that can affect currency demand
Inward flow of remittances
Speculation that a currency will appreciate
Central bank intervention to increase the value of a currency
Remittance
A transfer of money from one country to another, in most cases by foreign workers who send money from their earnings in the country of residence to their family in their home country
Factors affecting imports
Domestic demand for imports of goods
Domestic demand for imports of services
The rate of inflation relative to other countries
Relative growth rates
