Lecture 5 Flashcards
What is an exchange rate?
exchange rate is the price or value of a currency.
Why do businesses prefer stable exchange rates?
because fluctuating exchange rates can impact their profits and contracts.
What is hedging in the context of exchange rates?
an attempt to reduce exposure to exchange rate risk by locking in forward rates through agreements.
How are exchange rates connected to trade deficits?
Wisselkoersen zijn verbonden met handelstekorten, aangezien handelstekorten met buitenlands kapitaal worden gefinancierd, en de waarde van de valuta beïnvloedt het invoer- en uitvoervolume
How do interest rates affect exchange rates?
Interest rates can repel or attract international capital, influencing exchange rates.
What are nominal exchange rates?
Nominal exchange rates represent the price of one currency in terms of another currency.
What is the real exchange rate?
The real exchange rate takes into account the price of goods and factors in inflation to measure the purchasing power of a currency.
What is the purpose of investing in foreign currencies?
What is the purpose of investing in foreign currencies?
The purpose of investing in foreign currencies is to buy when a currency is cheap and sell it when it becomes more expensive, to take advantage of potential gains.
PPP?
PPP is an economic theory that compares different countries’ currencies through a “basket of goods” approach
Purchasing Power Parity
PPP is an economic theory that compares different countries’ currencies through a “basket of goods” approach
How does the PPP model relate to exchange rates?
The PPP (Purchasing Power Parity) model argues that currency values will adjust based on changes in price levels, but in reality, many factors influence exchange rates, weakening the PPP relationship.
How does the trade-based model explain the movement of exchange rates?
suggests that changes in trade deficits can affect the movement of exchange rates, as foreign demand for a currency is influenced by the trade balance and foreign savings.
How is the exchange rate determined?
The exchange rate of a currency is determined by supply and demand in the foreign exchange market.
floating exchange rates
mean that the prices between each currency can change depending on market factors; primarily supply and demand.
