Exchange rates Flashcards

1
Q

definition of exchange rate

A

The value of a currency to another currency.

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2
Q

list the types of exchange rate systems

A
  1. Floating
  2. Fixed
  3. Managed
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3
Q

Definition of a floating exchange rate system

A

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

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4
Q

Definition of a fixed exchange rate system

A

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

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5
Q

Definition of a managed exchange rate system

A

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

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6
Q

How to distinguish between depreciation and devaluation

A

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.

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7
Q

What factors influence exchange rate

A
  1. Imports and exports
  2. Speculation
  3. Relative interest rate
  4. Relative inflation rate
  5. FDI
  6. Quantitative easing
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8
Q

SPECIAL ONE

What is a managed float

A

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

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9
Q

What does exchange rate impact on

A
  1. Growth and unemployment
  2. rate of inflation
  3. FDI flows
  4. current account of the balance of payment
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10
Q

How does exchange rate impact growth and unemployment

A

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

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11
Q

What is the Marshall-Lerner Condition

A

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

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12
Q

Methods for government to change exchange rate

A
  1. Foreign currency transactions (foreign currency reserves)

2, interest rate

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13
Q

Consequences of competitive depreciation

A
  1. High import costs (which may lead to poorer quality life and cost for producers)
  2. currency war
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14
Q

What is a currency war

A

When countries depreciate their exchange rate to make exports more competitive

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