Exchange rates Flashcards
Definition of exchange rates
An exchange rate is the price of one currency in relation to another
What are the different exchange rates?
floating , fixed and managed
What are floating exchange rates?
value of currency is determined by market forces of demand and supply for currency
What are fixed exchange rates?
fixed by central banks against another currency
What are managed exchange rates?
Same as floating but subject to government intervention
What is appreciation?
Increase value in currency due to higher demand for currency
What is revaluation?
adjustment of the value of a currency in relation to other currencies.
What is depreciation?
a decrease in value for currency due to a decrease in demand
What is devaluation?
value of currency decreasing under fixed exchange rate
How can government intervene to change value of currency?
change interest rates/ encourage investment
Buy its own currency to increase its own value
What is the role of financial markets
Financial markets facilitate the buying and selling of financial assets
What are factors affecting fiscal deficits?
GDP, size and population, unexpected events, discretionary fiscal policy, tax avoidance/evasion
What is the definition of automatic stabilisers?
Forms of government expenditure and some tax revenue that change automatically in line with GDP
What is the difference between a cyclical and structural budget deficit?
-Cyclical occurs during a recession
-Structural remains when the economy is operating at normal
What is the role of the central bank?
Controls monetary policy, bank to the government , bank to other banks, regulate financial system
