Foreign exchange rates

Question 1

Define exchange rate

Answer 1

This refers to the value of one currency measured in terms of another currency.

Question 2

What is the likely impact on a country’s exchange rate following an increase in the demand for its exports?

Answer 2

The exchange rate increases.

Question 3

How does a fixed exchange rate differ from a floating exchange rate?

Answer 3

A fixed exchange rate involves the government buying and selling foreign currencies to ensure the value of the currency stays at its pegged value.
A floating exchange rate exists when the value of a currency is measured by the market forces of demand and supply.

Question 4

What are the causes of exchange rate fluctuations?

Answer 4

-Changes in demand for imports
-Changes in demand for exports
-Inflation
-The degree of government intervention