Exchange Rates

Question 1

What is an exchange rate?

Answer 1

The price of one currency in terms of another

Question 2

Which institution controls the exchange rate system a country uses?

Answer 2

The Central Bank

Question 3

What are the exchange rate systems?

Answer 3

Floating, fixed, and managed exchange rates

Question 4

What is a floating exchange rate system?

Answer 4

A system wherein the exchange rate is almost unregulated and follows the laws of demand and supply

Question 5

What is a fixed exchange rate system?

Answer 5

A system where one currency is pegged to another

Question 6

What is a managed exchange rate system?

Answer 6

A system where the Central Bank sets a preferred currency value and an acceptable range before it intervenes

Question 7

What is a revaluation?

Answer 7

When the Central Bank decides to change the peg and increase the strength of its currency

Question 8

What is a devaluation

Answer 8

When the Central Bank decides to change the peg and decrease the strength of its currency

Question 9

How do interest rates affect currency value?

Answer 9

Raising interest rates appreciates a currency as returns on investment/savings become more attractive to foreigners and they demand local currency, while decreasing interest rates depreciates a currency as returns on investment/savings become less attractive to foreigners and they sell their local currency and move their money elsewhere

Question 10

How does a Central Bank regulate supply of a currency?

Answer 10

Selling its own currency to lower the currency value or buying it using foreign reserves to raise the currency value

Question 11

Which 6 factors influence floating exchange rates?

Answer 11

1. Relative inflation rates
2. Speculation
3. Quantitative easing
4. Relative interest rates
5. Net investment
6. The current account

Question 12

What is the difference between a revaluation/devaluation and an appreciation/depreciation?

Answer 12

The former are artificially created, while the latter occurs naturally

Question 13

Which 6 parts of an economy are impacted by exchange rates?

Answer 13

1. The current account
2. Economic growth
3. Price stability (inflation)
4. Employment
5. Living standards
6. FDI

Question 14

What do SPICED and WPIDEC stand for?

Answer 14

SPICED - Strong Pound Imports Cheaper Exports Dearer
WPIDEC - Weak Pound Imports Dearer Exports Cheaper