Currency Flashcards
Appreciation
When the forces of demand and supply increase the price of a currency.
The currency becomes worth more in terms of other currencies.
Currency Peg
A policy adopted by a government when setting a specific fixed value for its currency in terms of another currency or a basket of currencies.
It is used in fixed exchange rate systems.
Depreciation
A currency has depreciated if it has lost value.
The decline in the value of a currency in terms of another currency.
Devaluation
A decrease in the value of a currency, in terms of another, in a fixed exchange rate regime.
Exchange Rate
The value of a currency in terms of another.
Fixed Exchange Rate
A regime where the value of a currency in terms of another is fixed or pegged.
The central bank could also peg the currency to a basket of currencies or gold.
Flexible Exchange Rate
Where the forces of demand and supply determine the price of a currency.
Floating Exchange Rate
The value of a currency in terms of another is determined solely by the forces of supply and demand.
Foreign Exchange Reserves
The amount of foreign currencies held by a country’s central bank in order to manipulate its own currency.
Forex
A marketplace where different national currencies across the globe are traded.
J-Curve Effect
What happens to the current account when a currency depreciates:
In the short run, a depreciation may lead to a worsening of the current account.
In the long run the current account will improve and lead to a current account surplus.
If Marshal Lerner Condition is met
Marshal Lerner Condition
Sum of PEDX and PEDM > 1.
Overvalued
When it is higher than the equilibrium value, if the currency were allowed to be guided by the forces of supply and demand.
This only happens in a fixed or managed exchange rate system.
Revaluation
An increase in the value of a currency, in terms of another, in a fixed exchange rate regime.
Undervalued Currency
Lower than the equilibrium value, if the currency were allowed to be guided by the forces of supply and demand.
This only happens in a fixed or managed exchange rate system.
