Exchange Rates

Question 1

What is exchange rate

Answer 1

The value of a currency in another currency

Question 2

Draw an exchange rate diagram

Answer 2

bruh

Question 3

Factors of currency demand

Answer 3

• People who wanna buy exports
• People who wanna invest in the country
• Central banks
• speculators of foreign exchange

Question 4

Factors of currency supply

Answer 4

• People who want to buy imports
• People who want to invest overseas
• Central Banks

Question 5

What is a free floating exchange rate?

Answer 5

When the exchange rate is determined by the market forces within the foreign exchange market

Question 6

Factors affecting exchange rates

Answer 6

• Interest rate- affects attractiveness of investment
• Inflation- Affects the price of imports and exports, and thus exchange rate
• FDI: If there is FDI, the investing country has to pay in local currency
• Speculation

Question 7

What is the strengthening or weakening of an exchange rate called?

Answer 7

appreciating and depreciating

Question 8

What is demand pull and imported inflation?

Answer 8

Imported inflation- Country relies on imported raw resources. There’s depreciation, more expensive to import. INFLATION

Demand pull- Demand for exports shoot out as a result of depreciation. Unbalance, and there is an increase in price level

Question 9

impacts to consider when looking at change in exchange rates

Answer 9

Employment- workers in export industries, and industries that rely on imports

Inflation rate

Economic growth- How reliant is the country on trade?

Current account balance: This depends on whether the Marshall Lerner condition is fulfilled: If elasticities of imports and exports add up to more than one, depreciation will improve the current account balance.

Question 10

In a fixed rate regime, what is it called when a currency is weakened or strengthened?

Answer 10

strengthen: revaluation

Weaken: devaluation

Question 11

What is the hybrid between free floating and fixed exchange rates?

Answer 11

“Managed float”. This is when the currency is checked up occasionally by the government to be evaluated of devaluated

Question 12

Advantages of a fixed exchange rate:

Limitations

Answer 12

Degree of certainty and stability

Biggest limitation: How much storage the country has of foreign currencies. If not enough, can’t be evaluated too much.

Question 13

Note

Answer 13

If a government sells its currency, it doesn’t mean an increase in demand. It means an increase in supply.

Question 14

Purchasing power parity theory

Answer 14

A currencies should be able to buy the same amount of goods when converted between one another