Exchange rates Flashcards
1
Q
What ways can governments appreciate the exchange rate?
A
Increase interest rates
2
Q
What are hot money flows?
A
- Free flowing capital that needs to be invested in one place
- Investors want their money to increase in value
- 92% of the FOREX market is made up of hot money flows
3
Q
What factors do exchange rates depend on?
A
- Other countries interest rates
- Speculation of other currencies
- Other countries inflation rates
- Other currencies policies
4
Q
Why is the inflation rate at 9% in the UK?
A
- Cost push inflation caused by the war in Ukraine has driven up prices of energy and oil
- Production costs have risen
-2% demand pull inflation, the rest of the 8% represents cost push inflation
5
Q
How do you reduce cost push inflation?
A
- Supply side policies such as subsidizing renewable energy sources to reduce the dependency on Ukraine this would reduce the costs of production
- This takes a lot of time and money
6
Q
What is a fixed exchange rate system?
A
- The government sets the exchange rate at a specific target
7
Q
What is a floating exchange rate system?
A
- The price of the currency is set by supply and demand forces
8
Q
What is a managed managed exchange rate system?
A
- Exchange rate is floating but the government intervenes to influence the exchange rate
9
Q
What is a semi fixed system?
A
- Allows the exchange rate to fluctuate within a set limit
10
Q
What is a pegged exchange rate?
A
- The value of the currency is fixed to another currency
11
Q
What is monetary policy?
A
- Policy by the central bank
- Involves using interest rates and other monetary tools to influence consumer spending and thus reduce aggregate demand
12
Q
What is fiscal policy?
A
- Government policy
- Involves the use of government spending, taxation and borrowing to affect the level and growth of aggregate demand
13
Q
What is devaluation in a fixed exchange rate system?
A
- Decreasing the value of the currency
- Lowering the exchange rate, exports become cheaper, increase exports, improve balance of payments
- WIDEC
14
Q
How has China’s economy changed over the last few years?
A
- After the great financial crisis of 2008, US consumption fell, this affected the Chinese economy
- China created a middle class
- This was done to increase the domestic consumption, wages rose, they became less dependent on exports
- Consumption component of AD has increased
- 60 million people are set to join the middle class this year
15
Q
What are the advantages of a free floating exchange rate system?
A
- You do not need significant foreign currency reserves to defend the currency
