Exchange Rate Flashcards
What is an exchange rate?
An exchange rate is the value of one currency against another currency.
How many kinds of exchange rate are there?
Four
What are the different kinds of exchange rate?
Free floating exchange rate
Managed exchange rate
Semi-fixed exchanged rate
Fixed exchange rate
What is a free floating exchange rate?
A free-floating currency where the external value of a currency depends wholly on market forces of supply and demand.
What is a managed exchange rate (dirty floating)?
A managed-floating currency when the central bank may choose to intervene in the foreign exchange markets to affect the value of a currency to meet specific macroeconomic objectives.
How is a managed exchange rate achieved?
This can be achieved by selling the currency to decrease its value. This would happen because supply would increase, this would happen because the quantity would increase which could cause a extension in demand due to the equilibrium moving.
What is a Semi fixed exchange rate?
This occurs when the government seeks to keep the value of a currency between a band of the exchange rate. In other words, the exchange rate can fluctuate within a narrow band.
How is a Semi fixed exchange rate achieve?
A Semi fixed exchange rate is achieved by changing the aggregate demand this can be done by changing interest rates to encourage people to spend or save.
What is a fixed exchange rate?
A fixed exchange rate, sometimes called a pegged exchange rate, is a type of exchange rate regime in which a currency’s value is fixed or pegged by a monetary authority against the value of another currency, a basket of other currencies, or another measure of value, such as gold
How is a fixed exchange rate achieved?
A central bank maintains a fixed exchange rate by buying or selling its currency. If the domestic currency appreciates then the central bank will intervene and and sell its reserves of domestic currency in order to reduce the value of the domestic currency by increasing its supply in the forex market.
