CHAPTER 69 EXCHANGE RATE SYTEMS

Question 1

Adjustable peg systems

Answer 1

An exchange rate system where currencies are fixed in value in the short term but can devalued or revalued in the longer term.

Question 2

Appreciation of a currency

Answer 2

When the value of a currency rises because of free market forces or with a dirty float, because of government intervention.

Question 3

Bilateral exchange rate

Answer 3

The rate of exchange of one single currency for another single currency.

Question 4

Bretton Woods System

Answer 4

An adjustable peg exchange rate system which was used in the post-Second World War period until its collapse in the early 1970s.

Question 5

Crawling peg system

Answer 5

An adjustable peg system of exchange rates where there is an inbuilt mechanism for regular changes in the central value of the currency.

Question 6

Currency Board system

Answer 6

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

Question 7

Currency or exchange controls

Answer 7

Limits on the purchase and sales of foreign currency, usually through its central bank.

Question 8

Depreciation of a currency

Answer 8

When the value of a currency falls because of free market forces or with a dirty float, because of government intervention.

Question 9

Devaluation of a currency

Answer 9

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.

Question 10

Effective exchange rate or trade weighted exchange rate index

Answer 10

Measure of the exchange rate of a country’s currency, usually against a basket of currencies of a country’s major trading partners.

Question 11

Exchange rate

Answer 11

The value of one currency when traded for another currency.

Question 12

Exchange rate systems

Answer 12

Systems which determine the conditions under which one currency can be exchanged for another.

Question 13

Fixed exchange rate systems

Answer 13

A rate of exchange between at least two currencies, which is constant over a period of time.

Question 14

Floating or free exchange rate system

Answer 14

Where the value of a currency is determined by free market forces and where the value of a currency changes from day to day.

Question 15

Foreign exchange markets

Answer 15

Trading arrangements where currencies are bought and sold for each other.

Question 16

Gold and foreign currency reserves

Answer 16

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.

Question 17

Gold standard

Answer 17

An exchange rate system where the value of a currency was fixed against a weight of gold.

Question 18

Managed exchange rate systems or hybrid or intermediate system

Answer 18

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.

Question 19

Managed or dirty float

Answer 19

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.

Question 20

Nominal exchange rate

Answer 20

The rate at which one currency is bought and sold on the foreign exchange markets for another currency.

Question 21

Purchasing power parity theory of exchange rates

Answer 21

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

Question 22

Real exchange rate

Answer 22

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.

Question 23

Revaluation of a currency

Answer 23

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.