Exchange Rates Flashcards
Define nominal exchange rate
Number of units of domestic currency that can purchase 1 unit of foreign currency
Define real exchange rate
Nominal exchange rate adjusted to reflect the different inflation rates of 2 countries- shows competitiveness of currencies
Define effective exchange rate
Estimated to measure movements of country’s 💴 value (average change rate) in basket 🧺 of currencies 💴 of trade partner countries
Define trade weighted exchange rate
Common form of effective exchange rate- average exchange rate in basket 🧺 of currencies 💴 weighted by amount of trade with each country
Define exchange rate
Rate at which 1 currency 💴 exchanges for another
How many exchange rate systems are there?
3
What are the exchange rate systems?
1) Floating exchange rate
2) Fixed exchange rate
3) Managed exchange rate
Define floating exchange rate
Market forces (supply of 💴 and demand for 💴) determine value at which 💴 exchanges for another
Define fixed exchange rate
Value at which 1 💴 exchanges for another fixed by central bank or government against another 💴 OR 🧺 of currencies OR
Define managed exchange rate
Market forces (supply of and demand for 💴) determine value at which 1 💴 exchanges for another BUT intervention by central bank influences exchange rate of 💴
Define revaluation
ONLY occurs under system of fixed exchange rate when government decides to ⬆️ value of 💴 against other currencies 💴 OR gold
Define appreciation
Occurs under system of floating OR managed exchange rate when value of 💴 ⬆️ against another 💴 due to market forces
Define devaluation
ONLY occurs under system of fixed exchange rate when government decides to ⬇️ value of 💴 against other currencies 💴 OR gold
Define depreciation
Occurs under system of floating OR managed exchange rate when value of 💴 ⬇️ against another 💴 due to market forces
State the factors that influence the value of a country’s currency 💴 against other currencies 💴?
1) Relative inflation rates
2) Relative interest rates
3) State of economy
4) Balance of payments on current account
5) Political stability
6) Speculation