Global Econ Flashcards
Exchange rate
the value of one currency expressed in term of another currency
Floating exchange rate
an exchange rate system where the exchange rate is determined solely by the market demand and market supply of the currency in the foreign exchange market without any central bank intervention.
Appreciation
Depreciation
an increase/decrease in the value of a currency in terms of another currency in a floating or managed exchange rate system.
Determination of Floating ER
Foreign demand for exports: higher D for ex, higher D for currency, higher ER
Domestic demand for imports.
* Relative interest rates
* Relative inflation rates, inflation, lower ER
* Relative growth rates
Other countries higher growth rate: 别的国家growth好，higher ER
- Investment overseas
- Speculation
- Remittances: transfer money from one country to another eg. workers sending money to mother country: inward remittance from abroad. higher ER
RLE for appreciation
2015 US dollar appreciation-dollar rose nearly 12 percent over the currencies of the nation’s major global trading partners.
Positive U.S. employment reports, combined with an overall healthy U.S. economy, growing confidence.
export fall, employment fall in export industry.
industry that use import as input-growth
Eg. US steel: negative effect on car and manufacture industry> benefit for steel producers
rle for depreciation
1997 Indonesia in Asia Financial Crisis, depreciation (high IR)
Turkey’s currency, the lira, lost more than 20% of its value against the USD in August 2018.
First, fall in investors’ expectations-fear that they can’t repay their loan.
Secondly, President Trump approved doubling tariffs on Turkey.
Finally, no CB intervention, no sufficient dollar reserve.
Fixed exchange rate
an exchange rate system where the exchange rate is fixed, or pegged, to the value of another currency (or to the average value of a selection of currencies) and maintained there with appropriate central bank intervention.
Revaluation
Devaluation
an increase/decrease in the value of a currency in a fixed exchange rate system.
ways to maintain exchange rates
Official reserves of foreign currencies-CB buy its own currency while sell foreign exchange reserves.
Interest rates manipulation-Raise IR:attract foreign depositors
Exchange controls -Limit the amount of foreign currency that domestic residents are allowed to buy-restrict supply
Import/export policy-reduce import by expenditure
Borrowing-Gov (CB) borrowing from abroad to buy domestic currency
Managed exchange rates
an exchange rate that floats in the foreign exchange markets but is subject to intervention from time to time by domestic monetary authorities, in order to prevent undesirable movements in the exchange rate.
overvalued/undervalued currency
Fixed versus floating exchange rate systems
- Flexibility for policy-makers
- Correction of CA imbalance
- Inflation and implications
- Foreign currency reserves
- Degree of Certainty
fixed ER is very vulnerable to external shocks!
Balance of payments
a record of the value of all transactions of a country with the rest of the world over a period of time.
current account
a subaccount of the balance of payments that records the value of net exports in goods and services, net income and net current transfers of a country over a period of time.
Credit items/debit items
transactions within the balance of payments of a country that lead to an inflow/outflow of currency
Capital account
a subaccount of the balance of payments that includes transactions of non- produced(land, rights to natural resources), non-financial assets as well as capital transfers between residents and non-residents.
