Exchange rates Flashcards
Define exchange rate
The exchange rate of a currency is the weight of one currency relative to another
What is the exchange rate in a floating system?
Where the value of the pound is determined by the forces of supply and demand
What is the exchange rate in a fixed system?
Where the value of the pound is determined by the government compared to other currencies
Formulas for demand for a currency and supply of a currency
Demand for a currency = exports + capital inflows
Supply of a currency = import + capital outflows
Explain the diagram for a fixed exchange system
supply of currency can be easily manipulated by the central bank which can buy or sell the currency to change the price to where they want. the currency depreciates as a result which makes exports more competitive
Define a managed exchange rate system
combine the characteristics of fixed and floating exchange rate systems
the currency fluctuates but does not float in a fully free market
Exchange rate floats in the market but the central bank of the country buys and sells currencies to influence their exchange rate
Define revaluation
This is when the currency’s value is adjusted relative to a baseline, such as the
price of gold, another currency or wage rates.
Define depreciation
when the value of a currency falls relative to another currency, in a floating
exchange rate system.
Define appreciation
when the value of a currency increases.
Define devaluation
when the value of a currency is officially lowered in a fixed exchange
rate system.
