Exchange Rates

Question 1

What are exchange rates?

Answer 1

the price of one currency in terms of another

*in other words, the purchasing power of one currency against another.

Question 2

What is a bilateral exchange rate?

Answer 2

one currency in terms of one other
currency e.g. £1 = $1.05

Question 3

What is a multilateral exchange rate?

Answer 3

one currency in terms of a group of
other currencies

e.g. the effective or trade-weighted index

Question 4

What is a trade-weighted index?

Answer 4

a weighted average exchange rate
expressed as an index
(base year =100)

Question 5

What is a nominal exchange rate?

Answer 5

the price of the domestic currency (say the UK pound) in another foreign currency

Question 6

What are real exchange rates?

Answer 6

nominal rate adjusted for relative inflation rates

Question 7

What is depreciation?

Answer 7

Currency falls in value.

A currency depreciation happens inside a floating exchange rate system and means that one currency buys less of another currency.

Question 8

What is appreciation?

Answer 8

Currency rises in value.

A currency appreciation happens within a floating exchange rate system and is an increase in the external value of one currency in relation to another currency.

Question 9

What is devaluation?

Answer 9

devaluation happens inside a fixed or semi-fixed exchange rate system; the central bank reduces the official peg currency anchor price for official trading.

Question 10

What is revaluation?

Answer 10

revaluation happens inside a fixed or semi-fixed exchange rate system; the central bank increases the official peg currency anchor price for official trading.

Question 11

What happens to imports and exports when a currency depreciates?

Answer 11

Increase in import prices
Decrease in export prices

*WPIDEC