Exchange rates Flashcards
definition of exchange rate
The value of a currency to another currency.
list the types of exchange rate systems
- Floating
- Fixed
- Managed
Definition of a floating exchange rate system
The value of a currency is determined by the free market forces of demand and supply.
Definition of a fixed exchange rate system
The value of a currency is fixed against another currency through actions of a government/central bank
Definition of a managed exchange rate system
Exchange rate system where both free market forces and government/central bank can determine the rate of the currency.
How to distinguish between depreciation and devaluation
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.
What factors influence exchange rate
- Imports and exports
- Speculation
- Relative interest rate
- Relative inflation rate
- FDI
- Quantitative easing
SPECIAL ONE
What is a managed float
The exchange rate is free flowing, but government/central bank can rarely intervene to change its value.
What does exchange rate impact on
- Growth and unemployment
- rate of inflation
- FDI flows
- current account of the balance of payment
How does exchange rate impact growth and unemployment
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
What is the Marshall-Lerner Condition
Believes that if the PED of import + export = 1, then depreciation of currency will reduce current account deficit
Methods for government to change exchange rate
- Foreign currency transactions (foreign currency reserves)
2, interest rate
Consequences of competitive depreciation
- High import costs (which may lead to poorer quality life and cost for producers)
- currency war
What is a currency war
When countries depreciate their exchange rate to make exports more competitive