Exchange rates

Question 1

definition of exchange rate

Answer 1

The value of a currency to another currency.

Question 2

list the types of exchange rate systems

Answer 2

1. Floating
2. Fixed
3. Managed

Question 3

Definition of a floating exchange rate system

Answer 3

The value of a currency is determined by the free market forces of demand and supply.

Question 4

Definition of a fixed exchange rate system

Answer 4

The value of a currency is fixed against another currency through actions of a government/central bank

Question 5

Definition of a managed exchange rate system

Answer 5

Exchange rate system where both free market forces and government/central bank can determine the rate of the currency.

Question 6

How to distinguish between depreciation and devaluation

Answer 6

When currency is changing because of free market forces, it is appreciation and depreciation.

When currency is changing because of the government/central bank’s decision, it is revaluation and devaluation.

Question 7

What factors influence exchange rate

Answer 7

1. Imports and exports
2. Speculation
3. Relative interest rate
4. Relative inflation rate
5. FDI
6. Quantitative easing

Question 8

SPECIAL ONE

What is a managed float

Answer 8

The exchange rate is free flowing, but government/central bank can rarely intervene to change its value.

Question 9

What does exchange rate impact on

Answer 9

1. Growth and unemployment
2. rate of inflation
3. FDI flows
4. current account of the balance of payment

Question 10

How does exchange rate impact growth and unemployment

Answer 10

Depreciation -> import becomes more expensive and export more cheaper -> AD increases -> demand derive for labour increase -> employment increases

However, price of import increase -> cost of production increases -> LRAS shift left -> AD decreases -> derived demand for labour decreases

Question 11

What is the Marshall-Lerner Condition

Answer 11

Believes that if the PED of import + export = 1, then depreciation of currency will reduce current account deficit

Question 12

Methods for government to change exchange rate

Answer 12

1. Foreign currency transactions (foreign currency reserves)

2, interest rate

Question 13

What are the impacts of competitive depreciation

Goods and drawbacks

Answer 13

Good

1. Makes exports relatively cheaper abroad, increases exports , AD increases…
2. Employment may increase (labour is a derived demand)

Bad

1. High import costs (which may lead to poorer quality life and cost for producers)
2. currency war

Question 14

What is a currency war

Answer 14

When countries depreciate their exchange rate to make exports more competitive