Lesson 40 - unit 8 Flashcards
What is a currency exchange rate?
The price of one country’s currency expressed in terms of another country’s currency.
How are currency exchange rates determined?
By supply and demand
What is the practical impact of a cheaper or more expensive dollar for foreigners?
Cheaper dollars encourage foreigners to buy more American goods, while more expensive dollars mean foreigners are less likely to buy American goods.
How do businesses make purchases of products from other countries?
They exchange currency to buy products from other countries and import them.
How do U.S. interest rates affect currency exchange rates?
If U.S. interest rates move higher, it encourages foreign investment which means foreign investors buy more U.S. money which increases their value.
If U.S. interest rates move lower, it discourages foreign investment, which decreases the amount of money foreign investors buy, decreasing the value of U.S. dollars.
How might domestic events within a country affect the price for that nation’s currency in international markets?
If there was a revolution in a country, people would not want to buy that nation’s currency because it might not be worth anything in a week, which decreases the value of the currency. Also the wealthy in the country might buy foreign currency to maintain their wealth, continuing to lower the value of the currency.
What is the equilibrium exchange rate?
The exchange rate at which currency demand eequals currency supply.
What is the real exchange rate?
The rate of exchange for goods and services between one country and another.
What 2 steps was China allegedly taking in 2009 to keeps its currency value artificially low?
- They pegged the value cheaper than it would have brought in free trade in currency exchange markets
- They bought huge amounts of American currency.
What was the practical effect of China’s policies?
It encouraged other countries to buy Chinese goods and made imports into China expensive.
