exchange rates

Question 1

As a currency appreciates, exports become … competitive

Answer 1

less competitive

Question 2

As a currency appreciates, imports become … expensive

Answer 2

less
Domestic firms will find it more difficult to compete with cheaper
imports
* Lower prices might help to curb inflation, thus allowing a country
bank to be more aggressive with its monetary policy

Question 3

The country’s trade deficit (if it had one) would … as exports
fell and imports rose.

Answer 3

grow

Question 4

As a currency depreciates, imports become … expensive

Answer 4

more
Inflation may rise due to cost-push factors (“imported” inflation). This
would be one more factor that a country’s central bank would need
to factor in when setting its key interest rate.
* One can say that the people of this country will be “poorer” as their
purchasing power falls, esp. if they travel abroad.

Question 5

what are fixed and floating exchange rates?

Answer 5

Fixed and floating exchange rates refer to the different exchange rate regimes that countries use to maintain their currency on the world market. A floating currency is allowed to rise or fall depending on global demand, while a fixed currency maintains its value through a government-enforced peg.

Question 6

how do interest rates, exchange rates and inflation interact?

Answer 6

Higher interest rates offer banks and other lenders a better return relative to other countries. Higher interest rates attract foreign capital and cause the exchange rate to rise.