Exchange Rates Flashcards
What is an exchange rate?
An exchange rate is the price of one currency in terms of another currency, used when trading between different countries.
How are exchange rates determined?
Exchange rates are determined by the interaction of supply and demand forces in foreign exchange markets. If demand for a currency increases, its price will rise, and vice versa.
What is the difference between currency appreciation and currency depreciation?
Currency appreciation refers to an increase in the value of a currency due to market forces, which leads to an increase in its exchange rate.
Currency depreciation, on the other hand, refers to a decrease in the value of a currency, which leads to a decrease in its exchange rate
How do interest rates affect exchange rates? What if they are high or low?
If interest rates are higher in one country compared to others, foreign savers may choose to deposit their money in that country’s banks, increasing demand for that country’s currency and causing its exchange rate to rise.
Conversely, if interest rates are lower in one country compared to others, demand for its currency may decrease, causing its exchange rate to fall.
How does the demand for exports affect exchange rates?
if a country’s exports become more attractive to foreign buyers, this can increase demand for its currency as they will need to buy the country’s currency in order to pay for the exports. Therefore, causing the country’s exchange rate to rise.
How does currency speculation affect exchange rates?
Currency speculation refers to buying and selling currencies in order to make a profit.
If currency speculators believe that a currency’s exchange rate is going to rise, they may buy that currency, increasing demand for it and causing its exchange rate to rise.
Conversely, if they believe that a currency’s exchange rate is going to fall, they may sell that currency, increasing its supply and causing its exchange rate to fall.
How do changes in supply and demand affect exchange rates?
Changes in supply and demand can affect exchange rates because they determine the price of a currency.
If demand for a currency increases, its price will rise, and vice versa.
Similarly, if supply of a currency increases, its price will fall, and vice versa.
What are the effects of changing exchange rates? If a currency’s appreciating or depreciating, how will it affect exports and imports?
if a currency appreciates, the prices of exports may rise, which can lead to a decrease in demand for exports. This, in turn, can lead to a decrease in economic growth.
Conversely, if a currency depreciates, the prices of imports may rise, which can lead to an increase in inflation.
