Exchange Rates

Question 1

Exchange rate

Answer 1

Price of one currency in terms of another

Question 2

Why do we have exchange rates?

Answer 2

Necessary to convert currency when trading, countries can’t use each other’s currency

Question 3

TWI

Answer 3

Determines changes in a currency’s value against its main trading partners, weighted by percentage trade conducted with country

Question 4

Forex market

Answer 4

Where currency is traded

Question 5

Appreciation

Answer 5

Price increase in terms of another currency

Question 6

What is the target exchange rate?

Answer 6

Stable,

Question 7

Causes of depreciation

Answer 7

Decreased demand/increased supply of AUD

Question 9

Causes of decreased demand for AUD

Answer 9

Decreased exports, income credits, capital inflow
Fall in ToT, interest rate differential
Higher relative inflation

Question 10

Effect of depreciation

Answer 10

Decreased price of Aussie exports
Increased price of imports
Improved national competitiveness 
Net exports increase → trade balance
Boost economic activity

Question 11

Causes of increased supply of AUD

Answer 11

Increased imports, income debits, capital outflow

Fall in interest rate differential

Question 12

Depreciation

Answer 12

Price of currency decreases in terms of another

Question 13

World’s most traded currency

Answer 13

USD

Question 14

Why is it inaccurate to compare AUD with USD?

Answer 14

Not main trading partners

Question 15

3 ways to determine exchange rate

Answer 15

Floating, managed, fixed

Question 16

Fixed

Answer 16

Value tied to other currencies, central authority guarantees a certain exchange rate

Question 17

Revaluation

Answer 17

Movement to a higher exchange rate for fixed

Question 18

Devaluation

Answer 18

Movement to a lower exchange rate for fixed

Question 19

Who is the central authority that might set the exchange rate?

Answer 19

Government, reserve bank

Question 20

Managed exchange rate

Answer 20

Similar to free, allowed to find value within desired range, subject to intervention if outside said range

Question 21

How would the currency be supported for a managed rate?

Answer 21

Central authority would buy the currency with foreign exchange

Question 22

How would the currency be arrested for a managed rate?

Answer 22

Central authority would buy the foreign exchange with their own currency

Question 23

Free/floating exchange

Answer 23

Price of currency determined by demand and supply

Question 24

Strongest currency

Answer 24

GBP

Question 25

How is demand of a currency determined?

Answer 25

Credits: exports, received income, foreign investment, capital inflow

Question 26

How is supply of a currency determined?

Answer 26

Debits: imports, paid income, overseas investment, capital outflow

Question 27

Relative inflation rate

Answer 27

Increased international competitiveness, exports, demand for AUD
Decreased imports, supply of AUD

Question 28

Movements in ToT (ceteris paribus)

Answer 28

Increased terms of trade, exports receipts, demand for AUD

Decreased import payments, supply of AUD

Question 29

Effect of floating exchange rate (BoP)

Answer 29

Equalise value of debits/credits

Question 30

How does floating exchange balance BOP?

Answer 30

Matching surplus, demand/credits = supply/debits

Question 31

Quantitative easing

Answer 31

Creating more of a country’s currency