Chapter 9: The exchange rate and the balance of payments

Question 1

What is foreign exchange rate?

Answer 1

price at which one currency exchanges for another currency

Question 2

What is currecy depreciation?

Answer 2

fall in value of one currency in terms of another currency

Question 3

what is currency appreciation?

Answer 3

rise in value of one currency in terms of another currency

Question 4

What is flexible exchange rate?

Answer 4

permits the exchange rate to be determined by
demand and supply with no direct intervention in the foreign exchange market by the central
bank.

Question 5

What is fixed exchange rate?

Answer 5

When the government intervenes to regulate demand and supply and in turn regulate the exchange rate

Question 6

what is crawling peg?

Answer 6

Exchange rate that follows a path determined by a decision of the government or the central bank

Question 7

What is the exports effect?

Answer 7

The lower the exchange rate, the lower the prices of Canadian-produced goods and services to foreigners and the greater the volume of Canadian exports

Question 8

What is the expected profit effect?

Answer 8

The larger the expected profit from holding Canadian dollars, the greater the quantity of Canadian dollars demanded in the foreign exchange market

Question 9

What is the imports effect?

Answer 9

A. The larger the value of Canadian imports, the larger the quantity of Canadian dollars supplied in the foreign exchange market
B. The higher the exchange rate, the greater volume of Canadian imports

Question 10

What is arbitrage?

Answer 10

Process of seeking profit by buying in one market and selling for a higher price in another related market