Exchange rate systems Flashcards
1
Q
Exchange rates
A
The price of one currency expressed in terms of another currency.
- Determined by demand and supply, with the equilibrium level being the current exchange rate.
2
Q
Floating exchange rate
A
An exchange rate that is set purley by the forces of demand and supply, and free from government intervention
3
Q
Demand forces affecting floating exchange rate
A
- Exports of goods and services
- Inflows of FDI
- Speculation
- Inflows of ‘hot money’
4
Q
Supply forces affecting floating exchange rate
A
- Imports of goods and services
- Outflows of FDI
- Speculation
- Outflows of ‘hot money’
5
Q
Advantages of free floating exchange rate
A
- Automatic adjustment of BoP (Eg. Weaker currencies may make exports more price competitive hence reducing the deficit)
- Flexibility (Government isn’t trying to maintain particular exchange rate which can be expensive and constrictive)
- Low requirement to hold large foreign exchange reserves.
- Freedom to pursue other macroeconomic objectives. (Doesn’t have to focus on meeting an exchange rate target)
6
Q
Disadvantages of free floating exchange rate
A
- Uncertainty
- Speculation as no upper or lower limit on the price of a currency.
- Inflation (weak exchange rate may increase price of imports and potentially inflation)
- Damage to investment (Investment from abroad may be discouraged)
7
Q
Reached slide 9
A
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