Exchange Rates Flashcards
What is an exchange rate?
It is the price of one currency in terms of another.
Name the two main types of exchange rate regimes.
Fixed exchange rate and floating exchange rate.
What is a fixed exchange rate?
A system where the value of a currency is pegged to another currency or a basket of currencies.
Define a floating exchange rate.
A system where the value of a currency is determined by market forces of supply and demand.
What is a managed float exchange rate?
A hybrid system where exchange rates are primarily determined by market forces but are occasionally adjusted by central banks.
How does a currency depreciation affect exports?
It makes exports cheaper and more competitive in international markets.
What is currency appreciation?
An increase in the value of a currency relative to another currency.
How does currency appreciation affect imports?
It makes imports cheaper, benefiting consumers but potentially hurting domestic producers.
What is a currency peg?
A mechanism where a country’s currency value is fixed to another currency, such as the U.S. dollar.
What is the role of the foreign exchange market?
To facilitate the buying, selling, and conversion of currencies for trade, investment, and hedging.
Name one factor that influences exchange rate movements.
Interest rate differentials between countries.
How does inflation affect exchange rates?
Higher inflation in a country can lead to currency depreciation as its goods become less competitive internationally.
What is the Purchasing Power Parity (PPP) theory?
It states that exchange rates adjust to equalize the price of identical goods in different countries.
Explain the term “balance of payments.”
It is a record of all economic transactions between residents of a country and the rest of the world.
How do trade deficits impact exchange rates?
Persistent trade deficits can lead to currency depreciation due to excess demand for foreign currency.
What is the real exchange rate?
The exchange rate adjusted for inflation differences between two countries.
How do central banks influence exchange rates?
By intervening in forex markets, adjusting interest rates, or using foreign currency reserves.
What is a currency crisis?
A sudden and severe depreciation of a country’s currency, often leading to economic instability.
What is the role of speculation in exchange rate fluctuations?
Speculators buy and sell currencies based on expected changes, influencing short-term exchange rate movements.
How does foreign direct investment (FDI) affect exchange rates?
FDI inflows can increase demand for a country’s currency, leading to appreciation.
