CHAPTER 69 EXCHANGE RATE SYTEMS Flashcards
Adjustable peg systems
An exchange rate system where currencies are fixed in value in the short term but can devalued or revalued in the longer term.
Appreciation of a currency
When the value of a currency rises because of free market forces or with a dirty float, because of government intervention.
Bilateral exchange rate
The rate of exchange of one single currency for another single currency.
Bretton Woods System
An adjustable peg exchange rate system which was used in the post-Second World War period until its collapse in the early 1970s.
Crawling peg system
An adjustable peg system of exchange rates where there is an inbuilt mechanism for regular changes in the central value of the currency.
Currency Board system
An exchange rate system where a country fixes the value of its currency to another currency. Notes and coins in the domestic currency can only be printed to the value of assets in the other currency held by the central bank
Currency or exchange controls
Limits on the purchase and sales of foreign currency, usually through its central bank.
Depreciation of a currency
When the value of a currency falls because of free market forces or with a dirty float, because of government intervention.
Devaluation of a currency
When a government or central bank officially fixes a new lower exchange rate for the currency in a fixed or pegged system of exchange rates.
Effective exchange rate or trade weighted exchange rate index
Measure of the exchange rate of a country’s currency, usually against a basket of currencies of a country’s major trading partners.
Exchange rate
The value of one currency when traded for another currency.
Exchange rate systems
Systems which determine the conditions under which one currency can be exchanged for another.
Fixed exchange rate systems
A rate of exchange between at least two currencies, which is constant over a period of time.
Floating or free exchange rate system
Where the value of a currency is determined by free market forces and where the value of a currency changes from day to day.
Foreign exchange markets
Trading arrangements where currencies are bought and sold for each other.
Gold and foreign currency reserves
Gold and foreign currency owned by the central bank of a country and used mainly to change the foreign exchange value of the domestic currency by buying and selling currency on foreign exchanges.
Gold standard
An exchange rate system where the value of a currency was fixed against a weight of gold.
Managed exchange rate systems or hybrid or intermediate system
An exchange rate system where free markets determine the value of a currency but where central banks intervene from time to time to change the value of their currency.
Managed or dirty float
Where the exchange rate is determined by free market forces but governments intervene from time to time to alter the free market price of a currency.
Nominal exchange rate
The rate at which one currency is bought and sold on the foreign exchange markets for another currency.
Purchasing power parity theory of exchange rates
The hypothesis that long run changes in exchange rates are caused by differences in inflation rates between countries.
Real exchange rate
The ratio of the cost of a typical bundle of goods in one country compared to its cost in another country in the currencies of each country.
Revaluation of a currency
When a government or central bank officially fixes a new higher exchange rate for the currency in a fixed or pegged system of exchange rates.
