Exhange Rates

Question 1

Define exchange rate

Answer 1

The price of one currency in terms of another

Question 2

Define floating exchange rate

Answer 2

A system whereby the price of one currency in terms of another is determined by the forces of demand and supply

Question 3

Define fixed exchange rate

Answer 3

A system whereby the price of one currency in terms of another is set at specific rate and this rate is maintained by the government/central bank/monetary authority

Question 4

Define managed exchange rate

Answer 4

A system whereby the exchange rate is allowed to float freely within a week permitted ban. Intervention only occurs when the exchange rate ew he’s the upper or lower limits

Question 5

What are the factors that affect the supply of a currency

Answer 5

Those in the domestic country wishing to import goods and services
Domestic multinational firms wishing to set up in other countries
Domestics wishing to buy shares and other financial assets in other countries
Firms speculating on the international money markets
Governments selling their reserves of the currency

Question 6

Factors that affect the demand curve of exchange rates

Answer 6

Foreigners wishing to buy domestic exports of G/S
Foreign MNCs wishing to set up domestically
Foreign firms and individuals wishing to buy shares in domestic country
Firms speculating on the international money markets
Governments selling their reserves of the currency

Question 7

Define appreciation (exchange rates)

Answer 7

An upward movement of the exchange rate

Question 8

What are the impacts of appreciation (exchange rate)

Answer 8

Exports will be more expensive
Imports will be cheaper
Net exports will fall which should increase the current account
Cost push inflation would be reduced

Question 9

Define depreciation (exchange rate)

Answer 9

A downward movement of the exchange rate

Question 10

What are the impacts of depreciation ( exchange rates)

Answer 10

Cheaper exports
Pricier imports
Net exports will rise which should reduce current account deficit
Cost push inflation may occur

Question 11

Define hot money

Answer 11

Investment funds that flows regularly between different country’s financial markets as investment attempt to ensure they get the highest rate of return
Hot money will flow low interest rate countries into higher interest rate countries

Question 12

Link between interest rates and exchange rate

Answer 12

Increase in the internet rates leads to an appreciation of the exchange rate and vica versa