Exchange Rates

Question 1

Define Exchange Rate

Answer 1

amount of domestic currency needed to buy one unit of foreign currency
amount of foreign currency needed to buy one unit of domestic currency

Question 2

Define Appreciation

Answer 2

rise in value of a currency

Question 3

Define Depreciation

Answer 3

fall in value of a currency

Question 4

What are people looking to do with CDN dollars on the currency market?

Answer 4

buy foreign stuff
travel abroad
invest abroad

Question 5

why do people want CDN dollars on the currency market?

Answer 5

US$/CDN $buy Cdn stuff
travel in Canada
invest in Canada

Question 6

What are the possible changes in Exchange Rates?

Answer 6

long term excess of exports over import tends to currency appreciation

Demand decreases when supply is to high and currency depreciates

Question 7

What are flexible (floating) Exchange Rates?

Answer 7

determined by market forces

problem - potentially frequent fluctuations

Question 8

What are fixed (floating) Exchange Rates?

Answer 8

value of XR agreed upon internationally

control banks act to maintain equilibrium at fixed XR

Question 9

What was the Gold Standard?

Answer 9

currencies define in terms of a quantity of gold
fixed relationship, maintained between stack of gold and money supply
gold allowed to be freely exported and imported
effectively a fixed XR system
BoP surplus- gold flows in
BoP deficit - gold flows out

Question 10

What were the problems with the Gold Standard/ Fixed Exchange Rate System?

Answer 10

money supply and domestic economic donations altered with gold flow
world money supplies linked to new discoveries or lack thereof
competitive devaluation in 1930’s => XRs no longer fixed/ system breaks down

Question 11

What was the Bretton Woods Trade Agreement?

Answer 11

modified fixed XR system or adjustable reg system
International Monety Fund (IMF)
formed in 1949 to make loans to nations with temporary BoP deficits and, until 1971, administer the Bretton Woods System
US $ value linked to gold - both were OIR, but mainly US $ served as reserves
long term disequilibrium necessitated “orderly” devaluations from time- to - time
differing inflation rates
differing growth rates
reserve currency (US$) had to be stable for system to work
persistent US BoP deficits in 50s and 60s, US$ needed to be devalued

Question 12

What is a managed (dirty) Exchange rate?

Answer 12

modified flexible XR system essentially flexible with countries occasionally manipulating currency values using OIR
considerably more valuable XRs in short term but over long term, changes are more gradual