International Money System Flashcards
How can you determine value of currency?
Free market and government decree
What is exchange rate
Price in terms of 1 currency at which another can be bought
Ex: 2 pounds=$1
What kind of exchange rates does a free market have
Floating exchange rates
How do you FIND the value of currency through a free market
The intersection of the supply and demand curves
What kind of exchange rate does a government decreed currency have
Fixed exchange rate
Define appreciate
Increases in value
Define depreciate
Decreases in value
What is a mix of floating and fixed exchange rates?
Dirty/managed float
What are types of fixed rates
Overvaluation, undervaluation
Define overvaluation
Artificially inflating price
How can you predict the future of money value from exchange rates?
In the long, medium and short term
What is the long range predictor of money value
Purchasing power parity theory
What is purchasing power parity theory
If prices are different, the country-with-the-highest-inflation’s currency will depreciate
What is the Big Mac index?
Theoretically, a Big Mac should cost the same in every McDonalds, but across the world prices vary.
What is the medium range value determinant
Country growth- if the economy is good, money will depreciate
What is the short range money value predictor?
Interest rates- if interest rates increase, money will appreciate
Why is currency no longer on the gold standard
The price of gold couldn’t be controlled, therefore the money system couldn’t be managed
Why is overvaluation bad?
It requires a government to use up its international reserves, and devalue the money back to its original price
What is undervaluation?
Artifically lowering the price
What happens when you undervalue currency?
Jobs are created
No economy force will make it stop
What account includes international goods, services and investments?
Current account
What account includes financial assets?
Capital account
What is the balance of payments deficit
Supply exceeds demand of a country’s currency. Occurs when exchange rate is artifically high (overvalued)
What is the balance of payments surplus
Demand exceeds supply of a country’s currency. Occur when currency is undervalued
What is the bretton woods system?
Exchange rates were fixed
What is the current exchange rate system?
Dirty float
