Exchange rates Flashcards
Exchange rate systems definition
The exchange of a currency is the is the weight of a currency relative to another.
Floating exchange rate definition
*The value of the exchange rate is determined by the forces of supply and demand.
* limited intervention by the central bank and no target.
What happens to the floating exchange rate when demand increases?
The exchange rate appreciates.
What is the demand of a currency?
What is the supply of a currency?
- exports plus capital inflows
- imports plus capital outflows.
Benefits and issues with free floating currency?
- no work for CB, limited uncertainty for foreign investors
- market forces volatile, exposed to shocks.
Fixed exchange rate definition
- Central bank pegs the currency value
- CB must hold enough foreign reserves to intervene in market if necessary
- pegs can move overtime
- if this process isn’t processed effectively you can experience exchange rate crisis.
How does supply affect the currency in fixed exchange rate?
- supply change manipulated by CB, as they can sell or buy the current to change the price
- as supply increases, more is in the market, and price falls.
Managed exchange rates?
- Adjustable Pegs
- Crawling pegs
- managed floats
Adjustable pegs?
Currency is fixed to another currency but can be adjusted in response to economic conditions.
Crawling Pegs?
Currency can move within a band, can change overtime (in increments).
Benefits and issues with crawling and adjustable pegs?
- little benefits from fixed and floating rates
- attract bad intentions = accused of currency manipulation which could restrict trade, not transparent internationally.
Managed floats?
Primarily determined by market forces but has occasional intervention from CB.
Benefits and issues with managed floats?
- Little benefits from free floating
- nobody knows when CB intervenes.
Speculative currency attacks
- Black Wednesday
- Asia financial crisis.
Revaluation definition
The currency’s value is adjusted relative to a baseline.
