international economics (term one ) Flashcards
exchange rate
the value of one currency for the purpose of conversion to another
fixed exchange rate
where a central bank fixes an exchange rate at a particular level
floating exchange rate
where market forces [demand & supply] set the value of the exchange rate
re-valuation
if a fixed exchange rate is increased
de-valuation
if a fixed exchange rate is decreased
appreciation
if a floating exchange rate is increased
depreciation
if a floating exchange rate is decreased
trade weighted index
a weighted average of exchange rates from the nations we trade with
factors affecting demand
export of goods & services [foreign buyers demand AUD to buy Australian exports]
incomes received [Australians earning money from foreign investments (e.g. dividends or interest)]
capital inflow [foreign investors move money to Australia if interest rates increase]
speculation [traders buy AUD if they think it will increase]
factors affecting supply
import of goods & services [Australian buyers supply AUD to buy foreign imports]
incomes payable [foreigners earning money from Australian investments (e.g. dividends or interest)]
capital outflow [foreign investors move money overseas if Australian interest rates decrease]
speculation [traders sell AUD if they think it will decrease]
2 ways a currency appreciates
increase in demand
decrease in supply
2 ways a currency depreciates
decrease in demand
increase in supply
reasons for currency appreciation
high interest rates
competitive exports
positive speculation
less imports
less overseas travelling
Reserve Bank of Australia buys AUD [dirty float]
reasons for currency depreciation
low interest rates
expensive exports
negative speculation
more imports
more overseas travelling
Reserve Bank of Australia prints money
how would the Reserve Bank of Australia revaluate ?
revaluating the exchange rate from equilibrium causes a surplus
the RBA must buy the surplus using forex or gold
revaluation of the AUD
