Intro Exchange Rates & Causes of Currency Changing Value Flashcards
1
Q
Exchange rate
A
value of one currency as expressed in terms of another currency
2
Q
Free floating exchange rate system
A
where the value of a currency is determined by global demand & supply of the currency on the foreign exchange market w/out govmn’t intervention
3
Q
Depreciation
A
decrease in the value of a currency in a FLOATING exchange system due to decrease in demand OR increase in supply
4
Q
Appreciation
A
increase in the value of a currency in a FLOATING exchange system due to increase in demand OR decrease in supply
5
Q
Reasons a currency may appreciate or depreciate in a free floating system
A
- Foreign demand for exports changes
- Impact of an increased demand for exports
- demand increases - Domestic demand for imports changes
- Impact of an increased demand for imports
- supply increases - Relative interest rate changes, ceteris paribus
- Foreign investors impacted by interest rates - Relative rates of inflation
- Higher rate inflation
- Cheaper imports
- Supply of currency increases
- More expensive exports
- Demand for currency falls - Changes in investment from abroad
- Faster economic growth
- Nation becomes richer in comparison
-increased spending on imports
- supply of currency shifts right - Speculation
- Traders think currency will rise?
- Demand for currency increases
- Appreciation - Change in foreign currency reserves
- Central bank sells its foreign exchange reserves to purchase domestic currency?
- Domestic currency appreciates b/c demand increases - Change in remittances
- Greater outward flow due to foreigner workers sending money to other countries
- Increased supply, depreciation
- Greater inward flow b/c of expat citizens sending their incomes home to their mother country
- Increased demand, appreciation
6
Q
Remittances
A
transfer of money from one country to another by foreign workers
