Exchange Rates Flashcards
What is a floating exchange rate?
Currency value is set by demand and supply.
What is a fixed exchange rate?
Central bank sets the currency’s value.
What is a managed exchange rate?
Currency is allowed to float but within limits — central bank steps in if needed.
What causes appreciation in a floating system?
High demand for the currency.
What causes depreciation in a floating system?
High supply or low demand for the currency.
How is a fixed rate maintained?
Central bank buys/sells currency using reserves.
What is devaluation?
Central bank lowers the pegged rate.
What is revaluation?
Central bank raises the pegged rate.
How do interest rates affect exchange rates?
Higher rates = currency appreciates because more people put money in your banks.
How does inflation affect exchange rates?
Higher inflation = currency depreciates because your exports are less wanted.
Key benefit of fixed system?
Stability and predictability.
Key benefit of floating system?
More flexibility in monetary policy.
What are 3 causes of exchange rate changes?
Interest Rates
Remittances
Inflation
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