exchange rates

Question 1

1. J-Curve

Answer 1

Following a depreciation of the exchange rate, the J-curve effect shows a worsening of the Current Account in the short run and then an improvement in the long run.

Question 2

2. Marshall-Lerner Condition

Answer 2

Following a depreciation of the exchange rate, the Current Account will only improve if the sum of the elasticity of demand for exports and the elasticity of demand for imports is greater than one (i.e.) PEDx + PEDm > 1).

Question 3

1. Competitive Depreciation

Answer 3

When a country depreciates their own currency to keep their exports cheap and competitive.

Question 4

2. Currency War

Answer 4

A currency war is when countries depreciate their exchange rates to make their exports more competitive than other countries’.

Question 5

1. Revaluation

Answer 5

When a country raises their fixed exchange rate.

Question 6

2. Devaluation

Answer 6

When a country lowers their fixed exchange rate.

Question 7

1. Fixed Exchange Rates

Answer 7

The government, or central bank, fix the value of one currency to the value of another.

Question 8

2. Managed Exchange Rates

Answer 8

The government, or central bank, will only intervene to keep their exchange rate within a certain range.

Question 9

3. Floating Exchange Rates

Answer 9

The government or central bank does not intervene at all. The exchange rate is simply determined by market forces.

Question 10

1. Nominal Exchange Rate

Answer 10

The nominal exchange rate tells us the price of one currency in terms of another.

Question 11

2. Real Exchange Rate

Answer 11

The real ER tells us how much a currency is worth relative to the prices of goods and services in another country.

Question 12

3. Real Exchange Rate Formula

Answer 12

Real Exchange Rate = (Nominal Exchange Rate x Domestic Price Level)/Foreign Price Level

Question 13

1. International Competitiveness

Answer 13

A country is more competitive if their exports are sold at a lower price or a higher quality than other countries.

Question 14

2. Unit Labour Costs

Answer 14

Unit labour cost is the cost of wages per unit of output produced.

Question 15

3. Unit Labour Cost Formula

Answer 15

Unit Labour Cost = Total Wage Cost/Total Output

Question 16

4. Global Competitiveness Index

Answer 16

An index which attempts to rate the international competitiveness of different countries based on a variety of factors.

Question 17

What is speculation

Answer 17

investors predict changes in a currency’s exchange rate to make profit

Question 18

factors influencing floating exchange rate

Answer 18

speculation
inflation
interest rates

Question 19

What will happen if a country sells its own currency for a foreign currency

Answer 19

Increases supply leading to a depreciation

Question 20

Effects of competitive depreciation (3)

Answer 20

• lower prices lead to more competitiveness
• war currency
• further depreciation means imports for these countries become very expensive