Exchange Rates Flashcards
Give the three types of exchange rate systems.
- Floating exchange rate
- Fixed exchange rate
- Managed exchange rate
Define floating exchange rate.
Floating exchange rate system is where the exchange rate is solely determined by the market forces of demand and supply.
Define fixed exchange rate.
The fixed exchange rate system is where the government pegs the value of local currency against the price of another currency.
Define managed exchange rate.
The managed exchange rate system consists of the exchange rate being primarily determined by supply and demand, but the government at times may influence the exchange rate.
Define devaluation.
Devaluation is a process occurring under a fixed exchange rate, where the government adjusts the value of the currency downwards.
What is depreciation?
Depreciation is a process under the floating exchange rate, where the value of the currency is adjusted downwards. This is due to the market forces of demand and supply.
What is revaluation?
Revaluation is a process under a fixed exchange rate system, where the government officially adjusts the value of the currency upwards.
What is appreciation?
Appreciation occurs under a floating exchange rate system, where the value of the currency is adjusted upwards. This is due to the market forces of demand and supply.
Give a force of demand for determining exchange rates.
Exports of goods and services
Give another force of demand for determining exchange rates.
Inflows of FDI
Give a force of supply for determining exchange rates.
Falling interest rates
Give a third force of demand for determining exchange rates.
Rising interest rates
Give another force of supply for determining exchange rates.
Outflows of FDI
Give a third force of supply for determining exchange rates.
Imports of goods and services
Give a factor affecting floating exchange rates.
Demand for a currency - transaction demand and speculative demand
