Chapter 49 - Exchange Rates

Question 1

Real Exchange Rate

Answer 1

A currency’s value in terms of its real purchasing power.

Question 2

Trade Weighted Exchange Rate

Answer 2

The price of one currency against a basket of currencies.

Question 3

Fixed Exchange Rate

Answer 3

An exchange rate set by the government and maintained by the central bank.

Question 4

Devaluation

Answer 4

A decision by the government to lower the international price of the country’s currency.

Question 5

Revaluation

Answer 5

A decision by the government to raise the international price of the country’s currency.

Question 6

Managed System

Answer 6

Where the exchange rate is influenced by state intervention.

Question 7

Marshall Lerner Condition

Answer 7

The requirement that for a fall in the exchange rate to be successful in reducing a current account deficit, the sum of the price elasticities of demand for exports and imports must be greater than 1.

Question 8

J Curve Effect

Answer 8

A fall in the exchange rate causing an increase in a current account deficit before it reduces it due to the time it takes for demand to respond.